<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1998
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)
Washington 91-0462470
- ------------------------------------------------- ----------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1411 East Mission Avenue, Spokane, Washington 99202-2600
- ------------------------------------------------- ----------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 509-489-0500
Web site: http://www.wwpco.com
None
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since
last report)
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 [ ]
At July 31, 1998, 55,960,360 shares of Registrant's Common Stock, no par value
(the only class of common stock), were outstanding.
<PAGE> 2
THE WASHINGTON WATER POWER COMPANY
Index
<TABLE>
<CAPTION>
Page No.
--------
<S> <C>
Part I. Financial Information:
Item 1. Financial Statements
Consolidated Statements of Income - Three Months Ended
June 30, 1998 and 1997............................................ 3
Consolidated Statements of Income - Six Months Ended
June 30, 1998 and 1997............................................ 4
Consolidated Balance Sheets - June 30, 1998
and December 31, 1997............................................. 5
Consolidated Statements of Capitalization - June 30, 1998
and December 31, 1997............................................. 6
Consolidated Statements of Cash Flows - Six Months Ended
June 30, 1998 and 1997............................................ 7
Schedule of Information by Business Segments - Three Months Ended
June 30, 1998 and 1997............................................ 8
Schedule of Information by Business Segments - Six Months Ended
June 30, 1998 and 1997............................................ 10
Notes to Consolidated Financial Statements............................ 12
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations......................... 16
Part II. Other Information:
Item 4. Submission of Matters to a Vote of Security Holders............... 22
Item 5. Other Information................................................. 22
Item 6. Exhibits and Reports on Form 8-K.................................. 23
Signature............................................................................... 24
</TABLE>
<PAGE> 3
CONSOLIDATED STATEMENTS OF INCOME
The Washington Water Power Company
- --------------------------------------------------------------------------------
For the Three Months Ended June 30
Thousands of Dollars
<TABLE>
<CAPTION>
1998 1997
--------- ---------
<S> <C> <C>
OPERATING REVENUES .................................. $ 632,995 $ 236,274
--------- ---------
OPERATING EXPENSES:
Resource costs ................................... 476,001 106,025
Operations and maintenance ....................... 50,654 41,263
Administrative and general ....................... 35,795 25,832
Depreciation and amortization .................... 17,452 17,458
Taxes other than income taxes .................... 11,151 11,027
--------- ---------
Total operating expenses ...................... 591,053 201,605
--------- ---------
INCOME FROM OPERATIONS .............................. 41,942 34,669
--------- ---------
OTHER INCOME (EXPENSE):
Interest expense ................................. (16,855) (16,200)
Interest on income tax recovery .................. -- 47,337
Net gain on subsidiary transactions .............. -- 3,339
Other income (deductions)-net .................... (89) (6,340)
--------- ---------
Total other income (expense)-net .............. (16,944) 28,136
--------- ---------
INCOME BEFORE INCOME TAXES .......................... 24,998 62,805
INCOME TAXES ........................................ 9,355 14,330
--------- ---------
NET INCOME .......................................... 15,643 48,475
DEDUCT-Preferred stock dividend requirements ........ 788 1,812
--------- ---------
INCOME AVAILABLE FOR COMMON STOCK ................... $ 14,855 $ 46,663
========= =========
Average common shares outstanding (thousands) ....... 55,960 55,960
EARNINGS PER SHARE OF COMMON STOCK, BASIC AND DILUTED $ 0.27 $ 0.83
Dividends paid per common share ..................... $ 0.31 $ 0.31
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
3
<PAGE> 4
CONSOLIDATED STATEMENTS OF INCOME
The Washington Water Power Company
- --------------------------------------------------------------------------------
For the Six Months Ended June 30
Thousands of Dollars
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
OPERATING REVENUES .................................. $ 1,204,664 $ 520,285
----------- -----------
OPERATING EXPENSES:
Resource costs ................................... 885,256 230,601
Operations and maintenance ....................... 97,864 84,026
Administrative and general ....................... 62,418 46,014
Depreciation and amortization .................... 34,602 34,920
Taxes other than income taxes .................... 25,882 25,997
----------- -----------
Total operating expenses ...................... 1,106,022 421,558
----------- -----------
INCOME FROM OPERATIONS .............................. 98,642 98,727
----------- -----------
OTHER INCOME (EXPENSE):
Interest expense ................................. (34,060) (32,516)
Interest on income tax recovery .................. -- 47,337
Net gain on subsidiary transactions .............. 7,611 3,454
Other income (deductions)-net .................... 4,947 360
----------- -----------
Total other income (expense)-net .............. (21,502) 18,635
----------- -----------
INCOME BEFORE INCOME TAXES .......................... 77,140 117,362
INCOME TAXES ........................................ 29,265 39,039
----------- -----------
NET INCOME .......................................... 47,875 78,323
DEDUCT-Preferred stock dividend requirements ........ 1,612 3,590
----------- -----------
INCOME AVAILABLE FOR COMMON STOCK ................... $ 46,263 $ 74,733
=========== ===========
Average common shares outstanding (thousands) ....... 55,960 55,960
EARNINGS PER SHARE OF COMMON STOCK, BASIC AND DILUTED $ 0.83 $ 1.34
Dividends paid per common share ..................... $ 0.62 $ 0.62
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
4
<PAGE> 5
CONSOLIDATED BALANCE SHEETS
The Washington Water Power Company
- --------------------------------------------------------------------------------
Thousands of Dollars
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
---------- ----------
<S> <C> <C>
ASSETS:
CURRENT ASSETS:
Cash and cash equivalents ................................. $ 30,386 $ 30,593
Temporary cash investments ................................ 13,832 22,641
Accounts and notes receivable-net ......................... 227,833 176,882
Energy commodity assets ................................... 301,957 76,449
Materials and supplies, fuel stock and natural gas stored . 48,573 42,148
Prepayments and other ..................................... 36,733 28,130
---------- ----------
Total current assets .................................... 659,314 376,843
---------- ----------
UTILITY PROPERTY:
Utility plant in service-net .............................. 2,069,490 2,031,026
Construction work in progress ............................. 35,972 37,446
---------- ----------
Total ................................................... 2,105,462 2,068,472
Less: Accumulated depreciation and amortization .......... 659,901 635,349
---------- ----------
Net utility plant ....................................... 1,445,561 1,433,123
---------- ----------
OTHER PROPERTY AND INVESTMENTS:
Investment in exchange power-net .......................... 65,876 69,013
Non-utility properties and investments-net ................ 215,234 195,046
Energy commodity assets ................................... 370,189 13,103
Other-net ................................................. 23,665 20,065
---------- ----------
Total other property and investments .................... 674,964 297,227
---------- ----------
DEFERRED CHARGES:
Regulatory assets for deferred income tax ................. 173,722 176,682
Conservation programs ..................................... 50,878 53,338
Unamortized debt expense .................................. 22,880 23,978
Prepaid power purchases ................................... 12,794 18,134
Other-net ................................................. 29,362 32,460
---------- ----------
Total deferred charges .................................. 289,636 304,592
---------- ----------
TOTAL ................................................ $3,069,475 $2,411,785
========== ==========
LIABILITIES AND CAPITALIZATION:
CURRENT LIABILITIES:
Accounts payable .......................................... $ 231,088 $ 154,312
Energy commodity liabilities .............................. 291,683 70,135
Taxes and interest accrued ................................ 26,887 35,705
Other ..................................................... 66,294 79,586
---------- ----------
Total current liabilities ............................... 615,952 339,738
---------- ----------
NON-CURRENT LIABILITIES AND DEFERRED CREDITS:
Energy commodity liabilities .............................. 356,520 10,556
Non-current liabilities ................................... 30,984 25,515
Deferred income taxes ..................................... 358,750 352,749
Other deferred credits .................................... 14,430 17,230
---------- ----------
Total non-current liabilities and deferred credits ...... 760,684 406,050
---------- ----------
CAPITALIZATION (See Consolidated Statements of Capitalization) 1,692,839 1,665,997
---------- ----------
COMMITMENTS AND CONTINGENCIES (Note 5)
TOTAL ................................................ $3,069,475 $2,411,785
========== ==========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
5
<PAGE> 6
CONSOLIDATED STATEMENTS OF CAPITALIZATION
The Washington Water Power Company
- --------------------------------------------------------------------------------
Thousands of Dollars
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
----------- -----------
<S> <C> <C>
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 ......................... 211,500 211,500
Series B - 6.20% to 8.25% due 1999 through 2010 ......................... 150,000 150,000
----------- -----------
Total first mortgage bonds .............................................. 445,200 445,200
----------- -----------
Pollution Control Bonds:
6% Series due 2023 ........................................................ 4,100 4,100
Unsecured Medium-Term Notes:
Series A - 7.94% to 9.58% due 1998 through 2007 ........................... 52,500 52,500
Series B - 6.75% to 8.23% due 1999 through 2023 ........................... 115,000 115,000
Series C - 6.37% to 6.88% due 2028 ........................................ 45,000 --
----------- -----------
Total unsecured medium-term notes ....................................... 212,500 167,500
----------- -----------
Notes payable (due within one year) to be refinanced ......................... 80,000 108,500
Other ........................................................................ 46,681 36,885
----------- -----------
Total long-term debt ...................................................... 788,481 762,185
----------- -----------
COMPANY-OBLIGATED MANDATORILY REDEEMABLE
PREFERRED TRUST SECURITIES:
7 7/8%, Series A, due 2037 ................................................ 60,000 60,000
Floating Rate, Series B, due 2037 ......................................... 50,000 50,000
----------- -----------
Total company-obligated mandatorily redeemable preferred trust securities 110,000 110,000
----------- -----------
PREFERRED STOCK-CUMULATIVE:
10,000,000 shares authorized:
Subject to mandatory redemption:
$8.625 Series I; 100,000 shares outstanding ($100 stated value) ........... -- 10,000
$6.95 Series K; 350,000 shares outstanding ($100 stated value) ............ 35,000 35,000
----------- -----------
Total subject to mandatory redemption ................................... 35,000 45,000
----------- -----------
COMMON EQUITY:
Common stock, no par value; 200,000,000 shares authorized;
55,960,360 shares outstanding ............................................. 594,852 594,852
Note receivable from employee stock ownership plan ........................... (9,770) (9,750)
Capital stock expense and other paid in capital .............................. (10,173) (10,143)
Unrealized investment gain-net ............................................... 946 2,077
Retained earnings ............................................................ 183,503 171,776
----------- -----------
Total common equity ....................................................... 759,358 748,812
----------- -----------
TOTAL CAPITALIZATION ............................................................ $ 1,692,839 $ 1,665,997
=========== ===========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
6
<PAGE> 7
CONSOLIDATED STATEMENTS OF CASH FLOWS
Increase (Decrease) in Cash and Cash Equivalents
