1
PAGE 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
____
Form 10-K
____
X Annual report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 (Fee Required)
For the fiscal year ended September 30, 1994
or
___ Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 (No Fee Required)
For the transition period from ____________ to ____________.
I.R.S.
Commission Employer
File Exact Name of Registrant as State of Identification
Number Specified in Its Charter Incorporation Number
- ---------- ------------------------------ ------------- --------------
001-11227 Washington Energy Company Washington 91-1005304
001-11271 Washington Natural Gas Company Washington 91-1005303
Address of Principal Executive Offices Zip Code
- -------------------------------------- --------
815 Mercer Street, Seattle, Washington 98109
Registrants' Telephone Number, Including Area Code
--------------------------------------------------
(206) 622-6767
Securities registered pursuant to Section 12(b) of the Act:
Name of Each Exchange
Title of Each Class on Which Registered
------------------- ---------------------
Common Stock, $5 Par Value of New York Stock Exchange
Washington Energy Company
7.45% Preferred Stock, New York Stock Exchange
Series II, $25 Par Value of
Washington Natural Gas Company
8.50% Preferred Stock, New York Stock Exchange
Series III, $25 Par Value of
Washington Natural Gas Company
Securities registered pursuant to Section 12(g) of the Act: None
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 by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Washington Energy Company's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. X
Aggregate market value of the voting stock held by non-affiliates of Washington
Energy Company, computed by reference to the average of the high and low prices
of such stock on December 14, 1994: $308,480,000.
Indicate the number of shares outstanding of each of the registrant's classes
of common stock, as of the latest practicable date.
Outstanding
Registrant Title of Stock December 14, 1994
- ------------------------------ -------------- -----------------
Washington Energy Company $5 par value 23,826,205
Washington Natural Gas Company $5 par value 10,774,599
Documents Incorporated by Reference: None
____
2
PAGE 2
TABLE OF CONTENTS
PART I Page No.
Item 1. Business
(a) General Development of Business . . . . . . . . . 4
(b) Financial Information About Industry Segments . . 4
(c) Description of Business - Washington Natural
Gas Company . . . . . . . . . . . . . . . . . 4
(1) Territory Served . . . . . . . . . . . . 5
(2) Competitive Conditions . . . . . . . . . 5
(3) Customer Usage . . . . . . . . . . . . . 6
(4) Employee Relations . . . . . . . . . . . 6
(5) Franchises . . . . . . . . . . . . . . . 6
(6) Environmental Matters . . . . . . . . . . 7
(7) Gas Supply . . . . . . . . . . . . . . . . 8
General . . . . . . . . . . . . . . . 8
Pipeline and Other Gas Supply Sources 8
(8) Regulation and Rates . . . . . . . . . . . 10
(9) Merchandise Marketing . . . . . . . . . . 12
(10) New Construction . . . . . . . . . . . . 12
(11) Utility Operating Statistics . . . . . . . 13
Description of Business - Oil and Gas
Exploration and Production . . . . . . . . . 14
Description of Business - Merchandise and Energy
Efficiency Products . . . . . . . . . . . . . 15
Description of Business - Coal and Other
Businesses . . . . . . . . . . . . . . . . . 16
Description of Business - Discontinued Biowaste
Business . . . . . . . . . . . . . . . . . . 17
(d) Financial Information About Foreign and
Domestic Operations and Export Sales . . . . 17
3
PAGE 3
TABLE OF CONTENTS (Continued)
PART I Page No.
Item 2. Properties . . . . . . . . . . . . . . . . . . . . 17
Item 3. Legal Proceedings . . . . . . . . . . . . . . . 18
Item 4. Submission of Matters to a Vote of Security Holders 19
Executive Officers of the Registrants . . . . 20
PART II
Item 5. Market for Registrant's Common Stock and Related
Stockholder Matters . . . . . . . . . . . . . 21
Item 6. Selected Financial Data . . . . . . . . . . . . . 22
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations . . . . 24
Item 8. Financial Statements and Supplementary Data . . 33
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure . . . 73
PART III
Item 10. Directors and Executive Officers of the
Registrants . . . . . . . . . . . . . . . . . 74
Item 11. Executive Compensation . . . . . . . . . . . . . 77
Item 12. Security Ownership of Certain Beneficial Owners
and Management . . . . . . . . . . . . . . . 83
Item 13. Certain Relationships and Related Transactions . 83
PART IV
Item 14. Exhibits, Financial Statement Schedules and
Reports on Form 8-K . . . . . . . . . . . . . 84
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 96
4
PAGE 4
NOTE: All references to years and quarters in this filing are on the basis of
a fiscal year ended September 30 unless otherwise indicated.
PART I
Item 1. Business
(a) General Development of Business
Washington Energy Company ("Company") or ("Washington Energy") is a holding
company whose principal subsidiary is engaged in the retail distribution of
natural gas. The Company, through other subsidiaries, is also engaged in the
business of selling gas appliances, energy efficient and security products for
the home; holds an equity position in a publicly traded oil and gas exploration
and production company; and holds certain coal-related investments. The
Company is exempt from the provisions of the Public Utility Holding Company Act
of 1935 ("Act"), except with respect to acquisition of securities of other
public utility companies as defined in such Act.
The Company was incorporated in 1977 and acquired the common stock of
Washington Natural Gas Company ("Washington Natural") and its wholly- owned
subsidiaries through a merger in 1978. Washington Natural and its predecessors
have manufactured and distributed gas and subsequently distributed natural gas
in the Puget Sound region since prior to the turn of the century. Washington
Natural entered the gas appliance sales business in the late 1950s when natural
gas became available in the region. In response to higher prices for and
reduced availability of natural gas in the early 1970s, Washington Natural,
through its former subsidiaries, entered the oil and gas exploration and
production business, the energy-efficiency products business and initiated its
coal-related investments. As part of a change in business strategy, the
Company, in 1994, sold its biowaste technology business started in 1984, merged
its oil and gas subsidiary, Washington Energy Resources Company ("Resources"),
with a subsidiary of Cabot Oil & Gas Corporation ("Cabot") and combined its
appliance sales, energy efficiency products and home security businesses in a
new subsidiary, Washington Energy Services Company ("Services") in October
1993.
The Company's and Washington Natural's principal executive offices are located
at 815 Mercer Street, (P.0. Box 1869), Seattle, Washington 98111, and their
telephone number is (206) 622-6767. This Form 10-K is filed on behalf of the
Company and Washington Natural, which companies are referred to herein as
Registrants.
(b) Financial Information About Industry Segments
See Note 17 of Notes to Financial Statements on page 71.
(c) Description of Business
Washington Natural Gas Company
Washington Natural is engaged predominately in the distribution of natural gas
at the retail level.
5
PAGE 5
(1) Territory Served
Washington Natural distributes natural gas in the service area extending for
approximately 150 miles from north to south in the Puget Sound area of
Washington which accounts for approximately 2,619 square miles, or 3.9% of the
state's land area. The five counties in which Washington Natural's service
area is located have a total estimated population of 3,014,400 (57% of the
state's population). During 1994, Washington Natural served an average of
444,623 customers.
The four largest cities served are Seattle, Bellevue, Tacoma, and Everett.
Metropolitan Seattle, Washington Natural's major service area with 39% of
Washington Natural's customers, accounted for 41% of its total 1994 revenues.
The Bellevue area, with 23% of the customers, contributed 20% of 1994 revenues.
The Tacoma area, with 12% of the customers, accounted for 15% of 1994 revenues.
The Everett area supplied 7% of the customers and 8% of revenues for such
period.
(2) Competitive Conditions
The natural gas business competes with oil for industrial uses and space
heating, with electricity for drying, cooking, water heating and space heating,
and with wood for residential space heating. Although Washington Natural has
no direct competition from others distributing natural gas in the territory it
now serves, it does compete with gas marketers in the sale but not the delivery
or transportation of natural gas. Large industrial and commercial end-users
also have the option to bypass Washington Natural's system by constructing
pipelines to interconnect directly with the interstate pipeline which
transports all the natural gas consumed in the region.
Washington Natural currently has a significant competitive price advantage over
both electricity and fuel oil in its service territory. In a recent Washington
Natural survey of residential energy costs, fuel oil for space heating was
approximately 22% more expensive than gas, and electricity for residential
space heating was up to 150% more expensive than gas. Conversions of
residential users to gas from oil and electricity remain an important source of
new customer additions, with approximately 9,000 residential users converting
to gas in 1994. Washington Natural successfully competes with all the electric
utilities in its service area for new customers in the housing construction
market, with approximately 12,100 new homes utilizing gas for space and water
heating in 1994. Washington Natural's overall market share of the new
single-family home construction market in its service territory exceeded 75%
for 1994. Where gas is available, Washington Natural has an approximate 99%
share of the new single-family home construction market. Since natural gas
costs substantially less than electricity for home space and water heating
throughout its service area, Washington Natural expects that its share of the
new home market will continue at approximately 75%, and that conversions of
existing homes to gas will continue to be a major source of new customers. In
1994, Washington Natural's customer base grew by approximately 21,000 new
customers, or 5%.
Washington Natural began offering gas transportation service to its industrial
customers in 1986. Washington Natural's wholesale gas supplier at the time,
Northwest Pipeline Corporation ("Pipeline"), provided "open access" to its
system under interim federal regulations that enabled Washington Natural to
provide such service. The Federal Energy Regulatory Commission ("FERC")
granted Pipeline permanent authority to provide transportation service to
6
PAGE 6
distribution companies and end users in 1988. The availability of both firm
and interruptible transportation service, which enables industrial end users to
purchase low cost gas supplies directly from U.S. and Canadian producers, is an
important factor in maintaining gas usage by those end users during periods of
low residual oil prices. Cost savings from purchasing gas in the spot
(short-term interruptible) market also enable Washington Natural to retain as
gas sales customers, industrial end users that have a choice of fuel.
Continued evolution in the natural gas industry, resulting primarily from FERC
Orders 436, 500 and 636, has served to increase the ability of large gas end
users to bypass Washington Natural in obtaining gas supply and transportation
services. Nevertheless, to date, Washington Natural has not lost any
substantial industrial load as a result of bypass. Further, most industrial
users that have a choice of alternate fuels have remained on gas due to price
and other considerations.
In November 1993, Washington Natural began offering transportation services on
its distribution system under a new transportation tariff. While in the past
as many as 160 customers annually have taken advantage of the potential savings
provided by transportation service, as of October 1994, approximately 50
commercial and industrial customers have chosen to receive only transportation
service. Most customers have chosen to remain either firm or interruptible gas
sales customers of Washington Natural.
Natural gas will continue to play a prominent energy role in the Pacific
Northwest due to the abundant supplies available at competitive prices. In the
short term, competition with oil in the industrial market will continue but
should lessen due to increasingly stringent air quality control measures in
Washington Natural's service area.
(3) Customer Usage
Washington Natural's operating revenues and earnings vary with weather
conditions, particularly in the winter months, because over 90% of its
customers use natural gas for space heating.
(4) Employee Relations
As of November 30, 1994, Washington Energy had 1,413 employees of which 1,294
were employed by Washington Natural. During 1994 Washington Natural reduced
overall staffing by 12%, across all employee classifications. Washington
Natural has 877 employees organized within eight local unions with which it has
collective bargaining agreements. Three collective bargaining agreements are
currently under negotiation; one expires in March 1995 and the remaining four
expire in April 1995.
(5) Franchises
Washington Natural holds nonexclusive franchises from all but one of the
incorporated communities it services, excluding those communities in which
franchise renegotiations are in progress. The Seattle franchise is perpetual
and franchises covering other municipalities generally run for terms of 25
years. Washington Natural also holds certain franchises and revocable permits
issued by the Washington State Department of Transportation covering Washington
Natural's facilities located upon state highway rights-of-way. In addition to
the franchises mentioned, Washington Natural holds a Certificate of Public
Convenience and Necessity granted by the Washington Utilities and
Transportation Commission ("WUTC") to serve the area in which its distribution
system is located.
7
PAGE 7
(6) Environmental Matters
Washington Natural has principal responsibility for the cleanup of a former
manufactured gas plant site in the Tideflats area of Tacoma, Washington, which
the U.S. Environmental Protection Agency has determined contains several
contaminants and requires cleanup under the Comprehensive Environmental
Response, Compensation and Liability Act. Subsequent to fiscal year end,
remediation activities have been substantially completed. Based upon cleanup
cost estimates at fiscal year end and the cost of insurance litigation,
described below, less insurance settlements totaling $7.1 million, Washington
Natural's share of the cleanup cost at this site was estimated to be $33.6
million. In 1994, Washington Natural recorded a current liability for the
difference between the estimated total unrecovered cleanup cost and the $28.0
million of expenditures incurred through the end of the fiscal year, and also
recorded a corresponding receivable in the amount of $33.6 million for the
probable insurance recovery based upon the litigation described below.
In June 1991, Washington Natural filed a lawsuit in King County Superior Court,
State of Washington, against certain insurance companies that provided
insurance to Washington Natural at various times dating back to the 1940's. On
June 10, 1994, the Superior Court entered final judgement in favor of
Washington Natural. Under the terms of the final judgment, Washington Natural
is entitled to collect its present and future uncompensated reasonable and
necessary costs in remediating the site from the policies of the insurer
defendants in the action other than those that previously settled with
Washington Natural. The liability of these insurers is joint and several, up
to the annual limits of their policies and subject to relevant underlying
limits. The judgment provides for limitation of some of the insurers'
liability based on the presence in their policies of "owned property" or
"alienated premises" clauses. However, Washington Natural does not expect this
limitation to affect its ability to collect all of its remediation costs. The
final judgment further awards Washington Natural prejudgment interest and
declares that Washington Natural is entitled to collect its reasonable attorney
fees and costs incurred in obtaining coverage of its remediation costs. The
defendants have appealed the judgment to the Washington State Court of Appeals.
In the June 1994 quarter, Washington Natural also accrued $2.2 million before
income tax for estimated environmental investigation, legal and remediation
costs associated with certain former manufactured gas plant sites, one of which
is located in Everett, Washington. The Everett site is the subject of a
remedial investigation and feasibility study that is scheduled for completion
in June 1995. Washington Natural cannot reasonably estimate the extent or
range of future remediation costs, if any, at the Everett site until more
information is known from the remedial investigation and feasibility study.
Based on all known facts and analyses, Washington Natural believes it is not
reasonably likely that the identified environmental liabilities, after
consideration of insurance recoveries and the judgment entered against certain
insurance companies, will result in a material adverse impact on Washington
Natural's financial position or operating results and cash flow trends.
8
PAGE 8
(7) Gas Supply
General
Washington Natural currently purchases a blended portfolio of long-term firm,
short-term firm, and spot gas supplies from over 20 major or independent
producers (third-party purchases). Until October 8, 1992, Washington Natural
purchased firm gas supply from its affiliate, Washington Energy Exploration,
Inc. ("Exploration"), a subsidiary of Resources. Until October 31, 1993,
Washington Natural purchased firm gas supply from Pipeline under its firm sales
agreement. All of Washington Natural's gas supply is transported through
Pipeline under long-term firm transportation arrangements.
For baseload and peak-shaving purposes, Washington Natural supplements its
portfolio of firm gas supply by purchasing natural gas at generally lower
prices in summer, injecting it into storage facilities and withdrawing it in
the winter heating season. The storage facilities at Jackson Prairie in
Washington (which is one-third owned by Washington Natural) and at Clay Basin
in Utah are used for this purpose. Peaking needs are also met by using
Washington Natural's gas held in Pipeline's liquefied natural gas facility at
Plymouth, Washington, and by producing propane air gas at a plant owned by
Washington Natural and located on its distribution system. All of the peaking
supplies (except propane air gas) are delivered to Washington Natural under
firm transportation arrangements with Pipeline.
Pipeline and Other Gas Supply Sources
Prior to July 1991, Washington Natural was entitled to 150,000 MMBtu (million
British thermal units) per day of firm gas supply under its primary firm sales
service agreement with Pipeline. In July 1991, Washington Natural elected to
convert this agreement to firm transportation service. This conversion was
part of the transition subsequently contemplated by FERC Order 636. In May
1992, the FERC issued an order approving this conversion, subject to certain
conditions. Subsequently, Pipeline and substantially all of its sales
customers, including Washington Natural, requested FERC to remove certain of
these conditions. In October 1992, FERC issued an order removing these
conditions but imposing certain other conditions. As a result, on November 1,
1992, approximately 50% of the conversion became effective such that Washington
Natural's entitlement to firm sales service was reduced from 150,000 MMBtu per
day to 75,936 MMBtu per day, and its firm transportation capacity was increased
to 268,597 MMBtu per day. Pipeline and affected sales customers, including
Washington Natural, sought removal of the remaining conditions affecting the
conversion. Orders subsequently issued by the FERC eliminated or resolved the
remaining conditions such that the conversion process was completed on October
31, 1993. At that time, Washington Natural's firm transportation capacity
increased to 444,533 MMBtu per day, and its pipeline sales entitlement was
reduced to zero. Washington Natural's firm transportation capacity entitlement
had earlier been increased by 100,000 MMBtu per day on April 1, 1993, when
Pipeline expansion facilities were placed in service. Pursuant to a settlement
approved by the FERC in May 1994, Washington Natural holds additional firm
seasonal transportation capacity totalling 258,872 MMBtu per day which is
available exclusively to deliver gas from peaking resources. In addition,
Washington Natural has a transportation service agreement with Pipeline for
220,000 MMBtu per day of interruptible transportation capacity. Washington
Natural's firm transportation capacity contracts with Pipeline have remaining
terms ranging from 10 to 14 years. However, Washington Natural either has the
unilateral right to extend its firm
9
PAGE 9
and interruptible transportation contracts under their terms or the right of
first refusal to extend such contracts under current FERC orders.
Effective November 1, 1992, Washington Natural took assignment of contracts
from Pipeline for approximately 25,000 MMBtu per day of firm gas supply in the
Rocky Mountain supply region. The balance of Washington Natural's firm gas
supply, related to that portion of the conversion to transportation which took
place November 1, 1992, was sourced after that date from Washington Natural's
firm storage service at Clay Basin. Upon completion of the conversion
arrangements with Pipeline on October 31, 1993, Washington Natural took direct
control of its pro-rata share of the remaining gas supplies formerly contracted
to and managed by Pipeline. Washington Natural has also taken an assignment of
rights to approximately 78,000 MMBtu per day of firm supply originating in
Alberta, Canada, and the associated Pacific Gas Transmission Co. ("PGT") firm
pipeline capacity to deliver this supply to Pipeline. About 60% of the firm
supply purchased directly by Washington Natural from producers is Canadian,
primarily from British Columbia. The remainder is purchased from domestic
sources.
Order 636 provides, among other provisions, a complete "unbundling" of
interstate pipeline services. The greatest operating impacts of Order 636 on
Washington Natural are the implementation of a new design of Pipeline's rates
that allows Pipeline to recover all of its fixed costs through demand charges
for capacity and a mechanism for the release and resale by Washington Natural
of any temporary excess firm capacity. Washington Natural does not expect a
significant economic impact as a result of Order 636 due to Washington
Natural's relatively high utilization factor and the mitigation effects
afforded by the capacity release mechanism. Washington Natural has and will
continue to pursue the timely release of contracted pipeline capacity, when
warranted, either through pre-arranged assignments or via open market bidding.
To the extent that Washington Natural is able to release capacity, it will
allow for Washington Natural's recoupment of a portion of the costs associated
with any temporary excess firm pipeline capacity.
Washington Natural expects that all of its peak day requirements for
residential, commercial and small industrial markets will be met by firm gas
purchase contracts with third-party suppliers capable of providing reliable
supply at reasonable prices as well as through its firm storage service.
Washington Natural believes that with its portfolio of contracts for firm
supply (including those which were assigned to Washington Natural by Pipeline
upon conversion), its ability to purchase incremental firm supplies, and its
storage and other available peak-shaving facilities, it will be able to meet
anticipated growth in the requirements of firm customers for the foreseeable
future. Washington Natural is committed to securing least cost sources of gas
supply, including demand side management resources, to serve the needs of its
firm customers.
During 1994, the approximate weighted average cost of short-term spot gas
delivered to Washington Natural's market averaged $1.84 per MMBtu. During
1994, the approximate weighted average cost of firm supply delivered to
Washington Natural's market (including Pipeline sales gas, prior to October 31,
1993) averaged $2.51 per MMBtu.
In May 1994, Pipeline was ordered by FERC to modify the allocation of
transition costs, totaling $34 million plus interest, incurred in "unbundling"
interstate pipeline services, comprising supplier settlements recoverable by
Pipeline through fixed charges. Under this order, Washington Natural's share
10
PAGE 10
of these costs would increase from $1.2 million, previously paid, to $10.4
million, inclusive of interest. Washington Natural and six other customers
filed requests for rehearing. Under another proposed alternative allocation
method Washington Natural's share of the these costs would increase by $5.6
million, inclusive of interest. At September 30, 1994, Washington Natural
recorded a liability of $5.6 million for this contingency and an offsetting
regulatory receivable for the same amount as this additional cost is expected
to be fully recoverable in rates through purchased gas cost adjustments. On
December 20, 1994, the request for rehearing was denied by FERC. Washington
Natural is currently reviewing the order to determine what options are
available and what further actions to take.
(8) Regulation and Rates
Washington Natural is subject to the jurisdiction of, and regulation by, the
WUTC, a three-member body appointed by the governor of the state. Such
regulation relates principally to rates; service; issuance of securities;
acquisition, extension and abandonment of facilities; affiliated party
transactions and safety regulations. Under Washington law, the WUTC is
required to act upon rate filings within 11 months of the date of filing.
Since 1971, the WUTC has permitted Washington Natural to pass-on to its
customers, through changes in its rates, any changes in the price of gas it
purchases from independent third parties, using a purchased gas cost adjustment
mechanism. Prior to December 1991, these purchased gas cost adjustments
consisted primarily of pass-throughs of Pipeline rates that had been approved
by FERC. Accordingly, the WUTC recognized the need for immediate relief and
Washington Natural was allowed to pass these cost increases or decreases on to
its customers on a timely basis so that there was no effect on net income. The
overall effect of these adjustments from 1979 through 1990 was to decrease
rates. The purchased gas adjustment filed by Washington Natural in November
1991, which would have reduced rates, was suspended by the WUTC, in part in
order to review affiliated company purchases. As a result of the WUTC's
disallowance of a portion of Washington Natural's costs of such purchases,
Washington Natural no longer purchases gas from affiliates. Since 1991, the
WUTC has authorized two additional purchased gas cost adjustments. The
combined effects of these adjustments substantially increased rates and were
allowed on a timely basis so that there was minimal, if any, effect on net
income.
In July 1992, Washington Natural filed with the WUTC for a general rate
increase, Docket No. UG-920840, requesting an additional 13%, or $41.4 million,
in revenues annually. Of the requested amount, $28.4 million, or 8.9%, was for
general rate relief. The remainder covered new programs such as environmental
cleanup activities, compliance with revisions to safety rules, the replacement
of unprotected steel and cast iron underground pipe, and the development of
public compressed natural gas refueling stations for natural gas vehicles. At
a subsequent date, Washington Natural reduced its rate request to $14.8
million, on an annual basis, primarily in recognition of: (1) the WUTC's
decision to defer for later consideration amounts requested in connection with
environmental cleanup activities and compressed natural gas public refueling
stations; (2) the decline in costs of capital since the original case was filed
in July 1992; and (3) a change in the method for allocating costs to Washington
Natural's non-regulated merchandise and jobbing activities.
11
PAGE 11
On September 27, 1993, the WUTC issued its decision in the rate case and as a
result, Washington Natural decreased its rates by $15.4 million on an annual
basis, effective October 9, 1993. The principal differences between the
Company's rate request and the WUTC's ordered rate reduction were:
(1) an allowed overall rate of return of 9.15% on a rate base of $483.9
million compared to Washington Natural's proposed overall rate of return
of 9.98% on $504.0 million of rate base. This resulted in a difference
of approximately $10 million in annual revenue. Incorporated in the
allowed overall rate of return was a return on common equity of 10.5%
with a capital structure incorporating 44% common equity compared to the
12.0% return on common equity and 45% common equity in the capital
structure proposed by Washington Natural. The rate base difference
resulted from the allocation of additional plant to non-regulated
merchandising activities and the deferral of expenditures for
environmental remediation and safety programs;
(2) the disallowance by the WUTC of Washington Natural's proposed attrition
allowance of $5.2 million in annual revenue;
(3) the adjustments made by the WUTC to reduce the annual revenue
requirement by approximately $19 million as a result of the disallowance
of certain expenses related to advertising, marketing and merchandising
as opposed to Washington Natural's proposed reduction in its annual
revenue requirement of $8 million; and
(4) the acceptance by the WUTC of its Staff's adjustment for normal weather
which differed from Washington Natural's by $4.8 million in annual
revenue. The Staff determined normal weather by averaging the actual
heating degree days for eighteen of the previous twenty years excluding
the years with the greatest and least number of heating degree days.
Washington Natural's determination of normal weather was based on a
fifteen year trended rate for annual heating degree days.
After reviewing the WUTC's decision and giving consideration to filing of a
motion for reconsideration with the WUTC, Washington Natural determined that
the most appropriate way to proceed would be to file a limited-scope general
rate case. This case, Docket No. UG-931405, was filed on November 19, 1993,
and requested a revenue increase of $24.6 million. The primary focus was to
seek recovery of additional operating costs and the inclusion in rate base of
additional utility plant for system improvements and expansion since calendar
year 1991, which was used as the base measurement year in the prior rate case.
