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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, 1995
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. Employer
Commission File Exact Name of Registrant as Specified State of Identification
Number in Its Charter Incorporation Number
- --------------- ------------------------------------- ------------- ---------------
001-11227 Washington Energy Company Washington 91-1005304
001-11271 Washington Natural Gas Company Washington 91-1005303
Registrants' Telephone Number,
Address of Principal Executive Offices Zip Code Including Area Code
- -------------------------------------- -------- ------------------------------
815 Mercer Street, Seattle, Washington 98109 (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 Washington New York Stock Exchange
Energy Company
7.45% Series II, Cumulative Preferred New York Stock Exchange
Stock, $25 Par Value of Washington Natural
Gas Company
8.50% Series III, Cumulative Preferred New York Stock Exchange
Stock, $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 the Registrants' 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.
---
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 15, 1995: $455,195,049.
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 15, 1995
---------------------------------- -------------------- -----------------------
Washington Energy Company $5 par value 24,116,294
Washington Natural Gas Company $5 par value 10,982,107
Documents Incorporated by Reference: None
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TABLE OF CONTENTS
PART I Page
Item 1. Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
(a) General Development of Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
(b) Financial Information About Industry Segments . . . . . . . . . . . . . . . . . . . . . . 5
(c) Description of Business - Washington Natural Gas Company . . . . . . . . . . . . . . . . . 5
(1) Territory Served . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
(2) Competitive Conditions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
(3) Customer Usage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
(4) Employee Relations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
(5) Franchises . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
(6) Environmental Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
(7) Gas Supply . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Natural Gas Pipeline Deregulation . . . . . . . . . . . . . . . . . . . . . . . . . 8
Gas Supply Portfolio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Gas Transportation Capacity . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Gas Storage Capacity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
LNG and Propane Air . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Capacity Release . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
The Western Market Center . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Reallocation of Pipeline Transition Costs . . . . . . . . . . . . . . . . . . . . . 11
(8) Regulation and Rates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
(9) Regulated Equipment Rentals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
(10) Merchandise Marketing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
(11) New Construction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
(12) Utility Operating Statistics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Description of Business - Oil and Gas Exploration
and Production . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Description of Business - Merchandise and Energy
Efficiency Products . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Description of Business - Coal and Railroad Properties . . . . . . . . . . . . . . . . . . 18
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TABLE OF CONTENTS (Continued)
PART I (Continued) Page
Description of Business - Other Businesses . . . . . . . . . . . . . . . . . . . . . . . . 19
Description of Business - Discontinued Biowaste
Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
(d) Financial Information About Foreign and
Domestic Operations and Export Sales . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Item 2. Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Item 3. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Item 4. Submission of Matters to a Vote of Security Holders . . . . . . . . . . . . . . . . . . . 20
Executive Officers of the Registrants . . . . . . . . . . . . . . . . . . . . . . . . . . 21
PART II
Item 5. Market for Registrant's Common Stock and Related
Shareholder Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Item 6. Selected Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . 26
Item 8. Financial Statements and Supplementary Data . . . . . . . . . . . . . . . . . . . . . . . 40
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure . . . . . . . . . . . . . . . . . . . . . . . . . 90
PART III
Item 10. Directors and Executive Officers of the Registrants . . . . . . . . . . . . . . . . . . . 90
Item 11. Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 93
Item 12. Security Ownership of Certain Beneficial Owners
and Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 99
Item 13. Certain Relationships and Related Transactions . . . . . . . . . . . . . . . . . . . . . . 99
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 101
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 109
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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, Washington Natural Gas Company ("Washington
Natural") is engaged primarily in the retail distribution of natural gas. The
Company holds an equity position in a publicly traded oil and gas exploration
and production company, and through various subsidiaries, is also engaged in the
business of selling gas appliances, energy efficient and security products for
the home 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 and its wholly-owned subsidiaries through a merger in 1978. Washington
Natural and its predecessors have manufactured and distributed gas since prior
to the turn of the century and since 1956 have distributed natural gas in the
Puget Sound region of western Washington state. 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.
Washington Energy was formed in 1977 to serve as the holding company for the
diverse energy related businesses conducted by Washington Natural and the other
subsidiaries.
As part of a change in business strategy, the Company, in 1994, sold its
biowaste technology business started in 1984, and merged its oil and gas
subsidiary, Washington Energy Resources Company ("Resources"), with a subsidiary
of Cabot Oil & Gas Corporation ("Cabot"), Houston, Texas. Additionally, in
October 1993 the Company combined its appliance sales, energy efficiency
products and home security businesses in a new subsidiary, Washington Energy
Services Company ("Services").
On October 18, 1995, Washington Energy and Washington Natural entered into an
agreement to merge Washington Energy and Washington Natural with Puget Sound
Power & Light Company ("Puget") which, as the surviving corporation, will be
renamed at the effective time of the merger. Puget is an electric utility
servicing the Puget Sound area of western Washington. The merger would create
the largest combined electric and gas utility in the Sate of Washington. The
merger must be approved by the holders of the common stock of Washington Energy,
the holders of the preferred stock of Washington Natural, and the holders of the
common stock of Puget. In addition, the Washington Utilities and Transportation
Commission ("WUTC"), which regulates both utilities, must
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approve the merger and certain other conditions in the merger agreement must be
satisfied or waived. A joint proxy statement/prospectus will be sent to
shareholders of the three companies early in calendar 1996. Washington Energy
common shareholders and Washington Natural preferred shareholders will be asked
to vote on the merger at a combined shareholder meeting currently scheduled for
March 20, 1996, and Puget shareholders will vote at a special shareholder
meeting scheduled on the same date. Regulatory approval is expected prior to the
end of calendar 1996.
The merger requires approval by holders of two-thirds of the common shares of
Washington Energy and Puget as well as by two-thirds of the holders of the two
series of Washington Natural preferred stock voting separately. In the event the
merger is approved by the common shareholders of Washington Energy and Puget,
but not by the holders of either series of Washington Natural preferred stock,
the merger of Washington Energy or Puget would proceed with Washington Natural
remaining a wholly-owned subsidiary of the new company. If the merger is
approved, each share of Washington Energy common stock will be exchanged for
.860 of a share of Puget common stock and each share of (subject to the approval
of the merger by the holders of the Washington Natural preferred stock)
preferred stock of Washington Natural will be exchanged for one share of Puget
preferred stock with like rights and preferences (including par value,
dividends, redemption provisions and rights upon liquidation).
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 Consolidated Financial Statements.
(c) Description of Business
Washington Natural Gas Company
Washington Natural is engaged predominately in the distribution of natural gas
at the retail level. Washington Natural has two subsidiaries, WNG Cap I and WNG
Cap II, created to enhance Washington Natural's ability to lower its pipeline
transportation costs through capacity release and to provide other gas-related
services to be determined.
(1) Territory Served
Washington Natural distributes natural gas in a service area extending for
approximately 150 miles from north to south in the Puget Sound area of
Washington state 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 approximately 3,054,000
(56% of the state's population). During 1995, Washington Natural served an
average of 465,000 customers.
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Washington Natural's service area includes over 60 incorporated municipalities.
In addition to Seattle, this area includes four other major cities or
industrialized areas which combine to form the core of Washington Natural's
service territory. Seattle, with 24% of customers accounted for 25% of 1995
revenues. Tacoma with 11% of customers accounted for 13% of 1995 revenues.
Bellevue with 6% of customers accounted for 6% of 1995 revenues. Kent with 5% of
customers accounted for 5% of 1995 revenues. And Everett with 3% of customers
accounted for 5% of 1995 revenues.
(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
(transportation), of natural gas. Large industrial and commercial end-users also
have the option to bypass Washington Natural's distribution system by
constructing pipelines to interconnect directly with the interstate pipeline
which transports all the natural gas consumed in the region, although no
significant bypass by customers has occurred to date.
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 26% more expensive than gas and electricity for residential space
heating was up to 169% more expensive than gas. Conversions of residential users
to gas from oil and electricity remain an important source of new customer
additions, with approximately 8,000 residential users converting to gas in 1995.
Washington Natural successfully competes with all the electric utilities in its
service area for new customers in the new housing construction market, with
approximately 11,000 new homes utilizing gas for space and water heating in
1995. Washington Natural's overall market share of the new single-family home
construction market in its service territory exceeded 75% for 1995. In
residential areas where gas mains have already been extended, Washington
Natural's market share for space and water heating in new construction is even
higher. Since the cost of natural gas remains substantially lower than the cost
of 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 1995, Washington Natural's
total 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 local
distribution companies ("LDCs") and end users in 1988. The availability of both
firm and interruptible transportation service, which enables industrial end
users to purchase lower 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. Continued evolution in the natural
gas industry, resulting primarily from FERC Order
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Nos. 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 continued to use gas due to price and other
considerations.
In November 1993, Washington Natural began offering a new tariff for
transportation services on its distribution system. While in the past as many as
160 customers annually have taken advantage of the potential savings provided by
transportation service, in 1995, on average, approximately 55 commercial and
industrial customers chose to receive only transportation service. Most
customers have chosen to remain either firm or interruptible gas sales customers
of Washington Natural.
Natural gas should continue to play a prominent energy role in the Pacific
Northwest due to the abundant gas supplies available at competitive prices.
Competition with oil in the industrial market continues but is lessening 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 seasonally with
temperature and weather conditions, particularly in the winter and summer
months, because over 90% of its customers use natural gas for space heating.
(4) Employee Relations
As of September 30, 1995, Washington Energy had 1,340 employees of which 1,217
were employed by Washington Natural. Subsequent to September 30, 1995,
Washington Natural reduced the number of its salaried employees by 4%. In 1994,
Washington Natural reduced overall staffing by 12%, across all employee
classifications. Washington Natural has 820 employees organized within eight
local unions with which it has collective bargaining agreements. During 1995,
Washington Natural reached collective bargaining agreements with all five unions
which had contracts that expired in 1995. The new contracts generally reflected
an average annual increase in base wages and benefits of 3% for each of the next
three years, the effect of which is partially offset by decreases in the premium
time wage rate for certain work. There are no contracts currently under
negotiation and the earliest contract expiration is November 30, 1997.
