DEWEY BALLANTINE LLP
1301 AVENUE OF THE AMERICAS
NEW YORK, NEW YORK 10019-6092
TEL 212 259-8000 FAX 212 259-6333
J. ANTHONY TERRELL
212 259 7070
JTERRELL@DEWEYBALLANTINE.COM
March 23, 2006
Securities and Exchange Commission
100 F. Street, N.E.
Washington, D. C. 20549
Attention: Mr. H. Christopher Owings
Assistant Director
Division of Corporation Finance
Re: AVA Formation Corp.
Registration Statement on Form S-4
Filed February 15, 2006
File No. 333-131872
Avista Corporation
Form 10-K for Year Ended December 31, 2005
Filed March 7, 2006
File No. 1-03701
Ladies and Gentlemen:
On behalf of our client, AVA Formation Corp. ("AVA"), we advise you that
AVA is causing to be electronically transmitted herewith for filing Amendment
No. 1 to the Registration Statement referred to above. Amendment No. 1 includes
changes made in response to comments by the Staff in the letter dated March 16,
2006 ("Comment Letter"). We are also delivering to members of the Staff paper
copies of Amendment No. 1 marked to show changes.
On behalf of AVA and our client Avista Corporation ("Avista"), we are
submitting in this letter the specific responses of those companies to the
comments of the Staff in the Comment Letter. For your convenience, each comment
of the Staff is repeated in this letter, followed by the response thereto.
NEW YORK WASHINGTON, D.C. LOS ANGELES EAST PALO ALTO HOUSTON AUSTIN
LONDON WARSAW FRANKFURT MILAN ROME BEIJING
Securities and Exchange Commission
Mr. H. Christopher Owings
March 23, 2006
Page 2
Form S-4
General
1. We note that AVA Formation Corp. is a newly formed company and does
not meet the requirements for the use of Form S-3. Please
substantially revise to include the information required by Item 14
of Form S-4 with respect to AVA Formation Corp.
AVA is a new subsidiary of Avista, formed solely for the
purpose of effecting the reorganization into a holding company
structure. AVA has no assets (other than a nominal amount of
capital), no liabilities, no operations and no revenues or expenses.
For purposes of clarification, this disclosure has been added to the
Proxy Statement-Prospectus on pages 3 and 30. There is no more
information of any kind regarding AVA.
2. Please provide us with any gatefold information such as pictures,
graphics or artwork that will be used in the prospectus.
There is no gatefold information, whether pictures, graphics
or artwork, that will be used in the Proxy Statement-Prospectus,
except the organizational charts that appeared on pages 32-34 in the
Registration Statement. These charts have now been removed, but new
improved charts have been inserted into the Summary in Amendment No.
1 in response to comment 11.
Form of Proxy
3. We note that the form of proxy includes a statement that the proxy
confers the power to vote shares on the proposal and "such other
matters as may properly come before the meeting or any adjournments
thereof." Provide an opportunity to specify by boxes a choice
between approval or disapproval. Refer to Rule 14a-4(b).
Reference is made to comment 16 and our response thereto
regarding adjournments. The following discussion is qualified by
such response and is directed at other matters which may come before
the meeting or adjournments thereof -- that is, matters other than
the question of whether or not the meeting should be adjourned. We
believe that our response to comment 16, together with the
additional language inserted in the Proxy Statement-Prospectus under
"VOTING PROCEDURES", adequately addresses that question.
We respectively disagree with the proposition that Rule
14a-4(b) requires that a form of proxy provide an opportunity to
specify by boxes ("Choice Boxes") a choice between approval or
disapproval of, or abstention with respect to, the authority of the
proxies to properly vote in their discretion upon other matters
which may be brought before the meeting and of which the registrant
has not received
Securities and Exchange Commission
Mr. H. Christopher Owings
March 23, 2006
Page 3
timely notice, as provided in Rule 14a-4(c), and, indeed, has
received no notice at all. A requirement for such Choice Boxes would
appear to be effectively changing the Rule to say that discretionary
authority is never granted, as to any matter, unless the shareholder
has specifically granted it.
Rule 14a-4(a) provides that the form of proxy shall, among
other things, identify each separate matter intended to be acted
upon; provided, however, that no reference need be made to proposals
as to which discretionary authority is conferred pursuant to Rule
14a-4(c), even if the registrant has received timely notice as
contemplated in Rule 14a-4(c)(2). Obviously, no such identification
is required or, indeed, can be made in the form of proxy as to
matters of which the registrant has not been notified.
Rule 14a-4(b) requires Choice Boxes for each separate matter
referred to in the form of proxy as intended to be acted upon.
Paragraph (b)continues to permit a form of proxy to confer
discretionary authority with respect to matters as to which a choice
is not specified in the Choice Boxes, provided that the form of
proxy indicates how the proxies intend to vote as to such matter.
Nowhere in paragraphs (a) and (b) is any requirement to let a
shareholder specify whether or not discretionary authority is
granted as to any matter (whether or not such matter is identified
in the form of proxy).
Rule 14a-4(c) specifically permits a form of proxy to confer
discretionary authority, in the case of an annual meeting of
shareholders, as to seven categories of matters that may come up at
the meeting including, particularly:
1. matters as to which the registrant did not receive
timely notice, provided that a specific statement to
the effect that discretionary authority is granted is
contained in the proxy statement or form of proxy; and
2. even matters as to which if the registrant did receive
timely notice, provided that the registrant also
includes in the proxy statement advice on the nature of
the matter and how the proxies intend to vote on the
matter (subject to certain exceptions relating to
counter-solicitations).
