UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1998
-------------------------------------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
---------------- -----------------------------
Commission file number 1-1483
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WASHINGTON GAS LIGHT COMPANY
- -------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
District of Columbia and Virginia 53-0162882
--------------------------------- -----------------
(State or other jurisdiction of (I.R.S.Employer Identification No.)
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 43,732,896 July 31, 1998
- ---------------------------- ---------------- -------------
Class Number of Shares Date
WASHINGTON GAS LIGHT COMPANY
----------------------------
INDEX
-----
Page No.
--------
.......................................................................
PART I. Financial Information:
Item 1. Financial Statements
Consolidated Balance Sheets -
June 30, 1998 and September 30, 1997 .............. 2-3
Consolidated Statements of Income -
Three Months Ended June 30, 1998 and 1997 ......... 4
Consolidated Statements of Income -
Nine Months Ended June 30, 1998 and 1997 .......... 5
Consolidated Statements of Cash Flows -
Nine Months Ended June 30, 1998 and 1997 .......... 6
Notes to Consolidated Financial Statements .............. 7-11
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations .............12-23
PART II. Other Information:
Item 5. Other Information ................................. 24
Item 6. Exhibits and Reports on Form 8-K .................. 25
Signature .................................................. 25
1
WASHINGTON GAS LIGHT COMPANY
----------------------------
CONSOLIDATED BALANCE SHEETS
---------------------------
June 30, Sept. 30,
1998 1997
-------- ---------
(Unaudited)
(Thousands)
ASSETS
Property, Plant and Equipment
At original cost .................................. $ 1,948,777 $ 1,846,471
Accumulated depreciation and amortization ......... (663,393) (629,334)
----------- -----------
1,285,384 1,217,137
----------- -----------
Current Assets
Cash and cash equivalents ......................... 23,920 9,708
Accounts receivable ............................... 98,208 65,232
Gas costs due from customers ...................... 4,330 9,445
Allowance for doubtful accounts ................... (9,936) (11,043)
Accrued utility revenues .......................... 15,933 21,020
Materials and supplies--principally at average cost 15,866 15,186
Storage gas--at cost (first-in, first-out) ........ 23,826 81,072
Deferred income taxes ............................. 18,551 17,447
Other prepayments--principally taxes .............. 7,622 11,907
Other current assets .............................. 2,047 --
----------- -----------
200,367 219,974
----------- -----------
Deferred Charges and Other Assets
Regulatory assets--deferred purchased gas costs ... -- 4,447
Regulatory assets--other .......................... 95,268 97,509
Other ............................................. 18,054 12,965
----------- -----------
113,322 114,921
----------- -----------
Total ........................................... $ 1,599,073 $ 1,552,032
=========== ===========
See accompanying Notes to Consolidated Financial Statements.
2
WASHINGTON GAS LIGHT COMPANY
----------------------------
CONSOLIDATED BALANCE SHEETS
---------------------------
June 30, Sept. 30,
1998 1997
-------- ---------
(Unaudited)
(Thousands)
...............................................
CAPITALIZATION AND LIABILITIES
Capitalization
Common shareholders' equity ..................... $ 634,373 $ 589,035
Preferred stock ................................. 28,426 28,430
Long-term debt .................................. 474,399 431,575
---------- ----------
1,137,198 1,049,040
---------- ----------
Current Liabilities
Current maturities of long-term debt ............ 28,737 20,862
Notes payable ................................... 1,591 67,900
Accounts payable ................................ 81,396 99,578
Wages payable ................................... 14,380 13,590
Dividends declared .............................. 13,522 13,224
Customer deposits and advance payments .......... 9,099 16,662
Accrued taxes and interest ...................... 42,061 10,934
Pipeline refunds due to customers ............... 1,194 6,054
Gas costs due to customers ...................... 3,972 2,418
---------- ----------
195,952 251,222
---------- ----------
Deferred Credits
Unamortized investment tax credits .............. 20,725 21,427
Deferred income taxes ........................... 140,348 136,682
Regulatory liabilities--deferred purchased
gas costs .................................... 5,787 --
Other regulatory liabilities and other deferred
credits ...................................... 99,063 93,661
---------- ----------
265,923 251,770
---------- ----------
Total ......................................... $1,599,073 $1,552,032
========== ==========
See accompanying Notes to Consolidated Financial Statements.
3
WASHINGTON GAS LIGHT COMPANY
----------------------------
CONSOLIDATED STATEMENTS OF INCOME
---------------------------------
(Unaudited)
Three Months Ended
------------------
June 30, June 30,
1998 1997
-------- --------
(Thousands, Except Per Share Data)
............................................
