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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED
DECEMBER 31, 2000 OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM
_______ TO _______
COMMISSION FILE NUMBER 1-3701
AVISTA CORPORATION
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(Exact name of Registrant as specified in its charter)
Washington 91-0462470
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1411 East Mission Avenue, Spokane, Washington 99202-2600
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 509-489-0500
Web site: http://www.avistacorp.com
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
Name of Each Exchange
Title of Class on Which Registered
- ---------------------------------------------------- -------------------------
Common Stock, no par value, together with New York Stock Exchange
Preferred Share Purchase Rights appurtenant thereto Pacific Stock Exchange
7 7/8% Trust Originated Preferred Securities, Series A New York Stock Exchange
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Title of Class
Preferred Stock, Cumulative, Without Par Value
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days:
-------------------
Yes [X] No [ ]
-------------------
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (Section 229.405 of this chapter) is not contained herein, and
will not be contained, to the best of Registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [ ]
The aggregate market value of the Registrant's outstanding Common Stock, no par
value (the only class of voting stock), held by non-affiliates is
$743,889,494.25, based on the last reported sale price thereof on the
consolidated tape on February 28, 2001.
At February 28, 2001, 47,231,079 shares of Registrant's Common Stock, no par
value (the only class of common stock), were outstanding.
Documents Incorporated By Reference
Part of Form 10-K into Which
Document Document is Incorporated
- -------------------------------------------- --------------------------------
Proxy Statement to be filed in Part III, Items 10, 11,
connection with the annual meeting 12 and 13
of shareholders to be held May 10, 2001
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INDEX
Item Page
No. No.
--- ---
Acronyms and Terms............................................................................ iv
Part I
1. Business...................................................................................... 1
Company Overview............................................................................ 1
Avista Utilities............................................................................ 4
General..................................................................................... 4
Electric Operations......................................................................... 4
Electric Requirements....................................................................... 5
Electric Resources.......................................................................... 5
Future Resource Needs....................................................................... 6
Forecasted Electric Requirements and Resources.............................................. 7
Hydroelectric Relicensing................................................................... 7
Natural Gas Operations...................................................................... 8
Natural Gas Resources....................................................................... 8
Regulatory Issues........................................................................... 9
Industry Restructuring...................................................................... 11
Federal Level............................................................................... 11
State Level................................................................................. 12
Environmental Issues........................................................................ 12
Avista Utilities Operating Statistics....................................................... 13
Energy Trading and Marketing Line of Business............................................... 15
Avista Energy............................................................................... 15
Avista Power................................................................................ 16
Information and Technology Line of Business................................................. 16
Avista Advantage............................................................................ 16
Avista Labs................................................................................. 17
Avista Communications....................................................................... 17
Avista Ventures Line of Business............................................................ 17
Energy Trading and Marketing Operating Statistics........................................... 18
Information and Technology Operating Statistics............................................. 18
2. Properties.................................................................................... 19
Avista Utilities............................................................................ 19
3. Legal Proceedings............................................................................. 20
4. Submission of Matters to a Vote of Security Holders........................................... 20
Part II
5. Market for Registrant's Common Equity and Related Stockholder Matters......................... 20
6. Selected Financial Data....................................................................... 21
7. Management's Discussion and Analysis of Financial Condition and Results of Operations......... 22
Results of Operations....................................................................... 24
Liquidity and Capital Resources............................................................. 31
Future Outlook.............................................................................. 35
7A. Quantitative and Qualitative Disclosure about Market Risk..................................... 41
8. Financial Statements and Supplementary Data................................................... 43
Independent Auditors' Report................................................................ 42
Financial Statements........................................................................ 43
Notes to Financial Statements............................................................... 50
9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.......... *
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INDEX
Item Page
No. No.
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Part III
10. Directors and Executive Officers of the Registrant............................................ 74
11. Executive Compensation........................................................................ 75
12. Security Ownership of Certain Beneficial Owners and Management................................ 75
13. Certain Relationships and Related Transactions................................................ 75
Part IV
14. Financial Statements, Financial Statement Schedules, Exhibits and Reports on Form 8-K......... 76
Signatures.................................................................................... 77
Independent Auditors' Consent................................................................. 78
Exhibit Index................................................................................. 79
* = not an applicable item in the 2000 calendar year for the Company
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ACRONYMS AND TERMS
(The following acronyms and terms are found in multiple locations
within the document)
Acronym/Term Meaning
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aMW - Average Megawatt - a measure of electrical energy over time
AFUCE - Allowance for Funds Used to Conserve Energy; a carrying
charge similar to AFUDC (see below) for conservation-related
capital expenditures
AFUDC - Allowance for Funds Used During Construction; represents
the cost of both the debt and equity funds used to finance
utility plant additions during the construction period
Avista Capital - Parent company to the Company's non-regulated businesses
Avista Corp. - Avista Corporation, the Company
BPA - Bonneville Power Administration
Capacity - a measure of the rate at which a particular generating
source produces electricity
Centralia - the coal-fired Centralia Power Plant in western Washington
State
Colstrip - the coal-fired Colstrip Generating Project in southeastern
Montana
CPUC - California Public Utilities Commission
CT - combustion turbine; a natural gas-fired unit
Energy - a measure of the amount of electricity produced from a
particular generating source over time
FERC - Federal Energy Regulatory Commission
IPUC - Idaho Public Utilities Commission
KV - Kilovolt - a measure of capacity on transmission lines
KW, KWH - Kilowatt, kilowatthour, 1000 watts or 1000 watt hours
MW, MWH - Megawatt, megawatthour, 1000 KW or 1000 KWH
OPUC - Public Utility Commission of Oregon
Pentzer - Pentzer Corporation, a wholly owned subsidiary of the
Company which was the parent company to the majority
of the Company's non-energy businesses
Therm - Unit of measurement for natural gas; a therm is equal to
one hundred cubic feet (volume) or 100,000 BTUs (energy)
Watt - Unit of measurement for electricity; a watt is equal to the
rate of work represented by a current of one ampere under
a pressure of one volt
WUTC - Washington Utilities and Transportation Commission
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PART I
This Form 10-K contains forward-looking statements within the meaning of Section
21E of the Securities Exchange Act of 1934. Forward-looking statements should be
read with the cautionary statements and important factors included in this Form
10-K at Item 7 -- "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Safe Harbor Forward-Looking Statements."
Forward-looking statements are all statements other than statements of current
or historical fact, including without limitation those that are identified by
the use of the words "will," "anticipates," "seeks to," "estimates," "expects,"
"intends," "plans," "predicts," and similar expressions.
ITEM 1. BUSINESS
COMPANY OVERVIEW
Avista Corporation (Avista Corp., or the Company) was incorporated in the State
of Washington in 1889, and is an energy, information and technology company with
utility and subsidiary operations located in the Pacific Northwest. At December
31, 2000, the Company's employees included approximately 1,460 people in its
utility operations and approximately 800 people in its subsidiary businesses.
The Company's corporate headquarters are in Spokane, Washington, which serves as
the Inland Northwest's center for manufacturing, transportation, health care,
education, communication, agricultural and service businesses.
The Company's operations are organized into four lines of business -- Avista
Utilities, Energy Trading and Marketing, Information and Technology, and Avista
Ventures. Avista Utilities, which is an operating division of Avista Corp. and
not a separate entity, represents the regulated utility operations that are
responsible for retail electric and natural gas distribution, electric
transmission services and electric generation and production. Avista Utilities
also engages in electric wholesale sales and purchases of capacity and energy.
Avista Capital, a wholly owned subsidiary of Avista Corp., owns all of the
subsidiary companies engaged in the other lines of business. The Energy Trading
and Marketing line of business includes Avista Energy, Inc. (Avista Energy),
Avista Power, LLC (Avista Power) and Avista-STEAG, LLC (Avista-STEAG). The
Information and Technology line of business includes Avista Advantage, Inc.
(Avista Advantage), Avista Labs, Inc. (Avista Labs) and Avista Communications,
Inc. (Avista Communications). The Avista Ventures line of business includes
Avista Ventures, Inc. (Avista Ventures), and several other minor subsidiaries.
As of December 31, 2000, the Company had common equity investments of $363.0
million and $361.2 million in Avista Utilities and Avista Capital, respectively.
Regulatory, political, economic and technological changes have brought about the
accelerating transformation of the utility and energy industries, presenting
both opportunities and challenges. Avista Utilities seeks to maintain a strong,
low-cost utility business focused on delivering efficient, reliable and high
quality service to its customers. The utility business is expected to grow
modestly, consistent with historical trends. Expansion will primarily result
from economic growth in its service territory. Avista Energy scaled back
operations to the Western Systems Coordinating Council (WSCC) during 2000, and
will continue to focus on reducing the size and the risk associated with its
energy trading and marketing activities. Avista Energy's marketing efforts are
expected to be driven by its base of knowledge and experience in the operation
of both electric energy and natural gas physical systems in the region, as well
as its relationship-focused approach to its customers. Avista Power will
continue to pursue opportunities to develop new generation to support the
growing power requirements in the Northwest. The Company also intends to focus
on its investments in the Information and Technology subsidiaries as part of its
overall plan for generating shareholder value, which could include finding
equity partners to assist in financing the continued growth of the businesses.
The Company's operations are exposed to risks, including legislative and
governmental regulations, the price and supply of purchased power, fuel and
natural gas, recovery of purchased power and purchased natural gas costs,
weather conditions, availability of generation facilities, competition,
technology and availability of funding. In addition, the energy business exposes
the Company to the financial, liquidity, credit and commodity price risks
associated with wholesale sales and purchases.
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Following is a list of the major companies owned by Avista Capital:
Avista Energy - An electricity and natural gas trading and marketing company, operating
primarily in the WSCC.
Avista Power - A developer, purchaser and owner of electricity generating plants in strategic
locations throughout the West. Some projects may be developed with STEAG AG, a German
independent power producer, under Avista-STEAG, LLC.
Avista Advantage - A provider of Internet-based specialty billing and information services.
Avista Labs - The developer of proton exchange membrane (PEM) fuel cell technology
and fuel cell components.
Avista Communications - An Integrated Communications Provider (ICP) that provides local facilities-based
telecommunications solutions, and designs, builds and manages metropolitan area
fiber optic networks. Avista Capital owned 82% at December 31, 2000.
Avista Ventures - Responsible for investing in business opportunities that have potential value in
the lines of business in which the Company is already involved and managing the existing
businesses.
The Company's lines of business, and the companies included within them, are
illustrated below:
[CHART]
[ ] - denotes a business entity.
( ) - denotes an operating division or line of business.
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For the years ended December 31, 2000, 1999 and 1998, respectively, the four
primary business segments of the Company contributed the following percentages
of consolidated operating revenues, gross margins and pre-tax income/(loss) from
operations:
Income/(Loss) from
Operating Revenues Gross Margins Operations (pre-tax)
-------------------------- --------------------------- ----------------------------
2000 1999 1998 2000 1999 1998 2000 1999 1998
---- ---- ---- ---- ---- ---- ---- ---- ----
Avista Utilities 19% 14% 29% 44% 105% 89% 2% 455% 83%
Energy Trading and Marketing 81% 85% 65% 56% (5)% 11% 123% (312)% 13%
Information and Technology -- -- -- n/a n/a n/a (20)% (42)% (3)%
Avista Ventures -- 1% 6% n/a n/a n/a (5)% (1)% 7%
n/a -- not applicable
Gross margin is calculated by subtracting resource costs from operating
revenues. (See Schedule of Information by Business Segments for further
information).
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AVISTA UTILITIES
GENERAL
Avista Utilities provides electricity and natural gas distribution and
transmission services in a 26,000 square mile area in eastern Washington and
northern Idaho with a population of approximately 835,000. It also provides
natural gas distribution service in a 4,000 square mile area in northeast and
southwest Oregon and in the South Lake Tahoe region of California, with the
population in these areas approximating 500,000. At the end of 2000, retail
electric service was supplied to approximately 313,000 customers in eastern
Washington and northern Idaho; retail natural gas service was supplied to
approximately 279,000 customers in parts of Washington, Idaho, Oregon and
California.
Avista Utilities anticipates residential and commercial electric load growth to
average approximately 2.6% annually for the next five years primarily due to
expected increases in both population and the number of businesses in its
service territory. The number of electric customers is expected to increase and
the average annual usage by residential customers is expected to remain steady.
Avista Utilities expects natural gas load growth, including transportation
volumes, in its Washington and Idaho service area to average approximately 2.7%
annually for the next five years. The Oregon and South Lake Tahoe, California
service areas are anticipated to realize 3.4% growth annually during that same
period. The natural gas load growth is primarily due to expected conversions
from electric space and water heating to natural gas, and increases in both
population and the number of businesses in its service territories. These
electric and natural gas load growth projections are based on purchased economic
forecasts, publicly available studies, and internal analysis of company-specific
data, such as energy consumption patterns and internal business plans. See Item
7. Management's Discussion and Analysis of Financial Condition and Results of
Operations: Future Outlook for additional information.
ELECTRIC OPERATIONS
In addition to providing electric transmission and distribution services, Avista
Utilities is responsible for electric generation and production. 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. With this diverse energy
resource portfolio, Avista Utilities remains one of the nation's lowest-cost
producers of electric energy services. See Item 2. Properties -- Generating
Plants for additional information.
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 sells any surplus at the best
available price. This process includes hedging transactions.
In the second quarter of 2000, certain wholesale transactions contributed to
significant losses in Avista Utilities, as more fully discussed in Item 7
Management's Discussion and Analysis of Financial Condition and Results of
Operations.
Avista Utilities competes in the electric wholesale market with other western
utilities, federal marketing agencies and power marketers. The electric
wholesale market has changed significantly over the last few years with respect
to market participants, level of activity, variability of prices and credit.
These changes have contributed to the increased volatility of the market. See
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations, Significant Changes in Energy Markets for information about the
California energy situation.
Avista Energy, a wholly owned subsidiary of Avista Corp., pursues electric
energy trading activities; however, Avista Energy's activities are not related
to Avista Utilities' operations.
Challenges facing Avista Utilities' electric operations include, among other
things, changes in the availability of and volatility in the prices of power and
fuel, generating unit availability, legislative and governmental regulations,
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weather conditions and the ability to recover increased costs of purchased
power. Avista Utilities believes it faces minimal risk for stranded utility
assets resulting from deregulation due to its low-cost generation portfolio. In
a deregulated environment, however, evolving technologies that provide alternate
energy supplies could affect the market price of power, and certain generating
assets could have capital and operating costs above the adjusted market price.
See Industry Restructuring and Note 1 of Notes to Financial Statements for
additional information.
ELECTRIC REQUIREMENTS
Avista Utilities' 2000 annual peak requirements, including long-term and
short-term contractual obligations, were 3,829 MW. This peak occurred on January
31, 2000, at which time the maximum capacity available from Avista Utilities'
generating facilities, including long-term and short-term purchases, was 4,194
MW. The electric requirements include both retail distribution needs and
wholesale short-term and long-term commitments. Variations in energy usage by
Avista Utilities' ultimate customers occur from year to year, from season to
season and from month to month within a season, primarily as a result of weather
conditions. This results in a continual balancing of loads and resources, and
requires both purchases and sales of energy on a quarterly, monthly, daily and
hourly basis in order to be able to meet its load with the lowest cost
resources.
ELECTRIC RESOURCES
General Avista Utilities' diverse resource mix of hydroelectric projects,
thermal generating facilities, and power purchases and exchanges, combined with
strategic access to regional electric transmission systems, enables it to remain
one of the nation's lowest-cost producers and sellers of retail electric energy
services. At December 31, 2000, Avista Utilities' total owned resources
available were 65% hydroelectric and 35% thermal. See Avista Utilities' Electric
Operating Statistics for energy resource statistics.
Hydroelectric Resources Total hydroelectric resources provide 547 aMW annually
under normal streamflow conditions. Hydroelectric generation is Avista
Utilities' lowest cost source of electricity and the availability of
hydroelectric generation has a significant effect on its total energy costs.
Under average operating conditions, Avista Utilities meets approximately
one-third of its total energy requirements (both retail and long-term wholesale)
with its own hydroelectric generation and long-term hydroelectric contracts. The
streamflows to company-owned hydroelectric projects were 86%, 112% and 93% of
normal in 2000, 1999 and 1998, respectively.
Thermal Resources Total thermal resources provide 374 aMW annually under normal
operating conditions. Avista Utilities has a 15% interest in a twin-unit
coal-fired generating facility, the Colstrip Generating Project (Colstrip) in
southeastern Montana. Avista Utilities also owns a wood-waste-fired generating
facility known as the Kettle Falls Generating Station (Kettle Falls) in
northeastern Washington and two natural gas-fired CT generating units, located
in Spokane (Northeast Combustion Turbine). In addition, Avista Utilities also
operates and leases two natural gas-fired CT generating units in northern Idaho
(Rathdrum).
Avista Utilities also had a 17.5% interest in another twin-unit coal-fired
generating facility, the Centralia Power Plant (Centralia) in western
Washington. On May 5, 2000, the owners of Centralia sold the plant to TransAlta,
a Canadian company. Avista Utilities is purchasing energy from TransAlta to
replace the output from Centralia for the period from July 1, 2000 through
December 31, 2003. Avista Utilities will receive approximately 200 megawatts per
hour beginning each July and continuing through March of the following year
during the term of the contract. In 2000, 1999 and 1998, Centralia provided
approximately 15%, 37% and 37%, respectively, of Avista Utilities' thermal
generation.
Colstrip, which is operated by PPL Global, Inc., is supplied with fuel under
coal supply and transportation agreements in effect through December 2019 from
adjacent coal reserves. In 2000, 1999 and 1998, Colstrip provided approximately
47%, 48% and 46% of Avista Utilities' thermal generation, respectively.
Kettle Falls' primary fuel is wood-waste generated as a by-product from forest
industry operations within one hundred miles of the plant. Natural gas may be
used as an alternate fuel. A combination of long-term contracts plus spot
purchases provides Avista Utilities the flexibility to meet expected future fuel
requirements for the plant. In 2000, 1999 and 1998, Kettle Falls provided
approximately 12%, 8% and 9% of Avista Utilities' thermal generation,
respectively.
The four CTs are natural gas-fired generating units that formerly were primarily
used for peaking needs. Due to the high demand for power during 2000 and the
relative operating cost compared to higher wholesale market prices, these
generating units were run on a more regular basis, and will continue to be run
more regularly in the
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future. All four CTs have access to domestic and/or Canadian natural gas
supplies. In 2000, 1999 and 1998, these four units provided approximately 26%,
7% and 8%, respectively, of Avista Utilities' thermal generation.
Purchases, Exchanges and Sales In 2000, Avista Utilities had various long-term
purchase contracts with non-coincident peak (peak that does not occur during the
same hour) equating to 832 MW. Additionally, long-term hydroelectric purchase
contracts of 195 MW peak were available. Avista Utilities also enters into a
significant number of short-term sales and purchases with durations of up to one
year. Energy purchases and exchanges for the years 2000, 1999 and 1998 provided
approximately 68%, 69% and 70%, respectively, of Avista Utilities' total
electric energy requirements.
Under the Public Utility Regulatory Policies Act of 1978 (PURPA), Avista
Utilities is required to purchase generation from qualifying facilities,
including small hydroelectric and cogeneration projects, at avoided cost rates
adopted by the Washington Utilities and Transportation Commission (WUTC) and the
Idaho Public Utilities Commission (IPUC). Avista Utilities purchased
approximately 594,944 MWH, or about 2% of its total energy requirements, from
these sources at a cost of approximately $28 million in 2000. These contracts
expire at various times during the period 2001-2022.
FUTURE RESOURCE NEEDS
In August 2000, the WUTC approved Avista Utilities' plan for a Request for
Proposal (RFP) process to increase its power resources. New resources are needed
to serve Avista Utilities' long-term load requirements. As part of the order,
the WUTC agreed to waive normal time limits related to going out into the market
to determine the resource options available to Avista Utilities. In December
2000, Avista Utilities selected the Coyote Springs 2 project near Boardman,
Oregon.
The Coyote Springs 2 project is a combined-cycle natural gas fired combustion
turbine with generation output of approximately 280-megawatts. Key factors in
the selection of Coyote Springs 2 included its fully licensed status and the
fact that the manufacture and delivery of natural gas turbine equipment that
will power the project is secured. Engineering and procurement of the other
required major equipment began in January 2001, with completion of construction
expected in June 2002. Permits and contract modifications are being filed to
transfer ownership at cost to Avista Utilities from its subsidiary, Avista
Power, which previously acquired the rights for the project from Enron North
America and Portland General Electric. The Company is working to secure a term
loan for financing the construction. The total cost of the project is estimated
at $190 million.
In addition, Avista Utilities selected three demand side management proposals
which will yield approximately 13 MW in energy savings over a three-year period.
Avista Utilities expects negotiations of these proposals to be finalized during
the first quarter of 2001.
Avista Utilities has operational strategies in place to address the issue of
available resources to meet the increased demand for energy. Future capital
expenditures include plans for increasing capacity and generation at various
hydroelectric and thermal generating plants. In addition, action is being taken
to increase the energy output from the CT generating units owned and leased by
Avista Utilities. On February 16, 2001, Avista Utilities filed for permission to
increase the amount of operating hours allowed and for a small increase in the
amount of emissions allowed for minor pollutants. The increase in operating
hours does not require an increase in the emission levels of major pollutants
from these CTs. Approval of the request is expected in mid-2001. Avista
Utilities is also in the process of upgrading the air operating permit at the CT
units in Spokane to a Title V permit, which will increase the annual amount of
emissions allowed. In addition, Avista Utilities is asking to add additional
pollution control equipment at the site in order to increase the available hours
of operation.
The Company reached an agreement with the Spokane County Air Pollution Control
Authority that will allow operation of the Northeast Combustion Turbine for a
90-day period, beginning February 21, 2001, when it would have been idled due to
pollution control limits, producing power equivalent to 14 aMW on an annual
basis. In return for this waiver, the Company will contribute up to $324,000 to
a fund to defray the energy expenses of low-income residents of Spokane County,
and will also spend up to $900,000 to design and implement an environmental
offset project to reduce emissions in an amount equivalent to the emissions of
the plant during the waiver period.
Under normal water conditions and loads, Avista Utilities' own generation plants
and long-term contracts would be able to provide approximately 90% of its
forecasted native load energy requirements in 2001, and 100% thereof in 2002 and
2003. The balance would be covered through short-term contracts. Avista
Utilities has covered essentially all of its electric energy requirements in the
forward markets for 2001. Current forecasts show streamflow conditions for
hydroelectric generation for 2001, estimated at 60% of normal, to be among the
worst five
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years on record. In response to the reduced hydroelectric generation, Avista
Utilities has made additional fixed price purchases of energy, and expects to
receive the necessary local, state and federal approvals to increase the energy
output of its gas-fired thermal generation to cover its firm retail and
wholesale load requirements for 2001, with minimal additional purchases expected
from the high cost short-term wholesale market. However, if hydroelectric
conditions further deteriorate, its thermal plants do not operate as planned, or
weather conditions cause retail loads to increase, Avista Utilities would incur
increased costs from increased purchases in the short-term wholesale energy
market.
FORECASTED ELECTRIC REQUIREMENTS AND RESOURCES
(Average MW)
2001 2002 2003
----- ----- -----
Requirements:
System load(1) 1,026 995 1,027
Contracts 479 131 80
Short-term sales 56 -- --
----- ----- -----
Total Requirements 1,561 1,126 1,107
===== ===== =====
Resources:
System/contract hydro(2) 547 547 547
Company owned thermal generation 367 456 594
Contracts for purchased power(1) 546 262 251
Short-term purchased power 167 -- --
----- ----- -----
Total Resources 1,627 1,265 1,392
===== ===== =====
Surplus Resources 66 139 285
(1) Decrease from 2001 to 2002 reflects the expiration of a long-term sales
contract. There is a corresponding decrease in resources as a result of
the contract expiration. This information assumes no renewal of the
contract.
(2) Forecast above assumes normal water, which is the median of the 60
years of water between 1928 and 1988. Water conditions are expected to
be 60% of normal in 2001 due to current snow pack conditions. Avista
Utilities currently anticipates that hydro generation may be as much as
150 aMW below normal in 2001. This is offset by the waiver received on
February 21, 2001, for Northeast Combustion Turbine (14 aMW), the
original estimated surplus from the table above (66 aMW), the
anticipated change in Rathdrum permit to allow for additional hours of
operations (27 aMW) and additional short-term purchases.
HYDROELECTRIC RELICENSING
Avista Corp. is a licensee under the Federal Power Act, which regulates certain
of its hydroelectric generation resources and is administered by the Federal
Energy Regulatory Commission (FERC), and its licensed projects are subject to
the provisions of Part I of that Act. These provisions include payment for
headwater benefits, condemnation of licensed projects upon payment of just
compensation, and take-over of such projects after the expiration of the license
upon payment of the lesser of "net investment" or "fair value" of the project,
in either case plus severance damages. All but one of the Company's
hydroelectric plants are regulated by the FERC through project licenses issued
for 30-50 year periods. See Item 2. Properties -- Avista Utilities for
additional information.
The Cabinet Gorge and Noxon Rapids plants (764 MW) received a new 45-year
operating license from the FERC on February 23, 2000. The existing licenses were
combined into one license under the name Clark Fork Projects. The application to
relicense Cabinet Gorge and Noxon Rapids was filed with the FERC on February 18,
1999, and included the Clark Fork Settlement Agreement signed by 27 parties and
a collaboratively written environmental assessment report. The application
culminated seven years of planning and consultation with Native American Tribes,
special interest groups, resource agencies and the general public. Settlement
was reached two years before the license expired, and preserved the projects'
economic peaking and load following operations.
As part of the Settlement Agreement, Avista Utilities committed to early
implementation of protection, mitigation and enhancement measures, which began
in March 1999. Measures in the agreement, which will cost approximately $4.7
million annually, address issues related to fisheries, water quality, wildlife,
recreation, land use, cultural
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resources and erosion. Recovery of previously deferred hydro relicensing costs,
as well as estimated levels of ongoing costs associated with implementation of
the Settlement Agreement, have been addressed by both the WUTC and IPUC and
received favorable treatment. Process costs that had been deferred during the
licensing phase were allowed in rate base and are being amortized over the
45-year license term. The ongoing Settlement Agreement costs were allowed as
operating expenses. See Item 2. Properties - Avista Utilities and Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations: Future Outlook for additional information.
The issue of high dissolved gas levels which exceed Idaho water quality
standards downstream of Cabinet Gorge during spill periods continues to be
studied, as agreed to in the Settlement Agreement. To date, intensive biological
studies in the lower Clark Fork River and Lake Pend Oreille have documented
minimal biological effects of high dissolved gas levels on free ranging fish. An
engineering feasibility study has identified several possible structural
alternatives at Cabinet Gorge that may reduce dissolved gas levels. Under the
terms of the Settlement Agreement, the Company will develop an abatement and/or
mitigation strategy in 2002 in conjunction with the other signatories to the
agreement.
The Company operates six hydroelectric plants (191 MW) on the Spokane River, and
five of these (Long Lake, Nine Mile, Upper Falls, Monroe Street and Post Falls)
are under one FERC license. The sixth, Little Falls, is not licensed by the
FERC. The license for the Spokane River Projects expires in August 2007, and the
Company will be required to file a notice of intent to relicense prior to August
2002. Planning, discussions with stakeholder groups and information gathering
activities are currently underway.
NATURAL GAS OPERATIONS
Natural gas commodity prices increased dramatically during 2000. However, market
prices for natural gas continue to be competitive compared to alternative fuel
sources for residential, commercial and industrial customers. Proven reserves
and future natural gas development opportunities lead Avista Utilities to
believe that natural gas should sustain its market advantage. Significant growth
has occurred in the natural gas business in recent years due to increased demand
for natural gas in new construction. Avista Utilities also makes sales and
provides transportation service directly to large natural gas customers.
Most of Avista Utilities' large industrial customers purchase their own natural
gas requirements through gas marketers. For these customers, Avista Utilities
provides transportation from its pipeline interconnection to the customer's
premises. Avista Utilities has numerous individual contracts for natural gas
transportation service, most of which contain negotiated rates for its
distribution service based on the customer's competitive alternatives. Seven of
Avista Utilities' largest natural gas customers are provided natural gas
transportation service under individual contracts. These negotiated contracts
were entered into to retain these customers who can either by-pass Avista
Utilities' distribution system or have competitive alternative fuel capability.
All individual contracts are subject to regulatory review and approval. The
competitive nature of the natural gas spot market results in savings in the cost
of purchased natural gas, which encourages large customers with fuel-switching
capabilities to continue to utilize natural gas for their energy needs when
economic. The total volume transported on behalf of transportation customers for
2000, 1999 and 1998 was approximately 225.4, 232.7 and 226.1 million therms,
which represented approximately 38%, 40% and 41% of Avista Utilities' total
system deliveries.
Challenges facing Avista Utilities' natural gas operations include, among other
things, volatility in the price of natural gas, changes in the availability of
natural gas, legislative and governmental regulations, weather conditions,
conservation and the ability to recover increased costs of natural gas.
NATURAL GAS RESOURCES
Natural Gas Supply A diverse portfolio of resources allows Avista Utilities to
capture market opportunities that benefit its natural gas customers. Natural gas
supplies are available from both domestic and Canadian sources through both
long- and short-term, or spot market, purchases. Avista Utilities holds capacity
on six pipelines and owns natural gas storage facilities. This allows Avista
Utilities to optimize its available resources.
The Company's energy trading and marketing subsidiary, Avista Energy, is
responsible for the daily management and optimization of these resources for the
requirements of customers in the states of Washington, Idaho and Oregon under an
agreement with Avista Utilities. Under this relationship, Avista Utilities
retains ownership of its transportation, storage and long-term contracts and
Avista Energy acts as an agent to optimize these important
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resources. The utility commissions have approved Benchmark Incentive Mechanisms
that allow Avista Utilities and its customers to share some of the benefits of
Avista Energy's resource optimization activities. See Regulatory Issues for
additional information.
Firm natural gas supplies are available through negotiated agreements for terms
ranging between one month and seven years. Approximately 25% of the natural gas
supply is obtained from domestic sources, with the remaining 75% from Canadian
sources. Nearly all natural gas purchased from Canadian sources is contracted in
U.S. dollar denominations, limiting any foreign currency exchange exposure.
Canadian natural gas supplies are not considered to be at greater risk of
non-delivery than U.S. supplies.
Avista Utilities holds capacity on six natural gas pipelines, Northwest Pipeline
Company (NWP), Gas Transmission Northwest (GTN), Paiute Pipeline (Paiute),
Tuscarora Gas Transmission Company (Tuscarora), NOVA Pipeline, Ltd. (NOVA) and
Alberta Natural Gas Co. Ltd. (ANG), which provide it access to both domestic and
Canadian natural gas supplies.
Avista Utilities contracts with NWP for three types of firm service
(transportation, liquefied natural gas storage and underground storage), with
Paiute for firm transportation and liquefied natural gas storage and with GTN,
Tuscarora, NOVA and ANG for firm transportation only.
Jackson Prairie Natural Gas Storage Project (Storage Project) Avista Utilities
owns a one-third interest in the Storage Project, an underground natural gas
storage field located near Chehalis, Washington. The role of the Storage Project
in providing flexible natural gas supplies is increasingly important to Avista
Utilities' natural gas operations. It enables Avista Utilities to place natural
gas into storage when prices are low or to meet minimum natural gas purchasing
requirements, as well as to withdraw natural gas from storage when spot prices
are high or as needed to meet high demand periods. During 1999, Avista Utilities
completed the process of increasing the capacity at the Storage Project. This
increased capacity is being operated and managed by Avista Energy for the next
ten years. Avista Utilities has contracted to release some of its Storage
Project capacity to two other utilities until 2001 and 2002, with a provision
under one of the releases to partially recall the released capacity if Avista
Utilities determines additional natural gas storage is required for its own
system supply.
REGULATORY ISSUES
Avista Corp., as a regulated public utility, is currently subject to regulation
by state utility commissions with respect to prices, accounting, the issuance of
securities and other matters. The retail electric operations are subject to the
jurisdiction of the WUTC and the IPUC. The retail natural gas operations are
subject to the jurisdiction of the WUTC, the IPUC, the Oregon Public Utility
Commission (OPUC) and the California Public Utilities Commission (CPUC). The
Company is also subject to the jurisdiction of the FERC for its wholesale
natural gas rates charged for the release of capacity from the Jackson Prairie
Storage Project, and for electric transmission service and wholesale electric
sales.
In each regulatory jurisdiction, the price the Company may charge for retail
electric and natural gas services (other than specially negotiated retail rates
for industrial or large commercial customers, which are subject to regulatory
review and approval) is currently determined on a "cost of service" basis and is
designed to provide, after recovery of allowable operating expenses, an
opportunity to earn a reasonable return on "rate base." "Rate base" is generally
determined by reference to the original cost (net of accumulated depreciation)
of utility plant in service, subject to various adjustments for deferred taxes
and other items. Over time, rate base is increased by additions to utility plant
in service and reduced by depreciation of utility plant. As the energy business
is restructured, traditional "cost of service" ratemaking may evolve into some
other form of ratemaking. Rates for transmission services are based on the "cost
of service" principles and are set forth in tariffs on file with the FERC. See
Note 1 of Notes to Financial Statements for additional information about
regulation, depreciation and deferred taxes. Also see Industry Restructuring for
additional information about deregulation.
General Rate Cases In October 1999, Avista Utilities filed with the WUTC a
request for a general electric rate increase of $26.2 million, or 10.4%,
subsequently revised to $18.2 million, and a general natural gas rate increase
of $4.9 million, or 6.5%. On September 29, 2000, the WUTC ordered a $3.4
million, or 1.4%, reduction in electric rates and a $1.7 million, or 2.1%,
increase in natural gas rates. The WUTC also ordered that Avista Utilities'
annual rate of return on investment for both electricity and natural gas be
reduced from its current rate of return of 10.7% to 9.03%. Avista Utilities had
requested a 9.9% rate of return. Avista Utilities filed a Petition for
Reconsideration before the WUTC requesting that the commission reconsider
certain portions of its order. On November 8, 2000,
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the Commission slightly modified the original order by reducing the electric
reduction from $3.4 million to $2.9 million and increasing the natural gas
increase from $1.7 million to $1.8 million.
