<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 June 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 August 1, 2000, 47,144,345 shares of Registrant's Common Stock, no par value
(the only class of common stock), were outstanding.
<PAGE> 2
AVISTA CORPORATION
Index
Page No.
--------
Part I. Financial Information:
Item 1.Financial Statements
Consolidated Statements of Income and Comprehensive
Income - Three Months Ended June 30, 2000 and 1999.... 3
Consolidated Statements of Income and Comprehensive
Income - Six Months Ended June 30, 2000 and 1999...... 4
Consolidated Balance Sheets - June 30, 2000
and December 31, 1999................................. 5
Consolidated Statements of Capitalization - June 30, 2000
and December 31, 1999................................. 6
Consolidated Statements of Cash Flows - Six Months Ended
June 30, 2000 and 1999................................ 7
Schedule of Information by Business Segments -
Three Months Ended June 30, 2000 and 1999............. 8
Schedule of Information by Business Segments -
Six Months Ended June 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...................... 17
Item 3.Quantitative and Qualitative Disclosures About
Market Risk.............................................. 28
Part II. Other Information:
Item 4.Submission of Matters to a Vote of Security Holders... 28
Item 5.Other Information..................................... 28
Item 6.Exhibits and Reports on Form 8-K...................... 30
Signature.......................................................... 31
<PAGE> 3
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
Avista Corporation
--------------------------------------------------------------------------------
For the Three Months Ended June 30
Thousands of Dollars
<TABLE>
<CAPTION>
2000 1999
----------- ----------
<S> <C> <C>
OPERATING REVENUES....................................................... $1,353,414 $1,411,736
----------- ----------
OPERATING EXPENSES:
Resource costs...................................................... 1,287,295 1,297,210
Operations and maintenance.......................................... 24,676 37,053
Administrative and general.......................................... 35,040 28,936
Depreciation and amortization....................................... 18,832 19,223
Taxes other than income taxes....................................... 12,356 11,934
Exit costs - Avista Energy's Eastern energy business................ 2,958 -
----------- ----------
Total operating expenses........................................ 1,381,157 1,394,356
----------- ----------
INCOME (LOSS) FROM OPERATIONS............................................ (27,743) 17,380
OTHER INCOME (EXPENSE):
Interest expense.................................................... (15,230) (15,006)
Net gain on subsidiary transactions................................. 729 (884)
Other income-net.................................................... 15,381 7,504
----------- ----------
Total other income (expense)-net................................ 880 (8,386)
----------- ----------
INCOME (LOSS) BEFORE INCOME TAXES........................................ (26,863) 8,994
INCOME TAXES............................................................. (5,370) 485
----------- ----------
NET INCOME (LOSS)........................................................ (21,493) 8,509
DEDUCT-Preferred stock dividend requirements (Note 5)................... 608 5,384
----------- ----------
INCOME (LOSS) AVAILABLE FOR COMMON STOCK................................. $(22,101) $3,125
=========== ==========
Average common shares outstanding (thousands), Basic (Note 5)........... 47,113 40,185
EARNINGS (LOSS) PER SHARE OF COMMON STOCK, BASIC (Note 5)............... $(0.47) $ 0.08
EARNINGS (LOSS) PER SHARE OF COMMON STOCK, DILUTED (Note 5)............. $(0.47) $ 0.08
Dividends paid per common share.......................................... $0.12 $.0.12
NET INCOME (LOSS)........................................................ $(21,493) $8,509
OTHER COMPREHENSIVE INCOME (LOSS):
Foreign currency translation adjustment............................. 16 138
Unrealized investment gains/(losses)-net of tax..................... 249 (154)
----------- ----------
OTHER COMPREHENSIVE INCOME (LOSS)........................................ 265 (16)
----------- ----------
COMPREHENSIVE INCOME (LOSS).............................................. $(21,228) $ 8,493
=========== ==========
</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 Six Months Ended June 30
Thousands of Dollars
<TABLE>
<CAPTION>
2000 1999
----------- ----------
<S> <C> <C>
OPERATING REVENUES....................................................... $2,735,387 $2,647,931
----------- ----------
OPERATING EXPENSES:
Resource costs...................................................... 2,545,956 2,385,263
Operations and maintenance.......................................... 52,101 90,006
Administrative and general.......................................... 59,747 59,448
Depreciation and amortization....................................... 37,982 38,297
Taxes other than income taxes....................................... 28,466 27,030
Exit costs - Avista Energy's Eastern energy business................ 7,865 -
Restructuring charges - Pentzer..................................... 1,940 -
----------- ----------
Total operating expenses........................................ 2,734,057 2,600,044
----------- ----------
INCOME FROM OPERATIONS................................................... 1,330 47,887
----------- ----------
OTHER INCOME (EXPENSE):
Interest expense.................................................... (29,966) (31,758)
Net gain on subsidiary transactions................................. 821 15,594
Other income-net.................................................... 18,650 8,960
----------- ----------
Total other income (expense)-net................................ (10,495) (7,204)
----------- ----------
INCOME (LOSS) BEFORE INCOME TAXES........................................ (9,165) 40,683
INCOME TAXES............................................................. 1,803 12,786
----------- ----------
NET INCOME (LOSS)........................................................ (10,968) 27,897
DEDUCT-Preferred stock dividend requirements (Note 5)................... 22,518 10,767
----------- ----------
INCOME (LOSS) AVAILABLE FOR COMMON STOCK................................. $(33,486) $17,130
=========== ==========
Average common shares outstanding (thousands), Basic (Note 5)........... 44,205 40,319
EARNINGS (LOSS) PER SHARE OF COMMON STOCK, BASIC (Note 5)............... $(0.76) $ 0.42
EARNINGS (LOSS) PER SHARE OF COMMON STOCK, DILUTED (Note 5)............. $(0.76) $ 0.42
Dividends paid per common share.......................................... $.0.24 $.0.24
NET INCOME (LOSS)........................................................ $(10,968) $27,897
----------- ----------
OTHER COMPREHENSIVE INCOME (LOSS):
Foreign currency translation adjustment............................. 57 358
Unrealized investment gains/(losses)-net of tax..................... 403 261
----------- ----------
OTHER COMPREHENSIVE INCOME (LOSS)........................................ 460 619
----------- ----------
COMPREHENSIVE INCOME (LOSS).............................................. $(10,508) $ 28,516
=========== ==========
</TABLE>
4
<PAGE> 5
CONSOLIDATED BALANCE SHEETS
Avista Corporation
--------------------------------------------------------------------------------
Thousands of Dollars
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
----------- ------------
<S> <C> <C>
ASSETS:
CURRENT ASSETS:
Cash and cash equivalents........................................... $62,970 $40,041
Temporary cash investments.......................................... 1,000 7,490
Accounts and notes receivable-net................................... 668,223 530,774
Energy commodity assets............................................. 4,081,952 585,913
Materials and supplies, fuel stock and natural gas stored........... 32,544 28,352
Prepayments and other............................................... 99,046 21,499
----------- ----------
Total current assets............................................ 4,945,735 1,214,069
----------- ----------
UTILITY PROPERTY:
Utility plant in service-net........................................ 2,153,893 2,184,698
Construction work in progress....................................... 32,250 30,912
----------- ----------
Total........................................................... 2,186,143 2,215,610
Less: Accumulated depreciation and amortization.................... 696,367 714,773
----------- ----------
Net utility plant............................................... 1,489,776 1,500,837
----------- ----------
OTHER PROPERTY AND INVESTMENTS:
Investment in exchange power-net.................................... 50,638 54,123
Non-utility properties and investments-net.......................... 145,636 137,213
Non-current energy commodity assets................................. 929,643 491,799
Other-net........................................................... 23,028 31,051
----------- ----------
Total other property and investments............................ 1,148,945 714,186
----------- ----------
DEFERRED CHARGES:
Regulatory assets for deferred income tax........................... 160,594 166,456
Conservation programs............................................... 43,262 44,444
Unamortized debt expense............................................ 31,087 31,122
Other-net........................................................... 50,563 42,380
