<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission file number 1-3701
AVISTA CORPORATION
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Washington 91-0462470
------------------------------- ----------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1411 East Mission Avenue, Spokane, Washington 99202-2600
- --------------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 509-489-0500
Web site: http://www.avistacorp.com
None
--------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
At October 31, 1999, 35,644,829 shares of Registrant's Common Stock, no par
value (the only class of common stock), were outstanding.
<PAGE> 2
AVISTA CORPORATION
Index
<TABLE>
<CAPTION>
Page No.
--------
<S> <C>
Part I. Financial Information:
Item 1.Financial Statements
Consolidated Statements of Income - Three Months Ended
September 30, 1999 and 1998 .................................. 3
Consolidated Statements of Income - Nine Months Ended
September 30, 1999 and 1998 .................................. 4
Consolidated Balance Sheets - September 30, 1999
and December 31,
1998 ......................................................... 5
Consolidated Statements of Capitalization - September 30, 1999
and December 31, 1998 ........................................ 6
Consolidated Statements of Cash Flows - Nine Months Ended
September 30, 1999 and 1998 .................................. 7
Schedule of Information by Business Segments - Three Months Ended
September 30, 1999 and 1998 .................................. 8
Schedule of Information by Business Segments - Nine Months Ended
September 30, 1999 and 1998 .................................. 10
Notes to Consolidated Financial Statements ...................... 12
Item 2.Management's Discussion and Analysis of Financial Condition
and Results of Operations ....................................... 16
Item 3.Quantitative and Qualitative Disclosures About Market Risk ... 26
Part II Other Information:
Item 5.Other Information ............................................ 26
Item 6.Exhibits and Reports on Form 8-K ............................. 28
Signature ...................................................................... 29
</TABLE>
<PAGE> 3
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
Avista Corporation
- --------------------------------------------------------------------------------
For the Three Months Ended September 30
Thousands of Dollars
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
OPERATING REVENUES ................................................... $ 3,718,109 $ 1,434,055
----------- -----------
OPERATING EXPENSES:
Resource costs .................................................. 3,596,506 1,289,400
Operations and maintenance ...................................... 41,502 61,339
Administrative and general ...................................... 31,332 30,022
Depreciation and amortization ................................... 18,570 17,622
Taxes other than income taxes ................................... 12,002 11,369
----------- -----------
Total operating expenses ...................................... 3,699,912 1,409,752
----------- -----------
INCOME FROM OPERATIONS ............................................... 18,197 24,303
----------- -----------
OTHER INCOME (EXPENSE):
Interest expense ................................................ (15,855) (17,104)
Net gain on subsidiary transactions ............................. 43,054 48
Other income-net ................................................ 1,779 2,341
----------- -----------
Total other income (expense)-net .............................. 28,978 (14,715)
----------- -----------
INCOME BEFORE INCOME TAXES ........................................... 47,175 9,588
INCOME TAXES ......................................................... 19,562 881
----------- -----------
NET INCOME ........................................................... 27,613 8,707
DEDUCT-Preferred stock dividend requirements (Note 5) ............... 5,340 608
----------- -----------
INCOME AVAILABLE FOR COMMON STOCK .................................... $ 22,273 $ 8,099
=========== ===========
Average common shares outstanding (thousands), Basic (Note 5) ....... 36,634 55,960
Average common shares outstanding (thousands), Diluted (Note 5) ..... 52,055 55,960
EARNINGS PER SHARE OF COMMON STOCK, BASIC (Note 5) .................. $ 0.61 $ 0.14
EARNINGS PER SHARE OF COMMON STOCK, DILUTED (Note 5) ................ $ 0.52 $ 0.14
Dividends paid per common share ...................................... $ 0.12 $ 0.31
NET INCOME ........................................................... $ 27,613 $ 8,707
----------- -----------
OTHER COMPREHENSIVE INCOME:
Foreign currency translation adjustment ......................... 13 (229)
Unrealized investment gains/(losses)-net of tax ................. (510) (1,161)
----------- -----------
OTHER COMPREHENSIVE INCOME ........................................... (497) (1,390)
----------- -----------
COMPREHENSIVE INCOME ................................................. $ 27,116 $ 7,317
=========== ===========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
3
<PAGE> 4
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
Avista Corporation
- --------------------------------------------------------------------------------
For the Nine Months Ended September 30
Thousands of Dollars
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
OPERATING REVENUES ................................................ $ 6,366,047 $ 2,661,290
----------- -----------
OPERATING EXPENSES:
Resource costs ................................................. 5,981,449 2,191,459
Operations and maintenance ..................................... 131,887 164,887
Administrative and general ..................................... 90,551 92,519
Depreciation and amortization .................................. 56,901 52,225
Taxes other than income taxes .................................. 39,032 37,255
----------- -----------
Total operating expenses ..................................... 6,299,820 2,538,345
----------- -----------
INCOME FROM OPERATIONS ............................................ 66,227 122,945
----------- -----------
OTHER INCOME (EXPENSE):
Interest expense ............................................... (47,593) (51,151)
Net gain on subsidiary transactions ............................ 58,648 7,579
Other income-net ............................................... 10,576 7,639
----------- -----------
Total other income (expense)-net ............................. 21,631 (35,933)
----------- -----------
INCOME BEFORE INCOME TAXES ........................................ 87,858 87,012
INCOME TAXES ...................................................... 32,348 30,430
----------- -----------
NET INCOME ........................................................ 55,510 56,582
DEDUCT-Preferred stock dividend requirements (Note 5) ............ 16,107 2,219
----------- -----------
INCOME AVAILABLE FOR COMMON STOCK ................................. $ 39,403 $ 54,363
=========== ===========
Average common shares outstanding (thousands), Basic (Note 5) .... 39,077 55,960
Average common shares outstanding (thousands), Diluted (Note 5) .. 54,559 55,960
EARNINGS PER SHARE OF COMMON STOCK, BASIC (Note 5) ............... $ 1.01 $ 0.97
EARNINGS PER SHARE OF COMMON STOCK, DILUTED (Note 5) ............. $ 0.98 $ 0.97
Dividends paid per common share ................................... $ 0.36 $ 0.93
NET INCOME ........................................................ $ 55,510 $ 56,582
----------- -----------
OTHER COMPREHENSIVE INCOME:
Foreign currency translation adjustment ........................ 371 (363)
Unrealized investment gains/(losses)-net of tax ................ (249) (2,158)
----------- -----------
OTHER COMPREHENSIVE INCOME ........................................ 122 (2,521)
----------- -----------
COMPREHENSIVE INCOME .............................................. $ 55,632 $ 54,061
=========== ===========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
4
<PAGE> 5
CONSOLIDATED BALANCE SHEETS
Avista Corporation
- --------------------------------------------------------------------------------
Thousands of Dollars
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
------------- ------------
<S> <C> <C>
ASSETS:
CURRENT ASSETS:
Cash and cash equivalents .................................... $ 163,123 $ 72,836
Temporary cash investments ................................... 17,490 5,786
Accounts and notes receivable-net ............................ 558,388 456,857
Energy commodity assets ...................................... 530,996 357,581
Materials and supplies, fuel stock and natural gas stored .... 29,353 42,140
Prepayments and other ........................................ 50,365 33,396
---------- ----------
Total current assets ....................................... 1,349,715 968,596
---------- ----------
UTILITY PROPERTY:
Utility plant in service-net ................................. 2,143,179 2,095,301
Construction work in progress ................................ 51,290 45,391
---------- ----------
Total ...................................................... 2,194,469 2,140,692
Less: Accumulated depreciation and amortization ............. 706,089 669,750
---------- ----------
Net utility plant .......................................... 1,488,380 1,470,942
---------- ----------
OTHER PROPERTY AND INVESTMENTS:
Investment in exchange power-net ............................. 57,602 62,577
Non-utility properties and investments-net ................... 154,055 206,773
Energy commodity assets ...................................... 484,040 236,644
Other-net .................................................... 28,047 26,016
---------- ----------
Total other property and investments ....................... 723,744 532,010
---------- ----------
DEFERRED CHARGES:
Regulatory assets for deferred income tax .................... 167,698 171,037
Conservation programs ........................................ 45,338 49,114
Unamortized debt expense ..................................... 27,941 28,414
Other-net .................................................... 38,522 33,523
---------- ----------
Total deferred charges ..................................... 279,499 282,088
---------- ----------
TOTAL .................................................... $3,841,338 $3,253,636
========== ==========
LIABILITIES AND CAPITALIZATION:
CURRENT LIABILITIES:
Accounts payable ............................................. $ 608,675 $ 406,457
Energy commodity liabilities ................................. 538,392 348,387
Taxes and interest accrued ................................... 31,780 38,628
Other ........................................................ 39,186 70,721
---------- ----------
Total current liabilities .................................. 1,218,033 864,193
---------- ----------
NON-CURRENT LIABILITIES AND DEFERRED CREDITS:
Non-current liabilities ...................................... 41,023 34,815
Deferred revenue ............................................. 135,191 145,124
Energy commodity liabilities ................................. 437,498 207,948
Deferred income taxes ........................................ 371,584 357,702
Other deferred credits ....................................... 9,546 11,571
---------- ----------
Total non-current liabilities and deferred credits ......... 994,842 757,160
---------- ----------
CAPITALIZATION (See Consolidated Statements of Capitalization) .. 1,628,463 1,632,283
---------- ----------
COMMITMENTS AND CONTINGENCIES (Note 6)
TOTAL .................................................... $3,841,338 $3,253,636
========== ==========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
5
<PAGE> 6
CONSOLIDATED STATEMENTS OF CAPITALIZATION
Avista Corporation
- --------------------------------------------------------------------------------
Thousands of Dollars
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
------------- ------------
<S> <C> <C>
LONG-TERM DEBT:
First Mortgage Bonds:
7 1/8% due December 1, 2013 .................................................. $ 66,700 $ 66,700
7 2/5% due December 1, 2016 .................................................. 17,000 17,000
Secured Medium-Term Notes:
Series A - 6.13% to 7.90% due 2000 through 2023 ............................ 139,400 211,500
Series B - 6.20% to 8.25% due 1999 through 2010 ............................ 145,000 150,000
----------- -----------
Total first mortgage bonds ................................................. 368,100 445,200
----------- -----------
Pollution Control Bonds:
Floating Rate, Colstrip 1999A, due 2032 ...................................... 66,700 -
