UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
FORM 10-Q
(Mark One)
x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) | |
OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2003
OR
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) | |
OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number 1-3701
AVISTA CORPORATION
Registrants telephone number, including area code: 509-489-0500
Washington
91-0462470
(State or other jurisdiction of
(I.R.S. Employer
incorporation or organization)
Identification No.)
1411 East Mission Avenue, Spokane, Washington
99202-2600
(Address of principal executive offices)
(Zip Code)
Web site:
http://www.avistacorp.com
None
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 | o |
Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Act):
Yes | x | No | o |
As of October 31, 2003, 48,314,044 shares of Registrants Common Stock, no par value (the only class of common stock), were outstanding.
AVISTA CORPORATION
Index
Page No. | |||||||
|
|||||||
Part I. Financial Information:
|
|||||||
Item 1. Consolidated Financial Statements
|
|||||||
Consolidated Statements of Income and Comprehensive Income - Three Months Ended September 30, 2003 and 2002
|
3 | ||||||
Consolidated Statements of Income and Comprehensive Income - Nine Months Ended September 30, 2003 and 2002
|
4 | ||||||
Consolidated Balance Sheets - September 30, 2003 and December 31, 2002
|
5 | ||||||
Consolidated Statements of Cash Flows - Nine Months Ended September 30, 2003 and 2002
|
7 | ||||||
Schedule of Information by Business Segments - Three Months Ended September 30, 2003 and 2002
|
8 | ||||||
Schedule of Information by Business Segments - Nine Months Ended September 30, 2003 and 2002
|
9 | ||||||
Notes to Consolidated Financial Statements
|
10 | ||||||
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
|
32 | ||||||
Item 3. Quantitative and Qualitative Disclosures About Market Risk
|
67 | ||||||
Item 4. Controls and Procedures
|
67 | ||||||
Part II. Other Information:
|
|||||||
Item 1. Legal Proceedings
|
67 | ||||||
Item 6. Exhibits and Reports on Form 8-K
|
67 | ||||||
Signature
|
68 |
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
Avista Corporation
For the Three Months Ended September 30
Dollars in thousands, except per share amounts
2003 | 2002 | |||||||||
|
|
|||||||||
OPERATING REVENUES
|
$ | 224,377 | $ | 199,976 | ||||||
|
|
|
||||||||
OPERATING EXPENSES:
|
||||||||||
Resource costs
|
108,218 | 91,099 | ||||||||
Operations and maintenance
|
31,722 | 31,799 | ||||||||
Administrative and general
|
22,780 | 22,039 | ||||||||
Depreciation and amortization
|
20,114 | 17,440 | ||||||||
Taxes other than income taxes
|
13,424 | 13,991 | ||||||||
|
|
|
||||||||
Total operating expenses
|
196,258 | 176,368 | ||||||||
|
|
|
||||||||
INCOME FROM OPERATIONS
|
28,119 | 23,608 | ||||||||
|
|
|
||||||||
OTHER INCOME (EXPENSE):
|
||||||||||
Interest expense
|
(22,934 | ) | (24,870 | ) | ||||||
Capitalized interest
|
318 | 3,148 | ||||||||
|
|
|
||||||||
Net interest expense
|
(22,616 | ) | (21,722 | ) | ||||||
Other income - net
|
2,173 | 3,018 | ||||||||
|
|
|
||||||||
Total other income (expense)-net
|
(20,443 | ) | (18,704 | ) | ||||||
|
|
|
||||||||
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES
|
7,676 | 4,904 | ||||||||
INCOME TAXES
|
3,290 | 4,040 | ||||||||
|
|
|
||||||||
INCOME FROM CONTINUING OPERATIONS
|
4,386 | 864 | ||||||||
|
|
|
||||||||
DISCONTINUED OPERATIONS (Note 3):
|
||||||||||
Loss before income taxes
|
(101 | ) | (3,693 | ) | ||||||
Income tax benefit
|
35 | 1,214 | ||||||||
|
|
|
||||||||
LOSS FROM DISCONTINUED OPERATIONS
|
(66 | ) | (2,479 | ) | ||||||
|
|
|
||||||||
NET INCOME (LOSS)
|
4,320 | (1,615 | ) | |||||||
DEDUCT-Preferred stock dividend requirements
|
| 608 | ||||||||
|
|
|
||||||||
INCOME (LOSS) AVAILABLE FOR COMMON STOCK
|
$ | 4,320 | $ | (2,223 | ) | |||||
|
|
|
||||||||
Weighted-average common shares outstanding (thousands), Basic
|
48,281 | 47,866 | ||||||||
Weighted-average common shares outstanding (thousands), Diluted
|
48,691 | 47,866 | ||||||||
EARNINGS (LOSS) PER COMMON SHARE, BASIC AND DILUTED (Note 11)
|
||||||||||
Earnings per common share from continuing operations
|
$ | 0.09 | $ | 0.00 | ||||||
Loss per common share from discontinued operations
|
| (0.05 | ) | |||||||
|
|
|
||||||||
Total earnings (loss) per common share, basic and diluted
|
$ | 0.09 | ($0.05 | ) | ||||||
|
|
|
||||||||
Dividends paid per common share
|
$ | 0.125 | $ | 0.12 | ||||||
|
|
|
||||||||
COMPREHENSIVE INCOME (LOSS):
|
||||||||||
NET INCOME (LOSS)
|
$ | 4,320 | $ | (1,615 | ) | |||||
|
|
|
||||||||
OTHER COMPREHENSIVE INCOME (LOSS):
|
||||||||||
Foreign currency translation adjustment
|
25 | (154 | ) | |||||||
Unrealized loss on derivative commodity instruments - net of tax
|
(182 | ) | | |||||||
Unrealized loss on interest rate swap agreements - net of tax
|
(91 | ) | (646 | ) | ||||||
|
|
|
||||||||
TOTAL OTHER COMPREHENSIVE INCOME (LOSS)
|
(248 | ) | (800 | ) | ||||||
|
|
|
||||||||
COMPREHENSIVE INCOME (LOSS)
|
$ | 4,072 | $ | (2,415 | ) | |||||
|
|
|
The Accompanying Notes are an Integral Part of These Statements.
3
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
Avista Corporation
For the Nine Months Ended September 30
Dollars in thousands, except per share amounts
2003 | 2002 | |||||||||
|
|
|||||||||
OPERATING REVENUES
|
$ | 754,651 | $ | 746,209 | ||||||
|
|
|
||||||||
OPERATING EXPENSES:
|
||||||||||
Resource costs
|
351,090 | 356,407 | ||||||||
Operations and maintenance
|
98,504 | 93,727 | ||||||||
Administrative and general
|
73,327 | 78,225 | ||||||||
Depreciation and amortization
|
57,960 | 52,930 | ||||||||
Taxes other than income taxes
|
46,552 | 50,198 | ||||||||
|
|
|
||||||||
Total operating expenses
|
627,433 | 631,487 | ||||||||
|
|
|
||||||||
INCOME FROM OPERATIONS
|
127,218 | 114,722 | ||||||||
|
|
|
||||||||
OTHER INCOME (EXPENSE):
|
||||||||||
Interest expense
|
(69,605 | ) | (80,369 | ) | ||||||
Capitalized interest
|
677 | 7,538 | ||||||||
|
|
|
||||||||
Net interest expense
|
(68,928 | ) | (72,831 | ) | ||||||
Other income - net
|
4,387 | 14,631 | ||||||||
|
|
|
||||||||
Total other income (expense)-net
|
(64,541 | ) | (58,200 | ) | ||||||
|
|
|
||||||||
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES
|
62,677 | 56,522 | ||||||||
INCOME TAXES
|
27,136 | 26,390 | ||||||||
|
|
|
||||||||
INCOME FROM CONTINUING OPERATIONS
|
35,541 | 30,132 | ||||||||
|
|
|
||||||||
DISCONTINUED OPERATIONS (Note 3):
|
||||||||||
Loss before income taxes
|
(7,905 | ) | (9,351 | ) | ||||||
Income tax benefit
|
2,975 | 3,197 | ||||||||
|
|
|
||||||||
LOSS FROM DISCONTINUED OPERATIONS
|
(4,930 | ) | (6,154 | ) | ||||||
|
|
|
||||||||
NET INCOME BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGE
|
30,611 | 23,978 | ||||||||
CUMULATIVE EFFECT OF ACCOUNTING CHANGE (net of tax)
|
(1,190 | ) | (4,148 | ) | ||||||
|
|
|
||||||||
NET INCOME
|
29,421 | 19,830 | ||||||||
DEDUCT-Preferred stock dividend requirements
|
1,125 | 1,824 | ||||||||
|
|
|
||||||||
INCOME AVAILABLE FOR COMMON STOCK
|
$ | 28,296 | $ | 18,006 | ||||||
|
|
|
||||||||
Weighted-average common shares outstanding (thousands), Basic
|
48,202 | 47,771 | ||||||||
Weighted-average common shares outstanding (thousands), Diluted
|
48,514 | 47,842 | ||||||||
EARNINGS PER COMMON SHARE, BASIC (Note 11):
|
||||||||||
Earnings per common share from continuing operations
|
$ | 0.72 | $ | 0.60 | ||||||
Loss per common share from discontinued operations
|
(0.10 | ) | (0.13 | ) | ||||||
|
|
|
||||||||
Earnings per common share before cumulative effect of accounting change
|
0.62 | 0.47 | ||||||||
Loss per common share from cumulative effect of accounting change
|
(0.03 | ) | (0.09 | ) | ||||||
|
|
|
||||||||
Total earnings per common share, basic
|
$ | 0.59 | $ | 0.38 | ||||||
|
|
|
||||||||
EARNINGS PER COMMON SHARE, DILUTED (Note 11):
|
||||||||||
Earnings per common share from continuing operations
|
$ | 0.71 | $ | 0.60 | ||||||
Loss per common share from discontinued operations
|
(0.10 | ) | (0.13 | ) | ||||||
|
|
|
||||||||
Earnings per common share before cumulative effect of accounting change
|
0.61 | 0.47 | ||||||||
Loss per common share from cumulative effect of accounting change
|
(0.03 | ) | (0.09 | ) | ||||||
|
|
|
||||||||
Total earnings per common share, diluted
|
$ | 0.58 | $ | 0.38 | ||||||
|
|
|
||||||||
Dividends paid per common share
|
$ | 0.365 | $ | 0.36 | ||||||
|
|
|
||||||||
COMPREHENSIVE INCOME:
|
||||||||||
NET INCOME
|
$ | 29,421 | $ | 19,830 | ||||||
|
|
|
||||||||
OTHER COMPREHENSIVE INCOME (LOSS):
|
||||||||||
Foreign currency translation adjustment
|
693 | (3 | ) | |||||||
Unrealized loss on interest rate swap agreements - net of tax
|
(104 | ) | (990 | ) | ||||||
Unfunded accumulated benefit obligation - net of tax
|
12 | | ||||||||
Unrealized loss on derivative commodity instruments - net of tax
|
(182 | ) | | |||||||
Unrealized investment losses - net of tax
|
| (934 | ) | |||||||
|
|
|
||||||||
TOTAL OTHER COMPREHENSIVE INCOME (LOSS)
|
419 | (1,927 | ) | |||||||
|
|
|
||||||||
COMPREHENSIVE INCOME
|
$ | 29,840 | $ | 17,903 | ||||||
|
|
|
The Accompanying Notes are an Integral Part of These Statements.
4
CONSOLIDATED BALANCE SHEETS
Avista Corporation
Dollars in thousands
September 30, | December 31, | |||||||||
2003 | 2002 | |||||||||
|
|
|||||||||
ASSETS:
|
||||||||||
CURRENT ASSETS:
|
||||||||||
Cash and cash equivalents
|
$ | 187,184 | $ | 186,269 | ||||||
Securities held for trading
|
18,884 | | ||||||||
Accounts and notes receivable-less allowances of $46,646 and $46,909, respectively
|
261,799 | 320,836 | ||||||||
Energy commodity assets
|
198,711 | 365,477 | ||||||||
Materials and supplies, fuel stock and natural gas stored
|
26,244 | 21,746 | ||||||||
Prepayments and other current assets
|
83,954 | 73,437 | ||||||||
Assets held for sale from discontinued operations
|
| 5,900 | ||||||||
|
|
|
||||||||
Total current assets
|
776,776 | 973,665 | ||||||||
|
|
|
||||||||
NET UTILITY PROPERTY:
|
||||||||||
Utility plant in service
|
2,523,236 | 2,370,811 | ||||||||
Construction work in progress
|
36,845 | 17,581 | ||||||||
|
|
|
||||||||
Total
|
2,560,081 | 2,388,392 | ||||||||
Less: Accumulated depreciation and amortization
|
875,011 | 824,688 | ||||||||
|
|
|
||||||||
Total net utility property
|
1,685,070 | 1,563,704 | ||||||||
|
|
|
||||||||
OTHER PROPERTY AND INVESTMENTS:
|
||||||||||
Investment in exchange power-net
|
38,996 | 40,833 | ||||||||
Non-utility properties and investments-net
|
93,607 | 199,579 | ||||||||
Non-current energy commodity assets
|
284,204 | 348,309 | ||||||||
Other property and investments-net
|
15,036 | 12,702 | ||||||||
|
|
|
||||||||
Total other property and investments
|
431,843 | 601,423 | ||||||||
|
|
|
||||||||
DEFERRED CHARGES:
|
||||||||||
Regulatory assets for deferred income tax
|
132,104 | 139,138 | ||||||||
Other regulatory assets
|
26,868 | 29,735 | ||||||||
Utility energy commodity derivative assets
|
52,397 | 60,322 | ||||||||
Power and natural gas deferrals
|
176,299 | 166,782 | ||||||||
Unamortized debt expense
|
50,537 | 51,128 | ||||||||
Other deferred charges
|
29,514 | 28,236 | ||||||||
|
|
|
||||||||
Total deferred charges
|
467,719 | 475,341 | ||||||||
|
|
|
||||||||
TOTAL ASSETS
|
$ | 3,361,408 | $ | 3,614,133 | ||||||
|
|
|
The Accompanying Notes are an Integral Part of These Statements.
5
CONSOLIDATED BALANCE SHEETS (continued)
Avista Corporation
Dollars in thousands
September 30, | December 31, | |||||||||
2003 | 2002 | |||||||||
|
|
|||||||||
LIABILITIES AND STOCKHOLDERS EQUITY:
|
||||||||||
CURRENT LIABILITIES:
|
||||||||||
Accounts payable
|
$ | 281,639 | $ | 339,637 | ||||||
Energy commodity liabilities
|
160,067 | 304,781 | ||||||||
Current portion of long-term debt
|
16,283 | 71,896 | ||||||||
Current
portion of preferred stock-cumulative (17,500 shares outstanding)
|
1,750 | | ||||||||
Short-term borrowings
|
85,530 | 30,000 | ||||||||
Interest accrued
|
23,334 | 20,307 | ||||||||
Other current liabilities
|
209,139 | 172,125 | ||||||||
Liabilities of discontinued operations
|
| 2,084 | ||||||||
|
|
|
||||||||
Total current liabilities
|
777,742 | 940,830 | ||||||||
|
|
|
||||||||
LONG-TERM DEBT
|
899,048 | 902,635 | ||||||||
|
|
|
||||||||
COMPANY-OBLIGATED MANDATORILY REDEEMABLE
PREFERRED TRUST SECURITIES
|
100,000 | 0 | ||||||||
|
|
|
||||||||
PREFERRED STOCK-CUMULATIVE (subject to mandatory redemption):
|
||||||||||
10,000,000 shares authorized: $6.95 Series K
|
||||||||||
|
|
|
||||||||
297,500 shares outstanding ($100 stated value) as of September 30, 2003
|
29,750 | 0 | ||||||||
|
|
|
||||||||
OTHER NON-CURRENT LIABILITIES AND DEFERRED CREDITS:
|
||||||||||
Non-current energy commodity liabilities
|
241,155 | 314,204 | ||||||||
Utility energy commodity derivative liabilities
|
43,594 | 50,058 | ||||||||
Deferred income taxes
|
438,110 | 454,147 | ||||||||
Other non-current liabilities and deferred credits
|
102,700 | 106,218 | ||||||||
|
|
|
||||||||
Total other non-current liabilities and deferred credits
|
825,559 | 924,627 | ||||||||
|
|
|
||||||||
TOTAL LIABILITIES
|
2,632,099 | 2,768,092 | ||||||||
|
|
|
||||||||
COMPANY-OBLIGATED MANDATORILY REDEEMABLE
PREFERRED TRUST SECURITIES
|
0 | 100,000 | ||||||||
|
|
|
||||||||
PREFERRED STOCK-CUMULATIVE (subject to mandatory redemption):
|
||||||||||
10,000,000 shares authorized: $6.95 Series K
|
||||||||||
|
|
|
||||||||
332,500 shares outstanding ($100 stated value) as of December 31, 2002
|
0 | 33,250 | ||||||||
|
|
|
||||||||
COMMON EQUITY:
|
||||||||||
Common stock, no par value; 200,000,000 shares authorized;
48,310,886 and 48,044,208 shares outstanding
|
626,354 | 623,092 | ||||||||
Note receivable from employee stock ownership plan
|
(2,866 | ) | (4,146 | ) | ||||||
Capital stock expense and other paid in capital
|
(11,169 | ) | (11,928 | ) | ||||||
Accumulated other comprehensive loss
|
(19,945 | ) | (20,364 | ) | ||||||
Retained earnings
|
136,935 | 126,137 | ||||||||
|
|
|
||||||||
Total common equity
|
729,309 | 712,791 | ||||||||
|
|
|
||||||||
TOTAL STOCKHOLDERS EQUITY
|
729,309 | 746,041 | ||||||||
|
|
|
||||||||
COMMITMENTS AND CONTINGENCIES (See Notes to Consolidated Financial Statements)
|
||||||||||
TOTAL LIABILITIES AND STOCKHOLDERS EQUITY
|
$ | 3,361,408 | $ | 3,614,133 | ||||||
|
|
|
The Accompanying Notes are an Integral Part of These Statements.
6
CONSOLIDATED STATEMENTS OF CASH FLOWS
Increase (Decrease) in Cash and Cash Equivalents
Avista Corporation
For the Nine Months Ended September 30
Dollars in thousands
2003 | 2002 | ||||||||||
|
|
||||||||||
CONTINUING OPERATING ACTIVITIES:
|
|||||||||||
Net income
|
$ | 29,421 | $ | 19,830 | |||||||
Loss from discontinued operations
|
4,930 | 6,154 | |||||||||
Cumulative effect of accounting change
|
1,190 | 4,148 | |||||||||
Non-cash items included in net income:
|
|||||||||||
Depreciation and amortization
|
57,960 | 52,930 | |||||||||
Provision for deferred income taxes
|
(8,886 | ) | (37,785 | ) | |||||||
Power and natural gas cost amortizations (deferrals), net
|
(1,343 | ) | 66,518 | ||||||||
Amortization of debt expense
|
5,965 | 6,810 | |||||||||
Energy commodity assets and liabilities
|
10,998 | 80,889 | |||||||||
Other
|
(5,868 | ) | (11,682 | ) | |||||||
Changes in working capital components:
|
|||||||||||
Sale of customer accounts receivable-net
|
(25,000 | ) | (33,000 | ) | |||||||
Accounts and notes receivable
|
84,300 | 132,713 | |||||||||
Materials and supplies, fuel stock and natural gas stored
|
(4,498 | ) | (6,166 | ) | |||||||
Other current assets
|
(10,517 | ) | 14,675 | ||||||||
Accounts payable
|
(57,998 | ) | (61,606 | ) | |||||||
Other current liabilities
|
40,041 | 52,597 | |||||||||
|
|
|
|||||||||
NET CASH PROVIDED BY CONTINUING OPERATING ACTIVITIES
|
120,695 | 287,025 | |||||||||
|
|
|
|||||||||
CONTINUING INVESTING ACTIVITIES:
|
|||||||||||
Utility property construction expenditures (excluding AFUDC)
|
(64,617 | ) | (46,823 | ) | |||||||
Other capital expenditures
|
(2,686 | ) | (14,536 | ) | |||||||
Investment in securities held for trading
|
(18,884 | ) | | ||||||||
Changes in other property and investments
|
(2,554 | ) | 1,175 | ||||||||
Repayments received on notes receivable
|
1,178 | 5,078 | |||||||||
Assets acquired and investments in subsidiaries
|
(150 | ) | (352 | ) | |||||||
|
|
|
|||||||||
NET CASH USED IN CONTINUING INVESTING ACTIVITIES
|
(87,713 | ) | (55,458 | ) | |||||||
|
|
|
|||||||||
CONTINUING FINANCING ACTIVITIES:
|
|||||||||||
Increase in short-term borrowings
|
55,530 | 33,982 | |||||||||
Proceeds from issuance of long-term debt
|
44,795 | | |||||||||
Redemption and maturity of long-term debt
|
(109,582 | ) | (200,504 | ) | |||||||
Redemption of preferred stock
|
(1,575 | ) | (1,750 | ) | |||||||
Issuance of common stock
|
4,541 | 5,359 | |||||||||
Cash dividends paid
|
(18,749 | ) | (19,121 | ) | |||||||
Premiums paid for the redemption of long-term debt
|
(1,709 | ) | (9,707 | ) | |||||||
Long-term debt and short-term borrowing issuance costs
|
(2,113 | ) | (6,460 | ) | |||||||
|
|
|
|||||||||
NET CASH USED IN CONTINUING FINANCING ACTIVITIES
|
(28,862 | ) | (198,201 | ) | |||||||
|
|
|
|||||||||
NET CASH PROVIDED BY CONTINUING OPERATIONS
|
4,120 | 33,366 | |||||||||
NET CASH USED IN DISCONTINUED OPERATIONS
|
(3,205 | ) | (6,257 | ) | |||||||
|
|
|
|||||||||
NET INCREASE IN CASH AND CASH EQUIVALENTS
|
915 | 27,109 | |||||||||
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
|
186,269 | 171,097 | |||||||||
|
|
|
|||||||||
CASH AND CASH EQUIVALENTS AT END OF PERIOD
|
$ | 187,184 | $ | 198,206 | |||||||
|
|
|
|||||||||
SUPPLEMENTAL CASH FLOW INFORMATION:
|
|||||||||||
Cash paid during the period:
|
|||||||||||
Interest
|
$ | 60,532 | $ | 67,050 | |||||||
Income taxes
|
11,476 | 7,428 | |||||||||
Non-cash financing and investing activities:
|
|||||||||||
Property and equipment purchased under capital leases
|
5,312 | | |||||||||
Unrealized investment losses
|
| (1,436 | ) |
The Accompanying Notes are an Integral Part of These Statements.
7
SCHEDULE OF INFORMATION BY BUSINESS SEGMENTS
Avista Corporation
For the Three Months Ended September 30
Dollars in thousands
2003 | 2002 | |||||||||
|
|
|||||||||
OPERATING REVENUES:
|
||||||||||
Avista Utilities
|
$ | 190,988 | $ | 171,526 | ||||||
Energy Marketing and Resource Management
|
45,035 | 26,381 | ||||||||
Avista Advantage
|
5,002 | 4,419 | ||||||||
Other
|
2,959 | 3,985 | ||||||||
Intersegment eliminations
|
(19,607 | ) | (6,335 | ) | ||||||
|
|
|
||||||||
Total operating revenues
|
$ | 224,377 | $ | 199,976 | ||||||
|
|
|
||||||||
RESOURCE COSTS:
|
||||||||||
Avista Utilities
|
$ | 95,564 | $ | 80,816 | ||||||
Energy Marketing and Resource Management
|
32,261 | 16,618 | ||||||||
Intersegment eliminations
|
(19,607 | ) | (6,335 | ) | ||||||
|
|
|
||||||||
Total resource costs
|
$ | 108,218 | $ | 91,099 | ||||||
|
|
|
||||||||
OPERATIONS AND MAINTENANCE EXPENSES:
|
||||||||||
Avista Utilities
|
$ | 25,476 | $ | 24,951 | ||||||
Energy Marketing and Resource Management
|
| | ||||||||
Avista Advantage
|
2,841 | 3,235 | ||||||||
Other
|
3,405 | 3,613 | ||||||||
|
|
|
||||||||
Total operations and maintenance expenses
|
$ | 31,722 | $ | 31,799 | ||||||
|
|
|
||||||||
ADMINISTRATIVE AND GENERAL EXPENSES:
|
||||||||||
Avista Utilities
|
$ | 15,728 | $ | 14,455 | ||||||
Energy Marketing and Resource Management
|
5,248 | 4,862 | ||||||||
Avista Advantage
|
1,678 | 1,608 | ||||||||
Other
|
126 | 1,114 | ||||||||
|
|
|
||||||||
Total administrative and general expenses
|
$ | 22,780 | $ | 22,039 | ||||||
|
|
|
||||||||
DEPRECIATION AND AMORTIZATION EXPENSES:
|
||||||||||
Avista Utilities
|
$ | 18,572 | $ | 16,061 | ||||||
Energy Marketing and Resource Management
|
358 | 336 | ||||||||
Avista Advantage
|
685 | 728 | ||||||||
Other
|
499 | 315 | ||||||||
|
|
|
||||||||
Total depreciation and amortization expenses
|
$ | 20,114 | $ | 17,440 | ||||||
|
|
|
||||||||
INCOME FROM OPERATIONS (PRE-TAX):
|
||||||||||
Avista Utilities
|
$ | 22,503 | $ | 21,958 | ||||||
Energy Marketing and Resource Management
|
6,898 | 3,870 | ||||||||
Avista Advantage
|
(202 | ) | (1,152 | ) | ||||||
Other
|
(1,080 | ) | (1,068 | ) | ||||||
|
|
|
||||||||
Total income from operations
|
$ | 28,119 | $ | 23,608 | ||||||
|
|
|
||||||||
INCOME FROM CONTINUING OPERATIONS:
|
||||||||||
Avista Utilities
|
$ | 907 | $ | (461 | ) | |||||
Energy Marketing and Resource Management
|
4,844 | 2,732 | ||||||||
Avista Advantage
|
(265 | ) | (905 | ) | ||||||
Other
|
(1,100 | ) | (502 | ) | ||||||
|
|
|
||||||||
Total income from continuing operations
|
$ | 4,386 | $ | 864 | ||||||
|
|
|
||||||||
ASSETS (2002 amounts as of December 31):
|
||||||||||
Avista Utilities
|
$ | 2,287,578 | $ | 2,184,008 | ||||||
Energy Marketing and Resource Management
|
996,492 | 1,349,626 | ||||||||
Avista Advantage
|
31,496 | 31,733 | ||||||||
Other
|
45,842 | 42,866 | ||||||||
Discontinued Operations
|
| 5,900 | ||||||||
|
|
|
||||||||
Total assets
|
$ | 3,361,408 | $ | 3,614,133 | ||||||
|
|
|
||||||||
CAPITAL EXPENDITURES:
|
||||||||||
Avista Utilities
|
$ | 27,812 | $ | 13,895 | ||||||
Energy Marketing and Resource Management
|
524 | 9,861 | ||||||||
Avista Advantage
|
79 | 139 | ||||||||
Other
|
79 | 85 | ||||||||
|
|
|
||||||||
Total capital expenditures
|
$ | 28,494 | $ | 23,980 | ||||||
|
|
|
The Accompanying Notes are an Integral Part of These Statements.
8
SCHEDULE OF INFORMATION BY BUSINESS SEGMENTS
Avista Corporation
For the Nine Months Ended September 30
Dollars in thousands
2003 | 2002 | |||||||||
|
|
|||||||||
OPERATING REVENUES:
|
||||||||||
Avista Utilities
|
$ | 657,350 | $ | 648,157 | ||||||
Energy Marketing and Resource Management
|
172,719 | 126,680 | ||||||||
Avista Advantage
|
14,736 | 12,182 | ||||||||
Other
|
10,674 | 10,365 | ||||||||
Intersegment eliminations
|
(100,828 | ) | (51,175 | ) | ||||||
|
|
|
||||||||
Total operating revenues
|
$ | 754,651 | $ | 746,209 | ||||||
|
|
|
||||||||
RESOURCE COSTS:
|
||||||||||
Avista Utilities
|
$ | 330,470 | $ | 325,016 | ||||||
Energy Marketing and Resource Management
|
121,448 | 82,566 | ||||||||
Intersegment eliminations
|
(100,828 | ) | (51,175 | ) | ||||||
|
|
|
||||||||
Total resource costs
|
$ | 351,090 | $ | 356,407 | ||||||
|
|
|
||||||||
OPERATIONS AND MAINTENANCE EXPENSES:
|
||||||||||
Avista Utilities
|
$ | 78,759 | $ | 72,824 | ||||||
Energy Marketing and Resource Management
|
| | ||||||||
Avista Advantage
|
9,038 | 10,330 | ||||||||
Other
|
10,707 | 10,573 | ||||||||
|
|
|
||||||||
Total operations and maintenance expenses
|
$ | 98,504 | $ | 93,727 | ||||||
|
|
|
||||||||
ADMINISTRATIVE AND GENERAL EXPENSES:
|
||||||||||
Avista Utilities
|
$ | 48,883 | $ | 45,005 | ||||||
Energy Marketing and Resource Management
|
17,879 | 16,063 | ||||||||
Avista Advantage
|
4,927 | 5,084 | ||||||||
Other
|
1,638 | 12,073 | ||||||||
|
|
|
||||||||
Total administrative and general expenses
|
$ | 73,327 | $ | 78,225 | ||||||
|
|
|
||||||||
DEPRECIATION AND AMORTIZATION EXPENSES:
|
||||||||||
Avista Utilities
|
$ | 53,406 | $ | 48,538 | ||||||
Energy Marketing and Resource Management
|
978 | 1,031 | ||||||||
Avista Advantage
|
2,074 | 2,230 | ||||||||
Other
|
1,502 | 1,131 | ||||||||
|
|
|
||||||||
Total depreciation and amortization expenses
|
$ | 57,960 | $ | 52,930 | ||||||
|
|
|
||||||||
INCOME FROM OPERATIONS (PRE-TAX):
|
||||||||||
Avista Utilities
|
$ | 100,402 | $ | 108,348 | ||||||
Energy Marketing and Resource Management
|
31,319 | 25,299 | ||||||||
Avista Advantage
|
(1,303 | ) | (5,462 | ) | ||||||
Other
|
(3,200 | ) | (13,463 | ) | ||||||
|
|
|
||||||||
Total income from operations
|
$ | 127,218 | $ | 114,722 | ||||||
|
|
|
||||||||
INCOME FROM CONTINUING OPERATIONS:
|
||||||||||
Avista Utilities
|
$ | 19,944 | $ | 24,788 | ||||||
Energy Marketing and Resource Management
|
21,089 | 19,418 | ||||||||
Avista Advantage
|
(1,230 | ) | (3,551 | ) | ||||||
Other
|
(4,262 | ) | (10,523 | ) | ||||||
|
|
|
||||||||
Total income from continuing operations
|
$ | 35,541 | $ | 30,132 | ||||||
|
|
|
||||||||
ASSETS (2002 amounts as of December 31):
|
||||||||||
Avista Utilities
|
$ | 2,287,578 | $ | 2,184,008 | ||||||
Energy Marketing and Resource Management
|
996,492 | 1,349,626 | ||||||||
Avista Advantage
|
31,496 | 31,733 | ||||||||
Other
|
45,842 | 42,866 | ||||||||
Discontinued Operations
|
| 5,900 | ||||||||
|
|
|
||||||||
Total assets
|
$ | 3,361,408 | $ | 3,614,133 | ||||||
|
|
|
||||||||
CAPITAL EXPENDITURES:
|
||||||||||
Avista Utilities
|
$ | 64,617 | $ | 46,823 | ||||||
Energy Marketing and Resource Management
|
1,621 | 14,242 | ||||||||
Avista Advantage
|
265 | 139 | ||||||||
Other
|
800 | 155 | ||||||||
|
|
|
||||||||
Total capital expenditures
|
$ | 67,303 | $ | 61,359 | ||||||
|
|
|
The Accompanying Notes are an Integral Part of These Statements.
9
AVISTA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The accompanying consolidated financial statements of Avista Corporation (Avista Corp. or the Company) for the interim periods ended September 30, 2003 and 2002 are unaudited but, in the opinion of management, reflect all adjustments necessary for a fair statement of the results of operations for those interim periods. The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. The Consolidated Statements of Income and Comprehensive Income for the interim periods are not necessarily indicative of the results to be expected for the full year. These consolidated financial statements do not contain the detail or footnote disclosure concerning accounting policies and other matters which would be included in full fiscal year consolidated financial statements; therefore, they should be read in conjunction with the Companys audited consolidated financial statements included in the Companys Annual Report on Form 10-K for the year ended December 31, 2002 (2002 Form 10-K).