Operating Revenues ............................. $ 156,390 $ 171,942
Cost of Gas .................................... 83,875 87,578
--------- ---------
Net Revenues ................................... 72,515 84,364
--------- ---------
Other Operating Expenses
Operation .................................... 41,712 39,822
Maintenance .................................. 9,047 9,211
Depreciation and amortization ................ 13,732 12,949
General taxes ................................ 14,072 15,564
Income taxes ................................. (5,394) (200)
--------- ---------
73,169 77,346
--------- ---------
Operating Income (Loss) ........................ (654) 7,018
Other Income - Net ............................. 2,743 609
--------- ---------
Income Before Interest Expense ................. 2,089 7,627
Interest Expense
Interest on long-term debt ................... 8,915 7,483
Other ........................................ 196 509
--------- ---------
9,111 7,992
--------- ---------
Net Loss ....................................... (7,022) (365)
Dividends on Preferred Stock ................... 332 333
--------- ---------
Net Loss Applicable to Common Stock ............ $ (7,354) $ (698)
========= =========
Average Common Shares Outstanding .............. 43,677 43,704
========= =========
Loss per Average Common Share - Basic .......... $ (0.17) $ (0.02)
========= =========
Loss per Average Common Share - Diluted ........ $ (0.17) $ (0.02)
========= =========
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)
Nine Months Ended
-----------------
June 30, June 30,
1998 1997
-------- --------
(Thousands, Except Per Share Data)
Operating Revenues .................................$914,159 $948,365
Cost of Gas ........................................ 505,925 521,740
-------- --------
Net Revenues ....................................... 408,234 426,625
-------- --------
Other Operating Expenses
Operation ........................................ 125,702 127,728
Maintenance ...................................... 28,086 26,191
Depreciation and amortization .................... 40,896 38,348
General taxes .................................... 57,736 59,364
Income taxes ..................................... 47,065 54,960
-------- --------
299,485 306,591
-------- --------
Operating Income ................................... 108,749 120,034
Other Income - Net ................................. 4,353 2,266
-------- --------
Income Before Interest Expense ..................... 113,102 122,300
Interest Expense
Interest on long-term debt ....................... 25,103 22,657
Other ............................................ 3,168 3,440
-------- --------
28,271 26,097
-------- --------
Net Income ......................................... 84,831 96,203
Dividends on Preferred Stock ....................... 999 999
-------- --------
Net Income Applicable to Common Stock ..............$ 83,832 $ 95,204
======== ========
Average Common Shares Outstanding .................. 43,658 43,708
======== ========
Earnings per Average Common Share - Basic ..........$ 1.92 $ 2.18
======== ========
Earnings per Average Common Share - Diluted ........$ 1.92 $ 2.18
======== ========
Dividends Declared per Common Share ................$ 0.895 $ 0.875
======== ========
See accompanying Notes to Consolidated Financial Statements.
5
WASHINGTON GAS LIGHT COMPANY
----------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
(Unaudited)
Nine Months Ended
-----------------
June 30, June 30,
1998 1997
-------- --------
(Thousands)
......................................................
Operating Activities
Net income ............................................... $ 84,831 $ 96,203
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization a/ ....................... 44,997 44,067
Deferred income taxes - net ............................ 3,062 3,644
Amortization of investment tax credits ................. (702) (716)
Allowance for funds used during construction ........... (572) (282)
Other noncash (credits) - net, including gains
on investing activities ............................. (1,908) (2,715)
--------- ---------
129,708 140,201
Changes in assets and liabilities
(net of effects from purchase of non-utility companies):
Accounts receivable and accrued utility revenues ....... (23,438) (41,688)
Gas costs due from/to customers - net .................. 6,669 21,233
Storage gas ............................................ 57,246 42,117
Other prepayments - principally taxes .................. 4,348 1,995
Accounts and wages payable ............................. (21,461) 1,291
Customer deposits and advance payments ................. (7,563) (6,372)
Accrued taxes and interest ............................. 31,064 33,067
Pipeline refunds due to customers ...................... (4,860) (2,355)
Deferred purchased gas costs - net...................... 10,235 7,033
Other - net ............................................ (56) (1,485)
--------- ---------
Net Cash Provided by Operating Activities ........... 181,892 195,037
--------- ---------
Financing Activities
Common stock issued through the Dividend Reinvestment and
Common Stock Purchase Plan and Employee Savings Plans 2,490 312
Common stock repurchased ................................. (2,340) --
Long-term debt issued .................................... 72,000 83,812
Long-term debt retired ................................... (23,984) (35,543)
Premium on long-term debt retired ........................ (493) (1,422)
Notes payable - net of effects from purchase of
non-utility companies ............................... (67,654) (100,982)
Dividends on common and preferred stock .................. (39,778) (38,809)
--------- ---------
Net Cash (Used in) Financing Activities ............. (59,759) (92,632)
--------- ---------
Investing Activities
Capital expenditures ..................................... (110,600) (93,558)
Proceeds from sale of venture funds ...................... 1,619 --
Proceeds from sale of propane assets ..................... 4,050 --
Payment for purchase of non-utility companies
- net of cash acquired (See Note I).................. (2,990) --
--------- ---------
Net Cash (Used in) Investing Activities .............. (107,921) (93,558)
--------- ---------
Increase in Cash and Cash Equivalents .................... 14,212 8,847
Cash and Cash Equivalents at Beginning of Period ......... 9,708 4,589
--------- ---------
Cash and Cash Equivalents at End of Period ............... $ 23,920 $ 13,436
========= =========
Supplemental Disclosures of Cash Flow Information
Income taxes paid ...................................... $ 23,254 $ 26,785
Interest paid .......................................... $ 19,470 $ 18,380
a/ Includes amounts charged to other accounts.
See accompanying Notes to Consolidated Financial Statements.
