<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997 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
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
Name of Each Exchange
Title of Class on Which Registered
-------------- -------------------
Common Stock, no par value, together with New York Stock Exchange
Preferred Share Purchase Rights appurtenant thereto Pacific Stock Exchange
7 7/8% Trust Originated Preferred Securities, Series A New York Stock Exchange
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Title of Class
--------------
Preferred Stock, Cumulative, Without Par Value
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days:
Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (Section 229.405 of this chapter) is not contained herein, and
will not be contained, to the best of Registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [X]
The aggregate market value of the Registrant's outstanding Common Stock, no par
value (the only class of voting stock), held by non-affiliates is
$1,280,093,235.00, based on the last reported sale price thereof on the
consolidated tape on February 28, 1998.
At February 28, 1998, 55,960,360 shares of Registrant's Common Stock, no par
value (the only class of common stock), were outstanding.
Documents Incorporated By Reference
-----------------------------------
Part of Form 10-K into Which
Document Document is Incorporated
-------- ------------------------
Proxy Statement to be filed in Part III, Items 10, 11,
connection with the annual meeting 12 and 13
of shareholders to be held May 14, 1998
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THE WASHINGTON WATER POWER COMPANY
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INDEX
<TABLE>
<CAPTION>
Item Page
No. No.
--- ---
<S> <C> <C>
Acronyms and Terms........................................................... iii
Part I
1. Business..................................................................... 1
Company Overview........................................................... 1
Energy Delivery............................................................ 3
General.................................................................... 3
Electric Operations........................................................ 3
Natural Gas Operations..................................................... 3
Natural Gas Resources...................................................... 4
Regulatory Issues.......................................................... 4
Electric Delivery Operating Statistics..................................... 6
Generation and Resources................................................... 8
General.................................................................... 8
Electric Requirements...................................................... 8
Electric Resources......................................................... 8
Hydroelectric Relicensing.................................................. 9
Regulatory Issues.......................................................... 9
Generation and Resources Operating Statistics.............................. 10
National Energy Trading and Marketing...................................... 11
Non-Energy Business........................................................ 13
Industry Restructuring and Legislative Issues.............................. 14
Federal Level.............................................................. 14
State Level................................................................ 14
Experimental Programs...................................................... 15
Environmental Issues....................................................... 16
2. Properties................................................................... 17
Energy Delivery............................................................ 17
Generation and Resources................................................... 18
3. Legal Proceedings............................................................ 18
4. Submission of Matters to a Vote of Security Holders.......................... 18
Part II
5. Market for Registrant's Common Equity and Related Stockholder Matters........ 19
6. Selected Financial Data...................................................... 20
7. Management's Discussion and Analysis of Financial Condition and Results of
Operations ................................................................. 21
Results of Operations...................................................... 22
Liquidity and Capital Resources............................................ 26
Future Outlook............................................................. 28
8. Financial Statements and Supplementary Data.................................. 31
Independent Auditors' Report............................................... 32
Financial Statements....................................................... 33
Notes to Financial Statements.............................................. 39
9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure ............................................................... *
Part III
10. Directors and Executive Officers of the Registrant........................... 57
11. Executive Compensation....................................................... 58
12. Security Ownership of Certain Beneficial Owners and Management............... 58
13. Certain Relationships and Related Transactions............................... 58
Part IV
14. Financial Statements, Financial Statement Schedules, Exhibits and
Reports on Form 8-K ........................................................ 59
Signatures................................................................... 60
Independent Auditors' Consent................................................ 61
Exhibit Index................................................................ 62
</TABLE>
* = not an applicable item in the 1997 calendar year for the Company
ii
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THE WASHINGTON WATER POWER COMPANY
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ACRONYMS AND TERMS
(The following acronyms and terms are found in multiple locations within the
document)
<TABLE>
<CAPTION>
Acronym/Term Meaning
- ------------ -------
<S> <C>
aMW - Average Megawatt - a measure of electrical energy
over time
AFUCE - Allowance for Funds Used to Conserve Energy; a
carrying charge similar to AFUDC (see below) for
conservation-related capital expenditures
AFUDC - Allowance for Funds Used During Construction;
represents the cost of both the debt and equity funds
used to finance utility plant additions during the
construction period
Avista Corp. - Parent company to the Company's non-regulated
businesses
BPA - Bonneville Power Administration
Capacity - a measure of the rate at which a particular
generating source produces electricity
Centralia - the coal fired Centralia Power Plant in western
Washington State
Colstrip - the coal fired Colstrip Generating Project in
southeastern Montana
CPUC - California Public Utilities Commission
CT - combustion turbine; a natural gas fired unit used
primarily for peaking needs
DSM - Demand Side Management - the process of helping
customers manage their use of energy resources
Energy - a measure of the amount of electricity produced from
a particular generating source over time
FERC - Federal Energy Regulatory Commission
IPUC - Idaho Public Utilities Commission
KV - Kilovolt - a measure of capacity on transmission
lines
KW,KWH - Kilowatt, kilowatthour, 1000 watts or 1000 watt hours
MW,MWH - Megawatt, megawatthour, 1000 KW or 1000 KWH
OPUC - Public Utility Commission of Oregon
Pentzer - Pentzer Corporation, a wholly owned subsidiary of the
Company which is the parent company to the majority
of the Company's non-energy businesses
Therm - Unit of measurement for natural gas; a therm is equal
to one hundred cubic feet (volume) or 100,000 BTUs
(energy)
Watt - Unit of measurement for electricity; a watt is equal
to the rate of work represented by a current of one
ampere under a pressure of one volt
WIDCo - Washington Irrigation & Development Company, a wholly
owned non-energy subsidiary of the Company
WUTC - Washington Utilities and Transportation Commission
WWP - The Washington Water Power Company, the Company
</TABLE>
iii
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THE WASHINGTON WATER POWER COMPANY
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PART I
This Form 10-K contains forward-looking statements within the meaning of Section
21E of the Securities Exchange Act of 1934. Forward-looking statements should be
read with the cautionary statements and important factors included in this Form
10-K at Item 7 - - "Management's Discussion and Analysis of Financial Condition
and Results of Operations - - Safe Harbor Forward-Looking Statements."
Forward-looking statements are all statements other than statements of
historical fact, including without limitation those that are identified by the
use of the words "anticipates," "estimates," "expects," "intends," "plans,"
"predicts," and similar expressions.
ITEM 1. BUSINESS
COMPANY OVERVIEW
The Washington Water Power Company (Company), which was incorporated in the
State of Washington in 1889, primarily operates in the electric and natural gas
utility businesses. At December 31, 1997, the Company's employees included 1,467
people in its utility operations and approximately 1,751 people in its
majority-owned non-regulated businesses (energy and non-energy). The Company's
corporate headquarters are in Spokane, Washington (Spokane), which serves as the
Inland Northwest's center for manufacturing, transportation, health care,
education, communication, agricultural and service businesses.
Regulatory, economic and technological changes have brought about the
accelerating transformation of the electric utility industry from a vertically
integrated monopoly to separate market driven businesses. Since 1996, the
Company has reorganized its operations to take advantage of the changes in the
Company's business environment and to proactively respond to regulatory and
structural changes in the industry. The restructuring reinforces the Company's
commitment to and advocacy of utility industry deregulation. (See Industry
Restructuring and Legislative Issues for additional information).
The Company's utility operations are organized into two lines of business. The
Energy Delivery business includes retail electric and natural gas distribution
and transmission services. The Generation and Resources business includes
generation and production, resource optimization, electric and natural gas
commodity trading and wholesale marketing. Both the Energy Delivery and
Generation and Resources lines of business are currently conducted by separate
business divisions within the Company.
In February 1997, the Company's Board of Directors approved creation of a new
subsidiary, Avista Corp. (Avista), which owns all of the Company's non-regulated
businesses. Avista was formed to segregate the Company's non-regulated
businesses from its regulated businesses and support financing of the
non-regulated businesses as they develop and expand. The Company also
reorganized by adding a new line of business, National Energy Trading and
Marketing. The National Energy Trading and Marketing (energy) business includes
Avista Advantage, Inc. (Avista Advantage) and Avista Energy, Inc. (Avista
Energy). See Item 1. Business - National Energy Trading and Marketing and Notes
1, 3 and 4 of Notes to Financial Statements for additional information. The
non-energy business primarily consists of Pentzer Corporation (Pentzer)
which is the parent company to the majority of the Company's non-energy
businesses. See Item 1. Business - Non-Energy Business and Notes 1 and 18 of
Notes to Financial Statements for additional information.
[Flow chart showing the 1997 Organizational Structure of the Company]
1
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THE WASHINGTON WATER POWER COMPANY
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For the twelve months ended December 31, 1997, 1996 and 1995, respectively, the
Company derived operating revenues and income/(loss) from operations in the
following proportions:
<TABLE>
<CAPTION>
Income/(Loss) from
Operating Revenues Operations (pre-tax)
------------------ --------------------
1997 1996 1995 1997 1996 1995
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Energy Delivery 29% 40% 50% 60% 48% 57%
Generation and Resources 39% 45% 38% 34% 45% 36%
National Energy Trading and Marketing 19% - - 1% (1%) -
Non-Energy 13% 15% 12% 5% 8% 7%
</TABLE>
2
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THE WASHINGTON WATER POWER COMPANY
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ENERGY DELIVERY
GENERAL
Energy Delivery provides electricity and natural gas distribution and
transmission services in a 26,000 square mile area in eastern Washington and
northern Idaho with a population of approximately 825,000. Energy Delivery also
provides natural gas service in a 4,000 square mile area in northeast and
southwest Oregon and in the South Lake Tahoe region of California, with the
population in these areas approximating 495,000.
At the end of 1997, retail electric service was supplied to approximately
301,000 customers in eastern Washington and northern Idaho; retail natural gas
service was supplied to approximately 251,000 customers in parts of Washington,
Idaho, Oregon and California.
The Company expects economic growth to continue in its eastern Washington and
northern Idaho service area. The Company, along with others in the service area,
is continuing its efforts to facilitate expansion of existing businesses and
attract new businesses to the Inland Northwest. Agriculture, mining and lumber
were the primary industries for many years, but health care, education,
electronic and other manufacturing, tourism and the service sectors have become
increasingly important industries that operate in the Company's service area.
The Company also anticipates strong economic growth to continue in its Oregon
service area.
The Company anticipates residential and commercial electric load growth to
average approximately 2.1% annually for the next five years primarily due to
increases in both population and the number of businesses in its service
territory. The number of electric customers is expected to increase and the
average annual usage by residential customers is expected to remain steady on a
weather-adjusted basis.
The Company anticipates natural gas load growth, including transportation
volumes, in its Washington and Idaho service area to average approximately 2.9%
annually for the next five years. The Oregon and South Lake Tahoe, California
service areas are anticipated to realize 2.1% growth annually during that same
period. Refer to Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations: Results of Operations: Future Outlook for
additional information.
ELECTRIC OPERATIONS
Energy Delivery currently receives all of its electric supply from Generation
and Resources. (See Generation and Resources - Electric Resources for additional
information.)
Challenges facing the retail electric business include cost management,
self-generation and fuel switching by commercial and industrial customers, the
costs of increasingly stringent environmental laws and the potential for
stranded or non-recoverable utility assets. In April 1996, the Federal Energy
Regulatory Commission (FERC) issued Orders No. 888 and No. 889 which require
electric utility companies to provide third-party access to their transmission
systems and to establish an Open Access Same-time Information System (OASIS) to
provide transmission customers with information about available transmission
capacity, prices and other information, by electronic means. In addition, state
legislatures in the Company's service territory are currently reviewing
restructuring the retail electric business to full competition. When electric
utility companies are required to provide retail wheeling service, which is the
transmission of electric power from another supplier to a customer located
within such utility's service area, the Company believes it will face minimal
risk for stranded generation, transmission or distribution assets due to its low
cost structure. However, the Company cannot predict the potential impact, if
any, of restructuring the electric utility industry on the Company's future
financial condition and results of operations. (See Industry Restructuring and
Legislative Issues and Note 1 of Notes to Financial Statements for additional
information.)
NATURAL GAS OPERATIONS
Natural gas remains competitively priced compared to alternative fuel sources
for residential, commercial and industrial customers. Because of abundant
supplies and competitive markets, natural gas should sustain its market
advantage. The Company continues to advise electric customers as to the cost
advantages of converting space and water heating needs to natural gas.
Significant growth has occurred in the Company's natural gas business in recent
years due to increased demand for natural gas in new construction. The Company
also makes sales or provides transportation service directly to large natural
gas customers and non-retail sales to marketers and producers where points of
delivery are outside the Company's retail distribution area.
The Company provides transportation service to customers who obtain their own
natural gas supplies. Transportation service was a significant component of the
Company's total system deliveries in 1997. The competitive nature of the spot
natural gas market results in savings in the cost of purchased natural gas,
which encourages large customers with fuel-switching capabilities to continue to
utilize natural gas for their energy needs. The total volume transported on
behalf of transportation customers was approximately 245.1 million therms in
1997. This volume represented approximately 43% of the Company's total system
deliveries in 1997. In addition, the Company sells firm transportation to third
parties when it is not needed to serve the Company's customers.
3
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THE WASHINGTON WATER POWER COMPANY
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Most of the Company's large industrial customers purchase their own natural gas
requirements through gas marketers. For these customers, the Company provides
transportation from the Company's pipeline interconnection to the customer's
plant. The Company has numerous special contracts for gas transportation
service, most of which contain negotiated rates for Company distribution service
based on the customer's competitive alternatives. Seven of the Company's largest
gas customers are provided gas transportation service by the Company under
special contracts. These negotiated contracts were entered into to retain these
customers who can either by-pass the Company's distribution system or have
competitive alternative fuel capability. All special contracts are subject to
regulatory review and approval.
NATURAL GAS RESOURCES
Natural Gas Supply A diverse portfolio of resources allows the Company to
capture market opportunities that benefit the Company's natural gas customers.
Natural gas supplies are available from both domestic and Canadian sources
through both long- and short-term, or spot market, purchases. The Company holds
capacity on six pipelines and owns natural gas storage facilities which allow
the Company to optimize its available resources.
Firm natural gas supplies are purchased by the Company through negotiated
agreements having terms ranging between one month and seven years. During 1997,
approximately one-third of the Company's purchases were in the short-term
market, with contracts on a month-to-month basis. Approximately 12% of the
natural gas supply was obtained from domestic sources, with the remaining 88%
from Canadian sources. Nearly all natural gas purchased from Canadian sources is
contracted in U.S. dollar denominations, limiting any foreign currency exchange
exposure. The Company does not consider Canadian gas supplies to be at greater
risk of non-delivery than U.S. supplies.
The Company holds capacity on six natural gas pipelines, Northwest Pipeline
Company (NWP), Pacific Gas Transmission (PGT), Paiute Pipeline (Paiute),
Tuscarora Gas Transmission Company (Tuscarora), NOVA Pipeline, Ltd. (NOVA) and
Alberta Natural Gas Co. Ltd. (ANG), which provide the Company access to both
domestic and Canadian natural gas supplies. In 1997, the Company obtained gas
from over 25 different suppliers.
The Company contracts with NWP for three types of firm service (transportation,
liquefied natural gas storage and underground storage), with Paiute for firm
transportation and liquefied natural gas storage and with PGT, Tuscarora, NOVA
and ANG for firm transportation only.
Jackson Prairie Natural Gas Storage Project (Storage Project) The Company owns a
one-third interest in the Storage Project, which is an underground natural gas
storage field located near Chehalis, Washington. The role of the Storage Project
in providing flexible natural gas supplies is increasingly important to the
Company's natural gas operations as it enables the Company to place natural gas
into storage when prices are low or to meet minimum natural gas purchasing
requirements, as well as to withdraw natural gas from storage when spot prices
are high or as needed to meet high demand periods. The Company, together with
the other owners, is pursuing alternatives to increase the potential for both
capacity and deliverability at the Storage Project.
The Company has contracted to release some of its Storage Project capacity to
two other utilities until 2000 and 2001, with a provision under one of the
releases to partially recall the released capacity if the Company determines
additional natural gas is required for its own system supply.
REGULATORY ISSUES
The Company, as a regulated public utility, is currently subject to regulation
by state utility commissions with respect to prices, accounting, the issuance of
securities and other matters. The retail electric operations are subject to the
jurisdiction of the Washington Utilities and Transportation Commission (WUTC)
and the Idaho Public Utilities Commission (IPUC). The retail natural gas
operations are subject to the jurisdiction of the WUTC, the IPUC, the Oregon
Public Utility Commission (OPUC) and the California Public Utilities Commission
(CPUC). The Company is also subject to the jurisdiction of the FERC for its
(wholesale) natural gas rates charged for the release of capacity from the
Jackson Prairie Storage Project.
In each regulatory jurisdiction, the price the Company may charge for retail
electric and natural gas services (other than specially negotiated retail rates
for industrial or large commercial customers, which are subject to regulatory
review and approval) is currently determined on a "cost of service" basis and is
designed to provide, after recovery of allowable operating expenses, an
opportunity to earn a reasonable return on "rate base." "Rate base" is generally
determined by reference to the original cost (net of accumulated depreciation)
of utility plant in service, subject to various adjustments for deferred taxes
and other items (see Note 1 of Notes to Financial Statements for additional
information about regulation, depreciation and deferred taxes). Over time, rate
base is increased by additions to utility plant in service and reduced by
depreciation of utility plant. As the energy business is restructured,
traditional "cost of service" ratemaking may evolve into some other form of
ratemaking. Rates for transmission services are based on the "cost of service"
principles and are set forth in tariffs on file with the FERC. (See Industry
Restructuring and Legislative Issues for additional information.)
General Rate Cases The Company's last general electric rate cases were effective
in March 1987 for the State of Washington and September 1986 for the State of
Idaho; both allowed a return on equity of 12.90%.
4
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THE WASHINGTON WATER POWER COMPANY
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On June 27, 1997 the Company filed a general natural gas rate increase of $7.87
million with the WUTC for the State of Washington. On December 1, 1997, all
interested parties filed a settlement agreement with the WUTC. On December 24,
1997, the WUTC accepted the settlement agreement. The resulting $5 million, or
7.5%, increase was effective January 1, 1998. The agreement included a two-year
freeze in general revenue requirements. Such a freeze does not preclude the
Company from filing natural gas trackers (see below for additional information)
or from filing for recovery of "extraordinary circumstances". Included in the
settlement agreement was a stated return on equity of 10.75%. However, the
agreements reached in the settlement do not set a precedent for future rate
filings. The Company's last general natural gas rate cases involving litigated
cost of capital resulted in allowed return on equity of: 12.90% for the State of
Washington effective August 1990; 12.75% for the State of Idaho effective
October 1989.
Demand Side Management (DSM) The WUTC and IPUC approved as filed, effective
January 1, 1997, the Company's proposed electric DSM programs and tariff rider
for a three-year extension ending December 31, 1999. The Company's programs,
while maintaining a residential electric weatherization program and fuel
efficiency awareness programs, now place a greater emphasis on commercial and
industrial programs. The tariff rider is a separate revenue source and
represents a 1.54% electric revenue surcharge. These surcharge revenues will be
used to fund the Company's 1997 through 1999 DSM programs.
In 1993, the OPUC authorized the Company to defer revenue requirements
associated with its Oregon DSM investments and established an annual rate
adjustment mechanism to reflect the deferred costs on a timely basis. Under this
authorization, the Company files annually, concurrent with the Company's annual
natural gas "tracker" filing, a rate adjustment to recover DSM program costs and
margin losses.
Power Cost Adjustment (PCA) The Company has a PCA in Idaho which tracks changes
in hydroelectric generation, surplus energy prices, related changes in thermal
generation and the Public Utility Regulatory Policies Act of 1978 (PURPA)
contracts, but not changes in revenues or costs associated with other wheeling
or power contracts. Rate changes are triggered when the deferred balance reaches
$2.2 million provided no more than two surcharges or rebates are in effect at
the same time. See Note 1 of Notes to Financial Statements for additional
information.
Purchased Gas Adjustment (Natural Gas Trackers) Natural gas trackers are
supplemental tariffs filed with state regulatory commissions which are designed
to pass through changes in purchased natural gas costs and do not normally
result in any changes in net income to the Company. In November 1997, the
Company filed a natural gas tracker with the IPUC requesting a $3.97 million, or
15.6%, increase which was approved, effective December 15, 1997. In October
1997, the Company filed a natural gas tracker with the OPUC requesting a $3.67
million, or 8.86%, increase which was approved, effective December 1, 1997. The
Oregon gas tracker includes a provision that specifies a sharing of benefits and
risks associated with changes in gas prices. In January 1998, the Company filed
a natural gas tracker with the WUTC. In February 1998, the WUTC approved a $1.18
million, or 1.64%, decrease effective February 15, 1998.
5
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THE WASHINGTON WATER POWER COMPANY
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ENERGY DELIVERY OPERATING STATISTICS
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
RETAIL ELECTRIC OPERATIONS
ELECTRIC OPERATING REVENUES (Thousands of Dollars):
Residential.......................................... $160,411 $160,345 $156,755
Commercial........................................... 144,952 144,717 140,221
Industrial........................................... 58,391 62,067 60,979
Public street and highway lighting................... 3,352 3,359 3,345
-------- -------- --------
Total retail electric revenue...................... 367,106 370,488 361,300
Transmission revenues................................ 19,503 11,907 8,307
Other revenues....................................... 8,685 6,740 6,107
Transfer to Generation and Resources (1)............ (180,544) (180,018) (175,337)
-------- -------- --------
Total electric energy delivery revenues............ $214,750 $209,117 $200,377
======== ======== ========
ELECTRIC ENERGY SALES (Thousands of MWhs):
Residential.......................................... 3,270 3,220 3,150
Commercial........................................... 2,716 2,674 2,592
Industrial........................................... 1,759 1,839 1,803
Public street and highway lighting................... 24 24 23
-------- -------- --------
Total retail energy sales.......................... 7,769 7,757 7,568
======== ======== ========
ELECTRIC AVERAGE HOURLY LOAD (aMW)..................... 954 973 924
======== ======== ========
NUMBER OF ELECTRIC CUSTOMERS (Average for Period):
Residential.......................................... 261,873 257,726 253,364
Commercial........................................... 33,681 33,043 32,236
Industrial........................................... 1,145 1,133 1,107
Public street and highway lighting................... 371 363 349
-------- -------- --------
Total retail electric customers.................... 297,070 292,265 287,056
======== ======== ========
ELECTRIC RESIDENTIAL SERVICE AVERAGES:
Annual use per customer (KWh)........................ 12,489 12,493 12,434
Revenue per KWh (in cents)........................... 4.90 4.98 4.98
Annual revenue per customer.......................... $612.55 $622.15 $618.69
NATURAL GAS OPERATIONS
NATURAL GAS OPERATING REVENUES (Thousands of Dollars):
Residential.......................................... $81,855 $85,904 $84,358
Commercial........................................... 42,731 51,006 52,671
Industrial - firm.................................... 3,563 3,949 5,470
Industrial - interruptible........................... 512 1,131 1,967
-------- -------- --------
Total retail natural gas revenues.................. 128,661 141,990 144,466
Non-retail sales..................................... 19,559 9,862 10,530
Transportation....................................... 12,678 12,154 12,340
Other revenues....................................... 4,884 7,305 6,891
-------- -------- --------
Total natural gas energy delivery revenues......... $165,782 $171,311 $174,227
======== ======== ========
THERMS DELIVERED (Thousands of Therms):
Residential.......................................... 182,037 183,927 159,919
Commercial........................................... 118,494 132,744 120,838
Industrial - firm.................................... 12,509 12,757 14,658
Industrial - interruptible........................... 3,217 4,174 10,621
-------- -------- --------
Total retail sales................................. 316,257 333,602 306,036
Non-retail sales..................................... 105,297 67,656 104,831
Transportation....................................... 245,139 237,894 221,261
Interdepartmental sales and Company use.............. 2,087 22,215 25,043
-------- -------- --------
Total therms - sales and transportation............ 668,780 661,367 657,171
======== ======== ========
</TABLE>
(1) Transfer to Generation and Resources represents the portion of revenues
collected by Energy Delivery from retail customers attributable to the
sale of the electric energy commodity delivered by Energy Delivery.
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ENERGY DELIVERY OPERATING STATISTICS
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
SOURCES OF NATURAL GAS SUPPLY (Thousands of Therms):
Purchases............................................ 431,646 422,194 429,903
Storage - injections................................. (31,288) (26,260) (31,248)
Storage - withdrawals................................ 22,183 24,572 32,332
Natural gas for transportation....................... 245,139 237,894 221,261
Distribution system gains (losses)................... 1,100 2,967 4,923
-------- -------- --------
Total supply....................................... 668,780 661,367 657,171
======== ======== ========
NET SYSTEM MAXIMUM CAPABILITY (Thousands of Therms):
Net system maximum demand (winter)................... 3,134 3,273 2,758
Net system maximum firm contractual capacity (winter) 4,220 4,210 4,210
NUMBER OF NATURAL GAS CUSTOMERS (Average for Period):
Residential.......................................... 214,927 203,245 192,252
Commercial........................................... 27,171 25,747 24,606
Industrial - firm.................................... 306 300 281
Industrial - interruptible........................... 25 28 31
-------- -------- --------
Total retail customers............................. 242,429 229,320 217,170
Non-retail sales..................................... 17 7 5
Transportation....................................... 111 93 75
-------- -------- --------
Total natural gas customers........................ 242,557 229,420 217,250
======== ======== ========
NATURAL GAS RESIDENTIAL SERVICE AVERAGES:
Washington and Idaho
Annual use per customer (therms)................... 927 1,007 919
Revenue per therm (in cents)....................... 40.44 41.90 48.98
Annual revenue per customer........................ $374.90 $421.91 $450.07
Oregon and California
Annual use per customer (therms)................... 703 724 678
Revenue per therm (in cents)....................... 55.71 58.55 61.78
Annual revenue per customer........................ $391.56 $424.00 $418.88
HEATING DEGREE DAYS: (1)
Spokane, WA
Actual............................................. 6,510 7,477 6,363
30 year average.................................... 6,842 6,842 6,842
% of average....................................... 95% 109% 93%
Medford, OR
Actual............................................. 4,144 4,088 3,751
30 year average.................................... 4,611 4,611 4,611
% of average....................................... 90% 89% 81%
INCOME FROM ENERGY DELIVERY OPERATIONS (After tax)......... $77,788 $64,345 $76,436
======== ======== ========
</TABLE>
(1) Heating degree days are the measure of the coldness of weather
experienced, based on the extent to which the average of high and low
temperatures for a day falls below 65 degrees Fahrenheit (annual degree
days below historic indicate warmer than average temperatures).
7
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THE WASHINGTON WATER POWER COMPANY
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GENERATION AND RESOURCES
GENERAL
The Generation and Resources line of business manages the Company's electric
energy resource portfolio, which is used to serve Energy Delivery's retail
electric customers and Generation and Resources' wholesale electric customers.
The primary business focus of Generation and Resources is to optimize the
availability and operation of generation resources. The Company owns and
operates nine hydroelectric projects, a wood-waste fueled generating station and
two natural gas combustion turbine (CT) peaking units. See Item 2. Properties -
Generation and Resources for additional information. The Company also owns a 15%
share in two coal-fired generating facilities and leases two additional gas CT
peaking units. With this diverse energy resource portfolio, the Company remains
one of the nation's lowest-cost producers and sellers of electric energy
services.
The Company's wholesale marketing and trading business units within the
Generation and Resources line of business are a secondary, but very important
part of the Company's overall business strategy. Since 1987, the Company has
entered into a number of long-term power sales contracts that have increased its
wholesale electric revenues, and the Company is continuing to actively pursue
electric wholesale marketing and energy trading business opportunities. Energy
trading includes short-term sales and purchases such as next hour, next day and
monthly blocks of energy. Wholesale marketing includes sales and purchases under
long-term contracts with one-year and longer terms. Wholesale sales are affected
by weather and streamflow conditions and may eventually be affected by the
restructuring of the electric utility industry. (See Industry Restructuring and
Legislative Issues for additional information.)
Challenges facing Generation and Resources include evolving technologies which
provide alternate energy supplies and deregulation of electric and natural gas
markets. The Company believes it faces minimal risk for stranded generation
assets as a result of deregulation due to its low cost structure. Generation and
Resources continues to compete in the wholesale electric market with other
western utilities, federal marketing agencies and power marketers. It is
expected that competition to sell energy will remain vigorous due to increased
competition and surplus capacity in the western United States. Competition in
the sale of capacity and energy is influenced by many factors, including the
availability of capacity in the western United States, the availability and
price of natural gas, and transmission availability. Business challenges
affecting the energy trading business include new entrants in the wholesale
market, such as power brokers and marketers, and declining per unit margins.
ELECTRIC REQUIREMENTS
The Company's 1997 annual peak requirements, including long-term and short-term
contractual obligations, were 4,226 MW. This peak occurred on January 14, 1997,
at which time the maximum capacity available from the Company's generating
facilities, including long-term and short-term purchases, was 4,684 MW. The
electric requirements are affected by both Energy Delivery's electric needs and
Generation and Resources' wholesale contractual commitments.
ELECTRIC RESOURCES
The Company's diverse resource mix of hydroelectric projects, thermal generating
facilities and power purchases and exchanges, combined with strategic access to
regional electric transmission systems, enables the Company to remain one of the
nation's lowest-cost producers and sellers of electric energy services. At
December 31, 1997, the Company's total owned resources available were 58%
hydroelectric and 42% thermal. See Generation and Resources Operating Statistics
on page 10 for the Company's energy resource statistics.
Hydroelectric Resources Hydroelectric generation is the Company's lowest cost
source of electricity and the availability of hydroelectric generation has a
significant effect on the Company's total energy costs. Under average operating
conditions, the Company meets about one-third of its total energy requirements
(both retail and long-term wholesale), with its own hydroelectric generation and
long-term hydroelectric contracts. The streamflows to Company-owned
hydroelectric projects were 172%, 145% and 120% of normal in 1997, 1996 and
1995, respectively.
Total hydroelectric resources provide 531 aMW annually.
Thermal Resources The Company has a 15% interest in each of two twin-unit
coal-fired facilities-the Centralia Power Plant in western Washington and Units
3 and 4 of the Colstrip Generating Project in southeastern Montana. In addition,
the Company owns a wood-waste-fired facility known as the Kettle Falls
Generating Station in northeastern Washington and two natural gas-fired CTs,
located in Spokane, used for peaking needs. The Company also operates and leases
two natural gas-fired CTs in northern Idaho, used for peaking needs. Total
thermal resources provide 302 aMW annually.
Centralia, which is operated by PacifiCorp, is supplied with coal under both a
fuel supply agreement in effect through December 2020 and various spot market
purchases. In 1997, 1996 and 1995, Centralia provided approximately 39%, 46% and
30%, respectively, of the Company's thermal generation. (See Environmental
Issues for additional information.)
Colstrip is supplied with fuel under coal supply and transportation agreements
in effect through December 2019 from adjacent coal reserves. The Montana Power
Company is the operator of Colstrip. In 1997, 1996 and 1995, Colstrip provided
approximately 46%, 34% and 47% of the Company's thermal generation,
respectively.
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THE WASHINGTON WATER POWER COMPANY
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Kettle Falls' primary fuel is wood-waste generated as a by-product from forest
industry operations within one hundred miles of the plant. Natural gas may be
used as an alternate fuel. A combination of long-term contracts plus spot
purchases provides the Company the flexibility to meet expected future fuel
requirements for the plant. In 1997, 1996 and 1995, Kettle Falls provided
approximately 11%, 10% and 8% of the Company's thermal generation, respectively.
The four CTs are natural gas-fired units, primarily used for peaking needs. The
two Rathdrum (Idaho) CTs have access to domestic and Canadian natural gas
supplied through PGT. In 1997, 1996 and 1995, these four units provided
approximately 4%, 10% and 15%, respectively, of the Company's thermal
generation. Thermal generation from CTs during 1997 was lower than prior years
primarily due to the cost of natural gas as compared to alternative energy
supplies.
Purchases, Exchanges and Sales In 1997, the Company had various purchase
contracts equating to 751 MW, with an average remaining life of 3.7 years.
Additionally, long-term hydro purchase contracts of 197 MW were available with
an average remaining contract life of 11.6 years. The Company also enters into a
significant amount of short-term sales and purchases with durations of up to one
year. Energy purchases and exchanges for the years 1997, 1996 and 1995 provided
approximately 65%, 54% and 36%, respectively, of the Company's total electric
energy requirements, which reflects increased wholesale trading activity.
Under PURPA, the Company is required to purchase generation from qualifying
facilities, including small hydroelectric and cogeneration projects, at avoided
cost rates adopted by the WUTC and the IPUC. The Company purchased approximately
561,000 MWH, or about 2% of the Company's total energy requirements, from these
sources at a cost of approximately $26 million in 1997. These contracts expire
in 1999-2022.
HYDROELECTRIC RELICENSING
The Company is a licensee under the Federal Power Act, which regulates certain
of the Company's generation resources and is administered by the FERC, and its
licensed projects are subject to the provisions of Part I of that Act. These
provisions include payment for headwater benefits, condemnation of licensed
projects upon payment of just compensation and take-over of such projects after
the expiration of the license upon payment of the lesser of "net investment" or
"fair value" of the project, in either case plus severance damages. All but one
of the Company's hydroelectric plants are regulated by the FERC through project
licenses issued for 30-50 year periods. See Item 2. Properties - Generation and
Resources for additional information.
The Cabinet Gorge and Noxon Rapids plants are currently in the process of
relicensing with an expiration date on the existing license of February 2001.
The Company filed a Notice of Intent to relicense in 1996 and has since
consulted with resource agencies, Native American tribes, special interest
groups and the general public regarding its relicensing. The Company's goal in
consultation is to develop settlement agreements with all parties, which will
form the basis for the license application expected to be submitted in February
1999. The focus in 1998 will be negotiating settlement agreements and preparing
a collaboratively written environmental assessment and license application. An
Environmental Impact Statement (EIS) will be written by the FERC in the period
between application filing and issuance of a new license.
The Company's approach to relicensing departs from the conventional FERC
process. Early FERC involvement and EIS scoping has occurred prior to
application and the consultation process has been expanded to a comprehensive
collaborative process including all stakeholders. The collaborative process used
by the Company is nationally recognized as the model for FERC's alternative
approach to relicensing.
The Company has presented to the collaborative participants a proposed
comprehensive package of protection, mitigation and enhancement measures that
addresses impacts resulting from the continued operations of the Cabinet Gorge
and Noxon Rapids projects. The comprehensive package includes issues such as
fisheries, water quality, wildlife, recreation, land use, cultural resources and
erosion, and represents the results of studies and interests of over 40
organizations and 100 individuals. The preliminary proposal presented by the
Company amounts to $161 million to be spent over a 50-year license term. See
Item 2. Properties - Generation and Resources and Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations: Future
Outlook for additional information.
REGULATORY ISSUES
The Company is subject to the jurisdiction of the FERC for its accounting
procedures and its wholesale electric rates. Some wholesale electric rates are
determined on a "cost-of-service" basis in a manner similar to retail rates. See
Energy Delivery - Regulatory Issues for additional information. Also, the
Company can enter into wholesale electric sales contracts with rates based on
"cost-of-service" principles. Generally, rates for wholesale electric sales by
the Company for terms up to five years are based on market prices.
9
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THE WASHINGTON WATER POWER COMPANY
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<TABLE>
<CAPTION>
GENERATION AND RESOURCES OPERATING STATISTICS
Years Ended December
------------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
ELECTRIC ENERGY RESOURCES (Thousands of MWhs):
Hydro generation (from Company facilities).......... 4,863 5,045 4,038
Thermal generation (from Company facilities)........ 2,627 2,764 2,537
Purchased power - long-term hydro................... 1,212 1,170 1,159
Purchased power - other............................. 16,038 10,641 4,113
Power exchanges..................................... 178 102 156
-------- -------- --------
Total power resources........................... 24,918 19,722 12,003
Energy losses and Company use....................... (739) (790) (525)
-------- -------- --------
Total energy resources (net of losses).......... 24,179 18,932 11,478
======== ======== ========
ELECTRIC ENERGY REQUIREMENTS (Thousands of MWhs):
Energy Delivery..................................... 7,769 7,757 7,568
Long-term wholesale................................. 4,307 4,507 1,953
Short-term wholesale................................ 12,103 6,668 1,957
-------- -------- --------
Total energy requirements....................... 24,179 18,932 11,478
======== ======== ========
RESOURCE AVAILABILITY at time of system peak (MW):
Total requirements (winter) (1)..................... 4,226 3,180 2,545
Total resource availability (winter)................ 4,684 3,340 2,855
Total requirements (summer) (2)..................... 4,345 2,978 2,037
Total resource availability (summer)................ 4,766 3,357 2,660
ELECTRIC OPERATING REVENUES (Thousands of Dollars):
Long-term wholesale................................. $138,730 $139,116 $ 84,220
Short-term wholesale................................ 187,190 91,443 25,013
Other revenues...................................... 4,669 7,989 2,042
Transfer from Energy Delivery (3)................... 180,544 180,018 175,337
-------- -------- --------
Total electric energy trading revenues.......... $511,133 $418,566 $286,612
======== ======== ========
NUMBER OF ELECTRIC CUSTOMERS (Average for Period):
Wholesale customers................................. 91 60 33
======== ======== ========
INCOME FROM GENERATION AND RESOURCES OPERATIONS
(After tax)......................................... $ 47,737 $ 65,048 $ 52,325
======== ======== ========
</TABLE>
(1) Includes long-term contract obligations of 1,022 MW, 744 MW and 733 MW
and 1,688 MW, 725 MW and 327 MW of short-term sales in 1997, 1996 and
1995, respectively.
(2) Includes long-term contract obligations of 1,011 MW, 839 MW and 691 MW
in 1997, 1996 and 1995, respectively, and short-term sales of 1,966 MW,
739 MW and 25 MW in 1997, 1996 and 1995, respectively.
(3) Transfer from Energy Delivery represents the portion of revenues
collected by Energy Delivery from retail customers attributable to the
sale of the electric energy commodity delivered by Energy Delivery.
10
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THE WASHINGTON WATER POWER COMPANY
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NATIONAL ENERGY TRADING AND MARKETING
Avista Corp. is the parent company to the Company's National Energy Trading and
Marketing businesses. As a result of reorganizing the Company to proactively
respond to deregulation, the Company added a new line of business, National
Energy Trading and Marketing. Avista Energy and Avista Advantage conduct the
National Energy Trading and Marketing businesses. As of December 31, 1997, the
Company had an equity investment of approximately $206.7 million in Avista
Corp., of which approximately $58.3 million was invested in Avista Energy.
Wholesale trading and marketing in the Western Systems Coordinating Council
(WSCC) are still being done in the Generation and Resources line of business.
(See Generation and Resources for additional information.) National Energy
Trading and Marketing efforts focus on a national basis, which includes
conducting business in the WSCC.
Avista Energy focuses on energy commodity trading, energy marketing and other
related businesses on a national basis. Avista Energy's business is affected by
several factors, including:
- the demand for and availability of energy throughout the United
States,
- an increasing number of power brokers and marketers,
- lower unit margins on new sales contracts,
- fewer long-term power contracts being entered into, resulting in
a heavier reliance on short-term power contracts which have
lower margins than long-term contracts,
- marginal fuel prices, and
- deregulation of the electric utility industry.
Avista Energy was originally incorporated in February 1996 as WWP Resource
Services, Inc. In February 1997, WWP Resource Services, Inc.'s name was changed
to Avista Energy, Inc. Avista Energy was non-operating until July 1, 1997 when
it began its electric and natural gas trading and marketing activities. In
preparation for expansion in the Canadian market, Avista Energy Canada, Ltd., a
wholly owned subsidiary of Avista Energy, was formed on July 7, 1997, but
conducted no operations in 1997.
Avista Energy's headquarters are in Spokane with offices in Portland, Oregon and
Houston, Texas. As noted below, Avista Energy has developed several alliances
and partnerships to support its trading and marketing efforts. Avista Energy
will continue to explore and pursue additional alliance and investment
opportunities in other areas of the country in order to further expand its
national energy trading and marketing business.
Avista Energy's current business activities include marketing, scheduling and
trading electricity and natural gas. Physical and financial transactions are
traded in the North America marketplace. In 1997, Avista Energy sold
approximately 4.5 million MWh of electric energy and 66.8 million dekatherms of
natural gas.
In 1997, the revenues and income from operations of the National Energy Trading
and Marketing business segment were derived primarily from trading operations
(rather than marketing operations), in part due to the absence of a fully
deregulated marketplace. As Avista Energy's marketing operations develop and
more opportunities are presented by an increasing number of states permitting
customer choice, the company expects that a greater percentage of Avista
Energy's revenues and income will be derived from marketing operations.
In 1996, WWP Resources, Inc. (now Avista Energy) and Mock Energy Services,
California's largest natural gas marketer, formed Avista/Mock Energy, LLC, a
limited liability company in which Avista Energy has a 50% ownership interest,
to provide integrated energy services to customers throughout the State of
California. Under the terms of the agreement, Avista/Mock Energy will market
electricity and related services to industrial and large commercial customers
throughout California. The company will also offer energy-related products and
services to its customers through Avista Advantage. The direct access market in
California is currently expected to open April 1, 1998.
In April 1997, Avista Energy contracted with Chelan County Public Utility
District (Chelan PUD), located in Washington State, to jointly market a
significant portion of Chelan PUD's hydroelectric resources to other utilities
throughout the Western United States. In addition, Avista Energy began assisting
with the real-time scheduling of such output beginning in August 1997. On
October 20, 1997, a complaint for declaratory and injunctive relief was filed in
Chelan County Superior Court in order to determine whether the joint marketing
and real-time scheduling efforts of Chelan PUD and Avista Energy are within
Chelan PUD's lawful authority to undertake. The Plaintiff, a taxpayer and
ratepayer of the District, requests relief in the form of a judgment declaring
the agreements unconstitutional and without force. Briefs by the Plaintiff are
due March 17, 1998 and the hearing on the matter is scheduled for March 26,
1998. Avista Energy is presently unable to assess the likelihood of an adverse
outcome or estimate an amount or range of potential loss in the event of an
adverse outcome.
In June 1997, Avista Energy formed an alliance with Energy West Incorporated, a
diversified energy and retail propane company in Montana, to develop and
implement a direct access, retail power marketing business in Montana. The
direct access market in Montana is currently expected to open July 1, 1998.
Effective August 1, 1997, Avista Energy and Howard Energy Marketing, Inc.,
formed Howard/Avista Energy, LLC (Howard/Avista), a limited liability company in
which Avista Energy has a 50% ownership interest. Howard/Avista markets natural
gas to commercial and industrial end-users, utilities, producers and other
marketing companies.
11
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THE WASHINGTON WATER POWER COMPANY
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Howard/Avista also provides related services including fuel management, storage,
transportation and risk management. Howard/Avista operates primarily in the
upper Midwest and Northeast United States, with offices in Michigan, New York,
Illinois, Wisconsin, Pennsylvania, Texas and Oklahoma. Avista Energy's initial
equity investment in Howard/Avista was $25 million. The investment in
Howard/Avista is accounted for using the equity method of accounting. During its
five month existence in 1997, Howard/Avista sold approximately 351 million
dekatherms of natural gas, averaging 2.3 million dekatherms per day. See Note 4
of Notes to Financial Statements for additional information.
Avista Advantage provides a variety of energy-related products and services to
commercial and industrial customers on a national basis. Its primary product
lines include consolidated billing and resource accounting.
Refer to Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations: Results of Operations: National Energy Trading and
Marketing Operations and Notes 1, 3 and 4 of Notes to Financial Statements for
additional information.
12
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THE WASHINGTON WATER POWER COMPANY
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NON-ENERGY BUSINESS
Avista Corp. is also the parent company to the Company's non-energy
subsidiaries. The Non-energy business is conducted primarily by Pentzer, which
is the parent company to the majority of the Company's non-energy businesses. As
of December 31, 1997, the Company had an equity investment of approximately
$206.7 million in Avista Corp., of which approximately $138.0 million was
invested in Pentzer and $10.4 million was invested in the remaining non-energy
subsidiaries, the largest of which is Washington Irrigation and Development
Company (WIDCo), which maintains a small investment portfolio.