In Avista Utilities' last general electric rate case in the State of Idaho, the
IPUC granted a rate increase of $9.3 million, or 7.6%, with an authorized rate
of return of 8.98%, effective August 1999.
Power Cost Deferrals (Washington) On August 9, 2000, the WUTC approved Avista
Utilities' request for deferred accounting treatment for certain power costs
related to increases in short-term power prices beginning July 1, 2000 and
ending June 30, 2001. The specific power costs deferred include the changes in
power costs to Avista Utilities from those included in base retail rates,
related to three power cost components: the net effect of changes in short-term
wholesale market prices on short-term wholesale purchases and sales; the effect
on power costs from changes in the level of hydroelectric generation; and the
net effect on power costs from changes in the level of thermal generation
(including changes in fuel prices). The deferrals each month are calculated as
the difference between the actual costs to Avista Utilities associated with
these three power cost components, and the level of costs included in Avista
Utilities' base retail rates. The power costs deferred are related solely to the
operation of Avista Utilities' system resources to serve its system retail and
wholesale load obligations. During 2000, the Company deferred a total of $33.9
million under this accounting order.
On January 24, 2001, the WUTC approved a modification to the deferral mechanism
to recover power supply costs associated with meeting increased retail and
wholesale system load requirements, effective December 1, 2000. The WUTC also
required Avista Utilities to file a proposal by mid-March 2001 that will address
the prudency of the incurred power costs, the optimization of Company-owned
resources to the benefit of retail customers, the appropriateness of recovery of
power costs through a deferral mechanism, a proposal for cost of capital offsets
to recognize the shift in risk from shareholders to ratepayers and Avista
Utilities' plan to mitigate the deferred power costs. Avista Utilities also
plans to file for an extension of the deferred accounting treatment beyond June
30, 2001.
Power Cost Adjustment (PCA) (Idaho) Avista Utilities has a PCA mechanism in
Idaho that tracks changes in hydroelectric generation, secondary energy prices,
related changes in thermal generation, as well as changes in PURPA contracts,
but not changes in revenues or costs associated with other wheeling or power
contracts. Rate changes were triggered when the deferred balance reached $2.2
million. No more than two surcharges or rebates are to be in effect at the same
time. A new trigger of $3.0 million was effective beginning December 2000. On
January 16, 2001, Avista Utilities filed an application with the IPUC seeking
proposed modifications to the existing PCA mechanism. Due to extremely high
short-term power prices, Avista Utilities is requesting to recover power supply
costs associated with meeting increased retail and wholesale system load
requirements, as well as to recover replacement power costs associated with
possible thermal plant forced outages. See Note 1 of Notes to Financial
Statements for additional information.
Purchased Gas Adjustment (PGA or Natural Gas Trackers) Natural gas trackers are
supplemental tariffs filed with state regulatory commissions which are designed
to pass through changes in purchased natural gas costs, and do not normally
result in any changes in net income. In December 2000, Avista Utilities filed
natural gas trackers with the WUTC, IPUC and OPUC requesting increases of $33.9
million, or 29%, $14.1 million, or 29%, and $22.4 million, or 35%, respectively.
Avista Utilities received effective approval dates from the WUTC of January 12,
2001, the IPUC of February 15, 2001, and the OPUC of January 24, 2001. In
February 2001, Avista Utilities filed with CPUC a gas tracker requesting an
increase of $7.7 million, or 61%. Prior to the above mentioned increases, the
WUTC and IPUC each approved increases of 29% effective September 1, 2000. The
OPUC approved a 19% increase effective October 1, 2000.
Natural Gas Benchmark Mechanism Avista Utilities received regulatory approval of
its Natural Gas Benchmark Mechanism in 1999 from the IPUC, WUTC and OPUC. The
mechanism eliminates natural gas procurement operations within Avista Utilities
and consolidates gas procurement operations under Avista Energy, the Company's
non-regulated affiliate. The ownership of the natural gas assets remains with
Avista Utilities, but the assets are managed by Avista Energy through an Agency
Agreement. Avista Utilities maintains a natural gas staff to prepare load
forecasts and analyses related to long-term resource acquisitions, to manage the
Agency Agreement with Avista Energy and to support state and federal regulatory
activities. The Natural Gas Benchmark Mechanism was implemented September 1,
1999 and runs through March 31, 2002.
Consolidation of natural gas procurement operations under Avista Energy allows
the Company to gain synergies and better manage its risk by combining and
operating the two portfolios as one portfolio and gain efficiencies by
eliminating duplicate functions. Effective January 1, 2001, the WUTC and IPUC
approved Avista Utilities' modifications to the Benchmark Mechanism,
incorporating the use of financial products (fixed-price transactions or
hedging). Due to the unprecedented increase in and volatility of natural gas
commodity costs, it was determined that
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such additional flexibility was needed in the Mechanism to properly manage
costs. (The use of financial products was incorporated in the original Oregon
Mechanism.) The Natural Gas Benchmark Mechanism provides certain guaranteed
benefits to retail customers and provides the Company with the opportunity to
improve earnings, i.e., a performance-based mechanism.
Demand Side Management (DSM) Programs On January 17, 2001, Avista Utilities
filed a request with the WUTC and IPUC to implement a natural gas revenue
surcharge of 0.5% to provide funding for natural gas energy-efficiency programs.
The WUTC approved the surcharge effective February 8, 2001 and the IPUC approved
it effective February 15, 2001. Avista Utilities currently has an electric
revenue surcharge, or tariff rider, of approximately 1.5% and 1.0% in Washington
and Idaho, respectively, to fund its electric DSM programs. Avista Utilities
expects to file a request with the IPUC in mid-March 2001 to increase the Idaho
Electric DSM rider to 1.5%. The tariff rider has been in place since 1995 and
was the first "system benefit charge" for energy efficiency in the country.
INDUSTRY RESTRUCTURING
FEDERAL LEVEL
Industry restructuring to open the electric wholesale energy market to
competition was initially promoted by federal legislation. The Energy Policy Act
of 1992 (Energy Act) amended provisions of the Public Utility Holding Company
Act of 1935 (PUHCA) and the Federal Power Act to remove certain barriers to a
competitive wholesale market. The Energy Act confers expanded authority upon the
FERC to issue orders requiring electric utilities to transmit power and energy
to or for wholesale purchasers and sellers, and to require electric utilities to
enlarge or construct additional transmission capacity for the purpose of
providing these services. It also created "exempt wholesale generators", a new
class of independent power plant owners that are able to sell generation only at
the wholesale level. This permits public utilities and other entities to
participate through subsidiaries in the development of independent electric
generating plants for sales to wholesale customers without being required to
register under the PUHCA.
FERC Order No. 888, issued in April 1996, requires public utilities operating
under the Federal Power Act to provide access to their transmission systems to
third parties pursuant to the terms and conditions of the FERC's pro-forma open
access transmission tariff. FERC Order No. 889, the companion rule to Order No.
888, requires public utilities to establish an Open Access Same-Time Information
System (OASIS) to provide transmission customers with information about
available transmission capacity and other information by electronic means. It
also requires each public utility subject to the rule to functionally separate
its transmission and wholesale power merchant functions. The FERC issued its
initial order accepting the non-rate terms and conditions of Avista Utilities'
open access transmission tariff in November 1996. Avista Utilities filed its
"Procedures for Implementing Standards of Conduct under FERC Order No. 889" with
the FERC in December 1996 and adopted these Procedures effective January 3,
1997. FERC Orders No. 888 and No. 889 have not had a material effect on Avista
Utilities' operating results.
In December 1999, FERC Order No. 2000 was issued regarding the development of
Regional Transmission Organizations (RTO). This final rule required public
utilities subject to FERC regulation to file an RTO proposal, or a description
of efforts to participate in an RTO, and any existing obstacles to RTO
participation, by October 2000. Avista Utilities and five other Western
utilities have taken steps toward the formation of an independent transmission
company, TransConnect, which would serve six states. TransConnect would be a
member of the planned regional transmission organization, RTO West. The new,
for-profit company would own or lease the high voltage transmission facilities
currently held by the Company, Montana Power Co., Puget Sound Energy Corp.,
Portland General Electric Co., Nevada Power Co. and Sierra Pacific Power Co. The
proposal was filed October 17, 2000. If 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.
The North American Electric Reliability Council and the Western Systems
Coordinating Council (WSCC) have undertaken initiatives to establish a series of
security coordinators to oversee the reliable operation of the regional
transmission system. Accordingly, Avista Utilities, in cooperation with other
utilities in the Pacific Northwest, established the Pacific Northwest Security
Coordinator (PNSC), which oversees daily and short-term operations of the
Northwest sub-regional transmission grid, and has limited authority to direct
certain actions of control area
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operators in the case of a pending transmission system emergency. Avista
Utilities executed its service agreement with the PNSC in September 1998.
STATE LEVEL
Further competition may be introduced by state action. Competition for retail
customers is not generally allowed in Avista Utilities' service territory. While
the Energy Act precludes the FERC from mandating retail wheeling, state
regulators and legislators could open service territories to full competition at
the retail level. Legislative action at the state level would be required for
full retail wheeling and customer choice to occur in Washington and Idaho.
For the past several years, the legislatures and public utility commissions in
Washington and Idaho have conducted a series of hearings and several studies
regarding electric industry restructuring. Issues such as unbundling,
deregulation, reliability and consumer protection have been examined. Impacts on
customer service quality and system reliability (generation, transmission and
distribution) have been considered on a "macro" basis under various
restructuring scenarios. Public policy makers in Washington and Idaho continue
to examine other states' experiences with restructuring, while cognizant that
the Pacific Northwest generally benefits from the lowest electric rates in the
country.
Although there is currently no action surrounding deregulation in Washington or
Idaho, activities related to California's deregulation have affected wholesale
power prices in the West, including the Company's service territory. See Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations for information about the California energy situation.
ENVIRONMENTAL ISSUES
The Company is subject to environmental regulation by federal, state and local
authorities. The generation, transmission, distribution, service and storage
facilities in which Avista Utilities has an ownership interest have been
designed to comply with all environmental laws presently applicable.
Furthermore, the Company conducts periodic reviews of all its facilities and
operations to anticipate emerging environmental issues. The Company's Board of
Directors has an Environmental Committee to deal specifically with these issues.
Air Quality The most significant impact of the Clean Air Act (CAA) and the 1990
Clean Air Act Amendments (CAAA) was on the Centralia Power Plant, which is
classified as a "Phase II" coal plant under the CAAA. Obligations under the CAA
were assumed by TransAlta when the sale of Centralia was completed in May 2000.
Colstrip, which is also a "Phase II" coal-fired plant under the CAAA, is not
expected to be required to implement any additional SO2 mitigation in the
foreseeable future in order to continue operations.
Avista Utilities' other thermal projects also are subject to various CAAA
standards. Every five years each project requires an updated operating permit
(known as a Title V permit) which addresses, among other things, the compliance
of the plant with the CAAA. The operating permit for the CT peaking units at
Rathdrum was issued in December 2000. During 2001, the Company will renew the
operating permit for the Kettle Falls plant and apply for an upgrade to a Title
V permit for the natural gas-fired CTs located in Spokane.
See Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations: Future Outlook and Note 22 to Financial Statements for
additional information.
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AVISTA UTILITIES OPERATING STATISTICS
Years Ended December 31,
------------------------
2000 1999 1998
----------- ----------- -----------
ELECTRIC OPERATIONS
ELECTRIC OPERATING REVENUES (Thousands of Dollars):
Residential ..................................................... $ 158,065 $ 158,658 $ 157,019
Commercial ...................................................... 149,770 152,107 149,767
Industrial ...................................................... 82,992 69,559 64,662
Public street and highway lighting .............................. 3,612 3,517 3,387
----------- ----------- -----------
Total retail revenues ........................................ 394,439 383,841 374,835
----------- ----------- -----------
Long-term wholesale ............................................. 322,229 134,945 102,928
Short-term wholesale ............................................ 542,525 387,554 354,413
----------- ----------- -----------
Total wholesale revenues ..................................... 864,754 522,499 457,341
----------- ----------- -----------
Total energy revenues ........................................ 1,259,193 906,340 832,176
Other ........................................................... 28,062 21,824 23,898
----------- ----------- -----------
Total electric operating revenues ............................ $ 1,287,255 $ 928,164 $ 856,074
=========== =========== ===========
ELECTRIC ENERGY SALES (Thousands of MWhs):
Residential ..................................................... 3,279 3,237 3,217
Commercial ...................................................... 2,886 2,848 2,810
Industrial ...................................................... 2,048 2,032 1,878
Public street and highway lighting .............................. 25 25 24
----------- ----------- -----------
Total retail energy sales .................................... 8,238 8,142 7,929
----------- ----------- -----------
Long-term wholesale ............................................. 5,554 5,335 3,680
Short-term wholesale ............................................ 10,253 14,443 15,535
----------- ----------- -----------
Total wholesale energy sales ................................. 15,807 19,778 19,215
----------- ----------- -----------
Total electric energy sales .................................. 24,045 27,920 27,144
=========== =========== ===========
ELECTRIC ENERGY RESOURCES (Thousands of MWhs):
Hydro generation (from Company facilities) ...................... 3,819 4,287 3,860
Thermal generation (from Company facilities) .................... 3,153 3,353 3,522
Purchased power - long-term hydro ............................... 929 1,093 910
Purchased power - other ......................................... 16,706 19,697 19,405
Power exchanges ................................................. 67 16 26
----------- ----------- -----------
Total power resources ........................................ 24,674 28,446 27,723
Energy losses and Company use ................................... (629) (526) (579)
----------- ----------- -----------
Total energy resources (net of losses) ....................... 24,045 27,920 27,144
=========== =========== ===========
NUMBER OF ELECTRIC CUSTOMERS (Average for Period):
Residential ..................................................... 273,219 270,013 265,891
Commercial ...................................................... 35,060 34,877 34,407
Industrial ...................................................... 1,254 1,189 1,169
Public street and highway lighting .............................. 392 389 383
----------- ----------- -----------
Total electric retail customers .............................. 309,925 306,468 301,850
Wholesale ....................................................... 58 68 85
----------- ----------- -----------
Total electric customers ..................................... 309,983 306,536 301,935
=========== =========== ===========
ELECTRIC RESIDENTIAL SERVICE AVERAGES:
Annual use per customer (KWh) ................................... 12,003 11,990 12,099
Revenue per KWh (in cents) ...................................... 4.82 4.90 4.88
Annual revenue per customer ..................................... $ 578.53 $ 587.59 $ 590.54
ELECTRIC AVERAGE HOURLY LOAD (aMW) ................................. 1,012 990 971
=========== =========== ===========
RESOURCE AVAILABILITY at time of system peak (MW):
Total requirements (winter):
Retail ....................................................... 1,491 1,351 1,701
Long-term contract obligations ............................... 965 941 663
Short-term sales ............................................. 1,373 2,340 2,401
----------- ----------- -----------
Total requirements (winter) ............................... 3,829 4,632 4,765
Total resource availability (winter) ............................ 4,194 4,831 4,991
Total requirements (summer):
Retail ....................................................... 1,473 1,418 1,521
Long-term contract obligations ............................... 1,231 1,155 780
Short-term sales ............................................. 1,525 3,435 2,792
----------- ----------- -----------
Total requirements (summer) ............................... 4,229 6,008 5,093
Total resource availability (summer) ............................ 4,656 6,633 5,340
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AVISTA UTILITIES OPERATING STATISTICS
Years Ended December 31,
------------------------
2000 1999 1998
----------- ----------- -----------
NATURAL GAS OPERATIONS
NATURAL GAS OPERATING REVENUES (Thousands of Dollars):
Residential ..................................................... $ 128,240 $ 99,879 $ 92,614
Commercial ...................................................... 69,982 51,952 49,539
Industrial - firm ............................................... 5,404 3,695 3,685
Industrial - interruptible ...................................... 2,276 1,352 1,639
----------- ----------- -----------
Total retail natural gas revenues ............................ 205,902 156,878 147,477
Non-retail sales ................................................ 5,691 15,189 24,846
Transportation .................................................. 10,254 10,784 12,100
Other revenues .................................................. 2,999 4,633 8,715
----------- ----------- -----------
Total natural gas operating revenues ......................... $ 224,846 $ 187,484 $ 193,138
=========== =========== ===========
THERMS DELIVERED (Thousands of Therms):
Residential ..................................................... 212,198 200,184 187,571
Commercial ...................................................... 135,126 125,611 122,263
Industrial - firm ............................................... 12,604 11,241 11,494
Industrial - interruptible ...................................... 5,746 5,209 6,053
----------- ----------- -----------
Total retail sales ........................................... 365,674 342,245 327,381
Non-retail sales ................................................ 4,034 74,117 126,522
Transportation .................................................. 225,392 232,739 226,139
Interdepartmental sales and Company use ......................... 802 9,801 32,647
----------- ----------- -----------
Total therms delivered ....................................... 595,902 658,902 712,689
=========== =========== ===========
SOURCES OF NATURAL GAS SUPPLY (Thousands of Therms):
Purchases ....................................................... 372,795 430,698 499,983
Storage - injections ............................................ (467) (30,508) (32,023)
Storage - withdrawals ........................................... 403 23,972 23,140
Natural gas for transportation .................................. 225,392 232,739 226,139
Distribution system gains (losses) .............................. (2,221) 2,001 (4,550)
----------- ----------- -----------
Total supply ................................................. 595,902 658,902 712,689
=========== =========== ===========
NUMBER OF NATURAL GAS CUSTOMERS (Average for Period):
Residential ..................................................... 242,983 234,844 226,165
Commercial ...................................................... 29,739 29,032 28,236
Industrial - firm ............................................... 296 308 310
Industrial - interruptible ...................................... 38 30 26
----------- ----------- -----------
Total retail customers ....................................... 273,056 264,214 254,737
Non-retail sales ................................................ 2 9 19
Transportation .................................................. 96 107 119
----------- ----------- -----------
Total natural gas customers .................................. 273,154 264,330 254,875
=========== =========== ===========
NATURAL GAS RESIDENTIAL SERVICE AVERAGES:
Washington and Idaho
Annual use per customer (therms) ............................. 950 887 861
Revenue per therm (in cents) ................................. 57.82 45.74 44.97
Annual revenue per customer .................................. $ 549.07 $ 405.51 $ 387.17
Oregon and California
Annual use per customer (therms) ............................. 730 789 772
Revenue per therm (in cents) ................................. 66.83 58.59 58.32
Annual revenue per customer .................................. $ 487.80 $ 462.21 $ 450.13
NET SYSTEM MAXIMUM CAPABILITY (Thousands of Therms):
Net system maximum demand (winter) .............................. 2,347 2,077 3,284
Net system maximum firm contractual capacity (winter) ........... 4,320 4,320 4,220
HEATING DEGREE DAYS:(1)
Spokane, WA
Actual ....................................................... 7,176 6,408 5,951
30 year average .............................................. 6,842 6,842 6,842
% of average ................................................. 105% 94% 87%
Medford, OR
Actual ....................................................... 4,388 4,401 4,421
30 year average .............................................. 4,611 4,611 4,611
% of average ................................................. 95% 95% 96%
- --------------------
(1) Heating degree days are the measure of the coldness of weather
experienced, based on the extent to which the average of high and low
temperatures for a day falls below 65 degrees Fahrenheit (annual degree
days below historic average indicate warmer than average temperatures).
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ENERGY TRADING AND MARKETING LINE OF BUSINESS
The Energy Trading and Marketing line of business includes Avista Energy, Avista
Power and Avista-STEAG. Avista Energy and Avista Power are wholly owned
subsidiaries of Avista Capital. Avista-STEAG is 50% owned by Avista Capital.
AVISTA ENERGY
Avista Energy is an electricity and natural gas trading and marketing business
focused on marketing energy in the Western U.S. In 1997, Avista Energy began
conducting business on a national basis and expanded operations with its
acquisition of Vitol Gas & Electric, LLC (Vitol) in 1999. However, in November
1999, the decision was made to reduce Avista Energy's size and risk by
redirecting its focus away from national energy trading and marketing toward a
more regionally-based energy trading and marketing effort in the West backed by
contracts for energy commodities and by the output of specific facilities
available under contract.
Avista Energy's headquarters are in Spokane, Washington, with offices in
Portland, Oregon, and Vancouver, British Columbia, Canada.
Avista Energy is in the business of buying and selling electricity and natural
gas. Avista Energy's customers include commercial and industrial end-users,
electric utilities, natural gas distribution companies and other trading
companies. Avista Energy also trades electricity and natural gas derivative
commodity instruments, including futures, options, swaps and other contractual
arrangements on national exchanges and through unregulated exchanges and brokers
from whom these commodity derivatives are available. During 1999, Avista Energy
also sold and traded coal and sulfur dioxide (SO2) allowances, but eliminated
these activities in 2000 as contracts expired. In 2000, Avista Energy sold
approximately 105.5 million MWhs of electric energy, 309.2 million dekatherms of
natural gas and 3.5 million tons of coal, compared to approximately 135.1
million MWhs of electric energy, 775.8 million dekatherms of natural gas and 1.6
million tons of coal in 1999.
Avista Energy's business is affected by many factors, including, among other
things, volatility of prices within the power and natural gas markets, the
demand for and availability of energy, lower unit margins on new sales contracts
and deregulation of the electric utility industry.
In April 1997, Avista Energy entered into a marketing agreement with Chelan
County Public Utility District (Chelan PUD), located in Washington State. The
agreement allows Avista Energy to market, on a "real-time" basis, a portion of
the output from Chelan PUD's hydroelectric resources (557 Mwhs) and to jointly
market energy products and services to other utilities in the region.
Effective September 1, 1999, Avista Energy began managing Avista Utilities'
natural gas assets and natural gas purchasing operations. Under the agreement,
Avista Energy serves as agent for Avista Utilities, managing its pipeline
transportation and natural gas storage assets, as well as purchasing natural gas
for Avista Utilities' retail customers. The assets continue to be owned by
Avista Utilities, but they are fully integrated operationally into Avista
Energy's portfolio to optimize the value. An incentive plan allows Avista Energy
the opportunity to retain a portion of the benefits associated with asset
optimization and the efficiencies gained in purchasing natural gas for Avista
Utilities. Approvals were received from the state regulatory agencies in
Washington, Idaho and Oregon. The incentive plan began September 1, 1999 and
ends March 31, 2002. Avista Utilities may seek continuation of the plan from
regulators with six months notice prior to the end of the term.
The participants in the emerging wholesale energy market are public utility
companies and, increasingly, power marketers which may or may not be affiliated
with public utility companies or other entities. The participants in this market
trade not only electricity and natural gas as commodities, but also derivative
commodity instruments such as futures, forwards, swaps, options and other
instruments. This market is largely unregulated and most transactions are
conducted on an "over-the-counter" basis, there being no central clearing
mechanism (except in the case of specific instruments traded on the commodity
exchanges).
Avista Energy is subject to the various risks inherent in commodity trading
including, particularly, market risk and credit risk. Because Avista Energy
operates within the WSCC, the company is directly and indirectly exposed to the
California markets. See Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations: Results of Operations and Future
Outlook, and Notes 1, 2, 4 and 5 of Notes to Financial Statements for additional
information regarding the market
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and credit risks inherent in the energy trading business, fourth quarter 1999
restructuring costs, Avista Energy's risk management policies and procedures,
accounting practices, and positions held by Avista Energy at December 31, 2000.
Avista Capital provides guarantees for Avista Energy's line of credit agreement
and, in the course of business, may provide guarantees to other parties with
whom Avista Energy may be doing business.
AVISTA POWER
Avista Power develops and owns electricity generation in strategic locations
primarily throughout the West. Avista Power and Cogentrix Energy, Inc. have
entered into an agreement to jointly build and/or buy interests in natural
gas-fired electric generation plants in the states of Washington, Oregon and
Idaho. A project under this agreement is the 270 megawatt facility located in
Rathdrum, Idaho, with 100 percent of its output contracted to Avista Energy for
25 years. The facility is currently under construction and is expected to be
on-line in August 2001. The total cost of the project is estimated at $160
million; Avista Power's equity in the project is approximately $16 million.
In December 2000, Avista Utilities selected the Coyote Springs 2 project, a
280-megawatt combined-cycle natural gas turbine plant under construction near
Boardman, Oregon, to add generation to its portfolio. Permits and contract
modifications are in the process of being filed to transfer ownership from
Avista Power to Avista Utilities. The final permit transfers are expected in
early 2001, with project completion in mid-2002.
Avista Power is also in the permitting process for an additional 249-megawatt
turbine plant to be sited in Longview, Washington. This project is a joint
venture with STEAG AG, Germany's largest independent power producer.
As a further execution of its strategy to shift focus to the western regional
power markets, Avista Power sold all its licensed and unlicensed
assets located outside the WSCC to STEAG AG. In addition, Avista Power's
interest in a project site located in Bogalusa, Louisiana, was sold in late
2000.
Some projects may be developed with STEAG AG under Avista-STEAG, LLC.
INFORMATION AND TECHNOLOGY LINE OF BUSINESS
The Information and Technology line of business includes Avista Advantage,
Avista Labs and Avista Communications. Avista Fiber and Avista Communications
merged operations in 2000, incorporating Avista Fiber into Avista
Communications. Avista Advantage and Avista Labs are majority-owned and wholly
owned subsidiaries of Avista Capital, respectively. As of December 31, 2000,
Avista Capital owned approximately 82% of Avista Communications.
AVISTA ADVANTAGE
Headquartered in Spokane, Avista Advantage is an e-commerce provider of
facilities management billing and information services to commercial customers
throughout the U.S. and Canada.
Avista Advantage processes and presents consolidated bills on-line, and pays
utility and maintenance and repair bills for multi-site commercial and
industrial customers. Information gathered from invoices, utilities and other
customer-specific data allows Avista Advantage to provide its customers with
in-depth analytical support, real-time reporting and unbiased consulting in
regard to energy, water, waste, and maintenance and repair expenses.
Avista Advantage has secured patents on its two critical business systems, the
Advantage Customer Internet Site (ACIS), which provides high value, operational
information drawn from utility bills, and the AviTrack database, which processes
and reports on information gathered from utilities to ensure customers are
receiving the most effective services at the proper price. Avista Advantage is
not aware of any claimed or threatened infringement on any patents issued to
date and will continue to expand and protect its existing patents, as well as
file additional patent applications for new products, services and process
enhancements.
As of the end of 2000, Avista Advantage's customer base was over 140 customers,
having over 46,000 billed sites throughout the U.S. and Canada. Two venture
capital firms invested in Avista Advantage during the fourth quarter
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of 2000. The strategic investments will help refine, expand and market Avista
Advantage's growing number of facility cost management services.
AVISTA LABS
Avista Labs has developed a unique modular PEM fuel cell that delivers reliable,
affordable and clean distributed power solutions. The modular design allows fuel
cell cartridges to be easily removed and replaced without interrupting power.
The company believes this exclusive "hot swap" feature makes Avista Labs'
technology more scalable, configurable, reliable and durable than other fuel
cell technologies. In addition to its modular-based PEM fuel cell, Avista Labs
is dedicated to commercializing a broad array of components to complement its
fuel cell in order to deliver system solutions to residential, industrial and
commercial markets.
Avista Labs has been granted two patents, with more than 230 issued claims
recognizing and protecting the unique attributes of its fuel cell system. The
company has eight more patent applications pending or in process directed to its
unique approach.
Testing of the Avista Labs' fuel cells is underway to gather field data in a
wide variety of operating conditions. In September 2000, Avista Labs delivered
its latest prototype to the Houston Advanced Research Center for testing and
evaluation. Avista Labs continues to add new locations to its current list of
seven Beta testing sites around the country.
Key alliances in bringing Avista Labs' product to market include a joint
marketing/installation agreement with Black & Veatch, a global leader in
engineering, procurement and construction, and an agreement with Logan
Industries, Inc., which has been manufacturing and assembling Avista Labs fuel
cell units for field testing since early 1999.
Effective December 1, 2000, Avista Labs exercised its right to terminate the
exclusivity obligations of the Joint Development Agreement with UOP, LLC,
entered into in August 1999. The Joint Development Agreement included a
provision obligating the parties to work exclusively with one another in regard
to the subject matter of the Agreement, which involved programs to develop a
fuel cell system utilizing a fuel cell and a fuel processor. Avista Labs formed
a new company, H2fuel, LLC, in January 2001 to develop and commercialize a new
Technology for manufacturing hydrogen for fuel cells. Avista Labs owns a 70%
interest in H2fuel. The remaining interest is owned by United Fuel
Technologies, LLC. Avista Labs will transfer its ongoing fuel processor
development work to H2fuel.
AVISTA COMMUNICATIONS
A provider of facilities-based telecommunications solutions in under-served
communities throughout Washington, Idaho and Montana, Avista Communications
delivers integrated voice and broadband data services over a state-of-the-art
network, offering business customers a choice in bundled communications services
including data transport, Internet access and local voice services. Continually
seeking new ways to leverage advancing technology, Avista Communications is
dedicated to creating competitive advantages for customers delivered by
experienced teams of local experts. The total number of lines sold at December
31, 2000 was over 7,200, with approximately 5,400 lines installed.
Based in Spokane, Avista Communications currently serves customers in 10
northwest markets including Billings, Montana; Coeur d'Alene, Post Falls, Moscow
and Lewiston, Idaho; Spokane, Yakima, Bellingham, Clarkston and Pullman,
Washington. In 2001, Avista Communications expects to add additional products
and services to complement its strategic direction toward the
convergence of voice and data service delivery for business customers in
communities with populations under 500,000.
AVISTA VENTURES LINE OF BUSINESS
The Avista Ventures line of business includes Avista Ventures and several other
minor subsidiaries, including Pentzer Corporation, Avista Development and Avista
Services. Avista Ventures was formed in April 2000 to align Avista Corp.'s
investment and acquisition activities in the strategic growth areas of energy,
information and technology.
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ENERGY TRADING AND MARKETING OPERATING STATISTICS
Years Ended December 31,
------------------------
2000 1999 1998
---------- ---------- ----------
AVISTA ENERGY
REVENUES (Thousands of Dollars):
Electric .................................................... $4,721,291 $4,745,615 $1,665,348
Natural gas ................................................. 1,751,264 1,900,487 743,386
Coal ........................................................ 58,996 49,569 --
---------- ---------- ----------
Total revenues ........................................... $6,531,551 $6,695,671 $2,408,734
========== ========== ==========
SALES VOLUMES:
Electricity (Thousands of MWhs) ............................. 105,548 135,099 54,430
Natural gas (Thousands of dekatherms) ....................... 309,160 775,822 424,152
Coal (Thousands of tons) .................................... 3,514 1,638 --
INFORMATION AND TECHNOLOGY OPERATING STATISTICS
Years Ended December 31,
------------------------
2000 1999 1998
---------- ---------- ----------
AVISTA ADVANTAGE
Contracted Sites ................................................ 65,858 26,056 5,603
Billed Sites .................................................... 46,127 21,186 3,081
AVISTA LABS
Beta Units Produced ............................................. 114 n/a n/a
Beta Units Installed ............................................ 29 n/a n/a
AVISTA COMMUNICATIONS
Lines Sold ...................................................... 7,248 2,857 n/a
Lines Installed ................................................. 5,395 1,598 n/a
n/a - not available
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ITEM 2. PROPERTIES
AVISTA UTILITIES
Avista Utilities' electric properties, located in the States of Washington,
Idaho and Montana, include the following:
Generating Plants
Nameplate Present Year of
No. of Rating Capability FERC License
Units (MW)(1) (MW)(2) Expiration
------------ ------------ ------------ ------------
Hydroelectric Generating Stations (River)
Washington:
Long Lake (Spokane) 4 70.0 88.0 2007
Little Falls (Spokane) 4 32.0 36.0 n/a
Nine Mile (Spokane) 4 26.4 24.5 2007
Upper Falls (Spokane) 1 10.0 10.2 2007
Monroe Street (Spokane) 1 14.8 14.8 2007
Idaho:
Cabinet Gorge (Clark Fork) 4 231.3 236.0 2045(3)
Post Falls (Spokane) 6 14.8 18.0 2007
Montana:
Noxon Rapids (Clark Fork) 5 466.2 528.0 2045(3)
------------ ------------
Total Hydroelectric 865.5 955.5
Thermal Generating Stations
Washington:
Kettle Falls 1 50.7 49.0
Northeast (Spokane) CT 2 61.2 68.0
Idaho:
Rathdrum CT 2 166.5 176.0
Montana:
Colstrip (Units 3 and 4)(4) 2 233.4 222.0
------------ ------------
Total Thermal 511.8 515.0
Total Generation Properties 1,377.3 1,470.5
============ ============
n/a not applicable.
(1) Nameplate Rating, also referred to as "installed capacity", is the
manufacturer's assigned power rating under specified conditions.
(2) Capability is the maximum generation of the plant without exceeding
approved limits of temperature, stress and environmental conditions.
(3) On February 23, 2000, the Company received a new operating license for
Cabinet Gorge and Noxon Rapids. (See Item 1. Business: Avista Utilities
- Hydroelectric Relicensing for additional information.)
(4) Jointly owned; data above refers to Avista Utilities' 15% interest.
Electric Distribution and Transmission Plant
Avista Utilities operates approximately 12,200 miles of primary and secondary
distribution lines in its electric system in addition to a transmission system
of approximately 575 miles of 230 kV line and 1,520 miles of 115 kV line. Avista
Utilities also owns a 10% interest in 495 miles of a 500 kV line between
Colstrip, Montana and Townsend, Montana.
The 230 kV lines are used to transmit power from Avista Utilities' Noxon Rapids
and Cabinet Gorge hydroelectric generating stations to major load centers in its
service area, as well as to transfer power between points of interconnection
with adjoining electric transmission systems. These lines interconnect with
Bonneville at five locations and at one location each with PacifiCorp, Montana
Power and Idaho Power Company. The Bonneville interconnections serve as points
of delivery for power from the Colstrip generating station, as well as for the
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interchange of power with entities outside the Pacific Northwest. The
interconnection with PacifiCorp is used to integrate Mid-Columbia hydroelectric
generating facilities to Avista Utilities' loads, as well as for the interchange
of power with entities within the Pacific Northwest.