----------- ----------
Total deferred charges.......................................... 285,506 284,402
----------- ----------
TOTAL........................................................ $7,869,962 $3,713,494
=========== ==========
LIABILITIES AND CAPITALIZATION:
CURRENT LIABILITIES:
Accounts payable.................................................... $735,186 $522,478
Energy commodity liabilities........................................ 4,093,826 594,065
Short-term borrowings............................................... 133,832 2,530
Taxes and interest accrued.......................................... 22,334 35,123
Other............................................................... 34,870 32,783
----------- ----------
Total current liabilities....................................... 5,020,048 1,186,979
----------- ----------
NON-CURRENT LIABILITIES AND DEFERRED CREDITS:
Non-current liabilities............................................. 39,010 44,067
Deferred revenue.................................................... 128,543 132,975
Non-current energy commodity liabilities............................ 843,412 441,372
Deferred income taxes............................................... 364,049 377,049
Other deferred credits.............................................. 104,170 11,041
----------- ----------
Total non-current liabilities and deferred credits.............. 1,479,184 1,006,504
----------- ----------
CAPITALIZATION (See Consolidated Statements of Capitalization)........... 1,370,730 1,520,011
----------- ----------
COMMITMENTS AND CONTINGENCIES (Note 6)
TOTAL........................................................ $7,869,962 $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>
June 30, December 31,
2000 1999
----------- ------------
<S> <C> <C>
LONG-TERM DEBT:
First Mortgage Bonds:
Secured Medium-Term Notes:
Series A - 6.13% to 7.90% due 2002 through 2023.............. $129,500 $139,400
Series B - 6.20% to 7.89% due 2000 through 2010.............. 109,000 124,000
----------- ----------
Total first mortgage bonds................................... 238,500 263,400
----------- ----------
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 - 7.94% to 9.57% due 2001 through 2007................. 31,000 31,000
Series B - 6.75% to 8.23% due 2001 through 2023................. 96,000 96,000
Series C - 5.99% to 8.02% due 2007 through 2028................. 109,000 109,000
----------- ----------
Total unsecured medium-term notes............................ 236,000 236,000
----------- ----------
Notes payable (due within one year) to be refinanced................ - 118,500
Other............................................................... 30,993 12,503
----------- ----------
Total long-term debt............................................ 593,293 718,203
----------- ----------
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:
$6.95 Series K; 350,000 shares outstanding ($100 stated value).. 35,000 35,000
----------- ----------
Total subject to mandatory redemption........................ 35,000 35,000
----------- ----------
CONVERTIBLE PREFERRED STOCK:
Not subject to mandatory redemption:
$12.40 Convertible Series L; 0 and 1,508,210 shares outstanding
($182.80 stated value)...................................... - 263,309
----------- ----------
Total convertible preferred stock........................... - 263,309
----------- ----------
COMMON EQUITY:
Common stock, no par value; 200,000,000 shares authorized;
47,128,163 and 35,648,239 shares outstanding................... 609,152 318,731
Note receivable from employee stock ownership plan................. (7,696) (8,240)
Capital stock expense and other paid in capital.................... (12,063) (4,347)
Other comprehensive income......................................... 294 (166)
Retained earnings.................................................. 42,750 87,521
----------- ----------
Total common equity............................................ 632,437 393,499
----------- ----------
TOTAL CAPITALIZATION.................................................... $1,370,730 $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 Six Months Ended June 30
Thousands of Dollars
<TABLE>
<CAPTION>
2000 1999
----------- ----------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income (loss).................................................. $(10,968) $27,897
NON-CASH ITEMS INCLUDED IN NET INCOME:
Depreciation and amortization.................................. 37,892 38,297
Provision for deferred income taxes............................ (6,721) 14,928
Allowance for equity funds used during construction............ (539) (496)
Power and natural gas cost deferrals and amortizations......... (3,613) (3,340)
Gain on sale of property and subsidiary investments-net........ (12,244) (28,112)
Energy commodity assets and liabilities........................ 11,593 3
(Increase) decrease in working capital components:
Sale of customer accounts receivables-net................... 6,000 35,000
Receivables and prepaid expense............................. (235,477) (230,496)
Materials & supplies, fuel stock and natural gas stored..... 4,402 (2,568)
Payables and other accrued liabilities...................... 161,862 218,528
Other....................................................... 35,090 7,433
----------- ----------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES..................... (12,723) 77,074
----------- ----------
INVESTING ACTIVITIES:
Construction expenditures (excluding AFUDC-equity funds)........... (40,683) (39,716)
Other capital requirements......................................... (16,312) (12,964)
Decrease in other noncurrent balance sheet items-net............... 16,585 9,801
Proceeds from property sales and sale of subsidiary investments.... 89,943 62,014
Assets acquired and investments in subsidiaries.................... (2,253) (21,718)
----------- ----------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES..................... 47,280 (2,583)
----------- ----------
FINANCING ACTIVITIES:
Increase in short-term borrowings.................................. 12,802 51,088
Proceeds from issuance of long-term debt........................... 20,000 809
Redemption and maturity of long-term debt.......................... (27,807) (101,324)
Redemption of preferred stock...................................... (3) (372)
Sale (repurchase) of common stock.................................. 1,581 (26,489)
Cash dividends paid................................................ (15,747) (20,475)
Other-net.......................................................... (2,454) (3,144)
----------- ----------
NET CASH USED IN FINANCING ACTIVITIES................................... (11,628) (99,907)
----------- ----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS.................... 22,929 (25,416)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD........................ 40,041 72,836
----------- ----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD.............................. $62,970 $47,420
=========== ==========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid (received) during the period:
Interest....................................................... $29,990 $31,976
Income taxes................................................... (12,380) 10,329
Noncash financing and investing activities:
Series L Preferred Stock converted to common stock............. 271,286 -
Property purchased under capitalized leases.................... - 919
</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 June 30
Thousands of Dollars
<TABLE>
<CAPTION>
2000 1999
----------- -----------
<S> <C> <C>
OPERATING REVENUES:
Avista Utilities................................................... $318,783 $221,091
Energy Trading and Marketing....................................... 1,043,467 1,160,326
Information and Technology......................................... 2,228 889
Avista Ventures.................................................... 8,660 29,785
Intersegment eliminations.......................................... (19,724) (355)
----------- ----------
Total operating revenues....................................... $1,353,414 $1,411,736
=========== ==========
RESOURCE COSTS:
Avista Utilities:
Power purchased................................................ $269,569 $86,631
Natural gas purchased for resale............................... 16,257 20,916
Fuel for generation............................................ 10,210 9,770
Other.......................................................... 55,653 10,441
Energy Trading and Marketing:
Cost of sales.................................................. 955,330 1,169,807
Intersegment eliminations.......................................... (19,724) (355)
----------- ----------
Total resource costs (excluding non-energy businesses)......... $1,287,295 $1,297,210
=========== ==========
GROSS MARGINS:
Avista Utilities................................................... $(32,906) $93,333
Energy Trading and Marketing....................................... 88,137 (9,481)
----------- ----------
Total gross margins (excluding non-energy businesses).......... $55,231 $83,852
=========== ==========
OPERATIONS AND MAINTENANCE EXPENSES:
Avista Utilities................................................... $15,655 $13,049
Energy Trading and Marketing....................................... (50) 93
Information and Technology......................................... 2,611 1,231
Avista Ventures.................................................... 6,460 22,680
----------- ----------