As of December 31, 1997, Avista Corp. had approximately $484.5 million in total
assets, or about 20% of the Company's consolidated assets. Avista Corp's
portfolio of non-energy investments includes companies involved in investments,
fuel cell research and development, fiber optic technology and real estate.
Pentzer's portfolio of investments includes companies involved in consumer
product promotion, specialty tool manufacturing, metal fabrication, financial
services and electronic technology.
Pentzer's current investment profile focuses on manufacturers and distributors
of industrial and consumer products as well as service businesses. The Company
seeks businesses with above average records of earnings growth in industries
that are not cyclical or dependent upon high levels of research and development.
Emphasis is placed on leading companies with strong market franchises, dominant
or proprietary product lines or other significant competitive advantages.
Pentzer is particularly interested in companies serving niche markets. Total
equity investment in any one company is generally limited to $15 million, and
control of the acquired company's board of directors is generally required.
Pentzer's business strategy is to acquire controlling interest in a broad range
of middle-market companies, to help these companies grow through internal
development and strategic acquisitions, and to sell the portfolio investments
either to the public or to strategic buyers when it becomes most advantageous in
meeting Pentzer's return on invested capital objectives. Pentzer's goal is to
produce financial returns for the Company's shareholders that, over the
long-term, should be higher than that of the utility operations. From time to
time, a significant portion of Pentzer's earnings contributions may be the
result of transactional gains. Transactional gains arise from a one-time event
or a specific transaction, such as the sale of an investment or individual
company from Pentzer's portfolio of investments. Non-transactional earnings
arise out of the ongoing operations of the individual portfolio companies.
Accordingly, although the income stream is expected to be positive, it may be
uneven from year to year.
Refer to Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations: Results of Operations: Non-Energy Operations and Notes 1
and 18 of Notes to Financial Statements for additional information.
13
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THE WASHINGTON WATER POWER COMPANY
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INDUSTRY RESTRUCTURING AND LEGISLATIVE ISSUES
FEDERAL LEVEL
Industry restructuring to remove certain barriers to competition in the electric
utility industry was initially promoted by federal legislation. The Energy
Policy Act of 1992 (Energy Act) confers expanded authority upon the FERC to
issue orders requiring electric utilities to transmit power and energy to or for
wholesale purchasers and sellers, and to require electric utilities to enlarge
or construct additional transmission capacity for the purpose of providing these
services.
As previously reported, the FERC issued its final rule in Order No. 888 in April
1996. That order requires public utilities operating under the Federal Power Act
to provide access to their transmission systems to third parties pursuant to the
terms and conditions of the FERC's pro-forma open access transmission tariff.
Utilities were required to file an open access tariff, allowing only limited
variations to the pro-forma tariff to reflect regional operating practices.
Utilities were also required to take transmission service under this same
tariff. The Company filed its open access tariff with the FERC in July 1996 and
subsequently began providing transmission service under the tariff. The FERC
issued its initial order accepting the non-rate terms and conditions of the
Company's tariff in November 1996.
In the FERC's Order No. 889, the companion rule to Order No. 888, the FERC
required public utilities to establish a system, OASIS, to provide transmission
customers with information about available transmission capacity, prices and
other information, by electronic means. This enables customers to obtain
transmission service in a non-discriminatory fashion. The final rule required
each public utility subject to the rule to functionally separate its
transmission and wholesale power merchant functions, and prescribed standards of
conduct under which it is assured that a utility's wholesale power merchant
function obtains information about its transmission system in the same manner
competitors do. The Company filed its "Procedures for Implementing Standards of
Conduct under FERC Order No. 889" with the FERC in December 1996 and adopted
these Procedures effective January 3, 1997. FERC Orders No. 888 and No. 889 have
not had a significant material effect on the operating results of the Company.
In response to FERC Orders No. 888 and 889, the Company and various Northwest
utilities began investigating the feasibility of transferring certain operation
responsibilities associated with a regional transmission grid to an independent
grid operator. In November 1997, the Company withdrew from the effort to
establish an independent grid operator in the Northwest because the costs were
greater than the perceived benefits. The Company is exploring other regional
transmission alternatives intended to help facilitate a competitive electric
power market, including the development of an independent grid scheduling entity
which might provide quantifiable efficiencies in administering access to the
Northwest transmission system in a non-discriminatory fashion.
The North American Electric Reliability Council and the WSCC have undertaken
initiatives to establish a series of security coordinators to oversee the
reliable operation of the regional transmission system. In connection therewith,
the Company, in cooperation with other utilities in the Pacific Northwest, is
working to establish the Pacific Northwest Security Coordinator (PNSC) which
will oversee daily and short-term operations of the northwest sub-regional
transmission grid and have limited authority to direct certain actions of
control area operators in the case of a pending transmission system emergency.
The PNSC is expected to be operational by June 1998.
STATE LEVEL
Further competition may be introduced by state action. Competition for retail
customers is not generally allowed in the Company's service territory. While the
Energy Act precludes the FERC from mandating retail wheeling, state regulators
and legislators could open service territories to full competition at the retail
level. Legislative action at the state level would be required for full retail
wheeling to occur in Washington and Idaho. However, the Company believes that
competition will ultimately be introduced into the retail electric business.
During 1997, the Idaho Legislature initiated an analysis of impacts on Idaho
citizens of restructuring electrical services. The Idaho Legislature enacted
legislation requiring the IPUC to compile utilities' costs separately by
generation, transmission and distribution. The Company submitted its unbundling
cost study on December 18, 1997. The IPUC will audit all investor owned
utilities' cost of service studies, including results of operations, methodology
and allocations. This process will, most likely, generate hearings and
presentation of witnesses.
Bills introduced in the Washington State Legislature to move toward retail
competition in the electric business failed during 1997. The proposed
legislation would have allowed customer choice beginning July 1, 1999 with
unbundling beginning September 1, 1998. Bills introduced in the 1998 Washington
Legislative session include proposed legislation to require cost unbundling,
development and disclosure of consumer protection policies, and studies of
deregulation and system reliability.
The WUTC has initiated a collaborative effort, which includes stakeholders, to
examine unbundling and related issues. Unbundling would require utilities to
compile costs separately by generation, transmission and distribution. September
1998 is the preliminary date for unbundling cost filings with scope and
methodology to be determined in the meantime.
Due to their experiences following telephone deregulation, regulators are
sensitive to potential customer service and
14
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THE WASHINGTON WATER POWER COMPANY
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reliability issues resulting from electric industry restructuring. The WUTC has
launched a staff investigation to examine potential rulemaking in areas of
reporting, vegetation management, pole inspection and maintenance,
undergrounding and system reliability benchmarks.
The Company has developed a model as an alternative to customer choice for small
customers. The Portfolio Access Model (PA Model) was developed as a transition
to full direct access. Under the PA Model, large-use customers would receive
direct access; small-use customers would be provided a menu of services priced
at market rates such as monthly and annual pricing, as well as optional "green
rates" for renewable power. The PA Model has served as a regional proposal under
discussion by legislative committees and work groups in Washington, Idaho and
Oregon. The PA Model will continue to be examined in 1998 with legislation
expected to be introduced in 1999. More Options for Power Services II (MOPS II)
is the Company's PA Model regulatory pilot. (See Experimental Programs below for
additional information.)
Notice of Inquiry (NOI) The WUTC intends to reexamine the eight guiding
principles developed in December 1995 as part of its Electric Industry
Restructuring Inquiry. The principles state that future WUTC regulatory
oversight will balance such issues as reliability, pricing responsive to
customers needs and selected public policy concerns.
In August 1995, the WUTC initiated an NOI entitled, "Examining Regulation of
Local Distribution Companies in the Face of Change in the Natural Gas Industry."
The outcome of the NOI process was a set of conclusions by the WUTC that gas DSM
should be evaluated utility by utility, the Gas Integrated Resource Plan process
should continue, and the PGA Mechanism and natural gas procurements incentive
should be evaluated in a separate NOI entitled "Purchased Gas Adjustment
Mechanisms".
EXPERIMENTAL PROGRAMS
To assess impacts of competition and customer choice, the Company implemented
the following experimental programs: Direct Access and Delivery Service Tariff
(DADS), More Options for Power Services I (MOPS I) tariff and More Options for
Power Services II (MOPS II) tariff. The Company has received regulatory approval
to defer all costs incurred from implementing the MOPS I and MOPS II pilot
programs. In each case, the Company loses some margin (approximately $0.4
million in total for 1997) which is not material to the Company's consolidated
financial condition or results of operations.
Direct Access and Delivery Service Tariff (DADS) To proactively respond to the
potential regulatory change of customer choice in the electric business, the
Company filed the DADS tariff to better understand how customer choice could
affect and benefit its large industrial customers. In May 1996, the Company
filed with the WUTC and the IPUC an experimental DADS tariff to allow eligible
customers to choose their supplier to serve up to one-third of their electric
load. The eligible customers are 30 of the Company's largest customers in
Washington and Idaho. This trial tariff is effective through August 31, 1998. As
of January 1, 1998, 13 of the eligible customers were taking service under the
tariff representing 50% of the eligible load. Five different alternative
suppliers are selling energy to those customers mostly with one-year terms at a
fixed price for the capacity and energy. The tariff will not affect the rates
for other customer classes during or after the experimental period. The Company
does not recover any of the lost margin on the commodity which the Company is no
longer supplying.
More Options for Power Services I (MOPS I) A MOPS I experimental tariff was
filed in February 1997 with the WUTC and IPUC to help the Company assess the
potential benefits of direct access for its electric residential and commercial
customers and to collect information that will assist in the transition to
customer choice for those classes of customers. The pilot allows only the
customers in the towns of Odessa and Harrington to participate. This trial
tariff is effective through June 30, 1999. Since its implementation date of July
1, 1997, 244 of the 980 eligible customers have elected Grant County PUD as
their supplier. This represents a bill savings of approximately 6% - 10% to
customers. Originally, six power marketers signed up to participate; all but
Grant County PUD withdrew upon California's announcement of full direct access
by January 1, 1998. The Company has agreed to absorb 50% of the lost margin on
the commodity which the Company is no longer supplying.
More Options for Power Services II (MOPS II) While MOPS I allowed customers to
purchase from alternative energy suppliers, MOPS II will provide access to the
Company's portfolio of traditional service, monthly market, annual market and
renewable resource pricing. (See PA Model above for additional information.)
Approximately 7,800 customers in the towns of Deer Park, Washington and Hayden,
Idaho would be able to elect alternative energy service from the Company
by mid-1998. The Company received approval on this program on December 31, 1997
and January 27, 1998 from the WUTC and IPUC, respectively. This trial tariff
is effective through mid-2000. The Company has agreed to absorb 33% of the lost
margin on the commodity which the Company is no longer supplying.
15
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THE WASHINGTON WATER POWER COMPANY
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ENVIRONMENTAL ISSUES
The Company is subject to environmental regulation by federal, state and local
authorities. The generation, transmission, distribution, service and storage
facilities in which the Company has an ownership interest have been designed to
comply with all environmental laws presently applicable. Furthermore, the
Company conducts periodic reviews of all its facilities and operations to
anticipate emerging environmental issues. The Company's Board of Directors has
an Environmental Committee to deal specifically with these issues.
Air Quality. The Company continues to assess both the potential and actual
impact of the 1990 Clean Air Act Amendments (CAAA) on the thermal generating
plants in which it maintains an ownership interest. Centralia, which is operated
by PacifiCorp, is classified as a "Phase II" coal-fired plant under the CAAA
and, as such, will be required to reduce sulfur dioxide (SO2) emissions.
Centralia is also impacted by "visibility impairment" issues related to Mt.
Rainier National Park in southwestern Washington, which requires additional
reductions in emissions. A RACT (Reasonably Available Control Technology) order
was issued by SWAPCA (Southwest Washington Air Pollution Control Agency) which
requires a reduction in SO2 emissions of approximately 90% by the year 2000. The
standards in the RACT order were established by a collaborative decision-making
group consisting of representatives from federal and state agencies and the
plant owners. The Company is currently evaluating its options with regard to
Centralia, which include selling the Company's interest in the plant, importing
cleaner coal from other sources, employing various scrubbing technologies or
closing the plant down. The most likely option is installing additional
scrubbers. The Company's estimated share of this option will be incurred over
several years and is currently estimated to be $35 million of capital costs.
These estimates of future obligations are included in the projected Company
Capital Requirements in Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations: Liquidity. The Company
anticipates making a final decision with respect to these options in 1998.
Colstrip, which is also a "Phase II" coal-fired plant and is operated by Montana
Power, is not expected to be required to implement any additional SO2 mitigation
in the foreseeable future in order to continue operations. Reduction in nitrogen
oxides (NOX) will be required at both Centralia and Colstrip prior to the year
2000. The anticipated share of costs for NOX compliance are not expected to have
a major economic impact on the Company.
The Company's other thermal projects also are subject to various CAAA standards.
Every five years each project requires an updated operating permit (known as a
Title V permit) which addresses, among other things, the compliance of the plant
with the CAAA. The permit for the Spokane CTs was received in 1995. The permit
for the Company's Kettle Falls plant was issued in 1996. The operating permit
application for the Rathdrum CTs in northern Idaho received approval and was
issued in 1997.
Refer to Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations: Future Outlook and Note 17 to Financial Statements for
additional information.
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THE WASHINGTON WATER POWER COMPANY
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ITEM 2. PROPERTIES
ENERGY DELIVERY
ELECTRIC DISTRIBUTION AND TRANSMISSION PLANT
The Company operates approximately 12,200 miles of primary and secondary
distribution lines in its electric system in addition to a transmission system
of approximately 550 miles of 230 kV line and 1,550 miles of 115 kV line. The
Company also owns a 10% interest in 495 miles of a 500 kV line between Colstrip,
Montana and Townsend, Montana, and a 15% interest in three miles of a 500 kV
line from Centralia, Washington to the nearest Bonneville Power Administration
(Bonneville) interconnection.
The 230 kV lines are used to transmit power from the Company's Noxon Rapids and
Cabinet Gorge hydroelectric generating stations to major load centers in the
Company's service area as well as to transfer power between points of
interconnection with adjoining electric transmission systems. These lines
interconnect with Bonneville at five locations and at one location each with
PacifiCorp, Montana Power and Idaho Power Company. The Bonneville
interconnections serve as points of delivery for power from the Colstrip and
Centralia generating stations as well as for the interchange of power with
entities outside the Pacific Northwest. The interconnection with PacifiCorp is
used to integrate Mid-Columbia hydroelectric generating facilities to the
Company's loads as well as for the interchange of power with entities within the
Pacific Northwest.
The 115 kV lines provide for transmission of energy as well as providing for the
integration of the Spokane River hydroelectric and Kettle Falls wood-waste
generating stations with service area load centers. These lines interconnect
with Bonneville at nine locations, Grant County Public Utility District (PUD),
Seattle City Light and Tacoma City Light at two locations and one
interconnection each with Chelan County PUD, PacifiCorp and Montana Power.
Natural Gas Plant
The Company has natural gas distribution mains of approximately 3,650 miles in
Washington and Idaho and 1,690 miles in Oregon and California, as of December
31, 1997.
The Company, NWP and Puget Sound Energy each own a one-third undivided interest
in the Storage Project, which has a total peak day deliverability of 5.7 million
therms, with a total working natural gas inventory of 155.2 million therms.
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THE WASHINGTON WATER POWER COMPANY
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GENERATION AND RESOURCES
The Company's electric generation properties, located in the States of
Washington, Idaho and Montana, include the following:
Generating Plant
<TABLE>
<CAPTION>
Nameplate Present Year of
No. of Rating Capability FERC License
Units (MW)(1) (MW)(2) Expiration
------ --------- ---------- ------------
<S> <C> <C> <C> <C>
Hydroelectric Generating Stations
(River)
Washington:
Long Lake (Spokane) 4 70.0 72.8 2007
Little Falls (Spokane) 4 32.0 36.0 N/A
Nine Mile (Spokane) 4 26.4 29.0 2007
Upper Falls (Spokane) 1 10.0 10.2 2007
Monroe Street (Spokane) 1 14.8 14.8 2007
Meyers Falls (Colville) 2 1.2 1.3 2023
Idaho:
Cabinet Gorge (Clark Fork) 4 221.9 236.0 2001 (3)
Post Falls (Spokane) 6 14.8 18.0 2007
Montana:
Noxon Rapids (Clark Fork) 5 466.7 554.0 2001 (3)
----- -----
Total Hydroelectric 857.8 972.1
Thermal Generating Stations
Washington:
Centralia (4) 2 199.5 201.0
Kettle Falls 1 50.7 48.0
Northeast (Spokane) CT (5) 2 61.2 69.0
Idaho:
Rathdrum CT (5) 2 166.5 176.0
Montana:
Colstrip (Units 3 and 4) (4) 2 233.4 222.0
----- -----
Total Thermal 711.3 716.0
Total Generation Properties 1,569.1 1,688.1
======= =======
</TABLE>
N/A Not applicable.
(1) Nameplate Rating, also referred to as "installed capacity", is the
manufacturer's assigned power rating under specified conditions.
(2) Capability is the maximum generation of the plant without exceeding
approved limits of temperature, stress and environmental conditions.
(3) The formal relicensing process began in September 1995 for Cabinet Gorge
and Noxon Rapids. (See Generation and Resources - Hydroelectric
Relicensing for additional information.)
(4) Jointly owned; data above refers to Company's respective 15% interests.
(5) Used primarily for peaking needs.
ITEM 3. LEGAL PROCEEDINGS
In December 1996, the Company filed a Complaint for declaratory relief and money
damages against Underwriters at Lloyds of London (Lloyds) 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 another underwriter, Aegis.
The Company's Complaint seeks money damages in excess of $16 million. Refer to
Note 17 of Notes to Financial Statements for additional information.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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THE WASHINGTON WATER POWER COMPANY
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Outstanding shares of Common Stock are listed on the New York and Pacific Stock
Exchanges. As of February 28, 1998, there were approximately 29,360 registered
shareholders of the Company's no par value Common Stock.
See Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations: Future Outlook for additional information about common
stock dividends.
Refer to Notes 1 and 16 of Notes to Financial Statements for additional
information. For high and low stock price information, refer to Note 20 of Notes
to Financial Statements.
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THE WASHINGTON WATER POWER COMPANY
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ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------------------------------------------------
1997 1996 1995 1994 1993
--------- --------- --------- --------- ---------
(Thousands of Dollars except Per Share Data and Ratios)
<S> <C> <C> <C> <C> <C>
Operating Revenues:
Energy Delivery and
Generation and Resources * ........ $ 890,516 $ 798,994 $ 661,216 $ 608,067 $ 601,722
National Energy Trading and Marketing . 247,646 116 - - -
Non-energy ............................ 164,010 145,847 93,793 62,698 38,877
--------- --------- --------- --------- ---------
Total ................................. 1,302,172 944,957 755,009 670,765 640,599
Operating Income/(Loss):
Energy Delivery and
Generation and Resources * ........ 178,289 173,658 176,344 149,051 153,108
National Energy Trading and Marketing . 2,191 (1,801) - - -
Non-energy ............................ 8,984 15,064 13,496 6,407 7,742
--------- --------- --------- --------- ---------
Total ................................. 189,464 186,921 189,840 155,458 160,850
Net Income/(Loss):
Energy Delivery and
Generation and Resources * .......... 100,777(1) 62,404 72,310 63,567 69,510
National Energy Trading and Marketing . 2,488 (1,161) - - -
Non-energy ............................ 11,532 22,210 14,811 13,630 13,266
--------- --------- --------- --------- ---------
Total ................................. 114,797 83,453 87,121 77,197 82,776
Preferred Stock Dividend Requirements ... 5,392 7,978 9,123 8,656 8,335
Income Available for Common Stock ....... 109,405(1) 75,475 77,998 68,541 74,441
Outstanding Common Stock (000s):
Weighted Average ...................... 55,960 55,960 55,173 53,538 51,616
Year-End .............................. 55,960 55,960 55,948 54,421 52,758
Book Value per Share .................. $ 13.36 $ 12.70 $ 12.82 $ 12.45 $ 12.02
Earnings per Share:
Energy Delivery and
Generation and Resources ............ 1.71(1) 0.97 1.14 1.03 1.19
National Energy Trading and Marketing . 0.04 (0.02) - - -
Non-energy ............................ 0.21 0.40 0.27 0.25 0.25
--------- --------- --------- --------- ---------
Total, Basic and Diluted .............. 1.96(1) 1.35 1.41 1.28 1.44
Dividends Paid per Common Share ....... 1.24 1.24 1.24 1.24 1.24
Total Assets at Year-End:
Energy Delivery and
Generation and Resources ............ 1,926,739 1,921,429 1,869,180 1,817,815 1,701,652
National Energy Trading and Marketing . 214,630 899 - - -
Non-energy ............................ 270,416 254,970 229,722 176,438 136,186
--------- --------- --------- --------- ---------
Total ................................. 2,411,785 2,177,298 2,098,902 1,994,253 1,837,838
Long-term Debt at Year-End .............. 762,185 764,526 738,287 721,146 647,229
Preferred Stock Subject to Mandatory
Redemption at Year-End ................ 45,000 65,000 85,000 85,000 85,000
Company-Obligated Mandatorily
Redeemable Preferred Trust Securities 110,000 - - - -
Ratio of Earnings to Fixed Charges ...... 3.49 2.97 3.22 3.24 3.45
Ratio of Earnings to Fixed Charges and
Preferred Dividend Requirements ........ 3.12 2.50 2.61 2.59 2.77
</TABLE>
* Energy Delivery and Generation and Resources figures contain some minor
consolidating intersegment eliminations.
(1) Includes the $41.4 million after-tax effect of the income tax recovery
(see Note 9 of Notes to Financial Statements for additional
information).
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THE WASHINGTON WATER POWER COMPANY
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ITEM 7. 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. 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 this line of
business without the commodity prices having a material income effect. Usage by
retail customers varies from year to year primarily as a result of weather
conditions, customer growth and the economy in the Company's service area. Other
factors which may influence long-term energy usage include conservation efforts,
appliance efficiency and other technology.
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 (WSCC). Energy trading
includes short-term sales and purchases, such as next hour, next day and monthly
blocks of energy. Wholesale marketing includes sales and purchases under
long-term contracts with one-year and longer terms. Generation and Resources
manages the Company's electric energy resource portfolio, which is used to serve
Energy Delivery's retail electric customers and Generation and Resources'
wholesale electric customers. In managing the electric energy resource
portfolio, Generation and Resources seeks to optimize the availability and
operations of generation resources. Revenues and the cost of electric power
purchases vary from year to year depending on the electric wholesale power
market, which is affected by several factors, including the availability of
water for hydroelectric generation, the availability of base load plants in the
region, marginal fuel prices and the demand for power in other areas of the
country. Other factors affecting the wholesale power market include an
increasing number of power brokers and marketers, lower unit margins on new
sales contracts than were realized in the past, fewer long-term power contracts
being entered into, resulting in a heavier reliance on short-term power
contracts, typically with lower margins, deregulation of the electric utility
industry and competition from low cost generation being developed by independent
power producers.
Avista Corp. owns the Company's National Energy Trading and Marketing and
Non-energy businesses. As a result of reorganizing the Company to proactively
respond to deregulation, the Company added a new line of business - National
Energy Trading and Marketing. 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, which includes conducting business within the WSCC. Avista
Energy's business is affected by several factors, including the demand for and
availability of power throughout the United States, an increasing number of
power brokers and marketers, lower unit margins on new sales contracts, fewer
long-term power contracts being entered into, resulting in a heavier reliance on
short-term power contracts with lower margins, marginal fuel prices and
deregulation of the electric utility industry. Avista Advantage provides a
variety of energy-related products and services to commercial and industrial
customers on a national basis. Its primary product lines include consolidated
billing and resource accounting.
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. Pentzer's business strategy is such that its earnings result from
both transactional and non-transactional earnings. Transactional gains arise
from a one-time event or a specific transaction, such as the sale of an
investment or individual company from Pentzer's portfolio of investments.
Non-transactional earnings arise out of the ongoing operations of the individual
portfolio companies.
RESULTS OF OPERATIONS
OVERALL OPERATIONS
Overall earnings per share for 1997 were $1.96, compared to $1.35 in 1996 and
$1.41 in 1995. The 1997 results include the receipt of $41.4 million, after-tax,
in an income tax recovery from the Internal Revenue Service, which was partially
offset by environmental reserves and non-recurring adjustments (see below and
Note 9 of Notes to Financial Statements for additional information about the
income tax recovery). The 1996 results reflect $11.1 million in after-tax
operating expenses related to storm damage on the electric distribution system
and the expensing of $10.3 million in after-tax non-operating costs related to
the terminated proposed merger between the Company and Sierra Pacific Resources
(see Note 19 of Notes to Financial Statements for additional information about
the merger termination). The 1996 results also reflect improved utility
earnings, primarily from Generation and Resources' wholesale electric
activities, and transactional gains totaling $15.1 million recorded by Pentzer
primarily as a result of the sale of property by one of its subsidiary
companies and the sale of stock in Itron, Inc. (Itron). The 1995
21
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THE WASHINGTON WATER POWER COMPANY
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results include improved earnings from Generation and Resources' wholesale
electric operations and $6.1 million in transactional gains from Pentzer,
primarily due to the sale of Itron stock.
Net income available for common stock increased $33.9 million, or 45%, in 1997
after decreasing $2.5 million in 1996. Utility (Energy Delivery and Generation
and Resources) income available for common stock increased $41.0 million, or
75%, in 1997 after decreasing $8.8 million, or 14%, in 1996. Utility income
contributed $1.71 to earnings per share in 1997, compared to $0.97 in 1996 and
$1.14 in 1995. The income tax recovery resulted in an increase of $0.74 in
earnings per share for 1997, which was offset by $0.25 per share in
environmental reserves and other miscellaneous non-recurring adjustments. The
ice storm (see below) and merger-related expenses resulted in decreases of $0.20
and $0.18, respectively, in earnings per share for 1996. National Energy Trading
and Marketing income available for common stock increased $3.6 million in 1997
and realized a loss of $1.2 million in 1996, contributing $0.04 to earnings per
share in 1997 compared to a loss of $0.02 in 1996. These companies did not exist
in 1995. Non-energy operating income available for common stock decreased $10.7
million, or 48%, in 1997 and increased $7.4 million, or 50%, in 1996 and
contributed $0.21 to earnings per share in 1997, compared to $0.40 in 1996 and
$0.27 in 1995. The 1996 non-energy results reflect $0.27 per share from
transactional gains.
Income from Energy Delivery operations increased $24.3 million, or 27%, in 1997
over 1996 and decreased $18.8 million, or 17%, in 1996 from 1995, with both
changes primarily due to the $17.1 million in pre-tax expenses in 1996
associated with storm damage on the electric distribution system. Income from
Generation and Resources operations decreased $19.6 million, or 23%, in 1997
from 1996 and increased $16.1 million, or 24%, in 1996 over 1995. The decrease
in 1997 was primarily the result of expiration of older sales contracts with
higher margins, lower unit margins on new sales contracts, lower hydroelectric
generation and higher transmission expenses. The increase in 1996 was primarily
due to increased wholesale electric revenues, resulting from both new power
contracts and improved streamflow conditions.
On November 19, 1996, the eastern Washington and northern Idaho region
experienced an ice storm that resulted in damage to the Company's electric
transmission and distribution system. The Company's service area was affected by
continuing snow and rain, which hampered the Company's efforts to restore
electric service to some customers until December 1, 1996. Initially, over
one-third, or 100,000, of the Company's retail electric customers were without
electric service. Repairing the damage to the Company's system cost
approximately $21.8 million, of which $17.1 million (pre-tax) was attributable
to operations and maintenance expenses, including labor and materials, for the
repair of damaged lines, transformers and other equipment. The remainder of the
cost represents capital expenditures to replace poles and other equipment
damaged beyond repair.
Interest expense increased $3.0 million in 1997, as compared to 1996, and $4.2
million in 1996, as compared to 1995, with both increases primarily due to
higher levels of outstanding debt during the year. In 1997 and 1996, $70 million
and $20 million, respectively, in preferred stock was redeemed, which increased
short-term borrowings. In addition, a total of $110 million in Preferred Trust
Securities were issued in January and June 1997, distributions on which are
included in interest expense. (See Note 15 of Notes to Financial Statements and
Liquidity and Capital Resources for additional information.) During 1997, 1996
and 1995, $51.5 million, $38.0 million and $45.0 million, respectively, of
long-term debt matured or was redeemed, while $20.0 million and $78.0 million in
long-term debt was issued in 1997 and 1995, respectively. At December 31, 1997,
long-term debt outstanding was $2.3 million lower than at December 31, 1996.
Long-term debt outstanding at December 31, 1996 was $26.2 million higher than at
the end of 1995 due to increased borrowings from banks.
In June 1997, the Company received $81 million from the Internal Revenue Service
(IRS) to settle an income tax claim relating to its investment in the terminated
nuclear project 3 of the Washington Public Power Supply System (WNP3). The $81
million recovery included $34 million in income taxes the Company overpaid in
prior years plus $47 million in accrued interest, which in total contributed
$41.4 million, or $0.74 per share, to net income. (See Note 9 of Notes to
Financial Statements for additional information about the income tax recovery.)
Income taxes increased $11.6 million, or 23%, in 1997 over 1996 primarily due to
the taxes on the interest income received as a part of the income tax recovery,
partially offset by an $11.4 million income tax benefit associated with the
income tax recovery and adjustments related to revised estimates on certain tax
issues. Income taxes decreased $2.9 million in 1996 from 1995 primarily due to
the effects of the expenses associated with the storm damage on the Company's
electric distribution system and the merger-related expenses written off during
the year, partially offset by increased income from operations.
Preferred stock dividend requirements decreased $2.6 million in 1997 over 1996
due to the redemption of $20 million in Preferred Stock, Series I in June 1997
and the redemption of the entire $50 million Flexible Auction Preferred Stock,
Series J in August 1997. These securities were redeemed with a portion of the
proceeds of the Preferred Trust Securities which were issued in January and June
1997. However, as described above, distributions on the Preferred Trust
Securities are accounted for in interest expense, not preferred dividends.
Preferred stock dividend requirements decreased $1.1 million, or 13%, in 1996
from 1995 due to the redemption of $20 million of Preferred Stock, Series I in
June 1996.
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THE WASHINGTON WATER POWER COMPANY
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ENERGY DELIVERY
1997 COMPARED TO 1996
Energy Delivery's income from operations increased $24.3 million, or 27%, in
1997 over 1996 primarily due to $17.1 million in pre-tax expenses associated
with the storm damage on the Company's electric distribution system in 1996.
Energy Delivery's operating revenues increased $0.1 million, while expenses
decreased $24.2 million during 1997 as compared to 1996.
Total electric retail revenues increased $5.6 million in 1997 as compared to
1996, primarily as a result of increased transmission revenues, partially offset
by decreased revenues from retail electric customers. Transmission revenues
increased $7.6 million in 1997 over 1996 due to increased wholesale electric
sales. Electric retail revenues decreased $3.4 million, primarily due to
decreased industrial sales as a result of the DADS tariff and other adjustments,
partially offset by a 1.6% growth in retail customers during 1997. Total natural
gas revenues decreased $5.5 million in 1997 from 1996, primarily due to
decreased therm sales as a result of weather 5% warmer than normal in 1997 as
compared to 9% colder than normal in 1996, and decreased natural gas prices,
partially offset by an increase in non-retail sales and 5.7% customer growth.
Operating and maintenance expenses decreased $21.4 million in 1997 from 1996
primarily due to the $17.1 million in expenses recorded in 1996 related to the
storm damage on the Company's electric distribution system. Natural gas
purchased expense decreased $2.7 million in 1997 from 1996 primarily due to
lower therm sales as a result of warmer weather.
1996 COMPARED TO 1995
Energy Delivery's income from operations decreased $18.8 million, or 17%, in
1996 from 1995. The decrease was due to increased operating costs associated
with the storm damage on the Company's distribution system, partially offset by
increased revenues due to colder weather than in 1995. Energy Delivery's
operating revenues and expenses increased $5.8 million and $24.6 million,
respectively, during 1996 as compared to 1995.
Electric revenues increased $8.7 million in 1996 as compared to 1995. Electric
residential and commercial revenues increased by a combined $8.1 million,
primarily as a result of weather 9% colder than normal in 1996, as compared to
7% warmer than normal in 1995, and a 2.4% growth in these two classes of
customers during 1996. Transmission revenues increased $3.6 million in 1996 over
1995 due to increased wholesale electric sales. Total natural gas revenues
decreased $2.9 million in 1996 from 1995. Natural gas therm sales to residential
and commercial customers increased 13% during 1996, primarily as a result of 6%
customer growth in those sectors, due in large part to population growth and new
construction, and as a result of colder than normal weather. However, in spite
of the increased sales volumes, residential and commercial revenues decreased
slightly due to decreases in natural gas prices. Purchased gas cost adjustments
effective in Washington, Idaho and Oregon during December 1995 decreased the
rates paid by customers in 1996 by 13.58%, 16.68% and 5.82%, respectively.
Operating and maintenance expenses increased $12.6 million in 1996 over 1995
primarily due to the $17.1 million in expenses related to the storm damage on
the Company's electric distribution system, partially offset by a $5.8 million
decrease in the cost of natural gas purchased.
Administrative and general expenses increased by $8.4 million in 1996, compared
to 1995, primarily due to accruals related to postretirement and pension
benefits, a write-off of regulatory deferrals of pension expenses, development
of a financial information system, and increases in labor and benefits costs.
GENERATION AND RESOURCES
1997 COMPARED TO 1996
Generation and Resources' income from operations decreased $19.6 million, or
23%, in 1997 from 1996. The decrease was due to an $11.8 million decrease from
the expiration of older sales contracts with higher margins, lower unit margins
on new sales contracts and higher transmission expenses due to increased sales.
Generation and Resources' operating revenues and expenses increased $92.6
million and $112.2 million, respectively, during 1997 as compared to 1996.
Results from this business segment include activities for the first seven months
of 1997 that as of August 1997 are being conducted by Avista Energy.
Generation and Resources' revenues increased 22% in 1997 over 1996, primarily
due to increased short-term sales. During 1997 there was a significant shift in
product mix between short- and long-term sales. Revenues from short-term sales,
typically with smaller margins, increased $99.8 million, while long-term
revenues, typically with higher margins, decreased $0.4 million in 1997 as
compared to 1996. Total sales volumes during 1997 increased 47% over 1996.
Short-term sales volumes in 1997 increased 5.4 million mwhs, or 82%, while
long-term sales decreased 0.2 million mwhs.
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THE WASHINGTON WATER POWER COMPANY
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Increased short-term sales resulted in a $119.4 million, or 63%, increase in
electric purchased power expense in 1997 over 1996, which accounts for the
majority of the increase in Generation and Resources' operating expenses. Fuel
costs decreased $6.1 million in 1997 compared to 1996 as a result of economic
dispatch of the thermal generating plants.
1996 COMPARED TO 1995
Generation and Resources' income from operations increased $16.1 million, or
24%, in 1996 over 1995. The increase was primarily the result of increased
wholesale sales. Generation and Resources' operating revenues and expenses
increased $132.0 million and $115.9 million, respectively, during 1996 as
compared to 1995.
Generation and Resources' revenues increased 46% in 1996 over 1995, primarily
due to new power contracts for firm wholesale electric service and increased
spot market sales as a result of improved streamflow conditions which led to
increased availability of hydroelectric generation in the region. Long-term
revenues increased $54.9 million in 1996 over 1995, while revenues from
short-term sales increased $66.4 million during the same period. Streamflows
were 145% of normal for 1996. Wholesale kWh sales were nearly three times
greater in 1996 than 1995, which offset a 26% decline in average prices.
Commitments under new firm wholesale contracts and increased spot market sales
resulted in a $92.4 million, or 95%, increase in electric purchased power
expense in 1996 over 1995, which accounts for the majority of the increase in
Generation and Resources' operating expenses. Fuel costs increased $8.3 million
in 1996 compared to 1995 as a result of higher generation at thermal plants
during the year due to increased wholesale sales during 1996.
Other operating and maintenance expenses increased $11.2 million in 1996 over
1995 primarily due to increased transmission expenses associated with increased
wholesale sales, increased Idaho Power Cost Adjustment (PCA) expenses, resulting
from improved streamflow conditions, the costs of excess fuel purchased for
thermal generation, which was subsequently sold so there is a revenue offset,
and higher labor costs associated with increased wholesale sales.
Administrative and general expenses increased by $3.1 million in 1996, compared
to 1995, primarily due to accruals related to postretirement and pension
benefits, a write-off of regulatory deferrals of pension expenses, development
of a financial information system, increased FERC fees due to higher levels of
generation and increases in labor and benefits costs.
NATIONAL ENERGY TRADING AND MARKETING
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 and began trading operations
in August 1997. Avista Energy maintains a trading portfolio so it marks its
portfolio to fair market value on a daily basis (mark-to-market accounting),
which may cause earnings variability in the future.
1997 COMPARED TO 1996
National Energy Trading and Marketing's income from operations increased $4.0
million in 1997 over 1996. This increase was primarily due to Avista Energy
becoming operational, partially offset by continued start-up costs at both
companies and, for the energy services business, expected customers and revenue
streams that did not materialize and a longer than anticipated sales cycle.
National Energy Trading and Marketing's operating revenues and expenses
increased $247.5 million and $243.5 million, respectively, during 1997 as
compared to 1996.
In 1997, the revenues and income from operations were derived primarily from
Avista Energy's trading operations, rather than marketing operations, in part
due to the absence of a fully deregulated marketplace. As Avista Energy's
marketing operations develop, and more opportunities are presented by an
increasing number of states permitting customer choice, the company expects that
a greater percentage of Avista Energy's revenues and income will be derived from
marketing operations.
1996 COMPARED TO 1995
National Energy Trading and Marketing's income from operations was a loss of
$1.8 million in 1996. Its operating revenues and expenses were $0.1 million and
$1.9 million, respectively, during 1996. Expenses incurred during 1996 were
primarily start-up costs. The companies did not exist in 1995.
24
<PAGE> 28
THE WASHINGTON WATER POWER COMPANY
- --------------------------------------------------------------------------------
NON-ENERGY
1997 COMPARED TO 1996
Non-energy operating revenues and expenses increased $18.2 million and $24.2
million, respectively, in 1997 as compared to 1996 primarily as a result of
acquisitions. Operating income decreased $6.1 million in 1997 from 1996
primarily as a result of lower earnings contributions from Pentzer portfolio
companies. Non-energy net income for 1997 was $11.5 million, which represents a
$10.7 million, or 48%, decrease from 1996. The decrease in 1997 earnings
primarily resulted from transactional gains recorded by Pentzer in 1997 totaling
$7.3 million, primarily from the sale of Itron stock and the sale of a portfolio
company, compared to transactional gains during 1996 totaling $15.1 million, net
of taxes and other adjustments, as a result of the sale of property by one of
its subsidiary companies and the sale of stock in Itron.
1996 COMPARED TO 1995
Non-energy operating revenues and expenses increased $52.1 million and $50.5
million, respectively, in 1996 as compared to 1995 primarily as a result of
acquisitions. Operating income increased $1.6 million primarily due to increased
earnings contributions from Pentzer portfolio companies. Non-energy net income
for 1996 was $22.2 million, which represents a $7.4 million, or 50%, increase
over 1995 earnings. The increase in 1996 earnings primarily resulted from
transactional gains totaling $10.8 million, net of taxes and other adjustments,
recorded by Pentzer as a result of the sale of property by one of its subsidiary
companies. Transactional gains in 1996 also included $4.7 million from the sale
of stock in Itron, a decrease of $1.3 million from the amount recorded in 1995
from the sale of Itron stock.
25
<PAGE> 29
THE WASHINGTON WATER POWER COMPANY
- --------------------------------------------------------------------------------
LIQUIDITY AND CAPITAL RESOURCES
OVERALL OPERATIONS
Operating Activities Cash from operating activities less cash dividends paid
provided 100% of energy operations capital expenditures in 1997 and 1996 as
compared to 83% in 1995. Net cash provided by operating activities in 1997
increased over 1996 due in large part to the $31.3 million increase in net
income primarily from the income tax recovery. Cash from the income tax recovery
was used to fund new business investment, including growth opportunities in
national energy markets, and reduced the need for issuance of long-term debt
during 1997. In addition, changes in various working capital components caused
cashflows to increase by $6.0 million over 1996. When the effects of non-cash
items, such as the increased provision for deferred income taxes from the income
tax recovery and adjustments for depreciation and the FAS 109 regulatory asset
are removed from net income, there is an additional increase in cash provided by
operating activities. Power and natural gas cost deferrals had a negative effect
on cashflows for 1997 as a result of PCA rebates in effect in 1997 as compared
to surcharges in effect during 1996, increased natural gas prices during the
first part of 1997 and reduced prices paid by natural gas customers during 1997.
Deferred revenues and other-net 1997 cashflows decreased due to a contract
buyout by Generation and Resources and price risk management activities at
Avista Energy.
Investing Activities Net cash used in investing activities increased in 1997
over 1996 primarily due to the Company's investment in subsidiaries, and
Pentzer's and Avista Energy's subsequent investments in, and acquisitions of,
other companies. Utility operations capital expenditures, excluding Allowance
for Funds Used During Construction (AFUDC) and Allowance for Funds Used to
Conserve Energy (AFUCE, a carrying charge similar to AFUDC for
conservation-related capital expenditures), were $256 million for the 1995-1997
period.
Financing Activities Net cash used in financing activities totaled $66.2 million
in 1997 compared to $71.2 million in 1996. Bank borrowings increased $23.5
million and long-term debt increased $20.0 million during 1997. In January and
June 1997, $110 million of preferred trust securities were issued. (See Note 15
of Notes to Financial Statements for additional information.) Proceeds of the
issuances were used for the maturity and redemption of $70.0 million of
preferred stock and $51.5 million of long-term debt and to fund a portion of the
Company's capital expenditures. During the 1995-1997 period, $224.5 million of
long-term debt and preferred stock matured, was mandatorily redeemed or was
optionally redeemed and refinanced at a lower cost.
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.
Capital expenditures are financed on an interim basis with notes payable (due
within one year). The Company has $120 million in committed lines of credit. In
addition, the Company may currently borrow up to $60 million through other
borrowing arrangements with banks. As of December 31, 1997, $48.5 million was
outstanding under the committed lines of credit and $60.0 million was
outstanding under other short-term borrowing arrangements.
From time to time the Company enters into sale/leaseback arrangements for
various long-term assets which provide additional sources of funds. See Note 13
to Financial Statements for additional information.
The Company is restricted under various agreements as to the additional
securities it can issue. Under the most restrictive test of the Company's
Mortgage, an additional $584 million of First Mortgage Bonds could be issued as
of December 31, 1997. As of December 31, 1997, under its Restated Articles of
Incorporation, approximately $1.0 billion of additional preferred stock could be
issued at an assumed dividend rate of 7.14%.
During the 1998-2000 period, utility capital expenditures are expected to be
$276 million, and $135 million will be required for long-term debt maturities
and preferred stock sinking fund requirements. During this three-year period,
the Company estimates that internally-generated funds will provide approximately
80% of the funds needed for its capital expenditure program. External financing
will be required to fund a portion of capital expenditures, maturing long-term
debt and preferred stock sinking fund requirements. These estimates of capital
expenditures are subject to continuing review and adjustment. Actual capital
expenditures may vary from these estimates due to factors such as changes in
business conditions, construction schedules and environmental requirements.
See Notes 2, 11, 12, 13, 14, 15 and 16 of Notes to Financial Statements for
additional details related to financing activities.