Please refer to the section Acronyms and Terms in the 2002 Form 10-K for
definitions of terms such as capacity, energy and therm.
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Business
Avista Corp. is an energy company engaged in the generation, transmission and
distribution of energy as well as other energy-related businesses. Avista
Utilities, an operating division of Avista Corp. and not a separate entity,
represents the regulated utility operations. Avista Utilities generates,
transmits and distributes electricity in parts of eastern Washington and
northern Idaho. Avista Utilities also provides natural gas distribution
service in parts of eastern Washington, northern Idaho, northeast and southwest
Oregon and in the South Lake Tahoe region of California. Avista Capital, a
wholly owned subsidiary of Avista Corp., is the parent company of all of the
subsidiary companies engaged in the other non-utility lines of business.
The Companys operations are exposed to risks including, but not limited to,
the effects of: legislation and governmental regulations; the price and supply
of purchased power, fuel and natural gas; recoverability of power and natural
gas costs; streamflow and 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.
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.
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 Marketing and Resource Management line of business operations
primarily include non-regulated electricity and natural gas marketing and
resource management activities including performance-based optimization of
energy assets owned by other entities and derivative commodity instruments such
as futures, options, swaps and other contractual arrangements. Avista
Advantage is a provider of internet-based facility intelligence, cost
management, billing and information services to retail customers throughout
North America. The Other line of business includes other investments and
operations of various subsidiaries as well as the operations of Avista Capital
on a parent company only basis.
10
AVISTA CORPORATION
Avista Utilities Operating Revenues
Operating revenues for Avista Utilities related to the sale of energy are
generally recorded when service is rendered or energy is delivered to
customers. The determination of the energy sales to individual customers is
based on the reading of their meters, which occurs on a systematic basis
throughout the month. At the end of each month, the amount of energy delivered
to customers since the date of the last meter reading is estimated and the
corresponding unbilled revenue is estimated and recorded.
Avista Energy Operating Revenues
For all periods ending on or before December 31, 2002, Avista Energy followed
Statement of Financial Accounting Standards (SFAS) No. 133, Accounting for
Derivative Instruments and Hedging Activities with respect to all contracts
entered into after October 25, 2002. Effective January 1, 2003, Avista Energy
follows SFAS No. 133 with respect to all contracts. Avista Energy reports the
net margin on derivative commodity instruments accounted for under SFAS No. 133
as operating revenues. Revenues from contracts, which are not accounted for as
derivatives under SFAS No. 133, are reported on a gross basis in operating
revenues.
Avista Energy followed the mark-to-market method of accounting for energy
contracts entered into for trading and price risk management purposes in
compliance with Emerging Issues Task Force (EITF) Issue No. 98-10, Accounting
for Contracts Involved in Energy Trading and Risk Management Activities
through December 31, 2002 for contracts entered into on or prior to October 25,
2002. Avista Energy recognized 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 settled contracts. See
Note 2 for a discussion of the rescission of EITF Issue No. 98-10 in October
2002.
Other Income-Net
Other income-net consisted of the following items for the three and nine months
ended September 30 (dollars in thousands):
Stock-Based Compensation
The Company follows the disclosure only provisions of 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.
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 three and nine months ended
September 30:
11
AVISTA CORPORATION
Goodwill
Goodwill arising from acquisitions represents the excess of the purchase price
over the estimated fair value of net assets acquired. The Company evaluates
goodwill for impairment on an annual basis or more frequently if impairment
indicators arise.
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 because (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
can be charged to and collected from customers at levels that will recover the
Companys costs. 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) are reflected as deferred charges on the balance sheet. These costs
and/or obligations are not reflected in the statement of income until the
period during which 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 with respect 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
(see Power Cost Deferrals and Recovery Mechanisms and Natural Gas Cost
Deferrals and Recovery Mechanisms below for further information), investment
in exchange power, regulatory assets for deferred income taxes, unamortized
debt expense, regulatory assets offsetting energy commodity derivative
liabilities (see Note 5 for further information), 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 September 30, 2003 and December 31, 2002 (dollars in
thousands):
Deferred credits include, among other items, regulatory liabilities offsetting
energy commodity derivative assets (see Note 5 for further information),
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 other non-current liabilities and deferred credits.
Natural Gas Benchmark Mechanism
The Idaho Public Utilities Commission (IPUC), Washington Utilities and
Transportation Commission (WUTC) and Oregon Public Utilities Commission (OPUC)
approved Avista Utilities Natural Gas Benchmark Mechanism in 1999. The
mechanism eliminated the majority of natural gas procurement operations within
Avista Utilities and consolidated natural gas procurement operations under
Avista Energy, the Companys non-regulated subsidiary. The ownership of the
natural gas assets remains with Avista Utilities; however, the assets are
managed by Avista Energy through an Agency Agreement. Avista Utilities
continues to manage natural gas procurement for its California operations,
which currently represents approximately four percent of its total natural gas
therm sales.
The Natural Gas Benchmark Mechanism provides benefits to retail customers and
allows Avista Energy to retain a portion of the benefits associated with asset
optimization and the efficiencies gained in purchasing natural gas for Avista
Utilities as part of a larger portfolio. In the first quarter of 2002, the
IPUC and the OPUC approved the continuation of the Natural Gas Benchmark
Mechanism and related Agency Agreement through March 31, 2005. In January
2003, the WUTC approved the continuation of the Natural Gas Benchmark
Mechanism and related Agency Agreement through January 29, 2004. In April
2003, the Company filed a request with the WUTC to amend certain aspects of
the Natural Gas Benchmark Mechanism and related Agency Agreement and requested
an extension
12
AVISTA CORPORATION
through March 31, 2007. In July 2003, the WUTC staff and the Public Counsel
Section of the Attorney Generals Office filed testimony recommending
termination of the Natural Gas Benchmark Mechanism in Washington at the end of
January 2004. The termination of the mechanism would likely result in natural
gas procurement operations being performed by Avista Utilities for Washington
natural gas customers. WUTC staff and Public Counsel have recommended that if
the WUTC determines that the mechanism should not be terminated, the level of
benefits provided to Avista Utilities customers be increased on a prospective
basis. During August 2003, Avista Utilities filed its response to the WUTC
staff and Public Counsel recommendations requesting the continuation of the
Natural Gas Benchmark Mechanism and further explaining the benefits that
customers receive by having natural gas procurement operations managed by
Avista Energy as part of a larger natural gas portfolio. Hearings will be
held before the WUTC during November 2003 to determine any changes and whether
or not the Natural Gas Benchmark Mechanism and related Agency Agreement will
be extended beyond January 29, 2004.
In accordance with SFAS No. 71, profits recognized by Avista Energy on natural
gas sales to Avista Utilities, including gains and losses 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
expected to be recovered through future retail rates.
Power Cost Deferrals and Recovery Mechanisms
Avista Utilities defers the recognition in the income statement of certain
power supply costs as approved by the WUTC. 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 power supply costs deferred
include certain differences between actual power supply costs incurred by
Avista Utilities and the costs included in base retail rates. This difference
in power supply costs primarily results 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). Avista
Utilities accrues interest on deferred power costs in the Washington
jurisdiction at a rate, which is adjusted semi-annually, of 8.8 percent as of
September 30, 2003. Total deferred power costs for Washington customers were
$127.8 million and $123.7 million as of September 30, 2003 and December 31,
2002, respectively.
In June 2002, the WUTC issued an order that became effective July 1, 2002. The
order provided for the restructuring of rate increases previously approved by
the WUTC totaling 31.2 percent. The general increase to base retail rates was
19.3 percent and the remaining 11.9 percent represents the continued recovery
of deferred power costs. In the June 2002 rate order, the WUTC approved the
establishment of an Energy Recovery Mechanism (ERM). The ERM replaced a series
of temporary deferral mechanisms that were in place in Washington since
mid-2000. The ERM allows Avista Utilities to increase or decrease electric
rates periodically with WUTC approval to reflect changes in power supply costs.
The ERM provides for Avista Utilities to incur the cost of, or receive the
benefit from, the first $9.0 million in annual power supply costs above or
below the amount included in base retail rates. Under the ERM, 90 percent of
annual power supply costs exceeding or below the initial $9.0 million are
deferred for future surcharge or rebate to Avista Utilities customers. The
remaining 10 percent of power supply costs are an expense of, or benefit to,
the Company.
Under the ERM, Avista Utilities agreed to make an annual filing to provide the
opportunity for the WUTC and other interested parties to review the prudence of
and audit the ERM deferred power cost transactions for the prior calendar year.
The settlement agreement establishing the ERM provided for a 90-day review
period for the filing; however, the period may be extended by agreement of the
parties or by WUTC order. Avista Utilities made its first annual filing with
the WUTC in March 2003 related to $18.4 million of deferred power costs
incurred for the period July 1, 2002 through December 31, 2002. Previous
settlement agreements established the prudence and recoverability of power
costs incurred through June 30, 2002. In May 2003, the WUTC staff, the
Industrial Customers of Northwest Utilities (ICNU), and the Public Counsel
Section of the Attorney Generals Office filed a motion requesting a
pre-hearing conference related to Avista Utilities March 2003 ERM filing. As
a result of that motion, a pre-hearing conference was held in May 2003 and an
order was issued by the WUTC establishing a hearing schedule. The WUTC staff,
the ICNU and Public Counsel filed testimony in August 2003 and Avista Utilities
filed its response to this testimony in September 2003. The WUTC staff and the
ICNU have taken the position that costs ranging from $2.0 million to $2.6
million associated with the delay of the Coyote Springs 2 project should be
disallowed and removed from the deferred power cost balance. Public Counsel
has taken the position that $14.0 million of losses on the sale of natural gas
purchased for electric generation should be disallowed and removed from the
deferred power cost balance. The Company believes that such costs were
prudently incurred and in the best interest of its electric customers. The
originally scheduled October 2003 evidentiary hearing has been delayed until
December 2003 at the request of Public Counsel.
13
AVISTA CORPORATION
Avista Utilities has a power cost adjustment (PCA) mechanism in Idaho that
allows it to modify electric rates periodically with IPUC approval to recover
or rebate a portion of the difference between actual net power supply costs and
the amount included in base retail rates. The PCA mechanism allows for the
deferral of 90 percent of the difference between certain actual net power
supply expenses and the authorized level of net power supply expenses approved
in the last Idaho general rate case. Avista Utilities accrues interest on
deferred power costs in the Idaho jurisdiction at a rate, which is adjusted
annually, of 2.0 percent on current year deferrals and 4.0 percent on carryover
balances as of September 30, 2003. The IPUC originally approved a 19.4 percent
surcharge in October 2001, which had been extended through October 2003. In
October 2003, the IPUC issued another order extending the surcharge for an
additional 60-day period while it continues to consider extending the surcharge
for an additional 12 months. The IPUC staff filed comments recommending the
continuation of the 19.4 percent PCA surcharge; however, they recommend the
disallowance of approximately $5.9 million of deferred power costs. The
recommended disallowance relates to natural gas purchased for electric
generation under long-term contracts entered into during 2001 at a time of both
high wholesale power and natural gas prices. The Company believes that such
costs were prudently incurred and in the best interest of its electric
customers and has requested that these costs be addressed in a general electric
rate case that the Company plans to file in the first quarter of 2004. The
IPUC staff comments also recommend that the Company work with the IPUC staff
and customers with respect to its risk policies. Total deferred power costs
for Idaho customers were $30.9 million and $31.5 million as of September 30,
2003 and December 31, 2002, respectively.
Natural Gas Cost Deferrals and Recovery Mechanisms
Under established regulatory practices in each respective state, Avista
Utilities is allowed to adjust its natural gas rates periodically (with
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 already included in retail rates are deferred and charged or credited
to expense when regulators approve inclusion of the cost changes in rates.
Total deferred natural gas costs were $17.6 million and $11.5 million as of
September 30, 2003 and December 31, 2002, respectively.
Intersegment Eliminations
Intersegment eliminations represent the transactions between Avista Utilities
and Avista Energy for energy commodities and services.
Reclassifications
Certain prior period amounts were reclassified to conform to current statement
format. These reclassifications were made for comparative purposes and to
conform to changes in accounting standards and have not affected previously
reported total net income or common equity.
NOTE 2. NEW ACCOUNTING STANDARDS
In June 2001, the Financial Accounting Standards Board (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 will be accreted to its present value each
period and the related capitalized costs will be depreciated over the useful
life of the related asset. Upon retirement of the asset, the Company will
either settle the retirement obligation for its recorded amount or incur a
gain or loss. The adoption of this statement on January 1, 2003 did not have
a material impact on the Companys financial condition or results of
operations.
In June 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated
with Exit or Disposal Activities which nullifies EITF Issue No. 94-3,
Liability Recognition for Certain Employee Termination Benefits and Other
Costs to Exit an Activity (including Certain Costs Incurred in a
Restructuring). This statement requires that a liability for a cost
associated with an exit or disposal activity is recognized when the liability
is incurred. Under EITF Issue No. 94-3, a liability for an exit cost was
recognized at the date of an entitys commitment to an exit plan. SFAS No. 146
also requires the initial measurement of the liability at fair value. This
statement is effective for exit or disposal activities that are initiated after
December 31, 2002. The adoption of this statement did not have any impact on
the Companys financial condition or results of operations.
14
AVISTA CORPORATION
In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based
Compensation Transition and Disclosure which amends SFAS No. 123 Accounting
for Stock-Based Compensation. This statement provides alternative methods of
transition for a voluntary change to the fair value method of accounting for
stock-based compensation. In addition, this statement 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-based compensation in a more
prominent place in the financial statements (see Note 1 Stock-based
Compensation). This statement also requires the disclosure of pro forma net
income and earnings per common share in interim as well as annual financial
statements. The alternative transition methods and annual financial statement
disclosures are effective for fiscal years ending after December 15, 2002.
Interim disclosures are required for periods ending after December 15, 2002.
The adoption of this statement affects the Companys disclosures. As the
Company has not elected to adopt the fair value method of accounting for
stock-based compensation, the adoption of this statement does not have any
impact on the Companys financial condition or results of operations.
In April 2003, the FASB issued SFAS No. 149, Amendment of Statement 133 on
Derivative Instruments and Hedging Activities. This statement amends SFAS No.
133 for decisions made: (1) as part of the Derivatives Implementation Group
process that effectively required amendments to SFAS No. 133; (2) in connection
with other FASB projects dealing with financial instruments; and (3) in
connection with implementation issues raised in relation to the application of
the definition of a derivative, (in particular, the meaning of an initial net
investment that is smaller than would be required for other types of contracts
that would be expected to have a similar response to changes in market factors,
the meaning of underlying, and the characteristics of a derivative that contain
financing components). This statement is effective for contracts entered into
or modified after June 30, 2003, except as stated below and for hedging
relationships designated after June 30, 2003. The provisions of SFAS No. 149
that relate to SFAS No. 133 implementation issues that were effective for
fiscal quarters that began prior to June 15, 2003 should continue to be applied
in accordance with their respective effective dates. In addition, certain
provisions relating to forward purchases or sales of when-issued securities
or other securities that do not yet exist, should be applied to existing
contracts as well as new contracts entered into after June 30, 2003. Avista
Utilities has entered into certain forward contracts to purchase or sell power
and natural gas used for generation that no longer meet the normal purchases
and sales exception in accordance with the provisions of SFAS No. 149. This
statement requires that substantially all new forward contracts to purchase or
sell power and natural gas used for generation, which have been entered into on
or after July 1, 2003 be recorded as assets or liabilities at market value,
with an offsetting regulatory asset or liability as authorized by regulatory
accounting orders (see Note 5). In accordance with the provisions of SFAS No.
149, Avista Utilities recorded derivative liabilities of $0.7 million as of
September 30, 2003.
In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity. This
statement requires the Company to classify certain financial instruments as
liabilities that have historically been classified as equity. This statement
requires the Company to classify as a liability financial instruments that are
subject to mandatory redemption at a specified or determinable date or upon an
event that is certain to occur. This statement is effective for financial
instruments entered into or modified after May 31, 2003, and otherwise shall be
effective at the beginning of the first interim period beginning after June 15,
2003. The restatement of financial statements for prior periods is not
permitted. The adoption of this statement during the quarter ended September
30, 2003 requires the Company to classify $100.0 million of mandatorily
redeemable preferred trust securities and $31.5 million of preferred stock
subject to mandatory redemption as liabilities on the Consolidated Balance
Sheet. The adoption of this statement also requires the Company to classify
preferred stock dividends as interest expense in the Consolidated Statements of
Income and Comprehensive Income. The adoption of this statement does not cause
the Company to fail to meet any of the covenants of the Companys $245.0
million committed line of credit, including covenants not to permit the ratio
of consolidated total debt to consolidated total capitalization of Avista
Corp. to be greater than 65 percent at the end of any fiscal quarter.
Avista Energy accounted for energy commodity trading activity in compliance
with EITF Issue No. 98-10 through December 31, 2002 for contracts entered into
on or prior to October 25, 2002. Under EITF Issue No. 98-10, Avista Energy
recognized 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 settled contracts. In October
2002, the EITF rescinded Issue No. 98-10. As such, Avista Energy is required
to account for energy trading contracts that meet the definition of a
derivative at market value in compliance with SFAS No. 133. This statement
now applies to all contracts as of January 1, 2003. Contracts not meeting the
definition of a derivative are no longer accounted for at market value and
include Avista Energys Agency Agreement with Avista Utilities, natural gas
storage contracts, tolling agreements and natural gas transportation
agreements. The transition from EITF Issue No. 98-10 to accrual based
accounting resulted in the adjustment of the contracts not considered
derivatives, from their market value to their cost basis. Any gains or losses
on contracts that are not considered derivatives are recognized
15
AVISTA CORPORATION
when the contracts are settled or realized. The Company anticipates that the
changes will primarily affect the timing of the recognition of income or loss
in earnings, and not change the underlying economics or cash flows of
transactions entered into by Avista Energy. The transition to SFAS No. 133
increased the volatility in reported earnings due to the fact that certain
contracts, which are not considered derivatives, economically hedge contracts
that are accounted for as derivative instruments at market value under SFAS
No. 133. During September 2003, Avista Energy implemented hedge accounting
for certain transactions (see Note 6). This should partially mitigate the
effects from the transition to SFAS No. 133 and reduce the volatility of
reporting earnings on a prospective basis. On January 1, 2003, Avista Energy
recorded as a cumulative effect of accounting change a charge of $1.2 million
(net of tax) related to the transition from EITF Issue No. 98-10 to SFAS No.
133.
In November 2002, the FASB issued Interpretation No. 45, Guarantors
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others. This interpretation clarifies the
requirements of SFAS No. 5, Accounting for Contingencies relating to a
guarantors accounting for, and disclosure of, the issuance of certain types of
guarantees. This interpretation requires that upon issuance of a guarantee,
the guarantor must recognize a liability for the fair value of the obligation
it assumes under that guarantee. The initial recognition and measurement
provisions of this interpretation are to be applied on a prospective basis to
guarantees issued or modified subsequent to December 31, 2002 and did not have
a material impact on the Companys financial condition or results of
operations. The disclosure requirements of this interpretation are effective
for financial statements issued for periods that end after December 15, 2002.
In October 2003, the FASB delayed the implementation of Interpretation No. 46,
Consolidation of Variable Interest Entities from the third quarter of 2003 to
the fourth quarter of 2003. In general, a variable interest entity does not
have equity investors with voting rights or it has equity investors that do not
provide sufficient financial resources for the entity to support its
activities. Variable interest entities are commonly referred to as special
purpose entities or off-balance sheet structures; however, this FASB
interpretation applies to a broader group of entities. This interpretation
requires a variable interest entity to be consolidated by the primary
beneficiary of that entity. The primary beneficiary is subject to a majority
of the risk of loss from the variable interest entitys activities or it is
entitled to receive a majority of the entitys residual returns. The
interpretation also requires disclosure of variable interest entities that a
company is not required to consolidate but in which it has a significant
variable interest. The consolidation requirements of this interpretation apply
immediately to variable interest entities created after January 31, 2003 and
apply to existing entities for the first fiscal year or interim period ending
after December 15, 2003. Certain disclosure requirements apply to all
financial statements issued after January 31, 2003, regardless of when the
variable interest entity was established.
FASB Interpretation No. 46 will require the Company to consolidate WP Funding
LP effective for the period ended December 31, 2003. WP Funding LP is an
entity that was formed in 1993 for the purpose of acquiring the 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 and 3
percent represented equity. The Company operates the Rathdrum CT and leases it
from WP Funding LP. The total amount of WP Funding LP debt outstanding was
$54.6 million as of September 30, 2003. The lease term expires in February
2020; however, the current debt matures in October 2005 and will need to be
refinanced at that time. As of September 30, 2003, the book value of the debt
and equity of WP Funding LP exceeds the book value of the Rathdrum CT by $16.1
million. In accordance with regulatory accounting practices, the Company will
record this amount as a regulatory asset upon the consolidation of WP Funding
LP. The addition of the Rathdrum CT to Avista Utilities generation resource
base, which entered commercial operation in 1995, was reviewed in previous
state regulatory filings with the WUTC and IPUC. Based on September 30, 2003
amounts, the consolidation of WP Funding LP will increase long-term debt by
$54.6 million, net utility plant by $40.2 million, regulatory assets by $16.1
million and other liabilities by $1.7 million (representing minority interest).
The adoption of this FASB interpretation will not cause the Company to fail to
meet any of the covenants of the Companys $245.0 million committed line of
credit, including covenants not to permit the ratio of consolidated total
debt to consolidated total capitalization of Avista Corp. to be greater than
65 percent at the end of any fiscal quarter.
Based on current interpretations, the Company believes that FASB Interpretation
No. 46 will result in the Company no longer including Avista Capital I and
Avista Capital II in its consolidated financial statements for the period ended
December 31, 2003. Avista Capital I and Avista Capital II are business trusts
formed in 1997 for the purpose of issuing a combined $110.0 million of
preferred trust securities to third parties and $3.4 million of common trust
securities to Avista Corp. The sole assets of Avista Capital I and Avista
Capital II are $113.4 million of junior subordinated deferrable interest
debentures of Avista Corp. Avista Capital I and Avista Capital II are
considered variable interest entities under the provisions of FASB
Interpretation No. 46. As Avista Corp. is not the primary
16
AVISTA CORPORATION
beneficiary, these entities will no longer be included in Avista Corp.s
consolidated financial statements. The removal of Avista Capital I and Avista
Capital II will result in a decrease in preferred trust securities of $100.0
million, an increase in long-term debt of $113.4 million and an increase in
other property and investments of $13.4 million (representing the $3.4 million
of common trust securities and $10.0 million of preferred trust securities
purchased by Avista Corp. in 2000).
NOTE 3. DISCONTINUED OPERATIONS
In July 2003, Avista Corp. announced an investment of $6.0 million by a group
of private equity investors in a new entity, AVLB, Inc., which acquired the
assets previously held by Avista Corp.s fuel cell manufacturing and
development subsidiary, Avista Labs. In September 2003, AVLB, Inc. (doing
business under the name Avista Labs) received an additional investment by
private equity investors of $6.2 million. This investment relieved Avista
Corp. of its commitment to provide additional funding of up to $1.5 million to
AVLB, Inc. Avista Corp. has an ownership interest of approximately 17.5
percent in AVLB, Inc., with the opportunity but no further obligation to fund
or invest in this business. Avista Corp.s investment in AVLB, Inc. is
accounted for under the cost method.
In September 2001, the Company reached a decision that it would dispose of
substantially all of the assets of Avista Communications. The divestiture of
the operating assets of Avista Communications was complete by the end of 2002.
Revenues for Avista Communications were $0.5 million and $3.5 million for the
three and nine months ended September 30, 2002, respectively.
Amounts reported as discontinued operations for the three and nine months
ended September 30, 2003 represent the operations of Avista Labs. Amounts
reported as discontinued operations for the three and nine months ended
September 30, 2002 represents the operations of Avista Labs and Avista
Communications as follows:
NOTE 4. ACCOUNTS RECEIVABLE SALE
In 1997, Avista Receivables Corp. (ARC), formerly known as WWP Receivables
Corp., 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. On May 29,
2002, ARC, the Company and a third-party financial institution entered into a
three-year agreement whereby ARC can sell without recourse, on a revolving
basis, up to $100.0 million of those receivables. ARC 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
September 30, 2003 and December 31, 2002, $40.0 million and $65.0 million,
respectively, in accounts receivables were sold under this revolving
agreement.
NOTE 5. UTILITY ENERGY COMMODITY DERIVATIVE ASSETS AND LIABILITIES
SFAS No. 133, as amended by SFAS No. 138, establishes accounting and reporting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts, and for hedging activities. It requires the
recording of all derivatives as either assets or liabilities on 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.
Avista Utilities enters into forward contracts to purchase or sell energy.
Under these forward contracts, Avista Utilities commits to purchase or sell a
specified amount of energy at a specified time, or during a specified period,
in the future. Certain of these forward contracts are considered derivative
instruments. Avista Utilities also records
17
AVISTA CORPORATION
derivative commodity assets and liabilities for over-the-counter and
exchange-traded derivative instruments as well as certain long-term contracts.
These contracts are entered into to manage Avista Utilities loads and
resources as discussed in Note 6. In conjunction with the issuance of SFAS No.
133, the WUTC and the IPUC issued accounting orders authorizing Avista
Utilities to offset any derivative assets or liabilities with a regulatory
asset or liability. This accounting treatment is intended to defer the
recognition of mark-to-market gains and losses on energy commodity transactions
until the period of settlement. The order provides for Avista Utilities to not
recognize the unrealized gain or loss on utility derivative commodity
instruments in the Consolidated Statements of Income and Comprehensive Income.
Such realized gains or losses are recognized in the period of settlement
subject to current or future recovery in retail rates. Realized gains and
losses are reflected as adjustments through purchased gas cost adjustments, the
ERM and the PCA mechanism.
Prior to the adoption of SFAS No. 149 on July 1, 2003, Avista Utilities
believed substantially all of its 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. See Note 2 for a discussion of prospective changes that impact
the accounting for contracts when entered on or after July 1, 2003, in
accordance with SFAS No. 149. In accordance with the provisions of SFAS No.
149, Avista Utilities recorded derivative liabilities of $0.7 million as of
September 30, 2003. Contracts that are not considered derivatives under SFAS
No. 133 are generally accounted for at cost until they are settled, unless
there is a decline in the fair value of the contract that is determined to be
other than temporary.
As of September 30, 2003, the utility derivative commodity asset balance was
$52.4 million, the derivative commodity liability balance was $43.6 million
and the offsetting net regulatory liability was $8.8 million. As of December
31, 2002, the utility derivative commodity asset balance was $60.3 million,
the derivative commodity liability balance was $50.1 million and the
offsetting net regulatory liability was $10.2 million. Utility derivative
assets and liabilities, as well as the offsetting net regulatory asset or
liability, can change significantly from period to period due to the
settlement of contracts, the entering of new contracts and changes in
commodity prices. The derivative commodity asset balance is included in
Deferred Charges Utility energy commodity derivative assets and the
derivative commodity liability balance is included in Non-Current Liabilities
and Deferred Credits Utility energy commodity derivative liabilities on the
Consolidated Balance Sheet. The offsetting net regulatory asset is included
in Deferred Charges Other regulatory assets and the offsetting net
regulatory liability is included in Non-Current Liabilities and Deferred
Credits Other non-current liabilities and deferred credits on the
Consolidated Balance Sheet.
Interpretations that may be issued by the Derivatives Implementation Group, a
task force created to assist the 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.
NOTE 6. ENERGY COMMODITY MANAGEMENT AND 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 risks inherent in these
activities. The Company has a Risk Management Committee, separate from the
units that create such risk exposure, that is 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 engages in an ongoing process of resource optimization which
involves the pursuit of economic resources to serve load obligations
and using existing resources to capture available economic value. Avista
Utilities sells and purchases wholesale electric capacity and energy to and
from utilities and other entities as part of the process of acquiring resources
to serve its retail and wholesale load obligations. These transactions range
from a term as short as one hour up to and including long-term contracts that
extend beyond one year. 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
18
AVISTA CORPORATION
market information and experience. On the basis of these continuing
projections, Avista Utilities makes purchases and sales of energy on an annual,
quarterly, monthly, daily and hourly basis to match expected resources to
expected energy requirements. Resource optimization also includes transactions
such as purchasing fuel to run thermal generation and, when economic, selling
fuel and substituting wholesale market purchases for the operation of Avista
Utilities own resources, as well as other wholesale transactions to capture
the value of available generation and transmission resources. This
optimization process includes hedging transactions as a means of managing
risks.
Avista Utilities manages the impact of fluctuations in electric energy prices
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
manage the exposure to market risk. Avista Energy is responsible for the daily
management of natural gas supplies to meet the requirements of Avista
Utilities customers in the states of Washington, Idaho and Oregon (see
description of Natural Gas Benchmark Mechanism in Note 1). Avista Utilities
continues to manage natural gas procurement for its California operations,
which currently represents approximately four percent of its total natural gas
therm sales.
The Risk Management Committee has limited the types of commodity instruments
Avista Utilities may use 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 energy resources owned or under contract by
Avista Utilities.
Avista Energy
Avista Energy is an electricity and natural gas marketing and resource
management business. Avista Energy focuses on asset-backed optimization of
combustion turbines and hydroelectric assets owned by other entities, long-term
electric supply contracts, natural gas storage, and electric and natural gas
transmission and transportation arrangements. Avista Energy is also involved
in the trading of electricity and natural gas, including derivative commodity
instruments.
Effective January 1, 2003, Avista Energy accounts for energy trading contracts
that meet the definition of a derivative in compliance with SFAS No. 133.
Contracts not meeting the definition of a derivative are accounted for on an
accrual basis. Avista Energy accounted for energy commodity trading activity in
compliance with EITF Issue No. 98-10 through December 31, 2002 for contracts
entered into on or prior to October 25, 2002. In October 2002, the EITF
rescinded Issue No. 98-10, which required Avista Energy to adopt SFAS No. 133.
See Note 2 for further details.
Avista Energy purchases natural gas and electricity from producers and energy
marketing and trading companies. Its customers include commercial and
industrial end-users, electric utilities, natural gas distribution companies,
and energy marketing and 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 can experience
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.
Avista Energy measures the risk in its electric and natural gas portfolio daily
utilizing a Value-at-Risk (VAR) model, monitoring its risk in comparison to
established thresholds. VAR measures the expected portfolio loss under
hypothetical adverse price movements over a given time interval within 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.
Derivative commodity instruments sold and purchased by Avista Energy include:
forward contracts, which involve physical delivery of an energy commodity;
futures contracts, which involve the buying or selling of natural gas or
electricity 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
19
AVISTA CORPORATION
commodities at a fixed price. Foreign currency risks are primarily related to
Canadian exchange rates and are managed using standard instruments available in
the foreign currency markets.
Avista Energys derivative commodity instruments accounted for under SFAS No.
133 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 electric
derivative commodity instruments, these market prices are generally available
through two years. For natural gas derivative commodity instruments, these
market prices are generally available through three years. For longer-term
positions and certain short-term positions for which market prices are not
available, a model to estimate forward price curves is utilized. Avista Energy
reports the net margin on derivative commodity instruments accounted for under
SFAS No. 133 as operating revenues. Revenues from contracts, which are not
accounted for as derivatives under SFAS No. 133, are reported on a gross basis
in operating revenues. Costs from contracts, which are not accounted for as
derivatives under SFAS No. 133, are reported on a gross basis in resource
costs. 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.
Avista Energy implemented hedge accounting in accordance with SFAS No. 133
during the third quarter of 2003. Specific natural gas and electric trading
derivative contracts have been designated as hedging instruments in cash flow
hedging relationships. The hedge strategies represent cash flow hedges of the
variable price risk associated with expected purchases of natural gas and sales
of electricity. These designated hedging instruments represent hedges of
variable price exposures generated from certain contracts, which do not qualify
as derivatives under SFAS No. 133. For all derivatives designated as cash flow
hedges, Avista Energy documents the relationship between the hedging instrument
and the hedged item (forecasted purchases and sales of power and natural gas),
as well as the risk management objective and strategy for using the hedging
instrument. Avista Energy assesses whether change in the value of the
designated derivative is highly effective in achieving offsetting cash flows
attributable to the hedged item, both at the inception of the hedge and on an
ongoing basis. Any change in the fair value of the designated derivative that
is effective, is recorded in accumulated other comprehensive income or loss,
while changes in fair value that is not effective is recognized currently in
earnings as operating revenues. Amounts recorded in accumulated other
comprehensive income or loss are recognized in earnings during the period that
the hedged item is recognized in earnings.
During the third quarter of 2003, a loss of $0.1 million related to hedge
ineffectiveness was recorded in earnings as a reduction of operating revenues.
