Business Context and Reporting Period
Company: The Washington Water Power Company (Avista Corp)
Filing Type: Form 10-Q (Quarterly Report)
Reporting Period: Three months ended March 31, 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. National operations include National Energy Trading and Marketing (Avista Energy) and Non-energy businesses (primarily Pentzer Corporation).
Key Financial Metrics
| Metric | Q1 1998 | Q1 1997 |
|---|---|---|
| Operating Revenues | $571.7 million | $284.0 million |
| Net Income | $32.2 million | $29.8 million |
| Income Available for Common Stock | $31.4 million | $28.1 million |
| Earnings Per Share (Basic & Diluted) | $0.56 | $0.50 |
| Operating Cash Flow | $57.6 million | $75.8 million |
| Total Assets | $2,565.3 million | $2,411.8 million |
| Total Long-Term Debt | $730.8 million | $762.2 million |
| Cash and Cash Equivalents | $32.5 million | $30.6 million |
Material Changes vs. Prior Period
- Revenue Surge: Operating revenues increased 101% to $571.7 million, driven primarily by the National Energy Trading and Marketing segment, which grew from $0.1 million to $271.1 million following the start of trading operations in July 1997.
- Profitability: Net income increased 8% to $32.2 million. Income available for common stock rose 12% to $31.4 million.
- Segment Performance:
- Energy Delivery: Pre-tax income increased 8% due to natural gas price increases and lower operating expenses.
- Generation and Resources: Pre-tax income decreased 65% ($12.7 million) due to hydroelectric generation being 31% lower than the prior year, necessitating higher-cost purchased power.
- Non-Energy: Income increased significantly due to a $5.5 million after-tax gain from the sale of Systran Financial Services.
- Cash Flow: Operating cash flow decreased $18.2 million year-over-year, primarily due to changes in working capital components (increased receivables and decreased payables) related to Avista Energy's operations.
Outlook, Risks, and Contingencies
- FERC Order: On April 30, 1998, the Federal Energy Regulatory Commission (FERC) issued a show-cause order alleging violations of Orders No. 888 and 889 regarding transmission service provided to Avista Energy. The FERC may require refunds of market-based power sales profits and suspend Avista Energy's tariff for six months. Management believes the potential refund amount is not material to the consolidated financial position.
- Litigation:
- Nez Perce Tribe: Ongoing appeal regarding alleged treaty violations related to dismantled dams. Alleged damages range from $425 million to $650 million plus punitive damages. The Company previously won summary judgment, but the case is in mediation.
- Oil Spill: Litigation regarding an oil spill at the Central Steam Plant was settled and dismissed with prejudice in December 1997. The Company is pursuing insurance recovery from Lloyds of London for over $16 million.
- ITRON Litigation: A class action lawsuit involving Itron, Inc. and the Company is temporarily stayed pending legal determinations in a related case.
- Year 2000: The Company is executing a program to address Y2K risks. Estimated costs remain within the range reported in the 1997 Form 10-K.
- Liquidity: The Company maintains $120 million in committed lines of credit and $100 million in other borrowing arrangements. As of March 31, 1998, $35.5 million was outstanding under committed lines.
Investor Verification Checklist
- Verify the impact of the FERC show-cause order on future trading margins and potential refund liabilities.
- Monitor the status of the Nez Perce Tribe litigation and the outcome of ongoing mediation.
- Assess the sustainability of the National Energy Trading and Marketing revenue growth, which is highly dependent on market conditions and trading volumes.
- Review the hydroelectric generation forecasts for the remainder of 1998, as low streamflows significantly impacted Generation and Resources margins in Q1.
- Confirm the final settlement terms regarding the oil spill insurance recovery from Lloyds of London.