The Washington Water Power Company
- --------------------------------------------------------------------------------
For the Six Months Ended June 30
Thousands of Dollars
<TABLE>
<CAPTION>
1998 1997
--------- ---------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income ................................................. $ 47,875 $ 78,323
NON-CASH ITEMS INCLUDED IN NET INCOME:
Depreciation and amortization ........................... 34,602 34,920
Provision for deferred income taxes ..................... 9,923 34,983
Allowance for equity funds used during construction ..... (692) (599)
Power and natural gas cost deferrals and amortizations .. 71 (12,850)
Gains/losses on sales and other-net ..................... (17,194) (15,685)
(Increase) decrease in working capital components:
Receivables and prepaid expense ....................... (63,139) 11,793
Materials & supplies, fuel stock and natural gas stored (6,425) (3,556)
Payables and other accrued liabilities ................ 60,802 (1,583)
Other ................................................. 3,892 12,710
--------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES ..................... 69,715 138,456
--------- ---------
INVESTING ACTIVITIES:
Construction expenditures (excluding AFUDC-equity funds) ... (39,933) (37,625)
Other capital requirements ................................. (5,760) (4,079)
Decrease in other noncurrent balance sheet items-net ....... 1,898 8,255
Proceeds from sale of subsidiary investments ............... 16,385 71
Assets acquired and investments in subsidiaries ............ (33,517) (1,760)
--------- ---------
NET CASH USED IN INVESTING ACTIVITIES ......................... (60,927) (35,138)
--------- ---------
FINANCING ACTIVITIES:
Decrease in short-term borrowings .......................... (28,500) (85,000)
Proceeds from issuance of preferred trust securities ....... -- 110,000
Redemption of preferred stock .............................. (10,000) (20,000)
Proceeds from issuance of long-term debt ................... 51,000 --
Redemption and maturity of long-term debt .................. (6,000) (20,000)
Cash dividends paid ........................................ (36,343) (38,360)
Other-net .................................................. 20,848 (28,248)
--------- ---------
NET CASH USED IN FINANCING ACTIVITIES ......................... (8,995) (81,608)
--------- ---------
NET INCREASE (DECREASE) IN CASH & CASH EQUIVALENTS ............ (207) 21,710
CASH & CASH EQUIVALENTS AT BEGINNING OF PERIOD ................ 30,593 8,211
--------- ---------
CASH & CASH EQUIVALENTS AT END OF PERIOD ...................... $ 30,386 $ 29,921
========= =========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the period:
Interest ................................................ $ 31,764 $ 36,913
Income taxes ............................................ 29,296 33,955
Noncash financing and investing activities:
Property purchased under capitalized leases ............. 396 1,290
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
7
<PAGE> 8
SCHEDULE OF INFORMATION BY BUSINESS SEGMENTS
The Washington Water Power Company
- --------------------------------------------------------------------------------
For the Three Months Ended June 30
Thousands of Dollars
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
OPERATING REVENUES:
Energy Delivery ............................... $ 81,883 $ 77,874
Generation and Resources ...................... 120,127 120,509
National Energy Trading and Marketing ......... 380,864 2,018
Non-energy .................................... 53,429 35,899
Intersegment eliminations ..................... (3,308) (26)
----------- -----------
Total operating revenues ................... $ 632,995 $ 236,274
=========== ===========
RESOURCE COSTS:
Energy Delivery:
Natural gas purchased for resale ........... $ 18,570 $ 17,594
Other ...................................... (734) (43)
Generation and Resources:
Power purchased ............................ 73,613 64,857
Fuel for generation ........................ 7,819 5,981
Other ...................................... 10,188 15,996
National Energy Trading and Marketing:
Cost of sales .............................. 366,545 1,640
----------- -----------
Total resource costs (excluding Non-energy) $ 476,001 $ 106,025
=========== ===========
GROSS MARGINS:
Energy Delivery ............................... $ 64,047 $ 60,323
Generation and Resources ...................... 28,507 33,675
National Energy Trading and Marketing ......... 14,319 378
----------- -----------
Total gross margins (excluding Non-energy) . $ 106,873 $ 94,376
=========== ===========
ADMINISTRATIVE AND GENERAL EXPENSES:
Energy Delivery ............................... $ 14,618 $ 14,217
Generation and Resources ...................... 4,855 5,163
National Energy Trading and Marketing ......... 7,717 1,955
Non-energy .................................... 8,605 4,497
----------- -----------
Total administrative and general expenses .. $ 35,795 $ 25,832
=========== ===========
DEPRECIATION AND AMORTIZATION EXPENSES:
Energy Delivery ............................... $ 8,639 $ 8,102
Generation and Resources ...................... 6,260 6,440
National Energy Trading and Marketing ......... 180 --
Non-energy .................................... 2,373 2,916
----------- -----------
Total depreciation and amortization expenses $ 17,452 $ 17,458
=========== ===========
INCOME/(LOSS) FROM OPERATIONS (PRE-TAX):
Energy Delivery ............................... $ 18,000 $ 14,935
Generation and Resources ...................... 14,950 19,739
National Energy Trading and Marketing ......... 6,419 (2,065)
Non-energy .................................... 2,573 2,060
----------- -----------
Total income from operations ............... $ 41,942 $ 34,669
=========== ===========
INCOME AVAILABLE FOR COMMON STOCK:
Energy Delivery and Generation and Resources .. $ 9,491 $ 44,845
National Energy Trading and Marketing ......... 4,017 (1,313)
Non-energy .................................... 1,347 3,131
----------- -----------
Total income available for common stock .... $ 14,855 $ 46,663
=========== ===========
</TABLE>
8
<PAGE> 9
<TABLE>
<S> <C> <C>
ASSETS: (1997 amounts at December 31)
Energy Delivery ............................... $ 1,046,798 $ 1,051,585
Generation and Resources ...................... 606,583 620,142
Other utility ................................. 256,708 255,012
National Energy Trading and Marketing ......... 885,544 214,630
Non-energy .................................... 273,842 270,416
----------- -----------
Total assets ............................... $ 3,069,475 $ 2,411,785
=========== ===========
CAPITAL EXPENDITURES (excluding AFUDC/AFUCE):
Energy Delivery ............................... $ 16,268 $ 18,940
Generation and Resources ...................... 3,990 (1,837)
National Energy Trading and Marketing ......... 742 360
Non-energy .................................... 2,733 3,229
----------- -----------
Total capital expenditures ................. $ 23,733 $ 20,692
=========== ===========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
9
<PAGE> 10
SCHEDULE OF INFORMATION BY BUSINESS SEGMENTS
The Washington Water Power Company
- --------------------------------------------------------------------------------
For the Six Months Ended June 30
Thousands of Dollars
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
OPERATING REVENUES:
Energy Delivery ............................... $ 209,176 $ 196,016
Generation and Resources ...................... 247,038 247,207
National Energy Trading and Marketing ......... 651,921 2,129
Non-energy .................................... 101,113 75,000
Intersegment eliminations ..................... (4,584) (67)
----------- -----------
Total operating revenues ................... $ 1,204,664 $ 520,285
=========== ===========
RESOURCE COSTS:
Energy Delivery:
Natural gas purchased for resale ........... $ 56,489 $ 49,933
Other ...................................... (1,960) (475)
Generation and Resources:
Power purchased ............................ 159,508 136,764
Fuel for generation ........................ 17,289 15,643
Other ...................................... 22,503 27,096
National Energy Trading and Marketing:
Cost of sales .............................. 631,427 1,640
----------- -----------
Total resource costs (excluding Non-energy) $ 885,256 $ 230,601
=========== ===========
GROSS MARGINS:
Energy Delivery ............................... $ 154,647 $ 146,558
Generation and Resources ...................... 47,738 67,704
National Energy Trading and Marketing ......... 20,494 489
----------- -----------
Total gross margins (excluding Non-energy) . $ 222,879 $ 214,751
=========== ===========
ADMINISTRATIVE AND GENERAL EXPENSES:
Energy Delivery ............................... $ 25,790 $ 25,738
Generation and Resources ...................... 8,379 8,967
National Energy Trading and Marketing ......... 11,720 2,599
Non-energy .................................... 16,529 8,710
----------- -----------
Total administrative and general expenses .. $ 62,418 $ 46,014
=========== ===========
DEPRECIATION AND AMORTIZATION EXPENSES:
Energy Delivery ............................... $ 17,315 $ 16,223
Generation and Resources ...................... 12,442 13,055
National Energy Trading and Marketing ......... 346 59
Non-energy .................................... 4,499 5,583
----------- -----------
Total depreciation and amortization expenses $ 34,602 $ 34,920
=========== ===========
INCOME/(LOSS) FROM OPERATIONS (PRE-TAX):
Energy Delivery ............................... $ 63,372 $ 55,866
Generation and Resources ...................... 21,713 40,499
National Energy Trading and Marketing ......... 8,416 (3,055)
Non-energy .................................... 5,141 5,417
----------- -----------
Total income from operations ............... $ 98,642 $ 98,727
=========== ===========
INCOME AVAILABLE FOR COMMON STOCK:
Energy Delivery and Generation and Resources .. $ 31,759 $ 72,215
National Energy Trading and Marketing ......... 6,080 (1,954)
Non-energy .................................... 8,424 4,472
----------- -----------
Total income available for common stock .... $ 46,263 $ 74,733
=========== ===========
</TABLE>
10
<PAGE> 11
<TABLE>
<S> <C> <C>
ASSETS: (1997 amounts at December 31)
Energy Delivery ............................... $ 1,046,798 $ 1,051,585
Generation and Resources ...................... 606,583 620,142
Other utility ................................. 256,708 255,012
National Energy Trading and Marketing ......... 885,544 214,630
Non-energy .................................... 273,842 270,416
----------- -----------
Total assets ............................... $ 3,069,475 $ 2,411,785
=========== ===========
CAPITAL EXPENDITURES (excluding AFUDC/AFUCE):
Energy Delivery ............................... $ 32,300 $ 32,490
Generation and Resources ...................... 6,663 483
National Energy Trading and Marketing ......... 902 468
Non-energy .................................... 5,208 3,996
----------- -----------
Total capital expenditures ................. $ 45,073 $ 37,437
=========== ===========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
11
<PAGE> 12
THE WASHINGTON WATER POWER COMPANY
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The accompanying financial statements of The Washington Water Power Company
(Company) for the interim periods ended June 30, 1998 and 1997 are unaudited
but, in the opinion of management, reflect all adjustments, consisting only of
normal recurring accruals, necessary for a fair statement of the results of
operations for those interim periods. The results of operations for the interim
periods are not necessarily indicative of the results to be expected for the
full year. These financial statements do not contain the detail or footnote
disclosure concerning accounting policies and other matters which would be
included in full fiscal year financial statements; therefore, they should be
read in conjunction with the Company's audited financial statements included in
the Company's Annual Report on Form 10-K for the year ended December 31, 1997
(1997 Form 10-K).
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NEW ACCOUNTING STANDARDS
As of January 1, 1998, the Company adopted Statement of Financial Accounting
Standards No. 130 (FAS No. 130), "Reporting Comprehensive Income." It requires
companies to classify items of other comprehensive income by their nature in a
financial statement and display the accumulated balance of other comprehensive
income separately from retained earnings and additional paid-in capital in the
equity section of a statement of financial position. For the three months ended
June 30, 1998 and 1997, accumulated comprehensive income totaled $(1.3) million
and $3.6 million, respectively. For the six months ended June 30, 1998 and
1997, accumulated comprehensive income totaled $(0.9) million and $4.3 million,
respectively.
