UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Form 10-K
(Mark One)
Commission file number
1-3701
AVISTA CORPORATION
Washington, D.C. 20549
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE FISCAL YEAR ENDED
DECEMBER 31, 2001
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE TRANSITION PERIOD FROM _____ TO _______
Washington
91-0462470
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
1411 East Mission Avenue, Spokane, Washington
99202-2600
(Address of principal executive offices)
(Zip Code)
Registrants telephone number, including area code: 509-489-0500
Web site: http://www.avistacorp.com
Securities registered pursuant to Section 12(b) of the Act:
Title of Class
Name of Each Exchange
on Which Registered
Common Stock, no par value, together with
Preferred Share Purchase Rights appurtenant thereto
New York Stock Exchange
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
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 (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of Registrants 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 Registrants outstanding Common Stock, no par value (the only class of voting stock), held by non-affiliates is $696,099,691, based on the last reported sale price thereof on the consolidated tape on February 28, 2002.
As of February 28, 2002, 47,678,061 shares of Registrants Common Stock, no par
value (the only class of common stock), were outstanding.
Documents Incorporated By Reference
Document
Part of Form 10-K into Which
Document is Incorporated
Proxy Statement to be filed in
connection with the annual meeting
of shareholders to be held May 9, 2002
Part III, Items 10, 11,
12 and 13
AVISTA CORPORATION
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 Energy Requirements and Resources | 7 | ||||||||
Hydroelectric Relicensing | 7 | ||||||||
Natural Gas Operations | 8 | ||||||||
Natural Gas Resources | 9 | ||||||||
Regulatory Issues | 9 | ||||||||
Industry Restructuring | 12 | ||||||||
Federal Level | 12 | ||||||||
State Level | 13 | ||||||||
Environmental Issues | 13 | ||||||||
Avista Utilities Operating Statistics | 14 | ||||||||
Western Power Market Issues | 16 | ||||||||
Energy Trading and Marketing Line of Business | 17 | ||||||||
Avista Energy | 17 | ||||||||
Avista Power | 18 | ||||||||
Information and Technology Line of Business | 18 | ||||||||
Avista Advantage | 18 | ||||||||
Avista Labs | 19 | ||||||||
Other Line of Business | 19 | ||||||||
Discontinued Operations - Avista Communications | 19 | ||||||||
2. | Properties | 20 | |||||||
Avista Utilities | 20 | ||||||||
3. | Legal Proceedings | 21 | |||||||
4. | Submission of Matters to a Vote of Security Holders | 21 | |||||||
Part II | |||||||||
5. | Market for Registrant's Common Equity and Related Stockholder Matters | 21 | |||||||
6. | Selected Financial Data | 22 | |||||||
7. | Management's Discussion and Analysis of Financial Condition and Results of Operations | 23 | |||||||
Avista Corp. Lines of Business | 23 | ||||||||
Avista Utilities - Regulatory Matters | 24 | ||||||||
Enron Exposure | 27 | ||||||||
Western Power Market Issues | 28 | ||||||||
Results of Operations | 29 | ||||||||
Overall Operations | 29 | ||||||||
Avista Utilities | 31 | ||||||||
Energy Trading and Marketing | 33 | ||||||||
Information and Technology | 36 | ||||||||
Other | 36 | ||||||||
Discontinued Operations | 37 | ||||||||
Critical Accounting Policies | 37 | ||||||||
Liquidity and Capital Resources | 39 | ||||||||
Review of Cash Flow Statement | 39 | ||||||||
Overall Liquidity | 40 |
ii
AVISTA CORPORATION
Item | Page | ||||||||
No. | No. | ||||||||
|
|
||||||||
Capital Resources | 40 | ||||||||
Off-Balance Sheet Arrangements | 42 | ||||||||
Total Company Capitalization | 42 | ||||||||
Credit Ratings | 42 | ||||||||
Avista Utilities Operations | 43 | ||||||||
Energy Trading and Marketing Operations | 43 | ||||||||
Information and Technology Operations | 44 | ||||||||
Other Operations | 44 | ||||||||
Contractual Obligations | 44 | ||||||||
Other Commercial Commitments | 45 | ||||||||
Additional Financial Data | 45 | ||||||||
Future Outlook | 45 | ||||||||
Business Strategy | 45 | ||||||||
Competition | 45 | ||||||||
Business Risk | 46 | ||||||||
Risk Management | 48 | ||||||||
Economic and Load Growth | 49 | ||||||||
Environmental Issues | 49 | ||||||||
Other | 50 | ||||||||
Safe Harbor for Forward-Looking Statements | 50 | ||||||||
7A. | Quantitative and Qualitative Disclosure about Market Risk | 51 | |||||||
8. | Financial Statements and Supplementary Data | 51 | |||||||
Independent Auditors' Report | 52 | ||||||||
Financial Statements | 53 | ||||||||
Notes to Consolidated Financial Statements | 60 | ||||||||
9. | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure | * | |||||||
Part III | |||||||||
10. | Directors and Executive Officers of the Registrant | 89 | |||||||
11. | Executive Compensation | 90 | |||||||
12. | Security Ownership of Certain Beneficial Owners and Management | 90 | |||||||
13. | Certain Relationships and Related Transactions | 90 | |||||||
Part IV | |||||||||
14. | Financial Statements, Financial Statement Schedules, Exhibits and Reports on Form 8-K | 91 | |||||||
Signatures | 92 | ||||||||
Independent Auditors' Consent | 93 | ||||||||
Exhibit Index | 94 |
* = not an applicable item in the 2001 calendar year for the Company
iii
AVISTA CORPORATION
ACRONYMS AND TERMS
Acronym/Term | Meaning | |||
|
|
|||
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 Companys 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 | ||
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 | ||
WSCC | - | Western Systems Coordinating Council | ||
WUTC | - | Washington Utilities and Transportation Commission |
iv
AVISTA CORPORATION
PART I
This Annual Report on 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 Annual Report on Form 10-K at Item 7 Managements Discussion and Analysis of Financial Condition and Results of Operations Safe Harbor for Forward-Looking Statements. Forward-looking statements are all statements other than statements of historical fact, including without limitation those that are identified by the use of words such as, but not limited to, will, anticipates, seeks to, estimates, expects, intends, plans, predicts, and similar expressions. Such statements are inherently subject to a variety of risks and uncertainties that could cause actual results to differ materially from those expressed.
Item 1. Business
Company Overview
Avista Corporation (Avista Corp. or the Company) was incorporated in the State of Washington in 1889. Avista Corp. is an energy company involved in the generation, transmission and distribution of energy as well as other energy-related businesses. As of December 31, 2001, the Companys employees included approximately 1,435 people in its utility operations and approximately 740 people in its subsidiary businesses. The Companys corporate headquarters are in Spokane, Washington, which serves as the Inland Northwest center for manufacturing, transportation, health care, education, communication, agricultural and service businesses.
The Company is currently organized into four lines of business Avista Utilities, Energy Trading and Marketing, Information and Technology, and Other. Avista Utilities, an operating division of Avista Corp. and not a separate entity, represents the regulated utility operations. Avista Utilities is responsible for electric generation and transmission, and electric and natural gas distribution services. Avista Utilities also engages in wholesale purchases and sales of electric capacity and energy. Avista Capital, a wholly owned subsidiary of Avista Corp., is the parent company of all of the subsidiary companies engaged in the other non-regulated lines of business. The Energy Trading and Marketing line of business includes Avista Energy, Inc. (Avista Energy) and Avista Power, LLC (Avista Power). The Information and Technology line of business includes Avista Advantage, Inc. (Avista Advantage) and Avista Labs, Inc. (Avista Labs). The Other line of business includes Avista Ventures, Inc. (Avista Ventures), Avista Capital (parent company only amounts) and several other minor subsidiaries. In September 2001, the Company made a decision to discontinue the operations of Avista Communications, Inc. (Avista Communications), previously included in the Information and Technology line of business. As of December 31, 2001, the Company had common equity investments of $368.7 million and $351.4 million in Avista Utilities and Avista Capital, respectively.
Avista Utilities seeks to maintain a strong, low-cost and efficient electric and natural gas utility business focused on providing reliable, 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. It is Avista Utilities strategy to own or control a sufficient amount of resources to meet its retail and wholesale electric requirements on an average annual basis. During 2000, Avista Energy scaled back its operations regionally to work primarily within the Western Systems Coordinating Council (WSCC) and has focused on reducing the size and the risk associated with its energy trading and marketing activities. Avista Energys 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 WSCC, as well as its relationship-focused approach to its customers. During 2001, the Company decided that Avista Power would no longer pursue the development of additional non-regulated generation plants. The Company intends to find equity partners to assist in financing the continued growth of the Information and Technology businesses, Avista Advantage and Avista Labs. The Company plans to dispose or phase out of assets and operations that are not related to its energy operations.
The Companys operations are exposed to risks including, but not limited to, 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 purchases and sales.
1
AVISTA CORPORATION
Following is a list of the major subsidiaries of Avista Capital:
Avista Energy -
An electricity and natural gas trading and marketing company,
operating primarily in the WSCC.
Avista Power -
Originally formed to develop and own generating assets.
In 2001, the Company decided that Avista Power would no
longer pursue the development of additional non-regulated
generating plants. Avista Power continues to manage the
generation assets it currently owns.
Avista Advantage -
Provider of internet-based facility intelligence and cost
management services to commercial and industrial customers
in North America.
Avista Labs -
Developed a unique modular proton exchange membrane (PEM)
fuel cell that delivers reliable, affordable and clean
distributed power solutions. In addition to its PEM fuel
cell, Avista Labs seeks to commercialize selected
components to complement its fuel cell in order to deliver
system solutions to industrial, commercial and residential
markets.
The Companys current lines of business, and the companies included within them, are illustrated below:
denotes a business entity.
¡
denotes an operating division or line of business.
2
AVISTA CORPORATION
For the years ended December 31, 2001, 2000 and 1999, respectively, the four
business segments of the Company contributed the following percentages of
consolidated operating revenues, gross margins and income from operations
(pre-tax):
Income from
Operating Revenues
Gross Margins
Operations (pre-tax)
2001
2000
1999
2001
2000
1999
2001
2000
1999
21
%
19
%
14
%
74
%
46
%
105
%
68
%
1
%
402
%
83
%
83
%
84
%
26
%
54
%
(5
)%
56
%
115
%
(276
)%
n/a
n/a
n/a
(18
)%
(12
)%
(25
)%
2
%
n/a
n/a
n/a
(6
)%
(4
)%
(1
)%
(4
)%
(2
)%
n/a not applicable
The table above only includes results from continuing operations.
Gross margin is calculated as operating revenues less resource costs and is only calculated for Avista Utilities and Energy Trading and Marketing. (See Schedule of Information by Business Segments in the Consolidated Financial Statements for further information).
3
Avista Utilities
General
Avista Utilities generates, transmits and distributes electricity and distributes natural gas. Retail electric and natural gas customers include residential, commercial and industrial classifications. Avista Utilities also engages in wholesale purchases and sales of electric capacity and energy as part its resource management and load-serving obligations.
Avista Utilities provides electric 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 830,000. 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 525,000. At the end of 2001, Avista Utilities supplied retail electric service to approximately 317,000 customers in eastern Washington and northern Idaho and retail natural gas service to approximately 284,000 customers in parts of Washington, Idaho, Oregon and California.
Avista Utilities anticipates residential and commercial electric load growth to average between 2.0 and 3.0 percent 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; however, the average annual usage by residential customers is not expected to change significantly. For the next five years, Avista Utilities expects natural gas load growth, including transportation volumes, to average between 1.5 and 2.0 percent annually in Washington and Idaho and between 2.0 and 3.0 percent annually in the Oregon and South Lake Tahoe service areas. 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 Avista Utilities 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. Managements 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 generates electricity for sales to retail customers. Avista Utilities owns and operates eight hydroelectric projects, a wood-waste fueled generating station and a two-unit natural gas-fired combustion turbine (CT) generating facility. It also owns a 15 percent share in a two-unit coal-fired generating facility and leases and operates a two-unit natural gas-fired CT generating facility. In addition, Avista Utilities has a number of long-term power purchase and exchange contracts that increase its available resources. See Item 2. Properties for further information with respect to generation properties. Avista Utilities plans to add new generation assets in 2002 with the planned completion of the Coyote Springs 2 project and the addition of two small generation facilities.
Historically, Avista Utilities electric rates to retail customers have been among the lowest of investor-owned utilities in the United States, due primarily to its large proportion of hydroelectric resources as compared to other investor-owned utilities. Retail electric rates remain low, relative to other investor-owned utilities in the United States, even after the enactment of recent temporary surcharges and rate increases. See Regulatory Issues-Power Cost Deferrals for further information.
Avista Utilities sells and purchases electric capacity and energy to and from utilities and other entities in the wholesale market under long-term contracts having terms of more than one year. In addition, Avista Utilities engages in an ongoing process of resource optimization which involves short-term purchases and sales in the wholesale market in pursuit of an economic selection of resources to serve retail and wholesale loads. Avista Utilities makes continuing projections of (1) future retail and wholesale loads based on, among other things, forward estimates of factors such as customer usage and weather as well as historical data and contract terms and (2) resource availability based on, among other things, estimates of streamflows, generating unit availability, historic and forward market information and experience. On the basis of these continuing projections, Avista Utilities makes purchases and sales of energy on a quarterly, monthly, daily and hourly basis to match actual resources to actual energy requirements and to sell any surplus at the best available price. This process includes hedging transactions.
Avista Utilities competes in the electric wholesale market with other utilities, federal marketing agencies and power marketers. The electric wholesale market has changed significantly over the last few years with respect to market participants involved, level of activity, variability of prices, FERC-imposed price caps and counterparty credit issues. These changes contributed to the increased volatility of the wholesale market during 2000 and the first half of 2001. During the second half of 2001 wholesale market prices and volatility both decreased to levels similar to those
4
AVISTA CORPORATION
experienced before 2000. See Western Power Market Issues and Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations -Western Power Market Issues for more information.
Challenges facing Avista Utilities electric operations include, among other things, the ability to recover deferred power supply costs and the timing of such recovery, changes in the availability of and volatility in the prices of power and fuel, generating unit availability, legislative and governmental regulations, and weather conditions. Avista Utilities believes it faces minimal risk for stranded utility assets resulting from deregulation due to its relatively 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. Avista Utilities may also be exposed to refunds for wholesale power sales depending on the outcome of the FERCs retroactive price cap proceeding for the Pacific Northwest; however, Avista Utilities would have the opportunity to establish offsetting claims. See Industry Restructuring, Western Power Market Issues, Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations Western Power Market Issues and Note 1 of Notes to Consolidated Financial Statements for additional information.
Electric Requirements
Annual peak requirements for 2001 were 3,234 MW (including long-term wholesale obligations of 937 MW and short-term wholesale obligations of 797 MW). This peak occurred on January 16, 2001 at which time the maximum resource capacity available from Avista Utilities was 3,553 MW. The maximum resource capacity included 1,418 MW of company-owned electric generation, 144 MW from long-term hydroelectric contracts, 548 MW of other long-term wholesale purchases and 1,443 MW of short-term wholesale purchases. Variations in energy usage by Avista Utilities 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 necessitates a continual balancing of loads and resources, and requires both purchases and sales of energy for annual, quarterly, monthly, daily and hourly periods in order to meet electric requirements and to prudently manage and optimize available resources.
Electric Resources
General Avista Utilities diverse electric 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 a low-cost producer of electric energy. As of December 31, 2001, Avista Utilities total owned and leased resource capability was approximately 1,480 MW, of which 65 percent was hydroelectric and 35 percent was thermal. See Avista Utilities Operating Statistics Electric Operations for energy resource statistics.
Hydroelectric Resources Hydroelectric generation is Avista Utilities lowest cost source per MWh of electricity and the availability of hydroelectric generation has a significant effect on its total power supply costs. Under average operating conditions, Avista Utilities projects that it would be able to meet approximately one-half of its total electric requirements (both retail and long-term wholesale) with its own hydroelectric generation and fixed long-term hydroelectric contracts with certain Public Utility Districts in Washington state. Total hydroelectric resource generation (both company-owned and purchased under long-term hydroelectric contracts) was 3.2 million MWhs in 2001, a decrease from 4.7 million MWhs in 2000 and 5.4 million MWhs in 1999.
Total hydroelectric resources (including resources purchased under long-term hydroelectric contracts) provide 550 aMW (or 4.8 million MWhs) annually under normal streamflow conditions. The streamflows to company-owned hydroelectric projects were 56 percent, 86 percent and 112 percent of normal in 2001, 2000 and 1999, respectively. In a critical water year (defined by the Northwest Power Pool as the worst water conditions on record), Avista Utilities would expect hydroelectric production of 400 aMW, 150 aMW below normal. Average hydroelectric production for the year 2001 was 369 aMW, which is 181 aMW below normal and the lowest level in the 73 years in which records have been kept. The combination of low hydroelectric production and other factors resulted in Avista Utilities incurring power supply costs during the second half of 2000 and the year 2001 significantly in excess of the amount of power supply costs recovered through retail rates in effect at the time. See Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations Avista Utilities-Regulatory Matters for more information.
Thermal Resources Avista Utilities has a 15 percent interest in a twin-unit, coal-fired generating facility, the Colstrip 3 & 4 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 a two-unit natural gas-fired CT generating facility, located in northeast Spokane (Northeast CT). In addition, Avista Utilities also leases and operates a two-unit natural gas-fired CT generating facility in northern Idaho (Rathdrum CT).
5
AVISTA CORPORATION
Until May 2000, Avista Utilities had a 15 percent interest in a twin-unit, coal-fired generating facility, the Centralia Power Plant (Centralia) in western Washington. In May 2000, the owners of Centralia sold the plant to TransAlta. 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 receives approximately 200 megawatts per hour during the term of the contract beginning each July and continuing through March of the following year.
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.
Kettle Falls primary fuel is wood-waste generated as a by-product from forest industry operations within 100 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.
The Northeast CT and Rathdrum CT are natural gas-fired generating units that were primarily used for peaking electric requirements prior to 2000. Due to the shortage of hydroelectric generation during 2000 and 2001 and the relative operating cost compared to higher wholesale market prices, these generating units were operated on a more frequent basis. The Northeast CT and the Rathdrum CT have access to natural gas supplies that are adequate to meet their respective operating needs.
The following table shows Avista Utilities thermal resource generation (in
thousands of MWhs) during the years ended December 31:
2001
2000
1999
493
1,224
1,617
1,473
1,622
361
370
273
1,023
817
234
3,001
3,153
3,353
Purchases, Exchanges and Sales Avista Utilities purchases power under various long-term purchase contracts. Avista Utilities also enters into a significant number of short-term sales and purchases with terms of up to one year.
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 rates approved by the Washington Utilities and Transportation Commission (WUTC) and the Idaho Public Utilities Commission (IPUC). These contracts expire at various times through 2022.
See Avista Utilities Operating Statistics Electric Energy Resources for more detailed information with respect to purchased power and power from exchanges in 2001, 2000 and 1999.
Future Resource Needs
In August 2000, the WUTC approved Avista Utilities plan to increase its power resources to serve long-term electric requirements. The Company evaluated 32 third-party supply-side and demand-side proposals submitted through the request-for-proposal process in 2000. In December 2000, Avista Utilities selected the Coyote Springs 2 project, located near Boardman, Oregon, as the supply-side option.
The Coyote Springs 2 project is a combined-cycle, natural gas-fired combustion turbine with generation output of approximately 280 MW. Engineering and procurement of required major equipment began in January 2001. In December 2001, the Company completed the sale of 50 percent of its interest in the Coyote Springs 2 project to an affiliate of Mirant Americas Development, Inc. (Mirant). The Company and Mirant are sharing equally in the costs of construction, operation and output from the plant. The total cost of the plant is expected to be approximately $190 million. Upon completion of construction, expected to be in the third quarter of 2002, the Companys 50 percent ownership interest in the Coyote Springs 2 project will be transferred from Avista Power to Avista Corp. to be operated as an asset of Avista Utilities.
Due to the shortage of hydroelectric generation and high wholesale market prices during the first half of 2001, Avista Utilities initiated the process of placing several small diesel and natural gas-fired generators into operation at sites in its
6
AVISTA CORPORATION
service territory. Due to the reduction in wholesale market prices during the second half of 2001, Avista Utilities reevaluated the cost of the small generation units and will not operate as many of the units as originally planned. The Boulder Park generation facility (Boulder Park) located in Spokane County and a small combustion generation unit in Kettle Falls, Washington (Kettle Falls CT) will be in operation by mid-2002. These projects have a combined generation capability of 32 MW.
As part of the strategy to mitigate the decrease in electric resources caused by the low hydroelectric availability and volatile energy markets, Avista Utilities implemented several buy-back and rebate programs for retail customers during 2001. The programs were designed to encourage conservation and decrease average customer usage.
Avista Utilities has operational strategies to ensure that it has available
resources sufficient to meet the increased demand for energy. Under normal
water conditions and loads, Avista Utilities hydroelectric and thermal
generation and long-term contracts would have been able to provide 100 percent
of its forecasted native retail load and wholesale energy requirements during
2001. Avista Utilities has made purchases to enable it to cover its electric
energy requirements for 2002 and believes that it will be in a surplus power
position in 2003 and 2004 under normal water conditions.
Forecasted Electric Energy Requirements and Resources
(aMW)
2002
2003
2004
1,001
1,021
1,055
48
24
7
1,049
1,045
1,062
550
550
550
299
361
366
275
264
244
1,124
1,175
1,160
75
130
98
(1) | Assumes normal water conditions, which is the mean of the 60 years between 1928 and 1988. Preliminary forecasts indicate streamflows are expected to be 87 percent of normal in 2002 based on current snow pack conditions. Avista Utilities currently estimates that hydroelectric generation will be 534 aMW in 2002. | |
(2) | Includes new generation available in 2002 from the Companys 50 percent ownership in the Coyote Springs 2 project. Forecast assumes no generation from the Northeast CT and the Rathdrum CT, which are generally only used to meet peaking electric load requirements, and/or when operating costs are lower than short-term wholesale market prices. |
Significant Customer A contract with Avista Utilities largest customer, Potlatch Corporation (Potlatch), expired on December 31, 2001. Since 1992 Potlatch had received service under a special contract under the PURPA. Potlatchs Lewiston, Idaho facility includes about 100 aMW of electric requirements and approximately 60 aMW of self-generation that is currently economic to operate. Avista Utilities and Potlatch are currently negotiating a new agreement. As part of the new agreement, the parties have agreed that Potlatch will receive electric service from Avista at large industrial tariff (Schedule 25) rates. Potlatch is currently using its generation for its own electric requirements, which results in a net electric requirement on Avista Utilities system of approximately 40 aMW. Although Potlatch would like to sell its generation output, the current market price for wholesale electricity is below the Schedule 25 rates, therefore Potlatch uses its generation to meet its electric requirements. The ultimate resolution of this contract could have an impact on Avista Utilities resource planning, that Avista Utilities is working to minimize through continued negotiations of the terms and conditions associated with service to Potlatch under Schedule 25 rates. Any changes in the revenue and expense associated with serving Potlatch would be reflected in the Idaho power cost adjustment mechanism (PCA).
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 FERC. Avista Corp.s 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
7
AVISTA CORPORATION
investment or fair value of the project, in either case, plus severance damages. All but one of the Companys hydroelectric plants are regulated by the FERC through project licenses issued for 30-50 year periods.
In February 2000, Avista Utilities received a 45-year operating license from the FERC for the Cabinet Gorge and Noxon Rapids Hydroelectric Generating Developments. The Clark Fork Settlement Agreement, included as part of the FERC license procedures, preserved the projects economic peaking and load following operations. As part of the Clark Fork Settlement Agreement, Avista Utilities initiated implementation of protection, mitigation and enhancement measures in March 1999. Measures in the agreement, which will cost approximately $4.7 million annually, address issues related to fisheries, water quality, wildlife, recreation, land use, cultural resources and erosion. Recovery of previously deferred hydroelectric relicensing costs, as well as estimated levels of ongoing costs associated with implementation of the Settlement Agreement, were addressed by both the WUTC and IPUC and received favorable treatment. Costs of approximately $15 million deferred during the licensing phase were allowed in rate base and are being amortized over the 45-year license term. The ongoing Clark Fork Settlement Agreement costs are recorded as operating expenses. See Item 2. Properties Avista Utilities and Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations Future Outlook for additional information.
The issue of high levels of dissolved gas which exceed Idaho water quality standards downstream of Cabinet Gorge during spill periods continues to be studied, as agreed to in the Clark Fork 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 identified several possible structural alternatives at Cabinet Gorge that may reduce dissolved gas levels. Under the terms of the Clark Fork 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 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; the Company will file a notice of intent to relicense before August 2002. Planning, discussions with stakeholder groups and information gathering activities are ongoing.
Natural Gas Operations
Natural gas commodity prices increased dramatically during 2000 and remained high during the first half of 2001 before declining during the second half of the year. Natural gas commodity costs in excess of the amount recovered in current rates are deferred and recovered in future periods with applicable regulatory approval through adjustments to rates. Market prices for natural gas continue to be competitive compared to alternative fuel sources for residential, commercial and industrial customers. Avista Utilities believes that natural gas should sustain its market advantage based on the levels of existing reserves and potential natural gas development in the future. Growth has occurred in the natural gas business due to increased demand for natural gas in new construction, as well as conversions from electric space and water heating to natural gas.
Avista Utilities makes sales and provides transportation service directly to large natural gas customers. The majority of Avista Utilities large industrial customers purchase their own natural gas requirements through natural gas marketers. For these customers, Avista Utilities provides transportation from its pipeline interconnection to the customers premises. 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 2001, 2000 and 1999 was 180.9, 224.8 and 232.4 million therms, which represented approximately 33 percent, 38 percent and 35 percent of Avista Utilities total system deliveries, respectively.
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 natural gas costs.
8
AVISTA CORPORATION
Natural Gas Resources
Natural Gas Supply Natural gas supplies are available from domestic and Canadian sources through both long- and short-term, or spot market, purchases. Avista Utilities has capacity delivery rights on six pipelines and owns natural gas storage facilities. A diverse portfolio of natural gas resources allows Avista Utilities to capture market opportunities that benefit its natural gas customers.
The Companys energy trading and marketing subsidiary, Avista Energy, is responsible for the daily management and optimization of these resources for the requirements of customers in the states of Washington, Idaho and Oregon under an agreement with Avista Utilities. Under this relationship, Avista Utilities retains ownership of its transportation, storage and long-term contracts and Avista Energy acts as an agent to optimize these important resources. The utility commissions have approved Benchmark Incentive Mechanisms that allow Avista Utilities and its customers to share the benefits of Avista Energys resource optimization activities. See Regulatory Issues: Natural Gas Benchmark Mechanism and Note 1 of Notes to Consolidated Financial Statements for additional information.
Firm natural gas supplies are available through negotiated agreements for terms ranging between one month and seven years. Approximately 25 percent of the natural gas supplies are obtained from domestic sources, with the remaining 75 percent 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 supplies from the United States.
Jackson Prairie Natural Gas Storage Project (Jackson Prairie Storage Project) Avista Utilities owns a one-third interest in the Jackson Prairie Storage Project, an underground natural gas storage field located near Chehalis, Washington. The role of the Jackson Prairie Storage Project in providing flexible natural gas supplies is 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, the process of increasing the capacity at the Jackson Prairie Storage Project was completed. This increased capacity is being operated and managed by Avista Energy for a ten-year period. Avista Utilities has contracted to release a total of approximately 43 percent of its Jackson Prairie Storage Project capacity to two other utilities. One of these contracts requires two years notice for termination and one contract is renewed on a year to year basis.
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 and 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. The FERC also issued orders with respect to a price mitigation plan applicable to certain wholesale power transactions throughout the western United States during the period June 2001 through September 2002. See Western Power Market Issues for additional information.
In each regulatory jurisdiction, rates 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) are currently determined on a cost of service basis and are 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 Consolidated Financial Statements for additional information about regulation, depreciation and deferred income taxes. See Industry Restructuring for additional information about deregulation.
Power Cost Deferrals In August 2000, the WUTC approved Avista Utilities request for deferred accounting treatment for certain power costs related to, among other things, increases in short-term wholesale electric prices from July 1, 2000 through June 30, 2001. Avista Utilities is permitted to defer the recognition in the income statement of the portion of power supply costs that is in excess of the level currently recovered from retail customers. Deferred power supply costs are recorded as a deferred charge on the balance sheet for future review and the opportunity for recovery through retail
9
AVISTA CORPORATION
rates. The specific power costs deferred include the changes in power costs to Avista Utilities from the costs included in base retail rates, related to changes in short-term wholesale market prices, changes in the level of hydroelectric generation and changes in the level of thermal generation (including changes in fuel prices). In January 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.
In May 2001, the WUTC approved a settlement agreement reached among Avista Corp., the staff of the WUTC and other parties with respect to deferred power costs. The agreement, among other things, provided for the extension of Avista Corp.s deferred accounting mechanism through February 2003. During June and the first part of July of 2001, Avista Utilities evaluated the effect of several significant developments that changed its plans for the recovery of deferred power costs. These developments included a decline in hydroelectric availability, the increased cost of energy and capacity to meet retail and wholesale demand for 2001 and a decline in wholesale market prices. As such, Avista Utilities determined that its plan for recovery of deferred cost balances, as contemplated in the May 2001 settlement agreement with the WUTC and the existing PCA with the IPUC, was not feasible.
Accordingly, in July 2001 Avista Utilities filed requests with the WUTC and IPUC for the approval of an electric energy surcharge of 36.9 percent in Washington and a PCA surcharge of 14.7 percent in Idaho for a 27-month period beginning in September 2001.
In September 2001, the WUTC ordered a 25 percent temporary electric rate surcharge for the 15-month period from October 1, 2001 to December 31, 2002 applied uniformly across all Washington electric customer classes. As part of the surcharge order, the WUTC ordered Avista Utilities to file a general rate case by December 2001. The order by the WUTC also provided for the termination of the accounting mechanism for the deferral of power costs effective December 31, 2001. The WUTC subsequently approved the continuation of the accounting mechanism for deferred power costs for the period from January 1, 2002 through the conclusion of the general rate case.
In November 2001, Avista Utilities filed a request with the WUTC for an expedited procedural schedule to address the prudence and recoverability of deferred power costs incurred as of September 30, 2001. In March 2002, the WUTC issued an order approving the prudence and recoverability of 90 percent of deferred power supply costs incurred during the period from July 1, 2000 through December 31, 2001. This resulted in the Company expensing $21.8 million of power supply costs previously deferred.
In October 2001, the IPUC issued an order approving a 14.7 percent PCA surcharge for Idaho electric customers and granted an extension of a 4.7 percent PCA surcharge implemented earlier in 2001 that was to expire January 31, 2002. Both PCA surcharges will remain in effect until October 11, 2002. The IPUC directed Avista Utilities to file a status report 60 days before the PCA surcharge expires. If review of the status report and the actual balance of deferred power costs support continuation of the PCA surcharge, the IPUC has indicated that it anticipates the PCA surcharge would be extended for an additional period. The current PCA mechanism allows for the deferral of 90 percent of the difference between actual net power supply expenses and the authorized level of net power supply expense approved in the last Idaho general rate case.
As of December 31, 2001, total deferred power costs were $213.3 million, including $140.2 million in Washington and $73.1 million in Idaho. In 2001, revenue collected under the Washington and Idaho surcharges totaled $14.4 million and deferred power costs were further reduced $60.7 million through the amortization of a deferred non-cash credit. Based on current projections, total deferred power costs balances are expected to be approximately $150 million at the end of 2002 and fully recovered by 2007.
See Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations Avista Utilities-Regulatory Matters for additional information.
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 percent, subsequently revised to $18.2 million, and a general natural gas rate increase of $4.9 million, or 6.5 percent. In September 2000, the WUTC ordered a $3.4 million, or 1.4 percent, reduction in electric rates and a $1.7 million, or 2.1 percent, increase in natural gas rates. The WUTC also ordered that Avista Utilities overall rate of return for both electricity and natural gas be reduced from 10.7 percent to 9.03 percent. Avista Utilities had requested a 9.9 percent overall rate of return. Avista Utilities filed a Petition for Reconsideration with the WUTC requesting that the commission reconsider certain portions of its order. In November 2000, the Commission slightly modified the original order, 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.
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AVISTA CORPORATION
On December 3, 2001, the Company filed a general electric rate case with the WUTC, as ordered by the WUTC in September 2001. Issues to be addressed include, among other things, the recovery of cash outlays for increased power supply costs and expenses related to building additional generation. The rate case requested by Avista Corp. proposes a 10.39 percent overall rate of return. The WUTC may take up to 11 months to review the general rate case filing.
In the rate case filing with the WUTC, Avista Corp. requested an interim rate increase of 10 percent (or $29.3 million in annual revenues) above current rates (including the 25 percent temporary surcharge approved by the WUTC in September 2001 discussed above). In March 2002, the WUTC ordered an increase to base retail rates of 6.2 percent (or $14.7 million in annual revenues). The order also modified the temporary electric surcharge such that one-fifth of the existing 25 percent surcharge will be applied to offset the Companys general operating costs and the remainder will continue to be applied as a recovery of deferred power costs. In the general rate case filing, the Company requested that a number of adjustments be made that would result in no net change to rates above the interim rate increase. The Company requested that once the interim rate increase ends, base electric rates would increase by 22.5 percent (or $53.2 million in annual revenues) and the electric surcharge would be reduced from 25 percent to 14.9 percent. These rate increases are necessary in order to continue the recovery of deferred power costs. The proposed rate increases also reflect, among other things, the recovery of costs associated with the addition of the Companys 50 percent ownership in the Coyote Springs 2 power plant and the construction of two small generation projects built to serve retail customer needs.
In the general rate case, Avista Corp. requested the implementation of a temporary accounting mechanism for the deferral of power supply costs incurred in excess of the amount recovered through rates effective January 1, 2002 until the conclusion of the general rate case. The WUTC approved this request on December 21, 2001. In the general rate case, Avista Corp. requested the establishment of a permanent PCA mechanism to increase or decrease future electric rates based on actual power supply costs, similar to the Idaho PCA mechanism that allows for the deferral of 90 percent of the difference between actual net power supply costs and the authorized level of net power supply costs.
In Avista Utilities last general electric rate case in Idaho, the IPUC granted a rate increase of $9.3 million, or 7.6 percent, with an authorized rate of return of 8.98 percent, effective August 1999.
Purchased Gas Adjustment (PGA or Natural Gas Trackers) Natural gas trackers are supplemental tariffs filed with state regulatory commissions designed to pass through changes in purchased natural gas costs, and do not normally result in any changes in net income. In July 2001, Avista Utilities filed requests for PGAs with the WUTC and the IPUC. Both the Washington PGA increase of 12.2 percent approved by the WUTC and the Idaho PGA increase of 11.5 percent approved by the IPUC became effective in August 2001. Avista Utilities estimates these PGA rate changes will increase revenues by $24.6 million for approximately one year. Total deferred natural gas costs were $52.7 million as of December 31, 2001. Based on current PGAs in place and current natural gas prices, Avista Utilities expects that the deferred natural gas cost balance will be fully recovered by December 2002.
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 eliminated natural gas procurement operations within Avista Utilities for these jurisdictions and consolidated gas procurement operations under Avista Energy, the Companys non-regulated affiliate. The ownership of the natural gas assets remains with Avista Utilities; however, Avista Energy through an Agency Agreement with Avista Utilities manages the assets. 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.
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 a single portfolio and to gain efficiencies by eliminating duplicate functions. Effective January 1, 2001, the WUTC and IPUC approved Avista Utilities modifications to the Natural Gas 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 such additional flexibility was needed in the Natural Gas Benchmark Mechanism to properly manage costs. The Natural Gas Benchmark Mechanism provides certain guaranteed benefits to retail customers and provides the Company with the opportunity to improve earnings (a performance-based mechanism).
Avista Utilities provided notice of its intent to continue the Natural Gas Benchmark Mechanism and related Agency Agreement with Avista Energy to the applicable state regulatory agencies in 2001. In early 2002, the WUTC approved the continuation of the Natural Gas Benchmark Mechanism and related Agency Agreement through March 31, 2003 and the IPUC approved the continuation through March 31, 2005. The OPUC is expected to make its ruling in late March 2002.
11
AVISTA CORPORATION
Demand Side Management (DSM) and Low-Income Assistance Programs DSM programs are designed to encourage conservation of energy. In February 2001, the WUTC and the IPUC approved Avista Utilities implementation of a natural gas revenue surcharge of 0.5 percent to provide funding for natural gas energy-efficiency programs. Avista Utilities currently has electric revenue surcharges, or tariff riders, of approximately 1.5 percent in Washington and Idaho to fund its electric DSM programs. The tariff rider has been in place since 1995 and was the first system benefit charge for energy efficiency in the United States.
Effective May 2001, the WUTC approved an increase in electric and natural gas surcharges, or tariff rider, of 0.79 percent to supplement the Community Action Agencys existing federal and state low-income heating energy assistance program and Project Share funds. The annual revenue of approximately $2.7 million funds eastern Washington agencies assistance to help in-need customers pay their energy bills.
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 expanded the authority of 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 FERCs 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 1997. FERC Orders No. 888 and No. 889 have not had a material effect on Avista Utilities operating results.
Avista Corp. and three other Western utilities have taken steps toward the formation of a for-profit Independent Transmission Company (ITC), TransConnect, which would serve portions of six states. TransConnect would be a member of the planned regional transmission organization, RTO West, a non-profit entity, and it would own or lease the high voltage transmission facilities currently held by Avista Corp., Portland General Electric Co., Nevada Power Co. and Sierra Pacific Power Co. A proposal was filed in October 2000 in response to the FERCs Order No. 2000, which requires utilities subject to FERC regulation to file a proposal to form a Regional Transmission Organization (RTO), or a description of efforts to participate in an RTO, and any existing obstacles to RTO participation. In April 2001, the FERC issued the RTO West/TransConnect order granting, with modifications, the participating companies petition. Avista Corp. is actively evaluating this order to determine the effects of the modifications and the impact to the potential development of TransConnect. TransConnect filed its proposal with FERC in November 2001. Avista Corp. only joined in the planning protocol modified governance for this filing. The final proposal 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 or RTO West will ultimately depend on the conditions related to the formation of the entities, as well as the economics and conditions imposed in the regulatory approval process. If TransConnect were formed, it could result in Avista Utilities divesting $174 million of electric transmission assets.
The North American Electric Reliability Council and the WSCC have undertaken initiatives to establish a series of security coordinators to oversee the reliable operation of the regional transmission system. Accordingly, Avista Utilities, in cooperation with other utilities in the Pacific Northwest, established the Pacific Northwest Security Coordinator (PNSC), which oversees daily and short-term operations of the Northwest sub-regional transmission grid and has limited authority to direct certain actions of control area operators in the case of a pending transmission system emergency. Avista Utilities executed its service agreement with the PNSC in September 1998.
12
AVISTA CORPORATION
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 were examined. Impacts on customer service quality and system reliability (generation, transmission and distribution) were 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 Californias deregulation have affected wholesale power prices in the western United States, including the Companys service territory. See Western Power Market Issues for information about the California energy situation.
An initiative was presented in November 2001 in Montana to create a public agency to own and operate all hydroelectric generating facilities within the state. Avista Utilities largest generation plant, Noxon Rapids, is located in Montana on the Clark Fork River. If this proposed initiative obtains the required signatures by June 21, 2002 and is passed into law in the November 2002 General Election, Noxon Rapids could be acquired from the Company either through a negotiated sale or at fair market value through a condemnation proceeding. This could have significant negative ramifications for the Company. As such, the Company intends to vigorously oppose this initiative and intends to legally defend itself against the acquisition of Noxon Rapids. See Note 24 of Notes to Consolidated Financial Statements for additional information.
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 were designed to comply with all applicable environmental laws. Furthermore, the Company conducts periodic reviews of all its facilities and operations to respond to or anticipate emerging environmental issues. The Companys Board of Directors has an Environmental Committee to deal specifically with these issues.
Air Quality The most significant impact on the Company related to the Clean Air Act (CAA) and the 1990 Clear Air Act Amendments (CAAA) pertains to Colstrip, which is a Phase II coal-fired plant under the CAAA. Colstrip is not expected to be required to implement any additional sulfur dioxide (SO2) mitigation in the foreseeable future in order to continue operations. Avista Utilities other thermal projects 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 Rathdrum CT was issued in December 2000. During 2001, the Company applied to renew the operating permit for the Kettle Falls plant and applied for an upgrade to a Title V permit for the natural gas-fired CTs located in Spokane. The Company anticipates the receipt of these operating permits during the second quarter of 2002. Additionally, the Company received operating permits for several small generation projects during 2001. Due to the decline in wholesale market prices during the second half of 2001, Avista Utilities reevaluated the cost of the small generation units and will not operate as many of the units as originally planned.
During 2001, Avista Corp. extended the operating hours of the Northeast CT with an agreement with the Spokane County Air Pollution Control Authority (SCAPCA) under a special operating order called an Assurance of Discontinuance (AOD). The SCAPCA has allowed for continued operation of the Northeast CT upon the condition of a payment of $150 for each hour of operation paid into a mitigation fund for assistance to low-income customers and the payment of $10,000 for each day of operation to fund an environmental offset project. The AOD allows Avista Utilities to use the Northeast CT to temporarily bring on added generating capacity for the benefit of its customers and the region during a time of increased energy demand and limited energy resources. Extended operation of the Northeast CT was approved after the SCAPCA determined, through air emission modeling and projections, that extended operation of the turbine would not adversely impact air quality. The funding of the environmental offset project will be paid until such time as a new operating permit is issued by the SCAPCA. The Company submitted its permit application for permanent operation of the Northeast CT in November 2001.
See Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations Future Outlook and Note 24 of the Notes to Consolidated Financial Statements for additional information.
13
AVISTA CORPORATION
AVISTA UTILITIES OPERATING STATISTICS
Years Ended December 31,
2001
2000
1999
$
158,847
$
158,065
$
158,658
155,371
149,770
152,107
80,433
82,992
69,559
3,790
3,612
3,517
398,441
394,439
383,841
480,903
864,754
522,499
42,861
28,062
21,824
$
922,205
$
1,287,255
$
928,164
3,219
3,279
3,237
2,882
2,886
2,848
1,892
2,048
2,032
25
25
25
8,018
8,238
8,142
6,262
15,807
19,778
14,280
24,045
27,920
2,564
3,819
4,287
3,001
3,153
3,353
631
929
1,093
4,196
5,500
4,791
3,869
10,611
14,308
559
595
598
(104
)
67
16
14,716
24,674
28,446
(436
)
(629
)
(526
)
14,280
24,045
27,920
276,845
273,219
270,013
35,454
35,060
34,877
1,434
1,254
1,189
402
392
389
314,135
309,925
306,468
44
58
68
314,179
309,983
306,536
11,629
12,003
11,990
4.93
4.82
4.90
$
573.77
$
578.53
$
587.59
975
1,012
990
1,500
1,491
1,351
1,734
2,338
3,281
3,234
3,829
4,632
3,553
4,194
4,831
1,379
1,473
1,418
1,332
2,756
4,590
2,711
4,229
6,008
2,927
4,656
6,633
14
AVISTA CORPORATION
Years Ended December 31,
2001
2000
1999
$
179,584
$
128,240
$
99,879
104,012
69,982
51,952
11,130
7,680
5,047
294,726
205,902
156,878
1,762
5,691
15,189
8,576
10,242
10,777
3,579
3,011
4,640
$
308,643
$
224,846
$
187,484
198,413
212,198
200,184
126,869
135,126
125,611
15,523
18,350
16,450
340,805
365,674
342,245
4,831
4,034
74,117
180,918
224,803
232,388
15,430
1,391
10,152
541,984
595,902
658,902
348,620
372,795
430,698
(62
)
(467
)
(30,508
)
54
403
23,972
180,918
224,803
232,388
14,662
589
351
(2,208
)
(2,221
)
2,001
541,984
595,902
658,902
249,650
242,983
234,844
30,355
29,739
29,032
328
334
338
280,333
273,056
264,214
2
2
9
86
96
107
280,421
273,154
264,330
852
950
887
89.24
57.82
45.74
$
760.02
$
549.07
$
405.51
688
730
789
93.44
66.83
58.59
$
643.31
$
487.80
$
462.21
2,236
2,347
2,077
4,320
4,320
4,320
6,800
7,176
6,408
6,842
6,842
6,842
99
%
105
%
94
%
4,143
4,388
4,401
4,611
4,611
4,611
90
%
95
%
95
%
(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 indicate warmer than average temperatures). |
15
AVISTA CORPORATION
Western Power Market Issues
Avista Utilities and Avista Energy are directly and indirectly involved with issues surrounding Western power markets, including the California market. In early 2001, Californias two largest utilities, Southern California Edison (SCE) and Pacific Gas & Electric Company (PG&E), defaulted on payment obligations owed to various energy sellers, including the California Power Exchange (CalPX), California Independent System Operator (CalISO), and Automated Power Exchange (APX). CalPX, CalISO and APX defaulted on their payment obligations to Avista Energy. PG&E and CalPX filed voluntary petitions under chapter 11 of the bankruptcy code for protection from creditors. SCE has remained outside of bankruptcy.
The FERC issued an order in August 2000 initiating hearing proceedings under section 206 of the Federal Power Act to address matters affecting bulk power markets and wholesale energy prices (including volatile price fluctuations) in California. In November 2000 the FERC proposed specific remedies to address dysfunctions in Californias wholesale bulk markets and to ensure just and reasonable wholesale power rates by public utility sellers in California. The FERC denied requested refunds from sellers of electric power for sales prior to October 2, 2000 and held that sales made after October 2, 2000 are subject to refund, with the level and extent of any refund to be determined in future orders. In April 2001, the FERC issued a price mitigation order that affected the CalISO spot market. In June 2001, the FERC expanded its price mitigation plan for the California spot market to 24 hours a day, seven days a week and broadened the price curbs to the eleven state Western region through September 2002. Since June 2001, spot market prices have remained below the FERC-imposed caps.
Earlier in 2001, the Governor of California invoked emergency executive powers to seize certain power contracts (called block forward contracts) between the CalPX and, respectively, PG&E and SCE after PG&Es and SCEs defaults. The block forward contracts would have been significant assets of the CalPX bankruptcy estate if they had not been so removed by the Governor. PG&E, SCE, the CalPX Creditors Committee, and certain individual creditors filed suits separately against the State of California for compensation related to the seized block forward contracts. In September 2001, the U.S. Court of Appeals for the Ninth Circuit ruled that wholesale energy suppliers are entitled to injunctive relief from the State of California. At this time, it is not possible to predict the timing or outcome of this claim against the State of California.
In July 2001, the FERC issued an order to commence a fact-finding hearing to determine amounts to be refunded for sales during the period from October 2, 2000 to June 20, 2001 in the California spot market operated by the CalISO and the CalPX. The order provides that any refunds owed could be offset against unpaid energy debts due to the same party. The FERC schedule for this proceeding has been postponed repeatedly and is not expected to be continued until August 2002 or later. Avista Energy is participating in this proceeding pursuant to the FERC order and cannot predict its outcome at this time.
The July 2001 FERC order also directed a separate evidentiary proceeding to explore wholesale power market issues in the Pacific Northwest. The FERCs Pacific Northwest proceeding seeks to determine whether there were excessive charges for spot market sales in the Pacific Northwest in the period December 25, 2000 to June 20, 2001, and whether there is sufficient factual basis for the FERC to take further action. Based on their application of selected retroactive pricing methods, certain parties have asserted claims for significant refunds from Avista Energy and lesser refunds from Avista Utilities. Avista Energy and Avista Utilities joined with numerous other wholesale market participants to vigorously oppose proposals for retroactive price caps and refund claims. In September 2001, the FERCs administrative law judge for this proceeding issued a recommendation that the FERC should not order refunds for the Pacific Northwest for the period in question and that the FERC should take no further action on these matters. The FERC has not yet issued a decision in the Pacific Northwest refund proceeding.
