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 March 31, 1998
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 [ ]
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At April 30, 1998, 55,960,360 shares of Registrant's Common Stock, no par value
(the only class of common stock), were outstanding.
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THE WASHINGTON WATER POWER COMPANY
Index
Page No.
--------
Part I. Financial Information:
Item 1.Financial Statements
Consolidated Statements of Income - Three Months Ended
March 31, 1998 and 1997............................... 3
Consolidated Balance Sheets - March 31, 1998
and December 31, 1997.................................. 4
Consolidated Statements of Capitalization - March 31, 1998
and December 31, 1997................................. 5
Consolidated Statements of Cash Flows - Three Months Ended
March 31, 1998 and 1997............................... 6
Schedule of Information by Business Segments - Three
Months Ended March 31, 1998 and 1997.................. 7
Notes to Consolidated Financial Statements............... 9
Item 2.Management's Discussion and Analysis of
Financial Condition and Results of Operations............ 12
Part II. Other Information:
Item 5.Other Information..................................... 15
Item 6.Exhibits and Reports on Form 8-K...................... 16
Signature............................................................... 17
3
CONSOLIDATED STATEMENTS OF INCOME
The Washington Water Power Company
- --------------------------------------------------------------------------------
For the Three Months Ended March 31
Thousands of Dollars
1998 1997
--------- ---------
OPERATING REVENUES .................................. $ 571,678 $ 284,046
--------- ---------
OPERATING EXPENSES:
Resource costs ................................... 408,855 124,575
Operations and maintenance ....................... 47,580 44,440
Administrative and general ....................... 26,225 18,554
Depreciation and amortization .................... 17,659 17,462
Taxes other than income taxes .................... 14,726 14,956
--------- ---------
Total operating expenses ....................... 515,045 219,987
--------- ---------
INCOME FROM OPERATIONS .............................. 56,633 64,059
--------- ---------
OTHER INCOME (EXPENSE):
Interest expense ................................. (17,229) (16,316)
Interest on income tax recovery .................. 1,960 --
Net gain on subsidiary transactions .............. 7,611 --
Other income (deductions)-net .................... 3,166 6,814
--------- ---------
Total other income (expense)-net ............... (4,492) (9,502)
--------- ---------
INCOME BEFORE INCOME TAXES .......................... 52,141 54,557
INCOME TAXES ........................................ 19,909 24,709
--------- ---------
NET INCOME .......................................... 32,232 29,848
DEDUCT-Preferred stock dividend requirements ........ 824 1,778
--------- ---------
INCOME AVAILABLE FOR COMMON STOCK ................... $ 31,408 $ 28,070
========= =========
Average common shares outstanding (thousands) ....... 55,960 55,960
EARNINGS PER SHARE OF COMMON STOCK, BASIC AND DILUTED $ 0.56 $ 0.50
Dividends paid per common share ..................... $ 0.31 $ 0.31
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
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CONSOLIDATED BALANCE SHEETS
The Washington Water Power Company
- --------------------------------------------------------------------------------
Thousands of Dollars
March 31, December 31,
1998 1997
---------- ----------
ASSETS:
CURRENT ASSETS:
Cash and cash equivalents ................................. $ 32,525 $ 30,593
Temporary cash investments ................................ 25,640 22,641
Accounts and notes receivable-net ......................... 185,758 176,882
Energy commodity assets ................................... 183,104 76,449
Materials and supplies, fuel stock and natural gas stored . 39,138 42,148
Prepayments and other ..................................... 34,682 28,130
---------- ----------
Total current assets .................................... 500,847 376,843
---------- ----------
UTILITY PROPERTY:
Utility plant in service-net .............................. 2,052,475 2,031,026
Construction work in progress ............................. 34,214 37,446
---------- ----------
Total ................................................... 2,086,689 2,068,472
Less: Accumulated depreciation and amortization .......... 647,986 635,349
---------- ----------
Net utility plant ....................................... 1,438,703 1,433,123
---------- ----------
OTHER PROPERTY AND INVESTMENTS:
Investment in exchange power-net .......................... 67,446 69,013
Non-utility properties and investments-net ................ 244,649 208,149
Other-net ................................................. 15,812 20,065
---------- ----------
Total other property and investments .................... 327,907 297,227
---------- ----------
DEFERRED CHARGES:
Regulatory assets for deferred income tax ................. 176,682 176,682
Conservation programs ..................................... 52,093 53,338
Unamortized debt expense .................................. 23,339 23,978
Prepaid power purchases ................................... 14,773 18,134
Other-net ................................................. 30,944 32,460
---------- ----------
Total deferred charges .................................. 297,831 304,592
---------- ----------
TOTAL ................................................. $2,565,288 $2,411,785
========== ==========
LIABILITIES AND CAPITALIZATION:
CURRENT LIABILITIES:
Accounts payable .......................................... $ 174,485 $ 154,312
Energy commodity liabilities .............................. 179,206 70,135
Taxes and interest accrued ................................ 57,923 35,705
