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, 1999
------------------------
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 incorporation (I.R.S. Employer
or organization) Identification No.)
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 46,364,502 April 30, 1999
- ---------------------------- ---------------- --------------
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, 1999 and September 30, 1998 2-3
Consolidated Statements of Income -
Three Months Ended March 31, 1999 and 1998 4
Consolidated Statements of Income -
Six Months Ended March 31, 1999 and 1998 5
Consolidated Statements of Cash Flows -
Six Months Ended March 31, 1999 and 1998 6
Notes to Consolidated Financial Statements 7-11
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 12-25
Item 3. Quantitative and Qualitative Disclosures About
Market Risks of the Company 26
PART II. Other Information:
Item 4. Submission of Matters to a Vote of Security Holders 26-27
Item 5. Other Information 27-28
Item 6. Exhibits and Reports on Form 8-K 28-29
Signature 29
1
WASHINGTON GAS LIGHT COMPANY
----------------------------
CONSOLIDATED BALANCE SHEETS
---------------------------
Mar. 31, Sept. 30,
1999 1998
----------- ---------
(Unaudited)
(Thousands)
ASSETS
Property, Plant and Equipment
At original cost $2,059,520 $1,992,770
Accumulated depreciation and amortization (697,091) (673,269)
---------- ----------
1,362,429 1,319,501
---------- ----------
Current Assets
Cash and cash equivalents 13,622 17,876
Accounts receivable 176,987 92,178
Gas costs due from customers 11,804 9,921
Allowance for doubtful accounts (8,565) (9,078)
Accrued utility revenues 48,625 16,304
Materials and supplies--principally at
average cost 15,279 15,607
Storage gas--at cost (first-in, first-out) 13,260 76,338
Deferred income taxes 17,698 16,337
Other prepayments--principally taxes 12,041 13,864
Other 1,485 849
---------- ----------
302,236 250,196
---------- ----------
Deferred Charges and Other Assets
Regulatory assets--deferred purchased
gas costs - 3,550
Regulatory assets--other 89,238 91,802
Other 20,892 17,384
---------- ----------
110,130 112,736
---------- ----------
Total $1,774,795 $1,682,433
========== ==========
________________________
See accompanying Notes to Consolidated Financial Statements.
2
WASHINGTON GAS LIGHT COMPANY
----------------------------
CONSOLIDATED BALANCE SHEETS
---------------------------
Mar. 31, Sept. 30,
1999 1998
---------- ----------
(Unaudited)
(Thousands)
CAPITALIZATION AND LIABILITIES
Capitalization
Common shareholders' equity $ 730,452 $ 607,755
Preferred stock 28,423 28,424
Long-term debt 453,093 428,641
---------- ----------
1,211,968 1,064,820
---------- ----------
Current Liabilities
Current maturities of long-term debt 47,020 64,106
Notes payable 16,605 124,943
Accounts and wages payable 135,104 116,770
Dividends declared 14,470 13,485
Customer deposits and advance payments 9,070 19,454
Accrued taxes and interest 54,975 9,200
Pipeline refunds due to customers 2,517 1,437
Gas costs due to customers 4,433 5,671
Other 300 1,146
---------- ----------
284,494 356,212
---------- ----------
Deferred Credits
Unamortized investment tax credits 20,035 20,493
Deferred income taxes 138,977 145,519
Regulatory liabilities--deferred purchased
gas costs 25,889 -
Other regulatory liabilities and other
deferred credits 93,432 95,389
---------- ----------
278,333 261,401
---------- ----------
Total $1,774,795 $1,682,433
========== ==========
________________________
See accompanying Notes to Consolidated Financial Statements.
3
WASHINGTON GAS LIGHT COMPANY
----------------------------
CONSOLIDATED STATEMENTS OF INCOME
---------------------------------
(Unaudited)
Three Months Ended
----------------------------
Mar. 31, Mar. 31,
1999 1998
--------- ---------
(Thousands, Except Per Share Data)
Operating Revenues $ 392,988 $ 390,221
Cost of Gas 195,817 210,003
--------- ---------
Net Revenues 197,171 180,218
--------- ---------
Other Operating Expenses
Operation 41,344 40,890
Maintenance 9,762 9,802
Depreciation and amortization 14,692 13,734
General taxes 21,722 23,894
Income taxes 36,999 30,197
--------- ---------
124,519 118,517
--------- ---------
Operating Income 72,652 61,701
Other Income - Net 1,369 1,498
--------- ---------
Income Before Interest Expense 74,021 63,199
--------- ---------
Interest Expense
Interest on long-term debt 8,674 8,196
Other 503 1,274
--------- ---------
9,177 9,470
--------- ---------
Net Income 64,844 53,729
Dividends on Preferred Stock 333 333
--------- ---------
Net Income Applicable to Common Stock $ 64,511 $ 53,396
========= =========
Average Common Shares Outstanding 46,293 43,628
========= =========
Earnings per Average Common Share - Basic $ 1.39 $ 1.22
========= =========
Earnings per Average Common Share - Diluted $ 1.39 $ 1.22
========= =========
Dividends Declared per Common Share $ 0.305 $ 0.300
========= =========
________________________
See accompanying Notes to Consolidated Financial Statements.