Nowhere does Rule 14a-4(c) suggest that a form of proxy may confer
such discretionary authority only if the shareholder indicates on
the form of proxy that the shareholder elects to confer such
authority.
It is our position that when Rule 14a-4(a) states that "a
proxy may confer discretionary authority...", the Rule is not
granting permission to the shareholder to grant discretionary
authority because it would seem that the shareholder has the right
and the power to grant whatever authority he or she wants, by
signing a proxy card or a general or limited power-of-attorney.
Rather, the Rule is granting permission to the person soliciting the
proxy (in this case the issuer) to draft the proxy card so as to
require the shareholder to grant discretionary authority as to
certain matters by merely signing the card.
We respectfully request an opportunity to meet with the Staff
to discuss this issue in advance of an adverse determination.
4. Please revise Proposal 2 to refer to the share exchange in
connection with the reorganization to a holding company structure.
Securities and Exchange Commission
Mr. H. Christopher Owings
March 23, 2006
Page 4
The form of proxy has been revised to refer to the share
exchange.
Front Cover of the Proxy Statement/ Prospectus
5. Please revise the cover page as follows:
- Please limit the front cover to one page;
- Please omit the use of defined terms on the cover and in the
prospectus; instead, use abbreviated terms or terms that are
clear from their context;
- Please disclose recent stock price information for Avista
common stock and the trading symbols for Avista and AVA;
- Please highlight the risk factor reference by separating it
from the rest of the paragraph that appears in bold, or in
some other manner; please remove the other cross-references to
"Proposal Two" since this is not information required by Item
501 of Regulation S-K;
- Please disclose the total number of shares being offered in
the share exchange;
- Please identify the person making the proxy solicitation;
refer to Item 4 of Schedule 14; and
- Please revise to clarify that Avista's common stock will be
delisted after the share exchange is consummated.
The cover page of the Proxy Statement-Prospectus has been
revised in accordance with these comments; provided, however, that
AVA does not yet have a NYSE trading symbol (although "AVA",
Avista's current symbol, has been reserved). We believe that, since
"AVA Formation Corp." is only a temporary name for the holding
company and the permanent name has not yet been determined, it would
not be practicable at this time to determine and disclose a trading
symbol for AVA.
We note that this page already contains, at the bottom, a
statement as to on whose behalf the solicitation is made.
The cover page will be all on one page when it is printed and
the "red herring" legend has been removed.
Securities and Exchange Commission
Mr. H. Christopher Owings
March 23, 2006
Page 5
Additional Information About Avista and AVA, page 1
6. Please move this section so that it appears after the risk factors.
This section has been moved to follow "RISK FACTORS".
Incorporation of Documents by Reference, page 1
7. We note that you filed on March 7, 2006 your Form 10-K for the
fiscal year ended December 31, 2005. Please revise your disclosure
to refer to this most recent Form 10-K. See Item 11(a) of Form S-4.
Since Avista's 2005 Form 10-K has been filed, this section has
been revised to refer to the 2005 Form 10-K.
Summary, page 3
8. Please revise to include the information required by Item 5 of
Schedule 14A.
None of the individuals specified in Item 5(a) of Schedule 14A
has any interest in Proposal 2 or Proposal 3 which is required to be
disclosed. Reference is made to the instruction to Item 5(a).
9. Please briefly describe the material differences in the rights of
stockholders of Avista and AVA Formation. For instance, it appears
that there are differences with respect to cumulative voting to
elect directors, the percentage required to approve amendments to
the charter will be lowered from 80% to two-thirds, and the
preferred purchase right will be eliminated.
Material differences between the rights of Avista and AVA
shareholders have been briefly described. Please note that in the
State of Washington shareholders have cumulative voting rights
unless denied by the articles. See RCW 23B.02.020(3)(v), 23B.07.280.
AVA's articles do not deny cumulative voting rights.
10. Please briefly describe the revocability of the proxy.
The revocability of proxies has been noted in the introduction
to the Summary on page 3, in addition to the existing disclosure in
"VOTING PROCEDURES".
Holding Company Proposal, page 3
AVA and Avista, page 3
11. For ease of understanding, please include in your summary
organizational charts comparing your current structure and the
holding company structure. Refer to the Avista Form 425 filed on
March 3, 2006.
Securities and Exchange Commission
Mr. H. Christopher Owings
March 23, 2006
Page 6
New and improved organizational charts have been inserted into
the Summary and the charts later in the document have been removed.
Selected Avista Financial Information, page 5
12. Please consider the use of the word "unaudited" for the year ended
December 31, 2005. While this information appears to be derived from
the audited financial statements of Avista for the relevant years,
none of it is covered by an audit report and the use of the word
unaudited to describe a part of the information may imply that the
information presented for the preceding years are audited.
The word "unaudited" has been centered to indicate that it
applies to all three columns.
Risk Factors, page 7
13. Your introductory paragraph implies that you are incorporating risk
factors by reference. Please note that all material risk factors
must be disclosed in the proxy statement/ prospectus. Please revise
the introductory paragraph of this section to eliminate the
implication that you have not discussed all material risks, and
revise as necessary to include a discussion of all material risks in
your Risk Factors section.
The risk factors discussed in Item 1A of Avista's 2005 Form
10-K are inherent in an investment in Avista common stock and would
continue to be inherent in an investment in AVA common stock. These
risk factors would be relevant to an investment decision as to
whether or not to buy or sell Avista common stock and, after the
effective time of the share exchange, would be relevant to the same
decision with respect to AVA common stock.