Floating Rate, Colstrip 1999B, due 2034 ...................................... 17,000 -
6% Series due 2023 ........................................................... 4,100 4,100
----------- -----------
Total pollution control bonds .............................................. 87,800 4,100
----------- -----------
Unsecured Medium-Term Notes:
Series A - 7.94% to 9.57% due 1999 through 2007 .............................. 38,500 38,500
Series B - 6.75% to 8.23% due 2001 through 2023 .............................. 96,000 115,000
Series C - 5.99% to 6.88% due 2007 through 2028 .............................. 84,000 84,000
----------- -----------
Total unsecured medium-term notes .......................................... 218,500 237,500
----------- -----------
Notes payable (due within one year) to be refinanced ........................... 103,500 -
Other .......................................................................... 8,894 43,222
----------- -----------
Total long-term debt ......................................................... 786,794 730,022
----------- -----------
COMPANY-OBLIGATED MANDATORILY REDEEMABLE
PREFERRED TRUST SECURITIES:
7 7/8%, Series A, due 2037 ................................................... 60,000 60,000
Floating Rate, Series B, due 2037 ............................................ 50,000 50,000
----------- -----------
Total company-obligated mandatorily redeemable preferred trust securities .. 110,000 110,000
----------- -----------
PREFERRED STOCK-CUMULATIVE:
10,000,000 shares authorized:
Subject to mandatory redemption:
$6.95 Series K; 350,000 shares outstanding ($100 stated value) ............... 35,000 35,000
----------- -----------
Total subject to mandatory redemption ...................................... 35,000 35,000
----------- -----------
CONVERTIBLE PREFERRED STOCK:
Not subject to mandatory redemption:
$12.40 Convertible Series L; 1,515,460 and 1,540,460 shares outstanding
($182.80 stated value) ..................................................... 264,555 269,227
----------- -----------
Total convertible preferred stock .......................................... 264,555 269,227
----------- -----------
COMMON EQUITY:
Common stock, no par value; 200,000,000 shares authorized;
35,644,829 and 40,453,729 shares outstanding ................................. 318,682 381,401
Note receivable from employee stock ownership plan ............................. (8,513) (9,295)
Capital stock expense and other paid in capital ................................ (4,348) (4,176)
Other comprehensive income ..................................................... (219) (341)
Retained earnings .............................................................. 126,512 120,445
----------- -----------
Total common equity .......................................................... 432,114 488,034
----------- -----------
TOTAL CAPITALIZATION .............................................................. $ 1,628,463 $ 1,632,283
=========== ===========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
6
<PAGE> 7
CONSOLIDATED STATEMENTS OF CASH FLOWS
Increase (Decrease) in Cash and Cash Equivalents
Avista Corporation
- --------------------------------------------------------------------------------
For the Nine Months Ended September 30
Thousands of Dollars
<TABLE>
<CAPTION>
1999 1998
--------- ---------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income ......................................................... $ 55,510 $ 56,582
NON-CASH ITEMS INCLUDED IN NET INCOME:
Depreciation and amortization .................................... 56,901 52,225
Provision for deferred income taxes .............................. 21,034 8,514
Allowance for equity funds used during construction .............. (647) (1,105)
Power and natural gas cost deferrals and amortizations ........... (8,519) (2,945)
Gain on sale of subsidiary investments and other-net ............. (64,641) (9,068)
(Increase) decrease in working capital components:
Sale of customer accounts receivables-net ...................... 5,000 40,000
Receivables and prepaid expense ................................ (182,927) (311,481)
Materials & supplies, fuel stock and natural gas stored ........ (2,087) (2,959)
Payables and other accrued liabilities ......................... 244,208 328,188
Other .......................................................... (4,013) (4,341)
--------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES ............................. 119,819 153,610
--------- ---------
INVESTING ACTIVITIES:
Construction expenditures (excluding AFUDC-equity funds) ........... (60,193) (65,097)
Other capital requirements ......................................... (22,583) (9,895)
(Increase) decrease in other noncurrent balance sheet items-net .... (15,425) 2,859
Proceeds from sale of subsidiary investments ....................... 145,285 16,385
Assets acquired and investments in subsidiaries .................... (40,735) (33,804)
--------- ---------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES ................... 6,349 (89,552)
--------- ---------
FINANCING ACTIVITIES:
Increase (decrease) in short-term borrowings ....................... 97,151 (52,729)
Proceeds from issuance of long-term debt ........................... 84,933 66,615
Redemption and maturity of long-term debt .......................... (98,610) (18,764)
Redemption of preferred stock ...................................... (4,672) (10,000)
Repurchase of common stock ......................................... (82,047) -
Cash dividends paid ................................................ (30,316) (54,299)
Other-net .......................................................... (2,320) 10,034
--------- ---------
NET CASH USED IN FINANCING ACTIVITIES ................................. (35,881) (59,143)
--------- ---------
NET INCREASE IN CASH AND CASH EQUIVALENTS ............................. 90,287 4,915
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD ...................... 72,836 30,593
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD ............................ $ 163,123 $ 35,508
========= =========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the period:
Interest ......................................................... $ 45,586 $ 45,912
Income taxes ..................................................... 34,823 33,152
Noncash financing and investing activities:
Property purchased under capitalized leases ...................... 1,386 482
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
7
<PAGE> 8
SCHEDULE OF INFORMATION BY BUSINESS SEGMENTS
Avista Corporation
- --------------------------------------------------------------------------------
For the Three Months Ended September 30
Thousands of Dollars
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
OPERATING REVENUES:
Energy Delivery ........................................ $ 74,210 $ 78,871
Generation and Resources ............................... 243,727 219,956
National Energy Trading and Marketing .................. 3,364,678 1,077,730
Non-energy ............................................. 38,557 60,969
Intersegment eliminations .............................. (3,063) (3,471)
----------- -----------
Total operating revenues ............................. $ 3,718,109 $ 1,434,055
=========== ===========
RESOURCE COSTS:
Energy Delivery:
Natural gas purchased for resale ..................... $ 16,916 $ 17,020
PCA and other ........................................ (172) (599)
Generation and Resources:
Power purchased ...................................... 199,118 179,268
Fuel for generation .................................. 13,101 12,908
Other ................................................ 14,245 13,567
National Energy Trading and Marketing:
Cost of sales ........................................ 3,356,361 1,070,707
Intersegment eliminations .............................. (3,063) (3,471)
----------- -----------
Total resource costs (excluding Non-energy) .......... $ 3,596,506 $ 1,289,400
=========== ===========
GROSS MARGINS:
Energy Delivery ........................................ $ 57,466 $ 62,450
Generation and Resources ............................... 17,263 14,213
National Energy Trading and Marketing .................. 8,317 7,023
----------- -----------
Total gross margins (excluding Non-energy) ........... $ 83,046 $ 83,686
=========== ===========
OPERATIONS AND MAINTENANCE EXPENSES:
Energy Delivery ........................................ $ 15,276 $ 15,556
National Energy Trading and Marketing .................. 824 469
Non-energy ............................................. 25,402 45,314
----------- -----------
Total operations and maintenance expenses ............ $ 41,502 $ 61,339
=========== ===========
ADMINISTRATIVE AND GENERAL EXPENSES:
Energy Delivery ........................................ $ 11,875 $ 11,726
Generation and Resources ............................... 3,259 2,894
National Energy Trading and Marketing .................. 7,611 6,896
Non-energy ............................................. 8,587 8,506
----------- -----------
Total administrative and general expenses ............ $ 31,332 $ 30,022
=========== ===========
DEPRECIATION AND AMORTIZATION EXPENSES:
Energy Delivery ........................................ $ 9,104 $ 8,638
Generation and Resources ............................... 6,411 6,345
National Energy Trading and Marketing .................. 1,036 200
Non-energy ............................................. 2,019 2,439
----------- -----------
Total depreciation and amortization expenses ......... $ 18,570 $ 17,622
=========== ===========
INCOME/(LOSS) FROM OPERATIONS (PRE-TAX):
Energy Delivery ........................................ $ 12,386 $ 18,178
Generation and Resources ............................... 4,898 2,385
National Energy Trading and Marketing .................. (1,178) (545)
Non-energy ............................................. 2,091 4,285
----------- -----------
Total income from operations ......................... $ 18,197 $ 24,303
=========== ===========
</TABLE>
8
<PAGE> 9
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
INCOME AVAILABLE FOR COMMON STOCK:
Energy Delivery and Generation and Resources ........... $ (4,628) $ 5,903
National Energy Trading and Marketing .................. (297) (345)
Non-energy ............................................. 27,198 2,541
----------- -----------
Total income available for common stock (Note 5) .... $ 22,273 $ 8,099
=========== ===========
ASSETS: (1998 amounts at December 31)
Energy Delivery ........................................ $ 1,121,479 $ 1,120,323
Generation and Resources ............................... 602,856 619,086
Other utility .......................................... 329,634 265,526
National Energy Trading and Marketing .................. 1,642,904 957,421
Non-energy ............................................. 144,465 291,280
----------- -----------
Total assets ......................................... $ 3,841,338 $ 3,253,636
=========== ===========
CAPITAL EXPENDITURES (excluding AFUDC/AFUCE):
Energy Delivery ........................................ $ 15,658 $ 22,530
Generation and Resources ............................... 4,747 3,153
National Energy Trading and Marketing .................. (1,097) 222
Non-energy ............................................. 10,584 3,025
----------- -----------
Total capital expenditures ........................... $ 29,892 $ 28,930
=========== ===========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
9
<PAGE> 10
SCHEDULE OF INFORMATION BY BUSINESS SEGMENTS
Avista Corporation
- --------------------------------------------------------------------------------
For the Nine Months Ended September 30
Thousands of Dollars
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
OPERATING REVENUES:
Energy Delivery ........................................ $ 272,030 $ 288,048
Generation and Resources ............................... 533,784 466,994
National Energy Trading and Marketing .................. 5,444,698 1,752,223
Non-energy ............................................. 119,581 162,083
Intersegment eliminations .............................. (4,046) (8,058)
----------- -----------
Total operating revenues ............................. $ 6,366,047 $ 2,661,290
=========== ===========
RESOURCE COSTS:
Energy Delivery:
Natural gas purchased for resale ..................... $ 73,022 $ 73,509
PCA and other ........................................ (1,487) (2,560)
Generation and Resources:
Power purchased ...................................... 395,216 338,776
