<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 March 31, 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 April 30, 1999, 40,453,729 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> <C>
Part I. Financial Information:
Item 1. Financial Statements
Consolidated Statements of Income - Three Months Ended
March 31, 1999 and 1998 ...................................... 3
Consolidated Balance Sheets - March 31, 1999
and December 31, 1998 ........................................ 4
Consolidated Statements of Capitalization - March 31, 1999
and December 31, 1998 ........................................ 5
Consolidated Statements of Cash Flows - Three Months Ended
March 31, 1999 and 1998 ...................................... 6
Schedule of Information by Business Segments - Three Months Ended
March 31, 1999 and 1998 ...................................... 7
Notes to Consolidated Financial Statements ...................... 9
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations ....................................... 12
Item 3. Quantitative and Qualitative Disclosures About Market Risk ...... 18
Part II. Other Information:
Item 5. Other Information ............................................... 18
Item 6. Exhibits and Reports on Form 8-K ................................ 19
Signature .......................................................................... 20
</TABLE>
2
<PAGE> 3
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
Avista Corporation
- --------------------------------------------------------------------------------
For the Three Months Ended March 31
Thousands of Dollars
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
OPERATING REVENUES ................................ $ 1,212,822 $ 571,678
----------- -----------
OPERATING EXPENSES:
Resource costs ................................ 1,065,000 407,587
Operations and maintenance .................... 52,776 48,848
Administrative and general .................... 30,517 26,225
Depreciation and amortization ................. 19,070 17,659
Taxes other than income taxes ................. 15,096 14,726
----------- -----------
Total operating expenses ................... 1,182,459 515,045
----------- -----------
INCOME FROM OPERATIONS ............................ 30,363 56,633
----------- -----------
OTHER INCOME (EXPENSE):
Interest expense .............................. (16,739) (17,229)
Net gain on subsidiary transactions ........... 16,479 7,611
Other income (deductions)-net ................. 1,586 5,126
----------- -----------
Total other income (expense)-net ........... 1,326 (4,492)
----------- -----------
INCOME BEFORE INCOME TAXES ........................ 31,689 52,141
INCOME TAXES ...................................... 12,301 19,909
----------- -----------
NET INCOME ........................................ 19,388 32,232
DEDUCT-Preferred stock dividend requirements ...... 5,384 824
----------- -----------
INCOME AVAILABLE FOR COMMON STOCK ................. $ 14,004 $ 31,408
=========== ===========
Average common shares outstanding (thousands) ..... 40,454 55,960
EARNINGS PER SHARE OF COMMON STOCK, BASIC ......... $ 0.35 $ 0.56
EARNINGS PER SHARE OF COMMON STOCK, DILUTED ....... $ 0.34 $ 0.56
Dividends paid per common share ................... $ 0.12 $ 0.31
NET INCOME ........................................ $ 19,388 $ 32,232
----------- -----------
OTHER COMPREHENSIVE INCOME:
Foreign currency translation adjustment ....... 220 --
Unrealized investment gains/(losses)-net of tax 415 272
----------- -----------
OTHER COMPREHENSIVE INCOME ........................ 635 272
----------- -----------
COMPREHENSIVE INCOME .............................. $ 20,023 $ 32,504
=========== ===========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
3
<PAGE> 4
CONSOLIDATED BALANCE SHEETS
Avista Corporation
- --------------------------------------------------------------------------------
Thousands of Dollars
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
---------- ----------
<S> <C> <C>
ASSETS:
CURRENT ASSETS:
Cash and cash equivalents ................................ $ 80,807 $ 72,836
Temporary cash investments ............................... 490 5,786
Accounts and notes receivable-net ........................ 443,154 456,857
Energy commodity assets .................................. 486,131 335,224
Option premiums paid ..................................... 94,891 22,357
Materials and supplies, fuel stock and natural gas stored 38,010 42,140
Prepayments and other .................................... 43,543 33,396
---------- ----------
Total current assets .................................. 1,187,026 968,596
---------- ----------
UTILITY PROPERTY:
Utility plant in service-net ............................. 2,112,292 2,095,301
Construction work in progress ............................ 42,990 45,391
---------- ----------
Total ................................................. 2,155,282 2,140,692
Less: Accumulated depreciation and amortization ......... 682,408 669,750
---------- ----------
Net utility plant ..................................... 1,472,874 1,470,942
---------- ----------
OTHER PROPERTY AND INVESTMENTS:
Investment in exchange power-net ......................... 61,127 62,577
Non-utility properties and investments-net ............... 200,738 206,773
Energy commodity assets .................................. 205,910 236,644
Other-net ................................................ 26,606 26,016
---------- ----------
Total other property and investments .................. 494,381 532,010
---------- ----------
DEFERRED CHARGES:
Regulatory assets for deferred income tax ................ 170,114 171,037
Conservation programs .................................... 47,605 49,114
Unamortized debt expense ................................. 28,002 28,414
Other-net ................................................ 37,268 33,523
---------- ----------
Total deferred charges ................................ 282,989 282,088
---------- ----------
TOTAL .............................................. $3,437,270 $3,253,636
========== ==========
LIABILITIES AND CAPITALIZATION:
CURRENT LIABILITIES:
Accounts payable ......................................... $ 424,440 $ 406,457
Energy commodity liabilities ............................. 497,963 330,957
Option premiums received ................................. 60,686 17,430
Taxes and interest accrued ............................... 45,663 38,628
Other .................................................... 55,907 70,721
---------- ----------
Total current liabilities ............................. 1,084,659 864,193
---------- ----------
NON-CURRENT LIABILITIES AND DEFERRED CREDITS:
Non-current liabilities .................................. 36,561 34,815
Deferred revenue ......................................... 141,174 145,124
Energy commodity liabilities ............................. 169,303 207,948
Deferred income taxes .................................... 367,549 357,702
Other deferred credits ................................... 9,837 11,571
---------- ----------
Total non-current liabilities and deferred credits .... 724,424 757,160
---------- ----------
CAPITALIZATION (See Consolidated Statements of Capitalization) 1,628,187 1,632,283
---------- ----------
COMMITMENTS AND CONTINGENCIES (Note 4)
TOTAL .............................................. $3,437,270 $3,253,636
========== ==========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
4
<PAGE> 5
CONSOLIDATED STATEMENTS OF CAPITALIZATION
Avista Corporation
- --------------------------------------------------------------------------------
Thousands of Dollars
<TABLE>
<CAPTION>
March 31, 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 8.06% due 2000 through 2023 ............................. 180,400 211,500
Series B - 6.20% to 8.25% due 1999 through 2010 ............................. 150,000 150,000
----------- -----------
Total first mortgage bonds .................................................. 414,100 445,200
----------- -----------
Pollution Control Bonds:
6% Series due 2023 ............................................................ 4,100 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 .............................. 44,400 --
Other ............................................................................. 34,845 43,222
----------- -----------
Total long-term debt ........................................................... 715,945 730,022
----------- -----------
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; 1,540,460 shares outstanding ($182.80 stated value) 269,148 269,227
----------- -----------
Total convertible preferred stock ........................................... 269,148 269,227
----------- -----------
COMMON EQUITY:
Common stock, no par value; 200,000,000 shares authorized;
40,453,729 shares outstanding .................................................. 381,401 381,401
Note receivable from employee stock ownership plan ................................ (9,057) (9,295)
Capital stock expense and other paid in capital ................................... (4,177) (4,176)
Other comprehensive income ........................................................ 294 (341)
Retained earnings ................................................................. 129,633 120,445
----------- -----------
Total common equity ............................................................ 498,094 488,034
----------- -----------
TOTAL CAPITALIZATION .................................................................. $ 1,628,187 $ 1,632,283
=========== ===========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
5
<PAGE> 6
CONSOLIDATED STATEMENTS OF CASH FLOWS
Increase (Decrease) in Cash and Cash Equivalents
Avista Corporation
- --------------------------------------------------------------------------------
For the Three Months Ended March 31
Thousands of Dollars
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income .................................................... $ 19,388 $ 32,232
NON-CASH ITEMS INCLUDED IN NET INCOME:
Depreciation and amortization .............................. 19,070 17,659
Provision for deferred income taxes ........................ 11,275 7,870
Allowance for equity funds used during construction ........ (301) (402)
Power and natural gas cost deferrals and amortizations ..... (1,249) 1,151
Gain on sale of subsidiary investments and other-net ....... (10,865) (8,468)
(Increase) decrease in working capital components:
Receivables and prepaid expense ......................... (11,559) (32,459)
Materials & supplies, fuel stock and natural gas stored . 4,130 3,010
Payables and other accrued liabilities .................. 9,874 42,227
Other ................................................... (4,506) (5,235)
-------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES ......................... 35,257 57,585
-------- --------
INVESTING ACTIVITIES:
Construction expenditures (excluding AFUDC-equity funds) ...... (16,327) (19,253)
Other capital requirements .................................... (6,877) (2,445)
(Increase) decrease in other noncurrent balance sheet items-net (2,422) 2,923