The Financial Accounting Standards Board (FASB) issued FAS No. 133, entitled
"Accounting for Derivative Instruments and Hedging Activities" which will be
effective for fiscal years beginning after June 15, 1999. The statement requires
that all derivative financial instruments be recognized as either assets or
liabilities on the company's balance sheets. The Company does not expect any
significant impact on the Company's financial position or results of operations
as a result of adopting this standard, but additional footnote disclosure will
likely be required.
ALLOCATION OF REVENUES AND EXPENSES FOR REPORTING BUSINESS SEGMENTS
A portion of the utility's revenues and expenses have been allocated between two
business segments in order to report results of operations by the individual
lines of business - (1) Energy Delivery and (2) Generation and Resources. The
Energy Delivery business reports the results of the Company's transmission and
distribution services for retail electric operations and all natural gas
operations. Costs associated with electric energy commodities, such as purchased
power expense, as well as the revenues attributable to the recovery of such
costs from retail customers, have been eliminated from the Energy Delivery line
of business and are reflected in the results of the Generation and Resources
line of business. The results of all natural gas operations are included in the
Energy Delivery line of business because natural gas trackers allow natural gas
costs to pass through within that line of business without the commodity prices
having a material income effect. The Generation and Resources line of business
includes the generation and production of electric energy, and short- and
long-term electric and natural gas commodity trading and wholesale marketing
primarily to other utilities and power brokers in the western United States.
NOTE 2. ENERGY COMMODITY TRADING
Notional Amounts and Terms The notional amounts and terms of Avista Energy's
outstanding financial instruments at June 30, 1998 are set forth below:
<TABLE>
<CAPTION>
Fixed Price Fixed Price Maximum
Payor Receiver Terms in Years
----------- ------------ --------------
<S> <C> <C> <C>
Energy commodities (volumes)
Natural gas (mmBTU) 744,958,504 684,834,123 13
Electric (MWh) 53,738,270 41,642,984 9
</TABLE>
At June 30, 1998, Avista Energy also had sales and purchase commitments
associated with contracts based on market prices totaling 336,352,251 mmBTUs,
with terms extending up to 5 years. The fixed index electric transactions
totaled 1,955,880 MWhs, with terms extending up to 3 years.
Notional amounts reflect the volume of transactions but do not necessarily
represent the amounts exchanged by the parties to the commodity derivative
instruments. Accordingly, notional amounts do not accurately measure Avista
Energy's exposure to market or credit risks. The maximum terms in years detailed
above are not indicative of likely
12
<PAGE> 13
THE WASHINGTON WATER POWER COMPANY
- --------------------------------------------------------------------------------
future cash flows as these positions may be offset in the markets at any time in
response to Avista Energy's risk management needs.
Fair Value The fair value of Avista Energy's financial instruments as of June
30, 1998, and the average fair value of those instruments held during the six
months ended June 30, 1998 are set forth below (dollars in thousands):
<TABLE>
<CAPTION>
Fair Value Average Fair Value for the
as of June 30, 1998 six months ended June 30, 1998
------------------------------------------------------ --------------------------------------------------------
Current Long-term Current Long-term Current Long-term Current Long-term
Assets Assets Liabilities Liabilities Assets Assets Liabilities Liabilities
------ ------ ----------- ----------- ------- ------ ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Natural gas 88,235 24,844 82,960 26,140 72,237 16,026 70,150 15,400
Electric 213,722 345,345 208,723 330,380 114,933 127,832 110,191 120,160
------- ------- ------- ------- ------- ------- ------- -------
Total 301,957 370,189 291,683 356,520 187,170 143,858 180,341 135,560
</TABLE>
The weighted average term of Avista Energy's natural gas and related commodity
derivative instruments as of June 30, 1998 was approximately three months. The
weighted average term of Avista Energy's electric commodity derivatives at June
30, 1998 was approximately ten months. The change in the fair value position of
Avista Energy's energy commodity portfolio, net of the reserves for credit and
market risk from December 31, 1997 to June 30, 1998 was $9.0 million and is
included on the Consolidated Statements of Income in operating revenues.
NOTE 3. NATIONAL ENERGY TRADING AND MARKETING EQUITY INVESTMENT
Effective August 1, 1997, Howard Energy Marketing, which serves customers in the
upper Midwest and Northeast United States, and Avista Energy formed
Howard/Avista Energy, LLC (Howard/Avista), a limited liability company. Avista
Energy's initial equity investment in Howard/Avista was $25 million, resulting
in a 50% ownership interest. The investment in Howard/Avista is accounted for
using the equity method of accounting. Under this method, equity in the net
income or losses of Howard/Avista is reflected in Other Income (Deductions)-net
on the Consolidated Statements of Income for the three and six months ended June
30, 1998. The net investment in the net assets of Howard/Avista is included in
Non-utility Properties and Investments-net on the Consolidated Balance Sheets at
June 30, 1998 and December 31, 1997.
The following selected financial information reflects Howard/Avista's financial
position on a total (100%) basis and operating results as of and for the three
and six months ended June 30, 1998:
RESULTS OF OPERATIONS (thousands of dollars)
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, 1998 June 30, 1998
------------- -------------
<S> <C> <C>
Revenues $ 473,653 $ 1,153,231
Operating Expenses (475,311) (1,153,866)
Other Income-net 1,565 2,214
----------- -----------
Net Income (pre-tax) $ (93) $ 1,579
=========== ===========
Avista Energy's equity in earnings
of Howard/Avista Energy LLC (pre-tax) $ (47) $ 790
</TABLE>
FINANCIAL POSITION (thousands of dollars)
<TABLE>
<CAPTION>
June 30, 1998 December 31, 1997
------------- -----------------
<S> <C> <C>
Current Assets $285,890 $400,150
Other Assets 3,844 1,960
-------- --------
Total Assets $289,734 $402,110
======== ========
Current Liabilities $234,612 $348,339
Other Liabilities -- 228
-------- --------
Total Liabilities 234,612 348,567
Equity 55,122 53,543
-------- --------
Total Liabilities and Equity $289,734 $402,110
======== ========
Avista Energy's equity investment
in Howard/Avista Energy LLC (pre-tax) $ 27,561 $ 26,772
</TABLE>
13
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THE WASHINGTON WATER POWER COMPANY
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NOTE 4. FINANCINGS
The Company issued $45 million of Unsecured Medium-Term Notes, Series C during
the second quarter of 1998, with rates between 6.37% and 6.88% and maturity
dates in 2028.
The Company restricted 2.5 million shares of its common stock for a long-term
incentive plan for officers of the Company. No shares had been issued and no
proceeds had been collected under this plan as of June 30, 1998.
Reference is made to the information relating to financings and borrowings as
discussed under the caption "Liquidity and Capital Resources" in Item 2.
"Management's Discussion and Analysis of Financial Condition and Results of
Operations".
NOTE 5. COMMITMENTS AND CONTINGENCIES
The Company believes, based on the information presently known, the ultimate
liability for the matters discussed in this note, individually or in the
aggregate, taking into account established accruals for estimated liabilities,
will not be material to the consolidated financial position of the Company, but
could be material to results of operations or cash flows for a particular
quarter or annual period. No assurance can be given, however, as to the ultimate
outcome with respect to any particular lawsuit. To-date, there have been no
material developments since the 1997 Form 10-K was issued, with the exception of
the Itron litigation.
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, which is continuing.
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. The Clean-up Action Plan determined by the Department of
Ecology (DOE) is underway, and remediation facilities have been constructed and
installed and are being operated.
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 alleged that the oil released from the Company's
Central Steamplant trespassed on property owned by the plaintiff. In addition,
the plaintiff claimed 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. In December 1997, the settlement was
restructured, certain amounts were paid, the litigation was dismissed with
prejudice, a release was obtained, and other conditions remain to be fulfilled,
none of which would affect the dismissal of this action.
The Company pursued recovery from insurers and has reached settlement with one
of the two insurance carriers. On December 13, 1996, the Company filed a
Complaint for declaratory relief and money damages against Underwriters at
Lloyds of London (Lloyds), the remaining carrier, in Spokane County Superior
Court. The purpose of this action is to seek a declaration of the insurance
policies issued to the Company by Lloyds with respect to any liabilities of the
Company for environmental damage associated with the oil spill at the Central
Steam Plant and other environmental remediation efforts. The policies at issue
were in effect during the period between 1926 and 1979; thereafter, the Company
maintained its policies with a new underwriter, Aegis. The Company's Complaint
seeks money damages in excess of $16 million.
14
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THE WASHINGTON WATER POWER COMPANY
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ITRON LITIGATION
On August 19, 1997, a class action lawsuit was filed in the Superior Court of
Spokane County against Itron, Inc. (Itron), and certain named individuals, as
well as the Company, alleging violation of the Washington State Securities Act,
the Washington Consumer Protection Act, and negligent misrepresentation. It is
alleged that the Company was a controlling person of Itron by virtue of its
ownership, at one time, of approximately 12% of the outstanding shares of Itron,
and knew or should have known of the alleged false or misleading statements
relating to the development of Itron's fixed network meter reading systems and
the market therefor. On July 31, 1998, the court issued a memorandum decision
dismissing the action, finding that the plaintiffs had failed to state a cause
of action.
SPOKANE GAS PLANT
The Company is participating with the Washington State Department of
Transportation in an environmental study relating to the former Spokane Natural
Gas Plant site (which was operated as a coal gasification plant for
approximately 60 years until 1948) acquired by the Company through a merger in
1958. The Company no longer owns the property. Initial core samples taken from
the site indicate environmental contamination at the site. At this time, the
Company and other participants in the environmental study are in the process of
determining the specific nature and extent of the contamination, and any
necessary remedial action, as well as the cost thereof.
NOTE 6. ACQUISITIONS AND DISPOSITIONS
During the first quarter of 1998, Pentzer Corporation (Pentzer) sold Systran
Financial Services, resulting in an after-tax gain of $5.5 million.
In April, 1998, Pentzer completed the purchase of two new companies. Universal
Showcase, Ltd., in Toronto, Canada and Triangle Systems, Inc., in New York, both
produce store fixtures.
15
<PAGE> 16
THE WASHINGTON WATER POWER COMPANY
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The Washington Water Power Company (Company) operates as a regional utility
providing electric and natural gas sales and services and as a national entity
providing both energy and non-energy products and services. The utility portion
of the Company consists of two lines of business which are subject to state and
federal price regulation -- (1) Energy Delivery and (2) Generation and
Resources. The national businesses are conducted under Avista Corp., which is
the parent company to the Company's subsidiaries.
The Energy Delivery line of business includes transmission and distribution
services for retail electric operations, all natural gas operations, and other
energy products and services. The Generation and Resources line of business
includes the generation and production of electric energy, and short- and
long-term electric and natural gas sales, trading and wholesale marketing
primarily to other utilities and power brokers in the Western Systems
Coordinating Council.
