Business Context and Reporting Period
Company: The Washington Water Power Company (Avista Corp)
Filing Type: Form 10-Q (Quarterly Report)
Reporting Period: Quarter and nine months ended September 30, 1996
Business Overview: The Company operates as a utility generating, transmitting, and distributing electric energy and natural gas. It also maintains non-utility operations through Pentzer Corporation, which acquires and manages middle-market companies. Electric operations rely heavily on hydroelectric generation, making them sensitive to streamflow conditions.
Key Financial Metrics
| Metric (in thousands) | Q3 1996 | Q3 1995 | 9 Months 1996 | 9 Months 1995 |
|---|---|---|---|---|
| Operating Revenues | $219,751 | $157,869 | $663,655 | $514,770 |
| Income from Operations | $35,627 | $31,565 | $147,961 | $130,142 |
| Net Income | $18,364 | $10,885 | $69,242 | $54,503 |
| Income Available for Common Stock | $16,572 | $8,618 | $63,043 | $47,640 |
| Earnings Per Share (Diluted) | $0.30 | $0.16 | $1.13 | $0.87 |
| Cash Flow from Operations (9 Mo) | $163,898 | $113,753 | ||
| Total Assets | $2,114,545 (as of Sept 30, 1996) | |||
| Total Long-Term Debt | $727,147 (as of Sept 30, 1996) | |||
| Cash and Equivalents | $9,003 (as of Sept 30, 1996) |
Material Changes vs. Prior Period
- Revenue Growth: Operating revenues increased 39% in Q3 1996 and 29% year-to-date compared to 1995. This was driven primarily by a 33.5% increase in wholesale electric revenues due to new firm contracts and increased spot market sales, supported by hydroelectric generation at 123% of normal levels.
- Earnings Increase: Earnings per share rose to $0.30 in Q3 1996 from $0.16 in 1995. Year-to-date EPS increased to $1.13 from $0.87.
- Non-Utility Gains: Significant transactional gains contributed to earnings: a $4.7 million after-tax gain from the sale of Itron stock and a $10.8 million gain from the sale of the Spokane Industrial Park.
- Merger Costs: The Company expensed $15.8 million in merger-related costs in 1996 following the termination of a planned merger with Sierra Pacific Resources. These were reclassified from operating to non-operating expenses in Q3.
- Expense Trends: Electric operating expenses increased due to higher purchased power costs ($26.7 million in Q3) associated with increased wholesale sales. Natural gas revenues declined slightly due to lower prices and reduced non-retail sales.
Guidance, Outlook, and Risks
Management Commentary and Outlook
- Capital Expenditures: Utility capital expenditures for 1996-1998 are estimated at $237 million. The Company expects internally-generated funds to cover approximately 95% of these needs.
- Financing: The Company plans to file a registration statement in November 1996 to authorize up to $150 million in subordinated debt or preferred securities.
- Regulatory: The Company received FERC approval for National Power Marketer certification, allowing it to buy and sell energy nationwide. A trial "Direct Access" tariff was approved in Washington and Idaho for large customers.
Risks and Contingencies
- Nez Perce Tribe Litigation: The Tribe is appealing a summary judgment dismissal regarding alleged treaty violations related to two dismantled dams. Potential damages alleged range from $425 million to $650 million plus punitive damages. The Company cannot currently estimate the likelihood of an adverse outcome.
- Firestorm Litigation: Five class-action lawsuits remain pending regarding 1991 wildfires allegedly caused by downed lines. Trial dates are anticipated in the fall of 1997. The Company has received a settlement demand within insurance limits but cannot assess the final outcome.
- Environmental Remediation: An oil spill at the Spokane steam heat plant requires cleanup. An accrual of $3.1 million is recorded, with construction expected to begin in spring 1997.
- Williams Lake Lawsuit: A subsidiary faces a lawsuit in British Columbia seeking over $10 million regarding a 1993 asset sale. The outcome is currently unassessable.
Investor Verification Checklist
- Wholesale Market Exposure: Verify the sustainability of the 3x increase in wholesale kWh sales and the impact of the 34-35% decline in average wholesale prices on future margins.
- Hydro Dependency: Assess the risk of reduced streamflow in future periods, as current results rely on hydro generation being 123-145% of normal.
- Non-Utility Volatility: Confirm the recurring nature of non-utility earnings, noting that a significant portion ($15.5 million YTD) stems from one-time transactional gains (Itron sale, Spokane Industrial Park sale).
- Legal Accruals: Review the adequacy of the $3.1 million environmental accrual and the potential exposure from the Nez Perce Tribe appeal and Firestorm class actions, which could exceed current reserves.
- Debt Maturities: Monitor the $90 million in long-term debt and preferred stock sinking fund requirements due between 1996 and 1998.