5 March 2013
1. What is the business model of Avista?
“Avista Utilities Inc. engages in the generation, transmission, and distribution of energy” (Bloomberg Businessweek). They currently offer electricity from hydro, natural gas, coal, biomass, waste, nuclear, cogeration, and petroleum. The company also offers natural gas, electric, builder, renewable energy generation, energy pricing, housewarming gift certification, and transportation services for homes and businesses. In addition, it operates such as putting up poles, installing power lines, and building pipes for natural gas. Avista Utilities currently serves electric and natural gas to its customers in eastern Washington, northern Idaho, and southeastern Oregon (Bloomberg Businessweek).
In 2012, income from operations was almost $14 million less than the previous year. “The decrease in annual utility earnings was primarily due to reduced retail loads during the first and fourth quarters of the year (primarily as a result of warmer weather) and an increase in other operating expenses, and depreciation and amortization, which was partially offset by the implementation of general rate increases” (Bloomberg Businessweek). Avista expects 2013 utility earnings to grow due to electricity rate hikes. However, profits will be hindered due to increased operating costs and slow growth in the economy in the regions it operates (Bloomberg Businessweek).
2. What benefit would Avista derive from economic forecasting?
Economic forecasting as described on investopedia is “The process of attempting to predict the future condition of the economy. This involves the use of statistical models utilizing variables sometimes called indicators. Some of the most well-known economic indicators include inflation and interest rates, GDP growth/decline, retail sales and unemployment rates.” Avista can benefit from economic forecasting in several ways.
With regards to inflation, Avista must raise their rates to keep up with inflation. By doing so, they will be able to keep their profits at similar levels in the past. They can also determine how much above or below they want to change their prices in line with inflation (to provide their valued customers with low utility rates or raise capital for future projects). Forecasting interest rates can also be very helpful. Avista can determine the best possible time from them to borrow money for new projects (this will allow them to set aside enough capital). Forecasting GDP growth or decline can also benefit Avista, it will allow the company to see if they will need to provide more customers with utility services as companies begin to grow or new companies sprout up. This will allow them to prepare new infrastructure if they believe it is needed off of these forecasts. Accuracy is one of the main, if not the main criteria, used to judge forecast quality. This is why Avista must determine the correct methods in order to create accurate economic forecasting.
3. What macroeconomic and political variables help or hurt Avista's profitability?
One macroeconomic variable that could hurt Avista is if