Filed Pursuant To Rule 424(b)(3)
Registration No. 333-82502
PROSPECTUS
AVISTA CORPORATION
EXCHANGE OFFER
AVISTA CORP. IS OFFERING TO ISSUE ITS
7.75% FIRST MORTGAGE BONDS DUE 2007
(REGISTERED)
IN EXCHANGE FOR ITS
7.75% FIRST MORTGAGE BONDS DUE 2007
(UNREGISTERED)
THIS EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M.
NEW YORK CITY TIME, MAY 10, 2002 UNLESS EXTENDED
o The new bonds will:
o bear interest at 7.75% per annum, and
o mature on January 1, 2007.
These terms are the same as the terms of the old bonds. The new bonds will
not be subject to any restrictions on transfer, except in certain
circumstances relating to broker-dealers described in this prospectus.
o Avista Corp. will accept all bonds that bondholders properly tender and do
not withdraw before the expiration of the exchange offer.
o You will not recognize any income, gain or loss for U.S. federal income tax
purposes as a result of the exchange.
o Like the old bonds, the new bonds will be secured by a lien on Avista
Corp.'s facilities for the generation, transmission and distribution of
electric energy and for the storage and distribution of natural gas.
o The exchange offer is not conditioned on the tender of any minimum
principal amount of old bonds.
o There will likely be no public market for the new bonds.
----------------
SEE "RISK FACTORS" BEGINNING ON PAGE 11 TO READ ABOUT CERTAIN FACTORS YOU SHOULD
CONSIDER BEFORE MAKING ANY DECISION CONCERNING THIS EXCHANGE OFFER.
----------------
The Securities and Exchange Commission and state securities regulators have not
approved or disapproved of these securities, or determined if this prospectus is
truthful or complete. Any representation to the contrary is a criminal offense.
April 10, 2002
TABLE OF CONTENTS
PAGE PAGE
---- ----
Summary.............................3 Bank Credit Agreements...............38
Risk Factors.......................11 Certain U.S. Federal Income Tax
Considerations.....................39
Avista Corporation.................13
Plan Of Distribution.................42
Use of Proceeds....................16
Where You Can Find More Information..43
Certain Regulatory Matters.........16
Safe Harbor for Forward-Looking
The Exchange Offer.................19 Statements.........................44
Description of the New Bonds.......27 Legal Matters........................45
Experts..............................45
THIS PROSPECTUS INCORPORATES BY REFERENCE IMPORTANT BUSINESS AND FINANCIAL
INFORMATION ABOUT AVISTA CORP. THAT IS NOT INCLUDED IN OR DELIVERED WITH THIS
PROSPECTUS. SEE WHERE YOU CAN FIND MORE INFORMATION. YOU MAY OBTAIN COPIES OF
DOCUMENTS CONTAINING SUCH INFORMATION FROM US, WITHOUT CHARGE, BY EITHER CALLING
OR WRITING TO US AT:
AVISTA CORPORATION
1411 EAST MISSION AVENUE
SPOKANE, WASHINGTON 99202-2600
ATTENTION: TREASURER
TELEPHONE: (509) 489-0500
IN ORDER TO OBTAIN TIMELY DELIVERY, YOU MUST REQUEST DOCUMENTS FROM US NO LATER
THAN MAY 3, 2002, WHICH IS FIVE BUSINESS DAYS BEFORE THE EXPIRATION DATE OF THE
EXCHANGE OFFER ON MAY 10, 2002.
--------------------
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED OR INCORPORATED BY
REFERENCE IN THIS PROSPECTUS OR IN THE LETTER OF TRANSMITTAL IN CONNECTION WITH
THE EXCHANGE OFFER.
WE HAVE NOT AUTHORIZED ANYONE TO GIVE YOU ANY INFORMATION OTHER THAN THIS
PROSPECTUS. YOU SHOULD NOT ASSUME THAT THE INFORMATION CONTAINED OR INCORPORATED
IN THIS PROSPECTUS IS ACCURATE AS OF ANY DATE AFTER THE DATE OF THIS PROSPECTUS.
THIS PROSPECTUS IS NOT AN OFFER TO EXCHANGE THE NEW BONDS AND IT IS NOT
SOLICITING AN OFFER TO EXCHANGE THE NEW BONDS IN ANY JURISDICTION IN WHICH THE
EXCHANGE OFFER IS NOT PERMITTED.
2
SUMMARY
This summary, which is presented solely to furnish limited introductory
information regarding Avista Corporation (Avista Corp. or the Company), the
exchange offer and the new bonds, has been selected from the detailed
information contained elsewhere in this prospectus (including the documents
incorporated by reference). This summary does not contain all of the information
that you should consider before making a decision to participate in the exchange
offer. The terms "we", "us" and "our" refer to Avista Corp. and, when
applicable, its subsidiaries. You should read the entire prospectus carefully,
including the detailed financial and other information incorporated by reference
in this prospectus and the information contained in the section entitled RISK
FACTORS.
AVISTA CORPORATION
GENERAL
Avista Corp., which was incorporated in the State of Washington in 1889, is
an energy company involved in the generation, transmission and distribution of
energy as well as other energy-related businesses. Avista Utilities, which is an
operating division of Avista Corp. and not a separate entity, represents the
regulated utility operations that provide electric and natural gas service to
customers in four western states. We also have subsidiaries involved in energy
trading and marketing and information and technology businesses. Our corporate
headquarters are in Spokane, Washington, which serves as the Inland Northwest
center for manufacturing, transportation, health care, education, communication,
agricultural and service businesses.
Avista Utilities provides retail electricity distribution and transmission
services to a total of approximately 317,000 customers in eastern Washington and
northern Idaho, and retail natural gas distribution service to approximately
284,000 customers in parts of Washington, Idaho, Oregon and California. Avista
Utilities anticipates residential and commercial electric load growth to average
between 2.0% and 3.0% annually for the next five years and natural gas load
growth, including transportation volumes, to average for the next five years
between 1.5% and 2.0% annually in the Washington and Idaho service area and
between 2.0% and 3.0% annually in the Oregon and South Lake Tahoe service areas.
In addition to providing electric transmission and distribution services, Avista
Utilities generates electricity for sales to retail customers. It owns and
operates eight hydroelectric projects, a wood-waste fueled generating station
and a two-unit natural gas-fired combustion turbine generating facility. Avista
Utilities also owns a 15% share in a two-unit coal-fired generating facility and
leases and operates a two-unit natural gas-fired combustion turbine generating
facility. These facilities have a maximum capacity of approximately 1,480
megawatts ("MW"), of which 65% is hydroelectric and 35% is thermal. We also plan
to add new generation assets in 2002 with the expected completion of the Coyote
Springs 2 project near Boardman, Oregon, and the addition of two small
generation facilities. Avista Utilities also provides open access transmission
services and engages in wholesale sales and purchases of electric capacity and
energy.
Avista Corp.'s Energy Trading and Marketing line of business excludes
Avista Utilities' regulated utility operations, and is comprised of Avista
Energy, Inc. ("Avista Energy") and Avista Power, LLC ("Avista Power"). Avista
Energy is an electricity and natural gas trading and marketing business. Avista
Power has a 49% ownership interest in a 270 MW natural gas-fired combustion
turbine plant in Rathdrum, Idaho, which commenced commercial operation in
September 2001. Avista Power is also in the process of constructing the Coyote
Springs 2 power plant and completed the sale of 50% of its interest in the plant
to an affiliate of Mirant Americas Development, Inc. in December 2001. Upon the
planned completion of the plant in the third quarter of 2002, Avista Power's 50%
ownership interest will be transferred to Avista Corp. to be operated as an
asset of Avista Utilities.
RECENT DEVELOPMENTS
RECOVERY OF PURCHASED POWER COSTS
Beginning in the second quarter of 2000, the price of power in the
wholesale markets of the western United States increased considerably and became
much more volatile. In the second half of 2000 and continuing through 2001, we
were required to purchase above-normal amounts of power in the wholesale market
to meet our retail demand. This was primarily due to the reduced availability of
hydroelectric resources as a result of low streamflow conditions. The
combination of high wholesale market prices and increased amounts required to be
purchased increased power supply costs to amounts far in excess of the amounts
recovered from retail customers under existing rates prevailing while the high
costs were being incurred.
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In August 2000 the Washington Utilities and Transportation Commission
("WUTC") issued an order permitting us to record as an expense on our income
statement only that portion of our power supply costs which was being recovered
from retail customers under existing rates. Under the WUTC order, we were
permitted to "defer" the recognition in our income statement of 100% of the
portion of our power supply costs which was in excess of the level then being
recovered from retail customers. Instead, we were allowed to record these excess
costs as a "deferred charge" on our balance sheet for possible recovery in the
future. We already had similar authority in Idaho under a previously established
power cost adjustment mechanism ("PCA") that allows 90% of excess costs to be
deferred.
Our deferral balances had reached levels that made it necessary for the
Company to file for rate increases with the WUTC and the Idaho Public Utility
Commission ("IPUC") as described below.
As of December 31, 2001, the total amount expended for excess power supply
costs which has been deferred on our balance sheet was $213.3 million, of which
$140.2 million was attributable to Washington customers and $73.1 million was
attributable to Idaho customers.
REQUESTED ELECTRIC RATE INCREASES
September 2001 WUTC Order. In September 2001, the WUTC issued an order
approving a 25% temporary electric rate surcharge, subject to refund, for all
classes of Washington customers, for a period of 15 months commencing October
2001. The order also terminated the previously approved deferred accounting
mechanism, as of January 1, 2002. We had requested a 36.9% surcharge over a
period of 27 months. It was originally estimated that the order would allow us
to reduce the deferred power cost balance by $125 million. This included the
receipt of $71 million in additional revenue from the surcharge ($10.2 million
was recovered during 2001) and the accelerated amortization of $54 million of a
deferred non-cash credit on our balance sheet in October 2001. The amount so
credited, which was previously being amortized to revenue over a period of
years, resulted from an unrelated matter. There is no direct impact on net
income from either the surcharge or accelerated amortization of the deferred
non-cash credit. The WUTC ordered us to file a general rate case in December
2001 to determine the prudency of our purchased power costs as well as to
address other matters.
October 2001 IPUC Order. In October 2001, the IPUC issued an order
approving a 14.7% PCA surcharge, and extending an existing 4.7% PCA surcharge,
for all classes of Idaho customers for 12 months commencing immediately. We
currently estimate that the IPUC order will allow us to reduce the deferred
power cost balance by approximately $58.2 million. Of this amount, approximately
$23.6 million represents additional cash revenue and approximately $34.6 million
relates to an unrelated non-cash credit for costs being amortized through the
end of 2002. The IPUC indicated that it could, upon further review, authorize
extensions of the surcharges. As in the case of the Washington surcharge, the
Idaho PCA surcharge will have no material impact on net income.
November 2001 WUTC Deferred Cost Filing. In November 2001, prior to filing
our general rate case (which generally can take up to 11 months to be resolved),
we filed a request with the WUTC for an expedited procedural schedule to address
the prudence and recoverability of the Washington portion of our deferred
purchased power costs incurred as of September 30, 2001. As discussed below, in
March 2002, the WUTC approved the prudence and recoverability of 90% of deferred
power costs incurred as of December 31, 2001.
December 2001 WUTC General Rate Filing. On December 3, 2001, we filed a
general rate case with the WUTC requesting, among other things:
o an interim rate increase, subject to refund, of 10% above current
electric prices (including the 25% temporary surcharge approved by the
WUTC in September 2001) to offset increased costs that are in excess
of those being recovered through existing rates;
o the issuance of an order implementing a temporary deferred accounting
mechanism to run from January 1, 2002 until the conclusion of the
general rate case, to reflect cash spent to cover power supply-related
costs to serve retail customer needs but not yet reflected in rates;
o recovery of costs associated with the addition of the new Coyote
Springs 2 power project and other electric generation projects built
to serve retail customer needs;
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o establishment of a PCA mechanism to adjust electric rates up or down
with changes in the market and in hydroelectric conditions, similar to
the existing Idaho PCA mechanism that has been in place since 1989;
and
o a 12.75% rate of return on common equity.
December 2001 WUTC Order Granting Accounting Petition. In December 2001,
the WUTC issued an order authorizing the Company to defer 90% of its excess
power supply-related costs from January 1, 2002 until the conclusion of the
general rate case. The ratemaking treatment of these costs remains the subject
of the general rate case and are subject to final review and approval by the
WUTC.
March 2002 WUTC Order Regarding Deferred Cost Filings. In March 2002, the
WUTC issued an order approving a settlement agreement reached among Avista
Corp., the staff of the WUTC and other parties. This order approves the prudence
and recoverability of 90% (or $196 million) of deferred power supply costs
incurred by us during the period from July 1, 2000 through December 31, 2001.
This also resulted in us recording as an expense an additional $21.8 million in
power supply costs for the year ended December 31, 2001.
Additionally, the WUTC order provides that the collection of the 25%
temporary electric surcharge, approved by the WUTC in September 2001, will no
longer be subject to refund. The order also modified the temporary electric
surcharge such that one-fifth (or approximately $12 million in annual revenues)
of the existing 25% surcharge will be applied to offset our general operating
costs and the remainder (approximately $47 million in annual revenues) will
continue to be applied as a recovery of deferred power costs. The WUTC also
ordered a 6.2% (or $14.7 million in annual revenues) increase in base electric
rates for Washington customers.
RECENT GAS COST ADJUSTMENTS
In July 2001, we filed requests for purchased gas cost adjustments ("PGA")
with the WUTC and the IPUC. Both the Washington PGA increase of 12.2% approved
by the WUTC and the Idaho PGA increase of 11.5% approved by the IPUC became
effective in August 2001. We estimate that these PGA rate changes will increase
revenues by approximately $24.6 million for approximately one year. Total
deferred purchased gas costs were approximately $52.7 million as of December 31,
2001. Based on current PGAs in place and current natural gas prices, we expect
that the deferred natural gas cost balance will be fully recovered by December
2002. However, there will be no material impact on net income as natural gas
costs are amortized to offset the increase in revenues.
ASSET SALES
Coyote Springs 2. On December 12, 2001, we sold 50% of our interest in the
Coyote Springs 2 project, representing 140 MW of a 280 MW combined-cycle natural
gas-fired plant currently under construction near Boardman, Oregon to Mirant
Americas Development, Inc. ("Mirant"). National Energy Production Corporation
("NEPCO"), a wholly-owned subsidiary of Enron Corporation, is the contractor
responsible for the engineering, procurement and construction of the Coyote
Springs 2 project. The project is planned to begin commercial operation in the
third quarter of 2002. Avista Corp. and Mirant will share equally in the costs
of construction, operation and output from the plant. As of December 31, 2001,
we had invested approximately $92.5 million in the project, which has a total
expected cost of $190 million. Upon commercial operation, Avista's portion of
the output will be dedicated to Avista Utilities' retail customers.
Combustion Turbines. In November 2001, our subsidiary, Avista Power,
announced its intention to sell three combustion turbine units being
manufactured by General Electric Company. The expected proceeds will be
approximately $46 million in cash over a period commencing November 2001 and
continuing through July 2002. We recorded an $8.2 million pre-tax impairment
charge related to these assets in September 2001.
Avista Communications. In September 2001, we announced our intention to
dispose of our interest in Avista Communications, our telecommunications
affiliate, and thereby exit from the telecommunication service provider
business. To date we have announced dispositions of assets and operations in
Idaho, Montana, Washington and Wyoming. The divestiture is expected to be
completed during the first half of 2002. As a result of such divestitures, we
recorded a $58.4 million pre-tax impairment charge related to these operations
in September 2001.
5
RATINGS DOWNGRADE
In December 2001, Fitch, Inc. downgraded our credit ratings. Among those
ratings downgraded was our senior secured debt, which was downgraded from BBB
with a negative outlook to BBB- with a stable outlook. In October 2001, Moody's
Investor Service and Standard & Poor's downgraded our credit ratings. Among
those ratings downgraded was our senior secured debt, which was downgraded from
Baa1 to Baa3 with a negative outlook by Moody's Investor Service and from BBB to
BBB- with a negative outlook by Standard & Poor's. Also downgraded was our
overall corporate credit rating, which is now rated Ba1 with a negative outlook
by Moody's Investor Service and BB+ with a negative outlook by Standard &
Poor's.
ENRON EXPOSURE
Both Avista Energy and Avista Corp. (through the Avista Utilities division)
engage in physical and financial transactions for the purchase and sale of
electric energy and capacity and natural gas. Both companies had done
considerable business and had short-term and long-term contracts with several
affiliates of Enron Corporation ("Enron"). In December 2001, Enron and certain
of its affiliates filed for protection under Chapter 11 of the U.S. Bankruptcy
Code. The bankruptcy filing constituted an event of default under contracts
between Avista Corp. and Avista Energy, respectively, and certain Enron
affiliates. As a result, Avista Corp. and Avista Energy terminated all of these
contracts and suspended trading activities with Enron and its affiliates. Avista
Energy's long-term contracts with Enron affiliates also were terminated
entirely.
As of December 31, 2001, Avista Corp. and Avista Energy had net accounts
receivable from Enron and its affiliates of $3.1 million and $14.1 million,
respectively.
Avista Corp.'s and Avista Energy's contracts with each Enron affiliate
provide that, upon termination, the net settlement of accounts receivable and
accounts payable with such entity will be netted against the net mark-to-market
value of the terminated forward contracts with such entity. We currently
estimate that, for each of Avista Corp. and Avista Energy, netting the
mark-to-market liability against the defaulted net accounts receivable will
result in no significant loss due to non-collection from the Enron affiliates.
We further estimate that the net mark-to-market liability to Enron entities in
respect of terminated forward contracts of Avista Corp. and Avista Energy, taken
together, exceeds total net accounts receivable from these entities by less than
$30 million. Any claims by the Enron entities for amounts we might owe in
respect of the terminated forward contracts would be subject to any defenses and
counterclaims which we may have.