(5) Franchises
Washington Natural holds nonexclusive franchises from all of the incorporated
communities it services except the City of Lacey, and excluding four 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 beneath state highway rights-of-way. In
addition to the franchises mentioned, Washington Natural holds a Certificate of
Public Convenience and Necessity granted by the WUTC to serve the area in which
its distribution system is located.
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(6) Environmental Matters
For a description of environmental matters related to the Company and Washington
Natural, see Note 10 of Notes to Consolidated Financial Statements.
(7) Gas Supply
General
Washington Natural currently purchases a blended portfolio of long-term firm,
short-term firm, and spot gas supplies from a diverse group of major and
independent producers and gas marketers in the U.S. and Canada. Prior to
implementation of FERC Order No. 636 on November 1, 1993, Washington Natural
purchased a portion of its firm gas supply from Pipeline under a firm sales
agreement. All of Washington Natural's gas supply is ultimately transported
through Pipeline, the sole interstate pipeline directly supplying the western
Washington area.
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 underground storage facilities and withdrawing it
during the winter heating season. The storage facilities at Jackson Prairie in
Washington 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 ("LNG") facility at Plymouth, Washington, and by producing propane
air gas at a plant owned by Washington Natural and located on its distribution
system.
Washington Natural expects to meet its firm peak day requirements for
residential, commercial and industrial markets through its firm gas purchase
contracts, firm transportation capacity, firm storage capacity and other firm
peaking resources. Washington Natural believes that it will be able to acquire
incremental firm gas supply resources, which are reliable and reasonably priced,
to meet anticipated growth in the requirements of its firm customers for the
foreseeable future. Washington Natural is committed to securing least cost
sources of reliable gas supply, including demand side management resources, and
to optimizing resources to their highest and best use in order to best serve the
needs of its firm customers.
Natural Gas Pipeline Deregulation
The implementation of FERC Order No. 636 by Pipeline on November 1, 1993,
completed the deregulation of its activities as an interstate natural gas
pipeline and unbundled sales services formerly performed by Pipeline. The
complete unbundling of Pipeline's services at that date finalized Washington
Natural's transition from purchasing all of its gas supply from Pipeline prior
to 1986 to purchasing all gas supplies directly from producers and gas
marketers. As part of the transition, Washington Natural was assigned certain
long-term firm gas supply agreements of Pipeline effective November 1, 1992, and
November 1, 1993. In order to deliver gas supplies purchased directly from
suppliers to its distribution system, Washington Natural assumed long-term, firm
transportation capacity on the transmission systems of Pipeline and Pacific Gas
Transmission Company ("PGT"), together with associated demand charge
obligations. Washington Natural also acquired storage capacity with associated
demand charge obligations at Clay Basin in two increments effective April 1991
and April 1993.
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Gas Supply Portfolio
For the current winter heating season, Washington Natural has contracted for
approximately 25% of its expected peak day gas supply requirement from sources
originating in British Columbia under a combination of long-term and winter
peaking purchase agreements and firm gas exchange arrangements. Long-term gas
supplies from Alberta represent approximately 10% of the peak day requirement.
Long- term and winter peaking arrangements with U.S. suppliers and gas stored at
Clay Basin make up approximately 25% of the peak day portfolio. The balance of
the peak day requirement is expected to be met with gas stored at Jackson
Prairie, LNG held at Pipeline's Plymouth facility and propane air gas,
approximately 25%, 10% and 5%, respectively.
The current firm, long-term gas supply portfolio consists of arrangements with
12 producers and gas marketers with no single supplier representing more than
14% of the expected peak day requirement. The contracts have remaining terms
from less than one year to nine years with an average term of five years. All
but one of the supply contracts assigned to Washington Natural by Pipeline have
expired. The one remaining contract, with an Alberta supplier, has a remaining
term of nine years. All of the current gas supply contracts contain market
sensitive pricing provisions based on various published indices.
Washington Natural's firm gas supply portfolio is structured to take advantage
of regional price differentials and to market gas and services outside
Washington Natural's service territory ("off system sales") when market
opportunities arise and system supply requirements permit. The geographic mix of
suppliers and daily, monthly and annual take requirements permit a high degree
of flexibility in sourcing gas supplies in off-peak periods to minimize costs.
These activities lower the overall cost of gas for customers on Washington
Natural's distribution system. In 1995, Washington Natural's off system sales
totaled approximately 16 billion cubic feet ("BCF") of gas which generated $3.4
million of gross margin. Washington Natural is also an active participant in the
exchange of gas with other suppliers or marketers on different pipelines which
generated $1.2 million in gross margin. The savings or margin from these
activities do not affect Washington Natural's earnings, but are passed on to
Washington Natural's ratepayers through the purchased gas adjustment ("PGA")
mechanism.
Gas Transportation Capacity
Washington Natural currently holds firm transportation capacity on Pipeline and
PGT. Holders of such capacity pay fixed monthly demand charges for the right,
but not the obligation, to transport a specified quantity of gas from a receipt
point to a delivery point on the pipeline each day for the term of the
agreement.
Firm transportation capacity on Pipeline was initially made available to
utilities in 1988 under permanent authority of FERC Order No. 436. Washington
Natural holds firm capacity on Pipeline totaling 444,533 million British thermal
units ("MMBtu") per day acquired under five agreements at various times prior to
November 1, 1993, plus an additional 10,000 MMBtu per day acquired effective
November 1, 1995. The agreements provide for receipt of 196,705 MMBtu per day at
Sumas on the Washington border with British Columbia, 181,892 MMBtu per day at
various points in Wyoming, Colorado, and Utah and 75,936 MMBtu per day at
several interconnections with PGT. Washington Natural also holds seasonal firm
capacity on Pipeline for receipt of 188,372 MMBtu per
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day at the Jackson Prairie storage field and 70,500 MMBtu per day at the
Plymouth LNG facility. This capacity is available to deliver storage gas to
Washington Natural's distribution system during the heating season. The firm
capacity from Jackson Prairie will increase by 47,926 MMBtu per day effective
with the completion of an expansion project in the winter of 1996 to increase
the rate of daily deliverability from the field. Washington Natural's firm
transportation capacity contracts with Pipeline have remaining terms ranging
from 9 to 20 years. However, Washington Natural has either the unilateral right
to extend the contracts under their current terms or the right of first refusal
to extend such contracts under then current FERC orders.
Washington Natural holds firm transportation capacity on PGT totaling 90,392
MMBtu per day from Kingsgate on the Idaho border with British Columbia to
various interconnections with Pipeline. Gas originating in Alberta is
transported to Pipeline utilizing this capacity for subsequent delivery by
Pipeline to Washington Natural's distribution system. The contract for this
capacity has a remaining term of 28 years.
Gas Storage Capacity
Washington Natural holds storage capacity in the Jackson Prairie and Clay Basin
underground gas storage facilities. The Jackson Prairie facility, one-third
owned and operated by Washington Natural, is used primarily for intermediate
peaking purposes as it is designed to deliver a large volume of gas over a
relatively short time period. Washington Natural has peak, firm delivery
capacity of 188,372 MMBtu per day and total firm storage capacity of 6,341,660
MMBtu at the facility. A project will be completed in the winter of 1996 to
increase the daily deliverability, but not the total storage capacity, of the
Jackson Prairie facility. Washington Natural's share of the expansion will be
47,926 MMBtu per day. The location of the Jackson Prairie facility in Washington
Natural's service area provides significant cost savings by reducing the amount
of annual pipeline capacity required to meet peak day gas requirements. The Clay
Basin storage facility is intended as a baseload gas supply source, as well as a
peaking supply source. Washington Natural has a maximum firm withdrawal capacity
of 111,300 MMBtu per day from the facility with total storage capacity of
13,419,000 MMBtu. The capacity is held under two contracts with remaining terms
of 18 and 25 years.
LNG and Propane Air
LNG and propane air gas provide gas supply on short notice for short periods of
time. These sources are utilized as the supply of last resort in extreme peak
demand periods lasting a few hours or days due to their high cost. Washington
Natural has long-term contracts for storage of 241,700 MMBtu of its gas as LNG
at Pipeline's Plymouth facility which equates to approximately three and
one-half days supply at maximum daily deliverability of 70,500 MMBtu. Washington
Natural owns storage capacity for approximately 1.4 million gallons of propane.
The facilities are capable of delivering the equivalent of 30,000 MMBtu of gas
per day for up to four days directly into Washington Natural's distribution
system.
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Capacity Release
One of the most significant changes resulting from the deregulation of the
natural gas industry is the advent of capacity release to counter the impact on
pipeline customers of straight fixed variable rate design used by interstate
pipelines. Under this rate design, essentially all pipeline costs are recovered
from customers through fixed monthly demand charges, rather than volumetrically
as in the past. The FERC provided the capacity release mechanism as the means
for holders of firm capacity to relinquish temporarily unutilized pipeline
capacity to others in order to recoup all or a portion of the cost of such
capacity. Capacity may be released through several methods including open
bidding and by prearrangement. All capacity available for release is posted on
electronic bulletin boards of the pipelines. Washington Natural utilized
buy/sell and capacity release mechanisms in off-peak periods to recoup $2.8
million in demand charges in 1995. WNG CAP I and WNG CAP II, wholly-owned
subsidiaries of Washington Natural, were formed to provide additional
flexibility and benefits from capacity release. All savings from capacity
release are passed on to Washington Natural's ratepayers through the PGA
mechanism. In addition, off-system sales activities have often bundled gas sales
or other services with transportation which has increased capacity utilization.
In approving Washington Natural's PGA effective May 15, 1995, the WUTC has
allowed all capacity related demand charges incurred through that date to be
recovered in rates.
The Western Market Center
In 1995, Washington Natural elected to participate in The Western Market Center
("TWMC"), a newly-formed, regional gas supply and market hub in the Muddy Creek
area in southwest Wyoming. TWMC is essentially a computerized electronic gas
trading and management system associated with a hub located at the
interconnection of five major pipelines: Pipeline, Questar, Kern River, Colorado
Interstate Gas and Overland Trail. Participation in TWMC will enable Washington
Natural to provide gas management services including gas parking and lending to
a wider market of off-system customers. This is expected to increase off-peak
utilization of Washington Natural's storage and pipeline capacity as well as its
gas supply resources which should reduce the overall cost of gas supplies for
Washington Natural's ratepayers. Washington Natural will have a 10% ownership
interest in TWMC.
