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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED
DECEMBER 31, 1996 OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD
FROM _____ TO _______
COMMISSION FILE NUMBER 1-3701
THE WASHINGTON WATER POWER COMPANY
(Exact name of Registrant as specified in its charter)
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<S> <C>
Washington 91-0462470
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1411 East Mission Avenue, Spokane, Washington 99202-2600
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(Address of principal executive offices) (Zip Code)
</TABLE>
Registrant's telephone number, including area code:509-489-0500
Web site: http://www.wwpco.com
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
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Name of Each Exchange
Title of Class on Which Registered
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Common Stock, no par value, together with New York Stock Exchange
Preferred Share Purchase Rights appurtenant thereto Pacific Stock Exchange
7-7/8% Trust Originated Preferred Securities, Series A New York Stock Exchange
</TABLE>
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Title of Class
Preferred Stock, Cumulative, Without Par Value
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days:
Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (Section 229.405 of this chapter) is not contained herein,
and will not be contained, to the best of Registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [X]
The aggregate market value of the Registrant's outstanding Common Stock, no par
value (the only class of voting stock), held by non-affiliates is
$1,028,271,615.00, based on the last reported sale price thereof on the
consolidated tape on February 28, 1997.
At February 28, 1997, 55,960,360 shares of Registrant's Common Stock, no par
value (the only class of common stock), were outstanding.
Documents Incorporated By Reference
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Part of Form 10-K into Which
Document Document is Incorporated
- - ---------------------------------------- -------------------------------
Proxy Statement to be filed in Part III, Items 10, 11,
connection with the annual meeting 12 and 13
of shareholders to be held May 20, 1997
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THE WASHINGTON WATER POWER COMPANY
INDEX
<TABLE>
<CAPTION>
Item Page
No. No.
- - ---- -----
<S> <C> <C> <C>
Acronyms and Terms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . iii
Part I
1. Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Company Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Energy Delivery . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
General Business Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Electric Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Natural Gas Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Regulatory Issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Electric Delivery Operating Statistics . . . . . . . . . . . . . . . . . . . . . . . . 6
Energy Trading . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
General Business Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Regulatory Issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Energy Resources . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Electric Requirements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Electric Resources . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Hydroelectric Relicensing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Natural Gas Resources . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Energy Trading Operating Statistics . . . . . . . . . . . . . . . . . . . . . . . . . 12
Environmental Issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Non-Energy Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
2. Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Energy Delivery . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Energy Trading . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
3. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
4. Submission of Matters to a Vote of Security Holders . . . . . . . . . . . . . . . . . . 16
Part II
5. Market for Registrant's Common Equity and Related Stockholder Matters . . . . . . . . . 17
6. Selected Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
7. Management's Discussion and Analysis of Financial Condition and Results of Operations . 19
Results of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Liquidity and Capital Resources . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Future Outlook . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
8. Financial Statements and Supplementary Data . . . . . . . . . . . . . . . . . . . . . . 26
Independent Auditors' Report . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
Notes to Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure . . *
Part III
10. Directors and Executive Officers of the Registrant . . . . . . . . . . . . . . . . . . . 47
11. Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
12. Security Ownership of Certain Beneficial Owners and Management . . . . . . . . . . . . . 48
13. Certain Relationships and Related Transactions . . . . . . . . . . . . . . . . . . . . . 48
Part IV
14. Financial Statements, Financial Statement Schedules, Exhibits and Reports on Form 8-K . 49
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50
Independent Auditors' Consent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51
Exhibit Index . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52
</TABLE>
* = not an applicable item in the 1996 calendar year for the Company
ii
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THE WASHINGTON WATER POWER COMPANY
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ACRONYMS AND TERMS
(The following acronyms and terms are found in multiple locations within the
document)
Acronym/Term Meaning
aMW - Average Megawatt - a measure of electrical
energy over time
AFUCE - Allowance for Funds Used to Conserve Energy; a
carrying charge similar to AFUDC (see below)
for conservation-related capital expenditures
AFUDC - Allowance for Funds Used During Construction;
represents the cost of both the debt and equity
funds used to finance utility plant additions
during the construction period
BPA - Bonneville Power Administration
Capacity - a measure of the rate at which a particular
generating source produces electricity
Centralia - the coal fired Centralia Power Plant in western
Washington State
Colstrip - the coal fired Colstrip Generating Project in
southeastern Montana
CPUC - California Public Utilities Commission
CT - combustion turbine; a natural gas fired unit
used primarily for peaking needs
DSM - Demand Side Management - the process of helping
customers manage their use of energy resources
Energy - a measure of the amount of electricity produced
from a particular generating source over time
FERC - Federal Energy Regulatory Commission
IPUC - Idaho Public Utilities Commission
KV - Kilovolt - a measure of capacity on
transmission lines
KW, KWH - Kilowatt, kilowatthour, 1000 watts or 1000 watt
hours
MW, MWH - Megawatt, megawatthour, 1000 KW or 1000 KWH
OPUC - Public Utility Commission of Oregon
Pentzer - Pentzer Corporation, a wholly owned subsidiary
of the Company which is the parent company to
the majority of the Company's non-energy
businesses
Therm - Unit of measurement for natural gas; a therm is
equal to one hundred cubic feet (volume) or
100,000 BTUs (energy)
Watt - Unit of measurement for electricity; a watt is
equal to the rate of work represented by a
current of one ampere under a pressure of one
volt
WIDCo - Washington Irrigation & Development Company, a
wholly owned non-energy subsidiary of the
Company
WUTC - Washington Utilities and Transportation
Commission
WWP - The Washington Water Power Company, the Company
iii
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THE WASHINGTON WATER POWER COMPANY
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PART I
This Form 10-K contains forward-looking statements within the meaning of Section
21E of the Securities Exchange Act of 1934. Forward-looking statements should be
read with the cautionary statements and important factors included in this Form
10-K at Item 7 - - "Management's Discussion and Analysis of Financial Condition
and Results of Operations - - Safe Harbor Forward-Looking Statements."
Forward-looking statements are all statements other than statements of
historical fact, including without limitation those that are identified by the
use of the words "anticipates," "estimates," "expects," "intends," "plans,"
"predicts," and similar expressions.
ITEM 1. BUSINESS
COMPANY OVERVIEW
The Washington Water Power Company (Company), which was incorporated in the
State of Washington in 1889, primarily operates in the electric and natural gas
utility businesses. At December 31, 1996, the Company's employees included 1,453
people in its energy operations and approximately 1,850 people in its
majority-owned non-energy businesses. The Company's corporate headquarters are
in Spokane, Washington (Spokane), which serves as the Inland Northwest's center
for manufacturing, transportation, health care, education, communication,
agricultural and service businesses.
In August 1996, the Company reorganized its energy operations to take advantage
of the changes in the Company's business environment and to proactively respond
to regulatory and structural changes in the industry. The restructuring
reinforces the Company's commitment to and advocacy of utility industry
deregulation. The Company organized its energy operations into two lines of
business. The Energy Delivery business includes retail electric and natural gas
distribution and transmission services. The Energy Trading and Market Services
(Energy Trading) business includes generation and production, electric and
natural gas commodity trading and energy services.
Both the Energy Delivery and Energy Trading lines of business are currently
conducted by separate business divisions within the Company. The Company intends
eventually to conduct some or all of the Energy Trading line of business through
one or more of the subsidiaries as discussed below.
In addition to its energy businesses, the Company owns Pentzer Corporation
(Pentzer), parent company to the majority of the Company's non-energy
businesses.
[1996 ORGANIZATIONAL STRUCTURE]
1996 Organizational Structure is a chart that depicts the Company's
organizational structure during 1996. The top of the organizational chart shows
"Washington Water Power". Under this are the three Lines of Business -- "Energy
Delivery", "Energy Trading and Market Services", and "Non-Energy Business".
Under Energy Delivery are the two business units -- "Electric and Natural Gas"
and "Transmission Services". Under Energy Trading and Market Services are three
business units -- "Generation and Production", "Commodity Trading" and "Energy
Services". Under Non-Energy Business are two business units -- "Pentzer
Corporation" and "Other".
For the twelve months ended December 31, 1996, 1995 and 1994, respectively, the
Company derived operating revenues and income from operations in the following
proportions:
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<CAPTION>
Operating Revenues Income from Operations (pre-tax)
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1996 1995 1994 1996 1995 1994
<S> <C> <C> <C> <C> <C> <C>
Energy Delivery 40% 50% 52% 47% 57% 73%
Energy Trading 45% 38% 39% 45% 36% 23%
Non-Energy 15% 12% 9% 8% 7% 4%
</TABLE>
1
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THE WASHINGTON WATER POWER COMPANY
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As previously reported, on June 28, 1996, the Board of Directors of the Company
terminated the Agreement and Plan of Reorganization and Merger, dated as of June
27, 1994 by and among the Company, Sierra Pacific Resources (SPR), Sierra
Pacific Power Company, a subsidiary of SPR (SPPC), and Altus Corporation, a
wholly owned subsidiary of the Company, which would have provided for the merger
of the Company, SPR and SPPC with and into Altus.
In February 1997, the Company's Board of Directors approved creation of a new
subsidiary, Avista Corp. (Avista), which will own all of the Company's
non-regulated businesses (energy and non-energy). The non-regulated energy
businesses include Avista Advantage, Inc. (formerly WWP Energy Solutions, Inc.)
and Avista Energy, Inc. (formerly WWP Resource Services, Inc.). (See Item 1.
Business - Energy Trading for additional information about these businesses).
The non-energy business primarily consists of Pentzer which is the parent
company to the majority of the Company's non-energy businesses. See Item 1.
Business - Non-Energy Business and Note 15 to Financial Statements for
additional information. Avista was formed to segregate the Company's
non-regulated businesses from regulated businesses and support financing of the
non-regulated businesses as they develop and expand. The Company will operate
under this corporate structure prospectively; the remainder of these 10-K
discussions focus on the corporate structure in place during 1996.
2
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THE WASHINGTON WATER POWER COMPANY
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ENERGY DELIVERY
GENERAL BUSINESS MATTERS
Energy Delivery provides electricity and natural gas distribution and
transmission services in a 26,000 square mile area in eastern Washington and
northern Idaho with a population of approximately 825,000. Energy Delivery also
provides natural gas service in a 4,000 square mile area in northeast and
southwest Oregon and in the South Lake Tahoe region of California, with the
population in these areas approximating 495,000.
At the end of 1996, retail electric service was supplied to approximately
297,000 customers in eastern Washington and northern Idaho; retail natural gas
service was supplied to approximately 238,000 customers in parts of Washington,
Idaho, Oregon and California.
ELECTRIC OPERATIONS
Regulatory, economic and technological changes have brought about the
accelerating transformation of the electric utility industry from a vertically
integrated monopoly to a market driven business. The Company is well-positioned
to meet the challenges of increased competition due to its low production costs
and close proximity to major transmission lines. To assess impacts of
competition and customer choice, the Company has proposed and/or implemented
experimental programs which include a Direct Access and Delivery Service Tariff
(DADS) and a More Options for Power Services (MOPS) tariff. See Regulatory
Issues below for additional information.
Challenges facing the retail electric business include reduced energy
consumption and the cost of the energy supplied, self-generation and fuel
switching by commercial and industrial customers, the costs of increasingly
stringent environmental laws and the potential for stranded or non-recoverable
utility assets. In April 1996, the Federal Energy Regulatory Commission (FERC)
issued Orders No. 888 and No. 889 which require electric utility companies to
provide third-party access to their transmission systems and to establish an
Open Access Same-time Information System (OASIS) to provide transmission
customers with information about available transmission capacity, prices and
other information, by electronic means. See Energy Trading - Regulatory Issues
for additional information.
Bills have recently been introduced in the Washington State Legislature to move
toward retail competition in the electric business. The major features of the
proposed bills would allow consumers to choose a market-based rate alternative,
allow for recovery of some stranded costs, and require electric utility
companies to unbundle their services and rates; prices for local distribution
and ancillary services would continue to be regulated. The Company cannot
predict the timing or ultimate impact of these proposals if passed. However, the
Company believes it is clear that competition will ultimately be introduced into
the retail electric business.
IndeGO (Northwest Grid Operator) The Company signed a Memorandum of
Understanding (MOU) on July 11, 1996 with various Northwest utilities for the
purposes of jointly investigating the feasibility of transferring certain
operating responsibilities associated with a regional transmission grid to an
independent grid operator. It is conceivable that operation of the regional
transmission grid by an independent grid operator may facilitate evolution to a
competitive electric power market and potentially increase the efficiency of the
Northwest transmission system, as well as provide non-discriminatory open access
to the regional transmission grid consistent with FERC requirements. The Company
is participating in various IndeGO committees addressing a number of issues
(system operations, transmission pricing, regional planning, etc.) associated
with the development of an independent grid operator. IndeGO parties are working
cooperatively with all anticipated stakeholders during this initial development
stage. The MOU is essentially non-binding in that any party to the MOU may
withdraw at any time by providing written notice to each other party to the MOU.
At such time as IndeGO may be formally proposed, the Company, pursuant to its
ongoing internal evaluation of IndeGO, will determine whether it will
participate in the formation of the Northwest independent grid operator.
NATURAL GAS OPERATIONS
Natural gas remains competitively priced compared to alternative fuel sources
for residential, commercial and industrial customers. Because of abundant
supplies and competitive markets, natural gas should sustain its market
advantage. The Company continues to advise electric customers as to the cost
advantages of converting space and water heating needs to natural gas.
Significant growth has occurred in the Company's natural gas business in recent
years due to increased demand for natural gas in new construction. The Company
also makes sales or provides transportation service directly to large natural
gas customers and non-retail sales to marketers and producers where points of
delivery are outside the Company's retail distribution area.
The Company provides transportation service to customers who obtain their own
natural gas supplies. Transportation service continued to be a significant
component of the Company's total system deliveries in 1996. The competitive
nature of the spot natural gas market results in savings in the cost of
purchased natural gas, which encourages large customers with fuel-switching
capabilities to continue to utilize natural gas for their energy needs. The
total volume transported on behalf of transportation customers was approximately
237.9 million therms in 1996. This volume represented approximately 40% of the
Company's total system deliveries in 1996.
3
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THE WASHINGTON WATER POWER COMPANY
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While rate design changes have increased the costs of firm transportation to low
load-factor pipeline customers such as the Company, flexible receipt and
delivery points and capacity releases allow temporarily under-utilized
transportation to be released to others when not needed to serve the Company's
customers.
Challenges facing the Company's natural gas business include the continuing
potential for customers to by-pass the Company's natural gas system. Since 1988,
two of the Company's large industrial customers have built their own pipeline
interconnections. However, these customers continue to purchase natural gas
services from the Company. To reduce the potential for such by-pass, the Company
prices its natural gas services, including transportation contracts,
competitively, and has varying degrees of flexibility to price its
transportation and delivery rates by means of special contracts. The Company has
also signed long-term transportation contracts with two of its largest
industrial customers which reduces the chances of these customers by-passing the
Company's system in the foreseeable future.
REGULATORY ISSUES
The Company, as a public utility, is currently subject to regulation by state
utility commissions with respect to rates, accounting, the issuance of
securities and other matters. The retail electric operations are subject to the
jurisdiction of the Washington Utilities and Transportation Commission (WUTC)
and the Idaho Public Utilities Commission (IPUC). The natural gas operations are
subject to the jurisdiction of the WUTC, the IPUC, the Public Utility Commission
of Oregon (OPUC) and the California Public Utilities Commission (CPUC).
In each regulatory jurisdiction, the price the Company may charge for retail
electric and natural gas services (other than specially negotiated retail rates
for industrial or large commercial customers) is currently determined on a "cost
of service" basis and is designed to provide, after recovery of allowable
operating expenses, an opportunity to earn a reasonable return on "rate base."
"Rate base" is generally determined by reference to the original cost (net of
accumulated depreciation) of utility plant in service, subject to various
adjustments for deferred taxes and other items (see Note 1 to Financial
Statements for additional information about depreciation and deferred taxes).
Over time, rate base is increased by additions to utility plant in service and
reduced by depreciation and retirements of utility plant from service. As the
energy business is restructured, traditional "cost of service" rate setting may
be modified through performance-based (or "incentive") ratemaking. Rates for
transmission services are based on the same principles and are set forth in
tariffs on file with the FERC.
General Rate Cases The Company's last general electric rate cases were effective
in March 1987 for the State of Washington and September 1986 for the State of
Idaho; both allowed a return on equity of 12.90%. The Company's last general
natural gas rate cases were effective: in August 1990 for the State of
Washington and allowed a return on equity of 12.90%; in October 1989 for the
State of Idaho and allowed a return on equity of 12.75%.
Notice of Inquiry (NOI) The WUTC, after a notice of inquiry process, has
examined potential structural changes in the electric utility industry with a
focus on the implications of industry changes for Washington utility regulation
and recommendations concerning specific rules and regulations currently used by
the WUTC. The NOI process concluded in December 1995 with the issuance by the
WUTC of eight guiding principles stating basically that future WUTC regulatory
oversight will balance issues such as reliability, pricing responsive to
customers needs and selected public policy concerns. Washington utilities were
ordered to follow the eight guiding principles while the WUTC reviews other
states' experience with restructuring to determine potential benefits for
Washington customers. In January 1996, the IPUC initiated a similar NOI
entitled, "Investigation into Changes Occurring in the Electric Industry." The
IPUC issued an order in September 1996 indicating that, given the low electric
rates provided by Idaho utilities, the IPUC will review other states' experience
with restructuring to determine potential benefits for Idaho customers.
In August 1995, the WUTC initiated an NOI entitled, "Examining Regulation of
Local Distribution Companies in the Face of Change in the Natural Gas Industry."
The WUTC sought comments on the potential structural change in the natural gas
industry, the implications of industry changes for utility regulation and
recommendations concerning specific rules and regulations currently used by the
WUTC. As a result of comments received, the WUTC is reviewing regulatory
procedures and rules concerning such matters as least-cost planning, purchased
gas adjustment (PGA) mechanisms and demand side management (DSM) incentives. The
Company provided initial comments in September 1995 and reply comments in early
February 1996, and has participated in a series of meetings pertaining to
natural gas procurement incentives, DSM and unbundling issues.
Direct Access and Delivery Service Tariff (DADS) To proactively respond to the
potential regulatory change of customer choice in the electric business, the
Company filed a DADS tariff to better understand how customer choice could
affect and benefit its large industrial customers. In May 1996, the Company
filed with the WUTC and the IPUC an experimental DADS tariff to allow eligible
customers to choose their supplier to serve up to one-third of their electric
load. The only eligible customers are 30 of the Company's largest customers in
Washington and Idaho. The WUTC and the IPUC approved the tariff effective in
September 1996. This trial tariff is effective through August 31, 1998. As of
January 1, 1997, 13 of the eligible customers were taking service under the
tariff (eight Washington customers and five Idaho customers), representing 60%
of the eligible load. Five different alternative suppliers are selling energy to
those customers mostly with one-year terms at a fixed-price for the capacity and
energy. The tariff will not affect the rates for other customer classes during
or after the experimental period. The Company is absorbing any margin losses
associated with
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THE WASHINGTON WATER POWER COMPANY
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loads served on the DADS tariff and the losses incurred are not having a
material impact on the Company's financial condition or results of operation.
More Options for Power Services (MOPS) A MOPS experimental tariff was filed on
February 10, 1997 with the WUTC and IPUC to help the Company assess the
potential benefits of direct access for its electric residential and commercial
customers and to collect information that will assist in the transition to
customer choice. The MOPS filing proposes a two-year pilot program that would
allow approximately 2,500 residential and 300 commercial customers direct access
to alternative energy providers. This pilot is proposed to begin in mid-1997 and
end in mid-1999, assuming regulatory approval. The Company has proposed to
recover one-half of the lost margins associated with the pilot through the
energy delivery rate and absorb one-half of the margin losses. The program costs
and margin losses are not expected to have a material impact on the Company's
financial condition or results of operation.
Demand Side Management (DSM) The WUTC and IPUC approved as filed, effective
January 1, 1997, the Company's proposed electric DSM programs and tariff rider
for a three-year extension ending December 31, 1999. The Company's DSM programs
focus on both the continuation of selected existing programs available to broad
customer classes and the participation in the Northwest Energy Efficiency
Alliance, a partnership of regional utilities offering specifically structured
programs to influence market demand. The Company's programs, while maintaining a
residential electric weatherization program and fuel efficiency awareness
programs, now place a greater emphasis on commercial and industrial programs.
The tariff rider is a separate revenue source and represents a 1.54% electric
revenue surcharge. The revenues will be used to fund the Company's 1997 through
1999 DSM program surcharge expenditures.
The avoided cost of natural gas has decreased to a level which significantly
reduces the cost-effectiveness of natural gas DSM programs. The WUTC and IPUC
each approved the Company's reduction of the natural gas DSM tariff rider from a
surcharge of 0.52% to zero effective January 1, 1997. The Company will continue
to monitor the cost of natural gas to determine if there are any substantive
changes in the natural gas commodity that would improve the cost-effectiveness
of natural gas DSM programs.
In 1993, the OPUC authorized the Company to defer revenue requirements
associated with its Oregon DSM investments and established an annual rate
adjustment mechanism to reflect the deferred costs on a timely basis. Under this
authorization, the Company files annually, concurrent with the Company's annual
natural gas "tracker" filing, a rate adjustment to recover DSM program costs and
margin losses.
Power Cost Adjustment (PCA) The Company has a PCA in Idaho which tracks changes
in hydroelectric generation, surplus energy prices, related changes in thermal
generation and PURPA contracts, but not changes in revenues or costs associated
with other wheeling or power contracts. Rate changes are triggered when the
deferred balance reaches $2.2 million. See Note 1 to Financial Statements for
additional details.
Purchased Gas Adjustment (Natural Gas Trackers) Natural gas trackers are
designed to pass through changes in purchased natural gas costs and do not
normally result in any changes in net income to the Company. In September 1996,
the Company filed a natural gas tracker with the IPUC requesting a $2.34
million, or 8.5%, decrease which was approved, effective November 1, 1996. In
October 1996, the Company filed a natural gas tracker with the OPUC requesting a
$3.67 million, or 8.59%, decrease which was approved, effective December 1,
1996. The Oregon gas tracker includes a provision that specifies a sharing of
benefits and risks associated with changes in gas prices. In November 1996, the
Company filed a natural gas tracker with the WUTC requesting a $3.39 million, or
4.4%, decrease which was approved, effective January 1, 1997.