Other ..................................................... 63,738 79,586
---------- ----------
Total current liabilities ............................... 475,352 339,738
---------- ----------
NON-CURRENT LIABILITIES AND DEFERRED CREDITS:
Non-current liabilities ................................... 61,092 36,071
Deferred income taxes ..................................... 360,644 352,749
Other deferred credits .................................... 19,402 17,230
---------- ----------
Total non-current liabilities and deferred credits ...... 441,138 406,050
---------- ----------
CAPITALIZATION (See Consolidated Statements of Capitalization) 1,648,798 1,665,997
---------- ----------
COMMITMENTS AND CONTINGENCIES (Note 5)
TOTAL ................................................. $2,565,288 $2,411,785
========== ==========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
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5
CONSOLIDATED STATEMENTS OF CAPITALIZATION
The Washington Water Power Company
- --------------------------------------------------------------------------------
Thousands of Dollars
March 31, December 31,
1998 1997
----------- -----------
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 ............................... 211,500 211,500
Series B - 6.20% to 8.25% due 1999 through 2010 ............................... 150,000 150,000
----------- -----------
Total first mortgage bonds .................................................... 445,200 445,200
----------- -----------
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 52,500
Series B - 6.75% to 8.23% due 1999 through 2023 ................................. 115,000 115,000
----------- -----------
Total unsecured medium-term notes ............................................. 167,500 167,500
----------- -----------
Notes payable (due within one year) to be refinanced .............................. 80,500 108,500
Other ............................................................................. 33,515 36,885
----------- -----------
Total long-term debt ............................................................ 730,815 762,185
----------- -----------
COMPANY-OBLIGATED MANDATORILY REDEEMABLE
PREFERRED TRUST SECURITIES:
7 7/8%, Series A, due 2037 ...................................................... 60,000 60,000
Floating Rate, Series B, due 2037 ............................................... 50,000 50,000
----------- -----------
Total company-obligated mandatorily redeemable preferred
trust securities .......................................................... 110,000 110,000
----------- -----------
PREFERRED STOCK-CUMULATIVE:
10,000,000 shares authorized:
Subject to mandatory redemption:
$8.625 Series I; 100,000 shares outstanding ($100 stated value).................. 10,000 10,000
$6.95 Series K; 350,000 shares outstanding ($100 stated value) .................. 35,000 35,000
----------- -----------
Total subject to mandatory redemption ......................................... 45,000 45,000
----------- -----------
COMMON EQUITY:
Common stock, no par value; 200,000,000 shares authorized;
55,960,360 shares outstanding ................................................... 594,852 594,852
Note receivable from employee stock ownership plan ................................ (10,008) (9,750)
Capital stock expense and other paid in capital ................................... (10,145) (10,143)
Unrealized investment gain-net .................................................... 2,349 2,077
Retained earnings ................................................................. 185,935 171,776
----------- -----------
Total common equity ............................................................. 762,983 748,812
----------- -----------
TOTAL CAPITALIZATION ................................................................. $ 1,648,798 $ 1,665,997
=========== ===========
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 Three Months Ended March 31
Thousands of Dollars
1998 1997
-------- --------
OPERATING ACTIVITIES:
Net income .................................................... $ 32,232 $ 29,848
NON-CASH ITEMS INCLUDED IN NET INCOME:
Depreciation and amortization ............................... 17,659 17,462
Provision for deferred income taxes ......................... 7,870 9,609
Allowance for equity funds used during construction ......... (402) (290)
Power and natural gas cost deferrals and amortizations ...... 1,151 (8,658)
Gains/losses on sales and other-net ......................... (8,468) (3,903)
(Increase) decrease in working capital components:
Receivables and prepaid expense ........................... (32,459) 31,269
Materials & supplies, fuel stock and natural gas stored ... 3,010 2,415
Payables and other accrued liabilities .................... 42,227 (5,762)
Other ..................................................... (5,235) 3,771
-------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES ........................ 57,585 75,761
-------- --------
INVESTING ACTIVITIES:
Construction expenditures (excluding AFUDC-equity funds) ...... (19,253) (16,038)
Other capital requirements .................................... (2,445) (1,027)
(Increase) decrease in other noncurrent balance sheet items-net 2,923 7,236
Proceeds from sale of subsidiary investments .................. 22,433 71
Assets acquired and investments in subsidiaries ............... (10,254) (1,760)
-------- --------
NET CASH USED IN INVESTING ACTIVITIES ............................ (6,596) (11,518)
-------- --------
FINANCING ACTIVITIES:
Increase (decrease) in short-term borrowings .................. (28,000) (60,000)
Proceeds from issuance of preferred trust securities .......... -- 60,000
Proceeds from issuance of long-term debt ...................... 6,000 --
Redemption and maturity of long-term debt ..................... (6,000) --
Cash dividends paid ........................................... (18,171) (19,165)