As of September 30, 2003, there was a loss of $0.2 million (net of tax) in
accumulated other comprehensive loss related to designated cash flow hedges,
while no amounts in accumulated other comprehensive loss were recognized in
earnings during the third quarter. Of the amount in accumulated other
comprehensive loss as of September 30, 2003, $0.1 million is expected to be
recognized in earnings during the next 12 months. The actual amounts that will
be recognized in earnings during the next 12 months will vary from the expected
amounts as a result of changes in market prices. The maximum term of the
designated hedging instruments was 18 months.
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 September 30, 2003 are set forth below
(in thousands of mmBTUs and MWhs):
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AVISTA CORPORATION
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.
Estimated Fair Value
The estimated fair value of Avista Energys derivative
commodity instruments outstanding as of September 30, 2003, and the average
estimated fair value of those instruments held during the nine months ended
September 30, 2003, are set forth below (dollars in thousands):
The weighted average term of Avista Energys electric derivative commodity
instruments as of September 30, 2003 was approximately 6 months. The weighted
average term of Avista Energys natural gas derivative commodity instruments as
of September 30, 2003 was approximately 3 months. The change in the estimated
fair value position of Avista Energys energy commodity portfolio, net of
reserves for credit and market risk for the nine months ended September 30,
2003 was an unrealized loss of $11.0 million and is included in the
Consolidated Statements of Income and Comprehensive Income in operating
revenues. The change in the fair value position for the nine months ended
September 30, 2002 was an unrealized loss of $87.4 million.
Market Risk
Market risk is, in general, the risk of fluctuation in the market price of the
commodity being traded and is influenced primarily by supply and demand.
Market risk includes the fluctuation in the market price of associated
derivative commodity instruments. Market risk is influenced to the extent that
the performance or nonperformance by market participants of their contractual
obligations and commitments affect the supply of, or demand for, the commodity.
Avista Utilities and Avista Energy manage, on a portfolio basis and on a
delivery point basis, the market risks inherent in their activities subject to
parameters established by the Companys Risk Management Committee. These
parameters include but are not limited to overall portfolio and delivery point
volumetric limits. 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 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. These policies include an evaluation of
the financial condition and credit ratings of counterparties, collateral
requirements or other credit enhancements, such as letters of credit or parent
company guarantees, and the use of standardized agreements that allow for the
netting or offsetting of positive and negative exposures associated with a
single counterparty.
Avista Energy has concentrations of suppliers and customers in the electric and
natural gas industries including electric utilities, natural gas distribution
companies, and other energy marketing and trading companies. In addition,
Avista Energy has concentrations of credit risk related to geographic location
as Avista Energy operates primarily in the western United States and western
Canada. These concentrations of counterparties and concentrations of
geographic location may impact Avista Energys overall exposure to credit risk,
either positively or negatively, in that the counterparties may be similarly
affected by changes in economic, regulatory or other conditions.
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AVISTA CORPORATION
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 transactions. These counterparties may seek assurance of
performance in the form of letters of credit, prepayment or cash deposits, and,
in the case of Avista Energy, parent company (Avista Capital) 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, a change in regulatory requirements, forced outages at
generating plants and disruptions to information systems and other
administrative tools required for normal operations. 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.
The emergence of terrorism threats, both domestic and foreign, is a risk to the
entire utility industry, including Avista Utilities. Potential disruptions to
operations or destruction of facilities from terrorism or other
malicious acts are not readily
determinable. The Company has taken various steps to mitigate terrorism risks
and to prepare contingency plans in the event that its facilities are targeted.
NOTE 7. SHORT-TERM BORROWINGS
On May 13, 2003, the Company amended its committed line of credit with various
banks to increase the amount to $245.0 million from $225.0 million and extend
the expiration date to May 11, 2004. The Company can request the issuance of
up to $75.0 million in letters of credit under the amended committed line of
credit. As of September 30, 2003 and December 31, 2002, the Company had $85.0
million and $30.0 million, respectively, of borrowings outstanding under this
committed line of credit. As of September 30, 2003 and December 31, 2002,
there were $11.0 million and $14.3 million in letters of credit outstanding,
respectively. The committed line of credit is secured by $245.0 million of
non-transferable first mortgage bonds of the Company issued to the agent bank.
Such first mortgage bonds would only become due and payable in the event, and
then only to the extent, that the Company defaults on its obligations under
the committed line of credit.
The committed line of credit agreement contains customary covenants and default
provisions, including covenants not to permit the ratio of consolidated total
debt (not including preferred securities) to consolidated total
capitalization of Avista Corp. to be greater than 65 percent at the end of any
fiscal quarter. As of September 30, 2003, the Company was in compliance with
this covenant with a ratio of 53.8 percent. The committed line of credit also
has a covenant requiring the ratio of earnings before interest, taxes,
depreciation and amortization to interest expense of Avista Utilities for
the twelve-month period ending September 30, 2003 to be greater than 1.6 to 1.
As of September 30, 2003, the Company was in compliance with this covenant with
a ratio of 2.18 to 1.
On July 25, 2003, Avista Energy and its subsidiary, Avista Energy Canada, Ltd.,
as co-borrowers, entered into a committed credit agreement with a group of
banks in the aggregate amount of $110.0 million expiring July 23, 2004,
replacing a previous uncommitted credit agreement that had an extended
expiration date of July 31, 2003. This new committed credit facility provides
for the issuance of letters of credit to secure contractual obligations to
counterparties. This facility is guaranteed by Avista Capital and secured by
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 $30.0 million. No cash advances
were outstanding as of September 30, 2003 and December 31, 2002. Letters of
credit in the aggregate amount of $32.2 million and $17.4 million were
outstanding as of September 30, 2003 and December 31, 2002, 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. The credit agreement also contains covenants
and other restrictions related to Avista Energys trading limits and positions,
including VAR limits, restrictions with respect to changes in risk management
policies or volumetric limits, and limits on exposure related to hourly and
daily trading of electricity. Also, a reduction in the credit rating of Avista
Corp. would represent an event of default under Avista Energys credit
agreement. These covenants as well as certain counterparty agreements result
in Avista Energy
22
AVISTA CORPORATION
maintaining certain levels of cash and therefore inherently limiting the amount
of cash dividends that are available for distribution to Avista Capital and
ultimately to Avista Corp. Avista Energy was in compliance with the covenants
of its credit agreement as of September 30, 2003.
NOTE 8. LONG-TERM DEBT
The following details the interest rate and maturity dates of long-term debt
outstanding as of September 30, 2003 and December 31, 2002 (dollars in
thousands):
The following table details the Companys debt repurchases prior to scheduled
maturity from January 1, 2003 through September 30, 2003 (dollars in
thousands):
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AVISTA CORPORATION
In accordance with regulatory accounting practices, the total net premium on
the repurchase of debt of $1.7 million will be amortized over the average
remaining maturity of outstanding debt.
In September 2003, the Company issued $45.0 million of 6.125 percent First
Mortgage Bonds due in 2013. The proceeds were used to repay a portion of the
borrowings under the $245.0 million line of credit that were used on an interim
basis to fund $46.0 million of maturing 9.125 percent Unsecured Medium-Term
Notes.
NOTE 9. INTEREST RATE SWAP AGREEMENTS
On May 7, 2003, Avista Corp. terminated an interest rate swap agreement that
was entered into on July 17, 2002. This interest rate swap agreement
effectively changed the interest rate on $25 million of Unsecured Senior Notes
from a fixed rate of 9.75 percent to a variable rate based on LIBOR. With the
termination of the interest rate swap agreement, Avista Corp. received $1.5
million, which was recorded as a deferred credit (as part of long-term debt)
and will be amortized over the remaining term of the original agreement
(through June 1, 2008).
Rathdrum Power, LLC (RP LLC), an unconsolidated entity that is 49 percent owned
by Avista Power, operates a 270 MW natural gas-fired combustion turbine plant
in northern Idaho (Lancaster Project). As of September 30, 2003, RP LLC had
$118.0 million of debt outstanding that is not included in the consolidated
financial statements of the Company. There is no recourse to the Company with
respect to this debt. RP LLC has entered into two interest rate swap
agreements, maturing in 2006, to manage the risk that changes in interest rates
may affect the amount of future interest payments. RP LLC agreed to pay fixed
rates of interest with the differential paid or received under the interest
rate swap agreements recognized as an adjustment to interest expense. These
interest rate swap agreements are considered hedges against fluctuations in
future cash flows associated with changes in interest rates in accordance with
SFAS No. 133. The fair value of the interest rate swap agreements was
determined by reference to market values obtained from various third party
sources. Avista Powers 49 percent ownership interest in RP LLC is accounted
for under the equity method of accounting. As of September 30, 2003, there was
an unrealized loss of $1.4 million recorded as accumulated other comprehensive
loss on the Consolidated Balance Sheet.
NOTE 10. PREFERRED STOCK-CUMULATIVE
In March 2003, the Company redeemed 17,500 shares of preferred stock for $1.6
million, satisfying its redemption requirement for 2003.
NOTE 11. EARNINGS PER COMMON SHARE
The following table presents the computation of basic and diluted earnings per
common share for the three and nine months ended September 30 (in thousands,
except per share amounts):
24
AVISTA CORPORATION
* Due to the loss from continuing operations for the three months ended
September 30, 2002, the common stock equivalents from outstanding restricted
stock and stock options are not included in the calculation for
weighted-average number of common shares outstanding for diluted loss per
common share because the effect is antidilutive.
NOTE 12. 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.
Federal Energy Regulatory Commission Inquiry
In February 2002, the Federal Energy Regulatory Commission (FERC) issued an
order commencing a fact-finding investigation of potential manipulation of
electric and natural gas prices in the California energy markets by multiple
companies. On May 8, 2002, the FERC requested data and information with
respect to certain trading strategies that companies may have engaged in.
Specifically, the requests inquired as to whether or not the Company engaged in
certain trading strategies that were the same or similar to those used by Enron
Corporation (Enron) and its affiliates. These requests were made to all
sellers of wholesale electricity and/or ancillary services in power markets in
the western United States during 2000 and 2001, including Avista Corp. and
Avista Energy. On May 22, 2002, Avista Corp. and Avista Energy filed their
responses to this request indicating that both companies had engaged in sound
business practices in accordance with established market rules, and that no
information was evident from business records or employee interviews that would
indicate that Avista Corp. or Avista Energy, or its employees, were knowingly
engaged in these trading strategies, or any variant of the strategies.
On June 4, 2002, the FERC issued an additional order to Avista Corp. and three
other companies requiring these companies to show cause within ten days as to
why their authority to charge market-based rates should not be revoked. In
this order, the FERC alleged that Avista Corp. failed to respond fully and
accurately to the data request made on May 8, 2002. On June 14, 2002, Avista
Corp. provided additional information in response to the June 4, 2002 FERC
order to establish that its initial response was appropriate and adequate.
On August 13, 2002, the FERC issued an order to initiate an investigation into
possible misconduct by Avista Corp. and Avista Energy and two affiliates of
Enron: Enron Power Marketing, Inc. (EPMI) and Portland General Electric
Corporation (PGE). The purpose of the investigation was to determine whether
Avista Corp. and Avista Energy engaged in or facilitated certain Enron trading
strategies, whether Avista Corp.s or Avista Energys role in
transactions with EPMI and PGE resulted in the circumvention of a code of
conduct governing transactions with affiliates, and the imposition of any
appropriate remedies such as refunds and revocation of market-based rates. The
25
AVISTA CORPORATION
investigation also explored whether the companies provided all relevant
information in response to the May 8, 2002 data request.
In December 2002, as a result of the investigation, the FERC trial staff,
Avista Corp. and Avista Energy filed a joint motion announcing that the parties
had reached an agreement in principle and requesting that the procedural
schedule be suspended. In the joint motion, the FERC trial staff stated that
its investigation found no evidence that: (1) any executives or employees of
Avista Utilities or Avista Energy knowingly engaged in or facilitated any
improper trading strategy; (2) Avista Utilities or Avista Energy engaged in any
efforts to manipulate the western energy markets during 2000 and 2001; and (3)
Avista Utilities or Avista Energy withheld relevant information from the FERCs
inquiry into the western energy markets for 2000 and 2001. In December 2002,
the FERCs administrative law judge approved the joint motion, suspending the
procedural schedule in the FERC investigation regarding Avista Corp. and Avista
Energy. In January 2003, the FERC trial staff, Avista Corp. and Avista Energy
filed a completed agreement in resolution of the proceeding with the
administrative law judge. The parties requested that the administrative law
judge certify the agreement and forward it to the FERC commissioners for
acceptance following a 30-day comment period.
In February 2003, the City of Tacoma (Tacoma) and California Parties (the
Office of the Attorney General, the California Public Utilities Commission
(CPUC), and the California Electricity Oversight Board, filing jointly) filed
comments in opposition to the agreement in resolution between the FERC trial
staff, Avista Corp. and Avista Energy. PGE filed comments supporting the
agreement in resolution, but took exception to how certain transactions were
reported. On March 3, 2003, Avista Corp. and Avista Energy filed joint reply
comments in response to Tacoma, the California Parties, and PGE. The FERC
trial staff filed separate reply comments supporting the agreement in
resolution and responding to Tacoma, the California Parties and PGE. The reply
comments of Avista Corp., Avista Energy and the FERC trial staff also
reiterated the request that the administrative law judge certify the agreement
in resolution and forward it to the FERC commissioners for approval.
On March 26, 2003, the FERC policy staff issued its final report on their
investigation of western energy markets. In the report, the FERC policy staff
recommended the issuance of show cause orders to dozens of companies to
respond to allegations of possible misconduct in the western energy markets
during 2000 and 2001. Of the companies named in the March 26, 2003 report,
Avista Corp. and Avista Energy were among the few that had already been the
subjects of a FERC investigation.
At an April 9, 2003 prehearing conference relating to the ongoing investigation
of Avista Corp. and Avista Energy, Avista Corp. proposed that the decision to
certify the agreement between Avista Corp., Avista Energy and the FERC trial
staff be delayed to further address certain issues and to allow for potential
uncertainty to be removed with respect to the final resolution of the case.
The FERCs administrative law judge agreed and ordered a further prehearing
conference to clarify certain issues raised in the March 26, 2003 FERC policy
staff report on western energy markets.
On May 15, 2003, the FERCs trial staff submitted supplementary information
explaining its conclusions and addressing three narrowly focused issues related
to the March 26, 2003 FERC policy staff report on western energy markets. The
FERCs administrative law judge held a further prehearing conference on May 20,
2003, at which time the FERC trial staff reviewed its findings and conclusions,
and reiterated their recommendation to certify the agreement in resolution as
supplemented. On May 27, 2003, Tacoma and the California Parties reiterated
their objections to the proposed agreement in resolution. Avista Corp., Avista
Energy and the FERC trial staff each filed reply comments to Tacoma and the
California Parties on June 3, 2003, reiterating their recommendations to the
FERCs administrative law judge for certification of the agreement in
resolution.
On June 25, 2003, the FERCs administrative law judge issued an order denying
the request to certify the agreement in resolution and to forward it to the
FERC commissioners for final approval. In the June 25, 2003 order, the FERCs
administrative law judge reinstated a procedural schedule that called for
further testimony and hearings in the case.
On July 10, 2003, Avista Corp. and Avista Energy filed an appeal to the June
25, 2003 order. In the appeal, Avista Corp. and Avista Energy asserted that
the FERCs administrative law judge did not have the opportunity to consider
how other orders, which were also issued on June 25, 2003 by the FERC with
respect to western energy markets and Enron, would impact the case. Those
orders provided additional guidance with respect to defining improper trading
activities with the effect of further validating the findings of the FERC trial
staffs investigation of Avista Corp. and Avista Energy. On July 10, 2003, the
FERC trial staff also filed a motion with the FERCs administrative law judge
26
AVISTA CORPORATION
asking for clarification and reconsideration of the June 25, 2003 order. The
FERCs trial staff requested that the agreement in resolution be certified and
forwarded to the FERC commissioners for final approval without the need for a
further hearing. On July 17, 2003, Avista Corp. and Avista Energy filed an
answer to this motion with the FERC, which supported the FERC trial staffs
position.
On July 24, 2003, the FERCs administrative law judge issued an order, which
granted the FERC trial staffs July 10, 2003 motion for reconsideration. In
the order, the judge found that there are no unresolved issues of material fact
and that the record is sufficient for the FERC to make a determination on the
merits of the settlement. The judge certified the agreement in resolution and
forwarded it to the FERC commissioners for final approval. In reaching this
conclusion, the FERCs administrative law judge considered the July 10, 2003
appeal by Avista Corp. and Avista Energy. However, this appeal was denied as
moot in view of granting the FERC trial staff motion for reconsideration. The
certification states that the Chief Judge further finds that the proposed
settlement disposes of all issues set for hearing in this proceeding, that it
is just, reasonable, and in the public interest.
On August 8, 2003, the California Parties filed a motion with the FERC and the
chief administrative law judge requesting that the judge reconsider his July
24, 2003 order granting reconsideration and canceling the procedural schedule,
as well as, the judges certification of the agreement in resolution. In
response to the filing, the chief administrative law judge stated that he
certified the agreement in resolution and forwarded it to the FERC
commissioners for their consideration. The chief administrative law judge
indicated that he would advise the Secretary of the FERC that the California
Parties motion be referred to the FERC commissioners for consideration. On
August 22, 2003, Avista Corp. and Avista Energy filed a response to the August
8, 2003 motion of the California Parties. The response reiterated, among other
things, that the agreement in resolution is strongly supported by the extensive
investigation conducted by the FERC trial staff, and should be approved by the
FERC commissioners.
U.S. Commodity Futures Trading Commission (CFTC) Subpoena
Beginning on June 17, 2002, the CFTC issued several subpoenas directing Avista
Corp. and Avista Energy to produce certain materials, make employees available
to respond to certain interrogatories. The inquiries relate to whether the
electricity and natural gas trades by Avista Corp. and Avista Energy involved
round trip trades, wash trades, or sell/buyback trades and proper price
reporting. Avista Corp. and Avista Energy are cooperating with the CFTC and
providing the information requested by the CFTC.
Class Action Securities Litigation
On September 27, 2002, Ronald R. Wambolt filed a class action lawsuit in the
United States District Court for the Eastern District of Washington against
Avista Corp., Thomas M. Matthews, the former Chairman of the Board, President
and Chief Executive Officer of the Company, Gary G. Ely, the current Chairman
of the Board, President and Chief Executive Officer of the Company, and Jon E.
Eliassen, the former Senior Vice President and Chief Financial Officer of the
Company. On October 9, 2002, Gail West filed a similar class action lawsuit in
the same court against the same parties. On November 7, 2002, Michael Atlas
filed a similar class action lawsuit in the same court against the same
parties. On November 21, 2002, Peter Arnone filed a similar class action
lawsuit in the same court against the same parties. On February 3, 2003, the
court issued an order consolidating the complaints under the name In re Avista
Corp. Securities Litigation, and on February 7, 2003 appointed the lead
plaintiff and co-lead counsel. On August 19, 2003, the plaintiffs filed their
consolidated amended class action complaint in the same court against the same
parties. In their complaint, the plaintiffs continue to assert violations of
the federal securities laws in connection with alleged misstatements and
omissions of material fact pursuant to Sections 10(b) and 20(a) of the
Securities Exchange Act of 1934. The plaintiffs allege that the Company did
not have adequate risk management processes, procedures and controls. The
plaintiffs further allege that the Company engaged in unlawful energy trading
practices and allegedly manipulated western power markets. The plaintiffs
assert that alleged misstatements and omissions have occurred in the Companys
filings with the Securities and Exchange Commission and other information made
publicly available by the Company, including press releases. The class action
complaint asserts claims on behalf of all persons who purchased, converted,
exchanged or otherwise acquired the Companys common stock during the period
between November 23, 1999 and August 13, 2002. The Company filed a motion to
dismiss this complaint in October 2003 and intends to vigorously defend against
this lawsuit.
27
AVISTA CORPORATION
California Energy Markets
In April 2002, several subsidiaries of Reliant Energy, Inc. (Reliant) and Duke
Energy Corporation (Duke) filed cross-complaints against Avista Energy and
numerous other participants in the California energy markets. The
cross-complaints seek indemnification for any liability which may arise from
original complaints filed against Reliant and Duke with respect to charges of
unlawful and unfair business practices in the California energy markets under
California law. Avista Energy filed motions to dismiss the cross-complaints.
In the meantime, the U.S. District Court remanded the case to California State
Court, which remand is itself the subject of an appeal to the United States
Court of Appeals for the Ninth Circuit.
In March 2002, the Attorney General of the State of California (California AG)
filed a complaint with the FERC against certain specific companies (not
including Avista Corp. or its subsidiaries) and all other public utility
sellers in California. The complaint alleges that sellers with market-based
rates have violated their tariffs by not filing with the FERC
transaction-specific information about all of their sales and purchases at
market-based rates. As a result, the California AG contends that all past
sales should be subject to refund if found to be above just and reasonable
levels. In May 2002, the FERC issued an order denying the claim to issue
refunds. In July 2002, the California AG requested a rehearing on the FERC
order, which request was denied in September 2002. The California AG filed a
Petition for Review of the FERCs decision with the United States Court of
Appeals for the Ninth Circuit.
In April 2002, the California AG provided notice of intent to file a complaint
against Avista Energy in the California State Court on behalf of the State of
California. In the notice of intent to file a complaint, the California AG
alleges that Avista Energy failed to file rates and changes to rates charged
for each sale of wholesale electricity in California markets with the FERC as
required by Federal Power Act regulations and FERC orders. The threatened
complaint asserts that each violation of law, regulation and order is an
unlawful and unfair business practice under the California Business and
Professions Code, subject to a penalty of $2,500 per violation. The threatened
complaint further alleges that certain rates charged for wholesale electricity
sold in California exceeded a just and reasonable rate. As such, the
threatened complaint alleges that these rates violate the Federal Power Act and
are also a violation under the California Business and Professions Code,
subject to penalty. A significant portion of the transactions involved in this
threatened complaint are also the subject of FERC proceedings to examine
potential refunds and in most cases are transactions for which Avista Energy is
still owed payment. As of the filing date of this report, the California AG
has not filed any such complaint against Avista Energy. Complaints have been
filed by the California AG against approximately a dozen other companies, many
of which have been dismissed based upon federal preemption and primary
jurisdiction arguments. Those orders of dismissal have been appealed by the
California AG to the United States Court of Appeals for the Ninth Circuit.
Port of Seattle Complaint
On May 21, 2003, the Port of Seattle filed a complaint in the United States
District Court for the Western District of Washington against numerous
companies, including Avista Corp., Avista Energy and Avista Power. The
complaint seeks compensatory and treble damages for alleged violations of the
Sherman Act and the Racketeer Influenced and Corrupt Organization Act by
transmitting, via wire communications, false information intended to increase
the price of power, knowing that others would rely upon such information. The
complaint alleges that the defendants and others knowingly devised and
attempted to devise a scheme to defraud and to obtain money and property from
electricity customers throughout the WECC, by means of false and fraudulent
pretenses, representations and promises. The alleged purpose of the scheme was
to artificially increase the price that the defendants received for their
electricity and ancillary services, to receive payments for services they did
not provide and to manipulate the price of electricity throughout the WECC. In
August 2003, the Company filed a motion to dismiss this complaint. A
conditional transfer order has been granted, which if it becomes final, would
move this case to the United States District Court for the Southern District of
California to consolidate it with other pending actions.
State of Montana Complaint
On June 30, 2003, the Attorney General of the State of Montana (Montana AG)
filed a complaint in the Montana District Court on behalf of the people of
Montana and the Flathead Electric Cooperative, Inc. against numerous companies,
including Avista Corp. The complaint alleges that the companies illegally
manipulated western electric and natural gas markets in 2000 and 2001. The
Montana AG also petitioned the Montana Public Service
Commission to fine public utilities $1,000 a day for each day it finds they
engaged in alleged deceptive, fraudulent, anticompetitive or abusive
practices and order refunds when consumers were forced to pay more than just
and
28
AVISTA CORPORATION
reasonable rates. This case was subsequently moved to the United States
District Court for the District of Montana and is the subject of a conditional
transfer order, which if it becomes final, would consolidate this case with
other pending actions in the United States District Court for the Southern
District of California. The Company intends to file a motion to dismiss this
complaint.
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 period from July 1, 1997 through June 30, 2000, the
Department of Revenue (DOR) took the position that approximately 20 percent of
the forward energy 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 forward contract 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. The DOR
issued a Proposed Determination on December 4, 2002, which reiterated the
original $14.5 million assessment. At the present time Avista Energy is still
in active negotiations with the DOR with respect to a final resolution of this
matter and believes that a satisfactory settlement can be reached. However, if
a satisfactory settlement can not be reached, Avista Energy will have to record
a charge and resolve the issue in court.
Colstrip Generating Project Complaint
In May 2003, various parties (all of which are residents or businesses of
Colstrip, Montana) filed a consolidated complaint against the owners of the
Colstrip Generating Project (Colstrip) in Montana District Court. Avista Corp.
owns a 15 percent interest in units 3 and 4 of Colstrip, which is located in
southeastern Montana. The plaintiffs allege damages to buildings as a result
of rising ground water as well as damages from contaminated waters leaking from
the lakes and ponds of Colstrip. The plaintiffs are seeking punitive damages,
an order by the court to remove the lakes and ponds and the forfeiture of all
profits earned from the generation of Colstrip. The Company intends to work
with the other owners of Colstrip in defense of this complaint.
Montana Public School Trust Fund Lawsuit
On October 20, 2003, Richard Dolan and Denise Hayman filed a lawsuit in the
United States District Court for the District of Montana against all private
owners of hydroelectric dams in Montana, including Avista Corp. The lawsuit
alleges that the hydroelectric facilities are located on state-owned riverbeds
and the owners have never paid compensation to the states public school trust
fund. The lawsuit requests lease payments dating back to the construction of
the respective dams and also requests damages for trespassing and unjust
enrichment. The Company intends to defend itself against this complaint.
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. 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 another PLP, Burlington
Northern & Santa Fe Railway Co. (BNSF) 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
29
AVISTA CORPORATION
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 an initial draft Consent Decree for the
PLPs to review. During the first quarter of 2002, the Company and BNSF signed
a cost sharing agreement. On September 11, 2002, the Company, BNSF and the
DOE finalized the Consent Decree to implement the CAP. The third PLP has
indicated it will not sign the Consent Decree. It is currently estimated that
the Companys share of the costs will be less than $1.0 million. The
Engineering and Design Report for the CAP was submitted to the DOE in January
2003 and approved by the DOE in May 2003. Work under the CAP commenced during
the second quarter of 2003. Negotiations are continuing with the third PLP
with respect to the logistics of the CAP.
Spokane River
In March 2001, the DOE informed Avista Development, a subsidiary of Avista
Capital, 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 that it had been designated as a PLP with respect to contaminated sites
on the Spokane River. The DOE discovered PCBs in fish and sediments in the
Spokane River in the 1970s and 1980s. In the 1990s, the DOE performed
subsequent sampling of the river and identified potential sources of the PCBs,
including the Spokane Industrial Park (SIP) and a number of other entities in
the area. The SIP, 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 the DOE. 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, the DOE confirmed
Avista Developments status as a PLP and named at least two other PLPs in this
matter. During the first half of 2002, Avista and one other PLP met with the
DOE to begin discussions and provide comments to the DOE on a draft Consent
Decree and Scope of Work for a focused remedial investigation and feasibility
study of the site. One other PLP has not been participating in negotiations.
The Consent Decree and Scope of Work for the remedial investigation and
feasibility study of the site were finalized during the fourth quarter of 2002
and formally entered into Spokane County Superior Court in January 2003. As
directed by Avista and the other PLP, the field work for the remedial
investigation began in April 2003. The other PLP that has been participating
with Avista Development has filed for bankruptcy; however, the bankruptcy court
has permitted the disbursement of funds related to this remedial investigation
and feasibility study. Disbursement of funds related to the actual cleanup of
PCBs will need to settled and approved by the bankruptcy court. In April 2003,
the DOE released its study of wastewater and sludge handling from facilities
owned by a fourth PLP. The DOE study indicated that the fourth PLP continued
to discharge PCBs into the Spokane River. The DOE issued the fourth PLP a
final notice of participation as a PLP on April 30, 2003. As directed by
Avista and the other PLP, sampling of groundwater and completion of transects
for bottom profiling of the Spokane River behind Upriver Dam was completed
during the second quarter of 2003 as part of the remedial investigation. The
sampling of water and sediments for PCBs was completed during the third quarter
of 2003. It is currently expected that the actual cleanup of PCB sediments in
the Spokane River will be coordinated to the extent possible with the EPAs
separate plan to remove heavy metals from the Spokane River, contamination that
resulted from decades of mining upstream at locations in Idaho and is not
related to the activities of Avista Development.
Lake Coeur dAlene
In July 1998, the United States District Court for the District of Idaho issued
its finding that the Coeur dAlene 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 has not been 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 United
States Court of Appeals for the Ninth Circuit. 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.
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AVISTA CORPORATION
Spokane River Relicensing
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 and referred to herein as the Spokane River Project.
The sixth, Little Falls, is operated under separate Congressional authority
and is not licensed by the FERC. The license for the Spokane River Project
expires in August 2007; the Company filed a Notice of Intent to Relicense on
July 29, 2002. The formal consultation process involving planning and
information gathering with stakeholder groups is underway. The Companys goal
is to develop with the stakeholders a comprehensive and cost-effective
settlement agreement to be filed as part of the Companys license application
to the FERC in July 2005.
Clark Fork Settlement Agreement
The issue of high levels of dissolved gas which exceed Idaho and federal water
quality standards downstream of the Cabinet Gorge Hydroelectric Generating
Project (Cabinet Gorge) during spill periods continues to be studied, as agreed
to in the Clark Fork Settlement Agreement and incorporated into the operating
license renewed by the FERC in 1999. To date, intensive biological studies in
the lower Clark Fork River and Lake Pend Oreille have documented no significant
biological effects of high dissolved gas levels on free ranging fish. Under
the terms of the Clark Fork Settlement Agreement, the Company developed an
abatement and mitigation strategy during 2002 with the other signatories to the
agreement. In December 2002, the Company submitted its plan for review and
approval by the other signatories as well as the FERC. The structural
alternative proposed in the plan provides for the modification of the two
existing diversion tunnels built when Cabinet Gorge was originally constructed.
The costs of modifications to the first tunnel are currently estimated to be
$37 million (including AFUDC and inflation) and would be incurred between 2004
and 2009. The second tunnel would be modified only after evaluation of the
performance of the first tunnel and such modifications would commence no later
than 10 years following the completion of the first tunnel. It is currently
estimated that the costs to modify the second tunnel would be $23 million
(including AFUDC and inflation). As part of the plan, the Company will also
provide $0.5 million annually commencing as early as 2004, as mitigation for
aquatic resources that might be adversely affected by high dissolved gas
levels. Mitigation funds will continue until the modification of the second
tunnel commences or if the second tunnel is not modified to an agreed upon
point in time commensurate with the biological effects of high dissolved gas
levels. The Company will seek regulatory recovery of the costs for the
modification of Cabinet Gorge and the mitigation payments.
The operating license for the Clark Fork Project describes the approach to
restore bull trout populations in the project areas. Using the concept of
adaptive management and working closely with the U.S. Fish and Wildlife
Service, the Company is evaluating the feasibility of fish passage. The results
of these studies will help the Company and other parties determine the best use
of funds toward continuing fish passage efforts or other population enhancement
measures.
Other Contingencies
In the normal course of business, the Company has various other legal claims
and 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, results of operations or cash flows.
31
AVISTA CORPORATION
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
Safe Harbor for Forward-Looking Statements
This Report on Form 10-Q contains
forward-looking statements within the meaning of
Section 21E of the Securities Exchange Act of
1934. Avista Corp. 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.
Certain of these risks and uncertainties are beyond the Companys control.
Such risks and uncertainties include, among others:
32
AVISTA CORPORATION
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.
However, 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. 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.
The following discussion and analysis is provided for the consolidated
financial condition and results of operations of Avista Corp., including 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 engaged in the
generation, transmission and distribution of
energy as well as other energy-related
businesses. The Company is organized into four
lines of business Avista Utilities, Energy
Marketing and Resource Management, Avista
Advantage, 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 non-utility lines of business.
As of September 30, 2003, the Company had common
equity investments of $463.5 million and $265.8
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, a two-unit natural gas-fired
combustion turbine (CT) generating facility and
two small generating facilities. 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 July 2003, the combined cycle
natural gas-fired Coyote Springs 2 Generation
Project (Coyote Springs 2) was placed into
operation. Avista Utilities has a 50 percent
ownership interest (140 MW) in Coyote Springs 2.
