<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 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 May 1, 2000, 47,110,537 shares of Registrant's Common Stock, no par value
(the only class of common stock), were outstanding.
<PAGE> 2
AVISTA CORPORATION
Index
<TABLE>
<CAPTION>
Page No.
--------
<S> <C> <C>
Part I. Financial Information:
Item 1. Financial Statements
Consolidated Statements of Income - Three Months Ended
March 31, 2000 and 1999........................................... 3
Consolidated Balance Sheets - March 31, 2000
and December 31, 1999............................................. 4
Consolidated Statements of Capitalization - March 31, 2000
and December 31, 1999............................................. 5
Consolidated Statements of Cash Flows - Three Months Ended
March 31, 2000 and 1999........................................... 6
Schedule of Information by Business Segments - Three Months Ended
March 31, 2000 and 1999........................................... 7
Notes to Consolidated Financial Statements........................... 9
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations............................................ 13
Item 3. Quantitative and Qualitative Disclosures About Market Risk 18
Part II. Other Information:
Item 5. Other Information................................................ 19
Item 6. Exhibits and Reports on Form 8-K................................. 20
Signature........................................................................... 21
</TABLE>
<PAGE> 3
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
Avista Corporation
- --------------------------------------------------------------------------------
For the Three Months Ended March 31
Thousands of Dollars
<TABLE>
<CAPTION>
2000 1999
----------- -----------
<S> <C> <C>
OPERATING REVENUES ................................................... $ 1,381,974 $ 1,212,822
----------- -----------
OPERATING EXPENSES:
Resource costs ..................................................... 1,258,665 1,065,000
Operations and maintenance ......................................... 27,422 52,772
Administrative and general ......................................... 24,707 30,517
Depreciation and amortization ...................................... 19,150 19,074
Taxes other than income taxes ...................................... 16,110 15,096
Exit costs - Avista Energy's Eastern energy business ............... 4,907 -
Restructuring charges - Pentzer .................................... 1,940 -
----------- -----------
Total operating expenses ........................................ 1,352,901 1,182,459
----------- -----------
INCOME FROM OPERATIONS ............................................... 29,073 30,363
----------- -----------
OTHER INCOME (EXPENSE):
Interest expense ................................................... (14,737) (16,739)
Net gain on subsidiary transactions ................................ - 16,479
Other income-net ................................................... 3,362 1,586
----------- -----------
Total other income (expense)-net ................................ (11,375) 1,326
----------- -----------
INCOME BEFORE INCOME TAXES ........................................... 17,698 31,689
INCOME TAXES ......................................................... 7,173 12,301
----------- -----------
NET INCOME ........................................................... 10,525 19,388
DEDUCT-Preferred stock dividend requirements (Note 5) ............... 21,910 5,384
----------- -----------
INCOME AVAILABLE FOR COMMON STOCK .................................... $ (11,385) $ 14,004
=========== ===========
Average common shares outstanding (thousands), Basic (Note 5) ....... 41,297 40,454
Average common shares outstanding (thousands), Diluted (Note 5) ..... 49,524 55,960
EARNINGS PER SHARE OF COMMON STOCK, BASIC (Note 5) .................. $ (0.28) $ 0.35
EARNINGS PER SHARE OF COMMON STOCK, DILUTED (Note 5) ................ $ (0.28) $ 0.34
Dividends paid per common share ...................................... $ 0.12 $ 0.12
NET INCOME ........................................................... $ 10,525 $ 19,388
----------- -----------
OTHER COMPREHENSIVE INCOME:
Foreign currency translation adjustment ............................ 41 220
Unrealized investment gains/(losses)-net of tax .................... 154 415
----------- -----------
OTHER COMPREHENSIVE INCOME ........................................... 195 635
----------- -----------
COMPREHENSIVE INCOME ................................................. $ 10,720 $ 20,023
=========== ===========
</TABLE>
The Accompanying Notes are an Integral Part of These Statements.
3
<PAGE> 4
CONSOLIDATED BALANCE SHEETS
Avista Corporation
- --------------------------------------------------------------------------------
Thousands of Dollars
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
---------- ----------
<S> <C> <C>
ASSETS:
CURRENT ASSETS:
Cash and cash equivalents ...................................... $ 46,090 $ 40,041
Temporary cash investments ..................................... 3,200 7,490
Accounts and notes receivable-net .............................. 382,727 530,774
Energy commodity assets ........................................ 729,721 585,913
Materials and supplies, fuel stock and natural gas stored ...... 22,109 28,352
Prepayments and other .......................................... 39,756 21,499
---------- ----------
Total current assets ......................................... 1,223,603 1,214,069
---------- ----------
UTILITY PROPERTY:
Utility plant in service-net ................................... 2,196,694 2,184,698
Construction work in progress .................................. 32,664 30,912
---------- ----------
Total ........................................................ 2,229,358 2,215,610
Less: Accumulated depreciation and amortization ............... 725,716 714,773
---------- ----------
Net utility plant ............................................ 1,503,642 1,500,837
---------- ----------
OTHER PROPERTY AND INVESTMENTS:
Investment in exchange power-net ............................... 52,383 54,123
Non-utility properties and investments-net ..................... 138,528 137,213
Energy commodity assets ........................................ 571,678 491,799
Other-net ...................................................... 32,976 31,051
---------- ----------
Total other property and investments ......................... 795,565 714,186
---------- ----------
DEFERRED CHARGES:
Regulatory assets for deferred income tax ...................... 163,083 166,456
Conservation programs .......................................... 43,900 44,444
Unamortized debt expense ....................................... 31,117 31,122
Other-net ...................................................... 47,864 42,380
---------- ----------
Total deferred charges ....................................... 285,964 284,402
---------- ----------
TOTAL ...................................................... $3,808,774 $3,713,494
========== ==========
LIABILITIES AND CAPITALIZATION:
CURRENT LIABILITIES:
Accounts payable ............................................... $ 431,859 $ 522,478
Energy commodity liabilities ................................... 744,319 594,065
Taxes and interest accrued ..................................... 43,923 35,123
Other .......................................................... 34,249 35,313
---------- ----------
Total current liabilities .................................... 1,254,350 1,186,979
---------- ----------
NON-CURRENT LIABILITIES AND DEFERRED CREDITS:
Non-current liabilities ........................................ 46,699 44,067
Deferred revenue ............................................... 130,759 132,975
Energy commodity liabilities ................................... 516,751 441,372
Deferred income taxes .......................................... 375,410 377,049
Other deferred credits ......................................... 13,055 11,041
---------- ----------
Total non-current liabilities and deferred credits ........... 1,082,674 1,006,504
---------- ----------
CAPITALIZATION (See Consolidated Statements of Capitalization) .... 1,471,750 1,520,011
---------- ----------
COMMITMENTS AND CONTINGENCIES (Note 6)
TOTAL ...................................................... $3,808,774 $3,713,494
========== ==========
</TABLE>
The Accompanying Notes are an Integral Part of These Statements.