Other-net ..................................................... (2,886) (18,287)
-------- --------
NET CASH USED IN FINANCING ACTIVITIES ............................ (49,057) (37,452)
-------- --------
NET INCREASE (DECREASE) IN CASH & CASH EQUIVALENTS ............... 1,932 26,791
CASH & CASH EQUIVALENTS AT BEGINNING OF PERIOD ................... 30,593 8,211
-------- --------
CASH & CASH EQUIVALENTS AT END OF PERIOD ......................... $ 32,525 $ 35,002
======== ========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the period:
Interest .................................................... $ 14,655 $ 12,707
Income taxes ................................................ 390 1,305
Noncash financing and investing activities:
Property purchased under capitalized leases ................. 244 91
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 March 31
Thousands of Dollars
1998 1997
----------- -----------
OPERATING REVENUES:
Energy Delivery .............................. $ 127,295 $ 119,397
Generation and Resources ..................... 126,910 125,441
National Energy Trading and Marketing ........ 271,057 111
Non-energy ................................... 47,684 39,138
Intersegment eliminations .................... (1,268) (41)
----------- -----------
Total operating revenues ................... $ 571,678 $ 284,046
=========== ===========
RESOURCE COSTS:
Energy Delivery:
Natural gas purchased for resale ........... $ 37,918 $ 32,339
Other ...................................... (1,226) (433)
Generation and Resources:
Power purchased ............................ 85,895 71,907
Fuel for generation ........................ 9,470 9,663
Other ...................................... 12,315 11,099
National Energy Trading and Marketing:
Cost of sales .............................. 264,483 --
----------- -----------
Total resource costs (excluding Non-energy) $ 408,855 $ 124,575
=========== ===========
GROSS MARGINS:
Energy Delivery .............................. $ 90,603 $ 87,491
Generation and Resources ..................... 19,230 32,772
National Energy Trading and Marketing ........ 6,574 111
----------- -----------
Total gross margins (excluding Non-energy) . $ 116,407 $ 120,374
=========== ===========
ADMINISTRATIVE AND GENERAL EXPENSES:
Energy Delivery .............................. $ 11,174 $ 11,522
Generation and Resources ..................... 3,522 3,802
National Energy Trading and Marketing ........ 4,170 593
Non-energy ................................... 7,359 2,637
----------- -----------
Total administrative and general expenses .. $ 26,225 $ 18,554
=========== ===========
DEPRECIATION AND AMORTIZATION EXPENSES:
Energy Delivery .............................. $ 8,678 $ 8,125
Generation and Resources ..................... 6,180 6,612
National Energy Trading and Marketing ........ 163 23
Non-energy ................................... 2,638 2,702
----------- -----------
Total depreciation and amortization expenses $ 17,659 $ 17,462
=========== ===========
INCOME/(LOSS) FROM OPERATIONS (PRE-TAX):
Energy Delivery .............................. $ 45,368 $ 42,183
Generation and Resources ..................... 6,767 19,507
National Energy Trading and Marketing ........ 1,930 (990)
Non-energy ................................... 2,568 3,359
----------- -----------
Total income from operations ............... $ 56,633 $ 64,059
=========== ===========
INCOME AVAILABLE FOR COMMON STOCK:
Energy Delivery and Generation and Resources . $ 22,268 $ 27,371
National Energy Trading and Marketing ........ 2,050 (641)
Non-energy ................................... 7,090 1,340
----------- -----------
Total income available for common stock .... $ 31,408 $ 28,070
=========== ===========
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SCHEDULE OF INFORMATION BY BUSINESS SEGMENTS
The Washington Water Power Company
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For the Three Months Ended March 31
Thousands of Dollars
1998 1997
----------- -----------
ASSETS: (1997 amounts at December 31)
Energy Delivery .............................. $ 1,051,694 $ 1,051,585
Generation and Resources ..................... 612,960 620,142
Other utility ................................ 254,249 255,012
National Energy Trading and Marketing ........ 390,193 214,630
Non-energy ................................... 256,192 270,416
----------- -----------
Total assets ............................... $ 2,565,288 $ 2,411,785
=========== ===========
CAPITAL EXPENDITURES (excluding AFUDC/AFUCE):
Energy Delivery .............................. $ 16,032 $ 12,976
Generation and Resources ..................... 2,673 2,594
National Energy Trading and Marketing ........ 160 --
Non-energy ................................... 2,475 1,144
----------- -----------
Total capital expenditures ................. $ 21,340 $ 16,714
=========== ===========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
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9
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 March 31, 1998 and 1997 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, 1997
(1997 Form 10-K).
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
As of January 1, 1998, the Company adopted Statement of Financial Accounting
Standards No. 130 (FAS No. 130), "Reporting Comprehensive Income." It requires
companies to classify items of other comprehensive income by their nature in a
financial statement and display the accumulated balance of other comprehensive
income separately from retained earnings and additional paid-in capital in the
equity section of a statement of financial position. For the three months ended
March 31, 1998, changes in accumulated comprehensive income totaled $0.4
million, which consisted of $0.3 million from unrealized investment gains on
available-for-sale securities and $0.1 million from the ESOP dividend tax
savings.