Reallocation of Pipeline Transition Costs
In May 1994, Pipeline was ordered by the FERC to modify the previous allocation
of transition costs, totaling $34 million plus interest, incurred in
"unbundling" interstate pipeline services. Under this order, Washington
Natural's share of these costs increased from $1.2 million, previously paid, to
$10.4 million, inclusive of interest. Washington Natural and six other customers
filed requests for rehearing. On December 20, 1994, the FERC issued an order
denying the rehearing requests and permitting Pipeline to bill customers under
the modified allocation methodology. Pending the outcome of an appeal to the
United States Court of Appeals, Washington Natural began making monthly payments
to Pipeline in May 1995 under a 12 month payment schedule. The WUTC has allowed
Washington Natural to recover the full amount of the liability as part of the
PGA which went into effect on May 15, 1995.
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(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 Washington 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, all changes in the price of gas it
purchases from non-affiliated suppliers, using the PGA mechanism. This mechanism
allows Washington Natural to pass these cost increases or decreases on to its
customers on a timely basis, resulting in no material impact on net income.
Since disallowing a portion of the cost of gas purchased from a subsidiary of
Resources, a Washington Natural affiliate, in a 1992 order, the WUTC has
authorized three PGAs. The effects of the adjustments in 1992 and 1993
substantially increased rates and were allowed on a timely basis. On May 11,
1995, the most recent PGA was approved by the WUTC, effective May 15, 1995. This
PGA results in a pass-through to customers, of an annual reduction in the cost
of purchased gas of $46.5 million.
July 1992 Rate Case
In July 1992, Washington Natural filed with the WUTC for a general rate
increase, Docket No. UG-920840 (the "July 1992 Rate Case"), requesting an
additional 13%, or $41.4 million, in annual revenues and therefore margin. 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 proposed 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.
On September 27, 1993, the WUTC issued its decision in the rate case, ordering a
decrease in Washington Natural's rates and margin of $15.4 million on an annual
basis, effective October 9, 1993. The principal differences in the annual
revenue requirement between Washington Natural's rate request and the WUTC's
ordered rate reduction were:
(1) approximately $11 million of adjustments made by the WUTC to disallow
certain expenses related to advertising, marketing and merchandising;
(2) approximately $10 million due to 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;
(3) $5.2 million related to disallowance of Washington Natural's proposed
attrition allowance; and
(4) $4.8 million associated with the weather normalization calculation.
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November 1993 Rate Case
After reviewing the WUTC's decision in the July 1992 Rate Case and giving
consideration to filing of a motion for reconsideration with the WUTC,
Washington Natural determined that the most appropriate action would be to file
a limited-scope general rate case. This case, Docket No. UG-931405, was filed in
November 1993 (the "November 1993 Rate Case"), and requested a revenue and
margin 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 expansions since calendar year 1991, which was
used as the base measurement year in the July 1992 Rate Case. On May 27, 1994,
the WUTC issued an order approving a settlement of the November 1993 Rate Case.
The terms of the settlement agreement provided for a $19.0 million increase in
annual revenue and margin and an agreement that Washington Natural would not
request an increase in total revenues other than PGA filings or in certain
limited circumstances prior to March 1, 1995.
March 1995 Rate Case
In March 1995, Washington Natural filed a general rate case (the "March 1995
Rate Case") seeking to raise rates by 8.5%, or $35.4 million on an annual basis.
The filing was requested in order to reflect the higher costs of capital and
increased operating costs as a result of customer growth. As part of the filing,
Washington Natural petitioned that $17.8 million of the $35.4 million request be
granted as interim rate relief.
On May 11, 1995, Washington Natural and the WUTC reached a negotiated settlement
of the March 1995 Rate Case. The settlement ordered a $17.7 million annual
increase in revenue and margin. The increase reflects an authorized
rate-of-return on common equity in the range of 11% - 11.25%, up from the
previous level of 10.5%. The WUTC also stipulated that Washington Natural will
be allowed to earn in excess of that range to the extent that it can do so by
managing its cost of service. The new rates became effective May 15, 1995. As
part of the settlement, Washington Natural has agreed not to make a general rate
case filing prior to May 15, 1997. The agreement, however, does not preclude
filing under the PGA mechanism or for interim emergency rate relief if
conditions warrant such rate relief.
Rate Redesign Filing
As a result of the WUTC's decision in the July 1992 Rate Case, Washington
Natural filed a Transportation Service, Cost of Service and Rate Redesign
Proposal in June 1994 (the "Rate Redesign Filing"). In its July 1992 Rate Case
decision, the WUTC did not accept any of the cost of service methodologies
proposed, explaining that the changing nature of the industry, including the
separate and distinct function of providing transportation service, required
additional consideration. The Rate Redesign Filing, Docket No. UG- 940814,
included proposed rates that would better reflect the actual cost of serving
various classes of customers. The filing applied 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 service.
On May 11, 1995, the WUTC ordered the implementation of a cost-based rate design
effective May 15, 1995. The order, while revenue neutral in total,
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shifted rates and costs, and thus margin responsibility, among customer classes.
The average margins for transportation service decreased by 26% and margins for
larger volume industrial sales customers decreased by 27%. The order also raised
average residential margins 4.5%. Firm commercial and smaller industrial average
margins were not affected. The changes in transportation and industrial margins
make the utility economically indifferent to customer choices between
transportation and sales service. The order enhances Washington Natural's
ability to offer rates that support cost effective and responsible growth.
Line Extension and New Customer Addition Policy
In March 1995, the WUTC approved a new tariff for extending natural gas mains
and services to new customers. Under the new policy, main and service extensions
that meet the target rate-of-return, currently 9.15%, based on an analysis of
estimated costs and gas usage, are provided to customers without additional
contributions. This new policy helps ensure that new customer growth is
profitable. If a new main or service extension is estimated to have a
rate-of-return of less than 9.15%, the customer is required to make either a
one-time contribution or pay a new customer rate, at the customer's choice. A
contribution is a one-time advance payment to cover project costs. This advance
payment may be refundable at the end of five years based on additional new
customer load which has been added to the new main or service extension since it
was initially installed. The other choice is payment of a nonrefundable new
customer rate for five years. The new customer rate is essentially a surcharge
of 11.5 cents per therm for new residential developments or 17 cents per therm
for residential or small commercial conversions.
(9) Regulated Equipment Rentals
Washington Natural is also engaged in the business of leasing water heaters and
conversion burners for residential and commercial use. As of September 30, 1995,
Washington Natural had approximately 119,000 active equipment leases to
customers with an original cost and net book value of approximately $74 million
and $64 million, respectively. Lease revenues are included in the financial
statements as part of Regulated Utility Sales since the rates charged are
subject to the approval of WUTC. Lease revenues were $10,317,000, $9,405,000 and
$7,712,000 for 1995, 1994 and 1993 respectively.
(10) 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 19.
(11) New Construction
Washington Natural is one of the fastest growing natural gas LDCs in the nation
due to economic growth in its service area and the high conversion rate of
existing homes to gas. In 1995 and 1994, Washington Natural made $87.2 and $84.5
million, respectively, in capital expenditures to add new customers and
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to maintain the reliability and safety of its distribution system. Washington
Natural's capital spending in 1996 is projected to be $86 million.
See the Liquidity and Capital Resources section of Management's Discussion and
Analysis of Financial Condition and Results of Operations at page 36.
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(12) Washington Natural Utility Operating Statistics
Year Ended September 30,
------------------------------------------------------------------
1995 1994 1993 1992 1991
-------- -------- -------- -------- --------
(in thousands)
Regulated utility sales:
Residential firm gas sales $231,202 $206,602 $195,936 $152,015 $160,265
Commercial firm gas sales 97,396 91,749 87,644 67,393 72,833
Industrial firm gas sales 25,860 28,827 23,967 17,226 20,472
Interruptible gas sales 44,541 51,425 44,160 29,593 43,563
Transportation services 10,732 8,399 8,434 11,231 6,783
Other 10,317 9,405 7,712 7,481 7,136
-------- -------- -------- -------- --------
Total regulated utility
sales $420,048 $396,407 $367,853 $284,939 $311,052
======== ======== ======== ======== ========
Customers, average number
served:
Residential firm 423,195 403,642 383,291 361,454 337,815
Commercial firm 38,378 37,112 35,951 34,503 33,011
Industrial firm 2,754 2,824 2,844 2,857 2,842
Interruptible 1,037 1,009 988 948 1,037
Transportation 55 36 68 130 56
------- ------- ------- ------- -------
Total average customers 465,419 444,623 423,142 399,892 374,761
======= ======= ======= ======= =======
Gas volumes (thousands of therms):
Residential firm sales 398,283 371,472 382,118 301,887 346,782
Commercial firm sales 179,725 174,668 177,724 142,402 162,915
Industrial firm sales 55,365 62,698 54,096 52,019 49,309
Interruptible sales 132,312 151,175 127,678 78,645 131,278
Transportation volumes 156,945 119,590 159,765 199,143 156,402
------- ------- ------- ------- -------
Total gas volumes 922,630 879,603 901,381 774,096 846,686
Company use 729 801 848 838 699
Unaccounted for 1,328 489 (2,318) 660 (2,348)
------- ------- ------- ------- -------
Total send out 924,687 880,893 899,911 775,594 845,037
======= ======= ======= ======= =======
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(12) Washington Natural Utility Operating Statistics (Continued)
Year Ended September 30,
------------------------------------------------------------------
1995 1994 1993 1992 1991
-------- -------- -------- -------- --------
Average use per customer (therms):
Residential firm 941 921 998 835 1,027
Commercial firm 4,683 4,708 4,903 4,127 4,935
Industrial firm 20,103 22,035 24,618 18,208 17,350
Interruptible 127,591 147,315 129,231 82,959 126,594
Transportation 2,853,545 3,400,694 2,133,676 1,531,869 2,792,893
Average revenue per customer:
Residential firm $ 546 $ 512 $ 511 $ 421 $ 474
Commercial firm 2,538 2,472 2,438 1,953 2,206
Industrial firm 9,390 10,208 8,427 6,029 7,203
Interruptible 42,952 50,966 44,695 31,216 42,009
Transportation 195,127 233,306 124,029 86,392 121,125
Average revenue per therm (cents):
Residential firm 58.0 55.6 51.3 50.4 46.2
Commercial firm 54.2 52.5 49.3 47.3 44.7
Industrial firm 46.7 46.0 44.3 33.1 41.5
Interruptible 33.7 34.0 34.6 37.6 33.2
Total sales customers 52.1 49.8 47.4 46.3 43.0
Transportation 6.8 7.0 5.3 5.6 4.3
Average cost per therm
(cents) (1): 28.6 29.5 24.0 22.7 20.0
Weather - degree days 4,201 4,289 4,702 3,933 4,888
% of normal (30-yr avg) 88% 90% 98% 82% 101%
(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.