On May 27, 1994, the WUTC issued an order approving a settlement of the rate
case. The terms of the settlement agreement provide for a $19.0 million
increase in annual revenues and agreement that Washington Natural will not
request an increase in total revenues prior to March 1, 1995. However,
Washington Natural may make 1) tracking filings caused by changes in purchased
gas and pipeline costs; 2) filings required by law or WUTC order; and 3)
filings for increased revenues if conditions necessary for interim/emergency
relief exist, including conditions which prevent Washington Natural from
financing with unsecured debt.
As a result of the WUTC's September 1993 decision in Docket No. UG-920840,
Washington Natural filed a Transportation Service, Cost of Service and Rate
Redesign Proposal in June 1994. In its September 1993 decision, the WUTC
refused to accept any of the cost of service methodologies proposed, explaining
that the changing nature of the industry, including the separate
12
PAGE 12
and distinct function of providing transportation service, required additional
consideration. Washington Natural's June 1994 filing, in Docket No. UG-940814,
includes proposed rates that, if approved, would better reflect the cost of
serving various classes of customers. This proposal applies a methodology that
takes peak demand costs into consideration in addition to average volumetric
throughput. This Peak and Average approach is, in Washington Natural's
opinion, responsive to the reality of the current natural gas environment and
treats transportation as a separate and distinct function. The filing is
revenue neutral but, as proposed, will shift revenue responsibility and in
turn, costs among customer classes. Proposed rates for transportation service
would decrease by 55% and rates for larger volume industrial sales customers
would decrease by 13%. The request also proposes to raise residential rates
5.7% and firm commercial and industrial rates by 1.8%. The changes in
transportation and industrial rates would make the utility economically
indifferent to customer choices between transportation and sales service. If
approved as proposed, the filing would enhance Washington Natural's ability to
offer rates that would support cost effective and responsible growth. The WUTC
has until May, 1995, to rule on the proposal. Washington Natural also expects
to file a general rate case in March 1995 to address all the costs of operating
the utility. In addition to updating operating costs and rate base to reflect
recent growth, the utility also will request an increase in its allowed rate of
return in light of the recent increases in its cost of capital. The WUTC would
have until February 1996 to act on such a filing.
(9) Merchandise Marketing
In order to address the concerns raised by the WUTC regarding allocations
between Washington Natural's regulated activities and non-regulated merchandise
activities, the merchandise sales business was transferred on October 1, 1993,
to Services, a newly-formed subsidiary of Washington Energy. At that time,
Washington Natural terminated all merchandise sales activity. See Merchandise
and Energy Efficiency Products on page 15.
(10) New Construction
Washington Natural is one of the fastest growing natural gas utilities in the
nation due to economic growth in its service area and the high conversion rate
of existing homes to gas. In 1994, Washington Natural made $84.5 million in
capital expenditures to add new customers and to maintain the reliability and
safety of its distribution system. Washington Natural's estimated capital
spending in 1995 is lower at $79 million because customer growth is expected to
be slightly lower than the prior year. It is expected that capital
expenditures will be initially funded with cash flow from operations and
short-term borrowing. See the Liquidity and Capital Resources section of
Management's Discussion and Analysis of Financial Condition and Results of
Operations on page 29.
13
PAGE 13
(11) Washington Natural Utility Operating Statistics
Year Ended September 30,
----------------------------------------------------------------
1994 1993 1992 1991 1990
-------- -------- -------- -------- --------
Operating Revenues (in thousands):
Residential firm gas sales $206,870 $196,318 $152,015 $160,265 $151,815
Commercial firm gas sales 91,739 87,250 67,393 72,833 70,506
Industrial firm gas sales 28,606 25,209 17,226 20,472 22,052
Interruptible gas sales 51,218 44,160 29,593 43,563 43,523
Transportation 8,569 7,204 11,231 6,783 4,682
Other 9,405 7,712 7,481 7,136 6,754
-------- -------- -------- -------- --------
Total Operating Revenues $396,407 $367,853 $284,939 $311,052 $299,332
======== ======== ======== ======== ========
Customers, Average Number Served:
Residential firm 403,642 383,291 361,454 337,815 313,524
Commercial firm 37,112 35,951 34,503 33,011 31,208
Industrial firm 2,824 2,844 2,857 2,842 2,820
Interruptible 1,009 988 948 1,037 1,041
Transportation 36 68 130 56 40
-------- -------- -------- -------- --------
Average Total Customers 444,623 423,142 399,892 374,761 348,633
======== ======== ======== ======== ========
Gas Volumes (thousands of therms):
Residential firm sales 371,581 382,337 301,887 346,782 288,612
Commercial firm sales 174,729 176,261 142,402 162,915 143,562
Industrial firm sales 62,227 70,013 52,019 49,309 56,195
Interruptible sales 148,641 127,680 78,645 131,278 144,720
Transportation volumes 122,425 145,090 199,143 156,402 108,727
-------- -------- -------- ------- --------
Total Gas volumes 879,603 901,381 774,096 846,686 741,816
Company use 801 848 838 699 700
Unaccounted for 489 (2,318) 660 (2,348) (206)
-------- -------- -------- -------- --------
Total Sendout 880,893 899,911 775,594 845,037 742,310
======== ======== ======== ======== ========
14
PAGE 14
(11) Washington Natural Utility Operating Statistics (Continued)
Year Ended September 30,
----------------------------------------------------------------------
1994 1993 1992 1991 1990
---------- ---------- ---------- ---------- ----------
Average Use Per Customer - Therms:
Residential firm 921 998 835 1,027 921
Commercial firm 4,708 4,903 4,127 4,935 4,600
Industrial firm 22,035 24,618 18,208 17,350 19,927
Interruptible 147,315 129,231 82,959 126,594 139,020
Transportation 3,400,694 2,133,676 1,531,869 2,792,893 2,718,175
Average Revenue Per Customer:
Residential firm $ 513 $ 512 $ 421 $ 474 $ 484
Commercial firm 2,472 2,427 1,953 2,206 2,259
Industrial firm 10,130 8,864 6,029 7,203 7,820
Interruptible 50,761 44,696 31,216 42,009 41,809
Transportation 238,028 105,941 86,392 121,125 117,050
Average Revenue Per Therm (cents):
Residential firm 55.7 51.3 50.4 46.2 52.6
Commercial firm 52.5 49.5 47.3 44.7 49.1
Industrial firm 46.0 36.0 33.1 41.5 39.2
Interruptible 34.5 34.6 37.6 33.2 30.1
Total Sales Customers 50.0 46.7 46.3 43.0 45.5
Transportation 7.0 5.0 5.6 4.3 4.3
Average Cost Per
Therm (cents) (1): 29.5 24.0 22.7 20.0 23.4
Weather - Degree Days 4,289 4,702 3,933 4,888 4,473
% of normal (30-year average) 90 98 82 101 93
(1) Average Cost Per Therm includes both fixed and variable elements, and it
is not a common gas industry practice to allocate these among classes of
customers. Washington Natural does not sell or transport gas to any of
its customers at a loss or on a break-even basis. The cost of gas for
serving firm customers is greater than that for serving interruptible
customers.
Oil and Gas Exploration and Production
The Company has participated in the oil and gas exploration and production
business since 1974 through Resources and its predecessor, Thermal Exploration,
Inc. The Company announced its intention late in 1993 to explore options to
monetize the value of Resources. On May 2, 1994, Resources was merged with a
wholly-owned subsidiary of Cabot Oil & Gas Corporation based in Houston, Texas.
Through the merger the Company currently owns 16.6% of Cabot's outstanding
voting securities of which 8.6% is common stock and 8.0% is convertible voting
preferred stock. William P. Vititoe, Chairman of the Company's Board of
Directors, Chief Executive Officer and President, and Robert F. Bailey, a
Director of the Company, also became members of Cabot's Board of Directors.
See Note 13 of Notes to Financial Statements on page 65 for further discussion
of the merger transaction.
The Company is accounting for its investment in Cabot's common stock using the
equity method, whereby the Company is recording its proportionate share of
15
PAGE 15
Cabot's earnings and losses available to common shareholders as "Other income
(expense)". Only a brief summary of Cabot's business taken solely from its
1993 Form 10-K filing will be presented here since Cabot's stock is publicly
traded on the New York Stock Exchange and more detailed information is
available in its filings with the Securities and Exchange Commission. Cabot's
fiscal year corresponds to the calendar year.
Prior to the Resources merger, substantially all of Cabot's operations were in
the Appalachian Region of West Virginia, Pennsylvania and New York, and in the
Anadarko Region of southwestern Kansas, Oklahoma and the Texas Panhandle.
Cabot has operated in the Appalachian Region for over 100 years and in the
Anadarko Region for over 50 years. Cabot's proved reserves at December 31,
1993, totalled approximately 825 billion cubic feet equivalent ("Bcfe"), 98% of
which was natural gas, primarily in long-lived fields with extended production
histories. Historically, Cabot has maintained its reserve base through
low-risk development drilling, although it made two significant reserve
acquisitions in 1993 at a total cost of $82.4 million.
In addition to drilling and production, Cabot also operates several gas
gathering and pipeline systems in the Appalachian Region made up of
approximately 3,500 miles of pipeline with interconnects to interstate
pipelines and local distribution companies. The company also has two gas
storage fields in the same region. Cabot also purchases substantial quantities
of gas from other producers for resale.
The Resources merger expanded Cabot's major areas of operation to include the
Green River Basin in southwestern Wyoming as well as certain fields in South
Texas. The merger increased Cabot's reserves by 191 Bcfe to over 1 trillion
cubic feet making Cabot the sixth largest independent oil and gas producing
company in the U.S. The majority of Resources' employees, aside from those
based in its former Seattle headquarters, have been employed by Cabot.
Merchandise and Energy Efficiency Products
Since the late 1950s Washington Natural had marketed energy-efficient gas
appliances and conservation products which complemented its gas distribution
service. In order to address the concerns raised by the WUTC during the 1993
rate case regarding allocations of common costs between Washington Natural's
regulated activities and its non-regulated merchandise sales activities, the
merchandise sales business was transferred on October 1, 1993, to Washington
Energy Services Company, a newly-formed, wholly-owned subsidiary of Washington
Energy. Effective the same date, the Company's HomeGuardTM security systems
business, which had been conducted by another of the Company's wholly-owned
subsidiaries, Thermal Efficiency, Inc. ("Thermal Efficiency"), was also
transferred to Services.
Services sells three types of products to primarily residential homeowners: gas
appliances, including gas furnaces; energy efficient window and siding
products; and security systems and monitoring. With the elimination of joint
marketing through Washington Natural and the sharing of certain common costs,
Services has changed the scope and the manner in which this business is
conducted. The product lines have been narrowed to focus on the more
high-margin products. All product installations and servicing are conducted by
independent dealers and contractors. Product purchases are consolidated with
fewer distributors which also perform inventory and delivery functions.
Services does not provide its own long-term installment financing for customer
purchases.
16
PAGE 16
The markets for Services products are highly competitive. Competitors range
from large widely-known national chains to small independent dealers with
minimal name recognition. Services' sales strategy is based on an extensive
advertising campaign, drawing on association with Washington Energy, the
convenience of in-home purchasing, comprehensive research of the marketplace,
and a knowledgeable, well-trained sales force.
Coal and Other Businesses
Washington Energy holds coal and coal-related investments and conducts other
business operations through various wholly-owned subsidiaries. Thermal Energy,
Inc., owns 95% of the Montco Partnership ("Montco"), which holds leases and
other rights to mine coal in Montana with the ultimate objective of opening one
or more mines when market conditions are suitable. Montco's coal reserves are
concentrated in two areas suitable for surface mining which have been assigned
the project names Montco and Cook Mountain. The Montco project involves 12,664
acres in the Ashland-Birney area of southeastern Montana. In adjacent areas,
the partnership owns additional coal reserves and has surface rights over coal
owned by the U.S. Government. A surface mining permit applied for by Montco
with the State of Montana in late 1980 was issued in November 1984 and was
renewed for a five-year period in 1989. Montco is currently pursuing an
additional renewal of the state permit. The Federal Office of Surface Mining
issued a federal surface mining permit in 1985 which was renewed in 1990. The
Cook Mountain project, located northeast of Ashland, Montana, involves over
20,000 acres of surface rights held by lease and in fee.
Proposals for short-term test burns to be conducted in 1995 have been made to
several electric utilities. The results of such tests would better define the
quality of the reserves. The partnership's coal reserves, with their
low-sulfur content, should be attractive to electric utilities and industries
that are required to reduce sulfur dioxide emissions by the year 2000 under
amendments of the Clean Air Act passed in 1990.
The Company, through its wholly-owned subsidiary ThermRail, Inc., holds an
87.5% partnership interest in the Tongue River Railroad Company ("TRR"),
Billings, Montana. TRR was formed to develop a transportation system for the
substantial reserves of low-sulfur coal in the northern Powder River Basin area
of southeastern Montana, which area includes the Montco holdings described
above. TRR has received a Certificate of Public Convenience and Necessity from
the Interstate Commerce Commission ("ICC") for a proposed 81-mile rail project.
Additionally, TRR has filed with the ICC for an extension of the Tongue River
rail line by an additional 42 miles into southeastern Montana. The proposed
extension would shorten by about 150 miles the railroad haul between the
southeast Montana and northeast Wyoming areas, and electricity generating
stations in Minnesota, Michigan and Wisconsin.
Certain gas transportation, storage and other contractual arrangements that
were excluded from the merger of Resources were transferred to a newly-formed,
wholly-owned subsidiary of the Company, Washington Energy Gas Marketing
Company. See Note 14 "Commitments and Contingencies" of Notes to Financial
Statements on page 66 for further information regarding these excluded
contractual arrangements.
The Company and its subsidiaries' primary liability insurance coverage is
provided by Mercer Insurance Company Limited ("Mercer Insurance"), a
Bermuda-domiciled insurance company. Mercer Insurance is wholly-owned by WECO
Finance
17
PAGE 17
Company, a wholly-owned subsidiary of Washington Energy. Mercer Insurance does
not provide insurance to any non-affiliated parties.
Discontinued Biowaste Business
The Company had been engaged in the development of biowaste technology since
1984 through Unisyn, a Hawaii general partnership. Unisyn developed and
patented an integrated, efficient pollution control technology which processes
organic wastes by anaerobic digestion and produces saleable by-products in
demand in various markets. A pilot plant was in operation in Waimanalo,
Hawaii, however, Unisyn had been unsuccessful in licensing its technology to
others. In August 1993, the Company's board of directors decided to divest the
Unisyn operation which was reported as a discontinued operation in the
Company's financial statements in that year. In August 1994, the Company sold
the stock of its two wholly-owned subsidiaries, Thermal Efficiency, Inc. and
Holdings Northwest, Inc. which jointly owned Unisyn. The two subsidiaries had
no other significant operations or operating assets at the date of sale.
(d) Financial Information About Foreign and Domestic Operations and
Export Sales
Washington Energy and its subsidiaries do not export products to, or do
significant business in, foreign countries.
Item 2. Properties
Washington Natural's properties consist primarily of its underground natural
gas distribution system and associated facilities owned in fee in 65 cities and
towns (principally Seattle, Bellevue, Tacoma and Everett) and parts of five
counties in the Puget Sound region of the State of Washington. It owns a total
of 268 acres of land, of which 20 acres are sites for peak-shaving plants, 60
acres are sites for city gate stations for purchased or transported natural
gas, and the balance is for distribution service facilities and office
buildings.
Washington Natural also owns a one-third undivided interest in the Jackson
Prairie underground storage field consisting of 147 acres of owned surface land
and storage, and 3,234 acres of leased storage. The site contains 77 wells for
injection and withdrawal of gas and water and compression facilities.
Approximately 18.8 billion cubic feet of non-inventory cushion gas is in place.
The principal structures owned are service and office buildings and warehouses
in Seattle, Tacoma, Bellevue and Auburn, and those housing propane gas
production facilities. Small local office and service buildings in various
other communities are owned or leased.
Substantially all of the property of Washington Natural is subject to the lien
of its First Mortgage Bonds.
The Company holds interests in coal properties as described on page 16.
The Company believes its properties to be generally in good condition and well
maintained and to be suitable and adequate to carry on the Company's business.
18
PAGE 18
Item 3. Legal Proceedings
On August 8, 1989, the Washington State Department of Transportation (the
"WDOT") commenced a lawsuit in the U.S. District Court, Western District of
Washington, against Washington Natural and other defendants. The suit seeks
the recovery of approximately $7 million in costs incurred by the WDOT in
cleaning up contamination at a former manufactured gas plant which discontinued
operations in the early 1900s. The contamination was discovered by the WDOT
while constructing a highway. Washington Natural has asserted numerous
defenses. The Court has ruled that Washington Natural is not the corporate
successor to the company that actually operated the manufactured gas plant at
the site. The trial of this matter was bifurcated. A trial to determine
whether WDOT has incurred costs recoverable as damages and, if so, the amount
of such damages, has been completed. The trial court ruled that WDOT's claim
was barred due to its failure to comply with federal law governing the cleanup
of hazardous waste sites, and has ordered that judgment be entered in favor of
Washington Natural and the other defendants. Accordingly, a second trial to
determine the allocation of liability for WDOT's damages will not be necessary
at this time. The WDOT has appealed the decision to the United States Court of
Appeals for the Ninth Circuit.
On May 10, 1994, the WDOT filed an action in the state Superior Court for
Pierce County Washington against Washington Natural and other defendants
arising out of the same occurrence and seeking the same damages as sought in
the lawsuit currently on appeal in the 9th Circuit Court of Appeals. This
state court action alleges a claim under Washington's Model Toxic Control Act,
which was recently amended to allow a private right of action for cost
recovery. The state court action has been stayed by Stipulation and Order
dated June 10, 1994. The WDOT has indicated that it will pursue the state
court action if the pending appeal is denied by the 9th Circuit Court of
Appeals. If the WDOT pursues this matter in the state court, Washington
Natural intends to vigorously defend the action on several grounds, however the
outcome cannot be predicted at this time.
A class-action lawsuit was filed against the Company and two of its officers in
U.S. District Court, Western District of Washington, in February 1994, alleging
violations of state and federal securities act provisions and associated
violations of Washington state law. The essence of the complaint concerned
alleged disclosure violations regarding the nature or the extent of the
downside financial risk associated with the 1992 utility rate request filing of
Washington Natural. In May 1994, the Company filed a Motion to Dismiss which
was granted on July 25, 1994. The plaintiffs have appealed the dismissal to
the United States Court of Appeals for the Ninth Circuit; however, in
management's opinion, the appeal is unlikely to succeed.
On September 6, 1994, Cost Management Services, Inc. ("Cost Management"), a
Mercer Island, Washington, company involved in the purchase and resale of
natural gas, filed an action against Washington Natural in U.S. District Court,
Western District of Washington. Cost Management alleges that Washington
Natural has monopolized or attempted to monopolize the market for natural gas
in central western Washington. Cost Management also alleges 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 seeks injunctive relief and damages in an
unspecified amount. Washington Natural has denied the allegations and is
vigorously defending this matter. A Motion to Dismiss the
19
PAGE 19
lawsuit has been filed by Washington Natural. Neither the outcome nor the
financial exposure from this lawsuit can be predicted at this time in the
absence of pre-trial discovery.
For litigation matters pertaining to Washington Natural's former manufactured
gas plant in Tacoma, Washington see "Environmental Matters" on Page 7, Note 10
of Notes to Financial Statements on Page 63, and the "Environmental Matters"
section of Management's Discussion and Analysis of Financial Condition and
Results of Operations on Page 31.
Item 4. Submission of Matters to a Vote of Security Holders
There were no matters submitted to a vote of security holders, through the
solicitation of proxies or otherwise, during the fourth quarter ending
September 30, 1994.
20
PAGE 20
Executive Officers of the Registrants
Name Title Age
- -------------------- ------------------------------------------- ---
William P. Vititoe Chairman of the Board of Directors, 56
Chief Executive Officer and President
(Chairman and Chief Executive Officer
since February, 1994, President since
April 1994,). (1)
James W. Gustafson Senior Vice President - Operations (since 61
April 1990; Senior Vice President - Gas
Supply, Administrative and Rates, August
1979 to April 1990). (2)
Robert J. Tomlinson Senior Vice President - Legal and 58
Administration (since February 1990; Senior Vice
President - Legal and Secretary, October
1985 to February 1990). (1)
James P. Torgerson Senior Vice President - Finance, Planning 42
and Development and Chief Financial Officer
(since February 1990; Senior Vice President -
Planning and Development, October 1988 -
February 1990; Chief Financial Officer,
since November 1989). (1)
William J. Wortley Senior Vice President - Public Affairs 57
(since February 1993; Vice President -
Public Affairs, April 1989 - February 1993;
Assistant Vice President - Public Affairs,
October 1986 - April 1989). (2)
Donald H. Gessel President - Washington Energy Services 52
Company (since June 1994(3); Senior Vice
President - Marketing, Gas Supply and
Rates, August 1990 to October 1994(2);
Senior Vice President - Marketing,
September 1986 to August 1990(2)).
Allyn P. Hebner Vice President and Chief Accounting Officer 41
(since June 1, 1994(1); Vice President and
Treasurer of Washington Energy Resources
Company, February 1993 to June 1994(3); Assistant
Vice President and Treasurer of Washington
Energy Resources Company, April 1991 to
February 1993(3); Vice President of Finance/
Controller - Allwaste Services, Inc., March
1988 to February 1991.)
(1) of Washington Energy and of
Washington Natural.
(2) of Washington Natural only.
(3) of Washington Energy subsidiary
There are no family relationships between any of the executive officers or any
executive officer and any director. Officers are elected by the Board of
Directors and serve until the next annual meeting or until their successors are
21
PAGE 21
elected and qualified, provided, however, that any officer may be removed at
any time by majority vote of the Board.
PART II
Item 5. Market for Registrant's Common Stock and Related Stockholder
Matters
The common stock of Washington Energy is traded on the New York Stock Exchange
(trading symbol is WEG). The following table reflects the dividends paid and
the range of high and low selling prices of the Company's common stock on the
New York Stock Exchange by quarter for 1994 and 1993:
Price Range
Dividends -----------------------
Fiscal Period Per Share High Low
----------------- --------- ------ ------
1994 1st Quarter $ .25 20 17-3/8
2nd Quarter .25 18-7/8 16
3rd Quarter .25 17-1/4 14-3/8
4th Quarter .25 15-5/8 14-1/4
1993 1st Quarter $ .35 22-1/4 20-7/8
2nd Quarter .35 24-1/4 21-1/2
3rd Quarter .35 26-3/8 21-5/8
4th Quarter .35 23-5/8 17-1/2
There were approximately 12,838 common stockholders of the Company as of
December 14, 1994. It is currently the policy of the Company's Board of
Directors to declare cash dividends payable in December, March, June and
September of each year. The Company and its predecessor have paid cash
dividends since 1960. The dividend rate is reassessed regularly in light of
existing conditions, the needs of the Company and the interests of
shareholders. The Company's Board of Directors announced in October 1993 its
decision to lower the Company's quarterly dividend from 35 cents to 25 cents.
(See Note 4 of Notes to Financial Statements on page 59 for a description of
certain limitations on the Company's ability to pay dividends.)
