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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 June 30, 2000
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 46,431,606 July 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
Consolicated Statements of Income...................................4-5
Consolidated Statements of Cash Flows.................................6
Notes to Consolidated Financial Statements.........................7-16
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations......................................17-35
Item 3. Quantitative and Qualitative Disclosures
About Market Risks of the Company.................................36
PART II. OTHER INFORMATION.................................................36
Item 6. Exhibits and Reports on Form 8-K..................................36
SIGNATURE...................................................................37
- 1 -
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
WASHINGTON GAS LIGHT COMPANY
CONSOLIDATED BALANCE SHEETS
June 30, September 30,
2000 1999
------------- -------------
(Unaudited)
(Thousands)
ASSETS
PROPERTY, PLANT AND EQUIPMENT
At orginal cost $ 2,184,530 $ 2,114,071
Accumulated depreciation and amortization (753,966) (711,329)
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1,430,564 1,402,742
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CURRENT ASSETS
Cash and cash equivalents 29,661 26,935
Accounts receivable 128,927 74,295
Gas cost due from customers 836 5,127
Allowance for doubtful accounts (6,063) (6,626)
Accrued utility revenues 18,461 17,141
Materials and supplies--principally at average cost 17,064 17,207
Storage gas--at cost (first-in, first-out) 75,816 80,481
Deferred income taxes 17,933 19,662
Other prepayments--principally taxes 10,832 14,888
Other 1,557 648
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295,024 249,758
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DEFERRED CHARGES AND OTHER ASSETS
Regulatory assets 84,150 84,278
Other 40,714 29,946
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124,864 114,224
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Total Assets $ 1,850,452 $ 1,766,724
============= =============
The accompanying Notes to the Consolidated Financial Statements are an integral
part of these consolidated statements.
- 2 -
WASHINGTON GAS LIGHT COMPANY
CONSOLIDATED BALANCE SHEETS
June 30, September 30,
2000 1999
------------- -------------
(Unaudited)
(Thousands)
CAPITALIZATION AND LIABILITIES
CAPITALIZATION
Common shareholders'equity (Notes 4 and 5) $ 740,766 $ 684,034
Preferred stock (Note 4) 28,173 28,420
Long-term debt (Note 3) 559,554 506,084
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1,328,493 1,218,538
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CURRENT LIABILITIES
Current maturities of long-term debt 1,865 1,431
Notes payable 58,776 113,067
Accounts and wages payable 131,388 118,108
Dividends declared 14,738 14,507
Customer deposits and advance payments 7,729 15,853
Gas costs due to customers 3,541 11,321
Accrued taxes 26,846 5,226
Other 13,939 5,613
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258,822 285,126
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DEFERRED CREDITS
Unamortized investment tax credits 18,764 19,439
Deferred income taxes 167,559 156,495
Provision for pensions and benefits 25,136 40,087
Other 51,678 47,039
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263,137 263,060
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Total Capitalization and Liabilities $ 1,850,452 $ 1,766,724
============= =============
The accompanying Notes to the Consolidated Financial Statements are an integral
part of these consolidated statements.
- 3 -
WASHINGTON GAS LIGHT COMPANY
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three Months Ended
----------------------------------
June 30, June 30,
2000 1999
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(Thousands,Except Per Share Data)
UTILITY OPERATIONS
OPERATING REVENUES $ 171,553 $ 149,973
Less: Cost of gas 92,307 75,117
Revenue taxes 4,386 4,888
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NET REVENUES 74,860 69,968
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OTHER OPERATING EXPENSES
Operation 37,390 41,985
Maintenance 8,355 8,107
Depreciation and amortization 16,512 15,169
General taxes 8,838 8,459
Income taxes (1,904) (4,206)
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69,191 69,514
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Utility Operating Income 5,669 454
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NON-UTILITY OPERATIONS
OPERATING REVENUES (Note 8)
Energy marketing 29,101 18,037
Heating, ventilating and air conditioning 9,959 6,245
Customer financing 584 793
Other non-utility revenues 179 249
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39,823 25,324
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EQUITY LOSS ON 50%-OWNED HVAC SUBSIDIARY (102) --
OTHER OPERATING (INCOME) EXPENSES--NET
Non-utility operating expenses 40,301 22,688
Income taxes (151) 937
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40,150 23,625
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Non-Utility Operating Income (Loss) (429) 1,699
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TOTAL OPERATING INCOME 5,240 2,153
OTHER INCOME (EXPENSES)--NET (129) (221)
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INCOME BEFORE INTEREST EXPENSE 5,111 1,932
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INTEREST EXPENSE
Interest on long-term debt 9,010 8,678
Other 1,396 18
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10,406 8,696
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NET LOSS (5,295) (6,764)
DIVIDENDS ON PREFERRED STOCK 330 332
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NET LOSS APPLICABLE TO COMMON STOCK $ (5,625) $ (7,096)
============= =============
AVERAGE COMMON SHARES OUTSTANDING 46,479 46,410
============= =============
LOSS PER AVERAGE COMMON SHARE--
BASIC AND DILUTED (Note 4) $ (0.12) $ (0.15)
============= =============
DIVIDENDS DECLARED PER COMMON SHARE $ 0.310 $ 0.305
============= =============
The accompanying Notes to the Consolidated Financial Statements are an integral
part of these consolidated statements.
- 4 -
WASHINGTON GAS LIGHT COMPANY
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Nine Months Ended
----------------------------------
June 30, June 30,
2000 1999
------------- --------------
(Thousands, Except Per Share Data)
UTILITY OPERATIONS
OPERATING REVENUES $ 874,383 $ 839,803
Less: Cost of gas 457,423 429,346
Revenue taxes 31,608 31,687
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NET REVENUES 385,352 378,770
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OTHER OPERATING EXPENSES
Operation 112,464 127,653
Maintenance 22,508 27,137
Depreciation and amortization 48,803 44,166
General taxes 19,203 19,988
Loss from agreement to sell utility property (Note 2) -- 3,300
Income taxes 56,180 47,952
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259,158 270,196
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Utility Operating Income 126,194 108,574
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NON-UTILITY OPERATIONS
OPERATING REVENUES (Note 8)
Energy Marketing 136,110 85,929
Heating, ventilating and air conditioning 32,385 21,982
Customer financing 2,271 2,811
Other non-utility revenues 923 1,065
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171,689 111,787
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EQUITY LOSS ON 50%-OWNED HVAC SUBSIDIARY (629) --
OTHER OPERATING (INCOME) EXPENSES
Non-utility operating expenses 163,265 105,791
Gains on sales of non-utility assets (711) --
Income taxes 2,485 2,139
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165,039 107,930
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Non-Utility Operating Income 6,021 3,857
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TOTAL OPERATING INCOME 132,215 112,431
OTHER INCOME (EXPENSES)--NET (113) (1,582)
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INCOME BEFORE INTEREST EXPENSE 132,102 110,849
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INTEREST EXPENSE
Interest on long-term debt 26,505 26,149
Other 5,870 1,705
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32,375 27,854
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NET INCOME 99,727 82,995
DIVIDENDS ON PREFERRED STOCK 993 998
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NET INCOME APPLICABLE TO COMMON STOCK $ 98,734 $ 81,997
============= ==============
AVERAGE COMMON SHARES OUTSTANDING 46,474 45,837
============= ==============
EARNINGS PER AVERAGE COMMON SHARE--
BASIC AND DILUTED (Note 4) $ 2.12 $ 1.79
============= ==============
DIVIDENDS DECLARED PER COMMON SHARE $ 0.925 $ 0.910
============= ==============
The accompanying Notes to the Consolidated Financial Statements are an integral
part of these consolidated statements.
- 5 -
WASHINGTON GAS LIGHT COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended
----------------------------------
June 30, June 30,
2000 1999
------------- --------------
(Thousands)
OPERATING ACTIVITIES
Net Income $ 99,727 $ 82,995
ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH
(USED IN) PROVIDED BY OPERATING ACTIVITIES
Depreciation and amortization <F1> 52,358 48,892
Deferred income taxes--net 18,476 603
Amortization of investment tax credits (675) (685)
Accrued/deferred pension cost--net (9,818) (95)
Allowance for funds used during construction (599) (1,389)
Loss from agreement to sell utility property (Note 2) -- 3,300
Other noncash charges (credits)--net (1,396) 155
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158,073 133,776
CHANGES IN ASSETS AND LIABILITIES
NET OF ACQUISITIONS AND DISPOSITIONS (Note 2)
Accounts receivable and accrued utility revenues (56,515) 12,578
Gas cost due from/to customers--net (3,489) (2,793)
Storage gas 4,665 37,041
Other prepayments--principally taxes 4,056 4,958
Accounts payable 9,585 5,684
Wages payable 3,402 (2,646)
Customer deposits and advance payments (8,124) (10,745)
Accrued taxes 21,620 27,200
Accrued interest 8,691 8,314
Pipeline refunds due to customers (1,679) 713
Deferred purchased gas costs--net (6,089) 18,159
Other--net 1,121 70
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Net Cash Provided by Operating Activities 135,317 232,309
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FINANCING ACTIVITIES
Common stock issued (Note 4) -- 63,835
Long-term debt issued (Note 3) 54,930 28,342
Long-term debt retired (Note 3) (935) (20,293)
Debt issuance costs (439) (2,271)
Notes payable--net (54,291) (121,379)
Dividends on common and preferred stock (43,737) (42,165)
Other financing activities 464 278
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Net Cash Used in Financing Activities (44,008) (93,653)
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INVESTING ACTIVITIES
Capital expenditures (77,265) (112,706)
Investment in limited liability company (10,000) --
Other investing activities (1,318) --
------------- --------------
Net Cash Used in Investing Activities (88,583) (112,706)
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INCREASE IN CASH AND CASH EQUIVALENTS <F2> 2,726 25,950
Cash and Cash Equivalents at Beginning of Period 26,935 17,876
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Cash and Cash Equivalents at End of Period $ 29,661 $ 43,826
============= ==============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Income taxes paid $ 21,629 $ 18,920
Interest paid $ 23,679 $ 20,364
<FN>
<F1> Includes amounts charged to other accounts.
