PAGE 1
- ------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
X Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the three and nine month periods ended June
30, 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
Registrants'
Telephone Number,
Including
Address of Principal Executive Offices Zip Code Area Code
- -------------------------------------- ----------- -----------------
815 Mercer Street, Seattle, Washington 98109 (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 July 31, 1996
- ------------------------------ -------------- --------------
Washington Energy Company $5 par value 24,225,766
Washington Natural Gas Company $5 par value 11,084,018
- ------------------------------------------------------------------------------
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 through a subsidiary 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, upon written request, 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 Nine Months Ended June 30, 1996 and 1995...........5
Consolidated Condensed Balance Sheets -
June 30, 1996, September 30, 1995 and
June 30, 1995................................................6
Consolidated Statements of Capitalization -
June 30, 1996 and 1995.......................................8
Consolidated Condensed Statements of Cash Flows -
Three and Nine Months Ended June 30, 1996 and 1995..........10
Consolidated Statements of Common Shareholders'
Earnings (Deficit) Reinvested in the Business
and Premium on Common Stock -
Three and Nine Months Ended June 30, 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 Nine Months Ended June 30, 1996 and 1995..........13
Consolidated Condensed Balance Sheets -
June 30, 1996, September 30, 1995 and
June 30, 1995...............................................14
Consolidated Statements of Capitalization -
June 30, 1996 and 1995......................................16
Consolidated Condensed Statements of Cash Flows -
Three and Nine Months Ended June 30, 1996 and 1995..........18
Consolidated Statements of Common Shareholder's
Earnings Reinvested in the Business
and Premium on Common Stock -
Three and Nine Months Ended June 30, 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)...............28
PART II - OTHER INFORMATION................................................32
SIGNATURES.................................................................33
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. These consolidated condensed financial statements should 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 NINE MONTHS ENDED
JUNE 30, 1996 AND 1995 (Unaudited)
Three Months Ended Nine Months Ended
June 30, June 30,
-------------------- -------------------
1996 1995 1996 1995
-------- -------- -------- --------
(in thousands except per share amounts)
OPERATING REVENUES:
Regulated utility sales $78,695 $ 75,122 $347,893 $374,632
Merchandise, conservation
products and other 5,816 3,744 19,402 17,998
-------- -------- -------- --------
Total operating revenues 84,511 78,866 367,295 392,630
-------- -------- -------- --------
OPERATING EXPENSES:
Cost of gas sold 33,395 36,237 158,637 199,939
Operating and maintenance 20,705 20,960 67,339 67,003
Depreciation and amortization 9,052 8,516 27,166 25,635
General taxes 8,033 8,855 33,243 35,043
Federal income taxes 1,008 (2,460) 16,826 10,998
-------- -------- -------- --------
Total operating expenses 72,193 72,108 303,211 338,618
-------- -------- -------- --------
OPERATING INCOME 12,318 6,758 64,084 54,012
OTHER INCOME (EXPENSE):
Preferred dividend requirement
Washington Natural Gas Company (1,755) (1,755) (5,265) (5,371)
Other, net (223) (294) 530 (95)
-------- -------- -------- --------
GROSS INCOME 10,340 4,709 59,349 48,546
INTEREST CHARGES 10,256 10,333 31,107 29,687
-------- -------- -------- --------
NET INCOME (LOSS) $ 84 $ (5,624) $ 28,242 $ 18,859
======== ======== ======== ========
EARNINGS (LOSS) PER COMMON SHARE $ - $ (.23) $ 1.17 $ .79
======== ======== ======== ========
AVERAGE COMMON SHARES
OUTSTANDING 24,183 23,950 24,134 23,848
======== ======== ======== ========
DIVIDENDS PAID PER COMMON
SHARE OUTSTANDING $ .25 $ .25 $ .75 $ .75
======== ======== ======== ========
The accompanying notes are an integral part of these consolidated
statements.
PAGE 6
WASHINGTON ENERGY COMPANY AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
JUNE 30, 1996 (Unaudited), SEPTEMBER 30, 1995 AND
JUNE 30, 1995 (Unaudited)
ASSETS
June September June
30, 1996 30, 1995 30, 1995
---------- ---------- ----------
(in thousands)
PROPERTY, PLANT AND EQUIPMENT:
Utility plant, at original cost $1,114,357 $1,055,322 $1,022,438
Coal and other 15,675 15,621 55,808
Accumulated depreciation and
amortization (297,157) (273,735) (268,756)
---------- ---------- ----------
Net property, plant and equipment 832,875 797,208 809,490
---------- ---------- ----------
INVESTMENT IN UNCONSOLIDATED AFFILIATES
69,291 70,313 95,338
---------- ---------- ----------
CURRENT ASSETS:
Cash and cash equivalents 8,306 9,315 8,448
Receivables, net 15,073 20,437 19,109
Federal income taxes receivable 8,319 10,942 9,682
Deferred income taxes 2,210 3,707 4,788
Materials and supplies, at average cost 20,981 31,968 24,202
---------- ---------- ----------
Total current assets 54,889 76,369 66,229
---------- ---------- ----------
OTHER ASSETS AND DEFERRED CHARGES:
Environmental receivables 8,681 8,116 37,647
Regulatory tax asset 17,605 17,605 18,810
Deferred charges and other 31,663 19,879 20,846
---------- ---------- ----------
Total other assets and deferred
charges 57,949 45,600 77,303
---------- ---------- ----------
Total assets $1,015,004 $ 989,490 $1,048,360
========== ========== ==========
The accompanying notes are an integral part of these consolidated balance
sheets.
