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Class Action Suits Filed Against Avista

Class Action Suits Filed Against Avista

A handful of law firms have filed class action lawsuits on behalf of Avista Corp.'s stockholders after the company reported a loss of $22.1 million or $0.47 per share in the second quarter, stemming from unhedged power trades in the forward market. The loss compared to a gain of $3.1 million or $0.08 per share in 2Q99.

In late June, Avista executives revealed that one of their energy traders entered into excessive levels of short-term, fixed-price power contracts. The trader allegedly committed suicide after the transactions were discovered, (see NGI, June 26).

Cauley & Geller, LLP became the latest law firm to join the rush to represent stockholders who purchased Avista stock between April 7 and June 21. The firms charge that during the class period despite assurances by Avista that it would only enter into derivative contracts as a means to "limit the exposure to market risk," the company entered into massive amounts of forward contracts in a gamble that electricity prices would decrease in the future. Prices did not drop, and shareholders suffered large losses. The day before the class period, Avista's shares were trading at $37.69 per share. After the trading revelations came to light on June 21, they closed at $19 per share.

The class action complaints were filed after Avista posted its second quarter results last week. Of the company's divisions, Avista Utilities posted the largest loss per share at $1.33, followed by the Information Technology segment with a loss of 13 cents, and Avista Ventures posting a one cent decrease. On the positive side, Avista Energy, the trading and marketing arm, reported a dollar gain per share on the quarter.

"Despite the utility financial results of the second quarter, Avista Energy is performing well in their market and our growth businesses in telecom, Internet and technology continue to meet significant milestones. We remain committed to our overall strategy for growth in these dynamic growth sectors," said Tom Matthews, Avista Corp.'s chairman.

The loss was worse than expected due to the late June power price spikes, which drove average monthly prices up to $182 per MWh from the $120 per MWh that was expected. The utilities division was struck hardest by higher purchased power costs, which forced the gross margin $126 million lower than the company previously estimated. The company attributed the other costs to a string of factors, including extraordinary hot weather, plant outages during the last week of June, exposure to index prices and index prices being higher than preliminary estimates.

Avista Energy business in California offset some of the losses of the utility segment in the Pacific Northwest by earning $47.8 million after taxes during the second quarter, but price spikes were not the only problem.

Avista executives disclosed in June that Senior Energy Trader Roger W. Scholten exceeded company guidelines by entering 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 same time. Matthews said that he did not find out about the problems until mid-May. He also said that the trader's manager told Scholten to stop. Instead of ceasing, Scholten continued selling more of the contracts on April 14. The following day Scholten killed himself at his home in Post Falls, WA, according to the Coeur d' Alene Memorial Funeral Home.

Matthews said an audit done the following week revealed that Scholten's initial damage was a little less than $15 million, but the damage quickly grew when the company attempted to reduce its exposure to the poor trades gradually.

Realizing the main problem lies within its utility segment, Avista has recently acquired the services of Williams Energy Marketing & Trading to consult on risk management, risk analysis and resource optimization for Avista Utilities. The contract will commence on Aug. 1, and run through June 30, 2002.

Avista Utilities now expects a total of $160 million in excess purchased power costs for the full year of 2000. It is a $20 million increase from previous estimates. "We have taken the necessary steps to address the issues that led to this situation and with favorable rate relief we believe this problem will be limited to the year 2000," said Matthews. "The fundamentals of power pricing in this region of the country have changed as a result of various factors including the restructuring of the electric utility business in California, shortage of generating capacity in the Northwest, and reductions in hydro generation. Therefore, we've changed our approach to the utility business," he explained.

Alex Steis

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