22
PAGE 22
Item 6. Selected Financial Data
WASHINGTON ENERGY COMPANY AND SUBSIDIARIES
Year Ended September 30,
------------------------------------------------------------------------
1994 1993 1992 1991 1990
---------- ---------- -------- -------- --------
(in thousands except per share amounts)
OPERATING REVENUES:
Regulated utility sales $ 396,407 $ 367,853 $284,939 $311,052 $299,332
Merchandise and other 35,618 71,185 72,533 65,414 55,103
Oil and natural gas operations -- 31,354 17,616 19,098 9,570
---------- ---------- -------- -------- --------
TOTAL OPERATING REVENUES $ 432,025 $ 470,392 $375,088 $395,564 $364,005
========== ========== ======== ======== ========
OPERATING INCOME $ 25,730 $ 55,482 $ 45,980 $ 59,394 $ 48,631
OTHER INCOME (EXPENSE), net (34,925) (2,057) (956) 1,178 (4,004)
---------- ---------- -------- -------- --------
GROSS INCOME (LOSS) (9,195) 53,425 45,024 60,572 44,627
---------- ---------- -------- -------- --------
TOTAL INTEREST CHARGES 36,105 31,931 31,592 29,716 25,886
INTEREST CHARGES CAPITALIZED (453) (541) (549) (725) (829)
---------- ---------- -------- -------- --------
NET INTEREST CHARGES 35,652 31,390 31,043 28,991 25,057
---------- ---------- -------- -------- --------
INCOME (LOSS) FROM
CONTINUING OPERATIONS (44,847) 22,035 13,981 31,581 19,570
DISCONTINUED OPERATIONS (799) (12,388) (2,542) (3,235) (1,577)
---------- ---------- -------- -------- --------
NET INCOME (LOSS) (45,646) 9,647 11,439 28,346 17,993
DIVIDENDS ON PREFERRED STOCK 9 101 105 112 117
EXCESS PREMIUM - PREFERRED
REDEMPTION 673 -- -- -- --
---------- ---------- -------- -------- --------
EARNINGS (LOSS) ON COMMON STOCK $ (46,328) $ 9,546 $ 11,334 $ 28,234 $ 17,876
========== ========== ======== ======== ========
EARNINGS (LOSS) PER COMMON
SHARE FROM:
Continuing operations $(1.94) $ .95 $ .71 $1.73 $1.27
Discontinued operations (.03) (.53) (.13) (.18) (.10)
------ ----- ----- ----- -----
EARNINGS (LOSS) PER COMMON SHARE $(1.97) $ .42 $ .58 $1.55 $1.17
====== ===== ===== ===== =====
DIVIDENDS PER COMMON SHARE $ 1.00 $1.40 $1.40 $1.38 $1.34
====== ===== ===== ===== =====
TOTAL COMMON DIVIDENDS DECLARED
BASED ON SHARES OUTSTANDING ON
RECORD DATES DURING EACH PERIOD $ 23,468 $ 32,282 $ 27,499 $ 25,584 $ 20,741
========== ========== ======== ======== ========
TOTAL ASSETS $1,030,494 $1,035,817 $899,874 $809,657 $713,947
========== ========== ======== ======== ========
LONG-TERM DEBT AND
REDEEMABLE PREFERRED STOCK $ 380,200 $ 370,700 $304,228 $259,788 $257,412
========== ========== ======== ======== ========
COMMON SHAREHOLDERS' INTEREST $ 256,800 $ 322,931 $275,517 $284,260 $220,381
========== ========== ======== ======== ========
23
PAGE 23
Item 6. Selected Financial Data (Continued)
WASHINGTON NATURAL GAS COMPANY
Year Ended September 30,
--------------------------------------------------------------------
1994 1993 1992 1991 1990
-------- -------- -------- -------- --------
(in thousands except per share amounts)
OPERATING REVENUES:
Regulated utility sales $396,407 $367,853 $284,939 $311,052 $299,332
Merchandise and conservation
products -- 63,210 66,083 60,393 49,008
-------- -------- -------- -------- --------
TOTAL OPERATING REVENUES $396,407 $431,063 $351,022 $371,445 $348,340
======== ======== ======== ======== ========
TOTAL GROSS MARGIN (Gas Sales
Revenues Less Gas Purchases Plus
Transportation Margin) $163,500 $178,984 $147,122 $165,884 $144,494
======== ======== ======== ======== ========
OPERATING INCOME $ 23,942 $ 49,802 $ 38,143 $ 51,761 $ 44,533
OTHER INCOME (EXPENSE), net (2,067) (1,198) 135 2,450 (2,931)
-------- -------- -------- -------- --------
GROSS INCOME 21,875 48,604 38,278 54,211 41,602
INTEREST CHARGES (30,118) (26,833) (26,047) (24,802) (22,840)
-------- -------- -------- -------- --------
NET INCOME (LOSS) (8,243) 21,771 12,231 29,409 18,762
DIVIDENDS ON PREFERRED STOCK 3,979 2,720 2,740 2,755 2,776
EXCESS PREMIUM, PREFERRED REDEMPTION 798 -- -- -- --
-------- -------- -------- -------- --------
EARNINGS (LOSS) ON COMMON STOCK $(13,020) $ 19,051 $ 9,491 $ 26,654 $ 15,986
======== ======== ======== ======== ========
TOTAL COMMON DIVIDENDS DECLARED
BASED ON SHARES OUTSTANDING ON
RECORD DATES DURING EACH PERIOD $ 16,937 $ 26,045 $ 21,691 $ 20,151 $ 16,569
======== ======== ======== ======== ========
TOTAL ASSETS $885,016 $834,516 $729,536 $657,727 $581,801
======== ======== ======== ======== ========
LONG-TERM DEBT AND PREFERRED STOCK $380,200 $370,700 $304,280 $259,940 $242,405
======== ======== ======== ======== ========
COMMON SHAREHOLDER'S INTEREST $235,988 $262,334 $205,599 $210,889 $171,255
======== ======== ======== ======== ========
24
PAGE 24
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Results of Operations
Washington Energy Company ("the Company") incurred a net loss available to
common of $46.3 million, or $1.97 per share, in 1994 due to various
non-recurring charges and lower operating earnings. The following table
summarizes earnings and losses available to common and per share by year:
1994 1993 1992
---------------- ---------------- ---------------
Amounts Per Per Per
in millions Amount Share Amount Share Amount Share
------ ------ ------ ----- ------ -----
Before non-recurring
charges $ (3.8) $ (.16) $ 21.9 $ .95 $13.9 $ .71
Non-recurring
charges (41.7) (1.78) -- -- -- --
------ ------ ------ ----- ----- -----
Continuing
operations (45.5) (1.94) 21.9 .95 13.9 .71
Discontinued
operations (.8) (.03) (12.4) (.53) (2.6) (.13)
------ ------ ------ ----- ----- -----
Net income (loss) $(46.3) $(1.97) $ 9.5 $ .42 $11.3 $ .58
====== ====== ====== ===== ===== =====
The non-recurring charges result from: 1) the merger of the Company's oil and
gas exploration and production subsidiary and certain contractual arrangements
excluded from the merger ($30.0 million after-tax); 2) restructuring and
downsizing the gas utility subsidiary ($4.6 million after-tax); and 3) other
write-offs and reserves established in the gas utility ($7.1 million
after-tax). Even after excluding these charges, the contribution to earnings
from each of the Company's continuing businesses (before interest, income taxes
and preferred dividend requirements of the Company's gas utility subsidiary,
Washington Natural Gas Company) was substantially lower than in prior years as
shown in the following table and discussed below:
In millions 1994 1993 1992
----- ----- -----
Gas utility $33.3 $50.8 $33.8
Merchandise sales .1 7.9 9.5
Oil and gas 1.9 9.3 6.6
Other (4.1) (2.9) (.7)
----- ----- -----
Total $31.2 $65.1 $49.2
===== ===== =====
The Company completed the disposition of its biowaste business, Unisyn, through
the sale of the two subsidiaries that owned Unisyn. The decision was made to
dispose of this business in 1993, and it was first reported as a discontinued
operation in that year. In addition to the $2.6 million net operating loss
incurred in 1993, a $9.8 million after-tax charge was recorded to write down
Unisyn's assets to estimated realizable value and to establish a reserve for
operating losses through disposition. An additional loss of $799,000 was
incurred in 1994 to complete the disposition.
25
PAGE 25
Merger of Oil and Gas Subsidiary
On May 2, 1994, the Company merged its oil and gas subsidiary, Washington
Energy Resources Company ("Resources"), with Cabot Oil & Gas Corporation
("Cabot") in a tax-free exchange. The Company received total consideration,
including repayment of intercompany debt, valued at $162.2 million, consisting
of 2,133,000 shares of Cabot Class A common stock, 1,134,000 shares of Cabot 6%
convertible voting preferred stock, and $63.7 million of cash, in exchange for
the stock of Resources. The Cabot preferred stock is convertible into
1,972,174 shares of Cabot Class A common stock and is entitled to the same
number of votes on shareholder matters, making the Company the holder of 16.6%
of Cabot's total voting securities. The Company recorded a net loss on the
transaction of $13.9 million after providing for deferred taxes of
approximately $32.0 million, and established an after-tax reserve of $4.4
million for a potential downward purchase price adjustment based on the
performance of wells in a certain field over a one year time period.
Excluded from the Resources merger were certain gas transportation, storage and
other contractual arrangements of Resources. The Company established after-tax
reserves of $11.7 million ($18.0 million pre-tax) for anticipated future losses
associated with these excluded contractual arrangements. Due to the merger and
the associated elimination of operating and marketing staffs and Company-owned
gas production to aid in managing and utilizing these arrangements, combined
with actual operating history for the gas transportation arrangements that were
placed in service November 1, 1993, management estimated that these
arrangements would continue to generate losses for the foreseeable future.
During 1994, $3.7 million (pre-tax) of the reserves was utilized.
The merger allows the Company to continue its presence in the upstream oil and
gas industry at a reduced investment level and without the need for future
additional investment. The Company is accounting for its investment in Cabot
common stock using the equity method due to its representation on Cabot's board
of directors. Using this accounting method, the Company reports its
proportionate share of Cabot's earnings or losses available to common
shareholders along with preferred dividends from Cabot in "Other income
(expense)." Resources' 1994 earnings through the merger date have been
reclassified to "Other income (expense)," consistent with the equity accounting
presentation. Prior year financial statements continue to reflect Resources
on a consolidated basis, as previously reported, in accordance with generally
accepted accounting principles.
The 1994 earnings contribution from the oil and gas business before interest
and income taxes (consisting of Resources' earnings through the merger date and
earnings from the investments in Cabot thereafter) was $1.9 million, compared
with $9.3 million and $6.6 million in 1993 and 1992, respectively. Resources'
1994 earnings of $1.0 million through the merger date were adversely impacted
by lower oil prices and losses from the gas transportation arrangements
described above. Subsequent to the merger, Cabot reported losses of which the
Company's proportionate share totaled $573,000, due primarily to seasonal
factors and generally lower gas prices. Dividend income from Cabot preferred
stock was $1.4 million.
Restructuring and Other Non-recurring Charges
In the third quarter, Washington Natural recorded charges totaling $4.6 million
after-tax related to a restructuring to consolidate operations and downsize its
workforce. The charges included estimated severance costs as well as expensing
26
PAGE 26
the costs previously capitalized for planning a new headquarters building that
is not needed currently. At September 30, 1994, Washington Natural's workforce
had been reduced 12 percent from the October 1993 level.
Washington Natural recorded additional charges totaling $7.1 million after-tax
to write off costs deemed to be unrecoverable and to establish certain
reserves. A total of $1.5 million after-tax was included to provide for
estimated environmental investigation, legal and remediation costs associated
with certain former manufactured gas plant sites and to write off certain
environmental-related deferred costs. Also included was a $2.2 million charge
after-tax for the supplemental executive retirement plan to reflect recent
management changes.
Operating Revenues
The following table summarizes the Company's operating revenues by line of
business:
In millions 1994 1993 1992
------ ------ ------
Utility
Gas sales $387.0 $360.1 $277.5
Other regulated revenues 9.4 7.7 7.5
Merchandise sales 35.6 70.3 71.9
Oil and gas -- 31.6 25.6
Other -- .7 (7.4)
------ ------ ------
Total $432.0 $470.4 $375.1
====== ====== ======
Resources' 1994 revenues have been reclassified to "Other income (expense)" as
described previously.
The 7% increase in utility gas revenues in 1994 was the net result of several
factors, including a 23% increase in the cost of purchased gas, which was
passed through to customers with no impact on earnings, and customer growth of
5%, or 21,000 customers. Largely offsetting the effects of these factors were
lower rates associated with the $15.4 million annual revenue decrease ordered
by the Washington Utilities and Transportation Commission ("WUTC") in October
1993, and weather that was 10% warmer than normal and 9% warmer than the prior
year. A general rate increase totaling $19.0 million annually, ordered by the
WUTC, went into effect on June 2, 1994, but did not have a material impact on
revenues for the year since it occurred after the end of the heating season.
Gas sales volumes in 1994 were essentially the same as in 1993, while weather
was 9% warmer. The 5% increase in customers, combined with the
warmer-than-normal temperatures occurring largely during the late spring and
summer months, when the heating load was low, resulted in the
smaller-than-expected decline in gas sales volumes.
Merchandise sales revenues totaled $35.6 million in 1994, a decrease of $34.7
million from 1993. Effective October 1, 1993, the Company reestablished its
merchandise sales operation in Washington Energy Services Company ("Services").
The bulk of these sales operations, relating to gas appliances, were previously
conducted by Washington Natural. The other operations moved to Services, sales
of security and energy- saving products, previously were conducted by a
separate
27
PAGE 27
subsidiary. The elimination of joint marketing, installation and service
activities and the reorganization of the merchandise functions have negatively
impacted the Company's ability to attract new merchandise customers and
resulted in Services operating at approximately a breakeven level.
The increase in total operating revenues from 1992 to 1993 consisted primarily
of higher utility gas revenues as shown above. The increase in utility
revenues was due largely to weather that was 20% colder than 1992, per therm
gas costs that were 5.7% higher and 6% growth in customers.
Operating Expenses
The following table shows the Company's operating expenses by line of business,
before and after income taxes:
In millions 1994 1993 1992
------ ------ ------
Utility
Purchases of gas $223.5 $181.2 $130.3
Operations and maintenance 81.8 67.0 62.9
Depreciation and amortization 30.9 28.2 25.8
General taxes 41.2 39.0 31.6
Merchandise sales 35.7 62.3 62.6
Oil and gas -- 23.9 19.1
Other .9 3.6 (6.9)
------ ------ ------
Total before income taxes 414.0 405.2 325.4
Income taxes (7.7) 9.7 3.7
------ ------ ------
Per consolidated income statements $406.3 $414.9 $329.1
====== ====== ======
The $8.6 million decrease in operating expenses in 1994 reflected in the income
statement is due to deconsolidation of Resources ($23.9 million), reduced
merchandise sales expenses ($26.6 million) and the change in income taxes from
an expense to a benefit ($17.4 million), which were largely offset by growth in
utility operating expenses ($62.0 million).
The increase in utility operating expenses in 1994 was due primarily to the
higher cost of natural gas purchases ($42.3 million) which was recovered from
customers through purchased gas cost adjustments. Most of the increase in
operations and maintenance ("O&M") expenses of $14.8 million resulted from the
non-recurring charges described previously ($11.7 million). The remaining 3%
increase in total utility operating expenses resulted largely from customer
growth. The restructuring and work force reduction did not materially reduce
operating expenses in 1994 since most of the changes occurred in the fourth
quarter. The 6% increase in general taxes consisted primarily of higher
utility taxes due to the revenue increase during the year. The 10%
depreciation increase resulted from the continued high level of capital
spending during the last two years.
28
PAGE 28
The increase in operating expenses from 1992 to 1993 was caused by many of the
same factors that increased expenses in 1994, with the exception of the
non-recurring charges. The only major difference was the 20% colder weather
experienced in 1993 versus 1992. As a result, purchased gas volumes increased
by 31% in 1993.
Inflation and Changing Prices
The Company is directly and indirectly affected by inflation and changing
prices in several ways, most of which are also heavily influenced by the WUTC
regulatory process.
Natural gas prices have been highly volatile in recent years, which has
impacted Washington Natural's cost of purchased gas but has not affected
Washington Natural's earnings due to use of a "purchased gas cost adjustment"
mechanism. As requested by Washington Natural, the WUTC has authorized changes
in customer rates to permit the "pass through" of projected changes in the cost
of purchased gas. Differences between authorized costs and actual costs are
accumulated in balancing accounts for future recovery or refund. Except for
costs disallowed in a 1992 order relating primarily to purchases from an
affiliate, the WUTC historically has allowed changes in purchased gas costs to
be passed through to customers with no impact on earnings. Washington Natural
no longer purchases gas from affiliates. The most recent purchased gas cost
adjustment went into effect in July 1993.
Washington Natural's operating results are impacted by the effects of inflation
on O&M expenses, particularly wages, which historically comprise approximately
55% of O&M expenses. Washington Natural must request general rate increases to
offset the effects of increases in O&M expenses. Such requests normally
receive intense scrutiny, including extensive analysis of historical and
current O&M expenses, by the WUTC, which has up to eleven months from the
filing date of the request to issue an order. The delay in receiving rate
relief, due to the time required to prepare and file the rate request and the
time required for WUTC review, can result in significant earnings deterioration
in the interim, particularly in periods of higher inflation. Washington
Natural filed for general rate increases in July 1992 and November 1993, as
described below.
Inflation impacts the Company and Washington Natural indirectly through its
effect on interest rates. In recent years, approximately $225-355 million of
the Company's capitalization has been long-term debt, and short-term debt
levels have averaged over $100 million on an annual basis. Prior to the
interest rate increases in 1994, interest rates generally had declined each
year since the mid-1980s. The Company benefited from the declining rates by
refinancing higher rate notes with lower rate notes and through reduced
interest expense on its short-term debt.
The current level of interest rates is also a major factor in determining
Washington Natural's allowed rate of return on equity associated with its
general rate filings. Prior to the October 1993 rate order in which Washington
Natural's allowed rate of return on common equity was set at 10.5%, the allowed
rate of return had been set at 16.25%. This rate was based on a 1985 rate
order that corresponded to a period of high interest rates.
29
PAGE 29
General Rate Cases
Washington Natural filed for a general rate increase in July 1992 and received
an order from the WUTC in September 1993 to decrease its rates by $15.4 million
on an annual basis effective October 9, 1993. Three primary factors
contributed to the rate decrease: 1) the WUTC disallowed recovery in rates of
certain expenses that it deemed to be related to the non-regulated merchandise
sales business or otherwise outside the scope of, or unnecessary for, utility
operations; 2) the timing of the WUTC's order closely coincided with a 15-year
low in interest rates which, management believes, weighed heavily in reducing
Washington Natural's allowed rate of return on equity from 16.25% to 10.5%; and
3) the order was based on a capital structure for Washington Natural containing
a higher percentage of lower-cost debt.
In November 1993, Washington Natural filed a limited-scope general rate case
seeking a $24.6 million increase in annual revenues. The primary focus was to
seek recovery of additional operating costs and the inclusion in rate base of
utility plant additions since calendar year 1991, which was the base
measurement year used in the prior rate case. On May 27, 1994, the WUTC issued
an order approving a settlement of the rate case. The settlement provided for
a $19.0 million increase in annual revenues and agreement that Washington
Natural would not request an increase in total revenues prior to March 1, 1995.
However, Washington Natural may make: 1) tracking filings caused by changes in
purchased gas and pipeline costs; 2) filings required by law or WUTC order; and
3) filings for increased revenues if conditions necessary for interim/emergency
rate relief exist, including conditions that prevent Washington Natural from
financing with unsecured debt.
Liquidity and Capital Resources
In 1994, the Company changed the manner in which its operations are financed,
resulting in a change in its capital structure in response to reduced earnings
and operating cash flow and the merger of Resources. The following table
summarizes the major cash flow items for the last three years:
In millions 1994 1993 1992
------- ------- -------
Operating cash flow $ 15.9 $ 36.6 $ 66.3
Common dividends (23.5) (32.3) (27.5)
Capital expenditures (86.9) (128.1) (122.7)
Short-term borrowing, net (20.3) 7.3 35.9
Net issuance of preferred
stock 64.7 (10.2) (.2)
Cash from Resources
merger, net 42.9 -- --
Issuance of common stock 6.3 70.5 7.4
Net issuance of long-term
debt (3.3) 67.7 48.1
Other, net (3.5) (3.9) (3.4)
------ ------- -------
Net change in cash $ (7.7) $ 7.6 $ 3.9
====== ======= =======
Operating cash flow was inadequate to fund common dividends in 1994. The
Company effectively used the $42.9 million net cash proceeds from the Resources
merger ($63.7 million proceeds net of cash advanced to Resources prior to the
merger) to fund the majority of its common dividend payments and to reduce
30
PAGE 30
short-term debt. Preferred stock was issued to fund most of the Company's
capital spending rather than issuing common stock and long-term debt as in 1993
and 1992.
With the merger of Resources, the bulk ($84.5 million) of the Company's 1994
gross capital expenditures ($86.9 million) was for utility plant. Washington
Natural makes capital expenditures to add new customers to its gas distribution
system and to insure the reliability and safety of the system. Capital
expenditures normally are funded with a combination of cash flow from
operations after dividend payments and short-term borrowings on an interim
basis. The short-term borrowings are reduced periodically with the proceeds
from 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.
Washington Natural issued preferred stock twice during 1994 to provide
long-term financing for its 1994 capital spending and to fund the early
redemption of all outstanding preferred issues to take advantage of lower
dividend requirements and to eliminate future sinking-fund requirements. The
early redemption occurred in November 1993 at an aggregate cost of $23.2
million. Also in November 1993, the public offering of 2.4 million shares of
7.45% cumulative preferred stock was completed, netting proceeds of $58.8
million. On September 15, 1994, Washington Natural completed a public offering
of 1.2 million shares of 8.50% cumulative preferred stock, which netted
proceeds of $29.1 million. The 7.45% preferred stock is redeemable on or after
November 1, 2003, at par value, and the 8.50% preferred stock is redeemable on
or after September 1, 1999, at par value.
Capital expenditures in 1995 are projected at $79 million for Washington
Natural and $3 million for the Company's other businesses. The Company does
not anticipate incurring significant expenditures to develop its coal reserves
and associated railroad in the next two years. The Company expects to fund its
1995 capital spending with cash flow from operations and short-term borrowings.
Washington Natural is currently prohibited from issuing additional First
Mortgage Bonds because of interest coverage tests in the bond indenture. The
earliest Washington Natural could expect to be able to issue additional bonds
is the fourth quarter of 1995. The Company can issue unsecured debt.
In addition to its capital spending program, Washington Natural has seasonal
short-term borrowing requirements. Operating revenues vary with weather
conditions because approximately 90% of Washington Natural's customers use
natural gas for space heating. This normally produces substantially increased
earnings and operating cash flow during the first eight or nine months of each
year and a loss and negative cash flow in the remaining three or four months,
with the 12 months as a whole being profitable and generating positive
operating cash flow. Because of this, Washington Natural must borrow on a
short-term basis to meet its operating needs for a portion of the year.
The Company has several short-term financing arrangements available currently:
a $150 million commercial paper program backed by a committed revolving credit
agreement, of which $61 million was unused at September 30, 1994; uncommitted
bank and other credit arrangements totaling $80 million, of which $44 million
was available at year end; and a committed agreement to sell up to $90 million
of merchandise and gas receivables, of which $34 million was unused at year
end. The borrowing capacity under the latter agreement is effectively limited
by the availability of receivables to sell. At September 30, 1994, a time of
31
PAGE 31
the year when gas receivable balances are low due to seasonal factors, all but
$2 million of eligible receivables had been sold under the arrangement.
In management's opinion, the Company has sufficient capital resources, both
internal and external, to meet anticipated financing requirements.
Environmental Matters
In management's opinion, based on all known facts and analyses, it is not
likely that environmental liabilities identified to date, after consideration
of insurance recoveries and the judgment entered against certain insurance
companies, will result in a material adverse impact on Washington Natural's
financial position or operating results and cash flow trends. (See Note 10 page
63 of Notes to Financial Statements.)
Litigation
(See Note 11 page 64 of Notes to Financial Statements.) In light of the recent
dismissal of the class action lawsuit and known facts in the case, in
management's opinion, the appeal of the decision to dismiss the action is
unlikely to succeed. Accordingly, no material adverse impact to the Company is
likely from this case.
Neither the outcome nor the financial exposure from the anti-trust lawsuit
filed against Washington Natural by a local natural gas marketing company can
be predicted at this time in the absence of pretrial discovery. Washington
Natural has denied the allegations and is vigorously defending this matter.
Future Outlook
A number of changes have been made in the last year that should improve the
Company's results of operations and financial position over the next several
years. The disposition of the biowaste business has eliminated a continual
source of operating losses over the past five years. The merger of the oil and
gas business with Cabot has allowed the Company to recoup a portion of its
investment and has eliminated a major source of future capital requirements for
the Company, which must continue to fund the rapid growth of Washington
Natural.
At Washington Natural, the recently approved $19 million rate increase will
increase operating income in 1995. The recent management restructuring, 12%
work force reduction and ongoing re-engineering efforts will contain operating
costs in the near term and may provide additional cost savings in the long
term. The recent rise in interest rates will have a negative impact on
earnings by increasing short-term borrowing costs.
Washington Natural's annual customer growth has averaged 6% over the last five
years, which is well above the national average among natural gas utilities.
Customer growth is expected to be down slightly in 1995, at 4% to 5% or
approximately 18,000 to 22,000 new customers.
Washington Natural has filed a proposal to redesign its rates to better reflect
the cost of serving various classes of customers. Washington Natural filed
proposed tariffs with the WUTC in June 1994 that, if approved, would reduce
transportation rates by 55% and industrial rates by 13% and make Washington
Natural economically indifferent when customers choose between transportation
and sales service. The request also proposes to raise residential rates by
32
PAGE 32
5.7% and firm commercial and industrial rates by 1.8%. The effect of these
changes, if approved, would be to increase the margin on gas sales to
residential and commercial markets (where the majority of Washington Natural's
growth occurs), decrease the margin on transportation and larger volume
industrial sales, and still maintain the competitive advantage of gas versus
alternative energy services. The WUTC has until May 1995 to act on this
filing.
Washington Natural also expects to file a general rate case in March 1995 to
address all of the costs of operating the utility. In addition to updating
operating costs and rate base to reflect recent growth, the utility also will
request an increase in its allowed rate of return in light of the recent
increases in its cost of capital. The WUTC would have until February 1996 to
act on such a filing.
Common Dividend
In October 1993, the Company's quarterly dividend was lowered from 35 cents to
25 cents. Management does not currently intend to recommend to the Board of
Directors a further reduction in the dividend. In management's opinion, the
strategies the Company is employing, downsizing and re-engineering Washington
Natural, greater emphasis on regulatory relations and the merger of the oil and
gas exploration subsidiary, should result in earnings to support the dividend
over the long term.
33
PAGE 33
Item 8. Financial Statements and Supplementary Data
1. Financial Statements:
Washington Energy Company and Subsidiaries
Consolidated balance sheets as of September 30, 1994 and 1993.
Consolidated statements of income for each of the three years in the
period ended September 30, 1994.
Consolidated statements of capitalization as of September 30, 1994
and 1993.
Consolidated statements of shareholders' earnings reinvested in the
business and premium on capital stock for each of the three years in
the period ended September 30, 1994.
Consolidated statements of cash flows for each of the three years in
the period ended September 30, 1994.
Washington Natural Gas Company
Balance sheets as of September 30, 1994 and 1993.
Statements of income for each of the three years in the period ended
September 30, 1994.
Statements of capitalization as of September 30, 1994 and 1993.
Statements of shareholder's earnings reinvested in the business and
premium on capital stock for each of the three years in the period
ended September 30, 1994.