4
WASHINGTON GAS LIGHT COMPANY
----------------------------
CONSOLIDATED STATEMENTS OF INCOME
---------------------------------
(Unaudited)
Six Months Ended
---------------------------------
Mar. 31, Mar. 31,
1999 1998
--------- --------
(Thousands, Except Per Share Data)
Operating Revenues $ 690,337 $ 757,768
Cost of Gas 354,736 422,049
--------- ---------
Net Revenues 335,601 335,719
--------- ---------
Other Operating Expenses
Operation 88,968 83,991
Maintenance 19,030 19,039
Depreciation and amortization 28,997 27,165
General taxes 38,328 43,663
Income taxes 52,122 52,458
--------- ---------
227,445 226,316
--------- ---------
Operating Income 108,156 109,403
Other Income - Net 761 1,611
--------- ---------
Income Before Interest Expense 108,917 111,014
--------- ---------
Interest Expense
Interest on long-term debt 17,435 16,188
Other 1,723 2,973
--------- ---------
19,158 19,161
--------- ---------
Net Income 89,759 91,853
Dividends on Preferred Stock 666 666
--------- ---------
Net Income Applicable to Common Stock $ 89,093 $ 91,187
========= =========
Average Common Shares Outstanding 45,584 43,645
========= =========
Earnings per Average Common Share - Basic $ 1.95 $ 2.09
========= =========
Earnings per Average Common Share - Diluted $ 1.95 $ 2.09
========= =========
Dividends Declared per Common Share $ 0.605 $ 0.595
========= =========
________________________
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,
1999 1998
-------- --------
(Thousands)
Operating Activities
Net income $ 89,759 $ 91,853
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization a/ 32,117 29,856
Deferred income taxes - net (6,849) (4,946)
Amortization of investment tax credits (458) (470)
Allowance for funds used during construction (972) (378)
Loss from agreement to sell West Virginia assets
(Note 10) 3,300 -
Other noncash credits - net (216) (421)
--------- --------
116,681 115,494
Changes in assets and liabilities:
Accounts receivable and accrued utility revenues (117,643) (144,205)
Gas costs due from/to customers - net (3,121) 3,909
Storage gas 63,078 57,251
Other prepayments - principally taxes 1,823 1,283
Accounts and wages payable 17,350 14,738
Customer deposits and advance payments (10,384) (7,764)
Accrued taxes and interest 45,775 43,401
Pipeline refunds due to customers 1,080 (4,765)
Deferred purchased gas costs - net 29,439 24,411
Other - net (3,301) 3,663
--------- --------
Net Cash Provided by Operating Activities 140,777 107,416
--------- --------
Financing Activities
Common stock issued 61,241 -
Common stock repurchased - (2,340)
Long-term debt issued 27,196 72,000
Long-term debt retired (19,925) (23,733)
Premium on long-term debt retired - (493)
Debt issuance costs (Note 5) (2,258) (1,103)
Notes payable - net (108,338) (54,800)
Dividends on common and preferred stock (27,696) (26,425)
--------- --------
Net Cash Used in Financing Activities (69,780) (36,894)
--------- --------
Investing Activities
Capital expenditures (75,251) (67,354)
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 (75,251) (68,725)
--------- --------
(Decrease) Increase in Cash and Cash Equivalents (4,254) 1,797
Cash and Cash Equivalents at Beginning of Period 17,876 9,708
--------- --------
Cash and Cash Equivalents at End of Period $ 13,622 $ 11,505
========= ========
Supplemental Disclosures of Cash Flow Information
Income taxes paid $ 14,347 $ 18,889
Interest paid $ 19,988 $ 19,156
______________________
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)
1. 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, 1998.
2. 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, 1999.
3. 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.
4. Certain amounts in financial statements of prior years have been
reclassified to conform to the presentation of the current year.
5. Interest Rate Hedge
The Company has $39 million of 8-3/4% First Mortgage Bonds (FMBs) that can
be called by the Company, or put to the Company on July 1, 1999. On
September 2, 1998, in order to lock in the Treasury yield for an
anticipated $39 million Medium-Term Note (MTN) issuance, which will be used
to refund the FMBs, the Company entered into an agreement that reflects the
forward sale of $40 million of 10-year U.S. Treasury notes at a fixed price
to be paid on July 1, 1999. The Company 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"
(SFAS No. 80). The Company will record any gain or loss associated with
this hedge as MTN debt issuance costs when the Company issues such debt and
will amortize the costs over the life of the MTNs. If the agreement is
terminated without completing the anticipated MTN issuance, any gain or
loss will be immediately recognized in earnings.
Debt Issuance
The Company issued $25 million of 10-year MTNs in October 1998 with a
coupon rate of 5.49%. In order to lock in the Treasury yield for this
issuance, in June 1998, the Company entered into an agreement that
reflected a forward sale of $24.9 million of 10-year U.S. Treasury notes at
a fixed price. The Company unwound its hedge position concurrent with the
issuance of the above mentioned $25 million of MTNs, recording debt
issuance costs of $2.1 million to be amortized over the life of the MTNs.
This accounting treatment was in accordance with SFAS No. 80. The effective
cost of the debt was 6.74%.
6. In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and for Hedging Activities" (SFAS No. 133). This statement is
effective for fiscal years beginning after June 15, 1999, and the Company
must adopt it in the first quarter of 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
7
WASHINGTON GAS LIGHT COMPANY
----------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
(Unaudited)
(continued)
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.
7. In November 1998, the Emerging Issues Task Force (EITF) of the Financial
Accounting Standards Board reached a consensus related to EITF Issue No.
98-10, "Accounting for Contracts Involved in Energy Trading and Risk
Management Activities." This consensus requires that energy trading
contracts, as these are defined in the consensus, are presented at fair
value with periodic gains and losses included in earnings. The Company is
reviewing EITF Issue No. 98-10, which would be applicable to the Company in
its fiscal year 2000, and does not currently expect it to materially impact
the Company's financial condition or results of operations.
8. Basic and diluted earnings per share ("EPS") computations for the three and
six months ended March 31, 1999 and 1998 are shown below. Basic EPS is
computed by dividing net income applicable to common stock by the weighted
average number of common shares outstanding during the periods. Diluted EPS
assumes conversion of convertible preferred stock at the beginning of the
applicable period.
