UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1998
-------------------------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
---------------------- --------------------------
Commission file number 1-1483
----------------------------------------------------------
WASHINGTON GAS LIGHT COMPANY
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
District of Columbia and Virginia 53-0162882
- ----------------------------------------- -----------------------------------
(State or other jurisdiction (I.R.S.Employer Identification No.)
of incorporation or organization)
1100 H Street, N. W., Washington, D. C. 20080
- ----------------------------------------- ----------------------------------
(Address of principal executive offices) (Zip Code)
(703) 750-4440
- --------------------------------------------------------------------------------
Registrant's telephone number, including area code
NONE
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report.)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
----- -----
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 43,629,425 April 30, 1998
- ---------------------------- -------------------- --------------------
Class Number of Shares Date
WASHINGTON GAS LIGHT COMPANY
----------------------------
INDEX
Page No.
..................................................................
PART I. Financial Information:
Item 1. Financial Statements
Consolidated Balance Sheets -
March 31, 1998 and September 30, 1997 .............. 2-3
Consolidated Statements of Income -
Three Months Ended March 31, 1998 and 1997 ......... 4
Consolidated Statements of Income -
Six Months Ended March 31, 1998 and 1997 ........... 5
Consolidated Statements of Cash Flows -
Six Months Ended March 31, 1998 and 1997 ........... 6
Notes to Consolidated Financial Statements ............... 7-10
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations ......................... 11-19
PART II. Other Information:
Item 4. Submission of Matters to a Vote of
Security Holders .................................. 20
Item 5. Other Information .................................. 21
Item 6. Exhibits and Reports on Form 8-K ................... 22
Signature ................................................... 22
1
WASHINGTON GAS LIGHT COMPANY
----------------------------
CONSOLIDATED BALANCE SHEETS
---------------------------
Mar. 31, Sept. 30,
1998 1997
---------- ----------
(Unaudited)
(Thousands)
ASSETS
Property, Plant and Equipment
At original cost $1,911,103 $1,846,471
Accumulated depreciation and amortization (653,491) (629,334)
---------- ----------
1,257,612 1,217,137
---------- ----------
Current Assets
Cash and cash equivalents 11,505 9,708
Accounts receivable 188,040 65,232
Gas costs due from customers 6,481 9,445
Allowance for doubtful accounts (11,353) (11,043)
Accrued utility revenues 48,285 21,020
Materials and supplies--principally at average cost 15,305 15,186
Storage gas--at cost (first-in, first-out) 23,821 81,072
Deferred income taxes 18,692 17,447
Other prepayments--principally taxes 10,687 11,907
Other current assets 1,062 -
---------- ----------
312,525 219,974
---------- ----------
Deferred Charges and Other Assets
Regulatory assets--deferred purchased gas costs - 4,447
Regulatory assets--other 96,386 97,509
Other 17,990 12,965
---------- ----------
114,376 114,921
---------- ----------
Total $1,684,513 $1,552,032
========== ==========
See accompanying Notes to Consolidated Financial Statements.
2
WASHINGTON GAS LIGHT COMPANY
----------------------------
CONSOLIDATED BALANCE SHEETS
---------------------------
Mar. 31, Sept. 30,
1998 1997
---------- ----------
(Unaudited)
(Thousands)
CAPITALIZATION AND LIABILITIES
Capitalization
Common shareholders' equity $ 652,375 $ 589,035
Preferred stock 28,426 28,430
Long-term debt 474,729 431,575
---------- ----------
1,155,530 1,049,040
---------- ----------
Current Liabilities
Current maturities of long-term debt 28,706 20,862
Notes payable 14,445 67,900
Accounts payable 117,701 99,578
Wages payable 14,233 13,590
Dividends declared 13,424 13,224
Customer deposits and advance payments 8,898 16,662
Accrued taxes and interest 54,398 10,934
Pipeline refunds due to customers 1,289 6,054
Gas costs due to customers 3,363 2,418
---------- ----------
256,457 251,222
---------- ----------
Deferred Credits
Unamortized investment tax credits 20,958 21,427
Deferred income taxes 132,869 136,682
Regulatory liabilities--deferred purchased gas costs 19,964 -
Other regulatory liabilities and other deferred credits 98,735 93,661
---------- ----------
272,526 251,770
---------- ----------
Total $1,684,513 $1,552,032
========== ==========
See accompanying Notes to Consolidated Financial Statements.
3
WASHINGTON GAS LIGHT COMPANY
----------------------------
CONSOLIDATED STATEMENTS OF INCOME
---------------------------------
(Unaudited)
Three Months Ended
-----------------------
Mar. 31, Mar. 31,
1998 1997
-------- ---------
(Thousands, Except Per
Share Data)
................................................
