Business Context and Reporting Period
Company: Avista Corporation
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2006
Headquarters: Spokane, Washington
Avista Corporation is an energy company engaged in the generation, transmission, and distribution of energy. Its operations are divided into four segments: Avista Utilities (regulated electric and natural gas utility operations), Energy Marketing and Resource Management (trading and resource management via Avista Energy), Advantage IQ (facility information and cost management services), and Other (sheet metal fabrication and investments). In May 2006, shareholders approved a proposal to reorganize into a holding company structure, pending regulatory approval.
Key Financial Metrics (2006)
| Metric | 2006 Value | 2005 Value |
|---|---|---|
| Total Operating Revenues | $1,506.3 million | $1,359.6 million |
| Net Income | $73.1 million | $45.2 million |
| Earnings Per Share (Diluted) | $1.47 | $0.92 |
| Operating Cash Flow | $201.5 million | $130.2 million |
| Total Assets | $4,056.5 million | $4,948.5 million |
| Total Debt | $1,093.9 million | $1,206.4 million |
| Common Stockholders' Equity | $916.8 million | $771.1 million |
| Dividends Paid Per Share | $0.57 | $0.545 |
Material Changes vs. Prior Period
- Revenue Growth: Total operating revenues increased 10.8% to $1.506 billion, driven by a $106.6 million increase in utility revenues (primarily natural gas) and a $29.5 million increase in non-utility energy marketing revenues.
- Profitability Surge: Net income increased 61.8% to $73.1 million. This was primarily due to improved performance in the Energy Marketing and Resource Management segment, which turned a $8.6 million loss in 2005 into an $11.6 million profit in 2006.
- Utility Performance: Avista Utilities net income rose to $58.0 million (from $52.5 million) due to a $24.6 million increase in gross margin. This was aided by a $2.6 million benefit under the Washington Energy Recovery Mechanism (ERM) and improved hydroelectric generation (104% of normal).
- Debt Reduction: Total debt decreased by $112.5 million to $1.094 billion, funded by operating cash flows and the issuance of common stock ($77.7 million net proceeds in December 2006).
- Asset Base: Total assets decreased by $892 million, largely due to a decline in the fair value of energy commodity derivative assets at Avista Energy following decreases in natural gas prices.
Guidance, Outlook, and Risks
- 2007 Outlook: Management forecasts utility net income may decrease in 2007 compared to 2006. This is due to the expectation of absorbing expenses under the ERM (versus a benefit in 2006) and the dismissal of a recent request to increase electric rates in Washington.
- Capital Expenditures: Utility capital expenditures are expected to range between $180 million and $190 million annually for 2007–2009, focusing on transmission system enhancements and generation upgrades.
- Regulatory Risks:
- Hydroelectric Relicensing: The license for the Spokane River Project expires August 1, 2007. Initial cost estimates for relicensing conditions range from $175 million to $500 million over 50 years, though management believes final costs may be lower.
- Rate Cases: A general rate case is expected to be filed in Washington in the first half of 2007. Recovery of deferred power and natural gas costs remains subject to regulatory review.
- Market Risks: The company faces significant exposure to commodity price volatility (electricity and natural gas) and credit risk from counterparties. Avista Energy's earnings are subject to mark-to-market accounting, causing variability.
- Legal Proceedings: The company is involved in various proceedings related to the 2000–2001 western energy crisis, including refund proceedings in California and the Pacific Northwest. Management believes reserves are adequate but outcomes remain uncertain.
Investor Verification Checklist
- Hydroelectric Relicensing Costs: Verify the final terms and cost estimates for the Spokane River Project relicensing, as costs could significantly impact future capital expenditures and rates.
- Washington Rate Case Outcome: Monitor the outcome of the upcoming general rate case in Washington, which is critical for recovering deferred costs and maintaining utility margins.
- Avista Energy Volatility: Assess the sustainability of Avista Energy's 2006 profitability given the inherent volatility of energy trading and mark-to-market accounting.
- Deferred Cost Recovery: Review the status of deferred power and natural gas costs ($79.5 million for power, $18.3 million for gas) and the timeline for regulatory recovery.
- Debt Maturities: Note the $370 million in long-term debt maturities and preferred stock redemptions due in 2007 and 2008, requiring refinancing or equity issuance.