<F2> Cash equivalents are highly liquid investments with maturity of three
months or less when purchased.
</FN>
The accompanying notes to the Consolidated Financial Statements are an integral
part of these consolidated statements.
- 6 -
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 Light or
the Company) and its subsidiaries. In the opinion of Washington Gas Light, 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 Washington Gas Light's Annual Report on Form 10-K for the fiscal
year ended September 30, 1999. Certain amounts in the financial statements of
prior years have been reclassified to conform to the presentation of the current
year.
Due to the seasonal nature of Washington Gas Light'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--RESTRUCTURING AND RELATED ORGANIZATIONAL CHANGES
CORPORATE STRUCTURE
At its March 3, 2000, Annual Meeting of Shareholders, Washington Gas
Light's shareholders voted to form a holding company known as WGL Holdings, Inc.
(WGL Holdings). Under the new structure, Washington Gas Light, as the regulated
utility, and the subsidiaries it currently holds, will each operate as separate
subsidiaries of WGL Holdings. WGL Holdings and Washington Gas Light are taking
the necessary steps to implement the new structure.
The Company received the necessary approval of the State Corporation
Commission of Virginia (SCC of VA) on May 11, 2000. WGL Holdings also applied to
the Securities and Exchange Commission on March 31, 2000, for approval of its
financing program. However, the approval of the financing plan, which is the
last necessary regulatory approval, is still pending. As a result, it is likely
that the holding company will not become effective prior to this fall.
Upon the implementation of the holding company structure, stock
certificates previously representing shares of Washington Gas Light common stock
will automatically represent the same number of shares of WGL Holdings common
stock and will entitle the holder to receive a stock certificate of WGL
Holdings. WGL Holdings will apply to the New York Stock Exchange to list its
common stock for trading under the symbol "WGL," which is the same symbol used
by Washington Gas Light.
- 7 -
After the reorganization, all serial preferred stock of Washington Gas
Light will remain issued and outstanding as shares of Washington Gas Light
serial preferred stock. The dividend rate for the preferred stock will not be
changed and those dividends will continue to be paid by Washington Gas Light.
All outstanding indebtedness and other obligations of Washington Gas Light will
remain as obligations of Washington Gas Light after the reorganization. Holders
of Washington Gas Light medium-term notes will continue as security holders of
Washington Gas Light.
Immediately after the consummation of the merger, WGL Holdings will
have no outstanding securities other than common stock, but could issue other
securities in the future.
SUBSIDIARY MERGERS
Shenandoah Gas Company--On September 29, 1999, the Company's Board of
----------------------
Directors authorized a merger of a Company subsidiary, Shenandoah Gas Company
(Shenandoah), into Washington Gas Light to form a single corporation for the
regulated distribution of natural gas. On December 22, 1999, the SCC of VA
issued an order that approved the merger request, but required that Shenandoah
continue to operate as a division with separate accounting records until the
Company files, and the SCC of VA approves, a plan for the merger of the tariffs
for Washington Gas Light and Shenandoah. In the interim, the Company must
continue to fulfill longstanding regulatory reporting requirements for
Washington Gas Light and Shenandoah as separate entities.
Certificates of Merger were issued by the District of Columbia
Department of Consumer and Regulatory Affairs, effective March 22, 2000, and by
the SCC of VA, effective April 1, 2000. Shenandoah was merged into Washington
Gas Light effective April 1, 2000.
Virginia Intrastate Pipeline Company--Effective December 28, 1999, an
-------------------------------------
inactive Company subsidiary, Virginia Intrastate Pipeline Company (VIPCo) was
merged into Washington Gas Light. VIPCo was originally organized to construct
and operate a natural gas pipeline. Construction of the proposed project was
subsequently cancelled and, as a result, VIPCo has been inactive for a number of
years and was so at the time of the merger.
Brandywood Estates, Inc.--Effective May 31, 2000, Brandywood Estates,
------------------------
Inc., merged into Advanced Marketing Concepts, Inc. (AMC), with AMC being the
surviving corporation. Subsequently, the name of AMC was changed to Brandywood
Estates, Inc., which is a Delaware Corporation. AMC was an inactive subsidiary
and Brandywood Estates, Inc., was a general partner, along with a major
developer, in a venture designed to develop 1,600 acres of land in Prince
George's County, Maryland for sale or lease.
NEW SUBSIDIARY
In May 1999, the Company announced plans for the development of a
12-acre parcel of land in Southeast Washington, D.C. that the Company has owned
since 1888. The development will be a mixed-use commercial project that will be
implemented in five phases. The entire five-phase project will be completed over
a five-to-ten year period. Washington Gas Light will lease its land to ventures
that will be established during each phase of the project and the Company will
retain a carried interest in the development. The Company is pursuing this
development in partnership with Lincoln Property Company, a national developer.
Washington Gas Light will make no capital investments in this venture and will
play no active role in any development or management activities.
- 8 -
In January 2000, the Company established WG Maritime Plaza I, Inc. (WG
Maritime), to hold Washington Gas Light's interest in the first phase of this
development. WG Maritime is a subsidiary of Washington Gas Resources, Corp., a
wholly owned subsidiary of Washington Gas Light that serves as the parent
company for most of the Company's non-utility subsidiaries. No expenditures were
made by WG Maritime through June 30, 2000, and future expenditures by WG
Maritime are not expected to be material.
DISPOSITION OF WEST VIRGINIA ASSETS
In November 1998, Shenandoah entered into an agreement to sell
virtually all of 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 on July 1, 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 $1.9 million after-tax.
The current owner is serving Shenandoah's former 3,800 natural gas
customers in the City of Martinsburg and in Berkeley County, West Virginia. To
ensure continued natural gas service in the Eastern Panhandle of West Virginia,
the Shenandoah division provides natural gas transportation service to the
current owner. Shenandoah continues to provide natural gas service to more than
11,400 customers in the northern Shenandoah Valley of Virginia.
NOTE 3--LONG-TERM DEBT
UNSECURED MEDIUM-TERM NOTES
During the nine-month period ending June 30, 2000, the Company issued
$53,000,000 of unsecured Medium Term Notes (MTNs) whose terms were individually
set as to interest rate, maturity and any call or put option, as follows:
Interest Amount Date
-----------------------------
Rate Issued Issued Maturity Call/Put Options
-------- ------------- ------------- ------------- -------------------------------------
7.50% $ 8,500,000 April 3, 2000 April 1, 2030 Holders have the option to put these
notes to the Company at par by
delivering written notice at least 30
days, but no more than 60 days, prior
to April 1, 2010
7.50% 4,000,000 April 6, 2000 April 6, 2010 None
7.45% 20,500,000 June 19, 2000 June 20, 2005 None
7.70% 20,000,000 June 19, 2000 June 21, 2010 None
-------------
Total $ 53,000,000
=============
INTEREST RATE HEDGES AND DEBT ISSUANCES
At June 30, 2000, the Company had no interest rate hedge agreements
outstanding in connection with planned issuances of MTNs. However, at June 30,
1999, the Company had one interest rate hedge agreement outstanding. The Company
accounts for its hedging agreements as
- 9 -
hedges of anticipated transactions in accordance with Statement of Financial
Accounting Standards No.80, Accounting for Future 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 of
$55.7 million were used for general corporate purposes, including capital
expenditures.
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 tables show the computation of basic and diluted EPS for the three
months and nine months ended June 30, 2000 and 1999.
Net Per Share
Income (Loss) Shares Amount
------------- ------ ---------
(Thousands, Except Per Share Data)
For the Three Months Ended June 30, 2000
- ----------------------------------------
Basic EPS:
Net Loss Applicable to Common Stock $ (5,625) 46,479 $ (0.12)
Effect of Dilutive Securities:
Stock-Based Compensation Plans -- 62
-------- ------
Diluted EPS:
Net Loss Applicable to Common Stock
Plus Assumed Conversions $ (5,625) 46,541 $ (0.12)
======== ====== =======
- 10 -
Net Per Share
Income (Loss) Shares Amount
------------- ------ ---------
(Thousands, Except Per Share Data)
For the Three Months Ended June 30, 1999
- ----------------------------------------
Basic EPS:
Net Loss Applicable to Common Stock $ (7,096) 46,410 $ (0.15)
Effect of Dilutive Securities:
$4.60 and $4.36 Convertible Preferred Stock,
Assuming Conversion on April 1, 1999 2 27
Stock-Based Compensation Plans -- 22
-------- ------
Diluted EPS:
Net Loss Applicable to Common Stock
Plus Assumed Conversions $ (7,094) 46,459 $ (0.15)
======== ====== =======
For the Nine Months Ended June 30, 2000
- ---------------------------------------
Basic EPS:
Net Income Applicable to Common Stock $ 98,734 46,474 $ 2.12
Effect of Dilutive Securities:
$4.60 and $4.36 Convertible Preferred Stock,
Assuming Conversion on October 1, 1999<F1> 6 10
Stock-Based Compensation Plans -- 50
-------- ------
Diluted EPS:
Net Income Applicable to Common Stock
Plus Assumed Conversions $ 98,740 46,534 $ 2.12
======== ====== =======
For the Nine Months Ended June 30, 1999
- ---------------------------------------
Basic EPS:
Net Income Applicable to Common Stock $ 81,997 45,837 $ 1.79
Effect of Dilutive Securities:
$4.60 and $4.36 Convertible Preferred Stock,
Assuming Conversion on October 1, 1998 8 27
Stock-Based Compensation Plans -- 7
-------- ------
Diluted EPS:
Net Income Applicable to Common Stock
Plus Assumed Conversions $ 82,005 45,871 $ 1.79
======== ====== =======
<FN>
<F1> All outstanding convertible preferred stock was either converted or redeemed on February 1, 2000.
