20060328AVU response 1st staff request.pdf

Avista Corp.
1411EastMission POBox3727
Spokane, Washington 99220,3727
Telephone [phone]
Toll Free 800-727-9170
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Corp.
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March 27 2006
Cecelia A. Gassner
Deputy Attorney General
Idaho Public Utilities Commission
472 W. Washington
Boise, Idaho 83702-5983
RE:Case No. A VU-06-1 / A VU-06-
A vista Corporation hereby submits an original and 2 copies of its response to Staff Data Request
number 1.
Questions regarding this response should be directed to me at [phone].
Sincerely,
Liz M. Andrews
Senior Regulatory Analyst
Avista Utilities
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Enclosures
AVISTACORPORATION
RESPONSE TO REQUEST FOR INFORMATION , U
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JURISDICTION: Idaho
CASE NO: A VU-06-1/A VU-06-
REQUESTER: IPUCTYPE: Data Request
REQUEST NO.
DATE PREPARED: q~/,27/4Q96 CC; : :
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WITNESS:
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RESPONDER: Liz Andrews
DEPARTMENT: State and Federal Regulation
TELEPHONE: [phone]
REQUEST:
Please provide any and all documentation, policies and procedures that explain the mechanisms
utilized to adequately ring-fence Avista Utilities from AVA Formation Corporation.
RESPONSE:
Legal Separation
Conversion to a holding company structure would allow Avista (as Avista Utilities) to continue
to operate its regulated utility business efficiently while effecting the structural separation of
certain non-regulated businesses of A vista from regulated utility businesses.! A vista s traditional
utility operations would be more separated from the non-utility businesses, thereby further
ensuring that cross subsidization is avoided and that business risk of other segments of the
business is not reflected in the traditional utility operations. Avista, as Avista Utilities, no
longer would ultimately control ownership of the other companies such as Avista Energy and
A vista Advantage. The new structure thus would better shield A vista Utilities from the
consequences of liabilities incurred by other segments of the business.
Avista s current corporate structure cannot accommodate the same degree of financial and legal
separation as can a holding company structure. All business activities now must be either part of
A vista itself or conducted in entities owned by A vista. As a result, any volatility in earnings
associated with these other businesses will continue to be reflected in Avista s financial results.
In a holding company structure, these other businesses are expected to be conducted as holding
company subsidiaries separate from Avista. Avista Utilities ' earnings would be insulated from
the potential volatility ofthese businesses because their activities would not be reflected in the
utility s financial statements.
A vista, as A vista Utilities, would continue to be a separate legal entity and would be managed as
such, separate and distinct from AVA and other A V A subsidiaries (attached are illustrations
A vista s organization before and after the formation of a holding company). The A vista
Utilities board of directors would continue to be an active board that will act in good faith with
the care and loyalty expected of a board. Even though the members of the A vista Utilities board
I Following completion of the Plan of Exchange, by which A vista Corporation will become a subsidiary of the new
holding company (A V A), the shares of stock of A vista Capital held currently by A vista Corporation will be
distributed to A V A, and Avista Corporation s name will be changed to Avista Utilities.
Response to IPUC Staff Data Request No.Page 2 of 4
of directors may also be members of A V A's board, the two boards will exercise separate and
independent functions and duties.
As discussed below, Avista Utilities will continue to have a financial and capital structure of its
own. A vista Utilities would continue to issue its own debt securities and preferred stock. It will
continue to have its own lines of credit, its own sources of revenue, its own operations, and its
own employees.
In its application, A vista Utilities has listed the commitments it will make to assure the necessary
separation of A vista Utilities from the other affiliates:
. The cost of the formation of the holding company structure would not be included in
future A vista Utilities ratemaking proposals;
. A vista would continue to provide access to information for A V A and all subsidiaries for
audit purposes;
. A vista would continue to maintain prudent utility operating standards;
. A vista would continue to maintain internal controls that preclude "cross-subsidization
between the utility and other subsidiaries;
. A vista would continue to assure segregation of operations among the utility and other
affiliated entities, and prevent co-mingling of assets, and would continue to comply with
all applicable statutes, rules and commission practices regarding property transfers
affiliated or subsidiary transactions and securities transactions; and
. A V A costs (or corporate support costs) will be fairly allocated among the utility and
other subsidiaries.
