1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2001
--------------
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
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AVISTA CORPORATION
(Exact name of registrant as specified in its charter)
Washington 91-0462470
------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1411 East Mission Avenue, Spokane, Washington 99202-2600
- ---------------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 509-489-0500
------------
Web site: http://www.avistacorp.com
None
----------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
At April 30, 2001, 47,318,093 shares of Registrant's Common Stock, no par value
(the only class of common stock), were outstanding.
2
AVISTA CORPORATION
Index
Page No.
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Part I. Financial Information:
Item 1. Financial Statements
Consolidated Statements of Income and Comprehensive Income -
Three Months Ended March 31, 2001 and 2000........................ 3
Consolidated Balance Sheets - March 31, 2001
and December 31, 2000............................................. 4
Consolidated Statements of Capitalization - March 31, 2001
and December 31, 2000............................................. 5
Consolidated Statements of Cash Flows - Three Months Ended
March 31, 2001 and 2000........................................... 6
Schedule of Information by Business Segments - Three Months Ended
March 31, 2001 and 2000........................................... 7
Notes to Consolidated Financial Statements........................... 9
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations........................................ 14
Item 3. Quantitative and Qualitative Disclosures About Market Risk....... 20
Part II. Other Information:
Item 5. Other Information................................................ 21
Item 6. Exhibits and Reports on Form 8-K................................. 23
Signature........................................................................... 24
3
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
Avista Corporation
- --------------------------------------------------------------------------------
For the Three Months Ended March 31
Thousands of Dollars
2001 2000
----------- -----------
OPERATING REVENUES ............................................. $ 2,043,310 $ 1,381,974
----------- -----------
OPERATING EXPENSES:
Resource costs .............................................. 1,881,736 1,258,665
Operations and maintenance .................................. 24,172 26,855
Administrative and general .................................. 37,639 25,274
Depreciation and amortization ............................... 21,020 19,150
Taxes other than income taxes ............................... 17,776 16,110
Exit costs - Avista Energy's Eastern energy business ........ -- 4,907
Restructuring charges - Pentzer ............................. -- 1,940
----------- -----------
Total operating expenses .................................. 1,982,343 1,352,901
----------- -----------
INCOME FROM OPERATIONS ......................................... 60,967 29,073
----------- -----------
OTHER INCOME (EXPENSE):
Interest expense ............................................ (21,583) (14,737)
Net gain on subsidiary transactions ......................... 2,152 --
Other income-net ............................................ 7,652 3,362
----------- -----------
Total other income (expense)-net .......................... (11,779) (11,375)
----------- -----------
INCOME BEFORE INCOME TAXES ..................................... 49,188 17,698
INCOME TAXES ................................................... 19,785 7,173
----------- -----------
NET INCOME ..................................................... 29,403 10,525
DEDUCT-Preferred stock dividend requirements (Note 4) .......... 608 21,910
----------- -----------
INCOME (LOSS) AVAILABLE FOR COMMON STOCK ....................... $ 28,795 $ (11,385)
=========== ===========
Average common shares outstanding (thousands), Basic (Note 4) .. 47,237 41,297
EARNINGS (LOSS) PER SHARE OF COMMON STOCK,
BASIC AND DILUTED (Note 4) .................................. $ 0.61 $ (0.28)
Dividends paid per common share ................................ $ 0.12 $ 0.12
NET INCOME ..................................................... $ 29,403 $ 10,525
----------- -----------
OTHER COMPREHENSIVE INCOME (LOSS):
Foreign currency translation adjustment ..................... (14) 41
Unrealized investment gains/(losses)-net of tax ............. 1,565 154
----------- -----------
TOTAL OTHER COMPREHENSIVE INCOME ............................... 1,551 195
----------- -----------
COMPREHENSIVE INCOME ........................................... $ 30,954 $ 10,720
=========== ===========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
3
4
CONSOLIDATED BALANCE SHEETS
Avista Corporation
- --------------------------------------------------------------------------------
Thousands of Dollars
March 31, December 31,
2001 2000
----------- ------------
ASSETS:
CURRENT ASSETS:
Cash and cash equivalents ........................................................... $ 205,185 $ 194,365
Temporary investments ............................................................... 4,875 1,058
Accounts and notes receivable-less allowances of $23,046 and $14,579, respectively .. 536,402 861,308
Energy commodity assets ............................................................. 7,842,182 7,956,229
Materials and supplies, fuel stock and natural gas stored ........................... 23,243 24,496
Prepayments and other ............................................................... 78,181 54,244
----------- -----------
Total current assets .............................................................. 8,690,068 9,091,700
----------- -----------
UTILITY PROPERTY:
Utility plant in service-net ........................................................ 2,217,077 2,205,230
Construction work in progress ....................................................... 39,540 33,535
----------- -----------
Total ............................................................................. 2,256,617 2,238,765
Less: Accumulated depreciation and amortization ..................................... 733,862 720,453
----------- -----------
Net utility plant ................................................................. 1,522,755 1,518,312
----------- -----------
OTHER PROPERTY AND INVESTMENTS:
Investment in exchange power-net .................................................... 45,150 46,981
Non-utility properties and investments-net .......................................... 265,157 219,450
Non-current energy commodity assets ................................................. 1,628,787 1,367,107
Other-net ........................................................................... 25,805 21,885
----------- -----------
Total other property and investments .............................................. 1,964,899 1,655,423
----------- -----------
DEFERRED CHARGES:
Regulatory assets for deferred income tax ........................................... 158,283 156,692
Utility energy commodity derivative assets .......................................... 203,620 --
Power and natural gas deferrals ..................................................... 142,108 75,648
Unamortized debt expense ............................................................ 28,799 27,874
Other-net ........................................................................... 53,525 38,275
----------- -----------
Total deferred charges ............................................................ 586,335 298,489
----------- -----------
TOTAL ........................................................................... $12,764,057 $12,563,924
=========== ===========
LIABILITIES AND CAPITALIZATION:
CURRENT LIABILITIES:
Accounts payable .................................................................... $ 622,387 $ 892,545
Energy commodity liabilities ........................................................ 7,725,175 7,834,007
Current portion of long-term debt ................................................... 65,379 89,901
Short-term borrowings ............................................................... 213,000 163,160
Taxes and interest accrued .......................................................... 31,970 1,971
Other ............................................................................... 169,670 143,623
----------- -----------
Total current liabilities ......................................................... 8,827,581 9,125,207
----------- -----------
NON-CURRENT LIABILITIES AND DEFERRED CREDITS:
Non-current liabilities ............................................................. 40,359 38,975
Deferred revenue .................................................................... 45,705 46,498
Non-current energy commodity liabilities ............................................ 1,535,540 1,272,374
Utility energy commodity derivative liabilities ..................................... 79,104 --
Deferred income taxes ............................................................... 467,622 446,310
Other deferred credits .............................................................. 203,323 95,530
----------- -----------
Total non-current liabilities and deferred credits ................................ 2,371,653 1,899,687
----------- -----------
CAPITALIZATION (See Consolidated Statements of Capitalization) ......................... 1,564,823 1,539,030
----------- -----------
COMMITMENTS AND CONTINGENCIES (Note 5)
TOTAL ........................................................................... $12,764,057 $12,563,924
=========== ===========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
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5
CONSOLIDATED STATEMENTS OF CAPITALIZATION
Avista Corporation
- --------------------------------------------------------------------------------
Thousands of Dollars
March 31, December 31,
2001 2000
----------- ------------
LONG-TERM DEBT:
First Mortgage Bonds:
Secured Medium-Term Notes:
Series A - 625% to 790% due 2002 through 2023 .............................. $ 129,500 $ 129,500
Series B - 650% to 789% due 2002 through 2010 .............................. 74,000 74,000
----------- -----------
Total first mortgage bonds ................................................. 203,500 203,500
----------- -----------
Pollution Control Bonds:
Floating Rate, Colstrip 1999A, due 2032 ...................................... 66,700 66,700
Floating Rate, Colstrip 1999B, due 2034 ...................................... 17,000 17,000
6% Series due 2023 ........................................................... 4,100 4,100
----------- -----------
Total pollution control bonds .............................................. 87,800 87,800
----------- -----------
Unsecured Medium-Term Notes:
Series A - 794% to 899% due 2003 through 2007 ................................ 13,000 13,000
Series B - 675% to 823% due 2002 through 2023 ................................ 89,000 89,000
Series C - 599% to 802% due 2007 through 2028 ................................ 109,000 109,000
Series D - 8625% due 2003 .................................................... 175,000 175,000
----------- -----------
Total unsecured medium-term notes .......................................... 386,000 386,000
----------- -----------
Other .......................................................................... 2,179 2,506
----------- -----------
