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FORM 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
----------------
(Mark One)
[ X ] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended DECEMBER 31, 1999
OR
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
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Commission Exact name of registrant as specified in its charter and States of I.R.S. Employer
File Number principal office address and telephone number Incorporation I.D. Number
1-1483 WASHINGTON GAS LIGHT COMPANY District of Columbia 53-0162882
1100 H Street, N.W. and Virginia
Washington, D.C. 20080
(703) 750-4440
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 the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common Stock $1.00 par value 46,475,488 January 31, 2000
- ---------------------------- ---------------- ----------------
Class Number of Shares Date
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TABLE OF CONTENTS
Page
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Part I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
Consolidated Balance Sheets.......................... 2-3
Consolidated Statements of Income.................... 4
Consolidated Statements of Cash Flows................ 5
Notes to Consolidated Financial Statements........... 6-10
ITEM 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations.. 11-19
ITEM 3. Quantitative and Qualitative Disclosures About Market
Risks of the Company................................ 20
PART II. OTHER INFORMATION
ITEM 5. Other Information.................................... 20
ITEM 6. Exhibits and Reports on Form 8-K..................... 20
SIGNATURE ..................................................... 21
-1-
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
WASHINGTON GAS LIGHT COMPANY
CONSOLIDATED BALANCE SHEETS
December 31, September 30,
1999 1999
------------ ------------
(Unaudited)
(Thousands)
ASSETS
PROPERTY, PLANT AND EQUIPMENT
At original cost $ 2,135,368 $ 2,114,071
Accumulated depreciation and amortization (726,332) (711,329)
----------- ------------
1,409,036 1,402,742
----------- ------------
Current Assets
Cash and cash equivalents 20,166 26,935
Accounts receivable 140,038 74,295
Gas costs due from customers 4,549 5,127
Allowance for doubtful accounts (6,244) (6,626)
Accrued utility revenues 87,968 17,141
Materials and supplies--principally at average cost 18,206 17,207
Storage gas--at cost (first-in, first-out) 72,809 80,481
Deferred income taxes 19,634 19,662
Other prepayments--principally taxes 15,710 14,888
Other 307 648
----------- ------------
373,143 249,758
----------- ------------
Deferred Charges and Other Assets
Regulatory assets 79,704 84,278
Other 29,743 29,946
---------- ------------
109,447 114,224
Total Assets $ 1,891,626 $ 1,766,724
=========== ============
The accompanying Notes to Consolidated Financial Statements are an integral part
of these consolidated statements.
-2-
WASHINGTON GAS LIGHT COMPANY
CONSOLIDATED BALANCE SHEETS
December 31, September 30,
1999 1999
------------ ------------
(Unaudited)
(Thousands)
CAPITALIZATION AND LIABILITIES
CAPITALIZATION
Common shareholders' equity (Notes 4 and 5) $ 709,427 $ 684,034
Preferred stock (Note 4) 28,413 28,420
Long-term debt (Note 3) 507,041 506,084
---------- ----------
1,244,881 1,218,538
Current Liabilities
Current maturities of long-term debt 1,488 1,431
Notes payable 173,564 113,067
Accounts and wages payable 113,158 118,108
Dividends declared 14,506 14,507
Customer deposits and advance payments 15,235 15,853
Gas costs due to customers 10,943 11,321
Accrued taxes 32,089 5,226
Other 14,177 5,613
---------- ----------
375,160 285,126
Deferred Credits
Unamortized investment tax credits 19,214 19,439
Deferred income taxes 151,681 156,495
Other 100,690 87,126
---------- ----------
271,585 263,060
---------- ----------
Total Capitalization and Liabilities $1,891,626 $1,766,724
========== ==========
The accompanying Notes to Consolidated Financial Statements are an integral part
of these consolidated statements.
-3-
WASHINGTON GAS LIGHT COMPANY
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three Months Ended
----------------------------------
December 31, December 31,
1999 1998
-----------------------------------
(Thousands, Except Per Share Data)
UTILITY OPERATIONS
Operating Revenues $ 310,516 $ 297,349
Less: Cost of gas 164,902 158,919
Revenue taxes 11,682 11,069
------------- --------------
Net Revenues 133,932 127,361
------------- --------------
Other Operating Expenses
Operation 35,540 44,324
Maintenance 6,467 9,268
Depreciation and amortization 15,965 14,305
General taxes 4,460 5,537
Loss from agreement to sell utility property (Note 2) -- 3,300
Income taxes 22,484 15,123
------------- -------------
84,916 91,857
------------- -------------
Utility Operating Income 49,016 35,504
------------- -------------
NON-UTILITY OPERATIONS
Operating Revenues
Energy marketing 43,754 23,188
Heating, ventilating and air conditioning 10,220 6,979
Customer financing 576 995
Other non-utility 500 364
------------- -------------
55,050 31,526
------------- -------------
Other Operating Expenses
Non-utility operating expenses 52,149 31,235
Income taxes 1,123 109
------------- -------------
53,272 31,344
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Non-Utility Operating Income 1,778 182
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TOTAL OPERATING INCOME 50,794 35,686
Other Income (Expenses)--Net (345) (790)
------------- -------------
INCOME BEFORE INTEREST EXPENSE 50,449 34,896
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INTEREST EXPENSE
Interest on long-term debt 8,497 8,761
Other 2,173 1,220
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10,670 9,981
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NET INCOME 39,779 24,915
DIVIDENDS ON PREFERRED STOCK 333 333
------------- -------------
NET INCOME APPLICABLE TO COMMON STOCK $ 39,446 $ 24,582
============= =============
AVERAGE COMMON SHARES OUTSTANDING 46,467 45,038
============= =============
EARNINGS PER AVERAGE COMMON SHARE--BASIC & DILUTED (Note 4) $ 0.85 $ 0.55
============= =============
DIVIDENDS DECLARED PER COMMON SHARE $ 0.305 $ 0.300
============= =============
The accompanying Notes to Consolidated Financial Statements are an integral part
of these consolidated statements.