Proceeds from sale of subsidiary investments .................. 63,483 22,433
Assets acquired and investments in subsidiaries ............... (40,755) (10,254)
-------- --------
NET CASH USED IN INVESTING ACTIVITIES ............................. (2,898) (6,596)
-------- --------
FINANCING ACTIVITIES:
Increase (decrease) in short-term borrowings .................. 38,801 (28,224)
Proceeds from issuance of long-term debt ...................... 581 6,251
Redemption and maturity of long-term debt ..................... (52,694) (8,686)
Cash dividends paid ........................................... (10,250) (18,171)
Other-net ..................................................... (826) (227)
-------- --------
NET CASH USED IN FINANCING ACTIVITIES ............................. (24,388) (49,057)
-------- --------
NET INCREASE IN CASH & CASH EQUIVALENTS ........................... 7,971 1,932
CASH & CASH EQUIVALENTS AT BEGINNING OF PERIOD .................... 72,836 30,593
-------- --------
CASH & CASH EQUIVALENTS AT END OF PERIOD .......................... $ 80,807 $ 32,525
======== ========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the period:
Interest ................................................... $ 13,862 $ 14,655
Income taxes ............................................... 1,439 390
Noncash financing and investing activities:
Property purchased under capitalized leases ................ 267 244
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
6
<PAGE> 7
SCHEDULE OF INFORMATION BY BUSINESS SEGMENTS
Avista Corporation
- --------------------------------------------------------------------------------
For the Three Months Ended March 31
Thousands of Dollars
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
OPERATING REVENUES:
Energy Delivery ............................... $ 117,416 $ 127,295
Generation and Resources ...................... 149,370 126,910
National Energy Trading and Marketing ......... 896,028 271,057
Non-energy .................................... 50,636 47,684
Intersegment eliminations ..................... (628) (1,268)
----------- -----------
Total operating revenues ................... $ 1,212,822 $ 571,678
=========== ===========
RESOURCE COSTS:
Energy Delivery:
Natural gas purchased for resale ........... $ 35,191 $ 37,918
PCA and other .............................. (493) (1,226)
Generation and Resources:
Power purchased ............................ 109,765 85,895
Fuel for generation ........................ 8,001 9,470
Other ...................................... 11,289 12,315
National Energy Trading and Marketing:
Cost of sales .............................. 901,875 264,483
Intersegment eliminations ..................... (628) (1,268)
----------- -----------
Total resource costs (excluding Non-energy) $ 1,065,000 $ 407,587
=========== ===========
GROSS MARGINS:
Energy Delivery ............................... $ 82,718 $ 90,603
Generation and Resources ...................... 20,315 19,230
National Energy Trading and Marketing ......... (5,847) 6,574
----------- -----------
Total gross margins (excluding Non-energy) . $ 97,186 $ 116,407
=========== ===========
OPERATIONS AND MAINTENANCE EXPENSES:
Energy Delivery ............................... $ 13,035 $ 14,158
National Energy Trading and Marketing ......... 764 312
Non-energy .................................... 38,977 34,378
----------- -----------
Total operations and maintenance expenses .. $ 52,776 $ 48,848
=========== ===========
ADMINISTRATIVE AND GENERAL EXPENSES:
Energy Delivery ............................... $ 11,515 $ 11,174
Generation and Resources ...................... 2,975 3,522
National Energy Trading and Marketing ......... 6,460 4,170
Non-energy .................................... 9,567 7,359
----------- -----------
Total administrative and general expenses .. $ 30,517 $ 26,225
=========== ===========
DEPRECIATION AND AMORTIZATION EXPENSES:
Energy Delivery ............................... $ 9,184 $ 8,678
Generation and Resources ...................... 6,269 6,180
National Energy Trading and Marketing ......... 653 163
Non-energy .................................... 2,964 2,638
----------- -----------
Total depreciation and amortization expenses $ 19,070 $ 17,659
=========== ===========
INCOME/(LOSS) FROM OPERATIONS (PRE-TAX):
Energy Delivery ............................... $ 37,482 $ 45,369
Generation and Resources ...................... 8,417 6,767
National Energy Trading and Marketing ......... (13,734) 1,929
Non-energy .................................... (1,802) 2,568
----------- -----------
Total income from operations ............... $ 30,363 $ 56,633
=========== ===========
</TABLE>
7
<PAGE> 8
<TABLE>
<S> <C> <C>
INCOME AVAILABLE FOR COMMON STOCK:
Energy Delivery and Generation and Resources .. $ 14,065 $ 22,268
National Energy Trading and Marketing ......... (8,006) 2,050
Non-energy .................................... 7,945 7,090
----------- -----------
Total income available for common stock .... $ 14,004 $ 31,408
=========== ===========
ASSETS: (1998 amounts at December 31)
Energy Delivery ............................... $ 1,094,852 $ 1,120,323
Generation and Resources ...................... 606,035 619,086
Other utility ................................. 251,767 265,526
National Energy Trading and Marketing ......... 1,212,080 957,421
Non-energy .................................... 272,536 291,280
----------- -----------
Total assets ............................... $ 3,437,270 $ 3,253,636
=========== ===========
CAPITAL EXPENDITURES (excluding AFUDC/AFUCE):
Energy Delivery ............................... $ 12,615 $ 16,032