Avista Utilities facilities have a total net
capability of approximately 1,651 megawatts
(MW), of which 58 percent is hydroelectric and
42 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 engages in an ongoing process
of resource optimization which involves the
pursuit of economic resources to serve
load obligations and using existing resources to
capture available economic value. Avista
Utilities sells and purchases wholesale electric
capacity and energy to and from utilities and
other entities as part of the process of
acquiring resources to serve its retail and
wholesale load obligations. These transactions
range from a term as short as one hour up to and
including long-term contracts that extend beyond
one year. 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 an annual, quarterly, monthly, daily
and hourly basis to match expected resources to
expected energy requirements. Resource
optimization also includes transactions such as
purchasing fuel to run thermal generation and,
when economic, selling fuel and substituting
wholesale market purchases for the operation of
Avista Utilities own resources, as well as
other wholesale transactions to capture the
value of available generation and transmission
resources. This optimization process includes
hedging transactions as a means of managing
risks.
The Energy Marketing and Resource Management
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 resource
management business, operating primarily in the
Western Electricity Coordinating Council (WECC)
geographical area, which is comprised of eleven
Western states as well as the provinces of
British Columbia and Alberta, Canada. Avista
Power was formed to develop and own generation
assets. Avista Power continues to manage the
generation assets it currently owns, primarily
its 49 percent interest in a 270 megawatt (MW)
natural gas-fired combustion turbine plant in
northern Idaho (Lancaster Project), which
commenced commercial operation in September
2001.
33
AVISTA CORPORATION
Avista Advantage, Inc. (Avista Advantage) is a
provider of internet based facility
intelligence, cost management, billing and
information services to multi-site retail
customers throughout North America. Its primary
product lines include consolidated billing,
resource accounting, energy analysis and load
profiling services.
The Other line of business includes Avista
Ventures, Inc. (Avista Ventures), Pentzer
Corporation (Pentzer), Avista Development,
Avista Services and the operations of Avista
Capital that are not included through its
subsidiaries. Included in this line of business
is Advanced Manufacturing and Development, a
subsidiary of Avista Ventures that performs
custom manufacturing of sheet metal of
electronic enclosures, parts and systems for the
computer, telecom and medical industries.
Advanced Manufacturing and Development also has
a wood products division that provides complete
fabrication and turnkey assembly for arcade
games, kiosks, store fixtures, and displays.
The Company continues to limit its future
investment in the Other line of business.
In July 2003, Avista Corp. announced an investment of $6.0 million by a group
of private equity investors in a new entity, AVLB, Inc., which acquired the
assets previously held by Avista Corp.s fuel cell manufacturing and
development subsidiary, Avista Labs. As such, these operations are reported as
a discontinued operation. In September 2003, AVLB, Inc. (doing business under
the name Avista Labs) received an additional investment by private equity
investors of $6.2 million. This investment relieved Avista Corp. of its
commitment to provide additional funding of up to $1.5 million to AVLB, Inc.
Avista Corp. has an ownership interest of approximately 17.5 percent in AVLB,
Inc., with the opportunity but no further obligation to fund or invest in this
business.
In September 2001, Avista Corp. decided that it
would dispose of substantially all of the assets
of Avista Communications, Inc. (Avista
Communications), formerly part of the
Information and Technology line of business with
Avista Advantage and Avista Labs. The
divestiture of operating assets was complete by
the end of 2002. The operations of Avista
Communications are included as part of
discontinued operations during the three and
nine months ended September 30, 2002.
Avista Utilities Regulatory Matters
General Rate
Cases
In April 2003, Avista Utilities filed revised tariff schedules to effect a
general rate increase for Oregon retail customers of approximately $7.5
million. In September 2003, the OPUC approved an annual revenue increase of
$6.3 million effective October 1, 2003, which provides for, among other things,
an overall rate of return of 8.88 percent and a return on equity of 10.25
percent.
Purchased Gas
Adjustments
During the second half of 2002, Avista Utilities adjusted its natural gas rates
in response to a decrease in current and projected natural gas costs at that
time. During the fourth quarter of 2002, natural gas rate decreases of 17.4
percent, 15.5 percent, 7.1 percent and 16.2 percent were approved and
implemented in Washington, Idaho, Oregon and California, respectively. As
discussed above, current and projected natural gas prices increased towards the
end of 2002 and into the first half of 2003. During September and October of
2003, natural gas rate increases of 8.7 percent, 2.4 percent, 12.4 percent and
15.0 percent were approved and implemented in Washington, Idaho, Oregon and
California, respectively. The rate increase in Washington was approved subject
to refund, pending further review of the deferred natural gas costs. These
natural gas rate increases and decreases are designed to pass through changes
in purchased natural gas costs to customers and reduce operating revenues and
resource costs with no change in Avista Utilities gross margin or net income.
Total deferred natural gas costs were $17.6 million and $11.5 million as of
September 30, 2003 and December 31, 2002, respectively.
34
AVISTA CORPORATION
Natural Gas Benchmark
Mechanism
Significant Customer
Contract
Integrated Resource
Plan
Power Cost Deferrals and
Recovery Mechanisms
In June 2002, the WUTC issued an order that became effective July 1, 2002 with
respect to a general electric rate
35
AVISTA CORPORATION
case filed by Avista Utilities in December
2001. The order provided for the restructuring of rate increases previously
approved by the WUTC totaling 31.2 percent. The general increase to base
retail rates was 19.3 percent and the remaining 11.9 percent represents the
continued recovery of deferred power costs.
In the June 2002 rate order, the WUTC approved the establishment of the ERM.
The ERM replaced a series of temporary power cost deferral mechanisms that
were in place in Washington since mid-2000. The ERM allows Avista Utilities
to increase or decrease electric rates periodically with WUTC approval to
reflect changes in power supply costs. The ERM provides for Avista Utilities
to incur the cost of, or receive the benefit from, the first $9.0 million in
annual power supply costs above or below the amount included in base retail
rates. Under the ERM, 90 percent of the power supply costs exceeding or below
the initial $9.0 million are deferred for future surcharge or rebate to Avista
Utilities customers. The remaining 10 percent of power supply costs are an
expense of, or benefit to, the Company.
The Company expensed the initial $9.0 million of power supply costs above the
amount included in base retail rates during the first quarter of 2003. The
majority of these costs relate to fuel contracts entered into during 2001 that
expire in 2004 for the Companys thermal generating units.
Under the ERM, Avista Utilities agreed to make an annual filing on or before
April 1st of each year to provide the opportunity for the WUTC and other
interested parties to review the prudence of and audit the ERM deferred power
cost transactions for the prior calendar year. The settlement agreement
establishing the ERM provided for a 90-day review period for the filing;
however, the period may be extended by agreement of the parties or by WUTC
order. Avista Utilities made its first annual filing with the WUTC on March
28, 2003 related to $18.4 million of deferred power costs incurred for the
period July 1, 2002 through December 31, 2002. Previous settlement agreements
established the prudence and recoverability of power costs incurred through
June 30, 2002. On May 8, 2003 the WUTC staff, the Industrial Customers of
Northwest Utilities, and the Public Counsel Section of the Attorney Generals
Office filed a motion requesting a pre-hearing conference related to Avista
Utilities March 28, 2003 ERM filing. As a result of that motion, a
pre-hearing conference was held in May 2003 and an order was issued by the
WUTC establishing a hearing schedule. The WUTC staff, the ICNU and Public
Counsel filed testimony in August 2003 and Avista Utilities filed its response
to this testimony in September 2003. The WUTC staff and the ICNU have taken
the position that costs ranging from $2.0 million to $2.6 million associated
with the delay of the Coyote Springs 2 project should be disallowed and
removed from the deferred power cost balance. Public Counsel has taken the
position that $14.0 million of losses on the sale of natural gas purchased for
electric generation should be disallowed and removed from the deferred power
cost balance. The Company believes that such costs were prudently incurred and
in the best interest of its electric customers. The originally scheduled
October 2003 evidentiary hearing has been delayed until December 2003 at the
request of Public Counsel.
Avista Utilities has a PCA mechanism in Idaho that allows it to modify
electric rates periodically with IPUC approval to recover or rebate a portion
of the difference between actual net power supply costs and the amount
included in base retail rates. The PCA mechanism allows for the deferral of
90 percent of the difference between certain actual net power supply expenses
and the authorized level of net power supply expense approved in the last
Idaho general rate case. The IPUC originally approved a 19.4 percent
surcharge in October 2001, which had been extended through October 2003. In
October 2003, the IPUC issued another order extending the surcharge for an
additional 60-day period while it continues to consider extending the
surcharge for an additional 12 months. The IPUC staff filed comments
recommending the continuation of the 19.4 percent PCA surcharge; however, they
recommend the disallowance of approximately $5.9 million of deferred power
costs. The recommended disallowance relates to natural gas purchased for
electric generation under long-term contracts entered into during 2001 at a
time of both high wholesale power and natural gas prices. The Company
believes that such costs were
prudently incurred and in the best interest of its electric customers and has
requested that these costs be addressed in a general electric rate case that
the Company plans to file in the first quarter of 2004. The IPUC staff
comments also recommend that the Company work with the IPUC staff and
customers with respect to its risk policies.
36
AVISTA CORPORATION
The following table shows activity in deferred power costs for Washington and
Idaho during 2002 and the nine months ended September 30, 2003 (dollars in
thousands):
During a year having normal streamflow conditions, Avista Utilities would
expect to have generation from its hydroelectric resources (both owned and
purchased under long-term hydroelectric contracts) of approximately 550 aMW.
For 2002, streamflow conditions were 112 percent of normal and hydroelectric
generation was 553 aMW (101 percent of normal). Current forecasts indicate
that streamflow conditions for 2003 are expected to be approximately 85 percent
of normal. Avista Utilities currently estimates that hydroelectric generation
will be 500 aMW (90 percent of normal) in 2003. Based on current projections,
total deferred power costs are expected to be approximately $158 million at the
end of 2003. It is expected that the recovery of deferred power costs will
take several years.
Power Market Issues
Avista Utilities and Avista Energy participate directly and indirectly in the
power markets in the United States. Developments in these markets,
particularly in the western part of the United States, have affected both
Avista Utilities and Avista Energy. Federal and state officials including, but
not limited to, the FERC and the 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 proceedings are
continuing and their ultimate outcome and the resulting impact on the Company
cannot be predicted at this time.
California Energy 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). Consequently, CalPX, CalISO and APX defaulted
on their payment obligations to others including Avista Energy. PG&E and CalPX
filed voluntary petitions under chapter 11 of the bankruptcy code for
protection from creditors. On March 1, 2002, SCE paid its past due obligations
to the CalPX and various other creditors; however, these funds did not flow
directly to Avista Energy or others. As of September 30, 2003, Avista Energys
accounts receivable outstanding related to defaulting parties in California did
not exceed its reserves for uncollected amounts, cost of collection, and
refunds. Avista Energy is currently pursuing recovery of the defaulted
obligations.
In July 2001, the FERC issued an order to commence a fact-finding hearing to
determine if refunds should be owed and, if so, the amounts of such refunds 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. However, in 2002 the FERC announced
that it was considering changing the method used to
determine natural gas costs for calculating refunds in this proceeding, which
would delay their findings. Furthermore, on November 20, 2002, the FERC issued
a Discovery Order, which reopened the evidentiary record and allowed parties in
the proceeding to conduct additional discovery for the period January 1, 2000
to June 20, 2001. The November 20, 2002 Discovery Order required that, by no
later than March 3, 2003, the market
37
AVISTA CORPORATION
participants provide relevant documents to support any proposed recommendations
to the FERC. The Discovery Order also afforded parties in this proceeding the
opportunity to respond by March 20, 2003 to submissions made by March 3, 2003.
On December 12, 2002, the FERC administrative law judge issued a Certification
of Proposed Findings on California Refund Liability detailing the proposed
refund amounts, which was presented to the FERC for consideration.
Several parties filed documents with the FERC on March 3, 2003 presenting
supplemental information regarding alleged improper market conduct and requests
for refunds and other relief under the additional discovery procedures set
forth in both the California and Pacific Northwest refund proceedings. The
filing parties include the California Parties (a joint filing including the
Attorney General of the State of California, the California Electricity
Oversight Board, the CPUC, and PG&E), the City of Tacoma and Port of Seattle
(jointly), the City of Seattle, and the Washington State Attorney General. The
filing parties, with the exception of the Washington State Attorney General,
have made specific allegations with regard to many companies, including Avista
Corp. and Avista Energy. Based upon review of the filings, there were no new
allegations or information not known to and addressed by the FERC trial staff
in a separate investigation of Avista Corp. and Avista Energy. Avista Corp.
and Avista Energy filed reply comments in response to the allegations of the
parties in March 2003.
On March 26, 2003, the FERC policy staff issued its final report on their
investigation of western energy markets. In the report, the FERC policy staff
recommended the issuance of show cause orders to dozens of companies to
respond to allegations of possible misconduct in the western energy markets
during 2000 and 2001. Of the companies named in the March 26, 2003 report,
Avista Corp. and Avista Energy were among the few that had already been
subjects of a FERC investigation. As explained at Federal Energy Regulatory
Commission Inquiry in Note 12 of the Notes to Consolidated Financial
Statements regarding the investigation of Avista Corp. and Avista Energy, the
FERC trial staff stated that its investigation found no evidence that: (1) any
executives or employees of Avista Utilities or Avista Energy knowingly engaged
in or facilitated any improper trading strategy; (2) Avista Utilities or Avista
Energy engaged in any efforts to manipulate the western energy markets during
2000 and 2001; and (3) Avista Utilities or Avista Energy withheld relevant
information from the FERCs inquiry into the western energy markets for 2000
and 2001. On July 24, 2003, the FERCs administrative law judge certified the
agreement in resolution with respect to the FERCs investigation of Avista
Corp. and Avista Energy and forwarded it to the FERC commissioners for final
approval. See further discussion of this FERC investigation of Avista Corp.
and Avista Energy at Federal Energy Regulatory Commission Inquiry in Note 12
of the Notes to Consolidated Financial Statements.
On March 26, 2003, the FERC also addressed issues related to refund proceedings
in the California energy markets. Based on current information, the Company
believes that it has sufficient reserves in place for potential California
refunds.
On June 25, 2003, the FERC issued two broad show cause orders to over 60 power
trading companies (Avista Corp. and Avista Energy were not included) that are
alleged to have engaged in manipulative practices that disrupted western energy
markets in 2000 and 2001. On June 25, 2003, the FERC also announced that it
had not found evidence that would support the modification of certain long-term
power contracts in western energy markets, saying that it would not be in the
public interest and that buyers had failed to make a case for such action.
On June 25, 2003, the FERC issued an order with respect to the bidding behavior
and practices engaged in by participants in the short-term energy markets
operated by the CalISO and the CalPX. This order calls for the review of bids
above $250 per MW made by participants during the period from May 1, 2000 to
October 2, 2000. This order was made in response to the March 26, 2003 FERC
policy staff report on western energy markets, which indicated that certain
bids for this period appeared to have been excessive. Market participants with
bids above $250 per MW during the period described above will be required to
demonstrate why their bidding behavior and practices did not violate applicable
market rules. If violations were found to exist, the FERC would require the
refund of any unjust profits and could also enforce other non-monetary
penalties, such as the revocation of market-
based rate authority. Avista Energy is subject to this review. Avista Energy
maintains that it has engaged in sound business practices in accordance with
established market rules.
Pacific Northwest Refund Proceedings
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
38
AVISTA CORPORATION
oppose proposals by parties for 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. On
December 19, 2002, the FERC issued a Discovery Order that reopened the
evidentiary record and allowed parties in the proceeding to conduct additional
discovery for the period January 1, 2000 to June 20, 2001. The December 19,
2002 Discovery Order required that, by no later than March 3, 2003, the market
participants provide relevant documents to support any proposed recommendations
to the FERC. The Discovery Order also afforded parties in this proceeding the
opportunity to respond by March 20, 2003 to submissions made by March 3, 2003.
On March 26, 2003 the FERC policy staff issued a report recommending that the
FERC reconsider the refund proceedings in the Pacific Northwest energy markets.
On May 6, 2003, the Transaction Finality Group (comprised primarily of western
utility and energy companies, including Avista Corp. and Avista Energy)
requested oral arguments before the FERC in the Pacific Northwest refund
proceedings. In its request to the FERC, the Transaction Finality Group
stated, among other things, that any action that the FERC takes regarding the
electricity market prices in the Pacific Northwest during 2000 and 2001 will
retroactively disturb thousands of completed and long-settled bilateral
contracts. On June 25, 2003, the FERC denied the request of certain parties
for retroactive refunds for spot market sales in the Pacific Northwest during
the period from December 25, 2000 to June 20, 2001. On July 25, 2003, the
Transaction Finality Group filed a request for rehearing supporting the FERCs
decision to deny retroactive refund claims in the Pacific Northwest spot market
but raising argument on certain procedural issues only in the event that the
FERC entertains additional arguments in the case. Also on July 25, 2003,
several other parties filed requests for rehearing on the FERCs order. The
request for rehearing was granted by the FERC in August 2003. The Company
cannot predict when a final decision in the Pacific Northwest refund proceeding
will be issued by the FERC. Until more information is available regarding
possible refunds to be paid or received by Avista Corp., Avista Energy and
other participants in the Pacific Northwest energy markets, the Company will
not be in a position to estimate the net effects on the Company or the
materiality of such net effects. The Company continues to oppose any proposals
for refund claims as inappropriate. If the FERC orders market participants to
pay refunds, those participants, including Avista Corp. and Avista Energy,
would seek refunds from other participants which sold power to them. It is
possible that certain municipal and other participants that are not generally
subject to FERC jurisdiction could assert that, while they are entitled to
receive refunds, they are not obligated under a FERC order to pay refunds. If
the Company could not recover its refund claims against any such participants
in the FERC proceedings, it may seek to do so in a court of law.
See further information under Federal Energy Regulatory Commission Inquiry,
U.S. Commodity Futures Trading Commission (CFTC) Subpoena, California Energy
Markets, Port of Seattle Complaint, and State of Montana Complaint in
Note 12 of the Notes to Consolidated Financial Statements.
Regional Transmission Organizations
Avista Corp. is negotiating with nine other utilities in the western United
States 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 FERC Order No. 2000 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. FERC
Order No. 2000 is a follow-up to FERC Orders No. 888 and 889 issued in 1996,
which required transmission owners to provide non-discriminatory transmission
service to third parties. RTO West filed its Stage 2 proposal with the FERC in
March 2002 and received limited approval from the FERC of this initial plan in
September 2002. With further development of detail and some modifications, the
FERC stated that the
proposal will satisfy not only FERC Order No. 2000 requirements, but can also
provide a basic framework for standard market design in the western United
States. Further development of the RTO West proposal by the filing utilities
continues. Under the current proposal, RTO West would have its own independent
governing board. The participating transmission owners would retain ownership
of the transmission assets, but would not have a role in operating the
transmission grid.
Avista Corp. and two 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 five states and own or lease
the high voltage transmission facilities of the participating utilities.
TransConnect filed its proposal with the FERC in November 2001 and received
limited approval from the FERC in September 2002.
The final proposals 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 established in the regulatory approval process.
If TransConnect were formed, it could result in Avista Utilities divesting its
electric transmission assets. The formation of RTO West or TransConnect could
have an impact on the
39
AVISTA CORPORATION
Companys transmission costs and profitability.
In September 2003, Western Interconnection L.L.C. (WI) filed an application
with the FERC to issue a note in support of a $100.0 million construction loan
as part of seeking certification as a RTO. As proposed, WI would provide
transmission service in the western United States. As part of its application,
WI has requested that the FERC order each jurisdictional utility in the western
United States (including Avista Corp.) to provide escrow funding to WI in the
amount of $4.0 million per year. Several parties (including Avista Corp.) have
filed motions with the FERC requesting that the FERC deny the WI application.
Wholesale Power Market Design
In April 2003, the FERC issued a White Paper presenting a revised version of
proposed wholesale power market rules. The White Paper emphasizes a focus on
the formation of RTOs and on ensuring that all independent transmission
organizations have sound market rules. The White Paper further indicates that
the implementation schedule will vary depending on regional needs and will also
allow for regional differences. This White Paper was developed based on input
from numerous state regulatory agencies, utility companies, industry and
consumer groups, as well as the public. The White Paper reflects significant
concerns raised with respect to the FERCs initial proposal of a Standard
Market Design in July 2002. The FERCs stated goals with respect to wholesale
power markets include: reliable and reasonably priced electric service for all
customers; sufficient electric infrastructure; transparent markets with fair
rules for all market participants; stability and regulatory certainty for
customers, the electric power industry, and investors; technological
innovation; and efficient use of the nations resources. The White Paper
proposes a significant role being played by regional authorities in setting up
regional power markets. As the proposed market rules develop, the Company
continues to assess the impact the changes would have on its operations as well
as how the changes would impact the RTO West, TransConnect and WI proposals.
Results of Operations
Diluted earnings (loss) per common share by business segments
The following table presents diluted earnings (loss) per common share by
business segments for the three and nine months ended September 30:
Overall Operations
Three months ended September 30, 2003 compared to the three months ended
September 30, 2002
Income from continuing operations was $4.4 million for the three months ended
September 30, 2003 compared to $0.9 million for the three months ended
September 30, 2002. The increase was primarily due to an increase in net
income recorded by Avista Utilities and Energy Marketing and Resource
Management and a decrease in the net loss recorded by Avista Advantage,
partially offset by an increased net loss for the Other business segment.
Net income for Energy Marketing and Resource Management was $4.8 million for
the three months ended September 30, 2003 compared to $2.7 million for the
three months ended September 30, 2002. The primary reason for the increase in
net income was an increase in gross margin (operating revenues less resource
costs). During September 2003, Avista Energy implemented hedge accounting for
certain transactions. This should partially mitigate the effects from the
transition to SFAS No. 133 and reduce the volatility of reporting earnings on a
prospective basis.
40
AVISTA CORPORATION
Net income for Avista Utilities was $0.9 million for the three months ended
September 30, 2003, compared to a net loss of $0.5 million for the three months
ended September 30, 2002. The increase for Avista Utilities was primarily due
to an increase in gross margin and a decrease in interest expense, partially
offset by an increase in other operating expenses.
Avista Advantage incurred a net loss of $0.3 million for the three months ended
September 30, 2003 compared to $0.9 million for the three months ended
September 30, 2002. The decrease in the net loss was primarily due to an
increase in operating revenues and a decrease in operating expenses.
The Other line of business incurred a net loss of $1.1 million for the three
months ended September 30, 2003 compared to $0.5 million for the three months
ended September 30, 2002. The increase in the net loss was due to a decrease
in interest income as well as an increase in the net loss for Advanced
Manufacturing and Development.
Total revenues increased $24.4 million for the three months ended September 30,
2003 compared to the three months ended September 30, 2002. Avista Utilities
revenues increased $19.5 million, or 11 percent, primarily due to increased
electric revenues, partially offset by decreased natural gas revenues. The
increase in electric revenues reflects an increase in retail, wholesale and
other revenues. The decrease in natural gas revenues was primarily due to
natural gas rate decreases implemented during the fourth quarter of 2002.
Revenues from Energy Marketing and Resource Management increased $18.7 million,
or 71 percent, due to an increase in net trading revenue and increased revenues
on contracts, which are not considered derivatives under SFAS No. 133
(primarily the Agency Agreement with Avista Utilities). Revenues from Avista
Advantage increased 13 percent to $5.0 million primarily as a result of
customer growth. Revenues from the Other line of business decreased $1.0
million primarily due to decreased revenues from Advanced Manufacturing and
Development. Intersegment eliminations increased to $19.6 million for the
three months ended September 30, 2003 from $6.3 million for the three months
ended September 30, 2002 representing increased sales of natural gas under the
Agency Agreement between Avista Utilities and Avista Energy.
Total resource costs increased $17.1 million for the three months ended
September 30, 2003 compared to the three months ended September 30, 2002.
Resource costs for Avista Utilities increased $14.7 million primarily due to an
increase in the expense for power purchased and fuel for generation, partially
offset by net power and natural gas cost deferrals compared to net amortization
of previous deferrals in the prior period. The increase in power purchased
expense was primarily due to an increase in the price of power, partially
offset by a decrease in the volume of wholesale power purchases. The net
deferral of power and natural gas costs was $10.6 million for the
three months ended September 30, 2003, compared to net amortization of $3.1
million for the three months ended September 30, 2002. During the three months
ended September 30, 2002, the initial $4.5 million in power costs above the
amount included in base retail rates in Washington was expensed, which
increased resource costs for that period. Resource costs for Energy Marketing
and Resource Management increased $15.6 million due to an increase in costs
from contracts that are not accounted for as derivatives under SFAS No. 133
(primarily the Agency Agreement with Avista Utilities). Intersegment
eliminations increased to $19.6 million for the three months ended September
30, 2003 from $6.3 million for the three months ended September 30, 2002
representing increased purchases of natural gas under the Agency Agreement
between Avista Utilities and Avista Energy.
Operations and maintenance expenses decreased $0.1 million for the three months
ended September 30, 2003 compared to the three months ended September 30, 2002
primarily due to decreased expenses for Avista Advantage and the Other business
segment, partially offset by increased expenses for Avista Utilities. Avista
Advantage continues to be focused on reducing operating expenses by improving
efficiencies.
Administrative and general expenses increased $0.7 million for the three months
ended September 30, 2003 compared to the three months ended September 30, 2002
primarily due to increased expenses for Avista Utilities and Energy Marketing
and Resource Management, partially offset by decreased expenses for the Other
business segment. The increase for Avista Utilities reflects increased
employee expenses, including pension costs. The increase for Energy Marketing
and Resource Management was primarily a result of increased compensation
expenses resulting from increased earnings, partially offset by decreased
professional fees. Administrative and general expenses for the Other business
segment decreased primarily due to reduced litigation costs.
Depreciation and amortization increased $2.7 million for the three months ended
September 30, 2003 compared to the three months ended September 30, 2002
primarily due to utility plant additions at Avista Utilities and the resulting
increase in depreciation expense.
41
AVISTA CORPORATION
Taxes other than income taxes decreased $0.6 million for the three months ended
September 30, 2003 compared to the three months ended September 30, 2002
primarily due to increased taxes for Energy Marketing and Resource Management.
Interest expense decreased $1.9 million for the three months ended September
30, 2003 compared to the three months ended September 30, 2002 primarily due to
a decrease in the average balance of debt outstanding. This increase was
partially offset by the inclusion of $0.5 million of preferred stock dividends
as interest expense for the three months ended September 30, 2003 in accordance
with SFAS No. 150 (see Note 2 of the Notes to Consolidated Financial
Statements). During 2002, the Company repurchased $203.6 million of long-term
debt. The Company repurchased $52.5 million of long-term debt during the nine
months ended September 30, 2003. The Company expects interest expense to
continue to decline in 2003 due to the effect of debt repurchases in 2002 and
the first nine months of 2003. In September 2003, the Company issued $45.0
million of 6.125 percent First Mortgage Bonds due in 2013. The proceeds were
used to repay a portion of the borrowings under the $245.0 million line of
credit that were used on an interim basis to fund $46.0 million of maturing
9.125 percent Unsecured Medium-Term Notes and is expected to result in an
overall reduction in the Companys interest expense.
Capitalized interest decreased $2.8 million for the three months ended
September 30, 2003 compared to the three months ended September 30, 2002. This
was primarily due to the fact that the Company did not capitalize any interest
related to Coyote Springs 2 subsequent to September 30, 2002 because the
project was substantially completed.
Other income-net decreased $0.8 million for the three months ended September
30, 2003 compared to three months ended September 30, 2002 primarily due to
reduced interest income.
Nine months ended September 30, 2003 compared to the nine months ended
September 30, 2002
Income from continuing operations was $35.5 million for the nine months ended
September 30, 2003 compared to $30.1 million for the nine months ended
September 30, 2002. The increase was primarily due to increased net income
recorded by Energy Marketing and Resource Management and a decrease in the net
losses recorded by Avista Advantage and the Other business segment, partially
offset by decreased net income from Avista Utilities.
Net income for Energy Marketing and Resource Management was $21.1 million
(excluding the cumulative effect of accounting change) for the nine months
ended September 30, 2003 compared to $19.4 million for the nine months ended
September 30, 2002. During the nine months ended September 30, 2003, Avista
Energys earnings were positively impacted by the effects of accounting for
energy contracts under SFAS No. 133 and a settlement with certain Enron
Corporation affiliates. Avista Energys transition to SFAS No. 133 resulted in
contracts, which are not considered derivatives, no longer being accounted for
at market value. The transition to SFAS No. 133 increased the volatility of
reported earnings due to the fact that certain contracts, which are not
considered derivatives, economically hedged contracts that are accounted for as
derivative instruments at market value under SFAS No. 133. During September
2003, Avista Energy implemented hedge accounting for certain transactions.
This should partially mitigate the effects from the transition to SFAS No. 133
and reduce the volatility of reporting earnings on a prospective basis.
Net income for Avista Utilities was $19.9 million for the nine months ended
September 30, 2003, compared to $24.8 million for the nine months ended
September 30, 2002. The decrease for Avista Utilities was primarily due to an
increase in other operating expenses, partially offset by an increase in gross
margin and a decrease in interest expense.
Avista Advantage incurred a net loss of $1.2 million for the nine months ended
September 30, 2003 compared to $3.6 million for the nine months ended September
30, 2002. The decrease in the net loss was primarily due to an increase in
operating revenues and a decrease in operating expenses.
The Other line of business incurred a net loss of $4.3 million for the nine
months ended September 30, 2003 compared to $10.5 million (excluding the
cumulative effect of accounting change) for the nine months ended September 30,
2002. The decrease in the net loss was primarily due to a reduction in
litigation costs and settlements.
Total revenues increased $8.4 million for the nine months ended September 30,
2003 compared to the nine months ended September 30, 2002. Avista Utilities
revenues increased $9.2 million, or 1 percent, primarily due to increased
electric revenues, partially offset by decreased natural gas revenues. The
decrease in natural gas revenues was primarily due to natural gas rate
decreases implemented during the fourth quarter of 2002 and partially due to
42
AVISTA CORPORATION
decreased therms sold as a result of milder weather during the first quarter of
2003. The increase in electric revenues reflects an increase in retail,
wholesale and other revenues. Revenues from Energy Marketing and Resource
Management increased $46.0 million, or 36 percent, primarily due to increased
revenues on contracts that are not considered derivatives under SFAS No. 133
(primarily the Agency Agreement with Avista Utilities), as well as the effect
of the transition to SFAS No. 133. The transition to SFAS No. 133 resulted in
certain contracts with net unrecognized losses of $8.2 million for the nine
months ended September 30, 2003 not being accounted for at market value. These
losses are recognized as transactions under the contracts are settled or
realized. These contracts that were not accounted for at market value
economically hedged certain other contracts with unrealized gains for the nine
months ended September 30, 2003, that were considered derivatives under SFAS
No. 133, and as such were recorded at market value. Avista Energys settlement
of various positions with Enron Corporation affiliates and the resulting
release by Avista Energy of amounts which had been reserved against such
positions also had a positive impact of $8.3 million on operating revenues for
the nine months ended September 30, 2003. Revenues from Avista Advantage
increased 21 percent to $14.7 million primarily as a result of customer growth
at Avista Advantage. Revenues from the Other line of business increased $0.3
million primarily due to increased revenues from Advanced Manufacturing and
Development. Intersegment eliminations increased to $100.8 million for the
nine months ended September 30, 2003 from $51.2 million for the nine months
ended September 30, 2002 representing increased sales of natural gas under the
Agency Agreement between Avista Utilities and Avista Energy.
Total resource costs decreased $5.3 million for the nine months ended September
30, 2003 compared to the nine months ended September 30, 2002. Resource costs
for Avista Utilities increased $5.5 million primarily due to an increase in the
expense for power purchased, fuel for generation and other fuel costs,
partially offset by net power and natural gas cost deferrals compared to net
amortization of previous deferrals in the prior period. The net deferral of
power and natural gas costs was $1.3 million for the nine months ended
September 30, 2003, compared to net amortization of $66.5 million for the nine
months ended September 30, 2002. The increase in power
purchased expense was primarily due to an increase in the price of power and
partially due to an increase in the volume of wholesale power purchases.
During the nine months ended September 30, 2003, the initial $9.0 million in
power costs above the amount included in base retail rates in Washington was
expensed as compared to $4.5 million expensed during the third quarter of 2002.
Resource costs for Energy Marketing and Resource Management increased $38.9
million due to an increase in costs from contracts that are not accounted for
as derivatives under SFAS No. 133 (primarily the Agency Agreement with Avista
Utilities), partially offset by a change in natural gas inventory valuations.