However, these risk factors do not appear to be relevant to
the decision that Avista shareholders are being asked to make. The
holders of Avista common stock, who have already incurred the risks
set forth in the 2005 Form 10-K by making their investment in Avista
common stock, are now being asked to approve a holding company
structure. The only risk factor relevant to that decision is the
first risk factor set forth in the Proxy Statement-Prospectus. Since
the Avista shareholders are already subject to the risk factors
discussed in the 2005 10-K, and will continue to be so subject
whether or not a holding company structure is adopted, those risk
factors are not relevant to the decision as to whether to approve a
holding company structure.
Accordingly, the reference in the Proxy Statement-Prospectus
to the risk factors contained in Avista's 2005 Form 10-K has been
deleted as not being relevant or material.
Securities and Exchange Commission
Mr. H. Christopher Owings
March 23, 2006
Page 7
14. Please include a risk factor describing the risks of the proposed
share exchange and restructuring.
The first risk factor included in the original filing is the
only risk factor specifically applicable to the formation of the
holding company. It is now set forth, with minor revisions, as the
only risk factor.
The performance of any new AVA subsidiaries is uncertain, page 7
15. The disclosure in this risk factor appears generic because the
information could apply to many companies in your industry or even
in other industries. Please revise to specifically indicate how the
stated risk applies to your company, or delete this risk factor.
This seemingly generic risk factor has been deleted.
Voting Procedures, page 8
16. Please clarify that proxies indicating votes against a proposal will
not be used to vote in favor of adjourning or otherwise postponing
the meeting to allow for additional voting on the proposal.
Otherwise, include a separate proposal describing the procedures for
adjourning or postponing a meeting.
Two new paragraphs under the subheading "Adjournment" have
been added under "VOTING PROCEDURES" disclosing that the Annual
Meeting could be adjourned with respect to one or more matters to be
acted upon. This new disclosure expressly indicates that proxies
directing votes against a proposal will not be used to vote in favor
of an adjournment to allow for the solicitation of additional votes
in favor of that proposal, as suggested in this comment.
Proposal 1 - Election of Directors, page 9
17. We note disclosure indicating the board "has no reason to believe
that any nominee will be unable to serve as a director." Please
expand your disclosure to state, if true, that each of the nominees
has consented to becoming a director. In addition, please file the
appropriate written consents. Refer to Rule 438 of Regulation C.
The expanded disclosure has been made with respect to the
nominees to Avista's Board of Directors. In addition, written
consents by all current members of Avista's Board of Directors, and
the new nominees thereto, to becoming members of AVA's Board of
Directors have been filed as exhibits.
18. Please revise to include all of the information required by Item 7
of Schedule 14A. For example, the business experience during the
past five years for Mrs. Blake, Mr. Knight, Dr. Powell and Ms.
Stanley is unclear. See Item 401(e) of Regulation S-K.
Securities and Exchange Commission
Mr. H. Christopher Owings
March 23, 2006
Page 8
The disclosure has been revised as requested.
19. Please substantiate or delete the promotional references appearing
in the biographical information of Ms. Stanley. For example, we note
disclosure indicating she has held "progressively responsible
positions of leadership" and was named one off the "Twenty-Five
Women to Watch in Banking."
The "promotional" references have been deleted.
20. Please identify the two parties to the commercial transaction under
the description of Mr. Eiguren's business experience.
The disclosure has been revised as requested.
Director and Executive Compensation, page 17
21. Please disclose whether the vesting schedule of options issued to
executive officers will accelerate as a result of the company's
restructuring.
The formation of the holding company will not accelerate the
vesting of options or other awards granted to executive officers. An
additional paragraph to this effect has been added to "Executive
Compensation and Employee Benefit Plans", on page 55, which is
within the discussion of Proposal 2.
Class Action Securities Litigation, page 29
22. To the extent possible, please update the current status of the
legal proceedings discussed in this section. Please also explain to
us why you do not expect that this lawsuit will have a material
adverse effect on your financial condition, results of operations or
cash flows. We may have further comment after reviewing your
response.
Update on the Proceedings: On July 30, 2004, the Court entered
an Order denying the Defendants Motion to Dismiss the Plaintiffs'
Consolidated Amended Class Action Complaint ("CAC"). The Defendants
filed a Motion to Reconsider on June 13, 2005. On October 19, 2005,
the Court entered an Order granting Defendants' Motion to Reconsider
and dismissed the Plaintiffs' CAC with leave to amend. The
Plaintiffs filed a Second Amended Class Action Complaint ("SCAC") on
November 10, 2005. The Defendants filed a Motion to Dismiss the SCAC
on January 6, 2006, and the Motion is fully briefed and set for oral
hearing on April 14, 2006.
Explanation of Avista's Opinion: In Avista's opinion the
lawsuit should not have a material adverse effect on its financial
condition, results of operations or cash flows because Plaintiffs
fail to allege loss causation under the standard set out in
Securities and Exchange Commission
Mr. H. Christopher Owings
March 23, 2006
Page 9
Dura Pharmaceuticals, Inc. v. Broudo, 125 S. Ct. 1627, 161 L. Ed. 2d
577 (2005). In dismissing the CAC, the judge noted that to state a
claim for securities fraud under Section 10(b) of the Exchange Act
and Rule 10b-5, a plaintiff must plead, among other things, loss
causation, which is "a causal connection between the material
misrepresentation and the loss". Dura Pharmaceuticals, 125 S. Ct. at
1631 (citing 15 U.S.C. Section 78u-4(b)(4)). The Court noted that
alleging purchase price inflation, as the Plaintiffs did, is
insufficient to establish loss causation. The judge also noted that
in addition to purchase price inflation, the Plaintiffs argued they
pled loss causation by alleging that they were damaged when the FERC
announced two Orders, on June 4 and August 13, 2002, following which
the price of Avista stock dropped. The Court rejected this argument
because the Plaintiffs failed to allege facts showing the drops in
Avista's stock price following the announcement of the FERC's orders
were caused by disclosure of Avista's alleged misrepresentations.
