<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, 2000
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 November 1, 2000, 47,162,680 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 and Comprehensive Income -
Three Months Ended September 30, 2000 and 1999...................... 3
Consolidated Statements of Income and Comprehensive Income -
Nine Months Ended September 30, 2000 and 1999....................... 4
Consolidated Balance Sheets - September 30, 2000
and December 31, 1999............................................... 5
Consolidated Statements of Capitalization - September 30, 2000
and December 31, 1999............................................... 6
Consolidated Statements of Cash Flows - Nine Months Ended
September 30, 2000 and 1999......................................... 7
Schedule of Information by Business Segments - Three Months Ended
September 30, 2000 and 1999......................................... 8
Schedule of Information by Business Segments - Nine Months Ended
September 30, 2000 and 1999......................................... 10
Notes to Consolidated Financial Statements............................. 12
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.............................................. 18
Item 3. Quantitative and Qualitative Disclosures About Market Risk ........ 29
Part II. Other Information:
Item 5. Other Information.................................................. 29
Item 6. Exhibits and Reports on Form 8-K................................... 31
Signature............................................................................. 32
</TABLE>
<PAGE> 3
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
Avista Corporation
--------------------------------------------------------------------------------
For the Three Months Ended September 30
Thousands of Dollars
<TABLE>
<CAPTION>
2000 1999
----------- -----------
<S> <C> <C>
OPERATING REVENUES .............................................. $ 2,864,305 $ 3,718,109
----------- -----------
OPERATING EXPENSES:
Resource costs ............................................... 2,702,225 3,596,506
Operations and maintenance ................................... 30,033 41,502
Administrative and general ................................... 30,532 31,332
Depreciation and amortization ................................ 19,680 18,570
Taxes other than income taxes ................................ 13,936 12,002
----------- -----------
Total operating expenses ................................... 2,796,406 3,699,912
----------- -----------
INCOME FROM OPERATIONS .......................................... 67,899 18,197
----------- -----------
OTHER INCOME (EXPENSE):
Interest expense ............................................. (19,808) (15,855)
Net gain on subsidiary transactions .......................... - 43,054
Other income-net ............................................. 9,950 1,779
----------- -----------
Total other income (expense)-net ........................... (9,858) 28,978
----------- -----------
INCOME BEFORE INCOME TAXES ...................................... 58,041 47,175
INCOME TAXES .................................................... 23,501 19,562
----------- -----------
NET INCOME ...................................................... 34,540 27,613
DEDUCT-Preferred stock dividend requirements (Note 5) .......... 608 5,340
----------- -----------
INCOME AVAILABLE FOR COMMON STOCK ............................... $ 33,932 $ 22,273
=========== ===========
Average common shares outstanding (thousands), Basic (Note 5) .. 47,147 36,634
EARNINGS PER SHARE OF COMMON STOCK, BASIC (Note 5) ............. $ 0.72 $ 0.61
EARNINGS PER SHARE OF COMMON STOCK, DILUTED (Note 5) ........... $ 0.72 $ 0.52
Dividends paid per common share ................................. $ 0.12 $ 0.12
NET INCOME ...................................................... $ 34,540 $ 27,613
----------- -----------
OTHER COMPREHENSIVE INCOME (LOSS):
Foreign currency translation adjustment ...................... (33) 13
Unrealized investment gains/(losses)-net of tax .............. (403) (510)
----------- -----------
TOTAL OTHER COMPREHENSIVE INCOME (LOSS) ......................... (436) (497)
----------- -----------
COMPREHENSIVE INCOME ............................................ $ 34,104 $ 27,116
=========== ===========
</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>
2000 1999
----------- -----------
<S> <C> <C>
OPERATING REVENUES .............................................. $ 5,599,693 $ 6,366,047
----------- -----------
OPERATING EXPENSES:
Resource costs ............................................... 5,248,183 5,981,449
Operations and maintenance ................................... 82,132 131,887
Administrative and general ................................... 90,279 90,551
Depreciation and amortization ................................ 57,662 56,901
Taxes other than income taxes ................................ 42,401 39,032
Exit costs - Avista Energy's Eastern energy business ......... 7,865 -
Restructuring charges - Pentzer .............................. 1,940 -
----------- -----------
Total operating expenses ................................... 5,530,462 6,299,820
----------- -----------
INCOME FROM OPERATIONS .......................................... 69,231 66,227
----------- -----------
OTHER INCOME (EXPENSE):
Interest expense ............................................. (49,774) (47,593)
Net gain on subsidiary transactions .......................... - 58,648
Other income-net ............................................. 29,421 10,576
----------- -----------
Total other income (expense)-net ........................... (20,353) 21,631
----------- -----------
INCOME BEFORE INCOME TAXES ...................................... 48,878 87,858
INCOME TAXES .................................................... 25,305 32,348
----------- -----------
NET INCOME ...................................................... 23,573 55,510
DEDUCT-Preferred stock dividend requirements (Note 5) .......... 23,127 16,107
----------- -----------
INCOME AVAILABLE FOR COMMON STOCK ............................... $ 446 $ 39,403
=========== ===========
Average common shares outstanding (thousands), Basic (Note 5) .. 45,193 39,077
EARNINGS PER SHARE OF COMMON STOCK, BASIC (Note 5) ............. $ 0.01 $ 1.01
EARNINGS PER SHARE OF COMMON STOCK, DILUTED (Note 5) ........... $ 0.01 $ 0.98
Dividends paid per common share ................................. $ 0.36 $ 0.36
NET INCOME ...................................................... $ 23,573 $ 55,510
----------- -----------
OTHER COMPREHENSIVE INCOME:
Foreign currency translation adjustment ...................... 24 371
Unrealized investment gains/(losses)-net of tax .............. - (249)
----------- -----------
TOTAL OTHER COMPREHENSIVE INCOME ................................ 24 122
----------- -----------
COMPREHENSIVE INCOME ............................................ $ 23,597 $ 55,632
=========== ===========
</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,
2000 1999
---------- ----------
<S> <C> <C>
ASSETS:
CURRENT ASSETS:
Cash and cash equivalents .................................... $ 78,490 $ 40,041
Temporary cash investments ................................... - 7,490
Accounts and notes receivable-net ............................ 965,660 530,774
Energy commodity assets ...................................... 2,202,768 585,913
Materials and supplies, fuel stock and natural gas stored .... 39,002 28,352
Prepayments and other ........................................ 67,544 21,499
---------- ----------
Total current assets ....................................... 3,353,464 1,214,069
---------- ----------
UTILITY PROPERTY:
Utility plant in service-net ................................. 2,163,279 2,184,698
Construction work in progress ................................ 45,333 30,912
---------- ----------
Total ...................................................... 2,208,612 2,215,610
Less: Accumulated depreciation and amortization ............. 707,860 714,773
---------- ----------
Net utility plant .......................................... 1,500,752 1,500,837
---------- ----------
OTHER PROPERTY AND INVESTMENTS:
Investment in exchange power-net ............................. 48,809 54,123
Non-utility properties and investments-net ................... 193,965 137,213
Non-current energy commodity assets .......................... 852,109 491,799
Other-net .................................................... 24,539 31,051
---------- ----------
Total other property and investments ....................... 1,119,422 714,186
---------- ----------
DEFERRED CHARGES:
Regulatory assets for deferred income tax .................... 158,988 166,456
Conservation programs ........................................ 40,366 44,444
Unamortized debt expense ..................................... 31,255 31,122
Other-net .................................................... 80,439 42,380
---------- ----------
Total deferred charges ..................................... 311,048 284,402
---------- ----------
TOTAL .................................................... $6,284,686 $3,713,494
========== ==========
LIABILITIES AND CAPITALIZATION:
CURRENT LIABILITIES:
Accounts payable ............................................. $1,014,266 $ 522,478
Energy commodity liabilities ................................. 2,184,607 594,065
Short-term borrowings ........................................ 118,100 2,530
Taxes and interest accrued ................................... 7,864 35,123
Other ........................................................ 27,718 32,783
---------- ----------
Total current liabilities .................................. 3,352,555 1,186,979
---------- ----------
NON-CURRENT LIABILITIES AND DEFERRED CREDITS:
Non-current liabilities ...................................... 37,526 44,067
Deferred revenue ............................................. 39,574 132,975
Non-current energy commodity liabilities ..................... 770,784 441,372
Deferred income taxes ........................................ 400,482 377,049
Other deferred credits ....................................... 134,421 11,041
---------- ----------
Total non-current liabilities and deferred credits ......... 1,382,787 1,006,504
---------- ----------
CAPITALIZATION (See Consolidated Statements of Capitalization) .. 1,549,344 1,520,011
---------- ----------
COMMITMENTS AND CONTINGENCIES (Note 6)
TOTAL .................................................... $6,284,686 $3,713,494
========== ==========
</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,
2000 1999
----------- -----------
<S> <C> <C>
LONG-TERM DEBT:
First Mortgage Bonds:
Secured Medium-Term Notes:
Series A - 625% to 790% due 2002 through 2023 ............... $ 129,500 $ 139,400
Series B - 624% to 789% due 2000 through 2010 ............... 104,000 124,000
----------- -----------
Total first mortgage bonds .................................. 233,500 263,400
----------- -----------
Pollution Control Bonds:
Floating Rate, Colstrip 1999A, due 2032 ....................... 66,700 66,700
Floating Rate, Colstrip 1999B, due 2034 ....................... 17,000 17,000
6% Series due 2023 ............................................ 4,100 4,100
----------- -----------
Total pollution control bonds ............................... 87,800 87,800
----------- -----------
Unsecured Medium-Term Notes:
Series A - 794% to 957% due 2001 through 2007 ................. 31,000 31,000
Series B - 675% to 823% due 2001 through 2023 ................. 96,000 96,000
Series C - 599% to 802% due 2007 through 2028 ................. 109,000 109,000
Series D - 8625% due 2003 ..................................... 175,000 -
----------- -----------
Total unsecured medium-term notes ........................... 411,000 236,000
----------- -----------
Notes payable (due within one year) to be refinanced ............ - 118,500
Other ........................................................... 10,847 12,503
----------- -----------
Total long-term debt .......................................... 743,147 718,203
----------- -----------
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:
$695 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:
$1240 Convertible Series L; 0 and 1,508,210 shares
outstanding ($18280 stated value) ........................... - 263,309
----------- -----------
Total convertible preferred stock ........................... - 263,309
----------- -----------
COMMON EQUITY:
Common stock, no par value; 200,000,000 shares authorized;
47,158,911 and 35,648,239 shares outstanding .................. 609,690 318,731
Note receivable from employee stock ownership plan .............. (7,348) (8,240)
Capital stock expense and other paid in capital ................. (12,063) (4,347)
Other comprehensive income ...................................... (142) (166)
Retained earnings ............................................... 71,060 87,521
----------- -----------
Total common equity ........................................... 661,197 393,499
----------- -----------
TOTAL CAPITALIZATION ............................................... $ 1,549,344 $ 1,520,011
=========== ===========
</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>
2000 1999
--------- ---------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income ...................................................... $ 23,573 $ 55,510
NON-CASH ITEMS INCLUDED IN NET INCOME:
Depreciation and amortization ................................. 57,662 56,901
Provision for deferred income taxes ........................... 31,524 21,034
Allowance for equity funds used during construction ........... (861) (647)
Power and natural gas cost deferrals and amortizations ........ (47,296) (8,519)
Gain on sale of property and subsidiary investments-net ....... (16,861) (58,418)
Energy commodity assets and liabilities ....................... (52,306) (6,717)
Other-net ..................................................... 8,399 494
(Increase) decrease in working capital components:
Sale of customer accounts receivables-net ................... 13,000 5,000
Receivables and prepaid expense ............................. (506,377) (182,927)
Materials & supplies, fuel stock and natural gas stored ..... (1,879) (2,087)
Payables and other accrued liabilities ...................... 413,172 244,208
Other ....................................................... 20,153 (4,013)
--------- ---------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES ................ (58,097) 119,819
--------- ---------
INVESTING ACTIVITIES:
Construction expenditures (excluding AFUDC-equity funds) ........ (66,374) (60,193)
Other capital requirements ...................................... (67,051) (22,583)
Change in other noncurrent balance sheet items-net .............. 27,458 (15,425)
Proceeds from property sales and sale of subsidiary investments . 90,063 145,285
Assets acquired and investments in subsidiaries ................. (2,416) (40,735)
--------- ---------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES ................ (18,320) 6,349
--------- ---------
FINANCING ACTIVITIES:
Increase (decrease) in short-term borrowings .................... (6,632) 97,151
Proceeds from issuance of long-term debt ........................ 175,000 84,933
Redemption and maturity of long-term debt ....................... (29,900) (98,610)
Redemption of preferred stock ................................... (3) (4,672)
Sale (repurchase) of common stock ............................... 2,467 (82,047)
Cash dividends paid ............................................. (22,024) (30,316)
Other-net ....................................................... (4,042) (2,320)
--------- ---------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES ................ 114,866 (35,881)
--------- ---------
NET INCREASE IN CASH AND CASH EQUIVALENTS .......................... 38,449 90,287
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD ................... 40,041 72,836
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD ......................... $ 78,490 $ 163,123
========= =========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid (received) during the period:
Interest ...................................................... $ 43,048 $ 45,586
Income taxes .................................................. (11,943) 34,823
Noncash financing and investing activities:
Series L Preferred Stock converted to common stock ............ 271,286 -
Property purchased under capitalized leases ................... - 1,386
</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>
2000 1999
----------- -----------
<S> <C> <C>
OPERATING REVENUES:
Avista Utilities ........................................... $ 397,662 $ 317,937
Energy Trading and Marketing ............................... 2,480,990 3,364,316
Information and Technology ................................. 2,902 1,475
Avista Ventures ............................................ 9,272 37,444
Intersegment eliminations .................................. (26,521) (3,063)
----------- -----------
Total operating revenues ................................. $ 2,864,305 $ 3,718,109
=========== ===========
RESOURCE COSTS:
Avista Utilities:
Power purchased .......................................... $ 326,450 $ 199,416
Natural gas purchased for resale ......................... 12,309 16,916
Fuel for generation ...................................... 19,843 13,100
Other .................................................... (32,998) 13,776
Energy Trading and Marketing:
Cost of sales ............................................ 2,403,142 3,356,361
Intersegment eliminations .................................. (26,521) (3,063)
----------- -----------
Total resource costs (excluding non-energy businesses) ... $ 2,702,225 $ 3,596,506
=========== ===========
GROSS MARGINS:
Avista Utilities ........................................... $ 72,058 $ 74,729
Energy Trading and Marketing ............................... 77,848 7,955
----------- -----------
Total gross margins (excluding non-energy businesses) .... $ 149,906 $ 82,684
=========== ===========
OPERATIONS AND MAINTENANCE EXPENSES:
Avista Utilities ........................................... $ 14,507 $ 15,275
Energy Trading and Marketing ............................... 260 151
Information and Technology ................................. 7,418 1,604
Avista Ventures ............................................ 7,848 24,472
----------- -----------
Total operations and maintenance expenses ................ $ 30,033 $ 41,502
=========== ===========
ADMINISTRATIVE AND GENERAL EXPENSES:
Avista Utilities ........................................... $ 15,475 $ 15,134
Energy Trading and Marketing ............................... 10,409 6,933
Information and Technology ................................. 4,317 2,056
Avista Ventures ............................................ 331 7,209
----------- -----------
Total administrative and general expenses ................ $ 30,532 $ 31,332
=========== ===========
DEPRECIATION AND AMORTIZATION EXPENSES:
Avista Utilities ........................................... $ 16,163 $ 15,515
Energy Trading and Marketing ............................... 822 779
Information and Technology ................................. 1,717 752
Avista Ventures ............................................ 978 1,524
----------- -----------
Total depreciation and amortization expenses ............. $ 19,680 $ 18,570
=========== ===========
INCOME (LOSS) FROM OPERATIONS (PRE-TAX):
Avista Utilities ........................................... $ 13,600 $ 17,284
Energy Trading and Marketing ............................... 64,972 91
Information and Technology ................................. (10,613) (2,962)
Avista Ventures ............................................ (60) 3,784
----------- -----------
Total income from operations ............................. $ 67,899 $ 18,197
=========== ===========
</TABLE>
8
<PAGE> 9
SCHEDULE OF INFORMATION BY BUSINESS SEGMENTS
Avista Corporation
--------------------------------------------------------------------------------
For the Three Months Ended September 30
Thousands of Dollars
<TABLE>
<CAPTION>
2000 1999
----------- -----------
<S> <C> <C>
INCOME (LOSS) AVAILABLE FOR COMMON STOCK:
Avista Utilities ........................................... $ (969) $ (4,609)
Energy Trading and Marketing ............................... 42,049 597
Information and Technology ................................. (6,767) (1,908)
Avista Ventures ............................................ (381) 28,193
----------- -----------
Total income available for common stock (Note 5) ........ $ 33,932 $ 22,273
=========== ===========
ASSETS: (1999 amounts at December 31)
Avista Utilities ........................................... $ 1,978,135 $ 1,976,716
Energy Trading and Marketing ............................... 4,117,257 1,595,470
Information and Technology ................................. 71,815 26,379
Avista Ventures ............................................ 117,479 114,929
----------- -----------
Total assets ............................................. $ 6,284,686 $ 3,713,494
=========== ===========
CAPITAL EXPENDITURES (excluding AFUDC/AFUCE):
Avista Utilities ........................................... $ 30,909 $ 20,405
Energy Trading and Marketing ............................... 42,104 (1,795)
Information and Technology ................................. 10,094 3,749
Avista Ventures ............................................ 158 7,533
----------- -----------
Total capital expenditures ............................... $ 83,265 $ 29,892
=========== ===========
</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>
2000 1999
----------- -----------
<S> <C> <C>
OPERATING REVENUES:
Avista Utilities ........................................... $ 1,014,987 $ 805,814
Energy Trading and Marketing ............................... 4,630,646 5,443,706
Information and Technology ................................. 7,420 3,067
Avista Ventures ............................................ 25,046 117,506
Intersegment eliminations .................................. (78,406) (4,046)
----------- -----------
Total operating revenues ................................. $ 5,599,693 $ 6,366,047
=========== ===========
RESOURCE COSTS:
Avista Utilities:
Power purchased .......................................... $ 715,152 $ 396,135
Natural gas purchased for resale ......................... 71,114 73,022
Fuel for generation ...................................... 43,621 30,871
Other .................................................... 35,539 34,687
Energy Trading and Marketing:
Cost of sales ............................................ 4,461,163 5,450,780
Intersegment eliminations .................................. (78,406) (4,046)
----------- -----------
Total resource costs (excluding non-energy businesses) ... $ 5,248,183 $ 5,981,449
=========== ===========
GROSS MARGINS:
Avista Utilities ........................................... $ 149,561 $ 271,099
Energy Trading and Marketing ............................... 169,483 (7,074)
----------- -----------
Total gross margins (excluding non-energy businesses) .... $ 319,044 $ 264,025
=========== ===========
OPERATIONS AND MAINTENANCE EXPENSES:
Avista Utilities ........................................... $ 46,427 $ 41,363
Energy Trading and Marketing ............................... 778 251
Information and Technology ................................. 14,661 4,383
Avista Ventures ............................................ 20,266 85,890
----------- -----------
Total operations and maintenance expenses ................ $ 82,132 $ 131,887
=========== ===========
ADMINISTRATIVE AND GENERAL EXPENSES:
Avista Utilities ........................................... $ 45,891 $ 45,573
Energy Trading and Marketing ............................... 23,752 20,045
Information and Technology ................................. 16,542 4,118
Avista Ventures ............................................ 4,094 20,815
----------- -----------
Total administrative and general expenses ................ $ 90,279 $ 90,551
=========== ===========
DEPRECIATION AND AMORTIZATION EXPENSES:
Avista Utilities ........................................... $ 48,919 $ 46,703
Energy Trading and Marketing ............................... 1,955 2,304
Information and Technology ................................. 3,856 1,325
Avista Ventures ............................................ 2,932 6,569
----------- -----------
Total depreciation and amortization expenses ............. $ 57,662 $ 56,901
=========== ===========
INCOME (LOSS) FROM OPERATIONS (PRE-TAX):
Avista Utilities ........................................... $ (30,817) $ 100,202
Energy Trading and Marketing ............................... 132,647 (29,674)
Information and Technology ................................. (27,802) (6,807)
Avista Ventures ............................................ (4,797) 2,506
----------- -----------
Total income from operations ............................. $ 69,231 $ 66,227
=========== ===========
</TABLE>
10
<PAGE> 11
SCHEDULE OF INFORMATION BY BUSINESS SEGMENTS
Avista Corporation
--------------------------------------------------------------------------------
For the Nine Months Ended September 30
Thousands of Dollars
<TABLE>
<CAPTION>
2000 1999
----------- -----------
<S> <C> <C>
INCOME (LOSS) AVAILABLE FOR COMMON STOCK:
Avista Utilities ........................................... $ (65,707) $ 25,431
Energy Trading and Marketing ............................... 85,812 (17,416)
Information and Technology ................................. (18,679) (4,487)
Avista Ventures ............................................ (980) 35,875
----------- -----------
Total income available for common stock (Note 5) ........ $ 446 $ 39,403
=========== ===========
ASSETS: (1999 amounts at December 31)
Avista Utilities ........................................... $ 1,978,135 $ 1,976,716
Energy Trading and Marketing ............................... 4,117,257 1,595,470
Information and Technology ................................. 71,815 26,379
Avista Ventures ............................................ 117,479 114,929
----------- -----------
Total assets ............................................. $ 6,284,686 $ 3,713,494
=========== ===========
CAPITAL EXPENDITURES (excluding AFUDC/AFUCE):
Avista Utilities ........................................... $ 72,555 $ 59,522
Energy Trading and Marketing ............................... 42,218 3,816
Information and Technology ................................. 24,116 8,873
Avista Ventures ............................................ 853 9,726
----------- -----------
Total capital expenditures ............................... $ 139,742 $ 81,937
=========== ===========
</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, 2000 and 1999 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, 1999
(1999 Form 10-K).