26
<PAGE> 30
THE WASHINGTON WATER POWER COMPANY
- --------------------------------------------------------------------------------
NATIONAL ENERGY TRADING AND MARKETING OPERATIONS
During 1997, the Company invested $50 million in the common equity of Avista
Corp. Avista Corp. utilized the majority of the proceeds from this investment to
increase its total investment in the common equity of Avista Energy to $50
million. Avista Energy funds its ongoing operations with a combination of
internally-generated cash and external financing. The Company expects continued
significant growth in Avista Energy's national energy trading and marketing
business activities. This rapid growth will require increased capital
investment, as well as an increased need for credit and financial support.
Avista Energy and its subsidiary, Avista Energy Canada, Ltd., as co-borrowers,
entered into a one-year credit agreement effective December 30, 1997, with a
commercial bank. The facility expires November 30, 1998 and is guaranteed by
Avista Corp. The agreement is uncommitted with a demand feature exercisable by
the bank at the bank's sole discretion. At year-end there were no cash advances
(demand notes payable) and letters of credit outstanding under the facility
totaled $2.75 million. See Note 12 of Notes to Financial Statements for
additional information.
At December 31, 1997, the National Energy Trading and Marketing operations had
$11.4 million in cash and cash equivalents and $2.0 million in long-term debt
outstanding.
The 1998-2000 National Energy Trading and Marketing capital expenditures are
expected to be $2.4 million.
NON-ENERGY OPERATIONS
Capital expenditures for the non-energy operations were $12.8 million for the
1995-1997 period. During this period, $31.7 million of debt was repaid and
capital expenditures were partially financed by the $36.6 million in proceeds
from new long-term debt.
The non-energy operations have $80 million in short-term borrowing arrangements
($18.6 million outstanding as of December 31, 1997) to fund corporate
requirements on an interim basis. At December 31, 1997, the non-energy
operations had $39.9 million in cash and marketable securities with $45.9
million in long-term debt outstanding.
The 1998-2000 non-energy capital expenditures are expected to be $8.8 million,
and $34.0 million in debt maturities will also occur. During the next three
years, internally-generated cash and other debt obligations are expected to
provide the majority of the funds for the non-energy capital expenditure
requirements.
TOTAL COMPANY CASH REQUIREMENTS
(Millions of Dollars)
<TABLE>
<CAPTION>
Actual Projected
------------------ -------------------
1995 1996 1997 1998 1999 2000
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Utility operations:
Energy Delivery capital expenditures (1) $ 61 $ 80 $ 75 $ 67 $ 67 $ 65
Generation and Resources capital expenditures (1) 19 9 12 23 26 28
Debt and preferred stock maturities (2) 37 63 121 20 48 55
---- ---- ---- ---- ---- ----
Total Utility 117 152 208 110 141 148
---- ---- ---- ---- ---- ----
Avista Corp. operations:
Capital expenditures 5 2 12 4 3 4
Investments - 4 59 16 25 25
Debt maturities 8 10 12 12 11 10
---- ---- ---- ---- ---- ----
Total Avista Corp. 13 16 83 32 39 39
---- ---- ---- ---- ---- ----
Total Company $130 $168 $291 $142 $180 $187
==== ==== ==== ==== ==== ====
</TABLE>
(1) Capital expenditures exclude AFUDC and AFUCE.
(2) Excludes notes payable (due within one year).
The Company's total common equity increased $38.1 million to $748.8 million at
the end of 1997. The 1997 increase was primarily due to the $41.4 million
after-tax effect of the income tax recovery (see Note 9 of Notes to Financial
Statements for additional information). The Company's consolidated capital
structure at December 31, 1997, was 46% debt, 9% preferred securities (including
the Preferred Trust Securities) and 45% common equity as compared to 48% debt,
7% preferred securities and 45% common equity at year-end 1996.
27
<PAGE> 31
THE WASHINGTON WATER POWER COMPANY
- --------------------------------------------------------------------------------
FUTURE OUTLOOK
Competition and Business Risk
The electric and natural gas businesses continue to undergo transformation and
have become increasingly competitive as a result of economic, regulatory and
technological changes. The Company believes that it is well positioned to meet
future challenges due to its low production costs, close proximity to major
transmission lines and natural gas pipelines, active participation in the
wholesale electric market and its commitment to customer satisfaction, customer
choice, cost reduction and continuous improvement of work processes. In
addition, the Company evaluates business opportunities that will allow it to
expand its economies of scale and diversify its risk posed by weather and
economic conditions.
The Company continues to compete for new retail electric customers with various
rural electric cooperatives and public utility districts in and adjacent to its
service territories. Challenges facing the retail electric business include
evolving technologies which provide alternate energy supplies, the cost of the
energy supplied, the potential for retail wheeling, self-generation and fuel
switching by commercial and industrial customers, increasingly stringent
environmental laws and the potential for stranded or nonrecoverable utility
assets. When electric utility companies are required to provide retail wheeling
service, which is the transmission of electric power from another supplier to a
customer located within such utility's service area, the Company believes it
will be in a position to benefit since it is committed to remaining one of the
country's lowest-cost providers of electric energy. Consequently, the Company
believes it faces minimal risk for stranded generation, transmission or
distribution assets due to its low cost structure.
Natural gas remains priced competitively compared to other alternative fuel
sources for residential, commercial and industrial customers and is projected to
remain so into the future due to abundant supplies and competition. Challenges
facing the Company's retail natural gas business include the potential for
customers to by-pass the Company's natural gas system. To reduce the potential
for such by-pass, the Company prices its natural gas services, including
transportation contracts, competitively and has varying degrees of flexibility
to price its transportation and delivery rates by means of special contracts.
The Company has also signed long-term transportation contracts with two of its
largest industrial customers which reduces the risks of these customers
by-passing the Company's system in the foreseeable future.
In 1996, the FERC issued Order No. 888 which requires public utilities operating
under the Federal Power Act to provide access to their transmission systems to
third parties. The Company filed its Open Access tariff with the FERC in July
1996, and subsequently began providing transmission service under the tariff. In
the FERC's Order No. 889, the companion rule to Order No. 888, the FERC requires
public utilities to establish an Open Access Same-time Information System
(OASIS) to provide transmission customers with information about transmission
capacity, prices and other information, by electronic means. These FERC orders
have not had a material effect on the Company's operating results and are not
expected to in the future.
Generation and Resources and Avista Energy continue to compete in the wholesale
electric market with other utilities, federal marketing agencies and power
marketers. It is expected that competition to sell capacity will remain
vigorous, and that prices will remain depressed for at least the next several
years, due to increased competition and surplus capacity in the western United
States. Competition related to the sale of capacity and energy is influenced by
many factors, including the availability of capacity in the western United
States, the availability and prices of natural gas and oil, spot energy prices
and transmission access. Business challenges affecting the Generation and
Resources and National Energy Trading and Marketing lines of business include
an increasing number of power brokers and marketers, competition from low-cost
generation being developed by independent power producers and declining margins
due to a greater reliance on short-term sales, typically with lower margins than
long-term sales. Other challenges facing theses line of business include
evolving technologies which provide alternate energy supplies and deregulation
of electric and natural gas markets.
Resource planning for both the electric and natural gas businesses has been
integrated so that the Company's customers are provided the most efficient and
cost-effective products possible for all their energy requirements. The
Company's need for new future electric resources to serve retail loads is
expected to remain very minimal. The switching of electric heating customers to
natural gas requires increased efforts on the Company's part in negotiating and
securing competitively priced natural gas supplies for the future.
The Company's energy-related businesses are exposed to risks relating to changes
in certain commodity prices and counterparty performance. In order to manage the
various risks relating to these exposures, the Company utilizes electric,
natural gas and related commodity derivatives, and has established risk
management oversight for these risks for each area of the Company's
energy-related business. The Company has implemented or is in the process of
implementing procedures to manage such risk and has established a comprehensive
risk management committee, separate from the units that create such risk
exposure and overseen by the Audit Committee of the Company's Board of
Directors, to monitor compliance with the Company's risk management policies and
procedures.
28
<PAGE> 32
THE WASHINGTON WATER POWER COMPANY
- --------------------------------------------------------------------------------
Economic and Load Growth
The Company expects economic growth to continue in its eastern Washington and
northern Idaho service area. The Company, along with others in the service area,
is continuing its efforts to facilitate expansion of existing businesses and
attract new businesses to the Inland Northwest. Agriculture, mining and lumber
were the primary industries for many years, but health care, education,
electronic and other manufacturing, tourism and the service sectors have become
increasingly important industries that operate in the Company's service area.
The Company also anticipates strong economic growth to continue in its Oregon
service area.
The Company anticipates residential and commercial electric load growth to
average approximately 2.1% annually for the next five years primarily due to
increases in both population and the number of businesses in its service
territory. The number of electric customers is expected to increase and the
average annual usage by residential customers is expected to remain steady on a
weather-adjusted basis. A Public Utility Regulatory Policies Act of 1978 (PURPA)
contract with the Company's largest customer expires in 2002. The customer is
expected to self-generate at that time, which will reduce the load to this
customer by the amount the Company has been purchasing and then reselling to
them. Although it will have no material impact on loads, it will reduce the
Company's costs since the PURPA contract is at above-market prices. The
resulting impact on the Company's total load for retail customers is zero load
growth because the loss of this customer is expected to approximately equal the
load growth from all other retail customers. Overall, the load growth, adjusted
for this situation, remains at 2.0% annually.
The Company anticipates natural gas load growth, including transportation
volumes, in its Washington and Idaho service area to average approximately 2.9%
annually for the next five years. The Oregon and South Lake Tahoe, California
service areas are anticipated to realize 2.1% growth annually during that same
period.
The forward-looking projections set forth above regarding retail sales growth
are based, in part, upon publicly available population and demographic studies
conducted independently. The Company's expectations regarding retail sales
growth are also based upon various assumptions including, without limitation,
assumptions relating to weather and economic and competitive conditions and an
assumption that the Company will incur no material loss of retail customers due
to self-generation or retail wheeling. Changes in the underlying assumptions can
cause actual experience to vary significantly from forward-looking projections.
Environmental Issues
Since December 1991, a number of species of fish in the Northwest, including the
Snake River sockeye salmon and chinook salmon, the Kootenai River white sturgeon
and the bull trout have either been added to the endangered species list under
the Federal Endangered Species Act (ESA), listed as "threatened" under the ESA
or been petitioned for listing under the ESA. Thus far, measures which have been
adopted and implemented to save both the Snake River sockeye salmon and chinook
salmon have not directly impacted generation levels at any of the Company's
hydroelectric dams. The Company does, however, purchase power from four projects
on the Columbia River that are being directly impacted by these ongoing
mitigation measures. The reduction in generation at these projects is relatively
minor, resulting in minimal economic impact on the Company at this time. Future
actions to save these, and other as yet unidentified fish or wildlife species,
could further impact the Company's operations or the operations of some of its
major customers or suppliers. It is currently not possible to predict the likely
economic costs to the Company resulting from these actions.
The Company is currently in the process of relicensing the Cabinet Gorge and
Noxon Rapids hydroelectric projects on the Clark Fork River in northern Idaho
and western Montana. The restoration of native salmonic fish, in particular bull
trout, is a principal focus for the members of the collaborative hydroelectric
relicensing project. Bull trout are native to this area and a "threatened"
listing for bull trout may occur in 1998 under the ESA. The Company is working
closely with the U.S. Fish and Wildlife Service, Native American tribes and the
states of Idaho and Montana to institute coordinated recovery measures on the
lower Clark Fork River. It is currently not possible to predict the likely
economic costs to the Company resulting from bull trout recovery.
Relicensing studies in 1997 indicated very high levels of atmospheric gas
supersaturation below Cabinet Gorge Dam during periods of heavy spill. Future
studies are expected to identify what, if any, effects there are to aqueous
resources and whether abatement measures will be required at Cabinet Gorge.
See Note 17 of Notes to Financial Statements for additional information.
Year 2000
The Company has and will continue to review, test and make modifications to its
computer systems and applications to ensure that its generation, transmission
and distribution facilities, as well as its corporate functions, will provide
uninterrupted service and that year 2000 transactions can be processed. This
review process includes its information systems, the control and embedded
systems of the Company's utility plant, as well as the status of major vendors.
The Company will review and, if necessary, test the compliance plans of the
operators of utility plants in which the Company has an ownership interest but
does not have operating control. The Company has identified the major
29
<PAGE> 33
THE WASHINGTON WATER POWER COMPANY
- --------------------------------------------------------------------------------
vendors with which it has major alliances or is dependent upon for products or
services and is in the process of contacting such vendors to ascertain what
plans they have to correct any problems they may face with year 2000 compliance.
The Company is also involved in discussions with other electric service
providers in the Western Systems Coordinating Council to evaluate potential
risks associated with this issue resulting from interconnected electric and
informational systems.
At this time, it is the Company's assessment that all identified modifications
to systems within the Company's operating control will be made within the
required time frames. Preliminary estimates of the incremental costs to be
incurred in the 1997-1999 period are approximately $4-6 million. Maintenance and
modification costs will be expensed as incurred, while the costs of new
software, approximately $1.4 million of the total estimate, will be capitalized
and amortized over the software's useful life. The Company can make no
assurances regarding the year 2000 compliance status of systems or parties
outside of the Company's direct control and the Company cannot assess the effect
on the Company of non-compliance by systems or parties outside of the Company's
direct control.
Other
The Board of Directors considers the level of dividends on the Company's common
stock on a continuing basis, taking into account numerous factors including,
without limitation, the Company's results of operations and financial condition,
as well as general economic and competitive conditions. The Company's net income
available for dividends is derived from its retail electric and natural gas
utility operations, its non-energy operations (primarily Pentzer) and its
National Energy Trading and Marketing operations.
SAFE HARBOR FOR FORWARD-LOOKING STATEMENTS
The Company is including the following cautionary statement in this Form 10-K to
make applicable and to take advantage of the safe harbor provisions of the
Private Securities Litigation Reform Act of 1995 for any forward-looking
statements made by, or on behalf of, the Company. Forward-looking statements
include statements concerning plans, objectives, goals, strategies, future
events or performance, and underlying assumptions (many of which are based, in
turn, upon further assumptions) and other statements which are other than
statements of historical facts. From time to time, the Company may publish or
otherwise make available forward-looking statements of this nature. All such
subsequent forward-looking statements, whether written or oral and whether made
by or on behalf of the Company, are also expressly qualified by these cautionary
statements.
Forward-looking statements involve risks and uncertainties which could cause
actual results or outcomes to differ materially from those expressed. The
Company's expectations, beliefs and projections are expressed in good faith and
are believed by the Company to have a reasonable basis, including without
limitation management's examination of historical operating trends, data
contained in the Company's records and other data available from third parties,
but there can be no assurance that the Company's expectations, beliefs or
projections will be achieved or accomplished. Furthermore, any forward-looking
statement speaks only as of the date on which such statement is made, and the
Company undertakes no obligation to update any forward-looking statement or
statements to reflect events or circumstances that occur after the date on which
such statement is made or to reflect the occurrence of unanticipated events. New
factors emerge from time to time, and it is not possible for management to
predict all of such factors, nor can it assess the impact of each such factor on
the Company's business or the extent to which any such factor, or combination of
factors, may cause actual results to differ materially from those contained in
any forward-looking statement.
Energy Delivery and Generation and Resources Operations -
In addition to other factors and matters discussed elsewhere herein, some
important factors that could cause actual results or outcomes for the Company
and its Energy Delivery and Generation and Resources operations to differ
materially from those discussed in forward-looking statements include prevailing
legislative developments, governmental policies and regulatory actions with
respect to allowed rates of return, financings, or industry and rate structures,
weather conditions, wholesale and retail competition (including but not limited
to electric retail wheeling and transmission cost), availability of economic
supplies of natural gas, present or prospective natural gas distribution or
transmission competition (including but not limited to prices of alternative
fuels and system deliverability costs), recovery of purchased power and
purchased gas costs, present or prospective generation, operations and
construction of plant facilities, and acquisition and disposal of assets or
facilities.
National Energy Trading and Marketing Operations -
In addition to other factors and matters discussed elsewhere herein, some
important factors that could cause actual results or outcomes for the National
Energy Trading and Marketing operations to differ materially from those
discussed in forward-looking statements include further industry restructuring
evolving from federal and/or state legislation, regulatory actions by state
utility commissions, demand for and availability of energy throughout the
country, wholesale competition, availability of economic supplies of natural
gas, margins on purchased power, and the formation of additional alliances or
entities.
30
<PAGE> 34
THE WASHINGTON WATER POWER COMPANY
- --------------------------------------------------------------------------------
Non-Energy Operations -
Certain important factors which could cause actual results or outcomes for the
Company's non-energy operations to differ materially from those discussed in
forward-looking statements include competition from other companies, the ability
to obtain new customers and retain old ones, reliability of customer orders,
business acquisitions, disposal of assets, the ability to obtain funds from
operations, debt or equity, research and development findings and the
availability of economic expansion or development opportunities.
Factors Common to All Operations -
The business and profitability of the Company are also influenced by economic
risks, changes in and compliance with environmental and safety laws and
policies, weather conditions, population growth rates and demographic patterns,
market demand for energy from plants or facilities, changes in tax rates or
policies, unanticipated project delays or changes in project costs,
unanticipated changes in operating expenses or capital expenditures, labor
negotiation or disputes, changes in credit ratings or capital market conditions,
inflation rates, inability of the various counterparties to meet their
obligations with respect to the Company's financial instruments, changes in
accounting principles and/or the application of such principles to the Company,
changes in technology and legal proceedings.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Independent Auditor's Report and Financial Statements begin on the next
page.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
31
<PAGE> 35
INDEPENDENT AUDITORS' REPORT
The Washington Water Power Company
Spokane, Washington
We have audited the accompanying consolidated balance sheets and statements of
capitalization of The Washington Water Power Company and subsidiaries (the
Company) as of December 31, 1997 and 1996, and the related consolidated
statements of income and retained earnings, cash flows, and the schedules of
information by business segments for each of the three years in the period ended
December 31, 1997. These financial statements and schedules are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and schedules are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements and
schedules. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement and schedule presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements and schedules present
fairly, in all material respects, the financial position of the Company and its
subsidiaries at December 31, 1997 and 1996, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 1997, in conformity with generally accepted accounting principles. In
addition, the schedules referred to above present fairly, in all material
respects, the segment information of the Company and its subsidiaries in
accordance with generally accepted accounting principles.
Deloitte & Touche LLP
Seattle, Washington
January 30, 1998
32
<PAGE> 36
CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS
The Washington Water Power Company
- --------------------------------------------------------------------------------
For the Years Ended December 31
Thousands of Dollars
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
OPERATING REVENUES .................................. $ 1,302,172 $ 944,957 $ 755,009
----------- ----------- -----------
OPERATING EXPENSES:
Resource costs ................................... 719,905 378,664 272,462
Operations and maintenance ....................... 176,354 181,298 115,657
Administrative and general ....................... 96,611 76,972 62,486
Depreciation and amortization .................... 69,893 72,097 67,572
Taxes other than income taxes .................... 49,945 49,005 46,992
----------- ----------- -----------
Total operating expenses ....................... 1,112,708 758,036 565,169
----------- ----------- -----------
INCOME FROM OPERATIONS .............................. 189,464 186,921 189,840
----------- ----------- -----------
OTHER INCOME (EXPENSE):
Interest expense ................................. (66,275) (63,255) (59,022)
Interest on income tax recovery .................. 47,338 -- --
Net gain on subsidiary transactions .............. 11,218 23,953 9,328
Merger-related expenses .......................... -- (15,848) --
Other income (deductions)-net .................... (5,873) 1,191 (609)
----------- ----------- -----------
Total other income (expense)-net ............... (13,592) (53,959) (50,303)
----------- ----------- -----------
INCOME BEFORE INCOME TAXES .......................... 175,872 132,962 139,537
INCOME TAXES ........................................ 61,075 49,509 52,416
----------- ----------- -----------
NET INCOME .......................................... 114,797 83,453 87,121
DEDUCT-Preferred stock dividend requirements ........ 5,392 7,978 9,123
----------- ----------- -----------
INCOME AVAILABLE FOR COMMON STOCK ................... $ 109,405 $ 75,475 $ 77,998
=========== =========== ===========
Average common shares outstanding (thousands) ....... 55,960 55,960 55,173
EARNINGS PER SHARE OF COMMON STOCK, BASIC AND DILUTED $ 1.96 $ 1.35 $ 1.41
Dividends paid per common share ..................... $ 1.24 $ 1.24 $ 1.24
RETAINED EARNINGS, JANUARY 1 ........................ $ 131,301 $ 125,031 $ 114,848
NET INCOME .......................................... 114,797 83,453 87,121
DIVIDENDS DECLARED:
Preferred stock .................................. (5,339) (8,213) (8,971)
Common stock ..................................... (69,390) (69,390) (68,392)
ESOP dividend tax savings ........................... 407 420 425
----------- ----------- -----------
RETAINED EARNINGS, DECEMBER 31 ...................... $ 171,776 $ 131,301 $ 125,031
=========== =========== ===========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
33
<PAGE> 37
CONSOLIDATED BALANCE SHEETS
The Washington Water Power Company
- --------------------------------------------------------------------------------
At December 31
Thousands of Dollars
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
ASSETS:
CURRENT ASSETS:
Cash and cash equivalents ................................. $ 30,593 $ 8,211
Temporary cash investments ................................ 22,641 19,709
Accounts and notes receivable-net ......................... 176,882 148,742
Energy commodity assets ................................... 76,449 --
Materials and supplies, fuel stock and natural gas stored . 42,148 31,729
Prepayments and other ..................................... 28,130 19,998
---------- ----------
Total current assets .................................... 376,843 228,389
---------- ----------
UTILITY PROPERTY:
Utility plant in service-net .............................. 2,031,026 1,951,604
Construction work in progress ............................. 37,446 38,696
---------- ----------
Total ................................................... 2,068,472 1,990,300
Less: Accumulated depreciation and amortization .......... 635,349 592,424
---------- ----------
Net utility plant ....................................... 1,433,123 1,397,876
---------- ----------
OTHER PROPERTY AND INVESTMENTS:
Investment in exchange power-net .......................... 69,013 75,312
Non-utility properties and investments-net ................ 208,149 149,747
Other-net ................................................. 20,065 22,670
---------- ----------
Total other property and investments .................... 297,227 247,729
---------- ----------
DEFERRED CHARGES:
Regulatory assets for deferred income tax ................. 176,682 164,753
Conservation programs ..................................... 53,338 57,703
Unamortized debt expense .................................. 23,978 23,148
Prepaid power purchases ................................... 18,134 30,935
Other-net ................................................. 32,460 26,765
---------- ----------
Total deferred charges .................................. 304,592 303,304
---------- ----------
TOTAL ................................................. $2,411,785 $2,177,298
========== ==========
LIABILITIES AND CAPITALIZATION:
CURRENT LIABILITIES:
Accounts payable .......................................... $ 154,312 $ 95,268
Energy commodity liabilities .............................. 70,135 --
Taxes and interest accrued ................................ 35,705 37,344
Other ..................................................... 79,586 70,873
---------- ----------
Total current liabilities ............................... 339,738 203,485
---------- ----------
NON-CURRENT LIABILITIES AND DEFERRED CREDITS:
Non-current liabilities ................................... 36,071 27,855
Deferred income taxes ..................................... 352,749 312,529
Other deferred credits .................................... 17,230 43,167
---------- ----------
Total non-current liabilities and deferred credits ...... 406,050 383,551
---------- ----------
CAPITALIZATION (See Consolidated Statements of Capitalization) 1,665,997 1,590,262
---------- ----------
COMMITMENTS AND CONTINGENCIES (Notes 10, 13 and 17)
TOTAL ................................................. $2,411,785 $2,177,298
========== ==========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
34
<PAGE> 38
CONSOLIDATED STATEMENTS OF CAPITALIZATION
The Washington Water Power Company
- --------------------------------------------------------------------------------
At December 31
Thousands of Dollars
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<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 - 595% to 806% due 2000 through 2023 ................................ 211,500 227,000
Series B - 620% to 825% due 1999 through 2010 ................................ 150,000 141,000
----------- -----------
Total first mortgage bonds ................................................... 445,200 451,700
----------- -----------
Pollution Control Bonds:
6% Series due 2023 ............................................................. 4,100 4,100
Unsecured Medium-Term Notes:
Series A - 794% to 958% due 1998 through 2007 .................................. 52,500 72,500
Series B - 675% to 823% due 1999 through 2023 .................................. 115,000 120,000
----------- -----------
Total unsecured medium-term notes ............................................ 167,500 192,500
----------- -----------
Notes payable (due within one year) to be refinanced ............................. 108,500 85,000
Other ............................................................................ 36,885 31,226
----------- -----------
Total long-term debt ........................................................... 762,185 764,526
----------- -----------
COMPANY-OBLIGATED MANDATORILY REDEEMABLE
PREFERRED TRUST SECURITIES:
7 7/8%, Series A, due 2037 ..................................................... 50,000 --
Floating Rate, Series B, due 2037 .............................................. 60,000 --
----------- -----------
Total company-obligated mandatorily redeemable preferred trust securities .... 110,000 --
----------- -----------
PREFERRED STOCK-CUMULATIVE:
10,000,000 shares authorized:
Subject to mandatory redemption:
$8.625 Series I; 100,000 and 300,000 shares outstanding ($100 stated value) .... 10,000 30,000
$6.95 Series K; 350,000 shares outstanding ($100 stated value) ................. 35,000 35,000
----------- -----------
Total subject to mandatory redemption ........................................ 45,000 65,000
----------- -----------
Not subject to mandatory redemption:
Flexible Auction Series J; 500 shares outstanding - 1996 ($100,000 stated value) -- 50,000
----------- -----------
Total not subject to mandatory redemption .................................... -- 50,000
----------- -----------
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 ............................... (9,750) (11,009)
Capital stock expense and other paid in capital .................................. (10,143) (10,112)
Unrealized investment gain-net ................................................... 2,077 5,704
Retained earnings ................................................................ 171,776 131,301
----------- -----------
Total common equity ............................................................ 748,812 710,736
----------- -----------
TOTAL CAPITALIZATION ................................................................ $ 1,665,997 $ 1,590,262
=========== ===========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
35
<PAGE> 39
CONSOLIDATED STATEMENTS OF CASH FLOWS
Increase (Decrease) in Cash and Cash Equivalents
The Washington Water Power Company
- --------------------------------------------------------------------------------
For the Years Ended December 31
Thousands of Dollars
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income ................................................ $ 114,797 $ 83,453 $ 87,121
NON-CASH ITEMS INCLUDED IN NET INCOME:
Depreciation and amortization ........................... 69,893 72,097 67,572
Provision for deferred income taxes ..................... 37,122 12,505 (5,487)
Allowance for equity funds used during construction ..... (1,323) (1,072) (589)
Power and natural gas cost deferrals and amortizations .. (16,470) 666 16,156
Deferred revenues and other-net ......................... (17,758) (215) 9,600
(Increase) decrease in working capital components:
Receivables and prepaid expense ....................... (39,733) (26,333) (22,279)
Materials & supplies, fuel stock and natural gas stored (8,050) 7,741 (11,733)
Payables and other accrued liabilities ................ 55,163 21,618 21,532
Other ................................................. 8,758 7,103 (29,661)
--------- --------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES .................... 202,399 177,563 132,232
--------- --------- ---------
INVESTING ACTIVITIES:
Construction expenditures (excluding AFUDC-equity funds) .. (89,016) (91,279) (83,494)
Other capital requirements ................................ (11,696) (1,399) 550
Decrease in other noncurrent balance sheet items-net ...... 18,620 18,565 8,893
Assets acquired and investments in subsidiaries ........... (31,702) (29,225) (13,864)
--------- --------- ---------
NET CASH USED IN INVESTING ACTIVITIES ........................ (113,794) (103,338) (87,915)
--------- --------- ---------
FINANCING ACTIVITIES:
Increase (decrease) in short-term borrowings .............. 23,500 55,500 (28,500)
Proceeds from issuance of preferred trust securities ...... 110,000 -- --
Proceeds from issuance of long-term debt .................. 20,000 -- 78,000
Redemption and maturity of long-term debt ................. (51,500) (38,000) (45,000)
Redemption of preferred stock ............................. (70,000) (20,000) --
Sale of common stock ...................................... -- 216 12,518
Cash dividends paid ....................................... (75,329) (77,318) (65,499)
Other-net ................................................. (22,894) 8,424 4,150
--------- --------- ---------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES .......... (66,223) (71,178) (44,331)
--------- --------- ---------
NET INCREASE (DECREASE) IN CASH & CASH EQUIVALENTS ........... 22,382 3,047 (14)
CASH & CASH EQUIVALENTS AT BEGINNING OF PERIOD ............... 8,211 5,164 5,178
--------- --------- ---------
CASH & CASH EQUIVALENTS AT END OF PERIOD ..................... $ 30,593 $ 8,211 $ 5,164
========= ========= =========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the period:
Interest ................................................ $ 63,608 $ 56,893 $ 53,415
Income taxes ............................................ 29,132 49,447 50,004
Noncash financing and investing activities:
Property purchased under capitalized leases ............. 4,521 4,356 2,628
Fair value of assets acquired in acquisitions ........... -- -- 38,187
Liabilities assumed in connection with acquisitions ..... -- -- 28,695
Notes receivable in exchange for land ................... -- 29,913 5,837
Net unrealized holding gains (losses) ................... (5,050) (13,680) 5,043
Dividend reinvestment plan reinvested dividends ......... -- 216 11,516
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
36
<PAGE> 40
SCHEDULE OF INFORMATION BY BUSINESS SEGMENTS
The Washington Water Power Company
- --------------------------------------------------------------------------------
For the Years Ended December 31
Thousands of Dollars
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
OPERATING REVENUES:
Energy Delivery .............................. $ 380,532 $ 380,428 $ 374,604
Generation and Resources ..................... 511,133 418,566 286,612
National Energy Trading and Marketing ........ 247,646 116 --
Non-energy ................................... 164,010 145,847 93,793
Intersegment eliminations .................... (1,149) -- --
----------- ----------- -----------
Total operating revenues ................... $ 1,302,172 $ 944,957 $ 755,009
=========== =========== ===========
RESOURCE COSTS:
Energy Delivery:
Natural gas purchased for resale ........... $ 93,880 $ 96,585 $ 102,375
Other ...................................... (2,050) 1,151 1,055
Generation and Resources:
Power purchased ............................ 309,439 190,040 97,669
Fuel for generation ........................ 34,461 40,578 32,298
Other ...................................... 50,694 50,237 39,065
National Energy Trading and Marketing:
Cost of sales .............................. 232,389 -- --
Other ...................................... 2,173 73 --
Intersegment eliminations .................... (1,081) -- --
----------- ----------- -----------
Total resource costs (excluding Non-energy) $ 719,905 $ 378,664 $ 272,462
=========== =========== ===========
GROSS MARGINS:
Energy Delivery .............................. $ 288,702 $ 282,692 $ 271,174
Generation and Resources ..................... 116,539 137,711 117,580
National Energy Trading and Marketing ........ 13,084 43 --
----------- ----------- -----------
Total gross margins (excluding Non-energy) . $ 418,325 $ 420,446 $ 388,754
=========== =========== ===========
ADMINISTRATIVE AND GENERAL EXPENSES:
Energy Delivery .............................. $ 46,688 $ 47,664 $ 39,240
Generation and Resources ..................... 16,312 15,339 12,198
National Energy Trading and Marketing ........ 10,442 1,844 --
Non-energy ................................... 23,169 12,125 11,048
----------- ----------- -----------
Total administrative and general expenses .. $ 96,611 $ 76,972 $ 62,486
=========== =========== ===========
DEPRECIATION AND AMORTIZATION EXPENSES:
Energy Delivery .............................. $ 32,483 $ 33,875 $ 31,764
Generation and Resources ..................... 25,432 27,899 27,405
National Energy Trading and Marketing ........ 442 -- --
Non-energy ................................... 11,536 10,323 8,403
----------- ----------- -----------
Total depreciation and amortization expenses $ 69,893 $ 72,097 $ 67,572
=========== =========== ===========
INCOME/(LOSS) FROM OPERATIONS (PRE-TAX):
Energy Delivery .............................. $ 113,745 $ 89,447 $ 108,212
Generation and Resources ..................... 64,613 84,211 68,132
National Energy Trading and Marketing ........ 2,191 (1,801) --
Non-energy ................................... 8,984 15,064 13,496
Intersegment eliminations .................... (69) -- --
----------- ----------- -----------
Total income from operations ............... $ 189,464 $ 186,921 $ 189,840
=========== =========== ===========
INCOME AVAILABLE FOR COMMON STOCK:
Energy Delivery and Generation and Resources . $ 95,385 $ 54,426 $ 63,187
National Energy Trading and Marketing ........ 2,488 (1,161) --
Non-energy ................................... 11,532 22,210 14,811
----------- ----------- -----------
Total income available for common stock .... $ 109,405 $ 75,475 $ 77,998
=========== =========== ===========
</TABLE>
37
<PAGE> 41
SCHEDULE OF INFORMATION BY BUSINESS SEGMENTS
The Washington Water Power Company
- --------------------------------------------------------------------------------
For the Years Ended December 31
Thousands of Dollars
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
ASSETS:
Energy Delivery .......................... $1,051,585 $1,014,451 $ 917,011
Generation and Resources ................. 620,142 683,599 656,628
Other utility ............................ 255,012 223,379 295,541
National Energy Trading and Marketing .... 214,630 899 --
Non-energy ............................... 270,416 254,970 229,722
---------- ---------- ----------
Total assets ........................... $2,411,785 $2,177,298 $2,098,902
========== ========== ==========
CAPITAL EXPENDITURES (excluding AFUDC/AFUCE):
Energy Delivery .......................... $ 75,499 $ 80,095 $ 61,047
Generation and Resources ................. 11,676 8,726 18,897
National Energy Trading and Marketing .... 4,056 -- --
Non-energy ............................... 7,951 2,339 4,934
---------- ---------- ----------
Total capital expenditures ............. $ 99,182 $ 91,160 $ 84,878
========== ========== ==========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
38
<PAGE> 42
THE WASHINGTON WATER POWER COMPANY
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS
The Washington Water Power Company (Company) was incorporated in the State of
Washington in 1889, and 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. Usage by retail customers varies from year to year
primarily as a result of weather conditions, customer growth, the economy in the
Company's service area, conservation efforts, appliance efficiency and other
technology.
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 United States. Energy trading includes short-term sales
and purchases, such as next hour, next day and monthly blocks of energy.
Wholesale marketing includes sales and purchases under long-term contracts with
one-year and longer terms. Generation and Resources manages the Company's
electric energy resource portfolio, which is used to serve Energy Delivery's
retail electric customers and Generation and Resources' wholesale electric
customers. In managing the electric energy resource portfolio, Generation and
Resources seeks to optimize the availability and operations of generation
resources. Revenues and the cost of electric power purchases vary from year to
year depending on the electric wholesale power market, which is affected by
several factors, including the availability of water for hydroelectric
generation, the availability of base load plants in the region, marginal fuel
prices and the demand for power in other areas of the country. Other factors
affecting the wholesale power market include an increasing number of power
brokers and marketers, lower unit margins on new sales contracts than were
realized in the past, fewer long-term power contracts being entered into,
resulting in a heavier reliance on short-term power contracts, typically with
lower margins, deregulation of the electric utility industry and competition
from low cost generation being developed by independent power producers.
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 Energy's business is affected by several factors, including the
demand for and availability of power throughout the United States, an increasing
number of power brokers and marketers, lower unit margins on new sales
contracts, fewer long-term power contracts being entered into, resulting in a
heavier reliance on short-term power contracts with lower margins, marginal fuel
prices and deregulation of the electric utility industry. Avista Advantage
provides a variety of energy-related products and services to commercial and
industrial customers on a national basis. Its primary product lines include
consolidated billing and resource accounting.
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. Pentzer's business strategy is such that its earnings result from
both transactional and non-transactional earnings. Transactional gains arise
from a one-time event or a specific transaction, such as the sale of an
investment or individual company from Pentzer's portfolio of investments.
Non-transactional earnings arise out of the ongoing operations of the individual
portfolio companies.
BASIS OF REPORTING
The financial statements are presented on a consolidated basis and, as such,
include the assets, liabilities, revenues and expenses of the Company and its
wholly owned subsidiaries. All material intercompany transactions have been
eliminated in the consolidation. The accompanying financial statements include
the Company's proportionate share of utility plant and related operations
resulting from its interests in jointly owned plants (See Note 6). The
financial activity of each of the Company's lines of business is reported in
the "Schedule of Information by Business Segments." Such information is an
integral part of these financial statements.
The preparation of the Company's consolidated financial statements in conformity
with generally accepted accounting principles necessarily requires management to
make estimates and assumptions that directly affect the reported amounts of
assets, liabilities, revenues and expenses.
ALLOCATION OF REVENUES AND EXPENSES FOR REPORTING BUSINESS SEGMENTS
A portion of the utility's revenues and expenses have been allocated between the
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
39
<PAGE> 43
THE WASHINGTON WATER POWER COMPANY
- --------------------------------------------------------------------------------
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.
SYSTEM OF ACCOUNTS
The accounting records of the Company's utility operations are maintained in
accordance with the uniform system of accounts prescribed by the Federal Energy
Regulatory Commission (FERC) and adopted by the appropriate state regulatory
commissions.
REGULATION
The Company is subject to state regulation in Washington, Idaho and Montana for
its electric operations. Natural gas operations are regulated in Washington,
Idaho, Oregon and California. The Company is subject to regulation by the FERC
with respect to its wholesale electric transmission rates and the natural gas
rates charged for the release of capacity from the Jackson Prairie Storage
Project.
OPERATING REVENUES
The Company accrues estimated unbilled revenues for electric and natural gas
services provided through month-end.
OTHER INCOME (DEDUCTIONS) -- NET
Other income (deductions)-net is composed of the following items:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------
1997 1996 1995
-------- -------- --------
(Thousands of Dollars)
<S> <C> <C> <C>
Interest income .................... $ 6,392 $ 5,760 $ 3,645
Capitalized interest (debt) ........ 1,550 1,290 1,042
Gain (loss) on property dispositions (1,222) (152) 1,272
Minority interest .................. (574) (1,193) (314)
Capitalized interest (equity) ...... 1,323 1,072 589
Other .............................. (13,342) (5,586) (6,843)
-------- -------- --------
Total ......................... $ (5,873) $ 1,191 $ (609)
======== ======== ========
</TABLE>
EARNINGS PER SHARE
Earnings per share have been computed based on the weighted average number of
common shares outstanding during the period. Basic and diluted earnings per
share, computations prescribed per FAS No. 128, are the same since the Company
does not have any common stock equivalents to dilute basic earnings per share.
UTILITY PLANT
The cost of additions to utility plant, including an allowance for funds used
during construction and replacements of units of property and betterments, is
capitalized. Costs of depreciable units of property retired plus costs of
removal less salvage are charged to accumulated depreciation.
ALLOWANCE FOR FUNDS USED DURING CONSTRUCTION
The Allowance for Funds Used During Construction (AFUDC) represents the cost of
both the debt and equity funds used to finance utility plant additions during
the construction period. In accordance with the uniform system of accounts
prescribed by regulatory authorities, AFUDC is capitalized as a part of the cost
of utility plant and is credited currently as a noncash item to Other Income
(see Other Income above). The Company generally is permitted, under established
regulatory rate practices, to recover the capitalized AFUDC, and a fair return
thereon, through its inclusion in rate base and the provision for depreciation
after the related utility plant has been placed in service. Cash inflow related
to AFUDC does not occur until the related utility plant investment is placed in
service.
The effective AFUDC rate was 10.67% in 1997, 1996 and 1995. The Company's AFUDC
rates do not exceed the maximum allowable rates as determined in accordance with
the requirements of regulatory authorities.
40
<PAGE> 44
THE WASHINGTON WATER POWER COMPANY
- --------------------------------------------------------------------------------
DEPRECIATION
For utility operations, depreciation provisions are estimated by a method of
depreciation accounting utilizing unit rates for hydroelectric plants and
composite rates for other properties. Such rates are designed to provide for
retirements of properties at the expiration of their service lives. The rates
for hydroelectric plants include annuity and interest components, in which the
interest component is 6%. For utility operations, the ratio of depreciation
provisions to average depreciable property was 2.59% in 1997, 2.58% in 1996 and
2.57% in 1995.
The average service lives and remaining average service lives, respectively, for
the following broad categories of property are: electric thermal production - 35
and 19 years; hydroelectric production - 100 and 81 years; electric transmission
- - 60 and 30 years; electric distribution - 40 and 33 years; and natural gas
distribution property - 44 and 32 years.
CASH AND CASH EQUIVALENTS
For the purposes of the Consolidated Statements of Cash Flows, the Company
considers all temporary investments with an initial maturity of three months or
less to be cash equivalents.
TEMPORARY INVESTMENTS
Investments in debt and marketable equity securities are classified as
"available for sale" and are recorded at fair value. Investments totaling $28.2
million and $22.6 million are included on the Consolidated Balance Sheets at
December 31, 1997 as other property and investments and current assets,
respectively. Investments totaling $14.2 million and $19.7 million are included
on the Consolidated Balance Sheets at December 31, 1996 as other property and
investments and current assets, respectively. Unrealized investment gains, as of
December 31, 1997 and 1996, of $2.1 million and $5.7 million, respectively, net
of taxes, are reflected as a separate component of shareholders' equity in the
Consolidated Statements of Capitalization.
DEFERRED CHARGES AND CREDITS
The Company prepares its financial statements in accordance with the provisions
of FAS No. 71, "Accounting for the Effects of Certain Types of Regulation." A
regulated enterprise can prepare its financial statements in accordance with FAS
No. 71 only if (i) the enterprise's rates for regulated services are established
by or subject to approval by an independent third-party regulator, (ii) the
regulated rates are designed to recover the enterprise's cost of providing the
regulated services and (iii) in view of demand for the regulated services and
the level of competition, it is reasonable to assume that rates set at levels
that will recover the enterprise's costs can be charged to and collected from
customers. FAS No. 71 requires a cost-based, rate-regulated enterprise to
reflect the impact of regulatory decisions in its financial statements. In
certain circumstances, FAS No. 71 requires that certain costs and/or obligations
(such as incurred costs not currently recovered through rates, but expected to
be so recovered in the future) be reflected in a deferral account in the balance
sheet and not be reflected in the statement of income or loss until matching
revenues are recognized. If at some point in the future the Company determines
that it no longer meets the criteria for continued application of FAS No. 71 to
all or a portion of the Company's regulated operations, the Company could be
required to write off its regulatory assets and could be precluded from the
future deferral in the Consolidated Balance Sheet of costs not recovered through
rates at the time such costs were incurred, even if such costs were expected to
be recovered in the future.
The Company's primary regulatory assets include Investment in Exchange Power,
conservation programs, deferred income taxes, the provision for postretirement
benefits and debt issuance and redemption costs. Those items without a specific
line on the Consolidated Balance Sheets are included in Deferred Charges -
Other-net. Deferred credits include natural gas deferrals, unrecovered purchased
gas costs and the gain on the general office building sale/leaseback which is
being amortized over the life of the lease, and are included on the Consolidated
Balance Sheets as Non-current Liabilities and Deferred Credits - Other Deferred
Credits.
POWER AND NATURAL GAS COST ADJUSTMENT PROVISIONS
The Company has a power cost adjustment mechanism (PCA) in Idaho which allows
the Company to modify electric rates to recover or rebate a portion of the
difference between actual and allowed net power supply costs. The PCA tracks
changes in hydroelectric generation, secondary prices, related changes in
thermal generation and PURPA contracts. Rate changes are triggered when the
deferred balance reaches $2.2 million. The deferred balance was $4.2 million at
December 31, 1997, but a tariff change was not filed since there are currently
two rebates in effect and the PCA rules do not allow more than two consecutive
surcharges/rebates during any 12-month period. The following surcharges and
rebates were in effect during the past three years: a $2.6 million (2.3%) rebate
effective September 1, 1997, which will expire August 31, 1998; a $2.6 million
(2.4%) rebate effective June 1, 1997, which will expire May 31, 1998; a $2.5
million (2.3%) rebate effective September 1, 1996, which expired August 31,
1997; $2.3 million (2.4%) surcharge effective September 1, 1995, which expired
August 31, 1996; and a $2.2 million (2.5%) surcharge effective January 1, 1995,
which expired December 31, 1995. The rebates balance and the deferred balance
are included in the Current Liabilities - Other and Non-Current Liabilities and
Deferred Credits - Other Deferred Credits lines, respectively, on the
Consolidated Balance Sheets.