Fuel for generation .................................. 30,871 30,196
Other ................................................ 37,093 36,073
National Energy Trading and Marketing:
Cost of sales ........................................ 5,450,780 1,723,523
Intersegment eliminations .............................. (4,046) (8,058)
----------- -----------
Total resource costs (excluding Non-energy) .......... $ 5,981,449 $ 2,191,459
=========== ===========
GROSS MARGINS:
Energy Delivery ........................................ $ 200,495 $ 217,099
Generation and Resources ............................... 70,604 61,949
National Energy Trading and Marketing .................. (6,082) 28,700
----------- -----------
Total gross margins (excluding Non-energy) ........... $ 265,017 $ 307,748
=========== ===========
OPERATIONS AND MAINTENANCE EXPENSES:
Energy Delivery ........................................ $ 41,363 $ 44,368
National Energy Trading and Marketing .................. 2,323 1,648
Non-energy ............................................. 88,201 118,871
----------- -----------
Total operations and maintenance expenses ............ $ 131,887 $ 164,887
=========== ===========
ADMINISTRATIVE AND GENERAL EXPENSES:
Energy Delivery ........................................ $ 35,911 $ 37,517
Generation and Resources ............................... 9,663 11,272
National Energy Trading and Marketing .................. 21,522 18,616
Non-energy ............................................. 23,455 25,114
----------- -----------
Total administrative and general expenses ............ $ 90,551 $ 92,519
=========== ===========
DEPRECIATION AND AMORTIZATION EXPENSES:
Energy Delivery ........................................ $ 27,449 $ 25,954
Generation and Resources ............................... 19,255 18,786
National Energy Trading and Marketing .................. 2,776 546
Non-energy ............................................. 7,421 6,939
----------- -----------
Total depreciation and amortization expenses ......... $ 56,901 $ 52,225
=========== ===========
INCOME/(LOSS) FROM OPERATIONS (PRE-TAX):
Energy Delivery ........................................ $ 66,356 $ 81,550
Generation and Resources ............................... 33,846 24,098
National Energy Trading and Marketing .................. (32,746) 7,871
Non-energy ............................................. (1,229) 9,426
----------- -----------
Total income from operations ......................... $ 66,227 $ 122,945
=========== ===========
</TABLE>
10
<PAGE> 11
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
INCOME AVAILABLE FOR COMMON STOCK:
Energy Delivery and Generation and Resources ........... $ 25,338 $ 37,663
National Energy Trading and Marketing .................. (19,604) 5,744
Non-energy ............................................. 33,669 10,956
----------- -----------
Total income available for common stock (Note 5) .... $ 39,403 $ 54,363
=========== ===========
ASSETS: (1998 amounts at December 31)
Energy Delivery ........................................ $ 1,121,479 $ 1,120,323
Generation and Resources ............................... 602,856 619,086
Other utility .......................................... 329,634 265,526
National Energy Trading and Marketing .................. 1,642,904 957,421
Non-energy ............................................. 144,465 291,280
----------- -----------
Total assets ......................................... $ 3,841,338 $ 3,253,636
=========== ===========
CAPITAL EXPENDITURES (excluding AFUDC/AFUCE):
Energy Delivery ........................................ $ 48,943 $ 54,830
Generation and Resources ............................... 10,579 9,816
National Energy Trading and Marketing .................. 5,055 1,124
Non-energy ............................................. 17,360 8,233
----------- -----------
Total capital expenditures ........................... $ 81,937 $ 74,003
=========== ===========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
11
<PAGE> 12
AVISTA CORPORATION
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The accompanying financial statements of Avista Corporation (Avista Corp. or the
Company) for the interim periods ended September 30, 1999 and 1998 are unaudited
but, in the opinion of management, reflect all adjustments, consisting only of
normal recurring accruals, necessary for a fair statement of the results of
operations for those interim periods. The results of operations for the interim
periods are not necessarily indicative of the results to be expected for the
full year. These financial statements do not contain the detail or footnote
disclosure concerning accounting policies and other matters which would be
included in full fiscal year financial statements; therefore, they should be
read in conjunction with the Company's audited financial statements included in
the Company's Annual Report on Form 10-K for the year ended December 31, 1998
(1998 Form 10-K).
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NEW ACCOUNTING STANDARDS
The FASB issued FAS No. 133, entitled "Accounting for Derivative Instruments and
Hedging Activities" which was originally to be effective for fiscal years
beginning after June 15, 1999. In May 1999, implementation was delayed for one
year, so it is now effective for fiscal years beginning after June 15, 2000. The
statement requires that all derivative financial instruments be recognized as
either assets or liabilities on a company's balance sheets at fair value. The
accounting for changes in the fair value of a derivative will depend on the
intended use of the derivative and the resulting designation. Avista Energy
currently accounts for derivative commodity instruments entered into for trading
purposes using the mark-to-market method of accounting, in compliance with EITF
98-10, "Accounting for Energy Trading and Risk Management Activities." The
Company is in the process of determining the impact of the statement on the
Company's financial position and results of operations.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to current
statement format. These reclassifications were made for comparative purposes and
have not affected previously reported total net income or common shareholders'
equity.
NOTE 2. ENERGY COMMODITY TRADING
Contract Amounts and Terms Under Avista Energy's derivative instruments, Avista
Energy either (i) as "fixed price payor," is obligated to pay a fixed price or
amount and is entitled to receive the commodity (or currency) or a fixed amount
or (ii) as "fixed price receiver," is entitled to receive a fixed price or
amount and is obligated to deliver the commodity (or currency) or pay a fixed
amount or (iii) as "index price payor," is obligated to pay an indexed price or
amount and is entitled to receive the commodity or a variable amount or (iv) as
"index price receiver," is entitled to receive an indexed price or amount and is
obligated to deliver the commodity or pay a variable amount. The contract or
notional amounts and terms of Avista Energy's derivative commodity investments
outstanding at September 30, 1999 are set forth below (volumes in thousands of
mmBTUs and MWhs, dollars in thousands):
<TABLE>
<CAPTION>
Fixed Price Fixed Price Maximum
Payor Receiver Terms in Years
----------- ----------- --------------
<S> <C> <C> <C>
Energy commodities (volumes)
Natural gas 435,647 404,274 5
Electric 133,639 117,204 20
Coal (tons) 2,653 3,054 1
Financial products
Foreign currency $ 1,159 $ - 4
</TABLE>
<TABLE>
<CAPTION>
Index Price Index Price Maximum
Payor Receiver Terms in Years
----------- ----------- --------------
<S> <C> <C> <C>
Energy commodities (volumes)
Natural gas 1,145,199 872,708 5
Electric 744 1,368 2
Coal (tons) 30 123 1
</TABLE>
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Contract or notional amounts reflect the volume of transactions, but do not
necessarily represent the amounts exchanged by the parties to the derivative
commodity instruments. Accordingly, contract or notional amounts do not
accurately measure Avista Energy's exposure to market or credit risks. The
maximum terms in years detailed above are not indicative of likely future cash
flows as these positions may be offset in the markets at any time.
Fair Value The fair value of Avista Energy's derivative commodity instruments
outstanding at September 30, 1999, and the average fair value of those
instruments held during the nine months ended September 30, 1999 are set forth
below (dollars in thousands):
<TABLE>
<CAPTION>
Fair Value Average Fair Value for the
as of September 30, 1999 nine months ended September 30, 1999
---------------------------------------------------- ----------------------------------------------------
Current Long-term Current Long-term Current Long-term Current Long-term
Assets Assets Liabilities Liabilities Assets Assets Liabilities Liabilities
-------- --------- ----------- ----------- -------- --------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Natural gas $151,707 $ 27,300 $165,422 $ 16,181 $145,475 $ 64,785 $154,756 $ 54,171
Electric 371,777 456,153 369,703 420,766 283,886 295,263 278,744 268,277
Coal 7,512 587 3,267 551 3,756 294 1,633 275
-------- -------- -------- -------- -------- -------- -------- --------
Total $530,996 $484,040 $538,392 $437,498 $433,117 $360,342 $435,133 $322,723
</TABLE>
The weighted average term of Avista Energy's natural gas and related derivative
commodity instruments as of September 30, 1999 was approximately three months.
The weighted average term of Avista Energy's electric derivative commodity
instruments at September 30, 1999 was approximately four months. The weighted
average term of Avista Energy's coal commodity instruments at September 30, 1999
was approximately seven months. The change in the fair value position of Avista
Energy's energy commodity portfolio, net of the reserves for credit and market
risk from December 31, 1998 to September 30, 1999 was $6.2 million and is
included on the Consolidated Statements of Income in operating revenues.
NOTE 3. FINANCINGS
On September 15, 1999, $83.7 million of Pollution Control Revenue Refunding
Bonds (Avista Corporation Colstrip Project), Series 1999A due 2032 and Series
1999B due 2034 were issued by the City of Forsyth, Montana. The proceeds of the
bonds were loaned to the Company under a Loan Agreement and were invested in
Federal Agency instruments maturing on December 1, 1999. On that date, the funds
will be utilized to refund the $66.7 million of 7 1/8% First Mortgage Bonds due
2013 and the $17.0 million of 7 2/5% First Mortgage Bonds due 2016. The Series
1999A and Series 1999B Bonds are backed by an insurance policy issued by AMBAC
Assurance Corporation and bear interest on a floating rate basis that will be
reset periodically. The initial interest rate until February 2000 is 3.6%.
Reference is made to the information relating to financings and borrowings as
discussed under the caption "Liquidity and Capital Resources" in Item 2.
"Management's Discussion and Analysis of Financial Condition and Results of
Operations".
NOTE 4. COMMON STOCK REPURCHASE PLAN
On May 12, 1999, the Company's Board of Directors authorized a common stock
repurchase program in which the Company may repurchase in the open market or
through privately negotiated transactions up to an aggregate of 10 percent of
its common stock and common stock equivalents over the next two years. The
repurchased shares will be retired as authorized but unissued shares. As of
September 30, 1999, the Company had repurchased approximately 4.8 million
shares. During the third quarter of 1999, the Company repurchased 250,000 shares
of Return-Enhanced Convertible Securities, which is equivalent to 25,000 shares
of Convertible Preferred Stock, Series L. The combined repurchases of these two
securities represent 9% of outstanding common stock and common stock
equivalents.
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NOTE 5. EARNINGS PER SHARE
Average shares outstanding for basic earnings per share (EPS) were 36,633,929
and 39,076,962 for the quarter and nine months ended September 30, 1999,
respectively. Options to purchase 620,400 shares of common stock were
outstanding during the quarter and nine months ended September 30, 1999, but
605,400 shares were not included in the computation of diluted earnings per
share because the options' exercise price was greater than the average market
price of the common shares for the periods and, therefore, the effect was
antidilutive. The average number of common shares outstanding for both basic and
diluted EPS was 55,960,360 for both periods in 1998 as the Company did not have
any common stock equivalents outstanding in either of those periods.