Total operations and maintenance expenses...................... $24,676 $37,053
=========== ==========
ADMINISTRATIVE AND GENERAL EXPENSES:
Avista Utilities................................................... $16,077 $15,951
Energy Trading and Marketing....................................... 9,562 7,024
Information and Technology......................................... 7,346 1,388
Avista Ventures.................................................... 2,055 4,573
----------- ----------
Total administrative and general expenses...................... $35,040 $28,936
=========== ==========
DEPRECIATION AND AMORTIZATION EXPENSES:
Avista Utilities................................................... $16,071 $15,736
Energy Trading and Marketing....................................... 481 974
Information and Technology......................................... 1,315 331
Avista Ventures.................................................... 965 2,182
----------- ----------
Total depreciation and amortization expenses................... $18,832 $19,223
=========== ==========
INCOME (LOSS) FROM OPERATIONS (PRE-TAX):
Avista Utilities................................................... $(92,023) $37,018
Energy Trading and Marketing....................................... 74,221 (17,572)
Information and Technology......................................... (8,928) (2,074)
Avista Ventures.................................................... (1,013) 8
----------- ----------
Total income (loss) from operations............................ $(27,743) $17,380
=========== ==========
</TABLE>
8
<PAGE> 9
SCHEDULE OF INFORMATION BY BUSINESS SEGMENTS
Avista Corporation
--------------------------------------------------------------------------------
For the Three Months Ended June 30
Thousands of Dollars
<TABLE>
<CAPTION>
2000 1999
----------- ----------
<S> <C> <C>
INCOME (LOSS) AVAILABLE FOR COMMON STOCK:
Avista Utilities................................................... $(62,645) $15,900
Energy Trading and Marketing....................................... 47,300 (10,676)
Information and Technology......................................... (6,248) (1,324)
Avista Ventures.................................................... (508) (775)
----------- ----------
Total income (loss) available for common stock (Note 5)....... $(22,101) $3,125
=========== ==========
ASSETS: (1999 amounts at December 31)
Avista Utilities................................................... $1,975,941 $1,976,716
Energy Trading and Marketing....................................... 5,717,530 1,595,470
Information and Technology......................................... 53,042 26,379
Avista Ventures.................................................... 123,449 114,929
----------- ----------
Total assets................................................... $7,869,962 $3,713,494
=========== ==========
CAPITAL EXPENDITURES (excluding AFUDC/AFUCE):
Avista Utilities................................................... $23,068 $23,199
Energy Trading and Marketing....................................... 101 1,953
Information and Technology......................................... 9,195 2,967
Avista Ventures.................................................... 221 1,100
----------- ----------
Total capital expenditures..................................... $32,585 $29,219
=========== ==========
</TABLE>
The Accompanying Notes are an Integral Part of These Statements.
9
<PAGE> 10
SCHEDULE OF INFORMATION BY BUSINESS SEGMENTS
Avista Corporation
--------------------------------------------------------------------------------
For the Six Months Ended June 30
Thousands of Dollars
<TABLE>
<CAPTION>
2000 1999
---------- ----------
<S> <C> <C>
OPERATING REVENUES:
Avista Utilities.................................................... $ 617,326 $487,877
Energy Trading and Marketing........................................ 2,149,655 2,079,390
Information and Technology.......................................... 4,517 1,584
Avista Ventures..................................................... 15,774 80,063
Intersegment eliminations........................................... (51,885) (983)
---------- ----------
Total operating revenues........................................ $2,735,387 $2,647,931
========== ==========
RESOURCE COSTS:
Avista Utilities:
Power purchased................................................. $388,702 $196,719
Natural gas purchased for resale................................ 58,805 56,107
Fuel for generation............................................. 23,778 17,771
Other........................................................... 68,536 20,912
Energy Trading and Marketing:
Cost of sales................................................... 2,058,020 2,094,737
Intersegment eliminations........................................... (51,885) (983)
---------- ----------
Total resource costs (excluding non-energy businesses).......... $2,545,956 $2,385,263
========== ==========
GROSS MARGINS:
Avista Utilities.................................................... $77,505 $196,368
Energy Trading and Marketing........................................ 91,635 (15,347)
----------- ----------
Total gross margins (excluding non-energy businesses)........... $169,140 $181,021
========== ==========
OPERATIONS AND MAINTENANCE EXPENSES:
Avista Utilities.................................................... $31,922 $26,085
Energy Trading and Marketing........................................ 518 102
Information and Technology.......................................... 7,243 2,574
Avista Ventures..................................................... 12,418 61,245
---------- ----------
Total operations and maintenance expenses....................... $52,101 $90,006
========== ==========
ADMINISTRATIVE AND GENERAL EXPENSES:
Avista Utilities.................................................... $30,415 $30,441
Energy Trading and Marketing........................................ 13,344 13,100
Information and Technology.......................................... 12,225 2,294
Avista Ventures..................................................... 3,763 13,613
---------- ----------
Total administrative and general expenses....................... $59,747 $59,448
========== ==========
DEPRECIATION AND AMORTIZATION EXPENSES:
Avista Utilities.................................................... $32,756 $31,189
Energy Trading and Marketing........................................ 1,133 1,533
Information and Technology.......................................... 2,139 539
Avista Ventures..................................................... 1,954 5,036
---------- ----------
Total depreciation and amortization expenses.................... $37,982 $38,297
========== ==========
INCOME (LOSS) FROM OPERATIONS (PRE-TAX):
Avista Utilities.................................................... $(44,417) $82,918
Energy Trading and Marketing........................................ 67,674 (30,083)
Information and Technology.......................................... (17,190) (3,845)
Avista Ventures..................................................... (4,737) (1,103)
---------- ----------
Total income (loss) from operations............................. $1,330 $47,887
========== ==========
</TABLE>
10
<PAGE> 11
SCHEDULE OF INFORMATION BY BUSINESS SEGMENTS
Avista Corporation
--------------------------------------------------------------------------------
For the Six Months Ended June 30
Thousands of Dollars
<TABLE>
<CAPTION>
2000 1999
---------- ----------
<S> <C> <C>
INCOME (LOSS) AVAILABLE FOR COMMON STOCK:
Avista Utilities.................................................... $(64,699) $29,966
Energy Trading and Marketing........................................ 43,762 (18,012)
Information and Technology.......................................... (11,912) (2,579)
Avista Ventures..................................................... (637) 7,755
---------- ----------
Total income (loss) available for common stock (Note 5)........ $(33,486) $17,130
========== ==========
ASSETS: (1999 amounts at December 31)
Avista Utilities.................................................... $1,975,941 $1,976,716
Energy Trading and Marketing........................................ 5,717,530 1,595,470
Information and Technology.......................................... 53,042 26,379
Avista Ventures..................................................... 123,449 114,929
----------- ----------
Total assets.................................................... $7,869,962 $3,713,494
========== ==========
CAPITAL EXPENDITURES (excluding AFUDC/AFUCE):
Avista Utilities................................................... $41,646 $39,117
Energy Trading and Marketing....................................... 114 5,612
Information and Technology......................................... 14,022 5,123
Avista Ventures.................................................... 695 2,193
----------- ----------
Total capital expenditures..................................... $56,477 $52,045
========== ==========
</TABLE>
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 June 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
On June 15, 2000, the Financial Accounting Standards Board issued FAS No. 138,
which is an amendment of FAS No. 133, entitled "Accounting for Derivative
Instruments and Hedging Activities." The new Statement addresses a limited
number of issues causing implementation difficulties for a large number of
entities preparing to apply FAS 133. The issue that potentially most affects the
Company is that the "normal purchases and normal sales" exception is expanded.
