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, 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 [ ]
At October 31, 1998, 55,861,040 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, 1998 and 1997 ................................. 3
Consolidated Statements of Income - Nine Months Ended
September 30, 1998 and 1997 ................................. 4
Consolidated Balance Sheets - September 30, 1998
and December 31, 1997 ....................................... 5
Consolidated Statements of Capitalization - September 30, 1998
and December 31, 1997 ....................................... 6
Consolidated Statements of Cash Flows - Nine Months Ended
September 30, 1998 and 1997 ................................. 7
Schedule of Information by Business Segments - Three Months Ended
September 30, 1998 and 1997 ................................. 8
Schedule of Information by Business Segments - Nine Months Ended
September 30, 1998 and 1997 ................................. 10
Notes to Consolidated Financial Statements ...................... 12
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations ................... 16
Part II. Other Information:
Item 5. Other Information ........................................... 24
Item 6. Exhibits and Reports on Form 8-K ............................ 25
Signature ......................................................................... 26
3
CONSOLIDATED STATEMENTS OF INCOME
The Washington Water Power Company
- --------------------------------------------------------------------------------
For the Three Months Ended September 30
Thousands of Dollars
1998 1997
----------- -----------
OPERATING REVENUES .................................. $ 1,434,055 $ 295,076
----------- -----------
OPERATING EXPENSES:
Resource costs .................................. 1,289,400 166,762
Operations and maintenance ...................... 61,339 45,185
Administrative and general ...................... 30,022 24,606
Depreciation and amortization ................... 17,622 16,764
Taxes other than income taxes ................... 11,369 12,052
----------- -----------
Total operating expenses ...................... 1,409,752 265,369
----------- -----------
INCOME FROM OPERATIONS .............................. 24,303 29,707
----------- -----------
OTHER INCOME (EXPENSE):
Interest expense ................................ (17,104) (16,545)
Net gain on subsidiary transactions ............. 48 7,756
Other income (deductions)-net ................... 2,341 572
----------- -----------
Total other income (expense)-net .............. (14,715) (8,217)
----------- -----------
INCOME BEFORE INCOME TAXES .......................... 9,588 21,490
INCOME TAXES ........................................ 881 8,253
----------- -----------
NET INCOME .......................................... 8,707 13,237
DEDUCT-Preferred stock dividend requirements ........ 608 979
----------- -----------
INCOME AVAILABLE FOR COMMON STOCK ................... $ 8,099 $ 12,258
=========== ===========
Average common shares outstanding (thousands) ....... 55,960 55,960
EARNINGS PER SHARE OF COMMON STOCK, BASIC AND DILUTED $ 0.14 $ 0.22
Dividends paid per common share ..................... $ 0.31 $ 0.31
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
3
4
CONSOLIDATED STATEMENTS OF INCOME
The Washington Water Power Company
- --------------------------------------------------------------------------------
For the Nine Months Ended September 30
Thousands of Dollars
1998 1997
----------- -----------
OPERATING REVENUES .................................. $ 2,661,290 $ 815,361
----------- -----------
OPERATING EXPENSES:
Resource costs .................................. 2,191,459 397,363
Operations and maintenance ...................... 164,887 129,226
Administrative and general ...................... 92,519 70,673
Depreciation and amortization ................... 52,225 51,684
Taxes other than income taxes ................... 37,255 38,049
----------- -----------
Total operating expenses ...................... 2,538,345 686,995
----------- -----------
INCOME FROM OPERATIONS .............................. 122,945 128,366
----------- -----------
OTHER INCOME (EXPENSE):
Interest expense ................................ (51,151) (49,061)
Interest on income tax recovery ................. -- 47,338
Net gain on subsidiary transactions ............. 7,579 11,152
Other income (deductions)-net ................... 7,639 1,056
----------- -----------
Total other income (expense)-net .............. (35,933) 10,485
----------- -----------
INCOME BEFORE INCOME TAXES .......................... 87,012 138,851
INCOME TAXES ........................................ 30,430 47,292
----------- -----------
NET INCOME .......................................... 56,582 91,559
DEDUCT-Preferred stock dividend requirements ........ 2,219 4,568
----------- -----------
INCOME AVAILABLE FOR COMMON STOCK ................... $ 54,363 $ 86,991
=========== ===========
Average common shares outstanding (thousands) ....... 55,960 55,960
EARNINGS PER SHARE OF COMMON STOCK, BASIC AND DILUTED $ 0.97 $ 1.55
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,
1998 1997
---------- ----------
ASSETS:
CURRENT ASSETS:
Cash and cash equivalents ................................ $ 35,508 $ 30,593
Temporary cash investments ............................... 14,727 22,641
Accounts and notes receivable-net ........................ 437,822 176,882
Energy commodity assets .................................. 193,106 76,449
Materials and supplies, fuel stock and natural gas stored 50,676 42,148
Prepayments and other .................................... 30,317 28,130
---------- ----------
Total current assets ................................... 762,156 376,843
---------- ----------
UTILITY PROPERTY:
Utility plant in service-net ............................. 2,083,983 2,031,026
Construction work in progress ............................ 41,773 37,446
---------- ----------
Total .................................................. 2,125,756 2,068,472
Less: Accumulated depreciation and amortization ......... 668,801 635,349
---------- ----------
Net utility plant ...................................... 1,456,955 1,433,123
---------- ----------
OTHER PROPERTY AND INVESTMENTS:
Investment in exchange power-net ......................... 64,228 69,013
Non-utility properties and investments-net ............... 211,954 195,046
Energy commodity assets .................................. 59,260 13,103
Other-net ................................................ 23,531 20,065
---------- ----------
Total other property and investments ................... 358,973 297,227
---------- ----------
DEFERRED CHARGES:
Regulatory assets for deferred income tax ................ 172,358 176,682
Conservation programs .................................... 49,992 53,338
Unamortized debt expense ................................. 22,915 23,978
Prepaid power purchases .................................. 8,976 18,134
Other-net ................................................ 32,142 32,460
---------- ----------
Total deferred charges ................................. 286,383 304,592
---------- ----------
TOTAL ................................................ $2,864,467 $2,411,785
========== ==========
LIABILITIES AND CAPITALIZATION:
CURRENT LIABILITIES:
Accounts payable ......................................... $ 487,649 $ 154,312
Energy commodity liabilities ............................. 189,858 70,135
Taxes and interest accrued ............................... 29,174 35,705
Other .................................................... 64,652 79,586
---------- ----------
Total current liabilities .............................. 771,333 339,738
---------- ----------
NON-CURRENT LIABILITIES AND DEFERRED CREDITS:
Energy commodity liabilities ............................. 44,054 10,556
Non-current liabilities .................................. 32,175 25,515
Deferred income taxes .................................... 355,396 352,749
Other deferred credits ................................... 16,422 17,230
---------- ----------
Total non-current liabilities and deferred credits ..... 448,047 406,050
---------- ----------
CAPITALIZATION (See Consolidated Statements of Capitalization) 1,645,087 1,665,997
---------- ----------
COMMITMENTS AND CONTINGENCIES (Note 5)
TOTAL ................................................ $2,864,467 $2,411,785
========== ==========
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,
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 ............................ 48,500 52,500
Series B - 6.75% to 8.23% due 1999 through 2023 ............................ 115,000 115,000
Series C - 6.37% to 6.88% due 2028 ......................................... 45,000 --
----------- -----------