For the Three Months Ended
March 31, 1999
--------------------------------
Per Share
Income Shares Amount
-------- ------ ---------
(Thousands, Except Per Share Data)
Basic EPS:
Net Income Applicable to Common Stock $64,511 46,293 $1.39
Effect of Dilutive Securities:
- -----------------------------
$4.60 and $4.36 Convertible Preferred Stock,
Assuming Conversion on January 1, 1999 3 24
------- ------
Diluted EPS:
Net Income Applicable to Common Stock
Plus Assumed Conversions $64,514 46,317 $1.39
======= ====== =====
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 Six Months Ended
March 31, 1999
---------------------------------
Per Share
Income Shares Amount
------ ------ ---------
(Thousands, Except Per Share Data)
Basic EPS:
Net Income Applicable to Common Stock $89,093 45,584 $1.95
Effect of Dilutive Securities:
- -----------------------------
$4.60 and $4.36 Convertible Preferred Stock,
Assuming Conversion on October 1, 1998 6 24
------- ------
Diluted EPS:
Net Income Applicable to Common Stock
Plus Assumed Conversions $89,099 45,608 $1.95
======= ====== =====
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
======= ====== =====
9. On November 12, 1998, the Company publicly offered 2 million shares of
common stock at $25.0625 per share. On November 18, 1998, the underwriters
involved in the offering exercised their option to purchase an additional
300,000 shares from the Company at the same price per share. Net proceeds
from the sale amounted to $55.7 million, and are being used for general
corporate purposes, including capital expenditures and working capital
requirements.
10. On November 2, 1998, Shenandoah Gas Company (Shenandoah Gas), a wholly
owned subsidiary of the Company entered into an agreement to sell its
natural gas utility assets located in West Virginia. According to this
agreement, Shenandoah Gas will provide natural gas transportation service
through its pipeline system in Virginia to the purchaser to assure
continued natural gas service in the Eastern Panhandle of West Virginia.
Shenandoah Gas has approximately 3,600 customers in Martinsburg and
surrounding areas in Berkeley County, West Virginia. Shenandoah Gas will
continue to provide natural gas utility service to its approximately 10,000
customers in the northern Shenandoah Valley of Virginia.
In fiscal year 1998, Shenandoah Gas' natural gas therm deliveries in West
Virginia represented less than two percent of the Company's consolidated
natural gas therm deliveries and less than one percent of associated
consolidated revenues. Shenandoah Gas' West Virginia operations contributed
approximately $200,000 (0.3%) to the Company's fiscal year 1998 net income
applicable to common stock. This represents less than one-half of one cent
of basic and diluted earnings per average common share for fiscal year
1998. During the quarter ended December 31, 1998, the Company recorded a
non-recurring $3.3 million pre-tax loss ($2.1 million after-tax or $0.05
per average common share) related to this agreement to reflect the
anticipated loss at settlement.
10
WASHINGTON GAS LIGHT COMPANY
----------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
(Unaudited)
(continued)
The proposed transaction is subject to approval by the Public Service
Commission of West Virginia. The transportation service to be provided by
Shenandoah Gas to the purchaser is subject to approval by the Federal
Energy Regulatory Commission.
11. Stock-Based Compensation
At the Company's Annual Meeting of stockholders held on February 24, 1999,
stockholders approved the Company's 1999 Incentive Compensation Plan (1999
Plan) replacing the expiring Long-Term Incentive Compensation Plan (LTICP).
Similar to the LTICP, the 1999 Plan provides for the granting of shares of
common stock to officers and key employees of the Company and is designed
to promote the long-term success of the Company by recruiting and retaining
key employees. The 1999 Plan differs from the LTICP in that it enables the
Company to impose performance goals with respect to any award, thereby
requiring forfeiture of all or part of any award if such performance goals
are not met. The Company applies Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" (APB No. 25) and related
interpretations in accounting for its stock-based compensation plans. The
maximum number of shares that may be issued under the 1999 Plan is
1,000,000 shares of common stock.
On March 31, 1999, the Company granted 99,465 of nonqualified stock options
and 45,702 of performance shares under the 1999 Plan. The stock options
vest three years after the date of the grant and expire on the tenth
anniversary of the grant date. Since the stock options were granted at the
fair market value of the Company's stock on the grant date, no compensation
expense will be recognized.
For the performance shares, 15,802 shares will vest after 18 months and for
29,900 shares, vesting occurs at the end of 30 months. At the end of the
vesting periods, the ultimate amount of performance shares issued to the
recipients will be adjusted upward or downward based on the Company's total
shareholder return relative to a selected peer company group. In accordance
with APB No. 25, the Company will recognize estimated compensation expense
ratably over the vesting periods of the performance shares.
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
every objective 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, which are not intended to cover all events, 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 effect of fluctuations in weather from
normal levels; (4) variations in prices of natural gas and competing energy
sources; (5) the Company's ability to develop new markets and product and
service offerings as well as to maintain existing markets and the expenditures
required to develop and provide such products and services; (6) conditions of
the capital markets utilized by the Company to access capital to finance
operations and capital expenditures; (7) improvements in products or services
offered by competitors; (8) the cost and effects of legal and administrative
claims and proceedings against the Company or which may be brought against the
Company; (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; and (10) the impact of regulatory proceedings initiated by the Company
or other parties before the regulatory commissions that have jurisdiction over
the Company's retail rates.
RESULTS OF OPERATIONS
- ---------------------
THREE MONTHS ENDED MARCH 31, 1999 vs. MARCH 31, 1998
- ----------------------------------------------------
Earnings
- --------
For the quarter ended March 31, 1999, net income applicable to common stock
was $64.5 million, or $11.1 million higher than the results for the same period
last year. Basic and diluted earnings per average common share were $1.39, or
$0.17 higher than last year. Average common shares outstanding increased by 6.1%
from the prior year, primarily due to the public offering of 2.3 million shares
of common stock in the first quarter of the current year (See Note 9 to the
Consolidated Financial Statements) and common shares issued under the Dividend
Reinvestment and Common Stock Purchase Plan and the Employee Savings Plans. This
increase in average common shares outstanding in the current quarter reduced
earnings per share by $0.09 per average common share in this quarter. The
increase in net income applicable to common stock was directly attributable to
higher net revenues derived from a 13.9% increase in firm therms delivered. This
increase in firm therms delivered resulted from 14.6% colder weather in the
current quarter compared to last year and a 3.1% increase in customer meters.