Operating Revenues ................................. $390,221 $431,465
Cost of Gas ........................................ 210,003 242,888
-------- --------
Net Revenues ....................................... 180,218 188,577
-------- --------
Other Operating Expenses
Operation ........................................ 40,890 42,160
Maintenance ...................................... 9,802 8,113
Depreciation and amortization .................... 13,734 12,819
General taxes .................................... 23,894 24,854
Income taxes ..................................... 30,197 33,670
-------- --------
118,517 121,616
-------- --------
Operating Income ................................... 61,701 66,961
Other Income - Net ................................. 1,498 1,106
-------- --------
Income Before Interest Expense ..................... 63,199 68,067
Interest Expense
Interest on long-term debt ....................... 8,196 7,720
Other ............................................ 1,274 1,203
-------- --------
9,470 8,923
-------- --------
Net Income ......................................... 53,729 59,144
Dividends on Preferred Stock ....................... 333 333
-------- --------
Net Income Applicable to Common Stock .............. $ 53,396 $ 58,811
======== ========
Average Common Shares Outstanding .................. 43,628 43,706
======== ========
Earnings per Average Common Share - Basic .......... $ 1.22 $ 1.35
======== ========
Earnings per Average Common Share - Diluted ........ $ 1.22 $ 1.34
======== ========
Dividends Declared per Common Share ................ $ 0.300 $ 0.295
======== ========
See accompanying Notes to Consolidated Financial Statements.
4
WASHINGTON GAS LIGHT COMPANY
----------------------------
CONSOLIDATED STATEMENTS OF INCOME
---------------------------------
(Unaudited)
Six Months Ended
-----------------------
Mar. 31, Mar. 31,
1998 1997
-------- ---------
(Thousands, Except Per
Share Data)
................................................
Operating Revenues ................................. $757,768 $776,423
Cost of Gas ........................................ 422,049 434,162
-------- --------
Net Revenues ....................................... 335,719 342,261
-------- --------
Other Operating Expenses
Operation ........................................ 83,991 87,906
Maintenance ...................................... 19,039 16,980
Depreciation and amortization .................... 27,165 25,398
General taxes .................................... 43,663 43,800
Income taxes ..................................... 52,458 55,160
-------- --------
226,316 229,244
-------- --------
Operating Income ................................... 109,403 113,017
Other Income - Net ................................. 1,611 1,657
-------- --------
Income Before Interest Expense ..................... 111,014 114,674
Interest Expense
Interest on long-term debt ....................... 16,188 15,173
Other ............................................ 2,973 2,933
-------- --------
19,161 18,106
-------- --------
Net Income ......................................... 91,853 96,568
Dividends on Preferred Stock ....................... 666 666
-------- --------
Net Income Applicable to Common Stock .............. $ 91,187 $ 95,902
======== ========
Average Common Shares Outstanding .................. 43,645 43,710
======== ========
Earnings per Average Common Share - Basic .......... $ 2.09 $ 2.19
======== ========
Earnings per Average Common Share - Diluted ........ $ 2.09 $ 2.19
======== ========
Dividends Declared per Common Share ................ $ 0.595 $ 0.580
======== ========
See accompanying Notes to Consolidated Financial Statements.
5
WASHINGTON GAS LIGHT COMPANY
----------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
(Unaudited)
Six Months Ended
-----------------------
Mar. 31, Mar. 31,
1998 1997
-------- ---------
(Thousands)
Operating Activities
Net income ............................................ $ 91,853 $ 96,568
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization a/ .................... 29,856 29,007
Deferred income taxes - net ......................... (4,946) (3,440)
Amortization of investment tax credits .............. (470) (479)
Allowance for funds used during construction ........ (378) (179)
Other noncash (credits) - net ....................... (421) (1,520)
-------- --------
115,494 119,957
Changes in assets and liabilities
(net of effects from purchase of non-utility companies):
Accounts receivable and accrued utility revenues .... (144,205) (145,813)
Gas costs due from/to customers - net ............... 3,909 15,236
Storage gas ......................................... 57,251 62,052
Other prepayments - principally taxes ............... 1,283 1,971
Accounts and wages payable .......................... 14,738 12,085
Customer deposits and advance payments .............. (7,764) (6,553)
Accrued taxes and interest .......................... 43,401 48,693
Pipeline refunds due to customers ................... (4,765) (9,466)
Deferred purchased gas costs ........................ 24,411 13,367
Other - net ......................................... 2,560 (1,700)
-------- --------
Net Cash Provided by Operating Activities ......... 106,313 109,829
-------- --------
Financing Activities
Common stock issued ................................... -- 312
Long-term debt issued ................................. 72,000 83,788
Long-term debt retired ................................ (23,733) (35,506)
Premium on long-term debt retired ..................... (493) (1,422)
Common stock repurchased .............................. (2,340) --
Notes payable - net of effects from purchase
of non-utility companies ............................ (54,800) (64,715)
Dividends on common and preferred stock ............... (26,425) (25,583)
-------- --------
Net Cash (Used in) Financing Activities ........... (35,791) (43,126)
-------- --------
Investing Activities
Capital expenditures .................................. (67,354) (60,600)
Sale of Venture Funds ................................. 1,619 --
Payment for purchase of non-utility companies
(net of cash acquired) .............................. (2,990) --
-------- --------
Net Cash (Used in) Investing Activities ........... (68,725) (60,600)
-------- --------
Increase in Cash and Cash Equivalents ................. 1,797 6,103
Cash and Cash Equivalents at Beginning of Period ...... 9,708 4,589
-------- --------
Cash and Cash Equivalents at End of Period ............ $ 11,505 $ 10,692
======== ========
Supplemental Disclosures of Cash Flow Information
Income taxes paid ................................... $ 18,889 $ 14,462
Interest paid ....................................... $ 19,156 $ 17,965
a/ Includes amounts charged to other accounts.
See accompanying Notes to Consolidated Financial Statements.