NOTE 2. ENERGY COMMODITY TRADING
Notional Amounts and Terms The notional amounts and terms of Avista Energy's
outstanding financial instruments at March 31, 1998 are set forth below:
Fixed Price Fixed Price Maximum
Payor Receiver Terms in Years
------------ ----------- --------------
Energy commodities (volumes)
Natural gas (mmBTU) 481,177 389,466 13
Electric (MWh) 44,570 34,209 9
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THE WASHINGTON WATER POWER COMPANY
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At March 31, 1998, Avista Energy also had sales and purchase commitments
associated with contracts based on market prices totaling 263,981 mmBTUs, with
terms extending up to 3 years. The fixed index electric transactions totaled
2,001 MWh.
Notional amounts reflect the volume of transactions but do not necessarily
represent the amounts exchanged by the parties to the commodity derivative
instruments. Accordingly, notional amounts do not accurately measure Avista
Energy's exposure to market or credit risks. The maximum terms in years detailed
above are not indicative of likely future cash flows as these positions may be
offset in the markets at any time in response to Avista Energy's risk management
needs.
Fair Value The fair value of Avista Energy's financial instruments as of March
31, 1998, and the average fair value of those instruments held during the three
months ended March 31, 1998 are set forth below:
Fair Value Average Fair Value for the
as of March 31, 1998 three months ended March 31, 1998
------------------------------------------ --------------------------------------------
Current Long-term Current Long-term Current Long-term Current Long-term
Assets Assets Liabilities Liabilities Assets Assets Liabilities Liabilities
------- --------- ----------- ----------- ------- --------- ----------- -----------
(thousands of dollars)
Natural gas 74,241 19,716 75,738 16,954 43,155 11,462 43,436 9,723
Electric 108,863 28,565 103,468 22,649 63,282 16,604 59,339 12,989
The weighted average term of Avista Energy's natural gas and related commodity
derivative instruments as of March 31, 1998 was approximately three months. The
weighted average term of Avista Energy's electric commodity derivatives at March
31, 1998 was approximately twelve months. The change in the fair value position
of Avista Energy's energy commodity portfolio, net of the reserves for credit
and market risk from December 31, 1997 to March 31, 1998 was $2.5 million and is
included on the Consolidated Statements of Income in operating revenues.
NOTE 3. NATIONAL ENERGY TRADING AND MARKETING EQUITY INVESTMENT
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 quarter ended
March 31, 1998. 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 March 31, 1998 and December 31, 1997.
The following selected financial information for Howard/Avista reflects that
company's total financial position and operating results as of and for the three
months ended March 31, 1998:
RESULTS OF OPERATIONS (thousands of dollars)
Three months ended
March 31, 1998
------------------
Revenues $ 679,578
Operating Expenses (678,555)
Other Income-net 649
---------
Net Income (pre-tax) $ 1,672
=========
Avista Energy's equity in earnings
of Howard/Avista Energy LLC (pre-tax) $ 836
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THE WASHINGTON WATER POWER COMPANY
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FINANCIAL POSITION (thousands of dollars)
March 31, 1998 December 31, 1997
-------------- -----------------
Current Assets $370,285 $400,150
Other Assets 1,514 1,960
-------- --------
Total Assets $371,799 $402,110
======== ========
Current Liabilities $316,213 $348,339
Other Liabilities 371 228
-------- --------
Total Liabilities 316,584 348,567
Equity 55,215 53,543
-------- --------
Total Liabilities and Equity $371,799 $402,110
======== ========
Avista Energy's equity investment
in Howard/Avista Energy LLC (pre-tax) $ 27,608 $ 26,772
NOTE 4. FINANCINGS
The Company has an effective Registration Statement covering up to $250 million
of unsecured debt securities, to be issued as Medium-Term Notes, Series C.
Reference is made to the information relating to financings and borrowings as
discussed under the caption "Liquidity and Capital Resources" in Item 2.
"Management's Discussion and Analysis of Financial Condition and Results of
Operations".
NOTE 5. COMMITMENTS AND CONTINGENCIES
The Company believes, based on the information presently known, the ultimate
liability for the matters discussed in this note, individually or in the
aggregate, taking into account established accruals for estimated liabilities,
will not be material to the consolidated financial position of the Company, but
could be material to results of operations or cash flows for a particular
quarter or annual period. No assurance can be given, however, as to the ultimate
outcome with respect to any particular lawsuit. To-date, there have been no
material developments since the 1997 Form 10-K was issued.