</FN>
- 11 -
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 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 had the option of accepting the $100 cash redemption value or
converting their shares into Washington Gas Light 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 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.
$4.36 Series $4.60 Series
------------ ------------
Conversions:
------------
Shares of Preferred Stock Converted 1,067 382
Shares of Common Stock Issued 10,670 4,202
Cash Paid for Fractional Shares $ 1,482 $ 638
Redemptions:
------------
Shares of 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 key employees and Company directors. The stock-based compensation plans
are designed to promote the Company's long-term success by attracting,
recruiting and retaining key employees, and giving certain employees and Company
directors an ownership interest in Washington Gas Light, thereby promoting a
closer identity of interests between those individuals and the Company's
stockholders.
Non-employee directors receive a portion of their annual retainer fee
in the form of common stock through the Directors' Stock Compensation Plan. On
January 3, 2000, a total of 5,600 shares of common stock was granted to
directors from the Company's treasury stock. The fair value of the common stock
on the grant date was $26.25 per share.
NOTE 6--ENVIRONMENTAL MATTERS
The Company has identified up to ten sites where Washington Gas Light,
its subsidiaries, or their predecessors may have operated manufactured gas
plants (MGP). The Company last used any such plant in 1984. In connection with
these operations, the Company is aware that certain by-products of the gas
manufacturing process are present at, or near, some former sites and may be
present at others.
At one of the former MGP sites, studies show the presence of coal tar
under the site and an adjoining property. The Company's risk assessment study
performed on the site shows that there is no unacceptable risk to human health
or the environment. The Company has taken steps to control the movement of
contaminants into an adjacent river by installing a water treatment system that
removes and treats contaminated groundwater at the site. The Company received
approval from governmental authorities for a comprehensive remedial plan for the
majority of the site that will allow
- 12 -
commercial development of the Company's property. The Company has signed a
development agreement with a national developer to enter a ground lease and
obtain a carried interest in the commercial development. Financing for the
project is pending (see Note 2--Restructuring and Related Organizational
Changes). Approval of a remedial plan for the remainder of the site which
consists of an adjoining property owned by a separate entity, is expected, soon.
At another former MGP site, a local government has notified the Company
about the detection of a substance in an adjacent river that may be related to
this site. This same local government owned and operated the MGP for the
majority of the life of the plant. The local government sold the MGP to a
company, which was subsequently merged into Washington Gas Light. Washington Gas
Light retired the MGP many years ago. In addition, the Company is aware that the
local government has had communications about this condition with federal
environmental authorities. At this time, the extent and nature of the
contamination have not been determined. The Company is holding discussions with
the local government about the Company's potential contributions, if any, to the
site.
See Note 9 to the Consolidated Financial Statements in the Washington
Gas Light Company 1999 Annual Report on Form 10-K for a discussion of the other
eight sites.
NOTE 7--COMMITMENTS AND CONTINGENCIES
MARYLAND REGULATORY MATTERS
On January 6, 2000, the Company announced that it filed with the Public
Service Commission of Maryland (PSC of MD or the Commission) a non-unanimous
settlement agreement that would, 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
could occur would be for material changes in costs due to extraordinary events,
such as tax rate changes or new regulatory requirements. The agreement also
included the potential to reduce customers' bills and increase returns to
shareholders through the use of an earnings-sharing mechanism. In addition, the
agreement included a provision for residential heating customers that would
reduce fluctuations in customers' bills due to the effects of weather deviations
from normal levels.
On April 28, 2000, the hearing examiner assigned to this proceeding
issued a "Proposed Order of Hearing Examiner" (Proposed Order) which declined to
approve the proposed settlement. This recommendation is based upon the hearing
examiner's conclusion that the settlement does not adequately address historical
disproportionate rates of return among classes of customers. On May 15, 2000,
separate appeals were filed with the PSC of MD by Washington Gas Light, the
Maryland Office of People's Counsel and the PSC of MD Staff. The appeals
requested that the hearing examiner's proposed order be reversed and that the
joint agreement filed in January 2000 be approved. Oral arguments from all
parties were entertained by the Commission at a hearing held on July 18, 2000.
The Company expects a Commission decision by late summer.
DISTRICT OF COLUMBIA REGULATORY MATTERS
On February 17, 2000, the District of Columbia's Office of the People's
Counsel (OPC) filed a complaint with the Public Service Commission of the
District of Columbia (PSC of DC) requesting an investigation into the rates and
charges of Washington Gas Light. The complaint alleges that: 1) the actual
return on equity earned by Washington Gas Light is significantly higher than
that authorized by the PSC of DC; and 2) the return on equity that the PSC of DC
authorizes Washington Gas Light to earn is higher than is appropriate, given
current economic conditions.
- 13 -
On February 28, 2000, Washington Gas Light submitted an "Answer" to the
PSC of DC requesting the dismissal of the OPC complaint chiefly on the grounds
that the OPC's analysis of the Company's rates was substantively flawed. The
Company has responded to questions made by the PSC of DC Staff (Staff) and has
met with Staff to review these responses and to answer their follow-up
questions.
On May 12, 2000, the OPC filed a motion requesting leave to reply to
Washington Gas Light's Answer and a reply to the Company's Answer, asserting
that Washington Gas Light's Answer failed to demonstrate that a rate
investigation is unnecessary and once again asked the PSC of DC to open an
investigation.
On May 22, 2000, Washington Gas Light submitted a "Response" urging the
Commission to dismiss the OPC Motion. The Company's Response charged that the
OPC motion contained no new information, violated PSC of DC policy and
prejudiced both the Company and District of Columbia customers. All matters--the
OPC Complaint, Washington Gas Light's Answer, the OPC Motion and the Company's
Response--are under review by the PSC of DC. No specific timeline has been
established for the PSC of DC to render its final decision on this matter.
NOTE 8--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 nearly 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. Through the Company's subsidiary, Washington Gas Energy
Services, Inc. (WGEServices), 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 energy marketing
segment is also positioned to enter the deregulated electricity markets as
opportunities develop. Through two wholly owned subsidiaries, Washington Gas
Energy Systems, Inc. (WGESystems) and American Combustion Industries, Inc.
(ACI) and as a partner in Primary Investors, LLC (Primary Investors), the
Company's 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.
- 14 -
Non-Utility Operations
-------------------------------------------------------
Regulated Energy Customer Other Total Elim./
Utility Marketing HVAC Financing Activities Non-Utility Other Consolidated
------------------------------------------------------------------------------------------
(In thousands of dollars)
Three Months Ended June 30, 2000
- --------------------------------
Total Revenues $ 171,553 $ 29,101 $ 9,959 $ 584 $ 179 $ 39,823 $ - $ 211,376
Operating Expenses
Depreciation and Amortization 16,512 9 143 - - 152 - 16,664
Operating Expenses <F1> 151,276 30,320 9,000 328 501 40,149 - 191,425
Income Tax Expense (1,904) (431) 308 84 (112) (151) - (2,055)
---------- -------- ------- ------ ------ -------- ----- ----------
Total Operating Expenses 165,884 29,898 9,451 412 389 40,150 - 206,034
Equity in Loss of 50% Affiliate<F2> - - (102) - - (102) - (102)
---------- -------- ------- ------ ------ -------- ----- ----------
Operating Income 5,669 (797) 406 172 (210) (429) - 5,240
Interest Expense--Net 9,913 3 269 42 1 315 178 10,406
Other Non-Operating Inc. (Exp.)<F3> - - (86) - - (86) (43) (129)
---------- -------- ------- ------ ------ -------- ------ ----------
Net Income (Loss) $ (4,244) $ (800) $ 51 $ 130 $ (211) $ (830) $ (221) $ (5,295)
========== ======== ======= ====== ====== ======== ====== ==========
Total Assets $1,753,492 $ 45,313 $38,702 $6,157 $ 569 $ 90,741 $6,219 $1,850,452
========== ======== ======= ====== ====== ======== ====== ==========
Equity Investment in
Primary Services, LLC<F4> $ - $ - $16,817 $ - $ - $ 16,817 $ - $ 16,817
========== ======== ======= ====== ====== ======== ====== ==========
Capital Expenditures $ 27,400 $ 107 $ 52 $ - $ - $ 159 $ - $ 27,559
========== ======== ======= ====== ====== ======== ====== ==========
Three Months Ended June 30, 1999
- --------------------------------
Total Revenues $ 149,973 $ 18,037 $ 6,245 $ 793 $ 249 $ 25,324 $ - $ 175,297
Operating Expenses
Depreciation and Amortization 15,169 9 46 - - 55 - 15,224
Operating Expenses<F1> 138,556 16,088 5,700 500 345 22,633 - 161,189
Income Tax Expense (4,206) 676 160 100 1 937 - (3,269)
---------- -------- ------- ------ ------ -------- ----- ----------
Total Operating Expenses 149,519 16,773 5,906 600 346 23,625 - 173,144
---------- -------- ------- ------ ------ -------- ----- ----------
Operating Income 454 1,264 339 193 (97) 1,699 - 2,153
Interest Expense--Net 8,506 3 121 36 1 161 29 8,696
Other Non-Operating Inc. (Exp.)<F3> - - 7 - - 7 (228) (221)
---------- -------- ------- ------ ------ -------- ----- ----------
Net Income (Loss) $ (8,052) $ 1,261 $ 225 $ 157 $ (98) $ 1,545 $ (257) $ (6,764)
========== ======== ======= ====== ====== ======== ====== ==========
Total Assets $1,673,545 $ 24,019 $13,361 $3,490 $ 300 $ 41,170 $6,545 $1,721,260
========== ======== ======= ====== ====== ======== ====== ==========
Capital Expenditures $ 37,239 $ 1 $ 215 $ - $ - $ 216 $ - $ 37,455
========== ======== ======= ====== ====== ======== ====== ==========
<FN>
<F1> Includes cost of gas and revenue taxes during all reported periods.