Statements of cash flows for each of the three years in the period
ended September 30, 1994.
2. Supplementary Data (Unaudited):
Consolidated selected quarterly financial data for each of the three
years in the period ended September 30, 1994.
34
PAGE 34
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders and Board of Directors of Washington Energy Company:
We have audited the accompanying consolidated balance sheets and statements of
capitalization of Washington Energy Company (a Washington corporation) and
subsidiaries as of September 30, 1994 and 1993, and the related consolidated
statements of income, shareholders' earnings reinvested in the business,
premium on capital stock and cash flows for each of the three years in the
period ended September 30, 1994, and the accompanying balance sheets and
statements of capitalization of Washington Natural Gas Company as of September
30, 1994 and 1993, and the related statements of income, shareholder's earnings
reinvested in the business, premium on capital stock and cash flows for each of
the three years in the period ended September 30, 1994. These financial
statements and the schedules referred to below are the responsibility of the
companies' management. Our responsibility is to express an opinion on these
financial statements and schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Washington Energy Company and
subsidiaries and of Washington Natural Gas Company as of September 30, 1994 and
1993, and the results of their operations and their cash flows for each of the
three years in the period ended September 30, 1994, in conformity with
generally accepted accounting principles.
Our audit was made for the purpose of forming an opinion on the basic financial
statements taken as a whole. The schedules listed in Item 14(a) are presented
for purposes of complying with the Securities and Exchange Commission's rules
and are not part of the basic financial statements. These schedules have been
subjected to the auditing procedures applied in the audit of the basic
financial statements and, in our opinion, fairly state in all material respects
the financial data required to be set forth therein in relation to the basic
financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Seattle, Washington,
October 25, 1994
35
PAGE 35
WASHINGTON ENERGY COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
September 30,
------------------------------
1994 1993
---------- ----------
(in thousands)
PROPERTY, PLANT AND EQUIPMENT:
Utility plant, at original cost $ 977,406 $ 903,892
Oil and gas (on full cost method),
coal and other 54,398 258,065
Accumulated depreciation,
depletion and amortization (249,239) (297,062)
---------- ----------
Net property, plant and equipment 782,565 864,895
---------- ----------
INVESTMENTS IN UNCONSOLIDATED AFFILIATES 98,139 --
---------- ----------
CURRENT ASSETS:
Cash and cash equivalents 5,387 13,049
Receivables, net of allowance for
uncollectible accounts of $2,139 and
$474, respectively 5,689 20,868
Unbilled revenue 9,961 11,072
Federal income taxes 6,124 15,354
Purchased gas receivable 21,261 23,869
Materials and supplies, at average cost 28,069 40,779
---------- ----------
Total current assets 76,491 124,991
---------- ----------
OTHER ASSETS AND DEFERRED CHARGES:
Environmental insurance receivable 33,947 --
Utility tax asset 18,810 18,767
Deferred charges and other 20,542 27,164
---------- ----------
Total other assets and deferred charges 73,299 45,931
---------- ----------
Total assets $1,030,494 $1,035,817
========== ==========
The accompanying notes are an integral part of these consolidated balance
sheets.
36
PAGE 36
WASHINGTON ENERGY COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (Continued)
CAPITALIZATION AND LIABILITIES
September 30,
--------------------------------
1994 1993
---------- ----------
(in thousands)
CAPITALIZATION (see statements):
Common shareholders' interest $ 256,800 $ 322,931
Redeemable preferred stock 90,000 17,300
Long-term debt 290,200 353,400
---------- ----------
Total capitalization 637,000 693,631
---------- ----------
CURRENT LIABILITIES:
Notes payable and commercial paper 125,182 145,498
Current sinking fund requirements and debt
maturities 60,140 5,528
Accounts payable 34,326 44,484
Other current liabilities 32,261 19,261
Accrued general taxes 12,044 14,198
---------- ----------
Total current liabilities 263,953 228,969
---------- ----------
DEFERRED CREDITS AND OTHER LIABILITIES:
Accumulated deferred income taxes 72,518 78,688
Other utility tax liabilities 12,560 13,139
Unamortized investment tax credits 10,132 10,913
Contributions in aid of construction 12,298 10,113
Contingency reserves and other 22,033 364
---------- ----------
Total deferred credits and other
liabilities 129,541 113,217
---------- ----------
Total capitalization and liabilities $1,030,494 $1,035,817
========== ==========
The accompanying notes are an integral part of these consolidated balance
sheets.
37
PAGE 37
WASHINGTON ENERGY COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Year Ended September 30,
---------------------------------------
1994 1993 1992
-------- -------- --------
(in thousands, except
per share amounts)
OPERATING REVENUES:
Regulated utility sales $396,407 $367,853 $284,939
Merchandise, conservation products
and other 35,618 71,185 72,533
Oil and natural gas operations -- 31,354 17,616
-------- -------- --------
Total operating revenues 432,025 470,392 375,088
OPERATING EXPENSES:
Purchases of gas 223,502 180,893 122,355
Utility operations and maintenance 76,049 67,255 62,579
Other operations 42,019 75,927 71,479
Depreciation, depletion and amortization 30,901 38,274 34,852
General taxes 41,487 42,829 34,178
Federal income taxes (7,663) 9,732 3,665
-------- -------- --------
Total operating expenses 406,295 414,910 329,108
-------- -------- --------
OPERATING INCOME 25,730 55,482 45,980
OTHER INCOME (EXPENSE):
Pre-tax loss on merger of subsidiary (6,304) -- --
Federal income taxes on merger of subsidiary (23,711) -- --
Preferred dividend requirement -
Washington Natural Gas Company (3,970) (2,612) (2,622)
Other, net (940) 555 1,666
-------- -------- --------
Gross income (loss) (9,195) 53,425 45,024
INTEREST CHARGES 35,652 31,390 31,043
-------- -------- --------
INCOME (LOSS) FROM CONTINUING OPERATIONS (44,847) 22,035 13,981
DISCONTINUED OPERATIONS:
Loss from operations, net of income tax -- (2,570) (2,542)
Loss on disposal, net of income tax (799) (9,818) --
-------- -------- --------
NET INCOME (LOSS) (45,646) 9,647 11,439
DIVIDENDS ON PREFERRED STOCK 9 101 105
EXCESS PREMIUM, PREFERRED REDEMPTION 673 -- --
-------- -------- --------
EARNINGS (LOSS) ON COMMON STOCK $(46,328) $ 9,546 $ 11,334
======== ======== ========
The accompanying notes are an integral part of these consolidated statements.
38
PAGE 38
WASHINGTON ENERGY COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Continued)
Year Ended September 30,
-------------------------------
1994 1993 1992
------- ------- -------
(in thousands, except
per share amounts)
EARNINGS (LOSS) PER COMMON SHARE:
From continuing operations $ (1.94) $ .95 $ .71
From discontinued operations (0.03) (.53) (.13)
------- ------- -------
Earnings (loss) per common share $ (1.97) $ .42 $ .58
======= ======= =======
AVERAGE COMMON SHARES OUTSTANDING 23,486 22,996 19,659
======= ======= =======
DIVIDENDS PER COMMON SHARE $ 1.00 $ 1.40 $ 1.40
======= ======= =======
TOTAL COMMON DIVIDENDS DECLARED BASED
ON SHARES OUTSTANDING ON RECORD DATES
DURING EACH PERIOD $23,468 $32,282 $27,499
======= ======= =======
The accompanying notes are an integral part of these consolidated statements.
39
PAGE 39
WASHINGTON ENERGY COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CAPITALIZATION
September 30,
---------------------
1994 1993
--------- ---------
(in thousands)
COMMON SHAREHOLDERS' INTEREST:
Common stock, $5 par value, authorized
50,000,000 shares, outstanding
23,713,688 and 23,311,375 shares $ 118,568 $ 116,557
Premium on common stock 199,571 197,917
Shareholders' earnings (deficit) reinvested
in the business (61,339) 8,457
--------- ---------
Total common shareholders' interest 256,800 322,931
--------- ---------
40%* 47%*
Shares
REDEEMABLE PREFERRED STOCK: Outstanding at
Washington Energy Company - Cumulative; September 30,
authorized 400,000 shares of $100 par (in thousands)
value and 800,000 shares of $25 par ------------------
value 1994 1993
Washington Natural - cumulative; ----- ----
authorized 1,000,000 shares of $100
par value and 4,000,000 shares of
$25 par value
5%, Series A, $100 par value -- 21 -- 2,100
6%, Series B, $100 par value -- 24 -- 2,448
8-7/8%, Series C, $100 par value -- 30 -- 3,000
8-3/4%, Series F, $100 par value -- 30 -- 3,000
8-3/4%, Series I, $25 par value -- 480 -- 12,000
7.45%, Series II, $25 par value 2,400 -- 60,000 --
8.50%, Series III, $25 par value 1,200 -- 30,000 --
--------- ---------
90,000 22,548
Less sinking-fund requirements
included in current liabilities -- (5,248)
--------- ---------
Total preferred stock 90,000 17,300
--------- ---------
14%* 2%*
*Percentage of total capitalization.
The accompanying notes are an integral part of these consolidated statements.
40
PAGE 40
WASHINGTON ENERGY COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CAPITALIZATION
(Continued)
September 30,
-------------------
1994 1993
-------- --------
(in thousands)
LONG-TERM DEBT:
First Mortgage Bonds
9.96% due 1995 $ 40,000 $ 40,000
8-7/8% due 1996 -- 3,200
8.80% due 1996 25,000 25,000
8-1/8% due 1997 3,340 3,480
10-1/4% due 1997 30,000 30,000
9.60% due 2000 25,000 25,000
9.57% due 2020 25,000 25,000
Secured Medium-Term Notes, Series A
5.55% and 5.67% due 1995 20,000 20,000
8.25% due 1998 11,000 11,000
7.08% due 1999 10,000 10,000
8.51% through 8.55% due 2001 19,000 19,000
7.53% and 7.91% due 2002 30,000 30,000
8.25% through 8.40% due 2022 35,000 35,000
Secured Medium-Term Notes, Series B
6.23% through 6.31% due 2003 28,000 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
-------- --------
350,340 353,680
Less sinking-fund requirements
and maturities included in
current liabilities (60,140) (280)
-------- --------
Total long-term debt 290,200 353,400
-------- --------
46%* 51%*
TOTAL CAPITALIZATION
$637,000 $693,631
======== ========
100%* 100%*
*Percentage of total capitalization.
The accompanying notes are an integral part of these consolidated statements.
41
PAGE 41
WASHINGTON ENERGY COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EARNINGS
REINVESTED IN THE BUSINESS AND PREMIUM ON CAPITAL STOCK
Year Ended September 30,
------------------------------
1994 1993 1992
-------- -------- --------
(in thousands)
Balance, beginning of year $ 8,457 $ 31,193 $ 47,358
Net income (loss) (45,646) 9,647 11,439
Excess premium, preferred
redemption (673) -- --
Cash dividends on capital stock:
Common stock, $1.00, $1.40, and
$1.40 per share, respectively (23,468) (32,282) (27,499)
Preferred stock
5%, Series A (3) (26) (21)
6%, Series B (1) (21) (28)
8-7/8%, Series C (5) (54) (56)
-------- -------- --------
Balance, end of year $(61,339) $ 8,457 $ 31,193
-------- -------- --------
WASHINGTON ENERGY COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF PREMIUM ON CAPITAL STOCK
Year Ended September 30,
------------------------------
1994 1993 1992
-------- -------- --------
(in thousands)
Balance at beginning of year $197,917 $145,075 $139,465
Excess of proceeds over par value of
common stock issued by public offer-
ing, less expense of sale -- 46,543 --
Excess of cost over par value of
preferred stock reacquired (492) -- --
Excess of purchase price over par value
of shares of common stock issued under
the Dividend Reinvestment and Stock
Purchase Plan 3,848 6,038 4,967
Excess of purchase price over par value
of shares of common stock issued under
the Employee Stock Purchase and Owner-
ship Plans 481 631 639
Excess of purchase price over par
value of shares of common stock
issued under the Directors Stock
Bonus Plan 2 8 19
Common and preferred stock expense (2,185) (378) (15)
-------- -------- --------
Balance at end of year $199,571 $197,917 $145,075
======== ======== ========
The accompanying notes are an integral part of these consolidated statements.
42
PAGE 42
WASHINGTON ENERGY COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended September 30,
------------------------------
1994 1993 1992
-------- -------- --------
(in thousands)
Cash Flow Provided by (Used in)
Operating Activities:
Income (loss) from continuing operations $(44,847) $ 22,035 $ 13,981
Adjustments to reconcile income (loss) from
continuing operations to net cash provided
by operating activities:
Pre-tax loss on merger of Resources 6,304 -- --
Depreciation, depletion and amortization 31,293 38,635 36,136
Provision for uncollectible accounts
receivable 3,267 1,613 1,195
Increase (decrease) in:
Federal income tax - current 6,571 (8,844) (1,571)
Federal income tax - deferred (23,452) 17,551 1,396
Deferred tax on merger of Resources 24,784 -- --
Deferred charges (19,953) (20,105) 1,305
Accounts receivable 35,766 (19,126) (21,591)
Accounts payable 6,668 4,767 12,312
Materials and supplies 11,824 (4,539) (156)
Other assets and liabilities (26,662) 8,251 19,256
Other 4,331 (3,632) 3,988
-------- -------- --------
Total adjustments 60,741 14,571 52,270
-------- -------- --------
Net cash provided by operating
activities 15,894 36,606 66,251
-------- -------- --------
Cash Flow Provided by (Used in) Investing
Activities:
Utility plant additions (84,506) (91,275) (94,860)
Coal, oil and gas and other
property expenditures (2,347) (38,211) (30,576)
Invested in Resources prior to merger (20,760) -- --
Proceeds from merger of Resources 63,661 -- --
Proceeds from disposition -- 1,339 2,689
-------- -------- --------
Net cash used in investing activities (43,952) (128,147) (122,747)
-------- -------- --------
The accompanying notes are an integral part of these consolidated statements.
43
PAGE 43
WASHINGTON ENERGY COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Continued)
Year Ended September 30,
------------------------------
1994 1993 1992
------- -------- --------
(in thousands)
Cash Flow Provided by (Used in)
Financing Activities:
Proceeds from issuance of common stock $ 6,342 $ 70,528 $ 7,437
Proceeds from issuance of preferred stock 87,887 -- --
Proceeds from debt financing
(reductions of):
First Mortgage Bonds -- 77,000 95,000
Commercial paper, net (20,316) 24,388 18,765
Bank loans, net -- (17,100) 17,100
Redemptions and repurchases
Preferred stock (23,221) (10,200) (200)
Long-term debt (3,340) (9,260) (46,884)
Cash dividend payments
Common (23,468) (32,282) (27,499)
Preferred (9) (101) (105)
-------- -------- -------
Net cash provided by
financing activities 23,875 102,973 63,614
-------- -------- -------
Net cash provided by (used in)
continuing operations (4,183) 11,432 7,118
Net cash used in discontinued operations (3,479) (3,795) (3,260)
-------- -------- -------
Net increase (decrease) in cash (7,662) 7,637 3,858
Beginning cash and cash equivalents 13,049 5,412 1,554
-------- -------- -------
Ending cash and cash equivalents $ 5,387 $ 13,049 $ 5,412
======== ======== =======
Supplemental Disclosures of Cash Flow Information
Cash Paid During the Year for:
Interest (net of amounts capitalized) $ 35,468 $ 30,685 $29,726
Income taxes 5,180 6,598 4,165
The accompanying notes are an integral part of these consolidated statements.
44
PAGE 44
WASHINGTON NATURAL GAS COMPANY
BALANCE SHEETS
ASSETS
September 30,
---------------------------------
1994 1993
--------- ---------
(in thousands)
UTILITY PLANT, at original cost $ 977,406 $ 903,892
Accumulated depreciation (239,520) (216,781)
--------- ---------
Net utility plant 737,886 687,111
--------- ---------
RECEIVABLES FROM AFFILIATED COMPANIES 2,020 4,459
--------- ---------
CURRENT ASSETS:
Cash and cash equivalents 427 9,773
Receivables, net of allowance for
uncollectible accounts of $2,096 and
$474, respectively 2,003 9,066
Unbilled revenue 9,961 11,072
Federal income taxes 20,161 8,000
Purchased gas receivable 21,261 23,869
Materials and supplies, at average cost 25,360 39,606
--------- ---------
Total current assets 79,173 101,386
--------- ---------
OTHER ASSETS AND DEFERRED CHARGES:
Environmental insurance receivable 33,947 --
Utility tax asset 18,810 18,767
Deferred charges and other 13,180 22,793
--------- ---------
Total other assets and deferred charges 65,937 41,560
--------- ---------
Total assets $ 885,016 $ 834,516
========= =========
The accompanying notes are an integral part of these balance sheets.
45
PAGE 45
WASHINGTON NATURAL GAS COMPANY
BALANCE SHEETS (Continued)
CAPITALIZATION AND LIABILITIES
September 30,
-------------------------------
1994 1993
-------- ---------
(in thousands)
CAPITALIZATION (see statements):
Common shareholder's interest $ 235,988 $ 262,334
Redeemable preferred stock 90,000 17,300
Long-term debt 290,200 353,400
--------- ---------
Total capitalization 616,188 633,034
--------- ---------
CURRENT LIABILITIES:
Current sinking fund requirements
and debt maturities 60,140 5,580
Accounts payable 30,914 27,489
Other current liabilities 26,773 11,204
Accrued general taxes 11,869 10,755
--------- ---------
Total current liabilities 129,696 55,028
--------- ---------
PAYABLES TO AFFILIATED COMPANIES 39,828 49,809
--------- ---------
DEFERRED CREDITS AND OTHER LIABILITIES:
Accumulated deferred income taxes 64,314 62,480
Other utility tax liabilities 12,560 13,139
Unamortized investment tax credits 10,132 10,913
Contributions in aid of construction 12,298 10,113
--------- ---------
Total deferred credits and
other liabilities 99,304 96,645
--------- ---------
Total capitalization and liabilities $ 885,016 $ 834,516
========= =========
The accompanying notes are an integral part of these balance sheets.
46
PAGE 46
WASHINGTON NATURAL GAS COMPANY
STATEMENTS OF INCOME
Year Ended September 30,
----------------------------------------
1994 1993 1992
-------- -------- --------
(in thousands)
OPERATING REVENUES:
Regulated utility sales $396,407 $367,853 $284,939
Merchandise and conservation products -- 63,210 66,083
-------- -------- --------
Total operating revenues 396,407 431,063 351,022
OPERATING EXPENSES:
Purchases of gas 223,502 181,157 130,336
Utility operations and maintenance 78,348 67,644 63,358
Other operations 3,423 55,801 57,182
Depreciation 30,901 28,183 25,786
General taxes 41,169 38,979 31,570
Federal income taxes (4,878) 9,497 4,647
-------- -------- --------
Total operating expenses 372,465 381,261 312,879
-------- -------- --------
OPERATING INCOME 23,942 49,802 38,143
OTHER INCOME (EXPENSE), net (2,067) (1,198) 135
-------- -------- --------
Gross income 21,875 48,604 38,278
INTEREST CHARGES 30,118 26,833 26,047
-------- -------- --------
NET INCOME (LOSS) (8,243) 21,771 12,231
DIVIDENDS ON PREFERRED STOCK 3,979 2,720 2,740
EXCESS PREMIUM, PREFERRED REDEMPTION 798 -- --
-------- -------- --------
EARNINGS (LOSS) ON COMMON STOCK $(13,020) $ 19,051 $ 9,491
======== ======== ========
The accompanying notes are an integral part of these statements.
47
PAGE 47
WASHINGTON NATURAL GAS COMPANY
STATEMENTS OF CAPITALIZATION
September 30,
-----------------------
1994 1993
-------- --------
(in thousands)
COMMON SHAREHOLDER'S INTEREST:
Common stock, $5 par value,
authorized 25,000,000 shares,
outstanding 10,774,599 and 10,524,409 shares $ 53,873 $ 52,622
Premium on common stock 163,978 161,618
Shareholder's earnings reinvested
in the business 18,137 48,094
-------- --------
Total common shareholder's interest 235,988 262,334
-------- --------
38%* 41%*
Shares
REDEEMABLE PREFERRED STOCK: Outstanding at
Cumulative; authorized September 30,
1,000,000 shares of $100 par value (in thousands)
and 4,000,000 shares of $25 par value --------------------
1994 1993
------ ------
5%, Series A, $100 par value -- 21 -- 2,100
6%, Series B, $100 par value -- 25 -- 2,500
8-7/8%, Series C, $100 par value -- 30 -- 3,000
8-3/4%, Series F, $100 par value -- 30 -- 3,000
8-3/4%, Series I, $25 par value -- 480 -- 12,000
7.45%, Series II, $25 par value 2,400 -- 60,000 --
8.50%, Series III, $25 par value 1,200 -- 30,000 --
-------- --------
90,000 22,600
Less sinking-fund requirements
included in current liabilities -- (5,300)
-------- --------
Total preferred stock 90,000 17,300
-------- --------
15%* 3%*
*Percentage of total capitalization.
The accompanying notes are an integral part of these statements.
48
PAGE 48
WASHINGTON NATURAL GAS COMPANY
STATEMENTS OF CAPITALIZATION
(Continued)
September 30,
-------------------------------
1994 1993
-------- --------
(in thousands)
LONG-TERM DEBT:
First Mortgage Bonds
9.96% due 1995 $ 40,000 $ 40,000
8-7/8% due 1996 -- 3,200
8.80% due 1996 25,000 25,000
8-1/8% due 1997 3,340 3,480
10-1/4% due 1997 30,000 30,000
9.60% due 2000 25,000 25,000
9.57% due 2020 25,000 25,000
Secured Medium-Term Notes, Series A
5.55% and 5.67% due 1995 20,000 20,000
8.25% due 1998 11,000 11,000
7.08% due 1999 10,000 10,000
8.51% through 8.55% due 2001 19,000 19,000
7.53% and 7.91% due 2002 30,000 30,000
8.25% through 8.40% due 2022 35,000 35,000
Secured Medium-Term Notes, Series B
6.23% through 6.31% due 2003 28,000 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
-------- --------
350,340 353,680
Less sinking-fund requirements
and debt maturities included in
current liabilities (60,140) (280)
-------- --------
Total long-term debt 290,200 353,400
-------- --------
47%* 56%*
TOTAL CAPITALIZATION $616,188 $633,034
======== ========
100%* 100%*
*Percentage of total capitalization.
The accompanying notes are an integral part of these statements.
49
PAGE 49
WASHINGTON NATURAL GAS COMPANY
STATEMENTS OF SHAREHOLDER'S EARNINGS
REINVESTED IN THE BUSINESS
Year Ended September 30,
-----------------------------------------
1994 1993 1992
-------- -------- --------
(in thousands)
Balance, beginning of year $ 48,094 $ 55,088 $ 67,288
Net income (loss) for the year (8,243) 21,771 12,231
Excess premium, preferred redemption (798) -- --
Cash dividends on capital stock:
Common stock $1.60, $2.60, and
$2.60 per share, respectively (16,937) (26,045) (21,691)
Preferred stock
5%, Series A (9) (108) (113)
6%, Series B (13) (154) (160)
8-7/8%, Series C (23) (271) (280)
8-3/4%, Series F (22) (437) (437)
8-3/4%, Series I (88) (1,750) (1,750)
7.45%, Series II (3,824) -- --
8.50%, Series III -- -- --
-------- -------- --------
Balance, end of year $ 18,137 $ 48,094 $ 55,088
======== ======== ========
WASHINGTON NATURAL GAS COMPANY
STATEMENTS OF PREMIUM ON CAPITAL STOCK
Year Ended September 30,
-----------------------------------------
1994 1993 1992
-------- -------- --------
(in thousands)
Balance at beginning of year $161,618 $108,186 $102,417
Excess of proceeds over par value of
common stock issued to parent company,
less expense of sale -- 46,714 --
Excess of cost over par value of
preferred stock reacquired (331) -- --
Excess of purchase price over
par value of shares of common
stock issued under the parent
company's Dividend Reinvestment
and Stock Purchase Plan 4,507 6,651 5,502
Excess of purchase price over
par value of shares of common
stock issued under the parent
company's Employee Stock Purchase
Plan 350 361 349
Common and preferred stock expense (2,166) (294) (82)
-------- -------- --------
Balance at end of year $163,978 $161,618 $108,186
======== ======== ========
The accompanying notes are an integral part of these statements.
50
PAGE 50
WASHINGTON NATURAL GAS COMPANY
STATEMENTS OF CASH FLOWS
Year Ended September 30,
----------------------------------------
1994 1993 1992
------- -------- --------
(in thousands)
Cash Flow Provided by (Used in)
Operating Activities:
Net income (loss) $ (8,243) $ 21,771 $ 12,231
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Depreciation and amortization 31,293 28,544 26,085
Provision for uncollectible accounts
receivable 3,571 1,610 1,173
Increase (decrease) in:
Federal income tax - Current (12,161) 1,830 (2,745)
Federal income tax - Deferred 1,053 12,724 4,512
Accounts receivable 41,150 (16,112) (20,406)
Accounts payable 1,945 6,966 (3,022)
Materials and supplies 14,246 (4,643) 42
Deferred charges (18,178) (17,724) (1,114)
Other assets and liabilities (21,910) 1,413 18,986
Other 4,114 (1,175) 2,882
-------- -------- --------
Total adjustments 45,123 13,433 26,393
-------- -------- --------
Net cash provided by operating
activities 36,880 35,204 38,624
-------- -------- --------
Cash Flow Used in Investing Activities:
Utility plant additions (84,506) (91,275) (94,860)
-------- -------- --------
The accompanying notes are an integral part of these statements.