Under established regulatory practices, the Company is also allowed to adjust
its natural gas rates from time to time to reflect increases or decreases in the
cost of natural gas purchased. Differences between actual natural gas costs
41
<PAGE> 45
THE WASHINGTON WATER POWER COMPANY
- --------------------------------------------------------------------------------
and the natural gas costs allowed in rates are deferred and charged or credited
to expense when regulators approve inclusion of the cost changes in rates. In
Oregon, regulatory provisions include a sharing of benefits and risks associated
with changes in natural gas prices. The balance is included on the Consolidated
Balance Sheets as Non-current Liabilities and Deferred Credits - Other Deferred
Credits.
INCOME TAXES
The Company and its eligible subsidiaries file consolidated federal income tax
returns. Subsidiaries are charged or credited with the tax effects of their
operations on a stand-alone basis. The Company's federal income tax returns have
been examined with all issues resolved, and all payments made, through the 1994
return.
NEW ACCOUNTING STANDARDS
The Financial Accounting Standards Board (FASB) issued FAS No. 128, entitled
"Earnings per Share" which is effective for fiscal years ending December 31,
1997. FAS No. 128 establishes standards for computing and presenting earnings
per share. The Company adopted this standard effective December 31, 1997. Basic
and diluted earnings per share are the same since the Company does not have any
common stock equivalents to dilute basic earnings per share. Earnings per share
for prior years were not restated.
FAS No. 129, entitled "Disclosure of Information about Capital Structure,"
effective for fiscal years ending December 31, 1997, requires certain
disclosures related to the Company's capital structure. The Company adopted this
standard effective December 31, 1997. The required information is provided in
Notes 11, 14, 15 and 16.
FAS No. 130, entitled "Reporting Comprehensive Income," is effective for fiscal
years beginning after December 15, 1997. It requires companies to (a) classify
items of other comprehensive income by their nature in a financial statement and
(b) 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. The Company does not expect this standard to
have a material effect on the Company's financial statement presentation.
FAS No. 131, entitled "Disclosure about Segments of an Enterprise and Related
Information," which is effective for financial statements for periods beginning
after December 15, 1997, requires public enterprises to report financial and
descriptive information on the basis that it is used internally for evaluating
segment performance and deciding how to allocate resources to segments. The
Company adopted this standard effective December 31, 1997. The required
disclosures are provided in the Schedule of Information by Business Segment and
in Note 1.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to current
statement format. These reclassifications were made for comparative purposes and
have not affected previously reported total net income or common shareholders'
equity.
NOTE 2. ACCOUNTS RECEIVABLE SALE
In July 1997, WWP Receivables Corp. (WWPRC) was incorporated as a wholly owned,
bankruptcy-remote subsidiary of the Company for the purpose of acquiring or
purchasing interests in certain accounts receivable, both billed and unbilled,
of the Company. Subsequently, WWPRC and the Company have entered into an
agreement whereby WWPRC can sell without recourse, on a revolving basis, up to
$40.0 million in those receivables. WWPRC is obligated to pay fees which
approximate the purchaser's cost of issuing commercial paper equal in value to
the interests in receivables sold. On a consolidated basis, the amount of such
fees is included in operating expenses of the Company. At December 31, 1997,
$40.0 million in receivables had been sold pursuant to the agreement, which
qualifies as a sale of assets under FAS No. 125.
NOTE 3. ENERGY COMMODITY TRADING
The Company's energy-related businesses are exposed to risks relating to changes
in certain commodity prices and counterparty performance. In order to manage the
various risks relating to these exposures, the Company utilizes electric,
natural gas and related commodity derivatives, and has established risk
management oversight for these risks for each area of the Company's
energy-related business. The Company has implemented or is in the process of
implementing procedures to manage such risk and has established a comprehensive
risk management committee, separate from the units that create such risk
exposure and overseen by the Audit Committee of the Company's Board of
Directors, to monitor compliance with the Company's risk management policies and
procedures.
GENERATION AND RESOURCES
The Company protects itself against price fluctuations on electric energy and
natural gas by limiting the aggregate level of net open positions which are
exposed to market price changes and through the use of electric, natural gas and
related commodity derivative instruments for hedging purposes. The net open
position is actively managed
42
<PAGE> 46
THE WASHINGTON WATER POWER COMPANY
- --------------------------------------------------------------------------------
with strict policies designed to limit the exposure to market risk and which
require daily and weekly reporting to management of potential financial
exposure. The risk management committee has limited the types of financial
instruments the Company may trade to those related to electricity and natural
gas commodities and those instruments are to be used for hedging price
fluctuations associated with the management of resources. Financial instruments
are not held for speculative trading purposes. Gains and losses related to
derivative commodity instruments which qualify as hedges are recognized in the
Consolidated Statements of Income when the underlying hedged physical
transaction closes (the deferral method) and are included in the same category
as the hedged item (natural gas purchased or purchased power expense, as the
case may be). At December 31, 1997, the commodity derivative hedge agreements
outstanding were immaterial.
NATIONAL ENERGY TRADING AND MARKETING
Avista Energy markets power and energy services to other utilities and wholesale
power marketers by entering into contracts to purchase or supply natural gas and
electric energy at specified delivery points and at specified future dates.
Avista Energy engages in the trading of electric, natural gas and related
commodity derivatives, such as forwards, futures, swaps and options, and
therefore experiences net open positions in terms of price, volume and specified
delivery point. The open positions expose Avista Energy to the risk that
fluctuating market prices may adversely impact its financial position or results
of operations. However, the net open position is actively managed with strict
policies designed to limit the exposure to market risk and which require daily
reporting to management of potential financial exposure. The risk management
committee has limited the types of electric, natural gas and related commodity
derivative instruments Avista Energy may trade to those related to electricity
and natural gas commodities.
Avista Energy's trading activities are subject to mark-to-market accounting,
under which changes in the market value of outstanding electric, natural gas and
related commodity derivative instruments are recognized as gains or losses in
the period of change. Gains and losses on electric, natural gas and related
commodity derivative instruments utilized for trading are recognized in income
on a current basis (the mark-to-market method) and are included on the
Consolidated Statements of Income in operating revenues or expenses (cost of
sales), as appropriate, and on the Consolidated Balance Sheets as energy
commodity assets or liabilities or as non-utility properties and investments-net
(a non-current asset) or non-current liabilities. Because of underlying price
fluctuations, the mark-to-market totals may fluctuate throughout the month.
Notional Amounts and Terms The notional amounts and terms of the outstanding
financial instruments at December 31, 1997 are set forth below (volumes in
thousands of mmBTUs and MWhs):
<TABLE>
<CAPTION>
Fixed Price Fixed Price Maximum
Payor Receiver Terms in Years
----------- ----------- --------------
<S> <C> <C> <C>
Energy commodities
Natural gas 250,293 269,658 13
Electric 17,848 14,925 9
</TABLE>
Avista Energy also has sales and purchase commitments associated with contracts
based on market prices totaling 108,464,859 mmBTUs, with terms extending up to 3
years. At year-end, there were no fixed index electric transactions.
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 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 the financial instruments as of December 31, 1997,
and the average fair value of those instruments held during the year are set
forth below (dollars in thousands):
<TABLE>
<CAPTION>
Fair Value Average Fair Value for the
as of December 31, 1997 year ended December 31, 1997
------------------------------------------- --------------------------------------------
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 54,235 3,517 51,753 3,105 31,104 2,017 29,680 1,781
Electric 22,214 9,586 18,382 7,451 12,740 5,498 10,542 4,273
</TABLE>
The weighted average term of Avista Energy's natural gas and related commodity
derivative instruments as of December 31, 1997 was approximately three months.
The weighted average term of Avista Energy's electric
43
<PAGE> 47
THE WASHINGTON WATER POWER COMPANY
- --------------------------------------------------------------------------------
commodity derivatives at year-end was approximately twelve months. The fair
value position of Avista Energy's energy commodity portfolio, net of the
reserves for credit and market risk was $8.9 million and is included on the
Consolidated Statements of Income in operating revenues.
MARKET RISK
The Company manages, on a portfolio basis, the market risks inherent in its
activities subject to parameters established by its Board of Directors. Market
risks are monitored by the risk management committee to ensure compliance with
the Company's stated risk management policies. The Company measures the risk in
its portfolio on a daily basis in accordance with value-at-risk and other risk
methodologies established by the risk management committee. The quantification
of market risk using value-at-risk provides a consistent measure of risk across
diverse energy markets and products.
CREDIT RISK
The Company is exposed to credit risk in the event of nonperformance by
customers or counterparties of their contractual obligations. The concentration
of customers and/or counterparties may impact overall exposure to credit risk,
either positively or negatively, in that the counterparties may be similarly
affected by changes in economic, regulatory or other conditions. However, the
Company maintains credit policies with regard to their customers and
counterparties that management believes significantly minimize overall credit
risk. These policies include an evaluation of potential customers' and
counterparties' financial condition and credit rating, collateral requirements
or other credit enhancements such as letters of credit or parent company
guarantees, and the use of standardized agreements which allow for the netting
or offsetting of positive and negative exposures associated with a single
counterparty. The Company maintains credit reserves which are based on
management's evaluation of the credit risk of the overall portfolio. Based on
these policies, exposures and the credit reserves, the Company does not
anticipate a materially adverse effect on financial position or results of
operations as a result of customer or counterparty nonperformance. New York
Mercantile Exchange traded futures and option contracts are financially
guaranteed by the Exchange and have nominal credit risk.
NOTE 4. 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 in which
Avista Energy has a 50% ownership. Avista Energy's initial equity investment in
Howard/Avista was $25 million. 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 accompanying Consolidated Statements of Income for the year ended
December 31, 1997. The net investment in the net assets of Howard/Avista is
included in Non-utility Properties and Investments-net on the accompanying
Consolidated Balance Sheets at December 31, 1997.
The following selected financial information for Howard/Avista reflects that
company's total financial position and operating results as of and for the five
months ended December 31, 1997:
RESULTS OF OPERATIONS (thousands of dollars)
<TABLE>
<CAPTION>
Five months ended
December 31, 1997
-----------------
<S> <C>
Revenues $1,041,622
Operating Expenses (1,038,087)
Other Income-net 8
----------
Net Income (pre-tax) $ 3,543
==========
Avista Energy's equity in earnings
of Howard/Avista Energy LLC (pre-tax) $ 1,772
</TABLE>
44
<PAGE> 48
THE WASHINGTON WATER POWER COMPANY
- --------------------------------------------------------------------------------
FINANCIAL POSITION (thousands of dollars)
<TABLE>
<CAPTION>
December 31, 1997
-----------------
<S> <C>
Current Assets $ 400,150
Other Assets 1,960
---------
Total Assets $ 402,110
=========
Current Liabilities $ 348,339
Other Liabilities 228
---------
Total Liabilities 348,567
Equity 53,543
---------
Total Liabilities and Equity $ 402,110
=========
Avista Energy's equity investment
in Howard/Avista Energy LLC (pre-tax) $ 26,772
</TABLE>
NOTE 5. PROPERTY, PLANT AND EQUIPMENT
The year-end balances of the major classifications of property, plant and
equipment are detailed in the following table (thousands of dollars):
<TABLE>
<CAPTION>
AT DECEMBER 31,
-------------------------
1997 1996
---------- ----------
<S> <C> <C>
Energy Delivery:
Electric distribution ........................ $ 567,552 $ 539,467
Electric transmission ........................ 262,393 251,559
Natural gas underground storage .............. 18,646 18,275
Natural gas distribution ..................... 329,232 302,853
Natural gas transmission ..................... 3,059 3,059
Construction work in progress (CWIP) and other 163,949 156,012
---------- ----------
Energy Delivery total ...................... 1,344,831 1,271,225
---------- ----------
Generation and Resources:
Electric production .......................... 702,092 695,273
CWIP and other ............................... 21,549 23,802
---------- ----------
Generation and Resources total ............. 723,641 719,075
---------- ----------
Total utility ................................. 2,068,472 1,990,300
National Energy Trading and Marketing ......... 4,345 294
Non-energy .................................... 44,831 35,533
---------- ----------
Total ......................................... $2,117,648 $2,026,127
========== ==========
</TABLE>
NOTE 6. JOINTLY OWNED ELECTRIC FACILITIES
The Company has investments in jointly owned generating plants. Financing for
the Company's ownership in the projects is provided by the Company. The
Company's share of related operating and maintenance expenses for plants in
service is included in corresponding accounts in the Consolidated Statements of
Income. See Note 17 for additional information related to potential impacts of
Clean Air Act Amendments on these plants. The following table indicates the
Company's percentage ownership and the extent of the Company's investment in
such plants at December 31, 1997:
<TABLE>
<CAPTION>
COMPANY'S CURRENT SHARE OF
-----------------------------------------------------------------
KW of Construction
Installed Fuel Ownership Plant in Accumulated Net Plant Work in
Project Capacity Source (%) Service Depreciation In Service Progress
- ------- -------- ------ --------- -------- ------------ ---------- -------------
(Thousands of Dollars)
<S> <C> <C> <C> <C> <C> <C> <C>
Centralia......... 1,330,000 Coal 15% $ 56,825 $ 36,317 $ 20,508 $ 137
Colstrip 3 & 4.... 1,556,000 Coal 15 273,597 104,811 168,786 -
</TABLE>
45
<PAGE> 49
THE WASHINGTON WATER POWER COMPANY
- --------------------------------------------------------------------------------
NOTE 7. PENSION PLANS
The Company has a pension plan covering substantially all of its regular
full-time employees. Certain of the Company's subsidiaries also participate in
this plan. Individual benefits under this plan are based upon years of service
and the employee's average compensation as specified in the Plan. The Company's
funding policy is to contribute annually an amount equal to the net periodic
pension cost, provided that such contributions are not less than the minimum
amounts required to be funded under the Employee Retirement Income Security Act,
nor more than the maximum amounts which are currently deductible for tax
purposes. Pension fund assets are invested primarily in marketable debt and
equity securities. The Company also has another plan which covers the executive
officers.
Net pension cost (income) for 1997, 1996 and 1995 is summarized as follows:
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
(Thousands of Dollars)
<S> <C> <C> <C>
Service cost-benefits earned during the period ....... $ 4,762 $ 4,629 $ 3,464
Interest cost on projected benefit obligation ........ 10,601 9,954 9,142
Actual return on plan assets ......................... (21,042) (16,897) (27,910)
Net amortization and deferral ........................ 7,904 4,682 17,272
-------- -------- --------
Net periodic pension cost ......................... $ 2,225 $ 2,368 $ 1,968
======== ======== ========
</TABLE>
The funded status of the Plans and the pension liability at December 31, 1997,
1996 and 1995, are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
(Thousands of dollars)
<S> <C> <C> <C>
Actuarial present value of benefit obligation:
Accumulated benefit obligation (including vested benefits of
$(127,109,000), $(123,601,000) and $(114,964,000), respectively) ...... $(127,777) $(125,658) $(116,877)
========= ========= =========
Projected benefit obligation for service rendered to date ............... $(155,565) $(143,242) $(133,233)
Plan assets at fair value ............................................... 166,242 149,846 140,528
--------- --------- ---------
Plan assets in excess of projected benefit obligation ................... 10,677 6,604 7,295
Unrecognized net gain from returns different than assumed ............... (23,802) (21,101) (19,704)
Prior service costs not yet recognized .................................. 15,655 17,020 18,385
Unrecognized net transition asset at year-end (being amortized
over 19 years) ........................................................ (8,101) (9,187) (10,273)
--------- --------- ---------
Pension liability ....................................................... $ (5,571) $ (6,664) $ (4,297)
========= ========= =========
Assumptions used in calculations were:
Discount rate at year-end ............................................... 7.25% 7.5% 7.5%
Rate of increase in future compensation level ........................... 4.0% 4.0% 4.0%
Expected long-term rate of return on assets ............................. 9.0% 9.0% 9.0%
</TABLE>
NOTE 8. OTHER POSTRETIREMENT BENEFITS
FAS No. 106, "Employers' Accounting for Postretirement Benefits Other Than
Pensions," requires the Company to accrue the estimated cost of postretirement
benefit payments during the years that employees provide services and allows
recognition of the unrecognized transition obligation in the year of adoption or
the amortization of such obligation over a period of up to twenty years. The
Company elected to amortize this obligation of approximately $34,500,000 over a
period of twenty years, beginning in 1993.
The Company received accounting orders from the Washington Utilities and
Transportation Commission (WUTC) and the Idaho Public Utilities Commission
(IPUC) allowing the deferral of expense accruals under this Statement as a
regulatory asset for future recovery. After further agreements with the WUTC,
the Company discontinued deferring expenses, began amortizing prior deferrals
already recorded and began recognition of current expenses in 1996.
The Company provides certain health care and life insurance benefits for
substantially all of its retired employees. In 1997, 1996 and 1995, the Company
recognized $1.2 million, $1.3 million and $1.8 million, respectively, as an
expense for postretirement health care and life insurance benefits. The
following table sets forth the health care plan's funded status at December 31,
1997, 1996 and 1995.
46
<PAGE> 50
THE WASHINGTON WATER POWER COMPANY
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Retirees 584 574 617
Active plan participants 1,272 1,345 1,328
-------- -------- --------
Total participants 1,856 1,919 1,945
</TABLE>
Accumulated postretirement benefit obligation (thousands of dollars):
<TABLE>
<S> <C> <C> <C>
Non-fully eligible plan participants $ (7,949) $ (8,103) $ (8,813)
Fully eligible plan participants (5,029) (5,008) (4,427)
Retirees and beneficiaries (18,824) (17,866) (20,189)
-------- --------- --------
Total (31,802) (30,977) (33,429)
Fair value of plan assets 11,098 5,388 4,711
-------- -------- --------
Unfunded accumulated postretirement benefit obligation (20,704) (25,589) (28,718)
Unrecognized (gain)/loss (5,639) (6,621) (3,396)
Unrecognized transition obligation 23,000 25,683 27,288
-------- -------- --------
Accrued postretirement benefit cost $ (3,343) $ (6,527) $ (4,826)
======== ======== ========
</TABLE>
Net postretirement benefit cost for 1997, 1996 and 1995 (thousands of dollars):
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Service cost - benefits earned during the period $ 637 $ 634 $ 573
Return on the plan assets (if any) (637) (568) (226)
Interest cost on accumulated postretirement benefit obligation 2,247 2,234 2,452
Amortization of transition obligation 1,335 1,375 1,414
-------- -------- --------
Total net periodic cost $ 3,582 $ 3,675 $ 4,213
======== ======== ========
</TABLE>
The currently assumed health care cost trend rate used in measuring the
accumulated postretirement benefit obligation is 5% for all years shown. The
assumed rate of future medical cost increases has been gradually decreased since
the adoption of FAS No. 106 in response to the actual leveling off of cost
increases in the plan. A one-percentage-point increase in the assumed health
care cost trend rate for each year would increase the accumulated postretirement
benefit obligation as of December 31, 1996 and net postretirement health care
cost by approximately $224,000. The assumed discount rate used in determining
the accumulated postretirement benefit obligation was 7.25%.
NOTE 9. ACCOUNTING FOR INCOME TAXES
In June 1997, the Company received $81 million from the Internal Revenue Service
(IRS) to settle an income tax claim relating to its investment in the terminated
nuclear project 3 of the Washington Public Power Supply System (WNP3). The $81
million recovery included $34 million in income taxes the Company overpaid in
prior years plus $47 million in accrued interest, which in total contributed
$41.4 million, or $0.74 per share, to net income.
The Company had claimed that it realized a loss in 1985 relating to its $195
million investment in WNP3 entitling it to current tax deductions. The IRS,
however, originally denied the Company's claim and ruled that the investment
should be written off over 32.5 years, the term of a settlement agreement
between the Company and the Bonneville Power Administration relating to WNP3.
The Company disagreed with this ruling and had been pursuing a reversal for
several years. The IRS has now agreed with the Company's position.
The Company entered into settlement agreements with the WUTC and the IPUC
in 1987 and 1988 providing for the recovery through retail prices of
approximately 60% of the Company's $195 million investment in WNP3. As a result
of these agreements, customers have been and will continue to receive the tax
benefits relating to the recoverable portion of WNP3 over the recovery periods
specified in the settlement agreements. The settlement agreements resulted in a
write-off of approximately $75 million of the Company's WNP3 investment, with
the entire write-off charged to shareholders. The tax recovery and related
accrued interest from the IRS will flow through to the benefit of shareholders.
The cash was used to fund new business investment, including growth
opportunities in national energy markets, and reduced the need for issuance of
long-term debt during 1997.
As of December 31, 1997 and 1996, the Company had recorded net regulatory assets
of $176.7 million and $164.8 million, respectively, related to the probable
recovery of FAS No. 109, "Accounting for Income Taxes," deferred tax liabilities
from customers through future rates. Such regulatory assets will be adjusted by
amounts recovered through rates.
47
<PAGE> 51
THE WASHINGTON WATER POWER COMPANY
- --------------------------------------------------------------------------------
Deferred income taxes reflect the net tax effects of (a) temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes, and (b) tax credit
carryforwards. The net deferred federal income tax liability consists of the
following (thousands of dollars):
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Deferred tax liabilities:
Differences between book and tax bases
of utility plant $368,137 $333,017 $320,502
Loss on reacquired debt 5,504 6,283 7,173
Other 5,825 8,271 10,013
-------- -------- --------
Total deferred tax liabilities 379,466 347,571 337,688
-------- -------- --------
Deferred tax assets:
Reserves not currently deductible 12,630 14,942 15,742
Contributions in aid of construction 6,277 5,425 4,634
Deferred natural gas credits 1,138 4,157 3,894
Centralia Trust 2,515 2,185 --
Gain on sale of office building 1,279 1,371 1,463
Other 2,878 6,962 4,426
-------- -------- --------
Total deferred tax assets 26,717 35,042 30,159
-------- -------- --------
Net deferred tax liability $352,749 $312,529 $307,529
======== ======== ========
</TABLE>
A reconciliation of federal income taxes derived from statutory tax rates
applied to income from continuing operations and federal income tax as set forth
in the accompanying Consolidated Statements of Income and Retained Earnings is
as follows (the current and deferred effective tax rates are approximately the
same during all periods):
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
------------------------------------
1997 1996 1995
-------- -------- --------
(Thousands of Dollars)
<S> <C> <C> <C>
Computed federal income taxes at statutory rate ....... $ 60,552 $ 46,103 $ 47,875
Increase (decrease) in tax resulting from:
Accelerated tax depreciation ....................... 5,014 23 (909)
Prior year audit adjustments ....................... (31,458) (3,491) 5,418
Reserve for WNP3 ................................... 10,402 - -
Other .............................................. 12,500 3,955 (4,121)
-------- -------- --------
Total federal income tax expense* ..................... $ 57,010 $ 46,590 $ 48,263
======== ======== ========
INCOME TAX EXPENSE CONSISTS OF THE FOLLOWING:
Federal taxes currently provided ...................... $ 51,104 $ 37,456 $ 48,318
Deferred income taxes ................................. 5,906 9,134 (55)
-------- -------- --------
Total federal income tax expense ...................... 57,010 46,590 48,263
State income tax expense ........................... 4,065 2,919 4,153
-------- -------- --------
Federal and state income taxes ........................ $ 61,075 $ 49,509 $ 52,416
======== ======== ========
*Federal Income Tax Expense:
Utility ........................................... $ 50,409 $ 34,866 $ 41,203
National Energy Trading and Marketing ............. 1,415 (625) --
Non-energy ........................................ 5,186 12,349 7,060
-------- -------- --------
Total Federal Income Tax Expense ...................... $ 57,010 $ 46,590 $ 48,263
======== ======== ========
Federal statutory rate ................................ 35% 35% 35%
</TABLE>
NOTE 10. LONG-TERM PURCHASED POWER CONTRACTS WITH REQUIRED MINIMUM PAYMENTS
Under fixed contracts with Public Utility Districts (PUD), the Company has
agreed to purchase portions of the output of certain generating facilities.
Although the Company has no investment in such facilities, these contracts
provide that the Company pay certain minimum amounts (which are based at least
in part on the debt service requirements of the supplier) whether or not the
facility is operating. The cost of power obtained under the contracts, including
payments made when a facility is not operating, is included in operations and
maintenance expense in the Consolidated Statements of Income. Information as of
December 31, 1997, pertaining to these contracts is summarized in the following
table:
48
<PAGE> 52
THE WASHINGTON WATER POWER COMPANY
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
COMPANY'S CURRENT SHARE OF
----------------------------------------------------------------- Contract
Debt Revenue Expira-
Kilowatt Annual Service Bonds tion
Output Capability Costs(1) Costs(2) Outstanding Date
-------- ---------- -------- -------- ----------- --------
(Thousands of Dollars)
<S> <C> <C> <C> <C> <C> <C>
PUD CONTRACTS:
Chelan County PUD:
Rocky Reach Project .......... 2.9% 37,000 1,652 573 6,822 2011
Grant County PUD:
Priest Rapids Project ........ 6.1 55,000 1,524 883 10,627 2005
Wanapum Project .............. 8.2 75,000 1,947 1,178 16,950 2009
Douglas County PUD:
Wells Project ................ 3.7 30,000 828 577 6,593 2018
-------- -------- -------- -------- -------- --------
Totals ............... 197,000 $ 5,951 $ 3,211 $ 40,992
======== ======== ======== ========
</TABLE>
(1) The annual costs will change in proportion to the percentage of output
allocated to the Company in a particular year. Amounts represent the
operating costs for the year 1997.
(2) Included in annual costs.
Actual expenses for payments made under the above contracts for the years 1997,
1996 and 1995, were $5.9 million, $5.4 million and $8.1 million, respectively.
The estimated aggregate amounts of required minimum payments (the Company's
share of debt service costs) under the above contracts for the next five years
are $5.4 million in 1998, $5.3 million in 1999, $6.3 million in 2000, $6.2
million in 2001 and $6.6 million in 2002 (minimum payments thereafter are
dependent on then market conditions). In addition, the Company will be required
to pay its proportionate share of the variable operating expenses of these
projects.
NOTE 11. LONG-TERM DEBT
The annual sinking fund requirements and maturities for the next five years for
long-term debt outstanding at December 31, 1997 are as follows:
<TABLE>
<CAPTION>
YEAR ENDED SINKING FUND
DECEMBER 31 MATURITIES REQUIREMENTS TOTAL
----------- ---------- ------------ -----
(thousands of Dollars)
<S> <C> <C> <C>
1998............ 10,000 4,407 14,407
1999............ 47,500 4,407 51,907
2000............ 55,000 4,197 59,197
2001............ 44,000 3,647 47,647
2002............ 50,000 3,497 53,497
</TABLE>
The sinking fund requirements may be met by certification of property additions
at the rate of 167% of requirements. All of the utility plant is subject to the
lien of the Mortgage and Deed of Trust securing outstanding First Mortgage
Bonds.
In 1997, $20.0 million of First Mortgage Bonds in the form of Secured
Medium-Term Notes were issued, while $26.5 million of Secured Medium-Term Notes
and $25.0 million of Unsecured Medium-Term Notes matured or were repurchased. As
of December 31, 1997, the Company had remaining authorization to issue up to
$89.0 million of Secured Medium-Term Notes.
In November 1997, the Company filed a Registration Statement with the SEC for up
to and including $250 million of Debt Securities of the Company.
At December 31, 1997, the Company had $108.5 million outstanding under borrowing
arrangements which are expected to be refinanced in 1998. See Note 12 for
details of credit agreements.
49
<PAGE> 53
THE WASHINGTON WATER POWER COMPANY
- --------------------------------------------------------------------------------
Included in other long-term debt are the following items related to non-energy
operations (thousands of dollars):
<TABLE>
<CAPTION>
OUTSTANDING AT DECEMBER 31,
---------------------------
1997 1996
------- -------
<S> <C> <C>
Notes payable - variable rates through 1999 ........ $40,480 $34,633
Capital lease obligations .......................... 7,601 7,046
------- -------
Total non-energy .............................. 48,081 41,679
Less: current portion ............................ 12,177 11,180
------- -------
Net non-utility long-term debt ................ $35,904 $30,499
======= =======
</TABLE>
The fair value of the Company's long-term debt at December 31, 1997 and 1996 is
estimated to be $647.3 million, or 105% of the carrying value and $658.7
million, or 102% of the carrying value, respectively. These estimates are based
on available market information.
NOTE 12. BANK BORROWINGS
At December 31, 1997, the Company maintained lines of credit with various banks
under two separate credit agreements amounting to $120.0 million. The Company
has one revolving line of credit, expiring December 10, 1999, which provides a
total credit commitment of $70.0 million. The second revolving credit agreement,
which expires on July 22, 2000, provides a total credit commitment of $50.0
million. The Company pays commitment fees of up to 0.09% per annum on the
average daily unused portion of each credit agreement.
In addition, under various agreements with banks, the Company can have up to
$60.0 million in loans outstanding at any one time, with the loans available at
the banks' discretion. These arrangements provide, if funds are made available,
for fixed-term loans for up to 180 days at a fixed rate of interest.
Balances and interest rates of bank borrowings under these arrangements were as
follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------
1997 1996
---------- ---------
(Thousands of Dollars)
<S> <C> <C>
BALANCE OUTSTANDING AT END OF PERIOD:
Fixed-term loans .................................. $ 60,000 $ 50,000
Revolving credit agreement ........................ 48,500 35,000
MAXIMUM BALANCE DURING PERIOD:
Fixed-term loans .................................. $ 60,000 $ 50,000
Revolving credit agreement ........................ 48,500 35,500
AVERAGE DAILY BALANCE DURING PERIOD:
Fixed-term loans .................................. $ 23,737 $ 15,482
Revolving credit agreement ........................ 8,981 12,280
AVERAGE ANNUAL INTEREST RATE DURING PERIOD:
Fixed-term loans .................................. 5.81% 5.67%
Revolving credit agreement ........................ 5.66 5.34
AVERAGE ANNUAL INTEREST RATE AT END OF PERIOD:
Fixed-term loans .................................. 6.20% 5.88%
Revolving credit agreement ........................ 6.39 6.02
</TABLE>
Avista Energy and its subsidiary, Avista Energy Canada, Ltd., as co-borrowers,
entered into a one-year credit agreement effective December 30, 1997, with a
commercial bank. The facility expires November 30, 1998 and is guaranteed by
Avista Corp. The agreement is uncommitted with a demand feature exercisable by
the bank at the bank's sole discretion. All amounts advanced are done so on a
demand loan basis. The agreement also provides, on an uncommitted basis, for the
issuance of letters of credit to secure suppliers of products purchased by the
co-borrowers. The credit facility is collateralized by substantially all of
Avista Energy's inventory and receivables. The bank may extend credit, subject
to the adequacy of collateral, up to $50 million. 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. The credit facility includes a
number of covenants (both affirmative and negative) and default events. At
year-end, Avista Energy is in compliance with all such covenants. At year-end
there were no cash advances (demand notes payable) and letters of credit
outstanding under the facility totaled $2.75 million.
50
<PAGE> 54
THE WASHINGTON WATER POWER COMPANY
- --------------------------------------------------------------------------------
Non-energy operations have $80 million in short-term borrowing arrangements
available. At December 31, 1997 and 1996, $18.6 million and $29.6 million,
respectively, were outstanding.
NOTE 13. LEASES
The Company has entered into several lease arrangements involving various
assets, with minimum terms ranging from one to fourteen years and expiration
dates from 1998 to 2011. Certain of the lease arrangements require the Company,
upon the occurrence of specified events, to purchase the leased assets for
varying amounts over the term of the lease. The Company's management believes
that the likelihood of the occurrence of the specified events under which the
Company could be required to purchase the property is remote. Rent expense for
the years ended December 31, 1997, 1996 and 1995 was $16.9 million, $15.2
million and $13.0 million, respectively. Future minimum lease payments (in
thousands of dollars) required under operating leases that have initial or
remaining noncancelable lease terms in excess of one year as of December 31,
1997 are estimated as follows:
<TABLE>
<CAPTION>
Year ending December 31:
<S> <C>
1998 $ 7,030
1999 7,059
2000 6,146
2001 5,957
2002 5,840
Later years 31,845
--------
Total minimum payments required $ 63,877
========
</TABLE>
The Company also has various other cancellable operating leases, which are
charged to operating expense, consisting of the Rathdrum combustion turbines,
the Company airplane and a large number of small, relatively short-term,
renewable agreements for various items, such as office equipment and office
space.
NOTE 14. PREFERRED STOCK
CUMULATIVE PREFERRED STOCK NOT SUBJECT TO MANDATORY REDEMPTION:
The Company redeemed its $50 million of Flexible Auction Preferred Stock, Series
J in August 1997. The dividend rate on this preferred stock was reset every 49
days based on an auction. During the time it was outstanding in 1997, the
dividend rate varied from 4.06% to 4.60%.
CUMULATIVE PREFERRED STOCK SUBJECT TO MANDATORY REDEMPTION:
Redemption requirements:
$8.625, Series I - On June 15, 1998, the Company must redeem the remaining
100,000 shares at $100 per share plus accumulated dividends.
$6.95, Series K - On September 15, 2002, 2003, 2004, 2005 and 2006, the
Company must redeem 17,500 shares at $100 per share plus accumulated
dividends through a mandatory sinking fund. Remaining shares must be
redeemed on September 15, 2007. The Company has the right to redeem an
additional 17,500 shares on each September 15 redemption date.
There are $11.75 million in mandatory redemption requirements during the
1998-2002 period.
In June 1997, the Company had a mandatory redemption of $10 million, or 100,000
shares, and also completed an optional redemption of an additional 100,000
shares, or $10 million, of its $8.625 Series I.
The fair value of the Company's preferred stock at December 31, 1997 and 1996 is
estimated to be $49.8 million, or 111% of the carrying value and $118.3 million,
or 103% of the carrying value, respectively. These estimates are based on
available market information.
NOTE 15. COMPANY-OBLIGATED MANDATORILY REDEEMABLE PREFERRED TRUST SECURITIES
On January 23, 1997, Washington Water Power Capital I, a business trust, issued
to the public $60,000,000 of Preferred Trust Securities having a distribution
rate of 7 7/8%. Concurrent with the issuance of the Preferred Trust Securities,
the Trust issued $1,855,675 of Common Trust Securities to the Company. The sole
assets of the Trust are the Company's 7 7/8% Junior Subordinated Deferrable
Interest Debentures, Series A, with a principal amount of $61,855,675.
Accordingly, no financial statements have been presented. These debt securities
may be redeemed at the Company's option on or after January 15, 2002 and mature
January 15, 2037.
51
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THE WASHINGTON WATER POWER COMPANY
- --------------------------------------------------------------------------------
On June 3, 1997, Washington Water Power Capital II, a business trust, issued to
the public $50,000,000 of Preferred Trust Securities having a floating
distribution rate of LIBOR plus 0.875%, calculated and reset quarterly
(initially 6.6875%). The distribution rate at December 31, 1997 was 6.77734%.
Concurrent with the issuance of the Preferred Trust Securities, the Trust issued
$1,547,000 of Common Trust Securities to the Company. The sole assets of the
Trust are the Company's Floating Rate Junior Subordinated Deferrable Interest
Debentures, Series B, with a principal amount of $51,547,000. Accordingly, no
financial statements have been presented. These debt securities may be redeemed
at the Company's option on or after June 1, 2007 and mature June 1, 2037.
The Company has guaranteed the payment of distributions on, and redemption price
and liquidation amount in respect of, the Preferred Trust Securities to the
extent that the Trust has funds available for such payment from the debt
securities. Upon maturity or prior redemption of such debt securities, the Trust
Securities will be mandatorily redeemed. The Company's Consolidated Statements
of Capitalization reflect only the $60 million and $50 million of Preferred
Trust Securities, accordingly all intercompany transactions have been
eliminated.
The fair value of the Company's preferred trust securities at December 31, 1997
is estimated to be $109.4 million, or 99% of the carrying value. These estimates
are based on available market information.
NOTE 16. COMMON STOCK
In April 1990, the Company sold 1,000,000 shares of its common stock to the
Trustee of the Investment and Employee Stock Ownership Plan for Employees of the
Company (Plan) for the benefit of the participants and beneficiaries of the
Plan. In payment for the shares of Common Stock, the Trustee issued a promissory
note payable to the Company in the amount of $14,125,000. Dividends paid on the
stock held by the Trustee, plus Company contributions to the Plan, if any, are
used by the Trustee to make interest and principal payments on the promissory
note. The balance of the promissory note receivable from the Trustee ($9.75
million at December 31, 1997) is reflected as a reduction to common equity. The
shares of Common Stock are allocated to the accounts of participants in the Plan
as the note is repaid. During 1997, the cost recorded for the Plan was $3.4
million. Interest on the note payable to the Company, cash and stock
contributions to the Plan and dividends on the shares held by the Trustee were
$1.0 million, $2.6 million and $1.2 million, respectively.
In February 1990, the Company adopted a shareholder rights plan, which was
subsequently amended, pursuant to which holders of Common Stock outstanding on
March 2, 1990, or issued thereafter, have been granted one preferred share
purchase right (Right) on each outstanding share of Common Stock. Each Right,
initially evidenced by and traded with the shares of Common Stock, entitles the
registered holder to purchase one two-hundredth of a share of Preferred Stock of
the Company, without par value, at an exercise price of $40, subject to certain
adjustments, regulatory approval and other specified conditions. The Rights will
be exercisable only if a person or group acquires 10% or more of the Common
Stock or announces a tender offer, the consummation of which would result in the
beneficial ownership by a person or group of 10% or more of the Common Stock.
The Rights may be redeemed, at a redemption price of $0.005 per Right, by the
Board of Directors of the Company at any time until any person or group has
acquired 10% or more of the Common Stock. The Rights will expire on February 16,
2000.
During 1992, the Company received authorization to issue 1.5 million shares of
Common Stock under a second Periodic Offering Program (POP). No shares were
issued under the POP during 1995, 1996 or 1997. At December 31, 1997, 572,400
shares remained authorized but unissued.
The Company has a Dividend Reinvestment and Stock Purchase Plan under which the
Company's stockholders may automatically reinvest their dividends and make
optional cash payments for the purchase of the Company's Common Stock at current
market value.
Beginning in early 1996, shares were purchased on the open market to fulfill
obligations of the 401(K) and Dividend Reinvestment Plans. Sales of Common Stock
for 1997, 1996 and 1995 are summarized below (thousands of dollars):
<TABLE>
<CAPTION>
1997 1996 1995
------------------------ ------------------------ ------------------------
Shares Amount Shares Amount Amount Shares
---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1 ....................... 55,960,360 $ 594,852 55,947,967 $ 594,636 54,420,696 $ 570,603
---------- ---------- ---------- ---------- ---------- ----------
Employee Investment Plan (401-K) ......... -- -- -- -- 304,353 4,718
Dividend Reinvestment Plan ............... -- -- 12,393 216 1,222,918 19,315
---------- ---------- ---------- ---------- ---------- ----------
Total Issues ............................. -- -- 12,393 216 1,527,271 24,033
---------- ---------- ---------- ---------- ---------- ----------
Balance at December 31 ..................... 55,960,360 $ 594,852 55,960,360 $ 594,852 55,947,967 $ 594,636
========== ========== ========== ========== ========== ==========
</TABLE>
52
<PAGE> 56
THE WASHINGTON WATER POWER COMPANY
- --------------------------------------------------------------------------------
NOTE 17. 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.
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 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.
FIRESTORM
On October 16, 1991, gale-force winds struck a five-county area in eastern
Washington and a seven-county area in northern Idaho. These winds were
responsible for causing 92 separate wildland fires, resulting in two deaths and
the loss of 114 homes and other structures, some of which were located in the
Company's service territory. Five separate class action lawsuits have been filed
against the Company by private individuals in the Superior Court for Spokane
County. All of these suits were certified as class actions on September 16,
1994, and bifurcated for trial of liability and damage issues by order of the
same date.
53
<PAGE> 57
THE WASHINGTON WATER POWER COMPANY
- --------------------------------------------------------------------------------
The Company was also served with two suits in Spokane County Superior Court
filed on April 20, 1994 and on September 15, 1994, both of which sought
individual damages from separate and for alleged wrongful death of two persons.
Five additional and separate suits were brought by Grange Insurance Company, and
were filed in Spokane County Superior Court on October 10, 1994, for
approximately $2.2 million paid to Grange insureds for the same fire areas.
A settlement agreement was reached with all parties to the Firestorm litigation
and was approved following hearing in the Superior Court of Spokane County on
December 4, 1997, and a final order of dismissal with prejudice was entered on
December 5, 1997. No appeal resulted from that order. This action resolved all
claims pending against the Company relating to the above-mentioned occurrences.
The Company's contribution toward the settlement is $10.3 million, with all but
$1.2 million being covered by insurance proceeds.
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. This action has been temporarily stayed pending the
determination of certain legal issues in a similar case filed in the U.S.
District Court for the Eastern District of Washington, involving similar facts
and circumstances, but which did not otherwise name the Company as a defendant.
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.
OTHER CONTINGENCIES
The Company routinely assesses, based on in-depth studies, expert analyses and
legal reviews, its contingencies, obligations and commitments for remediation of
contaminated sites, including assessments of ranges and probabilities of
recoveries from other responsible parties who have and have not agreed to a
settlement and recoveries from insurance carriers. The Company's policy is to
immediately accrue and charge to current expense identified exposures related to
environmental remediation sites based on estimates of investigation, cleanup and
monitoring costs to be incurred.
The Company must be in compliance with requirements under the Clean Air Act
Amendments (CAAA) by the year 2000 at both the Colstrip and Centralia thermal
generating plants, in which the Company maintains an ownership interest. The
anticipated share of costs at Colstrip are not expected to have a major economic
impact on the Company, but estimates at Centralia are expected to be
approximately $35 million, which have been included in the Company's future
projected capital expenditures.
The Company has potential liabilities under the Federal Endangered Species Act
(ESA) for species of fish that have either already been added to the endangered
species list, been listed as "threatened" or been petitioned for listing. Thus
far, measures which have been adopted and implemented have had minimal impact of
the Company. Future actions to save these, and other as yet unidentified fish or
wildlife species, particularly as the Company is relicensing several of its
hydroelectric facilities, could impact the Company's operations. It is currently
not possible to determine the likely financial impact of any further actions.
The Company has long-term contracts related to the purchase of fuel for thermal
generation, natural gas and hydroelectric power. Terms of the natural gas
purchase contracts range from one month to five years and the majority provide
for minimum purchases at the then effective market rate. The Company also has
various agreements for the purchase, sale or exchange of electric energy with
other utilities, cogenerators, small power producers and government agencies.
54
<PAGE> 58
THE WASHINGTON WATER POWER COMPANY
- --------------------------------------------------------------------------------
As of December 31, 1997, the Company's collective bargaining agreement with the
International Brotherhood of Electrical Workers represented approximately 46% of
employees. The current agreement with the union local representing the majority
of the bargaining unit employees expires on March 25, 1999. A local agreement in
the South Lake Tahoe area, which represents 7 employees, also expires on March
25, 1999.
NOTE 18. ACQUISITIONS AND DISPOSITIONS
During 1997, Pentzer acquired three new companies: Target Woodworks, Inc., a
Florida-based company; White Plus, a California-based company; and Proco Wood
Products, a Minnesota-based company. All three companies provide
point-of-purchase and in-store merchandising services. During 1996, Pentzer
acquired one company that provides point-of-purchase and in-store merchandising
services. In 1995, Pentzer acquired two companies.
In May 1997, Pentzer sold its interest in a portfolio company, Safety Speed Cut,
resulting in a gain of approximately $2.0 million, net of taxes. In 1996,
Pentzer Development Corporation, a subsidiary of Pentzer, sold the Spokane
Industrial Park, resulting in a gain of approximately $10.8 million, net of
taxes and other adjustments. In February 1998, Pentzer sold its interest in
Systran, resulting in a gain of approximately $5.8 million, net of taxes, which
will be included in income in the first quarter of 1998.