5
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ENERGY DELIVERY OPERATING STATISTICS
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------------------------
1996 1995 1994
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<S> <C> <C> <C>
RETAIL ELECTRIC OPERATIONS
ELECTRIC OPERATING REVENUES (Thousands of Dollars):
Residential ....................................................... $ 160,345 $ 156,755 $ 146,894
Commercial ........................................................ 144,717 140,221 131,254
Industrial ........................................................ 62,067 60,979 57,438
Public street and highway lighting ................................ 3,359 3,345 3,108
--------- --------- ---------
Total retail electric revenue ................................. 370,488 361,300 338,694
Transmission revenues ............................................. 11,931 8,362 12,636
Other revenues .................................................... 6,747 6,050 6,960
Transfer to Energy Trading (1) ................................... (181,708) (176,528) (168,503)
--------- --------- ---------
Total electric energy delivery revenues ....................... $ 207,458 $ 199,184 $ 189,787
========= ========= =========
ELECTRIC ENERGY SALES (Thousands of MWhs):
Residential ....................................................... 3,220 3,150 3,035
Commercial ........................................................ 2,674 2,592 2,477
Industrial ........................................................ 1,863 1,803 1,705
Public street and highway lighting ................................ 24 23 22
--------- --------- ---------
Total retail energy sales ..................................... 7,781 7,568 7,239
========= ========= =========
ELECTRIC AVERAGE HOURLY LOAD (aMW): .................................. 973 924 886
========= ========= =========
NUMBER OF ELECTRIC CUSTOMERS (Average for Period):
Residential ....................................................... 257,726 253,364 239,733
Commercial ........................................................ 33,043 32,236 29,402
Industrial ........................................................ 1,133 1,107 999
Public street and highway lighting ................................ 363 349 325
--------- --------- ---------
Total retail electric customers ............................... 292,265 287,056 270,459
========= ========= =========
ELECTRIC RESIDENTIAL SERVICE AVERAGES:
Annual use per customer (KWh) ..................................... 12,493 12,434 12,661
Revenue per KWh (in cents) ........................................ 4.98 4.98 4.84
Annual revenue per customer ....................................... $ 622.15 $ 618.69 $ 612.74
NATURAL GAS OPERATIONS
NATURAL GAS OPERATING REVENUES (Thousands of Dollars):
Residential ....................................................... $ 85,904 $ 84,358 $ 76,597
Commercial ........................................................ 51,006 52,671 50,981
Industrial - firm ................................................. 3,949 5,470 5,642
Industrial - interruptible ........................................ 1,131 1,967 3,570
--------- --------- ---------
Total retail natural gas revenues ............................. 141,990 144,466 136,790
Non-retail sales .................................................. 9,862 10,530 5,098
Transportation .................................................... 12,154 12,340 11,140
Other revenues .................................................... 7,305 6,891 3,748
--------- --------- ---------
Total natural gas energy delivery revenues .................... $ 171,311 $ 174,227 $ 156,776
========= ========= =========
THERMS DELIVERED (Thousands of Therms):
Residential ....................................................... 183,927 159,919 150,106
Commercial ........................................................ 132,744 120,838 120,901
Industrial - firm ................................................. 12,757 14,658 15,614
Industrial - interruptible ........................................ 4,174 10,621 12,801
--------- --------- ---------
Total retail sales ............................................ 333,602 306,036 299,422
Non-retail sales .................................................. 67,656 104,831 36,107
Transportation .................................................... 237,894 221,261 195,543
Interdepartmental sales and Company use ........................... 22,215 25,043 257
--------- --------- ---------
Total therms - sales and transportation ....................... 661,367 657,171 531,329
========= ========= =========
</TABLE>
(1) The transfer to Energy Trading represents the portion of revenues
collected by Energy Delivery for the generation and resource costs to
meet retail loads.
6
<PAGE> 10
THE WASHINGTON WATER POWER COMPANY
- - --------------------------------------------------------------------------------
ENERGY DELIVERY OPERATING STATISTICS
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------------------------
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
SOURCES OF NATURAL GAS SUPPLY (Thousands of Therms):
Purchases ......................................................... 422,194 429,903 335,780
Storage - injections .............................................. (26,260) (31,248) (20,518)
Storage - withdrawals ............................................. 24,572 32,332 19,053
Natural gas for transportation .................................... 237,894 221,261 195,543
Distribution system gains (losses) ................................ 2,967 4,923 1,471
--------- --------- ---------
Total supply .................................................. 661,367 657,171 531,329
========= ========= =========
NET SYSTEM MAXIMUM CAPABILITY (Thousands of Therms):
Net system maximum demand (winter) ................................ 3,273 2,758 2,605
Net system maximum firm contractual capacity (winter) ............. 3,523 3,523 3,523
NUMBER OF NATURAL GAS CUSTOMERS (Average for Period):
Residential ....................................................... 203,245 192,252 179,176
Commercial ........................................................ 25,747 24,606 23,466
Industrial - firm ................................................. 300 281 264
Industrial - interruptible ........................................ 28 31 33
--------- --------- ---------
Total retail customers ........................................ 229,320 217,170 202,939
Non-retail sales .................................................. 7 5 1
Transportation .................................................... 93 75 60
--------- --------- ---------
Total natural gas customers ................................... 229,420 217,250 203,000
========= ========= =========
NATURAL GAS RESIDENTIAL SERVICE AVERAGES:
Washington and Idaho
Annual use per customer (therms) .............................. 1,007 919 899
Revenue per therm (in cents) .................................. 41.90 48.98 47.46
Annual revenue per customer ................................... $ 421.91 $ 450.07 $ 426.83
Oregon and California
Annual use per customer (therms) .............................. 724 678 731
Revenue per therm (in cents) .................................. 58.55 61.78 58.62
Annual revenue per customer ................................... $ 424.00 $ 418.88 $ 428.64
HEATING DEGREE DAYS:(1) .............................................. (1)
Spokane, WA
Actual ........................................................ 7,477 6,363 6,225
30 year average ............................................... 6,842 6,842 6,842
% of average .................................................. 109.3 93.0 91.0
Medford, OR
Actual ........................................................ 4,088 3,751 4,348
30 year average ............................................... 4,611 4,611 4,611
% of average .................................................. 88.7 81.3 94.3
INCOME FROM ENERGY DELIVERY OPERATIONS (After income tax) ................ $ 63,205 $ 75,623 $ 82,728
========= ========= =========
</TABLE>
(1) Heating degree days are the measure of the coldness of weather
experienced, based on the extent to which the average of high and low
temperatures for a day falls below 65 degrees Fahrenheit (annual degree
days below historic average indicate warmer than average temperatures).
7
<PAGE> 11
THE WASHINGTON WATER POWER COMPANY
- - --------------------------------------------------------------------------------
ENERGY TRADING
GENERAL BUSINESS MATTERS
Energy Trading manages the Company's electric energy resource portfolio, which
is used to serve Energy Delivery's retail electric customers and Energy
Trading's wholesale electric customers. Energy Trading is also in the electric
and natural gas commodity trading business where it is involved in both
short-term trading and long-term contracts at the wholesale level. Other energy
services are provided through Avista Advantage, a subsidiary of the Company.
In managing the electric energy resource portfolio, Energy Trading seeks to
maximize availability and minimize cost of production of generation resources.
The Company owns and operates nine hydroelectric projects, a wood-waste fueled
generating station and two natural gas combustion turbine (CT) peaking units.
The Company also owns a 15% share in two coal-fired generating facilities and
leases two additional gas CT peaking units. With this diverse energy resource
portfolio, the Company remains one of the nation's lowest-cost producers and
sellers of electric energy services.
The commodity trading business consists of energy trading and wholesale
marketing. Energy trading includes short-term sales and purchases such as next
hour, next day and monthly blocks of energy. Wholesale marketing includes sales
and purchases under long-term contracts with one-year and longer terms.
The Company's wholesale marketing and commodity trading businesses are a growing
and important part of the Company's overall business strategy. Since 1987, the
Company has entered into a number of long-term power sales contracts that have
increased its wholesale electric business and the Company is continuing to
actively pursue electric wholesale business opportunities. Wholesale sales are
affected by weather and streamflow conditions and may eventually be affected by
the restructuring of the electric utility industry.
Challenges facing Energy Trading include evolving technologies which provide
alternate energy supplies and deregulation of electric and natural gas markets.
Energy Trading continues to compete in the wholesale electric market with other
western utilities, federal marketing agencies and power marketers. It is
expected that competition to sell capacity will remain vigorous, and that prices
will remain depressed for at least the next several years, due to increased
competition and surplus capacity in the western United States. Competition in
the sale of capacity and energy is influenced by many factors, including the
availability of capacity in the western United States, the availability and
prices of natural gas and oil, spot energy prices and transmission access.
Business challenges affecting the energy trading business include new entrants
in the wholesale market, such as power brokers and marketers, competition from
low-cost generation being developed by independent power producers and declining
margins. In addition, the Energy Act confers expanded authority upon the FERC to
issue orders requiring electric utilities to transmit power and energy to or for
wholesale purchasers and sellers, and to require electric utilities to enlarge
or construct additional transmission capacity to provide these services.
To meet the challenges of a changing marketplace, the Company formed two new
non-regulated subsidiaries, Avista Advantage, Inc. and Avista Energy, Inc.
Avista Advantage provides a variety of energy-related products and services to
commercial and industrial customers on a national basis. The Avista Advantage
product line includes real-time metering, consolidated billing, lighting and
security systems, energy technology services and energy commodity management.
Avista Energy will focus on commodity trading, energy marketing and other
related businesses. In September 1996, the FERC approved Avista Energy's
application for National Power Marketer certification. This will allow Avista
Energy to buy electricity for resale to utilities and other customers throughout
the United States. The national energy marketing effort will be operating from
Spokane, WA.
In November 1996, an alliance was formed with Mock Energy Services, California's
largest natural gas marketer, to provide integrated energy services to customers
throughout the State of California. Under the terms of the agreement, the
alliance will market natural gas and electric commodity service to industrial
and large commercial customers throughout California. The alliance will also
offer customers a wide variety of energy-related products and services through
Avista Advantage.
REGULATORY ISSUES
The Company is subject to the jurisdiction of the FERC for its accounting
procedures, its wholesale electric rates and its (wholesale) natural gas rates
charged for the release of capacity from the Jackson Prairie Storage Project.
Some wholesale electric rates are determined on a "cost-of-service" basis in a
manner similar to retail rates. See Energy Delivery - Regulatory Issues for
additional information. Also, the Company can enter into wholesale electric
sales contracts with rates based on "cost-of-service" principles. Generally,
rates for wholesale electric sales by the Company for terms up to five years are
based on market prices.
FERC Orders No. 888 and No. 889 As previously reported, the FERC issued its
final rule in Order No. 888 on April 24, 1996. The final rule requires public
utilities operating under the Federal Power Act to provide access to their
transmission systems to third parties pursuant to the terms and conditions of
the FERC's pro-forma Open Access Transmission tariff. Utilities were required to
file an Open Access tariff, allowing only limited variations to the pro-forma
tariff to reflect regional operating practices. Utilities were also required to
take transmission service under this same tariff. The Company filed its Open
Access tariff with the FERC on July 8, 1996 and subsequently began providing
transmission service under
8
<PAGE> 12
the tariff. The FERC issued its initial order on the non-rate terms and
conditions of the tariff on November 13, 1996, accepting the tariff for filing
subject to the Company submitting three minor changes to the tariff.
In the FERC's Order No. 889, the companion rule to Order No. 888, the FERC
required public utilities to establish an OASIS to provide transmission
customers with information about available transmission capacity, prices and
other information, by electronic means. This would enable such customers to
obtain non-discriminatory transmission service. The final rule requires each
public utility subject to the rule to functionally separate its transmission and
wholesale power merchant functions and prescribed standards or conduct pursuant
to which it is assured a utility's wholesale power merchant function obtains
information about its transmission system in the same manner competitors do. The
Company filed its "Procedures for Implementing Standards of Conduct under FERC
Order No. 889" with the FERC on December 31, 1996 and adopted these Procedures
effective January 3, 1997.
FERC Orders NO. 888 and No. 889 have not had a significant material effect on
the operating results of the Company.
9
<PAGE> 13
THE WASHINGTON WATER POWER COMPANY
- - --------------------------------------------------------------------------------
ENERGY RESOURCES
ELECTRIC REQUIREMENTS
The Company's 1996 annual peak requirements, including long-term and short-term
contractual obligations, was 3,180 MW. This peak occurred on January 31, 1996,
at which time the maximum capacity available from the Company's generating
facilities, including long-term and short-term purchases, was 3,340 MW. The
electric requirements are affected by both Energy Delivery's and Energy
Trading's electric needs.
ELECTRIC RESOURCES
The Company's diverse resource mix of hydroelectric projects, thermal generating
facilities and power purchases and exchanges, combined with strategic access to
regional electric transmission systems, enables the Company to remain one of the
nation's lowest-cost producers and sellers of electric energy services. At
December 31, 1996, the Company's total owned resources available were 58%
hydroelectric and 42% thermal. See Energy Trading Operating Statistics on page
12 for the Company's energy resource statistics.
Hydroelectric Resources Hydroelectric generation is the Company's lowest cost
source of electricity and the availability of hydroelectric generation has a
significant effect on the Company's total energy costs. Under normal operating
conditions, the Company meets about 49% of its total energy requirements (both
retail and wholesale), with its own hydroelectric generation and long-term
hydroelectric contracts. The streamflows to Company-owned hydroelectric projects
were 145%, 120% and 65% of normal in 1996, 1995 and 1994, respectively.
Thermal Resources The Company has a 15% interest in each of two twin-unit
coal-fired facilities - the Centralia Power Plant in western Washington and
Units 3 and 4 of the Colstrip Generating Project in southeastern Montana. In
addition, the Company owns a wood-waste-fired facility known as the Kettle Falls
Generating Station in northeastern Washington and two natural gas-fired CTs,
located in Spokane, used for peaking needs. The Company also leases two natural
gas-fired CTs, both in northern Idaho, used for peaking needs.
Centralia, which is operated by PacifiCorp, is supplied with coal under both a
fuel supply agreement in effect through December 2020 and various spot market
purchases. In 1996, 1995 and 1994, Centralia provided approximately 46%, 30% and
42%, respectively, of the Company's thermal generation.
Colstrip is supplied with fuel under coal supply and transportation agreements
in effect through December 2019 from adjacent coal reserves. The Montana Power
Company is the operator of Colstrip. In 1996, 1995 and 1994, Colstrip provided
approximately 34%, 47% and 48% of the Company's thermal generation,
respectively.
Kettle Falls' primary fuel is wood-waste generated as a by-product from forest
industry operations within one hundred miles of the plant. Natural gas may be
used as an alternate fuel. A combination of long-term contracts plus spot
purchases provides the Company the flexibility to meet expected future fuel
requirements for the plant. In 1996, 1995 and 1994, Kettle Falls provided
approximately 10%, 8% and 10% of the Company's thermal generation, respectively.
The CTs are natural gas-fired units, primarily used for peaking needs. The
Rathdrum CTs have access to domestic and Canadian natural gas supplied through
Pacific Gas Transmission (PGT). In 1996 and 1995, these units provided
approximately 10% and 15%, respectively, of the Company's thermal generation
primarily due to the low cost of natural gas during the two years. Thermal
generation provided by the Spokane CT in prior years was immaterial.
Purchases, Exchanges and Sales In 1996, the Company had various purchase
contracts equating to a non-coincident peak of 669 MW, with an average remaining
life of 4.9 years. Additionally, long-term hydro purchase contracts of 197 MW
were available with an average remaining contract life of 12.6 years. The
Company also enters into a significant amount of short-term sales and purchases
with durations of up to one year. Energy purchases and exchanges for the years
1996, 1995 and 1994 provided approximately 54%, 36% and 30%, respectively, of
the Company's total electric energy requirements, including wholesale
obligations.
Under the Public Utility Regulatory Policies Act of 1978 (PURPA), the Company is
required to purchase generation from qualifying facilities, including small
hydroelectric and cogeneration projects, at avoided cost rates adopted by the
WUTC and the IPUC. The Company purchased approximately 574,000 MWH, or about 3%
of the Company's total energy requirements, from these sources at a cost of
approximately $25 million in 1996.
HYDROELECTRIC RELICENSING
The Company is a licensee under the Federal Power Act and its licensed projects
are subject to the provisions of Part I of that Act. These provisions include
payment for headwater benefits, condemnation of licensed projects upon payment
of just compensation and take-over of such projects after the expiration of the
license upon payment of the lesser of "net investment" or "fair value" of the
project, in either case plus severance damages.
10
<PAGE> 14
THE WASHINGTON WATER POWER COMPANY
- - --------------------------------------------------------------------------------
All but one of the Company's hydroelectric plants are regulated by the FERC
through project licenses issued for a 30-50 year period. The Cabinet Gorge and
Noxon Rapids plants are currently in the process of relicensing with an
expiration date of February 2001. The Company filed a Notice of Intent to
relicense in 1996 and has undertaken consultation with resource agencies, Native
American tribes, special interest groups and the general public. The Company's
goal in consultation is to develop settlement agreements with all parties, which
will form the basis for the license application in February 1999. Natural
resource and engineering studies as defined by the consultation process will be
the focus in 1997 with the objective to obtain information necessary for
decisions regarding future protection, mitigation and enhancement measures. An
Environmental Impact Statement (EIS) will be written in the period between
application filing and issuance of a new license.
The Company's approach to relicensing is unique because it departs from the
conventional FERC process. Early FERC involvement and EIS scoping has occurred
prior to application and the consultation process has been expanded to include
all stakeholders. The Company signed an agreement inviting Trout Unlimited to
become a partner at the onset of the process. See Item 2. Properties - Energy
Trading for additional information. See Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operations: Future Outlook for
additional information.
NATURAL GAS RESOURCES
Natural Gas Supply A diverse portfolio of resources allows the Company to
capture market opportunities that benefit the Company's natural gas customers.
Natural gas supplies are available from both domestic and Canadian sources
through both firm and short-term, or spot market, purchases. The Company has
access to five pipelines and a natural gas storage facility which allows the
Company to optimize its available resources.
Firm natural gas supplies are purchased by the Company through negotiated
agreements having terms ranging between one month and eight years. During 1996,
approximately one-third of the Company's purchases were in the short-term
market, with contracts on a month-to-month basis. Approximately 30% of the
natural gas supply was obtained from domestic sources, with the remaining 70%
from Canadian sources.
The Company has access to five natural gas pipelines, Northwest Pipeline Company
(NWP), Pacific Gas Transmission (PGT), Paiute Pipeline (Paiute), NOVA Pipeline,
Ltd. (NOVA) and Alberta Natural Gas Co. Ltd. (ANG), which provide the Company
access to both domestic and Canadian natural gas supplies. In 1996, the Company
obtained gas from over 15 different suppliers.
The Company contracts with NWP for three types of firm service (transportation,
liquefied natural gas storage and underground storage) and with PGT, NOVA and
ANG for firm transportation only. The Company contracts with Paiute for firm
transportation and liquefied natural gas storage to deliver natural gas to its
California customers.
Jackson Prairie Natural Gas Storage Project (Storage Project) The Company owns a
one-third interest in the Storage Project, which is an underground natural gas
storage field located near Chehalis, Washington. The role of the Storage Project
in providing flexible natural gas supplies is increasingly important to the
Company's natural gas operations as it enables the Company to place natural gas
into storage when prices are low or to meet minimum natural gas purchasing
requirements, as well as to withdraw natural gas from storage when spot prices
are high or as needed to meet high demand periods. The Company, together with
the other owners, is pursuing alternatives to increase the potential for both
capacity and deliverability at the Storage Project.
The Company has contracted to release some of its Storage Project capacity to
two other utilities until 1998 and 2000, respectively, with a provision under
one of the releases to partially recall the released capacity if the Company
determines additional natural gas is required for its own system supply.
11
<PAGE> 15
THE WASHINGTON WATER POWER COMPANY
- - --------------------------------------------------------------------------------
ENERGY TRADING OPERATING STATISTICS
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
ELECTRIC ENERGY RESOURCES (Thousands of MWhs):
Hydro generation (from Company facilities).................... 5,045 4,038 2,904
Thermal generation (from Company facilities).................. 2,764 2,537 3,427
Purchased power - long-term hydro............................. 1,170 1,159 1,177
Purchased power - other....................................... 10,640 4,113 3,146
Power exchanges............................................... 102 156 (24)
-------- -------- --------
Total power resources....................................... 19,721 12,003 10,630
Energy losses and Company use................................. (765) (525) (504)
-------- -------- --------
Total energy resources (net of losses)...................... 18,956 11,478 10,126
======== ======== ========
ELECTRIC ENERGY REQUIREMENTS (Thousands of MWhs):
Retail........................................................ 7,781 7,568 7,239
Long-term wholesale........................................... 4,507 1,953 1,523
Short-term wholesale.......................................... 6,668 1,957 1,364
-------- -------- --------
Total energy requirements................................... 18,956 11,478 10,126
======== ======== ========
RESOURCE AVAILABILITY at time of system peak (MW):
Total requirements (winter) (1)............................... 3,180 2,545 2,233
Total resource availability (winter).......................... 3,340 2,855 2,468
Total requirements (summer) (2)............................... 2,978 2,037 1,793
Total resource availability (summer).......................... 3,357 2,660 2,392
ELECTRIC OPERATING REVENUES (Thousands of Dollars):
Long-term wholesale........................................... 139,116 84,220 64,890
Short-term wholesale.......................................... 91,443 25,013 26,496
Other revenues................................................ 8,108 2,044 1,615
Transfer from Energy Delivery (3)............................. 181,708 176,528 168,503
-------- -------- --------
Total electric energy trading revenues...................... $420,375 $287,805 $261,504
======== ======== ========
NUMBER OF ELECTRIC CUSTOMERS (Average for Period):
Wholesale customers........................................... 60 33 27
======== ======== ========
INCOME FROM ENERGY TRADING OPERATIONS (After income tax)....... $ 64,421 $ 53,138 $ 28,685
======== ======== ========
</TABLE>
(1) Includes long-term contract obligations of 744 MW, 733 MW and 539 MW and
725 MW, 327 MW and 242 MW of short-term sales in 1996, 1995 and 1994,
respectively.
(2) Includes long-term contract obligations of 839 MW, 691 MW and 509 MW in
1996, 1995 and 1994, respectively, and short-term sales of 739 MW, 25 MW
and 1 MW in 1996, 1995 and 1994, respectively.
(3) Transfer from Energy Delivery represents the portion of revenues
collected from retail customers for generation and resource costs to meet
retail loads.
12
<PAGE> 16
THE WASHINGTON WATER POWER COMPANY
- - --------------------------------------------------------------------------------
ENVIRONMENTAL ISSUES
The Company is subject to environmental regulation by federal, state and local
authorities. The generation, transmission, distribution, service and storage
facilities in which the Company has an ownership interest have been designed to
comply with all environmental laws presently applicable. Furthermore, the
Company conducts periodic reviews of all its facilities and operations to
anticipate emerging environmental issues. The Company's Board of Directors has
an Environmental Committee to deal specifically with these issues.
Air Quality. The Company continues to assess both the potential and actual
impact of the 1990 Clean Air Act Amendments (CAAA) on the thermal generating
plants in which it maintains an ownership interest. Centralia, which is operated
by PacifiCorp, is classified as a "Phase II" coal-fired plant under the CAAA
and, as such, will be required to reduce sulfur dioxide (SO2) emissions.
Centralia is also impacted by "visibility impairment" issues related to Mt.
Rainier National Park in southwestern Washington, which requires additional
reductions in emissions. A RACT (Reasonably Available Control Technology) order
is expected to be issued by SWAPCA (Southwest Washington Air Pollution Control
Agency) which may require a reduction in SO2 emissions of approximately 90% by
the year 2000. The standards in the RACT order were established by a
collaborative decision-making group consisting of representatives from federal
and state agencies and the plant owners. The Company is currently evaluating its
options with regard to Centralia.
Colstrip, which is also a "Phase II" coal-fired plant and is operated by Montana
Power, is not expected to be required to implement any additional SO2 mitigation
in the foreseeable future in order to continue operations. Reduction in nitrogen
oxides (NOX) will be required at both Centralia and Colstrip prior to the year
2000. The anticipated share of costs for NOX compliance are not expected to have
a major economic impact on the Company.
The Company's other thermal projects also are subject to various CAAA standards.
Every five years each project requires an updated operating permit (known as a
Title V permit) which addresses, among other things, the compliance of the plant
with the CAAA. The permit for the Spokane CT was received in 1995. The permit
for the Company's Kettle Falls plant was issued in August 1996. The operating
permit application for the Rathdrum CTs in northern Idaho received approval, but
will not be issued until later in 1997.
Superfund Sites. Since 1993, the Company and other responsible parties have been
involved with remediation efforts at the Spokane Junkyard Site located in
Spokane, Washington. Cleanup actions were completed during 1996. Ongoing
monitoring of the site is required, but the costs associated with the monitoring
are minimal. Refer to Item 3. Legal Proceedings for additional information.