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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.
NEW ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative
Instruments and Hedging Activities." In June 2000, the FASB issued SFAS No. 138,
which amends certain provisions of SFAS 133 to clarify four areas causing
difficulties in implementation. The amendment included expanding the normal
purchase and sale exemption for supply contracts, permitting the offsetting of
certain intercompany foreign currency derivatives and thus reducing the number
of third party derivatives, permitting hedge accounting for foreign-currency
denominated assets and liabilities, and redefining interest rate risk to reduce
sources of ineffectiveness. The Company appointed a team to implement SFAS 133.
The Company will adopt SFAS 133 and the corresponding amendments under SFAS 138
on January 1, 2001. The Company is currently implementing accounting policies
and procedures to determine the impact of SFAS 133 on its consolidated results
of operations and financial position. The impact of adoption of SFAS 133 on the
Company's results of operations is dependent upon the fair values of the
Company's derivatives and related financial information at the date of adoption.
This statement should have no impact on consolidated cash flows.
In December 1999, the Securities and Exchange Commission released Staff
Accounting Bulletin (SAB) No. 101, "Revenue Recognition in Financial
Statements," to provide guidance on the recognition, presentation and disclosure
of revenues in financial statements. The Company is in the process of
determining the impact of this bulletin, particularly as it applies to the
subsidiary companies as they continue to grow their businesses.
NOTE 2. RESTRUCTURING CHARGES
In November 1999, Avista Energy, Inc. (Avista Energy) began to redirect its
focus away from national energy trading toward a more regionally-based energy
marketing and trading effort in the West. The downsizing plan called for the
shutting down of all of the operations in Houston and Boston and eliminating
approximately 80 positions. The Houston operations were closed during the first
quarter of 2000, and the Boston operations were closed during the second quarter
of 2000. In the fourth quarter of 1999, Avista Energy recorded a charge of $5.9
million, after taxes, for expenses related to employee terminations, such as
contract terminations and retention payments. During the first quarter of 2000,
the entire $5.9 million reserve was paid out for employee termination expenses,
leaving no accrued balance at March 31, 2000. Avista Energy sold its Eastern
power book during the first quarter of 2000 for a $1.0 million after-tax loss,
but did not find a buyer for its natural gas or coal contracts in the East. The
remaining Eastern natural gas contracts, primarily for transportation and
storage, are being managed out of the Spokane office. The only remaining
activity related to coal contracts is scheduling, which will continue until the
end of 2000 when the last of the contracts expire. In addition to the
restructuring charges previously reserved and paid, other transition costs in
the amount of $3.1 million and $1.8 million, both after taxes, for the first and
second quarters of 2000, respectively, were incurred related to closing the
Houston and Boston offices and discontinuing operations in the East. Minimal
transition costs were recorded in the third quarter, with little expected for
the remainder of 2000.
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In the 1999 Form 10-K, it was announced that Pentzer Corporation (Pentzer) would
also be redirecting its focus. In the first quarter of 2000, Pentzer recorded a
charge of $1.2 million, after taxes, for expenses related to employee
terminations. All of this accrual was paid out as of June 30, 2000.
NOTE 3. ENERGY COMMODITY TRADING
AVISTA UTILITIES
During the second quarter of 2000, Avista Utilities held options and forward
contracts for wholesale trading purposes. The fair value of these assets and
liabilities outstanding at June 30, 2000 was $1.4 million and $28.9 million,
respectively. The fair value of these liabilities outstanding at September 30,
2000 was $4.7 million (there were no outstanding assets at that time). The
average fair value of these assets and liabilities held during the six months
between March 31, 2000 and September 30, 2000 was $0.2 million and $2.9 million,
respectively. The net loss from the change in the fair value position of Avista
Utilities' options and forward contracts from March 31, 2000 to September 30,
2000 was $3.1 million and is included in the Consolidated Statements of Income
in resource costs. The fair value at December 31, 1999 and March 31, 2000 of
options held by Avista Utilities for trading purposes was immaterial.
AVISTA ENERGY
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 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 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,
2000 are set forth below (volumes in thousands of mmBTUs and MWhs):
<TABLE>
<CAPTION>
Fixed Price Fixed Price Maximum
Payor Receiver Terms in Years
----------- ----------- --------------
<S> <C> <C> <C>
Energy commodities (volumes)
Natural gas 103,412 88,398 3
Electric 141,695 131,320 20
Coal (tons) 1,243 1,243 -
</TABLE>
<TABLE>
<CAPTION>
Index Price Index Price Maximum
Payor Receiver Terms in Years
----------- ----------- --------------
<S> <C> <C> <C>
Energy commodities (volumes)
Natural gas 711,976 754,125 5
Electric 535 34 4
</TABLE>
Contract or notional amounts reflect the volume of transactions, but do not
necessarily represent the dollar 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, 2000, and the average fair value of those
instruments held during the nine months ended September 30, 2000 are set forth
below (dollars in thousands):
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<TABLE>
<CAPTION>
Fair Value Average Fair Value for the
as of September 30, 2000 nine months ended September 30, 2000
-------------------------------------------------------- --------------------------------------------------------
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 $ 133,331 $ 74,886 $ 127,826 $ 70,379 $ 126,401 $ 46,001 $ 123,786 $ 40,774
Electric 2,067,850 777,223 2,055,902 700,405 1,813,038 666,713 1,819,450 605,081
Coal 1,587 - 879 - 5,174 429 4,496 57
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Total $2,202,768 $ 852,109 $2,184,607 $ 770,784 $1,944,613 $ 713,143 $1,947,732 $ 645,912
</TABLE>
The weighted average term of Avista Energy's natural gas and related derivative
commodity instruments as of September 30, 2000 was approximately three months.
The weighted average term of Avista Energy's electric derivative commodity
instruments at September 30, 2000 was approximately two months. The weighted
average term of Avista Energy's coal derivative commodity instruments at
September 30, 2000 was approximately three 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, 1999 to September 30, 2000 was $59.2
million and is included in the Consolidated Statements of Income in operating
revenues.
NOTE 4. 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 5. EARNINGS PER SHARE
On February 16, 2000, all outstanding shares of Series L Preferred Stock were
converted into 11,410,047 shares of common stock. The weighted-average number of
shares of common stock outstanding during the nine months ended September 30,
2000 related to the converted shares was 2,532,031. The costs of converting the
Series L Preferred Stock into common stock totaled $21.3 million during the
first quarter of 2000, with $18.1 million representing the optional conversion
premium and $3.2 million attributable to the regular dividend on the stock.
However, the weighted-average number of converted shares and the conversion
costs were not included in the calculation of diluted earnings per share for the
nine months ended September 30, 2000 because their effects were antidilutive.
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
---------------------- ----------------------
2000 1999 2000 1999
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net income $34,540 $27,613 $23,573 $55,510
Less: Preferred stock dividends 608 5,340 23,127 16,107
------- ------- ------- -------
Income available for common stock-basic 33,932 22,273 446 39,403
Convertible Preferred Stock, Series L,
dividend requirements - 4,732 - 14,282
------- ------- ------- -------
Income available for common stock-diluted $33,932 $27,005 $ 446 $53,685
======= ======= ======= =======
Weighted-average number of common shares
outstanding-basic 47,147 36,634 45,193 39,077
Conversion of Convertible Preferred Stock, Series L - 15,298 - 15,369
Restricted stock 99 122 99 113
Stock options 115 1 364 -
------- ------- ------- -------
Weighted-average number of common shares
outstanding-diluted 47,361 52,055 45,656 54,559
======= ======= ======= =======
Earnings per common share
Basic $ 0.72 $ 0.61 $ 0.01 $ 1.01
Diluted $ 0.72 $ 0.52 $ 0.01 $ 0.98
</TABLE>
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NOTE 6. COMMITMENTS AND CONTINGENCIES
SECURITIES LITIGATION
On July 27, 2000, John Bain filed a lawsuit in the U.S. District Court for the
Eastern District of Washington against the Company and Thomas M. Matthews, the
Chairman of the Board, President and Chief Executive Officer of the Company, and
Jon E. Eliassen, a Senior Vice President and the Chief Financial Officer of the
Company. On August 2, 2000, Wei Cao and William Dalton filed separate lawsuits
in the same Court against the Company and Mr. Matthews. On August 7, 2000,
Martin Capetz filed a lawsuit in the same Court against the Company, Mr.