Total long-term debt ......................................................... 679,479 679,806
----------- -----------
COMPANY-OBLIGATED MANDATORILY REDEEMABLE
PREFERRED TRUST SECURITIES:
7 7/8%, Series A, due 2037 ................................................... 60,000 60,000
Floating Rate, Series B, due 2037 ............................................ 40,000 40,000
----------- -----------
Total company-obligated mandatorily redeemable preferred trust securities .. 100,000 100,000
----------- -----------
PREFERRED STOCK-CUMULATIVE:
10,000,000 shares authorized:
Subject to mandatory redemption:
$695 Series K; 350,000 shares outstanding ($100 stated value) ................ 35,000 35,000
----------- -----------
Total subject to mandatory redemption ...................................... 35,000 35,000
----------- -----------
COMMON EQUITY:
Common stock, no par value; 200,000,000 shares authorized;
47,265,979 and 47,208,689 shares outstanding ................................. 611,837 610,741
Note receivable from employee stock ownership plan ............................. (6,730) (7,040)
Capital stock expense and other paid in capital ................................ (11,696) (11,696)
Other comprehensive income ..................................................... 828 (723)
Retained earnings .............................................................. 156,105 132,942
----------- -----------
Total common equity .......................................................... 750,344 724,224
----------- -----------
TOTAL CAPITALIZATION .............................................................. $ 1,564,823 $ 1,539,030
=========== ===========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
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6
CONSOLIDATED STATEMENTS OF CASH FLOWS
Increase (Decrease) in Cash and Cash Equivalents
Avista Corporation
- --------------------------------------------------------------------------------
For the Three Months Ended March 31
Thousands of Dollars
2001 2000
--------- ---------
OPERATING ACTIVITIES:
Net income ....................................................... $ 29,403 $ 10,525
NON-CASH ITEMS INCLUDED IN NET INCOME:
Depreciation and amortization .................................. 21,020 19,150
Provision for deferred income taxes ............................ 20,939 2,299
Power and natural gas cost deferrals and amortizations ......... (68,019) (861)
Gain on sale of property and subsidiary investments-net ........ (329) (41)
Energy commodity assets and liabilities ........................ 8,699 3,088
Other-net ...................................................... (21,817) (4,426)
(Increase) decrease in working capital components:
Sale of customer accounts receivables-net .................... 24,000 25,000
Receivables and prepaid expense .............................. 281,837 76,864
Materials & supplies, fuel stock and natural gas stored ...... 1,253 5,504
Payables and other accrued liabilities ....................... (224,524) (85,967)
Other ........................................................ (7,015) 37,006
--------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES ........................... 65,447 88,141
--------- ---------
INVESTING ACTIVITIES:
Construction expenditures (excluding AFUDC-equity funds) ......... (19,438) (17,835)
Other capital requirements ....................................... (49,924) (5,314)
Change in other noncurrent balance sheet items-net ............... (5,419) 6,006
Proceeds from property sales and sale of subsidiary investments .. 98 --
Assets acquired and investments in subsidiaries .................. -- (1,810)
--------- ---------
NET CASH USED IN INVESTING ACTIVITIES ............................... (74,683) (18,953)
--------- ---------
FINANCING ACTIVITIES:
Increase (decrease) in short-term borrowings ..................... 49,840 (36,030)
Redemption and maturity of long-term debt ........................ (25,067) (16,034)
Sale (repurchase) of common stock ................................ 1,818 (113)
Cash dividends paid .............................................. (6,287) (9,473)
Other-net ........................................................ (248) (1,489)
--------- ---------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES ................. 20,056 (63,139)
--------- ---------
NET INCREASE IN CASH AND CASH EQUIVALENTS ........................... 10,820 6,049
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD .................... 194,365 40,041
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD .......................... $ 205,185 $ 46,090
========= =========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid (received) during the period:
Interest ....................................................... $ 24,722 $ 15,901
Income taxes ................................................... (14,243) 6,341
Noncash financing and investing activities:
Intangibles acquired through issuance of common stock .......... 1,286 --
Changes due to FAS 115 adjustment to investments ............... 2,407 --
Property purchased under capitalized leases .................... 469 --
Series L Preferred Stock converted to common stock ............. -- 271,286
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
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7
SCHEDULE OF INFORMATION BY BUSINESS SEGMENTS
Avista Corporation
- --------------------------------------------------------------------------------
For the Three Months Ended March 31
Thousands of Dollars
2001 2000
------------ ------------
OPERATING REVENUES:
Avista Utilities .......................................... $ 415,627 $ 298,542
Energy Trading and Marketing .............................. 1,744,893 1,106,188
Information and Technology ................................ 5,411 2,290
Avista Ventures and other ................................. 5,691 7,114
Intersegment eliminations ................................. (128,312) (32,160)
------------ ------------
Total operating revenues ................................ $ 2,043,310 $ 1,381,974
============ ============
RESOURCE COSTS:
Avista Utilities:
Power purchased ......................................... $ 243,433 $ 119,133
Natural gas purchased for resale ........................ 79,438 42,549
Fuel for generation ..................................... 26,124 13,568
Power and natural gas deferrals ......................... (66,451) 344
Other ................................................... 32,174 12,540
Energy Trading and Marketing:
Cost of sales ........................................... 1,695,330 1,102,691
Intersegment eliminations ................................. (128,312) (32,160)
------------ ------------
Total resource costs (excluding non-energy businesses) .. $ 1,881,736 $ 1,258,665
============ ============
GROSS MARGINS:
Avista Utilities .......................................... $ 100,909 $ 110,752
Energy Trading and Marketing .............................. 49,563 3,497
------------ ------------
Total gross margins (excluding non-energy businesses) ... $ 150,472 $ 114,249
============ ============
OPERATIONS AND MAINTENANCE EXPENSES:
Avista Utilities .......................................... $ 16,085 $ 16,265
Information and Technology ................................ 3,669 4,632
Avista Ventures and other ................................. 4,418 5,958
------------ ------------
Total operations and maintenance expenses ............... $ 24,172 $ 26,855
============ ============
ADMINISTRATIVE AND GENERAL EXPENSES:
Avista Utilities .......................................... $ 14,528 $ 14,338
Energy Trading and Marketing .............................. 11,863 4,349
Information and Technology ................................ 9,781 4,879
Avista Ventures and other ................................. 1,467 1,708
------------ ------------
Total administrative and general expenses ............... $ 37,639 $ 25,274
============ ============
DEPRECIATION AND AMORTIZATION EXPENSES:
Avista Utilities .......................................... $ 16,503 $ 16,685
Energy Trading and Marketing .............................. 473 652
Information and Technology ................................ 3,188 825
Avista Ventures and other ................................. 856 988
------------ ------------
Total depreciation and amortization expenses ............ $ 21,020 $ 19,150
============ ============
INCOME (LOSS) FROM OPERATIONS (PRE-TAX):
Avista Utilities .......................................... $ 37,655 $ 47,606
Energy Trading and Marketing .............................. 36,083 (6,547)
Information and Technology ................................ (11,686) (8,262)
Avista Ventures and other ................................. (1,085) (3,724)
------------ ------------
Total income from operations ............................ $ 60,967 $ 29,073
============ ============
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SCHEDULE OF INFORMATION BY BUSINESS SEGMENTS
Avista Corporation
- --------------------------------------------------------------------------------
For the Three Months Ended March 31
Thousands of Dollars
2001 2000
------------ ------------
INCOME (LOSS) AVAILABLE FOR COMMON STOCK:
Avista Utilities .......................................... $ 12,464 $ (2,066)
Energy Trading and Marketing .............................. 27,099 (3,538)
Information and Technology ................................ (7,704) (5,663)
Avista Ventures and other ................................. (3,064) (118)
------------ ------------
Total income available for common stock ................. $ 28,795 $ (11,385)
============ ============
ASSETS: (2000 amounts at December 31)
Avista Utilities .......................................... $ 2,271,861 $ 2,129,614
Energy Trading and Marketing .............................. 10,342,262 10,271,834
Information and Technology ................................ 86,444 59,632
Avista Ventures and other ................................. 63,490 102,844
------------ ------------
Total assets ............................................ $ 12,764,057 $ 12,563,924
============ ============
CAPITAL EXPENDITURES (excluding AFUDC/AFUCE):
Avista Utilities .......................................... $ 20,187 $ 18,578
Energy Trading and Marketing .............................. 40,430 13
Information and Technology ................................ 9,115 4,827
Avista Ventures and other ................................. 379 474
------------ ------------
Total capital expenditures .............................. $ 70,111 $ 23,892
============ ============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
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9
AVISTA CORPORATION
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The accompanying financial statements of Avista Corporation (Avista Corp. or the
Company) for the interim periods ended March 31, 2001 and 2000 are unaudited
but, in the opinion of management, reflect all adjustments, consisting only of
normal recurring accruals, necessary for a fair statement of the results of
operations for those interim periods. The results of operations for the interim
periods are not necessarily indicative of the results to be expected for the
full year. These financial statements do not contain the detail or footnote
disclosure concerning accounting policies and other matters which would be
included in full fiscal year financial statements; therefore, they should be
read in conjunction with the Company's audited financial statements included in
the Company's Annual Report on Form 10-K for the year ended December 31, 2000
(2000 Form 10-K).