In September 2001, PG&E filed a plan of reorganization that provides for payment to all creditors on or around January 1, 2003. The PG&E plan requires various approvals, including procedural and content matters, by the Federal Bankruptcy Court, Securities and Exchange Commission, Nuclear Regulatory Commission, and the FERC. Various parties, including consumer groups and the CPUC, have announced opposition to the plan of reorganization. The CPUC filed a term sheet in February 2002 outlining an alternative plan of reorganization. On February 27, 2002, the Federal Bankruptcy Court ruled that the CPUC would be permitted to file its full plan, which it must do by April 15, 2002. The CPUC term sheet estimates that creditors would be paid in or around January 2003.
In October 2001, SCE and the CPUC announced a settlement of SCEs filed rate doctrine lawsuit. By entering into a settlement agreement and obtaining additional financing, SCE made substantially full payment on its past due obligations on March 1, 2002. The defaulted payments due to Avista Energy remain entangled with the CalPX, which was the intermediary between many energy sellers and SCE as energy purchaser.
16
AVISTA CORPORATION
As of December 31, 2001, Avista Energys accounts receivable related to defaulting parties in California net of reserves for uncollected amounts, cost of collection, and refunds were approximately $6.5 million. Avista Energy is currently pursuing recovery for the defaulted obligations.
Energy Trading and Marketing Line of Business
The Energy Trading and Marketing line of business includes Avista Energy and Avista Power, both wholly owned subsidiaries of Avista Capital.
Avista Energy
Avista Energy is an electricity and natural gas trading and marketing business focused on marketing energy in the western United States. In 1997, Avista Energy began conducting business on a national basis and expanded operations with its acquisition of Vitol Gas & Electric, LLC in 1999. However, in November 1999, the Company decided to reduce Avista Energys 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 western United States. Avista Energys trading and marketing efforts are backed by contracts for energy commodities and by the output of specific facilities available under contract. Avista Energys headquarters are in Spokane, Washington, and it also has an office in Vancouver, British Columbia, Canada.
Avista Energy is in the business of buying and selling electricity and natural
gas. Avista Energys 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. Most transactions are conducted on a largely unregulated
over-the-counter basis, there being no central clearing mechanism (except in
the case of specific instruments traded on the commodity exchanges). During
1999, Avista Energy also sold and traded coal and SO2 allowances, but
eliminated these activities in 2000 as contracts expired. The following table
provides operating statistics for Avista Energy for the years ended December
31:
2001
2000
1999
$
3,380,058
$
4,721,291
$
4,745,615
1,619,285
1,751,264
1,900,487
1,612
58,996
49,569
$
5,000,955
$
6,531,551
$
6,695,671
47,927
105,548
135,099
248,193
273,448
775,822
3,514
1,638
Although Avista Energy scaled back operations to focus primarily in the western United States during 2000, its trading operations continue to be affected by, among other things, volatility of prices within the electric energy and natural gas markets, the demand for and availability of energy, lower unit margins on new sales contracts, FERC- ordered price caps, financial condition of counterparties and deregulation of the electric utility industry.
In April 1997, Avista Energy entered into a marketing agreement with Chelan County Public Utility District (PUD), located in Washington State. The agreement allows Avista Energy to market, on a real-time basis, a portion of the output from Chelan County PUDs 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 storage assets, transportation contracts and natural gas purchasing operations. Under an Agency Agreement, Avista Energy serves as agent for Avista Utilities, managing its pipeline transportation rights 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; however, they are fully integrated operationally into Avista Energys portfolio. A benchmark incentive mechanism 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 for continuation of the agreement and the benchmark incentive mechanism were received from the state regulatory agencies in Washington and Idaho in
17
AVISTA CORPORATION
early 2002. The current benchmark incentive mechanism and related Agency Agreement expires in March 2003 in Washington and March 2005 in Idaho. The OPUC is expected to issue its ruling in late March 2002.
Avista Energy is subject to the various risks inherent in commodity trading including, particularly, market risk, liquidity risk, commodity risk and credit risk. See Western Power Market Issues, Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations Future Outlook, and Notes 1, 5 and 7 of Notes to Consolidated Financial Statements for additional information regarding the market and credit risks inherent in the energy trading business, fourth quarter 1999 restructuring costs, Avista Energys risk management policies and procedures, accounting practices, and positions held by Avista Energy as of December 31, 2001.
Avista Capital provides guarantees for Avista Energys 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 Capital had $91.6 million of such guarantees outstanding as of December 31, 2001.
Avista Power
Avista Power was formed to develop and own generation assets. During 2001, the Company decided that Avista Power would no longer pursue the development of additional non-regulated generation projects due to changing market conditions and as part of Avista Corp.s overall business strategy. Avista Power continues to manage the generation assets it currently owns.
Avista Power is a 49 percent owner of a 270 MW natural gas-fired combustion turbine plant in Rathdrum, Idaho, which commenced commercial operation in September 2001. The output from this plant is contracted to Avista Energy for 25 years. Avista Power is also in the process of constructing the Coyote Springs 2 power plant and completed the sale of 50 percent of its interest in the plant to Mirant in December 2001. Upon the planned completion of the plant in the third quarter of 2002, Avista Powers 50 percent ownership interest will be transferred to Avista Corp. to be operated as an asset of Avista Utilities.
Information and Technology Line of Business
The Information and Technology line of business includes Avista Advantage and Avista Labs. Avista Advantage and Avista Labs are majority-owned and wholly owned subsidiaries of Avista Capital, respectively.
Avista Advantage
Avista Advantage is a provider of internet-based facility intelligence and cost management billing and information services to customers throughout North America. Avista Advantages solutions are designed to provide multi-site companies with critical and easy-to-access information that enables them to proactively manage and reduce their facility-related expenses.
Avista Advantage analyzes and presents consolidated bills on-line, and pays utility and other facility-related expenses for multi-site customers. Information gathered from invoices, providers and other customer-specific data allows Avista Advantage to provide its customers with in-depth analytical support, real-time reporting and consulting services with regard to facility-related energy, waste, repair and maintenance, and telecom expenses.
Avista Advantage has secured five patents on its two critical business systems, the Facility IQ system, which provides operational information drawn from facility bills, and the AviTrack database, which processes and reports on information gathered from service providers 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 of its 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 December 31, 2001, Avista Advantage serviced 203 customers, having 79,749 billed sites throughout North America. This is an increase from 135 customers and 46,127 billed sites as of December 31, 2000. As of December 31, 1999, Avista Advantage serviced 75 customers and 21,186 billed sites. During 2001, Avista Advantage processed $4.3 billion of bills, an increase from $1.1 billion in 2000 and $0.2 billion in 1999.
Two venture capital firms invested a total of $3.4 million in Avista Advantage during the fourth quarter of 2000.
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AVISTA CORPORATION
Avista Labs
Avista Labs 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 PEM fuel cell, Avista Labs seeks to commercialize selected components to complement its fuel cell in order to deliver system solutions to industrial, commercial and residential markets.
Avista Labs was granted three patents, with more than 260 issued claims recognizing and protecting the unique attributes of its fuel cell system. Avista Labs received notice of allowance of two additional patents, including a patent with 301 claims protecting its modular approach to the design of fuel cell systems. Avista Labs has 21 more patent applications pending or in process directed to its unique approach in fuel cells, power conversion and other components.
Key alliances in bringing Avista Labs product to market include a joint marketing agreement with Black & Veatch, a leading engineering, procurement and construction company, and an agreement with Logan Industries, Inc., which has been assembling Avista Labs fuel cell units for field testing and sales since early in 1999. In June 2001, Avista Labs entered into an agreement with Maxwell Technologies to provide PowerCache ultracapacitors to optimize performance and reduce the cost of its unique, modular fuel cells systems and components. Avista Labs and Maxwell Technologies entered a multi-year agreement and are exploring areas of mutual interest for a broader strategic relationship.
In January 2001, Avista Labs formed a new company, H2fuel, LLC, to develop and commercialize technology for manufacturing hydrogen for fuel cells and other hydrogen applications. Avista Labs owns a 70 percent interest in H2fuel. The remaining interest is owned by Unitel Fuels Technologies, LLC. Avista Labs transferred its ongoing fuel processor development work to H2fuel. H2fuel has two patent applications pending directed to the use of certain catalysts for autothermal reforming.
During 2001, Avista Labs also introduced a hydrogen sensor product for fuel cell developers and other hydrogen users. This hydrogen sensor can be a component of any fuel cell system and is currently commercially available. It is the first hydrogen sensor to receive Underwriters Laboratories, Inc., recognition under UL standard 2075.
During 2001, Avista Labs achieved a key milestone by initiating commercial sales of its hydrogen-only fuel cell systems for various applications, primarily back-up power for the commercial market. Avista Labs completed commercial transactions for the sale or lease of 50 units during 2001. As of December 31, 2001, 76 fuel cell units were installed in 21 locations in North and South America. As of December 31, 2000, 29 fuel cell units were installed.
Other Line of Business
The Other line of business includes several minor subsidiaries, including Avista Ventures, Pentzer Corporation (Pentzer), Avista Development and Avista Services. The operations of Avista Capital that are not included through its subsidiaries are included in this line of business. Prior to 1999, Pentzer was the parent company to the majority of Avista Corp.s other subsidiary business, controlling interests in a broad range of middle market companies. Beginning in 2000, the focus of this line of business was changed to invest in business opportunities that have potential value to the Companys energy-related businesses. Currently, activities in this line of business are not significant and the Company intends to limit its future investment in this line of business.
Discontinued Operations Avista Communications
Avista Communications provided local dial tone, data transport, internet services, voice messaging and other telecommunications services to several communities in the western United States. In September 2001, the Company made a decision to discontinue the operations of Avista Communications, previously included in the Information and Technology line of business. As such, Avista Communications is reported as a discontinued operation. The divestiture of Avista Communications is expected to be completed during the first half of 2002.
19
AVISTA CORPORATION
Item 2. Properties
Avista Utilities
Avista Utilities electric properties, located in the States of Washington,
Idaho, Montana and Oregon, include the following:
Generation Properties (1)
Nameplate
Present
No. of
Rating
Capability
Units
(MW) (2)
(MW) (3)
4
70.0
88.0
4
32.0
36.0
4
26.4
24.5
1
10.0
10.2
1
14.8
15.0
4
245.1
246.0
6
14.8
18.0
5
466.2
527.0
879.3
964.7
1
50.7
50.0
2
61.8
66.8
2
166.5
176.0
2
233.4
222.0
512.4
514.8
1,391.7
1,479.5
(1) | All generation properties are owned by the Company with the exception of the Rathdrum CT, which is leased. | |
(2) | Nameplate Rating, also referred to as installed capacity, is the manufacturers assigned power rating under specified conditions. | |
(3) | Capability is the maximum generation of the plant without exceeding approved limits of temperature, stress and environmental conditions. | |
(4) | Jointly owned; data above refers to Avista Utilities 15 percent interest. |
Electric Distribution and Transmission Plant
Avista Utilities operates approximately 12,200 miles of primary and secondary electric distribution lines and an electric transmission system of approximately 595 miles of 230 kV line and 1,520 miles of 115 kV line. Avista Utilities also owns a 10 percent 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 BPA at five locations and at one location each with PacifiCorp, Montana Power and Idaho Power Company. The BPA interconnections serve as points of delivery for power from the Colstrip generating station, as well as for the interchange of power with entities outside the Pacific Northwest. The interconnection with PacifiCorp is used to integrate Mid-Columbia
20
AVISTA CORPORATION
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 BPA at nine locations, Grant County PUD, Seattle City Light and Tacoma City Light at two locations each and one interconnection each with Chelan County PUD, PacifiCorp and Montana Power.
Natural Gas Plant
Avista Utilities has natural gas distribution mains of approximately 2,542 miles in Washington, 1,436 miles in Idaho and 1,895 miles in Oregon and California combined, as of December 31, 2001.
Avista Utilities, Northwest Pipeline and Puget Sound Energy each own a one-third undivided interest in the Jackson Prairie 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 24 of Notes to Consolidated Financial Statements for additional information.
Item 4. Submission of Matters to a Vote of Security Holders
None.
PART II
Item 5. Market for Registrants 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, 2002, there were approximately 18,120 registered shareholders of the Companys no par value Common Stock.
The Board of Directors considers the level of dividends on the Companys common stock on a continuing basis, taking into account numerous factors including, without limitation, the Companys results of operations and financial condition, as well as general economic and competitive conditions. The Companys net income available for dividends is derived primarily from Avista Utilities operations.
For additional information, refer to Notes 1, 20 and 23 of Notes to Consolidated Financial Statements. For high and low stock price information, refer to Note 26 of Notes to Consolidated Financial Statements.
21
AVISTA CORPORATION
Item 6. Selected Financial Data
Years Ended December 31,
2001
2000
1999
1998
1997
(In thousands, except per share data and ratios)
$
1,230,847
$
1,512,101
$
1,115,647
$
1,049,212
$
891,665
5,000,955
6,531,551
6,695,671
2,408,734
247,028
13,815
5,732
2,266
1,318
792
16,385
32,937
122,303
231,483
163,598
(252,155
)
(176,744
)
(33,488
)
(7,440
)
(1,149
)
$
6,009,847
$
7,905,577
$
7,902,399
$
3,683,307
$
1,301,934
$
114,927
$
3,177
$
142,567
$
143,153
$
178,289
94,669
250,196
(97,785
)
22,826
6,577
(29,872
)
(26,424
)
(8,966
)
(4,979
)
(5,391
)
(10,432
)
(9,861
)
(423
)
12,033
9,962
$
169,292
$
217,088
$
35,393
$
173,033
$
189,437
$
24,164
$
(38,781
)
$
59,573
$
56,297
$
100,777
70,087
161,753
(60,739
)
14,116
5,346
(19,384
)
(19,032
)
(5,989
)
(3,221
)
(3,455
)
(15,262
)
(2,885
)
35,817
11,124
12,099
$
59,605
$
101,055
$
28,662
$
78,316
$
114,767
$
(47,449
)
$
(9,376
)
$
(2,631
)
$
(177
)
$
30
$
12,156
$
91,679
$
26,031
$
78,139
$
114,797
$
2,432
$
23,735
$
21,392
$
8,399
$
5,392
$
9,724
$
67,944
$
4,639
$
69,740
$
109,405
47,417
45,690
38,213
54,604
55,960
47,435
46,103
38,325
54,658
55,960
47,633
47,209
35,648
40,454
55,960
$
0.46
$
(1.37
)
$
1.00
$
0.88
$
1.70
1.47
3.51
(1.59
)
0.26
0.10
(0.41
)
(0.41
)
(0.16
)
(0.06
)
(0.06
)
(0.32
)
(0.06
)
0.94
0.20
0.22
$
1.20
$
1.67
$
0.19
$
1.28
$
1.96
$
(1.00
)
$
(0.20
)
$
(0.07
)
$
$
$
0.20
$
1.47
$
0.12
$
1.28
$
1.96
$
0.21
$
1.49
$
0.12
$
1.28
$
1.96
$
0.48
$
0.48
$
0.48
$
1.05
$
1.24
$
15.12
$
15.34
$
11.04
$
12.07
$
13.38
$
2,396,317
$
2,143,791
$
1,976,716
$
2,004,935
$
1,926,739
1,506,185
10,271,834
1,595,470
955,615
212,868
26,891
14,429
6,312
2,492
2,221
86,514
96,362
114,929
285,625
268,703
21,316
50,665
20,067
4,969
1,254
$
4,037,223
$
12,577,081
$
3,713,494
$
3,253,636
$
2,411,785
$
1,175,715
$
679,806
$
714,904
$
730,022
$
762,185
$
100,000
$
100,000
$
110,000
$
110,000
$
110,000
$
35,000
$
35,000
$
35,000
$
35,000
$
45,000
$
$
$
263,309
$
269,227
$
$
720,063
$
724,224
$
393,499
$
488,034
$
748,812
1.84
3.45
1.66
2.66
3.49
1.78
2.19
1.11
2.26
3.12
22
AVISTA CORPORATION
Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis is provided for the consolidated financial condition and results of operations of Avista Corporation (Avista Corp. or the Company) which includes its subsidiaries. This discussion focuses on significant factors concerning the Companys financial condition and results of operations and should be read along with the consolidated financial statements.
Avista Corp. Lines of Business
Avista Corp. is an energy company involved in the generation, transmission and distribution of energy as well as other energy-related businesses. The Company is currently organized into four lines of business Avista Utilities, Energy Trading and Marketing, Information and Technology, and Other. Avista Utilities, 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., is the parent company of all of the subsidiary companies engaged in the other non-regulated lines of business. As of December 31, 2001, the Company had common equity investments of $368.7 million and $351.4 million in Avista Utilities and Avista Capital, respectively.
Avista Utilities generates, transmits and distributes electricity and distributes natural gas. Avista Utilities owns and operates eight hydroelectric projects, a wood-waste fueled generating station and a two-unit natural gas-fired combustion turbine (CT) generating facility. It also owns a 15 percent share in a two-unit coal-fired generating facility and leases and operates a two-unit natural gas-fired CT generating facility. These facilities have a total net capability of approximately 1,480 megawatts, of which 65 percent is hydroelectric and 35 percent is thermal.
In addition to company owned resources, Avista Utilities has a number of long-term power purchase and exchange contracts that increase its available resources. Avista Utilities sells and purchases electric capacity and energy to and from utilities and other entities in the wholesale market under long-term contracts having terms of more than one year. In addition, Avista Utilities engages in an ongoing process of resource optimization which involves short-term purchases and sales in the wholesale market in pursuit of an economic selection of resources to serve retail and wholesale loads. Avista Utilities makes continuing projections of (1) future retail and wholesale loads based on, among other things, forward estimates of factors such as customer usage and weather as well as historical data and contract terms and (2) resource availability based on, among other things, estimates of streamflows, generating unit availability, historic and forward market information and experience. On the basis of these continuing projections, Avista Utilities makes purchases and sales of energy on a quarterly, monthly, daily and hourly basis to match actual resources to actual energy requirements and to sell any surplus at the best available price. This process includes hedging transactions.
During a year having normal water conditions, Avista Utilities would expect to have generation from its hydroelectric resources (both owned and purchased under long-term hydroelectric contracts) of approximately 550 average megawatts (aMW). In a critical water year (defined by the Northwest Power Pool as the worst water conditions on record), Avista Utilities would expect hydroelectric production of 400 aMW, 150 aMW below normal. Average hydroelectric production for the year 2001 was 369 aMW (67 percent of normal), which is 181 aMW below normal and the lowest level in the 73 years in which records have been kept. Preliminary forecasts indicate streamflow conditions are expected to be 87 percent of normal in 2002 based on current snow pack conditions. Avista Utilities currently estimates that hydroelectric generation will be 534 aMW (97 percent of normal) in 2002.
Developments in wholesale energy markets, compounded by the record low availability of hydroelectric resources in 2001, have had an adverse effect on Avista Corp.s financial condition, results of operations, cash flows and liquidity. See Avista Utilities Regulatory Matters, Results of Operations and Liquidity and Capital Resources.
The Energy Trading and Marketing line of business is comprised of Avista Energy, Inc. (Avista Energy) and Avista Power, LLC (Avista Power). Avista Energy is an electricity and natural gas marketing and trading business, operating primarily in the Western Systems Coordinating Council (WSCC), which is comprised of the eleven Western states. Avista Power was originally formed to develop and own generation assets. During 2001, the Company decided that Avista Power would no longer pursue the development of additional non-regulated generation projects.
The Information and Technology line of business is comprised of Avista Advantage, Inc. (Avista Advantage) and Avista Laboratories, Inc. (Avista Labs). Avista Advantage is a provider of internet-based facility intelligence, cost management billing and information services to retail customers throughout North America. Its primary product
23
AVISTA CORPORATION
lines include consolidated billing, resource accounting, energy analysis, load profiling and maintenance and repair billing services. Avista Labs developed a unique modular Proton Exchange Membrane (PEM) fuel cell that delivers reliable, affordable and clean distributed power solutions. In addition to its PEM fuel cell, Avista Labs seeks to commercialize selected components to complement its fuel cell in order to deliver system solutions to industrial, commercial and residential markets.
The Other line of business includes Avista Ventures, Inc. (Avista Ventures), Avista Capital (parent company only amounts), Pentzer Corporation (Pentzer) and several other minor subsidiaries. During 2000, the focus of this line of business was changed from investing in a broad range of middle market companies to investing in business opportunities that have potential value to the Companys energy-related businesses. Currently, activities in this line of business are not significant and the Company intends to limit its future investment in this line of business.
Avista Communications, Inc. (Avista Communications) provided local dial tone, data transport, internet services, voice messaging and other telecommunications services to several communities in the western United States. In September 2001, Avista Corp. decided that it would dispose of substantially all of the assets of Avista Communications. As such, these operations are reported as a discontinued operation. Avista Corp. began its divestiture of this business during the fourth quarter of 2001, and the divestiture is expected to be completed during the first half of 2002.
Avista Utilities Regulatory Matters
Beginning in the second quarter of 2000, the price of power in the wholesale markets of the western United States increased considerably and became much more volatile. While prices and volatility decreased during the second half of 2001, the effects of contracts entered during the period of high wholesale prices continue to have a significant impact on Avista Corp.s financial condition and results of operations. In the second half of 2000 and continuing through 2001, Avista Utilities was required to purchase above-normal amounts of power in the wholesale market to meet its retail demand. This was primarily due to the reduced availability of hydroelectric resources as a result of low streamflow conditions. The combination of high wholesale market prices and increased amounts required to be purchased increased power supply costs to amounts far in excess of the amounts recovered from retail customers under current rates.
Under current orders and approvals from the Washington Utilities and Transportation Commission (WUTC) and the Idaho Public Utilities Commission (IPUC), Avista Utilities is permitted to defer the recognition in the income statement of 90 percent of power supply costs that are in excess of the level currently recovered from retail customers. Deferred power supply costs are recorded as a deferred charge on the balance sheet for future review and the opportunity for recovery through retail rates. The specific power costs deferred include the changes in power costs to Avista Utilities from the costs included in base retail rates, related to changes in short-term wholesale market prices, changes in the level of hydroelectric generation and changes in the level of thermal generation (including changes in fuel prices). The power costs deferred relate solely to the operation of Avista Utilities system resources to serve its retail and wholesale load obligations.
In December 2001, the Company filed a general rate case with the WUTC to address, among other things, the recovery of cash outlays for increased power supply costs and expenses related to building additional generation. The WUTC may take up to 11 months to review the general rate case filing. Avista Corp. requested an interim rate increase of 10 percent (or $29.3 million in annual revenues) above current rates (including the 25 percent temporary surcharge approved by the WUTC in September 2001). At the conclusion of the general rate case, Avista Corp. requested that a number of adjustments be made that would result in no net change to rates above the interim rate increase. The interim rate increase would end, base electric rates would increase by 22.5 percent (or $53.2 million in annual revenues) and the electric surcharge would be reduced from 25 percent to 14.9 percent. These rate increases are necessary in order to continue the recovery of deferred power costs. The proposed rate increases also reflect, among other things, the recovery of costs associated with the addition of the Companys 50 percent ownership in the Coyote Springs 2 power plant and the addition of several small generation projects built to serve retail customer needs. The general rate case proposed by Avista Corp. requests a 12.75 percent rate of return on common equity and a 10.39 percent overall rate of return.
In the December 2001 general rate case filing, Avista Corp. requested the implementation of a temporary accounting mechanism for the deferral of power costs incurred in excess of the amount recovered through rates effective January 1, 2002 until the conclusion of the general rate case. The WUTC approved this request in December 2001. In the general rate case, Avista Corp. requested the establishment of a permanent power cost adjustment (PCA) mechanism to increase or decrease future electric rates based on actual power supply costs, similar to the existing Idaho PCA
24
AVISTA CORPORATION
mechanism. This provides for the deferral of 90 percent of the difference between actual net power supply costs and the amount of power supply costs authorized in current rates.
In March 2002, the WUTC issued an order approving a settlement agreement reached among Avista Corp., the staff of the WUTC and other parties. This order approves the prudence and recoverability of 90 percent (or $196 million) of deferred power supply costs incurred by the Company during the period from July 1, 2000 through December 31, 2001. This resulted in the Company recording as an expense an additional $21.8 million in power supply costs for the year ended December 31, 2001.
Additionally, the WUTC order provides that the collection of the 25 percent temporary electric surcharge, approved by the WUTC in September 2001, will no longer be subject to refund. The order also modified the temporary electric surcharge such that one-fifth (or approximately $12 million in annual revenues) of the existing 25 percent surcharge will be applied to offset the Companys general operating costs and the remainder (approximately $47 million in annual revenues) will continue to be applied as a recovery of deferred power costs. The WUTC also ordered a 6.2 percent (or $14.7 million in annual revenues) increase in base electric rates for Washington customers. Both the 6.2 percent increase in base electric rates and one-fifth of the temporary surcharge will increase net income.
As of December 31, 2001, total deferred power costs were $213.3 million,
including $140.2 million in Washington and $73.1 million in Idaho. Based on
current projections, total deferred power costs balances are expected to be
approximately $150 million at the end of 2002 and fully recovered by 2007. The
following table shows activity in deferred power costs for Washington and Idaho
during 2001 (dollars in thousands):
Washington
Idaho
Total
$
34,580
$
2,693
$
37,273
155,241
67,086
222,327
9,838
3,606
13,444
(1,866
)
(1,866
)
199,659
71,519
271,178
11,955
6,591
18,546
8,232
4,077
12,309
6,189
2,037
8,226
(53,794
)
(6,927
)
(60,721
)
(10,223
)
(4,210
)
(14,433
)
(21,780
)
(21,780
)
$
140,238
$
73,087
$
213,325
The following discussion details significant developments during the second half of 2000 and the year 2001 leading to the March 2002 WUTC orders and the December 2001 general electric rate case filing.
In August 2000, the WUTC approved Avista Utilities request for deferred accounting treatment for certain power costs related to, among other things, increases in short-term wholesale electric prices beginning July 1, 2000 through June 30, 2001. In January 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 approval of the modification was conditioned on Avista Utilities filing by March 2001 a proposal addressing the prudence of the incurred power costs, the optimization of Company-owned resources to the benefit of retail customers and the appropriateness of recovery of power costs through a deferral mechanism. This proposal was also to address cost of capital offsets to recognize the shift in risk from shareholders to ratepayers and Avista Utilities plan to mitigate the deferred power costs.
In May 2001, the WUTC approved a settlement agreement reached among Avista Corp., the staff of the WUTC and other parties with respect to deferred power costs. The agreement, among other things, provided for the extension of Avista Corp.s deferral accounting mechanism through February 2003. Due to the planned addition of generating resources as well as the expiration of certain long-term power sale agreements, Avista Utilities, at the time of the settlement agreement, expected to be in a power surplus position by the middle of 2002. The agreement was based, in part, on the expectation that Avista Utilities profits from surplus power sales would offset the deferred power cost balance, reducing the balance to zero by the end of February 2003 without any rate increase to retail customers. These expectations were based on assumptions as to a number of variables including, but not limited to, streamflow conditions, thermal plant performance, level of retail loads, wholesale market prices and the amount of additional generating resources. Avista Utilities reserved the right to alter, amend, or terminate the settlement agreement as
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AVISTA CORPORATION
well as the right to seek interim rate relief. As discussed below, subsequent events and conditions changed Avista Utilities original expectations and plans.
In response to the dramatically reduced generation from hydroelectric facilities commencing in the second quarter of 2001, Avista Utilities was required to make additional fixed price purchases of energy to meet its retail and wholesale electric requirements for 2001 on the higher cost short-term wholesale market.
In June 2001, the Federal Energy Regulatory Commission (FERC) issued an order adopting a price mitigation plan applicable to certain wholesale power sales in California and throughout the western United States during the period June 20, 2001 through September 30, 2002. The order applies to pre-schedule (day-ahead) and real-time (hour-ahead) transactions in the western United States. Wholesale market prices in the western United States decreased considerably after the price caps were imposed and prices remained well below the price cap levels through the end of 2001. The decrease in wholesale market prices affected Avista Utilities plan for recovery of deferred power costs through future surplus power sales.
During June and the first part of July 2001, Avista Utilities evaluated the effect of the recent decline in wholesale market prices and the FERC price mitigation plan on its ability to recover deferred power cost balances under the settlement agreement approved by the WUTC in May 2001 and the continuing PCA mechanism for Idaho customers approved by the IPUC. The decline in forward wholesale prices and the FERC price mitigation plan reduced the expected value from future surplus sales of energy. In addition, low hydroelectric availability combined with the high cost of energy and capacity under forward contracts entered to meet customer demand for 2001 increased current and estimated future deferred power costs to levels significantly higher than originally anticipated. As such, Avista Utilities determined that the plan for recovery of deferred power cost balances, as contemplated in the May 23, 2001 settlement agreement with the WUTC and the existing PCA with the IPUC, was not feasible.
Accordingly, in July 2001 Avista Utilities filed requests with the WUTC and IPUC for the approval of an electric energy surcharge of 36.9 percent in Washington and a PCA surcharge of 14.7 percent in Idaho for a 27-month period beginning in September 2001.
In September 2001, the WUTC ordered a 25 percent temporary electric rate surcharge for the 15-month period from October 1, 2001 to December 31, 2002 applied uniformly to energy charges across all Washington electric customer classes. The March 2002 WUTC order amended the surcharge such that one-fifth will be applied to offset the Companys general operating costs and the remainder will continue to be applied as a recovery of deferred power costs. It was originally estimated the order would allow Avista Utilities to reduce the deferred power cost balance by $125 million. This included the receipt of $71 million in additional revenue from the surcharge ($10.2 million was received during 2001) and the accelerated amortization of $54 million of a deferred non-cash credit on the Companys balance sheet in October 2001. The deferred non-cash credit related to funds received in December 1998 for the monetization of a contract in which the Company assigned and transferred certain rights under a long-term power sales contract with Portland General Electric (PGE) to a funding trust. The deferred non-cash credit balance was originally to be amortized into revenues over the 16-year period of the long-term sales contract. There is no direct impact on net income from either the surcharge or accelerated amortization of the deferred non-cash credit; however, the surcharge revenue increases cash flows.
As part of the surcharge order, the WUTC ordered Avista Utilities to file a general rate case by December 2001 as discussed above. The order by the WUTC also provided for the termination of the accounting mechanism for the deferral of power costs effective December 31, 2001. The WUTC subsequently approved the continuation of the accounting mechanism for deferred power costs for the period from January 1, 2002 through the conclusion of the general rate case. As requested by Avista Utilities, the deferred power cost accounting mechanism was modified to reflect the deferral of 90 percent of the difference between actual power supply costs and the amount of power supply costs allowed to be recovered in current retail rates.
In October 2001, the IPUC issued an order approving a 14.7 percent PCA surcharge for Idaho electric customers and granted an extension of a 4.7 percent PCA surcharge implemented earlier in 2001 that was to expire January 2002. Both PCA surcharges will remain in effect until October 2002. The IPUC directed Avista Utilities to file a status report 60 days before the PCA surcharge expires. If review of the status report and the actual balance of deferred power costs support continuation of the PCA surcharge, the IPUC has indicated that it anticipates the PCA surcharge will be extended for an additional period. It is currently estimated the IPUC order will allow Avista Utilities to reduce the deferred power cost balance by approximately $58.2 million. This includes the receipt of $23.6 million in additional revenue from the PCA surcharges ($4.2 million was received during the fourth quarter of 2001) and the accelerated amortization of $34.6 million of a deferred non-cash credit on the Companys balance sheet for the
26
AVISTA CORPORATION
monetization of the power sales contract with PGE ($6.9 million was amortized in 2001). There is no direct impact on net income from either the PCA surcharges or accelerated amortization of the deferred non-cash credit; however, the PCA surcharges increase cash flows.
In November 2001, Avista Utilities filed a request with the WUTC for an expedited procedural schedule to address the prudence and recoverability of deferred power costs incurred as of September 30, 2001. The Company made this request due to the fact that uncertainty involving the recovery of deferred power costs would present financing challenges for the Company during the first half of 2002. The Companys $220 million committed line of credit as well as a $90 million accounts receivable financing facility expire in May 2002. The Company may also decide to issue equity securities during 2002. In March 2002, the WUTC approved the prudence and recoverability of 90 percent of deferred power costs incurred as of December 31, 2001 as discussed above.
Enron Exposure
On December 2, 2001, Enron Corporation (Enron) and certain of its affiliates filed for protection under chapter 11 of the United States Bankruptcy Code. The bankruptcy filing constituted an event of default under contracts between Avista Corp. and Avista Energy, respectively, and certain Enron affiliates, Enron Power Marketing, Inc. (EPMI), Enron North America Company (ENA) and Enron Canada Corp. (ECC), that are guaranteed by Enron. As a result, Avista Corp. and Avista Energy terminated all but one of these contracts and suspended trading activities with most Enron affiliates; short-term, balance of the month deals with EPMI are still being transacted through Avista Energy on a prepaid basis.
Both Avista Corp. and Avista Energy engage in physical and financial transactions for the purchase and sale of electric energy and capacity and natural gas. Both companies had done considerable business and had short-term and long-term contracts with Enron affiliates. Avista Corp. has one three-year purchase with remaining deliveries scheduled from 2004 to 2006 with EPMI. Avista Energys long-term contracts with Enron affiliates were terminated entirely.
As of December 31, 2001, Avista Corp. and Avista Energy had net accounts receivable of $3.1 million and $14.1 million, respectively, from Enron affiliates. The contracts of Avista Corp. and Avista Energy with each Enron affiliate provide that, upon termination, the net settlement of accounts receivable and accounts payable with such entity will be netted against the net mark-to-market value of the terminated forward contracts with such entity. It is estimated that, for each of Avista Corp. and Avista Energy, netting the mark-to-market liability against the defaulted net accounts receivable will result in no significant loss due to non-collection from the Enron affiliates. It is further estimated that the net mark-to-market liability to Enron affiliates in respect of terminated forward contracts of Avista Corp. and Avista Energy, taken together, exceeds total net accounts receivable from these entities by less than $30 million. Any claims by the Enron entities for amounts that Avista Corp. and Avista Energy might owe in respect of the terminated forward contracts would be subject to any defenses and counterclaims which Avista Corp. and Avista Energy may have. Any residual obligation by Avista Corp. or Avista Energy for termination payments is not expected to have a material impact on the Companys financial condition or results of operations.
The estimates of the mark-to-market values of terminated forward contracts are based on available broker quotes, for the respective periods, and on assumptions as to future market prices and other information. While Avista Corp. and Avista Energy believe these assumptions are reasonable, they are subject to change and ultimately could be challenged by the Enron entities or their bankruptcy trustees. The mark-to-market value of terminated contracts has not been firmly established and could result in undercollection that is not expected to be material to the financial condition or results of operations of either Avista Corp. or Avista Energy.
National Energy Production Corporation (NEPCO), a wholly owned subsidiary of Enron, is the contractor responsible for the engineering, procurement and construction of the Coyote Springs 2 project. Avista Corp. owns 50 percent of the Coyote Springs 2 project, which is expected to commence commercial operation in the third quarter of 2002. NEPCO was not included in the bankruptcy filings made by Enron and its affiliates. However, Enron guaranteed NEPCOs obligations, and the bankruptcy filing by Enron was an event of default under the Coyote Springs 2 construction contract. NEPCO and Coyote Springs 2, LLC, an entity formed for the purpose of constructing the Coyote Spring 2 plant, amended the construction contract to, among other things, authorize Coyote Springs 2, LLC to make immediate draws under a letter of credit posted to secure NEPCOs performance and to permit Coyote Springs 2, LLC to pay third-party subcontractors of NEPCO directly. Coyote Springs 2, LLC is continuing to assess the ability of NEPCO to perform its obligations under the construction contract and may need to exercise additional remedies in the event the impact of the Enron bankruptcy prevents NEPCO from performing its obligations under the construction contract.
27
AVISTA CORPORATION
Avista Corp. is party to a power exchange arrangement which expires in 2016. Under this power exchange arrangement, EPMI purchases capacity from Avista Corp. and sells capacity to Spokane Energy LLC (Spokane Energy), a subsidiary of Avista Corp., formed in 1998 solely for the purpose of monetizing the long-term capacity contract between PGE and Avista Corp. Spokane Energy sells the related capacity to PGE, a subsidiary of Enron that has not been included in the bankruptcy filing to date and is in the process of being sold to another company. This power exchange arrangement was originally established for the purpose of monetizing a $145 million long-term capacity contract between Avista Corp. and PGE. EPMI assisted in setting up the monetization structure and acts as an intermediary to abide by certain regulatory restrictions that currently prevent Spokane Energy and Avista Corp. from dealing directly with each other. The transaction is structured such that Spokane Energy bears full recourse risk for a monetization loan (balance of $131.1 million as of December 31, 2001) that matures in January 2015 with no recourse to Avista Corp. related to the loan. EPMI is obligated to pay approximately $150,000 per month to Avista Corp. for its capacity purchase and servicing functions related to this power exchange arrangement. EPMI defaulted on two payments to Avista Corp. prior to filing for bankruptcy. As a result, in December 2001, Avista Corp. and EPMI entered an agreement that allows Avista Corp. to continue receiving the monthly payments from EPMI while Avista Corp. evaluates alternatives with respect to EPMIs involvement in the transaction going forward.
Western Power Market Issues
Avista Utilities and Avista Energy are directly and indirectly involved in the power markets in the western United States. Developments in these markets have impacted both Avista Utilities and Avista Energy. Federal and state officials, including the FERC and the California Public Utility Commission (CPUC), commenced reviews in 2000 to determine the causes of the changes in the wholesale energy markets to develop legal and regulatory remedies to address alleged market failures or abuses and large defaults by certain parties in the wholesale markets. The ultimate outcome of these reviews and the resulting impact on the Company cannot be predicted at this time.
In early 2001, Californias two largest utilities, Southern California Edison (SCE) and Pacific Gas & Electric Company (PG&E), defaulted on payment obligations owed to various energy sellers, including the California Power Exchange (CalPX), California Independent System Operator (CalISO), and Automated Power Exchange (APX). CalPX, CalISO and APX defaulted on their payment obligations to Avista Energy. PG&E and CalPX filed voluntary petitions under chapter 11 of the bankruptcy code for protection from creditors. SCE has not filed for bankruptcy protection. As of December 31, 2001, Avista Energys accounts receivable related to defaulting parties in California net of reserves for uncollected amounts, cost of collection, and refunds were approximately $6.5 million. Avista Energy is currently pursuing recovery for the defaulted obligations. Reserves for defaulted payments established in 2000 and 2001 accounted for the majority of the Companys increase in the total allowance for doubtful accounts to $50.2 million as of December 31, 2001 from $14.4 million as of December 31, 2000 and $4.3 million as of December 31, 1999.
In April 2001, the FERC issued a price mitigation order that affected the CalISO spot market. In June 2001, the FERC expanded its price mitigation plan for the California spot market to 24 hours a day, seven days a week and broadened the price caps to the eleven state Western region. Since June 2001, spot market prices have remained below the FERC-imposed caps.
In July 2001, the FERC issued an order to commence a fact-finding hearing to determine amounts to be refunded for sales during the period from October 2, 2000 to June 20, 2001 in the California spot market. The order provides that any refunds owed could be offset against unpaid energy debts due to the same party. The FERC schedule for this proceeding has been postponed repeatedly and is not expected to be continued until August 2002 or later. Avista Energy is participating in this proceeding pursuant to the FERC order and cannot predict its outcome at this time. If retroactive price caps or refunds were imposed, Avista Energy could develop offsetting claims.
The July 2001 FERC order also directed an evidentiary proceeding to explore wholesale power market issues in the Pacific Northwest to determine whether there were excessive charges for spot market sales in the Pacific Northwest during the period from December 25, 2000 to June 20, 2001. Based on their application of selected retroactive pricing methods, certain parties asserted claims for significant refunds from Avista Energy and lesser refunds from Avista Utilities. Avista Energy and Avista Utilities joined with numerous other wholesale market participants to vigorously oppose proposals for retroactive price caps and refund claims. In September 2001, the FERCs administrative law judge for this proceeding issued a recommendation that the FERC should not order refunds for the Pacific Northwest for the period in question and that the FERC should take no further action on these matters. The FERC has not yet issued a decision in the Pacific Northwest refund proceeding. If retroactive price caps or refunds were imposed, Avista Utilities and Avista Energy could develop offsetting claims.
Avista Corp. is participating with other utilities in the Pacific Northwest in the possible formation of a Regional Transmission Organization (RTO), RTO West, a non-profit organization. The potential formation of RTO West is in response to a FERC order requiring all utilities subject to FERC regulation to file a proposal to form a RTO, or a description of efforts to participate in a RTO, and any existing obstacles to RTO participation. Avista Corp. and three other Western utilities have also taken steps toward the formation of a for-profit Independent Transmission Company, TransConnect, which would be a member of RTO West, serve portions of six states and own or lease the high voltage transmission facilities of the participating utilities. TransConnect filed its proposal with FERC in November 2001. The final proposal 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 or RTO West will ultimately depend on the conditions related to the formation of the entities, as well as the economics and conditions imposed in the regulatory approval process. If TransConnect were formed, it could result in Avista Utilities divesting $174 million of electric transmission assets.
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AVISTA CORPORATION
Results of Operations
Overall Operations
2001 compared to 2000
Income from continuing operations was $59.6 million for 2001 compared to income
from continuing operations of $101.1 million for 2000. The decrease is
primarily due to reduced net income recorded by the Energy Trading and
Marketing line of business, partially offset by an increase in net income from
Avista Utilities. Also contributing to the decline in income from continuing
operations was an increase in interest expense and $21.8 million of deferred
power costs written off during 2001. The Energy Trading and Marketing line of
business recorded net income of $70.1 million in 2001 compared to $161.8
million in 2000. Avista Energys operations continue to be positively affected
by a well-positioned portfolio of energy-related assets in the Pacific
Northwest and western energy markets. The primary reason for the decrease in
net income was a reduction in the mark-to-market adjustment for the change in
the fair value position of Avista Energys energy commodity portfolio. During
the second half of 2001, volatility in wholesale energy markets in the western
United States decreased, which reduced Avista Energys earnings potential. Net
income recorded by Avista Utilities was $24.2 million in 2001, an increase from
a net loss of $38.8 million in 2000. Avista Utilities net loss for 2000 was
primarily due to unprecedented sustained peaks in electric energy prices
compounded by a wholesale short position.
The Information and Technology line of business incurred a net loss of $19.4
million for 2001 compared to a net loss of $19.0 million for 2000 as Avista
Advantage and Avista Labs continued to grow their operations.
The Other line of business incurred a net loss of $15.3 million for 2001
compared to a net loss of $2.9 million for 2000. The increase in the net loss
from 2000 is primarily a result of increased interest expense on intercompany
borrowings between Avista Capital and Avista Corp. that is eliminated in the
consolidated financial statements.
The discontinued operations of Avista Communications incurred a net loss of
$47.4 million for 2001 compared to a net loss of $9.4 million for 2000. The
significant loss from Avista Communications is primarily due to pre-tax asset
impairment charges of $58.4 million recorded during the third quarter of 2001.
Total revenues decreased $1,895.7 million in 2001 compared to 2000. Avista
Utilities revenues decreased $281.3 million, or 19 percent, primarily due to
decreased wholesale electric sales partially offset by increased retail
revenues from both electric and natural gas sales. The increase in retail
revenues is primarily a result of higher rates approved by state regulatory
agencies to recover deferred power and natural gas costs. Revenues from the
Energy Trading and Marketing line of business decreased $1,530.6 million, or 23
percent, primarily due to decreased sales volumes of electricity and natural
gas from the continued downsizing of the business. Revenues from the
Information and Technology companies increased 141 percent to $13.8 million
primarily as a result of customer growth at Avista Advantage. Revenues from
the Other line of business decreased $16.6 million, or 50 percent, reflecting
decreased activity in this line of business. Intersegment eliminations
represent the transactions between Avista Utilities and Avista Energy for
commodities and services. Intersegment eliminations increased $75.4 million
from 2000 to 2001. The significant increase was primarily due to an increase
in prices for natural gas to serve Avista Utilities retail customers and to
fuel natural gas-fired turbines to generate electricity.
Resource costs decreased $1,829.0 million in 2001 compared to 2000. Avista
Utilities resource costs decreased $396.5 million, or 32 percent, primarily
due to reduced wholesale power purchases. Energy Trading and Marketing
resource costs decreased $1,357.1 million, or 22 percent, primarily due to
decreased energy trading volumes.
Administrative and general expenses decreased $15.7 million primarily due to
reduced expenses for Avista Utilities and Energy Trading and Marketing. This
was primarily a result of company-wide initiatives to reduce expenses. This
was also due to decreased incentive compensation expense based on lower
earnings by both Avista Energy and the Company.
Interest expense increased $38.2 million in 2001 compared to 2000, primarily
due to higher levels of outstanding debt during the year. Long-term debt and
short-term borrowings outstanding as of December 31, 2001 increased $320.2
million from December 31, 2000.
Capitalized interest increased $7.1 million from 2000 to 2001 primarily due to
increased interest capitalized for the Coyote Springs 2 power plant project.
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AVISTA CORPORATION
Income taxes decreased $42.6 million in 2001 compared to 2000, primarily due to
decreased earnings before income taxes. The effective tax rate was 36.6
percent for 2001 compared to 43.2 percent for 2000. The higher effective tax
rate in 2000 was primarily due to higher state income taxes.
Preferred stock divided requirements decreased from 2000 due to the conversion
of all outstanding shares of Series L Preferred Stock into shares of common
stock, which resulted in a one-time charge of $21.3 million for preferred stock
dividend requirements in 2000.
Diluted earnings per share from continuing operations were $1.20 for 2001
compared to earnings from continuing operations of $1.67 per diluted share for
2000. Avista Utilities contributed $0.46 per share for 2001 compared to a net
loss of $1.37 per share for 2000. The Energy Trading and Marketing operations
contributed $1.47 per diluted share for 2001 compared to a contribution of
$3.51 per diluted share for 2000. The Information and Technology operations
recorded a net loss of $0.41 per diluted share for 2001, consistent with a net
loss of $0.41 per diluted share for 2000. The Other line of business recorded
a net loss of $0.32 per diluted share for 2001 compared to a net loss of $0.06
per diluted share for 2000. The discontinued operations of Avista
Communications recorded a net loss of $1.00 per diluted share for 2001 compared
to a net loss of $0.20 per diluted share for 2000.
2000 compared to 1999
Income from continuing operations was $101.1 million for 2000, an increase
compared to income from continuing operations of $28.7 million for 1999. The
primary reason for the increase in income from continuing operations was
earnings of $161.8 million recorded by the Energy Trading and Marketing line of
business, compared to a loss of $60.7 million in 1999 recorded by this business
segment. Avista Energy benefited in 2000 from a well-positioned portfolio of
energy-related assets and significant increases in the volatility of Pacific
Northwest and western United States energy markets during 2000. 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 net losses from
the other lines of business. Avista Utilities operations recorded a net loss
of $38.8 million for 2000 compared to net income of $59.6 million for 1999,
primarily the result of significantly higher purchased power costs 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).
The Information and Technology line of business incurred a net loss of $19.0
million for 2000 compared to a net loss of $6.0 million for 1999 as Avista
Advantage and Avista Labs substantially increased their operations and the
corresponding effect on operating expenses.
The Other line of business incurred a net loss of $2.9 million for 2000
compared to net income of $35.8 million for 1999. The 1999 earnings included
transactional gains recorded by Pentzer that totaled $35.9 million from the
sale of two groups of portfolio companies.
The discontinued operations of Avista Communications resulted in a net loss of
$9.4 million for 2000 compared to a net loss of $2.6 million for 1999
reflecting the expansion of operations.
Total revenues increased $3.2 million in 2000 compared to 1999; however, there
were large changes within the individual lines of business. Avista Utilities
revenues increased $396.5 million, or 36 percent, primarily due to increased
wholesale electric sales. Revenues for Energy Trading and Marketing decreased
$164.1 million, or 2 percent due to decreased sales volumes of electricity and
natural gas from the restructuring and downsizing of the business, offset by
higher energy commodity prices. Revenues from the Information and Technology
companies increased 153 percent to $5.7 million as Avista Advantage continued
to increase its customer base. Revenues from the Other line of business
decreased $89.4 million or 73 percent due to the sale of the Creative Solutions
Group and Store Fixtures Group of portfolio companies by Pentzer during 1999.