Weather for the three months ended March 31, 1999 was 0.8% warmer than normal
while weather for the same period last year was 14.2% warmer than normal.
12
WASHINGTON GAS LIGHT COMPANY
----------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
------------------------------------------------
(continued)
Net Revenues
- ------------
Net revenues for the period increased by $17.0 million (9.4%) from the same
period last year to $197.2 million. The following table compares certain
operating statistics for the quarters ended March 31, 1999 and 1998.
Three Months Ended
----------------------
Mar. 31, Mar. 31,
1999 1998
-------- --------
Gas Sales and Deliveries (thousands of therms)
Firm
Gas Sold and Delivered 440,918 419,008
Gas Delivered for Others 89,977 47,142
------- -------
530,895 466,150
------- -------
Interruptible
Gas Sold and Delivered 19,552 27,323
Gas Delivered for Others 95,704 76,663
------- -------
115,256 103,986
------- -------
Electric Generation
Gas Delivered for Others 16,290 11,439
------- -------
Total Deliveries 662,441 581,575
======= =======
Degree Days
Actual 2,121 1,851
Normal 2,138 2,157
Customer Meters (end of period) 847,670 821,956
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. 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.
13
WASHINGTON GAS LIGHT COMPANY
----------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
------------------------------------------------
(continued)
Under delivery service tariffs, certain firm customers are eligible to
acquire their gas supply from the Company (bundled gas service) or a third-party
supplier, such as unregulated marketers and unregulated subsidiaries of other
utility companies. The Company continues to serve all firm customers by
delivering gas through its distribution system (delivery service), which results
in the Company earning a regulated return on this service. Net revenues
generated from firm customers that do not acquire their gas supply from the
Company are equivalent on a per unit basis to those earned on bundled gas
service. Therefore, the Company does not experience any loss of margins from
customers that choose to purchase their gas from a third-party supplier.
Firm therm deliveries increased by 64.7 million therms (13.9%) in the
current quarter, primarily due to weather that was 14.6% colder than the same
quarter last year and the effect of a 3.1% increase in the number of customer
meters.
Gas Delivered to Interruptible Customers
- ----------------------------------------
Therms delivered to interruptible customers increased by 11.3 million
therms (10.8%) in the current quarter. The increase in volumes delivered
resulted primarily from the colder weather experienced during the current
quarter. 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 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 has two customers with facilities in Maryland to which it sells
and/or delivers gas that is used to generate electricity. Volumes delivered for
electric generation in the current quarter increased by 4.9 million therms
(42.4%) over the same period last year, primarily due to increased usage by
these customers. 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 $414,000 (0.8%) from the
same period last year. This increase is primarily attributable to increased
advertising costs, partially offset by lower costs in the current year
associated with ongoing technology initiatives.
Depreciation and amortization increased by $958,000 (7.0%) primarily due to
the Company's increased investment in plant and equipment to meet customer
growth and to upgrade existing facilities.
General taxes declined by $2.2 million (9.1%) primarily due to a decrease
in gross receipts taxes caused by a decline in the tax rate in the District of
Columbia. The Company records the amounts collected from customers in revenue
and in general tax expense and, therefore, there is generally no effect on net
income.
14
WASHINGTON GAS LIGHT COMPANY
----------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
------------------------------------------------
(continued)
Income taxes, including amounts reflected in Other Income - Net, increased
by $7.6 million, primarily due to higher pre-tax income generated this quarter.
Other Income - Net
- ------------------
Other Income - Net declined by $129,000 primarily due to a $1.6 million
gain on the sale of certain investments in venture capital funds recorded in the
same period in the prior year, partially offset by higher earnings generated
from energy marketing activities in the current period.
Interest Expense
- ----------------
Total interest expense decreased by $293,000 (3.1%) from the same period
last year, reflecting the following changes:
Composition of the Changes in Interest Expense:
Increase/(Decrease)
-------------------
(Thousands)
Long-Term Debt $ 478
Short-Term Debt (467)
Other (304)
------
Total $ (293)
======
Long-Term Debt - The increase in interest on long-term debt of $478,000 was
primarily due to a $36.9 million rise in the average amount of long-term debt
outstanding, partially offset by a decline of 0.15 percentage points in the
weighted-average cost of such debt.
Short-Term Debt - The decrease in interest on short-term debt of $467,000 was
due to a $26.7 million decline in the average amount of short-term debt
outstanding and a decrease of 0.69 percentage points in the weighted-average
cost of such debt.
Other - Other interest expense decreased by $304,000 in the current quarter
primarily reflecting an increase in the accrual for allowance for funds used
during construction.
SIX MONTHS ENDED MARCH 31, 1999 vs MARCH 31, 1998
- -------------------------------------------------
Earnings
- --------
For the six months ended March 31, 1999, net income applicable to common
stock totaled $89.1 million, or $2.1 million lower than the results for the same
period last year. Basic and diluted earnings per average common share were $1.95
compared to $2.09 per average common share last year. The decline in net income
applicable to common stock for the six-month period primarily resulted from a
non-recurring $2.1 million after-tax loss recorded in the first quarter ($0.05
per average common share) related to an agreement to sell the Shenandoah Gas
natural gas utility assets located in West Virginia (See Note 10 to the
Consolidated Financial Statements). In addition, earnings per average common
share decreased $0.09 primarily due to an increase
15
WASHINGTON GAS LIGHT COMPANY
----------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
------------------------------------------------
(continued)
in the average common shares outstanding during the current six-month period.
The increase in average common shares outstanding resulted from the previously
mentioned common stock offering in the first quarter and common shares issued
under the Dividend Reinvestment and Common Stock Purchase Plan and the Employee
Savings Plans.