Generation and Resources ...................... 3,303 2,673
National Energy Trading and Marketing ......... 3,918 160
Non-energy .................................... 2,990 2,475
----------- -----------
Total capital expenditures ................. $ 22,826 $ 21,340
=========== ===========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
8
<PAGE> 9
AVISTA CORPORATION
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The accompanying financial statements of Avista Corporation (Avista Corp. or the
Company) for the interim periods ended March 31, 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 will be effective for fiscal years beginning after
June 15, 1999. The statement requires that all derivative financial instruments
be recognized as either assets or liabilities on the 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 researching the statement and its
impact 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 variable
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
variable amount. The contract or notional amounts and terms of Avista Energy's
derivative commodity investments outstanding at March 31, 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 645,878,066 710,421,968 5
Electric 113,059,103 86,353,424 10
Coal (tons) 186,918 194,652 2
Financial products
Foreign currency - $ 15,691 5
</TABLE>
At March 31, 1999, Avista Energy also had sales and purchase commitments
associated with contracts based on market prices totaling 748,809,882 mmBTUs,
with terms extending up to 12 years. Fixed index electric transactions totaled
4,259,633 MWhs, with terms extending up to 10 years. The fixed index coal
transactions totaled 42,397 tons, with terms extending up to 2 years.
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 in response to
Avista Energy's risk management needs.
9
<PAGE> 10
AVISTA CORPORATION
- --------------------------------------------------------------------------------
Fair Value The fair value of Avista Energy's derivative commodity instruments
outstanding at March 31, 1999, and the average fair value of those instruments
held during the three months ended March 31, 1999 are set forth below (dollars
in thousands):
<TABLE>
<CAPTION>
Fair Value Average Fair Value for the
as of March 31, 1999 three months ended March 31, 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 $123,237 $ 42,869 $135,437 $ 33,565 $131,319 $ 72,570 $139,319 $ 62,863
Electric 357,979 162,721 357,408 135,449 276,902 148,547 272,582 125,618
Coal 4,915 320 5,118 289 3,277 213 3,412 193
--------- ---------- ---------- ---------- --------- ---------- --------- ----------
Total $486,131 $205,910 $497,963 $169,303 $411,498 $221,330 $415,313 $188,674
</TABLE>
The weighted average term of Avista Energy's natural gas and related derivative
commodity instruments as of March 31, 1999 was approximately three months. The
weighted average term of Avista Energy's electric derivative commodity
instruments at March 31, 1999 was approximately ten months. The weighted average
term of Avista Energy's coal commodity instruments at March 31, 1999 was
approximately four 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 March 31, 1999 was $(7.3) million and is included
on the Consolidated Statements of Income in operating revenues.
NOTE 3. FINANCINGS
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. 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 Company is participating with the Washington State Department of
Transportation in an environmental study relating to the former Spokane Natural
Gas Plant site (which was operated as a coal gasification plant for
approximately 60 years until 1948) 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
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. The Company also
committed to pursue additional characterization of the site, with more drillings
and samples, and is in the process of determining the extent of further work.
The Company will be negotiating with the DOE on the remedial measures.
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
10
<PAGE> 11
AVISTA CORPORATION
- --------------------------------------------------------------------------------
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. Following a responsive pleading from the plaintiff, the
court took the matter under advisement. On May 4, 1999, the Court granted the
Company's and its affiliates' motion to dismiss the case and granted the
plaintiff twenty days to file and serve an Amended Complaint.
NOTE 5. 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 is 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. The acquisition was funded through the issuance of additional
shares of common stock to Avista Capital.
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 transactional
gain of $10.1 million, net of taxes.
11
<PAGE> 12
AVISTA CORPORATION
- --------------------------------------------------------------------------------
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 Advantage 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.
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
First quarter 1999 net income available for common stock was $14.0 million, a
$17.4 million decrease from first quarter 1998 net income of $31.4 million. The
decrease in earnings was primarily the result of an $8.0 million loss from the
National Energy Trading and Marketing line of business due to warmer than normal
weather, soft national energy markets and a lack of volatility within those
markets, as compared to net income of $2.1 million in the first quarter of 1998.
