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, 1996, or
Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from ____________ to ____________.
Commission I.R.S. 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 April 30, 1996
------------------------------ -------------- --------------
Washington Energy Company $5 par value 24,174,141
Washington Natural Gas Company $5 par value 11,049,916
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 primarily in the retail distribution of natural gas. The
Company holds an equity position in a publicly traded oil and gas exploration
and production company, and is also engaged in the business of selling gas
appliances, energy efficient and security products for the home. The Company is
exempt from the provisions of the Public Utility Holding Company Act of 1935
("Act"), except with respect to the 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.
DOCUMENTS TO BE FURNISHED
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, 815 Mercer
Street, (P.O. Box 1869), Seattle, Washington 98111 (Telephone: (206) 622-6767).
INDEX
Page
PART I - FINANCIAL INFORMATION . . . . . . . . . . . . . . . . . . . . . .
4
Item 1. Consolidated Condensed Financial Statements . . . . . . . . . . .
4
Consolidated Condensed Financial Statements of Washington Energy
Company and Subsidiaries (All statements are unaudited except for
the September 30, 1995 Balance Sheet, which has been audited.)
Consolidated Statements of Income -
Three and Six Months Ended March 31, 1996 and 1995 . . . .
5
Consolidated Condensed Balance Sheets -
March 31, 1996, September 30, 1995 and
March 31, 1995 . . . . . . . . . . . . . . . . . . . . . .
6
Consolidated Statements of Capitalization -
March 31, 1996 and 1995 . . . . . . . . . . . . . . . . .
8
Consolidated Condensed Statements of Cash Flows -
Three and Six Months Ended March 31, 1996 and 1995 . . . .
10
Consolidated Statements of Shareholders'
Earnings (Deficit) Reinvested in the Business
and Premium on Common Stock -
Three and Six Months Ended March 31, 1996 and 1995 . . . .
12
PAGE 3
INDEX
(Continued)
Page
Consolidated Condensed Financial Statements of Washington Natural Gas
Company and Subsidiaries (All statements are unaudited except for
the September 30, 1995 Balance Sheet, which has been audited.)
Consolidated Statements of Income -
Three and Six Months Ended March 31, 1996 and 1995 . . . .
13
Consolidated Condensed Balance Sheets -
March 31, 1996, September 30, 1995 and
March 31, 1995 . . . . . . . . . . . . . . . . . . . . . .
14
Consolidated Statements of Capitalization -
March 31, 1996 and 1995 . . . . . . . . . . . . . . . . .
16
Consolidated Condensed Statements of Cash Flows -
Three and Six Months Ended March 31, 1996 and 1995 . . . .
18
Consolidated Statements of Shareholder's
Earnings Reinvested in the Business
and Premium on Common Stock -
Three and Six Months Ended March 31, 1996 and 1995 . . . .
20
Notes to Consolidated Condensed Financial Statements
(Unaudited) . . . . . . . . . . . . . . . . . . . . . . . .
21
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations (Unaudited) . . . . . .
29
PART II - OTHER INFORMATION . . . . . . . . . . . . . . . . . . . . . . .
33
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
34
PAGE 4
PART I - FINANCIAL INFORMATION
Item 1. Consolidated Condensed Financial Statements
The consolidated 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 consolidated 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, 1996 AND 1995 (Unaudited)
Three Months Ended Six Months Ended
March 31, March 31,
------------------- -------------------
1996 1995 1996 1995
-------- -------- -------- --------
(in thousands except per share amounts)
OPERATING REVENUES:
Regulated utility sales $148,673 $149,763 $269,198 $299,510
Merchandise, conservation
products and other 6,616 7,756 13,586 14,254
-------- -------- -------- --------
Total operating revenues 155,289 157,519 282,784 313,764
-------- -------- -------- --------
OPERATING EXPENSES:
Cost of gas sold 69,465 81,878 125,242 163,702
Operating and maintenance 23,267 24,205 46,634 46,043
Depreciation, depletion and
amortization 9,064 8,170 18,114 17,119
General taxes 13,680 14,103 25,210 26,188
Federal income taxes 10,331 6,381 15,818 13,458
-------- -------- -------- --------
Total operating expenses 125,807 134,737 231,018 266,510
-------- -------- -------- --------
OPERATING INCOME 29,482 22,782 51,766 47,254
-------- -------- -------- --------
OTHER INCOME (EXPENSE):
Preferred dividend requirement -
Washington Natural Gas Company (1,755) (1,755) (3,510) (3,616)
Other, net 512 21 753 199
-------- -------- -------- --------
GROSS INCOME 28,239 21,048 49,009 43,837
INTEREST CHARGES 10,216 9,820 20,851 19,354
-------- -------- -------- --------
NET INCOME $ 18,023 $ 11,228 $ 28,158 $ 24,483
======== ======== ======== ========
EARNINGS PER COMMON SHARE $ .75 $ .47 $ 1.17 $ 1.03
AVERAGE COMMON SHARES OUTSTANDING 24,139 23,859 24,109 23,797
DIVIDENDS PAID PER COMMON SHARE
OUTSTANDING $ .25 $ .25 $ .50 $ .50
The accompanying notes are an integral part of these consolidated statements.
PAGE 6
WASHINGTON ENERGY COMPANY AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
MARCH 31, 1996 (Unaudited), SEPTEMBER 30, 1995
AND MARCH 31, 1995 (Unaudited)
ASSETS
March September March
31, 1996 30, 1995 31, 1995
---------- ---------- ----------
(in thousands)
PROPERTY, PLANT AND EQUIPMENT:
Utility plant, at original cost $1,092,224 $1,055,322 $1,010,310
Coal and other 15,661 15,621 55,428
Accumulated depreciation and
amortization (289,388) (273,735) (264,438)
---------- ---------- ----------
Net property, plant and equipment 818,497 797,208 801,300
---------- ---------- ----------
INVESTMENT IN UNCONSOLIDATED AFFILIATES 69,393 70,313 96,561
---------- ---------- ----------
CURRENT ASSETS:
Cash and cash equivalents 8,277 9,315 6,864
Receivables, net 34,234 20,437 23,387
Federal income taxes receivable 8,953 10,942 7,647
Deferred income taxes 2,210 3,707 4,754
Materials and supplies, at average
cost 17,965 31,968 18,070
---------- ---------- ----------
Total current assets 71,639 76,369 60,722
---------- ---------- ----------
OTHER ASSETS AND DEFERRED CHARGES:
Environmental receivables 8,130 8,116 37,624
Regulatory tax asset 17,605 17,605 18,810
Deferred charges and other 26,602 19,879 20,462
---------- ---------- ----------
Total other assets and deferred
charges 52,337 45,600 76,896
---------- ---------- ----------
Total assets $1,011,866 $ 989,490 $1,035,479
========== ========== ==========
The accompanying notes are an integral part of these consolidated balance
sheets.
