AVA is representative of a tension investors are likely to continue to feel for the next several years: How do investors balance the risks and rewards of continued unregulated operations at utilities, versus the risks and rewards of regulated operations .. and the reliance on politicians for revenue increases balanced against the greater surety value of regulated revenues.
Avista Corp (AVA) reported 1Q EPS on April 27th, and showed that utilities continue to struggle to find the balance between producing results from their regulated and their unregulated businesses.
Though the regulated business produced earnings slightly below expectations due to uncontrollable weather conditions, it was the unregulated results that caused the company to reevaluate 2005 results. How large a reevaluation? In its conference call, AVA told investors just what 2005 would hold for them,
We are revising our consolidated earnings guidance for 2005 from a range of $1.20 to $1.35 per diluted share to a range of $0.95 to $1.05 per diluted share primarily as a result of the first quarter performance of the Energy Marketing and Resource Management segment. The upper end of the range for Avista Utilities has been reduced by $0.05 per diluted share due to below-normal hydroelectric generation forecasted for the year and decreased retail revenues during the first quarter of 2005 as a result of warmer than normal weather. As such we expect Avista Utilities to contribute between $0.95 and $1.05 per diluted share. … The 2005 outlook for the Energy Marketing and Resource Management segment has been reduced from a contribution in the range of $0.20 to $0.30 per diluted share to a range of a loss of $0.05 to a contribution of $0.05 per diluted share. This will require the Energy Marketing and Resource Management segment to earn between $0.12 and $0.22 per diluted share the remainder of the year … We still expect Avista Advantage to contribute $0.05 per diluted share, and the other segment to lose $0.05 per diluted share.
(Quotes are from the CCBN StreetEvents transcript.)
Though AVA indicated in its earnings conference call part of the unregulated shortfall can be regained in other time periods due to the nature of AVA's hedging of its Energy Marketing and Resource Management portfolio of gas assets and contracts, there is no guarantee that commodity market conditions and AVA's risk management programs will fully regain what was lost in the 1st Quarter of 2005.
AVA's earnings announcement did not hurt the stock that day, or in the ensuing week ... but the stock had slid from a high of $18.24 in early March 2005, to its current price of $16.89 (-7.5%) while the UTY index has rsien a little over 1% in the same time period. The gas commodity market and the risk it brought to AVA's business could have been a factor in the underperformance. But AVA also filed for a large rate increase with its regulators in the same time frame (late March 2005), creating another risk factor for the stock market to measure.