51
PAGE 51
WASHINGTON NATURAL GAS COMPANY
STATEMENTS OF CASH FLOWS
(Continued)
Year Ended September 30,
-------------------------------------------
1994 1993 1992
-------- -------- --------
(in thousands)
Cash Flow Provided by (Used in)
Financing Activities:
Proceeds from issuance of common stock $ 6,108 $ 64,023 $ 6,992
Proceeds from issuance of preferred stock
Proceeds from debt financing
(reductions of):
Preferred stock 87,887 -- --
First mortgage bonds -- 77,000 95,000
Commercial paper (8,502) (11,250) 10,055
Bank loans, net -- (17,100) 17,100
Redemptions and repurchases
Preferred stock (23,398) (10,300) (300)
Long-term debt (3,340) (9,260) (46,884)
Cash dividend payments
Common (16,937) (26,045) (21,691)
Preferred (3,538) (2,725) (2,745)
-------- -------- --------
Net cash provided by
financing activities 38,280 64,343 57,527
-------- -------- --------
Net increase (decrease) in cash and
cash equivalents (9,346) 8,272 1,291
Beginning cash and cash equivalents 9,773 1,501 210
-------- -------- --------
Ending cash and cash equivalents $ 427 $ 9,773 $ 1,501
======== ======== ========
Supplemental Disclosures of Cash Flow Information
Cash Paid During the Year for:
Interest (net of amounts capitalized) $ 29,836 $ 26,264 $ 24,892
Income taxes 2,400 601 3,134
The accompanying notes are an integral part of these statements.
52
PAGE 52
WASHINGTON ENERGY COMPANY AND SUBSIDIARIES
WASHINGTON NATURAL GAS COMPANY
NOTES TO FINANCIAL STATEMENTS
Certain information, necessary to understand Washington Natural's financial
condition and results of operations, is substantially the same as disclosed by
the Company in this report.
(1) SUMMARY OF ACCOUNTING POLICIES:
(a) General
The consolidated financial statements include the accounts of Washington Energy
Company ("the Company") and its wholly-owned subsidiaries, after elimination of
intercompany items and transactions. The Company's subsidiaries are Washington
Natural Gas Company ("Washington Natural"); Washington Energy Services Company
("Services"); Washington Energy Gas Marketing Company ("WEGM"); WECO Finance
Company and its wholly-owned subsidiary; Thermal Energy, Inc., and its
wholly-owned subsidiary; and ThermRail, Inc. Due to the merger of Washington
Energy Resources Company ("Resources") with a subsidiary of Cabot Oil & Gas
Corporation ("Cabot"), Houston, Texas, the current year financial statements
through the date of the merger show Resources' earnings in "Other income
(expense)," using the equity method of accounting. The prior year financial
statements reflect Resources on a consolidated basis in accordance with
generally accepted accounting principles ("GAAP").
Washington Natural's accounting records are maintained in accordance with GAAP
and with the Federal Energy Regulatory Commission's ("FERC") uniform system of
accounts, which has been adopted by the Washington Utilities and Transportation
Commission ("WUTC").
(b) Reclassifications
Certain amounts in the 1993 and 1992 financial statements have been
reclassified to conform with the 1994 presentation. Certain regulated revenues
of Washington Natural, which were previously reported as "Merchandise,
conservation products and other" in the income statement, are now combined with
utility gas sales and reported as "Regulated utility sales". The costs of
developing and implementing certain major computer software applications were
previously reported as deferred charges and are now reported in property, plant
and equipment.
(c) Utility Plant and Depreciation
Utility plant is stated at the original cost of construction. When a
depreciable unit of property is retired, the cost is credited to utility plant
and charged to accumulated depreciation together with the cost of removal, less
any salvage. No gain or loss is recognized upon normal retirement.
Substantially all of the property of Washington Natural is subject to the lien
of its First Mortgage Bonds.
Provisions for depreciation of utility plant are determined by applying
straight-line rates to the original cost of the various classifications of
property, adjusted for estimated removal cost and salvage. These rates may be
adjusted prospectively from time to time based upon revised estimates of the
useful lives, removal costs and salvage of the various classes of assets, with
53
PAGE 53
approval of the WUTC. The average depreciation rate used was approximately
3.5% for 1994 and 3.6% for 1993 and 1992.
(d) Regulatory Assets
Washington Natural defers certain costs that otherwise would be charged to
expense if it is probable that the WUTC will permit future recovery of such
costs. Differences between the actual cost of purchased gas and that allowed
by the WUTC are deferred and recovered or repaid through a "purchased gas cost
adjustment" mechanism. Certain income tax deferrals are discussed in Note 2.
The remainder of these costs are reported as "Deferred charges and other" in
the financial statements and are amortized and recovered in rates as prescribed
by the WUTC. At September 30, 1994 and 1993, such deferred charges totaled
$3,614,000 and $1,918,000, respectively. Of the total year end 1994 balance,
$1,831,000 was being amortized and recovered in rates, with the remainder
subject to future regulatory review and approval for recovery.
(e) Interest Capitalized
The Company capitalizes the interest costs incurred to finance assets under
construction or development. Interest capitalized relative to utility plant
construction in 1994, 1993 and 1992 was $453,000, $250,000, and $656,000,
respectively. The Company discontinued interest capitalization on its coal
projects in 1994 as the projects were not actively under development during the
year. Total interest capitalized in 1993 and 1992 related to the coal projects
was $541,000 and $549,000, respectively.
(f) Unbilled Gas Revenues
Washington Natural accrues revenues for gas delivered but not billed to
customers based on estimated usage from the meter reading dates to month end.
(2) INCOME TAXES:
(a) General
The Company and all of its subsidiaries file a consolidated federal income tax
return. Current and deferred taxes are recorded by each member of the
consolidated group as if each were a stand-alone entity using the consolidated
rate. Under an informal tax sharing arrangement, each member of the group pays
or is paid for the current tax liability or benefit it generates when paid or
realized by the consolidated group.
54
PAGE 54
The Company's consolidated income tax provision is as follows (in thousands):
1994 1993 1992
------- ------- -------
Charged to operations
Current $(8,257) $(4,598) $(1,590)
Deferred 1,375 15,126 6,035
Investment tax credit, net (781) (796) (780)
------- ------- -------
(7,663) 9,732 3,665
Charged to other income
(expense) 23,398 (36) 325
Charged to discontinued
operations (430) (6,610) (1,309)
------- ------- -------
Total income tax expense $15,305 $ 3,086 $ 2,681
======= ======= =======
The amount charged to "Other income (expense)" in 1994 consists primarily of
deferred income taxes provided on the Cabot merger (see Note 13 page 65).
Washington Natural's consolidated income tax provision is as follows
(in thousands):
1994 1993 1992
------- ------ ------
Charged to operations:
Current $(5,309) $2,380 $1,341
Deferred 1,212 7,913 4,086
Investment tax credit, net (781) (796) (780)
Charged to other income, net (1,113) 50 254
------- ------ ------
Total income tax expense (benefit) $(5,991) $9,547 $4,901
======= ====== ======
On October 1, 1993, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 109, "Accounting for Income Taxes," which superseded
SFAS No. 96, the prior accounting standard for income taxes the Company had
followed since 1988. SFAS Nos. 109 and 96 both prescribe use of the liability
method, whereby deferred tax assets and liabilities are recognized for
temporary differences between the carrying amounts of assets and liabilities in
the financial statements and their respective tax bases. Deferred tax assets
and liabilities are measured using enacted tax rates that will be in effect
when the temporary differences are expected to be settled. The effect of a
change in tax rates on deferred tax assets and liabilities is recognized in
income in the period the change is enacted. Adoption of SFAS No. 109 had no
material impact on results of operations.
55
PAGE 55
The temporary differences and associated tax assets and liabilities comprising
the Company's net deferred tax liability at September 30 are as follows (in
thousands):
1994
--------
Deferred tax liabilities
Accelerated depreciation $ 61,264
Investment in Cabot stock 29,735
Coal development activities 11,813
Environmental remediation 1,943
Other 1,497
--------
Total 106,252
--------
Deferred tax assets
Net operating loss carry-
forward 20,045
Alternative minimum tax
credits 8,333
Reserves for future losses 4,951
Other 405
--------
Total 33,734
--------
Net deferred tax liability $ 72,518
========
The components of deferred income tax expense for years under which the Company
followed SFAS No. 96 are as follows:
Year Ended September 30,
------------------------
1993 1992
------- -------
(in thousands)
Included in Operating Expense:
Tax depreciation $ 4,452 $3,588
Gas and oil exploration and
production activities 5,721 1,960
Coal development activities 1,398 (410)
Railroad activities 44 55
Investment activities (69) (161)
Waste conversion activities (65) 503
Interest capitalized 184 -
Environmental activities 3,461 500
------- ------
15,126 6,035
Included in Other Income:
Other non-utility activities 50 219
------- ------
Total deferred tax provision $15,176 $6,254
======= ======
56
PAGE 56
At September 30, 1994 the following carry-forwards are available to reduce the
Company's future income tax liability (in thousands):
Tax
Reduction Expiration
--------- ----------
Net operating loss $20,045 2009
Alternative minimum tax credits 8,333 Unlimited
======= =========
The Company has determined it is more likely than not that the deferred tax
assets will be realized and, therefore, a valuation allowance is not required.
The alternative minimum tax credits can be used in the future to reduce the
Company's regular tax liability in excess of its minimum tax liability.
(b) Flow-through accounting
In accordance with a directive from the WUTC, Washington Natural uses
"flow-through accounting," wherein no charge is made currently in the income
statement for certain income tax payments deferred as allowed by the Internal
Revenue Service. However, as required by SFAS No. 109, a deferred tax
liability or asset has been recorded for the amount of income tax payments
deferred. A deferred utility tax asset or liability has been recorded to
reflect the expected recovery through customer rates when these taxes become
payable in future periods. Based on the WUTC's past decisions and policies,
management expects that the Commission will continue to allow Washington
Natural full recovery in its rates of the increased future tax expense
resulting from the use of this accounting method.
(c) Reconciliation of Statutory Income Tax Rate to Effective Rate
WASHINGTON ENERGY COMPANY AND SUBSIDIARIES
Year Ended September 30,
------------------------------------
1994 1993 1992
------ ------ ------
Statutory income tax rate (35.0%) 34.8% 34.0%
Excess of book over tax depreciation not
deferred 3.4 2.2 4.9
Accelerated benefit on early retirement
of depreciable assets (2.8) (2.8) (3.6)
Tax credit on gas produced from tight
sands formation 4.9 (5.1) (5.5)
Amortization of investment tax credit (2.7) (2.5) (4.3)
Dividends-minority interest 4.8 2.8 5.0
Cabot merger and related reserves (see
Note 13 page 65) 83.3 -- --
Effect of tax rate change from 34% to 35% -- 2.8 --
Adjustments related to prior years -- -- (4.1)
Other, net (1.8) (1.6) (4.2)
---- ---- ----
Effective income tax rate 54.1% 30.6% 22.2%
==== ==== ====
57
PAGE 57
WASHINGTON NATURAL GAS COMPANY
Year Ended September 30,
-----------------------------------
1994 1993 1992
------ ---- ----
Statutory income tax rate (35.0%) 34.8% 34.0%
Excess of book over tax depreciation
not deferred 7.0 2.2 5.1
Accelerated benefit on early
retirement of depreciable assets (5.7) (2.9) (3.8)
Amortization of investment tax credit (5.5) (2.5) (4.5)
Other, net (2.9) (1.1) (2.2)
----- ---- ----
Effective income tax rate (42.1%) 30.5% 28.6%
===== ==== ====
The investment tax credit was repealed by Congress in 1986. Credits earned
previously are being credited to income over the lives of the property giving
rise to the credits.
(3) COMMON STOCK:
(a) Public Offering of $5 Par Value Common Stock
In October 1992, the Company sold 3,050,000 shares of its common stock to the
public for net proceeds of $61,793,000. Proceeds were used to repay a portion
of the short-term borrowings outstanding at the time of sale.
(b) Employee Stock Purchase Plan
The Company has an Employee Stock Purchase Plan, under which options are
granted to eligible employees who elect to participate in the plan. The option
price under the plan is 90% of the fair market value of the common stock at the
grant date, or 100% of the fair market value at the exercise date, whichever is
less; but in no event less than the par value of the common stock. In 1994,
1993 and 1992, 27,055, 21,549, and 21,051 shares, respectively, were issued
under the plan at average prices per share of $16.27, $20.08, and $19.99,
respectively, with average fair market values on the exercise date of $16.44,
$22.09, and $22.57, respectively. At September 30, 1994, 60,282 shares were
authorized for future issues.
(c) Dividend Reinvestment and Stock Purchase Plan
This plan, available to all holders of the Company's common stock, provides for
reinvestment of dividends at 95% of the average of the high and low prices of
Washington Energy's common stock on each dividend payment date. The plan also
provides for the purchase of common stock with optional cash payments not to
exceed $3,000 per quarter at 100% of the average price on the dividend payment
date. During 1994, 1993 and 1992, 363,879, 367,421, and 321,020 shares,
respectively, were issued under the plan. At September 30, 1994, there were
108,492 shares of the Company's common stock authorized but unissued under this
plan.
58
PAGE 58
(d) Performance Share Plan
A Performance Share Plan was established October 1, 1981, which provides for
the annual assignment of performance units to designated officers and other key
executives, and for payment of the awards to be contingent upon attainment of
future performance objectives of the Company. Under current committee policy,
unless otherwise authorized by the committee, at least fifty percent of any
payments made pursuant to the plan are to be paid in common stock of the
Company and the balance of the payments are to be paid in cash or shares of
common stock. The actual value of each award at the time of payment depends on
(a) the number of contingent performance units assigned, (b) the Company's
financial performance for the four year period following the assignment
compared with pre-established goals, and (c) the market value of the Company's
common stock at the time of any award payment. At September 30, 1994, the
remaining maximum number of shares that could be used to make award payments
was 774,324 shares of common stock. At September 30, 1994, 118,154 performance
units had been assigned under the plan. During 1994, there were 10,489 shares
issued under the plan.
(e) Stock Option Plan
The Stock Option Plan, with stock appreciation rights, approved by the
shareholders in February 1984, expired September 30, 1993. As of September 30,
1994, options to purchase 187,300 shares were granted and unexercised, and
198,632 shares had been issued under the plan. The options and appreciation
rights exercised during 1994, 1993 and 1992 were 700, 45,427 and 21,600,
respectively, at average prices of $15.06, $19.43 and $19.38. Total
compensation expense recognized for this plan in 1994, 1993 and 1992,
respectively, was $0, $135,845 and $46,508. At September 30, 1994, the
exercise price on these options range from a low of $20.06 to a high of $21.38,
and expire between 1999 and 2002.
The Board of Directors, by resolution at its meeting on December 15, 1993,
recommended a new Stock Option Plan which was approved by a vote of the
shareholders on February 25, 1994. Under this plan, as in the previous plan,
options are offered to executive and key employees to purchase shares of
Washington Energy's common stock at a price of not less than 100% of the market
value of such shares at the time of granting the option. 800,000 shares of
common stock have been authorized for the purposes of this plan. Options to
purchase 106,200 shares at prices ranging from $18.25 to $18.375, with
expiration dates ranging from December 14, 2003 to January 14, 2004, have been
granted under this plan. As of September 30, 1994 all 106,200 options were
outstanding.
(f) Directors' Stock Bonus Plan
The Directors' Stock Bonus Plan was approved by the shareholders in February
1991. The plan provides for annual grants of 200 shares of Washington Energy
Company common stock to outside directors. At September 30, 1994, 8,000 shares
had been awarded under the plan. These awards are deferred until the director
leaves the Board of Directors. When the director leaves the Board of Directors
the shares are issued. During 1994, 1993 and 1992, 190, 382, and 1,145 shares,
respectively, were issued under the plan.
(g) General
The increase in common equity resulting from issuance of shares under the plans
was $6,342,000 in 1994, $8,735,000 in 1993, and $7,437,000 in 1992.
59
PAGE 59
Unexercised options at September 30, 1994, do not result in any material
dilution of earnings per common share.
(4) DIVIDEND 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. At September 30, 1994, all retained earnings of Washington
Natural were restricted under the terms of these indentures. Washington
Natural is restricted from paying dividends to Washington Energy until its
retained earnings increase by more than $23 million.
(5) FINANCING, SOURCES OF CAPITAL AND NEW CONSTRUCTION:
The Company's projected 1995 utility construction requirements and other
capital expenditures are estimated at $82 million. The Company plans to fund
these programs with internally generated cash flow and short-term borrowings.
The Company has a $150 million commercial paper program available at current
market rates. At September 30, 1994, $61 million of this program was unused.
This program is backed by a committed revolving credit agreement with eight
banks. The credit agreement allows the Company to borrow at market interest
rates for unsecured commercial loans and requires payment of an annual
commitment fee of .25% on the average unused amount.
The Company has uncommitted short-term credit arrangements whereby it may
borrow up to $80 million at current short-term market rates. At September 30,
1994, $44 million of this credit line was available.
Washington Natural has an agreement with Cooperative Receivables Corporation
("CRC") whereby it may sell to CRC up to $90 million principal amount of
undivided interests in merchandise and gas accounts receivable at face value.
With the transfer of the merchandise business to Services in 1994, new
merchandise receivables are no longer being sold to CRC. At September 30,
1994, $56 million of outstanding merchandise and gas receivables had been sold
under the agreement, which represented all but approximately $2 million of
total receivables eligible to be sold to CRC.
The composite interest rate at September 30, 1994, 1993 and 1992, on
outstanding short-term borrowings was 5.01%, 3.33% and 3.52%, respectively.
During the past three years, short-term borrowing levels and average interest
rates were as follows:
1994 1993 1992
------ ------ ------
Maximum outstanding
(in millions) $174.3 $161.4 $138.2
Average outstanding
(in millions) $115.5 $116.5 $111.6
Weighted average rate 4.2% 4.2% 6.0%
The Company has entered into interest rate swap agreements to reduce the impact
of changes in interest rates on its floating-term debt. The two agreements
outstanding at September 30, 1994, effectively change the Company's interest
rate on commercial paper to 8.59% on a notional principal amount of
60
PAGE 60
$25 million expiring December 28, 1995, and to 9.64% on a notional principal
amount of $16.5 million expiring March 31, 2000.
The Company leases the majority of its motor vehicle fleet, certain computer
and telecommunications equipment and office space at four locations, which are
accounted for as operating leases. Annual rental expense for 1994, 1993 and
1992 was $4,050,000, $5,098,000 and $4,889,000, respectively. Minimum annual
lease payments are as follows (in thousands):
1995 $ 3,694
1996 2,472
1997 1,552
1998 941
1999 495
Thereafter 15,177
-------
Total $24,331
=======
(6) LONG-TERM DEBT:
The total principal amount of Washington Natural's First Mortgage Bonds
authorized by the indenture dated April 1, 1957, is not limited except as
restricted by the provisions of the indenture and except as may be limited by
law.
The Company's sinking fund requirements and long-term debt maturities for the
next five years ending September 30 are: 1995, $60,140,000; 1996, $25,140,000;
1997, $140,000; 1998, $43,920,000; and 1999, none. These are expected to be
refunded by a combination of short-term borrowings and the issuance of
long-term debt.
(7) COAL AND RAILROAD PROPERTIES:
Thermal Resources, Inc., a wholly-owned subsidiary of Thermal Energy, Inc., has
subleased to Montco, a 95%-owned partnership formed to develop coal properties
in southeastern Montana, its rights to surface control over and mineral rights
to approximately 270 million tons of recoverable coal reserves and surface
control over substantial additional reserves in the area. Proposals for test
burns of Montco's coal have been made to several utilities. The results of
such tests would better define the quality of the reserves.
ThermRail, Inc., holds an 87.5% partnership interest in the Tongue River
Railroad Company ("TRR"), which was formed to develop a railroad to transport
Montco's coal to market. TRR is currently awaiting approval by the Interstate
Commerce Commission of a request to extend the proposed rail line beyond the
Montco properties. This would facilitate use of the line by existing coal
shippers, which would enhance the economic viability of developing Montco's
coal reserves.
The Company's investment in Thermal Energy, Inc., totaled $28,001,000 and
$26,238,000 at September 30, 1994 and 1993, respectively, and its investment in
ThermRail, Inc., totaled $5,584,000 and $4,925,000 at the respective dates.
The Company does not anticipate incurring significant expenditures to develop
the coal reserves or the railroad during the next two years. In management's
opinion, no events have occurred or circumstances exist that indicate any
material impairment of these investments.
61
PAGE 61
(8) PREFERRED STOCK:
On September 15, 1994, Washington Natural sold 1,200,000 shares of 8.50%
cumulative preferred stock, $25 par value, to the public for net proceeds of
$29,105,000. The new preferred stock is redeemable on or after September 1,
1999, at par value and has no sinking-fund requirements.
In November 1993, Washington Natural sold 2,400,000 shares of 7.45% cumulative
preferred stock, $25 par value, to the public following the early redemption of
all its other preferred stock series. The sale netted proceeds to Washington
Natural of $58,782,000. The preferred stock is redeemable on or after November
1, 2003, at par value and has no sinking-fund requirements.
As part of a plan for early redemption, the Company and Washington Natural
redeemed in November 1993, all previously outstanding preferred stock. The
following shares were redeemed at the following prices: Series A, 21,000
shares, $102; Series B, 24,480 shares, $101; Series C, 30,000 shares, $101;
Series F, 30,000 shares, $102.9167; and Series I, 480,000 shares, $25.7292.
Washington Natural had previously elected to redeem at par value 10,000 shares
of its preferred stock Series F, $100 par value, and 160,000 shares of
preferred stock Series I, $25 par value, through additional, optional
sinking-fund payments in September 1993.
(9) PENSION AND RETIREMENT BENEFITS:
The Company has a defined benefit pension plan (the "Plan") for the benefit of
all regular employees who have attained 21 years of age and have completed one
year of service. Benefits are based on annual compensation and length of
service. The Company's policy is to fund the Plan annually at the level
necessary to provide benefits attributable to service to date and for benefits
expected to be earned in the future.
As required by SFAS No. 87, the Company follows the projected unit credit
method for determining pension expense for financial reporting purposes.
Application of this accounting method on October 1, 1987, resulted in a
transition gain (excess of Plan assets over projected benefit obligations) of
$14,584,000, which is being amortized over 18 years. The entry-age normal
actuarial cost method continues to be used for funding purposes.
62
PAGE 62
The following tables set forth the Plan's funded status and the pension
liability recognized in the consolidated financial statements (in thousands):
1994 1993 1992
------- ------- -----------
Actuarial present value of accumulated
benefit obligations:
Vested $36,828 $33,360 $ 28,936
Non-vested 732 478 1,731
------- ------- -----------
Total $37,560 $33,838 $ 30,667
======= ======= ===========
Projected benefit obligations for service
rendered to date $48,538 $43,965 $ 39,963
Plan assets at fair value, primarily marketable
stocks, bonds and short-term investments 57,812 57,414 51,906
------- ------- -----------
Plan assets in excess of projected benefit
obligations 9,274 13,449 11,943
Unrecognized amounts
Prior service cost 1,976 2,141 2,306
Net gain (4,683) (7,745) (5,212)
Net transition gain (8,913) (9,723) (10,533)
------- ------- -----------
Net pension liability included
in the balance sheet $(2,346) $(1,878) $ (1,496)
======= ======= ===========
Net pension cost includes:
Service cost of benefits earned
during the period $ 2,577 $ 2,249 $ 2,023
Interest cost on projected benefit
obligations 3,238 2,941 2,703
Actual return on Plan assets (1,870) (6,891) (5,665)
Amortization of net transition
gain (810) (810) (810)
Unrecognized prior service cost 165 165 165
Amortization of deferred gain (456) (326) (196)
Asset gain (loss) deferred (2,376) 3,054 2,146
------- ------- -----------
Net pension cost $ 468 $ 382 $ 366
======= ======= ===========
Assumptions used in the calculations:
Weighted-average discount rate 7 1/2% 7 1/2% 7 1/2%
Long-term rate of return on assets 7 1/2% 7 1/2% 7 1/2-8 1/2%
Compensation increase 6% 6% 6%
======= ======= ===========
The Company also has a supplemental executive retirement plan ("SERP") which
provides pension benefits to Company officers in addition to those provided by
the Plan. Benefits are based on annual compensation and are payable from
general corporate funds. As a long-term funding mechanism, the Company
purchases life insurance policies on its officers sufficient to pay expected
future benefits.
In 1994, the Company recorded a liability for future benefit obligations of
SERP and an asset representing the cash surrender value of life insurance
policies purchased to fund SERP. For accounting and disclosure purposes,
neither the total death benefit from the life insurance policies of
63
PAGE 63
$24,100,000 nor the policies' net cash surrender value of $2,696,000 at
September 30, 1994, qualify as plan assets since the proceeds of the policies
are not segregated or formally restricted to funding SERP.
The following tables set forth SERP's funded status and the liability
recognized in the consolidated financial statements (in thousands):
1994
-------
Actuarial present value of accumulated plan
benefit obligations
Vested $ 4,005
Non-vested 716
-------
Total $ 4,721
=======
Projected benefit obligations for service
rendered to date $ 4,721
Plan assets --
-------
Plan assets less than projected benefit
obligations (4,721)
Unrecognized amounts
Prior service cost 4,451
Gain (654)
-------
Net pension liability included
in the balance sheet $ (924)
=======
Net pension cost includes:
Service cost of benefits earned during the period $ 322
Interest cost on projected benefit obligations 383
Unrecognized prior service cost 289
-------
Net pension cost $ 994
=======
Assumptions used in the calculations:
Weighted-average discount rate 7 1/2%
Compensation increase 4 1/2%
The Company does not offer any significant post-retirement benefits other than
pensions.
