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 six month periods ended March 31, 1995, 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
001-11271 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 March 31, 1995
- ------------------------------ -------------- --------------
Washington Energy Company $5 par value 23,937,774
Washington Natural Gas Company $5 par value 10,896,165
PAGE 2
INTRODUCTION
Washington Energy Company ("Company" or "Washington Energy") is a holding
company whose principal subsidiary, Washington Natural Gas Company
("Washington Natural") is engaged in the retail distribution of natural gas.
The Company, through other subsidiaries, is also engaged in the business of
selling gas appliances, energy efficiency and security products for the home;
holds an equity position in a publicly traded oil and gas exploration and
production company; and holds certain coal-related investments and gas
brokerage and marketing. The Company is exempt from the provisions of the
Public Utility Holding Company Act of 1935 ("Act"), except with respect to
acquisition of securities of other public utility companies as defined in such
Act. This Form 10-Q is filed on behalf of Company and Washington Natural,
which companies are referred to herein as Registrants.
INCORPORATED DOCUMENTS TO BE FURNISHED
Certain documents or parts thereof have been incorporated herein by reference,
as permitted by rules of the Securities and Exchange Commission. The Company
will provide you, upon your written request, with a copy of any and all
information that has been incorporated by reference herein. Any such request
for copies should be directed to the Company's Treasury Department, P.O. Box
1869, Seattle, Washington 98111 (Telephone: (206) 622-6767).
INDEX
Page
PART I - FINANCIAL INFORMATION . . . . . . . . . . . . . . . . . . . . .
4
Item 1. Condensed Financial Statements . . . . . . . . . . . . . . . . .
4
Consolidated Condensed Financial Statements of
Washington Energy Company and Subsidiaries
(All statements are unaudited except for
September 30, 1994 Balance Sheet, which
has been audited.)
Consolidated Statements of Income -
Three and Six Months Ended March 31, 1995
and 1994 . . . . . . . . . . . . . . . . . . . . . . . . .
5
Consolidated Condensed Balance Sheets -
March 31, 1995, September 30, 1994
and March 31, 1994 . . . . . . . . . . . . . . . . . . . .
7
Consolidated Condensed Statements of
Capitalization - March 31, 1995 and 1994 . . . . . . . . .
9
Consolidated Condensed Statements of
Cash Flows - Three and Six Months Ended
March 31, 1995 and 1994 . . . . . . . . . . . . . . . .
11
PAGE 3
INDEX (Continued)
Page
Consolidated Statements of Common Shareholders'
Earnings (Deficit) Reinvested in the Business
and Premium on Common Stock - Three and Six
Months Ended March 31, 1995 and 1994 . . . . . . . . . .
13
Condensed Financial Statements of Washington
Natural Gas Company (All statements are
unaudited except for September 30, 1994
Balance Sheet, which have been audited.)
Statements of Income -
Three and Six Months Ended March 31,
1995 and 1994 . . . . . . . . . . . . . . . . . . . . .
14
Condensed Balance Sheets -
March 31, 1995, September 30, 1994
and March 31, 1994 . . . . . . . . . . . . . . . . . . .
15
Condensed Statements of Capitalization -
March 31, 1995 and 1994 . . . . . . . . . . . . . . . .
17
Condensed Statements of Cash Flows -
Three and Six Months Ended March 31,
1995 and 1994 . . . . . . . . . . . . . . . . . . . . .
19
Statements of Common Shareholder's Earnings
Reinvested in the Business and Premium
on Common Stock - Three and Six Months
Ended March 31, 1995 and 1994 . . . . . . . . . . . . .
21
Notes to Condensed Financial Statements
(Unaudited) . . . . . . . . . . . . . . . . . . . . . . . .
22
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations . . . . . . . . . . .
32
Part II - OTHER INFORMATION . . . . . . . . . . . . . . . . . . . . . .
40
Item 4. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . 40
Item 5. Ratio of Earnings to Fixed Charges . . . . . . . . . . . . .
40
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . .
40
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . .
42
PAGE 4
PART I - FINANCIAL INFORMATION
Item 1. Condensed Financial Statements
The condensed 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 condensed financial statements be read in
conjunction with the financial statements and the notes thereto included in
Registrants' latest annual report on Form 10-K.
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 SIX MONTHS ENDED MARCH 31, 1995 AND 1994
(In Thousands Except Per Share Amounts)
(Unaudited)
Three Months Ended Six Months Ended
March 31, March 31,
1995 1994 1995 1994
-------- -------- -------- --------
OPERATING REVENUES:
Regulated utility sales $149,763 $141,821 $299,510 $273,791
Merchandise, conservation
products and other 7,756 9,349 14,254 23,821
-------- -------- -------- --------
Total operating revenues 157,519 151,170 313,764 297,612
-------- -------- -------- --------
OPERATING EXPENSES:
Purchases of gas 81,878 82,491 163,702 157,812
Operating and maintenance 24,633 28,179 46,578 59,451
Depreciation, depletion and
amortization 8,077 7,644 16,958 15,288
General taxes 14,118 13,889 26,232 23,849
Federal income taxes 6,393 2,467 13,644 7,100
-------- -------- -------- --------
Total operating expenses 135,099 134,670 267,114 263,500
-------- -------- -------- --------
OPERATING INCOME 22,420 16,500 46,650 34,112
OTHER INCOME (EXPENSE):
Preferred dividend requirement -
Washington Natural Gas Company (1,755) (1,118) (3,616) (1,735)
Other, net (156) 763 53 773
-------- -------- -------- --------
Gross income 20,509 16,145 43,087 33,150
INTEREST CHARGES 9,281 8,699 18,604 17,347
-------- -------- -------- --------
INCOME FROM CONTINUING OPERATIONS 11,228 7,446 24,483 15,803
PAGE 6
(Continued)
WASHINGTON ENERGY COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE AND SIX MONTHS ENDED MARCH 31, 1995 AND 1994
(In Thousands Except Per Share Amounts)
(Unaudited)
Three Months Ended Six Months Ended
March 31, March 31,
1995 1994 1995 1994
-------- -------- -------- --------
DISCONTINUED OPERATIONS:
Loss from operations, net of
income tax - - - 47
------- ------- ------- -------
NET INCOME 11,228 7,446 24,483 15,756
DIVIDENDS ON PREFERRED STOCK - - - 9
EXCESS PREMIUM - PREFERRED
REDEMPTION - - - 673
-------- ------- -------- --------
EARNINGS ON COMMON STOCK $ 11,228 $ 7,446 $ 24,483 $ 15,074
======== ======= ======== ========
EARNINGS PER COMMON SHARE:
From continuing operations $.47 $.32 $1.03 $.64
From discontinued operations
------- ------- ------- -------
Earnings Per Common Share $.47 $.32 $1.03 $.64
======= ======= ======= =======
Average common shares
outstanding 23,859 23,443 23,797 23,387
Dividends paid per common
share outstanding $0.25 $0.25 $0.50 $0.50
The accompanying notes are an integral part of these consolidated financial
statements.