PAGE 7
WASHINGTON ENERGY COMPANY AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
JUNE 30, 1996 (Unaudited), SEPTEMBER 30, 1995 AND
JUNE 30, 1995 (Unaudited)
(Continued)
CAPITALIZATION AND LIABILITIES
June September June
30, 1996 30, 1995 30, 1995
---------- ---------- ----------
(in thousands)
CAPITALIZATION (see Consolidated Statements
of Capitalization):
Common shareholders' interest $ 209,721 $ 196,686 $ 261,696
Redeemable preferred stock of subsidiary 90,000 90,000 90,000
Long-term debt 344,920 310,060 265,060
---------- ---------- ----------
Total capitalization 644,641 596,746 616,756
---------- ---------- ----------
CURRENT LIABILITIES:
Notes payable and commercial paper 132,325 161,994 125,480
Current sinking fund requirements
and debt maturities 140 30,140 65,140
Accounts payable 24,032 32,755 30,601
Purchased gas liability 49,317 15,554 22,015
Accrued general taxes 11,825 12,556 11,781
Environmental remediation liabilities 4,779 4,578 4,950
Other current liabilities 29,934 28,939 29,280
---------- ---------- ----------
Total current liabilities 252,352 286,516 289,247
---------- ---------- ----------
DEFERRED CREDITS AND OTHER LIABILITIES:
Deferred income taxes 72,626 59,450 89,470
Regulatory tax liability 11,016 11,017 12,560
Unamortized investment tax credits 8,779 9,352 9,547
Contributions in aid of construction 15,701 14,252 13,850
Contingency reserves and other 9,889 12,157 16,930
---------- ---------- ----------
Total deferred credits and
other liabilities 118,011 106,228 142,357
---------- ---------- ----------
Total capitalization and $1,015,004 $ 989,490 $1,048,360
liabilities
========== ========== ==========
The accompanying notes are an integral part of these consolidated balance
sheets.
PAGE 8
WASHINGTON ENERGY COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CAPITALIZATION
JUNE 30, 1996 AND 1995 (Unaudited)
Shares Outstanding at
June 30, June 30,
1996 1995 1996 1995
-------- -------- -------- --------
(in thousands) (in thousands)
COMMON SHAREHOLDERS' INTEREST:
Common stock, $5 par value;
authorized 50,000,000 shares 24,226 24,015 $121,129 $120,075
Premium on common stock 204,722 201,974
Shareholders' deficit (116,130) (60,353)
-------- --------
Total common shareholders'
interest 209,721 261,696
-------- --------
REDEEMABLE PREFERRED STOCK: 33%* 43%*
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 2,400 2,400 60,000 60,000
8.50%, Series III 1,200 1,200 30,000 30,000
-------- --------
Total preferred stock 90,000 90,000
-------- --------
14%* 14%*
*Percentage of total capitalization.
The accompanying notes are an integral part of these consolidated statements.
PAGE 9
WASHINGTON ENERGY COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CAPITALIZATION
JUNE 30, 1996 AND 1995 (Unaudited)
(Continued)
June 30,
-------------------
1996 1995
-------- --------
LONG-TERM DEBT: (in thousands)
First mortgage bonds
9.96% due 1995 - 40,000
8.80% due 1996, retired August 1995 - 25,000
8-1/8% due 1997 3,060 3,200
10-1/4% due 1997, retired December 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 -
6.58% due 2006 10,000 -
7.02% and 7.04% due 2007 25,000 -
6.61% and 6.62% due 2009 8,000 -
7.12% due 2010 7,000 -
7.35% and 7.36% due 2015 12,000 -
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) (65,140)
-------- --------
Total long-term debt 344,920 265,060
-------- --------
53%* 43%*
TOTAL CAPITALIZATION $644,641 $616,756
======== ========
*Percentage of total capitalization.
