1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE FISCAL
YEAR ENDED DECEMBER 31, 1999 OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION
PERIOD FROM _____ TO _______
COMMISSION FILE NUMBER 1-3701
AVISTA CORPORATION
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(Exact name of Registrant as specified in its charter)
Washington 91-0462470
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1411 East Mission Avenue, Spokane, Washington 99202-2600
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 509-489-0500
Web site: http://www.avistacorp.com
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
Name of Each Exchange
Title of Class on Which Registered
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Common Stock, no par value, together with New York Stock Exchange
Preferred Share Purchase Rights appurtenant thereto Pacific Stock Exchange
7 7/8% Trust Originated Preferred Securities, Series A New York Stock Exchange
$12.40 Preferred Stock, Convertible Series L (depositary shares) New York Stock Exchange
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Title of Class
Preferred Stock, Cumulative, Without Par Value
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 [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (Section 229.405 of this chapter) is not contained herein, and
will not be contained, to the best of Registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [ ]
The aggregate market value of the Registrant's outstanding Common Stock, no par
value (the only class of voting stock), held by non-affiliates is
$1,414,713,252.02, based on the last reported sale price thereof on the
consolidated tape on February 29, 2000.
At February 29, 2000, 47,058,286 shares of Registrant's Common Stock, no par
value (the only class of common stock), were outstanding.
Documents Incorporated By Reference
Part of Form 10-K into Which
Document Document is Incorporated
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Proxy Statement to be filed in Part III, Items 10, 11,
connection with the annual meeting 12 and 13
of shareholders to be held May 11, 2000
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AVISTA CORPORATION
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INDEX
Item Page
No. No.
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Acronyms and Terms........................................................... iv
Part I
1. Business..................................................................... 1
Company Overview........................................................... 1
Avista Utilities........................................................... 4
General.................................................................... 4
Electric Requirements...................................................... 5
Electric Resources......................................................... 5
Hydroelectric Relicensing.................................................. 6
Natural Gas Operations..................................................... 6
Natural Gas Resources...................................................... 7
Regulatory Issues.......................................................... 7
Avista Utilities Operating Statistics...................................... 9
Energy Trading and Marketing............................................... 11
Avista Energy.............................................................. 11
Avista Power............................................................... 12
Energy Trading and Marketing Operating Statistics.......................... 13
Information and Technology................................................. 14
Avista Advantage........................................................... 14
Avista Labs................................................................ 15
Avista Communications...................................................... 15
Pentzer and Other.......................................................... 16
Pentzer.................................................................... 16
Avista Development......................................................... 16
Avista Services............................................................ 16
Industry Restructuring..................................................... 17
Federal Level.............................................................. 17
State Level................................................................ 17
Experimental Programs...................................................... 18
Environmental Issues....................................................... 19
2. Properties................................................................... 20
Avista Utilities........................................................... 20
3. Legal Proceedings............................................................ 21
4. Submission of Matters to a Vote of Security Holders.......................... 21
Part II
5. Market for Registrant's Common Equity and Related Stockholder Matters........ 22
6. Selected Financial Data...................................................... 23
7. Management's Discussion and Analysis of Financial Condition and Results of
Operations................................................................. 24
Results of Operations...................................................... 25
Liquidity and Capital Resources............................................ 30
Future Outlook............................................................. 33
7A. Quantitative and Qualitative Disclosure about Market Risk.................... 39
8. Financial Statements and Supplementary Data.................................. 39
Independent Auditors' Report............................................... 40
Financial Statements....................................................... 41
Notes to Financial Statements.............................................. 47
9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure................................................................. *
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Part III
10. Directors and Executive Officers of the Registrant........................... 72
11. Executive Compensation....................................................... 73
12. Security Ownership of Certain Beneficial Owners and Management............... 73
13. Certain Relationships and Related Transactions............................... 73
Part IV
14. Financial Statements, Financial Statement Schedules, Exhibits and Reports
on Form 8-K................................................................ 74
Signatures................................................................... 75
Independent Auditors' Consent................................................ 76
Exhibit Index................................................................ 77
* = not an applicable item in the 1999 calendar year for the Company
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ACRONYMS AND TERMS
(The following acronyms and terms are found in multiple
locations within the document)
Acronym/Term Meaning
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aMW - Average Megawatt - a measure of electrical energy over time
AFUCE - Allowance for Funds Used to Conserve Energy; a carrying
charge similar to AFUDC (see below) for conservation-related
capital expenditures
AFUDC - Allowance for Funds Used During Construction; represents the
cost of both the debt and equity funds used to finance
utility plant additions during the construction period
Avista Capital - Parent company to the Company's non-regulated
businesses
Avista Corp. - Avista Corporation, the Company
BPA - Bonneville Power Administration
Capacity - a measure of the rate at which a particular generating
source produces electricity
Centralia - the coal-fired Centralia Power Plant in western Washington
State
Colstrip - the coal-fired Colstrip Generating Project in southeastern
Montana
CPUC - California Public Utilities Commission
CT - combustion turbine; a natural gas-fired unit used primarily
for peaking needs
Energy - a measure of the amount of electricity produced from a
particular generating source over time
FERC - Federal Energy Regulatory Commission
IPUC - Idaho Public Utilities Commission
KV - Kilovolt - a measure of capacity on transmission lines
KW, KWH - Kilowatt, kilowatthour, 1000 watts or 1000 watt hours
MW, MWH - Megawatt, megawatthour, 1000 KW or 1000 KWH
OPUC - Public Utility Commission of Oregon
Pentzer - Pentzer Corporation, a wholly owned subsidiary of the
Company which was the parent company to the majority of the
Company's non-energy businesses
Therm - Unit of measurement for natural gas; a therm is equal to one
hundred cubic feet (volume) or 100,000 BTUs (energy)
Watt - Unit of measurement for electricity; a watt is equal to the
rate of work represented by a current of one ampere under a
pressure of one volt
WUTC - Washington Utilities and Transportation Commission
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PART I
This Form 10-K contains forward-looking statements within the meaning of Section
21E of the Securities Exchange Act of 1934. Forward-looking statements should be
read with the cautionary statements and important factors included in this Form
10-K at Item 7 - - "Management's Discussion and Analysis of Financial Condition
and Results of Operations - - Safe Harbor Forward-Looking Statements."
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 "will," "anticipates," "seeks to," "estimates," "expects,"
"intends," "plans," "predicts," and similar expressions.
ITEM 1. BUSINESS
COMPANY OVERVIEW
Avista Corporation (Avista Corp., or the Company), was incorporated in the State
of Washington in 1889, and is an energy, information and technology company with
utility and subsidiary operations located throughout North America. At December
31, 1999, the Company's employees included 1,524 people in its utility
operations and approximately 600 people in its subsidiary businesses. The
Company's corporate headquarters are in Spokane, Washington, which serves as the
Inland Northwest's center for manufacturing, transportation, health care,
education, communication, agricultural and service businesses.
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 seeks to maintain a strong, low-cost utility business as well as to
focus on growing Avista Advantage, Inc. (Avista Advantage), Avista Labs, Inc.
(Avista Labs) and Avista Communications, Inc. (Avista Communications), which are
its internet, technology and communication subsidiaries, respectively. The
Company intends to continue investing in the development of these growth
subsidiaries while continuing to search for opportunities to grow its utility
business and increase its asset and customer base. Key strengths of the Company
include its position as a leading e-commerce portal for energy/facility
management and patented web-based programming, a developer of innovative fuel
cell technology, and a regional provider of telecommunications and fiber optics
services, as well as being one of the lowest cost producers of power in the
nation.
Locally. Part of the Company's strategy for 1999 was to expand the utility
service territory through acquisitions, but the lack of economically feasible
acquisition opportunities and the uncertainty of favorable state commission
approvals led to a change in strategies. The Company decided to concentrate on
other growth avenues, such as the information and technology businesses, to
generate shareholder value. However, the Company will selectively add to its
already strong foundation of state-regulated utility assets, solidifying its
position as a leading supplier of low-cost electric and natural gas energy
services, if the right opportunities arise. The Company will also continue to
grow its rate base through customer growth and capital expenditures.
Regionally. The Company plans to concentrate on growing its telecommunications
and fiber optic business as part of its overall strategic focus on generating
shareholder value. In addition, the Company plans to add to its regulated and
non-regulated energy-related assets on a regional basis as the industry
consolidates to further optimize its assets and create greater economies of
scale. The growth is expected to be driven by the Company's significant base of
knowledge and experience in the operation of physical systems - for both
electric energy and natural gas - in the region, as well as its
relationship-focused approach to the customer.
Nationally. The Company will seek to expand its customer base through the growth
of Avista Advantage, with its Internet-based specialty billing and information
services, and Avista Labs, with its innovative fuel cell technologies, as part
of its overall strategic focus on generating shareholder value.
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.
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The Company's operations are organized into four lines of business - Avista
Utilities, Energy Trading and Marketing, Information and Technology, and Pentzer
and Other. Avista Utilities, an operating division of Avista Corp., represents
the regulated utility operations that are responsible for retail electric and
natural gas distribution, electric transmission services, electric generation
and production, electric wholesale marketing, and electric commodity trading,
primarily for the purpose of optimizing system resources. Avista Capital, a
wholly owned subsidiary of Avista Corp., owns all of the subsidiary companies
engaged in the other lines of business. The Energy Trading and Marketing line of
business includes Avista Energy, Inc. (Avista Energy), Avista Power, LLC.
(Avista Power) and Avista-STEAG, LLC (Avista-STEAG). See Item 1. Business -
Energy Trading and Marketing and Notes 1, 2, 4 and 5 of Notes to Financial
Statements for additional information. The Information and Technology line of
business includes Avista Advantage, Avista Labs and Avista Communications. The
Pentzer and Other line of business includes Pentzer Corporation (Pentzer),
Avista Development, Inc. (Avista Development) and Avista Services, Inc. (Avista
Services). Pentzer's business strategy has been to acquire controlling interests
in a broad range of middle market companies, facilitate improved productivity
and growth, and ultimately sell such companies to the public or a strategic
buyer. Beginning in 2000, Pentzer will refocus its investment efforts on
emerging energy-related technology and information companies. (See Item 1.
Business - Pentzer and Other and Notes 1 and 23 of Notes to Financial Statements
for additional information.) As of December 31, 1999, the Company had common
equity investments of $163.4 million ($426.7 million including convertible
securities) and $230.1 million in Avista Utilities and Avista Capital,
respectively.
The Company changed the way it reports business segments in this Form 10-K from
the 1998 Form 10-K. In the 1998 Form 10-K and the quarterly Form 10-Q reports
for 1999, the Company reported Avista Utilities information by its two separate
lines of business - (1) Energy Delivery and (2) Generation and Resources. The
National Energy Trading and Marketing line of business included results of
Avista Energy, Avista Advantage and Avista Power. The Non-Energy line of
business included Pentzer and all of the remaining subsidiaries' activities. The
business segment presentation in this Form 10-K reflects the basis currently
used by the Company's management to analyze performance and determine the
allocation of resources. Avista Utilities' business is now managed based on the
total regulated operations, not by individual segments. The Energy Trading and
Marketing line of business changed its focus from a national emphasis to a
regional effort, but its operations are non-regulated, as opposed to Avista
Utilities' operations. The Information and Technology line of business reflects
the current efforts of the Company to grow those businesses and focus on
generating shareholder value. Pentzer and Other reports on the other non-utility
operations of various subsidiaries.
Following is a list of the major companies owned by Avista Capital:
Avista Advantage - A leading provider of Internet-based specialty billing
and information services.
Avista Labs - The developer of proton exchange membrane fuel cell
technology.
Avista Communications - A Competitive Local Exchange Carrier (CLEC) that
provides local facilities-based telecommunications
solutions, and designs, builds and manages
metropolitan area fiber optic networks. Avista Capital
owned 71% at December 31, 1999.
Avista Energy - An electricity and natural gas marketing and trading
company.
Avista Power - Created to develop and own electricity generation
and/or natural gas fuel storage assets in strategic
locations throughout the West. If Avista Power creates
projects that STEAG AG, a German independent power
producer, wants to partner with, such projects will be
done under Avista-STEAG, LLC.
Pentzer - A private investment company wholly owned by Avista
Capital.
Avista Development - Real-estate and other investments.
Avista Services - A non-regulated marketing arm of Avista Utilities,
which offers value-added products and services to
existing utility customers.
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The Company's lines of business, and the companies included within them, are
illustrated below:
[FLOW CHART]
[ ] - denotes a business entity.
o - denotes an operating division or line of business.
For the twelve months ended December 31, 1999, 1998 and 1997, respectively, the
Company derived operating revenues, gross margins and pre-tax income/(loss) from
operations in the following proportions:
Income/(Loss) from
Operating Revenues Gross Margins Operations (pre-tax)
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1999 1998 1997 1999 1998 1997 1999 1998 1997
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Avista Utilities 14% 29% 68% 105% 89% 97% 455% 83% 94%
Energy Trading and Marketing 84% 65% 19% (5)% 11% 3% (312)% 13% 4%
Information and Technology 0% 0% 0% n/a n/a n/a (42)% (3)% (3)%
Pentzer and Other 2% 6% 13% n/a n/a n/a (1)% 7% 5%
n/a - not applicable
Gross margin is calculated by subtracting resource costs from operating
revenues. (See Schedule of Information by Business Segments for further
information).
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AVISTA CORPORATION
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AVISTA UTILITIES
GENERAL
Avista Utilities provides electricity and natural gas distribution and
transmission services in a 26,000 square mile area in eastern Washington and
northern Idaho with a population of approximately 835,000. It also provides
natural gas distribution service in a 4,000 square mile area in northeast and
southwest Oregon and in the South Lake Tahoe region of California, with the
population in these areas approximating 500,000. At the end of 1999, retail
electric service was supplied to approximately 309,000 customers in eastern
Washington and northern Idaho; retail natural gas service was supplied to
approximately 269,000 customers in parts of Washington, Idaho, Oregon and
California. Avista Utilities anticipates residential and commercial electric
load growth to average approximately 2.8% annually for the next five years
primarily due to expected increases in both population and the number of
businesses in its service territory. The number of electric customers is
expected to increase and the average annual usage by residential customers is
expected to remain steady on a weather-adjusted basis. The Company also expects
natural gas load growth, including transportation volumes, in its Washington and
Idaho service area to average approximately 2.4% annually for the next five
years. The Oregon and South Lake Tahoe, California service areas are anticipated
to realize 3.6% growth annually during that same period. The natural gas load
growth is primarily due to expected conversions from electric space and water
heating to natural gas, and increases in both population and the number of
businesses in its service territories. These electric and natural gas load
growth projections are based on purchased baseline economic forecasts, publicly
available studies, and internal analysis of company-specific data, such as
energy consumption patterns and internal business plans. See Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations: Results of Operations: Future Outlook for additional information.
Besides providing electricity and natural gas distribution and electric
transmission services, Avista Utilities is also responsible for electric
generation and production, electric wholesale marketing, and electric commodity
trading, primarily for the purpose of optimizing system resources. Wholesale
marketing and trading activities are primarily within the Western Systems
Coordinating Council (WSCC). Avista Utilities owns and operates eight
hydroelectric projects, a wood-waste fueled generating station and two natural
gas combustion turbine (CT) peaking units. It also owns a 17.5% and a 15% share
in two coal-fired generating facilities and leases two additional gas CT peaking
units. With this diverse energy resource portfolio, Avista Utilities remains one
of the nation's lowest-cost producers and sellers of electric energy services.
See Item 2. Properties - Generating Plants for additional information.
Avista Utilities' wholesale marketing and trading activities are a secondary,
but very important, part of Avista Utilities' overall business strategy. Since
1987, Avista Utilities has entered into a number of long-term power sales
contracts that have increased its electric wholesale revenues, and it is
continuing to pursue electric wholesale marketing business and energy trading
opportunities. Wholesale marketing includes sales and purchases under long-term
contracts with one-year and longer terms. Wholesale sales are affected by
weather and streamflow conditions and may eventually be affected by the
restructuring of the electric utility industry. Electric commodity trading
includes short-term sales and purchases, such as next hour, next day and monthly
blocks of energy, primarily for the purpose of optimizing system resources. See
Industry Restructuring for additional information.
Avista Utilities competes in the electric wholesale market with other western
utilities, federal marketing agencies and power marketers. Avista Utilities'
participation in the electric wholesale market allows it to maintain presence in
and knowledge of the market, resulting in maximum optimization of its resources.
The electric wholesale market has changed significantly over the last few years
with respect to market participants, level of activity, variability of prices,
and per-unit margins. These changes have contributed to the increased liquidity
of the market, which in turn has increased transactional volumes in the market.
It is expected that competition in the wholesale power market will remain
vigorous.
Avista Corp., through its Avista Energy subsidiary, also pursues energy trading
activities; however, Avista Energy's activities are not subject to state and
federal price regulation.
Challenges facing Avista Utilities include cost management, evolving
technologies, self-generation and fuel switching by commercial and industrial
customers, the costs of increasingly stringent environmental laws and the
potential for stranded or non-recoverable utility assets. Avista Utilities
believes it faces minimal risk for stranded utility assets resulting from
deregulation due to its low-cost generation portfolio. In a deregulated
environment, however, evolving technologies that provide alternate energy
supplies could affect the market price of power, and certain generating assets
could have capital and operating costs above the adjusted market price. See
Industry Restructuring and Note 1 of Notes to Financial Statements for
additional information.
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ELECTRIC REQUIREMENTS
Avista Utilities' 1999 annual peak requirements, including long-term and
short-term contractual obligations, were 4,632 MW. This peak occurred on
December 13, 1999, at which time the maximum capacity available from Avista
Utilities' generating facilities, including long-term and short-term purchases,
was 4,831 MW. The electric requirements include both retail distribution needs
and wholesale short-term and long-term commitments, which limits the amount of
excess capacity available to support its energy trading business and, therefore,
results in the need to purchase power.
ELECTRIC RESOURCES
Avista Utilities' diverse resource mix of hydroelectric projects, thermal
generating facilities, and power purchases and exchanges, combined with
strategic access to regional electric transmission systems, enables it to remain
one of the nation's lowest-cost producers and sellers of electric energy
services. At December 31, 1999, Avista Utilities' total owned resources
available were 58% hydroelectric and 42% thermal. See Avista Utilities' Electric
Operating Statistics on page 9 for Avista Utilities' energy resource statistics.
Hydroelectric Resources Hydroelectric generation is Avista Utilities' lowest
cost source of electricity and the availability of hydroelectric generation has
a significant effect on its total energy costs. Under average operating
conditions, Avista Utilities meets about one-third of its total energy
requirements (both retail and long-term wholesale) with its own hydroelectric
generation and long-term hydroelectric contracts. The streamflows to
company-owned hydroelectric projects were 112%, 93% and 169% of normal in 1999,
1998 and 1997, respectively. Total hydroelectric resources provide 618 aMW
annually.
Thermal Resources Avista Utilities has an interest in each of two twin-unit
coal-fired facilities - a 17.5% interest in the Centralia Power Plant in western
Washington and a 15% interest in Units 3 and 4 of the Colstrip Generating
Project in southeastern Montana. Avista Utilities purchased Portland General
Electric's 2.5% interest in Centralia in December 1999, adding to its previous
15% interest. This additional interest in currently being held as non-utility
property until the outcome of the pending sale is determined. In addition,
Avista Utilities owns a wood-waste-fired facility known as the Kettle Falls
Generating Station in northeastern Washington and two natural gas-fired CTs,
located in Spokane, used for peaking needs. Avista Utilities also operates and
leases two natural gas-fired CTs in northern Idaho, used for peaking needs.
Total thermal resources provide 383 aMW annually.
Centralia, which is operated by PacifiCorp, is supplied with coal under both a
fuel supply agreement in effect through December 2020 and various spot market
purchases. In 1999, 1998 and 1997, Centralia provided approximately 37%, 37% and
38%, respectively, of Avista Utilities' thermal generation. In May 1999, the
owners of the Centralia Power Plant announced an agreement to sell the plant to
TransAlta, a Canadian company. Regulatory approvals have been received from the
Washington Utilities and Transportation Commission (WUTC) and the Idaho Public
Utilities Commission (IPUC). The Company is reviewing the terms of these
approvals to determine whether to agree to the sale. Avista Utilities will
require additional generating capacity if the sale is finalized. If TransAlta
becomes the new owner, it has agreed to replace Avista Utilities' lost output
for three years through a purchase agreement. See Environmental Issues for
additional information about the pending sale.
Colstrip is supplied with fuel under coal supply and transportation agreements
in effect through December 2019 from adjacent coal reserves. The Montana Power
Company sold its interest in the Colstrip Generating Project to PP&L Global,
which is now the operator of Colstrip. In 1999, 1998 and 1997, Colstrip provided
approximately 48%, 46% and 47% of Avista Utilities' thermal generation,
respectively.
Kettle Falls' primary fuel is wood-waste generated as a by-product from forest
industry operations within one hundred miles of the plant. Natural gas may be
used as an alternate fuel. A combination of long-term contracts plus spot
purchases provides the Company the flexibility to meet expected future fuel
requirements for the plant. In 1999, 1998 and 1997, Kettle Falls provided
approximately 8%, 9% and 11% of Avista Utilities' thermal generation,
respectively.
The four CTs are natural gas-fired units, primarily used for peaking needs. Two
CTs have access to domestic and Canadian natural gas supplied through Pacific
Gas Transmission (PGT). In 1999, 1998 and 1997, these four units provided
approximately 7%, 8% and 4%, respectively, of Avista Utilities' thermal
generation.
Purchases, Exchanges and Sales In 1999, Avista Utilities had various long-term
purchase contracts with non-coincidental peak (peak that does not occur during
the same hour) equating to 682 MW, with an average remaining life of 3.6 years.
Additionally, long-term hydroelectric purchase contracts of 197 MW peak were
available with an average remaining contract life of 11.8 years. Avista
Utilities also enters into a significant number of short-term sales and
purchases with durations of up to one year. Energy purchases and exchanges for
the years 1999, 1998 and 1997 provided approximately
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65%, 66% and 65%, respectively, of Avista Utilities' total electric energy
requirements, which reflects increased wholesale marketing and resource
optimization trading activity.
Under the Public Utility Regulatory Policies Act of 1978 (PURPA), Avista
Utilities is required to purchase generation from qualifying facilities,
including small hydroelectric and cogeneration projects, at avoided cost rates
adopted by the WUTC and the IPUC. Avista Utilities purchased approximately
597,618 MWH, or about 2% of its total energy requirements, from these sources at
a cost of approximately $27 million in 1999. These contracts expire in
2000-2022.
HYDROELECTRIC RELICENSING
Avista Utilities is a licensee under the Federal Power Act, which regulates
certain of its generation resources and is administered by the Federal Energy
Regulatory Commission (FERC), and its licensed projects are subject to the
provisions of Part I of that Act. These provisions include payment for headwater
benefits, condemnation of licensed projects upon payment of just compensation,
and take-over of such projects after the expiration of the license upon payment
of the lesser of "net investment" or "fair value" of the project, in either case
plus severance damages. All but one of Avista Utilities' hydroelectric plants
are regulated by the FERC through project licenses issued for 30-50 year
periods. See Item 2. Properties - Avista Utilities for additional information.
The Cabinet Gorge and Noxon Rapids plants received a new 45-year operating
license from the FERC on February 23, 2000. The existing licenses were combined
into one license under the name Clark Fork Projects. The application to
relicense Cabinet Gorge and Noxon Rapids was filed with the FERC on February 18,
1999, and included the Clark Fork Settlement Agreement signed by 27 parties and
a collaboratively written environmental assessment report. The application
culminated seven years of planning and consultation with Native American Tribes,
special interest groups, resource agencies and the general public. For
hydroelectric projects of this size, it is unprecedented to have reached
settlement two years before the license expired, while preserving the projects'
economic peaking and load following operations. The collaborative process used
by Avista Utilities is nationally recognized as the model for the FERC's
alternative approach to relicensing.
As part of the Settlement Agreement, Avista Utilities committed to early
implementation of protection, mitigation and enhancement measures beginning in
March 1999. Measures in the agreement, which will cost approximately $4.7
million annually, address issues related to fisheries, water quality, wildlife,
recreation, land use, cultural resources and erosion. See Item 2. Properties -
Avista Utilities and Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations: Future Outlook for additional information.
The issue of high dissolved gas levels downstream of Cabinet Gorge during spill
periods continues to be studied, as agreed to in the Settlement Agreement. To
date, intensive biological studies in the lower Clark Fork River and Lake Pend
Oreille have documented minimal biological effects of high dissolved gas levels
on free ranging fish. Under the terms of the Settlement Agreement, Avista
Utilities will develop an abatement and/or mitigation strategy by 2002.
Avista Utilities operates six hydroelectric plants on the Spokane River, and
five of these (Long Lake, Nine Mile, Upper Falls, Monroe Street and Post Falls)
are under one FERC license. Little Falls is not licensed by the FERC. The
license for the Spokane River Projects expires in August 2007, and Avista
Utilities will be required to file a notice of intent to relicense prior to
August 2002. Planning and information gathering activities are currently
underway.
NATURAL GAS OPERATIONS
Natural gas remains competitively priced compared to alternative fuel sources
for residential, commercial and industrial customers. Because of abundant
supplies and competitive markets, natural gas should sustain its market
advantage. Avista Utilities continues to advise residential and commercial
electric customers about the cost advantages of converting space and water
heating needs to natural gas. Significant growth has occurred in the natural gas
business in recent years due to increased demand for natural gas in new
construction. Avista Utilities also makes sales and provides transportation
service directly to large natural gas customers.
Most of Avista Utilities' large industrial customers purchase their own natural
gas requirements through gas marketers. For these customers, Avista Utilities
provides transportation from its pipeline interconnection to the customer's
premises. Avista Utilities has numerous special contracts for natural gas
transportation service, most of which contain negotiated rates for its
distribution service based on the customer's competitive alternatives. Seven of
Avista Utilities' largest natural gas customers are provided natural gas
transportation service by Avista Utilities under special contracts. These
negotiated contracts were entered into to retain these customers who can either
by-pass Avista Utilities' distribution system or have
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competitive alternative fuel capability. All special contracts are subject to
regulatory review and approval. The competitive nature of the spot natural gas
market results in savings in the cost of purchased natural gas, which encourages
large customers with fuel-switching capabilities to continue to utilize natural
gas for their energy needs. The total volume transported on behalf of
transportation customers for 1999, 1998 and 1997 was approximately 232.7, 226.1
and 245.1 million therms, which represented approximately 40%, 41% and 43% of
Avista Utilities' total system deliveries.
NATURAL GAS RESOURCES
Natural Gas Supply A diverse portfolio of resources allows Avista Utilities to
capture market opportunities that benefit its natural gas customers. Natural gas
supplies are available from both domestic and Canadian sources through both
long- and short-term, or spot market, purchases. Avista Utilities holds capacity
on six pipelines and owns natural gas storage facilities, which allows Avista
Utilities to optimize its available resources.
The Company's energy trading and marketing subsidiary, Avista Energy, is
responsible for the daily management and optimization of these resources for the
requirements of customers in the states of Washington, Idaho and Oregon under an
agreement with Avista Utilities. Under this relationship, Avista Utilities
retains ownership of its transportation, storage and long-term contracts and
Avista Energy acts as an agent to optimize these important resources. The
utility commissions of these states have approved Benchmark Incentive Mechanisms
that allow Avista Utilities and its customers to share some of the benefits of
Avista Energy's resource optimization activities. See Regulatory Issues for
additional information.
Firm natural gas supplies are purchased by Avista Utilities through negotiated
agreements having terms ranging between one month and seven years. During 1999,
approximately one-third of Avista Utilities' purchases were in the short-term
market, with contracts on a month-to-month basis. Approximately 14% of the
natural gas supply was obtained from domestic sources, with the remaining 86%
from Canadian sources. Nearly all natural gas purchased from Canadian sources is
contracted in U.S. dollar denominations, limiting any foreign currency exchange
exposure. Avista Utilities does not consider Canadian natural gas supplies to be
at greater risk of non-delivery than U.S. supplies.
Avista Utilities holds capacity on six natural gas pipelines, Northwest Pipeline
Company (NWP), PGT, Paiute Pipeline (Paiute), Tuscarora Gas Transmission Company
(Tuscarora), NOVA Pipeline, Ltd. (NOVA) and Alberta Natural Gas Co. Ltd. (ANG),
which provide it access to both domestic and Canadian natural gas supplies.
Avista Utilities contracts with NWP for three types of firm service
(transportation, liquefied natural gas storage and underground storage), with
Paiute for firm transportation and liquefied natural gas storage and with PGT,
Tuscarora, NOVA and ANG for firm transportation only.
Jackson Prairie Natural Gas Storage Project (Storage Project) Avista Utilities
owns a one-third interest in the Storage Project, an underground natural gas
storage field located near Chehalis, Washington. The role of the Storage Project
in providing flexible natural gas supplies is increasingly important to Avista
Utilities' natural gas operations. It enables Avista Utilities to place natural
gas into storage when prices are low or to meet minimum natural gas purchasing
requirements, as well as to withdraw natural gas from storage when spot prices
are high or as needed to meet high demand periods. During 1999, Avista Utilities
completed the process of increasing the capacity at the Storage Project. This
increased capacity is being operated and managed by Avista Energy for the next
ten years in order to optimize the value of this natural gas storage asset.
Avista Utilities has contracted to release some of its Storage Project capacity
to two other utilities until 2001 and 2002, with a provision under one of the
releases to partially recall the released capacity if Avista Utilities
determines additional natural gas storage is required for its own system supply.
REGULATORY ISSUES
Avista Utilities, as a regulated public utility, is currently subject to
regulation by state utility commissions with respect to prices, accounting, the
issuance of securities and other matters. The retail electric operations are
subject to the jurisdiction of the WUTC and the IPUC. The retail natural gas
operations are subject to the jurisdiction of the WUTC, the IPUC, the Oregon
Public Utility Commission (OPUC) and the California Public Utilities Commission
(CPUC). Avista Utilities is also subject to the jurisdiction of the FERC for its
wholesale natural gas rates charged for the release of capacity from the Jackson
Prairie Storage Project.
In each regulatory jurisdiction, the price Avista Utilities may charge for
retail electric and natural gas services (other than specially negotiated retail
rates for industrial or large commercial customers, which are subject to
regulatory review and approval) is currently determined on a "cost of service"
basis and is designed to provide, after recovery of allowable operating
expenses, an opportunity to earn a reasonable return on "rate base." "Rate base"
is generally determined by reference to the original cost (net of accumulated
depreciation) of utility plant in service, subject to various adjustments for
7
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deferred taxes and other items. Over time, rate base is increased by additions
to utility plant in service and reduced by depreciation of utility plant. As the
energy business is restructured, traditional "cost of service" ratemaking may
evolve into some other form of ratemaking. Rates for transmission services are
based on the "cost of service" principles and are set forth in tariffs on file
with the FERC. See Note 1 of Notes to Financial Statements for additional
information about regulation, depreciation and deferred taxes. Also see Industry
Restructuring and Legislative Issues for additional information about
deregulation.