4
<PAGE> 5
CONSOLIDATED STATEMENTS OF CAPITALIZATION
Avista Corporation
- --------------------------------------------------------------------------------
Thousands of Dollars
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
----------- -----------
<S> <C> <C>
LONG-TERM DEBT:
First Mortgage Bonds:
Secured Medium-Term Notes:
Series A - 6.13% to 7.90% due 2000 through 2023 ............................. $ 139,400 $ 139,400
Series B - 6.20% to 7.89% due 2000 through 2010 ............................. 109,000 124,000
----------- -----------
Total first mortgage bonds .................................................. 248,400 263,400
----------- -----------
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 ............................ 85,000 118,500
Other ........................................................................... 11,581 12,503
----------- -----------
Total long-term debt .......................................................... 668,781 718,203
----------- -----------
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;
47,077,536 and 35,648,239 shares outstanding .................................. 607,467 318,731
Note receivable from employee stock ownership plan .............................. (7,968) (8,240)
Capital stock expense and other paid in capital ................................. (12,027) (4,347)
Other comprehensive income ...................................................... 29 (166)
Retained earnings ............................................................... 70,468 87,521
----------- -----------
Total common equity ........................................................... 657,969 393,499
----------- -----------
TOTAL CAPITALIZATION ............................................................... $ 1,471,750 $ 1,520,011
=========== ===========
</TABLE>
The Accompanying Notes are an Integral Part of These Statements.
5
<PAGE> 6
CONSOLIDATED STATEMENTS OF CASH FLOWS
Increase (Decrease) in Cash and Cash Equivalents
Avista Corporation
- --------------------------------------------------------------------------------
For the Three Months Ended March 31
Thousands of Dollars
<TABLE>
<CAPTION>
2000 1999
--------- ---------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income ........................................................ $ 10,525 $ 19,388
NON-CASH ITEMS INCLUDED IN NET INCOME:
Depreciation and amortization ................................... 19,150 19,074
Provision for deferred income taxes ............................. 2,299 11,275
Allowance for equity funds used during construction ............. (283) (301)
Power and natural gas cost deferrals and amortizations .......... 591 (1,249)
Gain on sale of subsidiary investments and other-net ............ 321 (10,869)
(Increase) decrease in working capital components:
Sale of customer accounts receivables-net ..................... 25,000 -
Receivables and prepaid expense ............................... 69,806 (11,559)
Materials & supplies, fuel stock and natural gas stored ....... 5,504 4,130
Payables and other accrued liabilities ........................ (82,765) 9,874
Other ......................................................... 30,613 (4,506)
--------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES ............................ 80,761 35,257
--------- ---------
INVESTING ACTIVITIES:
Construction expenditures (excluding AFUDC-equity funds) .......... (18,076) (16,327)
Other capital requirements ........................................ (6,086) (6,877)
(Increase) decrease in other noncurrent balance sheet items-net ... 15,129 (2,422)
Proceeds from sale of subsidiary investments ...................... - 63,483
Assets acquired and investments in subsidiaries ................... (1,810) (40,755)
--------- ---------
NET CASH USED IN INVESTING ACTIVITIES ................................ (10,843) (2,898)
--------- ---------
FINANCING ACTIVITIES:
Increase (decrease) in short-term borrowings........................ (36,030) 38,801
Proceeds from issuance of long-term debt .......................... - 581
Redemption and maturity of long-term debt ......................... (16,034) (52,694)
Repurchase of common stock ........................................ (648) -
Cash dividends paid ............................................... (9,473) (10,250)
Other-net ......................................................... (1,684) (826)
--------- ---------
NET CASH USED IN FINANCING ACTIVITIES ................................ (63,869) (24,388)
--------- ---------
NET INCREASE IN CASH AND CASH EQUIVALENTS ............................ 6,049 7,971
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD ..................... 40,041 72,836
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD ........................... $ 46,090 $ 80,807
========= =========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the period:
Interest ........................................................ $ 15,901 $ 13,862
Income taxes .................................................... 1 1,439
Noncash financing and investing activities:
Series L Preferred Stock converted to common stock .............. 271,286 -
Property purchased under capitalized leases ..................... - 267
</TABLE>
The Accompanying Notes are an Integral Part of These Statements.