6
WASHINGTON GAS LIGHT COMPANY
----------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
(Unaudited)
A. In the opinion of Washington Gas Light Company (the Company), the
accompanying Consolidated Financial Statements reflect all adjustments
(which include only normal recurring adjustments) necessary to present
fairly the results for such periods. Refer to the Company's Annual Report
on Form 10-K for the fiscal year ended September 30, 1997.
B. Due to the seasonal nature of the Company's business, the results of
operations shown do not indicate the expected results for the fiscal year
ended September 30, 1998.
C. The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
D. Certain amounts in financial statements of prior years have been
reclassified to conform to the presentation of the current year.
E. During the six months ended March 31, 1998, the Company issued a total of
$72 million in Medium-Term Notes (MTNs). Of the total amount, $20 million
of the notes have a 25-year nominal life and the remaining $52 million have
a 30-year nominal life. The coupon rates range from 6.57% to 6.85%. For $62
million of these MTNs, the Company has an option to redeem the MTNs at any
time, as a whole or in part, at the greater of: (1) par value; or (2) the
price implied in the yield to maturity, plus 20 basis points, of a
comparable-maturity Treasury security. The remaining $10 million in MTNs
cannot be redeemed prior to maturity.
In February 1998, the Company used part of the proceeds of the MTN
issuances to redeem $11 million of the 8-3/4% Series First Mortgage Bonds.
The Company paid a premium of $493,000 on the redemption.
F. At March 31, 1998, the Company had a short-term revolving credit agreement
with a group of banks that allows the Company to borrow up to $160 million.
The agreement, which had an original expiration date of May 23, 1998, has
been extended for one year, with a new expiration date of May 22, 1999. The
agreement allows for another annual extension next year, with an ultimate
termination date no later than May 26, 2000.
G. On March 25, 1998, the Company acquired a 100% interest in American
Combustion, Inc. and American Combustion Industries, Inc. The two companies
will be jointly operated under the name ACI. ACI is a heating, ventilating
and air-conditioning contracting firm serving commercial customers in the
Washington, D.C. metropolitan area. The purchase price of $5.0 million was
financed with $3.0 million in available cash resources and the issuance of
a $2.0 million promissory note that is being repaid in monthly installments
over two years. The acquisition was accounted for using the purchase method
of accounting. The excess of the purchase price over net assets acquired
was recognized as goodwill and is being amortized on a straight-line basis
over 15 years. The impact of this acquisition is expected to be immaterial
to the Company's financial condition and results of operations.
H. In those years when the Company does not request a modification of its
basic rates in a prior twelve-month period, the Company is required to make
a filing with the State Corporation Commission of Virginia (SCC of VA) that
provides the basis for the staff of the commission to make a recommendation
to the SCC of VA on the reasonableness of the Company's rates on a
prospective basis. Such a filing was made by the Company in March 1997 on
the basis of its results of operations for the twelve months ended December
31, 1996. In August 1997, the staff of the commission filed a
7
WASHINGTON GAS LIGHT COMPANY
----------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
(Unaudited)
(continued)
report with the SCC of VA after having reviewed the Company's most recent
filing. Although the staff report concluded that the Company earned in
excess of the allowed range of the granted return on equity for the twelve
months ended December 31, 1996, it did not recommend that rates be adjusted
on a prospective basis. However, the staff did conclude that the Company's
earnings level in calendar year 1996 had effectively allowed it to recover
certain regulatory assets associated with losses on reacquired debt that
were recorded on the Company's books at December 31, 1996 and thus
recommended that these regulatory assets be written off. The write-off
proposed by the staff amounts to $3.3 million ($2.1 million after income
taxes).
The Company has taken exception to the staff's report and both the Company
and staff have participated in a hearing in which the positions of both
parties were presented before a Hearing Examiner. The Company believes that
the staff's recommendation was not made in accordance with the procedures
that have been established by the commission and that it violates the
prohibition against retroactive ratemaking. A decision of the Hearing
Examiner is expected in the relatively near future.
On April 30, 1998, as the result of a proceeding before the SCC of VA of a
non-affiliated gas utility, the Hearing Examiner issued a report
recommending that the SCC of VA issue an order finding that the utility's
earnings level had effectively allowed it to recover certain regulatory
assets and thus recommended that those regulatory assets be written off.
The SCC of VA has yet to issue its order either approving, modifying or
denying the Hearing Examiner's recommendation. The Company believes the
facts in that proceeding and the nature of the regulatory assets involved
differ from those being considered in its proceeding.
The Company continues to believe that the regulatory assets recorded on its
books applicable to operations in Virginia are probable of recovery.
However, if the staff of the SCC of VA prevails in requiring the Company to
write off the Virginia portion of the regulatory asset related to losses on
reacquired debt, the Company believes it is likely that it will have to
write off an additional $11.0 million of other regulatory assets associated
with Virginia operations that were recorded at March 31, 1998.
