1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission file number 1-3701
THE WASHINGTON WATER POWER COMPANY
(Exact name of registrant as specified in its charter)
Washington 91-0462470
------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1411 East Mission Avenue, Spokane, Washington 99202-2600
- --------------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 509-489-0500
Web site: http://www.wwpco.com
None
----------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
At October 31, 1997, 55,960,360 shares of Registrant's Common Stock, no par
value (the only class of common stock), were outstanding.
2
THE WASHINGTON WATER POWER COMPANY
Index
Page No.
--------
Part I. Financial Information:
Item 1.Financial Statements
Consolidated Statements of Income - Three Months Ended
September 30, 1997 and 1996 .................................. 3
Consolidated Statements of Income - Nine Months Ended
September 30, 1997 and 1996 .................................. 4
Consolidated Balance Sheets - September 30, 1997
and December 31, 1996 ........................................ 5
Consolidated Statements of Capitalization - September 30, 1997
and December 31, 1996 ........................................ 6
Consolidated Statements of Cash Flows - Nine Months Ended
September 30, 1997 and 1996 .................................. 7
Schedule of Information by Business Segments - Three Months Ended
September 30, 1997 and 1996 .................................. 8
Schedule of Information by Business Segments - Nine Months Ended
September 30, 1997 and 1996 .................................. 9
Notes to Consolidated Financial Statements ...................... 10
Item 2.Management's Discussion and Analysis of
Financial Condition and Results of Operations ................... 14
Part II. Other Information:
Item 5.Other Information ............................................ 19
Item 6.Exhibits and Reports on Form 8-K ............................. 20
Signature ...................................................................... 21
3
CONSOLIDATED STATEMENTS OF INCOME
The Washington Water Power Company
- --------------------------------------------------------------------------------
For the Three Months Ended September 30
Thousands of Dollars
1997 1996
---- ----
OPERATING REVENUES ............................... $ 295,076 $ 219,751
--------- ---------
OPERATING EXPENSES:
Operations and maintenance ..................... 211,947 135,804
Administrative and general ..................... 24,606 19,322
Depreciation and amortization .................. 16,764 18,070
Taxes other than income taxes .................. 12,052 10,928
--------- ---------
Total operating expenses ..................... 265,369 184,124
--------- ---------
INCOME FROM OPERATIONS ........................... 29,707 35,627
--------- ---------
OTHER INCOME (EXPENSE):
Interest expense ............................... (16,545) (16,895)
Net gain on subsidiary transactions ............ 7,756 6,850
Merger-related expenses ........................ -- (303)
Other income (deductions)-net .................. 572 57
--------- ---------
Total other income (expense)-net ............. (8,217) (10,291)
--------- ---------
INCOME BEFORE INCOME TAXES ....................... 21,490 25,336
INCOME TAXES ..................................... 8,253 6,972
--------- ---------
NET INCOME ....................................... 13,237 18,364
DEDUCT-Preferred stock dividend requirements ..... 979 1,792
--------- ---------
INCOME AVAILABLE FOR COMMON STOCK ................ $ 12,258 $ 16,572
========= =========
Average common shares outstanding (thousands) .... 55,960 55,960
EARNINGS PER SHARE OF COMMON STOCK ............... $ 0.22 $ 0.30
Dividends paid per common share .................. $ 0.31 $ 0.31
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
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4
CONSOLIDATED STATEMENTS OF INCOME
The Washington Water Power Company
- --------------------------------------------------------------------------------
For the Nine Months Ended September 30
Thousands of Dollars
1997 1996
------ ------
OPERATING REVENUES ............................... $ 815,361 $ 663,655
--------- ---------
OPERATING EXPENSES:
Operations and maintenance ..................... 526,589 367,438
Administrative and general ..................... 70,673 57,268
Depreciation and amortization .................. 51,684 53,345
Taxes other than income taxes .................. 38,049 37,643
--------- ---------
Total operating expenses ..................... 686,995 515,694
--------- ---------
INCOME FROM OPERATIONS ........................... 128,366 147,961
--------- ---------
OTHER INCOME (EXPENSE):
Interest expense ............................... (49,061) (47,461)
Interest on income tax recovery ................ 47,338 --
Net gain on subsidiary transactions ............ 11,152 23,914
Merger-related expenses ........................ -- (15,848)
Other income (deductions)-net .................. 1,056 179
--------- ---------
Total other income (expense)-net ............. 10,485 (39,216)
--------- ---------
INCOME BEFORE INCOME TAXES ....................... 138,851 108,745
INCOME TAXES ..................................... 47,292 39,503
--------- ---------
NET INCOME ....................................... 91,559 69,242
DEDUCT-Preferred stock dividend requirements ..... 4,568 6,199
--------- ---------
INCOME AVAILABLE FOR COMMON STOCK ................ $ 86,991 $ 63,043
========= =========
Average common shares outstanding (thousands) .... 55,960 55,960
EARNINGS PER SHARE OF COMMON STOCK ............... $ 1.55 $ 1.13
Dividends paid per common share .................. $ 0.93 $ 0.93
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
4
5
CONSOLIDATED BALANCE SHEETS
The Washington Water Power Company
- --------------------------------------------------------------------------------
Thousands of Dollars
September 30, December 31,
1997 1996
------------- ------------
ASSETS:
PROPERTY:
Utility plant in service-net ............................... $2,008,844 $1,951,604
Construction work in progress .............................. 42,466 38,696
---------- ----------
Total .................................................... 2,051,310 1,990,300
Less: Accumulated depreciation and amortization ........... 630,455 592,424
---------- ----------
Net utility plant ........................................ 1,420,855 1,397,876
---------- ----------
OTHER PROPERTY AND INVESTMENTS:
Investment in exchange power-net ........................... 70,577 75,312
Non-utility properties and investments-net ................. 191,898 149,747
Other-net .................................................. 24,709 22,670
---------- ----------
Total other property and investments ..................... 287,184 247,729
---------- ----------
CURRENT ASSETS:
Cash and cash equivalents .................................. 23,019 8,211
Temporary cash investments ................................. 21,039 19,709
Accounts and notes receivable-net .......................... 80,177 148,742
Materials and supplies, fuel stock and natural gas stored .. 43,408 31,729
Prepayments and other ...................................... 26,712 19,998
---------- ----------
Total current assets...................................... 194,355 228,389
---------- ----------
DEFERRED CHARGES:
Regulatory assets for deferred income tax .................. 170,954 164,753
Conservation programs ...................................... 54,419 57,703
Prepaid power purchases .................................... 21,836 30,935
Unamortized debt expense ................................... 24,309 23,148
Other-net .................................................. 32,238 26,765
---------- ----------
Total deferred charges ................................... 303,756 303,304
---------- ----------
TOTAL .................................................... $2,206,150 $2,177,298
========== ==========
CAPITALIZATION AND LIABILITIES:
CAPITALIZATION (See Consolidated Statements of Capitalization) $1,630,019 $1,590,262
---------- ----------
CURRENT LIABILITIES:
Accounts payable ........................................... 85,024 95,268
Taxes and interest accrued ................................. 36,195 37,344
Other ...................................................... 60,902 70,873
---------- ----------
Total current liabilities ................................ 182,121 203,485
---------- ----------
NON-CURRENT LIABILITIES AND DEFERRED CREDITS:
Non-current liabilities .................................... 29,536 27,855
Deferred income taxes ...................................... 346,999 312,529
Other ...................................................... 17,475 43,167
---------- ----------
Total non-current liabilities and deferred credits ....... 394,010 383,551
---------- ----------
COMMITMENTS AND CONTINGENCIES (Note 3)
Total..................................................... $2,206,150 $2,177,298
========== ==========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
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CONSOLIDATED STATEMENTS OF CAPITALIZATION
The Washington Water Power Company
- --------------------------------------------------------------------------------
Thousands of Dollars
September 30, December 31,
1997 1996
------------- ------------
COMMON EQUITY:
Common stock, no par value: 200,000,000 shares authorized;
55,960,360 shares outstanding................................... $ 594,853 $ 594,853
Note receivable from employee stock ownership plan ............... (10,203) (11,009)
Capital stock expense and other paid in capital................... (10,135) (10,112)
Unrealized investment gain-net.................................... 3,536 5,703