The Court found that the FERC orders did not reveal any factual
information showing Avista illegally manipulated the energy market
or made the factual misrepresentations alleged in the CAC, and that
the FERC orders did not provide a basis for asserting a causal
relationship between Avista's alleged fraud and Plaintiffs' alleged
economic loss.
Based on Avista's review of the SCAC, it is Avista's opinion
that the SCAC does not contain any additional factual allegations,
that were not contained in the CAC, that substantively support loss
causation under the Dura standard, and that the SCAC should,
therefore, be dismissed for failure to state a claim. Avista cannot
predict the Court's ruling, but it is Avista's opinion that the
Court should dismiss the SCAC for the same reasons it dismissed the
CAC.
Proposal 2 - Holding Company Proposal, page 30
Corporate Reorganization, page 30
23. Please include a discussion of the background of the reorganization
proposal.
A subsection entitled "Background" has been added on page 38.
24. Please revise to briefly describe the operations of the four
business segments of Avista, particularly the segment you categorize
as "Other."
Additional information regarding the business segments has
been provided.
25. In the charts appearing on pages 32-34, please revise to explain the
difference between a business entity and business segment.
The charts have been revised and the footnotes clarified. In
addition, the charts have been moved into the Summary pursuant to comment
No. 11.
Securities and Exchange Commission
Mr. H. Christopher Owings
March 23, 2006
Page 10
Reasons for Holding Company Proposal, page 34
26. Please balance your disclosure of the potential benefits of the
proposed restructuring with equally prominent disclosure of
potential negative consequences of the proposal.
A subheading entitled "Possible Negative Consequences" has
been added under the heading "Reasons for Holding Company Proposal".
27. We note that the holding company structure would permit the use of
financing techniques by non-utility businesses. Please describe in
greater detail the financing techniques to which you refer.
The discussion under "Reasons for Holding Company Proposal --
Benefits" has been revised to eliminate references to "financing
techniques" and to focus on the fact that AVA would have
considerably more flexibility in making capital contributions to its
subsidiaries than does Avista. This is primarily because Avista's
securities issues are subject to prior regulatory approval and the
proceeds of Avista's securities issues may not be used to make
contributions to subsidiaries. AVA would not be so limited.
28. We note disclosure on page 34 indicating that the holding company
structure would make it easier for AVA to enter into new businesses
within other sectors of the energy industry. We also note disclosure
on page 37 indicating that after the effective time of the share
exchange, AVA may form new subsidiaries that may engage in
businesses that are not related to the energy business. Please
identify and describe the businesses you contemplate entering into.
The reference to the energy sector has been eliminated.
The disclosure under "Business of AVA" has been clarified. The
Avista Board of Directors currently intends to limit future
investments in the Other business segment, as disclosed in the 2005
10-K, and has no present intention of entering into any new lines of
business.
Amendment or Termination of Plan of Exchange, page 37
29. Please explain why you are unable to predict under what
circumstances the share exchange might be terminated or abandoned.
We may have further comment after reviewing your response.
The disclosure has been revised to give some examples of
circumstances which could warrant termination or abandonment of the
Plan of Exchange.
Securities and Exchange Commission
Mr. H. Christopher Owings
March 23, 2006
Page 11
Material United States Income Tax Consequences, page 38
30. Please note that the signed tax opinion must be filed before the
registration statement is declared effective. Please revise your
statements that the opinion "will be based...," so that the opinion
speaks as of the effective date of the registration statement.
The disclosure has been revised as requested.
31. We note that you have filed a short-form tax opinion (see Exhibit
8). Please revise your disclosure so that the prospectus clearly
states that the discussion in the tax consequences section of the
prospectus is the opinion of Heller Ehrman LLP. Similarly, please
revise your tax opinion to clearly state that the discussion in the
tax consequences section of the prospectus is counsel's opinion. In
addition, please revise to clarify which statements in the
disclosure are the opinions of Heller Ehrman. It is not appropriate
to require investors to determine which portions of the disclosure
are statements of law and conclusions of law.
The disclosure has been revised as requested.
Listing of AVA Common Stock, page 46
32. We note that listing AVA common stock on the New York Stock Exchange
is a condition to the consummation of the share exchange. Please
further explain this condition, including the timing of the listing
with the completion of the share exchange.
The disclosure under the heading "Listing of AVA Common Stock"
on page 53 has been expanded in response to this comment.
Experts, page 49
33. Please update the experts section of the filing to reflect the
updating of the financial statements upon your filing of Avista's
December 31, 2005 Form 10-K.
The "Experts" section has been updated to refer to the audited
financial statements contained in Avista's 2005 Form 10-K.
Proposal 3: Ratification of Appointment of the Independent Registered...,
page 53
34. Please describe the nature of the services comprising the fees
disclosed under the category "All Other Fees." Refer to Item 9(e)(4)
of Schedule 14A.
The disclosure has been revised as requested.
Securities and Exchange Commission
Mr. H. Christopher Owings
March 23, 2006
Page 12
Security Ownership of Management and Others, page 54
35. Please revise to include your principal stockholder, Barclays, in
the beneficial ownership table.