General Rate Cases In the Company's last general electric rate case in the State
of Idaho, the IPUC granted a rate increase of $9.3 million, or 7.6%, with an
authorized 10.75% return on common equity, effective August, 1999.
On October 22, 1999, the Company filed for a general electric rate increase of
$26.3 million, or 10.40%, with the WUTC. The Company is requesting a return on
common equity of 12.25%, based on a target capital structure for the utility of
47% debt, 6% preferred securities and 47% common equity. The Company is also
requesting a Power Cost Adjustment (PCA) similar to the one in effect in Idaho.
(See below for information about the Idaho PCA.) An order is expected in the
latter part of 2000. The Company's last general electric rate case in the State
of Washington was effective in March 1987, with an allowed return on common
equity of 12.90%.
On October 22, 1999, the Company filed for a general natural gas rate increase
of $4.9 million, or 6.5%, with the WUTC. The Company is requesting a return on
common equity of 12.25%, based on a target capital structure for the utility of
47% debt, 6% preferred securities and 47% common equity. An order is expected in
the latter part of 2000. On June 27, 1997, the Company filed for a general
natural gas rate increase of $7.9 million with the WUTC. The Company's last
general natural gas rate cases involving litigated cost of capital resulted in
an allowed return on common equity of 12.90% for the State of Washington,
effective August 1990, and 12.75% for the State of Idaho, effective October
1989.
In December 1998, the OPUC approved a stipulation that settled the main issues
associated with a Staff investigation into Purchased Gas Adjustment (PGA)
related earnings issues. The Settlement requires a general earnings review in
the spring of each year. The adjusted earnings will be calculated on the prior
calendar year test year, with minor regulatory adjustments, but will not be
adjusted for weather. An earnings threshold will be determined annually by
adding 710 basis points (7.10%) to the average of the test year annual yields
reported monthly on 5-, 7- and 10-year U.S. Treasuries. For 1999, the threshold
rate was 12.70%. If adjusted earnings are above the threshold, the Company will
retain two-thirds of the earnings exceeding the threshold, and revenues
representing the remaining one-third will be shared with customers through a
temporary rate adjustment.
Power Cost Adjustment (PCA) The Company has a PCA mechanism in Idaho that tracks
changes in hydroelectric generation, secondary energy prices, related changes in
thermal generation, as well as changes in PURPA contracts, but not changes in
revenues or costs associated with other wheeling or power contracts. Rate
changes are triggered when the deferred balance reaches $2.2 million, provided
no more than two surcharges or rebates are in effect at the same time. See Note
1 of Notes to Financial Statements for additional information.
Purchased Gas Adjustment (PGA or Natural Gas Trackers) Natural gas trackers are
supplemental tariffs filed with state regulatory commissions which are designed
to pass through changes in purchased natural gas costs, and do not normally
result in any changes in net income to the Company. In November 1999, the
Company filed a natural gas tracker with the WUTC requesting a $12.1 million, or
16.2%, increase, which was approved, effective January 1, 2000. In November
1999, the OPUC approved a $4.7 million, or 9.5%, increase effective December 1,
1999. In September 1999, the Company filed a natural gas tracker with the IPUC
requesting a $2.7 million, or 8.6%, increase, which was approved, effective
November 1, 1999.
Natural Gas Benchmark Mechanism The Company received regulatory approval of its
Natural Gas Benchmark Mechanism on February 1, 1999, June 23, 1999 and August
10, 1999 by the IPUC, WUTC and OPUC, respectively. The mechanism eliminates
natural gas procurement operations within Avista Utilities and consolidates gas
procurement operations under Avista Energy, the Company's non-regulated
affiliate. The ownership of the natural gas assets remains with Avista
Utilities, but the assets are managed by Avista Energy through an Agency
Agreement. A reduced natural gas staff remains in Avista Utilities to prepare
load forecasts and analyses related to long-term resource acquisitions, to
manage the Agency Agreement with Avista Energy and to support state and federal
regulatory activities. The Natural Gas Benchmark Mechanism was implemented
September 1, 1999 and runs through March 31, 2002.
Consolidation of natural gas procurement operations under Avista Energy allows
the Company to gain synergies and better manage its risk by combining and
operating the two portfolios as one portfolio and gain efficiencies by
eliminating duplicate functions. The Natural Gas Benchmark Mechanism provides
certain guaranteed benefits to retail customers as well as provides the Company
with the opportunity to improve earnings, i.e., a performance-based mechanism.
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AVISTA UTILITIES OPERATING STATISTICS
Years Ended December 31,
-----------------------------------------
1999 1998 1997
--------- --------- ---------
ELECTRIC OPERATIONS
ELECTRIC OPERATING REVENUES (Thousands of Dollars):
Residential ..................................... $ 158,658 $ 157,019 $ 160,411
Commercial ...................................... 152,107 149,767 144,952
Industrial ...................................... 69,559 64,662 58,391
Public street and highway lighting .............. 3,517 3,387 3,352
--------- --------- ---------
Total retail revenues ...................... 383,841 374,835 367,106
--------- --------- ---------
Long-term wholesale ............................. 134,945 102,928 138,730
Short-term wholesale ............................ 387,554 354,413 191,202
--------- --------- ---------
Total wholesale revenues ................... 522,499 457,341 329,932
--------- --------- ---------
Total energy revenues ...................... 906,340 832,176 697,038
Other ........................................... 21,824 23,898 28,845
--------- --------- ---------
Total electric operating revenues .......... $ 928,164 $ 856,074 $ 725,883
========= ========= =========
ELECTRIC ENERGY SALES (Thousands of MWhs):
Residential ..................................... 3,237 3,217 3,270
Commercial ...................................... 2,848 2,810 2,716
Industrial ...................................... 2,032 1,878 1,759
Public street and highway lighting .............. 25 24 24
--------- --------- ---------
Total retail energy sales .................. 8,142 7,929 7,769
--------- --------- ---------
Long-term wholesale ............................. 5,335 3,680 4,307
Short-term wholesale ............................ 14,443 15,535 12,103
--------- --------- ---------
Total wholesale energy sales ............... 19,778 19,215 16,410
--------- --------- ---------
Total electric energy sales ................ 27,920 27,144 24,179
========= ========= =========
ELECTRIC ENERGY RESOURCES (Thousands of MWhs):
Hydro generation (from Company facilities) ...... 4,287 3,860 4,863
Thermal generation (from Company facilities) .... 3,353 3,522 2,627
Purchased power - long-term hydro ............... 1,093 910 1,212
Purchased power - other ......................... 19,697 19,405 16,038
Power exchanges ................................. 16 26 178
--------- --------- ---------
Total power resources ...................... 28,446 27,723 24,918
Energy losses and Company use ................... (526) (579) (739)
--------- --------- ---------
Total energy resources (net of losses) ..... 27,920 27,144 24,179
========= ========= =========
NUMBER OF ELECTRIC CUSTOMERS (Average for Period):
Residential ..................................... 270,013 265,891 261,873
Commercial ...................................... 34,877 34,407 33,681
Industrial ...................................... 1,189 1,169 1,145
Public street and highway lighting .............. 389 383 371
--------- --------- ---------
Total electric retail customers ............ 306,468 301,850 297,070
Wholesale ....................................... 68 85 91
--------- --------- ---------
Total electric customers ................... 306,536 301,935 297,161
========= ========= =========
ELECTRIC RESIDENTIAL SERVICE AVERAGES:
Annual use per customer (KWh) ................... 11,990 12,099 12,489
Revenue per KWh (in cents) ...................... 4.90 4.88 4.90
Annual revenue per customer ..................... $ 587.59 $ 590.54 $ 612.55
ELECTRIC AVERAGE HOURLY LOAD (aMW) ................... 990 971 954
========= ========= =========
RESOURCE AVAILABILITY at time of system peak (MW):
Total requirements (winter) (1) ................. 4,632 4,765 4,226
Total resource availability (winter) ............ 4,831 4,991 4,684
Total requirements (summer) (2) ................. 6,008 5,093 4,345
Total resource availability (summer) ............ 6,633 5,340 4,766
(1) Includes long-term contract obligations of 941 MW, 663 MW and 1,022 MW and
2,340 MW, 2,401 MW and 1,688 MW of short-term sales in 1999, 1998 and 1997,
respectively.
(2) Includes long-term contract obligations of 1,155 MW, 780 MW and 1,011 MW
and short-term sales of 3,435 MW, 2,792 MW and 1,966 MW in 1999, 1998 and
1997, respectively.
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AVISTA UTILITIES OPERATING STATISTICS
Years Ended December 31,
-------------------------------------------
1999 1998 1997
--------- --------- ---------
NATURAL GAS OPERATIONS
NATURAL GAS OPERATING REVENUES (Thousands of Dollars):
Residential ............................................ $ 99,879 $ 92,614 $ 81,855
Commercial ............................................. 51,952 49,539 42,731
Industrial - firm ...................................... 3,695 3,685 3,563
Industrial - interruptible ............................. 1,352 1,639 512
--------- --------- ---------
Total retail natural gas revenues ................. 156,878 147,477 128,661
Non-retail sales ....................................... 15,189 24,846 19,559
Transportation ......................................... 10,784 12,100 12,678
Other revenues ......................................... 4,633 8,715 4,884
--------- --------- ---------
Total natural gas operating revenues .............. $ 187,484 $ 193,138 $ 165,782
========= ========= =========
THERMS DELIVERED (Thousands of Therms):
Residential ............................................ 200,184 187,571 182,037
Commercial ............................................. 125,611 122,263 118,494
Industrial - firm ...................................... 11,241 11,494 12,509
Industrial - interruptible ............................. 5,209 6,053 3,217
--------- --------- ---------
Total retail sales ................................ 342,245 327,381 316,257
Non-retail sales ....................................... 74,117 126,522 105,297
Transportation ......................................... 232,739 226,139 245,139
Interdepartmental sales and Company use ................ 9,801 32,647 2,087
--------- --------- ---------
Total therms delivered ............................ 658,902 712,689 668,780
========= ========= =========
SOURCES OF NATURAL GAS SUPPLY (Thousands of Therms):
Purchases .............................................. 430,698 499,983 431,646
Storage - injections ................................... (30,508) (32,023) (31,288)
Storage - withdrawals .................................. 23,972 23,140 22,183
Natural gas for transportation ......................... 232,739 226,139 245,139
Distribution system gains (losses) ..................... 2,001 (4,550) 1,100
--------- --------- ---------
Total supply ...................................... 658,902 712,689 668,780
========= ========= =========
NUMBER OF NATURAL GAS CUSTOMERS (Average for Period):
Residential ............................................ 234,844 226,165 214,927
Commercial ............................................. 29,032 28,236 27,171
Industrial - firm ...................................... 308 310 306
Industrial - interruptible ............................. 30 26 25
--------- --------- ---------
Total retail customers ............................ 264,214 254,737 242,429
Non-retail sales ....................................... 9 19 17
Transportation ......................................... 107 119 111
--------- --------- ---------
Total natural gas customers ....................... 264,330 254,875 242,557
========= ========= =========
NATURAL GAS RESIDENTIAL SERVICE AVERAGES:
Washington and Idaho
Annual use per customer (therms) .................. 887 861 927
Revenue per therm (in cents) ...................... 45.74 44.97 40.44
Annual revenue per customer ....................... $ 405.51 $ 387.17 $ 374.90
Oregon and California
Annual use per customer (therms) .................. 789 772 703
Revenue per therm (in cents) ...................... 58.59 58.32 55.71
Annual revenue per customer ....................... $ 462.21 $ 450.13 $ 391.56
NET SYSTEM MAXIMUM CAPABILITY (Thousands of Therms):
Net system maximum demand (winter) ..................... 2,077 3,284 3,134
Net system maximum firm contractual capacity (winter) .. 4,320 4,220 4,220
HEATING DEGREE DAYS: (1)
Spokane, WA
Actual ............................................ 6,408 5,951 6,510
30 year average ................................... 6,842 6,842 6,842
% of average ...................................... 94% 87% 95%
Medford, OR
Actual ............................................ 4,401 4,421 4,144
30 year average ................................... 4,611 4,611 4,611
% of average ...................................... 95% 96% 90%
(1) Heating degree days are the measure of the coldness of weather experienced,
based on the extent to which the average of high and low temperatures for a
day falls below 65 degrees Fahrenheit (annual degree days below historic
average indicate warmer than average temperatures).
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ENERGY TRADING AND MARKETING
The Energy Trading and Marketing line of business includes Avista Energy, Avista
Power and Avista-STEAG. Avista Energy and Avista Power are wholly owned
subsidiaries of Avista Capital. Avista-STEAG is 50% owned by Avista Capital.
Avista Capital's total equity investment in this line of business was
approximately $86.0 million on December 31, 1999.
AVISTA ENERGY
Avista Energy is an electricity and natural gas marketing and trading business
focused on marketing energy in the Western United States. In 1999, Avista Energy
began conducting business on a national basis with its acquisition of Vitol Gas
& Electric, LLC (Vitol). However, in November 1999, the decision was made to
reduce Avista Energy's risk by redirecting its focus away from national energy
trading and marketing 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 decision came as a
result of Avista Energy's inability to effectively and consistently compete on a
national basis with the larger trading and marketing companies.
Avista Energy's headquarters are currently in Boston, Massachusetts with offices
in Houston, Texas; Spokane, Washington; Portland, Oregon; and Vancouver, British
Columbia, Canada. As a result of the restructuring, Avista Energy is closing the
Boston and Houston offices and relocating headquarters back to Spokane in the
first half of 2000.
Avista Energy is in the business of buying and selling electricity and natural
gas. Avista Energy's customers include commercial and industrial end-users,
electric utilities, natural gas distribution companies and other trading
companies. Avista Energy also trades electricity and natural gas derivative
commodity instruments, including futures, options, swaps and other contractual
arrangements on national exchanges and through unregulated exchanges and brokers
from whom these commodity derivatives are available. During 1999, Avista Energy
also sold and traded coal and sulfur dioxide (SO2) allowances, but it is Avista
Energy's intent to eliminate these activities in 2000. However, that is
dependent upon finding a buyer for the coal contracts already entered into. In
1999, Avista Energy sold approximately 135.1 million MWhs of electric energy,
775.8 million dekatherms of natural gas and 1.6 million tons of coal, compared
to approximately 54.4 million MWhs of electric energy and 424.2 million
dekatherms of natural gas in 1998. No coal was sold in 1998. These volumes, and
the associated revenues, will all decline in the future as a result of the
restructuring.
Avista Energy's business is affected by many factors, including:
- the demand for and availability of energy,
- lower unit margins on new sales contracts,
- fewer long-term power contracts being entered into, resulting in a
heavier reliance on short-term power contracts which have lower
margins than long-term contracts,
- marginal fuel prices, and
- deregulation of the electric utility industry.
In April 1997, Avista Energy entered into a marketing agreement with Chelan
County Public Utility District (Chelan PUD), located in Washington State. The
agreement allows Avista Energy to market, on a "real-time" basis, a portion of
the output from Chelan PUD's hydroelectric resources and to jointly market
energy products and services to other utilities in the region. Twenty-eight
percent, or 557 megawatts, of total generated capacity from Chelan PUD's
hydroelectric resources are available for real-time scheduling and resource
optimization. Avista Energy and Chelan PUD offer a variety of products, all
designed to help smaller utilities adjust to the emerging energy market. On
October 20, 1997, a complaint for declaratory and injunctive relief was filed in
Chelan County Superior Court by James A. Brown, a taxpayer and ratepayer of the
Chelan PUD, in order to determine whether the joint marketing and real-time
scheduling efforts of Chelan PUD and Avista Energy are within Chelan PUD's
lawful authority to undertake. This lawsuit was dismissed on July 30, 1999, and
Avista Energy and Chelan PUD continue to operate under the contractual alliance.
Effective September 1, 1999, Avista Energy began managing Avista Utilities'
natural gas assets and natural gas purchasing operations. Under the agreement,
Avista Energy serves as agent for Avista Utilities, managing its pipeline
transportation and natural gas storage assets, as well as purchasing natural gas
for Avista Utilities' retail customers. The assets continue to be owned by
Avista Utilities, but they are fully integrated operationally into Avista
Energy's portfolio to optimize the value. The incentive plan allows Avista
Energy the opportunity to retain a portion of the benefits associated with asset
optimization and the efficiencies gained in purchasing natural gas for Avista
Utilities. Approvals were received from the state regulatory agencies in
Washington, Idaho and Oregon. The incentive plan began September 1, 1999 and
ends March 31, 2002. Avista Utilities may seek continuation of the plan from
regulators with six months notice prior to the end of the term.
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The participants in the emerging wholesale energy market are public utility
companies and, increasingly, power marketers which may or may not be affiliated
with public utility companies or other entities. The participants in this market
trade not only electricity and natural gas as commodities, but also derivative
commodity instruments such as futures, forwards, swaps, options and other
instruments. This market is largely unregulated and most transactions are
conducted on an "over-the-counter" basis, there being no central clearing
mechanism (except in the case of specific instruments traded on the commodity
exchanges). Power marketers, whether or not affiliated with other entities,
generally do not own production facilities and are not subject to net capital or
other requirements of any regulatory agency.
Avista Energy is subject to the various risks inherent in commodity trading
including, particularly, market risk and credit risk. See Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations:
Results of Operations: Energy Trading and Marketing Operations; Future Outlook -
Energy Trading Business; and Notes 1, 2, 4 and 5 of Notes to Financial
Statements for additional information regarding the market and credit risks
inherent in the energy trading business, fourth quarter restructuring costs,
Avista Corp.'s risk management policies and procedures, accounting practices,
and positions held by Avista Energy at December 31, 1999.
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.
AVISTA POWER
Avista Power was formed to develop and own electricity generation and/or natural
gas fuel storage assets in strategic locations primarily throughout the West.
Avista Power's goal is to create value-added partnerships and joint ventures to
solidify market position, primarily in support of Avista Energy's operations.
Avista Power and Cogentrix Energy, Inc. have entered into an agreement to
jointly build and/or buy interests in natural gas-fired electric generation
plants in the states of Washington, Oregon and Idaho. The first project under
the new agreement is a 270 megawatt facility located in Rathdrum, Idaho, with
100% of its output contracted to Avista Energy for 25 years. The facility is
currently under construction and is expected to start up in late 2001. The total
cost of the project is estimated at $160 million; Avista Power's share of the
costs is approximately $80 million.
If Avista Power creates projects that STEAG AG, a German independent power
producer, wants to partner with, such projects will be done under Avista-STEAG,
LLC.
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ENERGY TRADING AND MARKETING OPERATING STATISTICS
Years Ended December 31,
----------------------------------------
1999 1998 1997
---------- ---------- --------
AVISTA ENERGY
REVENUES (Thousands of Dollars):
Electric ............................... $4,745,615 $1,665,348 $111,344
Natural gas ............................ 1,900,487 743,386 135,684
Coal ................................... 49,569 -- --
---------- ---------- --------
Total revenues .................... $6,695,671 $2,408,734 $247,028
========== ========== ========
VOLUMES:
Electricity (Thousands of MWhs) ........ 135,099 54,430 4,540
Natural gas (Thousands of dekatherms) .. 775,822 424,152 67,319
Coal (Tons) ............................ 1,637,851 -- --
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INFORMATION AND TECHNOLOGY
The Information and Technology line of business includes Avista Advantage,
Avista Labs and Avista Communications. Avista Fiber and Avista Communications
will merge operations in 2000, so Avista Fiber's information has been
incorporated into Avista Communications. Avista Advantage and Avista Labs are
wholly owned subsidiaries of Avista Capital. As of December 31, 1999, Avista
Capital owned approximately 71% of Avista Communications.
AVISTA ADVANTAGE
Headquartered in Spokane, Avista Advantage is a leading e-commerce provider of
specialty billing and information services to commercial customers throughout
the U.S. and Canada. Avista Advantage has established itself as a leader in the
development and implementation of customer-focused, non-traditional energy
solutions.
Avista Advantage processes and presents consolidated bills on-line, and pays
utility and maintenance and repair bills for multi-site commercial and
industrial customers. Information gathered from invoices, utilities and other
customer-specific data allows Avista Advantage to provide its customers with
in-depth analytical support, real-time reporting and unbiased consulting in
regard to energy, water, waste, and maintenance and repair expenses.
As of the end of 1999, Avista Advantage's customer base was over 100 customers,
having over 40,000 committed sites throughout the U.S. and Canada. Its customers
include Starbucks, Disney Stores, Kinko's, Home Depot, CVS Drug Stores and Time
Warner.
Avista Advantage's current products and services offering includes:
Consolidated billing - Invoices are entered into the AviTrack(TM)
database, which performs a variety of tolerance tests on the data. Edits
are resolved prior to the bill being presented to the customer for
payment. The ACIS(TM) Internet portal presents consolidated bills to be
viewed and approved on-line. Customers transfer the funds necessary to pay
invoices (in aggregate) directly to Avista Advantage, which remits to all
vendors.
Resource accounting - Over 500 different reports are available based on
customer-specific information requirements delivered on-line via the
ACIS(TM) portal.
Utility usage analysis - Avista Advantage compares usage information to
similar sites across the country and helps customers design strategies to
address identified issues.
Load profiling - Energy profiles are developed for individual sites, which
is useful in forecasting future energy costs and pinpointing patterns of
irregular energy consumption for further analysis.
Maintenance and repair billing services - Scheduled maintenance, standard
and emergency repairs of infrastructure and equipment are tracked,
monitored and bills are paid. This area of service is currently under
development.
Invoice audits - Audits of invoices are performed to customer
specifications.
Task report card - A monthly task report card is prepared summarizing
specific billing issues that were identified and resolved, listing the
actual savings resulting from the analysis, and documenting additional
opportunities for savings that have been identified for further analysis.
The ongoing management of customer utility and maintenance and repair bills
provides Avista Advantage with a database of information about customers and
their facilities services history. This database will be the foundation for
offering additional products and services tailored to the needs of individual
customers. Future products and services could include:
Commodity consulting services - Using load and usage information from the
AviTrack(TM) database to help customers purchase energy on the commodity
market. The potential for this service will increase significantly as
additional states allow retail customers to choose their energy suppliers.
Procurement services - Purchasing services and equipment on behalf of
customers to address operational improvements identified through the
standard Avista Advantage product offering. This may be expanded to
include all products and services required by a facilities management
organization.
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Telecommunications (voice, data and video) bill processing - Expanding the
current utility bill offering to include telecommunications invoices.
Web advertising and referral fees - Utilizing the ACIS(TM) web site as a
portal through which providers and users of e-commerce products and
services can conduct business.
Avista Advantage has secured patents on its two critical business systems, the
Advantage Customer Internet Site (ACIS(TM)), which provides high value,
operational information drawn from utility bills, and the AviTrack(TM) database,
which processes and reports on information gathered through input from utilities
to ensure customers are receiving the most effective services at the proper
price. Intellectual property protection includes a wide range of business
methods and systems related to ACIS(TM) and AviTrack(TM). Avista Advantage is
not aware of any claimed or threatened infringement on any patents issued to
date. Avista will continue to expand and protect its existing patents, as well
as file additional patent applications for new products, services and process
enhancements.
AVISTA LABS
Avista Labs is in the process of developing Proton Exchange Membrane (PEM) fuel
cells for power generation at the site of the consumer. The prototype fuel cell
has a unique modular cartridge design that allows for easy operation, low cost
and simple production. Avista Labs intends to integrate a fuel processor using
natural gas and propane fuels with an existing low-cost, flexible, modular,
stationary fuel cell, establish multiple beta-testing sites within strategic
market segments and attract additional partners for development and growth.
Avista Labs has filed applications for five patents, and is in the process of
drafting two more applications. The first, and most significant, patent was
approved, and issued on February 29, 2000. This patent protects the main
attributes of the fuel cell. A second patent, involving the operation of the
fuel cell, has been approved, but has not yet been issued. Approval is expected
on all of the other patent applications by year-end.
Avista Labs selected Logan Industries, of Spokane, to manufacture, assemble and
prepare the first 200 fuel cell units for field testing. Avista Labs and UOP,
LLC, a Chicago-based company, signed a joint development agreement that will
integrate UOP's fuel processor into Avista Lab's fuel cell design. This
represents one of the most critical steps in successful commercialization of
stationary fuel cells, possibly in early 2001. Avista Labs also signed a joint
marketing/installation agreement with Black & Veatch, a global engineering and
construction company.
In October 1998, Avista Labs was awarded a two year $2.0 million technology
development contract from the Department of Commerce's National Institute of
Standards and Technology Advanced Technology Program to accelerate fuel cell
development for commercial application.
AVISTA COMMUNICATIONS
Avista Communications, formed in January 1999 upon the acquisition of One Eighty
Communications, is the newest company in the Information and Technology line of
business. At December 31, 1999, Avista Capital owned 71% of this company. Avista
Communications is a Competitive Local Exchange Carrier (CLEC), providing local,
facilities-based telecommunications solutions. During 2000, Avista
Communications and Avista Fiber, a subsidiary started in 1996, will merge
operations. Avista Communications will then be additionally responsible for
designing, building and managing metropolitan area fiber optic networks,
services formerly provided by Avista Fiber.
The focus of Avista Communications is on providing local dial tone, data
transport, internet services, voice messaging and enhanced telecommunications
solutions to business customers via an advanced fiber optic network and
state-of-the-art switching technology. Target markets include under-served
communities in the western U.S. with populations under 500,000. Avista
Communications is already providing services in Billings, Montana and Lewiston,
Idaho and expects to be providing services in at least three more Northwest
communities in 2000.
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PENTZER AND OTHER
Pentzer, a wholly owned subsidiary of Avista Capital, is the largest entity in
the Pentzer and Other line of business. The other subsidiaries in this line of
business are Avista Development and Avista Services. At December 31, 1999,
Avista Capital's total equity investment in this line of business was
approximately $140.3 million, of which $122.2 million related to Pentzer.
PENTZER
Pentzer, a private investment fund specializing in profitable middle market
businesses, was the parent company for a majority of Avista Corp.'s other
subsidiary businesses until 1999, when it sold two groups of its portfolio
companies. In the past, Pentzer's business strategy has been to acquire
controlling interests in a broad range of middle market companies, facilitate
improved productivity and growth, and ultimately sell such companies to the
public or a strategic buyer. Total equity investment in any one company was
generally limited to $15 million.
Beginning in 2000, Pentzer's business strategy is to invest in companies that
are positioned to be leaders in emerging technology and information businesses
that are linked to the energy business. The investments will be directly in
businesses that meet these criteria, and indirectly, through the strategic
investment in certain venture capital firms that invest in similar business
segments and where Pentzer has the opportunity to directly invest in specific
portfolio companies.
Pentzer's goal is to produce strategic growth opportunities and financial
returns for the Company's shareholders that, over the long-term, should be
higher than that of the utility operations. From time to time, a significant
portion of Pentzer's earnings contributions may be the result of transactional
gains. Transactional gains arise from a one-time event or a specific
transaction, such as the sale of an investment or company from Pentzer's
portfolio of investments. In 1999, Pentzer generated $35.9 million in after-tax
transactional gains due to sales of portfolio companies.
AVISTA DEVELOPMENT
Avista Development manages and markets the corporation's community investments,
including real-estate, tax credit housing and other assets.
AVISTA SERVICES
Avista Services, the newest subsidiary under Avista Capital, provides products
and services to existing utility customers, which includes energy consulting,
mail order merchandising and the sale of items such as Dish Network Systems,
surge protectors and generators through a third party.
See Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations: Results of Operations: Pentzer and Other and Notes 1 and
23 of Notes to Financial Statements for additional information.
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INDUSTRY RESTRUCTURING
FEDERAL LEVEL
Industry restructuring to remove certain barriers to competition in the electric
utility industry was initially promoted by federal legislation. The Energy
Policy Act of 1992 (Energy Act) confers expanded authority upon the FERC to
issue orders requiring electric utilities to transmit power and energy to or for
wholesale purchasers and sellers, and to require electric utilities to enlarge
or construct additional transmission capacity for the purpose of providing these
services.
The FERC issued its final rule in Order No. 888 in April 1996. That order
requires public utilities operating under the Federal Power Act to provide
access to their transmission systems to third parties pursuant to the terms and
conditions of the FERC's pro-forma open access transmission tariff. FERC Order
No. 889, the companion rule to Order No. 888, requires public utilities to
establish an Open Access Same-Time Information System (OASIS) to provide
transmission customers with information about available transmission capacity
and other information by electronic means, and requires each public utility
subject to the rule to functionally separate its transmission and wholesale
power merchant functions. The FERC issued its initial order accepting the
non-rate terms and conditions of Avista Utilities' open access transmission
tariff in November 1996. Avista Utilities filed its "Procedures for Implementing
Standards of Conduct under FERC Order No. 889" with the FERC in December 1996
and adopted these Procedures effective January 3, 1997. FERC Orders No. 888 and
No. 889 have not had a significant material effect on Avista Utilities'
operating results.
On December 20, 1999, the FERC issued a final rule in Order No. 2000 regarding
the development of Regional Transmission Organizations (RTO). This final rule
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. Avista Utilities and various Northwest
utilities initially investigated the feasibility of transferring certain
operational responsibilities associated with a regional transmission grid to an
independent grid operator in 1997. Avista Utilities withdrew from this effort in
December 1997 because the costs to establish an independent grid operator in the
Northwest were greater than the perceived benefits. Notwithstanding the FERC's
developing policies, Avista Utilities has continued to explore other regional
transmission alternatives intended to help facilitate a competitive electric
power market, including the development of an RTO that might provide
quantifiable efficiencies in administering access to the Northwest transmission
system in a non-discriminatory fashion. In response to the FERC's Order 2000,
Avista Utilities will be submitting its response on RTO development and
participation to the FERC by October 2000.
The North American Electric Reliability Council and the WSCC have undertaken
initiatives to establish a series of security coordinators to oversee the
reliable operation of the regional transmission system. Accordingly, Avista
Utilities, in cooperation with other utilities in the Pacific Northwest, has
established the Pacific Northwest Security Coordinator (PNSC), which oversees
daily and short-term operations of the Northwest sub-regional transmission grid,
and has limited authority to direct certain actions of control area operators in
the case of a pending transmission system emergency. Avista Utilities executed
its service agreement with the PNSC in September 1998.