Matthews and Mr. Eliassen. Each complaint is brought on behalf of a purported
class of persons who purchased Company common stock during periods commencing as
early as April 7, 2000 and ending June 21, 2000. The plaintiffs assert
violations of Section 10(b) of the Securities Exchange Act of 1934, as amended,
and Rule 10b-5 thereunder, arising out of various alleged misstatements and
omissions in the Company's Annual Report on Form 10-K for the year 1999 and its
Quarterly Report on Form 10-Q for the quarter ended March 31, 2000 and in
specified press releases issued by the Company, and, further, claim that
plaintiffs and the respective purported classes suffered damages as a result
thereof. Such alleged misstatements and omissions are claimed to relate to the
Company's trading activities in wholesale energy markets, the Company's risk
management policies and procedures with respect thereto and the Company's
trading losses in the second quarter of 2000. The plaintiffs request, among
other things, compensatory damages in unspecified amounts and other relief as
the Court may deem proper. The Company denies liability and intends to defend
these lawsuits vigorously. On November 9, 2000, the court entered an order
consolidating the cases, appointing the lead stockholder-plaintiff, and
appointing lead stockholders-plaintiffs' counsel to prosecute the litigation.
COMMODITY FUTURES TRADING COMMISSION INVESTIGATION
Avista Energy and one or more of its former employees are the subject of an
investigation by the Commodity Futures Trading Commission (CFTC) into futures
trading, including certain electricity futures contracts, in July of 1998. As
part of its investigation, the CFTC is examining the placement of orders on
July 27, 1998 to purchase August 1998 Palo Verde and California-Oregon Border
(COB) futures contracts traded on the New York Mercantile Exchange and whether
the trading in question amounted to a manipulation of the price of those
contracts. As of the date of the filing of this Quarterly Report, the CFTC has
not yet determined whether or not to charge any traders or Avista Energy (as the
traders' employer) with violations of law.
OTHER MATTERS
The Company believes, based on the information presently known, that the
ultimate liability for the following 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.
POWER COSTS DEFERRALS
On August 9, 2000, the Washington Utilities and Transportation Committee (WUTC)
approved the Company's request for deferred accounting treatment for certain
power costs related to the recent increase in short-term wholesale market
prices. Deferred accounting treatment is effective for power costs beginning
July 1, 2000 and ending June 30, 2001. The specific power costs deferred include
the changes in power costs to the Company from those included in the Company's
base retail rates, related to three power cost components: the net effect of
changes in short-term wholesale market prices on short-term wholesale purchases
and sales; the effect on power costs from changes in the level of hydroelectric
generation; and the net effect on power costs from changes in the level of
thermal generation (including changes in fuel prices). The deferrals each month
are calculated as the difference between the actual costs to the Company
associated with these three power cost components, and the level of costs
included in the Company's base retail rates. The power costs deferred are
related solely to the operation of the Company's system resources to serve its
system retail and wholesale load obligations. Deferrals do not include losses
associated with wholesale trading activity. During the third quarter of 2000,
the Company deferred $30.8 million in power costs pursuant to the WUTC
accounting order. Regulatory approval of the recovery of these deferred costs
will be addressed in a future regulatory proceeding, in which the Company is
required to support the reasonableness and prudence of the costs, and that the
Company's resources were optimized to the benefit of its retail customers.
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 party (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.
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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 DOE issued a Draft Agreed Order to the Company on January 17, 2000, and
solicited public comment. The Agreed Order was signed by the DOE, the Company
and Burlington Northern Railroad (another PLP) on March 13, 2000. The work to be
performed under the Agreed Order includes three major technical parts:
completion of the RI; performance of a focused Feasibility Study (FS); and
implementation of an interim groundwater monitoring plan. During the second
quarter, the Company received comments from the DOE on its initial RI, then
submitted another draft of the RI, which has been accepted as final by the DOE.
The Company also received comments from the DOE pertaining to the FS, which
outlines cleanup alternatives. Another FS, which responded to the DOE comments,
was submitted to the DOE on October 13. The Company expects final comments 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.
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. Plaintiff has
appealed this adverse determination to the Ninth Circuit Court of Appeals. If
the Court approves an agreement reached among the parties, this case, including
the appeal, will be dismissed with prejudice without the Company or its
affiliates paying damages or other monetary relief to plaintiff.
SALE OF CREATIVE SOLUTIONS GROUP
On April 7, 2000, Creative Solutions Group, Inc. and Form House Holdings, Inc.
filed a complaint against Pentzer Corporation in the United States District
Court for the District of Massachusetts, alleging misrepresentations and breach
of representations and warranties made under a stock purchase agreement.
Pursuant to this agreement, Pentzer sold the capital stock of a group of
companies on March 31, 1999. Plaintiffs allege that Pentzer breached various
representations and warranties concerning financial statements, cost of goods
sold and inventory, contending that reliance on such representations and
warranties caused them to pay more for the group of companies than they were
worth. In total, plaintiffs allege damages in the approximate amount of $27
million. Pentzer has retained legal counsel and intends to vigorously defend
against this action. Pentzer has pending before the Court a request that the
matter be sent to arbitration.
NOTE 7. DISPOSITIONS
On May 5, 2000, the owners of the Centralia Power Plant sold the plant to
TransAlta, a Canadian company. The Company has recorded an after-tax gain
totaling $7.8 million from the sale of its 17.5% ownership interest in the
plant. The balance of the total after-tax gain of $34.7 million from the sale of
Centralia was deferred and will be returned to Avista Utilities' customers
through rates over established periods of time. Idaho customers will receive
$7.0 million of the after-tax gain, which translates into a rate reduction of
1.8% over an eight-year period. Washington customers will receive the remaining
$19.9 million through credits to their electric bills over a two-month period.
Avista Utilities has purchased energy from TransAlta to replace the output from
Centralia for the period from July 1, 2000 through December 31, 2003. Avista
Utilities will receive approximately 200 megawatts per hour beginning each July
and continuing through March of the following year during the term of the
contract. The Company is
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assessing its options for a longer-term replacement of the power through its
Request for Proposal (RFP) process discussed in Part II. Item 5. Other
Information.
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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 an energy,
information and technology company with a regional utility operation and
subsidiary operations located throughout North America. The utility portion of
the Company, doing business as Avista Utilities, is subject to state and federal
price regulation. The national businesses are conducted under Avista Capital,
which is the parent company to the Company's subsidiaries.
Avista Utilities provides electric transmission and electric and natural gas
distribution services to retail customers. It is also responsible for the
generation and production of electric energy. Through the second quarter of
2000, Avista Utilities was also engaged in electric wholesale marketing and
electric commodity trading, primarily for the purpose of optimizing system
resources, as described in the following paragraph. Wholesale marketing includes
sales and purchases under long-term contracts with terms longer than one year.
Electric commodity trading includes short-term sales and purchases, such as next
hour, next day and monthly blocks of energy. Wholesale marketing and trading
activities have been primarily with other utilities and power marketers in the
Western Systems Coordinating Council (WSCC). As explained more fully under
"Results of Operations - Overall Operations," by June 30, 2000, Avista Utilities
had ceased all trading activities except to the extent necessary to optimize
system resources to meet retail customer loads and wholesale obligations.
Avista Utilities estimates future retail and firm wholesale loads based on
contract terms, historic data and forward estimates of factors such as customer
usage and weather. In addition, Avista Utilities projects resource availability
to meet loads based on estimates of streamflows, unit availability, historic and
forward market information and experience. The Company is required to both buy
and sell energy on a quarterly, monthly, daily and hourly basis to optimize its
resources and match actual resources to actual energy requirements. There may be
significant price and volume variances when actual results are compared to
estimates.
During the second and third quarters of the year 2000, significant price
volatility, driven in part by availability of resources and demand for energy
throughout the WSCC, materially impacted the cost of meeting the Company's
system load requirements. While the Company plans for resources to meet current
and expected retail and wholesale load obligations, price volatility and load
volatility may materially impact the power costs to the Company in the future.
The Energy Trading and Marketing line of business is comprised of Avista Energy,
Inc. (Avista Energy), Avista Power, Inc. (Avista Power) and Avista-STEAG, LLC
(Avista-STEAG). Avista Energy is an electricity and natural gas marketing and
trading business, also operating primarily in the WSCC. Avista Power was formed
to develop and own generation assets. Avista-STEAG is a joint venture between
Avista Capital and STEAG AG, a German independent power producer, to develop
electric generating assets.
The Information and Technology line of business is comprised of Avista
Advantage, Inc. (Avista Advantage), Avista Laboratories, Inc. (Avista Labs) and
Avista Communications, Inc. (Avista Communications). Avista Advantage is a
business-to-business e-commerce enabled portal that provides a variety of
energy-related products and services to commercial and industrial customers on a
national basis. Its primary product lines include consolidated billing, resource
accounting, energy analysis, load profiling, and maintenance and repair billing
services. Avista Labs is in the process of developing modular Proton Exchange
Membrane (PEM) fuel cells for power generation at the site of the consumer or
industrial user. Avista Communications is a Competitive Local Exchange Carrier
(CLEC) providing local dial tone, data transport, internet services, voice
messaging and other telecommunications services to under-served communities in
the Western United States. In April 2000, Avista Communications and Avista
Fiber, Inc. merged operations, with Avista Communications now additionally
responsible for designing, building and managing metropolitan area fiber optic
networks.
The Avista Ventures line of business includes Avista Ventures, Inc. (Avista
Ventures), Pentzer Corporation (Pentzer), Avista Development, Inc. (Avista
Development) and Avista Services, Inc. (Avista Services). Avista Ventures was
formed late in the first quarter of 2000 to align Avista Corp.'s investment and
acquisition activities in the strategic growth areas of energy, information and
technology. Avista Ventures is responsible for developing a pipeline of future
opportunities for growth and innovation. Avista Ventures is the parent company
to Pentzer and Avista Development. Pentzer was the parent company to the
majority of the Company's other subsidiary businesses until 1999, when it sold
two groups of its portfolio companies. Pentzer's business strategy was such that
its income resulted from both transactional and non-transactional earnings.
Transactional gains have been generated by one-time events or specific
transactions, such as the sale of an investment or companies from Pentzer's
portfolio of investments. Non-transactional earnings have been generated by the
ongoing operations of the individual portfolio
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companies. Avista Development holds other community investments, including real
estate, tax credit housing and other assets. Avista Services is the marketing
arm of Avista Utilities that offers products and services to existing utility
customers, including energy consulting, mail order merchandising and sales of
items such as surge protectors and generators.
Regulatory, economic and technological changes have brought about the
accelerating transformation of the utility and energy industries, creating new
opportunities to expand the Company's businesses and serve new markets. In
pursuing such opportunities, the Company's strategy is to focus on continuing
its growth as a leading provider of information and energy technology services.
