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
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.