Net Revenues
- ------------
Net revenues for the period were $335.6 million, reflecting a small
decrease from the same period last year. The following table compares certain
operating statistics for the six months ended March 31, 1999 and 1998. Weather
for the six months ended March 31, 1999 was 4.8% warmer than normal while
weather for the same period last year was 4.4% warmer than normal.
Six Months Ended
-----------------------
March 31, March 31,
1999 1998
--------- ---------
Gas Sales and Deliveries (thousands of therms)
Firm
Gas Sold and Delivered 733,014 774,418
Gas Delivered for Others 122,311 74,311
--------- ---------
855,325 848,729
--------- ---------
Interruptible
Gas Sold and Delivered 34,710 56,035
Gas Delivered for Others 170,774 149,473
--------- ---------
205,484 205,508
--------- ---------
Electric Generation
Gas Delivered for Others 29,743 27,971
--------- ---------
Total Deliveries 1,090,552 1,082,208
========= =========
Degree Days
Actual 3,345 3,377
Normal 3,514 3,533
Customer Meters (end of period) 847,670 821,956
Gas Delivered to Firm Customers
- -------------------------------
Firm therm deliveries increased by 6.6 million therms (0.8%) in the current
period, primarily due to the colder weather in the second quarter of this year
(although for the full six-month period weather was warmer than last year) and
the effect of a 3.1% increase in the number of customer meters. However, a
decrease in gross receipts taxes included in operating revenues primarily offset
the effect that the increase in firm therms delivered had on net revenues.
Various taxing authorities levy these taxes on revenues. Therefore, such taxes
16
WASHINGTON GAS LIGHT COMPANY
----------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
------------------------------------------------
(continued)
decrease with declines in revenues. The Company recovers the taxes from
customers and remits them to the various taxing authorities. The Company records
amounts of decreased gross receipts taxes in general tax expense and, therefore,
the decrease in net revenues associated with gross receipts taxes generally does
not affect net income. Revenues for the current six-month period decreased due
to a drop in the cost of gas billed to customers this year and the effect of
customers shifting from bundled gas service to delivery service. This shifting
can cause variations in gas revenues since the delivery service rate does not
include a cost of gas component.
Gas Delivered to Interruptible Customers
- ----------------------------------------
Therms delivered to interruptible customers declined only slightly in the
current six-month period. As previously described in this report, the effect on
net income of changes in gas deliveries to interruptible customers is minimal
due to margin-sharing arrangements in each of the Company's jurisdictions.
Gas Delivered for Electric Generation
- -------------------------------------
Volumes delivered for electric generation in the current six-month period
increased by 1.8 million therms (6.3%) over the same period last year, primarily
due to increased usage by these customers during the second quarter of fiscal
year 1999. Margins earned on such deliveries are being shared with firm
customers as described previously in this report.
Other Operating Expenses
- ------------------------
Operation and maintenance expenses increased by $5.0 million (4.8%) from
the same period last year. This increase is primarily attributable to: (1) the
previously-mentioned non-recurring loss ($3.3 million pre-tax) related to an
agreement to sell the Shenandoah Gas natural gas utility assets located in West
Virginia; (2) higher costs associated with technology initiatives; and (3)
increased advertising costs. Partially offsetting these increases are decreased
uncollectible accounts expenses reflecting lower revenues due to a drop in the
cost of gas this year, and lower labor costs.
Depreciation and amortization increased by $1.8 million (6.7%) primarily
due to the Company's increased investment in plant and equipment to meet
customer growth and to upgrade existing facilities.
General taxes declined by $5.3 million (12.2%) primarily due to a decrease
in gross receipts taxes, reflecting lower revenues caused by a drop in the cost
of gas this year and a rate reduction in the District of Columbia. The Company
records the amounts collected from customers in revenue and general tax expense,
and, therefore there is generally no effect on net income.
Income taxes, including amounts reflected in Other Income - Net, increased
slightly from the same period last year. The effective income tax rates were
36.99% and 36.41% for 1999 and 1998, respectively.
17
WASHINGTON GAS LIGHT COMPANY
----------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
------------------------------------------------
(continued)
Other Income - Net
- ------------------
Other Income - Net decreased by $850,000, primarily due to a $1.6 million
gain on the sale of certain investments in venture capital funds recorded in the
same period last year and higher miscellaneous general expenses. Higher earnings
generated from energy-related activities partially offset the effect of these
items.
The Company and its subsidiaries engage in energy-related activities that
include energy marketing, commercial energy services, consumer financing and
merchandising. The following table compares the financial results for each of
these activities for the six months ended March 31, 1999 and 1998.
Net Income (Loss) Applicable to Energy-Related Activities
---------------------------------------------------------
Six Months Ended
--------------------------
Mar. 31, Mar. 31,
1999 1998
-------- --------
(Thousands)
Energy Marketing $ 648 $ (419)
Commercial Energy Services 504 40
Consumer Financing 627 452
Other, including merchandising 127 (99)
------ -------
Total $1,906 $ (26)
====== =======
Energy Marketing
- ----------------
The Company's gas marketing subsidiary, Washington Gas Energy Services,
Inc. (WGES), sells natural gas in competition with unregulated marketers and
unregulated subsidiaries of other utility companies. WGES continues to gain
market share both inside and outside the Company's traditional service
territory. Higher earnings generated this year include the effect of customer
growth. The results of WGES for the six-month-ended periods are not indicative
of the anticipated fiscal year results. WGES made more sales in the current
period that are billed based on the volumes of gas delivered which is typically
greater in the colder winter months. In the prior year most revenue came from
annual fixed rate sales contracts which were matched with gas costs that may
vary seasonally. The quantity and pricing structure of these purchase contracts
are designed to match its sales commitments to effectively lock in a margin on
gas sales over the terms of existing sales contracts.