These changes have also had a significant effect on energy markets.
Historically, the price of power in wholesale markets has been affected
primarily by production costs and by other factors including streamflows, the
availability of hydro and thermal generation and transmission capacity, weather
and the resulting retail loads, and the price of coal, natural gas and oil for
thermal generating units. Any combination of these factors that resulted in a
shortage of energy generally caused the market price of power to move upward.
Now, however, market prices appear to be affected by other factors as well.
These factors include the gradual elimination of excess generating capacity in
the Pacific Northwest and the WSCC, which results in higher prices for
short-term energy, as well as increasing instances of transmission congestion in
the region in periods of high demand. Other factors may result from the
restructuring of the electric utility business at the state and federal levels
and the deregulation of wholesale energy markets. These factors may include, for
example, the increased ownership of generating facilities by entities which are
not traditional "public utilities" as a result of utility divestitures, as well
as the rapid growth of the wholesale market for capacity and energy on a
short-term basis and increased trading in derivative commodity instruments.
Based on historical trends, Avista Utilities' business plan had forecast on-peak
power prices of approximately $19 per megawatthour for May and June. On-peak
power costs in the market averaged $60 per megawatthour in May and over $180 per
megawatthour in June, with hourly spikes as high as $1,300 per megawatthour.
Prices remain at unprecedented levels in the Pacific Northwest, without any
apparent direct relationship to actual costs of generation. On-peak power costs
in the market averaged between $122 and $222 per megawatthour during the third
quarter, with peaks between $205 and $476 per megawatthour. Federal and state
officials, including the FERC and the California Public Utilities Commission,
commenced reviews to determine the cause of the market changes. See "Regulatory
Proceedings Affecting the Wholesale Electricity Market" in Item 5.
The Company's growth strategy exposes it to risks, including risks associated
with rapid expansion, challenges in recruiting and retaining qualified
personnel, risks associated with acquisitions and joint ventures and increasing
competition. In addition, the energy trading and marketing business exposes the
Company to the financial, liquidity and credit risks associated with commodity
trading activities.
The Company expects to post slightly above breakeven earnings per share on a
diluted basis for the fourth quarter of 2000. These expectations reflect the
Company's continued investment in the Information and Technology subsidiaries,
the effects of additional power costs and the potential benefits to Avista
Energy of expected continued price volatility in western power markets. The
Company's cash flows have been affected because of the higher power and natural
gas costs, as well as cash collateral required for counterparties and trading at
Avista Energy. The Company anticipates, based on information currently
available, that it will be able to satisfy all cash requirements through the
remainder of 2000. These projections are subject to a variety of risks and
uncertainties that could cause actual results to differ from this estimate,
including those described above and listed under "Safe Harbor for Forward
Looking Statements." See "Liquidity and Capital Resources" for additional
information.
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RESULTS OF OPERATIONS
OVERALL OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 1999
The third quarter 2000 income available for common stock was $33.9 million
compared to earnings of $22.3 million in the third quarter of 1999. The Energy
Trading and Marketing operations recorded net income of $42.0 million in the
third quarter of 2000 compared to $0.6 million in 1999. Avista Energy benefited
from a well-positioned portfolio in the rapidly changing Pacific Northwest and
western energy markets. The positive earnings from Avista Energy were partially
offset by losses from the other lines of business. Avista Utilities recorded a
loss of $1.0 million during the third quarter of 2000 compared to a loss of $4.6
million in 1999. Third quarter purchased power expenses at Avista Utilities were
partially mitigated by an accounting order issued by the Washington Utilities
and Transportation Commission (WUTC) that allows the Company to defer excess
power costs incurred through June 30, 2001 to serve retail and long-term
wholesale customer loads. During the third quarter of 2000, Avista Utilities
deferred $30.8 million of power costs in Washington, the recovery of which will
be addressed in a future regulatory proceeding. The loss in the third quarter of
1999 was primarily due to the increased preferred dividend requirement related
to the Convertible Series L Preferred Stock. The Information and Technology line
of business recorded a loss of $6.8 million in 2000 compared to a loss of $1.9
million in the third quarter of 1999 as these businesses continued to grow their
operations. The Avista Ventures line of business recorded a third quarter loss
of $0.4 million in 2000 compared to net income of $28.2 million in 1999. Pentzer
sold a group of portfolio companies in the third quarter of 1999 that resulted
in a $27.6 million after-tax transactional gain.
The basic and diluted earnings per share for the third quarter of 2000 were
$0.72, compared to a contribution of $0.61 per basic share and $0.52 per diluted
share in 1999. Energy Trading and Marketing operations contributed $0.89 per
basic share in the third quarter of 2000 compared to $0.01 in 1999. Avista
Utilities recorded a loss of $0.02 per basic share in the third quarter of 2000
compared to a loss of $0.12 in 1999. Information and Technology operations had a
loss of $0.14 per basic share in the third quarter of 2000 compared to a loss of
$0.05 in 1999. The Avista Ventures line of business recorded a loss of $0.01 per
basic share compared to a contribution of $0.77 in 1999.
On August 9, 2000, the WUTC approved the Company's request for deferred
accounting treatment for certain power costs related to the recent increase in
short-term wholesale market prices. Deferred accounting treatment is effective
for power costs beginning July 1, 2000 and ending June 30, 2001. The specific
power costs deferred include the changes in power costs to the Company from
those included in the Company's base retail rates, related to three power cost
components: the net effect of changes in short-term wholesale market prices on
short-term wholesale purchases and sales; the effect on power costs from changes
in the level of hydroelectric generation; and the net effect on power costs from
changes in the level of thermal generation (including changes in fuel prices).
The deferrals each month are calculated as the difference between the actual
costs to the Company associated with these three power cost components, and the
level of costs included in the Company's base retail rates. The power costs
deferred are related solely to the operation of the Company's system resources
to serve its system retail and wholesale load obligations. Deferrals do not
include losses associated with wholesale trading activity. During the third
quarter of 2000, the Company deferred $30.8 million in power costs pursuant to
the WUTC accounting order. Regulatory approval of the recovery of these deferred
costs will be addressed in a future regulatory proceeding, in which the Company
is required to support the reasonableness and prudence of the costs, and that
the Company's resources were optimized to the benefit of its retail customers.
In October 1999, the Company filed with the WUTC a request for a general
electric rate increase of $26.2 million, or 10.4%, subsequently revised to $18.2
million, and a general natural gas rate increase of $4.9 million, or 6.5%. On
September 29, 2000, the WUTC ordered a $3.4 million, or 1.4%, reduction in
electric rates and a $1.7 million, or 2.1%, increase in natural gas rates. The
WUTC also ordered that the Company's annual rate of return on investment for
both electricity and natural gas be reduced from its current rate of return of
10.7% to 9.03%. The Company had requested a 9.9% rate of return. On October 9,
2000, the Company filed a Petition for Reconsideration before the WUTC
requesting that the commission reconsider certain portions of its order. On
November 8, 2000, the Commission slightly modified the original order by
reducing the electric reduction from $3.4 million to $2.9 million and increasing
the natural gas increase from $1.7 million to $1.8 million. The Company plans to
make additional filings with the WUTC related to higher power supply costs and
an electricity power cost adjustment and tracker mechanism.
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The Company is taking extensive measures to address the power cost issues,
minimize risk and mitigate its financial hardship. Avista Utilities has
eliminated its short-term wholesale trading activities except to the extent
necessary to optimize system resources to meet retail customer loads and
long-term wholesale obligations. Avista Utilities is also assessing alternatives
to meet future energy needs. The Company is currently evaluating power proposals
that it received in September 2000 through its Request for Proposal (RFP)
process.
The Company hired Williams Energy Marketing & Trading Company in July 2000 to
advise Avista Utilities on risk management, risk analysis and resource
optimization issues for all system requirements.
NINE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1999
The income available for common stock for the first nine months of 2000
was $0.4 million compared to earnings of $39.4 million in 1999. The Energy
Trading and Marketing line of business recorded earnings of $85.8 million in the
first nine months of 2000 compared to a loss of $17.4 million in 1999. Avista
Energy benefited from a well-positioned portfolio in the Pacific Northwest and
western energy markets. The positive earnings from Avista Energy were partially
offset by losses from the other lines of business. The conversion of the
outstanding Series L Preferred Stock back into common stock in February 2000
resulted in a one-time charge of $21.3 million to preferred stock dividend
requirements. Excluding the effect of this transaction, the Company's earnings
would have been $21.7 million. Avista Utilities' operations lost $42.6 million
in the first nine months of 2000 compared to net income of $41.5 million in 1999
(results for both periods are before preferred dividend requirements). The loss
was primarily the result of the significantly higher purchased power costs for
Avista Utilities that were compounded by a short position related to wholesale
trading activity during the second quarter of 2000. (See paragraphs below for
additional information about the higher energy prices and short position.) In
addition, losses from the Information and Technology line of business were $18.7
million in 2000 compared to a loss of $4.5 million in 1999 as these businesses
continued to grow their operations. The loss attributable to common stock from
the Avista Ventures line of business was $1.0 million in 2000, compared to
earnings of $35.9 million in 1999. The 1999 earnings included a transactional
gain totaling $37.7 million, net of taxes, recorded by Pentzer as a result of
the sale of two groups of portfolio companies.
The basic and diluted loss per share for the first nine months of 2000
was $0.01, compared to a contribution of $1.01 per basic share and $0.98 per
diluted share in 1999. Excluding any effects related to the Series L Preferred
Stock, earnings per share would have been $0.45 for the nine months ended
September 30, 2000. Energy Trading and Marketing operations contributed $1.89
per basic share in the first nine months of 2000 compared to a loss of $0.45 in
1999. Avista Utilities recorded a loss of $1.45 per basic share in the first
nine months of 2000 compared to a contribution of $0.65 in 1999, which includes
preferred stock dividend requirements in both periods. Information and
Technology operations had a loss of $0.41 per basic share in the first nine
months of 2000 compared to a loss of $0.11 in 1999. The Avista Ventures line of
business had a loss of $0.02 per basic share in the first nine months of 2000
compared to a contribution of $0.92 in 1999.
Avista Utilities' pre-tax loss from operations was $30.8 million in the first
nine months of 2000, or a decrease of $131.0 million from 1999. The loss
resulted primarily from significantly higher electric energy prices in wholesale
markets, compounded by a short position related to wholesale trading activity.