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 NINE MONTHS ENDED
JUNE 30, 1996 AND 1995 (Unaudited)
Three Months Ended Nine Months Ended
June 30, June 30,
------------------- ------------------
1996 1995 1996 1995
-------- -------- -------- --------
CASH FLOW PROVIDED BY (USED IN) OPERATING (in thousands) (in thousands)
ACTIVITIES:
Net income (loss) $ 84 $ (5,624) $28,242 $ 18,859
Adjustments to reconcile net income
(loss) to net cash provided by (used
in) operating activities:
Depreciation and amortization 9,105 8,603 27,347 25,908
Provision for uncollectible accounts
receivable 312 167 939 528
Equity in undistributed losses of
unconsolidated affiliate 102 1,223 1,022 2,801
Deferred federal income taxes 788 (2,554) 14,100 10,554
Changes in:
Accounts receivable 18,849 4,111 4,425 (3,143)
Current federal income taxes
receivable/payable 634 (2,035) 2,623 2,452
Purchased gas receivable/liability 5,076 (2,158) 33,763 43,276
Environmental expenditures, net of
recoveries (98) (744) (364) (4,949)
Accounts payable 1,987 3,338 (8,723) 2,474
Materials and supplies (3,016) (6,132) 10,987 3,867
Deferred charges (5,114) (383) (11,574) (5,288)
Other operating assets and
liabilities (6,590) (1,855) (556) (7,639)
Other (188) (208) (408) (986)
-------- -------- -------- --------
Total adjustments 21,847 1,373 73,581 69,855
-------- -------- -------- --------
Net cash provided by (used in)
operating activities 21,931 (4,251) 101,823 88,714
-------- -------- -------- --------
CASH FLOW PROVIDED BY (USED IN)
INVESTING ACTIVITIES:
Utility plant additions (23,462) (16,442) (62,956) (50,967)
Other property expenditures (14) (381) (54) (1,411)
Proceeds from disposition of fixed
assets 233 237 584 530
-------- -------- -------- --------
Net cash used in investing
activities (23,243) (16,586) (62,426) (51,848)
-------- -------- -------- --------
PAGE 11
WASHINGTON ENERGY COMPANY AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS FOR
THE THREE AND NINE MONTHS ENDED
JUNE 30, 1996 AND 1995 (Unaudited)
(Continued)
Three Months Ended Nine Months Ended
June 30, June 30,
------------------- -----------------
1996 1995 1996 1995
-------- -------- -------- --------
CASH FLOW PROVIDED BY (USED IN) FINANCING (in thousands) (in thousands)
ACTIVITIES:
Proceeds from issuance of:
Common stock 979 1,175 2,888 3,910
First mortgage bonds - - 34,609 -
Proceeds from (reduction of) issuance of
notes payable and commercial paper, net 6,407 27,230 (29,669) 298
Redemptions of first mortgage bonds - - (30,140) (20,140)
Common stock dividends (6,045) (5,984) (18,094) (17,873)
-------- -------- -------- --------
Net cash provided by (used in)
financing activities 1,341 22,421 (40,406) (33,805)
-------- -------- -------- --------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 29 1,584 (1,009) 3,061
Beginning cash and cash equivalents 8,277 6,864 9,315 5,387
-------- -------- -------- --------
Ending cash and cash equivalents $ 8,306 $ 8,448 $ 8,306 $ 8,448
======== ======== ======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION
Cash paid during the period for:
Interest (net of amount capitalized) $ 9,608 $ 6,878 $ 27,490 $ 25,682
Income taxes paid - 2,035 - 2,385
The accompanying notes are an integral part of these consolidated statements.
PAGE 12
WASHINGTON ENERGY COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMMON SHAREHOLDERS'
EARNINGS (DEFICIT) REINVESTED IN THE BUSINESS
FOR THE THREE AND NINE MONTHS ENDED
JUNE 30, 1996 AND 1995 (Unaudited)
Three Months Ended Nine Months Ended
June 30, June 30,
------------------- --------------------
1996 1995 1996 1995
--------- --------- --------- --------
(in thousands) (in thousands)
Balance at beginning of period $(110,169) $(48,745) $(126,278) $(61,339)
Net income (loss) 84 (5,624) 28,242 18,859
Common stock dividends declared (6,045) (5,984) (18,094) (17,873)
--------- --------- --------- --------
Balance at end of period $(116,130) $(60,353) $(116,130) $(60,353)
========= ========= ========= ========
WASHINGTON ENERGY COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF PREMIUM ON COMMON STOCK
FOR THE THREE AND NINE MONTHS ENDED
JUNE 30, 1996 AND 1995 (Unaudited)
Three Months Ended Nine Months Ended
June 30, June 30,
------------------ -------------------
1996 1995 1996 1995
-------- -------- -------- --------
(in thousands) (in thousands)
Balance at beginning of period $204,002 $201,185 $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 125 124 241 238
Excess of purchase price over par
value of shares of common stock
issued under the Dividend Rein-
vestment and Stock Purchase Plan 592 668 1,868 2,338
Excess of purchase price over par
value of shares of common stock