6
WASHINGTON GAS LIGHT COMPANY
----------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
June 30, 1998
-------------
(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 nine months ended June 30, 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 proceeds from 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. The Company plans to issue $25 million of 10-year MTNs in November 1998 for
general corporate purposes. The Company's interest costs associated with
issuing MTNs reflect comparable Treasury yields plus additional costs for
issuing corporate debt.
In order to lock in the Treasury yield for the anticipated MTN issuance in
November 1998, the Company, on June 15, 1998, entered into an agreement
that reflects the forward sale of $24,875,000 of 10-year U.S. Treasury
notes at a fixed price to be paid on November 3, 1998. The Company accounts
for this transaction as a hedge of an anticipated transaction in accordance
with Statement of Financial Accounting Standards No. 80, "Accounting for
Futures Contracts." Any gain or loss associated with this hedge will be
recognized as an MTN debt issuance cost when the Company issues such debt.
If the agreement is terminated without completing the anticipated MTN
issuance, any gain or loss will be immediately recognized in earnings.
G. At June 30, 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.
7
WASHINGTON GAS LIGHT COMPANY
----------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
June 30, 1998
-------------
(Unaudited)
(continued)
H. The Company's federal income tax returns for all years through September
30, 1994 and for the year ended September 30, 1996 have been reviewed and
closed or closed without review by the Internal Revenue Service.
I. 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.
J. On May 1, 1998, the Company sold the propane assets of its Frederick Gas
division for $4,050,000, recognizing a gain of $2.5 million ($1.6 million
after income taxes) 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.
K. For a detailed discussion of the Company's 1996 State Corporation
Commission of Virginia (SCC of VA) Annual Information Filing, please refer
to the Company's Form 10-K for the year ended September 30, 1997 and, as
most recently updated, to the Company's Form 8-K filed on July 10, 1998.
In August 1997, the Staff of the SCC of VA recommended that the Company's
calendar year 1996 earnings level (under an "earnings test," as defined by
the Staff of the SCC of VA) effectively allowed the Company to recover
certain regulatory assets associated with losses on reacquired debt
recorded on the Company's books at December 31, 1996, and thus these
regulatory assets should be written off. The position taken by the Staff in
its August 1997 recommendation, if upheld, would not only likely have
impaired the regulatory assets associated with losses on reacquired debt,
but potentially other regulatory assets applicable to the Company's
Virginia operations as well. The Company took exception to the Staff's
report, and both the Company and Staff participated in a hearing in which
both parties presented their positions before a Hearing Examiner in October
1997.
As previously reported in the Company's July 10, 1998 Form 8-K, on June 25,
1998, the Hearing Examiner issued a report recommending that the SCC of VA
order the Company to write off the portion of the regulatory asset related
to losses on reacquired debt incurred during the twelve months ended
December 31, 1996. The Company disagreed with the conclusions of the
Hearing Examiner, and the Company and the Staff filed comments with the SCC
of VA on July 10, 1998.
On August 6, 1998, the SCC of VA issued an Order ruling that any regulatory
assets associated with losses on reacquired debt incurred when the debt is
refunded with new long-term debt are not subject to an earnings test and
need not be written off. Additionally, the SCC of VA ruled that the Company
8
WASHINGTON GAS LIGHT COMPANY
----------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
June 30, 1998
-------------
(Unaudited)
(continued)
must file an earnings test with the Commission if it seeks to establish any
new regulatory assets other than those associated with losses on reacquired
debt refunded with new long-term debt.
As a result of the August 6, 1998 Order of the SCC of VA, the uncertainty
regarding the status of regulatory assets associated with losses on
reacquired debt applicable to the Company's Virginia operations has been
resolved in favor of the Company. The Company believes, in accordance with
Statement of Financial Accounting Standards No. 71, "Accounting for the
Effects of Certain Types of Regulation," that its regulatory assets
associated with losses on reacquired debt, as well as all other regulatory
assets applicable to operations in Virginia, are probable of future
recovery.
L. In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" (SFAS No. 133). This statement is
effective for fiscal years beginning after June 15, 1999, and the Company
must adopt it no later than fiscal year 2000. SFAS No. 133 establishes
accounting and reporting standards requiring that every derivative
instrument (including certain derivative instruments embedded in other
contracts) be recorded in the balance sheet as either an asset or liability
measured at its fair value. SFAS No. 133 requires that changes in the
derivative's fair value be recognized currently in earnings unless specific
hedge accounting criteria are met. Special accounting for qualifying hedges
allows a derivative's gains and losses to offset related results on the
hedged item in the income statement, and requires that a company must
formally document, designate, and assess the effectiveness of transactions
that receive hedge accounting. The Company is reviewing SFAS No. 133 and
does not currently expect it to materially impact its financial condition
or results of operations.