Barclays is no longer a 5% shareholder of Avista. Therefore,
the discussion of Barclays has been deleted.
Exhibits
Exhibit 23(b) Consent of Independent Registered Public Accounting Firm
36. Please have your independent registered public accountants provide
an updated consent to the use of their reports on your December 31,
2005 financial statements and on the effectiveness of internal
control in the amended filing.
An updated consent of Deloitte & Touche LLP has been filed
with Amendment No. 1 as a new Exhibit 23(b).
Undertakings
37. Please revise to delete the paragraph pursuant to Item 512(b) of
Regulation S-K since you are a new registrant and therefore not
permitted to incorporate by reference Exchange Act documents.
The specified paragraph has been deleted from the
undertakings.
Form 10-K for the fiscal year ended December 31, 2005
Item 1. Business, page 1
38. Please provide support for the qualitative and comparative
statements that appear in this section. Please mark your support or
provide page references in your response to the sections you rely
upon for each specific statement. To the extent you are unable to
provide support, please delete the qualitative and comparative
statement. We note the following:
- Avista Utilities expects to continue to be among the industry
leaders in performance, value and service in its electric and
natural gas utility business.
- Based on Avista Utilities' forecast for electric customer
growth of 2.5 percent and natural gas customer growth of 4
percent within its service area, Avista Utilities anticipates
retail electric and natural gas load growth will average
between 3 and 3.5 percent annually for the next four years.
Securities and Exchange Commission
Mr. H. Christopher Owings
March 23, 2006
Page 13
There are multiple sources of information with respect to
first item.
With respect to service-related performance, Avista
periodically benchmarks its operations for power quality and
reliability, as well as customer service and satisfaction. In
particular, a recent external study has found Avista to be strong in
power quality and reliability as well as customer service. Please
see pages 8 and 9 of the "2005 Electric Utility Residential Customer
Satisfaction Study" which is being furnished to the Staff under
separate cover as supplemental information. Avista has omitted
certain pages, which provide specific data about companies other
than Avista that is not publicly available and Avista does not have
permission to distribute.
In addition, for 2005, Avista exceeded its internal targets
with a customer satisfaction rating of 93 percent. Please see the
"Voice of the Customer Overall Customer Satisfaction" that presents
internally prepared statistics for period from 2000 through 2006
(YTD), which is being furnished to Staff under separate cover as
supplemental information.
With respect to shareholder value-related performance,
Avista's common stock has performed at the 67th percentile among the
S&P 400 MidCap Utilities Index during the period from January 1,
2003 to December 31, 2005. Please see the report from an independent
consultant, which is being furnished to Staff under separate cover
as supplemental information. During this period, Avista's total
market capitalization increased from $560 million to $860 million.
Avista's market capitalization has increased to over $950 million as
of March 20, 2006.
Avista has also benchmarked its utility operations against its
peers and determined that Avista is strong in distribution and
transmission operations, as well as hydro operations. Please see
pages 10, 12, 28 and 30 of the " 2005 Benchmarking Update" which is
being furnished to the Staff under separate cover as supplemental
information.
The statements in Avista's 2005 Form 10-K regarding customer
growth and load growth, which have been noted by Staff, are based on
Avista's internal forecast and analysis. A copy of relevant portions
of such forecast and analysis is being furnished to the Staff under
separate cover as supplemental information.
In future filings, Avista plans to limit its qualitative and
comparative statements, although Avista will continue to disclose
forecasted customer growth and load growth as is customary in the
utility industry.
The documents being furnished to the Staff in response to this
comment, namely,
Securities and Exchange Commission
Mr. H. Christopher Owings
March 23, 2006
Page 14
(i) the "2005 Electric Utility Customer Satisfaction Study",
(ii) the "Voice of the Customer Overall Customer Satisfaction"
statistics,
(iii) the independent consultants report calculating the
percentile ranking of Avista's common stock among the S&P 400 MidCap
Utilities Index during the period from January 1, 2003 to December
31, 2005,
(iv) the "2005 Benchmarking Update" and
(v) relevant portions of Avista's internal forecast and
analysis
are being furnished to the Staff as supplemental information to
facilitate the Staff's review of Avista's 2005 Form 10-K, but not
for filing with the Commission. Avista understands that these
documents will not become publicly available by reason of their
being so furnished to the Staff.
Item 7. Management's Discussion and Analysis of Financial Condition, page 24
39. Please explain to us, and in future filings discuss, in reasonable
detail any known material trends and uncertainties that will have or
are reasonably likely to have a material impact on your revenues or
income or result in your liquidity decreasing or increasing in any
material way. For example, if relevant, you may discuss the evolving
trends in each segment of your business, the nature of your
competition, and the consumer demands for your products and services
in the geographical markets where you operate and the trends that
would affect each segment. In doing so, provide additional
information about the quality and variability of your earnings and
cash flows so that investors can ascertain the likelihood of the
extent past performance is indicative of future performance. In
addition, discuss in reasonable detail the material opportunities,
challenges and risks in the short and long term and the specific
actions you are taking to address each. Please refer to SEC Release
No. 33-8350.