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to current
statement format. These reclassifications were made for comparative purposes and
have not affected previously reported total net income or common shareholders'
equity.
NEW ACCOUNTING STANDARDS
In September 2000, the Financial Accounting Standards Board (FASB) issued FAS
No. 140, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities", which revises the standards for accounting for
securitizations and other transfers of financial assets and collateral and
requires certain disclosures. This statement is effective for transfers and
servicing of financial assets and extinguishments of liabilities occurring after
March 31, 2001. The Statement is effective for recognition and reclassification
of collateral and for disclosures relating to securitization transactions and
collateral for fiscal years ending after December 15, 2000. FAS No. 140 has been
adopted as of April 1, 2001. There was no material financial statement impact
resulting from the adoption of this statement.
Avista Utilities adopted FAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities," and the corresponding amendments under FAS No. 138, on
January 1, 2001. Based on Avista Utilities' current interpretations of FAS No.
133, 138 and the FASB's Derivative Implementation Group (DIG), Avista Utilities
believes that the majority of its long-term purchases and sales contracts for
both capacity and energy qualify as normal purchases and sales under FAS No.
133. Some of Avista Utilities' contracts for less than one year in duration
(short-term) are subject to booking out, whereby power may not be physically
delivered. Avista Utilities does not believe that these short-term contracts can
be classified as normal purchases and sales. The Washington Utilities and
Transportation Commission (WUTC) and the Idaho Public Utilities Commission
(IPUC) issued accounting orders requiring Avista Utilities to offset any
derivative assets or liabilities with a regulatory asset or liability, thus
deferring the unrealized gains or losses.
On January 1, 2001, Avista Utilities recorded a derivative commodity asset of
$252.3 million and a derivative commodity liability of $36.1 million. The
difference of $216.2 million was recorded as a regulatory liability in
accordance with the accounting treatment prescribed by the accounting orders
from the WUTC and IPUC discussed above. At March 31, 2001, the derivative
commodity asset balance was $203.6 million, the derivative commodity liability
balance was $79.1 million and the offsetting regulatory liability was $124.5
million. The asset balance is included in Deferred Charges - Utility Energy
Commodity Derivative Assets, the liability balance is included in Non-Current
Liabilities and Deferred Credits - Utility Energy Commodity Derivative
Liabilities, and the regulatory liability is included in Non-Current Liabilities
and Deferred Credits -- Other on the Consolidated Balance Sheets.
NOTE 2. 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, both quantitative and qualitative, inherent in
these activities.
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AVISTA CORPORATION
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AVISTA UTILITIES
Avista Utilities sells and purchases electric capacity and energy at wholesale
to and from utilities and other entities under firm long-term contracts having
terms of more than one year. In addition, Avista Utilities engages in short-term
sales and purchases in the wholesale market as part of an economic selection of
resources to serve its retail and firm wholesale loads. Avista Utilities makes
continuing projections of (1) future retail and firm wholesale loads based on,
among other things, forward estimates of factors such as customer usage and
weather as well as historical data and contract terms and (2) resource
availability based on, among other things, estimates of streamflows, generating
unit availability, historic and forward market information and experience. On
the basis of these continuing projections, Avista Utilities makes purchases and
sales of energy on a quarterly, monthly, daily and hourly basis to match actual
resources to actual energy requirements and to sell any surplus at the best
available price.
Avista Utilities protects itself against price fluctuations on electric energy
by establishing volume limits for the imbalance between projected loads and
resources and through the use of derivative commodity instruments for hedging
purposes. Any imbalance is required to remain within limits, or management
action or decisions are triggered to address larger imbalance situations and
limit the exposure to market risk. Avista Energy is responsible for the daily
management of gas resources to meet the requirements of Avista Utilities
customers. In addition, Avista Utilities utilizes derivative commodity
instruments for hedging price risk associated with natural gas. 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. The market values of
natural gas derivative commodity instruments held by Avista Utilities at March
31, 2001, and December 31, 2000, were a $1.8 million net liability and a $1.0
million net asset, respectively.
AVISTA ENERGY
Contract Amounts and Terms Under Avista Energy's derivative instruments, Avista
Energy either (i) as "fixed price payor," is obligated to pay a fixed price or
amount and is entitled to receive the commodity or a fixed amount or (ii) as
"fixed price receiver," is entitled to receive a fixed price or amount and is
obligated to deliver the commodity or pay a fixed amount or (iii) as "index
price payor," is obligated to pay an indexed price or amount and is entitled to
receive the commodity or a variable amount or (iv) as "index price receiver," is
entitled to receive an indexed price or amount and is obligated to deliver the
commodity or pay a variable amount. The contract or notional amounts and terms
of Avista Energy's derivative commodity investments outstanding at March 31,
2001, are set forth below (in thousands of mmBTUs and MWhs):
Fixed Price Fixed Price Maximum
Payor Receiver Terms in Years
----------- ----------- --------------
Energy commodities (volumes)
Natural gas 109,238 97,825 3
Electric 133,599 127,350 20
Index Price Index Price Maximum
Payor Receiver Terms in Years
----------- ----------- --------------
Energy commodities (volumes)
Natural gas 631,014 670,942 4
Electric 903 436 4
Contract or notional amounts reflect the volume of transactions, but do not
necessarily represent the dollar amounts exchanged by the parties to the
derivative commodity instruments. Accordingly, contract or notional amounts do
not accurately measure Avista Energy's exposure to market or credit risks. The
maximum terms in years detailed above are not indicative of likely future cash
flows as these positions may be offset in the markets at any time.
10
11
AVISTA CORPORATION
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Fair Value The fair value of Avista Energy's derivative commodity instruments
outstanding at March 31, 2001, and the average fair value of those instruments
held during the three months ended March 31, 2001, are set forth below (dollars
in thousands):
Fair Value Average Fair Value for the
as of March 31, 2001 three months ended March 31, 2001
--------------------------------------------------- ---------------------------------------------------
Current Long-term Current Long-term Current Long-term Current Long-term
Assets Assets Liabilities Liabilities Assets Assets Liabilities Liabilities
---------- ---------- ----------- ----------- ---------- ---------- ----------- -----------
Natural gas $ 365,622 $ 88,886 $ 344,983 $ 88,184 $ 404,138 $ 107,096 $ 388,548 $ 104,763
Electric 7,475,644 1,539,901 7,380,089 1,447,356 7,494,151 1,390,851 7,390,940 1,299,194
Emission
allowances 916 -- 103 -- 916 -- 103 --
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Total $7,842,182 $1,628,787 $7,725,175 $1,535,540 $7,899,205 $1,497,947 $7,779,591 $1,403,957
The weighted average term of Avista Energy's natural gas and related derivative
commodity instruments as of March 31, 2001, was approximately six months. The
weighted average term of Avista Energy's electric derivative commodity
instruments at March 31, 2001, was approximately six months. The change in the
fair value position of Avista Energy's energy commodity portfolio, net of the
reserves for credit and market risk, from December 31, 2000, to March 31, 2001,
was a decrease of $6.7 million and is included in the Consolidated Statements of
Income in operating revenues.
NOTE 3. FINANCINGS
Reference is made to the information relating to financings and borrowings as
discussed under the caption "Liquidity and Capital Resources" in Item 2.
"Management's Discussion and Analysis of Financial Condition and Results of
Operations".