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., and since 1994, through its investment in Cabot. On May 2, 1994, Resources
was merged in a tax-free exchange with a wholly-owned subsidiary of Cabot based
in Houston, Texas. Through the merger the Company currently owns 16.4% of
Cabot's outstanding voting securities consisting of 2,133,000 shares of common
stock, representing 9.4% of total common shares outstanding, and 1,134,000
shares of convertible voting preferred stock. William P. Vititoe, Chairman of
the Board of Directors, Chief Executive Officer and President of Washington
Energy, and Robert F. Bailey, a director of Washington Energy, also became
members of Cabot's Board of Directors. See Note 13 of Notes to Consolidated
Financial Statements 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
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Cabot's earnings and losses available to common shareholders as "Other income
(expense)". Only a brief summary of Cabot's business, taken from its 1994 Form
10-K filing, is presented here since Cabot's stock is publicly traded on the New
York Stock Exchange ("NYSE") and more detailed information is available in its
filings with the Securities and Exchange Commission ("SEC"). Cabot's fiscal year
corresponds to the calendar year.
Substantially all of Cabot's operations are in the Appalachian Region of West
Virginia, Pennsylvania and New York, and in the Western Region, including the
Anadarko Basin of southwestern Kansas, Oklahoma and the Texas Panhandle, in the
Green River Basin of Wyoming and in South Texas. Cabot has operated in the
Appalachian Region for over 100 years and in the Anadarko Basin for over 50
years. Cabot's proved reserves at December 31, 1994, totaled approximately 1,001
billion cubic feet equivalent ("Bcfe"), 95% 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
acquired its interests in the Green River Basin and South Texas through the
Resources merger, valued by Cabot at $176 million, and made two other
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 3,600 miles of pipeline with interconnections to interstate
pipelines and local distribution companies. It also has two gas storage fields
in the same region. Cabot also purchases substantial quantities of gas from
other producers in the Appalachian Region and the Gulf Coast area for resale to
customers in the northeastern United States.
The oil and gas production business is highly competitive and Cabot's operating
results are largely determined by the natural gas prices prevailing in the
markets it serves. In response to the nation-wide decline in natural gas prices
during the past year, Cabot has instituted numerous cost reduction measures,
including employee lay-offs and consolidation of administrative functions.
During the quarter ended September 30, 1995, Cabot wrote down the carrying value
of its oil and gas producing assets by $113.9 million in connection with early
adoption of Statement of Financial Accounting Standards ("SFAS") No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of." See Managements' Discussion and Analysis of Financial
Conditions and Results of Operations at page 28 and Note 13 of Notes to
Consolidated Financial Statements for further information regarding Cabot's
operating results and losses recognized by Washington Energy related to its
investment in 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 July
1992 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 Services, a newly-formed, wholly-owned subsidiary of Washington Energy.
Effective the same date, the Company's HomeGuard(TM) security systems business,
which had been conducted by another of the Company's then wholly-owned
subsidiaries, Thermal Efficiency, Inc., was also transferred to Services.
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Services sells three types of products, primarily to residential homeowners: gas
appliances, including 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.
The markets for Services products are highly competitive. Competitors range from
large widely-known national chains to small independent dealers with minimal
name recognition. Service's 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 Railroad Properties
Thermal Energy, Inc. holds the Company's coal investments through its 95%
ownership 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 if market conditions become 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. The Cook Mountain project, located northeast of Ashland,
Montana, involves over 20,000 acres of surface rights over coal held by lease
and in fee.
Proposals for short-term coal test burns, which may be conducted in 1996 or
1997, have been made to several electric utilities. The results of such tests
would better define the quality of the reserves and the economics of
establishing full scale mining operations. 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 to 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 proposed rail
project by an additional 42 miles into southeastern Montana. The proposed
extension would shorten by about 150 miles the railroad haul between the coal
producing areas further south in Montana and in northeast Wyoming, and
electricity generating stations in Minnesota, Michigan and Wisconsin. This would
benefit existing coal shippers by reducing haul distances and would increase the
value and development potential of Montco's coal reserves.
20
Page 20
In 1995, the Company wrote down the carrying value of its coal reserves and
railroad assets to estimated fair market value in conjunction with the early
adoption of SFAS No. 121. The coal reserves were written down from $38.7 million
to $4.0, million and the railroad assets amounting to $6.0 million, consisting
of engineering and other intangible development costs, were written down to
zero. See Note 8 of Notes to Consolidated Financial Statements for further
information concerning the write-downs. While current coal prices and
projections of future coal prices do not support full development of these
assets over the next five to ten years, the Company intends to maintain its
investments and to periodically reassess the viability of further development.
Other Businesses
Certain gas transportation, storage and other contractual arrangements that were
excluded from the merger of Resources with Cabot were transferred to a
newly-formed, wholly-owned subsidiary of the Company, Washington Energy Gas
Marketing Company ("WEGM"). See Note 14 of Notes to Consolidated Financial
Statements 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 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 and its predecessor. Unisyn
developed and patented pollution control technology which processes organic
wastes by anaerobic digestion and produces saleable by-products. 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 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 assets at the date of sale. See Note 15
of Notes to Consolidated Financial Statements.
(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, Kent and Everett) and parts of
five counties in the Puget Sound region of Washington State. It owns a total of
268 acres of land, of which 20 acres are sites for peak-shaving
21
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plants, 60 acres are sites for city gate stations for receipt of 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 or 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 20.
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.
Item 3. Legal Proceedings
For a description of the legal matters related to the Company and Washington
Natural see Note 11 of Notes to Consolidated Financial Statements.
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 ended September
30, 1995.
22
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Executive Officers of the Registrants
Name Title Age
- -------------------- ------------------------------------------------------------------------- ---
William P. Vititoe Chairman of the Board of Directors, Chief Executive Officer and President 57
(Chairman and Chief Executive Officer since February 1994, President
since April 1994). (1)
Timothy J. Hogan Executive Vice President - Chief Operating Officer (since August 1995; 44
Senior Vice President - Supply, Administration and Corporate Secretary,
February 1995 - August 1995; Vice President - Supply, Administration and
Corporate Secretary, June 1994 - February 1995; Vice President - Legal
and Corporate Secretary, February 1990 - June 1994). (1)
James P. Torgerson Executive Vice President - Chief Administrative Officer and Chief 43
Financial Officer (since August 1995; Senior Vice President - Finance,
Planning and Development and Chief Financial Officer, February 1990 -
August 1995). (1)
Robert J. Tomlinson Senior Vice President - General Counsel and Corporate Secretary (since 59
August 1995; Senior Vice President - Legal and Administration, February
1990 - August 1995). (1)
James W. Gustafson Senior Vice President - Operations (since April 1990). (2) 62
William J. Wortley Senior Vice President - Government Affairs (since August 1995; Senior 58
Vice President - Public Affairs, February 1993 - August 1995; Vice
President - Public Affairs, April 1989 - February 1993). (2)
Donald H. Gessel President - Washington Energy Services Company (since October 1993 (3); 53
Senior Vice President - Marketing, Gas Supply and Rates, August 1990 -
October 1993). (2)
Allyn P. Hebner Vice President - Finance, Treasurer and Chief Accounting Officer (since 42
August 1995 (1); Vice President and Chief Accounting Officer, June 1994 -
August 1995 (1); Vice President and Treasurer of Washington Energy
Resources Company, February 1993 - June 1994 (3); Assistant Vice
President and Treasurer of Washington Energy Resources Company, April
1991 - February 1993. (3)
(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
elected and qualified, provided, however, that any officer may be removed at any
time by majority vote of the Board of Directors.
23
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PART II
Item 5. Market for Registrant's Common Stock and Related Shareholder Matters
The common stock of Washington Energy is traded on the NYSE (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 NYSE by quarter for 1995
and 1994:
Price Range
Dividends -------------------------
Period Per Share High Low
------------------- --------- ------- -------
1995 1st Quarter $.25 $14-3/4 $12-1/2
2nd Quarter .25 14-3/8 13
3rd Quarter .25 16-7/8 13
4th Quarter .25 17-3/8 15-3/4
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
There were approximately 12,159,000 common shareholders of the Company as of
December 15, 1995. It is currently the policy of the 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. (See Note 4 of Notes to
Consolidated Financial Statements for a description of certain limitations on
the Company's ability to pay dividends.)