The year-to-date results for 2000 include a $7.8 million after-tax gain recorded
by the Company as a result of the sale of its interest in the Centralia Power
Plant. The balance of the total after-tax gain of $34.7 million from the sale of
Centralia was deferred and will be returned to Avista Utilities' customers
through rates.
Unprecedented sustained peaks in electric energy prices throughout the WSCC in
May and June, compounded by a wholesale short position discussed below,
contributed to the significant losses recorded by Avista Utilities in the second
quarter. The increased prices caused a reduction in gross margin of
approximately $121.5 million in the first nine months of 2000 from 1999.
During the second and third quarters, Avista Utilities purchased energy in order
to meet system obligations to serve retail and long-term wholesale customers.
These purchases provided power in addition to power available from the Company's
own generating resources. Due to the spikes in wholesale market prices described
above, the cost of these purchases was significantly higher than the amounts
currently being recovered from customers. On August 9, 2000, the WUTC approved
the Company's request for deferred accounting treatment for certain power costs
related to the recent increase in short-term wholesale market prices. Deferred
accounting treatment is effective for power costs beginning July 1, 2000 and
ending June 30, 2001. During the third quarter of 2000, the Company deferred
$30.8 million in power costs in Washington.
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Based on the Company's views of streamflows, historic market prices and energy
availability in the second quarter of 2000, the Company entered into contracts
and sold call options for fixed-price power for delivery through the remainder
of the year, without making matching purchases at the same time, and also made
certain short-term sales at fixed prices which were offset by purchases at
prices indexed to the market price at the time of delivery. Certain of these
wholesale trading positions were outside normal operating guidelines. Avista
Utilities was therefore required to buy additional power not only to meet its
obligations to its retail and long-term wholesale customers, as described above,
but also to cover its wholesale trading positions. The process was impeded by
the rapid escalation of market prices and lack of liquidity in the power
markets. These purchases were made at fixed prices significantly higher than the
related selling prices and at index, which settled at unprecedented levels in
June. The pricing of these purchases caused substantially all of Avista
Utilities' loss for the second quarter. By June 30, 2000, Avista Utilities had
ceased all trading activities except to the extent necessary to optimize system
resources to meet retail customer loads and long-term wholesale obligations.
Avista Utilities' short position was compounded by the May 5 sale of its
interest in the Centralia plant, which reduced its system capacity by 201
megawatts. Avista Utilities entered into a three-and-one-half-year contract to
purchase 200 megawatts from TransAlta beginning in July 2000. Based on
historical trends and the Company's views on power prices and availability of
power for May and June, Avista Utilities did not seek to replace the Centralia
generation for the months of May and June with firm commitments.
AVISTA UTILITIES
THREE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 1999
Avista Utilities' pre-tax income from operations was $13.6 million in the third
quarter of 2000, compared to $17.3 million in 1999. Third quarter purchased
power expenses at Avista Utilities were partially mitigated by an accounting
order issued by the WUTC that allows the Company to defer, for later recovery, a
portion of the excess power costs incurred through June 30, 2001 to serve its
system retail and wholesale load requirements. During the third quarter of 2000,
Avista Utilities deferred $30.8 million of power costs pursuant to this order,
in addition to a $6.0 million deferral pursuant to the existing Power Cost
Adjustment (PCA) in Idaho. Avista Utilities' operating revenues and expenses
increased $79.7 million and $83.4 million, respectively, in the third quarter of
2000 over 1999.
Retail electric revenues increased $6.6 million in the third quarter of 2000
over 1999 primarily due to increased prices and greater sales volumes due to
customer growth. Wholesale electric revenues increased $72.7 million, or 38%,
while sales volumes decreased 42% during the third quarter of 2000, reflecting
average sales prices 139% higher in 2000. Wholesale sales volumes decreased due
to the cessation of all trading activities except to the extent necessary to
optimize system resources to meet retail customer loads and long-term wholesale
obligations. Natural gas revenues decreased $3.4 million in the third quarter of
2000 from 1999 due to decreased levels of non-retail sales.
Purchased power volumes were 34% lower in the third quarter of 2000 than last
year due to decreased wholesale sales, but purchased power prices averaged 148%
higher, resulting in a $127.0 million, or 64%, increase in purchased power
expense in 2000. The $30.8 million deferral of power costs pursuant to the WUTC
accounting order partially offset purchased power costs in the third quarter of
2000. Streamflows in the third quarter of 2000 were 73% of normal compared to
120% in the third quarter of 1999. Fuel for generation expense increased $6.7
million due to increased generation at the thermal plants. Purchased natural gas
costs decreased $4.6 million in the third quarter of 2000, primarily as a result
of lower non-retail therm sales. Other resource costs decreased $46.8 million
from 1999 primarily due to $38.8 million of net mark-to-market adjustments and a
$7.5 million increase in the Idaho Power Cost Adjustment (PCA) deferral over
1999.
NINE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1999
Avista Utilities' pre-tax loss from operations was $30.8 million in the first
nine months of 2000, or a decrease of $131.0 million from 1999. The loss was
primarily the result of the increase in purchased power costs during the second
quarter, as described above. The year-to-date utility results also include the
$7.8 million gain from the sale of Centralia mentioned above. Avista Utilities'
operating revenues and expenses increased $209.2 million and $340.2 million,
respectively, in the first nine months of 2000 over 1999.
Retail electric revenues increased $15.5 million in the first nine months of
2000 over 1999 due to increased prices and greater sales volumes due to customer
growth. Wholesale electric revenues increased $190.2 million, or 51%,
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while sales volumes decreased 13% during the first nine months of 2000 over
1999, reflecting average sales prices 73% higher in 2000. Wholesale sales
volumes decreased due to the cessation of all trading activities except to the
extent necessary to meet retail customer loads and wholesale obligations.
Natural gas revenues decreased $2.8 million in the first nine months of 2000
from 1999. Retail natural gas revenues increased $11.9 million, but were offset
by a $14.4 million decrease in non-retail sales.
Purchased power volumes were 11% lower for the first nine months of 2000 than
last year primarily due to decreased wholesale sales, but purchased power prices
averaged 102% higher, resulting in a $319.0 million, or 81%, increase in
purchased power expense in the first nine months of 2000 over 1999. The $30.8
million deferral of power costs pursuant to the WUTC accounting order partially
offset purchased power costs in 2000. Streamflows in the first nine months of
2000 were 90% of normal compared to 110% in 1999. Fuel for generation expense
increased $12.8 million due to increased generation at the thermal plants.
Purchased natural gas costs decreased $1.9 million in the first nine months of
2000, primarily due to the decreased volumes sold.
Operations and maintenance expenses increased $5.1 million, or 12%, due to a
variety of items, including increased distribution expenses, higher fees
associated with the increased amount of customer accounts receivables sold,
increased accruals for uncollectible accounts and other expenses related to
customer accounting services.
ENERGY TRADING AND MARKETING
Energy Trading and Marketing includes the results of Avista Energy, Avista Power
and Avista-STEAG. 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 Business Risk -Energy Trading Business beginning on page 27.
THREE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 1999
Energy Trading and Marketing's income available for common stock for the third
quarter of 2000 was $42.0 million, compared to $0.6 million in 1999. Avista
Energy's operations were positively affected by warmer than normal weather and a
well-positioned portfolio in volatile western electric markets.
Energy Trading and Marketing's revenues and operating expenses decreased $883.3
million and $948.2 million, respectively, in the third quarter of 2000 from
1999. The decrease in revenues is primarily the result of decreased volumes of
transactions due to Avista Energy's closing its Eastern operations and
refocusing its business to the West, partially offset by the impact of increased
prices. The decrease in expenses is primarily the result of Avista Energy's
closing its Eastern operations and refocusing its business to the western energy
markets.
NINE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1999
Energy Trading and Marketing's income available for common stock for the first
nine months of 2000 was $85.8 million, compared to a loss of $17.4 million in
1999. Avista Energy's operations in the first nine months of 2000 were
positively affected by warmer than normal weather and a well-positioned
portfolio in volatile western electric markets. Avista Energy's operations were
negatively impacted by losses from the liquidation of its Eastern electric book
and associated operating costs to close its Eastern operations in Houston and
Boston. The Houston and Boston offices were closed during the first and second
quarters of 2000, and the Eastern electric book was sold at a $1.0 million
after-tax loss.
Energy Trading and Marketing's revenues decreased $813.1 million and operating
expenses decreased $975.4 million in the first nine months of 2000 from 1999.
The year-to-date decrease in revenues is primarily the result of lower sales
volumes, partially offset by increased prices. The year-to-date decrease in
expenses is primarily the result of Avista Energy's closing its Eastern
operations and refocusing its business to the West.
Energy Trading and Marketing's balance sheet increased $2.5 billion from
December 1999 to September 2000. Avista Energy's energy commodity assets and
liabilities increased primarily as a result of significant price increases for
both natural gas and power during this period. Trade receivables and payables
increased due to higher market prices on current positions.
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INFORMATION AND TECHNOLOGY
The Information and Technology line of business includes the results of Avista
Advantage, Avista Labs and Avista Communications. Avista Corp. has committed to
invest in the development of these information and energy technology businesses.
THREE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 1999
Information and Technology's loss attributable to common stock for the third
quarter of 2000 was $6.8 million, compared to a loss of $1.9 million in 1999.
Operating revenues and expenses for this line of business increased $1.4 million
and $9.1 million, respectively, during the third quarter of 2000 over 1999,
primarily due to growth in each of the individual businesses.
NINE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1999
Information and Technology's loss attributable to common stock for the first
nine months of 2000 was $18.7 million, compared to a loss of $4.5 million in
1999. Operating revenues and expenses for this line of business increased $4.4
million and $25.3 million, respectively, during the first nine months of 2000
over 1999, primarily due to growth in each of the individual businesses.
AVISTA VENTURES
The Avista Ventures line of business includes the results of Avista Ventures,
Pentzer, Avista Development and Avista Services.
THREE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 1999
The loss attributable to common stock from this line of business was $0.4
million in the third quarter of 2000, compared to earnings of $28.2 million in
1999. The 1999 results included a transactional gain of $27.6 million, net of
taxes, from Pentzer's sale of a group of portfolio companies in the third
quarter of 1999.