The Company is in the process of determining the impact of this new statement.
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 through
the end of 2000 when 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 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 are
expected for the remainder of 2000.
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 the accrual for termination benefits was paid out as of
June 30, 2000.
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NOTE 3. ENERGY COMMODITY TRADING
AVISTA UTILITIES
During the second quarter of 2000, Avista Utilities held options and forward
contracts for 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 average fair value of these assets and liabilities held during the three
months ended June 30, 2000 was $0.9 million and $15.5 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 June 30, 2000 was $26.8 million and
is included in the Consolidated Statements of Income in resource costs. In
addition to the actual losses recorded from these options and forward contracts,
the Company accrued a $16.0 million charge related to the estimated impact of
the higher energy prices on earnings for the remainder of the year due to the
options held for trading purposes. This charge relates to expected losses solely
from certain fixed price wholesale contracts. At March 31, 2000, options held by
Avista Utilities for trading purposes were 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 June 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 160,808 145,106 3
Electric 181,572 168,767 20
Coal (tons) 2,455 2,455 1
</TABLE>
<TABLE>
<CAPTION>
Index Price Index Price Maximum
Payor Receiver Terms in Years
----------- ----------- --------------
<S> <C> <C> <C>
Energy commodities (volumes)
Natural gas 657,109 630,299 5
Electric 960 494 5
</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 June 30, 2000, and the average fair value of those instruments
held during the six months ended June 30, 2000 are set forth below (dollars in
thousands):
<TABLE>
<CAPTION>
Fair Value Average Fair Value for the
as of June 30, 2000 six months ended June 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 $ 182,836 $ 48,009 $ 179,619 $ 43,390 $ 129,129 $ 38,753 $ 128,400 $ 33,592
Electric 3,896,326 881,634 3,912,173 800,022 2,198,144 671,568 2,209,846 608,736
Coal 2,790 -- 2,034 -- 6,659 401 5,700 64
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Total $4,081,952 $ 929,643 $4,093,826 $ 843,412 $2,333,932 $ 710,722 $2,343,946 $ 642,392
</TABLE>
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The weighted average term of Avista Energy's natural gas and related derivative
commodity instruments as of June 30, 2000 was approximately three months. The
weighted average term of Avista Energy's electric derivative commodity
instruments at June 30, 2000 was approximately four months. The weighted average
term of Avista Energy's coal derivative commodity instruments at June 30, 2000
was approximately five 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 June 30, 2000 was $26.1 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
Average common shares outstanding for basic earnings per share were 47,112,779
and 40,185,205 for the quarters ended June 30, 2000 and 1999, respectively, and
44,204,871 and 40,318,725 for the six months ended June 30, 2000 and 1999,
respectively. On February 16, 2000, all outstanding shares of Series L Preferred
Stock were converted into 11,410,047 shares of common stock, which averaged
3,811,958 shares of common stock for the calculation of diluted earnings per
share for the six months ended June 30, 2000. 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,
these costs were not included in the calculation of diluted earnings per share
because their effect was antidilutive.
The computation of basic and diluted earnings per common share is as follows (in
thousands, except per share amounts):
<TABLE>
<CAPTION>
Six Months Ended
2nd Quarter June 30
---------------------- ----------------------
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net income $(21,493) $ 8,509 $(10,968) $ 27,897
Less: Preferred stock dividends 608 5,384 22,518 10,767
-------- -------- -------- --------
Income available for common stock-basic (22,101) 3,125 (33,486) 17,130
Convertible Preferred Stock, Series L,
dividend requirements -- -- -- --
-------- -------- -------- --------
Income available for common stock-diluted $(22,101) $ 3,125 $(33,486) $ 17,130
======== ======== ======== ========
Weighted-average number of common shares
outstanding-basic 47,113 40,185 44,205 40,319
Conversion of Convertible Preferred Stock, Series L -- -- -- --
Restricted stock* -- 115 -- 108
Stock options* -- -- -- --
-------- -------- -------- --------
Weighted-average number of common shares
outstanding-diluted 47,113 40,300 44,205 40,427
======== ======== ======== ========
Earnings per common share
Basic $ (0.47) $ 0.08 $ (0.76) $ 0.42
Diluted $ (0.47) $ 0.08 $ (0.76) $ 0.42
</TABLE>
* Due to the losses in the second quarter of 2000 and for the six months ended
June 30, 2000, the common stock equivalents from outstanding restricted stock
and stock options are not included in the calculations for weighted-average
number of common shares outstanding for diluted earnings per share because their
effect is antidilutive.
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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 commending 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.
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.
FUTURE POWER LOSSES
In June 2000, the Company recorded a $16.0 million charge related to the
estimated impact of the higher energy prices on earnings for the remainder of
the year. This charge relates to expected losses solely from certain fixed price
wholesale contracts.
The potential also exists for additional losses related to sales to the
Company's retail customers that occur after June 30, 2000, but these losses were
not accrued because they cannot be reasonably estimated. Several factors could
affect the amount, such as changes in retail consumption, primarily due to
weather, and changes in system generation, due to factors such as streamflows,
availability of plants and unexpected plant outages. 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 costs to be
deferred will include the changes in power costs to the Company related to
three power cost variables: short-term wholesale market prices, hydroelectric
generation, and thermal generation. The deferrals each month will be calculated
as the difference between the actual costs to the Company associated with
these three power cost variables, and the level of costs included in the
Company's base retail rates. The power costs to be deferred are related solely
to the operation of the Company's system resources to serve its load
obligations. Deferrals will not include losses associated with wholesale
commercial trading activity. Regulatory approval of the recovery of the
deferred costs will be addressed in a future ratemaking proceeding, in which
the Company will 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 person
(PLP) with respect to any hazardous substances located on this site, stemming
from the Company's past ownership of the former Gas Plant. In its notice, the
DOE stated that it intended to complete an on-going remedial investigation of
this site, complete a feasibility study to determine the most effective means of
halting or controlling future releases of substances from the site, and
implement appropriate remedial measures.
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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 to the DOE, which the Company expects to be
final. The Company also received comments from the DOE pertaining to the FS,
which outlines cleanup alternatives, and is in the process of clarifying some of
the DOE comments and preparing responses. Another FS, which will respond to DOE
comments, will be submitted to the DOE during the late summer or early fall.
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.
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.
NOTE 7. DISPOSITIONS
On May 5, 2000, the owners of the Centralia Power Plant sold the plant to
TransAlta, a Canadian company. The Company recorded an $8.1 million after-tax
gain in the second quarter of 2000 from the sale of its 17.5% ownership interest
in the plant. The balance of the total after-tax gain of $33.9 million from the
sale of Centralia was deferred, and will be returned to Avista Utilities'
customers through rates. Idaho customers will get $6.8 million, which translates
into a rate reduction of 1.3% over an eight-year period. Washington customers
will receive the remaining $19.0 million, with the method and timing to be
determined as part of the pending general rate case before the WUTC. Avista
Utilities will require additional generating capacity, and TransAlta has agreed
to replace Avista Utilities' lost output for three years through a purchase
agreement effective July 1, 2000. The Company is assessing its options for a
longer-term replacement of the power.
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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 has also been engaged in electric wholesale marketing and
electric commodity trading, primarily for the purpose of optimizing system
resources. Wholesale marketing includes sales and purchases under long-term
contracts with one-year and longer terms. 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 brokers 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 marketing and
trading activities except to the extent necessary to optimize system resources
and to the extent related to existing contracts and positions.