STATE LEVEL
Further competition may be introduced by state action. Competition for retail
customers is not generally allowed in Avista Utilities' service territory. While
the Energy Act precludes the FERC from mandating retail wheeling, state
regulators and legislators could open service territories to full competition at
the retail level. Legislative action at the state level would be required for
full retail wheeling and customer choice to occur in Washington and Idaho.
From 1995 through 1999, the legislatures and public utility commissions in
Washington and Idaho have covered a series of hearings and conducted several
studies regarding electric industry restructuring. Issues such as unbundling,
deregulation, reliability and consumer protection have been examined. Impacts on
customer service quality and system reliability (generation, transmission and
distribution) have been considered on a "macro" basis under various
restructuring scenarios. Public policy makers in Washington and Idaho continue
to examine other states' experiences with restructuring, while cognizant that
the Pacific Northwest generally benefits from the lowest electric rates in the
country.
In 1997, Governor Locke issued an executive order requiring all agencies in the
State of Washington to review their significant rules under the criterion of
need, efficiency, clarity and cost. The WUTC is in the process of examining its
electric and natural gas rules. Resulting modifications to existing rules may
include changes to customer service and reliability standards. Avista Utilities
believes that any such modifications to the WUTC's existing rules will not
materially impact operations.
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Avista Utilities has developed a model to offer broader customer choice. The
Portfolio Access Model (PA Model) was developed as a transition to full direct
access. Under the PA Model, large-use customers would receive direct access,
while small-use customers would be provided a menu of services priced at market
rates, such as monthly and annual pricing, as well as optional "green rates" for
renewable power. The PA Model has served as a regional proposal under discussion
by legislative committees and work groups in Washington, Idaho and Oregon. In
1999, the Oregon Legislature voted into law an electric restructuring system
similar to Avista Utilities' PA Model. More Options for Power Services II (MOPS
II) is Avista Utilities' PA Model regulatory pilot.
On January 20, 1999, the CPUC granted Avista Utilities a full exemption to the
CPUC's Affiliate Transaction Rules, provided that Avista Utilities complies with
its voluntary agreement that none of its affiliates will participate in business
activities in its South Lake Tahoe service territory. These rules require that a
utility's energy marketing affiliates follow detailed operating and reporting
protocols as well as full separation from the regulated entity for any business
activity in California. Avista Utilities also agreed to provide periodic reports
from an independent auditor verifying that its affiliates have not participated
directly or indirectly within this service territory.
EXPERIMENTAL PROGRAMS
To assess the potential impact of competition and customer choice, commencing in
1997, Avista Utilities has implemented a variety of experimental programs that
permitted its retail customers to choose other energy suppliers. The cost of
these programs to Avista Utilities, in terms of lost margin, has not been
material.
On the basis of its experience under these programs, Avista Utilities believes
that if the States of Washington and/or Idaho adopted legislation providing for
customer choice, the effect on its results of operations would not be material.
This is due largely to (1) Avista Utilities' current retail rates, which are
among the lowest in the U.S., and (2) Avista Utilities' ability to sell capacity
and energy in wholesale markets without any significant loss of margin.
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ENVIRONMENTAL ISSUES
The Company is subject to environmental regulation by federal, state and local
authorities. The generation, transmission, distribution, service and storage
facilities in which Avista Utilities has an ownership interest have been
designed to comply with all environmental laws presently applicable.
Furthermore, the Company conducts periodic reviews of all its facilities and
operations to anticipate emerging environmental issues. The Company's Board of
Directors has an Environmental Committee to deal specifically with these issues.
Air Quality. The most significant impact of the Clean Air Act (CAA) and the 1990
Clean Air Act Amendments (CAAA) is on the Centralia Steam Electric Plant, which
is classified as a "Phase II" coal plant under the CAAA. Construction is
underway to install limestone scrubbers on both units. The first unit will go
into operation in 2001 and the second in 2002. The scrubbers are expected to
result in a 90% reduction in sulfur dioxide (SO2) emissions. This level of
reduction exceeds the requirements of the CAA and meets the RACT (Reasonably
Available Control Technology) order by the Southwest Washington Pollution
Control Authority (SWAPCA). The plant will also install low nitrogen oxide (NOX)
burners to reduce the emission of NOX. The standards in the RACT order were
established by a collaborative decision-making group consisting of
representatives from federal and state agencies and the plant owners. Avista
Utilities and the other owners decided to take bids for the sale of the
Centralia Steam Electric Plant and have announced TransAlta of Calgary as the
selected bidder in the auction process. The sale must be approved by federal and
state regulators, as well as the city councils and directors who control the
municipal utilities and public utility districts that also have ownership
interests in the plant. Regulatory approvals have been received from the FERC
and state commissions in Washington, Idaho, Oregon and Wyoming. Commissions in
Utah and California have yet to make their decisions. The Company is reviewing
the terms of the approvals from the WUTC and the IPUC to determine whether to
agree to the sale. Obligations under the CAA would be assumed by TransAlta if
the sale of the Centralia Steam Electric Plant is completed.
Colstrip, which is also a "Phase II" coal-fired plant under the CAAA, is not
expected to be required to implement any additional SO2 mitigation in the
foreseeable future in order to continue operations.
Avista Utilities' other thermal projects also are subject to various CAAA
standards. Every five years each project requires an updated operating permit
(known as a Title V permit) which addresses, among other things, the compliance
of the plant with the CAAA. No permits are required at any of Avista Utilities'
thermal plants in 2000.
See Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations: Future Outlook and Note 22 to Financial Statements for
additional information.
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ITEM 2. PROPERTIES
AVISTA UTILITIES
Avista Utilities' electric properties, located in the States of Washington,
Idaho and Montana, include the following:
Generating Plant
Nameplate Present Year of
No. of Rating Capability FERC License
Units (MW)(1) (MW)(2) Expiration
------ --------- ---------- ------------
Hydroelectric Generating Stations (River)
Washington:
Long Lake (Spokane) 4 70.0 88.0 2007
Little Falls (Spokane) 4 32.0 36.0 n/a
Nine Mile (Spokane) 4 26.4 24.5 2007
Upper Falls (Spokane) 1 10.0 10.2 2007
Monroe Street (Spokane) 1 14.8 14.8 2007
Idaho:
Cabinet Gorge (Clark Fork) 4 221.9 236.0 2045(3)
Post Falls (Spokane) 6 14.8 18.0 2007
Montana:
Noxon Rapids (Clark Fork) 5 466.7 528.0 2045(3)
------- -------
Total Hydroelectric 856.6 955.5
Thermal Generating Stations
Washington:
Centralia(4) 2 199.5 201.0
Kettle Falls 1 50.7 49.0
Northeast (Spokane) CT(5) 2 61.2 69.0
Idaho:
Rathdrum CT(5) 2 166.5 176.0
Montana:
Colstrip (Units 3 and 4)(4) 2 233.4 222.0
------- -------
Total Thermal 711.3 717.0
Total Generation Properties 1,567.9 1,672.5
======= =======
n/a not applicable.
(1) Nameplate Rating, also referred to as "installed capacity", is the
manufacturer's assigned power rating under specified conditions.
(2) Capability is the maximum generation of the plant without exceeding
approved limits of temperature, stress and environmental conditions.
(3) On February 23, 2000, the Company received a new operating license for
Cabinet Gorge and Noxon Rapids. (See Item 1. Business: Avista Utilities -
Hydroelectric Relicensing for additional information.)
(4) Jointly owned; data above refers to Avista Utilities' respective 15%
interests. The remaining 2.5% interest in Centralia, purchased by the
Company in December 1999, is currently being held as non-utility property
until the outcome of the pending sale is determined.
(5) Used primarily for peaking needs.
Electric Distribution and Transmission Plant
Avista Utilities operates approximately 12,200 miles of primary and secondary
distribution lines in its electric system in addition to a transmission system
of approximately 575 miles of 230 kV line and 1,520 miles of 115 kV line. Avista
Utilities also owns a 10% interest in 495 miles of a 500 kV line between
Colstrip, Montana and Townsend, Montana, and a 15% interest in three miles of a
500 kV line from Centralia, Washington to the nearest Bonneville Power
Administration (Bonneville) interconnection.
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The 230 kV lines are used to transmit power from Avista Utilities' Noxon Rapids
and Cabinet Gorge hydroelectric generating stations to major load centers in its
service area, as well as to transfer power between points of interconnection
with adjoining electric transmission systems. These lines interconnect with
Bonneville at five locations and at one location each with PacifiCorp, Montana
Power and Idaho Power Company. The Bonneville interconnections serve as points
of delivery for power from the Colstrip and Centralia generating stations, as
well as for the interchange of power with entities outside the Pacific
Northwest. The interconnection with PacifiCorp is used to integrate Mid-Columbia
hydroelectric generating facilities to Avista Utilities' loads, as well as for
the interchange of power with entities within the Pacific Northwest.
The 115 kV lines provide for transmission of energy and the integration of the
Spokane River hydroelectric and Kettle Falls wood-waste generating stations with
service-area-load centers. These lines interconnect with Bonneville at nine
locations, Grant County Public Utility District (PUD), Seattle City Light and
Tacoma City Light at two locations and one interconnection each with Chelan
County PUD, PacifiCorp and Montana Power.
Natural Gas Plant
Avista Utilities has natural gas distribution mains of approximately 3,877 miles
in Washington and Idaho and 1,794 miles in Oregon and California, as of December
31, 1999.
Avista Utilities, Northwest Pipeline and Puget Sound Energy each own a one-third
undivided interest in the Jackson Prairie Natural Gas Storage Project, which has
a total peak day deliverability of 8.8 million therms, with a total working
natural gas inventory of 190.3 million therms.
ITEM 3. LEGAL PROCEEDINGS
See Note 22 of Notes to Financial Statements for additional information.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Outstanding shares of Common Stock are listed on the New York and Pacific Stock
Exchanges. As of February 29, 2000, there were approximately 20,726 registered
shareholders of the Company's no par value Common Stock.
See Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations: Future Outlook for additional information about common
stock dividends.
For additional information, refer to Notes 1, 18 and 21 of Notes to Financial
Statements. For high and low stock price information, refer to Note 24 of Notes
to Financial Statements.
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ITEM 6. SELECTED FINANCIAL DATA
Years Ended December 31,
------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
----------- ----------- ----------- ----------- -----------
(Thousands of Dollars except Per Share Data and Ratios)
Operating Revenues:
Avista Utilities * ................... $ 1,082,159 $ 1,041,772 $ 890,516 $ 798,994 $ 661,216
Energy Trading and Marketing ......... 6,695,671 2,408,734 247,028 -- --
Information and Technology ........... 4,851 1,995 1,030 813 --
Pentzer and Other .................... 122,303 231,483 163,598 145,150 93,793
----------- ----------- ----------- ----------- -----------
Total ................................ 7,904,984 3,683,984 1,302,172 944,957 755,009
Operating Income/(Loss):
Avista Utilities * ................... 142,567 143,153 178,289 173,658 176,344
Energy Trading and Marketing ......... (97,785) 22,826 6,577 (649) --
Information and Technology ........... (13,002) (5,192) (5,364) (1,443) --
Pentzer and Other .................... (423) 12,033 9,962 15,355 13,496
----------- ----------- ----------- ----------- -----------
Total ................................ 31,357 172,820 189,464 186,921 189,840
Net Income/(Loss):
Avista Utilities * ................... 59,470 56,297 100,777(4) 62,404 72,310
Energy Trading and Marketing ......... (60,740) 14,116 5,346 (414) --
Information and Technology ........... (10,156) (3,398) (3,425) (919) --
Pentzer and Other .................... 37,457 11,124 12,099 22,382 14,811
----------- ----------- ----------- ----------- -----------
Total ................................ 26,031 78,139 114,797 83,453 87,121
Preferred Stock Dividend Requirements .. 21,392(1) 8,399(1) 5,392 7,978 9,123
Income Available for Common Stock ...... 4,639 69,740 109,405(4) 75,475 77,998
Outstanding Common Stock (000s):
Weighted Average ..................... 38,213(1) 54,604(1) 55,960 55,960 55,173
Year-End ............................. 35,648(1) 40,454(1) 55,960 55,960 55,948
Book Value per Share ................... $ 11.04(1) $ 12.07(1) $ 13.36 $ 12.70 $ 12.82
Earnings per Share:
Avista Utilities ..................... 1.00 0.88 1.70(4) 0.97 1.14
Energy Trading and Marketing ......... (1.59) 0.26 0.10 (0.01) --
Information and Technology ........... (0.27) (0.06) (0.06) (0.01) --
Pentzer and Other .................... 0.98 0.20 0.22 0.40 0.27
----------- ----------- ----------- ----------- -----------
Total, Basic and Diluted ............. 0.12 1.28 1.96(4) 1.35 1.41
Adjusted Diluted ..................... 0.44(2) 1.35(2) -- -- --
Dividends Paid per Common Share ...... 0.48(3) 1.05(3) 1.24 1.24 1.24
Total Assets at Year-End:
Avista Utilities ..................... 1,976,716 2,004,935 1,926,739 1,921,429 1,869,180
Energy Trading and Marketing ......... 1,595,470 955,615 212,868 320 --
Information and Technology ........... 26,379 7,461 3,475 1,517 --
Pentzer and Other .................... 114,929 285,625 268,703 254,032 229,722
----------- ----------- ----------- ----------- -----------
Total .................................. 3,713,494 3,253,636 2,411,785 2,177,298 2,098,902
Long-term Debt at Year-End ............. 718,203 730,022 762,185 764,526 738,287
Company-Obligated Mandatorily
Redeemable Preferred Trust Securities 110,000 110,000 110,000 -- --
Preferred Stock Subject to Mandatory
Redemption at Year-End ............... 35,000 35,000 45,000 65,000 85,000
Convertible Preferred Stock ............ 263,309 269,227(1) -- -- --
Ratio of Earnings to Fixed Charges ..... 1.61 2.66 3.49 2.97 3.22
Ratio of Earnings to Fixed Charges and
Preferred Dividend Requirements ....... 1.07 2.25 3.12 2.50 2.61
* Avista Utilities amounts contain the consolidating intersegment
eliminations.
(1) In December 1998, the Company converted shares of common stock for
Convertible Preferred Stock, which was responsible for a number of
changes in the data in 1999 and 1998 from 1997. (See Note 15 of Notes to
Financial Statements.)
(2) Assumes the Convertible Preferred Stock was converted back to common
stock. (See Note 19 of Notes to Financial Statements.)
(3) The Company paid a common stock dividend of $0.31 per share through the
third quarter of 1998. Beginning in the fourth quarter of 1998, the
common stock dividend paid was reduced to $0.12 per share each quarter.
(4) Includes the $41.4 million after-tax effect of the income tax recovery.
(See Note 9 of Notes to Financial Statements.)
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ITEM 7. 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. In 1999, Avista Energy began conducting business on a national
basis with its acquisition of Vitol Gas & Electric, LLC (Vitol). However, market
factors changed significantly during the year, and by the end of 1999, Avista
Energy decided to reduce its risk by redirecting its focus away from national
energy trading toward a more regionally-based energy marketing and trading
effort, primarily within the Western Systems Coordinating Council (WSCC). Avista
Power was formed in December 1998 to develop and own generation assets primarily
in support of Avista Energy. Avista-STEAG was created in 1999 as a joint venture
between Avista Capital and STEAG AG, a German independent power producer, to
develop electric generating assets. See Liquidity and Capital Resources: Risk
Management.
The Information and Technology line of business is comprised of Avista
Advantage, Inc. (Avista Advantage), Avista Laboratories, Inc. (Avista Labs),
Avista Fiber, Inc. (Avista Fiber) 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. During 2000, Avista Fiber, a
subsidiary started in 1996, and Avista Communications will merge operations.
Avista Communications will then be additionally responsible for designing,
building and managing metropolitan area fiber optic networks, services formerly
provided by Avista Fiber.
The Pentzer and Other line of business includes Pentzer Corporation (Pentzer),
Avista Development, Inc. (Avista Development) and Avista Services, Inc. (Avista
Services). 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 earnings 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
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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.
The Company changed the way it reports business segments in this Form 10-K from
the 1998 Form 10-K. In the 1998 Form 10-K and the quarterly Form 10-Q reports
for 1999, the Company reported Avista Utilities information by its two separate
lines of business - (1) Energy Delivery and (2) Generation and Resources. The
National Energy Trading and Marketing line of business included results of
Avista Energy, Avista Advantage and Avista Power. The Non-Energy line of
business included Pentzer and all of the remaining subsidiaries' activities. The
business segment presentation in this Form 10-K reflects the basis currently
used by the Company's management to analyze performance and determine the
allocation of resources. Avista Utilities' business is now managed based on the
total regulated operations, not by individual segments. The Energy Trading and
Marketing line of business changed its focus from a national emphasis to a
regional effort, but its operations are non-regulated, as opposed to Avista
Utilities' operations. The Information and Technology line of business reflects
the current efforts of the Company to grow those businesses and focus on
generating shareholder value. Pentzer and Other reports on the other non-utility
operations of various subsidiaries.
RESULTS OF OPERATIONS
OVERALL OPERATIONS
1999 COMPARED TO 1998
Overall reported basic earnings per share for 1999 were $0.12, compared to $1.28
in 1998. In December 1998, the Company exchanged 15,404,595 shares of its common
stock for shares of Convertible Preferred Stock, Series L, which resulted in an
increase of $13.4 million in preferred stock dividend requirements in 1999 over
1998. Excluding the effects of this transaction, earnings per share would have
been $0.44 in 1999, compared to $1.35 in 1998. The primary reason for the
decrease was a $60.7 million after-tax loss recorded by the Energy Trading and
Marketing line of business, due to a $27.3 million after-tax charge recorded by
Avista Energy related to the downsizing and restructuring of the business, and
$32.1 million of after-tax operational losses due to warmer than normal weather
across the nation, soft national energy markets and a lack of volatility within
those markets. The restructuring charge includes a charge for impairment of
assets from the purchase of Vitol in February 1999 and reserves for severance
and other related expenses. In addition, the utility operations recorded charges
of approximately $5 million related to the impairment of utility assets, which
were partially offset by the reversal of certain environmental reserves. These
charges were partially offset by the $35.9 million of transactional gains
recorded by Pentzer due to the sales of two groups of portfolio companies.
Net income available for common stock decreased $65.1 million in 1999 from 1998.
Avista Utilities' income available for common stock decreased $9.8 million from
1998 due to the increased preferred stock dividend associated with the
Convertible Preferred Stock, contributing $1.00 per basic share for 1999,
compared to $0.88 in 1998. Energy Trading and Marketing's income available for
common stock decreased $74.9 million from 1998, for a loss of $1.59 per basic
share in 1999, as compared to a contribution of $0.26 per share in 1998, due
primarily to the restructuring charges and operational losses discussed above.
Information and Technology's income available for common stock decreased $6.8
million from 1998, for a loss of $0.27 per share in 1999, compared to a loss of
$0.06 in 1998, due primarily to continued start-up and expansion costs. Pentzer
and Other subsidiaries' operating income available for common stock increased
$26.3 million in 1999 and contributed $0.98 to basic earnings per share in 1999,
compared to $0.20 per share in 1998. Transactional gains recorded by Pentzer
totaled $35.9 million, or $0.94 per share, and $4.3 million, or $0.08 per share,
in 1999 and 1998, respectively.
Total revenues increased $4.22 billion in 1999 over 1998, primarily due to the
growth of Avista Energy's business as a result of its acquisition of Vitol.
Resource costs increased $4.40 billion, again primarily as a result of the
growth in Avista Energy's business. Intersegment eliminations represent the
transactions between Avista Utilities and Avista Energy for commodities and
services. The large increase in 1999 over 1998 was primarily due to an agreement
whereby Avista Energy serves as agent for Avista Utilities, managing its
pipeline transportation and natural gas storage assets, as well as purchasing
natural gas for Avista Utilities' retail customers. Gross margins for Avista
Utilities decreased $3.0 million primarily due to larger increases in purchased
power costs than in the associated wholesale revenues. Avista Energy's gross
margin decreased $66.6 million to a negative $17.9 million, primarily due to
losses on positions taken in anticipation of certain weather patterns in
particular areas of the country which did not occur as planned. Operations and
maintenance expenses decreased $74.4 million, primarily due to decreased
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expenses as a result of the sales of portfolio companies by Pentzer.
Administrative and general expenses decreased $1.8 million primarily due to
decreased expenses as a result of the sales of portfolio companies by Pentzer,
partially offset by increased salary expenses from the growth in Avista Energy's
business and the purchase of Vitol, which added significantly to staffing
levels, and increased start-up costs at the Information and Technology
companies.
Interest expense decreased $4.0 million in 1999, as compared to 1998, primarily
due to lower levels of outstanding debt during the year. During 1999, $108.7
million of long-term debt was issued, while $208.3 million of long-term debt
matured or was redeemed. At December 31, 1999, $118.5 million of notes payable
were outstanding, compared to no balances at December 31, 1998. Long-term debt
outstanding at December 31, 1999 was $11.8 million lower than at the end of
1998.
Income taxes decreased $26.6 million, or 61%, in 1999 from 1998, primarily due
to losses and restructuring charges incurred by the Energy Trading and Marketing
line of business, which were partially offset by higher taxes resulting from the
transactional gains from the sales of the portfolio companies by Pentzer.
Preferred stock dividend requirements increased $13.0 million in 1999 over 1998
due to the exchange of shares of common stock for shares of $12.40 Convertible
Preferred Stock, Series L, which occurred in December 1998 and the redemption of
the final $10.0 million of Preferred Stock, Series I in June 1998.
1998 COMPARED TO 1997
Overall reported earnings per share for 1998 were $1.28, compared to $1.96 in
1997. The primary factors causing the decrease from 1997 were an income tax
recovery, net of associated items, which increased 1997 earnings per share by
$0.49, and decreased operating income from Avista Utilities' wholesale electric
operations in 1998. In addition, in December 1998, the Company exchanged
15,404,595 shares of its common stock for shares of Convertible Preferred Stock
(see Notes 15 and 19 of Notes to Financial Statements for additional information
about the new Convertible Preferred Stock and earnings per share). If these
shares had been exchanged at the beginning of the year, basic and diluted
earnings per share for 1998 would have been $1.39 and $1.35, respectively.
Net income available for common stock decreased $39.7 million in 1998 from 1997.
The 1998 results primarily reflect hydroelectric generation 21% lower than 1997
and increased purchased power prices and volumes, partially offset by improved
earnings at Avista Energy. In addition, the 1997 results include the impact of
$41.4 million, after-tax, in an income tax recovery from the Internal Revenue
Service, which was partially offset by $14.0 million, after-tax, in
environmental reserves and non-recurring adjustments (see below and Note 9 of
Notes to Financial Statements for additional information about the income tax
recovery). Excluding these items, Avista Utilities' income available for common
stock decreased $20.2 million, or 30%, in 1998, contributing $0.88 to earnings
per share in 1998, compared to $1.70 in 1997. Energy Trading and Marketing
income available for common stock increased $8.8 million, contributing $0.26 to
earnings per share in 1998 as compared to $0.10 in 1997 when there were only 5
months of operations. Information and Technology companies recorded losses
totaling $0.06 per basic share in both 1998 and 1997. Pentzer and Other
subsidiaries' operating income available for common stock decreased $1.0 million
in 1998 and contributed $0.20 to earnings per share in 1998, compared to $0.22
in 1997. Transactional gains recorded by Pentzer totaled $4.3 million, or $0.08
per share, and $7.3 million, or $0.13 per share, in 1998 and 1997, respectively.
Interest expense increased $2.8 million in 1998, as compared to 1997, primarily
due to higher levels of outstanding debt during the year. During 1998, $84.0
million of long-term debt was issued, while $14.0 million of long-term debt
matured or was redeemed. At December 31, 1998, there was no short-term debt
outstanding, compared to $108.5 million at December 31, 1997. Long-term debt
outstanding at December 31, 1998 was $32.2 million lower than at the end of
1997.
Income taxes decreased $17.7 million, or 29%, in 1998 from 1997, primarily due
to higher taxes in 1997 on the interest income received as a part of the income
tax recovery, partially offset by adjustments related to revised estimates on
certain tax issues.
Preferred stock dividend requirements increased $3.0 million in 1998 over 1997
due to the exchange of shares of common stock for shares of $12.40 Convertible
Preferred Stock, Series L, which occurred in December 1998. This was partially
offset by the redemption of $10 million in Preferred Stock, Series I in June
1998.
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AVISTA UTILITIES
1999 COMPARED TO 1998
Avista Utilities' pre-tax income from operations decreased $0.6 million in 1999
from 1998. Operating revenues and expenses increased $66.4 million and $67.0
million, respectively, during 1999.
Retail electric revenues increased $9.0 million due to increased kWh sales of 3%
due to customer growth of 1.5% and slightly cooler weather in Avista Utilities'
service area in 1999 than in 1998. Wholesale electric revenues increased $65.2
million, primarily due to prices 11% greater and sales volumes 3% higher in 1999
over 1998. Natural gas revenues decreased $5.7 million primarily as a result of
decreased non-retail sales, partially offset by increased retail sales due to
customer growth and increased customer usage as a result of slightly cooler
weather in Avista Utilities' service area in 1999.
Non-retail sales are sales of natural gas on an off-system basis, to other
utilities and large industrial customers outside of Avista Utilities' service
territories. Revenues from these sales are offset by like increases in purchased
gas expense, and margins from these transactions are credited back to customers
through rate changes for the cost of natural gas. Non-retail sales decreased in
1999 primarily due to the agreement whereby Avista Energy serves as agent for
Avista Utilities, managing its pipeline transportation and natural gas storage
assets, as well as purchasing natural gas for Avista Utilities' customers, in
order to optimize the value of its resources. Avista Energy will make these
sales in the future, if it is optimal to managing the natural gas portfolio. The
utility commissions of Washington, Idaho and Oregon have approved Benchmark
Incentive Mechanisms that allow Avista Utilities and its customers to share some
of the benefits of Avista Energy's resource optimization activities.
Purchased power volumes increased 2% and prices were 13% higher than last year,
which resulted in a $72.9 million, or 15%, increase in purchased power expense
in 1999 over 1998. This increase accounts for the majority of the increase in
Avista Utilities' operating expenses. Operations and maintenance expenses
decreased $4.6 million in 1999 from 1998 as a result of fewer storms, resulting
in less storm damage, and realizing the benefit of preventive maintenance
programs such as cable replacement, pole test and treat, and tree trimming.
Administrative and general expenses decreased $3.3 million due to increased
expenditures during 1998 associated with the change in executive officers and
the corporate name change. Avista Utilities also recorded charges of
approximately $5 million related to impairment of assets, which primarily
included items such as deferred charges now deemed unrecoverable through rates
and a defective inventory software system.
1998 COMPARED TO 1997
Avista Utilities' pre-tax income from operations decreased $35.2 million, or
20%, in 1998 from 1997. Operating revenues and expenses increased $157.5 million
and $192.8 million, respectively, in 1998.
Wholesale electric revenues increased $127.4 million, primarily due to sales
volumes 17% higher and prices 18% higher in 1998 than 1997. Total natural gas
revenues increased $27.4 million in 1998 over 1997, primarily due to a
combination of 4.4% customer growth, increased natural gas prices approved by
the Washington Utilities and Transportation Commission (WUTC), effective in
January 1998, and an increase in non-retail sales, partially offset by decreased
customer usage as a result of weather 8% warmer in 1998 than 1997.
Resource costs account for the majority of the increase in Avista Utilities'
operating expenses. Purchased power volumes increased 17% and prices were 30%
higher in 1998 than 1997, which resulted in a $161.2 million, or 52%, increase
in purchased power expense in 1998 over 1997. Natural gas purchased costs
increased $15.3 million due to increased therm sales. Fuel for generation
increased $9.8 million due to increased generation at the thermal plants as a
result of increased wholesale electric sales.
ENERGY TRADING AND MARKETING
Energy Trading and Marketing includes the results of Avista Energy, Avista
Power, and Avista-STEAG. Avista Power and Avista-STEAG operations had little or
no impact on earnings in either 1999 or 1998. Although Avista Energy began
incurring start-up costs during 1996, it only became operational in July 1997
and began trading operations in August 1997. Avista Energy maintains a trading
portfolio that it marks to fair market value on a daily basis (mark-to-market
accounting), and which may cause earnings variability in the future.
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1999 COMPARED TO 1998
Energy Trading and Marketing income available for common stock for 1999 was an
after-tax loss of $60.7 million compared to earnings of $14.1 million in 1998.
The primary reason for the decrease was a $27.3 million after-tax charge
recorded by Avista Energy related to the downsizing and restructuring of the
business, and $32.1 million of after-tax operational losses due to warmer than
normal weather across the nation, soft national energy markets and a lack of
volatility within those markets. The restructuring charge consists of a $21.4
million after-tax charge for the write-off of goodwill from the purchase of
Vitol in February 1999 and a $5.9 million after-tax reserve for severance
payments and other related expenses. Avista Energy recognized losses (1) on
positions taken in anticipation of certain weather patterns in particular areas
of the country, which lost value when the expected patterns did not occur, and
(2) on options, also taken in anticipation of certain weather patterns in
particular areas of the country, which expired unexercised when the expected
patterns did not occur. See Liquidity and Capital Resources: Risk Management
for additional information about market risk and credit risk.
Since its inception in 1997, Avista Energy has developed and expanded its
business and added experienced traders and staff. This growth continued in 1999
with Avista Energy's purchase of Vitol in the first quarter. Vitol, located in
Boston, Massachusetts, was one of the top 20 energy marketing companies in the
United States. Late in the second quarter of 1999, Avista Energy added a
significant number of energy professionals in its Spokane and Houston offices.
The integration of Vitol operations into Avista Energy began during the second
quarter with the consolidation of back-office support, improvements in
accounting and trading processes and personnel, and continued enhancements in
risk management systems across Avista Energy.
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 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. Avista Energy is shutting down its operations in
Houston and Boston, which will eliminate approximately 80 positions. Avista
Energy sought a buyer for the Eastern book of business, and is currently in the
process of closing that transaction. The electric contracts will likely be sold
at approximately book value. To date, Avista Energy has not found a buyer for
the natural gas or coal contracts. Avista Energy already has prudency and credit
reserves recorded on its books that will likely cover any remaining risks
associated with these Eastern contracts.
During 1999, Avista Energy derived the majority of its revenues from trading
activities, rather than marketing activities. Marketing activities are defined
as structured deals with non-standard products. The contracts are usually of
one-year or longer terms, and are designed to meet the customers' specific
requirements as to timing and amounts. Customers are primarily large, end-use
customers or utilities. With the redirection in focus, Avista Energy plans to
eventually derive more revenues from marketing activities rather than trading
activities. However, due to the current portfolio of contracts in place, it will
require several years to fully accomplish this transition. Current expectations
are for losses to continue through the first three quarters of 2000 due to
contracts still in place and further expenses relating to the downsizing of the
business.