M. The Company adopted Statement of Financial Accounting Standards No. 128,
"Earnings Per Share" in the first quarter of fiscal year 1998. Basic and
diluted earnings per share (EPS) shown below for the three and nine months
ended June 30, 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 nine months ended June 30, 1998 and 1997 is shown on the
following pages:
9
WASHINGTON GAS LIGHT COMPANY
----------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
June 30, 1998
-------------
(Unaudited)
(continued)
For the Three Months Ended
June 30, 1998
--------------------------
Per-Share
Income Shares Amount
------ ------ ------
(Thousands, Except Per
Share Data)
Basic EPS:
Net Loss Applicable to Common Stock ........... $(7,354) 43,677 $(0.17)
Effect of Dilutive Securities:
------------------------------
$4.60 and $4.36 Convertible Preferred Stock,
Assuming Conversion on April 1, 1998 ........ 2 26
------- ------
Diluted EPS:
Net Loss Applicable to Common Stock
Plus Assumed Conversions ................ $(7,352) 43,703 $(0.17)
======= ====== ======
For the Three Months Ended
June 30, 1997
--------------------------
Per-Share
Income Shares Amount
------ ------ ------
(Thousands, Except Per
Share Data)
Basic EPS:
Net Loss Applicable to Common Stock ............. $(698) 43,704 $(0.02)
Effect of Dilutive Securities:
------------------------------
$4.60 and $4.36 Convertible Preferred Stock,
Assuming Conversion on April 1, 1997 .......... 3 27
----- ------
Diluted EPS:
Net Loss Applicable to Common Stock
Plus Assumed Conversions .................. $(695) 43,731 $(0.02)
===== ====== ======
10
WASHINGTON GAS LIGHT COMPANY
----------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
June 30, 1998
-------------
(Unaudited)
(continued)
For the Nine Months Ended
June 30, 1998
--------------------------
Per-Share
Income Shares Amount
------ ------ ------
(Thousands, Except Per
Share Data)
Basic EPS:
Net Income Applicable to Common Stock ........... $83,832 43,658 $1.92
Effect of Dilutive Securities:
------------------------------
$4.60 and $4.36 Convertible Preferred Stock,
Assuming Conversion on October 1, 1997 ........ 9 27
------ -----
Diluted EPS:
Net Income Applicable to Common Stock
Plus Assumed Conversions .................. $83,841 43,685 $1.92
======= ====== =====
For the Nine Months Ended
June 30, 1997
--------------------------
Per-Share
Income Shares Amount
------ ------ ------
(Thousands, Except Per
Share Data)
Basic EPS:
Net Income Applicable to Common Stock ........... $95,204 43,708 $2.18
Effect of Dilutive Securities:
------------------------------
$4.60 and $4.36 Convertible Preferred Stock,
Assuming Conversion on October 1, 1996 ........ 9 27
------- ------
Diluted EPS:
Net Income Applicable to Common Stock
Plus Assumed Conversions .................. $95,213 43,735 $2.18
======= ====== =====
11
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; (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;
and (9) estimates of future costs or the effect on future operations as a result
of events that could result from the Year 2000 issue described further herein.
RESULTS OF OPERATIONS
- ---------------------
THREE MONTHS ENDED JUNE 30, 1998 vs. JUNE 30, 1997
- --------------------------------------------------
Earnings
- --------
For the three months ended June 30, 1998, the Company recorded a seasonal
net loss applicable to common stock of $7.4 million, or $0.17 per average common
share (basic and diluted). This compares to a net loss applicable to common
stock of $0.7 million, or $0.02 per average common share (basic and diluted),
for the same 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.
Effective May 1, 1998, shares issued under the Dividend Reinvestment and Common
Stock Purchase Plan and the Employee Savings Plans are being issued as new
shares rather than being purchased on the open market. The increased net loss
this quarter primarily resulted from lower therm sales due to warmer weather
experienced during the current quarter, and increased operation expenses
primarily attributable to the Company's Year 2000 program and other technology
initiatives. Partially offsetting the decline in earnings in the current quarter
was a $1.6 million after-tax gain on the sale of the Company's Frederick Gas
division propane assets, recorded in Other Income-Net.
Net Revenues
- ------------
Net revenues for the period declined by $11.8 million (14.0%) from the same
period last year to $72.5 million. The table on the following page compares
certain operating statistics for the quarters ended June 30, 1998 and 1997.
12
WASHINGTON GAS LIGHT COMPANY
----------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
------------------------------------------------
(continued)
Three Months Ended
June 30, June 30,
1998 1997
-------- --------
Gas Sales and Deliveries (thousands of therms)
Gas Sold and Delivered
Firm ........................................ 113,118 161,416
Interruptible ............................... 9,984 25,728
------- -------
123,102 187,144
------- -------
Gas Delivered for Others
Firm ........................................ 19,783 5,872
Interruptible ............................... 51,588 43,758
Electric Generation ......................... 22,532 35,288
------- -------
93,903 84,918
------- -------
Total Deliveries ......................... 217,005 272,062
======= =======
Degree Days
Actual ...................................... 279 462
Normal ...................................... 310 310
Customer Meters (end of period) ................. 819,062 796,202
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 June 30, 1998 was 10.0% warmer than
normal while weather for the same period last year was 49.0% colder 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 34.4 million therms
(20.6%) in the current quarter, primarily due to weather that was 39.6% warmer
than the same quarter last year, partially offset by the effect of a 2.9%
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 7.9 million therms (11.4%)
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
13
WASHINGTON GAS LIGHT COMPANY
----------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
------------------------------------------------
(continued)
returns a majority of the margins earned on interruptible gas sales and
deliveries to firm customers after it 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 decreased by 12.8 million therms
(36.1%) over the same period last year, primarily due to lower prices for
competing fuels during the period. 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 $1.7 million (3.5%) from
the same period last year. This increase is primarily attributable to
approximately $3.7 million ($2.3 million after income taxes, or $0.05 per
average common share) in increased costs related to the Company's Year 2000
program and other technology initiatives. For a further discussion of the
Company's Year 2000 program, please refer to page 20. Partially offsetting these
increases are lower labor costs including a decline in employee levels, and
decreased uncollectible accounts expenses reflecting lower revenues due to the
warmer weather and a decline in gas costs during the recent heating season.