(10) LIABILITY FOR ENVIRONMENTAL MATTERS:
Washington Natural has principal responsibility for the cleanup of a former
manufactured gas plant site in the Tide Flats area of Tacoma, Washington, which
the U.S. Environmental Protection Agency has determined contains several
contaminants and requires cleanup under the Comprehensive Environmental
Response, Compensation and Liability Act. Subsequent to fiscal year end,
remediation activities have been substantially completed. Based upon cleanup
cost estimates at fiscal year end and the cost of insurance litigation,
described below, less insurance settlements totaling $7,140,000, Washington
Natural's share of the cleanup cost at this site was estimated to be
$33,600,000. In 1994, Washington Natural recorded a current liability for the
difference between the estimated total unrecovered cleanup cost and the
64
PAGE 64
$27,998,000 of expenditures incurred through the end of the fiscal year, and
also recorded a corresponding receivable in the amount of $33,600,000 for the
probable insurance recovery based upon the litigation described below.
In June 1991, Washington Natural filed a lawsuit in King County Superior Court,
State of Washington, against certain insurance companies that provided
insurance to Washington Natural at various times dating back to the 1940s. On
June 10, 1994, the Superior Court entered final judgment in favor of Washington
Natural. Under the terms of the final judgment, Washington Natural is entitled
to collect its present and future uncompensated reasonable and necessary costs
in remediating the site from the policies of the insurer defendants in the
action other than those that previously settled with Washington Natural. The
liability of these insurers is joint and several, up to the annual limits of
their policies and subject to relevant underlying limits. The judgment
provides for limitation of some of the insurers' liability based on the
presence in their policies of "owned property" or "alienated premises" clauses.
However, Washington Natural does not expect this limitation to affect its
ability to collect all of its remediation costs. The final judgment further
awards Washington Natural prejudgment interest and declares that Washington
Natural is entitled to collect its reasonable attorney fees and costs incurred
in obtaining coverage of its remediation costs. The defendants have appealed
the judgment to the Washington State Court of Appeals.
In the June 1994 quarter, Washington Natural also accrued $2,231,000 for
estimated environmental investigation, legal and remediation costs associated
with certain former manufactured gas plant sites, one of which is located in
Everett, Washington. The Everett site is the subject of a remedial
investigation and feasibility study that is scheduled for completion in June
1995. Washington Natural cannot reasonably estimate the extent or range of
future remediation costs, if any, at the Everett site until more information is
known from the remedial investigation and feasibility study.
Based on all known facts and analyses, Washington Natural believes it is not
likely that the identified environmental liabilities, after consideration of
insurance recoveries and the judgment entered against certain insurance
companies, will result in a material adverse impact on Washington Natural's
financial position or operating results and cash flow trends.
(11) Litigation
Shareholder Lawsuit - A class-action lawsuit was filed against the Company and
two of its officers in U.S. District Court, Western District of Washington, in
February 1994, alleging violations of state and federal securities act
provisions and associated violations of Washington state law. The essence of
the complaint concerned alleged disclosure violations regarding the nature or
the extent of the downside financial risk associated with the 1992 utility rate
request filing of Washington Natural. In May 1994, the Company filed a Motion
to Dismiss, which was granted on July 25, 1994. The plaintiffs have appealed
the dismissal to the United States Court of Appeals for the Ninth Circuit;
however, in management's opinion, the appeal is unlikely to succeed.
Anti-Trust Lawsuit - On September 6, 1994, Cost Management Services, Inc.
("Cost Management"), a Mercer Island, Washington, company involved in the
purchase and resale of natural gas, filed an action against Washington Natural
in U.S. District Court, Western District of Washington. Cost Management
alleges that Washington Natural has monopolized or attempted to monopolize the
market for natural gas in central western Washington. Cost Management also
65
PAGE 65
alleges 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 seeks injunctive relief and
damages in an unspecified amount. Washington Natural has denied the
allegations and is vigorously defending this matter. A Motion to Dismiss the
lawsuit has been filed by Washington Natural. Neither the outcome of nor the
financial exposure from this lawsuit can be predicted at this time in the
absence of pre-trial discovery.
(12) 1994 Charges
In the third quarter of 1994, the Company recognized $18,308,000 of
restructuring and other one-time charges predominantly related to Washington
Natural. Charges totaling $7,097,000 relate to restructuring and downsizing
utility operations and include employee severance costs and expensing of costs
previously capitalized in planning a new headquarters building that is not
needed currently. The employee severance charge of $3,500,000 related to a
staffing reduction of 12% from the October 1993 level of 1,480 employees. As
of September 30, 1994, $1,327,000 in termination benefits had been paid out.
The third-quarter charges also included provisions by Washington Natural for
estimated environmental investigation, legal and remediation costs associated
with certain former manufactured gas plant sites and the write-off of certain
deferred costs. These charges totaled $2,231,000. Washington Natural also
recorded a $3,351,000 charge for the supplemental executive retirement plan to
reflect recent management changes.
(13) Merger of Oil and Gas Subsidiary
On May 2, 1994, the Company merged its oil and gas exploration and production
subsidiary, Resources, with a wholly-owned subsidiary of Cabot in a tax-free
exchange. The Company received 2,133,000 shares of Cabot Class A common stock,
1,134,000 shares of 6% convertible voting preferred stock of Cabot, stated
value $50, and $63,661,000 cash in exchange for all the outstanding capital
stock of Resources. The 1,134,000 shares of Cabot preferred stock are
convertible into 1,972,174 shares of Cabot Class A common stock, and are
entitled to the same number of votes on shareholder matters, making the Company
the holder of 16.6% of Cabot's total voting securities. As part of the
transaction Cabot increased its Board of Directors from nine to eleven and
appointed two directors nominated by the Company to fill the new positions.
The Company recorded a net loss on the merger of $13,895,000, after providing
for deferred taxes of approximately $32,000,000, and established a reserve of
$6,800,000 for a potential downward purchase price adjustment based on the
performance of wells in a certain field over one year.
Excluded from the merger were certain gas transportation, storage and other
contractual arrangements of Resources that were retained by the Company. Upon
completion of the merger, the Company established reserves of $18,000,000 for
anticipated future losses associated with these excluded contractual
arrangements (see Note 14 page 66).
66
PAGE 66
The Company's interest in Cabot's common stock is being accounted for using the
equity method because the Company, through its representation on Cabot's Board,
has the ability to exercise significant influence over operating and financial
policies of Cabot.
The following table details the Company's investment in Cabot at September 30,
1994, and earnings and dividends received from the investment during the year
(dollars in thousands):
Investment in Cabot
Preferred stock $51,619
Common stock 46,182
Percentage of total Cabot common 9.4%
Percentage of voting interest in Cabot 16.6%
Pre-tax income
Preferred dividends accrued $ 1,418
Equity in earnings (loss) (573)
Dividends received
Preferred $ 567
Common 171
As of the merger date, the carrying value of the Company's investment in Cabot
exceeded the amount of underlying equity in the net assets of Cabot by
$26,800,000. Based on the closing price on the New York Stock Exchange on
September 30, 1994, the aggregate fair value of the Company's investment in
Cabot common stock was $39,194,000. No fair value has been determined for the
Cabot preferred stock as it is not publicly traded.
(14) COMMITMENTS AND CONTINGENCIES
WEGM demand charge and gas sales obligations
WEGM holds firm rights to transport natural gas on the Nova Corporation of
Alberta ("Nova"), Alberta Natural Gas Company ("ANG") and Pacific Gas
Transmission Company ("PGT") pipelines from Alberta, Canada, to the northern
border of California, as well as certain gas storage rights at the Alberta
Energy Company ("AECO") field in Alberta and the Jackson Prairie field in
western Washington. These rights were formerly held by a wholly-owned
subsidiary of Resources but were excluded from the merger of Resources and
Cabot completed in May 1994. WEGM has contracted with IGI Resources ("IGI"),
Boise, Idaho, to manage these rights for a five-year period.
The transportation rights on the PGT pipeline consist of approximately 25,000
MMBtu per day of annual capacity and 20,000 MMBtu per day of winter-only
capacity to Stanfield, Oregon, and approximately 20,000 MMBtu per day of annual
capacity to the California border. WEGM holds similar rights on Nova and ANG.
Effective November 1, 1995, WEGM has permanently assigned to IGI all of its
Stanfield capacity. WEGM's remaining PGT rights expire in October 2023, and
the ANG and Nova rights expire in October 2008, with annual renewal options.
The annual obligations for future demand charges through the primary term of
WEGM's gas transportation and storage contracts are as follows: 1995,
$9,403,000; 1996, $5,139,000; 1997, $4,654,000; 1998, $4,654,000; 1999,
$4,654,000; thereafter, $92,798,000.
WEGM has entered into a 20-year contract to supply gas to an electricity
cogeneration plant currently under construction in western Washington. The
67
PAGE 67
contract is for approximately 8,000 MMBtu per day commencing in 1996.
Discussions are underway with several Canadian gas producers to provide firm
20-year supply to service the contract. WEGM will transport the gas using a
portion of its PGT capacity to California. WEGM expects to secure the gas
supply at such price and terms to fully recover its transportation costs.
IGI's management contract provides for incentive payments based on the
percentage of pipeline demand charges mitigated. Currently, as an expansion
capacity holder, WEGM cannot fully recover its demand charges, which are
approximately 70 percent higher than those paid by holders of vintage capacity.
FERC is currently considering a request from PGT for the cost of the expansion
capacity to be "rolled in" with the costs of the vintage capacity to establish
a uniform rate for holders of both types of capacity. If approved, a rolled-in
rate would significantly reduce WEGM's future demand charge obligation.
Upon completion of the merger of Resources and Cabot, WEGM recorded a charge of
$16,000,000 to reserve for estimated future losses associated with the
transportation and storage commitments. During 1994, $3,001,000 of the reserve
was utilized. This reserve will be evaluated periodically to determine its
adequacy.
Washington Natural commitments
Washington Natural has entered into various firm supply, transportation and
storage service contracts in order to assure adequate availability of gas
supply for its firm customers. Many of these contracts, which have remaining
terms of from one to 29 years, provide that Washington Natural must pay a fixed
demand charge each month, regardless of actual usage. Certain of Washington
Natural's firm gas supply agreements also obligate Washington Natural to
purchase a minimum annual quantity at market-based contract prices. Generally,
if the minimum volumes are not purchased and taken during the year, Washington
Natural is obligated to pay a gas inventory charge calculated as a percentage
of the then-current contract commodity price times the minimum quantity not
taken. Alternatively, under some of the contracts, the supplier may exercise a
right to reduce its subsequent obligation to provide firm gas to Washington
Natural.
68
PAGE 68
The following tables summarize Washington Natural's obligations for future
demand charges through the primary terms of its existing contracts and the
minimum annual take requirements under the gas supply agreements. The
quantified obligations are based on current contract prices and FERC authorized
rates (already reflecting the implementation of FERC Order No. 636), which are
subject to change.
Demand Charge Obligations
2000 and
In thousands 1995 1996 1997 1998 1999 thereafter Total
------- ------- ------- ------- ------- ---------- ----------
Firm gas supply $40,498 $34,352 $34,352 $34,352 $33,511 $137,227 $ 314,292
Firm transpor-
tation service 50,099 50,099 50,099 50,099 50,099 314,996 565,491
Firm storage and
peaking service 7,643 8,723 8,723 8,723 8,723 156,691 199,226
------- ------- ------- ------- ------- -------- ----------
Total $98,240 $93,174 $93,174 $93,174 $92,333 $608,914 $1,079,009
======= ======= ======= ======= ======= ======== ==========
Minimum Annual Take Obligations
2000 and
In thousands 1995 1996 1997 1998 1999 thereafter Total
of therms ------- ------- ------- ------- ------- ---------- ---------
Firm gas supply 536,834 376,680 365,730 365,730 310,980 1,148,064 3,104,018
======= ======= ======= ======= ======= ========= =========
Washington Natural believes that all demand charges will be recoverable in
rates charged to its customers. Further, pursuant to implementation of FERC
Order No. 636, Washington Natural has the right to resell or release to others
any of its unutilized gas supply or transportation and storage capacity.
Washington Natural does not anticipate any difficulty in achieving the minimum
annual take obligations shown, as such volumes represent less than 67% of
expected annual sales for fiscal 1995 and less than 48% of expected sales for
subsequent years.
Washington Natural's current firm gas supply contracts obligate the suppliers
to provide, in the aggregate, annual volumes up to those shown below:
Maximum Supply Available Under Current Firm Supply Contracts
2000 and
In thousands 1995 1996 1997 1998 1999 thereafter Total
of therms ------- ------- ------- ------- ------- ---------- ---------
Total 976,805 748,661 722,861 722,861 595,111 2,282,053 6,048,352
======= ======= ======= ======= ======= ========= =========
In May 1994, Northwest Pipeline Corporation ("Pipeline"), Washington Natural's
prior wholesale gas supplier, was ordered by FERC to modify the allocation of
transition costs, totaling $34 million plus interest, incurred in "unbundling"
interstate pipeline services, comprising supplier settlements recoverable by
Pipeline through fixed charges. Under this order, Washington Natural's share
of these costs would increase from $1,200,000, previously paid, to $10,400,000,
69
PAGE 69
inclusive of interest. Washington Natural and six other customers filed
requests for rehearing. Under another proposed alternative allocation method
Washington Natural's share of these costs would increase by $5,600,000 million,
inclusive of interest. At September 30, 1994, Washington Natural recorded a
liability of $5,600,000 for this contingency and an offsetting regulatory
receivable for the same amount as this additional cost is expected to be fully
recoverable in rates through purchased gas cost adjustments.
On December 20, 1994, the request for rehearing was denied by FERC. Washington
Natural is currently reviewing the order to determine what options are
available and what actions to take.
(15) DISCONTINUED OPERATIONS
In August 1993, the Company's board of directors decided to seek a buyer for
Unisyn, its biowaste technology business. Accordingly, the consolidated
financial statements of the Company were restated for 1993 and prior years to
report Unisyn as a discontinued operation. In August 1994, the Company sold
the stock of its wholly-owned subsidiaries, Thermal Efficiency, Inc. and
Holdings Northwest, Inc., which jointly owned Unisyn. Additional adjustments
have been made to the 1994 and prior-year financial statements to properly
reflect the business segment sold. The 1993 results include a charge to write
off the investment in Unisyn, including estimated losses through the expected
disposal date, of $9,818,000, net of $5,286,000 of taxes. The 1994 results
include an additional loss of $799,000, net of $430,000 of taxes, realized upon
disposition of the two subsidiaries.
(16) FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value of
each class of financial instrument for which it is practicable to estimate that
value.
Cash and cash equivalents
Cash and cash equivalents include cash and investments with an original
maturity of less than 90 days. The carrying value approximates fair value
because of the short maturity of these instruments.
Long-term debt
Rates currently available to the Company for debt with similar terms and
remaining maturities are used to estimate fair value of existing debt.
Preferred stock
Prices currently available to the Company for preferred stock with similar
terms and remaining maturities are used to estimate fair value of existing
preferred stock.
Interest rate swap agreements
The fair value of interest rate swaps (used for hedging purposes) is the
estimated amount that the Company would receive or pay to terminate the swap
agreement at the reporting date, taking into account current interest rates and
the current credit-worthiness of all the parties to the swap.
The estimated fair values of the Company's financial instruments are as
70
PAGE 70
follows:
1994 1993
-------------------- -------------------
Carrying Fair Carrying Fair
In thousands Amount Value Amount Value
-------- -------- -------- --------
Financial liabilities
Long-term debt $350,340 $345,043 $353,680 $385,595
Preferred stock $ 90,000 $ 79,956 $ 22,548 $ 22,033
Unrecognized financial
instruments:
Interest rate swaps $ -- $ (2,639) $ -- $ (8,932)
71
PAGE 71
(17) CONSOLIDATED INDUSTRY SEGMENT INFORMATION:
Year Ended September 30,
------------------------------------
1994 1993 1992
---------- ---------- --------
(in thousands)
Revenue from unaffiliated customers
Natural gas distribution * $ 396,407 $ 367,853 $284,939
Merchandising * 35,618 70,265 71,856
Oil and natural gas -- 31,618 25,597
Less intersegment revenue -- (264) (7,981)
Coal and other -- 920 677
---------- ---------- --------
Total $ 432,025 $ 470,392 $375,088
========== ========== ========
Operating income (loss) before income taxes
Natural gas distribution $ 19,063 $ 52,504 $ 34,373
Merchandising (106) 7,945 9,517
Oil and natural gas -- 7,700 6,514
Coal and other (890) (2,935) (759)
---------- ---------- --------
Total $ 18,067 $ 65,214 $ 49,645
========== ========== ========
Identifiable assets
Natural gas distribution $ 870,906 $ 829,319 $725,848
Merchandising 4,094 3,442 2,894
Oil and natural gas 98,139 153,626 118,088
Biowaste, coal and other 57,355 49,430 53,044
---------- ---------- --------
Total $1,030,494 $1,035,817 $899,874
========== ========== ========
Capital expenditures
Natural gas distribution $ 84,506 $ 91,275 $ 94,860
Merchandising 1,182 -- --
Oil and natural gas -- 36,445 26,503
Coal and other 1,165 1,766 4,073
---------- ---------- --------
Total $ 86,853 $ 129,486 $125,436
========== ========== ========
Washington Energy is engaged principally in natural gas distribution; oil and
natural gas exploration and production; sale of natural gas appliances,
security systems, conservation and other products; and holds investments in
coal properties.
* The Company's utility and merchandise sales customers all are located in the
Puget Sound area of Washington state.
72
PAGE 72
(18) SUPPLEMENTARY INCOME INFORMATION:
Significant taxes (other than federal income taxes) charged to operating
expenses by Washington Energy and subsidiaries were as follows:
Year Ended September 30,
------------------------------
1994 1993 1992
-------- -------- --------
(in thousands)
State business, utility and
unemployment compensation $ 16,822 $ 17,458 $ 13,615
Real and personal property 7,534 9,483 7,543
Business and occupation 13,943 12,372 9,606
Federal payroll and other 3,188 3,516 3,414
-------- -------- --------
$ 41,487 $ 42,829 $ 34,178
======== ======== ========
Payroll taxes capitalized totaled $1,093,000, $1,222,000 and $973,000 in 1994,
1993, and 1992, respectively. Maintenance expense totaled $7,931,000,
$6,508,000, and $6,107,000 in 1994, 1993, and 1992, respectively. Taxes
charged to other accounts are not significant. Rents, royalties and
advertising are not significant. The Company has no amortization items which
exceed 1% of total sales and revenues. Amounts for Washington Natural are
substantially the same.
73
PAGE 73
CONSOLIDATED SELECTED QUARTERLY FINANCIAL DATA
Years Ending September 30, (Unaudited)
Consolidated operating revenues and income (loss), net income (loss) and
earnings (loss) per common share by quarter (in thousands, except per share
amounts).
Operating Net Earnings
Operating Income Income (Loss)
Revenues (Loss) (Loss) Per Share
--------- --------- -------- ---------
1994 Quarter*
First $146,743 $18,339 $ 8,310 $ .33
Second 151,461 16,365 7,446 .32
Third 79,034 (6,757) (48,916) (2.08)
Fourth 54,787 (2,217) (12,486) (.53)
-------- ------- -------- ------
For the year $432,025 $25,730 $(45,646) $(1.97)++
======== ======= ======== ======
1993 Quarter*
First $136,124 $22,778 $ 13,581 $ .60
Second 160,896 24,186 15,563 .67
Third 90,906 7,596 (1,701) (.07)
Fourth 82,466 922 (17,796) (.77)
-------- ------- -------- ------
For the year $470,392 $55,482 $ 9,647 $ .42 ++
======== ======= ======== ======
1992 Quarter*
First $119,392 $20,310 $ 11,653 $ .60
Second 125,641 19,032 10,348 .53
Third 69,207 4,870 (3,962) (.20)
Fourth 60,848 1,768 (6,600) (.33)
-------- ------- -------- ------
For the year $375,088 $45,980 $ 11,439 $ .58 ++
======== ======= ======== ======
* Results by quarter vary significantly because operating revenues and
earnings are greatly affected by variations in weather conditions. The
three months ending September 30 have usually been a loss period. Certain
amounts in the 1994 and 1993 quarterly statements have been reclassified to
conform with the 1994 presentation.
++ Quarterly earnings per share are based upon the average number of common
shares outstanding during each quarter. Because the average number of
shares outstanding has increased in each quarter shown, the sum of
quarterly earnings does not equal earnings per share for the year.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure: None
74
PAGE 74
PART III
Item 10. Directors and Executive Officers of the Registrants
(a) Directors: (As to Washington Energy and Washington Natural)
Year First
Name, Present Occupation and Elected as
Experience for Past Five Years Age Director(1)
- ------------------------------------------------------------ ----- -----------
Virginia Anderson (2) (3) 47 1991
Director of Seattle Center, City of Seattle
since 1988.
Robert F. Bailey (2) (4) (5) 62 1988
President of Trans Republic Energy, L.P., an
oil and gas investment company since January
1992 and Mabelle, Inc., an oil and gas production
company. Previously he was President of Alta
Energy Corporation, Midland, Texas, an oil and
gas drilling and production company operating
primarily in the southwestern United States.
Donald J. Covey (1) (2) 66 1982
Chairman of the Board of Directors of UNICO
Properties, Inc., Seattle, since 1992, Chairman
and Chief Executive Officer, 1990 to 1992,
President and Chief Executive Officer, 1985 to
1990. UNICO Properties, Inc., manages several
major office buildings in downtown Seattle.
John W. Creighton, Jr. (4) (5) 62 1989
President of Weyerhaeuser Company, Tacoma,
Washington, a forest products company,
since 1988.
Robert L. Dryden (3) (4) 61 1991
Executive Vice President, Airplane Production, Boeing
Commercial Airplane Group. From November 1987 to January
1990, he served as President of Boeing Military
Airplanes in Wichita, Kansas.
Tomio Moriguchi (1) (2) 58 1988
President of Uwajimaya, Inc., food and
merchandise distributor, retailer, and exporter,
President, Town and Country Travel, Inc., and
President, North American Post Publishing Company.
75
PAGE 75
Sally G. Narodick (3) (4) 49 1989
Chairman and Chief Executive Officer of
Edmark Corporation, Redmond, Washington, a
developer of special education software and
print curriculum materials, since October
1989. From April 1987 to October 1989, she
was a founder and partner of Narodick, Ross
& Associates, a Seattle-based financial and
marketing consulting firm. Previously she
was Senior Vice President of the retail
services division of Seafirst Corporation,
a subsidiary of Bank of America, N.T. and S.A.
William P. Vititoe (1) (3) (5) 56 1994
Chief Executive Officer and President of
Washington Energy Company and Washington
Natural Gas since 1994. From November 1990
to November 1993, he served as President
and Chief Executive Officer of American
Natural Resources Pipeline Co., a natural
gas pipeline company. From July 1989
to October 1990, he served as President of
Ameritech Enterprises Group, a diversified
communications company. Prior to that he
served as President and Chief Executive Officer
of Michigan Bell Telephone Company from
September 1983 to July 1989.
(1) Member of Executive Committee (Chairman is William P. Vititoe)
(2) Member of Audit Committee (Chairman is Donald J. Covey)
(3) Member of Administrative Committee (Chairman is Sally G. Narodick)
(4) Member of Compensation and Benefits Committee (Chairman is John
W. Creighton)
(5) Member of Nominating Committee (Chairman is Robert F. Bailey)
The Washington Energy Directors serve in three classes for staggered terms
whereby only Directors in a particular class are elected at each annual meeting
of stockholders. The term of Directors Bailey, Creighton and Vititoe expires
in 1996; that of Directors Anderson, Moriguchi and Narodick expires in 1997 and
that of Directors Covey and Dryden expires in 1995. Each Director has served
continuously since the date of his or her first election as a Director of
Washington Energy. The next annual meeting of stockholders is scheduled to be
held February 24, 1995. In case of a vacancy on the Board of Directors, the
remaining Directors, by majority vote, may elect a successor to serve until the
next annual meeting of stockholders. During the year ended September 30, 1994,
the Board reduced the number of board members from nine to eight upon the
retirement of Mr. Robert Golliver, President and C.O.O. The Washington Natural
Directors are elected annually. There are no family relationships between any
of the Directors, or any Director and any executive officer of the Company.
Certain of the Directors are also Directors of other companies that make
periodic filings with the Securities and Exchange Commission as follows:
Virginia Anderson - Columbia Bank and U.S. Bank of Washington, U.S.
Bancorporation; Robert F. Bailey - Texas Commerce Bank-Midland and Cabot 0il &
Gas Corporation; John W. Creighton, Jr. - Weyerhaeuser Company, Mortgage
Investments Plus, Inc., Portland General Corporation and Quality Food Centers,
Inc.; Robert L. Dryden - U.S. Bancorp-U.S. Bank of Washington; Tomio Moriguchi
- - Seafirst Corporation, a subsidiary of the Bank of America N.T. & S.A.; Sally
G. Narodick - Edmark
76
PAGE 76
Corporation, Pacific Northwest Bank and Penwest; and William P. Vititoe - Cabot
Oil & Gas Corporation, Comerica Bank and Amerisure Michigan Mutual Insurance
Company.