6
<PAGE> 7
SCHEDULE OF INFORMATION BY BUSINESS SEGMENTS
Avista Corporation
- --------------------------------------------------------------------------------
For the Three Months Ended March 31
Thousands of Dollars
<TABLE>
<CAPTION>
2000 1999
----------- -----------
<S> <C> <C>
OPERATING REVENUES:
Avista Utilities ........................................... $ 298,542 $ 266,786
Energy Trading and Marketing ............................... 1,106,188 895,691
Information and Technology ................................. 2,290 695
Avista Ventures ............................................ 7,114 50,278
Intersegment eliminations .................................. (32,160) (628)
----------- -----------
Total operating revenues ................................. $ 1,381,974 $ 1,212,822
=========== ===========
RESOURCE COSTS:
Avista Utilities:
Power purchased .......................................... $ 119,133 $ 110,088
Natural gas purchased for resale ......................... 42,549 35,191
Fuel for generation ...................................... 13,568 8,001
Other .................................................... 12,884 10,473
Energy Trading and Marketing:
Cost of sales ............................................ 1,102,691 901,875
Intersegment eliminations .................................. (32,160) (628)
----------- -----------
Total resource costs (excluding non-energy businesses) .. $ 1,258,665 $ 1,065,000
=========== ===========
GROSS MARGINS:
Avista Utilities ........................................... $ 110,408 $ 103,033
Energy Trading and Marketing ............................... 3,497 (6,184)
----------- -----------
Total gross margins (excluding non-energy businesses) ... $ 113,905 $ 96,849
=========== ===========
OPERATIONS AND MAINTENANCE EXPENSES:
Avista Utilities ........................................... $ 16,265 $ 13,035
Energy Trading and Marketing ............................... 567 10
Information and Technology ................................. 4,632 1,341
Avista Ventures ............................................ 5,958 38,386
----------- -----------
Total operations and maintenance expenses ................ $ 27,422 $ 52,772
=========== ===========
ADMINISTRATIVE AND GENERAL EXPENSES:
Avista Utilities ........................................... $ 14,338 $ 14,490
Energy Trading and Marketing ............................... 3,782 6,076
Information and Technology ................................. 4,879 906
Avista Ventures ............................................ 1,708 9,045
----------- -----------
Total administrative and general expenses ................ $ 24,707 $ 30,517
=========== ===========
DEPRECIATION AND AMORTIZATION EXPENSES:
Avista Utilities ........................................... $ 16,685 $ 15,453
Energy Trading and Marketing ............................... 652 559
Information and Technology ................................. 825 208
Avista Ventures ............................................ 988 2,854
----------- -----------
Total depreciation and amortization expenses ............. $ 19,150 $ 19,074
=========== ===========
INCOME/(LOSS) FROM OPERATIONS (PRE-TAX):
Avista Utilities ........................................... $ 47,606 $ 45,899
Energy Trading and Marketing ............................... (6,547) (12,828)
Information and Technology ................................. (8,262) (1,771)
Avista Ventures ............................................ (3,724) (937)
----------- -----------
Total income from operations ............................. $ 29,073 $ 30,363
=========== ===========
</TABLE>
7
<PAGE> 8
SCHEDULE OF INFORMATION BY BUSINESS SEGMENTS
Avista Corporation
- --------------------------------------------------------------------------------
For the Three Months Ended March 31
Thousands of Dollars
<TABLE>
<CAPTION>
2000 1999
----------- -----------
<S> <C> <C>
INCOME AVAILABLE FOR COMMON STOCK:
Avista Utilities ........................................... $ (2,054) $ 14,083
Energy Trading and Marketing ............................... (3,538) (7,336)
Information and Technology ................................. (5,664) (1,254)
Avista Ventures ............................................ (129) 8,511
----------- -----------
Total income available for common stock (Note 5) ........ $ (11,385) $ 14,004
=========== ===========
ASSETS: (1999 amounts at December 31)
Avista Utilities ........................................... $ 1,926,704 $ 1,976,716
Energy Trading and Marketing ............................... 1,731,521 1,595,470
Information and Technology ................................. 40,776 26,379
Avista Ventures ............................................ 109,773 114,929
----------- -----------
Total assets ............................................. $ 3,808,774 $ 3,713,494
=========== ===========
CAPITAL EXPENDITURES (excluding AFUDC/AFUCE):
Avista Utilities ........................................... $ 18,578 $ 15,918
Energy Trading and Marketing ............................... 13 3,658
Information and Technology ................................. 4,827 2,156
Avista Ventures ............................................ 474 1,094
----------- -----------
Total capital expenditures ............................... $ 23,892 $ 22,826
=========== ===========
</TABLE>
The Accompanying Notes are an Integral Part of These Statements.
8
<PAGE> 9
AVISTA CORPORATION
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The accompanying financial statements of Avista Corporation (Avista Corp. or the
Company) for the interim periods ended March 31, 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.
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
shutting down all of the operations in Houston and Boston and eliminating
approximately 80 positions. The Houston operations were closed during the first
quarter of 2000, with the Boston operations scheduled to close during the second
quarter. 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 $1.6 million before-tax loss.
To date, Avista Energy has not found a buyer for the natural gas or coal
contracts. In addition to the restructuring charges previously reserved and
paid, other transition costs in the amount of $4.9 million before taxes were
incurred during the first quarter of 2000 related to closing the Houston and
Boston offices and discontinuing operations in the East. Additional transition
costs will continue through the second quarter 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. None of the $1.2 million for termination benefits was paid out as
of March 31, 2000.