<F2> The initial investment in Primary Investors was made in August 1999; additional investments have been made during the
current fiscal year.
<F3> The amounts reported for Other Non-Operating Inc. (Exp.) are net of applicable income taxes. The amounts reported in the
HVAC and Elim./Other columns for the three months ended June 30, 2000, include an income tax benefit of $47,000 and
$186,000, respectively. The amounts reported in the same columns for the three months ended June 30, 1999, include a
$4,000 income tax expense and a $138,000 tax benefit, respectively.
<F4> Reflects Washington Gas Light's total investment in Primary Investors of $17.5 million, less its equity interest in that
company's net loss from inception of $683,000.
</FN>
- 15 -
Non-Utility Operations
----------------------------------------------------------
Regulated Energy Customer Other Total Elim./
Utility Marketing HVAC Financing Activities Non-Utility Other Consolidated
------------------------------------------------------------------------------------------
(In thousands of dollars)
Nine Months Ended June 30, 2000
- --------------------------------
Total Revenues $ 874,383 $136,110 $32,385 $2,271 $ 923 $171,689 $ - $1,046,072
Operating Expenses
Depreciation and Amortization 48,803 23 428 - - 451 - 49,254
Operating Expenses <F1> 643,206 132,995 27,844 1,055 209 162,103 - 805,309
Income Tax Expense 56,180 1,137 1,361 422 (435) 2,485 - 58,665
---------- -------- ------- ------ ------ -------- ------ ----------
Total Operating Expenses 748,189 134,155 29,633 1,477 (226) 165,039 - 913,228
Equity in Loss of 50% Affiliate<F2> - - (629) - - (629) - (629)
---------- -------- ------- ------ ------ -------- ------- ----------
Operating Income 126,194 1,955 2,123 794 1,149 6,021 - 132,215
Interest Expense--Net 30,808 8 756 127 2 893 674 32,375
Other Non-Operating Inc. (Exp.)<F3> - - (285) - - (285) 172 (113)
---------- -------- ------- ------ ------ -------- ------- ----------
Net Income (Loss) $ 95,386 $ 1,947 $ 1,082 $ 667 $1,147 $ 4,843 $ (502) $ 99,727
========== ======== ======= ====== ====== ======== ======= ==========
Total Assets $1,753,492 $ 45,313 $38,702 $6,157 $ 569 $ 90,741 $ 6,219 $1,850,452
========== ======== ======= ====== ====== ======== ======= ==========
Equity Investment in
Primary Services, LLC<F4> $ - $ - $16,817 $ - $ - $ 16,817 $ - $ 16,817
========== ======== ======= ====== ====== ======== ====== ==========
Capital Expenditures $ 76,944 $ 139 $ 182 $ - $ - $ 321 $ - $ 77,265
========== ======== ======= ====== ====== ======== ====== ==========
Nine Months Ended June 30, 1999
- -------------------------------
Total Revenues $ 839,803 $ 85,929 $21,982 $2,811 $1,065 $111,787 $ - $ 951,590
Operating Expenses
Depreciation and Amortization 44,166 23 131 - - 154 - 44,320
Operating Expenses <F1> 639,111 82,979 20,320 1,415 923 105,637 - 744,748
Income Tax Expense 47,952 1,017 516 496 110 2,139 - 50,091
---------- -------- ------- ------ ------ -------- ------- ----------
Total Operating Expenses 731,229 84,019 20,967 1,911 1,033 107,930 - 839,159
---------- -------- ------- ------ ------ -------- ------- ----------
Operating Income 108,574 1,910 1,015 900 32 3,857 - 112,431
Interest Expense--Net 27,350 4 326 115 4 449 55 27,854
Other Non-Operating Inc. (Exp.)<F3> - - 8 - - 8 (1,590) (1,582)
---------- -------- ------- ------ ------ -------- ------- ----------
Net Income (Loss) $ 81,224 $ 1,906 $ 697 $ 785 $ 28 $ 3,416 $(1,645) $ 82,995
========== ======== ======= ====== ====== ======== ======= ==========
Total Assets $1,673,545 $ 24,019 $13,361 $3,490 $ 300 $ 41,170 $ 6,545 $1,721,260
========== ======== ======= ====== ====== ======== ======= ==========
Capital Expenditures $ 111,984 $ 20 $ 702 $ - $ - $ 722 $ - $ 112,706
========== ======== ======= ====== ====== ======== ======= ==========
<FN>
<F1> Includes cost of gas and revenue taxes during all reported periods, a loss on the agreement to sell utility property
during the nine months ended June 30, 1999, and gains on the sales of non-utility assets during the nine months ended
June 30, 2000.
<F2> The initial investment in Primary investors was made in August 1999; additional investments have been made during the
current fiscal year.
<F3> The amounts reported for Other Non-Operating Inc. (Exp.) are net of applicable income taxes. The amounts reported in the
HVAC and Elim./Other columns include an income tax benefit of $153,000 and $570,000, respectively. The amounts reported
in the same columns for the nine months ended June 30, 1999 are net of a $4,000 income tax expense and a $803,000 tax
benefit respectively.
<F4> Reflects Washington Gas Light's total investments in Primary Investors of $17.5 million, less its equity interest in that
company's net loss from inception of $683,000.
</FN>
- 16 -
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 competitive
alternatives; and
9) 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 and Analysis of Financial Condition and
Results of Operations should be read in conjunction with the Company's
Consolidated Financial Statements and Notes thereto.
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 2000 VS. JUNE 30, 1999
EARNINGS
--------
For the three months ended June 30, 2000, the third quarter of the
Company's fiscal year, Washington Gas Light achieved a $1.5 million improvement
in its operating results from the same period last year. During the quarter
ended June 30, 2000, the Company incurred a net loss applicable to common stock
of $5.6 million, compared to a $7.1 million loss for the same period last
- 17 -
year. The basic and diluted loss per average common share in the current quarter
was $0.12, compared to a basic and diluted loss per average common share of
$0.15 for the same quarter in fiscal year 1999. The Company's operations are
weather sensitive and a significant portion of its revenue stream comes from
deliveries of natural gas to residential heating customers. A seasonal decline
in demand for natural gas historically results in a loss for the utility in
its third fiscal quarter.
These results were driven by a 14.4 percent increase in the number of
degree days during the current quarter compared with the same quarter last year,
in addition to a 2.9 percent increase in the Company's customer base and an 8.7
percent reduction in utility operation and maintenance expenses.
Reductions in utility operation and maintenance expenses enhanced
earnings per average common share by $0.06 over the same quarter last year. In
total, utility operation and maintenance expenses fell by $4.3 million to $45.7
million, primarily due to: 1) the absence of expenses in the current quarter
from the Company's former West Virginia operations that it sold in July 1999; 2)
reductions in uncollectible accounts expense; 3) lower pension and
postretirement medical and life insurance benefits and 4) the absence of costs
incurred last year associated with the implementation of the Company's
enterprise-wide software system and the preparation of its infrastructure for
the transition to the Year 2000. The current quarter's decreases were partially
offset by an increase in labor expense over that incurred during the same
quarter last year. A $1.3 million increase in depreciation and amortization
expense, resulting from the Company's increased investment in property, plant
and equipment, including the new enterprise-wide software system that was
completed during the second half of fiscal year 1999, reduced earnings by $0.02
per average common share.
The impact of the improved performance of the Company's utility
operations on earnings was offset somewhat as the earnings from the Company's
non-utility operations declined from a net income of $1.5 million in the third
quarter of fiscal year 1999, to a net loss of $0.8 million in the current
quarter. This decline was primarily attributable to lower gross margins and
higher selling, general and administrative expenses by the Company's energy
marketing segment, as well as start-up costs that its residential heating,
ventilation and air conditioning (HVAC) segment is incurring this year, its
first year of operations. Excluding the effect of small losses incurred by the
Company's minor non-utility operations, the earnings produced by the Company's
non-utility energy marketing, HVAC and customer financing segments declined from
a $0.04 gain per average common share earned during the third quarter of fiscal
year 1999, to a $0.01 loss per average common share in the current quarter.
In addition, interest expense rose from $8.7 million during the three
months ended June 30, 1999, to $10.4 million during the current fiscal quarter,
because of an increase in debt used primarily to fund a higher volume and cost
of storage gas balances, larger amounts of gas costs deferred and an increased
investment in the Company's HVAC segment. In addition, the interest expense for
the three months ended June 30, 1999, was unusually low, because some of the
proceeds from a common stock issuance early in fiscal year 1999 were used to
reduce short-term debt. The increase in interest expense resulted in a $0.02
reduction in earnings per average common share during the three months ended
June 30, 2000, compared to the same quarter of fiscal year 1999.
NET REVENUES
------------
Net revenues for the quarter ended June 30, 2000, increased $4.9
million (7.0 percent) from the same period last year to $74.9 million. This
represents a $0.07 per average common share improvement this quarter, over the
three months ended June 30, 1999.
- 18 -
As shown in the following table, a 3.3 percent increase in the number
of customers served by the Company's continuing operations, coupled with a 14.4
percent increase in the number of heating degree days, resulted in a 7.1 percent
increase in firm therm deliveries by the Company's continuing operations.
Results for the quarter ended June 30, 1999, include approximately $0.8 million
of net revenues from the Company's former West Virginia operations that were
sold in July 1999 (See Note 2 to the Consolidated Financial Statements). The
Company is making wholesale deliveries of natural gas to the current owner of
the Company's former West Virginia utility property. However, on a per therm
basis, net revenues earned by the Company on these wholesale deliveries
are significantly lower than those earned on direct sales and deliveries to the
West Virginia customers during fiscal year 1999, reflecting a lower cost
of delivering gas on a wholesale basis. The lower price per therm earned on
deliveries to the wholesale provider of the Company's former West Virginia
customers reduced the Company's net revenues by approximately $0.7 million from
the quarter ended June 30, 1999.