The 115 kV lines provide for transmission of energy and the integration of the
Spokane River hydroelectric and Kettle Falls wood-waste generating stations with
service-area-load centers. These lines interconnect with Bonneville at nine
locations, Grant County Public Utility District (PUD), Seattle City Light and
Tacoma City Light at two locations and one interconnection each with Chelan
County PUD, PacifiCorp and Montana Power.
Natural Gas Plant
Avista Utilities has natural gas distribution mains of approximately 3,877 miles
in Washington and Idaho and 1,849 miles in Oregon and California, as of December
31, 2000.
Avista Utilities, Northwest Pipeline and Puget Sound Energy each own a one-third
undivided interest in the Jackson Prairie Natural Gas Storage Project, which has
a total peak day deliverability of 8.8 million therms, with a total working
natural gas inventory of 190.3 million therms.
ITEM 3. LEGAL PROCEEDINGS
See Note 22 of Notes to Financial Statements for additional information.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Outstanding shares of Common Stock are listed on the New York and Pacific Stock
Exchanges. As of February 28, 2001, there were approximately 19,066 registered
shareholders of the Company's no par value Common Stock.
See Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations: Future Outlook for additional
general information about common stock dividends.
For additional information, refer to Notes 1, 18 and 21 of Notes to Financial
Statements. For high and low stock price information, refer to Note 24 of Notes
to Financial Statements.
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ITEM 6. SELECTED FINANCIAL DATA
Years Ended December 31,
-----------------------------------------------------------------------------------
2000 1999 1998 1997 1996
----------- ----------- ----------- ----------- -----------
(Thousands of Dollars except Per Share Data and Ratios)
Operating Revenues:
Avista Utilities ........................ $ 1,512,101 $ 1,115,647 $ 1,049,212 $ 891,665 $ 798,994
Energy Trading and Marketing ............ 6,531,551 6,695,671 2,408,734 247,028 --
Information and Technology .............. 11,645 4,851 1,995 1,030 813
Avista Ventures ......................... 32,937 122,303 231,483 163,598 145,150
Intersegment eliminations ............... (176,744) (33,488) (7,440) (1,149) --
----------- ----------- ----------- ----------- -----------
Total ................................... $ 7,911,490 $ 7,904,984 $ 3,683,984 $ 1,302,172 $ 944,957
Operating Income/(Loss) (pre-tax):
Avista Utilities ........................ $ 3,177 $ 142,567 $ 143,153 $ 178,289 $ 173,658
Energy Trading and Marketing ............ 250,196 (97,785) 22,826 6,577 (649)
Information and Technology .............. (40,084) (13,002) (5,192) (5,364) (1,443)
Avista Ventures ......................... (9,861) (423) 12,033 9,962 15,355
----------- ----------- ----------- ----------- -----------
Total ................................... $ 203,428 $ 31,357 $ 172,820 $ 189,464 $ 186,921
Net Income/(Loss):
Avista Utilities ........................ $ (38,781) $ 59,573 $ 56,297 $ 100,777(3) $ 62,404
Energy Trading and Marketing ............ 161,753 (60,739) 14,116 5,346 (414)
Information and Technology .............. (28,408) (8,620) (3,398) (3,425) (919)
Avista Ventures ......................... (2,885) 35,817 11,124 12,099 22,382
----------- ----------- ----------- ----------- -----------
Total ................................... $ 91,679 $ 26,031 $ 78,139 $ 114,797 $ 83,453
Preferred Stock Dividend Requirements ...... $ 23,735(1) $ 21,392(1) $ 8,399(1) $ 5,392 $ 7,978
Income Available for Common Stock .......... $ 67,944 $ 4,639 $ 69,740 $ 109,405(3) $ 75,475
Outstanding Common Stock (000s):
Weighted Average ........................ 45,690 38,213(1) 54,604(1) 55,960 55,960
Year-End ................................ 47,209 35,648(1) 40,454(1) 55,960 55,960
Book Value per Share .................... $ 15.34 $ 11.04(1) $ 12.07(1) $ 13.36 $ 12.70
Earnings per Share:
Avista Utilities ........................ $ (1.36) $ 1.00 $ 0.88 $ 1.70(3) $ 0.97
Energy Trading and Marketing ............ 3.51 (1.59) 0.26 0.10 (0.01)
Information and Technology .............. (0.62) (0.23) (0.06) (0.06) (0.01)
Avista Ventures ......................... (0.06) 0.94 0.20 0.22 0.40
----------- ----------- ----------- ----------- -----------
Total, Diluted .......................... $ 1.47 $ 0.12 $ 1.28 $ 1.96 $ 1.35
Total, Basic ............................ $ 1.49 $ 0.12 $ 1.28 $ 1.96(3) $ 1.35
Dividends Paid per Common Share ......... $ 0.48 $ 0.48(2) $ 1.05(2) $ 1.24 $ 1.24
Total Assets at Year-End:
Avista Utilities ........................ $ 2,129,614 $ 1,976,716 $ 2,004,935 $ 1,926,739 $ 1,921,429
Energy Trading and Marketing ............ 10,271,834 1,595,470 955,615 212,868 320
Information and Technology .............. 59,632 26,379 7,461 3,475 1,517
Avista Ventures ......................... 102,844 114,929 285,625 268,703 254,032
----------- ----------- ----------- ----------- -----------
Total ................................... $12,563,924 $ 3,713,494 $ 3,253,636 $ 2,411,785 $ 2,177,298
Long-term Debt at Year-End ................. $ 679,806 $ 718,203 $ 730,022 $ 762,185 $ 764,526
Company-Obligated Mandatorily
Redeemable Preferred Trust Securities ... $ 100,000 $ 110,000 $ 110,000 $ 110,000 --
Preferred Stock Subject to Mandatory
Redemption at Year-End .................. $ 35,000 $ 35,000 $ 35,000 $ 45,000 $ 65,000
Convertible Preferred Stock ................ -- $ 263,309 $ 269,227(1) -- --
Ratio of Earnings to Fixed Charges ......... 3.26 1.61 2.66 3.49 2.97
Ratio of Earnings to Fixed Charges and
Preferred Dividend Requirements .......... 2.06 1.07 2.25 3.12 2.50
(1) In December 1998, the Company converted shares of common stock for
Convertible Preferred Stock, which was responsible for a number
of changes in the data in 2000, 1999 and 1998 from 1997. (See Note 15 of
Notes to Financial Statements.)
(2) The Company paid a quarterly common stock dividend of $0.31 per share
through the third quarter of 1998. Beginning in the fourth quarter of 1998,
the quarterly common stock dividend was reduced to $0.12 per share.
(3) Includes the $41.4 million after-tax effect of an IRS income tax recovery
related to the Company's investment in the terminated nuclear project 3
of the Washington Public Power Supply System.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OVERVIEW
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. 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. As of December 31, 2000, the Company had common
equity investments of $363.0 million and $361.2 million in Avista Utilities and
Avista Capital, respectively.
In addition to providing electricity and natural gas distribution and electric
transmission services, Avista Utilities is responsible for electric generation
and production. 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. With this
diverse energy resource portfolio, Avista Utilities remains one of the nation's
lowest-cost producers of electric energy services.
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 sells any surplus at the best
available price. This process includes hedging transactions. In the second
quarter of 2000, certain wholesale transactions contributed to significant
losses in Avista Utilities, as more fully discussed below in "Results of
Operations".
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, Inc. (Avista Power) and Avista-STEAG, LLC (Avista-STEAG).
Avista Energy is an electricity and natural gas trading and marketing 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.
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 enabled portal that provides a variety of
energy-related products and services to commercial and industrial customers on a
North American basis. Its primary product lines include consolidated billing,
resource accounting, energy analysis, load profiling, and maintenance and repair
billing services. Avista Labs is in the process of developing both modular
Proton Exchange Membrane (PEM) fuel cells for power generation at the site of
the consumer or industrial user and fuel cell components. 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 U.S. In April 2000, Avista
Communications and Avista Fiber, Inc. merged operations, with Avista
Communications now additionally responsible for designing, building and managing
metropolitan area fiber optic networks.
The Avista Ventures line of business includes Avista Ventures, Inc. (Avista
Ventures), 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
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Regulatory, political, economic and technological changes have brought about the
accelerating transformation of the utility and energy industries, presenting
both opportunities and challenges.
These changes have had a significant effect on energy markets. Historically, the
price of power in wholesale markets has been affected primarily by production
costs and by other factors including streamflows, the availability of hydro and
thermal generation and transmission capacity, weather and the resulting retail
loads, and the price of coal, natural gas and oil for thermal generating units.
Any combination of these factors that resulted in a shortage of energy or
increased cost of production generally caused the market price of power to move
upward. Now, however, wholesale power market prices appear to react more
independently from traditional cost-driven and supply and demand factors.
Significant emerging factors include the gradual depletion of excess generating
capacity in the WSCC, increasing instances of transmission congestion and
increased ownership of generating facilities by entities which are not
traditional "public utilities". Wholesale power markets have been affected by
the restructuring of electric utility regulation at the state and federal
levels.
Wholesale power prices rose dramatically starting in the second quarter of 2000
and remain significantly above historic levels in the Pacific Northwest and
throughout the WSCC. Federal and state officials, including the Federal Energy
Regulatory Commission (FERC) and the California Public Utility Commission
(CPUC), commenced reviews to determine the cause of the market changes.
Additionally, President Bush has appointed Vice President Cheney to chair an
energy policy task force at least in part as a response to the extreme market
pressures and power shortages that have affected California and other parts of
the WSCC. The governors of Washington, Oregon and Idaho have also become
involved in seeking to stabilize power market prices and the availability of
power in the region.
California Energy Crisis. During 2000, particularly in the fourth quarter, the
changes in Western energy markets resulted in an energy supply shortage that
particularly affected power availability in California. Power shortages, coupled
with California's power market structure, led to the two largest of California's
three investor-owned utilities (IOUs), Southern California Edison (SCE) and
Pacific Gas & Electric (PG&E), issuing warnings of their impending inability to
meet payment commitments. In the first quarter of 2001, SCE and PG&E defaulted
on several hundred million dollars of payment obligations owed to various
creditors. Because of regulatory changes that were adopted by California law in
1997, California's IOUs were required to divest ownership of much of their owned
power generation capacity, to sell output from their remaining generating plants
into a power market, to reduce retail customer prices and hold them at a fixed
level until certain transition charges were amortized, and to buy all
requirements for customers' needs through short-term purchases from the
newly-created California Power Exchange (CalPX), California Independent System
Operator (CalISO), Automated Power Exchange (APX) and other specified entities.
As demand began to outstrip supply in California, the price of power skyrocketed
and these IOUs bought power at much higher prices than they sold it to end
users. They exhausted their credit and capital capacity early in 2001. The PG&E
and SCE defaults resulted in subsequent defaults by CalPX, CalISO and APX in
amounts the latter three parties owed to Avista Energy.
There were approximately 50 participants in the CalPX at the end of 2000. Avista
Energy participated in transactions with the CalPX and CalISO, primarily as a
seller. The CalPX tariff, approved by the FERC, includes a provision that
permits backcharges to CalPX participants under certain circumstances to keep
its settlement accounts whole in the event of a default by a participant. The
CalPX tariff specifies that collateral and contracts of the defaulting parties
be liquidated to provide funds to cover their defaults, followed by liquidation
of a performance bond posted by participants collectively, before backcharges
will be levied. The CalPX did not obtain sufficient collateral from SCE or PG&E
to assure their performance, even when signals of their financial difficulties
were gaining attention from rating agencies, from the press, and from reports
filed by SCE and PG&E with the Securities and Exchange Commission. When SCE and
PG&E defaulted, the Governor of California obtained a temporary restraining
order (TRO) to block the CalPX from liquidating the SCE and PG&E contracts. When
the TRO expired and an injunction was not granted, the Governor invoked
emergency executive powers to seize those contracts. The CalPX began levying
backcharges by withholding amounts payable to participants and sending invoices
for additional amounts. In January 2001, the CalPX gave notice that it was
suspending its block forward and day-ahead market operations. Several of the
CalPX participants, including PG&E, have protested the backcharges through
filings with the FERC and the courts. Avista Energy is among the entities
seeking to have the backcharge provisions ruled inoperable by the FERC. In its
second round of backcharges in February 2001, the CalPX backcharged remaining
participants for the increasing cascade of defaults, leading to the possibility
that, if backcharges were continued and additional parties either could not or
would not pay amounts so invoiced, the last remaining participant might bear the
entire market's settlement obligation. On February 9, 2001, Avista Energy
obtained a TRO in Federal Court in the Central District of California that
suspended the backcharges and preserved Avista Energy's $500,000 letter of
credit posted to the CalPX for assurance of performance; 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 to file with the FERC to take action to
declare the backcharge practices to be contrary to the tariff's
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purpose, to declare the backcharges to be inoperable because of the removal of
the SCE and PG&E contracts, and to invoke jurisdiction over the CalPX in winding
up its affairs. The court action and the FERC complaint are continuing.
Avista Energy participated in the California power market as part of its Western
U.S. business focus. At December 31, 2000, Avista Energy had net accounts
receivable of $66.3 million from CalPX, CalISO and APX and had a special bad
debt reserve of $8.3 million against that amount. Avista Energy received $21.4
million in January and February of 2001 against the $66.3 million balance, with
$22.5 million being due in March 2001.
Avista Energy also has forward contracts with affiliates of SCE's parent
corporation, Edison International (EIX), through its Edison Mission Energy (EME)
unit and with affiliates of PG&Es' parent corporation, PG&E Corp. (PGC), through
entities in its National Energy Group (NEG). EIX and PGC have taken steps
collectively referred to as "ring-fencing" to protect EME and NEG, respectively,
and their subsidiaries from creditors of their utility business units, SCE and
PG&E, respectively. The CPUC and certain customer groups have initiated
investigations into the transactions between regulated units of EIX and PGC and
their affiliates. Avista Energy is continuing to monitor the situation with
respect to EME and NEG counterparties and cannot predict the ultimate outcome of
its positions with these entities. Avista Energy does not believe these
conditions will have a material adverse impact on the results of operations or
its financial position.
The Company's operations are exposed to risks, including legislative and
governmental regulations, the price and supply of purchased power, fuel and
natural gas, recovery of purchased power and purchased natural gas costs,
weather conditions, availability of generation facilities, competition,
technology and availability of funding. In addition, the energy business exposes
the Company to the financial, liquidity, credit and commodity price risks
associated with wholesale sales and purchases.
The Company expects Avista Utilities' electric and natural gas business to earn
between $0.90 and $1.00 per share for 2001, based on current streamflow and
weather projections, anticipated purchased power prices and the continued
ability to defer excess purchased power costs. Avista Corp.'s consolidated
earnings for 2001 will reflect continued support of the Information and
Technology subsidiaries and the expectations for a reduced contribution from
Avista Energy as it continues to manage the size and risk of the business.
Consolidated earnings per share could be significantly less than the $0.90 to
$1.00 anticipated from the Avista Utilities business segment.
RESULTS OF OPERATIONS
OVERALL OPERATIONS
2000 COMPARED TO 1999
Overall diluted earnings per share for 2000 were $1.47, compared to $0.12 in
1999. The primary reason for the increase was earnings of $161.8 million
recorded by the Energy Trading and Marketing line of business, after a loss of
$60.7 million in 1999 recorded by this business segment. Avista Energy benefited
in 2000 from a well-positioned portfolio in the volatile Pacific Northwest and
western energy markets. The loss from Avista Energy in 1999 related to expenses
associated with the downsizing and restructuring of the business, as well as
operational losses. The positive earnings from Avista Energy in 2000 were
partially offset by losses from the other lines of business. In February 2000,
the Company converted all the remaining outstanding shares of its Series L
Preferred Stock back into common stock, which resulted in a one-time charge of
$21.3 million to preferred dividend requirements. In addition, Avista Utilities'
operations recorded losses, which were primarily the result of significantly
higher purchased power costs that were compounded by short positions related to
wholesale trading activity at the utility during the second quarter of 2000.
(See paragraphs below for additional information about the higher energy prices
and short positions.)
Net income available for common stock increased $63.3 million in 2000 over 1999.
Energy Trading and Marketing's contribution to income available for common stock
increased to $161.8 million over 1999, for earnings of $3.51 per diluted share
in 2000 compared to a loss of $1.59 per share in 1999, due primarily to the
volatile energy market discussed above. Avista Utilities' contribution to income
available for common stock decreased $100.7 million from 1999 due to the
conversion costs associated with the convertible preferred stock discussed
above, higher purchased power expenses and wholesale trading activities, for a
loss of $1.36 per diluted share in 2000 compared to a contribution of $1.00 in
1999. Information and Technology's contribution to income available for common
stock decreased $19.8 million from 1999, for a loss of $0.62 per diluted share
in 2000 compared to a loss of $0.23 in 1999, as these businesses continued to
grow their operations. The contribution to income available for common stock
from the Avista Ventures line of business decreased $38.7 million in 2000, for a
loss of $0.06 per
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diluted share in 2000 compared to a contribution of $0.94 in 1999. The 1999
earnings included transactional gains recorded by Pentzer that totaled $35.9
million, or $0.94 per share, from the sale of two groups of portfolio companies.
Total revenues increased $6.5 million in 2000 over 1999, but there were large
changes within the individual lines of business. Avista Utilities' revenues
increased 36%, primarily due to increased prices of both electricity and natural
gas. Revenues at Avista Energy decreased 2% due to decreased sales volumes of
electricity and natural gas from the restructuring and downsizing of the
business, offset by sharply higher prices. Revenues from the Information and
Technology companies increased 140% to $11.6 million as these companies
continued to grow their businesses. Intersegment eliminations represent the
transactions between Avista Utilities and Avista Energy for commodities and
services. The large increase in 2000 over 1999 was primarily due to an entire
year of activity under the agency agreement whereby Avista Energy serves as
agent for Avista Utilities, managing its pipeline transportation contract rights
and natural gas storage assets, as well as purchasing natural gas for Avista
Utilities' retail customers.
Resource costs decreased $97.7 million in total. Avista Utilities' resource
costs increased 73%, primarily due to electric and natural gas commodity prices.
Avista Energy's resource costs decreased 7%, due to decreased energy trading
volumes but offset by the increased prices of commodities. Intersegment
eliminations also increased due to an entire year of activity under the agency
agreement between Avista Utilities and Avista Energy.
Operations and maintenance, administrative and general, and depreciation and
amortization expenses were all primarily impacted by the Information and
Technology and Avista Ventures lines of business. All three categories of
expenses increased at the Information and Technology companies as they continued
to grow their businesses. All three categories of expenses decreased at the
Avista Ventures line of business as a result of the sales of portfolio companies
by Pentzer during 1999.
Interest expense increased $3.6 million in 2000 over 1999, primarily due to
higher levels of outstanding debt during the year. During 2000, $224.0 million
of long-term debt was issued, while $54.6 million of long-term debt matured and
$10.0 million of Preferred Trust Securities were repurchased. Long-term debt and
short-term borrowings outstanding at December 31, 2000 were $217.1 million
higher than at the end of 1999.
Income taxes increased $56.7 million in 2000 over 1999, primarily due to
increased earnings recorded by the Energy Trading and Marketing line of business
and gains on the sale of the Centralia Power Plant (Centralia) recorded by
Avista Utilities. Income taxes in 1999 were lower than normal primarily as a
result of the operational losses and restructuring charges incurred by Avista
Energy.
Preferred stock dividend requirements increased $2.3 million in 2000 over 1999
due to the conversion costs and dividends paid associated with converting the
Convertible Preferred Stock, Series L, into common stock in February 2000.
1999 COMPARED TO 1998
Overall diluted earnings per share for 1999 were $0.12, compared to $1.28 in
1998. The primary reason for the decrease was a $60.7 million after-tax loss
recorded by the Energy Trading and Marketing line of business, due to a $27.3
million after-tax charge recorded by Avista Energy related to the downsizing and
restructuring of the business, and $32.1 million of after-tax operational losses
due to warmer than normal weather across the nation, soft national energy
markets and a lack of volatility within those markets. The restructuring charge
includes a charge for impairment of assets from the purchase of Vitol in
February 1999 and reserves for severance and other related expenses. In December
1998, the Company exchanged 15,404,595 shares of its common stock for shares of
Convertible Preferred Stock, Series L, which resulted in an increase of $13.4
million in preferred stock dividend requirements in 1999 over 1998. In addition,
the utility operations recorded charges of approximately $5 million related to
the impairment of utility assets, which were partially offset by the reversal of
certain environmental reserves. These charges were partially offset by the $35.9
million of transactional gains recorded by Pentzer due to the sales of two
groups of portfolio companies.
Net income available for common stock decreased $65.1 million in 1999 from 1998.
Avista Utilities' income available for common stock decreased $9.8 million from
1998 due to the increased preferred stock dividend associated with the
Convertible Preferred Stock, contributing $1.00 per diluted share for 1999,
compared to $0.88 in 1998. Energy Trading and Marketing's income available for
common stock decreased $74.9 million from 1998, for a loss of $1.59 per diluted
share in 1999, as compared to a contribution of $0.26 per share in 1998, due
primarily to the restructuring charges and operational losses discussed above.
Information and Technology's income available
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for common stock decreased $6.8 million from 1998, for a loss of $0.27 per share
in 1999, compared to a loss of $0.06 in 1998, due primarily to continued
start-up and expansion costs. Income available for common stock from the Avista
Ventures line of business increased $26.3 million in 1999 and contributed $0.98
to diluted earnings per share in 1999, compared to $0.20 per share in 1998.
Transactional gains recorded by Pentzer totaled $35.9 million, or $0.94 per
share, and $4.3 million, or $0.08 per share, in 1999 and 1998, respectively.
Total revenues increased $4.22 billion in 1999 over 1998, primarily due to the
growth of Avista Energy's business as a result of its acquisition of Vitol.
Resource costs increased $4.40 billion, again primarily as a result of the
growth in Avista Energy's business. Intersegment eliminations represent the
transactions between Avista Utilities and Avista Energy for commodities and
services. The large increase in 1999 over 1998 was primarily due to an agreement
whereby Avista Energy serves as agent for Avista Utilities, managing its
pipeline transportation and natural gas storage assets, as well as purchasing
natural gas for Avista Utilities' retail customers. Gross margins for Avista
Utilities decreased $3.0 million primarily due to larger increases in purchased
power costs than in the associated wholesale revenues. Avista Energy's gross
margin decreased $66.6 million to a negative $17.9 million, primarily due to
losses on positions taken in anticipation of certain weather patterns in
particular areas of the country which did not occur. Operations and maintenance
expenses decreased $74.4 million, primarily due to decreased expenses as a
result of the sales of portfolio companies by Pentzer. Administrative and
general expenses decreased $1.8 million primarily due to decreased expenses as a
result of the sales of portfolio companies by Pentzer, partially offset by
increased salary expenses from the growth in Avista Energy's business and the
purchase of Vitol, which added significantly to staffing levels, and increased
start-up costs at the Information and Technology companies.
Interest expense decreased $4.0 million in 1999, as compared to 1998, primarily
due to lower levels of outstanding debt during the year. During 1999, $108.7
million of long-term debt was issued, while $208.3 million of long-term debt
matured or was redeemed. At December 31, 1999, $118.5 million of notes payable
were outstanding, compared to no balances at December 31, 1998. Long-term debt
outstanding at December 31, 1999 was $11.8 million lower than at the end of
1998.
Income taxes decreased $26.6 million, or 61%, in 1999 from 1998, primarily due
to losses and restructuring charges incurred by the Energy Trading and Marketing
line of business, which were partially offset by higher taxes resulting from the
transactional gains from the sales of the portfolio companies by Pentzer.
Preferred stock dividend requirements increased $13.0 million in 1999 over 1998
due to the exchange of shares of common stock for shares of $12.40 Convertible
Preferred Stock, Series L, which occurred in December 1998 and the redemption of
the final $10.0 million of Preferred Stock, Series I in June 1998.
AVISTA UTILITIES
2000 COMPARED TO 1999
Avista Utilities' pre-tax income from operations was $3.2 million in 2000, or a
decrease of $139.4 million from 1999. The loss resulted primarily from
significantly higher electric energy prices in wholesale markets, compounded by
a short position related to wholesale trading activity. The results for 2000
include a $9.0 million after-tax gain recorded as a result of the sale of its
interest in Centralia. The balance of the total after-tax gain of $37.2 million
from the sale of Centralia was deferred and has been or will be returned to
Avista Utilities' customers through rates. Avista Utilities' operating revenues
and expenses increased $396.5 million and $535.8 million, respectively, in 2000
over 1999.
During 2000, Avista Utilities purchased energy in order to meet system
obligations to serve retail and wholesale customers. Unprecedented sustained
peaks in electric energy prices throughout the WSCC beginning in May 2000,
compounded by a wholesale short position discussed below, contributed to
significant losses recorded by Avista Utilities in the second quarter of 2000.
The cost of these power purchases was significantly higher than the amounts
currently being recovered from customers. The increased purchased power prices
caused a reduction in gross margin of approximately $138.9 million in 2000 from
1999. Based on historical trends, Avista Utilities' business plan had forecast
on-peak power prices of approximately $19 per megawatthour for May and June of
2000. On-peak power costs in the market averaged $60 per megawatthour in May and
over $180 per megawatthour in June, with hourly spikes as high as $1,300 per
megawatthour.
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On August 9, 2000, the Washington Utilities and Transportation Commission (WUTC)
approved Avista Utilities' request for deferred accounting treatment for certain
power costs related to increases in short-term power prices beginning July 1,
2000 and ending June 30, 2001. The specific power costs deferred include the
changes in power costs to Avista Utilities from those included in base retail
rates, related to three power cost components: the net effect of changes in
short-term wholesale market prices on short-term wholesale purchases and sales;
the effect on power costs from changes in the level of hydroelectric generation;
and the net effect on power costs from changes in the level of thermal
generation (including changes in fuel prices). The deferrals each month are
calculated as the difference between the actual costs to Avista Utilities
associated with these three power cost components, and the level of costs
included in Avista Utilities' base retail rates. The power costs deferred are
related solely to the operation of Avista Utilities' system resources to serve
its system retail and wholesale load obligations.
On January 24, 2001, the WUTC approved a modification to the deferral mechanism
to recover power supply costs associated with meeting increased retail and
wholesale system load requirements, effective December 1, 2000. The WUTC also
required Avista Utilities to file a proposal by mid-March 2001 that will address
the prudency of the incurred power costs, the optimization of Company-owned
resources to the benefit of retail customers, the appropriateness of recovery of
power costs through a deferral mechanism, a proposal for cost of capital offsets
to recognize the shift in risk from shareholders to ratepayers and Avista
Utilities' plan to mitigate the deferred power costs. Avista Utilities also
plans to file for an extension of this deferred accounting treatment beyond June
30, 2001.
On January 16, 2001, Avista Utilities filed an application with the Idaho Public
Utilities Commission (IPUC) seeking proposed modifications to the existing Power
Cost Adjustment (PCA) mechanism. Due to extremely high short-term power prices,
Avista Utilities is requesting to recover power supply costs associated with
meeting increased retail and wholesale system load requirements, as well as to
recover replacement power costs associated with possible thermal plant forced
outages.
During 2000, Avista Utilities deferred $33.9 million in power costs in
Washington and $4.5 million in Idaho under the PCA mechanism currently in place.
Based on Avista Utilities' views of streamflows, historic market prices and
energy availability in the second quarter of 2000, Avista Utilities entered into
contracts and sold call options for fixed-price power for delivery through the
remainder of 2000, without making matching purchases at the same time, and also
made certain short-term sales at fixed prices which were offset by purchases at
prices indexed to the market price at the time of delivery. Certain of these
wholesale trading positions were outside normal operating guidelines. Avista
Utilities was required to buy additional power not only to meet its obligations
to its retail and long-term wholesale customers, as described above, but also to
cover its wholesale trading positions. An orderly process to complete the
necessary power purchases was impeded by the rapid escalation of market prices
and lack of liquidity in the power markets. These purchases were made at fixed
prices significantly higher than the related selling prices and at index, which
settled at unprecedented levels in June. The pricing of these purchases caused
the majority of Avista Utilities' loss for the second quarter.
Avista Utilities' short position was compounded by the May 5 sale of its
interest in Centralia, which reduced its system capacity by 201 megawatts. Based
on historical trends and Avista Utilities' views on power prices and
availability of power for May and June, Avista Utilities did not seek to replace
the Centralia generation for those two months with firm commitments. Avista
Utilities entered into a three-and-one-half-year contract to purchase 200
megawatts from TransAlta beginning in July 2000.
On September 29, 2000, the WUTC ordered a $3.4 million, or 1.4%, reduction in
electric rates and a $1.7 million, or 2.1%, increase in natural gas rates.
Avista Utilities had filed a request with the WUTC in October 1999 for a general
electric rate increase of $26.2 million, or 10.4%, subsequently revised to $18.2
million, and a general natural gas rate increase of $4.9 million, or 6.5%. The
WUTC also ordered that Avista Utilities' annual rate of return on investment for
both electricity and natural gas be reduced from 10.7% to 9.03%. Avista
Utilities had requested a 9.9% rate of return. Avista Utilities filed a Petition
for Reconsideration before the WUTC requesting that the commission reconsider
certain portions of its order. On November 8, 2000, the Commission slightly
modified the original order by reducing the electric reduction from $3.4 million
to $2.9 million and increasing the natural gas increase from $1.7 million to
$1.8 million.
Retail electric revenues increased $10.6 million in 2000 over 1999 due primarily
to increased prices, as well as greater sales volumes due to customer growth and
increased usage due to weather. Wholesale electric revenues increased $342.3
million, or 66%, while sales volumes decreased 20% in 2000 compared to 1999,
reflecting average sales prices 107% higher in 2000. Wholesale sales volumes
decreased due to management's decision in mid-year to reduce power imbalance
volume limits (the difference between projected load obligations and projected
resource availability), based on the emergent market price volatility, and to
focus primarily on energy transactions necessary
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to efficiently manage power resources to meet retail customer loads and
wholesale obligations. The extent of future wholesale transactions will be
determined based on resource additions or changes and load obligations and
contract commitments. Wholesale transactions continue to be an integral tool in
efficiently managing and economically dispatching Avista Utilities' power
resource availability to meet supply obligations within the coordinated Pacific
Northwest power grid.
Natural gas revenues increased $37.4 million in 2000 over 1999. Retail natural
gas revenues increased $49.0 million, primarily due to increased natural gas
prices, but were offset by a $9.5 million decrease in non-retail sales.
Non-retail natural gas sales are sales of natural gas commodity and related
services outside of the Avista Utilities distribution system to other utilities
and large industrial customers. Revenues from these sales are offset by like
increases in purchased gas expense, and margins from these transactions are
credited back to retail customers through rate changes approved by state
regulators for the cost of natural gas. Non-retail sales have decreased since
mid-1999 primarily due to the agency agreement between Avista Utilities and
Avista Energy mentioned above. Avista Energy will make the majority of these
sales in the future, if it is optimal to managing the natural gas portfolio. The
utility commissions of Washington, Idaho and Oregon have approved Benchmark
Incentive Mechanisms that allow Avista Utilities and its customers to share some
of the benefits of Avista Energy's resource optimization activities.
Purchased power volumes were 15% lower in 2000 primarily due to decreased
wholesale sales, but purchased power prices averaged 132% higher, resulting in a
$529.0 million, or 97%, increase in purchased power expense in 2000 over 1999.
The $33.9 million deferral of power costs pursuant to the WUTC accounting order
and the $4.5 million deferred under the Idaho PCA partially offset purchased
power expense recognized in 2000. Streamflows in 2000 were 86% of normal
compared to 112% in 1999. Fuel for power generation expense increased $22.7
million due to increased generation at the thermal plants as a result of
increased demand for power and increases in natural gas commodity prices.
Purchased natural gas costs increased $39.7 million in 2000, primarily due to
increased prices for the commodity, increased volumes of sales due to customer
growth and increased usage due to weather.
Operations and maintenance expenses increased $5.6 million, or 10%, due to a
variety of items, including increased distribution expenses, higher fees
associated with the increased amount of customer accounts receivables sold,
increased accruals for uncollectible accounts and other expenses related to
customer accounting services.
1999 COMPARED TO 1998
Avista Utilities' pre-tax income from operations decreased $0.6 million in 1999
from 1998. Operating revenues and expenses increased $66.4 million and $67.0
million, respectively, during 1999.
Retail electric revenues increased $9.0 million due to increased kWh sales of 3%
due to customer growth of 1.5% and slightly cooler weather in Avista Utilities'
service area in 1999 than in 1998. Wholesale electric revenues increased $65.2
million, primarily due to prices 11% greater and sales volumes 3% higher in 1999
over 1998. Natural gas revenues decreased $5.7 million primarily as a result of
decreased non-retail sales, partially offset by increased retail sales due to
customer growth and increased customer usage as a result of slightly cooler
weather in Avista Utilities' service area in 1999.
Purchased power volumes increased 2% and prices were 13% higher than the
previous year, which resulted in a $72.9 million, or 15%, increase in purchased
power expense in 1999 over 1998. This increase accounted for the majority of the
increase in Avista Utilities' operating expenses. Operations and maintenance
expenses decreased $4.6 million in 1999 from 1998 as a result of fewer storms,
resulting in less storm damage, and realizing the benefit of preventive
maintenance programs such as cable replacement, pole test and treat, and tree
trimming. Administrative and general expenses decreased $3.3 million due to
increased expenditures during 1998 associated with the change in executive
officers and the corporate name change. Avista Utilities also recorded charges
of approximately $5 million related to impairment of assets, which primarily
included items such as deferred charges now deemed unrecoverable through rates
and a defective inventory software system.
ENERGY TRADING AND MARKETING
Energy Trading and Marketing includes the results of Avista Energy, Avista
Power, and Avista-STEAG. Avista Power and Avista-STEAG operations had minimal
impact on earnings in 2000, 1999 or 1998. 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 the 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. See Liquidity and Capital Resources: Risk Management and Note
4 of Notes to Financial Statements for additional information about market risk
and credit risk.