The computation of basic and diluted earnings per common share is as follows (in
thousands, except per share amounts):
<TABLE>
<CAPTION>
Nine Months Ended
3rd Quarter September 30
--------------------- ---------------------
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net income $ 27,613 $ 8,707 $ 55,510 $ 56,582
Less: Preferred stock dividends 5,340 608 16,107 2,219
-------- -------- -------- --------
Income available for common stock-basic 22,273 8,099 39,403 54,363
Convertible Preferred Stock, Series L,
dividend requirements 4,732 - 14,282 -
-------- -------- -------- --------
Income available for common stock-diluted $ 27,005 $ 8,099 $ 53,685 $ 54,363
======== ======== ======== ========
Weighted-average number of common shares
outstanding-basic 36,634 55,960 39,077 55,960
Conversion of Convertible Preferred Stock, Series L 15,298 - 15,369 -
Restricted stock 122 - 113 -
Exercise of stock options 1 - - -
-------- -------- -------- --------
Weighted-average number of common shares
outstanding-diluted 52,055 55,960 54,559 55,960
======== ======== ======== ========
Earnings per common share
Basic $ 0.61 $ 0.14 $ 1.01 $ 0.97
Diluted $ 0.52 $ 0.14 $ 0.98 $ 0.97
</TABLE>
NOTE 6. COMMITMENTS AND CONTINGENCIES
The Company believes, based on the information presently known, the ultimate
liability for the matters discussed in this note, individually or in the
aggregate, taking into account established accruals for estimated liabilities,
will not be material to the consolidated financial position of the Company, but
could be material to results of operations or cash flows for a particular
quarter or annual period. No assurance can be given, however, as to the ultimate
outcome with respect to any particular lawsuit.
SPOKANE GAS PLANT
The Spokane Natural Gas Plant site (which was operated as a coal gasification
plant for approximately 60 years until 1948) was acquired by the Company through
a merger in 1958. The Company no longer owns the property. Initial core samples
taken from the site indicate environmental contamination at the site. On January
15, 1999, the Company received notice from the State of Washington's Department
of Ecology (DOE) that it had been designated as a potentially liable person
(PLP) with respect to any hazardous substances located on this site, stemming
from the Company's past ownership of the former Gas Plant. In its notice, the
DOE stated that it intended to complete an on-going remedial investigation of
this site, complete a feasibility study to determine the most effective means of
halting or controlling future releases of substances from the site, and
implement appropriate remedial measures.
The Company responded to the DOE acknowledging its listing as a PLP, but
requested that additional parties also be listed as PLPs. In the spring of 1999,
the DOE named two other parties as additional PLPs. The Company completed
additional characterization of the site for the remedial investigation (RI). The
PLPs are negotiating with
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AVISTA CORPORATION
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the DOE on an Agreement Order, which will specify the scope of work for the RI
and the feasibility study (FS). The Order is expected to be in place by the end
of November.
EASTERN PACIFIC ENERGY
On October 9, 1998, Eastern Pacific Energy (Eastern Pacific), an energy
aggregator participating in the restructured retail energy market in California,
filed suit against the Company and its affiliates, Avista Advantage and Avista
Energy in the United States District Court for the Central District of
California. Eastern Pacific alleges, among other things, a breach of an oral or
implied joint venture agreement whereby the Company agreed to supply not less
than 300 megawatts of power to Eastern Pacific's California customers and that
Avista Advantage agreed to provide energy-related products and services. The
complaint seeks an unspecified amount of damages and also seeks to recover any
future profits earned from sales of the aforementioned amount of power to
California consumers. The Company and its affiliates intend to vigorously defend
against all of the claims.
On December 4, 1998, Avista Advantage, Avista Energy and the Company jointly
filed a motion to dismiss the complaint for failure to state a claim upon which
relief can be granted. On May 4, 1999, the Court granted the Company's and its
affiliates' motion to dismiss the case and granted the plaintiff the opportunity
to file and serve an Amended Complaint, which it did. The Company and its
affiliates renewed their motion to dismiss and on October 22, 1999, the Court
again granted the motion to dismiss, this time with prejudice. It is unknown, at
this time, whether the plaintiff will appeal this adverse determination to the
Ninth Circuit Court of Appeals.
THE POWER COMPANY OF AMERICA
On June 25, 1999, the trustee (Trustee) of the PCA Liquidating Trust (Trust),
the successor of The Power Company of America, L.P. (PCA), demanded that Avista
Energy pay the Trust approximately $22.4 million. Until June 1998, Avista Energy
and PCA had entered into forward contracts for the purchase/sale of electric
power. In early July 1998, PCA defaulted on its contract obligations with Avista
Energy and numerous other counterparties. Accordingly, on July 6, 1998, Avista
Energy suspended all business dealings with PCA. On August 17, 1998, an
involuntary petition was filed against PCA in the U.S. Bankruptcy Court for the
District of Connecticut, and on January 5, 1999, the Court approved a plan of
reorganization and established the Trust. Avista Energy has filed a Proof of
Claim for approximately $2.6 million, representing the net amount owing by PCA
to Avista Energy for power delivered to or received from PCA prior to July 6,
1998.
The Trustee's primary claim is based on the allegation that Avista Energy
wrongfully terminated the forward contracts on July 6, 1998, resulting in
alleged damages to PCA of about $18.5 million, recoverable under contract and/or
bankruptcy law, in connection with those contracts in which Avista Energy was
the seller and PCA was the buyer. The Trustee's demand threatens to commence a
lawsuit against Avista Energy in the Bankruptcy Court if its claims cannot be
settled.
Based on an evaluation of the Trustee's demand, the Company and Avista Energy
believe that the Trustee's claims (including the referenced $18.5 million claim)
lack substantial merit and they intend to contest them vigorously. Furthermore,
the Company and Avista Energy believe that the Trustee's claim under the forward
sell contracts, to the extent found to be valid, is subject to significantly
offsetting claims from Avista Energy against PCA. Accordingly, while the Company
cannot predict the ultimate outcome of this matter, the Company does not believe
that the Trustee's claims will be material to the Company's consolidated
financial position.
NOTE 7. ACQUISITIONS AND DISPOSITIONS
Effective February 1, 1999, Avista Energy completed and closed the purchase of
Vitol Gas & Electric, LLC (Vitol), based in Boston, Massachusetts. Vitol was one
of the top 20 energy marketing companies in the United States. Vitol trades gas,
electricity, coal and SO2 allowances in markets in the eastern half of the
United States.
During the first quarter of 1999, Pentzer Corporation (Pentzer) sold its
Creative Solutions Group, a group of five portfolio companies that provide
point-of-purchase displays and other merchandising and packaging services to
retailers and consumer product companies. The sale resulted in a gain of $10.1
million, net of taxes. During the third quarter of 1999, Pentzer sold its Store
Fixtures Group, a group of six portfolio companies that design, manufacture and
deliver store fixture products to major retailers. The sale resulted in a gain
of $27.6 million, net of taxes.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Avista Corporation (Avista Corp. or the Company) operates as a regional utility
providing electric and natural gas sales and services and as a national entity
providing both energy and non-energy products and services. The utility portion
of the Company, doing business as Avista Utilities, consists of two lines of
business which are subject to state and federal price regulation -- (1) Energy
Delivery and (2) Generation and Resources. The national businesses are conducted
under Avista Capital, which is the parent company to the Company's subsidiaries.
The Energy Delivery line of business includes transmission and distribution
services for retail electric operations, all natural gas operations, and other
energy products and services. The Generation and Resources line of business
includes the generation and production of electric energy, and short- and
long-term electric and natural gas sales, trading and wholesale marketing
primarily to other utilities and power brokers in the Western Systems
Coordinating Council.
Avista Capital is the parent company to the National Energy Trading and
Marketing and Non-energy businesses. The National Energy Trading and Marketing
business is comprised of Avista Energy, Avista Advantage and Avista Power.
Avista Energy focuses on commodity trading, energy marketing and other related
businesses on a national basis. Avista Energy's primary trading offices are
located in Boston, MA, Houston, TX and Spokane, WA, and its principal
administrative office is in Boston, MA. Avista Advantage, which is based in
Spokane, WA, provides a variety of energy-related products and services, such as
consolidated billing and resource accounting, to commercial and industrial
customers on a national basis. Avista Power was formed in December 1998 to
develop and own generation assets primarily in support of Avista Energy.
The Non-energy business is conducted primarily by Pentzer Corporation (Pentzer),
which is the parent company to the majority of the Company's Non-energy
businesses. Other non-energy subsidiaries under Avista Capital include Avista
Development, Avista Labs, Avista Communications and Avista Fiber. Avista
Development manages and markets the corporation's community investments,
including real estate and other assets. Avista Labs develops fuel cells and
multiple fuel processing approaches using propane, methane and methanol as base
fuels to integrate into its fuel cell subsystem. Avista Communications, formed
in January 1999, is the newest of the non-energy subsidiaries. It will provide
local high-speed telecommunications services to under-served Northwest
communities. Avista Communications is a sister company to Avista Fiber, which
focuses on building high-speed local dark fiber networks in Northwest
communities.
Changes underway in the utility and energy industries are creating new
opportunities to expand the Company's businesses and serve new markets. In
pursuing such opportunities, the Company is shifting its strategic direction to
growth, which could subject the Company to a higher degree of risk than that of
a traditional regulated public utility company.
RESULTS OF OPERATIONS
OVERALL OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 1998
Basic earnings per share for the third quarter of 1999 were $0.61 compared to
$0.14 in the third quarter of 1998. In December 1998, the Company exchanged
15,404,595 shares of its common stock for shares of Convertible Preferred Stock,
Series L, which resulted in an increase of $4.7 million in preferred stock
dividend requirements in the third quarter of 1999 over 1998. Diluted earnings
per share for the third quarter of 1999 were $0.52 compared to $0.14 in the
third quarter of 1998. Basic and diluted earnings per share were the same in the
third quarter of 1998 as the Company did not have any dilutive common stock
equivalents outstanding at that time.
Third quarter 1999 net income available for common stock was $22.3 million, a
$14.2 million increase over third quarter 1998. The increase was primarily the
result of non-energy earnings that included a transactional gain totaling $27.6
million, net of taxes, recorded by Pentzer as a result of the sale of a group of
portfolio companies. The increased earnings were partially offset by the higher
preferred stock dividend requirements mentioned above and decreased earnings
from non-energy operations due to the loss of income from the first quarter 1999
sale of a group of Pentzer's portfolio companies. Income taxes for the third
quarter of 1999 increased substantially over 1998 as a result of taxes on
Pentzer's transactional gain.