Energy Trading and Marketing's revenues and operating expenses increased $4.29
billion and $4.36 billion, respectively, in 1999 over 1998. The increase in
revenues and expenses was primarily the result of Avista Energy continuing to
grow its business. Energy Trading and Marketing's assets increased $639.9
million from December 1998 to December 1999. Avista Energy's energy commodity
assets and liabilities increased as a result of additional trading volumes,
which were partially offset by market price declines. Trade receivables and
payables increased due to additional volumes of sales and purchases.
1998 COMPARED TO 1997
Energy Trading and Marketing's income available for common stock increased $8.8
million in 1998 over 1997. (Year-to-year results are not comparable since 1998
results reflect a full year of operations at Avista Energy and 1997 only
represents five months of operations.) Energy Trading and Marketing's operating
revenues and expenses increased $2.16 billion and $2.15 billion, respectively,
during 1998 as compared to 1997.
Avista Energy provided positive results in 1998 despite the price volatility
experienced in power markets in the Midwest and East during various periods of
the year. The company was well-positioned in its market, which allowed net gains
in its portfolio during periods of high volatility. Avista Energy expected high
volatility in Eastern electric markets in the summer of 1998 based on expected
demand and the high probability of a weather-related impact on
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markets in the summer of 1998 based on expected demand and the high probability
of a weather-related impact on energy prices. As a result, Avista Energy
established positions in anticipation of volatile market swings, and in turn
experienced positive earnings in its portfolio during this period.
INFORMATION AND TECHNOLOGY
The Information and Technology line of business includes the results of Avista
Advantage, Avista Labs, Avista Fiber and Avista Communications. Avista
Communications began operations in early 1999. Avista Corp. has committed to
invest in the development and build-up of these information and technology
start-up businesses as part of its overall strategic focus on generating
shareholder value.
1999 COMPARED TO 1998
Information and Technology's income available for common stock for 1999 was a
loss of $10.2 million, compared to a loss of $3.4 million in 1998. Increases in
revenues and various expense categories for this line of business were primarily
due to growth in each of the individual businesses.
1998 COMPARED TO 1997
Revenues and expenses for the companies in this line of business increased in
1998 over 1997, primarily due to start-up costs in each of the businesses.
However, losses from operations totaled slightly more than $5.0 million in both
years, and income available for common stock was a loss of $3.4 million in both
1998 and 1997.
PENTZER AND OTHER
The Pentzer and Other line of business includes the results of Pentzer, Avista
Development and Avista Services.
1999 COMPARED TO 1998
Income available for common stock for 1999 from Pentzer and other subsidiaries
totaled $37.5 million, which is a $26.3 million increase over 1998. The
increased earnings resulted primarily from transactional gains recorded by
Pentzer in 1999 totaling $35.9 million, net of taxes, from the sales of two
groups of portfolio companies. Transactional gains during 1998 totaled $4.3
million, net of taxes, as a result of the sale of a portfolio company.
Non-transactional earnings totaled $1.2 million in 1999, a decrease of $6.2
million from 1998, primarily due to the loss of income resulting from the sales
of portfolio companies. Operating revenues and expenses decreased $109.2 million
and $96.7 million, respectively, primarily as a result of the sales of portfolio
companies by Pentzer.
1998 COMPARED TO 1997
Income available for common stock for 1998 from Pentzer and other subsidiaries
was $11.1 million, which was a $1.0 million decrease from 1997 earnings.
Transactional gains decreased to $4.3 million in 1998 from $7.3 million in 1997,
while non-transactional earnings from Pentzer's portfolio companies increased
$2.2 million. The non-transactional earnings included an approximate $4.4
million after-tax loss in the fourth quarter at a Pentzer operating company due
to a business repositioning and an inventory adjustment.
Income from operations totaled $12.0 million, which was a $2.1 million increase
over 1997. Operating revenues and expenses increased $67.9 million and $65.8
million, respectively, primarily as a result of acquisitions and increased
business activity from several of Pentzer's portfolio companies.
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LIQUIDITY AND CAPITAL RESOURCES
AVISTA CORP. OVERALL OPERATIONS
Operating Activities Net cash provided by operating activities in 1999
decreased from 1998 due primarily to decreased net income in 1999 and the $143.4
million provided by the monetization of a contract in 1998 (see below and Note 1
of Notes to Financial Statements for additional information). The growth in
Avista Energy's operations resulted in the large changes in various working
capital components, such as receivables and payables.
Investing Activities Net cash used in investing activities decreased in 1999
from 1998 primarily due to the sales of portfolio companies by Pentzer in 1999.
Utility operations' capital expenditures, excluding Allowance for Funds Used
During Construction (AFUDC) and Allowance for Funds Used to Conserve Energy
(AFUCE, a carrying charge similar to AFUDC for conservation-related capital
expenditures), were $265 million for the 1997-1999 period.
Financing Activities Net cash used in financing activities totaled $116.8
million in 1999 compared to $108.7 million in 1998. In 1999, $110.5 million in
short-term notes payable were issued and $116.5 million of proceeds were
received from the issuance of long-term debt, including $25.0 million of
Medium-Term Notes (MTNs). These proceeds, plus cash provided from operating
activities, were used to retire $211.5 million of long-term debt and repurchase
$82.0 million of common stock and $5.9 million of preferred stock. In 1998,
$84.0 million of proceeds were received from the issuance of Medium-Term Notes.
These proceeds, plus cash provided from operating activities, were used to
retire $14.0 million of long-term debt, redeem $10 million of preferred stock
and pay down $108.5 million of short-term debt. During the 1997-1999 period,
$359 million of long-term debt and preferred stock matured, was mandatorily
redeemed or was optionally redeemed and refinanced at a lower cost.
In August 1998, the Company announced a dividend restructuring plan that reduced
the Company's annual common stock dividend from $1.24 per share to $0.48 per
share, a 61% reduction, which was effective with the payment of the common stock
dividend paid on December 15, 1998. At the same time, 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. Shareholders who chose not to participate in the exchange
offer retained their ownership in Avista Corp. common stock. The annual savings
resulting from the dividend restructuring were approximately $30 million for the
periods that the preferred stock was outstanding, increasing to about $42
million annually after the conversion of the preferred shares back to common
stock. The savings assisted in funding a portion of the Company's capital
expenditures, maturing long-term debt and preferred stock sinking fund
requirements. See Note 15 of Notes to Financial Statements for additional
information about the convertible preferred stock.
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 May 1999, the Company's Board of Directors authorized a common stock
repurchase program in which the Company may repurchase in the open market or
through privately negotiated transactions up to an aggregate of 10 percent of
its common stock and common stock equivalents over the next two years. The
repurchased shares will return to the status of authorized but unissued shares.
As of December 31, 1999, the Company had repurchased approximately 4.8 million
common shares and 322,500 shares of RECONS (which is equivalent to 32,250 shares
of Convertible Preferred Stock, Series L). The combined repurchases of these two
securities represent 9% of outstanding common stock and common stock
equivalents.
In September 1999, $83.7 million of Pollution Control Revenue Refunding Bonds
(Avista Corporation Colstrip Project), Series 1999A due 2032 and Series 1999B
due 2034 were issued by the City of Forsyth, Montana. The proceeds of the bonds
were utilized to refund the $66.7 million of 7 1/8% First Mortgage Bonds due
2013 and the $17.0 million of 7 2/5% First Mortgage Bonds due 2016. The Series
1999A and Series 1999B Bonds are backed by
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an insurance policy issued by AMBAC Assurance Corporation and bear interest on a
floating rate basis that is reset periodically. The initial interest rate until
February 2000 was 3.6% and is currently 3.75%.
In August 1999, the Company completed the documentation to issue $400 million of
MTNs, Series D. As of December 31, 1999, the Company had a total of $541.0
million of MTNs authorized to be issued.
The Company funds capital expenditures with a combination of
internally-generated cash and external financing. The level of cash generated
internally and the amount that is available for capital expenditures fluctuates
annually. Cash provided by operating activities remains the Company's primary
source of funds for operating needs, dividends and capital expenditures.
Capital expenditures are financed on an interim basis with notes payable. The
Company has $260 million in committed lines of credit. In addition, the Company
may currently borrow up to $100 million through other borrowing arrangements
with banks. As of December 31, 1999, $75.0 million was outstanding under the
committed lines of credit and $33.5 million was outstanding under other
short-term borrowing arrangements.
In October 1999, the Company implemented a $50.0 million commercial paper
program. As of December 31, 1999, $10.0 million of commercial paper was
outstanding.
From time to time the Company enters into sale/leaseback arrangements for
various long-term assets which provide additional sources of funds. See Note 13
of Notes to Financial Statements for additional information about leases.
The Company is restricted under various agreements as to the additional
securities it can issue. As of December 31, 1999, under its Restated Articles of
Incorporation, approximately $215.0 million of additional preferred stock could
be issued at an assumed dividend rate of 6.95%.
During 1998, the Company entered into an agreement that increased the amount of
customer accounts receivable the Company could sell from $40 million to $80
million to provide additional funds for capital expenditures, maturing long-term
debt and preferred stock sinking fund requirements. At December 31, 1999, $45.0
million in receivables had been sold pursuant to the agreement.
AVISTA UTILITIES OPERATIONS
In December 1998, Avista Utilities assigned and transferred certain rights under
a long-term power sales contract to a funding trust. In return, Avista Utilities
received approximately $143.4 million, representing the present value of the
cash flows for the majority of the remaining payments due under the long-term
sales contract, which were utilized to repay short-term bank borrowings and
other debt.
During the 2000-2002 period, utility capital expenditures are expected to be
$320 million, and $137 million will be required for long-term debt maturities
and preferred stock sinking fund requirements. During this three-year period,
the Company estimates that internally generated funds will provide all of the
funds needed for its capital expenditure program. External financing will be
required to fund a portion of maturing long-term debt and preferred stock
sinking fund requirements. Sources of funds would include, but are not
necessarily limited to, cash flows from the reduction in the Company's common
stock dividend, sales of certain assets, additional long-term debt, leasing or
issuance of other equity securities. These estimates of capital expenditures are
subject to continuing review and adjustment. Actual capital expenditures may
vary from these estimates due to factors such as changes in business conditions,
construction schedules and environmental requirements.
See Notes 3, 11, 12, 13, 14, 15, 16, 17 and 18 of Notes to Financial Statements
for additional details related to financing activities.
ENERGY TRADING AND MARKETING OPERATIONS
During 1999, the Company invested $40.0 million in the common equity of Avista
Capital. Avista Capital utilized the majority of the proceeds from this
investment to fund Avista Energy's operations. Avista Capital's total investment
in this line of business totaled $86.0 million at December 31, 1999. Avista
Energy funds its ongoing operations with a combination of internally generated
cash and a bank line of credit.
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Avista Energy and its subsidiary, Avista Energy Canada, Ltd., as co-borrowers,
have a credit agreement with two commercial banks in the aggregate amount of
$110 million, expiring May 31, 2000. The credit agreement may be terminated by
the banks at any time and all extensions of credit under the agreement are
payable upon demand, in either case at the banks' sole discretion. The agreement
also provides, on an uncommitted basis, for the issuance of letters of credit to
secure contractual obligations to counterparties. The facility is guaranteed by
Avista Capital and is secured by substantially all of Avista Energy's assets.
The maximum amount of credit extended by the banks for cash advances is $30
million, with availability of up to $110 million (less the amount of outstanding
cash advances, if any) for the issuance of letters of credit. At December 31,
1999 and 1998, there were no cash advances (demand notes payable) outstanding.
Letters of credit outstanding under the facility totaled approximately $75.8
million and $20.2 million at December 31, 1999 and 1998, respectively.
Capital expenditures for the Energy Trading and Marketing companies were $9.3
million for the 1997-1999 period. The 2000-2002 capital expenditures are
expected to be $293.9 million, and $0.3 million in debt maturities will also
occur. The large capital requirement projections are primarily for the
development and/or ownership of generation assets. The companies expect to seek
outside funding through partnerships or other arrangements to support these
capital requirements.
At December 31, 1999, the Energy Trading and Marketing companies had $37.2
million in cash and cash equivalents and $1.5 million in long-term debt
outstanding.
INFORMATION AND TECHNOLOGY OPERATIONS
Capital expenditures for the Information and Technology companies were $21.7
million for the 1997-1999 period. The 2000-2002 capital expenditures are
expected to be $74.9 million. These companies expect to seek outside funding
through partnerships or other arrangements to support these capital
requirements.
At December 31, 1999, the Information and Technology companies had $5.3 million
in cash and marketable securities with $3.5 million in long-term debt
outstanding.
In early 1999, Avista Labs announced the receipt of a $2 million technology
development award from the Department of Commerce's National Institute of
Standards and Technology Advanced Technology Program. The Company will
contribute another $1.22 million over a two-year period. Avista Labs is working
on technology that will increase the energy density of its fuel cell design and
develop multiple fuel processing approaches using propane, methane and methanol
as base fuels to integrate into its fuel cell subsystem.
PENTZER AND OTHER OPERATIONS
Capital expenditures for these companies were $24.4 million for the 1997-1999
period. During this period, $46.7 million of debt was repaid and capital
expenditures were partially financed by the $55.8 million in proceeds from new
long-term debt. The 2000-2002 capital expenditures are expected to be $1.9
million, and $5.9 million in debt maturities will also occur. During the next
three years, internally generated cash and other debt obligations are expected
to provide the majority of the funds for these capital expenditure requirements.
The decrease in these projected capital expenditures is primarily related to the
change in Pentzer's focus beginning in 2000.
The operations have $27.5 million in short-term borrowing arrangements ($2.5
million outstanding as of December 31, 1999) to fund corporate requirements on
an interim basis. At December 31, 1999, these companies had $8.7 million in cash
and marketable securities with $4.9 million in long-term debt outstanding.
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TOTAL COMPANY CASH REQUIREMENTS
(Millions of Dollars)
Actual Projected
------------------------ ------------------------
1997 1998 1999 2000 2001 2002
---- ---- ---- ---- ---- ----
Avista Utilities operations:
Capital expenditures(1) $ 87 $ 92 $ 86 $116 $103 $101
Debt and preferred stock maturities(2) 121 24 214 45 40 52
---- ---- ---- ---- ---- ----
Total Avista Utilities 208 116 300 161 143 153
---- ---- ---- ---- ---- ----
Avista Capital operations:
Capital expenditures(3) 12 14 29 71 165 135
Investments 59 53 51 -- 41 33
Debt maturities 12 18 3 4 1 1
---- ---- ---- ---- ---- ----
Total Avista Capital 83 85 83 75 207 169
---- ---- ---- ---- ---- ----
Total Company $291 $201 $383 $236 $350 $322
==== ==== ==== ==== ==== ====
(1) Capital expenditures exclude AFUDC and AFUCE.
(2) Excludes notes payable (due within one year).
(3) Represents Avista Capital's portion of projected joint projects. Some
projected capital expenditures may depend on the availability of additional
funding from other outside sources.
The Company's total common equity decreased $94.5 million to $393.5 million at
the end of 1999. The decrease was primarily due to the common stock repurchase
program and payment of dividends in excess of net income. The Company's
consolidated capital structure at December 31, 1999, was 47% debt, 27% preferred
securities (including the Preferred Trust Securities) and 26% common equity as
compared to 45% debt, 25% preferred securities (including the Preferred Trust
Securities) and 30% common equity at year-end 1998. Had the convertible
preferred stock been converted back to common stock, the Company's consolidated
capital structure at December 31, 1999, would have been 47% debt, 10% preferred
securities (including the Preferred Trust Securities) and 43% common equity as
compared to 45% debt, 9% preferred securities (including the Preferred Trust
Securities) and 46% common equity at year-end 1998.
ADDITIONAL FINANCIAL DATA
At December 31, 1999, the total long-term debt of the Company and its
consolidated subsidiaries, as shown in the Company's consolidated financial
statements, was approximately $718.2 million. Of such amount, $236.0 million
represents long-term unsecured and unsubordinated indebtedness of the Company,
and $351.2 million represents secured indebtedness of the Company. The balance
of $131.0 million includes short-term notes to be refinanced as well as
indebtedness of the subsidiaries. Consolidated long-term debt does not include
the Company's subordinated indebtedness held by the issuers of Company-obligated
preferred trust securities.
FUTURE OUTLOOK
Business Strategy
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 seeks to maintain a strong, low-cost utility business as well as to
focus on growing Avista Advantage, Avista Labs and Avista Communications. The
Company intends to continue investing in the development of these growth
subsidiaries while continuing to search for opportunities to grow its utility
business and increase its asset and customer base. Key strengths of the Company
include its position as a leading e-commerce portal for energy/facility
management and patented web-based programming, a developer of innovative fuel
cell technology, and a regional provider of telecommunications and fiber optics
services, as well as being one of the lowest cost producers of power in the
nation.
Locally. Part of the Company's strategy for 1999 was to expand the utility
service territory through acquisitions, but the lack of economically feasible
acquisition opportunities and the uncertainty of favorable state commission
approvals led to a change in strategies. The Company decided to concentrate on
other growth avenues, such as the
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information and technology businesses, to generate shareholder value. However,
the Company will selectively add to its already strong foundation of
state-regulated utility assets, solidifying its position as a leading supplier
of low-cost electric and natural gas energy services, if the right opportunities
arise. The Company will also continue to grow its rate base through customer
growth and capital expenditures.
Regionally. The Company plans to concentrate on growing its telecommunications
and fiber optic business as part of its overall strategic focus on generating
shareholder value. In addition, the Company plans to add to its regulated and
non-regulated energy-related assets on a regional basis as the industry
consolidates to further optimize its assets and create greater economies of
scale. The growth is expected to be driven by the Company's significant base of
knowledge and experience in the operation of physical systems - for both
electric energy and natural gas - in the region, as well as its
relationship-focused approach to the customer.
Nationally. The Company will seek to expand its customer base through the growth
of Avista Advantage, with its Internet-based specialty billing and information
services, and Avista Labs, with its innovative fuel cell technologies, as part
of its overall strategic focus on generating shareholder value.
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.
In 1999, the Company conducted the majority of its non-energy business through
Pentzer, its wholly owned subsidiary. Pentzer's business strategy was to acquire
controlling interests in a broad range of middle market companies, facilitate
improved productivity and growth, and ultimately sell such companies to the
public or a strategic buyer. Beginning in 2000, Pentzer's business strategy is
to invest in companies that are positioned to be leaders in emerging technology
and information businesses that are linked to the energy business. The
investments will be directly in businesses that meet these criteria, and
indirectly, through the strategic investment in certain venture capital firms
that invest in similar business segments and where Pentzer has the opportunity
to directly invest in specific portfolio companies. Pentzer's goal is to produce
strategic growth opportunities and financial returns for the Company's
shareholders that, over the long-term, should be higher than that of the utility
operations.
General Competition and Business Risk
Avista Utilities continues to compete for new retail electric customers with
various rural electric cooperatives and public utility districts in and adjacent
to its service territories. Challenges facing the retail electric business
include evolving technologies that provide alternate energy supplies, the cost
of the energy supplied, the potential for retail wheeling, self-generation and
fuel switching by commercial and industrial customers and increasingly stringent
environmental laws. When electric utility companies are required to provide
retail wheeling service, Avista Utilities believes it will be in a position to
benefit since it is committed to remaining one of the country's lowest-cost
providers of electric energy. Consequently, Avista Utilities believes it faces
minimal risk for stranded generation, transmission or distribution assets due to
its low cost structure. Avista Utilities' need for new future electric resources
to serve retail loads is expected to remain very minimal.
Natural gas remains competitively priced compared to other alternative fuel
sources for residential, commercial and industrial customers and is projected to
remain so into the future due to abundant supplies and competition. Challenges
facing Avista Utilities' retail natural gas business include the potential for
customers to by-pass its natural gas system. To reduce the potential for such
by-pass, Avista Utilities prices its natural gas services, including
transportation contracts, competitively and has varying degrees of flexibility
to price its transportation and delivery rates by means of special contracts.
Avista Utilities has long-term transportation contracts with seven of its
largest industrial customers, which reduces the risks of these customers
by-passing the system in the foreseeable future.
Avista Utilities and Avista Energy continue to compete in the electric wholesale
market with other utilities, federal marketing agencies and power marketers. It
is expected that competition to sell capacity will remain vigorous, and that
prices will remain depressed for at least the next several years, due to
increased competition and surplus capacity in the western United States.
Competition related to the sale of capacity and energy is influenced by many
factors, including the availability of capacity in the western U.S., the
availability and prices of natural gas and oil, spot energy prices and
transmission access. Business challenges affecting the Avista Utilities and
Energy Trading and Marketing lines of business include competition from low-cost
generation being developed by independent power producers,
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declining margins due to a greater reliance on short-term sales, evolving
technologies that provide alternate energy supplies and deregulation of electric
and natural gas markets.
The Company's energy-related businesses are exposed to risks, including risks
relating to changes in certain commodity prices and counterparty performance. In
order to manage the various risks relating to these exposures, the Company
utilizes electric, natural gas and related commodity derivatives, and has
established risk management oversight for these risks for each area of the
Company's energy-related business. The Company has implemented procedures to
manage such risk and has established a comprehensive Risk Management Committee,
separate from the units that create such 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.
The Avista Capital subsidiaries are also subject to competition and business
risks, among other risks, as they evolve more fully, particularly the
Information and Technology companies. Competition from other companies in these
emerging industries may mean challenges for a company to be the first to market
a new product or service to gain the advantage in market share. In order to grow
these new businesses as planned, one significant challenge will be the
availability of funding and resources to meet the capital needs. Other
challenges will be rapidly advancing technologies, possibly making some of the
current technology quickly obsolete, and requiring continual research and
development for product advancement. In order for some of these subsidiaries to
succeed, they will need to reduce costs of these emerging technologies to make
them affordable to future customers.
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
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 $230.1 million at December 31, 1999.
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.
The forward-looking information presented below provides only estimates of what
may occur in the future, assuming certain adverse market conditions, due to
reliance on model assumptions. As a result, actual future results may differ
materially from those presented. These disclosures are not indicators of
expected future losses, but only indicators of reasonably possible losses.
Interest Rate Risk The Company is subject to the risk of fluctuating interest
rates in the normal course of business. The fair value of the Company's cash and
short-term investment portfolio and the fair value of notes payable at December
31, 1999 approximated carrying value. Given the short-term nature of these
instruments, market risk, as measured by the change in fair value resulting from
a hypothetical change in interest rates, is immaterial.
The Company manages interest rate risk by taking advantage of market conditions
when timing the issuance of long-term financings and optional debt redemptions
and through the use of fixed rate long-term debt with varying maturities. A
portion of the Company's capitalization consists of floating rate Pollution
Control Bonds, of which the interest rate resets periodically, and
Company-Obligated Mandatorily Redeemable Preferred Trust Securities, of which
the interest portion of the $50 million Series B resets on a quarterly basis,
both reflecting current market conditions. As of December 31, 1999, a
hypothetical 15% change in interest rates would result in an immaterial change
in the Company's cash flows related to the increased interest expense associated
with these floating rate securities.
Commodity Price Risk Avista Utilities and Avista Energy are exposed to market
fluctuations in the price and transportation costs of electric and natural gas
commodities and, therefore, utilize derivative commodity instruments to hedge
the impact of these fluctuations on their energy-related assets, liabilities,
and other contractual arrangements. In addition, Avista Energy trades these
instruments to take advantage of market opportunities. At times this may create
a net open position in its portfolio that could result in material losses if
prices do not move in the manner or direction anticipated. The Company and
Avista Energy's risk management program and policies are designed to manage the
risks associated with market fluctuations in the price of electricity and
natural gas commodities (see Note 4 of Notes to Financial Statements for
additional information).
Avista Energy measures the risk in its derivative commodity portfolio on a daily
basis utilizing a Value-at-Risk (VAR) model and monitors its risk in comparison
to established thresholds. VAR measures the worst expected loss
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over a given time interval under normal market conditions at a given confidence
level. Avista Utilities and Avista Energy also use other measures to monitor the
risk in their derivative commodity portfolios on a monthly, quarterly and annual
basis.
The VAR computations are based on an historical simulation, which utilizes price
movements over a specified period to simulate forward price curves in the energy
markets to estimate the unfavorable impact of one-day's price movement in the
existing portfolio. The quantification of market risk using VAR provides a
consistent measure of risk across diverse energy markets and products. VAR
represents an estimate of reasonably possible net losses in earnings that would
be recognized on its portfolio assuming hypothetical movements in future market
rates and is not necessarily indicative of actual results that may occur.
Avista Energy's VAR computations utilize several key assumptions, including a
95% confidence level for the resultant price movement and a one-day holding
period. The calculation includes derivative commodity instruments held for
trading purposes and excludes the effects of written and embedded physical
options in the trading portfolio.
At December 31, 1999, Avista Energy's estimated potential one-day unfavorable
impact on gross margin was $1.1 million, as measured by VAR, related to its
commodity trading and marketing business, compared to $3.3 million at December
31, 1998. The average daily VAR for 1999 was $3.7 million, compared to $3.0
million in 1998. After Avista Energy's restructuring is complete, the average
daily VAR is expected to be less than $1.0 million. Changes in markets
inconsistent with historical trends or assumptions used could cause actual
results to exceed predicted limits. Market risks associated with derivative
commodity instruments held for purposes other than trading were not material at
December 31, 1999.
In addition to commodity price risk, Avista Utilities' commodity positions are
also subject to operational and event risks including, among others, increases
in load demand, transmission or transport disruptions, fuel quality
specifications and forced outages at generating plants.
Foreign Currency Risk The Company has investments in several Canadian companies
through Avista Energy Canada, Ltd. and its acquisition of Coast Pacific
Management, Inc. (see Note 23 for additional information about this
acquisition). The Company's exposure to foreign currency risk and other foreign
operations risk was immaterial to the Company's consolidated results of
operations and financial position in 1999 and is not expected to change
materially in the near future.
Economic and Load Growth
Avista Utilities expects economic growth to continue in its eastern Washington
and northern Idaho service area. Avista Utilities, along with others in the
service area, is continuing its efforts to facilitate expansion of existing
businesses and attract new businesses to the Inland Northwest. Although
agriculture, mining and lumber were the primary industries for many years, today
health care, education, electronic and other manufacturing, tourism and the
service sectors are becoming increasingly important industries that operate in
Avista Utilities' service area. Avista Utilities also anticipates moderate
economic growth to continue in its Oregon service area.
Avista Utilities anticipates residential and commercial electric load growth to
average approximately 2.8% annually for the next five years primarily due to
increases in both population and the number of businesses in its service
territory. The number of electric customers is expected to increase and the
average annual usage by residential customers is expected to remain steady on a
weather-adjusted basis. A Public Utility Regulatory Policies Act of 1978 (PURPA)
contract with Avista Utilities' largest customer expires in 2002. The customer
is expected to self-generate at that time, which will reduce the load to this
customer by the amount Avista Utilities has been purchasing and then reselling
to them. Although it will have no material impact on loads, it will reduce
Avista Utilities' costs since the PURPA contract is at above-market prices.
Avista Utilities anticipates natural gas load growth, including transportation
volumes, in its Washington and Idaho service area to average approximately 2.4%
annually for the next five years. The Oregon and South Lake Tahoe, California
service areas are anticipated to realize 3.6% growth annually during that same
period. The anticipated natural gas load growth is primarily due to expected
conversions from electric space and water heating to natural gas, and increases
in both population and the number of businesses in its service territory.
The forward-looking projections set forth above regarding retail sales growth
are based, in part, upon purchased baseline economic forecasts and publicly
available population and demographic studies. The expectations regarding retail
sales growth are also based upon various assumptions including, without
limitation, assumptions relating to
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AVISTA CORPORATION
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weather and economic and competitive conditions, internal analysis of
company-specific data, such as energy consumption patterns and internal business
plans, and an assumption that Avista Utilities will incur no material loss of
retail customers due to self-generation or retail wheeling. Changes in the
underlying assumptions can cause actual experience to vary significantly from
forward-looking projections.
Environmental Issues
Since December 1991, a number of species of fish in the Northwest, including the
Snake River sockeye salmon and fall chinook salmon, the Kootenai River white
sturgeon, the upper Columbia River steelhead, the upper Columbia River spring
chinook salmon and the bull trout have been listed as threatened or endangered
under the Federal Endangered Species Act (ESA). Thus far, measures which have
been adopted and implemented to save the Snake River sockeye salmon and fall
chinook salmon have not directly impacted generation levels at any of the
Company's hydroelectric dams. The Company does, however, purchase power from
four projects on the Columbia River that are being directly impacted by ongoing
mitigation measures for salmon and steelhead. The reduction in generation at
these projects is relatively minor, resulting in minimal economic impact on the
Company at this time. It is currently not possible to accurately predict the
likely economic costs to the Company resulting from all future actions.
The Company received a new FERC operating license for the Cabinet Gorge and
Noxon Rapids hydroelectric projects on February 23, 2000. The restoration of
native salmonid fish, in particular bull trout, is a principal focus for the
Company with the new license. Bull trout are native to this area and a
"threatened" listing for bull trout occurred in 1998 under the ESA. The Company,
as directed by the Clark Fork Projects' Settlement Agreement, is working closely
with the U.S. Fish and Wildlife Service, Native American tribes and the states
of Idaho and Montana to institute coordinated recovery measures on the lower
Clark Fork River. The new FERC license establishes a plan for bull trout
restoration, including annual budget estimates.
The Company continues to study the issue of high dissolved gas levels downstream
of Cabinet Gorge during spill periods, as agreed to in the Settlement Agreement
for relicensing of Cabinet Gorge. To date, intensive biological studies in the
lower Clark Fork River and Lake Pend Oreille have documented minimal biological
effects of high dissolved gas levels on free ranging fish. Under the terms of
the Settlement Agreement, the Company will develop an abatement and/or
mitigation strategy by 2002.
See Note 22 of Notes to Financial Statements for additional information.
Year 2000
Since 1997 the Company worked on a comprehensive program to address areas of
risk associated with the Year 2000. The Year 2000 project was organized around
project activity teams that were formed to identify, test and fix systems and
programs that might be affected by the rollover into the Year 2000. The Company
experienced no Year 2000-related disruptions in its systems used to deliver
electricity and natural gas commodities and services to customers, or in any of
its other desktop or business systems. Through December 31, 1999, the Company
spent $6.0 million in incremental costs for its Year 2000 project, which were
funded through operating cashflows.
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OTHER
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 (Tribe) 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 the Coeur d' Alene Lake. 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 storage rights on the reservoir and
operation of the Company's hydroelectric facilities on the Spokane River,
downstream of the Coeur d' Alene Lake, which is the reservoir for these plants.