Depreciation and amortization increased by $783,000 (6.0%) primarily due to
the Company's increased investment in new plant and equipment.
General taxes declined by $1.5 million (9.6%) 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-Net, decreased by
$4.1 million, primarily due to a higher pre-tax loss generated this quarter.
Other Income - Net
- ------------------
Other Income - Net increased by $2.1 million, primarily due to a $1.6
million gain on the sale of the Company's Frederick Gas division propane assets.
Additionally contributing to the increase were earnings generated from other
non-utility activities, including non-regulated gas marketing.
Interest Expense
- ----------------
Total interest expense increased by $1,119,000 (14.0%) from the same period
last year, reflecting the following changes:
14
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 ......................................... $ 1,432
Short-term debt ........................................ (343)
Other .................................................. 30
-------
Total ............................................... $ 1,119
=======
Long-Term Debt - The increase in interest on long-term debt of $1,432,000 was
primarily due to an $89.3 million rise in the average amount of long-term debt
outstanding, partially offset by a decline of 0.16 percentage points in the
weighted-average cost of such debt.
Short-Term Debt - The decrease in interest on short-term debt of $343,000 was
due to a $23.9 million decline in the average amount of short-term debt
outstanding and a decrease of 0.07 percentage points in the weighted-average
cost of such debt.
NINE MONTHS ENDED JUNE 30, 1998 vs. JUNE 30, 1997
- -------------------------------------------------
Earnings
- --------
For the nine months ended June 30, 1998, net income applicable to common
stock totaled $83.8 million, or $11.4 million lower than the same period last
year. Basic and diluted earnings per average common share were $1.92, or $0.26
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 effects of the warmer weather in the current period.
The effects of the warmer weather were partially offset by a 2.9% increase in
the number of customer meters and an increase in Other Income-Net.
Net Revenues
- ------------
Net revenues for the period declined by $18.4 million (4.3%) from the same
period last year to $408.2 million. Weather for the nine months ended June 30,
1998 was 4.9% warmer than normal while weather for the same period last year was
less than 1% colder than normal. Weather for the period this year was 5.3%
warmer than for the same period last year. The table on the following page
compares certain operating statistics for the nine months ended June 30, 1998
and 1997.
15
WASHINGTON GAS LIGHT COMPANY
----------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
------------------------------------------------
(continued)
Nine Months Ended
-----------------
June 30, June 30,
1998 1997
-------- --------
Gas Sales and Deliveries (thousands of therms)
Gas Sold and Delivered
Firm .......................................... 887,537 1,014,816
Interruptible ................................. 66,018 133,403
Electric Generation ........................... -- 51
--------- ---------
953,555 1,148,270
--------- ---------
Gas Delivered for Others
Firm .......................................... 88,396 19,814
Interruptible ................................. 206,759 142,565
Electric Generation ........................... 50,502 55,512
--------- ---------
345,657 217,891
--------- ---------
Total Deliveries ........................... 1,299,212 1,366,161
========= =========
Degree Days
Actual ........................................ 3,656 3,862
Normal ........................................ 3,843 3,838
Customer Meters (end of period) ................... 819,062 796,202
Gas Delivered to Firm Customers
Firm therm deliveries, including gas sold and delivered and gas delivered
for others, decreased by 58.7 million therms (5.7%) in the current period,
primarily due to the warmer weather experienced this year, partially offset by
the effect of a 2.9% 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, decreased by 3.2 million therms (1.2%)
in the current period. The decrease in volumes delivered resulted primarily from
the warmer weather in the current period. As a result of the previously
mentioned margin-sharing arrangements in each of the Company's jurisdictions,
the effect on net income of decreased deliveries to interruptible customers was
minimal.
Gas Delivered for Electric Generation
Volumes delivered for electric generation in the current nine-month period
decreased by 5.1 million therms (9.1%) over the same period last year due to
decreased usage by these customers during the third quarter of fiscal year 1998,
primarily resulting from lower prices for competing fuels. Margins earned on
such deliveries are being shared with firm customers as described previously in
this report.
16
WASHINGTON GAS LIGHT COMPANY
----------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
------------------------------------------------
(continued)
Other Operating Expenses
- ------------------------
Operation and maintenance expenses decreased by $131,000, or less than 1%,
from the same period last year. Reductions from last year comprising this
decrease include the effects of lower labor costs, including a decline in
employee levels, and decreased uncollectible accounts expenses. Partially
offsetting these decreases are increased costs related to the Company's Year
2000 program and other technology initiatives, as described previously in this
report.
Depreciation and amortization increased by $2.5 million (6.6%) primarily
due to the Company's increased investment in new plant and equipment.
General taxes declined by $1.6 million (2.7%), primarily due to a decrease
in gross receipts taxes, reflecting lower revenues caused by the warmer weather
in the current period. 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-Net, decreased by
$7.5 million (13.3%), primarily due to lower pre-tax income generated in the
current nine-month period.