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Utility operations (Energy Delivery and Generation and Resources) had a loss of
$0.12 per basic share and no impact on diluted earnings per share for the third
quarter of 1999 compared to a contribution of $0.10 in the third quarter of
1998. National Energy Trading and Marketing operations had a loss of $0.01 per
basic share and no impact on diluted earnings per share in the third quarter of
1999 compared to a loss of $0.01 in the same period in 1998. Non-energy
operations contributed $0.74 per basic share and $0.52 per diluted share for the
third quarter of 1999 compared to a contribution of $0.05 in the same period in
1998.
NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1998
Basic earnings per share for the first nine months of 1999 were $1.01 compared
to $0.97 in the same period of 1998. As a result of the exchange of shares of
common stock for shares of the Convertible Preferred Stock mentioned above,
preferred stock dividend requirements increased $13.9 million in the first nine
months of 1999 over 1998. Diluted earnings per share for the first nine months
of 1999 were $0.98 compared to $0.97 for the same period in 1998. Basic and
diluted earnings per share were the same through year-to-date September 1998 as
the Company did not have any dilutive common stock equivalents outstanding at
that time.
Net income available for common stock for the first nine months of 1999 was
$39.4 million compared to $54.4 million in 1998. Non-energy earnings for 1999
included transactional gains totaling $37.6 million, net of taxes, recorded by
Pentzer as a result of the sale of two groups of portfolio companies, which were
partially offset by the loss of income from the companies sold in the first
quarter of 1999. Non-energy income for 1998 included a $5.5 million
transactional gain, net of taxes, from the sale of a portfolio company by
Pentzer. The National Energy Trading and Marketing line of business recorded a
$19.6 million loss year-to-date in 1999 due to warmer than normal weather, soft
national energy markets and a lack of volatility within those markets, as
compared to net income of that line of business of $5.7 million in 1998 (see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations: Results of Operations: National Energy Trading and Marketing"). In
addition, earnings from utility operations decreased $12.3 million in the first
nine months of 1999 from 1998 due to the increased preferred stock dividend
requirements mentioned above and higher purchased power costs and lower
wholesale sales prices experienced by the Generation and Resources line of
business, particularly in the first quarter of 1999.
Utility operations contributed $0.65 per basic share and $0.72 per diluted share
for the first nine months of 1999 compared to $0.67 in 1998. National Energy
Trading and Marketing operations had a loss of $0.50 per basic share and a loss
of $0.36 per diluted share in the first nine months of 1999 compared to a
contribution of $0.10 in 1998. Non-energy operations contributed $0.86 per basic
share and $0.62 per diluted share for the first nine months of 1999 compared to
$0.20 in 1998.
AVISTA UTILITIES
Avista Utilities is an operating division of Avista Corp. that consists of the
two lines of business, (1) Energy Delivery and (2) Generation and Resources,
that comprise the utility portion of the Company.
THREE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 1998
Avista Utilities' pre-tax income from operations decreased $3.3 million, or 16%,
in the third quarter of 1999 from the same period in 1998. Operating revenues
and expenses increased $19.1 million and $22.4 million, respectively, during the
third quarter of 1999.
Retail electric revenues increased $2.5 million due to customer growth and
slightly cooler weather in the third quarter of 1999. Wholesale electric
revenues increased $15.4 million, primarily due to sales volumes 2% higher and
prices 6% higher in the third quarter of 1999 over 1998. Natural gas revenues
increased $0.8 million primarily due to customer growth and slightly cooler
weather in 1999.
Purchased power volumes increased 3% and prices were 7% higher than last year,
which resulted in a $19.9 million, or 11%, increase in purchased power expense
in the third quarter of 1999 over 1998. This increase accounts for the majority
of the increase in Avista Utilities' operating expenses.
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NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1998
Avista Utilities' pre-tax income from operations decreased $5.4 million in 1999
from the same period in 1998. Operating revenues and expenses increased $50.8
million and $56.2 million, respectively, during 1999.
Retail electric revenues increased $8.7 million due to customer growth and
slightly cooler weather in the first nine months of 1999 over 1998. Wholesale
electric revenues increased $41.5 million, primarily due to sales volumes 2%
higher and prices 10% higher in the 1999 period. Natural gas revenues increased
$2.7 million primarily due to customer growth and slightly cooler weather in
1999.
Purchased power volumes increased 2% and prices were 14% higher than last year,
which resulted in a $56.9 million, or 17%, increase in purchased power expense
in the first nine months of 1999 over 1998.
The following sections, (1) Energy Delivery and (2) Generation and Resources,
provide more detailed explanations of results of operations for the two
individual utility lines of business.
ENERGY DELIVERY
THREE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 1998
Energy Delivery's pre-tax income from operations decreased $5.8 million, or 32%,
in the third quarter of 1999 from the same period in 1998. The decrease was
primarily the result of an increase in the transfer price between the two
utility lines of business representing the revenue from the sale of the electric
energy commodity used to serve Energy Delivery's customers. This transfer of
revenues between the two utility lines of business occurs through the use of a
transfer price, primarily based on cost of production studies, that is
associated with the sale of a kilowatthour of electricity. The electric energy
commodity revenues are collected by Energy Delivery and transferred to
Generation and Resources. The increase in the transfer price represents the
increased cost of purchased power. This amounted to an additional $6.1 million
that was transferred from Energy Delivery to Generation and Resources, but this
additional amount was not collected from the customers. Energy Delivery's
operating revenues decreased $4.7 million in the third quarter of 1999 from 1998
while operating expenses increased $1.1 million.
Retail electric revenues, excluding the effect of the revenues transferred to
Generation and Resources, increased $3.6 million and natural gas revenues
increased $0.8 million in the third quarter of 1999 over 1998 due to customer
growth and slightly cooler weather in the third quarter of 1999.
NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1998
Energy Delivery's pre-tax income from operations decreased $15.2 million, or
19%, in the first nine months of 1999 from the same period in 1998. The decrease
was primarily the result of the increase in the transfer price between the two
utility lines of business that was discussed above. The increase in the transfer
price amounted to an additional $18.6 million that was transferred from Energy
Delivery to Generation and Resources, but this additional amount was not
collected from the customers. Energy Delivery's operating revenues and expenses
decreased $16.0 million and $0.8 million, respectively, during the first nine
months of 1999 from 1998.
Retail electric revenues, excluding the effect of the revenues transferred to
Generation and Resources, increased $9.5 million and natural gas revenues
increased $2.7 million in the first nine months of 1999 over 1998 due to
customer growth and slightly cooler weather in 1999 as compared to 1998 which
led to increased customer usage.
Total operating expenses decreased $0.8 million in the first nine months of 1999
from 1998. Other operations and maintenance expenses decreased $3.0 million due
to fewer storms, resulting in less storm damage, and realizing the benefit of
preventive maintenance programs such as cable replacement, pole test and treat,
and tree trimming. Administrative and general expenses decreased $1.6 million
from the first nine months of 1998 as a result of increased expenses during 1998
associated with the change in executive officers. These decreased expenses were
partially offset by increased depreciation and amortization expenses due to
increased plant-in-service and higher taxes other than income due to excise and
property taxes.
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GENERATION AND RESOURCES
THREE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 1998
Generation and Resources' pre-tax income from operations increased $2.5 million,
or 105%, in the third quarter of 1999 over 1998. The increase was primarily due
to the increase in the transfer price between the two utility lines of business,
which resulted in a $6.1 million increase in the electric energy commodity
revenues transferred to Generation and Resources by Energy Delivery. Operating
revenues and expenses increased $23.8 million and $21.3 million in the third
quarter of 1999 over 1998.
Wholesale revenues increased $15.4 million, or 9%, while sales volumes increased
only 2% during the third quarter of 1999 over 1998, reflecting higher prices for
purchased power in the region. Streamflows in the third quarter of 1999 were
120% of normal, compared to 100% of normal in 1998, which resulted in
hydroelectric generation 6% higher in 1999 than 1998. The majority of the
remainder of the increased revenues resulted from the higher electric commodity
revenues transferred from Energy Delivery.
Purchased power volumes increased 3% and prices were 7% higher than last year,
which resulted in a $19.9 million, or 11%, increase in purchased power expense
in the third quarter of 1999 over 1998. This increase accounts for the majority
of the increase in Generation and Resources' operating expenses.
NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1998
Generation and Resources' pre-tax income from operations increased $9.7 million,
or 40%, in the first nine months of 1999 over the same period in 1998. The
increase was primarily due to the increase in the transfer price between the two
utility lines of business, which resulted in an $18.6 million increase in the
electric energy commodity revenues transferred to Generation and Resources by
Energy Delivery. This increase was partially offset by purchased power costs
that increased more than the associated wholesale revenues during the first nine
months of 1999. The Company committed to electric energy purchases in 1998 based
on region-wide forecasts for colder temperatures and the expected higher demand
for energy from both retail and wholesale customers during early 1999. When
those forecasted colder temperatures did not materialize as anticipated in the
first quarter of 1999, the Company sold that energy into wholesale markets at
lower prices. Operating revenues and expenses increased $66.8 million and $57.0
million in the third quarter of 1999 over 1998.
Wholesale revenues increased $41.5 million, or 12%, while sales volumes
increased only 2% during the first nine months of 1999 over 1998, reflecting
higher prices for purchased power in the region. Streamflows in the first nine
months of 1999 were 110% of normal, compared to 92% of normal in 1998, which
resulted in hydroelectric generation 9% higher in the first nine months of 1999
compared to 1998. The majority of the remainder of the increased revenues
resulted from the higher electric commodity revenues transferred from Energy
Delivery.
Increased wholesale sales caused purchased power volumes to increase 2%, which,
combined with purchased power prices 14% higher than last year, resulted in a
$56.9 million, or 17%, increase in purchased power costs in the first nine
months of 1999 over 1998. This increase accounts for the majority of the
increase in Generation and Resources' operating expenses.
NATIONAL ENERGY TRADING AND MARKETING
National Energy Trading and Marketing includes the results of Avista Energy, the
national energy marketing subsidiary; Avista Advantage, the energy services
subsidiary; and Avista Power, formed in December 1998 to develop and own
generation assets primarily in support of Avista Energy. Avista Power operations
have had minimal impact on earnings to date. Avista Energy maintains a trading
portfolio that it marks to fair market value on a daily basis (mark-to-market
accounting), which causes earnings variability. For additional information about
market risk and credit risk, see Energy Trading Business on page 24.
THREE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 1998
National Energy Trading and Marketing income available for common stock for the
third quarter of 1999 was a loss of $0.3 million, which was the same as 1998.
Avista Energy's positive earnings for the quarter were offset by losses from
Avista Advantage and Avista Power. Avista Advantage's results primarily reflect
customers and revenue streams that
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have not materialized as expected and a longer than anticipated sales cycle.