Our estimates of the mark-to-market values of terminated forward contracts
are based on available broker quotes for the respective periods, and on
assumptions as to future market prices and other information. While we believe
that our assumptions are reasonable, they are subject to change and ultimately
could be challenged by the Enron entities or their bankruptcy trustees. The
mark-to-market value of terminated contracts has not been firmly established and
could result in undercollection that is not expected to be material to our
financial condition or results of operations.
NEPCO, a wholly-owned subsidiary of Enron and the contractor for the Coyote
Springs 2 project, was not included in the initial bankruptcy filings made by
Enron and its affiliates. However Enron guaranteed NEPCO's obligations, and the
bankruptcy filing by Enron was an event of default under the Coyote Springs 2
construction contract. NEPCO and Coyote Springs 2, LLC, an entity formed for the
purpose of constructing the Coyote Springs 2 plant, amended the construction
contract to, among other things, authorize Coyote Springs 2, LLC to make
immediate draws under a letter of credit posted to secure NEPCO's performance
and to permit Coyote Springs 2, LLC to pay third-party subcontractors of NEPCO
directly. Coyote Springs 2, LLC is continuing to assess the ability of NEPCO to
perform its obligations under the construction contract and may need to exercise
additional remedies in the event the impact of the Enron bankruptcy prevents
NEPCO from performing its obligations under the construction contract.
Avista Corp. is party to a power exchange arrangement which expires in
2016. Under this power exchange arrangement, Enron Power Marketing Inc. ("EPMI")
(one of the Enron affiliates which filed for bankruptcy protection) purchases
capacity from Avista Corp. and sells capacity to Spokane Energy LLC ("Spokane
Energy"), a subsidiary of Avista Corp., formed in 1998 solely for the purpose of
monetizing the long-term capacity contract between Portland General Electric
("PGE") and Avista Corp. Spokane Energy sells the related capacity to PGE, a
subsidiary of Enron that has not been included in the bankruptcy filing to date
and is in the process of being sold to another company. This power exchange
arrangement was originally established for the purpose of monetizing a $145
million long-term capacity contract between Avista Corp. and PGE. EPMI assisted
in setting up the monetization structure and acts as an intermediary to abide by
certain regulatory restrictions that currently prevent Spokane Energy and Avista
6
Corp. from dealing directly with each other. The transaction is structured such
that Spokane Energy bears full recourse risk for a monetization loan (balance of
$131.1 million as of December 31, 2001) that matures January 2015 with no
recourse to Avista Corp. related to the loan. EPMI is obligated to pay
approximately $150,000 per month to Avista Corp. for its capacity purchase and
servicing functions related to this power exchange arrangement. EPMI defaulted
on two payments totaling $300,000 owed to Avista Corp. prior to filing for
bankruptcy. As a result, in December 2001, Avista Corp. and EPMI entered an
agreement that allows Avista Corp. to continue receiving the monthly payments
from EPMI while Avista Corp. evaluates alternatives with respect to EPMI's
involvement in the transaction going forward.
THE EXCHANGE OFFER
GENERAL Avista Corp. is offering to exchange $1,000 in principal
amount of new bonds for each $1,000 in principal amount
of old bonds that bondholders properly tender and do not
withdraw before the expiration date. Avista Corp. will
issue the new bonds on or promptly after the expiration
date. There is $150,000,000 in aggregate principal
amount of old bonds outstanding. See THE EXCHANGE OFFER.
EXPIRATION DATE The exchange offer will expire at 5:00 p.m., New York
City time, on May 10, 2002 unless extended. If extended,
the term "expiration date" will mean the latest date and
time to which the exchange offer is extended. Avista
Corp. will accept for exchange any and all old bonds
which are properly tendered in the exchange offer and
not withdrawn before 5:00 p.m., New York City time, on
the expiration date.
RESALE OF NEW BONDS Based on interpretive letters written by the staff of
the Securities and Exchange Commission to companies
other than Avista Corp., Avista Corp. believes that,
subject to certain exceptions, the new bonds may
generally be offered for resale, resold and otherwise
transferred by any holder thereof, without compliance
with the registration and prospectus delivery provisions
of the Securities Act of 1933. However, any holder who
is an "affiliate" of Avista Corp. within the meaning of
Rule 405 under the Securities Act would have to comply
with these provisions unless an exemption was available.
If Avista Corp.'s belief is inaccurate, holders of new
bonds who offer, resell or otherwise transfer new bonds
in violation of the Securities Act may incur liability
under that Act. Avista Corp. will not assume or
indemnify holders against this liability.
CONDITIONS TO THE Avista Corp. may terminate the exchange offer before the
EXCHANGE OFFER expiration date if it determines that its ability to
proceed with the exchange offer could be materially
impaired due to
o any legal or governmental action,
o any new law, statute, rule or regulation, or
o any interpretation by the staff of the SEC of any
existing law, statute, rule or regulation.
TENDER PROCEDURES - If you wish to tender old bonds that are registered in
BENEFICIAL OWNERS the name of a broker, dealer, commercial bank, trust
company or other nominee, you should contact the
registered holder promptly and instruct the registered
holder to tender on your behalf.
IF YOU ARE A BENEFICIAL HOLDER, YOU SHOULD FOLLOW THE
INSTRUCTIONS RECEIVED FROM YOUR BROKER OR NOMINEE WITH
RESPECT TO TENDERING PROCEDURES AND CONTACT YOUR BROKER
OR NOMINEE DIRECTLY.
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TENDER PROCEDURES - If you are a registered holder of old bonds and you wish
REGISTERED HOLDERS to participate in the exchange offer, you must complete,
AND DTC PARTICIPANTS sign and date the letter of transmittal delivered with
this prospectus, or a facsimile thereof. If you are a
participant in The Depository Trust Company and you wish
to participate in the exchange offer, you must instruct
DTC to transmit to the exchange agent a message
indicating that you agree to be bound by the terms of
the letter of transmittal. You should mail or otherwise
transmit the letter of transmittal or facsimile (or DTC
message), together with your old bonds (in book-entry
form if you are a participant in DTC) and any other
required documentation to Citibank, N.A., as exchange
agent.
GUARANTEED DELIVERY If you are a registered holder of old bonds and you wish
PROCEDURES to tender them, but they are not immediately available
or you cannot deliver them or the letter of transmittal
to the exchange agent prior to the expiration date, you
must tender your old bonds according to special
guaranteed delivery procedures. See THE EXCHANGE OFFER -
"Procedures for Tendering - Registered Holders and DTC
Participants - Registered Holders" on page 23.
WITHDRAWAL RIGHTS You may withdraw tenders of old bonds at any time before
5:00 p.m., New York City time, on the expiration date.
CERTAIN FEDERAL INCOME The exchange of new bonds for old bonds will not be a
TAX CONSIDERATIONS taxable event for U.S. federal income tax purposes. As a
result, you will not recognize any income, gain or loss
with respect to the exchange.
EFFECT ON HOLDERS OF If you are a holder of old bonds and do not tender your
OLD BONDS old bonds in the exchange offer, you will continue to
hold the old bonds and you will be entitled to all the
rights and limitations applicable to the old bonds in
the mortgage, except for any rights under the
registration rights agreement that by their terms
terminate upon the consummation of the exchange offer.
CONSEQUENCES OF All untendered old bonds will continue to be subject to
FAILURE TO EXCHANGE the restrictions on transfer provided for in the old
bonds. In general, the old bonds may not be offered or
sold unless registered under the Securities Act of 1933,
except pursuant to an exemption from, or in a
transaction not subject to, the Securities Act of 1933
and applicable state securities laws. Other than the new
bonds being registered in connection with the exchange
offer, we do not currently anticipate that we will
register the old bonds under the Securities Act of 1933.
EXCHANGE AGENT Citibank, N.A. is the exchange agent. Its telephone
number is 1-800-422-2066. Its address is 111 Wall
Street, 14th Floor/Zone 3, New York, New York 10043.
THE NEW BONDS
OFFERED SECURITIES $150,000,000 principal amount of 7.75% First Mortgage
Bonds due 2007
MATURITY DATE January 1, 2007
INTEREST PAYMENT DATES January 1 and July 1 of each year, beginning July 1,
2002
SECURITY; RANKING The new bonds will be issued under Avista Corp.'s
Mortgage and Deed of Trust, dated as of June 1, 1939, as
supplemented (the "mortgage") and will be secured by a
lien on Avista Corp.'s facilities for the generation,
transmission and distribution of electric energy and for
the storage and distribution of natural gas. The new
bonds will rank equally in right of payment with all of
Avista Corp.'s current and future first mortgage bonds
and senior in right of payment to all current and future
unsecured senior indebtedness and subordinated
indebtedness, which as of December 31, 2001 was $967.2
million. As of December 31, 2001, Avista Corp. had
outstanding $533.5 million of first mortgage bonds.
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ISSUANCE OF Additional bonds may be issued under the mortgage on the
ADDITIONAL BONDS basis of 70% of the cost or fair value to Avista Corp.
(whichever is less) of property additions or on the
basis of retired bonds or cash deposited with the
trustee.
USE OF PROCEEDS The net proceeds from the issuance and sale of the old
bonds are being used to retire maturing medium-term
notes and other short-term indebtedness. We will not
receive any proceeds from the issuance of the new bonds
in the exchange offer.
RISK FACTORS
You should read the RISK FACTORS section, beginning on page 11 of this
prospectus, so that you understand the risks associated with an investment in
securities of Avista Corp.
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SUMMARY CONSOLIDATED FINANCIAL DATA
We have selected the historical financial data shown below from the
consolidated financial statements of Avista Corp. You should read this
information along with the consolidated financial statements of Avista Corp. and
the notes to those financial statements which are incorporated by reference into
this prospectus.
Years Ended December 31,
--------------------------------------------------------------------
1997 1998 1999 2000 2001
---------- ---------- ---------- ---------- ----------
(Thousands of Dollars except Ratios)
Income Statement Data:
Operating Revenues:
Avista Utilities................. $891,665 $1,049,212 $1,115,647 $1,512,101 $1,230,847
Energy Trading and Marketing..... 247,028 2,408,734 6,695,671 6,531,551 5,000,955
Information and Technology....... 792 1,318 2,266 5,732 13,815
Other............................ 163,598 231,483 122,303 32,937 16,385
Intersegment eliminations........ (1,149) (7,440) (33,488) (176,744) (252,155)
Total............................ $1,301,934 $3,683,307 $7,902,399 $7,905,577 $6,009,847
Income (Loss) from Operations
(pre-tax):
Avista Utilities................. $178,289 $143,153 $142,567 $3,177 $114,927
Energy Trading and Marketing..... 6,577 22,826 (97,785) 250,196 94,669
Information and Technology....... (5,391) (4,979) (8,966) (26,424) (29,872)
Other............................ 9,962 12,033 (423) (9,861) (10,432)
Total............................ $189,437 $173,033 $35,393 $217,088 $169,292
Interest Expense ................... $66,275 $69,017 $64,747 $68,255 $106,480
Income from Continuing Operations
Before Income Taxes................ 175,826 121,746 45,559 178,053 93,991
Income from Continuing Operations... 114,767 78,316 28,662 101,055 59,605
Income (Loss) from
Discontinued Operations............ 30 (177) (2,631) (9,376) (47,449)
Net Income.......................... 114,797 78,139 26,031 91,679 12,156
Preferred Stock Dividend
Requirements....................... 5,392 8,399(1) 21,392(1) 23,735(1) 2,432
Common Stock Dividend............... $69,390 $56,898 $18,301 $22,616 $22,765
Balance Sheet Data:
Utility Plant in Service--Net....... $1,433,123 $1,470,942 $1,500,837 $1,518,312 $1,565,642
Total Assets:
Avista Utilities................. $1,926,739 $2,004,935 $1,976,716 $2,143,791 $2,396,317
Energy Trading and Marketing..... 212,868 955,615 1,595,470 10,271,834 1,506,185
Information and Technology....... 2,221 2,492 6,312 14,429 26,891
Other............................ 268,703 285,625 114,929 96,362 86,514
Discontinued Operations--Avista
Communications.................. 1,254 4,969 20,067 50,665 21,316
Total............................ $2,411,785 $3,253,636 $3,713,494 $12,577,081 $4,037,223
Total Debt.......................... $762,185 $730,022 $714,904 $931,966 $1,252,641
Company-Obligated Mandatorily
Redeemable Preferred
Trust Securities................... 110,000 110,000 110,000 100,000 100,000
Preferred Stock Subject to
Mandatory Redemption............... 45,000 35,000 35,000 35,000 35,000
Convertible Preferred Stock......... -- 269,227(1) 263,309 -- --
Common Equity....................... 748,812 488,034 393,499 724,224 720,063
Other Financial Data:
Earnings Before Interest, Taxes,
Depreciation and Amortization...... $311,952 $261,087 $178,179 $312,244 $272,452
Depreciation and Amortization....... $69,851 $70,324 $67,873 $65,936 71,981
Capital Expenditures................ $91,160 $106,270 $104,635 $173,160 $282,184
Ratio of Earnings Before Interest,
Taxes, Depreciation and
Amortization to Fixed Charges(2)... 4.71 3.78 2.75 4.57 2.56
Ratio of Earnings to Fixed
Charges(3)......................... 3.49 2.66 1.66 3.45 1.84
(1) In December 1998, we converted shares of common stock for Convertible
Preferred Stock, which was responsible for a number of changes in the data
in 2000, 1999 and 1998 from 1997. (See Note 17 of Notes to Financial
Statements in the Form 10-K.)
(2) "Earnings Before Interest, Taxes, Depreciation and Amortization", or
EBITDA, represents income from continuing operations before interest
expense (including related amortization), taxes based on income from
continuing operations, depreciation and amortization. EBITDA is commonly
used to analyze companies on the basis of operating performance, leverage
and liquidity. While EBITDA should not be construed as a substitute for
operating income or a better measure of liquidity than cash flow from
operating activities, which are determined in accordance with generally
accepted accounting principles, we have presented EBITDA to provide
additional information with respect to our ability to meet future debt
service, capital expenditure and working capital requirements. EBITDA is
not a measure determined under generally accepted accounting principles.
Also, as calculated above, EBITDA may not be comparable to similarly titled
measures reported by other companies. "Fixed Charges" include interest
(whether or not capitalized) and related amortization.
(3) "Earnings," as defined by Regulation S-K, represent the aggregate of (1)
income from continuing operations before the cumulative effect of an
accounting change, (2) taxes based on income from continuing operations,
(3) investment tax credit adjustments--net and (4) fixed charges. "Fixed
Charges" include interest (whether expensed or capitalized), related
amortization and estimated interest applicable to rentals.
10
RISK FACTORS
You should carefully consider the following factors in addition to the
other information contained or incorporated by reference in this prospectus. The
risks described in this section are those that we consider to be most
significant to this exchange offer. If any of the following events occur, our
business, financial condition or results of operation could be materially
harmed.
WE HAVE SIGNIFICANT CASH REQUIREMENTS, SIGNIFICANT INDEBTEDNESS AND LIMITED CASH
AVAILABLE.
From the fourth quarter of 2000 through the end of 2001, our cash
requirements for purchased power were greater than the related amounts paid to
us by our retail customers. In addition to purchased power and operating
expenses, we have continuing commitments for capital expenditures for
construction, improvement and maintenance of facilities. We have incurred
substantial levels of indebtedness, both short and long term, to finance these
requirements and to otherwise maintain adequate levels of working capital. Debt
service is another significant cash requirement. In addition, we have also made
significant cash investments to finance the development of companies in our
Information and Technology line of business. These cash outflows have
substantially reduced cash available for our ordinary operating expenses through
2001.
WE NEED TO MAINTAIN ADEQUATE CREDIT WITH BANKS.
We also need to maintain access to adequate levels of credit with our
banks. Cash held by Avista Energy, one of our subsidiaries, is restricted by
that company's credit agreement and is not generally available to Avista Corp.
However, Avista Energy is permitted to make quarterly dividends, subject to
certain "net worth" and "working capital" requirements, in an amount equal to
50% of Avista Energy's net earnings (in some cases after certain adjustments)
during the immediately preceding fiscal quarter.
THE EXTENT TO WHICH THE CURRENT SURCHARGES AND THE PROPOSED WASHINGTON RATE
INCREASE WILL OFFSET OUR DEFERRED ENERGY COST BALANCES WILL DEPEND ON A NUMBER
OF FACTORS BEYOND OUR CONTROL.
The temporary electric rate surcharge approved by the WUTC in September
2001, the settlement agreement approved by the WUTC in March 2002, and the PCA
surcharge approved by the IPUC in October 2001 should allow us to reduce our
deferred energy cost balances to approximately $150 million by the end of 2002.
For reference, the total deferred electric energy cost balance at December 31,
2001 was approximately $213.3 million. The extent to which the amounts recovered
under the surcharges and the proposed rate increase in Washington will be
sufficient to offset the deferred cost balances will depend on a number of
factors beyond our control, including, but not limited to, the availability of
hydroelectric resources, outages of generation units, energy demand, energy
prices in wholesale markets and possible additional rate relief of the type
currently being sought.
WE ARE SUBJECT TO THE RISKS INHERENT IN THE UTILITY BUSINESS AND OUR CASH FLOW
AND EARNINGS COULD CONTINUE TO BE ADVERSELY AFFECTED, BEYOND THE TERM OF ANY
RATE INCREASES, DUE TO POTENTIAL HIGH PRICES AND VOLATILE MARKETS FOR PURCHASED
POWER, INCREASED CUSTOMER DEMAND FOR ENERGY, RECURRENCE OF LOW AVAILABILITY OF
OUR HYDROELECTRIC RESOURCES, OUTAGES OF OUR GENERATING FACILITIES OR A FAILURE
TO DELIVER ON THE PART OF OUR SUPPLIERS.