Other Income - Net
- ------------------
Other Income - Net increased by $2.1 million, primarily due to a $1.6
million gain on the sale of the Company's Frederick Gas division propane assets,
and a $1.6 million gain on the sale of investments in venture capital funds.
These increases were partially offset by lower amounts generated from other
non-utility activities, including the effect of the prior year reversal of
valuation reserves.
Interest Expense
- ----------------
Total interest expense increased by $2,174,000 (8.3%) from the same period
last year, reflecting the following changes:
Composition of the Changes in Interest Expense:
Increase/(Decrease)
-------------------
(Thousands)
Long-term debt ......................................... $ 2,446
Short-term debt ........................................ (93)
Other .................................................. (179)
-------
Total .............................................. $ 2,174
=======
Long-Term Debt - The increase in interest on long-term debt of $2,446,000 was
primarily due to a $59.1 million rise in the average amount of long-term debt
outstanding, partially offset by a decline of 0.24 percentage points in the
weighted-average cost of such debt.
17
WASHINGTON GAS LIGHT COMPANY
----------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
------------------------------------------------
(continued)
Short-Term Debt - The decrease in interest on short-term debt of $93,000 was
primarily due to a $4.6 million decrease in the average amount of short-term
debt outstanding, partially offset by an increase of 0.21 percentage points in
the weighted-average cost of such debt.
Other - Other interest expense decreased by $179,000, primarily reflecting a
higher accrual in the current period for Allowance for Funds Used During
Construction.
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 of long-term debt, the Company had $1.6
million and $14.3 million of short-term debt outstanding as of June 30, 1998 and
June 30, 1997, respectively. The balance of short-term debt outstanding at June
30, 1998 represents various secured short-term bank loans reflected on the books
of newly acquired non-utility companies. Total short-term debt outstanding
declined by $66.3 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
- -------------------------------------------------
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.
As disclosed in its most recent annual report on Form 10-K, the Company
maintains relatively high credit ratings on its rated debt securities. The
Company will consider the issuance of additional common stock in the future to
support these ratings and optimize its capital structure consistent with
existing needs and market conditions.
18
WASHINGTON GAS LIGHT COMPANY
----------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
------------------------------------------------
(continued)
Operating Activities
Net cash provided by operating activities, net of the effects from the
purchase of non-utility companies, was $181.9 million during the first nine
months of fiscal year 1998 and compares to $195.0 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 nine months ended June 30, 1998 and 1997.
Financing Activities
During the first quarter of fiscal year 1998, the Company paid $2.3 million
to repurchase 88,700 shares of common stock. Effective May 1, 1998, shares
issued under the Dividend Reinvestment and Common Stock Purchase Plan (DRP) and
Employee Savings Plans (Savings Plans) are being issued as new shares rather
than being purchased on the open market. During the third quarter of fiscal year
1998, the Company raised $2.5 million through the DRP and Savings Plans.
The table below summarizes the Company's issuances of long-term debt,
consisting entirely of Medium-Term Notes (MTNs), in the nine months ended June
30, 1998:
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
nine months ended June 30, 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.
Investing Activities
Capital expenditures for the first nine months of fiscal year 1998 were
$110.6 million with a budget of $168.8 million for the fiscal year. 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.
19
WASHINGTON GAS LIGHT COMPANY
----------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
------------------------------------------------
(continued)
In January 1998, the Company received $1.6 million from the sale of
investments in venture capital funds. In May 1998, the Company sold the propane
assets of its Frederick Gas Division for $4,050,000, recognizing a net-of-tax
gain of $1.6 million.
Non-utility Activities
During the nine months ended June 30, 1998, the Company sold, with
recourse, $21.1 million of non-utility accounts receivable. This compares to
$26.1 million sold in the nine months ended June 30, 1997.
OTHER FACTORS AFFECTING THE COMPANY
- -----------------------------------
YEAR 2000
- ---------
The Company is providing the following disclosure pursuant to the
Securities and Exchange Commission's Interpretation titled "Disclosure of Year
2000 Issues and Consequences by Public Companies, Investment Advisers,
Investment Companies, and Municipal Securities Issuers," effective August 4,
1998.
Like other companies who use business-application software programs and
rely on a computing infrastructure that includes embedded systems, the so-called
Year 2000 issue also affects the Company. The Company's software programs and
computing infrastructure that use two-digit years to define the applicable year,
rather than four-digit years, and 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 or device shutting down, performing incorrect
computations or performing inconsistently.
In 1996, the Company began a structured program to address Year 2000
issues. It has been implementing individual strategies targeted at the specific
nature of the Year 2000 issues in each of the following areas: (1) business-
application systems including, but not limited to, the Company's customer
service, operations and financial systems and end-user applications; (2)
embedded systems, including equipment that operates such items as the Company's
storage and distribution system, meters, telecommunications, fleet and
buildings; (3) vendor and supplier relationships; (4) interruptible customers
and their ability to switch to alternate fuels as required under their tariffs;
and (5) contingency planning.