Avista Corp. owns the Company's National Energy Trading and Marketing and
Non-energy businesses. The National Energy Trading and Marketing businesses are
conducted by Avista Energy and Avista Advantage. Avista Energy focuses on
commodity trading, energy marketing and other related businesses on a national
basis. Avista Advantage provides a variety of energy-related products and
services, such as consolidated billing and resource accounting, to commercial
and industrial customers on a national basis. The Non-energy business is
conducted primarily by Pentzer Corporation (Pentzer), which is the parent
company to the majority of the Company's Non-energy businesses.
Changes underway in the utility and energy industries are creating new
opportunities to expand the Company's businesses and serve new markets. In
pursuing such opportunities, the Company is shifting its strategic direction to
growth, which could subject the Company to a higher degree of risk than that of
a traditional regulated public utility company.
RESULTS OF OPERATIONS
OVERALL OPERATIONS
THREE MONTHS ENDED JUNE 30, 1998 COMPARED TO THREE MONTHS ENDED JUNE 30, 1997
Second quarter 1998 net income available for common stock was $14.9 million
compared to second quarter 1997 income of $46.7 million. The decrease in
earnings was primarily the result of the receipt of $41.4 million in the second
quarter of 1997 in interest income from an income tax recovery, partially offset
by $9.8 million, after taxes, in non-recurring accounting transactions. The 1998
net income figures include increased earnings from National Energy Trading and
Marketing activities, which were partially offset by decreased earnings from
Generation and Resources operations, due in large part to increased resource
costs in the second quarter of 1998 as compared to the same period in 1997.
Earnings per share for the second quarter of 1998 were $0.27 as
compared to $0.83 in the second quarter of 1997. Energy Delivery and Generation
and Resources contributed $0.17 to earnings per share for the second quarter of
1998 compared to $0.80 in the second quarter of 1997, with the decrease
resulting from the income tax recovery. National Energy Trading and Marketing
operations contributed $0.07 to earnings per share in the second quarter of 1998
compared to a loss of $0.02 in the same period in 1997. Non-energy operations
contributed $0.03 to earnings per share for the second quarter of 1998 compared
to $0.05 in the same period in 1997, primarily due to a $2.0 million
transactional gain on the sale of a portfolio company by Pentzer during the
second quarter of 1997.
SIX MONTHS ENDED JUNE 30, 1998 COMPARED TO SIX MONTHS ENDED JUNE 30, 1997
Net income available for common stock for the first half of 1998 was $46.3
million compared to $74.7 million for the first six months of 1997. The decrease
in earnings was primarily the result of the receipt of $41.4 million in the
second quarter of 1997 in interest income from the income tax recovery,
partially offset by $9.8 million in non-recurring accounting transactions. The
1998 net income figures include increased earnings from National Energy Trading
and Marketing activities and a $5.5 million transactional gain, net of taxes,
from the sale of a portfolio company by Pentzer which occurred in the first
quarter of 1998. The increase in earnings was partially offset by decreased
earnings from Generation and Resources operations, due in large part to
increased resource costs in the first six months of 1998 as compared to the same
period in 1997.
Earnings per share for the first half of 1998 were $0.83 as compared to
$1.34 in the first six months of 1997. Energy Delivery and Generation and
Resources contributed $0.57 to earnings per share for the first half of 1998
compared to $1.29 in the first six months of 1997. The reduction in the 1998
figures was primarily due to the income tax recovery in 1997. Ongoing operations
for the first six months of 1997 (removing the effects of the income tax
recovery and non-recurring transactions) would have resulted in total earnings
per share of $0.77 and utility earnings of $0.72 per share. National Energy
Trading and Marketing operations contributed $0.11 to earnings per share in the
first six months of 1998 compared to a loss of $0.03 in the same period in 1997.
Non-energy operations contributed $0.15 to earnings per
16
<PAGE> 17
THE WASHINGTON WATER POWER COMPANY
- --------------------------------------------------------------------------------
share for the first half of 1998 compared to $.08 in the same period in 1997,
due to a $0.10 per share contribution from the 1998 $5.5 million transactional
gain discussed above.
ENERGY DELIVERY
THREE MONTHS ENDED JUNE 30, 1998 COMPARED TO THREE MONTHS ENDED JUNE 30, 1997
Energy Delivery's pre-tax income from operations increased $3.0 million, or 20%,
in the second quarter of 1998 over the same period in 1997. The increase was
primarily the result of customer growth and the positive impact of a natural gas
price increase effective January 1998. Energy Delivery's operating revenues and
expenses increased $4.0 million and $1.0 million, respectively, during the
second quarter of 1998 as compared to 1997.
Natural gas revenues increased $3.8 million in the second quarter of 1998 over
1997 due to a combination of customer growth and increased prices approved by
the Washington Utilities and Transportation Commission (WUTC) in November 1997,
which was effective January 1, 1998.
Total operating expenses increased $1.0 million in the second quarter of 1998
from 1997 due to increased purchased natural gas costs as a result of both
higher prices paid during 1998 and increased therm sales due to customer growth.
SIX MONTHS ENDED JUNE 30, 1998 COMPARED TO SIX MONTHS ENDED JUNE 30, 1997
Energy Delivery's pre-tax income from operations increased $7.5 million, or 13%,
in the first six months of 1998 over 1997. The increase was primarily the result
of customer growth and the positive impact of a natural gas price increase
effective January 1998. Energy Delivery's operating revenues and expenses
increased $13.2 million and $5.7 million, respectively, during the first half of
1998 as compared to 1997.
Natural gas revenues increased $13.5 million in the first six months of 1998
over 1997 due to a combination of increased sales due to a greater volume of
sales for resale and 5% customer growth and increased prices approved by the
WUTC.
Purchased natural gas costs increased $6.6 million in the first half of 1998,
primarily from increased therm sales due to higher sales for resale and customer
growth. Other operating and maintenance expenses decreased slightly from the
previous year primarily due to milder weather and fewer storms through the first
half of 1998.
GENERATION AND RESOURCES
THREE MONTHS ENDED JUNE 30, 1998 COMPARED TO THREE MONTHS ENDED JUNE 30, 1997
Generation and Resources' pre-tax income from operations decreased $4.8 million,
or 24%, in the second quarter of 1998 from the same period in 1997. The decrease
was primarily due to hydroelectric generation that was 16% lower in the second
quarter of 1998 compared to 1997, which resulted in higher levels of purchased
power to meet sales commitments, and the impact of a shifting product mix as
described below. Streamflows in the second quarter of 1998 were 86% of normal,
compared to 178% in the second quarter of 1997.
Increased wholesale sales and decreased hydroelectric generation caused
purchased power volumes to increase 11%, which, combined with purchased power
prices 3% higher than last year, resulted in an $8.8 million, or 14%, increase
in purchased power costs in the second quarter of 1998 over 1997. This increase
accounts for the majority of the increase in Generation and Resources' operating
expenses and the decline in gross margins and pre-tax operating income.
During 1997 there was a significant shift in product mix between short- and
long-term sales which continued into 1998. This trend is expected to continue
due to the expiration of older sales contracts with higher margins, fewer
long-term contracts being entered into and tightening margins on new sales
contracts. Revenues from short-term sales, typically with smaller margins,
increased $23.2 million, or 63%, while short-term sales volumes increased 727.9
million mwhs, or only 23%, during the second quarter of 1998 over 1997,
reflecting higher prices for purchased power in the region. Revenues from
long-term sales, typically with higher margins, decreased $23.2 million, or 54%,
while long-term sales volumes decreased 312.6 million mwhs, or 30%, during the
same period.
SIX MONTHS ENDED JUNE 30, 1998 COMPARED TO SIX MONTHS ENDED JUNE 30, 1997
Generation and Resources' pre-tax income from operations decreased $18.8
million, or 46%, in the first six months of 1998 from the same period in 1997.
The decrease was primarily due to hydroelectric generation that was 22% lower in
the first half of 1998 compared to 1997, which resulted in higher levels of
purchased power to meet sales commitments and the impact of a shifting product
mix as described below. Streamflows in the first six months of 1998 were 91% of
normal, compared to 180% in the first half of 1997.
17
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THE WASHINGTON WATER POWER COMPANY
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Increased wholesale sales and decreased hydroelectric generation caused
purchased power volumes to increase 8%, which, combined with purchased power
prices 8% higher than last year, resulted in a $22.7 million, or 17%, increase
in purchased power costs in the first half of 1998 over 1997. This increase
accounts for the majority of the increase in Generation and Resources' operating
expenses and the decline in gross margins and pre-tax operating income.
The same shift in product mix and the reasons behind it, as discussed above,
were also relevant to the results for the six months ended June 30, 1998.
Revenues from short-term sales, typically with smaller margins, increased $43.1
million, or 61%, while short-term sales volumes increased 1,271.2 million mwhs,
or 22%, during the first six months of 1998 over 1997, reflecting higher prices
for purchased power in the region. Revenues from long-term sales, typically with
higher margins, decreased $38.1 million, or 47%, while long-term sales volumes
decreased 697.1 million mwhs, or 30%, during the same period.
NATIONAL ENERGY TRADING AND MARKETING
THREE MONTHS ENDED JUNE 30, 1998 COMPARED TO THREE MONTHS ENDED JUNE 30, 1997
National Energy Trading and Marketing includes the results of Avista Energy, the
national energy marketing subsidiary, and Avista Advantage, the energy services
subsidiary. Although both companies began incurring start-up costs during 1996,
Avista Energy only became operational in July 1997. National Energy Trading and
Marketing income available for common stock for the second quarter of 1998 was
$4.0 million, which was a $5.3 million increase over second quarter 1997
earnings when start-up costs were being incurred. National Energy Trading and
Marketing operating revenues and expenses increased $378.8 million and $370.4
million, respectively, during the second quarter of 1998 as compared to 1997
primarily as a result of Avista Energy beginning trading operations in July
1997. During this period, Avista Energy added experienced electricity and
natural gas traders both in its Eastern and Western markets.
Credit reserves were reviewed thoroughly during the second quarter in light of
events discussed below and are believed to be at adequate levels. National
Energy Trading and Marketing's total assets and liabilities increased by
approximately $517 million during the second quarter of 1998. This increase
resulted from both the volume of transactions increasing and the impact of the
market's extreme price volatility on forward price curves, thereby increasing
the valuation of Avista Energy's mark-to-market assets and liabilities.
Avista Energy provided positive results for the second quarter despite the
extreme price volatility experienced in power markets in the Midwest and East
during June. The company was well-positioned in its market, which allowed net
gains in its portfolio during the period of high volatility. Avista Energy
expected high volatility in Eastern electric markets in the summer of 1998 based
on expected demand and the high probability of a weather-related impact on
energy prices. As a result, Avista Energy established positions in anticipation
of volatile market swings, and in turn experienced positive earnings in its
portfolio during this period. However, there is no guarantee that positive
results can or will always be achieved. Avista Energy marks its trading
portfolio to fair market value on a daily basis, which can cause earnings
variability. For additional information about market risk and credit risk, see
Liquidity: Energy Trading Business.
SIX MONTHS ENDED JUNE 30, 1998 COMPARED TO SIX MONTHS ENDED JUNE 30, 1997
National Energy Trading and Marketing income available for common stock for the
first six months of 1998 was $6.1 million, which was an $8.0 million increase
over the first half of 1997 when start-up costs were being incurred. National
Energy Trading and Marketing operating revenues and expenses increased $649.8
million and $638.3 million, respectively, during the first half of 1998 as
compared to 1997 primarily as a result of Avista Energy beginning trading
operations in July 1997.