The utility business involves many operating risks. If Avista Utilities'
operating expenses, including the cost of purchased power, significantly exceed
the levels recovered from retail customers for an extended period of time, its
cash flow and earnings would be negatively affected. Factors which could cause
purchased power costs to be higher than currently anticipated include, but are
not limited to, a return to high prices in Western wholesale markets during
periods when Avista Utilities has insufficient power resources to meet its load
requirements and/or high volumes of energy purchased in wholesale markets at
prices above the amount recovered in retail rates due to:
o increases in demand due, for example, either to weather or customer
growth;
o below normal energy generated by our hydroelectric resources due to
low streamflow conditions;
11
o extended outages of any of our thermal or other generating facilities
or the transmission lines that deliver energy to load centers; and
o failure to perform on the part of any party from which we purchase
capacity or energy.
WE ARE SUBJECT TO THE COMMODITY PRICE RISK, CREDIT RISK AND OTHER RISKS
ASSOCIATED WITH ENERGY MARKETS.
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. Avista Utilities may also be exposed to
refunds for wholesale power sales depending on the outcome of the FERC's
retroactive price cap proceeding for the Pacific Northwest but would also have
the opportunity to establish offsetting claims.
Our subsidiary, Avista Energy, trades and markets electricity and natural
gas, along with derivative commodity instruments, including futures, options,
swaps and other contractual arrangements. As a result of these trading and
marketing activities, we are 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 separate proceedings related to market controls within California and
within the Pacific Northwest that include proposals by certain parties to
retroactively impose price caps. The retroactive application of price caps could
result in liabilities for refunding revenues recognized in prior periods. Avista
Energy and other parties are vigorously opposing these proposals. If retroactive
price caps were imposed, Avista Energy could develop offsetting claims.
Credit risk includes the risk that counterparties that owe us money or
energy will breach their obligations. Should the counterparties to these
arrangements fail to perform, we may be forced to enter into alternative
arrangements. In that event, our financial results could be adversely affected
and we could incur losses. Although our models take into account the expected
probability of default by counterparties, our actual exposure to a default by a
particular counterparty could be greater than the models predict.
12
AVISTA CORPORATION
GENERAL
Avista Corp., which was incorporated in the State of Washington in 1889, is
an energy company involved in the generation, transmission and distribution of
energy as well as other energy-related businesses. We also have subsidiaries
involved in information and technology businesses. Our corporate headquarters
are in Spokane, Washington, which serves as the Inland Northwest's center for
manufacturing, transportation, health care, education, communication,
agricultural and service businesses.
Our operations are organized into four lines of business:
o Avista Utilities;
o Energy Trading and Marketing;
o Information and Technology; and
o Other.
Avista Utilities, which is an operating division of Avista Corp. and not a
separate legal entity, provides electric and natural gas service to customers in
four western states and is subject to state and federal price regulation. Avista
Capital, one of our wholly owned subsidiaries, owns all of the subsidiary
companies engaged in the other lines of business.
BUSINESS STRATEGY
Our strategy is to:
o improve cashflow and continue rebuilding our financial strength by:
o pursuing a general rate increase in Washington to recover
increased costs and the portion of our deferred power costs not
being recovered by the surcharge in Washington.
o disposing of assets and operations, such as the Avista
Communications line of business, not directly related to our
energy operations.
o being positioned to issue equity securities during 2002, subject
to market and other conditions.
o reducing our ratio of total debt to total capitalization.
o maintain a strong, low-cost, efficient electric and natural gas
utility business in the Northwest.
o own or control generation and natural gas resources sufficient to meet
retail and wholesale requirements.
o continue to position Avista Energy as a focused, asset-enabled energy
marketing and trading business.
o find strategic partners for Avista Labs and Avista Advantage.
13
ENERGY BUSINESSES
Avista Utilities
Avista Utilities provides electricity and natural gas distribution and
transmission services in a 26,000 square mile area in eastern Washington and
northern Idaho with a population of approximately 830,000. It also provides
natural gas distribution service in a 4,000 square mile area in northeast and
southwest Oregon and in the South Lake Tahoe region of California, with the
population in these areas of approximately 525,000. At the end of 2001, retail
electric service was supplied to approximately 317,000 customers in eastern
Washington and northern Idaho; retail natural gas service was supplied to
approximately 284,000 customers in parts of Washington, Idaho, Oregon and
California.
Our retail customers include residential, commercial and industrial
classifications, with the residential classification accounting for the most
energy consumed and the greatest contribution to revenues. Avista Utilities also
engages in wholesale sales and purchases of electric capacity and energy.
Avista Utilities anticipates residential and commercial electric load
growth to average between 2.0% and 3.0% annually for the next five years
primarily due to expected increases in both population and the number of
businesses in its service territory. Avista Utilities expects natural gas load
growth, including transportation volumes, to average for the next five years
between 1.5% and 2.0% annually in the Washington and Idaho service area and
between 2.0% and 3.0% annually in the Oregon and South Lake Tahoe service areas,
in each case due to expected conversions from electric space and water heating
to natural gas, and increases in both population and the number of businesses in
these areas. These projections are based on purchased economic forecasts,
publicly available studies, and internal analysis of company-specific data, such
as energy consumption patterns and internal business plans.
In addition to providing electric transmission and distribution services,
Avista Utilities generates electricity for sales to retail customers. Avista
Utilities owns and operates eight hydroelectric projects, a wood-waste fueled
generating station and a two-unit natural gas-fired combustion turbine
generating facility. It also owns a 15% share in a two-unit coal-fired
generating facility and leases and operates a two-unit additional natural
gas-fired combustion turbine generating facility. These facilities have a
maximum capacity of approximately 1,480 megawatts, of which 65% is hydroelectric
and 35% is thermal. In addition, Avista Utilities has a number of long-term
power purchase and exchange contracts that increase its available resources.
Historically, Avista Utilities' electric rates to retail customers have
been among the lowest of all investor-owned utilities in the United States, due
primarily to the large proportion of hydroelectric resources. Retail electric
rates will remain low, on a relative basis, even after the temporary surcharges
which were recently approved in Washington and Idaho, described under CERTAIN
REGULATORY MATTERS.
In February 2000 Avista Utilities received a new 45-year operating license
from the FERC for the Cabinet Gorge and Noxon Rapids Hydroelectric Generating
Stations, which have a combined maximum generating capacity of 773 MW. Of Avista
Utilities' remaining 192 MW of owned hydroelectric resources, six other plants
represent 156 MW of maximum capacity that are operated under a FERC license
expiring in 2007.
On December 12, 2001, we sold 50% of our interest in the Coyote Springs 2
project, representing 140 MW, of a 280 MW combined-cycle natural gas-fired plant
currently under construction near Boardman, Oregon to Mirant. NEPCO, a
wholly-owned subsidiary of Enron, is the contractor responsible for the
engineering, procurement and construction of the Coyote Springs 2 project. The
project is planned to begin commercial operation in the third quarter of 2002.
Avista Corp. and Mirant will share equally in the costs of construction,
operation and output from the plant. As of December 31, 2001, we had invested
approximately $92.5 million in the Coyote Springs 2 project, which has a total
expected cost of approximately $190 million.
Dramatic increases in the price of energy in Western wholesale markets
during 2000 and the first part of 2001, compounded by the deterioration of the
availability of hydroelectric resources in 2001 to the lowest level in at least
73 years, have had an adverse effect on Avista Corp.'s financial condition and
results of operations. See RISK FACTORS and "Management's Discussion and
14
Analysis of Financial Condition and Results of Operations" in Avista Corp.'s
Annual Report on Form 10-K for the year ended December 31, 2001.
Energy Trading and Marketing
Energy Trading and Marketing is comprised of Avista Energy and Avista
Power. Avista Energy is an electricity and natural gas trading and marketing
business. Avista Energy operates in the Western Systems Coordinating Council,
which is comprised of the eleven Western states and parts of Western Canada and
Baja California.
Avista Energy is in the business of buying and selling electricity and
natural gas. Avista Energy's customers include commercial and industrial
end-users, electric utilities, natural gas distribution companies and other
trading companies. Avista Energy also trades electricity and natural gas
derivative commodity instruments.
Avista Power has a 49% ownership interest in a 270 megawatt natural gas
combustion turbine facility in Rathdrum, Idaho, which commenced commercial
operation in September 2001. All of the output is contracted to Avista Energy
for 25 years. Due to changing market conditions and as part of the Avista Corp's
overall business strategy, Avista Corp. has decided that Avista Power will not
develop any additional non-regulated generating projects.
OTHER BUSINESSES
Information and Technology is comprised of Avista Laboratories, Inc.
("Avista Labs") and Avista Advantage, Inc. ("Avista Advantage").
o Avista Labs is developing both modular Proton Exchange Membrane fuel
cells for power generation at the site of the consumer or industrial
user and fuel cell components including fuel processors and hydrogen
sensors. Avista Labs has recently initiated commercial sales of its
hydrogen-only fuel cell systems for various applications, primarily
back-up power for the commercial market.
o Avista Advantage is an e-commerce provider of facilities management
billing and information services to commercial customers throughout
the U.S. and Canada. Its primary product lines include consolidated
billing, resource accounting, energy analysis, load profiling and
maintenance and repair billing services.
Avista Corp. decided in September 2001 that it would divest substantially
all of the assets of Avista Communications, which provides various
telecommunications services to communities in the Northwest. The divestiture is
expected to be completed during the first half of 2002. In October 2001,
minority shareholders of Avista Communications acquired ownership of its Montana
and Wyoming operations as well as its dial-up internet access operations in
Spokane, Washington and Coeur d'Alene, Idaho. In December 2001, Avista
Communications completed the sale of the assets and customer accounts of its
Yakima and Bellingham, Washington operations to Advanced Telcom Group, Inc. In
December 2001, Avista Communications entered into an agreement to transfer its
voice and integrated services customer accounts in Spokane, Washington and Coeur
d' Alene, Idaho to certain subsidiaries of XO Communications, Inc. The Company
is continuing to pursue divestiture of the remaining portions of the business.
The Other line of business includes several other minor subsidiaries. Since
2000, the focus of this line of business has been to invest in business
opportunities that would have potential value to Avista Corp.'s energy-related
businesses. Currently, activities in this line of business are not significant
and Avista Corp. intends to limit its future investment in this line of
business.
15
USE OF PROCEEDS
The net proceeds from the issuance and sale of the old bonds were used to
retire $114 million of medium-term notes maturing between December 2001 and July
2002, and other short-term indebtedness bearing interest at a weighted average
rate of 7.26% per annum. We will not receive any proceeds from the issuance of
the new bonds in the exchange offer.
CERTAIN REGULATORY MATTERS
ELECTRIC
Beginning in the second quarter of 2000, the price of power in the
wholesale markets of the western United States increased considerably and became
much more volatile. In the second half of 2000 and continuing through 2001,
Avista Utilities was required to purchase above-normal amounts of power in the
wholesale market to meet its retail demand. This was primarily due to the
reduced availability of hydroelectric resources as a result of low streamflow
conditions. The combination of high wholesale market prices and increased
amounts required to be purchased increased power supply costs to amounts far in
excess of the amounts recovered from retail customers under existing rates
prevailing while the high costs were being incurred.
Under current orders and approvals from the WUTC and the IPUC, Avista
Utilities is permitted to defer the recognition in the income statement of 90%
of power supply costs that are in excess of the level currently recovered from
retail customers. Deferred power supply costs are recorded as a deferred charge
on the balance sheet for future review and the opportunity for recovery through
retail rates. The specific power costs deferred include the changes in power
costs to Avista Utilities from the costs included in base retail rates, related
to changes in short-term wholesale market prices, changes in the level of
hydroelectric generation and changes in the level of thermal generation
(including changes in fuel prices). The power costs deferred relate solely to
the operation of Avista Utilities' system resources to serve its retail and
wholesale load obligations.
In December 2001, we filed a general rate case with the WUTC to address,
among other things, the recovery of cash outlays for increased power supply
costs and expenses related to building additional generation. The WUTC may take
up to 11 months to review the general rate case filing. Avista Corp. requested
an interim rate increase of 10% (or $29.3 million in annual revenues) above
current rates (including the 25% temporary surcharge approved by the WUTC in
September 2001). Avista Corp. requested that a number of adjustments be made
that would result in no net change to rates above the interim rate increase at
the conclusion of the general rate case. The interim rate increase would end,
base electric rates would increase by 22.5% (or $53.2 million in annual
revenues) and the electric surcharge would be reduced from 25% to 14.9%. These
rate increases are necessary in order to continue the recovery of deferred power
costs. The proposed rate increases also reflect, among other things, the
recovery of costs associated with the addition of our 50% ownership in the
Coyote Springs 2 power plant and the addition of several small generation
projects built to serve retail customer needs. The general rate case proposed by
Avista Corp. requests a 12.75% rate of return on common equity and a 10.39%
overall rate of return. In the December 2001 general rate case filing, Avista
Corp. requested the implementation of a temporary accounting mechanism for the
deferral of power costs incurred in excess of the amount recovered through rates
effective January 1, 2002 until the conclusion of the general rate case. The
WUTC approved this request in December 2001. In the general rate case, Avista
Corp. requested the establishment of a PCA mechanism to increase or decrease
future electric rates based on actual power supply costs, similar to the
existing Idaho PCA mechanism. This provides for the deferral of 90% of the
difference between actual net power supply costs and the amount of power supply
costs authorized in current rates.
In March 2002, the WUTC issued an order approving a settlement agreement
reached among Avista Corp., the staff of the WUTC and other parties. This order
approves the prudence and recoverability of 90% (or $196 million) of deferred
power supply costs incurred by us during the period from July 1, 2000 through
December 31, 2001. This resulted in our recording as an expense an additional
$21.8 million in power supply costs for the year ended December 31, 2001.
16
Additionally, the WUTC order provides that the collection of the 25%
temporary electric surcharge, approved by the WUTC in September 2001, will no
longer be subject to refund. The order also modified the temporary electric
surcharge such that one-fifth (or approximately $12 million in annual revenues)
of the existing 25% surcharge will be applied to offset our general operating
costs and the remainder (approximately $47 million in annual revenues) will
continue to be applied as a recovery of deferred power costs. The WUTC also
ordered a 6.2% (or $14.7 million in annual revenues) increase in base electric
rates for Washington customers. Both the 6.2% increase in base electric rates
and one-fifth of the temporary surcharge will increase net income.
As of December 31, 2001, total deferred power costs were $213.3 million,
including $140.2 million in Washington and $73.1 million in Idaho. Based on
current projections, total deferred power costs balances are expected to be
approximately $150 million at the end of 2002 and fully recovered by 2007. The
following table shows activity in deferred power costs for Washington and Idaho
during 2001 (dollars in thousands):
Washington Idaho Total
- ----------------------------------------------------------------------------------------------------
Deferred power costs as of December 31, 2000 $ 34,580 $ 2,693 $ 37,273
Activity from January 1 - September 30, 2001:
Power costs deferred 155,241 67,086 222,327
Interest and other net additions 9,838 3,606 13,444
Recovery of deferred power costs - (1,866) (1,866)
---------- ---------- ----------
Deferred power costs as of September 30, 2001 199,659 71,519 271,178
Activity from October 1 - December 31, 2001:
Power costs deferred 11,955 6,591 18,546
Mark-to-market loss 8,232 4,077 12,309
Interest and other net additions 6,189 2,037 8,226
Amortization of deferred credit (53,794) (6,927) (60,721)
Recovery of deferred power costs (10,223) (4,210) (14,433)
Write-off deferred power costs (21,780) - (21,780)
---------- ---------- ----------
Deferred power costs as of December 31, 2001 $140,238 $ 73,087 $213,325
========== ========== ==========
The following discussion details significant developments during the second
half of 2000 and the year 2001 leading to the March 2002 WUTC orders and the
December 2001 general electric rate case filing.
In August 2000, the WUTC approved Avista Utilities' request for deferred
accounting treatment for certain power costs related to, among other things,
increases in short-term wholesale electric prices beginning July 1, 2000 through
June 30, 2001. In January 2001, the WUTC approved a modification to the deferral
mechanism to recover power supply costs associated with meeting increased retail
and wholesale system load requirements, effective December 1, 2000. The approval
of the modification was conditioned on Avista Utilities filing by March 2001 a
proposal addressing the prudence of the incurred power costs, the optimization
of Company-owned resources to the benefit of retail customers and the
appropriateness of recovery of power costs through a deferral mechanism. This
proposal was also to address cost of capital offsets to recognize the shift in
risk from shareholders to ratepayers and Avista Utilities' plan to mitigate the
deferred power costs.
In May 2001, the WUTC approved a settlement agreement reached among Avista
Corp., the staff of the WUTC and other parties with respect to deferred power
costs. The agreement, among other things, provided for the extension of Avista
Corp.'s deferral accounting mechanism through February 2003. Due to the planned
addition of generating resources as well as the expiration of certain long-term
power sale agreements, Avista Utilities, at the time of the settlement
agreement, expected to be in a power surplus position by the middle of 2002. The
agreement was based, in part, on the expectation that Avista Utilities' profits
from surplus power sales would offset the deferred power cost balance, reducing
the balance to zero by the end of February 2003 without any rate increase to
retail customers. These expectations were based on assumptions as to a number of
variables including, but not limited to, streamflow conditions, thermal plant
performance, level of retail loads, wholesale market prices and the amount of
additional generating resources. Avista Utilities reserved the right to alter,
amend, or terminate the settlement agreement as well as the right to seek
interim rate relief. As discussed below, subsequent events and conditions
changed Avista Utilities' original expectations and plans.
17
In response to the dramatically reduced generation from hydroelectric
facilities commencing in the second quarter of 2001, Avista Utilities was
required to make additional fixed price purchases of energy to meet its retail
and wholesale electric requirements for 2001 on the higher cost short-term
wholesale market.