NOTE 19. MERGER TERMINATION
On June 28, 1996, the Board of Directors of the Company terminated the Agreement
and Plan of Reorganization and Merger, dated as of June 27, 1994 by and among
the Company, Sierra Pacific Resources (SPR), Sierra Pacific Power Company, a
subsidiary of SPR (SPPC), and Altus Corporation, a wholly owned subsidiary of
the Company (Altus, formerly named Resources West Energy Corporation), which
would have provided for the merger of the Company, SPR and SPPC with and into
Altus. The Company had approximately $15.8 million, or $10.3 million after-tax,
in merger-related transaction and transition costs that were expensed in 1996.
No increase in rates will occur as a result of these costs being expensed.
55
<PAGE> 59
THE WASHINGTON WATER POWER COMPANY
- --------------------------------------------------------------------------------
NOTE 20. SELECTED QUARTERLY INFORMATION (UNAUDITED)
The Company's energy operations are significantly affected by weather
conditions. Consequently, there can be large variances in revenues, expenses and
net income between quarters based on seasonal factors such as temperatures and
streamflow conditions. A summary of quarterly operations (in thousands of
dollars except per share amounts) for 1997 and 1996 follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
--------------------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
---------- ---------- ------------ -----------
1997
<S> <C> <C> <C> <C>
Operating revenues .................... $ 284,046 $ 236,274 $ 295,076 $ 486,776
Operating income ...................... 64,060 34,669 29,707 61,028
Net income ............................ 29,848 48,475 13,237 23,237
Income available for common stock ..... 28,070 46,663 12,258 22,414
Outstanding common stock (000s):
Weighted average .................... 55,960 55,960 55,960 55,960
Actual .............................. 55,960 55,960 55,960 55,960
Earnings per share:
Energy Delivery and
Generation and Resources ......... $ 0.49 $ 0.81 $ 0.12 $ 0.29
National Energy Trading and Marketing (0.01) (0.03) (0.02) 0.10
Non-energy .......................... 0.02 0.05 0.12 0.02
Total, Basic and Diluted ............ $ 0.50 $ 0.83 $ 0.22 $ 0.41
Dividends paid per common share ....... $ 0.31 $ 0.31 $ 0.31 $ 0.31
Trading price range per share:
High ................................ $ 19 $ 19 7/8 $ 21 1/4 $ 24 13/16
Low ................................. $ 17 3/8 $ 17 3/8 $ 18 7/8 $ 18 15/16
1996
Operating revenues .................... $ 248,004 $ 195,900 $ 219,751 $ 281,302
Operating income ...................... 66,446 45,888* 35,627 38,960
Net income ............................ 41,909 8,968 18,364 14,212
Income available for common stock ..... 39,643 6,827 16,572 12,433
Outstanding common stock (000s):
Weighted average .................... 55,958 55,960 55,960 55,960
Actual .............................. 55,960 55,960 55,960 55,960
Earnings per share:
Energy Delivery and
Generation and Resources ......... $ 0.50 $ 0.10 $ 0.19 $ 0.18
National Energy Trading and Marketing -- (0.01) -- (0.01)
Non-energy .......................... 0.21 0.03 0.11 0.05
---------- ---------- ---------- ----------
Total, Basic and Diluted ............ $ 0.71 $ 0.12 $ 0.30 $ 0.22
Dividends paid per common share ....... $ 0.31 $ 0.31 $ 0.31 $ 0.31
Trading price range per share:
High ................................ $ 19 1/8 $ 19 7/8 $ 19 3/4 $ 19 3/4
Low ................................. $ 17 1/4 $ 17 3/4 $ 17 7/8 $ 18
</TABLE>
* The amount reported above for Operating Income in the second quarter of 1996
differs from the amount reported in the second quarter Form 10-Q because the
merger expenses were retroactively reclassified from operating expenses to
non-operating expenses during the third quarter of 1996.
56
<PAGE> 60
THE WASHINGTON WATER POWER COMPANY
- --------------------------------------------------------------------------------
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information regarding the directors of the Registrant has been omitted pursuant
to General Instruction G to Form 10-K. Reference is made to the Registrant's
Proxy Statement to be filed with the Securities and Exchange Commission in
connection with the Registrant's annual meeting of shareholders to be held on
May 14, 1998.
Executive Officers of the Registrant
<TABLE>
<CAPTION>
Name Age Business Experience During Past 5 Years
- ---- --- ---------------------------------------
<S> <C> <C>
Paul A. Redmond 61 Chairman of the Board and Chief Executive Officer since
August 1996; Chairman of the Board, President and Chief
Executive Officer February 1994 - August 1996; Chairman of the
Board and Chief Executive Officer May 1988 - February 1994.
W. Lester Bryan 57 President & Chief Operating Officer since August 1996;
Senior Vice President - Rates & Resources May 1992 - August 1996.
Jon E. Eliassen 51 Senior Vice President, Chief Financial Officer & Treasurer since
November 1997; Senior Vice President & Chief Financial Officer
August 1996 - November 1997; Vice President - Finance & Chief
Financial Officer February 1986 - August 1996.
Gary G. Ely 50 Senior Vice President & General Manager since August 1996;
Vice President - Natural Gas February 1991- August 1996.
Robert D. Fukai 48 Vice President - External Relations since August 1996; Vice President -
Human Resources, Corporate Services & Marketing January 1993 -
August 1996.
JoAnn G. Matthiesen 57 Vice President - Human Resources since August 1996; Vice President -
Organization Effectiveness, Public Relations & Assistant to the Chairman
January 1993 - August 1996.
Lawrence J. Pierce 45 Vice President since November 1997; Vice President & Treasurer August
1996 - November 1997; Vice President - Business Analysis August 1994 - August
1996; Director - Business Analysis February 1992 - August 1994.
Ronald R. Peterson 45 Vice President and Controller since February 1998; Controller August 1996
- February 1998; Treasurer February 1992 - August 1996.
Terry L. Syms 49 Vice President and Corporate Secretary since February 1998; Corporate
Secretary March 1988 - February 1998.
</TABLE>
All of the Company's executive officers, with the exception of Messr. Fukai,
were officers or directors of one or more of the Company's subsidiaries in 1997.
Executive officers are elected annually by the Board of Directors.
57
<PAGE> 61
THE WASHINGTON WATER POWER COMPANY
- --------------------------------------------------------------------------------
ITEM 11. EXECUTIVE COMPENSATION
Information regarding executive compensation has been omitted pursuant to
General Instruction G to Form 10-K. Reference is made to the Registrant's Proxy
Statement to be filed with the Securities and Exchange Commission in connection
with the Registrant's annual meeting of shareholders to be held on May 14, 1998.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
(a) Security ownership of certain beneficial owners (owning 5% or more of
Registrant's voting securities):
None.
(b) Security ownership of management:
Information regarding security ownership of management has been omitted
pursuant to General Instruction G to Form 10-K. Reference is made to the
Registrant's Proxy Statement to be filed with the Securities and Exchange
Commission in connection with the Registrant's annual meeting of
shareholders to be held on May 14, 1998.
(c) Changes in control:
None.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information regarding certain relationships and related transactions has been
omitted pursuant to General Instruction G to Form 10-K. Reference is made to the
Registrant's Proxy Statement to be filed with the Securities and Exchange
Commission in connection with the Registrant's annual meeting of shareholders to
be held on May 14, 1998.
58
<PAGE> 62
PART IV
ITEM 14. FINANCIAL STATEMENTS, FINANCIAL STATEMENT SCHEDULES, EXHIBITS AND
REPORTS ON FORM 8-K
(a) 1. Financial Statements (Included in Part II of this report):
Independent Auditors' Report
Consolidated Statements of Income and Retained Earnings for the
Years Ended December 31, 1997, 1996 and 1995
Consolidated Balance Sheets, December 31, 1997 and 1996
Consolidated Statements of Capitalization, December 31, 1997 and
1996
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1997, 1996 and 1995
Schedule of Information by Business Segments for the Years Ended
December 31, 1997, 1996 and 1995
Notes to Financial Statements
(a) 2. Financial Statement Schedules:
None
(a) 3. Exhibits:
Reference is made to the Exhibit Index commencing on page 62. The
Exhibits include the management contracts and compensatory plans or
arrangements required to be filed as exhibits to this Form 10-K by
Item 601(10)(iii) of Regulation S-K.
(b) Reports on Form 8-K:
Dated June 28, 1997, regarding the Company's receipt of an $81
million income tax recovery from the Internal Revenue Service.
59
<PAGE> 63
THE WASHINGTON WATER POWER COMPANY
- --------------------------------------------------------------------------------
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
THE WASHINGTON WATER POWER COMPANY
March 17, 1998 By /s/ Paul A. Redmond
- -------------- ---------------------------------------
Date Paul A. Redmond
Chairman of the Board and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Paul A. Redmond Principal Executive March 17, 1998
- ------------------------------------------- Officer and Director
Paul A. Redmond (Chairman of the Board
and Chief Executive Officer)
/s/ W. Lester Bryan Officer
- ------------------------------------------- and Director March 17, 1998
W. Lester Bryan (President
and Chief Operating Officer)
/s/ J. E. Eliassen Principal Financial
- ------------------------------------------- and Accounting Officer March 17, 1998
J. E. Eliassen (Senior Vice President,
Chief Financial Officer and Treasurer)
/s/ David A. Clack Director March 17, 1998
- -------------------------------------------
David A. Clack
/s/ Duane B. Hagadone Director March 17, 1998
- -------------------------------------------
Duane B. Hagadone
/s/ Sarah M. R. Jewell Director March 17, 1998
- -------------------------------------------
Sarah M. R. Jewell
/s/ John F. Kelly Director March 17, 1998
- -------------------------------------------
John F. Kelly
/s/ Eugene W. Meyer Director March 17, 1998
- -------------------------------------------
Eugene W. Meyer
/s/ Bobby Schmidt Director March 17, 1998
- -------------------------------------------
Bobby Schmidt
/s/ Larry A. Stanley Director March 17, 1998
- -------------------------------------------
Larry A. Stanley
/s/ R. John Taylor Director March 17, 1998
- -------------------------------------------
R. John Taylor
</TABLE>
60
<PAGE> 64
THE WASHINGTON WATER POWER COMPANY
- --------------------------------------------------------------------------------
EXHIBIT INDEX
<TABLE>
<CAPTION>
Previously Filed*
--------------------------
With
Registration As
Exhibit Number Exhibit
- ------- ------------ -------
<S> <C> <C> <C>
3(a) 1-3701 (with 4(a) Restated Articles of Incorporation of the Company as filed August 4, 1994.
1994 2nd Quarter
10-Q)
3(b) 1-3701 (with 4(a) Bylaws of the Company, as amended, May 13, 1996.
1996 2nd Quarter
10-Q)
4(a)-1 2-4077 B-3 Mortgage and Deed of Trust, dated as of June 1, 1939
4(a)-2 2-9812 4(c) First Supplemental Indenture, dated as of October 1, 1952.
4(a)-3 2-60728 2(b)-2 Second Supplemental Indenture, dated as of May 1, 1953.
4(a)-4 2-13421 4(b)-3 Third Supplemental Indenture, dated as of December 1, 1955.
4(a)-5 2-13421 4(b)-4 Fourth Supplemental Indenture, dated as of March 15, 1967.
4(a)-6 2-60728 2(b)-5 Fifth Supplemental Indenture, dated as of July 1, 1957.
4(a)-7 2-60728 2(b)-6 Sixth Supplemental Indenture, dated as of January 1, 1958.
4(a)-8 2-60728 2(b)-7 Seventh Supplemental Indenture, dated as of August 1, 1958.
4(a)-9 2-60728 2(b)-8 Eighth Supplemental Indenture, dated as of January 1, 1959.
4(a)-10 2-60728 2(b)-9 Ninth Supplemental Indenture, dated as of January 1, 1960.
4(a)-11 2-60728 2(b)-10 Tenth Supplemental Indenture, dated as of April 1, 1964.
4(a)-12 2-60728 2(b)-11 Eleventh Supplemental Indenture, dated as of March 1, 1965.
4(a)-13 2-60728 2(b)-12 Twelfth Supplemental Indenture, dated as of May 1, 1966.
4(a)-14 2-60728 2(b)-13 Thirteenth Supplemental Indenture, dated as of August 1, 1966.
4(a)-15 2-60728 2(b)-14 Fourteenth Supplemental Indenture, dated as of April 1, 1970.
4(a)-16 2-60728 2(b)-15 Fifteenth Supplemental Indenture, dated as of May 1, 1973.
4(a)-17 2-60728 2(b)-16 Sixteenth Supplemental Indenture, dated as of February 1, 1975.
4(a)-18 2-60728 2(b)-17 Seventeenth Supplemental Indenture, dated as of November 1, 1976.
4(a)-19 2-69080 2(b)-18 Eighteenth Supplemental Indenture, dated as of June 1, 1980.
4(a)-20 1-3701 (with 4(a)-20 Nineteenth Supplemental Indenture, dated as of January 1, 1981.
1980 Form 10-K)
4(a)-21 2-79571 4(a)-21 Twentieth Supplemental Indenture, dated as of August 1, 1982.
4(a)-22 1-3701 (with 4(a)-22 Twenty-First Supplemental Indenture, dated as of September 1, 1983.
Form 8-K dated
September 20,
1983)
4(a)-23 2-94816 4(a)-23 Twenty-Second Supplemental Indenture, dated as of March 1, 1984.
</TABLE>
- ----------
*Incorporated herein by reference.
**Filed herewith.
62
<PAGE> 65
THE WASHINGTON WATER POWER COMPANY
- --------------------------------------------------------------------------------
EXHIBIT INDEX (continued)
<TABLE>
<CAPTION>
Previously Filed*
---------------------------
With
Registration As
Exhibit Number Exhibit
- ------- ------------ -------
<S> <C> <C> <C>
4(a)-24 1-3701 (with 4(a)-24 Twenty-Third Supplemental Indenture, dated as of
1986 Form 10-K) December 1, 1986.
4(a)-25 1-3701 (with 4(a)-25 Twenty-Fourth Supplemental Indenture, dated as of
1987 Form 10-K) January 1, 1988.
4(a)-26 1-3701 (with 4(a)-26 Twenty-Fifth Supplemental Indenture, dated as of
1989 Form 10-K) October 1, 1989.
4(a)-27 33-51669 4(a)-27 Twenty-Sixth Supplemental Indenture, dated as of
April 1, 1993.
4(a)-28 1-3701 (with 4(a)-28 Twenty-Seventh Supplemental Indenture, dated as of
1993 Form 10-K) January 1, 1994.
4(b)-1 1-3701 (with 4(e)-1 Loan Agreement between City of Forsyth, Rosebud County,
1989 Form 10-K) and the Company, dated as of November 1, 1989 (Series
1989 A and 1989 B). Replaces Exhibit 4(e)-1
(agreement between the Company and City of
Forsyth, Rosebud County, Montana, dated as of
October 1, 1986) filed with Form 10-K for
1986 and Exhibit 4(g)-1 (agreement between
the Company and City of Forsyth, Rosebud
County, Montana, dated as of April 1, 1987)
filed with Form 10-K for 1987.
4(b)-2 1-3701 (with 4(e)-2 Indenture of Trust, Pollution Control Revenue Refunding
1989 Form 10-K) Bonds (Series 1989 A and 1989 B) between City of Forsyth,
Rosebud County, Montana and Chemical Bank, dated as of
November 1, 1989. Replaces Exhibit 4(e)-2 (Indenture
of Trust between City of Forsyth, Rosebud County,
Montana and Chemical Bank dated as of October 1,
1986) filed with Form 10-K for 1986 and Exhibit
4(g)-2 (Indenture of Trust between City of Forsyth,
Rosebud County, Montana and Chemical Bank, dated as
of April 1, 1987) filed with Form 10-K for 1987.
4(c)-1 1-3701 (with 4(h)-1 Indenture between the Company and Chemical Bank dated
1988 Form 10-K) as of July 1, 1988 (Series A and B Medium-Term Notes).
4(d)-1 1-3701 (with 4(k)-1 Credit Agreements between the Company and Seattle-First
1992 Form 10-K) National Bank, West One Bank Idaho, N.A., First
Interstate Bank of Washington, N.A., First Security Bank
of Idaho, N.A., U.S. Bank of Washington, N.A., and
Washington Trust Bank with Seattle-First National Bank as agent,
dated as of December 10, 1992.
4(d)-2 1-3701 (with 4(k)-2 Third Amendment to Credit Agreements between the Company
1995 Form 10-K) and Seattle-First National Bank, West One Bank Idaho, N.A.,
First Interstate Bank of Washington, N.A., First
Security Bank of Idaho, N.A., U.S. Bank of Washington, N.A.,
and Washington Trust Bank with Seattle-First National Bank as
agent, dated as of November 21, 1994.
</TABLE>
- ----------
*Incorporated herein by reference.
**Filed herewith.
63
<PAGE> 66
THE WASHINGTON WATER POWER COMPANY
- --------------------------------------------------------------------------------
EXHIBIT INDEX (continued)
<TABLE>
<CAPTION>
Previously Filed*
--------------------------
With
Registration As
Exhibit Number Exhibit
- ------- ------------ -------
<S> <C> <C> <C>
4(d)-3 ** Fourth Amendment to Credit Agreements between the
Company and Bank of America NW, N.A. doing business as
Seafirst Bank and formerly known as Seattle-First National
Bank, Wells Fargo Bank, N.A. successor by merger with First
Interstate Bank of Washington, N.A., First Security Bank of
Idaho, N.A., U.S. Bank of Washington, N.A. for itself and as
successor by merger with West One Bank, N.A., and
Washington Trust Bank; and Seafirst Bank as Agent for the
Banks, dated as of September 3, 1996.
4(e)-1 1-3701 (with 4(n) Rights Agreement, dated as of February 16, 1990, between
Form 8-K dated the Company and the Bank of New York as successor
February 16, 1990) Rights Agent.
4(e)-2 1-3701 (with 1994 4(b) Amendment No. 1 to Rights Agreement, dated as of May 10, 1994.
First Quarter
Form 10-Q)
4(e)-3 1-3701 (with 1994 4(b) Amendment No. 2 to Rights Agreement, dated as of June 27, 1994.
Third Quarter
Form 10-Q)
4(f)-1 ** Amended and Restated Credit Agreement between the
Company and The Toronto-Dominion Bank, The Bank of
New York and NationsBank of Texas, N.A. with Toronto
Dominion Bank as agent for the Banks, dated as of July 22, 1997.
10(a)-l 2-13788 13(e) Power Sales Contract (Rocky Reach Project) with
Public Utility District No. 1 of Chelan County,
Washington, dated as of November 14, 1957.
10(a)-2 2-60728 10(b)-1 Amendment to Power Sales Contract (Rocky Reach
Project) with Public Utility District No. 1 of Chelan
County, Washington, dated as of June 1, 1968.
10(b)-1 2-13421 13(d) Power Sales Contract (Priest Rapids Project) with
Public Utility District No. 2 of Grant County,
Washington, dated as of May 22, 1956.
10(b)-2 2-60728 5(d)-1 Second Amendment to Power Sales Contract (Priest Rapids
Project) with Public Utility District No. 2 of Grant
County, Washington, dated as of December 19, 1977.
10(c)-1 2-60728 5(e) Power Sales Contract (Wanapum Project) with
Public Utility District No. 2 of Grant County,
Washington, dated as of June 22, 1959.
10(c)-2 2-60728 5(e)-1 First Amendment to Power Sales Contract (Wanapum
Project) with Public Utility District No. 2 of Grant
County, Washington, dated as of December 19, 1977.
10(d)-1 2-60728 5(g) Power Sales Contract (Wells Project) with Public Utility
District No. 1 of Douglas County, Washington, dated as
of September 18, 1963.
10(d)-2 2-60728 5(g)-1 Amendment to Power Sales Contract (Wells Project)
with Public Utility District No. 1 of Douglas County,
Washington, dated as of February 9, 1965.
</TABLE>
- ----------
* Incorporated herein by reference.
** Filed herewith.
64
<PAGE> 67
THE WASHINGTON WATER POWER COMPANY
- --------------------------------------------------------------------------------
EXHIBIT INDEX (continued)
<TABLE>
<CAPTION>
Previously Filed*
-------------------------------
With
Registration As
Exhibit Number Exhibit
- ------- ------------ -------
<S> <C> <C> <C>
10(d)-3 2-60728 5(h) Reserved Share Power Sales Contract (Wells Project)
with Public Utility District No. 1 of Douglas County,
Washington, dated as of September 18, 1963.
10(d)-4 2-60728 5(h)-1 Amendment to Reserved Share Power Sales Contract
(Wells Project) with Public Utility District No. 1 of Douglas
County, Washington, dated as of February 9, 1965.
10(e) 2-60728 5(i) Canadian Entitlement Exchange Agreement executed by
Bonneville Power Administration Columbia Storage Power
Exchange and the Company, dated as of August 13, 1964.
10(f) 2-60728 5(j) Pacific Northwest Coordination Agreement, dated as of
September 15, 1964.
10(g)-1 2-60728 5(k) Ownership Agreement between the Company, Pacific
Power & Light Company, Puget Sound Power & Light
Company, Portland General Electric Company, Seattle City
Light, Tacoma City Light and Grays Harbor and Snohomish
County Public Utility Districts as owners of the Centralia
Steam Electric Generating Plant, dated as of May 15, 1969.
10(g)-3 1-3701 (with Form 10(h)-3 Centralia Fuel Supply Agreement between PacifiCorp
10-K for 1991) Electric Operations, as the Seller, and the Company, Puget
Sound Power & Light Company, Portland General Electric
Company, Seattle City Light, Tacoma City Light and Grays
Harbor and Snohomish County Public Utility Districts,
as the Buyers of coal for the Centralia Steam Electric
Generating Plant, dated as of January 1, 1991.
10(h)-l 2-47373 13(y) Agreement between the Company, Bonneville Power
Administration and Washington Public Power Supply
System for purchase and exchange of power from the Nuclear
Project No. 1 (Hanford), dated as of January 6, 1973.
10(h)-2 2-60728 5(m)-1 Amendment No. 1 to the Agreement between the Company
between the Company, Bonneville Power Administration and
Washington Public Power Supply System for purchase and
exchange of power from the Nuclear Project No. 1 (Hanford),
dated as of May 8, 1974.
10(h)-3 1-3701 (with Form 10(i)-3 Agreement between Bonneville Power Administration,
10-K for 1986) the Montana Power Company, Pacific Power & Light,
Portland General Electric, Puget Sound Power & Light, the
Company and the Supply System for relocation costs of
Nuclear Project No. 1 (Hanford) dated as of July 9, 1986.
10(i)-1 2-60728 5(n) Ownership Agreement of Nuclear Project No. 3, sponsored
by Washington Public Power Supply System, dated as of
September 17, 1973.
10(i)-2 1-3701 (with Form 1 Settlement Agreement and Covenant Not to Sue executed
10-Q for quarter by the United States Department of Energy acting
ended September 30, by and through the Bonneville Power Administration
1985) and the Company, dated as of September 17, 1985,
describing the settlement of Project 3 litigation.
</TABLE>
- ----------
* Incorporated herein by reference.
** Filed herewith.
65
<PAGE> 68
THE WASHINGTON WATER POWER COMPANY
- --------------------------------------------------------------------------------
EXHIBIT INDEX (continued)
<TABLE>
<CAPTION>
Previously Filed*
--------------------------------------
With
Registration As
Exhibit Number Exhibit
- ------- ------------ -------
<S> <C> <C> <C>
10(i)-3 1-3701 (with Form 10-Q 2 Agreement to Dismiss Claims and Covenant
for quarter ended Not to Sue between the Washington Public
September 30, 1985) Power Supply System and the Company, dated
as of September 17, 1985, describing the settlement
of Project 3 litigation with the Supply System.
10(i)-4 1-3701 (with Form 10-Q 3 Agreement among Puget Sound Power & Light
for quarter ended Company, the Company, Portland General Electric
September 30, 1985) Company and PacifiCorp, dba Pacific Power & Light
Company, agreeing to execute contemporaneously
an irrevocable offer, to and for the benefit of the Bonneville
Power Administration, dated as of September 17, 1985.
10(j)-2 2-66184 5(r) Service Agreement (Natural Gas Storage Service), dated as
of August 27, 1979, between the Company and Northwest
Pipeline Corporation.
10(j)-3 2-60728 5(s) Service Agreement (Liquefaction-Storage Natural Gas Service),
dated as of December 7, 1977, between the Company and
Northwest Pipeline Corporation.
10(j)-4 1-3701 (with 1989 10(k)-4 Amendment dated as of January 1, 1990, to Firm
Form 10-K) Transportation Agreement, dated as of June 15, 1988,
between the Company and Northwest Pipeline Corporation.
10(j)-6 1-3701 (with 1992 10(k)-6 Firm Transportation Service Agreement, dated as of
Form 10-K) April 25, 1991, between the Company and Pacific Gas
Transmission Company.
10(j)-7 1-3701 (with 1992 10(k)-7 Service Agreement Applicable to Firm Transportation Service,
Form 10-K) dated June 12, 1991, between the Company and Alberta
Natural Gas Company Ltd.
10(k)-1 1-3701 (with Form 8-K 13(b) Letter of Intent for the Construction and Ownership
for August 1976) of Colstrip Units No. 3 and 4, sponsored by The
Montana Power Company, dated as of April 16, 1974.
10(k)-2 1-3701 (with 1981 10(s)-7 Ownership and Operation Agreement for Colstrip
Form 10-K) Units No. 3 and 4, sponsored by The Montana
Power Company, dated as of May 6, 1981.
10(k)-3 1-3701 (with 1981 10(s)-2 Coal Supply Agreement for Colstrip Units No. 3 and 4
Form 10-K) between The Montana Power Company, Puget Sound
Power & Light Company, Portland General Electric Company,
Pacific Power & Light Company, Western Energy
Company and the Company, dated as of July 2, 1980.
10(k)-4 1-3701 (with 1981 10(s)-3 Amendment No. 1 to Coal Supply Agreement for
Form 10-K) Colstrip Units No. 3 and 4, dated as of July 10, 1981.
10(k)-5 1-3701 (with 1988 10(l)-5 Amendment No. 4 to Coal Supply Agreement for Colstrip
Form 10-K) Units No. 3 and 4, dated as of January 1, 1988.
10(l)-1 1-3701 (with 1986 10(n)-2 Lease Agreement between the Company and IRE-4
Form 10-K) New York, Inc., dated as of December 15, 1986,
relating to the Company's central operating facility.
</TABLE>
- ----------
* Incorporated herein by reference.
** Filed herewith.
66
<PAGE> 69
THE WASHINGTON WATER POWER COMPANY
- --------------------------------------------------------------------------------
EXHIBIT INDEX (continued)
<TABLE>
<CAPTION>
Previously Filed*
--------------------------------------
With
Registration As
Exhibit Number Exhibit
- ------- ------------ -------
<S> <C> <C> <C>
10(m) 1-3701 (with 1983 10(v) Supplemental Agreement No. 2, Skagit/Hanford Project,
Form 10-K) dated as of December 27, 1983, relating to the termination
of the Skagit/Hanford Project.
10(n) 1-3701 (with 1986 10(p)-l Agreement for Purchase and Sale of Firm Capacity and
Form 10-K) Energy between Puget Sound Power & Light Company
and the Company, dated as of August 1, 1986.
10(o) 1-3701 (with 1991 10(q)-1 Electric Service and Purchase Agreement between
Form 10-K) Potlatch Corporation and the Company, dated as of
January 3, 1991.
10(p) 1-3701 (with 1992 10(r)-1 Power Sale Agreement between the Company and the
Form 10-K) Northern California Power Agency dated October 11, 1991.
10(q) 1-3701 (with 1992 10(s)-1 Agreements for Purchase and Sale of Firm Capacity
Form 10-K) between the Company and Portland General Electric
Company dated March and June 1992.
10(r)-1 1-3701 (with 1992 10(t)-8 Executive Deferral Plan of the Company. (***)
Form 10-K)
10(r)-2 1-3701 (with 1992 10(t)-9 The Company's Unfunded Outside Director
Form 10-K) Retirement Plan. (***)
10(r)-3 1-3701 (with 1992 10(t)-10 The Company's Unfunded Supplemental
Form 10-K) Executive Retirement Plan. (***)
10(r)-4 1-3701 (with 1992 10(t)-11 The Company's Unfunded Supplemental
Form 10-K) Executive Disability Plan. (***)
10(r)-5 1-3701 (with 1992 10(t)-12 Income Continuation Plan of the Company. (***)
Form 10-K)
12 ** Statement re computation of ratio of earnings to fixed
charges and preferred dividend requirements.
21 ** Subsidiaries of Registrant.
27 ** Financial Data Schedule.
</TABLE>
- ----------
* Incorporated herein by reference.
** Filed herewith.
*** Management contracts or compensatory plans filed as exhibits by reference
per Item 601(10)(iii) of Regulation S-K.
67
<PAGE> 1
EXHIBIT 4(d)-3
FOURTH AMENDMENT
TO
REVOLVING CREDIT AGREEMENT
THIS AGREEMENT dated as of September 3, 1996 AMENDS that certain
Revolving Credit Agreement between The Washington Water Power Company
("Borrower") and the following Banks or their predecessors: Bank of America NW,
N.A. doing business as Seafirst Bank and formerly known as Seattle-First
National Bank, Wells Fargo Bank, N.A. successor by merger with First Interstate
Bank of Washington, N.A., First Security Bank of Idaho, N.A., U.S. Bank of
Washington, N.A. for itself and as successor by merger with West One Bank Idaho,
N.A., and Washington Trust Bank (the "Banks"); and Seafirst Bank, as Agent for
the Banks (the "Agent"), dated as of December 10, 1992 (the "Credit Agreement"),
as previously amended on March 1, 1993, January 21, 1994 and November 21, 1994.
WHEREAS, pursuant to Section 2.10 of Credit Agreement, the Borrower
requested the extension of the Expiration Date: and
WHEREAS, the Banks would agree to the requested extension only if the
Borrower agreed to the following amendment;
THEREFORE, in consideration of the mutual covenants it is HEREBY AGREED
as follows:
1. The definition of "Applicable Margin" contained in Section 1 is hereby
amended to read as follows:
"Applicable Margin" shall mean on any date, with respect to Eurodollar
Loans or ABR Loans, as the case may be, the applicable spreads set forth
on the attached Exhibit A based upon the Rating Level on that date.
Each change in the Applicable Margin shall apply to all Eurodollar Loans
that are outstanding at any time during the period commencing on the
effective date of such change and ending on the date immediately
preceding the effective date of the next such change.
2. The definition of "Commitment Fee" contained in Section 1 is hereby
amended to read as follows:
"Commitment Fee" shall mean with respect to each Bank that per annum fee
equal to the applicable rate set forth on the attached Exhibit A based upon the
Borrower's Rating Level on that date as applied in accordance with Section
2.6(a).
3. The definition of "Rating Level" is hereby amended to read as follows:
<PAGE> 2
"Rating Level" shall mean on any date the following classification of
the Borrower's Ratings:
Rating Level 1 A- or higher by S&P or A3 or higher by Moody's.
Rating Level 2 Below A- by S&P and below A3 by Moody's, but higher
than or equal to BBB by S&P or higher than or equal to
Baa2 by Moody's.
Rating Level 3 Below BBB by S&P or below Baa2 by Moody's.
For purposes of the foregoing, (i) if either Moody's or S&P shall not have in
effect a Rating (other than because such rating agency shall no longer be in the
business of rating corporate debt obligations), then such rating agency will be
deemed to have established a Rating in Level 3: and (ii) if any rating
established or deemed to have been established by Moody's or S&P shall be
changed (other than as a result of a change in the rating system of either
Moody's or S&P), such change shall be effective as of the day after the date on
which such change is first announced by the rating agency making such change. If
the rating system of either Moody's or S&P shall change, or if either such
rating agency shall cease to be in the business of rating corporate debt
obligations, the Borrower and the Banks shall negotiate in good faith to amend
the references to specific ratings in this definition to reflect such changed
rating system or the non-availability of ratings from such rating agency.
4. The Expiration Date is extended to December 10, 1999, pursuant t
Section 2.10 of the Credit Agreement in the same manner and to the same extent
as if there had been no amendment of the Credit Agreement.
5. Except as expressly amended by this Agreement, the Credit Agreement
shall continue in full force and effect.
6. This Agreement may be executed in multiple counterparts, including
signed facsimile copies followed by delivery to the Agent of the original signed
counterpart.
Dated and signed as of this 3rd day of September, 1996.
BORROWER:
THE WASHINGTON WATER POWER COMPANY
By /s/ LAWRENCE J. PIERCE
--------------------------------
Its Vice President & Treasurer
<PAGE> 3
EXHIBIT A
<TABLE>
<CAPTION>
COMMITMENT EURODOLLAR AB
---------- ---------- --
FEE LOAN SPREAD LOAN SPREAD
--- ----------- -----------
<S> <C> <C> <C>
Rating Level 1 0.09% 0.25% 0
Rating Level 2 0.125% 0.35% 0
Rating Level 3 0.175% 0.475% 0
</TABLE>
<PAGE> 4
Agent:
SEAFIRST BANK, as agent
for the Banks
By /s/ DORA A. BROWN
---------------------------------
Its Assistant Vice President
Banks:
SEAFIRST BANK
By /s/ DAVID A DEHLENDORF
---------------------------------
Its Vice President
WELLS FARGO BANK, N.A. successor by
merger with FIRST INTERSTATE BANK
OF WASHINGTON, N.A.
By
---------------------------------
Its
FIRST SECURITY BANK OF IDAHO, N.A.
By
---------------------------------
Its
U.S. BANK OF WASHINGTON, N.A. for
itself and as successor by Merger
with West One Bank of Idaho, N.A.
By
---------------------------------
Its
WASHINGTON TRUST BANK
By
---------------------------------
Its
<PAGE> 1
EXECUTION COPY
EXHIBIT 4(f)-1
================================================================================
$50,000,000
AMENDED AND RESTATED
REVOLVING CREDIT AGREEMENT
among
THE WASHINGTON WATER POWER COMPANY,
THE BANKS NAMED HEREIN
and
TORONTO DOMINION (TEXAS), INC.
Dated as of July 22, 1997
================================================================================
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Article Section Page
- ------- ------- ----
<S> <C>
I. DEFINITIONS
SECTION 1.01. Defined Terms.........................................4
SECTION 1.02. Terms Generally......................................19
II. THE CREDITS
SECTION 2.01. Commitments..........................................19
SECTION 2.02. Loans................................................19
SECTION 2.03. Notice of Borrowings.................................21
SECTION 2.04. Notes; Repayment of Loans............................22
SECTION 2.05. Fees.................................................22
SECTION 2.06. Interest on Loans....................................23
SECTION 2.07. Default Interest.....................................24
SECTION 2.08. Alternate Rate of Interest...........................24
SECTION 2.09. Termination and Reduction of
Commitments................................................24
SECTION 2.10. Prepayment...........................................25
SECTION 2.11. Reserve Requirements; Change
in Circumstances...........................................25
SECTION 2.12. Change in Legality...................................27
SECTION 2.13. Indemnity............................................28
SECTION 2.14. Pro Rata Treatment...................................29
SECTION 2.15. Sharing of Setoffs...................................29
SECTION 2.16. Payments.............................................30
SECTION 2.17. Taxes................................................30
SECTION 2.18. Termination or Assignment of
Commitments Under Certain Circumstances....................33
III. REPRESENTATIONS AND WARRANTIES
SECTION 3.01. Organization; Powers.................................34
SECTION 3.02. Authorization........................................34
SECTION 3.03. Enforceability.......................................35
SECTION 3.04. Governmental Approvals...............................35
SECTION 3.05. Financial Statements.................................35
SECTION 3.06. No Material Adverse Change...........................36
SECTION 3.07. Litigation; Compliance with
Laws.......................................................36
</TABLE>
-i-
<PAGE> 3
<TABLE>
<CAPTION>
Article Section Page
- ------- ------- ----
<S> <C>
SECTION 3.08. Federal Reserve Regulations..........................36
SECTION 3.09. Investment Company Act; Public
Utility Holding Company Act................................37
SECTION 3.10. Use of Proceeds......................................37
SECTION 3.11. No Material Misstatements............................37
SECTION 3.12. Employee Benefit Plans...............................37
SECTION 3.13. Environmental and Safety
Matters....................................................38
SECTION 3.14. Significant Subsidiaries.............................39
IV. CONDITIONS OF LENDING
SECTION 4.01. All Borrowings.......................................39
SECTION 4.02. First Borrowing......................................40
V. AFFIRMATIVE COVENANTS
SECTION 5.01. Existence; Businesses and
Properties.................................................41
SECTION 5.02. Insurance............................................42
SECTION 5.03. Taxes and Obligations................................43
SECTION 5.04. Financial Statements, Reports,
etc........................................................43
SECTION 5.05. Litigation and Other Notices.........................44
SECTION 5.06. ERISA................................................45
SECTION 5.07. Maintaining Records; Access to
Properties and Inspections.................................45
SECTION 5.08. Use of Proceeds......................................46
VI. NEGATIVE COVENANTS
SECTION 6.01. Liens................................................46
SECTION 6.02. Mergers, Consolidations and
Acquisitions...............................................50
SECTION 6.03. Disposition of Assets................................51
VII. EVENTS OF DEFAULT
VIII. THE AGENT
</TABLE>
-ii-
<PAGE> 4
<TABLE>
<CAPTION>
Article Section Page
- ------- ------- ----
IX. MISCELLANEOUS
<S> <C>
SECTION 9.01. Notices...............................................58
SECTION 9.02. Survival of Agreement.................................59
SECTION 9.03. Binding Effect........................................60
SECTION 9.04. Successors and Assigns................................60
SECTION 9.05. Expenses; Indemnity...................................64
SECTION 9.06. Right of Setoff.......................................65
SECTION 9.07. Applicable Law........................................65
SECTION 9.08. Waivers; Amendment....................................65
SECTION 9.09. Interest Rate Limitation..............................66
SECTION 9.10. Entire Agreement......................................67
SECTION 9.11. Waiver of Jury Trial..................................67
SECTION 9.12. Severability..........................................67
SECTION 9.13. Counterparts..........................................68
SECTION 9.14. Headings..............................................68
SECTION 9.15. Jurisdiction; Consent to
Service of Process..........................................68
</TABLE>
References
Exhibit A Note
Exhibit B Assignment and Acceptance
Exhibit C Administrative Questionnaire
Exhibit D-1 Opinion of General Counsel for the Borrower
Exhibit D-2 Opinion of Special Counsel for the Borrower
Schedule 2.01 Banks
Schedule 3.14 Significant Subsidiaries
Schedule 4.02(c) Orders of Governmental Authorities
-iii-
<PAGE> 5
4
AMENDED AND RESTATED REVOLVING CREDIT AGREEMENT dated as
of July 22, 1997, among THE WASHINGTON WATER POWER COMPANY, a
Washington corporation (herein called the "Borrower"), the
banks listed in Schedule 2.01 (the "Banks") and TORONTO
DOMINION (TEXAS), INC., as agent for the Banks (in such
capacity, the "Agent").
The Borrower has requested that the Banks extend credit to the
Borrower in order to enable the Borrower to borrow on a standby revolving credit
basis on and after the date hereof, at any time prior to the Expiration Date (as
herein defined) a principal amount not in excess of $50,000,000 at any time
outstanding. The proceeds of such borrowings are to be used for general
corporate purposes. In consideration of the mutual covenants and agreements
contained herein, the parties agree as follows:
ARTICLE I. DEFINITIONS
SECTION 1.01. Defined Terms. As used in this Agreement, the
following terms shall have the meanings specified below:
"ABR Borrowing" shall mean a Borrowing comprised of ABR Loans.
"ABR Loan" shall mean any Loan bearing interest at a rate determined
by reference to the Alternate Base Rate in accordance with the provisions of
Article II.
"Administrative Questionnaire" shall mean an Administrative
Questionnaire in the form of Exhibit C.
"Affiliate" shall mean, when used with respect to a specified
person, another person that directly, or indirectly through one or more
intermediaries, Controls or is Controlled by or is under common Control with the
person specified.
"Agency Fee" shall have the meaning assigned to such term in Section
2.05(b).
"Alternate Base Rate" shall mean, for any day, a rate per annum
(rounded upwards, if necessary, to the
<PAGE> 6
5
nearest 1/16 of 1%) equal to the greater of (a) the Prime Rate (computed on the
basis of the actual number of days elapsed over a year of 365 or 366 days, as
the case may be) in effect on such day and (b) the sum of (i) the Federal Funds
Effective Rate in effect for such day plus (ii) 1/2 of 1%. If for any reason the
Agent shall have determined (which determination shall be conclusive absent
manifest error) that it is unable to ascertain the Federal Funds Effective Rate
for any reason, the Alternate Base Rate shall be determined without regard to
clause (b) of the first sentence of this definition until the circumstances
giving rise to such inability no longer exist.
"Applicable Fee Percentage" shall mean on any date the applicable
percentage set forth below based upon the Ratings:
<TABLE>
<CAPTION>
Applicable
Fee
Percentage
----------
<S> <C>
Level 1
A- or higher by S&P; and .09%
A3 or higher by Moody's
Level 2
BBB+ or higher by S&P; and .125%
Baa1 or higher by Moody's
Level 3
BBB or higher by S&P; and .15%
Baa2 or higher by Moody's
Level 4
BBB- or higher by S&P; and .1875%
Baa3 or higher by Moody's
Level 5
Lower than BBB- by S&P; and .30%
Lower than Baa3 by Moody's
</TABLE>
For purposes of the foregoing, (i) if the Ratings in effect on any date fall in
different Levels, the Applicable Fee
<PAGE> 7
6
Percentage shall be determined on such date by reference to the superior
(numerically lower) Level, unless the Ratings differ by more than one Level, in
which case the applicable Level shall be the Level next below the superior
(numerically lower) of the two; (ii) if either Moody's or S&P shall not have in
effect a Rating (other than because such rating agency shall no longer be in the
business of rating corporate debt obligations), then such rating agency will be
deemed to have established a Rating in Level 5; and (iii) if any rating
established or deemed to have been established by Moody's or S&P shall be
changed (other than as a result of a change in the rating system of either
Moody's or S&P), such change shall be effective as of the day after the date on
which such change is first announced by the rating agency making such change.
Each change in the Applicable Fee Percentage shall apply to the daily unused
amount of the relevant Commitment in accordance with Section 2.05 herein during
the period commencing on the effective date of such change and ending on the
date immediately preceding the effective date of the next such change. If the
rating system of either Moody's or S&P shall change, or if either such rating
agency shall cease to be in the business of rating corporate debt obligations,
the Borrower and the Banks shall negotiate in good faith to amend the references
to specific ratings in this definition to reflect such changed rating system or
the non-availability of ratings from such rating agency.
"Applicable Margin" shall mean on any date, with respect to
Eurodollar Loans or ABR Loans, as the case may be, the applicable percentage set
forth below based upon the Ratings:
<TABLE>
<CAPTION>
Eurodollar ABR
Loan Spread Loan Spread
----------- -----------
<S> <C> <C>
Level 1
A- or higher by S&P; and .25% 0%
A3 or higher by Moody's
Level 2
BBB+ by S&P; and .375% 0%
Baa1 by Moody's
</TABLE>
<PAGE> 8
7
<TABLE>
<CAPTION>
Eurodollar ABR
Loan Spread Loan Spread
----------- -----------
<S> <C> <C>
Level 3
BBB by S&P; and .45% 0%
Baa2 by Moody's
Level 4
BBB- by S&P; and .625% .50%
Baa3 by Moody's
Level 5
Lower than BBB- by S&P; and 1.00% .50%
Lower than Baa3 by Moody's
</TABLE>
For purposes of the foregoing, (i) if the Ratings in effect on any date fall in
different Levels, the Applicable Margin shall be determined on such date by
reference to the superior (numerically lower) Level, unless the Ratings differ
by more than one Level, in which case the applicable Level shall be the Level
next below the superior (numerically lower) of the two; (ii) if either Moody's
or S&P shall not have in effect a Rating (other than because such rating agency
shall no longer be in the business of rating corporate debt obligations), then
such rating agency will be deemed to have established a Rating in Level 5; and
(iii) if any rating established or deemed to have been established by Moody's or
S&P shall be changed (other than as a result of a change in the rating system of
either Moody's or S&P), such change shall be effective as of the day after the
date on which such change is first announced by the rating agency making such
change. Each change in the Applicable Margin shall apply to all Eurodollar Loans
that are outstanding at any time during the period commencing on the effective
date of such change and ending on the date immediately preceding the effective
date of the next such change. If the rating system of either Moody's or S&P
shall change, or if either such rating agency shall cease to be in the business
of rating corporate debt obligations, the Borrower and the Banks shall negotiate
in good faith to amend the references to specific ratings in this definition to
reflect such changed rating system or the non-availability of ratings from such
rating agency.