NOTE 4. EARNINGS PER SHARE
The computation of basic and diluted earnings per common share is as follows (in
thousands, except per share amounts):
1st Quarter
------------------
2001 2000
------- --------
Net income $29,403 $ 10,525
Less: Preferred stock dividends 608 21,910
------- --------
Income available for common stock-basic and diluted $28,795 $(11,385)
Weighted-average number of common shares
outstanding-basic 47,237 41,297
Conversion of Convertible Preferred Stock, Series L -- 7,624
Restricted stock 6 99
Stock options -- 504
------- --------
Weighted-average number of common shares
outstanding-diluted 47,243 49,524
======= ========
Earnings per common share, Basic and Diluted $ 0.61 $ (0.28)
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NOTE 5. COMMITMENTS AND CONTINGENCIES
The Company believes, based on the information presently known, that 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.
SECURITIES LITIGATION
On July 27, 2000, John Bain filed a lawsuit in the U.S. District Court for the
Eastern District of Washington against the Company and Thomas M. Matthews, the
former Chairman of the Board, President and Chief Executive Officer of the
Company, and Jon E. Eliassen, a Senior Vice President and the Chief Financial
Officer of the Company. On August 2, 2000, Wei Cao and William Dalton filed
separate lawsuits in the same Court against the Company and Mr. Matthews. On
August 7, 2000, Martin Capetz filed a lawsuit in the same Court against the
Company, Mr. Matthews and Mr. Eliassen. On November 9, 2000, the court entered
an order consolidating the cases, appointing the lead stockholder-plaintiff, and
appointing lead stockholders-plaintiffs' counsel to prosecute the litigation. On
February 13, 2001, plaintiffs filed their First Amended and Consolidated Class
Action asserting claims on behalf of a purported class of persons who purchased
Company common stock during the period April 14, 2000, through June 21, 2000. In
their consolidated complaint, plaintiffs assert violations of Section 10(b) of
the Securities Exchange Act of 1934, as amended, and Rule 10b-5 thereunder,
arising out of various alleged misstatements and omissions in the Company's
Annual Report on Form 10-K for the year 1999, its Quarterly Report on Form 10-Q
for the quarter ended March 31, 2000, and in other information made publicly
available by the Company, and, further, claim that plaintiffs and the purported
class suffered damages as a result thereof. Such alleged misstatements and
omissions are claimed to relate to the Company's trading activities in wholesale
energy markets, the Company's risk management policies and procedures with
respect thereto, and the Company's trading losses in the second quarter of 2000.
The plaintiffs request, among other things, compensatory damages in unspecified
amounts and other relief as the Court may deem proper. On March 29, 2001, the
Company filed a Motion to Dismiss the Consolidated Complaint, which will be
heard by the Court on May 31, 2001. The Company denies liability and intends to
defend the consolidated lawsuit vigorously.
The staff of the Securities and Exchange Commission has requested from the
Company certain information regarding Avista Utilities' wholesale trading
activities and its risk management policies and procedures with respect thereto.
The Company is complying with this request.
COMMODITY FUTURES TRADING COMMISSION INVESTIGATION
Avista Energy and one or more of its former employees are the subject of an
investigation by the Commodity Futures Trading Commission (CFTC) into futures
trading of certain Palo Verde and California Oregon Border electricity futures
contracts traded on the New York Mercantile Exchange on four separate dates in
1998. The Company has received notice from the CFTC's Division of Enforcement
(Division) that the Division will recommend to the CFTC Commissioners that it be
authorized to bring charges of manipulation, attempted manipulation and other
charges in connection with trading on those four dates. The Company intends to
submit what is informally known as a "Wells Submission" setting forth reasons
why charges should not be brought.
STATE OF WASHINGTON BUSINESS AND OCCUPATION TAX
The State of Washington's Business and Occupation Tax applies to gross revenue
from business activities. For most types of business, the tax applies to the
gross sales price received for goods or services. For certain types of financial
trading activities, including the sale of stocks, bonds and other securities,
the tax applies to the realized gain from the sale of the financial asset. On an
audit for the years 1997 through June 2000, the Department of Revenue (DOR) took
the position that approximately 20% of the energy futures trades of Avista
Energy should not be treated as securities trades, but rather as energy
deliveries. As a result, the DOR applied tax against the gross sales price of
the energy contracts at issue. Avista Energy subsequently received an assessment
of $14.5 million for tax and interest related to the disputed issue. It is the
position of Avista Energy that all of its futures trading activities are
substantively the same and there is no proper basis for the distinction made by
the DOR. An administrative appeal has been filed with the DOR and Avista Energy
expects a determination before the end of 2001. Avista Energy is prepared to
seek relief in the Washington courts if a satisfactory determination is not
received.
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HAMILTON STREET BRIDGE SITE
A portion of the Hamilton Street Bridge Site in Spokane, Washington, (including
a former coal gasification plant site which operated for approximately 60 years
until 1948) was acquired by the Company through a merger in 1958. The Company no
longer owns the property. Initial core samples taken from the site indicate
environmental contamination at the site. On January 15, 1999, the Company
received notice from the State of Washington's Department of Ecology (DOE) that
it had been designated as a potentially liable party (PLP) with respect to any
hazardous substances located on this site, stemming from the Company's past
ownership of the former gas plant site. 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 to implement
appropriate remedial measures. The Company responded to the DOE acknowledging
its listing as a PLP, but requested that additional parties also be listed as
PLPs. In the spring of 1999, the DOE named two other parties as additional PLPs.
An Agreed Order was signed by the DOE, the Company and Burlington Northern &
Santa Fe Railway Co. (another PLP) on March 13, 2000 that provided for the
completion of a remedial investigation and a feasibility study. The work to be
performed under the Agreed Order includes three major technical parts:
completion of the remedial investigation; performance of a focused feasibility
study; and implementation of an interim groundwater monitoring plan. During the
second quarter of 2000, the Company received comments from the DOE on its
initial remedial investigation, then submitted another draft of the remedial
investigation, which has been accepted as final by the DOE. The Company also
received comments from the DOE pertaining to the feasibility study, which
outlines cleanup alternatives. Another feasibility study, which responded to the
DOE comments, was submitted to the DOE on October 13, 2000. The Company received
final comments and submitted another draft of the feasibility study in November
of 2000, which was accepted. The public comment period ran from December 15,
2000 through January 18, 2001. A preliminary draft of a Clean-up Action Plan
(CAP) was received from the DOE on April 27, 2001, and is currently being
reviewed by the Company and Burlington Northern & Santa Fe Railway Co.
SALE OF CERTAIN PENTZER CORPORATION (PENTZER) SUBSIDIARIES
On February 26, 2001, IDX Corporation, formerly known as Store Fixtures Group,
Inc., filed a complaint against Pentzer in the United States District Court for
the District of Massachusetts, alleging breach of contract and negligent
misrepresentation relating to a stock purchase agreement. Pursuant to this
agreement, Pentzer sold the capital stock of a group of companies on August 31,
1999. Plaintiff alleges that Pentzer breached various representations and
warranties concerning financial statements and inventory, contending that
reliance on such representations and warranties caused them to pay more for the
group of companies than they were worth. In total, plaintiff claims damages in
the approximate amount of $9 million. Pentzer has retained legal counsel and
intends to vigorously defend against this action.
On April 7, 2000, Creative Solutions Group, Inc. and Form House Holdings, Inc.
filed a complaint against Pentzer in the United States District Court for the
District of Massachusetts, alleging misrepresentations and breach of
representations and warranties made under a stock purchase agreement. Pursuant
to this agreement, Pentzer sold the capital stock of a group of companies on
March 31, 1999. Plaintiffs allege that Pentzer breached various representations
and warranties concerning financial statements, cost of goods sold and
inventory, contending that reliance on such representations and warranties
caused them to pay more for the group of companies than they were worth. In
total, plaintiffs allege damages in the approximate amount of $27 million.
Pentzer has retained legal counsel and intends to vigorously defend against this
action. The Court denied Pentzer's request that the matter be sent to
arbitration and Pentzer has appealed that determination to the First Circuit
Court of Appeals.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Avista Corporation (Avista Corp. or the Company) operates as an energy,
information and technology company with a regional utility operation and
subsidiary operations located in the Pacific Northwest. The Company's operations
are organized into four lines of business - Avista Utilities, Energy Trading and
Marketing, Information and Technology, and Avista Ventures and Other. Avista
Utilities, which is an operating division of Avista Corp. and not a separate
entity, represents the regulated utility operations. Avista Capital, a wholly
owned subsidiary of Avista Corp., owns all of the subsidiary companies engaged
in the other lines of business.