The full Board of Directors met 8 times during the year ended September 30,
1994. Each incumbent director attended more than 75 percent of the aggregate
number of meetings of the Board of Directors and committees on which he or she
served.
Board Committees
The Board has a standing Administrative Committee, Audit Committee,
Compensation and Benefits Committee, Executive Committee and Nominating
Committee. The Audit Committee and the Compensation and Benefits Committee
consist exclusively of non-employee directors.
Administrative Committee. The Administrative Committee is currently composed
of Ms. Narodick, Chairman, Ms. Anderson, Mr. Dryden, Mr. Vititoe and the
Company's Chief Financial Officer, Mr. Torgerson, who serves as a non-director
Committee member. The Committee is responsible for the administration of the
defined contribution and the defined benefit retirement plans of the Company.
The Committee met 3 times during 1994.
Audit Committee. The Audit Committee is currently composed of Mr. Covey,
Chairman, Ms. Anderson, Mr. Bailey, and Mr. Moriguchi. The Committee is
responsible for oversight of the Company's and its subsidiaries' corporate
accounting practices, financial reporting process and internal accounting and
other financial control systems. The Committee is also responsible for the
review of management's recommendation of independent public accountants. The
Committee met 3 times during 1994.
Compensation and Benefits Committee. The Compensation and Benefits Committee
currently consists of Mr. Creighton, Jr., Chairman, Mr. Bailey, Mr. Dryden, and
Ms. Narodick. The Committee is responsible for determining appropriate
compensation and other benefit measures for executive officers of the Company.
The Committee met 4 times during 1994.
Executive Committee. The Executive Committee currently consists of Mr.
Vititoe, Chairman, Mr. Covey and Mr. Moriguchi. It is authorized to act in
lieu of the full Board on various matters between Board meetings. The
Committee met one time during 1994.
77
PAGE 77
Nominating Committee. The Nominating Committee currently consists of Mr.
Bailey, Chairman, Mr. Creighton, Jr., and Mr. Vititoe. The Nominating
Committee is responsible for the identification and evaluation of candidates
for election to the Board. The Committee met one time during 1994.
Any shareholder recommendations for nominations to the Board of Directors for
consideration by the Nominating Committee for the 1996 Annual Meeting should be
sent to Mr. Bailey, Chairman, Nominating Committee, Washington Energy Company,
P.O. Box 1869, Seattle, WA 98111, so as to be received no later than September
15, 1995.
(b) Executive Officers: (As to Washington Energy and Washington Natural)
See data following Item 4 of Part I.
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
Directors and its executive officers to file reports of ownership and reports
of changes in ownership of the Company's common stock with the Securities and
Exchange Commission and the New York Stock Exchange. Directors and executive
officers are also required by Commission regulations to furnish the Company
with copies of all such reports that they file. Based solely on its review of
the copies of such forms received by it, the Company believes that all filing
requirements applicable to its Directors and executive officers were complied
with during the year ended September 30, 1994.
Item 11. Executive Compensation
Some of the executive officers and/or directors of the Company also serve in
the identical capacity or capacities with Washington Natural and receive
remuneration for such services from Washington Natural, with affiliates being
charged for time spent by the officers and directors on the affiliates'
business affairs.
78
PAGE 78
The following table shows the total annual and long-term compensation paid by
the Company and its affiliates to the persons who, for the year ended September
30, 1994 were the Chief Executive Officer and the other four most highly
compensated executive officers of the Company and Washington Natural ("Named
Executives").
SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION LONG-TERM COMPENSATION
----------------------------------- -------------------------------------------
Securities
Other Annual Underlying Other All Other
Name and Salary Bonus Compensation Options/ Incentives Compensation
Principal Position Year ($)(5) ($)(1) ($)(6) SARs (#)(2) Payouts ($)(3) ($)(4)
- ------------------ ------ -------- --------- ------------ ----------- -------------- ------------
William P. Vititoe 1994 $230,423 $100,000 $78,664 40,000 $ -- $2,437
Chairman, Chief 1993 -- -- -- -- -- --
Executive 1992 -- -- -- -- -- --
Officer and
President
James A. Thorpe 1994 185,030 -- -- 12,500 -- 4,758
Chairman of the 1993 317,208 -- -- 12,500 50,923 6,866
Board & CEO 1992 308,055 -- -- 12,500 79,982 --
(Retired May 1,
1994)
James P. Torgerson 1994 137,346 23,200 -- 2,600 -- 4,119
Sr. Vice 1993 133,128 8,000 -- 2,600 19,804 3,994
President - 1992 129,285 8,900 -- 2,600 29,467 --
Finance,
Planning &
Development;
CFO
Robert J. 1994 136,098 8,000 -- 2,600 -- 3,960
Tomlinson 1993 134,532 6,800 -- 2,600 19,804 3,992
Sr. Vice 1992 129,285 6,200 -- 2,600 29,467 --
President -
Legal and
Administration
James W. Gustafson 1994 137,346 7,200 -- 2,600 -- 4,119
Sr. Vice 1993 133,128 6,800 -- 2,600 19,804 3,350
President - 1992 129,285 5,000 -- 2,600 29,467 --
Operations,
Washington Natural
Gas Company
Donald H. Gessel 1994 136,596 6,313 -- 2,600 -- 4,098
President, 1993 133,128 8,900 -- 2,600 19,804 3,817
Washington 1992 129,285 7,000 -- 2,600 29,467 --
Energy Services
Company
79
PAGE 79
(1) Incentive compensation is based on performance in the year shown but
determined and paid the following year. For example, bonuses for 1994
are based on performance in 1994 and are measured and paid in the fourth
quarter of calendar 1994.
(2) All options granted to executive officers were in tandem with stock
appreciation rights ("SARs").
(3) Amounts in the column relate to payouts under the Company's Second
Performance Share Plan further described in the Long-Term Incentive
Program section.
(4) The amounts in the "All Other Compensation" column are the Company
contribution to individual 401(k) accounts.
(5) Mr. Vititoe's salary reflects service from January 15, 1994. His
annual base salary is $325,000.
(6) Mr. Vititoe's "Other Annual Compensation" includes moving expenses
and temporary housing of $75,640. The balance of the amount
shown in this column is the car allowance paid.
1994 Stock Option/SAR Grants
The following table sets forth the number of stock options which were granted
to each of the named executives during 1994. In addition, the table provides
the present value of the stock options as of the grant date.
Securities Under-
lying Options Exercise or Grant Date
/SARS Granted % of Total Options Base Price Expiration Present Value
Name (#)(1) Granted to Employees ($/Sh) Date ($) (2)
---- ---------------- -------------------- ----------- ---------- -------------
William P. Vititoe 40,000 26% 18.250 01/14/04 70,400
James A. Thorpe 12,500 8% 18.375 12/14/03 24,000
James P. Torgerson 2,600 2% 18.375 12/14/03 4,992
Robert J. Tomlinson 2,600 2% 18.375 12/14/03 4,992
James W. Gustafson 2,600 2% 18.375 12/14/03 4,992
Donald H. Gessel 2,600 2% 18.375 12/14/03 4,992
(1) The exercise price of the options was the fair market value of the
Company's stock on the date of the grant. Each option was granted in
tandem with an SAR covering the same number of shares. Any optionee
exercising their stock options loses the corresponding SARs as to
those shares and vice versa. All vested options were immediately
exercisable. The options were vested upon grant except for 30,000 of
Mr. Vititoe's options. Mr. Vititoe's unvested options will vest
10,000 shares on January 1995 and as to an additional 10,000 shares on
the next two anniversaries of that date.
(2) The values shown were calculated using the Black-Scholes option
pricing model. That model is based on arbitrary assumptions regarding
variables such as stock price volatility, future dividend yield, and
interest rates. The actual value that an executive may realize, if
any, will depend on the amount by which the stock price at the time of
exercise exceeds the exercise price, which is the fair market value of
the stock at the time of grant. There is no assurance that any
executive will receive the amounts estimated by the Black-Scholes
model.
80
PAGE 80
The following table sets forth information concerning each stock option (or
tandem SAR) which was exercised during 1994 by each of the named executives and
the year-end value of the unexercised stock options (and tandem SARs), provided
on an aggregated basis.
AGGREGATED OPTIONS/SAR EXERCISES IN 1994
AND YEAR END OPTION/SAR VALUES
Number of
Securities Underlying
Unexercised Options/ Value of Unexercised
Shares Acquired Value SARs at Yr End (#)(3) In-the-Money Options
Name on Exercise(#)(1) Realized($)(2) Exercisable/Unexercisable SARs at Yr End ($)(4)
- ------------------ ----------------- -------------- --------------------------- ---------------------
William P. Vititoe -- -- 10,000 / 30,000 --
James A. Thorpe -- -- 0 / 0 --
James P. Torgerson -- -- 13,000 / 0 --
Robert J. Tomlinson -- -- 13,000 / 0 --
James W. Gustafson -- -- 13,000 / 0 --
Donald H. Gessel -- -- 13,000 / 0 --
(1) This number represents the number of shares with respect to which SARs
were exercised.
(2) The figures presented in this column have been calculated based upon
the difference between the fair market value of each stock option/SAR
on the date of exercise and its exercise price.
(3) All unexercised options at year end were exercisable; except 30,000 of
Mr. Vititoe's options.
(4) The exercise price of all unexercised options at year end were more
than the closing price of the Company's common stock at year end.
LONG-TERM INCENTIVE PROGRAM - AWARDS
IN 1994
Estimated Future Payouts
Under Non-Stock Price-Based Plans (2)(3)
No. of Units Period Until ----------------------------------------
Name (#)(1) Payout Threshold (#) Target(#) Maximum
-------------------- ------------ ------------ -------------- --------- -------
William P. Vititoe -- -- -- -- --
James A. Thorpe 3,800 4 years 608 3,800 6,650
James P. Torgerson 1,500 4 years 240 1,500 2,625
Robert J. Tomlinson 1,500 4 years 240 1,500 2,625
James W. Gustafson 1,500 4 years 240 1,500 2,625
Donald H. Gessel 1,500 4 years 240 1,500 2,625
(1) This represents the number of performance units assigned under the
Second Washington Energy Company Performance Share Plan. Dependent
upon satisfaction of future performance objectives of the Company,
each unit can represent the right to receive up to 1-3/4 shares of
common stock.
(2) This represents the number of shares of common stock that may be
awarded with respect to the units granted under the plan. The actual
number of shares awarded will depend on (a) the number of contingent
performance units assigned, (b) the Company's financial performance
for the four-year period following the assignment compared with
pre-established goals, and (c) the market value of the Company's
common stock at the time of any
81
PAGE 81
award payment. Under current committee policy, unless otherwise
authorized by the committee, at least fifty percent of any payments
made pursuant to the Plan must be paid in common stock of the Company
and the balance of the payments must be paid in cash or shares of
common stock. The Compensation and Benefits Committee determines
what portion of the payout is to be satisfied in shares of common
stock and what portion is to be satisfied in cash.
(3) Under the plan, named executives will, after a change in control,
generally receive at least one share of common stock per unit, or more
depending on the Company's performance through the date of the change
in control.
Supplemental Executive Retirement Plan
Washington Natural Gas Company has a plan to provide officers, including the
named executives, with retirement, death and disability benefits supplementing
the benefits from the Company's defined benefit plan for salaried employees,
reduced by Social Security and benefits payable under plans of other, prior
employers.
The supplemental plan is designed so that each participant will receive
retirement plan payments, primary social security benefits and supplemental
plan payments equal, in the aggregate, to 70% of the participant's average
salary during the highest three years in the eight years preceding the
participant's retirement. The remuneration covered by this plan includes base
salary and commissions. It provides payments of annual benefits for life upon
retirement from the Company upon reaching age 65 or at the election of the
officer, with the Company's consent, at or after age 62 at appropriately
reduced benefit levels.
Based on the computation through September 30, 1994, the average annual pension
benefit (payable in the form of a joint and 50% survivor annuity with ten-year
term certain) payable upon retirement from the Company, at age 65, to the named
executives would be: Mr. Vititoe $214,623; Mr. Thorpe $213,562; Mr. Torgerson,
$88,014; Mr. Tomlinson $88,013; Mr. Gustafson $89,697; and Mr. Gessel $88,015.
The portion of the benefit payable under the supplemental retirement plan will
be paid net of amounts received from social security, the Company's defined
benefit plan for salaried employees and any benefits received from retirement
plans of prior employers.
Conditional Employment Agreements in the Event of a Change in Control
The Company has conditional employment agreements with three of its key
executive officers: Messrs. William P. Vititoe, Robert J. Tomlinson and James
P. Torgerson. The employment agreements offer additional security to these key
management personnel to better enable them to function effectively without
distraction in the event that uncertainties as to the future control of the
Company should arise. These agreements provide certain benefits should
employment be terminated other than for cause, or by death, disability or
normal retirement within three years subsequent to a change in control of the
Company. Change in control of the Company includes the acquisition by any
person of: (1) power to exercise a controlling influence over management or
policies; (2) ownership or power to vote 25% or more of the outstanding voting
securities of the Company; or (3) change in the majority of the Board of
Directors during the six-year period subsequent to the acquisition by any
person of ownership or power to vote 10% or more of the outstanding voting
securities of the Company without the approval of the majority of the Board of
82
PAGE 82
Directors in office prior to such acquisition. The benefits to be provided by
the Company include: (1) a cash payment equal to three times the most recent
year's annual compensation, or a cash payment equal to annual compensation
until normal retirement date if less than three years; (2) lump sum payment for
amounts calculated under dissolution of the Performance Share Plan; (3)
maintenance of participation in all current employee benefit plans or provision
for substantially similar benefits for a three-year period or until normal
retirement date if sooner; (4) a cash payment at retirement date equal to the
additional retirement compensation to which the executive would have been
entitled had the executive continued in the employ of the Company for an
additional three years or until normal retirement date if sooner; (5) a cash
payment equal to the difference between the exercise prices of all stock
options and the higher of: (a) the average of the high and low sales prices on
the date of termination, or (b) the highest price actually paid in connection
with the change in control of the Company; and (6) a cash payment equal to the
excise taxes imposed by the Internal Revenue Code Section 4999, if any, on all
payments enumerated in this sentence, plus the tax expense to the executive
resulting from this additional payment. If the executive voluntarily
terminates without good reason, as defined in the agreement, no additional or
special benefits accrue to the executive. Since the conditions specified in
the contracts have not occurred, no amounts were charged to expense by the
Company under these agreements in 1994.
Compensation of Directors
Each Director who is not an officer of the Company and its subsidiaries is paid
a retainer of $8,000 per year and an additional $1,500 per year for serving on
the Executive Committee or as Chairman of another Committee of the Board. In
addition, each such Director is paid a fee of $600 for attending a regular,
special or annual meeting of the Board or for a committee meeting not held on
the same day as a Board meeting. None of such directors is eligible to
participate in any of the compensation plans described above. The Company also
has a Directors Stock Bonus Plan which was approved by the stockholders in
February 1991. Under this plan, an outside Director is awarded 200 shares of
Company common stock in January of each year for service on the Board of
Directors for the prior year. During 1994, 1,400 shares of common stock were
awarded under the plan. The Company pays no additional remuneration to
employees of the Company who are directors.
Independent Accountants and Auditors
The firm of Arthur Andersen LLP has audited the accounts of the Company, and
its predecessor, Washington Natural, for a number of years and has been
selected to audit the accounts of the Company for the year ending September 30,
1995. Representatives of Arthur Andersen LLP are expected to be present at the
Annual Meeting, with the opportunity to make a statement if they desire to do
so, and will be available to respond to appropriate questions submitted in
writing to the Secretary of the Company in advance of the meeting.
Date for Receipt of 1996 Stockholder Proposals
Stockholder proposals intended to be presented at the 1996 Annual Meeting must
be received by the Company no later than September 15, 1995 to be considered
for inclusion in the proxy statement and proxy for the 1996 meeting.
83
PAGE 83
Item 12. Security Ownership of Certain Beneficial Owners and Management
Washington Energy Company
SECURITY OWNERSHIP OF DIRECTORS AND OFFICERS
(stated as of December 14, 1994)
Name of Amount of Beneficial Percent
Beneficial Owner Ownership of Class
- --------------------------- -------------------- --------
Directors
Virginia Anderson 1,041 --
Robert F. Bailey 4,132 --
Donald J. Covey 6,015 --
John W. Creighton, Jr. 2,242 --
Robert L. Dryden 2,966 --
Tomio Moriguchi 1,919 --
Sally G. Narodick 1,242 --
Named Executive Officers (*also serve as Directors)
William P. Vititoe* 55,400 (1) --
James A. Thorpe (Retired May 1, 1994) 63,623 --
James P. Torgerson 19,409 (1) --
Robert J. Tomlinson 26,220 (1) --
James W. Gustafson 38,882 (1) --
Donald H. Gessel 26,564 (1) --
All directors and executive
officers as a group (15 persons) 287,007 (1) 1.2%
(1) Includes unexercised options to acquire shares of common stock pursuant
to the Company's Stock Option Plan as follows: Mr. Vititoe, 52,500
shares; Mr. Thorpe, 0 shares; Mr. Torgerson, 15,600 shares; Mr.
Tomlinson, 15,600; Mr. Gustafson, 13,000; Mr. Gessel, 15,600; and all
directors and executive officers as a group, 140,600 shares.
Washington Energy is unaware of any person beneficially owning more than five
percent of its common stock.
With respect to each person who has options to acquire common stock, such
options are assumed to be outstanding for the purpose of computing percentage
ownership of that person, but are assumed not to be outstanding for purposes of
computing percentage ownership for any other person.
Washington Natural Gas Company
(a) Washington Energy owns of record 100% of Washington Natural's common
stock, $5 par value, which is the sole voting security.
(b) Holding of equity securities by directors and officers: None.
Item 13. Certain Relationships and Related Transactions: None.
84
PAGE 84
PART IV
Item 14. Exhibits, Financial Statements, Schedules and Reports on Form 8-K
(a) 1. Financial Statements:
The financial statements filed as part of this report are listed
on the index in Item 8.
2. Financial Statement Schedules:
Schedule II -- Amounts receivable from related parties and underwriters,
promoters, and employees other than related parties for the years ended
September 30, 1994, 1993 and 1992.
Washington Energy Company and Subsidiaries
Washington Natural Gas Company
Schedule III -- Condensed Financial Information of Registrant for the
years ended September 30, 1994, 1993 and 1992.
Washington Energy Company
Schedule V -- Property, plant and equipment for the years ended
September 30, 1994, 1993 and 1992.
Washington Energy Company and Subsidiaries
Washington Natural Gas Company
Schedule VI -- Accumulated provision for depreciation, depletion and
amortization for the years ended September 30, 1994, 1993 and 1992.
Washington Energy Company and Subsidiaries
Washington Natural Gas Company
Schedule VIII -- Valuation and Qualifying accounts for the years ended
September 30, 1994, 1993 and 1992.
Washington Energy Company and Subsidiaries
Washington Natural Gas Company
The information required to be submitted in Schedules VII, IX, X, and
XIII has been included in the financial statements or supporting
schedules. Schedules I, IV, XI, XII and XIV have been omitted as they
are not applicable or not required.
85
PAGE 85
(b) Reports on Form 8-K:
A report on Form 8-K was filed by Washington Energy and Washington
Natural dated August 1, 1994, regarding third-quarter results and
favorable dismissal of shareholder class-action suit.
A report on Form 8-K was filed by Washington Energy and Washington
Natural dated September 8, 1994, regarding an appeal of the dismissal of
shareholder class-action suit and filing of anti-trust lawsuit against
Washington Natural.
(c) Exhibits: See Exhibit Index at page 97.
For the purposes of complying with the amendments to the rules governing Form
S-8 (effective July 13, 1990) under the Securities Act of 1933, the undersigned
Registrant hereby undertakes as follows, which undertaking shall be
incorporated by reference into Registrant's Registration Statements on Form S-8
Nos. 33-1348, 2-91092, 33-24221, 2-63093 and 33-55381.
Insofar as indemnification for liabilities arising under the Securities Act of
1933 may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities
Act of 1933 and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of
our report included in this Form 10-K, into the Company's previously filed
Registration Statement File Nos. 33-1348, 2-91092, 33-24221, 2-63093, 33-18684,
33-49599 and 33-55381.
ARTHUR ANDERSEN LLP
Seattle, Washington
December 22, 1994
86
PAGE 86
Schedule II
WASHINGTON ENERGY COMPANY AND SUBSIDIARIES
WASHINGTON NATURAL GAS COMPANY
AMOUNTS RECEIVABLE FROM RELATED PARTIES
FOR THE YEARS ENDED SEPTEMBER 30, 1994, 1993 AND 1992
WASHINGTON ENERGY COMPANY AND SUBSIDIARIES
WESCO WESCO
Resources, Inc. Transportation, Inc.
--------------- --------------------
(In thousands)
Balance 9/30/91 $ -- $ --
Additions 116 102
Deductions -- --
---- ----
Balance 9/30/92 116 102
Additions 38 11
Deductions -- --
---- ----
Balance 9/30/93 154 113
Additions 30 9
Reductions -- --
---- ----
Balance 9/30/94* $184 $122
---- ----
WASHINGTON NATURAL GAS COMPANY
None.
* Both interest and principal on these notes are due on December 31, 1994. The
interest rate is the Reference Rate of Seafirst Bank of Seattle, Washington,
plus 2%.
