PAGE 1
______________________________________________________________________________
______________________________________________________________________________
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
X Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the three and nine-month periods ended June 30, 1994, or
Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from ____________ to ____________.
I.R.S.
Commission Employer
File Exact Name of Registrant as State of Identification
Number Specified in Its Charter Incorporation Number
- ---------- ------------------------------ ------------- --------------
001-11227 Washington Energy Company Washington 91-1005304
000-11271 Washington Natural Gas Company Washington 91-1005303
Address of Principal Executive Offices Zip Code
- -------------------------------------- --------
815 Mercer Street, Seattle, Washington 98109
Registrants' Telephone Number, Including Area Code
--------------------------------------------------
(206) 622-6767
Indicate by check mark whether the registrants (1) have 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
registrants were required to file such reports), and (2) have been subject to
such filing requirements for the past 90 days Yes _X_ No ___.
Indicate the number of shares outstanding of each of the issuers' classes of
common stock, as of the latest practicable date.
Outstanding
Registrant Title of Stock June 30, 1994
- ------------------------------ -------------- -----------------
Washington Energy Company $5 par value 23,617,904
Washington Natural Gas Company $5 par value 10,718,938
______________________________________________________________________________
______________________________________________________________________________
PAGE 2
INTRODUCTION
Washington Energy Company ("Company") or ("Washington Energy"), incorporated
under the laws of the State of Washington, is a holding company exempt from
the provisions of the Public Utility Holding Company Act of 1935 except
Section (a)(2) thereof. It is the parent of Washington Natural Gas Company
("Washington Natural"), a natural gas distribution company incorporated under
the laws of the State of Washington. This Form 10-Q is filed on behalf of
Company and Washington Natural, which companies are referred to herein as
Registrants.
INDEX
Page
PART I - FINANCIAL INFORMATION . . . . . . . . . . . . . . . . . . . . . 4
Item 1. Financial Statements . . . . . . . . . . . . . . . . . . . . . . 4
Consolidated Financial Statements of
Washington Energy Company and Subsidiaries
(All statements are unaudited except for
September 30, 1993 Balance Sheets, which
have been audited.)
Consolidated Statements of Income -
Three and Nine Months Ended June 30, 1994
and 1993 . . . . . . . . . . . . . . . . . . . . . . . . . 5
Consolidated Balance Sheets -
June 30, 1994, September 30, 1993
and June 30, 1993 . . . . . . . . . . . . . . . . . . . . . 6
Consolidated Statements of
Capitalization - June 30, 1994 and 1993 . . . . . . . . . . 8
Consolidated Statements of
Cash Flows - Three and Nine Months Ended
June 30, 1994 and 1993 . . . . . . . . . . . . . . . . . . 9
Consolidated Statements of Shareholders'
Earnings Reinvested in the Business and
Premium on Capital Stock - Three and Nine
Months Ended June 30, 1994 and 1993 . . . . . . . . . . . 11
Financial Statements of Washington
Natural Gas Company (All statements are
unaudited except for September 30, 1993
Balance Sheets, which have been audited.)
Statements of Income -
Three and Nine Months Ended June 30, 1994
and 1993 . . . . . . . . . . . . . . . . . . . . . . . . 12
Balance Sheets -
June 30, 1994, September 30, 1993 and
June 30, 1993 . . . . . . . . . . . . . . . . . . . . . . 13
PAGE 3
INDEX (Continued)
Page
Statements of Capitalization -
June 30, 1994 and 1993 . . . . . . . . . . . . . . . . . 15
Statements of Cash Flows -
Three and Nine Months Ended June 30,
1994 and 1993 . . . . . . . . . . . . . . . . . . . . . . 16
Statements of Shareholder's Earnings
Reinvested in the Business and Premium
on Capital Stock - Three and Nine Months
Ended June 30, 1994 and 1993 . . . . . . . . . . . . . . 17
Notes to Financial Statements
(Unaudited) . . . . . . . . . . . . . . . . . . . . . . . . . 18
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations . . . . . . . . . . . . 21
Part II - OTHER INFORMATION . . . . . . . . . . . . . . . . . . . . . . 25
Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . 25
Item 5. Other Information . . . . . . . . . . . . . . . . . . . . . . 25
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . 25
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
PAGE 4
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
The financial statements included herein have been prepared by the Registrants,
without audit, pursuant to the rules and regulations of the Securities and
Exchange Commission. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to such rules and
regulations, although the Registrants believe that the disclosures are adequate
to make the information presented not misleading. It is suggested that these
financial statements be read in conjunction with the financial statements and
the notes thereto included in Registrants' latest annual report on Form 10-K
and quarterly reports on Form 10-Q for the first and second quarters of the
current fiscal year.
Because of seasonal and other factors, the results of operations for the
interim periods presented should not be considered indicative of the results to
be expected for the full fiscal year.
PAGE 5
WASHINGTON ENERGY COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE AND NINE MONTHS ENDED JUNE 30, 1994 AND 1993
(In Thousands Except Per Share Amounts)
(Unaudited)
Three Months Ended Nine Months Ended
June 30, June 30,
1994 1993 1994 1993
-------- -------- -------- --------
OPERATING REVENUES:
Utility sales of gas $ 70,102 $ 66,434 $339,181 $307,840
Merchandise, conservation products
and other 6,961 16,986 36,086 58,499
Oil and natural gas operations - 7,486 - 21,587
-------- -------- -------- --------
Total operating revenues 77,063 90,906 375,267 387,926
OPERATING EXPENSES:
Purchases of gas 40,811 32,139 198,623 155,403
Utility operations and maintenance 26,159 15,978 59,461 49,288
Other operations 8,094 17,387 32,794 54,089
Depreciation, depletion and amortization 7,532 9,038 22,594 27,315
General taxes 9,990 10,120 35,586 34,043
Federal income taxes (8,487) (1,352) (1,412) 13,228
-------- -------- -------- --------
Total operating expenses 84,099 83,310 347,646 333,366
-------- -------- ------- --------
OPERATING INCOME (LOSS) (7,036) 7,596 27,621 54,560
OTHER INCOME (EXPENSE)
Pre-tax loss on merger of subsidiary (Note 5) (4,694) - (4,694) -
Federal income taxes on merger (24,274) - (24,274) -
Preferred dividend requirement -
Washington Natural Gas Company (1,117) (652) (2,852) (1,960)
Other, net (2,325) (136) (2,144) (41)
-------- -------- -------- --------
Gross income (loss) (39,446) 6,808 (6,343) 52,559
INTEREST EXPENSE:
Interest on long-term debt 7,738 6,568 22,839 19,636
Interest on short-term debt 1,306 1,403 3,972 4,121
Other interest charges, net 426 (129) 6 (648)
-------- -------- -------- --------
Total interest expense 9,470 7,842 26,817 23,109
-------- -------- -------- --------
INCOME (LOSS) FROM CONTINUING OPERATIONS (48,916) (1,034) (33,160) 29,450
DISCONTINUED OPERATIONS
Loss from operations, net of income tax - (667) - (2,007)
-------- -------- -------- --------
NET INCOME (LOSS) (48,916) (1,701) (33,160) 27,443
DIVIDENDS ON PREFERRED STOCK - 24 9 76
EXCESS PREMIUM - PREFERRED REDEMPTION - - 673 -
-------- -------- -------- --------
EARNINGS (LOSS) ON COMMON STOCK $(48,916) $ (1,725) $(33,842) $ 27,367
======== ======== ======== ========
EARNINGS (LOSS) PER COMMON SHARE:
From continuing operations $ (2.08) $ (.05) $ (1.44) $ 1.28
From discontinued operations - (.02) - (.09)
-------- -------- -------- --------
NET INCOME (LOSS) $ (2.08) $ (.07) $ (1.44) $ 1.19
======== ======== ======== ========
DIVIDENDS PER SHARE $ .25 $ .35 $ .75 $ 1.05
AVERAGE COMMON SHARES OUTSTANDING 23,529 23,129 23,435 22,917
The accompanying notes are an integral part of these consolidated financial
statements.