In June 2001, the FERC issued an order adopting a price mitigation plan
applicable to certain wholesale power sales in California and throughout the
western United States during the period June 20, 2001 through September 30,
2002. The order applies to pre-schedule (day-ahead) and real-time (hour-ahead)
transactions in the western United States. Wholesale market prices in the
western United States decreased considerably after the price caps were imposed
and prices remained well below the price cap levels through the end of 2001. The
decrease in wholesale market prices affected Avista Utilities' plan for recovery
of deferred power costs through future surplus power sales.
During June and the first part of July 2001, Avista Utilities evaluated the
effect of the recent decline in wholesale market prices and the FERC price
mitigation plan on its ability to recover deferred power cost balances under the
settlement agreement approved by the WUTC in May 2001 and the continuing PCA
mechanism for Idaho customers approved by the IPUC. The decline in forward
wholesale prices and the FERC price mitigation plan reduced the expected value
from future surplus sales of energy. In addition, low hydroelectric availability
combined with the high cost of energy and capacity under forward contracts
entered into to meet customer demand for 2001 increased current and estimated
future deferred power costs to levels significantly higher than originally
anticipated. As such, Avista Utilities determined that the plan for recovery of
deferred power cost balances, as contemplated in the May 2001 settlement
agreement with the WUTC and the existing PCA with the IPUC, was not feasible.
Accordingly, in July 2001 Avista Utilities filed requests with the WUTC and
IPUC for the approval of an electric energy surcharge of 36.9% in Washington and
a PCA surcharge of 14.7% in Idaho for a 27-month period beginning in September
2001.
In September 2001, the WUTC ordered a 25% temporary electric rate surcharge
for the 15-month period from October 1, 2001 to December 31, 2002 applied
uniformly to energy charges across all Washington electric customer classes. The
March 2002 WUTC order amended the surcharge such that one-fifth will be applied
to offset our general operating costs and the remainder will continue to be
applied as a recovery of deferred power costs. It was originally estimated that
the order would allow Avista Utilities to reduce the deferred power cost balance
by $125 million. This included the receipt of $71 million in additional revenue
from the surcharge ($10.2 million was received during 2001) and the accelerated
amortization of $54 million of a deferred non-cash credit on our balance sheet
in October 2001. The deferred non-cash credit related to funds received in
December 1998 for the monetization of a contract in which we assigned and
transferred certain rights under a long-term power sales contract with PGE to a
funding trust. The deferred non-cash credit balance was originally to be
amortized into revenues over the 16-year period of the long-term sales contract.
There is no direct impact on net income from either the surcharge or accelerated
amortization of the deferred non-cash credit; however, the surcharge revenue
increases cash flows.
As part of the surcharge order, the WUTC ordered Avista Utilities to file a
general rate case by December 2001 as discussed above. The order by the WUTC
also provided for the termination of the accounting mechanism for the deferral
of power costs effective December 31, 2001. The WUTC subsequently approved the
continuation of the accounting mechanism for deferred power costs for the period
from January 1, 2002 through the conclusion of the general rate case. As
requested by Avista Utilities, the deferred power cost accounting mechanism was
modified to reflect the deferral of 90% of the difference between actual power
supply costs and the amount of power supply costs allowed to be recovered in
current retail rates.
In October 2001, the IPUC issued an order approving a 14.7% PCA surcharge
for Idaho electric customers and granted an extension of a 4.7% PCA surcharge
implemented earlier in 2001 that was to expire January 2002. Both PCA surcharges
will remain in effect until October 2002. The IPUC directed Avista Utilities to
file a status report 60 days before the PCA surcharge expires. If review of the
status report and the actual balance of deferred power costs support
continuation of the PCA surcharge, the IPUC has indicated that it anticipates
the PCA surcharge will be extended for an additional period. It is currently
estimated the IPUC order will allow Avista Utilities to reduce the deferred
power cost balance by approximately $58.2 million. This includes the receipt of
$23.6 million in additional revenue from the PCA surcharges ($4.2 million was
received during the fourth quarter of 2001) and the accelerated amortization of
18
$34.6 million of a deferred non-cash credit on our balance sheet for the
monetization of the power sales contract with PGE ($6.9 million was amortized in
2001). There is no direct impact on net income from either the PCA surcharges or
accelerated amortization of the deferred non-cash credit; however, the PCA
surcharges increase cash flows.
In November 2001, Avista Utilities filed a request with the WUTC for an
expedited procedural schedule to address the prudence and recoverability of
deferred power costs incurred as of September 30, 2001. We made this request due
to the fact that uncertainty involving the recovery of deferred power costs
would present financing challenges for us during the first half of 2002. Our
$220 million committed line of credit as well as a $90 million accounts
receivable financing facility expire in May 2002. We may also decide to issue
equity securities during 2002. In March 2002, the WUTC approved the prudence and
recoverability of 90% of deferred power costs incurred as of December 31, 2001
as discussed above.
GAS
On July 6, 2001, Avista Utilities filed requests for purchased gas cost
adjustments ("PGA") with the WUTC and the IPUC. Both the Washington PGA increase
of 12.2% approved by the WUTC and the Idaho PGA increase of 11.5% approved by
the IPUC became effective in August 2001. Total deferred purchased gas costs
were $52.7 million as of December 31, 2001. Avista Utilities estimates the PGA
rate changes will increase revenues by $24.6 million for approximately one year.
Based on current PGAs in place and current natural gas prices, Avista Utilities
expects that the deferred natural gas cost balance will be fully recovered by
December 2002. However, there will be no impact on net income as deferred
natural gas costs are amortized to offset the increase in revenues.
THE EXCHANGE OFFER
PURPOSE AND EFFECT OF THE EXCHANGE OFFER
Avista Corp. is offering to issue its 7.75% First Mortgage Bonds due 2007,
which have been registered under the Securities Act (the "New Bonds"), in
exchange for its 7.75% First Mortgage Bonds due 2007, which have not been so
registered (the "Old Bonds"), as described herein (the "Exchange Offer").
The Old Bonds were sold by Goldman, Sachs & Co., BNY Capital Markets, Inc.,
Fleet Securities, Inc. and TD Securities (USA) Inc. (the "Initial Purchasers")
on December 19, 2001 to a limited number of institutional investors (the
"Purchasers"). In connection with the sale of the Old Bonds, Avista Corp. and
the Initial Purchasers entered into an Exchange and Registration Rights
Agreement, dated December 19, 2001 (the "Registration Rights Agreement"), which
requires, among other things, Avista Corp.
(a) to file with the Securities and Exchange Commission (the "SEC") a
registration statement under the Securities Act of 1933, as amended (the
"Securities Act") with respect to New Bonds identical in all material
respects to the Old Bonds, to use commercially reasonable efforts to cause
such registration statement to be declared effective under the Securities
Act and to make an exchange offer for the Old Bonds as discussed below, or
(b) to register the Old Bonds under the Securities Act.
Avista Corp. is obligated, upon the effectiveness of the exchange offer
registration statement referred to in (a) above, to offer the holders of the Old
Bonds the opportunity to exchange their Old Bonds for a like principal amount of
New Bonds which will be issued without a restrictive legend and may be reoffered
and resold by the holder without restrictions or limitations under the
Securities Act. A copy of the Registration Rights Agreement has been filed as an
exhibit to the Registration Statement of which this prospectus is a part. The
Exchange Offer is being made pursuant to the Registration Rights Agreement to
satisfy Avista Corp.'s obligations under that agreement. The term "Holder" with
respect to the Exchange Offer means any person in whose name Old Bonds are
registered on Avista Corp.'s books, any other person who has obtained a properly
19
completed assignment from the registered holder or any DTC participant whose Old
Bonds are held of record by DTC. At the date of this prospectus, the sole Holder
of Old Bonds is DTC.
In participating in the Exchange Offer, a Holder is deemed to represent to
Avista Corp., among other things, that
(a) the New Bonds acquired pursuant to the Exchange Offer are being
obtained in the ordinary course of business of the person receiving such
New Bonds, whether or not such person is the Holder,
(b) neither the Holder nor any such other person receiving such New
Bonds is engaging in or intends to engage in a distribution of such New
Bonds,
(c) neither the Holder nor any such other person receiving such New
Bonds has an arrangement or understanding with any person to participate in
the distribution of such New Bonds, and
(d) neither the Holder nor any such other person receiving such New
Bonds is an "affiliate," as defined in Rule 405 under the Securities Act,
of Avista Corp.
Based on an interpretation by the staff of the SEC set forth in no-action
letters issued to third-parties, Avista Corp. believes that the New Bonds issued
pursuant to the Exchange Offer may be offered for resale and resold or otherwise
transferred by any Holder of such New Bonds (other than any such Holder which is
an "affiliate" of Avista Corp. within the meaning of Rule 405 under the
Securities Act and except as otherwise discussed below with respect to Holders
which are broker-dealers) without compliance with the registration and
prospectus delivery requirements of the Securities Act, so long as such New
Bonds are acquired in the ordinary course of such Holder's business and such
Holder has no arrangement or understanding with any person to participate in the
distribution (within the meaning of the Securities Act) of such New Bonds. Any
Holder who tenders in the Exchange Offer for the purpose of participating in a
distribution of the New Bonds cannot rely on such interpretation by the staff of
the SEC and must comply with the registration and prospectus delivery
requirements of the Securities Act in connection with a secondary resale
transaction. Under no circumstances may this prospectus be used for any offer to
resell or any resale or other transfer in connection with a distribution of the
New Bonds. In the event that Avista Corp.'s belief is not correct, Holders of
the New Bonds who transfer New Bonds in violation of the prospectus delivery
provisions of the Securities Act and without an exemption from registration
thereunder may incur liability thereunder. Avista Corp. does not assume or
indemnify Holders against such liability.
Each broker-dealer that receives New Bonds for its own account in exchange
for Old Bonds which were acquired by such broker-dealer as a result of
market-making activities or other trading activities must, and must agree to,
deliver a prospectus in connection with any resale of such New Bonds. This
prospectus may be used for such purpose. Any such broker-dealer may be deemed to
be an "underwriter" within the meaning of the Securities Act. The foregoing
interpretation of the staff of the SEC does not apply to, and this prospectus
may not be used in connection with, the resale by any broker-dealer of any New
Bonds received in exchange for an unsold allotment of Old Bonds purchased
directly from Avista Corp.
Avista Corp. has not entered into any arrangement or understanding with any
person to distribute the New Bonds to be received in the Exchange Offer.
The Exchange Offer is not being made to, nor will Avista Corp. accept
tenders for exchange from, Holders of Old Bonds in any jurisdiction in which the
Exchange Offer or the acceptance thereof would not be in compliance with the
securities or blue sky laws of such jurisdiction.
See PLAN OF DISTRIBUTION.
TERMS OF THE EXCHANGE OFFER
Upon the terms and subject to the conditions set forth in this prospectus
and in the letter of transmittal, Avista Corp. will accept any and all Old Bonds
properly tendered and not withdrawn prior to 5:00 p.m., New York City time, on
20
the Expiration Date. Avista Corp. will issue $1,000 in principal amount of New
Bonds in exchange for each $1,000 in principal amount of outstanding Old Bonds
surrendered in the Exchange Offer. However, Old Bonds may be tendered only in
integral multiples of $1,000. The form and terms of the New Bonds will be the
same as the form and terms of the Old Bonds. The New Bonds will evidence the
same debt as the Old Bonds. The New Bonds will be issued under and entitled to
the benefits of the mortgage pursuant to which the Old Bonds were issued. The
New Bonds will be registered under the Securities Act while the Old Bonds were
not.
As of the date of this prospectus, $150,000,000 in aggregate principal
amount of the Old Bonds is outstanding. This prospectus, together with the
letter of transmittal, is being sent to all registered Holders of the Old Bonds.
Avista Corp. will be deemed to have accepted validly tendered Old Bonds
when, as and if Avista Corp. shall have given oral (promptly confirmed in
writing) or written notice thereof to the Exchange Agent. The Exchange Agent
will act as agent for the tendering Holders for the purpose of receiving the New
Bonds from Avista Corp.
Old Bonds that are not tendered for exchange in the Exchange Offer will
remain outstanding and will be entitled to the rights and benefits such Holders
have under the mortgage. If any tendered Old Bonds are not accepted for exchange
because of an invalid tender, the occurrence of certain other events set forth
herein or otherwise, certificates for any such unaccepted Old Bonds will be
returned, without expense, to the tendering Holder thereof as promptly as
practicable after the Expiration Date.
Holders who tender Old Bonds in the Exchange Offer will not be required to
pay brokerage commissions or fees or, subject to the instructions in the letter
of transmittal, transfer taxes with respect to the exchange pursuant to the
Exchange Offer. Avista Corp. will pay all charges and expenses, other than
certain applicable taxes described below, in connection with the Exchange Offer.
EXPIRATION DATE; EXTENSIONS; AMENDMENTS TO THE EXCHANGE OFFER
The term "Expiration Date," shall mean 5:00 p.m., New York City time on May
10, 2002, unless Avista Corp., in its sole discretion, extends the Exchange
Offer, in which case the term "Expiration Date" shall mean the latest date and
time to which the Exchange Offer is extended.
In order to extend the Exchange Offer, Avista Corp. will notify the
Exchange Agent of any extension by oral (promptly confirmed in writing) or
written notice and will mail to the registered Holders an announcement thereof,
prior to 9:00 a.m., New York City time, on the next business day after the then
Expiration Date.
Avista Corp. reserves the right, in its sole discretion,
(a) to delay accepting any Old Bonds, to extend the Exchange Offer or
to terminate the Exchange Offer if any of the conditions set forth below
under "--Conditions to the Exchange Offer" shall not have been satisfied by
giving oral (promptly confirmed in writing) or written notice of such
delay, extension or termination to the Exchange Agent or
(b) to amend the terms of the Exchange Offer in any manner.
Any such delay in acceptances, extension, termination or amendment will be
followed as promptly as practicable by oral or written notice thereof to the
registered Holders. If the Exchange Offer is amended in a manner determined by
Avista Corp. to constitute a material change, Avista Corp. will promptly
disclose such amendment by means of a prospectus supplement that will be
distributed to the registered Holders of the Old Bonds, and Avista Corp. will
extend the Exchange Offer for a period of five to ten business days, depending
upon the significance of the amendment and the manner of disclosure to the
registered Holders, if the Exchange Offer would otherwise expire during such
five to ten business day period.
21
Without limiting the manner in which Avista Corp. may choose to make a
public announcement of any delay, extension, amendment or termination of the
Exchange Offer, Avista Corp. will have no obligation to publish, advertise, or
otherwise communicate any such public announcement, other than by making a
timely release to an appropriate news agency.
Upon satisfaction or waiver of all the conditions to the Exchange Offer,
Avista Corp. will accept, promptly after the Expiration Date, all Old Bonds
properly tendered and will issue the New Bonds promptly after acceptance of the
Old Bonds. See "--Conditions to the Exchange Offer." For purposes of the
Exchange Offer, Avista Corp. will be deemed to have accepted properly tendered
Old Bonds for exchange when, as and if Avista Corp. shall have given oral
(promptly confirmed in writing) or written notice thereof to the Exchange Agent.
In all cases, issuance of the New Bonds for Old Bonds that are accepted for
exchange pursuant to the Exchange Offer will be made only after timely receipt
by the Exchange Agent of a properly completed and duly executed letter of
transmittal (or facsimile thereof or an Agent's message in lieu thereof) and all
other required documents; provided, however, that Avista Corp. reserves the
absolute right to waive any defects or irregularities in the tender or
conditions of the Exchange Offer. If any tendered Old Bonds are not accepted for
any reason set forth in the terms and conditions of the Exchange Offer or if Old
Bonds are submitted for a greater principal amount or a greater principal
amount, respectively, than the Holder desires to exchange, then such unaccepted
or non-exchanged Old Bonds evidencing the unaccepted portion, as appropriate,
will be returned without expense to the tendering Holder thereof as promptly as
practicable after the expiration or termination of the Exchange Offer.
CONDITIONS TO THE EXCHANGE OFFER
Notwithstanding any other term of the Exchange Offer, Avista Corp. will not
be required to exchange any New Bonds for any Old Bonds and may terminate the
Exchange Offer before the acceptance of any Old Bonds for exchange, if:
(a) any action or proceeding is instituted or threatened in any court
or by or before any governmental agency with respect to the Exchange Offer
which, in Avista Corp.'s reasonable judgment, might materially impair the
ability of Avista Corp. to proceed with the Exchange Offer; or
(b) any law, statute, rule or regulation is proposed, adopted or
enacted, or any existing law, statute, rule or regulation is interpreted by
the staff of the SEC, which, in Avista Corp.'s reasonable judgment, might
materially impair the ability of Avista Corp. to proceed with the Exchange
Offer.
If Avista Corp. determines in its sole discretion that any of these
conditions are not satisfied, Avista Corp. may
(c) refuse to accept any Old Bonds and return all tendered Old Bonds
to the tendering Holders,
(d) extend the Exchange Offer and retain all Old Bonds tendered prior
to the expiration of the Exchange Offer, subject, however, to the rights of
Holders who tendered such Old Bonds to withdraw their tendered Old Bonds,
or
(e) waive such unsatisfied conditions with respect to the Exchange
Offer and accept all properly tendered Old Bonds which have not been
withdrawn. If such waiver constitutes a material change to the Exchange
Offer, Avista Corp. will promptly disclose such waiver by means of a
prospectus supplement that will be distributed to the registered Holders,
and Avista Corp. will extend the Exchange Offer for a period of five to ten
business days, depending upon the significance of the waiver and the manner
of disclosure to the registered Holders, if the Exchange Offer would
otherwise expire during such five to ten business day period.
22
PROCEDURES FOR TENDERING--REGISTERED HOLDERS AND DTC PARTICIPANTS
REGISTERED HOLDERS OF OLD BONDS, AS WELL AS BENEFICIAL OWNERS WHO ARE
DIRECT PARTICIPANTS IN DTC, WHO DESIRE TO PARTICIPATE IN THE EXCHANGE OFFER
SHOULD FOLLOW THE DIRECTIONS SET FORTH BELOW AND IN THE LETTER OF TRANSMITTAL.