Intersegment eliminations increased to $100.8 million for the nine months ended
September 30, 2003 from $51.2 million for the nine months ended September 30,
2002, representing increased purchases of natural gas under the Agency
Agreement between Avista Utilities and Avista Energy.
Operations and maintenance expenses increased $4.8 million for the nine months
ended September 30, 2003 compared to the nine months ended September 30, 2002
primarily due to increased expenses for Avista Utilities, partially offset by
decreased expenses for Avista Advantage. The increase in operations and
maintenance expenses for Avista Utilities was partially due to increased
pension costs. The increase for Avista Utilities was also due to initiatives
implemented during the third quarter of 2001 designed to temporarily reduce
certain operating expenses to improve liquidity and operating cash flows.
These initiatives resulted in significantly reduced expenses for 2001 and the
first half of 2002. Cost reduction measures were not as restrictive during the
last half of 2002 and 2003 as the second half of 2001 and the first half of
2002. Avista Advantage continues to be focused on reducing operating expenses
by improving efficiencies.
Administrative and general expenses decreased $4.9 million for the nine months
ended September 30, 2003 compared to the nine months ended September 30, 2002
primarily due to decreased expenses for the Other business segment, partially
offset by increased expenses for Energy Marketing and Resource Management and
Avista Utilities. Administrative and general expenses for the Other business
segment decreased due to reduced litigation costs and settlements. The
increase for Energy Marketing and Resource Management was primarily a result of
increased compensation expenses. The increase for Avista Utilities was
consistent with the increase in operations and maintenance expenses. Increased
insurance costs also contributed to the increase in administrative and general
expenses.
Depreciation and amortization increased $5.0 million for the nine months ended
September 30, 2003 compared to the nine months ended September 30, 2002
primarily due to utility plant additions at Avista Utilities and the resulting
increase in depreciation expense.
Taxes other than income taxes decreased $3.6 million for the nine months ended
September 30, 2003 compared to the nine months ended September 30, 2002
primarily due to decreased retail natural gas revenues and related taxes for
Avista Utilities.
43
AVISTA CORPORATION
Interest expense decreased $10.8 million for the nine months ended September
30, 2003 compared to the nine months ended September 30, 2002 primarily due to
a decrease in the average balance of debt outstanding. This increase was
partially offset by the inclusion of $0.5 million of preferred stock dividends
as interest expense for the nine months ended September 30, 2003 in accordance
with SFAS No. 150 (see Note 2 of the Notes to Consolidated Financial
Statements). During 2002, the Company repurchased $203.6 million of long-term
debt. The Company repurchased $52.5 million of long-term debt during the nine
months ended September 30, 2003. The Company expects interest expense to
continue to decline in 2003 due to the effect of debt repurchases in 2002 and
the first nine months of 2003. In September 2003, the Company issued $45.0
million of 6.125 percent First Mortgage Bonds due in 2013. The proceeds were
used to repay a portion of the borrowings under the $245.0 million line of
credit that were used on an interim basis to fund $46.0 million of maturing
9.125 percent Unsecured Medium-Term Notes and is expected to result in an
overall reduction in the Companys interest expense.
Capitalized interest decreased $6.9 million for the nine months ended September
30, 2003 compared to the nine months ended September 30, 2002. This was
primarily due to the fact that the Company did not capitalize any interest
related to Coyote Springs 2 subsequent to September 30, 2002 because the
project was substantially completed.
Other income-net decreased $10.2 million for the nine months ended September
30, 2003 compared to the nine months ended September 30, 2002 primarily due to
reduced interest income (including accrued interest on power and natural gas
deferrals) as well as a decrease in the gains on the disposition of assets by
Avista Capital
subsidiaries. Increased losses on certain investments in the Other business
segment also contributed to the decrease in other income-net.
Income taxes increased $0.7 million for the nine months ended September 30,
2003 compared to the nine months ended September 30, 2002, primarily due to
increased earnings before income taxes. The effective tax rate was 43.3
percent for the nine months ended September 30, 2003 compared to 46.7 percent
for the nine months ended September 30, 2002.
During the nine months ended September 30, 2003, Avista Energy recorded as a
cumulative effect of accounting change a charge of $1.2 million (net of tax)
related to the transition from EITF Issue No. 98-10 to SFAS No. 133.
In April 2002, the Company completed its transitional test of goodwill related
to the adoption of SFAS No. 142 Goodwill and Other Intangible Assets.
Accordingly, the Company determined that $6.4 million of goodwill related to
Advanced Manufacturing and Development was impaired. The Company recorded this
impairment of $4.1 million, net of tax, as a cumulative effect of accounting
change for the nine months ended September 30, 2002.
Avista Utilities
Three months ended September 30, 2003 compared to the three months ended
September 30, 2002
Net income for Avista Utilities was $0.9 million for the three months ended
September 30, 2003 compared to a net loss of $0.5 million for the three months
ended September 30, 2002. Avista Utilities income from operations was $22.5
million for the three months ended September 30, 2003 compared to $22.0 million
for the three months ended September 30, 2002. This increase was primarily due
to an increase in gross margin (operating revenues less resource costs),
partially offset by an increase in other operating expenses. The increase in
other operating expenses reflects increased pension and insurance costs.
The following table presents Avista Utilities gross margin for the three
months ended September 30 (dollars in thousands):
Avista Utilities operating revenues increased $19.5 million and resource costs
increased $14.8 million resulting in an increase of $4.7 million in gross
margin for the three months ended September 30, 2003 as compared to the three
months ended September 30, 2002. The gross margin on electric sales increased
$6.0 million and the gross margin on natural gas sales decreased $1.3 million.
44
AVISTA CORPORATION
The increase in electric gross margin was primarily due to an increase in use
per customer and the resulting increase in retail MWhs sold. Total retail MWhs
sold increased 13 percent and residential use per customer increased 6 percent
primarily due to weather. Also contributing to the increase in electric gross
margin was the initial $4.5 million of excess power costs that Avista Utilities
expensed under the ERM during the third quarter of 2002, which reduced electric
gross margin for that period.
The following table presents Avista Utilities electric operating revenues and
MWh sales for the three months ended September 30 (dollars and MWhs in
thousands):
Retail electric revenues increased $11.6 million for the three months ended
September 30, 2003 from the three months ended September 30, 2002. This
increase was primarily due to increased use per customer and total MWhs sold.
These increases reflect an increase in use per customer as well as an increase
in the average number of customers. The increase in use per customer appears
to reflect warmer weather during the three months ended September 30, 2003 as
compared to the three months ended September 30, 2002 and the resulting impact
on air conditioning usage.
Wholesale electric revenues increased $1.3 million, or 8 percent, reflecting
average sales prices that were 108 percent higher than the prior period,
partially offset by a 48 percent decrease in wholesale sales volumes. Average
wholesale prices increased to $56.63 per MWh for the three months ended
September 30, 2003 from $27.22 per MWh for the three months ended September 30,
2002. The increase in average wholesale sales prices appears to primarily
reflect decreased hydroelectric resources as compared to the prior year
throughout the western United States and an increase in the cost of natural gas
used for generation. The extent of future wholesale transactions will be based
on the projection of future needs, the availability of resources owned or under
contract by Avista Utilities, wholesale market prices and changes to loads of
Avista Utilities customers and contractual obligations.
Other electric revenues increased $9.1 million primarily due to the sale of
natural gas purchased as fuel for electric generation that was not used in
generation. This natural gas was not used for generation because electric
wholesale market prices were generally below the cost of operating the
gas-fired thermal generating units.
The following table presents Avista Utilities natural gas operating revenues
and therm sales for the three months ended September 30 (dollars and therms in
thousands):
Natural gas revenues decreased $2.6 million for the three months ended
September 30, 2003 from the three months ended September 30, 2002 primarily due
to a decrease in retail rates. During the fourth quarter of 2002, retail rates
for natural gas were reduced in response to a decrease in current and projected
natural gas costs. The decrease in rates was partially offset by an increase
in total retail therms sold during the third quarter of 2003 as compared to the
third quarter of 2002.
45
AVISTA CORPORATION
The following table presents Avista Utilities average number of electric and
natural gas customers as well as heating degree days for the three months ended
September 30:
The following table presents Avista Utilities resource costs for the three
months ended September 30 (dollars in thousands):
Power purchased for the three months ended September 30, 2003 increased $10.3
million, or 33 percent, compared to the three months ended September 30, 2002
due to an increase in price of power purchases, partially offset by a decrease
in the volume of wholesale power purchases. Average purchased power prices for
the three months ended September 30, 2003 were $34.87 per MWh or 48 percent
higher than $23.64 per MWh for the three months ended September 30, 2002 and
volumes purchased decreased 10 percent compared to the three months ended
September 30, 2002. The increase in the price of power purchases reflects
increases in the price of power in the western United States and the Pacific
Northwest. Warm and dry conditions in the Pacific Northwest as well as the
increased cost of natural gas used to generate electricity during May through
September of 2003 appear to have increased the price of electricity during the
third quarter of 2003 as compared to the third quarter of 2002. Reduced
hydroelectric availability and increased demand due to warmer weather also
appear to have affected wholesale electric prices in the western United States
and the Pacific Northwest.
The net deferral of power costs was $6.8 million for the three months ended
September 30, 2003 compared to $3.6 million of net amortization for the three
months ended September 30, 2002. During the three months ended September 30,
2003, Avista Utilities recovered (collected as revenue) $6.1 million of
previously deferred power costs in Washington and $6.8 million in Idaho.
During the three months ended September 30, 2003, Avista Utilities deferred
$11.6 million of power costs in Washington and $8.2 million in Idaho. Total
deferred power costs were $158.7 million as of September 30, 2003. See further
description of issues related to deferred power costs in the
section Avista Utilities Regulatory Matters.
During the three months ended September 30, 2003, Avista Utilities had $3.8
million of net deferrals of natural gas
46
AVISTA CORPORATION
costs compared to $0.5 million of net
deferrals for the three months ended September 30, 2002. Total deferred
natural gas costs were $17.6 million as of September 30, 2003.
The expense for natural gas purchased for the three months ended September 30,
2003 increased $2.0 million compared to the three months ended September 30,
2002 primarily due to the increase in total therms purchased consistent with an
increase in retail natural gas sales.
Fuel for generation for the three months ended September 30, 2003 increased
$12.3 million compared to the three months ended September 30, 2002. This was
due to expenses associated with natural gas used as fuel for Coyote Springs 2,
which was placed into operation on July 1, 2003.
Nine months ended September 30, 2003 compared to the nine months ended
September 30, 2002
Net income for Avista Utilities was $19.9 million for the nine months ended
September 30, 2003 compared to $24.8 million for the nine months ended
September 30, 2002. Avista Utilities income from operations was $100.4
million for the nine months ended September 30, 2003 compared to $108.3 million
for the nine months ended September 30, 2002. This decrease was primarily due
to an increase in other operating expenses, partially offset by an increase in
gross margin.
The increase in other operating expenses reflects increased pension and
insurance costs. The increase in other operating expense was also due to
initiatives implemented during the third quarter of 2001 designed to
temporarily reduce certain operating expenses to improve liquidity and
operating cash flows. These initiatives resulted in significantly reduced
expenses for 2001 and the first half of 2002. Cost reduction measures were not
as restrictive during the second half of 2002 and 2003 as the second half of
2001 and the first half of 2002.
The following table presents Avista Utilities gross margin for the nine months
ended September 30 (dollars in thousands):
Avista Utilities operating revenues increased $9.2 million and resource costs
increased $5.5 million, which resulted in an increase of $3.7 million in gross
margin for the nine months ended September 30, 2003 as compared to the nine
months ended September 30, 2002. The gross margin on natural gas sales
decreased $5.5 million and the gross margin on electric sales increased $9.2
million.
The decrease in the gross margin on natural gas sales was primarily due to a
decrease in retail customer usage. Primarily due to milder weather during the
first three months of 2003, total retail therm sales decreased by 5 percent.
The increase in electric gross margin was primarily due to the general electric
rate increase of 19.3 percent in Washington base retail rates effective July 1,
2002. This increase was partially offset by the expense of the initial $9.0
million of power supply costs in Washington exceeding the amount included in
base retail rates during the nine months ended September 30, 2003 as compared
to $4.5 million expensed during the nine months ended September 30, 2002.
The following table presents Avista Utilities electric operating revenues and
MWh sales for the nine months ended September 30 (dollars and MWhs in
thousands):
47
AVISTA CORPORATION
Retail electric revenues increased $15.1 million for the nine months ended
September 30, 2003 from the nine months ended September 30, 2002. This
increase was primarily due to electric rate increases implemented during 2002
and partially due to an increase in total MWhs sold. The weather was generally
milder than 2002 during the first quarter of 2003 which reduced MWh sales
during the first part of the year. However, this was offset by warmer weather
during the second and third quarters of 2003, which increased residential and
commercial air conditioning usage during the period.
Wholesale electric revenues increased $8.7 million, or 17 percent, reflecting
average sales prices that were 26 percent higher than the prior period,
partially offset by a 7 percent decrease in wholesale sales volumes. Average
wholesale prices increased to $34.57 per MWh for the nine months ended
September 30, 2003 from $27.54 per MWh for the nine months ended September 30,
2002. The increase in average wholesale sales prices appears to primarily
reflect decreased hydroelectric resources as compared to the prior year
throughout the western United States and an increase in the cost of natural gas
used for generation. The extent of future wholesale transactions will be based
on the projection of future needs, the availability of resources owned or under
contract by Avista Utilities, wholesale market prices and changes to loads of
Avista Utilities customers and contractual obligations.
Other electric revenues increased $31.1 million primarily due to the sale of
natural gas purchased as fuel for electric generation that was not used in
generation. This natural gas was not used for generation because electric
wholesale market prices were generally below the cost of operating the
gas-fired thermal generating units.
The following table presents Avista Utilities natural gas operating revenues
and therm sales for the nine months ended September 30 (dollars and therms in
thousands):
Natural gas revenues decreased $45.8 million for the nine months ended
September 30, 2003 from the nine months ended September 30, 2002 due to a
decrease in retail rates. During the fourth quarter of 2002, retail rates for
natural gas were reduced in response to a decrease in current and projected
natural gas costs. The decrease also reflects a decrease in total therms sold
as a result of mild weather during the first quarter of 2003.
The following table presents Avista Utilities average number of electric and
natural gas customers as well as heating degree days for the nine months ended
September 30:
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AVISTA CORPORATION
The following table presents Avista Utilities resource costs for the nine
months ended September 30 (dollars in thousands):
Power purchased for the nine months ended September 30, 2003 increased $32.3
million, or 44 percent, compared to the nine months ended September 30, 2002
primarily due to an increase in price of power purchases and partially due to
an increase in the volume of power purchases. Average purchased power prices
for the nine months ended September 30, 2003 were $31.59 per MWh or 41 percent
higher than $22.38 per MWh for the nine months ended September 30, 2002 and
volumes purchased increased 2 percent compared to the nine months ended
September 30, 2002. The increase in the price of power purchases reflects
increases in the price of power in the western United States and the Pacific
Northwest. This appears to be partially due to lower than normal precipitation
and snowpack conditions during the fourth quarter of 2002 and the first two
months of 2003 and the anticipated effects on hydroelectric generation in the
region. Precipitation and snowpack conditions improved substantially during
March 2003, which appears to be partially responsible for decreasing wholesale
electric prices in March and April 2003. Warm and dry conditions in the Pacific
Northwest as well as the increased cost of natural gas used to generate
electricity during May through September of 2003 appear to have increased the
price of electricity during the second and third quarters of 2003 as compared
to the second and third quarters of 2002. Reduced hydroelectric availability
and increased demand due to warmer weather also appear to have affected
wholesale electric prices in the western United States and the Pacific
Northwest.
Net amortization of deferred power costs was $4.4 million for the nine months
ended September 30, 2003 compared to $34.7 million for the nine months ended
September 30, 2002. During the nine months ended September 30, 2003, Avista
Utilities recovered (collected as revenue) $19.2 million of previously deferred
power costs in Washington and $19.4 million in Idaho. During the nine months
ended September 30, 2003, Avista Utilities deferred $17.0 million of power
costs in Washington and $17.4 million in Idaho.
During the nine months ended September 30, 2003, Avista Utilities had $5.7
million of net deferrals of natural gas costs compared to $31.8 million of net
amortization for the nine months ended September 30, 2002.
The expense for natural gas purchased for the nine months ended September 30,
2003 decreased $2.7 million compared to the nine months ended September 30,
2002 primarily due to the decrease in total therms purchased consistent with a
decrease in natural gas sales.
Fuel for generation for the nine months ended September 30, 2003 increased
$11.7 million compared to the nine
months ended September 30, 2002. This was due to expenses associated with
natural gas used as fuel for Coyote Springs 2, which was placed into operation
on July 1, 2003.
Other fuel costs for the nine months ended September 30, 2003 increased $25.3
million compared to the nine months ended September 30, 2002. This was due to
an increase in natural gas purchased as fuel for electric generation that was
not used. This natural gas was sold with the associated revenues reflected as
other electric revenues. Other fuel costs exceeded the revenues from selling
the natural gas. This cost is accounted for under the ERM in Washington and
the PCA in Idaho.
49
AVISTA CORPORATION
Energy Marketing and Resource Management
Energy Marketing and Resource Management includes the results of Avista Energy
and Avista Power.
Avista Energy is an electricity and natural gas marketing and resource
management business, operating primarily within the WECC. Avista Energy
focuses on asset-backed optimization of combustion turbines and hydroelectric
assets owned by other entities, long-term electric supply contracts, natural
gas storage, and electric and natural gas transmission and transportation
arrangements. Avista Energy is also involved in the trading of electricity and
natural gas, including derivative commodity instruments. Avista Energys
marketing efforts are driven by its base of knowledge and experience in the
operation of both electric energy and natural gas physical systems in the WECC,
as well as its relationship-focused approach with its customers. Avista
Energys earnings are primarily derived from the following activities:
Both the volatility and liquidity in the wholesale energy markets affect Avista
Energys earnings. The volatility in wholesale energy markets measures the
size and frequency of price movements. Liquidity represents the volume of
activity in the wholesale energy markets during a given period of time.
Increases in the volatility and liquidity in wholesale energy markets generally
increases Avista Energys earnings or losses while decreases in the volatility
and liquidity tend to decrease Avista Energys earnings or losses.
Derivative commodity instruments in the energy trading portfolio are marked to
estimated fair market value on a daily basis (mark-to-market accounting), which
causes earnings variability. Market prices are utilized in determining the
value of electric, natural gas and related derivative commodity instruments.
For electric commodity instruments, these market prices are generally available
through two years. For natural gas commodity instruments, these market prices
are generally available through three years. For longer-term positions and
certain short-term positions for which market prices are not available, models
based on forward price curves are utilized. These models incorporate a variety
of estimates and assumptions, the ultimate outcomes of which are beyond Avista
Energys control including, among others, estimates and assumptions as to
demand growth, fuel price escalation, availability of existing generation and
costs of new generation. Actual experience can vary significantly from these
estimates and assumptions.
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). Avista
Energys trading operations are 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, deregulation
of the electric utility industry, the creditworthiness of counterparties and
the reduced liquidity in energy markets. See Business Risk for further
information.
Avista Energy reports the net margin on derivative commodity instruments
accounted for under SFAS No. 133 as operating revenues. Revenues from
contracts, which are not accounted for as derivatives under SFAS No. 133, are
reported on a gross basis in operating revenues. Costs from contracts, which
are not accounted for as derivatives under SFAS No. 133, are reported on a
gross basis in resource costs.
50
AVISTA CORPORATION
The following table presents Avista Energys gross margin for the three and
nine months ended September 30 (dollars in thousands):
Three months ended September 30, 2003 compared to the three months ended
September 30, 2002
Energy Marketing and Resource Managements net income was $4.8 million for the
three months ended September 30, 2003, compared to $2.7 million for the three
months ended September 30, 2002. The primary reason for the increase in net
income was an increase in the gross margin (operating revenues less resource
costs). Operating revenues increased $18.7 million and resource costs
increased $15.6 million for the three months ended September 30, 2003 as
compared to the three months ended September 30, 2002.
Avista Energys gross margin was $12.8 million for the three months ended
September 30, 2003 compared to $9.8 million for the three months ended
September 30, 2002. The increase in gross margin was partially due to
accounting for energy contracts under SFAS No. 133, which resulted in certain
contracts with net unrecognized losses of $0.3 million for the three months
ended September 30, 2003 not being accounted for at market value. These losses
are recognized as the contracts are settled or realized. These contracts that
are not accounted for at market value economically hedge certain other
contracts with unrealized gains for the three months ended September 30, 2003,
that are considered derivatives under SFAS No. 133, and as such are recorded at
market value with a positive impact on gross margin. During September 2003,
Avista Energy implemented hedge accounting for certain transactions. This
should partially mitigate the effects from the transition to SFAS No. 133 and
reduce the volatility of reporting earnings on a prospective basis.
Realized gains decreased to $7.0 million for the three months ended September
30, 2003 from $61.5 million for the three months ended September 30, 2002.
Realized gains represent the net gain on contracts that have settled. The
decrease in realized gains was primarily due to a decrease in the gains on
physical electric and natural gas transactions. The decrease in realized gains
on physical electric and natural gas transactions was due to a decrease in the
average margin. The total mark-to-market adjustment for Energy Marketing and
Resource Management was an unrealized gain of $5.7 million for the three months
ended September 30, 2003 compared to an unrealized loss of $51.7 million for
the three months ended September 30, 2002. The change in the unrealized
gain/loss was primarily due to the settlement of contracts and the realization
of previously unrealized gains during the three months ended September 30,
2002.
Administrative and general expenses increased $0.4 million, or 8 percent, from
the prior period primarily due to increased incentive compensation expense
based on higher earnings in the third quarter of 2003, partially offset by
decreased professional fees.
Nine months ended September 30, 2003 compared to the nine months ended
September 30, 2002
Energy Marketing and Resource Managements net income was $21.1 million
(excluding the cumulative effect of accounting change) for the nine months
ended September 30, 2003, compared to $19.4 million for the nine months ended
September 30, 2002. Operating revenues increased $46.0 million and resource
costs increased $38.9 million for the nine months ended September 30, 2003 as
compared to the nine months ended September 30, 2002.
Avista Energys gross margin (operating revenues less resource costs) was $51.3
million for the nine months ended September 30, 2003 compared to $44.1 million
for the nine months ended September 30, 2002. The increase in gross margin was
partially due to the transition to SFAS No. 133 which resulted in certain
contracts with net unrecognized losses of $8.2 million for the nine months
ended September 30, 2003 not being accounted for at market value. These losses
are recognized as the contracts are settled or realized. These contracts that
are not accounted for at market value economically hedge certain other
contracts with unrealized gains for the nine months ended September 30, 2003
that are considered derivatives under SFAS No. 133, and as such are recorded at
market value with a positive impact on gross margin. The positive effects of
the transition to SFAS No. 133 will be reversed in future periods as market
values change or the contracts are settled and realized. During September 2003,
Avista Energy implemented hedge accounting for certain transactions. This
should partially mitigate the effects from the transition to SFAS No. 133 and
reduce the volatility of reporting earnings on a prospective basis. Avista
Energys
51
AVISTA CORPORATION
settlement of various positions with Enron Corporation affiliates and
the resulting release by Avista Energy of amounts which had been reserved
against such positions also had a positive impact of $8.3 million on gross
margin for the nine months ended September 30, 2003. During the nine months
ended September 30, 2003, Avista Energy reached settlement agreements on its
terminated positions with certain Enron Corporation affiliates. These
settlement agreements were approved by the U.S. Bankruptcy Court in May 2003.
In each instance, the settlement agreements reached satisfy all of the Avista
entitys obligations and exposure to such Enron Corporation affiliate.
Realized gains decreased to $62.3 million for the nine months ended September
30, 2003 from $125.0 million for the nine months ended September 30, 2002.
Realized gains represent the net gain on contracts that have settled. The
decrease in realized gains was primarily due to a decrease in the gains on
physical electric and natural gas transactions partially offset by the
settlement with Enron Corporation affiliates, increased gains on settled
financial transactions and gains on the change in natural gas inventory
valuations. Realized gains for the nine months ended September 30, 2002 also
reflects gains from the settlement of transactions that were initiated during
the period of high wholesale market prices and volatility during 2000 and 2001.
The total mark-to-market adjustment for Energy Marketing and Resource
Management was an unrealized loss of $11.0 million for the nine months ended
September 30, 2003 compared to an unrealized loss of $80.9 million for the nine
months ended September 30, 2002. The change in the unrealized loss was
primarily due to the transition to SFAS No. 133 described above and the
settlement of contracts with significant realized gains during the nine months
ended September 30, 2002.
Energy Marketing and Resource Managements total assets decreased $353.1
million from December 31, 2002 to September 30, 2003 primarily due to a
decrease in energy commodity assets and the transfer of the Coyote Springs 2
plant from Avista Power to Avista Corp. in January 2003. The decrease in
energy commodity assets reflects both the settlement of contracts during the
period and a decrease in energy commodity prices.
Energy trading activities and positions
The following table summarizes information with respect to Avista Energys
trading activities during the nine months ended September 30, 2003 (dollars in
thousands):
52
AVISTA CORPORATION
The following table discloses summarized information with respect to valuation
techniques and contractual maturities of Avista Energys energy commodity
contracts outstanding as of September 30, 2003 (dollars in thousands):
Avista Power
Avista Power is a 49 percent owner of the Lancaster Project, which commenced
commercial operation in September 2001. Cogentrix Energy, Inc. which owns 51
percent of the Lancaster Project, is in the process of being acquired by the
Goldman Sachs Group, Inc. in a transaction that is expected to be completed in
early 2004. All of the output from the Lancaster Project is contracted to
Avista Energy for 25 years. Avista Power and its co-owner, Mirant Oregon LLC
(Mirant Oregon) an affiliate of Mirant Americas Development, Inc.,
substantially completed the construction of Coyote Springs 2 during 2002. In
January 2003, Avista Powers 50 percent ownership interest in Coyote Springs 2
was transferred to Avista Corp. for inclusion in Avista Utilities power
generation resource
portfolio. See New Generating Resource Avista Utilities for further
information.
Avista Advantage
Avista Advantage remains focused on growing revenue, improving margins,
reducing fixed and variable costs and continuously enhancing client
satisfaction.
The following table presents Avista Advantages gross margin for the three and
nine months ended September 30 (dollars in thousands):
53
AVISTA CORPORATION
Three months ended September 30, 2003 compared to the three months ended
September 30, 2002
Avista Advantages net loss was $0.3 million for the three months ended
September 30, 2003 compared to $0.9 million for the three months ended
September 30, 2002. Operating revenues for Avista Advantage increased $0.6
million and operating expenses decreased $0.4 million, as compared to the three
months ended September 30, 2002. The increase in operating revenues was
primarily due to the expansion of Avista Advantages customer base. The
decrease in operating expenses reflects improved efficiencies, a reduction in
the number of employees and a focus on reducing operating expenses.
Nine months ended September 30, 2003 compared to the nine months ended
September 30, 2002
Avista Advantages net loss was $1.2 million for the nine months ended
September 30, 2003 compared to $3.6 million for the nine months ended September
30, 2002. Operating revenues for Avista Advantage increased $2.6 million and
operating expenses decreased $1.6 million, as compared to the nine months ended
September 30, 2002. The increase in operating revenues was primarily due to
the expansion of Avista Advantages customer base. Avista Advantage had an 18
percent increase in the number of billed sites as of September 30, 2003
compared to September 30, 2002. The decrease in operating expenses reflects
improved efficiencies, a reduction in the number of employees and a focus on
reducing operating expenses. Total costs per account were reduced by 26
percent for the nine months ended September 30, 2003 compared to the nine
months ended September 30, 2002.
Other
The Other line of business includes Avista Ventures, Pentzer, Avista
Development, Avista Services and the operations of Avista Capital that are not
included through its subsidiaries. As opportunities arise, the Company plans
to dispose of investments and phase out of operations in the Other business
segment.
Three months ended September 30, 2003 compared to the three months ended
September 30, 2002
The net loss from this line of business was $1.1 million for the three months
ended September 30, 2003, compared to $0.5 million for the three months ended
September 30, 2002. The increase in the net loss was partially due to a
decrease in interest income. An increase in the net loss recorded by Advanced
Manufacturing and Development also contributed to the increase in the net loss
for the segment. Operating revenues from this line of business decreased $1.0
million and operating expenses decreased $1.0 million, respectively, for the
three months ended September 30, 2003 as compared to the three months ended
September 30, 2002.
Nine months ended September 30, 2003 compared to the nine months ended
September 30, 2002
The net loss from this line of business was $4.3 million for the nine months
ended September 30, 2003, compared to $10.5 million (excluding the cumulative
effect of accounting change) for the nine months ended September 30, 2002. The
decrease in the net loss was primarily due to an increase in income from
operations. Operating revenues from this line of business increased $0.3
million and operating expenses decreased $10.0 million, respectively, for the
nine months ended September 30, 2003 as compared to the nine months ended
September 30, 2002. The increase in income from operations was primarily due
to a decrease in litigation costs and settlements. The improvement in income
from operations was partially offset by an increase in losses on certain other
investments of Avista Ventures not related to Advanced Manufacturing and
Development.
Discontinued Operations
In July 2003, Avista Corp. announced an investment of $6.0 million by a group
of private equity investors in a new entity, AVLB, Inc., which acquired the
assets previously held by Avista Corp.s fuel cell manufacturing and
development subsidiary, Avista Labs. In September 2003, AVLB, Inc. (doing
business under the name Avista Labs) received an additional investment by
private equity investors of $6.2 million. This investment relieved Avista
Corp. of its commitment to provide additional funding of up to $1.5 million to
AVLB, Inc. Avista Corp. has an ownership interest of approximately 17.5
percent in AVLB, Inc., with the opportunity but no further obligation to fund
or invest in this business.
In September 2001, the Company reached a decision that it would dispose of
substantially all of the assets of Avista Communications. The divestiture of
the operating assets of Avista Communications was complete by the end of 2002.
54
AVISTA CORPORATION
Amounts reported as discontinued operations for the three and nine months ended
September 30, 2003 represent the operations of Avista Labs. Amounts reported
as discontinued operations for the three and nine months ended September 30,
2002 represents the operations of Avista Communications and Avista Labs.
New Generating Resource Avista Utilities
In July 2003, the 280 MW combined cycle natural gas-fired combustion turbine
power plant at Coyote Springs located near Boardman, Oregon was placed into
operation. The Companys ownership interest in the plant was transferred from
Avista Power to Avista Corp. in January 2003 to be operated as an asset of
Avista Utilities. Avista Corp. and Mirant Oregon are sharing equally in the
costs of operation and output from Coyote Springs 2. Each owner is separately
responsible for arranging for the purchase and delivery of natural gas in order
to fuel its respective interest in the plant. Each owner is also separately
responsible for the sale and delivery of electric energy generated with respect
to its interest in the plant.
Transactions with Mirant Corporation
On July 14, 2003, Mirant Corporation and substantially all its subsidiaries in
the United States filed for bankruptcy protection under chapter 11 of the
bankruptcy code for protection from creditors.
The Company does not expect the bankruptcy filing by Mirant Corporation, which
did not include Mirant Oregon, the owner of one-half of Coyote Springs 2, to
have any material effect on the joint ownership and operation of the plant.
Avista Corp. and Mirant Oregon are both current with respect to their
obligations to share equally in the costs of the plant. While physical
limitations prevent the operation of the plant at less than approximately
seventy percent of its base load capacity, the joint operating agreement
provides mechanisms to allow a single owner to dispatch and direct the
operation of more than its interest in the plant in order to achieve operation
at or above the plants minimum dispatch level in the event that the other
owner is unable or unwilling to dispatch its portion of the plant.
Additionally, provisions in the joint operating agreement provide that if
either party fails to fund its portion of the operating costs or otherwise meet
its obligations under the joint operating agreement, that the non-defaulting
owner may elect a variety of remedies. Such remedies include the right, after
notice and a cure period, (i) to convert a payment default into an adjustment
of the ownership interests in the plant, resulting in a reduction of the
defaulting owners interest and a corresponding increase in the non-defaulting
owners interest, (ii) to declare a default and pursue recovery of unpaid
amounts or other equitable remedies against the defaulting party, (iii) to
exercise a purchase option to acquire the defaulting owners interest in the
plant, or (iv) to trigger a retirement of the plant. The Company will continue
to assess the ability of Mirant Oregon to perform its obligations under the
joint operating agreement and the need to exercise remedies in the event the
impact of the Mirant Corporation bankruptcy prevents Mirant Oregon from
performing its obligations with respect to Coyote Springs 2.