PAGE 6
WASHINGTON ENERGY COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS - JUNE 30, 1994 (Unaudited),
SEPTEMBER 30, 1993 AND JUNE 30, 1993 (Unaudited)
(In Thousands)
ASSETS
June September June
30, 1994 30, 1993 30, 1993
---------- ---------- --------
PROPERTY, PLANT AND EQUIPMENT:
Utility plant, at original cost $ 947,753 $ 888,944 $873,939
Oil and gas (on full cost method),
coal and other 54,086 258,304 262,206
Accumulated provisions for depreciation,
depletion and amortization (246,692) (295,755) (297,204)
---------- ---------- --------
Net property, plant and equipment 755,147 851,493 838,941
CURRENT ASSETS:
Cash and cash equivalents 5,067 13,049 2,932
Accounts receivable, net 16,894 20,868 20,482
Unbilled revenue 10,538 11,072 8,953
Federal income taxes 23,954 15,354 3,609
Purchased gas receivable 6,171 23,869 11,263
Materials and supplies, at average cost 19,900 40,779 30,952
---------- ---------- --------
Total current assets 82,524 124,991 78,191
INVESTMENT IN UNCONSOLIDATED AFFILIATE (NOTE 5) 98,317 - -
OTHER ASSETS AND DEFERRED CHARGES:
Utility tax asset 18,767 18,767 17,004
Environmental remediation receivable 31,930 - -
Deferred charges and other 30,201 40,805 39,473
---------- ---------- --------
Total other assets and deferred charges 80,898 59,572 56,477
---------- ---------- --------
Total assets $1,016,886 $1,036,056 $973,609
========== ========== ========
The accompanying notes are an integral part of these consolidated balance
sheets.
PAGE 7
(Continued)
WASHINGTON ENERGY COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS - JUNE 30, 1994 (Unaudited),
SEPTEMBER 30, 1993 AND JUNE 30, 1993 (Unaudited)
(In Thousands)
CAPITALIZATION AND LIABILITIES
June September June
30, 1994 30, 1993 30, 1993
---------- --------- --------
CAPITALIZATION (see statements):
Common shareholders' interest $ 274,805 $ 322,931 $346,798
Preferred stock 60,000 17,300 27,300
Long-term debt 330,200 353,400 276,400
---------- ---------- --------
Total capitalization 665,005 693,631 650,498
CURRENT LIABILITIES:
Notes payable and commercial paper 98,413 145,498 133,809
Current sinking fund requirements
and debt maturities 20,140 5,528 14,508
Accounts payable 25,308 44,484 53,518
Environmental remediation liability 9,446 - -
Accrued general taxes 10,532 14,198 11,233
Net liabilities - discontinued operations 657 2,919 -
Other current liabilities 29,385 16,581 -
---------- ---------- --------
Total current liabilities 193,881 229,208 213,068
DEFERRED CREDITS AND OTHER LIABILITIES:
Accumulated deferred income taxes 102,381 78,688 71,781
Other utility tax liabilities 13,139 13,139 16,985
Unamortized investment tax credits 10,319 10,913 11,115
Contributions in aid of construction 11,628 10,113 9,768
Realization reserves and other 20,533 364 394
---------- ---------- --------
Total deferred credits and
other liabilities 158,000 113,217 110,043
---------- ---------- --------
Total capitalization and liabilities $1,016,886 $1,036,056 $973,609
========== ========== ========
The accompanying notes are an integral part of these consolidated balance
sheets.
PAGE 8
WASHINGTON ENERGY COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CAPITALIZATION
JUNE 30, 1994 AND 1993
(In Thousands)
(Unaudited)
1994 1993
-------- --------
COMMON SHAREHOLDERS' INTEREST:
Common stock, $5 par value; authorized 50,000,000
shares, outstanding 23,617,904 and 23,210,956 shares $118,090 $116,055
Premium on capital stock 199,664 196,340
Shareholders' earnings (deficit) reinvested in the business (42,949) 34,403
-------- --------
Total common shareholders' interest 274,805 346,798
PREFERRED STOCK:
Cumulative; authorized Shares Outstanding
1,000,000 shares of $100 at June 30,
par value and 4,000,000 --------------------
shares of $25 par value 1994 1993
------ ------
5%, Series A, $100 par value 21 - 2,100
6%, Series B, $100 par value 24 - 2,448
8-7/8%, Series C, $100 par value 30 - 3,000
8-3/4%, Series F, $100 par value 50 - 5,000
8-3/4%, Series I, $25 par value 800 - 20,000
7.45%, Series II, $25 par value 2,400 60,000 -
Less - Sinking fund requirements
included in current liabilities - (5,248)
-------- --------
Total preferred stock 60,000 27,300
LONG-TERM DEBT:
First Mortgage Bonds
6-7/8% due 1993 - 3,980
12% due 1993 - 5,000
9.96% due 1995 40,000 40,000
8-7/8% due 1996 - 3,200
8.80% due 1996 25,000 25,000
8-1/8% due 1997 3,340 3,480
10-1/4% due 1997 30,000 30,000
9.60% due 2000 25,000 25,000
9.57% due 2020 25,000 25,000
Secured Medium-Term Notes, Series A
5.55% and 5.67% due 1995 20,000 20,000
8.25% due 1998 11,000 11,000
7.08% due 1999 10,000 10,000
8.51% through 8.55% due 2001 19,000 19,000
7.53% and 7.91% due 2002 30,000 30,000
8.25% through 8.40% due 2022 35,000 35,000
Secured Medium-Term Notes, Series B
6.23% through 6.31% due 2003 28,000 -
6.07% and 6.10% due 2004 18,500 -
6.51% and 6.53% due 2008 4,500 -
6.83% and 6.90% due 2013 13,000 -
7.19% due 2023 13,000 -
-------- --------
350,340 285,660
Less sinking-fund requirements and
maturities included in current liabilities (20,140) (9,260)
-------- --------
Total long-term debt 330,200 276,400
-------- --------
TOTAL CAPITALIZATION $665,005 $650,498
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
PAGE 9
WASHINGTON ENERGY COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE AND NINE MONTHS ENDED JUNE 30, 1994 AND 1993
(In Thousands)
(Unaudited)
Three Months Ended Nine Months Ended
June 30, June 30,
1994 1993 1994 1993
-------- -------- -------- --------
CASH FLOW PROVIDED BY (USED IN)
OPERATING ACTIVITIES:
Net income (loss) from continuing operations $(48,916) $ (1,034) $(33,160) $ 29,450
-------- -------- -------- --------
Adjustments to reconcile net income (loss)
from continuing operations to net cash
provided by operating activities:
Undistributed earnings - unconsolidated
affiliate (395) - (484) -
Pre-tax loss on merger of subsidiary 4,694 - 4,694 -
Depreciation, depletion and amortization 7,631 9,130 22,887 27,588
Sale of accounts receivable (15,000) 10,000 (15,000) 10,000
Provision for uncollectible accounts
receivable 311 383 1,401 1,437
Increase (decrease) in:
Federal income tax payable:
Current (13,446) (2,336) (10,709) 2,611