Avista has made efforts to follow the guidance in SEC Release
No. 33-8350 with respect to known material trends and uncertainties
that will have or are reasonably likely to have a material impact on
Avista's revenues, income or liquidity. Examples of such disclosures
include, but are not limited to: 1) the "Executive Level Summary" on
pages 27-29 that includes discussion of the dependency of Avista
Utilities' financial performance upon weather conditions, wholesale
market conditions and regulatory decisions, expected utility growth
rates, future capital expenditures and the primary factors causing
volatility of Avista Energy's results 2) "Avista Utilities -
Regulatory Matters" on pages 29-31 that includes disclosure of
Securities and Exchange Commission
Mr. H. Christopher Owings
March 23, 2006
Page 15
recent rate changes 3) "Overall Liquidity" on pages 50-51 that
includes disclosure of hydroelectric conditions and increasing
commodity costs and 4) "Avista Utilities Operations" on page 55 that
includes disclosure of future debt maturities and capital
expenditures. In future filings, Avista will continue to consider
the guidance of SEC Release No. 33-8350 with a view to enhancing its
disclosures with respect to known material trends and uncertainties.
Executive Level Summary, page 27
40. We note your disclosure indicating that Avista Utilities operating
and financial performance is substantially dependent upon, among
other things, weather conditions, the price of natural gas and
electricity in the wholesale market and weather conditions. Please
tell us, and in future filings describe more specifically, how these
factors affect your operating and financial performance.
In "Item 1A. Risk Factors" (page 16), Avista has disclosed in
detail how weather conditions and commodity price risk can affect
its results of operations, financial condition and cash flows. In
future filings, Avista will enhance its disclosures in "Item 7.
Management's Discussion and Analysis of Financial Condition and
Results of Operations" with respect to weather conditions and the
price of natural gas and electricity in the wholesale market to
provide summarized disclosures of the information provided in "Item
1A. Risk Factors."
Capital Resources, page 51
41. Please tell us, and in future filings discuss, the anticipated
effects, if any, that the proposed restructuring of the company will
have on future compliance with the financial covenants discussed in
this section.
Avista does not expect the proposed reorganization to affect
the compliance with the ratio of "earnings before interest, taxes,
depreciation and amortization" to "interest expense" of Avista
Utilities. The ratio is currently measured at the Avista Utilities
level and will continue to be measured at that level in the future.
The ratio of "consolidated total debt" to "consolidated total
capitalization" is currently measured at the Avista Corp. level.
Once the proposed reorganization is complete, the ratio will be
measured at the Avista Utilities level. The "Avista Capital
Dividend" will result in a reduction in common equity and a
corresponding increase in the ratio. However, the expected increase
in the ratio is not expected to breach the covenant and such ratio
is expected to start declining in 2006.
Securities and Exchange Commission
Mr. H. Christopher Owings
March 23, 2006
Page 16
Avista is currently in the process of negotiating a new credit
facility, which may offer more favorable pricing. In addition,
Avista and its lenders are also discussing the feasibility of
increasing the permissible debt-to-capitalization ratio for a
temporary period as a precautionary measure.
Avista will provide disclosure of these ratios and any changes
in the covenants in future filings.
Financial Statements
Consolidated Statements of Cash Flows, page 69
42. Please explain how you classify AFUDC in the statement of cash
flows. Please tell us what portion of the allowance relates to
equity funds versus capitalized interest expense incurred. If you
exclude AFUDC from investing activities, please explain your basis.
Please see footnote 7 to SFAS no. 95. On a different note, can you
show us how the AFUDC rate is determined and explain the "maximum
allowable rates" referred to under AFUDC.
Avista classifies AFUDC (both the equity and debt portions)
amounts as non-cash regulatory adjustments representing the cost of
both the debt and equity funds used to finance utility plant
additions during the construction period. The amount does not
reflect cash paid for utility property capital expenditures. As a
result, AFUDC is subtracted from net income in arriving at operating
cash flows and from utility property capital expenditures in
arriving at investing cash flows. For the year ended December 31,
2005, the equity component of AFUDC was $1.4 million and the debt
component was $1.7 million. Upon further review of SFAS No. 95
(specifically footnote 7 to paragraph 17c as referred to by the
Staff), Avista may consider classifying the debt component of AFUDC
as utility capital expenditures in the investing activities section
of its statement of cash flows. Avista will review industry
practices and consult with certain peer companies in reaching its
final conclusion. The debt component amounts are $1.7 million, $1.4
million and $1.1 million for the years ended December 31, 2005, 2004
and 2003, respectively. In each year, this represents an immaterial
portion (less than 1.5%) of both operating and investing cash flows.
As such, Avista does not plan to amend its 2005 Form 10-K, but may
change this classification in future periods.
The total AFUDC rate is determined based on the overall rate
of return allowed by regulators in Avista's primary regulatory
jurisdiction (Washington), which is the maximum allowable rate. This
rate was 9.72 percent for 2005, 2004 and 2003.
Securities and Exchange Commission
Mr. H. Christopher Owings
March 23, 2006
Page 17
Notes to Financial Statements
Note 1. Summary of Significant Accounting Policies, Page 72
Other Non-Utility Revenues. Page 73,
43. We presume you are recognizing revenues from the Advanced
Manufacturing and Development operations when products are shipped
to customers rather than upon delivery of the product to your
customers based on the risk of loss as dictated by your shipping
terms. Please tell us and disclose your shipping terms. If shipment
is not when all of the risks and rewards of ownership are
transferred to the customer, provide your basis in GAAP for your
revenue recognition policy.
The point at which the risk of loss transfers to the customer
is at the time of shipment with the exception of sales that are
delivered with AM&D's vehicles. However, substantially all of these
sales would be delivered on the same day as shipment. Revenues in
2005 from AM&D totaled $17.1 million, or less than 1.3 percent of
total consolidated revenues for Avista. The total gross profit on
these sales was $1.2 million. Avista will enhance its disclosures
in future filings to discuss the transfer of risk of loss that
generally occurs upon shipment.