Retained earnings................................................. 166,609 131,301
---------- ---------
Total common equity........................................... 744,660 710,736
---------- ---------
PREFERRED STOCK-CUMULATIVE:
10,000,000 shares authorized:
Not subject to mandatory redemption:
Flexible Auction Series J; 500 shares outstanding ($100,000
stated value) -- 50,000
---------- ---------
Total not subject to mandatory redemption..................... -- 50,000
---------- ---------
Subject to mandatory redemption:
$8.625, Series I; 100,000 and 300,000 shares outstanding
($100 stated value) .......................................... 10,000 30,000
$6.95, Series K; 350,000 shares outstanding
($100 stated value) .......................................... 35,000 35,000
---------- ---------
Total subject to mandatory redemption......................... 45,000 65,000
---------- ---------
COMPANY-OBLIGATED MANDATORILY REDEEMABLE PREFERRED
TRUST SECURITIES:
7 7/8%, Series A, due 2037...................................... 60,000 --
Floating Rate, Series B, due 2037............................... 50,000 --
---------- ---------
Total company-obligated mandatorily redeemable
preferred trust securities ................................. 110,000 --
---------- ---------
LONG-TERM DEBT:
First Mortgage Bonds:
7 1/8% due December 1, 2013..................................... 66,700 66,700
7 2/5% due December 1, 2016..................................... 17,000 17,000
Secured Medium-Term Notes:
Series A - 5.95% to 8.06% due 2000 through 2023............... 212,000 227,000
Series B - 6.24% to 8.25% due 1997 through 2010............... 151,000 141,000
---------- ---------
Total first mortgage bonds.................................... 446,700 451,700
---------- ---------
Pollution Control Bonds:
6% Series due 2023.............................................. 4,100 4,100
Unsecured Medium-Term Notes:
Series A - 7.94% to 9.58% due 1998 through 2007................. 52,500 72,500
Series B - 6.75% to 8.23% due 1999 through 2023................. 115,000 120,000
---------- ---------
Total unsecured medium-term notes............................. 167,500 192,500
---------- ---------
Notes payable (due within one year) to be refinanced.............. 74,000 85,000
Other............................................................. 38,059 31,226
---------- ---------
Total long-term debt.......................................... 730,359 764,526
---------- ---------
TOTAL CAPITALIZATION................................................ $1,630,019 $1,590,262
========== ==========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
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CONSOLIDATED STATEMENTS OF CASH FLOWS
Increase (Decrease) in Cash and Cash Equivalents
The Washington Water Power Company
- --------------------------------------------------------------------------------
For the Nine Months Ended September 30
Thousands of Dollars
1997 1996
------- ------
OPERATING ACTIVITIES:
Net income ................................................. $ 91,559 $ 69,241
NON-CASH REVENUES AND EXPENSES
INCLUDED IN NET INCOME:
Depreciation and amortization ............................ 51,684 53,345
Provision for deferred income taxes ...................... 36,128 6,140
Allowance for equity funds used during construction ...... (960) (567)
Power and natural gas cost deferrals and amortization .... (14,626) 5,510
Deferred revenues and other-net .......................... (12,885) 7,560
(Increase) decrease in working capital components:
Receivables and prepaid expenses-net ................... 45,909 6,139
Materials & supplies, fuel stock and natural gas stored (9,401) 6,275
Payables and other accrued liabilities ................. (7,485) 1,890
Other-net .............................................. 13,743 8,365
--------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES .................... 193,666 163,898
--------- ---------
INVESTING ACTIVITIES:
Construction expenditures (excluding AFUDC-equity funds) ... (62,489) (60,804)
Other capital requirements ................................. (7,392) (590)
(Increase) decrease in other noncurrent balance sheet
items-net ................................................ 14,590 15,244
Assets acquired and investments in subsidiaries ............ (35,478) (29,016)
--------- ---------
NET CASH USED IN INVESTING ACTIVITIES ........................ (90,769) (75,166)
--------- ---------
FINANCING ACTIVITIES:
Increase (decrease) in short-term borrowings ............... (11,000) 12,000
Proceeds from issuance of preferred trust securities ....... 110,000 --
Proceeds from issuance of long-term debt ................... 15,000 --
Repurchase and maturity of long-term debt .................. (45,000) (35,000)
Redemption of preferred stock .............................. (70,000) (20,000)
Sale of common stock-net ................................... 805 720
Other-net .................................................. (30,737) 15,539
--------- ---------
NET FINANCING ACTIVITIES BEFORE CASH DIVIDENDS ............... (30,932) (26,741)
Less cash dividends paid ................................ (57,157) (58,152)
--------- ---------
NET CASH USED IN FINANCING ACTIVITIES ........................ (88,089) (84,893)
--------- ---------
NET INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS ......... 14,808 3,839
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD ............. 8,211 5,164
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD ................... $ 23,019 $ 9,003
========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the period:
Interest ................................................. $ 45,397 $ 39,898
Income taxes ............................................. $ 51,393 $ 32,668
Non-cash financing and investing activities ................ $ 2,519 $ 42,762
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
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SCHEDULE OF INFORMATION BY BUSINESS SEGMENTS
The Washington Water Power Company
- --------------------------------------------------------------------------------
For the Three Months Ended September 30
Thousands of Dollars
1997 1996
---- ----
OPERATING REVENUES:
Energy Delivery ............................ $ 69,980 $ 71,487
Generation and Resources ................... 135,141 106,692
National Energy Trading and Marketing ...... 49,535 102
Non-energy ................................. 41,298 41,470
Intersegment eliminations .................. (878) --
----------- -----------
Total operating revenues ................. $ 295,076 $ 219,751
=========== ===========
OPERATIONS AND MAINTENANCE EXPENSES:
Energy Delivery:
Natural gas purchased for resale ......... $ 13,633 $ 13,388
Other .................................... 14,459 15,815
Generation and Resources:
Purchased power .......................... 86,278 49,740
Fuel for generation ...................... 9,851 13,902
Other .................................... 12,025 11,216
National Energy Trading and Marketing:
Cost of sales ............................ 46,633 --
Other .................................... 663 152
Non-energy ................................. 29,283 31,591
Intersegment eliminations .................. (878) --
----------- -----------
Total operations and maintenance expenses $ 211,947 $ 135,804
=========== ===========
ADMINISTRATIVE AND GENERAL EXPENSES:
Energy Delivery ............................ $ 10,774 $ 11,551
Generation and Resources ................... 4,115 4,021
National Energy Trading and Marketing ...... 3,458 405
Non-energy ................................. 6,259 3,345
----------- -----------
Total administrative and general expenses $ 24,606 $ 19,322
=========== ===========
DEPRECIATION AND AMORTIZATION:
Energy Delivery ............................ $ 8,095 $ 8,427
Generation and Resources ................... 6,106 7,027
National Energy Trading and Marketing ...... 122 --
Non-energy ................................. 2,441 2,616
----------- -----------
Total administrative and general expenses $ 16,764 $ 18,070
=========== ===========
INCOME/(LOSS) FROM OPERATIONS:
Energy Delivery ............................ $ 14,537 $ 14,099
Generation and Resources ................... 13,932 18,307
National Energy Trading and Marketing ...... (1,292) (455)
Non-energy ................................. 2,530 3,676
----------- -----------
Total income from operations ............. $ 29,707 $ 35,627
=========== ===========
INCOME AVAILABLE FOR COMMON STOCK:
Energy Delivery and Generation and Resources $ 6,821 $ 10,492
National Energy Trading and Marketing ...... (1,097) (296)
Non-energy ................................. 6,534 6,376
----------- -----------
Total income available for common stock .. $ 12,258 $ 16,572
=========== ===========
ASSETS: (1996 amounts at December 31)
Energy Delivery ............................ $ 1,015,318 $ 1,014,451
Generation and Resources ................... 631,621 683,599
Other utility .............................. 256,298 223,379
National Energy Trading and Marketing ...... 42,157 899
Non-energy ................................. 260,756 254,970
----------- -----------
Total assets ............................. $ 2,206,150 $ 2,177,298
=========== ===========
CAPITAL EXPENDITURES (excluding AFUDC/AFUCE)
Energy Delivery............................. $ 21,562 $ 21,262
Generation and Resources.................... 3,187 2,115
National Energy Trading and Marketing....... 2,306 --
Non-energy.................................. 3,802 454
----------- -----------
Total capital expenditures................ $ 30,857 $ 23,831
=========== ===========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
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SCHEDULE OF INFORMATION BY BUSINESS SEGMENTS