Total unsecured medium-term notes ....................................... 208,500 167,500
----------- -----------
Notes payable (due within one year) to be refinanced ......................... 54,200 108,500
Other ........................................................................ 40,691 36,885
----------- -----------
Total long-term debt ....................................................... 752,691 762,185
----------- -----------
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
$6.95 Series K; 350,000 shares outstanding ($100 stated value) ............. 35,000 35,000
----------- -----------
Total subject to mandatory redemption ................................... 35,000 45,000
----------- -----------
COMMON EQUITY:
Common stock, no par value; 200,000,000 shares authorized;
55,960,360 shares outstanding .............................................. 593,579 594,852
Note receivable from employee stock ownership plan ........................... (9,533) (9,750)
Capital stock expense and other paid in capital .............................. (10,198) (10,143)
Foreign currency translation adjustment ...................................... (363) --
Unrealized investment gain-net ............................................... (82) 2,077
Retained earnings ............................................................ 173,993 171,776
----------- -----------
Total common equity ........................................................ 747,396 748,812
----------- -----------
TOTAL CAPITALIZATION ............................................................. $ 1,645,087 $ 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 Nine Months Ended September 30
Thousands of Dollars
1998 1997
--------- ---------
OPERATING ACTIVITIES:
Net income ................................................. $ 56,582 $ 91,559
NON-CASH ITEMS INCLUDED IN NET INCOME:
Depreciation and amortization ............................ 52,225 51,684
Provision for deferred income taxes ...................... 8,514 36,128
Allowance for equity funds used during construction ...... (1,105) (960)
Power and natural gas cost deferrals and amortizations ... (2,945) (14,626)
Gains/losses on sales and other-net ...................... (9,068) (12,885)
(Increase) decrease in working capital components:
Sale of customer accounts receivables-net ............. 40,000 --
Receivables and prepaid expense ....................... (311,481) 45,909
Materials & supplies, fuel stock and natural gas stored (2,959) (9,401)
Payables and other accrued liabilities ................ 328,188 (7,485)
Other ................................................. (4,341) 13,743
--------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES ...................... 153,610 193,666
--------- ---------
INVESTING ACTIVITIES:
Construction expenditures (excluding AFUDC-equity funds) ... (65,097) (62,489)
Other capital requirements ................................. (9,895) (7,392)
Decrease in other noncurrent balance sheet items-net ....... 2,859 14,590
Proceeds from sale of subsidiary investments ............... 16,385 3,725
Assets acquired and investments in subsidiaries ............ (33,804) (39,203)
--------- ---------
NET CASH USED IN INVESTING ACTIVITIES .......................... (89,552) (90,769)
--------- ---------
FINANCING ACTIVITIES:
Decrease in short-term borrowings .......................... (54,300) (11,000)
Proceeds from issuance of preferred trust securities ....... -- 110,000
Redemption of preferred stock .............................. (10,000) (70,000)
Proceeds from issuance of long-term debt ................... 45,000 15,000
Redemption and maturity of long-term debt .................. (4,000) (45,000)
Cash dividends paid ........................................ (54,299) (57,157)
Other-net .................................................. 18,456 (29,932)
--------- ---------
NET CASH USED IN FINANCING ACTIVITIES .......................... (59,143) (88,089)
--------- ---------
NET INCREASE (DECREASE) IN CASH & CASH EQUIVALENTS ............. 4,915 14,808
CASH & CASH EQUIVALENTS AT BEGINNING OF PERIOD ................. 30,593 8,211
--------- ---------
CASH & CASH EQUIVALENTS AT END OF PERIOD ....................... $ 35,508 $ 23,019
========= =========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the period:
Interest ................................................. $ 45,912 $ 45,397
Income taxes ............................................. 33,152 51,393
Noncash financing and investing activities:
Property purchased under capitalized leases .............. 482 2,519
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
1998 1997
----------- -----------
OPERATING REVENUES:
Energy Delivery .............................. $ 78,871 $ 69,980
Generation and Resources ..................... 219,956 135,141
National Energy Trading and Marketing ........ 1,077,730 49,535
Non-energy ................................... 60,969 41,298
Intersegment eliminations .................... (3,471) (878)
----------- -----------
Total operating revenues ................... $ 1,434,055 $ 295,076
=========== ===========
RESOURCE COSTS:
Energy Delivery:
Natural gas purchased for resale ........... $ 17,020 $ 13,633
Other ...................................... (599) (781)
Generation and Resources:
Power purchased ............................ 179,268 86,278
Fuel for generation ........................ 12,908 9,851
Other ...................................... 13,567 12,025
National Energy Trading and Marketing:
Cost of sales .............................. 1,070,707 46,634
Intersegment eliminations .................... (3,471) (878)
----------- -----------
Total resource costs (excluding Non-energy) $ 1,289,400 $ 166,762
=========== ===========
GROSS MARGINS:
Energy Delivery .............................. $ 62,450 $ 57,128
Generation and Resources ..................... 14,213 26,987
National Energy Trading and Marketing ........ 7,023 2,901
----------- -----------
Total gross margins (excluding Non-energy) . $ 83,686 $ 87,016
=========== ===========
OPERATIONS AND MAINTENANCE EXPENSES:
Energy Delivery .............................. $ 15,556 $ 15,240
National Energy Trading and Marketing ........ 469 662
Non-energy ................................... 45,314 29,283
----------- -----------
Total operations and maintenance expenses .. $ 61,339 $ 45,185
=========== ===========
ADMINISTRATIVE AND GENERAL EXPENSES:
Energy Delivery .............................. $ 11,726 $ 10,774
Generation and Resources ..................... 2,894 4,115
National Energy Trading and Marketing ........ 6,896 3,458
Non-energy ................................... 8,506 6,259
----------- -----------
Total administrative and general expenses .. $ 30,022 $ 24,606
=========== ===========
DEPRECIATION AND AMORTIZATION EXPENSES:
Energy Delivery .............................. $ 8,638 $ 8,095
Generation and Resources ..................... 6,345 6,106
National Energy Trading and Marketing ........ 200 122
Non-energy ................................... 2,439 2,441
----------- -----------
Total depreciation and amortization expenses $ 17,622 $ 16,764
=========== ===========
INCOME/(LOSS) FROM OPERATIONS (PRE-TAX):
Energy Delivery .............................. $ 18,178 $ 14,537
Generation and Resources ..................... 2,385 13,932
National Energy Trading and Marketing ........ (545) (1,292)
Non-energy ................................... 4,285 2,530
----------- -----------
Total income from operations ............... $ 24,303 $ 29,707
=========== ===========
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INCOME AVAILABLE FOR COMMON STOCK:
Energy Delivery and Generation and Resources . $ 5,903 $ 6,821
National Energy Trading and Marketing ........ (345) (1,097)
Non-energy ................................... 2,541 6,534
----------- -----------
Total income available for common stock .... $ 8,099 $ 12,258
=========== ===========
ASSETS: (1997 amounts at December 31)
Energy Delivery .............................. $ 1,065,542 $ 1,051,585
Generation and Resources ..................... 618,549 620,142
Other utility ................................ 239,818 255,012
National Energy Trading and Marketing ........ 661,785 214,630
Non-energy ................................... 278,773 270,416
----------- -----------
Total assets ............................... $ 2,864,467 $ 2,411,785
=========== ===========
CAPITAL EXPENDITURES (excluding AFUDC/AFUCE):
Energy Delivery .............................. $ 22,530 $ 21,562
Generation and Resources ..................... 3,153 3,187
National Energy Trading and Marketing ........ 222 2,306
Non-energy ................................... 3,025 3,802
----------- -----------
Total capital expenditures ................. $ 28,930 $ 30,857
=========== ===========
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