NEZ PERCE TRIBE
On December 6, 1991, the Nez Perce Tribe filed an action against the Company in
U. S. District Court for the District of Idaho alleging, among other things,
that two dams formerly operated by the Company, the Lewiston Dam on the
Clearwater River and the Grangeville Dam on the South Fork of the Clearwater
River, provided inadequate passage to migrating anadromous fish in violation of
rights under treaties between the Tribe and the United States made in 1855 and
1863. The Lewiston and Grangeville Dams, which had been owned and operated by
other utilities under hydroelectric licenses from the Federal Power Commission
(the "FPC", predecessor of the Federal Energy Regulatory Commission (FERC))
prior to acquisition by the Company, were acquired by the Company in 1937 with
the approval of the FPC, but were dismantled and removed in 1973 and 1963,
respectively. Allegations of actual loss under different assumptions range
between $425 million and $650 million, together with $100 million in punitive
damages.
On November 21, 1994, the Company filed a Motion for Summary Judgment of
Dismissal. On March 28, 1996, a U.S. District judge entered a summary judgment
in favor of the Company dismissing the complaint. The Tribe filed a notice of
appeal to the Ninth Circuit Court of Appeals on April 24, 1996. A mediation
conference was held on October 11, 1996. Following the conclusion of that
conference, briefing schedules were vacated indefinitely to accommodate a
mediation process, which is continuing.
OIL SPILL
The Company completed an updated investigation of an oil spill from an
underground storage tank that occurred several years ago in downtown Spokane at
the site of the Company's steam heat plant. Underground soil testing conducted
in 1993 showed that the oil had migrated approximately one city block beyond the
steam plant property. The Clean-up Action Plan determined by the Department of
Ecology (DOE) is underway, and remediation facilities have been constructed and
installed and are being operated.
On August 17, 1995, a lawsuit was filed against the Company in Superior Court of
the State of Washington for Spokane County by Davenport Sun International Hotels
and Properties, Inc., the owner of a hotel property in downtown Spokane,
Washington. The Complaint alleged that the oil released from the Company's
Central Steamplant trespassed on property owned by the plaintiff. In addition,
the plaintiff claimed that the Steamplant has caused a diminution of value of
plaintiff's land. After mediation, the matter was resolved by settlement and
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THE WASHINGTON WATER POWER COMPANY
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compromise, subject to certain conditions. In December 1997, the settlement was
restructured, certain amounts were paid, the litigation was dismissed with
prejudice, a release was obtained, and other conditions remain to be fulfilled,
none of which would affect the dismissal of this action.
The Company pursued recovery from insurers and has reached settlement with one
of the two insurance carriers. On December 13, 1996, the Company filed a
Complaint for declaratory relief and money damages against Underwriters at
Lloyds of London (Lloyds), the remaining carrier, in Spokane County Superior
Court. The purpose of this action is to seek a declaration of the insurance
policies issued to the Company by Lloyds with respect to any liabilities of the
Company for environmental damage associated with the oil spill at the Central
Steam Plant and other environmental remediation efforts. The policies at issue
were in effect during the period between 1926 and 1979; thereafter, the Company
maintained its policies with a new underwriter, Aegis. The Company's Complaint
seeks money damages in excess of $16 million.
ITRON LITIGATION
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.
SPOKANE GAS PLANT
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 until 1948) 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 6. ACQUISITIONS AND DISPOSITIONS
During the first quarter of 1998, Pentzer Corporation (Pentzer) sold Systran
Financial Services, resulting in an after-tax gain of $5.5 million.
In early April, 1998, Pentzer completed the purchase of two new companies.
Universal Showcase, Ltd., in Toronto, Canada and Triangle Systems, Inc., in New
York, both produce store fixtures.
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THE WASHINGTON WATER POWER COMPANY
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The Washington Water Power Company (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 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. The national businesses are conducted under Avista Corp., which is
the parent company to the Company's subsidiaries.
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. The Generation and Resources line of business
includes the generation and production of electric energy, and short- and
long-term electric and natural gas sales trading and wholesale marketing
primarily to other utilities and power brokers in the Western Systems
Coordinating Council.
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. Avista Energy focuses on
commodity trading, energy marketing and other related businesses on a national
basis. Avista Advantage provides a variety of energy-related products and
services, such as consolidated billing and resource accounting, to commercial
and industrial customers on a national basis. The Non-energy business is
conducted primarily by Pentzer Corporation (Pentzer), which is the parent
company to the majority of the Company's Non-energy businesses.
RESULTS OF OPERATIONS
OVERALL OPERATIONS
First quarter 1998 net income available for common stock was $31.4 million, a
$3.3 million increase from first quarter 1997 net income of $28.1 million. The
increase in earnings was primarily the result of a $5.5 million transactional
gain, net of taxes, from the sale of a portfolio company by Pentzer which
occurred in the first quarter of 1998 and increased earnings from National
Energy Trading and Marketing activities. The increase in earnings was partially
offset by decreased earnings from Generation and Resources operations, due in
large part to increased resource costs in the first quarter of 1998 as compared
to the same period in 1997.