The Washington Water Power Company
- --------------------------------------------------------------------------------
For the Nine Months Ended September 30
Thousands of Dollars
1997 1996
---- ----
OPERATING REVENUES:
Energy Delivery ............................ $ 267,010 $ 266,171
Generation and Resources ................... 381,334 290,436
National Energy Trading and Marketing ...... 51,610 102
Non-energy ................................. 116,353 106,946
Intersegment eliminations .................. (946) --
----------- -----------
Total operating revenues ................. $ 815,361 $ 663,655
=========== ===========
OPERATIONS AND MAINTENANCE EXPENSES:
Energy Delivery:
Natural gas purchased for resale ......... $ 63,566 $ 63,457
Other .................................... 43,160 45,381
Generation and Resources:
Purchased power .......................... 223,042 115,837
Fuel for generation ...................... 25,494 27,610
Other .................................... 39,121 34,733
National Energy Trading and Marketing:
Cost of sales ............................ 48,136 --
Other .................................... 1,634 371
Non-energy ................................. 83,314 80,049
Intersegment eliminations .................. (878) --
----------- -----------
Total operations and maintenance expenses $ 526,589 $ 367,438
=========== ===========
ADMINISTRATIVE AND GENERAL EXPENSES:
Energy Delivery ............................ $ 36,457 $ 35,334
Generation and Resources ................... 13,137 11,605
National Energy Trading and Marketing ...... 6,052 712
Non-energy ................................. 15,027 9,617
----------- -----------
Total administrative and general expenses $ 70,673 $ 57,268
=========== ===========
DEPRECIATION AND AMORTIZATION:
Energy Delivery ............................ $ 24,311 $ 25,359
Generation and Resources ................... 19,167 20,944
National Energy Trading and Marketing ...... 181 --
Non-energy ................................. 8,025 7,042
----------- -----------
Total administrative and general expenses $ 51,684 $ 53,345
=========== ===========
INCOME/(LOSS) FROM OPERATIONS:
Energy Delivery ............................ $ 71,528 $ 68,169
Generation and Resources ................... 53,356 71,234
National Energy Trading and Marketing ...... (4,398) (982)
Non-energy ................................. 7,948 9,540
Intersegment eliminations .................. (68) --
----------- -----------
Total income from operations ............. $ 128,366 $ 147,961
=========== ===========
INCOME AVAILABLE FOR COMMON STOCK:
Energy Delivery and Generation and Resources $ 79,037 $ 44,153
National Energy Trading and Marketing ...... (3,092) (638)
Non-energy ................................. 11,046 19,528
----------- -----------
Total income available for common stock .. $ 86,991 $ 63,043
=========== ===========
ASSETS: (1996 amounts at December 31)
Energy Delivery ............................ $ 1,015,318 $ 1,014,451
Generation and Resources ................... 631,621 683,599
Other utility .............................. 256,298 223,379
National Energy Trading and Marketing ...... 42,157 899
Non-energy ................................. 260,756 254,970
----------- -----------
Total assets ............................. $ 2,206,150 $ 2,177,298
=========== ===========
CAPITAL EXPENDITURES (excluding AFUDC/AFUCE):
Energy Delivery ............................ $ 53,751 $ 53,873
Generation and Resources ................... 7,228 4,925
National Energy Trading and Marketing ...... 2,666 --
Non-energy ................................. 5,093 1,603
----------- -----------
Total assets ............................. $ 68,738 $ 60,401
=========== ===========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
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10
THE WASHINGTON WATER POWER COMPANY
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The accompanying financial statements of The Washington Water Power Company
(Company) for the interim periods ended September 30, 1997 and 1996 are
unaudited but, in the opinion of management, reflect all adjustments, consisting
only of normal recurring accruals, necessary for a fair statement of the results
of operations for those interim periods. The results of operations for the
interim periods are not necessarily indicative of the results to be expected for
the full year. These financial statements do not contain the detail or footnote
disclosure concerning accounting policies and other matters which would be
included in full fiscal year financial statements; therefore, they should be
read in conjunction with the Company's audited financial statements included in
the Company's Annual Report on Form 10-K for the year ended December 31, 1996
(1996 Form 10-K).
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ALLOCATION OF REVENUES AND EXPENSES FOR REPORTING BUSINESS SEGMENTS
A portion of the utility's revenues and expenses have been allocated between the
two business segments in order to report results of operations by the individual
lines of business - (1) Energy Delivery and (2) Generation and Resources. The
Energy Delivery business reports the results of the Company's transmission and
distribution services for retail electric operations and all natural gas
operations. Costs associated with electric energy commodities, such as purchased
power expense, as well as the revenues attributable to the recovery of such
costs from retail customers, have been eliminated from the Energy Delivery line
of business and are reflected in the results for the Generation and Resources
line of business. The results of all natural gas operations are included in the
Energy Delivery line of business, since natural gas trackers allow natural gas
costs to pass through within that line of business without the commodity prices
having an income effect. The Generation and Resources line of business includes
the generation and production of electric energy, and short- and long-term
electric and natural gas commodity trading and wholesale marketing primarily to
other utilities and power brokers in the western United States. The National
Energy Trading and Marketing businesses are conducted by Avista Energy and
Avista Advantage. The Non-energy business is conducted primarily by Pentzer,
which is the parent company to the majority of the Company's Non-energy
businesses. All intersegment transactions between the Company and
its subsidiaries have been eliminated.
The business segment information from prior periods has been reclassified to
conform to the current period presentation. The reporting of business segment
results has been reclassified to reflect the way the Company is now doing
business, as was discussed in the 1996 Form 10-K.
NOTE 2. FINANCINGS
COMPANY-OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES
On January 23, 1997, Washington Water Power Capital I, a business trust, issued
to the public $60,000,000 of Preferred Trust Securities having a distribution
rate of 7 7/8%. Concurrent with the issuance of the Preferred Trust Securities,
the Trust issued $1,855,675 of Common Trust Securities to the Company. The sole
assets of the Trust are the Company's 7 7/8% Junior Subordinated Deferrable
Interest Debentures, Series A, with a principal amount of $61,855,675. These
debt securities may be redeemed at the Company's option on or after January 15,
2002 and mature January 15, 2037.
On June 3, 1997, Washington Water Power Capital II, a business trust, issued to
the public $50,000,000 of Preferred Trust Securities having a floating
distribution rate of LIBOR plus 0.875%, calculated and reset quarterly
(initially 6.6875%). Concurrent with the issuance of the Preferred Trust
Securities, the Trust issued $1,547,000 of Common Trust Securities to the
Company. The sole assets of the Trust are the Company's Floating Rate Junior
Subordinated Deferrable Interest Debentures, Series B, with a principal amount
of $51,547,000. These debt securities may be redeemed at the Company's option on
or after June 1, 2007 and mature June 1, 2037.
The Company has guaranteed the payment of distributions on, and redemption price
and liquidation amount in respect of, the Preferred Trust Securities to the
extent that the Trust has funds available for such payment from the debt
securities. Upon maturity or prior redemption of such debt securities, the Trust
Securities will be mandatorily redeemed. The Company's Consolidated Statements
of Capitalization reflect only the $60 million and $50 million of Preferred
Trust Securities.
In November 1997, the Company filed a Registration Statement with the
Securities and Exchange Commission for authorization to issue up to and
including $250 million of debt securities.
NOTE 3. COMMITMENTS AND CONTINGENCIES
The Company and certain of its subsidiaries are parties to various legal claims,
actions and complaints. Although the Company cannot predict with certainty
whether or not it will ultimately be successful in these legal proceedings,
management believes that as of this time, it has adequately reserved for any
potential liabilities and that the ultimate
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THE WASHINGTON WATER POWER COMPANY
- --------------------------------------------------------------------------------
outcome of all the claims and actions should not have a material adverse effect
on the Company's consolidated operations, financial condition or liquidity. For
information about specific legal proceedings involving the Company or its
subsidiaries, reference is made to the Company's 1996 Form 10-K. To-date, there
have been no material developments since that report was issued, with the
exception of the following matters.