NOTE 3. ENERGY COMMODITY TRADING
Contract Amounts and Terms Under Avista Energy's derivative instruments, Avista
Energy either (i) as "fixed price payor," is obligated to pay a fixed price or
amount and is entitled to receive the commodity or 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 March 31,
2000 are set forth below (volumes in thousands of mmBTUs and MWhs, dollars in
thousands):
<TABLE>
<CAPTION>
Fixed Price Fixed Price Maximum
Payor Receiver Terms in Years
----------- ----------- --------------
<S> <C> <C> <C>
Energy commodities (volumes)
Natural gas 248,138 230,974 4
Electric 195,124 182,554 20
Coal (tons) 3,595 3,595 1
</TABLE>
9
<PAGE> 10
AVISTA CORPORATION
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Index Price Index Price Maximum
Payor Receiver Terms in Years
----------- ----------- --------------
<S> <C> <C> <C>
Energy commodities (volumes)
Natural gas 684,984 621,716 5
Electric 1,215 903 5
</TABLE>
Contract or notional amounts reflect the volume of transactions, but do not
necessarily represent the amounts exchanged by the parties to the derivative
commodity instruments. Accordingly, contract or notional amounts do not
accurately measure Avista Energy's exposure to market or credit risks. The
maximum terms in years detailed above are not indicative of likely future cash
flows as these positions may be offset in the markets at any time.
Fair Value The fair value of Avista Energy's derivative commodity instruments
outstanding at March 31, 2000, and the average fair value of those instruments
held during the three months ended March 31, 2000 are set forth below (dollars
in thousands):
<TABLE>
<CAPTION>
Fair Value Average Fair Value for the
as of March 31, 2000 three months ended March 31, 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 $109,775 $ 35,700 $110,366 $ 25,532 $ 92,599 $ 32,598 $ 93,773 $ 24,663
Electric 616,123 535,062 630,315 491,016 558,042 497,281 568,917 454,233
Coal 3,823 916 3,638 203 7,176 859 6,502 165
-------- -------- -------- -------- -------- -------- -------- --------
Total $729,721 $571,678 $744,319 $516,751 $657,817 $530,738 $669,192 $479,061
</TABLE>
The weighted average term of Avista Energy's natural gas and related derivative
commodity instruments as of March 31, 2000 was approximately three months. The
weighted average term of Avista Energy's electric derivative commodity
instruments at March 31, 2000 was approximately four months. The weighted
average term of Avista Energy's coal derivative commodity instruments at March
31, 2000 was approximately six 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 March 31, 2000 was $0.05 million and is
included on 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 41,296,963
and 40,453,729 for the quarters ended March 31, 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 7,623,916
shares of common stock for the quarterly calculation of diluted earnings per
share. The costs of converting the Series L Preferred Stock into common stock
totaled $21.3 million for 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.
10
<PAGE> 11
AVISTA CORPORATION
- --------------------------------------------------------------------------------
The computation of basic and diluted earnings per common share is as follows (in
thousands, except per share amounts):
<TABLE>
<CAPTION>
1st Quarter
-----------------------
2000 1999
-------- --------
<S> <C> <C>
Net income $ 10,525 $ 19,388
Less: Preferred stock dividends 21,910 5,384
-------- --------
Income available for common stock-basic (11,385) 14,004
Convertible Preferred Stock, Series L,
dividend requirements - 4,775
-------- --------
Income available for common stock-diluted $(11,385) $ 18,779
======== ========
Weighted-average number of common shares
outstanding-basic 41,297 40,454
Conversion of Convertible Preferred Stock, Series L 7,624 15,405
Restricted stock 99 101
Exercise of stock options 504 -
-------- --------
Weighted-average number of common shares
outstanding-diluted 49,524 55,960
Earnings per common share
Basic $ (0.28) $ 0.35
Diluted $ (0.28) $ 0.34
</TABLE>
NOTE 6. COMMITMENTS AND CONTINGENCIES
The Company believes, based on the information presently known, the ultimate
liability for the matters discussed in this note, individually or in the
aggregate, taking into account established accruals for estimated liabilities,
will not be material to the consolidated financial position of the Company, but
could be material to results of operations or cash flows for a particular
quarter or annual period. No assurance can be given, however, as to the ultimate
outcome with respect to any particular lawsuit.
SPOKANE GAS PLANT
The Spokane Natural Gas Plant site (which was operated as a coal gasification
plant for approximately 60 years until 1948) was acquired by the Company through
a merger in 1958. The Company no longer owns the property. Initial core samples
taken from the site indicate environmental contamination at the site. On January
15, 1999, the Company received notice from the State of Washington's Department
of Ecology (DOE) that it had been designated as a potentially liable person
(PLP) with respect to any hazardous substances located on this site, stemming
from the Company's past ownership of the former Gas Plant. In its notice, the
DOE stated that it intended to complete an on-going remedial investigation of
this site, complete a feasibility study to determine the most effective means of
halting or controlling future releases of substances from the site, and
implement appropriate remedial measures.
The Company responded to the DOE acknowledging its listing as a PLP, but
requested that additional parties also be listed as PLPs. In the spring of 1999,
the DOE named two other parties as additional PLPs. The Company completed
additional characterization of the site for the remedial investigation (RI).
The 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. The RI is currently
under review by the DOE, with comments expected during the second quarter of
2000. The Company will be submitting the FS for comments in mid-May.
11
<PAGE> 12
AVISTA CORPORATION
- --------------------------------------------------------------------------------
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.
12
<PAGE> 13
AVISTA CORPORATION
- --------------------------------------------------------------------------------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Avista Corporation (Avista Corp. or the Company) operates as 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, 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 are primarily with other
utilities and power brokers in the Western Systems Coordinating Council (WSCC).
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 primarily in support of Avista Energy.
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),
Avista Communications, Inc. (Avista Communications) and Avista Fiber, Inc.