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For the Nine Months Ended September 30
Thousands of Dollars
1998 1997
----------- -----------
OPERATING REVENUES:
Energy Delivery .............................. $ 288,048 $ 267,010
Generation and Resources ..................... 466,994 381,334
National Energy Trading and Marketing ........ 1,752,223 51,610
Non-energy ................................... 162,083 116,353
Intersegment eliminations .................... (8,058) (946)
----------- -----------
Total operating revenues ................... $ 2,661,290 $ 815,361
=========== ===========
RESOURCE COSTS:
Energy Delivery:
Natural gas purchased for resale ........... $ 73,509 $ 63,566
Other ...................................... (2,560) (1,256)
Generation and Resources:
Power purchased ............................ 338,776 223,042
Fuel for generation ........................ 30,196 25,494
Other ...................................... 36,073 39,121
National Energy Trading and Marketing:
Cost of sales .............................. 1,723,523 48,274
Intersegment eliminations .................... (8,058) (878)
----------- -----------
Total resource costs (excluding Non-energy) $ 2,191,459 $ 397,363
=========== ===========
GROSS MARGINS:
Energy Delivery .............................. $ 217,099 $ 204,700
Generation and Resources ..................... 61,949 93,677
National Energy Trading and Marketing ........ 28,700 3,336
----------- -----------
Total gross margins (excluding Non-energy) . $ 307,748 $ 301,713
=========== ===========
OPERATIONS AND MAINTENANCE EXPENSES:
Energy Delivery .............................. $ 44,368 $ 44,416
National Energy Trading and Marketing ........ 1,648 1,496
Non-energy ................................... 118,871 83,314
----------- -----------
Total operations and maintenance expenses .. $ 164,887 $ 129,226
=========== ===========
ADMINISTRATIVE AND GENERAL EXPENSES:
Energy Delivery .............................. $ 37,517 $ 36,457
Generation and Resources ..................... 11,272 13,137
National Energy Trading and Marketing ........ 18,616 6,052
Non-energy ................................... 25,114 15,027
----------- -----------
Total administrative and general expenses .. $ 92,519 $ 70,673
=========== ===========
DEPRECIATION AND AMORTIZATION EXPENSES:
Energy Delivery .............................. $ 25,954 $ 24,311
Generation and Resources ..................... 18,786 19,167
National Energy Trading and Marketing ........ 546 181
Non-energy ................................... 6,939 8,025
----------- -----------
Total depreciation and amortization expenses $ 52,225 $ 51,684
=========== ===========
INCOME/(LOSS) FROM OPERATIONS (PRE-TAX):
Energy Delivery .............................. $ 81,550 $ 71,528
Generation and Resources ..................... 24,098 53,356
National Energy Trading and Marketing ........ 7,871 (4,398)
Non-energy ................................... 9,426 7,948
Intersegment eliminations .................... -- (68)
----------- -----------
Total income from operations ............... $ 122,945 $ 128,366
=========== ===========
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INCOME AVAILABLE FOR COMMON STOCK:
Energy Delivery and Generation and Resources . $ 37,663 $ 79,037
National Energy Trading and Marketing ........ 5,744 (3,092)
Non-energy ................................... 10,956 11,046
----------- -----------
Total income available for common stock .... $ 54,363 $ 86,991
=========== ===========
ASSETS: (1997 amounts at December 31)
Energy Delivery .............................. $ 1,065,542 $ 1,051,585
Generation and Resources ..................... 618,549 620,142
Other utility ................................ 239,818 255,012
National Energy Trading and Marketing ........ 661,785 214,630
Non-energy ................................... 278,773 270,416
----------- -----------
Total assets ............................... $ 2,864,467 $ 2,411,785
=========== ===========
CAPITAL EXPENDITURES (excluding AFUDC/AFUCE):
Energy Delivery .............................. $ 54,830 $ 53,751
Generation and Resources ..................... 9,816 7,228
National Energy Trading and Marketing ........ 1,124 2,666
Non-energy ................................... 8,233 5,093
----------- -----------
Total capital expenditures ................. $ 74,003 $ 68,738
=========== ===========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
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12
THE WASHINGTON WATER POWER COMPANY
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The accompanying financial statements of The Washington Water Power Company
(Company) for the interim periods ended September 30, 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
NEW ACCOUNTING STANDARDS
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
September 30, 1998 and 1997, accumulated comprehensive income totaled $(1.4)
million and $(6.2) million, respectively. For the nine months ended September
30, 1998 and 1997, accumulated comprehensive income totaled $(2.2) million and
$(1.9) million, respectively.
The Financial Accounting Standards Board (FASB) issued FAS No. 133, entitled
"Accounting for Derivative Instruments and Hedging Activities" which will be
effective for fiscal years beginning after June 15, 1999. The statement requires
that all derivative financial instruments be recognized as either assets or
liabilities on the company's balance sheets. The Company is in the process of
researching the statement and its possible impact on the Company's financial
position and results of operations. Additional footnote disclosure will likely
be required.
ALLOCATION OF REVENUES AND EXPENSES FOR REPORTING BUSINESS SEGMENTS
A portion of the utility's revenues and expenses have been allocated between 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 of the Generation and Resources
line of business. The results of all natural gas operations are included in the
Energy Delivery line of business because natural gas trackers allow natural gas
costs to pass through within that line of business without the commodity prices
having a material 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.
NOTE 2. ENERGY COMMODITY TRADING
Notional Amounts and Terms The notional amounts and terms of Avista Energy's
outstanding financial instruments at September 30, 1998 are set forth below:
Fixed Price Fixed Price Maximum
Payor Receiver Terms in Years
----- -------- --------------
Energy commodities (volumes)
Natural gas (mmBTU) 827,881,136 776,620,175 5
Electric (MWh) 39,511,914 40,625,360 9
At September 30, 1998, Avista Energy also had sales and purchase commitments
associated with contracts based on market prices totaling 369,881,772 mmBTUs,
with terms extending up to 5 years. The fixed index electric transactions
totaled 1,437,576 MWhs, with terms extending up to 3 years.
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
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THE WASHINGTON WATER POWER COMPANY
- --------------------------------------------------------------------------------
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
September 30, 1998, and the average fair value of those instruments held during
the nine months ended September 30, 1998 are set forth below (dollars in
thousands):
Fair Value Average Fair Value for the
as of September 30, 1998 nine months ended September 30, 1998
---------------------------------------------------- ----------------------------------------------------
Current Long-term Current Long-term Current Long-term Current Long-term
Assets Assets Liabilities Liabilities Assets Assets Liabilities Liabilities
------- ------- ------- ------- ------- ------- ------- -------
Natural gas 118,633 26,282 125,253 21,551 83,836 18,590 83,926 16,938
Electric 74,473 32,978 64,605 22,503 104,818 104,119 98,795 95,746
------- ------- ------- ------- ------- ------- ------- -------
Total 193,106 59,260 189,858 44,054 188,654 122,709 182,721 112,684
The weighted average term of Avista Energy's natural gas and related commodity
derivative instruments as of September 30, 1998 was approximately three months.
The weighted average term of Avista Energy's electric commodity derivatives at
September 30, 1998 was approximately ten 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 September 30, 1998 was $9.6
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. Avista
Energy's initial equity investment in Howard/Avista was $25 million, resulting
in a 50% ownership interest. 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 Consolidated Statements of Income for the quarter and year-to-date ended
September 30, 1998. The net investment in the net assets of Howard/Avista is
included in Non-utility Properties and Investments-net on the Consolidated
Balance Sheets at September 30, 1998 and December 31, 1997.