Intersegment eliminations increased $143.3 million from 1999 to 2000. The
significant increase from 1999 to 2000 was primarily due to an entire year of
activity under the agency agreement whereby Avista Energy serves as agent for
Avista Utilities, managing its natural gas pipeline transportation contract
rights and storage assets, as well as purchasing natural gas for Avista
Utilities retail customers.
Resource costs decreased $97.8 million from 1999 to 2000. Avista Utilities
resource costs increased 75 percent, primarily due to increased wholesale power
purchases to meet wholesale sales requirements. Energy Trading and Marketings
resource costs decreased 7 percent, due to reduced energy trading volumes
partially offset by higher energy commodity prices.
30
AVISTA CORPORATION
Operation and maintenance expenses decreased $58.1 million from 1999 to 2000
primarily due to the Other line of business as a result of the sales of
portfolio companies by Pentzer during 1999.
Administrative and general expenses increased $10.9 million from 1999 to 2000.
This was due to both the expansion of operations in the Information and
Technology line of business and increased incentive compensation at Avista
Energy. These increases are partially offset by decreased administrative and
general expenses for the Other line of business as a result of the sales of
portfolio companies by Pentzer during 1999.
Interest expense increased $3.5 million in 2000 compared to 1999, primarily due
to higher levels of outstanding debt during the year. Long-term debt and
short-term borrowings outstanding as of December 31, 2000 were $217.1 million
higher than as of December 31, 1999.
Other income-net decreased $48.1 million from 1999 to 2000 primarily due to a
decrease in the net gain on subsidiary transactions. The net gain of $57.5
million in 1999 primarily related to the sale of two groups of portfolio
companies by Pentzer.
Income taxes increased $60.1 million in 2000 compared to 1999, primarily due to
increased earnings before income taxes. The effective tax rate was 43.2
percent for 2000 compared to 37.1 percent for 1999.
Preferred stock dividend requirements increased $2.3 million in 2000 compared
to 1999 due to the conversion costs and dividends paid associated with
converting the Convertible Preferred Stock, Series L, into common stock in
February 2000.
Diluted earnings per share from continuing operations were $1.67 for 2000
compared to $0.19 for 1999. Energy Trading and Marketings earnings per
diluted share increased to $3.51 in 2000 compared to a loss of $1.59 per
diluted share in 1999, due primarily to the volatile energy market discussed
above. Avista Utilities recorded a loss of $1.37 per diluted share in 2000
compared to earnings of $1.00 per diluted share in 1999. Information and
Technologys net loss increased to $0.41 per diluted share in 2000 compared to
a loss of $0.16 per diluted share in 1999, as Avista Advantage and Avista Labs
continued to grow their operations. Income from the Other line of business
decreased to a loss of $0.06 per diluted share in 2000 compared to earnings of
$0.94 per diluted share in 1999. The 1999 earnings included transactional
gains recorded by Pentzer from the sale of two groups of portfolio companies.
The discontinued operations of Avista Communications net loss was $0.20 per
diluted share in 2000 compared to a loss of $0.07 per diluted share in 1999.
Avista Utilities
2001 compared to 2000
Avista Utilities recorded net income of $24.2 million in 2001 compared to a net
loss of $38.8 million in 2000. Avista Utilities pre-tax income from
operations was $114.9 million for 2001 compared to $3.2 million for 2000. This
increase was primarily due to an increase in gross margin. Avista Utilities
operating revenues decreased $281 million and resource costs decreased $396
million resulting in an increase of $115 million in gross margin for 2001 as
compared to 2000.
Based on views of streamflows, historic wholesale 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 without
making matching purchases at the same time. Avista Utilities also made certain
short-term sales at fixed prices that 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, 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 during the second quarter of 2000. These
purchases were made at fixed prices significantly higher than the related
selling prices and at index, which settled at unprecedented levels in June
2000. The pricing of these purchases caused the majority of Avista Utilities
net loss for 2000.
Avista Utilities short position was compounded by the May 2000 sale of its
interest in the Centralia Power
Plant to TransAlta, which reduced its system capacity by 200 megawatts. Based
on historical trends and Avista Utilities views on power prices and
availability of power for May and June 2000, Avista Utilities did not seek to
replace the Centralia Power Plant 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.
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AVISTA CORPORATION
Retail electric revenues increased $4.0 million for 2001 from 2000. This
increase was primarily due to the electric surcharges implemented in Washington
and Idaho to recover deferred power costs, partially offset by decreased use
per customer and kWh sold. Wholesale electric revenues decreased $383.9
million, or 44 percent, while wholesale sales volumes decreased 60 percent from
2000, reflecting average sales prices that were 40 percent higher than the
prior year. Wholesale sales volumes decreased due to managements decision in
2000 to reduce power imbalance volume limits (the difference between projected
load obligations and projected resource availability). This decision was based
on the emergent market price volatility, and Avista Utilities strategy to
focus primarily on energy transactions necessary 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.
Natural gas revenues increased $83.8 million for 2001 from 2000 due to
increased prices approved by state commissions to recover increased natural gas
costs partially offset by decreased therm sales, primarily due to both
decreased retail and transportation customer volumes.
Power purchased during 2001 decreased $364.2 million, or 34 percent compared to
2000 primarily due to the decreased volume of power purchases, partially offset
by higher average prices. Average purchased power prices for 2001 were 28
percent higher than for 2000; however, volumes purchased decreased 48 percent.
The decrease in the volume of purchased power was primarily the result of
decreases in the volume of wholesale electric sales.
During 2001 Avista Utilities deferred $145.4 million (net of the $21.8 million
write-off) in power costs in Washington and $73.7 million in Idaho. The total
balance of deferred power costs was $140.2 million for Washington and $73.1
million for Idaho as of December 31, 2001. Avista Utilities will only be able
to recover these balances of deferred power costs in the amounts, and at the
times, authorized by the WUTC and the IPUC. In September 2001, the WUTC
approved a temporary electric surcharge of 25 percent. In 2001, revenue
collected under the Washington surcharge was $10.2 million and $53.8 million of
a deferred non-cash credit was offset against deferred power costs. In October
2001, the IPUC approved a PCA surcharge and the extension of a previously
approved PCA surcharge for a total of 19.4 percent. In 2001, revenue collected
under the Idaho PCA surcharges was $4.2 million and $6.9 million of a deferred
non-cash credit was offset against deferred power costs. In March 2002, the
WUTC issued an order approving the prudence and recoverability of 90 percent of
deferred power supply costs incurred during the period from July 1, 2000
through December 31, 2001. This resulted in the Company recording an
additional expense for $21.8 million of power supply costs previously deferred
in 2001. Additionally, the order also provided that one-fifth of the 25
percent electric surcharge will be applied to offset the Companys general
operating costs and the remainder will continue to be applied as a recovery of
deferred power costs. The WUTC order also approved a 6.2 percent (or $14.7
million in annual revenues) increase in base retail rates. See further
description of issues related to deferred power costs in the section Avista
Utilities Regulatory Matters.
Avista Utilities deferred, net of amortization, $7.7 million of purchased
natural gas costs during 2001 and total deferred natural gas costs were $52.7
million as of December 31, 2001. In July 2001, the Company filed requests for
purchased gas cost adjustments (PGA) with the WUTC and the IPUC in order to
recover certain deferred natural gas costs related to Washington and Idaho
natural gas purchases. The Washington PGA increase of 12.2 percent approved by
the WUTC and the Idaho PGA increase of 11.5 percent approved by the IPUC became
effective in August 2001. Avista Utilities estimates these PGA rate changes
will increase revenues by $24.6 million for approximately one year. Based on
current PGAs in place and current natural gas prices, Avista Utilities expects
that the deferred natural gas cost balance will be fully recovered by December
2002. However, there will be no impact on net income as deferred natural gas
costs are amortized to offset this increase in revenues.
The cost of fuel for generation for 2001 increased $12.9 million from 2000
primarily due to an increase in natural gas-fired combustion turbine plant
generation and partially due to the increased cost of natural gas. Natural gas
costs were relatively high compared to historical prices during the first half
of 2001 before declining in the second half of 2001.
The expense for natural gas purchased for resale for 2001 increased $50.8
million compared to 2000 due to the increased cost of natural gas partially
offset by a decrease in total therms sold. Consistent with changes
in fuel for generation, natural gas costs have declined during the second half
of 2001 compared to the first half of the year.
As part of the strategy to mitigate the decline in electric resources caused by
the poor hydroelectric conditions and volatile energy markets, Avista Utilities
had several buy-back and rebate programs for residential, commercial and
industrial customers during 2001. The programs were designed to encourage
conservation and decrease average
32
AVISTA CORPORATION
customer usage.
Construction is continuing on the 280 MW combined cycle natural gas-fired
turbine power plant at the Coyote Springs 2 site near Boardman, Oregon. During
the fourth quarter of 2001, the Company completed the sale of 50 percent of its
interest in the Coyote Springs 2 plant to an affiliate of Mirant Americas
Development, Inc. (Mirant). Avista Corp. and Mirant will share equally in the
costs of construction, operation and output from the plant. As of December 31,
2001, the Company had invested $92.5 million in the Coyote Springs 2 project
(net of funds received from Mirant in connection with the sale) and the total
cost of the plant is expected to be $190 million. If total costs equal the
amount projected, Mirant will fund the remaining costs to complete the plant.
The Companys 50 percent ownership interest in the Coyote Springs 2 plant will
transfer from Avista Power to Avista Corp. to be operated as an asset of Avista
Utilities upon the completion of the construction, which is expected to be in
the third quarter of 2002.
2000 compared to 1999
Avista Utilities recorded a net loss of $38.8 million in 2001 compared to net
income of $59.6 million in 1999. Avista Utilities pre-tax income from
operations was $3.2 million in 2000, a decrease of $139.4 million from 1999.
The net loss in 2000 resulted primarily from significantly higher electric
energy prices in wholesale markets, compounded by a short position related to
wholesale trading activity. Avista Utilities operating revenues and expenses
increased $396.5 million and $535.8 million, respectively, in 2000 compared to
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 and the sale of the Centralia Power
Plant discussed above, 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 recovered through power sales. Based on
historical trends, Avista Utilities 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.
Retail electric revenues increased $10.6 million in 2000 compared to 1999 due
to increased rates, 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 percent, while sales volumes decreased 20 percent in 2000
compared to 1999, reflecting average sales prices 107 percent higher in 2000.
Wholesale sales volumes decreased due to managements decision in mid-year to
reduce power imbalance volume limits as discussed above.
Natural gas revenues increased $37.4 million in 2000 compared to 1999. Retail
natural gas revenues increased $49.0 million, primarily due to increased
natural gas rates, partially offset by a $9.5 million decrease in wholesale
sales. Wholesale 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 corresponding 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.
Purchased power volumes were 15 percent lower in 2000 as compared to 1999
primarily due to decreased wholesale sales, but average purchased power prices
were 132 percent higher, resulting in a $529.0 million, or 97 percent, increase
in purchased power expense in 2000 compared to 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 cost
recognized as expenses in 2000. Streamflows in 2000 were 86 percent of normal
compared to 112 percent 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, decreased hydroelectric generation and increases in
natural gas commodity prices. Purchased natural gas costs increased $53.4
million in 2000, primarily due to increased prices for the commodity, and
partially due to increased volumes of sales resulting from customer growth and
increased usage due to weather.
Energy Trading and Marketing
Energy Trading and Marketing includes the results of Avista Energy and Avista
Power. Avista Energy maintains an energy trading portfolio that it marks to
estimated fair market value on a daily basis (mark-to-market accounting), which
may cause earnings variability in the future. Market prices are utilized in
determining the value of electric, natural gas and related derivative commodity
instruments. For longer-term positions and certain short-term positions for
which market prices are not available, a model based on forward price curves is
also utilized. Although Avista
33
AVISTA CORPORATION
Energy scaled back operations to focus
primarily in the western United States during 2000, its trading operations
continue to be affected by, among other things, volatility of prices within the
electric energy and natural gas markets, the demand for and availability of
energy, lower unit margins on new sales contracts, FERC-ordered price caps and
deregulation of the electric utility industry.
Avista Energy trades electricity and natural gas, along with derivative
commodity instruments, including futures, options, swaps and other contractual
arrangements. Most transactions are conducted on a largely unregulated
over-the-counter basis, there being no central clearing mechanism (except in
the case of specific instruments traded on the commodity exchanges). As a
result of these trading activities, Avista Energy is subject to various risks,
including market, liquidity, commodity and credit risk. See Business Risks
and Note 7 of Notes to Consolidated Financial Statements for further
information. The following summarizes information with respect to energy
trading activities during 2001 (dollars in thousands):
The following discloses summarized information with respect to valuation
techniques and contractual maturities of energy commodity contracts outstanding
as of December 31, 2001 (dollars in thousands):
34
AVISTA CORPORATION
2001 compared to 2000
Energy Trading and Marketings net income was $70.1 million for 2001, compared
to $161.8 million for 2000. Avista Energys operations continue to be
positively affected by a well-positioned portfolio of energy-related assets in
the Pacific Northwest and western energy markets. The primary reason for the
decrease in net income was a decrease in the mark-to-market adjustment for the
change in the fair value position of Avista Energys energy commodity
portfolio. The mark-to-market adjustment was an unrealized loss of $30.2
million for 2001 compared to an unrealized gain of $176.8 million for 2000. The
decrease is primarily due to a significant amount of contracts settled during
2001 and the realization of previous unrealized gains. Volatility in energy
markets and increased commodity prices during 2000 resulted in significant
unrealized gains during 2000. These unrealized gains were partially realized
during 2001. The majority of the remaining unrealized gains are expected to be
realized during 2002 and 2003 as commodity contracts are settled.
Energy Trading and Marketings operating revenues and cost of sales decreased
$1,530.6 million and $1,357.1 million, respectively, for 2001 compared to 2000,
resulting in a decrease in gross margin of $173.5 million. The decrease in
revenues and expenses is primarily the result of decreased sales volumes from
2000. Although gross margin decreased from 2000 to 2001, realized gross margin
increased to $164.5 million in 2001 from $130.9 million in 2000.
Administrative and general expenses decreased $7.8 million or 19 percent from
2000 primarily due to reduced incentive compensation expense based on lower
earnings in 2001.
Expenses associated with the exit of Avista Energys operations in Houston and
Boston during the first half of 2000 totaled $7.9 million in 2000.
During 2001 the Company recorded an impairment charge of $8.2 million related
to three turbines owned by Avista Power which is reflected in the line item
other income-net in the Consolidated Statements of Income. The Company
originally planned to use these turbines in a non-regulated generation project.
The Company decided that it would no longer pursue the development of
additional non-regulated generation projects. As such, the Company wrote down
the carrying value of the turbines to estimated fair value less selling costs
and is in the process of completing the sale of the turbines.
Energy Trading and Marketings total assets decreased $8.77 billion from
December 31, 2000 to December 31, 2001 primarily due to a decrease in total
current and non-current energy commodity assets. This decrease in commodity
assets primarily reflects the settlement of a significant amount of contracts
during 2001 and a decrease in the forward price and estimated value of natural
gas and electricity from December 31, 2000 to December 31, 2001.
Avista Power is a 49 percent owner of a 270 MW natural gas-fired combustion
turbine plant in Rathdrum, Idaho, which commenced commercial operation in
September 2001. The output from this plant is contracted to Avista Energy for
25 years. Avista Power is in the process of constructing the Coyote Springs 2
power plant and it sold 50 percent of its interest to Mirant during the fourth
quarter of 2001. Upon the planned completion of the plant in the third quarter
of 2002, Avista Powers 50 percent ownership interest will be transferred to
Avista Corp. for inclusion with the Avista Utilities power generation resource
portfolio.
2000 compared to 1999
Energy Trading and Marketings net income was $161.8 million for 2000 compared
to a net loss of $60.7 million for 1999. A well-positioned portfolio in the
volatile Pacific Northwest and western electric markets positively affected
Avista Energys operations in 2000. During the second half of 1999 and the
first half of 2000, Avista Energys 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 western United States. Its more narrowly focused operations are
backed by contracts for energy commodities and by the output of specific
facilities available under contracts. Avista Energy shut down its operations
in Houston and Boston during the first half of 2000 and reduced
35
AVISTA CORPORATION
employment by
approximately 80 positions. The Eastern electric book was sold at a $1.0
million after-tax loss in early 2000.
Energy Trading and Marketings operating revenues and operating expenses
decreased $164.1 million and $512.1 million, respectively, in 2000 compared to
1999. The decrease in revenues was primarily due to lower sales volumes,
partially offset by increased energy commodity prices. The decreased expenses
primarily resulted from reduced volumes of transactions, partially offset by
increased resource costs due to higher energy commodity prices, and the closure
of Avista Energys Eastern operations and refocusing the business to the
western United States.
The volume of power and natural gas sales decreased significantly as Avista
Energys focus was redirected to the WSCC. Electric sales volumes decreased 22
percent, while natural gas sales decreased 65 percent. The exception to this
was the comparatively minor coal sales, which increased 115 percent in volume
in 2000 compared to 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.
Energy Trading and Marketings balance sheet increased $8.68 billion from
December 31, 1999 to December 31, 2000. Avista Energys 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.
Information and Technology
The Information and Technology line of business includes the results of Avista
Advantage and Avista Labs. Consistent with its overall business strategy, the
Company is attempting to find equity partners to assist in financing the
continued growth of these businesses.
2001 compared to 2000
Information and Technologys net loss was $19.4 million for 2001 compared to a
net loss of $19.0 million for 2000. Operating revenues and expenses for this
line of business increased $8.1 million and $11.5 million, respectively, as
compared to 2000. Avista Advantage accounted for the increase in revenues
primarily due to the expansion of its customer base. The increase in operating
expenses reflects expansion of operations for Avista Advantage and further fuel
cell development by Avista Labs.
2000 compared to 1999
Information and Technologys net loss was $19.0 million for 2000 compared to a
net loss of $6.0 million for 1999. Operating revenues and expenses for this
line of business increased $3.5 million and $21.0 million, respectively, over
1999. Avista Advantage accounted for the increase in operating revenues while
each of Avista Advantage and Avista Labs contributed to the increase in
operating expenses.
Other
The Other line of business includes the results of Avista Ventures, Avista
Capital (parent company only amounts), Pentzer and several other minor
subsidiaries.
2001 compared to 2000
The net loss from this line of business was $15.3 million for 2001, compared to
a net loss of $2.9 million for 2000. The increase in the net loss from 2000 is
primarily a result of increased interest expense on intercompany borrowings
between Avista Capital and Avista Corp. that is eliminated in the consolidated
financial statements. Operating revenues and expenses from this line of
business decreased $16.6 million and $16.0 million, respectively, during 2001
as compared to 2000 reflecting reduced activities in this line of business.
2000 compared to 1999
The net loss from this line of business was $2.9 million for 2000, compared to
net income of $35.8 million in 1999. The 2000 net 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 Pentzers 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
36
AVISTA CORPORATION
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 were sold during the third quarter of 1999.
Revenues and expenses from these companies were included only in the 1999
amounts.
Discontinued Operations
In September 2001, the Company reached a decision that it would dispose of
substantially all of the assets of Avista Communications. The divestiture is
expected to be completed during the first half of 2002. In October 2001,
minority shareholders of Avista Communications acquired ownership of its
Montana and Wyoming operations as well as its dial-up internet access
operations in Spokane, Washington and Coeur dAlene, Idaho. In December 2001,
Avista Communications completed the sale of the assets and customer accounts of
its Yakima and Bellingham, Washington operations to Advanced Telcom Group, Inc.
In December 2001, Avista Communications entered an agreement to transfer voice
and integrated services customer accounts in Spokane, Washington and Coeur
dAlene, Idaho to certain subsidiaries of XO Communications, Inc. The Company
is continuing to pursue disposal of the remaining portions of the business.
In connection with the planned disposal of substantially all of the operating
assets of Avista Communications, the Company wrote down the value of the assets
to the estimated fair value of the assets upon the planned disposal of the
business unit, resulting in a charge of $58.4 million.
2001 compared to 2000
The net loss for 2001 was $47.4 million, compared to a net loss of $9.4 million
for 2000. The significant net loss for 2001 was due to asset impairment
charges. The loss from operations for Avista Communications was $21.1 million
for 2001 compared to $15.4 million for 2000.
2000 compared to 1999
The net loss for 2000 was $9.4 million, compared to a net loss of $2.6 million
for 2000. The loss from operations for Avista Communications was $15.4 million
for 2001 compared to $4.3 million for 2000. The significant increase in the
net loss and the loss from operations from 1999 to 2000 was due to the rapid
expansion of the Avista Communications business during this period.
Critical Accounting Policies
The preparation of the consolidated financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect amounts
reported in the consolidated financial statements. Changes in these estimates
and assumptions are considered reasonably possible and may have a material
impact on the consolidated financial statements and thus actual results could
differ from the amounts reported and disclosed herein.
The Company prepares its consolidated financial statements in accordance with
the provisions of Statement of Financial Accounting Standards (SFAS) No. 71,
Accounting for the Effects of Certain Types of Regulation. SFAS No. 71
requires the Company to reflect the impact of regulatory decisions in its
financial statements. SFAS No. 71 requires that certain costs and/or
obligations (such as incurred power and natural gas costs not currently
recovered through rates, but expected to be recovered in the future) be
reflected in a deferral account in the balance sheet and not be reflected in
the statement of income 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 SFAS No. 71 to all or a portion of the Companys
regulated operations, the Company could be required to write off its regulatory
assets. The Company could also be precluded from the future deferral 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. In accordance with SFAS No.
71, profits recognized by Avista Energy on natural gas sales to Avista
Utilities, including unrealized gains on natural gas contracts, are not
eliminated in the consolidated financial statements. This is due to the fact
that costs
incurred by Avista Utilities for natural gas purchases to serve retail
customers and for fuel for electric generation are recovered through future
rates.
37
AVISTA CORPORATION
The Companys primary regulatory assets include power and natural gas
deferrals, investment in exchange power, regulatory assets for deferred income
taxes, unamortized debt expense, regulatory asset offsetting energy commodity
derivative liabilities, conservation programs and the provision for
postretirement benefits. Deferred credits include regulatory liabilities
created when the Centralia Power Plant was sold and the gain on the general
office building sale/leaseback which is being amortized over the life of the
lease.
Avista Energy accounts for derivative commodity instruments entered into for
trading purposes using the mark-to-market method of accounting, in compliance
with Emerging Issues Task Force (EITF) Issue No. 98-10, Accounting for Energy
Trading and Risk Management Activities, with unrealized gains and losses
recognized in the consolidated statements of income. 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. Market prices are utilized in determining the value of electric,
natural gas and related derivative commodity instruments. For longer-term
positions and certain short-term positions for which market prices are not
available, a valuation model based on estimated forward price curves is also
utilized which requires the use of subjective assumptions and variables. The
use of different assumptions and variables in the valuation model could have a
material impact on the fair value of the commodity instruments and the
unrealized gain or loss recognized in the consolidated financial statements.
Avista Utilities buys and sells energy under forward contracts that are
considered to be derivatives and accounts for these derivatives in accordance
with SFAS No. 133, Accounting for Derivative Instruments and Hedging
Activities. 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 energy requirements and resources. In
conjunction with the issuance of SFAS No. 133, the WUTC and the IPUC issued
accounting orders requiring Avista Utilities to offset any derivative assets or
liabilities with a regulatory asset or liability. As a result, unrealized
gains or losses for Avista Utilities are not recognized in the consolidated
statements of income and comprehensive income.
Interpretations that may be issued by the Derivatives Implementation Group, a
task force created to assist the Financial Accounting Standards Board (FASB) in
answering questions that companies have in implementing SFAS No. 133, may
change the conclusions that the Company has reached regarding accounting for
energy contracts. As a result, the accounting treatment and financial statement
impact could change in future periods.
For further information on the Companys accounting policies and new accounting
standards that will be adopted by the Company in future periods see Notes 1
and 2 of Notes to Consolidated Financial Statements.
38
AVISTA CORPORATION
Liquidity and Capital Resources
Review of Cash Flow Statement
Continuing Operating Activities
Net cash used in continuing operating
activities was $93.3 million in 2001 compared to net cash provided by
continuing operating activities of $84.1 million in 2000. The primary reason
for the increase in net cash used in continuing operating activities was power
and natural gas cost deferrals including interest, net of amortization, of
$248.4 million in 2001 compared to $67.3 million in 2000. This was primarily
due to the effect of increased purchased power prices, fuel for generation and
natural gas costs, as well as low hydroelectric availability that increased the
volume of purchased power that was needed to meet retail demand. Also
contributing to the decrease in cash flows from continuing operating activities
was a decrease in net income. Net cash used in working capital components
increased in 2001 compared to 2000, with net cash used of $90.0 million in 2001
compared to net cash provided by working capital components of $74.7 million in
2000. Decreased commodity prices and energy transactions that affected both
Avista Utilities and Avista Energy were primarily responsible for the large
changes in various working capital components, such as receivables and accounts
payable. Significant changes in non-cash items also include a $183.5 million
change in energy commodity assets and liabilities, primarily related to Avista
Energy.
Continuing Investing Activities
Net cash used in continuing investing
activities was $218.4 million in 2001 compared to $65.1 million in 2000. The
increase in net cash used in continuing investing activities was primarily the
result of increased capital expenditures in 2001 including $157.0 million by
the Energy Trading and Marketing line of business. These expenditures were
primarily for the construction of the Coyote Springs 2 power plant and Avista
Powers acquisition of turbines originally planned for use in a non-regulated
generation project. In 2001, proceeds from property sales and subsidiary
investments were $76.0 million, primarily related to the sale of the 50 percent
interest in the Coyote Springs 2 power plant and Avista Powers turbines. In
2000, $105.2 million in proceeds were provided from the sale of property and
subsidiary investments, primarily related to the sale of the Companys interest
in the Centralia Power Plant.
Continuing Financing Activities
Net cash provided by continuing financing
activities was $302.9 million in 2001 compared to $175.3 million in 2000.
Short-term borrowings decreased $88.1 million and long-term debt increased
$410.2 million in 2001. The overall increase in borrowings in 2001 reflects
increased cash needs for the Company to fund investing activities, increased
power and natural gas costs and other operating needs.
On April 3, 2001, the Company issued $400.0 million of 9.75 percent Senior
Notes (Senior Notes) due June 1, 2008. The net proceeds from the issuance were
used to fund a portion of construction expenditures, pay down balances
outstanding under the Companys committed line of credit and for other general
corporate purposes. The Senior Notes were issued under an indenture that,
among other things, restricts the ability of the Company and its subsidiaries
from engaging in certain activities, including certain transactions with
affiliates. In December 2001, the Company issued $150.0 million of 7.75
percent First Mortgage Bonds due in 2007. The proceeds from the issuance were
used to fund maturing Medium-Term Notes and pay down balances outstanding under
the Companys committed line of credit. During 2001, $15.0 million of Secured
Medium-Term Notes, with rates of 7.59 percent and 7.60 percent, and $74.0
million of Unsecured Medium-Term Notes, with rates between 8.0 percent and 9.57
percent, matured. The Company also used a portion of the $150.0 million of
proceeds from issuance of First Mortgage Bonds to legally defease $50.0 million
of Medium-Term Notes scheduled to mature in 2002 with interest rates between
6.28 percent and 8.15 percent.
Short-term borrowings increased $42.1 million and long-term debt increased
$169.7 million in 2000. In August and December of 2000, the Company issued a
total of $224.0 million of Unsecured MTNs, Series D at rates of 8.0 percent and
8.625 percent due in 2001 and 2003. A total of $44.9 million of Secured MTNs
matured during 2000, with rates between 6.13 percent and 8.20 percent.
During 2001, the Company issued 423,989 shares of common stock for $8.3
million. The shares were issued through the Employee Investment Plan, the
Dividend Reinvestment and Stock Purchase Plan as well as restricted stock
through the Long-Term Incentive Plan.
Discontinued Operations
Net cash used in discontinued operations was $17.2
million in 2001 compared to $37.1 million of net cash used in discontinued
operations in 2000. The decrease was primarily due to a decrease in capital
expenditures by Avista Communications as the Company decided to dispose of the
operations.
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AVISTA CORPORATION
Overall Liquidity
The Companys cash outlays for purchased power have exceeded the related
amounts paid to the Company by its retail customers. This condition, which was
due to reduced availability of hydroelectric resources, increased prices in the
wholesale market and increased volumes purchased to meet retail customer
demand, has existed since the second quarter of 2000. In addition to operating
expenses, the Company has continuing commitments for capital expenditures for
construction, improvement and maintenance of facilities. In 2001, the Company
incurred substantial levels of indebtedness, both short and long-term, to
finance these requirements and to otherwise maintain adequate levels of working
capital. Debt service is another significant cash requirement. In addition,
the Company made significant cash investments to finance the development of
companies in the Information and Technology line of business.
The temporary electric surcharge in Washington and the PCA surcharge in Idaho,
which were implemented during September and October 2001, respectively, provide
a basis for improving the Companys liquidity. The Company completed the sale
of 50 percent of its interest in the Coyote Springs 2 project to Mirant during
the fourth quarter of 2001. The Company is also in the process of selling
three turbines owned by Avista Power with part of the proceeds received during
2001 and the remainder to be received during the first half of 2002.
Additionally, the Company reduced capital expenditures by $15 million for the
fourth quarter of 2001 and by $40 million for 2002 from the amount originally
budgeted. The Companys disposal of Avista Communications reduces future cash
investments in the Information and Technology line of business. These measures
are largely related to the Companys efforts to improve cash flows and should
provide the Company the ability to maintain access to adequate levels of credit
with its banks. In March 2002, the WUTC issued an order approving the prudence
and recoverability of 90 percent (or $196 million) of deferred power supply
costs incurred by the Company through December 31, 2001. Additionally, the WUTC
order provides for one-fifth of the existing 25 percent surcharge be applied to
offset the Companys general operating costs and the remainder will continue to
be applied against the deferred power cost balance. The WUTC also approved a
6.2 percent (or $14.7 million in annual revenues) increase in base electric
rates for Washington customers. However, the Company still needs to receive a
favorable outcome in the Washington general electric case filed in December
2001 in order to continue to improve liquidity. See further description of
issues related to deferred power costs in the section Avista Utilities -
Regulatory Matters.
If Avista Utilities purchased power and natural gas costs continue to exceed
the levels recovered from retail customers, its cash flows will continue to be
negatively affected. Factors that could cause purchased power costs to
continue at higher levels than planned include, but are not limited to, a
return to high prices in wholesale markets and continued high volumes of energy
purchased in the wholesale markets. Factors beyond the Companys control that
could result in high volumes of energy purchased include increases in demand
(either due to weather or customer growth), low availability of hydroelectric
resources, outages at generating facilities and failure of third parties to
deliver on energy or capacity contracts.
Total deferred natural gas costs were $52.7 million as of December 31, 2001.
In order to recover deferred natural gas costs, Avista Utilities received
approval from the WUTC and the IPUC for purchased gas cost adjustments during
August 2001. Avista Utilities estimates these PGA rate changes will increase
revenues by $24.6 million for approximately one year. Based on current PGAs in
place and current natural gas prices, Avista Utilities expects that the
deferred natural gas cost balance will be fully recovered by December 2002.
The Company was not able to obtain conventional financing for the Coyote
Springs 2 project due to lenders concerns with regards to the level of
deferred power costs and the corresponding effect on cash flows. As a result,
the Company sold 50 percent of the Coyote Springs 2 project to Mirant. As of
December 31, 2001, the Company had an investment of $92.5 million in the Coyote
Springs 2 project and the total cost of the plant is expected to be $190
million.
Capital Resources
The Company has incurred significant indebtedness to support capital
expenditures, to fund electric and natural gas costs that were in excess of the
amount recovered currently through rates and to maintain working capital. As
of December 31, 2001, the Company had total debt outstanding of $1,252.6
million. In addition, the Company needs to finance capital expenditures and
obtain additional working capital from time to time. The cash requirements to
service the total amount of indebtedness, both short-term and
long-term, could reduce the amount of cash flow available to fund working
capital, future acquisitions, deferred power and natural gas costs, dividends,
other corporate requirements and capital expenditures.
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AVISTA CORPORATION
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 depending
on a variety of factors. External financings and cash provided by operating
activities remain the Companys primary source of funds for operating needs,
dividends and capital expenditures. In 2002 and subsequent years, the Company
expects cash flows from operations to improve primarily from the recovery of
deferred power and natural gas costs. This should allow the Company to reduce
total debt outstanding. Capital expenditures are financed on an interim basis
with short-term borrowings.
Avista Corp. has a committed line of credit of $220 million that expires on May
29, 2002. As of December 31, 2001, $55 million was borrowed under this
committed line of credit. As of February 28, 2002, $25 million was borrowed
under this committed line of credit. Under this committed line of credit, the
Company may have up to $50 million in letters of credit outstanding. As of
December 31, 2001 there were $13.9 million of letters of credit outstanding.
As of February 28, 2002, there were $9.4 million of letters of credit
outstanding.
The committed line of credit agreement contains customary covenants and default
provisions, including covenants not to permit the ratio of consolidated total
debt to consolidated total capitalization of Avista Corp. to be, at the end
of any fiscal quarter, greater than 60 percent. As of December 31, 2001, the
ratio was in compliance with this covenant at 59.4 percent. The committed line
of credit also has a covenant requiring the ratio of consolidated cash flow
to consolidated fixed charges of Avista Corp. or Avista Utilities for any
four-fiscal quarter period ending at any fiscal quarter end to be less than
certain specified ratios. In August 2001, the Company determined that it would
not be in compliance with the fixed charge coverage covenant for the period
ending September 30, 2001 or for any subsequent period through the termination
date of the agreement. Accordingly, in September 2001, Avista Corp. requested,
and obtained, a waiver of this covenant through the termination date of the
agreement. As a result of this waiver, the failure to comply with this covenant does not
constitute an event of default under the agreement. Additionally, Avista Corp.
secured the committed line of credit with first mortgage bonds in connection
with this waiver.
Any default on its committed line of credit or other financing arrangements
could result in cross-defaults to other agreements and could induce vendors and
other counterparties to demand collateral. In the event of default, it would
be virtually impossible for the Company to obtain financing on any reasonable
terms to pay creditors or fund operations, and the Company would likely be
prohibited from paying dividends on its common stock.
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, 2001, Avista Corp. had
short-term notes receivable of $180.1 million from Avista Capital of which
$128.8 million of the receivables represents loans to Avista Power, primarily
for the Coyote Springs 2 project.
In February 2002, the Company repurchased $25 million of Medium-Term Notes
scheduled to mature in September 2003 at a premium of $1.2 million. As of
December 31, 2001, the Company had remaining authorization to issue up to
$317.0 million of Unsecured Medium-Term Notes.
The Mortgage and Deed of Trust securing the Companys First Mortgage Bonds
contains limitations on the amount of First Mortgage Bonds which may be issued
based on, among other things, a 70 percent debt-to-collateral ratio and a 2/1
net earnings to First Mortgage Bond interest ratio. Under various financing
agreements, the Company is also restricted as to the amount of additional First
Mortgage Bonds that it can issue. As of December 31, 2001, the Company could
issue $146.7 million of additional First Mortgage Bonds under the most
restrictive of these financing agreements.
The Company is restricted under various agreements and its Restated Articles of
Incorporation as to the additional preferred stock it can issue. As of
December 31, 2001, approximately $217.4 million of additional preferred stock
could be issued at an assumed divided rate of 6.95 percent with a maturity date
later than June 1, 2008.
In July 2001, the Company filed a registration statement on Form S-3 with the
Securities and Exchange Commission for the purpose of issuing up to 3.7 million
shares of common stock. No common stock has been issued under this
registration statement. The Company is currently considering issuing
convertible preferred stock instead of common stock due to changes in market
conditions and the decline in the price of the Companys common stock. If
market conditions warrant, the Company currently plans to issue equity
securities during late 2002.
41
AVISTA CORPORATION
Off-Balance Sheet Arrangements
WWP Receivables Corp. (WWPRC) is a wholly owned, bankruptcy-remote subsidiary
of the Company formed for the purpose of acquiring or purchasing interests in
certain accounts receivable, both billed and unbilled, of the Company. WWPRC
and the Company have an agreement whereby WWPRC can sell without recourse, on a
revolving basis, up to $90.0 million of those receivables. The current
agreement expires in May 2002. WWPRC is obligated to pay fees that approximate
the purchasers cost of issuing commercial paper equal in value to the
interests in receivables sold. As of December 31, 2001 and 2000, $75.0 million
and $80.0 million, respectively, in receivables were sold pursuant to the
agreement. As of February 28, 2002, $90.0 million of receivables were sold.
WP Funding LP is an entity that was formed for the purpose of acquiring the
Companys natural gas-fired combustion turbine generating facility in Rathdrum,
Idaho (Rathdrum CT). WP Funding LP purchased the Rathdrum CT from the Company
with funds provided by unrelated investors of which 97 percent represented
debt. The Company operates and leases the Rathdrum CT from WP Funding LP and
makes lease payments currently at $4.5 million per year. The total amount of
debt outstanding that is not included on the Companys balance sheet is $54.5
million as of December 31, 2001. The lease term expires in February 2020;
however, the current debt matures in October 2005 and will need to be
refinanced at that time. The FASB is currently discussing several issues
relating to the identification of and accounting for special-purpose entities
such as WP Funding LP. A current proposal by the FASB could require the
Company to begin consolidating WP Funding LP in 2003.
Total Company Capitalization
The Companys total common equity decreased $4.2 million during 2001 to $720.1
million as of December 31, 2001 primarily due to dividends offset by net income
and the issuance of common stock through stock compensation plans, the employee
401(k) plan and the Dividend Reinvestment Plan. The Companys consolidated
capital structure, including the current portion of long-term debt and
short-term borrowings as of December 31, 2001, was 59.4 percent debt, 6.4
percent preferred securities and 34.2 percent common equity, compared to 52.1
percent debt, 7.5 percent preferred securities and 40.4 percent common equity
as of December 31, 2000. It is the Companys plan to target a capital
structure of 50 percent debt and 50 percent preferred and common equity. The
Company plans to achieve this capital structure by reducing total debt as well
as the issuance of preferred or common stock and net earnings.
Credit Ratings
Two credit rating agencies lowered the Companys credit ratings in October 2001
and a third downgraded the Companys credit ratings in December 2001. The
downgrades resulted in an overall corporate credit rating that is below
investment grade. These downgrades increased the cost of debt and other
securities going forward and may affect the Companys ability to issue debt and
equity securities on reasonable terms. The following table summarizes the
Companys current credit ratings:
* Only assets are subordinated debentures of Avista Corporation
These security ratings are not recommendations to buy, sell or hold securities.
The ratings are subject to change or withdrawal at any time by the respective
credit rating agencies. Each credit rating should be evaluated independently
of any other rating.
42
AVISTA CORPORATION
Avista Utilities Operations
During the 2002-2003 period, utility capital expenditures are expected to be
$175 million and long-term debt maturities and preferred stock sinking fund
requirements are expected to be $209 million. During this period, internally
generated funds and external financings are expected to be sufficient to fund
the Companys capital expenditures, maturing long-term debt and preferred stock
sinking fund requirements. Sources of funds would include, but are not
necessarily limited to, recovery of deferred power and natural gas costs, other
positive operating cash flow, sales of certain assets, additional long-term
debt, leasing or issuance of equity securities. Cash dividends from the Avista
Capital subsidiaries will also provide funds. 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 6, 13, 14, 15, 16, 17, 18, 19 and 20 of Notes to Consolidated
Financial Statements for additional details related to financing activities.
Energy Trading and Marketing Operations
Avista Capitals total investment in this line of business was $330.5 million
as of December 31, 2001. Avista Energy funds its ongoing operations with a
combination of internally generated cash and a bank line of credit.
As of December 31, 2001 Avista Energy and its subsidiary, Avista Energy Canada,
Ltd., as co-borrowers, had a credit agreement with a group of commercial
lenders in the aggregate amount of $155 million expiring June 28, 2002.
Subsequent to December 31, 2001, the amount of the credit agreement was reduced
to $113.4 million. This credit agreement may be terminated by the banks at any
time and all extensions of credit under the agreement are payable upon demand,
in either case at the lenders sole discretion. This agreement also provides,
on an uncommitted basis, for the issuance of letters of credit to secure
contractual obligations to counterparties. This facility is guaranteed by
Avista Capital and secured by substantially all of Avista Energys assets. The
maximum amount of credit extended by the banks for the issuance of letters of
credit is the subscribed amount of the facility less the amount of outstanding
cash advances, if any. The maximum amount of credit extended by the banks for
cash advances is $30 million. As of December 31, 2001, there were no cash
advances (demand notes payable) outstanding and letters of credit outstanding
under the facility totaled approximately $39.6 million.
The Avista Energy credit agreement contains customary covenants and default
provisions, including covenants to maintain minimum net working capital and
minimum net worth as well as a covenant limiting the amount of indebtedness
which the co-borrowers may incur. In addition, the agreement contains certain
restricted payment provisions generally prohibiting distributions.
Avista Capital, in the course of business, may provide guarantees to other
parties with whom Avista Energy may be doing business. Avista Capitals
investment in Avista Energy totaled $301.6 million as of December 31, 2001.
Periodically, Avista Capital loans funds to Avista Energy to support its
short-term cash and collateral needs. These loans are subordinate to any
obligations of Avista Energy to the banks under the credit agreements. As of
December 31, 2001 there were no loans between Avista Capital and Avista Energy
outstanding.
Avista Energy manages collateral requirements with counterparties by providing
letters of credit, providing guarantees from Avista Capital and offsetting
transactions with counterparties. In addition to the letters of credit and
other items included above, cash deposited with counterparties totaled $1.5
million as of December 31, 2001, and is included in the consolidated balance
sheet in prepayments and other current assets. Avista Energy held cash deposits
from other parties in the amount of $15.7 million as of December 31, 2001, and
such amounts are subject to refund if conditions warrant because of continuing
portfolio value fluctuations with those parties.
As of December 31, 2001, Avista Energy had $159.6 million in cash. Covenants
in Avista Energys credit agreement restrict the amount of cash dividends that
can be distributed to Avista Capital and ultimately Avista Corp.
Capital expenditures for the Energy Trading and Marketing companies were $225.8
million for the 1999-2001 period, primarily due to Avista Powers investment in
the Coyote Springs 2 project as well as the purchase of turbines during 2001.
During the fourth quarter of 2001, Avista Power received $53.6 million in
proceeds
from the sale of 50 percent of the Coyote Springs 2 project and $22.7 million
in partial payments for the sale of three turbines. Capital expenditures are
expected to be $2.0 million in this line of business during the 2002-2003
period.
43
AVISTA CORPORATION
Information and Technology Operations
Capital expenditures for the Information and Technology line of business were
$16.7 million for the 1999-2001 period. The 2002-2003 capital expenditures are
expected to be $14.0 million. Avista Advantage and Avista Labs expect to
support these capital requirements through a combination of funding from Avista
Corp. and third party equity investment. Two venture capital firms made
minority interest investments totaling $3.4 million in Avista Advantage during
the fourth quarter of 2000. At December 31, 2001, the Information and
Technology companies had $0.2 million in cash and cash equivalents and $1.3
million in debt outstanding.
Other Operations
Capital expenditures for these companies were $11.8 million for the 1999-2001
period. The 2002-2003 capital expenditures are expected to be $7.0 million.
As of December 31, 2001, this line of business had $1.0 million in cash and
cash equivalents and temporary investments, with $21.1 million in debt
outstanding. In October 2001, Avista Capital issued a $20 million promissory
note collateralized by certain receivables. The note has a balloon payment of
$18.8 million due in October 2002. As of December 31, 2001, there was $19.8
million outstanding under the promissory note.
Contractual Obligations
The following table provides a summary of the Companys future contractual
obligations as of December 31, 2001 (dollars in millions):
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AVISTA CORPORATION
Other Commercial Commitments
The following table summarizes the Companys other commercial commitments
outstanding as of December 31, 2001 (dollars in millions):
As of December 31, 2001, Avista Corp. did not have any commitments outstanding
with equity triggers.
Additional Financial Data
As of December 31, 2001, the total long-term debt of the Company and its
consolidated subsidiaries, as shown in the Companys consolidated financial
statements, was $1,175.7 million. Of such amount, $863.8 million represents
long-term unsecured and unsubordinated indebtedness of the Company, and $313.5
million represents secured indebtedness of the Company. The unamortized debt
discount was $2.5 million. The subsidiaries had long-term debt of $1.0
million. Consolidated long-term debt does not include the Companys
subordinated indebtedness held by the issuers of Company-obligated preferred
trust securities. An additional $55 million of the Companys short-term debt
outstanding under or backed by the $220 committed line of credit is secured
indebtedness.
Future Outlook
Business Strategy
Avista Utilities seeks to maintain a strong, low-cost and efficient electric
and natural gas utility business focused on providing reliable, 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. It is Avista Utilities strategy to
own or control a sufficient amount of resources to meet its retail and
wholesale electric requirements on an average annual basis. During 2000,
Avista Energy scaled back its operations regionally to work primarily within
the WSCC and has focused on reducing the size and the risk associated with its
energy trading and marketing activities. Avista Energys 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 WSCC, as well
as its relationship-focused approach to its customers. During 2001, the
Company decided that Avista Power would no longer pursue the development of
additional non-regulated generation plants. The Company intends to find equity
partners to assist in financing the continued growth of the Information and
Technology businesses, Avista Advantage and Avista Labs. The Company plans to
dispose or phase out of assets and operations that are not related to its
energy operations.
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 were 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.
45
AVISTA CORPORATION
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 Companys 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.
As described under Avista Corp. Lines of Business, hydroelectric conditions
in 2001 were significantly below normal, leading to greater than normal
reliance on purchased power. The earnings impact of these factors is mitigated
by regulatory mechanisms that are intended to defer increased costs for
recovery in future periods. In order to recover deferred power costs, the WUTC
approved a temporary 25 percent electric rate surcharge to Washington customers
in September 2001 and the IPUC approved a total of a 19.4 percent PCA surcharge
to Idaho customers in October 2001. In December 2001, the Company filed a
general rate case with the WUTC. In March 2002, the WUTC issued an order
approving the prudence and recoverability of 90 percent (or $196 million) of
deferred power supply costs incurred by the Company during the period from July
1, 2000 through December 31, 2001. Avista Utilities is not able to fully
predict how the combination of energy resources, energy loads, prices, rate
recovery and other factors will ultimately drive deferred costs and the timing
of recovery of these costs in future periods. Current estimates and
projections by the Company indicate that deferred power costs would be
recovered by 2007. See further information at Avista Utilities Regulatory
Matters.
Challenges facing Avista Utilities electric operations include, among other
things, the ability to recover deferred power supply costs and the timing of
such recovery, changes in the availability of and volatility in the prices of
power and fuel, generating unit availability, legislative and governmental
regulations, and weather conditions. Avista Utilities believes it faces
minimal risk for stranded utility assets resulting from deregulation, due to
its relatively low-cost generation portfolio and because of the slower and more
cautious approach to regulatory changes 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 prevailing market
prices.
Natural gas commodity prices increased dramatically during 2000 and remained at
relatively high levels during the first half of 2001 before declining in the
second half of the year. Market prices for natural gas continue to be
competitive compared to alternative fuel sources for residential, commercial
and industrial customers. Avista Utilities believes that natural gas should
sustain its market advantage based on the levels of existing reserves and
potential natural gas development in the future. Growth has occurred in the
natural gas business in recent years due to increased demand for natural gas in
new construction, as well as conversions from electric space and water heating
to natural gas. 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 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 its largest industrial customers, which reduces the
risks of these customers by-passing the system in the foreseeable future.