To implement this comprehensive Year 2000 program, the Company established
a Year 2000 Project Office, chaired by the Vice President and Chief Information
Officer who reports directly to the President and Chief Executive Officer. The
multi-disciplinary project office includes executive management and employees
with expertise from various disciplines including, but not limited to,
information technology, engineering, finance, communications, internal audit,
facilities, procurement, law and human resources. In addition, the Company has
utilized the expertise of outside consultants to assist in the implementation of
the Year 2000 program in such areas as business-application system remediation,
business-application system replacement, and embedded systems inventory and
analysis.
20
WASHINGTON GAS LIGHT COMPANY
----------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
------------------------------------------------
(continued)
Business-Application Systems
- ----------------------------
In March 1997, the Company completed its assessment of all of its
business-application systems. It is resolving Year 2000 issues through the
replacement of certain equipment, the modification of certain software to
recognize the turn of the century, the replacement of certain software systems
with new systems that, in addition to providing additional business management
information, recognize four-digit years, and the "sunsetting" of certain
software and equipment.
By June 30, 1998, the Company had completed modifications to all of its
business applications targeted for remediation by use of outside resources. It
has tested and placed back into the production environment, business
applications representing approximately 50 percent of this remediated software
code. After the Company completes testing of the remaining applications, it
expects to have placed 100 percent of remediated business applications into a
Year 2000 compliant operating environment by the end of the first quarter of
fiscal year 1999 (i.e., the quarter ending December 31, 1998).
The Company is using a testing procedure commonly known as trace-based
testing to test business applications for Year 2000 functionality. This method
first captures current processing steps and relevant data, which are run prior
to remediation (baseline test) and again after remediation (regression test).
This process is intended to identify any business rules that may have changed
during the remediation effort and to confirm that only date processes have been
changed. Once the regression test is successfully completed, the Company uses
automated test software tools that perform date simulation of the system clock
being rolled forward to age the same data and to verify and compare results
(future date test).
The Company is also installing an enterprise-wide software system that will
replace twenty business-application systems, comprising its financial, human
resources and supply chain systems, which represents approximately one-half of
the business application software code requiring remediation or replacement. The
Company currently expects to complete the replacement, including testing, by the
end of the second quarter of fiscal year 1999 (i.e., the quarter ending March
31, 1999).
During the fourth quarter of fiscal year 1998, the Company also completed a
comprehensive, prioritized inventory of several hundred end-user applications
(i.e. PC-based databases and spreadsheets) and will begin implementing project
plans to replace or remediate these applications, as necessary, at the beginning
of fiscal year 1999. It expects to identify those applications targeted for
elimination and to complete replacement or remediation, including testing, by
the end of the third quarter of fiscal year 1999 (i.e., the quarter ending June
30, 1999).
Embedded Systems
- ----------------
The Company performed a comprehensive inventory of its embedded systems at
the component level. This inventory identified several hundred components that
are date sensitive. The Company has contacted all manufacturers of those
components that it has identified as critical to operations and continues to
contact many other manufacturers of embedded components to determine whether
their components are Year 2000 compliant. Approximately 98 percent of the
date-sensitive components that the Company has identified do not require
remediation or replacement to achieve Year 2000 compliance. The Company is
remediating or replacing, as applicable, the remaining 2 percent of the
identified non-compliant systems and expects to be completed by the end of the
second quarter of fiscal year 1999. The quality of the responses received from
manufacturers, the estimated impact of the individual system on the Company,
21
WASHINGTON GAS LIGHT COMPANY
----------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
------------------------------------------------
(continued)
and the ability of the Company to perform meaningful tests will influence its
decision to conduct independent testing of embedded systems.
Vendors and Suppliers
- ---------------------
The Company has contacted in writing and, in some cases, also through
face-to-face discussions, all vendors and suppliers of products and services
that it considers critical to its operations. These contacts have included
suppliers of interstate transportation capacity, natural gas producers,
financial institutions and electric, telephone and water companies. The quality
of the responses received from vendors and suppliers is not uniform. As a
result, the Company will consider new business relationships with alternate
providers of products and services as necessary and to the extent alternatives
are available.
Interruptible Customers
- -----------------------
The Company is communicating with its major interruptible customers to
inform them about potential vulnerability of embedded boiler and plant control
systems. Therefore, to position them to ensure their ability to switch to an
alternate fuel source, as required by applicable tariffs and contracts, if
called on to do so after the millennium, the Company has informed them that they
should assess the need to include potential remediation and/or replacement of
these systems as part of their Year 2000 programs.
Contingency Planning
- --------------------
The Company's Year 2000 strategies include contingency planning,
encompassing business continuity both within the Company and in the external
business environment. The planning effort includes critical Company areas such
as computing, networks, vendors and suppliers, operations, personnel and
business systems as well as systems and infrastructure external to the Company.
As part of its normal business practice, the Company maintains plans to follow
during emergency circumstances, some of which could arise from Year 2000-related
problems. Its contingency planning for the Year 2000 will address various
alternatives and will include assessing a variety of scenarios that could emerge
at the millennial change and require the Company to react. Presently, the
Company continues to develop its contingency plans for potential Year
2000-related problems.
Potential Risks
- ---------------
With respect to its internal operations, those over which the Company has
direct control, the Company believes the most significant potential risks are:
(1) its ability to use electronic devices to control and operate its
distribution system; (2) its ability to render timely bills to its customers;
(3) its ability to enforce tariffs and contracts applicable to interruptible
customers; and (4) its ability to maintain continuous operation of its computer
systems. The Company's Year 2000 program addresses each of these risks and the
remediation or replacement of these systems is well under way. Furthermore, the
contingency plan will outline alternatives in the event that any Year
2000-related situations may occur.