A proposed settlement agreement was reached related to Firestorm litigation as
discussed in the 1996 10-K. The settlement agreement is subject to court
approval, which is likely to occur in 1997. If approved in Spokane Superior
Court, the settlement agreement would resolve all claims pending against the
Company. The Company's portion of the proposed settlement is $10.3 million, with
all but $1.2 million being covered by insurance proceeds. The Company recorded
the $1.2 million liability during the third quarter of 1997.
The Oil Spill Clean-up Action Plan discussed in the 1996 Form 10-K is underway.
The Company has reached settlement with one of the two insurance carriers, and
has commenced a declaratory judgment against the other in Spokane Superior Court
in order to receive a judicial determination of the scope and extent of coverage
by the remaining carrier.
On August 19, 1997, a class action lawsuit was filed in the Superior Court of
Spokane County against Itron, Inc. (Itron), and certain named individuals, as
well as the Company, alleging violation of the Washington State Securities Act,
the Washington Consumer Protection Act, and negligent misrepresentation. It is
alleged that the Company was a controlling person of Itron by virtue of its
ownership, at one time, of approximately 12% of the outstanding shares of Itron,
and knew or should have known of the alleged false or misleading statements
relating to the development of Itron's fixed network meter reading systems and
the market therefor. This action has been temporarily stayed pending the
determination of certain legal issues in a similar case filed in the U.S.
District Court for the Eastern District of Washington, involving similar facts
and circumstances, but which did not otherwise name the Company as a defendant.
The Company is participating with the Washington State Department of
Transportation in an environmental study relating to the former Spokane Natural
Gas Plant site (which was operated as a coal gasification plant for
approximately 60 years) acquired by the Company through a merger in 1958. The
Company no longer owns the property. Initial core samples taken from the site
indicate environmental contamination at the site. At this time, the Company and
other participants in the environmental study are in the process of determining
the specific nature and extent of the contamination, and any necessary remedial
action, as well as the cost thereof.
NOTE 4. INCOME TAX RECOVERY
In June 1997, the Company received $81 million from the Internal Revenue Service
(IRS) to settle an income tax claim relating to its investment in the terminated
nuclear project 3 of the Washington Public Power Supply System (WNP3). The $81
million recovery included $34 million in income taxes the Company overpaid in
prior years plus $47 million in accrued interest, which contributed $41.4
million, or $0.74 per share, to net income.
The Company had claimed that it realized a loss in 1985 relating to its $195
million investment in WNP3 entitling it to current tax deductions. The IRS,
however, originally denied the Company's claim and ruled that the investment
should be written off over 32.5 years, the term of a settlement agreement
between the Company and the Bonneville Power Administration relating to WNP3.
The Company disagreed with this ruling and had been pursuing a reversal for
several years. The IRS has now agreed with the Company's position.
The Company entered into settlement agreements with the Washington Utilities and
Transportation Commission (WUTC) and the Idaho Public Utilities Commission
(IPUC) in 1987 and 1988 providing for the recovery through retail prices of
approximately 60% of the Company's $195 million investment in WNP3. As a result
of these agreements, customers have been and will continue to receive the tax
benefits relating to the recoverable portion of WNP3 over the recovery periods
specified in the settlement agreements. The settlement agreements resulted in a
write-off of approximately $75 million of the Company's WNP3 investment, with
the entire write-off charged to shareholders. The tax recovery and related
accrued interest from the IRS will flow through to the benefit of shareholders.
The cash was used to fund new business investment, including growth
opportunities in national energy markets, and will reduce the need for issuance
of long-term debt during 1997.
NOTE 5. ACQUISITIONS AND DISPOSITIONS
In May 1997, Pentzer Corporation (Pentzer) sold its interest in Safety Speed
Cut, resulting in a gain of approximately $2.0 million, net of taxes. In July
1997, Pentzer acquired two new companies - Target Woodworks, Inc., a
Florida-based company, and White Plus, a California-based company. In September
1997, Pentzer acquired Proco Wood Products, a Minnesota-based company. All three
companies provide point-of-purchase and in-store merchandising services. For
information related to acquisitions and affiliations by the Company's
subsidiary, Avista Energy, see Note 6 below.
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NOTE 6. NATIONAL ENERGY TRADING AND MARKETING
Avista Energy, Inc. (Avista Energy), the Company's national energy trading and
marketing company, began trading in the third quarter of 1997. Avista
Energy has and intends to continue to develop alliances and partnerships in
various areas of the country in order to market electric and natural gas
commodities and services as states provide open access to their retail markets.
Avista Energy has formed an alliance with Mock Energy Services, California's
largest natural gas marketer. Avista Energy has also formed a joint venture with
Energy West Incorporated, a diversified energy and retail propane company in
Montana.
In addition, Avista Energy formed an alliance with Chelan County Public Utility
District (Chelan PUD), located in Washington state, under which Avista Energy
and Chelan PUD are jointly marketing a significant portion of Chelan PUD's
hydroelectric resources to other utilities throughout the Western United States
and began assisting with the real-time scheduling of such output beginning in
August 1997. On October 20, 1997, a complaint for declaratory and injunctive
relief was filed in Chelan County Superior Court in order to determine whether
the joint marketing and real-time scheduling efforts of Chelan PUD and Avista
Energy are within Chelan PUD's lawful authority to undertake.
Effective August 1, 1997, Howard Energy Marketing, which serves customers in the
upper Midwest and Northeast United States, and Avista Energy formed
Howard/Avista Energy, LLC (Howard/Avista), a limited liability company in which
Avista Energy has a 50% ownership. Avista Energy's initial equity investment in
Howard/Avista was $25 million. The investment in Howard/Avista is accounted for
using the equity method of accounting. Under this method, equity in the net
income or losses of Howard/Avista is reflected in Other Income (Deductions)-net
on the accompanying Consolidated Statements of Income for the periods ended
September 30, 1997. The net investment in the net assets of Howard/Avista is
included in Non-utility Properties and Investments-net on the accompanying
Consolidated Balance Sheets at September 30, 1997.
The following selected financial information for Howard/Avista reflects that
company's total financial position and operating results as of and for the two
months ended September 30, 1997:
RESULTS OF OPERATIONS (thousands of dollars)
Two months ended
September 30, 1997
------------------
Revenues $ 268,998
Expenses 267,488
-----------
Net Income $ 1,510
===========
Avista Energy's equity in earnings
of Howard/Avista Energy LLC $755
FINANCIAL POSITION (thousands of dollars)
September 30, 1997
------------------
Current Assets $ 250,068
Other Assets 1,351
---------
Total Assets $ 251,419
=========
Current Liabilities $ 199,753
Other Liabilities 154
Equity 51,512
---------
Total Liabilities $ 251,419
=========
Avista Energy's equity investment
in Howard/Avista Energy LLC $ 25,000
NOTE 7. RISK MANAGEMENT AND DERIVATIVE FINANCIAL INSTRUMENTS
The Company's energy-related businesses are exposed to risks relating to changes
in certain commodity prices and customer and counterparty performance. In order
to manage the various risks relating to these exposures, the Company utilizes
derivatives and other financial instruments, and has established risk management
policies for these risks for each area of the Company's energy-related business.
The Company is in the process of implementing procedures to manage such risk and
has established a comprehensive risk management committee separate from the
units that create such risk exposure, (overseen by the Audit Committee of the
Company's Board of Directors) to monitor compliance with the Company's risk
management policies and procedures.
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GENERATION AND RESOURCES
The Company protects itself against price fluctuations on electric energy and
natural gas by back-to-back purchases and sales, and the use of derivatives and
other financial instruments for hedging purposes. Most transactions are "at
market", either through short-term spot purchases and sales or through longer
term contracts with month-to-month index pricing. The Company also enters into
term contracts requiring fixed price purchases or sales during future periods.