issued under the Incentive Stock
Option Plan 3 - 38 -
Common and preferred stock expense - (3) (41) (173)
-------- -------- -------- --------
Balance at end of period $204,722 $201,974 $204,722 $201,974
======== ======== ======== ========
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 NINE MONTHS ENDED
JUNE 30, 1996 AND 1995 (Unaudited)
Three Months Ended Nine Months Ended
June 30, June 30,
------------------ ------------------
1996 1995 1996 1995
-------- -------- -------- --------
(in thousands) (in thousands)
OPERATING REVENUES:
Regulated utility sales $ 78,695 $ 75,122 $347,893 $374,632
-------- -------- -------- --------
OPERATING EXPENSES:
Cost of gas sold 33,395 36,237 158,637 199,939
Utility operations and maintenance 14,863 16,249 48,065 46,557
Depreciation 8,954 8,420 26,866 25,378
General taxes 7,998 8,814 33,072 34,871
Federal income taxes 1,678 (1,114) 19,188 14,228
-------- -------- -------- --------
Total operating expenses 66,888 68,606 285,828 320,973
-------- -------- -------- --------
OPERATING INCOME 11,807 6,516 62,065 53,659
OTHER INCOME (EXPENSE), NET 113 (471) 268 (1,177)
-------- -------- -------- --------
GROSS INCOME 11,920 6,045 62,333 52,482
INTEREST CHARGES 8,380 7,945 23,956 23,878
-------- -------- -------- --------
NET INCOME (LOSS) 3,540 (1,900) 38,377 28,604
DIVIDENDS ON PREFERRED STOCK 1,755 1,755 5,265 5,371
-------- -------- -------- --------
EARNINGS (LOSS) ON COMMON STOCK $ 1,785 $ (3,655) $ 33,112 $ 23,233
======== ======== ======== ========
The accompanying notes are an integral part of these consolidated statements.
PAGE 14
WASHINGTON NATURAL GAS COMPANY AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
JUNE 30, 1996, (Unaudited) SEPTEMBER 30, 1995 AND
JUNE 30, 1995 (Unaudited)
ASSETS
June September June
30, 1996 30, 1995 30, 1995
---------- ---------- ----------
(in thousands)
UTILITY PLANT, at original cost $1,114,357 $1,055,322 $1,022,438
Accumulated depreciation (286,789) (263,664) (258,781)
---------- ---------- ----------
Net utility plant 827,568 791,658 763,657
---------- ---------- ----------
RECEIVABLES FROM AFFILIATED COMPANIES 27,716 102 113
---------- ---------- ----------
CURRENT ASSETS:
Cash and cash equivalents 2,223 3,571 4,013
Accounts receivables, net 10,723 16,644 15,991
Federal income taxes receivable - 1,416 1,416
Deferred income taxes 2,211 3,707 4,784
Materials and supplies, at average
cost 18,976 29,706 22,038
---------- ---------- ----------
Total current assets 34,133 55,044 48,242
---------- ---------- ----------
OTHER ASSETS AND DEFERRED CHARGES:
Environmental receivables 8,681 8,116 37,647
Regulatory tax asset 17,605 17,605 18,810
Deferred charges and other 28,909 18,073 17,671
---------- ---------- ----------
Total other assets and deferred
charges 55,195 43,794 74,128
---------- ---------- ----------
Total assets $ 944,612 $ 890,598 $ 886,140
========== ========== ==========
The accompanying notes are an integral part of these consolidated balance
sheets.
PAGE 15
WASHINGTON NATURAL GAS COMPANY AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
JUNE 30, 1996 (Unaudited), SEPTEMBER 30, 1995 AND
JUNE 30, 1995 (Unaudited)
(Continued)
CAPITALIZATION AND LIABILITIES
June September June
30, 1996 30, 1995 30, 1995
---------- --------- ---------
CAPITALIZATION (see Consolidated (in thousands)
Statements of Capitalization):
Common shareholder's interest $ 276,434 $ 251,528 $ 263,127
Redeemable preferred stock 90,000 90,000 90,000
Long-term debt 344,920 310,060 265,060
--------- --------- ---------
Total capitalization 711,354 651,588 618,187
--------- --------- ---------
CURRENT LIABILITIES:
Current sinking fund requirements
and debt maturities 140 30,140 65,140
Accounts payable 22,353 31,253 29,684
Purchased gas liability 49,317 15,554 22,015
Accrued general taxes 11,659 12,381 11,655
Federal income taxes payable 2,401 - -
Environmental remediation liabilities 4,779 4,578 4,950
Other current liabilities 22,707 23,958 21,811
--------- --------- ---------
Total current liabilities 113,356 117,864 155,255
--------- --------- ---------
PAYABLES TO AFFILIATED COMPANIES - 16,699 472
--------- --------- ---------
DEFERRED CREDITS AND OTHER LIABILITIES:
Deferred income taxes 84,406 69,826 76,269
Regulatory tax liability 11,016 11,017 12,560
Unamortized investment tax credits 8,779 9,352 9,547
Contributions in aid of construction 15,701 14,252 13,850
--------- --------- ---------
Total deferred credits and
other liabilities 119,902 104,447 112,226
--------- --------- ---------
Total capitalization and
liabilities $ 944,612 $ 890,598 $ 886,140
========= ========= =========
The accompanying notes are an integral part of these consolidated balance
sheets.