ALL OTHER BENEFICIAL OWNERS SHOULD FOLLOW THE INSTRUCTIONS RECEIVED FROM
THEIR BROKER OR NOMINEE AND SHOULD CONTACT THEIR BROKER OR NOMINEE DIRECTLY. THE
INSTRUCTIONS SET FORTH BELOW AND IN THE LETTER OF TRANSMITTAL DO NOT APPLY TO
SUCH BENEFICIAL OWNERS.
Registered Holders
To tender in the Exchange Offer, a Holder must complete, sign and date the
letter of transmittal, or facsimile thereof, have the signatures thereon
guaranteed if required by the letter of transmittal, and mail or otherwise
deliver such letter of transmittal or such facsimile to the Exchange Agent prior
to the Expiration Date. In addition, either
(a) certificates for such Old Bonds must be received by the Exchange
Agent along with the letter of transmittal, or
(b) the Holder must comply with the guaranteed delivery procedures
described below.
To be tendered effectively, the letter of transmittal and other required
documents must be received by the Exchange Agent at the address set forth below
under "--Exchange Agent" prior to the Expiration Date.
The tender by a Holder which is not withdrawn prior to the Expiration Date
will constitute an agreement between such Holder and Avista Corp. in accordance
with the terms and subject to the conditions set forth herein and in the letter
of transmittal.
THE METHOD OF DELIVERY OF OLD BONDS, THE LETTER OF TRANSMITTAL AND ALL
OTHER REQUIRED DOCUMENTS TO THE EXCHANGE AGENT IS AT THE ELECTION AND RISK OF
THE HOLDER, BUT THE DELIVERY WILL BE DEEMED MADE ONLY WHEN ACTUALLY RECEIVED OR
CONFIRMED BY THE EXCHANGE AGENT. INSTEAD OF DELIVERY BY MAIL, IT IS RECOMMENDED
THAT HOLDERS USE AN OVERNIGHT OR HAND DELIVERY SERVICE. IN ALL CASES, SUFFICIENT
TIME SHOULD BE ALLOWED TO ASSURE DELIVERY TO THE EXCHANGE AGENT BEFORE THE
EXPIRATION DATE. NO LETTER OF TRANSMITTAL OR OLD BONDS SHOULD BE SENT TO AVISTA
CORP. HOLDERS MAY REQUEST THEIR RESPECTIVE BROKERS, DEALERS, COMMERCIAL BANKS,
TRUST COMPANIES OR NOMINEES TO EFFECT THE ABOVE TRANSACTIONS FOR SUCH HOLDERS.
Signatures on a letter of transmittal or a notice of withdrawal, as the
case may be, must be guaranteed by an Eligible Institution (as defined below)
unless the Old Bonds tendered pursuant thereto is tendered
(a) by a registered Holder who has not completed the box entitled
"Special Payment Instructions" or "Special Delivery Instructions" on the
letter of transmittal or
(b) for the account of an Eligible Institution (as defined below).
In the event that signatures on a letter of transmittal or a notice of
withdrawal, as the case may be, are required to be guaranteed, such guarantor
must be a member firm of a registered national securities exchange or of the
National Association of Securities Dealers, Inc., a commercial bank or trust
company having an office or correspondent in the United States or an "eligible
guarantor institution" within the meaning of Rule 17Ad-15 under the Securities
Exchange Act of 1934, as amended (the "Exchange Act") (an "Eligible
Institution").
If the letter of transmittal is signed by a person other than the
registered Holder of any Old Bonds listed therein, such Old Bonds must be
endorsed or accompanied by a properly completed bond power signed by such
registered Holder as such registered Holder's name appears on such Old Bonds.
23
If the letter of transmittal or any Old Bonds or bond or stock powers are
signed by trustees, executors, administrators, guardians, attorneys-in-fact,
officers of corporations or others acting in a fiduciary or representative
capacity, such persons should so indicate when signing, and unless waived by
Avista Corp., evidence satisfactory to Avista Corp. of their authority to so act
must be submitted with the letter of transmittal.
Holders who wish to tender their Old Bonds and
(a) whose Old Bonds are not immediately available,
(b) who cannot deliver their Old Bonds, the letter of transmittal or
any other required documents to the Exchange Agent prior to the Expiration
Date, or
(c) who cannot complete the procedures for book-entry tender on a
timely basis
may effect a tender if:
(1) the tender is made through an Eligible Institution;
(2) prior to the Expiration Date, the Exchange Agent receives
from such Eligible Institution a properly completed and duly executed
Notice of Guaranteed Delivery (by facsimile transmission, mail or hand
delivery), setting forth the name and address of the Holder, the
certificate number(s) of such Old Bonds (unless tender is to be made
by book-entry transfer) and the principal amount of Old Bonds
tendered, stating that the tender is being made thereby and
guaranteeing that, within three New York Stock Exchange trading days
after the date of the expiration of the Exchange Offer, the
certificates for all physically tendered Old Bonds, in proper form for
transfer, or Book-Entry Confirmation (as defined in the letter of
transmittal), as the case may be, together with a properly completed
and duly executed letter of transmittal (or facsimile thereof or
Agent's Message in lieu thereof), with any required signature
guarantees and all other documents required by the letter of
transmittal, will be deposited by the Eligible Institution with the
Exchange Agent; and
(3) the certificates and/or other documents referred to in clause
(2) above must be received by the Exchange Agent within the time
specified above.
Upon request to the Exchange Agent a Notice of Guaranteed Delivery will be
sent to Holders who wish to tender their Old Bonds according to the guaranteed
delivery procedures set forth above.
DTC Participants
Any financial institution that is a participant in DTC's systems may make
book-entry delivery of Old Bonds by causing DTC to transfer such Old Bonds into
the Exchange Agent's account at DTC in accordance with DTC's procedures for
transfer. Such delivery must be accompanied by either
(a) the letter of transmittal or facsimile thereof, with any required
signature guarantees or
(b) an Agent's Message (as hereinafter defined),
and any other required documents, and must, in any case, be transmitted to and
received by the Exchange Agent at the address set forth below under "--Exchange
Agent" prior to the Expiration Date or the guaranteed delivery procedures
described above must be complied with. The Exchange Agent will make a request to
establish an account with respect to the Old Bonds at DTC for purposes of the
Exchange Offer within two business days after the date of this prospectus.
The term "Agent's Message" means a message, electronically transmitted by
DTC to and received by the Exchange Agent, and forming a part of the Book-Entry
Confirmation, which states that DTC has received an express acknowledgement from
24
a Holder of Old Bonds stating that such Holder has received and agrees to be
bound by, and makes each of the representations and warranties contained in, the
Letter of Transmittal and, further, that such Holder agrees that the Company may
enforce the Letter of Transmittal against such Holder.
Miscellaneous
All questions as to the validity, form, eligibility (including time of
receipt), acceptance of tendered Old Bonds and withdrawal of tendered Old Bonds
will be determined by Avista Corp. in its sole discretion, which determination
will be final and binding. Avista Corp. reserves the absolute right to reject
any and all Old Bonds not properly tendered or any Old Bonds Avista Corp.'s
acceptance of which would, in the opinion of counsel for Avista Corp., be
unlawful. Avista Corp. also reserves the right to waive any defects,
irregularities or conditions of tender as to particular Old Bonds. Avista
Corp.'s interpretation of the terms and conditions of the Exchange Offer
(including the instructions in the letter of transmittal) will be final and
binding on all parties. Unless waived, any defects or irregularities in
connection with tenders of Old Bonds must be cured within such time as Avista
Corp. shall determine. Although Avista Corp. intends to notify Holders of
defects or irregularities with respect to tenders of Old Bonds, none of Avista
Corp., the Exchange Agent, or any other person shall incur any liability for
failure to give such notification. Tenders of Old Bonds will not be deemed to
have been made until such defects or irregularities have been cured or waived.
Any Old Bonds received by the Exchange Agent that are not properly tendered and
as to which the defects or irregularities have not been cured or waived will be
returned by the Exchange Agent to the tendering Holders, unless otherwise
provided in the letter of transmittal, as soon as practicable following the
Expiration Date.
By tendering, each Holder or the Person receiving the New Bonds, as the
case may be will be deemed to represent to Avista Corp. that, among other
things,
o the New Bonds acquired pursuant to the Exchange Offer are being
obtained in the ordinary course of business of the Person receiving
such New Bonds, whether or not such person is the Holder,
o neither the Holder nor any such other person is engaged or intends to
engage in, or has an arrangement or understanding with any person to
participate in, the distribution of such New Bonds, and
o neither the Holder nor any such other Person is an "affiliate," as
defined in Rule 405 of the Securities Act, of Avista Corp.
In all cases, issuance of New Bonds pursuant to the Exchange Offer will be
made only after timely receipt by the Exchange Agent of certificates for the Old
Bonds tendered for exchange or a timely Book-Entry Confirmation of such Old
Bonds into the Exchange Agent's account at DTC, a properly completed and duly
executed letter of transmittal (or facsimile thereof or Agent's Message in lieu
thereof) and all other required documents. If any tendered Old Bonds are not
accepted for any reason set forth in the terms and conditions of the Exchange
Offer or if Old Bonds are submitted for a greater principal amount than the
Holder desires to exchange, such unaccepted or non-exchanged Old Bonds will be
returned without expense to the tendering Holder thereof (or, in the case of Old
Bonds tendered by book-entry transfer into the Exchange Agent's account at DTC
pursuant to the book-entry transfer procedures described below, such
non-exchanged Old Bonds will be credited to an account maintained with DTC) as
promptly as practicable after the expiration or termination of the Exchange
Offer.
Avista Corp. reserves the right in its sole discretion to purchase or make
offers for any Old Bonds that remain outstanding subsequent to the Expiration
Date or, as set forth above under "--Conditions to the Exchange Offer," to
terminate the Exchange Offer and, to the extent permitted by applicable law,
purchase Old Bonds in the open market, in privately negotiated transactions or
otherwise. The terms of any such purchases or offers could differ from the terms
of the Exchange Offer.
WITHDRAWAL OF TENDERS OF OLD BONDS
Except as otherwise provided herein, tenders of Old Bonds may be withdrawn
at any time prior to 5:00 p.m., New York City time, on the Expiration Date.
25
To withdraw a tender of Old Bonds in the Exchange Offer, a written or
facsimile transmission notice of withdrawal must be received by the Exchange
Agent at its address set forth herein prior to 5:00 p.m., New York City time, on
the Expiration Date. Any such notice of withdrawal must
(a) specify the name of the person having deposited the Old Bonds to
be withdrawn (the "Depositor"),
(b) identify the Old Bonds to be withdrawn (including the certificate
number (unless tendered by book-entry transfer),
(c) be signed by the Holder in the same manner as the original
signature on the letter of transmittal by which such Old Bonds were
tendered (including any required signature guarantees) or be accompanied by
documents of transfer sufficient to have the Trustee with respect to the
Old Bonds register the transfer of such Old Bonds in the name of the person
withdrawing the tender, and
(d) specify the name in which any such Old Bonds are to be registered,
if different from that of the Depositor. If Old Bonds have been tendered
pursuant to book-entry transfer, any notice of withdrawal must specify the
name and number of the account at DTC to be credited with the withdrawn Old
Bonds, in which case a notice of withdrawal will be effective if delivered
to the Exchange Agent by any method of delivery described in this
paragraph.
All questions as to the validity, form and eligibility (including time of
receipt) of such notices will be determined by Avista Corp., whose determination
shall be final and binding on all parties. Any Old Bonds so withdrawn will be
deemed not to have been validly tendered for purposes of the Exchange Offer and
will be returned to the Holder thereof without cost to such Holder as soon as
practicable after withdrawal; and no New Bonds will be issued with respect
thereto unless the Old Bonds so withdrawn are validly retendered. Properly
withdrawn Old Bonds may be retendered by following one of the procedures
described above under "-- Procedures for Tendering" at any time prior to the
Expiration Date.
EXCHANGE AGENT
Citibank, N.A. has been appointed as Exchange Agent of the Exchange Offer.
Requests for additional copies of this prospectus or of the letter of
transmittal and requests for Notice of Guaranteed Delivery with respect to the
exchange of the Old Bonds should be directed to the Exchange Agent addressed as
follows:
Citibank, N.A.
111 Wall Street
14th Floor/Zone 3
New York, New York 10043
Attention: Global Agency & Trust Services
By Telephone: 1-800-422-2066
By Facsimile: (212) 825-3483
FEES AND EXPENSES
The expenses of soliciting tenders will be paid by Avista Corp. The
principal solicitation is being made by mail; however, additional solicitation
may be made by telecopier, telephone or in person by officers and regular
employees of Avista Corp. and its affiliates.
Avista Corp. has not retained any dealer-manager in connection with the
Exchange Offer and will not make any payments to brokers-dealers or others
soliciting acceptances of the Exchange Offer. Avista Corp., however, will pay
the Exchange Agent reasonable and customary fees for its services and will
reimburse it for its reasonable out-of-pocket expenses in connection therewith.
26
The cash expenses to be incurred in connection with the Exchange Offer will
be paid by Avista Corp. and are estimated in the aggregate to be approximately
$125,000. Such expenses include registration fees, fees and expenses of the
Exchange Agent, accounting and legal fees and printing costs, among others.
Avista Corp. will pay all transfer taxes, if any, applicable to the
exchange of the Old Bonds pursuant to the Exchange Offer. If, however,
certificates representing New Bonds for principal amounts not tendered or
accepted for exchange are to be delivered to, or are to be issued in the name
of, any person other than the registered Holder of Old Bonds tendered, or if
tendered Old Bonds are registered in the name of, any person other than the
person signing the letter of transmittal, or if a transfer tax is imposed for
any reason other than the exchange of the Old Bonds pursuant to the Exchange
Offer, then the amount of any such transfer taxes (whether imposed on the
registered Holder or any other persons) will be payable by the tendering Holder.
If satisfactory evidence of payment of such taxes or exemption therefrom is not
submitted with the letter of transmittal, the amount of such transfer taxes will
be billed directly to such tendering Holder.
DESCRIPTION OF THE NEW BONDS
In this description, the words "Avista Corp." refer only to Avista
Corporation and not to any of its subsidiaries, except for purposes of financial
data determined on a consolidated basis. The Old Bonds and the New Bonds are
sometimes collectively called the "bonds".
GENERAL
Avista Corp. issued the Old Bonds under its Mortgage and Deed of Trust,
dated as of June 1, 1939, as supplemented, under which Citibank, N.A., is
trustee. The Old Bonds were issued in a private transaction that was not subject
to the registration requirements of the Securities Act. The bonds, together with
all other bonds outstanding under the mortgage, are hereinafter called,
collectively, the first mortgage bonds. The statements herein concerning the
bonds and the mortgage are merely a summary and do not purport to be complete.
Such statements make use of terms defined in the mortgage and are qualified in
their entirety by express reference to the cited sections and articles of the
mortgage. Sections 125 to 150 of the mortgage appear in the first supplemental
mortgage. The terms of the bonds include those stated in the mortgage and those
made part of the mortgage by reference to the Trust Indenture Act.
The following description is a summary of the material provisions of the
mortgage relating to the Old Bonds. It does not restate the mortgage in its
entirety. We urge you to read the mortgage because it, and not this description,
defines your rights as holders of the Old Bonds. Some defined terms used in this
description have the meanings assigned to them in the mortgage.
The registered holder of a bond will be treated as the owner of it for all
purposes. Only registered holders will have rights under the mortgage.
PRINCIPAL, MATURITY AND INTEREST
Avista Corp. will issue bonds in denominations of $1,000 and integral
multiples of $1,000. The bonds will mature on January 1, 2007. Interest on the
bonds will accrue at the rate of 7.75% per annum and will be payable
semi-annually in arrears on January 1 and July 1, commencing on July 1, 2002.
Avista Corp. will make each interest payment to the holders of record on the
immediately preceding December 15 and June 15.
Interest on the bonds will accrue from the date of original issuance or, if
interest has already been paid, from the date it was most recently paid.
Interest will be computed on the basis of a 360-day year comprised of twelve
30-day months.
Avista Corp. may not redeem the bonds in whole or in part prior to
maturity, and there is no sinking fund for the bonds.
27
METHODS OF RECEIVING PAYMENTS ON THE BONDS
Interest on each bond payable on each interest payment date will be paid by
check mailed to the registered holder of such bond on the record date relating
to such interest payment date; provided, however, that if such holder is a
securities depositary, such payment may be made by such other means in lieu of
check as shall be agreed upon by Avista Corp., the trustee and such holder; and
provided, further, that interest payable at maturity (whether at stated
maturity, upon redemption or otherwise, hereinafter "Maturity") will be paid to
the person to whom principal is paid.
Principal of and premium, if any, and interest on the bonds due at Maturity
will be payable upon presentation of the bonds at the principal office of the
trustee which has been designated by Avista Corp. as its office or agency for
such payment. Avista Corp. may change such office or agency, and may designate
any additional office or agency, in its discretion.
TRANSFER AND EXCHANGE
The transfer of bonds may be registered, and bonds may be exchanged for
other bonds, upon surrender thereof at the principal office of the trustee which
has been designated by Avista Corp. as its office or agency for such purposes.
Avista Corp. may change such office or agency, and may designate an additional
office or agency, in its discretion. No service charge will be made for any
registration of transfer or exchange of bonds, but Avista Corp. may require
payment of a sum sufficient to cover any tax or other governmental charge
incident thereto. Avista Corp. will not be required to make any transfer or
exchange of any bonds for a period of 10 days next preceding any selection of
bonds for redemption, nor will it be required to make transfers or exchanges of
any bonds which have been selected for redemption in whole or in part or as to
which Avista Corp. shall have received a notice for the redemption thereof in
whole or in part at the option of the owner.