NON-ENERGY
THREE MONTHS ENDED JUNE 30, 1998 COMPARED TO THREE MONTHS ENDED JUNE 30, 1997
Non-energy income available for common stock for the second quarter of 1998 was
$1.3 million, compared to second quarter 1997 earnings of $3.1 million. The
decrease in 1998 earnings primarily resulted from a second quarter 1997
transactional gain totaling $2.0 million, net of taxes, recorded by Pentzer as a
result of the sale of one of its portfolio companies, Safety Speed Cut.
Transactional gains decreased $2.8 million in the second quarter of 1998 from
1997, but were partially offset by a $1.4 million increase in non-transactional
income primarily from increased earnings from portfolio companies.
Non-energy operating revenues and expenses increased $17.5 million and $17.0
million, respectively, during the second quarter of 1998, as compared to 1997,
primarily as a result of acquisitions and increased business activity from
several of Pentzer's portfolio companies. Income from operations totaled $2.6
million, which was a $0.5 million increase in 1998 over 1997. During the second
quarter of 1998, Pentzer recognized $0.8 million, net of tax, of additional
compensation expense related to a change in the vesting schedule for stock
options in its portfolio companies previously granted to the retiring CEO of the
Company.
18
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THE WASHINGTON WATER POWER COMPANY
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SIX MONTHS ENDED JUNE 30, 1998 COMPARED TO SIX MONTHS ENDED JUNE 30, 1997
Non-energy income available for common stock for the first six months of 1998
was $8.4 million, compared to 1997 earnings of $4.5 million. The 1998 earnings
increase primarily resulted from a transactional gain totaling $5.5 million, net
of taxes, recorded by Pentzer in the first quarter as a result of the sale of
one of its portfolio companies, Systran Financial Services. Transactional gains
increased $3.4 million in the first half of 1998 over 1997, while
non-transactional income from portfolio companies increased $1.8 million.
Non-energy operating revenues and expenses increased $26.1 million and $26.4
million, respectively, during the first half of 1998, as compared to 1997,
primarily as a result of acquisitions and increased business activity from
several of Pentzer's portfolio companies. Income from operations totaled $5.1
million, which was a $0.3 million decrease in 1998 from 1997. During the first
half of 1998, Pentzer recognized $0.8 million, net of tax, of additional
compensation expense related to a change in the vesting schedule for stock
options in its portfolio companies previously granted to the retiring CEO of the
Company.
19
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THE WASHINGTON WATER POWER COMPANY
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LIQUIDITY AND CAPITAL RESOURCES
OVERALL OPERATIONS
Operating Activities Cash available from operating activities in the first six
months of 1998 decreased $68.7 million from the same period in 1997, primarily
due to the increase in 1997 net income from the income tax recovery. Changes in
various working capital components, such as decreased payables and increased
receivables caused cashflows to decrease $24.2 million from 1997, primarily due
to the growth in Avista Energy's operations. Power and natural gas cost
deferrals resulted in slightly increased cashflows in 1998 as compared to
decreased cashflows in 1997 when natural gas prices were higher during the first
quarter, natural gas customers paid reduced prices and PCA rebates were in
effect. See the Consolidated Statements of Cash Flows for additional details.
Investing Activities Cash used in investing activities totaled $60.9 million in
the first half of 1998 compared to $35.1 million in the same period in 1997. Net
cash used in investing activities was higher during 1998, primarily as a result
of acquisitions made by Pentzer, partially offset by proceeds from the sale of
subsidiary investments by Pentzer, and $12.5 million of investments in Avista
Corp. made by the Company. See the Consolidated Statements of Cash Flows for
additional information.
Financing Activities Cash used in financing activities totaled $9.0 million in
the first six months of 1998 compared to $81.6 million in 1997. Bank borrowings
were reduced by $28.5 million and $16.0 million of preferred stock and
medium-term notes matured or were redeemed in the first half of 1998 with the
proceeds of the issuance of $45.0 million of unsecured medium-term notes. In the
first six months of 1997, bank borrowings decreased $85.0 million and preferred
stock and medium-term notes totaling $40.0 million matured or were redeemed with
the proceeds of $110 million of Preferred Trust Securities which were issued in
January and June 1997. The increase of $20.8 million in Other-net in the first
half of 1998 reflects an increase in short- and long-term debt by the non-energy
companies as compared to a decrease of $28.2 million in 1997.
ENERGY DELIVERY AND GENERATION AND RESOURCES 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 capital expenditures.
The Company issued $45 million of Unsecured Medium-Term Notes, Series C during
the second quarter of 1998, with rates between 6.37% and 6.88%.
Capital expenditures are financed on an interim basis with notes payable (due
within one year). The Company has $200 million in a committed line of credit. In
addition, the Company may currently borrow up to $100 million through other
borrowing arrangements with banks. As of June 30, 1998, $80.0 million was
outstanding under other short-term borrowing arrangements and there were no
outstanding borrowings under the committed line of credit.
NATIONAL ENERGY TRADING AND MARKETING OPERATIONS
The National Energy Trading and Marketing operations have a credit agreement
with a commercial bank that is guaranteed by Avista Corp. The agreement may be
terminated by the bank at any time and all extensions of credit under the
agreement are payable upon demand, in either case at the bank's sole discretion.
The maximum cash component of credit extended by the bank is $15 million, with
availability of up to $50 million in the issuance of letters of credit. At June
30, 1998, there were no cash advances (demand notes payable) outstanding, and
letters of credit outstanding under the facility totaled $7.0 million. At June
30, 1998, the National Energy Trading and Marketing operations had $9.7 million
in cash and cash equivalents.
NON-ENERGY OPERATIONS
The non-energy operations have $47.7 million in short-term borrowing
arrangements available ($12.7 million outstanding as of June 30, 1998) to fund
Pentzer's portfolio companies' requirements on an interim basis. At June 30,
1998, the non-energy operations had $27.5 million in cash and marketable
securities with $56.4 million in long-term debt outstanding.
TOTAL COMPANY
The Company's total common equity increased by $10.5 million during the first
six months of 1998 to $759.4 million, primarily due to increased retained
earnings. The Company's consolidated capital structure at June 30, 1998, was
20
<PAGE> 21
THE WASHINGTON WATER POWER COMPANY
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47% debt, 8% preferred securities (including the Preferred Trust Securities) and
45% common equity as compared to 46% debt, 9% preferred securities and 45%
common equity at year-end 1997.
The Company's current estimates for capital expenditures (as disclosed in the
1997 Form 10-K) do not include any funds that may be required if the Company
were to be successful in acquiring additional generation properties. The Company
is continually evaluating opportunities as they become available and also
continues to evaluate its overall resource portfolio to maximize the value of
its resources and minimize its cost of generation.
Year 2000 The Company continues to move forward with a comprehensive program to
address areas of risk associated with the year 2000. Systems and programs that
may be affected by the year 2000 problem have been identified and activities are
underway to make these systems year 2000 ready. At this time, it is the
Company's assessment that all identified modifications that are within the
Company's operating control will be made within the required time frames.
Current estimates of costs remain within the initial range of estimated costs
reported in the Company's 1997 Form 10-K.
ENERGY TRADING BUSINESS
The participants in the emerging wholesale energy market are public utility
companies and, increasingly, power marketers which may or may not be affiliated
with public utility companies or other entities. The participants in this market
trade not only electricity and natural gas as commodities but also derivative
commodity instruments such as futures, forwards, swaps, options and other
instruments. This market is largely unregulated and most transactions are
conducted on an "over-the-counter" basis, there being no central clearing
mechanism (except in the case of specific instruments traded on the commodity
exchanges). Power marketers, whether or not affiliated with other entities,
generally do not own production facilities and are not subject to net capital or
other requirements of any regulatory agency.
The Company (to the extent that the Generation and Resources segment conducts
energy trading) and Avista Energy are subject to the various risks inherent in
commodity trading including, particularly, market risk and credit risk.
Market risk is, in general, the risk of fluctuation in the market price of the
commodity being traded and is influenced primarily by supply (in the case of
electricity, adequacy of generating reserve margins as well as scheduled and
unscheduled outages of generating facilities) and demand (extreme variations in
the weather, whether or not predicted). Market risk includes the risk of
fluctuation in the market price of associated derivative commodity instruments.
All market risk is influenced to the extent that the performance or
non-performance by market participants of their contractual obligations and
commitments affect the supply of the commodity.
Credit risk relates to the risk of loss that the Company (to the extent of
Generation and Resources' trading activities) and/or Avista Energy would incur
as a result of non-performance by counterparties of their contractual
obligations under the various instruments with the Company or Avista Energy, as
the case may be. Credit risk may be concentrated to the extent that one or more
groups of counterparties have similar economic, industry or other
characteristics that would cause their ability to meet contractual obligations
to be similarly affected by changes in market or other conditions. In addition,
credit risk includes not only the risk that a counterparty may default due to
circumstances relating directly to it, but also the risk that a counterparty may
default due to circumstances which relate to other market participants which
have a direct or indirect relationship with such counterparty. The Company and
Avista Energy seek to mitigate credit risk (and concentrations thereof) by
applying specific eligibility criteria to prospective counterparties. However,
despite mitigation efforts, defaults by counterparties occur from time to time.
To date, no such default has had a material adverse effect on the Company or
Avista Energy.
Avista Corp. provides guarantees for Avista Energy's line of credit agreement,
and in the course of business may provide guarantees to other parties with whom
Avista Energy may be doing business. The Company's investment in Avista Corp.
totaled $235 million at June 30, 1998.
SAFE HARBOR FOR FORWARD LOOKING STATEMENTS.
The Company is including the following cautionary statement in this Form 10-Q 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 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.
Such statements are inherently subject to a variety of risks and uncertainties
that could cause actual results to differ materially from those expressed. Such
risks and uncertainties include, among others, changes in the utility regulatory
environment, wholesale and retail competition, weather conditions and various
other matters, many of which are beyond the Company's control. These
forward-looking statements speak only as of the date of the report. The Company
expressly undertakes no obligation to update or revise any forward-looking
statement contained herein to reflect any change in the Company's expectations
with regard thereto or any change in events, conditions, or circumstances on
21
<PAGE> 22
THE WASHINGTON WATER POWER COMPANY
- --------------------------------------------------------------------------------
which any such statement is based. See "Safe Harbor for Forward Looking
Statements" in the Company's 1997 Form 10-K under Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Future Outlook.
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The 1998 Annual Meeting of Shareholders of the Company was held on May 14, 1998.
The re-election of three directors with expiring terms and the approval of a
long-term incentive plan were the only matters voted upon at the meeting. There
were 55,960,360 shares of Common Stock issued and outstanding as of March 19,
1998, the proxy record date, with 48,796,640 shares represented at said meeting.