PAGE 16
WASHINGTON NATURAL GAS COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CAPITALIZATION
JUNE 30, 1996 AND 1995 (Unaudited)
Shares Outstanding
at June 30, June 30,
------------------- -------------------
1996 1995 1996 1995
-------- -------- -------- --------
COMMON SHAREHOLDER'S INTEREST: (in thousands) (in thousands)
Common stock, $5 par value;
authorized 25,000,000 shares 11,084 10,946 $ 55,420 $ 54,731
Premium on common stock 170,074 167,026
Shareholder's earnings
reinvested in the business 50,940 41,370
-------- --------
Total common shareholder's
interest 276,434 263,127
-------- --------
39%* 43%*
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 2,400 2,400 60,000 60,000
8.50%, Series III 1,200 1,200 30,000 30,000
-------- --------
Total preferred stock 90,000 90,000
-------- --------
13%* 14%*
*Percentage of total capitalization.
The accompanying notes are an integral part of these consolidated statements.
PAGE 17
WASHINGTON NATURAL GAS COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CAPITALIZATION
JUNE 30, 1996 AND 1995 (Unaudited)
(Continued)
June 30,
------------------
1996 1995
-------- --------
LONG-TERM DEBT: (in thousands)
First mortgage bonds
9.96% due 1995 - 40,000
8.80% due 1996, retired August 1995 - 25,000
8-1/8% due 1997 3,060 3,200
10-1/4% due 1997, retired December 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 -
6.58% due 2006 10,000 -
7.02% and 7.04% due 2007 25,000 -
6.61% and 6.62% due 2009 8,000 -
7.12% due 2010 7,000 -
7.35% and 7.36% due 2015 12,000 -
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) (65,140)
-------- --------
Total long-term debt 344,920 265,060
-------- --------
48%* 43%*
TOTAL CAPITALIZATION $711,354 $618,187
======== ========
*Percentage of total capitalization.
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 NINE MONTHS ENDED
JUNE 30, 1996 AND 1995 (Unaudited)
Three Months Ended Nine Months Ended
June 30, June 30,
------------------ ------------------
1996 1995 1996 1995
-------- -------- -------- --------
(in thousands) (in thousands)
CASH FLOW FROM OPERATING ACTIVITIES:
Net income (loss) $ 3,540 $ (1,900) $ 38,377 $ 28,604
Adjustments to reconcile net income
(loss) to net cash provided by
(used in) operating activities:
Depreciation and amortization 9,007 8,507 27,047 25,652
Provision for uncollectible
accounts receivable 299 181 894 848
Deferred federal income taxes 1,312 (1,081) 15,503 14,094
Changes in:
Accounts receivable 19,047 3,555 5,027 (4,031)
Current federal income taxes
receivable/payable 460 (2) 3,817 (2)
Purchased gas receivable/liability 5,076 (2,158) 33,763 43,276
Environmental expenditures, net of
recoveries (97) (744) (363) (4,949)
Accounts payable 1,830 3,320 (8,900) 4,969
Materials and supplies (3,221) (6,346) 10,730 3,322
Deferred charges (5,469) (1,546) (10,627) (3,466)
Other assets and liabilities (5,164) (1,968) (525) (5,102)
Other (186) (208) (404) (985)
-------- -------- -------- --------
Total adjustments 22,894 1,510 75,962 73,626
-------- -------- -------- --------
Net cash provided by (used in)
operating activities 26,434 (390) 114,339 102,230
-------- -------- -------- --------
CASH FLOW PROVIDED BY (USED IN)
INVESTING ACTIVITIES:
Utility plant additions (23,462) (16,442) (62,956) (50,967)
Proceeds from disposition of fixed
assets 233 237 584 530
-------- -------- -------- --------
Net cash used in investing
activities (23,229) (16,205) (62,372) (50,437)
-------- -------- -------- --------
PAGE 19
WASHINGTON NATURAL GAS COMPANY AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
FOR THE THREE AND NINE MONTHS ENDED
JUNE 30, 1996 AND 1995 (Unaudited)
(Continued)
Three Months Ended Nine Months Ended
June 30, June 30,
------------------- ------------------
1996 1995 1996 1995
-------- -------- -------- --------
CASH FLOW PROVIDED BY (USED IN) FINANCING (in thousands) (in thousands)
ACTIVITIES:
Proceeds from issuance of:
Common stock 970 1,173 2,831 3,906
First mortgage bonds - - 34,609 -
Changes in receivables and payables
with affiliated companies, net 3,804 16,622 (44,313) (27,238)
Redemptions of first mortgage bonds - - (30,140) (20,140)
Cash dividend payments:
Common (5,525) - (11,037) -
Preferred (1,755) - (5,265) (4,735)
-------- -------- -------- --------
Net cash provided by (used in)
financing activities (2,506) 17,795 (53,315) (48,207)
-------- -------- -------- --------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 699 1,200 (1,348) 3,586
Beginning cash and cash equivalents 1,524 2,813 3,571 427
-------- -------- -------- --------
Ending cash and cash equivalents $ 2,223 $ 4,013 $ 2,223 $ 4,013
======== ======== ======== ========
SUPPLEMENTAL DISCLOSURES OF
CASH FLOW INFORMATION -
Cash paid during the period for:
Interest (net of amount capitalized) $ 7,074 $ 5,279 $ 20,375 $ 20,709
Income taxes - - - -
The accompanying notes are an integral part of these consolidated statements.
