Business Context and Reporting Period
Company: The Washington Water Power Company (Avista Corp)
Filing Type: Form 10-Q (Quarterly Report)
Reporting Period: Three and six months ended June 30, 1998
Business Overview: The Company operates as a regional utility providing electric and natural gas services (Energy Delivery and Generation & Resources) and as a national entity through Avista Corp, which manages National Energy Trading and Marketing and Non-energy businesses (primarily Pentzer Corporation). The Company is shifting its strategic direction toward growth in competitive energy markets.
Key Financial Metrics
| Metric (in thousands) | 3 Months Ended June 30, 1998 |
3 Months Ended June 30, 1997 |
6 Months Ended June 30, 1998 |
6 Months Ended June 30, 1997 |
|---|---|---|---|---|
| Operating Revenues | $632,995 | $236,274 | $1,204,664 | $520,285 |
| Net Income | $15,643 | $48,475 | $47,875 | $78,323 |
| Income Available for Common Stock | $14,855 | $46,663 | $46,263 | $74,733 |
| Earnings Per Share (Basic/Diluted) | $0.27 | $0.83 | $0.83 | $1.34 |
| Cash from Operating Activities | N/A | N/A | $69,715 | $138,456 |
| Total Assets | $3,069,475 | N/A | $3,069,475 | $2,411,785 |
| Total Long-Term Debt | $788,481 | N/A | $788,481 | $762,185 |
| Common Equity | $759,358 | N/A | $759,358 | $748,812 |
Note: 1997 Balance Sheet data is not provided in the text for the quarter; year-end 1997 data is used for comparison where applicable.
Material Changes vs. Prior Period
- Revenue Surge: Operating revenues increased significantly (168% for the quarter, 132% for the six months) driven primarily by the expansion of the National Energy Trading and Marketing segment, which began full operations in July 1997. Revenues for this segment grew from $2.0 million to $380.9 million in the second quarter.
- Net Income Decline: Despite revenue growth, Net Income and EPS decreased substantially compared to 1997. The primary driver was a one-time $41.4 million interest income receipt from an income tax recovery in Q2 1997, which did not recur in 1998.
- Utility Segment Performance:
- Energy Delivery: Pre-tax income increased 20% (Q2) and 13% (6 months) due to customer growth and natural gas price increases effective Jan 1998.
- Generation & Resources: Pre-tax income decreased 24% (Q2) and 46% (6 months). This was caused by lower hydroelectric generation (due to lower streamflows) necessitating higher purchased power costs, and a shift in product mix toward lower-margin short-term sales.
- Non-Energy Segment: Income decreased in Q2 due to the absence of a $2.0 million transactional gain recorded in Q2 1997. However, for the six-month period, income increased due to a $5.5 million gain from the sale of a portfolio company (Systran Financial Services) in Q1 1998.
Outlook, Risks, and Contingencies
- Management Commentary: The Company is shifting strategy toward growth in competitive markets, accepting higher risk profiles than traditional utilities. Avista Energy is positioned to benefit from market volatility but faces inherent market and credit risks.
- Regulatory Risks:
- FERC Order: The FERC issued a show cause order regarding alleged violations of Orders 888 and 889 related to transmission service provided to Avista Energy. The Company was ordered to disgorge profits and suspend certain market-based sales for 180 days. Management states the financial impact was not material.
- Nez Perce Tribe Litigation: A lawsuit alleges inadequate fish passage at two former dams, seeking damages between $425 million and $650 million plus punitive damages. The case is in mediation following a summary judgment dismissal in 1996.
- Environmental Contingencies:
- Oil Spill: Remediation is underway for a historical oil spill in Spokane. The Company is pursuing insurance recovery from Lloyds of London for over $16 million.
- Spokane Gas Plant: The Company is participating in an environmental study of a former coal gasification site it no longer owns; contamination has been detected.
- Year 2000: The Company is implementing a program to address Y2K risks, with costs estimated within previously reported ranges.
Investor Verification Checklist
- One-Time Items: Verify the exclusion of the $41.4 million 1997 tax recovery interest when comparing year-over-year earnings to assess core operational performance.
- Energy Trading Exposure: Review the mark-to-market valuation of Avista Energy's portfolio ($302M assets / $292M liabilities current; $370M assets / $357M liabilities long-term) and the associated credit risk in an unregulated market.
- Hydro Dependency: Assess the impact of streamflow variability on the Generation and Resources segment's margins, as lower flows directly increase purchased power costs.
- Litigation Status: Monitor the status of the Nez Perce Tribe mediation and the FERC compliance requirements, as these represent significant potential liabilities.
- Debt Structure: Note the capital structure is approximately 47% debt, 8% preferred, and 45% equity, with $45 million in new unsecured notes issued in Q2 1998.