<PAGE> 9
8
"Assignment and Acceptance" shall mean an assignment and acceptance
entered into by a Bank and an assignee, and accepted by the Agent and the
Borrower, in the form of Exhibit B or such other form as shall be approved by
the Agent.
"Board" shall mean the Board of Governors of the Federal Reserve
System of the United States.
"Borrowing" shall mean a group of Loans of a single Type made by the
Banks on a single date and as to which a single Interest Period is in effect.
"Business Day" shall mean any day (other than a day which is a
Saturday, Sunday or legal holiday in the State of New York) on which banks are
open for business in New York City; provided, however, that, when used in
connection with a Eurodollar Loan, the term "Business Day" shall also exclude
any day on which banks are not open for deal ings in dollar deposits in the
London interbank market.
"Capital Lease Obligations" of any person shall mean the obligations
of such person to pay rent or other amounts under any lease of (or other
arrangement conveying the right to use) real or personal property, or a
combination thereof, which obligations are required to be classified and
accounted for as capital leases on a balance sheet of such person under GAAP
and, for the purposes of this Agreement, the amount of such obligations at any
time shall be the capitalized amount thereof at such time determined in
accordance with GAAP.
"Closing Date" shall mean the date of this Agreement.
"Code" shall mean the Internal Revenue Code of 1986, as the same may
be amended from time to time.
"Commitment" shall mean, with respect to each Bank, the commitment
of such Bank to make Loans hereunder as set forth in Section 2.01, as the same
may be reduced from time to time pursuant to Section 2.09.
"Commitment Fee" shall have the meaning assigned to such term in
Section 2.05(a).
<PAGE> 10
9
"Control" shall mean the possession, directly or indirectly, of the
power to direct or cause the direction of the management or policies of a
person, whether through the ownership of voting securities, by contract or
otherwise, and "Controlling" and "Controlled" shall have meanings correlative
thereto.
"Default" shall mean any event or condition which upon notice, lapse
of time or both would constitute an Event of Default.
"dollars" or "$" shall mean lawful money of the United States of
America.
"Environmental Law" shall mean any and all applicable present and
future treaties, laws, regulations, enforceable requirements, binding
determinations, orders, decrees, judgments, injunctions, permits, approvals,
authorizations, licenses, permissions, notices or binding agreements issued,
promulgated or entered by any Governmental Authority, relating to the
environment, preservation or reclamation of natural resources, or to the
management, release or threatened release of contaminants or noxious odor,
including the Hazardous Materials Transportation Act, Comprehensive
Environmental Response, Compensation and Liability Act of 1980, as amended by
the Superfund Amendments and Reauthorization Act of 1986, Solid Waste Disposal
Act, as amended by the Resource Conservation and Recovery Act of 1976 and
Hazardous and Solid Waste Amendments of 1984, Federal Water Pollution Control
Act, as amended by the Clean Water Act of 1977, Clean Air Act of 1970, as
amended, Toxic Substances Control Act of 1976, Occupational Safety and Health
Act of 1970, as amended, Emergency Planning and Community Right-to-Know Act of
1986, Safe Drinking Water Act of 1974, as amended, and any similar or
implementing state law, and all amendments or regulations promulgated there
under.
"ERISA" shall mean the Employee Retirement Income Security Act of
1974, as the same may be amended from time to time.
"ERISA Affiliate" shall mean any trade or business (whether or not
incorporated) that is a member of a group of which the Borrower is a member and
which is treated as a single employer under Section 414 of the Code.
<PAGE> 11
10
"Eurodollar Borrowing" shall mean a Borrowing comprised of
Eurodollar Loans.
"Eurodollar Loan" shall mean any Loan bearing interest at a rate
determined by reference to the Eurodollar Rate in accordance with the provisions
of Article II.
"Eurodollar Rate" shall mean, with respect to any Eurodollar Loan
for any Interest Period, an interest rate per annum (rounded upwards, if
necessary, to the next 1/100 of 1%) equal to the product of (i) the LIBO Rate in
effect for such Interest Period and (ii) Statutory Reserves. For purposes
hereof, the term "LIBO Rate" shall mean an interest rate per annum equal to the
arithmetic average (rounded upwards, if necessary, to the next 1/100 of 1%) of
rates at which dollar deposits approximately equal to the principal amount of
the portion of such Eurodollar Loan to be made by The Toronto-Dominion Bank, and
for a maturity equal to the applicable Interest Period, are offered to the
London branch of The Toronto-Dominion Bank in the London interbank market for
Eurodollars at approximately 11:00 a.m., London time, two Business Days prior to
the commencement of such Interest Period.
"Event of Default" shall have the meaning assigned to such term in
Article VII.
"Expiration Date" shall mean the third anniversary of the date of
this Agreement.
"Federal Funds Effective Rate" shall mean, for any day, the weighted
average of the rates on overnight Federal funds transactions with members of the
Federal Reserve System arranged by Federal funds brokers, as published on the
next succeeding Business Day by the Federal Reserve Bank of New York, or, if
such rate is not so published for any day which is a Business Day, the average
of the quotations for the day of such transactions received by the Agent from
three Federal funds brokers of recognized standing selected by it.
"Fees" shall mean the Commitment Fee and the Agency Fee.
"Financial Officer" of any corporation shall mean the chief
financial officer or Treasurer of such corporation.
<PAGE> 12
11
"First Mortgage" shall mean the Mortgage and Deed of Trust dated as
of June 1, 1939, made by the Borrower in favor of Citibank, N.A., as successor
Trustee, as the same has been amended, modified or supplemented to date and as
the same may be further amended, modified or supplemented from time to time
hereafter.
"GAAP" shall mean generally accepted accounting principles, applied
on a consistent basis.
"Governmental Authority" shall mean any Federal, state, local or
foreign court or governmental agency, authority, instrumentality or regulatory
body.
"Guarantee" of or by any person shall mean any obligation,
contingent or otherwise, of such person guaranteeing or having the economic
effect of guaranteeing any Indebtedness of any other person (the "primary
obligor") in any manner, whether directly or indirectly, and including any
obligation of such person, direct or indirect, (a) to purchase or pay (or
advance or supply funds for the purchase or payment of) such Indebtedness or to
purchase (or to advance or supply funds for the purchase of) any security for
the payment of such Indebtedness, (b) to purchase property, securities or
services for the purpose of assuring the owner of such Indebtedness of the
payment of such Indebtedness or (c) to maintain working capital, equity capital
or other financial statement condition or liquidity of the primary obligor so as
to enable the primary obligor to pay such Indebtedness; provided, however, that
the term Guarantee shall not include endorsements for collection or deposit, in
either case in the ordinary course of business.
"Indebtedness" of any person shall mean, without duplication, (a)
all obligations of such person for borrowed money or with respect to deposits or
advances of any kind, (b) all obligations of such person evidenced by bonds,
debentures, notes or similar instruments, (c) all obligations of such person
upon which interest charges are customarily paid, (d) all obligations of such
person under conditional sale or other title retention agreements relating to
property or assets purchased by such person, (e) all obligations of such person
issued or assumed as the deferred purchase price of property or services (other
than trade payables incurred in the ordinary course of business), (f) all
Indebtedness of others secured by (or for which the holder of such Indebtedness
has an existing right, contin-
<PAGE> 13
12
gent or otherwise, to be secured by) any Lien on property owned or acquired by
such person, whether or not the obligations secured thereby have been assumed,
but limited, if such obligations are without recourse to such person, to the
lesser of the principal amount of such Indebtedness or the fair market value of
such property, (g) all Guarantees by such person of Indebtedness of others, (h)
all Capital Lease Obligations of such person, (i) all obligations of such person
in respect of interest rate protection agreements, foreign currency exchange
agreements or other interest or exchange rate hedging arrangements (the amount
of any such obligation to be the amount that would be payable upon the
acceleration, termination or liquidation thereof) and (j) all obligations of
such person as an account party in respect of letters of credit and bankers'
acceptances. The Indebtedness of any person shall include the Indebtedness of
any partnership in which such person is a general partner.
"Interest Payment Date" shall mean, with respect to any Loan, the
last day of the Interest Period applicable to the Borrowing of which such Loan
is a part and, in the case of a Eurodollar Borrowing with an Interest Period of
more than three months' duration, each day that would have been an Interest
Payment Date had successive Interest Periods of three months' duration been
applicable to such Borrowing, and, in addition, the date of any refinancing or
conversion of such Borrowing with or to a Borrowing of a different Type.
"Interest Period" shall mean (a) as to any Eurodollar Borrowing,
the period commencing on the date of such Borrowing and ending on the
numerically corresponding day (or, if there is no numerically corresponding day,
on the last day) in the calendar month that is 1, 2, 3 or 6 months thereafter,
as the Borrower may elect and (b) as to any ABR Borrowing, the period commencing
on the date of such Borrowing and ending on the earliest of (i) the next
succeeding March 31, June 30, September 30 or December 31, (ii) the Expiration
Date, and (iii) the date such Borrowing shall be repaid or prepaid in accordance
with Section 2.10; provided, however, that if any Interest Period would end on a
day other than a Business Day, such Interest Period shall be extended to the
next succeeding Business Day unless, in the case of a Eurodollar Borrowing only,
such next succeeding Business Day would fall in the next calendar month, in
which case such Interest Period shall end on the next
<PAGE> 14
13
preceding Business Day. Interest shall accrue from and including the first day
of an Interest Period to but excluding the last day of such Interest Period.
"Lien" shall mean, with respect to any asset, (a) any mortgage, deed
of trust, lien, pledge, encumbrance, charge or security interest in or on such
asset, (b) the interest of a vendor or a lessor under any conditional sale
agreement, capital lease or title retention agreement relating to such asset and
(c) in the case of securities, any purchase option, call or similar right of a
third party with respect to such securities.
"Loans" shall mean the revolving loans made by the Banks to the
Borrower pursuant to Section 2.01. Each Loan shall be a Eurodollar Loan or an
ABR Loan.
"Loan Documents" shall mean this Agreement and the Notes.
"Margin Stock" shall have the meaning given such term under
Regulation U.
"Material Adverse Effect" shall mean an effect on the business,
assets, operations or financial condition of the Borrower and the Subsidiaries
taken as a whole which could reasonably be expected to have a material adverse
effect on the creditworthiness of the Borrower.
"Moody's" shall mean Moody's Investors Service, Inc.
"Notes" shall mean promissory notes of the Borrower, substantially
in the form of Exhibit A, evidencing Loans.
"PBGC" shall mean the Pension Benefit Guaranty Corporation referred
to and defined in ERISA.
"person" shall mean a corporation, association, partnership, trust,
organization, business, individual or government or governmental agency or
political subdivision thereof.
"Plan" shall mean any pension plan subject to the provisions of
Title IV of ERISA or Section 412 or the Code
<PAGE> 15
14
which is maintained for employees of the Borrower or any ERISA Affiliate.
"Prime Rate" shall mean the rate of interest per annum adopted from
time to time by The Toronto-Dominion Bank at its principal office in New York
City as its prime rate. For purposes of this Agreement, any change in the
Alternate Base Rate due to a change in the Prime Rate shall be effective on the
date such change in the Prime Rate is adopted.
"Ratings" shall refer to the ratings of Moody's and S&P applicable
to the Borrower's senior secured long-term debt obligations.
"Register" shall have the meaning given to such term in Section
9.04(d).
"Regulation D" shall mean Regulation D of the Board as from time to
time in effect and all official rulings and interpretations thereunder or
thereof and shall include any successor or other regulation or official
interpretation of the Board relating to reserve requirements applicable to
member banks of the Federal Reserve System.
"Regulation G" shall mean Regulation G of the Board as from time to
time in effect and all official rulings and interpretations thereunder or
thereof.
"Regulation U" shall mean Regulation U of the Board as from time to
time in effect and all official rulings and interpretations thereunder or
thereof.
"Regulation X" shall mean Regulation X of the Board as from time to
time in effect and all official rulings and interpretations thereunder or
thereof.
"Reportable Event" shall mean any reportable event as defined in
Section 4043(b) of ERISA or the regulations issued thereunder with respect to a
Plan (other than a Plan maintained by an ERISA Affiliate which is considered an
ERISA Affiliate only pursuant to subsection (m) or (o) of Section 414 of the
Code).
"Required Banks" shall mean, at any time, Banks holding Loans
representing at least 66-2/3% of the aggregate principal amount of the Loans
outstanding or, if no Loans
<PAGE> 16
15
are outstanding, Banks having Commitments representing at least 66-2/3% of the
aggregate Commitments.
"Responsible Officer" of any corporation shall mean any executive
officer or Financial Officer of such corporation and any other officer or
similar official thereof responsible for the administration of the obligations
of such corporation in respect of this Agreement.
"S&P" shall mean Standard & Poor's Ratings Services.
"Significant Subsidiary" shall mean a Subsidiary meeting any one of
the following conditions: (a) the investments in and advances to such Subsidiary
by the Borrower and the other Subsidiaries, if any, as at the end of the
Borrower's latest fiscal quarter exceeded 10% of the total assets of the
Borrower and its Subsidiaries at such date, computed and consolidated in
accordance with GAAP; or (b) the Borrower's and the other Subsidiaries'
proportionate share of the total assets (after intercompany eliminations) of
such Subsidiary as at the end of the Borrower's latest fiscal quarter exceeded
10% of the total assets of the Borrower and its Subsidiaries at such date,
computed and consolidated in accordance with GAAP; or (c) the equity in the
income from continuing operations before income taxes, extraordinary items and
cumulative effect of a change in accounting principle of such Subsidiary for the
period of four consecutive fiscal quarters ending at the end of the Borrower's
latest fiscal quarter exceeded 10% of such income of the Borrower and its
Subsidiaries for such period, computed and consolidated in accordance with GAAP;
or (d) such Subsidiary is the parent of one or more Subsidiaries and, together
with such Subsidiaries would, if considered in the aggregate, constitute a
Significant Subsidiary.
"Statutory Reserves" shall mean a fraction (expressed as a decimal)
the numerator of which is the number one and the denominator of which is the
number one minus the aggregate of the maximum reserve percentages (including,
without limitation, any marginal, special, emergency or supplemental reserves)
with respect to Eurodollar funding (including with respect to Eurocurrency
Liabilities as defined in Regulation D) in an amount approximately equal to the
respective Eurodollar Loan and with a term approximately equal to the Interest
Period for such Eurodollar Loan
<PAGE> 17
16
expressed as a decimal established by the Board or by any other United States
banking authority to which the Agent is subject. Such reserve percentages shall
include, without limitation, those imposed under Regulation D. Statutory
Reserves shall be adjusted automatically on and as of the effective date of any
change in any reserve percentage.
"subsidiary" shall mean, for any person (the "Parent"), any
corporation, partnership or other entity of which securities or other ownership
interests having by the terms thereof ordinary voting power to elect a majority
of the board of directors or other persons performing similar functions of such
corporation, partnership or other entity (irrespective of whether or not at the
time securities or other ownership interests of any other class or classes of
such corporation, partnership or other entity shall have or might have voting
power by reason of the happening of any contingency) are at the time directly or
indirectly owned or controlled by the Parent or one or more of its subsidiaries
or by the Parent and one or more of its subsidiaries.
"Subsidiary" shall mean a subsidiary of the Borrower.
A "Subsidiary Event" shall mean the following; provided, however,
that a Subsidiary Event shall not be deemed to have occurred if the Banks have
previously consented thereto:
(a) any Significant Subsidiary shall fail to observe or perform any
covenant, condition or agreement contained in Section 5.01(a) as if such
section applied to such Significant Subsidiary, with all references
therein to the Borrower being deemed references to such Significant
Subsidiary;
(b) any Significant Subsidiary shall fail to observe or perform any
covenant, condition or agreement in Sections 5.01(b), 5.02, 5.03 or 5.07
as if such sections applied to such Significant Subsidiary, with all
references therein to the Borrower being deemed references to such
Significant Subsidiary, and such default shall continue unremedied for a
period of 30 days after notice thereof from the Agent or any Bank to the
Borrower;
(c) any Significant Subsidiary shall:
<PAGE> 18
17
(i) merge into or consolidate with any other person, or permit
any other person to merge into or consolidate with it, or purchase,
lease or otherwise acquire (in one transaction or a series of
transactions) all or substantially all of the assets of any other
person (whether directly by purchase, lease or other acquisition of
all or substantially all of the assets of such person or indirectly
by purchase or other acquisition of all or substantially all of the
capital stock of such other person) other than acquisitions in the
ordinary course of such Significant Subsidiary's business, except
that if, at the time thereof and immediately after giving effect
thereto no Event of Default or Default shall have occurred and be
continuing, then (A) such Significant Subsidiary may (i) merge with
or into, or consolidate with, any Subsidiary or (ii) merge with or
into, or consolidate with, the Borrower in a transaction in which
the Borrower is the surviving corporation, (B) such Significant
Subsidiary may purchase, lease or otherwise acquire from any
Subsidiary all or substantially all of its assets and may purchase
or otherwise acquire all or substantially all of the capital stock
of any person who immediately thereafter is a Subsidiary, (C) such
Significant Subsidiary may merge with or into, or consolidate with,
any other person so long as the assets of such person at the time of
such consolidation or merger, do not exceed 10% of the total assets
of the Borrower and its Subsidiaries, after giving effect to such
merger or consolidation, computed and consolidated in accordance
with GAAP consistently applied, and (D) such Significant Subsidiary
may purchase, lease or otherwise acquire any or all of the assets of
any other person (and may purchase or otherwise acquire the capital
stock of any other person) so long as the assets being purchased,
leased or acquired (or the Significant Subsidiary's proportionate
share of the assets of the person whose capital stock is being
acquired) do not exceed 10% of the total assets of the Borrower and
its Subsidiaries, after giving effect to such acquisition, computed
and consolidated in accordance with GAAP consistently applied, or
<PAGE> 19
18
(ii) sell, lease, transfer, assign or other wise dispose of
(in one transaction or in a series of transactions), in any fiscal
year, assets (whether now owned or hereafter acquired) which,
together with the amount of all sales, leases, transfers,
assignments or dispositions by the Borrower permitted under Section
6.03 (other than sales, leases, transfers, assignments or other
dispositions permitted under clauses (i) through (iv) of such
Section), are in excess of 10% of the assets of the Borrower and its
Subsidiaries as of the end of the most recent fiscal year, computed
and consolidated in accordance with GAAP consistently applied,
except (A) a Significant Subsidiary may sell, lease, transfer,
assign or otherwise dispose of, in any fiscal year, assets in the
ordinary course of business which, together with the amount of all
sales, leases, transfers, assignments or dispositions in the
ordinary course permitted under Section 6.03(i), do not exceed 5% of
the assets of the Borrower and its Subsidiaries as of the end of the
most recent fiscal year, computed and consolidated in accordance
with GAAP consistently applied, (B) to the extent permitted in
clause (c)(i) above and (C) any Significant Subsidiary may sell,
lease, transfer, assign or otherwise dispose of, or create, incur,
assume or permit to exist Liens on, receivables and related
properties or interests therein;
provided, however, that, notwithstanding anything in this clause (c) to the
contrary, a Subsidiary Event shall not be deemed to have occurred and shall not
constitute an Event of Default under paragraph (k) of Article VII if, after
giving effect to the consummation of any transaction contemplated by clause
(c)(i) or (c)(ii) hereof, such Significant Subsidiary shall have or shall be
deemed to have a ratio of total long-term Indebtedness to total stockholders'
equity equal to or less than 1.5 to 1.0.
"Transactions" shall have the meaning assigned to
such term in Section 3.02.
"Type", when used in respect of any Loan or Borrowing, shall refer
to the Rate by reference to which interest on such Loan or on the Loans
comprising such
<PAGE> 20
19
Borrowing is determined. For purposes hereof, "Rate" shall include the
Eurodollar Rate and the Alternate Base Rate.
SECTION 1.02. Terms Generally. The definitions in Section 1.01 shall
apply equally to both the singular and plural forms of the terms defined.
Whenever the context may require, any pronoun shall include the corresponding
masculine, feminine and neuter forms. The words "include", "includes" and
"including" shall be deemed to be followed by the phrase "without limitation".
All references herein to Articles, Sections, Exhibits and Schedules shall be
deemed references to Articles and Sections of, and Exhibits and Schedules to,
this Agreement unless the context shall otherwise require. Except as otherwise
expressly provided herein, all terms of an accounting or financial nature shall
be construed in accordance with GAAP, as in effect from time to time; provided,
however, that, for purposes of determining compliance with any covenant set
forth in Article VI, such terms shall be construed in accordance with GAAP as in
effect on the date of this Agreement applied on a basis consistent with the
application used in preparing the Borrower's audited financial statements
referred to in Section 3.05.
ARTICLE II. THE CREDITS
SECTION 2.01. Commitments. Subject to the terms and conditions and
relying upon the representations and warranties herein set forth, each Bank
agrees, severally and not jointly, to make Loans to the Borrower, at any time
and from time to time on or after the date of this Agreement, and until the
earlier of the Expiration Date and the termination of the Commitment of such
Bank in accordance with the terms hereof, in an aggregate principal amount at
any time outstanding not to exceed the Commitment set forth opposite its name in
Schedule 2.01 hereto, as the same may be reduced from time to time pursuant to
Section 2.09.
Within the limits set forth in the preceding sentence, the Borrower
may borrow, pay or prepay and reborrow Loans on or after the date of this
Agreement and prior to the Expiration Date, subject to the terms, conditions and
limitations set forth herein.
SECTION 2.02. Loans. (a) Each Loan shall be made as part of a
Borrowing consisting of Loans made by the
<PAGE> 21
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Banks ratably in accordance with their Commitments; provided, however, that the
failure of any Bank to make any Loan shall not in itself relieve any other Bank
of its obligation to lend hereunder (it being understood, however, that no Bank
shall be responsible for the failure of any other Bank to make any Loan required
to be made by such other Bank). The Loans comprising each Borrowing shall be in
an aggregate principal amount which is an integral multiple of $1,000,000.
(b) Each Borrowing shall be comprised entirely of ABR Loans or
Eurodollar Loans, as the Borrower may request pursuant to Section 2.03. Each
Bank may at its option fulfill its Commitment with respect to any Eurodollar
Loan by causing any domestic or foreign branch or Affiliate of such Bank to make
such Loan; provided that any exercise of such option shall not affect the
obligation of the Borrower to repay such Loan in accordance with the terms of
this Agreement and the applicable Note. Borrowings of more than one Type may be
outstanding at the same time; provided, however, that the Borrower shall not be
entitled to request any Borrowing which, if made, would result in an aggregate
of more than five separate Eurodollar Loans of any Bank being outstanding
hereunder at any one time. For purposes of the foregoing, Loans having different
Interest Periods, regardless of whether they commence on the same date, shall be
considered separate Loans.
(c) Subject to paragraph (e) below, each Bank shall make a Loan in
the amount of its pro rata portion, as determined under Section 2.14, of each
Borrowing hereunder on the proposed date thereof by wire transfer of immediately
available funds to the Agent in Houston, Texas, not later than 2:00 p.m., New
York City time, and the Agent shall by 3:00 p.m., New York City time, make
available to the Borrower in immediately available funds the amounts so received
(i) by wire transfer for credit to the account of the Borrower with Seattle
First National Bank, Account Number 13972-203; ABA # 12500002-4, or (ii) as
otherwise specified by the Borrower in its notice of Borrowing or, if a
Borrowing shall not occur on such date because any condition precedent herein
specified shall not have been met, return the amounts so received to the
respective Banks. Unless the Agent shall have received notice from a Bank prior
to the date of any Borrowing that such Bank will not make available to the Agent
such Bank's portion of such Borrowing, the Agent may assume that such Bank has
made such
<PAGE> 22
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portion available to the Agent on the date of such Borrowing in accordance with
this paragraph (c) and the Agent may, in reliance upon such assumption, make
available to the Borrower on such date a corresponding amount. If and to the
extent that such Bank shall not have made such portion available to the Agent,
such Bank and the Borrower severally agree to repay to the Agent forthwith on
demand such corresponding amount together with interest thereon, for each day
from the date such amount is made available to the Borrower until the date such
amount is repaid to the Agent at (i) in the case of the Borrower the interest
rate applicable at the time to the Loans comprising such Borrowing and (ii) in
the case of such Bank, the Federal Funds Effective Rate. If such Bank shall
repay to the Agent such corresponding amount, such amount shall constitute such
Bank's Loan as part of such Borrowing for purposes of this Agreement.
(d) Notwithstanding any other provision of this Agreement, the
Borrower shall not be entitled to request any Borrowing if the Interest Period
requested with respect thereto would end after the Expiration Date.
(e) The Borrower may refinance all or any part of any Borrowing with
a Borrowing of the same or a different Type, subject to the conditions and
limitations set forth in this Agreement. Any Borrowing or part thereof so
refinanced shall be deemed to be repaid or prepaid in accordance with Section
2.04 or 2.10, as applicable, with the proceeds of a new Borrowing, and the
proceeds of the new Borrowing, to the extent they do not exceed the principal
amount of the Borrowing being refinanced, shall not be paid by the Banks to the
Agent or by the Agent to the Borrower pursuant to paragraph (c) above.
SECTION 2.03. Notice of Borrowings. The Borrower shall give the
Agent written or telecopy notice (or telephone notice promptly confirmed in
writing or by telecopy) (a) in the case of a Eurodollar Borrowing, not later
than 10:00 a.m., New York City time, three Business Days before a proposed
borrowing and (b) in the case of an ABR Borrowing, not later than 12:00 (noon),
New York City time, the day of a proposed borrowing. Such notice shall be
irrevocable and shall in each case refer to this Agreement and specify (i)
whether the Borrowing then being requested is to be a Eurodollar Borrowing or an
ABR Borrowing; (ii) the date of such Borrowing (which shall be a Business Day)
and the amount thereof; and (iii) if such Borrowing is to be a
<PAGE> 23
22
Eurodollar Borrowing, the Interest Period with respect thereto. If no election
as to the Type of Borrowing is specified in any such notice, then the requested
Borrowing shall be an ABR Borrowing. If no Interest Period with respect to any
Eurodollar Borrowing is specified in any such notice, then the Borrower shall be
deemed to have selected an Interest Period of one month's duration. If the
Borrower shall not have given notice in accordance with this Section 2.03 of
its election to refinance a Borrowing prior to the end of the Interest Period in
effect for such Borrowing, then the Borrower shall (unless such Borrowing is
repaid at the end of such Interest Period) be deemed to have given notice of an
election to refinance such Borrowing with an ABR Borrowing. The Agent shall
promptly advise the Banks of any notice given pursuant to this Section 2.03 and
of each Bank's portion of the requested Borrowing.
SECTION 2.04. Notes; Repayment of Loans. The Loans made by each Bank
shall be evidenced by a Note, duly executed on behalf of the Borrower, dated the
date of this Agreement, in substantially the form attached hereto as Exhibit A,
with the blanks appropriately filled, payable to the order of such Bank in a
principal amount equal to such Bank's Commitment. The outstanding principal
balance of each Loan, as evidenced by such a Note, shall be payable on the last
day of the Interest Period applicable to such Loan and on the Expiration Date.
Each Note shall bear interest from the date of the first borrowing hereunder on
the outstanding principal balance thereof as set forth in Section 2.06. Each
Bank shall, and is hereby authorized by the Borrower to, endorse on the schedule
attached to each Note delivered to such Bank (or on a continuation of such
schedule attached to such Note and made a part thereof), or otherwise to record
in such Bank's internal records, an appropriate notation evidencing the date and
amount of each Loan from such Bank, each payment and prepayment of principal of
any such Loan, each payment of interest on any such Loan and the other
information provided for on such schedule; provided, however, that any such
recordation shall be conclusive absent manifest error and the failure of any
Bank to make such a notation or any error therein shall not affect the
obligation of the Borrower to repay the Loans made by such Bank in accordance
with the terms of this Agreement and the applicable Notes.
SECTION 2.05. Fees. (a) The Borrower agrees to pay to each Bank,
through the Agent, on the first day of
<PAGE> 24
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January, April, July and October, in each year, and on the date on which the
Commitment of such Bank shall be terminated as provided herein, a commitment
fee (a "Commitment Fee") on the average daily unused amount of the Commitment of
such Bank during the preceding quarter (or shorter period commencing with the
date hereof or ending with the Expiration Date or the date on which the
Commitment of such Bank shall be terminated). The Commitment Fees shall accrue
on each day at a rate per annum equal to the Applicable Fee Percentage in effect
on such day. All Commitment Fees shall be computed on the basis of the actual
number of days elapsed in a year of 365 or 366 days, as appropriate. The
Commitment Fee due to each Bank shall commence to accrue on the date of this
Agreement and shall cease to accrue on the date on which the Commitment of such
Bank shall be terminated as provided herein.
(b) The Borrower agrees to pay to the Agent, for its own account,
the fee set forth in the fee letter dated July 22, 1997, between the Agent and
the Borrower, at the times set forth therein (the "Agency Fee").
(c) All Fees shall be paid on the dates due, in immediately
available funds, to the Agent for distribution, if and as appropriate, among the
Banks. Once paid, none of the Fees shall be refundable under any circumstances.
SECTION 2.06. Interest on Loans. (a) Subject to the provisions of
Section 2.07, the Loans comprising each ABR Borrowing shall bear interest
(computed on the basis of the actual number of days elapsed over a year of 365
or 366 days, as the case may be) at a rate per annum equal to the Alternate Base
Rate plus the Applicable Margin.
(b) Subject to the provisions of Section 2.07, the Loans comprising
each Eurodollar Borrowing shall bear interest (computed on the basis of the
actual number of days elapsed over a year of 360 days) at a rate per annum equal
to the Eurodollar Rate for the Interest Period in effect for such Borrowing plus
the Applicable Margin.
(c) Interest on each Loan shall be payable on the Interest Payment
Dates applicable to such Loan except as otherwise provided in this Agreement.
The applicable Alternate Base Rate or Eurodollar Rate for each Interest Period
or day within an Interest Period, as the case may be,
<PAGE> 25
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shall be determined by the Agent, and such determination shall be conclusive
absent manifest error.
SECTION 2.07. Default Interest. If the Borrower shall default in the
payment of the principal of or interest on any Loan or any other amount becoming
due hereunder, by acceleration or otherwise, the Borrower shall on demand from
time to time pay interest, to the extent permitted by law, on such defaulted
amount up to (but not including) the date of actual payment (after as well as
before judgment) at a rate per annum (computed on the basis of the actual number
of days elapsed over a year of 360 days) equal to the Alternate Base Rate plus
the Applicable Margin plus 2%.
SECTION 2.08. Alternate Rate of Interest. In the event, and on each
occasion, that on the day two Business Days prior to the commencement of any
Interest Period for a Eurodollar Borrowing the Agent shall have in good faith
determined that dollar deposits in the principal amounts of the Loans comprising
such Borrowing are not generally available in the London interbank market, or
that the rates at which such dollar deposits are being offered will not
adequately and fairly reflect the cost to the majority in interest of the Banks
of making or maintaining their Eurodollar Loans during such Interest Period, or
that reasonable means do not exist for ascertaining the Eurodollar Rate, the
Agent shall, as soon as practicable thereafter, give written or telecopy notice
of such determination to the Borrower and the Banks. In the event of any such
determination, any request by the Borrower for a Eurodollar Borrowing pursuant
to Section 2.03 shall, until the Agent shall have advised the Borrower and the
Banks that the circumstances giving rise to such notice no longer exist, be
deemed to be a request for an ABR Borrowing. Each determination by the Agent
hereunder shall be conclusive absent manifest error.
SECTION 2.09. Termination and Reduction of Commitments. (a) The
Commitments shall be automatically terminated on the Expiration Date.
(b) Upon at least three Business Days' prior irrevocable written or
telecopy notice to the Agent, the Borrower may at any time in whole permanently
terminate, or from time to time in part permanently reduce, the unused portion
of the Commitments; provided, however, that each partial reduction of the
Commitments shall be in an integral multiple of $1,000,000.
<PAGE> 26
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(c) Each reduction in the Commitments hereunder shall be made
ratably among the Banks in accordance with their respective applicable
Commitments. The Borrower shall pay to the Agent for the account of the Banks,
on the date of each termination or reduction, the Commitment Fees on the amount
of the Commitments so terminated or reduced accrued through the date of such
termination or reduction.
SECTION 2.10. Prepayment. (a) The Borrower shall have the right at
any time and from time to time to prepay any Borrowing, in whole or in part,
upon at least three Business Days' prior written or telecopy notice (or
telephone notice promptly confirmed by written or telecopy notice) to the Agent;
provided, however, that each partial prepayment shall be in an amount which is
an integral multiple of $1,000,000.
(b) On the date of any termination or reduction of the Commitments
pursuant to Section 2.09, the Borrower shall pay or prepay so much of the
Borrowings as shall be necessary in order that the aggregate principal amount of
the Loans outstanding will not exceed the aggregate Commitments after giving
effect to such termination or reduction.
(c) Each notice of prepayment shall specify the prepayment date and
the principal amount of each Borrowing (or portion thereof) to be prepaid, shall
be irrevocable and shall commit the Borrower to prepay such Borrowing by the
amount stated therein on the date stated therein. All prepayments under this
Section 2.10 shall be subject to Section 2.13 but otherwise without premium or
penalty. All prepayments under this Section 2.10 shall be accompanied by accrued
interest on the principal amount being prepaid to the date of payment.
SECTION 2.11. Reserve Requirements; Change in Circumstances. (a)
Notwithstanding any other provision herein, if after the date of this Agreement
there is adopted any new law, rule or regulation or any change in applicable law
or regulation or in the interpretation or administration thereof by any
governmental authority charged with the interpretation or administration thereof
(whether or not having the force of law) which shall impose, modify or deem
applicable any reserve, special deposit or similar requirement against assets
of, deposits with or for the account of or credit extended by such Bank (except
any such reserve requirement which is reflected in the Eurodollar
<PAGE> 27
26
Rate) or shall impose on such Bank or the London interbank market any other
condition affecting this Agreement or Eurodollar Loans made by such Bank, and
the result of any of the foregoing shall be to increase the cost to such Bank of
making or maintaining any Eurodollar Loan or to reduce the amount of any sum
received or receivable by such Bank hereunder or under the Notes (whether of
principal, interest or otherwise) in respect of Eurodollar Loans by an amount
deemed by such Bank to be material, then the Borrower will pay to such Bank upon
demand such additional amount or amounts as will compensate such Bank for such
additional costs incurred or reduction suffered.
(b) If any Bank shall have determined that the applicability of any
law, rule, regulation, agreement or guideline adopted after the date hereof
regarding capital adequacy, or any change in any of the foregoing or the
adoption after the date hereof of any change in any law, rule, regulation,
agreement or guideline existing on the date hereof or in the interpretation or
administration of any of the foregoing by any governmental authority, central
bank or comparable agency charged with the interpretation or administration
thereof, or compliance by any Bank (or any lending office of such Bank) or any
Bank's holding company with any request or directive regarding capital adequacy
(whether or not having the force of law) of any such authority, central bank or
comparable agency, has or would have the effect of reducing the rate of return
on such Bank's capital or on the capital of such Bank's holding company, if any,
as a consequence of this Agreement or the Loans made by such Bank pursuant
hereto to a level below that which such Bank or such Bank's holding company
could have achieved but for such applicability, adoption, change or compliance
(taking into consideration such Bank's policies and the policies of such Bank's
holding company with respect to capital adequacy) by an amount deemed by such
Bank to be material, then from time to time the Borrower shall pay to such Bank
such additional amount or amounts as will compensate such Bank or such Bank's
holding company for any such reduction suffered.
(c) A certificate of each Bank setting forth in reasonable detail
such amount or amounts as shall be necessary to compensate such Bank or its
holding company as specified in paragraph (a) or (b) above, as the case may be,
and the manner in which such Bank has determined the same, shall be delivered to
the Borrower and shall be conclusive
<PAGE> 28
27
absent manifest error. The Borrower shall pay each Bank the amount shown as due
on any such certificate delivered by it within 10 days after its receipt of the
same.
(d) Failure on the part of any Bank to demand compensation for any
increased costs or reduction in amounts received or receivable or reduction in
return on capital with respect to any period shall not constitute a waiver of
such Bank's right to demand compensation with respect to such period or any
other period. The protection of this Section shall be available to each Bank
regardless of any possible contention of the invalidity or inapplicability of
the law, rule, regulation, guideline or other change or condition which shall
have occurred or been imposed.
SECTION 2.12. Change in Legality. (a) Notwithstanding any other
provision herein, if any change in, or adoption of, any law or regulation or in
the interpretation thereof by any governmental authority charged with the
administration or interpretation thereof shall make it unlawful for any Bank to
make or maintain any Eurodollar Loan or to give effect to its obligations as
contemplated hereby with respect to any Eurodollar Loan, then, by written notice
to the Borrower and to the Agent, such Bank may:
(i) declare that Eurodollar Loans will not there after be made by
such Bank hereunder, whereupon any request by the Borrower for a
Eurodollar Borrowing shall, as to such Bank only, be deemed a request for
an ABR Loan unless such declaration shall be subsequently withdrawn; and
(ii) require that all outstanding Eurodollar Loans made by it be
converted to ABR Loans, in which event all such Eurodollar Loans shall be
automatically converted to ABR Loans as of the effective date of such
notice as provided in paragraph (b) below.
In the event any Bank shall exercise its rights under (i) or (ii) above, all
payments and prepayments of principal which would otherwise have been applied to
repay the Eurodollar Loans that would have been made by such Bank or the
converted Eurodollar Loans of such Bank shall instead be applied to repay the
ABR Loans made by such Bank in lieu of, or resulting from the conversion of,
such Eurodollar Loans.
<PAGE> 29
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(b) For purposes of this Section 2.12, a notice to the Borrower by
any Bank shall be effective as to each Eurodollar Loan, if lawful, on the last
day of the Interest Period currently applicable to such Eurodollar Loan.
SECTION 2.13. Indemnity. The Borrower shall indemnify each Bank
against any loss or expense which such Bank may sustain or incur as a
consequence of (a) any failure by the Borrower to fulfill on the date of any
Eurodollar Borrowing hereunder the applicable conditions set forth in Article
IV, (b) any failure by the Borrower to borrow or to refinance any Eurodollar
Loan hereunder after irrevocable notice of such borrowing or refinancing has
been given pursuant to Section 2.03, (c) any payment or prepayment of a
Eurodollar Loan required by any other provision of this Agreement or otherwise
made or deemed made on a date other than the last day of the Interest Period
applicable thereto or (d) any default in payment or prepayment of the principal
amount of any Eurodollar Loan or any part thereof or interest accrued thereon,
as and when due and payable (at the due date thereof, whether by scheduled
maturity, acceleration, irrevocable notice of prepayment or otherwise)
including, in each such case, any loss or reasonable expense sustained or
incurred or to be sustained or incurred in liquidating or employing deposits
from third parties acquired to effect or maintain such Loan or any part thereof
as a Eurodollar Loan. Such loss or reasonable expense shall include an amount
equal to the excess, if any, as reasonably determined by such Bank, of (i) its
cost of obtaining the funds for the Eurodollar Loan being paid, prepaid,
converted or not borrowed (assumed to be the Eurodollar Rate applicable
thereto) for the period from the date of such payment, prepayment, conversion or
failure to borrow to the last day of the Interest Period for such Loan (or, in
the case of a failure to borrow, the Interest Period for such Eurodollar Loan
which would have commenced on the date of such failure) over (ii) the amount of
interest (as reasonably determined by such Bank) that would be realized by such
Bank in reemploying the funds so paid, prepaid or not borrowed for such period
or Interest Period, as the case may be. A certificate of any Bank setting forth
any amount or amounts which such Bank is entitled to receive pursuant to this
Section, and the manner in which such Bank has determined the same, shall be
delivered to the Borrower and shall be conclusive absent manifest error.
<PAGE> 30
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SECTION 2.14. Pro Rata Treatment. Except as required under Section
2.12, each Borrowing, each payment or prepayment of principal of any Borrowing,
each payment of interest on the Loans, each payment of the Commitment Fees, each
reduction of the Commitments and each refinancing of any Borrowing with a
Borrowing of any Type shall be allocated pro rata among the Banks in accordance
with their respective applicable Commitments (or, if such Commitments shall have
expired or been terminated, in accordance with the respective principal amounts
of their outstanding Loans). Each Bank agrees that in computing such Bank's
portion of any Borrowing to be made hereunder, the Agent may, in its discretion,
round each Bank's percentage of such Borrowing, computed in accordance with
Section 2.01, to the next higher or lower whole dollar amount.
SECTION 2.15. Sharing of Setoffs. Each Bank agrees that if it shall,
through the exercise of a right of banker's lien, setoff or counterclaim against
the Borrower, or pursuant to a secured claim under Section 506 of Title 11 of
the United States Code or other security or interest arising from, or in lieu
of, such secured claim, received by such Bank under any applicable bankruptcy,
insolvency or other similar law or otherwise, or by any other means, obtain
payment (voluntary or involuntary) in respect of any Loan or Loans as a result
of which the unpaid principal portion of its Loans shall be proportionately less
than the unpaid principal portion of the Loans of any other Bank, it shall be
deemed simultaneously to have purchased from such other Bank at face value, and
shall promptly pay to such other Bank the purchase price for, a participation in
the Loans of such other Bank, so that the aggregate unpaid principal amount of
the Loans and participations in Loans held by each Bank shall be in the same
proportion to the aggregate unpaid principal amount of all Loans then out
standing as the principal amount of its Loans prior to such exercise of banker's
lien, setoff or counterclaim or other event was to the principal amount of all
Loans outstanding prior to such exercise of banker's lien, setoff or counter-
claim or other event; provided, however, that, if any such purchase or purchases
or adjustments shall be made pursuant to this Section and the payment giving
rise thereto shall thereafter be recovered, such purchase or purchases or
adjustments shall be rescinded to the extent of such recovery and the purchase
price or prices or adjustment restored without interest. The Borrower expressly
consents to the foregoing arrangements and agrees that any Bank holding a
<PAGE> 31
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participation in a Loan deemed to have been so purchased may exercise any and
all rights of banker's lien, setoff or counterclaim with respect to any and all
moneys owing by the Borrower to such Bank by reason thereof as fully as if such
Bank had made a Loan directly to the Borrower in the amount of such
participation.
SECTION 2.16. Payments. (a) The Borrower shall make each payment
(including principal of or interest on any Borrowing or any Fees or other
amounts) hereunder and under any other Loan Document not later than 12:00
(noon), New York City time, on the date when due in dollars to the Agent at its
offices at 909 Fannin, Suite 1700, Houston, Texas, in immediately available
funds.
(b) Whenever any payment (including principal of or interest on any
Borrowing or any Fees or other amounts) hereunder or under any other Loan
Document shall become due, or otherwise would occur, on a day that is not a
Business Day, such payment may be made on the next succeeding Business Day, and
such extension of time shall in such case be included in the computation of
interest or Fees, if applicable.