In addition, earnings from utility operations declined $8.2 million from first
quarter 1998 due to warmer than normal weather and increased resource costs in
the first quarter of 1999. The decreased earnings were partially offset by a
$10.1 million transactional gain, net of taxes, from the sale of a group of
portfolio companies by Pentzer, which compares to a $5.5 million transactional
gain, net of taxes, from the sale of a portfolio company by Pentzer in the first
quarter of 1998. Preferred stock dividend requirements increased $4.6 million
from 1998 to 1999 due to the exchange of shares of common stock for shares of
the Convertible Preferred Stock, Series L, which occurred in December 1998.
Diluted earnings per share for the first quarter of 1999 were $0.34
as compared to $0.56 in the first quarter of 1998. Energy Delivery and
Generation and Resources contributed $0.34 to earnings per share for the first
quarter of 1999 compared to $0.40 in the first quarter of 1998. National Energy
Trading and Marketing operations had a loss of $0.14 per share in the first
quarter of 1999 compared to a contribution of $0.03 in the same period in 1998.
Non-energy operations contributed $0.14 to earnings per share for the first
quarter of 1999 compared to $0.13 in the same period in 1998, due to the $0.18
per share contribution from the 1999 transactional gain discussed above.
ENERGY DELIVERY
Energy Delivery's pre-tax income from operations decreased $7.9 million, or 17%,
in the first 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 amounted to an
additional $6.7 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 $9.9 million and
$2.0 million, respectively, during the first quarter of 1999 as compared to
1998.
Retail electric revenues, excluding the effect of the revenues transferred to
Generation and Resources, increased $1.8 million due to customer growth and
slightly cooler weather in the first quarter of 1999 as compared to 1998.
Natural gas
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revenues decreased $1.9 million in the first quarter of 1999 from 1998 due to
lower sales for resale, which resulted in a similar impact on purchased natural
gas expense.
Total operating expenses decreased $2.0 million in the first quarter of 1999
from 1998. Purchased natural gas costs decreased $2.7 million in the first
quarter of 1999, primarily from decreased therm sales due to lower sales for
resale. This decrease was partially offset by a $0.4 million increase in the
Idaho Power Cost Adjustment (PCA) in 1999 over 1998 due to higher streamflows.
GENERATION AND RESOURCES
Generation and Resources' pre-tax income from operations increased $1.7 million,
or 24%, in the first quarter 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 a $6.7 million increase in the electric
energy commodity revenues transferred to Generation and Resources by Energy
Delivery. This increase was nearly offset by purchased power costs that
increased more than the associated wholesale revenues during the first quarter
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. When those forecasted colder
temperatures did not materialize as anticipated in the first quarter, the
Company sold that energy into wholesale markets at lower prices.
Generation and Resources' revenues for the first quarter of 1999 increased $22.5
million over the same period in 1998. Streamflows in the first quarter of 1999
were 134% of normal, compared to 105% in the first quarter of 1998, which
resulted in hydroelectric generation 13% higher in the first quarter of 1999
compared to 1998. This led to higher volumes of wholesale sales. Wholesale
revenues increased $13.6 million, or 18%, while sales volumes increased only 6%
during the first quarter of 1999 over 1998, reflecting higher prices for
purchased power in the region. The majority of the remainder of the increased
revenues resulted primarily from the higher electric commodity revenues
transferred from Energy Delivery.
Increased wholesale sales caused purchased power volumes to increase 8%, which,
combined with purchased power prices 18% higher than last year, resulted in a
$24.2 million, or 28%, increase in resource costs in the first quarter 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, which was 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 which it marks to fair market value on a daily basis
(mark-to-market accounting), which causes earnings variability.
National Energy Trading and Marketing income available for common stock for the
first quarter of 1999 was a loss of $8.0 million, compared to first quarter 1998
earnings of $2.1 million. Its operations were primarily affected by warmer than
normal weather, soft national energy markets and a lack of volatility within
those markets. National Energy Trading and Marketing's revenues and operating
expenses increased $625.0 million and $640.6 million, respectively, in the first
quarter 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 continued through the first quarter of 1999 when Avista
Energy purchased Vitol Gas & Electric, LLC (Vitol). Vitol, located in Boston,
Massachusetts, is one of the top 20 energy marketing companies in the United
States.
The decrease in earnings due to mark-to-market accounting was primarily due to
the market decline resulting from mild weather conditions and a general lack of
volatility in the electric and natural gas commodity markets. This lack of
volatility continued to be a factor in these markets into the second quarter of
1999.
National Energy Trading and Marketing's total assets and liabilities increased
$254.7 million from December 1998 to March 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
Non-energy operations primarily reflect the results from Pentzer. Non-energy
income available for common stock for the first quarter of 1999 was $7.9
million, compared to first quarter 1998 earnings of $7.1 million. The 1999
earnings
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include a transactional gain totaling $10.1 million, net of taxes, recorded by
Pentzer as a result of the sale of a group 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 $2.6 million in the first quarter of 1999 from 1998.