I. The Company adopted Statement of Financial Accounting Standards (SFAS) No.
128, "Earnings Per Share" (SFAS No.128) in the first quarter of fiscal year
1998. Basic and diluted earnings per share (EPS) shown below for the three
and six months ended March 31, 1997 are the same as previously reported
primary and fully diluted EPS, respectively, for those periods. A
reconciliation of the numerators and denominators of basic and diluted EPS
computations for the three and six months ending March 31, 1998 and 1997 is
shown on the following pages:
8
WASHINGTON GAS LIGHT COMPANY
----------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
(Unaudited)
(continued)
For the Three Months Ended
March 31, 1998
----------------------------------
Per-Share
Income Shares Amount
------ ------ ------
(Thousands, Except Per Share Data)
Basic EPS:
Net Income Applicable to Common Stock $53,396 43,628 $1.22
Effect of Dilutive Securities:
$4.60 and $4.36 Convertible Preferred Stock,
Assuming Conversion on January 1, 1998 3 27
------- ------
Diluted EPS:
Net Income Applicable to Common Stock
Plus Assumed Conversions $53,399 43,655 $1.22
======= ====== =====
For the Three Months Ended
March 31, 1997
----------------------------------
Per-Share
Income Shares Amount
------ ------ ------
(Thousands, Except Per Share Data)
Basic EPS:
Net Income Applicable to Common Stock $58,811 43,706 $1.35
Effect of Dilutive Securities:
$4.60 and $4.36 Convertible Preferred Stock,
Assuming Conversion on January 1, 1997 3 28
------- ------
Diluted EPS:
Net Income Applicable to Common Stock
Plus Assumed Conversions $58,814 43,734 $1.34
======= ====== =====
9
WASHINGTON GAS LIGHT COMPANY
----------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
(Unaudited)
(continued)
For the Six Months Ended
March 31, 1998
----------------------------------
Per-Share
Income Shares Amount
------ ------ ------
(Thousands, Except Per Share Data)
Basic EPS:
Net Income Applicable to Common Stock $91,187 43,645 $2.09
Effect of Dilutive Securities:
$4.60 and $4.36 Convertible Preferred Stock,
Assuming Conversion on October 1, 1997 6 26
------- ------
Diluted EPS:
Net Income Applicable to Common Stock
Plus Assumed Conversions $91,193 43,671 $2.09
======= ====== =====
For the Six Months Ended
March 31, 1997
----------------------------------
Per-Share
Income Shares Amount
------ ------ ------
(Thousands, Except Per Share Data)
Basic EPS:
Net Income Applicable to Common Stock $95,902 43,710 $2.19
Effect of Dilutive Securities:
$4.60 and $4.36 Convertible Preferred Stock,
Assuming Conversion on October 1, 1996 6 27
------- ------
Diluted EPS:
Net Income Applicable to Common Stock
Plus Assumed Conversions $95,908 43,737 $2.19
======= ====== =====
10
WASHINGTON GAS LIGHT COMPANY
----------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
------------------------------------------------
This report may contain statements that are not based on historical facts
and thereby constitute forward-looking statements. Certain words, such as, but
not limited to, "estimates," "expects," "anticipates," "intends," "believes,"
and variations of these words, identify forward-looking statements that involve
uncertainties and risks. Although the Company believes such forward-looking
statements are based on reasonable assumptions, it cannot give assurance that
such results will be reached. The Company makes such statements in reliance on
the safe harbor protections provided under the Private Securities Litigation
Reform Act of 1995.
As required by such Act, the Company hereby identifies the following
important factors that could cause actual results to differ materially from any
results projected, forecasted, estimated or budgeted by the Company in
forward-looking statements: (1) risks and uncertainties impacting the Company as
a whole primarily related to changes in general economic conditions in the
United States; (2) changes in laws and regulations to which the Company is
subject, including tax, environmental and employment laws and regulations; (3)
the cost and effects of legal and administrative claims and proceedings against
the Company or which may be brought against the Company; (4) conditions of the
capital markets utilized by the Company to access capital to finance operations;
(5) the effect of fluctuations in weather from normal levels; (6) variations in
prices of natural gas and competing energy sources; (7) improvements in products
or services offered by competitors; and (8) the Company's ability to develop
expanded markets and product offerings as well as to maintain existing markets
and the expenditures required to develop and provide such products and services.
RESULTS OF OPERATIONS
- ---------------------
THREE MONTHS ENDED MARCH 31, 1998 vs. MARCH 31, 1997
- ----------------------------------------------------
Earnings
- --------
For the three months ended March 31, 1998, net income applicable to common
stock totaled $53.4 million, or $5.4 million lower than the same quarter last
year. Basic earnings per average common share were $1.22, or $0.13 per average
common share lower than one year ago. Diluted earnings per average common share
were $1.22, or $0.12 per average common share lower than the diluted earnings
per share of $1.34 for the same quarter last year. Convertible preferred stock
had a dilutive effect on earnings per average common share for the quarter last
year. Average common shares outstanding declined by less than 1% from the prior
year, primarily due to the effect of the Company's repurchase of 88,700 common
shares during the first quarter of fiscal year 1998. The decrease in net income
applicable to common stock was directly attributable to weather that was 3.8
percent warmer than the same period last year, resulting in a decline in firm
therms delivered and the associated net revenues.
Net Revenues
- ------------
Net revenues for the period declined by $8.4 million (4.4%) from the same
period last year to $180.2 million. The table on the following page compares
certain operating statistics for the quarters ended March 31, 1998 and 1997.