PAGE 7
WASHINGTON ENERGY COMPANY AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
MARCH 31, 1996 (Unaudited), SEPTEMBER 30, 1995
AND MARCH 31, 1995 (Unaudited)
(Continued)
CAPITALIZATION AND LIABILITIES
March September March
31, 1996 30, 1995 31, 1995
---------- ---------- ----------
(in thousands)
CAPITALIZATION (see Consolidated Statements of Capitalization):
Common shareholders' interest $ 214,704 $ 196,686 $ 272,129
Redeemable preferred stock of
subsidiary 90,000 90,000 90,000
Long-term debt 344,920 310,060 290,060
---------- ---------- ----------
Total capitalization 649,624 596,746 652,189
---------- ---------- ----------
CURRENT LIABILITIES:
Notes payable and commercial paper 125,918 161,994 98,250
Current sinking fund requirements
and debt maturities 140 30,140 40,140
Accounts payable 22,045 32,755 27,263
Purchased gas liability 44,241 15,554 24,173
Accrued general taxes 17,344 12,556 16,571
Environmental remediation liabilities 4,326 4,578 5,671
Other current liabilities 30,481 28,939 25,552
---------- ---------- ----------
Total current liabilities 244,495 286,516 237,620
---------- ---------- ----------
DEFERRED CREDITS AND OTHER LIABILITIES:
Deferred income taxes 71,655 59,450 91,795
Regulatory tax liability 11,017 11,017 12,560
Unamortized investment tax credits 8,962 9,352 9,742
Contributions in aid of construction 15,401 14,252 13,423
Contingency reserves and other 10,712 12,157 18,150
---------- ---------- ----------
Total deferred credits and
other liabilities 117,747 106,228 145,670
---------- ---------- ----------
Total capitalization and
liabilities $1,011,866 $ 989,490 $1,035,479
========== ========== ==========
The accompanying notes are an integral part of these consolidated balance
sheets.
PAGE 8
WASHINGTON ENERGY COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CAPITALIZATION
MARCH 31, 1996 AND 1995 (Unaudited)
Shares Outstanding
at March 31, March 31,
------------------ ------------------
1996 1995 1996 1995
-------- -------- -------- --------
(in thousands) (in thousands)
COMMON SHAREHOLDERS' INTEREST:
Common stock, $5 par value;
authorized 50,000,000 shares 24,174 23,938 $120,871 $119,689
Premium on common stock 204,002 201,185
Shareholders' accumulated
deficit (110,169) (48,745)
-------- --------
Total common shareholders'
interest 214,704 272,129
-------- --------
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 Gas Company -
cumulative; authorized
1,000,000 shares of $100 par
value and 4,000,000 shares
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 1,200 30,000 30,000
-------- --------
Total preferred stock 90,000 90,000
-------- --------
PAGE 9
WASHINGTON ENERGY COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CAPITALIZATION
MARCH 31, 1996 AND 1995 (Unaudited)
(Continued)
March 31,
------------------
1996 1995
-------- --------
(in thousands)
LONG-TERM DEBT:
First mortgage bonds
9.96% due 1995 - 40,000
8.80% due 1996 - 25,000
8-1/8% due 1997 3,060 3,200
10-1/4% due 1997, called in 1995 - 30,000
9.60% due 2000 25,000 25,000
9.57% due 2020 25,000 25,000
Secured medium-term notes, series A
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
Secured medium-term notes, series C
6.92% and 6.93% due 2005 31,000 -
7.02% and 7.04% due 2007 25,000 -
7.12% due 2010 7,000 -
7.35% and 7.36% due 2015 12,000 -
6.58% due 2006 10,000 -
6.61% and 6.62% due 2009 8,000 -
7.15% and 7.20% due 2025 17,000 -
-------- --------
345,060 330,200
Less sinking-fund requirements
and debt maturities included
in current liabilities (140) (40,140)
-------- --------
Total long-term debt 344,920 290,060
-------- --------
TOTAL CAPITALIZATION $649,624 $652,189
======== ========
The accompanying notes are an integral part of these consolidated statements.
PAGE 10
WASHINGTON ENERGY COMPANY AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
FOR THE THREE AND SIX MONTHS ENDED
MARCH 31, 1996 AND 1995 (Unaudited)
Three Months Ended Six Months Ended
March 31, March 31,
------------------- ------------------
1996 1995 1996 1995
-------- -------- -------- --------
(in thousands) (in thousands)
CASH FLOW PROVIDED BY (USED IN)
OPERATING ACTIVITIES:
Net income $ 18,023 $ 11,228 $ 28,158 $ 24,483
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation and amortization 9,117 8,257 18,257 17,305
Provision for uncollectible accounts
receivable 378 192 627 361
Equity in undistributed (income)
losses of unconsolidated affiliate (231) 1,172 920 1,578
Deferred federal income taxes 8,643 6,105 13,312 13,108
Changes in:
Accounts receivable 4,600 29,121 (14,424) (7,254)
Current federal income taxes
receivable 1,502 (300) 1,990 4,487
Purchased gas receivable/liability 18,308 24,679 28,687 45,434
Environmental recoveries
(expenditures) 420 (4,205) (266) (4,205)
Accounts payable (4,034) (7,415) (6,132) (864)
Materials and supplies 8,544 5,812 14,003 9,999
Deferred charges (3,267) (3,134) (6,460) (4,905)
Other operating assets and
liabilities 1,033 (2,475) 1,455 (5,784)
Other - (480) - (778)
-------- -------- -------- --------
Total adjustments 45,013 57,329 51,969 68,482
-------- -------- -------- --------
Net cash provided by operating
activities 63,036 68,557 80,127 92,965
-------- -------- -------- --------
CASH FLOW PROVIDED BY (USED IN) INVESTING
ACTIVITIES:
Utility plant additions (21,391) (18,818) (39,495) (34,232)
Other property expenditures (14) (708) (40) (1,030)
Proceeds from disposition of fixed
assets 34 - 134 -
-------- -------- -------- --------
Net cash used in investing
activities (21,371) (19,526) (39,401) (35,262)
-------- -------- -------- --------
PAGE 11
WASHINGTON ENERGY COMPANY AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
FOR THE THREE AND SIX MONTHS ENDED
MARCH 31, 1996 AND 1995 (Unaudited)
(Continued)
Three Months Ended Six Months Ended
March 31, March 31,
------------------- -------------------
1996 1995 1996 1995
-------- -------- -------- --------
(in thousands) (in thousands)
CASH FLOW PROVIDED BY (USED IN) FINANCING
ACTIVITIES:
Proceeds from issuance of:
Common stock 880 1,294 1,909 2,735
First mortgage bonds - - 34,592 -
Reductions in notes payable and
commercial paper, net (35,928) (23,266) (36,076) (26,932)
Redemptions of first mortgage bonds - (20,000) (30,140) (20,140)
Common stock dividends (6,032) (5,959) (12,049) (11,889)
-------- -------- -------- --------
Net cash used in financing
activities (41,080) (47,931) (41,764) (56,226)
-------- -------- -------- --------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 585 1,100 (1,038) 1,477
Beginning cash and cash equivalents 7,692 5,764 9,315 5,387
-------- -------- -------- --------
Ending cash and cash equivalents $ 8,277 $ 6,864 $ 8,277 $ 6,864
======== ======== ======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION Cash paid during the period for:
Interest (net of amount capitalized) $ 9,440 $ 12,373 $ 17,882 $ 18,804
Income taxes - 350 - 350
The accompanying notes are an integral part of these consolidated statements.