The following selected financial information reflects Howard/Avista's financial
position on a total (100%) basis and operating results as of and for the quarter
and year-to-date ended September 30, 1998:
RESULTS OF OPERATIONS (thousands of dollars)
Quarter ended Year-to-date ended
September 30, 1998 September 30, 1998
------------------ ------------------
Revenues $ 360,920 $ 1,545,280
Operating Expenses (360,453) (1,545,692)
Other Income-net 375 1,629
----------- -----------
Net Income (pre-tax) $ 842 $ 1,217
=========== ===========
Avista Energy's equity in earnings
of Howard/Avista Energy LLC (pre-tax) $ 421 $ 609
FINANCIAL POSITION (thousands of dollars)
September 30, 1998 December 31, 1997
----------- -----------
Current Assets $ 276,533 $ 400,150
Other Assets 1,547 1,960
----------- -----------
Total Assets $ 278,080 $ 402,110
=========== ===========
Current Liabilities $ 224,649 $ 348,339
Other Liabilities 91 228
----------- -----------
Total Liabilities 224,740 348,567
Equity 53,340 53,543
----------- -----------
Total Liabilities and Equity $ 278,080 $ 402,110
=========== ===========
Avista Energy's equity investment
in Howard/Avista Energy LLC (pre-tax) $ 26,670 $ 26,772
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THE WASHINGTON WATER POWER COMPANY
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NOTE 4. FINANCINGS
The Company issued $45 million of Unsecured Medium-Term Notes, Series C during
the second quarter of 1998, with rates between 6.37% and 6.88% and maturity
dates in 2028.
The Company has made available a maximum of 2.5 million shares of its common
stock for issuance under a long-term incentive plan for officers of the Company.
The shares issued under the plan will be drawn from authorized and unissued
shares or will be purchased by the trustee on the open market. As of September
30, 1998, 238,000 shares had been granted and no proceeds had been collected
under this plan.
On October 21, 1998, the Company commenced an exchange offer under which common
stock shareholders will be able to exchange their common shares for an equal
number of depositary shares each representing a one-tenth interest in one share
of mandatorily convertible preferred stock to be issued by the Company, which
will become Preferred Series L. This new series of preferred stock is part of a
dividend restructuring plan announced by the Company in August. All final
regulatory compliance or approval orders were received by October 8. Under the
terms of the plan, the Company has offered to exchange depositary shares
representing the new preferred stock for up to 20 million, or about 35%, of its
common shares outstanding. Each depositary share will pay an annual dividend of
$1.24 per share. If more than 20 million shares are tendered for exchange, the
tendered shares will be subject to proration. The Company has the option not to
complete the exchange offer if less than 6 million shares are tendered for
exchange to the Company. After three years, the new preferred stock will
automatically convert back to common stock on a ten-for-one basis. Prior to the
end of the three-year period, the Company has the option of converting the new
preferred stock into ten shares of common stock, each having a value equal to
$24.00, but in no event more than ten common shares per preferred share, and
paying any accrued and unpaid dividends and a premium.
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.
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.
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THE WASHINGTON WATER POWER COMPANY
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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
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. On September 2, 1998, the court issued an order of
dismissal with prejudice, finding that the plaintiffs had failed to state a
cause of action.
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.
EASTERN PACIFIC ENERGY
On October 9, 1998, Eastern Pacific Energy (Eastern Pacific), an energy
aggregator participating in the restructured retail energy market in California,
filed suit against the Company and it affiliates, Avista Advantage, Inc. and
Avista Energy, Inc. in the United States District Court for the Central District
of California. Eastern Pacific alleges, among other things, a breach of an oral
or implied joint venture agreement whereby the Company agreed to supply not less
than 300 megawatts of power to Eastern Pacific's California customers and that
Avista Advantage agreed to provide energy-related products and services. The
complaint seeks an unspecified amount of damages and also seeks to recover any
future profits earned from sales of the aforementioned amount of power to
California consumers. The Company and its affiliates intend to vigorously defend
against all of the claims.
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 April 1998, Pentzer completed the purchase of two new companies that produce
store fixtures -- Universal Showcase, Ltd., in Toronto, Canada and Triangle
Systems, Inc., in New York. In October 1998, Pentzer acquired two additional
store fixtures companies -- Horizon Terra, Inc., in Indiana and Pacific Coast
Showcase, Inc., in Washington.
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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
Effective January 1, 1999, The Washington Water Power Company (Company) will
change its name to Avista Corporation. All Company operations will be unified
under the Avista Corporation name, with two operating divisions -- Avista
Utilities for the regulated energy activities and Avista Capital (previously
Avista Corp.), a subsidiary which owns all of the non-regulated energy and
non-energy businesses.
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 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 Capital, 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 Capital 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.
Changes underway in the utility and energy industries are creating new
opportunities to expand the Company's businesses and serve new markets. In
pursuing such opportunities, the Company is shifting its strategic direction to
growth, which could subject the Company to a higher degree of risk than that of
a traditional regulated public utility company.
RESULTS OF OPERATIONS
OVERALL OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 1997
Third quarter 1998 net income available for common stock was $8.1 million
compared to third quarter 1997 income of $12.3 million. The decrease in earnings
was primarily the result of a gain recorded by Pentzer in 1997 related to the
sale of a portion of stock it held in Itron. In addition, Generation and
Resources income was down from 1997 due in large part to increased resource
costs and tighter margins on wholesale sales transactions in the third quarter
of 1998 as compared to the same period in 1997.
Earnings per share for the third quarter of 1998 were $0.14 as compared to $0.22
in the third quarter of 1997. Energy Delivery and Generation and Resources
contributed $0.10 to earnings per share for the third quarter of 1998 compared
to $0.12 in the third quarter of 1997, with the decrease resulting from
increased resource costs and tighter margins on wholesale transactions. National
Energy Trading and Marketing operations had a loss of $0.01 per share in the
third quarter of 1998 compared to a loss of $0.02 in the same period in 1997.
Non-energy operations contributed $0.05 to earnings per share for the third
quarter of 1998 compared to $0.12 in the same period in 1997, primarily due to
the sale in 1997 of a portion of Itron stock held by Pentzer.
NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1997
Net income available for common stock for the first nine months of 1998 was
$54.4 million compared to $87.0 million for the first nine months of 1997. The
decrease in earnings was primarily the result of the receipt of $41.4 million,
after taxes, in the second quarter of 1997 in interest income from an income tax
recovery, partially offset by $9.8 million, after taxes, in non-recurring
accounting transactions. The 1998 income figures include increased earnings from
National Energy Trading and Marketing activities and 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. The increase in earnings
was partially offset by decreased earnings from Generation and Resources
operations, due in large part to increased resource costs and tighter margins on
wholesale sales transactions in the first nine months of 1998 as compared to the
same period in 1997.
Earnings per share for the nine months of 1998 were $0.97 as compared to $1.55
in the first nine months of 1997. Energy Delivery and Generation and Resources
contributed $0.67 to earnings per share for the first nine months of 1998
compared to $1.41 in the first nine months of 1997. The reduction in the 1998
figures as compared to 1997 was primarily due to the income tax recovery in
1997. Ongoing operations for the first nine months of 1997 (removing the
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THE WASHINGTON WATER POWER COMPANY
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effects of the income tax recovery and non-recurring transactions) would have
resulted in total earnings per share of $0.99 and utility earnings of $0.85 per
share. National Energy Trading and Marketing operations contributed $0.10 to
earnings per share in the first nine months of 1998 compared to a loss of $0.06
in the same period in 1997. Non-energy operations contributed $0.20 to earnings
per share for the first nine months of both 1998 and 1997.