GAS, WEATHER AND METER STATISTICS
Three Months Ended
June 30,
---------------------- Percent
2000 1999 Variance Inc.(Dec.)
---------- ---------- ---------- ----------
Gas Sales and Deliveries (thousands of therms)
Firm
Gas Sold and Delivered
Continuing operations 86,095 97,158 (11,063) (11.4)
West Virginia operations -- 660 (660) (100.0)
Gas Delivered for Others
Continuing operations 62,661 41,795 20,866 49.9
West Virginia operations -- 2,630 (2,630) (100.0)
---------- ---------- ----------
148,756 142,243 6,513 4.6
---------- ---------- ----------
Interruptible
Gas Sold and Delivered
Continuing operations 5,684 6,841 (1,157) (16.9)
West Virginia operations -- 2,348 (2,348) (100.0)
Gas Delivered for Others 58,092 54,618 3,474 6.4
---------- ---------- ----------
63,776 63,807 (31) --
---------- ---------- ----------
Electric Generation
Gas Delivered for Others 84,096 38,506 45,590 118.4
---------- ---------- ----------
Total Deliveries 296,628 244,556 52,072 21.3
========== ========== ==========
Degree Days
Actual 326 285 41 14.4
Normal 309 312 (3) (1.0)
Percent cooler (Warmer) than Normal 5.5% (8.7%)
Customers Meters (end of period)
Continuing operations 871,175 843,107 28,068 3.3
West Virginia operations -- 3,759 (3,759) (100.0)
---------- ---------- ----------
Total Customer Meters 871,175 846,866 24,309 2.9
========== ========== ==========
- 19 -
Gas Delivered to Firm Customers
The level of gas delivered to firm customers is highly sensitive to
weather variability, 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 and none of the tariffs for the jurisdictions in which the Company
operates currently have a provision for weather normalization. However, the
Company does have declining block rates in its Maryland and Virginia
jurisdictions that reduce the impact that deviations from normal weather have on
net revenues. See Note 7--Commitments and Contingencies for a discussion of
proposed tariff changes in Maryland that include a weather normalization
provision.
During the three months ended June 30, 2000, firm therm deliveries rose
by 6.5 million therms or 4.6 percent over the same quarter last year. This
increase primarily reflects a 3.3 percent rise in the number of customer meters
from continuing operations, partially offset by the absence of sales this
quarter to nearly 3,800 customers of the Company's former West Virginia
operations. A 14.4 percent increase in heating degree days from last year also
contributed to the increase in firm therm deliveries. Weather for the three
months ended June 30, 2000, was 5.5 percent cooler than normal, while weather
for the same period last year was 8.7 percent warmer than normal.
An increasing number of customers are choosing to buy the natural gas
commodity from third-party suppliers, rather than purchasing the natural gas
commodity from Washington Gas Light "bundled" together with the delivery of the
natural gas. As a result, the volume of firm therm deliveries by the Company's
continuing operations to customers who purchase both the natural gas commodity
and delivery service as a "bundled" service decreased from 97.2 million therms
in the three months ended June 30, 1999, to 86.1 million therms during the
current quarter, or a decline of 11.4 percent. This decrease was more than
offset as the volume of firm gas delivered for others from the Company's
continuing operations rose from 41.8 million therms to 62.7 million therms, a
49.9 percent increase. On a per unit basis, the net revenues that Washington Gas
Light earns from delivering gas for others are the same as it earns from bundled
gas sales 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 when customers choose to purchase their gas from
a third-party supplier.
Gas Delivered to Interruptible Customers
Interruptible therm deliveries made by the Company's continuing
operations were 3.8 percent higher during the three months ended June 30, 2000,
over the same period last year. This increase reflects the absence in the third
quarter of fiscal 2000 of 2.3 million interruptible therm deliveries to the
Company's former West Virginia operations. In total, therm deliveries to
interruptible customers during the quarter ended June 30, 2000, are nearly
unchanged from the same period last year.
The effect on net income of any changes in delivered volumes and prices
to the interruptible class is minimized by margin-sharing arrangements embedded
in the Company's 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 in exchange for shifting many of the
fixed costs of providing service from the interruptible to the firm class.
- 20 -
Gas Delivered for Electric Generation
The Company sells and/or delivers natural gas for use at two electric
generation facilities in Maryland, which are each owned by separate companies
that are independent of Washington Gas Light. During the current quarter,
deliveries to these customers rose to 84.1 million therms, more than double the
volume of deliveries made during the three months ended June 30, 1999. This
increase occurred primarily because an operational problem at one customer's
electric generation facility precluded it from receiving delivery of other
alternate fossil fuels, which it typically includes in its fuel mix. Neither
Washington Gas Light nor the customer can predict how long the operational
problem at the affected electric generation facility will continue or how long
that facility will continue to use natural gas as its only source of fuel.
The Company shares a significant majority of the margins earned from
gas deliveries to these customers with firm customers. Therefore, changes in the
volume of interruptible gas deliveries to these customers do not have a material
effect on either net revenues or net income.
OTHER UTILITY OPERATING EXPENSES
--------------------------------
Operation and maintenance expenses for the three months ended June 30,
2000, declined by $4.3 million (8.7 percent) from the prior year's levels. This
reduction improved earnings per average common share by $0.06 over the same
quarter of last year. The results for the quarter ended June 30, 1999, included
$1.2 million of operation and maintenance expenses from the Company's former
West Virginia operations that were sold in July 1999. Other key factors that
contributed to the variance in operation and maintenance expenses for this
quarter compared with the same quarter last year include:
o a $3.0 million reduction in pension and postretirement medical and
life insurance benefits expense, a reduction that is expected to
continue through the fourth quarter of this fiscal year;
o a $2.1 million reduction in uncollectible accounts expense, which
resulted from the Company's continuing improvements to its
collection practices;
o the absence of $1.9 million of computer system support costs
associated with last year's: 1) implementation of the Company's
enterprise-wide software system in the second half of 1999; and 2)
preparation of the Company's infrastructure for the transition to
the Year 2000; and
o a $3.6 million increase in labor expense over the same quarter
last year, primarily reflecting increases in employee wages and
incentives, partially offset by a 6.3 percent reduction in the
number of utility employees.
Operation and maintenance expenses for the fourth quarter of fiscal
year 2000 are likely to be higher than the quarter just completed. Nonetheless,
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 expense increased by $1.3 million (8.9
percent) in the current quarter because of the Company's increased investment in
property, plant and equipment. During the current quarter, the Company recorded
$1.0 million of amortization associated with the completion of the
enterprise-wide software system in the second half of fiscal year 1999, an
increase
- 21 -
of $0.7 million over the amount recorded for the same quarter last year.
Approximately $1.0 million is being amortized each quarter over the ten-year
depreciable life of this system.
The net benefit on utility income taxes fell $2.3 million, primarily
due to an increase in pre-tax income this quarter. For utility operations, the
effective income tax rates were 31.1 percent for the third fiscal quarter of
2000 and 34.4 percent for the same period in fiscal 1999.
NON-UTILITY OPERATING RESULTS
-----------------------------
The Company has three primary unregulated operating segments: 1) energy
marketing; 2) HVAC; and 3) customer financing. The results from those
operations, plus the impact of other incidental unregulated activities decreased
operating income (after income taxes, but before interest expense) from $1.7
million during the quarter ended June 30, 1999, to a $0.4 million net loss in
the current quarter. After applicable interest expense, earnings from
non-utility activities declined from a gain of $0.03 per average common share
during the three months ended June 30, 1999, to a $0.02 loss per average common
share in the current quarter. The following table compares the financial
results, after taxes and interest expense, from non-utility activities for the
quarters ended June 30, 2000 and 1999.
Net Income (Loss) Applicable to Non-Utility Activities
(In thousands of dollars, except percentages)
Three Months Ended
June 30,
------------------------
2000 1999 Variance
-------- --------- ----------
Energy Marketing $ (800) $ 1,261 $ (2,061)
HVAC:
Commercial<F1> 249 225 24
Residential<F1> (198) -- (198)
Customer Financing 130 157 (27)
Other Non-Utility Operations (211) (98) (113)
-------- -------- ---------
Total $ (830) $ 1,545 $ (2,375)
======== ======== =========
<FN>
<F1> The net income reported for the Company's commercial HVAC operations
for the quarters ended June 30, 2000, and June 30, 1999, include
$118,000 and $22,000, respectively, of interest expense (net of income
tax benefit) associated with Washington Gas Light's investment. The
amounts reported for the Company's residential HVAC operations
represent its 50 percent equity earnings i Primary Investors, plus
$131,000 of Washington Gas Light's associated interest expense (net of
income tax benefit) on its investment in Primary Investors during
the quarter ended June 30, 2000.
</FN>
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 7.2 billion cubic feet (bcf)
of gas in the current quarter, an increase of 14.3 percent from 6.3 bcf sold in
the third quarter of fiscal year 1999. During the quarters ended June 30, 2000
and 1999, respectively, 24.0 percent and 26.6 percent of these sales were made
to customers outside of the service territory of the regulated utility. Revenues
increased from $18.0 million in the quarter ended June 30, 1999, to $29.1
million in the quarter ended June 30, 2000, a 61.3 percent increase.
- 22 -
Net income earned by WGEServices declined from a $1.3 million gain in
the quarter ended June 30, 1999, to a $0.8 million loss in the current quarter
as gross margins fell and selling, general and administrative expenses rose in
the current year. In the quarter ended June 30, 1999, this subsidiary benefited
from favorable market conditions as natural gas prices were falling. Conversely,
in the quarter ended June 30, 2000, WGEServices experienced the opposite effect.
Results from the Company's energy marketing affiliate remain on target to fund
growth with internally generated margins and to position WGEServices to enter
the deregulated electricity market wherever profitable opportunities develop.