(Avista Fiber). 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 merged operations, so Avista Communications is 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 energy, and information and technology
services.
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 and credit risks associated with commodity trading
activities. The Company believes that its extensive experience in the electric
and natural gas business, coupled with its strong management team, will allow
the Company to effectively manage its further development as a diversified
energy, information and technology company.
13
<PAGE> 14
AVISTA CORPORATION
- --------------------------------------------------------------------------------
RESULTS OF OPERATIONS
OVERALL OPERATIONS
First quarter 2000 net income available for common stock was a loss of $11.4
million, compared to $14.0 million in the first quarter of 1999. The decrease
was primarily the result of the conversion of the outstanding Series L Preferred
Stock back into common stock, which resulted in a one-time charge of $21.3
million to preferred stock dividend requirements. Excluding the effect of this
transaction, the Company would have had net income available for common stock of
$9.9 million. The decrease in 2000 earnings from 1999 levels is also due to the
$10.1 million transactional gain, net of taxes, recorded in the first quarter of
1999 by Pentzer from the sale of a group of portfolio companies. The gain
resulted in income of $8.5 million from the Avista Ventures line of business in
1999 compared to a loss of $0.1 million in 2000. Losses from the Information and
Technology line of business increased $4.4 million in 2000 from first quarter
1999 as these businesses continued to grow their operations. Losses from the
Energy Trading and Marketing line of business decreased $3.8 million from the
first quarter of 1999. Avista Utilities' results, excluding preferred stock
dividend requirements, improved $0.4 million over the same period in 1999.
Overall reported basic earnings per share for the first quarter of 2000 were a
loss of $0.28, compared to $0.35 in 1999. Excluding the effect of the charge for
the conversion of the Series L Preferred Stock, earnings per share would have
been $0.20, compared to $0.34 per diluted share in 1999. As a result of this
preferred dividend charge, Avista Utilities recorded a loss of $0.05 per basic
share for the first quarter of 2000 compared to a contribution of $0.35 in the
first quarter of 1999. Energy Trading and Marketing operations had a loss of
$0.09 per basic share in the first quarter of 2000 compared to a loss of $0.18
in the same period in 1999. Information and Technology operations had a loss of
$0.14 per basic share in 2000 compared to a loss of $0.03 in 1999. Results from
the Avista Ventures line of business were slightly negative in the first quarter
of 2000, with no impact on earnings per share, compared to a contribution of
$0.21 in the same period in 1999, which was primarily due to the $0.18 per share
contribution from Pentzer's 1999 transactional gain mentioned above.
AVISTA UTILITIES
Avista Utilities' pre-tax income from operations increased $1.7 million, or 4%,
in the first quarter of 2000 over the same period in 1999. The increase was
primarily the result of increased wholesale electric sales revenues, due to
higher market prices, and higher retail electric and natural gas revenues due to
price increases approved by state public utility commissions. The increased
revenues were partially offset by increased resource costs and higher operating
expenses. Avista Utilities' operating revenues and expenses increased $31.8
million and $30.1 million, respectively, during the first quarter of 2000 as
compared to 1999.
Retail electric revenues increased $3.9 million in the first quarter of 2000
over 1999 due to increased prices and greater sales volumes due to customer
growth. Streamflows in the first quarter of 2000 were 107% of normal compared to
134% in the first quarter of 1999. However, due to factors such as timing of the
flows, hydroelectric generation was 4% higher in the first quarter of 2000 than
in 1999. Wholesale electric revenues increased $18.5 million, or 20%, while
sales volumes increased only 1% during the first quarter of 2000 over 1999,
reflecting prices that were 19% higher for purchased power in the region.
Natural gas revenues increased $8.0 million in the first quarter of 2000 over
1999 due to increased prices approved by state commissions and increased therm
sales, primarily due to customer growth.
Purchased power prices were 13% higher than last year, resulting in a $9.0
million, or 8%, increase in purchased power in the first quarter of 2000 over
1999. Purchased natural gas costs increased $7.4 million in the first quarter of
2000, primarily from increased therm sales due to customer growth. Fuel for
generation increased $5.6 million due to increased generation at the thermal
plants. Operations and maintenance expenses increased $3.2 million due to a
variety of items, including 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.
Depreciation and amortization expenses increased $1.2 million, primarily due to
increased plant in service.
14
<PAGE> 15
AVISTA CORPORATION
- --------------------------------------------------------------------------------
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.
Energy Trading and Marketing income available for common stock for the first
quarter of 2000 was a loss of $3.5 million, compared to a loss of $7.3 million
in the first quarter of 1999. Avista Energy's operations were primarily affected
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 office was closed during the first quarter of 2000, with the Boston
office expected to close during the second quarter. The Eastern electric book
was sold at a $1.6 million pre-tax loss. Avista Energy is currently seeking a
buyer for its Eastern natural gas contracts.
Energy Trading and Marketing's revenues and operating expenses increased $210.5
million and $204.2 million, respectively, in the first quarter of 2000 over
1999. The increase in revenues and expenses is primarily the result of the
settlement of contracts originated during Avista Energy's initial growth from
1997 through early 1999. During this period, Avista Energy had been developing
and expanding its business and adding experienced traders and staff. This growth
continued through the first quarter of 1999 when Avista Energy purchased Vitol
Gas & Electric, LLC.
In November 1999, the decision was made to reduce Avista Energy's risk by
redirecting its focus away from national energy trading toward a more
regionally-based energy marketing and trading effort in the West backed by
contracts for energy commodities and by the output of specific facilities
available under contract. The change in the strategy followed significant
changes in the overall energy trading and marketing industry that created low
margins while requiring higher levels of investment, credit commitments and
value-at-risk limits. Mergers and consolidations within the industry also
created a small number of large players, and a marketplace where liquidity and
volatility were not favorable.