Moreover, A V A would be a "holding company" under the Public Utility Holding Company Act
of 2005 ("PUHCA 2005"). As a result, AVA and all of its subsidiaries (whether or not engaged
in any energy-related business) would be required to maintain books, accounts and other records
in accordance with the FERC regulations and to make them available to the FERC and the State
Commissions. In addition, upon the request of any State Commission, the FERC would have the
authority to review allocations of costs of non-power goods and administrative services among
A V A and its subsidiaries. The FERC has the authority generally to require that rates subject to
its jurisdiction be just and reasonable and in this context would continue to be able to, among
other things, review transactions between AVA and any affiliated or subsidiary company.
Avista will provide the amendments to its Registration Statement (S-4), Proxy Statement, and
Plan of Share Exchange, within the next few weeks, once finalized. These documents further
explain the process surrounding the formation of the holding company and its ring-fencing
attributes.
Cash Management Procedures
Avista s cash management procedures are designed to maintain segregation between the utility
cash flows and the cash flows of subsidiaries. These cash management guidelines have been
filed with FERC pursuant to Docket No. RM02-14 and are in compliance with FERC
requirements. Each company maintains separate bank accounts and our cash management
guidelines are designed to prevent the commingling of funds. It is A vista s intention that when
the holding company structure becomes effective, A V A will continue to maintain such
Response to IPUC Staff Data Request No.Page 3 of 4
separation, after reflecting the impact of the Reorganization.
Financings
From a financing perspective, A vista Utilities would issue its own debt and preferred stock, and
would maintain its own credit facility for short-term funding needs. A vista Utilities common
stock will be solely owned by A V A. When AVA issues stock or debt securities, it would use the
proceeds to fund, as necessary, the common equity requirements of all of its subsidiaries
including Avista Utilities. The other funding requirements of the non-regulated subsidiaries
would be provided by their own cash flows or separate financing raised at the subsidiary level.
Avista Utilities does not intend to guarantee any debt obligations of A V A or any of the other
affiliates or subsidiaries. Avista s current capitalization is shown in the following illustration as
it is expected to be allocated, which indicates the portions of Avista s capitalization that will stay
with it as A vista Utilities, and which will move to A V A and its other subsidiaries:
AVA Formation Corp.
LT Debt: $O.Om Equity: $771.1m
Avista Utilities, Inc.
L T Debt: $981m(3) Equity: $533.4m
Pref Trust: $113.4m Pref Stock: $28m
Avista Capital
LT Debt: $9m Equity: $237.
Avista
Advantage
Avista Energy
A vista Power
For illustrative purposes only, the table above shows a level of capitalization for the holding
company structure, as of the date of its implementation, based on December 31 , 2005 levels.
(a) Excludes short-teJ1Tl debt.
Cost Allocation Procedures
Avista s current cost allocation procedures between its regulated and non-regulated businesses
would not change after the Reorganization. Currently, there are transactions or costs for services
between the utility and its subsidiaries that are accounted for appropriately under applicable
statutes and rules established by each Commission. For example, charges that relate to
corporate services provided to subsidiaries are directly billed to subsidiaries at cost. Examples
of these charges are salaries of general office employees who spend time on corporate support
such as managerial functions , accounting, federal income tax filing, payroll, graphic services
etc. The revenues and expenses associated with these types of transactions are reviewed by
Commission staff and other interested parties during rate cases and through existing Commission
reporting requirements.
Response to IPUC Staff Data Request No.Page 4 of 4
Current employees of A vista in its utilities business would not change their employment
relationship after the Reorganization with the exception that the five senior Officers of A vista
would also report to A V A. The allocation ofthese Officers' salaries and expenses as appropriate
between A vista Utilities and the other subsidiaries of A V A would follow the same procedures as
under A vista s current structure.
Continuation of Prudent Business Practices
In addition to the structural separations discussed above, both A V A and A vista Utilities would
continue to operate in such a way as to protect utility customers from the risks associated with
A V A's other subsidiaries or affiliates. Avista has exited those businesses that did not fit within
Avista s strategy to focus on our energy and utility-related businesses. Avista s remaining
subsidiaries are adequately funded. A vista has downsized its Energy Marketing and Resource
Management business conducted at Avista Energy, as compared to prior years, and is increasing
its focus on the generally lower risk activities related to resource management and energy
services to industrial and large end use customers. There are no parental guarantees of any debt
obligations from the utility to any of its other affiliates or subsidiaries. And importantly, A vista
has separate, very disciplined, risk management programs in place at both A vista Utilities and
A vista Energy.
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