Non-energy operating revenues and expenses increased $3.0 million and $7.3
million, respectively, during the first quarter of 1999, as compared to 1998,
primarily as a result of acquisitions during 1998 and increased business
activity from several of Pentzer's portfolio companies. Income from operations
for the first quarter of 1999 was a loss of $1.8 million, which was a $4.4
million decrease from 1998. This decrease in earnings primarily reflects
decreased business activities at several of Pentzer's portfolio companies.
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LIQUIDITY AND CAPITAL RESOURCES
OVERALL OPERATIONS
Operating Activities Cash provided by operating activities in the first three
months of 1998 totaled $35.3 million, a decrease of $22.3 million from the same
period in 1998. Net income for the first quarter of 1999 was $12.8 million below
that of 1998. Changes in various working capital components caused cashflows to
decrease $2.1 million in 1999, compared to a $7.5 million increase in 1998,
primarily due to Avista Energy's operations in both periods.
Investing Activities Cash used in investing activities totaled $2.9 million in
the first quarter of 1999 compared to $6.6 million in the same period in 1998.
Net cash used in investing activities during 1999 was primarily due to the
purchase of Vitol and capital expenditures, partially offset by proceeds from
the sale of subsidiary investments by Pentzer.
Financing Activities Cash used in financing activities totaled $24.4 million in
the first three months of 1999 compared to $49.1 million in 1998. Short-term
borrowings increased $38.8 million, while $52.7 million of long-term debt
matured or was redeemed in the first quarter of 1999. In the first quarter of
1998, short-term borrowings decreased $28.2 million. Dividends paid decreased
$7.9 million in the first quarter of 1999 compared to 1998 as a result of the
Company's dividend restructuring that occurred in December 1998.
The Company's total common equity increased $10.1 million during the first
quarter of 1999 to $498.1 million, primarily due to net income for the quarter.
The Company's consolidated capital structure at March 31, 1999, was 44% debt,
25% preferred securities and 31% 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 March 31, 1999, would have been 44% debt, 9% preferred
securities and 47% common equity.
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.
Capital expenditures are financed on an interim basis with notes payable (due
within one year). The Company has $200 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 March 31, 1999, $44.4 million was
outstanding under other short-term borrowing arrangements and there were no
outstanding borrowings under the committed line of credit.
NATIONAL ENERGY TRADING AND MARKETING OPERATIONS
Avista Energy and its subsidiary, Avista Energy Canada, Ltd., as co-borrowers,
have a credit agreement with a commercial bank in the aggregate amount of $110
million, expiring May 15, 1999. The credit agreement may be terminated by the
bank at any time and all extensions of credit under the agreement are payable
upon demand, in either case at the bank's 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 cash component of credit extended by the bank is $30 million, with
availability of up to $110 million for the issuance of letters of credit. At
March 31, 1999, there were $3.5 million of cash advances (demand notes payable)
outstanding, and letters of credit outstanding under the facility totaled $42.9
million.
Avista Power recently announced the purchase of a site in New Mexico on which it
will construct a 120 megawatt combined cycle natural gas-fired electrical
generating plant. Construction of the plant will begin in 1999, with initial
operation in early 2000. The installed cost of the combined cycle gas turbine
facility is anticipated to be approximately $70 million.
NON-ENERGY OPERATIONS
The non-energy operations have $46.2 million in short-term borrowing
arrangements available ($11.2 million outstanding as of March 31, 1999) to fund
Pentzer's portfolio companies' requirements on an interim basis. At March 31,
1999, the non-energy operations had $74.0 million in cash and marketable
securities with $42.9 million in long-term debt outstanding (the current
portions of which are included on the Consolidated Balance Sheets as other
current liabilities).
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YEAR 2000
The Company continues to move forward with a comprehensive program to address
areas of risk associated with the Year 2000. Systems and programs that may be
affected by the Year 2000 problem have been identified and activities are
underway to make these systems Year 2000 ready. At this time, it is the
Company's belief that all identified modifications that are within the Company's
operating control will be made within the required time frames.
State of Readiness
In order to address Year 2000 issues, several project activity teams were
created and a comprehensive readiness plan was developed to bring the Company's
business critical systems into Year 2000 readiness by the middle of 1999. The
Company defines business critical systems as systems that directly affect the
Company's ability to deliver energy services to customers. The Company's Year
2000 project was divided into the five major categories of activities
that follow.