Avista Power's results are due to start-up costs.
National Energy Trading and Marketing's revenues and operating expenses
increased $2.287 billion and $2.288 billion, respectively, in the third quarter
of 1999 over 1998. The increase in revenues and expenses is primarily the result
of Avista Energy continuing to grow its business.
NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1998
National Energy Trading and Marketing income available for common stock for the
first nine months of 1999 was a loss of $19.6 million compared to earnings of
$5.7 million in 1998. Avista Energy's operations were primarily affected by
warmer than normal weather, soft national energy markets and a lack of
volatility within those markets. Avista Energy recognized losses (1) on
positions taken in anticipation of certain weather patterns in particular areas
of the country, which lost value when the expected patterns did not occur, and
(2) on options, also taken in anticipation of certain weather patterns in
particular areas of the country, which expired unexercised when the expected
patterns did not occur. In addition, Avista Advantage and Avista Power have
experienced losses year-to-date due to the factors mentioned above.
National Energy Trading and Marketing's revenues and operating expenses
increased $3.692 billion and $3.733 billion, respectively, in the first nine
months of 1999 over 1998. The increase in revenues and expenses is primarily the
result of Avista Energy continuing to grow its business. Since its inception in
1997, Avista Energy has been developing and expanding its business and adding
experienced traders and staff. This growth has continued into 1999 with Avista
Energy's purchase of Vitol Gas & Electric, LLC (Vitol) in the first quarter.
Vitol, located in Boston, Massachusetts, was one of the top 20 energy marketing
companies in the United States.
Late in the second quarter of 1999, Avista Energy added a significant number of
energy professionals in its Spokane and Houston offices. The integration of
Vitol operations into Avista Energy began during the second quarter and is
continuing, with the consolidation of back-office support, improvements in
accounting and trading processes and personnel, and continued enhancements in
risk management systems across Avista Energy. The addition of new systems, new
leadership, and new financial and trading personnel has begun to turn results
around, but have not been large enough to overcome earlier losses.
National Energy Trading and Marketing's balance sheet increased $685.5 million
from December 1998 to September 1999. Avista Energy's energy commodity assets
and liabilities increased as a result of additional trading volumes, which were
partially offset by market price declines. Trade receivables and payables
increased due to additional volumes of sales and purchases.
NON-ENERGY
THREE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 1998
Non-energy operations primarily reflect the results from Pentzer. Non-energy
income available for common stock for the third quarter of 1999 was $27.2
million, compared to third quarter 1998 earnings of $2.5 million. The 1999
earnings primarily resulted from a transactional gain totaling $27.6 million,
net of taxes, recorded by Pentzer as a result of the sale of a group of its
portfolio companies. The gain was partially offset by the loss of income due to
the sale of a group of Pentzer's portfolio companies during the first quarter of
1999. Income taxes for the third quarter of 1999 increased substantially over
1998 as a result of taxes on Pentzer's transactional gain.
Non-energy operating revenues and expenses decreased $22.4 million and $20.2
million, respectively, during the third quarter of 1999, as compared to 1998,
primarily due to the sale of a group of Pentzer's portfolio companies during the
first quarter of 1999.
NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1998
Non-energy income available for common stock for the first nine months of 1999
was $33.7 million, compared to 1998 earnings of $11.0 million. The 1999 earnings
include transactional gains totaling $37.6 million, net of taxes, recorded by
Pentzer as a result of the sale of two groups of portfolio companies. The 1998
earnings included a transactional gain totaling $5.5 million, net of taxes,
recorded by Pentzer as a result of the sale of one of its portfolio companies,
Systran Financial Services. Non-transactional income from portfolio companies
decreased $5.5 million in the first nine months
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of 1999 from 1998 primarily due to the loss of income from the sale of a group
of Pentzer's portfolio companies in the first quarter of 1999.
Non-energy operating revenues and expenses decreased $42.5 million and $31.8
million, respectively, during the first nine months of 1999, as compared to
1998, primarily as a result of the sale of a group of Pentzer's portfolio
companies during the first quarter of 1999.
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LIQUIDITY AND CAPITAL RESOURCES
OVERALL OPERATIONS
Operating Activities Cash provided by operating activities in the first nine
months of 1999 totaled $119.8 million, compared to $153.6 million during the
same period in 1998. The primary reason for decreased cashflows was that only
$5.0 million of customer accounts receivables were sold during the first nine
months of 1999 compared to $40.0 million in 1998. Other various working capital
components, such as receivables and payables, continued to change substantially
in the 1999 period, although to a lesser degree than in the 1998 period,
primarily due to Avista Energy's operations.
Investing Activities Investing activities provided net cash of $6.3 million in
the first nine months of 1999 compared to net cash used of $89.6 million in the
same period in 1998. The primary cause of the change for investing activities in
1999 was the sale of two groups of portfolio companies by Pentzer.
Financing Activities Cash used in financing activities totaled $35.9 million
in the first nine months of 1999 compared to $59.1 million in 1998. Short-term
borrowings increased $97.2 million and $84.9 million of long-term debt was
issued, while $103.3 million of long-term debt and preferred stock matured or
was redeemed in the first nine months of 1999. In the 1998 period, short-term
borrowings decreased $52.7 million, $66.6 million of long-term debt was issued
and $28.8 million of preferred stock and long-term debt was redeemed or matured.
The repurchase of company stock (see paragraph below) used $82.0 million in
1999. Dividends paid decreased $24.0 million in the first nine months of 1999
compared to 1998 as a result of the Company's dividend restructuring that
occurred in December 1998.
On May 12, 1999, the Company's Board of Directors authorized a common stock
repurchase program in which the Company may repurchase in the open market or
through privately negotiated transactions up to an aggregate of 10 percent of
its common stock and common stock equivalents over the next two years. The
repurchased shares will be retired as authorized but unissued shares. As of
September 30, 1999, the Company had repurchased approximately 4.8 million common
shares and 250,000 shares of Return-Enhanced Convertible Securities (which is
equivalent to 25,000 shares of Convertible Preferred Stock, Series L). The
combined repurchases of these two securities represent 9% of outstanding common
stock and common stock equivalents.
On September 15, 1999, $83.7 million of Pollution Control Revenue Refunding
Bonds (Avista Corporation Colstrip Project), Series 1999A due 2032 and Series
1999B due 2034 were issued by the City of Forsyth, Montana. The proceeds of the
bonds were loaned to the Company under a Loan Agreement and were invested in
Federal Agency instruments maturing on December 1, 1999. On that date, the funds
will be utilized to refund the $66.7 million of 7 1/8% First Mortgage Bonds due
2013 and the $17.0 million of 7 2/5% First Mortgage Bonds due 2016. The Series
1999A and Series 1999B Bonds are backed by an insurance policy issued by AMBAC
Assurance Corporation and bear interest on a floating rate basis that will be
reset periodically. The initial interest rate until February 2000 is 3.6%.
In August 1999, the Company completed the documentation to issue up to and
including $400 million of Medium-Term Notes (MTNs), Series D. As of September
30, 1999, the Company had a total of $541.0 million of MTNs authorized to be
issued. In October 1999, the Company issued $25.0 million of 8.02% MTNs, Series
C due 2010.
In October 1999, the Company implemented a $50.0 million commercial paper
program.
The Company's total common equity decreased $55.9 million during the first nine
months of 1999 to $432.1 million, primarily due to the repurchase and retirement
of shares of the Company's common stock. The Company's consolidated capital
structure at September 30, 1999, was 48% debt, 25% preferred securities and 27%
common equity, compared to 45% debt, 25% preferred securities and 30% common
equity at year-end 1998. Had the convertible preferred stock been converted back
to common stock, the Company's consolidated capital structure at September 30,
1999, would have been 48% debt, 9% preferred securities and 43% common equity.
Capital expenditures are financed on an interim basis with notes payable (due
within one year). The Company has $260 million in committed lines of credit. In
addition, the Company may currently borrow up to $100 million through other
borrowing arrangements with banks. As of September 30, 1999, $53.5 million was
outstanding under other short-term borrowing arrangements and $50.0 million was
outstanding under the committed line of credit.
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ENERGY DELIVERY AND GENERATION AND RESOURCES OPERATIONS
The Company funds capital expenditures with a combination of
internally-generated cash and external financing. The level of cash generated
internally and the amount that is available for capital expenditures fluctuates
annually. Cash provided by operating activities remains the Company's primary
source of funds for operating needs, dividends and capital expenditures.
NATIONAL ENERGY TRADING AND MARKETING OPERATIONS
Avista Energy and its subsidiary, Avista Energy Canada, Ltd., as co-borrowers,
have a credit agreement with two commercial banks in the aggregate amount of
$110 million, expiring May 31, 2000. The credit agreement may be terminated by
the banks at any time and all extensions of credit under the agreement are
payable upon demand, in either case at the banks' sole discretion. The agreement
also provides, on an uncommitted basis, for the issuance of letters of credit to
secure contractual obligations to counterparts. The facility is guaranteed by
Avista Capital and is secured by substantially all of Avista Energy's assets.
The maximum amount of credit extended by the banks for cash advances is $30
million, with availability of up to $110 million (less the amount of outstanding
cash advances, if any) for the issuance of letters of credit. At September 30,
1999, there were no cash advances (demand notes payable) outstanding, and
letters of credit outstanding under the facility totaled $80.0 million.
At September 30, 1999, National Energy Trading and Marketing operations had
$72.9 million in cash and marketable securities with $3.7 million in long-term
debt outstanding.
NON-ENERGY OPERATIONS
The non-energy operations have $29.0 million in short-term borrowing
arrangements available ($4.2 million outstanding as of September 30, 1999) to
fund Pentzer's portfolio companies' requirements on an interim basis. The
short-term borrowing arrangements available and the amounts outstanding have
decreased substantially during 1999 as a result of the sales of two groups of
portfolio companies by Pentzer. Capital expenditures have increased in 1999 over
1998 as a result of the increased requirements of the newer start-up
subsidiaries, such as Avista Communications and Avista Fiber.
At September 30, 1999, the non-energy operations had $20.9 million in cash and
marketable securities with $7.6 million in long-term debt outstanding (the
current portions of which are included on the Consolidated Balance Sheets as
other current liabilities).
YEAR 2000
State of Readiness
As of the end of September 1999, the Company believes all of its internal
business critical systems that could affect the Company's ability to deliver
electric and natural gas are Year 2000 ready. During the remainder of 1999, the
Company will complete the remaining non-mission critical tasks, continue to work
with key suppliers, and refine and test contingency plans. Key activities
include the assignment of resources to key locations for the evening of December
31, 1999 and the morning of January 1, 2000, training of personnel, testing of
contingency procedures and completion of other tasks that support the Company's
contingency plans. The Company participated in two region-wide contingency
planning drills coordinated by the Western Systems Coordinating Council (WSCC)
on April 9, 1999 and September 8-9, 1999.