Avista Energy trades electricity and natural gas, along with derivative
commodity instruments, including futures, options, swaps and other contractual
arrangements. As a result of these trading activities, Avista Energy is
subject to various risks, including commodity price risk and credit risk, as
well as possible new risks resulting from the recent imposition of market
controls by federal and state agencies. The FERC is
conducting separate proceedings related to market controls within California
and within the Pacific Northwest that include proposals by certain parties to
retroactively impose price caps. As a result, certain parties have asserted
claims for significant refunds from Avista Energy and lesser refunds from
Avista Utilities which could result in liabilities for refunding revenues
recognized in
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AVISTA CORPORATION
prior periods. Avista Energy and Avista Utilities have joined
other parties in vigorously opposing these proposals. If retroactive price
caps were imposed, Avista Energy could develop offsetting claims.
In connection with matching loads and resources, Avista Utilities engages in
wholesale sales and purchases of electric capacity and energy, and,
accordingly, is also subject to commodity price risk, credit risk and other
risks associated with these activities. As discussed above, Avista Utilities
may also be exposed to refunds for wholesale power sales depending on the
outcome of the FERCs retroactive price cap proceeding for the Pacific
Northwest but would also have the opportunity to establish offsetting claims.
Commodity Price Risk
Both Avista Utilities and Avista Energy are subject to
energy commodity price risk. Historically, the price of power in wholesale
markets was affected primarily by production costs and by other factors
including streamflows, the availability of hydroelectric 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 decline 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. As discussed above
and in the section Western Power Market Issues the FERC imposed a price
mitigation plan in the western United States in June 2001.
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
may be correlated to adequacy of generating reserve margins, scheduled and
unscheduled outages of generating facilities, availability of streamflows for
hydroelectric generation, 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.
Wholesale market prices for power and natural gas in the western United States
and western Canada were significantly higher in 2000 and the first half of 2001
than at any time in history, with unprecedented levels of volatility. Prices
and volatility decreased considerably during the second half of 2001.
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 that relate to
other market participants that 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 periodically occur.
Avista Energy experienced payment receipt defaults from certain parties
impacted by the California energy crisis. Avista Energy and Avista Corp.
(through the Avista Utilities division) have engaged in physical and financial
transactions with Enron and certain of its affiliates and experienced
disruptions to forward contract commitments as a result of Enrons December
2001 bankruptcy. See Enron Exposure for more information.
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 Companys capital resource reserves (credit facilities and cash).
Avista Utilities and Avista Energy actively monitor the exposure to possible
collateral calls and take steps to minimize capital requirements.
Other Operating Risks.
In addition to commodity price risk, Avista Utilities
commodity positions are 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. Avista
Utilities also has exposure to weather conditions and natural disasters that
can cause physical damage to property, requiring immediate repairs to restore
utility service.
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
Companys cash and short-term investment portfolio and the fair value of notes
payable as of
47
AVISTA CORPORATION
December 31, 2001 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 Companys capitalization consisted of floating rate Pollution
Control Bonds, with the interest rate adjusted periodically prior to January
2002. In January 2002, the interest rate on the bonds was fixed for a period
of seven years. The interest rate on $40 million of Company-Obligated
Mandatorily Redeemable Preferred Trust Securities Series B adjusts quarterly,
reflecting current market conditions. As of December 31, 2001, a hypothetical
15 percent change in interest rates would result in an immaterial change in the
Companys cash flows related to the increased interest expense associated with
these floating rate securities.
The Companys credit ratings were downgraded during the fourth quarter of 2001
resulting in an overall corporate credit rating that is below investment grade.
These downgrades increased the cost of debt and other securities going forward
and may affect the Companys ability to issue debt and equity securities at
reasonable interest rates.
Foreign Currency Risk.
The Company has investments in Canadian companies
through Avista Energy Canada, Ltd. and Copac Management, Inc. The Companys
exposure to foreign currency risk and other foreign operations risk was
immaterial to the Companys consolidated results of operations and financial
position in 2001 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 risk management oversight for
these risks for each area of the Companys energy-related business. The
Company has a comprehensive Risk Management Committee, separate from the units
that create such risk exposure and overseen by the Audit Committee of the
Companys Board of Directors, to monitor compliance with the Companys risk
management policies and procedures. Avista Utilities and Avista Energy have
policies and procedures to manage the risks, both quantitative and qualitative,
inherent in their businesses. The Companys Risk Management Committee reviews
the status of risk exposures through regular reports and meetings and it
monitors compliance with the Companys 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 flows and/or fair values.
Quantitative Risk Measurements.
Avista Utilities has volume limits for its
imbalance between projected loads and resources. Normal operations result in
seasonal mismatches between power loads and available resources. Avista
Utilities is able to vary the operation of its generating resources to help
match hourly, daily and weekly load fluctuations. 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 that 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.
Avista Energy measures the risk in its power and natural gas portfolio daily
utilizing a Value-at-Risk (VAR) model, monitoring 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 VAR computations are based on an historical simulation, that 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 Energys
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.
48
AVISTA CORPORATION
Avista Energys VAR computations utilize several key assumptions, including a
95 percent 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.
As of December 31, 2001, Avista Energys estimated potential one-day
unfavorable impact on gross margin was $0.4 million, as measured by VAR,
related to its commodity trading and marketing business, compared to $4.0
million as of December 31, 2000. The average daily VAR for 2001 was $1.2
million, compared to $1.6 million in 2000. Avista Energy was outside of its
one-day VAR limits a total of two times during 2001. 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 as
of December 31, 2001.
For forward transactions that 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 have become 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 between 2.0 and 3.0 percent 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.
Avista Utilities anticipates natural gas load growth, including transportation
volumes, in its Washington and Idaho service area to average between 1.5 and
2.0 percent annually for the next five years. The Oregon and South Lake Tahoe,
California service areas are anticipated to average between 2.0 and 3.0 percent
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. Thus far, measures that
were 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 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 in March 2001 that incorporates a
comprehensive settlement agreement. The restoration of native salmonid fish,
in particular bull trout, is a principal focus of the agreement. A
collaborative bull trout recovery program with the U.S.
49
AVISTA CORPORATION
Fish and Wildlife
Service, Native American tribes and the states of Idaho and Montana is underway
on the lower Clark Fork River. The FERC license establishes a plan for bull
trout restoration.
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 Cabinet Gorge. To date, intensive
biological studies in the lower Clark Fork River and Lake Pend Oreille
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 24 of Notes to Consolidated Financial Statements for additional
information.
Other
The Board of Directors considers the level of dividends on the Companys common
stock on a continuing basis, taking into account numerous factors including,
without limitation, the Companys results of operations and financial
condition, as well as general economic and competitive conditions. The
Companys net income available for dividends is derived
primarily from Avista Utilities
operations.
Safe Harbor for Forward-Looking Statements
This Annual Report on Form 10-K contains forward-looking statements within the
meaning of Section 21E of the Securities Exchange Act of 1934. The Company is
including the following cautionary statement 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). Forward-looking statements are all statements other than
statements of historical fact, including without limitation those that are
identified by the use of words such as, but not limited to, will,
anticipates, seeks to, 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.
Such statements are inherently subject to a variety of risks and uncertainties
that could cause actual results to differ materially from those expressed.
Such risks and uncertainties include, among others:
The Companys expectations, beliefs and projections are expressed in good faith
and are believed by the Company to have a reasonable basis, including without
limitation managements examination of historical operating trends, data
contained in the Companys records and other data available from third parties,
but there can be no assurance that the Companys 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 Companys 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.
50
AVISTA CORPORATION
Avista Utilities Operations -
In addition to other factors and matters discussed elsewhere herein, some
important factors that could cause actual results or outcomes for Avista
Utilities operations to differ materially from those discussed in
forward-looking statements include continuing legislative developments;
governmental policies and regulatory actions with respect to allowed rates of
return, financings, or industry and rate structures; weather conditions;
outages of any generating facilities; availability of economic supplies of
power and natural gas; competition in present or future 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; the ability to make profitable sales of any
surplus electric capacity or energy in wholesale markets; 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; federal and state regulatory and legislative
actions; demand for and availability of energy throughout the country;
wholesale competition; availability of economic supplies of power and 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 and Technology, and Other 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 inability
to reduce costs of the technologies down to economic levels; the inability to
obtain new customers and loss of significant customers or suppliers;
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 Companys
financial instruments; changes in accounting principles and/or the application
of such principles to the Company; changes in technology; changes in economic,
business or political conditions, including the continuing impact on the
economy of the September 11, 2001 terrorist attacks; and outcomes of legal
proceedings.
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Natural Gas
Electric
Total
Assets and
Assets and
Unrealized
Liabilities
Liabilities
Gain(Loss)
$
15,319
$
201,636
$
216,955
(51,291
)
(114,785
)
(166,076
)
1,282
13,971
15,253
73,082
47,503
120,585
$
38,392
$
148,325
$
186,717
(1)
Contracts settled during 2001 includes those contracts that were open in
2000 but settled in 2001 as well as new contracts entered into and settled
during 2001. Amount represents realized earnings associated with these
settled transactions.
(2)
Avista Energy did not enter into any origination transactions during 2001
in which dealer profit or mark-to-market gain or loss was recorded at
inception.
(3)
During 2001, Avista Energy changed the interest rate used to discount
trading positions from an incremental borrowing rate to LIBOR.
Additionally, Avista Energy eliminated a specific liquidity and valuation
adjustment related to the California market that was in place as of
December 31, 2000.
2003 and
2005 and
2006 and
2002
2004
2006
later
Total
$
11,217
$
21,594
$
$
$
32,811
1,829
581
2,031
1,140
5,581
$
13,046
$
22,175
$
2,031
$
1,140
$
38,392
$
92,456
$
43,344
$
$
$
135,800
(1,842
)
7,125
8,546
(1,304
)
12,525
$
90,614
$
50,469
$
8,546
$
(1,304
)
$
148,325
(1)
The fair value is determined based upon actively traded,
over-the-counter market quotes received from third party brokers. For
natural gas assets and liabilities, these market quotes are generally
available through three years. For electric assets and liabilities, these
market quotes are generally available through two years.
(2)
Represents contracts for delivery at basis locations not actively traded
in the over-the-counter markets. In addition, this includes all
contracts with a delivery period greater than three years, for which
active quotes are not available. These internally developed market curves
are based upon published New York Mercantile Exchange prices through seven
years, as well as basis spreads using historical and broker estimates.
After seven years, an escalation is used to estimate the valuation.
(3)
Represents contracts for delivery at basis locations not actively traded
in the over-the-counter markets. In addition, this includes all
contracts with a delivery period greater than two years, for which
active quotes are not available. These internally developed market curves
are determined using a production cost model with inputs for
assumptions related to power prices (including, without limitation, natural
gas prices, generation on line, transmission constraints, future demand and
weather). Avista Energy conducts frequent stress tests on the valuation of
its portfolio. By changing the input assumptions to the internally
developed market curves,
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these stress tests attempt to capture the
Companys sensitivity to changes in portfolio valuation. These stress
tests indicate that, for the portfolio valued under internally developed
market curves, the valuations can be reasonably certain to fall within 20
percent, upwards or downwards, of the reported values listed above.
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Standard & Poor's
Moody's
Fitch, Inc.
BB+
Ba1
BB+
BBB-
Baa3
BBB-
BB+
Ba1
BB+
BB-
Ba3
BB
BB-
Ba2
BB+
BB-
Ba2
BB
Negative
Negative
Stable
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2002
2003
2004
2005
2006
Thereafter
$
$
205
$
30
$
30
$
38
$
875
130
2
2
2
2
2
27
100
374
357
308
162
141
1,412
13
12
10
7
7
76
2
20
1,573
533
293
163
149
403
5
4
4
2
1
2
1
1
$
2,120
$
1,114
$
647
$
366
$
338
$
2,895
(1)
Represents a $220 million ($55 million outstanding at December 31, 2001)
line of credit and a $90 million ($75 million outstanding at December 31,
2001) accounts receivable financing facility, both expiring in May 2002.
(2)
All of the energy purchase contracts were entered as part of Avista
Utilities obligation to serve its retail natural gas and electric
customers energy requirements. As a result, these costs are generally
recovered either through base retail rates or adjustments to retail rates
as part of the power and natural gas cost adjustment mechanisms.
(3)
Represents Avista Energys contractual commitments to purchase physical
energy commodities in future periods. Avista Energy also has sales
commitments related to energy commodities in future periods. Financial
transactions, which could possibly change the cash flow associated with
these transactions, have been excluded because it is not possible to
identify those financial transactions entered into to economically hedge
purchase commitments. Avista Energy uses a portfolio type of hedging or
trading strategy.
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Commitment
Commitment
Outstanding
Expiration
$
54
2002
$
92
(1)
Represents the $155 million credit agreement at Avista Energy and the $50
million available for letters of credit under Avista Corp.s $220 million
line of credit. As of December 31, 2001, letters of credit totaled $39.6
million at Avista Energy and $13.9 million at Avista Corp. and primarily
relate to energy purchase contracts.
(2)
The face value of all performance guarantees issued by Avista Capital for
energy trading contracts at Avista Energy was approximately $1.2 billion
as of December 31, 2001. At any point in time, Avista Capital is only
liable for the outstanding portion of the guarantee, which was $91.6
million as of December 31, 2001. Most guarantees do not have set
expiration dates; however, either party may terminate the guarantee at any
time with minimal written notice.
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the outcome of the general electric rate case filed in the state of Washington on December 3, 2001
changes in the utility regulatory environment in the states in which the Company operates and the western United States
the impact of regulatory and legislative decisions including FERC price controls and including possible retroactive price caps
and resulting refunds
the availability and prices of purchased energy, volatility and illiquidity in wholesale energy markets
wholesale and retail competition (including but not limited to electric retail wheeling and transmission costs)
future streamflow conditions and the impact on the availability of hydroelectric resources
changes in future demand, either due to weather conditions or customer growth
failure to deliver on the part of any parties from which the Company purchases capacity or energy
the Companys ability to obtain financing through debt and/or equity issuance
the outcome of the proposed Montana Hydroelectric Security Act Initiative (See Note 24 of Notes to Consolidated Financial
Statements)
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Item 7a. Quantitative and Qualitative Disclosures About Market Risk
See Managements 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 Auditors Report and Financial Statements begin on the next page.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Not applicable.
51
INDEPENDENT AUDITORS REPORT
Avista Corporation
We have audited the accompanying consolidated balance sheets and statements of
capitalization of Avista Corporation and subsidiaries (the Company) as of
December 31, 2001 and 2000, and the related consolidated statements of income
and comprehensive 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, 2001. 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, 2001
and 2000, and the results of its operations and its cash flows for each of the
three years in the period ended December 31, 2001, in conformity with
accounting principles generally accepted in the United States of America.
/s/ Deloitte & Touche LLP
Seattle, Washington
52
Spokane, Washington
February 8, 2002
(March 4, 2002, as to Note 1)
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CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
Avista Corporation
For the Years Ended December 31
Dollars in thousands, except per share amounts
2001
2000
1999
$
6,009,847
$
7,905,577
$
7,902,399
5,464,530
7,293,520
7,391,277
125,656
129,708
187,853
119,216
134,912
123,996
71,981
65,936
67,873
59,172
54,608
53,085
9,805
42,922
5,840,555
7,688,489
7,867,006
169,292
217,088
35,393
(106,480
)
(68,255
)
(64,747
)
10,498
3,359
1,001
(95,982
)
(64,896
)
(63,746
)
20,681
25,861
73,912
(75,301
)
(39,035
)
10,166
93,991
178,053
45,559
34,386
76,998
16,897
59,605
101,055
28,662
(21,130
)
(15,367
)
(4,324
)
(58,417
)
4,319
2,454
1,536
27,779
3,537
157
(47,449
)
(9,376
)
(2,631
)
12,156
91,679
26,031
2,432
23,735
21,392
$
9,724
$
67,944
$
4,639
47,417
45,690
38,213
$
1.21
$
1.69
$
0.19
(1.00
)
(0.20
)
(0.07
)
$
0.21
$
1.49
$
0.12
$
1.20
$
1.67
$
0.19
(1.00
)
(0.20
)
(0.07
)
$
0.20
$
1.47
$
0.12
$
0.48
$
0.48
$
0.48
$
12,156
$
91,679
$
26,031
(221
)
(82
)
376
(740
)
1,585
(475
)
(201
)
624
(557
)
175
$
12,780
$
91,122
$
26,206
The Accompanying Notes are an Integral Part of These Statements.
53
CONSOLIDATED BALANCE SHEETS
Avista Corporation
As of December 31
Dollars in thousands
2001
2000
$
171,221
$
197,238
1,872
1,058
388,083
859,149
477,037
7,956,229
21,776
20,923
32,348
13,157
19,364
53,613
21,316
50,665
1,133,017
9,152,032
2,277,779
2,205,230
54,964
33,535
2,332,743
2,238,765
767,101
720,453
1,565,642
1,518,312
43,314
46,981
230,800
172,275
383,497
1,367,107
13,620
21,885
671,231
1,608,248
149,033
156,692
192,760
23,935
1,889
265,063
75,648
41,222
27,874
17,366
14,340
667,333
298,489
$
4,037,223
$
12,577,081
$
367,899
$
886,268
373,837
7,834,007
1,827
89,454
75,099
163,160
18,583
16,585
84,587
143,623
6,642
5,763
928,474
9,138,860
46,601
38,975
35,824
46,002
299,980
1,272,374
159,418
517,428
446,310
18,720
95,530
1,077,971
1,899,191
2,030,778
1,539,030
$
4,037,223
$
12,577,081
The Accompanying Notes are an Integral Part of These Statements
54
CONSOLIDATED STATEMENTS OF CAPITALIZATION
Avista Corporation
As of December 31
Dollars in thousands
2001
2000
$
104,500
$
129,500
59,000
74,000
163,500
203,500
150,000
313,500
203,500
66,700
66,700
17,000
17,000
4,100
4,100
87,800
87,800
400,000
13,000
13,000
79,000
89,000
109,000
109,000
175,000
175,000
376,000
386,000
962
2,619
(2,547
)
(113
)
1,175,715
679,806
60,000
60,000
40,000
40,000
100,000
100,000
35,000
35,000
617,737
610,741
(5,679
)
(7,040
)
(11,924
)
(11,696
)
(99
)
(723
)
120,028
132,942
720,063
724,224
$
2,030,778
$
1,539,030
The Accompanying Notes are an Integral Part of These Statements.
55
CONSOLIDATED STATEMENTS OF CASH FLOWS
Increase (Decrease) in Cash and Cash Equivalents
Avista Corporation
For the Years Ended December 31
Dollars in thousands
2001
2000
1999
$
12,156
$
91,679
$
26,031
47,449
9,376
2,631
71,981
65,936
67,873
79,141
79,274
(1,085
)
(248,386
)
(67,299
)
(14,906
)
299
(16,506
)
(57,860
)
8,225
33,622
10,636
(172,918
)
(9,841
)
15,129
19,843
(25,425
)
(5,000
)
35,000
20,000
453,309
(375,558
)
(139,878
)
(853
)
7,037
890
(503,475
)
442,984
162,775
(33,940
)
(34,758
)
47,180
(93,329
)
84,090
112,007
(119,905
)
(98,680
)
(87,160
)
(162,279
)
(73,515
)
(17,573
)
11,163
3,403
(7,636
)
75,953
105,228
148,851
(23,321
)
(1,496
)
(48,931
)
(218,389
)
(65,060
)
(12,449
)
(88,061
)
42,126
110,522
(10,000
)
550,457
224,000
115,749
(140,208
)
(54,283
)
(211,514
)
(5,918
)
8,267
2,625
(81,985
)
(25,110
)
(28,304
)
(39,757
)
(2,434
)
(850
)
(4,634
)
302,911
175,314
(117,537
)
(17,210
)
(37,094
)
(14,830
)
(26,017
)
157,250
(32,809
)
197,238
39,988
72,797
$
171,221
$
197,238
$
39,988
$
98,571
$
61,774
$
63,207
(38,817
)
31,404
42,891
22,665
1,114
271,286
469
2,557
2,437
(475
)
(201
)
2,548
3,500
The Accompanying Notes are an Integral Part of These Statements.
56
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
Avista Corporation
For the Years Ended December 31
Dollars in thousands
Preferred Stock
Convertible Preferred Stock,
Series K
Series L
Common Stock
Shares
Amount
Shares
Amount
Shares
Amount
350,000
$
35,000
1,540,460
$
269,227
40,453,729
$
381,401
(32,250
)
(5,918
)
(4,788,900
)
(62,393
)
(16,590
)
(277
)
350,000
$
35,000
1,508,210
$
263,309
35,648,239
$
318,731
(1,508,210
)
(263,309
)
11,410,047
289,118
(45,975
)
(1,488
)
70,742
1,192
97,478
2,614
28,158
574
350,000
$
35,000
$
47,208,689
$
610,741
91,128
1,763
172,681
2,823
160,180
2,410
350,000
$
35,000
$
47,632,678
$
617,737
[Additional columns below]
[Continued from above table, first column(s) repeated]
Note
Receivable
Capital
Accumulated
from Employee
Stock Expense
Other
Stock
and Other
Comprehensive
Retained
Ownership Plan
Paid-in Capital
Income (Loss)
Earnings
Total
$
(9,295
)
$
(4,176
)
$
(341
)
$
120,445
$
792,261
26,031
26,031
(171
)
(19,315
)
(87,797
)
(84
)
(361
)
1,055
1,055
376
376
(201
)
(201
)
(18,301
)
(18,301
)
(21,402
)
(21,402
)
147
147
$
(8,240
)
$
(4,347
)
$
(166
)
$
87,521
$
691,808
91,679
91,679
(8,009
)
(17,868
)
(68
)
(419
)
(1,907
)
689
101
1,982
(29
)
2,585
574
1,200
1,200
(82
)
(82
)
(475
)
(475
)
(22,616
)
(22,616
)
(5,600
)
(5,600
)
144
144
$
(7,040
)
$
(11,696
)
$
(723
)
$
132,942
$
759,224
12,156
12,156
(228
)
(14
)
1,521
2,823
2,410
1,361
1,361
(221
)
(221
)
(740
)
(740
)
1,585
1,585
(22,765
)
(22,765
)
(2,432
)
(2,432
)
141
141
$
(5,679
)
$
(11,924
)
$
(99
)
$
120,028
$
755,063
The Accompanying Notes are an Integral Part of These Statements.
57
SCHEDULE OF INFORMATION BY BUSINESS SEGMENTS
Avista Corporation
For the Years Ended December 31
Dollars in thousands
2001
2000
1999
$
1,230,847
$
1,512,101
$
1,115,647
5,000,955
6,531,551
6,695,671
13,815
5,732
2,266
16,385
32,937
122,303
(252,155
)
(176,744
)
(33,488
)
$
6,009,847
$
7,905,577
$
7,902,399
$
708,321
$
1,072,475
$
543,436
220,692
169,924
116,553
81,949
69,077
46,368
(210,540
)
(70,250
)
(14,616
)
49,574
5,233
19,411
4,866,689
6,223,805
6,713,613
(252,155
)
(176,744
)
(33,488
)
$
5,464,530
$
7,293,520
$
7,391,277
$
380,851
$
265,642
$
404,495
134,266
307,746
(17,942
)
$
515,117
$
573,388
$
386,553
$
97,831
$
95,117
$
90,390
249
370
12,607
6,611
6,310
15,218
27,731
90,783
$
125,656
$
129,708
$
187,853
$
53,416
$
62,111
$
66,362
33,494
41,256
31,732
23,918
22,329
3,389
8,388
9,216
22,513
$
119,216
$
134,912
$
123,996
$
61,383
$
57,479
$
55,545
2,188
2,466
3,692
5,403
2,169
1,175
3,007
3,822
7,461
$
71,981
$
65,936
$
67,873
$
114,927
$
3,177
$
142,567
94,669
250,196
(97,785
)
(29,872
)
(26,424
)
(8,966
)
(10,432
)
(9,861
)
(423
)
$
169,292
$
217,088
$
35,393
58
2001
2000
1999
$
24,164
$
(38,781
)
$
59,573
70,087
161,753
(60,739
)
(19,384
)
(19,032
)
(5,989
)
(15,262
)
(2,885
)
35,817
$
59,605
$
101,055
$
28,662
$
2,396,317
$
2,143,791
$
1,976,716
1,506,185
10,271,834
1,595,470
26,891
14,429
6,312
86,514
96,362
114,929
21,316
50,665
20,067
$
4,037,223
$
12,577,081
$
3,713,494
$
119,905
$
98,680
$
87,160
157,020
65,095
3,676
4,644
8,409
3,628
615
976
10,171
$
282,184
$
173,160
$
104,635
The Accompanying Notes are an Integral Part of These Statements
59
AVISTA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Business
Avista Corporation (Avista Corp. or the Company) is an energy company involved
in the generation, transmission and distribution of energy as well as other
energy-related businesses. The utility portion of the Company, doing business
as Avista Utilities, an operating division of Avista Corp. and not a separate
entity, provides electric and natural gas service to customers in four western
states and is subject to state and federal regulation. Avista Capital, a
wholly owned subsidiary of Avista Corp., is the parent company of all of the
subsidiary companies engaged in the other non-regulated lines of business.
The Companys 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 purchases and sales.
Basis of Reporting
The consolidated financial statements include the assets, liabilities, revenues
and expenses of the Company and its subsidiaries. The accompanying financial
statements include the Companys proportionate share of utility plant and
related operations resulting from its interests in jointly owned plants (See
Note 8).
Use of Estimates
The preparation of the consolidated financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect amounts
reported in the consolidated financial statements. Changes in these estimates
and assumptions are considered reasonably possible and may have a material
impact on the consolidated financial statements and thus actual results could
differ from the amounts reported and disclosed herein.
System of Accounts
The accounting records of the Companys 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 federal regulation by the
FERC.
Business Segments
Financial information for each of the Companys lines of business is reported
in the Schedule of Information by Business Segments. Such information is an
integral part of these consolidated financial statements. The business segment
presentation reflects the basis currently used by the Companys management to
analyze performance and determine the allocation of resources. Avista
Utilities business is managed based on the total regulated utility operation.
The Energy Trading and Marketing line of business operations primarily includes
non-regulated electricity and natural gas marketing and trading activities
including derivative commodity instruments such as futures, options, swaps and
other contractual arrangements. The Information and Technology line of
business operations includes utility internet billing services and fuel cell
technology. The Other line of business encompasses other investments and
non-energy operations of various subsidiaries as well as the operations of
Avista Capital on a parent company only basis. The Company is in the process
of divesting Avista Communications, its telecommunications business, which is
reported as a discontinued operation.
Operating Revenues
Operating revenues are recorded on the basis of service rendered, which
includes estimated unbilled revenue. 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 settled.
60
AVISTA CORPORATION
Intersegment Eliminations
Intersegment eliminations represent the transactions between Avista Utilities
and Avista Energy for energy 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 Companys
research and development expenses are related to the Information and Technology
line of business. Research and development expenses totaled $8.4 million, $8.1
million and $3.3 million in 2001, 2000 and 1999, respectively.
Advertising Costs
The Company expenses advertising costs as incurred. Advertising expenses
totaled $1.8 million, $1.2 million and $0.6 million in 2001, 2000 and 1999,
respectively.
Taxes other than income taxes
Taxes other than income taxes include state excise taxes, city occupational and
franchise taxes, real and personal property taxes and certain other taxes not
based on net income. These taxes are generally based on revenues or the value
of property. Utility related taxes collected from customers are recorded as
both revenue and expense and totaled $26.3 million, $23.5 million and $21.3
million in 2001, 2000 and 1999, respectively.
Other Income-Net
Other income-net consisted of the following items for the years ended December 31 (dollars in thousands):
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 Companys federal income tax returns
were examined with all issues resolved, and all payments made, through the 1998
return.
The Company accounts for income taxes using the liability method. Under the
liability method, a deferred tax asset or liability is determined based on the
enacted tax rates that will be in effect when the differences between the
financial statement carrying amounts and tax basis of existing assets and
liabilities are expected to be reported in the Companys consolidated income
tax returns. The deferred tax expense for the period is equal to the net
change in the deferred tax asset and liability accounts from the beginning to
the end of the period. The effect on deferred taxes of a change in tax rates
is recognized in income in the period that includes the enactment date.
Stock-Based Compensation
The Company follows the disclosure only provisions of Statement of Financial
Accounting Standards (SFAS) No. 123, Accounting for Stock-Based Compensation.
Accordingly, employee stock options are accounted for under Accounting
Principle Board Opinion (APB) No. 25, Accounting for Stock Issued to
Employees. Stock options are granted at exercise prices not less than the
fair value of common stock on the date of grant. Under APB No. 25, no
compensation expense is recognized pursuant to the Companys stock option
plans.
Comprehensive Income
The Companys comprehensive income is comprised of net income, foreign currency
translation adjustments, unfunded accumulated benefit obligation and unrealized
gains and losses on investments available-for-sale.
Foreign Currency Translation Adjustment
The assets and liabilities of Avista Energy Canada, Ltd. are denominated in
Canadian dollars and translated to United States dollars at exchange rates in
effect on the balance sheet date. Revenues and expenses are translated using
an average exchange rate. Translation adjustments resulting from this process
are reflected as a component of
61
AVISTA CORPORATION
other comprehensive income in the Consolidated Statements of Comprehensive Income.
Earnings Per Common Share
Basic earnings per common share is computed by dividing income available for
common stock by the weighted average number of common shares outstanding for
the period. Diluted earnings per common share is calculated by dividing income
available for common stock by diluted weighted average common shares
outstanding during the period, including common stock equivalent shares
outstanding using the treasury stock method, unless such shares are
anti-dilutive. Common stock equivalent shares include shares issuable upon
exercise of stock options and convertible stock. See Note 21 for earnings per
common share calculations.
Cash and Cash Equivalents
For the purposes of the Consolidated Statements of Cash Flows, the Company
considers all temporary investments with a purchased maturity of three months
or less to be cash equivalents.
Temporary Investments
Temporary investments consist of marketable equity securities classified as
available for sale. The unrealized gain on temporary investments totaled
$1.4 million as of December 31, 2001 compared to an unrealized loss of $0.7
million as of December 31, 2000, respectively, net of taxes, and are reflected
as a component of accumulated other comprehensive income on the Consolidated
Statements of Capitalization.
Allowance for Doubtful Accounts
The Company maintains an allowance for doubtful accounts to sufficiently
provide for estimated and potential losses on accounts receivable. The Company
determines the allowance for utility and other customer accounts receivable
based on historical write-offs as compared to accounts receivable and operating
revenues. Additionally, the Company establishes specific allowances for
certain individual accounts. The following table documents the activity in the
allowance for doubtful accounts during the years ended December 31 (dollars in
thousands):
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.
Utility Plant in Service
The cost of additions to utility plant in service, including an allowance for
funds used during construction and replacements of units of property and
improvements, 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 non-cash item to the
Consolidated Statements of Income in the line item capitalized interest. 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
is placed in service. Cash inflow related to AFUDC does not occur until the
related utility plant is placed in service.
The effective AFUDC rate was 9.03 percent in 2001 and 10.67 percent in 2000 and
1999. The Companys AFUDC rates do not exceed the maximum allowable rates as
determined in accordance with the requirements of regulatory authorities.
Depreciation
For utility operations, depreciation expense is estimated by a method of
depreciation accounting utilizing unit rates
62
AVISTA CORPORATION
for hydroelectric plants and
composite rates for other utility plant. 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 percent. For utility operations, the ratio
of depreciation provisions to average depreciable property was 2.84 percent in
2001, 2.72 percent in 2000 and 2.69 percent in 1999.
The average service lives and remaining average service lives, respectively,
for the following broad categories of utility property are: electric thermal
production 35 and 15 years; hydroelectric production 100 and 77 years;
electric transmission 60 and 26 years; electric distribution 40 and 29
years; and natural gas distribution property 44 and 28 years.
Goodwill
Goodwill arising from acquisitions represents the excess of the purchase price
over the estimated fair value of net assets acquired. The Company periodically
evaluates goodwill for impairment. Goodwill was amortized using the
straight-line method over periods not exceeding twenty years. Goodwill is
included in non-utility properties and investments-net in the Consolidated
Balance Sheets and totaled $13.7 million and $22.7 million as of December 31,
2001 and 2000, respectively. The level of goodwill as of December 31, 2001 and
2000 was supported by the value attributed to the operations acquired. See
Note 2 for changes in accounting for goodwill effective January 1, 2002.
Regulatory Deferred Charges and Credits
The Company prepares its consolidated financial statements in accordance with
the provisions of SFAS No. 71, Accounting for the Effects of Certain Types of
Regulation. The Company prepares its financial statements in accordance with
SFAS No. 71 due to the fact that (i) the Companys 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 Companys 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 Companys
costs can be charged to and collected from customers. SFAS No. 71 requires the
Company to reflect the impact of regulatory decisions in its financial
statements. SFAS No. 71 requires that certain costs and/or obligations (such
as incurred power and natural gas costs not currently recovered through rates,
but expected to be recovered in the future) be reflected as a deferred charge
on the balance sheet. These costs and/or obligations are not reflected in the
statement of income until the period that 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 SFAS No. 71 to all or a portion of the
Companys regulated operations, the Company could be required to write off its
regulatory assets. The Company could also be precluded from the future
deferral 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 Companys primary regulatory assets include power and natural gas
deferrals, investment in exchange power, regulatory assets for deferred income
taxes, unamortized debt expense, regulatory asset offsetting energy commodity
derivative liabilities, demand side management programs, conservation programs
and the provision for postretirement benefits. Those items without a specific
line on the Consolidated Balance Sheets are included in other regulatory
assets. Other regulatory assets consisted of the following as of December 31
(dollars in thousands):
Deferred credits include regulatory liabilities created when the Centralia
Power 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.
Natural Gas Benchmark Mechanism
Avista Utilities received regulatory approval of its Natural Gas Benchmark
Mechanism in 1999 from the Idaho Public Utilities Commission (IPUC), Washington
Utilities and Transportation Commission (WUTC) and Oregon Public Utilities
Commission (OPUC). The mechanism eliminated natural gas procurement operations
within Avista Utilities and consolidated gas procurement operations under
Avista Energy, the Companys non-regulated affiliate. The ownership of the
natural gas assets remains with Avista Utilities; however, the assets are
managed by Avista Energy through an Agency Agreement.
63
AVISTA CORPORATION
Effective January 1, 2001, the WUTC and IPUC approved Avista Utilities
modifications of the Natural Gas 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 such additional flexibility was needed in the Natural Gas
Benchmark Mechanism to properly manage costs. 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. In accordance with SFAS No. 71, profits recognized by Avista Energy
on natural gas sales to Avista Utilities, including unrealized gains on natural
gas contracts, are not eliminated in the consolidated financial statements.
This is due to the fact that costs incurred by Avista Utilities for natural gas
purchases to serve retail customers and for fuel for electric generation are
recovered through future retail rates.
Avista Utilities provided notice of its intent to continue the Natural Gas
Benchmark Mechanism and related Agency Agreement with Avista Energy to the
applicable state regulatory agencies in 2001. In early 2002, the WUTC approved
the continuation of the Natural Gas Benchmark Mechanism and related Agency
Agreement through March 31, 2003 and the IPUC approved the continuation through
March 31, 2005.
Power Cost Deferrals
Avista Utilities has deferred certain power costs as approved by the WUTC. The
specific power costs deferred include the changes in power costs to Avista
Utilities from the costs included in base retail rates, resulting from changes
in short-term wholesale market prices, changes in the level of hydroelectric
generation and changes in the level of thermal generation (including changes in
fuel prices). The power costs deferred relate solely to the operation of
Avista Utilities system resources to serve its system retail and wholesale
load obligations. During 2001, Avista Utilities deferred $145.4 million in
power costs (net of the $21.8 million written off pursuant to the WUTC order);
total deferred power costs were $140.2 million for Washington customers as of
December 31, 2001. During 2000, Avista Utilities deferred a total of $33.9
million in power costs related to Washington customers.
In September 2001, the WUTC ordered a 25 percent temporary electric rate
surcharge for the 15-month period from October 1, 2001 to December 31, 2002 to
allow Avista Utilities to recover a portion of Washington deferred power costs.
The order by the WUTC also provided for the termination of the accounting
mechanism for the deferral of power costs effective January 1, 2002. In
November 2001, Avista Utilities filed a request with the WUTC for an expedited
procedural schedule to address the prudence and recoverability of deferred
power costs incurred prior to September 30, 2001.
In the December 2001 general electric rate case filing, Avista Utilities
requested, among other things, the issuance of an order implementing a
temporary deferred accounting mechanism to be in effect during the period from
January 1, 2002 through the conclusion of the general rate case. The request
for a temporary deferred accounting mechanism was approved by the WUTC in
December 2001. As requested by Avista Utilities, the deferred power cost
accounting mechanism was modified to reflect the deferral of 90 percent of the
difference between actual power supply costs and the amount of power supply
costs allowed to be recovered in current retail rates. Avista Utilities also
requested the establishment of a permanent power cost adjustment (PCA)
mechanism to increase or decrease future electric rates based on actual power
supply costs, similar to the existing Idaho PCA mechanism.
On March 4, 2002 the WUTC issued an order approving the prudence and
recoverability of 90 percent of deferred power supply costs incurred during the
period from July 1, 2000 through December 31, 2001. This resulted in the
Company writing off $21.8 million of power supply costs previously deferred.
Additionally, the order provided that one-fifth of the existing 25 percent
surcharge will be applied to offset the Companys general operating costs and
the remainder will continue to be a recovery of deferred power costs. The
WUTC order also approved a 6.2 percent increase in base retail rates.
Avista Utilities has a PCA mechanism in Idaho that allows it to modify electric
rates to recover or rebate a portion of the difference between actual and
allowed net power supply costs. The current PCA mechanism allows for the
deferral of 90 percent of the difference between actual net power supply
expenses and the authorized level of net power supply expense approved in the
last Idaho general rate case. In October 2001, the IPUC issued an order
approving a 14.7 percent PCA surcharge for Idaho electric customers and granted
an extension of a 4.7 percent PCA surcharge implemented earlier in 2001 that
was to expire January 31, 2002. Both PCA surcharges will remain in effect
until October 2002. The IPUC directed Avista Utilities to file a status report
60 days before the PCA surcharge expires. If review of the status report and
the actual balance of deferred power costs support continuation
64
AVISTA CORPORATION
of the PCA
surcharge, the IPUC has indicated that it anticipates the PCA surcharge will be
extended for an additional period. Total deferred power costs for Idaho
customers were $73.1 million as of December 31, 2001.
Natural Gas Cost Deferrals
Under established regulatory practices in each respective state, Avista
Utilities is allowed to adjust its natural gas rates periodically with
appropriate regulatory approval 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. Total deferred natural gas costs were
$52.7 million as of December 31, 2001. Based on current natural gas rates in
place and current natural gas prices, Avista Utilities expects that the
deferred natural gas cost balance will be fully recovered by December 2002.
Deferred Revenue
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 were being amortized into
revenues over the 16-year period of the long-term sales contract. Pursuant to
the WUTC order in September 2001, the Company was directed to offset $53.8
million of the Washington share of the deferred revenue against deferred power
costs. The IPUC order in October 2001 directed the Company to amortize the
Idaho share of the deferred revenue against deferred power costs over the next
15 months. The unamortized balance as of December 31, 2001 was $27.7 million.
Reclassifications
Certain prior period amounts were 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 equity.
NOTE 2. NEW ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS No.
133, Accounting for Derivative Instruments and Hedging Activities. In June
2000, the FASB issued SFAS No. 138, which amended certain provisions of SFAS
No. 133 to clarify specific areas presenting difficulties in implementation.
SFAS No. 133, as amended by SFAS No. 138, establishes accounting and reporting
standards for derivative instruments, including certain derivative instruments
imbedded in other contracts, and for hedging activities. It requires the
recording of all derivatives as either assets or liabilities in the balance
sheet measured at estimated fair value and the recognition of the unrealized
gains and losses. In certain defined conditions, a derivative may be
specifically designated as a hedge for a particular exposure. The accounting
for derivatives depends on the intended use of the derivatives and the
resulting designation. The Company adopted SFAS No. 133 and the corresponding
amendments under SFAS No. 138, on January 1, 2001.
Avista Utilities buys and sells energy under forward contracts that are
considered 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. In
conjunction with the issuance of SFAS No. 133, the WUTC and the IPUC issued
accounting orders requiring Avista Utilities to offset any derivative assets or
liabilities with a regulatory asset or liability. As a result, unrealized
gains or losses for Avista Utilities are not recognized in the Consolidated
Statements of Income and Comprehensive Income.
Avista Energy accounts for derivative commodity instruments entered into for
trading purposes using the mark-to-market method of accounting, in compliance
with Emerging Issues Task Force (EITF) Issue No. 98-10, Accounting for Energy
Trading and Risk Management Activities, with unrealized gains and losses
recognized in the Consolidated Statements of Income.
On January 1, 2001, Avista Utilities recorded a derivative commodity asset of
$252.3 million and a derivative commodity liability of $36.1 million. The
difference of $216.2 million was recorded as a net regulatory liability in
accordance with the accounting orders from the WUTC and IPUC discussed above.
The amounts recorded as of January 1, 2001 were based on Avista Utilities
original interpretations of SFAS No.s 133, 138 and the guidance of the FASBs
Derivative Implementation Group (DIG). Avista Utilities believed the majority
of its long-term purchases and sales contracts for both capacity and energy qualified
as normal purchases and sales under SFAS No. 133 and were not required to be
recorded as derivative commodity assets and liabilities. Some contracts for
less than one year in duration (short-term) are subject to booking out, whereby
power may not be physically delivered. Avista
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AVISTA CORPORATION
Utilities believed these
short-term contracts could not be classified as normal purchases and sales and
were recorded as a derivative commodity asset or liability on the Consolidated
Balance Sheet.
Based on subsequent interpretations of DIG guidance and rulings, Avista
Utilities made changes to its accounting for certain contracts effective July
1, 2001. The DIG released its interpretation of issue C-15, Scope Exceptions:
Normal Purchases and Normal Sales Exception for Option-Type Contracts and
Forward Contracts in Electricity, on June 27, 2001. This DIG issue allows for
power purchase or sale agreements (including forward and option contracts) to
qualify for the normal purchase and sale exception provided certain criteria
are met. Based on its interpretation of the guidance from the DIG, Avista
Utilities no longer records derivative commodity assets and liabilities for
short-term contracts subject to booking out as it has concluded that these
contracts could qualify for the normal purchases and sales exception. As of
December 31, 2001, the derivative commodity asset balance was $1.9 million, the
derivative commodity liability balance was $159.4 million and the offsetting
net regulatory asset was $157.5 million.
The derivative commodity asset balance is included in Deferred Charges
Utility energy commodity derivative assets, the derivative commodity liability
balance is included in Non-Current Liabilities and Deferred Credits Utility
energy commodity derivative liabilities, and the offsetting net regulatory
asset is included in Deferred Charges Other regulatory assets on the
Consolidated Balance Sheet. Certain issues and interpretations that may be
issued by the DIG could change the conclusions that the Company has reached
regarding accounting for energy contracts and, as a result, the accounting
treatment and financial statement impact could change in future periods.
In September 2000, the FASB issued SFAS No. 140, Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities, a
replacement of SFAS No. 125. This statement revises the standards for
accounting for securitizations and transfers of financial assets and collateral
and requires certain disclosures; however, it carries over most of SFAS No.
125s provisions without reconsideration. The standards addressed in this
statement are based on consistent application of a financial components
approach that focuses on control. Under this approach, after a transfer of
financial assets, an entity recognizes the financial and servicing assets it
controls and the liabilities it has incurred, derecognizes financial assets
when control has been surrendered, and derecognizes liabilities when
extinguished. This statement became effective for transfers and servicing of
financial assets and extinguishments of liabilities after March 31, 2001 and
was effective for recognition and reclassification of collateral and for
disclosures relating to securitizations and collateral for 2000. The adoption
of this statement did not have a material impact on the Companys financial
condition or results of operations.
In June 2001, the FASB issued SFAS No. 141, Business Combinations which
applies to business combinations initiated after June 30, 2001. This statement
requires that business combinations be accounted for using the purchase method;
the use of the pooling-of-interests method is no longer permitted. The
purchase method of accounting requires the measurement of goodwill as the
excess of the cost of an acquired entity over the estimated fair value of net
amounts assigned to assets acquired and liabilities assumed. This statement
also addresses the financial statement disclosure requirements for business
combinations. The adoption of this statement did not have a material impact on
the Companys financial condition or results of operations.
In June 2001, the FASB issued SFAS No. 142, Goodwill and Other Intangible
Assets which applies to acquired intangible assets whether acquired singly, as
part of a group, or in a business combination. This statement requires that
goodwill not be amortized; however, goodwill for each reporting unit must be
evaluated for impairment on at least an annual basis using a two-step approach.
The first step used to identify potential
impairment compares the estimated fair value of a reporting unit to its
carrying amount, including goodwill. If the fair value of a reporting unit is
less than its carrying amount, the second step of the impairment evaluation
which compares the implied fair value of goodwill to its carrying amount is
performed to determine the amount of the impairment loss, if any. This
statement also provides standards for financial statement disclosures of
goodwill and other intangible assets and related impairment losses. The
Company adopted this statement on January 1, 2002. The adoption of this
statement did not have a material impact on the Companys financial condition
or results of operations.
In June 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement
Obligations which addresses financial accounting and reporting for obligations
associated with the retirement of tangible long-lived assets and the associated
asset retirement costs. This statement requires the recording of the fair
value of a liability for an asset retirement obligation in the period in which
it is incurred. When the liability is initially recorded, the associated costs
of the asset retirement obligation will be capitalized as part of the carrying
amount of the related long-lived asset. The liability for the asset
retirement obligation will be accreted to its present value each period and the
related capitalized costs will be depreciated over the useful life of the
related long-lived asset. Upon retirement of
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AVISTA CORPORATION
the asset, the Company will
either settle the retirement obligation for its recorded amount or incur a gain
or loss upon the retirement of the long-lived asset. The Company will be
required to adopt this statement on January 1, 2003. The Company is in the
process of determining the impact this statement will have on the Companys
financial condition and results of operations.
On August 1, 2001, the Company adopted SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets which supersedes SFAS No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to be Disposed Of. This statement also supersedes the accounting and
reporting provisions for the disposal of a business segment as provided for in
APB No. 30 Reporting the Results of Operations-Reporting the Effects of
Disposal of a Segment of a Business, and Extraordinary, Unusual and
Infrequently Occurring Events and Transactions. The statement establishes
accounting standards for all long-lived assets to be disposed of including
discontinued operations. Long-lived assets to be disposed of are measured at
the lower of their carrying amount or estimated fair value less selling costs,
whether reported in continuing operations or discontinued operations. As such,
discontinued operations will no longer be measured at net realizable value or
include amounts for future operating losses. This statement allows for the
reporting as discontinued operations components of an entity with
distinguishable operations from the rest of the entity and not limited to
reportable business segments. The Company elected to early adopt this
statement. See Note 3 for further information.
NOTE 3. DISCONTINUED OPERATIONS
In September 2001, the Company reached a decision that it would dispose of
substantially all of the assets of Avista Communications. In October 2001,
minority shareholders of Avista Communications acquired ownership of its
Montana and Wyoming operations as well as its dial-up internet access
operations in Spokane, Washington and Coeur dAlene, Idaho. In December 2001,
Avista Communications completed the sale of the assets and customer accounts of
its Yakima and Bellingham, Washington operations to Advanced Telcom Group, Inc.
In December 2001, Avista Communications entered an agreement to transfer voice
and integrated services customer accounts in Spokane, Washington and Coeur
dAlene, Idaho to certain subsidiaries of XO Communications, Inc. The Company
is continuing to pursue disposal of the remaining portions of the business. The
divestiture is expected to be completed during the first half of 2002.
In connection with the planned disposal of Avista Communications, the Company
assessed the carrying value of assets and goodwill of Avista Communications.
As such, the assets and goodwill of Avista Communications were written down to
the estimated fair value upon the planned disposal of the assets. The total
charges of $58.4 million are comprised of the following: $48.2 million for
asset impairment, $7.1 million for goodwill impairment and $3.1 million for
exit costs and other costs to sell Avista Communications. Certain exit costs
and other costs to sell Avista Communications are expected to be paid out
during the first half of 2002 and primarily include the
buyout of contracts and professional fees. Revenues for Avista Communications
were $11.5 million, $5.9 million and $2.6 in 2001, 2000 and 1999, respectively.