Refer to Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations: Future Outlook and Note 14 to Financial Statements for
additional information.
13
<PAGE> 17
THE WASHINGTON WATER POWER COMPANY
- - --------------------------------------------------------------------------------
NON-ENERGY BUSINESS
The majority of the non-energy operations are controlled by Pentzer, a wholly
owned subsidiary of the Company. As of December 31, 1996, the Company had an
equity investment of approximately $139 million in non-energy businesses, of
which approximately $130 million was invested in Pentzer. The remainder was
invested in other subsidiaries, the largest of which is Washington Irrigation
and Development Company (WIDCo), which maintains a small investment portfolio.
As of December 31, 1996, Pentzer had approximately $242 million in total assets,
or about 11% of the Company's consolidated assets. Pentzer's portfolio of
investments includes companies involved in consumer product promotion, specialty
tool manufacturing, metal fabrication, financial services and electronic
technology.
Pentzer's current investment profile focuses on manufacturers and distributors
of industrial and consumer products as well as service businesses. The Company
seeks businesses with above average records of earnings growth in industries
that are not cyclical or dependent upon high levels of research and development.
Emphasis is placed on leading companies with strong market franchises, dominant
or proprietary product lines or other significant competitive advantages.
Pentzer is particularly interested in companies serving niche markets. Total
equity investment in any one company is generally limited to $15 million, and
control of the acquired company's board of directors is generally required.
Pentzer's business strategy is to acquire controlling interest in a broad range
of middle-market companies, to help these companies grow through internal
development and strategic acquisitions, and to sell the portfolio investments
either to the public or to strategic buyers when it becomes most advantageous in
meeting Pentzer's return on invested capital objectives. Pentzer's goal is to
produce financial returns for the Company's shareholders that, over the
long-term, should be higher than that of the energy operations. From time to
time, a significant portion of Pentzer's earnings contributions may be the
result of transactional gains. Accordingly, although the income stream is
expected to be positive, it may be uneven from year to year.
Effective in March 1997, Pentzer is a wholly owned subsidiary of the Company's
non-regulated subsidiary, Avista Corp.
Refer to Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations: Results of Operations: Non-Energy Operations and Notes 1
and 15 to Financial Statements for additional information.
14
<PAGE> 18
THE WASHINGTON WATER POWER COMPANY
- - --------------------------------------------------------------------------------
ITEM 2. PROPERTIES
ENERGY DELIVERY
Electric Distribution and Transmission Plant
The Company operates approximately 12,110 miles of primary and secondary
distribution lines in its electric system in addition to a transmission system
of approximately 550 miles of 230 kV line and 1550 miles of 115 kV line. The
Company also owns a 10% interest in 495 miles of a 500 kV line from Colstrip,
Montana and a 15% interest in 3 miles of a 500 kV line from Centralia,
Washington to the nearest Bonneville Power Administration (BPA)
interconnections.
The 230 kV lines are used to transmit power from the Company's Noxon Rapids and
Cabinet Gorge hydroelectric generating stations to major load centers in the
Company's service area. The 230 kV lines also transmit to points of
interconnection with adjoining electric transmission systems for bulk power
transfers. These lines interconnect with BPA at five locations and at one
location each with PacifiCorp, Montana Power and Idaho Power Company. The BPA
interconnections serve as points of delivery for power from the Colstrip and
Centralia generating stations as well as for the interchange of power with the
Southwest. The interconnection with PacifiCorp is the point of delivery for
power purchased by the Company from Mid-Columbia projects' hydroelectric
generating stations.
The 115 kV lines provide for transmission of energy as well as providing for the
integration of the Spokane River hydroelectric and Kettle Falls wood-waste
generating stations with service area load centers. These lines interconnect
with the BPA at nine locations, Grant County Public Utility District (PUD),
Seattle City Light and Tacoma City Light at two locations and one interconnect
location each with Chelan County PUD, PacifiCorp and Montana Power.
Natural Gas Plant
The Company has natural gas distribution mains of approximately 3,420 miles in
Washington and Idaho and 1,630 miles in Oregon and California, as of December
31, 1996.
The Company, NWP and Washington Natural Gas Company each own a one-third
undivided interest in the Storage Project, which has a total peak day
deliverability of 4.6 million therms, with a total working natural gas inventory
of 155.2 million therms.
15
<PAGE> 19
THE WASHINGTON WATER POWER COMPANY
- - --------------------------------------------------------------------------------
ENERGY TRADING
The Company's electric generation properties, located in the States of
Washington, Idaho and Montana, include the following:
Generating Plant
<TABLE>
<CAPTION>
Nameplate Present Year of
No. of Rating Capability FERC License
Units (MW)(1) (MW)(2) Expiration
----- ------- ------- ----------
<S> <C> <C> <C> <C>
Hydroelectric Generating Stations (River)
Washington:
Long Lake (Spokane) 4 70.0 72.8 2007
Little Falls (Spokane) 4 32.0 36.0 N/A
Nine Mile (Spokane) 4 26.4 29.0 2007
Upper Falls (Spokane) 1 10.0 10.2 2007
Monroe Street (Spokane) 1 14.8 14.8 2007
Meyers Falls (Colville) 2 1.2 1.3 2023
Idaho:
Cabinet Gorge (Clark Fork) 4 221.9 236.0 2001 (3)
Post Falls (Spokane) 6 14.8 18.0 2007
Montana:
Noxon Rapids (Clark Fork) 5 466.7 554.0 2001 (3)
------- -------
Total Hydroelectric 857.8 972.1
Thermal Generating Stations
Washington:
Centralia (4) 2 199.5 201.0
Kettle Falls 1 50.7 48.0
Northeast (Spokane) CT (5) 2 61.2 69.0
Idaho:
Rathdrum CT (5), (6) 2 166.5 176.0
Montana:
Colstrip (Units 3 and 4) (4) 2 233.4 216.0
------- -------
Total Thermal 711.3 710.0
Total Generation Properties 1,569.1 1,682.1
======= =======
</TABLE>
N/A Not applicable.
(1) Nameplate Rating, also referred to as "installed capacity", is the
manufacturer's assigned power rating under specified conditions.
(2) Capability is the maximum generation of the plant without exceeding
approved limits of temperature, stress and environmental conditions.
(3) The formal relicensing process began in September 1995 for Cabinet Gorge
and Noxon Rapids.
(4) Jointly owned; data above refers to Company's respective 15% interests.
(5) Used primarily for peaking needs.
(6) Construction completed in January 1995; see Note 9 to Financial
Statements regarding long-term arrangement.
ITEM 3. LEGAL PROCEEDINGS
The Company is pursuing recovery from insurers, including filing suit against
Underwriters at Lloyds (Lloyds) for $16 million in Spokane County Superior
Court. The action is to recover the costs associated with the oil spill in
downtown Spokane at the site of the Company's steam heat plant and other
environmental remediation efforts. The Company's policies with Lloyds were in
effect through 1979; thereafter, its policies were maintained with another
underwriter, Aegis. Overlapping or unknown time periods when damages occurred
necessitates seeking recovery from both insurers.
Refer to Note 14 to Financial Statements.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
16
<PAGE> 20
THE WASHINGTON WATER POWER COMPANY
- - --------------------------------------------------------------------------------
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Outstanding shares of Common Stock are listed on the New York and Pacific Stock
Exchanges. As of February 28, 1997, there were approximately 31,566 registered
shareholders of the Company's no par value Common Stock.
See Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations: Future Outlook for additional information about common
stock dividends.
Refer to Notes 1, 5 and 17 to Financial Statements for additional information.
17
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THE WASHINGTON WATER POWER COMPANY
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ITEM 6. SELECTED FINANCIAL DATA
On November 9, 1993, the Company distributed, to shareholders of record on
October 25, 1993, shares of its common stock, without par value, under a
two-for-one stock split effected in the form of a 100% stock dividend. All
references to number of shares and per share information have been adjusted to
reflect the common stock split on a retroactive basis.
On July 31, 1990, WIDCo sold its 50% interest in its coal mining properties. The
consolidated financial statements, notes and selected financial data have been
reclassified to reflect the continuing operations of the Company. The revenues,
expenses, assets and liabilities of the discontinued operations have been
reclassified from those categories and netted into single line items in the
income statements and balance sheets.
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------------------------------------
1996 1995 1994 1993 1992
---------- ---------- ---------- ---------- ----------
(Thousands of Dollars except Per Share Data and Ratios)
<S> <C> <C> <C> <C> <C>
Operating Revenues:
Energy ............................ $ 799,144 $ 661,216 $ 608,067 $ 601,722 $ 524,983
Non-Energy ........................ 145,813 93,793 62,698 38,877 32,775
---------- ---------- ---------- ---------- ----------
Total ............................. 944,957 755,009 670,765 640,599 557,758
AFUDC/AFUCE .......................... 2,361 1,631 4,949 4,964 3,751
Net Income:
Energy ............................ 62,404 72,310 63,567 69,510 63,975
Non-Energy ........................ 21,049 14,811 13,630 13,266 8,292
Discontinued Operations ........... -- -- -- -- 2,403
---------- ---------- ---------- ---------- ----------
Total ............................. 83,453 87,121 77,197 82,776 74,670
Preferred Stock Dividend Requirements 7,978 9,123 8,656 8,335 6,817
Income Available for Common Stock .... 75,475 77,998 68,541 74,441 67,853
Outstanding Common Stock (000s):
Weighted Average .................. 55,960 55,173 53,538 51,616 49,550
Year-End .......................... 55,960 55,948 54,421 52,758 50,888
Book Value per Share ................. $ 12.70 $ 12.82 $ 12.45 $ 12.02 $ 11.54
Earnings per Share:
Energy ............................ .97 1.14 1.03 1.19 1.15
Non-Energy ........................... .38 .27 .25 .25 .17
Discontinued operations ........... -- -- -- -- .05
---------- ---------- ---------- ---------- ----------
Total ............................. 1.35 1.41 1.28 1.44 1.37
Dividends Paid per Common Share ...... 1.24 1.24 1.24 1.24 1.24
Total Assets at Year-End:
Energy ............................ 1,921,429 1,869,180 1,817,815 1,701,652 1,424,812
Non-Energy ........................ 255,869 229,722 176,438 136,186 109,203
---------- ---------- ---------- ---------- ----------
Total ............................. 2,177,298 2,098,902 1,994,253 1,837,838 1,534,015
Long-term Debt at Year-End ........... 764,526 738,287 721,146 647,229 596,897
Preferred Stock Subject to Mandatory
Redemption at Year-End ............. 65,000 85,000 85,000 85,000 85,000
Ratio of Earnings to Fixed Charges ... 2.97 3.22 3.24 3.45 3.08
Ratio of Earnings to Fixed Charges and
Preferred Dividend Requirements .... 2.50 2.61 2.59 2.77 2.57
</TABLE>
18
<PAGE> 22
THE WASHINGTON WATER POWER COMPANY
- - --------------------------------------------------------------------------------
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The Company is primarily engaged as a utility providing electric and natural gas
sales and services. The Energy Delivery business includes retail electric and
natural gas distribution and transmission services. Usage by retail customers
varies from year to year primarily as a result of weather conditions, the
economy in the Company's service area, customer growth, conservation, appliance
efficiency and other technology. The Energy Trading and Market Services (Energy
Trading) business includes generation and production, electric and natural gas
commodity trading and energy services. Revenues from the sale of energy to other
utilities and the cost of electric power purchases vary from year to year
depending on the electric wholesale power market, which is affected by several
factors, including the availability of water for hydroelectric generation, the
availability of base load plants in the region and the demand for power in other
areas of the country. Other factors affecting the wholesale power market include
an increasing number of power brokers and marketers and competition from low
cost generation being developed by independent power producers.
RESULTS OF OPERATIONS
OVERALL OPERATIONS
Overall earnings per share for 1996 were $1.35, compared to $1.41 in 1995 and
$1.28 in 1994. The 1996 results reflect $11.1 million in after-tax operating
expenses related to storm damage on the electric distribution system and the
expensing of $10.3 million in after-tax non-operating costs related to the
terminated proposed merger between the Company and Sierra Pacific Resources (see
Note 16 to the Financial Statements for additional information about the merger
termination). The 1996 results also reflect improved energy earnings, primarily
from wholesale electric activities, and transactional gains totaling $15.1
million recorded by Pentzer Corporation (Pentzer) primarily as a result of the
sale of property by one of its subsidiary companies and the sale of stock in
ITRON, Inc. (ITRON). The 1995 results include improved earnings from the
Company's electric operations and $6.1 million in transactional gains from
Pentzer, primarily due to the sale of ITRON stock. The 1994 earnings include
$8.0 million of transactional gains recorded by Pentzer primarily as a result of
the sale of ITRON stock.
Energy operating income available for common stock decreased $8.8 million, or
14%, in 1996 after increasing $8.3 million, or 15%, in 1995. Energy operating
income contributed $0.97 to earnings per share in 1996, compared to $1.14 in
1995 and $1.03 in 1994. The ice storm (see below) and merger-related expenses
resulted in decreases of $0.20 and $0.18, respectively, in earnings per share
for 1996. Non-energy operating income available for common stock increased $6.2
million, or 42%, in 1996 and $1.2 million in 1995 and contributed $0.38 to
earnings per share in 1996, compared to $0.27 in 1995 and $0.25 in 1994.
On November 19, 1996, the eastern Washington and northern Idaho region
experienced an ice storm that resulted in damage to the Company's electric
transmission and distribution system. The Company's service area was affected by
continuing snow and rain, which hampered the Company's efforts to restore
electric service to some customers until December 1, 1996. Initially, over
one-third, or 100,000, of the Company's retail electric customers were without
electric service. However, the Company estimates that approximately 75% of those
customers had their electric service fully restored within 72 hours of the first
storm. Repairing the damage to the Company's system cost approximately $21.8
million, of which $17.1 million (pre-tax) was attributable to operations and
maintenance expenses, including labor and materials, for the repair of damaged
lines, transformers and other equipment. The remainder of the cost represents
capital expenditures to replace poles and other equipment damaged beyond repair.
No increase in rates will occur as a result of these costs.
Income from Energy Delivery operations decreased $19.1 million, or 18%, in 1996
from 1995, primarily due to $17.1 million in pre-tax expenses associated with
the storm damage on the electric distribution system. Income from Energy
Delivery operations decreased $5.4 million, or 5%, in 1995 from 1994, primarily
due to increased operating expenses. Income from Energy Trading operations
increased $14.6 million, or 21%, in 1996 over 1995, and $32.7 million, or 90%,
in 1995 over 1994, primarily due to increased wholesale electric revenues,
resulting from both new power contracts and improved streamflow conditions. In
1995, purchased power and fuel expense decreased from 1994, both a result of the
improved streamflows.
Interest expense increased $4.2 million in 1996, as compared to 1995, and $6.0
million in 1995, as compared to 1994, with both increases primarily due to
higher levels of outstanding debt. In 1996, $20 million in preferred stock was
redeemed, which increased short-term borrowings. During 1996 and 1995, $38.0
million and $45.0 million, respectively, of long-term debt matured or was
redeemed, while $78.0 million in long-term debt was issued in 1995. At December
31, 1996, long-term debt outstanding was $26.2 million higher than at December
31, 1995, due to increased borrowings from banks. Long-term debt outstanding at
December 31, 1995, was $17.1 million higher than at the end of 1994.
Preferred stock dividend requirements decreased $1.1 million, or 13%, in 1996
from 1995 due to the redemption of $20 million of Preferred Stock, Series I in
June 1996. Preferred stock dividend requirements increased $0.5 million in 1995
over 1994 due to higher interest rates in 1995.
19
<PAGE> 23
THE WASHINGTON WATER POWER COMPANY
- - --------------------------------------------------------------------------------
ENERGY OPERATIONS
REVENUES
Total Energy Delivery revenues increased $5.4 million in 1996 over 1995.
Electric Energy Delivery revenues increased $8.3 million in 1996 as compared to
1995. Electric residential and commercial revenues increased by a combined $8.1
million, primarily as a result of weather 9% colder than normal in 1996, as
compared to 7% warmer than normal in 1995, and a 2.4% growth in these two
classes of customers during 1996. Transmission revenues increased $3.6 million
in 1996 over 1995 due to increased wholesale electric sales. Total natural gas
revenues decreased $2.9 million in 1996 from 1995. Natural gas therm sales to
residential and commercial customers increased 13% during 1996, primarily as a
result of 6% customer growth in those sectors, due in large part to population
growth and new construction, and as a result of colder than normal weather.
However, in spite of the increased sales volumes, residential and commercial
revenues decreased slightly due to decreases in natural gas prices. Purchased
gas cost adjustments effective in Washington, Idaho and Oregon during December
1995 decreased the rates paid by customers in 1996 by 13.58%, 16.68% and 5.82%,
respectively.
Total Energy Delivery revenues increased $26.8 million in 1995 over 1994.
Electric Energy Delivery revenues increased $9.4 million in 1995 as compared to
1994. Electric residential and commercial revenues increased by a combined $18.8
million, primarily as a result of an increase of nearly 16,500 customers, or 6%,
during 1995. Approximately 10,000 residential and commercial customers were
added through the acquisition of PacifiCorp's electric properties in northern
Idaho in late December 1994. Total natural gas revenues increased $17.5 million,
or 11%, in 1995 over 1994, as retail therm sales increased 24%. Residential and
commercial natural gas revenues increased by a combined $9.5 million in 1995 as
compared to 1994, primarily as a result of 7% customer growth in those sectors,
due to conversions from electric service to natural gas, population growth and
new construction. Transportation sales increased by 13% in 1995 over 1994,
leading to a $1.2 million increase in revenues. Non-retail natural gas sales
accounted for a $5.4 million increase in revenues in 1995 over 1994. The
revenues from these sales were offset by like increases in purchased gas
expense. Margins from these transactions are credited back to retail customers
through rate changes for the cost of gas.
Energy Trading revenues increased $132.6 million, or 46%, in 1996 over 1995,
primarily due to new power contracts for firm wholesale electric service and
increased spot market sales as a result of improved streamflow conditions which
led to increased availability of hydroelectric generation in the region. Firm
wholesale (long-term) revenues increased $54.9 million in 1996 over 1995, while
revenues from short-term (spot market) sales increased $66.4 million during the
same period. Streamflows were 145% of normal for 1996. Wholesale kWh sales were
nearly three times greater in 1996 than 1995, which offset a 26% decline in
average prices.
Energy Trading revenues increased $26.3 million, or 10%, in 1995 over 1994,
primarily due to new power contracts for firm wholesale electric service and
increased spot market sales as a result of improved streamflow conditions which
led to increased availability of hydroelectric generation in the region and
generation from the Rathdrum combustion turbine, which went into service in
January 1995. Firm wholesale (long-term) revenues increased $19.3 million in
1995 over 1994, while revenues from short-term sales decreased $1.5 million
during the same period. Hydroelectric generation was 105% above normal, due to
streamflows which were 120% of normal in 1995.
OPERATING EXPENSES
Total operating expenses increased by $24.5 million for Energy Delivery
operations and $117.9 million for Energy Trading operations during 1996 compared
to 1995. Total operating expenses increased by $32.2 million for Energy Delivery
operations and decreased $6.4 million for Energy Trading operations during 1995
compared to 1994.
Commitments under new firm wholesale contracts and increased spot market sales
resulted in a $92.4 million, or 95%, increase in electric purchased power
expense in 1996 over 1995, which accounts for the majority of the increase in
Energy Trading's operating expenses. Improved streamflow conditions, which
resulted in increased hydroelectric generation, caused purchased power expense
for 1995 to decline by $8.6 million from 1994.
Fuel costs increased $8.3 million in 1996 compared to 1995 as a result of higher
generation at thermal plants during the year. The increase in generation was
primarily due to increased wholesale sales during 1996. Fuel costs decreased
$6.9 million in 1995 compared to 1994 as a result of the increased availability
of hydroelectric generation during 1995.
Natural gas purchased expense decreased $5.8 million, or 6%, in 1996 as compared
to 1995, primarily due to lower natural gas prices, which offset an increase in
therm sales volumes of 4.2 million, or 1%. Natural gas purchased expense
increased $11.1 million, or 12%, in 1995 as compared to 1994, primarily as the
result of an increase in therm sales volumes of 125.8 million, or 24%. A large
portion of purchased gas expense is variable costs, with the result that
increases or decreases in revenues are generally offset by like changes in
purchased gas expense.
Other operating and maintenance expenses increased $29.6 million in 1996 over
1995 primarily due to the $17.1 million in expenses related to the storm damage
on the Company's electric distribution system. Transmission expenses associated
with increased wholesale sales increased $2.1 million in 1996 over 1995. The
Idaho Power
20
<PAGE> 24
THE WASHINGTON WATER POWER COMPANY
- - --------------------------------------------------------------------------------
Cost Adjustment (PCA), which allows the Company to change rates to recover or
rebate a portion of the difference between actual and allowed net power supply
costs, also increased during 1996. Net PCA adjustments, resulting from improved
streamflow conditions, accounted for $1.9 million of the increase in other
operating and maintenance expenses for 1996 over 1995. Increased amortization of
conservation programs and a higher accrual for uncollectible accounts were also
partially responsible for the increase in other operating and maintenance
expenses during 1996 over 1995. Other operating and maintenance expenses
increased $20.9 million in 1995 over 1994 due to net PCA adjustments, resulting
from improved streamflow conditions, which accounted for $5.8 million of the
increase, as well as lease payments and operating expenses related to the
Rathdrum combustion turbine, which went into service in 1995, increased
amortization of conservation programs, a higher accrual for uncollectible
accounts and environmental remediation reserves (see Note 14 to Financial
Statements for additional information).
Administrative and general expenses increased by $13.4 million in 1996, compared
to 1995, primarily due to $4.2 million in accruals related to postretirement and
pension benefits, a $1.6 million write-off of regulatory deferrals of pension
expenses, development of a financial information system, increased FERC fees due
to higher levels of generation and increases in labor and benefits costs.
Administrative and general expenses increased by $5.3 million in 1995, compared
to 1994, primarily due to lease payments for computer software systems, labor
expenses resulting from merger activities and other labor-related costs.
Income taxes decreased $3.3 million, or 7%, in 1996 over 1995 primarily due to
the effects of the expenses associated with the storm damage on the Company's
electric distribution system and the merger-related expenses written off during
the year, partially offset by increased income from operations. Income taxes
increased by $9.9 million, or 26%, in 1995 over 1994, as a result of increased
income from operations.
NON-ENERGY OPERATIONS
Non-energy operations primarily include the results of Pentzer. Pentzer's
business strategy is to acquire controlling interests in a broad range of
middle-market companies, to help these companies grow through internal
development and strategic acquisitions and to sell the portfolio investments
either to the public or to strategic buyers when it becomes most advantageous in
meeting Pentzer's return on invested capital objectives. Pentzer's goal is to
produce financial returns for the Company's shareholders that, over the
long-term, should be higher than those of the energy operations. From time to
time, a significant portion of Pentzer's earnings contributions may be the
result of transactional gains. Accordingly, although the income stream is
expected to be positive, it may be uneven from year to year.
Non-energy operating revenues and expenses increased by $52.0 million and $50.5
million, respectively, in 1996 as compared to 1995 primarily as a result of
acquisitions. Non-energy net income for 1996 was $21.0 million, which represents
a $6.2 million, or 42%, increase over 1995 earnings. The increase in 1996
earnings primarily resulted from transactional gains totaling $10.8 million, net
of taxes and other adjustments, recorded by Pentzer as a result of the sale of
property by one of its subsidiary companies. Transactional gains in 1996 also
included $4.7 million from the sale of stock in ITRON, a decrease of $1.3
million from the amount recorded in 1995 from the sale of ITRON stock.
