Business Context and Reporting Period
This Form 10-Q covers The Washington Water Power Company (Avista Corp) for the quarterly and nine-month periods ended September 30, 1997. The company operates as a regional utility providing electric and natural gas services (Energy Delivery and Generation and Resources) and as a national entity through Avista Corp, which manages National Energy Trading and Marketing and Non-energy businesses (primarily Pentzer Corporation). The reporting period reflects a strategic shift with the launch of Avista Energy in July 1997 and significant capital restructuring.
Key Financial Metrics
| Metric (in thousands) | 3 Months Ended Sep 30, 1997 | 3 Months Ended Sep 30, 1996 | 9 Months Ended Sep 30, 1997 | 9 Months Ended Sep 30, 1996 |
|---|---|---|---|---|
| Operating Revenues | $295,076 | $219,751 | $815,361 | $663,655 |
| Income from Operations | $29,707 | $35,627 | $128,366 | $147,961 |
| Net Income | $13,237 | $18,364 | $91,559 | $69,242 |
| Income Available for Common Stock | $12,258 | $16,572 | $86,991 | $63,043 |
| Earnings Per Share (Diluted) | $0.22 | $0.30 | $1.55 | $1.13 |
| Net Cash Provided by Operating Activities | N/A | N/A | $193,666 | $163,898 |
| Total Assets | $2,206,150 | N/A | $2,206,150 | $2,177,298 |
| Total Capitalization | $1,630,019 | N/A | $1,630,019 | $1,590,262 |
Liquidity and Capital Structure: As of September 30, 1997, cash and cash equivalents totaled $23.0 million. The capital structure consisted of 46% common equity, 45% debt, and 9% preferred stock. The company redeemed $70 million in preferred stock and repurchased $45 million in long-term debt during the period, funded partially by the issuance of $110 million in Preferred Trust Securities.
Material Changes vs. Prior Period
- Quarterly Decline: Net income available for common stock decreased $4.3 million (26%) in Q3 1997 compared to Q3 1996. This was driven by reduced margins in Generation and Resources wholesale operations and start-up costs for the new National Energy Trading and Marketing segment.
- Year-to-Date Growth: Net income available for common stock increased $24.0 million (38%) for the nine months ended September 30, 1997. This increase was primarily due to a one-time $41.4 million after-tax income tax recovery from the IRS regarding the WNP3 nuclear project investment, which included $47 million in accrued interest.
- Segment Performance:
- Energy Delivery: Operating income increased slightly due to lower operating costs, despite decreased retail revenues caused by warmer weather reducing heating loads.
- Generation and Resources: Operating income decreased significantly (24% in Q3, 25% YTD) due to the expiration of high-margin long-term contracts, a shift to lower-margin short-term sales, and higher purchased power expenses.
- National Energy Trading: Reported a loss of $1.1 million in Q3 and $3.1 million YTD due to start-up costs and delayed revenue realization.
- Non-Energy: Earnings decreased YTD primarily because 1996 included a $10.8 million transactional gain from a property sale, whereas 1997 included only a $2.0 million gain.
Guidance, Outlook, and Risks
- Capital Expenditures: The company expects capital expenditures of $239 million for the utility operations and $12 million for non-energy operations over the 1997-1999 period. Management estimates internally-generated funds will cover over 100% of utility capital needs, though external financing is required for debt maturities.
- Regulatory Proceedings:
- Natural Gas Rates: A rate case filed in June 1997 seeks a $7.9 million price increase; final orders are expected by May 1998.
- Power Cost Adjustment: A 2.344% rebate in Idaho was extended for 12 months.
- Market Access: An experimental "More Options for Power Services" tariff was approved but implementation of random customer selection was deferred due to lack of supplier participation.
- Risks and Contingencies:
- Legal: A proposed $10.3 million settlement for Firestorm litigation is pending court approval, with $1.2 million recorded as a liability (remainder covered by insurance). A class action lawsuit involving Itron, Inc. has been temporarily stayed.
- Environmental: An environmental study is underway for a former coal gasification plant site; the extent of contamination and remediation costs are currently being determined.
- Market Risk: The new National Energy Trading segment is exposed to commodity price fluctuations and credit risk, managed through hedging and strict risk management policies.
Investor Verification Checklist
- Income Tax Recovery Sustainability: Verify that the $41.4 million income tax recovery is a non-recurring item and does not represent a trend in future earnings.
- Wholesale Margin Compression: Assess the long-term impact of the shift from long-term to short-term power sales on the Generation and Resources segment's profitability.
- Start-up Costs: Monitor the National Energy Trading and Marketing segment for the timeline to profitability given the current losses and start-up expenses.
- Regulatory Outcomes: Track the approval status of the natural gas rate case and the potential impact of the "More Options for Power Services" program on retail margins.
- Debt Refinancing: Confirm the successful execution of the $250 million debt securities registration filed in November 1997 to manage upcoming maturities.