PAGE 7
WASHINGTON ENERGY COMPANY AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS - MARCH 31, 1995 (Unaudited),
SEPTEMBER 30, 1994 AND MARCH 31, 1994 (Unaudited)
(Thousands of Dollars)
ASSETS
March September March
31, 1995 30, 1994 31, 1994
--------- ---------- ---------
PROPERTY, PLANT AND EQUIPMENT:
Utility plant, at original cost $1,010,310 $ 977,406 $ 947,710
Coal and other 55,428 54,398 53,850
Accumulated provision
for depreciation,
depletion and amortization (264,438) (249,239) (242,699)
---------- ---------- ----------
Net property, plant and equipment 801,300 782,565 758,861
---------- ---------- ----------
INVESTMENT IN UNCONSOLIDATED
AFFILIATES 96,561 98,139 138,659
---------- ---------- ----------
CURRENT ASSETS:
Cash and cash equivalents 6,864 5,387 5,470
Receivables, net 22,419 43,035 56,176
Materials and supplies, at average cost 18,070 28,069 14,187
---------- ---------- ----------
Total current assets 47,353 76,491 75,833
---------- ---------- ----------
OTHER ASSETS AND DEFERRED CHARGES:
Environmental insurance receivables 37,624 33,947 31,930
Utility tax asset 18,810 18,810 18,767
Deferred charges and other 25,459 20,542 22,306
---------- ---------- ----------
Total other assets and deferred
charges 81,893 73,299 73,003
---------- ---------- ----------
Total assets $1,027,107 $1,030,494 $1,046,356
========== ========== ==========
The accompanying notes are an integral part of these consolidated balance
sheets.
PAGE 8
WASHINGTON ENERGY COMPANY AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS (continued)
MARCH 31, 1995 (Unaudited), SEPTEMBER 30, 1994 AND
MARCH 31, 1994 (Unaudited)
(Thousands of Dollars)
CAPITALIZATION AND LIABILITIES
March September March
31, 1995 30, 1994 31, 1994
-------- --------- ---------
CAPITALIZATION (see statements):
Common shareholders' interest $ 272,129 $ 256,800 $ 328,006
Redeemable preferred stock 90,000 90,000 60,000
Long-term debt 290,060 290,200 333,260
---------- --------- ----------
Total capitalization 652,189 637,000 721,266
---------- --------- ----------
CURRENT LIABILITIES:
Notes payable and commercial paper 98,250 125,182 126,642
Current sinking fund requirements
and debt maturities 40,140 60,140 20,280
Accounts payable 51,347 34,326 28,410
Other current liabilities 34,958 26,062 20,792
Accrued general taxes 16,571 12,044 13,961
Environmental remediation liabilities 5,671 6,199 12,174
---------- --------- ----------
Total current liabilities 246,937 263,953 222,259
---------- --------- ----------
DEFERRED CREDITS AND OTHER LIABILITIES:
Accumulated deferred income taxes 74,106 72,518 66,854
Other utility tax liabilities 12,560 12,560 13,139
Unamortized investment tax credits 9,742 10,132 10,517
Contributions in aid of construction 13,423 12,298 11,317
Contingency reserves and other 18,150 22,033 1,004
---------- --------- ----------
Total deferred credits and
other liabilities 127,981 129,541 102,831
---------- --------- ----------
Total capitalization and liabilities $1,027,107$1,030,494 $1,046,356
========== ========= ==========
The accompanying notes are an integral part of these consolidated balance
sheets.
PAGE 9
WASHINGTON ENERGY COMPANY AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CAPITALIZATION
MARCH 31, 1995 AND 1994
(Thousands of Dollars)
(Unaudited)
1995 1994
-------- --------
COMMON SHAREHOLDERS' INTEREST:
Common stock, $5 par value; $119,689 $117,561
authorized 50,000,000 shares,
outstanding 23,937,774 and
23,512,116 shares
Premium on common stock 201,185 198,600
Shareholders' earnings (deficit)
reinvested in the business (48,745) 11,845
-------- --------
Total common shareholders'
interest 272,129 328,006
Shares -------- --------
Outstanding at
March 31,
-------------------
1995 1994
REDEEMABLE PREFERRED STOCK: -------- -------
Washington Energy Company
Cumulative; authorized
200,000 shares of $100 par
value and 800,000 shares
of $25 par value - - - -
Washington Natural
Cumulative; authorized
1,000,000 shares of $100 par
value and 4,000,000 shares
of $25 par value:
7.45%, Series II, 2,400 2,400 60,000 60,000
$25 par value
8.50%, Series III, 1,200 - 30,000 -
$25 par value
-------- --------
Total preferred stock 90,000 60,000
-------- --------
PAGE 10
(Continued)
WASHINGTON ENERGY COMPANY AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CAPITALIZATION
MARCH 31, 1995 AND 1994
(Thousands of Dollars)
(Unaudited)
1995 1994
-------- --------
LONG-TERM DEBT:
First Mortgage Bonds
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 3,200 3,340
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
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 28,000
6.07% and 6.10% due 2004 18,500 18,500
6.51% and 6.53% due 2008 4,500 4,500
6.83% and 6.90% due 2013 13,000 13,000
7.19% due 2023 13,000 13,000
-------- --------
330,200 353,540
Less sinking-fund requirements
and debt maturities included in
current liabilities (40,140) (20,280)
-------- --------
Total long-term debt 290,060 333,260
-------- --------
TOTAL CAPITALIZATION $652,189 $721,266
======== ========
The accompanying notes are an integral part of these consolidated balance
sheets.