The details of the voting are shown below:
<TABLE>
<CAPTION>
Against
For or Withheld
---------- -----------
<S> <C> <C>
Re-election of Directors
David A. Clack 47,819,351 977,289
Bobby Schmidt 47,817,996 978,644
Larry A. Stanley 47,862,809 933,831
Long-term Incentive Plan 42,326,393 6,470,247
</TABLE>
ITEM 5. OTHER INFORMATION.
OTHER.
New Chief Executive Officer T.M. "Tom" Matthews was selected as the Company's
new chairman of the board and chief executive officer, effective July 1, 1998,
replacing Paul Redmond. Since December 1996, Mr. Matthews has served as the
president of Houston-based NGC Corporation. Prior to his time with NGC, Mr.
Matthews held the positions of vice president of Texaco, Inc., president of
Texaco's Global Gas and Power Division, and president and chief executive
officer of Texaco Natural Gas. He also held positions in Texaco as vice
president of gas for Texaco U.S.A. and president of Texaco Refining and
Marketing, Inc. Prior to joining Texaco, Mr. Matthews spent eight years at
Tenneco as president of Tennessee Gas Pipeline Company and executive vice
president of Tenneco Gas. He also spent 16 years with Exxon in various domestic
and international engineering, management, and executive positions.
Federal Energy Regulatory Commission (FERC) Order On April 30, 1998, the FERC
issued a show cause order asserting that the Company and Avista Energy had
violated Orders No. 888 and 889. The order directed the companies to show cause
why, as a result of the alleged violations, the FERC should not require refunds
of certain market-based power sales profits and, further, suspend, for six
months, Avista Energy's use of its market-based power sales tariff for any
transaction that would use the Company's transmission system.
Background: On October 30, 1997, Avista Energy submitted a request on the
Company's open-access same-time information system (OASIS) for interruptible
firm transmission service, pursuant to the Western Systems Power Pool agreement,
to transmit 29 MW for a two-month period (November and December 1997). The
Company and Avista Energy entered into an agreement to provide Avista Energy
with interruptible firm service which, according to the show cause order,
provided terms superior to the terms for non-firm service under the Company's
pro forma tariff. The Company provided the wheeling under service schedule D of
the Western Systems Power Pool agreement and was under the impression that
neither the FERC's affiliate conduct requirements nor Avista Energy's and the
Company's code of conduct precluded the Company from providing such service, but
that the Company was required to make a separate filing pursuant to section 205
of the Federal Power Act. On November 28, 1997, the Company filed with the FERC
the letter agreement under which it was providing the transmission service to
Avista Energy. In a January 8, 1998, deficiency letter, the commission staff
informed the Company that the proposed letter agreement failed to meet the
requirement that Avista Energy must take service under the Company's open-access
tariff as a condition of its market-based rate approval.
On June 11, 1998, the FERC directed Avista Energy to disgorge profits earned
from the power sale underlying the off-tariff transmission service provided by
the Company. The FERC additionally ordered Avista Energy not to engage for 180
days from June 11, 1998 in any power sales under its market-based power sales
tariff for any power sales transaction, executed after the date of the June 11,
1998 order, that would use the Company's transmission system. The FERC ordered
the Company and Avista Energy to file a compliance report within 30 days of this
order. The FERC's orders were complied within their entirety and the
disgorgement and the costs of compliance were not material to the consolidated
financial position of the Company.
22
<PAGE> 23
THE WASHINGTON WATER POWER COMPANY
- --------------------------------------------------------------------------------
Coeur d' Alene Lake Court Decision On July 28, 1998, the United States District
Court for the District of Idaho issued its finding that the Coeur d' Alene Tribe
of Idaho owns the bed and banks of the Coeur d' Alene Lake and the St. Joe River
lying within the current boundaries of the Coeur d' Alene Reservation. The
disputed bed and banks comprise approximately the southern one-third of Lake
Coeur d' Alene. This action had been brought by the United States on behalf of
the Tribe against the State of Idaho. While the Company is not a party to this
action and it is not presently known whether the State of Idaho will appeal this
decision to the Ninth Circuit, the Company is continuing to evaluate the impact
of this decision on the operation of its hydroelectric facilities on the Spokane
River, downstream of the Coeur d' Alene Lake.
ADDITIONAL FINANCIAL DATA.
At June 30, 1998, the total long-term debt of the Company and its consolidated
subsidiaries, as shown in the Company's consolidated financial statements, was
approximately $788.5 million. Of such amount, $212.5 million represents
long-term unsecured and unsubordinated indebtedness of the Company, and $449.3
million represents secured indebtedness of the Company. The balance of $126.7
million includes short-term notes to be refinanced as well as indebtedness of
subsidiaries. Consolidated long-term debt does not include the Company's
subordinated indebtedness held by the issuers of Company-obligated preferred
trust securities.
The following table reflects the ratio of earnings to fixed charges and the
ratio of earnings to fixed charges and preferred dividend requirements:
<TABLE>
<CAPTION>
12 Months Ended
--------------------------------------
June 30, December 31,
1998 1997
------------------ --------------
<S> <C> <C>
Ratio of Earnings to Fixed Charges 2.88 (x) 3.49 (x)
Ratio of Earnings to Fixed Charges and
Preferred Dividend Requirements 2.68 (x) 3.12 (x)
</TABLE>
The Company has long-term purchased power arrangements with various Public
Utility Districts and the interest expense components of these contracts are
included in purchased power expenses. These interest amounts are not included in
the fixed charges and would not have a material impact on fixed charges ratios.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
<TABLE>
<S> <C>
4(a) Bylaws of The Washington Water Power Company, as amended May 14, 1998.
12 Computation of ratio of earnings to fixed charges and preferred dividend requirements.
27 Financial Data Schedule.
</TABLE>
(b) Reports on Form 8-K.
Dated June 2, 1998, regarding the selection of the Company's new
Chairman of the Board and Chief Executive Officer.
23
<PAGE> 24
SIGNATURE
Pursuant to the requirements 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
(Registrant)
Date: August 10, 1998 __________________________________
J. E. Eliassen
Senior Vice President, Chief
Financial Officer and Treasurer
(Principal Accounting and
Financial Officer)
24
<PAGE> 1
Exhibit 4 (a)
BYLAWS
OF
The Washington Water Power
Company
As Amended May 15, 1998
<PAGE> 2
BYLAWS
OF
THE WASHINGTON WATER POWER COMPANY
* * * * *
ARTICLE I.
OFFICES
The principal office of the Corporation shall be in the City of
Spokane, Washington. The Corporation may have such other offices, either within
or without the State of Washington, as the Board of Directors may designate from
time to time.
ARTICLE II.
SHAREHOLDERS
SECTION 1. ANNUAL MEETING. The Annual Meeting of Shareholders shall be
held on such date in the month of May in each year as determined by the Board of
Directors for the purpose of electing directors and for the transaction of such
other business as may come before the meeting. If the day fixed for the Annual
Meeting shall be a legal holiday, such meeting shall be held on the next
succeeding business day.
SECTION 2. SPECIAL MEETINGS. Special meetings of the shareholders may
be called by the President, the Chairman of the Board, the majority of the Board
of Directors, the Executive Committee of the Board, and shall be called by the
President at the request of the holders of not less than two-thirds (2/3) of the
voting power of all shares of the voting stock voting together as a single
class. Only those matters that are specified in the call of or request for a
special meeting may be considered or voted at such meeting.
SECTION 3. PLACE OF MEETING. Meetings of the shareholders, whether they
be annual or special, shall be held at the principal office of the Corporation,
unless a place, either within or without the state, is otherwise designated by
the Board of Directors in the notice provided to shareholders of such meetings.
SECTION 4. NOTICE OF MEETING. Written or printed notice of every
meeting of shareholders shall be mailed by the Corporate Secretary or any
Assistant Corporate Secretary, not less than ten (10) nor more than fifty (50)
days before the date of the meeting, to each holder of record of stock entitled
to vote at the meeting. The notice shall be mailed to each shareholder at his
last known post office address, provided, however, that if a shareholder is
present at a meeting, or waives notice thereof in writing before or after the
meeting, the notice of the meeting to such shareholders shall be unnecessary.
SECTION 5. VOTING OF SHARES. At every meeting of shareholders each
holder of stock entitled to vote thereat shall be entitled to one vote for each
share of such stock held in his name on the books of the Corporation, subject to
the provisions of applicable law and the Articles of Incorporation, and may vote
and otherwise act in person or by proxy; provided, however, that in elections of
directors there shall be cumulative voting as provided by law and by the
Articles of Incorporation.
SECTION 6. QUORUM. The holders of a majority of the number of
outstanding shares of stock of the Corporation entitled to vote thereat, present
in person or by proxy at any meeting, shall constitute a quorum, but less than a
quorum shall have power to adjourn any meeting from time to time without notice.
No change shall be made in this Section 6 without the affirmative vote of the
holders of at least a majority of the outstanding shares of stock entitled to
vote.
2
<PAGE> 3
SECTION 7. CLOSING OF TRANSFER BOOKS OR FIXING OF RECORD DATE. For the
purposes of determining shareholders entitled to notice of or to vote at any
meeting of shareholders or any adjournment thereof, or shareholders entitled to
receive payment of any dividend, or in order to make a determination of
shareholders for any other proper purpose, the Board of Directors of the
Corporation may provide that the stock transfer books shall be closed for a
stated period but not to exceed, in any case, fifty (50) days. If the stock
transfer books shall be closed for the purpose of determining shareholders
entitled to notice of or to vote at a meeting of shareholders, such books shall
be closed for at least ten (10) days immediately preceding such meeting. In lieu
of closing the stock transfer books, the Board of Directors may fix in advance a
date as the record date for any such determination of shareholders, such date in
any case to be not more than seventy (70) days and, in case of a meeting of
shareholders, not less than ten (10) days prior to the date on which the
particular action, requiring such determination of shareholders, is to be taken.
When a determination of shareholders entitled to vote at any meeting of
shareholders has been made as provided in this section, such determination shall
apply to any adjournment thereof.
SECTION 8. VOTING RECORD. The officer or agent having charge of the
stock transfer books for shares of the Corporation shall make, at least ten (10)
days before each meeting of shareholders, a complete record of the shareholders
entitled to vote at such meeting or any adjournment thereof, arranged in
alphabetical order, with the address of and the number of shares held by each,
which record, for a period of ten (10) days prior to such meeting, shall be kept
on file at the registered office of the Corporation. Such record shall be
produced and kept open at the time and place of the meeting and shall be subject
to the inspection of any shareholder during the whole time of the meeting for
the purposes thereof.
SECTION 9. CONDUCT OF PROCEEDINGS. The Chairman of the Board shall
preside at all meetings of the shareholders. In the absence of the Chairman, the
President shall preside and in the absence of both, the Executive Vice President
shall preside. The members of the Board of Directors present at the meeting may
appoint any officer of the Corporation or member of the Board to act as Chairman
of any meeting in the absence of the Chairman, the President, or Executive Vice
President. The Corporate Secretary of the Corporation, or in his absence, an
Assistant Corporate Secretary, shall act as Secretary at all meetings of the
shareholders. In the absence of the Corporate Secretary or Assistant Corporate
Secretary at any meeting of the shareholders, the presiding officer may appoint
any person to act as Secretary of the meeting.