Earnings per share for the first quarter of 1998 were $0.56 as compared to $0.50
in the first quarter of 1997. Energy Delivery and Generation and Resources
contributed $0.40 to earnings per share for the first quarter of 1998 compared
to $0.49 in the first quarter of 1997. National Energy Trading and Marketing
operations contributed $0.03 to earnings per share in the first quarter of 1998
compared to a loss of $0.01 in the same period in 1997. Non-energy operations
contributed $0.13 to earnings per share for the first quarter of 1998 compared
to $0.02 in the same period in 1997, due to a $0.10 per share contribution from
the transactional gain discussed above.
Income taxes for the first quarter of 1998 decreased $4.8 million from the first
quarter of 1997, primarily as a result of income tax adjustments made in the
first quarter of 1997.
ENERGY DELIVERY
Energy Delivery's pre-tax income from operations increased $3.2 million, or 8%,
in the first quarter of 1998 over the same period in 1997. The increase was
primarily the result of the positive impact of a natural gas price increase
effective January 1998 and lower operating expenses. Energy Delivery's operating
revenues and expenses increased $7.9 million and $4.7 million, respectively,
during the first quarter of 1998 as compared to 1997.
Retail electric revenues decreased $1.8 million in the first quarter of 1998
compared to the same period in 1997, primarily as a result of a revenue
adjustment that occurred in the first quarter of 1997 and decreased customer
usage in the first quarter of 1998 due to warmer than normal weather. Natural
gas revenues increased $9.7 million in the first quarter of 1998 over 1997 due
to a combination of customer growth and increased prices approved by the
Washington Utilities and Transportation Commission (WUTC) in November 1997,
which was effective January 1, 1998.
Total operating expenses increased $4.7 million in the first quarter of 1998
from 1997. Purchased natural gas costs increased $5.6 million in the first
quarter of 1998, primarily from increased therm sales due to higher sales for
resale and customer growth. Other operating expenses decreased slightly from the
previous year primarily due to milder weather through the first quarter of 1998.
12
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THE WASHINGTON WATER POWER COMPANY
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GENERATION AND RESOURCES
Generation and Resources' pre-tax income from operations decreased $12.7
million, or 65%, in the first quarter of 1998 from the same period in 1997. The
decrease was primarily due to hydroelectric generation that was 31% lower in the
first quarter of 1998 compared to 1997, which resulted in higher levels of
purchased power to meet sales commitments. Streamflows in the first quarter of
1998 were 105% of normal, compared to 180% in the first quarter of 1997. In
addition, prices for purchased power were 14% higher than in 1997.
Generation and Resources' revenues for the first quarter of 1998 increased $1.5
million over the same period in 1997. During 1997 there was a significant shift
in product mix between short- and long-term sales which continued into 1998.
Revenues from short-term sales, typically with smaller margins, increased $19.9
million, or 59%, while short-term sales volumes increased 543.3 million mwhs,
or 22%, during the first quarter of 1998 over 1997, reflecting higher prices
for purchased power in the region. Revenues from long-term sales, typically
with higher margins, decreased $14.9 million, or 39%, while long-term sales
volumes decreased 384.5 million mwhs, or 30%, during the same period.
Commitments under long-term wholesale sales contracts caused purchased power
volumes to increase 5%, which, combined with purchased power costs 14% higher
than last year, resulted in a $15.0 million, or 16%, increase in resource costs
in the first quarter of 1998 over 1997. This increase accounts for the majority
of the increase in Generation and Resources' operating expenses and the decline
in gross margins and pre-tax operating income.
NATIONAL ENERGY TRADING AND MARKETING
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 first quarter of 1998 was
$2.1 million, which was a $2.7 million increase from first quarter 1997 earnings
when start-up costs were being incurred. National Energy Trading and Marketing
operating revenues and expenses increased $270.9 million and $268.0 million,
respectively, during the first quarter of 1998 as compared to 1997 primarily as
a result of Avista Energy beginning trading operations in July 1997.
NON-ENERGY
Non-energy operations primarily reflect the results of Pentzer. Non-energy
income available for common stock for the first quarter of 1998 was $7.1
million, compared to first quarter 1997 earnings of $1.3 million. The 1998
earnings increase primarily resulted from a transactional gain totaling $5.5
million, net of taxes, recorded by Pentzer as a result of the sale of one of its
portfolio companies, Systran Financial Services. Non-transactional income from
portfolio companies in the first quarter of 1998 increased $0.4 million over
1997.
Non-energy operating revenues and expenses increased $8.5 million and $9.3
million, respectively, during the first quarter of 1998, as compared to 1997,
primarily as a result of acquisitions and increased business activity from
several of Pentzer's portfolio companies. Income from operations totaled $2.6
million, which was a $0.8 million decrease in 1998 from 1997. This decrease in
earnings primarily reflects the reduction in earnings from the portfolio
companies sold by Pentzer since the first quarter of 1997 and decreased business
activities at several other companies.