PAGE 11
WASHINGTON ENERGY COMPANY AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS FOR
THE THREE AND SIX MONTHS ENDED MARCH 31, 1995 AND 1994
(Thousands of Dollars)
(Unaudited)
Three Months Ended Six Months Ended
March 31, March 31,
-------------------- -----------------
1995 1994 1995 1994
---------- --------- ------- --------
CASH FLOW PROVIDED BY OPERATING ACTIVITIES:
Income from continuing operations $ 11,228 $ 7,446 $ 24,483 $ 15,803
Adjustments to reconcile income
from continuing operations to net
cash provided by operating activities:
Depreciation, depletion and 8,257 7,780 17,305 15,541
amortization
Provision for uncollectible accounts
receivable 192 481 361 848
Equity in undistributed losses
of unconsolidated affiliate 1,172 - 1,578 -
Increase (decrease) in:
Federal income tax - current 5,140 (5,700) 16,397 2,737
Federal income tax - deferred 665 (1,549) 1,197 (765)
Accounts receivable 29,668 30,108 14,131 (3,173)
Accounts payable 16,759 (31,677) 17,111 (15,933)
Materials and supplies 5,812 18,546 9,999 25,706
Deferred charges (6,865) (16,544) (8,702) (29,163)
Other assets and liabilities (2,861) 12,568 (4,231) 15,815
Other (610) 3,611 3,336 7,022
-------- -------- -------- --------
Total adjustments 57,329 17,624 68,482 18,635
-------- -------- -------- --------
Net cash provided by operating
activities 68,557 25,070 92,965 34,438
-------- -------- -------- --------
CASH FLOW USED IN INVESTING ACTIVITIES:
Utility plant additions (18,818) (19,982) (34,232) (44,486)
Proceeds from disposition
Coal and other property expenditures (708) (734) (1,030) (1,799)
-------- -------- -------- --------
Net cash used in investing (19,526) (20,716) (35,262) (46,285)
activities
-------- -------- -------- --------
PAGE 12
(Continued)
WASHINGTON ENERGY COMPANY AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS FOR
THE THREE AND SIX MONTHS ENDED MARCH 31, 1995 AND 1994
(Thousands of Dollars)
(Unaudited)
Three Months Ended Six Months Ended
March 31, March 31,
------------------- -----------------
1995 1994 1995 1994
--------- -------- -------- --------
CASH FLOW FROM (USED IN) FINANCING ACTIVITIES:
Proceeds from issuance of common stock 1,294 1,473 2,734 1,686
Proceeds from issuance of (reduction of) - (135) - 58,795
preferred stock
Proceeds from issuance of (reduction
of):
Commercial paper, net 16,734 3,004 (26,932) (18,856)
Bank loans, net (40,000) - - -
Redemptions and repurchases:
Preferred stock - - - (23,221)
Long-term debt (20,000) - (20,140) (140)
Cash dividend payments:
Common (5,959) (5,855) (11,888) (11,685)
Preferred - - - (9)
-------- -------- -------- --------
Net cash provided by (used in)
financing activities (47,931) (1,513) (56,226) 6,570
-------- -------- -------- --------
Net cash provided by (used in)
continuing operations 1,100 2,841 1,477 (5,277)
Net cash used in discontinued operations (518) (846)
(primarily operating activities) - -
-------- -------- -------- --------
Net increase (decrease) in cash and
cash equivalents 1,100 2,323 1,477 (6,123)
Beginning cash and cash equivalents 5,764 3,147 5,387 11,593
-------- -------- -------- --------
Ending cash and cash equivalents 6,864 5,470 6,864 5,470
======== ======== ======== ========
SUPPLEMENTAL DISCLOSURES OF
CASH FLOW INFORMATION
Cash paid during the period for:
Interest (net of amount capitalized) $ 12,373 $ 11,021 $ 18,804 $ 17,290
Income taxes 350 7,530 350 2,817
The accompanying notes are an integral part of these consolidated financial
statements.
PAGE 13
WASHINGTON ENERGY COMPANY AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF COMMON SHAREHOLDERS' EARNINGS (DEFICIT)
REINVESTED IN THE BUSINESS AND PREMIUM ON COMMON STOCK
FOR THE THREE AND SIX MONTHS ENDED
MARCH 31, 1995 AND 1994 (Thousands of Dollars)
(Unaudited)
Three Months Ended Six Months Ended
March 31, March 31,
-------------------- -------------------
1995 1994 1995 1994
--------- -------- -------- --------
Balance at beginning of period $(59,972) $ 4,399 $(61,339) $ 8,457
Net income 11,228 7,446 24,483 15,756
Excess premium - preferred redemption - - - (673)
Cash dividends on capital stock:
Common stock - - (11,889) (11,686)
Preferred stock:
5%, Series A - - - (3)
6%, Series B - - - (1)
8-7/8%, Series C - - - (5)
-------- -------- -------- --------
Balance at end of period $(48,745) $ 11,845 $(48,745) $ 11,845
======== ======== ======== ========
CONSOLIDATED STATEMENTS OF PREMIUM ON CAPITAL STOCK
Balance at beginning of period $200,380 $197,734 $199,571 $197,917
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 the employee stock
purchase and option plans - - 114 335
Excess of purchase price over par
value of shares of common stock
issued under the Dividend Rein-
vestment and Stock Purchase Plan 846 1,014 1,670 2,084
Common and preferred stock expense (41) (148) (170) (1,244)
-------- -------- -------- --------
Balance at end of period $201,185 $198,600 $201,185 $198,600
======== ======== ======== ========
The accompanying notes are an integral part of these consolidated balance
sheets.
PAGE 14
WASHINGTON NATURAL GAS COMPANY
STATEMENTS OF INCOME
FOR THE THREE AND SIX MONTHS ENDED
MARCH 31, 1995 AND 1994
(Thousands of Dollars)
(Unaudited)
Three Months Ended Six Months Ended
March 31, March 31,
1995 1994 1995 1994
-------- -------- -------- --------
OPERATING REVENUES:
Regulated utility sales $149,763 $141,821 $299,510 $273,791
-------- -------- -------- --------
Total operating revenues 149,763 141,821 299,510 273,791
-------- -------- -------- --------
OPERATING EXPENSES:
Purchases of gas 81,878 82,491 163,702 157,812
Utility operations and maintenance 15,295 17,280 30,309 34,841
Other operations 335 577 374 1,009
Depreciation 8,077 7,644 16,958 15,288
General taxes 14,062 13,386 26,101 23,068
Federal income taxes 7,430 4,350 15,527 8,793
-------- -------- -------- --------
Total operating expenses 127,077 125,728 252,971 240,811
-------- -------- -------- --------
OPERATING INCOME 22,686 16,093 46,539 32,980
OTHER INCOME (EXPENSE), NET (785) 355 (853) 385
-------- -------- -------- --------
Gross income 21,901 16,448 45,686 33,365
INTEREST CHARGES 7,539 7,277 15,182 14,987
-------- -------- -------- --------
NET INCOME 14,362 9,171 30,504 18,378
DIVIDENDS ON PREFERRED STOCK 1,755 1,118 3,616 1,744
-------- -------- -------- --------
EARNINGS ON COMMON STOCK $ 12,607 $ 8,053 $ 26,888 $ 16,634
======== ======== ======== ========
The accompanying notes are an integral part of these financial statements.
