AVISTA’S TURNAROUND

Six years ago Gary Ely did something that made him ashamed.

The boss at Avista Corp. took the company’s stack of invoices … and sat on them. No dollars would flow from the blue headquarters building on East Mission Avenue until, Ely remembered, he could ensure the company had enough cash to first make payroll.

“My dad taught me a long time ago that your handshake was your bond. And you needed to keep your word. If it’s paying bills or whatever, you did that before you ate,” Ely said.

Now removed from those days of financial tumult, Avista is profitable and its stock price is steady.

The company has returned to its roots as the large utility serving Eastern Washington and North Idaho. Any lingering questions about the company’s direction should have been answered by the $175 million July sale of its energy-trading subsidiary.

With the turnaround task assigned him in 2000 nearly complete, Ely is handing leadership of the company to Scott Morris, part of a succession plan drawn up to ensure Avista continues doing much more than paying employees and vendors.

Employees hold Ely, a grandfather 21 times over, in high regard as he prepares to leave the company after a 40-year career. Ely’s own grandfather dug holes in South Hill basalt for Avista power poles.

“Gary saved this company. That’s right,” said two Avista employees who were hanging around outside their truck. They said the company will be in good hands. It’s a sentiment held by the rank and file, from work crews to engineers.

Morris, the incoming chief executive and president of the firm’s utility arm, has the business smarts and local pedigree to keep Avista on track. He is the son of a secretary and a Kaiser steelworker. As a 6-year-old, he roamed left field for the Power City Electric Cardinals. He later graduated from Shadle High School, collected college degrees from Gonzaga University, and coached his four children through multiple sports and public schools.

He has climbed his way up the company’s depth chart and worked closely with Ely, sharing a strategic vision for bringing Avista from back near financial collapse.

In interviews, each gives credit to employees and emphasizes customer service.

“You can make all the brilliant decisions you want to in this office,” Ely says about his executive suite overlooking fountains in front of the building, “but when it comes right down to it, it’s the people in the field that make the rubber meet the road.”

The company also owes much of its regained strength to customers, who have shouldered years of higher electric and natural gas bills – including a 9.4 percent increase scheduled for January.

Morris said Avista will continue upgrading dams, power plants, and transmission lines for years. It all adds up to a strong company, he said, that gives Spokane and North Idaho the safe and reliable system it needs for the future.

Fixing the company

Ely and Morris avoid talking about former company CEO Tom Matthews, who brought his Houston-fashioned energy show to a staid Washington Water Power Co. in the late 1990s. Speaking ill of former executives would be considered poor form.

Nonetheless, Avista’s engagement with Matthews unraveled.

“I have nothing to say about my predecessor other than the fact our values didn’t match and I was uncomfortable working here,” Ely said.

When the board talked Ely out of retiring, it made him a generous five-year contract offer. He declined it, thinking it unnecessary. Ely, now 60, first estimated in 2000 that he needed “three years to get the company fixed.”

He was wrong.

“When I stepped into it, I had no idea the company was in such serious difficulty,” Ely said.

Avista had not increased rates for 16 years; had not built new electricity generation; and had opted to buy 10 percent of the megawatts on the open market. When the market exploded in 2000 in the wake of California’s deregulation experiment, prices soared at a time when drought gripped the West. Avista’s hydropower generation slowed, and suddenly the company was buying more and more power at horrific highs.

In the aftermath, things were worse than ever imagined. The company was out of cash, and the numbers people warned that there wasn’t enough coming in to meet a $40 million payroll.

So Ely began traveling the investment bank circuit, finally settling on what are now called the “infamous Goldman notes.”

Avista established a $400 million line of credit with Goldman Sachs at an interest rate of 9.75 percent. By the end of 2001, all but $60 million had been tapped.

“Best thing we ever did,” Ely said, acknowledging that he has a plaque in his office commemorating the day he put his signature on such a debt. “Whether it’s $400 million or $40 or $40,000, a commitment is something you have to keep.

“I certainly didn’t want to leave my legacy as filing for bankruptcy.”

Financial analyst Paul Latta said Ely and Morris’ focus on the Avista’s core mission can be credited with bringing the company back.

“He’s a no-nonsense leader and was the right person,” Latta said of Ely.

The two executives worked many angles to keep the company upright.

Company officers took 15 percent pay cuts. Managers accepted a 5 percent trim. Work crews didn’t drive new trucks, instead fixing vehicles to squeeze every mile.

The efforts didn’t amount to many dollars, but the gesture sent the right message to regulators, Wall Street and customers: “This was serious and we were doing everything we could,” Ely said.

Ely argued Avista’s case personally to the Washington Utilities and Transportation Commission, asking the regulators to “clear the room” for the frank discussion.

“The commissioners, banks, any one of them could have caused this place to come crumbling down,” Ely said. “But they stuck with us, and today the company is in as good a shape as it ever has been.”

Rather than trying to scrimp and save for prosperity, Morris and Ely began adding new power plants and performing overdue maintenance, in part to reduce the company’s reliance on the volatile power trading market. As a result, Avista has ample power supplies to meet a decade of growth.

It hasn’t come easy, and Avista isn’t fixed – yet. That’s where Morris comes in.

He keeps a watchful eye on Avista’s big four constituencies: customers, employees, communities and shareholders.

“We’re at our best when focused on these things and they’re in balance,” Morris said.

Moving forward

Under Morris the executive team will keep working toward better marks from Wall Street’s three major ratings agencies. It’s an important detail, Morris said, because upgrades to investment-grade status help the company tap new lines of credit at better interest rates.

By June, the company intends to pay off the Goldman notes and free itself from a set of restrictions that didn’t allow higher dividends to shareholders of common stock.

These restrictions, Morris said, have suppressed interest from smaller investors. Lifting them could broaden interest in Avista stock.

D.A. Davidson financial analyst James Bellessa said Avista seems to have weathered the worst of its problems and has again become a predictable, well-run company.

But more challenges remain.

The leadership of the company is scheduled for an overhaul. About half of the company’s 132 leaders are retiring or will be eligible to retire within five years. Many have 30-plus years of experience.

“Change is inevitable, and we’ve been preparing for it,” Morris said.