ENERGY DELIVERY
THREE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 1997
Energy Delivery's pre-tax income from operations increased $3.6 million, or 25%,
in the third quarter of 1998 over the same period in 1997. The increase was
primarily the result of increased air conditioning loads, the positive impact of
a natural gas price increase effective January 1998 and customer growth. Energy
Delivery's operating revenues and expenses increased $8.9 million and $5.3
million, respectively, during the third quarter of 1998 as compared to 1997.
Electric revenues increased $4.9 million in the third quarter of 1998 over 1997
due to warmer than normal weather which increased air conditioning loads.
Natural gas revenues increased $4.0 million in the third quarter of 1998 over
1997 due to a combination of higher sales for resale, increased prices approved
by the Washington Utilities and Transportation Commission (WUTC) in November
1997, which were effective January 1, 1998, and customer growth.
Purchased gas costs increased $3.4 million in the third quarter of 1998 over
1997 primarily as a result of increased therm sales due to higher sales for
resale and customer growth.
NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1997
Energy Delivery's pre-tax income from operations increased $10.0 million, or
14%, in the first nine months of 1998 over 1997. The increase was primarily the
result of the positive impact of a natural gas price increase effective January
1998, increased air conditioning loads during the summer months and customer
growth. Energy Delivery's operating revenues and expenses increased $21.0
million and $11.0 million, respectively, during the first nine months of 1998 as
compared to 1997.
Electric revenues increased $3.5 million year-to-date in 1998 over 1997
primarily due to the increased air conditioning loads during the third quarter
of 1998. Natural gas revenues increased $17.5 million in the first nine months
of 1998 over 1997 due to a combination of increased sales due to a greater
volume of sales for resale, increased prices approved by the WUTC and 5%
customer growth.
Purchased natural gas costs increased $9.9 million in the first nine months of
1998, primarily from increased therm sales due to higher sales for resale and
customer growth.
GENERATION AND RESOURCES
THREE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 1997
Generation and Resources' pre-tax income from operations decreased $11.5
million, or 83%, in the third quarter of 1998 from the same period in 1997. The
decrease was primarily due to warmer than normal weather in the third quarter of
1998 throughout both the Company's service area and the Western region of the
United States, which increased the demand for electricity and, in turn,
increased prices for purchased power. In addition, hydroelectric generation was
19% lower in the third quarter of 1998 compared to 1997, which resulted in
higher levels of purchased power to meet sales commitments. Streamflows in the
third quarter of 1998 were 100% of normal, compared to 155% in the third quarter
of 1997.
Increased wholesale sales and decreased hydroelectric generation caused
purchased power volumes to increase 35%, which, combined with purchased power
prices 54% higher than last year, resulted in a $93.0 million, or 108%, increase
in purchased power costs in the third 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.
During 1997 there was a significant shift in product mix between short- and
long-term sales which continued into 1998. This trend is expected to continue
due to the expiration of older sales contracts with higher margins, fewer
long-term contracts being entered into and margins on new sales contracts
tightening. Revenues from short-term sales, typically with smaller margins,
increased $83.4 million, or 130%, while short-term sales volumes increased 1,582
million mwhs, or only 44%, during the third quarter of 1998 over 1997,
reflecting the higher prices for power in the region. Revenues from long-term
sales, typically with higher margins, increased $0.3 million, or 1%, while
long-term sales volumes increased 6.8 million mwhs, or 1%, during the same
period.
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NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1997
Generation and Resources' pre-tax income from operations decreased $29.3
million, or 55%, in the first nine months of 1998 from the same period in 1997.
The decrease was primarily due to hydroelectric generation that was 21% lower in
the first nine months of 1998 compared to 1997, which resulted in higher levels
of purchased power to meet sales commitments, and to the impact of a shifting
product mix as described below. Streamflows in the first nine months of 1998
were 92% of normal, compared to 175% in the first nine months of 1997.
Increased wholesale sales and decreased hydroelectric generation caused
purchased power volumes to increase 18%, which, combined with purchased power
prices 29% higher than last year, resulted in a $115.7 million, or 52%, increase
in purchased power costs in the first nine months 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.
The same shift in product mix and the reasons behind it, as discussed for the
third quarter, were also relevant to the results for the nine months ended
September 30, 1998. Revenues from short-term sales, typically with smaller
margins, increased $126.6 million, or 94%, while short-term sales volumes
increased 2,853 million mwhs, or 31%, during the first nine months of 1998 over
1997, reflecting higher prices for purchased power in the region. Revenues from
long-term sales, typically with higher margins, decreased $37.8 million, or 34%,
while long-term sales volumes decreased 690 million mwhs, or 21%, during the
same period.
NATIONAL ENERGY TRADING AND MARKETING
THREE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 1997
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 1998 was a
loss of $0.3 million, compared to a loss of $1.1 million in the third quarter of
1997 when start-up costs were being incurred. National Energy Trading and
Marketing operating revenues and expenses increased $1.03 billion and $1.03
billion, respectively, during the third quarter of 1998 as compared to 1997. The
increase in both revenues and expense is primarily volume driven as Avista
Energy began trading operations in July 1997. During the third quarter of 1997,
Avista Energy was still developing its business and adding experienced
electricity and natural gas traders.
Avista Energy expected high volatility in Eastern electric markets in the summer
of 1998 and its positions were established in anticipation of such market
swings. As a result of this market volatility, however, the Company experienced
negative earnings in its portfolio during this period. The negative portfolio
earnings were more than offset by the realization of positive earnings on prior
portfolio positions taken, which were recognized in revenues and resource costs.
However, because Avista Energy maintains a trading portfolio, it marks its
trading portfolio to fair market value on a daily basis, which can cause
earnings variability. For additional information about market risk and credit
risk, see Liquidity and Capital Resources: Energy Trading Business.
Credit reserves were reviewed thoroughly during the third quarter in light of
the market conditions discussed above and are believed to be at adequate levels.
National Energy Trading and Marketing's total assets and liabilities decreased
by approximately $230 million during the third quarter of 1998 as compared to
June 30, 1998. This decrease resulted from the impact of the market's price
volatility on forward price curves, which contributed to a decrease in the
valuation of Avista Energy's mark-to-market assets and liabilities. In addition,
a significant amount of the prior quarter's increases in mark-to-market assets
and liabilities were settled and realized in revenues and resource costs during
the third quarter of 1998.
NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1997
National Energy Trading and Marketing income available for common stock for the
first nine months of 1998 was $5.7 million, which was an $8.8 million increase
over the first nine months of 1997 when start-up costs were being incurred.
National Energy Trading and Marketing operating revenues and expenses increased
$1.70 billion and $1.69 billion, respectively, during the first nine months of
1998 as compared to 1997 primarily as a result of Avista Energy beginning
trading operations in July 1997.
Avista Energy provided positive results for the first nine months of 1998
despite the price volatility experienced in power markets in the Midwest and
East during various periods of the year. The company was well-positioned in its
market, which allowed net gains in its portfolio during the period of high
volatility. Avista Energy expected high volatility in Eastern electric markets
in the summer of 1998 based on expected demand and the high probability of a
weather-related impact on energy prices. As a result, Avista Energy established
positions in anticipation of volatile market swings, and in turn experienced
positive earnings in its portfolio during this period. However, there is no
guarantee that positive results can or will always be achieved.