PAGE 15
WASHINGTON NATURAL GAS COMPANY
CONDENSED BALANCE SHEETS - MARCH 31, 1995, (UNAUDITED)
SEPTEMBER 30, 1994 AND MARCH 31, 1994 (UNAUDITED)
(Thousands of Dollars)
(Unaudited)
ASSETS
March September March
31, 1995 30, 1994 31, 1994
--------- --------- ---------
UTILITY PLANT, at original cost $1,010,310 $977,406 $947,710
Accumulated provision for depreciation (254,559) (239,520) (232,805)
---------- -------- --------
Net utility plant 755,751 737,886 714,905
---------- -------- --------
RECEIVABLES FROM AFFILIATED COMPANIES 16,825 2,020 3,143
---------- -------- --------
CURRENT ASSETS:
Cash and cash equivalents 2,813 427 4,971
Receivables, net 26,031 53,386 49,001
Materials and supplies, at average cost 15,692 25,360 13,953
---------- -------- --------
Total current assets 44,536 79,173 67,925
---------- -------- --------
OTHER ASSETS AND DEFERRED CHARGES:
Environmental insurance receivables 37,624 33,947 31,930
Utility tax asset 18,810 18,810 18,767
Deferred charges and other 15,100 13,180 12,291
---------- -------- --------
Total other assets and deferred charges 71,534 65,937 62,988
---------- -------- --------
Total assets $ 888,646 $885,016 $848,961
========== ======== ========
The accompanying notes are an integral part of these balance sheets.
PAGE 16
(Continued)
WASHINGTON NATURAL GAS COMPANY
CONDENSED BALANCE SHEETS - MARCH 31, 1995 (Unaudited),
SEPTEMBER 30, 1994 AND MARCH 31, 1994 (Unaudited)
(Thousands of Dollars)
CAPITALIZATION AND LIABILITIES
March September March
31, 1995 30, 1994 31, 1994
-------- -------- --------
CAPITALIZATION (see statements):
Common shareholder's interest $ 265,609 $235,988 $267,125
Redeemable preferred stock 90,000 90,000 60,000
Long-term debt 290,060 290,200 333,260
----------- -------- --------
Total capitalization 645,669 616,188 660,385
----------- -------- --------
CURRENT LIABILITIES:
Current sinking fund requirements
and debt maturities 40,140 60,140 20,280
Accounts payable 50,536 30,914 27,816
Other current liabilities 16,776 20,574 12,801
Accrued general taxes 16,377 11,869 13,762
Environmental remediation liabilities 5,671 6,199 12,174
---------- -------- --------
Total current liabilities 129,500 129,696 86,833
---------- -------- --------
PAYABLES TO AFFILIATED COMPANIES 10,773 39,828 1,719
---------- -------- --------
DEFERRED CREDITS AND OTHER LIABILITIES:
Accumulated deferred income taxes 66,979 64,314 65,051
Other utility tax liabilities 12,560 12,560 13,139
Unamortized investment tax credits 9,742 10,132 10,517
Contributions in aid of construction 13,423 12,298 11,317
---------- -------- --------
Total deferred credits and
other liabilities 102,704 99,304 100,024
---------- -------- --------
Total capitalization and liabilities $ 888,646 $885,016 $848,961
========== ======== ========
The accompanying notes are an integral part of these balance sheets.
PAGE 17
WASHINGTON NATURAL GAS COMPANY
CONDENSED STATEMENTS OF CAPITALIZATION
MARCH 31, 1995 AND 1994
(Thousands of Dollars)
(Unaudited)
1995 1994
-------- --------
COMMON SHAREHOLDER'S INTEREST:
Common stock, $5 par value; $ 54,481 $ 53,253
authorized 25,000,000 shares,
outstanding 10,896,165 and
10,650,571 shares
Premium on common stock 166,104 162,619
Shareholder's earnings reinvested
in the business 45,024 51,253
-------- --------
Total common shareholder's
interest 265,609 267,125
-------- --------
Shares
Outstanding at
REDEEMABLE PREFERRED STOCK: March 31,
Cumulative; authorized (in thousands)
1,000,000 shares of $100 par --------------------
value and 4,000,000 shares 1995 1994
of $25 par value: ======== =========
7.45%, Series II,
$25 par value 2,400 2,400 60,000 60,000
8.50%, Series III,
$25 par value 1,200 - 30,000 -
-------- --------
Total preferred stock 90,000 60,000
-------- --------
PAGE 18
(Continued)
WASHINGTON NATURAL GAS COMPANY
CONDENSED STATEMENTS OF CAPITALIZATION
MARCH 31, 1995 AND 1994
(Thousands of Dollars)
(Unaudited)
1995 1994
-------- --------
LONG-TERM DEBT:
First Mortgage Bonds
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 3,200 3,340
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
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 28,000
6.07% and 6.10% due 2004 18,500 18,500
6.51% and 6.53% due 2008 4,500 4,500
6.83% and 6.90% due 2013 13,000 13,000
7.19% due 2023 13,000 13,000
-------- --------
330,200 353,540
Less sinking-fund requirements and
debt maturities included in current
liabilities (40,140) (20,280)
-------- --------
Total long-term debt 290,060 333,260
-------- --------
TOTAL CAPITALIZATION $645,669 $660,385
======== ========
The accompanying notes are an integral part of these balance sheets.