PAGE 20
WASHINGTON NATURAL GAS COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMMON SHAREHOLDER'S
EARNINGS REINVESTED IN THE BUSINESS
FOR THE THREE AND NINE MONTHS ENDED
JUNE 30, 1996 AND 1995 (Unaudited)
Three Months Ended Nine Months Ended
June 30, June 30,
------------------- ------------------
1996 1995 1996 1995
-------- -------- -------- --------
(in thousands) (in thousands)
Balance at beginning of period $ 54,680 $ 45,024 $ 28,865 $ 18,137
Net income (loss) 3,540 (1,900) 38,377 28,604
Dividends declared:
Common stock (5,525) - (11,037) -
Cumulative preferred stock:
7.45%, Series II (1,118) (1,118) (3,352) (3,354)
8.50%, Series III (637) (636) (1,913) (2,017)
-------- -------- -------- --------
Balance at end of period $ 50,940 $ 41,370 $ 50,940 $ 41,370
======== ======== ======== ========
WASHINGTON NATURAL GAS COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF PREMIUM ON COMMON STOCK
FOR THE THREE AND NINE MONTHS ENDED
JUNE 30, 1996 AND 1995 (Unaudited)
Three Months Ended Nine Months Ended
June 30, June 30,
------------------- ------------------
1996 1995 1996 1995
-------- -------- -------- --------
(in thousands) (in thousands)
Balance at beginning of period $169,274 $166,104 $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 143 151 278 288
Excess of purchase price over par
value of shares of common stock
issued under the parent company's
Dividend Reinvestment and Stock
Purchase Plan 657 774 2,083 2,933
Common and preferred stock expense - (3) (39) (173)
-------- -------- -------- --------
Balance at end of period $170,074 $167,026 $170,074 $167,026
======== ======== ======== ========
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)
June 30, 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
subsidiaries, 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 $5,512,000 to
Washington Energy in February 1996 and $5,525,000 in June 1996. At June 30,
1996, Washington Natural had retained earnings of $9,572,000 in excess of the
level specified in the most restrictive indenture covenant.
(b) Expense for Preferred Dividends of Subsidiary
Washington Energy's accounting method is to expense the preferred dividend
requirements of Washington Natural ratably during the fiscal year.
PAGE 22
(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.
The following table summarizes total expected costs, costs incurred and
recorded through June 30, 1996, expected recoveries from insurance companies
and other parties and actual recoveries through June 30, 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 $43,555 $ 3,250 $ 2,000 $ 1,000
Actual costs to June 30, 1996 43,555 460 1,717 92
------- ------- ------- -------
Balance expected to be incurred $ - $ 2,790 $ 283 $ 908
======= ======= ======= =======
Expected recoveries from insurance
companies and other parties $41,980 $ 3,250 $ 2,000 $ 1,000
Actual recoveries to June 30, 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
PAGE 23
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.
In June 1991, Washington Natural filed a lawsuit in King County Superior
Court, State of Washington, against certain insurance companies that provided
insurance applicable to the Tideflats 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 was entitled to collect its present and future uncompensated
reasonable and necessary costs in remediating the site from the policies of
certain insurer defendants in the action. During 1995, Washington Natural
settled its lawsuit with the insurance carriers regarding coverage of the
Tideflats remediation costs. In September 1995, Washington Natural received
approximately $29,000,000 in final settlement of all claims against insurance
carriers regarding this site. This final settlement, along with $11,683,000,
brought the total recoveries from insurance carriers and other potentially
responsible parties to $40,683,000.
Washington Natural as of June 30, 1996, expects to receive approximately
$1,297,000 from the sale of equipment and reimbursement from another
responsible party at the site. Additionally, Washington Natural seeks
recovery of unrecovered financing and direct remediation costs against other
third parties historically associated with the site which are potentially
responsible parties. Washington Natural, under an agreement with the
Washington Utilities and Transportation Commission ("WUTC"), will seek
recovery in future customer rates of the remediation costs which are not
reimbursed by third parties.
(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 was completed in June 1996. This analysis indicated that the
reserve for investigation and remediation costs of $3,250,000 previously
established is sufficient to cover the expected remediation costs at the site.