Total assets of $21.3 million as of December 31, 2001 were comprised of $16.6
million of deferred tax assets, $3.2 million of fixed assets and $1.5 million
of current assets including accounts receivable, cash, inventory and prepaid
expenses.
NOTE 4. IMPAIRMENT OF NON-OPERATING ASSETS
In 2001, the Company recorded an impairment charge related to three turbines
owned by Avista Power. The Company originally planned to use the turbines in a
non-regulated generation project. Due to changing market conditions the
Company decided to no longer pursue the development of additional non-regulated
generation projects. The Company is currently completing the sale of the
turbines and wrote down the carrying value of the turbines to estimated fair
value less selling costs. This resulted in a charge of $8.2 million included
in other income-net in the Consolidated Statements of Income.
NOTE 5. RESTRUCTURING AND EXIT COSTS
In November 1999, Avista Energy redirected its focus away from national energy
trading toward a more regional-based energy marketing and trading effort in the
western United States. The downsizing plan called for the shutting down of
operations in Houston and Boston during the first half of 2000 and eliminating
approximately 80 positions. In the fourth quarter of 1999, Avista Energy
recorded a charge of $9.3 million for expenses related to employee terminations
and recorded $33.6 million of goodwill impairment. Avista Energy sold its
eastern United States power book during the first quarter of 2000 for a $1.5
million loss, but did not find a buyer for its natural gas or coal
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AVISTA CORPORATION
contracts in
the eastern United States. The remaining eastern United States 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. In addition
to the restructuring charges previously reserved and paid, other transition
costs of $6.4 million for 2000 were incurred for closing the Houston and Boston
offices and phasing out operations in the eastern United States.
In the first quarter of 2000, it was announced that Pentzer would be
redirecting its focus. Pentzer recorded a charge of $1.9 million for expenses
related to employee terminations, which were paid during 2000.
NOTE 6. ACCOUNTS RECEIVABLE SALE
In 1997, WWP Receivables Corp. (WWPRC) was formed 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. Currently, WWPRC, the Company and a third-party financial
institution have an agreement that expires in May 2002 whereby WWPRC can sell
without recourse, on a revolving basis, up to $90.0 million of those
receivables. WWPRC is obligated to pay fees that approximate the purchasers
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. As of December 31, 2001 and 2000, $75.0
million and $80.0 million, respectively, in accounts receivables were sold.
NOTE 7. ENERGY COMMODITY TRADING
The Companys energy-related businesses are exposed to risks relating to, but
not limited 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 policies and procedures to manage both quantitative and qualitative
risks inherent in these activities. The Company has a comprehensive Risk
Management Committee, separate from the units that create such risk exposure
and overseen by the Audit Committee of the Companys Board of Directors, to
monitor compliance with the Companys 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 long-term contracts having terms
of more than one year. In addition, Avista Utilities engages in an ongoing
process of resource optimization which involves short-term purchases and sales
in the wholesale market in pursuit of an economic selection of resources to
serve retail and wholesale loads. Avista Utilities makes continuing
projections of (1) future retail and 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 purchases and sells energy on a
quarterly, monthly, daily and hourly basis to match actual resources to actual
energy 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. The market values of
natural gas derivative commodity instruments held by Avista Utilities as of
December 31, 2001 and 2000, were a $133.2 million net liability and a $1.0
million net asset, respectively. The significant liability position as of
December 31, 2001 is a result of forward commitments to purchase natural gas
entered during 2000 and the first part of 2001 at prices in excess of the
market price for natural gas as of December 31, 2001.
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Avista Energy
Avista Energy purchases natural gas and electricity 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 Energys 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 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 condition or results of operations. However, the net open
position is actively managed with strict policies designed to limit the
exposure to market risk and requires 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 are primarily related to Canadian exchange rates and are
managed using a variety of financial instruments, including forward rate
agreements.
Avista Energys 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 unrealized 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 and certain short-term positions for which market prices
are not available, a model based on forward price curves is 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. Net cash flows are
recognized in the period of settlement.
Contract Amounts and Terms
Under Avista Energys derivative instruments, Avista
Energy either (i) as fixed price payor, is obligated to pay a fixed price or
a fixed amount and is entitled to receive the commodity or a fixed amount or
(ii) as fixed price receiver, is entitled to receive a fixed price or a fixed
amount and is obligated to deliver the commodity or pay a fixed amount or (iii)
as index price payor, is obligated to pay an indexed price or an indexed
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 Energys derivative commodity
investments outstanding as of December 31, 2001 are set forth below (in
thousands of mmBTUs and MWhs):
Contract or notional amounts reflect the volume of transactions, but do not
necessarily represent the dollar amounts exchanged by the parties to the
derivative commodity instruments. Accordingly, contract or notional amounts do
not accurately measure Avista Energys 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.
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AVISTA CORPORATION
Estimated Fair Value
The estimated fair value of Avista Energys derivative
commodity instruments outstanding as of December 31, 2001, and the average
estimated fair value of those instruments held during the year ended December 31,
2001, are set forth below (dollars in thousands):
The weighted average term of Avista Energys natural gas derivative commodity
instruments as of December 31, 2001 was approximately 5 months. The weighted
average term of Avista Energys electric derivative commodity instruments as of
December 31, 2001 was approximately 6 months. The change in the estimated fair
value position of Avista Energys energy commodity portfolio, net of the
reserves for credit and market risk for 2001 was an unrealized loss of $30.2
million and is included in the Consolidated Statements of Income in operating
revenues. The change in the fair value position for 2000 was an unrealized
gain of $176.8 million. In 1999, an
unrealized gain of $0.2 million was recorded.
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
Companys Risk Management Committee. Market risks are monitored by the Risk
Management Committee to ensure compliance with the Companys 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 VAR
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 the risk that a counterparty may default due to
circumstances relating directly to it and the risk that a counterparty may
default due to circumstances that relate to other market participants that 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 periodically occur. Avista Energy experienced payment receipt
defaults from certain parties impacted by the California energy crisis. Avista
Energy and Avista Corp. (through the Avista Utilities division) have engaged in
physical and financial transactions with Enron and certain of its affiliates
and experienced disruptions to forward contract commitments as a result of
Enrons December 2001 bankruptcy. See Note 24 for more information.
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
guarantees. 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 Companys capital resource reserves (credit facilities and cash).
Avista Utilities and Avista Energy actively monitor the exposure to possible
collateral calls and take steps to minimize capital requirements.
Other Operating Risks
In addition to commodity price risk, Avista Utilities commodity positions are
subject to operational and event risks including, among others, increases in
load demand, transmission or transport disruptions, fuel quality specifications
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AVISTA CORPORATION
and forced outages at generating plants. Avista Utilities also has exposure to
weather conditions and natural disasters that can cause physical damage to
property, requiring immediate repairs to restore utility service.
NOTE 8. JOINTLY OWNED ELECTRIC FACILITIES
The Company has a 15 percent interest in a twin-unit coal-fired generating
facility, the Colstrip Generating Project (Colstrip) located in southeastern
Montana, and provides financing for its ownership interest in the project. The
Companys share of related operating and maintenance expenses for plant in
service is included in the Consolidated Statements of Income. The Companys
share of utility plant in service was $314.3 million and accumulated
depreciation was $149.3 million as of December 31, 2001.
NOTE 9. PROPERTY, PLANT AND EQUIPMENT
The balances of the major classifications of property, plant and equipment are
detailed in the following table as of December 31 (dollars in thousands):
Property, plant, and equipment under capital leases at Avista Capitals
subsidiaries totaled $5.4 million and $12.7 million as of December 31, 2001 and
2000, respectively. The associated accumulated depreciation totaled $2.6
million and $6.8 million as of December 31, 2001 and 2000, respectively.
NOTE 10. 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 Companys subsidiaries also participate in
this plan. Individual benefits under this plan are based upon years of service
and the employees average compensation as specified in the plan. The
Companys funding policy is to contribute amounts that 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 income tax purposes. Pension fund assets are invested primarily in
marketable debt and equity securities.
The Company also has a Supplemental Executive Retirement Plan (SERP) that
provides additional pension benefits to executive officers of the Company. The
SERP is intended to provide benefits to executive officers whose benefits under
the pension plan are reduced due to the application of Section 415 of the
Internal Revenue Code of 1986 and the deferral of salary under deferred
compensation plans.
In 2001, the Company recorded an unfunded accumulated benefit obligation of
$1.1 million related to the SERP. This resulted in a charge to other
comprehensive income of $0.7 million, net of taxes.
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
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AVISTA CORPORATION
services. The Company elected to amortize this obligation of $34.5 million
over a period of twenty years, beginning in 1993.
The following table sets forth the pension and health care plan disclosures as
of December 31, 2001 and 2000 and for the years ended December 31, 2001, 2000
and 1999 (dollars in thousands):
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, 2001 by $2.6
million and the service and interest cost by $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, 2001 by $2.4 million and the service and interest cost by $0.2
million.
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The Company has a salary deferral 401(k) plan that is a defined contribution
plan and covers substantially all employees. Employees can make contributions
to their respective accounts in the 401(k) plan on a pre-tax basis up to the
maximum amount permitted by law. The Company matches a portion of the salary
deferred by each participant according to the schedule in the 401(k) plan.
Employer matching contributions of $3.5 million, $3.3 million, $3.4 million
were expensed in 2001, 2000 and 1999, respectively.
NOTE 11. ACCOUNTING FOR INCOME TAXES
As of December 31, 2001 and 2000, the Company had net regulatory assets of
$149.0 million and $156.7 million, respectively, related to the probable
recovery of certain deferred tax liabilities from customers through future
rates.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes and tax credit
carryforwards. The net deferred income tax liability consisted of the
following as of December 31 (dollars in
thousands):
The realization of deferred tax assets is dependent upon the ability to
generate taxable income in future periods. The Company evaluated available
evidence supporting the realization of it deferred tax assets and determined it
is more likely than not that deferred tax assets will be realized.
A reconciliation of federal income taxes derived from statutory federal tax
rates (35 percent in 2001, 2000 and 1999) applied to pre-tax income from
continuing operations and expense as set forth in the accompanying Consolidated
Statements of Income is as follows for the years ended December 31 (dollars in
thousands):
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AVISTA CORPORATION
NOTE 12. ENERGY PURCHASE CONTRACTS
The Company has long-term contracts related to the purchase of fuel for thermal
generation, natural gas and hydroelectric power. The termination dates of the
contracts range from one month to the year 2044 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.
Total expenses for power purchased, natural gas purchased for resale and fuel
for generation were $1,011.0 million, $1,311.5 million and $706.4 million in
2001, 2000 and 1999, respectively. The following table details future
contractual commitments for power and natural gas resources (dollars in
thousands):
All of the energy purchase contracts were entered as part of Avista Utilities
obligation to serve its retail natural gas and electric customers energy
requirements. As a result, these costs are generally recovered either through
base retail rates or adjustments to retail rates as part of the power and
natural gas cost deferral and recovery mechanisms.
The Company has fixed contracts with certain Public Utility Districts (PUD) to
purchase portions of the output of certain generating facilities. Although the
Company has no investment in the PUD generating facilities, the fixed contracts
obligate the Company to pay certain minimum amounts (based in part on the debt
service requirements of the PUD) 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 resource costs in the Consolidated
Statements of Income. Expenses under these PUD contracts for 2001, 2000 and
1999, were $7.4 million, $7.5 million and $6.4 million, respectively.
Information as of December 31, 2001, pertaining to these PUD contracts is
summarized in the following table (dollars in thousands):
The estimated aggregate amounts of required minimum payments (the Companys
share of debt service costs) under these PUD contracts are as follows (dollars
in thousands):
In addition, the Company will be required to pay its proportionate share of the
variable operating expenses of these projects.
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AVISTA CORPORATION
NOTE 13. LONG-TERM DEBT
The following details the interest rate and maturity dates of secured and
unsecured medium-term notes outstanding as of December 31 (dollars in
thousands):
In addition to the required maturities documented in the table above, the
Company has sinking fund requirements of $1.6 million in each of 2002 and 2003,
$1.5 million in each of 2004 and 2005, and $1.2 million in 2006. The sinking
fund requirements may be met by certification of property additions at the rate
of 143 percent of requirements. All of the Companys utility plant is subject
to the lien of the Mortgage and Deed of Trust securing outstanding First
Mortgage Bonds.
In April 2001, the Company issued $400.0 million of 9.75 percent Senior Notes
due in 2008. In December 2001, the Company issued $150.0 million of 7.75
percent First Mortgage Bonds due in 2007. As of December 31, 2001, the Company
had remaining authorization to issue up to $317.0 million of Unsecured
Medium-Term Notes.
Under various financing agreements, the Company is restricted as to the amount
of additional First Mortgage Bonds that it can issue. As of December 31, 2001,
the Company could issue $146.7 million of additional First Mortgage Bonds under
the most restrictive of these financing agreements.
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 7.13 percent First Mortgage
Bonds due 2013 and the $17.0 million of 7.40 percent First Mortgage Bonds due
2016. The Series 1999A and Series 1999B Bonds are backed by an insurance
policy issued by AMBAC Assurance Corporation. The interest rate during 2001
ranged from 2.15 percent to 4.50 percent. As of December 31, 2001, the rate
was 2.17 percent and was a floating rate that adjusted periodically. In
January 2002, the interest rate on the bonds was fixed for a period of seven
years at a rate of 5.00 percent for Series 1999A and 5.13 percent of Series
1999B.
Other long-term debt consisted of the following items related to subsidiary
operations as of December 31 (dollars in thousands):
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AVISTA CORPORATION
NOTE 14. SHORT-TERM BORROWINGS
As of December 31, 2001, the Company maintained a committed line of credit with
various banks in the total amount of $220 million that expires on May 29, 2002.
Under this committed line of credit, the Company may have up to $50 million in
letters of credit outstanding. As of December 31, 2001 there were $13.9
million of letters of credit outstanding. The Company pays commitment fees of
up to 0.2 percent per annum on the average daily unused portion of the credit
agreement, and utilization fees of up to 0.5 percent.
The committed line of credit agreement contains customary covenants and default
provisions, including covenants not to permit the ratio of consolidated total
debt to consolidated total capitalization of Avista Corp. to be, at the end
of any fiscal quarter, greater than 60 percent. As of December 31, 2001, the
ratio was in compliance with this covenant at 59.4 percent. The committed line
of credit also has a covenant requiring the ratio of consolidated cash flow
to consolidated fixed charges of Avista Corp. or Avista Utilities for any
four-fiscal quarter period ending at any fiscal quarter end to be less than
certain specified ratios. In August 2001, the Company determined that it would
not be in compliance with the fixed charge coverage covenant for the period
ending September 30, 2001 or for any subsequent period through the termination
date of the agreement. Accordingly, in September 2001, Avista Corp. requested,
and obtained, a waiver of this covenant through the termination date of the
agreement. As a result of this waiver, the failure to comply with this covenant does not
constitute an event of default under the agreement. Additionally, Avista Corp.
secured the committed line of credit with first mortgage bonds in connection
with this waiver.
In addition, the Company had a $50 million regional commercial paper program
that is backed by the committed line of credit. During 2001, under various
agreements with banks, the Company could also have up to $100 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 as of December 31, 2001.
Balances and interest rates of bank borrowings under these arrangements were as
follows as of and for the years ended December 31 (dollars in thousands):
As of December 31, 2001 Avista Energy and its subsidiary, Avista Energy Canada,
Ltd., as co-borrowers, had a credit agreement with a group of commercial
lenders in the aggregate amount of $155 million expiring June 28, 2002. This
credit agreement may be terminated by the banks at any time and all extensions
of credit under the agreement are payable upon demand, in either case at the
lenders sole discretion. This agreement also provides, on an uncommitted
basis, for the issuance of letters of credit to secure contractual obligations
to counterparties. This facility is guaranteed by Avista Capital and secured
by substantially all of Avista Energys assets. The maximum amount of credit
extended by the banks for the issuance of letters of credit is the subscribed
amount of the facility less the amount of outstanding cash advances, if any.
The maximum amount of credit extended by the banks for cash
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AVISTA CORPORATION
advances is $30
million. Letters of credit outstanding under the facility totaled
approximately $39.6 million and $71.5 million as of December 31, 2001 and 2000,
respectively.
The Avista Energy credit agreement contains customary covenants and default
provisions, including covenants to maintain minimum net working capital and
minimum net worth, as well as a covenant limiting the amount of indebtedness
which the co-borrowers may incur. In addition, the agreement contains certain
restricted payment provisions generally prohibiting distributions.
In October 2001, Avista Capital entered into a $20 million promissory note
collateralized by certain receivables. The note is due in monthly installments
of $0.2 million including interest at a variable rate (6.0 percent as of
December 31, 2001). The note has a balloon payment of $18.8 million due in
October 2002 and there was $19.8 million outstanding under the promissory note
as of December 31, 2001.
NOTE 15. LEASES
The Company has multiple lease arrangements involving various assets, with
minimum terms ranging from one to twenty-five years and expiration dates from
2002 to 2020. The Companys most significant leased assets include the
Rathdrum CT and the corporate office building. Certain of the lease
arrangements require the Company, upon the occurrence of specified events, to
purchase the leased assets. The Companys management believes the likelihood
of the occurrence of the specified events under which the Company could be
required to purchase the leased assets is remote. Rental expense under
operating leases for the years ended December 31, 2001, 2000 and 1999 was $19.8
million, $16.2 million and $18.7 million, respectively. Future minimum lease
payments required under operating leases having initial or remaining
noncancelable lease terms in excess of one year as of December 31, 2001 were as
follows (dollars in thousands):
The payments under the Avista Capital subsidiaries capital leases for the next
three years are $1.4 million in 2002, $0.7 million in 2003 and $0.2 million in
2004. As of December 31, 2001, there were no material capital lease payments
at Avista Capital subsidiaries past 2004.
NOTE 16. PREFERRED STOCK-CUMULATIVE
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. As such, redemption requirements are $1.75 million in each of
the years 2002 through 2006. The 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. Upon involuntary liquidation, all
preferred stock will be entitled to $100 per share plus accrued dividends.
NOTE 17. CONVERTIBLE PREFERRED STOCK
In December 1998, as part of a dividend restructuring plan, the Company issued
1,540,460 shares of its $12.40 Convertible Preferred Stock, Series L (Series L
Preferred Stock), in exchange for 15,404,595 shares of common stock, on the
basis of a one-tenth interest in one share of preferred stock for each share of
common stock. The Series L Preferred Stock had a liquidation preference of
$182.8125 per share.
During 1999, the Company repurchased the equivalent of 32,250 shares of the
Series L Preferred Stock. In February 2000, the Company exercised its option
to convert all the remaining outstanding shares of Series L Preferred Stock
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. 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.
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AVISTA CORPORATION
NOTE 18. COMPANY-OBLIGATED MANDATORILY REDEEMABLE PREFERRED TRUST SECURITIES
In 1997, Avista Capital I, a business trust, issued $60.0 million of Preferred
Trust Securities with an annual distribution rate of 7.875 percent. Concurrent
with the issuance of the Preferred Trust Securities, Avista Capital I issued
$1.9 million of Common Trust Securities to the Company. The sole assets of
Avista Capital I are the Companys 7.875 percent Junior Subordinated Deferrable
Interest Debentures, Series A, with a principal amount of $61.9 million. These
debt securities may be redeemed at the Companys option on or after January 15,
2002 and mature January 15, 2037.
In 1997, Avista Capital II, a business trust, issued $50.0 million of Preferred
Trust Securities with a floating distribution rate of LIBOR plus 0.875 percent,
calculated and reset quarterly. The annual distribution rate paid during 2001
ranged from 2.95625 percent to 7.61125 percent. As of December 31, 2001, the
annual distribution rate was 2.95625 percent. Concurrent with the issuance of
the Preferred Trust Securities, Avista Capital II issued $1.5 million of Common
Trust Securities to the Company. The sole assets of Avista Capital II are the
Companys Floating Rate Junior Subordinated Deferrable Interest Debentures,
Series B, with a principal amount of $51.5 million. These debt securities may
be redeemed at the Companys option on or after June 1, 2007 and mature June 1,
2037. In December 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 Avista Capital I and Avista Capital II have funds available for
such payments from the respective debt securities. Upon maturity or prior
redemption of such debt securities, the Trust Securities will be mandatorily
redeemed. The Consolidated Statements of Capitalization reflect only $60.0
million and $40.0 million of Preferred Trust Securities as all intercompany
transactions have been eliminated.
NOTE 19. FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value of the Companys long-term debt (including current-portion, but
excluding notes payable and other) as of December 31, 2001 and 2000 was
estimated to be $1,160.2 million, or 99 percent of the carrying value, and
$772.5 million, or 101 percent of the carrying value, respectively. The fair
value of the Companys mandatorily redeemable preferred stock was estimated to
be $17.5 million, or 50 percent of the carrying value as of December 31, 2001
and 2000. The fair value of the Companys preferred trust securities as of
December 31, 2001 and 2000 was estimated to be $84.6 million, or 85 percent of
the carrying value, and $79.2 million, or 79
percent of the carrying value, respectively. These estimates were based on
available market information.
NOTE 20. 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 $14.1 million.
Dividends paid on the stock held by the Trustee, plus Company contributions to
the Plan, if any, are used by the Trustee to make interest and principal
payments on the promissory note. The balance of the promissory note receivable
from the Trustee ($5.7 million as of December 31, 2001) 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 2001, the
cost recorded for the Plan was $5.8 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 $0.6 million, $1.6 million and $0.1 million,
respectively during 2001.
In May 1999, the Companys Board of Directors authorized the Company to
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. During 1999 and 2000, the Company repurchased
approximately 4.8 million common shares and 322,500 shares of Return-Enhanced
Convertible Securities (equivalent to 32,250 shares of Convertible Preferred
Stock, Series L). The combined repurchases of these two securities represented
9 percent of outstanding common stock and common stock equivalents. No common
shares were repurchased during 2001.
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, were granted one preferred share purchase right (Right) on each
outstanding share of common stock. Each Rig initially evidenced by and
traded with the shares of common
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AVISTA CORPORATION
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 percent 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 percent 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) that has a market value at that
time equal to twice the purchase price. In no event will the Rights be
exercisable by a person that has acquired 10 percent or more of the Companys
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 percent or more of the common stock. The Rights 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
Companys stockholders may automatically reinvest their dividends and make
optional cash payments for the purchase of the Companys common stock at
current market value.
In March 2000, the Company began issuing shares of its common stock to the
Employee Investment Plan rather than having the Plan purchase 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. During the 2001 and 2000, a total of 332,861 and 125,636
shares of common stock were issued to these plans, respectively.
NOTE 21. EARNINGS PER COMMON SHARE
In February 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 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 preferred stock. As of December 31, 1999 1,508,210 shares of
$12.40 Convertible Preferred Stock, Series L, that was convertible into
15,082,100 shares of common stock were outstanding. All of these potential
common shares and the associated dividends were excluded from the computation
of diluted earnings per common share for 1999 because their inclusion had an
anti-dilutive effect on earnings per common share. The following table
presents the computation of basic and diluted earnings per common share for the
years ended December 31 (in thousands, except per share amounts):
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AVISTA CORPORATION
NOTE 22. INFORMATION AND TECHNOLOGY SEGMENT INFORMATION
The Information and Technology line of business includes the results of Avista
Advantage and Avista Labs. Additional financial information for each of these
separate companies is provided as follows for the years ended December 31
(dollars in thousands):
NOTE 23. 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 available a maximum of 2.5 million shares
of its common stock for grant under the 1998 Plan. The shares issued under the
1998 Plan are purchased by the trustee on the open market. Non-employee
Directors were added to this plan in 2000.
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 Company has available a maximum of 2.5 million shares of its
common stock for grant under the 2000 Plan.
The Company accounts for stock based compensation using APB No. 25 Accounting
for Stock Issued to Employees which requires the recognition of compensation
cost on the excess, if any, of the market price of the stock at the date of
grant over the exercise price of the option. As the exercise price for options
granted under the 1998 Plan and the 2000 Plan was equal to the market price at
the date of grant, there is no compensation expense recorded by the Company.
SFAS No. 123, Accounting for Stock-Based Compensation, requires the
disclosure of pro forma net income and earnings per common share had the
Company adopted the fair value method of accounting for stock options. Under
this statement, the fair value of stock-based awards is calculated with option
pricing models. These models require the use of subjective assumptions,
including stock price volatility, dividend yield, risk-free interest rate and
expected time to exercise. The fair value of options is estimated on the date
of grant using the Black-Scholes option-pricing model.
As of December 31, 2001, there were 2.5 million shares available for future
stock option grants under the 1998 Plan and the 2000 Plan.
The following summarizes stock options activity under the 1998 Plan and the
2000 Plan for the years ended December 31:
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AVISTA CORPORATION
Information with respect to options outstanding and options exercisable as of
December 31, 2001 was as follows:
If compensation expense for the Companys stock option plans were determined
consistent with SFAS No. 123, net income and earnings per common share would
have been the following pro forma amounts for the years ended December 31:
The Company granted 1,000 and 20,000 shares of restricted common stock in 2000
and 1999, respectively. No shares of restricted stock were granted in 2001.
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 2001, 2000 and 1999 vests over periods from four to
five years.
Common equity was reduced in the accompanying Consolidated Statements of
Capitalization by the cost of restricted shares acquired 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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AVISTA CORPORATION
Avista Capital Companies
Certain subsidiaries of Avista Capital have 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 vest over periods of 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 estimated
fair value.
NOTE 24. 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 condition 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 issue.
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 Complaint 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
asserted 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 Companys 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, claimed that plaintiffs and the purported class suffered damages as a
result thereof. Such alleged misstatements and omissions were claimed to
relate to the Companys trading activities in wholesale energy markets, the
Companys risk management policies and procedures with respect thereto, and the
Companys trading losses in the second quarter of 2000. The plaintiffs
requested, among other things, compensatory damages in unspecified amounts and
other relief as the Court may deem proper. On March 29, 2001, the Company
filed a Motion to Dismiss the Consolidated Complaint, which was granted by the
Court on June 14, 2001 without prejudice to allow the plaintiffs the
opportunity to amend the complaint to seek to cure the deficiencies identified
by the Court.
On January 8, 2002, plaintiffs filed a protective notice of appeal with the
Ninth Circuit Court of Appeals, wherein they appealed the District Courts
Order Granting Defendants Motion to Dismiss on June 14, 2001, and its December
20, 2001 Order Denying Plaintiffs Motion to Lift Stay of Discovery. On
February 2, 2002, the parties filed a stipulation with the Ninth Circuit Court
of Appeals, whereby all parties agreed to dismiss the appeal with prejudice.
On February 4, 2002, the parties also filed a stipulation of dismissal of the
case with prejudice in the District Court. On February 7, 2002, the District
Court issued its order dismissing the case with prejudice, and on February 14,
2002, the Court of Appeals issued its order dismissing the appeal with
prejudice.
Securities and Exchange Commission Inquiry
In October 2000, the staff of the Securities and Exchange Commission requested
certain information and documentation from the Company regarding Avista
Utilities wholesale trading activities and its risk management policies and
procedures with respect thereto. The Company complied with this request, and
has supplemented its response, at the Securities and Exchange Commissions
request, with respect to current risk management practices.
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AVISTA CORPORATION
Commodity Futures Trading Commission Investigation
Avista Energy and several of its former employees were subjected to an
investigation by the Commodity Futures Trading Commission (CFTC) into futures
trading of certain Palo Verde and California Oregon Border electricity futures
contracts traded on the New York Mercantile Exchange on four separate dates in
1998. The CFTCs Division of Enforcement (Division) recommended to the CFTC Commissioners that
Avista Energy and several of its former employees be charged with manipulation,
attempted manipulation and other charges in connection with trading on those
four dates. In August 2001 Avista Energy reached a settlement with the
Division in which it neither admits nor denies the allegations, paid a fine of
$2.1 million and agreed to a cease and desist order with respect to certain
trading activities.
State of Washington Business and Occupation Tax
The State of Washingtons Business and Occupation Tax applies to gross revenue
from business activities. For most types of business, the tax applies to the
gross sales price received for goods or services. For certain types of
financial trading activities, including the sale of stocks, bonds and other
securities, the tax applies to the realized gain from the sale of the financial
asset. On an audit for the years 1997 through June 2000, the Department of
Revenue (DOR) took the position that approximately 20 percent of the energy
futures trades of Avista Energy should not be treated as securities trades, but
rather as energy deliveries. As a result, the DOR applied tax against the
gross sales price of the energy contracts at issue. Avista Energy subsequently
received an assessment of $14.5 million for tax and interest related to the
disputed issue. It is the position of Avista Energy that all of its futures
trading activities are substantively the same and there is no proper basis for
the distinction made by the DOR. An administrative appeal was filed with the
DOR and a hearing was held on September 25, 2001. Avista Energy is prepared to
seek relief in the Washington courts if a satisfactory determination is not
received.
Hamilton Street Bridge Site
A portion of the Hamilton Street Bridge Site in Spokane, Washington (including
a former coal gasification plant site that operated for approximately 60 years
until 1948) was acquired by the Company through a merger in 1958. The Company
no longer owns the property. Initial core samples taken from the site indicate
environmental contamination at the site. On January 15, 1999, the Company
received notice from the State of Washingtons 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 Companys past
ownership of the former gas plant site. In its notice, the DOE stated that it
intended to complete an on-going remedial investigation of this site, complete
a feasibility study to determine the most effective means of halting or
controlling future releases of substances from the site, and to implement
appropriate remedial measures. The Company responded to the DOE acknowledging
its listing as a PLP, but requested that additional parties also be listed as
PLPs. In the spring of 1999, the DOE named two other parties as additional
PLPs.
An Agreed Order was signed by the DOE, the Company and Burlington Northern &
Santa Fe Railway Co. (BNSF) (another PLP) on March 13, 2000 that provided for
the completion of a remedial investigation and a feasibility study. The work
to be performed under the Agreed Order includes three major technical parts:
completion of the remedial investigation; performance of a focused feasibility
study; and implementation of an interim groundwater monitoring plan. During
the second quarter of 2000, the Company received comments from the DOE on its
initial remedial investigation, then submitted another draft of the remedial
investigation, which was accepted as final by the DOE. After responding to
comments from the DOE, the feasibility study was accepted by the DOE during the
fourth quarter of 2000. After receiving input from the Company and the other
PLPs, the final Cleanup Action Plan (CAP) was issued by the DOE on August 10,
2001. On September 10, 2001, the DOE issued a draft Consent Decree for the
PLPs to review. During the fourth quarter of 2001, the Company and BNSF
commenced negotiations on a PLP agreement and provided joint comments regarding
the draft Consent Decree to the DOE. The Companys portion of the costs
associated with the CAP is not material to the Consolidated Statements of
Income and were accrued for in the Consolidated Balance Sheet.
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AVISTA CORPORATION
Sale of Certain Pentzer Corporation Subsidiaries
On February 26, 2001, IDX Corporation, formerly known as Store Fixtures Group,
Inc., filed a complaint against Pentzer in the United States District Court for
the District of Massachusetts, alleging breach of contract and negligent
misrepresentation relating to a stock purchase agreement. Pursuant to this
agreement, Pentzer sold the capital stock of a group of companies on August 31,
1999. Plaintiff alleges that Pentzer breached various representations and
warranties concerning financial statements and inventory, contending that
reliance on such representations and warranties caused them to pay more for the
group of companies than they were worth. In total, plaintiff claims damages in
the approximate amount of $9 million. Pentzer has retained legal counsel and
intends to vigorously defend against this action.
On April 7, 2000, Creative Solutions Group, Inc. and Form House Holdings, Inc.
filed a complaint against Pentzer in the United States District Court for the
District of Massachusetts, alleging misrepresentations and breach of
representations and warranties made under a stock purchase agreement. Pursuant
to this agreement, Pentzer sold the capital stock of a group of companies on
March 31, 1999. On November 2, 2001, plaintiffs filed a motion to amend their
complaint. The proposed amended pleading, among other things, removes Form
House Holdings, Inc. as a plaintiff; however, plaintiff Creative Solutions
Group, Inc. continues to allege that Pentzer made misrepresentations and
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, plaintiff alleges damages in the
approximate amount of $31 million, plus exemplary damages, interest and
attorneys fees. A trial date is currently scheduled for June 2002. Pentzer
has retained legal counsel and intends to vigorously defend against this
action.
Spokane River
In March 2001, the Washington State Department of Ecology (Ecology) informed
Avista Development of a health advisory concerning PCBs found in fish caught in
a portion of the Spokane River. In June 2001 Avista Development received
official notice as a potentially liable person with respect to contaminated
sites on the Spokane River. Ecology discovered PCBs in fish and sediments in
the 1970s and 1980s. In the 1990s, Ecology performed subsequent sampling of
the river and identified potential sources of the PCBs, including the Spokane
Industrial Park (SIP) and a number of other entities in the area. The SIP,
renamed Pentzer Development Corporation (Pentzer Development) in 1990, operated
a wastewater treatment plant at the site until it was closed in December 1993.
The SIPs treatment plant discharged to the Spokane River under the terms of a
National Pollutant Discharge Elimination System permit issued by Ecology.
Pentzer Development sold the property in 1996 and merged with Avista
Development in 1998. Avista Development filed a response to this notice in
August 2001. In December 2001, Ecology confirmed Avista Developments status
as a PLP and named at least three other PLPs in this matter. The Company has
not accrued a liability for any potential future costs; however, the Company
believes that any future costs would be immaterial.
Lake Coeur dAlene
In July 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 dAlene and the St. Joe River lying within the current
boundaries of the Coeur dAlene Reservation. This action was brought by the
United States on behalf of the Tribe against the State of Idaho. While the
Company is not a party to this action, the Company is continuing to evaluate
the potential impact of this decision on the operation of its hydroelectric
facilities on the Spokane River, downstream of Lake Coeur dAlene. The United
States District Court decision was affirmed by the Ninth Circuit Court of
Appeals. The United States Supreme Court affirmed this decision in June 2001.
This will result in the Company being liable to the Coeur dAlene Tribe of
Idaho for payments for use of reservation lands under Section 10(e) of the
Federal Power Act. The amount of such payments and other effects this ruling
may have on the Company is not known and can not be estimated at this time.
Montana Hydroelectric Security Act Initiative
In November 2001, an initiative was presented in the state of Montana to create
a public agency to own and operate all hydroelectric generating facilities
within the State. The initiative would allow for the new public agency to
acquire through a negotiated purchase or an acquisition at fair market value
through a condemnation proceeding all hydroelectric facilities larger than 5 MW
that are in the public interest to own and operate for the benefit of the
people of Montana. The output from the hydroelectric facilities could be sold
at wholesale or retail, with preferences
84
AVISTA CORPORATION
for non-industrial customers and
customers with demand of less than 1 aMW. The Companys largest generation
plant, the Noxon Rapids Hydroelectric Generating Station (Noxon Rapids) (527
MW), is located in Montana on the Clark Fork River. In February 2000, Avista
Utilities received a new 45-year operating license from the FERC that applies
jointly to the Cabinet Gorge (located in Idaho) and Noxon Rapids projects.
The proposal is being presented as a ballot initiative, which allows for the
enactment of law through public vote without legislative approval. The
initiative was reviewed and approved by the following parties in the state of
Montana: the Legislative Service Division, the Attorney General and the
Secretary of State. The supporters of the initiative need to gather 20,510
signatures, including at least 5 percent of the voters in 34 of the 100 state
districts by June 21, 2002. If this is accomplished, the initiative will be
presented to the public in the November 2002 General Election and will require
a majority vote to become law.
If this proposed initiative is passed into law and Noxon Rapids were to be
acquired from the Company, it could have significant negative ramifications for
the Company. As such, the Company intends to vigorously oppose this initiative
and intends to legally defend itself against the acquisition of Noxon Rapids.
The Company is unable predict whether or not the proposed initiative will
obtain the necessary signatures and if it does, whether or not the initiative
would pass in the November 2002 election. Further, the Company is not able to
predict whether any legal challenge would be successful and ultimately the full
impact this initiative could have on the Companys financial condition and
results of operations.
Enron Corporation
On December 2, 2001, Enron Corporation (Enron) and certain of its affiliates
filed for protection under chapter 11 of the United States Bankruptcy Code.
The bankruptcy filing constituted an event of default under contracts between
Avista Corp. and Avista Energy, respectively, and certain Enron affiliates,
Enron Power Marketing, Inc. (EPMI), Enron North America Company (ENA) and Enron
Canada Corp. (ECC), that are guaranteed by Enron. As a result, Avista Corp.
and Avista Energy terminated all but one of these contracts and suspended
trading activities with most Enron affiliates; short-term, balance of the month
deals with EPMI are still being transacted through Avista Energy on a prepaid
basis.
Both Avista Corp. and Avista Energy engage in physical and financial
transactions for the purchase and sale of electric energy and capacity and
natural gas. Both companies had done considerable business and had short-term
and long-term contracts with Enron affiliates. Avista Corp. has one three-year
purchase with remaining deliveries scheduled from 2004 to 2006 with EPMI.
Avista Energys long-term contracts with Enron affiliates were terminated
entirely.
As of December 31, 2001, Avista Corp. and Avista Energy had net accounts
receivable of $3.1 million and $14.1 million, respectively, from Enron
affiliates. The contracts of Avista Corp. and Avista Energy with each Enron
affiliate provide that, upon termination, the net settlement of accounts
receivable and accounts payable with such entity will be netted against the net
mark-to-market value of the terminated forward contracts with such entity. It
is estimated that, for each of Avista Corp. and Avista Energy, netting the
mark-to-market liability against the defaulted net accounts receivable will
result in no significant loss due to non-collection from the Enron affiliates.
It is further estimated that the net mark-to-market liability to Enron
affiliates in respect of terminated forward contracts of Avista Corp. and
Avista Energy, taken together, exceeds total net accounts receivable from these
entities by less than $30 million. Any claims by the Enron entities for
amounts that Avista Corp. and Avista Energy might owe in respect of the
terminated forward contracts would be subject to any defenses and counterclaims
which Avista Corp. and Avista Energy may have. Any residual obligation by
Avista Corp. or Avista Energy for termination payments is not expected to have
a material impact on the Companys financial condition or results of
operations.
The estimates of the mark-to-market values of terminated forward contracts are
based on available broker quotes, for the respective periods, and on
assumptions as to future market prices and other information. While Avista
Corp. and Avista Energy believe these assumptions are reasonable, they are
subject to change and ultimately could be challenged by the Enron entities or
their bankruptcy trustees. The mark-to-market value of terminated contracts
has not been firmly established and could result in undercollection that is not
expected to be material to the financial condition or results of operations of
either Avista Corp. or Avista Energy.
National Energy Production Corporation (NEPCO), a wholly owned subsidiary of
Enron, is the contractor responsible for the engineering, procurement and
construction of the Coyote Springs 2 project. Avista Corp. owns 50 percent of
the Coyote Springs 2 project, which is expected to commence commercial
operation in the third quarter of
85
AVISTA CORPORATION
2002. NEPCO was not included in the
bankruptcy filings made by Enron and its affiliates. However, Enron guaranteed
NEPCOs obligations, and the bankruptcy filing by Enron was an event of default
under the Coyote Springs 2 construction contract. NEPCO and Coyote Springs 2,
LLC amended the construction contract to, among other things, authorize Coyote
Springs 2, LLC to make immediate draws under a letter of credit posted to
secure NEPCOs performance and to permit Coyote Springs 2, LLC to pay
third-party subcontractors of NEPCO directly. Coyote Springs 2, LLC is
continuing to assess the ability of NEPCO to perform its obligations under the
construction contract and may need to exercise additional remedies in the event
the impact of the Enron bankruptcy prevents NEPCO from performing its
obligations under the construction contract.
Avista Corp. is party to a power exchange arrangement which expires in 2016.
Under this power exchange arrangement, EPMI purchases capacity from Avista
Corp. and sells capacity to Spokane Energy LLC (Spokane Energy), a subsidiary
of Avista Corp., formed in 1998 solely for the purpose of monetizing the
long-term capacity contract between PGE and Avista Corp. Spokane Energy sells
the related capacity to PGE, a subsidiary of Enron that has not been included
in the bankruptcy filing to date and is in the process of being sold to another
company. This power exchange arrangement was originally established for the
purpose of monetizing a $145 million long-term capacity contract between Avista
Corp. and PGE. EPMI assisted in setting up the monetization structure and acts
as an intermediary to abide by certain regulatory restrictions that currently
prevent Spokane Energy and Avista Corp. from dealing directly with each other.
The transaction is structured such that Spokane Energy bears full recourse risk
for a monetization loan (balance of $131.1 million as of December 31, 2001)
that matures in January 2015 with no recourse to Avista Corp. related to the
loan. EPMI is obligated to pay approximately $150,000 per month to Avista
Corp. for its capacity purchase and servicing functions related to this power
exchange arrangement. EPMI defaulted on two payments to Avista Corp. prior to
filing for bankruptcy. As a result, in December 2001, Avista Corp. and EPMI
entered an agreement that allows Avista Corp. to continue receiving the monthly
payments from EPMI while Avista Corp. evaluates alternatives with respect to
EPMIs involvement in the transaction going forward.
Other Contingencies
In the normal course of business, the Company has various legal claims and
other contingent matters outstanding. The Company believes that any ultimate
liability arising from these actions will not have a material adverse impact on
the Companys financial condition or results of operations.
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 Companys 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 adopted and implemented have had minimal impact of the Company.
The 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 is evaluating the feasibility of fish passage,
and, depending upon the results of these experimental studies, determine the
applications of funds toward continuing fish passage efforts or other
population enhancement measures.
The Company continues to study the issue of high dissolved gas levels
downstream of Cabinet Gorge during spill periods, as agreed to in the
Settlement Agreement for the new license for Cabinet Gorge. To date, intensive
biological studies in the lower Clark Fork River and Lake Pend Oreille
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.
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 Companys 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.
86
AVISTA CORPORATION
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.
As of December 31, 2001, the Companys collective bargaining agreement with the
International Brotherhood of Electrical Workers represented approximately 53
percent of all employees. The current agreement with the local union
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. Negotiations are currently ongoing with
respect to both agreements that expire on March 25, 2002.
NOTE 25. ACQUISITIONS AND DISPOSITIONS
In May 2000, the owners of the Centralia Power Plant sold the plant to
TransAlta. Avista Utilities recorded an after-tax gain totaling $37.2 million
from the sale of its 17.5 percent ownership interest in the plant. Of the
total after-tax gain, $9.0 million was recorded in the Consolidated Statements
of Income for the year ended December 31, 2000 and $28.2 million was deferred
and 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 are receiving the remaining
$7.5 million of the after-tax gain, which is a rate reduction of 1.8 percent,
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. 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.
87
AVISTA CORPORATION
NOTE 26. SELECTED QUARTERLY FINANCIAL DATA (Unaudited)
The Companys 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,
except per share amounts) for 2001 and 2000 follows:
88
AVISTA CORPORATION
Table of Contents
2001
2000
1999
$
32,044
$
11,824
$
3,615
2,997
770
57,531
(8,338
)
20,278
4,071
217
694
466
(6,239
)
(7,705
)
8,229
$
20,681
$
25,861
$
73,912
Table of Contents
2001
2000
1999
$
14,404
$
4,267
$
7,547
39,947
11,835
2,991
(4,140
)
(1,698
)
(6,271
)
$
50,211
$
14,404
$
4,267
Table of Contents
2001
2000
$
158,747
$
5,200
5,673
28,813
18,262
$
192,760
$
23,935
Table of Contents
Table of Contents
Table of Contents
Table of Contents
Table of Contents
Table of Contents
Fixed
Fixed
Maximum
Index
Index
Maximum
Price
Price
Terms in
Price
Price
Terms in
Payor
Receiver
Years
Payor
Receiver
Years
102,744
107,660
8
700,576
678,949
4
92,599
89,816
15
388
11
3
Table of Contents
Estimated Fair Value
Average Estimated Fair Value for the
as of December 31, 2001
year ended December 31, 2001
Current
Long-term
Current
Long-term
Current
Long-term
Current
Long-term
Assets
Assets
Liabilities
Liabilities
Assets
Assets
Liabilities
Liabilities
$
184,389
$
74,300
$
171,801
$
48,496
$
325,580
$
103,625
$
310,061
$
87,510
292,648
309,197
202,036
251,484
3,245,925
810,925
3,143,976
740,165
344
39
$
477,037
$
383,497
$
373,837
$
299,980
$
3,571,849
$
914,550
$
3,454,076
$
827,675
Table of Contents
2001
2000
$
691,299
$
672,070
288,739
280,271
678,448
652,966
119,389
95,219
1,777,875
1,700,526
18,130
18,687
414,422
396,100
46,404
48,558
478,956
463,345
75,912
74,894
2,332,743
2,238,765
128,577
72,122
16,030
13,110
21,117
31,663
$
2,498,467
$
2,355,660
Table of Contents
Pension Benefits
Other Benefits
2001
2000
2001
2000
$
184,636
$
171,424
$
32,761
$
30,637
5,716
5,372
460
601
14,293
13,412
2,567
2,407
18,582
7,799
3,267
1,580
(11,780
)
(12,401
)
(2,635
)
(2,427
)
(937
)
(970
)
(65
)
(37
)
$
210,510
$
184,636
$
36,355
$
32,761
$
175,033
$
185,564
$
15,196
$
15,808
(9,313
)
(1,005
)
(902
)
(784
)
3,304
511
1,182
(11,078
)
(11,860
)
(771
)
(973
)
(937
)
(970
)
(65
)
(37
)
$
153,705
$
175,033
$
13,969
$
15,196
$
(56,805
)
$
(9,603
)
$
(22,386
)
$
(17,565
)
31,144
(12,152
)
(429
)
(5,961
)
9,726
11,274
(3,757
)
(4,843
)
16,865
18,399
$
(19,692
)
$
(15,324
)
$
(5,950
)
$
(5,127
)
7.25
%
7.75
%
7.25
%
7.75
%
9.00
%
9.00
%
9.00
%
9.00
%
5.00
%
5.00
%
9.00
%
5.00
%
5.00
%
5.00
%
2003
2000
12.00
%
6.00
%
6.00
%
6.00
%
2004
2000
2001
2000
1999
2001
2000
1999
$
5,716
$
5,372
$
6,201
$
460
$
601
$
696
14,293
13,412
12,526
2,567
2,407
2,178
(15,254
)
(16,243
)
(15,681
)
(1,311
)
(1,372
)
(1,075
)
(1,086
)
(1,086
)
(1,086
)
1,534
1,534
1,534
989
1,548
1,918
139
(858
)
46
(52
)
(300
)
(159
)
$
4,797
$
2,145
$
3,924
$
3,198
$
2,870
$
3,174
Table of Contents
2001
2000
$
17,431
$
4,943
11,071
37,080
9,176
8,543
4,481
3,848
3,415
9,650
9,943
11,792
55,517
75,856
367,406
366,126
88,323
27,889
66,401
86,650
34,444
25,484
5,679
5,761
4,696
4,872
5,996
5,384
572,945
522,166
$
517,428
$
446,310
2001
2000
1999
$
32,897
$
62,319
$
15,946
5,849
4,835
1,869
(8,870
)
3,712
(2,144
)
(395
)
72
(1,642
)
4,905
6,060
2,868
$
34,386
$
76,998
$
16,897
$
(44,755
)
$
(4,839
)
$
4,987
79,141
81,837
11,910
$
34,386
$
76,998
$
16,897
Table of Contents
2001
2000
1999
$
20,177
$
(1,990
)
$
33,284
32,489
95,266
(34,098
)
(11,977
)
(10,138
)
(3,225
)
(6,303
)
(6,140
)
20,936
$
34,386
$
76,998
$
16,897
2002
2003
2004
2005
2006
Thereafter
Total
$
165,322
$
179,953
$
141,612
$
89,387
$
88,088
$
892,218
$
1,556,580
203,967
172,589
161,924
77,534
49,592
493,461
1,159,067
$
369,289
$
352,542
$
303,536
$
166,921
$
137,680
$
1,385,679
$
2,715,647
Company's Current Share of
Debt
Revenue
Expira-
Kilowatt
Annual
Service
Bonds
tion
Output
Capability
Costs (1)
Costs (1)
Outstanding
Date
2.9
%
37,000
$
1,670
$
1,067
$
9,493
2011
6.1
55,000
1,750
928
9,895
2040
8.2
75,000
3,071
1,864
13,102
2040
3.5
30,000
942
588
5,703
2018
197,000
$
7,433
$
4,447
$
38,193
(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 2001. Debt
service costs are included in annual costs.