These contracts are either offset with physical purchases or sales or with
derivatives accounted for as hedges. The derivatives are not held for trading
purposes. Hedge accounting is utilized in non-trading activities when there is a
high degree of correlation between price movements in the derivative and the
item designated as being hedged. In instances where the anticipated correlation
of price movements does not occur, hedge accounting is terminated and future
changes in the value of the derivative are recognized as gains or losses. If the
hedged item is sold, the value of the derivative is recognized in income. Gains
and losses related to derivative financial instruments which qualify as hedges
are recognized in the Consolidated Statements of Income when the underlying
hedged physical transaction closes (the deferral method) and are included in the
same category as the hedged item (natural gas purchased and purchased power
expense). At September 30, 1997, the commodity hedge agreements outstanding were
immaterial.
NATIONAL ENERGY TRADING AND MARKETING
Avista Energy markets power and energy services to other utilities and wholesale
power marketers by entering into contracts to purchase or supply natural gas and
electric energy at specified delivery points and at specified future dates.
Avista Energy engages in the trading of financial instruments, such as forwards,
futures, swaps and options, and therefore experiences net open positions in
terms of price, volume and specified delivery point. The open position exposes
Avista Energy to the risk that fluctuating market prices may adversely impact
its financial position or results of operations. However, the net open position
is actively managed with strict policies designed to limit the exposure to
market risk and which require daily reporting to management of potential
financial exposure. The risk management committee has limited the types of
financial instruments Avista Energy may trade to those related to electricity
and natural gas commodities. In addition to trading activities, Avista Energy
may also hold and issue financial instruments, such as futures, swaps and
options, to reduce its exposure to market fluctuations in the price and
transportation costs of the natural gas and electric power marketed.
Because Avista Energy engages in the trading of such financial instruments, it
is subject to mark-to-market accounting, under which changes in the market value
of outstanding financial instruments are recognized as gains or losses in the
period of change. Under the mark-to-market method, an allowance is recorded
currently for net aggregate gains or losses of the entire portfolio resulting
from the effect of market changes on the net open positions. The net
mark-to-market allowance was immaterial to Avista Energy's results of operations
and financial position as of September 30, 1997. Gains and losses on derivatives
utilized for trading are recognized in income on a current basis (the
mark-to-market method) and are included on the Consolidated Statements of Income
in operating revenues or expenses (cost of sales), as appropriate, and on the
Consolidated Balance Sheets as other assets or liabilities for the National
Energy Trading and Marketing business segment.
MARKET RISK
Avista Energy manages, on a portfolio basis, the market risks inherent in its
activities subject to parameters established by its Board of Directors. Market
risks are monitored by the risk management committee to ensure compliance with
Avista Energy's stated risk management policies. Avista Energy measures the risk
in its portfolio on a daily basis in accordance with risk methodologies
established by the risk management committee. The quantification of market risk
provides a consistent measure of risk across diverse energy markets and
products.
CREDIT RISK
Credit risk relates to the risk of loss that would occur as a result of
nonperformance by customers or counterparties pursuant to the terms of their
contractual obligations. New York Mercantile Exchange (NYMEX, or the Exchange)
traded futures and option contracts are guaranteed by the Exchange and have
nominal credit risk. On all other transactions, the Company and Avista Energy
are exposed to credit risk in the event of nonperformance by customers or
counterparties. The concentration of counterparties may impact overall exposure
to credit risk, either positively or negatively, in that the counterparties may
be similarly affected by changes in economic, regulatory or other conditions.
However, the Company and Avista Energy maintain credit policies with regard to
its customers and counterparties that management believes significantly minimize
overall credit risk. These policies include an evaluation of potential
customers' and counterparties' financial condition and credit rating, collateral
requirements, such as letters of credit or parent company guarantees, under
certain circumstances and the use of standardized agreements which allow for the
netting of positive and negative exposures associated with a single
counterparty. The Company and Avista Energy maintain credit reserves based on
management's evaluation of the credit risk of the overall portfolio.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The Company operates as a regional utility providing electric and natural gas
sales and services and as a national entity providing both energy and non-energy
products and services. The regional utility portion of the Company consists of
two lines of business which are subject to state and federal price regulation --
(1) Energy Delivery and (2) Generation and Resources (which was reported in the
1996 Form 10-K and subsequent interim reports as the Energy Trading line of
business). The national businesses are conducted under Avista Corp., which is
the parent company to the Company's subsidiaries. The business segment
information from prior periods has been reclassified to conform to the current
period presentation. The reporting of business segment results has been
reclassified to reflect the way the Company is now doing business, as was
discussed in the 1996 Form 10-K.
The Energy Delivery line of business includes transmission and distribution
services for retail electric operations, all natural gas operations, and other
energy products and services. Usage by retail customers varies from year to year
primarily as a result of weather conditions, customer growth, the economy in the
Company's service area, conservation efforts, appliance efficiency and other
technology.
The Generation and Resources line of business includes the generation and
production of electric energy, and short- and long-term electric and natural gas
commodity trading and wholesale marketing primarily to other utilities and power
brokers in the western United States. Commodity trading involves short-term
sales and purchases of energy, such as next hour, next day and monthly blocks of
energy; wholesale marketing includes sales and purchases under long-term
contracts with one-year and longer terms. Revenues and the cost of electric
power purchases vary from year to year depending on the electric wholesale power
market, which is affected by several factors, including the availability of
water for hydroelectric generation, the availability of base load plants in the
region, marginal fuel prices and the demand for power in other areas of the
country. Other factors affecting the wholesale power market include an
increasing number of power brokers and marketers, lower unit margins on new
sales contracts than were realized in the past, fewer long-term power contracts
being entered into, resulting in a heavier reliance on short-term power
contracts, and competition from low cost generation being developed by
independent power producers.
Avista Corp. owns the Company's National Energy Trading and Marketing and
Non-energy businesses. The National Energy Trading and Marketing businesses are
conducted by Avista Energy and Avista Advantage. Previously the results of these
two companies, which were primarily start-up costs, were included in the
utility's Energy Trading line of business. Avista Energy focuses on commodity
trading, energy marketing and other related businesses on a national basis.
Avista Energy's business is affected by several factors, including the demand
for and availability of power throughout the United States, an increasing number
of power brokers and marketers, lower unit margins on new sales contracts than
were realized in the past, fewer long-term power contracts being entered into,
resulting in a heavier reliance on short-term power contracts, marginal fuel
prices and competition from low cost generation being developed by independent
power producers. Avista Advantage provides a variety of energy-related products
and services to commercial and industrial customers on a national basis. Its
primary product lines include consolidated billing and resource accounting. The
Non-energy business is conducted primarily by Pentzer, which is the parent
company to the majority of the Company's Non-energy businesses.
RESULTS OF OPERATIONS
OVERALL OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 1996
Third quarter 1997 net income available for common stock was $12.3 million, a
$4.3 million decrease from 1996 third quarter net income of $16.6 million. The
decrease in earnings was primarily the result of reduced margins from Generation
and Resources wholesale operations and start-up costs associated with the
Company's national energy businesses.
Overall earnings per share for the third quarter of 1997 decreased to $0.22 from
$0.30 in 1996. Utility operations (Energy Delivery and Generation and Resources)
contributed $0.12 to earnings per share for the third quarter of 1997 compared
to $0.19 in the third quarter of 1996. National Energy Trading and Marketing,
which began operations in July 1997, realized a loss of $0.02 per share for the
third quarter of 1997, primarily due to start-up costs, compared to zero
contribution in the third quarter of 1996. Non-energy operations contributed
$0.12 to earnings per share for the third quarter of 1997 compared to $0.11 in
the same period in 1996.
During the third quarter of 1996, the Company recorded a $2.6 million tax
benefit as a result of resolution of prior years' tax audit issues. The
preferred stock dividend decreased by $0.8 million in the third quarter of 1997,
respectively, from 1996 due to the redemption of $20 million in Preferred Stock,
Series I in June 1997 and the redemption of the entire $50 million Flexible
Auction Preferred Stock, Series J in August 1997. These securities were redeemed
with a portion of the proceeds of the Preferred Trust Securities which were
issued in January and June 1997. Distributions for the Preferred Trust
Securities are included in Interest Expense on the Consolidated
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Statements of Income. (See Note 2. of Notes to Financial Statements and
Liquidity and Capital Resources for additional information.)