Non-energy operating revenues and expenses increased by $31.1 million and $24.0
million, respectively, in 1995 as compared to 1994, also primarily as a result
of acquisitions. Non-energy net income for 1995 was $14.8 million, which
represents a $1.2 million, or 9%, increase over 1994 earnings. The increase in
1995 earnings primarily resulted from a $2.2 million increase in
non-transactional earnings over 1994 as a result of improved earnings from
companies in Pentzer's investment portfolio, including earnings from two
companies newly acquired in 1995, partially offset by a decline in transactional
gains of $1.1 million as compared to 1994. The 1995 and 1994 transactional gains
were primarily the result of gains recorded from the sale of ITRON stock.
21
<PAGE> 25
THE WASHINGTON WATER POWER COMPANY
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LIQUIDITY AND CAPITAL RESOURCES
OVERALL OPERATIONS
Operating Activities Cash from operating activities less cash dividends paid
provided 100% of energy operations capital expenditures in 1996 as compared to
83% in 1995 and 66% in 1994. Cash available from operating activities in 1996
increased from 1995 primarily due to increases in the deferred income tax
provision and changes in various working capital components, such as increased
receivables, and decreased materials and supplies, fuel stock and natural gas
stored and prepayments on power contracts, partially offset by the negative
effect of power and purchased gas deferrals. However, construction expenditures
have declined from 1994 levels so that cash from operating activities provided a
higher percentage of the funds for construction than in previous years. See Note
1 to Financial Statements for additional information.
Investing Activities Cash used in investing activities increased in 1996 over
1995 primarily due to the acquisition of a new company by Pentzer and the
Company's purchase of common stock in newly formed WWP subsidiaries. Cash used
in investing activities also increased as a result of establishment of trusts
for postretirement medical benefits and coal mining reclamation costs and the
net effect on cash flows of transactions related to the sale of property by
Pentzer. Pentzer received a promissory note for a portion of the sale price of
Spokane Industrial Park. Energy operations capital expenditures, excluding
Allowance for Funds Used During Construction (AFUDC) and Allowance for Funds
Used to Conserve Energy (AFUCE, a carrying charge similar to AFUDC for
conservation-related capital expenditures), were $292 million for the 1994-1996
period.
Financing Activities During the 1994-1996 period, $110.5 million of long-term
debt and preferred stock matured, was mandatorily redeemed, or was optionally
redeemed and refinanced at a lower cost. During 1996, $38.0 million of long-term
debt, with an average interest rate of 5.22%, matured or was repurchased.
In November 1996, the Company and three newly formed Trusts filed a Registration
Statement with the SEC for up to and including $150 million of Subordinated Debt
Securities of the Company and Preferred Trust Securities of the Trusts
(guaranteed by the Company), in one or more series and at prices and on terms to
be determined at the time of the offering. In January 1997, Subordinated Debt
Securities of the Company were issued to one of the Trusts, and that Trust, in
turn, issued to the public $60 million of Preferred Securities having a
distribution rate of 7 7/8%. On the Company's consolidated balance sheet, this
will appear as $60 million of new preferred trust securities. Proceeds of the
issuance were used to reimburse the Company's treasury for funds previously
expended for the maturity and redemption of preferred stock and long-term debt
and to fund a portion of the Company's capital expenditures.
ENERGY OPERATIONS
The Company funds capital expenditures with a combination of internally-
generated cash and external financing. The level of cash generated internally
and the amount that is available for capital expenditures fluctuates annually.
Cash provided by operating activities remains the Company's primary source of
funds for operating needs, dividends and construction expenditures.
Capital expenditures are financed on an interim basis with notes payable (due
within one year). The Company has $160 million in committed lines of credit. In
addition, the Company may currently borrow up to $60 million through other
borrowing arrangements with banks. As of December 31, 1996, $35.0 million was
outstanding under the committed lines of credit and $50.0 million was
outstanding under other short-term borrowing arrangements.
From time to time the Company enters into sale/leaseback arrangements for
various long-term assets which provide additional sources of funds. See Note 9
to Financial Statements for additional information.
The Company is restricted under various agreements as to the additional
securities it can issue. Under the most restrictive test of the Company's
Mortgage, an additional $543 million of First Mortgage Bonds could be issued as
of December 31, 1996. As of December 31, 1996, under its Restated Articles of
Incorporation, approximately $788 million of additional preferred stock could be
issued at an assumed dividend rate of 6.17%.
During the 1997-1999 period, energy capital expenditures are expected to be $239
million, and $132 million will be required for long-term debt maturities and
preferred stock sinking fund requirements. During this three-year period, the
Company estimates that internally-generated funds will provide approximately
103% of the funds needed for its capital expenditure program. Minimal amounts of
external financing will be required to fund maturing long-term debt and
preferred stock sinking fund requirements. These estimates of capital
expenditures are subject to continuing review and adjustment. Actual capital
expenditures may vary from these estimates due to factors such as changes in
business conditions, construction schedules and environmental requirements.
See Notes 4, 5, 6, 7, 8 and 9 to Financial Statements for additional details
related to financing activities.
22
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THE WASHINGTON WATER POWER COMPANY
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NON-ENERGY OPERATIONS
Capital expenditures for the non-energy operations were $16 million for the
1994-1996 period. During this period, $18.9 million of debt was repaid and
capital expenditures were partially financed by the $28.2 million in proceeds
from new long-term debt.
The non-energy operations have $45.0 million in short-term borrowing
arrangements ($29.6 million outstanding as of December 31, 1996) to fund
corporate requirements on an interim basis. At December 31, 1996, the non-energy
operations had $28.2 million in cash and marketable securities with $44.0
million in long-term debt outstanding.
The 1997-1999 non-energy capital expenditures are expected to be $11.6 million,
and $29.6 million in debt maturities will also occur. During the next three
years, internally-generated cash and other debt obligations are expected to
provide the majority of the funds for the non-energy capital expenditure
requirements.
TOTAL COMPANY CASH REQUIREMENTS
(Millions of Dollars)
<TABLE>
<CAPTION>
Actual (1) Projected
------------------ ------------------
1994 1995 1996 1997 1998 1999
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Capital Expenditures (2):
Energy:
Energy Delivery $100 $ 61 $ 80 $ 62 $ 65 $ 66
Energy Trading 23 19 9 16 20 10
---- ---- ---- ---- ---- ----
Total Energy 123 80 89 78 85 76
Non-Energy 9 5 2 5 3 4
---- ---- ---- ---- ---- ----
Total Company $132 $ 85 $ 91 $ 83 $ 88 $ 80
==== ==== ==== ==== ==== ====
Debt and Preferred Stock Maturities,
Redemptions & Sinking Fund
Requirements (Consolidated) (3): $ 8 $ 45 $ 73 $ 57 $ 35 $ 70
</TABLE>
(1) Excludes $62 million in 1994 for the combustion turbine project located
in Rathdrum, Idaho for which the Company obtained separate long-term
lease financing; see Note 9 to Financial Statements for additional
information.
Also excludes $33 million in 1994 for the acquisition of the northern
Idaho electric properties of PacifiCorp.
(2) Excludes AFUDC and AFUCE.
(3) Excludes notes payable (due within one year).
The Company's total common equity decreased by $6.4 million to $710.7 million at
the end of 1996. The 1996 decrease was primarily due to a $13.5 million decrease
in unrealized investment gains, due to sales of investments and decreased prices
from the prior year, partially offset by a $6.3 million increase in retained
earnings. The Company's consolidated capital structure at December 31, 1996, was
48% debt, 7% preferred stock and 45% common equity as compared to 46% debt, 9%
preferred stock and 45% common equity at year-end 1995.
FUTURE OUTLOOK
Competition and Business Risk
The electric and natural gas businesses continue to undergo transformation and
have become increasingly competitive as a result of economic, regulatory and
technological changes. The Company believes that it is well positioned to meet
future challenges due to its low production costs, close proximity to major
transmission lines and natural gas pipelines, active participation in the
wholesale electric market and its commitment to customer satisfaction, customer
choice, cost reduction and continuous improvement of work processes. In
addition, the Company evaluates business opportunities that will allow it to
expand its economies of scale and diversify its risk posed by weather and
economic conditions.
The Company continues to compete for new retail electric customers with various
rural electric cooperatives and public utility districts in and adjacent to its
service territories. Challenges facing the retail electric business include
evolving technologies which provide alternate energy supplies, reduced energy
consumption, the cost of the energy supplied, the potential for retail wheeling,
self-generation and fuel switching by commercial and industrial customers,
increasingly stringent environmental laws and the potential for stranded or
nonrecoverable utility assets. When electric utility companies are required to
provide retail wheeling service, which is the transmission of electric power
from another supplier to a customer located within such utility's service area,
the Company believes it will be in a position to benefit since it is committed
to remaining one of the country's lowest-cost providers of electric energy.
Consequently, the Company believes it faces minimal risk for stranded
generation, transmission or distribution assets due to its low cost structure.
23
<PAGE> 27
THE WASHINGTON WATER POWER COMPANY
- - --------------------------------------------------------------------------------
Natural gas remains priced competitively compared to other alternative fuel
sources for residential, commercial and industrial customers and is projected to
remain so into the future due to abundant supplies and competition. Challenges
facing the Company's retail natural gas business include the potential for
customers to by-pass the Company's natural gas system. To reduce the potential
for such by-pass, the Company prices its natural gas services, including
transportation contracts, competitively and has varying degrees of flexibility
to price its transportation and delivery rates by means of special contracts.
The Company has also signed long-term transportation contracts with two of its
largest industrial customers which reduces the risks of these customers
by-passing the Company's system in the foreseeable future.
In 1996, the FERC issued Order No. 888 which requires public utilities operating
under the Federal Power Act to provide access to their transmission systems to
third parties. The Company filed its Open Access tariff with the FERC in July
1996, and subsequently began providing transmission service under the tariff. In
the FERC's Order No. 889, the companion rule to Order No. 888, the FERC requires
public utilities to establish an Open Access Same-time Information System
(OASIS) to provide transmission customers with information about transmission
capacity, prices and other information, by electronic means. These FERC orders
have not had a material effect on the Company's operating results and are not
expected to in the future.
The Company continues to compete in the wholesale electric market with other
utilities, federal marketing agencies and power marketers. It is expected that
competition to sell capacity will remain vigorous, and that prices will remain
depressed for at least the next several years, due to increased competition and
surplus capacity in the western United States. Competition related to the sale
of capacity and energy is influenced by many factors, including the availability
of capacity in the western United States, the availability and prices of natural
gas and oil, spot energy prices and transmission access. Business challenges
affecting the wholesale electric business include an increasing number of power
brokers and marketers, competition from low-cost generation being developed by
independent power producers and declining margins. Other challenges facing
wholesale electric marketing include evolving technologies which provide
alternate energy supplies and deregulation of electric and natural gas markets.
In addition, the Energy Act confers expanded authority upon the FERC to issue
orders requiring electric utilities to transmit power and energy to or for
wholesale purchasers and sellers, and to require electric utilities to enlarge
or construct additional transmission capacity to provide these services.
Resource planning for both the electric and natural gas businesses has been
integrated so that the Company's customers are provided the most efficient and
cost-effective products possible for all their energy requirements. The
Company's need for new future electric resources to serve retail loads is
expected to remain very minimal. The switching of electric heating customers to
natural gas requires increased efforts on the Company's part in negotiating and
securing competitively-priced natural gas supplies for the future.
Economic and Load Growth
The Company expects economic growth to continue in its eastern Washington and
northern Idaho service area. The Company, along with others in the service area,
is continuing its efforts to expand existing businesses and attract new
businesses to the Inland Northwest. Agriculture, mining and lumber were the
primary industries for many years, but health care, electronic and other
manufacturing, tourism and the service sectors have become increasingly
important industries that operate in the Company's service area. The Company
also anticipates strong economic growth to continue in its Oregon service area.
The Company anticipates retail electric load growth to average approximately
2.0% annually for the next five years primarily due to increases in both
population and the number of businesses in its service territory. Although the
number of electric customers is expected to increase, the average annual usage
by residential customers is expected to decrease slightly on a weather-adjusted
basis.
The Company anticipates natural gas load growth, including transportation
volumes, in its Washington and Idaho service area to average approximately 1.5%
annually for the next five years. The Oregon and South Lake Tahoe, California
service areas are anticipated to realize 2.0% growth annually during that same
period.
The forward-looking projections set forth above regarding retail sales growth
are based, in part, upon publicly available population and demographic studies
conducted independently. The Company's expectations regarding retail sales
growth are also based upon various assumptions including, without limitation,
assumptions relating to weather and economic and competitive conditions and an
assumption that the Company will incur no material loss of retail customers due
to self-generation or retail wheeling. Changes in the underlying assumptions can
cause actual experience to vary significantly from forward-looking projections.
Environmental Issues
Since December 1991, a number of species of fish in the Northwest, including the
Snake River sockeye salmon and chinook salmon, the Kootenai River white sturgeon
and the bull trout have either been added to the endangered species list under
the Federal Endangered Species Act (ESA), listed as "threatened" under the ESA
or been petitioned for listing under the ESA. Thus far, measures which have been
adopted and implemented to save both the Snake
24
<PAGE> 28
THE WASHINGTON WATER POWER COMPANY
- - --------------------------------------------------------------------------------
River sockeye salmon and chinook salmon have not directly impacted generation
levels at any of the Company's hydroelectric dams. The Company does, however,
purchase power from four projects on the Columbia River that are being directly
impacted by these ongoing mitigation measures. The reduction in generation at
these projects is relatively minor, resulting in minimal economic impact on the
Company at this time. Future actions to save these, and other as yet
unidentified fish or wildlife species, could further impact the Company's
operations or the operations of some of its major customers. It is currently not
possible to predict the likely economic costs to the Company resulting from
these actions.
The Company is currently in the process of relicensing the Cabinet Gorge and
Noxon Rapids hydroelectric projects on the Clark Fork River in northern Idaho
and western Montana. Bull trout are native to this area and are again being
considered for listing under the ESA following a recent court decision. The
relicensing process includes a cooperative program for recovery with the two
states. It is currently not possible to predict the likely economic costs to the
Company resulting from bull trout recovery whether or not a listing occurs.
See Note 14 to Financial Statements for additional information.
Other
The Board of Directors considers the level of dividends on the Company's common
stock on a continuing basis, taking into account numerous factors including,
without limitation, the Company's results of operations and financial condition,
as well as general economic and competitive conditions. The Company's net income
available for dividends are derived from its retail electric and natural gas
energy operations and, increasingly, from its growing wholesale electric
operations and Pentzer's non-energy investment operations.
In February 1997, the Company's Board of Directors approved creation of a new
subsidiary, Avista Corp. (Avista), which will own all of the Company's
non-regulated energy and non-energy businesses. The non-regulated energy
businesses include Avista Advantage, Inc. (formerly WWP Energy Solutions, Inc.)
and Avista Energy, Inc. (formerly WWP Resource Services, Inc.). The non-energy
business primarily consists of Pentzer which is the parent company to the
majority of the Company's non-energy businesses. Avista was formed to segregate
the Company's non-regulated businesses from regulated businesses and support
financing of the non-regulated businesses as they develop and expand. The
Company will operate under this corporate structure prospectively.
SAFE HARBOR FOR FORWARD-LOOKING STATEMENTS
The Company is including the following cautionary statement in this Form 10-K to
make applicable and to take advantage of the safe harbor provisions of the
Private Securities Litigation Reform Act of 1995 for any forward-looking
statements made by, or on behalf of, the Company. Forward-looking statements
include statements concerning plans, objectives, goals, strategies, future
events or performance, and underlying assumptions (many of which are based, in
turn, upon further assumptions) and other statements which are other than
statements of historical facts. From time to time, the Company may publish or
otherwise make available forward-looking statements of this nature. All such
subsequent forward-looking statements, whether written or oral and whether made
by or on behalf of the Company, are also expressly qualified by these cautionary
statements.
Forward-looking statements involve risks and uncertainties which could cause
actual results or outcomes to differ materially from those expressed. The
Company's expectations, beliefs and projections are expressed in good faith and
are believed by the Company to have a reasonable basis, including without
limitation management's examination of historical operating trends, data
contained in the Company's records and other data available from third parties,
but there can be no assurance that the Company's expectations, beliefs or
projections will be achieved or accomplished. Furthermore, any forward-looking
statement speaks only as of the date on which such statement is made, and the
Company undertakes no obligation to update any forward-looking statement or
statements to reflect events or circumstances that occur after the date on which
such statement is made or to reflect the occurrence of unanticipated events. New
factors emerge from time to time, and it is not possible for management to
predict all of such factors, nor can it assess the impact of each such factor on
the Company's business or the extent to which any such factor, or combination of
factors, may cause actual results to differ materially from those contained in
any forward-looking statement.
Energy Operations -
In addition to other factors and matters discussed elsewhere herein, some
important factors that could cause actual results or outcomes for the Company
and its energy operations to differ materially from those discussed in
forward-looking statements include prevailing governmental policies and
regulatory actions with respect to allowed rates of return, financings, or
industry and rate structures, weather conditions, wholesale and retail
competition (including but not limited to electric retail wheeling and
transmission cost), availability of economic supplies of natural gas, present or
prospective natural gas distribution or transmission competition (including but
not limited to prices of alternative fuels and system deliverability costs),
recovery of purchased power and purchased gas costs, present or prospective
generation, operations and construction of plant facilities, and acquisition and
disposal of assets or facilities.
25
<PAGE> 29
THE WASHINGTON WATER POWER COMPANY
- - --------------------------------------------------------------------------------
Non-Energy Operations -
Certain important factors which could cause actual results or outcomes for the
Company and all or certain of its non-energy operations to differ materially
from those discussed in forward-looking statements include competition from
other companies, the ability to obtain new customers and retain old ones,
reliability of customer orders, business acquisitions, disposal of assets, the
ability to obtain funds from operations, debt or equity, and the availability of
economic expansion or development opportunities.
Factors Common to Energy and Non-Energy Operations -
The business and profitability of the Company are also influenced by economic
risks, changes in and compliance with environmental and safety laws and
policies, weather conditions, population growth rates and demographic patterns,
market demand for energy from plants or facilities, changes in tax rates or
policies, unanticipated project delays or changes in project costs,
unanticipated changes in operating expenses or capital expenditures, labor
negotiation or disputes, changes in credit ratings or capital market conditions,
inflation rates, inability of the various counterparties to meet their
obligations with respect to the Company's financial instruments, changes in
accounting principles and/or the application of such principles to the Company,
changes in technology and legal proceedings.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Independent Auditor's Report and Financial Statements begin on the next
page.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
26
<PAGE> 30
INDEPENDENT AUDITORS' REPORT
The Washington Water Power Company
Spokane, Washington
We have audited the accompanying consolidated balance sheets and statements of
capitalization of The Washington Water Power Company and subsidiaries (the
Company) as of December 31, 1996 and 1995, and the related consolidated
statements of income and retained earnings, cash flows, and the schedules of
information by business segments for each of the three years in the period
ended December 31, 1996. These financial statements and schedules are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and schedules are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements and
schedules. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement and schedule presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements and schedules present
fairly, in all material respects, the financial position of the Company and its
subsidiaries at December 31, 1996 and 1995, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 1996, in conformity with generally accepted accounting principles. In
addition, the schedules referred to above present fairly, in all material
respects the segment information of the Company and its subsidiaries in
accordance with generally accepted accounting principles.
As discussed in Note 1 to the financial statements, in 1996 the Company changed
its method of grouping products and services into new industry segments to
conform to a restructuring of the Company's business operations. The Company
retroactively restated the 1995 and 1994 financial statements for the change.