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 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 Proton Exchange Membrane
(PEM) fuel cells for power generation at the site of the consumer. 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 will be 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 arisen from one-time events or specific transactions,
such as the sale of an investment or companies from Pentzer's portfolio of
investments. Non-transactional earnings arise out of the ongoing operations of
the individual portfolio 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 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
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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
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 in
respect thereof.
Based on historical trends, Avista Utilities' business plan had forecast on-peak
power prices averaging $19 to $22 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 relationship to actual costs of generation. Federal and state officials
have announced that they will initiate reviews to determine the cause of the
market changes. See "Risk Management" for additional information.
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.
RESULTS OF OPERATIONS
OVERALL OPERATIONS
THREE MONTHS ENDED JUNE 30, 2000 COMPARED TO THREE MONTHS ENDED JUNE 30, 1999
The second quarter 2000 net loss attributable to common stock was $22.1 million,
compared to earnings of $3.1 million in the second quarter of 1999. Avista
Utilities lost $62.6 million during the second quarter of 2000, primarily due to
changing energy markets that have resulted in significantly higher energy
prices, which were compounded by a short position related to wholesale sales in
excess of amounts necessary to optimize system resources. (See paragraphs below
for additional information about the higher energy prices and short position.)
In addition, the Information and Technology line of business recorded a loss of
$6.2 million in 2000 compared to a loss of $1.3 million in the second quarter of
1999 as these businesses continued to grow their operations. The Avista Ventures
line of business recorded a second quarter loss of $0.5 million in 2000 compared
to a loss of $0.8 million in 1999. These decreased earnings were partially
offset by the Energy Trading and Marketing operations, which recorded net income
of $47.3 million in the second quarter of 2000, compared to a loss of $10.7
million in 1999.
The basic and diluted loss per share for the second quarter of 2000 were $0.47,
compared to a contribution of $0.08 in 1999. Avista Utilities recorded a loss of
$1.33 per basic share for the second quarter of 2000 compared to a contribution
of $0.40 in the second quarter of 1999. Information and Technology operations
had a loss of $0.13 per basic share in the second quarter of 2000 compared to a
loss of $0.03 in 1999. Results from the Avista Ventures line of business
improved slightly in the second quarter of 2000, with a loss of $0.01 per basic
share, compared to a loss of $0.02 in the same period in 1999. Energy Trading
and Marketing operations contributed $1.00 per basic share in the second quarter
of 2000, compared to a loss of $0.27 in the same period in 1999.
Avista Utilities' pre-tax loss from operations was $92.0 million in the second
quarter of 2000, or a decrease of $129.0 million from the same period in 1999.
The second quarter results for 2000 include an $8.1 million 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 $33.9 million from the sale of
Centralia will be returned to Avista Utilities' customers through rates. (See
Item 5 - "Other Information" for more information regarding the sale of Avista
Utilities' interest in Centralia.) The loss primarily resulted from
significantly higher electric energy prices, compounded by a short position
related to wholesale sales in excess of amounts necessary to optimize system
resources. Additionally, during the second quarter, the Company recorded a $16.0
million charge related to the estimated impact of the higher energy prices on
earnings for the remainder of the year. This charge relates to expected losses
solely from certain fixed price contracts.
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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. Avista Utilities expects to spend approximately 25% more than expected
for purchased power this year because of sustained price peaks. The increased
prices caused a reduction in gross margin of approximately $126 million in the
second quarter of 2000 from 1999.
Consistent with previous years, during the second quarter 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 power costs described above, the price of these purchases was significantly
higher than the amounts recoverable from customers.
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
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 short 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.
Avista Utilities' short position was compounded by the May 5 sale of its
interest in the Centralia plant, which reduced its system capacity by 175
megawatts. As part of the Centralia sale, Avista Utilities entered into a
favorably priced three-year contract to purchase 175 megawatts from the
Centralia plant beginning in July 2000. Based on historical trends and the
Company's views on power prices and availability of power for May and June at
the time of the sale, Avista Utilities did not seek to replace the Centralia
capacity for the months of May and June with firm commitments. See Item 5 -
"Other Information" for more information regarding the sale of Avista Utilities'
interest in Centralia.
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
costs to be deferred will include the changes in power costs to the Company
related to three power cost variables: short-term wholesale market prices,
hydroelectric generation, and thermal generation. The deferrals each month will
be calculated as the difference between the actual costs to the Company
associated with these three power cost variables, and the level of costs
included in the Company's base retail rates. The power costs to be deferred are
related solely to the operation of the Company's system resources to serve its
load obligations. Deferrals will not include losses associated with wholesale
commercial trading activity. Regulatory approval of the recovery of the deferred
costs will be addressed in a future ratemaking proceeding, in which the Company
will support the reasonableness and prudence of the costs, and that the
Company's resources were optimized to the benefit of its retail customers.
In addition, the Company's general rate case, which is pending before the WUTC,
includes a request to allow Avista Utilities to implement an energy cost
adjustment mechanism. This mechanism would allow increases and decreases in
energy costs to be passed through to customers as incurred, without a general
rate case, similarly to the power cost adjustment mechanism in Idaho. See Item 5
- "Other Information" for information regarding various proceedings before the
WUTC.
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 commodity sales and trading activities that
are not related to optimizing resources to meet customer loads and other
existing commitments. Avista Utilities is also assessing alternatives to meet
future years' energy needs based on a mix of existing resources, new power
projects and contracts which lock in supply and price. In addition, the Company
is implementing cost reduction efforts, such as company-wide expense reductions
and cutbacks in utility capital expenditures, and looking for financial
mitigation through such items as the deferred accounting treatment approved by
the WUTC and the proposed power cost adjustment mechanism currently before the
WUTC.
The Company has hired Williams Energy Marketing & Trading Company to advise
Avista Utilities on risk management, risk analysis and resource optimization
issues for all system requirements. The advisory services agreement is effective
August 1, 2000.
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The Company's cash flows have been affected because of the higher purchased
power costs as well as cash collateral required for counterparties and trading
at both Avista Energy and Avista Corp. 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.
SIX MONTHS ENDED JUNE 30, 2000 COMPARED TO SIX MONTHS ENDED JUNE 30, 1999
The net loss attributable to common stock for the first six months of 2000 was
$33.5 million compared to earnings of $17.1 million for the first half of 1999.
The loss was due in part to the conversion of the outstanding Series L Preferred
Stock back into common stock in February 2000, which resulted in a one-time
charge of $21.3 million to preferred stock dividend requirements. Excluding the
effect of this transaction, the Company's loss would have been $12.2 million.
Avista Utilities' operations lost $42.2 million in the first six months of 2000
compared to net income of $40.7 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 excess wholesale sales during the
second quarter of 2000 that were described above. The year-to-date results
include both the $16.0 million accrual for expected future losses and the $8.1
million gain from the sale of Centralia as described above. In addition, losses
from the Information and Technology line of business were $11.9 million in 2000
compared to a loss of $2.6 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 $0.6 million in the second quarter of 2000, compared to
earnings of $7.8 million in 1999. The 1999 earnings included a transactional
gain totaling $10.1 million, net of taxes, recorded by Pentzer as a result of
the sale of its Creative Solutions Group of portfolio companies. The losses from
these three lines of business were partially offset by earnings from the Energy
Trading and Marketing line of business of $43.8 million in the first half of
2000 compared to a loss of $18.0 million in the first six months of 1999.