Commercial Energy Services
- --------------------------
The Company's commercial energy services include the design and renovation
of mechanical heating, ventilating and air conditioning systems. Positive
financial results generated from two subsidiaries purchased by the Company in
March 1998 were the primary reason for increased profits in the current six-
month period.
18
WASHINGTON GAS LIGHT COMPANY
----------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
------------------------------------------------
(continued)
Consumer Financing
- ------------------
Consumer financing, which includes the financing of gas appliances and
certain other equipment for residential and small commercial customers,
continues to show positive results.
Interest Expense
- ----------------
Total interest expense for the six months ended March 31, 1999 decreased
slightly from the same period last year, reflecting the following changes:
Composition of the Changes in Interest Expense:
Increase/(Decrease)
-------------------
(Thousands)
Long-Term Debt $ 1,247
Short-Term Debt (746)
Other (504)
-------
Total $ (3)
=======
Long-Term Debt - The increase in interest on long-term debt of $1,247,000 was
primarily due to a $50.8 million rise in the average amount of long-term debt
outstanding, partially offset by a decline of 0.21 percentage points in the
weighted-average cost of such debt. The embedded cost of long-term debt at March
31, 1999 was 6.8%.
Short-Term Debt - The decrease in interest on short-term debt of $746,000 was
due to a $20.3 million decline in the average amount of short-term debt
outstanding and a decrease of 0.45 percentage points in the weighted-average
cost of such debt.
Other - Other interest expense decreased by $504,000 in the current period
primarily reflecting an increase in the accrual 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.
19
WASHINGTON GAS LIGHT COMPANY
----------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
------------------------------------------------
(continued)
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 can
activate these financing options to support or replace the Company's commercial
paper.
At March 31, 1999, the Company had notes payable outstanding of $16.6
million, as compared to $124.9 million at September 30, 1998. The decrease in
notes payable from September 30, 1998 reflects 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 significantly affect the level of therms delivered.
Cash Flow from
Operating Activities
Net cash provided by operating activities was $140.8 million during the
first six months of fiscal year 1999 or an improvement of $33.4 million from the
same period last year. The improvement is primarily due to lower funds
supporting accounts receivable reflecting decreased gas costs during the current
year.
Cash Flow from
Financing Activities
As more fully described in Note 9 to the Consolidated Financial Statements,
the Company in the first quarter of this year raised $55.7 million through the
sale of 2.3 million shares of common stock. Additionally, during the six months
ended March 31, 1999, the Company raised $5.5 million from shares issued through
the Dividend Reinvestment and Common Stock Purchase Plan and the Employee
Savings Plans.
During the six months ended March 31, 1999, the Company issued $27.2
million of long-term debt. Included in long-term debt issuances were $25 million
of Medium-Term Notes (MTNs) with a coupon rate of 5.49% along with construction
funding debt of approximately $1.8 million. The Company retired $15.2 million of
MTNs with coupon rates ranging from 7.08% to 7.97% and $4.0 million of 8-5/8%
Series First Mortgage Bonds.
Cash Flow from
Investing Activities
Capital expenditures for the first six months of fiscal year 1999 were
$75.3 million on a budget of $141.9 million for fiscal year 1999. Capital
expenditures in the first six months of fiscal year 1998 were $67.4 million.
Sales of Accounts Receivable
During the six months ended March 31, 1999, the Company sold, with
recourse, $15.5 million of non-utility accounts receivable, compared to $15.8
million in the six months ended March 31, 1998.
20
WASHINGTON GAS LIGHT COMPANY
----------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
------------------------------------------------
(continued)
OTHER FACTORS AFFECTING THE COMPANY
- -----------------------------------
YEAR 2000
- ---------
The millennial change to the Year 2000 could affect the Company's software
programs and computing infrastructure that use two-digit years to define the
applicable year, rather than four-digit years. As such they 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 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) communications with
customers; (5) business continuity management planning; and (6) independent
verification and validation.
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 Chairman 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 management, procurement, operations, 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, embedded systems inventory and analysis, business continuity
management planning, and independent verification and validation.
Business-Application Systems
- ----------------------------
In March 1997, the Company completed its assessment of all its
business-application systems. It is resolving Year 2000 issues through
remediation of 18 systems to recognize the turn of the century and the
replacement of 21 systems with new systems that provide additional business
management information and recognize four-digit years. By the end of February
1999, the Company had completed modifications to 17 of the business applications
targeted for remediation. The remaining application will be completed by June
1999. This application represents less than 1% of the code to be remediated.
Thus more than 99% of the applications targeted for remediation have been
remediated, tested and placed back into a Year 2000 operational environment.
21
WASHINGTON GAS LIGHT COMPANY
----------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
------------------------------------------------
(continued)
The Company used in-house staff to test all remediated applications and
used a testing procedure commonly known as trace-based testing to test modified
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 was successfully completed, the Company used automated
test software tools to perform additional applicable future date tests for each
system.
The Company is also installing an enterprise-wide software system that will
replace 19 business application systems, including its financial, human
resources and supply chain systems. Two other systems will be replaced with
systems not included in the enterprise-wide software initiative. These 21
business applications represent approximately one-half of the business
application software code requiring remediation or replacement. By early May
1999, the Company began using the financial and supply chain modules of the
enterprise-wide software system. The Company is on target to begin using the
human resources modules in early July 1999. The Company currently expects the
replacement of the two other systems will be completed by September 1999.
During the fourth quarter of fiscal year 1998, the Company completed a
comprehensive, prioritized inventory of end-user applications (i.e., PC-based
databases) and is implementing project plans to replace or remediate these
applications, as necessary. It expects to complete replacement or remediation,
including testing, by the end of September 1999.
Embedded Systems
- ----------------
The Company has performed a comprehensive inventory of its embedded systems
at the component level. This inventory identified several hundred components
that were potentially date sensitive. The Company has contacted all
manufacturers of those components that it has identified as critical or
important to its operations. Approximately three percent of the date-sensitive
components that the Company has identified are non-compliant based on
information provided by the manufacturers. All critical components have been
remediated, tested and placed back into production. The remaining components
should be remediated, tested and placed back into production by June 1999.