Desktop Computer Systems The Company performed Year 2000 testing on all
desktop computer hardware and inventoried and assessed desktop resident
third-party software. All non-compliant third-party software programs and
critical business desktop applications have been made Year 2000 ready. All
desktop hardware requiring remediation has either been fixed or replaced.
Business Systems Several of the Company's business systems would not have
operated correctly in the year 2000 and beyond. The Company has completed Year
2000 remediation and testing of mainframe computer code. A failure of these
systems would not jeopardize the Company's ability to deliver energy services to
customers, but might affect its ability to perform selected accounting and
business-related functions.
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Supply Chain The Company recognizes its dependence on outside suppliers of
goods and services and has worked to assure that the necessary products and
services are available. The Company identified and communicated with critical
suppliers in order to investigate their efforts to become Year 2000 ready. In
addition, the Company made site visits to selected key suppliers and reviewed
their contingency plans.
Embedded Systems Inventory, assessment, testing and remediation of
microprocessor-controlled devices is complete. Very few embedded systems
required remediation, and none requiring remediation would have caused a
disruption in service to customers.
Contingency Planning The Company has developed contingency plans for the
Company's electric and natural gas services and continues to participate in the
development of region-wide contingency plans for electric service through the
WSCC, the Company's electric reliability region.
Costs
The Company estimates that the cost of its Year 2000 project will be
approximately $7 million in incremental costs during the 1997-1999 time period.
Through September 30, 1999, the Company has spent $6.1 million in incremental
costs. These costs are being funded through operating cashflows. The Company
does not expect costs associated with the Year 2000 project to materially affect
the Company's earnings in any one year.
Risks
Based upon information to date, the Company believes that, in the most
reasonably likely worst-case scenario, Year 2000 issues could result in abnormal
operating conditions, such as short-term interruption of generation,
transmission and distribution functions, as well as Company-wide loss of system
monitoring and control functions and loss of voice communications. These
conditions, along with disruptions in natural gas service caused by failures of
gas suppliers or interstate gas pipelines coupled with power outages due to the
possible instability of the regional electric transmission grid, could result in
the possible temporary interruption of service to customers. The Company does
not believe the overall impact of this scenario will have a material impact on
its financial condition or operations due to the anticipated short-term nature
of interruptions.
The Company believes the primary areas of Year 2000 risk to be internal business
systems, which are discussed above, and external factors, which include the
regional electric transmission grid and natural gas pipelines. There can be no
guarantee that systems of other companies on which the Company's systems rely
will be timely converted. A failure to convert by another company or a
conversion that is incompatible with the Company's systems could have an effect
on the Company's ability to provide energy services.
Electric The Company is working with the other energy suppliers in the area to
address risks related to the regional electric transmission grid, which consists
of the interconnected transmission systems of each utility within the WSCC. Such
interconnected systems are critical to the reliability of each interconnected
electric service provider, as the failure of one such interconnected provider to
achieve Year 2000 compliance could disrupt the others from providing electric
services. Should the regional electric transmission grid become unstable, power
outages may occur. The Company cannot assure Year 2000 compliance or assess the
effect of non-compliance by systems or parties that the Company does not
control.
Natural Gas The Company has performed an inventory and assessment of the
equipment in its natural gas distribution systems and believes that there are no
devices in the systems that will cause a disruption in the delivery of natural
gas to customers due to a Year 2000 problem. However, the Company depends on
natural gas pipelines which it does not own or control, and if one or more of
the pipelines is unable to deliver natural gas, the Company in turn will be
unable to deliver natural gas to customers. In order to address this issue, the
Company has contacted each of the natural gas pipeline companies with which it
has contracts to assess their Year 2000 readiness efforts and will continue to
take reasonable steps to ensure that these suppliers are addressing any Year
2000 related problems that would result in a disruption in natural gas services
to customers.
Energy Trading In addition to the traditional utility operations of the
Company, the energy trading business conducted by Avista Energy is subject to
Year 2000 risk. Most of Avista Energy's internal business systems do not require
any significant upgrading and those that do have been addressed. With the
integration of Avista Energy's and Vitol's systems, an entire new infrastructure
is being implemented, scheduled to be complete by the end of September, which
will be Year 2000 compliant. However, if any of Avista Energy's counterparties
experience Year 2000
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problems (including, but not limited to, problems arising out of failures in the
generation or transmission systems of utilities or other energy suppliers), such
problems could impair the ability of Avista Energy or any of its counterparties
to fulfill their contractual obligations. Avista Energy has contacted its
counterparties and various power pools to assess their Year 2000 readiness and
is developing contingency plans. See "Energy Trading Business".
ENERGY TRADING BUSINESS
The participants in the emerging wholesale energy market are public utility
companies and, increasingly, power marketers which may or may not be affiliated
with public utility companies or other entities. The participants in this market
trade not only electricity and natural gas as commodities but also derivative
commodity instruments such as futures, forwards, swaps, options and other
instruments. This market is largely unregulated and most transactions are
conducted on an "over-the-counter" basis, there being no central clearing
mechanism (except in the case of specific instruments traded on the commodity
exchanges). Power marketers, whether or not affiliated with other entities,
generally do not own production facilities and are not subject to net capital or
other requirements of any regulatory agency.
The Company (to the extent that the Generation and Resources segment conducts
energy trading) and Avista Energy are subject to the various risks inherent in
commodity trading including, particularly, market risk and credit risk.
Market risk is, in general, the risk of fluctuation in the market price of the
commodity being traded and is influenced primarily by supply (in the case of
electricity, adequacy of generating reserve margins as well as scheduled and
unscheduled outages of generating facilities) and demand (extreme variations in
the weather, whether or not predicted). Market risk includes the risk of
fluctuation in the market price of associated derivative commodity instruments.
All market risk is influenced to the extent that the performance or
non-performance by market participants of their contractual obligations and
commitments affect the supply of the commodity.
Credit risk relates to the risk of loss that the Company (to the extent of
Generation and Resources' trading activities) and/or Avista Energy would incur
as a result of non-performance by counterparties of their contractual
obligations under the various instruments with the Company or Avista Energy, as
the case may be. Credit risk may be concentrated to the extent that one or more
groups of counterparties have similar economic, industry or other
characteristics that would cause their ability to meet contractual obligations
to be similarly affected by changes in market or other conditions. In addition,
credit risk includes not only the risk that a counterparty may default due to
circumstances relating directly to it, but also the risk that a counterparty may
default due to circumstances which relate to other market participants which
have a direct or indirect relationship with such counterparty. The Company and
Avista Energy seek to mitigate credit risk (and concentrations thereof) by
applying specific eligibility criteria to prospective counterparties. However,
despite mitigation efforts, defaults by counterparties may occur from time to
time. To date, no such default has had a material adverse effect on the Company
or Avista Energy.
Avista Capital provides guarantees for Avista Energy's line of credit agreement,
and in the course of business may provide guarantees to other parties with whom
Avista Energy may be doing business. The Company's investment in Avista Capital
totaled $275.8 million at September 30, 1999.
RISK MANAGEMENT
The risk management process established by the Company is designed to measure
both quantitative and qualitative risk in the business. The Company and Avista
Energy have adopted policies and procedures to manage the risks inherent in
their businesses and have established a comprehensive Risk Management Committee,
separate from the units that create the risk exposure and overseen by the Audit
and Finance Committee of the Company's Board of Directors, to monitor compliance
with the Company's risk management policies and procedures on a regular basis.
Nonetheless, adverse changes in interest rates, commodity prices and foreign
currency exchange rates may result in losses in earnings, cash flow and/or fair
values.
Interest Rate Risk The Company's market risks related to interest rates have
not changed materially from those reported in the 1998 Form 10-K.
Commodity Price Risk The Company's market risks related to commodity prices
have not changed materially from those reported in the 1998 Form 10-K. The
following Value-at-Risk (VAR) information has been updated for the
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AVISTA CORPORATION
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current period. At September 30, 1999, Avista Energy's estimated potential
one-day unfavorable impact on gross margin was $4.0 million, as measured by VAR,
related to its commodity trading and marketing business. The average daily VAR
for the first nine months of 1999 was $4.4 million.
Foreign Currency Risk The Company's market risks related to foreign currency
have not changed materially from those reported in the 1998 Form 10-K.
SAFE HARBOR FOR FORWARD LOOKING STATEMENTS.
The Company is including the following cautionary statement in this Form 10-Q to
make applicable and to take advantage of the safe harbor provisions of the
Private Securities Litigation Reform Act of 1995 for any forward-looking
statements made by, or on behalf of, the Company. Forward-looking statements are
all statements other than statements of historical fact, including without
limitation those that are identified by the use of the words "anticipates,"
"estimates," "expects," "intends," "plans," "predicts," and similar expressions.
Such statements are inherently subject to a variety of risks and uncertainties
that could cause actual results to differ materially from those expressed. Such
risks and uncertainties include, among others, changes in the utility regulatory
environment, wholesale and retail competition, weather conditions and various
other matters, many of which are beyond the Company's control. These
forward-looking statements speak only as of the date of the report. The Company
expressly undertakes no obligation to update or revise any forward-looking
statement contained herein to reflect any change in the Company's expectations
with regard thereto or any change in events, conditions, or circumstances on
which any such statement is based. See "Safe Harbor for Forward Looking
Statements" in the Company's 1998 Form 10-K under Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations Future
Outlook.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations: Liquidity and Capital Resources: Energy Trading Business and Risk
Management."
PART II. OTHER INFORMATION
ITEM 5. OTHER INFORMATION
Avista Utilities/Avista Energy Agency Agreement Effective September 1, 1999,
Avista Energy began managing the natural gas assets and natural gas purchasing
operations for Avista Utilities' Energy Delivery line of business. Under the
agreement, Avista Energy will serve as agent for Avista Utilities, managing its
pipeline transportation and natural gas storage assets, as well as purchasing
natural gas for Energy Delivery's retail customers. The assets will continue to
be owned by Avista Utilities, but they will be fully integrated operationally
into Avista Energy's portfolio to optimize the value. The incentive plan allows
Avista Energy the opportunity to retain a portion of the benefits associated
with asset optimization and the efficiencies gained in purchasing natural gas
for the utility. The Company received approval from the state regulatory
agencies in Washington, Idaho and Oregon. The incentive plan began September 1,
1999 and will end March 31, 2002. The Company may seek continuation of the plan
from regulators with six months notice prior to the end of the term.
