AVA

Business Context and Reporting Period

Company: The Washington Water Power Company (Avista Corp)

Filing Type: Form 10-Q (Quarterly Report)

Period Ended: March 31, 1994

Business Overview: The Company operates as a utility generating, purchasing, transmitting, and distributing electric energy and natural gas. Electric operations rely heavily on hydroelectric generation, making them sensitive to weather and streamflow. Non-utility operations are conducted through Pentzer Corporation, which acquires and manages middle-market companies.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Decline: Total operating revenues decreased 10.4% to $190.9 million. This was driven by a 17% drop in electric revenues due to warmer weather (20% warmer than Q1 1993) and a 43% decrease in wholesale electric sales compared to a large one-time sale in 1993.
• Profitability: Net income fell 26% to $26.7 million. Income from operations dropped 23% to $51.9 million. The decline in utility income was partially offset by lower purchased power costs ($15.1 million decrease).
• Segment Performance:
  • Electric: Operating income decreased 24% to $38.1 million.
  • Natural Gas: Revenues increased 10% to $53.5 million due to 10% customer growth and higher prices, though operating income fell 13% due to increased purchased gas costs.
  • Non-Utility: Net income decreased 43% to $1.6 million, primarily due to the absence of a $1.4 million transactional gain from gas turbine sales recorded in 1993.
• Capital Expenditures: Total capital expenditures increased to $33.5 million in Q1 1994 from $21.0 million in Q1 1993.

Outlook, Risks, and Contingencies

Management Commentary and Outlook

Management expects to continue emphasizing energy efficiency and customer base growth. Capital expenditures for the 1994-1996 period are projected at $334 million for utility operations, with internally generated funds expected to cover approximately 50% of these costs. The Company has $275 million in authorized but unissued Secured Medium-Term Notes available.

Material Risks and Contingencies

• Supply System Project 3 Litigation: Pending litigation with Chemical Bank regarding cost reallocation for nuclear projects. The Company cannot estimate potential loss but intends to defend vigorously. A trial date is set for July 15, 1995.
• Nez Perce Tribe Lawsuit: Allegations regarding inadequate fish passage at former dams. Damages sought range from $425 million to $650 million. Discovery is stayed pending a related case decision.
• Spokane Tribe Lawsuit: Claims regarding the Little Falls Hydroelectric Development interfering with fishing rights. Damages sought range from $100 million to $1.4 billion. Trial scheduled for November 1994.
• Environmental Remediation: An oil spill at the Steam Heat Plant site has migrated beyond property lines. A $2.0 million reserve has been established for mitigation costs.
• Firestorm Litigation: Multiple class action lawsuits filed regarding 1991 wildland fires. Damages sought are unspecified but include property damage and punitive damages.

Unusual Items and Acquisitions

• Acquisition: Agreed to acquire northern Idaho electric properties of Pacific Power & Light for approximately $30 million. Closing is proposed for Q3 1994, subject to regulatory approval.
• Power Sale Contract: Signed a 25-year contract to sell 50 MW of firm capacity and energy to Idaho Power Company, effective January 1, 1996.

Investor Verification Checklist

• Verify the impact of weather normalization on full-year electric revenue projections.
• Monitor the status of the Supply System Project 3 litigation and potential cost reallocation exposure.
• Confirm regulatory approval for the $30 million acquisition of Pacific Power & Light properties.
• Assess the adequacy of the $2.0 million reserve for the Steam Heat Plant environmental remediation.
• Review the timeline and potential financial impact of the Spokane Tribe lawsuit trial scheduled for November 1994.