Deloitte & Touche LLP
Seattle, Washington
January 31, 1997
27
<PAGE> 31
CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS
The Washington Water Power Company
- - --------------------------------------------------------------------------------
For the Years Ended December 31
Thousands of Dollars
<TABLE>
<CAPTION>
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
OPERATING REVENUES .................................................. $ 944,957 $ 755,009 $ 670,765
--------- --------- ---------
OPERATING EXPENSES:
Operations and maintenance ...................................... 559,962 388,119 350,703
Administrative and general ...................................... 76,972 62,486 59,645
Depreciation and amortization ................................... 72,097 67,572 59,479
Taxes other than income taxes ................................... 49,005 46,992 45,480
--------- --------- ---------
Total operating expenses ...................................... 758,036 565,169 515,307
--------- --------- ---------
INCOME FROM OPERATIONS............................................... 186,921 189,840 155,458
--------- --------- ---------
OTHER INCOME (EXPENSE):
Interest expense ................................................ (63,255) (59,022) (53,077)
Net gain on subsidiary transactions ............................. 23,953 9,328 11,519
Merger-related expenses ......................................... (15,848) -- --
Other income (deductions)-net ................................... 1,191 (609) 7,993
--------- --------- ---------
Total other income (expense)-net .............................. (53,959) (50,303) (33,565)
--------- --------- ---------
INCOME BEFORE INCOME TAXES........................................... 132,962 139,537 121,893
INCOME TAXES ........................................................ 49,509 52,416 44,696
--------- --------- ---------
NET INCOME........................................................... 83,453 87,121 77,197
DEDUCT-Preferred stock dividend requirements ........................ 7,978 9,123 8,656
--------- --------- ---------
INCOME AVAILABLE FOR COMMON STOCK ................................... $ 75,475 $ 77,998 $ 68,541
========= ========= =========
Average common shares outstanding (thousands) ....................... 55,960 55,173 53,538
EARNINGS PER SHARE OF COMMON STOCK .................................. $ 1.35 $ 1.41 $ 1.28
Dividends paid per common share ..................................... $ 1.24 $ 1.24 $ 1.24
RETAINED EARNINGS, JANUARY 1 ........................................ $ 125,031 $ 114,848 $ 112,424
NET INCOME .......................................................... 83,453 87,121 77,197
DIVIDENDS DECLARED:
Preferred stock ................................................. (8,213) (8,971) (8,823)
Common stock .................................................... (69,390) (68,392) (66,378)
ESOP dividend tax savings ........................................... 420 425 428
--------- --------- ---------
RETAINED EARNINGS, DECEMBER 31 ...................................... $ 131,301 $ 125,031 $ 114,848
========= ========= =========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
28
<PAGE> 32
CONSOLIDATED BALANCE SHEETS
The Washington Water Power Company
- - --------------------------------------------------------------------------------
At December 31
Thousands of Dollars
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
ASSETS:
PROPERTY:
Utility plant in service-net............................................. $1,951,604 $1,880,620
Construction work in progress............................................ 38,696 23,046
---------- ----------
Total ................................................................. 1,990,300 1,903,666
Less: Accumulated depreciation and amortization......................... 592,424 546,248
---------- ----------
Net utility plant...................................................... 1,397,876 1,357,418
---------- ----------
OTHER PROPERTY AND INVESTMENTS:
Investment in exchange power-net ........................................ 75,312 82,252
Non-energy properties and investments-net ............................... 149,747 135,612
Other-net ............................................................... 22,670 9,593
---------- ----------
Total other property and investments .................................. 247,729 227,457
---------- ----------
CURRENT ASSETS:
Cash and cash equivalents................................................ 8,211 5,164
Temporary cash investments .............................................. 19,709 27,395
Accounts and notes receivable-net ....................................... 148,742 102,389
Materials and supplies, fuel stock and natural gas stored ............... 31,729 38,004
Prepayments and other.................................................... 19,998 11,020
---------- ----------
Total current assets................................................... 228,389 183,972
---------- ----------
DEFERRED CHARGES:
Regulatory assets for deferred income tax ............................... 164,753 169,432
Conservation programs ................................................... 57,703 62,793
Prepaid power purchases ................................................. 30,935 32,605
Unamortized debt expense ................................................ 23,148 25,684
Other-net ............................................................... 26,765 39,541
---------- ----------
Total deferred charges................................................. 303,304 330,055
---------- ----------
TOTAL................................................................ $2,177,298 $2,098,902
========== ==========
CAPITALIZATION AND LIABILITIES:
CAPITALIZATION (See Consolidated Statements of Capitalization) .............. $1,590,262 $1,590,412
---------- ----------
CURRENT LIABILITIES:
Accounts payable......................................................... 95,268 64,841
Taxes and interest accrued............................................... 37,344 39,415
Other.................................................................... 70,873 64,152
---------- ----------
Total current liabilities.............................................. 203,485 168,408
---------- ----------
NON-CURRENT LIABILITIES AND DEFERRED CREDITS:
Non-current liabilities.................................................. 27,855 9,787
Deferred income taxes.................................................... 312,529 307,529
Other.................................................................... 43,167 22,766
---------- ----------
Total deferred credits................................................. 383,551 340,082
---------- ----------
COMMITMENTS AND CONTINGENCIES (Notes 9, 13 and 14)
TOTAL................................................................ $2,177,298 $2,098,902
========== ==========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
29
<PAGE> 33
CONSOLIDATED STATEMENTS OF CAPITALIZATION
The Washington Water Power Company
- - --------------------------------------------------------------------------------
At December 31
Thousands of Dollars
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
COMMON EQUITY:
Common stock, no par value; 200,000,000 shares authorized:
shares outstanding: 1996-55,960,360; 1995-55,947,967 ................................... $ 594,853 $ 594,636
Note receivable from employee stock ownership plan ....................................... (11,009) (11,690)
Capital stock expense and other paid in capital .......................................... (10,112) (10,072)
Unrealized investment gain-net ........................................................... 5,703 19,220
Retained earnings ........................................................................ 131,301 125,031
----------- -----------
Total common equity .................................................................... 710,736 717,125
----------- -----------
PREFERRED STOCK-CUMULATIVE:
10,000,000 shares authorized:
Not subject to mandatory redemption:
Flexible Auction Series J; 500 shares outstanding ($100,000 stated value) .............. 50,000 50,000
----------- -----------
Total not subject to mandatory redemption ............................................ 50,000 50,000
----------- -----------
Subject to mandatory redemption:
$8.625 Series I; 300,000 and 500,000 shares outstanding ($100 stated value) ............ 30,000 50,000
$6.95 Series K; 350,000 shares outstanding ($100 stated value) ......................... 35,000 35,000
----------- -----------
Total subject to mandatory redemption ................................................ 65,000 85,000
----------- -----------
LONG-TERM DEBT:
First Mortgage Bonds:
7 1/8% due December 1, 2013 ............................................................ 66,700 66,700
7 2/5% due December 1, 2016 ............................................................ 17,000 17,000
Secured Medium-Term Notes:
Series A - 5.95% to 8.06% due 2000 through 2023 ...................................... 227,000 250,000
Series B - 6.50% to 8.25% due 1997 through 2010 ...................................... 141,000 141,000
----------- -----------
Total first mortgage bonds ........................................................... 451,700 474,700
----------- -----------
Pollution Control Bonds:
6% Series due 2023 ..................................................................... 4,100 4,100
Unsecured Medium-Term Notes:
Series A - 7.94% to 9.58% due 1997 through 2007 ........................................ 72,500 72,500
Series B - 6.75% to 8.55% due 1999 through 2023 ........................................ 120,000 135,000
----------- -----------
Total unsecured medium-term notes .................................................... 192,500 207,500
----------- -----------
Notes payable (due within one year) to be refinanced ..................................... 85,000 29,500
Other .................................................................................... 31,226 22,487
----------- -----------
Total long-term debt ................................................................... 764,526 738,287
----------- -----------
TOTAL CAPITALIZATION ......................................................................... $ 1,590,262 $ 1,590,412
=========== ===========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
30
<PAGE> 34
CONSOLIDATED STATEMENTS OF CASH FLOWS
Increase (Decrease) in Cash and Cash Equivalents
The Washington Water Power Company
- - --------------------------------------------------------------------------------
For the Years Ended December 31
Thousands of Dollars
<TABLE>
<CAPTION>
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income .................................................................. $ 83,453 $ 87,121 $ 77,197
NON-CASH ITEMS INCLUDED IN NET INCOME:
Depreciation and amortization ............................................. 72,097 67,572 59,479
Provision for deferred income taxes ....................................... 12,505 (5,487) 15,380
Allowance for equity funds used during construction ....................... (1,072) (589) (1,261)
Power and natural gas cost deferrals and amortizations .................... 666 16,156 6,365
Deferred revenues and other-net ........................................... (215) 9,600 5,971
(Increase) decrease in working capital components:
Receivables and prepaid expense ......................................... (26,333) (22,279) (12,458)
Materials & supplies, fuel stock and natural gas stored ................. 7,741 (11,733) (1,864)
Payables and other accrued liabilities .................................. 21,618 21,532 4,343
Other ................................................................... 7,103 (29,661) (8,309)
--------- --------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES ....................................... 177,563 132,232 144,843
--------- --------- ---------
INVESTING ACTIVITIES:
Construction expenditures (excluding AFUDC-equity funds) .................... (91,279) (83,494) (95,815)
Other capital requirements .................................................. (1,399) 550 (21,603)
(Increase) decrease in other noncurrent balance sheet items-net ............. 18,565 8,893 (21,686)
Assets acquired and investments in subsidiaries ............................. (29,225) (13,864) (43,823)
--------- --------- ---------
NET CASH USED IN INVESTING ACTIVITIES ........................................... (103,338) (87,915) (182,927)
--------- --------- ---------
FINANCING ACTIVITIES:
Increase (decrease) in short-term borrowings ................................ 55,500 (28,500) (10,001)
Proceeds from issuance of long-term debt .................................... -- 78,000 88,000
Redemption and maturity of long-term debt ................................... (38,000) (45,000) (7,500)
Redemption of preferred stock ............................................... (20,000) -- --
Sale of common stock ........................................................ 897 12,518 14,934
Other-net ................................................................... 7,743 4,150 10,051
--------- --------- ---------
NET FINANCING ACTIVITIES BEFORE CASH DIVIDENDS .................................. 6,140 21,168 95,484
Less cash dividends paid .................................................. (77,318) (65,499) (63,423)
--------- --------- ---------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES ............................. (71,178) (44,331) 32,061
--------- --------- ---------
NET INCREASE (DECREASE) IN CASH & CASH EQUIVALENTS .............................. 3,047 (14) (6,023)
CASH & CASH EQUIVALENTS AT BEGINNING OF PERIOD .................................. 5,164 5,178 11,201
--------- --------- ---------
CASH & CASH EQUIVALENTS AT END OF PERIOD ........................................ $ 8,211 $ 5,164 $ 5,178
========= ========= =========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the period:
Interest .................................................................. $ 56,893 $ 53,415 $ 46,861
Income taxes .............................................................. $ 49,447 $ 50,004 $ 34,094
Noncash financing and investing activities .................................. $ 46,403 $ 87,763 $ 25,891
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
31
<PAGE> 35
SCHEDULE OF INFORMATION BY BUSINESS SEGMENTS
The Washington Water Power Company
- - --------------------------------------------------------------------------------
For the Years Ended December 31
Thousands of Dollars
<TABLE>
<CAPTION>
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
OPERATING REVENUES:
Energy Delivery .................................................... $ 378,769 $ 373,411 $ 346,563
Energy Trading ..................................................... 420,375 287,805 261,504
Non-energy ......................................................... 145,813 93,793 62,698
---------- ---------- ----------
Total operating revenues ......................................... $ 944,957 $ 755,009 $ 670,765
========== ========== ==========
OPERATIONS AND MAINTENANCE EXPENSES:
Energy Delivery:
Natural gas purchased for resale ................................. $ 96,585 $ 102,375 $ 91,277
Other energy delivery ............................................ 75,826 57,423 45,996
Energy Trading:
Power purchased .................................................. 190,040 97,669 106,277
Fuel for generation .............................................. 40,578 32,298 39,176
Other energy trading ............................................. 50,310 39,066 29,569
Non-energy ......................................................... 106,623 59,288 38,408
---------- ---------- ----------
Total operations and maintenance expenses ........................ $ 559,962 $ 388,119 $ 350,703
========== ========== ==========
ADMINISTRATIVE AND GENERAL EXPENSES:
Energy Delivery .................................................... $ 47,371 $ 39,026 $ 33,252
Energy Trading ..................................................... 17,476 12,412 12,882
Non-energy ......................................................... 12,125 11,048 13,511
---------- ---------- ----------
Total administrative and general expenses ........................ $ 76,972 $ 62,486 $ 59,645
========== ========== ==========
DEPRECIATION AND AMORTIZATION EXPENSES:
Energy Delivery .................................................... $ 33,851 $ 31,748 $ 29,030
Energy Trading ..................................................... 27,923 27,421 27,402
Non-energy ......................................................... 10,323 8,403 3,047
---------- ---------- ----------
Total depreciation and amortization expenses ..................... $ 72,097 $ 67,572 $ 59,479
========== ========== ==========
INCOME FROM OPERATIONS:
Energy Delivery .................................................... $ 88,105 $ 107,250 $ 112,636
Energy Trading ..................................................... 83,786 69,094 36,415
Non-energy ......................................................... 15,030 13,496 6,407
---------- ---------- ----------
Total income from operations ..................................... $ 186,921 $ 189,840 $ 155,458
========== ========== ==========
INCOME AVAILABLE FOR COMMON STOCK:
Energy operations .................................................. $ 54,426 $ 63,187 $ 54,911
Non-energy operations .............................................. 21,049 14,811 13,630
---------- ---------- ----------
Total income available for common stock .......................... $ 75,475 $ 77,998 $ 68,541
========== ========== ==========
ASSETS:
Energy Delivery .................................................... $ 959,053 $ 917,011 $ 898,114
Energy Trading ..................................................... 671,062 656,628 642,089
Other energy ....................................................... 291,314 295,541 277,612
Non-energy ......................................................... 255,869 229,722 176,438
---------- ---------- ----------
Total assets ..................................................... $2,177,298 $2,098,902 $1,994,253
========== ========== ==========
CAPITAL EXPENDITURES (excluding AFUDC/AFUCE):
Energy Delivery .................................................... $ 80,095 $ 61,047 $ 100,250
Energy Trading ..................................................... 8,726 18,897 22,485
Non-energy ......................................................... 2,339 4,934 8,701
---------- ---------- ----------
Total capital expenditures ....................................... $ 91,160 $ 84,878 $ 131,436
========== ========== ==========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
32
<PAGE> 36
THE WASHINGTON WATER POWER COMPANY
- - --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
- - --------------------------------------------------------------------------------
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS
The Company was incorporated in the State of Washington in 1889, and is
primarily engaged as a utility providing electric and natural gas sales and
services. The Energy Delivery business includes retail electric and natural gas
distribution and transmission services. Usage by retail customers varies from
year to year primarily as a result of weather conditions, the economy in the
Company's service area, customer growth, conservation, appliance efficiency and
other technology. The Energy Trading and Market Services (Energy Trading)
business includes generation and production, electric and natural gas commodity
trading and energy services. Revenues from the sale of energy to other utilities
and the cost of electric power purchases vary from year to year depending on the
electric wholesale power market, which is affected by several factors, including
the availability of water for hydroelectric generation, the availability of base
load plants in the region and the demand for power in other areas of the
country. Other factors affecting the wholesale power market include an
increasing number of power brokers and marketers and competition from low cost
generation being developed by independent power producers.
BASIS OF REPORTING
The financial statements are presented on a consolidated basis and, as such,
include the assets, liabilities, revenues and expenses of The Washington Water
Power Company (Company) and its wholly owned subsidiaries. All material
intercompany transactions have been eliminated in the consolidation. The
accompanying financial statements include the Company's proportionate share of
utility plant and related operations resulting from its interests in jointly
owned plants (See Note 3). The financial activity of each of the Company's lines
of business is reported in the "Schedule of Information by Business Segments."
Such information is an integral part of these financial statements. In 1996, the
Company changed its method of grouping products and services into new industry
segments. Information that was previously reported as electric, natural gas and
non-utility operations is now being reported by the new business lines of
Energy Delivery, Energy Trading and Non-Energy operations. The Company
retroactively restated the 1995 and 1994 financial statements for the change.
The preparation of the Company's consolidated financial statements in conformity
with generally accepted accounting principles necessarily requires management to
make estimates and assumptions that directly affect the reported amounts of
assets, liabilities, revenues and expenses.
SYSTEM OF ACCOUNTS
The accounting records of the Company's utility operations are maintained in
accordance with the uniform system of accounts prescribed by the Federal Energy
Regulatory Commission (FERC) and adopted by the appropriate state regulatory
commissions.
REGULATION
The Company is subject to state regulation in Washington, Idaho and Montana for
its electric operations. Natural gas operations are regulated in Washington,
Idaho, Oregon and California. The Company is subject to regulation by the FERC
with respect to its wholesale electric transmission rates and the natural gas
rates charged for the release of capacity from the Jackson Prairie Storage
Project.
OPERATING REVENUES
The Company accrues estimated unbilled revenues for electric and natural gas
services provided through month-end.
OTHER INCOME (DEDUCTIONS)--NET
Other income (deductions)-net is composed of the following items:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------
1996 1995 1994
------- ------- -------
(Thousands of Dollars)
<S> <C> <C> <C>
Interest income ....................... $ 5,760 $ 3,645 $ 3,535
Capitalized interest (debt) ........... 1,290 1,042 3,687
Gain (loss) on property dispositions .. (152) 1,272 738
Equity earnings in subsidiary companies -- -- 1,774
Minority interest ..................... (1,193) (314) (289)
Capitalized interest (equity) ......... 1,072 589 1,261
Other ................................. (5,586) (6,843) (2,713)
------- ------- -------
Total ............................ $ 1,191 $ (609) $ 7,993
======= ======= =======
</TABLE>
EARNINGS PER SHARE
Earnings per share have been computed based on the weighted average number of
common shares outstanding during the period.
33
<PAGE> 37
THE WASHINGTON WATER POWER COMPANY
- - --------------------------------------------------------------------------------
UTILITY PLANT
The cost of additions to utility plant, including an allowance for funds used
during construction and replacements of units of property and betterments, is
capitalized. Costs of depreciable units of property retired plus costs of
removal less salvage are charged to accumulated depreciation.
ALLOWANCE FOR FUNDS USED DURING CONSTRUCTION
The Allowance for Funds Used During Construction (AFUDC) represents the cost of
both the debt and equity funds used to finance utility plant additions during
the construction period. In accordance with the uniform system of accounts
prescribed by regulatory authorities, AFUDC is capitalized as a part of the cost
of utility plant and is credited currently as a noncash item to Other Income
(see Other Income above). The Company generally is permitted, under established
regulatory rate practices, to recover the capitalized AFUDC, and a fair return
thereon, through its inclusion in rate base and the provision for depreciation
after the related utility plant has been placed in service. Cash inflow related
to AFUDC does not occur until the related utility plant investment is placed in
service.
The effective AFUDC rate was 10.67% in 1996, 1995 and 1994. The Company's AFUDC
rates do not exceed the maximum allowable rates as determined in accordance with
the requirements of regulatory authorities.
DEPRECIATION
For utility operations, depreciation provisions are estimated by a method of
depreciation accounting utilizing unit rates for hydroelectric plants and
composite rates for other properties. Such rates are designed to provide for
retirements of properties at the expiration of their service lives. The rates
for hydroelectric plants include annuity and interest components, in which the
interest component is 6%. For energy operations, the ratio of depreciation
provisions to average depreciable property was 2.58% in 1996, 2.57% in 1995 and
2.56% in 1994.
CASH AND CASH EQUIVALENTS
For the purposes of the Consolidated Statements of Cash Flows, the Company
considers all temporary investments with an initial maturity of three months or
less to be cash equivalents.
TEMPORARY INVESTMENTS
Investments in debt and marketable equity securities are classified as
"available for sale" and are recorded at fair value. Investments totaling $14.2
million and $19.7 million are included on the Consolidated Balance Sheets at
December 31, 1996 as other property and investments and current assets,
respectively. Investments totaling $37.1 million and $27.4 million are included
on the Consolidated Balance Sheets at December 31, 1995 as other property and
investments and current assets, respectively. Unrealized investment gains, as of
December 31, 1996 and 1995, of $5.7 million and $19.2 million, respectively, net
of taxes, are reflected as a separate component of shareholders' equity in the
Consolidated Statements of Capitalization.
DERIVATIVE FINANCIAL INSTRUMENTS
The Company has used derivative instruments, primarily commodity price swaps, to
a limited extent as a means of hedging its costs and preserving margins in the
wholesale power business. The differential to be paid or received on a commodity
price swap agreement is recognized over the life of the agreement as an
adjustment to operating costs. The market and credit risk were determined to be
immaterial to the financial statements as of December 31, 1996, and over the
term of the agreements in effect at year-end. The Company will continue to use
derivative instruments for hedging and risk mitigation purposes, but has adopted
a policy not to trade in derivatives for speculative reasons. The Company's
policy established procedures for monitoring open positions and requires review
and approval of derivative instrument transactions.
DEFERRED CHARGES AND CREDITS
The Company prepares its financial statements in accordance with the provisions
of FAS No. 71, "Accounting for the Effects of Certain Types of Regulation." A
regulated enterprise can prepare its financial statements in accordance with FAS
No. 71 only if (i) the enterprise's rates for regulated services are established
by or subject to approval by an independent third-party regulator, (ii) the
regulated rates are designed to recover the enterprise's cost of providing the
regulated services and (iii) in view of demand for the regulated services and
the level of competition, it is reasonable to assume that rates set at levels
that will recover the enterprise's costs can be charged to and collected from
customers. FAS No. 71 requires a cost-based, rate-regulated enterprise to
reflect the impact of regulatory decisions in its financial statements. In
certain circumstances, FAS No. 71 requires that certain costs and/or obligations
(such as incurred costs not currently recovered through rates, but expected to
be so recovered in the future) be reflected in a deferral account in the balance
sheet and not be reflected in the statement of income or loss until matching
revenues are recognized. If at some point in the future the Company determines
that it no longer meets the criteria for continued application of FAS No. 71 to
all or a portion of the Company's regulated operations, the Company would be
required to write off its regulatory assets and would be precluded from the
future deferral in the Consolidated Balance Sheet of costs not recovered through
rates at the time such costs were incurred, even if such costs were expected to
be recovered in the future.
34
<PAGE> 38
THE WASHINGTON WATER POWER COMPANY
- - --------------------------------------------------------------------------------
The Company's primary regulatory assets include Investment in Exchange Power,
conservation programs, deferred income taxes, the provision for postretirement
benefits, unrecovered purchased gas costs and debt issuance and redemption
costs. Deferred credits include natural gas deferrals and the gain on the
general office building sale/leaseback being amortized over the life of the
lease.
POWER AND NATURAL GAS COST ADJUSTMENT PROVISIONS
The Company has a power cost adjustment mechanism (PCA) in Idaho which allows
the Company to modify electric rates to recover or rebate a portion of the
difference between actual and allowed net power supply costs. The PCA tracks
changes in hydroelectric generation, secondary prices, related changes in
thermal generation and PURPA contracts. Rate changes are triggered when the
deferred balance reaches $2.2 million. The following surcharges were in effect
during the past three years: a $2.5 million (2.3%) rebate effective September 1,
1996, which will expire August 31, 1997; $2.3 million (2.4%) surcharge effective
September 1, 1995, which expired August 31, 1996; and a $2.2 million (2.5%)
surcharge effective January 1, 1995, which expired December 31, 1995.
Under established regulatory practices, the Company is also allowed to adjust
its natural gas rates from time to time to reflect increases or decreases in the
cost of natural gas purchased. Differences between actual natural gas costs and
the natural gas costs allowed in rates are deferred and charged or credited to
expense when regulators approve inclusion of the cost changes in rates. In
Oregon, regulatory provisions include a sharing of benefits and risks associated
with changes in natural gas prices.
INCOME TAXES
The Company and its eligible subsidiaries file consolidated federal income tax
returns. Subsidiaries are charged or credited with the tax effects of their
operations on a stand-alone basis. The Company's federal income tax returns have
been examined with all issues resolved, and all payments made, through the 1992
return.
NEW ACCOUNTING STANDARDS
FAS No. 121, entitled "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to Be Disposed Of," was issued by the Financial Accounting
Standards Board (FASB), and is effective for fiscal years beginning after
December 15, 1995. FAS No. 121 requires the review of certain assets for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. If an asset is determined to
be impaired, a loss is recognized. The Company will continue to periodically
review its assets to determine whether any assets meet the requirements for
impairment recognition under this standard. The Company adopted the standard on
January 1, 1996, but does not expect any material impact on the Company's
financial position or results of operations.
FAS No. 125, entitled "Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities," which is effective after December
31, 1996, provides accounting and reporting standards for transfers and
servicing of financial assets and extinguishments of liabilities which focuses
on control of the assets. The statement provides standards for distinguishing
transfers of financial assets that are sales from transfers that are secured
borrowings. The Company has determined that its accounts receivable sale meets
the qualifications to be accounted for as a sale of assets under this standard
(see Note 4 to Financial Statements for additional information).
In October 1996, the American Institute of Certified Public Accountants issued
Statement of Position (SOP) 96-1, entitled "Environmental Remediation
Liabilities," which provides authoritative guidance for the recognition,
measurement, display and disclosure of environmental remediation liabilities in
financial statements. The Company's policy is to immediately accrue and charge
to current expense identified exposure related to environmental remediation
sites based on estimates of investigations, cleanup and monitoring costs to be
incurred. These accruals are then adjusted as further information develops or
circumstances change. Cost of future expenditures for environmental remediation
obligations are not discounted to their present value. The Company adopted SOP
96-1 on January 1, 1997, but it is not expected to have a material effect on the
Company's financial position or results of operations.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to current
statement format. These reclassifications were made for comparative purposes and
have not affected previously reported total net income or common shareholders'
equity.
35
<PAGE> 39
THE WASHINGTON WATER POWER COMPANY
- - --------------------------------------------------------------------------------
NOTE 2. PROPERTY, PLANT AND EQUIPMENT
The year-end balances of the major classifications of property, plant and
equipment are detailed in the following table (thousands of dollars):
<TABLE>
<CAPTION>
AT DECEMBER 31,
-----------------------
1996 1995
---------- ----------
<S> <C> <C>
Energy Delivery:
Electric distribution ........................ $ 539,467 $ 510,489
Electric transmission ........................ 251,559 248,587
Natural gas underground storage .............. 18,275 16,385
Natural gas distribution ..................... 302,853 276,295
Natural gas transmission ..................... 3,059 3,060
Construction work in progress (CWIP) and other 156,012 139,745
---------- ----------
Energy Delivery total ..................... 1,271,225 1,194,561
---------- ----------
Energy Trading:
Electric production .......................... 695,273 691,192
CWIP and other ............................... 23,802 17,913
---------- ----------
Energy Trading total ...................... 719,075 709,105
---------- ----------
Total energy ................................... 1,990,300 1,903,666
Non-energy ..................................... 35,827 60,498
---------- ----------
Total .......................................... $2,026,127 $1,964,164
========== ==========
</TABLE>
NOTE 3. JOINTLY OWNED ELECTRIC FACILITIES
The Company has invested in several jointly owned generating plants. Financing
for the Company's ownership in the projects is provided by the Company. The
Company's share of related operating and maintenance expenses for plants in
service is included in corresponding accounts in the Consolidated Statements of
Income. The following table indicates the Company's percentage ownership and the
extent of the Company's investment in such plants at December 31, 1996:
<TABLE>
<CAPTION>
COMPANY'S CURRENT SHARE OF
--------------------------------------------------------------------
KW of Construction
Installed Fuel Ownership Plant in Accumulated Net Plant Work in
Project Capacity Source (%) Service Depreciation In Service Progress
- - --------- -------- ------ ---------- -------- ------------ ---------- --------
(Thousands of Dollars)
<S> <C> <C> <C> <C> <C> <C> <C>
Centralia............. 1,330,000 Coal 15% $ 55,508 $34,833 $ 20,675 $1,501
Colstrip 3 & 4........ 1,556,000 Coal 15 273,575 97,575 176,000 -
</TABLE>
NOTE 4. ACCOUNTS RECEIVABLE SALE
The Company has entered into an agreement whereby it can sell without recourse,
on a revolving basis, up to $40,000,000 of interests in certain accounts
receivable, both billed and unbilled. The Company is obligated to pay fees which
approximate the purchaser's cost of issuing commercial paper equal in value to
the interests in receivables sold. The amount of such fees is included in
operating expenses. At both December 31, 1996 and 1995, $40,000,000 in
receivables had been sold pursuant to the agreement. The agreement qualifies as
a sale of assets under FAS No. 125 (see Note 1 to Financial Statements for
additional information).