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2000 COMPARED TO 1999
Energy Trading and Marketing's income available for common stock for 2000 was
$161.8 million compared to a loss of $60.7 million in 1999. Avista Energy's
operations in 2000 were positively affected by a well-positioned portfolio in
the volatile Pacific Northwest and western electric markets. Avista Energy's
operations were negatively impacted by losses from the liquidation of its
Eastern electric book and associated operating costs to close its Eastern
operations in Houston and Boston.
In November 1999, Avista Energy began redirecting its focus away from national
energy trading toward a more regionally-based energy trading and marketing
effort in the West. Its more narrowly focused operations in the West are backed
by contracts for energy commodities and by the output of specific facilities
available under contracts. The change in strategy followed significant changes
in the overall energy trading and marketing industry that created low margins
while requiring higher levels of investment, credit commitments and
value-at-risk limits. By late 1999, mergers and consolidations within the
industry reduced the number of firms and increased the remaining firms' typical
size, leaving a marketplace where liquidity and volatility were not favorable.
Avista Energy shut down its operations in Houston and Boston during the first
and second quarters of 2000 and reduced its workforce by approximately 80
positions. The Eastern electric book was sold at a $1.0 million after-tax loss
in early 2000. The remaining Eastern natural gas contracts, primarily for
transportation and storage, are being managed out of the Spokane office until
the last of the contracts expire in 2002.
Energy Trading and Marketing's revenues and operating expenses decreased $164.1
million and $512.1 million, respectively, in 2000 from 1999. The decrease in
revenues was primarily due to lower sales volumes, partially offset by increased
prices. The decreased expenses primarily resulted from decreased volumes of
transactions, partially offset by increased resource costs due to increased
commodity prices, and the closure of Avista Energy's Eastern operations and
refocusing the business to the West.
The volume of power and natural gas sales decreased significantly as Avista
Energy's focus was redirected to the WSCC. Electric sales volumes decreased 22%,
while natural gas sales decreased 60%. The exception to this was the
comparatively minor coal sales, which increased 115% in volume in 2000 over
1999. However, after the Houston and Boston offices were closed, no more coal
sales were made and the remaining contracts expired by the end of 2000, so there
will be no more coal sales or revenues to the future.
Energy Trading and Marketing's balance sheet increased $8.68 billion from
December 1999 to December 2000. Avista Energy's energy commodity assets and
liabilities increased primarily as a result of significant price increases for
both natural gas and power during this period. Trade receivables and payables
increased due to higher market prices on current positions.
1999 COMPARED TO 1998
Energy Trading and Marketing income available for common stock for 1999 was an
after-tax loss of $60.7 million compared to earnings of $14.1 million in 1998.
The primary reason for the decrease was a $27.3 million after-tax charge
recorded by Avista Energy related to the downsizing and restructuring of the
business, and $32.1 million of after-tax operational losses due to warmer than
normal weather across the nation, soft national energy markets and a lack of
volatility within those markets. The restructuring charge consisted of a $21.4
million after-tax charge for the write-off of goodwill from the purchase of
Vitol in February 1999 and a $5.9 million after-tax reserve for severance
payments and other related expenses. Avista Energy recognized losses (1) on
positions taken in anticipation of certain weather patterns in particular areas
of the country, which lost value when the expected patterns did not occur, and
(2) on options, also taken in anticipation of certain weather patterns in
particular areas of the country, which expired unexercised when the expected
patterns did not occur.
Since its inception in 1997, Avista Energy developed and expanded its business
and added experienced traders and staff. This growth continued in 1999 with
Avista Energy's purchase of Vitol in the first quarter. Vitol, located in
Boston, Massachusetts, was one of the top 20 energy marketing companies in the
United States. Late in the second quarter of 1999, Avista Energy added a
significant number of energy professionals in its Spokane and Houston offices.
The integration of Vitol operations into Avista Energy began during the second
quarter with the consolidation of back-office support, improvements in
accounting and trading processes and personnel, and continued enhancements in
risk management systems across Avista Energy.
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Energy Trading and Marketing's revenues and operating expenses increased $4.29
billion and $4.36 billion, respectively, in 1999 over 1998. The increase in
revenues and expenses was primarily the result of Avista Energy continuing to
grow its business. Energy Trading and Marketing's assets increased $639.9
million from December 1998 to December 1999. Avista Energy's energy commodity
assets and liabilities increased as a result of additional trading volumes,
which were partially offset by market price declines. Trade receivables and
payables increased due to additional volumes of sales and purchases.
INFORMATION AND TECHNOLOGY
The Information and Technology line of business includes the results of Avista
Advantage, Avista Labs and Avista Communications. Avista Corp. has committed to
invest in the continued growth of these information and technology businesses as
part of its overall strategic focus on generating shareholder value.
2000 COMPARED TO 1999
Information and Technology's loss attributable to common stock for the year was
$28.4 million compared to a loss of $8.6 million in 1999. Operating revenues and
expenses for this line of business increased $6.8 million and $33.9 million,
respectively, over 1999, primarily due to growth in each of the individual
businesses.
1999 COMPARED TO 1998
Information and Technology's income available for common stock for 1999 was a
loss of $10.2 million, compared to a loss of $3.4 million in 1998. Increases in
revenues and various expense categories for this line of business were primarily
due to growth in each of the individual businesses.
AVISTA VENTURES
The Avista Ventures line of business includes the results of Avista Ventures,
Pentzer, Avista Development and Avista Services.
2000 COMPARED TO 1999
The loss attributable to common stock from this line of business was $2.9
million for 2000, compared to earnings of $35.8 million in 1999. The 2000 loss
includes a $1.2 million after-tax charge recorded by Pentzer in the first
quarter for expenses related to employee terminations resulting from a
redirection of Pentzer's business focus. The 1999 earnings included
transactional gains totaling $35.9 million, net of taxes, recorded by Pentzer as
a result of the sale of its Creative Solutions Group and Store Fixtures Group of
portfolio companies, partially offset by a loss on the sale of equipment.
Operating revenues and expenses from this line of business decreased $89.4
million and $79.9 million, respectively, during 2000, primarily as a result of
the sales of portfolio companies by Pentzer. The Creative Solutions Group of
companies was sold at the end of the first quarter of 1999 and the Store
Fixtures Group of companies was sold during the third quarter of 1999. Revenues
and expenses from these companies were included only in the 1999 amounts.
1999 COMPARED TO 1998
Income available for common stock for 1999 from the Avista Ventures line of
business totaled $35.8 million, which was a $24.7 million increase over 1998.
The increased earnings resulted primarily from transactional gains recorded by
Pentzer in 1999 totaling $35.9 million, net of taxes, from the sales of two
groups of portfolio companies. Transactional gains during 1998 totaled $4.3
million, net of taxes, as a result of the sale of a portfolio company.
Non-transactional earnings totaled $1.2 million in 1999, a decrease of $6.2
million from 1998, primarily due to the loss of income resulting from the sales
of portfolio companies. Operating revenues and expenses decreased $109.2 million
and $96.7 million, respectively, primarily as a result of the sales of portfolio
companies by Pentzer.
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LIQUIDITY AND CAPITAL RESOURCES
OVERALL OPERATIONS
Operating Activities Operating activities provided cash of $76.2 million in 2000
compared to $111.2 million in 1999. The primary reasons for the decrease in cash
were the second quarter losses at Avista Utilities, not included in retail
rates, caused by higher power costs and the funds expended for power and natural
gas, but deferred for later recovery from customers. Increased commodity prices
that affected both Avista Utilities and Avista Energy were primarily responsible
for the large changes in various working capital components, such as receivables
and payables.
Investing Activities Investing activities used cash of $96.9 million in 2000
compared to $27.2 million in 1999. In 2000, Avista Utilities sold the Centralia
Power Plant, resulting in proceeds of approximately $89.2 million. In 1999,
Pentzer sold the Creative Solutions and Store Fixtures groups of companies and
Avista Energy acquired Vitol. Utility operations' capital expenditures,
excluding Allowance for Funds Used During Construction (AFUDC) and Allowance for
Funds Used to Conserve Energy (AFUCE, a carrying charge similar to AFUDC for
conservation-related capital expenditures), were $270 million for the 1998-2000
period.
Financing Activities Financing activities provided net cash of $175.0 million in
2000 compared to using cash of $116.8 million in 1999. In 2000, short-term notes
payable increased $42.1 million and $224.0 million of long-term debt was issued,
while $54.6 million of long-term debt matured or was redeemed. In addition, the
Company repurchased $10.0 million of Preferred Trust Securities. In 1999,
short-term notes payable increased $110.5 million and $116.5 million of proceeds
were received from the issuance of long-term debt, including $25.0 million of
Medium-Term Notes (MTNs). These proceeds, plus cash provided from operating
activities, were used to retire $211.5 million of long-term debt and repurchase
$82.0 million of common stock and $5.9 million of preferred stock. During the
1998-2000 period, $296 million of long-term debt and preferred stock matured,
was mandatorily redeemed or was optionally redeemed and refinanced at a lower
cost.
In August 1998, the Company announced a dividend restructuring plan that reduced
the Company's annual common stock dividend from $1.24 per share to $0.48 per
share, a 61% reduction, which was effective with the payment of the common stock
dividend paid on December 15, 1998. At the same time, an exchange offer was made
whereby shareholders were provided the opportunity to exchange their shares of
common stock for depositary shares, also known as RECONS (Return-Enhanced
Convertible Securities). Each RECONS represented a one-tenth ownership interest
in one share of mandatorily convertible Series L Preferred Stock. Each RECONS
paid an annual dividend of $1.24 for a period of about three years and after
three years would automatically convert back to common stock, unless the Company
exercised its option to convert the Series L Preferred Stock prior to the end of
the three-year period. Shareholders who chose not to participate in the exchange
offer retained their ownership in Avista Corp. common stock. The annual savings
resulting from the dividend restructuring were approximately $30 million for the
periods that the preferred stock was outstanding, increasing to about $42
million annually after the conversion of the preferred shares back to common
stock. The savings assisted in funding a portion of the Company's capital
expenditures, maturing long-term debt and preferred stock sinking fund
requirements. See Note 15 of Notes to Financial Statements for additional
information about the convertible preferred stock.
On February 16, 2000, the Company exercised its option to convert all the
remaining outstanding shares of Series L Preferred Stock back into common stock.
The RECONS were also converted into common stock on the same conversion date,
and each of the RECONS was converted into the following: 0.7205 shares of common
stock, representing the optional conversion price; plus 0.0361 shares of common
stock, representing the optional conversion premium; plus the right to receive
$0.21 in cash, representing an amount equivalent to accumulated and unpaid
dividends up until, but excluding, the conversion date. Cash payments were made
in lieu of fractional shares.
In March 2000, the Company began issuing new shares of common stock to the
Employee Investment Plan rather than the Plan purchasing shares of common stock
on the open market. In the fourth quarter of 2000, the Company also began
issuing new shares of common stock for the Dividend Reinvestment and Stock
Purchase Plan. Through December 31, 2000, a total of 125,636 new shares of
common stock were issued to both plans.
In August and December of 2000, the Company issued a total of $224.0 million of
Unsecured MTNs, Series D at rates of 8.000% and 8.625% due in 2001 and 2003. A
total of $44.9 million of Secured MTNs matured during 2000, with rates between
6.13% and 8.20%. As of December 31, 2000, the Company had a total of $317.0
million of Unsecured MTNs authorized to be issued.
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In May 1999, the Company's Board of Directors authorized a common stock
repurchase program in which the Company may repurchase in the open market or
through privately negotiated transactions up to an aggregate of 10 percent of
its common stock and common stock equivalents over the following two years. The
repurchased shares will return to the status of authorized but unissued shares.
During 1999, the Company repurchased approximately 4.8 million common shares and
322,500 shares of RECONS (which was equivalent to 32,250 shares of Convertible
Preferred Stock, Series L). The combined repurchases of these two securities
represent 9% of outstanding common stock and common stock equivalents. There was
no activity under this plan during 2000.
The Company funds capital expenditures with a combination of
internally-generated cash and external financing. The level of cash generated
internally and the amount that is available for capital expenditures fluctuates
annually. Cash provided by operating activities remains the Company's primary
source of funds for operating needs, dividends and capital expenditures.
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 purchased power and natural
gas costs incurred to serve the 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 Company and the time they are
collected from customers. As more fully described in Note 1 of Notes to the
Financial Statements -- "Power Cost Deferrals and Power and Natural Gas
Adjustment Provisions", costs in excess of those included in rates are deferred
as an asset on the balance sheet. Deferral balances at the end of 2000 totaled
$78.8 million. 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 hydro
generation) or customer demand could have a significant positive or negative
impact on expected deferrals and cash flows. On an interim basis, the Company
uses its revolving line of credit to fund these costs to the extent that they
exceed the cash flows available from operations. The Company expects to issue
longer-term debt during 2001 to pay down balances outstanding under the
revolving line of credit. This will provide additional liquidity needed to fund
the deferral balances. The Company intends to file applications with regulatory
commissions during 2001 to address timing of recovery of the deferred costs. If
the commissions approve the Company's requests, the deferral balances are
expected to begin being recovered starting in 2001 or 2002. The Company's
existing lines of credit are expected to be adequate to meet the current needs.
Under normal water conditions and loads, Avista Utilities' own generation plants
and long-term contracts would be able to provide approximately 90% of its
forecasted native load energy requirements in 2001, and 100% thereof in 2002 and
2003. The balance would be covered through short-term contracts. Avista
Utilities has covered essentially all of its electric energy requirements in the
forward markets for 2001. Current forecasts show streamflow conditions for
hydroelectric generation for 2001, estimated at 60% of normal, to be among the
worst five years on record. In response to the reduced hydroelectric generation,
Avista Utilities has made additional fixed price purchases of energy, and
expects to receive the necessary local, state and federal approvals to increase
the energy output of its natural gas-fired thermal generation to cover its firm
retail and wholesale load requirements for 2001, with minimal additional
purchases expected from the high cost short-term wholesale market. However, if
hydroelectric conditions further deteriorate, its thermal plants do not operate
as planned, or weather conditions cause retail loads to increase, Avista
Utilities would incur increased costs from increased purchases in the short-term
wholesale energy market.
Higher volatility in 2000 in power and natural gas prices and significant
increases in average price levels have resulted in the need for energy trading
counterparties to provide one another adequate assurances of their future
performance on energy transaction obligations. The adequate assurance demands
are satisfied through various means, including letters of credit, cash deposits
or prepayments, parent entity guaranties, contract terms and portfolio
management.
As mentioned earlier, the Company is currently in the process of obtaining
separate financing for construction of the Coyote Springs 2 project. The Company
is seeking to finance a majority of the costs during construction with a term
loan that would match the construction period. The project would serve as
collateral for the term loan. If the Company does not complete a separate
financing for this project, there would be a need to issue other debt or equity
securities during 2001 and 2002 to provide the funding.
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
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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. Capital expenditures
are financed on an interim basis with short-term borrowings or notes payable
(due within one year). The Company has $230 million in two committed lines of
credit, which expire on June 26, 2001. As part of the renewal of the agreements
in 2000, the Company pledged its shares of common stock in Avista Capital as
security for these agreements. The Company also had a $60 million three-month
line of credit that expired on October 25, 2000 and was not replaced. In
addition, the Company has a $50 million regional commercial paper program that
is backed by the committed lines of credit. During 2000, the Company could also
borrow up to $100 million through other borrowing arrangements with banks, but
none of these agreements were in place at year-end. As of December 31, 2000,
$152.0 million was outstanding under the committed line of credit and $11.2
million was outstanding under the commercial paper program.
From time to time the Company enters into sale/leaseback arrangements for
various long-term assets which provide additional sources of funds. See Note 13
of Notes to Financial Statements for additional information about leases.
The Company is restricted under various agreements as to the additional
securities it can issue. As of December 31, 2000, under its Restated Articles of
Incorporation, approximately $844.0 million of additional preferred stock could
be issued at an assumed dividend rate of 6.95%.
During 1998, the Company entered into an agreement that increased the amount of
customer accounts receivable the Company could sell from $40 million to $80
million to provide additional funds for capital expenditures, maturing long-term
debt and preferred stock sinking fund requirements. At December 31, 2000, $80.0
million in receivables had been sold pursuant to the agreement.
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 December 31, 2000, Avista Corp. had
short-term notes receivable of $113.6 million from Avista Capital, which
includes $56.7 million for the Coyote Springs 2 project, compared to short-term
notes payable of $18.3 million at December 31, 1999.
Avista Capital provides guarantees for Avista Energy's line of credit agreement,
and in the course of business may provide guarantees to other parties with whom
Avista Energy may be doing business. The Company's investment in Avista Capital
totaled $361.2 million at December 31, 2000.
AVISTA UTILITIES OPERATIONS
During the 2001-2003 period, utility capital expenditures are expected to be
$478 million, and $348 million will be required for long-term debt maturities
and preferred stock sinking fund requirements. During this three-year period,
internally generated funds and external financings will be used to fund the
Company's capital expenditure program, maturing long-term debt and preferred
stock sinking fund requirements. Sources of funds would include, but are not
necessarily limited to, sales of certain assets, additional long-term debt,
leasing or issuance of other equity securities. These estimates of capital
expenditures are subject to continuing review and adjustment. Actual capital
expenditures may vary from these estimates due to factors such as changes in
business conditions, construction schedules and environmental requirements.
See Notes 3, 11, 12, 13, 14, 15, 16, 17 and 18 of Notes to Financial Statements
for additional details related to financing activities.
ENERGY TRADING AND MARKETING OPERATIONS
Avista Capital's total investment in this line of business was $291.7 million at
December 31, 2000. Avista Energy funds its ongoing operations with a combination
of internally generated cash and a bank line of credit.
Avista Energy and its subsidiary, Avista Energy Canada, Ltd., as co-borrowers,
have a credit agreement with two commercial banks in the aggregate amount of
$110 million, decreasing periodically to $70 million at the end of the
agreement, and expiring April 30, 2001. Avista Energy is in the process of
renewing the line of credit. The credit agreement may be terminated by the
banks at any time and all extensions of credit under the agreement are payable
upon demand, in either case at the banks' sole discretion. The agreement also
provides, on an uncommitted basis, for the issuance of letters of credit to
secure contractual obligations to counterparties. The facility is guaranteed by
Avista Capital and is secured by substantially all of Avista Energy's assets.
The maximum amount of credit extended by the
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banks for cash advances is $30 million, with availability of up to $110 million
(less the amount of outstanding cash advances, if any) for the issuance of
letters of credit. At December 31, 2000 and 1999, there were no cash advances
(demand notes payable) outstanding. Letters of credit outstanding under the
facility totaled approximately $71.5 million and $75.8 million at December 31,
2000 and 1999, respectively.
Capital expenditures for the Energy Trading and Marketing companies were $71.1
million for the 1998-2000 period, primarily due to Avista Power's investment in
the Coyote Springs 2 projects. Avista Power's equity investment of $16 million
in Rathdrum is expected to occur in 2001.
At December 31, 2000, the Energy Trading and Marketing companies had $179.6
million in cash and cash equivalents and $0.5 million in long-term debt
outstanding.
As of December 31, 2000, 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.
Rising prices in power and natural gas beginning in the second quarter of 2000
and continuing beyond the end of 2000 triggered additional collateral
requirements with counterparties. Avista Energy is managing the collateral calls
by providing letters of credit, providing guarantees from Avista Capital and
offsetting transactions with counterparties. In addition to the letters of
credit and other items included above, cash deposited with counterparties
totaled $40.5 million as of December 31, 2000, and is included in the
Consolidated Balance Sheets in prepayments and other. The posted collateral will
be returned to Avista Energy depending on the effect of changing market values
of forward contracts or as forward positions settle. Avista Energy held cash
deposits from other parties in the amount of $96.6 million as of December 31,
2000, and such amounts are subject to refund if conditions warrant because of
continuing portfolio value fluctuations with those parties.
Avista Power and Cogentrix Energy, Inc. entered into an agreement to jointly
build a 270 megawatt natural gas combustion turbine facility in Rathdrum, Idaho,
with 100% of its output contracted to Avista Energy for 25 years. Non-recourse
project financing was completed in March 2000 and the facility is currently
under construction, with generation expected to start in late 2001. The total
cost of the project is estimated at $160 million; Avista Power's equity in the
project is approximately $16 million.
INFORMATION AND TECHNOLOGY OPERATIONS
Capital expenditures for the Information and Technology companies were $55.1
million for the 1998-2000 period. The 2001-2003 capital expenditures are
expected to be $61.0 million, and $0.1 million in debt maturities will also
occur. These companies expect to seek outside funding through partnerships or
other arrangements to support these capital requirements.
Two venture capital firms made small minority interest investments in Avista
Advantage during the fourth quarter of 2000.
At December 31, 2000, the Information and Technology companies had $1.3 million
in long-term debt outstanding.
In early 1999, Avista Labs announced the receipt of a $2 million technology
development award from the Department of Commerce's National Institute of
Standards and Technology Advanced Technology Program. Avista Labs is working on
technology that will increase the energy density of its fuel cell design and
develop multiple fuel processing approaches using propane, methane and methanol
as base fuels to integrate into its fuel cell subsystem.
AVISTA VENTURES OPERATIONS
Capital expenditures for these companies were $18.6 million for the 1998-2000
period. The 2001-2003 capital expenditures are expected to be $27.3 million, and
$0.5 million in debt maturities will also occur. During the next three years,
internally generated cash and other debt obligations are expected to provide the
majority of the funds for these capital expenditure requirements. The decrease
in these projected capital expenditures is primarily related to the change in
Pentzer's focus beginning in 2000.
At December 31, 2000, this line of business had $1.2 million in cash and cash
equivalents and temporary investments, with $0.8 million in long-term debt
outstanding.
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TOTAL COMPANY CASH REQUIREMENTS
(Millions of Dollars)
Actual Projected
------------------------ ------------------------
1998 1999 2000 2001 2002 2003
---- ---- ---- ---- ---- ----
Avista Utilities operations:
Capital expenditures(1) $ 92 $ 86 $100 $256 $131 $ 91
Debt and preferred securities
maturities and redemptions(2) 24 214 55 89 52 207
---- ---- ---- ---- ---- ----
Total Avista Utilities 116 300 155 345 183 298
---- ---- ---- ---- ---- ----
Avista Capital operations:
Capital expenditures(3) 14 29 101(4) 38 28 22
Investments 53 51 4 29 -- 2
Debt maturities 18 3 10 -- 1 --
---- ---- ---- ---- ---- ----
Total Avista Capital 85 83 115 67 29 24
---- ---- ---- ---- ---- ----
Total Company $201 $383 $270 $412 $212 $322
==== ==== ==== ==== ==== ====
Funding of Avista Capital(5) 42 40 114 75 22 2
(1) Capital expenditures exclude AFUDC and AFUCE.
(2) Excludes short-term borrowings and notes payable (due within one year).
(3) Represents Avista Capital's portion of projected joint projects. Some
projected capital expenditures may depend on the availability of additional
funding from other outside sources.
(4) The 2000 capital expenditures by Avista Capital includes funding of Coyote
Springs 2, which will be transferred to Avista Utilities.
(5) Funding of Avista Capital by Avista Corp. includes both equity investments
and notes payable.
The Company's total common equity increased $330.7 million to $724.2 million at
the end of 2000. The increase was primarily due to the conversion of convertible
preferred stock into common stock and the earnings recorded by Avista Energy.
The Company's consolidated capital structure at December 31, 2000, was 44% debt,
9% preferred securities (including the Preferred Trust Securities) and 47%
common equity as compared to 47% debt, 27% preferred securities (including the
Preferred Trust Securities) and 26% common equity at year-end 1999. Had the
convertible preferred stock been converted into common stock, the Company's
consolidated capital structure at December 31, 1999, would have been 47% debt,
10% preferred securities (including the Preferred Trust Securities) and 43%
common equity.
ADDITIONAL FINANCIAL DATA
At December 31, 2000, the total long-term debt of the Company and its
consolidated subsidiaries, as shown in the Company's consolidated financial
statements, was approximately $679.8 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 $2.5 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 $163.2
million of the Company's short-term debt outstanding under or backed by the
committed lines of credit is secured.
FUTURE OUTLOOK
Business Strategy
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Avista Utilities seeks to maintain a strong, low-cost utility business focused
on delivering efficient, reliable and high quality service to its customers. The
utility business is expected to grow modestly, consistent with historical
trends. Expansion will primarily result from economic growth in its service
territory. Avista Energy scaled back operations to the WSCC during 2000, and
will continue to focus on reducing the size and the risk associated with its
energy trading and marketing activities. Avista Energy's marketing efforts are
expected to be driven by its base of knowledge and experience in the operation
of both electric energy and natural gas physical systems in the region, as well
as its relationship-focused approach to its customers. Avista Power will
continue to pursue opportunities to develop new generation to support the
growing power requirements in the Northwest. The Company also intends to focus
on its investments in the Information and Technology subsidiaries as part of its
overall plans for generating shareholder value, which could include finding
equity partners to assist in financing the continued growth of the businesses.
Competition
Avista Utilities competes to provide service to new retail electric customers
with various rural electric cooperatives and public utility districts in and
adjacent to its service territories. Alternate sources of power may compete for
sales to existing Avista Utilities customers, including new market entrants as a
result of deregulation. Competition for available electric resources has become
more critical to utilities as surplus power resources have been absorbed by load
growth. Avista Utilities' natural gas distribution operations compete with other
energy sources but natural gas continues to maintain a price advantage compared
to heating oil, propane and other fuels, provided that the natural gas
distribution system is proximate to prospective customers.
The Avista Capital subsidiaries, particularly the Information and Technology
companies, are subject to competition as they develop products and services and
enter new markets. Competition from other companies in these emerging industries
may mean challenges for a company to be the first to market a new product or
service to gain the advantage in market share. In order for these new businesses
to grow as planned, one significant challenge will be the availability of
funding and resources to meet the capital needs. Other challenges will be
rapidly advancing technologies, possibly making some of the current technology
quickly obsolete, and requiring continual research and development for product
advancement. In order for some of these subsidiaries to succeed, they will need
to reduce costs of these emerging technologies to make them affordable to future
customers.
Business Risk
The Company's operations are exposed to risks, including legislative and
governmental regulations, the price and supply of purchased power, fuel and
natural gas, recovery of purchased power and purchased natural gas costs,
weather conditions, availability of generation facilities, competition,
technology and availability of funding.
Challenges facing Avista Utilities' electric operations include, among other
things, changes in the availability of and volatility in the prices of power and
fuel, generating unit availability, legislative and governmental regulations,
weather conditions, and the ability to recover increased costs of purchased
power. Avista Utilities believes it faces minimal risk for stranded utility
assets resulting from deregulation due to its low-cost generation portfolio and
because of the slower and more cautious approach to regulatory changes that have
been under consideration in Washington and Idaho. In a deregulated environment,
however, evolving technologies that provide alternate energy supplies could
affect the market price of power, and certain generating assets could have
capital and operating costs above the adjusted market price.
In addition, the energy trading and marketing business exposes the Company to
the financial, liquidity, credit and commodity price risks associated with
wholesale sales and purchases.
Natural gas commodity prices increased dramatically during 2000. However, market
prices for natural gas continue to be competitive compared to alternative fuel
sources for residential, commercial and industrial customers. Proven reserves
and future natural gas development opportunities lead the Company to believe
that natural gas should sustain its market advantage. Significant growth has
occurred in the natural gas business in recent years due to increased demand for
natural gas in new construction. Challenges facing Avista Utilities' natural gas
operations include, among other things, volatility in the price of natural gas,
changes in the availability of natural gas, legislative and governmental
regulations, weather conditions, conservation and the timing for recovery of
increased commodity supply costs. Avista Utilities' natural gas business also
faces the potential for large natural gas customers to by-pass its natural gas
system. To reduce the potential for such by-pass, Avista Utilities prices its
natural gas services, including transportation contracts, competitively and has
varying degrees of flexibility to price its transportation and delivery rates by
means of individual contracts. Avista Utilities has long-term transportation
contracts with seven of
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its largest industrial customers, which reduces the risks of these customers
by-passing the system in the foreseeable future.
Commodity Price Risk. Both Avista Utilities and Avista Energy are subject to
commodity price risk. Historically, the price of power in wholesale markets has
been affected primarily by production costs and by other factors including
streamflows, the availability of hydro and thermal generation and transmission
capacity, weather and the resulting retail loads, and the price of coal, natural
gas and oil to thermal generating units. Any combination of these factors that
resulted in a shortage of energy generally caused the market price of power to
move upward. Now, however, market prices appear to be affected by other factors
as well. These factors include the gradual elimination of excess generating
capacity in the WSCC and the effects of the restructuring of the electric
utility business at the state and federal levels and the deregulation of
wholesale energy markets.
Price risk is, in general, the risk of fluctuation in the market price of the
commodity needed, held or traded. In the case of electricity, price movements
are correlated to adequacy of generating reserve margins, scheduled and
unscheduled outages of generating facilities, availability of streamflows for
hydroelectric production, the price of thermal generating plant fuel, and
disruptions or constraints to transmission facilities. Demand changes (caused by
variations in the weather and other factors) are also correlated to price
movements. Price risk also includes the risk of fluctuation in the market price
of associated derivative commodity instruments (such as options and forward
contracts). Price risk may also be influenced to the extent that the performance
or non-performance by market participants of their contractual obligations and
commitments affect the supply of, or demand for, the commodity. As discussed
earlier, market prices for power and natural gas in the Western U.S. and Western
Canada were significantly higher in 2000 than at any time in history, with
unprecedented levels of volatility. The extreme price volatility experienced in
2000 suggests that other factors, including unexplained influences, also affect
market prices.
Credit Risk. Credit risk relates to the risk of loss that Avista Utilities
and/or Avista Energy would incur as a result of non-performance by
counterparties of their contractual obligations to deliver energy and make
financial settlements. Credit risk includes not only the risk that a
counterparty may default due to circumstances relating directly to it, but also
the risk that a counterparty may default due to circumstances which relate to
other market participants which have a direct or indirect relationship with such
counterparty. Avista Utilities and Avista Energy seek to mitigate credit risk by
applying specific eligibility criteria to existing and prospective
counterparties and by actively monitoring current credit exposures. However,
despite mitigation efforts, defaults by counterparties occur from time to time.
Avista Energy has experienced payment receipt defaults from certain parties
impacted by the California energy crisis and ultimate collection is not known at
this time. See Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations: Significant Changes in Energy Markets:
California Energy Crisis and Note 4 of Notes to Financial Statements for more
information about credit reserves.
Credit risk also involves the exposure that counterparties perceive related to
performance by Avista Utilities and Avista Energy to perform deliveries and
settlement of energy resource transactions. These counterparties seek assurance
of performance in the form of letters of credit, prepayment or cash deposits,
and, in the case of Avista Energy, parent company performance guaranties. In
periods of price volatility, the level of exposure can change significantly,
with the result that sudden and significant demands may be made against the
Company's capital resource reserves (credit facilities and cash).
Other Operating Risks. In addition to commodity price risk, Avista Utilities'
commodity positions are also subject to operational and event risks including,
among others, increases in load demand, transmission or transport disruptions,
fuel quality specifications and forced outages at generating plants. Some of
these factors have been addressed in the recent changes to the Washington
deferred power accounting adjustment and the Idaho PCA.
Interest Rate Risk. The Company is subject to the risk of fluctuating interest
rates in the normal course of business. The fair value of the Company's cash and
short-term investment portfolio and the fair value of notes payable at December
31, 2000 approximated carrying value. Given the short-term nature of these
instruments, market risk, as measured by the change in fair value resulting from
a hypothetical change in interest rates, is immaterial.
The Company manages interest rate risk by taking advantage of market conditions
when timing the issuance of long-term financings and optional debt redemptions
and through the use of fixed rate long-term debt with varying maturities. A
portion of the Company's capitalization consists of floating rate Pollution
Control Bonds, of which the interest rate resets periodically, and
Company-Obligated Mandatorily Redeemable Preferred Trust Securities, of which
the interest portion of the $40 million Series B resets on a quarterly basis,
both reflecting current market
37
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AVISTA CORPORATION
- -------------------------------------------------------------------------------
conditions. As of December 31, 2000, a hypothetical 15% change in interest rates
would result in an immaterial change in the Company's cash flows related to the
increased interest expense associated with these floating rate securities.
Foreign Currency Risk. The Company has investments in several Canadian companies
through Avista Energy Canada, Ltd. and its acquisition of Coast Pacific
Management, Inc. (see Note 23 for additional information about this
acquisition). The Company's exposure to foreign currency risk and other foreign
operations risk was immaterial to the Company's consolidated results of
operations and financial position in 2000 and is not expected to change
materially in the near future.
Risk Management
Risk Policies and Oversight. Avista Utilities and Avista Energy use a variety of
techniques to manage risks. The Company has established risk management
oversight for these risks for each area of the Company's energy-related
business. The Company has established a Risk Management Committee composed of
senior management separate from the units that create such risk exposure and
overseen by the Audit and Finance Committee of the Company's Board of Directors,
to monitor compliance with the Company's risk management policies. Avista
Utilities and Avista Energy have adopted policies and procedures to manage the
risks, both quantitative and qualitative, inherent in their businesses. The
Company's Risk Management Committee reviews the status of risk exposures through
regular reports and monitors compliance with the Company's risk management
policies and procedures on a regular basis. Nonetheless, adverse changes in
commodity prices, generating capacity, customer loads, and other factors may
result in losses in earnings, cash flow and/or fair values.
Avista Utilities hired Williams Energy Marketing & Trading Company in July 2000
to advise on risk management, risk analysis and power resource optimization
issues for all system requirements. The work was completed and the contract
ended in the fourth quarter of 2000.
Quantitative Risk Measurements. Avista Utilities has established volume limits
for its imbalance between projected loads and resources. Normal operations
result in seasonal mismatches between power loads and available resources.