SECTION 10. PROXIES. At all meetings of shareholders, a shareholder may
vote in person or by proxy executed in writing by the shareholder or by his duly
authorized attorney in fact. Such proxy shall be filed with the Corporate
Secretary of the Corporation before or at the time of the meeting.
ARTICLE III.
BOARD OF DIRECTORS
SECTION 1. GENERAL POWERS. The powers of the Corporation shall be
exercised by or under the authority of the Board of Directors, except as
otherwise provided by the laws of the State of Washington and the Articles of
Incorporation.
SECTION 2. NUMBER AND TENURE. The number of Directors of the
Corporation shall be nine (9); provided, however, that if the right to elect a
majority of the Board of Directors shall have accrued to the holders of the
Preferred Stock as provided in paragraph (1) of subdivision (j) of Article THIRD
of the Articles of Incorporation, then, during such period as such holders shall
have such right, the number of directors may exceed nine (9). Directors shall be
divided into three classes, as nearly equal in number as possible. At each
Annual Meeting of Shareholders, directors elected to succeed those directors
whose terms expire shall be elected for a term of
3
<PAGE> 4
office to expire at the third succeeding Annual Meeting of Shareholders after
their election. Notwithstanding the foregoing, directors elected by the holders
of the Preferred Stock in accordance with paragraph (1) of subdivision (j) of
Article THIRD of the Articles of Incorporation shall be elected for a term which
shall expire not later than the next Annual Meeting of Shareholders. All
directors shall hold office until the expiration of their respective terms of
office and until their successors shall have been elected and qualified.
SECTION 3. REGULAR MEETINGS. The regular annual meeting of the Board of
Directors shall be held immediately following the adjournment of the annual
meeting of the shareholders or as soon as practicable after said annual meeting
of shareholders. But, in any event, said regular annual meeting of the Board of
Directors must be held on either the same day as the annual meeting of
shareholders or the next business day following said annual meeting of
shareholders. At such meeting the Board of Directors, including directors newly
elected, shall organize itself for the coming year, shall elect officers of the
Corporation for the ensuing year, and shall transact all such further business
as may be necessary or appropriate. The Board shall hold regular quarterly
meetings, without call or notice, on such dates as determined by the Board of
Directors. At such quarterly meetings the Board of Directors shall transact all
business properly brought before the Board.
SECTION 4. SPECIAL MEETINGS. Special meetings of the Board of Directors
may be called by or at the request of the Chairman of the Board, the President,
the Executive Vice President or any three (3) directors. Notice of any special
meeting shall be given to each director at least two (2) days in advance of the
meeting.
SECTION 5. EMERGENCY MEETINGS. In the event of a catastrophe or a
disaster causing the injury or death to members of the Board of Directors and
the principal officers of the Corporation, any director or officer may call an
emergency meeting of the Board of Directors. Notice of the time and place of the
emergency meeting shall be given not less than two (2) days prior to the meeting
and may be given by any available means of communication. The director or
directors present at the meeting shall constitute a quorum for the purpose of
filling vacancies determined to exist. The directors present at the emergency
meeting may appoint such officers as necessary to fill any vacancies determined
to exist. All appointments under this section shall be temporary until a special
meeting of the shareholders and directors is held as provided in these Bylaws.
SECTION 6. CONFERENCE BY TELEPHONE. The members of the Board of
Directors, or of any committee created by the Board, may participate in a
meeting of the Board or of the committee by means of a conference telephone or
similar communication equipment by means of which all persons participating in
the meeting can hear each other at the same time. Participation in a meeting by
such means shall constitute presence in person at a meeting.
SECTION 7. QUORUM. A majority of the number of directors shall
constitute a quorum for the transaction of business at any meeting of the Board
of Directors. The action of a majority of the directors present at a meeting at
which a quorum is present shall be the action of the Board.
SECTION 8. ACTION WITHOUT A MEETING. Any action required by law to be
taken at a meeting of the directors of the Corporation, or any action which may
be taken at a meeting of the directors or of a committee, may be taken without a
meeting if a consent in writing, setting forth the action so taken, shall be
signed by all of the directors, or all of the members of the committee, as the
case may be. Such consent shall have the same effect as a unanimous vote.
4
<PAGE> 5
SECTION 9. VACANCIES. Subject to the provisions of paragraph (1) of
subdivision (j) of Article THIRD of the Articles of Incorporation, (a) any
vacancy occurring in the Board of Directors may be filled by the affirmative
vote of a majority of the remaining directors though less than a quorum of the
Board of Directors and any director so elected to fill a vacancy shall be
elected for the unexpired term of his or her predecessor in office and (b) any
directorship to be filled by reason of an increase in the number of directors
may be filled by the Board of Directors for a term of office continuing only
until the next election of directors by the shareholders.
SECTION 10. RESIGNATION OF DIRECTOR. Any director or member of any
committee may resign at any time. Such resignation shall be made in writing and
shall take effect at the time specified therein. If no time is specified, it
shall take effect from the time of its receipt by the Corporate Secretary, who
shall record such resignation, noting the day, hour and minute of its reception.
The acceptance of a resignation shall not be necessary to make it effective.
SECTION 11. REMOVAL. Subject to the provisions of paragraph (1) of
subdivision (j) of Article THIRD of the Articles of Incorporation, any director
may be removed from office at any time, but only for cause and only by the
affirmative vote of the holders of at least a majority of the voting power of
all of the shares of capital stock of the Corporation entitled generally to vote
in the election of directors voting together as a single class, at a meeting of
shareholders called expressly for that purpose; provided, however, that if less
than the entire Board of Directors is to be removed, no one of the directors may
be removed if the votes cast against the removal of such director would be
sufficient to elect such director if then cumulatively voted at an election of
the class of directors of which such director is a part. No decrease in the
number of directors constituting the Board of Directors shall shorten the term
of any incumbent director.
SECTION 12. ORDER OF BUSINESS. The Chairman of the Board shall preside
at all meetings of the directors. In the absence of the Chairman, the officer or
member of the Board designated by the Board of Directors shall preside. At
meetings of the Board of Directors, business shall be transacted in such order
as the Board may determine. Minutes of all proceedings of the Board of
Directors, or committees appointed by it, shall be prepared and maintained by
the Corporate Secretary or an Assistant Corporate Secretary and the original
shall be maintained in the principal office of the Corporation.
SECTION 13. NOMINATION OF DIRECTORS. Subject to the provisions of
paragraph (1) of subdivision (j) of Article THIRD of the Articles of
Incorporation, nominations for the election of directors may be made by the
Board of Directors, or a nominating committee appointed by the Board of
Directors, or by any holder of shares of the capital stock of the Corporation
entitled generally to vote in the election of directors (such stock being
hereinafter in this Section called "Voting Stock"). However, any holder of
shares of the Voting Stock may nominate one or more persons for election as
directors at a meeting only if written notice of such shareholder's intent to
make such nomination or nominations has been given, either by personal delivery
or by United States mail, postage prepaid, to the Corporate Secretary not later
than (i) with respect to an election to be held at an annual meeting of
shareholders, ninety (90) days in advance of such meeting and (ii) with respect
to an election to be held at a special meeting of shareholders for the election
of directors, the close of business on the seventh day following the date on
which notice of such meeting is first given to shareholders. Each such notice
shall set forth: (a) the name and address of the shareholder who intends to make
the nomination and of the person or persons to be nominated; (b) a
representation that such shareholder is a holder of record of shares of the
Voting Stock of the Corporation and intends to appear in person or by proxy at
the meeting to nominate the person or persons identified in the notice; (c) a
description of all arrangements or understandings between such shareholder and
each nominee and any other person or persons (naming such person or persons)
pursuant to which the nomination or nominations are to be made by such
shareholder; (d) such other information regarding each nominee proposed by such
shareholder as would be required to be included in a proxy statement under the
Securities
5
<PAGE> 6
Exchange Act of 1934, as amended, and the rules and regulations thereunder (or
any subsequent revisions replacing such Act, rules or regulations) if the
nominee(s) had been nominated, or were intended to be nominated, by the Board of
Directors; and (e) the consent of each nominee to serve as a Director of the
Corporation if so elected. The Chairman of the meeting may refuse to acknowledge
the nomination of any person not made in compliance with the foregoing
procedure.
SECTION 14. PRESUMPTION OF ASSENT. A director of the Corporation who is
present at a meeting of the Board of Directors, or of a committee thereof, at
which action on any corporate matter is taken, shall be presumed to have
assented to the action unless his dissent shall be entered in the minutes of the
meeting or unless he shall file his written dissent to such action with the
person acting as the Secretary of the meeting before the adjournment thereof or
shall forward such dissent by registered mail to the Corporate Secretary of the
Corporation immediately after the adjournment of the meeting. Such right to
dissent shall not apply to a director who voted in favor of such action.
SECTION 15. RETIREMENT OF DIRECTORS. Directors who are seventy (70)
years of age or more shall retire from the Board effective at the conclusion of
the Annual Meeting of Shareholders held in the year in which their term expires,
and any such Director shall not be nominated for election at such Annual
Meeting. The foregoing shall be effective in 1988 and thereafter as to any
Director who is seventy (70) years of age or more during the year in which his
or her term expires.
ARTICLE IV.
EXECUTIVE COMMITTEE
AND
ADDITIONAL COMMITTEES
SECTION 1. APPOINTMENT. The Board of Directors, by resolution adopted
by a majority of the Board, may designate three or more of its members to
constitute an Executive Committee. The designation of such committee and the
delegation thereto of authority shall not operate to relieve the Board of
Directors, or any member thereof, of any responsibility imposed by law.
SECTION 2. AUTHORITY. The Executive Committee, when the Board of
Directors is not in session, shall have and may exercise all of the authority of
the Board of Directors including authority to authorize distributions or the
issuance of shares of stock, except to the extent, if any, that such authority
shall be limited by the resolution appointing the Executive Committee or by law.
SECTION 3. TENURE. Each member of the Executive Committee shall hold
office until the next regular annual meeting of the Board of Directors following
his designation and until his successor is designated as a member of the
Executive Committee.
SECTION 4. MEETINGS. Regular meetings of the Executive Committee may be
held without notice at such times and places as the Executive Committee may fix
from time to time by resolution. Special meetings of the Executive Committee may
be called by any member thereof upon not less than two (2) days notice stating
the place, date and hour of the meeting, which notice may be written or oral.
Any member of the Executive Committee may waive notice of any meeting and no
notice of any meeting need be given to any member thereof who attends in person.
6
<PAGE> 7
SECTION 5. QUORUM. A majority of the members of the Executive Committee
shall constitute a quorum for the transaction of business at any meeting
thereof. Actions by the Executive Committee must be authorized by the
affirmative vote of a majority of the appointed members of the Executive
Committee.
SECTION 6. ACTION WITHOUT A MEETING. Any action required or permitted
to be taken by the Executive Committee at a meeting may be taken without a
meeting if a consent in writing, setting forth the action so taken, shall be
signed by all of the members of the Executive Committee.
SECTION 7. PROCEDURE. The Executive Committee shall select a presiding
officer from its members and may fix its own rules of procedure which shall not
be inconsistent with these Bylaws. It shall keep regular minutes of its
proceedings and report the same to the Board of Directors for its information at
a meeting thereof held next after the proceedings shall have been taken.