NOTE 5. COMMON STOCK
In April 1990, the Company sold 1,000,000 shares of its common stock to the
Trustee of the Investment and Employee Stock Ownership Plan for Employees of the
Company (Plan) for the benefit of the participants and beneficiaries of the
Plan. In payment for the shares of Common Stock, the Trustee issued a promissory
note payable to the Company in the amount of $14,125,000. Dividends paid on the
stock held by the Trustee, plus Company contributions to the Plan, if any, are
used by the Trustee to make interest and principal payments on the promissory
note. The balance of the promissory note receivable from the Trustee
($11,009,000 at December 31, 1996) is reflected as a reduction to common equity.
The shares of Common Stock are allocated to the accounts of participants in the
Plan as the note is repaid. During 1996, the cost recorded for the Plan was
$3,139,000. Interest on the note payable to the Company, cash and stock
contributions to the Plan and dividends on the shares held by the Trustee were
$1,087,000, $2,569,000 and $1,198,000, respectively.
36
<PAGE> 40
THE WASHINGTON WATER POWER COMPANY
- - --------------------------------------------------------------------------------
In February 1990, the Company adopted a shareholder rights plan, which was
subsequently amended, pursuant to which holders of Common Stock outstanding on
March 2, 1990, or issued thereafter, have been granted one preferred share
purchase right (Right) on each outstanding share of Common Stock. Each Right,
initially evidenced by and traded with the shares of Common Stock, entitles the
registered holder to purchase one two-hundredth of a share of Preferred Stock of
the Company, without par value, at an exercise price of $40, subject to certain
adjustments, regulatory approval and other specified conditions. The Rights will
be exercisable only if a person or group acquires 10% or more of the Common
Stock or announces a tender offer, the consummation of which would result in the
beneficial ownership by a person or group of 10% or more of the Common Stock.
The Rights may be redeemed, at a redemption price of $0.005 per Right, by the
Board of Directors of the Company at any time until any person or group has
acquired 10% or more of the Common Stock. The Rights will expire on February 16,
2000.
During 1992, the Company received authorization to issue 1.5 million shares of
Common Stock under a second Periodic Offering Program (POP). No shares were
issued under the POP during 1994, 1995 or 1996. At December 31, 1996, 572,400
shares remained authorized but unissued.
The Company has a Dividend Reinvestment and Stock Purchase Plan under which the
Company's stockholders may automatically reinvest their dividends and make
optional cash payments for the purchase of the Company's Common Stock at current
market value.
Beginning in 1996, shares were purchased on the open market to fulfill
obligations of the 401(K) and Dividend Reinvestment Plans. Sales of Common Stock
for 1996, 1995 and 1994 are summarized below (thousands of dollars):
<TABLE>
<CAPTION>
1996 1995 1994
------------------------ ------------------------ ------------------------
Shares Amount Shares Amount Shares Amount
---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1 ........................... 55,947,967 $ 594,636 54,420,696 $ 570,603 52,757,545 $ 544,609
---------- ---------- ---------- ---------- ---------- ----------
Employee Investment Plan (401-K) ............. -- -- 304,353 4,718 272,278 4,302
Dividend Reinvestment Plan ................... 12,393 216 1,222,918 19,315 1,390,873 21,692
---------- ---------- ---------- ---------- ---------- ----------
Total Issues ................................. 12,393 216 1,527,271 24,033 1,663,151 25,994
---------- ---------- ---------- ---------- ---------- ----------
Balance at December 31 ......................... 55,960,360 $ 594,852 55,947,967 $ 594,636 54,420,696 $ 570,603
========== ========== ========== ========== ========== ==========
</TABLE>
NOTE 6. PREFERRED STOCK
CUMULATIVE PREFERRED STOCK NOT SUBJECT TO MANDATORY REDEMPTION:
The dividend rate on Flexible Auction Preferred Stock, Series J is reset every
49 days based on an auction. During 1996, the dividend rate varied from 4.03% to
4.24% and at December 31, 1996, was 4.20%. Series J is subject to redemption at
the Company's option at a redemption price of 100% per share plus accrued
dividends.
CUMULATIVE PREFERRED STOCK SUBJECT TO MANDATORY REDEMPTION:
Redemption requirements:
$8.625, Series I - On June 15, 1997, 1998 and 1999, the Company must
redeem 100,000 shares at $100 per share plus accumulated dividends. The
Company may, at its option, redeem up to 100,000 shares in addition to
the required redemption on any redemption date.
$6.95, Series K - On September 15, 2002, 2003, 2004, 2005 and 2006, the
Company must redeem 17,500 shares at $100 per share plus accumulated
dividends through a mandatory sinking fund. Remaining shares must be
redeemed on September 15, 2007. The Company has the right to redeem an
additional 17,500 shares on each September 15 redemption date.
There are $30 million in mandatory redemption requirements during the 1997-2001
period.
In June 1996, the Company had a mandatory redemption of $10 million, or 100,000
shares, and also completed an optional redemption of an additional 100,000
shares, or $10 million, of its $8.625 Series I.
The fair value of the Company's preferred stock at December 31, 1996 and 1995 is
estimated to be $118.3 million, or 103% of the carrying value and $139.8
million, or 104% of the carrying value, respectively. These estimates are based
on available market information.
37
<PAGE> 41
THE WASHINGTON WATER POWER COMPANY
- - --------------------------------------------------------------------------------
NOTE 7. LONG-TERM DEBT
The annual sinking fund requirements and maturities for the next five years for
long-term debt outstanding at December 31, 1996 are as follows:
<TABLE>
<CAPTION>
YEAR ENDED SINKING FUND
DECEMBER 31 MATURITIES REQUIREMENTS TOTAL
----------- ---------- ------------ -----
(Thousands of Dollars)
<S> <C> <C> <C>
1997.............. 31,000 4,517 35,517
1998.............. 10,000 4,407 14,407
1999.............. 47,500 4,407 51,907
2000.............. 35,000 4,197 39,197
2001.............. 44,000 3,847 47,847
</TABLE>
The sinking fund requirements may be met by certification of property additions
at the rate of 167% of requirements. All of the utility plant is subject to the
lien of the Mortgage and Deed of Trust securing outstanding First Mortgage
Bonds.
In 1995 and 1994, $78.0 million and $88.0 million, respectively, of First
Mortgage Bonds in the form of Secured Medium-Term Notes were issued. As of
December 31, 1996, the Company had remaining authorization to issue up to $109.0
million.
At December 31, 1996, the Company had $85.0 million outstanding under borrowing
arrangements which will be refinanced in 1997. See Note 8 for details of credit
agreements.
Included in other long-term debt are the following related to non-energy
operations (thousands of dollars):
<TABLE>
<CAPTION>
OUTSTANDING AT DECEMBER 31,
-----------------------------
1996 1995
------- -------
<S> <C> <C>
Notes payable - variable rates through 1999..................... $34,633 $24,372
Capital lease obligations....................................... 7,046 4,715
------- -------
Total non-energy .......................................... 41,679 29,087
Less: current portion......................................... 11,180 6,813
------- -------
Net non-energy long-term debt.............................. $30,499 $22,274
======= =======
</TABLE>
The fair value of the Company's long-term debt at December 31, 1996 and 1995 is
estimated to be $658.7 million, or 102% of the carrying value and $733.2
million, or 107% of the carrying value, respectively. These estimates are based
on available market information.
NOTE 8. BANK BORROWINGS
At December 31, 1996, the Company maintained total lines of credit with various
banks under two separate credit agreements amounting to $160,000,000. The
Company has one revolving line of credit, expiring December 10, 1999, which
provides a total credit commitment of $70,000,000. The second revolving credit
agreement is composed of two tranches totaling $90,000,000. One tranche provides
for up to $50,000,000 of notes to be outstanding at any one time, while the
other provides for up to $40,000,000 of notes to be outstanding at any one time.
Both tranches of this agreement expire on July 23, 1997. The Company pays
commitment fees of up to 0.10% per annum on the average daily unused portion of
each credit agreement.
In addition, under various agreements with banks, the Company can have up to
$60,000,000 in loans outstanding at any one time, with the loans available at
the banks' discretion. These arrangements provide, if funds are made available,
for fixed-term loans for up to 180 days at a fixed rate of interest.
38
<PAGE> 42
THE WASHINGTON WATER POWER COMPANY
- - --------------------------------------------------------------------------------
Balances and interest rates of bank borrowings under these arrangements were as
follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------
1996 1995
---- ----
(Thousands of Dollars)
<S> <C> <C>
BALANCE OUTSTANDING AT END OF PERIOD:
Fixed-term loans ................................ $50,000 $10,000
Revolving credit agreement ...................... 35,000 19,500
MAXIMUM BALANCE DURING PERIOD:
Fixed-term loans ................................ $50,000 $10,000
Revolving credit agreement ...................... 35,500 28,500
AVERAGE DAILY BALANCE DURING PERIOD:
Fixed-term loans ................................ $15,482 $ 5,484
Revolving credit agreement ...................... 12,280 13,886
AVERAGE ANNUAL INTEREST RATE DURING PERIOD:
Fixed-term loans ................................ 5.67% 6.15%
Revolving credit agreement ...................... 5.34 6.11
AVERAGE ANNUAL INTEREST RATE AT END OF PERIOD:
Fixed-term loans ................................ 5.88% 6.06%
Revolving credit agreement ...................... 6.02 6.08
</TABLE>
Non-energy operations have $45.0 million in short-term borrowing arrangements
available. At December 31, 1996 and 1995, $29.6 million and $26.6 million,
respectively, were outstanding.
NOTE 9. LEASES
The Company has entered into several lease arrangements involving various
assets, with minimum terms ranging from one to fifteen years and expiration
dates from 1998 to 2011. Certain of the lease arrangements require the Company,
upon the occurrence of specified events, to purchase the leased assets for
varying amounts over the term of the lease. The Company's management believes
that the likelihood of the occurrence of the specified events under which the
Company could be required to purchase the property is remote. Rent expense for
the years ended December 31, 1996, 1995 and 1994 was $11.8 million, $10.7
million and $2.3 million, respectively. Future minimum lease payments (in
thousands of dollars) required under operating leases that have initial or
remaining noncancelable lease terms in excess of one year as of December 31,
1996 are estimated as follows:
<TABLE>
<CAPTION>
<S> <C>
Year ending December 31:
1997 $ 7,635
1998 1,847
1999 2,257
2000 2,257
2001 2,257
Later years 22,572
--------
Total minimum payments required $ 38,825
========
</TABLE>
The Company also has various other operating leases, which are charged to
operating expense, consisting of a large number of small, relatively short-term,
renewable agreements for various items, such as office equipment and office
space.
NOTE 10. PENSION PLANS
The Company has a pension plan covering substantially all of its regular
full-time employees. Certain of the Company's subsidiaries also participate in
this plan. Individual benefits under this plan are based upon years of service
and the employee's average compensation as specified in the Plan. The Company's
funding policy is to contribute annually an amount equal to the net periodic
pension cost, provided that such contributions are not less than the minimum
amounts required to be funded under the Employee Retirement Income Security Act,
nor more than the maximum amounts which are currently deductible for tax
purposes. Pension fund assets are invested primarily in marketable debt and
equity securities. The Company also has another plan which covers the executive
officers.
39
<PAGE> 43
THE WASHINGTON WATER POWER COMPANY
- - --------------------------------------------------------------------------------
Net pension cost (income) for 1996, 1995 and 1994 is summarized as follows:
<TABLE>
<CAPTION>
1996 1995 1994
-------- -------- --------
(Thousands of Dollars)
<S> <C> <C> <C>
Service cost-benefits earned during the period $ 4,629 $ 3,464 $ 4,323
Interest cost on projected benefit obligation 9,954 9,142 8,523
Actual return on plan assets ................. (16,897) (27,910) (248)
Net amortization and deferral ................ 4,682 17,272 (11,553)
-------- -------- --------
Net periodic pension cost (income) ....... $ 2,368 $ 1,968 $ 1,045
======== ======== ========
</TABLE>
The funded status of the Plans and the pension liability at December 31, 1996,
1995 and 1994, are as follows:
<TABLE>
<CAPTION>
1996 1995 1994
--------- --------- ---------
(Thousands of dollars)
<S> <C> <C> <C>
Actuarial present value of benefit obligation:
Accumulated benefit obligation (including vested benefits of
$(123,601,000), $(114,964,000) and $(88,596,000), respectively) $(125,658) $(116,877) $ (90,341)
========= ========= =========
Projected benefit obligation for service rendered to date ..... $(143,242) $(133,233) $(107,540)
Plan assets at fair value ..................................... 149,846 140,528 119,706
--------- --------- ---------
Plan assets in excess of projected benefit obligation ......... 6,604 7,295 12,166
Unrecognized net gain from returns different than assumed ..... (21,101) (19,704) (17,939)
Prior service costs not yet recognized ........................ 17,020 18,385 14,803
Unrecognized net transition asset at year-end (being amortized
over 19 years) ........................................... (9,187) (10,273) (11,359)
Regulatory deferrals .......................................... -- -- (1,841)
--------- --------- ---------
Pension liability ............................................. $ (6,664) $ (4,297) $ (4,170)
========= ========= =========
Assumptions used in calculations were:
Discount rate at year-end ..................................... 7.5% 7.5% 8.5%
Rate of increase in future compensation level ................. 4.0% 4.0% 4.0%
Expected long-term rate of return on assets ................... 9.0% 9.0% 9.0%
</TABLE>
NOTE 11. OTHER POSTRETIREMENT BENEFITS
FAS No. 106, "Employers' Accounting for Postretirement Benefits Other Than
Pensions," requires the Company to accrue the estimated cost of postretirement
benefit payments during the years that employees provide services and allows
recognition of the unrecognized transition obligation in the year of adoption or
the amortization of such obligation over a period of up to twenty years. The
Company elected to amortize this obligation of approximately $34,500,000 over a
period of twenty years, beginning in 1993.
The Company received accounting orders from the Washington Utilities and
Transportation Commission (WUTC) and the IPUC allowing the deferral of expense
accruals under this Statement as a regulatory asset for future recovery. The
Company discontinued deferring expenses, began amortizing prior deferrals
already recorded and began recognition of current expenses in 1996.
The Company provides certain health care and life insurance benefits for
substantially all of its retired employees. In 1996, 1995 and 1994, the Company
recognized $1,330,000, $1,800,000 and $1,270,000, respectively, as an expense
for postretirement health care and life insurance benefits. The following table
sets forth the health care plan's funded status at December 31, 1996, 1995 and
1994.
40
<PAGE> 44
THE WASHINGTON WATER POWER COMPANY
- - --------------------------------------------------------------------------------
Accumulated postretirement benefit obligation (thousands of dollars):
<TABLE>
<CAPTION>
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Retirees 574 617 642
Active plan participants 1,345 1,328 1,319
-------- -------- --------
Total participants 1,919 1,945 1,961
Unfunded accumulated postretirement benefit obligation $(25,589) $(28,718) $(31,072)
Unrecognized (gain)/loss (6,621) (3,396) (4,897)
Unrecognized transition obligation 25,683 27,288 28,894
-------- -------- --------
Accrued postretirement benefit cost $ (6,527) $ (4,826) $ (7,075)
======== ======== ========
</TABLE>
Net postretirement benefit cost for 1996, 1995 and 1994 (thousands of dollars):
<TABLE>
<CAPTION>
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
Service cost - benefits earned during the period $ 634 $ 573 $ 802
Return on the plan assets (if any) (568) (226) --
Interest cost on accumulated postretirement benefit
obligation 2,234 2,452 2,596
Amortization of transition obligation 1,375 1,414 1,606
------- ------- -------
Total net periodic cost $ 3,675 $ 4,213 $ 5,004
======= ======= =======
</TABLE>
The currently assumed health care cost trend rate used in measuring the
accumulated postretirement benefit obligation is 5% for 1996. The assumed rate
of future medical cost increases has been gradually decreased since the adoption
of FAS 106 in response to the actual leveling off of cost increases in the plan.
A one-percentage-point increase in the assumed health care cost trend rate for
each year would increase the accumulated postretirement benefit obligation as of
December 31, 1996 and net postretirement health care cost by approximately
$211,000. The assumed discount rate used in determining the accumulated
postretirement benefit obligation was 7.5%.
NOTE 12. ACCOUNTING FOR INCOME TAXES
As of December 31, 1996 and 1995, the Company had recorded net regulatory assets
of $164,753,000 and $169,432,000, respectively, related to the probable recovery
of FAS No. 109, "Accounting for Income Taxes," deferred tax liabilities from
customers through future rates. Such net regulatory assets will be adjusted by
amounts recovered through rates.
Deferred income taxes reflect the net tax effects of (a) temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes, and (b) tax credit
carryforwards. The net deferred federal income tax liability consists of the
following (thousands of dollars):
<TABLE>
<CAPTION>
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Deferred tax liabilities:
Differences between book and tax bases
of utility plant $333,017 $320,502 $317,991
Loss on reacquired debt 6,283 7,173 8,216
Deferred natural gas credits -- -- 1,095
Other 8,271 10,013 8,957
-------- -------- --------
Total deferred tax liabilities 347,571 337,688 336,259
-------- -------- --------
Deferred tax assets:
Reserves not currently deductible 14,942 15,742 14,429
Contributions in aid of construction 5,425 4,634 3,830
Deferred natural gas credits 4,157 3,894 --
Centralia Trust 2,185 -- --
Gain on sale of office building 1,371 1,463 1,555
Other 6,962 4,426 6,278
-------- -------- --------
Total deferred tax assets 35,042 30,159 26,092
-------- -------- --------
Net deferred tax liability $312,529 $307,529 $310,167
======== ======== ========
</TABLE>
41
<PAGE> 45
THE WASHINGTON WATER POWER COMPANY
- - --------------------------------------------------------------------------------
A reconciliation of federal income taxes derived from statutory tax rates
applied to income from continuing operations and federal income tax as set forth
in the accompanying Consolidated Statements of Income and Retained Earnings is
as follows (the current and deferred effective tax rates are approximately the
same during all periods):
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
---------------------------------
1996 1995 1994
-------- -------- --------
(Thousands of Dollars)
<S> <C> <C> <C>
Computed federal income taxes at statutory rate $ 46,103 $ 47,875 $ 41,983
Increase (decrease) in tax resulting from:
Accelerated tax depreciation 23 (909) 1,725
Equity earnings in affiliates -- -- (497)
Other 464 1,297 (1,320)
-------- -------- --------
Total federal income tax expense* $ 46,590 $ 48,263 $ 41,891
======== ======== ========
INCOME TAX EXPENSE CONSISTS OF THE FOLLOWING:
Federal taxes currently provided $ 37,456 $ 48,318 $ 32,334
Deferred income taxes 9,134 (55) 9,557
-------- -------- --------
Total federal income tax expense 46,590 48,263 41,891
State income tax expense 2,919 4,153 2,805
-------- -------- --------
Federal and state income taxes $ 49,509 $ 52,416 $ 44,696
======== ======== ========
*Federal Income Tax Expense:
Energy $ 34,241 $ 41,203 $ 35,513
Non-energy 12,349 7,060 6,378
-------- -------- --------
Total Federal Income Tax Expense $ 46,590 $ 48,263 $ 41,891
======== ======== ========
Federal statutory rate 35% 35% 35%
</TABLE>
NOTE 13. LONG-TERM PURCHASED POWER CONTRACTS WITH REQUIRED MINIMUM PAYMENTS
Under fixed contracts with Public Utility Districts (PUD), the Company has
agreed to purchase portions of the output of certain generating facilities.
Although the Company has no investment in such facilities, these contracts
provide that the Company pay certain minimum amounts (which are based at least
in part on the debt service requirements of the supplier) whether or not the
facility is operating. The cost of power obtained under the contracts, including
payments made when a facility is not operating, is included in operations and
maintenance expense in the Consolidated Statements of Income. Information as of
December 31, 1996, pertaining to these contracts is summarized in the following
table:
<TABLE>
<CAPTION>
COMPANY'S CURRENT SHARE OF
----------------------------------------------------------------
Contract
Debt Revenue Expira-
Kilowatt Annual Service Bonds tion
Output Capability Costs (1) Costs (2) Outstanding Date
------- ---------- --------- --------- ----------- ----
(Thousands of Dollars)
<S> <C> <C> <C> <C> <C> <C>
PUD CONTRACTS:
Chelan County PUD:
Lake Chelan Project (3)..... - - $ (491) $ - $ - 1995
Rocky Reach Project......... 2.9% 37,000 1,282 666 3,357 2011
Grant County PUD:
Priest Rapids Project....... 6.1 55,000 1,620 1,203 11,394 2005
Wanapum Project............. 8.2 75,000 2,205 1,501 17,149 2009
Douglas County PUD:
Wells Project............... 3.9 30,000 819 607 6,805 2018
------- ------ ------ -------
Totals 197,000 $5,435 $3,977 $38,705
======= ====== ====== =======
</TABLE>
(1) The annual costs will change in proportion to the percentage of output
allocated to the Company in a particular year. Amounts represent the
operating costs for the year 1996.
(2) Included in annual costs.
(3) The Lake Chelan Project contract expired in 1995. The negative costs in
1996 represent final adjustments.
42
<PAGE> 46
THE WASHINGTON WATER POWER COMPANY
- - --------------------------------------------------------------------------------
Actual expenses for payments made under the above contracts for the years 1996,
1995 and 1994, were $5,435,000, $8,080,000 and $8,717,000, respectively. The
estimated aggregate amounts of required minimum payments (the Company's share of
debt service costs) under the above contracts for the next five years are
$4,041,000 in 1997, $5,605,000 in 1998, $5,574,000 in 1999, $6,814,000 in 2000
and $6,677,000 in 2001 (minimum payments thereafter are dependent on then market
conditions). In addition, the Company will be required to pay its proportionate
share of the variable operating expenses of these projects.
NOTE 14. COMMITMENTS AND CONTINGENCIES
NEZ PERCE TRIBE
On December 6, 1991, the Nez Perce Tribe filed an action against the Company in
U. S. District Court for the District of Idaho alleging, among other things,
that two dams formerly operated by the Company, the Lewiston Dam on the
Clearwater River and the Grangeville Dam on the South Fork of the Clearwater
River, provided inadequate passage to migrating anadromous fish in violation of
rights under treaties between the Tribe and the United States made in 1855 and
1863. The Lewiston and Grangeville Dams, which had been owned and operated by
other utilities under hydroelectric licenses from the Federal Power Commission
(the "FPC", predecessor of the Federal Energy Regulatory Commission (FERC))
prior to acquisition by the Company, were acquired by the Company in 1937 with
the approval of the FPC, but were dismantled and removed in 1973 and 1963,
respectively. Allegations of actual loss under different assumptions range
between $425 million and $650 million, together with $100 million in punitive
damages.