Avista Utilities uses the wholesale power markets to sell projected resource
surpluses and obtain resources when deficits are projected in the 24-month
forward planning horizon. Any imbalance is required to remain within limits, or
management action or decisions are triggered to address larger imbalance
situations. Volume limits for forward periods are based on monthly and quarterly
averages, which may vary materially from the actual load and resource variations
within any given month or operating day. Future projections of resources are
updated as forecasted streamflows and other factors differ from prior estimates.
Forward power markets may be illiquid, and market products may only be available
to approximate Avista Utilities' desired transaction size and shape. Therefore,
open imbalance positions exist at any given time. During 2000, as market prices
and volatility rose to unprecedented levels, the Risk Management Committee
decreased the size of Avista Utilities' forward power imbalance limits.
Avista Energy measures the risk in its power and natural gas portfolio daily
utilizing a Value-at-Risk (VAR) model and monitors its risk in comparison to
established thresholds. VAR measures the worst expected loss over a given time
interval under normal market conditions at a given confidence level. Avista
Energy also measures its open positions in terms of volumes at each delivery
location for each forward time period. The extent of open positions is included
in the risk management policy and is measured with stress tests and VAR
modeling. The Risk Management Committee adopted a revised Avista Energy risk
policy in early 2000 to reflect the change in focus from a national operation to
the Western energy markets. The revised risk policy also reduced targeted levels
of risk compared to the prior policy.
The VAR computations are based on an historical simulation, which utilizes price
movements over a specified period to simulate forward price curves in the energy
markets to estimate the unfavorable impact of price movement in the portfolio of
transactions scheduled to settle within the following eight calendar quarters.
The quantification of market risk using VAR provides a consistent measure of
risk across Avista Energy's continually changing portfolio. VAR represents an
estimate of reasonably possible net losses in earnings that would be recognized
on its portfolio assuming hypothetical movements in future market rates and is
not necessarily indicative of actual results that may occur.
Avista Energy's VAR computations utilize several key assumptions, including a
95% confidence level for the resultant price movement and holding periods of one
and three days. The calculation includes derivative commodity instruments held
for trading purposes and excludes the effects of written and embedded physical
options in the trading portfolio.
38
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AVISTA CORPORATION
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At December 31, 2000, Avista Energy's estimated potential one-day unfavorable
impact on gross margin was $4.0 million, as measured by VAR, related to its
commodity trading and marketing business, compared to $1.1 million at December
31, 1999. The average daily VAR for 2000 was $1.6 million, compared to $3.7
million in 1999, primarily due to Avista Energy's restructuring. Changes in
markets inconsistent with historical trends or assumptions used could cause
actual results to exceed predicted limits. Market risks associated with
derivative commodity instruments held for purposes other than trading were not
material at December 31, 2000.
For forward transactions that would settle beyond the immediate eight calendar
quarters, Avista Energy applies other risk measurement techniques, including
price sensitivity stress tests, to assess the future market risk. Volatility in
longer-dated forward markets tends to be significantly less than near-term
markets.
Economic and Load Growth
Avista Utilities expects economic growth to continue in its eastern Washington
and northern Idaho service area. Avista Utilities, along with others in the
service area, is continuing its efforts to facilitate expansion of existing
businesses and attract new businesses to the Inland Northwest. Although
agriculture, mining and lumber were the primary industries for many years, today
health care, education, electronic and other manufacturing, tourism and the
service sectors are becoming increasingly important industries that operate in
Avista Utilities' service area. Avista Utilities also anticipates moderate
economic growth to continue in its Oregon service area.
Avista Utilities anticipates residential and commercial electric load growth to
average approximately 2.6% annually for the next five years, primarily due to
increases in both population and the number of businesses in its service
territory. The number of electric customers is expected to increase and the
average annual usage by residential customers is expected to remain steady. A
Public Utility Regulatory Policies Act of 1978 (PURPA) contract with Avista
Utilities' largest customer expires in 2002. The customer is expected to
self-generate at that time, which will reduce the load to this customer by the
amount Avista Utilities has been purchasing and then reselling to them.
Avista Utilities anticipates natural gas load growth, including transportation
volumes, in its Washington and Idaho service area to average approximately 2.7%
annually for the next five years. The Oregon and South Lake Tahoe, California
service areas are anticipated to realize 3.4% growth annually during that same
period. The anticipated natural gas load growth is primarily due to expected
conversions from electric space and water heating to natural gas, and increases
in both population and the number of businesses in its service territory.
The forward-looking projections set forth above regarding retail sales growth
are based, in part, upon purchased economic forecasts and publicly available
population and demographic studies. The expectations regarding retail sales
growth are also based upon various assumptions including, without limitation,
assumptions relating to weather and economic and competitive conditions,
internal analysis of company-specific data, such as energy consumption patterns
and internal business plans, and an assumption that Avista Utilities will incur
no material loss of retail customers due to self-generation or retail wheeling.
Changes in the underlying assumptions can cause actual experience to vary
significantly from forward-looking projections.
Environmental Issues
Since December 1991, a number of species of fish in the Northwest, including the
Snake River sockeye salmon and fall chinook salmon, the Kootenai River white
sturgeon, the upper Columbia River steelhead, the upper Columbia River spring
chinook salmon and the bull trout have been listed as threatened or endangered
under the Federal Endangered Species Act (ESA). Thus far, measures which have
been adopted and implemented to save the Snake River sockeye salmon and fall
chinook salmon have not directly impacted generation levels at any of Avista
Utilities' hydroelectric dams. Avista Utilities does, however, purchase power
from four projects on the Columbia River that are being directly impacted by
ongoing mitigation measures for salmon and steelhead. The reduction in
generation at these projects is relatively minor, resulting in minimal economic
impact on Avista Utilities at this time. It is currently not possible to
accurately predict the likely economic costs to the Company resulting from all
future actions.
The Company received a new FERC operating license for the Cabinet Gorge and
Noxon Rapids hydroelectric projects on February 23, 2000 that incorporates a
comprehensive settlement agreement reached with 27 signatories. The restoration
of native salmonid fish, in particular bull trout, is a principal focus of the
agreement. Bull trout are native to this area and were listed as "threatened" in
1998 under the ESA. A collaborative bull trout recovery program with the U.S.
Fish and Wildlife Service, Native American tribes and the states of Idaho and
Montana is underway on the lower Clark Fork River. The new FERC license
establishes a plan for bull trout restoration, including annual budget
estimates.
39
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AVISTA CORPORATION
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The Company continues to study the issue of high dissolved gas levels downstream
of Cabinet Gorge during spill periods, as agreed to in the Settlement Agreement
for relicensing of Cabinet Gorge. To date, intensive biological studies in the
lower Clark Fork River and Lake Pend Oreille have documented minimal biological
effects of high dissolved gas levels on free ranging fish. Under the terms of
the Settlement Agreement, the Company will develop an abatement and/or
mitigation strategy in 2002.
See Note 22 of Notes to Financial Statements for additional information.
Lake Coeur d'Alene 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. The disputed bed and banks
comprise approximately the southern one-third of Lake Coeur d'Alene. This
action had been brought by the United States on behalf of the Tribe against the
State of Idaho. While the Company is not a party to this action, which has been
appealed by the State of Idaho to the Ninth Circuit Court of Appeals, the
Company is continuing to evaluate the potential impact of this decision on the
operation of its hydroelectric facilities on the Spokane River, downstream of
Lake Coeur d'Alene. The State of Idaho filed a petition for writ of
certiorari with the United States Supreme Court, which petition was granted.
The Company expects that the matter will be heard and decided by July 2001.
Other
The Board of Directors considers the level of dividends on the Company's common
stock on a continuing basis, taking into account numerous factors including,
without limitation, the Company's results of operations and financial condition,
as well as general economic and competitive conditions. The Company's net income
available for dividends is derived from Avista Utilities' operations.
SAFE HARBOR FOR FORWARD-LOOKING STATEMENTS
The Company is including the following cautionary statement in this Form 10-K to
make applicable and to take advantage of the safe harbor provisions of the
Private Securities Litigation Reform Act of 1995 for any forward-looking
statements made by, or on behalf of, the Company. Forward-looking statements
include statements concerning plans, objectives, goals, strategies, projections
of future events or performance, and underlying assumptions (many of which are
based, in turn, upon further assumptions) and are all statements which are other
than statements of historical fact, including without limitation those that are
identified by the use of the words "anticipates," "estimates," "expects,"
"intends," "plans," "predicts," and similar expressions. From time to time, the
Company may publish or otherwise make available forward-looking statements of
this nature. All such subsequent forward-looking statements, whether written or
oral and whether made by or on behalf of the Company, are also expressly
qualified by these cautionary statements.
Forward-looking statements involve risks and uncertainties which could cause
actual results or outcomes to differ materially from those expressed. The
Company's expectations, beliefs and projections are expressed in good faith and
are believed by the Company to have a reasonable basis, including without
limitation management's examination of historical operating trends, data
contained in the Company's records and other data available from third parties,
but there can be no assurance that the Company's expectations, beliefs or
projections will be achieved or accomplished. Furthermore, any forward-looking
statement speaks only as of the date on which such statement is made, and the
Company undertakes no obligation to update any forward-looking statement or
statements to reflect events or circumstances that occur after the date on which
such statement is made or to reflect the occurrence of unanticipated events. New
factors emerge from time to time, and it is not possible for management to
predict all of such factors, nor can it assess the impact of each such factor on
the Company's business or the extent to which any such factor, or combination of
factors, may cause actual results to differ materially from those contained in
any forward-looking statement.
Avista Utilities' Operations --
In addition to other factors and matters discussed elsewhere herein, some
important factors that could cause actual results or outcomes for Avista
Utilities' operations to differ materially from those discussed in
forward-looking
40
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AVISTA CORPORATION
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statements include prevailing legislative developments, governmental policies
and regulatory actions with respect to allowed rates of return, financings, or
industry and rate structures, weather conditions, wholesale and retail
competition (including but not limited to electric retail wheeling and
transmission cost), availability of economic supplies of natural gas, present or
prospective natural gas distribution or transmission competition (including but
not limited to prices of alternative fuels and system deliverability costs),
recovery of purchased power and purchased gas costs, present or prospective
generation, operations and construction of plant facilities, and acquisition and
disposal of assets or facilities.
Energy Trading and Marketing Operations --
In addition to other factors and matters discussed elsewhere herein, some
important factors that could cause actual results or outcomes for the Energy
Trading and Marketing operations to differ materially from those discussed in
forward-looking statements include further industry restructuring evolving from
federal and/or state legislation, regulatory actions by state utility
commissions, demand for and availability of energy throughout the country,
wholesale competition, availability of economic supplies of natural gas, margins
on purchased power, changes in market factors, the formation of additional
alliances or entities, the availability of economically feasible generating
projects and the availability of funding for new generating assets.
Information, Technology, and Avista Ventures' Operations --
Certain additional important factors which could cause actual results or
outcomes for the remaining subsidiaries' operations to differ materially from
those discussed in forward-looking statements include competition from other
companies and other technologies, obsolescence of technologies, the ability or
inability to reduce costs of the technologies down to economic levels, the
ability to obtain new customers and retain old ones, reliability of customer
orders, business acquisitions, disposal of assets, the availability of funding
from other sources, research and development findings and the availability of
economic expansion or development opportunities.
Factors Common to All Operations --
The business and profitability of the Company are also influenced by, among
other things, economic risks, changes in and compliance with environmental and
safety laws and policies, weather conditions, population growth rates and
demographic patterns, market demand for energy from plants or facilities,
changes in tax rates or policies, unanticipated project delays or changes in
project costs, unanticipated changes in operating expenses or capital
expenditures, labor negotiation or disputes, changes in credit ratings or
capital market conditions, inflation rates, inability of the various
counterparties to meet their obligations with respect to the Company's financial
instruments, changes in accounting principles and/or the application of such
principles to the Company, changes in technology and legal proceedings.
ITEM 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations: Future Outlook: Business Risk and Risk Management."
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Independent Auditor's Report and Financial Statements begin on the next
page.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
41
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AVISTA CORPORATION
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INDEPENDENT AUDITORS' REPORT
Avista Corporation
Spokane, Washington
We have audited the accompanying consolidated balance sheets and statements of
capitalization of Avista Corporation and subsidiaries (the Company) as of
December 31, 2000 and 1999, and the related consolidated statements of income,
stockholders' equity, and cash flows, which include the schedule of information
by business segments, for each of the three years in the period ended December
31, 2000. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of the Company at December 31, 2000
and 1999, and the results of its operations and its cash flows for each of the
three years in the period ended December 31, 2000, in conformity with accounting
principles generally accepted in the United States of America.
/s/ Deloitte & Touche LLP
Seattle, Washington
February 2, 2001
(February 26, 2001, as to Note 22)
42
47
CONSOLIDATED STATEMENTS OF INCOME
Avista Corporation
- -------------------------------------------------------------------------------
For the Years Ended December 31
Thousands of Dollars
2000 1999 1998
------------ ----------- -----------
OPERATING REVENUES .......................................................... $ 7,911,490 $ 7,904,984 $ 3,683,984
------------ ----------- -----------
OPERATING EXPENSES:
Resource costs ........................................................... 7,320,261 7,417,940 3,021,046
Operations and maintenance ............................................... 108,092 155,176 229,620
Administrative and general ............................................... 139,355 127,958 129,771
Depreciation and amortization ............................................ 75,941 76,474 70,547
Taxes other than income taxes ............................................ 54,608 53,157 60,180
Asset impairment and restructuring charges ............................... 9,805 42,922 --
------------ ----------- -----------
Total operating expenses ............................................... 7,708,062 7,873,627 3,511,164
------------ ----------- -----------
INCOME FROM OPERATIONS ...................................................... 203,428 31,357 172,820
------------ ----------- -----------
OTHER INCOME (EXPENSE):
Interest expense ......................................................... (68,723) (65,076) (69,077)
Net gain on subsidiary transactions ...................................... 770 57,531 7,937
Other income (deductions)-net ............................................ 29,665 18,959 9,794
------------ ----------- -----------
Total other income (expense)-net ....................................... (38,288) 11,414 (51,346)
------------ ----------- -----------
INCOME BEFORE INCOME TAXES .................................................. 165,140 42,771 121,474
INCOME TAXES ................................................................ 73,461 16,740 43,335
------------ ----------- -----------
NET INCOME .................................................................. 91,679 26,031 78,139
DEDUCT-Preferred stock dividend requirements ................................ 23,735 21,392 8,399
------------ ----------- -----------
INCOME AVAILABLE FOR COMMON STOCK ........................................... $ 67,944 $ 4,639 $ 69,740
============ =========== ===========
Average common shares outstanding, basic (thousands) ....................... 45,690 38,213 54,604
EARNINGS PER SHARE OF COMMON STOCK, BASIC ................................... $ 1.49 $ 0.12 $ 1.28
EARNINGS PER SHARE OF COMMON STOCK, DILUTED (Note 19) ...................... $ 1.47 $ 0.12 $ 1.28
Dividends paid per common share ............................................. $ 0.48 $ 0.48 $ 1.05
43
48
CONSOLIDATED BALANCE SHEETS
Avista Corporation
- -------------------------------------------------------------------------------
At December 31
Thousands of Dollars
2000 1999
----------- -----------
ASSETS:
CURRENT ASSETS:
Cash and cash equivalents ................................................ $ 194,365 $ 40,041
Temporary cash investments ............................................... 1,058 9,277
Accounts and notes receivable-net ........................................ 861,308 530,774
Energy commodity assets .................................................. 7,956,229 585,913
Materials and supplies, fuel stock and natural gas stored ................ 24,496 28,352
Prepayments and other .................................................... 54,244 21,499
------------ -----------
Total current assets ................................................... 9,091,700 1,215,856
------------ -----------
UTILITY PROPERTY:
Utility plant in service-net ............................................. 2,205,230 2,184,698
Construction work in progress ............................................ 33,535 30,912
------------ -----------
Total .................................................................. 2,238,765 2,215,610
Less: Accumulated depreciation and amortization ......................... 720,453 714,773
------------ -----------
Net utility plant ...................................................... 1,518,312 1,500,837
------------ -----------
OTHER PROPERTY AND INVESTMENTS:
Investment in exchange power-net ......................................... 46,981 54,123
Non-utility properties and investments-net ............................... 219,450 135,426
Energy commodity assets .................................................. 1,367,107 491,799
Other-net ................................................................ 21,885 31,051
----------- -----------
Total other property and investments ................................... 1,655,423 712,399
------------ -----------
DEFERRED CHARGES:
Regulatory assets for deferred income tax ................................ 156,692 166,456
Conservation programs .................................................... 18,528 44,444
Unamortized debt expense ................................................. 27,874 31,122
Other-net ................................................................ 95,395 42,380
------------ -----------
Total deferred charges ................................................. 298,489 284,402
------------ -----------
TOTAL ................................................................ $ 12,563,924 $ 3,713,494
============ ===========
LIABILITIES AND CAPITALIZATION:
CURRENT LIABILITIES:
Accounts payable ......................................................... $ 892,545 $ 522,478
Energy commodity liabilities ............................................. 7,834,007 594,065
Current portion of long-term debt ........................................ 89,000 --
Short-term borrowings .................................................... 163,160 --
Taxes and interest accrued ............................................... 1,971 35,123
Other .................................................................... 144,524 35,313
------------ -----------
Total current liabilities .............................................. 9,125,207 1,186,979
------------ -----------
NON-CURRENT LIABILITIES AND DEFERRED CREDITS:
Non-current liabilities .................................................. 38,975 47,366
Deferred revenue ......................................................... 46,498 132,975
Energy commodity liabilities ............................................. 1,272,374 441,372
Deferred income taxes .................................................... 446,310 377,049
Other deferred credits ................................................... 95,530 11,041
------------ -----------
Total non-current liabilities and deferred credits ..................... 1,899,687 1,009,803
------------ -----------
CAPITALIZATION (See Consolidated Statements of Capitalization) .............. 1,539,030 1,516,712
------------ -----------
COMMITMENTS AND CONTINGENCIES (Notes 10, 13 and 22)
TOTAL ................................................................ $ 12,563,924 $ 3,713,494
============ ===========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
44
49
CONSOLIDATED STATEMENTS OF CAPITALIZATION
Avista Corporation
- -------------------------------------------------------------------------------
At December 31
Thousands of Dollars
2000 1999
------------ -----------
LONG-TERM DEBT:
First Mortgage Bonds:
Secured Medium-Term Notes:
Series A - 625% to 790% due 2002 through 2023 ........................ $ 129,500 $ 139,400
Series B - 650% to 789% due 2001 through 2010 ........................ 74,000 124,000
----------- -----------
Total first mortgage bonds ........................................... 203,500 263,400
----------- -----------
Pollution Control Bonds:
Floating Rate, Colstrip 1999A, due 2032 ................................ 66,700 66,700
Floating Rate, Colstrip 1999B, due 2034 ................................ 17,000 17,000
6% Series due 2023 ..................................................... 4,100 4,100
----------- -----------
Total pollution control bonds ........................................ 87,800 87,800
----------- -----------
Unsecured Medium-Term Notes:
Series A - 794% to 957% due 2001 through 2007 .......................... 13,000 31,000
Series B - 675% to 823% due 2001 through 2023 .......................... 89,000 96,000
Series C - 599% to 802% due 2007 through 2028 .......................... 109,000 109,000
Series D - 800% to 8625% due 2001 through 2003 ......................... 175,000 --
----------- -----------
Total unsecured medium-term notes .................................... 386,000 236,000
----------- -----------
Notes payable (due within one year) to be refinanced ..................... -- 118,500
Other .................................................................... 2,506 9,204
----------- -----------
Total long-term debt ................................................... 679,806 714,904
----------- -----------
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 50,000
----------- -----------
Total company-obligated mandatorily redeemable preferred trust
securities ......................................................... 100,000 110,000
----------- -----------
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
----------- -----------
CONVERTIBLE PREFERRED STOCK:
Not subject to mandatory redemption:
$1240 Convertible Series L; 0 and 1,508,210 shares outstanding ($18280
stated value) ........................................................ -- 263,309
----------- -----------
Total convertible preferred stock .................................... -- 263,309
----------- -----------
COMMON EQUITY:
Common stock, no par value; 200,000,000 shares authorized;
47,208,689 and 35,648,239 shares outstanding ........................... 610,741 318,731
Note receivable from employee stock ownership plan ....................... (7,040) (8,240)
Capital stock expense and other paid in capital .......................... (11,696) (4,347)
Other comprehensive income ............................................... (723) (166)
Retained earnings ........................................................ 132,942 87,521
----------- -----------
Total common equity .................................................... 724,224 393,499
----------- -----------
TOTAL CAPITALIZATION ........................................................ $ 1,539,030 $ 1,516,712
=========== ===========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
45
50
CONSOLIDATED STATEMENTS OF CASH FLOWS
Increase (Decrease) in Cash and Cash Equivalents
Avista Corporation
- -------------------------------------------------------------------------------
For the Years Ended December 31
Thousands of Dollars
2000 1999 1998
------------ ----------- -----------
OPERATING ACTIVITIES:
Net income ............................................................... $ 91,679 $ 26,031 $ 78,139
NON-CASH ITEMS INCLUDED IN NET INCOME:
Depreciation and amortization .......................................... 75,941 76,474 70,547
Provision for deferred income taxes .................................... 79,274 (1,085) 10,402
Allowance for equity funds used during construction .................... (604) (1,040) (1,283)
Power and natural gas cost deferrals and amortizations ................. (67,299) (14,906) (3,512)
Gain on sale of property and subsidiary investments-net ................ (16,506) (57,860) (8,084)
Energy commodity assets and liabilities ................................ (172,918) (9,841) (23,563)
Impairment of assets ................................................... -- 33,622 --
Other-net .............................................................. 13,954 (31,821) 25,334
(Increase) decrease in working capital components:
Sale of customer accounts receivable-net ............................. 35,000 20,000 (15,000)
Receivables and prepaid expense ...................................... (377,285) (140,348) (246,873)
Materials & supplies, fuel stock and natural gas stored .............. 3,857 497 9,524
Payables and other accrued liabilities ............................... 446,184 164,908 246,208
Other ................................................................ (35,081) 46,545 (17,336)
Monetization of contract ................................................. -- -- 143,400
------------ ----------- -----------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES ......................... 76,196 111,176 267,903
------------ ----------- -----------
INVESTING ACTIVITIES:
Construction expenditures (excluding AFUDC-equity funds) ................. (98,680) (87,160) (92,942)
Other capital requirements ............................................... (100,661) (29,451) (14,920)
(Increase) decrease in other noncurrent balance sheet items-net .......... 3,470 (7,712) 27,266
Proceeds from property sales and sale of subsidiary investments .......... 105,228 148,851 16,385
Assets acquired and investments in subsidiaries .......................... (6,223) (51,729) (52,780)
------------ ----------- -----------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES ......................... (96,866) (27,201) (116,991)
------------ ----------- -----------
FINANCING ACTIVITIES:
Increase (decrease) in short-term borrowings ............................. 42,126 110,522 (108,500)
Redemption of preferred trust securities ................................. (10,000) -- --
Proceeds from issuance of long-term debt ................................. 224,000 116,516 84,000
Redemption and maturity of long-term debt ................................ (54,603) (211,514) (14,000)
Redemption of preferred stock ............................................ -- (5,918) (10,000)
Sale (repurchase) of common stock ........................................ 2,625 (81,985) (1,475)
Cash dividends paid ...................................................... (28,304) (39,757) (64,548)
Other-net ................................................................ (850) (4,634) 5,854
------------ ----------- -----------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES ......................... 174,994 (116,770) (108,669)
------------ ----------- -----------
NET INCREASE (DECREASE) IN CASH & CASH EQUIVALENTS .......................... 154,324 (32,795) 42,243
CASH & CASH EQUIVALENTS AT BEGINNING OF PERIOD .............................. 40,041 72,836 30,593
------------ ----------- -----------
CASH & CASH EQUIVALENTS AT END OF PERIOD .................................... $ 194,365 $ 40,041 $ 72,836
============ =========== ===========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the period:
Interest ............................................................... $ 61,774 $ 63,207 $ 64,402
Income taxes ........................................................... 31,404 42,891 40,716
Noncash financing and investing activities:
Series L preferred stock converted to common stock ..................... 271,286 -- --
Property purchased under capitalized leases ............................ -- 2,557 1,209
Net unrealized holding gains (losses) .................................. (475) 201 (2,052)
Notes receivable for sale of investment ................................ 3,500 -- --
Common stock and retained earnings transfer to preferred stock ......... -- -- 276,821
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
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CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Avista Corporation
- -------------------------------------------------------------------------------
For the Years Ended December 31
Thousands of Dollars
Preferred Stock Convertible Preferred Stock
Series K Series L Common Stock
------------------------- ------------------------------ ----------------------------
Shares Amount Shares Amount Shares Amount
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1997 350,000 $35,000 -- $ -- 55,960,360 $ 594,852
- ------------------------------------------------------------------------------------------------------------------------------------
Net income
Conversion of common stock to
convertible preferred stock 1,540,460 269,227 (15,404,595) (211,201)
Stock issued under compensatory plans (102,036) (2,250)
Repayments of note receivable
Foreign currency translation adjustment
Unrealized investment loss-net
Cash dividends paid (common stock)
Cash dividends paid (preferred stock)
ESOP dividend tax savings
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1998 350,000 $35,000 1,540,460 $ 269,227 40,453,729 $ 381,401
- ------------------------------------------------------------------------------------------------------------------------------------
Net income
Repurchase of common stock and
common stock equivalents (32,250) (5,918) (4,788,900) (62,393)
Stock issued under compensatory plans (16,590) (277)
Repayments of note receivable
Foreign currency translation adjustment
Unrealized investment loss-net
Cash dividends paid (common stock)
Cash dividends paid (preferred stock)
ESOP dividend tax savings
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1999 350,000 $35,000 1,508,210 $ 263,309 35,648,239 $ 318,731
- ------------------------------------------------------------------------------------------------------------------------------------
Net income
Conversion of convertible preferred
stock into common stock (1,508,210) (263,309) 11,410,047 289,118
Repurchase of common stock (45,975) (1,488)
Stock issued under compensatory plans
net of tax benefit of $359 70,742 1,192
Employee Investment Plan (401-K) 97,478 2,614
Dividend Reinvestment Plan 28,158 574
Repayments of note receivable
Foreign currency translation adjustment
Unrealized investment loss-net
Cash dividends paid (common stock)
Cash dividends paid (preferred stock)
ESOP dividend tax savings
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2000 350,000 $35,000 -- $ -- 47,208,689 $ 610,741
- ------------------------------------------------------------------------------------------------------------------------------------
Note
Receivable Capital Accumulated
from Employee Stock Expense Other
Stock and Other Comprehensive Retained
Ownership Plan Paid-in Capital Income Earnings Total
- --------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1997 $ (9,750) $ (10,143) $ 2,077 $ 171,776 $ 783,812
- --------------------------------------------------------------------------------------------------------------------------------
Net income 78,139 78,139
Conversion of common stock to
convertible preferred stock 5,967 (64,844) (851)
Stock issued under compensatory plans (419) (2,669)
Repayments of note receivable 455 455
Foreign currency translation adjustment (366) (366)
Unrealized investment loss-net (2,052) (2,052)
Cash dividends paid (common stock) (56,898) (56,898)
Cash dividends paid (preferred stock) (7,639) (7,639)
ESOP dividend tax savings 330 330
- --------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1998 $ (9,295) $ (4,176) $ (341) $ 120,445 $ 792,261
- --------------------------------------------------------------------------------------------------------------------------------
Net income 26,031 26,031
Repurchase of common stock and
common stock equivalents (171) (19,315) (87,797)
Stock issued under compensatory plans (84) (361)
Repayments of note receivable 1,055 1,055
Foreign currency translation adjustment 376 376
Unrealized investment loss-net (201) (201)
Cash dividends paid (common stock) (18,301) (18,301)
Cash dividends paid (preferred stock) (21,402) (21,402)
ESOP dividend tax savings 147 147
- --------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1999 $ (8,240) $ (4,347) $ (166) $ 87,521 $ 691,808
- --------------------------------------------------------------------------------------------------------------------------------
Net income 91,679 91,679
Conversion of convertible preferred
stock into common stock (8,009) (17,868) (68)
Repurchase of common stock (419) (1,907)
Stock issued under compensatory plans -
net of tax benefit of $359 689 101 1,982
Employee Investment Plan (401-K) (29) 2,585
Dividend Reinvestment Plan 574
Repayments of note receivable 1,200 1,200
Foreign currency translation adjustment (82) (82)
Unrealized investment loss-net (475) (475)
Cash dividends paid (common stock) (22,616) (22,616)
Cash dividends paid (preferred stock) (5,600) (5,600)
ESOP dividend tax savings 144 144
- --------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2000 $ (7,040) $ (11,696) $ (723) $ 132,942 $ 759,224
- --------------------------------------------------------------------------------------------------------------------------------
-- -- -- -- --
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SCHEDULE OF INFORMATION BY BUSINESS SEGMENTS
Avista Corporation
- --------------------------------------------------------------------------------
For the Years Ended December 31
Thousands of Dollars
2000 1999 1998
------------ ----------- -----------
OPERATING REVENUES:
Avista Utilities .......................................... $ 1,512,101 $ 1,115,647 $ 1,049,212
Energy Trading and Marketing .............................. 6,531,551 6,695,671 2,408,734
Information and Technology ................................ 11,645 4,851 1,995
Avista Ventures ........................................... 32,937 122,303 231,483
Intersegment eliminations ................................. (176,744) (33,488) (7,440)
------------ ----------- -----------
Total operating revenues ................................ $ 7,911,490 $ 7,904,984 $ 3,683,984
============ =========== ===========
RESOURCE COSTS:
Avista Utilities:
Power purchased ......................................... $ 1,072,475 $ 543,436 $ 470,604
Natural gas purchased for resale ........................ 141,700 101,958 109,182
Fuel for generation ..................................... 69,077 46,368 44,281
Other ................................................... (10,052) 46,053 44,309
Energy Trading and Marketing:
Cost of sales ........................................... 6,223,805 6,713,613 2,360,110
Intersegment eliminations ................................. (176,744) (33,488) (7,440)
------------ ----------- -----------
Total resource costs (excluding non-energy businesses) .. $ 7,320,261 $ 7,417,940 $ 3,021,046
============ =========== ===========
GROSS MARGINS:
Avista Utilities .......................................... $ 238,901 $ 377,832 $ 380,836
Energy Trading and Marketing .............................. 307,746 (17,942) 48,624
------------ ----------- -----------
Total gross margins (excluding non-energy businesses) ... $ 546,647 $ 359,890 $ 429,460
============ =========== ===========
OPERATIONS AND MAINTENANCE EXPENSES:
Avista Utilities .......................................... $ 61,883 $ 56,291 $ 60,847
Energy Trading and Marketing .............................. 249 370 --
Information and Technology ................................ 18,229 7,732 3,902
Avista Ventures ........................................... 27,731 90,783 164,871
------------ ----------- -----------
Total operations and maintenance expenses ............... $ 108,092 $ 155,176 $ 229,620
============ =========== ===========
ADMINISTRATIVE AND GENERAL EXPENSES:
Avista Utilities .......................................... $ 62,111 $ 66,362 $ 69,693
Energy Trading and Marketing .............................. 41,256 31,732 25,201
Information and Technology ................................ 26,772 7,351 2,607
Avista Ventures ........................................... 9,216 22,513 32,270
------------ ----------- -----------
Total administrative and general expenses ............... $ 139,355 $ 127,958 $ 129,771
============ =========== ===========
DEPRECIATION AND AMORTIZATION EXPENSES:
Avista Utilities .......................................... $ 63,972 $ 62,981 $ 59,538
Energy Trading and Marketing .............................. 2,466 3,692 596
Information and Technology ................................ 5,681 2,340 653
Avista Ventures ........................................... 3,822 7,461 9,760
------------ ----------- -----------
Total depreciation and amortization expenses ............ $ 75,941 $ 76,474 $ 70,547
============ =========== ===========
INCOME/(LOSS) FROM OPERATIONS (PRE-TAX):
Avista Utilities .......................................... $ 3,177 $ 142,567 $ 143,153
Energy Trading and Marketing .............................. 250,196 (97,785) 22,826
Information and Technology ................................ (40,084) (13,002) (5,192)
Avista Ventures ........................................... (9,861) (423) 12,033
------------ ----------- -----------
Total income from operations ............................ $ 203,428 $ 31,357 $ 172,820
============ =========== ===========
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2000 1999 1998
------------ ----------- -----------
INCOME AVAILABLE FOR COMMON STOCK:
Avista Utilities ....................................... $ (62,516) $ 38,181 $ 47,898
Energy Trading and Marketing ........................... 161,753 (60,739) 14,116
Information and Technology ............................. (28,408) (8,620) (3,398)
Avista Ventures ........................................ (2,885) 35,817 11,124
------------ ----------- -----------
Total income available for common stock .............. $ 67,944 $ 4,639 $ 69,740
============ =========== ===========
ASSETS:
Avista Utilities ....................................... $ 2,129,614 $ 1,976,716 $ 2,004,935
Energy Trading and Marketing ........................... 10,271,834 1,595,470 955,615
Information and Technology ............................. 59,632 26,379 7,461
Avista Ventures ........................................ 102,844 114,929 285,625
------------ ----------- -----------
Total assets ......................................... $ 12,563,924 $ 3,713,494 $ 3,253,636
============ =========== ===========
CAPITAL EXPENDITURES (excluding AFUDC/AFUCE):
Avista Utilities ....................................... $ 99,807 $ 86,256 $ 92,295
Energy Trading and Marketing ........................... 65,095 3,676 2,357
Information and Technology ............................. 35,555 15,506 4,120
Avista Ventures ........................................ 976 10,171 7,498
------------ ----------- -----------
Total capital expenditures ........................... $ 201,433 $ 115,609 $ 106,270
============ =========== ===========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
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AVISTA CORPORATION
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS
Avista Corporation (Avista Corp. or the Company) operates as an energy,
information and technology company with a regional utility operation and
subsidiary operations located in the Pacific Northwest. The utility portion of
the Company, doing business as Avista Utilities, is subject to state and federal
price regulation. The other businesses are conducted under Avista Capital, which
is the parent company to the Company's subsidiaries.