PAGE 19
WASHINGTON NATURAL GAS COMPANY
CONDENSED STATEMENTS OF CASH FLOWS
FOR THE THREE AND SIX MONTHS
ENDED MARCH 31, 1995 AND 1994
(Thousands of Dollars)
(Unaudited)
Three Months Ended Six Months Ended
March 31, March 31,
1995 1994 1995 1994
-------- -------- -------- --------
CASH FLOW PROVIDED BY OPERATING ACTIVITIES:
Net income $ 14,362 $ 9,171 $ 30,504 $ 18,378
-------- -------- -------- --------
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 8,164 7,749 17,145 15,482
Provision for uncollectible
accounts receivable 352 472 667 830
Increase (decrease) in:
Federal income tax - current 6,078 3,265 12,900 2,584
Federal income tax - deferred 1,165 1,008 2,274 2,175
Accounts receivable 13,683 37,825 (1,017) 83
Accounts payable 33,473 (19,442) 34,092 (502)
Materials and supplies 5,397 18,452 9,668 25,653
Deferred charges (3,358) (16,144) (5,704) (21,553)
Other assets and liabilities (4,617) 10,648 (2,680) 13,329
Other 1,267 3,600 4,433 5,545
-------- -------- -------- --------
Total adjustments 61,604 47,433 71,778 43,626
-------- -------- -------- --------
Net cash provided by operating
activities 75,966 56,604 102,282 62,004
-------- -------- -------- --------
CASH FLOW USED IN INVESTING ACTIVITIES:
Utility plant additions (18,818) (19,982) (34,232) (44,485)
-------- -------- -------- --------
PAGE 20
(Continued)
WASHINGTON NATURAL GAS COMPANY
CONDENSED STATEMENTS OF CASH FLOWS
FOR THE THREE AND SIX MONTHS
ENDED MARCH 31, 1995 AND 1994
(Thousands of Dollars)
(Unaudited)
Three Months Ended Six Months Ended
March 31, March 31,
1995 1994 1995 1994
-------- -------- -------- --------
CASH FLOW PROVIDED BY (USED IN) FINANCING
ACTIVITIES:
Proceeds from issuance of common stock 1,294 1,471 2,734 $ 2,837
Proceeds from issuance of (reduction of)
preferred stock - (135) - 58,795
Repayments of commercial paper, net
Commercial paper (32,282) (29,223) (43,525) (46,434)
Redemptions and repurchases:
Preferred stock - - - (23,399)
Long-term debt (20,000) - (20,140) (140)
Cash dividend payments:
Common - (4,257) - (12,677)
Preferred (3,616) (472) (4,734) (1,303)
-------- -------- -------- --------
Net cash provided by (used in)
financing activities (54,604) (32,616) (65,665) (22,321)
-------- -------- -------- --------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 2,544 4,006 2385 (4,802)
BEGINNING CASH AND CASH EQUIVALENTS 269 965 427 9,773
-------- -------- -------- --------
ENDING CASH AND CASH EQUIVALENTS $ 2,813 $ 4,971 $ 2,812 $ 4,971
======== ======== ======== ========
SUPPLEMENTAL DISCLOSURES OF
CASH FLOW INFORMATION
Cash paid (received) during the period for:
Interest (net of amount capitalized) $ 10,874 $ 9,320 $ 15,423 $ 14,582
Income taxes 350 - 350 4,071
The accompanying notes are an integral part of these financial statements.
PAGE 21
WASHINGTON NATURAL GAS CO
STATEMENTS OF COMMON SHAREHOLDER'S EARNINGS
REINVESTED IN THE BUSINESS AND PREMIUM ON COMMON STOCK
FOR THE THREE AND SIX MONTHS ENDED
MARCH 31, 1995 AND 1994
(Thousands of Dollars)
(Unaudited)
Three Months Ended Six Months Ended
March 31, March 31,
1995 1994 1995 1994
-------- -------- -------- --------
Balance at beginning of period $32,417 $47,456 $18,137 $48,094
Net income 14,362 9,171 30,504 18,378
Excess premium -
preferred redemption - - - (798)
Cash dividends declared:
Common stock - (4,256) - (12,677)
Cumulative preferred stock -
5%, Series A - - - (9)
6%, Series B - - - (13)
8-7/8%, Series C - - - (23)
8-3/4%, Series F - - - (22)
8-3/4%, Series I - - - (88)
7.45%, Series II (1,118) (1,118) (2,236) (1,589)
8.50%, Series III (637) - (1,381) -
------- ------- ------- -------
Balance at end of period $45,024 $51,253 $45,024 $51,253
======= ======= ======= =======
STATEMENTS OF PREMIUM ON COMMON STOCK
Balance at beginning of period $165,080 $161,596 $163,978 $161,618
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 - - 137 180
Excess of purchase price over par
value of shares of common stock
issued under the parent company's
Dividend Reinvestment and Stock
Purchase Plan 1,065 1,172 2,159 2,381
Common and preferred stock expense (41) (149) (170) (1,229)
-------- -------- -------- --------
Balance at end of period $166,104 $162,619 $166,104 $162,619
======== ======== ======== ========
The accompanying notes are an integral part of these balance sheets.
PAGE 22
NOTES TO CONDENSED FINANCIAL STATEMENTS (Unaudited)
1. The consolidated financial statements include the accounts of Washington
Energy Company ("the Company") and its wholly-owned subsidiaries, after
elimination of intercompany items and transactions. The Company's
subsidiaries are Washington Natural Gas Company ("Washington Natural") and
its wholly-owned subsidiary; Washington Energy Services Company
("Services"); Washington Energy Gas Marketing Company ("WEGM"); WECO
Finance Company and its wholly-owned subsidiary; Thermal Energy, Inc., and
its wholly-owned subsidiary; and ThermRail, Inc. Due to the merger of
Washington Energy Resources Company ("Resources") with a subsidiary of
Cabot Oil & Gas Corporation ("Cabot"), Houston, Texas, on May 2, 1994, the
financial statements for the three months and six months ending March 31,
1995, include the Company's proportionate share of common ownership of the
operating results of Cabot using the equity method of accounting and the
preferred dividends of Cabot in "Other income (expense)." The prior year
statements reflect Resources on a basis consistent with the presentation of
Cabot. Certain amounts in the 1994 financial statements have been
reclassified to conform with the 1995 presentation.
In the opinion of management, all adjustments necessary for a fair
presentation of the results for the three-month and six-month periods have
been reflected and were of a normal recurring nature.
PAGE 23
NOTES TO CONDENSED FINANCIAL STATEMENTS (Unaudited)
(contd.)
2. Reference is made to the notes to the financial statements included on
pages 52 through 73 in the Registrants' Form 10-K annual report for the
fiscal year ended September 30, 1994. 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
consolidated condensed financial statements.
