After a difficult 2007, Avista Corp. should be able to rebound fully this year, bolster that improved performance in 2009, and increase its dividend substantially by the end of that year, a regional brokerage firm projects.


The firm, D.A. Davidson & Co., of Great Falls, Mont., says its maintaining its estimate that Avista will earn $1.45 a share in 2008, up substantially from the 73 cents to 83 cents a share that Avista has projected it will earn in 2007.


The company will report its 2007 earnings on Feb. 20. It earned $1.47 a share in 2006.


Further, D.A. Davidson says, We are initiating a 2009 estimate of $1.60 for Avistas net income that year. The brokerage firms report adds, We expect a significant increase in the dividend rate by year-end 2009.


James L. Bellessa Jr., the D.A. Davidson financial analyst who wrote the report, said in an interview that Avista currently is paying a dividend of 60 cents a share annually.


They expect to have a payout ratio of 60 percent like other utilities. Sixty percent of $1.60 a share would be 96 cents a share, and even if Avista merely increased its dividend to 80 cents a share by the end of 2009, that would be a 33 percent increase in just under two years, which would be significant, Bellessa says.


Avista suffered last year from a lack of rate relief in Washington state, rising costs, and other factors, but the Washington state Utilities and Transportation Commission allowed the company to raise its rates sufficiently effective Jan. 1 to increase its annual revenues by $33.5 million, Ballessa wrote.


Yet, because of regulatory lag in that process, D.A. Davidson doesnt expect Avista will achieve its allowed return on equity.


In fact, we expect the utility to file new rate cases in early 2008, in both Washington and Idaho, to mitigate such lags, he wrote.


Avista spokeswoman Jessie Wuerst says, There are plans to develop rate cases in both Washington and Idaho. Indeed, this regulatory lag is quite a challenge for us.


The companys capital expenses for 2007 are expected to come in at $194 million. It plans to spend about the same amount this year, and it expects to make $200 million in capital expenses in both 2009 and 2010, according to a presentation it made in a conference call after it released its third-quarter earnings. Yet, because of the way utilities are regulated, it cant seek rate increases to recoup those investments until after theyre made, Wuerst says.


Separately, Avistas utility bill-management subsidiary, Advantage IQ, which inspects, approves, and pays utility and site-facility bills on behalf of hundreds of major companies with thousands of locations, should contribute 15 cents a share to Avista Corp.s earnings next year, up from 13 cents in 2007, Bellessa says.


They made an investment in Advantage IQ for the last year that should bring help to the parent company, he says. Theyre a major factor.


That investment included marketing studies by a consultant, plus other things, Bellessa says.


Yet, he says, lower interest rates will hurt results at Advantage IQ, which makes up to 20 percent of its earnings on float.


Basically, he says, Advantage IQs customers pay the Spokane company amounts that it holds for a day or two in an account until it pays the customers bills when it has completed examining them. While the money is on deposit, it earns interest.


Thats just good business practice, says Wuerst. We have found such good savings for the companies in the management of their bills that it virtually pays for that.


Avista Corp. doesnt want to change its dividend until two things happen in the new year, Bellessa says. It wants to refinance a $273 million bond issue that it sold at a high interest rate of 9.75 percent when the company was in deep financial trouble several years ago. It can probably cut its rate on that debt by 3 percentage points in the refinancing, reducing its annual interest expenses by roughly $8 million, he says.


Secondly, it wants Standard & Poors to give Avista an investment grade on its debt financings if the Spokane company goes out for another financing round. The nations two other rating agencies, Fitch and Moodys, already have increased their ratings on Avistas debt to investment grade.


Wuerst says that Avistas executive team has said publicly that it hopes the companys board of directors will revisit Avistas dividend payout and policy when the rating agencies all have given Avistas debt investment-grade status. She says the board meets next on Feb. 14 and 15.


Meanwhile, covenants in the companys debt instruments have kept it from increasing its dividend by more than a half-cent at a time, she says.


Investors watch closely the dividends utility stocks pay because they buy such stocks for income as well as their relative stability.


Avista chopped its dividend from $1.24 a share annually to 48 cents a share in December 1998 when then-CEO Tom Matthews sought to raise cash to fund his efforts to convert Avista into a technology company.


After those efforts failed, Avista began raising its dividend gradually in September 2003, and it has raised its dividend five additional times since then to 60 cents a year.


Contact Richard Ripley at (509) 344-1261 or via e-mail at [email protected].