Deferred 14,304 (167) 7,064 5,560
Deferred tax on merger 23,999 - 23,999 -
Accounts receivable 29,240 35,006 24,440 (13,739)
Materials and supplies (5,713) (11,622) 19,993 5,288
Accounts payable (5,313) (4,412) (2,350) (7,199)
Deferred charges 1,247 (6,368) (10,666) (19,934)
Other assets and liabilities (535) 2,377 4,589 6,895
Other 266 985 4,186 2,729
-------- -------- -------- --------
Total adjustments 41,290 32,976 74,044 21,236
-------- -------- -------- --------
Net cash provided by (used in)
operating activities (7,626) 31,942 40,884 50,686
-------- -------- -------- --------
CASH FLOW (USED IN) PROVIDED BY
INVESTING ACTIVITIES:
Utility plant additions (18,366) (22,844) (60,819) (65,995)
Coal, oil and gas, and other property
expenditures - (9,124) (1,799) (23,581)
Investment in unconsolidated subsidiaries (1,772) - (20,238) -
Proceeds from sale of subsidiary 63,660 - 63,660 -
-------- -------- -------- --------
Net cash (used in) provided by
investing activities 43,522 (31,968) (19,196) (89,576)
-------- -------- -------- --------
PAGE 10
WASHINGTON ENERGY COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE AND NINE MONTHS ENDED JUNE 30, 1994 AND 1993
(In Thousands)
(Unaudited)
(Continued)
Three Months Ended Nine Months Ended
June 30, June 30,
1994 1993 1994 1993
-------- -------- -------- --------
CASH FLOW PROVIDED BY (USED IN)
FINANCING ACTIVITIES:
Commercial paper, net (28,229) 4,519 (47,085) 12,699
Bank loans, net - - - (17,100)
Proceeds from issuance of common stock 1,606 2,260 5,029 68,449
Proceeds from preferred stock (13) - 58,782 -
Redemptions and repurchases:
Preferred stock - - (23,222) (200)
Long-term debt (3,200) (140) (3,340) (280)
Cash dividend payments:
Common (5,878) (8,087) (17,563) (24,157)
Preferred - (24) (9) (76)
-------- -------- -------- --------
Net cash provided by (used in)
financing activities (35,714) (1,472) (27,408) 39,335
-------- -------- -------- --------
Net cash provided by (used in)
continuing operations 182 (1,498) (5,720) 445
Net cash used in discontinued
operations (585) (1,065) (2,262) (2,925)
-------- -------- -------- --------
Net decrease in cash and cash equivalents (403) (2,563) (7,982) (2,480)
Beginning cash and cash equivalents 5,470 5,495 13,049 5,412
-------- -------- -------- --------
Ending cash and cash equivalents $ 5,067 $ 2,932 $ 5,067 $ 2,932
======== ======== ======== ========
SUPPLEMENTAL DISCLOSURES OF
CASH FLOW INFORMATION -
Interest paid (net of amount capitalized) $ 5,595 $ 2,614 $ 22,495 $ 17,675
Income taxes paid (received) (100) 1,043 200 4,791
The accompanying notes are an integral part of these consolidated financial statements.
PAGE 11
WASHINGTON ENERGY COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EARNINGS (DEFICIT)
REINVESTED IN THE BUSINESS AND PREMIUM ON
CAPITAL STOCK FOR THE THREE AND NINE MONTHS ENDED
JUNE 30, 1994 AND 1993
(In Thousands)
(Unaudited)
Three Months Ended Nine Months Ended
June 30, June 30,
1994 1993 1994 1993
-------- -------- -------- --------
Balance at beginning of period $ 11,845 $ 44,215 $ 8,457 $ 31,193
Net income (loss) (48,916) (1,701) (33,160) 27,443
Excess premium - preferred redemption - - (673) -
Cash dividends on capital stock:
Common stock (5,878) (8,087) (17,564) (24,157)
Preferred stock
5%, Series A - (8) (3) (25)
6%, Series B - (3) (1) (10)
8-7/8%, Series C - (13) (5) (41)
-------- -------- -------- --------
Balance at end of period $(42,949) $ 34,403 $(42,949) $ 34,403
======== ======== ======== ========
CONSOLIDATED STATEMENTS OF PREMIUM ON CAPITAL STOCK
Three Months Ended Nine Months Ended
June 30, June 30,
1994 1993 1994 1993
-------- -------- -------- --------
Balance at beginning of period $198,600 $194,753 $197,917 $145,075
Excess of proceeds over par value
of common stock issued by public
offering, less expense of sale - - - 46,543
Excess of cost over par value of
preferred stock reacquired - - (492) -
Excess of purchase price over par
value of shares of common stock
issued under employee stock pur-
chase, and option plans and
Directors Stock Bonus Plan 147 188 482 635
Excess of purchase price over par
value of shares of common stock
issued under the Dividend Rein-
vestment and Stock Purchase Plan 930 1,535 3,014 4,465
Common and preferred stock expense (13) (136) (1,257) (378)
-------- -------- -------- --------
Balance at end of period $199,664 $196,340 $199,664 $196,340
======== ======== ======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
PAGE 12
WASHINGTON NATURAL GAS COMPANY
STATEMENTS OF INCOME
FOR THE THREE AND NINE MONTHS ENDED JUNE 30, 1994 AND 1993
(In Thousands)
(Unaudited)
Three Months Ended Nine Months Ended
June 30, June 30,
1994 1993 1994 1993
-------- -------- -------- --------
OPERATING REVENUES:
Sales of gas $ 70,101 $ 66,434 $339,180 $307,840
Merchandise and conservation products (210) 15,526 5,094 53,183
-------- -------- -------- -------
Total operating revenues 69,891 81,960 344,274 361,023
OPERATING EXPENSES:
Purchases of gas 40,811 32,139 198,623 155,667
Utility operations and maintenance 26,160 16,308 59,488 49,618
Other operations 314 13,205 1,323 42,089
Depreciation 7,531 6,934 22,594 21,000
General taxes 9,660 9,160 34,466 31,510
Federal income taxes (8,180) (1,070) 613 13,088
-------- -------- -------- -------
Total operating expenses 76,296 76,676 317,107 312,972
-------- -------- -------- -------
OPERATING INCOME (LOSS) (6,405) 5,284 27,167 48,051
OTHER EXPENSE, NET (2,840) (276) (3,047) (671)
-------- -------- -------- -------
Gross income (loss) (9,245) 5,008 24,120 47,380
INTEREST EXPENSE:
Interest on long-term debt 7,504 6,297 22,072 18,835
Interest on short-term debt 64 141 (89) 716
Other interest charges, net 155 109 727 347
-------- -------- -------- -------
Total interest expense 7,723 6,547 22,710 19,898
-------- -------- -------- -------
NET INCOME (LOSS) (16,968) (1,539) 1,410 27,482
DIVIDENDS ON PREFERRED STOCK 1,117 679 2,861 2,043
EXCESS PREMIUM - PREFERRED REDEMPTION - - 798 -
-------- -------- -------- -------
EARNINGS (LOSS) ON COMMON STOCK $(18,085) $ (2,218) $ (2,249) $ 25,439
======== ======== ======== ========
The accompanying notes are an integral part of these financial statements.