-4-
WASHINGTON GAS LIGHT COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended
---------------------------------
December 31, December 31,
1999 1998
---------------------------------
(Thousands)
OPERATING ACTIVITIES
Net income $ 39,779 $ 24,915
ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH
(USED IN) PROVIDED BY OPERATING ACTIVITIES
Depreciation and amortization <F1> 16,956 15,733
Deferred income taxes--net (2,721) (3,687)
Amortization of investment tax credits (225) (231)
Allowance for funds used during construction (254) (406)
Loss from agreement to sell utility property (Note 2) -- 3,300
Other noncash charges--net (3,485) 3,626
------------ ------------
50,050 43,250
CHANGES IN ASSETS AND LIABILITIES
NET OF ACQUISITIONS AND DISPOSITIONS (Note 2)
Accounts receivable and accrued utility (135,526) (93,857)
Gas costs due from/to customers--net 200 534
Storage gas 7,672 4,463
Other prepayments--principally taxes (822) (1,575)
Accounts payable (7,864) 21,928
Wages payable 1,446 (1,658)
Customer deposits and advance payments (618) 2,197
Accrued taxes 26,862 16,767
Accrued Interest 8,428 8,396
Deferred purchased gas costs--net 18,641 16,621
Other--net 1,579 (5,292)
------------ -------------
Net Cash (Used in) Provided by Operating Activities (29,952) 11,774
------------- -------------
FINANCING ACTIVITIES
Common stock issued -- 58,577
Long-term debt issued 1,443 26,099
Long-term debt retired (398) (11,375)
Debt issuance costs (55) (2,248)
Notes payable--net 60,497 (31,907)
Dividends on common and preferred stock (14,505) (13,452)
------------ -------------
Net Cash Provided by Financing Activities 46,982 25,694
------------ -------------
INVESTING ACTIVITIES
Capital expenditures (22,436) (35,864)
Other investing activities (1,363) --
------------ -------------
Net Cash Used in Investing Activities (23,799) (35,864)
------------ --------------
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS<F2> (6,769) 1,604
Cash and Cash Equivalents at Beginning of Period 26,935 17,876
------------ --------------
Cash and Cash Equivalents at End of Period $ 20,166 $ 19,480
============ ==============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Income taxes paid $ 313 $ 16
Interest paid $ 2,344 $ 1,834
<FN>
<F1>Includes amounts charged to other accounts.
<F2>Cash equivalents are highly liquid investments with a maturity of three
months or less when purchased.
</FN>
The accompanying Notes to Consolidated Financial Statements are an integral part
of these consolidated statements.
-5-
WASHINGTON GAS LIGHT COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1--GENERAL
ACCOUNTING MATTERS
These notes are an integral part of the accompanying consolidated
financial statements of Washington Gas Light Company (Washington Gas or the
Company) and its subsidiaries. In the opinion of Washington Gas, these financial
statements, including the notes hereto, reflect all adjustments (which include
only normal recurring adjustments) necessary for a fair statement of the results
for the periods presented. These financial statements should be read together
with the Company's Annual Report on Form 10-K for the fiscal year ended
September 30, 1999. Certain amounts in financial statements of prior years have
been reclassified to conform to the presentation of the current year.
Due to the seasonal nature of the Company's business, the results of
operations shown do not indicate the expected results for the fiscal year ended
September 30, 2000.
USE OF ESTIMATES IN PREPARATION OF FINANCIAL STATEMENTS
In accordance with generally accepted accounting principles, management
makes estimates and assumptions regarding: 1) reported amounts of assets and
liabilities; 2) disclosure of contingent assets and liabilities at the date of
the financial statements; and 3) reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
NOTE 2--ACQUISITIONS AND DISPOSITIONS
SHENANDOAH GAS COMPANY
In November 1998, Shenandoah Gas Company (Shenandoah), a Company
subsidiary, entered into an agreement to sell its natural gas utility assets
located in West Virginia. At that time, the Company recorded an estimated
pre-tax loss of $3.3 million ($2.1 million after-tax). When the sale was
consummated in July 1999, the Company reduced the pre-tax loss by $0.4 million
for a net pre-tax loss from the transaction of $2.9 million, or $1.8 million
after-tax.
On September 29, 1999, the Company's Board of Directors authorized a
merger of Shenandoah into Washington Gas to form a single corporation for the
regulated distribution of natural gas. On October 5, 1999, the Company filed an
application with the State Corporation Commission of Virginia (SCC of VA) to
begin the merger process. The SCC of VA issued an order on December 22, 1999
that approved the merger request, but required that separate accounting records
be maintained for the Shenandoah division until the Company files, and the SCC
approves, a plan for the merger of the tariffs for Washington Gas Light Company
and Shenandoah. In the interim, the Company must continue to fulfill
longstanding regulatory reporting requirements for Washington Gas Light Company
and Shenandoah as separate entities.