11
WASHINGTON GAS LIGHT COMPANY
----------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
------------------------------------------------
(continued)
Three Months Ended
-----------------------
Mar. 31, Mar. 31,
1998 1997
--------- --------
Gas Sales and Deliveries (thousands of therms)
Gas Sold and Delivered
Firm 419,008 484,255
Interruptible 27,323 53,278
-------- --------
446,331 537,533
-------- --------
Gas Delivered for Others
Firm 44,287 10,620
Interruptible 79,518 54,879
Electric Generation 11,439 9,587
-------- --------
135,244 75,086
-------- --------
Total Deliveries 581,575 612,619
======== ========
Degree Days
Actual 1,851 1,924
Normal 2,157 2,152
Customer Meters (end of period) 821,956 796,653
Gas Delivered to Firm Customers
The level of gas delivered to firm customers is highly sensitive to the
variability of weather since 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. Weather for the three months ended March 31, 1998 was 14.2% warmer than
normal while weather for the same period last year was 10.6% warmer than normal.
The Company has no weather normalization tariff provision in any of its
jurisdictions. However, the Company has declining block rates in two of its
three major jurisdictions that reduce the impact on net revenues of deviations
in weather from normal.
Therm deliveries to firm customers include the amounts reflected in gas
sold and delivered and gas delivered for others. Customers that do not acquire
their gas supply from the Company do not affect net revenues since margins
generated from delivering customer-owned gas are equivalent to those earned on
bundled gas service. Firm therm deliveries decreased by 31.6 million therms
(6.4%) in the current quarter, primarily due to weather that was 3.8% warmer
than the same quarter last year, partially offset by the effect of a 3.2%
increase in the number of customer meters.
Gas Delivered to Interruptible Customers
Therms delivered to interruptible customers, including gas sold and
delivered and gas delivered for others, declined by 1.3 million therms (1.2%) in
the current quarter. The decrease in volumes delivered resulted primarily from
the warmer weather as compared to the same period last year. The effect on net
income of changes in delivered volumes and prices to the interruptible class is
minimized by margin-sharing arrangements that are part of the design of the
Company's rates. Under these arrangements, the Company returns a majority of the
margins earned on interruptible gas sales and deliveries to firm customers after
it
12
WASHINGTON GAS LIGHT COMPANY
----------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
------------------------------------------------
(continued)
reaches a gross margin threshold or in exchange for the shifting of a portion of
the fixed costs of providing service from the interruptible to the firm class.
Gas Delivered for Electric Generation
The Company sells and/or transports gas to two customers with facilities in
Maryland who use the supplies to generate electricity. Volumes delivered for
electric generation in the current quarter increased by 1.9 million therms over
the same period last year, primarily due to greater downtime at one of the
facilities during the second quarter of fiscal year 1997. The Company shares a
significant majority of the margins earned on deliveries of gas to these
customers with firm customers and, therefore, changes in volumes delivered
between periods have an immaterial effect on net revenues and net income.
Other Operating Expenses
- ------------------------
Operation and maintenance expenses increased by $419,000 (0.8%) from the
same period last year. This increase is primarily attributable to increased
costs related to the modification of business-application software and computing
infrastructure to comply with Year 2000 requirements, as well as costs incurred
in connection with the replacement of certain existing computer systems to
provide additional business management information. Partially offsetting this
increase are lower labor costs due to a decline in employee levels, a lower
provision for injuries and damages, and decreased bad debt expenses reflecting
lower revenues due to the warmer weather.
Depreciation and amortization increased by $915,000 (7.1%) primarily due to
the Company's increased investment in new plant and equipment.
General taxes declined by $960,000 (3.9%) primarily due to a decrease in
gross receipts taxes, reflecting lower revenues caused by the warmer weather in
the current quarter. Gross receipts taxes collected from customers are reflected
in both revenues and general tax expense, and, therefore, there is no effect on
net income.
Income taxes, including amounts reflected in other income, decreased by
$3.9 million (11.3%), primarily due to lower pre-tax income generated this
quarter.
Other Income - Net
- ------------------
Other income - net increased by $392,000, including a $1.6 million gain on
the sale of investments in venture capital funds. Partially offsetting this
increase were lower amounts generated from other non-utility activities,
including the effect of the reversal of valuation reserves recorded in the same
period last year.
Interest Expense
- ----------------
Total interest expense increased by $547,000 (6.1%) from the same period
last year, reflecting the following changes:
13
WASHINGTON GAS LIGHT COMPANY
----------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
------------------------------------------------
(continued)
Composition of the Changes in Interest Expense:
Increase/(Decrease)
-------------------
(Thousands)
Long-term debt $ 476
Short-term notes payable 86
Other ( 15)
-----
Total $ 547
=====
Long-Term Debt - The increase in interest on long-term debt of $476,000 was
primarily due to a $47.2 million rise in the average amount of long-term debt
outstanding, partially offset by a decline of 0.36 percentage points in the
weighted-average cost of such debt.
Short-Term Notes Payable - The increase in interest on short-term debt of
$86,000 was due to a $2.6 million increase in the average amount of short-term
debt outstanding and an increase of 0.26 percentage points in the
weighted-average cost of such debt.
SIX MONTHS ENDED MARCH 31, 1998 vs. MARCH 31, 1997
- --------------------------------------------------
Earnings
- --------
For the six months ended March 31, 1998, net income applicable to common
stock totaled $91.2 million, or $4.7 million lower than the same period last
year. Basic and diluted earnings per average common share were $2.09, or $0.10
per average common share lower than one year ago. Average common shares
outstanding declined by less than 1% from the prior year. The decrease in net
income applicable to common stock was primarily attributable to lower net
revenues resulting from the detrimental effects of the warmer weather
experienced in the second quarter of this year, partially offset by lower
operation and maintenance expenses.