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THE WASHINGTON WATER POWER COMPANY
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National Energy Trading and Marketing's total assets and liabilities increased
by approximately $449 million from December 31, 1997 to September 30, 1998. This
increase resulted from both the volume of transactions increasing and the impact
of the market's price volatility on forward price curves, thereby increasing the
valuation of Avista Energy's mark-to-market assets and liabilities.
NON-ENERGY
THREE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 1997
Non-energy income available for common stock for the third quarter of 1998 was
$2.5 million, compared to third quarter 1997 earnings of $6.5 million. The
decrease in 1998 earnings primarily resulted from a gain recorded in 1997
related to the sale of a portion of stock in Itron held by Pentzer.
Transactional gains decreased $5.3 million in the third quarter of 1998 from
1997, but were partially offset by a $1.2 million increase in non-transactional
income primarily from increased earnings from portfolio companies.
Non-energy operating revenues and expenses increased $19.7 million and $17.9
million, respectively, during the third 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 $4.3
million, which was a $1.8 million increase over 1997.
NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1997
Non-energy income available for common stock for the first nine months of 1998
was $11.0 million, which was the same as 1997 earnings. Transactional gains
decreased $1.8 million in the first nine months of 1998 over 1997, while
non-transactional income from portfolio companies increased $2.9 million.
Non-energy operating revenues and expenses increased $45.7 million and $44.3
million, respectively, during the first nine months 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 $9.4
million, which was a $1.5 million increase over 1997.
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THE WASHINGTON WATER POWER COMPANY
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LIQUIDITY AND CAPITAL RESOURCES
OVERALL OPERATIONS
Operating Activities Cash provided by operating activities in the first nine
months of 1998 decreased $40.1 million from the same period in 1997, primarily
due to the increase in 1997 net income from the income tax recovery. Changes in
various working capital components, such as payables and receivables, caused
cashflows to increase $6.6 million from 1997, primarily due to the growth in
Avista Energy's operations and the sale of an additional $40.0 million of
customer accounts receivables. Power and natural gas cost deferrals decreased
cashflows to a greater degree in 1997 when natural gas prices were higher during
the first part of the year, natural gas customers paid lower prices and PCA
rebates were in effect. See the Consolidated Statements of Cash Flows for
additional details.
Investing Activities Cash used in investing activities totaled $89.6 million in
the first nine months of 1998 compared to $90.8 million in the same period in
1997. Net cash used in investing activities during 1998 primarily was for
acquisitions made by Pentzer, partially offset by proceeds from the sale of
subsidiary investments by Pentzer. See the Consolidated Statements of Cash Flows
for additional information.
Financing Activities Cash used in financing activities totaled $59.1 million in
the first nine months of 1998 compared to $88.1 million in 1997. Bank borrowings
were reduced by $54.3 million and $14.0 million of preferred stock and
medium-term notes matured or were redeemed in the first nine months of 1998 with
the proceeds of the issuance of $45.0 million of unsecured medium-term notes. In
the first nine months of 1997, bank borrowings decreased $11.0 million and
preferred stock and medium-term notes totaling $115.0 million matured or were
redeemed with the proceeds of $110 million of Preferred Trust Securities which
were issued in January and June 1997. The increase of $18.5 million in Other-net
in the first nine months of 1998 reflects an increase in short- and long-term
debt by the non-energy companies as compared to a decrease of $29.9 million in
1997.
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.
Capital expenditures are financed on an interim basis with notes payable (due
within one year). The Company has $200 million in a committed line of credit. In
addition, the Company may currently borrow up to $100 million through other
borrowing arrangements with banks. As of September 30, 1998, $54.2 million was
outstanding under other short-term borrowing arrangements and there were no
outstanding borrowings under the committed line of credit.
The Company's estimates for capital expenditures (as reported in the 1997 Form
10-K) do not include expenditures that would be required to fund its strategic
growth initiatives. Additional capital expenditures that would be required
during the 1999-2000 period could be in the range of $400-600 million. Sources
of funds would include, but are not necessarily limited to, cash flows from the
reduction in the Company's common stock dividend that was announced on August
17, 1998, monetization of certain long-term contracts, an increase in the sale
of the Company's accounts receivable, sales of certain assets, additional
long-term debt, leasing or other equity securities.
The dividend restructuring reduces the annual dividend on the Company's common
stock from $1.24 to $0.48 per share, a reduction of 61%. The reduction will be
effective with the payment of the dividend expected on December 15, 1998.
The Company issued $45 million of Unsecured Medium-Term Notes, Series C during
the second quarter of 1998, with rates between 6.37% and 6.88%.
On October 21, 1998, the Company commenced an exchange offer under which common
stock shareholders will be able to exchange their common shares for an equal
number of depositary shares each representing a one-tenth interest in one share
of mandatorily convertible preferred stock to be issued by the Company, which
will become Preferred Series L. This new series of preferred stock is part of a
dividend restructuring plan announced by the Company in August. All final
regulatory compliance or approval orders were received by October 8. Under the
terms of the plan, the Company has offered to exchange depositary shares
representing the new preferred stock for up to 20 million, or about 35%, of its
common shares outstanding. Each depositary share will pay an annual dividend of
$1.24 per share. If more than 20 million shares are tendered for exchange, the
tendered shares will be subject to proration. The Company has the option not to
complete the exchange offer if less than 6 million shares are tendered for
exchange to the Company. After three years, the new preferred stock will
automatically convert back to common stock on a ten-for-one basis. Prior to the
end of the three-year period, the Company has the option of converting the new
preferred stock
20
21
THE WASHINGTON WATER POWER COMPANY
- --------------------------------------------------------------------------------
into ten shares of common stock, each having a value equal to $24.00, but in no
event more than ten common shares per preferred share, and paying any accrued
and unpaid dividends and a premium.
The Company's total common equity decreased by $1.4 million during the first
nine months of 1998 to $747.4 million, primarily due to a decrease in the
unrealized investment gain-net, which is primarily Avista Capital's investment
in Itron stock, due to a declining stock price. The Company's consolidated
capital structure at September 30, 1998, was 46% debt, 9% preferred securities
and 45% common equity, which was the same as at year-end 1997.
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 Capital. The agreement may
be terminated by the bank at any time and all extensions of credit under the
agreement are payable upon demand, in either case 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
September 30, 1998, there were no cash advances (demand notes payable)
outstanding, and letters of credit outstanding under the facility totaled $28.8
million. At September 30, 1998, the National Energy Trading and Marketing
operations had $23.3 million in cash and cash equivalents.
NON-ENERGY OPERATIONS
The non-energy operations have $47.1 million in short-term borrowing
arrangements available ($16.0 million outstanding as of September 30, 1998) to
fund Pentzer's portfolio companies' requirements on an interim basis. At
September 30, 1998, the non-energy operations had $26.4 million in cash and
marketable securities with $51.1 million in long-term debt outstanding.
Avista Laboratories, a subsidiary of Avista Capital, recently announced the
receipt of a $2 million technology development award from the Department of
Commerce's National Institute of Standards and Technology Advanced Technology
Program. The Company will contribute another $1.22 million over a two-year
period. Avista Labs plans to work on technology that will increase the energy
density of its fuel cell design and develop multiple fuel processing approaches
using propane, methane and methanol as base fuels to integrate into its fuel
cell subsystem.