24
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Item 6. Selected Financial Data
WASHINGTON ENERGY COMPANY AND SUBSIDIARIES
Year Ended September 30,
---------------------------------------------------------------------
1995 1994 1993 1992 1991
---------- ---------- ---------- ---------- ----------
(in thousands except per share amounts)
OPERATING REVENUES:
Regulated utility sales $420,048 $396,407 $367,853 $284,939 $311,052
Merchandise and other 23,563 35,618 71,185 72,533 65,414
Oil and natural gas
operations -- -- 31,354 17,616 19,098
-------- -------- -------- -------- --------
TOTAL OPERATING
REVENUES $443,611 $432,025 $470,392 $375,088 $395,564
======== ======== ======== ======== ========
OPERATING INCOME $ 51,796 $ 28,168 $ 55,569 $ 45,980 $ 59,394
OTHER INCOME (EXPENSE), net (52,330) (36,717) (1,895) (956) 1,178
-------- -------- -------- -------- --------
GROSS INCOME (LOSS) (534) (8,549) 53,674 45,024 60,572
-------- -------- -------- -------- --------
TOTAL INTEREST CHARGES 41,188 36,751 32,180 31,592 29,716
CAPITALIZED INTEREST (660) (453) (541) (549) (725)
-------- -------- -------- -------- --------
INTEREST CHARGES 40,528 36,298 31,639 31,043 28,991
-------- -------- -------- -------- --------
INCOME (LOSS) FROM
CONTINUING OPERATIONS (41,062) (44,847) 22,035 13,981 31,581
DISCONTINUED OPERATIONS -- (799) (12,388) (2,542) (3,235)
-------- -------- -------- -------- --------
NET INCOME (LOSS) (41,062) (45,646) 9,647 11,439 28,346
DIVIDENDS ON PREFERRED
STOCK -- 9 101 105 112
EXCESS PREMIUM,
PREFERRED REDEMPTION -- 673 -- -- --
-------- -------- -------- -------- --------
EARNINGS (LOSS)
ON COMMON STOCK $(41,062) $(46,328) $ 9,546 $ 11,334 $ 28,234
======== ======== ======== ======== ========
EARNINGS (LOSS) PER
COMMON SHARE FROM:
Continuing operations $ (1.72) $ (1.94) $ .95 $ .71 $ 1.73
Discontinued operations -- (.03) (.53) (.13) (.18)
-------- -------- -------- -------- --------
EARNINGS (LOSS) PER
COMMON SHARE $ (1.72) $ (1.97) $ .42 $ .58 $ 1.55
======== ======== ======== ======== ========
25
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Item 6. Selected Financial Data (Continued)
WASHINGTON ENERGY COMPANY AND SUBSIDIARIES (Continued)
Year Ended September 30,
-----------------------------------------------------------------------------
1995 1994 1993 1992 1991
---------- ---------- ---------- ---------- ----------
(in thousands except per share amounts)
DIVIDENDS PER COMMON SHARE $ 1.00 $ 1.00 $ 1.40 $ 1.40 $ 1.38
========== ========== ========== ========== ==========
TOTAL COMMON DIVIDENDS
DECLARED based on shares
outstanding on record
dates during each period $ 23,877 $ 23,468 $ 32,282 $ 27,499 $ 25,584
========== ========== ========== ========== ==========
TOTAL ASSETS $ 989,490 $1,036,790 $1,035,817 $ 899,874 $ 809,657
========== ========== ========== ========== ==========
LONG-TERM DEBT AND RE-
DEEMABLE PREFERRED STOCK $ 400,060 $ 380,200 $ 370,700 $ 304,228 $ 259,788
========== ========== ========== ========== ==========
COMMON SHAREHOLDERS'
INTEREST $ 196,686 $ 256,800 $ 322,931 $ 275,517 $ 284,260
========== ========== ========== ========== ==========
26
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Item 6. Selected Financial Data (Continued)
WASHINGTON NATURAL GAS COMPANY AND SUBSIDIARIES
Year Ended September 30,
---------------------------------------------------------------------------
1995 1994 1993 1992 1991
-------- -------- -------- -------- --------
(in thousands)
OPERATING REVENUES:
Regulated utility sales $420,048 $396,407 $367,853 $284,939 $311,052
Merchandise and conser-
vation products -- -- 63,210 66,083 60,393
-------- -------- -------- -------- --------
TOTAL OPERATING REVENUES $420,048 $396,407 $431,063 $351,022 $371,445
======== ======== ======== ======== ========
TOTAL GROSS MARGIN
(Regulated utility sales
less cost of gas sold) $201,026 $172,905 $186,696 $154,603 $173,020
======== ======== ======== ======== ========
OPERATING INCOME $ 50,513 $ 26,381 $ 49,889 $ 38,143 $ 51,761
OTHER INCOME (EXPENSE), net (443) (3,860) (1,036) 135 2,450
-------- -------- -------- -------- --------
GROSS INCOME 50,070 22,521 48,853 38,278 54,211
INTEREST CHARGES (32,216) (30,764) (27,082) (26,047) (24,802)
-------- -------- -------- -------- --------
NET INCOME (LOSS) 17,854 (8,243) 21,771 12,231 29,409
DIVIDENDS ON PREFERRED STOCK 7,126 3,979 2,720 2,740 2,755
EXCESS PREMIUM,
PREFERRED REDEMPTION -- 798 -- -- --
-------- -------- -------- -------- --------
EARNINGS (LOSS) ON
COMMON STOCK $ 10,728 $(13,020) $ 19,051 $ 9,491 $ 26,654
======== ======== ======== ======== ========
TOTAL COMMON DIVIDENDS
DECLARED based on shares
outstanding on record
dates during each period $ -- $ 16,937 $ 26,045 $ 21,691 $ 20,151
======== ======== ======== ======== ========
TOTAL ASSETS $890,598 $872,549 $834,516 $729,536 $657,727
======== ======== ======== ======== ========
LONG-TERM DEBT AND
REDEEMABLE PREFERRED
STOCK $400,060 $380,200 $370,700 $304,280 $259,940
======== ======== ======== ======== ========
COMMON SHAREHOLDER'S
INTEREST $251,528 $235,988 $262,334 $205,599 $210,889
======== ======== ======== ======== ========
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Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Results of Operations
Washington Energy Company incurred net losses available to common of $41.1
million, or $1.72 per share, and $46.3 million, or $1.97 per share, in 1995 and
1994, respectively, due to various non-recurring or unusual charges ("Special
Charges"). The following table summarizes earnings and losses on common and per
share by year (amounts in millions except per share).
1995 1994 1993
-------------------- -------------------- ------------------
Per Per Per
Amount Share Amount Share Amount Share
------ ------- ------ ------- ------ -------
Before Special
Charges $ 8.1 $ .34 $ (3.8) $ (.16) $ 21.9 $ .95
Special Charges (49.2) (2.06) (41.7) (1.78) -- --
------ ------ ------ ------ ------ ------
Continuing
operations (41.1) (1.72) (45.5) (1.94) 21.9 .95
Discontinued
operations -- -- (.8) (.03) (12.4) (.53)
------ ------ ------ ------ ------ ------
Earnings (loss)
on common stock $(41.1) $(1.72) $(46.3) $(1.97) $ 9.5 $ .42
====== ====== ====== ====== ====== ======
The 1995 Special Charges result from; 1) early adoption of SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of," which resulted in write-downs of the Company's coal and rail
interests in Montana ($26.5 million after tax); 2) a reduction in the value of
Washington Energy's investment in Cabot associated with Cabot's implementation
of SFAS No. 121 as well as recognition of a permanent impairment of the carrying
value of its investment in Cabot ($16.1 million after tax); 3) increased losses
projected in the future from certain gas transportation and storage arrangements
assumed from the Company's former oil and gas exploration subsidiary ($3.3
million after tax); 4) gas utility employee severance costs ($2.0 million after
tax); and 5) deferred income taxes relating to tax contingencies ($1.3 million).
The 1994 Special Charges result from: 1) the merger of the Company's oil and gas
exploration and production subsidiary with Cabot and reserves established for
certain gas transportation and storage arrangements excluded from the merger
($30.0 million after tax); 2) restructuring and down sizing 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).
The decision was made to dispose of the Company's biowaste business, Unisyn, 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 after-tax loss of $799,000 was incurred in
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1994 to complete the disposition through the sale of the two subsidiaries that
owned Unisyn.
Excluding the Special Charges, the Company's 1995 earnings of $8.1 million are
improved from the loss reported in 1994, but remain lower than 1993 earnings.
The following table shows the contribution to earnings from each of the
Company's continuing businesses (before interest, income taxes and preferred
dividend requirements of Washington Natural, in millions).
1995 1994 1993
------ ------ ------
Gas utility $61.4 $33.3 $50.8
Merchandise sales (1.6) .1 7.9
Oil and gas .7 1.9 9.3
Other 1.8 (4.1) (2.9)
----- ----- -----
Total $62.3 $31.2 $65.1
===== ===== =====
The improvement in Washington Natural's 1995 earnings was due largely to an
increase in utility margin (revenues less cost of gas sold) resulting from
general rate increases granted in 1994 and 1995 and a reduction in ongoing
operations and maintenance ("O&M") expenses. Higher interest expense in 1995,
due primarily to increases in interest rates, and additional preferred stock
dividends, due to the issuance by Washington Natural of $30.0 million of
preferred stock late in 1994, partially offset the improvement in Washington
Natural's operating earnings.
Coal and Rail Related Charges
In the fourth quarter of 1995, the Company elected early adoption of SFAS No.
121 which resulted in $26.5 million in after-tax write-downs of the Company's
coal and railroad assets. Based on a mine feasibility study by a mining and
geological consulting firm, the Company has concluded that the economics of
developing its coal reserves are marginal or subeconomic over the next five to
ten years. Although prices for low sulfur coal are expected to increase in real
terms over the next five to ten years, prices are not expected to reach the
levels necessary to justify the additional capital expenditures necessary to
commence full scale mining operations within that time frame. Due to the
significance of the write-down indicated, the Company elected early adoption of
SFAS No. 121 and wrote down the carrying value of the coal properties from $38.7
million to $4.0 million (after-tax write-down of $22.6 million). As a
consequence of the determination that the coal reserves are uneconomical to
develop in the foreseeable future, the Company also wrote off its $6.0 million
($3.9 million after tax) railroad investment. The investment consisted of the
costs related to planning the railroad necessary to transport coal from the
proposed mine sites to the existing rail line for shipment on to markets in the
Midwest.
Oil and Gas Related Charges
The Company recorded two fourth quarter 1995 Special Charges related to its
investment in Cabot. Cabot also elected early adoption of SFAS No. 121 which
resulted in pre-tax write-downs of $113.9 million related to its oil and gas
properties. Under the equity method of accounting for its investment in Cabot
common stock, the Company recorded its 9.4% share of Cabot's write-down which
29
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totaled $4.2 million after tax. In addition, the Company recorded an $11.9
million after-tax charge to write down the excess of its recorded investment in
Cabot over its proportional interest in Cabot's underlying shareholder's equity.
The Company believes a permanent impairment in the value of its investment in
Cabot has occurred based on fundamental changes in the natural gas market over
the past year, which have sharply reduced gas prices and Cabot's earnings
potential. After the write-downs, the carrying value of the Company's investment
in Cabot is $70.0 million which approximates the fair market value of the shares
of Cabot common and preferred stock held by the Company at September 30, 1995.