The basic and diluted loss per share for the first half of 2000 was $0.76,
compared to a contribution of $0.42 in 1999. Excluding any effects related to
the Series L Preferred Stock, earnings (loss) per share would have been $(0.25)
and $0.48 for the six months ended June 30, 2000 and 1999, respectively. Avista
Utilities recorded a loss of $1.46 per basic share for the first half of 2000
compared to a contribution of $0.74 in the first six months of 1999, which
includes preferred stock dividend requirements in both periods. Information and
Technology operations had a loss of $0.27 per basic share in the first half of
2000 compared to a loss of $0.06 in 1999. Avista Ventures' operations had a loss
of $0.02 per basic share for the first half of 2000 compared to a contribution
of $0.19 in the same period in 1999. Energy Trading and Marketing operations
contributed $0.99 per share in the first six months of 2000 compared to a loss
of $0.45 in the same period in 1999.
Based on projected retail loads, the Company expects additional power costs of
at least $30 to $40 million related to sales to the Company's retail customers
in the second half of 2000, in addition to the $16 million already accrued for
the impact of higher energy prices on wholesale sales. Several factors could
affect the amount, such as changes in retail consumption, primarily due to
weather, and changes in system generation, due to factors such as streamflows,
availability of plants and unexpected plant outages. A portion of these expected
losses will be mitigated as a result of the deferred accounting treatment
approved by the WUTC. Based on current projections, Avista Corp. expects to post
a loss for the full year. 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."
AVISTA UTILITIES
THREE MONTHS ENDED JUNE 30, 2000 COMPARED TO THREE MONTHS ENDED JUNE 30, 1999
Avista Utilities' pre-tax loss from operations was $92.0 million in the second
quarter of 2000, or a decrease of $129.0 million from the same period in 1999.
The loss was primarily the result of the increase in purchased power costs, as
described above. The second quarter utility results also include both the $16.0
million accrual for expected future losses and the $8.1 million after-tax gain
from the sale of Centralia mentioned above. Avista Utilities' operating revenues
and expenses increased $97.7 million and $226.7 million, respectively, in the
second quarter of 2000 as compared to 1999.
Retail electric revenues increased $5.0 million in the second quarter of 2000
over 1999 due to increased prices and greater sales volumes due to customer
growth. Wholesale electric revenues increased $99.0 million, or 108%, while
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sales volumes increased only 15% during the second quarter of 2000 over 1999,
reflecting average sales prices 80% higher in 2000. Natural gas revenues
decreased $7.3 million in the second quarter of 2000 from 1999 due to decreased
customer usage as a result of warmer than normal temperatures in the service
area.
Streamflows in the second quarter of 2000 were 95% of normal compared to 106% in
the second quarter of 1999. Purchased power prices for the second quarter of
2000 averaged 164% higher than last year, and purchased power volumes were 18%
greater, resulting in a $182.9 million, or 211%, increase in purchased power
expense in the second quarter of 2000 over 1999. Purchased natural gas costs
decreased $4.7 million in the second quarter of 2000, primarily as a result of
lower therm sales due to decreased customer usage as a result of warmer than
normal temperatures in the service area. Other resource costs increased $45.2
million over 1999 primarily due to a $42.8 million increase in expense due to
mark-to-market accounting for options, which includes the $16 million accrual
for potential future losses, and a $2.0 million increase in Power Cost
Adjustment (PCA) expenses.
Operations and maintenance expenses increased $2.6 million, or 20%, 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.
SIX MONTHS ENDED JUNE 30, 2000 COMPARED TO SIX MONTHS ENDED JUNE 30, 1999
Avista Utilities' pre-tax loss from operations was $44.7 million in the first
six months of 2000, or a decrease of $127.3 million from the same period in
1999. The loss was primarily the result of the increase in purchased power
costs, as described above. The year-to-date utility results also include both
the $16.0 million accrual for expected future losses and the $8.1 million gain
from the sale of Centralia mentioned above. Avista Utilities' operating revenues
and expenses increased $129.4 million and $256.8 million, respectively, in the
first half of 2000 as compared to 1999.
Retail electric revenues increased $8.9 million in the first six months of 2000
over 1999 due to increased prices and greater sales volumes due to customer
growth. Wholesale electric revenues increased $117.5 million, or 64%, while
sales volumes increased only 8% during the first half of 2000 over 1999,
reflecting average sales prices 52% higher in 2000. Natural gas revenues
increased $0.6 million in the first six months of 2000 over 1999 due to
increased prices approved by state commissions and increased therm sales due to
customer growth. Retail natural gas revenues increased $9.3 million, but were
nearly offset by a $8.8 million decrease in non-retail sales.
Streamflows in the first six months of 2000 were 95% of normal compared to 107%
in 1999. Purchased power prices for the first six months of 2000 averaged 86%
higher than last year, and purchased power volumes were 6% greater, resulting in
a $192.0 million, or 98%, increase in purchased power expense in the first half
of 2000 over 1999. Purchased natural gas costs increased $2.7 million in the
first half of 2000, primarily from increased prices for natural gas. Fuel for
generation increased $6.0 million due to increased generation at the thermal
plants. Other resource costs increased $47.6 million over 1999 primarily due to
a $43.7 million increase in expense due to mark-to-market accounting for
options, which includes the $16 million accrual for potential future losses, and
a $2.0 million increase in PCA expenses.
Operations and maintenance expenses increased $5.8 million, or 22%, 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 Energy Trading Business beginning on page 26.
THREE MONTHS ENDED JUNE 30, 2000 COMPARED TO THREE MONTHS ENDED JUNE 30, 1999
Energy Trading and Marketing's income available for common stock for the second
quarter of 2000 was $47.3 million, compared to the second quarter 1999 loss of
$10.7 million. Avista Energy's operations were positively
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affected during the second quarter by warmer than normal weather and a
well-positioned portfolio in a volatile electric market, but were partially
offset by operating costs associated with closing its Eastern operations in
Boston.
Energy Trading and Marketing's revenues and operating expenses decreased $116.9
million and $208.7 million, respectively, in the second 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
re-focusing 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 re-focusing its business to the
West.
SIX MONTHS ENDED JUNE 30, 2000 COMPARED TO SIX MONTHS ENDED JUNE 30, 1999
Energy Trading and Marketing's income available for common stock for the first
six months of 2000 was $43.8 million, compared to a loss of $18.0 million in the
first half of 1999. Avista Energy's operations in the first half of 2000 were
positively affected by warmer than normal weather and a well-positioned
portfolio in a volatile electric market. 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 increased $70.3 million and operating
expenses decreased $27.5 million in the first half of 2000 compared to 1999. The
year-to-date increase in revenues is primarily the result of increased prices,
partially offset by lower sales volumes, during the second quarter. The
year-to-date decrease in expenses is primarily the result of Avista Energy's
closing its Eastern operations and re-focusing its business to the West.
Energy Trading and Marketing's balance sheet increased $4.1 billion from
December 1999 to June 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, as volumes declined
from December 1999 to June 2000.
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 technology start-up
businesses as part of its overall strategic focus on generating shareholder
value.
THREE MONTHS ENDED JUNE 30, 2000 COMPARED TO THREE MONTHS ENDED JUNE 30, 1999
Information and Technology's loss attributable to common stock for the second
quarter of 2000 was $6.2 million, compared to a loss of $1.3 million in 1999.
Operating revenues and expenses for this line of business increased $1.3 million
and $8.2 million, respectively, during the second quarter of 2000 over 1999,
primarily due to growth in each of the individual businesses.
SIX MONTHS ENDED JUNE 30, 2000 COMPARED TO SIX MONTHS ENDED JUNE 30, 1999
Information and Technology's loss attributable to common stock for the first six
months of 2000 was $11.9 million, compared to a loss of $2.6 million in 1999.
Operating revenues and expenses for this line of business increased $2.9 million
and $16.3 million, respectively, during the first half 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.
