Business Context and Reporting Period
Company: The Washington Water Power Company (AVISTA CORP)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 30, 1995
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 streamflow conditions. Natural gas operations are influenced by weather and customer growth. The Company also maintains non-utility operations through its subsidiary, Pentzer Corporation, which focuses on middle-market investments.
Key Financial Metrics
| Metric (in thousands) | Three Months Ended June 30, 1995 | Six Months Ended June 30, 1995 |
|---|---|---|
| Operating Revenues | $158,973 | $356,901 |
| Net Income | $15,163 | $43,618 |
| Income Available for Common Stock | $12,865 | $39,022 |
| Earnings Per Share (Common) | $0.23 | $0.71 |
| Dividends Paid Per Common Share | $0.31 | $0.62 |
| Net Cash Provided by Operating Activities | N/A | $71,040 |
| Total Assets | $2,007,698 | $2,007,698 |
| Total Long-Term Debt | $701,362 | $701,362 |
| Common Equity | $704,650 | $704,650 |
Material Changes vs. Prior Period
- Earnings Per Share: Decreased to $0.23 for the quarter (from $0.25 in 1994) and $0.71 for the six-month period (from $0.72 in 1994). The decline was primarily driven by non-operating items, including increased interest expense, lower Allowance for Funds Used During Construction (AFUDC), and reduced other income.
- Electric Operations: Operating income increased 5% for the quarter and 13% year-to-date. Revenues rose due to customer growth (including a December 1994 acquisition in northern Idaho) and higher residential/commercial sales. However, wholesale revenues declined significantly (14% quarterly, 16% YTD) due to improved regional streamflows reducing demand for secondary energy.
- Natural Gas Operations: Operating income increased 70% for the quarter and 7% year-to-date. Revenues surged 34% quarterly and 18% YTD, driven by customer growth, conversions from electric service, and higher average prices. Purchased gas costs increased proportionally with sales volume.
- Non-Utility Operations: Operating income increased significantly (378% quarterly, 137% YTD) due to stronger portfolio earnings and a transactional gain of $1.3 million from the sale of Itron, Inc. stock.
- Capital Structure: Long-term debt decreased slightly from year-end 1994 levels due to the maturity of $10 million in First Mortgage Bonds and $15 million in Unsecured Medium-Term Notes, partially offset by the issuance of $58 million in Secured Medium-Term Notes.
Guidance, Outlook, Risks, and Contingencies
Proposed Merger
The Company is pursuing a merger with Sierra Pacific Resources (SPR) and Sierra Pacific Power Company (SPPC) to form Resources West Energy Corporation. The merger is structured as a pooling-of-interests. Estimated net cost savings are $450 million over 10 years. As of June 30, 1995, $10.7 million in transaction costs have been incurred. Regulatory approvals are pending in several states (Washington, Idaho, California, Nevada), with a target closing date of end of 1995.
Liquidity and Capital Resources
Capital expenditures for 1995-1997 are projected at $228 million for utility operations. The Company expects internally-generated funds to cover approximately 90% of these needs. External financing is required for debt maturities and the remaining capital spend. The Company maintains $160 million in committed lines of credit.
Material Contingencies and Risks
- Nez Perce Tribe Litigation: The Tribe alleges inadequate fish passage at two former dams, seeking damages between $425 million and $650 million. The Company filed for summary judgment; a hearing occurred in July 1995, but the outcome is uncertain.
- Firestorm Litigation: Multiple class-action lawsuits allege negligence regarding fires caused by downed lines during 1991 gale-force winds. Trials are scheduled between 1997 and 1998. The Company cannot currently estimate potential losses.
- Environmental Remediation:
- Oil Spill (Spokane): A reserve of $3.1 million is recorded for remediation of an oil spill from a former steam plant.
- Dollar Road Site: $1.0 million was recorded in Q2 1995 for soil contamination remediation.
- Supply System Project 3: The Company settled a cost-sharing claim with Chemical Bank for $500,000 in July 1995.
- FERC Regulations: The FERC issued a Notice of Proposed Rulemaking (NOPR) regarding open access transmission and stranded cost recovery. Final rules are expected in early 1996, with potential impacts on the Company's operations and the proposed merger.
Investor Verification Checklist
- Merger Status: Verify the progress of regulatory approvals in Washington, Idaho, California, and Nevada, and the likelihood of closing by end of 1995.
- Wholesale Power Exposure: Assess the sensitivity of future earnings to regional hydroelectric streamflow conditions and wholesale market pricing.
- Litigation Exposure: Monitor the status of the Nez Perce Tribe lawsuit and Firestorm class actions, as potential liabilities could be material.
- Debt Maturities: Review the schedule of long-term debt maturities ($132 million due 1995-1997) and the Company's refinancing strategy.
- Non-Utility Volatility: Evaluate the sustainability of non-utility earnings, which are partially dependent on transactional gains from portfolio sales.