SECTION 8. COMMITTEES ADDITIONAL TO EXECUTIVE COMMITTEE. The Board of
Directors may, by resolution, designate one or more other committees, each such
committee to consist of two (2) or more of the directors of the Corporation. A
majority of the members of any such committee may determine its action and fix
the time and place of its meetings unless the Board of Directors shall otherwise
provide.
ARTICLE V.
OFFICERS
SECTION 1. NUMBER. The Board of Directors shall elect one of its
members Chairman of the Board and shall elect one of its members as President of
the Corporation and the offices of Chairman and President may be held by the
same person. The Board of Directors shall also elect one or more Vice
Presidents, a Corporate Secretary, a Treasurer and may from time to time elect
such other officers as the Board deems appropriate. The same person may be
appointed to more than one office except the offices of President and Corporate
Secretary.
SECTION 2. ELECTION AND TERM OF OFFICE. The officers of the Corporation
shall be elected by the Board of Directors at the annual meeting of the Board.
Each officer shall hold office until his successor shall have been duly elected
and qualified.
SECTION 3. REMOVAL. Any officer or agent may be removed by the Board of
Directors whenever in its judgment the best interests of the Corporation will be
served thereby, but such removal shall be without prejudice to contract rights,
if any, of the person so removed. Election or appointment of an officer or agent
shall not of itself create contract rights.
SECTION 4. VACANCIES. A vacancy in any office because of death,
resignation, removal, disqualification or otherwise may be filled by the Board
of Directors for the unexpired portion of the term.
SECTION 5. POWERS AND DUTIES. The officers shall have such powers and
duties as usually pertain to their offices, except as modified by the Board of
Directors, and shall have such other powers and duties as may from time to time
be conferred upon them by the Board of Directors.
7
<PAGE> 8
ARTICLE VI.
CONTRACTS, CHECKS AND DEPOSITS
SECTION 1. CONTRACTS. The Board of Directors may authorize any officer
or officers or agents, to enter into any contract or to execute and deliver any
instrument in the name of and on behalf of the Corporation, and such authority
may be general or confined to specific instances.
SECTION 2. CHECKS/DRAFTS/NOTES. All checks, drafts or other orders for
the payment of money, notes or other evidences of indebtedness issued in the
name of the Corporation shall be signed by such officer or officers, agent or
agents of the Corporation and in such manner as shall from time to time be
determined by resolution of the Board of Directors.
SECTION 3. DEPOSITS. All funds of the Corporation not otherwise
employed shall be deposited from time to time to the credit of the Corporation
in such banks, trust companies or other depositories as the Board of Directors
by resolution may select.
ARTICLE VII.
CERTIFICATES FOR SHARES AND THEIR TRANSFER
SECTION 1. CERTIFICATES FOR SHARES. Certificates representing shares of
the Corporation shall be in such form as shall be determined by the Board of
Directors and shall contain such information as prescribed by law. Such
certificates shall be signed by the President or a Vice President and by either
the Corporate Secretary or an Assistant Corporate Secretary, and sealed with the
corporate seal or a facsimile thereof. The signatures of such officers upon a
certificate may be facsimiles. The name and address of the person to whom the
shares represented thereby are issued, with the number of shares and date of
issue, shall be entered on the stock transfer books of the Corporation. All
certificates surrendered to the Corporation for transfer shall be cancelled and
no new certificate shall be issued until the former certificate for a like
number of shares shall have been surrendered and cancelled, except that in case
of a lost, destroyed or mutilated certificate a new one may be issued therefor
upon such terms and indemnity to the Corporation as the Board of Directors may
prescribe.
SECTION 2. TRANSFER OF SHARES. Transfer of shares of the Corporation
shall be made only on the stock transfer books of the Corporation by the holder
of record thereof or by his legal representative, who shall furnish proper
evidence of authority to transfer, or by his attorney thereunto authorized by
power of attorney duly executed and filed with the Corporate Secretary of the
Corporation, and on surrender for cancellation of the certificate for such
shares. The person in whose name shares stand on the books of the Corporation
shall be deemed by the Corporation to be the owner thereof for all purposes. The
Board of Directors shall have power to appoint one or more transfer agents and
registrars for transfer and registration of certificates of stock.
ARTICLE VIII.
CORPORATE SEAL
The seal of the Corporation shall be in such form as the Board of
Directors shall prescribe.
8
<PAGE> 9
ARTICLE IX.
INDEMNIFICATION
SECTION 1. INDEMNIFICATION OF DIRECTORS AND OFFICERS. The Corporation
shall indemnify and reimburse the expenses of any person who is or was a
director, officer, agent or employee of the Corporation or is or was serving at
the request of the Corporation as a director, officer, partner, trustee,
employee, or agent of another enterprise or employee benefit plan to the extent
permitted by and in accordance with Article SEVENTH of the Company's Articles of
Incorporation and as permitted by law.
SECTION 2. LIABILITY INSURANCE. The Corporation shall have the power to
purchase and maintain insurance on behalf of any person who is or was a
director, officer, employee, or agent of the Corporation or is or was serving at
the request of the Corporation as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust, other enterprise, or
employee benefit plan against any liability asserted against him and incurred by
him in any such capacity or arising out of his status as such, whether or not
the Corporation would have the power to indemnify him against such liability
under the laws of the State of Washington.
SECTION 3. RATIFICATION OF ACTS OF DIRECTOR, OFFICER OR SHAREHOLDER.
Any transaction questioned in any shareholders' derivative suit on the ground of
lack of authority, defective or irregular execution, adverse interest of
director, officer or shareholder, nondisclosure, miscomputation, or the
application of improper principles or practices of accounting may be ratified
before or after judgment, by the Board of Directors or by the shareholders in
case less than a quorum of directors are qualified; and, if so ratified, shall
have the same force and effect as if the questioned transaction had been
originally duly authorized, and said ratification shall be binding upon the
Corporation and its shareholders and shall constitute a bar to any claim or
execution of any judgment in respect of such questioned transaction.
ARTICLE X.
AMENDMENTS
Except as to Section 6 of Article II of these Bylaws, the Board of
Directors may alter or amend these Bylaws at any meeting duly held, the notice
of which includes notice of the proposed amendment. Bylaws adopted by the Board
of Directors shall be subject to change or repeal by the shareholders; provided,
however, that Section 2 of the Article II, Section 2 (other than the provision
thereof specifying the number of Directors of the Corporation), and Sections 9,
11 and 13 of Article III and this proviso shall not be altered, amended or
repealed, and no provision inconsistent therewith or herewith shall be included
in these Bylaws, without the affirmative votes of the holders of at least eighty
percent (80%) of the voting power of all the shares of the Voting Stock voting
together as a single class.
9
<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>
12 Mos. Ended Years Ended December 31
June 30, --------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Fixed charges, as defined:
Interest on long-term debt $ 64,863 $ 63,413 $ 60,256 $ 55,580 $ 49,566
Amortization of debt expense
and premium - net 2,942 2,862 2,998 3,441 3,511
Interest portion of rentals 4,362 4,354 4,311 3,962 1,282
-------- -------- -------- -------- --------
Total fixed charges $ 72,167 $ 70,629 $ 67,565 $ 62,983 $ 54,359
======== ======== ======== ======== ========
Earnings, as defined:
Net income from continuing ops. $ 84,349 $114,797 $ 83,453 $ 87,121 $ 77,197
Add (deduct):
Income tax expense 51,426 61,075 49,509 52,416 44,696
Total fixed charges above 72,167 70,629 67,565 62,983 54,359
-------- -------- -------- -------- --------
Total earnings $207,942 $246,501 $200,527 $202,520 $176,252
======== ======== ======== ======== ========
Ratio of earnings to fixed charges 2.88 3.49 2.97 3.22 3.24
Fixed charges and preferred dividend requirements:
Fixed charges above $ 72,167 $ 70,629 $ 67,565 $ 62,983 $ 54,359
Preferred dividend requirements (2) 5,495 8,261 12,711 14,612 13,668
-------- -------- -------- -------- --------
Total $ 77,662 $ 78,890 $ 80,276 $ 77,595 $ 68,027
======== ======== ======== ======== ========
Ratio of earnings to fixed charges
and preferred dividend requirements 2.68 3.12 2.50 2.61 2.59
</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.
<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 QUARTERLY REPORT ON FORM 10-Q FOR THE SIX MONTHS ENDED JUNE 30,
1998, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 1,445,561
<OTHER-PROPERTY-AND-INVEST> 674,964
<TOTAL-CURRENT-ASSETS> 659,314
<TOTAL-DEFERRED-CHARGES> 289,636
<OTHER-ASSETS> 0
<TOTAL-ASSETS> 3,069,475
<COMMON> 585,082
<CAPITAL-SURPLUS-PAID-IN> (9,227)
<RETAINED-EARNINGS> 183,503
<TOTAL-COMMON-STOCKHOLDERS-EQ> 759,358
35,000
110,000
<LONG-TERM-DEBT-NET> 634,118<F1>
<SHORT-TERM-NOTES> 92,702
<LONG-TERM-NOTES-PAYABLE> 39,956
<COMMERCIAL-PAPER-OBLIGATIONS> 0
<LONG-TERM-DEBT-CURRENT-PORT> 40,157
0
<CAPITAL-LEASE-OBLIGATIONS> 5,406
<LEASES-CURRENT> 2,404
<OTHER-ITEMS-CAPITAL-AND-LIAB> 1,350,374<F2>
<TOT-CAPITALIZATION-AND-LIAB> 3,069,475
<GROSS-OPERATING-REVENUE> 1,204,664
<INCOME-TAX-EXPENSE> 29,265<F3>
<OTHER-OPERATING-EXPENSES> 1,106,022
<TOTAL-OPERATING-EXPENSES> 1,106,022
<OPERATING-INCOME-LOSS> 98,642
<OTHER-INCOME-NET> 12,558
<INCOME-BEFORE-INTEREST-EXPEN> 111,200<F4>
<TOTAL-INTEREST-EXPENSE> 34,060
<NET-INCOME> 47,875
1,612
<EARNINGS-AVAILABLE-FOR-COMM> 46,263
<COMMON-STOCK-DIVIDENDS> 17,348
<TOTAL-INTEREST-ON-BONDS> 0
<CASH-FLOW-OPERATIONS> 69,715
<EPS-PRIMARY> 0.83
<EPS-DILUTED> 0.83
<FN>
<F1>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>OTHER ITEMS CAPITAL AND LIABILITIES INCLUDES THE CURRENT LIABILITIES, DEFERRED
CREDITS AND MINORITY INTEREST, LESS CERTAIN AMOUNTS INCLUDED UNDER LONG-TERM DEBT-
CURRENT PORTION AND LEASES-CURRENT, FROM THE COMPANY'S CONSOLIDATED BALANCE
SHEET.
<F3>THE COMPANY DOES NOT INCLUDE INCOME TAX EXPENSE AS AN OPERATING EXPENSE ITEM.
IT IS INCLUDED ON THE COMPANY'S STATEMENT AS A BELOW-THE-LINE ITEM.
<F4>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>