The Board of Directors considers the level of dividends on the Company's common
stock on a continuing basis, taking into account numerous factors including,
without limitation, the Company's results of operations and financial condition,
as well as general economic and competitive conditions. The Company's net income
available for dividends is derived from its retail electric and natural gas
utility operations.
SAFE HARBOR FOR FORWARD-LOOKING STATEMENTS
The Company is including the following cautionary statement in this Form 10-K 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
include statements concerning plans, objectives, goals, strategies, projections
of future events or performance, and underlying assumptions (many of which are
based, in turn, upon further assumptions) and are all statements which are 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. From time to time, the
Company may publish or otherwise make available forward-looking statements of
this nature. All such subsequent forward-looking statements, whether written or
oral and whether made by or on behalf of the Company, are also expressly
qualified by these cautionary statements.
Forward-looking statements involve risks and uncertainties which could cause
actual results or outcomes to differ materially from those expressed. The
Company's expectations, beliefs and projections are expressed in good faith and
are believed by the Company to have a reasonable basis, including without
limitation management's examination of historical operating trends, data
contained in the Company's records and other data available from third parties,
but there can be no assurance that the Company's expectations, beliefs or
projections will be achieved or accomplished. Furthermore, any forward-looking
statement speaks only as of the date on which such statement is made, and the
Company undertakes no obligation to update any forward-looking statement or
statements to reflect events or circumstances that occur after the date on which
such statement is made or to reflect the occurrence of unanticipated events. New
factors emerge from time to time, and it is not possible for management to
predict all of such factors, nor can it assess the impact of each such factor on
the Company's business or the extent to which any such factor, or
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combination of factors, may cause actual results to differ materially from those
contained in any forward-looking statement.
Avista Utilities' Operations -
In addition to other factors and matters discussed elsewhere herein, some
important factors that could cause actual results or outcomes for Avista
Utilities' operations to differ materially from those discussed in
forward-looking statements include prevailing legislative developments,
governmental policies and regulatory actions with respect to allowed rates of
return, financings, or industry and rate structures, weather conditions,
wholesale and retail competition (including but not limited to electric retail
wheeling and transmission cost), availability of economic supplies of natural
gas, present or prospective natural gas distribution or transmission competition
(including but not limited to prices of alternative fuels and system
deliverability costs), recovery of purchased power and purchased gas costs,
present or prospective generation, operations and construction of plant
facilities, and acquisition and disposal of assets or facilities.
Energy Trading and Marketing Operations -
In addition to other factors and matters discussed elsewhere herein, some
important factors that could cause actual results or outcomes for the Energy
Trading and Marketing operations to differ materially from those discussed in
forward-looking statements include further industry restructuring evolving from
federal and/or state legislation, regulatory actions by state utility
commissions, demand for and availability of energy throughout the country,
wholesale competition, availability of economic supplies of natural gas, margins
on purchased power, changes in market factors, the formation of additional
alliances or entities, the availability of economically feasible generating
projects and the availability of funding for new generating assets.
Information, Technology, Pentzer and Others' Operations -
Certain additional important factors which could cause actual results or
outcomes for the remaining subsidiaries' operations to differ materially from
those discussed in forward-looking statements include competition from other
companies and other technologies, obsolescence of technologies, the ability or
inability to reduce costs of the technologies down to economic levels, the
ability to obtain new customers and retain old ones, reliability of customer
orders, business acquisitions, disposal of assets, the availability of funding
from other sources, research and development findings and the availability of
economic expansion or development opportunities.
Factors Common to All Operations -
The business and profitability of the Company are also influenced by, among
other things, economic risks, changes in and compliance with environmental and
safety laws and policies, weather conditions, population growth rates and
demographic patterns, market demand for energy from plants or facilities,
changes in tax rates or policies, unanticipated project delays or changes in
project costs, unanticipated changes in operating expenses or capital
expenditures, labor negotiation or disputes, changes in credit ratings or
capital market conditions, inflation rates, inability of the various
counterparties to meet their obligations with respect to the Company's financial
instruments, changes in accounting principles and/or the application of such
principles to the Company, changes in technology and legal proceedings.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
See "Management's Discussion and Analysis of Results and Operations: Future
Outlook: General Competition and Business Risk, Energy Trading Business, and
Risk Management."
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Independent Auditor's Report and Financial Statements begin on the next
page.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
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INDEPENDENT AUDITORS' REPORT
Avista Corporation
Spokane, Washington
We have audited the accompanying consolidated balance sheets and statements of
capitalization of Avista Corporation and subsidiaries (the Company) as of
December 31, 1999 and 1998, and the related consolidated statements of income,
comprehensive income and retained earnings, and cash flows, which include the
schedule of information by business segments for each of the three years in the
period ended December 31, 1999. These financial statements and schedules are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of the Company at December 31, 1999
and 1998, and the results of its operations and its cash flows for each of the
three years in the period ended December 31, 1999, in conformity with generally
accepted accounting principles
/s/ Deloitte & Touche LLP
Deloitte & Touche LLP
Seattle, Washington
February 4, 2000 (February 16, 2000 as to Note 15)
40
45
CONSOLIDATED STATEMENTS OF INCOME, COMPREHENSIVE INCOME AND RETAINED EARNINGS
Avista Corporation
- --------------------------------------------------------------------------------
For the Years Ended December 31
Thousands of Dollars
1999 1998 1997
----------- ----------- -----------
OPERATING REVENUES .................................................... $ 7,904,984 $ 3,683,984 $ 1,302,172
----------- ----------- -----------
OPERATING EXPENSES:
Resource costs ................................................... 7,417,940 3,021,046 717,732
Operations and maintenance ....................................... 155,176 229,620 178,526
Administrative and general ....................................... 127,958 129,771 96,611
Depreciation and amortization .................................... 76,474 70,547 69,893
Taxes other than income taxes .................................... 53,157 60,180 49,946
Asset impairment and restructuring charges ....................... 42,922 -- --
----------- ----------- -----------
Total operating expenses ...................................... 7,873,627 3,511,164 1,112,708
----------- ----------- -----------
INCOME FROM OPERATIONS ................................................ 31,357 172,820 189,464
----------- ----------- -----------
OTHER INCOME (EXPENSE):
Interest expense ................................................. (65,076) (69,077) (66,275)
Interest on income tax recovery .................................. -- -- 47,338
Net gain on subsidiary transactions .............................. 57,531 7,937 11,218
Other income (deductions)-net .................................... 18,959 9,794 (5,873)
----------- ----------- -----------
Total other income (expense)-net .............................. 11,414 (51,346) (13,592)
----------- ----------- -----------
INCOME BEFORE INCOME TAXES ............................................ 42,771 121,474 175,872
INCOME TAXES .......................................................... 16,740 43,335 61,075
----------- ----------- -----------
NET INCOME ............................................................ 26,031 78,139 114,797
DEDUCT-Preferred stock dividend requirements .......................... 21,392 8,399 5,392
----------- ----------- -----------
INCOME AVAILABLE FOR COMMON STOCK ..................................... $ 4,639 $ 69,740 $ 109,405
=========== =========== ===========
Average common shares outstanding, basic (thousands) ................. 38,213 54,604 55,960
EARNINGS PER SHARE OF COMMON STOCK, BASIC AND DILUTED(Note 19) ........ $ 0.12 $ 1.28 $ 1.96
Dividends paid per common share ....................................... $ 0.48 $ 1.05 $ 1.24
NET INCOME ............................................................ $ 26,031 $ 78,139 $ 114,797
----------- ----------- -----------
OTHER COMPREHENSIVE INCOME, NET OF TAX:
Foreign currency translation adjustment .......................... 376 (366) --
Unrealized investment losses-net of reclassification adjustment .. (201) (2,052) (3,627)
----------- ----------- -----------
OTHER COMPREHENSIVE INCOME (LOSS) ..................................... 175 (2,418) (3,627)
----------- ----------- -----------
COMPREHENSIVE INCOME .................................................. $ 26,206 $ 75,721 $ 111,170
=========== =========== ===========
RETAINED EARNINGS, JANUARY 1 .......................................... $ 120,445 $ 171,776 $ 131,301
NET INCOME ............................................................ 26,031 78,139 114,797
DIVIDENDS DECLARED:
Preferred stock .................................................. (21,402) (7,639) (5,339)
Common stock ..................................................... (18,301) (56,898) (69,390)
Transfer to Preferred Stock, Series L ................................. -- (64,844) --
Stock repurchase ...................................................... (19,315) -- --
Restricted stock ...................................................... (84) (419) --
ESOP dividend tax savings ............................................. 147 330 407
----------- ----------- -----------
RETAINED EARNINGS, DECEMBER 31 ........................................ $ 87,521 $ 120,445 $ 171,776
=========== =========== ===========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
41
46
CONSOLIDATED BALANCE SHEETS
Avista Corporation
- --------------------------------------------------------------------------------
At December 31
Thousands of Dollars
1999 1998
---------- ----------
ASSETS:
CURRENT ASSETS:
Cash and cash equivalents .................................. $ 40,041 $ 72,836
Temporary cash investments ................................. 7,490 5,786
Accounts and notes receivable-net .......................... 530,774 456,857
Energy commodity assets .................................... 585,913 335,224
Materials and supplies, fuel stock and natural gas stored .. 28,352 42,140
Prepayments and other ...................................... 21,499 55,753
---------- ----------
Total current assets .................................... 1,214,069 968,596
---------- ----------
UTILITY PROPERTY:
Utility plant in service-net ............................... 2,184,698 2,095,301
Construction work in progress .............................. 30,912 45,391
---------- ----------
Total ................................................... 2,215,610 2,140,692
Less: Accumulated depreciation and amortization ........... 714,773 669,750
---------- ----------
Net utility plant ....................................... 1,500,837 1,470,942
---------- ----------
OTHER PROPERTY AND INVESTMENTS:
Investment in exchange power-net ........................... 54,123 62,577
Non-utility properties and investments-net ................. 137,213 206,773
Energy commodity assets .................................... 491,799 236,644
Other-net .................................................. 31,051 26,016
---------- ----------
Total other property and investments .................... 714,186 532,010
---------- ----------
DEFERRED CHARGES:
Regulatory assets for deferred income tax .................. 166,456 171,037
Conservation programs ...................................... 44,444 49,114
Unamortized debt expense ................................... 31,122 28,414
Other-net .................................................. 42,380 33,523
---------- ----------
Total deferred charges .................................. 284,402 282,088
---------- ----------
TOTAL ................................................ $3,713,494 $3,253,636
========== ==========
LIABILITIES AND CAPITALIZATION:
CURRENT LIABILITIES:
Accounts payable ........................................... $ 522,478 $ 406,457
Energy commodity liabilities ............................... 594,065 330,957
Taxes and interest accrued ................................. 35,123 38,628
Other ...................................................... 35,313 88,151
---------- ----------
Total current liabilities ............................... 1,186,979 864,193
---------- ----------
NON-CURRENT LIABILITIES AND DEFERRED CREDITS:
Non-current liabilities .................................... 44,067 34,815
Deferred revenue (Note 1) .................................. 132,975 145,124
Energy commodity liabilities ............................... 441,372 207,948
Deferred income taxes ...................................... 377,049 357,702
Other deferred credits ..................................... 11,041 11,571
---------- ----------
Total non-current liabilities and deferred credits ...... 1,006,504 757,160
---------- ----------
CAPITALIZATION (See Consolidated Statements of Capitalization) .. 1,520,011 1,632,283
---------- ----------
COMMITMENTS AND CONTINGENCIES (Notes 10, 13 and 22)
TOTAL ................................................ $3,713,494 $3,253,636
========== ==========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
42
47
CONSOLIDATED STATEMENTS OF CAPITALIZATION
Avista Corporation
- --------------------------------------------------------------------------------
At December 31
Thousands of Dollars
1999 1998
----------- -----------
LONG-TERM DEBT:
First Mortgage Bonds:
Secured Medium-Term Notes:
Series A - 6.13% to 7.90% due 2000 through 2023 ................................ $ 139,400 $ 211,500
Series B - 6.20% to 8.20% due 2000 through 2010 ................................ 124,000 150,000
7 1/8% due December 1, 2013 ....................................................... -- 66,700
7 2/5% due December 1, 2016 ....................................................... -- 17,000
----------- -----------
Total first mortgage bonds ..................................................... 263,400 445,200
----------- -----------
Pollution Control Bonds:
Floating Rate, Colstrip 1999A, due 2032 ........................................... 66,700 --
Floating Rate, Colstrip 1999B, due 2034 ........................................... 17,000 --
6% Series due 2023 ................................................................ 4,100 4,100
----------- -----------
Total pollution control bonds .................................................. 87,800 4,100
----------- -----------
Unsecured Medium-Term Notes:
Series A - 7.94% to 9.57% due 2001 through 2007 ................................... 31,000 38,500
Series B - 6.75% to 8.23% due 2001 through 2023 ................................... 96,000 115,000
Series C - 5.99% to 8.02% due 2007 through 2028 ................................... 109,000 84,000
----------- -----------
Total unsecured medium-term notes .............................................. 236,000 237,500
----------- -----------
Notes payable (due within one year) to be refinanced ................................. 118,500 --
Other ................................................................................ 12,503 43,222
----------- -----------
Total long-term debt .............................................................. 718,203 730,022
----------- -----------
COMPANY-OBLIGATED MANDATORILY REDEEMABLE
PREFERRED TRUST SECURITIES:
7 7/8%, Series A, due 2037 ........................................................ 60,000 60,000
Floating Rate, Series B, due 2037 ................................................. 50,000 50,000
----------- -----------
Total company-obligated mandatorily redeemable preferred trust securities ...... 110,000 110,000
----------- -----------
PREFERRED STOCK-CUMULATIVE:
10,000,000 shares authorized:
Subject to mandatory redemption:
$6.95 Series K; 350,000 shares outstanding ($100 stated value) .................... 35,000 35,000
----------- -----------
Total subject to mandatory redemption .......................................... 35,000 35,000
----------- -----------
CONVERTIBLE PREFERRED STOCK:
Not subject to mandatory redemption:
$12.40 Convertible Series L; 1,508,210 and 1,540,460 shares outstanding ($182.80
stated value) .................................................................. 263,309 269,227
----------- -----------
Total convertible preferred stock .............................................. 263,309 269,227
----------- -----------
COMMON EQUITY:
Common stock, no par value; 200,000,000 shares authorized;
35,648,239 and 40,453,729 shares outstanding ...................................... 318,731 381,401
Note receivable from employee stock ownership plan ................................... (8,240) (9,295)
Capital stock expense and other paid in capital ...................................... (4,347) (4,176)
Other comprehensive income ........................................................... (166) (341)
Retained earnings .................................................................... 87,521 120,445
----------- -----------
Total common equity ............................................................... 393,499 488,034
----------- -----------
TOTAL CAPITALIZATION ...................................................................... $ 1,520,011 $ 1,632,283
=========== ===========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
43
48
CONSOLIDATED STATEMENTS OF CASH FLOWS
Increase (Decrease) in Cash and Cash Equivalents
Avista Corporation
- --------------------------------------------------------------------------------
For the Years Ended December 31
Thousands of Dollars
1999 1998 1997
--------- --------- ---------
OPERATING ACTIVITIES:
Net income ......................................................... $ 26,031 $ 78,139 $ 114,797
NON-CASH ITEMS INCLUDED IN NET INCOME:
Depreciation and amortization ...................................... 76,474 70,547 69,893
Provision for deferred income taxes ................................ (1,085) 10,402 37,122
Allowance for equity funds used during construction ................ (1,040) (1,283) (1,323)
Power and natural gas cost deferrals and amortizations ............. (14,906) (3,512) (16,470)
Gain on sale of subsidiary investments and other-net ............... (32,278) (6,313) (389)
Impairment of assets ............................................... (33,622) -- --
(Increase) decrease in working capital components:
Sale of customer accounts receivable-net ........................ 20,000 (15,000) --
Receivables and prepaid expense ................................. (140,348) (246,873) (39,733)
Materials & supplies, fuel stock and natural gas stored ......... 497 9,524 (8,050)
Payables and other accrued liabilities .......................... 164,908 246,208 55,163
Other ........................................................... 46,545 (17,336) 13,774
Monetization of contract ........................................... -- 143,400 --
--------- --------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES ............................... 111,176 267,903 224,784
--------- --------- ---------
INVESTING ACTIVITIES:
Construction expenditures (excluding AFUDC-equity funds) ........... (87,160) (92,942) (89,016)
Other capital requirements ......................................... (29,451) (14,920) (11,696)
(Increase) decrease in other noncurrent balance sheet items-net .... (7,712) 27,266 (3,765)
Proceeds from sale of subsidiary investments ....................... 148,851 16,385 11,606
Assets acquired and investments in subsidiaries .................... (51,729) (52,780) (43,308)
--------- --------- ---------
NET CASH USED IN INVESTING ACTIVITIES ................................... (27,201) (116,991) (136,179)
--------- --------- ---------
FINANCING ACTIVITIES:
Increase (decrease) in short-term borrowings ....................... 110,522 (108,500) 23,500
Proceeds from issuance of preferred trust securities ............... -- -- 110,000
Proceeds from issuance of long-term debt ........................... 116,516 84,000 20,000
Redemption and maturity of long-term debt .......................... (211,514) (14,000) (51,500)
Redemption of preferred stock ...................................... (5,918) (10,000) (70,000)
Repurchase of common stock ......................................... (81,985) (1,475) --
Cash dividends paid ................................................ (39,757) (64,548) (75,329)
Other-net .......................................................... (4,634) 5,854 (22,894)
--------- --------- ---------
NET CASH USED IN FINANCING ACTIVITIES ................................... (116,770) (108,669) (66,223)
--------- --------- ---------
NET INCREASE (DECREASE) IN CASH & CASH EQUIVALENTS ...................... (32,795) 42,243 22,382
CASH & CASH EQUIVALENTS AT BEGINNING OF PERIOD .......................... 72,836 30,593 8,211
--------- --------- ---------
CASH & CASH EQUIVALENTS AT END OF PERIOD ................................ $ 40,041 $ 72,836 $ 30,593
========= ========= =========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the period:
Interest ........................................................ $ 63,207 $ 64,402 $ 63,608
Income taxes .................................................... 42,891 40,716 29,132
Noncash financing and investing activities:
Property purchased under capitalized leases ..................... 2,557 1,209 4,521
Net unrealized holding gains (losses) ........................... -- -- (5,050)
Notes receivable for sale of investment ......................... -- 25,000 --
Common stock and retained earnings transfer to preferred stock .. -- 276,821 --
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
44
49
SCHEDULE OF INFORMATION BY BUSINESS SEGMENTS
Avista Corporation
- --------------------------------------------------------------------------------
For the Years Ended December 31
Thousands of Dollars
1999 1998 1997
----------- ----------- -----------
OPERATING REVENUES:
Avista Utilities ........................................... $ 1,115,647 $ 1,049,212 $ 891,665
Energy Trading and Marketing ............................... 6,695,671 2,408,734 247,028
Information and Technology ................................. 4,851 1,995 1,030
Pentzer and Other .......................................... 122,303 231,483 163,598
Intersegment eliminations .................................. (33,488) (7,440) (1,149)
----------- ----------- -----------
Total operating revenues ................................ $ 7,904,984 $ 3,683,984 $ 1,302,172
----------- ----------- -----------
RESOURCE COSTS:
Avista Utilities:
Power purchased ......................................... $ 543,477 $ 470,604 $ 309,439
Natural gas purchased for resale ........................ 101,958 109,182 93,880
Fuel for generation ..................................... 46,368 44,281 34,461
Other ................................................... 46,012 44,309 48,644
Energy Trading and Marketing:
Cost of sales ........................................... 6,713,613 2,360,110 232,389
Intersegment eliminations .................................. (33,488) (7,440) (1,081)
----------- ----------- -----------
Total resource costs (excluding non-energy businesses) .. $ 7,417,940 $ 3,021,046 $ 717,732
----------- ----------- -----------
GROSS MARGINS:
Avista Utilities ........................................... $ 377,832 $ 380,836 $ 405,241
Energy Trading and Marketing ............................... (17,942) 48,624 14,639
----------- ----------- -----------
Total gross margins (excluding non-energy businesses) ... $ 359,890 $ 429,460 $ 419,880
----------- ----------- -----------
OPERATIONS AND MAINTENANCE EXPENSES:
Avista Utilities ........................................... $ 56,291 $ 60,847 $ 59,138
Energy Trading and Marketing ............................... 370 -- --
Information and Technology ................................. 7,732 3,902 3,247
Pentzer and Other .......................................... 90,783 164,871 116,141
----------- ----------- -----------
Total operations and maintenance expenses ............... $ 155,176 $ 229,620 $ 178,526
=========== =========== ===========
ADMINISTRATIVE AND GENERAL EXPENSES:
Avista Utilities ........................................... $ 66,362 $ 69,693 $ 63,000
Energy Trading and Marketing ............................... 31,732 25,201 7,880
Information and Technology ................................. 7,351 2,607 2,816
Pentzer and Other .......................................... 22,513 32,270 22,915
----------- ----------- -----------
Total administrative and general expenses ............... $ 127,958 $ 129,771 $ 96,611
=========== =========== ===========
DEPRECIATION AND AMORTIZATION EXPENSES:
Avista Utilities ........................................... $ 62,981 $ 59,538 $ 57,915
Energy Trading and Marketing ............................... 3,692 596 136
Information and Technology ................................. 2,340 653 350
Pentzer and Other .......................................... 7,461 9,760 11,492
----------- ----------- -----------
Total depreciation and amortization expenses ............ $ 76,474 $ 70,547 $ 69,893
=========== =========== ===========
INCOME/(LOSS) FROM OPERATIONS (PRE-TAX):
Avista Utilities ........................................... $ 142,567 $ 143,153 $ 178,358
Energy Trading and Marketing ............................... (97,785) 22,826 6,577
Information and Technology ................................. (13,002) (5,192) (5,364)
Pentzer and Other .......................................... (423) 12,033 9,962
Intersegment eliminations .................................. -- -- (69)
----------- ----------- -----------
Total income from operations ............................ $ 31,357 $ 172,820 $ 189,464
=========== =========== ===========
45
50
1999 1998 1997
----------- ----------- -----------
INCOME AVAILABLE FOR COMMON STOCK:
Avista Utilities ........................................... $ 38,078 $ 47,898 $ 95,385
Energy Trading and Marketing ............................... (60,740) 14,116 5,346
Information and Technology ................................. (10,156) (3,398) (3,425)
Pentzer and Other .......................................... 37,457 11,124 12,099
----------- ----------- -----------
Total income available for common stock ................. $ 4,639 $ 69,740 $ 109,405
=========== =========== ===========
ASSETS:
Avista Utilities ........................................... $ 1,976,716 $ 2,004,935 $ 1,926,739
Energy Trading and Marketing ............................... 1,595,470 955,615 212,868
Information and Technology ................................. 26,379 7,461 3,475
Pentzer and Other .......................................... 114,929 285,625 268,703 ...
----------- ----------- -----------
Total assets ............................................ $ 3,713,494 $ 3,253,636 $ 2,411,785
=========== =========== ===========
CAPITAL EXPENDITURES (excluding AFUDC/AFUCE):
Avista Utilities ........................................... $ 86,256 $ 92,295 $ 87,175
Energy Trading and Marketing ............................... 3,676 2,357 3,222
Information and Technology ................................. 15,506 4,120 2,047
Pentzer and Other .......................................... 10,171 7,498 6,738
----------- ----------- -----------
Total capital expenditures .............................. $ 115,609 $ 106,270 $ 99,182
=========== =========== ===========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
46
51
AVISTA CORPORATION
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE 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.
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 the Company 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.
BASIS OF REPORTING
The financial statements are presented on a consolidated basis and, as such,
include the assets, liabilities, revenues and expenses of the Company and its
wholly owned subsidiaries. All material intercompany transactions have been
eliminated in the consolidation. The accompanying financial statements include
the Company's proportionate share of utility plant and related operations
resulting from its interests in jointly owned plants (See Note 7). The financial
activity of each of the Company's lines of business is reported in the "Schedule
of Information by Business Segments." Such information is an integral part of
these financial statements.
The preparation of the Company's consolidated financial statements in conformity
with generally accepted accounting principles necessarily requires management to
make estimates and assumptions that directly affect the reported amounts of
assets, liabilities, revenues and expenses.
SYSTEM OF ACCOUNTS
The accounting records of the Company's utility operations are maintained in
accordance with the uniform system of accounts prescribed by the Federal Energy
Regulatory Commission (FERC) and adopted by the appropriate state regulatory
commissions.
REGULATION
The Company is subject to state regulation in Washington, Idaho, Montana, Oregon
and California. The Company is subject to regulation by the FERC with respect to
its wholesale electric transmission rates and the natural gas rates charged for
the release of capacity from the Jackson Prairie Storage Project.
BUSINESS SEGMENTS
The Company changed the way it reports business segments in this Form 10-K from
the 1998 Form 10-K and has restated prior periods to reflect this change. In the
1998 Form 10-K and the quarterly Form 10-Q reports for 1999, the Company
reported Avista Utilities information by its two separate lines of business -
(1) Energy Delivery and (2) Generation and Resources. The National Energy
Trading and Marketing line of business included results of Avista Energy, Avista
Advantage and Avista Power. The Non-Energy line of business included Pentzer and
all of the remaining subsidiaries' activities. The business segment presentation
in this Form 10-K reflects the basis currently used by the Company's management
to analyze performance and determine the allocation of resources. Avista
Utilities' business is now managed based on the total regulated operations, not
by individual segments. The Energy Trading and Marketing line of business
changed its focus from a national emphasis to a regional effort, but its
operations are non-regulated, as opposed to Avista Utilities' operations. The
Information and Technology line of business reflects the current efforts of the
Company to grow those businesses and focus on generating shareholder value.
Pentzer and Other reports on the other non-utility operations of various
subsidiaries.
47
52
AVISTA CORPORATION
- --------------------------------------------------------------------------------
OPERATING REVENUES
The Company accrues estimated unbilled revenues for electric and natural gas
sales and services provided through month-end. Avista Energy follows the
mark-to-market method of accounting for energy contracts entered into for
trading and price risk management purposes. Avista Energy recognizes revenue
based on the change in the market value of outstanding derivative commodity
sales contracts, net of future servicing costs and reserves, in addition to
revenue related to physical and financial contracts that have matured.
INTERSEGMENT ELIMINATIONS
Intersegment eliminations represent the transactions between Avista Utilities
and Avista Energy for commodities and services.
RESEARCH AND DEVELOPMENT EXPENSES
Company-sponsored research and development expenses related to present and
future products are expensed as incurred. The majority of the Company's research
and development expenses are related to subsidiary businesses. Research and
development expenses totaled approximately $3.3 million, $1.0 million and $1.0
million in 1999, 1998 and 1997, respectively.
OTHER INCOME (DEDUCTIONS)--NET
Other income (deductions)-net is composed of the following items:
YEARS ENDED DECEMBER 31,
-----------------------------------
1999 1998 1997
------- ------- --------
(Thousands of Dollars)
Interest income ....................... $ 3,615 $ 9,560 $ 6,392
Capitalized interest (debt) ........... 1,001 1,592 1,549
Gain (loss) on property dispositions .. 4,071 12 (1,222)
Minority interest ..................... 2,002 296 (574)
Capitalized interest (equity) ......... 1,040 1,283 1,323
Other ................................. 7,230 (2,949) (13,341)
------- ------- --------
Total ............................ $18,959 $ 9,794 $ (5,873)
======= ======= ========
EARNINGS PER SHARE
Financial Accounting Standard (FAS) No. 128, "Earnings Per Share," became
effective in the fourth quarter of 1997 and requires two presentations of
earnings per share - "basic" and "diluted." Basic earnings per share (EPS) is
computed by dividing income available to common shareholders by the weighted
average number of common shares outstanding for the period. Diluted EPS reflects
the potential dilution that could occur if dilutive securities, such as stock
options and convertible stock, were exercised or converted into common stock
that then shared in the earnings of the Company. See Note 19 for specific
information about the Company's EPS calculations.
UTILITY PLANT
The cost of additions to utility plant, including an allowance for funds used
during construction and replacements of units of property and betterments, is
capitalized. Costs of depreciable units of property retired plus costs of
removal less salvage are charged to accumulated depreciation.
ALLOWANCE FOR FUNDS USED DURING CONSTRUCTION
The Allowance for Funds Used During Construction (AFUDC) represents the cost of
both the debt and equity funds used to finance utility plant additions during
the construction period. In accordance with the uniform system of accounts
prescribed by regulatory authorities, AFUDC is capitalized as a part of the cost
of utility plant and is credited currently as a noncash item to Other Income
(see Other Income above). The Company generally is permitted, under established
regulatory rate practices, to recover the capitalized AFUDC, and a fair return
thereon, through its inclusion in rate base and the provision for depreciation
after the related utility plant has been placed in service. Cash inflow related
to AFUDC does not occur until the related utility plant investment is placed in
service.
The effective AFUDC rate was 10.67% in 1999, 1998 and 1997. The Company's AFUDC
rates do not exceed the maximum allowable rates as determined in accordance with
the requirements of regulatory authorities.
DEPRECIATION
For utility operations, depreciation provisions are estimated by a method of
depreciation accounting utilizing unit rates for hydroelectric plants and
composite rates for other properties. Such rates are designed to provide for
48
53
AVISTA CORPORATION
- --------------------------------------------------------------------------------
retirements of properties at the expiration of their service lives. The rates
for hydroelectric plants include annuity and interest components, in which the
interest component is 6%. For utility operations, the ratio of depreciation
provisions to average depreciable property was 2.69% in 1999, 2.60% in 1998 and
2.59% in 1997.
The average service lives and remaining average service lives, respectively, for
the following broad categories of property are: electric thermal production - 35
and 17 years; hydroelectric production - 100 and 79 years; electric transmission
- - 60 and 28 years; electric distribution - 40 and 31 years; and natural gas
distribution property - 44 and 30 years.
CASH AND CASH EQUIVALENTS
For the purposes of the Consolidated Statements of Cash Flows, the Company
considers all temporary investments with an initial maturity of three months or
less to be cash equivalents.
TEMPORARY INVESTMENTS
Investments in debt and marketable equity securities are classified as
"available for sale" and are recorded at fair value. Investments totaling $1.8
million and $7.5 million are included on the Consolidated Balance Sheets at
December 31, 1999 as other property and investments and current assets,
respectively. Investments totaling $4.3 million and $5.8 million are included on
the Consolidated Balance Sheets at December 31, 1998 as other property and
investments and current assets, respectively. Unrealized investment gains, as of
December 31, 1999 and 1998, of $(0.2) million and $0.02 million, respectively,
net of taxes, are reflected as a component of other comprehensive income on the
Consolidated Statements of Capitalization.