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 belief that all identified modifications that are within the Company's
operating control will be made within the required time frames.
State of Readiness
In order to address Year 2000 issues, several project activity teams were
created and a comprehensive readiness plan was developed to bring the Company
into Year 2000 readiness by the middle of 1999. The project was divided into
four major categories of activities: Desktop Computer Systems, Business Systems,
Supply Chain and Embedded Systems.
Desktop Computer Systems All desktop computer hardware has been Year 2000 tested
and an inventory and assessment of desktop resident third-party software has
been completed. As a result, more than 350 of the Company's 1,100 desktop
computers require hardware remediation, which is expected to be completed by
mid-1999. All non-compliant third-party software programs are planned to be
upgraded to a Year 2000 ready version by the middle of 1999. In addition, all
critical business desktop applications are expected to be converted, tested and
made Year 2000 ready by the middle of 1999.
Business Systems Many of the Company's critical business systems would not have
operated correctly in the year 2000 and beyond, and thus have been or are in the
process of being re-programmed, upgraded or replaced. Key business systems have
been inventoried and assessed. For example, the Company's Accounts Payable and
General Ledger systems have been upgraded to Year 2000 ready versions, while new
Materials Management, Human Resources and Payroll systems are currently being
installed. Year 2000 testing is in process on the Accounts Payable and General
Ledger systems. Testing of the Company's Billing, Customer Service and Work
Management systems began in October 1998 and is expected to be completed before
the middle of 1999. A failure of these systems would not jeopardize the
Company's ability to deliver energy services to customers, but might affect its
ability to perform selected accounting and business-related functions.
21
22
THE WASHINGTON WATER POWER COMPANY
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Supply Chain The Company recognizes its dependence on outside suppliers of goods
and services and is working to assure that the necessary products and services
are available. To address these issues, the Company has communicated with
suppliers and identified critical suppliers in order to investigate their
efforts to become year 2000 ready. In addition, the Company has made site visits
to select key suppliers and will be reviewing their contingency plans.
Embedded Systems The Embedded System team is responsible for locating,
assessing, testing, fixing or replacing microprocessor-controlled devices.
Inventory and assessment is 90 percent complete, and to date very few embedded
systems have been found that require remediation. None of these requiring
remediation would have caused a disruption in service to our customers.
Remediation and testing is complete at nine of the Company's twelve generation
sites and these sites are Year 2000 ready. The combined output from these plants
represents about 75 percent of the Company's overall generation capacity or
about 900 megawatts. The process for testing a generation facility for Year 2000
consists of identification and testing of all facility systems and system
components; renovations of systems and components that fail the tests; and a
full facility test where system clocks are manually moved forward and the entire
plant is put into operation as if it were already the year 2000. Remediation and
testing at the remaining sites is scheduled to occur before the middle of 1999.
The Company's Supervisory Control and Data Acquisition (SCADA) system, which
monitors and controls the majority of the Company's generating and substation
equipment and the transmission system, was run "in the Year 2000" for three days
without incident. All testing of electric metering has been completed. Testing
of devices in the Company's transmission and distribution substations systems is
expected to be complete by mid-1999. Initial assessment indicates that most of
the embedded systems in these areas are either already Year 2000 compliant or
are not within an essential business system.
Costs
The Company estimates that the cost of its Year 2000 project will be
approximately $4-6.5 million in incremental costs during the 1997-1999 time
period. Through September 30, 1998, the Company has spent $2.2 million in
incremental costs. These costs are being funded through operating cashflows. The
Company does not expect costs associated with the Year 2000 project to
materially affect the Company's earnings in any one year.
Risks
The Company believes the primary areas of Year 2000 risk to be internal business
systems, which are discussed above, and external factors, which include the
regional electric transmission grid and natural gas pipelines. There can be no
guarantee that systems of other companies on which the Company's systems rely
will be timely converted. A failure to convert by another company or a
conversion that is incompatible with the Company's systems could have an effect
on the Company's ability to provide energy services.
Electric The Company is working with the other energy suppliers in the area to
address risks related to the regional electric transmission grid, which consists
of the interconnected transmission systems of each utility within the Western
Systems Coordinating Council (WSCC). Such interconnected systems are critical to
the reliability of each interconnected electric service provider, as the failure
of one such interconnected provider to achieve Year 2000 compliance could
disrupt the others from providing electric services. Should the regional
electric transmission grid become unstable, power outages may occur. The Company
is in the process of developing contingency plans, including re-starting from a
system-wide outage. The Company is in the process of contacting its major
suppliers of electricity to assess their Year 2000 preparations. The Company has
met with one of its largest suppliers, Bonneville Power Administration, and
exchanged information. The North American Electric Reliability Council (NERC)
has responsibility for overseeing the efforts of the industry in the United
States and is coordinating Year 2000 efforts and contingency planning within ten
electric reliability councils throughout the United States. Coordination in the
Company's region is through the WSCC. The WSCC, along with NERC, has set a
deadline of December 31, 1998 for the development of contingency plans. The
Company cannot assure Year 2000 compliance or assess the effect of
non-compliance by systems or parties that the Company does not control.
In addition to the traditional electric utility operations of the Company, the
energy trading business conducted by Avista Energy, Inc. is subject to Year 2000
risk. Most of Avista Energy's internal business systems do not require any
significant upgrading and those that do are being addressed. However, if any of
Avista Energy's counterparties experience Year 2000 problems (including but not
limited to problems arising out of failures in the generation or transmission
systems of utilities or other energy suppliers), such problems could impair the
ability of Avista Energy or any of its counterparties to fulfill their
contractual obligations. Avista Energy is in the process of contacting its
counterparties to assess their Year 2000 readiness and of developing contingency
plans. See "Energy Trading Business".
Natural Gas The Company has performed an inventory and assessment of the
equipment in its natural gas distribution systems and believes that there are no
devices in the systems that will cause a disruption in the delivery of natural
gas to customers due to a Year 2000 problem. However, the Company depends on
natural gas pipelines which it does not own or control, and if one or more of
the pipelines is unable to deliver natural gas, the Company in turn
22
23
THE WASHINGTON WATER POWER COMPANY
- --------------------------------------------------------------------------------
will be unable to deliver natural gas to customers. In order to address this
issue, the Company has contacted each of the natural gas pipeline companies with
which it has contracts to assess their Year 2000 readiness efforts and will
continue to take reasonable steps to ensure that these suppliers are addressing
any Year 2000 related problems that would result in a disruption in natural gas
services to customers. In the event of a disruption in natural gas service, the
Company has in place Emergency Operating Plans (generic plans to handle any
unexpected emergency event) to address this type of situation, and is in the
process of developing contingency plans specifically for Year 2000 related
disruptions in the delivery of natural gas.
Contingency Planning
The Company is in the process of developing contingency plans, which will
include such topics as identifying key personnel, communications, and deployment
plans, along with training and equipment. Plans are scheduled to be completed by
December 31, 1998.
ENERGY TRADING BUSINESS
The participants in the emerging wholesale energy market are public utility
companies and, increasingly, power marketers which may or may not be affiliated
with public utility companies or other entities. The participants in this market
trade not only electricity and natural gas as commodities but also derivative
commodity instruments such as futures, forwards, swaps, options and other
instruments. This market is largely unregulated and most transactions are
conducted on an "over-the-counter" basis, there being no central clearing
mechanism (except in the case of specific instruments traded on the commodity
exchanges). Power marketers, whether or not affiliated with other entities,
generally do not own production facilities and are not subject to net capital or
other requirements of any regulatory agency.