Regulatory, political, economic and technological changes have brought about the
accelerating transformation of the utility and energy industries, presenting
both opportunities and challenges. The Company's focus is to optimize its
businesses and to adapt its operations accordingly.
The Company's operations are exposed to risks, including legislative and
governmental regulations, the price and supply of purchased power, fuel and
natural gas, recovery of purchased power and purchased natural gas costs,
weather conditions, availability of generation facilities, competition,
technology and availability of funding. In addition, the energy business exposes
the Company to the financial, liquidity, credit and commodity price risks
associated with wholesale sales and purchases.
BASIS OF REPORTING
The financial statements are presented on a consolidated basis and, as such,
include the assets, liabilities, revenues and expenses of the Company and its
wholly owned subsidiaries. All material intercompany transactions have been
eliminated in the consolidation. The accompanying financial statements include
the Company's proportionate share of utility plant and related operations
resulting from its interests in jointly owned plants (See Note 7). The financial
activity of each of the Company's lines of business is reported in the "Schedule
of Information by Business Segments." Such information is an integral part of
these financial statements.
The preparation of the Company's consolidated financial statements in conformity
with accounting principles generally accepted in the United States of America
necessarily requires management to make estimates and assumptions that directly
affect the reported amounts of assets, liabilities, revenues and expenses.
Actual results could differ from estimates.
SYSTEM OF ACCOUNTS
The accounting records of the Company's utility operations are maintained in
accordance with the uniform system of accounts prescribed by the Federal Energy
Regulatory Commission (FERC) and adopted by the appropriate state regulatory
commissions.
REGULATION
The Company is subject to state regulation in Washington, Idaho, Montana, Oregon
and California. The Company is subject to regulation by the FERC with respect to
its wholesale electric transmission rates and the natural gas rates charged for
the release of capacity from the Jackson Prairie Storage Project.
BUSINESS SEGMENTS
The business segment presentation reflects the basis currently used by the
Company's management to analyze performance and determine the allocation of
resources. Avista Utilities' business is managed based on the total regulated
operations. The Energy Trading and Marketing line of business has redirected its
focus to a Western regional effort, but its operations are non-regulated, as
opposed to Avista Utilities' operations. The Information and Technology line of
business reflects the Company's newest businesses with operations related to
internet billing services, fuel cells and telecommunications. The Avista
Ventures line of business reflects the other non-energy operations of various
subsidiaries.
OPERATING REVENUES
The Company accrues estimated unbilled revenues for electric and natural gas
sales and services provided through month-end. Avista Energy follows the
mark-to-market method of accounting for energy contracts entered into for
trading and price risk management purposes. Avista Energy recognizes revenue
based on the change in the market value of outstanding derivative commodity
sales contracts, net of future servicing costs and reserves, in addition to
revenue related to physical and financial contracts that have matured.
50
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AVISTA CORPORATION
- --------------------------------------------------------------------------------
INTERSEGMENT ELIMINATIONS
Intersegment eliminations represent the transactions between Avista Utilities
and Avista Energy for commodities and services.
RESEARCH AND DEVELOPMENT EXPENSES
Company-sponsored research and development expenses related to present and
future products are expensed as incurred. The majority of the Company's research
and development expenses are related to subsidiary businesses. Research and
development expenses totaled approximately $8.1 million, $3.3 million and $1.0
million in 2000, 1999 and 1998, respectively.
OTHER INCOME (DEDUCTIONS) -- NET
Other income (deductions)-net is composed of the following items:
YEARS ENDED DECEMBER 31,
-----------------------------------
2000 1999 1998
-------- ------- -------
(Thousands of Dollars)
Interest income ........................ $ 11,824 $ 3,615 $ 9,560
Capitalized interest (debt) ............ 3,476 1,001 1,592
Gain (loss) on property dispositions ... 20,278 4,071 12
Minority interest ...................... 3,148 2,002 296
Capitalized interest (equity) .......... 604 1,040 1,283
Other .................................. (9,665) 7,230 (2,949)
-------- ------- -------
Total ............................. $ 29,665 $18,959 $ 9,794
======== ======= =======
EARNINGS PER SHARE
Basic EPS is computed by dividing income available to common shareholders by the
weighted average number of common shares outstanding for the period. Diluted EPS
reflects the potential dilution that could occur if dilutive securities, such as
stock options and convertible stock, were exercised or converted into common
stock that then shared in the earnings of the Company. See Note 19 for specific
information about the Company's EPS calculations.
UTILITY PLANT
The cost of additions to utility plant, including an allowance for funds used
during construction and replacements of units of property and betterments, is
capitalized. Costs of depreciable units of property retired plus costs of
removal less salvage are charged to accumulated depreciation.
ALLOWANCE FOR FUNDS USED DURING CONSTRUCTION
The Allowance for Funds Used During Construction (AFUDC) represents the cost of
both the debt and equity funds used to finance utility plant additions during
the construction period. In accordance with the uniform system of accounts
prescribed by regulatory authorities, AFUDC is capitalized as a part of the cost
of utility plant and is credited currently as a noncash item to Other Income
(see Other Income (Deductions)-net above). The Company generally is permitted,
under established regulatory rate practices, to recover the capitalized AFUDC,
and a fair return thereon, through its inclusion in rate base and the provision
for depreciation after the related utility plant has been placed in service.
Cash inflow related to AFUDC does not occur until the related utility plant
investment is placed in service.
The effective AFUDC rate was 10.67% in 2000, 1999 and 1998. The Company's AFUDC
rates do not exceed the maximum allowable rates as determined in accordance with
the requirements of regulatory authorities.
DEPRECIATION
For utility operations, depreciation provisions are estimated by a method of
depreciation accounting utilizing unit rates for hydroelectric plants and
composite rates for other properties. Such rates are designed to provide for
retirements of properties at the expiration of their service lives. The rates
for hydroelectric plants include annuity and interest components, in which the
interest component is 9%. For utility operations, the ratio of depreciation
provisions to average depreciable property was 2.72% in 2000, 2.69% in 1999 and
2.60% in 1998.
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AVISTA CORPORATION
- --------------------------------------------------------------------------------
The average service lives and remaining average service lives, respectively, for
the following broad categories of utility property are: electric thermal
production -- 35 and 16 years; hydroelectric production -- 100 and 78 years;
electric transmission -- 60 and 27 years; electric distribution -- 40 and 30
years; and natural gas distribution property -- 44 and 29 years.
CASH AND CASH EQUIVALENTS
For the purposes of the Consolidated Statements of Cash Flows, the Company
considers all temporary investments with an initial maturity of three months or
less to be cash equivalents.
TEMPORARY INVESTMENTS
Temporary investments consist of marketable equity securities that are
classified as "available for sale." At December 31, 2000 and 1999, unrealized
investment losses totaled $0.7 million and $0.2 million, respectively, net of
taxes, and are reflected as a component of other comprehensive income on the
consolidated Statements of Capitalization. At December 31, 2000 and 1999, the
carrying value of available for sale securities was $1.1 million and $9.3
million, respectively.
INVENTORY
Inventory consists primarily of materials and supplies, fuel stock and natural
gas stored. Inventory is recorded at the lower of cost or market, primarily
using the average cost method.
DEFERRED CHARGES AND CREDITS
The Company prepares its financial statements in accordance with the provisions
of FAS No. 71, "Accounting for the Effects of Certain Types of Regulation." A
regulated enterprise can prepare its financial statements in accordance with FAS
No. 71 only if (i) the enterprise's rates for regulated services are established
by or subject to approval by an independent third-party regulator, (ii) the
regulated rates are designed to recover the enterprise's cost of providing the
regulated services and (iii) in view of demand for the regulated services and
the level of competition, it is reasonable to assume that rates set at levels
that will recover the enterprise's costs can be charged to and collected from
customers. FAS No. 71 requires a cost-based, rate-regulated enterprise to
reflect the impact of regulatory decisions in its financial statements. In
certain circumstances, FAS No. 71 requires that certain costs and/or obligations
(such as incurred costs not currently recovered through rates, but expected to
be so recovered in the future) be reflected in a deferral account in the balance
sheet and not be reflected in the statement of income or loss until matching
revenues are recognized. If at some point in the future the Company determines
that it no longer meets the criteria for continued application of FAS No. 71 to
all or a portion of the Company's regulated operations, the Company could be
required to write off its regulatory assets and could be precluded from the
future deferral in the Consolidated Balance Sheets of costs not recovered
through rates at the time such costs were incurred, even if such costs were
expected to be recovered in the future.
The Company's primary regulatory assets include Investment in Exchange Power,
conservation programs, deferred income taxes, unrecovered purchased gas costs,
deferred power costs, the provision for postretirement benefits and debt
issuance and redemption costs. Those items without a specific line on the
Consolidated Balance Sheets are included in Deferred Charges -- Other-net.
Deferred credits include natural gas deferrals, regulatory liabilities created
when the Centralia plant was sold and the gain on the general office building
sale/leaseback which is being amortized over the life of the lease, and are
included on the Consolidated Balance Sheets as Non-current Liabilities and
Deferred Credits -- Other Deferred Credits.
DEFERRED REVENUES
In December 1998, the Company received cash proceeds of $143.4
million from the monetization of a contract in which the Company assigned and
transferred certain rights under a long-term power sales contract to a funding
trust. The proceeds were recorded as deferred revenue and are being amortized
into revenues over the 16-year period of the long-term sales contract. Pursuant
to the WUTC order in late 2000, the Company was directed to offset the
Washington jurisdiction's share of the deferred revenue by writing down certain
of the Company's assets and liabilities, such as conservation programs and a
PURPA contract buyout. The balance at December 31, 2000 was $40.4 million,
which represents the Idaho jurisdiction's share of the deferred revenue.
POWER COST DEFERRALS
On August 9, 2000, the WUTC approved Avista Utilities' request for deferred
accounting treatment for certain power costs related to increases in short-term
power prices beginning July 1, 2000 and ending June 30, 2001. The specific power
costs deferred include the changes in power costs to Avista Utilities from those
included in base retail rates, related to three power cost components: the net
effect of changes in short-term wholesale market prices on short-term wholesale
purchases and sales; the effect on power costs from changes in the level of
hydroelectric generation; and the net effect on power costs from changes in the
level of thermal generation (including changes in fuel prices). The deferrals
each month are calculated as the difference between the actual costs to Avista
Utilities
52
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AVISTA CORPORATION
- --------------------------------------------------------------------------------
associated with these three power cost components, and the level of costs
included in Avista Utilities' base retail rates. The power costs deferred are
related solely to the operation of Avista Utilities' system resources to serve
its system retail and wholesale load obligations. Deferrals do not include net
losses associated with wholesale trading activity incurred in the first half of
2000. During 2000, Avista Utilities deferred a total of $33.9 million under this
accounting order.
On January 24, 2001, the WUTC approved a modification to the deferral mechanism
to recover power supply costs associated with meeting increased retail and
wholesale system load requirements, effective December 1, 2000. The WUTC also
required Avista Utilities to file a proposal by mid-March 2001 that will address
the prudency of the incurred power costs, the optimization of its owned
resources to the benefit of retail customers, the appropriateness of recovery of
power costs through a deferral mechanism, a proposal for cost of capital offsets
to recognize the shift in risk from shareholders to ratepayers and Avista
Utilities' plan to mitigate the deferred power costs. Avista Utilities also
plans to file for an extension of this deferred accounting treatment through
2001.
POWER AND NATURAL GAS COST ADJUSTMENT PROVISIONS
Avista Utilities has a power cost adjustment mechanism (PCA) in Idaho which
allows it to modify electric rates to recover or rebate a portion of the
difference between actual and allowed net power supply costs. The PCA tracks
changes in hydroelectric generation, secondary prices, related changes in
thermal generation and Public Utility Regulatory Policies Act of 1978 (PURPA)
contracts. Rate changes were triggered when the deferred balance reached $2.2
million. The new trigger is $3.0 million. The following surcharges and rebates
were in effect during 1998 through 2000: a $2.4 million (2.0%) rebate effective
August 1, 2000 scheduled to expire July 31, 2001; a $2.8 million (2.5%) rebate
effective August 1, 1999 which expired July 31, 2000; a $3.1 million (2.7%)
rebate effective February 1, 1999, which expired January 31, 2000; a $2.7
million (2.4%) rebate effective June 1, 1998, which expired May 31, 1999; a $2.6
million (2.3%) rebate effective September 1, 1997, which expired August 31,
1998; and a $2.6 million (2.4%) rebate effective June 1, 1997, which expired May
31, 1998. Avista Utilities has filed for a $5.7 million (4.8%) surcharge to be
effective February 1, 2001 and expire on January 31, 2002. The rebate balances
and the deferred balance are included in the Current Liabilities -- Other and
Non-Current Liabilities and Deferred Credits -- Other Deferred Credits lines,
respectively, on the Consolidated Balance Sheets. The surcharge balance is
included on the Consolidated Balance Sheets in Current Assets -- Accounts and
Notes Receivable-Net.
On January 16, 2001, Avista Utilities filed an application with the IPUC seeking
proposed modifications to the existing PCA mechanism. Due to extremely high
short-term power prices, Avista Utilities is requesting to recover power supply
costs associated with meeting increased retail and wholesale system load
requirements, as well as to recover replacement power costs associated with
possible thermal plant forced outages.
Under established regulatory practices, Avista Utilities is also allowed to
adjust its natural gas rates from time to time to reflect increases or decreases
in the cost of natural gas purchased. Differences between actual natural gas
costs and the natural gas costs allowed in rates are deferred and charged or
credited to expense when regulators approve inclusion of the cost changes in
rates. In Oregon, regulatory provisions include a sharing of benefits and risks
associated with changes in natural gas prices, as well as a sharing of benefits
if certain threshold earnings levels are exceeded. The balance is included on
the Consolidated Balance Sheets as Non-current Liabilities and Deferred Credits
- -- Other Deferred Credits.
INCOME TAXES
The Company and its eligible subsidiaries file consolidated federal income tax
returns. Subsidiaries are charged or credited with the tax effects of their
operations on a stand-alone basis. The Company's federal income tax returns have
been examined with all issues resolved, and all payments made, through the 1996
return.
STOCK-BASED COMPENSATION
The Company measures compensation expense for its stock-based employee
compensation using the intrinsic value method and provides pro forma disclosures
of net income and net earnings per common share as if the fair value method had
been applied in measuring compensation expense.
Equity instruments issued to non-employees for good or services are accounted
for at fair value and are marked to market until service is complete or a
performance commitment date is reached.
OTHER COMPREHENSIVE INCOME
The Company's comprehensive income is comprised of net income, foreign currency
translation adjustments and unrealized gains and losses on investments held as
available-for-sale investments.
53
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AVISTA CORPORATION
- --------------------------------------------------------------------------------
CUMULATIVE FOREIGN CURRENCY TRANSLATION ADJUSTMENT
Assets and liabilities of Avista Energy Canada, Ltd. are denominated in Canadian
dollars and translated to U.S. dollars at exchange rates in effect on the
balance sheet date. Revenues, costs and expenses for the company are translated
using an average rate. Cumulative translation adjustments resulting from this
process are reflected as a component of other comprehensive income in the
shareholders' equity section in the Consolidated Statements of Capitalization.
NEW ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board (FASB) issued FAS No.
133, "Accounting for Derivative Instruments and Hedging Activities", which
requires that all derivative financial instruments (including certain derivative
instruments embedded in other contracts) be recognized as either assets or
liabilities on a company's balance sheet at fair value. The accounting for
changes in the fair value of a derivative depends on the intended use of the
derivative and the resulting designation. In June 2000, the FASB issued FAS No.
138, which amends certain provisions of FAS No. 133 to clarify certain issues.
Avista Utilities buys and sells power under forward contracts that are
considered to be derivatives. Under forward contracts, Avista Utilities commits
to purchase or sell a specified amount of capacity and energy. These contracts
are generally entered into to manage Avista Utilities' loads and resources.
Avista Energy accounts for derivative commodity instruments entered into for
trading purposes using the mark-to-market method of accounting, in compliance
with EITF 98-10, "Accounting for Energy Trading and Risk Management Activities",
with unrealized gains and losses recognized in the income statement.
The Company adopted FAS No. 133, and the corresponding amendments under FAS No.
138, on January 1, 2001. Based on the Company's current interpretations of FAS
No. 133, 138 and the FASB's Derivative Implementation Group (DIG), the Company
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 the Company's contracts for less than one year in duration
(short-term) are subject to booking out, whereby power may not be physically
delivered. The Company does not believe that these short-term contracts can be
classified as normal purchases and sales. The fair value of these specific
short-term contracts will be recorded on the Company's balance sheet as of
January 1, 2001. The Company received accounting orders from the WUTC and the
IPUC requiring the Company to offset any derivative assets or liabilities with a
regulatory asset or liability, thus deferring the unrealized gains or losses.
On January 1, 2001, the Company recorded a derivative asset of $252.3 million
and a derivative liability of $36.1 million. The difference of $216.2 million
has been recorded as a regulatory liability in accordance with the accounting
treatment prescribed by the accounting orders from the WUTC and IPUC discussed
above.
Because of the complexity of derivatives and FAS No. 133, the FASB established
the DIG, as mentioned above. To date, the DIG has issued more than 100
interpretations to provide guidance in applying FAS No. 133. Certain pending
issues and other interpretations that may be issued by the DIG may change the
conclusions that the Company has reached and, as a result, the accounting
treatment and financial statement impact could change in the future.
In September 2000, the 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
will be 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. The Company does not believe there will be a material
financial statement impact resulting from adopting this statement.
In December 1999, the Securities and Exchange Commission released Staff
Accounting Bulletin (SAB) No. 101, "Revenue Recognition in Financial
Statements," to provide guidance on the recognition, presentation and disclosure
of revenues in financial statements. The Company adopted SAB No. 101 in the
fourth quarter of 2000. There was no material impact on the Company's
Consolidated Statements of Income.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to current
statement format. These reclassifications were made for comparative purposes and
have not affected previously reported total net income or common shareholders'
equity.
NOTE 2. ASSET IMPAIRMENT AND RESTRUCTURING CHARGES
In November 1999, Avista Energy began to redirect its focus away from national
energy trading toward a more regionally-based energy marketing and trading
effort in the West. The downsizing plan called for the shutting down
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of all of the operations in Houston and Boston and eliminating approximately 80
positions. The Houston operations were closed during the first quarter of 2000,
and the Boston operations were closed during the second quarter of 2000. In the
fourth quarter of 1999, Avista Energy recorded a charge of $5.9 million, after
taxes, for expenses related to employee terminations. Avista Energy sold its
Eastern power book during the first quarter of 2000 for a $1.0 million after-tax
loss, but did not find a buyer for its natural gas or coal contracts in the
East. The remaining Eastern natural gas contracts, primarily for transportation
and storage, are being managed out of the Spokane office until the last of the
contracts expire in 2002. A former employee scheduled the remaining
coal contracts until the last of the contracts expired at the end of 2000. In
addition to the restructuring charges previously reserved and paid, other
transition costs in the amount of $3.1 million and $1.8 million, both after
taxes, for the first and second quarters of 2000, respectively, were incurred
related to closing the Houston and Boston offices and discontinuing operations
in the East. Minimal transition costs were recorded in the second half of 2000.
In the 1999 Form 10-K, it was announced that Pentzer would also be redirecting
its focus. In the first quarter of 2000, Pentzer recorded a charge of $1.2
million, after taxes, for expenses related to employee terminations, which was
paid during 2000.
NOTE 3. ACCOUNTS RECEIVABLE SALE
In 1997, WWP Receivables Corp. (WWPRC) was incorporated as a wholly owned,
bankruptcy-remote subsidiary of the Company for the purpose of acquiring or
purchasing interests in certain accounts receivable, both billed and unbilled,
of the Company. Subsequently, WWPRC and the Company have entered into an
agreement whereby WWPRC can sell without recourse, on a revolving basis, up to
$80.0 million of those receivables. WWPRC is obligated to pay fees that
approximate the purchaser's cost of issuing commercial paper equal in value to
the interests in receivables sold. On a consolidated basis, the amount of such
fees is included in operating expenses of the Company. At December 31, 2000 and
1999, $80.0 million and $45.0 million, respectively, in receivables had been
sold pursuant to the agreement.
NOTE 4. ENERGY COMMODITY TRADING
The Company's energy-related businesses are exposed to risks relating to changes
in certain commodity prices and counterparty performance. In order to manage the
various risks relating to these exposures, Avista Utilities utilizes electric,
natural gas and related derivative commodity instruments, such as forwards,
futures, swaps and options, and Avista Energy engages in the trading of such
instruments. Avista Utilities and Avista Energy have adopted policies and
procedures to manage the risks, both quantitative and qualitative, inherent in
these activities and have established a comprehensive Risk Management Committee,
separate from the units that create such risk exposure and overseen by the Audit
and Finance Committee of the Company's Board of Directors, to monitor compliance
with the Company's risk management policies and procedures.
AVISTA UTILITIES
Avista Utilities 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 sells any surplus at the best
available price. This process includes hedging transactions.
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. Gains and losses related
to derivative commodity instruments which qualify as hedges are recognized in
the Consolidated Statements of Income when the underlying hedged physical
transaction closes (the deferral method) and are included in the same category
as the hedged item (natural gas purchased or purchased power expense, as the
case may be). At December 31, 2000, the Company had $1.0 million of derivative
commodity instruments outstanding. At December 31, 1999, the Company's
derivative commodity instruments outstanding were immaterial.
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ENERGY TRADING AND MARKETING
Avista Energy purchases natural gas and electricity directly from producers and
other trading companies, and its customers include commercial and industrial
end-users, electric utilities, natural gas distribution companies, and other
trading companies. Avista Energy's marketing and energy risk management services
are provided through the use of a variety of derivative commodity contracts to
purchase or supply natural gas and electric energy at specified delivery points
and at specified future dates. Avista Energy also trades natural gas and
electricity derivative commodity instruments on national exchanges and through
other unregulated exchanges and brokers from whom these commodity derivatives
are available, and therefore experiences net open positions in terms of price,
volume, and specified delivery point.
The open positions expose Avista Energy to the risk that fluctuating market
prices may adversely impact its financial position or results of operations.
However, the net open position is actively managed with strict policies designed
to limit the exposure to market risk and which require daily reporting to
management of potential financial exposure. These policies include statistical
risk tolerance limits using historical price movements to calculate daily
earnings at risk as well as total Value-at-Risk (VAR) measurement.
Derivative commodity instruments sold and purchased by Avista Energy include:
forward contracts, involving physical delivery of an energy commodity; futures
contracts, which involve the buying or selling of natural gas, electricity or
other energy-related commodities at a fixed price; over-the-counter swap
agreements which require Avista Energy to receive or make payments based on the
difference between a specified price and the actual price of the underlying
commodity; and options, which mitigate price risk by providing for the right,
but not the requirement, to buy or sell energy-related commodities at a fixed
price.
Foreign currency risks associated with the fair value of the energy commodity
portfolio are primarily related to Canadian currency exchange rates and are
managed using a variety of financial instruments, including forward rate
agreements.
Avista Energy's trading activities are subject to mark-to-market accounting,
under which changes in the market value of outstanding electric, natural gas and
related derivative commodity instruments are recognized as gains or losses in
the period of change. Market prices are utilized in determining the value of the
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. Gains and losses on electric, natural gas and
related derivative commodity instruments utilized for trading are recognized in
income on a current basis (the mark-to-market method) and are included on the
Consolidated Statements of Income in operating revenues or resource costs, as
appropriate, and on the Consolidated Balance Sheets as current or non-current
energy commodity assets or liabilities. Contracts in a receivable position, as
well as the options held, are reported as assets. Similarly, contracts in a
payable position, as well as options written, are reported as liabilities.
Cashflows are recognized during the period of settlement.
Contract Amounts and Terms Under Avista Energy's derivative instruments, Avista
Energy either (i) as "fixed price payor," is obligated to pay a fixed price or
amount and is entitled to receive the commodity (or currency) or a fixed amount
or (ii) as "fixed price receiver," is entitled to receive a fixed price or
amount and is obligated to deliver the commodity (or currency) or pay a fixed
amount or (iii) as "index price payor," is obligated to pay an indexed price or
amount and is entitled to receive the commodity or a variable amount or (iv) as
"index price receiver," is entitled to receive an indexed price or amount and is
obligated to deliver the commodity or pay a variable amount. The contract or
notional amounts and terms of Avista Energy's derivative commodity investments
outstanding at December 31, 2000 are set forth below (volumes in thousands of
mmBTUs, MWhs and tons, dollars in thousands):
Fixed Price Fixed Price Maximum
Payor Receiver Terms in Years
-------------- -------------- --------------
Energy commodities (volumes)
Natural gas ............. 92,329 77,033 9
Electric ................ 142,709 132,962 16
Coal .................... 10 10 1
Index Price Index Price Maximum
Payor Receiver Terms in Years
-------------- -------------- --------------
Energy commodities (volumes)
Natural gas ............. 674,311 692,794 4
Electric ................ 918 155 4
Market prices are utilized in determining the value of the 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.
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Contract or notional amounts reflect the volume of transactions, but do not
necessarily represent the amounts exchanged by the parties to the derivative
commodity instruments. Accordingly, contract or notional amounts do not
accurately measure Avista Energy's exposure to market or credit risks. The
maximum terms in years detailed above are not indicative of likely future cash
flows as these positions may be offset in the markets at any time in response to
Avista Energy's risk management needs.
Fair Value The fair value of Avista Energy's derivative commodity instruments
outstanding at December 31, 2000, and the average fair value of those
instruments held during the year are set forth below (dollars in thousands):
Fair Value Average Fair Value for the
as of December 31, 2000 year ended December 31, 2000
-------------------------------------------------------- --------------------------------------------------------
Current Long-term Current Long-term Current Long-term Current Long-term
Assets Assets Liabilities Liabilities Assets Assets Liabilities Liabilities
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Natural gas $ 442,655 $ 125,306 $ 432,113 $ 121,342 $ 189,652 $ 61,832 $ 185,421 $ 56,888
Electric 7,512,658 1,241,801 7,401,791 1,151,032 2,952,962 781,731 2,935,918 714,271
Emission
allowances 916 -- 103 -- 4,322 343 3,617 46
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Total $ 7,956,229 $ 1,367,107 $ 7,834,007 $ 1,272,374 $ 3,146,936 $ 843,906 $ 3,124,956 $ 771,205
=========== =========== =========== =========== =========== =========== =========== ===========
The weighted average term of Avista Energy's natural gas and related derivative
commodity instruments as of December 31, 2000 was approximately six months. The
weighted average term of Avista Energy's electric derivative commodity
instruments at December 31, 2000 was approximately six months. The change in the
fair value position of Avista Energy's energy commodity portfolio, net of the
reserves for credit and market risk for the year ended December 31, 2000 was
$176.8 million and is included on the Consolidated Statements of Income in
operating revenues.
MARKET RISK
Avista Utilities and Avista Energy manage, on a portfolio basis, the market
risks inherent in their activities subject to parameters established by the
Company's Risk Management Committee. Market risks are monitored by the Risk
Management Committee to ensure compliance with the Company's stated risk
management policies. Avista Utilities measures exposure to market risk through
daily evaluation of the imbalance between projected loads and resources. Avista
Energy measures the risk in its portfolio on a daily basis utilizing a value-at
risk model and monitors its risk in comparison to established thresholds.
CREDIT RISK
Credit risk relates to the risk of loss that Avista Utilities and/or Avista
Energy would incur as a result of non-performance by counterparties of their
contractual obligations to deliver energy and make financial settlements. Credit
risk includes not only the risk that a counterparty may default due to
circumstances relating directly to it, but also the risk that a counterparty may
default due to circumstances which relate to other market participants which
have a direct or indirect relationship with such counterparty. Avista Utilities
and Avista Energy seek to mitigate credit risk by applying specific eligibility
criteria to existing and prospective counterparties and by actively monitoring
current credit exposures. However, despite mitigation efforts, defaults by
counterparties occur from time to time.
Credit risk also involves the exposure that counterparties perceive related to
performance by Avista Utilities and Avista Energy to perform deliveries and
settlement of energy resource transactions. These counterparties seek assurance
of performance in the form of letters of credit, prepayment or cash deposits,
and, in the case of Avista Energy, parent company performance guaranties. In
periods of price volatility, the level of exposure can change significantly,
with the result that sudden and significant demands may be made against the
Company's capital resource reserves (credit facilities and cash).
OTHER OPERATING RISKS
In addition to commodity price risk, Avista Utilities' commodity positions are
also subject to operational and event risks including, among others, increases
in load demand, transmission or transport disruptions, fuel quality
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specifications and forced outages at generating plants. Some of these factors
have been addressed in the recent changes to the Washington deferred power
accounting adjustment and the Idaho PCA.
NOTE 5. ENERGY TRADING AND MARKETING EQUITY INVESTMENT
Effective November 30, 1998, Avista Energy sold its 50% ownership interest in
Howard/Avista Energy LLC to H&H Star Energy, Inc. for $25 million. Avista
Energy's initial equity investment in Howard/Avista Energy, LLC was $25 million
in August 1997. Dividends of $0.7 million were received from Howard/Avista
Energy, LLC in 1998. Avista Energy's pre-tax equity in earnings of Howard/Avista
Energy LLC was $(1.0) million for the eleven months ended November 30, 1998.
NOTE 6. PROPERTY, PLANT AND EQUIPMENT
The year-end balances of the major classifications of property, plant and
equipment are detailed in the following table (thousands of dollars):
AT DECEMBER 31,
--------------------------
2000 1999
---------- ----------
Avista Utilities:
Electric production ..................... $ 672,070 $ 720,409
Electric transmission ................... 280,271 272,299
Electric distribution ................... 652,966 622,974
CWIP and other .......................... 95,219 85,648
---------- ----------
Electric total ....................... 1,700,526 1,701,330
---------- ----------
Natural gas underground storage ......... 18,687 18,418
Natural gas transmission ................ 2,674 3,194
Natural gas distribution ................ 396,100 372,208
CWIP and other .......................... 45,884 49,259
---------- ----------
Natural gas total .................... 463,345 443,079
---------- ----------
Common plant (including CWIP) ........... 74,894 71,201
---------- ----------
Total Avista Utilities .................... 2,238,765 2,215,610
Energy Trading and Marketing .............. 68,544 8,304
Information and Technology ................ 49,242 21,613
Avista Ventures ........................... 23,842 24,027
---------- ----------
Total ..................................... $2,380,393 $2,269,554
========== ==========
Property, plant, and equipment under capital leases at Avista Capital's
subsidiaries totaled $12.7 million and $11.1 million and the associated
accumulated depreciation totaled $6.8 million and $3.8 million in 2000 and 1999,
respectively.
NOTE 7. JOINTLY OWNED ELECTRIC FACILITIES
The Company has an investment in a jointly owned thermal generating plant. The
Company provides financing for its ownership in the project. The Company's share
of related operating and maintenance expenses for plant in service is included
in corresponding accounts in the Consolidated Statements of Income. The
following table indicates the Company's percentage ownership and the extent of
the Company's investment in the plant at December 31, 2000:
COMPANY'S CURRENT SHARE OF
----------------------------------------------------------------------
KW of Construction
Installed Fuel Ownership Plant in Accumulated Net Plant Work in
Project Capacity Source (%) Service Depreciation In Service Progress
- --------- -------- ------ ----------- -------- ------------ ---------- -------------
(Thousands of Dollars)
Colstrip 3 & 4........ 1,556,000 Coal 15% $311,651 $140,295 $171,356 $ --
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NOTE 8. PENSION PLANS AND OTHER POSTRETIREMENT BENEFIT PLANS
The Company has a pension plan covering substantially all of its regular
full-time employees. Certain of the Company's subsidiaries also participate in
this plan. Individual benefits under this plan are based upon years of service
and the employee's average compensation as specified in the Plan. The Company's
funding policy is to contribute annually an amount equal to the net periodic
pension cost, provided that such contributions are not less than the minimum
amounts required to be funded under the Employee Retirement Income Security Act,
nor more than the maximum amounts which are currently deductible for tax
purposes. Pension fund assets are invested primarily in marketable debt and
equity securities. The Company also has other plans that cover the executive
officers and key managers.
The Company provides certain health care and life insurance benefits for
substantially all of its retired employees. The Company accrues the estimated
cost of postretirement benefit payments during the years that employees provide
services. The Company elected to amortize this obligation of approximately $34.5
million over a period of twenty years, beginning in 1993.