Energy Trading and Marketing's total assets and liabilities increased $136.1
million from December 1999 to March 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 decreased due to lower sales volumes as Avista Energy has
discontinued its trading activity in the East.
INFORMATION AND TECHNOLOGY
The Information and Technology line of business includes the results of Avista
Advantage, Avista Labs, Avista Communications and Avista Fiber. 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.
Information and Technology's income available for common stock for the first
quarter of 2000 was a loss of $5.7 million, compared to a loss of $1.3 million
in 1999. Operating revenues and expenses for this line of business increased
$1.6 million and $8.1 million, respectively, during the first quarter 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.
Income available for common stock for this line of business was a loss of $0.1
million in the first quarter of 2000, compared to first quarter 1999 earnings of
$8.5 million. The 1999 earnings included a transactional gain totaling $10.1
million, net of taxes, recorded by Pentzer as a result of the sale of a group of
portfolio companies.
Operating revenues and expenses for this line of business decreased $43.2
million and $40.4 million, respectively, during the first quarter 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, so revenues and expenses from these eleven companies
were included in the first quarter 1999 amounts.
15
<PAGE> 16
AVISTA CORPORATION
- --------------------------------------------------------------------------------
LIQUIDITY AND CAPITAL RESOURCES
OVERALL OPERATIONS
Operating Activities Cash provided by operating activities in the first quarter
of 2000 totaled $80.8 million, compared to $35.3 million for the same period in
1999. The primary reason for increased cashflows was the $25.0 million of
customer accounts receivables that were sold during the first quarter of 2000.
Other various working capital components, such as receivables and payables,
continued to change substantially in the 2000 period, primarily due to Avista
Energy's operations.
Investing Activities Net cash used in investing activities totaled $10.8 million
in the first quarter of 2000 compared to $2.9 million in the same period in
1999. The primary differences in investing activities between 2000 and 1999 were
Avista Energy's acquisition of Vitol and the sale of the Creative Solutions
Group of companies by Pentzer, both in the first quarter of 1999.
Financing Activities Cash used in financing activities totaled $63.9 million in
the first quarter of 2000 compared to $24.4 million in 1999. Short-term
borrowings decreased $36.0 million and $16.0 million of long-term debt matured
or was redeemed in the first quarter of 2000. In the first quarter of 1999,
short-term borrowings increased $38.8 million, and $52.7 million of long-term
debt was redeemed or matured.
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.
The Company's total common equity increased $264.5 million during the first
quarter of 2000 to $658.0 million, primarily due to the conversion of all
remaining Series L Preferred Stock back to common stock. The Company's
consolidated capital structure at March 31, 2000, was 45% debt, 10% preferred
securities and 45% 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). The Company has $260 million in committed lines of credit. In
addition, the Company may currently borrow up to $100 million through other
borrowing arrangements with banks. The Company also has a $50 million regional
commercial paper program. As of March 31, 2000, $50.0 million was outstanding
under the committed line of credit, $25.0 million was outstanding under other
short-term borrowing arrangements and $10.0 million was outstanding under the
commercial paper program.
The Company funds capital expenditures with a combination of
internally-generated cash and external financing. The level of cash generated
internally and the amount that is available for capital expenditures fluctuates
annually. Cash provided by operating activities remains the Company's primary
source of funds for operating needs, dividends and capital expenditures.
ENERGY TRADING AND MARKETING OPERATIONS
Avista Energy and its subsidiary, Avista Energy Canada, Ltd., as co-borrowers,
have a credit agreement with two commercial banks in the aggregate amount of
$110 million, expiring May 31, 2000. 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
16
<PAGE> 17
AVISTA CORPORATION
- --------------------------------------------------------------------------------
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 March 31, 2000, there were no cash advances (demand notes payable)
outstanding and letters of credit outstanding under the facility totaled
approximately $49.9 million.
At March 31, 2000, the Energy Trading and Marketing operations had $48.1 million
in cash and marketable securities with $0.8 million in long-term debt
outstanding.
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.
INFORMATION AND TECHNOLOGY OPERATIONS
At March 31, 2000, the Information and Technology operations had $0.1 million in
cash and marketable securities with $2.7 million in long-term debt outstanding.
AVISTA VENTURES OPERATIONS
Avista Ventures operations have $21.5 million in short-term borrowing
arrangements available (nothing outstanding as of March 31, 2000) to fund
Pentzer's portfolio companies' requirements on an interim basis. The short-term
borrowing arrangements available and the amounts outstanding have decreased
substantially over the past year as a result of the sales of two groups of
portfolio companies by Pentzer.
At March 31, 2000, these operations had $3.3 million in cash and marketable
securities with $9.2 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. All market risk is influenced to
the extent that the performance or non-performance by market participants of
their contractual obligations and commitments affect the supply of, 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. Credit risk may be concentrated to the extent that one
17
<PAGE> 18
AVISTA CORPORATION
- --------------------------------------------------------------------------------
or more groups of counterparties have similar economic, industry or other
characteristics that would cause their ability to meet contractual obligations
to be similarly affected by changes in market or other conditions. In addition,
credit risk includes not only the risk that a counterparty may default due to
circumstances relating directly to it, but also the risk that a counterparty may
default due to circumstances which relate to other market participants which
have a direct or indirect relationship with such counterparty. Avista Utilities
and Avista Energy seek to mitigate credit risk (and concentrations thereof) by
applying specific eligibility criteria to prospective counterparties. However,
despite mitigation efforts, defaults by counterparties occur from time to time.