PAGE 12
WASHINGTON ENERGY COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS'
EARNINGS (DEFICIT) REINVESTED IN THE BUSINESS
FOR THE THREE AND SIX MONTHS ENDED
MARCH 31, 1996 AND 1995 (Unaudited)
Three Months Ended Six Months Ended
March 31, March 31,
--------------------- -------------------
1996 1995 1996 1995
--------- -------- --------- --------
(in thousands) (in thousands)
Balance at beginning of period $(128,192) $(59,973) $(126,278) $(61,339)
Net income 18,023 11,228 28,158 24,483
Common stock dividends declared - - (12,049) (11,889)
--------- -------- --------- --------
Balance at end of period $(110,169) $(48,745) $(110,169) $(48,745)
========= ======== ========= ========
WASHINGTON ENERGY COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF PREMIUM ON COMMON STOCK
FOR THE THREE AND SIX MONTHS ENDED
MARCH 31, 1996 AND 1995 (Unaudited)
Three Months Ended Six Months Ended
March 31, March 31,
--------------------- -------------------
1996 1995 1996 1995
--------- -------- --------- --------
(in thousands) (in thousands)
Balance at beginning of period $ 203,354 $200,380 $ 202,616 $199,571
Excess of purchase price over par
value of shares of common stock
issued under the Employee Stock
Purchase and Ownership Plans - - 116 114
Excess of purchase price over par
value of shares of common stock
issued under the Dividend Rein-
vestment and Stock Purchase Plan 662 846 1,276 1,670
Excess of purchase price over par
value of shares of common stock
issued under the Incentive Stock
Option Plan 25 - 35
Common and preferred stock expense (39) (41) (41) (170)
-------- -------- -------- --------
Balance at end of period $204,002 $201,185 $204,002 $201,185
======== ======== ======== ========
The accompanying notes are an integral part of these consolidated statements.
PAGE 13
WASHINGTON NATURAL GAS COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE AND SIX MONTHS ENDED
MARCH 31, 1996 AND 1995 (Unaudited)
Three Months Ended Six Months Ended
March 31, March 31,
1996 1995 1996 1995
-------- -------- -------- --------
(in thousands) (in thousands)
OPERATING REVENUES:
Regulated utility sales $148,673 $149,763 $269,198 $299,510
-------- -------- -------- --------
OPERATING EXPENSES:
Cost of gas sold 69,465 81,878 125,242 163,702
Utility operations and maintenance 16,701 15,294 33,201 30,308
Depreciation 8,958 8,077 17,912 16,958
General taxes 13,615 14,048 25,075 26,057
Federal income taxes 11,068 7,417 17,510 15,342
-------- -------- -------- --------
Total operating expenses 119,807 126,714 218,940 252,367
-------- -------- -------- --------
OPERATING INCOME 28,866 23,049 50,258 47,143
OTHER INCOME (EXPENSE), NET (128) (609) 155 (707)
-------- -------- -------- --------
GROSS INCOME 28,738 22,440 50,413 46,436
INTEREST CHARGES 7,774 8,078 15,576 15,932
-------- -------- -------- --------
NET INCOME 20,964 14,362 34,837 30,504
DIVIDENDS ON PREFERRED STOCK - 1,755 3,510 3,616
-------- -------- -------- --------
EARNINGS ON COMMON STOCK $ 20,964 $ 12,607 $ 31,327 $ 26,888
======== ======== ======== ========
The accompanying notes are an integral part of these consolidated statements.
PAGE 14
WASHINGTON NATURAL GAS COMPANY AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
MARCH 31, 1996 (Unaudited), SEPTEMBER 30, 1995
AND MARCH 31, 1995 (Unaudited)
ASSETS
March September March
31, 1996 30, 1995 31, 1995
---------- ---------- ----------
(in thousands)
UTILITY PLANT, at original cost $1,092,224 $1,055,322 $1,010,310
Accumulated depreciation (279,117) (263,664) (254,559)
---------- ---------- ----------
Net utility plant 813,107 791,658 755,751
---------- ---------- ----------
RECEIVABLES FROM AFFILIATED COMPANIES 31,520 102 16,265
---------- ---------- ----------
CURRENT ASSETS:
Cash and cash equivalents 1,524 3,571 2,813
Accounts receivable, net 30,069 16,644 19,727
Federal income taxes receivable - 1,416 1,416
Deferred income taxes 2,210 3,707 4,746
Materials and supplies,
at average cost 15,755 29,706 15,692
---------- ---------- ----------
Total current assets 49,558 55,044 44,394
---------- ---------- ----------
OTHER ASSETS AND DEFERRED CHARGES:
Environmental receivables 8,130 8,116 37,624
Regulatory tax asset 17,605 17,605 18,810
Deferred charges and other 23,494 18,073 16,125
---------- ---------- ----------
Total other assets and deferred
charges 49,229 43,794 72,559
---------- ---------- ----------
Total assets $ 943,414 $ 890,598 $ 888,969
========== ========== ==========
The accompanying notes are an integral part of these consolidated balance
sheets.
PAGE 15
WASHINGTON NATURAL GAS COMPANY AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
MARCH 31, 1996 (Unaudited), SEPTEMBER 30, 1995
AND MARCH 31, 1995 (Unaudited)
(Continued)
CAPITALIZATION AND LIABILITIES
March September March
31, 1996 30, 1995 31, 1995
--------- --------- ---------
(in thousands)
CAPITALIZATION (see Consolidated Statements of Capitalization):
Common shareholder's interest $ 279,204 $ 251,528 $ 265,610
Redeemable preferred stock 90,000 90,000 90,000
Long-term debt 344,920 310,060 290,060
--------- --------- ---------
Total capitalization 714,124 651,588 645,670
--------- --------- ---------
CURRENT LIABILITIES:
Current sinking fund requirements
and debt maturities 140 30,140 40,140
Accounts payable 20,523 31,253 26,363
Purchased gas liability 44,241 15,554 24,173
Accrued general taxes 17,092 12,381 16,377
Federal income taxes payable 1,941 - -
Environmental remediation liabilities 4,326 4,578 5,671
Other current liabilities 22,737 23,958 17,731
--------- --------- ---------
Total current liabilities 111,000 117,864 130,455
--------- --------- ---------
PAYABLES TO AFFILIATED COMPANIES - 16,699 2
--------- --------- ---------
DEFERRED CREDITS AND OTHER LIABILITIES:
Deferred income taxes 82,910 69,826 77,117
Regulatory tax liability 11,017 11,017 12,560
Unamortized investment tax credits 8,962 9,352 9,742
Contributions in aid of construction 15,401 14,252 13,423
--------- --------- ---------
Total deferred credits and
other liabilities 118,290 104,447 112,842
--------- --------- ---------
Total capitalization and
liabilities $ 943,414 $ 890,598 $ 888,969
========= ========= =========
The accompanying notes are an integral part of these consolidated balance
sheets.