Avista Utilities is responsible for electric generation, production, and
transmission, and electric and natural gas distribution services. Avista
Utilities owns and operates eight hydroelectric projects, a wood-waste fueled
generating station and two natural gas-fired combustion turbine (CT) generating
units. It also owns a 15% share in a two-unit coal-fired generating facility and
leases and operates two additional natural gas-fired CT generating units. In
addition, Avista Utilities has a number of long-term power purchase and exchange
contracts that increase its available resources.
Avista Utilities sells and purchases electric capacity and energy at wholesale
to and from utilities and other entities under firm long-term contracts having
terms of more than one year. In addition, Avista Utilities engages in short-term
sales and purchases in the wholesale market as part of an economic selection of
resources to serve its retail and firm wholesale loads. Avista Utilities makes
continuing projections of (1) future retail and firm wholesale loads based on,
among other things, forward estimates of factors such as customer usage and
weather as well as historical data and contract terms and (2) resource
availability based on, among other things, estimates of streamflows, generating
unit availability, historic and forward market information and experience. On
the basis of these continuing projections, Avista Utilities makes purchases and
sales of energy on a quarterly, monthly, daily and hourly basis to match actual
resources to actual energy requirements, as it operates the lowest-cost
resources to serve its load requirements, and to sell any surplus at the best
available price.
The Energy Trading and Marketing line of business excludes the regulated utility
operations, Avista Utilities, and is comprised of Avista Energy, Inc. (Avista
Energy), Avista Power, LLC (Avista Power) and Avista-STEAG, LLC (Avista-STEAG).
Avista Energy is an electricity and natural gas marketing and trading business,
operating primarily in the Western Systems Coordinating Council (WSCC). Avista
Power was formed to develop and own generation assets. Avista-STEAG is a joint
venture between Avista Capital and STEAG AG, a German independent power
producer, to develop electric generating assets. On April 27, 2001, Avista
Capital provided its notice of termination of the Avista-STEAG, LLC, originally
formed for the purpose of jointly developing sites for power projects.
The Information and Technology line of business is comprised of Avista
Advantage, Inc. (Avista Advantage), Avista Laboratories, Inc. (Avista Labs) and
Avista Communications, Inc. (Avista Communications). Avista Advantage is a
business-to-business e-commerce portal that provides a variety of energy-related
products and services to commercial and industrial customers in North America.
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 or industrial user and
fuel cell components. See Item 5. Other Information for additional details.
Avista Communications is an Integrated Communications Provider (ICP) providing
local dial tone, data transport, internet services, voice messaging and other
telecommunications services to under-served communities in the Western United
States. Avista Corp. is seeking additional partners for Avista Communications as
part of its overall strategic focus on generating shareholder value.
The Avista Ventures and other line of business includes Avista Ventures, Inc.
(Avista Ventures) and several other minor subsidiaries. This line of business is
responsible for investing in business opportunities that have potential value in
the lines of business in which the Company is already involved.
SIGNIFICANT CHANGES IN ENERGY MARKETS
Beginning in the second quarter of 2000, the price of power and natural gas in
the Western wholesale market increased considerably and became much more
volatile. Price ranges are remaining at levels significantly above historic
levels in the Pacific Northwest and throughout the WSCC. Federal and state
officials, including the FERC, the California Public Utility Commission and the
Attorneys General of California, Oregon and Washington, have commenced reviews
to determine the causes of the changes in the wholesale energy markets.
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California's two largest utilities, Southern California Edison (SCE) and Pacific
Gas & Electric Company (PG&E), defaulted on several hundred million dollars of
payment obligations owed to various creditors in the first quarter of 2001. The
PG&E and SCE defaults resulted in subsequent defaults by the California Power
Exchange (CalPX), California Independent System Operator (CalISO) and Automated
Power Exchange (APX). The latter three parties have defaulted on their payment
obligations to Avista Energy. On March 10, 2001, the CalPX filed in the U.S.
Bankruptcy Court for the Central District of California a voluntary petition
under Chapter 11 of the bankruptcy code. The Bankruptcy Court has appointed
Avista Energy and other market participants to a Creditors Committee to
participate in the CalPX bankruptcy proceedings.
The Governor of California invoked emergency executive powers to seize certain
power contracts (called "block forward contracts") between the CalPX and,
respectively, PG&E and SCE after PG&E's and SCE's defaults. The block forward
contracts would have been significant assets of the CalPX bankruptcy estate if
they had not been so removed by the Governor. The CalPX initiated a claim to the
Victim Compensation and Government Claims Board of the State of California for
compensation related to the seized block forward contracts. The Creditors
Committee is pursuing an agreement with the CalPX to assume control over the
Victims Compensation claim and various other litigation on behalf of the CalPX,
the CalPX bankruptcy estate and the market participants.
The CalPX began levying backcharges in January 2001 by withholding amounts
payable to participants and invoicing additional amounts. On February 9, 2001,
Avista Energy obtained a Temporary Restraining Order (TRO) in Federal Court in
the Central District of California, suspending the backcharges. On March 5,
2001, the Court issued a preliminary injunction that continued the relief
granted by the TRO and required the escrowing of amounts received by the CalPX.
Avista Energy joined in a group of nine complainants filing with the FERC to: 1)
take action to declare the backcharge practices to be contrary to the tariff's
purpose, 2) declare the backcharges to be inoperable because of the removal of
the SCE and PG&E block forward contracts, and 3) invoke jurisdiction over the
CalPX in winding up its affairs. On April 6, 2001, the FERC issued its order
granting a permanent bar from the backcharge practice and ruled the prior
backcharges to be invalid. The FERC has been asked to clarify the treatment of
previously paid backcharges by any CalPX participants.
At March 31, 2001, Avista Energy's accounts receivable related to defaulting
parties in California, net of reserves, were approximately $24 million.
On April 6, 2001, PG&E filed in the U.S. Bankruptcy Court for the Central
District of California a voluntary petition under Chapter 11 of the bankruptcy
code. PG&E is a significant debtor to the CalPX and the CalISO which, as
described above, has defaulted on obligations to Avista Energy. None of Avista
Corp.'s business units is owed obligations directly by PG&E. Avista Energy is
actively engaged in the PG&E bankruptcy proceedings to further protect its
interests in the CalPX and CalISO debts.
The Company expects to post earnings per share of between $0.85 and $1.10 per
diluted share for the full year of 2001. These expectations reflect a
contribution of between $0.90 and $1.00 from Avista Utilities based on current
streamflow and weather projections, anticipated purchased power prices and the
continued ability to defer excess purchased power costs; Avista Energy's
potential to earn between $0.90 and $1.00; and partial offsets related to
continued support of the Company's information and technology businesses. These
projections are subject to a variety of risks and uncertainties that could cause
actual results to differ from this estimate, including those described above and
listed under "Safe Harbor for Forward Looking Statements." See "Liquidity and
Capital Resources" for additional information.
RESULTS OF OPERATIONS
OVERALL OPERATIONS
First quarter 2001 net income available for common stock was $28.8 million,
compared to a loss of $11.4 million in the first quarter of 2000. On February
16, 2000, all outstanding shares of Series L Preferred Stock were converted into
shares of common stock, which resulted in a one-time charge of $21.3 million to
preferred stock dividend requirements. The primary reason for the increase in
2001 was income available for common stock of $27.1 million recorded by the
Energy Trading and Marketing line of business, after a loss of $3.5 million in
2000 recorded by this business segment. Avista Energy continues to benefit from
a well-positioned portfolio in the volatile Pacific Northwest and western energy
markets. Losses from Avista Energy in 2000 were primarily due to the liquidation
of its Eastern electric book and associated operating costs to close its Eastern
operations in Houston and Boston.
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Avista Utilities' operations had income available for common stock of $12.5
million compared to a loss of $2.1 million in the first quarter of 2000. First
quarter 2000 earnings for Avista Utilities were negatively affected by the
conversion of the preferred securities. Excluding the effect of the preferred
stock conversion, net income available for common stock for the first quarter of
2000 from Avista Utilities would have been $19.2 million. Increased operating
revenues were more than offset by increased resource costs, resulting in lower
gross margin related to electric sales compared to the first quarter of 2000.
During the first quarter of 2001, a portion of wholesale revenues and higher
purchased power costs were offset and deferred through a balancing account
approved by the WUTC and IPUC. On April 30, 2001, a settlement was reached
between Avista Utilities, the staff of the WUTC, the Public Counsel Section of
the Washington Attorney General's Office and the Industrial Customers of
Northwest Utilities, which calls for the extension of the Washington deferral
accounting mechanism to run through 2003. The Information and Technology line of
business incurred a loss of $7.7 million in the first quarter of 2001 compared
to a loss of $5.7 million in the first quarter of 2000 as these businesses
continued to grow their operations. The Avista Ventures and Other line of
business incurred a loss of $3.1 million in the first quarter of 2001 compared
to a loss of $0.1 million in the first quarter of 2000.