NINE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1996
Net income available for common stock for the first nine months of 1997 was
$87.0 million, a $24.0 million increase from net income of $63.0 million during
the first nine months of 1996. The increase in earnings was primarily the result
of an income tax recovery which resulted in a $41.4 million, or $0.74 per share,
increase in after-tax income during the second quarter of 1997 (see Note 4 of
Notes to Financial Statements for additional information) and the expensing of
$10.3 million after-tax, or $0.18 per share, in merger costs in the 1996 period.
The 1996 results also included a $10.8 million transactional gain, net of tax
and other adjustments, from the sale of property held for sale by one of
Pentzer's subsidiaries.
Overall earnings per share for the first nine months of 1997 increased to $1.55
from $1.13 in 1996. Utility operations (Energy Delivery and Generation and
Resources) contributed $1.41 to earnings per share for the first nine months of
1997 compared to $0.79 in the first nine months of 1996. The increase in
earnings per share from the income tax recovery was partially offset by several
non-operating and operating accruals and accounting adjustments, as well as
decreased operating income from the Generation and Resources line of business.
National Energy Trading and Marketing operations realized a loss of $0.06 per
share for the first nine months of 1997 compared to a loss of $0.01 per share in
the same period in 1996, primarily as a result of start-up costs in both
periods. Non-energy operations contributed $0.20 to earnings per share for the
first nine months of 1997 compared to $0.35 in the same period in 1996. The
decrease in non-energy earnings was primarily the result of a $10.8 million
transactional gain ($0.19 per share), net of tax and other adjustments, from the
sale of property in the first quarter of 1996.
Other income (deductions) for the first nine months of 1997 included $47 million
in interest income on the income tax recovery, which was partially offset by
several non-operating accruals and accounting adjustments. Income taxes
increased $7.8 million in the first nine months of 1997 over 1996 primarily due
to the taxes on the interest income received as a part of the income tax
recovery, partially offset by an $11.4 million income tax benefit associated
with the income tax recovery. During the third quarter of 1996, the Company
recorded a $2.6 million tax benefit as a result of resolution of prior years'
tax audit issues. The year-to-date 1997 income taxes were also partially offset
by first quarter 1997 adjustments related to revised estimates on certain tax
issues. The preferred stock dividend decreased $1.6 million in the first nine
months of 1997 from 1996 due to the redemption of $20 million in Preferred
Stock, Series I in June 1997 and the redemption of the entire $50 million
Flexible Auction Preferred Stock, Series J in August 1997. These securities were
redeemed with a portion of the proceeds of the Preferred Trust Securities which
were issued in January and June 1997. (See Note 2. of Notes to Financial
Statements and Liquidity and Capital Resources for additional information.)
ENERGY DELIVERY
THREE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 1996
Energy Delivery income from operations increased $0.4 million, or 3%, in the
third quarter of 1997 over the same period in 1996. The increase was due to
lower operating costs, partially offset by decreased retail electric and natural
gas revenues. Energy Delivery's operating revenues and expenses decreased $1.5
million and $1.9 million, respectively, during the third quarter of 1997 as
compared to 1996.
Retail electric revenues decreased $1.3 million in the third quarter of 1997
compared to the same period in 1996, primarily as a result of decreased customer
usage due to weather, particularly during the month of September. In September
1996, temperatures were 26% colder than normal, which increased the heating
load. In September 1997, the weather was 48% warmer than normal, resulting in
very little heating load. There was no material change in total natural gas
revenues between the two periods.
Other operating and maintenance costs decreased $1.4 million in the third
quarter of 1997 from 1996, primarily as a result of a $1.1 million reduction in
expenses associated with the Idaho Power Cost Adjustment (PCA), which allows the
Company to change prices to recover or rebate a portion of the difference
between actual and allowed net power supply costs.
NINE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1996
Energy Delivery income from operations increased $3.4 million, or 5%, in the
first nine months of 1997 over the same period in 1996. The increase was due to
increased transmission revenues, a rate settlement, customer growth and lower
operating expenses. Energy Delivery's operating revenues increased $0.8 million
and expenses decreased $2.5 million, respectively, during the first nine months
of 1997 compared to 1996.
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Retail electric revenues increased $1.5 million in the first nine months of 1997
compared to 1996, due to a $3.3 million increase in transmission revenues as a
result of increased wholesale electric sales, partially offset by decreased
retail sales due to weather which was 4% warmer year-to-date in 1997, compared
to 11% colder than normal in the same period in 1996. There was no material
change in total natural gas revenues between the two periods.
Other operating and maintenance expenses decreased $2.2 million, primarily due
to a $2.3 million reduction in expenses associated with the PCA. Administrative
and general expenses increased $1.1 million in the first nine months of 1997
compared to 1996, due primarily to accruals related to employee compensation and
higher regulatory fees, partially offset by non-recurring expenses in 1996.
GENERATION AND RESOURCES
THREE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 1996
Generation and Resources income from operations decreased $4.4 million, or 24%,
in the third quarter of 1997 from the same period in 1996. The decrease was due
to the expiration of older sales contracts with higher margins, lower unit
margins on new sales contracts and higher transmission expenses due to increased
sales. Generation and Resources operating revenues and expenses increased $28.4
million and $32.8 million, respectively, during the third quarter of 1997 as
compared to 1996.
Generation and Resources revenues increased primarily as a result of increased
short-term sales. During the third quarter of 1997, there was a significant
shift in product mix between short- and long-term sales. Revenues from long-term
sales, typically with higher margins, decreased $7.0 million in the third
quarter of 1997 as compared to 1996, while revenues from short-term sales,
typically with smaller margins, increased $36.9 million during the same period.
Total sales volumes during the third quarter of 1997 increased 41% from the same
period in 1996. Long-term sales volumes decreased 0.2 million mwhs, or 19%,
while short-term sales increased 1.6 million mwhs, or 76%.
Commitments under new long-term wholesale sales contracts and increased
short-term sales, combined with increased costs under some long-term purchased
power contracts, resulted in a $36.5 million increase in electric purchased
power expense in the third quarter of 1997 over 1996, which accounts for the
majority of the increase in Generation and Resources' operating expenses. Fuel
expense decreased $4.1 million in the third quarter of 1997 from 1996, due to
economic dispatch as hydroelectric generation was 16% higher than in the same
period of 1996.
NINE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1996
Generation and Resources income from operations decreased $17.9 million, or 25%,
in the first nine months of 1997 from the same period in 1996. The decrease was
due to the expiration of older sales contracts with higher margins, lower unit
margins on new sales contracts, lower hydroelectric generation and higher
transmission expenses. Generation and Resources operating revenues and expenses
increased $90.9 million and $108.8 million, respectively, during the first nine
months of 1997 compared to 1996.
Generation and Resources revenues increased due to new power contracts for
long-term wholesale electric service and increased short-term sales. Over the
first nine months of 1997, there was a significant shift in product mix between
short- and long-term sales as compared to the first nine months of 1996.
Revenues from long-term sales increased $9.2 million in the first nine months of
1997 over 1996, while revenues from short-term sales increased $82.5 million
during the same period. Total sales volumes during the first nine months of 1997
increased 62% over the same period in 1996. Long-term sales volumes increased
0.1 million mwhs, or 1%, while short-term sales increased by 4.8 million mwhs,
or 106%.
Purchased power expense increased $107.2 million, or 93%, in the first nine
months of 1997 over 1996, which accounts for the majority of the year-to-date
increase in Generation and Resources operating expenses. During the first nine
months of 1997, hydroelectric generation was 7% below that of the same period of
1996. Fuel costs decreased $2.1 million in the first nine months of 1997
compared to 1996 due to decreased generation at thermal plants in the third
quarter of 1997. Other operating and maintenance expenses increased $4.4 million
in the first nine months of 1997 from the same period in 1996. Transmission
expenses increased $1.3 million in the nine-month period of 1997 over 1996 due
to a second quarter $1.1 million accrual related to prior periods and increased
wholesale sales. Administrative and general expenses increased $1.5 million in
the first nine months of 1997, compared to 1996, due primarily to accruals
related to employee compensation and higher regulatory fees, partially offset by
non-recurring expenses in 1996.