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 commercial HVAC activities
INCREASED FROM $6.2 million in the quarter ended June 30, 1999 to $10.0 million
in the quarter ended June 30, 2000, a 59.5 percent increase. Net income from
these operations rose from $225,000 to $249,000, respectively.
The results for HVAC also include a $0.2 million net loss from the
Company's investment in Primary Investors a residential and light commercial
HVAC entity in which the Company acquired a 50 percent interest in August 1999.
Primary Investors, through its wholly owned subsidiary, Primary Service Group
LLC (PSG), is in the process of acquiring residential HVAC companies and
integrating their operations. To date, PSG has acquired nine companies with
annualized revenues of $51 million. The net loss by Primary Investors results
from the relatively high level of integration costs, without the full effect of
the expected revenues that will ultimately be derived from these investments.
Primary Investors expects integration costs to stabilize and revenues to
increase, resulting in profitable operations in fiscal year 2001. Excluding
the Company's net losses incurred to date from Primary, Washington Gas Light
has a $17.5 million investment in Primary as of June 30, 2000.
Customer Financing
The customer financing segment provides financing for consumer
purchases of natural gas appliances and energy-related equipment. Net income
from customer financing fell $27,000 in the current quarter to $130,000 due to
higher interest rates charged by banks that purchase the financing contracts.
INTEREST EXPENSE
----------------
Total interest expense increased by $1.7 million (19.7 percent) from
the same period last year, reflecting the following changes in interest expense:
Composition of Interest Expense
(In thousands of dollars, except percentages)
Three Months Ended
June 30,
------------------------
2000 1999 Variance
-------- ------- ---------
Long-Term Debt $ 9,010 $ 8,678 $ 332
Short-Term Debt 1,291 12 1,279
Other (Includes AFUDC) 105 6 99
-------- ------- --------
TOTAL $ 10,406 $ 8,696 $ 1,710
======== ======= ========
- 23 -
The increase in interest on long-term debt of $332,000 was primarily
due to the issuance of $53 million of Medium Term Notes (MTNs) during the
current fiscal quarter (See Note 3 to the Consolidated Financial Statements).
The average balance of long-term debt increased from $491.8 million during the
three months ended June 30, 1999 to $515.6 million during the current fiscal
year, while the weighted average cost of such debt declined by 0.18 percentage
points during the same period. The embedded cost of long-term debt outstanding
at June 30, 2000, was 6.9 percent.
The $1.3 million increase in interest on short-term debt was due to an
$80.0 million rise in the average short-term debt balance and a 1.1 percentage
point increase in the weighted-average cost of such debt. The average balance of
short-term debt outstanding increased during the quarter ended June 30, 2000,
primarily due to:
o the issuance of common stock and MTNs early in fiscal year 1999,
of which a portion of the proceeds were used to reduce short-term
debt; and
o an increase in short-term debt issued during the current quarter.
This short-term debt was used primarily to fund a higher volume
and cost of storage gas balances, as well as the larger amounts of
gas costs deferred in the quarter ended June 30, 2000, compared
with the same quarter last year.
Other interest expense increased $99,000 due primarily to a decrease in
the accrual for allowance for funds used during construction (AFUDC). The
decreased accrual for AFUDC reflects a decline in average construction work in
progress, which reflects the completion of the enterprise-wide software system
during the second half of fiscal year 1999.
NINE MONTHS ENDED JUNE 30, 2000 VS. JUNE 30, 1999
EARNINGS
--------
For the nine months ended June 30, 2000, net income applicable to
common stock was $98.7 million, or $16.7 million higher than the results for the
same period last year. Basic and diluted earnings per average common share for
the nine months ended June 30, 2000 and June 30, 1999, respectively, were $2.12
and $1.79. Results for the nine months ended June 30, 2000, included a
nonrecurring gain of $0.02 per average common share associated with the sales
of two minor non-utility investments. Results for the nine months ended June
30, 1999, included a $2.1 million ($0.05 per average common share) nonrecurring
net loss from the agreement to sell the Company's West Virginia natural gas
utility assets. Additional shares outstanding in the current nine-month
period caused earnings per average common share to be $0.03 lower than last
year.
Utility net revenues increased $6.6 million (1.7 percent) primarily
because of a 1.7 percent increase in firm therm deliveries, which reflects a 2.9
percent increase in the Company's customer growth, partially offset by weather
that was 1.5 percent warmer than last year. In addition, utility operation and
maintenance expenses decreased $19.8 million or 12.8 percent in the current
nine-month period and enhanced earnings per share by $0.27 over the same period
last year. Utility net revenues and operation and maintenance expenses for 1999
include results from the Company's former West Virginia operations that were
sold in July 1999 (See Note 2 to the Consolidated Financial Statements). A $4.6
million increase in depreciation and amortization expense, resulting from the
Company's increased investment in property, plant and equipment, including the
new
- 24 -
enterprise-wide software system that was completed during the second half of
fiscal year 1999, reduced earnings by $0.06 per average common share.
The Company's three major non-utility operations contributed $0.08 per
average common share, a $0.01 improvement over the nine months ended June 30,
1999. The increase was primarily attributable to improvements by the Company's
unregulated commercial HVAC operations.
Interest expense rose from $27.9 million during the nine months ended
June 30, 1999, to $32.4 million during the current nine-month period, for the
same reasons previously described in the discussion of the Company's three-month
results of operations. The increase in interest expense resulted in a $0.06
reduction in earnings per average common share during the nine months ended June
30, 2000, compared to the same nine-month period in fiscal year 1999.
NET REVENUES
------------
Net revenues for the nine months ended June 30, 2000, increased by $6.6
million (1.7 percent) from the same period last year to $385.4 million and
caused earnings per average common share to rise by $0.09 over the nine months
ended June 30, 1999. As shown in the following table, a 3.3 percent increase in
the number of customers served by the Company's continuing operations, partially
offset by 1.5 percent warmer weather, resulted in a 2.9 percent increase in firm
therm deliveries by the Company's continuing operations.
These improvements more than offset the impact of $4.0 million of net
revenues from the Company's former West Virginia operations (sold in July 1,
1999), which were included in the results for the nine months ended June 30,
1999. As previously discussed, the gross margins that the Company currently
earns on wholesale sales to the current owner of its former West Virginia
operations are significantly lower than the gross margins it earned during
the first nine months of fiscal year 1999, when it made direct sales and
deliveries to retail customers in West Virginia. The lower price per therm
earned on deliveries to the wholesale provider of the Company's former West
Virginia customers, which reflects the lower cost of providing that service,
reduced the Company's net revenues by approximately $3.7 million from the nine
months ended June 30, 1999.
- 25 -
GAS, WEATHER AND METER STATISTICS
Nine Months Ended
June 30,
--------------------- Percent
2000 1999 Variance Inc.(Dec.)
--------- --------- --------- ----------
Gas Sales and Deliveries (thousands of therms)
Firm
Gas Sold and Delivered
Continuing operations 738,989 827,198 (88,209) (10.7)
West Virginia operations -- 3,634 (3,634) (100.0)
Gas Delivered for Others
Continuing operations 275,514 158,948 116,566 73.3
West Virginia operations -- 7,788 (7,788) (100.0)
--------- --------- ---------
1,014,503 997,568 16,935 1.7
--------- --------- ---------
Interruptible
Gas Sold and Delivered
Continuing operations 23,806 35,772 (11,966) (33.5)
West Virginia operations -- 8,127 (8,127) (100.0)
Gas Delivered for Others 214,288 225,392 (11,104) (4.9)
--------- --------- ---------
238,094 269,291 (31,197) (11.6)
--------- --------- ---------
Electric Generation
Gas Delivered for Others 137,449 68,249 69,200 101.4
--------- --------- ---------
Total Deliveries 1,390,046 1,335,108 54,938 4.1
========= ========= =========
Degree Days
Actual 3,574 3,630 (56) (1.5)
Normal 3,812 3,825 (13) (0.3)
Percent Cooler (Warmer) than Normal (6.2%) (5.1%)
Customer Meters (end of period)
Continuing operations 871,175 843,107 28,068 3.3
West Virginia operations -- 3,759 (3,759) (100.0)
--------- --------- ---------
Total Customer Meters 871,175 846,866 24,309 2.9
========= ========= =========
Gas Delivered to Firm Customers--Gas Sold and Delivered
During the nine months ended June 30, 2000, firm therm deliveries rose
by 16.9 million therms or 1.7 percent over the same period last year. This
increase primarily reflects a 3.3 percent rise in the number of customer meters
from continuing operations, partially offset by the absence of deliveries this
fiscal period to nearly 3,800 customers of the Company's former West Virginia
operations that were sold in July 1999. Firm therm deliveries were also
adversely affected by a 1.5 percent decrease in heating degree days from last
year. Weather for the nine months ended June 30, 2000, was 6.2 percent warmer
than normal, while weather for the same period last year was 5.1 percent warmer
than normal.
The volume of firm therm deliveries from continuing operations to
customers who purchase "bundled" service from Washington Gas Light decreased
from 827.2 million therms in the nine months ended June 30, 1999 to 739.0
million therms during the current nine-month period, or a decline of 10.7
percent. This decrease was more than offset as the volume of firm gas delivered
for others from the
- 26 -
Company's continuing operations rose from 158.9 million therms to 275.5 million
therms, a 73.3 percent increase.
Gas Delivered to Interruptible Customers--Gas Sold and Delivered
Deliveries to interruptible customers during the nine months ended June
30, 2000, decreased by 31.2 million therms or 11.6 percent from the same period
last year, because of decreased demand by interruptible customers coupled with
the 1.5 percent decrease in heating degree days, as well as the absence of 8.1
million therm sales and deliveries associated with the Company's former West
Virginia operations which were included in the results for the nine months ended
June 30, 1999. As previously described in this report, the effect on net income
of changes in gas deliveries to interruptible customers is minimal due to
margin-sharing arrangements in each of the Company's jurisdictions.