Operating revenues and expenses from this line of business decreased $28.2
million and $24.3 million, respectively, during the third quarter of 2000 from
1999. The Store Fixtures Group of portfolio companies was sold by Pentzer during
the third quarter of 1999, so revenues and expenses from these companies were
still included in the 1999 amounts.
NINE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1999
The loss attributable to common stock from this line of business was $1.0
million in the first nine months of 2000, compared to earnings of $35.9 million
in 1999. The 2000 loss includes a $1.2 million after-tax charge recorded by
Pentzer in the first quarter for expenses related to employee terminations
resulting from a redirection of Pentzer's business focus. The 1999 earnings
included transactional gains totaling $37.7 million, net of taxes, recorded by
Pentzer as a result of the sale of its Creative Solutions Group and Store
Fixtures Group of portfolio companies, partially offset by a loss on the sale of
equipment.
Operating revenues and expenses from this line of business decreased $92.5
million and $85.2 million, respectively, during the first nine months of 2000,
as compared to 1999, primarily as a result of the sales of portfolio companies
by Pentzer. The Creative Solutions Group of companies was sold at the end of the
first quarter of 1999 and the Store Fixtures Group of companies was sold during
the third quarter of 1999. Revenues and expenses from these companies were
included only in the 1999 amounts.
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LIQUIDITY AND CAPITAL RESOURCES
OVERALL OPERATIONS
Operating Activities Operating activities in the first nine months of 2000 used
net cash of $58.1 million, compared to providing net cash of $119.8 million for
the same period in 1999. Net income for the first nine months of 2000 was $23.6
million compared to $55.5 million in 1999. Power and natural gas cost deferrals
and amortizations increased by $38.8 million over 1999 primarily due to the
accounting order approved by the WUTC, and the effect of increased power and
natural gas costs on the Idaho PCA and natural gas trackers already in place in
various states. Increased power prices resulted in significant changes in the
mark-to-market balances of energy commodity assets and liabilities at both
Avista Utilities and Avista Energy during the first nine months of 2000, with a
total non-cash impact on net income of $52.3 million. Other working capital
components, primarily receivables and payables and other accrued liabilities,
continued to change substantially in the 2000 period, primarily due to Avista
Energy's operations, as a result of increased costs for power.
Investing Activities Investing activities used net cash of $18.3 million in the
first nine months of 2000 compared to providing net cash of $6.3 million in the
same period in 1999. In 2000, Avista Utilities sold the Centralia Power Plant,
resulting in proceeds of approximately $89.2 million. In 1999, Pentzer sold the
Creative Solutions and Store Fixtures groups of companies and Avista Energy
acquired Vitol.
Financing Activities Net cash provided by financing activities totaled $114.9
million in the first nine months of 2000 compared to a $35.9 million net use of
cash in 1999. Short-term borrowings decreased $6.6 million and $29.9 million of
long-term debt matured in the first nine months of 2000, while $175.0 million of
long-term debt was issued. In the first nine months of 1999, short-term
borrowings increased $97.2 million and $84.9 million of long-term debt was
issued, while $98.6 million of long-term debt matured or was redeemed. Also,
$82.0 million of common stock was repurchased in 1999.
In August 1998, an exchange offer was made whereby shareholders were provided
the opportunity to exchange their shares of common stock for depositary shares,
also known as RECONS (Return-Enhanced Convertible Securities). Each RECONS
represented a one-tenth ownership interest in one share of mandatorily
convertible Series L Preferred Stock. Each RECONS paid an annual dividend of
$1.24 for a period of about three years and after three years would
automatically convert back to common stock, unless the Company exercised its
option to convert the Series L Preferred Stock prior to the end of the
three-year period. On February 16, 2000, the Company exercised its option to
convert all the remaining outstanding shares of Series L Preferred Stock back
into common stock. The RECONS were also converted into common stock on the same
conversion date, and each of the RECONS was converted into the following: 0.7205
shares of common stock, representing the optional conversion price; plus 0.0361
shares of common stock, representing the optional conversion premium; plus the
right to receive $0.21 in cash, representing an amount equivalent to accumulated
and unpaid dividends up until, but excluding, the conversion date. Cash payments
were made in lieu of fractional shares.
In March 2000, the Company began issuing new shares of common stock to the
Employee Investment Plan rather than having the Plan purchase shares of common
stock on the open market. Through September 30, 2000, 78,645 new shares of
common stock were issued to the Plan.
In August 2000, the Company issued $175.0 million of Unsecured Medium-Term
Notes, Series D at a rate of 8.625% due in 2003.
Capital expenditures are financed on an interim basis with notes payable (due
within one year). On June 26, 2000, the Company renegotiated its committed lines
of credit with various banks. The two lines of credit total $230 million, and
both expire on June 26, 2001. As part of the renewals, the Company pledged its
shares of common stock in Avista Capital as security for these agreements. In
addition, the Company had a $60 million three-month line of credit that expired
on October 25, 2000 and was not replaced. The Company also has a $50 million
regional commercial paper program that is backed by the committed lines of
credit and may currently borrow up to $15 million through other borrowing
arrangements with banks. As of September 30, 2000, $90.0 million was outstanding
under the committed line of credit, $21.1 million was outstanding under the
commercial paper program and $7.0 million was outstanding under other short-term
borrowing arrangements.
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The Company's total common equity increased $267.7 million during the first nine
months of 2000 to $661.2 million, primarily due to the conversion of all
remaining Series L Preferred Stock back to common stock. The Company's
consolidated capital structure (including short-term borrowings) at September
30, 2000, was 51% debt, 9% preferred securities and 40% common equity, compared
to 47% debt, 27% preferred securities and 26% common equity at December 31,
1999. Had the convertible preferred stock been converted back to common stock,
the Company's consolidated capital structure at December 31, 1999, would have
been 47% debt, 10% preferred securities and 43% common equity. Short-term
borrowings at Avista Corp. that were formerly classified as "Notes Payable (due
within one year) to be refinanced" on the Consolidated Statements of
Capitalization were reclassified to "Short-term borrowings" on the Balance Sheet
beginning in June 2000 as a result of the credit agreements' duration of only
one year.
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. External financings and cash provided by operating activities remain
the Company's primary source of funds for operating needs, dividends and capital
expenditures.
As part of its ongoing cash management practices and operations, Avista Corp.
may, at any time, have short-term notes receivable and payable with Avista
Capital. In turn, Avista Capital may also have short-term notes receivable and
payable with its subsidiaries. As of September 30, 2000, Avista Corp. had
short-term notes receivable of $89.2 million from Avista Capital.
ENERGY TRADING AND MARKETING OPERATIONS
Avista Energy and its subsidiary, Avista Energy Canada, Ltd., as co-borrowers,
had a credit agreement with two commercial banks in the aggregate amount of $110
million, which expired September 30, 2000. Avista Energy is currently working
with the banks to extend the agreement through January 28, 2001. Final approval
has been received from one bank, but not from the other, although it is
expected. This 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. This agreement also provides, on an
uncommitted basis, for the issuance of letters of credit to secure contractual
obligations to counterparties. This facility is guaranteed by Avista Capital and
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, 2000, there were no cash
advances (demand notes payable) outstanding and letters of credit outstanding
under the facility totaled approximately $99 million.
Avista Capital, 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 $297.8 million at September 30, 2000.
As of September 30, 2000, Avista Capital had loaned $21.6 million to Avista
Energy to support its short-term cash and collateral needs. These loans are
subordinate to any obligations to the banks under the credit agreements.
Rising prices in power and natural gas during the second and third quarters of
2000 triggered additional collateral requirements with counterparties. Avista
Energy is managing the collateral calls by providing letters of credit,
providing guarantees from Avista Capital and offsetting transactions with
counterparties. In addition to the letters of credit and other items included
above, cash deposited with counterparties totaled $61.1 million as of September
30, 2000, and is included in the Consolidated Balance Sheets in prepayments and
other. The posted collateral will be returned to Avista Energy as forward
positions settle.
At September 30, 2000, the Energy Trading and Marketing operations had $71.0
million in cash and marketable securities with $0.9 million in long-term debt
outstanding (the current portions of which are included on the Consolidated
Balance Sheets in other current liabilities).
Avista Power and Cogentrix Energy, Inc. entered into an agreement to jointly
build a 270 megawatt natural gas combustion turbine facility in Rathdrum, Idaho,
with 100% of its output contracted to Avista Energy for 25 years. Non-recourse
project financing was completed in March 2000 and the facility is currently
under construction, with generation expected to start in late 2001. The total
cost of the project is estimated at $160 million; Avista Power's equity in the
project is approximately $16 million. See Item 5. Other Information about
another generation project Avista Power is constructing.
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INFORMATION AND TECHNOLOGY OPERATIONS
At September 30, 2000, the Information and Technology operations had $2.7
million in long-term debt outstanding (the current portions of which are
included on the Consolidated Balance Sheets as other current liabilities).
AVISTA VENTURES OPERATIONS
Avista Ventures operations has $1.5 million in short-term borrowing arrangements
available to fund Pentzer's portfolio companies' requirements on an interim
basis. Pentzer's $20 million agreement was terminated during the third quarter
of 2000.
At September 30, 2000, these operations had $2.3 million in cash and marketable
securities with $9.7 million in long-term debt outstanding (the current portions
of which are included on the Consolidated Balance Sheets as other current
liabilities).
BUSINESS RISK
ENERGY TRADING BUSINESS
The participants in the wholesale energy market are public utility companies
and, increasingly, power and natural gas 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, swaps, options and other
instruments. The pricing for 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).
Avista Utilities and Avista Energy are subject to the various risks inherent in
the energy business 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, or disruptions or constraints to
transmission facilities) and demand (caused by variations in the weather and
other factors). Market risk includes the risk of fluctuation in the market price
of associated derivative commodity instruments. 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, or demand for, the
commodity.
Credit risk relates to the risk of loss that Avista Utilities and/or Avista
Energy would incur as a result of non-performance by counterparties of their
contractual obligations to deliver energy and make financial settlements. 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. Avista Utilities 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 Avista Utilities or Avista Energy.
RISK MANAGEMENT
Avista Utilities and Avista Energy have adopted policies and procedures to
manage the risks, both quantitative and qualitative, inherent in their
businesses, and have 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.