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 had
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
has continued to monitor groundwater at the site during the spring and summer
of 1996 in order 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
PAGE 24
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.
(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.
During the quarter ended June 30, 1996, Washington Natural increased the
recorded estimated liability to $700,000 and the expected insurance recovery
to $700,000.
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 June 30, 1996, include
environmental receivables totaling $8,681,000 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
PAGE 25
result in a material adverse impact on the Company's or Washington Natural's
financial position, operating results or cash flow trends.
(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
alleged a claim under Washington's Model Toxics Control Act, which allows 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 asserted
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. The WDOT has said it will not appeal the May 3,
1996 decision; therefore, this action has been favorably resolved.
(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. On July
25, 1994, the District Court issued an Order Granting Defendants' Motion To
Dismiss and entered a judgment dismissing the action. The plaintiffs appealed
to the Court of Appeals. On May 15, 1996 the Court of Appeals upheld
Washington Natural's motion to dismiss. There is no indication at this time
that the plaintiffs will pursue a further appeal to the U.S. Supreme Court.
PAGE 26
(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 appeal of the District Court decision.
The parties, on November 22, 1995, filed briefs with the Court of Appeals.
Oral arguments were presented on August 8, 1996. 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 June 30,
1996, payments of $435,000 were made to former employees. The remaining
reserve of $1,491,000 at June 30, 1996 will be fully utilized by future
payment of severance benefits which are being paid over time based on the
terms of individual severance agreements.
(7) 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. The merged company will be named
Puget Sound Energy ("PSE") and would create a combination utility serving
more than 848,000 electric customers and more than 488,000 gas customers in
the state of Washington. See Exhibit 99 for pro forma financial information
of the merged company.
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 was structured to qualify as a pooling-of-interests. As
of June 30, 1996, Washington Energy and Washington Natural have incurred
$6,330,000 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 for regulatory purposes but will be expensed for financial
reporting purposes. These costs have been deferred and are included in
deferred charges and other assets, pending consummation of the merger.
PAGE 27
Included as Exhibit 99 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 gives effect to the
merger as if it had occurred at the balance sheet date. The unaudited pro forma
condensed consolidated statements of income for the six months and twelve months
ended June 30, 1996, give effect to the merger as if it had occurred on July 1,
1995. 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 costs to achieve these savings including merger transaction
and transition costs, over a ten-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 be completed prior to
the end of calendar 1996 with an order to be issued in late 1996 or 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 (HSR), and the expiration of the applicable
waiting periods. Washington Energy and Puget filed the required HSR documents
on July 15, 1996. As of August 14, 1996, the filing is still pending with the
Department of Justice and the Federal Trade Commission.
PAGE 28
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
June 30, 1996 was $84,000, compared to the net loss of $5.6 million for the
same quarter a year ago. Net income of the principal subsidiary, Washington
Natural Gas Company ("Washington Natural"), was $3.5 million for the quarter,
an improvement of $5.4 million compared to the net loss of $1.9 million for
the same period last year.
The increase in net income resulted primarily from more normal weather
conditions, the May 1995 general rate increase of $17.7 million (on an annual
basis), and continuing customer growth. During the current quarter
temperatures were 2 percent colder than normal compared to 25 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 nine months ended June 30,
1996, increased $9.3 million compared to net income of $18.9 million the same
period one year ago. Earnings per share of $1.17 increased from $.79. The
Company's results for the current nine-month period benefited from more normal
weather in the second and third quarters but were adversely impacted due to
the unseasonably warm weather in the first quarter ended December 31, 1995.
Washington Natural's net income for the current nine-month period of $38.4
million increased $9.8 million compared to the net income of $28.6 million for
the same period last year.
Operating Revenues
The Company's operating revenues of $84.5 million for the quarter ended June
30, 1996 were up $5.6 million from the same quarter in the prior year. Gas
revenues increased 5 percent, from $75.1 million to $78.7 million, while total
gas volumes increased 15 percent, from 169 million therms sold to 195 million
therms sold. Gas volumes increased primarily due to more normal weather and
customer growth. However, gas revenues for the current quarter did not
increase proportionately to the increase in gas volumes due to the shifting
of customers among rate schedules, primarily from interruptible gas sales to
transportation service and the implementation of a purchased gas adjustment in
May 1995. As a result of the rate redesign implemented in May 1995,
Washington Natural earns generally the same margin on transportation service
as it does on interruptible large volume gas sales. Accordingly, margin was
favorably impacted by the increased gas volumes. The purchased gas adjustment
(PGA) passes on to customers over a two-year period, in the form of lower
rates, the difference between 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.
Utility margin (regulated utility sales less the cost of gas sold) of $45.3
million increased $6.4 million compared to the same quarter last year. The 16
percent increase in utility margin resulted from a 15 percent increase in
total gas volumes due to more normal weather conditions, the May 1995 general
rate increase and continued customer growth.