PAGE 13
WASHINGTON NATURAL GAS COMPANY
BALANCE SHEETS - JUNE 30, 1994 (Unaudited),
SEPTEMBER 30, 1993 AND JUNE 30, 1993 (Unaudited)
(In Thousands)
ASSETS
June September June
30, 1994 30, 1993 30, 1993
-------- -------- --------
UTILITY PLANT, at original cost $947,753 $888,944 $873,939
Accumulated provision for depreciation (236,762) (215,474) (215,327)
-------- -------- --------
Net utility plant 710,991 673,470 658,612
RECEIVABLES FROM AFFILIATED COMPANIES 2,320 4,459 2,597
CURRENT ASSETS:
Cash and cash equivalents 1,381 9,773 2,071
Accounts receivable, net 39,483 52,007 28,012
Materials and supplies, at average cost 19,641 39,606 29,654
-------- -------- --------
Total current assets 60,505 101,386 59,737
OTHER ASSETS AND DEFERRED CHARGES:
Utility tax asset 18,767 18,767 17,004
Environmental remediation receivable 31,930 - -
Deferred charges and other 23,227 36,434 35,571
-------- -------- --------
Total other assets and deferred charges 73,924 55,201 52,575
-------- -------- --------
Total assets $847,740 $834,516 $773,521
======== ======== ========
The accompanying notes are an integral part of these balance sheets.
PAGE 14
(Continued)
WASHINGTON NATURAL GAS COMPANY
BALANCE SHEETS - JUNE 30, 1994 (Unaudited),
SEPTEMBER 30, 1993 AND JUNE 30, 1994 (Unaudited)
(In Thousands)
CAPITALIZATION AND LIABILITIES
June September June
30, 1994 30, 1993 30, 1993
-------- --------- --------
CAPITALIZATION (see statements):
Common shareholder's interest $246,369 $262,334 $272,118
Preferred stock 60,000 17,300 27,300
Long-term debt 330,200 353,400 276,400
-------- -------- --------
Total capitalization 636,569 633,034 575,818
CURRENT LIABILITIES:
Current sinking fund requirements
and debt maturities 20,140 5,580 14,560
Accounts payable 22,328 27,489 21,882
Environmental remediation liability 9,446 - -
Accrued general taxes 10,359 10,755 8,548
Other current liabilities 21,879 11,204 17,187
-------- -------- --------
Total current liabilities 84,152 55,028 62,177
PAYABLE TO AFFILIATED COMPANIES 24,493 49,809 45,291
-------- -------- --------
DEFERRED CREDITS AND OTHER LIABILITIES:
Deferred income taxes 66,271 62,480 52,368
Other utility tax liabilities 13,139 13,139 16,985
Unamortized investment tax credits 10,319 10,913 11,115
Contributions in aid of construction 11,627 10,113 9,767
Other 1,170 - -
-------- -------- --------
Total deferred credits and
other liabilities 102,526 96,645 90,235
-------- -------- --------
Total capitalization and liabilities $847,740 $834,516 $773,521
======== ======== ========
The accompanying notes are an integral part of these balance sheets.
PAGE 15
WASHINGTON NATURAL GAS COMPANY
STATEMENTS OF CAPITALIZATION
JUNE 30, 1994 AND 1993
(In Thousands)
(Unaudited)
1994 1993
-------- --------
COMMON SHAREHOLDER'S INTEREST:
Common stock, $5 par value; authorized 25,000,000
shares, outstanding 10,718,938 and 10,457,752 shares $ 53,595 $ 52,289
Premium on capital stock 163,867 159,877
Shareholder's earnings reinvested
in the business 28,907 59,952
-------- --------
Total common shareholder's interest 246,369 272,118
PREFERRED STOCK: Shares
Cumulative; authorized Outstanding at
1,000,000 shares of $100 June 30,
par value and 4,000,000 ---------------
of $25 par value 1994 1993
------ ------
5%, Series A, $100 par value - 21 - 2,100
6%, Series B, $100 par value - 25 - 2,500
8-7/8%, Series C, $100 par value - 30 - 3,000
8-3/4%, Series F, $100 par value - 50 - 5,000
8-3/4%, Series I, $25 par value - 800 - 20,000
7.45%, Series II, $25 par value 2,400 - 60,000 -
Less - Sinking fund requirements
included in current liabilities - (5,300)
-------- --------
Total preferred stock 60,000 27,300
LONG-TERM DEBT:
First Mortgage Bonds -
6-7/8% due 1993 - 3,980
12% due 1993 - 5,000
9.96% due 1995 40,000 40,000
8-7/8% due 1996 - 3,200
8.80% due 1996 25,000 25,000
8-1/8% due 1997 3,340 3,480
10-1/4% due 1997 30,000 30,000
9.60% due 2000 25,000 25,000
9.57% due 2020 25,000 25,000
Secured Medium-Term Notes, Series A
5.55% and 5.67% due 1995 20,000 20,000
8.25% due 1998 11,000 11,000
7.08% due 1999 10,000 10,000
8.51% to 8.55% due 2001 19,000 19,000
7.53% and 7.91% due 2002 30,000 30,000
8.25% to 8.40% due 2022 35,000 35,000
Secured Medium-Term Notes, Series B
6.23% through 6.31% due 2003 28,000 -
6.07% and 6.10% due 2004 18,500 -
6.51% and 6.53% due 2008 4,500 -
6.83% and 6.90% due 2013 13,000 -
7.19% due 2023 13,000 -
-------- --------
350,340 285,660
Less sinking-fund requirements and matur-
ities included in current liabilities (20,140) (9,260)
-------- --------
Total long-term debt 330,200 276,400
-------- --------
TOTAL CAPITALIZATION $636,569 $575,818
======== ========
The accompanying notes are an integral part of these financial statements.
