Avista Corp. Chairman Tom Matthews said Wednesday the company will break even in the second quarter and earnings for the year are projected to be flat, resulting from unexpectedly high power prices and unauthorized trading at its regulated utility.
First Call had been expecting the Spokane, Wash.-based company to earn 19�/share in the second quarter and $1.01/share for the year.
Avista Utilities is expecting to spend about 25% more for purchased power this year because of poor forecasting and price spikes that will result in a $90 million loss in the second quarter, Matthews said during a conference call. If prices remain at current high levels for the remainder of the year, additional potential losses of at least $50 million in gross margin could occur.
He blamed the problems on higher power prices "the likes of which we have never seen" and "mistakes and miscalculations" at the utility. Matthews said purchased electricity during May and June usually averages about $20/Mw, and the company routinely goes uncovered in the second and third quarters of the year, relying on outside generation. In recent weeks, Avista's on-peak power costs averaged $60/Mw in May and over $100/Mw in June, with spikes as high as $750/Mw.
Avista Utilities President Edward Turner said, "We believe the electric energy markets in the Northwest are fundamentally changing."
The utility's short position was compounded by the sale of the Centralia plant, Matthews said, which reduced its system capacity by 175 Mw, he said. In addition, an Avista Utilities energy trader entered into excessive levels of short-term, fixed-price contracts for wholesale sales for delivery of power through October 2000, without making matching purchases at the time, the company said.
As a result, Avista Utilities was forced to buy additional power at prices significantly higher than the selling prices to cover those contracts. The price spike caused what would have been a "$10-$15 million problem" to escalate to $100 million problem," Matthews said. The utility's short-term wholesale trading unit has been eliminated, he said.
When senior management became aware of the short positions, the company said in a statement, it determined the most prudent course was to avoid the high costs of immediate action to offset the effect of these positions. Instead, the utility began to gradually diminish its exposure. This process has been impeded by the continuing high levels of market prices and lack of liquidity in the power markets, it said.
Cost recovery
Moreover, Matthews said, the company has been "buying high and selling low" to meet its retail obligations. However, he said, the company plans to file a request with regulators to recover the utility's power costs in Washington. Avista's general rate case, which is pending before the Washington Utilities and Transportation Commission (WUTC), includes a request to allow Avista Utilities to implement an energy cost adjustment mechanism. This mechanism would allow increases and decreases in energy costs to be passed through to customers as incurred, without a general rate case, similar to Avista's power cost adjustment mechanism in Idaho.
During the balance of the year, the demands on Avista Corp. cash resources are expected to increase significantly, company officials said. Additional cash needs include increased purchased power expense, as well as calls for cash collateral by Avista Energy's counterparties, Matthews said, but the company expects it will be able to satisfy all cash requirements.
He said the company's unregulated Avista Energy unit is expected to earn an estimated $70 million or more in gross margin in the second quarter, reflecting current results as well as the mark-to-market value of its contracts. As part of the Centralia sale, Avista Utilities entered into a favorably priced contract to purchase 175 Mw from the Centralia plant beginning in July 2000.
Taking into consideration the Centralia contract and power available from other sources, Matthews said the company will still need to buy forward 100-150 Mw to meet its needs during the second and third quarter of 2001 and eliminate its exposure to short-term price spikes. Among the options are purchasing power back from industrial customers and going into the open market.
In recognition of the need for additional generation in the Pacific Northwest, Matthews noted, Avista Power recently broke ground on a 250-Mw plant in Idaho. Avista Power is in the final stages of closing on a second 250-Mw plant to be constructed next year in Oregon. Both projects will be powered by combined-cycle natural gas turbines.
Matthews said growth projections are still on track at Avista Advantage, Avista Labs, and the telecommunications unit.