For the nine months ended June 30, 1996 revenues of $367.3 million decreased
$25.3 million or approximately 6 percent even though total gas volumes were up
4 percent from the prior year. As discussed above, the shifting from
interruptible sales to transportation service and the PGA resulted in a
PAGE 29
decrease in revenue despite an increase in gas volumes due to more normal
weather and customer growth. Utility margin for the nine months increased by
$14.6 million or 8 percent due primarily to the general rate increase and a 4
percent increase in the average number of customers.
Operating Expenses
The Company's operating expenses of $72.2 million for the three months ended
June 30, 1996, including federal income taxes, remained relatively unchanged
compared to the three months ended June 30, 1995. The Company experienced a
decrease in the cost of gas sold of $2.8 million as a result of a lower
weighted average cost of gas established in the May 1995 PGA implementation.
This was offset by a $3.5 million increase in federal income tax expense due
to higher pre-tax income. For the nine months ended June 30, 1996 operating
expenses of $303.2 million were down $35.4 million due to a $41.3 million
decrease in the cost of gas sold, offset by $5.8 million in additional income
taxes due to higher pre-tax income.
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 $63.0
million for the nine months ended June 30, 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 nine-month period, cash flow from operations after
dividends were sufficient to fund capital expenditures excluding $4.5 million
which were funded through long-term debt.
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 $118 million was unused at
June 30, 1996; an uncommitted bank credit arrangement of $25 million, all of
which was available at June 30, 1996; and a committed agreement to sell up to
$90 million of merchandise and gas receivables, of which $58 million was
unused at June 30, 1996. The terms of the committed revolving credit
agreement limit the Company's total borrowing capacity, which includes long-
term debt notes payable and commercial paper, to 65 percent of total
capitalization. At June 30, 1996, Washington Energy had the capacity to
increase total borrowing by only $28 million as a result of this overall debt
limitation. Due to operational strategies, management believes that the
overall debt limitation will not adversely impact anticipated financing
requirements. The borrowing capacity under the committed agreement to sell
receivables is effectively limited by the availability of receivables to sell.
At June 30, 1996, Washington Natural had $500,000 of eligible receivables
which had not been sold under the arrangement.
PAGE 30
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 June 30, 1996 accounts receivable balance of $15.1 million reflects a
decrease of $5.4 million from September 30, 1995 and a $4 million decrease
from June 30, 1995 because more receivables were sold during the current
quarter.
The purchased gas liability (a liability to customers related to the purchased
gas adjustment mechanism) of $49.3 million at June 30, 1996 has increased from
$15.6 million at September 30, 1995. This is due primarily to the actual
purchase of gas during the nine months at a cost lower than the cost of gas
authorized in Washington Natural's rates.
Notes payable and commercial paper of $132 million at June 30, 1996 were down
$30 million from September 30, 1995 primarily due to positive cash flow from
the purchase gas adjustment mechanism.
Materials and supplies inventory at June 30, 1996 were $21 million compared to
$32 million as of September 30, 1995 due to the seasonal reduction in natural
gas stored underground.
Deferred charges of $31.7 million at June 30, 1996 have increased from $19.9
million at September 30, 1995 due primarily to $6.3 million of merger related
costs.
FUTURE OUTLOOK
(a) Proposed Merger
Washington Energy and Washington Natural have agreed to merge into Puget Sound
Power and Light Company ("Puget") as discussed in Note 7 of the Notes to
Consolidated Condensed Financial Statements.
(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 June 1996. Operating
earnings have benefited from the $17.7 million general rate increase approved
in May 1995. The weather patterns in Washington Natural's service territory
have approximated normal except for the quarter ended December 31, 1995, which
was significantly warmer than normal. If normal weather patterns continue and
the current cost structure remains stable, Washington Natural's earnings
should be positively impacted. Also, the Company expects utility customer
growth of about 4 percent, or 16,000 to 19,000 new customers for fiscal 1996.
PAGE 31
COMMON DIVIDEND
The Company paid a dividend of 25 cents in each of the quarters ended June 30,
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, Puget
Sound Energy (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.
* * *
The statements regarding financial performance and results and other
statements which are not historical facts contained in this document are
forward-looking statements that involve risk and uncertainties, including but
not limited to market factors, regulatory uncertainties, weather, interest
rates, future operating costs and other factors.
PAGE 32
PART II - OTHER INFORMATION
Item 5. Other Information -
Washington Natural's ratios of earnings to fixed charges for the twelve months
ended June 30, 1996 and June 30, 1995 were 2.17 and 1.83, respectively.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
12. Washington Natural's 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 Financial Statements of Puget Sound Energy After the
Merger of Washington Energy and Puget.
(b) Reports on Form 8-K.
A report on Form 8-K was filed by Washington Energy and Washington
Natural on May 15, 1996, regarding the Company's operating results for
the quarter ended March 31, 1996.
PAGE 33
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
August 14, 1996