Avista: Western Market Uncertainty Clouds Earnings Picture

Although Avista Corp. has revised its earnings projections for 2001 upward in the wake of positive second quarter earnings results, company executives said that the political and regulatory uncertainty that continues to swirl around western energy markets muddles its ability to forecast how its energy trading and marketing arm will perform over the next year or so.

Avista recently reported second quarter 2001 consolidated revenues of $1.5 billion and net income available for common stock of $22.1 million, or $0.47 per diluted share. This compares favorably with revenues of $1.4 billion and a loss of $0.47 per diluted share for the equivalent quarter last year. The increase came despite the worst hydro and stream flow conditions Avista has experienced in the 73 years records have been kept.

"In light of Avista's financial performance year-to-date and current expectations for energy markets, stream flows and weather, the company is revising its full-year 2001 consolidated corporate earnings guidance upward slightly to between $1.10 and $1.20 per diluted share," said Avista CFO Jon Eliassen. He noted that this estimate includes somewhat reduced Avista Utilities earnings expectations because of poor hydro conditions, offset by better-than-expected earnings from Avista Energy.

In a conference call with analysts, Gary Ely, Avista's CEO, highlighted a number of variables that make it difficult to pinpoint with any degree of certainty earnings guidance for Avista Energy. "We're talking about a market that currently has price controls in it; we're talking about a market that they're doing all kinds of things in California," Ely said.

Avista remains directly and indirectly exposed to the California markets since it operates within the Western Systems Coordinating Council, the region affected by FERC energy price mitigation efforts. Avista Energy has set aside additional reserves to offset the receivables balance that the company is owed from the California Independent System Operator and the California Power Exchange. Current receivables are approximately $8 million, net of reserves.

"We are reducing the risk in that business and we are focusing around those things that we do very well," Ely told analysts. "I would like to think that there is more upside than downside in that business, but again that's why the range is there."

Ely said that although Avista is "fairly confident" on the lower end of the earnings projection range for Avista Energy, a lot will depend on what happens in the market over the next 12 months. "We're talking about price controls [that] will go through third quarter of next year before they come off," he said. "We don't even know if they're going to come off; they could be extended further out into the future or they may come off and fourth quarter of next year may be something entirely different."

"If you look at the needs on the West Coast in particular, and even here in the Northwest, there's still a substantial need for new generation," Ely continued. The reason that Avista has chosen not to pursue merchant plant activity is due to an inability to forecast what the future will hold "with all of the regulatory and political climate that surrounds the prices in the West."

Eliassen reminded analysts that Avista Energy not only trades electricity, but natural gas as well. The CFO said that as illustrated by Avista's experience over the past year, especially in the first quarter and to a lesser degree the second quarter, a "significant amount" of earnings from Avista Energy can come in the natural gas business.

"Now, again, that's seasonal, even on a marketing business or a trading business like [Avista] Energy, so it comes more during the winter or spring months, but we have significant assets both on the electric side of that business, as well as the gas side in terms of gas storage, pipeline capacity," Eliassen added. "So, it's really a portfolio that we're working with now at Avista Energy, not necessarily the long-term contracts that we had in the past." The executive said that going forward the company will probably have a better feel in terms of what the floor should be for potential earnings at Avista Energy.

"In 2002, Avista Energy could earn in the range of $0.45 to $0.60 per share because of our initiative to reduce the size and risk of this business, and because wholesale market conditions are expected to be much less volatile in the future." In total, Avista expects its consolidated corporate earnings for 2002 will depend on the level of continued investment in the company's technology businesses.

The Avista executive said that assuming hydro conditions improve and regulators allow the company to recover gas and electric deferrals, Avista expects earnings from its utility unit for 2002 to be slightly greater than in 2001.

For the most recent second quarter, Avista Energy contributed $0.55 per share in diluted earnings. "Throughout the past year, Avista Energy has repeatedly turned in a strong performance," Ely said. "By focusing on the western region and marketing a portfolio of assets and contracts for gas and electric generation and transmission, we're able to make the best use of our knowledge and experience in the markets we know well.''

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