INVENTORY
Inventory consists primarily of materials and supplies, fuel stock and natural
gas stored. Inventory is recorded at the lower of cost or market, primarily
using the average cost method.
DEFERRED CHARGES AND CREDITS
The Company prepares its financial statements in accordance with the provisions
of FAS No. 71, "Accounting for the Effects of Certain Types of Regulation." A
regulated enterprise can prepare its financial statements in accordance with FAS
No. 71 only if (i) the enterprise's rates for regulated services are established
by or subject to approval by an independent third-party regulator, (ii) the
regulated rates are designed to recover the enterprise's cost of providing the
regulated services and (iii) in view of demand for the regulated services and
the level of competition, it is reasonable to assume that rates set at levels
that will recover the enterprise's costs can be charged to and collected from
customers. FAS No. 71 requires a cost-based, rate-regulated enterprise to
reflect the impact of regulatory decisions in its financial statements. In
certain circumstances, FAS No. 71 requires that certain costs and/or obligations
(such as incurred costs not currently recovered through rates, but expected to
be so recovered in the future) be reflected in a deferral account in the balance
sheet and not be reflected in the statement of income or loss until matching
revenues are recognized. If at some point in the future the Company determines
that it no longer meets the criteria for continued application of FAS No. 71 to
all or a portion of the Company's regulated operations, the Company could be
required to write off its regulatory assets and could be precluded from the
future deferral in the Consolidated Balance Sheet of costs not recovered through
rates at the time such costs were incurred, even if such costs were expected to
be recovered in the future.
The Company's primary regulatory assets include Investment in Exchange Power,
conservation programs, deferred income taxes, the provision for postretirement
benefits and debt issuance and redemption costs. Those items without a specific
line on the Consolidated Balance Sheets are included in Deferred Charges -
Other-net. Deferred credits include natural gas deferrals, unrecovered purchased
gas costs and the gain on the general office building sale/leaseback which is
being amortized over the life of the lease, and are included on the Consolidated
Balance Sheets as Non-current Liabilities and Deferred Credits - Other Deferred
Credits.
DEFERRED REVENUES
In December 1998, the Company received cash proceeds of $143.4 million from the
monetization of a contract in which the Company assigned and transferred certain
rights under a long-term power sales contract to a funding trust. The proceeds
were recorded as deferred revenue and are being amortized into revenues over the
16-year period of the long-term sales contract. The balance at December 31, 1999
was $133.0 million.
POWER AND NATURAL GAS COST ADJUSTMENT PROVISIONS
The Company has a power cost adjustment mechanism (PCA) in Idaho which allows
the Company to modify electric rates to recover or rebate a portion of the
difference between actual and allowed net power supply costs. The PCA
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tracks changes in hydroelectric generation, secondary prices, related changes in
thermal generation and Public Utility Regulatory Policies Act of 1978 (PURPA)
contracts. Rate changes are triggered when the deferred balance reaches $2.2
million. The following surcharges and rebates were in effect during the past
three years: a $2.8 million (2.5%) rebate effective August 1, 1999 scheduled to
expire July 31, 2000; a $3.1 million (2.7%) rebate effective February 1, 1999,
which expired January 31, 2000; a $2.7 million (2.4%) rebate effective June 1,
1998, which expired May 31, 1999; a $2.6 million (2.3%) rebate effective
September 1, 1997, which expired August 31, 1998; a $2.6 million (2.4%) rebate
effective June 1, 1997, which expired May 31, 1998; and a $2.5 million (2.3%)
rebate effective September 1, 1996, which expired August 31, 1997. The rebate
balances and the deferred balance are included in the Current Liabilities -
Other and Non-Current Liabilities and Deferred Credits - Other Deferred Credits
lines, respectively, on the Consolidated Balance Sheets.
Under established regulatory practices, the Company is also allowed to adjust
its natural gas rates from time to time to reflect increases or decreases in the
cost of natural gas purchased. Differences between actual natural gas costs and
the natural gas costs allowed in rates are deferred and charged or credited to
expense when regulators approve inclusion of the cost changes in rates. In
Oregon, regulatory provisions include a sharing of benefits and risks associated
with changes in natural gas prices, as well as a sharing of benefits if certain
threshold earnings levels are exceeded. The balance is included on the
Consolidated Balance Sheets as Non-current Liabilities and Deferred Credits -
Other Deferred Credits.
INCOME TAXES
The Company and its eligible subsidiaries file consolidated federal income tax
returns. Subsidiaries are charged or credited with the tax effects of their
operations on a stand-alone basis. The Company's federal income tax returns have
been examined with all issues resolved, and all payments made, through the 1996
return.
STOCK-BASED COMPENSATION
Compensation cost for stock options is measured as the excess of the quoted
market price of the Company's stock at the date of grant over the amount an
employee must pay to acquire the stock. Restricted stock is recorded as
compensation cost over the requisite vesting periods based on the market value
on the date of grant. The Company accounts for its stock-based compensation
using the intrinsic value method prescribed in Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees" rather than using the
fair-value-based method of accounting for stock-based employee compensation
plans as prescribed under FAS No. 123, "Accounting for Stock-Based
Compensation." However, the Company has adopted the disclosure requirements of
FAS No. 123. See Note 21 for more information about the Company's stock-based
compensation plans.
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OTHER COMPREHENSIVE INCOME
Effective January 1, 1998, the Company adopted FAS No. 130, "Reporting
Comprehensive Income," which establishes new rules for the reporting and display
of comprehensive income (net income plus all other changes in net assets from
nonowner sources) and its components. The adoption had no impact on the
Company's net income or stockholders' equity. Prior year financial statements
have been reclassified to conform to these requirements. The following table
reflects the accumulated balances of other comprehensive income:
Foreign
Unrealized Currency
Investment Translation Comprehensive
Gain/(Loss) Adjustment Income
------------------------------------------------------------------------------------------
Balance at January 1, 1997 $ 5,704 $ $ 5,704
Unrealized investment gain/(loss), net of tax
of $810 1,504 1,504
Less: reclassification adjustment, net of
tax of $2,762 (5,131) (5,131)
------------------------------------------------------------------------------------------
Balance at December 31, 1997 2,077 2,077
Unrealized investment gain/(loss), net of tax
of $1,105 (2,052) (2,052)
Foreign currency translation adjustment (366) (366)
------------------------------------------------------------------------------------------
Balance at December 31, 1998 25 (366) (341)
Unrealized investment gain/(loss), net of tax
of $108 (201) (201)
Foreign currency translation adjustment 376 376
------------------------------------------------------------------------------------------
Balance at December 31, 1999 $ (176) $ 10 $ (166)
------------------------------------------------------------------------------------------
CUMULATIVE FOREIGN CURRENCY TRANSLATION ADJUSTMENT
Assets and liabilities of Avista Energy Canada, Ltd. are denominated in Canadian
dollars and translated to U. S. dollars at exchange rates in effect on the
balance sheet date. Revenues, costs and expenses for the company are translated
using an average rate. Cumulative translation adjustments resulting from this
process are reflected as a component of other comprehensive income in the
shareholders' equity section in the Consolidated Statements of Capitalization.
NEW ACCOUNTING STANDARDS
The FASB issued FAS No. 133, entitled "Accounting for Derivative Instruments and
Hedging Activities" which is effective for fiscal years beginning after June 15,
2000. The statement requires that all derivative financial instruments be
recognized as either assets or liabilities on a company's balance sheets at fair
value. The accounting for changes in the fair value of a derivative will depend
on the intended use of the derivative and the resulting designation. Avista
Energy currently accounts for derivative commodity instruments entered into for
trading purposes using the mark-to-market method of accounting, in compliance
with EITF 98-10, "Accounting for Energy Trading and Risk Management Activities."
The Company is in the process of determining the impact of the statement on the
Company's financial position and results of operations, and developing systems
for ongoing monitoring and measurement.
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. ASSET IMPAIRMENT AND RESTRUCTURING CHARGES
In November 1999, Avista Corp.'s Board of Directors authorized the reduction of
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.
The downsizing plans call for shutting down all of the operations in Houston and
Boston, which will eliminate approximately 80 positions, during the first three
to six months of 2000. In the fourth quarter of 1999, Avista Energy recorded a
pre-tax charge of $42.9 million for expenses related to this restructuring of
Avista
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Energy's business. The after-tax effect of these charges was $27.3 million, or
$0.71 per basic common share. The charge included $21.4 million, after taxes,
for the write-off of goodwill associated with the purchase of Vitol earlier in
1999 and $5.9 million, after taxes, for expenses related to employee
terminations, such as contract terminations and retention payments. None of the
$5.9 million for termination benefits was paid out as of December 31, 1999.
Avista Energy sought a buyer for the Eastern book of business, and is currently
in the process of closing that transaction. The electric contracts will likely
be sold at approximately book value. To date, Avista Energy has not found a
buyer for the natural gas or coal contracts.
NOTE 3. ACCOUNTS RECEIVABLE SALE
In July 1997, WWP Receivables Corp. (WWPRC) was incorporated as a wholly owned,
bankruptcy-remote subsidiary of the Company for the purpose of acquiring or
purchasing interests in certain accounts receivable, both billed and unbilled,
of the Company. Subsequently, WWPRC and the Company have entered into an
agreement whereby WWPRC can sell without recourse, on a revolving basis, up to
$80.0 million of those receivables. WWPRC is obligated to pay fees that
approximate the purchaser's cost of issuing commercial paper equal in value to
the interests in receivables sold. On a consolidated basis, the amount of such
fees is included in operating expenses of the Company. At December 31, 1999 and
1998, $45.0 million and $25.0 million, respectively, in receivables had been
sold pursuant to the agreement, which qualify as sales of assets under FAS No.
125.
NOTE 4. ENERGY COMMODITY TRADING
The Company's energy-related businesses are exposed to risks relating to changes
in certain commodity prices and counterparty performance. In order to manage the
various risks relating to these exposures, Avista Utilities utilizes electric,
natural gas and related derivative commodity instruments, such as forwards,
futures, swaps and options, and Avista Energy engages in the trading of such
instruments. Avista Utilities and Avista Energy have adopted policies and
procedures to manage the risks inherent in these activities and have established
a comprehensive Risk Management Committee, separate from the units that create
such 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.
AVISTA UTILITIES
Avista Utilities protects itself against price fluctuations on electric energy
and natural gas by limiting the aggregate level of net open positions which are
exposed to market price changes and through the use of electric, natural gas and
related derivative commodity instruments for hedging purposes. The net open
position is actively managed with strict policies designed to limit the exposure
to market risk and which require daily and weekly reporting to management of
potential financial exposure. The Risk Management Committee has limited the
types of commodity instruments Avista Utilities may trade to those related to
electricity and natural gas commodities and those instruments are to be used for
hedging price fluctuations associated with the management of resources.
Commodity instruments are not generally held by Avista Utilities for speculative
trading purposes. Gains and losses related to derivative commodity instruments
which qualify as hedges are recognized in the Consolidated Statements of Income
when the underlying hedged physical transaction closes (the deferral method) and
are included in the same category as the hedged item (natural gas purchased or
purchased power expense, as the case may be). At December 31, 1999 and 1998, the
Company's derivative commodity instruments outstanding were immaterial.
ENERGY TRADING AND MARKETING
Avista Energy purchases natural gas and electricity directly from producers and
other trading companies, and its customers include commercial and industrial
end-users, electric utilities, natural gas distribution companies, and other
trading companies. Avista Energy's marketing and energy risk management services
are provided through the use of a variety of derivative commodity contracts to
purchase or supply natural gas and electric energy at specified delivery points
and at specified future dates. Avista Energy also trades natural gas and
electricity derivative commodity instruments on national exchanges and through
other unregulated exchanges and brokers from whom these commodity derivatives
are available, and therefore experiences net open positions in terms of price,
volume, and specified delivery point.
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The open positions expose Avista Energy to the risk that fluctuating market
prices may adversely impact its financial position or results of operations.
However, the net open position is actively managed with strict policies designed
to limit the exposure to market risk and which require daily reporting to
management of potential financial exposure. These policies include statistical
risk tolerance limits using historical price movements to calculate daily
earnings at risk as well as total Value-at-Risk (VAR) measurement.
Derivative commodity instruments sold and purchased by Avista Energy include:
forward contracts, involving physical delivery of an energy commodity; futures
contracts, which involve the buying or selling of natural gas, electricity or
other energy-related commodities at a fixed price; over-the-counter swap
agreements which require Avista Energy to receive or make payments based on the
difference between a specified price and the actual price of the underlying
commodity; and options, which mitigate price risk by providing for the right,
but not the requirement, to buy or sell energy-related commodities at a fixed
price.
Foreign currency risks associated with the fair value of the energy commodity
portfolio are primarily related to Canadian currency exchange rates and are
managed using a variety of financial instruments, including forward rate
agreements.
Avista Energy's trading activities are subject to mark-to-market accounting,
under which changes in the market value of outstanding electric, natural gas and
related derivative commodity instruments are recognized as gains or losses in
the period of change. Gains and losses on electric, natural gas and related
derivative commodity instruments utilized for trading are recognized in income
on a current basis (the mark-to-market method) and are included on the
Consolidated Statements of Income in operating revenues or resource costs, as
appropriate, and on the Consolidated Balance Sheets as current or non-current
energy commodity assets or liabilities. Contracts in a receivable position, as
well as the options held, are reported as assets. Similarly, contracts in a
payable position, as well as options written, are reported as liabilities.
Cashflows are recognized during the period of settlement.
Contract Amounts and Terms. Under Avista Energy's derivative instruments, Avista
Energy either (i) as "fixed price payor," is obligated to pay a fixed price or
amount and is entitled to receive the commodity (or currency) or a fixed amount
or (ii) as "fixed price receiver," is entitled to receive a fixed price or
amount and is obligated to deliver the commodity (or currency) or pay a fixed
amount or (iii) as "index price payor," is obligated to pay an indexed price or
amount and is entitled to receive the commodity or a variable amount or (iv) as
"index price receiver," is entitled to receive an indexed price or amount and is
obligated to deliver the commodity or pay a variable amount. The contract or
notional amounts and terms of Avista Energy's derivative commodity investments
outstanding at December 31, 1999 are set forth below (volumes in thousands of
mmBTUs and MWhs, dollars in thousands):
Fixed Price Fixed Price Maximum
Payor Receiver Terms in Years
----------- ----------- --------------
Energy commodities (volumes)
Natural gas 352,021 337,056 4
Electric 202,793 189,630 20
Coal (tons) 5,276 6,364 1
Financial products
Foreign currency $426 $-- 4
Index Price Index Price Maximum
Payor Receiver Terms in Years
----------- ----------- --------------
Energy commodities (volumes)
Natural gas 979,652 819,660 5
Electric 1,581 1,365 5
Contract or notional amounts reflect the volume of transactions, but do not
necessarily represent the amounts exchanged by the parties to the derivative
commodity instruments. Accordingly, contract or notional amounts do not
accurately measure Avista Energy's exposure to market or credit risks. The
maximum terms in years detailed above are not indicative of likely future cash
flows as these positions may be offset in the markets at any time in response to
Avista Energy's risk management needs.
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Fair Value. The fair value of Avista Energy's derivative commodity instruments
outstanding at December 31, 1999, and the average fair value of those
instruments held during the year are set forth below (dollars in thousands):
Fair Value Average Fair Value for the
as of December 31, 1999 year ended December 31, 1999
---------------------------------------------------- ----------------------------------------------------
Current Long-term Current Long-term Current Long-term Current Long-term
Assets Assets Liabilities Liabilities Assets Assets Liabilities Liabilities
-------- -------- ----------- ----------- -------- -------- ------------ -----------
Natural gas $ 75,422 $ 29,496 $ 77,181 $ 23,795 $107,333 $ 65,884 $110,635 $ 57,978
Electric 499,963 461,501 507,518 417,450 347,979 297,937 347,651 266,618
Coal 10,528 802 9,366 127 5,264 401 4,683 64
-------- -------- -------- -------- -------- -------- -------- --------
Total $585,913 $491,799 $594,065 $441,372 $460,576 $364,222 $462,969 $324,660
The weighted average term of Avista Energy's natural gas and related derivative
commodity instruments as of December 31, 1999 was approximately three months.
The weighted average term of Avista Energy's electric derivative commodity
instruments at December 31, 1999 was approximately four months. The weighted
average term of Avista Energy's coal derivative commodity instruments at
December 31, 1999 was approximately eight months. The change in the fair value
position of Avista Energy's energy commodity portfolio, net of the reserves for
credit and market risk for the year ended December 31, 1999 was $0.2 million and
is included on the Consolidated Statements of Income in operating revenues.
MARKET RISK
Avista Utilities and Avista Energy manage, on a portfolio basis, the market
risks inherent in their activities subject to parameters established by the
Company's Risk Management Committee. Market risks are monitored by the Risk
Management Committee to ensure compliance with the Company's stated risk
management policies. Avista Utilities and Avista Energy measure the risk in
their portfolios on a daily basis in accordance with value-at-risk and other
risk methodologies established by the Risk Management Committee. The
quantification of market risk using value-at-risk provides a consistent measure
of risk across diverse energy markets and products.
CREDIT RISK
Avista Utilities and Avista Energy are exposed to credit risk in the event of
nonperformance by customers or counterparties of their contractual obligations.
The concentration of customers and/or counterparties may impact overall exposure
to credit risk, either positively or negatively, in that the counterparties may
be similarly affected by changes in economic, regulatory or other conditions.
However, Avista Utilities and Avista Energy maintain credit policies with regard
to their customers and counterparties that management believes significantly
minimize overall credit risk. These policies include an evaluation of potential
customers' and counterparties' financial condition and credit rating, collateral
requirements or other credit enhancements such as letters of credit or parent
company guarantees, and the use of standardized agreements which allow for the
netting or offsetting of positive and negative exposures associated with a
single counterparty. Avista Utilities and Avista Energy maintain credit reserves
that are based on management's evaluation of the credit risk of the overall
portfolios. Based on these policies, exposures and the credit reserves, the
Company does not anticipate a materially adverse effect on financial position or
results of operations as a result of customer or counterparty nonperformance.
New York Mercantile Exchange traded futures and option contracts are financially
guaranteed by the Exchange and have nominal credit risk.
Avista Energy has concentrations of suppliers and customers in the electric and
natural gas industries, including electric utilities, natural gas distribution
companies and other energy marketing and trading companies. In addition, Avista
Energy has concentrations of credit risk related to geographic location. These
concentration of counterparties and concentrations of geographic location may
impact Avista Energy's overall exposure to credit risk, either positively or
negatively, in that the counterparties may be similarly affected by changes in
economic, regulatory or other conditions.
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NOTE 5. ENERGY TRADING AND MARKETING EQUITY INVESTMENT
Effective November 30, 1998, Avista Energy sold its 50% ownership interest in
Howard/Avista Energy LLC to H&H Star Energy, Inc. for $25 million. Avista
Energy's initial equity investment in Howard/Avista Energy, LLC was $25 million
in August 1997. Dividends of $0.7 million were received from Howard/Avista
Energy, LLC in 1998. Avista Energy's pre-tax equity in earnings of Howard/Avista
Energy LLC were $(1.0) million and $1.8 million for the eleven months ended
November 30, 1998 and the five months ended December 31, 1997, respectively.
NOTE 6. PROPERTY, PLANT AND EQUIPMENT
The year-end balances of the major classifications of property, plant and
equipment are detailed in the following table (thousands of dollars):
AT DECEMBER 31,
--------------------------
1999 1998
---------- ----------
Avista Utilities:
Electric production $ 720,409 $ 709,144
Electric transmission 272,299 265,343
Electric distribution 622,974 593,787
CWIP and other 85,648 81,435
---------- ----------
Electric total 1,701,330 1,649,709
---------- ----------
Natural gas underground storage 18,418 18,732
Natural gas transmission 3,194 3,217
Natural gas distribution 372,208 352,332
CWIP and other 49,259 47,499
---------- ----------
Natural gas total 443,079 421,780
---------- ----------
Common plant (including CWIP) 71,201 69,203
---------- ----------
Total Avista Utilities 2,215,610 2,140,692
Energy Trading and Marketing 8,304 5,579
Information and Technology 21,613 6,403
Pentzer and Other 24,027 33,071
---------- ----------
Total $2,269,554 $2,185,745
========== ==========
Property, plant, and equipment under capital leases at Avista Capital's
subsidiaries totaled $11.1 million and $13.3 million and the associated
accumulated depreciation totaled $3.8 million and $2.8 million in 1999 and 1998,
respectively.
NOTE 7. JOINTLY OWNED ELECTRIC FACILITIES
The Company has investments in jointly owned generating plants. The Company
provides financing for the Company's ownership in the projects. The Company's
share of related operating and maintenance expenses for plants in service is
included in corresponding accounts in the Consolidated Statements of Income. See
Note 22 for additional information related to potential impacts of Clean Air Act
Amendments on these plants. The following table indicates the Company's
percentage ownership and the extent of the Company's investment in such plants
at December 31, 1999:
COMPANY'S CURRENT SHARE OF
----------------------------------------------------------------
KW of Construction
Installed Fuel Ownership Plant in Accumulated Net Plant Work in
Project Capacity Source (%) Service Depreciation In Service Progress
- ------- -------- ------ ----------- -------- ------------ ---------- --------
(Thousands of Dollars)
Centralia *................... 1,330,000 Coal 15% $ 57,898 $ 40,391 $ 17,507 $ --
Colstrip 3 & 4................ 1,556,000 Coal 15 310,804 131,328 179,476 --
* The Company purchased an additional 2.5% interest in Centralia in December
1999, which is currently being held as non-utility property until the
outcome of the pending sale of Centralia is determined.
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NOTE 8. PENSION PLANS AND OTHER POSTRETIREMENT BENEFIT PLANS
The Company has a pension plan covering substantially all of its regular
full-time employees. Certain of the Company's subsidiaries also participate in
this plan. Individual benefits under this plan are based upon years of service
and the employee's average compensation as specified in the Plan. The Company's
funding policy is to contribute annually an amount equal to the net periodic
pension cost, provided that such contributions are not less than the minimum
amounts required to be funded under the Employee Retirement Income Security Act,
nor more than the maximum amounts which are currently deductible for tax
purposes. Pension fund assets are invested primarily in marketable debt and
equity securities. The Company also has other plans that cover the executive
officers and key managers.
The Company provides certain health care and life insurance benefits for
substantially all of its retired employees. The Company accrues the estimated
cost of postretirement benefit payments during the years that employees provide
services. The Company elected to amortize this obligation of approximately
$34,500,000 over a period of twenty years, beginning in 1993.
The following table sets forth the pension and health care plan disclosures:
Pension Benefits Other Benefits
------------------------ ----------------------
1999 1998 1999 1998
--------- --------- -------- --------
(Thousands of Dollars)
CHANGE IN BENEFIT OBLIGATION
Benefit obligation at beginning of year $ 178,589 $ 155,565 $ 32,345 $ 31,802
Service cost 5,951 4,982 696 585
Interest cost 11,915 11,247 2,178 2,100
Amendments (6,463) 5,454 -- --
Actuarial (gain)/loss (14,679) 10,088 (2,377) 108
Benefits paid (12,109) (8,747) (2,205) (2,250)
Expenses paid (1,107) -- -- --
--------- --------- -------- --------
Benefit obligation at end of year $ 162,097 $ 178,589 $ 30,637 $ 32,345
--------- --------- -------- --------
CHANGE IN PLAN ASSETS
Fair value of plan assets
at beginning of year $ 178,879 $ 166,242 $ 12,459 $ 11,098
Actual return on plan assets 19,902 21,384 3,228 1,374
Employer contributions -- -- 809 731
Benefits paid (12,109) (8,747) (688) (744)
Expenses paid (1,107) -- -- --
--------- --------- -------- --------
Fair value of plan assets at end of year $ 185,565 $ 178,879 $ 15,808 $ 12,459
--------- --------- -------- --------
Funded status $ 23,467 $ 289 $(14,829) $(19,886)
Unrecognized net actuarial gain (38,667) (19,767) (9,997) (5,626)
Unrecognized prior service cost 11,651 19,455 -- --
Unrecognized net transition
obligation/(asset) (5,929) (7,015) 19,933 21,467
--------- --------- -------- --------
Accrued benefit cost $ (9,478) $ (7,038) $ (4,893) $ (4,045)
========= ========= ======== ========
ASSUMPTIONS AS OF DECEMBER 31
Discount rate 7.75% 6.75% 7.75% 6.75%
Expected return on plan assets 9.00% 9.00% 9.00% 9.00%
Rate of compensation increase 4.00% 4.00%
Medical cost trend - initial 5.00% 5.00%
Medical cost trend - ultimate 5.00% 5.00%
Year for ultimate medical cost trend 1999 1998
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Pension Benefits Other Benefits
----------------------------------- ---------------------------------
1999 1998 1997 1999 1998 1997
--------- --------- --------- -------- -------- --------
(Thousands of Dollars)
COMPONENTS OF NET PERIODIC BENEFIT COST
Service cost $ 5,951 $ 4,982 $ 4,762 $ 696 $ 585 $ 637
Interest cost 11,915 11,247 10,601 2,178 2,100 2,247
Expected return on plan assets (15,681) (14,768) (13,152) (1,075) (953) (973)
Transition (asset)/obligation recognition (1,086) (1,086) (1,086) 1,534 1,533 1,570
Amortization of prior service cost 1,341 1,654 1,365 -- -- 13
Net gain recognition -- (562) (265) (159) (326) (248)
Asset gain deferred -- -- -- -- -- 336
Net periodic benefit cost --------- --------- ---------- -------- -------- --------
$ 2,440 $ 1,467 $ 2,225 $ 3,174 $ 2,939 $ 3,582
--------- --------- ---------- -------- -------- --------
Assumed health cost trend rates have a significant effect on the amounts
reported for the health care plans. A one-percentage-point increase in the
assumed health care cost trend rate for each year would increase the accumulated
postretirement benefit obligation as of December 31, 1999 by approximately $2.4
million and the service and interest cost by approximately $273,000. A
one-percentage-point decrease in the assumed health care cost trend rate for
each year would decrease the accumulated postretirement benefit obligation as of
December 31, 1999 by approximately $2.2 million and the service and interest
cost by approximately $246,000.
The Company also sponsors an employee savings plan that covers substantially all
employees. Employer matching contributions of $3.4 million, $2.8 million, $2.9
million were expensed in 1999, 1998 and 1997, respectively.
NOTE 9. ACCOUNTING FOR INCOME TAXES
In June 1997, the Company received $81 million from the Internal Revenue Service
(IRS) to settle an income tax claim relating to its investment in the terminated
nuclear project 3 of the Washington Public Power Supply System (WNP3). The $81
million recovery included $34 million in income taxes the Company overpaid in
prior years plus $47 million in accrued interest, which in total contributed
$41.4 million, or $0.74 per share, to net income.
The Company had claimed that it realized a loss in 1985 relating to its $195
million investment in WNP3 entitling it to current tax deductions. The IRS,
however, originally denied the Company's claim and ruled that the investment
should be written off over 32.5 years, the term of a settlement agreement
between the Company and the Bonneville Power Administration relating to WNP3.
The Company disagreed with this ruling and had been pursuing a reversal for
several years. The IRS has now agreed with the Company's position.
The Company entered into settlement agreements with the WUTC and the IPUC in
1987 and 1988 providing for the recovery through retail prices of approximately
60% of the Company's $195 million investment in WNP3. As a result of these
agreements, customers have been and will continue to receive the tax benefits
relating to the recoverable portion of WNP3 over the recovery periods specified
in the settlement agreements. The settlement agreements resulted in a write-off
of approximately $75 million of the Company's WNP3 investment, with the entire
write-off charged to shareholders. The tax recovery and related accrued interest
from the IRS will flow through to the benefit of shareholders. The cash was used
to fund new business investment, including growth opportunities in national
energy markets, and reduced the need for issuance of long-term debt during 1997.
As of December 31, 1999 and 1998, the Company had recorded net regulatory assets
of $166.5 million and $171.0 million, respectively, related to the probable
recovery of FAS No. 109, "Accounting for Income Taxes," deferred tax liabilities
from customers through future rates. Such regulatory assets will be adjusted by
amounts recovered through rates.
Deferred income taxes reflect the net tax effects of (a) temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes, and (b) tax credit
carryforwards. The net deferred federal income tax liability consists of the
following (thousands of dollars):
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1999 1998
-------- --------
Deferred tax liabilities:
Differences between book and tax bases
of utility plant $383,729 $375,881
Loss on reacquired debt 5,357 4,979
Other 19,774 7,462
-------- --------
Total deferred tax liabilities 408,860 388,322
-------- --------
Deferred tax assets:
Reserves not currently deductible 10,747 11,727
Contributions in aid of construction 7,878 7,159
Centralia Trust 2,897 2,325
Gain on sale of office building 1,098 1,190
Other 9,191 8,219
-------- --------
Total deferred tax assets 31,811 30,620
-------- --------
Net deferred tax liability $377,049 $357,702
======== ========
A reconciliation of federal income taxes derived from statutory tax rates
applied to income from continuing operations and federal income tax as set forth
in the accompanying Consolidated Statements of Income and Retained Earnings is
as follows (the current and deferred effective tax rates are approximately the
same during all periods):
FOR THE YEARS ENDED DECEMBER 31,
----------------------------------------
1999 1998 1997
-------- -------- --------
(Thousands of Dollars)
Computed federal income taxes at statutory rate .. $ 14,970 $ 42,516 $ 61,555
Increase (decrease) in tax resulting from:
Accelerated tax depreciation ................ 1,869 1,431 2,589
Prior year audit adjustments ................ (1,642) (1,526) (31,458)
Reserve for WNP3 ............................ -- -- 10,402
Other ....................................... 3,687 (2,343) 13,922
-------- -------- --------
Total federal income tax expense* ................ $ 18,884 $ 40,078 $ 57,010
======== ======== ========
INCOME TAX EXPENSE CONSISTS OF THE FOLLOWING:
Federal taxes currently provided ................. $ 6,974 $ 20,094 $ 51,104
Deferred income taxes ............................ 11,910 19,984 5,906
-------- -------- --------
Total federal income tax expense ................. 18,884 40,078 57,010
State income tax expense .................... (2,144) 3,257 4,065
-------- -------- --------
Federal and state income taxes ................... $ 16,740 $ 43,335 $ 61,075
======== ======== ========
*Federal Income Tax Expense:
Utility .................................... $ 34,757 $ 28,582 $ 50,409
Energy Trading and Marketing ............... (32,680) 7,789 2,954
Information and Technology ................. (3,383) (2,010) (1,928)
Pentzer and Other .......................... 20,190 5,717 5,575
-------- -------- --------
Total Federal Income Tax Expense ................. $ 18,884 $ 40,078 $ 57,010
======== ======== ========
Federal statutory rate ........................... 35% 35% 35%
NOTE 10. LONG-TERM PURCHASED POWER CONTRACTS WITH REQUIRED MINIMUM PAYMENTS
Under fixed contracts with Public Utility Districts (PUD), the Company has
agreed to purchase portions of the output of certain generating facilities.