PAGE 16
WASHINGTON NATURAL GAS COMPANY
STATEMENTS OF CASH FLOWS
FOR THE THREE AND NINE MONTHS ENDED JUNE 30, 1994 AND 1993
(In Thousands)
(Unaudited)
Three Months Ended Nine Months Ended
June 30, June 30,
1994 1993 1994 1993
-------- -------- -------- --------
CASH FLOW PROVIDED BY (USED IN)
OPERATING ACTIVITIES:
Net income (loss) $(16,968) $ (1,539) $ 1,410 $ 27,482
-------- -------- -------- --------
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Depreciation and amortization 7,630 7,024 22,887 21,272
Sale of accounts receivable (15,000) 10,000 (15,000) 10,000
Provision for uncollectible accounts
receivable 311 382 1,401 1,434
Increase (decrease) in:
Federal income tax payable
Current (10,715) (2,152) (8,131) 9,927
Deferred 1,022 938 3,197 2,814
Accounts receivable 37,956 31,135 36,393 (7,979)
Materials and supplies (5,688) (11,318) 19,965 5,309
Accounts payable (7,887) (2,417) (7,004) 77
Deferred charges 1,502 (6,364) (9,277) (18,021)
Other assets and liabilities 6,727 2,506 10,576 5,059
Other (87) 747 2,003 2,029
-------- -------- -------- --------
Total adjustments 15,771 30,481 57,010 31,921
-------- -------- -------- --------
Net cash provided by (used in)
operating activities (1,197) 28,942 58,420 59,403
-------- -------- -------- --------
CASH FLOW (USED IN) INVESTING ACTIVITIES:
Utility plant additions (18,366) (22,844) (60,819) (65,995)
-------- -------- -------- --------
CASH FLOW PROVIDED BY (USED IN)
FINANCING ACTIVITIES:
Proceeds from issuance of common stock 1,603 2,213 4,795 61,949
Proceeds from debt financing:
Preferred stock (13) - 58,782 -
Commercial paper 22,961 2,551 (23,473) (14,486)
Bank loans, net - - - (17,100)
Redemptions and repurchases:
Preferred stock - (100) (23,399) (300)
Long-term debt (3,200) (140) (3,340) (280)
Cash dividend payments:
Common (4,260) (10,804) (16,937) (20,575)
Preferred (1,118) (682) (2,421) (2,046)
-------- -------- -------- --------
Net cash provided by (used in)
financing activities 15,973 (6,962) (5,993) 7,162
-------- -------- -------- --------
Net Increase (Decrease) in Cash
and Cash Equivalents (3,590) (864) (8,392) 570
Beginning Cash and Cash Equivalents 4,971 2,935 9,773 1,501
-------- -------- -------- --------
ENDING CASH AND CASH EQUIVALENTS $ 1,381 $ 2,071 $ 1,381 $ 2,071
======== ======== ======== ========
SUPPLEMENTAL DISCLOSURES OF
CASH FLOW INFORMATION -
Interest paid $ 3,877 $ 1,491 $ 18,549 $14,722
Income taxes paid - - - -
The accompanying notes are an integral part of these financial statements.
PAGE 17
WASHINGTON NATURAL GAS COMPANY
STATEMENTS OF SHAREHOLDER'S EARNINGS
REINVESTED IN THE BUSINESS AND PREMIUM ON
CAPITAL STOCK FOR THE THREE AND NINE MONTHS ENDED
JUNE 30, 1994 AND 1993
(In Thousands)
(Unaudited)
Three Months Ended Nine Months Ended
June 30, June 30,
1994 1993 1994 1993
-------- -------- -------- --------
Balance at beginning of period $ 51,253 $ 72,974 $ 48,094 $ 55,088
Net income (loss) (16,968) (1,539) 1,410 27,482
Excess premium - preferred redemption - - (798) -
Cash dividends declared:
Common stock (4,260) (10,804) (16,938) (20,575)
Cumulative preferred stock -
5%, Series A - (26) - (81)
6%, Series B - (40) - (117)
8-7/8%, Series C - (66) - (204)
8-3/4%, Series F - (109) - (328)
8-3/4%, Series I - (438) - (1,313)
7.45%, Series II (1,118) - (2,861) -
-------- -------- -------- --------
Balance at end of period $ 28,907 $ 59,952 $ 28,907 $ 59,952
======== ======== ======== ========
STATEMENTS OF PREMIUM ON CAPITAL STOCK
Three Months Ended Nine Months Ended
June 30, June 30,
1994 1993 1994 1993
-------- -------- -------- --------
Balance at beginning of period $162,619 $158,173 $161,618 $108,186
Excess of proceeds over par value
of common stock issued to parent
company, less expense of sale - - - 46,714
Excess of cost over par value of
preferred stock reacquired - - (331) -
Excess of purchase price over par
value of shares of common stock
issued under the parent company's
Employee Stock Purchase Plan 170 182 350 361
Excess of purchase price over par
value of shares of common stock
issued under the parent company's
Dividend Reinvestment and Stock
Purchase Plan 1,091 1,688 3,472 4,910
Common and preferred stock expense (13) (166) (1,242) (294)
-------- -------- -------- --------
Balance at end of period $163,867 $159,877 $163,867 $159,877
======== ======== ======== ========
The accompanying notes are an integral part of these financial statements.
PAGE 18
NOTES TO FINANCIAL STATEMENTS (Unaudited)
1. The consolidated financial statements include the accounts of Washington
Energy Company, and its wholly owned subsidiaries, after elimination of
intercompany items and transactions: Washington Natural Gas Company;
Thermal Efficiency, Inc.; ThermRail, Inc; WECO Finance Company and its
wholly-owned subsidiary; Thermal Energy, Inc. and its wholly-owned
subsidiary; Holdings Northwest, Inc; Washington Energy Services Company
("Services") and Washington Energy Gas Marketing Company. Due to the
merger of Washington Energy Resources Company ("Resources") into a
subsidiary of Cabot Oil & Gas Company ("Cabot"), Houston, Texas, the
current fiscal year financial statements show Resources earnings in
Other Income, using the equity method of accounting. The prior year
statements continue to reflect Resources on a consolidated basis.
In the opinion of management, all adjustments necessary to a fair presen-
tation of the results for the three and nine month periods have been
reflected and were of a normal recurring nature.
2. Reference is made to the notes to the financial statements included on
pages 49 through 82 in the Registrants' Form 10-K annual report for the
fiscal year ended September 30, 1993. Those notes include a summary of
significant accounting policies and a description of other events and
transactions which should be read in connection with the accompanying
financial statements.
3. Dividends on Washington Energy common stock are payable when and as
declared by the Board of Directors out of funds legally available there-
for.
There is no formal restriction on payment of common dividends by Washing-
ton Energy. At June 30, 1994, retained earnings of Washington Natural
were restricted under terms of the indentures securing Washington Natu-
ral's First Mortgage Bonds. Washington Natural is not in violation of its
First Mortgage Bond indentures, but it cannot issue dividends to Washing-
ton Energy until it increases its retained earnings by $11.3 million.
4. Washington Natural has principal responsibility for the cleanup of a
former manufactured gas plant site in the Tide Flats area of Tacoma,
Washington, which the U.S. Environmental Protection Agency has determined
contains several contaminants and requires cleanup under the Comprehensive
Environmental Response, Compensation and Liability Act, as amended.
Remediation activities are expected to be substantially completed by the
end of calendar 1994. Based upon current cleanup cost estimates and the
cost of insurance litigation, described below, less insurance recoveries
to date totaling $7.1 million, Washington Natural's share of the cleanup
cost at this site is estimated to be $31.9 million. In the March, 1994
quarter Washington Natural recorded a current liability for the difference
between the estimated total cleanup cost unrecovered at the time of $31.9
million and the $19.8 million of expenditures incurred through March,
1994, and also recorded a corresponding receivable in the amount of $31.9
million for the probable insurance recovery based upon the litigation
described below.