The Company (to the extent that the Generation and Resources segment conducts
energy trading) and Avista Energy are subject to the various risks inherent in
commodity trading including, particularly, market risk and credit risk.
Market risk is, in general, the risk of fluctuation in the market price of the
commodity being traded and is influenced primarily by supply (in the case of
electricity, adequacy of generating reserve margins as well as scheduled and
unscheduled outages of generating facilities) and demand (extreme variations in
the weather, whether or not predicted). Market risk includes the risk of
fluctuation in the market price of associated derivative commodity instruments.
All market risk is influenced to the extent that the performance or
non-performance by market participants of their contractual obligations and
commitments affect the supply of the commodity.
Credit risk relates to the risk of loss that the Company (to the extent of
Generation and Resources' trading activities) and/or Avista Energy would incur
as a result of non-performance by counterparties of their contractual
obligations under the various instruments with the Company or Avista Energy, as
the case may be. Credit risk may be concentrated to the extent that one or more
groups of counterparties have similar economic, industry or other
characteristics that would cause their ability to meet contractual obligations
to be similarly affected by changes in market or other conditions. In addition,
credit risk includes not only the risk that a counterparty may default due to
circumstances relating directly to it, but also the risk that a counterparty may
default due to circumstances which relate to other market participants which
have a direct or indirect relationship with such counterparty. The Company and
Avista Energy seek to mitigate credit risk (and concentrations thereof) by
applying specific eligibility criteria to prospective counterparties. However,
despite mitigation efforts, defaults by counterparties occur from time to time.
To date, no such default has had a material adverse effect on the Company or
Avista Energy.
Avista Capital provides guarantees for Avista Energy's line of credit agreement,
and in the course of business may provide guarantees to other parties with whom
Avista Energy may be doing business. The Company's investment in Avista Capital
totaled $240.8 million at September 30, 1998.
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
23
24
THE WASHINGTON WATER POWER COMPANY
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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 a show cause order asserting that the Company and Avista Energy had
violated Orders No. 888 and 889. The order directed 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 an 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.
On June 11, 1998 the FERC directed Avista Energy to disgorge profits earned from
the power sale underlying the off-tariff transmission service provided by the
Company. The FERC additionally ordered Avista Energy not to engage for 180 days
from June 11, 1998 in any power sales under its market-based power sales tariff
for any power sales transaction, executed after the date of the June 11, 1998
order, that would use the Company's transmission system. The FERC ordered the
Company and Avista Energy to file a compliance report within 30 days of this
order. The FERC's orders were complied with in their entirety and the
disgorgement and the costs of compliance were not material to the consolidated
financial position of the Company.
Coeur d' Alene Lake Court Decision On July 28, 1998, the United States District
Court for the District of Idaho issued its finding that the Coeur d' Alene Tribe
of Idaho owns the bed and banks of the Coeur d' Alene Lake and the St. Joe River
lying within the current boundaries of the Coeur d' Alene Reservation. The
disputed bed and banks comprise approximately the southern one-third of Lake
Coeur d' Alene. This action had been brought by the United States on behalf of
the Tribe against the State of Idaho. While the Company is not a party to this
action, which has been appealed by the State of Idaho to the Ninth Circuit, the
Company is continuing to evaluate the impact of this decision on the operation
of its hydroelectric facilities on the Spokane River, downstream of the Coeur d'
Alene Lake, which is the reservoir for these plants.
Proposed Rate Increase In September 1998, the Company notified the Idaho Public
Utilities Commission of its intent to file for increased electric prices. The
Company intends to seek an overall general electric price increase of 5-10%,
which will increase electric revenues in Idaho by $7-12 million. Company
management is still in the process of determining specific amounts. The filing
will be made on or about December 1, 1998, with the anticipation of implementing
by the third quarter of 1999.
ADDITIONAL FINANCIAL DATA.
At September 30, 1998, the total long-term debt of the Company and its
consolidated subsidiaries, as shown in the Company's consolidated financial
statements, was approximately $752.7 million. Of such amount, $208.5 million
represents long-term unsecured and unsubordinated indebtedness of the Company,
and $449.3 million represents secured indebtedness of the Company. The balance
of $94.9 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.
24
25
THE WASHINGTON WATER POWER COMPANY
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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,
1998 1997
------------------ -------------------
Ratio of Earnings to Fixed Charges 2.71 (x) 3.49 (x)
Ratio of Earnings to Fixed Charges and
Preferred Dividend Requirements 2.54 (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.
Dated June 2, 1998, regarding the selection of the Company's new
Chairman of the Board and Chief Executive Officer.
Dated August 17, 1998, regarding a dividend restructuring plan and
the Company's name change.
Dated October 21, 1998, regarding the Company's press release for
third quarter earnings, the proposed electric rate increase in
Idaho, a lawsuit filed against the Company, new capital
expenditure estimates and disclosure required by the SEC
related to Year 2000 information.
25
26
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 10, 1998 /s/ J. E. Eliassen
------------------
Senior Vice President, Chief
Financial Officer and Treasurer
(Principal Accounting and
Financial Officer)
26
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
September 30, Years Ended December 31
--------------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
Fixed charges, as defined:
Interest on long-term debt $ 65,634 $ 63,413 $ 60,256 $ 55,580 $ 49,566
Amortization of debt expense
and premium - net 2,836 2,862 2,998 3,441 3,511
Interest portion of rentals 4,311 4,354 4,311 3,962 1,282
-------- -------- -------- -------- --------
Total fixed charges $ 72,781 $ 70,629 $ 67,565 $ 62,983 $ 54,359
======== ======== ======== ======== ========
Earnings, as defined:
Net income from continuing ops $ 79,820 $114,797 $ 83,453 $ 87,121 $ 77,197
Add (deduct):
Income tax expense 44,389 61,075 49,509 52,416 44,696
Total fixed charges above 72,781 70,629 67,565 62,983 54,359
-------- -------- -------- -------- --------
Total earnings $196,990 $246,501 $200,527 $202,520 $176,252
======== ======== ======== ======== ========
Ratio of earnings to fixed charges 2.71 3.49 2.97 3.22 3.24
Fixed charges and preferred dividend requirements:
Fixed charges above $ 72,781 $ 70,629 $ 67,565 $ 62,983 $ 54,359
Preferred dividend requirements (2) 4,737 8,261 12,711 14,612 13,668
-------- -------- -------- -------- --------
Total $ 77,518 $ 78,890 $ 80,276 $ 77,595 $ 68,027
======== ======== ======== ======== ========
Ratio of earnings to fixed charges
and preferred dividend requirements 2.54 3.12 2.50 2.61 2.59
(1) Calculations have been restated to reflect the results from continuing
operations (ie. excluding discontinued coal mining operations).
(2) Preferred dividend requirements have been grossed up to their pre-tax
level.
UT
1,000
9-MOS
DEC-31-1998
JAN-01-1998
SEP-30-1998
PER-BOOK
1,456,955
358,973
762,156
286,383
0
2,864,467
584,046
(10,643)
173,993
747,396
35,000
110,000
629,946
70,036
34,993
0
40,532
0
4,752
2,244
1,189,568
2,864,467
2,661,290
30,430
2,538,345
2,538,345
122,945
15,218
138,163
51,151
56,582
2,219
54,363
17,348
0
153,610
0.97
0.97
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.