3. There are no formal restrictions on payment of common dividends by Washing-
ton Energy, but as a practical matter, its long-term ability to pay
dividends is limited by the restrictions on dividend payments in the First
Mortgage Bond Indentures of Washington Natural and the preferential
dividend rights of holders of Washington Natural preferred stock. At March
31, 1995, $41,368,000 of the retained earnings of Washington Natural were
restricted as to the payment of common dividends under terms of the most
restrictive of the indentures securing Washington Natural's First Mortgage
Bonds. Although Washington Natural's retained earnings at March 31, 1995
exceed those specified in the most restrictive covenant by approximately
$3,600,000, Washington Natural does not intend to pay dividends to
Washington Energy prior to the end of the Company's September 30, 1995
fiscal year since Washington Natural normally incurs seasonal losses in the
latter part of the fiscal year which would reduce Washington Natural's
unrestricted retained earnings.
PAGE 24
NOTES TO CONDENSED FINANCIAL STATEMENTS (Unaudited)
(contd.)
4. Washington Natural is the former operator of, or the successor to a former
operator of, manufactured gas plants at the following sites which are
currently undergoing investigation or remedial action relating to
environmental contamination: (1) the Tide Flats area of Tacoma, Washington;
(2) Everett, Washington; and (3) Chehalis, Washington. There are other
former manufactured gas plant sites where the Company has incurred costs,
primarily legal defense costs since Washington Natural does not believe
that it has responsibility as a successor to a former operator(s). These
other sites are not expected to result in significant liability to the
Company. The financial statements reflect management's estimates of the
costs to be incurred, based on known and available information with regard
to the extent of contamination and the potential methods of cleanup
believed to be feasible at each site. Washington Natural is continually
evaluating the progress at each site and the cost estimates will be
revised, as necessary, as new information is available. The financial
statements reflect the expected recovery of a significant portion of the
total cleanup costs from insurance carriers as discussed in greater detail
below.
PAGE 25
NOTES TO CONDENSED FINANCIAL STATEMENTS (Unaudited)
(contd.)
The following table summarizes the expected costs, the costs recorded
through March 31, 1995, the expected recoveries from insurance companies
and other parties and the actual recoveries through March 31, 1995, for
each of the three sites:
Tide Flats Everett Chehalis
Estimated total
investigation, legal
$44,928,514
$3,250,000 $2,000,000
remediation, and
financing costs.
Actual costs recorded to
date 43,954,275 161,937 699,307
Balance expected to be
paid $ 974,239 $3,088,063 $1,300,693
Expected recoveries from
insurance companies and
other parties
$44,515,268 $2,000,000 $2,000,000
Actual recoveries
received to date 11,252,888 -0- -0-
Balance expected to be
$33,262,380 $2,000,000 $2,000,000
recovered
PAGE 26
NOTES TO CONDENSED FINANCIAL STATEMENTS (Unaudited)
(contd.)
The remediation activities at the Tide Flats site in Tacoma,
Washington, were substantially completed as of December 31, 1994.
After final completion, which is scheduled for June 30, 1995, the
Company will incur ongoing monitoring and maintenance costs which will
be expensed as incurred and are not estimated to be material.
The Everett site is the subject of a remedial investigation and
feasibility study scheduled for completion in June 1995. The total
cost of the study of $1,250,000 was expensed in the fiscal year ended
September 30, 1994. Washington Natural cannot reasonably estimate the
full extent of future remediation costs at the Everett site until more
information is available from the remedial investigation and
feasibility study. However, a reserve for remediation costs of
$2,000,000 has been established based on the preliminary information
obtained during the investigation.
The Chehalis site has been undergoing investigation and remediation
activities since September 1992. The original cost estimate for the
remediation was $200,000. Due to additional contamination found at
the site and complications encountered in the remediation process, the
estimated cost of the cleanup was increased by $1,800,000.
Washington Natural sold the site of a former manufactured gas plant at
Lake Union known as "Gas Works Park," to the City of Seattle on
September 4, 1962. The City of Seattle, in a letter from the Seattle
PAGE 27
NOTES TO CONDENSED FINANCIAL STATEMENTS (Unaudited)
(contd.)
City Attorney dated February 24, 1995, has requested that Washington
Natural participate in the clean up of this site. The letter also
indicates that if Washington Natural does not participate, the City of
Seattle will pursue legal remedies which the City believes are
available. Washington Natural believes that the contract which
transferred ownership of the land to the City of Seattle presents
substantial defenses against any claims the City of Seattle may make
for environmental remediation costs, which may be incurred at this
site. Because the extent of contamination at the site is unknown and
the City of Seattle has not formally initiated any legal proceedings,
the course of events at this site cannot be predicted. Thus
Washington Natural has not recorded any liability with respect to the
Gas Works site as of March 31, 1995. To the extent that Washington
Natural may be required under state or federal statutes to incur
remediation costs being the potentially responsible party, as a former
owner and operator of the site, it is believed that Washington Natural
will have substantial contractual recourse against the City of
Seattle.
As indicated above, Washington Natural's financial statements as of
March 31, 1995, include environmental insurance receivables in the
amount of $37,624,000 related to the Tide Flats, Everett, and Chehalis
sites, based upon successful litigation against its insurers regarding
the Tide Flats site. In June 1991, Washington Natural filed a lawsuit
in King County Superior Court, State of Washington, against certain
PAGE 28
NOTES TO CONDENSED FINANCIAL STATEMENTS (Unaudited)
(contd.)
insurance companies that provided insurance applicable to the Tide
Flats site at various times dating back to the 1940s. 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 uncompensated reasonable and
necessary costs in remediating the site from the policies of the
insurer defendants in the action. The liability of the defendant
insurers is joint and several, up to the annual limits of their
policies, subject to relevant underlying limits. The defendants have
appealed the judgment to the Washington State Court of Appeals;
however, Washington Natural does not believe the appeal will be
successful. Although the factual situation at the other sites differs
in some respects from the factual situation at the Tide Flats site,
Washington Natural, based on the precedent established at the Tide
Flats site and discussion with legal counsel, believes it is probable
that it has insurance coverage sufficient to recover all the
remediation costs at the other former gas plant sites.
Based on all known facts and analyses, Washington Natural believes it
is not likely that the identified environmental liabilities, after
consideration of insurance recoveries and the judgment entered against
certain insurance companies, will result in a material adverse impact
on Washington Natural's financial position, operating results and cash
flow trends.
