Credit ratings agency Fitch has upgraded the ratings of a number of debt instruments held by US energy utility Avista Corp but cited concern of margin pressure and potential cash flow problems for a part of the business due to below normal hydro power operations.

The improvement in ratings follow Fitch’s view of there being less business risk following the sale of Avista Corp’s energy marketing and resource management subsidiary, Avista Energy, which enables it to focus on its core services. Avista Corp is a combined electric and natural gas utility, and serves parts of states in the Pacific north west region of the US.

However, the improved ratings and the positive outlook it has on Avista Corp are also based on there being normal water conditions as well as regulatory outcomes. Fitch noted that Avista Corp subsidiary Avista Utilities’ margins suffer due to below normal hydro generation as it has to meet the shortfall through purchased thermal resources.

To help offset the higher thermal costs, Avista Corp has requested a power-only rate increase. The filing was made to the Washington Utilities and Transportation Commission (WUTC) in April, and it anticipates a verdict by early March 2008. Approval of the request for the selective ratings increase would improve the company’s creditworthiness, Fitch said.

Fitch also noted, though, that a prolonged period of below normal hydro operations as well as high natural gas prices could put a squeeze on Avista Corp’s cash flow, which was a concern of fixed income investors. Again, approval of the rate increase could help alleviate the pressure to some degree.