SECTION 2.17. Taxes. (a) Any and all payments by the Borrower
hereunder shall be made, in accordance with Section 2.16, free and clear of and
without deduction for any and all present or future taxes, levies, imposts,
deductions, charges or withholdings, and all liabilities with respect thereto,
excluding taxes imposed on the net income of the Agent or any Bank (or any
transferee or assignee thereof, including a participation holder (any such
entity being called a "Transferee")) and franchise taxes imposed on the Agent or
any Bank (or Transferee) by the United States or any jurisdiction under the laws
of which the Agent or any such Bank (or Transferee) or the applicable lending
office is organized or any political subdivision thereof (all such nonexcluded
taxes, levies, imposts, deductions, charges, withholdings and liabilities being
hereinafter referred to as "Taxes"). If the Borrower shall be required by law to
deduct any Taxes from or in respect of any sum payable hereunder to the Banks
(or any Transferee) or the Agent, (i) the sum payable shall be increased by the
amount necessary so that after making all required deductions (including
deductions applicable to additional sums payable under this Section 2.17) such
Bank (or Transferee) or the Agent (as the case may be) shall receive an amount
<PAGE> 32
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equal to the sum it would have received had no such deductions been made, (ii)
the Borrower shall make such deductions and (iii) the Borrower shall pay the
full amount deducted to the relevant taxing authority or other Governmental
Authority in accordance with applicable law; provided, however, that no
Transferee of any Bank shall be entitled to receive any greater payment under
this paragraph (a) than such Bank would have been entitled to receive with
respect to the rights assigned, participated or otherwise transferred unless
such assignment, participation or transfer shall have been made at a time when
the circumstances giving rise to such greater payment did not exist.
(b) In addition, the Borrower agrees to pay any present or future
stamp or documentary taxes or any other excise or property taxes, charges or
similar levies which arise from any payment made hereunder or from the
execution, delivery or registration of, or otherwise with respect to, this
Agreement or any other Loan Document (hereinafter referred to as "Other Taxes").
(c) The Borrower will indemnify each Bank (or Transferee) and the
Agent for the full amount of Taxes and Other Taxes paid by such Bank (or
Transferee) or the Agent, as the case may be, and any liability (including
penalties, interest and reasonable expenses) arising therefrom or with respect
thereto, whether or not such Taxes or Other Taxes were correctly or legally
asserted by the relevant taxing authority or other Governmental Authority. Such
indemnification shall be made within 30 days after the date any Bank (or
Transferee) or the Agent, as the case may be, makes written demand therefor. If
a Bank (or Transferee) or the Agent shall become aware that it is entitled to
receive a refund in respect of Taxes or Other Taxes as to which it has been
indemnified by the Borrower pursuant to this Section 2.17, it shall promptly
notify the Borrower of the availability of such refund and shall, within 30 days
after receipt of a request by the Borrower, apply for such refund at the
Borrower's expense. If any Bank (or Transferee) or the Agent receives a refund
in respect of any Taxes or Other Taxes as to which it has been indemnified by
the Borrower pursuant to this Section 2.17, it shall promptly notify the
Borrower of such refund and shall repay such refund to the Borrower (to the
extent of amounts that have been paid by the Borrower under this Section 2.17
with respect to such refund) within 30 days (or promptly upon receipt, if the
Borrower has requested application for such refund pursuant
<PAGE> 33
32
hereto), net of all out-of-pocket expenses of such Bank and without interest;
provided that the Borrower, upon the request of such Bank (or Transferee) or the
Agent, agrees to return such refund (plus penalties, interest or other charges)
to such Bank (or Transferee) or the Agent in the event such Bank (or Transferee)
or the Agent is required to repay such refund. Nothing contained in this
paragraph (c) shall require any Bank (or Transferee) or the Agent to make
available any of its tax returns (or any other information relating to its taxes
which it deems to be confidential); provided that Borrower, at its expense,
shall have the right to receive an opinion from a firm of independent public
accountants of recognized national standing acceptable to the Borrower that the
amount due hereunder is correctly calculated.
(d) Within 30 days after the date of any payment of Taxes or Other
Taxes withheld by the Borrower in respect of any payment to any Bank (or
Transferee) or the Agent, the Borrower will furnish to the Agent, at its address
referred to in Section 9.01, the original or a certified copy of a receipt
evidencing payment thereof.
(e) Without prejudice to the survival of any other agreement
contained herein, the agreements and obligations contained in this Section 2.17
shall survive the payment in full of the principal of and interest on all Loans
made hereunder.
(f) On or prior to the execution of this Agreement and on or before
the transfer to a Transferee, the Agent shall notify the Borrower of each Bank's
(or Transferee's) address. On or prior to the Banks' (or Transferee's) first
Interest Payment Date, and from time to time as required by law, each Bank (or
Transferee) that is organized under the laws of a jurisdiction outside the
United States shall, if legally able to do so, deliver to the Borrower and the
Agent such certificates, documents or other evidence, as required by the Code or
Treasury Regulations issued pursuant thereto, including Internal Revenue Service
Form 1001 or Form 4224 and any other certificate or statement of exemption
required by Treasury Regulation Section 1.1441-1, 1.1441-4 or 1.1441-6(c) or any
subsequent version thereof or successors thereto, properly completed and duly
executed by such Bank (or Transferee) establishing that such payment is (i) not
subject to United States Federal withholding tax under the Code because such
payment
<PAGE> 34
33
is effectively connected with the conduct by such Bank (or Transferee) of a
trade or business in the United States or (ii) totally exempt from United States
Federal withholding tax, or subject to a reduced rate of such tax under a
provision of an applicable tax treaty. Unless the Borrower and the Agent have
received forms or other documents satisfactory to them indicating that such
payments hereunder or under the Notes are not subject to United States Federal
withholding tax or are subject to such tax at a rate reduced by an applicable
tax treaty, the Borrower shall withhold taxes from such payments at the
applicable statutory rate.
(g) The Borrower shall not be required to pay any additional amounts
to any Bank (or Transferee) in respect of United States Federal withholding tax
pursuant to paragraph (a) above if the obligation to pay such additional
amounts would not have arisen but for a failure by such Bank (or Transferee) to
comply with the provisions of paragraph (f) above; provided, however, that the
Borrower shall be required to pay those amounts to any Bank (or Transferee) that
it was required to pay hereunder prior to the failure of such Bank (or
Transferee) to comply with the provisions of such paragraph (f).
SECTION 2.18. Termination or Assignment of Commitments Under Certain
Circumstances. (a) Any Bank (or Transferee) claiming any additional amounts
payable pursuant to Section 2.11 or Section 2.17 or exercising its rights under
Section 2.12 shall use reasonable efforts (consistent with legal and regulatory
restrictions) to file any certificate or document requested by the Borrower or
to change the jurisdiction of its applicable lending office if the making of
such a filing or change would avoid the need for or reduce the amount of any
such additional amounts which may thereafter accrue or avoid the circumstances
giving rise to such exercise and would not, in the sole determination of such
Bank, be otherwise disadvantageous to such Bank (or Transferee).
(b) In the event that any Bank shall have delivered a notice or
certificate pursuant to Section 2.11 or 2.12, or the Borrower shall be required
to make additional payments under Section 2.17 to any Bank (or Transferee) or to
the Agent with respect to any Bank (or Transferee), the Borrower shall have the
right, at its own expense, upon notice to such Bank (or Transferee) and the
Agent, (a) to terminate the Commitment of such Bank (or Transferee) or
<PAGE> 35
34
(b) to require such Bank (or Transferee) to transfer and assign without recourse
(in accordance with and subject to the restrictions contained in Section 9.04)
all its interests, rights and obligations under this Agreement to another
financial institution which shall assume such obligations; provided that (i) no
such termination or assignment shall conflict with any law, rule or regulation
or order of any Governmental Authority and (ii) the Borrower or the assignee, as
the case may be, shall pay to the affected Bank (or Transferee) in immediately
available funds on the date of such termination or assignment the principal of
and interest accrued to the date of payment on the Loans made by it hereunder
and all other amounts accrued for its account or owed to it hereunder.
ARTICLE III. REPRESENTATIONS AND WARRANTIES
The Borrower represents and warrants to each of the Banks that:
SECTION 3.01. Organization; Powers. Each of the Borrower and the
Significant Subsidiaries (a) is a corporation duly organized, validly existing
and in good standing under the laws of the jurisdiction of its organization, (b)
has all requisite power and authority to own its property and assets and to
carry on its business as now con ducted and as proposed to be conducted, (c) is
qualified to do business in every jurisdiction where such qualification is
required, except where the failure so to qualify would not result in a Material
Adverse Effect, and (d) in the case of the Borrower, has the corporate power and
authority to execute, deliver and perform its obligations under each of the Loan
Documents and each other agreement or instrument contemplated thereby to which
it is or will be a party and to borrow hereunder.
SECTION 3.02. Authorization. The execution, delivery and performance
by the Borrower of each of the Loan Documents and the borrowings hereunder
(collectively, the "Transactions") (a) have been duly authorized by all
requisite corporate and, if required, stockholder action and (b) will not (i)
violate (A) any provision of law, statute, rule or regulation the violation of
which could reasonably be expected to impair the validity and enforceability of
this Agreement or any other Loan Document or materially impair the rights of or
benefits available to the Banks
<PAGE> 36
35
under the Loan Documents, or of the certificate or articles of incorporation or
other constitutive documents or by-laws of the Borrower or any Significant
Subsidiary, (B) any order of any Governmental Authority the violation of which
could reasonably be expected to impair the validity or enforce ability of this
Agreement or any other Loan Document, or materially impair the rights of or
benefits available to the Banks under the Loan Documents, or (C) any provision
of any indenture or other material agreement or instrument evidencing or
relating to borrowed money to which the Borrower or any Significant Subsidiary
is a party or by which any of them or any of their property is or may be bound
in a manner which could reasonably be expected to impair the validity and
enforceability of this Agreement or any other Loan Document or materially impair
the rights of or benefits available to the Banks under the Loan Documents, (ii)
be in conflict with, result in a breach of or constitute (alone or with notice
or lapse of time or both) a default under any such indenture, agreement or other
instrument in a manner which could reasonably be expected to impair the validity
and enforceability of this Agreement or any other Loan Document or materially
impair the rights of or benefits available to the Banks under the Loan Documents
or (iii) result in the creation or imposition under any such indenture,
agreement or other instrument of any Lien upon or with respect to any property
or assets now owned or hereafter acquired by the Borrower.
SECTION 3.03. Enforceability. This Agreement has been duly executed
and delivered by the Borrower and constitutes, and each other Loan Document
when executed and delivered by the Borrower will constitute, a legal, valid and
binding obligation of the Borrower enforceable against the Borrower in
accordance with its terms.
SECTION 3.04. Governmental Approvals. No action, consent or approval
of, registration or filing with or any other action by any Governmental
Authority is or will be required in connection with the Transactions, except
such as have been made or obtained and are in full force and effect.
SECTION 3.05. Financial Statements. The Borrower has heretofore
furnished to the Banks its consolidated balance sheets and statements of income
and statements of cash flow as of and for the fiscal year ended December 31,
1996, audited by and accompanied by the opinion of Deloitte & Touche,
independent public accountants. Such financial
<PAGE> 37
36
statements present fairly the financial condition and results of operations of
the Borrower and its consolidated subsidiaries as of such dates and for such
periods. Such balance sheets and the notes thereto, together with the Borrower's
Annual Report on Form 10-K for the fiscal year ended December 31, 1996, reflect
all liabilities, direct or contingent, of the Borrower and its consolidated
Subsidiaries as of the dates thereof which are material on a consolidated
basis. Such financial statements were prepared in accordance with GAAP applied
(except as noted therein) on a consistent basis.
SECTION 3.06. No Material Adverse Change. Except as disclosed in the
Borrower's Annual Report on Form 10-K for the fiscal year ended December 31,
1996 and in the Borrower's Form 10-Q for the fiscal quarter ended March 31,
1997, there has been no change in the business, assets, operations or financial
condition of the Borrower and the Subsidiaries, taken as a whole, since December
31, 1996, which could reasonably be expected to have a material adverse effect
on the creditworthiness of the Borrower.
SECTION 3.07. Litigation; Compliance with Laws. (a) Except as set
forth in the Annual Report of the Borrower on Form 10-K for the year ended
December 31, 1996, or in any document filed prior to the date of this Agreement
pursuant to Sections 13(a), 14 or 15(d) of the Securities Exchange Act of 1934,
there are not any actions, suits or proceedings at law or in equity or by or
before any Governmental Authority now pending or, to the knowledge of the
Borrower, threatened against or affecting the Borrower or any Subsidiary or any
business, property or rights of any such person (i) which involve any Loan
Document or the Transactions or (ii) which could reasonably be anticipated,
individually or in the aggregate, to result in a Material Adverse Effect.
(b) Neither the Borrower nor any of the Subsidiaries is in
violation of any law, rule or regulation, or in default with respect to any
judgment, writ, injunction or decree of any Governmental Authority, where such
violation or default would be reasonably likely to result in a Material Adverse
Effect.
SECTION 3.08. Federal Reserve Regulations. (a) Neither the Borrower
nor any of the Subsidiaries is engaged principally, or as one of its important
activities,
<PAGE> 38
37
in the business of extending credit for the purpose of purchasing or carrying
Margin Stock.
(b) No part of the proceeds of any Loan will be used, whether
directly or indirectly, and whether immediately, incidentally or ultimately,
(i) to purchase or carry Margin Stock or to extend credit to others for the
purpose of purchasing or carrying Margin Stock or to refund indebtedness
originally incurred for such purpose, or (ii) for any purpose which entails a
violation of, or which is inconsistent with, the provisions of the Regulations
of the Board, including Regulation G, U or X.
SECTION 3.09. Investment Company Act; Public Utility Holding Company
Act. The Borrower is not (a) an "investment company" as defined in, or subject
to regulation under, the Investment Company Act of 1940 or (b) subject to
regulation as a "holding company" under the Public Utility Holding Company Act
of 1935.
SECTION 3.10. Use of Proceeds. The Borrower will use the proceeds of
the Loans only for the purposes specified in the preamble to this Agreement.
SECTION 3.11. No Material Misstatements. No information, report,
financial statement, exhibit or schedule furnished by or on behalf of the
Borrower to the Agent or any Bank in connection with the negotiation of any Loan
Document or included therein or delivered pursuant thereto contained, contains
or will contain any material misstatement of fact or, when considered together
with all reports theretofore filed with the Securities and Exchange Commission,
omitted, omits or will omit to state any material fact necessary to make the
statements therein, in the light of the circumstances under which they were, are
or will be made, not misleading.
SECTION 3.12. Employee Benefit Plans. Each of the Borrower and its
ERISA Affiliates is in compliance in all material respects with the applicable
provisions of ERISA and the regulations and published interpretations
thereunder. No Reportable Event has occurred as to which the Borrower or any
ERISA Affiliate was required to file a report with the PBGC, and the present
value of all benefit liabilities under each Plan (based on those assumptions
used to fund such Plan) did not, as of the last annual valuation
<PAGE> 39
38
date applicable thereto, exceed by more than $10,000,000 the value of the assets
of such Plan.
SECTION 3.13. Environmental and Safety Matters. Each of the Borrower
and each Subsidiary has complied with all Federal, state, local and other
statutes, ordinances, orders, judgments, rulings and regulations relating to
environmental pollution or to environmental or nuclear regulation or control or
to employee health or safety, except where noncompliance would not be reasonably
likely to result in a Material Adverse Effect. Neither the Borrower nor any
Subsidiary has received notice of any failure so to comply, except where
noncompliance would not be reasonably likely to result in a Material Adverse
Effect. The Borrower's and the Subsidiaries' plants do not manage any hazardous
wastes, hazardous substances, hazardous materials, toxic substances, toxic
pollutants or substances similarly denominated, as those terms or similar terms
are used in the Resource Conservation and Recovery Act, the Comprehensive
Environmental Response Compensation and Liability Act, the Hazardous Materials
Transportation Act, the Toxic Substance Control Act, the Clean Air Act, the
Clean Water Act or any other applicable law relating to environmental pollution
or employee health and safety, or any nuclear fuel or other radioactive
materials, in violation of any law or any regulations promulgated pursuant
thereto, where such violation would be reasonably likely to result in a
Material Adverse Effect. The Borrower is aware of no events, conditions or
circumstances involving environmental pollution or contamination or employee
health or safety that could reasonably be expected to result in a Material
Adverse Effect. The representations and warranties set forth in this Section
3.13 are, however, subject to any matters, circumstances or events set forth in
the Borrower's Annual Report on Form 10-K for the fiscal year ended December 31,
1996 and in the Borrower's Form 10-Q for the fiscal quarter ended March 31,
1997; provided, however, that the inclusion of such matters, circumstances or
events as exceptions (or any other exceptions contained in the representations
and warranties which refer to the Borrower's Annual Report on Form 10-K for the
fiscal year ended December 31, 1996 or the Borrower's Form 10-Q for the fiscal
quarter ended March 31, 1997) shall not be construed to mean that the Borrower
has concluded that any such matter, circumstance or effect is likely to result
in a Material Adverse Effect.
<PAGE> 40
39
SECTION 3.14. Significant Subsidiaries. Schedule 3.14 sets forth as
of the date hereof a list of all Significant Subsidiaries of the Borrower and
the percentage owner ship interest of the Borrower therein.
ARTICLE IV. CONDITIONS OF LENDING
The obligations of the Banks to make Loans here under are subject to
the satisfaction of the following conditions:
SECTION 4.01. All Borrowings. On the date of
each Borrowing, including each Borrowing in which Loans are
refinanced with new Loans as contemplated by Section 2.02(e):
(a) The Agent shall have received a notice of such Borrowing as
required by Section 2.03.
(b) The representations and warranties set forth in Article III
hereof (except, in the case of a refinancing that does not increase the
aggregate principal amount of Loans outstanding, the representations set
forth in Sections 3.06 and 3.07) shall be true and correct in all material
respects on and as of the date of such Borrowing with the same effect as
though made on and as of such date, except to the extent such
representations and warranties expressly relate to an earlier date.
(c) The Borrower shall be in compliance with all the terms and
provisions set forth herein and in each other Loan Document on its part to
be observed or performed, and at the time of and immediately after such
Borrowing no Event of Default or Default shall have occurred and be
continuing.
Each Borrowing shall be deemed to constitute a representation and warranty by
the Borrower on the date of such Borrowing as to the matters specified in
paragraphs (b) and (c) of this Section 4.01.
<PAGE> 41
40
SECTION 4.02. First Borrowing. On the date of this Agreement:
(a) Each Bank shall have received a duly executed Note complying
with the provisions of Section 2.04.
(b) The Agent shall have received favorable written opinions of (i)
Paine, Hamblen, Coffin, Brooke & Miller, general counsel for the Borrower,
and (ii) Reid & Priest, special counsel to the Borrower, each dated the
date of this Agreement and addressed to the Banks, to the effect set forth
in Exhibits D-1 and D-2 hereto, and the Borrower hereby instructs such
counsel to deliver such opinions to the Agent.
(c) The Agent shall have received evidence satisfactory to it and
set forth on Schedule 4.02(c) that the Borrower shall have obtained all
consents and approvals of, and shall have made all filings and
registrations with, any Governmental Authority required in order to
consummate the Transactions, in each case without the imposition of any
condition which, in the judgment of the Banks, could adversely affect
their rights or interests hereunder.
(d) All legal matters incident to this Agreement and the borrowings
hereunder shall be satisfactory to the Banks and their counsel and to
Cravath, Swaine & Moore, counsel for the Agent.
(e) The Agent shall have received (i) a copy of the certificate or
articles of incorporation, including all amendments thereto, of the
Borrower, certified as of a recent date by the Secretary of State of the
state of its organization, and a certificate as to the good standing of
the Borrower as of a recent date, from such Secretary of State; (ii) a
certificate of the Secretary or Assistant Secretary of the Borrower dated
the Closing Date and certifying (A) that attached thereto is a true and
complete copy of the by-laws of the Borrower as in effect on the Closing
Date and at all times since a date prior to the date of the resolutions
described in clause (B) below, (B) that attached thereto is a true and
complete copy of resolutions duly adopted by the Board of Directors of the
Borrower authorizing the execution, delivery and performance of the Loan
Documents and the borrowings hereunder, and
<PAGE> 42
41
that such resolutions have not been modified, rescinded or amended and are
in full force and effect, (C) that the certificate or articles of
incorporation of the Borrower have not been amended since the date of the
last amendment thereto shown on the certificate of good standing furnished
pursuant to clause (i) above, and (D) as to the incumbency and specimen
signature of each officer executing any Loan Document or any other
document delivered in connection herewith on behalf of the Borrower; (iii)
a certificate of another officer as to the incumbency and specimen
signature of the Secretary or Assistant Secretary executing the
certificate pursuant to (ii) above; and (iv) such other documents as the
Banks or their counsel or Cravath, Swaine & Moore, counsel for the Agent,
may reasonably request.
(f) The Agent shall have received a certificate, dated the Closing
Date and signed by a Financial Officer of the Borrower, confirming
compliance with the conditions precedent set forth in paragraphs (b) and
(c) of Section 4.01.
(g) The Agent shall have received all Fees and other amounts due and
payable on or prior to the date of this Agreement.
ARTICLE V. AFFIRMATIVE COVENANTS
The Borrower covenants and agrees with each Bank that so long as
this Agreement shall remain in effect or the principal of or interest on any
Loan, any Fees or any other expenses or amounts payable under any Loan Document
shall be unpaid, unless the Required Banks shall otherwise consent in writing,
the Borrower will:
SECTION 5.01. Existence; Businesses and Properties. (a) Do or cause
to be done all things necessary to preserve, renew and keep in full force and
effect its legal existence, except as otherwise expressly permitted under
Section 6.02.
(b) Do or cause to be done all things necessary to obtain, preserve,
renew, extend and keep in full force and effect the rights, licenses, permits,
franchises, authorizations, patents, copyrights, trademarks and trade names
utilized in the conduct of the Borrower's business
<PAGE> 43
42
except where the failure so to obtain, preserve, renew, extend or maintain any
of the foregoing would not result in a Material Adverse Effect; maintain and
operate such business in substantially the manner in which it is presently
conducted and operated, except as otherwise expressly permitted under this
Agreement; comply in all material respects with all applicable laws, rules,
regulations and orders of any Governmental Authority, whether now in effect or
hereafter enacted if failure to comply with such requirements would result in a
Material Adverse Effect; and at all times maintain and preserve all property
material to the conduct of such business and keep such property in good repair,
working order and condition and from time to time make, or cause to be made, all
needful and proper repairs, renewals, additions, improvements and replacements
thereto necessary in order that the business carried on in connection therewith
may be properly conducted at all times; provided, however, that the Borrower may
cause the discontinuance of the operation or a reduction in the capacity of any
of its facilities, or any element or unit thereof including, without limitation,
real and personal properties, facilities, machinery and equipment, (i) if, in
the judgment of the Borrower, it is no longer advisable to operate the same, or
to operate the same at its former capacity, and such discontinuance or reduction
would not result in a Material Adverse Effect, or (ii) if the Borrower intends
to sell and dispose of its interest in the same in accordance with the terms of
this Agreement and within a reasonable time shall endeavor to effectuate the
same.
SECTION 5.02. Insurance. (a) Maintain insurance, to such extent and
against such risks, as is customary with companies in the same or similar
businesses and owning similar properties in the same general area in which the
Borrower operates and (b) maintain such other insurance as may be required by
law. All insurance required by this Section 5.02 shall be maintained with
financially sound and reputable insurers or through self-insurance; provided,
however, that the portion of such insurance constituting self-insurance shall be
comparable to that usually maintained by companies engaged in the same or
similar businesses and owning similar properties in the same general area in
which the Borrower operates and the reserves maintained with respect to such
self-insured amounts are deemed adequate by the officer or officers of the
Borrower responsible for insurance matters.
<PAGE> 44
43
SECTION 5.03. Taxes and Obligations. Pay and discharge promptly when
due all taxes, assessments and governmental charges or levies imposed upon it or
upon its income or profits or in respect of its property, before the same shall
become delinquent or in default, as well as all lawful claims for labor,
materials and supplies or otherwise which, if unpaid, might give rise to a Lien
upon such properties or any part thereof; provided, however, that (i) such
payment and discharge shall not be required with respect to any such tax,
assessment, charge, levy or claim so long as the validity or amount thereof
shall be contested in good faith by appropriate proceedings and the Borrower
shall, to the extent required by GAAP, have set aside on its books adequate
reserves with respect thereto and (ii) the Borrower shall be permitted to fail
to pay any amounts secured by the non-consensual equitable Lien of The Chase
Manhattan Bank, successor by merger to Chemical Bank, as bond trustee for
Washington Public Power Supply Systems Projects 4 and 5 permitted under Section
6.01(y), which Lien shall not exceed $25 million, excluding interest, and may
permit the foreclosure of such Lien by The Chase Manhattan Bank.
SECTION 5.04. Financial Statements, Reports, etc.
Furnish to the Agent and each Bank:
(a) within 105 days after the end of each fiscal year, its
consolidated and consolidating balance sheets and related statements of
income and statements of cash flow, showing the financial condition of the
Borrower and its consolidated Subsidiaries as of the close of such fiscal
year and the results of its operations and the operations of such
Subsidiaries during such year, all audited by Deloitte & Touche or other
independent public accountants of recognized national standing acceptable
to the Required Banks and accompanied by an opinion of such accountants
(which shall not be qualified in any material respect) to the effect that
such consolidated financial statements fairly present the financial
condition and results of operations of the Borrower on a consolidated
basis (except as noted therein) in accordance with GAAP consistently
applied;
(b) within 50 days after the end of each of the first three fiscal
quarters of each fiscal year, its consolidated and, to the extent
otherwise available, consolidating balance sheets and related statements
of
<PAGE> 45
44
income and statements of cash flow, showing the financial condition of
the Borrower and its consolidated subsidiaries as of the close of such
fiscal quarter and the results of its operations and the operations of
such subsidiaries during such fiscal quarter and the then elapsed portion
of the fiscal year, all certified by one of its Financial Officers as
fairly presenting the financial condition and results of operations of the
Borrower on a consolidated basis in accordance with GAAP consistently
applied, subject to normal year-end audit adjustments;
(c) concurrently with any delivery of financial statements under (a)
or (b) above, a certificate of the relevant accounting firm opining on or
certifying such statements or Financial Officer (which certificate, when
furnished by an accounting firm, may be limited to accounting matters and
disclaim responsibility for legal interpretations) certifying that to the
knowledge of the accounting firm or the Financial Officer, as the case may
be, no Event of Default or Default has occurred or, if such an Event of
Default or Default has occurred, specifying the nature and extent thereof
and any corrective action taken or proposed to be taken with respect
thereto;
(d) promptly after the same become publicly available, copies of all
periodic and other reports, proxy statements and other materials filed by
it with the Securities and Exchange Commission, or any governmental
authority succeeding to any of or all the functions of said Commission, or
with any national securities exchange, or distributed to its share
holders, as the case may be; and
(e) promptly, from time to time, such other information regarding
the operations, business affairs and financial condition of the Borrower
or any Significant Subsidiary, or compliance with the terms of any Loan
Document, as the Agent or any Bank may reasonably request.
SECTION 5.05. Litigation and Other Notices. Furnish to the Agent and
each Bank prompt written notice of the following:
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45
(a) any Event of Default or Default, specifying the nature and
extent thereof and the corrective action (if any) proposed to be taken
with respect thereto;
(b) the filing or commencement of, or any written threat or notice
of intention of any person to file or commence, any action, suit or
proceeding, whether at law or in equity or by or before any Governmental
Authority, against the Borrower or any Subsidiary thereof which could
reasonably be anticipated to result in a Material Adverse Effect; and
(c) any development that has resulted in, or could reasonably be
anticipated to result in, a Material Adverse Effect.
SECTION 5.06. ERISA. (a) Comply in all material respects with the
applicable provisions of ERISA and (b) furnish to the Agent and each Bank (i) as
soon as possible, and in any event within 30 days after any Responsible Officer
of the Borrower or any ERISA Affiliate either knows or has reason to know that
any Reportable Event has occurred that alone or together with any other
Reportable Event could reasonably be expected to result in liability of the
Borrower to the PBGC in an aggregate amount exceeding $10,000,000, a statement
of a Financial Officer setting forth details as to such Reportable Event and the
action proposed to be taken with respect thereto, together with a copy of the
notice, if any, of such Reportable Event given to the PBGC, (ii) promptly after
receipt thereof, a copy of any notice the Borrower or any ERISA Affiliate may
receive from the PBGC relating to the intention of the PBGC to terminate any
Plan or Plans (other than a Plan maintained by an ERISA Affiliate which is
considered an ERISA Affiliate only pursuant to subsection (m) or (o) of Section
414 of the Code) or to appoint a trustee to administer any Plan or Plans and
(iii) within 10 days after the due date for filing with the PBGC pursuant to
Section 412(n) of the Code of a notice of failure to make a required installment
or other payment with respect to a Plan, a statement of a Financial Officer
setting forth details as to such failure and the action proposed to be taken
with respect thereto, together with a copy of such notice given to the PBGC.
SECTION 5.07. Maintaining Records; Access to Properties and
Inspections. Maintain all financial records in accordance with GAAP and permit
any representatives
<PAGE> 47
46
designated by any Bank to visit and inspect the financial records and the
properties of the Borrower at reasonable times and as often as requested and to
make extracts from and copies of such financial records, and permit any
representatives designated by any Bank to discuss the affairs, finances and
condition of the Borrower with the chief financial officer of the Borrower, or
other person designated by the chief financial officer, and independent
accountants therefor.
SECTION 5.08. Use of Proceeds. Use the proceeds of the Loans only
for the purposes set forth in the preamble to this Agreement.
ARTICLE VI. NEGATIVE COVENANTS
The Borrower covenants and agrees with each Bank that, so long as
this Agreement shall remain in effect or the principal of or interest on any
Loan, any Fees or any other expenses or amounts payable under any Loan Document
shall be unpaid, unless the Required Banks shall otherwise consent in writing,
the Borrower will not:
SECTION 6.01. Liens. Create, incur, assume or permit to exist any
Lien on any property or assets (including stock or other securities of any
person, including any Subsidiary) now owned or hereafter acquired by it or on
any income or revenues or rights in respect of any thereof, except:
(a) Liens on property or assets of the Borrower created by the
documents, instruments or agreements existing on the date hereof and which
are listed as exhibits to the Borrower's Annual Report on Form 10-K for
the fiscal year ended December 31, 1996, to the extent that such Liens
secure only obligations arising under such existing documents, agreements
or instruments;
(b) any Lien existing on any property or asset prior to the
acquisition thereof by the Borrower; provided that (i) such Lien is not
created in contemplation of or in connection with such acquisition and
(ii) such Lien does not apply to any other property or assets of the
Borrower;
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47
(c) the Lien of the First Mortgage;
(d) Liens permitted under the First Mortgage (whether or not such
permitted Liens cover properties or assets subject to the Lien of the
First Mortgage) and any other Liens to which the Lien of the First
Mortgage is expressly made subject;
(e) the Lien of any collateral trust mortgage or similar instrument
which would be intended to eventually replace (in one transaction or a
series of transactions) the First Mortgage (as amended, modified or
supplemented from time to time, "Collateral Trust Mortgage") on properties
or assets of the Borrower to secure bonds, notes and other obligations of
the Borrower; provided that, so long as the First Mortgage shall
constitute a Lien on properties or assets of the Borrower, the bonds,
notes or other obligations issued under the Collateral Trust Mortgage (i)
shall also be secured by an equal principal amount of bonds issued under
the First Mortgage or (ii) shall be issued against property additions not
subject to the Lien of the First Mortgage;
(f) Liens permitted under the Collateral Trust Mortgage (whether or
not such permitted Liens cover properties or assets subject to the Lien of
the Collateral Trust Mortgage) and any other Liens to which the Lien of
the Collateral Trust Mortgage is subject;
(g) Liens for taxes, assessments or governmental charges not yet due
or which are being contested in compliance with Section 5.03;
(h) carriers', warehousemen's, mechanic's, materialmen's,
repairmen's or other like Liens arising in the ordinary course of business
and securing obligations that are not due or which are being contested in
compliance with Section 5.03;
(i) pledges and deposits made in the ordinary course of business in
compliance with workmen's compensation, unemployment insurance and other
social security laws or regulations;
(j) Liens incurred or created in connection with or to secure the
performance of bids, tenders, trade
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48
contracts (other than for Indebtedness), leases, statutory obligations,
surety and appeal bonds, performance bonds and other obligations of a
like nature incurred in the ordinary course of business;
(k) zoning restrictions, easements, rights-of-way, restrictions on
use of real property and other similar encumbrances incurred in the
ordinary course of business which, in the aggregate, are not substantial
in amount and do not materially detract from the value of the property
subject thereto or interfere with the ordinary conduct of the business of
the Borrower or any of its Subsidiaries;
(l) Liens (i) which secure obligations not assumed by the Borrower,
(ii) on account of which the Borrower has not and does not expect to pay
interest directly or indirectly and (iii) which exist upon real estate or
rights in or relating to real estate in respect of which the Borrower has
a right-of-way or other easement for purposes of substations or
transmission or distribution facilities;
(m) rights reserved to or vested in any federal, state or local
governmental body or agency by the terms of any right, power, franchise,
grant, license, contract or permit, or by any provision of law, to
recapture or to purchase, or designate a purchase of or order the sale
of, any property of the Borrower or to terminate any such right, power,
franchise, grant, license, contract or permit before the expiration
thereof;
(n) Liens of judgments covered by insurance, or upon appeal and
covered by bond, or to the extent not so covered not exceeding at one time
$10,000,000 in aggregate amount;
(o) any Liens, moneys sufficient for the discharge of which shall
have been deposited in trust with the trustee or mortgagee under the
instrument evidencing such Lien, with irrevocable authority of such
trustee or mortgagee to apply such moneys to the discharge of such Lien to
the extent required for such purpose;
(p) rights reserved to or vested in any federal, state or local
governmental body or agency or other
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49
public authority to control or regulate the business or property of the
Borrower;
(q) any obligations or duties, affecting the property of the
Borrower to any federal, state or local governmental body or agency or
other public authority with respect to any authorization, permit, consent
or license of such body, agency or authority, given in connection with the
purchase, construction, equipping, testing and operation of the Borrower's
utility property;
(r) with respect to any property which the Borrower may hereafter
acquire, any exceptions or reservations therefrom existing at the time of
such acquisition or any terms, conditions, agreements, covenants,
exceptions and reservations expressed or provided in the deeds of other
instruments, respectively, under and by virtue of which the Borrower shall
hereafter acquire the same, none of which materially impairs the use of
such property for the purposes for which it is acquired by the Borrower;
(s) leases and subleases entered into in the ordinary course of
business;
(t) banker's Liens and other Liens in the nature of a right of
set-off;
(u) Liens resulting from any transaction permitted under Section
6.03(iv);
(v) renewals, replacements, amendments, modifications, supplements,
refinancings or extensions of Liens set forth above to the extent that the
principal amount of Indebtedness secured by such Lien immediately prior
thereto is not increased and such Lien is not extended to other property
(it being understood that such limitation does not apply to the Liens
described in subsection (c), (e) or (u) above);
(w) security deposits or amounts paid into trust funds for the
reclamation of mining properties;
(x) restrictions on transfer or use of properties and assets, first
rights of refusal, and rights to acquire properties and assets granted to
others;
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50
(y) non-consensual equitable Liens on the Borrower's
tenant-in-common or other interest in joint projects;
(z) Liens on the Borrower's tenant-in-common or other interest in
joint projects incurred by the project sponsor without the express consent
of the Borrower to such incurrence; and
(aa) Liens not expressly permitted in clauses (a) through (z) of
this Section 6.01 to secure Indebtedness of the Borrower, provided that
the aggregate outstanding principal amount of the Indebtedness so secured
does not at any one time exceed $100,000,000.
SECTION 6.02. Mergers, Consolidations and Acquisitions. Merge into
or consolidate with any other person, or permit any other person to merge into
or consolidate with it, or purchase, lease or otherwise acquire (in one
transaction or a series of transactions) all or substantially all of the assets
of any other person (whether directly by purchase, lease or other acquisition of
all or substantially all of the assets of such person or indirectly by purchase
or other acquisition of all or substantially all of the capital stock of such
other person) other than acquisitions in the ordinary course of the Borrower's
business, except that if (A) at the time thereof and immediately after giving
effect thereto no Event of Default or Default shall have occurred and be
continuing and (B) in the case of any merger or consolidation involving the
Borrower in which the Borrower is not the surviving corporation, the surviving
corporation shall assume in writing the obligations of the Borrower under this
Agreement and any other Loan Documents, then (a) the Borrower may merge or
consolidate with any Subsidiary in a transaction in which the Borrower is the
surviving corporation, (b) the Borrower may purchase, lease or otherwise acquire
from any Subsidiary all or substantially all of its assets and may purchase or
otherwise acquire all or substantially all of the capital stock of any person
who immediately thereafter is a Subsidiary, (c) the Borrower may merge with or
into, or consolidate with, any other person so long as (i) in the case where the
business of such other person, or an Affiliate of such other person, entirely or
primarily consists of an electric or gas utility business, the senior secured
long-term debt rating of the Borrower shall be at least BBB or higher by S&P and
Baa2 or higher by Moody's immediately after such merger or
<PAGE> 52
51
consolidation, or in the case of a merger or consolidation in which the Borrower
is not the surviving entity, the senior secured long-term debt rating of the
surviving entity or an Affiliate thereof shall be at least BBB+ or higher by S&P
and Baa1 or higher by Moody's immediately after such merger or consolidation, or
(ii) in the case where such other person's business does not entirely or
primarily consist of an electric or gas utility business, the assets of such
person at the time of such consolidation or merger do not exceed 10% of the
total assets of the Borrower and its Subsidiaries after giving effect to such
merger or consolidation, computed and consolidated in accordance with GAAP
consistently applied, and (d) the Borrower may purchase, lease or otherwise
acquire any or all of the assets of any other person (and may purchase or
otherwise acquire the capital stock of any other person) so long as (i) the
assets being purchased, leased or acquired (or the assets of the person whose
capital stock is being acquired) entirely or primarily consist of electric or
gas utility assets or (ii) in the case where the assets being purchased, leased
or acquired (or the assets of the person whose capital stock is being acquired)
do not entirely or primarily consist of electric or gas utility assets, the
assets being acquired (or the Borrower's proportionate share of the assets of
the person whose capital stock is being acquired) do not exceed 10% of the total
assets of the Borrower and its Subsidiaries, after giving effect to such
acquisition, computed and consolidated in accordance with GAAP consistently
applied.
SECTION 6.03. Disposition of Assets. Sell, lease, transfer, assign
or otherwise dispose of (in one transaction or in a series of transactions), in
any fiscal year, assets (whether now owned or hereafter acquired) which,
together with the amount of all sales, leases, transfers, assignments or other
dispositions permitted under clause (c)(ii) of the definition of Subsidiary
Event in Article I (other than sales, leases, transfers, assignments or other
dispositions permitted under clauses (c)(ii) (A) through (C) in such
definition), exceed 10% of the assets of the Borrower and its Subsidiaries as of
the end of the most recent fiscal year, computed and consolidated in accordance
with GAAP consistently applied, except (i) the Borrower may, in any fiscal year,
sell, lease, transfer, assign or otherwise dispose of assets in the ordinary
course of business which, together with the amount of all sales, leases,
transfers, assignments or other dispositions in the
<PAGE> 53
52
ordinary course permitted under clause (c)(ii)(A) of the definition of
Subsidiary Event in Article I, do not exceed 5% of the assets of the Borrower
and its Subsidiaries as of the end of the most recent fiscal year, computed and
consolidated in accordance with GAAP consistently applied, (ii) to the extent
permitted under Section 5.03, 6.01 or Section 6.02, (iii) the Borrower may sell,
lease, transfer, assign or otherwise dispose of its interest in the Washington
Public Power Supply System Nuclear Project No. 3 in accordance with the
settlement agreement among the Borrower, the Washington Public Power Supply
System and Bonneville Power Administration, as the same may be amended, modified
or supplemented from time to time and (iv) the Borrower may sell, lease,
transfer, assign or otherwise dispose (including by way of capital contribution)
of, or create, incur, assume or permit to exist Liens on, receivables and
related properties or interests therein.
ARTICLE VII. EVENTS OF DEFAULT
In case of the happening (and during the continuance) of any of the
following events ("Events of Default"):
(a) any representation or warranty made or deemed made in or in
connection with any Loan Document or the borrowings hereunder, or any
representation, warranty, statement or information contained in any
report, certificate, financial statement or other instrument furnished in
connection with or pursuant to any Loan Document, shall prove to have been
false or misleading in any material respect when so made, deemed made or
furnished;
(b) default shall be made in the payment of any principal of any
Loan when and as the same shall become due and payable, whether at the due
date thereof or at a date fixed for prepayment thereof or by acceleration
thereof or otherwise;
(c) default shall be made in the payment of any interest on any Loan
or any Fee or any other amount (other than an amount referred to in (b)
above) due under any Loan Document, when and as the same shall become due
and payable, and such default shall continue unremedied for a period of
five Business Days;
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53
(d) default shall be made in the due observance or performance by
the Borrower of any covenant, condition or agreement contained in Section
5.01(a) or 5.05 or in Article VI;
(e) default shall be made in the due observance or performance by
the Borrower of any covenant, condition or agreement contained in any Loan
Document (other than those specified in (b), (c) or (d) above) and such
default shall continue unremedied for a period of 30 days after notice
thereof from the Agent or any Bank to the Borrower;
(f) the Borrower or any Significant Subsidiary shall (i) fail to pay
any principal or interest, regardless of amount, due in respect of any
Indebted ness when the aggregate unpaid principal amount is in excess of
$10,000,000, when and as the same shall become due and payable (after
expiration of any applicable grace period), or (ii) fail to observe or
perform any other term, covenant, condition or agreement (after expiration
of any applicable grace period) contained in any agreement or instrument
evidencing or governing any such Indebtedness if the effect of any failure
referred to in this clause (ii) is to cause, or to permit the holder or
holders of such Indebtedness or a trustee on its or their behalf (with or
without the giving of notice, the lapse of time or both) to cause, such
Indebtedness to become due prior to its stated maturity, except as
otherwise permitted under Section 5.03(ii);
(g) an involuntary proceeding shall be commenced or an involuntary
petition shall be filed in a court of competent jurisdiction seeking (i)
relief in respect of the Borrower or any Significant Subsidiary, or of a
substantial part of the property or assets of the Borrower or a
Significant Subsidiary, under Title 11 of the United States Code, as now
constituted or hereafter amended, or any other Federal or state
bankruptcy, insolvency, receivership or similar law, (ii) the appointment
of a receiver, trustee, custodian, sequestrator, conservator or similar
official for the Borrower or any Significant Subsidiary or for a
substantial part of the property or assets of the Borrower or a
Significant Subsidiary or (iii) the winding-up or liquidation of the
Borrower or any Significant Subsid-
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54
iary; and such proceeding or petition shall continue undismissed, or an
order or decree approving or ordering any of the foregoing shall be
entered and continue unstayed and in effect, for a period of 60 or more
days;
(h) the Borrower or any Significant Subsidiary shall (i) voluntarily
commence any proceeding or file any petition seeking relief under Title 11
of the United States Code, as now constituted or hereafter amended, or any
other Federal or state bankruptcy, insolvency, receivership or similar
law, (ii) consent to the institution of, or fail to contest in a timely
and appropriate manner, any proceeding or the filing of any petition
described in (g) above, (iii) apply for or consent to the appointment of a
receiver, trustee, custodian, sequestrator, conservator or similar
official for the Borrower or any Significant Subsidiary or for a
substantial part of the property or assets of the Borrower or any
Significant Subsidiary, (iv) file an answer admitting the material
allegations of a petition filed against it in any such proceeding, (v)
make a general assignment for the benefit of creditors, (vi) become
unable, admit in writing its inability or fail generally to pay its debts
as they become due or (vii) take any action for the purpose of effecting
any of the foregoing;
(i) a final judgment or judgments shall be rendered against the
Borrower, any Significant Subsidiary or any combination thereof for the
payment of money with respect to which an aggregate amount in excess of
$10,000,000 is not covered by insurance and the same shall remain
undischarged for a period of 30 consecutive days during which execution
shall not be effectively stayed, or any action shall be legally taken by
a judgment creditor to levy upon assets or properties of the Borrower or
any Significant Subsidiary to enforce any such judgment;
(j) a Reportable Event or Reportable Events, or a failure to make a
required installment or other payment (within the meaning of Section
412(n)(l) of the Code), shall have occurred with respect to any Plan or
Plans that reasonably could be expected to result in liability of the
Borrower to the PBGC or to a Plan in an aggregate amount exceeding
$10,000,000 and, within 30
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55
days after the reporting of any such Reportable Event to the Agent or
after the receipt by the Agent of the statement required pursuant to
Section 5.06, the Agent shall have notified the Borrower in writing that
(i) the Required Banks have made a determination that, on the basis of
such Reportable Event or Reportable Events or the failure to make a
required payment, there are reasonable grounds (A) for the termination of
such Plan or Plans by the PBGC, (B) for the appointment by the appropriate
United States District Court of a trustee to administer such Plan or Plans
or (C) for the imposition of a lien in favor of a Plan and (ii) as a
result thereof an Event of Default exists hereunder; or a trustee shall be
appointed by a United States District Court to administer any such Plan
or Plans; or the PBGC shall institute proceedings to terminate any Plan or
Plans; or
(k) there shall occur a Subsidiary Event;
then, and in every such event (other than an event with respect to the Borrower
described in paragraph (g) or (h) above), and at any time thereafter during the
continuance of such event, the Agent, at the request of the Required Banks,
shall, by notice to the Borrower, take either or both of the following actions,
at the same or different times: (i) terminate forthwith the Commitments and (ii)
declare the Loans then outstanding to be forthwith due and payable in whole or
in part, whereupon the principal of the Loans so declared to be due and payable,
together with accrued interest thereon and any unpaid accrued Fees and all other
liabilities of the Borrower accrued hereunder and under any other Loan Document,
shall become forthwith due and payable, without presentment, demand, protest or
any other notice of any kind, all of which are hereby expressly waived by the
Borrower, anything contained herein or in any other Loan Document to the
contrary notwithstanding; and in any event with respect to the Borrower
described in paragraph (g) or (h) above, the Commitments shall automatically
terminate and the principal of the Loans then outstanding, together with accrued
interest thereon and any unpaid accrued Fees and all other liabilities of the
Borrower accrued hereunder and under any other Loan Document, shall
automatically become due and payable, without presentment, demand, protest or
any other notice of any kind, all of which are hereby expressly waived by the
Borrower, anything contained herein or in any other Loan Document to the
contrary notwithstanding.