PAGE 29
NOTES TO CONDENSED FINANCIAL STATEMENTS (Unaudited)
(contd.)
5. 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
resolution 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. Plaintiffs have appealed to the U.S.
Court of Appeals for the Ninth Circuit; however, in management's
opinion, the appeal is unlikely to succeed.
6. Anti-Trust Lawsuit - On September 6, 1994, Cost Management Services,
Inc. ("Cost Management"), a Mercer Island, Washington, company
involved in the purchase and resale of natural gas, filed an action
against Washington Natural in U.S. District Court, Western District of
Washington. Cost Management alleged that Washington Natural has
monopolized or attempted to monopolize the market for natural gas in
central western Washington.
PAGE 30
NOTES TO CONDENSED FINANCIAL STATEMENTS (Unaudited)
(contd.)
Cost Management also alleged Washington Natural failed to charge its
customers in accordance with the prices, terms and conditions set
forth in tariffs filed by Washington Natural with the WUTC and that it
wrongfully interfered with Cost Management's relationships with its
customers. Cost Management sought injunctive relief and damages in an
unspecified amount. Washington Natural filed a motion to dismiss the
lawsuit which was granted May 5, 1995. In dismissing Cost
Management s action the court ruled that the state action doctrine
provides antitrust immunity for conduct done pursuant to a clearly
articulated and actively supervised state policy, where unfettered
competition is replaced with regulation. In dismissing the federal
antitrust claims, the court declined to retain jurisdiction over Cost
Management s state law claims which were dismissed without prejudice.
Cost Management has the right to appeal the U.S. District Court order.
7. On April 10, 1995, the State of Montana s Department of State Lands
(DSL) issued a decision not to extend the time in which Montco, a
Montana limited partnership in which the Company has a material
interst, could commence coal mining operations under its surface
mining permit. DSL's decision, which is tantamount to a denial of the
surface mining permit, is being appealed. In addition, DSL has
indicated that Montco could reapply for a surface mining permit.
DSL s April 10th decision is not expected to have a material impact on
the Company s plans or its ability to realize its investment in the
mineral rights.
PAGE 31
NOTES TO CONDENSED FINANCIAL STATEMENTS (Unaudited)
(contd.)
8. 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 32
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
RESULTS OF OPERATIONS
The Company reported income from continuing operations of $11.2 million for the
quarter ended March 31, 1995, up $3.8 million from the same quarter a year ago.
Income from continuing operations for the first six months of fiscal 1995 of
$24.4 million was up $8.7 million from the same period a year ago. Earnings per
share on common stock were $.47 for the second quarter of fiscal 1995, up from
$.32 a year ago. Earnings per share on common stock were $1.03 during the first
six months of fiscal 1995, up from $.64 for the same period a year ago. Net
income of the principal subsidiary, Washington Natural, was $14.4 million for
the quarter, up $5.2 million from the same period last year and net income for
the first six months of fiscal 1995 was $30.5 million compared with $18.4
million in 1994.
Although weather, which impacts Washington Natural's results directly, was
significantly warmer in the second quarter and the first six months of fiscal
1995 compared to normal and the prior year, consolidated quarterly earnings rose
51 percent, and consolidated earnings for the six months rose 62 percent. The
improved fiscal 1995 financial results to date were due primarily to (1) a $19
million utility rate increase granted in June 1994, (2) continued growth in the
number of utility customers which increased approximately 21,000 to 466,000, and
(3) an 11 percent decline in utility operating and maintenance costs which
resulted primarily from a reduction in employment levels in the summer of 1994.
Page 33
Operating Revenues
The Company's operating revenues of $157.6 million for the quarter ended
March 31, 1995, were up $6.3 million compared with the same period a year ago.
Utility revenues of $149.8 million were up 5.7% from the same period last year,
due primarily to the $19 million rate increase granted in June 1994. Utility
revenues year-to-date were up 6% primarily for the same reason. The utility
served over 21,000, or 5%, more customers in the current period compared to a
year ago.
Washington Energy Services Company, a subsidiary formed on October 1, 1993, to
conduct the merchandising activities previously conducted by Washington Natural,
recorded merchandise and other revenues of $7.8 million for the quarter,
compared to $9.3 million for the same period a year ago. Merchandise revenues
for the six months year-to-date were $14.3 million compared to $23.8 million for
the same period in fiscal 1994. The elimination of joint marketing and the
reorganization of the merchandise functions have negatively impacted Service's
ability to attract new merchandise customers.
Operating Expenses
The Company's operating expenses of $135.1 million, including federal income
tax, were up $.4 million for the three months ended March 31, 1995. Operating
expenses were up $3.6 million for the first six months of fiscal 1995 from the
same period last year. The increase in operating expenses was due primarily to
increases in purchased gas cost due to additional volumes sold, higher federal
income taxes based on increased profits, and revenue based general taxes, which
are largely offset by a reduction in operating and maintenance costs.
PAGE 34
Significant Balance Sheet Changes
The three and six month periods ended March 31, 1995, were significantly
impacted by the positive cash flow effects of changes in the purchased gas
adjustment receivable and the increase in sales volumes during the winter
heating season which depleted inventories of natural gas stored underground.
As discussed in more detail in the future outlook section of Management's
Discussion and Analysis, Washington Natural is permitted by the WUTC to
accumulate in balancing accounts the differences between authorized purchased
gas costs and actual purchased gas costs. At September 30, 1994 Washington
Natural had a purchased gas adjustment receivable of approximately $15.7
million. As of March 31, 1995 the purchased gas adjustment was a liability of
$29.8 million because as natural gas prices declined during the three and six
months ended March 31, 1995, Washington Natural was able to purchase gas at
below the authorized rate, thereby incurring an obligation to be passed through
to the rate payers in the future.
Prior to the winter heating season Washington Natural built up its inventory of
natural gas stored underground at summer gas prices to approximately $14.8
million as of September 30, 1994. Then during the winter, the increased sales
volumes depleted the inventories of natural gas stored underground to
approximately $5.0 million as of March 31, 1995.
The swing in the purchased gas adjustment from a receivable to a payable balance
and the conversion of inventories of natural gas stored underground into sales
during the winter resulted in positive cash flow which was used to pay down
PAGE 35
short-term and long-term debt. During the six months ended March 31, 1995
short-term and long-term debt were reduced by $26.9 and $20.0 respectively.
LIQUIDITY AND CAPITAL RESOURCES
Washington Natural makes capital expenditures to add new customers to its gas
distribution system and to insure the reliability and safety of the system.