To date, no such default has had a material adverse effect on Avista Utilities
or Avista Energy.
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 $221.5 million at March 31, 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 The Company's market risks related to commodity prices have
not changed materially from those reported in the 1999 Form 10-K. The following
Value-at-Risk (VAR) information has been updated for the current period. At
March 31, 2000, Avista Energy's estimated potential one-day unfavorable impact
on gross margin was $1.2 million, as measured by VAR, related to its commodity
trading and marketing business. The average daily VAR for the first quarter of
2000 was $0.9 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.
SAFE HARBOR FOR FORWARD LOOKING STATEMENTS.
The Company is including the following cautionary statement in this Form 10-Q to
make applicable and to take advantage of the safe harbor provisions of the
Private Securities Litigation Reform Act of 1995 for any forward-looking
statements made by, or on behalf of, the Company. Forward-looking statements are
all statements other than statements of historical fact, including without
limitation those that are identified by the use of the words "anticipates,"
"estimates," "expects," "intends," "plans," "predicts," and similar expressions.
Such statements are inherently subject to a variety of risks and uncertainties
that could cause actual results to differ materially from those expressed. Such
risks and uncertainties include, among others, changes in the utility regulatory
environment, wholesale and retail competition, weather conditions and various
other matters, many of which are beyond the Company's control. These
forward-looking statements speak only as of the date of the report. The Company
expressly undertakes no obligation to update or revise any forward-looking
statement contained herein to reflect any change in the Company's expectations
with regard thereto or any change in events, conditions, or circumstances on
which any such statement is based. See "Safe Harbor for Forward Looking
Statements" in the Company's 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."
18
<PAGE> 19
AVISTA CORPORATION
- --------------------------------------------------------------------------------
PART II. OTHER INFORMATION
ITEM 5. OTHER INFORMATION
Washington Rate Cases In October 1999, the Company filed for a general electric
rate increase of $26.2 million, or 10.4%, and a general natural gas rate
increase of $4.9 million, or 6.5%, with the Washington Utilities and
Transportation Commission (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 requested a 9.9% rate of
return. These recommendations by the WUTC staff are not binding on the
commission, which has until September to decide the case. The Company intends to
vigorously contest the positions of the WUTC staff and intervenors, believing
there is a sound basis for rate relief. The Company will file its rebuttal on
June 2. Additional hearings for the case are scheduled for July.
Centralia Power Plant On May 5, 2000, the owners of the Centralia Power Plant
sold the plant to TransAlta, a Canadian company. The Company will record a $33.9
million after-tax gain from the sale of its 17.5% ownership interest in the
plant. Ratepayers will benefit from the return of $25.8 million of the gain.
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. Shareholders will benefit from $8.1 million of the
gain, which will be included in net income. Avista Utilities will require
additional generating capacity, so TransAlta has agreed to replace Avista
Utilities' lost output for three years through a purchase agreement. 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, 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.
Avista Ventures Avista Ventures has made an initial investment in Metering
Technology Corporation (MTC), a California-based company that develops and
manufactures digital gas and electric meters. Avista Ventures will also seek
opportunities through investments in a network of venture capital firms and has
made an investment in the Woodside Fund IV, a firm that invests in early stage
technology ventures. Avista Ventures has also committed to invest in, and has
made its first contribution to, Enertech Capital Partners.
ADDITIONAL FINANCIAL DATA
At March 31, 2000, the total long-term debt of the Company and its consolidated
subsidiaries, as shown in the Company's consolidated financial statements, was
approximately $668.8 million. Of such amount, $236.0 million represents
long-term unsecured and unsubordinated indebtedness of the Company, and $336.2
million represents secured indebtedness of the Company. The balance of $96.6
million includes short-term notes to be refinanced as well as indebtedness of
subsidiaries. Consolidated long-term debt does not include the Company's
subordinated indebtedness held by the issuers of Company-obligated preferred
trust securities.
19
<PAGE> 20
AVISTA CORPORATION
- --------------------------------------------------------------------------------
The following table reflects the ratio of earnings to fixed charges and the
ratio of earnings to fixed charges and preferred dividend requirements:
<TABLE>
<CAPTION>
12 Months Ended
-------------------------
March 31, December 31,
2000 1999
-------- -----------
<S> <C> <C>
Ratio of Earnings to Fixed Charges 1.43(x) 1.61(x)
Ratio of Earnings to Fixed Charges and
Preferred Dividend Requirements 0.73(x) 1.07(x)
</TABLE>
The Company has long-term purchased power arrangements with various Public
Utility Districts and the interest expense components of these contracts are
included in purchased power expenses. These interest amounts are not included in
the fixed charges and would not have a material impact on fixed charges ratios.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
12 Computation of ratio of earnings to fixed charges and preferred
dividend requirements.
27 Financial Data Schedule.
(b) Reports on Form 8-K.
Dated January 6, 2000, regarding lower utility revenues due to warm
weather and fourth quarter charges due to restructuring at Avista Energy
and impairment of utility assets.
Dated January 28, 2000, announcing the conversion of the Series L
Preferred Stock back into common stock.