PAGE 19
NOTES TO CONDENSED FINANCIAL STATEMENTS (Unaudited)
(Cont'd)
In June 1991, Washington Natural filed a lawsuit in King County Superior
Court, State of Washington, against certain insurance companies which
provided insurance to Washington Natural at various times dating back to
the 1940's. On June 10, 1994, the Superior Court entered final judgment
in favor of Washington Natural. Under the terms of the final judgment,
Washington Natural is entitled to collect its present and future uncompen-
sated reasonable and necessary costs in remediating the site from the
policies of the four remaining insurer defendants in the action. The
liability of these insurers is joint and several, up to the annual limits
of their policies and subject to relevant underlying limits. The judgment
provides for limitation of some of the insurers' liability based on the
presence in their policies of "alienated premises" clauses. However,
Washington Natural does not expect this limitation to affect its ability
to collect all of its remediation costs. The final judgment further
awards Washington Natural prejudgment interest and declares that Washing-
ton Natural is entitled to collect its reasonable attorney fees and costs
incurred in obtaining coverage of its remediation costs. The defendants
have appealed the judgment to the Washington State Court of Appeals,
Division I.
In the June 1994 quarter, Washington Natural also accrued an additional
$2.2 million pre-tax ($1.5 million after-tax) expense for estimated
environmental investigation, legal and remediation costs associated with
several former manufactured gas plant sites.
Based on all known facts and analyses, Washington Natural believes it is
not reasonably likely that the identified environmental liabilities after
consideration of insurance recoveries and the judgment entered against
certain insurance companies, will result in a materially adverse impact on
Washington Natural's financial position or operating results and cash flow
trends.
5. On May 2, 1994, the Company merged its oil and gas exploration and
production subsidiary, Resources into a wholly owned subsidiary of Cabot
in a tax-free exchange. The Company received 2,133,000 shares of Cabot
Class A common stock, 1,134,000 shares of 6% convertible voting preferred
stock of Cabot, stated value $50, and $63.7 million cash in exchange for
all the outstanding capital stock of Resources. The 1,134,000 shares of
Cabot preferred stock are convertible into 1,972,174 shares of Cabot Class
A common stock, making Washington Energy the beneficial owner of 4,105,174
Class A common shares in total representing 16.6% of the Class A common
stock on a diluted basis, assuming conversion of the preferred stock owned
by the Company. As part of the transaction Cabot increased its Board of
Directors from ten to twelve and agreed to appoint two directors nominated
by the Company to fill the new positions. The Company recorded an after-
tax loss on the merger of $12.2 million after provision for deferred taxes
of approximately $33.0 million and established an after-tax reserve of
$4.4 million for a potential downward purchase price adjustment based on
the performance of wells in a certain field over a one-year time horizon.
Excluded from the merger were certain firm gas transportation, storage and
other contractual arrangements of Resources which were retained by the
Company. In the quarter ended June 30, 1994, the Company established
after-tax reserves of $12.4 million for anticipated future losses associ-
ated with these excluded contractual arrangements.
The recorded investment in Cabot of $98.3 million at June 30, 1994,
consisted of $46.7 million equity in Cabot common stock and $51.6 million
investment in preferred stock. During the third quarter of 1994, the
Company recorded an equity net loss of $142,000, based on Cabot's earn-
ings, received common dividends of $85,000 and accrued preferred dividends
of $567,000. Based on the closing price on the New York Stock Exchange on
June 30, 1994 the aggregate fair value of the Company's investment in
Cabot common stock was $44.5 million.
PAGE 20
NOTES TO CONDENSED FINANCIAL STATEMENTS (Unaudited)
(Cont'd)
Although the Company's interest in Cabot's total voting securities
outstanding is less than 20%, this investment is being accounted for using
the equity method because the Company, through its representation of two
seats on Cabot's Board, has the ability to exercise significant control
over operating and financial policies of Cabot.
6. The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards (SFAS) No. 109, "Accounting For Income Taxes," which
supersedes SFAS No. 96, the accounting standard the Company had followed
since 1987. The Company adopted SFAS No. 109 as of October 1, 1993 with
no significant impact on the financial statements of the Company.
7. The Company formed Services, effective October 1, 1993. This new subsid-
iary consolidates the Company's merchandising of energy and security
products for the home, including merchandising operations previously
managed by Washington Natural. While the reporting of merchandising
operations by Washington Energy is not affected by this formation,
Washington Natural's results of operations will no longer include the
revenues and expenses from the merchandising operations previously managed
by it. Washington Natural's gross operating revenue and net operating
income without the transferred merchandising operations are shown below:
(in thousands)
Three Months Ended Nine Months Ended
June 30, June 30,
1994 1993 1994 1993
-------- -------- -------- --------
Gross operating revenues $70,101 $66,435 $339,180 $311,701
Net operating income (loss) (6,405) 3,220 27,167 42,940
8. A class-action lawsuit was filed against Washington Energy and two of its
officers in the United States District Court, Western District of Washington,
in February, 1994, alleging violations of state and federal securities act
provisions and associated violations of Washington state law. The essence of
the complaint concerned alleged disclosure violations regarding the nature or
the extent of the downside financial risk associated with the 1992 utility
rate request filing of Washington Natural. In May, 1994, Washington Energy
filed a Motion to Dismiss. Discovery in the case was stayed pending resolu-
tion of this motion and on July 25, 1994, the District Court issued its Order
Granting Defendants' Motion To Dismiss and entered a judgment dismissing the
action. Subject to the filing of any motions which would extend the appeal
period, plaintiffs have until August 24, 1994 to appeal the judgment.
9. In the third quarter of fiscal 1994, the Company recognized $11.9 million of
restructuring and other one-time, after-tax charges predominantly related to
Washington Natural. After-tax charges totaling $4.6 million relate to
restructuring and downsizing utility operations and include expected employee
severance costs and expensing the costs incurred in planning a new headquar-
ters building which is not needed currently. The employee severance charge
of $2.3 million after-tax ($3.5 million pre-tax) anticipates a staffing
reduction of 10% from the October 1993 level of 1,480 employees. All
departments are currently reviewing processes and staffing requirements. As
of June 30, 1994 staffing levels had declined by approximately 3% and
$341,000 in termination benefits had been paid out. The staff reduction will
be largely completed by September 30, 1994.
The third quarter charges also included reserves established by Washington
Natural for estimated environmental investigation, legal and remediation
costs associated with several former manufactured gas plant sites and the
write off of certain deferred costs. These charges totaled $1.5 million,
after-tax. Washington Natural also recognized a liability of $2.2 million
after-tax for its supplemental executive retirement plan to reflect recent
management changes and the timing difference between payments under the plan
and the receipt of life insurance proceeds that fund the plan.
_________________________________
Because of seasonal and other factors, the results of operations for the
interim periods presented should not be considered indicative of the results
to be expected for the full fiscal year.
PAGE 21
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
RESULTS OF OPERATIONS
Washington Energy Company ("Company") recorded various one-time charges in the
third-quarter totaling $40.9 million, or $1.74 per share which resulted in a net
loss from continuing operations of $48.9 million for the quarter ended June 30,
1994.