22
WASHINGTON GAS LIGHT COMPANY
----------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
------------------------------------------------
(continued)
Vendor and Supplier Relationships
- ---------------------------------
The Company is contacting in writing or through face-to-face discussions
all vendors and suppliers of products and services that it considers critical or
important to its operation. These contacts include providers of interstate
transportation capacity and storage, natural gas suppliers, financial
institutions and electric, telecommunications and water companies. The Company
has evaluated responses and continues the process of following up with the
vendors and suppliers either through meetings or by letter. The Company will
consider new business relationships with alternate providers of products and
services as necessary and to the extent alternatives are available. However, the
Company recognizes there are no practical alternatives for external
infrastructure such as electric, telecommunications and water services,
suppliers of natural gas and providers of interstate transportation capacity and
storage to deliver natural gas to the Company's distribution system.
Customer Communications
- -----------------------
The Company is communicating with its major interruptible customers to
inform them about the potential vulnerability of embedded boiler and plant
control systems. The Company 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 to ensure their ability to switch to an alternate fuel
source, as required by applicable tariffs and contracts and if called on to do
so.
In addition, the Company is communicating its Year 2000 efforts to
customers through individual, community and association presentations through
responses to written inquiries, through brochures explaining our program which
was mailed to customers and through its website.
Year 2000 Risks and Business Continuity Planning
- ------------------------------------------------
With respect to its internal operations, 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 including
the enterprise-wide software system the Company is currently implementing. The
Company's Year 2000 program addresses each of these risks, and the remediation
or replacement of these systems is well under way. In the event that any Year
2000-related problems may occur, the Company's continuity plan will outline
alternatives to mitigate the impact of such failures, to the extent possible.
23
WASHINGTON GAS LIGHT COMPANY
----------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
------------------------------------------------
(continued)
The Company relies on the suppliers of natural gas and interstate
transportation and storage capacity to deliver natural gas to the Company's
distribution system. External infrastructure, such as electric,
telecommunications and water services, is necessary for the Company's basic
operation 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 to communicate with its
customers. It could also have a material adverse financial impact including, but
not limited to, lost revenues, increased operating costs and claims from
customers related to business interruptions. The Company has no way of ensuring
that those vendors or suppliers mentioned above for which there are no viable
options will be timely Year 2000 compliant.
As part of its normal business practice, the Company maintains plans to
follow during emergency circumstances. These plans are being used as a basis to
build the Company's continuity plan for potential Year 2000-related problems. As
part of its contingency planning effort the Company has performed table-top
exercises to validate this plan. The Company will continue performing table-top
exercises and drills, which are expected to continue through the end of 1999.
The Company maintains and operates a command center that is activated
during emergency circumstances. The Company will manage specific Year 2000
continuity operations from the command center during the millennium change as
well as at other points in time on an as needed basis. The Company has informed
its employees that every employee will be expected to work or be available to
work between December 27, 1999, and January 7, 2000, and between February 22,
2000, and March 7, 2000.
Because of the interconnected nature of potential Year 2000-related
problems, the Company recognizes that effective continuity planning must focus
on both internal and external operations. Therefore, the Company has been in
contact with and will work with federal, state, and local governmental agencies
as well as local organizations and other utilities as it completes its planning
effort.
The Company believes that its work will serve to reduce the risk that its
internal systems will fail for Year 2000 reasons. However, the continuity plan
cannot offset interrupted delivery to the Company's distribution system of
natural gas by the producers of natural gas and providers of interstate
transportation capacity or the impact on operations of failures of electric,
telecommunications and water services.
Independent Verification and Validation
- ---------------------------------------
The Company is currently working with external consultants to verify and
validate the Company's Year 2000 remediation and replacement strategies and
results for both business applications and embedded systems.
To verify and validate the Company's remediation efforts on its business
applications the consultants reviewed all remediated business applications to
determine that the code was remediated correctly. The consultants have reviewed
the compliance statements received from the manufacturers of the critical and
important embedded system components and where possible have developed
strategies and testing procedures to verify the compliance statements. The
Company has independently tested approximately 45% of those critical and
important embedded systems that it has determined it can meaningfully test. To
date the Company
24
WASHINGTON GAS LIGHT COMPANY
----------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
------------------------------------------------
(continued)
has completed its independent verification and validation of all of its critical
systems. The Company is on target to complete its independent verification and
validation of its embedded systems, and the one remaining business application,
by June 1999.
Financial Implications
- ----------------------
To implement its Year 2000 strategies, the Company currently expects to
have generated non-recurring expenses of approximately $12 million over the
three fiscal-year periods ending September 30, 1999 for (1) business-application
systems remediation; (2) embedded systems replacement; (3) end-user applications
remediation and replacement; (4) independent verification and validation; and
(5) certain costs associated with the replacement of certain existing business
systems. The Company will capitalize costs of approximately $41 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.
The following tables reflect the amounts charged to expense and capitalized
for the fiscal years ending September 30, 1997 and 1998 and fiscal year 1999
through March 31, 1999:
- --------------------------------------------------------------------------------
Business-application systems remediation, embedded systems replacement, end-user
applications remediation and replacement, and independent verification and
validation
- --------------------------------------------------------------------------------
(millions) 1999 1998 1997 Total
- --------------------------------------------------------------------------------
Expense $ 1 $ 1 $ 1 $ 3
- --------------------------------------------------------------------------------
Capital $ - $ 1 $ - $ 1
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Business-application software systems replacement
- --------------------------------------------------------------------------------
(millions) 1999 1998 1997 Total
- --------------------------------------------------------------------------------
Expense $ 2 $ 4 $ - $ 6
- --------------------------------------------------------------------------------
Capital $ 13 $ 19 $ - $ 32
- --------------------------------------------------------------------------------
To date the Company has incurred $9 million or approximately 75% of the
estimated costs the Company expects to expense for its Year 2000 strategies.