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NATIONAL ENERGY TRADING AND MARKETING
THREE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 1996
National Energy Trading and Marketing includes the results of Avista Energy, the
national energy marketing subsidiary, and Avista Advantage, the energy services
subsidiary. Although both companies began incurring start-up costs during 1996,
Avista Energy only became operational in July 1997. National Energy
Trading and Marketing income available for common stock for the third quarter of
1997 was a loss of $1.0 million, which is a $0.7 million decrease from third
quarter 1996 earnings. The decrease in 1997 earnings primarily resulted from
continued start-up costs, expected customers and revenue streams that did not
materialize and a longer than anticipated sales cycle for energy services.
National Energy Trading and Marketing operating revenues and expenses increased
$49.4 million and $50.3 million, respectively, during the third quarter of 1997
as compared to 1996 primarily as a result of Avista Energy beginning operations
in July 1997.
NINE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1996
National Energy Trading and Marketing income available for common stock for the
first nine months of 1997 was a loss of $3.1 million, which is a $2.5 million
decrease from year-to-date 1996 earnings. The 1997 earnings decrease was
primarily due to the same reasons discussed in the quarterly discussion above.
National Energy Trading and Marketing operating revenues and expenses increased
$51.5 million and $54.9 million, respectively, during the first nine months of
1997 as compared to 1996 primarily as a result of Avista Energy beginning
operations in July 1997.
NON-ENERGY
THREE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 1996
Non-energy operations primarily reflect the results of Pentzer. Non-energy
income available for common stock for the third quarter of 1997 was $6.5
million, compared to third quarter 1996 earnings of $6.4 million. Transactional
earnings in the third quarter of 1997 exceeded 1996 by $0.6 million.
Non-transactional income from portfolio companies in the third quarter of 1997
was lower than 1996 by $0.5 million. Non-energy operating revenues decreased
$0.2 million and expenses increased $1.0 million during the third quarter of
1997, as compared to 1996, primarily as a result of acquisitions and increased
business activity from Pentzer's portfolio companies. Income from operations
totaled $2.5 million, which was a $1.1 million decrease in 1997 from 1996. This
decrease in earnings primarily reflects the sale of a portfolio company by
Pentzer and decreased business activities at several companies.
NINE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1996
Non-energy income available for common stock for the first nine months of 1997
was $11.0 million, which is an $8.5 million decrease from earnings in the same
period in 1996. The 1996 earnings primarily resulted from a transactional gain
totaling $10.8 million, net of taxes and other adjustments, recorded by Pentzer
as a result of the sale of property by one of its subsidiary companies. The 1997
earnings include a transactional gain of $2.0 million, net of taxes, from the
sale of a portfolio company. Non-transactional earnings from portfolio companies
in 1997 were down slightly from 1996. Non-energy operating revenues and expenses
increased $9.4 million and $11.0 million, respectively, during the first nine
months of 1997 as compared to 1996, primarily as a result of acquisitions and
increased business activity from Pentzer's portfolio companies. Income from
operations totaled $7.9 million, which was a $1.6 million decrease in 1997 from
1996, primarily due to the sale of a portfolio company by Pentzer and decreased
business activities at several companies.
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LIQUIDITY AND CAPITAL RESOURCES
OVERALL OPERATIONS
Operating Activities Net cash provided by operating activities in the first nine
months of 1997 increased by $29.8 million from the same period in 1996 due in
large part to the $27.4 million increase in net income from the income tax
recovery. Cash from the income tax recovery has been used to fund new business
investment, including growth opportunities in national energy markets, and will
reduce the need for issuance of long-term debt during 1997. In addition, changes
in various working capital components, such as increased payables and decreased
receivables, caused cashflows to increase by $20.1 million over the same period
of last year. When the effects of non-cash items, such as the increased
provision for deferred income taxes from the income tax recovery and adjustments
for depreciation and the FAS 109 regulatory asset are removed from net income,
there is an additional increase in cash provided by operating activities. Power
and natural gas cost deferrals had a negative effect on cashflows for the first
nine months of 1997 as a result of PCA rebates in effect in 1997 as compared to
surcharges in effect during the first nine months of 1996, increased natural gas
prices during the first part of 1997 and reduced prices paid by natural gas
customers in the current year. Deferred revenues and other-net caused
year-to-date cashflows in 1997 to decrease due to a contract buyout which
occurred as a result of a power transaction.
Investing Activities Net cash used in investing activities totaled $90.8 million
in the first nine months of 1997 compared to $75.2 million in the same period in
1996. Cash used in investing activities was higher during 1997 than 1996 due
primarily to the Company's investment in subsidiaries, and Pentzer's and other
subsidiaries' subsequent investments in, and acquisitions of, other companies.
Cash used in investing activities during the first nine months of 1996 resulted
from the establishment of trusts totaling $10.8 million for postretirement
medical benefits and coal mining reclamation costs and the $8.2 million net
effect on cash flows of transactions related to the sale of property by Pentzer.
Pentzer received a promissory note for a portion of the sale price of an
industrial park in the first quarter of 1996.
Financing Activities Net cash used in financing activities totaled $88.1 million
in the first nine months of 1997 compared to $84.9 million in 1996. Bank
borrowings decreased by $11.0 million, preferred stock totaling $70.0 million
was redeemed and $45.0 million of long-term debt was repurchased in the first
nine months of 1997 with the proceeds of $110 million of Preferred Trust
Securities which were issued in January and June of 1997. See Note 2 of Notes to
Financial Statements for additional information about these securities. The
reduction of $30.7 million in Other-net reflects the repayment of short-term
borrowings and long-term debt by Pentzer during 1997, as compared to increasing
its borrowings in the first nine months of 1996.
ENERGY DELIVERY AND GENERATION AND RESOURCES
The Company funds its capital expenditures with a combination of
internally-generated cash and external financing. The level of cash generated
internally and the amount that is available for capital expenditures fluctuates
annually. Cash provided by operating activities remains the Company's primary
source of funds for operating needs, dividends and capital expenditures.
Capital expenditures are financed on an interim basis with short-term debt. The
Company has $120 million in committed lines of credit, a reduction of $40
million from previous levels. In addition, the Company may borrow up to $60
million through other borrowing arrangements with banks. As of September 30,
1997, $44.0 million was outstanding under the committed lines of credit and
$30.0 million was outstanding under the other borrowing arrangements with banks.
In November 1997, the Company filed a Registration Statement with the Securities
and Exchange Commission for authorization to issue up to and including $250
million of debt securities.
During the 1997-1999 period, capital expenditures are expected to be $239
million, and, in addition, $138.5 million will be required for long-term debt
maturities and repurchases and preferred stock sinking fund requirements. During
this three-year period, the Company estimates that internally-generated funds
will provide over 100% of the funds needed for its capital expenditure program.
External financing will be required to fund a portion of the maturing long-term
debt and preferred stock sinking fund requirements. These estimates of capital
expenditures are subject to continuing review and adjustment. Actual capital
expenditures may vary from these estimates due to factors such as changes in
business conditions, construction schedules and environmental requirements.
NATIONAL ENERGY TRADING AND MARKETING
At September 30, 1997, the National Energy Trading and Marketing operations had
$4.3 million in cash and cash equivalents with $1.4 million in long-term debt
outstanding.
18
19
THE WASHINGTON WATER POWER COMPANY
- --------------------------------------------------------------------------------
NON-ENERGY
The non-energy operations have $79.0 million in short-term borrowing
arrangements available ($10.9 million outstanding as of September 30, 1997) to
fund corporate requirements on an interim basis. At September 30, 1997, the
non-energy operations had $32.7 million in cash and marketable securities with
$47.8 million in long-term debt outstanding.
The 1997-1999 non-energy capital expenditures are expected to be $12 million,
and $30 million in debt will mature in this period. During the next three years,
internally-generated cash and debt obligations are expected to provide the
majority of the funds for the non-energy capital expenditure requirements. These
estimates of capital expenditures are subject to continuing review and
adjustment. Actual capital expenditures may vary from these estimates due to
factors such as changes in business conditions, acquisitions or sales of
businesses and other transactions.
TOTAL COMPANY
The Company's total common equity increased by $33.9 million during the first
nine months of 1997 to $744.7 million, primarily due to a $35.3 million increase
in retained earnings. The Company's consolidated capital structure at September
30, 1997, was 45% debt, 9% preferred stock (including the new Preferred Trust
Securities) and 46% common equity as compared to 48% debt, 7% preferred stock
and 45% common equity at year-end 1996.