The following chart shows a summary of results for the three and nine months
ended June 30, 1994 and 1993. The per share amounts are after preferred
dividends and excess premium paid on preferred stock.
($in millions except per share numbers)
3 months ended June 30, 9 months ended June 30,
1994 1993 1994 1993
Earnings Per Earnings Per Earnings Per Earnings Per
(Loss) Share (Loss) Share (Loss) Share (Loss) Share
Before third quarter charges $ (8.0) $ (.34) $(1.0) $(.05) $ 7.1 $ .30 $ 29.5 $1.28
Third quarter charges (40.9) (1.74) - - (40.9) (1.74) - -
------ ------ ----- ----- ------ ------ ------ -----
Continuing operations (48.9) (2.08) (1.0) (.05) (33.8) (1.44) 29.4 1.28
Discontinued operations - - (.7) (.02) - - (2.0) (.09)
------ ------ ----- ----- ------ ------ ------ -----
Net income (loss) on
common stock $(48.9) $(2.08) $(1.7) $(.07) $(33.8) $(1.44) $ 27.4 $1.19
====== ====== ===== ===== ====== ====== ====== =====
Net loss of the principal subsidiary, Washington Natural, was $17.0 million
for the quarter compared with $1.5 million from the same period last year and
net income for the first nine months of fiscal 1994 was $1.4 million compared
with $27.5 million in 1993.
Restructuring and Other One-Time Charges
After-tax charges, totaling $11.9 million, relate to restructuring and
downsizing Washington Natural, writing off costs deemed to be unrecoverable and
establishing reserves for certain deferred assets.
By September 30, 1994, Washington Natural anticipates a staffing reduction of
approximately 10 percent from its level of 1,480 employees as of October 1993.
The total charge to earnings included $4.6 million after-tax for estimated
severance costs as well as expensing the costs incurred in planning a new
headquarters building which is not needed currently.
In addition, Washington Natural established reserves for estimated
environmental investigation, legal and remediation costs associated with former
manufactured gas plant sites and wrote off certain deferred costs. These
charges totaled $1.5 million, after-tax. Washington Natural also recognized a
liability of $2.2 million after-tax for its supplemental executive retirement
plan to reflect recent management changes and the timing difference between
payments under the plan and the receipt of life insurance proceeds that fund
the plan.
Merger of Subsidiary
On May 2, 1994, the Company merged its oil and gas exploration and production
subsidiary, Resources, into a wholly owned subsidiary of Cabot in a tax-free
exchange. Washington Energy received 2,133,000 shares of Cabot Class A common
stock, 1,134,000 shares of 6% convertible voting preferred stock of Cabot,
stated value $50, and $63.7 million in cash in exchange for all of the
outstanding capital stock of Resources. The 1,134,000 shares of Cabot
PAGE 22
preferred stock is convertible into 1,972,174 shares of Cabot Class A common
stock, making Washington Energy the beneficial owner of 4,105,174 Class A
common shares in total representing 16.6% of the Class A common Stock on a
diluted basis, assuming conversion of the preferred stock owned by the Company.
The cash received from the merger has been used to reduce Washington Energy's
short-term debt. The Company recorded an after-tax loss on the merger of $12.2
million after provision for deferred taxes of approximately $33.0 million and
established an after-tax reserve of $4.4 million for a potential downward
purchase price adjustment based on the performance of wells in a certain field
over a one-year time horizon.
As part of the transaction Cabot also increased its Board of Directors from ten
to twelve and agreed to appoint two directors nominated by Washington Energy to
fill the new positions. The merger allows the Company to continue its presence
in the exploration and production industry without the need for additional
capital investment.
Excluded from the merger were certain firm gas transportation, storage and
other contractual arrangements of Resources which were retained by the Company.
In the quarter ended June 30, 1994, the Company established after-tax reserves
of $12.4 million for anticipated future losses associated with these excluded
contractual arrangements. Due to the Resources merger and associated
elimination of operating and marketing staff and Company-owned gas production
to aide in managing and utilizing these arrangements, combined with actual
operating history for the gas transportation arrangements which were placed in
service November 1, 1993, management estimated that these arrangements would
continue to generate losses for the foreseeable future.
Operating Revenues
The Company's operating revenues of $77.1 million for the quarter ended
June 30, 1994, were down $13.8 million compared with the same period a year
ago, as a result of a decline in merchandise sales and the reclassification of
Resources revenue for the current period to other income due to the merger
with Cabot. Consolidated utility gas revenues of $70.1 million were up 6% from
the same period last year as the net result of several factors: higher prices
for purchased gas which were passed through to customers with no impact on net
income and customer growth of over 21,000, or 5%, more customers in the
current quarter compared to a year ago were largely offset by lower revenues
due to a $15.4 million annual revenue decrease as the result of a general rate
order by the Washington Utilities and Transportation Commission ( WUTC )in
October 1993; shifting by some large-volume customers between classes and to
alternative fuels; and weather which was approximately 18% warmer than normal
and 1% warmer than the same period a year ago. A combination of warmer
temperatures and class and fuel shifting resulted in a 3% decrease in gas
sales volumes for the three months ended June 30, 1994, compared to a year
ago. Utility gas revenues year-to-date were up 10% compared to a year ago,
for the same reasons affecting the third quarter results. The general rate
increase placed in effect by Washington Natural on June 2, 1994 did not have
a material impact on the three and nine month results.
Merchandise sales and related revenues were $7.0 million for the quarter,
compared to $17.0 million for the same period a year ago. Merchandise sales
and related revenues for the nine months year to date were $36.1 million
compared to $58.5 million for the same period last year. Effective
October 1, 1993, the Company reestablished its merchandise sales operation
in Services. The bulk of these sales operations, appliances, were previously
conducted by Washington Natural. The other operations moved to Services,
sales of security and energy-saving products, were previously conducted by a
separate subsidiary. Services revenues totaled $6.6 million for the quarter
and $29.9 million for the nine months to-date. The remaining merchandise
related revenues were from appliance leasing activities retained by Washington
Natural and gas service initiation fees. The elimination of joint marketing,
installation and service activities and the reorganization of the merchandise
functions have negatively impacted the Company's ability to attract new
merchandise customers, and resulted in an operating loss during the quarter.
Operating Expenses
The Company's operating expenses of $84.1 million, including federal income
taxes, were up $.1 million for the three months ended June 30, 1994.
Operating expenses were up $14.3 million for the first nine months of fiscal
1994 from the same period last year. The deconsolidation of Resources reduced
reported operating expenses for the current periods, but was more than offset
by the increase in natural gas prices, and revenue related taxes, and the
reserves mentioned above.
PAGE 23
LIQUIDITY AND CAPITAL RESOURCES
Washington Natural makes capital expenditures to provide reliable gas
distribution service to its customers. In years of normal weather for utility
operations, approximately half of the capital needs are met through cash flow
from operations. The remaining requirements are funded through short-term
borrowing which are subsequently refinanced from the proceeds of securities
issues. The choice and timing of the issuance of long-term debt and equity
securities is dependent on management's evaluation of need, financial market
conditions and other factors. The Company's capital investment requirements
for the first nine months of fiscal 1994 were $62.6 million. These
requirements were met through cash provided from operations, short-term
borrowings and proceeds from issuance of equity securities.