Additionally, the Company has capitalized $33 million or approximately 80% of
the costs to replace certain existing business-application software systems.
Until the Company has completed further analysis of the impact of the Year 2000
issue on its continuity 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.
25
Item 3.
- -------
Quantitative and Qualitative Disclosures About Market Risks of the Company
- --------------------------------------------------------------------------
The Company has interest rate risk exposure related to long-term debt.
Additionally, the Company's subsidiary, Washington Gas Energy Services, Inc.
(WGES) has price risk exposure related to gas-marketing activities. For
information regarding the Company's exposure related to these risks see Item 7A
in the Company's most recently filed Form 10-K. The Company's risk associated
with interest rates has not materially changed from September 30, 1998. At March
31, 1999, WGES' open position was not material to the Company's financial
position or results of operations.
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 24, 1999.
(c) Matters voted upon at the meeting:
The following individuals were elected to the Board of Directors at
the annual meeting on February 24, 1999:
Director Votes in Favor Votes Withheld
-------- -------------- --------------
Michael D. Barnes 38,649,075 649,804
Fred J. Brinkman 38,793,064 505,815
Daniel J. Callahan, III 38,879,701 419,178
Orlando W. Darden 38,776,731 522,148
James H. DeGraffenreidt, Jr. 38,851,954 446,925
Melvyn J. Estrin 38,883,272 415,607
Philip A. Odeen 38,860,440 438,439
Joseph M. Schepis 38,918,327 380,552
Karen Hastie Williams 38,686,014 612,865
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 1999.
This proposal was approved by a vote of 38,758,711 in favor of the proposal
and 289,897 against. There were 250,271 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 6,560,395 in favor of the proposal and 19,980,282
against. There were 1,642,822 abstentions and 11,115,380 broker non-votes.
26
PART II. OTHER INFORMATION
--------------------------
(continued)
The Board of Directors recommended that the stockholders ratify the
adoption of the Company's 1999 Incentive Compensation Plan for key
personnel. This proposal was approved by a vote of 28,444,101 in favor of
the proposal and 9,905,301 against. There were 949,477 abstentions.
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 cannot be determined at this
time.
B. On March 31, 1999, the Company's Board of Directors elected Adrian P.
Chapman as Vice President with responsibility for regulatory affairs and
energy acquisition. Mr. Chapman most recently held the position of
Department Head-Regulatory Affairs. Previously, he has held management
positions with the Company in Marketing, Market Planning and Analysis, and
Rates and Regulatory Affairs. Mr. Chapman has been employed by the Company
since 1982.
Also on March 31, 1999, the Company's Board of Directors elected Shelley C.
Jennings as Treasurer. Ms. Jennings most recently held the position of
Department Head-Customer Accounts. Previously, she has served as Manager of
Short-Term Financing, Assistant Treasurer, Director of Accounting
Operations and Area Head-Procurement. Ms. Jennings has been employed by the
Company since 1978.
C. At the Company's annual meeting held on February 24, 1999, shareholders
elected Philip A. Odeen to the Company's Board of Directors. This increases
the size of the Company's Board of Directors from eight to nine members.
Mr. Odeen is Executive Vice President and General Manager of TRW Systems &
Information Technology Group, TRW Inc., a technology, manufacturing and
services company.
D. On May 17, 1999, the Company filed an application for an Incentive Rate
Plan with the Maryland Public Service Commission. The application requested
that the Company's rates be frozen at current levels for five years from
the date of approval. In addition to the rate freeze, the plan proposes an
asymmetrical sharing mechanism for revenues when the Company's earnings on
its Maryland business exceeds a 12% return on equity (ROE), with the
ratepayers receiving 50% and the Company retaining 50% of the excess. The
plan provides for a change in the 12% benchmark return on equity when the
twelve-month average of the 30-year Treasuries moves by more than 100 basis
points in either direction. The plan also allows for adjustments to rates
due to circumstances beyond the Company's control such as changes in tax
laws, legislative mandates, Financial Accounting Standards Board or
Securities and Exchange Commission accounting modifications or new or
increased regulatory requirements. The plan provides the Company
27
PART II. OTHER INFORMATION
--------------------------
(continued)
with the opportunity to adjust rates, subject to Commission review and
refund, should its Maryland weather-adjusted ROE drop below 8.5%. Finally,
the plan maintains the gas cost mechanisms that provide for the recovery of
actual costs of gas from firm customers. A decision is expected prior to
the fiscal year 2000 heating season.
Item 6.
- -------
Exhibits and Reports on Form 8-K
- --------------------------------
(a) Exhibits Filed Herewith:
Description Page in 10-Q
- ----------------------------------------------- -------------------
3 Bylaws (as amended February 24, 1999) See separate volume
10 Material Contracts
10.1 Directors' Stock Compensation Plan "
(as amended March 1, 1999)*
10.2 Employment Agreement between the "
Company and the Chairman and Chief
Executive Officer, dated March 15, 1999*
27 Financial Data Schedule "
99.0 Computation of Ratio of "
Earnings to Fixed Charges
99.1 Computation of Ratio of "
Earnings to Fixed Charges and
Preferred Stock Dividends
Exhibits Incorporated by Reference:
10 Material Contracts
10.1 1999 Incentive Compensation Plan
filed with the Proxy Statement on
January 25, 1999*
* Compensatory plan agreement required to be filed pursuant to Item 14 (c) of
Form 10-K.
28
PART II. OTHER INFORMATION
--------------------------
(continued)
(b) Reports on Form 8-K:
There were no reports on Form 8-K filed during the three months ended March
31, 1999.
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 May 17, 1999 /s/ Robert E. Tuoriniemi
------------ ----------------------------
Controller
(Principal Accounting Officer)
29