Net Revenues
- ------------
Net revenues for the period declined by $6.5 million (1.9%) from the same
period last year to $335.7 million. Weather for the six months ended March 31,
1998 was 4.4% warmer than normal while weather for the same period last year was
3.6% warmer than normal. Weather for the period this year was less than 1%
warmer than for the same period last year. The table on the following page
compares certain operating statistics for the six months ended March 31, 1998
and 1997.
14
WASHINGTON GAS LIGHT COMPANY
----------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
------------------------------------------------
(continued)
Six Months Ended
-------------------------
Mar. 31, Mar. 31,
1998 1997
---------- ---------
Gas Sales and Deliveries (thousands of therms)
Gas Sold and Delivered
Firm 774,418 853,400
Interruptible 56,035 107,675
Electric Generation - 51
--------- ---------
830,453 961,126
--------- ---------
Gas Delivered for Others
Firm 68,613 13,942
Interruptible 155,171 98,807
Electric Generation 27,971 20,224
--------- ---------
251,755 132,973
--------- ---------
Total Deliveries 1,082,208 1,094,099
========= =========
Degree Days
Actual 3,377 3,400
Normal 3,533 3,528
Customer Meters (end of period) 821,956 796,653
Gas Delivered to Firm Customers
Firm therm deliveries, including gas sold and delivered and gas delivered
for others, decreased by 24.3 million therms (2.8%) in the current period,
primarily due to warmer weather in the second quarter of this year, partially
offset by the effect of a 3.2% increase in the number of customer meters.
Gas Delivered to Interruptible Customers
Therms delivered to interruptible customers, including gas sold and
delivered and gas delivered for others, increased by 4.7 million therms (2.3%)
in the current period. The increase in volumes delivered resulted primarily from
colder weather in the first quarter of fiscal year 1998, during which there were
no interruptions in service to interruptible customers. As a result of the
previously mentioned margin-sharing arrangements in each of the Company's
jurisdictions, the effect on net income of increased deliveries to interruptible
customers was minimal.
Gas Delivered for Electric Generation
Volumes delivered for electric generation in the current six-month period
increased by 7.7 million therms over the same period last year, primarily due to
increased usage by these customers during the first quarter of fiscal year 1998.
Margins earned on such deliveries are being shared with firm customers as
described previously in this report.
Other Operating Expenses
- ------------------------
Operation and maintenance expenses decreased by $1.9 million (1.8%) from
the same period last year. This decrease is primarily attributable to lower
labor costs resulting from a decline in employee levels
15
WASHINGTON GAS LIGHT COMPANY
----------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
------------------------------------------------
(continued)
and a lower provision for injuries and damages. Partially offsetting these
decreases are increased costs related to the Year 2000, as described previously
in this report.
Depreciation and amortization increased by $1.8 million (7.0%) primarily
due to the Company's increased investment in new plant and equipment.
General taxes declined by $137,000 (0.3%) primarily due to a decrease in
gross receipts taxes, reflecting lower revenues. As previously mentioned in this
report, gross receipts taxes collected from customers are reflected in both
revenues and general tax expense, and, therefore, there is no effect on net
income. Higher property taxes resulting from increased investments in property
partially offset this decline.
Income taxes, including amounts reflected in other income, decreased by
$3.4 million (6.0%), primarily due to lower pre-tax income generated in the
current six-month period.
Other Income - Net
- ------------------
Other income - net decreased by $46,000, primarily due to lower amounts
generated from non-utility activities, including the effect of the reversal of
valuation reserves recorded last year. These decreases were largely offset by a
$1.6 million gain on the sale of investments in venture capital funds.
Interest Expense
- ----------------
Total interest expense increased by $1,055,000 (5.8%) from the same period
last year, reflecting the following changes:
Composition of the Changes in Interest Expense:
Increase/(Decrease)
-------------------
(Thousands)
Long-term debt $ 1,015
Short-term notes payable 249
Other (209)
-------
Total $ 1,055
=======
Long-Term Debt - The increase in interest on long-term debt of $1,015,000 was
primarily due to a $44.1 million rise in the average amount of long-term debt
outstanding, partially offset by a decline of 0.28 percentage points in the
weighted-average cost of such debt.
Short-Term Notes Payable - The increase in interest on short-term debt of
$249,000 was due to a $5.0 million increase in the average amount of short-term
debt outstanding and an increase of 0.24 percentage points in the
weighted-average cost of such debt.
Other - Other interest expense decreased by $209,000, primarily reflecting a
higher accrual in the current period for Allowance for Funds Used During
Construction.
16
WASHINGTON GAS LIGHT COMPANY
----------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
------------------------------------------------
(continued)
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
Short-Term Cash Requirements and Related Financing
- --------------------------------------------------
The Company's business is highly weather sensitive and seasonal.
Approximately 75% of the Company's therms delivered (excluding deliveries for
electric generation) occur in the first and second fiscal quarters. This weather
sensitivity causes short-term cash requirements to vary significantly during the
year. Cash requirements peak in the fall and winter months when accounts
receivable, accrued utility revenues and storage gas are at or near their
highest levels. After the winter heating season, these assets are converted into
cash and are used to liquidate short-term debt and acquire storage gas for the
subsequent heating season.