Gas Delivered for Electric Generation
Volumes delivered for electric generation more than doubled, increasing
from 68.2 million therms delivered during the nine-month period ending June 30,
1999 to 137.4 million therms delivered during the same period of the current
fiscal year. This increase occurred primarily for the same reason described in
the discussion of the Company's three-month operating results. Margins earned on
such deliveries are being shared with firm customers as described previously in
this report.
OTHER UTILITY OPERATING EXPENSES
--------------------------------
During the nine months ended June 30, 2000, operation and maintenance
expenses declined $19.8 million (12.8 percent) from the prior year's levels.
This reduction improved earnings per average common share by $0.27 over the same
nine-month period last year. The results for the nine months ended June 30,
1999, included $5.3 million of operation and maintenance expenses from the West
Virginia operations that were sold in July 1999. Other key factors that
contributed to the variance in operation and maintenance expenses for the first
nine months of fiscal year 2000 compared with the same period for the prior year
include:
o an $8.4 million reduction in pension and postretirement medical
and life insurance benefits expense;
o a $3.9 million reduction in advertising, corporate relations and
miscellaneous customer service expenses;
o a $3.9 million decrease in construction and technical support
expenses;
o the absence of $2.6 million of computer system support
costs associated with last year's : 1) implementation of the
Company's enterprise-wide software system in the second half of
1999; and 2) preparation of the Company's infrastructure for the
transition to the year 2000; and
o a $2.4 million reduction in the uncollectible accounts expense
resulting from the previously discussed improvement to the
Company's collection practices.
These reductions were partially offset by a $6.1 million net increase
in labor and benefit expenses. This increase reflects an increase in employee
wages and incentives, offset somewhat by the 6.3 percent reduction in the number
of utility employees.
- 27 -
The operation and maintenance expenses in the fourth quarter of fiscal
year 2000 are likely to be higher than those incurred in any of the preceding
quarters in fiscal year 2000. Nonetheless, 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 $4.6 million (10.5 percent)
in the current nine-month period because of the Company's increased investment
in property, plant and equipment. Included in this increase is $2.8 million of
additional amortization related to the new enterprise-wide software system that
was completed in the second half of fiscal year 1999. The increase in
depreciation and amortization reduced earnings per average common share for the
nine months ended June 30, 2000, by $0.06 per share when compared to last year.
Utility income taxes increased by $8.2 million, primarily due to a 16.5
percent increase in pre-tax utility income for the current nine-month period.
For utility operations, the effective income tax rate was 37.1 percent for the
first nine months of both fiscal 2000 and 1999.
NON-UTILITY OPERATING RESULTS
-----------------------------
During the nine months ended June 30, 2000, the results from the
Company's unregulated energy marketing, HVAC and customer financing activities,
plus the impact of other incidental unregulated activities increased net
operating income (after income taxes, but before interest expense) to $6.0
million compared to $3.9 million earned during the same period last year, an
increase of $2.1 million. Earnings per average common share derived from
non-utility activities were $0.10 in the current nine-month period, an increase
of $0.03 over last year. The increase in non-utility earnings includes a
nonrecurring gain of $0.02 per average common share from a subsidiary's sales of
certain venture funds and a preferred stock interest. The following table
compares the financial results, after income taxes and associated interest
expense, from non-utility activities for the nine months ended June 30, 2000 and
1999.
Net Income (Loss) Applicable to Non-Utility Activities
(In thousands of dollars, except percentages)
Nine Months Ended
June 30,
--------------------
2000 1999 Variance
--------- -------- --------
Energy Marketing $ 1,947 $ 1,906 $ 41
HVAC:
Commercial<F1> 1,832 697 1,135
Residential<F1> (750) -- (750)
Customer Financing 667 785 (118)
Other Non-Utility Operations
Continuing Operations (7) 28 (35)
Gain from sales of non-utility assets 1,154 -- 1,154
--------- -------- -------
TOTAL $ 4,843 $ 3,416 $ 1,427
========= ======== =======
<FN>
<F1> The net income reported for the Company's commercial HVAC operations
for the nine months ended June 30, 2000, and June 30, 1999, include
$443,000 and $70,000, respectively, of interest expense (net of income
tax benefit) associated with Washington Gas Light's investment. The
amounts reported for the Company's residential HVAC operations
represent its 50 percent equity earnings in Primary Investors, plus
$341,000 of Washington Gas Light's associated interest expense (net of
income tax benefit) on its investment in Primary Investors during the
nine months ended June 30, 2000.
</FN>
- 28 -
Energy Marketing
WGEServices, the Company's retail energy marketing subsidiary,
continued to expand rapidly as the subsidiary sold 39.0 billion cubic feet (bcf)
of gas in the current nine-month period, an increase of 33.6 percent from 29.2
bcf sold in the first nine months of year 1999. During the nine months ended
June 30, 2000 and 1999, respectively, 22.6 percent and 21.5 percent of these
sales were made to customers outside of the service territory of the regulated
utility revenues increased from $85.9 million in the nine months ended June 30,
1999 to $136.1 million in the nine months ended June 30, 2000, a 58.4 percent
increase. The improvement in the energy marketing segment's revenues was due
primarily to the continuing growth of WGEServices' customer base and higher
natural gas prices. Despite the growth of the WGEServices' customer base and its
increased volume of sales, there was only a slight increase in that subsidiary's
net income during the nine months ended June 30, 2000, over the same period last
year, because of increased natural gas prices during the third quarter which
reduced gross margins and because of increased selling, general and
administrative expenses.
HVAC
Revenues derived from the Company's commercial HVAC activities
increased from $22.0 million in the nine months ended June 30, 1999, to $32.4
million in the nine months ended June 30, 2000, a 47.3 percent increase. Net
income from those operations roase from $0.7 million to $1.8 million, reflecting
increased revenues and the absence of start-up costs that were incurred during
the first nine months of fiscal year 1999.
The results for the HVAC segment also include a $750,000 net loss from
the Company's investment in Primary Investors, reflecting start-up costs
necessary to integrate companies that are being acquired. As mentioned
previously in this report, Primary Investors is in the process of acquiring
residential HVAC companies and integrating their operations. The net loss by
Primary Investors results from the relatively high level of integration costs,
without the full effect of the expected revenues that will ultimately be derived
from these investments. Primary Investors expects integration costs to stabilize
and revenues to increase, resulting in profitable operations in fiscal year
2001.
Customer Financing
Net income from customer financing decreased $118,000 in the current
nine-month period due to a lower volume of contracts sold by the Company to
banks in addition to an increase in interest rates charged by those banks over
the same period last year.
Sale of Non-Utility Assets
During the nine months ended June 30, 2000, a non-utility Company
subsidiary sold a preferred stock investment and recorded a pre-tax book gain of
$300,000. In addition, the same subsidiary recorded a pre-tax gain of $411,000
from the sales of certain venture funds. In total, the Company recorded a
$1,154,000 after-tax gain on these transactions, which includes the tax benefit
of capital loss carrybacks.
INTEREST EXPENSE
----------------
Total interest expense increased by $4.5 million (16.2 percent)
from the same period last year, reflecting the following changes:
- 29 -
Composition of Interest Expense
(In thousands, except percentages)
Nine Months Ended
June 30,
------------------------
2000 1999 Variance
-------- --------- ---------
Long-Term Debt $ 26,505 $ 26,149 $ 356
Short-Term Debt 5,622 1,941 3,681
Other (Includes AFUDC) 248 (236) 484
-------- --------- --------
Total $ 32,375 $ 27,854 $ 4,521
======== ========= ========
The $3.7 million increase in interest on short-term debt was due to a
$74.5 million rise in the average amount of short-term debt outstanding and an
increase of 0.80 percentage points in the weighted-average cost of such debt.
The average balance of short-term debt outstanding increased during the nine
months ended June 30, 2000, primarily due to: 1) the issuance of common stock
and MTNs early in fiscal year 1999, of which a portion of the proceeds were used
to reduce short-term debt; and 2) increased short-term debt issued to fund a
higher volume and cost of storage gas balances and larger amounts of gas costs
deferred in the nine months ended June 30, 2000, compared with the same period
last year.
Other interest expense increased $484,000 due primarily to a decrease
in the accrual for AFUDC. The decreased accrual for AFUDC reflects a decline in
average construction work in progress due primarily to the completion of the
enterprise-wide software system during the second half of fiscal year 1999.
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 therm deliveries (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 generally used to liquidate short-term debt and
acquire storage gas for the subsequent heating season.
At June 30, 2000, the Company had notes payable outstanding, which
consist of bank loans and commercial paper, of $58.8 million as compared to
$113.1 million at September 30, 1999. The decrease in notes payable from
September 1999 reflects the seasonal nature of the Company's cash requirements.
Due to higher costs of gas in storage, larger deferred gas cost balances and the
recent investments in Primary Investors, the June 30, 2000, balance of notes
payable outstanding is greater than typically experienced during this time of
the year.
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
- 30 -
December 1994. The number of customer meters and the variability of
the weather from normal levels significantly affect the level of therms
delivered.
CASH FLOW FROM OPERATING ACTIVITIES
Operating activities provided net cash during the first nine months of
fiscal year 2000 of $135.3 million compared with $232.3 million during the same
period last year. The $97.0 million decline in cash from operating activities
was primarily the result of:
o higher funds used to support increased levels of utility and
non-utility accounts receivable, primarily reflecting an increase
in the volume of therms sold during the current year by both
Washington Gas Light and WGEServices, as well a rise in natural
gas costs embedded in the price of the commodity sold to
customers. In addition, a rise in third party and off-system gas
sales also contributed to the increased levels of utility accounts
receivable in the current year;
o higher funds used to support an increase in the volume of gas
stored and higher gas prices during the current period; and
o an under-recovery of purchased gas costs from customers during the
nine months ended June 30, 2000, compared with the same period
last year.