SECURITY
The bonds, together with all other first mortgage bonds now or hereafter
issued under the mortgage, will be secured by the mortgage, which constitutes a
first mortgage lien on Avista Corp.'s facilities for the generation,
transmission and distribution of electric energy and the storage and
distribution of natural gas and substantially all of Avista Corp.'s assets
(except as stated below), subject to
o leases of minor portions of the Company's property to others for uses
that do not interfere with the Company's business;
o leases of certain property of the Company not used in its utility
business;
o excepted encumbrances, as defined in the mortgage; and
o encumbrances, defects and irregularities deemed immaterial by the
Company in the operation of the Company's business.
There are excepted from the lien all cash and securities (including without
limitation securities issued by Avista Corp.'s subsidiaries); merchandise,
equipment, materials or supplies held for sale or consumption in the Company's
operations; receivables, contracts, leases and operating agreements; electric
energy, and other material or products (including gas) generated, manufactured,
produced or purchased by the Company, for sale, distribution or use in the
ordinary course of its business. (Mortgage, Granting Clauses.)
The mortgage contains provisions for subjecting to the lien thereof all
property (other than property of the kinds excepted from such lien) acquired by
the Company after the execution and delivery thereof, subject to purchase money
liens and liens existing thereon at the time of acquisition, and, subject to
limitations in the case of consolidation, merger or sale of substantially all of
the Company's assets. (Mortgage, Granting Clauses and Art. XV.)
28
The mortgage provides that the trustee shall have a lien upon the mortgaged
property, prior to the bonds, for the payment of its reasonable compensation and
expenses and for indemnity. (Mortgage, Secs. 92 and 97; First Supplemental, Art.
XXV.)
Although its utility operations are conducted directly by Avista Corp., all
of the other operations of Avista Corp. are conducted through its subsidiaries.
The lien of the mortgage does not cover the assets of the subsidiaries or the
securities of the subsidiaries held by Avista Corp. In addition, the bonds will
be effectively subordinated in right of payment to all indebtedness and other
liabilities and commitments (including trade payables and lease obligations) of
Avista Corp.'s subsidiaries. Any right of Avista Corp. to receive assets of any
of its subsidiaries upon the subsidiary's liquidation or reorganization (and the
consequent right of the holders of the bonds to participate in those assets)
will be effectively subordinated to the claims of that subsidiary's creditors,
except to the extent that Avista Corp. is itself recognized as a creditor of the
subsidiary, in which case the claims of Avista Corp. would still be subordinate
in right of payment to any security in the assets of the subsidiary and any
indebtedness of the subsidiary senior to that held by Avista Corp. In addition,
Avista Corp.'s ability to access the cash flow of its subsidiaries is subject to
substantial restrictions. See BANK CREDIT AGREEMENTS. As of December 31, 2001,
Avista Corp.'s subsidiaries had approximately $22.9 million of indebtedness,
$440.4 million of payables and other liabilities, and $673.8 million of energy
commodity liabilities (energy commodity liabilities are held in a portfolio
containing $860.5 million of energy commodity assets) outstanding.
As of the date of this prospectus, $533.5 million of first mortgage bonds
are outstanding. This amount includes $220 million of non-transferable first
mortgage bonds which were issued in September 2001 to the agent bank under
Avista Corp.'s primary credit facility in order to provide the benefit of the
lien of the mortgage to secure Avista Corp.'s obligations. The indebtedness
under the credit facility (including the collateral bonds) are included in
Avista Corp.'s short-term debt. See BANK CREDIT AGREEMENTS.
MAINTENANCE AND REPLACEMENT FUND
Annual Maintenance and Replacement Fund payments are required to be made to
the trustee in an amount equal to the excess, if any, of the amount which, in
the opinion of an engineer expressed in a certificate delivered to the trustee,
should have been expended during the preceding calendar year for repairs,
maintenance, renewals or replacements of, or substitutions for, the mortgaged
property over the amount actually expended for such purposes. Any annual
requirement may be satisfied (a) in cash or (b) by credit for the amount of
first mortgage bonds that would otherwise be issuable on the basis of either
property additions or of first mortgage bonds or prior lien bonds theretofore
retired; provided, however, that the Company is not permitted to satisfy any
Maintenance and Replacement Fund requirement by the deposit of cash if, at the
time such requirement is to be satisfied, it has unfunded property additions
having a cost or fair value (whichever is less) equal to or greater than 110% of
such requirement. Cash deposited with the trustee pursuant to the Maintenance
and Replacement Fund may, among other things, be applied to the purchase of
first mortgage bonds or to the redemption of first mortgage bonds which are, by
their terms, redeemable before maturity.
In every year since the execution and delivery of the mortgage, the Company
has made all necessary expenditures for the aforesaid purposes and an engineer
has so certified, with the result that the Company has never been required to
make any payment to the trustee under the Maintenance and Replacement Fund.
In addition, the mortgage contains a covenant pursuant to which the Company
is required for each calendar year to expend or accrue for maintenance or to
appropriate for property retirement or for property amortization 13 1/2% of the
gross operating revenues of the Company, as defined therein; provided, however,
that the Company may so expend, accrue or appropriate a lesser amount if a
regulatory authority determines that such lesser amount is adequate. Excess
amounts expended, accrued or appropriated in any year may be credited against
the five succeeding years' requirements. This covenant does not require the
deposit of cash with the trustee.
The Company amended the mortgage, effective as of the Modification
Effective Date referred to below, to eliminate the provisions for property
maintenance and retirement described above. No consent of the holders of the
bonds is required in order for this amendment to become effective. See
"--Modification."
29
(Mortgage, Sec. 38; First Supplemental, Article XXV; Second Supplemental,
Sec. 9; Eighteenth Supplemental, Sec. 4; Twenty-sixth Supplemental, Sec. 2;
Twenty-ninth Supplemental, Art. II.)
SPECIAL PROVISIONS FOR RETIREMENT OF BONDS
If, during any 12-month period, any of the mortgaged property is taken by
eminent domain and/or sold to any governmental, authority and/or sold pursuant
to an order of a governmental authority, with the result that the Company
receives $15,000,000 or more in cash or in principal amount of purchase money
obligations, the Company is required to apply such cash and the proceeds of such
obligations (subject to certain conditions and deductions, and to the extent not
otherwise applied) to the redemption of first mortgage bonds which are, by
their, terms, redeemable before maturity by the application of such cash and
proceeds. (Mortgage, Sec. 64; Tenth Supplemental, Sec. 4.)
ISSUANCE OF ADDITIONAL BONDS
The present maximum principal amount of first mortgage bonds which may be
outstanding under the mortgage is $10,000,000,000. However, the Company has
reserved the right to amend the mortgage (without any consent of or other action
of holders of any bonds now or hereafter outstanding) to remove this limitation.
First mortgage bonds of any series may be issued from time to time on the
basis of:
(1) 60% of cost or fair value of property additions (whichever is less)
after adjustments to offset retirements;
(2) retirement of first mortgage bonds; and
(3) deposit of cash.
The Old Bonds were issued upon the basis of unfunded property additions and
retired first mortgage bonds and New Bonds will only be issued in exchange for a
like principal amount of Old Bonds tendered in the Exchange Offer.
The Company has amended the mortgage, effective as of the Modification
Effective Date referred to below, to (x) change 60% in the preceding sentence to
70% and (y) make correlative changes in provisions relating to, among other
things, the release of property from the lien of the mortgage and the withdrawal
of cash held by the trustee. No consent of the holders of the bonds is required
in order for this amendment to become effective. See "--Modification."
No first mortgage bonds may be issued as described in clause (1) or (3) in
the preceding paragraph unless net earnings for 12 consecutive months out of the
preceding 15 calendar months (before income taxes, depreciation and amortization
of property, property losses and interest on any indebtedness and amortization
of debt discount and expense) are at least twice the annual interest
requirements on all first mortgage bonds at the time outstanding, including the
additional issue, and on all indebtedness of prior rank. Such net earnings test
generally need not be satisfied prior to the issuance of first mortgage bonds as
described in clause (2) in the preceding paragraph unless (x) the annual
requirements on the retired first mortgage bonds on the basis of which the bonds
are to be issued have been excluded from a net earnings certificate delivered to
the trustee since the retirement of such first mortgage bonds or (y)(i) the
retired first mortgage bonds on the basis of which the bonds are to be issued
mature by their terms at a date more than two years after the date for
authentication and delivery of such bonds and (ii) the bonds bear interest at a
higher rate than such retired first mortgage bonds.
30
The Company has amended the mortgage, effective as of the Modification
Effective Date referred to below:
o to modify the net earnings test described in the preceding paragraph
to, among other things:
o provide that the period over which net earnings is computed shall
be 12 out of the preceding 18 months;
o specifically permit the inclusion in net earnings of revenues
collected or accrued subject to possible refund; specifically
permit the inclusion in net earnings of any portion of the
allowance for funds used during construction, and any portion of
the allowance for funds used to conserve energy (or any analogous
amount), which is not included in "other income" (or any
analogous item) in the Company's books of account;
o provide that, in calculating net earnings, no deduction from
revenues or other income shall be made for (1) expenses or
provisions for any non-recurring charge to income of whatever
kind or nature (including without limitation the recognition of
expense due to the non-recoverability of investment) or (2)
provisions for any refund of revenues previously collected or
accrued subject to possible refund, and
o provide that, in calculating annual interest requirements, (1) if
any first mortgage bonds or prior ranking indebtedness bears
interest at a variable rate, the annual interest requirements
thereon shall be determined by reference to the rate or rates in
effect on the date next preceding the date of the new issue of
first mortgage bonds and (2) if the new issue of first mortgage
bonds is to bear interest at a variable rate or rates, the annual
interest requirements thereon shall be determined by reference to
the rate or rates to be in effect at the time of the initial
issuance thereof.
No consent of the holders of the bonds is required in order for this
amendment to become effective. See "--Modification."
Property additions generally include electric, natural gas, steam or water
property acquired after May 31, 1939, but may not include property used
principally for the production or gathering of natural gas. Any such property
additions may be used if their ownership and operation is within the corporate
purposes of the Company regardless of whether or not the Company has all
necessary permission it may need at any time from governmental authorities to
operate such property additions.
The holders of the bonds will be deemed to have consented to an amendment
to the provision of the mortgage which requires that Avista Corp. deliver an
opinion of counsel as to the status of the lien of the mortgage on Property
Additions being certified to the Trustee. The amendment permits us to deliver to
the Trustee, in lieu of such opinion, title insurance with respect to such
Property Additions in an amount not less than 35% of the cost or fair value to
Avista Corp. (whichever is less) of such Property Additions. Such amendment
could not be made without the requisite consent of the holders of outstanding
bonds as described under "--Modification."
No first mortgage bonds may be issued on the basis of property additions
subject to prior liens, unless the prior lien bonds secured thereby have been
qualified by being deducted from the first mortgage bonds otherwise issuable and
do not exceed 50% of such property additions, and unless the first mortgage
bonds then to be outstanding which have been issued against property subject to
continuing prior liens and certain other items would not exceed 15% of the first
mortgage bonds outstanding. The Company has amended the mortgage, effective as
of the Modification Effective Date referred to below, to change 50% in the
foregoing sentence to 70%. No consent of the holders of the bonds is required in
order for this amendment to become effective. See "--Modification."
The amount of prior liens on mortgaged property acquired after the date of
delivery of the mortgage may be increased subsequent to the acquisition of such
property provided that, if any property subject to such prior lien shall have
31
been made the basis of any application under the mortgage, all the additional
obligation are deposited with the trustee or other holder of a prior lien.
(Mortgage, Secs. 4 to 8, 20 to 30 and 46; First Supplemental, Sec. 2; Eleventh
Supplemental, Sec. 5; Twelfth Supplemental, Sec. 1; Fourteenth Supplemental,
Sec. 4; Seventeenth Supplemental, Sec. 3; Eighteenth Supplemental, Secs. 1, 2
and 6; Twenty-sixth Supplemental, Sec. 2; Twenty-ninth Supplemental, Art. II.)
RELEASE AND SUBSTITUTION OF PROPERTY
Property may be released from the lien of the mortgage upon the basis of
(1) deposit of cash or, to a limited amount, purchase money mortgages, (2)
property additions and (3) waiver of the right to issue first mortgage bonds.
Cash may be withdrawn upon the bases stated in clauses (2) and (3) above. When
property released has not been made the basis of any application under the
mortgage, the property additions used to effect the release may again, in
certain cases, become available as credits under the mortgage, and the waiver of
the right to issue first mortgage bonds, to effect the release made in certain
cases, cease to be effective as such a waiver. Similar provisions are in effect
as to cash proceeds of such property. The mortgage contains special provisions
with respect to prior lien bonds pledged, and disposition of moneys received on
pledged bonds secured by prior lien. (Mortgage, Secs. 5; 31, 32, 46 to 50, 59,
60, 61, 118 and 134.)
MODIFICATION
In general, the mortgage, the rights and obligations of the Company and the
rights of the bondholders may be modified with the consent of 75% in principal
amount of the first mortgage bonds outstanding, and, if less than all series of
first mortgage bonds are affected, the consent also of 75% in principal amount
of the first mortgage bonds of each series affected. However, no modification of
the terms of payment of principal or interest, and no modification affecting the
lien or reducing the percentage required for modification, is effective against
any bondholder without his consent. The Company has the right to make certain
specific amendments and amendments necessary from time to time to qualify the
mortgage under the Trust Indenture Act of 1939 as in force on the date of such
amendments without the consent of bondholders. (Mortgage, Art. XVIII, Secs. 120
and 149; First Supplemental, Sec. 10.)
The Company has amended the mortgage, effective as of the Modification
Effective Date referred to below, so as to provide that the mortgage, the rights
and obligations of the Company and the rights of the bondholders may be modified
with the consent of 60% in principal amount of the first mortgage bonds
outstanding or, if less than all series of first mortgage bonds are affected,
then the consent only, of 60% in principal amount of the first mortgage bonds
outstanding of the series so affected, considered as one class. (Twenty-sixth
Supplemental, Sec. 2; Twenty-ninth Supplemental, Art. II.) No consent of the
holders of the bonds is required in order for these amendments to become
effective.
In addition to all other amendments to the mortgage described above which
will become effective as of the Modification Effective Date referred to below,
the Company has amended the mortgage, effective as of the Modification Effective
Date referred to below, in the following respects:
o to specifically provide that no reduction in the book value of
property recorded in the plant account of the Company shall constitute
a property retirement, otherwise than in connection with physical
retirements of property abandoned, destroyed or disposed of, and
otherwise than in connection with the removal of such property in its
entirety from the plant account;
o to provide that the lien of the mortgage shall not automatically
attach to the properties of another corporation which shall have
consolidated or merged with the Company in a transaction in which the
Company shall be the surviving or resulting corporation;
o to provide that if the Company shall have appointed a successor
trustee, meeting the requirements therefor set forth in the mortgage,
which shall have accepted such appointment, the trustee shall be
deemed to have resigned; and
32
o to specifically provide that the mortgage may be amended without the
consent of the holders of the first mortgage bonds:
o to evidence the succession of a successor trustee;
o to add additional covenants of the Company and additional
defaults, which may be applicable only to the first mortgage
bonds of specified series;
o to correct the description of property subject to the lien of the
mortgage or to subject additional property to such lien;
o to change or eliminate any provision of the mortgage or to add
any new provision to the mortgage; provided, that no such change,
elimination or addition shall adversely affect the interests of
the holders of first mortgage bonds of any series in any material
respect;
o to establish the form or terms of first mortgage bonds of any
series;
o to provide for procedures to utilize a non-certificated system of
registration for all or any series of first mortgage bonds;
o to change any place or places for payment, registration of
transfer or exchange, or notices to and demands upon the Company,
with respect to all or any series of first mortgage bonds;
o to increase or decrease the maximum principal amount of bonds
issuable under the mortgage; to make any other changes which do
not adversely affect the interests of the holders of first
mortgage bonds of any series in any material respect;
o or to evidence any change required or permitted under the Trust
Indenture Act of 1939, as amended.
(Twenty-sixth Supplemental, Sec. 2; Twenty-ninth Supplemental, Art. II)
No consent of the holders of the bonds is required in order for these
amendments to become effective.
As used herein, the term "Modification Effective Date" means the first time
at which certain first mortgage bonds which mature May 29, 2002 are no longer
outstanding (unless the holders of such first mortgage bonds consent to the
foregoing amendments).
COMPLETED DEFAULTS; REMEDIES
Completed Defaults include default in payment of principal; default for 60
days in payment of interest; default in payment of interest or principal of
qualified prior lien bonds continued beyond any grace period; certain events in
bankruptcy, insolvency or reorganization; and default in complying with other
covenants for 90 days after notice. The trustee may withhold notice of default
(except in payment of principal, interest or funds for retirement of first
mortgage bonds) if it determines that it is in the interest of the bondholders.
(Mortgage, Secs. 44, 65 and 135.)
The mortgage provides that, upon the occurrence of a Completed Default, the
trustee may, and upon written request of the holders of a majority in principal
amount of first mortgage bonds then outstanding shall, declare the principal of
and accrued interest on all outstanding bonds immediately due and payable;
provided, however, that if, before any sale of the mortgaged property, all
defaults have been cured, the holders of a majority in principal amount of
outstanding first mortgage bonds may annul such declaration. (Mortgage, Sec.
65.)
33
No holder of first mortgage bonds may enforce the lien of the mortgage
unless such holder shall have given the trustee written notice of a default and
unless the holders of 25% in principal amount of the first mortgage bonds have
requested the trustee in writing to act and have offered the trustee adequate
security and indemnity and a reasonable opportunity to act. Holders of a
majority in principal amount of the first mortgage bonds may direct the time,
method and place of conducting any proceedings for any remedy available to the
trustee, or exercising any trust or power conferred upon the trustee, or may
direct the trustee to take certain action. (Mortgage, Secs. 65, 68, 69, 79, 92
and 138(d) and Art. XXV.)
Notwithstanding any other provision of the mortgage, the right of any
holder of any bond to receive payment of the principal of and interest on such
bond, or to institute suit for the enforcement of any such payment, shall not be
impaired or affected without the consent of such holder. (Mortgage, Sec. 148).