Overall reported diluted earnings per share for the first quarter of 2001 were
$0.61, compared to a loss of $0.28 in 2000. The Energy Trading and Marketing
operations contributed $0.57 per diluted share in the first quarter of 2001
compared to a loss of $0.09 in the same period in 2000. Avista Utilities
contributed $0.26 per diluted share in 2001 compared to a loss of $0.05 per
share for the first quarter of 2000 as a result of the preferred dividend charge
in 2000. Excluding the effect of the preferred stock conversion, Avista
Utilities would have reported earnings of $0.39 per share in 2000. The
Information and Technology operations had a loss of $0.16 per diluted share in
2001 compared to a loss of $0.14 in 2000. The Avista Ventures and Other
operations recorded a loss of $0.06 for the first quarter of 2001 compared to
break even in 2000.
AVISTA UTILITIES
Avista Utilities' pre-tax income from operations decreased $10.0 million, or
21%, in the first quarter of 2001 from the same period in 2000. The decrease was
primarily the result of decreased gross margin. Avista Utilities' operating
revenues and expenses increased $117.1 million and $127.0 million, respectively,
during the first quarter of 2001 as compared to 2000.
During the first quarter of 2001, Avista Utilities deferred $21.4 million in
power costs in Washington and $8.3 million in Idaho under the power cost
adjustment mechanism currently in place. The total balance of deferral costs for
Washington was $56.0 million and $11.0 million for Idaho at March 31, 2001.
On April 30, 2001, a settlement agreement was reached between the Company, the
staff of the WUTC, the Public Counsel Section of the Washington Attorney
General's Office and the Industrial Customers of Northwest Utilities to extend
the Washington deferral accounting mechanism through February 2003. Avista
Utilities expects to move into a surplus power position by July 2002, ultimately
reducing the power-cost deferral balance to zero by the end of February 2003 and
minimizing the need to increase retail rates to customers. The power-cost
deferral balance reduction is dependent, however, upon streamflow conditions,
thermal plant performance, level of retail loads, wholesale market prices and
additional generating resources being put into operations as planned during the
deferral period. The commission has been requested to approve the agreement by
the end of May 2001.
Retail electric revenues decreased $7.3 million in the first quarter of 2001
from 2000 due to refunds to customers in January 2001 from the gain on the sale
of the Company's interest in the Centralia thermal generation plant, which was
sold in May 2000. Streamflows in the first quarter of 2001 were 53% of normal
compared to 107% in the first quarter of 2000. Wholesale electric revenues
increased $142.2 million, or 130%, while sales volumes decreased 50% during the
first quarter of 2001 from 2000, reflecting average sales prices that were 355%
higher for purchased power in the region. Natural gas revenues increased $38.8
million in the first quarter of 2001 from 2000 due to increased prices approved
by state commissions and increased therm sales, primarily due to customer growth
and increased usage due to weather.
Average purchased power prices in the first quarter of 2001 were 284% higher
than in the first quarter of 2000, resulting in a $124.3 million, or 153%,
increase in purchased power expense. The $56.0 million deferral of power costs
pursuant to the WUTC accounting order and the $11.0 million deferred under the
Idaho PCA partially offset
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purchased power expenses. Volume decreased 34% from the first quarter of 2000 to
the first quarter of 2001. Purchased natural gas costs increased $36.9 million
in the first quarter of 2001, due to increased prices and increased therm sales
for the commodity. Fuel for generation increased $12.6 million due to increased
generation at the thermal plants and the higher cost of natural gas.
As part of the Company's strategy to manage the decrease in electric resources
caused by the current poor hydroelectric conditions and volatile energy markets,
Avista Utilities is implementing several buy-back and rebate programs for
residential, commercial and industrial customers. The programs are designed to
encourage conservation. Additionally, Avista Utilities is pursuing the
acquisition and construction of several small generation projects throughout its
service territory. Avista Power is continuing construction on the 280 MW
combined cycle natural gas turbine power plant at the Coyote Springs site near
Boardman, Oregon. Permits and contract modifications are being filed to transfer
ownership from Avista Power to Avista Utilities. See Item 5. Other Information
for additional details.
ENERGY TRADING AND MARKETING
Energy Trading and Marketing includes the results of Avista Energy, Avista Power
and Avista-STEAG. Avista Energy maintains an energy 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. Market prices are utilized
in determining the value of electric, natural gas and related derivative
commodity instruments. For longer-term positions, in addition to market prices,
a model based on forward price curves is also utilized.
Energy Trading and Marketing's income available for common stock for the first
quarter of 2001 was $27.1 million, compared to a loss of $3.5 million in the
first quarter of 2000. Avista Energy's operations continue to be positively
affected by a well-positioned portfolio in the volatile Pacific Northwest and
western electric markets. Avista Energy shut down its operations in Houston and
Boston during the first and second quarters of 2000.
Energy Trading and Marketing's revenues and operating expenses increased $638.7
million and $596.1 million, respectively, in the first quarter of 2001 over
2000. The increase in revenues and expenses is primarily the result of
significantly higher prices as electric sales volumes dropped 62% from the first
quarter of 2000.
Energy Trading and Marketing's total assets and liabilities increased $70.4
million from December 2000 to March 2001. The majority of this increase is due
to Avista Power's construction in progress increasing as a result of the current
construction at the Coyote Springs 2 project. This project will be transferred
to Avista Utilities. Energy Trading and Marketing's administrative and general
expenses rose $7.5 million over the first quarter of 2000 due to increased
incentive compensation expenses at Avista Energy.
INFORMATION AND TECHNOLOGY
The Information and Technology line of business includes the results of Avista
Advantage, Avista Labs and Avista Communications. Income available for common
stock for the first quarter of 2001 was a loss of $7.7 million, compared to a
loss of $5.7 million in 2000. Operating revenues and expenses for this line of
business increased $3.1 million and $6.5 million, respectively, during the first
quarter of 2001 over 2000, primarily due to growth in each of the individual
businesses.
AVISTA VENTURES
The Avista Ventures line of business includes the results of Avista Ventures and
several other minor subsidiaries. Income available for common stock from this
line of business was a loss of $3.1 million in the first quarter of 2001,
compared to a loss of $0.1 million in 2000. Operating revenues and expenses from
this line of business decreased $1.4 million and $4.1 million, respectively,
during the first quarter of 2001, as compared to 2000.
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LIQUIDITY AND CAPITAL RESOURCES
OVERALL OPERATIONS
Operating Activities Operating activities in the first three months of 2001
provided net cash of $65.4 million, compared to $88.1 million for the same
period in 2000. Net income for the first three months of 2001 was $29.4 million
compared to $10.5 million in 2000. Cash expended for power and natural gas, but
deferred for later recovery, was the primary reason for the decrease in cash
from operating activities. Power and natural gas cost deferrals and
amortizations increased $67.2 million over 2000 primarily due to the effect of
increased purchased power prices, fuel for generation and natural gas costs.
Working capital components, primarily receivables and payables and other accrued
liabilities, continued to change substantially upward in the 2001 period,
primarily due to Avista Energy's operations, as a result of increased costs for
power and natural gas.
Investing Activities Investing activities used net cash of $74.7 million in the
first three months of 2001 compared to $19.0 million in the same period in 2000.
The increase was primarily the result of capital expenditures, including $29.5
million for the construction of the Coyote Springs 2 generating project.
Financing Activities Net cash provided by financing activities totaled $20.1
million in the first three months of 2001 compared to a $63.1 million net use of
cash in 2000. Short-term borrowings increased $49.8 million but were offset by
$25.1 million of long-term debt that matured in the first three months of 2001.
In the first three months of 2000, short-term borrowings decreased $36.0 million
and $16.0 million of long-term debt matured or was redeemed.
On April 3, 2001, the Company issued $400.0 million of 9.75% Senior Notes
(Notes) due June 1, 2008. The $389.3 million in net proceeds will be used to
fund a portion of construction expenditures, pay down balances outstanding under
the revolving line of credit or for other corporate purposes. The Notes are
issued under an indenture that, among other things, restricts the ability of the
Company and its subsidiaries from engaging in certain activities, including
certain transactions with affiliates.
During the first quarter of 2001, $15 million of Secured Medium-Term Notes, with
rates of 7.59% and 7.60%, and $10 million of Unsecured Medium-Term Notes, with a
rate of 9.57%, matured.