87
PAGE 87
Schedule III
WASHINGTON ENERGY COMPANY
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
BALANCE SHEETS
September 30,
------------------------
1994 1993
-------- --------
(in thousands)
ASSETS
INVESTMENTS IN CONSOLIDATED SUBSIDIARIES:
Washington Natural Gas Company $235,982 $268,455
Thermal Energy, Inc. 8,219 9,382
Washington Energy Resources Company -- 40,682
Thermal Efficiency, Inc. -- (16,918)
ThermRail, Inc. 1,069 1,108
WECO Finance Company 1,545 988
Holdings Northwest, Inc. -- (771)
Washington Energy Gas Marketing (13,121) --
Washington Energy Services Company 1,106 --
-------- --------
Total investments in subsidiaries 234,800 302,926
-------- --------
INVESTMENTS IN UNCONSOLIDATED AFFILIATES 98,139 --
-------- --------
NOTES AND ACCOUNTS RECEIVABLE FROM SUBSIDIARIES 74,600 177,222
-------- --------
CURRENT ASSETS:
Other receivables 1,319 955
Federal income taxes receivable 2,902 819
-------- -------
Total current assets 4,221 1,774
-------- -------
OTHER DEFERRED CHARGES 112 235
-------- -------
Total assets $411,872 $482,157
======== ========
CAPITALIZATION AND LIABILITIES
CAPITALIZATION:
Common shareholders' interest $256,800 $322,931
Preferred stock -- 5,886
-------- --------
Total capitalization 256,800 328,817
-------- --------
NOTES AND ACCOUNTS PAYABLE TO SUBSIDIARIES 1,854 4,193
-------- --------
CURRENT LIABILITIES:
Checks issued in excess of cash in bank 453 1,938
Notes payable and commercial paper 125,182 145,498
Accounts payable and accrued interest 2,636 976
Dividends payable -- 547
Sinking fund requirements - preferred stock -- 188
-------- --------
Total current liabilities 128,271 149,147
-------- --------
DEFERRED CREDITS:
Deferred federal income taxes 17,147 --
Contingency reserves 7,800 --
-------- --------
Total deferred credits 24,947 --
-------- --------
Total capitalization and liabilities $411,872 $482,157
======== ========
88
PAGE 88
Schedule III (Continued)
WASHINGTON ENERGY COMPANY
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENTS OF INCOME
Year Ended September 30,
--------------------------------
1994 1993 1992
-------- ------- -------
(in thousands, except
per share amounts)
EQUITY IN EARNINGS (LOSSES) OF SUBSIDIARIES:
Washington Natural Gas Company,
including cash dividends received
by Washington Energy Company of
$16,937, $26,045 and $21,691,
respectively $ (8,243) $ 21,771 $12,231
Other subsidiaries (13,670) (10,695) 456
-------- ------- -------
Total equity in earnings (losses)
of subsidiaries (21,913) 11,076 12,687
OTHER INCOME AND DEDUCTIONS, NET (23,733) (1,429) (1,248)
-------- ------- -------
NET INCOME (LOSS) (45,646) 9,647 11,439
DIVIDENDS ON PREFERRED STOCK 9 101 105
EXCESS PREMIUM, PREFERRED REDEMPTION 673 -- --
-------- ------- -------
EARNINGS (LOSS) ON COMMON STOCK $(46,328) $ 9,546 $11,334
======== ======= =======
EARNINGS (LOSS) PER COMMON SHARE $ (1.97) $ .42 $ .58
======== ======= =======
AVERAGE COMMON SHARES OUTSTANDING 23,486 22,996 19,659
======== ======= =======
DIVIDENDS PER COMMON SHARE OUTSTANDING $ 1.00 $ 1.40 $ 1.40
======== ======= =======
89
PAGE 89
Schedule III (Continued)
WASHINGTON ENERGY COMPANY
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENTS OF CASH FLOWS
Year Ended September 30,
-----------------------------------------
1994 1993 1992
-------- -------- --------
(in thousands)
Cash Flow from Operating Activities:
Income (loss) from continuing operations $(44,847) $ 22,035 $ 13,981
Adjustments to reconcile income (loss)
from continuing operations to net
cash provided by operating activities:
Pre-tax loss on merger of Resources 6,304 -- --
Increase (decrease) in:
Non-cash provisions for merger and
and other 6,262 -- --
Federal income tax - current (2,083) (4,528) (680)
Federal income tax - deferred (7,637) -- --
Deferred tax on merger of Resources 24,784 -- --
Undistributed losses of affiliates 21,913 14,968 9,004
Other assets and liabilities (611) 1,299 1,413
Other (2,679) (602) 37
-------- -------- --------
Total adjustments 46,253 11,137 9,774
-------- -------- --------
Net cash provided by
operating activities 1,406 33,172 23,755
-------- -------- --------
Cash Flow Provided by (Used in) Investing
Activities:
Dividends received from affiliates 16,937 26,045 21,691
Investment in affiliates (6,620) (95,398) (24,894)
Advances to affiliates (6,947) (22,408) (15,755)
Invested in Resources prior to merger (20,760) -- --
Proceeds from merger of Resources 63,661 -- --
-------- -------- --------
Net cash provided by (used in)
investing activities 46,271 (91,761) (18,958)
-------- -------- --------
90
PAGE 90
SCHEDULE III (Continued)
WASHINGTON ENERGY COMPANY
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENTS OF CASH FLOWS
(Continued)
Year Ended September 30,
----------------------------------------
1994 1993 1992
-------- --------- --------
(in thousands)
Cash Flow Provided by (Used in)
Financing Activities:
Proceeds from issuance of
common stock $ 6,342 $ 70,528 $ 7,437
Proceeds from issuance of
commercial paper, net (20,316) 24,388 18,765
Redemptions and repurchases of
preferred stock (6,747) (149) (149)
Cash dividend payments
Common (23,468) (32,282) (27,499)
Preferred (9) (101) (105)
-------- --------- --------
Net cash provided by (used in)
financing activities (44,198) 62,384 (1,551)
-------- --------- --------
Net cash provided by
continuing operations 3,479 3,795 3,246
Net cash used in discontinued
operations (3,479) (3,795) (3,260)
-------- --------- --------
Net decrease in cash -- -- (14)
Beginning cash and cash
equivalents -- -- 14
-------- --------- --------
Ending cash and cash equivalents $ -- $ -- $ --
======== ========= ========
Supplemental Disclosures of Cash
Flow Information
Cash Paid During the Year for:
Interest (net of amount
capitalized) $ 7,283 $ 5,704 $ 6,551
Income taxes $ 0 $ 5,136 $ 851
91
PAGE 91
Schedule V
WASHINGTON ENERGY COMPANY AND SUBSIDIARIES
WASHINGTON NATURAL GAS COMPANY
PROPERTY, PLANT AND EQUIPMENT
FOR THE YEAR ENDED SEPTEMBER 30, 1994
Balance Balance
September 30, Additions Retire- September 30,
Classification 1993 at Cost ments 1994
-------------- ------------- --------- -------- --------------
(in thousands)
WASHINGTON NATURAL GAS COMPANY:
GAS UTILITY PLANT, at original
cost:
Tangible property -
Production $ 4,038 $ 21 $ 21 $ 4,038
Underground storage plant 10,015 -- -- 10,015
Transmission 23,063 4,406 9 27,460
Distribution 745,820 80,110 10,764 815,166
General 71,720 12,567 198 84,089
Completed work not classified 35,477 (7,735) -- 27,742
Acquisition adjustment 317 -- -- 317
Construction work in progress 10,382 (4,863) -- 5,519
---------- --------- -------- ----------
900,832 84,506 10,992 974,346
Intangibles -
Organization 159 -- -- 159
Franchises 7 -- -- 7
---------- --------- -------- ----------
166 -- -- 166
Gas stored underground -
noncurrent 2,894 -- -- 2,894
---------- --------- -------- ----------
Total utility plant 903,892 84,506 10,992 977,406
OTHER SUBSIDIARIES OF
WASHINGTON ENERGY COMPANY:
COAL, OIL AND GAS EXPLORATION AND
PRODUCTION AND OTHER PROPERTIES 258,065 2,347 206,014 54,398
---------- --------- -------- ----------
Total $1,161,957 $ 86,853 $217,006 $1,031,804
========== ========= ======== ==========
92
PAGE 92
Schedule V (Continued)
WASHINGTON ENERGY COMPANY AND SUBSIDIARIES
WASHINGTON NATURAL GAS COMPANY
PROPERTY, PLANT AND EQUIPMENT
FOR THE YEAR ENDED SEPTEMBER 30, 1993
Balance Balance
September 30, Additions Retire- September 30,
Classification 1993 at Cost ments 1994
-------------- ------------- --------- ------- -------------
(in thousands)
WASHINGTON NATURAL GAS COMPANY:
GAS UTILITY PLANT, at original
cost:
Tangible property -
Production $ 4,029 $ 9 $ -- $ 4,038
Underground storage plant 9,234 781 -- 10,015
Transmission 15,771 7,292 -- 23,063
Distribution 690,369 62,989 7,538 745,820
General 68,086 3,640 6 71,720
Completed work not classified 23,031 12,446 -- 35,477
Acquisition adjustment 317 -- -- 317
Construction work in progress 6,264 4,118 -- 10,382
---------- --------- ------- ----------
817,101 91,275 7,544 900,832
Intangibles -
Organization 159 -- -- 159
Franchises 7 -- -- 7
---------- --------- ------- ----------
166 -- -- 166
Gas stored underground -
noncurrent 2,894 -- -- 2,894
---------- --------- ------- ----------
Total utility plant 820,161 91,275 7,544 903,892
OTHER SUBSIDIARIES OF
WASHINGTON ENERGY COMPANY:
COAL, OIL AND GAS EXPLORATION AND
PRODUCTION AND OTHER PROPERTIES 237,891 38,211 18,037 258,065
---------- -------- ------- ----------
Total $1,058,052 $129,486 $25,581 $1,161,957
========== ======== ======= ==========
93
PAGE 93
Schedule V (Continued)
WASHINGTON ENERGY COMPANY AND SUBSIDIARIES
WASHINGTON NATURAL GAS COMPANY
PROPERTY, PLANT AND EQUIPMENT
FOR THE YEAR ENDED SEPTEMBER 30, 1992
Balance Balance
September 30, Additions Retire- September 30,
Classification 1991 at Cost ments 1992
-------------- ------------- --------- -------- -------------
(in thousands)
WASHINGTON NATURAL GAS COMPANY:
GAS UTILITY PLANT, at original
cost:
Tangible property -
Production $ 3,875 $ 163 $ 9 $ 4,029
Underground storage plant 9,224 10 -- 9,234
Transmission 15,422 466 117 15,771
Distribution 617,335 81,204 8,170 690,369
General 59,932 9,952 1,798 68,086
Completed work not classified 23,798 (767) -- 23,031
Acquisition adjustment 317 -- -- 317
Construction work in progress 2,432 3,832 -- 6,264
-------- --------- -------- ----------
732,335 94,860 10,094 817,101
Intangibles -
Organization 159 -- -- 159
Franchises 7 -- -- 7
-------- --------- -------- ----------
166 -- -- 166
Gas stored underground -
noncurrent 2,894 -- -- 2,894
-------- --------- -------- ----------
Total utility plant 735,395 94,860 10,094 820,161
OTHER SUBSIDIARIES OF
WASHINGTON ENERGY COMPANY:
COAL, OIL AND GAS EXPLORATION AND
PRODUCTION AND OTHER PROPERTIES 210,981 31,379 4,469 237,891
-------- --------- -------- ----------
Total $946,376 $ 126,239 $ 14,563 $1,058,052
======== ========= ======== ==========
94
PAGE 94
Schedule VI
WASHINGTON ENERGY COMPANY AND SUBSIDIARIES
WASHINGTON NATURAL GAS COMPANY
ACCUMULATED PROVISION FOR DEPRECIATION, DEPLETION AND AMORTIZATION
FOR THE YEARS ENDED SEPTEMBER 30, 1994, 1993 AND 1992
(in thousands)
WASHINGTON NATURAL OTHER SUBSIDIARIES OF
GAS COMPANY: WASHINGTON ENERGY COMPANY:
Accumulated Accumulated provision for
provision for depreciation, depletion
depreciation and amortization of coal
of gas utility and oil and gas exploration
plant and production properties Total
------------------ ---------------------------- --------
Balance 9/30/91 $177,522 $ 64,316 $241,838
Additions
Charged to income 25,786 9,066 34,852
Charged to transportation 478 -- 478
Other 59 (a) -- --
Discontinued operations -- 1,248 1,248
Deductions
Retirements or sales (9,025)(b) (212) (9,237)
-------- -------- --------
Balance 9/30/92 194,820 74,418 269,238
Additions
Charged to income 28,183 10,091 38,274
Charged to transportation 747 -- 747
Other (337)(a) 154 (183)
Discontinued operations -- 1,159 1,159
Deductions
Retirements or sales (6,632)(c) -- (6,632)
Discontinued operations -- (5,541) (5,541)
-------- -------- --------
Balance 9/30/93 216,781 80,281 297,062
Additions
Charged to income 30,901 -- 30,901
Charged to transportation 681 -- 681
Charged to construction 564 -- 564
Other
(140)(a) 128 (12)
Deductions
Retirements or sales (9,196)(d) (70,761)(e) (79,957)
-------- -------- --------
Balance 9/30/94 $239,591 $ 9,648 $249,239
======== ======== ========
(a) Represents net change in retirement work in progress.
(b) Represents retirements of property other than land of $10,094,000 less
net salvage and cost of removal of $1,069,000.
(c) Represents retirement of property other than land of $7,544,000 less net
salvage and cost of removal of $912,000.
(d) Represents retirements of property other than land of $9,200,000, less
net salvage and cost of removal of $4,000.
(e) Primarily represents merger of Washington Energy Resources Company.
95
PAGE 95
Schedule VIII
WASHINGTON ENERGY COMPANY AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED SEPTEMBER 30, 1994, 1993 and 1992
Additions
--------------------
Balance at Charged Recoveries Written Off Balance
Beginning to of Previous as Uncol- at End
of Period Income Write-Offs lectible of Period
---------- ------- ----------- ----------- ---------
(in thousands)
1994:
Allowances for uncol-
lectible accounts $474 $2,794 $473 $(1,602) $2,139
==== ====== ==== ======= ======
1993:
Allowances for uncol-
lectible accounts $828 $1,317 $296 $(1,967) $ 474
==== ====== ==== ======= ======
1992:
Allowances for uncol-
lectible accounts $872 $ 853 $342 $(1,239) $ 828
==== ====== ==== ======= ======
WASHINGTON NATURAL GAS COMPANY
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED SEPTEMBER 30, 1994, 1993 and 1992
Additions
--------------------
Balance at Charged Recoveries Written Off Balance
Beginning to of Previous as Uncol- at End
of Period Income Write-Offs lectible of Period
---------- ------- ----------- ----------- ---------
(in thousands)
1994:
Allowances for uncol-
lectible accounts $474 $2,743 $473 $(1,594) $2,096
==== ====== ==== ======= ======
1993:
Allowances for uncol-
lectible accounts $303 $1,314 $296 $(1,439) $ 474
==== ====== ==== ======= ======
1992:
Allowances for uncol-
lectible accounts $368 $ 831 $342 $(1,238) $ 303
==== ====== ==== ======= ======
96
PAGE 96
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrants have duly caused this report to be signed on their
behalf by the undersigned, thereunto duly authorized.
WASHINGTON ENERGY COMPANY and
WASHINGTON NATURAL GAS COMPANY
December 14, 1994 /s/ William P. Vititoe
---------------------------------------------
(William P. Vititoe, Chief Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrants and in the capacities and on the dates indicated.
Date Signature Title
---- --------- -----
December 14, 1994 /s/ Virginia Anderson
-----------------------------
(all signatures) (Virginia Anderson) Director
/s/ R. F. Bailey
------------------------------
(R. F. Bailey) Director
/s/ Donald Covey
------------------------------
(Donald Covey) Director
/s/ John W. Creighton, Jr.
-----------------------------
(John W. Creighton, Jr.) Director
/s/ Robert L. Dryden
-----------------------------
(Robert L. Dryden) Director
/s/ Tomio Moriguchi
------------------------------
(Tomio Moriguchi) Director
/s/ Sally G. Narodick
------------------------------
(Sally G. Narodick) Director
/s/ William P. Vititoe
------------------------------
(William P. Vititoe) Chairman of the Board of
Directors, Chief Executive
Officer, President and
Director
/s/ J. P. Torgerson
------------------------------
(J. P. Torgerson) Senior Vice President,
Planning and Development
and Principal Financial
Officer
/s/ Allyn P. Hebner
------------------------------
(Allyn P. Hebner) Vice President,
Controller and Principal
Accounting Officer
97
PAGE 97
EXHIBIT INDEX
Certain of the following exhibits are filed herewith. Certain other of the following exhibits have heretofore been
filed with the Commission and are incorporated herein by reference.
(*Filed herewith)
2-A.1 Agreement of Merger by and among Cabot Oil & Gas Corporation, COG Acquisition Company, Washington Energy Resources
Company and Washington Energy Company, dated February 25, 1994 (incorporated by reference from Exhibits to Washington
Energy Company Schedule 13D, for event dated May 2, 1994).
2-A.2 Amendment No. 1 to Agreement of Merger by and among Cabot Oil & Gas Corporation, COG Acquisition Company, Washington
Energy Resources Company and Washington Energy Company, dated May 2, 1994 (incorporated by reference from Exhibits to
Washington Energy Company Schedule 13D, for event dated May 2, 1994).
4-A Restated Articles of Incorporation of Washington Energy Company (incorporated herein by reference to Washington
Energy Company Exhibit 3-A, Form 10-Q for the quarter ended June 30, 1988, File No. 0-8745).
4-A.1 Articles of Amendment to the Articles of Incorporation of Washington Energy Company, dated March 6, 1990, increasing
the $5 par value common stock to 50,000,000 shares from 25,000,000 shares (incorporated herein by reference to
Washington Energy Company Exhibit 3-A.1, Form 10-K for the year ended September 30, 1990, File No. 0-8745).
4-A.2 Articles of Amendment to the Articles of Incorporation of Washington Energy Company dated June 14, 1991, changing
the length of the term of a Director elected to fill a vacancy (incorporated herein by reference to Washington Energy
Company Exhibit 3-A.2, Form 10-K for the year ended September 30, 1991, File 0-8745).
4-A.3 Amended and Restated Articles of Incorporation of Washington Natural Gas Company, dated November 2, 1993
(incorporated herein by reference to Washington Natural Gas Company Exhibit 4-A.2, Registration No. 33-50919).
4-A.4 Articles of Amendment to Amended and Restated Articles of Incorporation of Washington Natural Gas Company, dated
November 10, 1993 (incorporated herein by reference to Washington Natural Gas Company Exhibit 4-A.3, Registration No.
33-50919).
4-A.5 Articles of Amendment to Amended and Restated Articles of Incorporation of Washington Natural Gas Company
establishing a series of Preferred Stock, dated November 18, 1993 (incorporated herein by reference to Washington
Natural Gas Company Exhibit 4-A.5, Form 10-K for the year ended September 30, 1993, File No. 001-1127).
*4-A.6 Articles of Amendment to Amended and Restated Articles of Incorporation of Washington Natural Gas Company
establishing a series of Preferred Stock, dated September 9, 1994.
4-B.1 Amended and Restated Bylaws of Washington Energy Company adopted October 10, 1990 (incorporated herein by reference
to Washington Energy Company Exhibit 3-B.1, Form 10-K for the year ended September 30, 1990, File No. 0-8745).
98
PAGE 98
4-B.2 Amendment to the Bylaws of Washington Energy Company, adopted December 12, 1990 (incorporated herein by reference to
Washington Energy Company Exhibit 3-B.2, Form 10-K for the year ended September 30, 1990, File No. 0-8745).
*4-B.3 Amendment to the Bylaws of Washington Energy Company, adopted April 20, 1994.
*4-B.4 Amendment to the Bylaws of Washington Energy Company, adopted October 19, 1994.
4-C.1 Amended and Restated Bylaws of Washington Natural Gas Company adopted December 14, 1990 (incorporated herein by
reference to Washington Natural Gas Company Exhibit 3-D.1, Form 10-K for the year ended September 30, 1990, File
No. 0-951).
*4-C.2 Amendment to the Bylaws of Washington Natural Gas Company adopted October 19, 1994.
4-D.1 Indenture of First Mortgage dated as of April 1, 1957 (incorporated herein by reference to Washington Natural Gas
Company Exhibit 4-B, Registration No. 2-14307).
4-D.2 First Supplemental Indenture dated as of October 1, 1959 (incorporated herein by reference to Washington Natural Gas
Company Exhibit 4-D, Registration No. 2-17876).
4-D.3 Seventh Supplemental Indenture dated as of February 1, 1967 (incorporated herein by reference to Washington Natural
Gas Company Exhibit 4-M, Registration No. 2-27093).
4-D.4 Eleventh Supplemental Indenture dated as of April 1, 1971 (incorporated herein by reference to Washington Natural
Gas Company Exhibit to Form 8-K for April 1971, File No. 0-951).
4-D.5 Twelfth Supplemental Indenture dated as of November 1, 1972 (incorporated herein by reference to Washington Natural
Gas Company Exhibit to Form 8-K for November 1972, File No. 0-951).
4-D.6 Sixteenth Supplemental Indenture dated as of June 1, 1977 (incorporated herein by reference to Exhibit 6-05 of
Washington Energy Company's S-14 Registration Statement, Registration No. 2-60352).
4-D.7 Seventeenth Supplemental Indenture dated as of August 9, 1978 (incorporated herein by reference to Washington Energy
Company Exhibit 5-K.18, Registration No. 2-64428).
4-D.8 Twenty-third Supplemental Indenture dated as of July 15, 1986 (incorporated herein by reference to Washington Natural
Gas Compan Exhibit 4-B.21, Form 10-K for the year ended September 30, 1986, File No. 0-951).
4-D.9 Twenty-fourth Supplemental Indenture dated as of December 15, 1987 (incorporated herein by reference to Washington
Natural Gas Company Exhibit 4-B.21, Form 10-K for the year ended September 30, 1988, File No. 0-951).
4-D.10 Twenty-fifth Supplemental Indenture dated as of August 15, 1988 (incorporated herein by reference to Washington
Natural Gas Company Exhibit 4-B.22, Form 10-K for the year ended September 30, 1988, File No. 0-951).
99
PAGE 99
4-D.11 Twenty-sixth Supplemental Indenture dated as of September 1, 1990 (incorporated herein by reference to Washington
Natural Gas Company Exhibit 4-B.19, Form 10-K for the year ended September 30, 1990, File No. 0-951).
4-D.12 Twenty-seventh Supplemental Indenture dated as of September 1, 1990 (incorporated herein by reference to Washington
Natural Gas Company Exhibit 4-B.20, Form 10-K for the year ended September 30, 1988, File No. 0-951).
4-D.13 Twenty-eighth Supplemental Indenture dated as of July 31, 1991 (incorporated herein by reference to Washington
Natural Gas Company exhibit 4-A, Form 10-Q for the quarter ended March 31, 1993, File No. 0-951).
4-D.14 Twenty-ninth Supplemental Indenture dated as of June 1, 1993 (incorporated herein by reference to Exhibit 4-A of
Washington Natural Gas Company's S-3 Registration Statement, Registration No. 33-49599).
*10-A Service Agreement dated September 1, 1987 between Northwest Pipeline Corporation and Washington Natural Gas Company
for SGS-1 fir storage service at Jackson Prairie.
*10-B Service Agreement dated April 14, 1993 between Questar Pipeline Corporation and Washington Natural Gas Company for
FSS-1 firm storage service at Clay Basin.
10-C Service Agreement dated November 1, 1989, with Northwest Pipeline Corporation covering liquefaction storage gas
service filed under cover of Form SE dated December 27, 1989.
*10-D Firm Transportation Service Agreement dated October 1, 1990 between Northwest Pipeline Corporation and Washington
Natural Gas Company.
10-E Gas Transportation Service Contract dated June 29, 1990, between Washington Natural Gas Company and Northwest
Pipeline Corporation (incorporated herein by reference to Washington Natural Gas Company exhibit 4-A Form 10-Q for
the quarter ended March 31, 1993, File No. 0-951).
10-E.1 Gas Transportation Service Contract dated July 31, 1991, between Washington Natural Gas Company and Northwest
Pipeline Corporation (incorporated herein by reference to Washington Natural Gas Company exhibit 4-A Form 10-Q for
the quarter ended March 31, 1993, File No. 0-951).
10-F $150,000,000 Amended and Restated Revolving Credit Agreement dated March 18, 1994, by and among Washington Energy
Company, Seattle-First National Bank, The Bank of New York, the First National Bank of Chicago, U.S. Bank of
Washington, National Association, Bank of Montreal, ABN Amro Bank N.U., The Bank of Nova Scotia and CIBC Inc.
10-G Intentionally left blank.
10-H Intentionally left blank.
10-I Form of Washington Natural Gas Company - Executive Retirement Compensation Agreement (incorporated herein by
reference to Washington Natural Gas Company Exhibit 10-N, Registration No. 2-72790).
100
PAGE 100
10-J Second Washington Energy Company Performance Share Plan (amended and restated effective October 1, 1991)
(incorporated herein by reference to Washington Energy Company Exhibit 10-L.1, Form 10-K, for the year ended
September 30, 1991, File No. 0-8745).
10-K.1 Washington Energy Company Stock Option Plan (incorporated herein by reference to Exhibit 10-C Washington Energy
Company Form 10-Q for the quarter ended March 31, 1984, File No. 0-8745).
10-K.2 Amendment to Washington Energy Company Stock Option Plan (incorporated herein by reference to Washington Energy
Company Exhibit 10-S, Form 10-K for the year ended September 30, 1986, File No. 0-8745).
10-K.3 Amendment to Washington Energy Company Stock Option Plan dated as of February 26, 1988 (incorporated herein by
reference to Washington Energy Company Form S-8, Registration No. 33-24221).
10-K.4 Washington Energy Company Stock Option Plan effective December 15, 1993, (incorporated herein by reference to
Washington Energy Company Exhibit 99, Registration No. 33-55381).
10-L Washington Energy Company Directors Stock Bonus Plan (incorporated herein by reference to Washington Energy Company
Exhibit 10-O Form 10-K for the year ended September 30, 1990, File No. 0-8745).
*10-M.1 Employment Agreement between Washington Energy Company, Washington Natural Gas Company and William P. Vititoe dated
January 15, 1994.
10-M.2 Form of Conditional Executive Employment Contract, filed under cover of Form SE dated December 27, 1988.
*10-M.3 Washington Energy Company and subsidiaries Annual Incentive Plan for Vice Presidents and above, dated October 1988.
*10-M.4 Agreement dated January 1, 1994, between Washington Energy Company, Washington Natural Gas Company and Robert R.
Golliver former President and Chief Operating Officer of Washington Energy Company and Washington Natural Gas
Company, providing for termination benefits.
*10-M.5 Agreement dated September 30, 1994, between Washington Energy Company and Keith Anderson, former President of
Washington Energy Resources Company, providing for termination benefits.
10-N Interest Rate Swap Agreement dated September 27, 1989 between Thermal Resources, Inc., and the First National Bank
of Chicago, filed under cover of Form SE dated December 27, 1989.
*10-O Firm Transportation Service Agreement dated March 1, 1992 between Northwest Pipeline Corporation and Washington
Natural Gas Company.
*10-P Firm Transportation Service Agreement dated January 12, 1994 between Northwest Pipeline Corporation and Washington
Natural Gas Company for firm transportation service from Jackson Prairie.
*10-Q Firm Transportation Service Agreement dated January 12, 1994 between Northwest Pipeline Corporation and Washington
Natural Gas Company for firm transportation service from Jackson Prairie.
101
PAGE 101
*10-R Firm Transportation Service Agreement dated January 12, 1994 between Northwest Pipeline Corporation and Washington
Natural Gas Company for firm transportation service from Plymouth, LNG.
10-S Service Agreement dated July 9, 1991 with Northwest Pipeline Corporation for SGS-2F Storage Service filed under cover
of Form SE dated December 23, 1991.
*10-T Firm Transportation Agreement dated October 27, 1993 between Pacific Gas Transmission Company and Washington Natural
Gas Company for firm transportation service from Kingsgate.
10-U Firm Storage Service Agreement and Amendment dated April 30, 1991 between Questar Pipeline Company and Washington
Natural Gas Company for firm storage service at Clay Basin filed under cover of Form SE dated December 23, 1991.
10-V Interest Rate and Currency Exchange Agreement dated as of December 26, 1990 applicable to the Interest Rate Swap
between Bank of America and Washington Energy Corporation filed under cover of Form SE dated December 23, 1991.
10-W Master Energy Price Swap agreement dated February 2, 1993 between Lehman Brothers Commercial Corporation and
Washington Energy Marketing, Inc., filed under cover of Form SE dated December 27, 1993.
10-X Interest Rate and Currency Exchange Agreement dated as of August 19, 1991 between Washington Natural Gas Company and
Merrill Lynch Capital Services, Inc., filed under cover of Form SE dated December 23, 1991.
10-X.1 Interest Rate Swap Agreement dated as of August 19, 1991 between Washington Natural Gas Company and the First
National Bank of Chicago filed under cover of Form SE dated December 23, 1991.
10-X.2 Interest Rate and Currency Exchange Agreement dated as of August 19, 1991, between Washington Natural Gas Company
and Bank of America filed under cover of Form SE dated December 23, 1991.
*12 Computation of Ratios
*21 Subsidiaries of the Registrant
*23 Consent of Arthur Andersen LLP
(Set forth herein on page 85).
*27.1 Financial Data Schedule -- Washington Energy Company
*27.2 Financial Data Schedule -- Washington Natural Gas Company