Desktop Computer Systems All desktop computer hardware has been Year 2000 tested
and an inventory and assessment of desktop resident third-party software has
been completed. The Company expects hardware remediation to be completed by
mid-1999. All non-compliant third-party software programs and critical business
desktop applications are expected to be upgraded, converted, tested and made
Year 2000 ready by the middle of 1999.
Business Systems Many of the Company's critical business systems would not have
operated correctly in the year 2000 and beyond, and thus have been or are in the
process of being re-programmed, upgraded or replaced. Key business systems have
been inventoried and assessed. The Company has completed remediation and testing
of all mainframe computer business systems. Implementation of a new Materials
Management system is scheduled for late 1999. The Company is in the process of
developing alternative plans in the unlikely event the Company is unable to
implement the new Materials Management System before the year 2000. 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. The Company has completed testing and
remediation of approximately 90% of its business critical systems.
Supply Chain The Company recognizes its dependence on outside suppliers of goods
and services and is working to assure that the necessary products and services
are available. To address these issues, the Company has communicated with
suppliers and identified critical suppliers in order to investigate their
efforts to become Year 2000 ready. In addition, the Company has made site visits
to select key suppliers and is reviewing their contingency plans.
Embedded Systems The Embedded System team is responsible for locating,
assessing, testing, fixing or replacing microprocessor-controlled devices.
Inventory and assessment is 99% complete, and to date very few embedded
systems have been found that require remediation. None of these requiring
remediation would have caused a disruption in service to customers. Remediation
and testing is complete at all eleven of the Company's generation sites and
these sites are Year 2000 ready.
The Company's Supervisory Control and Data Acquisition (SCADA) system, which
monitors and controls the majority of the Company's generating and substation
equipment and the transmission system, was run "in the Year 2000" for three days
without incident. Testing of electric metering and devices in the Company's
transmission and distribution substations systems has been completed and full
testing of selected substations is in process and scheduled to be completed by
mid-1999.
Contingency Planning The Company has developed contingency plans for the
Company's electric and natural gas services and has also participated in the
development of region-wide contingency plans for electric service through the
Company's electric reliability region - the Western Systems Coordinating
Council (WSCC).
A major Year 2000 project activity for the Company during 1999 is the
development and implementation of detailed operational plans to support the
Company's contingency plans. Key activities in 1999 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 backup procedures and the
completion of tasks that support the Company's contingency plans.
The Company participated in a region-wide Year 2000 drill on April 9, 1999,
simulating the partial loss of voice and data communications. The drill
successfully exercised the Company's backup communications systems and selected
manual procedures that would be needed to operate the Company's electric systems
in the unlikely event of a loss of communications due to Year 2000. The drill
was facilitated by the North American Electric Reliability Council. The Company
is also planning to participate in a second region-wide drill scheduled for
September 9, 1999.
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Costs
The Company estimates that the cost of its Year 2000 project will be
approximately $6-7 million in incremental costs during the 1997-1999 time
period. Through March 31, 1999, the Company had spent $4.0 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.
In addition to the traditional electric 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 are being addressed. However, if any of Avista
Energy's counterparties experience Year 2000 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 is in the process of contacting its
counterparties to assess their Year 2000 readiness and of developing contingency
plans.
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 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
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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 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 $311.7 million at March 31, 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 current
period. At March 31, 1999, Avista Energy's estimated potential one-day
unfavorable impact on gross margin was $4.5 million, as measured by VAR,
related to its commodity trading and marketing business. The average daily VAR
for the first quarter of 1999 was $3.5 million.
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At March 31, 1999, Avista Energy's estimated potential one-day unfavorable
impact on gross margin was $4.5 million, as measured by VAR, related to its
commodity trading and marketing business. The average daily VAR for the first
quarter of 1999 was $3.5 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: Risk Management."
PART II. OTHER INFORMATION
ITEM 5. OTHER INFORMATION
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.
Centralia Power Plant On May 10, 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 year.
Avista Labs Avista Labs selected a Spokane company, Logan Industries, Inc., to
manufacture its introductory proton exchange membrane (PEM) fuel cell generators
slated for field tests this spring. A minimum of 200 PEM fuel cell power units
will be manufactured, assembled and tested, with delivery of the first unit by
the end of May. In June of
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this year, Avista Labs will begin installing demonstration sites throughout the
United States to prove the reliability and ease of operation.
Avista Power On May 6, 1999, Avista Power and STEAG AG, Germany's largest
independent power producer announced that the two companies will form a joint
venture to develop, build and/or buy electric generation assets in strategic
locations throughout North America. STEAG will purchase a 50 percent interest in
Avista Power and invest jointly with Avista Power in future projects. STEAG also
secured an option to purchase a minority interest in Avista Energy.