-6-
NOTE 3--LONG TERM DEBT
INTEREST RATE HEDGES AND DEBT ISSUANCES
At December 31, 1999, the Company had no interest rate hedge agreements
outstanding in connection with planned issuances of Medium-Term Notes (MTNs).
However, at December 31, 1998, the Company had one interest rate hedge agreement
outstanding. The Company accounts for its hedging agreements as hedges of
anticipated transactions in accordance with Statement of Financial Accounting
Standards No. 80, Accounting for Futures Contracts.
During October 1998, the Company issued $25 million of 10-year MTNs
with a coupon rate of 5.49 percent. During June 1998, in order to lock in the
Treasury yield for this issuance, the Company entered into an agreement that
reflected a forward sale of $24.9 million of 10-year U.S. Treasury notes at a
fixed price. The Company unwound its hedge position concurrent with the issuance
of the above-mentioned $25 million of MTNs. The $2.1 million that the Company
paid associated with the settlement of this hedge agreement was recorded to
unamortized debt issuance costs in October 1998 and is being amortized over the
life of the MTNs. The effective cost of the debt was 6.74 percent.
During September 1998, in order to lock in the Treasury yield for an
anticipated $39 million MTN issuance related to the refunding of $39 million of
8 3/4 percent First Mortgage Bonds in July 1999, the Company entered into an
agreement that reflected the forward sale of $40 million of 10-year U.S.
Treasury notes at a fixed price to be paid on July 1, 1999. The Company unwound
its hedge position concurrent with the issuance of $50 million of MTNs in early
July 1999. The Company received $2.0 million associated with the settlement of
this hedge agreement, which it recorded as a reduction to unamortized debt
issuance costs. This benefit is being amortized over the life of the MTNs. The
effective cost of the debt was 6.31 percent.
NOTE 4--COMMON STOCK, PREFERRED STOCK, AND EARNINGS PER SHARE
SALE OF COMMON STOCK
On November 12, 1998, the Company publicly offered two million shares
of common stock at $25.0625 per share. On November 18, 1998, the underwriters
involved in the offering exercised their option to purchase an additional
300,000 shares from the Company at the same price per share. Net proceeds from
the sale amounted to $55.7 million, and were being used for general corporate
purposes, including capital expenditures and working capital requirements.
EARNINGS PER SHARE
Basic earnings per share (EPS) is computed by dividing net income
applicable to common stock by the weighted-average number of common shares
outstanding during the reported period. Diluted EPS assumes the conversion of
convertible preferred stock and the issuance of common shares pursuant to
stock-based compensation plans at the beginning of the applicable period. The
following table shows the computation of basic and diluted EPS for the three
months ended December 31, 1999 and 1998, respectively.
-7-
Net Per Share
Income Shares Amount
--------- ------ ---------
(Thousands, Except Per Share Data)
For the Three Months Ended December 31, 1999
- --------------------------------------------
Basic EPS:
Net Income Applicable to Common Stock $39,446 46,467 $0.85
Effect of Dilutive Securities:
$4.60 and $4.36 Convertible Preferred Stock,
Assuming Conversion on October 1, 1999 3 27
Stock-Based Compensation Plans - 48
------- ------ ------
Diluted EPS:
Net Income Applicable to Common Stock
Plus Assumed Conversions $39,449 46,542 $0.85
======= ====== =====
For the Three Months Ended December 31, 1998
- --------------------------------------------
Basic EPS:
Net Income Applicable to Common Stock $24,582 45,038 $0.55
Effect of Dilutive Securities:
$4.60 and $4.36 Convertible Preferred Stock,
Assuming Conversion on October 1, 1998 3 26
------- ------ -----
Diluted EPS:
Net Income Applicable to Common Stock
Plus Assumed Conversions $24,585 45,064 $0.55
======= ====== =====
PREFERRED STOCK REDEMPTION
On December 29, 1999, the Company notified the stockholders of its
$4.36 convertible series preferred stock and its $4.60 convertible series
preferred stock that the Board of Directors of Washington Gas Light Company had
voted to redeem all outstanding shares of its convertible stock at a price of
$100 per share on February 1, 2000. For both series of convertible preferred
stock, stockholders of record on January 11, 2000 had the option of accepting
the $100 cash redemption value or converting their shares into Washington Gas
Light Company common stock. Each share of the $4.36 preferred stock and the
$4.60 preferred stock could be converted into 10.29 and 11.39 shares,
respectively, of Washington Gas Light Company common stock. Fractional shares
were converted to cash based on the value of the preferred stock on the date
that the preferred stock certificates were received by the Company's transfer
agent. Both series of convertible preferred stock were redeemed on February 1,
2000 as shown in the following table.
-8-
$4.36 Series $4.60 Series
------------ ------------
Conversions:
-----------
Preferred Stock Converted 1,067 382
Common Stock Issued 10,670 4,202
Cash Paid for Fractional Shares $ 1,482 $ 638
Redemptions:
-----------
Preferred Stock Redeemed 779 174
Total Redemption Cost $ 77,900 $ 17,400
NOTE 5--STOCK-BASED COMPENSATION
The Company periodically provides compensation in the form of common
stock to keyemployees and Company directors. In February 1999, the shareholders
approved the 1999 Incentive Compensation Plan (1999 Plan) that allows the
Company to grant up to 1,000,000 shares of common stock to officers and key
employees, linked to the achievement of performance goals.