Both Avista Corp. and Avista Energy had energy contracts with a subsidiary of
Mirant Corporation that was included in the bankruptcy filing, Mirant Americas
Energy Marketing (MAEM). The bankruptcy filing did not represent an event of
default or trigger the termination of Avista Corp.s natural gas swap contract
with MAEM. As of the bankruptcy filing date, Avista Corp. was in a liability
position with respect to this contract and does not expect to have any material
adverse effect on its financial condition or results of operations as a result
of this bankruptcy filing. The bankruptcy filing constituted an event of
default under contracts between Avista Energy and MAEM. As a result, Avista
Energy terminated all of its contracts and suspended trading activities with
MAEM. Avista Energys contracts with MAEM provide that, upon termination, the
net settlement of accounts receivable and accounts payable will be netted
against the net mark-to-market value of the terminated forward contracts. As
of the bankruptcy filing date, it is estimated that for Avista Energy, netting
the mark-to-market positions against net accounts receivables or payables
results in a net liability position and will not result in any material adverse
effect on its financial condition or results of operations.
55
AVISTA CORPORATION
Liquidity and Capital Resources
Review of Cash Flow Statement
Continuing Operating Activities
Net cash provided by continuing operating
activities was $120.7 million for the nine months ended September 30, 2003
compared to $287.0 million for the nine months ended September 30, 2002. The
primary reason for the decrease in net cash provided by continuing operating
activities was a decrease in cash
provided by working capital components, a change in power and natural gas cost
amortizations and deferrals and a change in energy commodity assets and
liabilities. Power and natural gas cost deferrals, net of amortization, were
$1.3 million for the nine months ended September 30, 2003 compared to net
amortization of $66.5 million for the nine months ended September 30, 2002.
This was primarily due to reduced amortization (and a corresponding decrease in
cash revenues received from customers) of deferred natural gas costs and the
reduced amortization (as a greater percentage of electric rate increases have
been allocated to a general rate increase) of deferred power costs in
Washington. The amortization of deferred power and natural gas costs is
substantially matched by an increase in cash revenues collected from customers.
The deferral of power and natural gas costs is substantially matched by an
increase in cash resource costs paid for power and natural gas costs. Net cash
provided by working capital components was $23.3 million for the nine months
ended September 30, 2003, compared to $99.2 million for the nine months ended
September 30, 2002. Significant changes in non-cash items also included a
$69.9 million change in energy commodity assets and liabilities, representing
the change from an unrealized loss of $80.9 million on energy trading
activities for Avista Energy for the nine months ended September 30, 2002 to an
unrealized loss of $11.0 million for the nine months ended September 30, 2003.
The $28.9 million change in the provision for deferred income taxes was
primarily due to changes in deferred power and natural gas cost amortizations
and deferrals described above.
Continuing Investing Activities
Net cash used in continuing investing
activities was $87.7 million for the nine months ended September 30, 2003, an
increase compared to $55.5 million for the nine months ended September 30,
2002. The increase was primarily due to an increase in utility property
construction expenditures and the investment in securities held for trading.
Utility property construction expenditures were unusually low during 2002 due
to liquidity constraints. The securities held for trading represents the
investment of cash held at Avista Energy in short-term instruments.
Continuing Financing Activities
Net cash used in continuing financing
activities was $28.9 million for the nine months ended September 30, 2003
compared to $198.2 million for the nine months ended September 30, 2002.
During the nine months ended September 30, 2003, short-term borrowings
increased $55.5 million, the Company repurchased $52.5 million of long-term
debt scheduled to mature in future years, and $57.1 million of long-term debt
matured. In September 2003, the Company issued $45.0 million (net proceeds of
$44.8 million) of 6.125 percent First Mortgage Bonds due in 2013. The increase
in short-term borrowings primarily reflects an increase in the amount of debt
outstanding under Avista Corp.s line of credit. The overall decrease in
borrowings during the nine months ended September 30, 2003 reflects positive
cash flows from operations.
During the nine months ended September 30, 2002, the Company repurchased $200.5
million of long-term debt and short-term borrowings increased $34.0 million.
Overall Liquidity
During 2002 and the nine months ended September 30, 2003, the Companys overall
liquidity improved compared to 2001. The general electric rate case order
issued by the WUTC in June 2002 is allowing the Company to continue to improve
its liquidity. The general electric rate case order provided for the
restructuring and continuation of previously approved rate increases totaling
31.2 percent. The general increase to base retail rates was 19.3 percent and
the remaining 11.9 percent represents the continued recovery of deferred power
costs. Additionally, the Company has a PCA surcharge of 19.4 percent in place
in Idaho. See further details in the section Avista Utilities - Regulatory
Matters.
For 2003, operating budgets were designed to control operating costs and limit
capital expenditures. 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. As a result of
improved operating cash flow, during 2002 and through September 30, 2003, the
Company repurchased $256.1 million of long-term debt.
56
AVISTA CORPORATION
If Avista Utilities power and natural gas costs were to significantly exceed
the levels currently recovered from retail customers, its cash flows would be
negatively affected. Factors that could cause purchased power costs to exceed
the levels currently recovered from customers include, but are not limited to,
higher prices in wholesale markets combined with an increased need to purchase
power in the wholesale markets. Current FERC imposed price caps limit
wholesale market prices to $250 per MWh. Factors beyond the Companys control
that could result in an increased need to purchase power in the wholesale
markets include, but are not limited to, 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.
Covenants in Avista Energys credit agreement as well as certain counterparty
agreements result in Avista Energy maintaining certain levels of cash and
therefore inherently limiting the amount of cash dividends that are available
for distribution to Avista Capital and ultimately to Avista Corp.
In July 2003, Avista Corp. announced an investment by a group of private equity
investors in a new entity, AVLB, Inc., which acquired the assets previously
held by Avista Corp.s fuel cell manufacturing and development subsidiary,
Avista Labs. In September 2003, AVLB, Inc. (doing business under the name
Avista Labs) received an additional investment by private equity investors of
$6.2 million. This eliminates Avista Corp.s future funding requirements for
this business while preserving the opportunity, but not the obligation, for
future investment.
Capital Resources
The Company incurred significant indebtedness to support capital expenditures,
to fund power and natural gas costs that were in excess of the amount recovered
currently through rates and to maintain working capital through the end of
2001. However, as of September 30, 2003, the Companys total debt outstanding
was $1,000.9 million, a decrease from $1,004.5 million as of December 31, 2002
and $1,252.6 million as of December 31, 2001. The decrease from December 31,
2002 was primarily due to the repurchase of long-term debt and the maturity of
long-term debt, partially offset by the issuance of long-term debt in September
2003 and an increase in short-term borrowings. The decrease in total debt was
made possible by positive operating cash flows from both Avista Utilities and
Avista Energy. The Company needs to finance capital expenditures and obtain
additional working capital from time to time. The cash requirements needed to
service indebtedness, both short-term and long-term, reduces the amount of cash
flow available to fund working capital, purchased power and natural gas costs,
capital expenditures, dividends and other corporate requirements.
The Company generally 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. Cash provided by utility operating
activities and cash generated by Avista Energy are expected to be the Companys
primary sources of funds for operating needs, dividends and capital
expenditures for 2003.
On May 13, 2003, the Company amended its committed line of credit with various
banks to increase the amount to $245.0 million from $225.0 million and extend
the expiration date to May 11, 2004. The Company can request the issuance of up
to $75.0 million in letters of credit under the amended committed line of
credit. As of September 30, 2003 and December 31, 2002, the Company had $85.0
million and $30.0 million, respectively, of borrowings outstanding under this
committed line of credit. As of September 30, 2003 and December 31, 2002,
there were $11.0 million and $14.3 million in letters of credit outstanding,
respectively. The committed line of credit is secured by $245.0 million of
non-transferable first mortgage bonds of the Company issued to the agent bank.
Such first mortgage bonds would only become due and payable in the event, and
then only to the extent, that the Company defaults on its obligations under the
committed line of credit.
The committed line of credit agreement contains customary covenants and default
provisions, including covenants not to permit the ratio of consolidated total
debt (not including preferred securities) to consolidated total
capitalization of Avista Corp. to be, at the end of any fiscal quarter,
greater than 65 percent. As of September 30, 2003, the Company was in
compliance with this covenant with a ratio of 53.8 percent. The committed line
of credit also has a covenant requiring the ratio of earnings before interest,
taxes, depreciation and amortization to interest expense of Avista Utilities
for the twelve-month period ending September 30, 2003 to be greater than 1.6 to
1. As of September 30, 2003, the Company was in compliance with this covenant
with a ratio of 2.18 to 1.
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 difficult for the Company to obtain financing on any reasonable terms to pay
creditors or fund operations, and the
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Company would likely be prohibited from
paying dividends on its common stock. As of September 30, 2003, Avista Corp.
was in compliance with the covenants of all of its financing agreements.
In March 2003, the Company redeemed 17,500 shares of preferred stock for $1.6
million, satisfying its redemption requirement for 2003.
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
2.00 to 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 September 30, 2003,
the Company could issue $64.4 million of additional First Mortgage Bonds under
the most restrictive of these financing agreements.
On June 25, 2003, the Company filed a registration statement on Form S-3 with
the Securities and Exchange Commission for the purpose of issuing up to $150.0
million of secured or unsecured debt securities. In September 2003, the
Company issued $45.0 million of 6.125 percent First Mortgage Bonds due in 2013.
The proceeds were used to repay a portion of the borrowings under the $245.0
million line of credit that were used on an interim basis to fund $46.0 million
of maturing 9.125 percent Unsecured Medium-Term Notes and is expected to result
in an overall reduction in the Companys interest expense.
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 and the Company
currently does not have any plans to issue common stock under this registration
statement.
Inter-Company Debt; Subordination
As part of its on-going cash management practices and operations, Avista Corp.
from time to time makes unsecured short-term loans to, and borrowings from,
Avista Capital. In turn, Avista Capital from time to time makes unsecured
short-term loans to, and borrowings from, its subsidiaries. As of September
30, 2003, Avista Corp. held short-term notes receivable from Avista Capital in
the principal amount of $40.0 million.
In addition, Avista Capital from time to time guarantees the indebtedness and
other obligations of its subsidiaries. See Energy Marketing and Resource
Management Operations for further information.
The credit arrangements of Avista Capitals subsidiaries generally provide that
any indebtedness owed by such entity to its corporate parent will be
subordinated to the indebtedness outstanding under such credit arrangements.
The right of Avista Corp., as a shareholder, to receive assets of any of its
direct or indirect subsidiaries upon the subsidiarys liquidation or
reorganization (and the consequent right of the holders of debt securities and
other creditors of Avista Corp. to participate in those assets) is junior to
the claims against such assets of that subsidiarys creditors. As a result,
the obligations of Avista Corp. to its debt securityholders and other unrelated
creditors are effectively subordinated in right of payment to all indebtedness
and other liabilities and commitments (including trade payables and lease
obligations) of Avista Corp.s direct and indirect subsidiaries. Similarly,
the obligations of Avista Capital to its creditors are effectively subordinated
in right of payment to all indebtedness and other liabilities and commitments
of its direct and indirect subsidiaries.
Pension Plan
As of September 30, 2003, the Companys pension plan had assets with a fair
value that was less than the present value of the accumulated benefit
obligation under the plan. In 2002, the Company recorded an additional minimum
liability for the unfunded accumulated benefit obligation of $33.4 million and
an intangible asset of $6.4 million (representing the amount of unrecognized
prior service cost) related to the pension plan. This resulted in a charge to
other comprehensive loss of $17.6 million, net of taxes.
The Company does not expect the current pension plan funding deficit to have a
material adverse impact on its financial condition, results of operations or
cash flows. 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. The Company has made $12 million in cash
contributions to the pension plan in 2003 and expects to make $15 million in
cash contributions over the next 12 months. The Companys goal is to have the
pension plans current obligations fully funded by 2006.
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Off-Balance Sheet Arrangements
Avista Receivables Corp. (ARC), formerly known as WWP Receivables Corp., is a
wholly owned, bankruptcy-remote subsidiary of the Company formed in 1997 for
the purpose of acquiring or purchasing interests in certain accounts
receivable, both billed and unbilled, of the Company. On May 29, 2002, ARC,
the Company and a third-party financial institution entered into a three-year
agreement whereby ARC can sell without recourse, on a revolving basis, up to
$100.0 million of those receivables. ARC 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 September 30, 2003, $40.0 million in receivables were sold pursuant to
the agreement.
WP Funding LP is an entity that was formed in 1993 for the purpose of acquiring
the 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 and
3 percent represented equity. The Company operates the Rathdrum CT and leases
it from WP Funding LP and currently makes lease payments of $4.5 million per
year. The total amount of WP Funding LP debt outstanding that was not included
on the Companys balance sheet was $54.6 million as of September 30, 2003. 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 addition of the
Rathdrum CT to Avista Utilities generation resource base, which entered
commercial operation in 1995, was reviewed in previous state regulatory filings
with the WUTC and IPUC. FASB Interpretation No. 46 will require the Company to
consolidate WP Funding LP effective for the period ended December 31, 2003.
Based on September 30, 2003 amounts, the consolidation of WP Funding LP will
increase long-term debt by $54.6 million, net utility plant by $40.2 million,
regulatory assets by $16.1 million and other liabilities by $1.7 million
(representing minority interest).
Total Company Capitalization
The Companys consolidated capital structure, including the current portion of
long-term debt and short-term borrowings consisted of the following as of
September 30, 2003 and December 31, 2002 (dollars in thousands):
The Companys total debt decreased by $3.7 million due to both the repurchase
of long-term debt and the maturity of long-term debt, partially offset by the
issuance of long-term debt in September 2003 and an increase in short-term
borrowings. The Companys consolidated common equity increased $16.5 million
during the nine months ended September 30, 2003 primarily due to net income and
the issuance of common stock through the Dividend Reinvestment Plan and
employee benefit plans, partially offset by dividends. The Company has a
target capital structure of 50 percent total debt and 50 percent preferred
trust securities, preferred stock and common equity.
Credit Ratings
The Companys credit ratings were downgraded during the fourth quarter of 2001
resulting in an overall corporate credit rating that is below investment grade.
The downgrade was due to liquidity concerns primarily related to the
significant amount of purchased power and natural gas costs incurred and the
resulting increase in debt levels and debt service costs.
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AVISTA CORPORATION
The following table summarizes the Companys current credit ratings:
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.
Avista Utilities Operations
Avista Utilities held cash deposits from other parties in the amount of $22.2
million as of September 30, 2003, which is included in cash and cash
equivalents with a corresponding amount in other current liabilities on the
Consolidated Balance Sheet. These amounts are subject to return if conditions
warrant because of continuing portfolio value fluctuations with those parties
or substitution of collateral.
As of September 30, 2003, Avista Utilities had $32.9 million in cash and
temporary investments, including the $22.2 million of cash deposits from other
parties.
See Notes 4, 7, 8, 9 and 10 of Notes to Consolidated Financial Statements for
additional details related to financing activities.
Energy Marketing and Resource Management Operations
On July 25, 2003, Avista Energy and its subsidiary, Avista Energy Canada, Ltd.,
as co-borrowers, entered into a committed credit agreement with a group of
banks in the aggregate amount of $110.0 million expiring July 23, 2004,
replacing a previous uncommitted credit agreement that had an extended
expiration date of July 31, 2003. This new committed credit facility provides
for the issuance of letters of credit to secure contractual obligations to
counterparties. This facility is guaranteed by Avista Capital and secured by
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 $30.0 million. No cash advances
were outstanding under the credit agreement as of September 30, 2003. Letters
of credit in the aggregate amount of $32.2 million and $17.4 million were
outstanding as of September 30, 2003 and December 31, 2002, 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. The credit agreement also contains covenants
and other restrictions related to Avista Energys trading limits and positions,
including VAR limits, restrictions with respect to changes in risk management
policies or volumetric limits, and limits on exposure related to hourly and
daily trading of electricity. Also, a reduction in the credit rating of Avista
Corp. would represent an event of default under Avista Energys credit
agreement. Avista Energy was in compliance with the covenants of its credit
agreement as of September 30, 2003.
Avista Capital provides guarantees for Avista Energys credit agreement and, in
the course of business, may provide guarantees to other parties with whom
Avista Energy may be doing business. At any point in time, Avista Capital is
only liable for the outstanding portion of the guarantee, which was $34.9
million as of September 30, 2003. The face value of all performance guarantees
issued by Avista Capital for energy trading contracts at Avista Energy was
$436.2 million as of September 30, 2003.
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AVISTA CORPORATION
Avista Energy manages collateral requirements with counterparties by providing
letters of credit, providing guarantees from Avista Capital, depositing cash
with counterparties and offsetting transactions with counterparties. Cash
deposited with counterparties totaled $50.5 million as of September 30, 2003,
which is included in prepayments and other current assets on the Consolidated
Balance Sheet. Avista Energy held cash deposits from other parties in the
amount of $86.7 million as of September 30, 2003, which is included in cash and
cash equivalents with a corresponding amount in other current liabilities on
the Consolidated Balance Sheet. These amounts are subject to return if
conditions warrant because of continuing portfolio value fluctuations with
those parties or substitution of collateral.
As of September 30, 2003, Avista Energy had $152.9 million in cash, including
the $86.7 million of cash deposits from other parties. In addition, Avista
Energy had $18.9 million of short-term investments held for trading as of
September 30, 2003. Covenants in Avista Energys credit agreement as well as
certain counterparty agreements result in Avista Energy maintaining certain
levels of cash and therefore inherently limiting the amount of cash dividends
that are available for distribution to Avista Capital and ultimately to Avista
Corp. During the nine months ended September 30, 2003 Avista Energy paid $2.1
million in dividends to Avista Capital. During October 2003, Avista Energy
paid $10.0 million in dividends to Avista Capital.
Avista Advantage Operations
As of September 30, 2003, Avista Advantage had $0.1 million of cash and cash
equivalents and $2.4 million in debt was outstanding. Avista Advantages
outstanding debt is related to capital leases.
Other Operations
As of September 30, 2003, this line of business had $1.3 million of cash and
cash equivalents and $0.7 million in debt was outstanding. The outstanding
debt includes short-term borrowings and capital leases.
Contractual Obligations
The Companys future contractual obligations have not changed materially from
the amounts disclosed in the 2002 Form 10-K with the following exceptions:
In September 2003, the Company issued $45.0 million of 6.125 percent First
Mortgage Bonds due in 2013. The proceeds were used to repay a portion of the
borrowings under the $245.0 million line of credit that were used on an interim
basis to fund $46.0 million of maturing 9.125 percent Unsecured Medium-Term
Notes.
The following table details the Companys debt repurchases prior to scheduled
maturity from January 1, 2003 through September 30, 2003 (dollars in
thousands):
Short-term debt of Avista Utilities increased from $95.0 million as of December
31, 2002 to $125.0 million as of September 30, 2003. The amount outstanding as
of September 30, 2003 included $85.0 million under Avista Corp.s $245.0
million committed line of credit and $40.0 million under a $100.0 million
accounts receivable financing facility as discussed under Off-Balance Sheet
Arrangements. Amounts outstanding under the accounts receivable financing
facility are accounted for as sales of accounts receivable on the Consolidated
Balance Sheet.
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Avista Energys contractual commitments to purchase energy commodities in
future periods were as follows as of September 30, 2003 (dollars in millions):
Avista Energy also has sales commitments related to energy commodities in
future periods.
As of September 30, 2003, Avista Corp. did not have any commitments outstanding
with equity triggers. When the Companys corporate credit rating was reduced
to below investment grade in October 2001, additional collateral requirements
due to rating triggers were met and further requirements are not currently
anticipated. Avista Corp. does not expect any material impact from rating
triggers; remaining triggers for Avista Corp. primarily relate to changes in
pricing under certain financing agreements. A reduction in the credit rating
of Avista Corp. would represent an event of default under Avista Energys
credit agreement.
Future Outlook
Business Strategy
Avista Corp. continues to implement its business strategy of focusing on
fundamentals with a concentrated effort on its core energy-related businesses.
Avista Corp. intends to focus on improving cash flows and earnings, controlling
costs and reducing debt while working to restore an investment grade credit
rating. 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 is expected to result
primarily from economic and population growth in its service territory. It is
Avista Utilities strategy to own or have contracts for a sufficient amount of
resources to meet its retail and wholesale energy requirements under a range of
operating conditions. Avista Energy operates primarily within the WECC and
focuses on asset-backed optimization of combustion turbines and hydroelectric
assets owned by other entities, long-term electric supply contracts, natural
gas storage, and electric and natural gas transmission and transportation
arrangements. Avista Energy is also involved in the trading of electricity and
natural gas, including derivative commodity instruments. Avista Energys
marketing efforts are driven by its base of knowledge and experience in the
operation of both electric energy and natural gas physical systems in the WECC,
as well as its relationship-focused approach with its customers. The Companys
strategy may include the acquisition or management of generation assets that
become available with partners that have capital resources. Avista Advantage
remains focused on growing revenue, improving margins, reducing fixed and
variable costs and continuously enhancing client satisfaction. Over time as
opportunities arise, the Company plans to dispose of assets and phase out
operations in the Other business segment.
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 providers of power may also
compete for sales to existing customers, including new market entrants as a
result of deregulation. Competition for available electric resources can be
critical to utilities as surplus power resources are absorbed by load growth.
Avista Utilities natural gas distribution operations compete with other energy
sources; however, natural gas continues to maintain a price advantage compared
to heating oil, propane and other fuels, provided that the natural gas
distribution system is proximate to prospective customers.
The 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 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.
Participants in the wholesale market include other utilities, federal marketing
agencies and energy trading and marketing companies. The wholesale market has
changed significantly over the last few years with respect to market
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AVISTA CORPORATION
participants involved, level of activity, variability in market prices,
liquidity, FERC-imposed price caps and counterparty credit issues. During 2000
and the first half of 2001, the electric wholesale market in the WECC region
was more turbulent than previously experienced and marked by significant
volatility, service disruptions and defaults by certain participants. During
the second half of 2001 and 2002, wholesale market prices decreased to levels
similar to those experienced before 2000. Wholesale market prices increased in
2003 compared to 2002; however, prices have not increased to levels experienced
during 2000 and the first half of 2001. Many energy companies are facing
liquidity issues, and counterparty credit exposure is of concern to market
participants. During 2002 and 2003 as compared to 2000 and the first half of
2001, electric and natural gas trading volumes have decreased, the energy
markets are less volatile and fewer creditworthy counterparties are currently
participating in the energy markets. Avista Corp. is actively monitoring
energy industry developments with a focus on liquidity, volatility of energy
trading markets and counterparty credit exposure.
The Avista Capital subsidiaries, particularly Avista Advantage, 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.
Pending Energy Legislation
The United States Congress is currently considering broad energy legislation
which reportedly may, among other things, promote investment in critical
transmission capacity and efficiency measures; expedite transmission facility
siting; improve system reliability, including through improved enforcement of
reliability standards and expanded open access requirements; repeal the PUHCA;
grant the FERC authority to order refunds from otherwise non-jurisdictional
sellers of electricity in certain markets; require the FERC to meet a public
interest standard before abrogating contracts; expand the FERCs merger
authority; and stimulate investment in and use of renewable energy. The
Company cannot predict whether or not any such legislation will be enacted or,
if enacted the exact substance of the legislation or the effects on the
Company.
Business Risk
The Companys operations are exposed to risks including, but not limited to,
the price and supply of purchased power, fuel and natural gas, regulatory
recovery of power and natural gas costs, streamflow and weather conditions, the
effects of changes in legislative and governmental regulations, changes in
regulatory requirements, availability of generation facilities, competition,
technology and availability of funding. Also, like other utilities, the
Companys facilities and operations may be exposed to terrorism risks or other
malicious acts. See further reference to risks and uncertainties under Safe
Harbor for Forward-Looking Statements.
Avista Utilities has mechanisms in place in each regulatory jurisdiction, which
provide for the recovery of the majority of the changes in its power and
natural gas costs. The majority of power and natural gas costs that exceed the
amount currently recovered through retail rates are deferred on the balance
sheet for the opportunity for recovery through future retail rates. These
deferred power and natural gas costs are subject to review for prudence and
recoverability and as such certain deferred costs may be disallowed by the
respective regulatory agencies.
Hydroelectric conditions in 2001 were significantly below normal, leading to a
greater than normal reliance on purchased power. Hydroelectric generation was
slightly above normal in 2002 and current forecasts indicate that hydroelectric
generation will be approximately 90 percent of normal in 2003. The earnings
impact of these factors is mitigated by regulatory mechanisms that are intended
to defer increased power supply costs for recovery in future periods. Avista
Utilities is not able to predict how the combination of energy resources,
energy loads, prices, rate recovery and other factors will ultimately drive
deferred power costs and the timing of recovery of these costs in future
periods. See further information at Avista Utilities - Regulatory Matters.
Challenges facing Avista Utilities electric operations include, among other
things, the timing of the recovery of deferred power and natural gas costs,
changes in the availability of and volatility in the prices of power and fuel,
generating unit availability, legislative and governmental regulations,
potential tax law changes, customer response to price increases and surcharges,
streamflows and weather conditions.
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AVISTA CORPORATION
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. Natural gas commodity prices during 2002 were
generally lower than during 2000 and the first half of 2001. Natural gas
commodity prices increased towards the end of 2002 and into the first half of
2003 before declining somewhat during the third quarter of 2003. 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 the potential for 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, oil space and electric 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 and
the timing of recovery for increased commodity costs. Avista Utilities
natural gas business also faces the potential for certain 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, subject to
state regulatory review and approval. Avista Utilities has long-term
transportation contracts with several of its largest industrial customers,
which reduces the risk of these customers by-passing the system in the
foreseeable future.
In addition to its asset management activities, 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 imposition of market controls by federal and state agencies.
The FERC is conducting proceedings and investigations related to market
controls within the western United States that include proposals by certain
parties to impose refunds. 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 prior periods. Avista Energy and Avista Utilities have joined other parties
in opposing these proposals. The refund proceedings provide that any refunds
owed could be offset against unpaid energy debts due to the same party. Avista
Energy has fully reserved for all defaulted obligations from California parties
and believes that any refunds imposed would not exceed its uncollected
receivables. On June 25, 2003, the FERC denied the request of certain parties
for retroactive refunds for spot market sales in the Pacific Northwest during
the period from December 25, 2000 to June 20, 2001. However, the FERC has
granted a request for rehearing in the Pacific Northwest refund proceedings.
See Power Market Issues for further information with respect to the refund
proceedings.
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.
Commodity Price Risk.
Both Avista Utilities and Avista Energy are subject to
energy commodity price risk. The price of power in wholesale markets is
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 operate thermal generating units. Any combination
of these factors that results in a shortage of energy generally causes the
market price of power to move upward. 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, prices can be
affected by the 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) can also affect market prices.
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, 2002 and
2003 relative to 2000 and the first 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
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AVISTA CORPORATION
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. These
policies include an evaluation of the financial condition and credit ratings of
counterparties, collateral requirements or other credit enhancements, such as
letters of credit or parent company guarantees, and the use of standardized
agreements that allow for the netting or offsetting of positive and negative
exposures associated with a single counterparty. However, despite mitigation
efforts, defaults by counterparties periodically occur. Avista Energy
experienced payment receipt defaults from certain parties impacted by the
California energy crisis. Both Avista Corp. and Avista Energy engaged in
considerable business and had short-term and long-term contracts with
entities that have filed for bankruptcy protection. These bankruptcies and
other changes, uncertainties and regulatory proceedings have resulted in
reduced liquidity in the energy markets.
A trend of declining credit quality was evident during 2002 and has continued
into 2003, particularly throughout the energy industry. Rating agencies have
downgraded the credit ratings of several of the counterparties of Avista Energy
and Avista Utilities. Avista Energy and Avista Utilities regularly evaluate
counterparties credit exposure for future settlements and delivery
obligations. Avista Energy and Avista Utilities have taken a conservative
position by reducing or eliminating open (unsecured) credit limits for parties
perceived to have increased default risk. Counterparty collateral is used to
offset the Companys credit risk where unsettled net positions and future
obligations by counterparties to pay Avista Utilities and/or Avista Energy or
deliver to Avista Utilities and/or Avista Energy warrant.
Avista Energy has concentrations of suppliers and customers in the electric and
natural gas industries including electric utilities, natural gas distribution
companies, and other energy marketing and trading companies. In addition,
Avista Energy has concentrations of credit risk related to geographic location
as Avista Energy operates in the western United States and western Canada.
These concentrations of counterparties and concentrations of geographic
location may impact Avista Energys overall exposure to credit risk, either
positively or negatively, in that the counterparties may be similarly affected
by changes in economic, regulatory or other conditions.
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 transactions. These counterparties may seek assurance of
performance in the form of letters of credit, prepayment or cash deposits, and,
in the case of Avista Energy, parent company (Avista Capital) 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.
In conjunction with the valuation of their commodity derivative instruments and
accounts receivable, Avista Utilities and Avista Energy maintain credit
reserves that are based on managements evaluation of the credit risk of the
overall portfolio. Based on these policies, exposures and credit reserves, the
Company does not anticipate a materially adverse effect on its financial
condition or results of operations as a result of counterparty nonperformance.
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, a change in regulatory requirements, forced outages at
generating plants and disruptions to information systems and other
administrative tools required for normal operations. 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.
The emergence of terrorism threats, both domestic and foreign, is a risk to the
entire utility industry, including Avista Utilities. Potential disruptions to
operations or destruction of facilities from terrorism or other malicious acts
are not readily determinable. The Company has taken various steps to mitigate
terrorism risks and to prepare contingency plans in the event that its
facilities are targeted.
Interest Rate Risk.
The Company is subject to the risk of fluctuating interest
rates in the normal course of business. 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. The interest rate on $40 million of
Company-Obligated Mandatorily Redeemable Preferred Trust Securities - Series B
is adjusted quarterly, reflecting current market conditions. In order to lower
interest payments during a period of declining interest rates, Avista Corp.
entered into an interest rate swap agreement, effective July 17, 2002, that was
terminated on May 7, 2003. This interest rate swap agreement effectively
changed the interest rate on $25 million of Unsecured Senior Notes from a fixed
rate of 9.75 percent to a variable rate based on LIBOR. Additionally, amounts
borrowed under the Companys committed line of credit have a variable interest
rate.
65
AVISTA CORPORATION
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 and prices. The downgrades also required the Company
to provide letters of credit and/or collateral to certain parties.
Foreign Currency Risk.
The Company has investments in Canadian companies
through Avista Energy Canada, Ltd. and its subsidiary, 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 during the nine months ended September 30,
2003 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 businesses. The
Company has a Risk Management Committee, separate from the units tasked with
managing this risk exposure and that is 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 in place 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, regulation 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 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. 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 available may not match 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 expected portfolio loss under
hypothetical adverse price movements, over a given time interval within 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 a historical simulation, utilizing price
movements over a specified period to simulate forward price curves in the
energy markets to estimate the potential 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. 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 embedded physical options in the trading portfolio.
As of September 30, 2003, Avista Energys estimated potential one-day
unfavorable impact on gross margin was $0.7 million, as measured by VAR,
related to its commodity trading and marketing business, compared to $0.7
million as of December 31, 2002. The average daily VAR for the nine months
ended September 30, 2003 was $0.7 million. The high daily VAR was $1.2
million and the low daily VAR was $0.4 million during the nine months ended
September 30, 2003. Avista Energy was in compliance with its one-day VAR
limits during the nine months ended September 30, 2003. Changes in markets
inconsistent with historical trends or assumptions used could cause actual
results to exceed predicted limits. For forward transactions that settle
beyond the next 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.
66
AVISTA CORPORATION
Item 3. Quantitative and Qualitative Disclosures About Market Risk
See Item 2. Managements Discussion and Analysis of Financial Condition and
Results of Operations: Future Outlook: Business Risk and Risk Management.
Item 4. Controls and Procedures
The Company has disclosure controls and procedures (as defined in Rules 13a-14
and 15d-14 under the Securities Exchange Act of 1934, as amended) to ensure
that material information contained in its filings with the Securities and
Exchange Commission is recorded, processed, summarized and reported on a timely
and accurate basis. The Companys principal executive officer and principal
financial officer have reviewed and evaluated the Companys disclosure controls
and procedures as of the end of the period covered by this report. Based on
such evaluation, the Companys principal executive officer and principal
financial officer have concluded that the Companys disclosure controls and
procedures are effective at ensuring that material information is recorded,
processed, summarized and reported on a timely and accurate basis in the
Companys filings with the Securities and Exchange Commission. Since such
evaluation there have not been any significant changes in the Companys
internal controls, or in other factors that could significantly affect these
controls.
There have been no changes in the Companys internal control over financial
reporting identified in connection with the evaluation required by Exchange Act
rules 13a-15(d) and 15d-15(d) that occurred during the Companys last fiscal
quarter (the Companys fourth fiscal quarter in the case of an annual report)
that has materially affected, or is reasonably likely to materially affect, the
Companys internal control over financial reporting.