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ARTICLE VIII. THE AGENT
In order to expedite the various transactions contemplated by this
Agreement, Toronto Dominion (Texas), Inc. is hereby appointed to act as Agent on
behalf of the Banks. Each of the Banks hereby irrevocably authorizes and directs
the Agent to take such action on behalf of such Bank under the terms and
provisions of this Agreement, and to exercise such powers hereunder as are
specifically delegated to or required of the Agent by the terms and provisions
hereof, together with such powers as are reasonably incidental thereto. The
Agent is hereby expressly authorized on behalf of the Banks, without hereby
limiting any implied authority, (a) to receive on behalf of each of the Banks
any payment of principal of or interest on the Loans outstanding hereunder and
all other amounts accrued hereunder paid to the Agent, and to distribute to each
Bank its proper share of all payments so received as soon as practicable; (b) to
give notice promptly on behalf of each of the Banks to the Borrower of any event
of default specified in this Agreement of which the Agent has actual knowledge
acquired in connection with its agency hereunder; and (c) to distribute
promptly to each Bank copies of all notices, agreements and other material as
provided for in this Agreement as received by such Agent.
Neither the Agent nor any of its directors, officers, employees or
agents shall be liable to any Bank as such for any action taken or omitted by
any of them hereunder except for its or his own gross negligence or wilful
misconduct, or be responsible for any statement, warranty or representation
herein or the contents of any document delivered in connection herewith or be
required to ascertain or to make any inquiry concerning the performance or
observance by the Borrower of any of the terms, conditions, covenants or
agreements of this Agreement. The Agent shall not be responsible to the Banks
for the due execution, genuineness, validity, enforceability or effectiveness of
this Agreement or any other instrument to which reference is made herein. The
Agent shall in all cases be fully protected in acting, or refraining from
acting, in accordance with written instructions signed by the Required Banks,
and, except as otherwise specifically provided herein, such instructions and any
action taken or failure to act pursuant thereto shall be binding on all the
Banks. The Agent shall, in the absence of knowledge to the contrary, be entitled
to
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57
rely on any paper or document believed by it in good faith to be genuine and
correct and to have been signed or sent by the proper person or persons. Neither
the Agent nor any of its directors, officers, employees or agents shall have any
responsibility to the Borrower on account of the failure or delay in performance
or breach by any Bank of any of its obligations hereunder or to any Bank on
account of the failure of or delay in performance or breach by any other Bank or
the Borrower of any of their respective obligations hereunder or in connection
herewith. The Agent may execute any and all duties hereunder by or through
agents or employees and shall be entitled to advice of legal counsel selected
by it with respect to all matters arising hereunder and shall not be liable for
any action taken or suffered in good faith by it in accordance with the advice
of such counsel.
The Agent and its affiliates may accept deposits from, lend money to
and generally engage in any kind of business with the Borrower or other
affiliate thereof as if it were not the Agent.
Each Bank recognizes that applicable laws, rules, regulations or
guidelines of governmental authorities may require the Agent to determine
whether the transactions contemplated hereby should be classified as "highly
lever aged" or assigned any similar or successor classification, and that such
determination may be binding upon the other Banks. Each Bank understands that
any such determination shall be made solely by the Agent based upon such factors
(which may include, without limitation, the Agent's internal policies and
prevailing market practices) as the Agent shall deem relevant and agrees that
the Agent shall have no liability for the consequences of any such
determination.
Each Bank agrees (i) to reimburse the Agent in the amount of such
Bank's pro rata share (based on its Commitment hereunder) of any expenses
incurred for the benefit of the Banks by the Agent, including reasonable counsel
fees and compensation of agents and employees paid for services rendered on
behalf of the Banks, not reimbursed by the Borrower and (ii) to indemnify and
hold harmless the Agent and any of its directors, officers, employees or agents,
on demand, in the amount of its pro rata share, from and against any and all
liabilities, obligations, losses, damages, penalties, actions, judgments, suits,
costs, expenses or disbursements of any kind or nature whatsoever
<PAGE> 59
58
which may be imposed on, incurred by or asserted against it in its capacity as
the Agent or any of them in any way relating to or arising out of this Agreement
or any action taken or omitted by it or any of them under this Agreement, to the
extent not reimbursed by the Borrower; provided, however, that no Bank shall be
liable to the Agent for any portion of such liabilities, obligations, losses,
damages, penalties, actions, judgments, suits, costs, expenses or disbursements
resulting from the gross negligence or wilful misconduct of the Agent or any of
its directors, officers, employees or agents.
Each Bank acknowledges that it has, independently and without
reliance upon the Agent or any other Bank and based on such documents and
information as it has deemed appropriate, made its own credit analysis and
decision to enter into this Agreement. Each Bank also acknowledges that it will,
independently and without reliance upon the Agent or any other Bank based on
such documents and information as it shall deem appropriate at the time,
continue to make its own decisions in taking or not taking action under or based
upon this Agreement, any related agreement or any document furnished hereunder.
The Agent may execute any of its duties under this Agreement by or
through agents or attorneys selected by them using reasonable care and shall be
entitled to advice of counsel concerning all matters pertaining to such duties.
The Agent shall not be responsible for the negligence or misconduct of any
agents or attorneys selected and authorized to act by it with reasonable care
unless the damage complained of directly results from an act or failure to act
on part of the Agent which constitutes gross negligence or wilful misconduct.
Delegation to an attorney or agent shall not release the Agent from its
obligation to perform or cause to be performed the delegated duty.
ARTICLE IX. MISCELLANEOUS
SECTION 9.01. Notices. Notices and other communications provided
for herein shall be in writing and shall be delivered by hand or overnight
courier service, mailed or
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59
sent by telecopy, graphic scanning or other telegraphic communications equipment
of the sending party, as follows:
(a) if to the Borrower, to it at East 1411 Mission Avenue (99202),
P.O. Box 3727, Spokane, Washington 99220, Attention of the Vice President
and Treasurer (Telecopy No. 509-482-4879);
(b) if to the Agent, to it at 909 Fannin, Suite 1700, Houston, Texas
77010, Attention of Kimberly Burelson (Telecopy No. 713-951-9921); and
(c) if to a Bank, to it at its address (or telecopy number) set
forth in Schedule 2.01 or in the Assignment and Acceptance pursuant to
which such Bank shall have become a party hereto.
All notices and other communications given to any party hereto in accordance
with the provisions of this Agreement shall be deemed to have been given on the
date of receipt if delivered by hand or overnight courier service or sent by
telecopy or other telegraphic communications equipment of the sender, or on the
date five Business Days after dispatch by certified or registered mail if
mailed, in each case delivered, sent or mailed (properly addressed) to such
party as provided in this Section 9.01 or in accordance with the latest
unrevoked direction from such party given in accordance with this Section 9.01.
SECTION 9.02. Survival of Agreement. All covenants, agreements,
representations and warranties, including, without limitation, any indemnities
and reimbursement obligations, made by the Borrower herein and in the
certificates or other instruments prepared or delivered in connection with or
pursuant to this Agreement or any other Loan Document shall be considered to
have been relied upon by the Banks and shall survive the making by the Banks of
the Loans, and the execution and delivery to the Banks of the Notes evidencing
such Loans, regardless of any investigation made by the Banks or on their
behalf, and shall continue in full force and effect as long as the principal of
or any accrued interest on any Loan or any Fee or any other amount payable under
this Agreement or any other Loan Document is outstanding and unpaid and so long
as the Commitments have not been terminated.
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SECTION 9.03. Binding Effect. This Agreement shall become effective
when it shall have been executed by the Borrower and the Agent and when the
Agent shall have received copies hereof which, when taken together, bear the
signatures of each Bank, and thereafter shall be binding upon and inure to the
benefit of the Borrower, the Agent and each Bank and their respective successors
and assigns, except that the Borrower shall not have the right to assign its
rights hereunder or any interest herein without the prior consent of all the
Banks.
SECTION 9.04. Successors and Assigns. (a) Whenever in this Agreement
any of the parties hereto is referred to, such reference shall be deemed to
include the successors and permitted assigns of such party; and all covenants,
promises and agreements by or on behalf of the Borrower, the Agent or the Banks
that are contained in this Agreement shall bind and inure to the benefit of
their respective successors and permitted assigns.
(b) Each Bank may assign to one or more assignees all or a portion
of its interests, rights and obligations under this Agreement (including all or
a portion of its Commitment and the Loans at the time owing to it and the Notes
held by it); provided, however, that (i) except in the case of an assignment to
a Bank or an Affiliate of such Bank, the Borrower and the Agent must give their
prior written consent to such assignment (which consent shall not be
unreasonably withheld), (ii) that no assignee of any Bank shall be entitled to
receive any greater payment or protection under Sections 2.11, 2.12(a), 2.13 or
2.17 than such Bank would have been entitled to receive with respect to the
rights assigned or otherwise transferred unless such assignment or transfer
shall have been made at a time when the circumstances giving rise to such
greater payment did not exist, (iii) each such assignment shall be of a
constant, and not a varying, percentage of all the assigning Bank's rights and
obligations under this Agreement, (iv) the amount of the Commitment of the
assigning Bank subject to each such assignment (determined as of the date the
Assignment and Acceptance with respect to such assignment is delivered to the
Agent) shall not be less than $5,000,000, (v) the parties to each such
assignment shall execute and deliver to the Agent an Assignment and Acceptance,
together with the Note or Notes subject to such assignment and a processing and
recordation fee of $5,000 and (vi) the assignee, if it shall not be a Bank,
shall deliver to the Agent an Adminis-
<PAGE> 62
61
trative Questionnaire. Upon acceptance and recording pursuant to paragraph (e)
of this Section 9.04, from and after the effective date specified in each
Assignment and Acceptance, which effective date shall be at least five Business
Days after the execution thereof, (A) the assignee thereunder shall be a party
hereto and, to the extent of the interest assigned by such Assignment and
Acceptance, have the rights and obligations of a Bank under this Agreement and
(B) the assigning Bank thereunder shall, to the extent of the interest assigned
by such Assignment and Acceptance, be released from its obligations under this
Agreement (and, in the case of an Assignment and Acceptance covering all or the
remaining portion of an assigning Bank's rights and obligations under this
Agreement, such Bank shall cease to be a party hereto but shall continue to be
entitled to the benefits of Sections 2.11, 2.13, 2.17 and 9.05, as well as to
any Fees accrued for its account and not yet paid).
(c) By executing and delivering an Assignment and Acceptance, the
assigning Bank thereunder and the assignee thereunder shall be deemed to confirm
to and agree with each other and the other parties hereto as follows: (i) such
assigning Bank warrants that it is the legal and beneficial owner of the
interest being assigned thereby free and clear of any adverse claim and that its
Commitment, and the outstanding balances of its Loans, in each case without
giving effect to assignments thereof which have not become effective, are as set
forth in such Assignment and Acceptance; (ii) except as set forth in (i) above,
such assigning Bank makes no representation or warranty and assumes no
responsibility with respect to any statements, warranties or representations
made in or in connection with this Agree ment, or the execution, legality,
validity, enforceability, genuineness, sufficiency or value of this Agreement,
any other Loan Document or any other instrument or document furnished pursuant
hereto, or the financial condition of the Borrower or any Subsidiary or the
performance or observance by the Borrower or any Subsidiary of any of its
obligations under this Agreement, any other Loan Document or any other
instrument or document furnished pursuant hereto; (iii) such assignee represents
and warrants that it is legally authorized to enter into such Assignment and
Acceptance; (iv) such assignee confirms that it has received a copy of this
Agreement, together with copies of the most recent financial statements
delivered pursuant to Section 5.04 and such other documents and information as
it has deemed appropriate to make its own credit analysis and decision to enter
into such
<PAGE> 63
62
Assignment and Acceptance; (v) such assignee will independently and without
reliance upon the Agent, such assigning Bank or any other Bank and based on such
documents and information as it shall deem appropriate at the time, continue to
make its own credit decisions in taking or not taking action under this
Agreement; (vi) such assignee appoints and authorizes the Agent to take such
action as agent on its behalf and to exercise such powers under this Agreement
as are delegated to the Agent by the terms hereof, together with such powers as
are reasonably incidental thereto; and (vii) such assignee agrees that it will
perform in accordance with their terms all the obligations which by the terms of
this Agreement are required to be performed by it as a Bank.
(d) The Agent shall maintain a copy of each Assignment and
Acceptance delivered to it including the recordation of the names and addresses
of the Banks, and the Commitment of, and principal amount of the Loans owing to,
each Bank pursuant to the terms hereof from time to time (the "Register"). The
Agent and the Banks may treat each person whose name is recorded in the Register
pursuant to the terms hereof as a Bank hereunder for all purposes of this
Agreement. The Register shall be available for inspection by the Borrower and
any Bank, at any reasonable time and from time to time upon reasonable prior
notice.
(e) Upon its receipt of a duly completed Assignment and Acceptance
executed by an assigning Bank and an assignee together with the Note or Notes
subject to such assignment, an Administrative Questionnaire completed in respect
of the assignee (unless the assignee shall already be a Bank hereunder), the
processing and recordation fee referred to in paragraph (b) above and, if
required, the written consent of the Borrower and the Agent to such assignment,
the Agent shall (i) accept such Assignment and Acceptance, (ii) record the
information contained therein in the Register and (iii) give prompt notice
thereof to the Banks. Within five Business Days after receipt of notice, the
Borrower, at its own expense, shall execute and deliver to the Agent, in
exchange for the surrendered Note or Notes, a new Note or Notes to the order of
such assignee in a principal amount equal to the applicable Commitment assumed
by it pursuant to such Assignment and Acceptance and, if the assigning Bank has
retained a Commitment, a new Note to the order of such assigning Bank in a
principal amount equal to the applicable Commitment retained by it. Such new
Note or
<PAGE> 64
63
Notes shall be in an aggregate principal amount equal to the aggregate principal
amount of such surrendered Note; such new Notes shall be dated the date of the
surrendered Notes which they replace and shall otherwise be in substantially the
form of Exhibit A hereto. Canceled Notes shall be returned to the Borrower.
(f) Each Bank may without the consent of the Borrower or the Agent
sell participations to one or more banks or other entities in all or a portion
of its rights and obligations under this Agreement (including all or a portion
of its Commitment and the Loans owing to it and the Notes held by it); provided,
however, that (i) such Bank's obligations under this Agreement shall remain
unchanged, (ii) such Bank shall remain solely responsible to the other parties
hereto for the performance of such obligations, (iii) the participating banks or
other entities shall be entitled to the benefit of the cost protection
provisions contained in Sections 2.11, 2.13 and 2.17 to the same extent as if
they were Banks (provided, that the amount of such benefit shall be limited to
the amount in respect of the interest sold to which the seller of such
participation would have been entitled had it not sold such interest) and (iv)
the Borrower, the Agent and the other Banks shall continue to deal solely and
directly with such Bank in connection with such Bank's rights and obligations
under this Agreement, and such Bank shall retain the sole right to enforce the
obligations of the Borrower relating to the Loans and to approve any amendment,
modification or waiver of any provision of this Agreement (other than
amendments, modifications or waivers decreasing any fees payable here under or
the amount of principal of or the rate at which interest is payable on the
Loans, extending any scheduled principal payment date or date fixed for the
payment of interest on the Loans or changing or extending the Commitments).
(g) Any Bank or participant may, in connection with any assignment
or participation or proposed assignment or participation pursuant to this
Section 9.04, disclose to the assignee or participant or proposed assignee or
participant any information relating to the Borrower furnished to such Bank by
or on behalf of the Borrower; provided that, prior to any such disclosure of
information designated by the Borrower as confidential, each such assignee or
participant or proposed assignee or participant shall execute an agreement
whereby such assignee or participant shall agree
<PAGE> 65
64
(subject to customary exceptions) to preserve the confidentiality of such
confidential information.
(h) Any Bank may at any time assign for security purposes all or any
portion of its rights under this Agreement and the Notes issued to it to a
Federal Reserve Bank; provided that no such assignment shall release a Bank from
any of its obligations hereunder.
(i) Subject to Section 6.02, the Borrower shall not assign or
delegate any of its rights or duties here under.
SECTION 9.05. Expenses; Indemnity. (a) The Borrower agrees to pay
all out-of-pocket expenses incurred by the Agent in connection with the
preparation of this Agreement and the other Loan Documents or in connection with
any amendments, modifications or waivers of the provisions hereof or thereof
(whether or not the transactions hereby contemplated shall be consummated) or
incurred by the Agent or any Bank in connection with the enforcement or
protection of their rights in connection with this Agreement and the other Loan
Documents or in connection with the Loans made or the Notes issued hereunder,
including the fees, charges and disbursements of Cravath, Swaine & Moore,
counsel for the Agent, and, in connection with any such amendment, modification
or waiver or any such enforcement or protection, the fees, charges and
disbursements of any other internal or external counsel for the Agent or any
Bank. The Borrower further agrees that it shall indemnify the Banks from and
hold them harmless against any documentary taxes, assessments or charges made
by any Governmental Authority by reason of the execution and delivery of this
Agreement or any of the other Loan Documents.
(b) The Borrower agrees to indemnify the Agent, each Bank and each
of their respective directors, officers, employees and agents (each such person
being called an "Indemnitee") against, and to hold each Indemnitee harmless
from, any and all losses, claims, damages, liabilities and related expenses,
including reasonable counsel fees, charges and disbursements, incurred by or
asserted against any Indemnitee arising out of, in any way connected with, or as
a result of (i) the execution or delivery of this Agreement or any other Loan
Document or any agreement or instrument contemplated thereby, the performance by
the parties thereto of their respective obligations thereunder or the consumma-
<PAGE> 66
65
tion of the Transactions and the other transactions contemplated thereby, (ii)
the use of the proceeds of the Loans or (iii) any claim, litigation,
investigation or proceeding relating to any of the foregoing, whether or not any
Indemnitee is a party thereto; provided that such indemnity shall not, as to
any Indemnitee, be available to the extent that such losses, claims, damages,
liabilities or related expenses are determined by a court of competent
jurisdiction by final and nonappealable judgment to have resulted from the gross
negligence or wilful misconduct of such Indemnitee.
(c) The provisions of this Section 9.05 shall remain operative and
in full force and effect regardless of the expiration of the term of this
Agreement, the consummation of the transactions contemplated hereby, the
repayment of any of the Loans, the invalidity or unenforceability of any term or
provision of this Agreement or any other Loan Document, or any investigation
made by or on behalf of the Agent or any Bank. All amounts due under this
Section 9.05 shall be payable on written demand therefor.
SECTION 9.06. Right of Setoff. If an Event of Default shall have
occurred and be continuing and the Loans shall have been accelerated as set
forth in Article VII, each Bank is hereby authorized at any time and from time
to time, to the fullest extent permitted by law, to set off and apply any and
all deposits (general or special, time or demand, provisional or final) at any
time held and other indebtedness at any time owing by such Bank (or bank
Controlling such Bank) to or for the credit or the account of the Borrower
against any of and all the obligations of the Borrower now or hereafter existing
under this Agreement and other Loan Documents held by such Bank. The rights of
each Bank under this Section are in addition to other rights and remedies
(including other rights of setoff) which such Bank may have. Any Bank shall
provide the Borrower with written notice promptly after exercising its rights
under this Section.
SECTION 9.07. Applicable Law. THIS AGREEMENT AND THE OTHER LOAN
DOCUMENTS SHALL BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE LAWS OF THE
STATE OF NEW YORK.
SECTION 9.08. Waivers; Amendment. (a) No failure or delay of the
Agent or any Bank in exercising any power or right hereunder shall operate as a
waiver thereof,
<PAGE> 67
66
nor shall any single or partial exercise of any such right or power, or any
abandonment or discontinuance of steps to enforce such a right or power,
preclude any other or further exercise thereof or the exercise of any other
right or power. The rights and remedies of the Agent and the Banks hereunder and
under the other Loan Documents are cumulative and are not exclusive of any
rights or remedies which they would otherwise have. No waiver of any provision
of this Agreement or any other Loan Document or consent to any departure by the
Borrower therefrom shall in any event be effective unless the same shall be
permitted by paragraph (b) below, and then such waiver or consent shall be
effective only in the specific instance and for the purpose for which given. No
notice or demand on the Borrower in any case shall entitle the Borrower to any
other or further notice or demand in similar or other circumstances.
(b) Neither this Agreement nor any provision hereof may be waived,
amended or modified except pursuant to an agreement or agreements in writing
entered into by the Borrower and the Required Banks; provided, however, that no
such agreement shall (i) decrease the principal amount of, or extend the
maturity of or any scheduled principal payment date or date for the payment of
any interest on any Loan, or waive or excuse any such payment or any part
thereof, or decrease the rate of interest on any Loan, without the prior written
consent of each holder of a Note affected thereby, (ii) change or extend the
Commitment or decrease the Commitment Fees of any Bank without the prior
written consent of such Bank, or (iii) amend or modify the provisions of Section
2.14, the provisions of this Section or the definition of "Required Banks",
without the prior written consent of each Bank; provided further that no such
agreement shall amend, modify or otherwise affect the rights or duties of the
Agent hereunder without the prior written consent of the Agent. Each Bank and
each holder of a Note shall be bound by any waiver, amendment or modification
authorized by this Section regardless of whether its Note shall have been marked
to make reference thereto, and any consent by any Bank or holder of a Note
pursuant to this Section shall bind any person subsequently acquiring a Note
from it, whether or not such Note shall have been so marked.
SECTION 9.09. Interest Rate Limitation. Notwithstanding anything
herein or in the Notes to the contrary, if at any time the applicable interest
rate, together with all fees and charges which are treated as interest under
appli-
<PAGE> 68
67
cable law (collectively the "Charges"), as provided for herein or in any other
document executed in connection herewith, or otherwise contracted for, charged,
received, taken or reserved by any Bank, shall exceed the maximum lawful rate
(the "Maximum Rate") which may be contracted for, charged, taken, received or
reserved by such Bank in accordance with applicable law, the rate of interest
payable under the Note held by such Bank, together with all Charges payable to
such Bank, shall be limited to the Maximum Rate.
SECTION 9.10. Entire Agreement. This Agreement and the other Loan
Documents constitute the entire contract between the parties relative to the
subject matter hereof. Any previous agreement among the parties with respect to
the subject matter hereof is superseded by this Agreement and the other Loan
Documents. Nothing in this Agreement or in the other Loan Documents, expressed
or implied, is intended to confer upon any party other than the parties hereto
and thereto any rights, remedies, obligations or liabilities under or by reason
of this Agreement or the other Loan Documents.
SECTION 9.11. Waiver of Jury Trial. Each party hereto hereby waives,
to the fullest extent permitted by applicable law, any right it may have to a
trial by jury in respect of any litigation directly or indirectly arising out
of, under or in connection with this Agreement or any of the other Loan
Documents. Each party hereto (a) certifies that no representative, agent or
attorney of any other party has represented, expressly or otherwise, that such
other party would not, in the event of litigation, seek to enforce the foregoing
waiver and (b) acknowledges that it and the other parties hereto have been
induced to enter into this Agreement and the other Loan Documents, as
applicable, by, among other things, the mutual waivers and certifications in
this Section 9.11.
SECTION 9.12. Severability. In the event any one or more of the
provisions contained in this Agreement or in any other Loan Document should be
held invalid, illegal or unenforceable in any respect, the validity, legality
and enforceability of the remaining provisions contained herein and therein
shall not in any way be affected or impaired thereby. The parties shall endeavor
in good-faith negotiations to replace the invalid, illegal or unenforceable
provisions with valid provisions the economic effect of
<PAGE> 69
68
which comes as close as possible to that of the invalid, illegal or
unenforceable provisions.
SECTION 9.13. Counterparts. This Agreement may be executed in two or
more counterparts, each of which shall constitute an original but all of which
when taken together shall constitute but one contract, and shall become
effective as provided in Section 9.03.
SECTION 9.14. Headings. Article and Section headings and the Table
of Contents used herein are for convenience of reference only, are not part of
this Agreement and are not to affect the construction of, or to be taken into
consideration in interpreting, this Agreement.
SECTION 9.15. Jurisdiction; Consent to Service of Process. (a) The
Borrower hereby irrevocably and unconditionally submits, for itself and its
property, to the nonexclusive jurisdiction of any New York State court or
Federal court of the United States of America sitting in New York City, and any
appellate court from any thereof, in any action or proceeding arising out of or
relating to this Agreement or the other Loan Documents, or for recognition or
enforcement of any judgment, and each of the parties hereto hereby irrevocably
and unconditionally agrees that all claims in respect of any such action or
proceeding may be heard and determined in such New York State or, to the extent
permitted by law, in such Federal court. Each of the parties hereto agrees that
a final judgment in any such action or proceeding shall be conclusive and may be
enforced in other jurisdictions by suit on the judgment or in any other manner
provided by law. Nothing in this Agreement shall affect any right that any Bank
may otherwise have to bring any action or proceeding relating to this Agreement
or the other Loan Documents against the Borrower or its proper ties in the
courts of any jurisdiction.
(b) The Borrower hereby irrevocably and unconditionally waives, to
the fullest extent it may legally and effectively do so, any objection which it
may now or here after have to the laying of venue of any suit, action or
proceeding arising out of or relating to this agreement or the other Loan
Documents in any New York State or Federal court. Each of the parties hereto
hereby irrevocably waives, to the fullest extent permitted by law, the defense
of an inconvenient forum to the maintenance of such action or proceeding in any
such court.
<PAGE> 70
69
(c) Each party to this Agreement irrevocably consents to service of
process in the manner provided for notices in Section 9.01. Nothing in this
Agreement will affect the right of any party to this Agreement to serve process
in any other manner permitted by law.
WITNESS the due execution hereof as of the date first above written.
THE WASHINGTON WATER POWER
COMPANY,
by /s/ JON E. ELIASSEN
--------------------------------------------
Name: Jon E. Eliassen
Title: Senior VP & CFO
TORONTO DOMINION (TEXAS),
INC., as Agent,
by
--------------------------------------------
Name:
Title:
THE TORONTO-DOMINION BANK,
HOUSTON AGENCY,
by
--------------------------------------------
Name:
Title:
THE BANK OF NEW YORK,
by
--------------------------------------------
Name:
Title:
<PAGE> 71
69
(c) Each party to this Agreement irrevocably consents to service of
process in the manner provided for notices in Section 9.01. Nothing in this
Agreement will affect the right of any party to this Agreement to serve process
in any other manner permitted by law.
WITNESS the due execution hereof as of the date first above written.
THE WASHINGTON WATER POWER
COMPANY,
by
--------------------------------------------
Name:
Title:
TORONTO DOMINION (TEXAS),
INC., as Agent,
by /s/ KIMBERLY BURLESON
--------------------------------------------
Name: KIMBERLY BURLESON
Title: VICE PRESIDENT
THE TORONTO-DOMINION BANK,
HOUSTON AGENCY,
by /s/ KIMBERLY BURLESON
--------------------------------------------
Name: KIMBERLY BURLESON
Title:MGR. CR ADMIN.
THE BANK OF NEW YORK,
by
--------------------------------------------
Name:
Title:
<PAGE> 72
69
(c) Each party to this Agreement irrevocably consents to service of
process in the manner provided for notices in Section 9.01. Nothing in this
Agreement will affect the right of any party to this Agreement to serve process
in any other manner permitted by law.
WITNESS the due execution hereof as of the date first above written.
THE WASHINGTON WATER POWER
COMPANY,
by
--------------------------------------------
Name:
Title:
TORONTO DOMINION (TEXAS),
INC., as Agent,
by
--------------------------------------------
Name:
Title:
THE TORONTO-DOMINION BANK,
HOUSTON AGENCY,
by
--------------------------------------------
Name:
Title:
THE BANK OF NEW YORK,
by /s/ JOHN W. HALL
--------------------------------------------
Name: JOHN W. HALL
Title: Vice President
<PAGE> 73
70
NATIONSBANK OF TEXAS, N.A.,
by /s/ CURTIS L. ANDERSON
--------------------------------------------
Name: Curtis L. Anderson
Title: Senior Vice President
<PAGE> 74
EXHIBIT A
[FORM OF]
NOTE
$__________________ [ ], 1997
New York, New York
FOR VALUE RECEIVED, the undersigned, THE WASHINGTON WATER POWER
COMPANY, a Washington corporation (the "Borrower"), hereby promises to pay to
the order of _______________________ (the "Bank"), at the office of Toronto
Dominion (Texas), Inc., (the "Agent"), at 909 Fannin, Suite 1700, Houston, Texas
77010, (i) on the last day of each Interest Period, as defined in the
$50,000,000 Amended and Restated Revolving Credit Agreement dated as of July 22,
1997 (the "Credit Agreement"), among the Borrower, the Banks named therein and
the Agent, the aggregate unpaid principal amount of all Loans (as defined in the
Credit Agreement) made to the Borrower by the Bank pursuant to the Credit
Agreement to which such Interest Period applies and (ii) on the Expiration Date
(as defined in the Credit Agreement) the lesser of the principal sum of
__________________ Dollars ($______________) and the aggregate unpaid principal
amount of all Loans made to the Borrower by the Bank pursuant to the Credit
Agreement, in lawful money of the United States of America in immediately
available funds, and to pay interest from the date hereof on the principal
amount hereof from time to time outstanding, in like funds, at said office, at
the rate or rates per annum and payable on the dates provided in the Credit
Agreement.
The Borrower promises to pay interest, on demand, on any overdue
principal and, to the extent permitted by law, overdue interest from their due
dates at the rate or rates provided in the Credit Agreement.
The Borrower hereby waives diligence, presentment, demand, protest
and notice of any kind whatsoever. The nonexercise by the holder of any of its
rights hereunder in any particular instance shall not constitute a waiver
thereof in that or any subsequent instance.
<PAGE> 75
2
All borrowings evidenced by this Note and all payments and
prepayments of the principal hereof and interest hereon and the respective dates
and maturity dates thereof shall be endorsed by the holder hereof on the
schedule attached hereto and made a part hereof or on a continuation thereof
which shall be attached hereto and made a part hereof, or otherwise recorded by
such holder in its internal records; provided, however, that the failure of the
holder hereof to make such a notation or any error in such a notation shall not
affect the obligations of the Borrower under this Note.
This Note is one of the Notes referred to in the Credit Agreement,
which, among other things, contains provisions for the acceleration of the
maturity hereof upon the happening of certain events, for optional and mandatory
prepayment of the principal hereof prior to the maturity hereof and for the
amendment or waiver of certain provisions of the Credit Agreement, all upon the
terms and conditions therein specified. This Note shall be construed in
accordance with and governed by the laws of the State of New York and any
applicable laws of the United States of America.
THE WASHINGTON WATER
POWER COMPANY
by
------------------------------
Name:
Title:
<PAGE> 76
3
Loans and Payments
Unpaid Name of
Amount Payments Principal Person
and Maturity ------------------ Balance of Making
Date Type of Loan Date Principal Interest Note Notation
- ---- ------------ -------- ------------------- ----------- --------
<PAGE> 77
EXHIBIT B
[FORM OF]
ASSIGNMENT AND ACCEPTANCE
Reference is made to the $50,000,00 Amended and Restated Credit
Agreement dated as of July 22, 1997 (the "Credit Agreement"), among The
Washington Water Power Company, a Washington corporation (the "Borrower"), the
banks listed on Schedule 2.01 thereto (the "Banks") and Toronto Dominion
(Texas), Inc., as agent for the Banks (in such capacity, the "Agent"). Terms
defined in the Credit Agreement are used herein with the same meanings.
1. The Assignor hereby sells and assigns, without recourse, to the
Assignee, and the Assignee hereby purchases and assumes, without recourse, from
the Assignor, effective as of the Effective Date set forth on the reverse
hereof, the interests set forth on the reverse hereof (the "Assigned Interest")
in the Assignor's rights and obligations under the Credit Agreement, including,
without limitation, the Commitment of the Assignor on the Effective Date and the
Loans owing to the Assignor which are outstanding on the Effective Date,
together with unpaid interest accrued on the assigned Loans to the Effective
Date and the amount, if any, set forth on the reverse hereof of the Fees accrued
to the Effective Date for the account of the Assignor. Each of the Assignor and
the Assignee hereby makes and agrees to be bound by all the representations,
warranties and agreements set forth in Section 9.04(c) of the Credit Agreement,
a copy of which has been received by each such party. From and after the
Effective Date (i) the Assignee shall be a party to and be bound by the
provisions of the Credit Agreement and, to the extent of the interests assigned
by this Assignment and Acceptance, have the rights and obligations of a Bank
thereunder and under the Loan Documents and (ii) the Assignor shall, to the
extent of the interests assigned by this Assignment and Acceptance, relinquish
its rights and be released from its obligations under the Credit Agreement.
2. This Assignment and Acceptance is being delivered to the Agent
together with (i) the Notes evidencing the Loans included in the Assigned
Interest, (ii) if the Assignee is organized under the laws of a jurisdiction
outside the United States, the forms specified in Section 2.17(f) of the Credit
Agreement, duly completed and executed by such Assignee, (iii) if the Assignee
is not already a Bank under the Credit Agreement, an Administrative
<PAGE> 78
2
Questionnaire in the form of Exhibit C to the Credit Agreement and (iv) a
processing and recordation fee of $5,000.
3. This Assignment and Acceptance shall be governed by and construed
in accordance with the laws of the State of New York.
Date of Assignment:
Legal Name of Assignor:
Legal Name of Assignee:
Assignee's Address for Notices:
Effective Date of Assignment
(may not be fewer than 5 Business
Days after the Date of Assignment):
<TABLE>
<CAPTION>
Assigned Percentage
of Facility and
Commitment
Thereunder (set
forth, to at least 8
decimals, as a
percentage of the
Facility and the
aggregate
Principal Commitments of all
Facility Assigned Banks thereunder)
- -------- -------- -----------------
<S> <C> <C>
Commitment Assigned: $ %
Loans: $ %
Fees Assigned
(if any): $ %
</TABLE>
<PAGE> 79
3
The terms set forth above and on the
reverse side hereof are hereby agreed to: Accepted:
_________________________ , as Assignor TORONTO DOMINION (TEXAS),
INC., as Agent
By: By:
------------------------------------ --------------------------------
Name: Name:
Title: Title:
_________________________ , as Assignee THE WASHINGTON POWER COMPANY
By: By:
------------------------------------ ---------------------------------
Name: Name:
Title: Title:
<PAGE> 80
EXHIBIT C
Administrative Questionnaire
<PAGE> 81
EXHIBIT D-1
Opinion of General Counsel for the Borrower
<PAGE> 82
EXHIBIT D-2
Opinion of Special Counsel for the Borrower
<PAGE> 83
SCHEDULE 2.01
Banks
<TABLE>
<CAPTION>
Bank Commitment
- ---- ----------
<S> <C>
The Toronto-Dominion Bank, Houston Agency $20,000,000
909 Fannin
Suite 1700
Houston, TX 77010
Attention: Ms. Kimberly Burleson
Telecopy: (713)951-9921
With copies to:
Toronto-Dominion Bank U.S.A. Division
31 West 52nd Street
New York, NY 10019-6101
Attention: David W. Silverstein
Telecopy: (212) 262-1929
The Bank of New York $15,000,000
One Wall Street
New York, NY 10286
Attention: Felicia LaForgia
Telecopy: (212) 635-7923
NationsBank of Texas, N.A. $15,000,000
901 Main Street
64th Floor
Dallas, TX 75202
Attention: Mr. Curtis Anderson
Telecopy: (214) 508-3943
</TABLE>
<PAGE> 84
SCHEDULE 3.14
Significant Subsidiaries
<TABLE>
<CAPTION>
Name Percent Ownership
---- -----------------
<S> <C>
Avista Corp. 100%
Pentzer Corporation 100%
</TABLE>
<PAGE> 85
SCHEDULE 4.02(c)
Orders of Governmental Authorities
1. Order(s) of the Washington Utilities and Transportation Commission.
2. Order(s) of the Oregon Public Utility Commission.
3. Order(s) of the Idaho Public Utilities Commission.
4. Order(s) of the California Public Utilities Commission.
<PAGE> 1
EXHIBIT 12
THE WASHINGTON WATER POWER COMPANY
Computation of Ratio of Earnings to Fixed Charges and
Preferred Dividend Requirements
Consolidated
(Thousands of Dollars)
<TABLE>
<CAPTION>
Years Ended December 31
----------------------------------------------------
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Fixed charges, as defined:
Interest on long-term debt $ 63,413 $ 60,256 $ 55,580 $ 49,566 $ 47,129
Amortization of debt expense
and premium - net 2,862 2,998 3,441 3,511 3,004
Interest portion of rentals 4,354 4,311 3,962 1,282 924
-------- -------- -------- -------- --------
Total fixed charges $ 70,629 $ 67,565 $ 62,983 $ 54,359 $ 51,057
======== ======== ======== ======== ========
Earnings, as defined:
Net income from continuing ops. $114,797 $ 83,453 $ 87,121 $ 77,197 $ 82,776
Add (deduct):
Income tax expense 61,075 49,509 52,416 44,696 42,503
Total fixed charges above 70,629 67,565 62,983 54,359 51,057
-------- -------- -------- -------- --------
Total earnings $246,501 $200,527 $202,520 $176,252 $176,336
======== ======== ======== ======== ========
Ratio of earnings to fixed charges 3.49 2.97 3.22 3.24 3.45
Fixed charges and preferred dividend requirements:
Fixed charges above $ 70,629 $ 67,565 $ 62,983 $ 54,359 $ 51,057
Preferred dividend requirements (2) 8,261 12,711 14,612 13,668 12,615
-------- -------- -------- -------- --------
Total $ 78,890 $ 80,276 $ 77,595 $ 68,027 $ 63,672
======== ======== ======== ======== ========
Ratio of earnings to fixed charges
and preferred dividend requirements 3.12 2.50 2.61 2.59 2.77
</TABLE>
(1) Calculations have been restated to reflect the results from continuing
operations (ie. excluding discontinued coal mining operations).
(2) Preferred dividend requirements have been grossed up to their pre-tax
level.
<PAGE> 1
Exhibit 21
THE WASHINGTON WATER POWER COMPANY
SUBSIDIARIES OF REGISTRANT
<TABLE>
<CAPTION>
Subsidiary State of Incorporation
- -------------------------------------------- ----------------------
<S> <C>
Pentzer Corporation Washington
Washington Irrigation & Development Company Washington
WP Finance Co. Washington
Avista Corp. Washington
Avista Advantage, Inc. Washington
Avista Energy, Inc. Washington
Avista Laboratories, Inc. Washington
WP International, Inc. Washington
WWP Fiber, Inc. Washington
WWP Receivables Corp. Washington
Altus Corporation Nevada
</TABLE>
<PAGE> 1
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement
No. 2-81697 on Form S-8, in Registration Statement No. 2-94816 on Form S-8, in
Registration Statement No. 33-49662 on Form S-3, in Registration Statement No.
33-51669 on Form S-3, in Registration Statement No. 33-53655 on Form S-3, in
Registration Statement No. 33-54791 on Form S-8, in Registration Statement No.
333-16353, in Registration Statement No. 333-16353-01, in Registration Statement
No. 333-16353-02, and in Registration Statement No. 333-16353-03 of our report
dated January 30, 1998, appearing in this Annual Report on Form 10-K of The
Washington Water Power Company for the year ended December 31, 1997.
Deloitte & Touche LLP
Seattle, Washington
March 17, 1998
61
<TABLE> <S> <C>
<ARTICLE> UT
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS OF THE WASHINGTON WATER POWER COMPANY,
INCLUDED IN THE ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1997,
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 1,433,123
<OTHER-PROPERTY-AND-INVEST> 297,227
<TOTAL-CURRENT-ASSETS> 376,843
<TOTAL-DEFERRED-CHARGES> 304,592
<OTHER-ASSETS> 0
<TOTAL-ASSETS> 2,411,785
<COMMON> 585,102
<CAPITAL-SURPLUS-PAID-IN> (8,066)
<RETAINED-EARNINGS> 171,776
<TOTAL-COMMON-STOCKHOLDERS-EQ> 748,812
155,000
0
<LONG-TERM-DEBT-NET> 607,803<F1>
<SHORT-TERM-NOTES> 127,118
<LONG-TERM-NOTES-PAYABLE> 30,057
<COMMERCIAL-PAPER-OBLIGATIONS> 0
<LONG-TERM-DEBT-CURRENT-PORT> 20,440
0
<CAPITAL-LEASE-OBLIGATIONS> 5,825
<LEASES-CURRENT> 1,779
<OTHER-ITEMS-CAPITAL-AND-LIAB> 714,951<F2>
<TOT-CAPITALIZATION-AND-LIAB> 2,411,785
<GROSS-OPERATING-REVENUE> 1,302,172
<INCOME-TAX-EXPENSE> 61,075<F3>
<OTHER-OPERATING-EXPENSES> 1,112,708
<TOTAL-OPERATING-EXPENSES> 1,112,708
<OPERATING-INCOME-LOSS> 189,464
<OTHER-INCOME-NET> 52,683
<INCOME-BEFORE-INTEREST-EXPEN> 242,147<F4>
<TOTAL-INTEREST-EXPENSE> 66,275
<NET-INCOME> 114,797
5,392
<EARNINGS-AVAILABLE-FOR-COMM> 109,405
<COMMON-STOCK-DIVIDENDS> 69,390
<TOTAL-INTEREST-ON-BONDS> 32,841
<CASH-FLOW-OPERATIONS> 202,399
<EPS-PRIMARY> 1.96
<EPS-DILUTED> 1.96
<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 STATEMENTS 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>