PAGE 16
WASHINGTON NATURAL GAS COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CAPITALIZATION
MARCH 31, 1996 AND 1995 (Unaudited)
Shares Outstanding
at March 31, March 31,
------------------ -------------------
1996 1995 1996 1995
-------- -------- -------- --------
(in thousands) (in thousands)
COMMON SHAREHOLDER'S INTEREST:
Common stock, $5 par value;
authorized 25,000,000 shares 11,050 10,896 $ 55,250 $ 54,481
Premium on common stock 169,274 166,104
Shareholder's earnings
reinvested in the business 54,680 45,025
-------- --------
Total common shareholder's
interest 279,204 265,610
-------- --------
REDEEMABLE PREFERRED STOCK,
cumulative; authorized 1,000,000
shares of $100 par value and
4,000,000 shares 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 1,200 30,000 30,000
-------- --------
Total preferred stock 90,000 90,000
-------- --------
PAGE 17
WASHINGTON NATURAL GAS COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CAPITALIZATION
MARCH 31, 1996 AND 1995 (Unaudited)
(Continued)
March 31,
--------------------
1996 1995
-------- --------
(in thousands)
LONG-TERM DEBT:
First mortgage bonds
9.96% due 1995 - 40,000
8.80% due 1996 - 25,000
8-1/8% due 1997 3,060 3,200
10-1/4% due 1997, called in 1995 - 30,000
9.60% due 2000 25,000 25,000
9.57% due 2020 25,000 25,000
Secured medium-term notes, series A
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
Secured medium-term notes, series C
6.92% and 6.93% due 2005 31,000 -
7.02% and 7.04% due 2007 25,000 -
7.12% due 2010 7,000 -
7.35% and 7.36% due 2015 12,000 -
6.58% due 2006 10,000 -
6.61% and 6.62% due 2009 8,000 -
7.15% and 7.20% due 2025 17,000 -
-------- --------
345,060 330,200
Less sinking-fund requirements
and maturities included in
current liabilities (140) (40,140)
-------- --------
Total long-term debt 344,920 290,060
-------- --------
TOTAL CAPITALIZATION $714,124 $645,670
======== ========
The accompanying notes are an integral part of these consolidated statements.
PAGE 18
WASHINGTON NATURAL GAS COMPANY AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
FOR THE THREE AND SIX MONTHS ENDED
MARCH 31, 1996 AND 1995 (Unaudited)
Three Months Ended Six Months Ended
March 31, March 31,
1996 1995 1996 1995
-------- -------- -------- --------
(in thousands) (in thousands)
CASH FLOW PROVIDED BY (USED IN)
OPERATING ACTIVITIES:
Net income $ 20,964 $ 14,362 $ 34,837 $ 30,504
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation and amortization 9,013 8,164 18,057 17,145
Provision for uncollectible
accounts receivable 361 352 595 667
Deferred federal income taxes 7,646 7,245 14,191 15,175
Changes in:
Accounts receivable 1,966 28,331 (14,020) (7,586)
Current federal income taxes
receivable/payable 3,324 - 3,357 -
Purchased gas receivable/liability 18,308 24,679 28,687 45,434
Environmental recoveries
(expenditures) 420 (4,205) (266) (4,205)
Accounts payable (4,450) (5,660) (6,152) 1,649
Materials and supplies 8,449 5,397 13,951 9,668
Deferred charges (3,354) 361 (5,158) (1,920)
Other assets and liabilities 2,274 (2,353) (1,694) (3,134)
Other - (480) - (778)
-------- -------- -------- --------
Total adjustments 43,957 61,831 51,548 72,115
-------- -------- -------- --------
Net cash provided by operating
activities 64,921 76,193 86,385 102,619
-------- -------- -------- --------
CASH FLOW PROVIDED BY (USED IN) INVESTING
ACTIVITIES:
Utility plant additions (21,391) (18,818) (39,495) (34,232)
Proceeds from disposition of fixed
assets 34 - 134 -
-------- -------- -------- --------
Net cash used in investing
activities (21,357) (18,818) (39,361) (34,232)
-------- -------- -------- --------
PAGE 19
WASHINGTON NATURAL GAS COMPANY AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
FOR THE THREE AND SIX MONTHS ENDED
MARCH 31, 1996 AND 1995 (Unaudited)
(Continued)
Three Months Ended Six Months Ended
March 31, March 31,
1996 1995 1996 1995
-------- -------- -------- --------
(in thousands) (in thousands)
CASH FLOW PROVIDED BY (USED IN) FINANCING
ACTIVITIES:
Proceeds from issuance of:
Common stock 846 1,294 1,860 2,734
First mortgage bonds - - 34,592 -
Receivables and payables with
affiliated companies, net (38,209) (32,509) (48,116) (43,860)
Redemptions of first mortgage bonds - (20,000) (30,140) (20,140)
Cash dividend payments:
Common (5,511) - (5,511) -
Preferred (1,755) (3,616) (1,756) (4,735)
-------- -------- -------- --------
Net cash used in financing
activities (44,629) (54,831) (49,071) (66,001)
-------- -------- -------- --------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS (1,065) 2,544 (2,047) 2,386
Beginning cash and cash equivalents 2,589 269 3,571 427
-------- -------- -------- --------
Ending cash and cash equivalents $ 1,524 $ 2,813 $ 1,524 $ 2,813
======== ======== ======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION Cash paid during the period for:
Interest (net of amount capitalized) $ 7,308 $ 10,874 $ 13,301 $ 15,423
Income taxes - 350 - 350
The accompanying notes are an integral part of these consolidated statements.