20
<PAGE> 21
AVISTA CORPORATION
- --------------------------------------------------------------------------------
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
AVISTA CORPORATION
(Registrant)
Date: May 12, 2000 /s/ J. E. Eliassen
--------------------------
J. E. Eliassen
Senior Vice President and
Chief Financial Officer
(Principal Accounting and
Financial Officer)
21
<PAGE> 1
EXHIBIT 12
AVISTA CORPORATION
Computation of Ratio of Earnings to Fixed Charges
and Preferred Dividend Requirements Consolidated
(Thousands of Dollars)
<TABLE>
<CAPTION>
12 Mos. Ended
March 31, Years Ended December 31
-----------------------------------------------------
2000 1999 1998 1997 1996
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Fixed charges, as defined:
Interest on long-term debt $ 60,035 $ 62,032 $ 66,218 $ 63,413 $ 60,256
Amortization of debt expense
and premium - net 3,039 3,044 2,859 2,862 2,998
Interest portion of rentals 4,514 4,645 4,301 4,354 4,311
-------- -------- -------- -------- --------
Total fixed charges $ 67,588 $ 69,721 $ 73,378 $ 70,629 $ 67,565
======== ======== ======== ======== ========
Earnings, as defined:
Net income from continuing ops $ 17,167 $ 26,031 $ 78,139 $114,797 $ 83,453
Add (deduct):
Income tax expense 11,613 16,740 43,335 61,075 49,509
Total fixed charges above 67,588 69,721 73,378 70,629 67,565
-------- -------- -------- -------- --------
Total earnings $ 96,368 $112,492 $194,852 $246,501 $200,527
======== ======== ======== ======== ========
Ratio of earnings to fixed charges 1.43 1.61 2.66 3.49 2.97
Fixed charges and preferred dividend
requirements:
Fixed charges above $ 67,588 $ 69,721 $ 73,378 $ 70,629 $ 67,565
Preferred dividend requirements(1) 63,568(2) 35,149 13,057 8,261 12,711
-------- -------- -------- -------- --------
Total $131,156 $104,870 $ 86,435 $ 78,890 $ 80,276
======== ======== ======== ======== ========
Ratio of earnings to fixed charges
and preferred dividend requirements 0.73 1.07 2.25 3.12 2.50
</TABLE>
(1) Preferred dividend requirements have been grossed up to their pre-tax
level.
(2) For the twelve months ended March 31, 2000, the preferred dividend
requirements amount includes the costs associated with converting the
Series L Preferred Stock back into common stock.
<TABLE> <S> <C>
<ARTICLE> UT
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS OF AVISTA CORPORATION, INCLUDED IN THE
QUARTERLY REPORT ON FORM 10-Q FOR THE THREE MONTHS ENDED MARCH 31, 2000, AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-END> MAR-31-2000
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 1,503,642
<OTHER-PROPERTY-AND-INVEST> 795,565
<TOTAL-CURRENT-ASSETS> 1,223,603
<TOTAL-DEFERRED-CHARGES> 285,964
<OTHER-ASSETS> 0
<TOTAL-ASSETS> 3,808,774
<COMMON> 599,499
<CAPITAL-SURPLUS-PAID-IN> (11,998)
<RETAINED-EARNINGS> 70,468
<TOTAL-COMMON-STOCKHOLDERS-EQ> 657,969
145,000
0
<LONG-TERM-DEBT-NET> 520,625<F1>
<SHORT-TERM-NOTES> 75,000
<LONG-TERM-NOTES-PAYABLE> 4,762
<COMMERCIAL-PAPER-OBLIGATIONS> 10,000
<LONG-TERM-DEBT-CURRENT-PORT> 58,301
0
<CAPITAL-LEASE-OBLIGATIONS> 3,494
<LEASES-CURRENT> 1,439
<OTHER-ITEMS-CAPITAL-AND-LIAB> 2,332,184<F2>
<TOT-CAPITALIZATION-AND-LIAB> 3,808,774
<GROSS-OPERATING-REVENUE> 1,381,974
<INCOME-TAX-EXPENSE> 7,173<F3>
<OTHER-OPERATING-EXPENSES> 1,352,901
<TOTAL-OPERATING-EXPENSES> 1,352,901
<OPERATING-INCOME-LOSS> 29,073
<OTHER-INCOME-NET> 3,362
<INCOME-BEFORE-INTEREST-EXPEN> 32,435<F4>
<TOTAL-INTEREST-EXPENSE> 14,737
<NET-INCOME> 10,525
21,910
<EARNINGS-AVAILABLE-FOR-COMM> (11,385)
<COMMON-STOCK-DIVIDENDS> 5,647
<TOTAL-INTEREST-ON-BONDS> 0
<CASH-FLOW-OPERATIONS> 80,761
<EPS-BASIC> (0.28)
<EPS-DILUTED> (0.28)
<FN>
<F1>LONG-TERM DEBT-NET DOES NOT MATCH THE AMOUNT REPORTED ON THE COMPANY'S
CONSOLIDATED STATEMENT OF CAPITALIZATION AS LONG-TERM DEBT DUE TO THE OTHER
CATEGORIES REQUIRED BY THIS SCHEDULE.
<F2>OTHER ITEMS CAPITAL AND LIABILITIES INCLUDES THE CURRENT LIABILITIES, DEFERRED
CREDITS AND MINORITY INTEREST, LESS CERTAIN AMOUNTS INCLUDED UNDER LONG-TERM
DEBT-CURRENT PORTION AND LEASES-CURRENT, FROM THE COMPANY'S CONSOLIDATED
BALANCE SHEET.
<F3>THE COMPANY DOES NOT INCLUDE INCOME TAX EXPENSE AS AN OPERATING EXPENSE ITEM.
IT IS INCLUDED ON THE COMPANY'S STATEMENTS AS A BELOW-THE-LINE ITEM.
<F4>INCOME BEFORE INTEREST EXPENSE IS NOT A SPECIFIC LINE ITEM ON THE COMPANY'S
INCOME STATEMENTS. THE COMPANY COMBINES TOTAL INTEREST EXPENSE AND OTHER INCOME
TO CALCULATE INCOME BEFORE INCOME TAXES.
</FN>
</TABLE>