On November 21, 1994, the Company filed a Motion for Summary Judgment of
Dismissal. On March 28, 1996, a U.S. District judge entered a summary judgment
in favor of the Company dismissing the complaint. The Tribe filed a notice of
appeal to the Ninth Circuit Court of Appeals on April 24, 1996. A mediation
conference was held on October 11, 1996. Following the conclusion of that
conference, briefing schedules were vacated indefinitely to accommodate a
mediation process. The parties are in the process of selection of a mediator and
a further status conference with the Ninth Circuit Mediator will be held on May
13, 1997. The Company is presently unable to assess the likelihood of an adverse
outcome in this litigation, or estimate an amount or range of potential loss in
the event of an adverse outcome.
OIL SPILL
The Company completed an updated investigation of an oil spill from an
underground storage tank that occurred several years ago in downtown Spokane at
the site of the Company's steam heat plant. Underground soil testing conducted
in 1993 showed that the oil had migrated approximately one city block beyond the
steam plant property. On December 6, 1993, the Company asked the Department of
Ecology (DOE) to enter into negotiations for a Consent Decree. The Consent
Decree, entered on November 8, 1994, provided for an extensive Remedial
Investigation (RI) and Feasibility Study (FS) to determine the appropriate
cleanup action. The RI and FS were completed in 1995 and an RI/FS report was
approved by the DOE in 1996. A Cleanup Action Plan (CAP) was determined by DOE
in 1996. The 1994 Consent Decree was amended to include the CAP with court
approval on December 2, 1996. The Company is now implementing the CAP. The
Company presently estimates that the total cleanup cost, including costs
incurred to-date, will approximate $10 million. As of December 31, 1996, an
accrual of $3.1 million is reflected on the Company's financial statements,
which represents the Company's best estimate of its uninsured liability.
On August 17, 1995, a lawsuit was filed against the Company in Superior Court of
the State of Washington for Spokane County by Davenport Sun International Hotels
and Properties, Inc., the owner of a hotel property in downtown Spokane,
Washington. The Complaint alleges that the oil released from the Company's
Central Steamplant trespassed on property owned by the plaintiff. In addition,
the plaintiff claims that the Steamplant has caused a diminution of value of
plaintiff's land. After mediation, the matter was resolved by settlement and
compromise, subject to certain conditions. If the settlement agreement fails or
is terminated, the Company is presently unable to assess the likelihood of an
adverse outcome in this litigation, or estimate an amount or range of potential
loss in the event of an adverse outcome.
FIRESTORM
On October 16, 1991, gale-force winds struck a five-county area in eastern
Washington and a seven-county area in northern Idaho. These winds were
responsible for causing 92 separate wildland fires, resulting in two deaths and
the loss of 114 homes and other structures, some of which were located in the
Company's service territory. Five separate class action lawsuits have been filed
against the Company by private individuals in the Superior Court for Spokane
County. All of these suits were certified as class actions on September 16,
1994, and bifurcated for trial of liability and damage issues by order of the
same date.
43
<PAGE> 47
THE WASHINGTON WATER POWER COMPANY
- - --------------------------------------------------------------------------------
The Company was also served with two suits in Spokane County Superior Court
filed on April 20, 1994 and on September 15, 1994, both of which sought
individual damages from separate and for alleged wrongful death of two persons.
Five additional and separate suits were brought by Grange Insurance Company, and
were filed in Spokane County Superior Court on October 10, 1994, for
approximately $2.2 million paid to Grange insureds for the same fire areas.
Complainants in all cases allege various theories of tortious conduct, including
negligence, creation of a public nuisance, strict liability and trespass; in
most cases, complainants allege that fires were caused by electric distribution
and/or transmission lines downed by wind-downed trees. The lawsuits seek
recovery for property damage, emotional and mental distress, lost income and
punitive damages, but do not specify the amount of damages being sought. All
cases are in a discovery phase. Plaintiffs' motion for consolidation of all
liability trials was denied without prejudice. Plaintiffs also filed a Motion to
Decertify all cases on damage issues, which motion was denied following a
hearing held on January 27, 1997. Still pending is a WWP Motion for
Discretionary Review before the Washington Court of Appeals (Div. III) on class
certification issues, which was heard by the Court on February 4, 1997. Trial
date(s) are anticipated in late 1997 or early 1998. The Company has received a
settlement demand for settlement of class action litigation which is within the
Company's insurance coverage limits. The Company is presently unable to assess
the likelihood of an adverse outcome or estimate an amount or range of potential
loss in the event of an adverse outcome.
WILLIAMS LAKE LAWSUIT
On December 21, 1995, a lawsuit was commenced in Vancouver, British Columbia
against the Company's subsidiary, Pentzer Corporation (Pentzer), by Tondu Energy
Systems, Inc. and T.E.S. Williams Lake Partnership alleging contract violations,
conspiracy, misrepresentation and breach of fiduciary duties in regard to the
1993 sale of assets of Pentzer Energy Services, Inc. to B.C. Gas, Inc. and a
U.S. subsidiary of B.C. Gas. The claims involve an alleged first right to
purchase interests in the Williams Lake, British Columbia wood-fired generating
station. The suit seeks damages in excess of $10 million, plus exemplary
damages, prejudgment interest, costs and attorneys' fees. Also named as
defendants are B.C. Gas, Inc., Inland Pacific Energy (Williams Lake) Corp.,
Pentzer Energy Services, Inc. and WP Energy Company. The Company is presently
unable to assess the likelihood of an adverse outcome or estimate an amount or
range of potential loss in the event of an adverse outcome.
At this time, management believes that the ultimate outcome of all the claims
and actions discussed in this note should not have a material adverse effect on
the Company's consolidated operations or financial position.
OTHER CONTINGENCIES
The Company routinely assesses, based on in-depth studies, expert analyses and
legal reviews, its contingencies, obligations and commitments for remediation of
contaminated sites, including assessments of ranges and probabilities of
recoveries from other responsible parties who have and have not agreed to a
settlement and recoveries from insurance carriers. The Company's policy is to
immediately accrue and charge to current expense identified exposures related to
environmental remediation sites based on estimates of investigation, cleanup and
monitoring costs to be incurred.
The Company must be in compliance with requirements under the Clean Air Act
Amendments (CAAA) by the year 2000 at both the Centralia and Colstrip thermal
generating plants, in which the Company maintains an ownership interest. The
Company is presently unable to determine the financial impact of these
requirements.
The Company has potential liabilities under the Federal Endangered Species Act
(ESA) for species of fish that have either already been added to the endangered
species list, been listed as "threatened" or been petitioned for listing. Thus
far, measures which have been adopted and implemented have had minimal impact of
the Company. Future actions to save these, and other as yet unidentified fish or
wildlife species, particularly as the Company is relicensing several of its
hydroelectric facilities, could impact the Company's operations. It is currently
not possible to determine the likely financial impact of any further actions.
The Company has long-term contracts related to the purchase of fuel for thermal
generation, natural gas and hydroelectric power. Terms of the natural gas
purchase contracts range from one month to five years and the majority provide
for minimum purchases at the then effective market rate. The Company also has
various agreements for the purchase, sale or exchange of electric energy with
other utilities, cogenerators, small power producers and government agencies.
As of December 31, 1996, the Company's collective bargaining agreement with the
International Brotherhood of Electrical Workers represented approximately 48% of
employees. The current agreement with the union local representing the majority
of the bargaining unit employees expires on March 25, 1997. Negotiations are
taking place between bargaining unit employees and Company management. A local
agreement in the South Lake Tahoe area, which represents 7 employees, expires on
March 25, 1999.
44
<PAGE> 48
THE WASHINGTON WATER POWER COMPANY
- - --------------------------------------------------------------------------------
NOTE 15. ACQUISITIONS AND DISPOSITIONS
In 1996, Pentzer Development Corporation, a subsidiary of Pentzer, sold the
Spokane Industrial Park, resulting in a gain of approximately $10.8 million, net
of taxes and other adjustments. During 1996, Pentzer acquired a company that
provides point-of-purchase and in-store merchandising services. In 1995 and
1994, Pentzer acquired two companies in each year.
NOTE 16. MERGER TERMINATION
On June 28, 1996, the Board of Directors of the Company terminated the Agreement
and Plan of Reorganization and Merger, dated as of June 27, 1994 by and among
the Company, Sierra Pacific Resources (SPR), Sierra Pacific Power Company, a
subsidiary of SPR (SPPC), and Altus Corporation, a wholly owned subsidiary of
the Company (Altus, formerly named Resources West Energy Corporation), which
would have provided for the merger of the Company, SPR and SPPC with and into
Altus. The Company had approximately $15.8 million, or $10.3 million after-tax,
in merger-related transaction and transition costs that were expensed in 1996.
No increase in rates will occur as a result of these costs being expensed.
NOTE 17. COMPANY-OBLIGATED MANDATORILY REDEEMABLE PREFERRED TRUST SECURITIES
In November 1996, the Company and three newly formed Trusts filed a Registration
Statement with the SEC for up to and including $150 million of Subordinated Debt
Securities of the Company and Preferred Trust Securities of the Trusts
(guaranteed by the Company). In January 1997, Subordinated Debt Securities of
the Company were issued to one of the Trusts, and that Trust, in turn, issued to
the public $60 million of Preferred Securities having a distribution rate of
7 7/8%. On the Company's consolidated balance sheet, this will appear as $60
million of new preferred trust securities.
45
<PAGE> 49
THE WASHINGTON WATER POWER COMPANY
- - --------------------------------------------------------------------------------
NOTE 18. SELECTED QUARTERLY INFORMATION (UNAUDITED)
The Company's energy operations are significantly affected by weather
conditions. Consequently, there can be large variances in revenues, expenses and
net income between quarters based on seasonal factors such as temperatures and
streamflow conditions. A summary of quarterly operations (in thousands of
dollars except per share amounts) for 1996 and 1995 follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
--------------------------------------------------------
MARCH JUNE SEPTEMBER DECEMBER
31 30 30 31
-------- -------- -------- --------
<S> <C> <C> <C> <C>
1996
Operating revenues ............................ $248,004 $195,900 $219,751 $281,302
Operating income .............................. 66,446 45,888 * 35,627 38,960
Net income .................................... 41,909 8,968 18,364 14,212
Income available for common stock ............. 39,643 6,827 16,572 12,433
Outstanding common stock (000s):
Weighted average ............................ 55,958 55,960 55,960 55,960
Actual ...................................... 55,960 55,960 55,960 55,960
Earnings per share:
Energy operations ........................... $ 0.50 $ 0.10 $ 0.19 $ 0.18
Non-energy operations ....................... 0.21 0.02 0.11 0.04
-------- -------- -------- --------
Total ....................................... $ 0.71 $ 0.12 $ 0.30 $ 0.22
Dividends paid per common share ............... $ 0.31 $ 0.31 $ 0.31 $ 0.31
Trading price range per share:
High ........................................ $ 19 1/8 $ 19 7/8 $ 19 3/4 $ 19 3/4
Low ......................................... $ 17 1/4 $ 17 3/4 $ 17 7/8 $ 18
1995
Operating revenues ............................ $197,928 $158,973 $157,869 $240,239
Operating income .............................. 58,474 40,103 31,565 59,698
Net income .................................... 28,453 15,163 10,885 32,620
Income available for common stock ............. 26,156 12,865 8,618 30,359
Outstanding common stock (000s):
Weighted average ............................ 54,582 54,986 55,363 55,745
Actual ...................................... 54,847 55,237 55,617 55,948
Earnings per share:
Energy operations ........................... $ 0.43 $ 0.19 $ 0.11 $ 0.41
Non-energy operations ....................... 0.05 0.04 0.05 0.13
-------- -------- -------- --------
Total ....................................... $ 0.48 $ 0.23 $ 0.16 $ 0.54
Dividends paid per common share ............... $ 0.31 $ 0.31 $ 0.31 $ 0.31
Trading price range per share:
High ........................................ $ 16 $ 16 $ 16 3/8 $ 18
Low ......................................... $ 13 1/2 $ 14 3/4 $ 15 $ 16
</TABLE>
* The amount reported above for Operating Income in the second quarter of
1996 differs from the amount reported in the second quarter Form 10-Q
because the merger expenses were retroactively reclassified from
operating expenses to non-operating expenses during the third quarter of 1996.
46
<PAGE> 50
THE WASHINGTON WATER POWER COMPANY
- - -------------------------------------------------------------------------------
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information regarding the directors of the Registrant has been omitted pursuant
to General Instruction G to Form 10-K. Reference is made to the Registrant's
Proxy Statement to be filed with the Securities and Exchange Commission in
connection with the Registrant's annual meeting of shareholders to be held on
May 20, 1997.
EXECUTIVE OFFICERS OF THE REGISTRANT
<TABLE>
<CAPTION>
Name Age Business Experience During Past 5 Years
<S> <C> <C>
Paul A. Redmond 60 Chairman of the Board and Chief Executive Officer since August 1996; Chairman of the Board,
President and Chief Executive Officer February 1994 - August 1996; Chairman of the Board and Chief
Executive Officer May 1988 - February 1994.
W. Lester Bryan 56 President & Chief Operating Officer since August 1996; Senior Vice President - Rates & Resources
May 1992 - August 1996; Vice President - Power Supply August 1983 - May 1992.
Jon E. Eliassen 49 Senior Vice President & Chief Financial Officer since August 1996. Vice President - Finance & Chief
Financial Officer February 1986 - August 1996.
Gary G. Ely 49 Senior Vice President & General Manager since August 1996; Vice President - Natural Gas February
1991 - August 1996.
Robert D. Fukai 47 Vice President - External Affairs since August 1996; Vice President - Human Resources, Corporate
Services & Marketing January 193 - August 1996; Vice President - Corporate Services & Human
Resources October 1992 - December 1992; Vice President - Operations May 1986 - October 1992.
JoAnn G. Matthiesen 56 Vice President - Human Resources since August 1996; Vice President - Organization Effectiveness,
Public Relations & Assistant to the Chairman January 1993 - August 1996; Vice President -
Marketing, Public Relations & Assistant to the Chairman February 1991 - January 1993.
Lawrence J. Pierce 44 Vice President & Treasurer since August 1996; Vice President - Business Analysis August 1994 -
August 1996; Director - Business Analysis February 1992 - August 1994; Treasurer February 1986 -
February 1992.
Nancy R. Racicot 49 Senior Vice President & General Manager since August 1996; Vice President - Operations October 1992
- August 1996; Vice President - Corporate Services March 1990 - October 1992.
Ronald R. Peterson 44 Controller since August 1996; Treasurer February 1992 - August 1996; Manager - Customer Information
Services March 1991 - February 1992.
Terry L. Syms 48 Corporate Secretary since March 1988.
</TABLE>
All of the Company's executive officers, with the exception of Messr. Fukai,
were officers or directors of one or more of the Company's subsidiaries in
1996.
Executive officers are elected annually by the Board of Directors.
47
<PAGE> 51
THE WASHINGTON WATER POWER COMPANY
- - --------------------------------------------------------------------------------
ITEM 11. EXECUTIVE COMPENSATION
Information regarding executive compensation has been omitted pursuant to
General Instruction G to Form 10-K. Reference is made to the Registrant's
Proxy Statement to be filed with the Securities and Exchange Commission in
connection with the Registrant's annual meeting of shareholders to be held on
May 20, 1997.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
(a) Security ownership of certain beneficial owners (owning 5% or more of
Registrant's voting securities):
None.
(b) Security ownership of management:
Information regarding security ownership of management has been
omitted pursuant to General Instruction G to Form 10-K. Reference is
made to the Registrant's Proxy Statement to be filed with the
Securities and Exchange Commission in connection with the Registrant's
annual meeting of shareholders to be held on May 20, 1997.
(c) Changes in control:
None.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information regarding certain relationships and related transactions has been
omitted pursuant to General Instruction G to Form 10-K. Reference is made to
the Registrant's Proxy Statement to be filed with the Securities and Exchange
Commission in connection with the Registrant's annual meeting of shareholders
to be held on May 20, 1997.
48
<PAGE> 52
THE WASHINGTON WATER POWER COMPANY
- - -------------------------------------------------------------------------------
PART IV
ITEM 14. FINANCIAL STATEMENTS, FINANCIAL STATEMENT SCHEDULES, EXHIBITS AND
REPORTS ON FORM 8-K
(a) 1. Financial Statements (Included in Part II of this report):
Independent Auditor's Report
Consolidated Statements of Income and Retained Earnings for the Years
Ended December 31, 1996, 1995 and 1994
Consolidated Balance Sheets, December 31, 1996 and 1995
Consolidated Statements of Capitalization, December 31, 1996 and 1995
Consolidated Statements of Cash Flows for the Years Ended December 31,
1996, 1995, and 1994
Schedule of Information by Business Segments for the Years Ended
December 31, 1996, 1995 and 1994
Notes to Financial Statements
(a) 2. Financial Statement Schedules:
None
(a) 3. Exhibits:
Reference is made to the Exhibit Index commencing on page 52. The
Exhibits include the management contracts and compensatory plans or arrangements
required to be filed as exhibits to this Form 10-K by Item 601(10)(iii) of
Regulation S-K.
(b) Reports on Form 8-K:
Dated June 28, 1996, regarding the termination of the Merger Agreement
between the Company, Sierra pacific Resources, Sierra Pacific
Power Company and Altus Corporation.
Dated December 1, 1996, regarding the storm damage to the Company's
electric transmission and distribution system resulting from an
ice storm.
49
<PAGE> 53
THE WASHINGTON WATER POWER COMPANY
- - --------------------------------------------------------------------------------
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
THE WASHINGTON WATER POWER COMPANY
March 20, 1997 By /s/ PAUL A. REDMOND
- - -------------------------- --------------------------------------
Date Paul A. Redmond
Chairman of the Board, President and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
Principal Executive
/s/ PAUL A. REDMOND Officer and Director March 20, 1997
- - ----------------------------------------------------
Paul A. Redmond (Chairman of the Board,
and Chief Executive Officer)
Officer
/s/ W. LESTER BRYAN and Director March 20, 1997
- - ----------------------------------------------------
W. Lester Bryan (President
and Chief Operating Officer)
Principal Financial
/s/ J. E. ELIASSEN and Accounting Officer March 20, 1997
- - ---------------------------------------------------
J. E. Eliassen (Senior Vice President
and Chief Financial Officer)
/s/ DAVID A. CLACK Director March 20, 1997
- - ----------------------------------------------------
David A. Clack
/s/ DUANE B. HAGADONE Director March 20, 1997
- - ----------------------------------------------------
Duane B. Hagadone
/s/ EUGENE W. MEYER Director March 20, 1997
- - ----------------------------------------------------
Eugene W. Meyer
/s/ H. NORMAN SCHWARZKOPF Director March 20, 1997
- - ----------------------------------------------------
General H. Norman Schwarzkopf
/s/ B. JEAN SILVER Director March 20, 1997
- - ----------------------------------------------------
B. Jean Silver
/s/ LARRY A. STANLEY Director March 20, 1997
- - ----------------------------------------------------
Larry A. Stanley
/s/ R. JOHN TAYLOR Director March 20, 1997
- - ----------------------------------------------------
R. John Taylor
</TABLE>
50
<PAGE> 54
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement No.
2-81697 on Form S-8, in Registration Statement No. 2-94816 on Form S-8, in
Registration Statement No. 33-49662 on Form S-3, in Registration Statement No.
33-51669 on Form S-3, in Registration Statement No. 33-53655 on Form S-3, in
Registration Statement No. 33-54791 on Form S-8, in Registration Statement No.
333-16353, in Registration Statement No. 333-16353-01, in Registration Statement
No. 333-16353-02, and in Registration Statement No. 333-16353-03 of our report
dated January 31, 1997, appearing in this Annual Report on Form 10-K of The
Washington Water Power Company for the year ended December 31, 1996.
Deloitte & Touche LLP
Seattle, Washington
March 20, 1997
51
<PAGE> 55
THE WASHINGTON WATER POWER COMPANY
- - --------------------------------------------------------------------------------
EXHIBIT INDEX
<TABLE>
<CAPTION>
Previously Filed*
---------------------------------
With
Registration As
Exhibit Number Exhibit
- - ------- ------ -------
<S> <C> <C> <C>
3(a) 1-3701 (with 1994 4(a) Restated Articles of Incorporation of the Company as
2nd Quarter 10-Q) filed August 4, 1994.
3(b) 1-3701 (with 1996 4(a) Bylaws of the Company, as amended, May 13, 1996.
2nd Quarter 10-Q)
4(a)-1 2-4077 B-3 Mortgage and Deed of Trust, dated as of June 1, 1939.
4(a)-2 2-9812 4(c) First Supplemental Indenture, dated as of October 1, 1952.
4(a)-3 2-60728 2(b)-2 Second Supplemental Indenture, dated as of May 1, 1953.
4(a)-4 2-13421 4(b)-3 Third Supplemental Indenture, dated as of December 1, 1955.
4(a)-5 2-13421 4(b)-4 Fourth Supplemental Indenture, dated as of March 15, 1967.
4(a)-6 2-60728 2(b)-5 Fifth Supplemental Indenture, dated as of July 1, 1957.
4(a)-7 2-60728 2(b)-6 Sixth Supplemental Indenture, dated as of January 1, 1958.
4(a)-8 2-60728 2(b)-7 Seventh Supplemental Indenture, dated as of August 1, 1958.
4(a)-9 2-60728 2(b)-8 Eighth Supplemental Indenture, dated as of January 1, 1959.
4(a)-10 2-60728 2(b)-9 Ninth Supplemental Indenture, dated as of January 1, 1960.
4(a)-11 2-60728 2(b)-10 Tenth Supplemental Indenture, dated as of April 1, 1964.
4(a)-12 2-60728 2(b)-11 Eleventh Supplemental Indenture, dated as of March 1, 1965.
4(a)-13 2-60728 2(b)-12 Twelfth Supplemental Indenture, dated as of May 1, 1966.
4(a)-14 2-60728 2(b)-13 Thirteenth Supplemental Indenture, dated as of August 1, 1966.
4(a)-15 2-60728 2(b)-14 Fourteenth Supplemental Indenture, dated as of April 1, 1970.
4(a)-16 2-60728 2(b)-15 Fifteenth Supplemental Indenture, dated as of May 1, 1973.
4(a)-17 2-60728 2(b)-16 Sixteenth Supplemental Indenture, dated as of February 1,
1975.
4(a)-18 2-60728 2(b)-17 Seventeenth Supplemental Indenture, dated as of
November 1, 1976.
4(a)-19 2-69080 2(b)-18 Eighteenth Supplemental Indenture, dated as of June 1, 1980.
4(a)-20 1-3701 (with 4(a)-20 Nineteenth Supplemental Indenture, dated as of January 1,
1980 Form 10-K) 1981.
4(a)-21 2-79571 4(a)-21 Twentieth Supplemental Indenture, dated as of August 1, 1982.
4(a)-22 1-3701 (with 4(a)-22 Twenty-First Supplemental Indenture, dated as of
Form 8-K dated September 1, 1983.
September 20, 1983)
4(a)-23 2-94816 4(a)-23 Twenty-Second Supplemental Indenture, dated as of
March 1, 1984.
</TABLE>
*Incorporated herein by reference.