The Company uses short-term debt in the form of commercial paper and
short-term bank loans to fund seasonal requirements. Alternative sources include
unsecured lines of credit, some of which are seasonal, and $160 million in a
revolving credit agreement maintained with a group of banks. The Company
utilizes these financing options to support or replace the Company's commercial
paper.
Excluding current maturities, the Company had $14.4 million and $50.6
million of short-term debt outstanding as of March 31, 1998 and March 31, 1997,
respectively. At March 31, 1998, the Company had outstanding $13.1 million of
commercial paper and $1.3 million of various secured short-term bank loans
reflected on the books of newly acquired non-utility companies. This represented
a decline of $53.5 million from the balance outstanding at September 30, 1997
reflecting the seasonality of the Company's cash requirements.
Long-Term Cash Requirements and Related Financing
- -------------------------------------------------
Capital expenditures for the first six months of fiscal year 1998 were
$67.4 million with a budget of $168.8 million for the fiscal year. To fund
construction expenditures and other capital requirements, the Company draws upon
both internal and external sources of cash. The Company's ability to generate
adequate cash internally depends upon a number of factors, including the timing
and amount of rate increases received and the level of therm deliveries. The
Company's last significant base rate increase became effective in December 1994.
The number of customer meters and the variability of the weather almost
exclusively affect the level of therms delivered.
Net cash provided by operating activities, net of the effects from the
purchase of non-utility companies, was $106.3 million during the first six
months of fiscal year 1998 and compares to $109.8 million for the same period
last year. The slight decrease was primarily due to a lower source of funds
provided from net income before non-cash items resulting from the warmer weather
experienced this year. Changes in working capital remained essentially the same
for the six months ended March 31, 1998 and 1997.
The table on the following page summarizes the Company's issuances of
long-term debt, consisting entirely of MTNs, in the six months ended March 31,
1998:
17
WASHINGTON GAS LIGHT COMPANY
----------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
------------------------------------------------
(continued)
Medium-Term Notes Issued
------------------------
Fiscal Year
Amount of Maturity
Date Issued Issuance Coupon Rate Date
-------------- ----------- ----------- -----------
January 1998 $10 million 6.57% 2028
February 1998 $12 million 6.72% 2028
March 1998 $ 4 million 6.85% 2028
March 1998 $26 million 6.81% 2028
March 1998 $20 million 6.65% 2023
-----------
Total $72 million
===========
The $12.0 million MTN issuance in February 1998 was used for the retirement
of $11 million of 8-3/4% Series First Mortgage Bonds. The Company paid a premium
of $493,000 on the redemption. Additional retirements of long-term debt in the
six months ended March 31, 1998 included $8.7 million of MTNs with coupon rates
ranging from 6.43% to 7.53% and $4.0 million of 8-5/8% Series First Mortgage
Bonds.
During the first quarter of fiscal year 1998, the Company paid $2.3
million to repurchase 88,700 shares of common stock.
In January 1998, the Company received $1.6 million from the sale of
investments in venture capital funds. In March 1998, the Company financed the
purchase of non-utility companies with $3.0 million in cash and $2.0 million of
debt financing that is being repaid in monthly installments over two years.
During the six months ended March 31, 1998, the Company sold, with
recourse, $15.8 million of non-utility accounts receivable. This compares to
$19.2 million sold in the six months ended March 31, 1997.
OTHER FACTORS AFFECTING THE COMPANY
- -----------------------------------
Year 2000
- ---------
Like all companies with business-application software programs written over
many years and computing infrastructure including computerized devices, the
Company is also affected by the so-called "Year 2000" issue. These programs,
which include, but are not limited to, the Company's customer service,
operations and financial systems, were written using two-year digits to define
the applicable year, rather than four-digit years. Any of the Company's programs
that have time-sensitive software may recognize a date using "00" as the year
1900 rather than the year 2000. This could result in the computer shutting down
or performing incorrect computations. The computing infrastructure, including
computerized devices, could contain date-sensitive software or electronics
embedded in the equipment that could cause the devices to fail to operate or to
operate inconsistently.
The Company is completing the process of identifying the systems and
infrastructure that could be affected by the Year 2000 issue and is developing
an implementation program to resolve the issue. This process includes
implementing individual strategies targeted at the specific nature of the Year
2000 issues
18
WASHINGTON GAS LIGHT COMPANY
----------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
------------------------------------------------
(continued)
in each of the following areas: (1) business applications, including mainframe,
telecommunications, networks, personal computers, electronic communications and
user-developed and supported applications; (2) embedded systems, including
equipment that operates such items as the Company's storage and distribution
system, metering, fleet and buildings; and (3) vendor and supplier
relationships.
Resolving Year 2000 issues will likely include the replacement of certain
equipment, modification of certain software to recognize the turn of the
century, or replacement of certain software systems with new systems that
provide additional business management information as well as recognize
four-digit dates. The Company's review of vendors and suppliers could result in
establishing new business relationships with alternate providers of products and
services.
The Company's Year 2000 strategies include contingency planning, such as
alternative methods to operate critical systems.
The Year 2000 efforts are currently expected to result in expenses of
approximately $8 million to $10 million that will be incurred by the turn of the
century. Also, the Company is replacing certain existing business application
software systems with new systems that will be Year 2000 operational and will
provide additional business management information. Most of the costs to replace
these systems, of approximately $15 million to $20 million, will be capitalized.