On October 1, 1999, the Company granted 90,253 nonqualified stock
options and 33,622 performance shares to officers under the 1999 Plan, in
addition to those options and performance shares that were previously granted
earlier in 1999. The stock options vest three years after the date of the grant
and expire on the tenth anniversary of the grant date. Since the stock options
were granted at the fair market value of the Company's stock on the grant date,
no compensation expense was recognized.
The performance shares granted on October 1, 1999 will vest three years
after the date of grant. At the end of the vesting period, the ultimate number
of performance shares issued, if any, to the recipients will require the Company
to achieve performance goals for total shareholder return relative to a selected
peer company group. In accordance with Accounting Principals Board Opinion No.
25, Accounting for Stock Issued to Employees, the Company recognizes estimated
compensation expense ratably over the vesting periods of the performance shares.
NOTE 6--OPERATING SEGMENT REPORTING
The Company reports four operating segments: 1) regulated utility; 2)
energy marketing; 3) heating, ventilating and air conditioning (HVAC)
activities; and 4) customer financing.
With over 95 percent of the Company's assets, the regulated utility
segment is the Company's core business. The regulated utility segment provides
regulated gas distribution services (including the purchase and delivery of
natural gas, meter reading, responding to customer inquiries, and bill
preparation), to customers in metropolitan Washington, D.C. and parts of
Maryland and Virginia. The energy marketing segment sells natural gas directly
to customers, both inside and outside the Company's traditional service
territory, in competition with unregulated gas marketers. The HVAC segment
designs, renovates and services mechanical heating, ventilating and air
conditioning systems for commercial and residential customers. The customer
financing segment provides financing for consumer purchases of natural gas
appliances and energy-related equipment. Operating segment information is
presented in the following table.
-9-
Non-Utility Operations
--------------------------------------------------------
Regulated Energy Customer Other Total Elim.
Utility Marketing HVAC Financing Activities Non-Utility Other Consolidated
--------------------------------------------------------------------------------------------
Three Months Ended December 31, 1999
- ------------------------------------
Total Revenues $ 310,516 $43,754 $10,220 $ 576 $ 500 $55,050 $ - $ 365,566
Depreciation and Amortization 15,965 7 143 - - 150 - 16,115
Operating Expenses 223,051 42,820 8,746 209 224 51,999 - 275,050
Income Tax Expense 22,484 382 512 126 103 1,123 105 23,712
Net Interest Expense 10,572 - 56 41 1 98 - 10,670
Net Income (Loss) 38,444 545 763 200 172 1,680 (345) 39,779
Total Assets 1,808,907 40,296 21,565 9,586 319 71,766 10,953 1,891,626
Capital Expenditures 22,314 26 96 - - 122 - 22,436
Three Months Ended December 31, 1998
- ------------------------------------
Total Revenues $ 297,349 $23,188 $ 6,979 $ 995 $ 364 $31,526 $ - $ 328,875
Depreciation and Amortization 14,305 7 39 - - 46 - 14,351
Operating Expenses 232,417 23,739 6,557 491 402 31,189 - 263,606
Income Tax Expense (Benefit) 15,123 (195) 139 179 (14) 109 (426) 14,806
Net Interest Expense 9,877 - 60 41 3 104 - 9,981
Net Income (Loss) 25,627 (363) 184 284 (27) 78 (790) 24,915
Total Assets 1,750,937 24,854 12,716 4,033 692 42,295 (2,315) 1,790,917
Capital Expenditures 35,512 - 352 - - 352 - 35,864
-10-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
Certain matters discussed in this report, excluding historical
information, include forward-looking statements. Words, including, but not
limited to, "estimates," "expects," "anticipates," "intends," "believes,"
"plans," and variations of these words, identify forward-looking statements that
involve uncertainties and risks.
These statements are necessarily based upon various assumptions with
respect to the future, including: 1) economic, competitive, political and
regulatory conditions and developments; 2) capital and energy commodity market
conditions; 3) changes in relevant laws and regulations, including tax,
environmental and employment laws and regulations; 4) weather conditions; 5)
legislative, regulatory and judicial mandates and decisions; 6) timing and
success of business and product development efforts; 7) technological
improvements; 8) the pace of deregulation efforts and the availability of other
competitive alternatives; 9) estimates of future costs or the effect on future
operations as a result of events that could result from the Year 2000 issue
described herein; and 10) other uncertainties. Such uncertainties are difficult
to predict accurately and are generally beyond the Company's direct control.
Accordingly, while it believes that the assumptions are reasonable, the Company
cannot ensure that all expectations and objectives will be realized. Readers are
urged to use care and consider the risks, uncertainties and other factors that
could affect the Company's business as described in this Quarterly Report on
Form 10-Q. All forward-looking statements made in this Quarterly Report on Form
10-Q rely upon the safe harbor protections provided under the Private Securities
Litigation Reform Act of 1995.
This management's discussion should be read in conjunction with the
Company's Consolidated Financial Statements and Notes thereto.