In the first quarter of 2001, the Company issued 92,400 shares of common stock
for $1.5 million under the Dividend Reinvestment Plan and the Employee
Investment Plan.
The Company's cash flows have been affected because of the higher power and
natural gas costs, as well as cash collateral required for counterparties and
trading at Avista Energy. The higher power and natural gas prices are expected
to continue to affect cash flows during 2001. The natural gas costs incurred to
serve Avista Utility's retail customers are generally recovered or expected to
be recovered in retail rates, however, there is a lag between the time the costs
are incurred by the Avista Utilities and the time they are collected from
customers. Costs in excess of those included in rates are deferred as an asset
on the balance sheet. Costs during 2001 are expected to continue to exceed the
levels included in rates and, as a result, deferral balances are expected to
increase during 2001. Because of the continuing high level of power and natural
gas prices, a significant change in Company resource availability (such as
hydroelectric generation) or customer demand could have a significant positive
or negative impact on expected deferrals and cash flows. On an interim basis,
the Company has used its revolving line of credit to fund these costs to the
extent that they exceed the cash flows available from operations. The Company is
negotiating to finance a majority of the construction costs for the Coyote
Springs 2 project with a construction loan that would match the construction
period.
The California energy crisis discussed earlier has had an impact on banks'
willingness to extend credit to energy and utility companies. Banks are
particularly concerned with the credit of companies in California and those in
the West with exposure to California or the potential to be impacted by what
ultimately happens in California. This may impact the Company's ability to
obtain financing from traditional sources. However, the Company currently
expects that it will be able to obtain financing required to meet its capital
and operating needs on reasonable terms.
The Company funds capital expenditures with a combination of
internally-generated cash and external financing. The level of cash generated
internally and the amount that is available for capital expenditures fluctuates
annually. External financings and cash provided by operating activities remain
the Company's primary source of funds for operating needs, dividends and capital
expenditures. Capital expenditures are financed on an interim basis with notes
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payable (due within one year). The Company has two committed lines of credit
that total $230 million, and both expire on June 26, 2001. The Company is
currently in the process of renewing these committed lines of credit. The
Company also has a $50 million regional commercial paper program that is backed
by the committed lines of credit. As of March 31, 2001, $213 million was
outstanding under the committed line of credit.
As part of its ongoing cash management practices and operations, Avista Corp.
may, at any time, have short-term notes receivable and payable with Avista
Capital. In turn, Avista Capital may also have short-term notes receivable and
payable with its subsidiaries. As of March 31, 2001, Avista Corp. had short-term
notes receivable of $176.7 million from Avista Capital of which $83.7 million of
the receivables represents loans to Avista Power for the Coyote Springs 2
project.
On February 16, 2000, the Company exercised its option to convert all the
remaining outstanding shares of Series L Preferred Stock 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.
ENERGY TRADING AND MARKETING OPERATIONS
Avista Energy and its subsidiary, Avista Energy Canada, Ltd., as co-borrowers,
have a credit agreement with two commercial banks in the aggregate amount of $80
million, decreasing to $70 million at the end of the agreement, and expiring May
31, 2001. Avista Energy is in the process of renewing the line of credit. This
credit agreement may be terminated by the banks at any time and all extensions
of credit under the agreement are payable upon demand, in either case at the
banks' sole discretion. This agreement also provides, on an uncommitted basis,
for the issuance of letters of credit to secure contractual obligations to
counterparties. This facility is guaranteed by Avista Capital and secured by
substantially all of Avista Energy's assets. The maximum amount of credit
extended by the banks for cash advances is $30 million, with availability of up
to $70 million (less the amount of outstanding cash advances, if any) for the
issuance of letters of credit. At March 31, 2001, there were no cash advances
(demand notes payable) outstanding and letters of credit outstanding under the
facility totaled approximately $22 million.
Avista Capital, in the course of business, may provide guarantees to other
parties with whom Avista Energy may be doing business. The Company's investment
in Avista Capital totaled $378.4 million at March 31, 2001.
As of March 31, 2001, Avista Capital had loaned $21.6 million to Avista Energy
to support its short-term cash and collateral needs. These loans are subordinate
to any obligations to the banks under the credit agreements.
Avista Energy manages collateral requirements with counterparties by
providing letters of credit, providing guarantees from Avista Capital and
offsetting transactions with counterparties. In addition to the letters of
credit and other items included above, cash deposited with counterparties
totaled $50.2 million as of March 31, 2001, and is included in the Consolidated
Balance Sheets in prepayments and other. Avista Energy held cash deposits from
other parties in the amount of $114.1 million as of March 31, 2001, and such
amounts are subject to refund if conditions warrant because of continuing
portfolio value fluctuations with those parties.
At March 31, 2001, the Energy Trading and Marketing operations had $203.4
million in cash, including the $114.1 million of collateral posted by other
parties, with $0.8 million in long-term debt outstanding (the current portions
of which are included on the Consolidated Balance Sheets in Current portion of
long-term debt).
Avista Power, as a 49% owner, and Cogentrix Energy, Inc. are jointly building a
270 megawatt natural gas combustion turbine facility in Rathdrum, Idaho, with
100% of its output contracted to Avista Energy for 25 years. Commercial
generation is expected to occur no later than the third quarter of 2001. The
total cost of the project is estimated at $160 million; Avista Power's equity in
the project is approximately $16 million.
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INFORMATION AND TECHNOLOGY OPERATIONS
At March 31, 2001, the Information and Technology operations had $1.7 million in
cash and temporary investments, with $2.2 million in long-term debt outstanding
(the current portions of which are included on the Consolidated Balance Sheets
in Current portion of long-term debt).
AVISTA VENTURES OPERATIONS
At March 31, 2001, Avista Ventures operations had $4.1 million in cash and
temporary investments with $0.7 million in long-term debt outstanding (the
current portions of which are included on the Consolidated Balance Sheets in
Current portion of long-term debt).
TOTAL COMPANY
The Company's total common equity increased $26.1 million during the first three
months of 2001 to $750.3 million. The Company's consolidated capital structure,
including the current portion of long-term debt and short-term borrowings at
March 31, 2001, was 52% debt, 7% preferred securities and 41% common equity,
compared to 52% debt, 8% preferred securities and 40% common equity at December
31, 2000.
BUSINESS RISK
The Company's market risks related to commodity prices, credit, operations,
interest rates and foreign currency have not changed materially from those
reported in the 2000 Form 10-K.
As described under "Management's Discussion and Analysis of Financial Condition
and Results of Operation - Results of Operation - Avista Utilities,"
hydroelectric conditions in 2001 are significantly below normal, leading to
greater than normal reliance on purchased power, thermal plant generation and
new generating resources. The earnings impact of these factors is mitigated by
regulatory mechanisms that are intended to defer increased costs for recovery in
future periods. Avista Utilities' deferred power and natural gas costs are
expected to increase further before they begin to decline. Avista Utilities
cannot fully predict how the combination of energy resources, energy loads,
prices and other factors will ultimately drive deferral costs.
SAFE HARBOR FOR FORWARD LOOKING STATEMENTS.
The Company is including the following cautionary statement in this Form 10-Q to
make applicable and to take advantage of the safe harbor provisions of the
Private Securities Litigation Reform Act of 1995 for any forward-looking
statements made by, or on behalf of, the Company. Forward-looking statements are
all statements other than statements of historical fact, including without
limitation those that are identified by the use of the words "anticipates,"
"estimates," "expects," "intends," "plans," "predicts," and similar expressions.
Such statements are inherently subject to a variety of risks and uncertainties
that could cause actual results to differ materially from those expressed. Such
risks and uncertainties include, among others, changes in the utility regulatory
environment, the availability and prices of purchased power, volatility and
illiquidity in wholesale energy markets, wholesale and retail competition,
weather conditions and various other matters, many of which are beyond the
Company's control. These forward-looking statements speak only as of the date of
the report. The Company expressly undertakes no obligation to update or revise
any forward-looking statement contained herein to reflect any change in the
Company's expectations with regard thereto or any change in events, conditions,
or circumstances on which any such statement is based. See "Safe Harbor for
Forward Looking Statements" in the Company's 2000 Form 10-K under Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations - Future Outlook.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
See "Liquidity and Capital Resources: Business Risk."