PAGE 20
WASHINGTON NATURAL GAS COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDER'S
EARNINGS REINVESTED IN THE BUSINESS
FOR THE THREE AND SIX MONTHS ENDED
MARCH 31, 1996 AND 1995 (Unaudited)
Three Months Ended Six Months Ended
March 31, March 31,
1996 1995 1996 1995
-------- -------- -------- --------
(in thousands) (in thousands)
Balance at beginning of period $ 39,227 $ 32,417 $ 28,865 $ 18,137
Net income 20,964 14,362 34,837 30,504
Dividends declared:
Common stock (5,511) - (5,511) -
Cumulative preferred stock:
7.45%, Series II - (1,118) (2,236) (2,236)
8.50%, Series III - (636) (1,275) (1,380)
-------- -------- -------- --------
Balance at end of period $ 54,680 $ 45,025 $ 54,680 $ 45,025
======== ======== ======== ========
WASHINGTON NATURAL GAS COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF PREMIUM ON COMMON STOCK
FOR THE THREE AND SIX MONTHS ENDED
MARCH 31, 1996 AND 1995 (Unaudited)
Three Months Ended Six Months Ended
March 31, March 31,
1996 1995 1996 1995
-------- -------- -------- --------
(in thousands) (in thousands)
Balance at beginning of period $168,576 $165,080 $167,752 $163,978
Excess of purchase price over par
value of shares of common stock
issued under the parent company's
Employee Stock Purchase Plan - - 135 137
Excess of purchase price over par
value of shares of common stock
issued under the parent company's
Dividend Reinvestment and Stock
Purchase Plan 737 1,065 1,428 2,159
Common and preferred stock expense (39) (41) (41) (170)
-------- -------- -------- --------
Balance at end of period $169,274 $166,104 $169,274 $166,104
======== ======== ======== ========
The accompanying notes are an integral part of these consolidated statements.
PAGE 21
WASHINGTON ENERGY COMPANY AND SUBSIDIARIES
WASHINGTON NATURAL GAS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Unaudited)
March 31, 1996
(1) SUMMARY OF CONSOLIDATION POLICY
The consolidated financial statements include the accounts of Washington Energy
Company ("Washington Energy" or "the Company") and its wholly-owned subsidiar-
ies, after elimination of intercompany items and transactions. The Company's
subsidiaries are:
1. Washington Natural Gas Company ("Washington Natural")
and its wholly-owned subsidiaries;
2. Washington Energy Services Company;
3. Washington Energy Gas Marketing Company;
4. WECO Finance Company and its wholly-owned subsidiary;
5. Thermal Energy, Inc., and its wholly-owned subsidiary; and
6. ThermRail, Inc.
In the opinion of management, all adjustments necessary for a fair presentation
of the results for the interim periods have been reflected and were of a normal
recurring nature.
(2) REFERENCE TO FORM 10-K FOR FISCAL YEAR ENDED SEPTEMBER 30, 1995
Reference is made to the notes to the consolidated financial statements included
on pages 61 through 90 in the Registrants' Form 10-K annual report for the
fiscal year ended September 30, 1995. Those notes include a summary of
significant accounting policies and a description of other events and
transactions which should be read in conjunction with the accompanying
consolidated condensed financial statements.
(3) DIVIDENDS
(a) Restriction
There are no restrictions on payment of dividends by the Company, 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. Washington Natural did not pay dividends to Washington
Energy during the period April 1994 to February 1996 due to these restrictions.
Washington Natural paid common dividends totaling $5,511,000 to Washington
Energy in February 1996. At March 31, 1996, Washington Natural was not
restricted from paying dividends to Washington Energy, since Washington
Natural's retained earnings exceeded $41,368,000, the most restrictive indenture
covenant.
PAGE 22
(b) Expense for Preferred Dividends of Subsidiary
Washington Energy's accounting method is to expense the preferred dividend
requirement of Washington Natural ratably during the fiscal year. During the
quarter ended December 31, 1995, Washington Natural's Board of Directors
declared dividends payable on January 1, 1996 and April 1, 1996. The dividend
payable on January 1, 1996 was expensed in the consolidated financial statements
of Washington Energy in the first fiscal quarter. The dividend payable on April
1, 1996 was expensed in the second fiscal quarter. Washington Natural recorded
both dividend declarations as a reduction to retained earnings in the first
fiscal quarter.
(4) LIABILITY FOR ENVIRONMENTAL MATTERS
(a) General
The distribution of natural gas by Washington Natural involves certain
controllable environmental risks. Washington Natural conducts its natural gas
distribution business using accepted industry practices and procedures.
Washington Natural is not aware of any material environmental exposures related
to its current natural gas distribution activities. However, Washington
Natural, as the former operator of, or the successor to a former operator of,
several manufactured gas plants in western Washington prior to 1957, has several
existing environmental exposures and one recently resolved environmental
insurance action.
Former manufactured gas plant sites in the following areas are currently
undergoing investigation, remedial actions or monitoring actions relating to
environmental contamination: 1) the Tideflats area of Tacoma, Washington; 2)
Everett, Washington; 3) Chehalis, Washington, 4) "Gas Works Park" in Seattle
and 5) "Upland Source Control site in Tacoma, Washington.
The financial statements reflect actual costs to date and 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 or
containment believed to be feasible at each site. Washington Natural is
continually evaluating the progress at each site and the cost estimates will be
revised, if necessary, as new information is available. The financial statements
reflect receivables for the expected recovery from insurance carriers and other
third parties of substantially all of the cleanup costs as discussed in greater
detail below.
PAGE 23
The following table summarizes total expected costs, costs incurred and recorded
through March 31, 1996, expected recoveries from insurance companies and other
parties and actual recoveries through March 31, 1996, for each of Washington
Natural's four significant sites (in thousands):
Gas Works
Tideflats Everett Chehalis Park
--------- ------- -------- ---------
Estimated total investigation,
legal, remediation, and
financing costs $43,481 $ 3,250 $ 2,000 $ 1,000
Actual costs to March 31, 1996 43,481 441 1,709 44
------- ------- ------- -------
Balance expected to be incurred $ - $ 2,809 $ 291 $ 956
======= ======= ======= =======
Expected recoveries from insurance
companies and other parties $41,980 $ 3,250 $ 2,000 $ 1,000
Actual recoveries to March 31, 1996 40,683 -- -- --
------- ------- ------- -------
Balance expected to be recovered $ 1,297 $ 3,250 $ 2,000 $ 1,000
======= ======= ======= =======
(b) Tideflats
The remediation activities at the Tideflats site were completed as of July
1995, and confirmed by the U.S. Environmental Protection Agency ("EPA") in a
letter dated September 28, 1995. The complete remediation activities consisted
of a site excavation pursuant to the Comprehensive Environmental Response,
Compensation and Liability Act under EPA management and oversight whereby
contaminated soils were removed, treated and stockpiled on the site. Monitoring
equipment has been installed at the site. In the future, ongoing monitoring and
maintenance costs will be expensed as incurred and are not estimated to be
material.