RESULTS OF OPERATIONS
THREE MONTHS ENDED DECEMBER 31, 1999 VS. DECEMBER 31, 1998
Earnings
--------
For the quarter ended December 31, 1999, net income applicable to
common stock was $39.4 million, or $14.9 million higher than the results for the
same period last year. Basic and diluted earnings per average common share were
$0.85, compared to $0.55 per average common share last year. Increased
deliveries to firm customers, primarily attributable to more favorable weather
conditions and an increase in customers this year, caused net utility revenues
to increase by $6.6 million or $0.09 per average common share over the same
quarter last year. An $11.6 million or 21.6 percent reduction in utility
operation and maintenance expenses in the current quarter enhanced earnings per
share by $0.16 over the same quarter last year. In addition, the Company's three
major non-utility operations contributed $0.03 per average common share, a $0.03
improvement over the quarter ended December 31, 1998. Results for the quarter
ended December 31, 1998 included a $2.1 million ($0.05 per average common share)
nonrecurring net loss from the disposal of a subsidiary's natural gas utility
assets located in West Virginia. Additional shares outstanding in the current
quarter caused earnings per average common share to be $0.03 lower than the same
quarter last year.
Net Revenues
------------
Net revenues for the current period increased by $6.6 million (5.2
percent) from the same period last year to $133.9 million. This improvement
caused earnings per average common share to rise by $0.09 over the quarter
ended December 31, 1998. The following table compares gas sales and
-11-
deliveries, degree days, and customer meter information for the quarters ended
December 31, 1999 and 1998.
Three Months Ended
December 31,
--------------------
1999 1998
------- -------
Gas Sales and Deliveries (thousands of therms)
Firm
Gas Sold and Delivered 284,210 292,096
Gas Delivered for Others 69,263 32,334
------- -------
353,473 324,430
Interruptible ------- -------
Gas Sold and Delivered 9,417 15,158
Gas Delivered for Others 74,304 75,070
------- -------
83,721 90,228
Electric Generation ------- -------
Gas Delivered for Others 25,755 13,453
------- -------
Total Deliveries 462,949 428,111
======= =======
Degree Days
Actual 1,295 1,224
Normal 1,368 1,376
Customer Meters (end of period) 863,258 837,974
Gas Delivered to Firm Customers
The level of gas delivered to firm customers is highly sensitive to the
variability of weather, because a large portion of the Company's deliveries of
natural gas is used for space heating. The Company's rates are based on normal
weather. Currently, the Company has no weather normalization tariff provision in
any of its jurisdictions. However, it does have declining block rates in its
Maryland and Virginia jurisdictions that reduce the impact on net revenues of
deviations from normal weather. See the discussion below under "Regulatory
Matters" with respect to proposed tariff changes in Maryland that include a
weather normalization provision.
Firm therm deliveries increased by 29.0 million therms (9.0 percent) in
the current quarter, reflecting a 3.0 percent rise in the number of customer
meters and a 5.8 percent increase in heating degree days over last year. Weather
for the three months ended December 31, 1999 was 5.3 percent warmer than normal
while weather for the same period last year was 11.0 percent warmer than normal.
Net revenues generated from delivering gas for others are equivalent on a per
unit basis to those earned on bundled gas services, or transactions in which
customers purchase both the natural gas commodity and the associated delivery
service from the Company. Therefore, the Company does not experience any loss of
margins from customers that choose to purchase their gas from a third-party
supplier.
Gas Delivered to Interruptible Customers
Deliveries to interruptible customers during the quarter ended December
31, 1999 decreased by 6.5 million therms or 7.2 percent from the same period
last year, because of decreased demand from interruptible customers. The effect
on net income of changes in delivered volumes and prices to the interruptible
class is minimized by margin-sharing arrangements embedded in the Company's
-12-
interruptible rate design. Under these arrangements, the Company applies a
majority of the margins earned on interruptible gas sales and deliveries to firm
customers' rates. This occurs once the Company reaches a pre-established gross
margin threshold or occurs in exchange for shifting many fixed costs of
providing service from the interruptible to the firm class.
Gas Delivered for Electric Generation
The Company sells and/or delivers gas to two companies that use natural
gas to fuel their electric generation facilities in Maryland. Deliveries to
these customers in the current quarter increased by 12.3 million therms (91.4
percent) over the same period last year. The Company shares a significant
majority of the margins earned on deliveries of gas to these customers with firm
customers and, therefore, changes in volumes delivered between periods have an
immaterial effect on net revenues and net income.
Other Utility Operating Expenses
--------------------------------
Operation and maintenance expenses decreased $11.6 million (21.6
percent) from the prior year's levels. This reduction improved earnings per
average common share by $0.16 over the same quarter of last year. Labor-related
expenses applicable to pension and postretirement medical and life insurance
benefits fell by approximately $2.6 million in the current quarter from the
prior year's level. Similar favorable variations in these benefit expenses are
expected for the remaining quarters of fiscal year 2000. Other impacts in the
current quarter include $1.5 million of lower technology expenses and $1.0
million of lower advertising expenses. The current quarter reflects the absence
of some expenses that are likely to be delayed until subsequent quarters of the
current fiscal year. Although operation and maintenance expenses for subsequent
quarters of the current fiscal year are likely to be higher than the quarter
just completed, the Company anticipates that such expenses for all of fiscal
year 2000 will be less than the level incurred for all of fiscal year 1999.
Depreciation and amortization increased by $1.7 million (11.6 percent)
in the current quarter because of the Company's increased investment in
property, plant and equipment. This caused earnings per average common share to
fall by $0.02 when compared to the same quarter last year. Included in this
increase is $1.0 million of amortization related to the completion of an
enterprise-wide software system in fiscal year 1999. Going forward, the
quarterly amortization associated with this system should continue to
approximate this amount.