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PART II. OTHER INFORMATION
ITEM 5. OTHER INFORMATION
Avista Utilities On February 27, 2001, Avista Corp. and the Spokane County Air
Pollution Control Authority (SCAPCA) reached an agreement to extend the
operating hours of Avista Utilities' 60 MWH Northeast Combustion Turbine power
plant located in Spokane. The 90-day extended operating period began February
21, 2001. The agreement allows Avista Utilities to use the plant to temporarily
bring on added generating capacity for the benefit of its customers and the
region during a time of increased energy demand and continued energy market
volatility. The plant, which is a reserve unit, has an operating license that
limits its use to a specified number of hours during times of peak power demand.
Extended operation of the plant was approved after SCAPCA determined, through
air emission modeling and projections, that extended operation of the turbine
would not adversely impact air quality.
Because emissions from the plant will exceed current permit limits during this
period of extended operations, Avista Utilities has agreed to develop an
"environmental offset project" to achieve future, verifiable emission reductions
in Spokane's federally designated non-attainment areas. The reductions are to be
equal to the amount of emissions created by the turbines during the extended
operating period. Avista Utilities will bear the cost of the project, with
project details to be worked out between the Company and SCAPCA.
Recognizing the ongoing impact of increased natural gas prices and a
colder-than-normal winter, Avista Utilities, as part of the agreement with
SCAPCA, made an additional contribution to low-income energy assistance funds in
its service area. The agreement calls for the contributed amount to be based on
the number of hours of plant operation during the 90-day period, which could
exceed $300,000.
The WUTC and IUPC have approved Avista Utilities' plan to pay consumers who
reduce electricity use by more than 5% compared with the same billing period
last year. The plan is to pay $0.05 per kilowatt-hour saved beyond the
threshold. The program will be in effect May 15, 2001, through October 12, 2001.
The WUTC also gave permission to increase a surcharge supporting energy
conservation programs and a second surcharge to support low-income energy
assistance programs.
Avista Utilities is considering placing several small diesel and natural
gas-fired generators around Washington and North Idaho at sites near
transmission lines. Site and air-pollution permits are required prior to the
facilities' operations. The sites and equipment used could be in place for as
long as 10 years.
On May 1, 2001, the IPUC directed the Company to file testimony in response to a
petition filed by Potlatch Corporation (Potlatch) with the IPUC requesting that
the Commission require Avista Utilities to serve the entirety of its Lewiston
facility's electrical requirements (approximately 100 MW) at embedded cost
rates. Since 1992 Potlatch has received service under a special contract for
entities qualifying under the Public Utility Regulatory Policies Act of 1978
(PURPA) with none of its load served at average embedded cost rates.
Additionally, 55 to 59 MW of the 100 MW being requested for service by Potlatch
for service after January 1, 2002 would constitute "new load" for Avista
Utilities, as Potlatch currently meets this load requirement through
self-generation. Potlatch would plan to sell their self-generation on the open
market. Avista Utilities believes that previous Commission rulings require
denial of Potlatch's request for service at average embedded cost rates. Avista
Utilities, in its April 12, 2001, response to Potlatch's petition, alleges that
the Commission's intention in such a situation, is for the parties to negotiate
a contract reflecting the marginal (incremental) costs of new resources to serve
a load of this magnitude. In order to comply with Potlatch's request, it would
be necessary for Avista Utilities to acquire more new resources at marginal
costs that are at least twice Avista Utilities' average embedded cost of
service.
Avista Labs On March 1, 2001, Avista Labs completed the formation of a new
company, H2fuel, LLC, to develop and commercialize a new technology for
manufacturing hydrogen for fuel cells. Avista Labs owns a 70 percent interest in
H2fuel. The remaining interest is owned by Unitel Fuels Technologies, LLC.
Avista Labs will transfer its ongoing fuel processor development work to H2fuel.
Regional Transmission Organizations (RTO) Avista Utilities and five other
Western utilities have taken steps toward the formation of an Independent
Transmission Company (ITC), TransConnect, which would serve six states.
TransConnect would be a member of the planned regional transmission
organization, RTO West, a non-profit entity. The new for-profit ITC company
would own or lease the high voltage transmission facilities currently held by
Avista Utilities, Montana Power Co., Puget Sound Energy Corp., Portland General
Electric Co., Nevada Power Co. and Sierra
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Pacific Power Co. The proposal was filed October 17, 2000, in response to the
FERC's Order No. 2000, which requires utilities subject to FERC regulation to
file an RTO proposal, or a description of efforts to participate in an RTO, and
any existing obstacles to RTO participation. On April 25, 2001, the FERC issued
the RTO West/TransConnect order granting, with modifications, the companies'
petition. Avista Utilities will be actively discussing this order to determine
the effects of the modifications and the impact to potential ITC development.
Outcomes of this process must be resubmitted to the FERC by December 1, 2001.
When a final proposal emerges it must be approved by the FERC, the boards of
directors of the filing companies and regulators in various states. The
companies' decision to move forward with the formation of TransConnect will
ultimately depend on the economics and conditions related to the formation of
TransConnect, as well as the economics and conditions related to the regulatory
approval process.
Lake Coeur d' Alene Court Decision On July 28, 1998, the United States District
Court for the District of Idaho issued its finding that the Coeur d' Alene Tribe
of Idaho owns portions of the bed and banks of Lake Coeur d' Alene and the St.
Joe River lying within the current boundaries of the Coeur d' Alene Reservation.
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, the Company
is continuing to evaluate the potential impact of this decision on the operation
of its hydroelectric facilities on the Spokane River, downstream of Lake Coeur
d' Alene. The United States District Court decision was affirmed by the Ninth
Circuit Court of Appeals. The United States Supreme Court accepted the State of
Idaho's petition for a writ of certiorari. The United States Supreme Court heard
oral arguments on April 23, 2001, and a decision is expected within the next few
months.
Temporary Price Caps On April 25, 2001, the FERC authorized California's
electricity market monitors to impose price caps when they find that the
available supply of electricity falls to within 7.5% of demand, a level the
state calls a Stage 1 emergency. The caps would be based on what federal and
state officials determine to be the highest costs of generation by the least
efficient power plants serving the market at the time. The caps are effective on
May 1, 2001, and will last one year. It is too early to determine the effects
the temporary caps may have on Company earnings.
Spokane River PCBs On March 7, 2001, the Washington State Department of Ecology
(DOE) informed Avista Development of a health advisory concerning PCBs found in
fish caught in a portion of the Spokane River. The DOE discovered PCBs in fish
and sediments in the 1970s and 1980s. In the 1990s, the DOE performed subsequent
sampling of the river and identified potential sources of the PCBs, including
the Spokane Industrial Park (SIP) and a number of other entities in the area.
The SIP, which was renamed Pentzer Development Corporation (Pentzer Development)
in 1990, operated a wastewater treatment plant at the site until it was closed
December 1993. The SIP's treatment plant discharged to the Spokane River under
the terms of a National Pollutant Discharge Elimination System permit issued by
the DOE. Pentzer Development sold the property in 1996 and merged with Avista
Development in 1998. Avista Development will likely be designated a potentially
liable person (PLP) with respect to PCBs located in the Spokane River.
ADDITIONAL FINANCIAL DATA
At March 31, 2001, the total long-term debt of the Company and its consolidated
subsidiaries, as shown in the Company's consolidated financial statements, was
approximately $679.5 million. Of such amount, $473.8 million represents
long-term unsecured and unsubordinated indebtedness of the Company, and $203.5
million represents secured indebtedness of the Company. The balance of $2.2
million represents indebtedness of subsidiaries. Consolidated long-term debt
does not include the Company's subordinated indebtedness held by the issuers of
Company-obligated preferred trust securities. An additional $213.0 million of
the Company's short-term debt outstanding under or backed by the committed lines
of credit is secured.
The following table reflects the ratio of earnings to fixed charges:
12 Months Ended
---------------------------
March 31, December 31,
2001 2000
---- ----
Ratio of Earnings to Fixed Charges 3.46(x) 3.26(x)
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The Company has long-term purchased power arrangements with various Public
Utility Districts and the interest expense components of these contracts are
included in purchased power expenses. These interest amounts are not included in
the fixed charges and would not have a material impact on fixed charges ratios.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
4(f) 9.75% Senior Notes due June 1, 2008 Indenture, dated as
of April 3, 2001.
12 Computation of ratio of earnings to fixed charges and
preferred dividend requirements.
(b) Reports on Form 8-K.
Dated May 2, 2001, regarding a settlement agreement related to the
Company's power-cost deferral and recovery plan in Washington.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
AVISTA CORPORATION
------------------
(Registrant)
Date: May 15, 2001 /s/ J. E. Eliassen
-------------------------
J. E. Eliassen
Senior Vice President and
Chief Financial Officer
(Principal Accounting and
Financial Officer)
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