Foreign Currency Translation Adjustment, Page 74
44. Your disclosure suggests that Avista Energy Canada, Ltd.'s
functional currency is the Canadian dollar. Please address the
salient economic factors that support this conclusion pursuant to
paragraph 42 of SFAS No. 52.
Substantially all of Avista Energy Canada's activities involve
the providing of natural gas service to end-user industrial and
commercial customers in British Columbia, Canada with the natural
gas supplies also coming from Canadian sources. These transactions
are denominated in Canadian dollars. Avista has considered the
salient economic factors described in paragraph 42 of SFAS No. 52
and has concluded that the Canadian dollar is the appropriate
functional currency for the operations for Avista Energy Canada
based on the following:
1. Cash flow indicators
Cash flows related to Avista Energy Canada's individual assets
and liabilities are primarily in Canadian dollars and do not
directly impact the parent's cash flows.
2. Sales price indicators
Securities and Exchange Commission
Mr. H. Christopher Owings
March 23, 2006
Page 18
Sales prices for Avista Energy Canada's products are not
primarily responsive on a short-term basis to changes in exchange
rates but are determined more by local competition.
3. Sales market indicators
There is an active local sales market for Avista Energy
Canada's products.
4. Expense indicators
Labor, materials, and other costs for Avista Energy Canada's
products or services are primarily local costs, even though there
are imports from the US.
5. Financing indicators
Funds generated by Avista Energy Canada's operations are
sufficient to service existing and normally expected debt
obligations.
6. Intercompany transactions and arrangements indicators
There is not an extensive interrelationship between the
operations of Avista Energy Canada and its parent. However, Avista
Energy Canada does rely on its parent's competitive advantages
regarding the purchase of natural gas.
Avista supplementally advises the Staff that the total amount
included in accumulated other comprehensive income was a gain of
$1.4 million as of December 31, 2005 and the change included in
comprehensive income for the year ended December 31, 2005 was $0.3
million, both of which are immaterial to Avista.
Depreciation
45. Please explain to us how the hydroelectric depreciation rates
include annuity and interest components. In this regard, an example
may be informative.
The calculation is comprised of two components. The first
component is the annuity amortization expense, which is calculated
by multiplying the depreciable hydroelectric plant by an annuity
factor determined through a depreciation study and approved by
Avista's regulators for use in setting rates to customers. The
second component is the interest component, which is calculated by
multiplying the depreciation reserve for the respective
hydroelectric plant asset by an interest rate. Avista's current
interest rate for hydroelectric facilities is 9%. This rate was also
determined through a depreciation study and approved by Avista's
regulators for use in setting rates to customers. The two components
are added together to determine depreciation expense. Avista's
regulators have consistently used this calculation method.
Securities and Exchange Commission
Mr. H. Christopher Owings
March 23, 2006
Page 19
Note 12. Pension Plans and Other Postretirement Benefit Plans, page 86
46. Please explain to us how you calculate the market related value of
plan assets as that term is defined in SFAS 87. Since there is an
alternative to how you can calculate this item, and it has a direct
effect on pension expense, we believe you should disclose how you
determine this amount in accordance with paragraph 12 of APB 22.
The "market-related value" of plan assets is calculated using
the "fair market value" of the assets as opposed to a "calculated
value" that recognizes changes in fair value in a systematic and
rational manner over not more than five years. As disclosed on page
87 of the 2005 Form 10-K:
"The fair value of pension plan assets invested in debt and
equity securities was based primarily on market prices. The fair
value of pension plan assets invested in real estate was determined
based on three basic approaches: (1) current cost of reproducing a
property less deterioration and functional economic obsolescence (2)
capitalization of the property's net earnings power; and (3) value
indicated by recent sales of comparable properties in the market.
The fair value of plan assets was determined as of December 31, 2005
and 2004."
Avista will revise its disclosure in future filings to make it
more clear that it uses "fair market value" to determine the
market-related value of its plan assets used to calculate expected
return on assets.
Note 18. Interest Rate Swap Agreements, page 94
47. We are unclear on what your accounting will be in the event
regulatory accounting orders arc not obtained prior to mandatory
cash settlements of your interest rate swaps. Please help us
understand your accounting and whether lack of an accounting order
would cause the amounts included in other comprehensive income to be
reclassified to the net income versus a regulatory liability. You
may want to provide us a step-by-step analysis of the transaction(s)
and the related accounting and rationale for such accounting at each
step. On a related note, it appears you classify the cash flows
associated with hedges of anticipated debt issuances as a financing
activity. Please explain to us in detail the basis for your
classification in this statement. We may have further comment.
Because Avista does not have regulatory accounting orders for
unrealized gains or losses related to these forward-starting
interest rate swaps (prior to mandatory cash settlement), Avista has
concluded that it is not appropriate under the provisions of SFAS 71
to reflect a regulatory asset or liability for these unrealized
gains or losses prior to realization. As a result, the unrealized
gains and losses are recorded as adjustments to other comprehensive
income or loss in accordance with SFAS No. 133 for cash flow hedges.
Securities and Exchange Commission
Mr. H. Christopher Owings
March 23, 2006
Page 20
Upon cash settlement of the interest rate swaps, the realized
gain or loss is/will be reclassified out of accumulated other
comprehensive income/loss, deferred as a regulatory asset or
liability (as part of long-term debt) and amortized over the life of
the debt issued. This is consistent with Avista's historical
regulatory accounting practices for all debt-related costs,
including issuance costs, realized gains and losses on the
repurchase of debt prior to scheduled maturity and cash settlement
of interest rate swaps. Avista believes this accounting treatment
for the realized gains or losses is consistent with the provisions
of SFAS No. 71 and has never been disallowed by any of Avista's
regulators.