2002
2003
2004
2005
2006
Thereafter
Total
$
4,423
$
4,651
$
4,275
$
4,701
$
3,396
$
26,256
$
47,702
Table of Contents
Secured Medium-Term Notes
Unsecured Medium-Term Notes
Maturity
Interest
Interest
Year
Rate
2001
2000
Rate
2001
2000
7.59%-7.60
%
$
$
15,000
8.01%-9.57
%
$
$
74,000
6.28%-6.61
%
*
40,000
8.15
%
*
10,000
6.25
%
15,000
15,000
6.75%-8.99
%
190,000
190,000
7.42
%
30,000
30,000
6.39%-6.68
%
29,500
29,500
7.89%-7.90
%
30,000
30,000
8.14
%
8,000
8,000
5.99%-7.94
%
26,000
26,000
6.89%-6.95
%
20,000
20,000
6.06
%
25,000
25,000
6.67%-6.90
%
10,000
10,000
8.02
%
25,000
25,000
7.37
%
7,000
7,000
8.05
%
12,000
12,000
7.26%-7.45
%
27,500
27,500
8.15%-8.23
%
10,000
10,000
7.18%-7.54
%
24,500
24,500
7.99
%
5,000
5,000
6.37%-6.88
%
45,000
45,000
$
163,500
$
218,500
$
376,000
$
460,000
*
In 2001, the Company legally defeased $50.0 million of Medium-Term Notes
scheduled to mature in 2002.
2001
2000
$
688
$
642
2,101
2,878
2,789
3,520
1,827
901
$
962
$
2,619
Table of Contents
2001
2000
1999
$
$
$
33,500
11,160
10,000
55,000
152,000
75,000
$
$
80,000
$
93,500
11,160
36,900
10,000
223,000
185,000
75,000
$
$
19,538
$
29,110
558
16,833
2,604
108,996
84,255
23,767
%
6.70
%
5.48
%
7.80
6.82
5.89
5.95
7.26
5.87
%
%
6.56
%
7.63
6.70
5.42
7.55
6.71
Table of Contents
Year ending December 31:
2002
2003
2004
2005
2006
Thereafter
Total
$
17,493
$
15,843
$
13,565
$
8,971
$
8,277
$
77,507
$
141,656
Table of Contents
Table of Contents
2001
2000
1999
$
59,605
$
101,055
$
28,662
(47,449
)
(9,376
)
(2,631
)
$
12,156
91,679
26,031
2,432
23,735
21,392
$
9,724
$
67,944
$
4,639
47,417
45,690
38,213
5
101
112
13
312
47,435
46,103
38,325
$
1.21
$
1.69
$
0.19
(1.00
)
(0.20
)
(0.07
)
$
0.21
$
1.49
$
0.12
$
1.20
$
1.67
$
0.19
(1.00
)
(0.20
)
(0.07
)
$
0.20
$
1.47
$
0.12
Table of Contents
2001
2000
1999
$
13,151
$
4,971
$
1,518
$
(15,098
)
$
(14,482
)
$
(5,042
)
$
(10,748
)
$
(11,022
)
$
(3,428
)
$
664
$
761
$
748
$
(14,774
)
$
(11,942
)
$
(3,924
)
$
(8,636
)
$
(8,010
)
$
(2,561
)
2001
2000
1999
1,843,900
1,360,325
589,800
781,900
623,200
780,700
(2,750
)
(44,975
)
(182,575
)
(94,650
)
(10,175
)
2,440,475
1,843,900
1,360,325
883,075
581,025
147,200
Table of Contents
2001
2000
1999
$
12.43
$
23.03
$
17.21
$
17.96
$
18.53
$
$
19.22
$
18.15
$
18.63
$
17.49
$
19.80
$
18.29
$
19.28
$
18.72
$
19.63
$
5.54
$
12.02
$
5.02
4.05% - 5.13
%
5.87% - 6.87
%
5.57% - 6.63
%
7
7
7
60.80
%
58.47
%
27.92
%
3.93
%
2.34
%
3.11
%
Options Outstanding
Options Exercisable
Weighted
Weighted
Weighted
Average
Average
Average
Range of
Number
Exercise
Remaining
Number
Exercise
Exercise Prices
of Shares
Price
Life (in years)
of Shares
Price
700,900
$
11.80
9.9
$
673,900
17.23
7.0
356,350
17.29
395,775
18.73
6.2
279,750
18.61
611,700
22.58
7.5
230,175
22.59
58,200
27.19
7.9
16,800
27.11
2,440,475
$
17.49
7.8
883,075
$
19.28
2001
2000
1999
$
12,156
$
91,679
$
26,031
$
9,355
$
89,850
$
24,636
$
0.21
$
1.49
$
0.12
$
0.15
$
1.45
$
0.08
$
0.20
$
1.47
$
0.12
$
0.15
$
1.43
$
0.08
Table of Contents
Table of Contents
Table of Contents
Table of Contents
Table of Contents
Table of Contents
Table of Contents
Three Months Ended
March 31
June 30
September 30
December 31
$
2,024,882
$
1,546,493
$
1,401,183
$
1,037,289
1,959,435
1,489,943
1,367,564
1,023,613
65,447
56,550
33,619
13,676
32,121
25,980
6,111
(4,607
)
(2,718
)
(3,255
)
(38,421
)
(3,055
)
29,403
22,725
(32,310
)
(7,662
)
$
28,795
$
22,117
$
(32,918
)
$
(8,270
)
47,237
47,372
47,486
47,569
47,266
47,465
47,537
47,633
$
0.67
$
0.54
$
0.12
$
(0.11
)
(0.06
)
(0.07
)
(0.81
)
(0.06
)
$
0.61
$
0.47
$
(0.69
)
$
(0.17
)
$
0.67
$
0.54
$
0.12
$
(0.11
)
(0.06
)
(0.07
)
(0.81
)
(0.06
)
$
0.61
$
0.47
$
(0.69
)
$
(0.17
)
$
0.12
$
0.12
$
0.12
$
0.12
$
20.63
$
23.97
$
19.98
$
14.60
$
15.60
$
16.27
$
13.40
$
10.60
$
1,380,935
$
1,352,432
$
2,862,809
$
2,309,401
1,348,668
1,376,919
2,791,581
2,171,321
32,267
(24,487
)
71,228
138,080
12,755
(19,123
)
36,419
71,004
(2,230
)
(2,370
)
(1,879
)
(2,897
)
10,525
(21,493
)
34,540
68,107
$
(11,385
)
$
(22,101
)
$
33,932
$
67,498
41,297
47,113
47,147
47,172
47,078
47,128
47,159
47,209
$
(0.22
)
$
(0.42
)
$
0.76
$
1.49
(0.06
)
(0.05
)
(0.04
)
(0.06
)
$
(0.28
)
$
(0.47
)
$
0.72
$
1.43
$
(0.22
)
$
(0.42
)
$
0.76
$
1.48
(0.06
)
(0.05
)
(0.04
)
(0.06
)
$
(0.28
)
$
(0.47
)
$
0.72
$
1.42
$
0.12
$
0.12
$
0.12
$
0.12
$
68.00
$
41.13
$
30.44
$
23.50
$
14.63
$
15.75
$
16.81
$
17.88
Table of Contents
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 Registrants
Proxy Statement to be filed with the Securities and Exchange Commission in
connection with the Registrants annual meeting of shareholders to be held on
May 9, 2002.
Executive Officers of the Registrant
Name
Age
Business Experience During Past 5 Years
Gary G. Ely
54
Director and Chairman of the Board since May 2001. 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.
Jon E. Eliassen
55
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.
David J. Meyer
48
Senior Vice President and General Counsel since September 1998; prior to
employment with the Registrant: Attorney Paine Hamblen Coffin Brooke &
Miller 1974 September 1998.
Scott L. Morris
44
Senior Vice President since February 2002; President Avista Utilities since
August 2000; General Manager Avista Utilities October 1991 August 2000.
David A. Brukardt
47
Chief Communication Officer
and Vice President of CorporateRelations and Strategic Planning since September
2001; Chief Communication Officer and Vice President of Investor and Corporate
Relations August 2000 September 2001; Vice President of Investor Relations
August 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
45
Vice President and Controller since June 1999; Controller Energy Delivery
and various other positions with the Company since 1980.
Kelly O. Norwood
43
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
49
Vice President and Treasurer since November 1998; Vice President Finance Avista
Utilities since September 2001; Vice President and Controller February 1998 -
November 1998; Controller August 1996 February 1998.
Terry L. Syms
53
Vice President and Corporate Secretary since February 1998; Corporate
Secretary March 1988 February 1998.
Roger D. Woodworth
45
Vice President since November 1998; Vice President of Utility Operations of
Avista Utilities since September 2001; Vice President Corporate Development
November 1998 September 2001; Director of Corporate Development and various
other positions with the Company since 1979.
Karen S. Feltes
46
Vice President of Human Resources and Corporate Services since February 2002;
Various Human Resources positions with the Company April 1998 February 2002.
Adjunct Instructor-City University and Director of Human Resources-Spokane Club
1996-1998.
89
AVISTA CORPORATION
All of the Companys executive officers, with the exception of Kelly O. Norwood, Christy M. Burmeister-Smith and Karen S. Feltes, were officers or directors of one or more of the Companys subsidiaries in 2001. 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 Registrants Proxy Statement to be filed with the Securities and Exchange Commission in connection with the Registrants annual meeting of shareholders to be held on May 9, 2002.
Item 12. Security Ownership of Certain Beneficial Owners and Management
(a) | Security ownership of certain beneficial owners (owning 5 percent or more of Registrants voting securities): | |
Information regarding security ownership of certain beneficial owners (owning 5 percent or more of Registrants voting securities) has been omitted pursuant to General Instruction G to Form 10-K. Reference is made to the Registrants Proxy Statement to be filed with the Securities and Exchange Commission in connection with the Registrants annual meeting of shareholders to be held on May 9, 2002. | ||
(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 Registrants Proxy Statement to be filed with the Securities and Exchange Commission in connection with the Registrants annual meeting of shareholders to be held on May 9, 2002. | ||
(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 Registrants Proxy Statement to be filed with the Securities and Exchange Commission in connection with the Registrants annual meeting of shareholders to be held on May 9, 2002.
90
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): |
91
AVISTA CORPORATION
Independent Auditors Report
Consolidated Statements of Income and Comprehensive Income for the Years Ended December 31, 2001, 2000 and 1999
Consolidated Balance Sheets, December 31, 2001 and 2000
Consolidated Statements of Capitalization, December 31, 2001 and 2000
Consolidated Statements of Cash Flows for the Years Ended December 31, 2001, 2000 and 1999
Consolidated Statements of Stockholders Equity for the Years Ended December 31, 2001, 2000 and 1999
Schedule of Information by Business Segments for the Years Ended December 31, 2001, 2000 and 1999
Notes to Consolidated Financial Statements
(a)
2. Financial Statement Schedules:
None
(a)
3. Exhibits:
Reference is made to the Exhibit Index commencing on page 94. 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 October 8, 2001 regarding the IPUC approval of a 14.7 percent
PCA surcharge and the extension of a 4.7 percent PCA surcharge to
Idaho customers as well credit rating changes for the Company.
Dated October 24, 2001 regarding the sale of 50 percent of Coyote
Springs 2 plant, the planned disposal of Avista Communications and
the financial results for Avista Corp. for the period ended September 30, 2001.
Dated December 2, 2001 regarding the filing of a general electric
rate case in Washington transactions with Enron Corporation and its
affiliates.
Table of Contents
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 18, 2002
Date |
By |
/s/ Gary G. Ely
Gary G. Ely Chairman of the Board, President and Chief Executive Officer |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
Signature | Title | Date | ||
|
|
|
||
/s/ Gary G. Ely
Gary G. Ely |
Principal Executive Officer
Chairman of the Board, President and Chief Executive Officer |
March 18, 2002 | ||
/s/ Jon E. Eliassen
Jon E. Eliassen |
Principal Financial and Accounting Officer (Senior Vice President and Chief Financial Officer) | March 18, 2002 | ||
/s/ Erik J. Anderson
Erik J. Anderson |
Director | March 18, 2002 | ||
/s/ Kristianne Blake
Kristianne Blake |
Director | March 18, 2002 | ||
/s/ David A. Clack
David A. Clack |
Director | March 18, 2002 | ||
/s/ Sarah M. R. Jewell
Sarah M. R. Jewell |
Director | March 18, 2002 | ||
/s/ John F. Kelly
John F. Kelly |
Director | March 18, 2002 | ||
/s/ Jessie J. Knight, Jr.
Jessie J. Knight, Jr. |
Director | March 18, 2002 | ||
/s/ Eugene W. Meyer
Eugene W. Meyer |
Director | March 18, 2002 | ||
/s/ Bobby Schmidt
Bobby Schmidt |
Director | March 18, 2002 | ||
/s/ R. John Taylor
R. John Taylor |
Director | March 18, 2002 | ||
/s/ Daniel J. Zaloudek
Daniel J. Zaloudek |
Director | March 18, 2002 |
92
AVISTA CORPORATION
INDEPENDENT AUDITORS CONSENT
We consent to the incorporation by reference in Registration Statement Nos. 2-81697, 2-94816, 33-54791, 333-03601, 333-22373, 333-58197, 33-32148, 333-33790, and 333-47290 on Form S-8, in Registration Statement Nos. 33-53655, 333-39551, 333-82165, 333-63243, 333-16353, 333-16353-01, 333-16353-02, 333-16353-03, and 333-64652 on Form S-3, and in Registration Statement Nos. 333-62232, and 333-82502 on Form S-4 of our report dated February 8, 2002 (March 4, 2002, as to Note 1), appearing in this Annual Report on Form 10-K of Avista Corporation for the year ended December 31, 2001.
/s/ Deloitte & Touche LLP
DELOITTE & TOUCHE LLP
Seattle, Washington
March 18, 2002
93
AVISTA CORPORATION
EXHIBIT INDEX
Previously Filed*
With
Registration
As
Exhibit
Number
Exhibit
3(a)
**
Restated Articles of Incorporation of Avista Corporation as
amended November 1, 1999.
3(b)
1-3701 (with June
30, 2000 Form 10-Q)
Bylaws of Avista Corporation, as amended July 1, 2000.
4(a)-1
2-4077B-3
Mortgage and Deed of Trust, dated as of June 1, 1939.
4(a)-2
2-98124(c)
First Supplemental Indenture, dated as of October 1, 1952.
4(a)-3
2-60728
2(b)-2
Second Supplemental Indenture, dated as of May 1, 1953.
4(a)-4
2-13421
4(b)-3
Third Supplemental Indenture, dated as of December 1, 1955.
4(a)-5
2-13421
4(b)-4
Fourth Supplemental Indenture, dated as of March 15, 1967.
4(a)-6
2-60728
2(b)-5
Fifth Supplemental Indenture, dated as of July 1, 1957.
4(a)-7
2-60728
2(b)-6
Sixth Supplemental Indenture, dated as of January 1, 1958.
4(a)-8
2-60728
2(b)-7
Seventh Supplemental Indenture, dated as of August 1, 1958.
4(a)-9
2-60728
2(b)-8
Eighth Supplemental Indenture, dated as of January 1, 1959.
4(a)-10
2-60728
2(b)-9
Ninth Supplemental Indenture, dated as of January 1, 1960.
4(a)-11
2-60728
2(b)-10
Tenth Supplemental Indenture, dated as of April 1, 1964.
4(a)-12
2-60728
2(b)-11
Eleventh Supplemental Indenture, dated as of March 1, 1965.
4(a)-13
2-60728
2(b)-12
Twelfth Supplemental Indenture, dated as of May 1, 1966.
4(a)-14
2-60728
2(b)-13
Thirteenth Supplemental Indenture, dated as of August 1, 1966.
4(a)-15
2-60728
2(b)-14
Fourteenth Supplemental Indenture, dated as of April 1, 1970.
4(a)-16
2-60728
2(b)-15
Fifteenth Supplemental Indenture, dated as of May 1, 1973.
4(a)-17
2-60728
2(b)-16
Sixteenth Supplemental Indenture, dated as of February 1, 1975.
4(a)-18
2-60728
2(b)-17
Seventeenth Supplemental Indenture, dated as of
November 1, 1976.
4(a)-19
2-69080
2(b)-18
Eighteenth Supplemental Indenture, dated as of June 1, 1980.
4(a)-20
1-3701 (with
1980 Form 10-K)
4(a)-20
Nineteenth Supplemental Indenture, dated as of January 1,
1981.
4(a)-21
2-79571
4(a)-21
Twentieth Supplemental Indenture, dated as of August 1, 1982.
* | Incorporated herein by reference. | |
** | Filed herewith. |
94
AVISTA CORPORATION
EXHIBIT INDEX (Continued)
Previously Filed*
With
Registration
As
Exhibit
Number
Exhibit
4(a)-22
1-3701 (with
Form 8-K dated
September 20, 1983)
4(a)-22
Twenty-First Supplemental Indenture, dated as of
September 1, 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
1986 Form 10-K)
4(a)-24
Twenty-Third Supplemental Indenture, dated as of
December 1, 1986.
4(a)-25
1-3701 (with
1987 Form 10-K)
4(a)-25
Twenty-Fourth Supplemental Indenture, dated as of
January 1, 1988.
4(a)-26
1-3701 (with
1989 Form 10-K)
4(a)-26
Twenty-Fifth Supplemental Indenture, dated as of
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
1993 Form 10-K)
4(a)-28
Twenty-Seventh Supplemental Indenture, dated as of
January 1, 1994.
4(a)-29
**
Twenty-Eighth Supplemental Indenture, dated as of
September 1, 2001
4(a)-30
333-82502
4(b)
Twenty-Ninth Supplemental Indenture, dated as of
December 1, 2001
4(a)-31
333-82165
4(a)
Indenture dated as of April 1, 1998 between Avista Corp.
Corporation and The Chase Manhattan Bank, as Trustee.
4(a)-32
1-3701 (with March
31, 2001 Form 10-Q)
4(f)
Indenture dated as of April 3, 2001, by and among the
Company and Chase Manhattan Bank and Trust Company,
National Association, as Trustee
4(b)-1
1-3701 (with
1999 Form 10-K)
Loan Agreement between City of Forsyth,
Montana, and the Company, dated as of
September 1, 1999 (Series 1999A)
4(b)-2
1-3701 (with
1999 Form 10-K)
Indenture of Trust, Pollution Control Revenue Refunding
Bonds (Series 1999A) between City of Forsyth, Montana, and
Chase Manhattan Bank and Trust Company, N.A., dated as of
September 1, 1999.
4(b)-3
1-3701 (with
1999 Form 10-K)
Loan Agreement between City of Forsyth,
Montana, and the Company, dated as of
September 1, 1999 (Series 1999B)
4(b)-4
1-3701 (with
1999 Form 10-K)
Indenture of Trust, Pollution Control Revenue Refunding
Bonds (Series 1999B) between City of Forsyth, Montana, and
Chase Manhattan Bank and Trust Company, N.A., dated as of
September 1, 1999.
* | Incorporated herein by reference. | |
** | Filed herewith. |
95
AVISTA CORPORATION
EXHIBIT INDEX (Continued)
Previously Filed*
With
Registration
As
Exhibit
Number
Exhibit
4(c)
1-3701 (with
1988 Form 10-K)
4(h)-1
Indenture between the Company and Chemical Bank dated
as of July 1, 1988 (Series A and B Medium-Term Notes)
4(d)
1-3701 (with June 30,
2001 Form 10-Q)
4(d)-2
Amended and Restated Credit Agreement, dated as of May 31,
2001, among Avista Corporation, The Bank of New York, as
Documentation Agent and Toronto Dominion (Texas), Inc.
As Agent.
4(e)
1-3701 (with
Form 8-K dated
November 15, 1999)
4
Rights Agreement, dated as of November 15, 1999, between
the Company and the Bank of New York as successor
Rights Agent.
4(f)
333-82502
4(c)
Exchange and Registration Rights Agreement, dated December 19,
2001 among the Company and Goldman, Sach & Co.,
BNY Capital Markets, Inc., Fleet Securities, Inc. and TD
Securities (USA), Inc.
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.
* | Incorporated herein by reference. | |
** | Filed herewith. |
96
AVISTA CORPORATION
EXHIBIT INDEX (Continued)
Previously Filed*
With
Registration
As
Exhibit
Number
Exhibit
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.
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
1986 Form 10-K)
10(i)-3
Agreement between Bonneville Power Administration,
the Montana Power Company, Pacific Power & Light,
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
September 30, 1985
Form 10-Q)
1
Settlement Agreement and Covenant Not to Sue executed
by the United States Department of Energy acting
by and through the Bonneville Power Administration
and the Company, dated as of September 17, 1985,
describing the settlement of Project 3 litigation.
10(i)-3
1-3701 (with
September 30, 1985
Form 10-Q)
2
Agreement to Dismiss Claims and Covenant
Not to Sue between the Washington Public
Power Supply System and the Company, dated
as of September 17, 1985, describing the settlement
of Project 3 litigation with the Supply System.
10(i)-4
1-3701 (with
September 30, 1985
Form 10-Q)
3
Agreement among Puget Sound Power & Light
Company, the Company, Portland General Electric
Company and PacifiCorp, dba Pacific Power & Light
Company, agreeing to execute contemporaneously an
irrevocable offer, to and for the benefit of the
Bonneville Power Administration, dated as of
September 17, 1985.
* | Incorporated herein by reference. | |
** | Filed herewith. |
97
AVISTA CORPORATION
EXHIBIT INDEX (Continued)
Previously Filed*
With
Registration
As
Exhibit
Number
Exhibit
10(j)-1
2-66184
5(r)
Service Agreement (Natural Gas Storage Service), dated as
of August 27, 1979, between the Company and Northwest
Pipeline Corporation.
10(j)-2
2-60728
5(s)
Service Agreement (Liquefaction-Storage Natural Gas Service),
dated as of December 7, 1977, between the Company and
Northwest Pipeline Corporation.
10(j)-3
1-3701 (with
1989 Form 10-K)
10(k)-4
Amendment dated as of January 1, 1990, to Firm
Transportation Agreement, dated as of June 15, 1988,
between the Company and Northwest Pipeline Corporation.
10(j)-4
1-3701 (with
1992 Form 10-K)
10(k)-6
Firm Transportation Service Agreement, dated as of
April 25, 1991, between the Company and Pacific Gas
Transmission Company.
10(j)-5
1-3701 (with
1992 Form 10-K)
10(k)-7
Service Agreement Applicable to Firm Transportation Service,
dated June 12, 1991, between the Company and Alberta
Natural Gas Company Ltd.
10(k)-1
1-3701 (with
Form 8-K for
August 1976)
13(b)
Letter of Intent for the Construction and Ownership
of Colstrip Units No. 3 and 4, sponsored by The
Montana Power Company, dated as of April 16, 1974.
10(k)-2
1-3701 (with
1981 Form 10-K)
10(s)-7
Ownership and Operation Agreement for Colstrip
Units No. 3 and 4, sponsored by The Montana
Power Company, dated as of May 6, 1981.
10(k)-3
1-3701 (with
1981 Form 10-K)
10(s)-2
Coal Supply Agreement for Colstrip Units No. 3 and 4
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
1981 Form 10-K)
10(s)-3
Amendment No. 1 to Coal Supply Agreement for
Colstrip Units No. 3 and 4, dated as of July 10, 1981.
10(k)-5
1-3701 (with
1988 Form 10-K)
10(l)-5
Amendment No. 4 to Coal Supply Agreement for Colstrip
Units No. 3 and 4, dated as of January 1, 1988.
10(l)-1
1-3701 (with
1986 Form 10-K)
10(n)-2
Lease Agreement between the Company and IRE-4
New York, Inc., dated as of December 15, 1986,
relating to the Companys central operating facility.
10(m)
1-3701 (with
1983 Form 10-K)
10(v)
Supplemental Agreement No. 2, Skagit/Hanford Project,
dated as of December 27, 1983, relating to the termination
of the Skagit/Hanford Project.
* | Incorporated herein by reference. | |
** | Filed herewith. |
98
AVISTA CORPORATION
EXHIBIT INDEX (Continued)
Previously Filed*
With
Registration
As
Exhibit
Number
Exhibit
10(n)
1-3701 (with
1986 Form 10-K)
10(p)-l
Agreement for Purchase and Sale of Firm Capacity and
Energy between Puget Sound Power & Light Company
and the Company, dated as of August 1, 1986.
10(o)
1-3701 (with
1991 Form 10-K)
10(q)-1
Electric Service and Purchase Agreement between
Potlatch Corporation and the Company, dated as of
January 3, 1991.
10(p)
1-3701 (with
1992 Form 10-K)
10(s)-1
Agreements for Purchase and Sale of Firm Capacity
between the Company and Portland General Electric
Company dated March and June 1992.
10(q)-1
1-3701 (with
1992 Form 10-K)
10(t)-8
Executive Deferral Plan of the Company. (***)
10(q)-2
1-3701 (with
1992 Form 10-K)
10(t)-10
The Companys Unfunded Supplemental
Executive Retirement Plan. (***)
10(q)-3
1-3701 (with
1992 Form 10-K)
10(t)-11
The Companys Unfunded Supplemental
Executive Disability Plan. (***)
10(q)-4
1-3701 (with
1992 Form 10-K)
10(t)-12
Income Continuation Plan of the Company. (***)
10(q)-5
1-3701 (with
1998 Form 10-K)
Long-Term Incentive Plan. (***)
10(q)-6
1-3701 (with
1999 Form 10-K)
Employment Agreement between the Company and
David J. Meyer. (***)
12
**
Statement re computation of ratio of earnings to fixed
charges and preferred dividend requirements.
21
**
Subsidiaries of Registrant.
* | 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. |
99
Exhibit 3(a)
RESTATED
ARTICLES OF INCORPORATION OF
AVISTA CORPORATION
Know all men by these presents that we have this day voluntarily associated ourselves together for the purpose of forming, and we do hereby form and agree to become a Corporation, under and by virtue of the laws of the Territory of Washington, and for such purpose we do hereby certify:-
FIRST: That the name of said Corporation is Avista Corporation.
SECOND: The objects and purposes for which the Corporation is formed are:
To acquire, buy, hold, own, sell, lease, exchange, dispose of, finance, deal in, construct, build, equip, improve, use, operate, maintain and work upon:
(a) Any and all kinds of plants and systems for the manufacture, production, storage, utilization, purchase, sale, supply, transmission, distribution or disposition of electric energy, natural or artificial gas, water or steam, or power produced thereby, or of ice and refrigeration of any and every kind;
(b) Any and all kinds of telephone, telegraph, radio, wireless and other systems, facilities and devices for the receipt and transmission of sounds and signals, any and all kinds of interurban, city and street railways and bus lines for the transportation of passengers and/or freight, transmission lines, systems, appliances, equipment and devices and tracks, stations, buildings and other structures and facilities;
(c) Any and all kinds of works, power plants, manufactories, structures, substations, systems, tracks, machinery, generators, motors, lamps, poles, pipes, wires, cables, conduits, apparatus, devices, equipment, supplies, articles and merchandise of every kind pertaining to or in anywise connected with the construction, operation or maintenance of telephone, telegraph, radio, wireless and other systems, facilities and devices for the receipt and transmission of sounds and signals, or of interurban, city and street railways and bus lines, or in anywise connected with or pertaining to the manufacture, production, purchase, use, sale, supply, transmission, distribution, regulation, control or application of electric energy, natural or artificial gas, water, steam, ice, refrigeration and power or any other purpose;
To acquire, buy, hold, own, sell, lease, exchange, dispose of, transmit, distribute, deal in, use, manufacture, produce, furnish and supply street and interurban railway and bus service, electric energy, natural or artificial gas, light, heat, ice, refrigeration, water and steam in any form and for any purposes whatsoever; and any power or force, or energy in any form and for any purposes whatsoever;
To manufacture, produce, buy or in any other manner acquire, and to sell, furnish, dispose of and distribute steam for heating or other purposes, and to purchase, lease or otherwise acquire, build, construct, erect, hold, own, improve, enlarge, maintain, operate, control, supervise and manage and to sell, lease or otherwise dispose of plants, works and facilities, including distribution systems, mains, pipes, conduits and meters, and all other necessary apparatus and appliances used or useful or convenient for use in the business of manufacturing, producing, selling, furnishing, disposing of and distributing steam for heating or for any other purposes;
To acquire, organize, assemble, develop, build up and operate constructing and operating and other organizations and systems, and to hire, sell, lease, exchange, turn over, deliver and dispose of such organizations and systems in whole or in part and as going organizations and systems and otherwise, and to enter into and perform contracts, agreements and undertakings of any kind in connection with any or all of the foregoing powers;
To do a general contracting business;
To purchase, acquire, develop, mine, explore, drill, hold, own, sell and dispose of lands, interest in and rights with respect to lands and waters and fixed and movable property;
To plan, design, construct, alter, repair, remove or otherwise engage in any work upon bridges, dams, canals, piers, docks, wharfs, buildings, structures, foundations, mines, shafts, tunnels, wells, waterworks and all kinds of structural excavations and subterranean work and generally to carry on the business of contractors and engineers;
To manufacture, improve and work upon and to deal in, purchase, hold, sell and convey minerals, metals, wood, oils and other liquids, gases, chemicals, animal and plant products or any of the products and by-products thereof or any article or thing into the manufacture of which any of the foregoing may enter;
To manufacture, improve, repair and work upon and to deal in, purchase, hold, sell and convey any and all kinds of machines, instruments, tools, implements, mechanical devices, engines, boilers, motors, generators, rails, cars, ships, boats, launches, automobiles, trucks, tractors, airships, aeroplanes, articles used in structural work, building materials, hardware, textiles, clothing, cloth, leather goods, furs and any other goods, wares and merchandise of whatsoever kind;
To construct, erect and sell buildings and structures in and on any lands for any use or purpose; to equip and operate warehouses, office buildings, hotels, apartment houses, apartment hotels and restaurants, or any other buildings and structures of whatsoever kind;
To guarantee, purchase, hold, sell, assign, transfer, mortgage, pledge or otherwise dispose of the shares of the capital stock of, or any bonds, securities or evidences of indebtedness created by any other corporation or corporations of the state of Washington or of any other state or government, and, while the owner of such stock, to exercise all the rights, powers and privileges of individual ownership with respect thereto, including the right to vote thereon, and to consent and otherwise act with respect thereto;
To aid in any manner any corporation or association, domestic or foreign, or any firm or individual, any shares of stock in which or any bonds, debentures, notes, securities, evidence of indebtedness, contracts or obligations of which are held by or for the Corporation or in which or in the welfare of which the Corporation shall have any interest, and to do any acts designed to protect, preserve, improve or enhance the value of any property at any time held or controlled by the Corporation, or in which it may be interested at any time; and to organize or promote or facilitate the organization of subsidiary companies;
To purchase from time to time any of its stock outstanding (so far as may be permitted by law) at such price as may be fixed by its Board of Directors or Executive Committee and accepted by the holders of the stock purchased, and to resell any stock so purchased at such price as may be fixed by its said Board of Directors or Executive Committee;
In any manner to acquire, enjoy, utilize and to sell or otherwise dispose of patents, copyrights and trademarks and any licenses or other rights or interests therein and thereunder;
To purchase, acquire, hold, own and sell or otherwise dispose of franchises, concessions, consents, privileges and licenses;
To borrow money and contract debts, to issue bonds, promissory notes, bills of exchange, debentures and other obligations and evidences of indebtedness payable at a specified time or times or payable upon the happening of a specified event or events, whether secured by mortgage, pledge or otherwise or unsecured, for money borrowed or in payment for property purchased or acquired or any other lawful objects; all as may be determined from time to time by the Board of Directors or Executive Committee of the Corporation, pursuant to the authority hereby conferred;
To create mortgages or deeds of trust which shall cover and create a lien upon all or any part of the property of the Corporation of whatsoever kind and wheresoever situated, then owned or thereafter acquired, and to provide in any such mortgage or deed of trust that the amount of bonds or other evidences of indebtedness to be issued thereunder and to be secured thereby shall be limited to a definite amount or limited only by the conditions therein specified and to issue or cause to be issued by the Corporation the bonds or other evidences of indebtedness to be secured thereby; all as may be determined from time to time by the Board of Directors or Executive Committee of the Corporation pursuant to the authority hereby conferred;
To do all and everything necessary and proper for the accomplishment of the objects enumerated in these Articles of Incorporation or any amendment thereof or necessary or incidental to the protection and benefit of the Corporation, and in general to carry on any lawful business necessary or incidental to the attainment of the objects of the Corporation whether or not such business is similar in nature to the objects set forth in these Articles of Incorporation or any amendment thereof;
To do any or all things herein set forth, to the same extent and as fully as natural persons might or could do, and in any part of the world, and as principal, agent, contractor or otherwise, and either alone or in conjunction with any other persons, firms, associations or corporations;
To conduct its business in any or all its branches in the state of Washington, other states, the District of Columbia, the territories and colonies of the United States, and any foreign countries, and to have one or more offices out of the state of Washington.
THIRD:
(a) The amount of capital with which the Corporation will begin to carry on business hereunder shall be FIVE MILLION FIVE HUNDRED DOLLARS ($5,000,500).
(b) The aggregate number of shares of capital stock which the Corporation shall have authority to issue is 210,000,000 shares, divided into 10,000,000 shares of Preferred Stock without nominal or par value, issuable in series as hereinafter provided, and 200,000,000 shares of Common Stock without nominal or par value.
(c) A statement of the preferences, limitations and relative rights of each class of capital stock of the Corporation, namely, the Preferred Stock without nominal or par value and the Common Stock without nominal or par value, of the variations in the relative rights and preferences as between series of the Preferred Stock insofar as the same are fixed by these Articles of Incorporation, and of the authority vested in the Board of Directors of the Corporation to
establish series of Preferred Stock and to fix and determine the variations in the relative rights and preferences as between series insofar as the same are not fixed by these Articles of Incorporation and as to which there may be variations between series is as follows.
(d) The shares of the Preferred Stock may be divided into and issued in series. Each series shall be so designated as to distinguish the shares thereof from the shares of all other series of the Preferred Stock and all other classes of capital stock of the Corporation. To the extent that these Articles of Incorporation shall not have established series of the Preferred Stock and fixed and determined the variations in the relative rights and preferences as between series, the Board of Directors shall have authority, and is hereby expressly vested with authority, to divide the Preferred Stock into series and, within the limitations set forth in these Articles of Incorporation and such limitations as may be provided by law, to fix and determine the relative rights and preferences of any series of the Preferred Stock so established. Such action by the Board of Directors shall be expressed in a resolution or resolutions adopted by it prior to the issuance of shares of each series, which resolution or resolutions shall also set forth the distinguishing designation of the particular series of the Preferred Stock established thereby. Without limiting the generality of the foregoing, authority is hereby expressly vested in the Board of Directors so to fix and determine, with respect to any series of the Preferred Stock:
(1) the rate or rates of dividend, if any, which may be expressed in terms of a formula or other method by which such rate or rates shall be calculated from time to time, and the date or dates on which dividends may be payable;
(2) whether shares may be redeemed and, if so, the redemption price and the terms and conditions of redemption;
(3) the amount payable upon shares in event of voluntary and involuntary liquidation;
(4) sinking fund provisions, if any, for the redemption or purchase of shares; and
(5) the terms and conditions, if any, on which shares may be converted.
All shares of the Preferred Stock of the same series
shall be identical except that shares of the same series issued
at different times may vary as to the dates from which dividends
thereon shall be cumulative; and all shares of the Preferred
Stock, irrespective of series, shall constitute one and the same
class of stock, shall be of equal rank, and shall be identical
except as to the designation thereof, the date or dates from
which dividends on shares thereof shall be cumulative, and the
relative rights and preferences set forth above in clauses (1)
through (5) of this subdivision (d), as to which there may be
variations between different series. Except as may be otherwise
provided by law, by subdivision (j) of this Article THIRD, or by
the resolutions establishing any series of Preferred Stock in
accordance with the foregoing provisions of this subdivision
(d), whenever the written consent, affirmative vote, or other
action on the part of the holders of the Preferred Stock may be
required for any purpose, such consent, vote or other action
shall be taken by the holders of the Preferred Stock as a single
class irrespective of series and not by different series.
(e) Out of any funds legally available for the payment of dividends, the holders of the Preferred Stock of each series shall be entitled, in preference to the holders of the Common Stock, to receive, but only when and as declared by the Board of Directors, dividends at the rate or rates fixed and determined with respect to each series in accordance with these Articles of Incorporation, and no more, payable as hereinafter provided. Such dividends shall be cumulative
so that if for all past dividend periods and the then current dividend periods dividends shall not have been paid or declared and set apart for payment on all outstanding shares of each series of the Preferred Stock, at the dividend rates fixed and determined for the respective series, the deficiency shall be fully paid or declared and set apart for payment before any dividends on the Common Stock shall be paid or declared and set apart for payment; provided, however, that nothing in this subdivision (e) or elsewhere in these Articles of Incorporation shall prevent the simultaneous declaration and payment of dividends on both the Preferred Stock and the Common Stock if there are sufficient funds legally available to pay all dividends concurrently. Dividends on all shares of the Preferred Stock of each series shall be cumulative from the date of issuance of shares of such series. If more than one series of the Preferred Stock shall be outstanding and if dividends on each series shall not have been paid or declared and set apart for payment, at the dividend rate or rates fixed and determined for such series, the shares of the Preferred Stock of each series shall share ratably in the payment of dividends including accumulations, if any, in accordance with the sums which would be payable on such shares if all dividends were declared and paid in full. As to all series of Preferred Stock, the dividend payment dates for regular dividends shall be the fifteenth day of March, June, September and December in each year, unless other dividend payment dates shall have been fixed and determined for any series in accordance with subdivision (d) of this Article THIRD, and the dividend period in respect of which each regular dividend shall be payable in respect of each series shall be the period commencing on the next preceding dividend payment date for such series and ending on the day next preceding the dividend payment date for such dividend. No interest, or sum of money in lieu of interest, shall be payable in respect of any dividend payment or payments which may be in arrears.
(f) Subject to the limitations set forth in paragraph (e) or elsewhere in these Articles of Incorporation (and subject to the rights of any class of stock hereafter authorized), dividends may be paid on the Common Stock when and as declared by the Board of Directors out of any funds legally available for the payment of dividends, and no holder of shares of any series of the Preferred Stock as such shall be entitled to share therein.
(g) In the event of any voluntary dissolution, liquidation or winding up of the Corporation, before any distribution or payment shall be made to the holders of the Common Stock, the holders of the Preferred Stock of each series then outstanding shall be entitled to receive out of the net assets of the Corporation available for distribution to its shareholders the respective amounts per share fixed and determined in accordance with these Articles of Incorporation to be payable on the shares of such series in the event of voluntary liquidation, and no more, and in the event of any involuntary dissolution, liquidation or winding up of the Corporation, before any distribution or payment shall be made to the holders of the Common Stock, the holders of the Preferred Stock of each series then outstanding shall be entitled to receive out of the net assets of the Corporation available for distribution to its shareholders the respective amounts per share fixed and determined in accordance with these Articles of Incorporation to be payable on the shares of such series in the event of involuntary liquidation, and no more. If upon any dissolution, liquidation or winding up of the Corporation, whether voluntary or involuntary, the net assets of the Corporation available for distribution to its shareholders shall be insufficient to pay the holders of all outstanding shares of Preferred Stock of all series the full amounts to which they shall be respectively entitled as aforesaid, the entire net assets of the Corporation available for distribution shall be distributed ratably to the holders of all outstanding shares of Preferred Stock of all series in proportion to the amounts to which they shall be respectively so entitled. For the purposes of this and the next succeeding subdivision, and without limiting the right of the Corporation to distribute its assets or to dissolve, liquidate or wind up in connection with any sale, merger or consolidation, the sale of all or substantially all of the property of the
Corporation, or the merger or consolidation of the Corporation into or with any other corporation or corporations, shall not be deemed to be a distribution of assets or a dissolution, liquidation or winding up of the Corporation, whether voluntary or involuntary.
(h) Subject to the limitations set forth in subdivision (g) of this Article THIRD or elsewhere in these Articles of Incorporation (and subject to the rights of any class of stock hereafter authorized) upon any dissolution, liquidation or winding up of the Corporation, whether voluntary or involuntary, any net assets of the Corporation available for distribution to its shareholders shall be distributed ratably to holders of the Common Stock.
(i) The Preferred Stock may be redeemed in accordance with the following provisions of this subdivision (i):
(1) Each series of the Preferred Stock which has been
determined to be redeemable as permitted by subdivision
(d) of this Article THIRD may be redeemed in whole or in
part by the Corporation, at its election expressed by
resolution of the Board of Directors, at any time or
from time to time, at the then applicable redemption
price fixed and determined with respect to each series,
subject however, to any terms and conditions specified
in respect of any series of the Preferred Stock in
accordance with subdivision (d) of this Article THIRD.
If less than all of the shares of any series are to be
redeemed, the redemption shall be made either pro rata
or by lot in such manner as the Board of Directors shall
determine.
(2) In the event the Corporation shall so elect to redeem shares of the Preferred Stock, notice of the intention of the Corporation to do so and of the date and place fixed for redemption shall be mailed not less than thirty nor more than ninety days before the date fixed for redemption to each holder of shares of the Preferred Stock to be redeemed at his address as it shall appear on the books of the Corporation, and on and after the date fixed for redemption and specified in such notice (unless the Corporation shall default in making payment of the redemption price), such holders shall cease to be shareholders of the Corporation with respect to such shares and shall have no interest in or claim against the Corporation with respect to such shares, excepting only the right to receive the redemption price therefor from the Corporation on the date fixed for redemption, without interest, upon endorsement, if required, and surrender of their certificates for such shares.
(3) Contemporaneously with the mailing of notice of redemption of any shares of the Preferred Stock as aforesaid or at any time thereafter on or before the date fixed for redemption, the Corporation may, if it so elects, deposit the aggregate redemption price of the shares to be redeemed with any bank or trust company doing business in the City of New York, New York, or Spokane, Washington, having a capital and surplus of at least $5,000,000, named in such notice, payable on the date fixed for redemption in the proper amounts to the respective holders of the shares to be redeemed, upon endorsement, if required, and surrender of their certificates for such shares, and on and after the making of such deposit such holders shall cease to be shareholders of the Corporation with respect to such shares and shall have no interest in or claim against the Corporation with respect to such shares, excepting only the right to exercise such redemption or exchange rights, if any, on or before the date fixed for redemption as may have been provided with respect to such shares or the right to receive the redemption price of their shares from such bank or trust company on the date fixed for redemption, without interest, upon endorsement, if required, and surrender of their certificates for such shares.
(4) If the Corporation shall have so elected to deposit the redemption moneys with a bank or trust company, any moneys so deposited which shall remain unclaimed at the end of six years after the redemption date shall be repaid to the Corporation, and upon such repayment holders of Preferred Stock who shall not have made claim against such moneys prior to such repayment shall be deemed to be unsecured creditors of the Corporation for an amount, without interest, equal to the amount they would theretofore have been entitled to receive from such bank or trust company. Any redemption moneys so deposited which shall not be required for such redemption because of the exercise, after the date of such deposit, of any right of conversion or exchange or otherwise, shall be returned to the Corporation forthwith. The Corporation shall be entitled to receive any interest allowed by any bank or trust company on any moneys deposited with such bank or trust company as herein provided, and the holders of any shares called for redemption shall have no claim against any such interest.
(5) Nothing herein contained shall limit any legal right of the Corporation to purchase or otherwise acquire any shares of the Preferred Stock.
(j) The holders of the Preferred Stock shall not have any right to vote for the election of Directors or for any other purpose except as otherwise provided by law and as set forth below in this subdivision of this Article THIRD or elsewhere in these Articles of Incorporation. Holders of Preferred Stock shall be entitled to notice of each meeting of shareholders at which they shall have any right to vote but except as may be otherwise provided by law shall not be entitled to notice of any other meeting of shareholders.
(1) Whenever and as often as, at any date, dividends payable on any shares of the Preferred Stock shall be in arrears in an amount equal to the aggregate amount of dividends accumulated on such shares of the Preferred Stock over the eighteen-month period ended on such date, the holders of the Preferred Stock of all series, voting separately and as a single class, shall be entitled to vote for and to elect a majority of the Board of Directors, and the holders of the Common Stock, voting separately and as a single class, shall be entitled to vote for and to elect the remaining Directors of the Corporation. The right of the holders of the Preferred Stock to elect a majority of the Board of Directors shall, however, cease when all defaults in the payment of dividends on their stock shall have been cured and such dividends shall be declared and paid out of any funds legally available therefor as soon as in the judgment of the Board of Directors is reasonably practicable. The terms of office of all persons who may be Directors of the Corporation at the time the right to elect Directors shall accrue to the holders of the Preferred Stock as herein provided shall terminate upon the election of their successors at a meeting of the shareholders of the Corporation then entitled to vote. Such election shall be held at the next Annual Meeting of Shareholders or may be held at a special meeting of shareholders but shall be held upon notice as provided in the Bylaws of the Corporation for a special meeting of the shareholders. Any vacancy in the Board of Directors occurring during any period when the Preferred Stock shall have elected representatives on the Board shall be filled by a majority vote of the remaining Directors representing the class of stock theretofore represented by the Director causing the vacancy. At all meetings of the shareholders held for the purpose of electing Directors during such times as the holders of the Preferred Stock shall have the exclusive right to elect a majority of the Board of Directors of the Corporation, the presence in person or by proxy of the holders of a majority of the outstanding shares of Preferred Stock of all series shall be required to substitute a quorum of such class for the election of Directors, and the presence in person or by proxy of the holders of a majority of the outstanding shares of Common Stock shall be required to constitute a quorum of such
class for the election of Directors; provided, however, that the absence of a quorum of the holders of stock of either class shall not prevent the election at any such meeting, or adjournment thereof, of Directors by the other class if the necessary quorum of the holders of stock of such class is present in person or by proxy at such meeting; and provided further, that, in the absence of a quorum of the holders of stock of either class, a majority of those holders of such stock who are present in person or by proxy shall have the power to adjourn the election of those Directors to be elected by that class from time to time without notice, other than announcement at the meeting, until the requisite amount of holders of stock of such class shall be present in person or by proxy.
(2) So long as any shares of the Preferred Stock shall be outstanding, the Corporation shall not, without the affirmative vote of the holders of at least a majority of the shares of the Preferred Stock at the time outstanding, adopt any amendment to these Articles of Incorporation if such amendment would:
(i) create or authorize any new class of stock ranking prior to or on a parity with the Preferred Stock as to dividends or upon dissolution, liquidation or winding up;
(ii) increase the authorized number of shares of the Preferred Stock; or
(iii) change any of the rights or preferences of the Preferred Stock at the time outstanding provided, however, that if any proposed change of any of the rights or preferences of any outstanding shares of the Preferred Stock would affect the holders of shares of one or more, but not all, series of the Preferred Stock then outstanding, only the affirmative vote of the holders of at least a majority of the total number of outstanding shares of all series so affected shall be required; and provided further, that nothing herein shall authorize the adoption of any amendment to these Articles of Incorporation by the vote of the holders of a lesser number of shares of the Preferred Stock, or of any other class of stock, or of all classes of stock, than is required for such an amendment by the laws of the state of Washington at the time applicable thereto.
