After sustaining deep financial wounds in 2001, Avista Corp. is aiming to take some important steps in the first quarter toward recovery.
First, though, the Spokane company, hurt over the last two years by precipitous wholesale energy prices and the worst hydropower conditions in its history, is going to do some more bleeding.
National rating agencies downgrades in October of Avistas unsecured credit already are costing the company $14.3 million in additional annual expenses, Jon E. Eliassen, Avistas chief financial officer and a senior vice president, said in testimony filed with the Washington Utilities and Transportation Commission (WUTC) last month.
Our credit rating is nearly the lowest of any rated utility listed by Standard & Poorsbarely better than the bankrupt or defaulted utilities in California, Eliassen said in his testimony.
In November, Standard & Poors rated Avista 310th out of 318 U.S. electric, gas, and water utilities, Eliassen said. He added, The companys financial condition needs to be improved as soon as possible because of the immediate requirement to renew bank lines (of credit) and other financing in early 2002.
Because of the turmoil Avista has been through, D.A. Davidson & Co., the Great Falls, Mont.-based regional brokerage firm that has an office here, no longer makes a recommendation on the companys stock, although it studies Avista and listens to management, spokesman Jim Bellessa says.
The company four years ago disenfranchised our investors when they brought in new management, cut the dividend, and did a lot of things that didnt pan out, Bellessa says. Now, Avista is trying to rebound from adverse energy markets and heal itself, he says.
Despite Avistas difficulties, Eliassen voiced optimism in an interview at the companys headquarters just before Christmas.
We are focused again on bringing the business back to its rootsa low-cost, regional utility competing in the wholesale and retail markets, Eliassen said. Have we turned the corner? Yes. Do we need support from the commission? Yes.
To help get its financial house in order, Avista, which filed a request with the WUTC Dec. 3 for a general electric-rate increase, is trying to meet these immediate goals:
*Obtain a ruling from the WUTC that the company acted prudently in incurring $200 million in excess wholesale power costs between July 1, 2000, and last Sept. 30. There needs to be an assurance that that is a recoverable expense, Eliassen says. Avista hopes to have an order on that prudency review as soon as the first week of April.
*Renegotiate with eight major banks, by the end of March, lines of credit that terminate at the end of May. Eliassen told the WUTC in his testimony, filed in support of Avistas general rate-increase request, that one of Avistas major banks already has told the company it no longer will commit to lend it money. At this point, there is some uncertainty about how many banks will renew (Avistas credit lines) and if they do, at what cost and with what additional conditions and covenants, Eliassen said.
Avista announced Dec. 21 that it had reached its other immediate major goal by obtaining the WUTCs approval to defer additional excess wholesale-electricity costs that it expects to incur between Jan. 1 and the conclusion of its general rate case, which is expected Nov. 1. Such excess costs arent covered by a utilitys current rates, but typically are adjusted into its rates when a rate case is concluded. Avista said it expects to incur $19.5 million in such costs during that period.
Avista hasnt announced its full-year financial results for 2001 yet, but it choked down a $32.9 million net loss in the third quarter when it took a $38.9 million after-tax loss related to the planned divestiture of its Avista Communications subsidiary. The third-quarter setback held down the companys net income available for common stock through the first nine months of 2001 to just $446,000, or 1 cent a share, compared with $33.9 million, or 72 cents a share, in the year-earlier period.
Avista also hopes to gain as early as the first week of April the WUTCs approval of a 10 percent interim electricity-rate increaseon top of a 25 percent surcharge approved by the WUTC effective Oct. 1effective until Avistas general rate case is concluded. That interim relief would send a message that the commission is supportive of the companys needs, Eliassen says. It also would give the company $16 million in additional revenueand cash flowbetween April 1 this year and the end of October.
Beefing up cash flow is vital to Avista right now because that can enable the company to buy down its debt and especially its higher-cost debt, Eliassen says.
He says that during 2001 the company failed to contribute to true cash, which he defines as earnings before payment of interest, taxes, depreciation, and amortization. Instead, it went backwards by $1 million, after generating $151 million in true cash in 2000.
This year, the company projects that it will contribute $330 million in true cash, Eliassen says. Even so, the company, which has heavy capital-expenditure and other funding needs, doesnt expect that its Avista Utilities subsidiary will reach an acceptable earnings level of $1.10 a share until 2003, Eliassen says.
Interest costs soared 50 percent
The companys crushing debt perhaps is illustrated best by its estimation that its total interest costs will have jumped by more than 50 percent in 2001soaring to $100 million from $65 million the year before.
The company hopes to see rating agencies restore its unsecured credit to investment grade in the second or third quarters of 2003. Avista must secure investment-grade ratings by July 2003 because it hopes to refinance at favorable terms $175 million in medium-term notes that mature in August 2003, Eliassen says. He says thats a key piece of the companys plan to reinvigorate its financial health.
The company would like to issue additional equity, but is in no position to do so right now, and probably wont be until this fall at the earliest, Eliassen says.
His earlier testimony to the WUTC includes a litany of what can happen to a major utility when its saddled suddenly with hundreds of millions in unexpected debt.
In October, both Moodys Investor Services and Standard & Poors dropped their ratings of Avistas creditincluding slapping junk bond status on the companys unsecured creditdays after the WUTC approved a 15-month, 25 percent electric-rate surcharge for Avista from Oct. 1 until the end of 2002. The company had sought a 27-month, 36.9 percent surcharge.
Eliassen testified that because of the junk-bond ratings attached to Avistas unsecured credit:
The company incurred about $2.2 million in additional interest expense and contingent fees to borrow under its bank line of credit. The company had to obtain waivers from banks to continue borrowing under the line, pay fees of $550,000, and grant a secured interest in its property.
Annual interest costs for unsecured medium-term notes issued in August 2000 jumped $875,000.
The annual cost of the companys pollution-control bonds for the Colstrip, Mont., coal-fired generating project will shoot up by about $2.4 million.
The cost of $400 million of debt issued earlier in 2001 soared by about $8 million annually.
The banks that have extended credit to the companys profitable Avista Energy subsidiary gained the prerogative of prohibiting dividend payments by Avista Energy to Avista Corp. Avista Energy paid its parent company a $30 million dividend in the third quarter of 2001. Avista Corp. is working with Avista Energys banks to allow an additional $50 million dividend payment in the first quarter this year.
Avista has been required to post collateral in excess of $5 million.
The annual cost of the companys accounts-receivable financing increased by $765,000, and Avista paid a $100,000 amendment fee to maintain the financing.
After the downgrades, Wachovia,