Washington Natural's utility construction requirements were $60.8 million
during the first nine months of fiscal 1994 and programs for other
subsidiaries (excluding Resources, which was merged with Cabot on May 2, 1994)
totalled $1.8 million for the same period. Estimated construction
requirements for Washington Natural are $80 million for the fiscal year ended
September 30, 1994, and estimated expenditures for Washington Energy's other
programs through other subsidiaries are estimated to be $3 million in fiscal
1994.
In addition to its construction program, the Company has seasonal short-term
borrowing requirements related to its utility operations. The operating
revenues and earnings of Washington Natural vary with weather conditions
because approximately 90% of its customers use natural gas for space heating.
This normally produces substantially increased operating revenues and earnings
during the first eight or nine months of each fiscal year and lower operating
revenues and a loss in the remaining three or four months, with the 12 months
as a whole being profitable. Because of this, Washington Natural must borrow
on a short-term basis to meet its operating needs for a portion of the year in
addition to its construction requirements.
The Company has commercial paper programs, bank and other credit arrangements
and an agreement to sell merchandise and gas receivables to provide short-term
financing. These arrangements provide the Company with total short-term
borrowing capacity and ability to sell receivables of $320 million. The total
remaining amount available from these sources was $156.5 million at June 30,
1994 which was higher than March 31, due to paying down short term debt with
the cash proceeds of $63.7 million from the merger of Resources with Cabot.
On November 1, 1993, Washington Natural redeemed all of its then outstanding
preferred stock at an aggregate cost of $23.2 million. Also in November 1993,
Washington Natural completed a public offering of 2.4 million shares of
preferred stock, 7.45% Series II, $25 par value, with net proceeds of $58.8
million.
It is the opinion of management that the Company has sufficient capital
resources, both internal and external, to meet anticipated capital
requirements.
ENVIRONMENTAL MATTERS
Based on all known facts and analyses, and the judgment entered against
certain insurance companies (see Note 4 of Notes to Financial Statements)
Washington Natural believes it is not reasonably likely that the identified
environmental liabilities will result in a materially adverse impact to its
financial position or operating results and cash flow trends.
PAGE 24
OUTLOOK
Growth
The past five years have been substantial growth years for the Company.
Washington Natural's number of customers has been growing about two to three
times faster than the national average among natural gas utilities.
Washington Natural anticipates its customer growth will continue, but not at
the 6.7% annual rate experienced during the past six full fiscal years since
the beginning of fiscal 1988. Washington Natural expects customer growth of
about 4% to 5% for fiscal 1994, or approximately 17,000 to 21,000 new
customers. Washington Natural anticipates capital spending for fiscal 1994
will be $21 million less than it experienced in 1993, or approximately $80
million.
Class-Action Lawsuit Dismissed
In light of the recent dismissal of the class action lawsuit, (see Note 8 of
Notes to Financial Statements), the Company believes that if an appeal of the
decision to dismiss the action is made, it will not be successful and there
will be no material adverse impact to the Company.
General Rate Case
Washington Natural filed a limited-scope general rate case with the WUTC on
November 19, 1993, requesting an increase in annual revenues of $24.6 million.
The primary focus was to seek recovery of additional operating costs and the
inclusion in rate base of additional utility plant for system improvements and
expansion since calendar year 1991, which was used as the base measurement
year in the prior rate case. On May 27, 1994, the WUTC issued an order
approving a settlement of the rate case. The terms of the settlement provide
for a $19.0 million increase in annual revenues and agreement that Washington
Natural shall not make a request for an increase in total revenues prior to
March 1, 1995. However, Washington Natural may make (1) tracking filings
caused by changes in purchased gas and pipeline costs, (2) filings required
by law or WUTC order, and (3) filings for increased revenues if conditions
necessary for interim/emergency rate relief exist, including conditions which
prevent Washington Natural from financing with unsecured debt.
Revised Rate Design
Washington Natural filed revised tariffs with the WUTC on June 15, 1994,
which would better align rates with the cost of serving various classes of
customers while maintaining or increasing the competitive position of gas
verses alternative energy services. The proposed tariffs would reduce
transportation rates by 55% and industrial rates by 13% and substantially
equalize the margin between transportation and sales service. The request
also proposes to raise residential rates 5.7% and firm commercial and
industrial by 1.8%. The WUTC has until May 1995 to act on this filing.
Dividend
In October 1993 the Company's dividend was reset from 35 cents to 25 cents.
Management has no intention to recommend to the Board of Directors a further
cut in the dividend. In managements opinion, the strategies the Company is
employing: downsizing and reengineering Washington Natural, greater emphasis
on regulatory relations and the merger of the oil and gas exploration
subsidiary, should result in earnings to support the dividend over the
long-term.
PAGE 25
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
The class action lawsuit filed against the Company and two of its
officers in the United States District Court, Western District of
Washington, in February, 1994 (as reported in Registrant's Form 8-K
dated February 23, 1994) has been dismissed and judgement was
granted in favor of Defendants on July 25, 1994. The suit had
alleged violations of state and federal securities laws and
associated violations of Washington state law relating to
Registrants' disclosure concerning the general rate filing with the
WUTC in 1992.
Item 5. Other Information
Washington Natural's ratios of earnings to fixed charges for the
twelve months ended June 30, 1994 and 1993 were .73 and 2.02,
respectively. Because of the $11.9 million in after-tax, one-time
charges in the quarter ended June 30, 1994, Washington Natural's
earnings for the twelve months ended June 30, 1994 are insufficient
to cover fixed charges. The amount of the deficiency is $8.5
million.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits - None.
(b) Reports on Form 8-K (all reports were under Item 5. Other
Events).
A report on Form 8-K was filed by Washington Energy and
Washington Natural dated April 8, 1994 regarding the
recommendation by the staff of the Washington Utilities and
Transportation Commission for a $19 million increase in rates.
A report on Form 8-K was filed by Washington Energy and
Washington Natural dated April 13, 1994 regarding the
announcement that lower fiscal 1994 earnings are expected.
A report on Form 8-K was filed by Washington Energy and
Washington Natural dated May 2, 1994, regarding second-
quarter results and the Cabot Oil & Gas merger.
A report on Form 8-K was filed by Washington Energy and
Washington Natural dated May 20, 1994, regarding the rate
case settlement of $19 million for Washington Natural.
A report on Form 8-K was filed by Washington Energy and
Washington Natural dated June 20, 1994 regarding the June 10,
1994 favorable judgment in Washington Natural's lawsuit
against insurance companies concerning environmental matters.
PAGE 26
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrants have duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
WASHINGTON ENERGY COMPANY
By /s/ William P. Vititoe
William P. Vititoe
Chairman, President and Chief Executive Officer
By /s/ James P. Torgerson
James P. Torgerson
Senior Vice President - Finance, Planning and
Development and Principal Financial Officer
WASHINGTON NATURAL GAS COMPANY
By /s/ William P. Vititoe
William P. Vititoe
Chairman, President and Chief Executive Officer
By /s/ James P. Torgerson
James P. Torgerson
Senior Vice President - Finance, Planning and
Development and Principal Financial Officer
August 12, 1994