13
15
THE WASHINGTON WATER POWER COMPANY
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LIQUIDITY AND CAPITAL RESOURCES
OVERALL OPERATIONS
Operating Activities Cash available from operating activities in the first
quarter of 1998 decreased $18.2 million from the first quarter of 1997. Changes
in various working capital components, such as decreased payables and increased
receivables caused cashflows to decrease $24.2 million from the same period of
last year, primarily due to Avista Energy's operations. Power and natural gas
cost deferrals resulted in slightly increased cashflows in 1998 as compared to
decreased cashflows in 1997 when natural gas prices were higher during the first
quarter, natural gas customers paid reduced prices and PCA rebates were in
effect. Gains/losses on sales and other-net decreased cashflows in 1998 due to
non-cash gains on subsidiary transactions recorded by Pentzer and risk
management activities by Avista Energy. See the Consolidated Statements of Cash
Flows for additional details.
Investing Activities Cash used in investing activities totaled $6.6 million in
the first quarter of 1998 compared to $11.5 million in the same period in 1997.
Net cash used in investing activities was lower during the first quarter of 1998
primarily as a result of proceeds from the sale of subsidiary investments by
Pentzer, partially offset by acquisitions made by Pentzer. See the Consolidated
Statements of Cash Flows for additional information.
Financing Activities Cash used in financing activities totaled $49.1 million in
the first quarter of 1998 compared to $37.5 million in 1997. Bank borrowings
were reduced $28.0 million in the first quarter of 1998. Bank borrowings
decreased $60.0 million in the first quarter of 1997 with the proceeds of $60
million of Preferred Trust Securities which were issued in January 1997. The
reduction of $2.9 million and $18.3 million in Other-net for the first quarter
of 1998 and 1997, respectively, reflects decreases in short and long-term debt
by the non-energy companies.
ENERGY DELIVERY AND GENERATION AND RESOURCES OPERATIONS
The Company funds 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.
The Company has an effective Registration Statement covering up to $250 million
of unsecured debt securities, to be issued as Medium-Term Notes, Series C.
Capital expenditures are financed on an interim basis with notes payable (due
within one year). The Company has $120 million in committed lines of credit. In
addition, the Company may currently borrow up to $100 million through other
borrowing arrangements with banks. As of March 31, 1998, $35.5 million was
outstanding under the committed lines of credit, and $45.0 million was
outstanding under other short-term borrowing arrangements.
NATIONAL ENERGY TRADING AND MARKETING OPERATIONS
The National Energy Trading and Marketing operations have a credit agreement
with a commercial bank that is guaranteed by Avista Corp. The agreement is
uncommitted with a demand feature exercisable by the bank at the bank's sole
discretion. The maximum cash component of credit extended by the bank is $15
million, with availability of up to $50 million in the issuance of letters of
credit. At March 31, 1998, there were no cash advances (demand notes payable)
outstanding, and letters of credit outstanding under the facility totaled $3.6
million. At March 31, 1998, the National Energy Trading and Marketing operations
had $9.3 million in cash and cash equivalents.
NON-ENERGY OPERATIONS
The non-energy operations have $21 million in short-term borrowing arrangements
available ($14.1 million outstanding as of March 31, 1998) to fund corporate
requirements on an interim basis. At March 31, 1998, the non-energy operations
had $41.9 million in cash and marketable securities with $43.2 million in
long-term debt outstanding.
TOTAL COMPANY
The Company's total common equity increased by $14.2 million during the first
quarter of 1998 to $763.0 million, primarily due to increased retained earnings
net of dividends declared. The Company's consolidated capital structure at March
31, 1998, was 44% debt, 10% preferred securities (including the Preferred Trust
Securities) and 46% common equity as compared to 46% debt, 9% preferred
securities and 45% common equity at year-end 1997.
14
16
THE WASHINGTON WATER POWER COMPANY
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The Company's current estimates for capital expenditures (as disclosed in the
1997 Form 10-K) do not include any funds that may be required if the Company
were to be successful in acquiring additional generation capacity. The Company
is continually evaluating opportunities as they become available and also
continues to evaluate its overall resource portfolio to maximize the value of
its resources and minimize its cost of generation.
Year 2000 The Company continues to move forward with a comprehensive program to
address areas of risk associated with the year 2000. Systems and programs that
may be affected by the year 2000 problem have been identified and activities are
underway to make these systems year 2000 ready. At this time, it is the
Company's assessment that all identified modifications that are within the
Company's operating control will be made within the required time frames.
Current estimates of costs remain within the initial range of estimated costs
reported in the Company's 1997 Form 10-K.
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 1997 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.
OTHER.
Federal Energy Regulatory Commission (FERC) Order On April 30, 1998, the FERC
issued an order asserting that the Company and Avista Energy had violated Orders
No. 888 and 889. The order directs the companies to show cause why, as a result
of the alleged violations, the FERC should not require refunds of certain
market-based power sales profits and, further, suspend, for six months, Avista
Energy's use of its market-based power sales tariff for any transaction that
would use the Company's transmission system.