(3) So long as any shares of the Preferred Stock shall be outstanding, the Corporation shall not, without the affirmative vote of the holders of at least a majority of the shares of the Preferred Stock at the time outstanding, issue any shares of the Preferred Stock, or of any other class of stock ranking prior to or on a parity with the Preferred Stock as to dividends or upon dissolution, liquidation or winding up, unless the net income of the Corporation available for the payment of dividends for a period of twelve consecutive calendar months within the fifteen calendar months immediately preceding the issuance of such shares (including, in any case in which such shares are to be issued in connection with the acquisition of new property, the net income of the property so to be acquired, computed on the same basis as the net income of the Corporation) is at least equal to one and one-half times the annual dividend requirements on all shares of the Preferred Stock, and on all shares of all other classes of stock ranking prior to or on a parity with the Preferred Stock as to dividends or upon dissolution, liquidation or winding up, which will be outstanding immediately after the issuance of such shares, including the shares proposed to be issued; provided, however, that if the shares of any series of the Preferred Stock or any such prior or parity stock shall have a variable dividend rate, the annual dividend requirement on the shares of such series shall be determined by reference to the weighted average dividend rate on such shares during the twelve-month period for which the net income of the Corporation available for the payment of dividends shall have been determined; and
provided, further, that if the shares of the series to be issued are to have a variable dividend rate, the annual dividend requirement on the shares of such series shall be determined by reference to the initial dividend rate upon the issuance of such shares. In any case where it would be appropriate, under generally accepted accounting principles to combine or consolidate the financial statements of any parent or subsidiary of the Corporation with those of the Corporation, the foregoing computation may be made on the basis of such combined or consolidated financial statements.
(k) Subject to the limitations set forth in subdivision (j) of this Article THIRD (and subject to the rights of any class of stock hereafter authorized), and except as may be otherwise provided by law, the holders of the Common Stock shall have the exclusive right to vote for the election of Directors and for all other purposes. At each meeting of shareholders, each holder of stock entitled to vote thereat shall be entitled to one vote for each share of such stock held by him and recorded in his name on the record date for such meeting, and may vote and otherwise act in person or by proxy; provided, however, that at each election for Directors every shareholder entitled to vote at such election shall have the right to vote the number of shares held by him for as many persons as there are Directors to be elected and for whose election he has the right to vote, or to cumulate his votes by giving one candidate as many votes as the number of such Directors multiplied by the number of his shares shall equal, or by distributing such votes on the same principle among any number of such candidates.
(l) Subject to the limitations set forth in subdivision (j) of this Article THIRD (and subject to the rights of any class of stock hereafter authorized), and except as may be otherwise provided by law, upon the vote of a majority of all of the Directors of the Corporation and of the holders of record of two-thirds of the total number of shares of the Corporation then issued and outstanding and entitled to vote (or, if the vote of a larger number or different proportion of shares is required by the laws of the state of Washington, notwithstanding the above agreement of the shareholders of the Corporation to the contrary, then upon the vote of the holders of record of the larger number or different proportion of shares so required) the Corporation may from time to time create or authorize one or more other classes of stock with such preferences, designations, rights, privileges, powers, restrictions, limitations and qualifications as may be determined by said vote, which may be the same or different from the preferences, designations, rights, privileges, powers, restrictions, limitations and qualifications of the classes of stock of the Corporation then authorized and/or the Corporation may increase or decrease the number of shares of one or more of the classes of stock then authorized.
(m) All stock of the Corporation without nominal or par value whether authorized herein or upon subsequent increases of capital stock or pursuant to any amendment hereof may be issued, sold and disposed of by the Corporation from time to time for such consideration in labor, services, money or property as may be fixed from time to time by the Board of Directors and authority to the Board of Directors so to fix such consideration is hereby granted by the shareholders. The consideration received by the Corporation from the issuance and sale of new or additional shares of capital stock without par value shall be entered in the capital stock account.
(n) No holder of any stock of the Corporation shall be entitled as of right to purchase or subscribe for any part of any stock of the Corporation authorized herein or of any additional stock of any class to be issued by reason of any increase of the authorized capital stock of the Corporation or of any bonds, certificates of indebtedness, debentures or other securities convertible into stock of the Corporation but any stock authorized herein or any such additional authorized issue of any stock or of securities convertible into stock may be issued and disposed of by the Board of Directors to such persons, firms, corporations or associations upon such terms and conditions as
the Board of Directors in their discretion may determine without offering any thereof on the same terms or any terms to the shareholders then of record or to any class of shareholders.
(o) (1) SERIES I. There is hereby established a ninth series of the Preferred Stock of the Corporation which shall have, in addition to the general terms and characteristics of all of the authorized shares of Preferred Stock of the Corporation, the following distinctive terms and characteristics:
(a) The ninth series of Preferred Stock of the Corporation shall consist of 500,000 shares and be designated as "$8.625 Preferred Stock, Series I."
(b) Said ninth series shall have a dividend rate of $8.625 per share per annum.
(c) The amount payable upon the shares of said ninth series in the event of dissolution, liquidation or winding up of the Corporation shall be $100.00 per share plus an amount equivalent to the accumulated and unpaid dividends thereon, if any, to the date of such dissolution, liquidation or winding up.
(d) (i) As and for a sinking fund for the redemption of shares of said ninth series, on June 15, 1996 and each June 15 thereafter until all shares of said ninth series shall have been retired, the Corporation shall redeem 100,000 shares of said ninth series at the price of $100.00 per share plus an amount equivalent to the accumulated and unpaid dividends thereon, if any, to the date fixed for redemption. The Corporation shall be entitled, at its option, on June 15, 1996 and each June 15 thereafter, to redeem up to 100,000 shares of said ninth series, in addition to the shares otherwise required to be redeemed on such date, at $100.00 per share plus an amount equivalent to the accumulated and unpaid dividends thereon, if any, to the date fixed for redemption; provided, however, that the option of the Corporation to so redeem up to 100,000 additional shares of the ninth series on each such sinking fund redemption date shall not be cumulative and shall not reduce the sinking fund requirements of this subparagraph (d) in any subsequent year. In the case of any redemption pursuant to this paragraph (d), the shares to be redeemed shall be selected by lot among the holders of the shares of said ninth series then outstanding in such manner as the appropriate Officers of the Corporation shall determine to result in a random selection. The shares of said ninth series shall not be redeemable at the option of the Corporation except as set forth in this subparagraph (d).
(ii) The sinking fund requirement of the Corporation to redeem shares of said ninth series pursuant to this subparagraph (d) shall be subject to any applicable restrictions of law and such redemption shall be made only out of funds legally available therefor.
(iii) The sinking fund requirement of the Corporation to redeem shares of said ninth series pursuant to this subparagraph (d) shall be cumulative. If at any time the Corporation shall not have satisfied in full the cumulative sinking fund requirement to redeem shares of said ninth series, the Corporation shall not pay or declare and set apart for payment any dividends upon, or make any other distribution with respect to, or redeem, purchase or otherwise acquire
any shares of, the Common Stock or any other class of stock ranking as to dividends and distributions of assets junior to the Preferred Stock.
(iv) If at any time the Corporation shall not have satisfied in full the cumulative sinking fund requirement to redeem shares of said ninth series pursuant to this subparagraph (d), and if at such time the Corporation shall be required pursuant to a sinking or similar fund to redeem or purchase shares of any other series of the Preferred Stock or any other class of stock ranking as to dividends and distributions of assets on a parity with the Preferred Stock, any funds of the Corporation legally available for the purpose shall be allocated among all such sinking or similar funds for series of the Preferred Stock and such parity stock in proportion to the respective amounts then required for the satisfaction thereof.
(e) The shares of said ninth series shall not, by their terms, be convertible.
(2) SERIES K. There is hereby established an eleventh series of the Preferred Stock of the Corporation which shall have, in addition to the general terms and characteristics of all of the authorized shares of Preferred Stock of the Corporation, the following distinctive terms and characteristics:
(a) The eleventh series of Preferred Stock of the Corporation shall consist of 350,000 shares and be designated as "$6.95 Preferred Stock, Series K."
(b) Said eleventh series shall have a dividend rate of $6.95 per share per annum.
(c) The amount payable upon the shares of said eleventh series in the event of dissolution, liquidation or winding up of the Corporation shall be $100.00 per share plus an amount equivalent to accumulated and unpaid dividends thereon, if any, to the date of such dissolution, liquidation or winding up.
(d) (i) As and for a sinking fund for the redemption of
shares of said eleventh series, on September 15,
2002, and on each September 15 thereafter to and
including September 15, 2006, the Corporation
shall redeem 17,500 shares of said eleventh
series, and on September 15, 2007, the
Corporation shall redeem all of the shares of
said eleventh series then outstanding, in each
case at the price of $100.00 per share plus an
amount equivalent to the accumulated and unpaid
dividends thereon, if any, to the date fixed for
redemption. The Corporation shall be entitled,
at its option, on September 15, 2002, and on
each September 15 thereafter to and including
September 15, 2006, to redeem up to 17,500
shares of said eleventh series, in addition to
the shares otherwise required to be redeemed on
such date, at the price of $100.00 per share
plus an amount equivalent to the accumulated and
unpaid dividends thereon, if any, to the date
fixed for redemption; provided, however, that
the option of the Corporation to so redeem up to
17,500 additional shares of the eleventh series
on each such sinking fund redemption date shall
not be cumulative and shall not reduce the
sinking fund requirements of this subparagraph
(d) in any subsequent year. The Corporation
shall be entitled, at its option, to credit
against any sinking fund redemption requirement
any shares of said eleventh series theretofore
purchased or otherwise acquired by the
Corporation and not theretofore credited against
any other sinking fund redemption requirement.
In the case of
any redemption pursuant to this subparagraph
(d), the shares to be redeemed shall be selected
by lot among the holders of the shares of said
eleventh series then outstanding in such manner
as the appropriate Officers of the Corporation
shall determine to result in a random selection.
The shares of said eleventh series shall not be
redeemable at the option of the Corporation
except as set forth in this subparagraph (d).
(ii) The sinking fund requirement of the Corporation to redeem shares of said eleventh series pursuant to this subparagraph (d) shall be subject to any applicable restrictions of law and such redemption shall be made only out of funds legally available therefor.
(iii) The sinking fund requirement of the Corporation to redeem shares of said eleventh series pursuant to this subparagraph (d) shall be cumulative. If at any time the Corporation shall not have satisfied in full the cumulative sinking fund requirement to redeem shares of said eleventh series, the Corporation shall not pay or declare and set apart for payment any dividends upon, or make any other distribution with respect to, or redeem, purchase or otherwise acquire any shares of, the Common Stock or any other class of stock ranking as to dividends and distributions of assets junior to the Preferred Stock.
(iv) If at any time the Corporation shall not have satisfied in full the cumulative sinking fund requirement to redeem shares of said eleventh series pursuant to this subparagraph (d), and if at such time the Corporation shall be required pursuant to a sinking or similar fund to redeem or purchase shares of any other series of the Preferred Stock or any other class of stock ranking as to dividends and distributions of assets on a parity with the Preferred Stock, any funds of the Corporation legally available for the purpose shall be allocated among all such sinking or similar funds for series of the Preferred Stock and such parity stock in proportion to the respective amounts then required for the satisfaction thereof.
(e) The shares of said eleventh series shall not, by their terms, be convertible.
(3) SERIES L. There is hereby established a twelfth series of the Preferred Stock of the Corporation which shall have, in addition to the general terms and characteristics of all of the authorized shares of Preferred Stock of the Corporation, the following distinctive terms and characteristics:
(a) The twelfth series of Preferred Stock of the Corporation shall consist of 1,540,460 shares and be designated as "$12.40 Preferred Stock, Convertible Series L".
(b) Said twelfth series shall have a dividend rate of $12.40 per share per annum; provided, however, that the amount of the dividend per share payable on December 15, 1998 shall be $3.10.
(c) The shares of said twelfth series shall not, by their terms, be redeemable.
(d) The amount payable upon the shares of said twelfth series in the event of dissolution, liquidation or winding up of the Corporation shall be $182.8125 per share plus an
amount equivalent to accumulated and unpaid dividends thereon, if any, to the date of such dissolution, liquidation or winding up.
(e) There shall be no sinking fund for the redemption or purchase of shares of said twelfth series.
(f) (i) (A) Each share of said twelfth series shall be
mandatorily converted on November 1, 2001
(the "Mandatory Conversion Date") into (1) a
number of shares of Common Stock determined
by reference to the Common Equivalent Rate
(as hereinafter defined) then in effect plus
(2) the right to receive an amount, in cash,
equivalent to the accumulated and unpaid
dividends on such share of said twelfth
series, if any, to but excluding the
Mandatory Conversion Date.
(B) Each share of said twelfth series shall be
convertible, at the option of the Company, at
any time on or after December 15, 1998 and
prior to the Mandatory Conversion Date, into
(1) a number of shares of Common Stock equal
to the Optional Conversion Price then in
effect, (2) the right to receive an amount,
in cash, equivalent to the accumulated and
unpaid dividends on the share of said twelfth
series to be converted to but excluding the
date fixed for conversion plus (3) the right
to receive the Optional Conversion Premium;
it being understood that the Company may not
so convert less than all shares of said
twelfth series.
(C) Each share of said twelfth series shall be mandatorily converted, at the time of effectiveness of any Extraordinary Transaction, into, or into the right to receive, as the case may be, securities and other property (including cash) of the same character and in the same respective amounts as the holder of such share would have received if such share had been converted pursuant to clause (B) above immediately prior to such time of effectiveness.
(ii) (A) The "Common Equivalent Rate" shall be initially ten shares of Common Stock for each share of said twelfth series; provided, however, that the Common Equivalent Rate shall be subject to adjustment from time to time as provided below. All adjustments to the Common Equivalent Rate shall be calculated to the nearest 1/100th of a share of Common Stock. Such rate, as adjusted and in effect at any time, is herein called the "Common Equivalent Rate."
(B) If the Corporation shall do any of the following (each, an "Adjustment Event"):
(1) pay a dividend or make a distribution with respect to Common Stock in shares of Common Stock,
(2) subdivide, reclassify or split its outstanding shares of Common Stock into a greater number of shares,
(3) combine or reclassify its outstanding shares of Common Stock into a smaller number of shares, or
(4) issue by reclassification of its shares of Common Stock any shares of Common Stock other than in an Extraordinary Transaction (as hereinafter defined),
then the Common Equivalent Rate in effect immediately prior to such Adjustment Event shall be adjusted so that on the Mandatory Conversion Date each share of said twelfth series shall be converted into the number of shares of Common Stock that the holder of such share would have owned or been entitled to receive after the happening of the Adjustment Event had such share been mandatorily converted immediately prior to the record date, if any, for such Adjustment Event or, if there is no record date, immediately prior to the effectiveness of such Adjustment Event. In case the Adjustment Event is a dividend or distribution, the adjustment to the Common Equivalent Rate shall become effective as of the close of business on the record date for determination of shareholders entitled to receive such dividend or distribution and any shares of Common Stock issuable in payment of a dividend shall be deemed to have been issued immediately prior to the close of business on the record date for such dividend for purposes of calculating the number of outstanding shares of Common Stock under clauses (C) and (D) below; and, in case the Adjustment Event is a subdivision, split, combination or reclassification, the adjustment to the Common Equivalent Rate shall become effective immediately after the effective date of such subdivision, split, combination or reclassification. Such adjustment shall be made successively.
In the event that Rights are separated from the outstanding shares of the Common Stock in accordance with the provisions of the Rights Agreement such that holders of shares of said twelfth series would not be entitled to receive any Rights in respect of the shares of Common Stock issuable upon conversion of the shares of said twelfth series, the Common Equivalent Rate shall be adjusted by multiplying the Common Equivalent Rate in effect on the Distribution Date (as defined in the Rights Agreement) by a fraction (1) the numerator of which shall be the Current Market Price per share of the outstanding shares of Common Stock on the Trading Date next preceding the Distribution Date and (2) the denominator of which shall be such Current Market Price less the fair market value (as determined by the Board of Directors of the Company, whose determination shall be conclusive, final and binding on the Corporation and all shareholders of the Corporation) as of such Distribution Date of the portion of the Rights allocable to one share of Common Stock. Such adjustment shall become effective on the opening of business on the business day next following the Distribution Date and will remain in effect unless and until (A) the Company (i) amends the Rights Agreement to provide that upon conversion of the shares of said twelfth series the holders thereof will receive, in addition to the shares of Common Stock issuable upon such conversion, the Rights which would have attached to such shares of Common Stock if the Rights had not become separated from the Common Stock pursuant to the Rights Agreement and (ii) converts the Preferred Stock into shares of Common Stock with such Rights or (B) the Rights expire, terminate or are redeemed, in which case appropriate adjustments, if any, shall be made to the Common Equivalent Rate consistent with the provisions of this subparagraph (f)(i). Notwithstanding the foregoing, in the event the aforesaid fair market value of the portion of the
Rights allocable to one share of Common Stock is equal to or greater than the Current Market Price per share of Common Stock on the Trading Date mentioned above, in lieu of the foregoing adjustment, adequate provision shall be made so that each holder of shares of said twelfth series shall have the right to receive upon conversion the number of shares of Common Stock such holder would have received had the shares of said twelfth series been mandatorily converted immediately prior to the Distribution Date.
(C) If the Corporation shall, after the date of the initial issuance of shares of said twelfth series, issue rights or warrants to all holders of the Common Stock entitling them for a period not exceeding 45 days from the date of such issuance to subscribe for or purchase shares of Common Stock at a price per share less than the Current Market Price of the Common Stock (as hereinafter defined), on the record date for the determination of shareholders entitled to receive such rights or warrants, then in each case the Common Equivalent Rate shall be adjusted by multiplying the Common Equivalent Rate in effect immediately prior to the date of issuance of such rights or warrants by a fraction (1) the numerator of which shall be the number of shares of Common Stock outstanding on the date of issuance of such rights or warrants, immediately prior to such issuance, plus the number of additional shares of Common Stock offered for subscription or purchase pursuant to such rights or warrants and (2) the denominator of which shall be the number of shares of Common Stock outstanding on the date of issuance of such rights or warrants, immediately prior to such issuance, plus the number of shares of Common Stock which the aggregate offering price of the total number of shares of Common Stock so offered for subscription or purchase pursuant to such rights or warrants would purchase at such Current Market Price (determined by multiplying such total number of shares by the exercise price of such rights or warrants and dividing the product so obtained by such Current Market Price). Such adjustment shall become effective as of the close of business on the record date for the determination of shareholders entitled to exercise such rights or warrants. To the extent that shares of Common Stock are not delivered after the expiration of such rights or warrants, the Common Equivalent Rate shall be readjusted to the Common Equivalent Rate which would then be in effect had the adjustments made upon the issuance of such rights or warrants been made upon the basis of delivery of only the number of shares of Common Stock actually delivered. Such adjustment shall be made successively.
(D) If the Corporation shall pay a dividend or make any other distribution to all holders of its Common Stock of evidences of its indebtedness or other assets (including shares of capital stock of the Corporation (other than Common Stock) but excluding any distributions and dividends referred to in clause (B) above or any cash dividends), or shall issue to all holders of its Common Stock rights or warrants to subscribe for or purchase any of its securities (other than those referred to in clause (C) above), then, in each such case, the Common Equivalent Rate shall be adjusted by multiplying the Common Equivalent Rate in effect on the record date for the determination of shareholders entitled to receive such dividend or distribution mentioned below by a fraction (1) the numerator of which shall be the Current Market Price of the Common Stock on such record date and (2) the denominator of
which shall be such Current Market Price per share of Common Stock less the fair market value (as determined by the Board of Directors of the Corporation, whose determination shall be conclusive, as final and binding upon the Corporation and all shareholders of the Corporation) as of such record date of the portion of the assets or evidences of indebtedness so distributed, or of such subscription rights or warrants, allocable to one share of Common Stock. Such adjustment shall become effective on the opening of business on the business day next following the record date for the determination of the shareholders entitled to receive such dividend or distribution. Notwithstanding the foregoing, in the event the portion of the assets or other evidences of indebtedness so distributed allocable to one share of Common Stock has a value equal to or greater than the Current Market Price per share of Common Stock on the record date mentioned above, in lieu of the foregoing adjustment, adequate provision shall be made so that each holder of shares of said twelfth series shall have the right to receive upon conversion assets or other evidences of indebtedness having a value in the amount such holder would have received had the shares of said twelfth series been mandatorily converted immediately prior to the record date for such dividend or distribution.
(E) If the Corporation shall pay a dividend or make any other distribution to all holders of its Common Stock exclusively in cash (excluding any quarterly cash dividend on Common Stock in any quarter to the extent it does not exceed $.16 per share (as adjusted to reflect subdivisions or combinations of Common Stock)) the Common Equivalent Rate shall be adjusted by multiplying the Common Equivalent Rate in effect on the record date for the determination of the shareholders entitled to receive such dividend or distribution by a fraction (1) the numerator of which shall be such Current Market Price per share of the Common Stock on such record date and (2) the denominator of which shall be such Current Market Price less the amount of cash so distributed (and not excluded as provided above) allocable to one share of Common Stock. Such adjustment shall become effective immediately prior to the opening of business on the business day next following record date. Notwithstanding the foregoing, in the event the portion of the cash so distributed allocable to one share of Common Stock is equal to or greater than the Current Market Price per share of Common Stock on the record date mentioned above, in lieu of the foregoing adjustment, adequate provision shall be made so that each holder of shares of said twelfth series shall have the right to receive upon conversion the amount of cash such holder would have received had the shares of said twelfth series been mandatorily converted immediately prior to the record date for such dividend or distribution. If an adjustment is required to be made pursuant to this clause (E) as a result of a distribution that is a quarterly dividend, such adjustment shall be based upon the amount by which such distribution exceeds the amount of the quarterly cash dividend permitted to be excluded as provided above; and an adjustment is required to be made pursuant to this clause (E) as a result of a distribution that is not a quarterly dividend, such adjustment shall be based upon the full amount of the distribution.
(F) Anything herein to the contrary notwithstanding, the Corporation may, at its option, make such upward adjustment in the Common Equivalent Rate, in
addition to the adjustments specified above, as the Corporation in its sole discretion may determine to be advisable, in order that any stock dividends, subdivision of shares, distribution of rights to purchase stock or securities, or a distribution of securities convertible into or exchangeable for stock (or any transaction that could be treated as any of the foregoing transactions pursuant to Section 305 of the Internal Revenue Code of 1986, as amended) hereafter made by the Corporation to its shareholders shall not be taxable. Any such adjustment shall be made effective as of such date as the Board of Directors of the Corporation shall determine. The determination of the Board of Directors of the Corporation as to whether or not such an adjustment to the Common Equivalent Rate should be made and, if so, as to what adjustment should be made and when, shall be conclusive, final and binding on the Corporation and all shareholders of the Corporation.
(G) As used herein, the "Current Market Price" of a share of Common Stock on any date shall be, except as otherwise specifically provided, the average of the daily Closing Prices (as hereinafter defined) for the five consecutive Trading Dates (as hereinafter defined) ending on and including the date of determination of the Current Market Price; provided, however, that if the Closing Price of the Common Stock on the Trading Date next following such five-day period (the "next-day closing price") is less than 95% of such average Closing Price, then the Current Market Price per share of Common Stock on such date of determination will be the next-day Closing Price; and provided, further, that with respect to any conversion or antidilution adjustment, if any event that results in an adjustment of the Common Equivalent Rate occurs during the period beginning on the first date of the applicable determination period and ending on the applicable conversion date, the Current Market Price as determined pursuant to the foregoing will be appropriately adjusted to reflect the occurrence of such event.
(H) In any case in which an adjustment as a result of any event is required to become effective as of the close of business on the record date for such event and the Mandatory Conversion Date occurs after such record date but before the occurrence of such event, the Corporation may in its sole discretion elect to defer the following until after the occurrence of such event (but shall be under no obligation to do so): (1) issuing to the holder of any converted shares of said twelfth series the additional shares of Common Stock issuable upon such conversion as a result of such adjustment and (2) paying to such holder any amount in cash in lieu of a fractional share of Common Stock as hereinafter provided.
(iii) Whenever the Common Equivalent Rate is adjusted as herein provided, the Corporation shall:
(A) forthwith compute the adjusted Common Equivalent Rate in accordance herewith and prepare a certificate signed by the President, any Vice President or the Treasurer of the Corporation setting forth the adjusted Common Equivalent Rate, the method of calculation thereof in reasonable detail and the facts requiring such adjustment and upon which such adjustment is based, which certificate shall be conclusive, final and binding evidence of the correctness of the adjustment, and file such certificate forthwith with the
transfer agent or agents for the shares of said twelfth series and for the Common Stock; and
(B) mail a notice stating that the Common Equivalent Rate has been adjusted, the facts requiring such adjustment and upon which such adjustment is based and setting forth the adjusted Common Equivalent Rate to the holders of record of the outstanding shares of said twelfth series at or prior to the time the Corporation mails an interim statement to its shareholders covering the fiscal quarter during which the facts requiring such adjustment occurred, but in any event within 45 days of the end of such fiscal quarter.
(iv) No fractional shares or scrip representing fractional shares of Common Stock shall be issued upon the conversion of any shares of said twelfth series. Instead of any fractional interest in a share of Common Stock which would otherwise be deliverable upon the conversion of a share of said twelfth series, the Corporation shall pay to the holder of such share an amount in cash (computed to the nearest cent) equal to the same fraction of the Current Market Price of the Common Stock determined as of the second Trading Date immediately preceding (i) the day on which the Company gives notice of an option conversion, (ii) in the event of an Extraordinary Transaction, the effective date of such transaction or (iii) in the event of a mandatory conversion, the Mandatory Conversion Date. If more than one share of any holder shall be converted at the same time, the number of full shares of Common Stock into which such shares shall be converted shall be computed on the basis of the aggregate number of shares so converted.
(v) Definitions. As used with respect to the shares of said twelfth series:
(A) the term "business day" shall mean any day other than a Saturday, Sunday or a day on which banking institutions in the State of Washington or the State of New York are authorized or obligated by law or executive order to remain closed or are closed because of a banking moratorium or otherwise;
(B) the term "Closing Price" on any day shall mean the reported last sale price on such day, or, in case no such sale takes place on such day, the average of the reported last bid and asked prices on such day, in either case as reported on the Consolidated Tape maintained by the Consolidated Tape Association, or, if the Common Stock is not listed or admitted to trading on any securities exchange which participates in the Consolidated Tape Association, the average of the reported last bid and asked prices regular way (with any relevant due bills attached) of the Common Stock on the over-the-counter market on the day in question as reported by the National Association of Securities Dealers Automated Quotation System, or a similar generally accepted reporting service, or if no information of such character shall be available, as determined in good faith by the Board of Directors on the basis of such relevant factors as the Board of Directors in good faith considers appropriate, (such determination to be conclusive, final and binding upon the Corporation and all shareholders of the Corporation);
(C) the term "Extraordinary Transaction" shall mean a merger or consolidation of the Corporation, a share exchange, division or conversion of the Corporation's
capital stock or an amendment of the Restated Articles of Incorporation of the Corporation that results in the conversion or exchange of Common Stock into, or the right of the holders thereof to receive, in lieu of or in addition to their shares of Common Stock, other securities or other property (whether of the Corporation or any other entity);
(D) the term "Notice Date" with respect to any notice given by the Corporation in connection with a conversion of any of the Shares of said twelfth series shall be the date of the commencement of the mailing of such notice to the holders of such shares as specified herein;
(E) the term "Optional Conversion Premium" shall mean, in respect of each share of said twelfth series converted at the option of the Company, an amount, in cash, initially equal to $20.90, declining by $.02111 for each day following December 15, 1998 to and including the optional conversion date (computed on the basis of a 360-day year consisting of twelve 30-day months) and equal to $0 on and after September 15, 2001; provided, however, that in lieu of delivering such amount in cash, the Company may, at its option, deliver a number of shares of Common Stock equal to the quotient of such amount divided by the Current Market Price on the second Trading Date immediately preceding (1) the date on which the Company gives notice of such conversion or (2) in the event of an Extraordinary Transaction, the effective date of such transaction;
(F) the term "Optional Conversion Price" shall mean,
in respect of each share of said twelfth series
converted at the option of the Company, a number
of shares of Common Stock equal to the lesser of
(1) the amount of $24.00 divided by the Current
Market Price as of the second Trading Date
immediately preceding (a) the date on which the
Company gives notice of such conversion or (b)
in the event of an Extraordinary Transaction,
the effective date of such transaction,
multiplied by ten and (2) the number of shares
of Common Stock determined by reference to the
Common Equivalent Rate;
(G) the term "Rights Agreement" shall mean the Rights Agreement, dated as of February 16, 1990, between the Company and The Bank of New York, successor Rights Agent, as amended; and the term "Rights" shall mean the "Preferred Share Purchase Rights" established under the Rights Agreement; and
(H) the term "Trading Date" shall mean a date on which the New York Stock Exchange (or any successor to such Exchange) is open for the transaction of business.
(vi) (A) Unless otherwise required by applicable law, notice of any conversion shall be sent to the holders of the shares of said twelfth series to be converted at the addresses shown on the books of the Corporation by mailing a copy of such notice not less than fifteen (15) days nor more than sixty (60) days prior to the conversion date. Each such notice shall state (1) the conversion date, (2) the total number of shares of said twelfth series to be converted (being the total number of shares outstanding), (3) the conversion price, (4) the place or
places where certificates for such shares are to be surrendered in exchange for certificates and/or cash representing the conversion price and (5) that dividends on the shares to be converted will cease to accrue on such conversion date. Notwithstanding the foregoing, the failure so to mail any such notice of mandatory conversion or any defect therein or in the mailing thereof shall not prevent the occurrence of such conversion or impair the validity thereof.
(B) The shares of said twelfth series shall, on the date fixed for conversion, be deemed to have been converted; from and after such conversion date dividends shall cease to accrue on such shares; and all rights of the holders of such shares (except only rights as holders of securities into which such shares shall have been converted and the right to receive certificates representing such securities and the right to receive an amount equal to dividends accrued on such shares to the date fixed for such conversion) shall terminate.
(vii) Upon the surrender by a holder of converted shares of said twelfth series of certificates representing such shares in accordance with the notice of conversion on or after the conversion date, the Corporation shall deliver to or upon the order of such holder:
(A) certificates representing whole units of the securities into which such shares of said twelfth series have been converted, such certificates to be registered in such name or names, and to be issued in such denominations, as such holder shall have specified;
(B) an amount, in cash, in lieu of fractional shares, as hereinbefore provided;
(C) an amount, in cash, equivalent to accumulated and unpaid dividends on such shares of Series A Preferred Stock to the conversion date;
(D) an amount, in cash, securities or other property, representing any other consideration to be delivered upon such conversion; and
(E) a certificate representing any shares of said twelfth series which had been represented by the certificate or certificates delivered to the Corporation in connection with such conversion but which were not converted.
(viii) The Corporation shall pay any and all documentary, stamp or similar issue or transfer taxes payable in respect of the issue or delivery of shares of Common Stock or other securities on the conversion of shares of said twelfth series; provided, however, that the Corporation shall not be required to pay any tax which may be payable in respect of any registration of transfer involved in the issue or delivery of shares of Common Stock or other securities in a name other than that of the registered holder of the shares converted, and no such issue or delivery shall be made unless and until the person requesting such issue has paid to the Corporation the amount of any such tax or has established, to the satisfaction of the Corporation, that such tax has been paid.
FOURTH: The duration of the Corporation shall be perpetual.
FIFTH: The number of Directors of the Corporation shall be such number, not to exceed eleven (11), as shall be specified from time to time by the Board of Directors in the Bylaws; provided, however, that if the right to elect a majority of the Board of Directors shall have accrued to the holders of the Preferred Stock as provided in paragraph (1) of subdivision (j) of Article THIRD, then, during such period as such holders shall have such right, the number of directors may exceed eleven (11). The Directors shall be divided into three classes, as nearly equal in number as possible. Commencing with the directors elected at the 1987 Annual Meeting of Shareholders, the term of office of the first class shall expire at the 1988 Annual Meeting of Shareholders, the term of office of the second class shall expire at the 1989 Annual Meeting of Shareholders and the term of office of the third class shall expire at the 1990 Annual Meeting of Shareholders. At each Annual Meeting of Shareholders thereafter, Directors elected to succeed those Directors whose terms expire shall be elected for a term of office to expire at the third succeeding Annual Meeting of Shareholders after their election. Notwithstanding the foregoing, Directors elected by the holders of the Preferred Stock in accordance with paragraph (1) of subdivision (j) of Article THIRD shall be elected for a term which shall expire not later than the next Annual Meeting of Shareholders. All Directors shall hold office until the expiration of their respective terms of office and until their successors shall have been elected and qualified.
Subject to the provisions of paragraph (1) of subdivision (j) of Article
THIRD, (a) any vacancy occurring in the Board of Directors may be filled by the
affirmative vote of a majority of the remaining Directors though less than a
quorum of the Board of Directors and any director so elected to fill a vacancy
shall be elected for the unexpired term of his or her predecessor in office and
(b) any directorship to be filled by reason of an increase in the number of
Directors may be filled by the Board of Directors for a term of office
continuing only until the next election of Directors by the shareholders.
No decrease in the number of directors constituting the Board of Directors shall shorten the term of any incumbent director.
Subject to the provisions of paragraph (1) of subdivision (j) of Article THIRD and the provisions of the next preceding paragraph of this Article FIFTH, any Director may be removed from office at any time, but only for cause and only by the affirmative vote of the holders of at least a majority of the voting power of all of the shares of capital stock of the Corporation entitled generally to vote in the election of directors (such stock being hereinafter in these Articles of Incorporation called "Voting Stock"), voting together as a single class, at a meeting of shareholders called expressly for that purpose; provided, however, that if less than the entire Board of Directors is to be removed, no one of the directors may be removed if the votes cast against the removal of such director would be sufficient to elect such director if then cumulatively voted at an election of the class of Directors of which such director is a part.
Notwithstanding anything contained in these Articles of Incorporation to the contrary, the provisions of this Article FIFTH shall not be altered, amended or repealed, and no provision inconsistent therewith shall be included in these Articles of Incorporation or the Bylaws of the Corporation, without the affirmative vote of the holders of at least eighty percent (80%) of the voting power of all of the shares of the Voting Stock, voting together as a single class.
SIXTH: That the principal place of business of said Corporation shall be Spokane, Spokane County, Washington.
SEVENTH: The corporate powers shall be exercised by the Board of Directors, except as otherwise provided by statute or by these Articles of Incorporation. The Board of Directors shall have power to authorize the payment of compensation to the Directors for services to the Corporation, including fees for attendance at meetings of the Board of Directors and other meetings, and to determine the amount of such compensation and fees.
The Board of Directors shall have power to adopt, alter, amend and repeal the Bylaws of the Corporation. To the extent provided under the laws of the state of Washington, any Bylaws adopted by the Directors under the powers conferred hereby may be repealed or changed by the shareholders.
An Executive Committee may be appointed by and from the Board of Directors in such manner and subject to such regulations as may be provided in the Bylaws, which committee shall have and may exercise, when the Board is not in session, all the powers of said Board which may be lawfully delegated subject to such limitations as may be provided in the Bylaws or by resolutions of the Board. The fact that the Executive Committee has acted shall be conclusive evidence that the Board was not in session at the time of such action. Additional committees may be appointed by and from the Board of Directors in such manner and subject to such regulations as may be provided in the Bylaws. Any action required or permitted by these Articles of Incorporation to be taken by the Board of Directors of the Corporation may be taken by a duly authorized committee of the Board of Directors, except as otherwise required by law.
No Director shall have any personal liability to the Corporation or its shareholders for monetary damages for his or her conduct as a Director of the Corporation; provided, however, that nothing herein shall eliminate or limit any liability which may not be so eliminated or limited under Washington law, as from time to time in effect. No amendment, modification or repeal of this paragraph shall eliminate or limit the protection afforded by this paragraph with respect to any act or omission occurring prior to the effective date thereof.
The Corporation shall, to the full extent permitted by applicable law, as from time to time in effect, indemnify any person made a party to, or otherwise involved in, any proceeding by reason of the fact that he or she is or was a Director of the Corporation against judgments, penalties, fines, settlements and reasonable expenses actually incurred by him or her in connection with such proceeding. The Corporation shall pay any reasonable expenses incurred by a Director in connection with any such proceeding in advance of the final determination thereof upon receipt from such Director of such undertakings for repayment as may be required by applicable law and a written affirmation by such director that he or she has met the standard of conduct necessary for indemnification, but without any prior determination, which would otherwise be required by Washington law, that such standard of conduct has been met. The Corporation may enter into agreements with each Director obligating the Corporation to make such indemnification and advances of expenses as are contemplated herein. Notwithstanding the foregoing, the Corporation shall not make any indemnification or advance which is prohibited by applicable law. The rights to indemnity and advancement of expenses granted herein shall continue as to any person who has ceased to be a Director and shall inure to the benefit of the heirs, executors and administrators of such a person.
A Director of the Corporation shall not be disqualified by his office from dealing or contracting with this Corporation either as a vendor, purchaser or otherwise, nor shall any transaction or contract of the Corporation be void or voidable by reason of the fact that any Director, or any firm of which any Director is a member, or any corporation of which any Director is a shareholder or Director, is in any way interested in such transaction or contract, provided that such transaction or contract is or shall be authorized, ratified, or approved, either (1) by vote of a majority of a quorum of the Board of Directors or of the Executive Committee without counting in such majority or quorum any Directors so interested, or a member of a firm so interested, or a shareholder or Director of a corporation so interested; or (2) by the written consent or by vote at a shareholders' meeting of the holders of record of a majority in number of all the outstanding shares of capital stock of the Corporation entitled to vote; nor shall any Director be liable to account to the Corporation for any profits realized by and from or through any such transaction or contract of the Corporation authorized, ratified, or approved as aforesaid by reason of the fact that he, or any firm of which he is a member, or any corporation of which he is a shareholder or a Director, was
interested in such transaction or contract. Nothing herein contained shall create any liability in the events above described or prevent the authorization, ratification or approval of such transaction or contract in any other manner approved by law.
Shareholders shall have no rights, except as conferred by statute or by the Bylaws, to inspect any book, paper or account of the Corporation.
Any property of the Corporation not essential to the conduct of its corporate business may be sold, leased, exchanged, or otherwise disposed of, by authority of its Board of Directors and the Corporation may sell, lease, exchange or otherwise dispose of, all of its property and franchises, or any of its property, franchises, corporate rights, or privileges, essential to the conduct of its corporate business and purposes upon the consent of and for such consideration and upon such terms as may be authorized by a majority of all of the Directors and the holders of two-thirds of the issued and outstanding shares of the Corporation having voting power (or, if the consent or vote of a larger number or different proportion of the Directors and/or shares is required by the laws of the state of Washington, notwithstanding the above agreement of the shareholders of the Corporation to the contrary, then upon the consent or vote of the larger number or different proportion of the Directors and/or shares so required) expressed in writing, or by vote at a meeting of holders of the shares of the Corporation having voting power duly held as provided by law, or in the manner provided by the Bylaws of the Corporation, if not inconsistent therewith.
Upon the affirmative vote of the holders of two-thirds of the issued and outstanding shares of the Corporation having voting power given at a meeting of the holders of the shares of the Corporation having voting power duly called for that purpose or when authorized by the written consent of the holders of two-thirds of the issued and outstanding shares of the Corporation having voting power and upon the vote of a majority of the Board of Directors, all of the property, franchises, rights and assets of the Corporation may be sold, conveyed, assigned and transferred as an entirety to a new company to be organized under the laws of the United States, the state of Washington or any other state of the United States, for the purpose of so taking over all the property, franchises, rights and assets of the Corporation, with the same or a different authorized number of shares of stock and with the same preferences, voting powers, restrictions and qualifications thereof as may then attach to the classes of stock of the Corporation then outstanding so far as the same shall be consistent with such laws of the United States or of Washington or of such other state (provided that the whole or any part of such stock or of any class thereof may be stock with or without a nominal or par value), the consideration for such sale and conveyance to be the assumption by such new company of all of the then outstanding liabilities of the Corporation and the issuance and delivery by the new company of shares of stock (any or all thereof either with or without nominal or par value) of such new company of the several classes into which the stock of the Corporation is then divided equal in number to the number of shares of stock of the Corporation of said several classes then outstanding. In the event of such sale, each holder of stock of the Corporation agrees so far as he may be permitted by the laws of Washington forthwith to surrender for cancellation his certificate or certificates for stock of the Corporation and to receive and accept in exchange therefor, as his full and final distributive share of the proceeds of such sale and conveyance and of the assets of the Corporation, a number of shares of the stock of the new company of the class corresponding to the class of the shares surrendered equal in number to the shares of stock of the Corporation so surrendered, and in such event no holder of any of the stock of the Corporation shall have any rights or interests in or against the Corporation, except the right upon surrender of his certificate as aforesaid properly endorsed, to receive from the Corporation certificates for such shares of said new company as herein provided. Such new company may have all or any of the powers of the Corporation and the certificate of incorporation and bylaws of such new company may contain all or any of the provisions contained in the Articles of Incorporation and Bylaws of the Corporation.
Upon the written assent, in person or by proxy, or pursuant to the affirmative vote, in person or by proxy, of the holders of a majority in number of the shares then outstanding and entitled to vote (or, if the assent or vote of a larger number or different proportion of shares is required by the laws of the state of Washington notwithstanding the above agreement of the shareholders of the Corporation to the contrary, then upon the assent or vote of the larger number or different proportion of the shares so required) (1) any or every statute of the state of Washington hereafter enacted, whereby the rights, powers or privileges of the Corporation are or may be increased, diminished, or in any way affected, or whereby the rights, powers or privileges of the shareholders of corporations organized under the law under which the Corporation is organized are increased, diminished or in any way affected or whereby effect is given to the action taken by any part less than all of the shareholders of any such corporation shall, notwithstanding any provision which may at the time be contained in these Articles of Incorporation or any law, apply to the Corporation, and shall be binding not only upon the Corporation but upon every shareholder thereof, to the same extent as if such statute had been in force at the date of the making and filing of these Articles of Incorporation and/or (2) amendments to said Articles authorized at the time of the making of such amendments by the laws of the state of Washington may be made; provided, however, that (a) the provisions of Article THIRD hereof limiting the preemptive rights of shareholders, requiring cumulative voting in the election of Directors and regarding entry in the capital stock account of consideration received upon the sale of shares of capital stock without nominal or par value and all of the provisions of Article FIFTH hereof shall not be altered, amended, repealed, waived or changed in any way, unless the holders of record of at least two-thirds of the number of shares entitled to vote then outstanding shall consent thereto in writing or affirmatively vote therefor in person or by proxy at a meeting of shareholders at which such change is duly considered.
Special meetings of the shareholders may be called by the President, the Chairman of the Board of Directors, a majority of the Board of Directors, any Executive Committee of the Board of Directors, and shall be called by the President at the request of the holders of at least two-thirds (2/3) of the voting power of all of the shares of the Voting Stock, voting together as a single class. Only those matters that are specified in the call of or request for a special meeting may be considered or voted upon at such meeting.
Notwithstanding anything contained in these Articles of Incorporation to the contrary, the paragraph in this Article SEVENTH relating to the adoption, alteration, amendment, change and repeal of the Bylaws of the Corporation, the paragraph in this Article SEVENTH relating to the calling and conduct of special meetings of the shareholders and this paragraph, and the provisions of the Bylaws of the Corporation relating to procedures for the nomination of Directors, shall not be altered, amended or repealed, and no provision inconsistent therewith shall be included in these Articles of Incorporation or the Bylaws of the Corporation, without the affirmative vote of the holders of at least eighty percent (80%) of the voting power of all the shares of the Voting Stock, voting together as a single class.
EIGHTH:
(a) In addition to any affirmative vote required by law or these Articles of Incorporation, and except as otherwise expressly provided in subdivision (b) of this Article EIGHTH:
(1) any merger or consolidation of the Corporation or any Subsidiary (as hereinafter defined) with (a) any Interested Shareholder (as hereinafter defined) or (b) any other corporation (whether or not itself an Interested Shareholder) which is, or after such merger or consolidation would be, an Affiliate (as hereinafter defined) of an Interested Shareholder; or
(2) any sale, lease, exchange, mortgage, pledge, transfer or other disposition (in one transaction or a series of transactions) to or with any Interested Shareholder or any Affiliate of any Interested Shareholder of any assets of the Corporation or any Subsidiary having an aggregate Fair Market Value of $10,000,000 or more; or
(3) the issuance or transfer by the Corporation or any Subsidiary (in one transaction or a series of transactions) of any securities of the Corporation or any Subsidiary to any Interested Shareholder or any Affiliate of any Interested Shareholder in exchange for cash, securities or other property (or a combination thereof) having an aggregate Fair Market Value of $10,000,000 or more; or
(4) the adoption of any plan or proposal for the liquidation or dissolution of the Corporation proposed by or on behalf of an Interested Shareholder or any Affiliate of any Interested Shareholder; or
(5) any reclassification of securities (including any reverse stock split), or recapitalization of the Corporation, or any merger or consolidation of the Corporation with any of its Subsidiaries or any other transaction (whether or not with or into or otherwise involving an Interested Shareholder) which has the effect, directly or indirectly, of increasing the proportionate share of the outstanding shares of any class of equity or convertible securities of the Corporation or any Subsidiary which is directly or indirectly owned by any Interested Shareholder or any Affiliate of any Interested Shareholder;
shall require the affirmative vote of the holders of at
least 80% of the voting power of all of the shares of
the Voting Stock, voting together as a single class.
Such affirmative vote shall be required notwithstanding
the fact that no vote may be required or that the vote
of a lower percentage may be specified, by law or in any
agreement with any national securities exchange or
otherwise. The term "Business Combination" as used in
this Article EIGHTH shall mean any transaction which is
referred to in any one or more of paragraphs (1) through
(5) of this subdivision (a).
(b) The provisions of subdivision (a) of this Article EIGHTH shall not be applicable to any particular Business Combination, and such Business Combination shall require only such affirmative vote, if any, as is required by law and any other provision of these Articles of Incorporation, if all of the conditions specified in either paragraph (1) or paragraph (2) below are met:
(1) The Business Combination shall have been approved by a majority of the Continuing Directors (as hereinafter defined); or
(2) All of the following conditions shall have been met:
(A) The aggregate amount of the cash and the Fair Market Value (as hereinafter defined) as of the date of the consummation of the Business Combination of consideration other than cash to be received per share by holders of Common Stock in such Business Combination shall be at least equal to the highest of the following:
(i) (if applicable) the highest per share price (including any brokerage commissions, transfer taxes and soliciting dealers' fees) paid by the Interested Shareholder for any shares of Common Stock acquired by it (x) within the two-year period immediately prior to the date of the first public announcement
of the proposal of the Business
Combination (the "Announcement Date") or
(y) in the transaction in which it
became an Interested Shareholder,
whichever is higher;
(ii) the Fair Market Value per share of Common Stock on the Announcement Date or on the date on which the Interested Shareholder became an Interested Shareholder (the "Determination Date"), whichever is higher; and
(iii) (if applicable) the price per share equal to the Fair Market Value per share of Common Stock determined pursuant to clause (A)(ii) above, multiplied by the ratio of (x) the highest per share price (including any brokerage commissions, transfer taxes and soliciting dealers' fees) paid by the Interested Shareholder for any shares of Common Stock acquired by it within the two-year period immediately prior to the Announcement Date to (y) the Fair Market Value per share of Common Stock on the first day in such two-year period upon which the Interested Shareholder acquired any shares of Common Stock.
(B) The aggregate amount of the cash and the Fair Market Value as of the date of the consummation of the Business Combination of consideration other than cash to be received per share by holders of shares of each class of outstanding Voting Stock (other than Common Stock and Institutional Voting Stock [as hereinafter defined]) shall be at least equal to the highest of the following (it being intended that the requirements of this subparagraph (B) shall be required to be met with respect to every class of outstanding Voting Stock (other than Institutional Voting Stock), whether or not the Interested Shareholder has previously acquired any shares of a particular class of Voting Stock):
(i) (if applicable) the highest per share price (including any brokerage commissions, transfer taxes and soliciting dealers' fees) paid by the Interested Shareholder for any shares of such class of Voting Stock acquired by it (x) within the two-year period immediately prior to the Announcement Date or (y) in the transaction in which it became an Interested Shareholder, whichever is higher;
(ii) (if applicable) the highest preferential amount per share to which the holders of shares of such class of Voting Stock are entitled in the event of any voluntary or involuntary dissolution, liquidation or winding up of the Corporation;
(iii) the Fair Market Value per share of such class of Voting Stock on the Announcement Date or on the Determination Date, whichever is higher; and
(iv) (if applicable) the price per share equal to the Fair Market Value per share of such class of Voting Stock determined pursuant to clause (B)(iii) above, multiplied by the ratio of (x) the highest per share price (including any brokerage commissions, transfer taxes and soliciting dealers' fees) paid by the Interested Shareholder for any shares of such class of Voting Stock acquired by it within the two-year period immediately prior to the Announcement Date to (y) the Fair Market Value per share of such class of Voting Stock on the first day in such two-year period upon which the Interested Shareholder acquired any shares of such class of Voting Stock.