The following table sets forth the pension and health care plan disclosures:
PENSION BENEFITS OTHER BENEFITS
-------------------------- ------------------------
2000 1999 2000 1999
--------- --------- -------- --------
(Thousands of Dollars)
CHANGE IN BENEFIT OBLIGATION
Benefit obligation at beginning of year $ 162,097 $ 178,589 $ 30,637 $ 32,345
Service cost 5,347 5,951 601 696
Interest cost 12,711 11,915 2,407 2,178
Amendments -- (6,463) -- --
Actuarial (gain)/loss 7,966 (14,679) 1,580 (2,377)
Benefits paid (11,860) (12,109) (2,427) (2,205)
Expenses paid (970) (1,107) (37) --
--------- --------- -------- --------
Benefit obligation at end of year $ 175,291 $ 162,097 $ 32,761 $ 30,637
========= ========= ======== ========
CHANGE IN PLAN ASSETS
Fair value of plan assets
at beginning of year $ 185,564 $ 178,879 $ 15,808 $ 12,459
Actual return on plan assets (1,005) 19,902 (784) 3,228
Employer contributions 3,304 -- 1,182 809
Benefits paid (11,860) (12,109) (973) (688)
Expenses paid (970) (1,107) (37) --
--------- --------- -------- --------
Fair value of plan assets at end of year $ 175,033 $ 185,565 $ 15,196 $ 15,808
========= ========= ======== ========
Funded status $ (257) $ 23,467 $(17,566) $(14,829)
Unrecognized net actuarial gain (12,595) (38,667) (5,960) (9,997)
Unrecognized prior service cost 10,679 11,651 -- --
Unrecognized net transition
obligation/(asset) (4,843) (5,929) 18,399 19,933
--------- --------- -------- --------
Accrued benefit cost $ (7,016) $ (9,478) $ (5,127) $ (4,893)
========= ========= ======== ========
ASSUMPTIONS AS OF DECEMBER 31
Discount rate 7.75% 6.75% 7.75% 6.75%
Expected return on plan assets 9.00% 9.00% 9.00% 9.00%
Rate of compensation increase 5.00% 4.00%
Medical cost trend -- initial 5.00% 5.00%
Medical cost trend -- ultimate 6.00% 5.00%
Year for ultimate medical cost trend 2000 1999
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PENSION BENEFITS OTHER BENEFITS
-------------------------------------- --------------------------------------
2000 1999 1998 2000 1999 1998
-------- -------- -------- -------- -------- --------
(Thousands of Dollars)
COMPONENTS OF NET PERIODIC BENEFIT COST
Service cost $ 5,347 $ 5,951 $ 4,982 $ 600 $ 696 $ 585
Interest cost 12,711 11,915 11,247 2,407 2,178 2,100
Expected return on plan assets (16,243) (15,681) (14,768) (1,372) (1,075) (953)
Transition (asset)/obligation recognition (1,086) (1,086) (1,086) 1,534 1,534 1,533
Amortization of prior service cost 971 1,341 1,654 -- -- --
Net gain recognition (858) -- (562) (299) (159) (326)
-------- -------- -------- -------- -------- --------
Net periodic benefit cost $ 842 $ 2,440 $ 1,467 $ 2,870 $ 3,174 $ 2,939
======== ======== ======== ======== ======== ========
Assumed health cost trend rates have a significant effect on the amounts
reported for the health care plans. A one-percentage-point increase in the
assumed health care cost trend rate for each year would increase the accumulated
postretirement benefit obligation as of December 31, 2000 by approximately $2.5
million and the service and interest cost by approximately $0.2 million. A
one-percentage-point decrease in the assumed health care cost trend rate for
each year would decrease the accumulated postretirement benefit obligation as of
December 31, 2000 by approximately $2.3 million and the service and interest
cost by approximately $0.2 million.
The Company also sponsors an employee savings plan that covers substantially all
employees. Employer matching contributions of $3.3 million, $3.4 million, $2.8
million were expensed in 2000, 1999 and 1998, respectively.
NOTE 9. ACCOUNTING FOR INCOME TAXES
As of December 31, 2000 and 1999, the Company had recorded net regulatory assets
of $156.7 million and $166.5 million, respectively, related to the probable
recovery of FAS No. 109, "Accounting for Income Taxes," deferred tax liabilities
from customers through future rates. Such regulatory assets will be adjusted by
amounts recovered through rates.
Deferred income taxes reflect the net tax effects of (a) temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes, and (b) tax credit
carryforwards. The net deferred federal income tax liability consists of the
following (thousands of dollars):
AT DECEMBER 31,
----------------------
2000 1999
-------- --------
Deferred tax assets:
Reserves not currently deductible $ 31,696 $ 10,747
Contributions in aid of construction 8,543 7,878
Centralia sale regulatory liability 9,650 --
Centralia Trust -- 2,897
Gain on sale of office building 1,007 1,098
Other 24,360 14,430
-------- --------
Total deferred tax assets 75,256 37,050
-------- --------
Deferred tax liabilities:
Differences between book and tax bases
of utility plant 411,560 383,729
Loss on reacquired debt 4,872 5,357
Energy commodity gains 85,263 16,871
Other 19,871 8,142
-------- --------
Total deferred tax liabilities 521,566 414,099
-------- --------
Net deferred tax liability $446,310 $377,049
======== ========
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A reconciliation of federal income taxes derived from statutory tax rates
applied to income from continuing operations and federal income tax as set forth
in the accompanying Consolidated Statements of Income and Retained Earnings is
as follows:
FOR THE YEARS ENDED DECEMBER 31,
----------------------------------------
2000 1999 1998
-------- -------- --------
(Thousands of Dollars)
Computed federal income taxes at statutory rate ......... $ 57,450 $ 14,970 $ 42,516
Increase (decrease) in tax resulting from:
Accelerated tax depreciation ........................ 4,835 1,869 1,431
Prior year audit adjustments ........................ 72 (1,642) (1,526)
Other ............................................... 7,392 3,687 (2,343)
-------- -------- --------
Total federal income tax expense* ....................... $ 69,749 $ 18,884 $ 40,078
======== ======== ========
INCOME TAX EXPENSE CONSISTS OF THE FOLLOWING:
Federal taxes currently provided ........................ $(12,088) $ 6,974 $ 20,094
Deferred income taxes ................................... 81,837 11,910 19,984
-------- -------- --------
Total federal income tax expense ........................ 69,749 18,884 40,078
State income tax expense ................................ 3,712 (2,144) 3,257
-------- -------- --------
Federal and state income taxes .......................... $ 73,461 $ 16,740 $ 43,335
======== ======== ========
*Federal Income Tax Expense:
Avista Utilities ................................... $ (1,789) $ 34,757 $ 28,582
Energy Trading and Marketing ....................... 91,353 (32,680) 7,789
Information and Technology ......................... (13,675) (3,383) (2,010)
Avista Ventures .................................... (6,140) 20,190 5,717
-------- -------- --------
Total Federal Income Tax Expense ........................ $ 69,749 $ 18,884 $ 40,078
======== ======== ========
Federal statutory rate .................................. 35% 35% 35%
NOTE 10. LONG-TERM PURCHASED POWER CONTRACTS WITH REQUIRED MINIMUM PAYMENTS
Under fixed contracts with Public Utility Districts (PUD), the Company has
agreed to purchase portions of the output of certain generating facilities.
Although the Company has no investment in such facilities, these contracts
provide that the Company pay certain minimum amounts (which are based at least
in part on the debt service requirements of the supplier) whether or not the
facility is operating. The cost of power obtained under the contracts, including
payments made when a facility is not operating, is included in operations and
maintenance expense in the Consolidated Statements of Income. Information as of
December 31, 2000, pertaining to these contracts is summarized in the following
table:
COMPANY'S CURRENT SHARE OF
--------------------------------------------------------------------------------
Contract
Debt Revenue Expira-
Kilowatt Annual Service Bonds tion
Output Capability Costs(1) Costs(2) Outstanding Date
----------- ----------- ----------- ----------- ----------- -----------
(Thousands of Dollars)
PUD CONTRACTS:
Chelan County PUD:
Rocky Reach Project ..... 2.9% 37,000 $ 1,742 $ 1,218 $ 6,196 2011
Grant County PUD:
Priest Rapids Project ... 6.1 55,000 1,799 936 10,088 2005
Wanapum Project ......... 8.2 75,000 2,917 1,829 14,732 2009
Douglas County PUD:
Wells Project ........... 3.5 30,000 1,042 591 6,193 2018
----------- ----------- ----------- -----------
Totals .......... 197,000 $ 7,500 $ 4,574 $ 37,209
=========== =========== =========== ===========
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(1) The annual costs will change in proportion to the percentage of output
allocated to the Company in a particular year. Amounts represent the
operating costs for the year 2000.
(2) Included in annual costs.
Actual expenses for payments made under the above contracts for the years 2000,
1999 and 1998, were $7.5 million, $6.4 million and $6.2 million, respectively.
The estimated aggregate amounts of required minimum payments (the Company's
share of debt service costs) under the above contracts for the next five years
are $3.8 million in 2001, $3.9 million in 2002, $4.0 million in 2003, $3.6
million in 2004 and $3.6 million in 2005 (minimum payments thereafter are
dependent on then market conditions). In addition, the Company will be required
to pay its proportionate share of the variable operating expenses of these
projects.
NOTE 11. LONG-TERM DEBT
The annual sinking fund requirements and maturities for the next five years for
long-term debt outstanding (excluding subsidiary debt) at December 31, 2000 are
as follows:
YEAR ENDING SINKING FUND
DECEMBER 31 MATURITIES REQUIREMENTS TOTAL
----------- ---------- ------------ -------
(Thousands of Dollars)
2001.............. $ 89,000 $2,185 $ 91,185
2002.............. 50,000 2,035 52,035
2003.............. 205,000 1,635 206,635
2004.............. 30,000 1,485 31,485
2005.............. 29,500 1,485 30,985
The sinking fund requirements may be met by certification of property additions
at the rate of 167% of requirements. All of the utility plant is subject to the
lien of the Mortgage and Deed of Trust securing outstanding First Mortgage
Bonds.
In September 1999, $83.7 million of Pollution Control Revenue Refunding Bonds
(Avista Corporation Colstrip Project), Series 1999A due 2032 and Series 1999B
due 2034 were issued by the City of Forsyth, Montana. The proceeds of the bonds
were utilized to refund the $66.7 million of 7 1/8% First Mortgage Bonds due
2013 and the $17.0 million of 7 2/5% First Mortgage Bonds due 2016. The Series
1999A and Series 1999B Bonds are backed by an insurance policy issued by AMBAC
Assurance Corporation and bear interest on a floating rate basis that is reset
periodically. The interest rate during 2000 ranged from 3.60% to 4.43%. At
December 31, 2000, the rate was 4.43%.
In 2000, the Company issued a total of $224.0 million of Unsecured MTNs, Series
D at rates of 8.000% and 8.625% due in 2001 and 2003. A total of $44.9 million
of Secured MTNs matured during 2000, with rates between 6.13% and 8.20%. In
1999, $25.0 million of Unsecured Medium-Term Notes (MTNs) were issued, while
$98.1 million of Secured MTNs and $26.5 million of Unsecured MTNs matured or
were redeemed. As of December 31, 2000, the Company had remaining authorization
to issue up to $317.0 million of Unsecured MTNs.
At December 31, 2000, the Company had $163.2 million in outstanding balances
under borrowing arrangements and commercial paper. See Note 12 for details of
credit agreements.
Included in other long-term debt are the following items related to subsidiary
operations (thousands of dollars):
OUTSTANDING AT DECEMBER 31,
---------------------------
2000 1999
------- -------
Notes payable ............................ $ 642 $ 9,598
Capital lease obligations ................ 2,877 6,457
------- -------
Subsidiary total debt ................. 3,519 16,055
Less: current portion .................... 901 6,147
------- -------
Subsidiary net long-term debt ......... $ 2,618 $ 9,908
======= =======
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NOTE 12. BANK BORROWINGS
At December 31, 2000, the Company maintained lines of credit with various banks
under two separate credit agreements. The two lines of credit total $230
million, and both expire on June 26, 2001. Avista Corp. has pledged its shares
of common stock in Avista Capital as security for these agreements. The Company
pays commitment fees of up to 0.2% per annum on the average daily unused portion
of each credit agreement, and utilization fees of up to 0.5%.
In addition, the Company has a $50 million regional commercial paper program
that is backed by the committed lines of credit. During 2000, under various
agreements with banks, the Company could also have up to $100.0 million in loans
outstanding at any one time, with the loans available at the banks' discretion.
These arrangements provided, if funds were made available, for fixed-term loans
for up to 180 days at a fixed rate of interest. None of these agreements were in
place at December 31, 2000.
Balances and interest rates of bank borrowings under these arrangements were as
follows:
YEARS ENDED DECEMBER 31,
------------------------
2000 1999
-------- --------
(Thousands of Dollars)
BALANCE OUTSTANDING AT END OF PERIOD:
Fixed-term loans ............................ $ -- $ 33,500
Commercial paper ............................ 11,160 10,000
Revolving credit agreement .................. 152,000 75,000
MAXIMUM BALANCE DURING PERIOD:
Fixed-term loans ............................ $ 80,000 $ 93,500
Commercial paper ............................ 36,900 10,000
Revolving credit agreement .................. 185,000 75,000
AVERAGE DAILY BALANCE DURING PERIOD:
Fixed-term loans ............................ $ 19,538 $ 29,110
Commercial paper ............................ 16,833 2,604
Revolving credit agreement .................. 84,255 23,767
AVERAGE ANNUAL INTEREST RATE DURING PERIOD:
Fixed-term loans ............................ 6.70% 5.48%
Commercial paper ............................ 6.82 5.89
Revolving credit agreement .................. 7.26 5.87
AVERAGE ANNUAL INTEREST RATE AT END OF PERIOD:
Fixed-term loans ............................ --% 6.56%
Commercial paper ............................ 7.63 6.70
Revolving credit agreement .................. 7.55 6.71
Avista Energy and its subsidiary, Avista Energy Canada, Ltd., as co-borrowers,
have a credit agreement with two commercial banks in the aggregate amount of
$110 million, decreasing periodically to $70 million at the end of the
agreement, and expiring April 30, 2001. The credit agreement may be terminated
by the banks at any time and all extensions of credit under the agreement are
payable upon demand, in either case at the banks' sole discretion. The agreement
also provides, on an uncommitted basis, for the issuance of letters of credit to
secure contractual obligations to counterparties. The facility is guaranteed by
Avista Capital and is secured by substantially all of Avista Energy's assets.
The maximum amount of credit extended by the banks for cash advances is $30
million, with availability of up to $110 million (less the amount of outstanding
cash advances, if any) for the issuance of letters of credit. At December 31,
2000 and 1999, there were no cash advances (demand notes payable) outstanding.
Letters of credit outstanding under the facility totaled approximately $71.5
million and $75.8 million at December 31, 2000 and 1999, respectively.
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NOTE 13. LEASES
The Company has entered into several lease arrangements involving various
assets, with minimum terms ranging from one to eleven years and expiration dates
from 2001 to 2011. Certain of the lease arrangements require the Company, upon
the occurrence of specified events, to purchase the leased assets for varying
amounts over the term of the lease. The Company's management believes that the
likelihood of the occurrence of the specified events under which the Company
could be required to purchase the property is remote. Rent expense for the years
ended December 31, 2000, 1999 and 1998 was $16.2 million, $18.7 million and
$17.6 million, respectively. Future minimum lease payments (in thousands of
dollars) required under operating leases that have initial or remaining
noncancelable lease terms in excess of one year as of December 31, 2000 are
estimated as follows:
Year ending December 31:
2001 $ 5,616
2002 5,626
2003 5,496
2004 4,974
2005 3,543
Later years 16,109
-------
Total minimum payments required $41,364
=======
The Company also has various other cancelable operating leases, which are
charged to operating expense, consisting of the Rathdrum combustion turbines,
the Company airplane and a large number of small, relatively short-term,
renewable agreements for various items, such as office equipment and office
space.
The payments under the Avista Capital subsidiaries' capital leases for the next
four years are $1.8 million in 2001, $1.2 million in 2002, $0.5 million in 2003
and $0.2 million in 2004. At December 31, 2000, there were no capital leases at
any Avista Capital subsidiaries that extended past 2004.
NOTE 14. PREFERRED STOCK
CUMULATIVE PREFERRED STOCK NOT SUBJECT TO MANDATORY REDEMPTION:
In December 1998, as part of a dividend restructuring plan, the Company issued
1,540,460 shares of its $12.40 Convertible Preferred Stock, Series L (Series L
Preferred Stock). The Company repurchased the equivalent of 32,250 shares of the
Series L Preferred Stock in 1999 and converted all remaining outstanding shares
to common stock in February 2000. See Note 15 for additional information.
CUMULATIVE PREFERRED STOCK SUBJECT TO MANDATORY REDEMPTION:
Redemption requirements:
$6.95, Series K - On September 15, 2002, 2003, 2004, 2005 and 2006, the
Company must redeem 17,500 shares at $100 per share plus accumulated
dividends through a mandatory sinking fund. Remaining shares must be
redeemed on September 15, 2007. The Company has the right to redeem an
additional 17,500 shares on each September 15 redemption date.
There are $7.0 million in mandatory redemption requirements during the 2001-2005
period.
NOTE 15. CONVERTIBLE PREFERRED STOCK
In December 1998, as part of a dividend restructuring plan, the Company issued
1,540,460 shares of its $12.40 Convertible Preferred Stock, Series L (Series L
Preferred Stock), in exchange for 15,404,595 shares of common stock, on the
basis of a one-tenth interest in one share of preferred stock for each share of
common stock. The Series L Preferred Stock had a liquidation preference of
$182.8125 per share.
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During 1999, the Company repurchased the equivalent of 32,250 shares of the
Series L Preferred Stock. On February 16, 2000, the Company exercised its option
to convert all the remaining outstanding shares of Series L Preferred Stock back
into common stock. One share of Series L Preferred Stock equaled 10 depositary
shares, also known as RECONS (Return-Enhanced Convertible Securities). The
RECONS were also converted into common stock on the same conversion date.
On the conversion date, each of the RECONS was converted into the following:
0.7205 shares of common stock, representing the optional conversion price; plus
0.0361 shares of common stock, representing the optional conversion premium;
plus the right to receive $0.21 in cash, representing an amount equivalent to
accumulated and unpaid dividends up until, but excluding, the conversion date.
Cash payments were made in lieu of fractional shares.
NOTE 16. COMPANY-OBLIGATED MANDATORILY REDEEMABLE PREFERRED TRUST SECURITIES
In 1997, Avista Capital I, a business trust, issued to the public $60,000,000 of
Preferred Trust Securities having a distribution rate of 7 7/8%. Concurrent with
the issuance of the Preferred Trust Securities, the Trust issued $1,855,675 of
Common Trust Securities to the Company. The sole assets of the Trust are the
Company's 7 7/8% Junior Subordinated Deferrable Interest Debentures, Series A,
with a principal amount of $61,855,675. These debt securities may be redeemed at
the Company's option on or after January 15, 2002 and mature January 15, 2037.
In 1997, Avista Capital II, a business trust, issued to the public $50,000,000
of Preferred Trust Securities having a floating distribution rate of LIBOR plus
0.875%, calculated and reset quarterly. The distribution rate paid during 2000
ranged from 6.976% to 7.715%. At December 31, 2000, the distribution rate was
7.61125%. Concurrent with the issuance of the Preferred Trust Securities, the
Trust issued $1,547,000 of Common Trust Securities to the Company. The sole
assets of the Trust are the Company's Floating Rate Junior Subordinated
Deferrable Interest Debentures, Series B, with a principal amount of
$51,547,000. These debt securities may be redeemed at the Company's option on or
after June 1, 2007 and mature June 1, 2037. On December 18, 2000, the Company
purchased $10.0 million of these Preferred Trust Securities.
The Company has guaranteed the payment of distributions on, and redemption price
and liquidation amount in respect of, the Preferred Trust Securities to the
extent that the Trust has funds available for such payment from the debt
securities. Upon maturity or prior redemption of such debt securities, the Trust
Securities will be mandatorily redeemed. The Company's Consolidated Statements
of Capitalization reflect only the $60 million and $40 million of Preferred
Trust Securities, accordingly all intercompany transactions have been
eliminated.
NOTE 17. FAIR VALUE OF FINANCIAL SECURITIES
The fair value of the Company's long-term debt (excluding notes payable and
other) at December 31, 2000 and 1999 is estimated to be $772.5 million, or 101%
of the carrying value and $545.8 million, or 93% of the carrying value,
respectively. The fair value of the Company's mandatorily redeemable preferred
stock at December 31, 2000 and 1999 is estimated to be $17.5 million, or 50% of
the carrying value and $35.1 million, or 100% of the carrying value,
respectively. The fair value of the Company's preferred trust securities at
December 31, 2000 and 1999 is estimated to be $79.2 million, or 79% of the
carrying value and $94.3 million, or 86% of the carrying value, respectively.
These estimates are all based on available market information. The fair value of
the Company's convertible preferred securities at December 31, 1999 was
estimated to be $230.0 million, or 87%, of the carrying value. This valuation
was based on the closing price of the securities on December 31, 1999. No
convertible preferred securities were outstanding at December 31, 2000.
NOTE 18. COMMON STOCK
In April 1990, the Company sold 1,000,000 shares of its common stock to the
Trustee of the Investment and Employee Stock Ownership Plan for Employees of the
Company (Plan) for the benefit of the participants and beneficiaries of the
Plan. In payment for the shares of Common Stock, the Trustee issued a promissory
note payable to the Company in the amount of $14,125,000. Dividends paid on the
stock held by the Trustee, plus Company
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contributions to the Plan, if any, are used by the Trustee to make interest and
principal payments on the promissory note. The balance of the promissory note
receivable from the Trustee ($7.0 million at December 31, 2000) is reflected as
a reduction to common equity. The shares of Common Stock are allocated to the
accounts of participants in the Plan as the note is repaid. During 2000, the
cost recorded for the Plan was $7.0 million. Interest on the note payable to the
Company, cash and stock contributions to the Plan and dividends on the shares
held by the Trustee were $0.7 million, $1.8 million and $0.2 million,
respectively.
In May 1999, the Company's Board of Directors authorized a common stock
repurchase program in which the Company may repurchase in the open market or
through privately negotiated transactions up to an aggregate of 10 percent of
its common stock and common stock equivalents over the next two years. The
repurchased shares return to the status of authorized but unissued shares. As of
December 31, 2000, the Company had repurchased approximately 4.8 million common
shares and 322,500 shares of Return-Enhanced Convertible Securities (which was
equivalent to 32,250 shares of Convertible Preferred Stock, Series L). The
combined repurchases of these two securities represent 9% of outstanding common
stock and common stock equivalents.
In November 1999, the Company adopted a shareholder rights plan pursuant to
which holders of Common Stock outstanding on February 15, 1999, or issued
thereafter, have been granted one preferred share purchase right (Right) on each
outstanding share of Common Stock. Each Right, initially evidenced by and traded
with the shares of Common Stock, entitles the registered holder to purchase one
one-hundredth of a share of Preferred Stock of the Company, without par value,
at a purchase price of $70, subject to certain adjustments, regulatory approval
and other specified conditions. The Rights will be exercisable only if a person
or group acquires 10% or more of the outstanding shares of Common Stock or
commences a tender or exchange offer, the consummation of which would result in
the beneficial ownership by a person or group of 10% or more of the outstanding
shares of Common Stock. Upon any such acquisition, each Right will entitle its
holder to purchase, at the purchase price, that number of shares of Common Stock
or Preferred Stock of the Company (or, in the case of a merger of the Company
into another person or group, common stock of the acquiring person) which has a
market value at that time equal to twice the purchase price. In no event will
the Rights be exercisable by a person which has acquired 10% or more of the
Company's Common Stock. The Rights may be redeemed, at a redemption price of
$0.01 per Right, by the Board of Directors of the Company at any time until any
person or group has acquired 10% or more of the Common Stock. The Rights will
expire on March 31, 2009. This plan replaced a similar shareholder rights plan
that expired in February 2000.
The Company has a Dividend Reinvestment and Stock Purchase Plan under which the
Company's stockholders may automatically reinvest their dividends and make
optional cash payments for the purchase of the Company's Common Stock at current
market value.
In March 2000, the Company began issuing new shares of common stock to the
Employee Investment Plan rather than having the Plan purchasing shares of common
stock on the open market. In the fourth quarter of 2000, the Company also began
issuing new shares of common stock for the Dividend Reinvestment and Stock
Purchase Plan. Through December 31, 2000, a total of 125,636 new shares of
common stock were issued to both plans.
NOTE 19. EARNINGS PER SHARE
On February 16, 2000, all outstanding shares of Series L Preferred Stock were
converted into 11,410,047 shares of common stock. The weighted-average number of
shares of common stock outstanding during the twelve months ended December 31,
2000 related to the converted shares was 9,975,997. The costs of converting the
Series L Preferred Stock into common stock totaled $21.3 million during the
first quarter of 2000, with $18.1 million representing the optional conversion
premium and $3.2 million attributable to the regular dividend on the stock. At
December 31, 1999 and 1998, 1,508,210 and 1,540,460 shares of $12.40 Convertible
Preferred Stock, Series L, which were convertible into 15,082,100 and 15,404,595
million shares of common stock, respectively, were outstanding. All of these
potential common shares and the associated dividends were excluded from the
computation of diluted EPS for 1999 and 1998 because their inclusion had an
antidilutive effect on EPS.
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The computation of basic and diluted earnings per common share is as follows (in
thousands, except per share amounts):
2000 1999 1998
------- ------- -------
Net income $91,679 $26,031 $78,139
Less: Preferred stock dividends 23,735 21,392 8,399
------- ------- -------
Income available for common stock-basic and diluted $67,944 $ 4,639 $69,740
======= ======= =======
Weighted-average number of common shares
outstanding-basic 45,690 38,213 54,604
Restricted stock 101 112 --
Stock options 312 -- 54
------- ------- -------
Weighted-average number of common shares
outstanding-diluted 46,103 38,325 54,658
======= ======= =======
Earnings per common share
Basic $ 1.49 $ 0.12 $ 1.28
Diluted $ 1.47 $ 0.12 $ 1.28
For additional information regarding the convertible preferred stock and stock
option plans, see Notes 15 and 21, respectively.
NOTE 20. INFORMATION AND TECHNOLOGY SEGMENT INFORMATION
The Information and Technology line of business includes the results of Avista
Advantage, Avista Labs and Avista Communications. Avista Fiber and Avista
Communications merged operations in 2000, so Avista Fiber's financial
information has been included with Avista Communications. Additional information
for each of these three separate companies is provided as follows (thousands of
dollars):
YEARS ENDED DECEMBER 31,
--------------------------------------
2000 1999 1998
-------- -------- --------
AVISTA ADVANTAGE
Operating Revenues $ 4,971 $ 1,518 $ 1,186
Operating Loss (pre-tax) $(14,481) $ (5,042) $ (2,904)
Net Loss $(11,022) $ (3,428) $ (2,052)
AVISTA LABS
Operating Revenues $ 761 $ 748 $ 132
Operating Loss (pre-tax) $(11,942) $ (3,924) $ (2,076)
Net Loss $ (8,010) $ (2,561) $ (1,169)
AVISTA COMMUNICATIONS
Operating Revenues $ 5,913 $ 2,585 $ 677
Operating Income (Loss) (pre-tax) $(13,661) $ (4,036) $ (212)
Net Income (Loss) $ (9,376) $ (2,631) $ (177)
NOTE 21. STOCK COMPENSATION PLANS
AVISTA CORP.
In 1998, the Company adopted and shareholders approved an incentive compensation
plan, the Long-Term Incentive Plan (1998 Plan). Under the 1998 Plan, certain key
employees, directors and officers of the Company and its subsidiaries may be
granted stock options, stock appreciation rights, stock awards (including
restricted stock) and other stock-based awards and dividend equivalent rights.
The Company has made available a maximum of 2.5
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million shares of its common stock for grant under the 1998 Plan. The shares
issued under the 1998 Plan will be purchased by the trustee on the open market.
Non-employee Directors were added to this plan in 2000.
In addition, in 2000, the Company adopted a Non-Officer Employee Long-Term
Incentive Plan (2000 Plan). The provisions of the 2000 Plan are essentially the
same as those under the 1998 Plan, except for the exclusion of directors and
officers of the Company.
The following summarizes stock options activity for 2000, 1999 and 1998 under
the Plan:
2000 1999 1998
------------- ------------- -------------
Number of shares under stock options:
Outstanding at beginning of year 1,360,325 589,800 --
Granted 623,200 780,700 589,800
Exercised (44,975) -- --
Canceled (94,650) (10,175) --
------------- ------------- -------------
Unexercised options outstanding at end of year 1,843,900 1,360,325 589,800
============= ============= =============
Exercisable options 581,025 147,200 --
============= ============= =============
Weighted average exercise price:
Granted $ 23.03 $ 17.21 $ 20.14
Exercised $ 18.53 -- --
Canceled $ 18.15 $ 18.63 --
Outstanding at end of year $ 19.80 $ 18.29 $ 20.14
Exercisable at end of year $ 18.72 $ 19.63 --
Weighted average fair value of options granted during the year $ 12.02 $ 5.02 $ 4.74
Principal assumptions used in applying the Black-Scholes model:
Risk-free interest rate 5.87% - 6.87% 5.57% - 6.63% 4.81% - 5.53%
Expected life, in years 7 7 7
Expected volatility 58.47% 27.92% 22.19%
Expected dividend yield 2.34% 3.11% 3.01%
Information with respect to stock options outstanding and stock options
exercisable at December 31, 2000 is as follows:
Stock options outstanding
Range of exercise prices $16.91 - $29.22
Weighted average remaining contractual life, in years 9
Weighted average exercise price $19.80
Stock options exercisable
Range of exercise prices $16.66 - $22.62
Number exercisable 581,025
Weighted average exercise price $18.72
The Company granted 1,000 and 20,000 shares of restricted common stock under the
Plan in 2000 and 1999, respectively. Plan participants are entitled to dividends
and to vote their respective shares. The sale or transfer of restricted stock is
prohibited during the vesting period except as specified in the award
agreements. The value of restricted stock awards is established by the average
market price on the date of grant. Restricted stock awarded in 2000 and 1999
have vesting periods from four to five years.
Common equity was reduced in the accompanying Consolidated Balance Sheets by the
cost of restricted shares acquired by the Plan trustee on the open market.
Accordingly, the Company is recording compensation expense ratably over the
restriction periods based on the reduction to common equity.
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The Company accounts for stock based compensation using APB Opinion No. 25,
"Accounting for Stock Issued to Employees." Under this method, compensation cost
is recognized on the excess, if any, of the market price of the stock at grant
date over the exercise price of the option. As the exercise price for options
granted under the Plan was equal to the market price at grant date, no
compensation expense has been recorded by the Company in connection this the
Plan. In accordance with FAS No. 123, "Accounting for Stock-Based Compensation,"
compensation expense is determined based on the fair value of the award and
recognizes that cost over the service period. Had compensation costs for these
plans been determined based on the fair value at the grant dates with FAS No.
123, the Company's net income would have been reduced to the pro forma amounts
indicated below. The pro forma amounts include the pro forma effect of
subsidiary companies' stock option plans.
2000 1999 1998
---------- ---------- ----------
Net income (in thousands):
As reported $ 91,679 $ 26,031 $ 78,139
Pro forma $ 89,850 $ 24,636 $ 76,891
Basic EPS as reported $ 1.49 $ 0.12 $ 1.28
Proforma Basic EPS $ 1.45 $ 0.08 $ 1.25
Diluted EPS as Reported $ 1.47 $ 0.12 $ 1.28
Proforma Diluted EPS $ 1.43 $ 0.08 $ 1.25
AVISTA CAPITAL COMPANIES
Certain subsidiaries under Avista Capital have adopted employee stock incentive
plans under which key employees and directors were granted the opportunity to
purchase shares of subsidiary common stock at prices equal to the fair market
value as determined by each subsidiary's Board of Directors. Restricted shares
are subject to transfer agreements and vest over various periods as defined in
the plans.
Certain subsidiaries under Avista Capital have adopted employee stock incentive
plans under which certain employees and directors of the Company and the
subsidiaries are granted options to purchase subsidiary shares at prices no less
than the fair market value on the date of grant. Options outstanding under these
plans usually become fully exercisable between three and five years from the
date granted and terminate ten years from the date granted. Upon termination of
employment, vested options may be exercised and the related subsidiary shares
may be, but are not required to be, repurchased by the applicable subsidiary at
fair value.
NOTE 22. COMMITMENTS AND CONTINGENCIES
The Company believes, based on the information presently known, 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
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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. 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, including certain electricity futures contracts, in July of 1998. As
part of its investigation, the CFTC is examining the placement of orders on
three separate dates in 1998 to purchase Palo Verde and California-Oregon Border
(COB) futures contracts traded on the New York Mercantile Exchange and whether
the trading in question amounted to a manipulation of the price of those
contracts.
STATE OF WASHINGTON BUSINESS AND OCCUPATION TAX
The State of Washington's Business and Occupation Tax generally applies to gross
receipts from business activities. Exceptions apply for financial trading
activities involving stocks, bonds and futures contracts. For those activities,
the gain from the transactions is the taxable basis. On an audit for the years
1997 through June of 2000, the Department of Revenue (DOR) made a distinction
between certain types of energy trades entered into by Avista Energy. As a
result, the DOR is attempting to apply tax to the gross receipts rather than the
trading gains on about 20% of Avista Energy's trading volume for the audit
period. Avista Energy has received a notice of assessment that contains a
deficiency of about $13.5 million related to the disputed issue. Avista Energy
believes that all of its trading activity should be subject to tax on the
trading gains only, and taxes have been accrued and paid based on this position.
An administrative appeal is currently being prepared for submittal to the DOR.
No estimate of the timing for an administrative resolution is available. In the
event a satisfactory determination is not received from the administrative
process, Avista Energy is prepared to seek recourse through the courts.
SPOKANE GAS PLANT
The Spokane Natural Gas Plant site (which was operated as a coal gasification
plant for approximately 60 years until 1948) was acquired by the Company through
a merger in 1958. The Company no longer owns the property. Initial core samples
taken from the site indicate environmental contamination at the site. On January
15, 1999, the Company received notice from the State of Washington's Department
of Ecology (DOE) that it had been designated as a potentially liable party (PLP)
with respect to any hazardous substances located on this site, stemming from the
Company's past ownership of the former Gas Plant. In its notice, the DOE stated
that it intended to complete an on-going remedial investigation of this site,
complete a feasibility study to determine the most effective means of halting or
controlling future releases of substances from the site, and implement
appropriate remedial measures.
The Company responded to the DOE acknowledging its listing as a PLP, but
requested that additional parties also be listed as PLPs. In the spring of 1999,
the DOE named two other parties as additional PLPs. The Company completed
additional characterization of the site for the remedial investigation (RI).
The DOE issued a Draft Agreed Order to the Company on January 17, 2000, and
solicited public comment. The Agreed Order was signed by the DOE, the Company
and Burlington Northern & Santa Fe Railway Co. (another PLP) on March 13, 2000.
The work to be performed under the Agreed Order includes three major technical
parts: completion of the RI; performance of a focused Feasibility Study (FS);
and implementation of an interim groundwater monitoring plan. During the second
quarter, the Company received comments from the DOE on its initial RI, then
submitted another draft of the RI, which has been accepted as final by the DOE.
The Company also received comments from the DOE pertaining to the FS, which
outlines cleanup alternatives. Another FS, which responded to the DOE comments,
was submitted to the DOE on October 13. The Company received final comments and
submitted another draft of the FS in November, which was accepted. The public
comment period ran from December 15, 2000 through January 18, 2001. After the
comment period, the DOE will issue a draft Clean-up Action Plan (CAP), which is
expected by the end of March.