SAFE HARBOR FOR FORWARD LOOKING STATEMENTS.
The Company is including the following cautionary statement in this Form 10-Q to
make applicable and to take advantage of the safe harbor provisions of the
Private Securities Litigation Reform Act of 1995 for any forward-looking
statements made by, or on behalf of, the Company. Forward-looking statements are
all statements other than statements of historical fact, including without
limitation those that are identified by the use of the words "anticipates,"
"estimates," "expects," "intends," "plans," "predicts," and similar expressions.
Such statements are inherently subject to a variety of risks and uncertainties
that could cause actual results to differ materially from those expressed. Such
risks and uncertainties include, among others, changes in the utility regulatory
environment, wholesale and retail competition, weather conditions and various
other matters, many of which are beyond the Company's control. These
forward-looking statements speak only as of the date of the report. The Company
expressly undertakes no obligation to update or revise any forward-looking
statement contained herein to reflect any change in the Company's expectations
with regard thereto or any change in events, conditions, or circumstances on
which any such statement is based. See "Safe Harbor for Forward Looking
Statements" in the Company's 1996 Form 10-K under Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Future Outlook.
PART II. OTHER INFORMATION
ITEM 5. OTHER INFORMATION.
REGULATORY PROCEEDINGS.
Natural Gas General Rate Case The Company filed a natural gas general rate case
with the Washington Utilities and Transportation Commission (WUTC) in June 1997
seeking an overall natural gas price increase of $7.9 million to offset
increases in the cost of maintaining and operating the Company's natural gas
distribution system. The WUTC has until May 1988 to issue a final order. The
proposed price increases are not likely to go into effect until mid-1998.
Natural Gas Tracker Filings The Company filed natural gas trackers in Idaho in
November and in Oregon in October requesting overall increases of 15.6% and
8.9%, respectively, due to increases in natural gas commodity prices.
19
20
THE WASHINGTON WATER POWER COMPANY
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Power Cost Adjustment The Company filed a proposal with the Idaho Public
Utilities Commission (IPUC) to extend an existing 2.344% power cost adjustment
rebate for 12 months. The rebate, which was originally intended to expire on
August 31, 1997, will instead expire on August 31, 1998. The proposal was
approved in August.
More Options for Power Services In February, the Company filed with the WUTC and
the IPUC an experimental More Options for Power Services (MOPS) tariff to allow
residents and businesses in the towns of Odessa and Harrington, Washington and
approximately 2,800 other randomly selected residential and commercial customers
in Washington and Idaho direct access to alternative energy providers. The WUTC
and IPUC approved the two-year program, to begin in mid-1997. However, the
Company deferred implementation of the random selection portion of the program
until some later date due to lack of supplier participation. Only one
alternative energy supplier marketed its services to the customers in Odessa and
Harrington and approximately 20% of the eligible customers signed up for this
alternative supplier. The program costs and margin losses associated with this
program are not expected to have a material impact on the Company's financial
condition or results of operations.
ADDITIONAL FINANCIAL DATA.
The following table reflects the ratio of earnings to fixed charges and the
ratio of earnings to fixed charges and preferred dividend requirements:
12 Months Ended
----------------------------------
September 30, December 31,
1997 1996
-------------- --------------
Ratio of Earnings to Fixed Charges 3.36(x) 2.97(x)
Ratio of Earnings to Fixed Charges and
Preferred Dividend Requirements 2.94(x) 2.50(x)
The Company has long-term purchased power arrangements with various Public
Utility Districts and the interest expense components of these contracts are
included in purchased power expenses. These interest amounts are not included in
the fixed charges and would not have a material impact on fixed charges ratios.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
12 Computation of ratio of earnings to fixed charges and preferred
dividend requirements.
27 Financial Data Schedule.
(b) Reports on Form 8-K.
Dated June 25, 1997, regarding the income tax recovery the Company
received from the Internal Revenue Service.
20
21
THE WASHINGTON WATER POWER COMPANY
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
THE WASHINGTON WATER POWER COMPANY
----------------------------------
(Registrant)
Date: November 14, 1997 /s/ J. E. Eliassen
------------------------
J. E. Eliassen
Senior Vice President, Chief
Financial Officer and Treasurer
(Principal Accounting and
Financial Officer)
21
22
EXHIBIT INDEX
EXHIBIT
NO. DESCRIPTION
- ------- -----------
12 Computation of ratio of earnings to fixed charges and preferred
dividend requirements.
27 Financial Data Schedule.
1
EXHIBIT 12
THE WASHINGTON WATER POWER COMPANY
Computation of Ratio of Earnings to Fixed Charges and
Preferred Dividend Requirements
Consolidated
(Thousands of Dollars)
12 Mos. Ended Years Ended December 31
September 30, ---------------------------------------
1997 1996 1995 1994 1993
------------- -------- -------- -------- --------
Fixed charges, as defined:
Interest on long-term debt $ 62,045 $ 60,256 $ 55,580 $ 49,566 $ 47,129
Amortization of debt expense
and premium - net 2,810 2,998 3,441 3,511 3,004
Interest portion of rentals 4,328 4,311 3,962 1,282 924
-------- -------- -------- -------- --------
Total fixed charges $ 69,183 $ 67,565 $ 62,983 $ 54,359 $ 51,057
======== ======== ======== ======== ========
Earnings, as defined:
Net income from continuing
ops $105,772 $ 83,453 $ 87,121 $ 77,197 $ 82,776
Add (deduct):
Income tax expense 57,287 49,509 52,416 44,696 42,503
Total fixed charges above 69,183 67,565 62,983 54,359 51,057
-------- -------- -------- -------- --------
Total earnings $232,242 $200,527 $202,520 $176,252 $176,336
======== ======== ======== ======== ========
Ratio of earnings to fixed charges 3.36 2.97 3.22 3.24 3.45
Fixed charges and preferred
dividend requirements:
Fixed charges above $ 69,183 $ 67,565 $ 62,983 $ 54,359 $ 51,057
Preferred dividend
requirements (2) 9,786 12,711 14,612 13,668 12,615
-------- -------- -------- -------- --------
Total $ 78,969 $ 80,276 $ 77,595 $ 68,027 $ 63,672
======== ======== ======== ======== ========
Ratio of earnings to fixed
charges and preferred
dividend requirements 2.94 2.50 2.61 2.59 2.77
(1) Calculations have been restated to reflect the results from continuing
operations (i.e., excluding discontinued coal mining operations).
(2) Preferred dividend requirements have been grossed up to their pre-tax level.
UT
1,000
9-MOS
DEC-31-1997
SEP-30-1997
PER-BOOK
1,420,855
287,184
194,355
303,756
0
2,206,150
584,650
(6,599)
166,609
744,660
155,000
0
612,869
85,260
31,405
0
15,786
0
6,085
1,943
553,142
2,206,150
815,361
47,292
686,995
686,995
128,366
59,546
187,912
49,061
91,559
4,568
86,991
52,043
0
193,666
1.55
1.55
LONG-TERM DEBT-NET DOES NOT MATCH THE AMOUNT REPORTED ON THE COMPANY'S
CONSOLIDATED STATEMENT OF CAPITALIZATION AS LONG-TERM DEBT DUE TO THE OTHER
CATEGORIES REQUIRED BY THIS SCHEDULE.
OTHER ITEMS CAPITAL AND LIABILITIES INCLUDES THE CURRENT LIABILITIES,
DEFERRED CREDITS AND MINORITY INTEREST, LESS CERTAIN AMOUNTS INCLUDED UNDER
LONG-TERM DEBT-CURRENT PORTION AND LEASES-CURRENT, FROM THE COMPANY'S
CONSOLIDATED BALANCE SHEET.
THE COMPANY DOES NOT INCLUDE INCOME TAX EXPENSE AS AN OPERATING EXPENSE
ITEM. IT IS INCLUDED ON THE COMPANY'S STATEMENTS AS A BELOW-THE-LINE ITEM.
INCOME BEFORE INTEREST EXPENSE IS NOT A SPECIFIC LINE ITEM ON THE COMPANY'S
INCOME STATEMENTS. THE COMPANY COMBINES TOTAL INTEREST EXPENSE AND OTHER INCOME
TO CALCULATE INCOME BEFORE INCOME TAXES.