On May 2, 1994, the Company merged its oil and gas subsidiary, Resources, with
Cabot in a tax-free exchange. The Company received Cabot common and preferred
stock with a fair market value of $98.5 million, in addition to the repayment of
$63.7 million of intercompany debt. The Company recorded a net loss on the
transaction of $18.3 million after providing for deferred taxes of approximately
$32.0 million, and establishing a pre-tax reserve of $6.8 million for a
potential downward purchase price adjustment based on the performance of wells
in a certain field over one year. During 1995 this entire reserve was utilized
and the Company recorded an additional pre-tax loss of $503,000 ($327,000 after
tax) in resolving substantially all remaining merger-related matters with Cabot.
In the fourth quarter of 1995, the Company recorded a $3.3 million after-tax
charge to earnings to increase its reserve by $5.0 million for anticipated
future losses associated with certain gas transportation and storage contractual
arrangements excluded from the merger of Resources with Cabot. Upon completion
of the Resources merger in 1994, the Company had recorded an after-tax charge of
$11.7 million to establish reserves of $16.0 million for anticipated future
losses associated with these excluded contractual arrangements and $2.0 million
for other excluded items. The Company had only limited operating experience with
these arrangements prior to the merger, since they were placed in service
November 1, 1993. Due to the merger and associated elimination of Resources'
operating and marketing staffs and gas production to aid in managing and
utilizing these arrangements, management anticipated that these arrangements
would continue to generate losses for the foreseeable future. During 1995 and
1994, $5.8 and $3.0 million (pre-tax) of the reserves were utilized,
respectively. The losses in 1995 were higher than expected due to warmer weather
and lower utilization of the pipeline capacity. In addition, further delays are
expected in the resolution of the pipeline's rate case before the FERC, the
outcome of which is expected to reduce the Company's capacity payments to the
pipeline. (See Note 14 of Notes to Consolidated Financial Statements for
additional information regarding these projected losses.)
Restructuring and Other Special Charges
In the fourth quarter of 1995, the Company recorded after-tax charges totaling
$3.3 million for employee severance costs and income tax contingencies. The
severance charge of $2.0 million related to a 4% reduction in Washington
Natural's work force, which was initiated during that quarter and completed in
the first quarter of 1996. The work-force reduction, which affected only
salaried employees, was part of Washington Natural's ongoing organizational
transformation initiated in 1994. The restructuring efforts were initiated in
the third quarter of 1994 when Washington Natural recorded after-tax charges
totaling $4.6 million to consolidate operations and downsize its work force.
30
Page 30
The charges included severance costs of $2.3 million (after tax) and expensing
$1.9 million of costs (after tax) previously capitalized for planning a new
headquarters building not currently needed. During 1994, Washington Natural's
work force was reduced 12% from the level at the beginning of the year. Although
the 1994 severance accrual was fully utilized in 1995 and the 1995 severance
accrual has been fully utilized in the first quarter of 1996, certain of the
severance benefits are to be paid over time as specified in certain severance
agreements, rather than in lump sum.
Washington Natural recorded additional charges in 1994 totaling $7.1 million
after tax to write off costs deemed to be unrecoverable and to establish certain
reserves. A total charge 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 after-tax
charge for supplemental executive retirement benefits.
Operating Revenues
The following table summarizes the Company's revenues by line of business (in
millions):
1995 1994 1993
------ ------ ------
Regulated utility sales $420.0 $396.4 $367.8
Merchandise sales 23.6 35.6 71.2
Oil and gas -- -- 31.4
------ ------ ------
Total $443.6 $432.0 $470.4
====== ====== ======
The $23.6 million, or 6%, increase in regulated utility sales in 1995 was
largely the result of two general rate increases and customer growth, partially
offset by a PGA which reduced revenues but did not impact earnings. Utility
margin increased by $28.1 million or 16% due primarily to the rate increases and
customer growth, and was not impacted by the PGA. The general rate orders, which
are discussed in detail in the General Rate Cases section below, increased
utility margin by approximately $18 million. The impact on utility margin in
1995 was less than the full, annualized impact of the two rate orders because of
warmer weather and the timing of the second increase which was ordered after the
heating season. Washington Natural's rate of growth in new customers remained at
5%, or 21,000 customers, during 1995, which increased gas sales volumes by 5%
and added an estimated $6 million in utility margin. Although weather in 1995
was 12% warmer than normal and 2% warmer than in 1994, the year-to-year impact
of weather on margin and gas volumes was negligible. Much of the winter of 1995
was colder than in 1994, while the rest of 1995, when heating load was lower,
was significantly warmer than 1994. Had weather been normal during 1995, utility
margin would have been higher by an estimated $9 million.
The 8% increase in regulated utility sales 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 (see General
Rate Case section below) ordered in October 1993, and
31
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weather that was 10% warmer than normal and 9% warmer than the prior year. A
general rate increase totaling $19.0 million annually, effective June 2, 1994,
did not have a material impact on revenues for the year since it occurred after
the end of the heating season.
The Company's merchandise sales revenues declined by $12.0 million or 34% in
1995, continuing the trend established when the bulk of this business,
consisting of gas appliance sales, was transferred from Washington Natural to
Services on October 1, 1993. The absence of joint marketing, installation and
service activities with Washington Natural continue to have a negative impact on
the ability of Services to attract new merchandise customers. Services completed
an extensive sales training program and restructuring of its sales force late in
1995, prior to its major fall marketing campaign; however, these actions were
taken too late in the year to significantly impact 1995 revenues. As a result,
Services incurred a loss, before interest and income tax, of $1.6 million in
1995, down from profits of $72,000 and $7.9 million in 1994 and 1993,
respectively.
The Company accounts for its investment in Cabot common stock using the equity
method of accounting. Under this accounting method, the Company records 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. The 1993 financial statements continue to reflect Resources on a
consolidated basis, as previously reported, in accordance with generally
accepted accounting principles.
Operating Expenses
The following table shows the Company's operating expenses by line of business,
before and after income taxes (in millions):
1995 1994 1993
------ ------ ------
Utility
Cost of gas sold $219.0 $223.5 $181.2
Operations and maintenance 68.1 81.8 71.6
Depreciation and amortization 33.1 30.9 28.2
General taxes 40.8 37.8 35.0
------ ------ ------
Total utility operating
expenses 361.0 374.0 316.0
Merchandise sales 25.3 35.7 62.3
Oil and gas -- -- 23.9
Other -- 0.9 3.0
------ ------ ------
Total before income taxes 386.3 410.6 405.2
Income taxes 5.5 (6.7) 9.6
------ ------ ------
Per consolidated
statements of income $391.8 $403.9 $414.8
====== ====== ======
The $12.1 million decrease in operating expenses reflected in the income
statement in 1995 is due primarily to lower total utility operating expenses
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($13.0 million) and lower merchandise sales expenses ($10.4 million), partially
offset by the change in income taxes from a benefit to an expense ($12.2
million) due to higher pre-tax utility earnings.
The $13.0 million decrease in total 1995 utility operating expenses consists
primarily of a $13.7 million decrease in O&M expenses. The decrease in O&M
expenses resulted from inclusion of $3.2 million of employee severance costs in
1995 versus $11.7 million of Special Charges included in 1994, and from $7.7
million in ongoing cost savings due primarily to the 1994 work-force reduction,
partially offset by $4.1 million of consulting charges to support the
organizational transformation efforts during 1995. The cost of gas sold
decreased in 1995 due to the PGA implemented in May 1995. The increases in
depreciation and general taxes were the result of capital spending to add
customers and revenue growth, respectively.
The $10.9 million decrease in operating expenses from 1993 to 1994 was 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
($16.3 million), all of which were largely offset by increases in cost of gas
sold ($42.3 million) and utility O&M expenses ($10.2 million). The increase in
the cost of gas sold was due to higher gas prices, since gas sales volumes were
essentially the same in both years, which was recovered from customers through
PGAs. The O&M expense increase was due primarily to the $11.7 million in Special
Charges recorded in 1994.
Oil and Gas Business Operating Results
In 1995, the Company recorded losses related to its investment in Cabot totaling
$14.8 million after tax. Excluding the write-downs discussed above, the Cabot
investment produced a pre-tax profit of $721,000 consisting of preferred
dividend income of $3.4 million net of equity in losses of $2.7 million. The
Company's 1995 results reflect a full year of Cabot's results, while 1994
results reflect only the five months subsequent to the merger.
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 investment in Cabot thereafter) was $1.9 million, compared
with $9.3 million of Resources' earnings in 1993. Resources' 1994 earnings of
$1.0 million through the merger date were adversely impacted by lower oil prices
and losses from the gas transportation and storage 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 preferred stock was $1.4
million pre-tax.
33
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General Rate Cases
Washington Natural filed and received rate orders for three general rate cases
in the period from July 1992 to May 1995. The following table shows the filing
dates of each case, the annual margin effect based on normal weather and the
effective date of each rate order:
Annual Margin
Date of Increase Effective Date
Filing (Decrease) of Rate Order
------------- --------------- --------------
July 1992 ($15.4 million) October 9, 1993
November 1993 $19.0 million June 2, 1994
March 1995 $17.7 million May 15, 1995
In the July 1992 filing, Washington Natural had initially sought a $41.4 million
rate increase which was subsequently reduced to $14.8 million. In September
1993, the WUTC issued an order decreasing rates by $15.4 million effective in
October 1993. The principal differences in the annual revenue requirement
between Washington Natural's rate request and the WUTC's ordered rate reduction
were:
(1) approximately $11 million of expenses related to advertising, marketing
and merchandising disallowed by the WUTC;
(2) approximately $10 million due to 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;
(3) $5.2 million related to disallowance of Washington Natural's proposed
attrition allowance; and
(4) $4.8 million associated with the weather normalization calculation.
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 revenue and an agreement that Washington Natural
would not request an increase in total revenues, other than PGA filings or in
other limited circumstances, prior to March 1, 1995.
In the March 1995 general rate case filing, Washington Natural requested a $35.4
million increase in annual revenues, with $17.8 million of the total to be
granted as interim rate relief in May 1995. The rate case was requested to cover
increased costs related to plant additions and upgrades and higher costs for
financing and general operations. On May 11, 1995, the WUTC issued an order
approving a settlement of the case. The order provided an additional $17.7
million in annual revenues and reflected an authorized rate of return on common
equity in the range of 11.0% - 11.25%, up from the previous level of 10.5%. The
WUTC also stipulated that Washington Natural will be allowed to earn in excess
of that range to the extent that it can do so by managing its cost of service.