Background: On October 30, 1997, Avista Energy submitted a request on the
Company's open-access same-time information system (OASIS) for interruptible
firm transmission service, pursuant to the Western Systems Power Pool agreement,
to transmit 29 MW for a two-month period (November and December 1997). The
Company and Avista Energy entered into a separate agreement to provide Avista
Energy with interruptible firm service which, according to the show cause order,
provided terms superior to the terms for non-firm service under the Company's
pro forma tariff. The Company provided the wheeling under service schedule D of
the Western Systems Power Pool agreement and was under the impression that
neither the FERC's affiliate conduct requirements nor Avista Energy's and the
Company's code of conduct precluded the Company from providing such service,
but that the Company was required to make a separate filing pursuant to
section 205 of the Federal Power Act. On November 28, 1997, the Company filed
with the FERC the letter agreement under which it was providing the
transmission service to Avista Energy. In a January 8, 1998, deficiency letter,
the commission staff informed the Company that the proposed letter agreement
failed to meet the requirement that Avista Energy must take service under the
Company's open-access tariff as a condition of its market-based rate approval.
While the Company and Avista Energy consider any sanction a serious matter, the
proposed sanctions would apply only to transactions utilizing the Company's
transmission system in eastern Washington, northern Idaho and western Montana.
It would not affect any other counterparty transactions or the on-going trading
and marketing functions of Avista Energy. The amount of profits that the FERC
proposed to be refunded would not be material to the consolidated financial
position of the Company. The Company and Avista Energy have 14 days from the
date of the order to respond.
15
17
THE WASHINGTON WATER POWER COMPANY
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ADDITIONAL FINANCIAL DATA.
At March 31, 1998, the total long-term debt of the Company and its consolidated
subsidiaries, as shown in the Company's consolidated financial statements, was
approximately $730.8 million. Of such amount, $167.5 million represents
long-term unsecured and unsubordinated indebtedness of the Company, and $449.3
million represents secured indebtedness of the Company. The balance of $114.0
million includes short-term notes to be refinanced as well as indebtedness of
subsidiaries. Consolidated long-term debt does not include the Company's
subordinated indebtedness held by the issuers of Company-obligated preferred
trust securities.
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
-----------------------------
March 31, December 31,
1998 1997
--------- ------------
Ratio of Earnings to Fixed Charges 3.43(x) 3.49(x)
Ratio of Earnings to Fixed Charges and
Preferred Dividend Requirements 3.14(x) 3.12(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.
None.
16
18
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: May 14, 1998 /s/ J. E. Eliassen
------------------------
J. E. Eliassen
Senior Vice President, Chief
Financial Officer and Treasurer
(Principal Accounting and
Financial Officer)
17
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
March 31, -----------------------------------------------
1998 1997 1996 1995 1994
------------- -------- -------- -------- --------
Fixed charges, as defined:
Interest on long-term debt $ 64,127 $ 63,413 $ 60,256 $ 55,580 $ 49,566
Amortization of debt expense
and premium - net 2,916 2,862 2,998 3,441 3,511
Interest portion of rentals 4,372 4,354 4,311 3,962 1,282
-------- -------- -------- -------- --------
Total fixed charges $ 71,415 $ 70,629 $ 67,565 $ 62,983 $ 54,359
======== ======== ======== ======== ========
Earnings, as defined:
Net income from continuing ops $117,181 $114,797 $ 83,453 $ 87,121 $ 77,197
Add (deduct):
Income tax expense 56,338 61,075 49,509 52,416 44,696
Total fixed charges above 71,415 70,629 67,565 62,983 54,359
-------- -------- -------- -------- --------
Total earnings $244,934 $246,501 $200,527 $202,520 $176,252
======== ======== ======== ======== ========
Ratio of earnings to fixed charges 3.43 3.49 2.97 3.22 3.24
Fixed charges and preferred
dividend requirements:
Fixed charges above $ 71,415 $ 70,629 $ 67,565 $ 62,983 $ 54,359
Preferred dividend requirements(1) 6,572 8,261 12,711 14,612 13,668
-------- -------- -------- -------- --------
Total $ 77,987 $ 78,890 $ 80,276 $ 77,595 $ 68,027
======== ======== ======== ======== ========
Ratio of earnings to fixed charges
and preferred dividend requirements 3.14 3.12 2.50 2.61 2.59
(1) Preferred dividend requirements have been grossed up to their pre-tax level.
UT
1,000
3-MOS
DEC-31-1998
MAR-31-1998
PER-BOOK
1,438,703
327,907
500,847
297,831
0
2,565,288
584,844
(7,796)
185,935
762,983
45,000
110,000
606,916
94,645
26,456
0
20,330
0
6,943
1,779
890,236
2,565,288
571,678
19,909
515,045
515,045
56,633
12,737
69,370
17,229
32,232
824
31,408
17,348
0
57,585
0.56
0.56
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.