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THREE MONTHS ENDED JUNE 30, 2000 COMPARED TO THREE MONTHS ENDED JUNE 30, 1999
The loss attributable to common stock from this line of business was $0.5
million in the second quarter of 2000, compared to a loss of $0.8 million in
1999. The 1999 results included a loss on the sale of equipment as one of
Pentzer's portfolio companies consolidated its locations.
Operating revenues and expenses from this line of business decreased $21.1
million and $20.1 million, respectively, during the second quarter of 2000 as
compared to 1999. The Store Fixtures Group of portfolio companies was sold by
Pentzer during the third quarter of 1999. Revenues and expenses from these
companies were still included in the second quarter 1999 amounts, but not in the
second quarter of 2000.
SIX MONTHS ENDED JUNE 30, 2000 COMPARED TO SIX MONTHS ENDED JUNE 30, 1999
The loss attributable to common stock from this line of business was $0.6
million in the first six months of 2000, compared to earnings of $7.8 million in
1999. The 2000 loss included 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 a
transactional gain totaling $10.1 million, net of taxes, recorded by Pentzer as
a result of the sale of its Creative Solutions Group of portfolio companies,
partially offset by a loss on the sale of equipment.
Operating revenues and expenses from this line of business decreased $64.3
million and $60.7 million, respectively, during the first six 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 six months of 2000 used
net cash of $12.7 million, compared to providing net cash of $77.1 million for
the same period in 1999. The net loss for the first half of 2000 was $11.0
million compared to income of $27.9 million for 1999. Increased power prices
resulted in significant changes in the mark-to-market balances of energy
commodity assets and liabilities during the first half of 2000. A $43.7 million
net increase in energy commodities at Avista Utilities was partially offset by a
net decrease of $32.1 million in energy commodities at Avista Energy, for a
total non-cash impact on net income of $11.6 million. Other working capital
components, primarily payables and other accrued liabilities, continued to
change substantially in the 2000 period, primarily due to Avista Energy's
operations.
Investing Activities Investing activities provided net cash of $47.3 million in
the first six months of 2000 compared to using net cash of $2.6 million in the
same period in 1999. In 2000, Avista Utilities sold the Centralia Power Plant,
resulting in proceeds of approximately $89.2 million, which was offset by $21.6
million in reductions to other non-current balance sheet items. In 1999, Pentzer
sold the Creative Solutions Group of companies and Avista Energy acquired Vitol.
Financing Activities Net cash used in financing activities totaled $11.6 million
in the first six months of 2000 compared to $99.9 million in 1999. Short-term
borrowings increased $12.8 million and $20.0 million of long-term debt was
issued, while $27.8 million of long-term debt matured in the first half of 2000.
In the first half of 1999, short-term borrowings increased $51.1 million and
$0.8 million of long-term debt was issued, while $101.3 million of long-term
debt matured or was redeemed. Also, $26.5 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 June 30, 2000, 50,627 new shares of common
stock were issued to the Plan.
The Company's total common equity increased $238.9 million during the first six
months of 2000 to $632.4 million, primarily due to the conversion of all
remaining Series L Preferred Stock back to common stock. The Company's
consolidated capital structure at June 30, 2000, was 43% debt, 11% preferred
securities and 46% common equity, compared to 47% debt, 27% preferred securities
and 26% common equity at December 31, 1999.
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 has negotiated a $60 million three-month line of credit
that expires on October 25, 2000. 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 June 30, 2000, $58.7 million was outstanding under the committed
line of credit, $23.1 million was outstanding under the commercial paper program
and $52.0 million was outstanding under other short-term borrowing arrangements.
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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 June 30, 2000, Avista Corp.
had short-term notes receivable of $55.0 million from Avista Capital.
The following table provides an updated forecast of future capital expenditures,
reflecting projected reductions in capital expenditures:
TOTAL COMPANY CASH REQUIREMENTS
(Millions of Dollars)
<TABLE>
<CAPTION>
Projected
----------------------
2000 2001 2002
---- ---- ----
<S> <C> <C> <C>
Avista Utilities operations:
Capital expenditures(1) $ 92 $ 83 $ 81
Debt and preferred stock maturities(2) 316 40 50
---- ---- ----
Total Avista Utilities 408 123 131
---- ---- ----
Avista Capital operations:
Investments in or loans to subsidiaries 41 29 30
Debt maturities 4 1 1
---- ---- ----
Total Avista Capital 45 30 31
---- ---- ----
Total Company $453 $153 $162
==== ==== ====
Subsidiary capital expenditures(3) 39 69 39
</TABLE>
(1) Capital expenditures exclude AFUDC and AFUCE.
(2) Excludes notes payable (due within one year).
(3) To the extent there are financial requirements for capital expenditures for
Avista Capital subsidiaries, the companies intend to obtain those funds
under financings on a non-recourse basis to Avista Corp.
ENERGY TRADING AND MARKETING OPERATIONS
Avista Energy and its subsidiary, Avista Energy Canada, Ltd., as co-borrowers,
have a credit agreement with two commercial banks in the aggregate amount of
$110 million, originally expiring May 31, 2000, but extended through September
5, 2000. Avista Energy is in the process of renegotiating the credit agreement
with the two commercial banks. The existing 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 is secured by substantially all of Avista
Energy's assets. The maximum amount of credit extended by the banks for cash
advances is $30 million, with availability of up to $110 million (less the
amount of outstanding cash advances, if any) for the issuance of letters of
credit. At June 30, 2000, there were no cash advances (demand notes payable)
outstanding and letters of credit outstanding under the facility totaled
approximately $103 million. In addition, on July 30, 2000, Avista Energy entered
into a new, short-term credit agreement which provides an additional $50 million
facility available through September 5, 2000.
As of June 30, 2000, Avista Capital had loaned $60 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 quarter 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 $83 million as of June 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.
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At June 30, 2000, the Energy Trading and Marketing operations had $34.4 million
in cash and marketable securities with $1.0 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.
INFORMATION AND TECHNOLOGY OPERATIONS
At June 30, 2000, the Information and Technology operations had $0.1 million in
cash and marketable securities with $2.6 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 have $21.5 million in short-term borrowing
arrangements available ($20.0 million outstanding as of June 30, 2000) to fund
Pentzer's portfolio companies' requirements on an interim basis.
At June 30, 2000, these operations had $9.1 million in cash and marketable
securities with $3.4 million in long-term debt outstanding (the current portions
of which are included on the Consolidated Balance Sheets as other current
liabilities).
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, forwards, swaps, options and
other instruments. This market is largely unregulated and most transactions are
conducted on an "over-the-counter" basis, there being no central clearing
mechanism (except in the case of specific instruments traded on the commodity
exchanges). Power marketers, whether or not affiliated with other entities,
generally do not own production facilities and are not subject to net capital or
other requirements of any regulatory agency.
Avista Utilities and Avista Energy are subject to the various risks inherent in
commodity trading including, particularly, market risk and credit risk.
Market risk is, in general, the risk of fluctuation in the market price of the
commodity being traded and is influenced primarily by supply (in the case of
electricity, adequacy of generating reserve margins, as well as scheduled and
unscheduled outages of generating facilities or disruptions to transmission
facilities) and demand (caused by extreme 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
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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.
Avista Capital provides guarantees for Avista Energy's line of credit agreement,
and in the course of business may provide guarantees to other parties with whom
Avista Energy may be doing business. The Company's investment in Avista Capital
totaled $302.7 million at June 30, 2000.
RISK MANAGEMENT
The risk management process established by the Company is designed to measure
both quantitative and qualitative risk in the business. Avista Utilities and
Avista Energy have adopted policies and procedures to manage the risks inherent
in their businesses and have established a comprehensive Risk Management
Committee, separate from the units that create the risk exposure and overseen by
the Audit and Finance Committee of the Company's Board of Directors, to monitor
compliance with the Company's risk management policies and procedures on a
regular basis. Nonetheless, adverse changes in interest rates, commodity prices
and foreign currency exchange rates may result in losses in earnings, cash flow
and/or fair values.