As part of the rate case settlement, Washington Natural agreed not to make a
general rate case filing prior to May 15, 1997.
34
Page 34
Washington Natural, however, is not precluded from PGA filings or filing for
interim or emergency rate relief if conditions warrant.
The May 11, 1995 order also implemented a rate redesign approved by the WUTC on
April 11, 1995. Generally, the rate redesign lowers the rates for transportation
customers and large commercial and industrial customers, while increasing the
rates for residential customers. In a separate decision on May 11, 1995, the
WUTC issued an order to implement a PGA to pass through a 46.5 million annual
reduction in the cost of purchased gas to customers on in the form of lower
rates. These actions by the WUTC resolved all outstanding 1995 rate issues.
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 the PGA 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
actual gas costs and those authorized in the prior PGA 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 PGA went into effect in May 1995 as described
above.
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, November 1993 and March 1995, as described
above.
Inflation also impacts Washington Natural directly through the cost of replacing
portions of its distribution system. Washington Natural's rates are set based on
the historical cost of construction of its distribution system and long
depreciable lives. Due to the long lives, the cost of replacing components of
the system is generally much higher than the original cost which impacts
Washington Natural's earnings through higher depreciation charges and higher
carrying costs of the new assets. Since replacing components of the system does
not generate additional revenues, Washington Natural must file general rate
cases in order to recover these higher costs. The estimated replacement cost of
Washington Natural's gas mains and service lines is $1.4 billion, which exceeds
historical cost by $800 million.
35
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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. Interest rates, in particular short-term rates, have
increased in 1994 and 1995, which has had a negative impact on earnings.
The current level of interest rates is also a major factor in determining
Washington Natural's authorized rate of return on equity associated with its
general rate filings. Prior to the October 1993 rate order in which Washington
Natural's rate of return on common equity was set at 10.5%, the rate of return
on common equity had been set at 16.25%. This rate was based on a 1985 rate
order that corresponded to a period of high interest rates in the early 1980's.
The May 1995 general rate order increased Washington Natural's authorized return
on common equity to 11% - 11.25%.
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Liquidity and Capital Resources
Capital expenditures typically represent the largest cash flow item for the
Company due to the capital-intensive nature and growth rate of the utility and,
prior to 1994, the oil and gas business. Of the Company's $88.7 million of 1995
gross capital expenditures, $87.2 million were for utility plant. Washington
Natural makes capital expenditures to add new customers to its gas distribution
system and to replace and enhance components of the system to insure its
reliability and safety. Washington Natural's financing strategy is to fund
capital expenditures with a combination of cash flow from operations, after
dividend payments, and short-term borrowings on an interim basis. The short-term
borrowings are reduced periodically with the proceeds from issuing long-term
debt and equity securities, the choice and timing of which are dependent on
management's evaluation of need, financial market conditions and other factors.
The following table summarizes the major cash flow items for the Company for the
three years ended September 30 (in millions):
1995 1994 1993
------ ------ ------
Operating cash flow $ 84.6 $ 14.6 $ 36.6
Common dividends (23.9) (23.5) (32.3)
Capital expenditures (88.7) (86.9) (129.5)
Short-term borrowing (repayment),
net 36.8 (20.3) 7.3
Net issuance (redemption)
of preferred stock -- 64.7 (10.2)
Cash from merger of subsidiary,
net -- 42.9 --
Issuance of common stock 4.8 6.3 70.5
Net issuance (retirement)
of long-term debt (10.1) (3.3) 67.7
Other, net .4 (2.2) (2.5)
------ ------ ------
Net change in cash $ 3.9 $ (7.7) $ 7.6
====== ====== ======
Operating cash flow of $84.6 million in 1995 was sufficient to fund virtually
all of the Company's investments in utility plant and other property. Washington
Energy funded its common stock dividend payments during 1995 from short-term
borrowings due to a restriction on the payment of common stock dividends by
Washington Natural in its first mortgage bond indentures. Due to the Special
Charges recorded in June 1994, Washington Natural's retained earnings fell below
the minimum level at which dividend payments to Washington Energy are permitted.
At September 30, 1995, Washington Natural's retained earnings remained $12.5
million below the minimum requirement as cumulative earnings since June 1994
have been insufficient to raise retained earnings to the minimum level. A total
of $85.1 million of long-term debt was retired and refinanced through issuance
of $75.0 million of medium-term notes, with generally lower interest rates, and
short-term borrowings which will produce annual interest savings of
approximately $1.3 million.
Operating cash flow in 1995 increased by $70.0 million compared to 1994. This
was due primarily to the purchased gas adjustment mechanism and environmental-
related insurance recoveries in excess of environmental expenditures. The
37
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purchased gas receivable of $21.3 million at September 30, 1994, shifted to a
liability of $15.6 million at September 30, 1995, as Washington Natural was able
to purchase gas for most of the year at an average cost below that being
recovered in rates based on the prior PGA. This created positive cash flow as
the receivable from rate payers was collected and an obligation was established.
As indicated in Note 10 of Notes to Consolidated Financial Statements,
Washington Natural, in 1995, reached an agreement with its insurers whereby
Washington Natural received $29.0 million in settlement of litigation regarding
environmental remediation of a former manufactured gas plant site in Tacoma,
Washington. Thus, the Company had net cash receipts of $24.2 million in 1995
related to environmental remediation activities compared to net cash payments of
$11.8 million and $9.3 million in 1994 and 1993, respectively.
Capital expenditures in 1996 are projected at $86 million for Washington Natural
and $2 million for the Company's other businesses. The Company has decided not
to develop its coal reserves and associated railroad in the foreseeable future.
The Company expects to fund its 1996 capital spending with cash flow from
operations and short-term borrowings. Washington Natural issued medium-term
notes at lower interest rates to refinance $30.0 million of first mortgage bonds
called early in December 1995. Washington Natural may issue additional notes
during 1996 in lieu of funding capital expenditures with short-term debt,
depending on market conditions.
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 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. Washington
Natural issued preferred stock twice during 1994 to fund capital spending and
the early redemption of all outstanding preferred issues to take advantage of
lower dividend requirements and to eliminate future sinking-fund requirements.
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. In September
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
early redemption occurred in November 1993 at an aggregate cost of $23.2
million.
In addition to short-term borrowing requirements to fund its capital spending
program on an interim basis, 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:
an aggregate of $250 million of commercial paper and similar programs backed by
a committed revolving credit agreement, of which $88 million was unused at
September 30, 1995; an uncommitted bank credit arrangement of $25 million, all
of which was available at year end; and a committed agreement to sell up to
38
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$90 million of merchandise and gas receivables, of which $62 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, 1995, a
time of the year when gas receivable balances are low due to seasonal factors,
all but $11 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 will result in a material
adverse impact on the Company's or Washington Natural's financial position or
operating results and cash flow trends. (For a description of Environmental
Matters, see Note 10 of Notes to Consolidated Financial Statements.)
Litigation
The Company or Washington Natural is a defendant in several potentially material
lawsuits. Based on prior decisions and known facts in the cases, management does
not believe the cases will, individually or in the aggregate, have a material
impact on the Company or Washington Natural. (See Note 11 of Notes to
Consolidated Financial Statements.)
Significant Balance Sheet Changes
The tax benefits of the 1995 Special Charges were primarily deferred tax
benefits which reduced the noncurrent deferred tax liability by a net $18.5
million from September 30, 1994 to September 30, 1995. The other significant
changes in the Company's balance sheet during 1995 result directly from matters
previously discussed in the foregoing sections of Management's Discussion and
Analysis of Financial Condition and Results of Operations.
Future Outlook
(a) Proposed Merger
On October 18, 1995, a definitive agreement was approved by Washington Energy's
and Washington Natural's Boards of Directors to merge Washington Energy and
Washington Natural into Puget, which, as the surviving corporation will be
renamed at the effective time of the merger. The merged company would be the
largest combined electric and gas utility in the state of Washington.
The agreement must be approved by the holders of the common stock of Washington
Energy, the holders of the preferred stock of Washington Natural, and the
holders of the common stock of Puget. In addition, the WUTC, which regulates
both utilities, must approve the merger, and certain other conditions in the
merger agreement must be satisfied or waived. Shareholders of the three
companies will be asked to vote on the merger on March 20, 1996. Regulatory
approval is expected prior to the end of calendar 1996.
The synergies from the merger are expected to generate substantial cost savings
that would not be available absent the merger. Preliminary estimates
39
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by the management of Washington Energy and Puget, with the assistance of
Deloitte & Touche LLP, indicate potential savings (after taking into account the
costs incurred to achieve such savings), which could not be achieved but for the
merger, of approximately $370 million over the ten-year period following the
merger.
(b) Expected Improvement in 1996 Earnings
Although the expected timing for completion of the merger precludes realizing
significant benefits from the synergies of the proposed merger with Puget in
1996, other decisions and actions taken over the past eighteen months will have
a favorable impact on the Company's performance in the coming year. First,
operating earnings will benefit from the $17.7 million rate increase approved in
May 1995, which will be in effect for the winter heating season. Operating
earnings could also benefit if weather in the region more closely approximates
long-term historical patterns.
Second, the Company's organizational transformation efforts are expected to
generate approximately $3 million in operating cost savings for the year. Much
of the savings will come from the management reorganization and work- force
reduction which occurred at the end of 1995. Additional savings will be achieved
later in the year as technology improvements are implemented to increase
operational efficiency as well as improve customer service. Certain of the
changes to be implemented involve joint operations with Puget based on
collaborative cost-saving efforts over the past year.
Third, the Company expects profitable utility customer growth of about 4%, or
16,000 to 19,000 new customers. Although the utility's growth rate is expected
to slow, the new customer addition and line extension policy approved in 1995
should facilitate profitable growth by requiring customer contributions or a
rate surcharge for line extensions which do not meet the 9.15% rate-of-return
threshold.
Fourth, the cost-based rate design implemented in May 1995, results in rates
more reflective of the true cost of serving the various classes of customers. In
general, the new rate design decreases rates for transportation and
larger-volume gas sales customers and increases rates for residential and firm
commercial and industrial customers. The new rate design makes Washington
Natural economically indifferent to customer choices between transportation and
sales service since the margin the utility realizes is now essentially the same.