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Commodity Price Risk Both Avista Utilities and Avista Energy are subject to
commodity price risk. Historically, the price of power in wholesale markets has
been affected primarily by production costs and by other factors including
streamflows, the availability of hydro and thermal generation and transmission
capacity, weather and the resulting retail loads, and the price of coal, natural
gas and oil to thermal generating units. Any combination of these factors that
resulted in a shortage of energy generally caused the market price of power to
move upward. Now, however, market prices appear to be affected by other factors
as well. These factors include the gradual elimination of excess generating
capacity in the WSCC, which results in higher prices for short-term energy, as
well as increasing instances of transmission congestion in the region in periods
of high demand. Other factors may include the effects of the restructuring of
the electric utility business at the state and federal levels and the
deregulation of wholesale energy markets.
Avista Utilities estimates future retail and firm wholesale loads based on
contract terms, historic data and forward estimates of factors such as customer
usage and weather. In addition, Avista Utilities projects resource availability
to meet loads based on estimates of streamflows, unit availability, historic and
forward market information and experience. The Company is required to both buy
and sell energy on a quarterly, monthly, daily and hourly basis to optimize its
resources and match actual resources to actual energy requirements. There may be
significant price and volume variances when actual results are compared to
estimates.
During the second and third quarters of the year 2000, significant price
volatility, driven in part by availability of resources and demand for energy
throughout the WSCC, materially impacted the cost of meeting the Company's
system load requirements. While the Company plans for resources to meet current
and expected retail and wholesale load obligations, price volatility and load
volatility may materially impact the power costs to the Company in the future.
The Company has a PCA mechanism in Idaho and the recently approved WUTC
accounting order to defer certain changes in power costs and resource
availability, both of which are expected to help offset a portion of the price
risk.
The Company hired Williams Energy Marketing & Trading Company in July 2000 to
advise Avista Utilities on risk management, risk analysis and resource
optimization issues for all system requirements.
At September 30, 2000, Avista Energy's estimated potential one-day unfavorable
impact on gross margin was $2.0 million, as measured by Value-at-Risk (VAR),
related to its commodity trading and marketing business. The average daily VAR
for the first nine months of 2000 was $1.4 million.
Interest Rate Risk The Company's market risks related to interest rates have not
changed materially from those reported in the 1999 Form 10-K.
Foreign Currency Risk The Company's market risks related to foreign currency
have not changed materially from those reported in the 1999 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, the availability and prices of purchased power, volatility and
illiquidity in wholesale energy markets, 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 1999 Form 10-K under Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations - Future Outlook.
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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
Securities Litigation See Note 6 of Notes to Financial Statements for
information related to recent securities litigation filed against the Company.
Executive Changes Effective November 10, 2000, the following appointments were
made at the Company's Board of Directors' meeting. Erik J. Anderson was
appointed to the Board of Directors, filling a vacancy created by the previously
announced departure of T. M. Matthews. Larry A. Stanley was elected
non-executive Chairman of the Board of Directors, replacing Mr. Matthews, who
resigned as Chairman of the Board at this meeting. Gary G. Ely was appointed
Avista Corp. President and Chief Executive Officer. Scott L. Morris and Kelly O.
Norwood were named Vice Presidents of Avista Corp.
Regulatory Proceedings Affecting the Wholesale Electricity Market In response to
numerous complaints and requests for relief filed by California utilities and
customers, the FERC issued an order on August 23, 2000, initiating hearing
proceedings to address matters affecting bulk power markets and wholesale energy
prices (including volatile price fluctuations) in California. On November 1,
2000, the FERC issued an order in which it found "that the electric market
structure and market rules for wholesale sales of electric energy in California
are seriously flawed and that these structures and rules, in conjunction with an
imbalance of supply and demand in California, have caused, and continue to have
the potential to cause, unjust and unreasonable rates for short-term energy ...
under certain conditions. While this record does not support findings of
specific exercises of market power, and while we are not able to reach definite
conclusions about the actions of individual sellers, there is clear evidence
that the California market structure and rules provide the opportunity for
sellers to exercise market power when supply is tight and can result in unjust
and unreasonable rates under the [Federal Power Act]." The FERC proposed
specific remedies to address dysfunctions in California's wholesale market
structures and rules and to ensure just and reasonable wholesale power rates by
jurisdictional sellers. The Company believes that the California wholesale
electricity market has a direct effect on wholesale markets throughout the West.
The FERC also determined that sales made into the California Independent System
Operator (ISO), which controls the high-voltage transmission grid, and the
California Power Exchange (PX), where power is bought and sold, from October 2,
2000 could be subject to refunds from sellers. The level and extent of such
refunds, if any, will be determined in future orders. In addition, the FERC
indicated that it would consider requests for equitable relief to remedy price
spike events occurring prior to October 2, 2000, but did not elaborate on the
nature or type of relief that might be considered.
Avista Utilities and Avista Energy have made, and continue to make, sales into
the California ISO or the California PX, or to power marketers known to resell
into the California ISO or the California PX. Neither Avista Utilities nor
Avista Energy has actively participated in these FERC proceedings, and they do
not presently intend to do so unless a party seeks equitable relief which would
potentially impact either of the companies. See "Risk Management" in Item 2 for
additional information.
On October 26, 2000, Puget Sound Energy, Inc. filed a request for an order
prospectively capping the prices at which sellers may sell energy and/or
capacity into Pacific Northwest wholesale power markets at a level that is equal
to the lower of any purchase price cap instituted by the California ISO or the
California PX, and any sales price cap instituted by the FERC. Puget Sound
Energy also asked the FERC to make any sales into wholesale power markets in the
Pacific Northwest subject to refund effective 60 days after the filing of its
complaint. The complaint names all sellers of wholesale power under the Western
Systems Power Pool Agreement as defendants, including Avista Utilities and
Avista Energy. The FERC has established a November 16, 2000 deadline for
respondents to file answers to the complaint, and Avista Utilities and Avista
Energy intend to file answers by that date.
Request for Proposal (RFP) for New Power Resources On August 9, 2000, the WUTC
approved the Company's plan for an RFP for new power resources. The new
resources are needed to serve the Company's long-term load requirements, and
will replace the generation from its share of the Centralia plant, which was
sold in May 2000. As part of the order, the WUTC agreed to waive normal time
limits related to going out into the market to determine the resource options
available to the Company. The Company is currently in the process of evaluating
proposals.
Avista Power Avista Power announced that it will build a 280 MW combined cycle
natural gas turbine power plant at the Coyote Springs site near Boardman,
Oregon. The rights for the Coyote Springs 2 project were purchased from Enron
North America and Portland General Electric (PGE). The natural gas turbine that
will power the project has been secured. Coyote Springs 2 is expected to be
owned by Avista Power and will be operated by PGE under a 15-year operations and
maintenance contract. Engineering and procurement of major equipment is
underway, with completion of the project scheduled for June 2002. The Company is
working to secure long-term, non-recourse project financing by the end of 2000.
The total cost of the project is estimated at $195 million.
Avista Labs Avista Labs entered into a Joint Development Agreement with UOP,
LLC, in August 1999. The Joint Development Agreement included a provision
obligating the parties to work exclusively with one another in regard to the
subject matter of the Agreement, which involved programs to develop a fuel cell
system utilizing a fuel cell and a fuel processor. In accordance with the terms
of the Joint Development Agreement, Avista Labs exercised its right to terminate
the exclusivity obligations of the Joint Development Agreement effective as of
September 15, 2000. On October 31, 2000, Avista Labs notified UOP of its intent
to terminate the Joint Development Agreement in its entirety in accordance with
the terms of the Agreement, effective as of December 1, 2000.
Avista Advantage Avista Advantage reached an agreement with EnerTech Capital
Partners for a strategic business investment that includes capital, access to a
wide network of resources and hands-on support and counsel. EnerTech Capital
Partners, based in Pennsylvania, is a private equity firm specializing in
service and technology companies poised for growth through deregulation and the
resulting convergence of the energy, utility and telecommunications industries.
Regional Transmission Organizations (RTO) Avista Utilities and five other
Western utilities have taken steps toward the formation of an independent
transmission company, TransConnect, which would serve six states. TransConnect
would be a member of the planned regional transmission organization, RTO West.
The new for-profit company would own or lease the high voltage transmission
facilities currently held by the Company, Montana Power Co., Puget Sound Energy
Corp., Portland General Electric Co., Nevada Power Co. and Sierra Pacific Power
Co. The proposal was filed October 17, 2000 in response to the FERC's Order No.
2000, which requires utilities subject to FERC regulation to file an RTO
proposal, or a description of efforts to participate in an RTO, and any existing
obstacles to RTO
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participation. If a final proposal emerges, it must be approved by the FERC, the
boards of directors of the filing companies and regulators in various states.
The companies' decision to move forward with the formation of TransConnect will
ultimately depend on the economics and conditions related to the formation of
TransConnect, as well as the economics and conditions related to the regulatory
approval process.
Lake Coeur d' Alene 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 portions of the bed and banks of Lake Coeur d' Alene 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 Court
of Appeals, the Company is continuing to evaluate the potential impact of this
decision on the operation of its hydroelectric facilities on the Spokane River,
downstream of Lake Coeur d' Alene. The State of Idaho has filed a petition for
writ of certiorari with the United States Supreme Court, which will exercise its
discretion to determine whether it will review the decision of the Ninth
Circuit. The Company expects that the Court will consider the petition within
the next few months.
ADDITIONAL FINANCIAL DATA
At September 30, 2000, the total long-term debt of the Company and its
consolidated subsidiaries, as shown in the Company's consolidated financial
statements, was approximately $743.1 million. Of such amount, $498.8 million
represents long-term unsecured and unsubordinated indebtedness of the Company,
and $233.5 million represents secured indebtedness of the Company. The balance
of $10.8 million represents 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. An additional $118.1
million of the Company's short-term debt outstanding under or backed by the
committed lines of credit is secured.
The following table reflects the ratio of earnings to fixed charges:
<TABLE>
<CAPTION>
12 Months Ended
----------------------------
September 30, December 31,
2000 1999
------------- -----------
<S> <C> <C>
Ratio of Earnings to Fixed Charges 1.05 (x) 1.61 (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 August 25, 2000, press release regarding executive and
organizational changes.
Dated October 27, 2000, press release reporting third quarter
earnings and the departure of T. M. Matthews, Avista Corp.'s
Chairman of the Board, President and Chief Executive Officer.
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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 14, 2000 /s/ J. E. Eliassen
-------------------------
J. E. Eliassen
Senior Vice President and
Chief Financial Officer
(Principal Accounting and
Financial Officer)
31