Washington Natural as of March 31, 1996, expects to receive approximately
$1,297,000 from the sale of equipment and reimbursement from another responsible
party at the site. After applying this sum, together with all other recoveries
attributable to the Tideflats site to the costs incurred to remediate the site,
Washington Natural will have recovered all but $1,501,000 of the costs it has
deferred with respect to the site. Washington Natural has also instituted suit
against other third parties historically associated with the site which are
potentially responsible for reimbursing Washington Natural's as yet unreimbursed
costs. Washington Natural, under an agreement with the WUTC, will seek recovery
in future customer rates of the remediation costs which are not reimbursed by
third parties.
PAGE 24
(c) Everett
A remedial investigation study of the Everett site was completed in August 1995.
A feasibility study to determine the appropriate method of remediation or
containment is in progress for completion in 1996. However, Washington Natural
cannot estimate the full extent of future costs at the Everett site until more
information is available from the feasibility study. However, a reserve for
investigation and remediation costs of $3,250,000 has been established based on
the preliminary information obtained during the remedial
investigation.
The Everett site was previously owned and operated by other companies who are
potentially liable parties ("PLPs") for the remediation of the site. The cost
estimate reflects the total cost expected to remediate the site before
contributions by other PLPs.
(d) Chehalis
The Chehalis site has been undergoing investigation and remediation activities
since September 1992. As of the fall of 1995, Washington Natural has completed
source control and installed groundwater monitoring wells. Washington Natural is
currently compiling seasonal groundwater data to determine if further remedial
measures are required. Data compiled during the winter indicates that the
contamination levels remain low. Washington Natural will continue to monitor
groundwater at the site during the spring and summer of 1996 to determine what,
if any, additional measures are required.
(e) Gas Works Park
Washington Natural sold the site of a former manufactured gas plant at Lake
Union, now known as "Gas Works Park," to the City of Seattle on September 4,
1962. The City of Seattle, in a letter from the Seattle City Attorney dated
February 24, 1995, requested that Washington Natural participate in a cleanup of
this site. The letter also indicated that if Washington Natural does not
participate, the City of Seattle will pursue legal remedies which the City of
Seattle believes are available. Washington Natural believes that the contract,
which sold 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.
To date, the City of Seattle has not formally initiated any legal proceedings
and the course of events at this site cannot be predicted. However, Washington
Natural has met with and has exchanged correspondence with the City of Seattle
seeking a solution to the request for Washington Natural's participation in the
cleanup at the Gas Works Park site. Washington Natural's most recent meetings
with the City of Seattle and the City's consultants have included discussions of
possible containment measures which could be employed at the site. During the
fourth quarter of fiscal 1995, a reserve for $1,000,000 for the potential
resolution of this matter with the City of Seattle was established. A receivable
of $1,000,000 was also established to reflect the probable recovery
of the estimated costs from Washington Natural's insurance carriers.
PAGE 25
(f) Upland Source Control and Thea Foss Waterway
Washington Natural was the former owner of land, located upland from the Thea
Foss Waterway in Tacoma, Washington where a manufactured gas plant was operated
by several other companies. Washington Natural acquired this site ("Upland
Source Control Site") after the manufactured gas plant was closed. The site was
later sold in parcels to several buyers. The City of Tacoma, the Washington
State Department of Transportation and three former operators of the plant and
Washington Natural as a former owner have been designated as potentially liable
parties at this site. In May 1996 a consultant to the PLPs estimated the cost of
remediating the Upland Source Control site to be approximately $4,000,000,
exclusive of any remediation costs which may arise in connection with the
adjacent Thea Foss Waterway. Because there are multiple PLPs, Washington Natural
believes, based on currently available information, that its maximum exposure is
approximately $700,000. Washington Natural believes that it is probable that it
has insurance coverage sufficient to recover the maximum potential costs at the
Upland Source Control site. The estimated liability for $700,000 and the
expected insurance recovery of $700,000 will be recorded in the third quarter of
fiscal 1996.
The City of Tacoma has undertaken an investigation study of potential
contamination in the Thea Foss Waterway. The extent of the contamination in the
waterway is not currently known and the impact on the Company and Washington
Natural cannot be currently determined.
(g) Expected Recoveries
Washington Natural's financial statements as of March 31, 1996, include
environmental receivables totaling $8,130,000 primarily for expected recoveries
from insurance carriers, based upon the successful litigation against its
insurers regarding the Tideflats site, and other PLPs. Although the factual
situations at the other sites differ in some respects from the factual situation
at the Tideflats site, Washington Natural believes, based on the precedents
established in the Tideflats case and discussion with legal counsel, that it is
probable that it has insurance coverage sufficient to recover costs not
recovered from other PLPs.
Based on all known facts and analyses, the Company and Washington Natural
believe it is not likely that the identified environmental liabilities will
result in a material adverse impact on the Company's or Washington Natural's
financial position, operating results or cash flow trends.
PAGE 26
(5) LITIGATION
(a) Washington State Department of Transportation Lawsuits
On August 8, 1989, the Washington State Department of Transportation (the
"WDOT") commenced a lawsuit ("Federal Action") in the U.S. District Court,
Western District of Washington ("District Court"), against Washington Natural
and other defendants. The suit sought from Washington Natural and the other
defendants, the recovery of approximately $7 million in costs incurred by the
WDOT in cleaning up contamination at the site of a former manufactured gas plant
which discontinued operations in the early 1900s. The trial court ruled that
WDOT's claim was barred due to its failure to comply with the National
Contingency Plan ("NCP") governing the cleanup of hazardous waste sites, and
ordered that judgment be entered in favor of Washington Natural and the other
defendants. The trial court's decision was affirmed by the United States Court
of Appeals for the Ninth Circuit ("Court of Appeals") on July 13, 1995. The WDOT
did not initiate an appeal of the Federal Action to the United States Supreme
Court within the prescribed time for appeal of the Court of Appeals decision
thereby finalizing the District Court's decision in favor of Washington Natural.
On May 10, 1994, the WDOT filed an action in the state Superior Court for Pierce
County, Washington ("State Action") against Washington Natural and other
defendants arising out of the same occurrence and seeking the same damages as
sought in the Federal Action described above. The State Action alleges a claim
under Washington's Model Toxics Control Act, which was recently amended to allow
a private right of action for cost recovery. The State Action was stayed by
Stipulation and Order dated June 10, 1994 pending the outcome of the Federal
Action. In March 1996 Washington Natural filed a motion to lift the stay of the
State Action proceedings and for summary judgement. The motion asserts that the
WDOT did not meet the standard required for recovery under state law
by its failure to comply with the NCP. This motion was granted on May 3, 1996
and the case was dismissed.
(b) Alleged Securities Violations
A class-action lawsuit was filed against Washington Energy and two of its
officers, one of whom has subsequently retired, (collectively, "the Defendants")
in District Court, 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, the Defendants
filed a motion to dismiss the lawsuit. 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. The plaintiffs have appealed to the Court of Appeals. On October 19,
1995 the Court of Appeals heard oral arguments. A decision is expected sometime
in 1996. In management's opinion, the District Court's decision should be upheld
on appeal.