Partially offsetting these uses of cash was a $24.3 million increase in
net income, adjusted for non-cash items.
CASH FLOW FROM FINANCING ACTIVITIES
During the first nine months of fiscal year 2000, no cash was generated
through common stock issued and no cash was used to reacquire common stock. For
the same period last year, the Company raised $55.7 million through the sale of
2.3 million shares of common stock and an additional $8.1 million from shares of
common stock issued through the Dividend Reinvestment and Common Stock Purchase
Plan and the Employee Savings Plan.
During the nine months ended June 30, 2000, the Company issued $54.9
million of long-term debt, including $53.0 million of Medium-Term Notes (MTNs)
with a weighted average coupon rate of 7.56% and $1.7 million of long-term debt
for the funding of construction projects.
The dividends paid by the Company during the nine months ended June 30,
2000, increased by $1.6 million due primarily to the issuance of 2.3 million
shares of common stock in November 1998 (See Note 4 to the Consolidated
Financial Statements) and a $0.015 increase per common share paid during the
current nine-month period compared to the nine months ended June 30, 1999.
CASH FLOW FROM INVESTING ACTIVITIES
Capital expenditures for the first nine months of fiscal year 2000 were
$77.3 million, on a budget of $125.3 million for fiscal year 2000, compared to
capital expenditures of $112.7 million for the first nine months of fiscal year
1999. The decline was attributable, in part, to an $18.1 million decrease in
capital expenditures associated with the Company's enterprise-wide software
system during the first nine months of fiscal year 2000.
- 31 -
During the nine months ended June 30, 2000, the Company invested $10.0
million in Primary Investors a partnership with Thayer Capital Partners that was
established in August 1999 to invest in companies that provide HVAC-oriented
products and services in the District of Columbia and parts of Maryland and
Virginia. To date, Washington Gas Light has invested $17.5 million, which
Primary Investors, has used to acquire nine companies with total annualized
revenues of $51.0 million.
SALES OF ACCOUNTS RECEIVABLE
----------------------------
During the nine months ended June 30, 2000, the Company sold, with
recourse, $18.4 million of non-utility accounts receivable, compared to $21.3
million in the nine months ended June 30, 1999.
OTHER FACTORS AFFECTING THE COMPANY
CORPORATE STRUCTURE
Changes in the Company corporate structure, including the establishment
of a holding company, are discussed in Note 2 to the Consolidated Financial
Statements.
ELECTRICITY SUPPLY AGREEMENT
In Maryland, beginning July 1, 2000, retail customers of Potomac
Electric Power Company, Baltimore Gas and Electric, Potomac Edison and Delmarva
Power and Light are able to choose their supplier of electricity. Similar to the
gas industry, customers of these utilities will have the option to either
continue purchasing their electricity "bundled" with the associated distribution
and transmission service from their current utility or purchase electricity from
a third-party supplier and have their current electric utility deliver the
energy. Similar customer choice programs are being considered for electric
customers in the Virginia and District of Columbia jurisdictions.
The Company, through its energy marketing subsidiary WGEServices, began
marketing electricity to retail electric customers in Maryland this summer and
plans to market electricity in other regions as electric customer choice
programs are introduced. On April 3, 2000, WGEServices entered into a master
purchase and sale agreement with Southern Company Energy Marketing L.P.
(Southern), a wholesale energy marketer. Under the agreement, when WGEServices
identifies profitable opportunities, it can purchase electric energy, capacity
and certain ancillary services from Southern, then resell it to retail electric
customers in Maryland and in other regions as customer choice programs are
introduced.
REGULATORY MATTERS
On July 1, 2000, the Public Service Commission of Maryland issued a
generic order which modifies the standards of conduct which govern dealings
between regulated electric and gas utilities (including Washington Gas Light)
and their affiliated companies. Most significantly, the order:
o prohibits the sharing of employees that perform certain corporate
functions, including market research, public relations,
advertising, marketing and customer service. The Order also limits
the sharing of employees for certain accounting and legal support
activities;
o requires utilities to file a Cost Allocation Manual, which
delineates the company's policies in allocating the costs of
shared services and the associated overhead thereof;
- 32 -
o establishes disclaimer and royalty requirements when an affiliate
uses the utility's name or logo;
o prohibits joint promotions, advertising and marketing activities
by the utility and its affiliates;
o establishes limitations on the loans and guarantees that may be
made by a utility to its affiliates; and
o expands reporting requirements of the regulated entity.
Washington Gas Light has filed an appeal of the Commission's order. The
Company has also requested that the effective date of the new rules be suspended
pending resolution of the appeal.
Other regulatory matters that may have an impact on the Company's
operations are discussed in Note 7 to the Consolidated Financial Statements.
YEAR 2000
Washington Gas Light has continued to operate successfully through the
turn of the century and during other key dates associated with the transition to
the year 2000. The Company continues to monitor its systems for Year 2000
issues.
The following table reflects the amounts charged to expense and
capitalized early in fiscal year 2000 and during 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.
(millions) 2000 1999 1998 1997 Total
---------- ---- ---- ---- ---- -----
Expense $ - $ 6 $ 5 $ 1 $ 12
Capital $ 1 $ 24 $ 20 $ - $ 45
No Year 2000-related costs were incurred during the three months ended
June 30, 2000 and the Company does not expect to incur any additional Year
2000-related costs.
LABOR MATTERS
Recently, new contracts were ratified by the members of Washington Gas
Light's four largest labor unions. All four contracts include an annual lump-sum
payment provision, based upon the Company meeting a rate of return on common
equity and the Board of Directors approval. Each contract also provides for
improved medical, sick leave and disability benefits. Additional information
regarding the specific contracts ratified by employees of each labor union is
described below.
On April 6, 2000, approximately 380 members of the Office and
Professional Employees International Union Local 2 voted to ratify a new
three-year labor contract with the Company. Key contract provisions for the
Local 2 members include:
o a lump sum contract ratification bonus of $1,200 per employee,
which was paid on April 13, 2000;
o a general wage increase of 1.5 percent, 1.0 percent and 2.0
percent in the first, second and third years of the contract,
respectively;
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o an increase in the Company's matching contribution for the 401(K)
Savings Plan up to 2.0 percent in the first year and up to 2.25
percent in the second and third years;
o an income security plan that provides up to 20 weeks of pay for
employees who may be affected by a declaration of excess in
classification;
o continuing security for employees, employed by the Company, on or
before April 1, 1985; and
o length of service-based performance bonuses for long-term
employees.
On June 6, 2000, approximately 725 members of Teamsters Local 96 voted
to ratify a new four-year labor contract with the Company. Key contract
provisions include the following:
o a 3.0 percent, 2.75 percent and 2.25 percent general wage increase
in the first, second and fourth years of the contract,
respectively; and in the third year employees may elect to receive
either a lump-sum payment of 2.5 percent of base pay or a 2.0
percent general wage increase;
o continuing employment security during the duration of the
contract;
o an increase in pension benefits from 44% to 46% of the three
highest years of pay for employees with at least 30 years of
service, which becomes effective December 2, 2002; and
o improved compensation for off-peak shifts and stand-by pay.
On August 1, 2000, employees at the Company's Shenandoah Division voted
to ratify a new four-year contract negotiated by the Teamsters union. The
contract, which covers 25 employees, includes the following key provisions:
o a general wage increase of 4.0 percent and 2.5 percent in the
first and second years of the contract, respectively, and a 2.25
percent general wage increase in both the third and fourth years;
and
o a lump sum contract ratification bonus of $300 per employee.
On August 1, 2000, production and maintenance workers at the Company's
Frederick Division voted to ratify a new three-year contract negotiated by the
International Brotherhood of Electrical Workers Local 1900 (IBEW). The contract,
which covers 21 employees, includes the following key contract provisions:
o a general wage increase of 4.0 percent, 3.25 percent and 3.0
percent in the first, second and third years of the contract,
respectively;
o a lump-sum payment of $300 in the first year of the contract;
o improved compensation for on-call assignments; and
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o an increase in the Company's matching contribution for the 401(K)
Savings Plan.
Later this year, the Company will negotiate with the IBEW for a second
contract, which covers 14 clerical employees, or less than 1 percent of the
Company's workforce, that will expire on October 31, 2000.
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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, 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 June 30, 2000, WGEServices' open
position was not material to the Company's financial position or results of
operations.
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27.0 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
Reports on Form 8-K:
o Washington Gas Light filed a Current Report on Form 8-K, dated
June 28, 2000, to report on the election of Ms.Debra L. Lee to
fill a vacancy on the Board of Directors created by the death of
Mr.Joseph M. Schepis on June 3, 2000. The Form 8-K also reported
that the responsibilities of Mr. James H.DeGraffenreidt, Jr. had
been expanded to include the office of president in addition to
his role as the Company's chairman and chief executive officer.
In addition, the Form 8-K reported a number of organizational
changes in the Company's senior management, the most significant
of which include: 1) the expansion of the responsibilities of
Ms. Elizabeth M. Arnold, Vice President, to include the Company's
unregulated customer finance section in addition to her other
responsibilities for the Company's strategic planning and all
other unregulated operations; and 2) the expansion of the
responsibilities of Mr. Terry D. McCallister, Vice President,
to include the Company's entire Gas Transportation organization
in addition to his previous responsibilities for plants and
gate stations, system operation and maintenance, and the Company's
Shenandoah and Frederick Divisions.
o Washington Gas Light filed a Current Report on Form 8-K, dated
June 3, 2000, to report the death of Mr. Joseph M. Schepis, the
Company's President and Chief Operating Officer. Mr. Schepis also
served on the Company's Board of Directors and was the president
and a director of several Company subsidiaries.
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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 August 11, 2000 /s/ Robert E. Touriniemi
---------------------- ----------------------------
Robert E. Tuoriniemi
Controller
(Principal Accounting Officer)
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