Table of Contents
Three months ended September 30,
Nine months ended September 30,
2003
2002
2003
2002
$
1,003
$
2,346
$
3,608
$
6,457
2,417
2,083
6,255
7,526
13
(206
)
1,844
212
170
(1,264
)
(284
)
(1,748
)
(2,032
)
(5,636
)
(5,196
)
276
451
1,630
4,284
$
2,173
$
3,018
$
4,387
$
14,631
Three months ended September 30,
Nine months ended September 30,
2003
2002
2003
2002
$
4,320
$
(1,615
)
$
29,421
$
19,830
$
3,607
$
(2,432
)
$
27,275
$
17,406
$
0.09
$
(0.05
)
$
0.59
$
0.38
$
0.07
$
(0.06
)
$
0.54
$
0.33
$
0.09
$
(0.05
)
$
0.58
$
0.38
$
0.07
$
(0.06
)
$
0.54
$
0.33
Table of Contents
September 30,
December 31,
2003
2002
$
4,373
$
4,728
21,025
23,733
1,470
1,274
$
26,868
$
29,735
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Avista Labs
Avista Communications
Total
$
(3,613
)
$
(80
)
$
(3,693
)
1,667
(453
)
1,214
$
(1,946
)
$
(533
)
$
(2,479
)
$
(10,410
)
$
1,059
$
(9,351
)
4,047
(850
)
3,197
$
(6,363
)
$
209
$
(6,154
)
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Fixed
Fixed
Maximum
Index
Index
Maximum
Price
Price
Terms in
Price
Price
Terms in
Payor
Receiver
Years
Payor
Receiver
Years
78,546
77,764
14
599
209
3
64,216
43,210
6
365,621
392,455
3
Table of Contents
Estimated Fair Value
Average Estimated Fair Value for the
as of September 30, 2003
nine months ended September 30, 2003
Current
Long-term
Current
Long-term
Current
Long-term
Current
Long-term
Assets
Assets
Liabilities
Liabilities
Assets
Assets
Liabilities
Liabilities
$
156,306
$
275,345
$
132,830
$
236,400
$
276,504
$
312,240
$
255,788
$
279,403
42,405
8,859
27,237
4,755
100,376
15,417
73,565
12,741
$
198,711
$
284,204
$
160,067
$
241,155
$
376,880
$
327,657
$
329,353
$
292,144
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Maturity
Interest
September 30,
December 31,
Year
Description
Rate
2003
2002
2003
6.25
%
$
15,000
$
15,000
2005
6.39%-6.68
%
29,500
29,500
2006
7.89%-7.90
%
30,000
30,000
2007
7.75
%
150,000
150,000
2008
6.89%-6.95
%
20,000
20,000
2010
6.67%-6.90
%
10,000
10,000
2012
7.37
%
7,000
7,000
2013
6.13
%
45,000
2018
7.26%-7.45
%
27,500
27,500
2023
7.18%-7.54
%
24,500
24,500
358,500
313,500
2003
6.75%-9.13
%
56,250
2004
7.42
%
28,500
30,000
2006
8.14
%
8,000
8,000
2007
5.99%-7.94
%
25,850
26,000
2008
9.75
%
317,746
341,529
2008
6.06
%
25,000
25,000
2010
8.02
%
25,000
25,000
2012
8.05
%
12,000
2022
8.15%-8.23
%
5,000
10,000
2023
7.99
%
5,000
5,000
2023
6.00
%
4,100
4,100
2028
6.37%-6.88
%
25,000
35,000
2032
5.00
%
66,700
66,700
2034
5.13
%
17,000
17,000
552,896
661,579
6,025
1,613
(2,090
)
(2,161
)
915,331
974,531
(16,283
)
(71,896
)
$
899,048
$
902,635
Repurchase
Interest
Maturity
Principal
Date
Description
Rate
Year
Amount
January 2003
9.75
%
2008
$
10,000
February 2003
9.75
%
2008
505
March 2003
8.23
%
2022
5,000
April 2003
6.88
%
2028
10,000
May 2003
5.99
%
2007
150
June 2003
7.42
%
2004
1,500
July 2003
8.05
%
2012
12,000
July 2003
9.75
%
2008
3,000
August 2003
9.75
%
2008
10,330
$
52,485
Table of Contents
Three Months Ended
Nine Months Ended
September 30,
September 30,
2003
2002
2003
2002
$
4,386
$
864
$
35,541
$
30,132
(66
)
(2,479
)
(4,930
)
(6,154
)
4,320
(1,615
)
30,611
23,978
(1,190
)
(4,148
)
4,320
(1,615
)
29,421
19,830
608
1,125
1,824
$
4,320
$
(2,223
)
$
28,296
$
18,006
48,281
47,866
48,202
47,771
2
203
203
207
109
69
48,691
47,866
48,514
47,842
Table of Contents
Three Months Ended
Nine Months Ended
September 30,
September 30,
2003
2002
2003
2002
$
0.09
$
0.00
$
0.72
$
0.60
(0.05
)
(0.10
)
(0.13
)
0.09
(0.05
)
0.62
0.47
(0.03
)
(0.09
)
$
0.09
$
(0.05
)
$
0.59
$
0.38
$
0.09
$
0.00
$
0.71
$
0.60
(0.05
)
(0.10
)
(0.13
)
0.09
(0.05
)
0.61
0.47
(0.03
)
(0.09
)
$
0.09
$
(0.05
)
$
0.58
$
0.38
Table of Contents
Table of Contents
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changes in the utility regulatory environment in the individual states in which the Company operates and the United States
in general. This can impact allowed rates of return, financings, or industry and rate structures;
the impact of regulatory and legislative decisions including FERC price controls, and including possible retroactive price
caps and resulting refunds;
the potential effects of any energy-related legislation passed into law by the United States Congress;
the impact from the potential formation of a Regional Transmission Organization and/or an Independent Transmission Company;
the impact from the implementation of the FERCs proposed wholesale power market rules;
volatility and illiquidity in wholesale energy markets, including the availability and prices of purchased energy;
wholesale and retail competition (including but not limited to electric retail wheeling and transmission costs);
future streamflow conditions that affect the availability of hydroelectric resources;
outages at any company-owned generating facilities;
unanticipated delays or changes in construction costs with respect to present or prospective generating facilities;
changes in weather conditions that can affect customer demand, result in natural disasters and/or customer outages;
changes in industrial, commercial and residential growth and demographic patterns in the Companys service territory;
the loss of significant customers and/or suppliers;
failure to deliver on the part of any parties from which the Company purchases and/or sells capacity or energy;
changes in the creditworthiness of customers and energy trading counterparties;
the Companys ability to obtain financing through the issuance of debt and/or equity securities, which can be affected by
various factors including the Companys credit ratings, interest rate fluctuations and other capital market conditions;
changes in future economic conditions in the Companys service territory and the United States in general, including
inflation or deflation and monetary policy;
the potential for future terrorist attacks, particularly with respect to utility plant assets;
changes in tax rates and/or policies;
changes in, and compliance with, environmental and endangered species laws, regulations, decisions and
policies, including present and potential environmental remediation costs;
the outcome of legal and regulatory proceedings concerning the Company or affecting directly
or indirectly its operations;
employee issues, including changes in collective bargaining unit agreements, strikes, work
stoppages or the loss of key executives, as well as the ability to recruit and retain
employees;
changes in actuarial assumptions and the return on assets with respect to the Companys
pension plan, which can impact future funding obligations, costs and pension plan
liabilities;
increasing health care costs and the resulting effect on health insurance premiums paid for
employees and on the obligation to provide postretirement health care benefits;
increasing costs of insurance, changes in coverage terms and the ability to obtain insurance.
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Table of Contents
The Company regularly reviews the need for electric or natural gas rate
changes in each state in which it provides service. Currently, the Company is
planning to file electric and natural gas general rate cases in Idaho during
the first quarter of 2004.
Natural gas commodity prices increased towards the end of 2002 and into the
first half of 2003 before declining somewhat during the third quarter of 2003.
The Company is well connected to multiple supply basins in the western United
States and western Canada and believes there will be sufficient supplies of
natural gas to meet its customers needs. However, natural gas prices in the
Pacific Northwest are increasingly affected by supply and demand factors in
other parts of the United States and Canada. 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.
Table of Contents
The IPUC, WUTC and OPUC approved Avista Utilities Natural Gas Benchmark
Mechanism in 1999. The mechanism eliminated the majority of natural gas
procurement operations within Avista Utilities and consolidated natural gas
procurement operations under Avista Energy, the Companys non-regulated
subsidiary. The ownership
of the natural gas assets remains with Avista Utilities; however, the assets
are managed by Avista Energy through an Agency Agreement. The Natural Gas
Benchmark Mechanism provides benefits to retail customers and allows Avista
Energy to retain a portion of the benefits associated with asset optimization
and the efficiencies gained in purchasing natural gas for Avista Utilities as
part of Avista Energys larger portfolio of natural gas assets. In the first
quarter of 2002, the IPUC and the OPUC approved the continuation of the
Natural Gas Benchmark Mechanism and related Agency Agreement through March 31,
2005. In January 2003, the WUTC approved the continuation of the Natural Gas
Benchmark Mechanism and related Agency Agreement through January 29, 2004. In
April 2003, the Company filed a request with the WUTC to amend certain aspects
of the Natural Gas Benchmark Mechanism and related Agency Agreement and
requested an extension through March 31, 2007. In July 2003, the WUTC staff
and the Public Counsel Section of the Attorney Generals Office filed
testimony recommending termination of the Natural Gas Benchmark Mechanism in
Washington at the end of January 2004. The termination of the mechanism would
likely result in natural gas procurement operations being performed by Avista
Utilities for Washington natural gas customers. The WUTC staff and Public
Counsel have recommended that if the WUTC determines that the mechanism should
not be terminated, the level of benefits provided to Avista Utilities
customers be increased on a prospective basis. During August 2003, Avista
Utilities filed its response to the WUTC staff and Public Counsel
recommendations requesting the continuation of the Natural Gas Benchmark
Mechanism and further explaining the benefits that customers receive by having
natural gas procurement operations managed by Avista Energy as part of a
larger natural gas portfolio. Hearings will be held before the WUTC during
November 2003 to determine any changes and whether or not the Natural Gas
Benchmark Mechanism and related Agency Agreement will be extended beyond
January 29, 2004.
A power purchase and sales contract with Potlatch Corporation (Potlatch)
expired on December 31, 2001. Potlatchs Lewiston, Idaho facility has
electric requirements of about 100 aMW. The facility also typically produces
approximately 60 aMW of generation. Since January 2002, Potlatch had been
using its generation to supply a portion of its own electric requirements,
which resulted in a net electric requirement on Avista Utilities system of
approximately 40 aMW. In December 2002, Potlatch filed a complaint with the
IPUC requesting that Avista Utilities be required to purchase its generation
at a rate equivalent to Avista Utilities avoided costs. During July 2003,
Avista Utilities and Potlatch executed a ten-year power purchase and sales
contact, under which Avista Utilities will purchase up to 62 aMW of Potlatchs
generation at a price slightly below the IPUC administratively determined
avoided cost rate. Additionally, Avista Utilities may from time to time
purchase generation above 62 aMW at a price that is somewhat below market
prices, when market conditions are such that it is mutually beneficial to
Potlatch and Avista Utilities. Avista Utilities will serve Potlatchs entire
electric requirements of approximately 100 aMW at the retail tariff rates
established for large industrial customers, unless a different rate is ordered
by the IPUC. The agreement is subject to the approval of the IPUC, including
the full recovery of the costs associated with the agreement through the Idaho
PCA mechanism or base retail rates. If approved by the IPUC, Avista Utilities
does not expect the agreement to have a material impact on future net income.
However, it would result in an increase in both retail revenues and resource
costs.
In May 2003, Avista Utilities submitted its 2003 Integrated Resource Plan
(IRP) to the WUTC and the IPUC. The IRP describes the mix of generating
resources including, but not limited to, an investment in wind power starting
in 2008, as well as energy efficiency programs to meet future electric power
needs at least cost. The IRP is developed every two years with a 20-year view
to the future.
Avista Utilities defers the recognition in the income statement of certain
power supply costs that are in excess of the level currently recovered from
retail customers as authorized by the WUTC and the IPUC. A portion of 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 are a percentage of the difference between certain actual
power supply costs incurred by Avista Utilities and the costs included in base
retail rates. This difference is
primarily 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).
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Washington
Idaho
Total
$
140,238
$
73,087
$
213,325
22,423
13,471
35,894
(7,068
)
(3,485
)
(10,553
)
6,726
888
7,614
(27,711
)
(27,711
)
(38,570
)
(24,732
)
(63,302
)
123,749
31,518
155,267
16,992
17,425
34,417
1,053
535
1,588
5,216
839
6,055
(19,183
)
(19,411
)
(38,594
)
$
127,827
$
30,906
$
158,733
(1)
Unrealized gains and losses on fuel contracts are not included in the ERM
and PCA mechanism until the contracts are settled or realized.
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Three months ended
Nine months ended
September
30,
September
30,
2003
2002
2003
2002
$
0.02
$
(0.02
)
$
0.39
$
0.48
0.10
0.05
0.44
0.41
(0.01
)
(0.02
)
(0.03
)
(0.07
)
(0.02
)
(0.01
)
(0.09
)
(0.22
)
0.09
0.00
0.71
0.60
(0.05
)
(0.10
)
(0.13
)
0.09
(0.05
)
0.61
0.47
(0.03
)
(0.09
)
$
0.09
$
(0.05
)
$
0.58
$
0.38
Table of Contents
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Electric
Natural Gas
Total
2003
2002
2003
2002
2003
2002
$
164,010
$
141,993
$
26,978
$
29,533
$
190,988
$
171,526
79,980
63,953
15,584
16,863
95,564
80,816
$
84,030
$
78,040
$
11,394
$
12,670
$
95,424
$
90,710
Table of Contents
Electric Operating
Electric Energy
Revenues
MWh Sales
2003
2002
2003
2002
$
44,028
$
40,399
712
663
52,050
49,236
762
718
23,099
17,997
545
404
1,186
1,174
6
6
120,363
108,806
2,025
1,791
18,673
17,329
330
637
24,974
15,858
$
164,010
$
141,993
2,355
2,428
Natural Gas
Natural Gas
Operating Revenues
Therm Sales
2003
2002
2003
2002
$
13,855
$
15,232
13,966
13,452
9,164
9,737
12,143
10,779
1,500
1,239
2,967
1,783
24,519
26,208
29,076
26,014
344
1,445
1,572
2,174
27,787
35,499
887
807
1,649
687
$
26,978
$
29,533
58,512
63,645
Table of Contents
Electric
Natural Gas
Customers
Customers
2003
2002
2003
2002
283,106
278,524
260,004
253,475
36,299
35,965
31,190
30,670
1,418
1,416
312
312
429
415
321,252
316,320
291,506
284,457
44
48
1
82
90
321,296
316,368
291,588
284,548
161
273
282
309
36
66
139
112
2003
2002
$
41,348
$
31,031
(6,844
)
3,614
17,040
4,761
24,868
24,101
(1,560
)
(3,281
)
5,128
3,727
79,980
63,953
19,310
17,280
(3,780
)
(481
)
54
64
15,584
16,863
$
95,564
$
80,816
Table of Contents
Electric
Natural Gas
Total
2003
2002
2003
2002
2003
2002
$
484,126
$
429,175
$
173,224
$
218,982
$
657,350
$
648,157
218,742
173,026
111,728
151,990
330,470
325,016
$
265,384
$
256,149
$
61,496
$
66,992
$
326,880
$
323,141
Electric Operating
Electric Energy
Revenues
MWh sales
2003
2002
2003
2002
$
145,710
$
141,139
2,337
2,303
149,204
144,449
2,158
2,114
56,932
51,194
1,285
1,146
3,564
3,485
19
19
355,410
340,267
5,799
5,582
60,139
51,470
1,740
1,869
68,577
37,438
$
484,126
$
429,175
7,539
7,451
Table of Contents
Natural Gas
Natural Gas
Operating Revenues
Therm Sales
2003
2002
2003
2002
$
103,109
$
127,778
125,334
130,336
56,555
75,080
78,801
85,430
4,512
5,754
8,134
8,368
164,176
208,612
212,269
224,134
686
2,281
6,299
7,202
108,864
129,631
2,749
2,482
2,565
1,276
$
173,224
$
218,982
323,698
357,322
Electric
Natural Gas
Customers
Customers
2003
2002
2003
2002
282,640
279,188
260,029
253,907
36,231
35,859
31,256
30,776
1,414
1,421
309
315
419
410
320,704
316,878
291,594
284,998
50
47
1
85
88
320,754
316,925
291,679
285,087
3,794
4,338
4,201
4,243
2,504
2,585
2,807
2,821
Table of Contents
2003
2002
$
105,305
$
72,972
4,355
34,722
25,360
13,692
77,685
52,391
(5,955
)
(11,446
)
11,992
10,695
218,742
173,026
117,262
120,003
(5,698
)
31,796
164
191
111,728
151,990
$
330,470
$
325,016
Table of Contents
The marketing and management of combustion turbines and hydroelectric assets owned by other entities.
The capture of price differences between commodities (spark spread) by converting natural gas into electricity through the
power generation process.
The purchase and storage of natural gas during periods of lower prices for sales during peak demand periods and higher
prices.
The transmission of electricity or transportation of natural gas between locations, including the moving of energy from
lower priced/demand regions to higher priced/demand markets and hub locations throughout the WECC.
Taking positions on future price movements within established risk management policies.
Table of Contents
Three months ended
Nine months ended
September 30,
September 30,
2003
2002
2003
2002
$
7,034
$
61,471
$
62,268
$
125,003
5,740
(51,708
)
(10,997
)
(80,889
)
$
12,774
$
9,763
$
51,271
$
44,114
Table of Contents
Electric
Natural Gas
Total
Assets net of
Assets net of
Unrealized
Liabilities
Liabilities
Gain (Loss)
$
60,081
$
34,720
$
94,801
(44,378
)
(17,890
)
(62,268
)
(357
)
(1,473
)
(1,830
)
47,075
3,916
50,991
$
62,421
$
19,273
$
81,694
(1)
Contracts settled during the nine months ended September 30, 2003 include
those contracts that were open in 2002 but settled during the nine months
ended September 30, 2003 as well as new contracts entered into and settled
during the nine months ended September 30, 2003. Amount represents
realized gains associated with these settled transactions.
(2)
Represents the adjustment for the transition to SFAS No. 133 for
contracts not meeting the definition of a derivative. Effective January
1, 2003, contracts that were entered into on or prior to October 25, 2002
and not
meeting the definition of a derivative are accounted for on an accrual
basis. Contracts not meeting the definition of a derivative include Avista
Energys Agency Agreement with Avista Utilities, natural gas storage
contracts, tolling agreements and natural gas transportation agreements.
(3)
Avista Energy has not entered into any origination transactions during
the nine months ended September 30, 2003 in which dealer profit or
mark-to-market gain or loss was recorded at inception.
(4)
During the nine months ended September 30, 2003, Avista Energy did not
experience a change in fair value as a result of changes in valuation
techniques.
Table of Contents
Greater
Greater
than one
than three
Greater
Less than
and less than
and less than
than
one year
three years
five years
five years
Total
$
24,273
$
21,225
$
$
$
45,498
(797
)
14,409
10,697
(7,386
)
16,923
$
23,476
$
35,634
$
10,697
$
(7,386
)
$
62,421
$
8,722
$
4,132
$
$
$
12,854
6,446
(1,244
)
791
426
6,419
$
15,168
$
2,888
$
791
$
426
$
19,273
(1)
Fair value is determined based upon actively traded, over-the-counter
market quotes received from third party brokers. For electric assets and
liabilities, these market quotes are generally available through two
years. For natural gas assets and liabilities, these market quotes are
generally available through three 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 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 performs frequent stress tests on the valuation
of the portfolio. While consistent valuation methodologies are used and
updates to the assumptions are used to capture current market information,
changes in these methodologies or underlying assumptions could result in
significantly different fair values and income recognition. These same
pricing techniques and stress tests are used to evaluate a contract prior
to taking a position.
(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 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.
Three months ended
Nine months ended
September 30,
September 30,
2003
2002
2003
2002
$
5,002
$
4,419
$
14,736
$
12,182
2,841
3,235
9,038
10,330
$
2,161
$
1,184
$
5,698
$
1,852
Table of Contents
Table of Contents
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Table of Contents
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Table of Contents
September 30, 2003
December 31, 2002
Percent
Percent
Amount
of total
Amount
of total
$
16,283
0.9
%
$
71,896
3.9
%
85,530
4.6
30,000
1.6
899,048
48.3
902,635
48.8
1,000,861
53.8
1,004,531
54.3
100,000
5.3
31,500
1.7
1,132,361
60.8
1,004,531
54.3
100,000
5.4
33,250
1.8
729,309
39.2
712,791
38.5
$
1,861,670
100.0
%
$
1,850,572
100.0
%
Table of Contents
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
Stable
Negative
Stable
*
Only assets are subordinated debentures of Avista Corporation
Table of Contents
Repurchase
Interest
Maturity
Principal
Date
Description
Rate
Year
Amount
Unsecured Senior Notes
9.75
%
2008
$
10,000
Unsecured Senior Notes
9.75
%
2008
505
Unsecured Medium-Term Notes
8.23
%
2022
5,000
Unsecured Medium-Term Notes
6.88
%
2028
10,000
Unsecured Medium-Term Notes
5.99
%
2007
150
Unsecured Medium-Term Notes
7.42
%
2004
1,500
Unsecured Medium-Term Notes
8.05
%
2012
12,000
Unsecured Senior Notes
9.75
%
2008
3,000
Unsecured Senior Notes
9.75
%
2008
10,330
Total debt repurchases
$
52,485
Table of Contents
Year ended September 30,
2004
2005
2006
2007
2008
Thereafter
$
864
$
278
$
232
$
155
$
160
$
342
32
4
1
Table of Contents
Table of Contents
Table of Contents
Table of Contents
Table of Contents
Part II. Other Information
Item 1. Legal Proceedings
See Note 12 of the Notes to Consolidated Financial Statements which is incorporated by reference.
Item 6. Exhibits and Reports on Form 8-K
(a) | Exhibits. | ||
Exhibits Filed : |
4(f) | Thirty-Second Supplemental Indenture, dated as of September 1, 2003. | |
12 | Computation of ratio of earnings to fixed charges and preferred dividend requirements. | |
31(a) | Certification of Chief Executive Officer | |
31(b) | Certification of Chief Financial Officer |
Exhibits Furnished: |
32 | Certification of Corporate Officers (Furnished Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002) |
(b) | Reports on Form 8-K. |
Dated July 10, 2003 with respect to the Companys appeal of the FERC administrative law judges decision to deny the request for certification of the agreement in resolution, as well as the disclosure of outside equity investment in Avista Labs. |
Dated July 24, 2003 with respect to 2003 second quarter earnings as well as the FERC administrative law judges certification of the agreement in resolution between Avista Corp., Avista Energy and the FERC staff. |
Dated August 19, 2003 to disclose a stipulation agreement in the Oregon natural gas general rate case and the filing of an amended and consolidated class action shareholder lawsuit. |
67
AVISTA CORPORATION
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
AVISTA CORPORATION | ||||
|
||||
(Registrant) | ||||
Date: November 10, 2003 | /s/ Malyn K. Malquist | |||
|
||||
Malyn K. Malquist
Senior Vice President and Chief Financial Officer (Principal Accounting and Financial Officer) |
68
AVISTA CORPORATION
TO
CITIBANK, N.A.
As Successor Trustee under
Mortgage and Deed of Trust,
dated as of June 1, 1939
THIRTY-SECOND SUPPLEMENTAL INDENTURE
Providing among other things for a series of bonds designated "First Mortgage Bonds, 6.125% Series due 2013" Due September 1, 2013
Dated as of September 1, 2003
THIRTY-SECOND SUPPLEMENTAL INDENTURE
THIS INDENTURE, dated as of the 1st day of September 2003, 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, New York 10043 (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 "Thirty-second 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 Thirty-first Supplemental Indentures being herein sometimes called collectively, the "Mortgage"); and
WHEREAS the Original Mortgage and the First through Thirtieth 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 Thirty-first Supplemental Indentures; and
WHEREAS the Thirty-first Supplemental Indenture, dated as of May 1, 2003 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 for the purpose of confirming or perfecting the lien of the Mortgage on certain of its properties, the Company has heretofore executed and delivered an Instrument of Further Assurance dated as of December 15, 2001, and such instrument has been appropriately filed or recorded in the various official records in the States of Washington, California, Idaho, 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 Thirty-second Supplemental Indenture and the terms of the bonds of the Thirtieth 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 Thirty-second 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.
The property so conveyed or intended to be so conveyed under the Mortgage shall include, but shall not be limited to, the property set forth in Exhibit C hereto, the particular description of which is intended only to aid in the identification thereof and shall not be construed as limiting the force, effect and scope of the foregoing.
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 Thirty-second 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
THIRTIETH SERIES OF BONDS
SECTION 1. (I) There shall be a series of bonds designated
"First Mortgage Bonds, 6.125% Series due 2013" (herein sometimes referred to as
the "bonds of the Thirtieth Series" or the "Bonds"), and the form thereof, which
has been established by Resolution of the Board of Directors of the Company, is
set forth on Exhibit D hereto. The bonds of the Thirtieth 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.
(II) The Bonds of the Thirtieth Series shall mature, shall bear interest and shall be payable as set forth below:
(a) the principal of bonds of the Thirtieth Series shall (unless theretofor paid) be payable on the Stated Maturity Date (as hereinafter defined);
(b) the bonds of the Thirtieth Series shall bear interest at the rate of six and one hundred twenty-five one thousandths per centum (6.125%) 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 D; 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 on the basis of a 360-day year consisting of twelve 30-days months;
(c) the principal of and premium, if any, and interest on each bond of the Thirtieth 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 Thirtieth Series (other than interest payable at Maturity) shall be payable by check, in similar coin or currency, mailed to the registered owner thereof as of the close of business on the Record Date next preceding each Interest Payment Date; provided, however, that if such registered owner shall be a securities depositary, such payment may be made by such other means in lieu of check as shall be agreed upon by the Company, the Trustee and such registered owner.
(III) (a) The bonds of the Thirtieth Series shall be redeemable in whole at any time, or in part from time to time, at the option of the Company at a redemption price equal to the greater of
(i) 100% of the principal amount of the bonds being redeemed and
(ii) the sum of the present values of the remaining scheduled payments of principal of and interest on the bonds being redeemed discounted to the date of redemption on a semiannual basis (assuming a 360-day year consisting of twelve 30-day
months) at a discount rate equal to the Treasury Yield (as hereinafter defined) plus 25 basis points,
plus, in the case of either (i) or (ii) above, whichever is applicable, accrued interest on such bonds to the date of redemption.
(b) (i) "Treasury Yield" means, with respect to any redemption of bonds of the Thirtieth Series, the rate per annum equal to the semiannual equivalent yield to maturity of the Comparable Treasury Issue, assuming a price for the Comparable Treasury Issue (expressed as a percentage of its principal amount) equal to the Comparable Treasury Price. The Treasury Yield shall be calculated as of the third business day preceding the redemption date or, if the bonds to be redeemed are to be caused to be deemed to have been paid within the meaning of Section 106 of the Original Mortgage prior to the redemption date, then as of the third business day prior to the earlier of (x) the date notice of such redemption is mailed to bondholders pursuant to Section 52 of the Original Mortgage and (y) the date irrevocable arrangements with the Trustee for the mailing of such notice shall have been made, as the case may be (the "Calculation Date").
(ii) "Comparable Treasury Issue" means the United States Treasury security selected by an Independent Investment Banker as having a maturity comparable to the remaining term of the bonds of the Thirtieth Series that would be utilized, at the time of selection and in accordance with customary financial practice, in pricing new issues of corporate debt securities of comparable maturity to the remaining term of the bonds.
(iii) "Comparable Treasury Price" means, (A) the average of the bid and asked prices for the Comparable Treasury Issue (expressed in each case as a percentage of its principal amount) on the third business day preceding the Calculation Date, as set forth in the H.15 Daily Update of the Federal Reserve Bank of New York or (B) if such release (or any successor release) is not published or does not contain such prices on such business day, the Reference Treasury Dealer Quotation for the Calculation Date.
(iv) "H.15(519)" means the weekly statistical release entitled "Statistical Release H.15 (519)", or any successor publication, published by the Board of Governors of the Federal Reserve System.
(v) "H.15 Daily Update" means the daily update of H.15(519) available through the worldwide website of the Board of Governors of the Federal Reserve System or any successor site or publication.
(vi) "Independent Investment Banker" means Lehman Brothers Inc. or an independent investment banking institution of national standing appointed by the Company and reasonably acceptable to the Trustee.
(vii) "Reference Treasury Dealer Quotation" means, with respect to the Reference Treasury Dealer, the average, as determined by the Trustee, of the bid and asked prices for the Comparable Treasury Issue (expressed in each case as a percentage of its principal amount and quoted in writing to the Trustee by such Reference Treasury Dealer at 5:00 p.m. on the third business day preceding the Calculation Date).
(viii) "Reference Treasury Dealer" means a primary U.S. Government securities dealer in New York City appointed by the Company and reasonably acceptable to the Trustee.
(IV) (a) At the option of the registered owner, any bonds of the Thirtieth Series, upon surrender thereof for cancellation at the office or agency of the Company in the Borough of Manhattan, The City of New York, shall be exchangeable for a like aggregate principal amount of bonds of the same series of other authorized denominations.
The bonds of the Thirtieth Series shall be transferable, upon the surrender thereof for cancellation, together with a written instrument of transfer in form approved by the registrar duly executed by the registered owner or by his duly authorized attorney, at the office or agency of the Company in the Borough of Manhattan, The City of New York.
Upon any exchange or transfer of bonds of the Thirtieth Series, the Company may make a charge therefor sufficient to reimburse it for any tax or taxes or other governmental charge, as provided in Section 12 of the Mortgage, but the Company hereby waives any right to make a charge in addition thereto or any exchange or transfer of bonds of the Thirtieth Series; provided, however, that the Company shall not be required to make any transfer or exchange of any bonds of the Thirtieth Series for a period of 10 days next preceding any selection of such bonds for redemption, nor shall it be required to make transfers or exchange of any bonds of the Thirtieth Series which shall have been selected for redemption in whole or in part or as to which the Company shall have received a notice for the redemption thereof in whole or in part at the option of the registered owner.
(b) The bonds of the Thirtieth Series are initially to be issued in global form, registered in the name of Cede & Co., as nominee for The Depository Trust Company (the "Depositary"). Notwithstanding the provisions of subdivision (a) above, such bonds shall not be transferable, nor shall any purported transfer be registered, except as follows:
(i) such bonds may be transferred in whole, and appropriate registration of transfer effected, to the Depositary, or by the Depositary to another nominee thereof, or by any nominee of the Depositary to any other nominee thereof, or by the Depositary or any nominee thereof to any successor securities depositary or any nominee thereof;
(ii) such bonds may be transferred in whole, and appropriate registration of transfer effected, to the beneficial holders thereof, and thereafter shall be transferable, if:
(A) The Depositary, or any successor securities depositary, shall have notified the Company and the Trustee that (I) it is unwilling or unable to continue to act as securities depositary with respect to such bonds or (II) it is no longer a clearing agency registered under the Securities Exchange Act of 1934, as amended, and, in either case, the Trustee shall not have been notified by the Company within one hundred twenty (120) days of the identity of a successor securities depositary with respect to such bonds; or
(B) the Company shall have delivered to the Trustee a written order to the effect that such bonds shall be so transferable on and after a date specified therein.
The bonds of the Thirtieth Series, when in global form, shall bear a legend as to such global form and the foregoing restrictions on transfer substantially as set forth below:
This global bond is held by Cede & Co., as nominee for The
Depository Trust Company (the "Depositary") for the benefit of
the beneficial owners hereof. This bond may not be
transferred, nor may any purported transfer be registered,
except that (i) this bond may be transferred in whole, and
appropriate registration of transfer effected, if such
transfer is by Cede & Co., as nominee for the Depositary, to
the Depositary, or by the Depositary to another nominee
thereof, or by any nominee of the Depositary to any other
nominee thereof, or by the Depositary or any nominee thereof
to any successor bonds depositary or any nominee thereof; and
(ii) this bond may be transferred, and appropriate
registration of transfer effected, to the beneficial holders
hereof, and thereafter shall be transferable without
restrictions (except as provided in the preceding paragraph)
if: (A) the Depositary, or any successor securities
depositary, shall have notified the Company and the Trustee
that (I) it is unwilling or unable to continue to act as
securities depositary with respect to the bonds or (II) it is
no longer a clearing agency registered under the Securities
Exchange Act of 1934, as amended, and, in either case, the
Trustee shall not have been notified by the Company within one
hundred twenty (120) days of the identity of a successor
securities depositary with respect to the bonds; or (B) the
Company shall have delivered to the Trustee a written order to
the effect that the bonds shall be so transferable on and
after a date specified therein.