PAGE 27
(c) Alleged Anti-Trust Violations
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 District Court. Cost
Management alleged that Washington Natural has monopolized or attempted to
monopolize the market for natural gas in central western Washington. 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 on 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 filed an appeal in the Court of Appeals
and it has filed a new lawsuit in Superior Court in King
County, which was stayed pending the District Court appeal. The parties, on
November 22, 1995, filed briefs with the Court of Appeals on the issue of the
District Court's judgment dismissing the federal antitrust claims. A hearing
date for oral arguments has not been set. In management's opinion, the District
Court decision should be upheld on appeal and the suit in the Superior Court is
unlikely to succeed.
(6) RESTRUCTURING AND SEVERANCE CHARGES
In the fiscal years ended September 30, 1994 and 1995 Washington Natural
established reserves for restructuring charges and employee severance of
$3,500,000 and $3,150,000, respectively. During the quarter ended March 31,
1996, payments of $578,000 were paid to former employees. The remaining reserve
of $1,926,000 at March 31, 1996 will be fully utilized to fund the future
payment of severance benefits which are being paid over time based on the terms
of individual severance agreements.
(7) PROPOSED MERGER
On March 20, 1996, shareholders of Washington Energy, Washington Natural, and
Puget Sound Power and Light Company ("Puget") approved the merger of the
companies and announced the new name of the merged company; Puget Sound Energy
("PSE"). The merger is designed to qualify as a pooling-of-interests for
accounting and financial reporting purposes. As of March 31, 1996, Washington
Energy and Washington Natural have incurred $2.5 million of costs, primarily
professional and legal fees directly attributable to the merger. Washington
Natural has requested, as part of the merger application with the WUTC, that
these costs be recovered in rates over a five-year period. These costs have been
deferred and are included in deferred charges and other.
PAGE 28
Included as exhibits are pro forma condensed financial statements which combine
the historical consolidated balance sheets and statements of income of
Washington Energy and subsidiaries and Puget after giving effect to the merger.
The unaudited pro forma condensed consolidated balance sheet at December 31,
1995 gives effect to the merger as if it had occurred at December 31, 1995. The
unaudited pro forma condensed consolidated statements of income for each of the
three years in the periods ended December 31, 1995 and the 3 month period ended
March 31, 1996 give effect to the merger as if it had occurred at January 1,
1993. These statements are prepared on the basis of accounting for the
merger as a pooling-of-interests and are based on the assumptions set forth in
the paragraph below. The pro forma condensed financial information has been
prepared from, and should be read in conjunction with Washington Energy's
historical consolidated audited financial statements and related notes and
Puget's historical audited financial statements and related notes, which are
incorporated herein by reference. The information contained herein with respect
to Puget and its subsidiaries has been supplied by Puget. The information is not
necessarily indicative of the financial position or operating results that would
have occurred had the merger been consummated on the date, or at the beginning
of the periods, for the which the merger is being given effect, nor is it
necessarily indicative of future operating results or financial position.
The merger is estimated to result in cost savings of approximately $370 million,
net of merger transaction and transition costs, over a 10 year period following
the consummation of the merger. The cost savings estimated to be achieved by the
merger are not reflected in the pro forma financial statements because the terms
and conditions under which the WUTC may approve the merger are unknown. Pro
forma per share data and common shares outstanding for PSE give effect to the
conversion of each share of Washington Energy common stock into .860 shares of
PSE common stock and each share of Washington Natural preferred stock to be
converted into one share of preferred stock of PSE with like rights and
preferences.
The merger is subject to approval by the WUTC. Washington Natural anticipates
that the WUTC's review of the merger application will occur during the remainder
of 1996 with an order to be issued in early 1997. The merger is also subject to
required filings with the United States Department of Justice and the Federal
Trade Commission under the Hart, Scott, Rodino Antitrust Improvements Act, and
the expiration of the applicable waiting periods.
PAGE 29
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
RESULTS OF OPERATIONS
Washington Energy Company's ("the Company") net income for the quarter ended
March 31, 1996 of $18.0 million increased $6.8 million or 61 percent from the
same quarter a year ago. Earnings per share of $.75 for the second quarter of
1996 were up from $.47 a year ago. Net income of the principal subsidiary,
Washington Natural Gas Company ("Washington Natural"), was $21.0 million for the
quarter, an increase of $6.6 million from the same period last year.
The increase in net income resulted primarily from the May 1995 general rate
increase of $17.7 million (on an annual basis), more normal weather conditions
and continuing customer growth. During the current quarter temperatures were 1
percent colder than normal compared to 17 percent warmer than normal in the
prior year. The number of utility customers served continues to grow, increasing
approximately 4 percent compared to the same period last year.
The Company's net income of $28.2 million for the six months ended March 31,
1996, increased $3.7 million from the same period one year ago, and earnings per
share of $1.17 increased from $1.03. The Company's results for the six months
ended March 31, 1996 are not as improved as the results during the second
quarter due to the unseasonably warm weather in the first quarter ended December
31, 1995. Washington Natural's net income for the six months of $34.8 million
increased $4.3 million over the same period in the previous year.
Operating Revenues
The Company's operating revenues of $155.3 million for the quarter ended March
31, 1996 were essentially unchanged from the prior year quarter although total
gas volumes were up approximately 11 percent. Total gas volumes increased from
318.4 million therms to 352.6 million therms. However, gas sales volumes (total
gas volumes less transportation volumes) were up only 3 percent. During the
quarter, Washington Natural experienced significant shifting of customers from
interruptible sales to transportation service. This resulted in a decrease in
interruptible gas sales revenue from $14.8 to $8.2 million. Due to the new rate
design, Washington Natural earns the same margin on transportation service as it
does on large volume gas sales. The increased gas sales volumes related to firm
gas sales did not result in increased revenues due to the impact of a purchased
gas adjustment ("PGA") which was implemented at the same time as the general
rate increase in May 1995. The PGA passes on to customers over a two year
period, in the form of lower rates, the actual and expected future cost savings
from a decline in natural gas prices. Although the PGA reduces revenues it does
not impact utility gross margin or net income.
Utility margin (regulated utility sales less the cost of gas sold) of $79.2
million increased $11.3 million compared to the same quarter last year. The 17
percent increase in utility margin resulted from an 11 percent increase in total
gas volumes due to more normal weather conditions, the general rate
increase and continued customer growth.
PAGE 30
For the six months ended March 31, 1996 revenues of $282.8 million decreased
$31.0 million or approximately 10 percent even though total gas volumes were
down only 2 percent from the prior year. As discussed above, the shifting from
interruptible sales to transportation service and the PGA resulted in a larger
percentage decrease in revenue than the percentage decline in gas volumes.
Utility margin for the six months increased by $8.1 million or 6 percent due
primarily to the general rate increase and 4 percent increase in average
customers.