Washington Electric and Natural Gas Rate Filings In October 1999, the Company
filed for electric and natural gas rate increases with the Washington Utilities
and Transportation Commission (WUTC). The Company is requesting an overall
electric revenue increase of $26.3 million, or 10.4%, and a natural gas increase
of $4.9 million, or 6.5%.
Idaho Electric Rate Increase In December 1998, the Company filed for a general
electric rate increase of $14.2 million, or 11.56%, with the Idaho Public
Utilities Commission (IPUC), which was later reduced to approximately
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$13.5 million or 10.9%. In July 1999, the IPUC approved a rate increase of $9.3
million or 7.58%, effective August 1, 1999. The Company is implementing a 2.5%
power cost adjustment (PCA) rebate, also effective August 1, 1999.
Centralia Power Plant In May 1999, the owners of the Centralia Power Plant
announced an agreement to sell the plant to TransAlta, a Canadian company.
Avista Corp. has a 15% interest in the generating plant. The Company expects to
receive gross proceeds of approximately $60 million for its share of the plant.
Final accounting for the sale of the plant is still being determined. The sale
must be approved by federal and state regulators, as well as the city councils
or directors who control the municipal utilities and public utility districts
that also have ownership interests in the Centralia plant. It is expected that
all approvals will be completed by the end of the first quarter of 2000.
Avista Labs Avista Labs selected a Spokane company, Logan Industries, Inc., to
manufacture its introductory proton exchange membrane (PEM) fuel cell
generators. Manufacturing began in June, with the first units scheduled to ship
in November. Avista Labs will then begin installing demonstration sites
throughout the United States to prove the reliability and ease of operation.
Avista Power In September 1999, Avista Power and STEAG AG, Germany's largest
independent power producer, completed the formation of a joint venture to
develop, build and/or buy electric generation assets in strategic locations
throughout North America. The level of investment may vary between projects, but
is normally expected to be equally shared.
Avista Communications Avista Communications continues to rapidly expand its
business as a provider of local, facilities-based telecommunications services,
including local dial tone, data transport, Internet access and data networking
connectivity in communities with populations under 250,000. In May 1999, Avista
Communications finalized an acquisition agreement with Western Technology
Partners, a Billings, Montana internet service provider, to form Avista
Communications of Montana. Avista Communications also recently announced plans
to expand into a number of regional cities, including Bellingham and Yakima,
Washington; Coeur d'Alene and Lewiston, Idaho; and Medford, Oregon.
Coeur d' Alene Lake Court Decision On July 28, 1998, the United States
District Court for the District of Idaho issued its finding that the Coeur d'
Alene Tribe of Idaho owns the bed and banks of the Coeur d' Alene Lake and the
St. Joe River lying within the current boundaries of the Coeur d' Alene
Reservation. The disputed bed and banks comprise approximately the southern
one-third of Lake Coeur d' Alene. This action had been brought by the United
States on behalf of the Tribe against the State of Idaho. While the Company is
not a party to this action, which has been appealed by the State of Idaho to the
Ninth Circuit, the Company is continuing to evaluate the impact of this decision
on the operation of its hydroelectric facilities on the Spokane River,
downstream of the Coeur d' Alene Lake, which is the reservoir for these plants.
ADDITIONAL FINANCIAL DATA
At September 30, 1999, the total long-term debt of the Company and its
consolidated subsidiaries, as shown in the Company's consolidated financial
statements, was approximately $786.8 million. Of such amount, $218.5 million
represents long-term unsecured and unsubordinated indebtedness of the Company,
and $455.9 million represents secured indebtedness of the Company. The balance
of $112.4 million includes short-term notes to be refinanced as well as
indebtedness of subsidiaries. Consolidated long-term debt does not include the
Company's subordinated indebtedness held by the issuers of Company-obligated
preferred trust securities.
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The following table reflects the ratio of earnings to fixed charges and the
ratio of earnings to fixed charges and preferred dividend requirements:
<TABLE>
<CAPTION>
12 Months Ended
----------------------------
September 30, December 31,
1999 1998
------------- ------------
<S> <C> <C>
Ratio of Earnings to Fixed Charges 2.71 (x) 2.66 (x)
Ratio of Earnings to Fixed Charges and
Preferred Dividend Requirements 1.81 (x) 2.25 (x)
</TABLE>
The Company has long-term purchased power arrangements with various Public
Utility Districts and the interest expense components of these contracts are
included in purchased power expenses. These interest amounts are not included in
the fixed charges and would not have a material impact on fixed charges ratios.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
12 Computation of ratio of earnings to fixed charges and
preferred dividend requirements.
27 Financial Data Schedule.
(b) Reports on Form 8-K.
Dated January 6, 1999, regarding the Company's name change to
Avista Corporation.
Dated June 15, 1999, regarding anticipated lower second quarter
earnings.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
AVISTA CORPORATION
(Registrant)
Date: November 15, 1999 /s/ J. E. Eliassen
-----------------------------
J. E. Eliassen
Senior Vice President and
Chief Financial Officer
(Principal Accounting and
Financial Officer)
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EXHIBIT 12
AVISTA CORPORATION
Computation of Ratio of Earnings to Fixed Charges and Preferred
Dividend Requirements Consolidated
(Thousands of Dollars)
<TABLE>
<CAPTION>
12 Mos. Ended Years Ended December 31
Sep. 30, --------------------------------------------------------
1999 1998 1997 1996 1995
------------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Fixed charges, as defined:
Interest on long-term debt $ 65,519 $ 66,218 $ 63,413 $ 60,256 $ 55,580
Amortization of debt expense
and premium - net 1,442 2,859 2,862 2,998 3,441
Interest portion of rentals 4,458 4,301 4,354 4,311 3,962
-------- -------- -------- -------- --------
Total fixed charges $ 71,419 $ 73,378 $ 70,629 $ 67,565 $ 62,983
======== ======== ======== ======== ========
Earnings, as defined:
Net income from continuing ops. $ 77,067 $ 78,139 $114,797 $ 83,453 $ 87,121
Add (deduct):
Income tax expense 44,917 43,335 61,075 49,509 52,416
Total fixed charges above 71,419 73,378 70,629 67,565 62,983
-------- -------- -------- -------- --------
Total earnings $193,403 $194,852 $246,501 $200,527 $202,520
======== ======== ======== ======== ========
Ratio of earnings to fixed charges 2.71 2.66 3.49 2.97 3.22
Fixed charges and preferred
dividend requirements:
Fixed charges above $ 71,419 $ 73,378 $ 70,629 $ 67,565 $ 62,983
Preferred dividend requirements (1) 35,275 13,057 8,261 12,711 14,612
-------- -------- -------- -------- --------
Total $106,694 $ 86,435 $ 78,890 $ 80,276 $ 77,595
======== ======== ======== ======== ========
Ratio of earnings to fixed charges
and preferred dividend requirements 1.81 2.25 3.12 2.50 2.61
</TABLE>
(1) Preferred dividend requirements have been grossed up to their pre-tax level.
<TABLE> <S> <C>
<ARTICLE> UT
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS OF AVISTA CORPORATION, INCLUDED IN THE
QUARTERLY REPORT ON FORM 10-Q FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999, AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> SEP-30-1999
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 1,488,380
<OTHER-PROPERTY-AND-INVEST> 723,744
<TOTAL-CURRENT-ASSETS> 1,349,715
<TOTAL-DEFERRED-CHARGES> 279,499
<OTHER-ASSETS> 0
<TOTAL-ASSETS> 3,841,338
<COMMON> 310,169
<CAPITAL-SURPLUS-PAID-IN> (4,567)
<RETAINED-EARNINGS> 126,512
<TOTAL-COMMON-STOCKHOLDERS-EQ> 432,114
145,000
264,555
<LONG-TERM-DEBT-NET> 618,792<F1>
<SHORT-TERM-NOTES> 107,659
<LONG-TERM-NOTES-PAYABLE> 1,395
<COMMERCIAL-PAPER-OBLIGATIONS> 0
<LONG-TERM-DEBT-CURRENT-PORT> 61,898
0
<CAPITAL-LEASE-OBLIGATIONS> 4,707
<LEASES-CURRENT> 2,269
<OTHER-ITEMS-CAPITAL-AND-LIAB> 2,202,949<F2>
<TOT-CAPITALIZATION-AND-LIAB> 3,841,338
<GROSS-OPERATING-REVENUE> 6,366,047
<INCOME-TAX-EXPENSE> 32,348<F3>
<OTHER-OPERATING-EXPENSES> 6,299,820
<TOTAL-OPERATING-EXPENSES> 6,299,820
<OPERATING-INCOME-LOSS> 66,227
<OTHER-INCOME-NET> 69,224
<INCOME-BEFORE-INTEREST-EXPEN> 135,451<F4>
<TOTAL-INTEREST-EXPENSE> 47,593
<NET-INCOME> 55,510
16,107
<EARNINGS-AVAILABLE-FOR-COMM> 39,403
<COMMON-STOCK-DIVIDENDS> 14,023
<TOTAL-INTEREST-ON-BONDS> 0
<CASH-FLOW-OPERATIONS> 119,819
<EPS-BASIC> 1.01
<EPS-DILUTED> 0.98
<FN>
<F1>LONG-TERM DEBT-NET DOES NOT MATCH THE AMOUNT REPORTED ON THE COMPANY'S
CONSOLIDATED STATEMENT OF CAPITALIZATION AS LONG-TERM DEBT DUE TO THE OTHER
CATEGORIES REQUIRED BY THIS SCHEDULE.
<F2>OTHER ITEMS CAPITAL AND LIABILITIES INCLUDES THE CURRENT LIABILITIES, DEFERRED
CREDITS AND MINORITY INTEREST, LESS CERTAIN AMOUNTS INCLUDED UNDER LONG-TERM
DEBT-CURRENT PORTION AND LEASES-CURRENT, FROM THE COMPANY'S CONSOLIDATED
BALANCE SHEET.
<F3>THE COMPANY DOES NOT INCLUDE INCOME TAX EXPENSE AS AN OPERATING EXPENSE ITEM.
IT IS INCLUDED ON THE COMPANY'S STATEMENTS AS A BELOW-THE-LINE ITEM.
<F4>INCOME BEFORE INTEREST EXPENSE IS NOT A SPECIFIC LINE ITEM ON THE COMPANY'S
INCOME STATEMENTS. THE COMPANY COMBINES TOTAL INTEREST EXPENSE AND OTHER
INCOME TO CALCULATE INCOME BEFORE INCOME TAXES.
</FN>
</TABLE>