Although the Company has no investment in such facilities, these contracts
provide that the Company pay certain minimum amounts (which are based at least
in part on the debt service requirements of the supplier) whether or not the
facility is operating. The cost of power obtained under the contracts, including
payments made when a facility is not operating, is included in operations and
maintenance expense in the Consolidated Statements of Income. Information as of
December 31, 1999, pertaining to these contracts is summarized in the following
table:
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COMPANY'S CURRENT SHARE OF
----------------------------------------------------------
Debt Revenue Contract
Kilowatt Annual Service Bonds Expiration
Output Capability Costs(1) Costs(2) Outstanding Date
------ ---------- -------- ------- ----------- ----------
(Thousands of Dollars)
PUD CONTRACTS:
Chelan County PUD:
Rocky Reach Project .... 2.9% 37,000 $ 1,417 $ 692 $ 7,017 2011
Grant County PUD:
Priest Rapids Project .. 6.1 55,000 1,539 830 10,317 2005
Wanapum Project ........ 8.2 75,000 2,557 1,582 15,274 2009
Douglas County PUD:
Wells Project .......... 3.7 30,000 903 591 6,767 2018
-------- ------- ------- -------
Totals ......... 197,000 $ 6,416 $ 3,695 $39,375
======== ======= ======= =======
(1) The annual costs will change in proportion to the percentage of output
allocated to the Company in a particular year. Amounts represent the
operating costs for the year 1999.
(2) Included in annual costs.
Actual expenses for payments made under the above contracts for the years 1999,
1998 and 1997, were $6.4 million, $6.2 million and $5.9 million, respectively.
The estimated aggregate amounts of required minimum payments (the Company's
share of debt service costs) under the above contracts for the next five years
are $3.9 million in 2000 and $4.0 million in each year of 2001 through 2004
(minimum payments thereafter are dependent on then market conditions). In
addition, the Company will be required to pay its proportionate share of the
variable operating expenses of these projects.
NOTE 11. LONG-TERM DEBT
The annual sinking fund requirements and maturities for the next five years for
long-term debt outstanding at December 31, 1999 are as follows:
YEAR ENDING SINKING FUND
DECEMBER 31 MATURITIES REQUIREMENTS TOTAL
----------- ---------- ------------ -------
(Thousands of Dollars)
2000.................... $44,900 $2,844 $47,744
2001.................... 40,000 2,395 42,395
2002.................... 50,000 2,245 52,245
2003.................... 30,000 1,845 31,845
2004.................... 30,000 1,695 31,695
The sinking fund requirements may be met by certification of property additions
at the rate of 167% of requirements. All of the utility plant is subject to the
lien of the Mortgage and Deed of Trust securing outstanding First Mortgage
Bonds.
In September 1999, $83.7 million of Pollution Control Revenue Refunding Bonds
(Avista Corporation Colstrip Project), Series 1999A due 2032 and Series 1999B
due 2034 were issued by the City of Forsyth, Montana. The proceeds of the bonds
were used to refund the $66.7 million of 7 1/8% First Mortgage Bonds due 2013
and the $17.0 million of 7 2/5% First Mortgage Bonds due 2016. The Series 1999A
and Series 1999B Bonds are backed by an insurance policy issued by AMBAC
Assurance Corporation and bear interest on a floating rate basis that is reset
periodically. The initial interest rate until February 2000 was 3.6% and is
currently 3.75%.
In 1999, $25.0 million of Unsecured Medium-Term Notes (MTNs) were issued, while
$98.1 million of Secured MTNs and $26.5 million of Unsecured MTNs matured or
were redeemed. In 1998, $84.0 million of Unsecured MTNs were issued, while $14.0
million of Unsecured MTNs matured or were redeemed. In August 1999, the
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Company completed the documentation to issue up to and including $400.0 million
of Unsecured MTNs, Series D. As of December 31, 1999, the Company had remaining
authorization to issue up to $541.0 million of Unsecured MTNs.
At December 31, 1999, the Company had $118.5 million in outstanding balances
under borrowing arrangements and commercial paper, which are expected to be
refinanced in 2000. See Note 12 for details of credit agreements.
Included in other long-term debt are the following items related to subsidiary
operations (thousands of dollars):
OUTSTANDING AT DECEMBER 31,
---------------------------
1999 1998
------- -------
Notes payable ....................... $ 9,598 $50,288
Capital lease obligations ........... 6,457 7,176
------- -------
Subsidiary total debt .......... 16,055 57,464
Less: current portion ............... 6,147 15,165
------- -------
Subsidiary net long-term debt .. $ 9,908 $42,299
======= =======
NOTE 12. BANK BORROWINGS
At December 31, 1999, the Company maintained lines of credit with various banks
under two separate credit agreements amounting to $260.0 million. The Company
has one revolving line of credit, expiring June 27, 2000, which provides a total
credit commitment of $135 million. The second revolving credit agreement, which
expires on June 29, 2001, provides a total credit commitment of $125 million.
The Company pays commitment fees of up to 0.11% per annum on the average daily
unused portion of each credit agreement.
In addition, under various agreements with banks, the Company can have up to
$100.0 million in loans outstanding at any one time, with the loans available at
the banks' discretion. These arrangements provide, if funds are made available,
for fixed-term loans for up to 180 days at a fixed rate of interest.
Balances and interest rates of bank borrowings under these arrangements were as
follows:
YEARS ENDED DECEMBER 31,
------------------------
1999 1998
------- -------
(Thousands of Dollars)
BALANCE OUTSTANDING AT END OF PERIOD:
Fixed-term loans .......................... $33,500 $ --
Commercial paper .......................... 10,000 --
Revolving credit agreement ................ 75,000 --
MAXIMUM BALANCE DURING PERIOD:
Fixed-term loans .......................... $93,500 $94,000
Commercial paper .......................... 10,000 --
Revolving credit agreement ................ 75,000 51,000
AVERAGE DAILY BALANCE DURING PERIOD:
Fixed-term loans .......................... $29,110 $47,651
Commercial paper .......................... 2,604 --
Revolving credit agreement ................ 23,767 21,340
AVERAGE ANNUAL INTEREST RATE DURING PERIOD:
Fixed-term loans .......................... 5.48% 5.69%
Commercial paper .......................... 5.89 --
Revolving credit agreement ................ 5.87 5.80
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AVERAGE ANNUAL INTEREST RATE AT END OF PERIOD:
Fixed-term loans .......................... 6.56% --%
Commercial paper .......................... 6.70 --
Revolving credit agreement ................ 6.71 --
Avista Energy and its subsidiary, Avista Energy Canada, Ltd., as co-borrowers,
have a credit agreement with two commercial banks in the aggregate amount of
$110 million, expiring May 31, 2000. The credit agreement may be terminated by
the banks at any time and all extensions of credit under the agreement are
payable upon demand, in either case at the banks' sole discretion. The agreement
also provides, on an uncommitted basis, for the issuance of letters of credit to
secure contractual obligations to counterparts. The facility is guaranteed by
Avista Capital and is secured by substantially all of Avista Energy's assets.
The maximum amount of credit extended by the banks for cash advances is $30
million, with availability of up to $110 million (less the amount of outstanding
cash advances, if any) for the issuance of letters of credit. At December 31,
1999 and 1998, there were no cash advances (demand notes payable) outstanding.
Letters of credit outstanding under the facility totaled approximately $75.8
million and $20.2 million at December 31, 1999 and 1998, respectively.
Pentzer's operations have $27.5 million in short-term borrowing arrangements
available. At December 31, 1999 and 1998, $2.5 million and $21.4 million,
respectively, were outstanding.
NOTE 13. LEASES
The Company has entered into several lease arrangements involving various
assets, with minimum terms ranging from one to thirteen years and expiration
dates from 2000 to 2011. Certain of the lease arrangements require the Company,
upon the occurrence of specified events, to purchase the leased assets for
varying amounts over the term of the lease. The Company's management believes
that the likelihood of the occurrence of the specified events under which the
Company could be required to purchase the property is remote. Rent expense for
the years ended December 31, 1999, 1998 and 1997 was $18.7 million, $17.6
million and $16.9 million, respectively. Future minimum lease payments (in
thousands of dollars) required under operating leases that have initial or
remaining noncancelable lease terms in excess of one year as of December 31,
1999 are estimated as follows:
Year ending December 31:
2000 $ 4,366
2001 3,967
2002 3,654
2003 3,433
2004 3,255
Later years 19,063
--------
Total minimum payments required $ 37,738
========
The Company also has various other cancelable operating leases, which are
charged to operating expense, consisting of the Rathdrum combustion turbines,
the Company airplane and a large number of small, relatively short-term,
renewable agreements for various items, such as office equipment and office
space.
The payments under the Avista Capital subsidiaries' capital leases for the next
five years are $2.9 million in 2000, $1.9 million in 2001, $1.3 million in 2002,
$0.7 million in 2003 and $0.4 million in 2004.
NOTE 14. PREFERRED STOCK
CUMULATIVE PREFERRED STOCK NOT SUBJECT TO MANDATORY REDEMPTION:
In December 1998, as part of a dividend restructuring plan, the Company issued
1,540,460 shares of its $12.40 Convertible Preferred Stock, Series L (Series L
Preferred Stock). During 1999, the Company repurchased the equivalent of 32,250
shares of the Series L Preferred Stock. See Note 15 for additional information.
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CUMULATIVE PREFERRED STOCK SUBJECT TO MANDATORY REDEMPTION:
Redemption requirements:
$6.95, Series K - On September 15, 2002, 2003, 2004, 2005 and 2006, the
Company must redeem 17,500 shares at $100 per share plus accumulated
dividends through a mandatory sinking fund. Remaining shares must be
redeemed on September 15, 2007. The Company has the right to redeem an
additional 17,500 shares on each September 15 redemption date.
There are $5.25 million in mandatory redemption requirements during the
2000-2004 period.
In June 1998, the Company redeemed the final $10 million, or 100,000 shares, of
its $8.625 Series I.
NOTE 15. CONVERTIBLE PREFERRED STOCK
In December 1998, as part of a dividend restructuring plan, the Company issued
1,540,460 shares of its $12.40 Convertible Preferred Stock, Series L (Series L
Preferred Stock), in exchange for 15,404,595 shares of common stock, on the
basis of a one-tenth interest in one share of preferred stock for each share of
common stock. The Series L Preferred Stock had a liquidation preference of
$182.8125 per share.
During 1999, the Company repurchased the equivalent of 32,250 shares of the
Series L Preferred Stock. 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. One share of Series L Preferred Stock equaled 10 depositary
shares, also known as RECONS (Return-Enhanced Convertible Securities). The
RECONS were also converted into common stock on the same conversion date.
Unless previously converted into common stock by the Company, on November 1,
2001 each share of the Series L Preferred Stock was to be converted into (1) ten
shares of common stock (subject to antidilution adjustments) and (2) the right
to receive an amount, in cash, equal to accrued and unpaid dividends.
The Series L Preferred Stock could be converted, at the option of the Company,
at any time prior to November 1, 2001, in whole but not in part, into, for each
share so converted (1) a number of shares of common stock equal to the Optional
Conversion Price then in effect, plus (2) the right to receive an amount, in
cash, equal to the accrued and unpaid dividends thereon to but excluding the
conversion date, plus (3) the right to receive the Optional Conversion Premium.
As used above,
* the "Optional Conversion Price" was, for each share of Series L
Preferred Stock so converted, a number of shares of common stock
equal to the lesser of (a) the amount of $24 divided by an amount
equal to the current market price of the common stock, multiplied by
ten and (b) one share of common stock (subject to antidilution
adjustments); and
* the "Optional Conversion Premium" was, for each share of Series L
Preferred Stock, so converted, an amount in cash, initially equal to
$20.90, declining by $0.02111 for each day following December 15,
1998 to and including the optional conversion date and equal to zero
on and after September 15, 2001; provided, however, that in lieu of
delivering such amount in cash, the Company was allowed, at its
option, to deliver a number of shares of common stock equal to the
quotient of such amount divided by an amount equal to the current
market price of the common stock.
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On the conversion date, 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.
NOTE 16. COMPANY-OBLIGATED MANDATORILY REDEEMABLE PREFERRED TRUST SECURITIES
On January 23, 1997, Avista Capital I, a business trust, issued to the public
$60,000,000 of Preferred Trust Securities having a distribution rate of 7 7/8%.
Concurrent with the issuance of the Preferred Trust Securities, the Trust issued
$1,855,675 of Common Trust Securities to the Company. The sole assets of the
Trust are the Company's 7 7/8% Junior Subordinated Deferrable Interest
Debentures, Series A, with a principal amount of $61,855,675. These debt
securities may be redeemed at the Company's option on or after January 15, 2002
and mature January 15, 2037.
On June 3, 1997, Avista Capital II, a business trust, issued to the public
$50,000,000 of Preferred Trust Securities having a floating distribution rate of
LIBOR plus 0.875%, calculated and reset quarterly (initially 6.6875%). The
distribution rate paid during 1999 ranged from 5.895% to 6.985%, which was the
rate outstanding at December 31, 1999. Concurrent with the issuance of the
Preferred Trust Securities, the Trust issued $1,547,000 of Common Trust
Securities to the Company. The sole assets of the Trust are the Company's
Floating Rate Junior Subordinated Deferrable Interest Debentures, Series B, with
a principal amount of $51,547,000. These debt securities may be redeemed at the
Company's option on or after June 1, 2007 and mature June 1, 2037.
The Company has guaranteed the payment of distributions on, and redemption price
and liquidation amount in respect of, the Preferred Trust Securities to the
extent that the Trust has funds available for such payment from the debt
securities. Upon maturity or prior redemption of such debt securities, the Trust
Securities will be mandatorily redeemed. The Company's Consolidated Statements
of Capitalization reflect only the $60 million and $50 million of Preferred
Trust Securities, accordingly all intercompany transactions have been
eliminated.
NOTE 17. FAIR VALUE OF FINANCIAL SECURITIES
The fair value of the Company's long-term debt (excluding notes payable and
other) at December 31, 1999 and 1998 is estimated to be $545.8 million, or 93%
of the carrying value and $735.5 million, or 107% of the carrying value,
respectively. The fair value of the Company's mandatorily redeemable preferred
stock at December 31, 1999 and 1998 is estimated to be $35.1 million, or 100% of
the carrying value and $38.5 million, or 110% of the carrying value,
respectively. The fair value of the Company's preferred trust securities at
December 31, 1999 and 1998 is estimated to be $94.3 million, or 86% of the
carrying value and $106.9 million, or 97% of the carrying value, respectively.
These estimates are all based on available market information. The fair value of
the Company's convertible preferred securities at December 31, 1999 and 1998 is
estimated to be $230.0 million, or 87%, of the carrying value and $301.4
million, or 112%, of the carrying value, respectively. This valuation was based
on the closing price of the securities on December 31, 1999.
NOTE 18. COMMON STOCK
In April 1990, the Company sold 1,000,000 shares of its common stock to the
Trustee of the Investment and Employee Stock Ownership Plan for Employees of the
Company (Plan) for the benefit of the participants and beneficiaries of the
Plan. In payment for the shares of Common Stock, the Trustee issued a promissory
note payable to the Company in the amount of $14,125,000. Dividends paid on the
stock held by the Trustee, plus Company contributions to the Plan, if any, are
used by the Trustee to make interest and principal payments on the promissory
note. The balance of the promissory note receivable from the Trustee ($8.2
million at December 31, 1999) is reflected as a reduction to common equity. The
shares of Common Stock are allocated to the accounts of participants in the Plan
as the note is repaid. During 1999, the cost recorded for the Plan was $5.4
million. Interest on the note payable to the Company, cash and stock
contributions to the Plan and dividends on the shares held by the Trustee were
$0.8 million, $4.0 million and $0.4 million, respectively.
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In May 1999, the Company's Board of Directors authorized a common stock
repurchase program in which the Company may repurchase in the open market or
through privately negotiated transactions up to an aggregate of 10 percent of
its common stock and common stock equivalents over the next two years. The
repurchased shares return to the status of authorized but unissued shares. As of
December 31, 1999, the Company had repurchased approximately 4.8 million common
shares and 322,500 shares of Return-Enhanced Convertible Securities (which is
equivalent to 32,250 shares of Convertible Preferred Stock, Series L). The
combined repurchases of these two securities represent 9% of outstanding common
stock and common stock equivalents.
In November 1999, the Company adopted a shareholder rights plan pursuant to
which holders of Common Stock outstanding on February 15, 1999, or issued
thereafter, have been granted one preferred share purchase right (Right) on each
outstanding share of Common Stock. Each Right, initially evidenced by and traded
with the shares of Common Stock, entitles the registered holder to purchase one
one-hundredth of a share of Preferred Stock of the Company, without par value,
at a purchase price of $70, subject to certain adjustments, regulatory approval
and other specified conditions. The Rights will be exercisable only if a person
or group acquires 10% or more of the outstanding shares of Common Stock or
commences a tender or exchange offer, the consummation of which would result in
the beneficial ownership by a person or group of 10% or more of the outstanding
shares of Common Stock. Upon any such acquisition, each Right will entitle its
holder to purchase, at the purchase price, that number of shares of Common Stock
or Preferred Stock of the Company (or, in the case of a merger of the Company
into another person or group, common stock of the acquiring person) which has a
market value at that time equal to twice the purchase price. In no event will
the Rights be exercisable by a person which has acquired 10% or more of the
Company's Common Stock. The Rights may be redeemed, at a redemption price of
$0.01 per Right, by the Board of Directors of the Company at any time until any
person or group has acquired 10% or more of the Common Stock. The Rights will
expire on March 31, 2009. This plan replaced a similar shareholder rights plan
that expired in February 2000.
The Company has a Dividend Reinvestment and Stock Purchase Plan under which the
Company's stockholders may automatically reinvest their dividends and make
optional cash payments for the purchase of the Company's Common Stock at current
market value.
The Company purchases stock on the open market to fulfill obligations of the
401(K) and Dividend Reinvestment Plans. Sales of Common Stock for 1999, 1998 and
1997 are summarized below (thousands of dollars):
1999 1998 1997
------------------------- ------------------------- ----------------------
Shares Amount Shares Amount Shares Amount
----------- --------- ----------- --------- ---------- --------
Balance at January 1 .................. 40,453,729 $ 381,401 55,960,360 $ 594,852 55,960,360 $594,852
----------- --------- ----------- --------- ---------- --------
Exchange for preferred stock .......... -- -- (15,404,595) (211,201) -- --
Stock repurchase plan ................. (4,788,900) (62,393) -- -- -- --
Stock options/restricted stock ........ (16,590) (277) (102,036) (2,250) -- --
----------- --------- ----------- --------- ---------- --------
Total issues (exchanges/repurchases) .. (4,805,490) (62,670) (15,506,631) (213,451) -- --
----------- --------- ----------- --------- ---------- --------
Balance at December 31 ................ 35,648,239 $ 318,731 40,453,729 $ 381,401 55,960,360 $594,852
========== ========= ========== ========= ========== ========
NOTE 19. EARNINGS PER SHARE
Average common shares outstanding for basic EPS were 38,212,763, 54,603,926 and
55,960,360 in 1999, 1998 and 1997, respectively. At December 31, 1999 and 1998,
1,508,210 and 1,540,460 shares of $12.40 Convertible Preferred Stock, Series L,
which were convertible into 15,082,100 and 15,404,595 million shares of common
stock, respectively, were outstanding. All of these potential common shares were
excluded from the computation of diluted EPS for 1999 and 1998 because their
inclusion had an antidilutive effect on EPS. Basic and diluted EPS were the same
in 1997, as the Company did not have any common stock equivalents outstanding
that year.
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The computation of basic and diluted earnings per common share is as follows (in
thousands, except per share amounts):
1999 1998 1997
------- ------- --------
Net income $26,031 $78,139 $114,797
Less: Preferred stock dividends 21,392 8,399 5,392
------- ------- --------
Income available for common stock-basic 4,639 69,740 109,405
Convertible Preferred Stock, Series L,
dividend requirements -- -- --
------- ------- --------
Income available for common stock-diluted $ 4,639 $69,740 $109,405
======= ======= ========
Weighted-average number of common shares
outstanding-basic 38,213 54,604 55,960
Conversion of Convertible Preferred Stock, Series L -- -- --
Restricted stock 112 -- --
Exercise of stock options -- 54 --
------- ------- --------
Weighted-average number of common shares
outstanding-diluted 38,325 54,658 55,960
------- ------- --------
Earnings per common share
Basic $ 0.12 $ 1.28 $ 1.96
Diluted $ 0.12 $ 1.28 $ 1.96
For additional information regarding the convertible preferred stock and stock
option plans, see Notes 15 and 21, respectively.
NOTE 20. INFORMATION AND TECHNOLOGY SEGMENT INFORMATION
The Information and Technology line of business includes the results of Avista
Advantage, Avista Labs and Avista Communications. Avista Fiber and Avista
Communications will merge operations in 2000, so Avista Fiber's financial
information has been included with Avista Communications. Additional information
on each of these three separate companies is provided as follows (thousands of
dollars):
1999 1998 1997
------- ------- -------
AVISTA ADVANTAGE
Operating Revenues $ 1,518 $ 1,186 $ 618
Operating Income (pre-tax) (5,042) (2,904) (4,386)
Net Income $(3,428) $(2,052) $(2,858)
AVISTA LABS
Operating Revenues $ 748 $ 132 $ 174
Operating Income (3,924) (2,076) (1,005)
Net Income $(2,561) $(1,169) $ (597)
AVISTA COMMUNICATIONS
Operating Revenues $ 2,585 $ 677 $ 238
Operating Income (4,036) (212) 27
Net Income $(4,167) $ (177) $ 30
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NOTE 21. STOCK COMPENSATION PLANS
AVISTA CORP.
In 1998, the Company adopted and shareholders approved an incentive compensation
plan, the Long-Term Incentive Plan (Plan). Under the Plan, certain key
employees, directors and officers of the Company and its subsidiaries may be
granted stock options, stock appreciation rights, stock awards (including
restricted stock) and other stock-based awards and dividend equivalent rights.
The Company has made available a maximum of 2.5 million shares of its common
stock for grant under the Plan. The shares issued under the Plan will be
purchased by the trustee on the open market.
The following summarizes stock options activity for 1999 and 1998 under the
Plan:
1999 1998
--------- -------
Number of shares under stock options:
Outstanding at beginning of year 589,800 --
Granted 780,700 589,800
Canceled (10,175) --
--------- -------
Unexercised options outstanding at end of year 1,360,325 589,800
--------- -------
Exercisable options 147,200 --
========= =======
Weighted average exercise price:
Granted $17.21 $20.14
Canceled $18.63 $ --
Outstanding at end of year $18.29 $20.14
Exercisable at end of year $19.63 $ --
Weighted average fair value of options granted during the year $ 5.02 $ 4.74
Principal assumptions used in applying the Black-Scholes model:
Risk-free interest rate 5.57% - 6.33% 4.81% - 5.53%
Expected life, in years 7 7
Expected volatility 27.92% 22.19%
Expected dividend yield 3.11% 3.01%
Information with respect to stock options outstanding and stock options
exercisable at December 31, 1999 is as follows:
Stock options outstanding
Range of exercise prices $16.66 - $22.62
Weighted average remaining contractual life, in years 9.33
Weighted average exercise price $18.29
Stock options exercisable
Range of exercise prices $18.31 - $22.62
Number exercisable 147,200
Weighted average exercise price $19.63
The Company granted 20,000 and 102,036 shares of restricted common stock under
the Plan in 1999 and 1998, respectively. Plan participants are entitled to
dividends and to vote their respective shares. The sale or transfer of
restricted stock is prohibited during the vesting period except as specified in
the award agreements. The value of restricted stock awards is established by the
average market price on the date of grant. Restricted stock awarded in 1999 and
1998 have vesting periods from 4 to 5 years.
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Common equity was reduced in the accompanying Consolidated Balance Sheets by the
cost of restricted shares acquired by the Plan trustee on the open market.
Accordingly, the Company is recording compensation expense ratably over the
restriction periods based on the reduction to common equity.
The Company accounts for stock based compensation using APB Opinion No. 25,
"Accounting for Stock Issued to Employees." Under this method, compensation cost
is recognized on the excess, if any, of the market price of the stock at grant
date over the exercise price of the option. As the exercise price for options
granted under the Plan was equal to the market price at grant date, no
compensation expense has been recorded by the Company in connection this the
Plan. In accordance with FAS No. 123, "Accounting for Stock-Based Compensation,"
compensation expense is determined based on the fair value of the award and
recognizes that cost over the service period. Had compensation costs for these
plans been determined based on the fair value at the grant dates with FAS No.
123, the Company's net income would have been reduced to the pro forma amounts
indicated below:
1999 1998
---------- ----------
Net income (in thousands):
As reported $ 26,030 $ 78,139
Pro forma $ 24,636(2) $ 76,891(2)
Basic EPS as reported $ 0.12 $ 1.28
Proforma Basic EPS $ 0.08 $ 1.25
Diluted EPS as Reported $ 0.12 $ 1.28
Proforma Diluted EPS $ 0.08 $ 1.25
(2) Includes pro forma effect of subsidiary companies stock option plans.
AVISTA CAPITAL COMPANIES
Certain subsidiaries under Avista Capital have adopted employee stock incentive
plans under which key employees and directors were granted the opportunity to
purchase shares of subsidiary common stock at prices equal to the fair market
value as determined by each subsidiary's Board of Directors. Restricted shares
are subject to transfer agreements and vest over various periods as defined in
the plans. The subsidiaries record compensation expense based on the increase in
the adjusted net book value of the shares subject to the plans.
Certain subsidiaries under Avista Capital have adopted employee stock incentive
plans under which certain employees and directors of the Company and the
subsidiaries are granted options to purchase subsidiary shares at prices no less
than the fair market value on the date of grant. Options outstanding under these
plans usually become fully exercisable between three and five years from the
date granted and terminate ten years from the date granted. Upon termination of
employment, vested options may be exercised and the related subsidiary shares
may be, but are not required to be, repurchased by the applicable subsidiary at
fair value.
NOTE 22. 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.
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AVISTA CORPORATION
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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 Draft Order will require the completion of an RI
and the performance of a focused Feasibility Study (FS) at the site. The work to
be performed under the proposed Order includes three major technical parts:
completion of the RI; performance of a focused FS; and, implementation of an
interim groundwater monitoring plan. Following this public comment opportunity,
the Draft Agreed Order will be finalized, incorporating any appropriate
modifications based on written comments received. Completion of the RI and
focused FS work is anticipated within approximately four months from the date
the Order is finalized.
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.
THE POWER COMPANY OF AMERICA
On June 25, 1999, the trustee (Trustee) of the PCA Liquidating Trust (Trust),
the successor of The Power Company of America, L.P. (PCA), demanded that Avista
Energy pay the Trust approximately $22.4 million. Until June 1998, Avista Energy
and PCA had entered into forward contracts for the purchase/sale of electric
power. In early July 1998, PCA defaulted on its contract obligations with Avista
Energy and numerous other counterparties. Accordingly, on July 6, 1998, Avista
Energy suspended all business dealings with PCA. On August 17, 1998, an
involuntary petition was filed against PCA in the U.S. Bankruptcy Court for the
District of Connecticut, and on January 5, 1999, the Court approved a plan of
reorganization and established the Trust. Avista Energy has filed a Proof of
Claim for approximately $2.6 million, representing the net amount owing by PCA
to Avista Energy for power delivered to or received from PCA prior to July 6,
1998.
The Trustee's primary claim is based on the allegation that Avista Energy
wrongfully terminated the forward contracts on July 6, 1998, resulting in
alleged damages to PCA of about $18.5 million, recoverable under contract and/or
bankruptcy law, in connection with those contracts in which Avista Energy was
the seller and PCA was the buyer. Avista Energy reached a settlement agreement
with the Trustee, in full settlement of all claims of the Trustee and Avista
Energy, in which Avista Energy agreed to pay the Trustee $850,000. On February
1, 2000, the Bankruptcy Court conducted a hearing, which approved the terms of
the settlement. The Bankruptcy Court also approved the settlement reached
between the Company and the Trustee, with respect to separate creditors' claims
of Avista Corp. and offsetting demands of the Trustee. Under that settlement,
all claims were effectively netted against each other, with no additional
payment owing by the Company.
OTHER CONTINGENCIES
The Company routinely assesses, based on in-depth studies, expert analyses and
legal reviews, its contingencies, obligations and commitments for remediation of
contaminated sites, including assessments of ranges and probabilities of
recoveries from other responsible parties who have and have not agreed to a
settlement and recoveries from insurance carriers. The Company's policy is to
immediately accrue and charge to current expense identified exposures related to
environmental remediation sites based on estimates of investigation, cleanup and
monitoring costs to be incurred.
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AVISTA CORPORATION
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The Company must be in compliance with requirements under the Clean Air Act
Amendments (CAAA) at both the Colstrip and Centralia thermal generating plants,
in which the Company maintains an ownership interest. The anticipated share of
costs at Colstrip are not expected to have a major economic impact on the
Company, but estimates for limestone scrubbers at both units at Centralia are
expected to be approximately $35 million, which have been included in the
Company's projected capital expenditures. However, a proposed sale of Centralia
to TransAlta, of Calgary, is pending. A decision on the sale is expected by
mid-year. Obligations under the CAAA would be assumed by TransAlta if the sale
is completed.
The Company has potential liabilities under the Federal Endangered Species Act
(ESA) for species of fish that have either already been added to the endangered
species list, been listed as "threatened" or been petitioned for listing. Thus
far, measures that have been adopted and implemented have had minimal impact of
the Company. The new operating license for the Clark Fork Projects describes the
approach to restore bull trout populations in the project areas. Using the
concept of adaptive management, the Company will evaluate the feasibility of
fish passage, and, depending upon the results of these experimental studies,
determine the applications of funds toward continuing fish passage efforts or
other population enhancement measures.
The Company continues to study the issue of high dissolved gas levels downstream
of Cabinet Gorge during spill periods, as agreed to in the Settlement Agreement
of the new license for Cabinet Gorge. To date, intensive biological studies in
the lower Clark Fork River and Lake Pend Oreille have documented minimal
biological effects of high dissolved gas levels on free ranging fish. Under the
terms of the Settlement Agreement, the Company will develop an abatement and/or
mitigation strategy by 2002.