70
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AVISTA CORPORATION
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EASTERN PACIFIC ENERGY
On October 9, 1998, Eastern Pacific Energy (Eastern Pacific), an energy
aggregator participating in the restructured retail energy market in California,
filed suit against the Company and its affiliates, Avista Advantage and Avista
Energy, in the United States District Court for the Central District of
California. Eastern Pacific alleges, among other things, a breach of an oral or
implied joint venture agreement whereby the Company agreed to supply not less
than 300 megawatts of power to Eastern Pacific's California customers and that
Avista Advantage agreed to provide energy-related products and services. The
complaint seeks an unspecified amount of damages and also seeks to recover any
future profits earned from sales of the aforementioned amount of power to
California consumers.
On December 4, 1998, Avista Advantage, Avista Energy and the Company jointly
filed a motion to dismiss the complaint for failure to state a claim upon which
relief can be granted. On May 4, 1999, the Court granted the Company's and its
affiliates' motion to dismiss the case and granted the plaintiff the opportunity
to file and serve an Amended Complaint, which it did. The Company and its
affiliates renewed their motion to dismiss and on October 22, 1999, the Court
again granted the motion to dismiss, this time with prejudice. Plaintiff
appealed this adverse determination to the Ninth Circuit Court of Appeals. A
settlement agreement was reached among the parties, whereby the suit would be
dismissed with prejudice and without any payment to Eastern Pacific, up vacation
by the Federal District Court of its earlier judgment of dismissal of Eastern
Pacific's claims. On February 8, 2001, the Court entered its Order Granting the
Joint Motion to Vacated Judgment and Dismissing the Action with Prejudice. The
Ninth Circuit Court of Appeals had previously entered an Order on October 29,
2000, dismissing the appeal pursuant to a stipulation of the parties.
SALE OF CERTAIN PENTZER CORPORATION SUBSIDIARIES
On February 26, 2001, IDX Corporation, formerly known was 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 Corporation in the United States District
Court for the District of Massachusetts, alleging misrepresentations and breach
of representations and warranties made under a stock purchase agreement.
Pursuant to this agreement, Pentzer sold the capital stock of a group of
companies on March 31, 1999. Plaintiffs allege that Pentzer breached various
representations and warranties concerning financial statements, cost of goods
sold and inventory, contending that reliance on such representations and
warranties caused them to pay more for the group of companies than they were
worth. In total, plaintiffs allege damages in the approximate amount of $27
million. Pentzer has retained legal counsel and intends to vigorously defend
against this action. 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.
OTHER CONTINGENCIES
The Company routinely assesses, based on in-depth studies, expert analyses and
legal reviews, its contingencies, obligations and commitments for remediation of
contaminated sites, including assessments of ranges and probabilities of
recoveries from other responsible parties who have and have not agreed to a
settlement and recoveries from insurance carriers. The Company's policy is to
immediately accrue and charge to current expense identified exposures related to
environmental remediation sites based on estimates of investigation, cleanup and
monitoring costs to be incurred.
The Company has potential liabilities under the Federal Endangered Species Act
(ESA) for species of fish that have either already been added to the endangered
species list, been listed as "threatened" or been petitioned for listing. Thus
far, measures that have been adopted and implemented have had minimal impact of
the Company. The new operating license for the Clark Fork Projects describes the
approach to restore bull trout populations in the project areas. Using the
concept of adaptive management, the Company will evaluate the feasibility of
fish passage, and, depending upon the results of these experimental studies,
determine the applications of funds toward continuing fish passage efforts or
other population enhancement measures.
71
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AVISTA CORPORATION
- --------------------------------------------------------------------------------
The Company continues to study the issue of high dissolved gas levels downstream
of Cabinet Gorge during spill periods, as agreed to in the Settlement Agreement
of the new license for Cabinet Gorge. To date, intensive biological studies in
the lower Clark Fork River and Lake Pend Oreille have documented minimal
biological effects of high dissolved gas levels on free ranging fish. Under the
terms of the Settlement Agreement, the Company will develop an abatement and/or
mitigation strategy by 2002.
Under the federal licenses for its hydroelectric projects, the Company is
obligated to protect its property rights, including water rights. The State of
Montana is examining the status of all water right claims within state
boundaries, which could potentially adversely affect the generating capacity of
the Company's Cabinet Gorge and Noxon Rapids hydroelectric facilities. The
Company is participating in this extended process, which is unlikely to be
concluded in the foreseeable future.
The Company must be in compliance with requirements under the Clean Air Act
Amendments (CAAA) at the Colstrip thermal generating plant, in which the Company
maintains an ownership interest. The anticipated share of costs at Colstrip is
not expected to have a major economic impact on the Company.
The Company has long-term contracts related to the purchase of fuel for thermal
generation, natural gas and hydroelectric power. Terms of the natural gas
purchase contracts range from one month to five years and the majority provide
for minimum purchases at the then effective market rate. The Company also has
various agreements for the purchase, sale or exchange of electric energy with
other utilities, cogenerators, small power producers and government agencies.
As of December 31, 2000, the Company's collective bargaining agreement with the
International Brotherhood of Electrical Workers represented approximately 53% of
employees. The current agreement with the union local representing the majority
of the bargaining unit employees expires on March 25, 2002. A local agreement in
the South Lake Tahoe area, which represents 5 employees, expires on March 25,
2002.
NOTE 23. ACQUISITIONS AND DISPOSITIONS
On May 5, 2000, the owners of the Centralia Power Plant sold the plant to
TransAlta, a Canadian company. Avista Utilities recorded an after-tax gain
totaling $9.0 million from the sale of its 17.5% ownership interest in the
plant. Of the total after-tax gain of $37.2 million from the sale of Centralia,
$28.2 million was deferred, to be returned to Avista Utilities' customers
through rates over established periods of time. Washington customers received
$20.7 million of the after-tax gain through pre-tax credits to their electric
bills over the two-month period of December 2000 and January 2001. Idaho
customers will receive the remaining $7.5 million of the after-tax gain, which
translates into a pre-tax reduction of 1.8% over an eight-year period.
During the first quarter of 1999, Pentzer sold its Creative Solutions Group, a
group of five portfolio companies that provide point-of-purchase displays and
other merchandising and packaging services to retailers and consumer product
companies. The sale resulted in a gain of $10.1 million, net of taxes. During
the third quarter of 1999, Pentzer sold its Store Fixtures Group, a group of six
portfolio companies that design, manufacture and deliver store fixture products
to major retailers. The sale resulted in a gain of $27.6 million, net of taxes.
During the first quarter of 1998, Pentzer sold Systran Financial Services,
resulting in an after-tax gain of $5.5 million. In November 1999, Pentzer
purchased the International Retail Services Group, a company that provides
backroom supplies for retail stores; this company was sold in November 2000.
In February 1999, Avista Energy purchased Vitol Gas & Electric, LLC (Vitol),
based in Boston, Massachusetts. Vitol traded natural gas, electricity, coal and
SO2 allowances in markets in the eastern half of the United States. The
acquisition was funded through the issuance of additional shares of common stock
to Avista Capital.
In January 1999, Avista Corp. acquired a majority ownership in One Eighty
Communications, a competitive local exchange carrier that provided local dial
tone and data services to commercial accounts in local communities. The new
company was renamed Avista Communications.
72
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AVISTA CORPORATION
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NOTE 24. SELECTED QUARTERLY INFORMATION (UNAUDITED)
The Company's energy operations are significantly affected by weather
conditions. Consequently, there can be large variances in revenues, expenses and
net income between quarters based on seasonal factors such as temperatures and
streamflow conditions. A summary of quarterly operations (in thousands of
dollars except per share amounts) for 2000 and 1999 follows:
THREE MONTHS ENDED
-----------------------------------------------------------------------------
MARCH JUNE SEPTEMBER DECEMBER
31 30 30 31
-------------- -------------- -------------- --------------
2000
Operating revenues ........................ $ 1,381,974 $ 1,353,414 $ 2,864,305 $ 2,311,797
Operating income .......................... 29,073 (27,743) 67,899 134,199
Net income ................................ 10,525 (21,493) 34,540 68,107
Income available for common stock ......... (11,385) (22,101) 33,932 67,498
Outstanding common stock (000s):
Weighted average ....................... 41,297 47,113 47,147 47,172
Actual ................................. 47,078 47,128 47,159 47,209
Earnings per share:
Avista Utilities ....................... $ (0.05) $ (1.33) $ (0.02) $ 0.03
Energy Trading and Marketing ........... (0.09) 1.00 0.89 1.74
Information and Technology ............. (0.14) (0.13) (0.14) (0.21)
Avista Ventures ........................ -- (0.01) (0.01) (0.04)
-------------- -------------- -------------- --------------
Earnings per share, basic .............. $ (0.28) $ (0.47) $ 0.72 $ 1.52
Earnings per share, diluted ............ $ (0.28) $ (0.47) $ 0.72 $ 1.50
Dividends paid per common share ........... $ 0.12 $ 0.12 $ 0.12 $ 0.12
Trading price range per share:
High ................................... $ 68.000 $ 41.125 $ 30.440 $ 23.500
Low .................................... $ 14.625 $ 15.750 $ 16.813 $ 17.880
1999
Operating revenues ........................ $ 1,212,822 $ 1,411,736 $ 3,718,109 $ 1,562,317
Operating income .......................... 30,363 17,380 18,197 (34,583)
Net income ................................ 19,388 8,509 27,613 (29,479)
Income available for common stock ......... 14,004 3,125 22,273 (34,763)
Outstanding common stock (000s):
Weighted average ....................... 40,454 40,185 36,634 35,648
Actual ................................. 40,454 38,881 35,645 35,648
Earnings per share:
Avista Utilities ....................... $ 0.35 $ 0.39 $ (0.13) $ 0.39
Energy Trading and Marketing ........... (0.18) (0.27) 0.02 (1.16)
Information and Technology ............. (0.03) (0.04) (0.06) (0.14)
Avista Ventures ........................ 0.21 -- 0.78 (0.01)
-------------- -------------- -------------- --------------
Earnings per share, basic .............. $ 0.35 $ 0.08 $ 0.61 $ (0.92)
Earnings per share, diluted ............ $ 0.34 $ 0.08 $ 0.52 $ (0.92)
Dividends paid per common share ........... $ 0.12 $ 0.12 $ 0.12 $ 0.12
Trading price range per share:
High ................................... $ 19.563 $ 18.188 $ 18.063 $ 18.125
Low .................................... $ 15.938 $ 14.625 $ 16.250 $ 15.000
73
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AVISTA CORPORATION
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PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information regarding the directors of the Registrant has been omitted pursuant
to General Instruction G to Form 10-K. Reference is made to the Registrant's
Proxy Statement to be filed with the Securities and Exchange Commission in
connection with the Registrant's annual meeting of shareholders to be held on
May 10, 2001.
Executive Officers of the Registrant
Name Age Business Experience During Past 5 Years
- ---- --- ---------------------------------------
Larry A. Stanley 72 Chairman of the Board since November 2000.
Gary G. Ely 53 President and Chief Executive Officer since October 2000; Executive Vice
President February 1999 - October 2000; Senior Vice President and
General Manager August 1996 - February 1999; Vice President - Natural
Gas February 1991- August 1996.
Jon E. Eliassen 53 Senior Vice President and Chief Financial Officer since November 1998;
Senior Vice President, Chief Financial Officer and Treasurer December
1997 - November 1998; Senior Vice President and Chief Financial Officer
August 1996 - December 1997; Vice President - Finance and Chief
Financial Officer February 1986 - August 1996.
David J. Meyer 47 Senior Vice President and General Counsel since September 1998; prior to
employment with the Registrant: Attorney - Paine Hamblen Coffin Brooke &
Miller 1974 - September 1998.
David A. Brukardt 46 Chief Communication Officer and Vice President of Investor and Corporate
Relations since August 2000; Vice President - Investor Relations July 1999
- August 2000; prior to employment with the Registrant: Director - Investor
and Corporate Relations - Harnischfeger Industries, Inc. and Vice President -
Harnischfeger Foundation July 1995 - July 1999.
Christy M. Burmeister-Smith 44 Vice President and Controller since June 1999; Controller - Energy
Delivery and various other positions with the Company since 1980.
Robert D. Fukai 51 Vice President - External Relations since August 1996; Vice President -
Human Resources, Corporate Services and Marketing January 1993 - August 1996.
Scott Morris 43 Vice President since November 2000; President - Avista Utilities since
August 2000; General Manager - Avista Utilities October 1991 - August 2000.
Kelly Norwood 42 Vice President since November 2000; Vice President and General Manager of
Energy Resources - Avista Utilities since August 2000; various other staff
and management positions with the Company since 1981.
Ronald R. Peterson 48 Vice President and Treasurer since November 1998; Vice President and
Controller February 1998 - November 1998; Controller August 1996 -
February 1998; Treasurer February 1992 - August 1996.
Terry L. Syms 52 Vice President and Corporate Secretary since February 1998; Corporate
Secretary March 1988 - February 1998.
74
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AVISTA CORPORATION
- --------------------------------------------------------------------------------
Name Age Business Experience During Past 5 Years
- ---- --- ---------------------------------------
Roger D. Woodworth 44 Vice President - Corporate Development since November 1998; Director of
Corporate Development and various other positions with the Company since
1979.
All of the Company's executive officers, with the exception of Messrs. Fukai,
Norwood and Woodworth and Mme. Burmeister-Smith were officers or directors of
one or more of the Company's subsidiaries in 2000.
Executive officers are elected annually by the Board of Directors.
ITEM 11. EXECUTIVE COMPENSATION
Information regarding executive compensation has been omitted pursuant to
General Instruction G to Form 10-K. Reference is made to the Registrant's Proxy
Statement to be filed with the Securities and Exchange Commission in connection
with the Registrant's annual meeting of shareholders to be held on May 10, 2001.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
(a) Security ownership of certain beneficial owners (owning 5% or more of
Registrant's voting securities):
Information regarding security ownership of certain beneficial owners
(owning 5% or more of Registrant's voting securities) has been omitted
pursuant to General Instruction G to Form 10-K. Reference is made to
the Registrant's Proxy Statement to be filed with the Securities and
Exchange Commission in connection with the Registrant's annual meeting
of shareholders to be held on May 10, 2001.
(b) Security ownership of management:
Information regarding security ownership of management has been omitted
pursuant to General Instruction G to Form 10-K. Reference is made to
the Registrant's Proxy Statement to be filed with the Securities and
Exchange Commission in connection with the Registrant's annual meeting
of shareholders to be held on May 10, 2001.
(c) Changes in control:
None.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information regarding certain relationships and related transactions has been
omitted pursuant to General Instruction G to Form 10-K. Reference is made to the
Registrant's Proxy Statement to be filed with the Securities and Exchange
Commission in connection with the Registrant's annual meeting of shareholders to
be held on May 10, 2001.
75
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AVISTA CORPORATION
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PART IV
ITEM 14. FINANCIAL STATEMENTS, FINANCIAL STATEMENT SCHEDULES, EXHIBITS AND
REPORTS ON FORM 8-K
(a) 1. Financial Statements (Included in Part II of this report):
Independent Auditors' Report
Consolidated Statements of Income, Comprehensive Income and Retained
Earnings for the Years Ended December 31, 2000, 1999 and 1998
Consolidated Balance Sheets, December 31, 2000 and 1999
Consolidated Statements of Capitalization, December 31, 2000 and 1999
Consolidated Statements of Cash Flows for the Years Ended December 31,
2000, 1999 and 1998
Consolidated Statements of Stockholders' Equity for the Years Ended
December 31, 2000, 1999 and 1998
Schedule of Information by Business Segments for the Years Ended
December 31, 2000, 1999 and 1998
Notes to Financial Statements
(a) 2. Financial Statement Schedules:
None
(a) 3. Exhibits:
Reference is made to the Exhibit Index commencing on page 79. The
Exhibits include the management contracts and compensatory plans or
arrangements required to be filed as exhibits to this Form 10-K by Item
601(10)(iii) of Regulation S-K.
(b) Reports on Form 8-K:
Dated January 6, 2000, regarding lower utility revenues due to warm
weather and fourth quarter charges due to restructuring at Avista
Energy and impairment of utility assets.
Dated January 28, 2000, announcing the conversion of the Series L
Convertible Preferred Stock into common stock.
Dated June 21, 2000, reporting significant increases in energy expenses
and the impact on Company earnings.
Dated July 26, 2000, announcing earnings for the second quarter of
2000.
Dated August 25, 2000, announcing executive changes within Avista Corp.
and Avista Utilities.
Dated October 25, 2000, announcing earnings for the third quarter of
2000 and the resignation of T. M. Matthews, the Company's Chairman of
the Board, President and Chief Executive Officer.
76
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AVISTA CORPORATION
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
AVISTA CORPORATION
March 8, 2001 By /s/ Gary G. Ely
------------------ ---------------------------------------
Date Gary G. Ely
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ Gary G. Ely Principal Executive Officer March 8, 2001
- ----------------------------------------------------
Gary G. Ely
President and Chief Executive Officer
/s/ J. E. Eliassen Principal Financial March 8, 2001
- ---------------------------------------------------- and Accounting Officer
J. E. Eliassen (Senior Vice President
and Chief Financial Officer)
/s/ Erik J. Anderson Director March 8, 2001
- ----------------------------------------------------
Erik J. Anderson
/s/ Kristianne Blake Director March 8, 2001
- ----------------------------------------------------
Kristianne Blake
/s/ David A. Clack Director March 8, 2001
- ----------------------------------------------------
David A. Clack
/s/ Sarah M. R. Jewell Director March 8, 2001
- ----------------------------------------------------
Sarah M. R. Jewell
/s/ John F. Kelly Director March 8, 2001
- ----------------------------------------------------
John F. Kelly
/s/ Eugene W. Meyer Director March 8, 2001
- ----------------------------------------------------
Eugene W. Meyer
/s/ Bobby Schmidt Director March 8, 2001
- ----------------------------------------------------
Bobby Schmidt
/s/ Larry A. Stanley Director March 8, 2001
- ----------------------------------------------------
Larry A. Stanley
/s/ R. John Taylor Director March 8, 2001
- ----------------------------------------------------
R. John Taylor
/s/ Daniel J. Zaloudek Director March 8, 2001
- ----------------------------------------------------
Daniel J. Zaloudek
77
82
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement Nos.
2-81697, 2-94816, 33-54791, 33-32148, 333-33790, and 333-47290 on Form S-8, and
in Registration Statement Nos. 33-53655, 333-39551, 333-82165, 333-16353, and
333-16353-03 on Form S-3 of our report dated February 2, 2001, (February 26,
2001 as to Note 22), appearing in this Annual Report on Form 10-K of Avista
Corporation for the year ended December 31, 2000.
/s/ Deloitte & Touche LLP
DELOITTE & TOUCHE LLP
Seattle, Washington
March 6, 2001
78
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AVISTA CORPORATION
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EXHIBIT INDEX
Previously Filed*
----------------------------------
With
Registration As
Exhibit Number Exhibit
- ------- ------ -------
3(a) 1-3701 (with Restated Articles of Incorporation of Avista Corporation as
1998 Form 10-K) restated February 25, 1999.
3(b) 1-3701 (with 2000 Bylaws of Avista Corporation, as amended July 1, 2000.
2nd Quarter 10-Q)
4(a)-1 2-4077 B-3 Mortgage and Deed of Trust, dated as of June 1, 1939.
4(a)-2 2-9812 4(c) First Supplemental Indenture, dated as of October 1, 1952.
4(a)-3 2-60728 2(b)-2 Second Supplemental Indenture, dated as of May 1, 1953.
4(a)-4 2-13421 4(b)-3 Third Supplemental Indenture, dated as of December 1, 1955.
4(a)-5 2-13421 4(b)-4 Fourth Supplemental Indenture, dated as of March 15, 1967.
4(a)-6 2-60728 2(b)-5 Fifth Supplemental Indenture, dated as of July 1, 1957.
4(a)-7 2-60728 2(b)-6 Sixth Supplemental Indenture, dated as of January 1, 1958.
4(a)-8 2-60728 2(b)-7 Seventh Supplemental Indenture, dated as of August 1, 1958.
4(a)-9 2-60728 2(b)-8 Eighth Supplemental Indenture, dated as of January 1, 1959.
4(a)-10 2-60728 2(b)-9 Ninth Supplemental Indenture, dated as of January 1, 1960.
4(a)-11 2-60728 2(b)-10 Tenth Supplemental Indenture, dated as of April 1, 1964.
4(a)-12 2-60728 2(b)-11 Eleventh Supplemental Indenture, dated as of March 1, 1965.
4(a)-13 2-60728 2(b)-12 Twelfth Supplemental Indenture, dated as of May 1, 1966.
4(a)-14 2-60728 2(b)-13 Thirteenth Supplemental Indenture, dated as of August 1, 1966.
4(a)-15 2-60728 2(b)-14 Fourteenth Supplemental Indenture, dated as of April 1, 1970.
4(a)-16 2-60728 2(b)-15 Fifteenth Supplemental Indenture, dated as of May 1, 1973.
4(a)-17 2-60728 2(b)-16 Sixteenth Supplemental Indenture, dated as of February 1,
1975.
4(a)-18 2-60728 2(b)-17 Seventeenth Supplemental Indenture, dated as of
November 1, 1976.
4(a)-19 2-69080 2(b)-18 Eighteenth Supplemental Indenture, dated as of June 1, 1980.
4(a)-20 1-3701 (with 4(a)-20 Nineteenth Supplemental Indenture, dated as of January 1,
1980 Form 10-K) 1981.
4(a)-21 2-79571 4(a)-21 Twentieth Supplemental Indenture, dated as of August 1, 1982.
*Incorporated herein by reference.
**Filed herewith.
79
84
AVISTA CORPORATION
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EXHIBIT INDEX (continued)
Previously Filed*
---------------------------------
With
Registration As
Exhibit Number Exhibit
- ------- ------------ -------
4(a)-22 1-3701 (with 4(a)-22 Twenty-First Supplemental Indenture, dated as of
Form 8-K dated September 1, 1983.
September 20, 1983)
4(a)-23 2-94816 4(a)-23 Twenty-Second Supplemental Indenture, dated as of
March 1, 1984.
4(a)-24 1-3701 (with 4(a)-24 Twenty-Third Supplemental Indenture, dated as of
1986 Form 10-K) December 1, 1986.
4(a)-25 1-3701 (with 4(a)-25 Twenty-Fourth Supplemental Indenture, dated as of
1987 Form 10-K) January 1, 1988.
4(a)-26 1-3701 (with 4(a)-26 Twenty-Fifth Supplemental Indenture, dated as of
1989 Form 10-K) October 1, 1989.
4(a)-27 33-51669 4(a)-27 Twenty-Sixth Supplemental Indenture, dated as of
April 1, 1993.
4(a)-28 1-3701 (with 4(a)-28 Twenty-Seventh Supplemental Indenture, dated as of
1993 Form 10-K) January 1, 1994.
4(a)-29 333-82165 4(a) Indenture dated as of April, 1 1998 between Avista Corp.
Corporation and The Chase Manhattan Bank, as Trustee.
4(b)-1 1-3701 (with Loan Agreement between City of Forsyth, Montana, and the
1999 Form 10-K) Company, dated as of September 1, 1999 (Series 1999A).
4(b)-2 1-3701 (with Indenture of Trust, Pollution Control Revenue Refunding
1999 Form 10-K) Bonds (Series 1999A) between City of Forsyth, Montana, and
Chase Manhattan Bank and Trust Company, N.A., dated as of
September 1, 1999.
4(b)-3 1-3701 (with Loan Agreement between City of Forsyth, Montana, and the
1999 Form 10-K) Company, dated as of September 1, 1999 (Series 1999B).
4(b)-4 1-3701 (with Indenture of Trust, Pollution Control Revenue Refunding
1999 Form 10-K) Bonds (Series 1999B) between City of Forsyth, Montana, and
Chase Manhattan Bank and Trust Company, N.A., dated as of
September 1, 1999.
4(c)-1 1-3701 (with 4(h)-1 Indenture between the Company and Chemical Bank dated
1988 Form 10-K) as of July 1, 1988 (Series A and B Medium-Term Notes).
4(d)-2 ** Amended and Restated Revolving Credit Agreement among Avista
Corporation, Toronto Dominion (Texas), Inc., Bank of America,
N.A. and The Bank of New York, dated June 26, 2000.
- -----------------
*Incorporated herein by reference.
**Filed herewith.
80
85
AVISTA CORPORATION
- --------------------------------------------------------------------------------
EXHIBIT INDEX (continued)
Previously Filed*
---------------------------------
With
Registration As
Exhibit Number Exhibit
- ------- ------------ -------
4(e) 1-3701 (with 4 Rights Agreement, dated as of November 15, 1999, between
Form 8-K dated the Company and the Bank of New York as successor
November 15, 1999) Rights Agent.
10(a)-l 2-13788 13(e) Power Sales Contract (Rocky Reach Project) with
Public Utility District No. 1 of Chelan County, Washington,
dated as of November 14, 1957.
10(a)-2 2-60728 10(b)-1 Amendment to Power Sales Contract (Rocky Reach
Project) with Public Utility District No. 1 of Chelan
County, Washington, dated as of June 1, 1968.
10(b)-1 2-13421 13(d) Power Sales Contract (Priest Rapids Project) with
Public Utility District No. 2 of Grant County,
Washington, dated as of May 22, 1956.
10(b)-2 2-60728 5(d)-1 Second Amendment to Power Sales Contract (Priest Rapids
Project) with Public Utility District No. 2 of Grant
County, Washington, dated as of December 19, 1977.
10(c)-1 2-60728 5(e) Power Sales Contract (Wanapum Project) with
Public Utility District No. 2 of Grant County,
Washington, dated as of June 22, 1959.
10(c)-2 2-60728 5(e)-1 First Amendment to Power Sales Contract (Wanapum
Project) with Public Utility District No. 2 of Grant
County, Washington, dated as of December 19, 1977.
10(d)-1 2-60728 5(g) Power Sales Contract (Wells Project) with Public Utility
District No. 1 of Douglas County, Washington, dated as
of September 18, 1963.
10(d)-2 2-60728 5(g)-1 Amendment to Power Sales Contract (Wells Project)
with Public Utility District No. 1 of Douglas County,
Washington, dated as of February 9, 1965.
10(d)-3 2-60728 5(h) Reserved Share Power Sales Contract (Wells Project)
with Public Utility District No. 1 of Douglas County,
Washington, dated as of September 18, 1963.
10(d)-4 2-60728 5(h)-1 Amendment to Reserved Share Power Sales Contract
(Wells Project) with Public Utility District No. 1 of Douglas
County, Washington, dated as of February 9, 1965.
10(e) 2-60728 5(i) Canadian Entitlement Exchange Agreement executed by
Bonneville Power Administration Columbia Storage Power
Exchange and the Company, dated as of August 13, 1964.
10(f) 2-60728 5(j) Pacific Northwest Coordination Agreement, dated as of
September 15, 1964.
- ------------------
*Incorporated herein by reference.
**Filed herewith.
81
86
AVISTA CORPORATION
- --------------------------------------------------------------------------------
EXHIBIT INDEX (continued)
Previously Filed*
----------------------------------
With
Registration As
Exhibit Number Exhibit
- ------- ------------ -------
10(h)-l 2-47373 13(y) Agreement between the Company, Bonneville Power
Administration and Washington Public Power Supply
System for purchase and exchange of power from the Nuclear
Project No. 1 (Hanford), dated as of January 6, 1973.
10(h)-2 2-60728 5(m)-1 Amendment No. 1 to the Agreement between the Company
between the Company, Bonneville Power Administration and
Washington Public Power Supply System for purchase and
exchange of power from the Nuclear Project No. 1 (Hanford),
dated as of May 8, 1974.
10(h)-3 1-3701 (with 10(i)-3 Agreement between Bonneville Power Administration,
Form 10-K for the Montana Power Company, Pacific Power & Light,
1986) Portland General Electric, Puget Sound Power & Light, the
Company and the Supply System for relocation costs of
Nuclear Project No. 1 (Hanford) dated as of July 9, 1986.
10(i)-1 2-60728 5(n) Ownership Agreement of Nuclear Project No. 3, sponsored
by Washington Public Power Supply System, dated as of
September 17, 1973.
10(i)-2 1-3701 (with 1 Settlement Agreement and Covenant Not to Sue executed
Form 10-Q for by the United States Department of Energy acting
quarter ended by and through the Bonneville Power Administration
September 30, and the Company, dated as of September 17, 1985,
1985) describing the settlement of Project 3 litigation.
10(i)-3 1-3701 (with 2 Agreement to Dismiss Claims and Covenant
Form 10-Q for Not to Sue between the Washington Public
quarter ended Power Supply System and the Company, dated
September 30, as of September 17, 1985, describing the settlement
1985) of Project 3 litigation with the Supply System.
10(i)-4 1-3701 (with 3 Agreement among Puget Sound Power & Light
Form 10-Q for Company, the Company, Portland General Electric
quarter ended Company and PacifiCorp, dba Pacific Power & Light
September 30, Company, agreeing to execute contemporaneously
1985) an irrevocable offer, to and for the benefit of the Bonneville
Power Administration, dated as of September 17, 1985.
10(j)-1 2-66184 5(r) Service Agreement (Natural Gas Storage Service), dated as
of August 27, 1979, between the Company and Northwest
Pipeline Corporation.
10(j)-2 2-60728 5(s) Service Agreement (Liquefaction-Storage Natural Gas Service),
dated as of December 7, 1977, between the Company and
Northwest Pipeline Corporation.
- -----------------
*Incorporated herein by reference.
**Filed herewith.
82
87
AVISTA CORPORATION
- --------------------------------------------------------------------------------
EXHIBIT INDEX (continued)
Previously Filed*
---------------------------------
With
Registration As
Exhibit Number Exhibit
- ------- ------------ -------
10(j)-3 1-3701 (with 10(k)-4 Amendment dated as of January 1, 1990, to Firm
1989 Form 10-K) Transportation Agreement, dated as of June 15, 1988,
between the Company and Northwest Pipeline Corporation.
10(j)-4 1-3701 (with 10(k)-6 Firm Transportation Service Agreement, dated as of
1992 Form 10-K) April 25, 1991, between the Company and Pacific Gas
Transmission Company.
10(j)-5 1-3701 (with 10(k)-7 Service Agreement Applicable to Firm Transportation Service,
1992 Form 10-K) dated June 12, 1991, between the Company and Alberta
Natural Gas Company Ltd.
10(k)-1 1-3701 (with 13(b) Letter of Intent for the Construction and Ownership
Form 8-K for of Colstrip Units No. 3 and 4, sponsored by The
August 1976) Montana Power Company, dated as of April 16, 1974.
10(k)-2 1-3701 (with 10(s)-7 Ownership and Operation Agreement for Colstrip
1981 Form 10-K) Units No. 3 and 4, sponsored by The Montana
Power Company, dated as of May 6, 1981.
10(k)-3 1-3701 (with 10(s)-2 Coal Supply Agreement for Colstrip Units No. 3 and 4
1981 Form 10-K) between The Montana Power Company, Puget Sound
Power & Light Company, Portland General Electric Company,
Pacific Power & Light Company, Western Energy
Company and the Company, dated as of July 2, 1980.
10(k)-4 1-3701 (with 10(s)-3 Amendment No. 1 to Coal Supply Agreement for
1981 Form 10-K) Colstrip Units No. 3 and 4, dated as of July 10, 1981.
10(k)-5 1-3701 (with 10(l)-5 Amendment No. 4 to Coal Supply Agreement for Colstrip
1988 Form 10-K) Units No. 3 and 4, dated as of January 1, 1988.
10(l)-1 1-3701 (with 10(n)-2 Lease Agreement between the Company and IRE-4
1986 Form 10-K) New York, Inc., dated as of December 15, 1986,
relating to the Company's central operating facility.
10(m) 1-3701 (with 10(v) Supplemental Agreement No. 2, Skagit/Hanford Project,
1983 Form 10-K) dated as of December 27, 1983, relating to the termination
of the Skagit/Hanford Project.
10(n) 1-3701 (with 10(p)-l Agreement for Purchase and Sale of Firm Capacity and
1986 Form 10-K) Energy between Puget Sound Power & Light Company
and the Company, dated as of August 1, 1986.
10(o) 1-3701 (with 10(q)-1 Electric Service and Purchase Agreement between
1991 Form 10-K) Potlatch Corporation and the Company, dated as of
January 3, 1991.
- -----------------
*Incorporated herein by reference.
**Filed herewith.
83
88
AVISTA CORPORATION
- --------------------------------------------------------------------------------
EXHIBIT INDEX (continued)
Previously Filed*
---------------------------------
With
Registration As
Exhibit Number Exhibit
- ------- ------------ -------
10(p) 1-3701 (with 10(s)-1 Agreements for Purchase and Sale of Firm Capacity
1992 Form 10-K) between the Company and Portland General Electric
Company dated March and June 1992.
10(q)-1 1-3701 (with 10(t)-8 Executive Deferral Plan of the Company. (***)
1992 Form 10-K)
10(q)-2 1-3701 (with 10(t)-10 The Company's Unfunded Supplemental
1992 Form 10-K) Executive Retirement Plan. (***)
10(q)-3 1-3701 (with 10(t)-11 The Company's Unfunded Supplemental
1992 Form 10-K) Executive Disability Plan. (***)
10(q)-4 1-3701 (with 10(t)-12 Income Continuation Plan of the Company. (***)
1992 Form 10-K)
10(q)-5 1-3701 (with Long-Term Incentive Plan. (***)
1998 Form 10-K)
10(q)-6 1-3701 (with
1998 Form 10-K) Employment Agreement between the Company
and T.M. Matthews. (***)
10(q)-7 1-3701 (with Employment Agreement between the Company and
1999 Form 10-K) David J. Meyer. (***)
12 ** Statement re computation of ratio of earnings to fixed
charges and preferred dividend requirements.
21 ** Subsidiaries of Registrant.
- ----------------
* Incorporated herein by reference.
** Filed herewith.
*** Management contracts or compensatory plans filed as exhibits by reference
per Item 601(10)(iii)of Regulation S-K.
84