Operating Expenses
The Company's operating expenses of $125.8 million, including federal income
taxes, decreased $8.9 million from the three months ended March 31, 1995. The
decrease in operating expenses was due primarily to a $12.4 million decrease in
the cost of gas sold, reflecting the shift of interruptible sales customers to
transportation service, which was partially offset by a $4.0 million increase in
federal income tax expense due to higher pre-tax income. For the six months
ended March 31, 1996 operating expenses of $231.0 million were down $35.5
million due to a $38.5 million decrease in the cost of gas sold.
LIQUIDITY AND CAPITAL RESOURCES
Capital expenditures typically represent the largest cash flow statement item
for the Company due to the capital-intensive nature and growth rate of the
utility. The bulk of the Company's gross capital expenditures of $39.5 million
for the six months ended March 31, 1996 was for utility plant. Washington
Natural makes capital expenditures to add new customers to its gas distribution
system and to replace and enhance components of the system to insure its
reliability and safety. Washington Natural's financing strategy is to fund
capital expenditures 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 issuing 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.
During the six-month period, 100% of the capital expenditures were funded by
cash flow from operations after dividends.
The Company has several short-term financing arrangements available currently:
an aggregate of $250 million of commercial paper and similar programs backed by
a committed revolving credit agreement, of which $124 million was unused at
March 31, 1996; an uncommitted bank credit arrangement of $25 million, all of
which was available at March 31, 1996; and a committed agreement to sell up to
$90 million of merchandise and gas receivables, of which $43 million was unused
at March 31, 1996. The borrowing capacity under the latter agreement is
effectively limited by the availability of receivables to sell. At March 31,
1996, Washington Natural had $18 million of eligible receivables which had not
been sold under the arrangement.
PAGE 31
ENVIRONMENTAL MATTERS
In management's opinion, based on all known facts and analyses, it is not likely
that environmental liabilities identified to date will result in a material
adverse impact on the Company's or Washington Natural's financial position or
operating results and cash flow trends. (See Note 4 of the Notes to Consolidated
Condensed Financial Statements.)
SIGNIFICANT BALANCE SHEET CHANGES
The March 31, 1996 accounts receivable balance of $34.2 million reflects an
increase of $13.8 million caused by the normal seasonal increase in gas sales
over a seasonal low point in Washington Natural's operating cycle at September
30, 1995. Additionally, this balance is $10.8 million higher than the prior year
because fewer receivables were sold during the current quarter.
The purchased gas liability (a liability to customers related to the purchased
gas adjustment mechanism) of $44.2 million at March 31, 1996 has increased from
$15.6 million at September 30, 1995. This is due to the actual purchase of gas
during the six months at a cost lower than the cost of gas authorized in
Washington Natural's rates.
Materials and supplies at March 31, 1996 were $18.0 million compared to $32.0
million as of September 30, 1996 due to the seasonal reduction in natural gas
stored underground.
FUTURE OUTLOOK
(a) Proposed Merger
On October 18, 1995, a definitive agreement was approved by Washington Energy's
and Washington Natural's Boards of Directors to merge Washington Energy and
Washington Natural into Puget Sound Power & Light Company, ("Puget") as the
surviving corporation. On March 20, 1996 the shareholders of the three companies
voted to approve the merger. The merged company will be named Puget Sound Energy
("PSE") and would create a combination utility serving more than 840,000
electric customers and more than 485,000 gas customers in the state of
Washington. See Exhibit 99 for pro forma financial information of the merged
company.
The WUTC, which regulates both utilities, must approve the merger, and certain
other conditions in the merger agreement must be satisfied or waived. The WUTC
decided to hold public hearings on the merger which will begin in June 1996 and
continue through February 1997. Washington Natural anticipates that the WUTC's
review of the merger application will occur during the remainder of 1996 with an
order to be issued in early 1997.
The synergies from the merger are expected to generate substantial cost savings
that would not be available absent the merger. The preliminary estimate of such
potential savings, by the management of Washington Energy and Puget with
PAGE 32
the assistance of Deloitte & Touche LLP, (after taking into account the costs
incurred to achieve such savings), is approximately $370 million over the
ten-year period following the merger.
(b) Factors Affecting Earnings
The expected timing for completion of the merger precludes realizing significant
benefits from the synergies of the proposed merger with Puget in 1996. Other
decisions and actions taken in recent fiscal years have had a favorable impact
on the Company's earnings through March 1996. Operating earnings have benefited
from the $17.7 million general rate increase approved in May 1995. Except for
the current quarter ended March 31, 1996, the weather patterns in Washington
Natural's service territory have been significantly warmer than normal. As a
result, Washington Natural's earnings should be positively impacted if weather
patterns return to normal and the current cost structure remains stable. Also,
the Company expects utility customer growth of about 4%, or 16,000 to 19,000 new
customers for fiscal 1996.
COMMON DIVIDEND
The Company paid a dividend of 25 cents in each of the quarters ended March 31,
1996 and 1995. The Company expects that the quarterly dividend of 25 cents per
share will be maintained through the effective date of the merger.
The amount, declaration and timing of dividends of the merged company (PSE),
will be a business decision to be made by PSE's Board of Directors ("PSE Board")
from time to time based on the combined company's results of operations and
financial condition, regulatory factors and such other business considerations
as PSE's Board considers relevant. Subject to the foregoing, it is anticipated
that PSE's Board initially will adopt the dividend policy followed by Puget,
which currently provides for annual dividends of $1.84 per share.
PAGE 33
PART II - OTHER INFORMATION
Item 5. Other Information -
The ratios of earnings to fixed charges for the twelve months ended March 31,
1996 and March 31, 1995 were 1.93 and 1.13, respectively.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
12. Computation of ratio of earnings to fixed charges.
27.1 Washington Energy Financial Data Schedule
27.2 Washington Natural Financial Data Schedule
99. Pro Forma Condensed Financial Statements of Puget Sound Energy
After the Merger of Washington Energy and Puget.
(b) Reports on Form 8-K.
(1) A report on Form 8-K was filed by Washington Energy and Washington Natural
on January 29, 1996, regarding the Company's operating results for the
quarter ended December 31, 1995.
(2) A report on Form 8-K was filed by Washington Energy and Washington Natural
on February 21, 1996, regarding the merger proposal of Washington Energy
and Washington Natural with Puget and the application for approval of the
merger filed with the WUTC.
(3) A report on Form 8-K was filed by Washington Energy and Washington Natural
on March 21, 1996, regarding the approval of the merger proposal by the
shareholders of Washington Energy, Washington Natural, and Puget, and the
announcement of the new name chosen for the merged company.
PAGE 34
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
Executive Vice President, Chief Administrative
Officer and Chief Financial Officer; the
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
Executive Vice President, Chief Administrative
Officer and Chief Financial Officer; the
Principal Financial Officer
May 15, 1996