The laws of the various states in which the property subject to the lien of
the mortgage is located may limit or deny the ability of the trustee and/or the
bondholders to enforce certain rights and remedies provided in the mortgage in
accordance with their terms.
CONCERNING THE TRUSTEE
The Trustee has, and is subject to, all the duties and responsibilities
specified with respect to an indenture trustee under the Trust Indenture Act of
1939, as amended. Subject to such provisions, the Trustee is not under any
obligation to take any action in respect of any default or otherwise, or toward
the execution or enforcement of any of the trusts created by the mortgage, or to
institute, appear in or defend any suit or other proceeding in connection
therewith, unless requested in writing so to do by the holders of a majority in
principal amount of the bonds then outstanding. Anything in the mortgage to the
contrary notwithstanding, the Trustee is under no obligation or duty to perform
any act thereunder (other than the delivery of notices) or to institute or
defend any suit in respect hereof, unless properly indemnified to its
satisfaction. (Mortgage, Sec. 92).
The Trustee may at any time resign and be discharged of the trusts created
by the mortgage by giving written notice to the Company and thereafter
publishing notice thereof, specifying a date when such resignation shall take
effect, as provided in the mortgage, and such resignation shall take effect upon
the day specified in such notice unless previously a successor trustee shall
have been appointed by the bondholders or the Company. The Trustee may be
removed at any time by the holders of a majority in principal amount of the
bonds then outstanding. (Mortgage, Secs. 100 and 101).
EVIDENCE OF COMPLIANCE WITH MORTGAGE PROVISIONS
Compliance with mortgage provisions is evidenced by written statements of
the Company's officers or persons selected or paid by the Company. In certain
major matters the accountant or engineer must be independent. Various
certificates and other papers are required to be filed annually and upon the
happening of certain events, including an annual certificate with reference to
compliance with the terms of the mortgage and absence of Defaults.
REPORTS
Whether or not required by the rules and regulations of the SEC, so long as
any bonds are outstanding, Avista Corp. will furnish to the holders of bonds,
within the time periods specified in the SEC's rules and regulations:
(1) all quarterly and annual financial information that would be
required to be contained in a filing with the SEC on Forms 10-Q and 10-K,
including a "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and, with respect to the annual information
only, a report on the annual financial statements by Avista Corp.'s
certified independent accountants; and
(2) all current reports that would be required to be filed with the
SEC on Form 8-K.
34
In addition, whether or not required by the rules and regulations of the
SEC, Avista Corp. will file a copy of all of the information and reports
referred to in clauses (1) and (2) above with the SEC for public availability
within the time periods specified in the SEC's rules and regulations (unless the
SEC will not accept such a filing) and make such information available to
securities analysts and prospective investors upon request. Avista Corp. has
also agreed that, for so long as any bonds remain outstanding, it will furnish
to the holders and to securities analysts and prospective investors, upon their
request, the information required to be delivered pursuant to Rule 144A(d)(4)
under the Securities Act.
BOOK-ENTRY, DELIVERY AND FORM
The New Bonds initially will be represented by one or more bonds in
registered, global form without interest coupons (collectively, the "Global
Bonds"). Upon issuance, the Global Bonds will be deposited with the trustee as
custodian for The Depository Trust Company ("DTC"), in New York, New York, and
registered in the name of DTC or its nominee, in each case for credit to an
account of a direct or indirect participant in DTC as described below.
Except as set forth below, the Global Bonds may be transferred, in whole
and not in part, only to another nominee of DTC or to a successor of DTC or its
nominee. Beneficial interests in the Global Bonds may not be exchanged for bonds
in certificated form except in the limited circumstances described below. See
"--Exchange of Global Bonds for Certificated Bonds." Except in the limited
circumstances described below, owners of beneficial interests in the Global
Bonds will not be entitled to receive physical delivery of bonds in certificated
form. In addition, transfers of beneficial interests in the Global Bonds will be
subject to the applicable rules and procedures of DTC and its direct or indirect
participants (including, if applicable, those of Euroclear and Clearstream),
which may change from time to time.
DEPOSITORY PROCEDURES
The following description of the operations and procedures of DTC,
Euroclear and Clearstream are provided solely as a matter of convenience. These
operations and procedures are solely within the control of the respective
settlement systems and are subject to changes by them from time to time. Avista
Corp. takes no responsibility for these operations and procedures and urges
investors to contact the system or their participants directly to discuss these
matters.
DTC has advised Avista Corp. that DTC is a limited-purpose trust company
organized under the laws of the State of New York, a member of the Federal
Reserve System, a "clearing corporation" within the meaning of the Uniform
Commercial Code and a "Clearing Agency" registered pursuant to the provisions of
Section 17A of the Exchange Act. DTC was created to hold securities for its
participating organizations (collectively, the "Participants") and to facilitate
the clearance and settlement of transactions in those securities between
Participants through electronic book-entry changes in accounts of its
Participants. The Participants include securities brokers and dealers (including
the initial purchasers), banks, trust companies, clearing corporations and
certain other organizations. Access to DTC's system is also available to other
entities such as banks, brokers, dealers and trust companies that clear through
or maintain a custodial relationship with a Participant, either directly or
indirectly (collectively, the "Indirect Participants"). Persons who are not
Participants may beneficially own securities held by or on behalf of DTC only
through the Participants or the Indirect Participants. The ownership interests
in, and transfers of ownership interests in, each security held by or on behalf
of DTC are recorded on the records of the Participants and Indirect
Participants.
DTC has also advised Avista Corp. that, pursuant to procedures established
by it:
(1) upon deposit of the Global Bonds representing the Old Bonds, DTC
credited the accounts of Participants designated by the initial purchasers of
the Old Bonds with portions of the principal amount of the Global Bonds; and
(2) ownership of these interests in the Global Bonds are, and ownership of
interests in New Bonds will be, shown on, and the transfer of ownership thereof
will be effected only through, records maintained by DTC (with respect to the
35
Participants) or by the Participants and the Indirect Participants (with respect
to other owners of beneficial interest in the Global Bonds).
Investors in the Global Bonds who are Participants in DTC's system may hold
their interests therein directly through DTC. Investors in the Global Bonds who
are not Participants may hold their interests therein indirectly through
organizations (including Euroclear and Clearstream) which are Participants in
such system. Euroclear and Clearstream will hold interests in the Global Bonds
on behalf of their participants through customers' securities accounts in their
respective names on the books of their respective depositories, which are
Euroclear Bank, S.A./N.V., as operator of Euroclear, and Citibank, N.A., as
operator of Clearstream. All interests in a Global Bond, including those held
through Euroclear or Clearstream, may be subject to the procedures and
requirements of DTC. Those interests held through Euroclear or Clearstream may
also be subject to the procedures and requirements of such systems. The laws of
some states require that certain Persons take physical delivery in definitive
form of securities that they own. Consequently, the ability to transfer
beneficial interests in a Global Bond to such Persons will be limited to that
extent. Because DTC can act only on behalf of Participants, which in turn act on
behalf of Indirect Participants, the ability of a Person having beneficial
interests in a Global Bond to pledge such interests to Persons that do not
participate in the DTC system, or otherwise take actions in respect of such
interests, may be affected by the lack of a physical certificate evidencing such
interests.
EXCEPT AS DESCRIBED BELOW, OWNERS OF INTERESTS IN THE GLOBAL BONDS WILL NOT
HAVE BONDS REGISTERED IN THEIR NAMES, WILL NOT RECEIVE PHYSICAL DELIVERY OF
BONDS IN CERTIFICATED FORM AND WILL NOT BE CONSIDERED THE REGISTERED OWNERS OR
"HOLDERS" THEREOF UNDER THE MORTGAGE OR THE BONDS FOR ANY PURPOSE.
Payments in respect of the principal of, and interest and premium, if any,
on a Global Bond registered in the name of DTC or its nominee will be payable to
DTC in its capacity as the registered Holder under the mortgage. Under the terms
of the mortgage, Avista Corp. and the trustee will treat the Persons in whose
names the bonds, including the Global Bonds, are registered as the owners
thereof for the purpose of receiving payments and for all other purposes.
Consequently, neither Avista Corp., the trustee nor any agent of Avista Corp. or
the trustee has or will have any responsibility or liability for:
(1) any aspect of DTC's records or any Participant's or Indirect
Participant's records relating to or payments made on account of beneficial
ownership interests in the Global Bonds or for maintaining, supervising or
reviewing any of DTC's records or any Participant's or Indirect
Participant's records relating to the beneficial ownership interests in the
Global Bonds; or
(2) any other matter relating to the actions and practices of DTC or
any of its Participants or Indirect Participants.
DTC has advised Avista Corp. that its current practice, upon receipt of any
payment in respect of securities such as the bonds (including principal and
interest), is to credit the accounts of the relevant Participants with the
payment on the payment date unless DTC has reason to believe it will not receive
payment on such payment date. Each relevant Participant is credited with an
amount proportionate to its beneficial ownership of an interest in the principal
amount of the relevant security as shown on the records of DTC. Payments by the
Participants and the Indirect Participants to the beneficial owners of bonds
will be governed by standing instructions and customary practices and will be
the responsibility of the Participants or the Indirect Participants and will not
be the responsibility of DTC, the trustee or Avista Corp. Neither Avista Corp.
nor the trustee will be liable for any delay by DTC or any of its Participants
in identifying the beneficial owners of the bonds, and Avista Corp. and the
trustee may conclusively rely on and will be protected in relying on
instructions from DTC or its nominee for all purposes.
DTC has advised Avista Corp. that transfers between Participants in DTC
will be effected in accordance with DTC's procedures, and will be settled in
same-day funds, and transfers between participants in Euroclear and Clearstream
will be effected in accordance with their respective rules and operating
procedures.
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Subject to compliance with the transfer and exchange restrictions described
herein, cross-market transfers between the Participants in DTC, on the one hand,
and Euroclear or Clearstream participants, on the other hand, will be effected
through DTC in accordance with DTC's rules on behalf of Euroclear or
Clearstream, as the case may be, by its respective depositary; however, such
cross-market transactions will require delivery of instructions to Euroclear or
Clearstream, as the case may be, by the counterparty in such system in
accordance with the rules and procedures and within the established deadlines
(Brussels time) of such system. Euroclear or Clearstream, as the case may be,
will, if the transaction meets its settlement requirements, deliver instructions
to its respective depositary to take action to effect final settlement on its
behalf by delivering or receiving interests in the relevant Global Bond in DTC,
and making or receiving payment in accordance with normal procedures for
same-day funds settlement applicable to DTC. Euroclear participants and
Clearstream participants may not deliver instructions directly to the
depositories for Euroclear or Clearstream.
DTC has advised Avista Corp. that it will take any action permitted to be
taken by a Holder of bonds only at the direction of one or more Participants to
whose account DTC has credited the interests in the Global Bonds and only in
respect of such portion of the aggregate principal amount of the bonds as to
which such Participant or Participants has or have given such direction.
However, if there is an Event of Default under the bonds, DTC reserves the right
to exchange the Global Bonds for legended bonds in certificated form, and to
distribute such bonds to its Participants.
Although DTC, Euroclear and Clearstream have agreed to the foregoing
procedures to facilitate transfers of interests in the Global Bonds among
participants in DTC, Euroclear and Clearstream, they are under no obligation to
perform or to continue to perform such procedures, and may discontinue such
procedures at any time. Neither Avista Corp. nor the trustee nor any of their
respective agents will have any responsibility for the performance by DTC,
Euroclear or Clearstream or their respective participants or indirect
participants of their respective obligations under the rules and procedures
governing their operations.
EXCHANGE OF GLOBAL BONDS FOR CERTIFICATED BONDS
A Global Bond is exchangeable for definitive bonds in registered
certificated form ("Certificated Bonds") if:
(1) DTC (a) notifies Avista Corp. that it is unwilling or unable to
continue as depositary for the Global Bonds and Avista Corp. fails to
appoint a successor depositary or (b) has ceased to be a clearing agency
registered under the Exchange Act and Avista Corp. fails to appoint a
successor depositary; or
(2) Avista Corp., at its option, notifies the trustee in writing that
it elects to cause the issuance of the Certificated Bonds.
Certificated Bonds delivered in exchange for any Global Bond or beneficial
interests in Global Bonds will be registered in the names, and issued in any
approved denominations, requested by or on behalf of the depositary (in
accordance with its customary procedures). Any such exchange will be effected
through the DTC Deposit/Withdraw at Custodian system and an appropriate
adjustment will be made to reflect a decrease in the principal amount of the
relevant Global Bond.
SAME DAY SETTLEMENT AND PAYMENT
Avista Corp. will make payments in respect of the bonds represented by the
Global Bonds (including principal, premium, if any, and interest) by wire
transfer of immediately available funds to the accounts specified by the Global
Bond Holder. Avista Corp. or its paying agent will make all payments of
principal, interest and premium with respect to Certificated Bonds by wire
transfer of immediately available funds to the accounts specified by the Holders
thereof or, if no such account is specified, by mailing a check to each such
Holder's registered address. The bonds represented by the Global Bonds are
expected to trade in DTC's Same-Day Funds Settlement System, and any permitted
secondary market trading activity in such bonds will, therefore, be required by
DTC to be settled in immediately available funds. Avista Corp. expects that
secondary trading in any Certificated Bonds will also be settled in immediately
available funds.
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Because of time zone differences, the securities account of a Euroclear or
Clearstream participant purchasing an interest in a Global Bond from a
Participant in DTC will be credited, and any such crediting will be reported to
the relevant Euroclear or Clearstream participant, during the securities
settlement processing day (which must be a business day for Euroclear and
Clearstream) immediately following the settlement date of DTC. DTC has advised
Avista Corp. that cash received in Euroclear or Clearstream as a result of sales
of interests in a Global Bond by or through a Euroclear or Clearstream
participant to a Participant in DTC will be received with value on the
settlement date of DTC but will be available in the relevant Euroclear or
Clearstream cash account only as of the business day for Euroclear or
Clearstream following DTC's settlement date.
BANK CREDIT AGREEMENTS
AVISTA CORP.
Avista Corp. has a $220 million line of credit with various banks under a
credit agreement that expires May 29, 2002. We have pledged our shares of common
stock of Avista Capital as security for our indebtedness under this agreement.
As of December 31, 2001, $55 million was outstanding under this line of credit.
This agreement contains customary covenants and default provisions, including
covenants not to permit (1) the ratio of "consolidated total debt" (as defined
in the Avista Corp. credit agreement) to "consolidated total capitalization" (as
defined in the Avista Corp. credit agreement) of Avista Corp. to be, at the end
of any fiscal quarter, greater than certain specified ratios; and (2) the ratio
of "consolidated cash flow" (as defined in the Avista Corp. credit agreement) to
"consolidated fixed charges" (as defined in the Avista Corp. credit agreement)
of Avista Corp. or Avista Utilities for any four-fiscal-quarter period ending on
any date set forth below to be less than certain specified ratios.
In August 2001 we determined that we would not comply with the fixed charge
coverage covenant with respect to Avista Corp. described above for the
four-fiscal-quarter period ending September 30, 2001 or for any subsequent
period through the expiration date of the agreement. Accordingly, Avista Corp.
requested, and obtained, a waiver of this covenant. The failure to comply with
the covenant for these periods will not constitute an event of default under the
agreement. In connection with this waiver, on September 21, 2001 Avista Corp.
issued to the agent bank $220 million in principal amount of non-transferable
first mortgage bonds under the mortgage in order to provide the benefit of the
lien of the mortgage to secure Avista Corp.'s obligations under the credit
agreement.
AVISTA ENERGY
Avista Energy and its subsidiary, Avista Energy Canada, Ltd., as
co-borrowers, have a credit agreement with various banks in the aggregate amount
of $97.2 million expiring June 28, 2002. The credit agreement may be terminated
by the banks at any time and all extensions of credit under the agreement are
payable upon demand, in either case at the lenders' sole discretion. The
agreement also provides, on an uncommitted basis, for the issuance of letters of
credit to secure contractual obligations to counterparties. The facility is
guaranteed by Avista Capital and is secured by substantially all of Avista
Energy's assets. The maximum amount of credit extended by the lenders for cash
advances is $30 million. At December 31, 2001, there were no cash advances
(demand notes payable) outstanding, and letters of credit outstanding totaled
approximately $40 million.
The Avista Energy agreement contains customary covenants and default
provisions, including covenants to maintain "minimum net working capital" and
"minimum net worth" (as defined in the Avista Energy credit agreement) and a
covenant limiting the amount of indebtedness which the co-borrowers may incur.
In addition, the agreement contains certain restricted payment provisions
generally prohibiting distributions. Quarterly dividends are, however,
permitted, subject to certain "net worth" and "working capital" requirements, in
an amount equal to 50% of Avista Energy's net earnings (in some cases after
certain adjustments) during the immediately preceding fiscal quarter.
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CERTAIN U.S. FEDERAL INCOME TAX CONSIDERATIONS
This section describes the material United States federal income tax
consequences of exchanging the Old Bonds for New Bonds and of owning and
disposing of bonds. This section reflects the opinion of Thelen Reid & Priest
LLP, counsel to Avista Corp. This section applies to you only if you acquired
the Old Bonds in the offering at the offering price and you hold your bonds as
capital assets for tax purposes. This section does not apply to you if you are a
member of a class of holders subject to special rules, such as:
o a dealer in securities or currencies,
o a trader in securities that elects to use a mark-to-market method of
accounting for your securities holdings,
o a bank,
o a life insurance company,
o a tax-exempt organization,
o a person that owns bonds that are a hedge or that are hedged against
interest rate risks,
o a person that owns bonds as part of a straddle or conversion
transaction for tax purposes, or
o a person whose functional currency for tax purposes is not the U.S.
dollar.
If you purchase bonds at a price other than the offering price, the
amortizable bond premium or market discount rules may also apply to you. You
should consult your tax advisor regarding this possibility.