Until the Company has completed further analysis of the impacts of the Year 2000
issue on its embedded systems, vendor and supplier relationships, and
contingency planning, it is unable to estimate the additional costs, if any, it
may incur as a result of its efforts.
Each of the components of the Company's Year 2000 effort is progressing and
the Company believes it is taking reasonable steps necessary to be able to
operate through the turn of the century and thereafter.
Sale of Propane Operations
- --------------------------
On May 1, 1998, the Company sold the propane assets of its Frederick Gas
division. As a result of this transaction, the Company will recognize a gain of
approximately $2 million (pre-tax) in the third quarter of fiscal year 1998. In
fiscal year 1997, net income from propane sales amounted to less than one-half
of 1% of the Company's total net income. The Company's Frederick Gas division,
which previously served approximately 2,900 propane customers, will continue to
provide natural gas and energy-related services to its approximately 15,000
customers in Frederick County, Maryland.
19
PART II. OTHER INFORMATION
----------------------------
Item 4.
- -------
Submission of Matters to a Vote of Security Holders
- ---------------------------------------------------
(a) The annual meeting of stockholders was held on February 20, 1998.
(c) Matters voted upon at the meeting:
The following individuals were elected to the Board of Directors at the
annual meeting on February 20, 1998:
Director Votes in Favor Votes Withheld
-------- -------------- --------------
Michael D. Barnes 37,252,421 498,036
Fred J. Brinkman 37,280,193 470,264
Daniel J. Callahan, III 37,342,556 407,888
Orlando W. Darden 37,189,608 560,849
James H. DeGraffenreidt, Jr. 37,252,909 497,548
Melvyn J. Estrin 37,335,072 415,385
Patrick J. Maher 37,328,651 421,806
Karen Hastie Williams 37,050,727 699,730
The following other matters were introduced and voted upon at the
annual meeting:
The Board of Directors recommended that the stockholders ratify the
appointment of Arthur Andersen LLP, independent public accountants, to
audit the books, records and accounts of the Company for fiscal year 1998.
This proposal was approved by a vote of 37,198,634 in favor of the proposal
and 273,218 against. There were 279,711 abstentions.
A stockholder proposed that the Board of Directors take steps to
provide for cumulative voting in the election of Directors. This proposal
was defeated by a vote of 5,830,753 in favor of the proposal and 21,597,789
against. There were 1,832,613 abstentions and 8,490,408 broker non-votes.
20
PART II. OTHER INFORMATION (continued)
--------------------------------------
Item 5.
- -------
Other Information
- -----------------
A. Many in the energy industry, including the Company, believe that the
increasingly deregulated and more competitive energy industry will continue
to lead to industry consolidation, combination, disaggregation and other
strategic alliances and restructuring as energy companies seek to offer a
broader range of energy services to compete more effectively in attracting
and retaining customers. For example, affiliations with other operating
utilities could potentially result in economies and synergies, and
combinations could provide a means to offer customers a more complete range
of energy services. Others are discontinuing operations in certain portions
of the energy industry or divesting portions of their business and
facilities. The Company, from time to time, performs studies, and in some
cases holds discussions regarding utility and energy-related investments
and transactions. The ultimate impact on the Company of any such
investments and transactions that may occur can not be determined at this
time.
B. On April 2, 1998, the Public Service Commission of the District of Columbia
approved the Company's request to operate a residential pilot program under
which up to 3,000 customers in the District of Columbia will be eligible to
choose their supplier of natural gas. The program is expected to go into
effect January 1, 1999.
Additionally in April 1998, the Public Service Commission of Maryland (PSC
of MD) approved the Company's proposal to allow all commercial customers in
Maryland to choose their natural gas supplier by June 1, 1998.
Approximately 25,000 commercial customers will be eligible to participate
in this program. The PSC of MD also approved the Company's request to
increase participation levels in the existing residential pilot program in
Maryland to 100,000 customers, effective September 1, 1998.
C. On March 25, 1998, the Board of Directors declared a dividend on common
stock of $0.30 per share. This compares to a $0.295 dividend declared in
the quarter ended March 31, 1997. The higher dividend rate, if declared for
the next three quarters, would represent an annual increase of $0.02 per
share and an annualized dividend of $1.20 per share.
D. Effective May 1, 1998, the Company will begin issuing new shares of stock
for distribution by the Dividend Reinvestment and Common Stock Purchase
Plan (DRP) and the employee savings plans. The Company has been buying
shares on the open market for these plans since November 1996. The issuance
of new shares will provide the Company with new capital for its business
needs.
21
PART II. OTHER INFORMATION (continued)
--------------------------------------
Item 6.
- -------
Exhibits and Reports on Form 8-K
- --------------------------------
(a) Exhibits Filed Herewith:
Description Page in 10-Q
- ------------------------------------------ --------------------
27 Financial Data Schedule See separate volume
99.0 Computation of Ratio of Earnings to
Fixed Charges "
99.1 Computation of Ratio of Earnings to
Fixed Charges and Preferred Stock Dividends "
(b) Reports on Form 8-K
There were no reports on Form 8-K filed during
the three months ended March 31, 1998.
SIGNATURE
---------
Pursuant to the requirements of the Securities and 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 May 15, 1998 /s/ Robert E. Tuoriniemi
------------------------------ --------------------------------
Controller
(Principal Accounting Officer)
22