With respect to Avista's classification of the mandatory cash
settlement of the interest rate swaps as a financing activity,
Avista considered the provisions of paragraph 6 of SFAS 104. This
guidance allows cash allows from contracts that are hedges to be
classified in the same category on the statement of cash flows as
the cash flows from the item being hedged. The forecasted debt
issuance that was hedged by the forward-starting interest rate swap
was issued during 2005 and the related swap was settled. Avista also
considered by analogy the guidance in EITF 95-13, which indicates
that debt issuance costs should be classified as financing
activities. Finally, Avista considered that the effect of these
forward-starting mandatory cash settled interest rate swaps is
similar to a premium or discount, which are treated as financing
activities. Based on the above considerations, both the proceeds
from the debt issuance and the cash received on the swap settlement
were classified as financing. Avista will enhance its disclosure in
future filings to clarify its accounting policy for these items.
Note 26. Commitments and Contingencies, page 100
California Refund Proceeding
48. You state that based on information currently known to your
management, you do not expect that the California refund proceeding
will have a material adverse effect on your financial condition,
results of operations or cash flows due to netting against
counterparty defaults. Please tell us your legal basis for assuming
that any refunds you may be obligated to make will be offset by
amounts owed to you. Further, tell us your basis in GAAP for
offsetting a contingent liability with a contingent recovery. If
not, then you should revise your assessment of materiality to
eliminate netting the amounts of potential refunds against
counterparty defaults. Please revise or advise.
Avista has based this assumption on the specific language of
Federal Energy Regulatory Commission (FERC) orders each of which has
stated that any refunds will be offset against unpaid amounts owed
to the respective parties. In particular, 112 FERC Paragraph 61,176
(Docket EL00-95-000 and Docket No. EL00-98-000) issued August 8,
2005, paragraph 115 states:
Securities and Exchange Commission
Mr. H. Christopher Owings
March 23, 2006
Page 21
"After taking into account comments concerning the
complications that might ensue from issuing refunds piecemeal,
including the difficulty of ensuring adequate funds to cover cost
filings, we will require the resolution of the cost filings prior to
issuance of any refunds. In reaching this determination, we are
particularly mindful of the CAISO's "administrative nightmare"
objections to our proposed two-phase approach, since the CAISO must
perform the task of finalizing the refunds as well as settle and
clear current ISO market activity and perform other vital daily
functions. We further find that resolving cost filings prior to
issuing refunds is consistent with our prior statement that refunds
will be offset by amounts still owed as determined in this
proceeding, and only the net result of this offset will flow to or
from parties. Parties are required to submit to the Commission their
cost filings no later than September 10, 2005. The technical
conference we establish below should hasten resolution of the cost
filings as expeditiously as practicable."
Also, (105 FERC P 61,066 at paragraph 180 issued October 16,
2003) states:
"it is a settled matter that refunds will be offset against
amounts still owed as determined in this proceeding. The very
concept of an offset precludes any possibility that sellers would be
required to remit refunds to buyers without first netting out
amounts still owed to sellers. Accordingly, it is also a settled
matter that amounts owed both by and to parties, as determined in
this proceeding, will be offset against each other and only the net
result of this offset will flow to or from parties. No further
clarification is required."
Northeast Combustion Turbine Site
49. Please tell us whether your accrual of the estimated clean-up costs
during 2005 was made without consideration of any potential recovery
of clean-up costs from Co-op and the engineering firm whom you refer
to in this note. Please also tell us the extent to which you may
have considered potential rate recovery of such clean up costs in
your materiality assumptions. Refer to SAB Topic 10:F.
Avista did not reduce or offset its accrued liability for the
estimated cleanup costs for any potential recoveries from Co-op or
the engineering firm referred to in Note 26 of its financial
statements. Avista also did not reduce its accrued liability for any
potential rate recovery as it determined that such potential
recovery did not meet the criteria in paragraph 9 of SFAS No. 71.
Furthermore, Avista has not recorded any gain contingency related to
potential recovery.
Item 9A. Controls and Procedures
50. We note your statement that disclosure controls and procedures can
only provide "reasonable assurance" of achieving their control
objectives. In future filings,
Securities and Exchange Commission
Mr. H. Christopher Owings
March 23, 2006
Page 22
please revise to state that your disclosure controls and procedures
are effective at the "reasonable assurance" level. Please refer to
Part II.F.4 of Final Rule Release 33-8238.
Avista will revise future filings to state that its disclosure
controls and procedures are effective at a "reasonable assurance"
level.
----------------
Securities and Exchange Commission
Mr. H. Christopher Owings
March 23, 2006
Page 23
Since Avista's Annual Meeting of Shareholders is scheduled to be held on
May 11, 2006, our clients would like to resolve these issues as soon as
possible. We would greatly appreciate the Staff's telephonic advice as to the
adequacy of the responses contained in this letter and/or as to any further
comments, questions or requests for additional information. Please feel free to
contact J. Anthony Terrell (212-259-7070), Michael F. Fitzpatrick, Jr.
(212-259-6670) or Lisa M. Walker (212-259-8495).
Thank you in advance for your consideration.
Very truly yours,
DEWEY BALLANTINE LLP, Counsel for
AVA Formation Corp.
Avista Corporation
By /s/ J. Anthony Terrell
-----------------------------------
J. Anthony Terrell