Income taxes, including amounts reflected in Non-Utility Operating
Results and Other Income (Expenses)--Net, increased by $8.9 million, primarily
due to higher pre-tax income generated this quarter. The effective income tax
rates were 37.35 percent and 37.28 percent for the first fiscal quarters of 2000
and 1999, respectively.
Non-Utility Operating Results
-----------------------------
The Company has three primary unregulated operating segments: 1) energy
marketing; 2) heating, ventilating and air conditioning (HVAC); and 3) customer
financing. The results from those operations, plus the impact of other
incidental unregulated activities increased after-tax net operating income by
$1.6 million from the same period last year to $1.8 million for the quarter
ended December 31, 1999. Earnings per average common share derived from
non-utility activities were $0.04 in the current quarter. There was no
contribution to earnings per share from these activities in the quarter ended
December 31, 1998. The following table compares the financial results, after
taxes and interest expense, from non-utility activities for the quarters ended
December 31, 1999 and 1998.
-13-
Net Income (Loss) Applicable to Non-Utility Activities
Three Months Ended December 31,
-------------------------------
1999 1998
------ -----
(Thousands)
Energy Marketing $ 545 $(363)
HVAC 763 184
Customer Financing 200 284
Other Non-Utility 172 (27)
------ -----
Total $1,680 $ 78
====== =====
Energy Marketing
The Company's retail energy marketing subsidiary, Washington Gas Energy
Services (WGEServices), sells natural gas in competition with unregulated
marketers and unregulated subsidiaries of other utility companies. WGEServices
continued to expand rapidly as the subsidiary sold 13.4 billion cubic feet (bcf)
of gas in the current quarter, an increase of 76.9 percent from 7.6 bcf sold in
the first quarter of fiscal year 1999. Approximately 25 percent of the total gas
sold by WGEServices in each quarter were sold to customers who do not take
delivery service from the regulated utility. Revenues increased from $23.2
million in the quarter ended December 31, 1998 to $43.8 million in the quarter
ended December 31, 1999, an 88.7 percent increase. Improvements in revenues and
net income for the energy marketing segment were due primarily to the continuing
growth of WGEServices' customer base and an increase in the proportion of
customers who are billed on the basis of their monthly usage as contrasted with
a fixed monthly bill. Results of energy marketing for the quarter are not
necessarily representative of the results that should be expected for the entire
fiscal year due to seasonal usage differences and the level of customer
acquisition costs that may be incurred as this business segment grows.
HVAC
The HVAC segment designs, renovates and services mechanical heating,
ventilating and air conditioning systems for commercial and residential
customers. Revenues derived from the Company's HVAC activities increased from
$7.0 million in the quarter ended December 31, 1998 to $10.2 million in the
quarter ended December 31, 1999, a 46.4 percent increase. The improvement by the
HVAC segment is attributable to the commercial portion of this segment
undertaking large installations at an increasing number of customers'
facilities. The results for HVAC also include an immaterial loss from the
Company's investment in Primary Investors, LLC (Primary Investors), a
residential and light commercial HVAC entity in which the Company acquired a 50
percent interest in August 1999. The net loss at Primary Investors results from
the incurrence of start-up costs necessary to integrate the companies it is
acquiring. For fiscal year 2000, the Company anticipates that its investment in
Primary Investors will be accretive to its earnings.
Customer Financing
The customer financing segment provides financing for consumer
purchases of natural gas appliances and energy-related equipment. Net income
from customer financing decreased $84,000 in the current quarter due to a lower
volume of contracts sold by the Company to banks and higher interest rates
charged by the banks to the Company.
-14-
Interest Expense
Total interest expense increased by $689,000 (6.9 percent) from the
same period last year, reflecting the following changes:
Composition of the Changes in Interest Expense:
Increase/(Decrease)
-------------------
(Thousands)
Long-Term Debt $(264)
Short-Term Debt 860
Other 93
-----
Total $ 689
======
The decrease in interest on long-term debt of $264,000 was primarily
due to a $1.1 million decline in the average amount of long-term debt
outstanding and a decrease of 0.21 percentage points in the weighted-average
cost of such debt. The embedded cost of long-term debt outstanding at December
31, 1999 was 6.8 percent. The increase in interest on short-term debt of
$860,000 was due to a $48.7 million rise in the average amount of short-term
debt outstanding and an increase of 0.57 percentage points in the
weighted-average cost of such debt.
LIQUIDITY AND CAPITAL RESOURCES
SHORT-TERM CASH REQUIREMENTS AND RELATED FINANCING
The Company's business is highly weather sensitive and seasonal.
Approximately 75 percent of the Company's therms delivered (excluding deliveries
for electric generation) occur in the first and second fiscal quarters. This
weather sensitivity causes short-term cash requirements to vary significantly
during the year. Cash requirements peak in the fall and winter months when
accounts receivable, accrued utility revenues and storage gas are at or near
their highest levels. After the winter heating season, these assets are
converted into cash and are used to liquidate short-term debt and acquire
storage gas for the subsequent heating season.
At December 31, 1999, the Company had notes payable outstanding, which
consist of bank loans and commercial paper, of $173.6 million as compared to
$113.1 million at September 30, 1999. The increase in notes payable from
September 1999 was primarily due to the Company's increased use of short-term
debt to finance the seasonal increase in accounts receivable and accrued utility
revenues from normal levels.