(V) For all purposes of this Thirty-second Supplemental Indenture, except as otherwise expressly provided or unless the context otherwise requires, the terms and with respect to the bonds of the Thirtieth Series listed below shall have the meanings specified:
"Interest Payment Date" means March 1 and September 1 in each year, commencing March 1, 2004.
"Maturity" means the date on which the principal of the bonds of the Thirtieth Series becomes due and payable, whether at the Stated Maturity Date, upon redemption or acceleration, or otherwise.
"Record Date", with respect to any Interest Payment Date, means the February 15 or August 15, as the case may be, next preceding such Interest Payment Date.
"Stated Maturity Date" means September 1, 2013.
(VI) Notwithstanding the provisions of Section 106 of the Original Mortgage, the Company shall not cause any bonds of the Thirtieth Series, or any portion of the principal
amount thereof, to be deemed to have been paid as provided in such Section and its obligations in respect thereof to be deemed to be satisfied and discharged prior to the Maturity thereof unless the Company shall deliver to the Trustee either:
(a) an instrument wherein the Company, notwithstanding the effect of Section 106 of the Original Mortgage in respect of such bonds, shall assume the obligation (which shall be absolute and unconditional) to irrevocably deposit with the Trustee such additional sums of money, if any, or additional government obligations (meeting the requirements of Section 106), if any, or any combination thereof, at such time or times, as shall be necessary, together with the money and/or government obligations theretofore so deposited, to pay when due the principal of and premium, if any, and interest due and to become due on such bonds or portions thereof, all in accordance with and subject to the provisions of Section 106; provided, however, that such instrument may state that the obligation of the Company to make additional deposits as aforesaid shall be subject to the delivery to the Company by the Trustee of a notice asserting the deficiency accompanied by an opinion of an independent accountant showing the calculation thereof (which opinion shall be obtained at the expense of the Company); or
(b) an Opinion of Counsel to the effect that the holders of such bonds, or portions of the principal amount thereof, will not recognize income, gain or loss for United States federal income tax purposes as a result of the satisfaction and discharge of the Company's indebtedness in respect thereof and will be subject to United States federal income tax on the same amounts, at the same times and in the same manner as if such satisfaction and discharge had not been effected.
(VII) The bonds of the Thirtieth Series shall have such further terms as are set forth in Exhibit D hereto. If there shall be a conflict between the terms of the form of bond and the provisions of the Mortgage, the provisions of the Mortgage shall control to the extent permitted by law.
(VIII) Prior, and as a condition, to the authentication and
delivery by the Trustee of the bonds of the Thirtieth Series, the Company shall
have delivered to the Trustee an endorsement to the policy of title insurance on
the Mortgaged and Pledged Property held by the Trustee increasing the face
amount of such policy by $45,000,000 to $440,000,000. The Trustee shall hold
such policy, as so endorsed, as part of the Mortgaged and Pledged Property, for
the benefit of the holders from time to time of the bonds Outstanding under the
Mortgage. The proceeds of such insurance shall be applied as provided in clause
(3) or (4) of Section 61 of the Original Mortgage or, if all bonds shall have
been declared immediately due and payable pursuant to Section 65 of the Original
Mortgage following the occurrence of a Completed Default, as provided in clauses
second and third of Section 75 of the Original Mortgage.
(IX) Upon the delivery of this Thirty-second Supplemental Indenture, bonds of the Thirtieth Series in an aggregate principal amount initially not to exceed $45,000,000 are to be issued and will be Outstanding, in addition to $558,500,000 aggregate principal amount of bonds of prior series Outstanding at the date of delivery of this Thirty-second Supplemental Indenture.
ARTICLE II
PROSPECTIVE AMENDMENT
SECTION 1. The owners of the bonds of the Thirtieth Series shall be deemed to have consented to the amendment of Section 28 of the Original Mortgage to add at the end thereof a new paragraph reading as follows:
Notwithstanding the foregoing, any Opinion of Counsel delivered pursuant to subdivision (7) of this Section 28, or pursuant to any other provision of this Indenture by reference to this Section 28, may, at the election of the Company, omit any or all of the statements contained in clause (a) of subdivision (7) if there shall have been delivered to the Trustee a policy of title insurance (or endorsement thereto) issued by a nationally recognized title insurance company, in an amount not less than twenty-eight percent (28%)(1) of the cost or fair value to the Company (whichever is less) of the Property Additions made the basis of such application, insuring, in customary terms, against risk of loss sustained or incurred by the Trustee by reason of any circumstances or conditions by virtue of which the statements omitted from clause (a) of such Opinion of Counsel would not have been accurate if made.
ARTICLE III
MISCELLANEOUS PROVISIONS
SECTION 1. The terms defined in the Original Mortgage shall, for all purposes of this Thirty-second 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 Thirty-second 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 Thirty-second 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 Thirty-second Supplemental Indenture.
SECTION 3. Whenever in this Thirty-second 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 Thirty-second 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 Thirty-second 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 Thirty-second Supplemental Indenture or any covenant, condition, stipulation, promise or agreement hereof, and all the covenants, conditions, stipulations, promises and agreements in this Thirty-second 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 Thirty-second 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 Thirty-second Supplemental Indenture shall not be deemed to be any part thereof.
IN WITNESS WHEREOF, on the 5th day of September 2003, 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 5th day of September 2003, 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 /s/ D.A. Brukardt ---------------------------------- Vice President Attest: /s/ Susan Y. Miner ------------------------------------ Assistant Corporate Secretary |
Executed, sealed and delivered
by AVISTA CORPORATION
in the presence of:
/s/ Marjorie N. Bjornberg ------------------------------------ /s/ Paul W. Kimball ------------------------------------ |
CITIBANK, N.A., AS TRUSTEE
By /s/ Wafaa Orfy ---------------------------------- Wafaa Orfy Vice President Attest: /s/ Nancy Forte ------------------------------------ Nancy Forte Assistant Vice President Executed, sealed and delivered by CITIBANK, N.A., as trustee. in the presence of: /s/ John J. Byrnes ------------------------------------ John J. Byrnes /s/ R. T. Kirchner ------------------------------------ R. T. Kirchner |
STATE OF WASHINGTON )
) ss.: COUNTY OF SPOKANE ) On the 5th day of September 2003, before me personally |
appeared David Brukardt, 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 5th day of September 2003, before me, a Notary Public in and for the State and County aforesaid, personally appeared David Brukardt, 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.
/s/ Anita L. Grafmiller ------------------------------------ Notary Public |
Anita L. Grafmiller Notary Public State of Washington Commission Expires June 17, 2005
STATE OF NEW YORK )
) ss.:
COUNTY OF NEW YORK )
On the 5th day of September 2003, before me personally appeared Wafaa Orfy 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 5th day of September 2003, before me, a Notary Public in and for the State and County aforesaid, personally appeared Wafaa Orfy, 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.
/s/ Nanette Murphy ----------------------------------------- Notary Public |
Nanette Murphy Notary Public, State of New York No. 01MU6086415 Qualified in Kings County Commission Expires 1/21/07
EXHIBIT A
MORTGAGE, SUPPLEMENTAL INDENTURES
AND SERIES OF BONDS
MORTGAGE OR PRINCIPAL PRINCIPAL SUPPLEMENTAL DATED AS SERIES AMOUNT AMOUNT INDENTURE OF NO. DESIGNATION ISSUED OUTSTANDING --------- -- --- ----------- ------ ----------- Original June 1, 1939 1 3-1/2% Series due 1964 $22,000,000 None First October 1, 1952 2 3-3/4% Series due 1982 30,000,000 None Second May 1, 1953 3 3-7/8% Series due 1983 10,000,000 None Third December 1, 1955 None Fourth March 15, 1957 None Fifth July 1, 1957 4 4-7/8% Series due 1987 30,000,000 None Sixth January 1, 1958 5 4-1/8% Series due 1988 20,000,000 None Seventh August 1, 1958 6 4-3/8% Series due 1988 15,000,000 None Eighth January 1, 1959 7 4-3/4% Series due 1989 15,000,000 None Ninth January 1, 1960 8 5-3/8% Series due 1990 10,000,000 None Tenth April 1, 1964 9 4-5/8% Series due 1994 30,000,000 None Eleventh March 1,1965 10 4-5/8% Series due 1995 10,000,000 None Twelfth May 1, 1966 None Thirteenth August 1, 1966 11 6 % Series due 1996 20,000,000 None Fourteenth April 1, 1970 12 9-1/4% Series due 2000 20,000,000 None Fifteenth May 1, 1973 13 7-7/8% Series due 2003 20,000,000 None Sixteenth February 1, 1975 14 9-3/8% Series due 2005 25,000,000 None Seventeenth November 1, 1976 15 8-3/4% Series due 2006 30,000,000 None Eighteenth June 1, 1980 None Nineteenth January 1, 1981 16 14-1/8% Series due 1991 40,000,000 None Twentieth August 1, 1982 17 15-3/4% Series due 60,000,000 None 1990-1992 Twenty-First September 1, 1983 18 13-1/2% Series due 2013 60,000,000 None Twenty-Second March 1, 1984 19 13-1/4% Series due 1994 60,000,000 None Twenty-Third December 1, 1986 20 9-1/4% Series due 2016 80,000,000 None Twenty-Fourth January 1, 1988 21 10-3/8% Series due 2018 50,000,000 None Twenty-Fifth October 1, 1989 22 7-1/8% Series due 2013 66,700,000 None 23 7-2/5% Series due 2016 17,000,000 None Twenty-Sixth April 1, 1993 24 Secured Medium-Term 250,000,000 $104,500,000 Notes, Series A ($250,000,000 authorized) Twenty-Seventh January 1, 1994 25 Secured Medium-Term 161,000,000 59,000,000 Notes, Series B ($250,000,000 authorized) Twenty-Eighth September 1, 2001 26 Collateral Series due 220,000,000 None 2002 Twenty-Ninth December 1, 2001 27 7.75% Series due 2007 150,000,000 150,000,000 Thirtieth May 1, 2002 28 Collateral Series due 225,000,000 None 2003 Thirty-first May 1, 2003 29 Collateral Series due 245,000,000 245,000,000 2004 |
EXHIBIT B
FILING AND RECORDING OF
THIRTY-FIRST SUPPLEMENTAL INDENTURE
FILING IN STATE OFFICES
FINANCING STATEMENT STATE OFFICE OF DATE DOCUMENT NUMBER ----------------------------------------------------------------------------------------------------- Washington Secretary of State 7/21/03 2003-203-1965-7 Idaho Secretary of State 7/7/03 B-2003-0947728-1 Montana Secretary of State 7/7/03 73832235 Oregon Secretary of State 7/8/03 626824 California Secretary of State 7/7/03 319160765 |
RECORDING IN COUNTY OFFICES
REAL ESTATE MORTGAGE RECORDS FINANCING ---------------------------- STATEMENT DOCUMENT DOCUMENT COUNTY OFFICE OF DATE NUMBER BOOK PAGE NUMBER ------ --------- ---- ------ ---- ----- ------ Washington Adams Auditor 7/8/03 269961 N/A N/A N/A Asotin Auditor 7/7/03 269228 N/A N/A N/A Benton Auditor 7/7/03 2003-031463 N/A N/A N/A Douglas Auditor 7/7/03 3062566 N/A N/A N/A Ferry Auditor 7/7/03 256389 N/A N/A N/A Franklin Auditor 7/7/03 1627477 N/A N/A N/A Garfield Auditor 7/7/03 7969 N/A N/A N/A Grant Auditor 7/7/03 1128766 N/A N/A N/A Klickitat Auditor 7/7/03 1038606 N/A N/A N/A Lewis Auditor 7/7/03 3171329 N/A N/A N/A Lincoln Auditor 7/7/03 2003-0429472 82 1862 N/A Pend Oreille Auditor 7/7/03 2003-0269557 N/A N/A N/A Skamania Auditor 7/10/03 149394 245 832 N/A Spokane Auditor 7/15/03 4925402 N/A N/A N/A Stevens Auditor 7/8/03 2003-0009203 295 1741 N/A Thurston Auditor 7/9/03 3549793 N/A N/A N/A Whitman Auditor 7/7/03 646902 N/A N/A N/A California El Dorado Recorder 7/9/03 2003-0068071-00 N/A N/A N/A Idaho Benewah Recorder 7/7/03 230873 N/A N/A N/A Bonner Recorder 7/8/03 628645 N/A N/A N/A Boundary Recorder 7/7/03 211318 N/A N/A N/A Clearwater Recorder 7/9/03 193020 N/A N/A N/A |
RECORDING IN COUNTY OFFICES
REAL ESTATE MORTGAGE RECORDS FINANCING ---------------------------- STATEMENT DOCUMENT DOCUMENT COUNTY OFFICE OF DATE NUMBER BOOK PAGE NUMBER ------ --------- ---- ------ ---- ----- ------ Idaho Recorder 7/7/03 429952 N/A N/A N/A Kootenai Recorder 7/7/03 1811895 N/A N/A N/A Latah Recorder 7/7/03 477785 N/A N/A N/A Lewis Recorder 7/7/03 129692 N/A N/A N/A Nez Perce Recorder 7/7/03 692054 N/A N/A N/A Shoshone Recorder 7/7/03 410781 N/A N/A N/A Montana Big Horn Clerk & Recorder 7/8/03 329435 71 65 N/A Broadwater Clerk & Recorder 7/8/03 145960 69 438 N/A Golden Valley Clerk & Recorder 7/7/03 75984 M 10585 N/A Meagher Clerk & Recorder 7/7/03 112668 F56 629 N/A Mineral Clerk & Recorder 7/7/03 93930 Dr-3 8386 N/A Rosebud Clerk & Recorder 7/8/03 94501 105 439 N/A Sanders Clerk & Recorder 7/7/03 41890 N/A N/A N/A Stillwater Clerk & Recorder 7/7/03 313022 N/A N/A N/A Treasure Clerk & Recorder 7/7/03 78437 M-16 612 N/A Wheatland Clerk & Recorder 7/7/03 102072 X 8470 N/A Yellowstone Clerk & Recorder 7/8/03 3239671 N/A N/A N/A Oregon Douglas Recorder 7/7/03 2003-018045 N/A N/A N/A Jackson Recorder 7/15/03 03-46132 N/A N/A N/A Josephine Recorder 7/8/03 2003-016243 N/A N/A N/A Klamath Recorder 7/8/03 N/A M03 46818 N/A Morrow Recorder 7/7/03 2003-8318 N/A N/A N/A Union Recorder 7/7/03 20034370 N/A N/A N/A Wallowa Recorder 7/7/03 48503 N/A N/A N/A |
EXHIBIT C
PROPERTY ADDITIONS
(A) The Additional Electric Substations and Substation Sites of the Company in the States of Idaho and Washington, including all buildings, structures, towers, poles, equipment, appliances and devices for transforming, converting and distributing electric energy, and the lands of the Company on which the same are situated and all of the Company's real estate and interests therein, machinery, equipment, appliances, devices, appurtenances and supplies, franchises, permits and other rights and other property forming a part of said substations or any of them, or used or enjoyed or capable of being used or enjoyed in connection with any thereof, including, but not limited to, the following situated in the States of Idaho and Washington:
1. Bonner County, Idaho: "Old Town 115kV Substation"; Property
No. ID-7B-041; Grantor: Bennett; Ptn of NW/4 SE/4 SE/4 in Sec. 24, T. 56 N., R.
6 WBM.
2. Spokane, County, Washington: "Boulder 230kV Substation"; Property No. WA-32-080; Grantor: Avista Development; Parcels B-E, J-L amended survey in N/2, Sec. 5, T. 25 N., R. 45 EWM.
EXHIBIT D
(FORM OF BOND)
THIS BOND IS SUBJECT TO RESTRICTIONS ON TRANSFER,
AS HEREINAFTER SET FORTH
CUSIP ________________
AVISTA CORPORATION
First Mortgage Bond,
_____% Series due ______
REGISTERED REGISTERED
NO. _________________ $___________________
AVISTA CORPORATION, a corporation of the State of Washington (hereinafter called the Company), for value received, hereby promises to pay to
, or registered assigns, on _______________________,
DOLLARS
and to pay the registered owner hereof interest thereon from ____________ semi-annually in arrears on ______________ and ________________ in each year (each such date being hereinafter called an "Interest Payment Date"), commencing ___________________ and at Maturity (as hereinafter defined), at the rate of ________ per centum (__%) per annum computed on the basis of a 360-day year consisting of twelve 30-day months, until the Company's obligation with respect to the payment of such principal shall have been discharged. The principal of and premium, if any, and interest on this bond payable at Maturity shall be payable upon presentation hereof at the office or agency of the Company in the Borough of Manhattan, The City of New York, in such coin or currency of the United States of America as at the time of payment is legal tender for public and private debts. The interest on this bond (other than interest payable at Maturity) shall be paid by check, in the similar coin or currency, mailed to the registered owner hereof as of the close of business on the _______________ or _____________, as the case may be, next preceding each Interest Payment Date (each such date being herein called a "Record Date"); provided, however, that if such registered owner shall be a securities depositary, such payment shall be made by such other means in lieu of check as shall be agreed upon by the Company, the Trustee and such registered owner. Interest payable at Maturity shall be paid to the person to whom principal shall be paid. As used herein, the term
"Maturity" shall mean the date on which the principal of this bond becomes due and payable, whether at stated maturity, upon redemption or acceleration, or otherwise.
This bond is one of an issue of bonds of the Company issuable in series and is one of a series known as its First Mortgage Bonds, _____% Series due ____, all bonds of all such series being issued and issuable under and equally secured (except insofar as any sinking or other fund, established in accordance with the provisions of the Mortgage hereinafter mentioned, may afford additional security for the bonds of any particular series) by a Mortgage and Deed of Trust, dated as of June 1, 1939, executed by the Company (formerly known as The Washington Water Power Company) to City Bank Farmers Trust Company and Ralph E. Morton, as Trustees (Citibank, N.A., successor Trustee to both said Trustees). Such mortgage and deed of trust has been amended and supplemented by various supplemental indentures, including the Thirty-second Supplemental Indenture, dated as of September 1, 2003 (the "Thirty-second Supplemental Indenture") and, as so amended and supplemented, is herein called the "Mortgage". Reference is made to the Mortgage for a description of the property mortgaged and pledged, the nature and extent of the security, the rights of the holders of the bonds and of the Trustee in respect thereof, the duties and immunities of the Trustee and the terms and conditions upon which the bonds are and are to be secured and the circumstances under which additional bonds may be issued. If there shall be a conflict between the terms of this bond and the provisions of the Mortgage, the provisions of the Mortgage shall control to the extent permitted by law. The holder of this bond, by its acceptance hereof, shall be deemed to have consented and agreed to all of the terms and provisions of the Mortgage and, further, in the event that such holder shall not be the sole beneficial owner of this bond, shall be deemed to have agreed to use all commercially reasonable efforts to cause all direct and indirect beneficial owners of this bond to have knowledge of the terms and provisions of the Mortgage and of this bond and to comply therewith, including particularly, but without limitation, any provisions or restrictions in the Mortgage regarding the transfer or exchange of such beneficial interests and any legend set forth on this bond.
The Mortgage may be modified or altered by affirmative vote of the holders of at least 60% in principal amount of the bonds outstanding under the Mortgage, considered as one class, or, if the rights of one or more, but less than all, series of bonds then outstanding are to be affected, then such modification or alteration may be effected with the affirmative vote only of 60% in principal amount of the bonds outstanding of the series so to be affected, considered as one class, and, furthermore, for limited purposes, the Mortgage may be modified or altered without any consent or other action of holders of any series of bonds. No modification or alteration shall, however, permit an extension of the Maturity of the principal of, or interest on, this bond or a reduction in such principal or the rate of interest hereon or any other modification in the terms of payment of such principal or interest or the creation of any lien equal or prior to the lien of the Mortgage or deprive the holder of a lien on the mortgaged and pledged property without the consent of the holder hereof.
The principal hereof may be declared or may become due prior to the stated maturity date on the conditions, in the manner and at the time set forth in the Mortgage, upon the occurrence of a completed default as in the Mortgage provided.
As provided in the Mortgage and subject to certain limitations therein set forth, this bond or any portion of the principal amount hereof will be deemed to have been paid if there has been irrevocably deposited with the Trustee moneys or direct obligations of or obligations guaranteed by the United States of America, the principal of and interest on which when due, and without regard to any reinvestment thereof, will provide moneys which, together with moneys so deposited, will be sufficient to pay when due the principal of and premium, if any, and interest on this bond when due.
The Mortgage contains terms, provisions and conditions relating to the consolidation or merger of the Company with or into, and the conveyance or other transfer, or lease, of assets to, another Corporation and to the assumption by such other Corporation, in certain circumstances, of all of the obligations of the Company under the Mortgage and on the bonds secured thereby.
In the manner prescribed in the Mortgage, this bond is transferable by the registered owner hereof in person, or by his duly authorized attorney, at the office or agency of the Company in the Borough of Manhattan, The City of New York, upon surrender and cancellation of this bond, together with a written instrument of transfer whenever required by the Company duly executed by the registered owner or by its duly authorized attorney, and, thereupon, a new fully registered bond of the same series for a like principal amount will be issued to the transferee in exchange herefor as provided in the Mortgage. The Company and the Trustee may deem and treat the person in whose name this bond is registered as the absolute owner hereof for the purpose of receiving payment and for all other purposes.
In the manner prescribed in the Mortgage, any bonds of this series, upon surrender thereof for cancellation at the office or agency of the Company in the Borough of Manhattan, The City of New York, are exchangeable for a like aggregate principal amount of bonds of the same series of other authorized denominations.
The bonds of this series shall be redeemable in whole at any time or in part from time to time, at the option of the Company, upon notice mailed as provided in Section 52 of the Mortgage, at the option of the Company at a redemption price equal to the greater of
(i) 100% of the principal amount of the bonds being redeemed and
(ii) the sum of the present values of the remaining scheduled payments of principal of and interest on the bonds being redeemed discounted to the date of redemption on a semiannual basis (assuming a 360-day year consisting of twelve 30-day months) at a discount rate equal to the Treasury Yield (as hereinafter defined) plus 25 basis points,
plus, in the case of either (i) or (ii) above, whichever is applicable, accrued interest on such bonds to the date of redemption.
"Treasury Yield" means, with respect to any redemption of bonds of the Thirtieth Series, the rate per annum equal to the semiannual equivalent yield to maturity of the Comparable Treasury Issue, assuming a price for the Comparable Treasury Issue (expressed as a percentage of its principal amount) equal to the Comparable Treasury Price. The Treasury Yield shall be calculated as of the third business day preceding the redemption date or, if the bonds to be redeemed are to be caused to be deemed to have been paid within the meaning of Section 106 of the Original Mortgage prior to the redemption date, then as of the third business day prior to the earlier of (x) the date notice of such redemption is mailed to bondholders pursuant to Section 52 of the Original Mortgage and (y) the date irrevocable arrangements with the Trustee for the mailing of such notice shall have been made, as the case may be (the "Calculation Date").
"Comparable Treasury Issue" means the United States Treasury security selected by an Independent Investment Banker as having a maturity comparable to the remaining term of the bonds of the Thirtieth Series that would be utilized, at the time of selection and in accordance with customary financial practice, in pricing new issues of corporate debt securities of comparable maturity to the remaining term of the bonds.
"Comparable Treasury Price" means, (A) the average of the bid and asked prices for the Comparable Treasury Issue (expressed in each case as a percentage of its principal amount) on the third business day preceding the Calculation Date, as set forth in the H.15 Daily Update of the Federal Reserve Bank of New York or (B) if such release (or any successor release) is not published or does not contain such prices on such business day, the Reference Treasury Dealer Quotation for the Calculation Date.
"H.15(519)" means the weekly statistical release entitled "Statistical Release H.15 (519)", or any successor publication, published by the Board of Governors of the Federal Reserve System.
"H.15 Daily Update" means the daily update of H.15(519) available through the worldwide website of the Board of Governors of the Federal Reserve System or any successor site or publication.
"Independent Investment Banker" means Lehman Brothers Inc. or an independent investment banking institution of national standing appointed by the Company and reasonably acceptable to the Trustee.
"Reference Treasury Dealer Quotation" means, with respect to the Reference Treasury Dealer, the average, as determined by the Trustee, of the bid and asked prices for the Comparable Treasury Issue (expressed in each case as a percentage of its principal amount and quoted in writing to the Trustee by such Reference Treasury Dealer at 5:00 p.m. on the third business day preceding the Calculation Date).
"Reference Treasury Dealer" means a primary U.S. Government securities dealer in New York City appointed by the Company and reasonably acceptable to the Trustee.
No recourse shall be had for the payment of the principal of or interest on this bond against any incorporator or any past, present or future subscriber to the capital stock, stockholder, officer or director of the Company or of any predecessor or successor corporation, as such, either directly or through the Company or any predecessor or successor corporation, under any rule of law, statute or constitution or by the enforcement of any assessment or otherwise, all such liability of incorporators, subscribers, stockholders, officers and directors being released by the holder or owner hereof by the acceptance of this bond and being likewise waived and released by the terms of the Mortgage.
This bond shall not become obligatory until Citibank, N.A., the Trustee under the Mortgage, or its successor thereunder, shall have signed the form of certificate endorsed hereon.
IN WITNESS WHEREOF, AVISTA CORPORATION has caused this bond to be signed in its corporate name by its President or one of its Vice Presidents by his signature or a facsimile thereof, and its corporate seal to be impressed or imprinted hereon and attested by its Corporate Secretary or one of its Assistant Corporate Secretaries by his signature or a facsimile thereof.
Dated: AVISTA CORPORATION
By:________________________
ATTEST:_________________________
TRUSTEE'S CERTIFICATE
This bond is one of the bonds, of the series herein designated, described or provided for in the within-mentioned Mortgage.
CITIBANK, N.A.
Trustee
By_________________________
Authorized Officer
THIS GLOBAL BOND IS HELD BY CEDE & CO., AS NOMINEE FOR THE
DEPOSITORY TRUST COMPANY (THE "DEPOSITARY") FOR THE BENEFIT OF THE BENEFICIAL
OWNERS HEREOF. THIS BOND MAY NOT BE TRANSFERRED, NOR MAY ANY PURPORTED TRANSFER
BE REGISTERED, EXCEPT THAT (i) THIS BOND MAY BE TRANSFERRED IN WHOLE, AND
APPROPRIATE REGISTRATION OF TRANSFER EFFECTED, IF SUCH TRANSFER IS BY CEDE &
CO., AS NOMINEE FOR THE DEPOSITARY, TO THE DEPOSITARY, OR BY THE DEPOSITARY TO
ANOTHER NOMINEE THEREOF, OR BY ANY NOMINEE OF THE DEPOSITARY TO ANY OTHER
NOMINEE THEREOF, OR BY THE DEPOSITARY OR ANY NOMINEE THEREOF TO ANY SUCCESSOR
BONDS DEPOSITARY OR ANY NOMINEE THEREOF; AND (ii) THIS BOND MAY BE TRANSFERRED,
AND APPROPRIATE REGISTRATION OF TRANSFER EFFECTED, TO THE BENEFICIAL HOLDERS
HEREOF, AND THEREAFTER SHALL BE TRANSFERABLE WITHOUT RESTRICTIONS (EXCEPT AS
PROVIDED IN THE PRECEDING PARAGRAPH) IF: (A) THE DEPOSITARY, OR ANY SUCCESSOR
SECURITIES DEPOSITARY, SHALL HAVE NOTIFIED THE COMPANY AND THE TRUSTEE THAT (I)
IT IS UNWILLING OR UNABLE TO CONTINUE TO ACT AS SECURITIES DEPOSITARY WITH
RESPECT TO THE BONDS OR (II) IT IS NO LONGER A CLEARING AGENCY REGISTERED UNDER
THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED, AND, IN EITHER CASE, THE
TRUSTEE SHALL NOT HAVE BEEN NOTIFIED BY THE COMPANY WITHIN ONE HUNDRED TWENTY
(120) DAYS OF THE IDENTITY OF A SUCCESSOR SECURITIES DEPOSITARY WITH RESPECT TO
THE BONDS; OR (B) THE COMPANY SHALL HAVE DELIVERED TO THE TRUSTEE A WRITTEN
ORDER TO THE EFFECT THAT THE BONDS SHALL BE SO TRANSFERABLE ON AND AFTER A DATE
SPECIFIED THEREIN.
FOR VALUE RECEIVED the undersigned hereby sells, assigns and transfers unto
[please insert social security or other identifying number of assignee]
[please print or typewrite name and address of assignee]
the within bond of AVISTA CORPORATION and does hereby irrevocably constitute and appoint _________, Attorney, to transfer said bond on the books of the within-mentioned Company, will full power of substitution in the premises.
Dated: _________ ____________________ Notice: The signature to this assignment must correspond with the name as written upon the face of the bond in every particular without alteration or enlargement or any change whatsoever. |
EXHIBIT 12
AVISTA CORPORATION
Computation of Ratio of Earnings to Fixed Charges and Preferred Dividend Requirements Consolidated
(Thousands of Dollars)
12 months ended Years Ended December 31 September 30, -------------------------------------------------- 2003 2002 2001 2000 1999 ------------ ----------- ----------- ----------- ----------- Fixed charges, as defined: Interest expense $ 86,085 $ 96,005 $ 100,180 $ 64,765 $ 61,666 Amortization of debt expense and premium - net 8,017 8,861 5,639 3,409 3,044 Interest portion of rentals 5,793 6,140 5,140 4,324 4,645 ------------ ----------- ----------- ----------- ----------- Total fixed charges $ 99,895 $ 111,006 $ 110,959 $ 72,498 $ 69,355 ============ =========== =========== =========== =========== Earnings, as defined: Income from continuing operations $ 47,583 $ 42,174 $ 68,241 $ 109,065 $ 31,223 Add (deduct): Income tax expense 35,595 34,849 40,585 81,143 18,276 Total fixed charges above 99,895 111,006 110,959 72,498 69,355 ------------ ----------- ----------- ----------- ----------- Total earnings $ 183,073 $ 188,029 $ 219,785 $ 262,706 $ 118,854 ============ =========== =========== =========== =========== Ratio of earnings to fixed charges 1.83 1.69 1.98 3.62 1.71 Fixed charges and preferred dividend requirements: Fixed charges above $ 99,895 $ 111,006 $ 110,959 $ 72,498 $ 69,355 Preferred dividend requirements(1) 2,977 4,387 3,878 41,394 33,914 ------------ ----------- ----------- ----------- ----------- Total $ 102,872 $ 115,393 $ 114,837 $ 113,892 $ 103,269 ============ =========== =========== =========== =========== Ratio of earnings to fixed charges and preferred dividend requirements 1.78 1.63 1.91 2.31 1.15 |
(1) Preferred dividend requirements have been grossed up to their pre-tax level.
EXHIBIT 31(a)
CERTIFICATION
I, Gary G. Ely, certify that:
1. I have reviewed this report on Form 10-Q of Avista Corporation;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b. Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
c. Disclosed in this report any change in the registrant's internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
Date: November 10, 2003 /s/ Gary G. Ely ------------------------------------ Gary G. Ely Chairman of the Board, President and Chief Executive Officer (Principal Executive Officer) |
EXHIBIT 31(b)
CERTIFICATION
I, Malyn K. Malquist, certify that:
1. I have reviewed this report on Form 10-Q of Avista Corporation;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b. Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
c. Disclosed in this report any change in the registrant's internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
Date: November 10, 2003 /s/ Malyn K. Malquist ------------------------------------ Malyn K. Malquist Senior Vice President and Chief Financial Officer (Principal Financial Officer) |
Exhibit 32
AVISTA CORPORATION
CERTIFICATION OF CORPORATE OFFICERS
(Furnished Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002)
Each of the undersigned, Gary G. Ely, Chairman of the Board, President
and Chief Executive Officer of Avista Corporation (the "Company"), and Malyn K.
Malquist, Senior Vice President and Chief Financial Officer of the Company,
hereby certifies, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002, that the Company's Quarterly
Report on Form 10-Q for the quarter ended September 30, 2003 fully complies with
the requirements of Section 13(a) of the Securities Exchange Act of 1934, as
amended, and that the information contained therein fairly presents, in all
material respects, the financial condition and results of operations of the
Company.
November 10, 2003
/s/ Gary G. Ely ----------------------------------- Gary G. Ely Chairman of the Board, President and Chief Executive Officer /s/ Malyn K. Malquist ------------------------------------ Malyn K. Malquist Senior Vice President and Chief Financial Officer |