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 March 31, 1999, the total long-term debt of the Company and its consolidated
subsidiaries, as shown in the Company's consolidated financial statements, was
approximately $715.9 million. Of such amount, $218.5 million represents
long-term unsecured and unsubordinated indebtedness of the Company, and $418.2
million represents secured indebtedness of the Company. The balance of $79.2
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.
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
----------------------------
March 31, December 31,
1999 1998
-------- ------------
<S> <C> <C>
Ratio of Earnings to Fixed Charges 2.38(x) 2.66(x)
Ratio of Earnings to Fixed Charges and
Preferred Dividend Requirements 1.87(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.
20
<PAGE> 21
AVISTA CORPORATION
- --------------------------------------------------------------------------------
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: May 13, 1999 /s/ J. E. Eliassen
-----------------------------
J. E. Eliassen
Senior Vice President and
Chief Financial Officer
(Principal Accounting and
Financial Officer)
21
<PAGE> 1
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
March 31, Years Ended December 31
--------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Fixed charges, as defined:
Interest on long-term debt $ 65,688 $ 66,218 $ 63,413 $ 60,256 $ 55,580
Amortization of debt expense
and premium - net 2,891 2,859 2,862 2,998 3,441
Interest portion of rentals 4,327 4,301 4,354 4,311 3,962
-------- -------- -------- -------- --------
Total fixed charges $ 72,906 $ 73,378 $ 70,629 $ 67,565 $ 62,983
======== ======== ======== ======== ========
Earnings, as defined:
Net income from continuing ops $ 65,296 $ 78,139 $114,797 $ 83,453 $ 87,121
Add (deduct):
Income tax expense 35,656 43,335 61,075 49,509 52,416
Total fixed charges above 72,906 73,378 70,629 67,565 62,983
-------- -------- -------- -------- --------
Total earnings $173,858 $194,852 $246,501 $200,527 $202,520
======== ======== ======== ======== ========
Ratio of earnings to fixed charges 2.38 2.66 3.49 2.97 3.22
Fixed charges and preferred dividend requirements:
Fixed charges above $ 72,906 $ 73,378 $ 70,629 $ 67,565 $ 62,983
Preferred dividend requirements (2) 20,035 13,057 8,261 12,711 14,612
-------- -------- -------- -------- --------
Total $ 92,941 $ 86,435 $ 78,890 $ 80,276 $ 77,595
======== ======== ======== ======== ========
Ratio of earnings to fixed charges
and preferred dividend requirements 1.87 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 THREE MONTHS ENDED MARCH 31, 1999, AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> MAR-31-1999
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 1,472,874
<OTHER-PROPERTY-AND-INVEST> 504,588
<TOTAL-CURRENT-ASSETS> 1,176,819
<TOTAL-DEFERRED-CHARGES> 282,989
<OTHER-ASSETS> 0
<TOTAL-ASSETS> 3,437,270
<COMMON> 372,344
<CAPITAL-SURPLUS-PAID-IN> (3,883)
<RETAINED-EARNINGS> 129,633
<TOTAL-COMMON-STOCKHOLDERS-EQ> 498,094
145,000
269,148
<LONG-TERM-DEBT-NET> 614,892<F1>
<SHORT-TERM-NOTES> 55,609
<LONG-TERM-NOTES-PAYABLE> 29,138
<COMMERCIAL-PAPER-OBLIGATIONS> 0
<LONG-TERM-DEBT-CURRENT-PORT> 33,200
0
<CAPITAL-LEASE-OBLIGATIONS> 5,015
<LEASES-CURRENT> 2,304
<OTHER-ITEMS-CAPITAL-AND-LIAB> 1,784,870<F2>
<TOT-CAPITALIZATION-AND-LIAB> 3,437,270
<GROSS-OPERATING-REVENUE> 1,212,822
<INCOME-TAX-EXPENSE> 12,301<F3>
<OTHER-OPERATING-EXPENSES> 1,182,459
<TOTAL-OPERATING-EXPENSES> 1,182,459
<OPERATING-INCOME-LOSS> 30,363
<OTHER-INCOME-NET> 18,065
<INCOME-BEFORE-INTEREST-EXPEN> 48,428<F4>
<TOTAL-INTEREST-EXPENSE> 16,739
<NET-INCOME> 19,388
5,384
<EARNINGS-AVAILABLE-FOR-COMM> 14,004
<COMMON-STOCK-DIVIDENDS> 4,855
<TOTAL-INTEREST-ON-BONDS> 0
<CASH-FLOW-OPERATIONS> 35,257
<EPS-PRIMARY> 0.35
<EPS-DILUTED> 0.34
<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>