Capital expenditures normally are funded with a combination of cash flow from
operations after dividend payments and short-term borrowings on an interim
basis. The short-term borrowings are reduced periodically with the proceeds
from the issuance of long-term debt and equity securities, the choice and timing
of which are dependent on management's evaluation of need, financial market
conditions and other factors.
The Company's capital investment requirements for the first six months of fiscal
1995 were $35.3 million. This compares to capital investment requirements for
the first six months of fiscal 1994 of $46.3 million. These requirements were
met through cash provided from operations.
In addition to its construction program, the Company has 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 earnings and cash flow
during the first eight or nine months of each fiscal year and a seasonal loss
and negative cash flow in the remaining three or four months, with the 12 months
as a whole being profitable and generating positive operating cash flow.
PAGE 36
Because of this, Washington Natural must borrow on a short-term basis to meet
its construction and operating needs for a portion of the year.
On March 31, 1995, the Company entered into a new short-term credit agreement
with a consortium of nine commercial banks. The agreement provides for a
revolving credit facility up to an aggregate amount of $250 million. Generally,
advances will bear interest at a floating or fixed rate equal to the higher of
the prime rate or the Federal Funds Rate plus one-half percent.
This new agreement supplements several short-term financing arrangements: a
$150 million commercial paper program which is backed by the committed
revolving credit agreement; uncommitted bank credit arrangements totaling $25
million; and a committed agreement to sell up to $90 million of merchandise
and gas receivables. The borrowing capacity under the latter agreement is
effectively limited by the availability of receivables to sell.
PAGE 37
It is the opinion of management that the Company has and will have sufficient
capital resources, both internal and external, to meet anticipated cash flow
requirements.
ENVIRONMENTAL MATTERS
In management's opinion, based on all known facts and analyses, it is not
likely that environmental liabilities identified to date, after consideration
of insurance recoveries and the judgment entered against certain insurance
companies, will result in a material adverse impact on Washington Natural's
financial position or operating results and cash flow trends. (See Note 4 of
the Notes to Financial Statements.)
PAGE 38
FUTURE OUTLOOK
Washington Natural filed a general rate case in March 1995 to address all of
the costs of operating the utility. In addition to updating operating costs
and rate base to reflect recent growth, the utility requested an increase in
its allowed rate of return in light of recent increases in its cost of capital.
In addition to this filing, Washington Natural had filed in June 1994 a
proposal to redesign its rates to better reflect the cost of serving various
classes of customers.
On May 11, 1995, the WUTC issued an order approving a settlement of the general
rate case filed in March 1995. The order provides an additional $17.7 million
in margin for the utility, to cover increased costs related to plant additions
and upgrades and higher costs for financing and general operations. The
increase in margin reflects an increase in the authorized rate of return on
common equity in the range of 11 to 11.25 percent, up from the previous level
of 10.5 percent. The WUTC also agreed that Washington Natural will be allowed
to earn in excess of that range to the extent that it can do so by managing its
cost of service. The order also implements a rate redesign ordered by the WUTC
on April 11, 1995 to better reflect the cost of service of various classes of
customers. Generally, the rates for transportation and most commercial and
industrial customers will go down while the rates for residential and certain
large-volume industrial customers will go up.
In a separate decision on May 11, 1995, the WUTC issued an order to implement a
purchased gas adjustment of $46.5 million on an annual basis as requested by
Washington Natural. The purchased gas adjustment is the mechanism whereby
Washington Natural passes through to its customers changes in the cost of gas
it purchases without impacting its operating margin. The purchased gas
adjustment enables Washington Natural to adjust its rates with approval of the
WUTC to fully recover its projected future cost of gas. Differences between
actual and projected gas costs are accumulated in balance sheet accounts for
recovery from or refund to customers as part of a future pruchased gas
adjustment. Natural gas prices have declined in recent months which has
resulted in Washington Natural over-collecting from its customer, based on the
last purchased gas adjustment approved by the WUTC in July 1993. The $46.5
million purchased gas adjustment will pass through to customers the amount
previously over-collected and Washington Natural s projection of continuing
lower gas prices in the future without impacting Washington Natural s operating
margin.
PAGE 39
The above actions by the WUTC resolve all the outstanding rate issues. All
rate adjustments will take effect on May 15, 1995. The settlement of the
general rate case and the rate redesign are key elements in improving the
Company's future financial performance. In addition to improving the Company's
profitability, it will enable the Company to be more competitive in the energy
marketplace.
The Company is also engaged in efforts to reduce costs and to reengineer the
Company's major operating processes and procedures. The results for the six
months ended March 31, 1995, reflect the cost savings achieved from a workforce
reduction at the utility in the summer of 1994. The Company has contracted
with a national consulting firm to assist in its reengineering efforts. At
this time, it is not possible to estimate the potential cost savings.
COMMON DIVIDEND
The Company paid a dividend of 25 cents per share in each of the quarters
ending December 31, 1994 and March 31, 1995 which are expected to be fully
taxable to the recipients. The Company paid a dividend of 25 cents per share
in the quarter ended December 1993 which also was fully taxable to the
recipients. The Company paid a dividend of 25 cents per share in the quarter
ended March 31, 1994 which was a return of capital to the recipients.
Page 40
PART II - OTHER INFORMATION
Item 4. Legal Proceedings
(a) For information relating to the dismissal of a lawsuit brought by Cost
Management Services, Inc., against Washington Natural in September
1994, see Footnote 6 to "Notes to Condensed Financial Statements."
Item 5. Ratio of Earnings to Fixed Charges
The ratios of earnings to fixed charges for the twelve months ended
March 31, 1995 and 1994 were .88 and 1.31, respectively.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits - None
(b) Reports on Form 8-K.
A report on Form 8-K was filed by Washington Energy and Washing-
ton Natural on February 2, 1995, regarding the Company's
operating results for the quarter ended December 31, 1994.
PAGE 41
A report on Form 8-K was filed by Washington Energy and Wash-
ington Natural on March 8, 1995, regarding Washington Natural's
filing a general rate case with the Washington Utilities and
Transportation Commission, requesting a rate increase of $35.4
million on an annual basis.
PAGE 42
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 of the Board of Directors,
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 of the Board of Directors,
Chief Executive Officer and President
By /s/ James P. Torgerson
James P. Torgerson
Senior Vice President - Finance, Planning and
Development and Principal Financial Officer
May 15, 1995