LONG-TERM CASH REQUIREMENTS AND RELATED FINANCING
To fund construction expenditures and other capital requirements, the
Company draws upon both internal and external sources of cash. The Company's
ability to generate adequate cash internally depends upon a number of factors,
including the timing and amount of rate increases received and the level of
therm deliveries. The Company's last significant base rate increase became
effective in December 1994. The number of customer meters and the variability of
the weather from normal levels significantly affect the level of therms
delivered.
-15-
CASH FLOW FROM OPERATING ACTIVITIES
Net cash used in operating activities totaled $30.0 million during the
first three months of fiscal year 2000 compared to $11.8 million of net cash
provided by operating activities for the same period last year. The decrease in
cash from operating activities was primarily the result of: 1) higher funds used
to support accounts receivable and accrued utility revenues as a result of
increased therm deliveries due to a greater number of heating degree days; and
2) a decrease in the source of cash reflected in accounts payable primarily as a
result of increased gas prices during the current quarter. Partially offsetting
these uses of cash were: 1) an increase in net income, adjusted for non-cash
items; and 2) an increase in accrued taxes, primarily due to higher taxable
income.
CASH FLOW FROM FINANCING ACTIVITIES
During the first three months of fiscal year 2000, there were no
issuances or redemptions of common stock. Last year $55.7 million was raised
through the sale of 2.3 million shares of common stock, and an additional $2.9
million was raised from shares issued through the Dividend Reinvestment and
Common Stock Purchase Plan and the Employee Savings Plans for the same period
last year.
Through the quarter ended December 31, 1998, the Company issued $1.4
million of long-term debt related to the funding of construction projects.
CASH FLOW FROM INVESTING ACTIVITIES
Capital expenditures for the first three months of fiscal year 2000
were $22.4 million, on a budget of $125.3 million for fiscal year 2000, compared
to capital expenditures of $35.9 million in the first three months of fiscal
year 1999. The decline was attributable to a $4.3 million decrease in capital
expenditures associated with the Company's enterprise-wide software system
during the first three months of fiscal year 2000, as well as the completion of
a number of construction projects during the first three months of fiscal year
1999.
Sales of Accounts Receivable
----------------------------
During the three months ended December 31, 1999, the Company sold, with
recourse, $6.3 million of non-utility accounts receivable, compared to $7.7
million in the three months ended December 31, 1998.
OTHER FACTORS AFFECTING THE COMPANY
Corporate Structure
In December 1999, Washington Gas Light Company announced its intention,
subject to receipt of the necessary approvals, to reorganize its corporate
structure to form a holding company known as WGL Holdings, Inc. As a result of
the reorganization, WGL Holdings, Inc. would be a "public utility holding
company" under the Public Utility Holding Company Act of 1935. Washington Gas
Light Company is taking the necessary steps to obtain regulatory and
shareholders' approvals and filed an S-4 registration statement with the
Securities and Exchange Commission on February 2, 2000. Under the new structure,
Washington Gas Light Company, as the regulated utility, and the subsidiaries it
currently holds, would each operate as separate subsidiaries of WGL Holdings,
Inc. Washington Gas Light Company will continue to operate as the regulated
local natural gas distribution company
-16-
throughout the Washington, D.C. metropolitan region. At the March 3, 2000 Annual
Meeting, shareholders of record on January 13, 2000 will vote on this proposal.
REGULATORY MATTERS
On January 6, 2000, the Company announced that it filed with the
Maryland Public Service Commission an agreement that will, if approved by the
Commission, freeze basic delivery rates at the present levels and insulate
Maryland customers from potential rate increases over the next five years. The
only adjustments that may occur will be for material changes in costs due to
extraordinary events such as tax rate changes or new regulatory requirements.
The agreement also includes the potential to reduce customers' bills and
increase returns to shareholders through the use of an earnings-sharing
mechanism. In addition, there is a provision for residential heating customers
that will reduce fluctuations in customers' bills due to the effects of weather.
YEAR 2000
The change to the Year 2000 had the potential to affect the Company's
software programs and computing infrastructure that use two-digit years to
define the applicable year, rather than four-digit years. As such, they could
have recognized a date using "00" as being the year 1900 rather than the year
2000. That could have resulted in the computer or device shutting down,
performing incorrect computations or performing inconsistently. Through the
implementation of its Year 2000 program, the Company continued to operate
successfully through the turn of the century and into the New Year.
The Company is now focusing on the next significant date, February 29,
and other key dates through the remainder of the year. The Company continues to
monitor its systems carefully as programs that run monthly or quarterly go into
operation. While the Company's plans for the remainder of the year take into
consideration the experience of the year-end date change, it believes continued
diligence will be required for much of the upcoming year. The Company believes
it is taking all reasonable steps necessary to continue to operate successfully.
The following discussion provides a summary of the major components of
the Company's Year 2000 program.
Business Application Systems
----------------------------
The Company resolved Year 2000 issues surrounding business-application
systems by remediating 18 systems to recognize the turn of the century and
replacing 21 systems with new systems that provide additional business
management information and recognize four-digit years.
The Company installed an enterprise-wide software system that replaced
19 business application systems, including its financial, human resources and
supply chain systems. Two other systems were replaced with systems that were not
included in the enterprise-wide software initiative. These 21 business
applications represented approximately one-half of the business application
software code requiring remediation or replacement.