Interest Rate Risk. The Company's market risks related to interest rates have
not changed materially from those reported in the 1999 Form 10-K.
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 has always estimated future loads based on historic data and
forward estimates of factors such as customer usage and weather. In addition,
projected resource availability to meet loads is based on estimates of
streamflows, unit availability, historic market information and experience. The
Company is required to both buy and sell energy on an hourly, monthly and
quarterly basis to match actual resources to its actual energy requirements.
There may be significant price and volume variances when actual results are
compared to estimates.
As of June, price volatility, availability of resources regionally, loads and
demand for energy throughout the WSCC have materially impacted the price of
energy for meeting retail load on a daily and hourly basis. While the Company
has resources available to meet average current and expected retail loads, price
volatility and load volatility materially impact the risk to the Company in the
future. The Company has a PCA mechanism in Idaho, and has a pending request in
Washington for a PCA, both of which would offset a portion of the increased
price risk.
The Company has hired Williams Energy Marketing & Trading Company to advise
Avista Utilities on risk management, risk analysis and resource optimization
issues for all system requirements. The advisory services agreement is effective
August 1, 2000 through June 30, 2002.
The following Value-at-Risk (VAR) information for Avista Energy has been updated
for the current period. At June 30, 2000, Avista Energy's estimated potential
one-day unfavorable impact on gross margin was $1.6 million, as measured by VAR,
related to its commodity trading and marketing business. The average daily VAR
for the first six months of 2000 was $1.2 million.
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.
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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.
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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The 2000 Annual Meeting of Shareholders of the Company was held on May 11, 2000.
The re-election of three directors with expiring terms was the only matter voted
upon at the meeting. There were 47,176,912 shares of Common Stock issued and
outstanding as of March 23, 2000, the proxy record date, with 39,915,931 shares
represented at said meeting. The details of the voting are shown below:
<TABLE>
<CAPTION>
Against
For or Withheld
---------- ----------
<S> <C> <C>
Re-election of Directors
Sarah M. R. (Sally) Jewell 39,246,462 669,469
John F. Kelly 39,250,843 665,088
R. John Taylor 39,243,998 671,933
</TABLE>
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.
Deferred Accounting Treatment for Power Costs 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 costs to be
deferred will include the changes in power costs to the Company related to
three power cost variables: short-term wholesale market prices, hydroelectric
generation, and thermal generation. The deferrals each month will be calculated
as the difference between the actual costs to the Company associated with
these three power cost variables, and the level of costs included in the
Company's base retail rates. The power costs to be deferred are related solely
to the operation of the Company's system resources to serve its load
obligations. Deferrals will not include losses associated with wholesale
commercial trading activity. Regulatory approval of the recovery of the
deferred costs will be addressed in a future ratemaking proceeding, in which
the Company will support the reasonableness and prudence of the costs, and that
the Company's resources were optimized to the benefit of its retail customers.
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AVISTA CORPORATION
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Request for Proposal (RFP) for New Power Generation. On August 9, 2000, the WUTC
approved the Company's plan for an RFP for new power generation. The added
generation is needed to increase the Company's existing generating capacity as
well as replace the generation from its share of the Centralia plant, which was
sold in May. As part of the order, the WUTC agreed to waive normal time limits
related to going out into the market to see what options are available for
development of new generation resources.
Washington Rate Cases. In October 1999, the Company filed for a general electric
rate increase of $26.2 million, or 10.4%, since revised to $18.2 million, and a
general natural gas rate increase of $4.9 million, or 6.5%, with the WUTC. On
May 5, 2000, the WUTC staff recommended a $16.5 million, or 6.5%, electric rate
decrease and a $785,000, or 1.0%, natural gas rate increase. The staff also
recommended 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 8.8%. The Company had requested a 9.9% rate of return. These recommendations
by the WUTC staff are not binding on the commission, which has until the end of
September to issue an order. The Company has vigorously contested the positions
of the WUTC staff and intervenors, believing there is a sound basis for rate
relief. The Company filed its rebuttal on June 2. Additional hearings for the
case were held in early July. Briefs were filed on August 11.
Avista Power's New Power Plant. 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 will be owned by Avista Power and operated by PGE under a 15-year operations
and maintenance contract. Engineering and procurement of major equipment in
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
September. The total cost of the project is estimated at $190 million.
Centralia Power Plant. On May 5, 2000, the owners of the Centralia Power Plant
sold the plant to TransAlta, a Canadian company. The Company recorded an $8.1
million after-tax gain in the second quarter of 2000 from the sale of its 17.5%
ownership interest in the plant. The balance of the total after-tax gain of
$33.9 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 get $6.8 million, which translates into a rate reduction of
1.3% over an eight-year period. Washington customers will receive the remaining
$19.0 million, with the method and timing to be determined as part of the
pending general rate case. Avista Utilities will require additional generating
capacity, and TransAlta has agreed to replace Avista Utilities' lost output for
three years through a purchase agreement effective July 1, 2000. The Company is
assessing its options for a longer-term replacement of the power.
Regional Transmission Organizations (RTO). Avista Utilities and five other
Western utilities have agreed to study the formation of a for-profit company
that would own the companies' transmission lines. The other companies involved
in the study are Montana Power Co., Puget Sound Energy Corp., Portland General
Electric Co., Nevada Power Co. and Sierra Pacific Power Co. This effort is in
response to the FERC's Order No. 2000, which requires public 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 participation, by
October 2000.
Coeur d' Alene Lake Court Decision. On July 28, 1998, the United States District
Court for the District of Idaho issued its finding that the Coeur d' Alene Tribe
of Idaho owns the bed and banks of the Coeur d' Alene Lake and the St. Joe River
lying within the current boundaries of the Coeur d' Alene Reservation. The
disputed bed and banks comprise approximately the southern one-third of Lake
Coeur d' Alene. This action had been brought by the United States on behalf of
the Tribe against the State of Idaho. While the Company is not a party to this
action, which has been appealed by the State of Idaho to the Ninth Circuit Court
of Appeals, the Company is continuing to evaluate the impact of this decision on
the operation of its hydroelectric facilities on the Spokane River, downstream
of the Coeur d' Alene Lake, which is the reservoir for these plants. 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 Court will consider the petition
within the next few months.
ADDITIONAL FINANCIAL DATA
At June 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 $593.3 million. Of such amount, $323.8 million represents
long-term unsecured and unsubordinated indebtedness of the Company, and $238.5
million represents secured indebtedness of the Company. The balance of $31.0
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 $81.8 million of the
Company's short-term debt outstanding under or backed by the committed lines of
credit is secured.
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AVISTA CORPORATION
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The following table reflects the ratio of earnings to fixed charges:
<TABLE>
<CAPTION>
12 Months Ended
---------------------
June 30, December 31,
2000 1999
-------- --------
<S> <C> <C>
Ratio of Earnings to Fixed Charges 0.90 (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.
4(a) Bylaws of Avista Corporation, as amended July 1, 2000.
12 Computation of ratio of earnings to fixed charges and preferred
dividend requirements.
27 Financial Data Schedule.
(b) Reports on Form 8-K.
Dated June 21, 2000, release regarding significant increases in
energy expenses and the impact on Company earnings.
Dated July 26, 2000, release reporting second quarter earnings.
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AVISTA CORPORATION
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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: August 14, 2000 /s/ J. E. Eliassen
------------------------------------
J. E. Eliassen
Senior Vice President and
Chief Financial Officer
(Principal Accounting and
Financial Officer)
31