The Company relies on the producers of natural gas and suppliers of
interstate transportation capacity to deliver natural gas to the Company's
distribution system. External infrastructure, such as electric, telephone and
water service, is necessary for the Company's basic operations as well as the
operations of many of its customers. Should any of these critical vendors fail,
the impact of any such failure could become a significant challenge to the
Company's ability to meet the demands of its customers, to operate its
distribution system and
22
WASHINGTON GAS LIGHT COMPANY
----------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
------------------------------------------------
(continued)
to communicate with its customers. It could also have a material adverse
financial impact, including but not limited to, lost sales revenues, increased
operating costs and claims from customers related to business interruptions.
Based on the information supplied to date by our critical vendors and suppliers,
the Company believes the probability of such failures to be remote. However,
the Company's structured program to address Year 2000 issues emphasizes
continued monitoring of the progress of these critical vendors and suppliers
toward meeting the projected completion of their Year 2000 programs.
Financial Implications
- ----------------------
To implement its Year 2000 strategies, the Company currently expects to
generate non-recurring expenses of approximately $8 million to $10 million, over
the three fiscal-year period ending September 30, 1999, for business-application
systems remediation, embedded systems replacement, end-user applications
remediation and replacement, and certain costs associated with the replacement
of certain existing business systems. The Company will capitalize costs of
approximately $17 million to $22 million incurred to replace certain existing
business-application software systems with new systems that will be Year 2000
operational and provide additional business management information.
As of June 30, 1998, the Company has incurred approximately $3 million for
business-application systems remediation, embedded systems replacement and
end-user applications remediation and replacement. With respect to the
replacement of existing business-application software systems, as of June 30,
1998, the Company has charged approximately $3 million to expense and
capitalized approximately $11 million. Until the Company has completed further
analysis of the impact of the Year 2000 issue on its 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 program is progressing
and the Company believes it is taking all reasonable steps necessary to be able
to operate successfully through and beyond the turn of the century.
23
PART II. OTHER INFORMATION
-----------------
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. As previously reported on Form 10-K for the year ended September 30, 1997,
on August 1, 1997, the Company's distribution subsidiary, Shenandoah Gas
Company, filed a request with the State Corporation Commission of Virginia
(SCC of VA) for new rates designed to collect additional annual operating
revenues of $2,306,000, or 10.54%. This request included an overall rate of
return of 10.03%, a return on common equity of 12.25%, and a 55.24% common
equity ratio. New rates were placed into effect, subject to refund,
effective December 28, 1997.
On July 16, 1998, the SCC of VA issued a final order approving an increase
in annual revenues of $1,435,198, effective December 28, 1997. The increase
reflects an overall rate of return of 9.062% and a return on equity of
10.70%. Amounts collected under interim rates in excess of the amount
granted by the SCC of VA will be returned to customers, with interest, by
October 1, 1998.
C. On June 18, 1998, the SCC of VA issued its final order approving the
Company's request to offer firm delivery service on a limited-term, pilot
basis to residential and commercial customers in Virginia. Customers may
enroll in the two-year program starting in October 1998, and sales will
begin in January 1999. In the first year of the program, up to 10% of the
Company's firm customers in Virginia would be eligible to participate in
the program, increasing to 20% in the second year. For the first year,
approximately 30,000 residential customers and 2,000 commercial customers
will be eligible to purchase gas from third-party suppliers under the
program.
D. On July 29, 1998, the Company's Board of Directors elected Frederic M.Kline
to the additinal position of Chief Financial Officer, effective October 1,
1998. Mr. Kline is currently Vice President and Treasurer and previously
held the position of Controller.
Also on July 29, 1998, the Company's Board of Directors elected
Beverly J. Burke as Vice President and Assistant General Counsel,
effective October 1, 1998. Ms. Burke is currently a department head in
the Office of the General Counsel, with responsibility for human resource
matters including labor and benefits. Ms. Burke previously held the
position of managing attorney in the litigation area.
E. Shareholders intending to make nominations of candidates for election to
the Board of Directors or to propose other business at any meeting of the
shareholders must give advance notice to the Corporate Secretary. The
corporate bylaws require that the Secretary receive this notice not less
than 60 days before the date of the shareholder meeting. The date of the
next annual shareholders' meeting will be announced to shareholders
sufficiently in advance to permit such notice to be provided in a timely
24
PART II. OTHER INFORMATION
-----------------
(continued)
manner. This advance notice requirement is different from the notice
required for shareholders to submit proposals for printing in the proxy
statement.
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
On July 10, 1998, the Company filed a Form 8-K
reporting an update of regulatory matters in Virginia.
On June 25, 1998, the Hearing Examiner of the State
Corporation Commission of Virginia issued a report
related to certain of the Company's regulatory assets
associated with its Virginia operations. Refer to the
Notes to Consolidated Financial Statements in this
report for further discussion of this matter.
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 14, 1998 /s/ Robert E. Tuoriniemi
------------------------------------------ ------------------------------
Controller
(Principal Accounting Officer)
25