The Company also replaced or remediated and tested critical end-user
applications (i.e., PC-based databases), as necessary.
-17-
Embedded Systems
----------------
The Company contacted all manufacturers of the components of its
embedded systems that it identified during a comprehensive inventory as being
critical or important to its operations. Based on information provided by those
manufacturers, approximately 3 percent of the date-sensitive components
identified by the Company were non-compliant. All critical and important
components were remediated, tested and placed back into production.
Vendor and Supplier Relationships
---------------------------------
The Company contacted in writing or through face-to-face discussions
all vendors and suppliers of products and services that it considered critical
or important to its operation. Those contacts included providers of interstate
transportation capacity and storage, natural gas suppliers, financial
institutions and electric, telecommunications and water companies. The Company
did not identify any disruptions by those suppliers, or their products or
services, associated with the transition to the Year 2000.
Independent Verification and Validation
---------------------------------------
The company worked with external consultants to verify and validate the
Company's Year 2000 remediation and replacement strategies and results for both
business applications and embedded systems.
Customer Communications
-----------------------
The Company informed its major interruptible customers about the
potential vulnerability of embedded boiler and plant control systems. These
customers were advised to assess the need for remediation and/or replacement of
these systems as part of their Year 2000 programs to ensure their ability to
switch to an alternate fuel source, as required by applicable tariffs and
contracts, if called on to do so. The Company required its interruptible
customers to switch to their alternate fuel sources on the morning of December
31, 1999. Once the Company had successfully transitioned into the new millennium
and confirmed that its natural gas suppliers and transporters were continuing to
operate successfully, the Company notified its interruptible customers that they
could resume natural gas usage. No other planned or unplanned interruptions
associated with the transition to the Year 2000 have occurred.
In addition, the Company explained its Year 2000 efforts to customers
through individual, community and association presentations; responses to
written inquires; brochures mailed to customers that explained the Company's
program; and its website.
Other customers were advised of the potential effects of the transition
to the Year 2000 through a variety of consumer outreach and educational forums.
Business Continuity Planning
----------------------------
As part of its normal business practice, the Company maintains plans to
follow during emergency circumstances. These plans were used as a basis to build
the Company's continuity plan for potential Year 2000-related problems
associated with the millennial date change and for other critical dates through
2000. The Company managed specific Year 2000 continuity operations from a
command center during the millennium change and will continue to do so at other
points in time on an as-needed basis. The Company has informed its employees, as
it did for the millennium change, that
-18-
every employee will be expected to work or be available to work during the leap
year transition period to address possible effects associated with the
February 29 date change.
Financial Implications
----------------------
The following table reflects the amounts charged to expense and
capitalized for the quarter ended December 31, 1999 and the fiscal years ending
September 30, 1999, 1998 and 1997 for business-application systems remediation,
embedded systems replacement, end-user applications remediation and replacement,
independent verification and validation costs and business continuity
initiatives.
-----------------------------------------------------------------------
Business-application systems remediation, embedded systems replacement,
end-user applications remediation and replacement, and independent
verification and validation
-----------------------------------------------------------------------
(millions) 2000 1999 1998 1997 Total
--------- ---- ---- ---- ---- -----
Expense $ - $2 $ 1 $1 $ 4
Capital $1 $3 $ 1 $- $ 5
-----------------------------------------------------------------------
Business-application software systems replacement
-----------------------------------------------------------------------
(millions) 2000 1999 1998 1997 Total
--------- ---- ---- ---- ---- -----
Expense $ - $ 4 $ 4 $ - $ 8
Capital $ - $21 $19 $ - $40
The Company does not anticipate incurring any significant additional
Year 2000-related costs.
-19-
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
OF THE COMPANY.
The Company has interest rate risk exposure related to long-term debt.
Additionally, the Company's subsidiary, Washington Gas Energy Services
(WGEServices) has price risk exposure related to gas marketing activities. For
information regarding the Company's exposure related to these risks, see Item 7A
in the Company's most recently filed Form 10-K. The Company's risk associated
with interest rates has not materially changed from September 30, 1999. At
December 31, 1999, WGEServices' open position was not material to the Company's
financial position or results of operations.
PART II. OTHER INFORMATION
Item 5. OTHER INFORMATION.
None.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
27.1 Financial Data Schedule
99.0 Computation of Ratio of Earnings to Fixed Charges
99.1 Computation of Ratio of Earnings to Fixed Charges and Preferred Stock
Dividends
(b) Reports on Form 8-K:
o Washington Gas Light Company filed a Current Report on Form 8-K, dated
January 6, 2000, announcing that it filed, with the Maryland Public
Service Commission, an agreement with the Maryland Office of Peoples
Counsel and the Maryland Public Service Commission Staff on an
incentive rate plan. In part, the agreement includes provisions to
freeze customer rates over the next five years along with an
earnings-sharing mechanism. The agreement is subject to review and
approval of the Public Service Commission of Maryland.
o Washington Gas Light Company filed a Current Report on 8-K, dated
December 30, 1999, announcing its intention, pending necessary
shareholder and regulatory approvals, to reorganize its corporate
structure to form a holding company known as WGL Holdings, Inc.
-20-
Signature
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
WASHINGTON GAS LIGHT COMPANY
----------------------------
(Registrant)
Date February 11, 2000 /s/ Robert E. Tuoriniemi
----------------- --------------------------------
Robert E. Tuoriniemi
Controller
(Principal Accounting Officer)
-21-