This section is based on the Internal Revenue Code of 1986, as amended, its
legislative history, existing and proposed Treasury regulations, published
rulings and court decisions, all as currently in effect. These authorities are
subject to change, possibly on a retroactive basis. This section does not
discuss all aspects of taxation that may be relevant to you. Accordingly, you
should consult your tax advisor as to the application and effect of state and
local taxes, foreign taxes and other tax laws.
UNITED STATES HOLDERS
This subsection describes the tax consequences to a United States holder.
You are a United States holder if you are a beneficial owner of a bond and you
are:
o a citizen or resident of the United States,
o a domestic corporation or partnership,
o an estate whose income is subject to United States federal income tax
regardless of its source, or
o a trust if a United States court can exercise primary supervision over
the trust's administration and one or more United States persons are
authorized to control all substantial decisions of the trust.
If you are not a United States holder, this subsection does not apply to
you and you should refer to "--United States Alien Holders" below.
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Exchange of Old Bonds for New Bonds
An exchange of Old Bonds for New Bonds will not be a taxable event for
federal income tax purposes. Rather, the New Bonds will be treated as a
continuation of the Old Bonds in the hands of a United States holder. As a
result, you will not recognize any income, gain or loss for federal income tax
purposes upon an exchange of Old Bonds for New Bonds, and you will have the same
tax basis and holding period in the New Bonds as you had in the Old Bonds.
Payments of Interest
You will be taxed on interest on your bonds as ordinary income at the time
you receive the interest or when it accrues, depending on your method of
accounting for tax purposes.
Purchase, Sale and Retirement of the Bonds
Your tax basis in your Old Bonds generally will be their cost, and your tax
basis in any New Bonds acquired in the Exchange Offer will be equal to your tax
basis in the Old Bonds surrendered. You will generally recognize capital gain or
loss on the sale or retirement of bonds equal to the difference between the
amount you realize on the sale or retirement, excluding any amounts attributable
to accrued but unpaid interest, and your tax basis in your bonds. Capital gain
of a noncorporate United States holder is generally taxed at a maximum rate of
20% where the property is held more than one year.
UNITED STATES ALIEN HOLDERS
This subsection describes the tax consequences to a United States alien
holder. You are a United States alien holder if you are the beneficial owner of
a bond and are, for United States federal income tax purposes:
o a nonresident alien individual,
o a foreign corporation,
o a foreign partnership,
o an estate unless its income is subject to United States federal income
tax regardless of its source, or
o a trust unless a United States court can exercise primary supervision
over the trust's administration and one or more United States persons
are authorized to control all substantial decisions of the trust.
If you are a United States holder, this section does not apply to you.
An exchange of Old Bonds for New Bonds will not constitute a taxable event
for federal income tax purposes. Rather, the New Bonds will be treated as a
continuation of the Old Bonds in the hands of a United States alien holder. As a
result, you will not recognize any income, gain or loss for federal income tax
purposes upon an exchange of Old Bonds for New Bonds, and you will have the same
tax basis and holding period in the New Bonds as you had in the Old Bonds.
Under United States federal income and estate tax law, and subject to the
discussion of backup withholding below, if you are a United States alien holder
of a bond:
o we and other U.S. payors generally will not be required to deduct
United States withholding tax from payments of principal, premium, if
any, and interest to you if, in the case of payments of interest:
(1) you do not actually or constructively own 10% or more of the
total combined voting power of all classes of stock of Avista
Corp. entitled to vote,
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(2) you are not a controlled foreign corporation that is related to
Avista Corp. through stock ownership, and
(3) either (1) you furnish the U.S. payor an Internal Revenue Service
Form W-8BEN certifying under penalties of perjury that you are
not a United States person, or (2) the payor can otherwise be
satisfied that you are not a United States person by relying on
account documentation or other evidence as prescribed in Treasury
regulations. You should consult your tax advisor regarding this
requirement. However, this requirement will not be considered
satisfied if the payor has actual knowledge or reason to know
that you are a United States person notwithstanding the
certificate or other documentation.
o no deduction for any United States federal withholding tax will be
made from any gain that you realize on the sale or exchange of your
bond, including the exchange of Old Bonds for New Bonds.
If you are engaged in a trade or business within the United States and the
interest on the bond is effectively connected with your United States business,
the interest and any gain on the bond will not be subject to withholding if you
have provided the payor an Internal Revenue Service Form W-8 as prescribed in
the Treasury regulations. However, interest on a bond that is effectively
connected with your United States business will be subject to United States
taxation in the same manner as applies to United States holders. In addition,
many tax treaties with the United States provide that interest and gain from
United States sources are not taxable in the United States, unless such amounts
are attributable to a permanent establishment in the United States. If you are
entitled to the benefits of a treaty with the United States that provides these
benefits, then interest and gain from the bond will generally not be taxable,
even if effectively connected with a United States trade or business, unless you
also have a permanent establishment in the United States to which the interest
or gain is attributable. In order to claim benefits under a tax treaty with the
United States, you must furnish an Internal Revenue Service Form W-8BEN to the
payor.
Further, a bond held by an individual who at death is not a citizen or
resident of the United States will not be includible in the individual's gross
estate for United States federal estate tax purposes if:
o the decedent did not actually or constructively own 10% or more of the
total combined voting power of all classes of stock of Avista Corp.
entitled to vote at the time of death, and
o the income on the bond would not have been effectively connected with
a United States trade or business of the decedent at the same time.
BACKUP WITHHOLDING AND INFORMATION REPORTING
We and other payors, including brokers, may be required to report to you
and to the Internal Revenue Service any payments of principal, premium and
interest on your bond and the amount of any proceeds from the sale or exchange
of your bond. As described more fully below, we and other payors may also be
required to make "backup withholding" from payments of principal, premium,
interest and sales proceeds if you fail to provide an accurate taxpayer
identification number or otherwise establish an exemption from backup
withholding.
Backup withholding is not an additional tax. If you are subject to backup
withholding, you may obtain a credit or refund of the amount withheld by filing
the required information with the Internal Revenue Service.
UNITED STATES HOLDERS
In general, if you are a noncorporate United States holder, we and other
payors are required to report to the Internal Revenue Service all payments of
principal, any premium and interest on your bond. In addition, we and other
payors are required to report to the Internal Revenue Service any payment of
proceeds of the sale of your bond before maturity within the United States.
Additionally, backup withholding at a rate of 30% (subject to phase-in rate
reductions until the rate equals 28% for payments after 2005) will apply to any
payments if you fail to provide an accurate taxpayer identification number, or
you are notified by the Internal Revenue Service that you have failed to report
all interest and dividends required to be shown on your federal income tax
returns.
41
UNITED STATES ALIEN HOLDERS
In general, payments of principal, premium or interest made by us and other
payors to you will not be subject to backup withholding and information
reporting, provided that the certification requirements described above under
"--United States Alien Holders" are satisfied or you otherwise establish an
exemption.
We and other payors are required to report payments of interest on your
bonds on Internal Revenue Service Form 1042-S even if the payments are not
otherwise subject to information reporting requirements.
In general, proceeds of your sale of a bond will not be subject to backup
withholding or information reporting if:
o you furnish your broker an Internal Revenue Service Form W-8BEN
certifying under penalties of perjury that you are not a United States
person, or
o your broker possesses other documentation concerning your account on
which the broker is permitted to rely under Treasury regulations to
establish that you are a non-United States person, or
o you otherwise establish an exemption.
If you are not exempted from backup withholding and information reporting
under the preceding paragraph:
o Backup withholding and information reporting will apply to the
proceeds of any sale that you make through the United States office of
any broker, foreign or domestic.
o Information reporting will also apply to the proceeds of sales that
are made through a foreign office of a broker if the proceeds are paid
into a United States account, or such proceeds or the confirmation of
the sale are mailed to you at a United States address, or if you have
opened an account with a United States office of your broker, or
regularly communicated with the broker from the United States
concerning the sale in question and other sales, or negotiated the
sale in question through the broker's United States office. Backup
withholding will also apply unless the proceeds of such a sale are
paid to an account maintained at a bank or other financial institution
located outside the United States.
o Information reporting, but not backup withholding, will apply to sales
made through a foreign office of a broker that is (1) a United States
person as defined in the Internal Revenue Code, (2) a foreign person
that derived 50% or more of its gross income for certain periods from
the conduct of a trade or business in the United States, (3) a
controlled foreign corporation as defined in the Internal Revenue
Code, or (4) a foreign partnership with certain U.S. connections.
Notwithstanding any withholding certificate or documentary evidence in a
broker's possession, a broker who has actual knowledge or reason to know that
you are a United States person will be required to make backup withholdings and
file information reports with the Internal Revenue Service if the broker is a
U.S. person or is a foreign person that has a U.S. connection of the type
discussed in the last bullet point of the preceding paragraph.
PLAN OF DISTRIBUTION
As discussed under THE EXCHANGE OFFER, based on an interpretation of the
staff of the SEC, New Bonds issued pursuant to the Exchange Offer may be offered
for resale and resold or otherwise transferred by any Holder of such New Bonds
(other than any such Holder which is an "affiliate" of Avista Corp. within the
meaning of Rule 405 under the Securities Act and except as otherwise discussed
below with respect to Holders which are broker-dealers) without compliance with
the registration and prospectus delivery requirements of the Securities Act so
long as such New Bonds are acquired in the ordinary course of such Holder's
business and such Holder has no arrangement or understanding with any person to
42
participate in the distribution (within the meaning of the Securities Act) of
such New Bonds.
Each broker-dealer that receives New Bonds for its own account in exchange
for Old Bonds which were acquired by such broker-dealer as a result of
market-making activities or other trading activities must, and must agree to,
deliver a prospectus in connection with any resale of such New Bonds. This
prospectus, as it may be amended or supplemented from time to time, may be used
by a broker-dealer in connection with resales of New Bonds received in exchange
for Old Bonds where such Old Bonds were acquired as a result of market-making
activities or other trading activities. Avista Corp. will for a period of 180
days after the Expiration Date make this prospectus, as amended or supplemented,
available to any broker-dealer for use in connection with any such resale.
New Bonds received by broker-dealers for their own account in the Exchange
Offer as described above may be sold from time to time in one or more
transactions in the over-the-counter market, in negotiated transactions, through
the writing of options on the New Bonds or a combination of such methods of
resale, at market prices prevailing at the time of resale, at prices related to
such prevailing market prices or at negotiated prices. Any such resale may be
made directly to purchasers or to or through brokers or dealers who may receive
compensation in the form of commissions or concessions from any such
broker-dealer and/or the purchasers of any such New Bonds. Any broker-dealer
that resells New Bonds that were received by it for its own account pursuant to
the Exchange Offer and any broker or dealer that participates in a distribution
of such New Bonds may be deemed to be an "underwriter" within the meaning of the
Securities Act and any profit on any such resale of New Bonds and any
commissions or concessions received by any such persons may be deemed to be
underwriting compensation under the Securities Act. The letter of transmittal
states that by acknowledging that it will deliver and by delivering a
prospectus, a broker-dealer will not be deemed to admit that it is an
"underwriter" within the meaning of the Securities Act.
The interpretation of the staff of the SEC referred to in the first
paragraph of this section does not apply to, and this prospectus may not be used
in connection with, the resale by any broker-dealer of any New Bonds received in
exchange for an unsold allotment of Old Bonds purchased directly from Avista
Corp.
Avista Corp. will not receive any proceeds from the issuance of the New
Bonds pursuant to the Exchange Offer or from any subsequent sale of the New
Bonds. Avista Corp. has agreed to pay all expenses incident to the Exchange
Offer other than commissions or concessions of any brokers or dealers and
expenses of counsel for the holders of the New Bonds and will indemnify the
holders of the New Bonds (including any broker-dealers) against certain
liabilities, including liabilities under the Securities Act.
WHERE YOU CAN FIND MORE INFORMATION
Avista Corp. files annual, quarterly and special reports, proxy statements
and other information with the SEC. You may read and copy any document Avista
Corp. files at the SEC's public reference room at 450 Fifth Street, N.W.,
Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for further
information on the public reference room. Avista Corp. SEC filings are also
available to the public from the SEC's website at http://www.sec.gov. However,
information on this website does not constitute a part of this prospectus.
During 2002, Avista Corp. has filed the following documents with the SEC
pursuant to the Exchange Act:
o Annual Report on Form 10-K for the year ended December 31, 2001 (the
"Form 10-K").
o Current Report on Form 8-K filed February 22, 2002.
These documents, as well as any other documents subsequently filed with the
SEC before the termination of the offering of the New Bonds, are incorporated
herein by reference and are considered to be part of this prospectus. Later
information contained in this prospectus updates and supersedes the information
set forth in the Form 10-K and any other incorporated documents.
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SAFE HARBOR FOR FORWARD-LOOKING STATEMENTS
We are including the following cautionary statements in this prospectus 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, Avista Corp. Forward-looking statements
include statements concerning plans, objectives, goals, strategies, projections
of future events or performance, and underlying assumptions (many of which are
based, in turn, upon further assumptions) and are all statements which are not
statements of historical fact. Forward-looking statements include statements
that are identified by the use of the words such as, but not limited to, "will,"
"anticipates," "seeks to," "estimates," "expects," "intends," "plans,"
"predicts," and similar expressions. From time to time, we 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 Avista Corp., are also expressly qualified by these
cautionary statements.
Forward-looking statements involve risks and uncertainties which could
cause actual results or outcomes to differ materially from those expressed. Our
expectations, beliefs and projections are expressed in good faith and are
believed by us to have a reasonable basis, including without limitation
management's examination of historical operating trends, data contained in our
records and other data available from third parties, but there can be no
assurance that our expectations, beliefs or projections will be achieved or
accomplished. Furthermore, any forward-looking statement speaks only as of the
date on which such statement is made, and we undertake no obligation to update
or revise any forward-looking statement or statements to reflect any change in
our expectations or any change in events, conditions or circumstances on which
any such statement is based 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 Avista Corp.'s business or the extent to which any such factor,
or combination of factors, may cause actual results to differ materially from
those contained in any forward-looking statement. In addition to other factors
and matters discussed elsewhere in this offering circular, the following are
some important factors that could cause actual results or outcomes from our
operations to differ materially from the forward-looking statements.
AVISTA UTILITIES' OPERATIONS
Important factors relating to Avista Utilities' operations include
continuing legislative developments, governmental policies and regulatory
actions with respect to allowed rates of return, financings, or industry and
rate structures; weather conditions and future streamflow conditions and their
impact on the availability of hydroelectric resources; outages of any generating
facilities; changes in demand for energy due to weather conditions, customer
growth and other factors; wholesale and retail competition (including but not
limited to electric retail wheeling and transmission cost); availability of
economic supplies of purchased power and natural gas; competition in present or
future natural gas distribution or transmission (including but not limited to
prices of alternative fuels and system deliverability costs); the availability
and costs of electric capacity and energy and natural gas in wholesale markets
as well as volatility and illiquidity in these markets; recovery of purchased
power and purchased gas costs; the ability to make profitable sales of any
surplus electric capacity or energy in wholesale markets; present or prospective
generation, operations and construction of plant facilities; and acquisition and
disposal of assets or facilities.
ENERGY TRADING AND MARKETING OPERATIONS
Energy Trading and Marketing includes the operations of Avista Energy and
Avista Power. Important factors relating to our Energy Trading and Marketing
operations include further industry restructuring evolving from federal and/or
state legislation; federal and state regulatory and legislative actions;
governmental controls on market operations and prices (including FERC price
controls and possible retroactive price caps and resulting refunds); demand for
and availability of energy throughout the country; wholesale competition;
availability of economic supplies of natural gas; margins on purchased power;
changes in market factors; the formation of additional alliances or entities;
the availability of economically feasible generating projects; and the
availability of funding for new generating assets.
44
INFORMATION AND TECHNOLOGY, AND OTHER OPERATIONS
Important factors relating to the remaining Avista Corp. subsidiaries'
operations include competition from other companies and other technologies;
obsolescence of technologies; the inability to reduce costs of the technologies
down to economic levels; the inability to obtain new customers and loss of
significant customers or suppliers; reliability of customer orders; business
acquisitions; disposal of assets; the availability of funding from other
sources; research and development findings; and the availability of economic
expansion or development opportunities.
FACTORS COMMON TO ALL OPERATIONS
The business and profitability of Avista Corp. are also influenced by,
among other things, economic risks; changes in and compliance with environmental
and safety laws and policies; weather conditions; population growth rates and
demographic patterns; market demand for energy from plants or facilities;
changes in tax rates or policies; unanticipated project delays or changes in
project costs; unanticipated changes in operating expenses or capital
expenditures; labor negotiations or disputes; changes in credit ratings or
capital market conditions; inflation rates; inability of the various
counterparties to meet their obligations with respect to financial instruments;
failure to deliver on the part of any parties from which Avista Corp. purchases
capacity or energy; Avista Corp.'s ability to obtain debt or equity financing;
changes in accounting principles and/or the application of such principles to
Avista Corp.; changes in technology; changes in economic, business or political
conditions, including the continuing impact on the economy of the September 11,
2001 terrorist attacks; and outcomes of legal proceedings.
LEGAL MATTERS
The validity of the New Bonds will be passed upon for Avista Corp. by
Thelen Reid & Priest LLP and Heller Ehrman White & McAuliffe LLP. In addition,
matters of federal income tax law and federal securities law will be passed upon
by Thelen Reid & Priest LLP. In giving their opinion, Thelen Reid & Priest LLP
may rely as to matters of Washington, California, Idaho, Montana and Oregon law
upon the opinion of Heller Ehrman White & McAuliffe LLP.
EXPERTS
The financial statements incorporated in this prospectus by reference from
Avista Corp.'s Annual Report on Form 10-K for the year ended December 31, 2001
have been audited by Deloitte & Touche LLP, independent auditors, as stated in
their report, which is incorporated herein by reference, and have been so
incorporated in reliance upon the report of such firm given upon their authority
as experts in accounting and auditing.
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