Under the federal licenses for its hydroelectric projects, the Company is
obligated to protect its property rights, including water rights. The State of
Montana is examining the status of all water right claims within state
boundaries, which could potentially adversely affect the generating capacity of
the Company's Cabinet Gorge and Noxon Rapids hydroelectric facilities. The
Company is participating in this extended process, which is unlikely to be
concluded in the foreseeable future.
The Company has long-term contracts related to the purchase of fuel for thermal
generation, natural gas and hydroelectric power. Terms of the natural gas
purchase contracts range from one month to five years and the majority provide
for minimum purchases at the then effective market rate. The Company also has
various agreements for the purchase, sale or exchange of electric energy with
other utilities, cogenerators, small power producers and government agencies.
As of December 31, 1999, the Company's collective bargaining agreement with the
International Brotherhood of Electrical Workers represented approximately 51% of
employees. The current agreement with the union local representing the majority
of the bargaining unit employees expires on March 25, 2002. A local agreement in
the South Lake Tahoe area, which represents 6 employees, expires on March 25,
2002.
NOTE 23. ACQUISITIONS AND DISPOSITIONS
During the first quarter of 1999, Pentzer Corporation (Pentzer) sold its
Creative Solutions Group, a group of five portfolio companies that provide
point-of-purchase displays and other merchandising and packaging services to
retailers and consumer product companies. The sale resulted in a gain of $10.1
million, net of taxes. During the third quarter of 1999, Pentzer sold its Store
Fixtures Group, a group of six portfolio companies that design, manufacture and
deliver store fixture products to major retailers. The sale resulted in a gain
of $27.6 million, net of taxes. During the first quarter of 1998, Pentzer sold
Systran Financial Services, resulting in an after-tax gain of $5.5 million. In
May 1997, Pentzer sold its interest in a portfolio company, Safety Speed Cut,
resulting in a gain of approximately $2.0 million, net of taxes.
In November 1999, Pentzer purchased the International Retail Services Group, a
company that provides backroom supplies for retail stores. In April 1998,
Pentzer completed the purchase of two new companies that produce store fixtures
- -- Universal Showcase, Ltd., in Toronto, Canada and Triangle Systems, Inc., in
New York. In October 1998, Pentzer acquired two additional store fixtures
companies -- Horizon Terra, Inc., in Indiana and Pacific Coast Showcase, Inc.,
in Washington. During 1997, Pentzer acquired three new companies: Target
Woodworks, Inc., a Florida-based company; White Plus, a California-based
company; and Proco Wood Products, a Minnesota-based company. All three companies
provide point-of-purchase and in-store merchandising services.
69
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AVISTA CORPORATION
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In January 1999, Avista Corp. acquired a majority ownership in One Eighty
Communications, a competitive local exchange carrier that provided local dial
tone and data services to commercial accounts in local communities. The new
company was renamed Avista Communications. It provides local high-speed
telecommunications services to under-served Northwest communities.
In December 1998, Avista Energy Canada, Ltd. acquired Coast Pacific Management,
Inc. (Coast Pacific), a natural gas marketing company based in Vancouver,
British Columbia, Canada. Coast Pacific manages and transports approximately
70,000 MMBtu of natural gas per day to some 70 large and medium size industrial
customers throughout British Columbia. Coast Pacific also acts as gas manager
for more than 40% of the large industrial market in the interior of British
Columbia.
In February 1999, Avista Energy purchased Vitol Gas & Electric, LLC (Vitol),
based in Boston, Massachusetts. Vitol was one of the top 20 energy marketing
companies in the United States. Vitol trades natural gas, electricity, coal and
SO2 allowances in markets in the eastern half of the United States. The
acquisition was funded through the issuance of additional shares of common stock
to Avista Capital.
70
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AVISTA CORPORATION
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NOTE 24. SELECTED QUARTERLY INFORMATION (UNAUDITED)
The Company's energy operations are significantly affected by weather
conditions. Consequently, there can be large variances in revenues, expenses and
net income between quarters based on seasonal factors such as temperatures and
streamflow conditions. A summary of quarterly operations (in thousands of
dollars except per share amounts) for 1999 and 1998 follows:
THREE MONTHS ENDED
--------------------------------------------------------
MARCH JUNE SEPTEMBER DECEMBER
31 30 30 31
---------- ---------- ---------- ----------
1999
Operating revenues.............................. $1,212,822 $1,411,736 $3,718,109 $1,562,317
Operating income................................ 30,363 17,380 18,197 (34,583)
Net income ..................................... 19,388 8,509 27,613 (29,479)
Income available for common stock............... 14,004 3,125 22,273 (34,763)
Outstanding common stock (000s):
Weighted average............................. 40,454 40,185 36,634 35,648
Actual....................................... 40,454 38,881 35,645 35,648
Earnings per share:
Avista Utilities............................. $0.35 $0.39 $(0.13) $0.39
Energy Trading and Marketing................. (0.18) (0.27) 0.02 (1.16)
Information and Technology................... (0.03) (0.04) (0.06) (0.14)
Pentzer and Other............................ 0.21 -- 0.78 (0.01)
---------- ---------- ---------- ----------
Earnings per share, basic.................... $0.35 $0.08 $0.61 $(0.92)
Earnings per share, diluted.................. $0.34 $0.08 $0.52 $(0.92)
Dividends paid per common share................. $0.12 $0.12 $0.12 $0.12
Trading price range per share:
High......................................... $19.563 $18.188 $18.063 $18.125
Low.......................................... $15.938 $14.625 $16.250 $15.000
1998
Operating revenues.............................. $571,678 $632,995 $1,434,055 $1,045,256
Operating income................................ 56,633 41,942 24,303 49,942
Net income ..................................... 32,232 15,643 8,707 21,557
Income available for common stock............... 31,408 14,855 8,099 15,378
Outstanding common stock (000s):
Weighted average............................. 55,960 55,960 55,960 50,669
Actual....................................... 55,960 55,960 55,960 40,454
Earnings per share:
Avista Utilities............................. $0.40 $0.17 $0.10 $0.21
Energy Trading and Marketing................. 0.04 0.08 0.01 0.13
Information and Technology................... (0.01) (0.01) (0.02) (0.02)
Pentzer and Other............................ 0.13 0.03 0.05 (0.01)
---------- ---------- ---------- ----------
Earnings per share, basic and diluted........ $0.56 $0.27 $0.14 $0.31
Dividends paid per common share................. $0.31 $0.31 $0.31 $0.12
Trading price range per share:
High......................................... $24.813 $24.875 $22.813 $20.188
Low.......................................... $21.688 $20.813 $16.250 $17.500
The effects of the conversion from common stock to convertible preferred stock
are reflected in the fourth quarter 1998 results. See Notes 14 and 18.
71
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AVISTA CORPORATION
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PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information regarding the directors of the Registrant has been omitted pursuant
to General Instruction G to Form 10-K. Reference is made to the Registrant's
Proxy Statement to be filed with the Securities and Exchange Commission in
connection with the Registrant's annual meeting of shareholders to be held on
May 11, 2000.
Executive Officers of the Registrant
Name Age Business Experience During Past 5 Years
- ---- --- ---------------------------------------
Thomas M. Matthews 56 Chairman of the Board, President and
Chief Executive Officer since October
1998; Chairman of the Board and Chief
Executive Officer July 1998 - October
1998; prior to employment with the
Registrant: President - Dynegy 1996 -
July 1998; Vice President - Texaco, Inc.
1994 - 1996.
Gary G. Ely 52 Executive Vice President since February
1999; Senior Vice President and General
Manager August 1996 - February 1999;
Vice President - Natural Gas February
1991- August 1996.
Jon E. Eliassen 53 Senior Vice President and Chief
Financial Officer since November 1998;
Senior Vice President, Chief Financial
Officer and Treasurer December 1997 -
November 1998; Senior Vice President and
Chief Financial Officer August 1996 -
December 1997; Vice President - Finance
and Chief Financial Officer February
1986 - August 1996.
David J. Meyer 46 Senior Vice President and General
Counsel since September 1998; prior to
employment with the Registrant: Attorney
- Paine Hamblen Coffin Brooke & Miller
1974 - September 1998.
David A. Brukardt 45 Vice President - Investor Relations
since July 1999; prior to employment
with the Registrant: Director - Investor
and Corporate Relations - Harnischfeger
Industries, Inc. and Vice President -
Harnischfeger Foundation July 1995 -
July 1999; Senior Vice President and
Principal - CCU, Inc. May 1998 - July
1995.
Christy M. Burmeister-Smith 43 Vice President and Controller since June
1999; Controller - Energy Delivery and
various other positions with the Company
since 1980.
Robert D. Fukai 50 Vice President - External Relations
since August 1996; Vice President -
Human Resources, Corporate Services and
Marketing January 1993 - August 1996.
JoAnn G. Matthiesen 59 Vice President - Human Resources and
Support Services since May 1999; Vice
President - Human Resources since August
1996; Vice President - Organization
Effectiveness, Public Relations and
Assistant to the Chairman January 1993 -
August 1996.
Ronald R. Peterson 47 Vice President and Treasurer since
November 1998; Vice President and
Controller February 1998 - November
1998; Controller August 1996 - February
1998; Treasurer February 1992 - August
1996.
Terry L. Syms 51 Vice President and Corporate Secretary
since February 1998; Corporate Secretary
March 1988 - February 1998.
72
77
Edward H. Turner 44 Vice President and General Manager -
Energy Delivery since November 1998;
prior to employment with the Registrant:
Director of Industrial Sales and various
other positions - Houston Lighting &
Power Company and Houston Industries
Incorporated for 24 years.
Roger D. Woodworth 43 Vice President - Corporate Development
since November 1998; Director of
Corporate Development and various other
positions with the Company since 1979.
All of the Company's executive officers, with the exception of Messrs. Brukardt,
Fukai and Woodworth and Mmes. Burmeister-Smith and Matthiesen were officers or
directors of one or more of the Company's subsidiaries in 1999.
Executive officers are elected annually by the Board of Directors.
ITEM 11. EXECUTIVE COMPENSATION
Information regarding executive compensation has been omitted pursuant to
General Instruction G to Form 10-K. Reference is made to the Registrant's Proxy
Statement to be filed with the Securities and Exchange Commission in connection
with the Registrant's annual meeting of shareholders to be held on May 11, 2000.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
(a) Security ownership of certain beneficial owners (owning 5% or more of
Registrant's voting securities):
Information regarding security ownership of certain beneficial owners (owning
5% or more of Registrant's voting securities) has been omitted pursuant to
General Instruction G to Form 10-K. Reference is made to the Registrant's Proxy
Statement to be filed with the Securities and Exchange Commission in connection
with the Registrant's annual meeting of shareholders to be held on May 11, 2000.
(b) Security ownership of management:
Information regarding security ownership of management has been omitted
pursuant to General Instruction G to Form 10-K. Reference is made to the
Registrant's Proxy Statement to be filed with the Securities and
Exchange Commission in connection with the Registrant's annual meeting
of shareholders to be held on May 11, 2000.
(c) Changes in control:
None.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information regarding certain relationships and related transactions has been
omitted pursuant to General Instruction G to Form 10-K. Reference is made to the
Registrant's Proxy Statement to be filed with the Securities and Exchange
Commission in connection with the Registrant's annual meeting of shareholders to
be held on May 11, 2000.
73
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AVISTA CORPORATION
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PART IV
ITEM 14. FINANCIAL STATEMENTS, FINANCIAL STATEMENT SCHEDULES, EXHIBITS AND
REPORTS ON FORM 8-K
(a) 1. Financial Statements (Included in Part II of this report):
Independent Auditors' Report
Consolidated Statements of Income, Comprehensive Income and Retained
Earnings for the Years Ended December 31, 1999, 1998 and 1997
Consolidated Balance Sheets, December 31, 1999 and 1998
Consolidated Statements of Capitalization, December 31, 1999 and 1998
Consolidated Statements of Cash Flows for the Years Ended December 31,
1999, 1998 and 1997
Schedule of Information by Business Segments for the Years Ended
December 31, 1999, 1998 and 1997
Notes to Financial Statements
(a) 2. Financial Statement Schedules:
None
(a) 3. Exhibits:
Reference is made to the Exhibit Index commencing on page 77. The
Exhibits include the management contracts and compensatory plans or
arrangements required to be filed as exhibits to this Form 10-K by Item
601(10)(iii) of Regulation S-K.
(b) Reports on Form 8-K:
Dated January 6, 1999, regarding the Company's name change to Avista
Corporation.
Dated June 15, 1999, regarding anticipated lower second quarter
earnings.
Dated November 15, 1999, announcing the adoption of a shareholder rights
plan to replace the plan that expired on February 16, 2000.
Dated December 2, 1999, announcing a redirection of Avista Energy's
focus away from national energy trading toward a more regionally based
energy marketing and trading effort backed by physical assets.
Dated January 6, 2000, regarding lower utility revenues due to warm
weather and fourth quarter charger 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.
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AVISTA CORPORATION
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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
March 17, 2000 By /s/ T. M. Matthews
- -------------------------- ------------------------------------
Date T. M. Matthews
Chairman of the Board, President
and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ T. M. Matthews Principal Executive March 17, 2000
- ------------------------------------------- Officer and Director
T. M. Matthews (Chairman of the Board,
President and Chief Executive Officer)
/s/ J. E. Eliassen Principal Financial March 17, 2000
- ------------------------------------------- and Accounting Officer
J. E. Eliassen (Senior Vice President
and Chief Financial Officer)
/s/ David A. Clack Director March 17, 2000
- -------------------------------------------
David A. Clack
/s/ Sarah M. R. Jewell Director March 17, 2000
- -------------------------------------------
Sarah M. R. Jewell
/s/ John F. Kelly Director March 17, 2000
- -------------------------------------------
John F. Kelly
/s/ Jessie J. Knight, Jr. Director March 17, 2000
- -------------------------------------------
Jessie J. Knight, Jr.
/s/ Eugene W. Meyer Director March 17, 2000
- -------------------------------------------
Eugene W. Meyer
/s/ Bobby Schmidt Director March 17, 2000
- -------------------------------------------
Bobby Schmidt
/s/ Larry A. Stanley Director March 17, 2000
- -------------------------------------------
Larry A. Stanley
/s/ R. John Taylor Director March 17, 2000
- -------------------------------------------
R. John Taylor
/s/ Daniel J. Zaloudek Director March 17, 2000
- -------------------------------------------
Daniel J. Zaloudek
75
80
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement Nos.
2-81697, 2-94816, 33-54791, and 33-32148 on Form S-8, and in Registration
Statement Nos. 33-53655, 333-39551, 333-82165, 333-16353, and 333-16353-03 on
Form S-3 of our report dated February 4, 2000 (February 16, 2000 as to Note 15),
appearing in this Annual Report on Form 10-K of Avista Corporation for the year
ended December 31, 1999.
/s/ Deloitte & Touche LLP
Deloitte & Touche LLP
Seattle, Washington
March 17, 2000
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AVISTA CORPORATION
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EXHIBIT INDEX
Previously Filed*
-------------------------
With
Registration As
Exhibit Number Exhibit
- ------- ------ -------
3(a) 1-3701 (with Restated Articles of Incorporation of Avista Corporation as
1998 Form 10-K) restated February 25, 1999.
3(b) 1-3701 (with 1999 Bylaws of Avista Corporation, as amended May 13, 1999.
2nd Quarter 10-Q)
4(a)-1 2-4077B-3 Mortgage and Deed of Trust, dated as of June 1, 1939.
4(a)-2 2-98124(c) First Supplemental Indenture, dated as of October 1, 1952.
4(a)-3 2-60728 2(b)-2 Second Supplemental Indenture, dated as of May 1, 1953.
4(a)-4 2-13421 4(b)-3 Third Supplemental Indenture, dated as of December 1, 1955.
4(a)-5 2-13421 4(b)-4 Fourth Supplemental Indenture, dated as of March 15, 1967.
4(a)-6 2-60728 2(b)-5 Fifth Supplemental Indenture, dated as of July 1, 1957.
4(a)-7 2-60728 2(b)-6 Sixth Supplemental Indenture, dated as of January 1, 1958.
4(a)-8 2-60728 2(b)-7 Seventh Supplemental Indenture, dated as of August 1, 1958.
4(a)-9 2-60728 2(b)-8 Eighth Supplemental Indenture, dated as of January 1, 1959.
4(a)-10 2-60728 2(b)-9 Ninth Supplemental Indenture, dated as of January 1, 1960.
4(a)-11 2-60728 2(b)-10 Tenth Supplemental Indenture, dated as of April 1, 1964.
4(a)-12 2-60728 2(b)-11 Eleventh Supplemental Indenture, dated as of March 1, 1965.
4(a)-13 2-60728 2(b)-12 Twelfth Supplemental Indenture, dated as of May 1, 1966.
4(a)-14 2-60728 2(b)-13 Thirteenth Supplemental Indenture, dated as of August 1, 1966.
4(a)-15 2-60728 2(b)-14 Fourteenth Supplemental Indenture, dated as of April 1, 1970.
4(a)-16 2-60728 2(b)-15 Fifteenth Supplemental Indenture, dated as of May 1, 1973.
4(a)-17 2-60728 2(b)-16 Sixteenth Supplemental Indenture, dated as of February 1, 1975.
4(a)-18 2-60728 2(b)-17 Seventeenth Supplemental Indenture, dated as of November 1, 1976.
4(a)-19 2-69080 2(b)-18 Eighteenth Supplemental Indenture, dated as of June 1, 1980.
4(a)-20 1-3701 (with 4(a)-20 Nineteenth Supplemental Indenture, dated as of January 1,
1980 Form 10-K) 1981.
4(a)-21 2-79571 4(a)-21 Twentieth Supplemental Indenture, dated as of August 1, 1982.
- -----------------
*Incorporated herein by reference.
**Filed herewith.
77
82
EXHIBIT INDEX (continued)
Previously Filed*
-------------------------
With
Registration As
Exhibit Number Exhibit
- ------- ------ -------
4(a)-22 1-3701 (with 4(a)-22 Twenty-First Supplemental Indenture, dated as of
Form 8-K dated September 1, 1983.
September 20, 1983)
4(a)-23 2-94816 4(a)-23 Twenty-Second Supplemental Indenture, dated as of
March 1, 1984.
4(a)-24 1-3701 (with 4(a)-24 Twenty-Third Supplemental Indenture, dated as of
1986 Form 10-K) December 1, 1986.
4(a)-25 1-3701 (with 4(a)-25 Twenty-Fourth Supplemental Indenture, dated as of
1987 Form 10-K) January 1, 1988.
4(a)-26 1-3701 (with 4(a)-26 Twenty-Fifth Supplemental Indenture, dated as of
1989 Form 10-K) October 1, 1989.
4(a)-27 33-51669 4(a)-27 Twenty-Sixth Supplemental Indenture, dated as of
April 1, 1993.
4(a)-28 1-3701 (with 4(a)-28 Twenty-Seventh Supplemental Indenture, dated as of
1993 Form 10-K) January 1, 1994.
4(b)-1 ** Loan Agreement between City of Forsyth, Montana, and the
Company, dated as of September 1, 1999 (Series 1999A).
4(b)-2 ** Indenture of Trust, Pollution Control Revenue Refunding
Bonds (Series 1999A) between City of Forsyth, Montana, and
Chase Manhattan Bank and Trust Company, N.A., dated as of
September 1, 1999.
4(b)-3 ** Loan Agreement between City of Forsyth, Montana, and the
Company, dated as of September 1, 1999 (Series 1999B).
4(b)-4 ** Indenture of Trust, Pollution Control Revenue Refunding
Bonds (Series 1999B) between City of Forsyth, Montana, and
Chase Manhattan Bank and Trust Company, N.A., dated as of
September 1, 1999.
4(c)-1 1-3701 (with 4(h)-1 Indenture between the Company and Chemical Bank dated
1988 Form 10-K) as of July 1, 1988 (Series A and B Medium-Term Notes).
4(d)-1 1-3701 (with Credit Agreement between the Company and Toronto
1998 Form 10-K) Dominion (Texas), Bank of America National Trust and
Savings Association and The Bank of New York with Toronto
Dominion as the agent, dated June 30, 1998.
4(d)-2 ** Amended and Restated Credit Agreement between the Company
and Toronto Dominion (Texas), Bank of America National
Trust and Savings Association and The Bank of New York
with Toronto Dominion as the agent, dated June 29, 1999.
- ------------------
*Incorporated herein by reference.
**Filed herewith.
78
83
EXHIBIT INDEX (continued)
Previously Filed*
-------------------------
With
Registration As
Exhibit Number Exhibit
- ------- ------ -------
4(e) 1-3701 (with Form 4 Rights Agreement, dated as of November 15, 1999, between
8-K dated November the Company and the Bank of New York as successor
15,1999) Rights Agent.
10(a)-l 2-13788 13(e) Power Sales Contract (Rocky Reach Project) with
Public Utility District No. 1 of Chelan County, Washington,
dated as of November 14, 1957.
10(a)-2 2-60728 10(b)-1 Amendment to Power Sales Contract (Rocky Reach
Project) with Public Utility District No. 1 of Chelan
County, Washington, dated as of June 1, 1968.
10(b)-1 2-13421 13(d) Power Sales Contract (Priest Rapids Project) with
Public Utility District No. 2 of Grant County,
Washington, dated as of May 22, 1956.
10(b)-2 2-60728 5(d)-1 Second Amendment to Power Sales Contract (Priest Rapids
Project) with Public Utility District No. 2 of Grant
County, Washington, dated as of December 19, 1977.
10(c)-1 2-60728 5(e) Power Sales Contract (Wanapum Project) with
Public Utility District No. 2 of Grant County,
Washington, dated as of June 22, 1959.
10(c)-2 2-60728 5(e)-1 First Amendment to Power Sales Contract (Wanapum
Project) with Public Utility District No. 2 of
Grant County, Washington, dated as of December 19, 1977.
10(d)-1 2-60728 5(g) Power Sales Contract (Wells Project) with Public Utility
District No. 1 of Douglas County, Washington, dated as
of September 18, 1963.
10(d)-2 2-60728 5(g)-1 Amendment to Power Sales Contract (Wells Project)
with Public Utility District No. 1 of Douglas County,
Washington, dated as of February 9, 1965.
10(d)-3 2-60728 5(h) Reserved Share Power Sales Contract (Wells Project)
with Public Utility District No. 1 of Douglas County,
Washington, dated as of September 18, 1963.
10(d)-4 2-60728 5(h)-1 Amendment to Reserved Share Power Sales Contract
(Wells Project) with Public Utility District No. 1 of Douglas
County, Washington, dated as of February 9, 1965.
10(e) 2-60728 5(i) Canadian Entitlement Exchange Agreement executed by
Bonneville Power Administration Columbia Storage Power
Exchange and the Company, dated as of August 13, 1964.
10(f) 2-60728 5(j) Pacific Northwest Coordination Agreement, dated as of
September 15, 1964.
- ----------
*Incorporated herein by reference.
**Filed herewith.
79
84
EXHIBIT INDEX (continued)
Previously Filed*
-------------------------
With
Registration As
Exhibit Number Exhibit
- ------- ------ -------
10(g)-1 2-60728 5(k) Ownership Agreement between the Company, Pacific
Power & Light Company, Puget Sound Power & Light
Company, Portland General Electric Company, Seattle City
Light, Tacoma City Light and Grays Harbor and Snohomish
County Public Utility Districts as owners of the Centralia
Steam Electric Generating Plant, dated as of May 15, 1969.
10(g)-2 1-3701 (with Form 10(h)-3 Centralia Fuel Supply Agreement between PacifiCorp
10-K for 1991) Electric Operations, as the Seller, and the Company, Puget
Sound Power & Light Company, Portland General Electric
Company, Seattle City Light, Tacoma City Light and Grays
Harbor and Snohomish County Public Utility Districts,
as the Buyers of coal for the Centralia Steam Electric
Generating Plant, dated as of January 1, 1991.
10(h)-l 2-47373 13(y) Agreement between the Company, Bonneville Power
Administration and Washington Public Power Supply
System for purchase and exchange of power from the Nuclear
Project No. 1 (Hanford), dated as of January 6, 1973.
10(h)-2 2-60728 5(m)-1 Amendment No. 1 to the Agreement between the Company
between the Company, Bonneville Power Administration and
Washington Public Power Supply System for purchase and
exchange of power from the Nuclear Project No. 1 (Hanford),
dated as of May 8, 1974.
10(h)-3 1-3701 (with 10(i)-3 Agreement between Bonneville Power Administration,
Form 10-K for the Montana Power Company, Pacific Power & Light,
1986) Portland General Electric, Puget Sound Power & Light, the
Company and the Supply System for relocation costs of
Nuclear Project No. 1 (Hanford) dated as of July 9, 1986.
10(i)-1 2-60728 5(n) Ownership Agreement of Nuclear Project No. 3, sponsored
by Washington Public Power Supply System, dated as of
September 17, 1973.
10(i)-2 1-3701 (with 1 Settlement Agreement and Covenant Not to Sue executed
Form 10-Q for by the United States Department of Energy acting
quarter ended by and through the Bonneville Power Administration
September 30, and the Company, dated as of September 17, 1985,
1985) describing the settlement of Project 3 litigation.
10(i)-3 1-3701 (with 2 Agreement to Dismiss Claims and Covenant
Form 10-Q for Not to Sue between the Washington Public
quarter ended Power Supply System and the Company, dated
September 30, as of September 17, 1985, describing the settlement
1985) of Project 3 litigation with the Supply System.
- -----------
*Incorporated herein by reference.
**Filed herewith.
80
85
EXHIBIT INDEX (continued)
Previously Filed*
-------------------------
With
Registration As
Exhibit Number Exhibit
- ------- ------ -------
10(i)-4 1-3701 (with 3 Agreement among Puget Sound Power & Light
Form 10-Q for Company, the Company, Portland General Electric
quarter ended Company and PacifiCorp, dba Pacific Power & Light
September 30, Company, agreeing to execute contemporaneously
1985) an irrevocable offer, to and for the benefit of
the Bonneville Power Administration, dated as of
September 17, 1985.
10(j)-1 2-66184 5(r) Service Agreement (Natural Gas Storage Service), dated as
of August 27, 1979, between the Company and Northwest
Pipeline Corporation.
10(j)-2 2-60728 5(s) Service Agreement (Liquefaction-Storage Natural Gas Service),
dated as of December 7, 1977, between the Company and
Northwest Pipeline Corporation.
10(j)-3 1-3701 (with 10(k)-4 Amendment dated as of January 1, 1990, to Firm
1989 Form 10-K) Transportation Agreement, dated as of June 15, 1988,
between the Company and Northwest Pipeline Corporation.
10(j)-4 1-3701 (with 10(k)-6 Firm Transportation Service Agreement, dated as of
1992 Form 10-K) April 25, 1991, between the Company and Pacific Gas
Transmission Company.
10(j)-5 1-3701 (with 10(k)-7 Service Agreement Applicable to Firm Transportation Service,
1992 Form 10-K) dated June 12, 1991, between the Company and Alberta
Natural Gas Company Ltd.
10(k)-1 1-3701 (with 13(b) Letter of Intent for the Construction and Ownership
Form 8-K for of Colstrip Units No. 3 and 4, sponsored by The
August 1976) Montana Power Company, dated as of April 16, 1974.
10(k)-2 1-3701 (with 10(s)-7 Ownership and Operation Agreement for Colstrip
1981 Form 10-K) Units No. 3 and 4, sponsored by The Montana
Power Company, dated as of May 6, 1981.
10(k)-3 1-3701 (with 10(s)-2 Coal Supply Agreement for Colstrip Units No. 3 and 4
1981 Form 10-K) between The Montana Power Company, Puget Sound
Power & Light Company, Portland General Electric Company,
Pacific Power & Light Company, Western Energy
Company and the Company, dated as of July 2, 1980.
10(k)-4 1-3701 (with 10(s)-3 Amendment No. 1 to Coal Supply Agreement for
1981 Form 10-K) Colstrip Units No. 3 and 4, dated as of July 10, 1981.
10(k)-5 1-3701 (with 10(l)-5 Amendment No. 4 to Coal Supply Agreement for Colstrip
1988 Form 10-K) Units No. 3 and 4, dated as of January 1, 1988.
10(l)-1 1-3701 (with 10(n)-2 Lease Agreement between the Company and IRE-4
1986 Form 10-K) New York, Inc., dated as of December 15, 1986,
relating to the Company's central operating facility.
- ---------
* Incorporated herein by reference.
** Filed herewith.
81
86
EXHIBIT INDEX (continued)
Previously Filed*
-------------------------
With
Registration As
Exhibit Number Exhibit
- ------- ------ -------
10(m) 1-3701 (with 10(v) Supplemental Agreement No. 2, Skagit/Hanford Project,
1983 Form 10-K) dated as of December 27, 1983, relating to the termination
of the Skagit/Hanford Project.
10(n) 1-3701 (with 10(p)-l Agreement for Purchase and Sale of Firm Capacity and
1986 Energy between Puget Sound Power & Light Company
Form 10-K) and the Company, dated as of August 1, 1986.
10(o) 1-3701 (with 10(q)-1 Electric Service and Purchase Agreement between
1991 Form 10-K) Potlatch Corporation and the Company, dated as of
January 3, 1991.
10(p) 1-3701 (with 10(s)-1 Agreements for Purchase and Sale of Firm Capacity
1992 Form 10-K) between the Company and Portland General Electric
Company dated March and June 1992.
10(q)-1 1-3701 (with 10(t)-8 Executive Deferral Plan of the Company. (***)
1992 Form 10-K)
10(q)-2 1-3701 (with 10(t)-10 The Company's Unfunded Supplemental
1992 Form 10-K) Executive Retirement Plan. (***)
10(q)-3 1-3701 (with 10(t)-11 The Company's Unfunded Supplemental
1992 Form 10-K) Executive Disability Plan. (***)
10(q)-4 1-3701 (with 10(t)-12 Income Continuation Plan of the Company. (***)
1992 Form 10-K)
10(q)-5 1-3701 (with Long-Term Incentive Plan. (***)
1998 Form 10-K)
10(q)-6 1-3701 (with Employment Agreement between the Company and
1998 Form 10-K) T. M. Matthews. (***)
10(q)-7 ** Employment Agreement between the Company and
David J. Meyer. (***)
12 ** Statement re computation of ratio of earnings to fixed
charges and preferred dividend requirements.
21 ** Subsidiaries of Registrant.
27 ** Financial Data Schedule.
- ----------
* Incorporated herein by reference.
** Filed herewith.
*** Management contracts or compensatory plans filed as exhibits by
reference per Item 601(10)(iii) of Regulation S-K.
82