**Filed herewith.
52
<PAGE> 56
THE WASHINGTON WATER POWER COMPANY
- - --------------------------------------------------------------------------------
EXHIBIT INDEX (continued)
<TABLE>
<CAPTION>
Previously Filed*
---------------------------------
With
Registration As
Exhibit Number Exhibit
- - ------- ------ -------
<S> <C> <C> <C>
4(a)-24 1-3701 (with 4(a)-24 Twenty-Third Supplemental Indenture, dated as of
1986 Form 10-K) December 1, 1986.
4(a)-25 1-3701 (with 4(a)-25 Twenty-Fourth Supplemental Indenture, dated as of
1987 Form 10-K) January 1, 1988.
4(a)-26 1-3701 (with 4(a)-26 Twenty-Fifth Supplemental Indenture, dated as of
1989 Form 10-K) October 1, 1989.
4(a)-27 33-51669 4(a)-27 Twenty-Sixth Supplemental Indenture, dated as of
April 1, 1993.
4(a)-28 1-3701 (with 4(a)-28 Twenty-Seventh Supplemental Indenture, dated as of
1993 Form 10-K) January 1, 1994.
4(b)-1 1-3701 (with 4(e)-1 Loan Agreement between City of Forsyth, Rosebud County,
1989 Form 10-K) and the Company, dated as of November 1, 1989 (Series
1989 A and 1989 B). Replaces Exhibit 4(e)-1 (agreement
between the Company and City of Forsyth, Rosebud County,
Montana, dated as of October 1, 1986) filed with Form 10-K
for 1986 and Exhibit 4(g)-1 (agreement between the Company
and City of Forsyth, Rosebud County, Montana, dated as of
April 1, 1987) filed with Form 10-K for 1987.
4(b)-2 1-3701 (with 4(e)-2 Indenture of Trust, Pollution Control Revenue Refunding
1989 Form 10-K) Bonds (Series 1989 A and 1989 B) between City of Forsyth,
Rosebud County, Montana and Chemical Bank, dated as of
November 1, 1989. Replaces Exhibit 4(e)-2 (Indenture
of Trust between City of Forsyth, Rosebud County, Montana
and Chemical Bank dated as of October 1, 1986) filed with
Form 10-K for 1986 and Exhibit 4(g)-2 (Indenture of Trust
between City of Forsyth, Rosebud County, Montana and Chemical
Bank, dated as of April 1, 1987) filed with Form 10-K for 1987.
4(c)-1 1-3701 (with 4(h)-1 Indenture between the Company and Chemical Bank dated
1988 Form 10-K) as of July 1, 1988 (Series A and B Medium-Term Notes).
4(d)-1 1-3701 (with 4(j)-1 Credit Agreements between the Company and Toronto-
1992 Form 10-K) Dominion (Texas), Inc., The Toronto-Dominion Bank
Houston Agency, The Bank of New York, CIBC, Inc. and
Citicorp USA, Inc. with Toronto-Dominion (Texas), Inc.
as agent, dated as of October 1, 1992.
4(d)-2 1-3701 (with 4(j)-2 First Amendment to Credit Agreements between the Company
1995 Form 10-K) and Toronto-Dominion (Texas), Inc., The Toronto-
Dominion Bank Houston Agency, The Bank of New York,
CIBC, Inc. and Citicorp USA, Inc. with Toronto-Dominion
(Texas), Inc. as agent, dated as of July 26, 1995.
4(d)-3 1-3701 (with 4(j)-3 Second Amendment to Credit Agreements between the
1995 Form 10-K) Company and Toronto-Dominion (Texas), Inc., The Toronto-
Dominion Bank Houston Agency, The Bank of New York,
CIBC, Inc. and Citicorp USA, Inc. with Toronto-Dominion
(Texas), Inc. as agent, dated as of July 26, 1995.
</TABLE>
- - -------------
*Incorporated herein by reference.
**Filed herewith.
53
<PAGE> 57
THE WASHINGTON WATER POWER COMPANY
- - --------------------------------------------------------------------------------
EXHIBIT INDEX (continued)
<TABLE>
<CAPTION>
Previously Filed*
---------------------------------
With
Registration As
Exhibit Number Exhibit
- - ------- ------ -------
<S> <C> <C> <C>
4(e)-1 1-3701 (with 4(k)-1 Credit Agreements between the Company and Seattle-First
1992 Form 10-K) National Bank, West One Bank Idaho, N.A., First
Interstate Bank of Washington, N.A., First Security Bank
of Idaho, N.A., U.S. Bank of Washington, N.A., and
Washington Trust Bank with Seattle-First National Bank as
agent, dated as of December 10, 1992.
4(e)-2 1-3701 (with 4(k)-2 Third Amendment to Credit Agreements between the Company
1995 Form 10-K) and Seattle-First National Bank, West One Bank Idaho, N.A.,
First Interstate Bank of Washington, N.A., First Security Bank
of Idaho, N.A., U.S. Bank of Washington, N.A., and Washington
Trust Bank with Seattle-First National Bank as agent, dated as of
November 21, 1994.
4(f)-1 1-3701 (with Form 8-K 4(n) Rights Agreement, dated as of February 16, 1990, between
dated February 16, 1990) the Company and the Bank of New York as successor
Rights Agent.
4(f)-2 1-3701 (with 1994 First 4(b) Amendment No. 1 to Rights Agreement, dated as of
Quarter Form 10-Q) May 10, 1994.
4(f)-3 1-3701 (with 1994 Third 4(b) Amendment No. 2 to Rights Agreement, dated as of
Quarter Form 10-Q) June 27, 1994.
10(a)-l 2-13788 13(e) Power Sales Contract (Rocky Reach Project) with
Public Utility District No. 1 of Chelan County,
Washington, dated as of November 14, 1957.
10(a)-2 2-60728 10(b)-1 Amendment to Power Sales Contract (Rocky Reach
Project) with Public Utility District No. 1 of Chelan
County, Washington, dated as of June 1, 1968.
10(b)-1 2-13421 13(d) Power Sales Contract (Priest Rapids Project) with
Public Utility District No. 2 of Grant County,
Washington, dated as of May 22, 1956.
10(b)-2 2-60728 5(d)-1 Second Amendment to Power Sales Contract (Priest Rapids
Project) with Public Utility District No. 2 of Grant
County, Washington, dated as of December 19, 1977.
10(c)-1 2-60728 5(e) Power Sales Contract (Wanapum Project) with
Public Utility District No. 2 of Grant County,
Washington, dated as of June 22, 1959.
10(c)-2 2-60728 5(e)-1 First Amendment to Power Sales Contract (Wanapum
Project) with Public Utility District No. 2 of Grant
County, Washington, dated as of December 19, 1977.
10(d)-1 2-60728 5(g) Power Sales Contract (Wells Project) with Public Utility
District No. 1 of Douglas County, Washington, dated as
of September 18, 1963.
10(d)-2 2-60728 5(g)-1 Amendment to Power Sales Contract (Wells Project)
with Public Utility District No. 1 of Douglas County,
Washington, dated as of February 9, 1965.
</TABLE>
*Incorporated herein by reference.
**Filed herewith.
54
<PAGE> 58
THE WASHINGTON WATER POWER COMPANY
- - --------------------------------------------------------------------------------
EXHIBIT INDEX (continued)
<TABLE>
<CAPTION>
Previously Filed*
---------------------------------
With
Registration As
Exhibit Number Exhibit
- - ------- ------ -------
<S> <C> <C> <C>
10(d)-3 2-60728 5(h) Reserved Share Power Sales Contract (Wells Project)
with Public Utility District No. 1 of Douglas County,
Washington, dated as of September 18, 1963.
10(d)-4 2-60728 5(h)-1 Amendment to Reserved Share Power Sales Contract
(Wells Project) with Public Utility District No. 1 of
Douglas County, Washington, dated as of February 9, 1965.
10(e) 2-60728 5(i) Canadian Entitlement Exchange Agreement executed by
Bonneville Power Administration Columbia Storage Power
Exchange and the Company, dated as of August 13, 1964.
10(f) 2-60728 5(j) Pacific Northwest Coordination Agreement, dated as of
September 15, 1964.
10(g)-1 2-60728 5(k) Ownership Agreement between the Company, Pacific
Power & Light Company, Puget Sound Power & Light
Company, Portland General Electric Company, Seattle City
Light, Tacoma City Light and Grays Harbor and Snohomish
County Public Utility Districts as owners of the Centralia
Steam Electric Generating Plant, dated as of May 15, 1969.
10(g)-3 1-3701 (with Form 10(h)-3 Centralia Fuel Supply Agreement between PacifiCorp
10-K for 1991) Electric Operations, as the Seller, and the Company, Puget
Sound Power & Light Company, Portland General Electric
Company, Seattle City Light, Tacoma City Light and Grays
Harbor and Snohomish County Public Utility Districts,
as the Buyers of coal for the Centralia Steam Electric Generating
Plant, dated as of January 1, 1991.
10(h)-l 2-47373 13(y) Agreement between the Company, Bonneville Power
Administration and Washington Public Power Supply System
for purchase and exchange of power from the Nuclear Project
No. 1 (Hanford), dated as of January 6, 1973.
10(h)-2 2-60728 5(m)-1 Amendment No. 1 to the Agreement between the Company
between the Company, Bonneville Power Administration and
Washington Public Power Supply System for purchase and exchange
of power from the Nuclear Project No. 1 (Hanford), dated as of
May 8, 1974.
10(h)-3 1-3701 (with 10(i)-3 Agreement between Bonneville Power Administration,
Form 10-K for the Montana Power Company, Pacific Power & Light,
1986) Portland General Electric, Puget Sound Power & Light, the Company and
the Supply System for relocation costs of Nuclear
Project No. 1 (Hanford) dated as of July 9, 1986.
10(i)-1 2-60728 5(n) Ownership Agreement of Nuclear Project No. 3, sponsored
by Washington Public Power Supply System, dated as of
September 17, 1973.
10(i)-2 1-3701 (with 1 Settlement Agreement and Covenant Not to Sue executed
Form 10-Q for by the United States Department of Energy acting
quarter ended by and through the Bonneville Power Administration
September 30, and the Company, dated as of September 17, 1985,
1985) describing the settlement of Project 3 litigation.
</TABLE>
*Incorporated herein by reference.
**Filed herewith.
55
<PAGE> 59
THE WASHINGTON WATER POWER COMPANY
- - --------------------------------------------------------------------------------
EXHIBIT INDEX (continued)
<TABLE>
<CAPTION>
Previously Filed*
---------------------------------
With
Registration As
Exhibit Number Exhibit
- - ------- ------ -------
<S> <C> <C> <C>
10(i)-3 1-3701 (with 2 Agreement to Dismiss Claims and Covenant
Form 10-Q for Not to Sue between the Washington Public
quarter ended Power Supply System and the Company, dated
September 30, as of September 17, 1985, describing the settlement
1985) of Project 3 litigation with the Supply System.
10(i)-4 1-3701 (with 3 Agreement among Puget Sound Power & Light
Form 10-Q for Company, the Company, Portland General Electric
quarter ended Company and PacifiCorp, dba Pacific Power & Light
September 30, Company, agreeing to execute contemporaneously
1985) an irrevocable offer, to and for the benefit of the
Bonneville Power Administration, dated as of September 17, 1985.
10(j)-2 2-66184 5(r) Service Agreement (Natural Gas Storage Service), dated as
of August 27, 1979, between the Company and Northwest
Pipeline Corporation.
10(j)-3 2-60728 5(s) Service Agreement (Liquefaction-Storage Natural Gas Service),
dated as of December 7, 1977, between the Company and
Northwest Pipeline Corporation.
10(j)-4 1-3701 (with 10(k)-4 Amendment dated as of January 1, 1990, to Firm
1989 Form 10-K) Transportation Agreement, dated as of June 15, 1988,
between the Company and Northwest Pipeline Corporation.
10(j)-6 1-3701 (with 10(k)-6 Firm Transportation Service Agreement, dated as of
1992 Form 10-K) April 25, 1991, between the Company and Pacific Gas
Transmission Company.
10(j)-7 1-3701 (with 10(k)-7 Service Agreement Applicable to Firm Transportation Service,
1992 Form 10-K) dated June 12, 1991, between the Company and Alberta
Natural Gas Company Ltd.
10(j)-8 1-3701 (with 10(k)-8 Natural Gas Sale and Purchase Agreement, dated
1992 Form 10-K) October 31, 1991, between the Company and
AEC Oil and Gas Company.
10(j)-9 1-3701 (with 10(k)-9 Natural Gas Purchase Contract, dated December 11, 1991,
1992 Form 10-K) between the Company and Grand Valley Gas Company
and Amerada Hess Canada Ltd.
10(j)-10 1-3701 (with 10(k)-10 Natural Gas Purchase Contract, dated December 13, 1991,
1992 Form 10-K) between the Company and Grand Valley Gas Company
and PanCanadian Petroleum Limited.
10(k)-1 1-3701 (with 13(b) Letter of Intent for the Construction and Ownership
Form 8-K for of Colstrip Units No. 3 and 4, sponsored by The
August 1976) Montana Power Company, dated as of April 16, 1974.
10(k)-2 1-3701 (with 10(s)-7 Ownership and Operation Agreement for Colstrip
1981 Form 10-K) Units No. 3 and 4, sponsored by The Montana
Power Company, dated as of May 6, 1981.
</TABLE>
*Incorporated herein by reference.
**Filed herewith.
56
<PAGE> 60
THE WASHINGTON WATER POWER COMPANY
- - --------------------------------------------------------------------------------
EXHIBIT INDEX (continued)
<TABLE>
<CAPTION>
Previously Filed*
---------------------------------
With
Registration As
Exhibit Number Exhibit
- - ------- ------ -------
<S> <C> <C> <C>
10(k)-3 1-3701 (with 10(s)-2 Coal Supply Agreement for Colstrip Units No. 3 and 4
1981 Form 10-K) between The Montana Power Company, Puget Sound
Power & Light Company, Portland General Electric
Company, Pacific Power & Light Company, Western
Energy Company and the Company, dated as of July 2, 1980.
10(k)-4 1-3701 (with 10(s)-3 Amendment No. 1 to Coal Supply Agreement for
1981 Form 10-K) Colstrip Units No. 3 and 4, dated as of July 10, 1981.
10(k)-5 1-3701 (with 10(l)-5 Amendment No. 4 to Coal Supply Agreement for Colstrip
1988 Form 10-K) Units No. 3 and 4, dated as of January 1, 1988.
10(l)-1 1-3701 (with 10(n)-2 Lease Agreement between the Company and IRE-4
1986 Form 10-K) New York, Inc., dated as of December 15, 1986,
relating to the Company's central operating facility.
10(m) 1-3701 (with 10(v) Supplemental Agreement No. 2, Skagit/Hanford Project,
1983 Form 10-K) dated as of December 27, 1983, relating to the termination
of the Skagit/Hanford Project.
10(n) 1-3701 (with 10(p)-l Agreement for Purchase and Sale of Firm Capacity and
1986 Form 10-K) Energy between Puget Sound Power & Light Company
and the Company, dated as of August 1, 1986.
10(o) 1-3701 (with 10(q)-1 Electric Service and Purchase Agreement between
1991 Form 10-K) Potlatch Corporation and the Company, dated as of
January 3, 1991.
10(p) 1-3701 (with 10(r)-1 Power Sale Agreement between the Company and the
1992 Form 10-K) Northern California Power Agency dated October 11, 1991.
10(q) 1-3701 (with 10(s)-1 Agreements for Purchase and Sale of Firm Capacity
1992 Form 10-K) between the Company and Portland General Electric
Company dated March and June 1992.
10(r)-1 1-3701 (with 10(s)-1 Employment Agreement between the Company
1994 Form 10-K) and Paul A. Redmond. (***)
10(r)-2 1-3701 (with 10(s)-2 Employment Agreement between the Company
1994 Form 10-K) and W. Lester Bryan. (***)
10(r)-3 1-3701 (with 10(s)-3 Employment Agreement between the Company
1994 Form 10-K) and Nancy Racicot. (***)
10(r)-4 1-3701 (with 10(s)-4 Employment Agreement between the Company
1994 Form 10-K) and Jon E. Eliassen. (***)
10(r)-5 1-3701 (with 10(s)-5 Employment Agreement between the Company
1994 Form 10-K) and Robert D. Fukai. (***)
10(r)-7 1-3701 (with 10(t)-7 Executive Deferral Plan of the Company. (***)
1992 Form 10-K)
</TABLE>
* Incorporated herein by reference.
** Filed herewith.
*** Management contracts or compensatory plans filed as exhibits by
reference per Item 601(10)(iii) of Regulation S-K.
57
<PAGE> 61
THE WASHINGTON WATER POWER COMPANY
- - --------------------------------------------------------------------------------
EXHIBIT INDEX (continued)
<TABLE>
<CAPTION>
Previously Filed*
---------------------------------
With
Registration As
Exhibit Number Exhibit
- - ------- ------ -------
<S> <C> <C> <C>
10(r)-8 1-3701 (with 10(t)-8 The Company's Unfunded Outside Director
1992 Form 10-K) Retirement Plan. (***)
10(r)-9 1-3701 (with 10(t)-9 The Company's Unfunded Supplemental
1992 Form 10-K) Executive Retirement Plan. (***)
10(r)-10 1-3701 (with 10(t)-10 The Company's Unfunded Supplemental
1992 Form 10-K) Executive Disability Plan. (***)
10(r)-11 1-3701 (with 10(t)-11 Income Continuation Plan of the Company. (***)
1992 Form 10-K)
12 ** Statement re computation of ratio of earnings to fixed
charges and preferred dividend requirements.
21 ** Subsidiaries of Registrant.
27 ** Financial Data Schedule.
</TABLE>
* Incorporated herein by reference.
** Filed herewith.
*** Management contracts or compensatory plans filed as exhibits
by reference per Item 601(10)(iii) of Regulation S-K.
58
<PAGE> 1
EXHIBIT 12
THE WASHINGTON WATER POWER COMPANY
Computation of Ratio of Earnings to Fixed Charges and
Preferred Dividend Requirements Consolidated
(Thousands of Dollars)
<TABLE>
<CAPTION>
Years Ended December 31
------------------------------------------------------------------------
1996 1995 1994 1993 1992 (1)
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Fixed charges, as defined:
Interest on long-term debt $ 60,256 $ 55,580 $ 49,566 $ 47,129 $ 51,727
Amortization of debt expense
and premium - net 2,998 3,441 3,511 3,004 1,814
Interest portion of rentals 4,311 3,962 1,282 924 1,105
-------- -------- -------- -------- --------
Total fixed charges $ 67,565 $ 62,983 $ 54,359 $ 51,057 $ 54,646
======== ======== ======== ======== ========
Earnings, as defined:
Net income from continuing ops. $ 83,453 $ 87,121 $ 77,197 $ 82,776 $ 72,267
Add (deduct):
Income tax expense 49,509 52,416 44,696 42,503 41,330
Total fixed charges above 67,565 62,983 54,359 51,057 54,646
-------- -------- -------- -------- --------
Total earnings $200,527 $202,520 $176,252 $176,336 $168,243
======== ======== ======== ======== ========
Ratio of earnings to fixed charges 2.97 3.22 3.24 3.45 3.08
Fixed charges and preferred
dividend requirements:
Fixed charges above $ 67,565 $ 62,983 $ 54,359 $ 51,057 $ 54,646
Preferred dividend requirements (2) 12,711 14,612 13,668 12,615 10,716
-------- -------- -------- -------- --------
Total $ 80,276 $ 77,595 $ 68,027 $ 63,672 $ 65,362
======== ======== ======== ======== ========
Ratio of earnings to fixed charges
and preferred dividend requirements 2.50 2.61 2.59 2.77 2.57
</TABLE>
(1) Calculations have been restated to reflect the results from continuing
operations (ie. excluding discontinued coal mining operations).
(2) Preferred dividend requirements have been grossed up to their pre-tax
level.
<PAGE> 1
Exhibit 21
THE WASHINGTON WATER POWER COMPANY
SUBSIDIARIES OF REGISTRANT
<TABLE>
<CAPTION>
Subsidiary State of Incorporation
---------- ----------------------
<S> <C>
Pentzer Corporation Washington
Washington Irrigation and Development Company Washington
WP Finance Company Washington
Avista Corp. Washington
Avista Advantage (formerly WWP Energy Solutions) Washington
Avista Energy (formerly WWP Resource Services) Washington
WP Laboratories Washington
WP International Washington
WWP Fiber, Inc. Washington
Altus Corporation Nevada
</TABLE>
<TABLE> <S> <C>
<ARTICLE> UT
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS OF THE WASHINGTON WATER POWER COMPANY,
INCLUDED IN THE ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1996,
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 1,397,876
<OTHER-PROPERTY-AND-INVEST> 247,729
<TOTAL-CURRENT-ASSETS> 228,389
<TOTAL-DEFERRED-CHARGES> 303,304
<OTHER-ASSETS> 0
<TOTAL-ASSETS> 2,177,298
<COMMON> 583,844
<CAPITAL-SURPLUS-PAID-IN> (4,409)
<RETAINED-EARNINGS> 131,301
<TOTAL-COMMON-STOCKHOLDERS-EQ> 710,736
65,000
50,000
<LONG-TERM-DEBT-NET> 617,972<F1>
<SHORT-TERM-NOTES> 85,000
<LONG-TERM-NOTES-PAYABLE> 25,239
<COMMERCIAL-PAPER-OBLIGATIONS> 0
<LONG-TERM-DEBT-CURRENT-PORT> 42,670
0
<CAPITAL-LEASE-OBLIGATIONS> 5,315
<LEASES-CURRENT> 1,698
<OTHER-ITEMS-CAPITAL-AND-LIAB> 573,668<F2>
<TOT-CAPITALIZATION-AND-LIAB> 2,177,298
<GROSS-OPERATING-REVENUE> 944,957
<INCOME-TAX-EXPENSE> 49,509<F3>
<OTHER-OPERATING-EXPENSES> 758,036
<TOTAL-OPERATING-EXPENSES> 758,036
<OPERATING-INCOME-LOSS> 186,921
<OTHER-INCOME-NET> 9,296
<INCOME-BEFORE-INTEREST-EXPEN> 196,217<F4>
<TOTAL-INTEREST-EXPENSE> 63,255
<NET-INCOME> 83,453
7,978
<EARNINGS-AVAILABLE-FOR-COMM> 75,475
<COMMON-STOCK-DIVIDENDS> 69,390
<TOTAL-INTEREST-ON-BONDS> 33,053
<CASH-FLOW-OPERATIONS> 177,563
<EPS-PRIMARY> 1.35
<EPS-DILUTED> 1.35
<FN>
<F1>(1) LONG-TERM DEBT-NET DOES NOT MATCH THE AMOUNT REPORTED ON THE COMPANY'S
CONSOLIDATED STATEMENT OF CAPITALIZATION AS LONG-TERM DEBT DUE TO THE OTHER
CATEGORIES REQUIRED BY THIS SCHEDULE.
<F2>(2) OTHER ITEMS CAPITAL AND LIABILITIES INCLUDES THE CURRENT LIABILITIES,
DEFERRED CREDITS AND MINORITY INTEREST, LESS CERTAIN AMOUNTS INCLUDED UNDER
THE LONG-TERM DEBT-CURRENT PORTION AND LEASES-CURRENT, FROM THE COMPANY'S
CONSOLIDATED BALANCE SHEET.
<F3>(3) THE COMPANY DOES NOT INCLUDE INCOME TAX EXPENSE AS AN OPERATING EXPENSE
ITEM. IT IS INCLUDED ON THE COMPANY'S STATEMENTS AS A BELOW-THE-LINE ITEM.
<F4>(4) INCOME BEFORE INTEREST EXPENSE IS NOT A SPECIFIC LINE ITEM ON THE COMPANY'S
INCOME STATEMENTS. THE COMPANY COMBINES TOTAL INTEREST EXPENSE AND OTHER INCOME
TO CALCULATE INCOME BEFORE INCOME TAXES.
</FN>
</TABLE>