(C) The consideration to be received by holders of a particular class of outstanding Voting Stock (including Common Stock) shall be in cash or in the same form as the Interested Shareholder has previously paid for shares of such class of Voting Stock. If the Interested Shareholder has paid for shares of any class of Voting Stock with varying forms of consideration, the form of consideration for such class of Voting Stock shall be either cash or the form used to acquire the largest number of shares of such class of Voting Stock previously acquired by it.
(D) After such Interested Shareholder has become an Interested Shareholder and prior to the consummation of such Business Combination:
(i) except as approved by a majority of the Continuing Directors, there shall have been no failure to declare and pay at the regular date therefor full dividends (whether or not cumulative) on the outstanding shares of stock of all classes ranking prior as to dividends to the Common Stock;
(ii) there shall have been (x) no reduction in the annual rate of dividends paid on the Common Stock (except as necessary to reflect any subdivision of the Common Stock), except as approved by a majority of the Continuing Directors, and (y) an increase in such annual rate of dividends as necessary to reflect any reclassification (including any reverse stock split), recapitalization, reorganization or any similar transaction which has the effect of reducing the number of outstanding shares of the Common Stock, unless the failure to so increase such annual rate is approved by a majority of the Continuing Directors; and
(iii) such Interested Shareholder shall not have become the beneficial owner of any additional shares of Voting Stock except as part of the transaction which results in such Interested Shareholder becoming an Interested Shareholder.
(E) After such Interested Shareholder has become an Interested Shareholder, such Interested Shareholder shall not have received the benefit, directly or indirectly (except proportionately as a shareholder), of any loans, advances, guarantees, pledges or other financial assistance or any tax credits or other tax advantages provided by the Corporation, whether in anticipation of or in connection with such Business Combination or otherwise.
(F) A proxy or information statement describing the proposed Business Combination and complying with the requirements of the Securities Exchange Act of 1934, as amended, and the rules and regulations thereunder (or any subsequent provisions replacing such Act, rules or regulations) shall be mailed to shareholders of the Corporation at least 30 days prior to the consummation of such Business Combination (whether or not such proxy or information statement is required to be mailed pursuant to such Act or subsequent provisions).
(c) For the purposes of this Article EIGHTH:
The terms "Affiliate" and "Associate" have the respective meanings ascribed to such terms in Rule 12b-2 of the General Rules and Regulations under the Securities Exchange Act of 1934, as in effect on January 1, 1987.
A person shall be deemed to be a "beneficial owner" of any Voting Stock:
(i) which such person or any of its Affiliates or Associates beneficially owns, directly or indirectly, or;
(ii) which such person or any of its Affiliates or
Associates has (a) the right to acquire (whether
such right is exercisable immediately or only
after the passage of time), pursuant to any
agreement, arrangement or understanding or upon
the exercise of conversion rights, exchange
rights, warrants or options, or otherwise, or
(b) the right to vote pursuant to any agreement,
arrangement or understanding; or
(iii) which is beneficially owned, directly or indirectly, by any other person with which such person or any of its Affiliates or Associates has any agreement, arrangement or understanding for the purpose of acquiring, holding, voting or disposing of any shares of Voting Stock.
For the purposes of determining whether a person is an Interested Shareholder the number of shares of Voting Stock deemed to be outstanding shall include all shares of which such person is the beneficial owner in accordance with the foregoing definition but shall not include any other shares of Voting Stock which may be issuable pursuant to any agreement, arrangement or understanding, or upon exercise of conversion rights, warrants or options, or otherwise.
The term "Continuing Director" means any member of the Board of Directors of the Corporation who is unaffiliated with the Interested Shareholder and was a member of the Board of Directors prior to the time that the Interested Shareholder became an Interested Shareholder, and any successor of a Continuing Director who is unaffiliated with the Interested Shareholder and is recommended to succeed a Continuing Director by a majority of Continuing Directors then on the Board of Directors.
The term "Fair Market Value" means (i) in the case of stock, the highest closing sale price during the 30-day period immediately preceding the date in question of a share of such stock on the Composite Tape for New York Stock Exchange-Listed Stocks, or, if such stock is not quoted on the Composite Tape, on the New York Stock Exchange, or, if such stock is not listed on such Exchange, on the principal United States securities exchange registered under the Securities Exchange Act of 1934, as amended, on which such stock is listed, or, if such stock is not listed on any such exchange, the highest closing bid quotation with respect to a share of such stock during the 30-day period preceding the date in question on the National Association of Securities Dealers, Inc. Automated Quotations System or any system then in use, or if no such quotations are available, the fair market value on the date in question of a share of such stock as determined by the Continuing Directors in good faith; and (ii) in the case of property other than cash or stock, the fair market value of such property on the date in question as determined by a majority of the Continuing Directors in good faith.
The term "Interested Shareholder" shall mean any person (other than the Corporation or any Subsidiary) who or which:
(i) is the beneficial owner, directly or indirectly, of more than 10% of the voting power of the outstanding Voting Stock; or
(ii) is an Affiliate of the Corporation and at any time within the two-year period immediately prior to the date in question was the beneficial owner, directly or indirectly, of 10% or more of the voting power of the then outstanding Voting Stock; or
(iii) is an assignee of or has otherwise succeeded to any shares of Voting Stock which were at any time within the two-year period immediately prior to the date in question beneficially owned by any Interested Shareholder, if such assignment or succession shall have occurred in the course of a transaction or series of transactions not involving a public offering within the meaning of the Securities Act of 1933, as amended.
The term "Institutional Voting Stock" shall mean any class of Voting Stock which was issued to and continues to be held solely by one or more insurance companies, pension funds, commercial banks, savings banks or similar financial institutions or institutional investors.
The term "person" shall mean any individual, firm, corporation or other entity.
The term "Subsidiary" shall mean any corporation of which a majority of any class of equity security is owned, directly or indirectly, by the corporation; provided, however, that for the purposes of the definition of Interested Shareholder set forth above, the term "Subsidiary" shall mean only a corporation of which a majority of each class of equity security is owned, directly or indirectly, by the Corporation.
The term "Voting Stock" has the meaning ascribed to such term in Article FIFTH.
In the event of any Business Combination in which the Corporation survives, the phrase "consideration other than cash to be received" as used in paragraphs 2(A) and 2(B) of subdivision (b) of this Article EIGHTH shall include the shares of Common Stock and/or the shares of any other class of outstanding Voting Stock retained by the holders of such shares.
(d) The Directors of the Corporation shall have the power and duty to determine for the purposes of this Article EIGHTH, on the basis of information known to them after reasonable inquiry, (A) whether a person is an Interested Shareholder, (B) the number of shares of Voting Stock beneficially owned by any person, (C) whether a person is an Affiliate or Associate of another person, (D) whether a class of Voting Stock is Institutional Voting Stock, and (E) whether the assets which are the subject of any Business Combination have, or the consideration to be received for the issuance or transfer of securities by the Corporation or any Subsidiary in any Business Combination has, an aggregate Fair Market Value of $10,000,000 or more.
Nothing contained in this Article EIGHTH shall be construed to relieve any Interested Shareholder from any fiduciary obligation imposed by law.
Notwithstanding anything contained in these Articles of Incorporation to the contrary, the provisions of this Article EIGHTH shall not be altered, amended or repealed, and no provision inconsistent therewith shall be included in these Articles of Incorporation or the Bylaws of the Corporation, without the affirmative vote of the holders of at least eighty percent (80%) of the voting power of all of the shares of the Voting Stock, voting together as a single class.
IN WITNESS WHEREOF, we have set our hands and seals under these presents, this 18th day of February 1999.
ATTEST:
(SEAL)
Certificate
STATE OF WASHINGTON
County of Spokane ss.
T. M. MATTHEWS and T. L. SYMS, being first duly sworn on oath, depose and say:
(a) That they have been authorized to execute the within Restated Articles of Incorporation by resolution of the Board of Directors adopted on the 12th day of February 1999;
(b) That these Restated Articles of Incorporation do not include an amendment to the Articles of Incorporation; and
(c) That these Restated Articles of Incorporation supersede the original Articles of Incorporation and all amendments thereto and restatements thereof.
SUBSCRIBED AND SWORN to before me this 18th day of February 1999.
(SEAL)
Exhibit 4(a)-29
AVISTA CORPORATION
TO
CITIBANK, N.A.
As Successor Trustee under
Mortgage and Deed of Trust,
dated as of June 1, 1939
TWENTY-EIGHTH SUPPLEMENTAL INDENTURE
Providing among other things for a series of bonds designated "First Mortgage Bonds, Collateral Series due 2002"
Due May 29, 2002
Dated as of September 1, 2001
TWENTY-EIGHTH SUPPLEMENTAL INDENTURE
THIS INDENTURE, dated as of the 1st day of September 2001, between AVISTA CORPORATION (formerly known as The Washington Water Power Company), a corporation of the State of Washington, whose post office address is 1411 East Mission Avenue, Spokane, Washington 99202 (the "Company"), and CITIBANK, N.A., formerly First National City Bank (successor by merger to First National City Trust Company, formerly City Bank Farmers Trust Company), a national banking association incorporated and existing under the laws of the United States of America, whose post office address is 111 Wall Street, New York, 10043 New York (the "Trustee"), as Trustee under the Mortgage and Deed of Trust, dated as of June 1, 1939 (the "Original Mortgage"), executed and delivered by the Company to secure the payment of bonds issued or to be issued under and in accordance with the provisions thereof, this indenture (the "Twenty-eighth Supplemental Indenture") being supplemental to the Original Mortgage, as heretofore supplemented and amended.
WHEREAS pursuant to a written request of the Company made in accordance with Section 103 of the Original Mortgage, Francis M. Pitt (then Individual Trustee under the Mortgage, as supplemented) ceased to be a trustee thereunder on July 23, 1969, and all of his powers as Individual Trustee have devolved upon the Trustee and its successors alone; and
WHEREAS by the Original Mortgage the Company covenanted that it would execute and deliver such further instruments and do such further acts as might be necessary or proper to carry out more effectually the purposes of the Original Mortgage and to make subject to the lien of the Original Mortgage any property thereafter acquired intended to be subject to the lien thereof; and
WHEREAS the Company has heretofore executed and delivered, in addition to the Original Mortgage, the indentures supplemental thereto, and has issued the series of bonds, set forth in Exhibit A hereto (the Mortgage, as supplemented and amended by the First through Twenty-seventh Supplemental Indentures being herein sometimes called collectively, the "Mortgage"); and
WHEREAS the Original Mortgage and the First through Twenty-sixth Supplemental Indentures have been appropriately filed or recorded in various official records in the States of Washington, California, Idaho, Montana and Oregon, as set forth in the First through Twenty-seventh Supplemental Indentures; and
WHEREAS the Twenty-seventh Supplemental Indenture, dated as of January 1, 1994, has been appropriately filed or recorded in the various official records in the States of Washington, California, Idaho, Montana and Oregon set forth in Exhibit B hereto; and
WHEREAS for the purpose of confirming or perfecting the lien of the Mortgage on certain of its properties, the Company has heretofore executed and delivered a Short Form Mortgage and Security Agreement, in multiple counterparts dated as of various dates in 1992, and such instrument has been appropriately filed or recorded in the various official records in the States of California, Montana and Oregon; and
WHEREAS in addition to the property described in the Mortgage the Company has acquired certain other property, rights and interests in property; and
WHEREAS Section 8 of the Original Mortgage provides that the form of each series of bonds (other than the First Series) issued thereunder and of the coupons to be attached to coupon bonds of such series shall be established by Resolution of the Board of Directors of the Company; that the form of such series, as established by said Board of Directors, shall specify the descriptive title of the bonds and various other terms thereof; and that such series may also contain such provisions not inconsistent with the provisions of the Mortgage as the Board of Directors may, in its discretion, cause to be inserted therein expressing or referring to the terms and conditions upon which such bonds are to be issued and/or secured under the Mortgage; and
WHEREAS Section 120 of the Original Mortgage provides, among other things, that any power, privilege or right expressly or impliedly reserved to or in any way conferred upon the Company by any provision of the Mortgage, whether such power, privilege or right is in any way restricted or is unrestricted, may be in whole or in part waived or surrendered or subjected to any restriction if at the time unrestricted or to additional restriction if already restricted, and the Company may enter into any further covenants, limitations or restrictions for the benefit of any one or more series of bonds issued thereunder, or the Company may cure any ambiguity contained therein, or in any supplemental indenture, by an instrument in writing executed and acknowledged by the Company in such manner as would be necessary to entitle a conveyance of real estate to record in all of the states in which any property at the time subject to the lien of the Mortgage shall be situated; and
WHEREAS the Company now desires to create a new series of bonds; and
WHEREAS the execution and delivery by the Company of this Twenty-eighth Supplemental Indenture, and the terms of the bonds of the Twenty-sixth Series, hereinafter referred to, have been duly authorized by the Board of Directors of the Company by appropriate Resolutions of said Board of Directors, and all things necessary to make this Twenty-eighth Supplemental Indenture a valid, binding and legal instrument have been performed;
NOW, THEREFORE, THIS INDENTURE WITNESSETH: That the Company, in consideration of the premises and of other good and valuable consideration, the receipt and sufficiency whereof are hereby acknowledged, hereby confirms the estate, title and rights of the Trustee (including without limitation the lien of the Mortgage on the property of the Company subjected thereto, whether now owned or hereafter acquired) held as security for the payment of both the principal of and interest and premium, if any, on the bonds from time to time issued under the Mortgage according to their tenor and effect and the performance of all the provisions of the Mortgage and of such bonds, and, without limiting the generality of the foregoing, hereby confirms the grant, bargain, sale, release, conveyance, assignment, transfer, mortgage, pledge, setting over and confirmation unto the Trustee, contained in the Mortgage, of all the following described properties of the Company, whether now owned or hereafter acquired, namely:
All of the property, real, personal and mixed, of every character and wheresoever situated (except any hereinafter or in the Mortgage expressly
excepted) which the Company now owns or, subject to the provisions of
Section 87 of the Mortgage, may hereafter acquire prior to the
satisfaction and discharge of the Mortgage, as fully and completely as
if herein or in the Mortgage specifically described, and including
(without in anywise limiting or impairing by the enumeration of the same
the scope and intent of the foregoing or of any general description
contained in Mortgage) all lands, real estate, easements, servitudes,
rights of way and leasehold and other interests in real estate; all
rights to the use or appropriation of water, flowage rights, water
storage rights, flooding rights, and other rights in respect of or
relating to water; all plants for the generation of electricity, power
houses, dams, dam sites, reservoirs, flumes, raceways, diversion works,
head works, waterways, water works, water systems, gas plants, steam
heat plants, hot water plants, ice or refrigeration plants, stations,
substations, offices, buildings and other works and structures and the
equipment thereof and all improvements, extensions and additions
thereto; all generators, machinery, engines, turbines, boilers, dynamos,
transformers, motors, electric machines, switchboards, regulators,
meters, electrical and mechanical appliances, conduits, cables, pipes
and mains; all lines and systems for the transmission and distribution
of electric current, gas, steam heat or water for any purpose; all
towers, mains, pipes, poles, pole lines, conduits, cables, wires, switch
racks, insulators, compressors, pumps, fittings, valves and connections;
all motor vehicles and automobiles; all tools, implements, apparatus,
furniture, stores, supplies and equipment; all franchises (except the
Company's franchise to be a corporation), licenses, permits, rights,
powers and privileges; and (except as hereinafter or in the Mortgage
expressly excepted) all the right, title and interest of the Company in
and to all other property of any kind or nature.
TOGETHER WITH all and singular the tenements, hereditaments and appurtenances belonging or in anywise appertaining to the aforesaid property or any part thereof, with the reversion and reversions, remainder and remainders and (subject to the provisions of Section 57 of the Original Mortgage) the tolls, rents, revenues, issues, earnings, income, product and profits thereof, and all the estate, right, title and interest and claim whatsoever, at law as well as in equity, which the Company now has or may hereafter acquire in and to the aforesaid property and franchises and every part and parcel thereof.
THE COMPANY HEREBY CONFIRMS that, subject to the provisions of
Section 87 of the Original Mortgage, all the property, rights, and franchises
acquired by the Company after the date thereof (except any hereinbefore or
hereinafter or in the Mortgage expressly excepted) are and shall be as fully
embraced within the lien of the Mortgage as if such property, rights and
franchises had been owned by the Company at the date of the Original Mortgage
and had been specifically described therein.
PROVIDED THAT the following were not and were not intended to be
then or now or hereafter granted, bargained, sold, released, conveyed, assigned,
transferred, mortgaged, pledged, set over or confirmed under the Mortgage and
were, are and shall be expressly excepted from the lien and operation namely:
(l) cash, shares of stock and obligations (including bonds, notes and other
securities) not hereafter specifically pledged, paid, deposited or delivered
under the Mortgage or covenanted so to be; (2) merchandise, equipment, materials
or supplies held for
the purpose of sale in the usual course of business or for consumption in the operation of any properties of the Company; (3) bills, notes and accounts receivable, and all contracts, leases and operating agreements not specifically pledged under the Mortgage or covenanted so to be; (4) electric energy and other materials or products generated, manufactured, produced or purchased by the Company for sale, distribution or use in the ordinary course of its business; and (5) any property heretofore released pursuant to any provisions of the Mortgage and not heretofore disposed of by the Company; provided, however, that the property and rights expressly excepted from the lien and operation of the Mortgage in the above subdivisions (2) and (3) shall (to the extent permitted by law) cease to be so excepted in the event that the Trustee or a receiver or trustee shall enter upon and take possession of the Mortgaged and Pledged Property in the manner provided in Article XII of the Original Mortgage by reason of the occurrence of a Completed Default as defined in said Article XII.
TO HAVE AND TO HOLD all such properties, real, personal and mixed, granted, bargained, sold, released, conveyed, assigned, transferred, mortgaged, pledged, set over or confirmed by the Company in the Mortgage as aforesaid, or intended so to be, unto the Trustee, and its successors, heirs and assigns forever.
IN TRUST NEVERTHELESS, for the same purposes and upon the same terms, trusts and conditions and subject to and with the same provisos and covenants as set forth in the Mortgage, this Twenty-eighth Supplemental Indenture being supplemental to the Mortgage.
AND IT IS HEREBY FURTHER CONFIRMED by the Company that all the terms, conditions, provisos, covenants and provisions contained in the Mortgage shall affect and apply to the property in the Mortgage described and conveyed, and to the estates, rights, obligations and duties of the Company and the Trustee and the beneficiaries of the trust with respect to said property, and to the Trustee and its successors in the trust, in the same manner and with the same effect as if the said property had been owned by the Company at the time of the execution of the Original Mortgage, and had been specifically and at length described in and conveyed to said Trustee by the Original Mortgage as a part of the property therein stated to be conveyed.
The Company further covenants and agrees to and with the Trustee and its successor or successors in such trust under the Mortgage, as follows:
ARTICLE I
TWENTY-SIXTH SERIES OF BONDS
SECTION 1. (I) There shall be a series of bonds designated "Collateral Series due 2002" (herein sometimes referred to as the "Twenty-sixth Series"), each of which shall also bear the descriptive title First Mortgage Bond, and the form thereof, which has been established by Resolution of the Board of Directors of the Company, is set forth on Exhibit C hereto. Bonds of the Twenty-sixth Series shall be issued as fully registered bonds in denominations of One Thousand Dollars and, at the option of the Company, any amount in excess thereof (the exercise of such option to be evidenced by the execution and delivery thereof) and shall be dated as in Section 10 of the Mortgage provided. Each bond of the Twenty-sixth Series shall mature on
May 29, 2002 and shall bear interest, be redeemable and have such other terms and provisions as set forth below.
(II) The Bonds of the Twenty-sixth Series shall have the following terms and characteristics:
(a) the Bonds of the Twenty-sixth Series shall be initially authenticated and delivered under the Indenture in the aggregate principal amount of $220,000,000;
(b) the Bonds of the Twenty-sixth Series shall bear interest at the rate of ten per centum (10%) per annum; interest on such bonds shall accrue from and including the date of the initial authentication and delivery thereof, except as otherwise provided in the form of bond attached hereto as Exhibit C; interest on such bonds shall be payable on each Interest Payment Date and at Maturity (as each of such terms is hereafter defined); and interest on such bonds during any period for which payment is made shall be computed in accordance with the Credit Agreement (as hereinafter defined);
(c) the principal of and premium, if any, and interest on each bond of the Twenty-sixth Series payable at Maturity shall be payable upon presentation thereof at the office or agency of the Company in the Borough of Manhattan, The City of New York, in such coin or currency as at the time of payment is legal tender for public and private debts. The interest on each bond of the Twenty-sixth Series (other than interest payable at Maturity) shall be payable directly to the registered owners thereof;
(d) the Bonds of the Twenty-sixth Series shall not be redeemable, in whole or in part, at the option of the Company;
(e) (i) the Bonds of the Twenty-sixth Series are to be issued and delivered to the Agent (as hereinafter defined) in order to provide the benefit of the lien of the Mortgage as security for the obligation of the Company under the Credit Agreement to pay the Obligations (as hereinafter defined), to the extent and subject to the limitations set forth in clauses (iii) and (iv) of this subdivision;
(ii) upon the earliest of (A) the occurrence of an Event of Default under the Credit Agreement, and further upon the condition that, in accordance with the terms of the Credit Agreement, the Commitments (as hereinafter defined) shall have been or shall have terminated and the Loans (as hereinafter defined) shall have been declared to be or shall have otherwise become due and payable immediately and the Agent shall have delivered to the Company a notice demanding redemption of the Bonds of the Twenty-sixth Series which notice states that it is being delivered pursuant to Article VII of the Credit Agreement, (B) the occurrence of an Event of Default under clause (g) or (h) of Article VII of the Credit Agreement, and (C) May 29, 2002, then all Bonds of the Twenty-sixth Series shall be redeemed or paid immediately at the principal amount thereof plus accrued interest to the date of redemption or payment;
(iii) the obligation of the Company to pay the accrued interest on Bonds of the Twenty-sixth Series on any Interest Payment Date prior to Maturity (a) shall be deemed to have been satisfied and discharged in full in the event that all amounts then due in
respect of the Obligations shall have been paid or (b) shall be deemed to remain unsatisfied in an amount equal to the aggregate amount then due in respect of the Obligations and remaining unpaid (not in excess, however, of the amount otherwise then due in respect of interest on the Bonds of the Twenty-sixth Series);
(iv) the obligation of the Company to pay the principal of and accrued interest on Bonds of the Twenty-sixth Series at or after Maturity (x) shall be deemed to have been satisfied and discharged in full in the event that all amounts then due in respect of the Obligations shall have been paid or (y) shall be deemed to remain unsatisfied in an amount equal to the aggregate amount then due in respect of the Obligations and remaining unpaid (not in excess, however, of the amount otherwise then due in respect of principal of and accrued interest on the Bonds of the Twenty-sixth Series).
(v) the Trustee shall be entitled to presume that the obligation of the Company to pay the principal of and interest on the Bonds of the Twenty-sixth Series as the same shall become due and payable shall have been fully satisfied and discharged unless and until it shall have received a written notice from the Agent, signed by an authorized officer thereof, stating that the principal of and/or interest on the Bonds of the Twenty-sixth Series has become due and payable and had not been fully paid, and specifying the amount of funds required to make such payment;
(f) no service charge shall be made for the registration of transfer or exchange of Bonds of the Twenty-sixth Series;
(g) in the event of an application by the Agent for a substituted Bond of the Twenty-sixth Series pursuant to Section 16 of the Original Mortgage, the Agent shall not be required to provide any indemnity or pay any expenses or charges as contemplated in said Section 16; and
(h) the Bonds of the Twenty-sixth Series shall have such other terms as are set forth in the form of bond attached hereto as Exhibit C.
Anything in this Supplemental Indenture or in the Bonds of the Twenty-sixth Series to the contrary notwithstanding, if, at the time of the Maturity of such Bonds, the stated aggregate principal amount of such Bonds then Outstanding shall exceed the aggregate Revolving Credit Exposures (as hereinafter defined), the aggregate principal amount of such Bonds shall be deemed to have been reduced by the amount of such excess.
(III) For all purposes of this Twenty-eighth Supplemental Indenture, except as otherwise expressly provided or unless the context otherwise requires, the terms defined below shall have the meanings specified:
"AGENT" means Toronto Dominion (Texas), Inc., in its capacity as Agent under the Credit Agreement.
"CREDIT AGREEMENT" means the Credit Agreement, dated as of May 31, 2001, among the Company, the banks parties thereto, The Bank of New York, as
Documentation Agent, and Toronto Dominion (Texas), Inc. as Agent, as amended, supplemented or otherwise modified from time to time.
"INTEREST PAYMENT DATE" means December 31, 2001 and March 30, 2002.
"MATURITY" means the date on which the principal of the Bonds of the Twenty-sixth Series becomes due and payable, whether at stated maturity, upon redemption or acceleration, or otherwise.
"COMMITMENTS", "LOANS", "OBLIGATIONS" and "REVOLVING CREDIT
EXPOSURES" shall have the meanings specified in the Credit Agreement:
A copy of the Credit Agreement is on file at the office of the Agent at 909 Fannin, Suite 1700, Houston, TX 77010 and at the office of the Company at 1411 East Mission Avenue, Spokane, WA 99202.
(IV) Upon the delivery of this Twenty-eighth Supplemental Indenture, bonds of the Twenty-sixth Series in an aggregate principal amount initially not to exceed $220,000,000 are to be issued and will be Outstanding, in addition to $203,500,000 aggregate principal amount of bonds of prior series Outstanding at the date of delivery of this Twenty-eighth Supplemental Indenture.
ARTICLE II
SECTION 1. The Company reserves the right, subject to appropriate corporate action, but without any consent or other action by holders of bonds of the Twenty-sixth Series, to make such amendments to the Mortgage as shall be necessary in order to make any or all of the amendments to the Mortgage set forth in paragraphs (1), (2), (3), (4), (5), (6) and (8) of Exhibit C to the Twenty-sixth Supplemental Indenture, dated as of April 1, 1993.
The Company confirms its reservation, contained in Article III of the Fourteenth Supplemental Indenture, dated as of April 1, 1970, of the right, subject to appropriate corporate action but without any consent or other action by holders of bonds of the Twelfth Series (as defined therein), or of any subsequently created series, to make such amendments to the Mortgage as shall be necessary in order to amend Article XVIII of the Mortgage to read as set forth in said Article III of said Fourteenth Supplemental Indenture. In addition, the Company hereby reserves the right, subject to appropriate corporate action but without any consent or other action by holders of bonds of the Twenty-sixth Series, to make such amendments to the Mortgage as shall be necessary in order to make the amendments to the Mortgage set forth in paragraph (7) of Exhibit C to the Twenty-sixth Supplemental Indenture.
SECTION 2. Notwithstanding the provisions of Section 1 of this Article II, no amendment to the Mortgage contemplated in such Section 1 shall become effective while any Bonds of the Twenty-sixth Series remain Outstanding unless the registered owner thereof shall have consented to such amendment.
ARTICLE III
MISCELLANEOUS PROVISIONS
SECTION 1. The terms defined in the Original Mortgage shall, for all purposes of this Twenty-eighth Supplemental Indenture, have the meanings specified in the Original Mortgage.
SECTION 2. The Trustee hereby confirms its acceptance of the trusts in the Original Mortgage declared, provided, created or supplemented and agrees to perform the same upon the terms and conditions in the Original Mortgage set forth, including the following:
The Trustee shall not be responsible in any manner whatsoever for or in respect of the validity or sufficiency of this Twenty-eighth Supplemental Indenture or for or in respect of the recitals contained herein, all of which recitals are made by the Company solely. Each and every term and condition contained in Article XVI of the Original Mortgage, shall apply to and form part of this Twenty-eighth Supplemental Indenture with the same force and effect as if the same were herein set forth in full, with such omissions, variations and insertions, if any, as may be appropriate to make the same conform to the provisions of this Twenty-eighth Supplemental Indenture.
SECTION 3. Whenever in this Twenty-eighth Supplemental Indenture either of the parties hereto is named or referred to, this shall, subject to the provisions of Articles XV and XVI of the Original Mortgage be deemed to include the successors and assigns of such party, and all the covenants and agreements in this Twenty-eighth Supplemental Indenture contained by or on behalf of the Company, or by or on behalf of the Trustee, or either of them, shall, subject as aforesaid, bind and inure to the respective benefits of the respective successors and assigns of such parties, whether so expressed or not.
SECTION 4. Nothing in this Twenty-eighth Supplemental Indenture, expressed or implied, is intended, or shall be construed, to confer upon, or to give to, any person, firm or corporation, other than the parties hereto and the holders of the bonds and coupons Outstanding under the Mortgage, any right, remedy or claim under or by reason of this Twenty-eighth Supplemental Indenture or any covenant, condition, stipulation, promise or agreement hereof, and all the covenants, conditions, stipulations, promises and agreements in this Twenty-eighth Supplemental Indenture contained by or on behalf of the Company shall be for the sole and exclusive benefit of the parties hereto, and of the holders of the bonds and of the coupons Outstanding under the Mortgage.
SECTION 5. This Twenty-eighth Supplemental Indenture shall be executed in several counterparts, each of which shall be an original and all of which shall constitute but one and the same instrument.
SECTION 6. The titles of the several Articles of this Twenty-eighth Supplemental Indenture shall not be deemed to be any part thereof.
IN WITNESS WHEREOF, on the __th day of September 2001, AVISTA CORPORATION has caused its corporate name to be hereunto affixed, and this instrument to be signed and sealed by its President or one of its Vice Presidents, and its corporate seal to be attested by its Corporate Secretary or one of its Assistant Corporate Secretaries for and in its behalf, all in The City of Spokane, Washington, as of the day and year first above written; and on the __th day of September 2001, CITIBANK, N.A., has caused its corporate name to be hereunto affixed, and this instrument to be signed and sealed by its President or one of its Vice Presidents or one of its Senior Trust Officers or one of its Trust Officers and its corporate seal to be attested by one of its Vice Presidents or one of its Trust Officers, all in The City of New York, New York, as of the day and year first above written.
AVISTA CORPORATION
By_________________________________________
Vice President
Attest:
Executed, sealed and delivered
by AVISTA CORPORATION
in the presence of:
CITIBANK, N.A., AS TRUSTEE
By_________________________________________
Vice President
Attest:
Executed, sealed and delivered
by CITIBANK, N.A.,
as trustee. in the presence of:
STATE OF WASHINGTON )
) ss.:
COUNTY OF SPOKANE )
On the __th day of September 2001, before me personally appeared ____________, to me known to be a Vice President of AVISTA CORPORATION, one of the corporations that executed the within and foregoing instrument, and acknowledged said instrument to be the free and voluntary act and deed of said Corporation for the uses and purposes therein mentioned and on oath stated that he was authorized to execute said instrument and that the seal affixed is the corporate seal of said Corporation.
On the __th day of September 2001, before me, _________, a Notary Public in and for the State and County aforesaid, personally appeared ___________, known to me to be a Vice President of AVISTA CORPORATION, one of the corporations that executed the within and foregoing instrument and acknowledged to me that such Corporation executed the same.
IN WITNESS WHEREOF, I have hereunto set my hand and affixed my official seal the day and year first above written.
Notary Public
STATE OF NEW YORK ) ) ss.: COUNTY OF NEW YORK ) |
On the __th day of September 2001, before me personally appeared __________, to me known to be a Vice President of CITIBANK, N.A., one of the corporations that executed the within and foregoing instrument, and acknowledged said instrument to be the free and voluntary act and deed of said Corporation for the uses and purposes therein mentioned and on oath stated that he was authorized to execute said instrument and that the seal affixed is the corporate seal of said Corporation.
On the __th day of September 2001, before me, __________, a Notary Public in and for the State and County aforesaid, personally appeared __________, known to me to be a Vice President of CITIBANK, N.A., one of the corporations that executed the within and foregoing instrument and acknowledged to me that such Corporation executed the same.
IN WITNESS WHEREOF, I have hereunto set my hand and affixed my official seal the day and year first above written.
EXHIBIT A
MORTGAGE, SUPPLEMENTAL INDENTURES
AND SERIES OF BONDS
------------------------ ---------------- --------------------------- ----------------- ------------------ MORTGAGE OR PRINCIPAL PRINCIPAL SUPPLEMENTAL SERIES AMOUNT AMOUNT INDENTURE DATED AS OF NO. DESIGNATION ISSUED OUTSTANDING ------------------------ ---------------- ----- --------------------- ----------------- ------------------ Original June 1, 1939 1 3-1/2% Series due $22,000,000 None 1964 ------------------------ ---------------- ----- --------------------- ----------------- ------------------ First October 1, 1952 2 3-3/4% Series due 30,000,000 None 1982 ------------------------ ---------------- ----- --------------------- ----------------- ------------------ Second May 1, 1953 3 3-7/8% Series due 10,000,000 None 1983 ------------------------ ---------------- ----- --------------------- ----------------- ------------------ Third December 1, None 1955 ------------------------ ---------------- ----- --------------------- ----------------- ------------------ Fourth March 15, 1957 None ------------------------ ---------------- ----- --------------------- ----------------- ------------------ Fifth July 1, 1957 4 4-7/8% Series due 30,000,000 None 1987 ------------------------ ---------------- ----- --------------------- ----------------- ------------------ Sixth January 1, 1958 5 4-1/8% Series due 20,000,000 None 1988 ------------------------ ---------------- ----- --------------------- ----------------- ------------------ Seventh August 1, 1958 6 4-3/8% Series due 15,000,000 None 1988 ------------------------ ---------------- ----- --------------------- ----------------- ------------------ Eighth January 1, 1959 7 4-3/4% Series due 15,000,000 None 1989 ------------------------ ---------------- ----- --------------------- ----------------- ------------------ Ninth January 1, 1960 8 5-3/8% Series due 10,000,000 None 1990 ------------------------ ---------------- ----- --------------------- ----------------- ------------------ Tenth April 1, 1964 9 4-5/8% Series due 30,000,000 None 1994 ------------------------ ---------------- ----- --------------------- ----------------- ------------------ Eleventh March 1,1965 10 4-5/8% Series due 10,000,000 None 1995 ------------------------ ---------------- ----- --------------------- ----------------- ------------------ Twelfth May 1, 1966 None ------------------------ ---------------- ----- --------------------- ----------------- ------------------ Thirteenth August 1, 1966 11 6 % Series due 20,000,000 None 1996 ------------------------ ---------------- ----- --------------------- ----------------- ------------------ Fourteenth April 1, 1970 12 9-1/4% Series due 20,000,000 None 2000 ------------------------ ---------------- ----- --------------------- ----------------- ------------------ Fifteenth May 1, 1973 13 7-7/8% Series due 20,000,000 None 2003 ------------------------ ---------------- ----- --------------------- ----------------- ------------------ Sixteenth February 1, 14 9-3/8% Series due 25,000,000 None 1975 2005 ------------------------ ---------------- ----- --------------------- ----------------- ------------------ Seventeenth November 1, 15 8-3/4% Series due 30,000,000 None 1976 2006 ------------------------ ---------------- ----- --------------------- ----------------- ------------------ Eighteenth June 1, 1980 None ------------------------ ---------------- ----- --------------------- ----------------- ------------------ Nineteenth January 1, 1981 16 14-1/8% Series due 40,000,000 None 1991 ------------------------ ---------------- ----- --------------------- ----------------- ------------------ Twentieth August 1, 1982 17 15-3/4% Series due 60,000,000 None 1990-1992 ------------------------ ---------------- ----- --------------------- ----------------- ------------------ Twenty-First September 1, 18 13-1/2% Series due 60,000,000 None 1983 2013 ------------------------ ---------------- ----- --------------------- ----------------- ------------------ Twenty-Second March 1, 1984 19 13-1/4% Series due 60,000,000 None 1994 ------------------------ ---------------- ----- --------------------- ----------------- ------------------ Twenty-Third December 1, 20 9-1/4% Series due 80,000,000 None 1986 2016 ------------------------ ---------------- ----- --------------------- ----------------- ------------------ Twenty-Fourth January 1, 1988 21 10-3/8% Series due 50,000,000 None 2018 ------------------------ ---------------- ----- --------------------- ----------------- ------------------ Twenty-Fifth October 1, 1989 22 7-1/8% Series due 66,700,000 None 2013 ------------------------ ---------------- ----- --------------------- ----------------- ------------------ 23 7-2/5% Series due 17,000,000 None 2016 ------------------------ ---------------- ----- --------------------- ----------------- ------------------ Twenty-Sixth April 1, 1993 24 Secured Medium-Term 250,000,000 129,500,000 Notes, Series A ($250,000,000 authorized) ------------------------ ---------------- ----- --------------------- ----------------- ------------------ Twenty-Seventh January 1, 1994 25 Secured Medium-Term 161,000,000 74,000,000 Notes, Series B ($250,000,000 authorized) ------------------------ ---------------- ----- --------------------- ----------------- ------------------ |
EXHIBIT B
FILING AND RECORDING OF
TWENTY-SEVENTH SUPPLEMENTAL INDENTURE
FILING IN STATE OFFICES
------------------------- ---------------------- ----------------------- ---------------------- FINANCING STATEMENT STATE OFFICE OF DATE DOCUMENT NUMBER ------------------------- ---------------------- ----------------------- ---------------------- Washington Secretary of State 06/27/94 94-178-0305 ------------------------- ---------------------- ----------------------- ---------------------- Idaho Secretary of State 06/27/94 B-618256 ------------------------- ---------------------- ----------------------- ---------------------- Montana Secretary of State 06/25/94 435875 ------------------------- ---------------------- ----------------------- ---------------------- Oregon Secretary of State 07/08/94 S12171 ------------------------- ---------------------- ----------------------- ---------------------- California Secretary of State 07/11/94 94141278 ------------------------- ---------------------- ----------------------- ---------------------- |
-------------------------------------------------------------------------------------------------- RECORDING IN COUNTY OFFICES -------------------------------------------------------------------------------------------------- REAL ESTATE MORTGAGE RECORDS FINANCING -------------------------------------------------- STATEMENT DOCUMENT DOCUMENT COUNTY OFFICE OF DATE NUMBER BOOK PAGE NUMBER ------------------ -------------- ----------- ------------- --------- -------------- ------------- Washington Adams Auditor 06/27/94 234983 213 529-543 N/A ------------------ -------------- ----------- ------------- --------- -------------- ------------- Asotin Auditor 06/29/94 209229 N/A N/A N/A ------------------ -------------- ----------- ------------- --------- -------------- ------------- Benton Auditor 06/27/94 94-21798 610 2026-2040 N/A ------------------ -------------- ----------- ------------- --------- -------------- ------------- Douglas Auditor 06/27/94 296880 M408 249-263 N/A ------------------ -------------- ----------- ------------- --------- -------------- ------------- Ferry Auditor 06/27/94 228205 N/A N/A N/A ------------------ -------------- ----------- ------------- --------- -------------- ------------- Franklin Auditor 06/27/94 511179 348 629-642 N/A ------------------ -------------- ----------- ------------- --------- -------------- ------------- Garfield Auditor 06/28/94 2516 N/A N/A N/A ------------------ -------------- ----------- ------------- --------- -------------- ------------- Grant Auditor 06/28/94 940628070 48 1688-1702 N/A ------------------ -------------- ----------- ------------- --------- -------------- ------------- Grays Harbor Auditor 06/27/94 940628105 94 22348-22362 N/A ------------------ -------------- ----------- ------------- --------- -------------- ------------- Klickitat Auditor 06/27/94 241798 311 240-284 N/A ------------------ -------------- ----------- ------------- --------- -------------- ------------- Lewis Auditor 06/27/94 9410393 609 407-421 N/A ------------------ -------------- ----------- ------------- --------- -------------- ------------- Lincoln Auditor 06/27/94 396426 63 3812-3826 N/A ------------------ -------------- ----------- ------------- --------- -------------- ------------- Pend Oreille Auditor 06/27/94 224002 112 1064-1078 N/A ------------------ -------------- ----------- ------------- --------- -------------- ------------- Skamania Auditor 06/27/94 119819 144 101-115 N/A ------------------ -------------- ----------- ------------- --------- -------------- ------------- Spokane Auditor 06/27/94 9406270090 1616 1627-1641 N/A ------------------ -------------- ----------- ------------- --------- -------------- ------------- Stevens Auditor 06/28/94 9407306 180 3009-3023 N/A ------------------ -------------- ----------- ------------- --------- -------------- ------------- Thurston Auditor 06/27/94 9406270205 2292 712-726 N/A ------------------ -------------- ----------- ------------- --------- -------------- ------------- Whitman Auditor 06/27/94 569835 N/A N/A N/A ------------------ -------------- ----------- ------------- --------- -------------- ------------- ------------------ -------------- ----------- ------------- --------- -------------- ------------- California El Dorado Recorder 06/27/94 38601 4297 376-390 N/A ------------------ -------------- ----------- ------------- --------- -------------- ------------- |
-------------------------------------------------------------------------------------------------- RECORDING IN COUNTY OFFICES -------------------------------------------------------------------------------------------------- REAL ESTATE MORTGAGE RECORDS FINANCING -------------------------------------------------- STATEMENT DOCUMENT DOCUMENT COUNTY OFFICE OF DATE NUMBER BOOK PAGE NUMBER ------------------ -------------- ----------- ------------- --------- -------------- ------------- Idaho Benewah Recorder 06/27/94 0197294 N/A N/A N/A ------------------ -------------- ----------- ------------- --------- -------------- ------------- Bonner Recorder 06/29/94 448003 N/A N/A N/A ------------------ -------------- ----------- ------------- --------- -------------- ------------- Boundary Recorder 06/27/94 0174119 96 79 N/A ------------------ -------------- ----------- ------------- --------- -------------- ------------- Clearwater Recorder 06/27/94 166173 N/A N/A N/A ------------------ -------------- ----------- ------------- --------- -------------- ------------- Idaho Recorder 06/27/94 375038 N/A N/A N/A ------------------ -------------- ----------- ------------- --------- -------------- ------------- Kootenai Recorder 06/28/94 1360574 N/A N/A N/A ------------------ -------------- ----------- ------------- --------- -------------- ------------- Latah Recorder 06/27/94 405741 N/A N/A N/A ------------------ -------------- ----------- ------------- --------- -------------- ------------- Lewis Recorder 06/27/94 116213 N/A N/A N/A ------------------ -------------- ----------- ------------- --------- -------------- ------------- Nez Perce Recorder 06/27/94 587858 N/A N/A N/A ------------------ -------------- ----------- ------------- --------- -------------- ------------- Shoshone Recorder 06/28/94 362587 N/A N/A N/A ------------------ -------------- ----------- ------------- --------- -------------- ------------- ------------------ -------------- ----------- ------------- --------- -------------- ------------- Montana Big Horn Clerk & 06/29/94 308833 27 482-496 Recorder ------------------ -------------- ----------- ------------- --------- -------------- ------------- Broadwater Clerk & 06/27/94 128530 29 904-918 N/A Recorder ------------------ -------------- ----------- ------------- --------- -------------- ------------- Golden Valley Clerk & 06/28/94 72280 M 7234-7248 N/A Recorder ------------------ -------------- ----------- ------------- --------- -------------- ------------- Meagher Clerk & 06/27/94 102949 F39 409-423 N/A Recorder ------------------ -------------- ----------- ------------- --------- -------------- ------------- Mineral Clerk & 06/27/94 78454 2 414B N/A Recorder ------------------ -------------- ----------- ------------- --------- -------------- ------------- Rosebud Clerk & 06/27/94 75447 83 264-278 N/A Recorder ------------------ -------------- ----------- ------------- --------- -------------- ------------- Sanders Clerk & 06/27/94 10915 Micro # N/A N/A Recorder 10915 ------------------ -------------- ----------- ------------- --------- -------------- ------------- Stillwater Clerk & 06/27/94 274663 120 83-97 N/A Recorder ------------------ -------------- ----------- ------------- --------- -------------- ------------- Treasure Clerk & 06/27/94 74352 13 346-360 N/A Recorder ------------------ -------------- ----------- ------------- --------- -------------- ------------- Wheatland Clerk & 06/27/94 95718 M 9568-8582 N/A Recorder ------------------ -------------- ----------- ------------- --------- -------------- ------------- Yellowstone Clerk & 06/27/94 1746403 N/A N/A N/A Recorder ------------------ -------------- ----------- ------------- --------- -------------- ------------- ------------------ -------------- ----------- ------------- --------- -------------- ------------- Oregon Douglas Recorder 06/27/94 94-14676 1304 970-984 N/A ------------------ -------------- ----------- ------------- --------- -------------- ------------- Jackson Recorder 06/30/94 94-24332 N/A N/A N/A ------------------ -------------- ----------- ------------- --------- -------------- ------------- Josephine Recorder 06/29/94 94-12871 170 3606-3621 N/A ------------------ -------------- ----------- ------------- --------- -------------- ------------- Klamath Recorder 06/28/94 83404 M94 19985-19999 N/A ------------------ -------------- ----------- ------------- --------- -------------- ------------- Union Recorder 06/27/94 154403 N/A N/A N/A ------------------ -------------- ----------- ------------- --------- -------------- ------------- |
EXHIBIT 12
AVISTA CORPORATION
Computation of Ratio of Earnings to Fixed Charges and Preferred Dividend Requirements Consolidated
(Thousands of Dollars)
Years Ended December 31 ------------------------------------------------------------------- 2001 2000 1999 1998 1997 ------------ ----------- ------------ ------------ ------------ Fixed charges, as defined: Interest expense $100,841 $64,846 $61,703 $66,158 $63,413 Amortization of debt expense and premium - net 5,639 3,409 3,044 2,859 2,862 Interest portion of rentals 5,140 4,324 4,645 4,301 4,354 ------------ ----------- ------------ ------------ ------------ Total fixed charges $111,620 $72,579 $69,392 $73,318 $70,629 ============ =========== ============ ============ ============ Earnings, as defined: Income from continuing operations $59,605 $101,055 $28,662 $78,316 $114,767 Add (deduct): Income tax expense 34,386 76,998 16,897 43,430 61,059 Total fixed charges above 111,620 72,579 69,392 73,318 70,629 ------------ ----------- ------------ ------------ ------------ Total earnings $205,611 $250,632 $114,951 $195,064 $246,455 ============ =========== ============ ============ ============ Ratio of earnings to fixed charges 1.84 3.45 1.66 2.66 3.49 Fixed charges and preferred dividend requirements: Fixed charges above $111,620 $72,579 $69,392 $73,318 $70,629 Preferred dividend requirements (1) 3,835 41,820 34,003 13,057 8,261 ------------ ----------- ------------ ------------ ------------ Total $115,455 $114,399 $103,395 $86,375 $78,890 ============ =========== ============ ============ ============ Ratio of earnings to fixed charges and preferred dividend requirements 1.78 2.19 1.11 2.26 3.12 |
(1) Preferred dividend requirements have been grossed up to their pre-tax level.
Exhibit 21
Avista Corporation
SUBSIDIARIES OF REGISTRANT
Subsidiary State of Incorporation ---------- ---------------------- Avista Capital, Inc. Washington Avista Advantage, Inc. Washington Avista Communications, Inc. Washington Avista Development, Inc. Washington Avista Energy, Inc. Washington Avista Laboratories, Inc. Washington Avista Power LLC Washington Avista Services, Inc. Washington Avista Turbine Power, Inc. Washington Avista Ventures, Inc. Washington Pentzer Corporation Washington WWP Receivables Corp. Washington |