The approval by the WUTC of a contract with The Boeing Company combined with the
new rate design significantly reduces the risk of Boeing and other large
industrial customers bypassing Washington Natural's distribution system by
interconnecting directly with the interstate pipeline. Bypass is now
economically feasible for very few customers.
(c) 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 cut in the dividend. In management's opinion, the results of
the Company's collaborative approach to regulatory relations over the last two
years (as evidenced by two general rate increases, the cost based rate redesign
and the new customer addition and line extension policy) and the organizational
transformation currently underway (including the redesign of key business
processes and elimination of excess layers of management) have
40
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set the stage for future earnings sufficient to support the dividend over the
long term.
41
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Item 8. Financial Statements and Supplementary Data
1. Financial Statements:
Washington Energy Company and Subsidiaries
Consolidated balance sheets as of September 30, 1995 and 1994.
Consolidated statements of income for each of the three years in
the period ended September 30, 1995.
Consolidated statements of capitalization as of September 30, 1995
and 1994.
Consolidated statements of shareholders' earnings (deficit)
reinvested in the business and premium on common stock for
each of the three years in the period ended September 30,
1995.
Consolidated statements of cash flows for each of the three years
in the period ended September 30, 1995.
Notes to consolidated financial statements
Washington Natural Gas Company and Subsidiaries
Consolidated balance sheets as of September 30, 1995 and 1994.
Consolidated statements of income for each of the three years in
the period ended September 30, 1995.
Consolidated statements of capitalization as of September 30, 1995
and 1994.
Consolidated statements of shareholder's earnings reinvested in the
business and premium on common stock for each of the three
years in the period ended September 30, 1995.
Consolidated statements of cash flows for each of the three years
in the period ended September 30, 1995.
Notes to consolidated financial statements
2. Supplementary Data (Unaudited):
Consolidated selected quarterly financial data for each of the
three years in the period ended September 30, 1995.
42
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REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the 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, 1995 and 1994, 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, 1995, and the accompanying consolidated balance sheets and
statements of capitalization of Washington Natural Gas Company and subsidiaries
as of September 30, 1995 and 1994, and the related consolidated 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, 1995. 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 and subsidiaries as of
September 30, 1995 and 1994, and the results of their operations and their cash
flows for each of the three years in the period ended September 30, 1995, in
conformity with generally accepted accounting principles.
As discussed in Note 1 to the financial statements, the Company adopted
Statement of Financial Accounting Standards No. 121 "Accounting for the
Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed Of" during
the current year.
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 27, 1995
43
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WASHINGTON ENERGY COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
September 30,
---------------------------
1995 1994
---------- ----------
(in thousands)
PROPERTY, PLANT AND EQUIPMENT:
Utility plant, at original cost $1,055,322 $ 977,406
Coal and other 15,621 54,398
Accumulated depreciation, depletion and
amortization (273,735) (249,239)
---------- ----------
Net property, plant and equipment 797,208 782,565
---------- ----------
INVESTMENTS IN UNCONSOLIDATED AFFILIATES 70,313 98,139
---------- ----------
CURRENT ASSETS:
Cash and cash equivalents 9,315 5,387
Receivables, net of allowance for
uncollectible accounts of $979 and
$1,295, respectively 10,830 6,533
Unbilled revenue 9,607 9,961
Federal income taxes receivable 10,942 12,134
Deferred income taxes 3,707 4,427
Purchased gas receivable -- 21,261
Materials and supplies, at average cost 31,968 28,069
---------- ----------
Total current assets 76,369 87,772
---------- ----------
OTHER ASSETS AND DEFERRED CHARGES:
Environmental receivables 8,116 33,947
Regulatory tax asset 17,605 18,810
Deferred charges and other 19,879 15,557
---------- ----------
Total other assets and deferred charges 45,600 68,314
----------- ----------
Total assets $ 989,490 $1,036,790
========== ==========
The accompanying notes are an integral part of these consolidated balance
sheets.
44
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WASHINGTON ENERGY COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (Continued)
CAPITALIZATION AND LIABILITIES
September 30,
---------------------------
1995 1994
---------- ----------
(in thousands)
CAPITALIZATION (see Consolidated Statements of Capitalization):
Common shareholders' interest $ 196,686 $ 256,800
Redeemable preferred stock of subsidiary 90,000 90,000
Long-term debt 310,060 290,200
---------- ----------
Total capitalization 596,746 637,000
---------- ----------
CURRENT LIABILITIES:
Notes payable and commercial paper 161,994 125,182
Current sinking-fund requirements and debt
maturities 30,140 60,140
Accounts payable 28,177 28,127
Purchased gas liability 15,554 --
Accrued general taxes 12,556 12,044
Environmental remediation liabilities 4,578 6,199
Other current liabilities 33,517 33,105
---------- ----------
Total current liabilities 286,516 264,797
---------- ----------
DEFERRED CREDITS AND OTHER LIABILITIES:
Noncurrent deferred income taxes 59,450 77,970
Regulatory tax liability 11,017 12,560
Unamortized investment tax credits 9,352 10,132
Contributions in aid of construction 14,252 12,298
Contingency reserves and other 12,157 22,033
---------- ----------
Total deferred credits and other
liabilities 106,228 134,993
---------- ----------
Total capitalization and liabilities $ 989,490 $1,036,790
========== ==========
The accompanying notes are an integral part of these consolidated balance
sheets.
45
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WASHINGTON ENERGY COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Year Ended September 30,
-------------------------------------------
1995 1994 1993
-------- -------- --------
(in thousands)
OPERATING REVENUES:
Regulated utility sales $420,048 $396,407 $367,853
Merchandise, conservation products
and other 23,563 35,618 71,185
Oil and natural gas operations -- -- 31,354
-------- -------- --------
Total operating revenues 443,611 432,025 470,392
-------- -------- --------
OPERATING EXPENSES:
Cost of gas sold 219,022 223,502 180,893
Operations and maintenance 93,184 118,065 147,116
Depreciation, depletion and
amortization 33,128 30,901 38,274
General taxes 40,974 38,086 38,895
Federal income taxes 5,507 (6,697) 9,645
-------- -------- --------
Total operating expenses 391,815 403,857 414,823
-------- -------- --------
OPERATING INCOME 51,796 28,168 55,569
-------- -------- --------
OTHER INCOME (EXPENSE):
Pre-tax loss on merger of subsidiary -- (6,304) --
Federal income taxes on merger of
subsidiary -- (23,711) --
Pre-tax write-down of coal and rail
investments (40,703) -- --
Pre-tax charges related to
unconsolidated affiliate (24,803) -- --
Deferred tax benefit of write-downs 22,927 -- --
Preferred dividend requirement -
Washington Natural Gas Company (7,126) (3,970) (2,612)
Other, net (2,625) (2,732) 717
-------- -------- --------
Total other income (expense) (52,330) (36,717) (1,895)
-------- -------- --------
GROSS INCOME (LOSS) (534) (8,549) 53,674
INTEREST CHARGES 40,528 36,298 31,639
-------- -------- --------
INCOME (LOSS) FROM CONTINUING OPERATIONS (41,062) (44,847) 22,035
DISCONTINUED OPERATIONS:
Loss from operations, net of income tax -- -- (2,570)
Loss on disposal, net of income tax -- (799) (9,818)
-------- -------- --------
NET INCOME (LOSS) (41,062) (45,646) 9,647
DIVIDENDS ON PREFERRED STOCK -- 9 101
EXCESS PREMIUM, PREFERRED REDEMPTION -- 673 --
-------- -------- --------
EARNINGS (LOSS) ON COMMON STOCK $(41,062) $(46,328) $ 9,546
======== ======== ========
The accompanying notes are an integral part of these consolidated statements.
46
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WASHINGTON ENERGY COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Continued)
Year Ended September 30,
--------------------------------------------
1995 1994 1993
------- ------- --------
(in thousands,
except per share amounts)
EARNINGS (LOSS) PER COMMON SHARE:
From continuing operations $ (1.72) $ (1.94) $ .95
From discontinued operations -- (.03) (.53)
------- ------- -------
EARNINGS (LOSS) PER COMMON SHARE $ (1.72) $ (1.97) $ .42
======= ======= =======
AVERAGE COMMON SHARES OUTSTANDING 23,893 23,486 22,996
======= ======= =======
DIVIDENDS PAID PER COMMON SHARE $ 1.00 $ 1.00 $ 1.40
======= ======= =======
TOTAL COMMON DIVIDENDS DECLARED
based on shares outstanding on
record dates during each period $23,877 $23,468 $32,282
======= ======= =======
The accompanying notes are an integral part of these consolidated statements.
47
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WASHINGTON ENERGY COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CAPITALIZATION
Shares Outstanding
at September 30, September 30,
--------------------- ------------------------
1995 1994 1995 1994
------ ------ -------- --------
(in thousands) (in thousands)
COMMON SHAREHOLDERS' INTEREST:
Common stock, $5 par value,
authorized 50,000,000 shares 24,070 23,714 $120,348 $118,568
Premium on common stock 202,616 199,571
Shareholders' accumulated deficit (126,278) (61,339)
-------- --------
Total common shareholders'
interest 196,686 256,800
-------- --------
33%* 40%*
REDEEMABLE PREFERRED STOCK:
Washington Energy Company -
Cumulative; authorized 200,000 shares of $100 par value
and 800,000 shares of $25 par value. No shares
outstanding.
Washington Natural Gas Company -
Cumulative; authorized 1,000,000 shares of $100 par value
and 4,000,000 share of $25 par value
7.45%, Series II, $25 par value 2,400 2,400 60,000 60,000
8.50%, Series III, $25 par value 1,200 1,200 30,000 30,000
-------- --------
Total preferred stock 90,000 90,000
-------- --------
15%* 14%*
*Percentage of total capitalization.
The accompanying notes are an integral part of these consolidated statements.
48
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WASHINGTON ENERGY COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CAPITALIZATION
(Continued)
September 30,
--------------------------
1995 1994
-------- --------
(in thousands)
LONG-TERM DEBT:
First mortgage bonds
9.96% due 1995 $ -- $ 40,000
8.80% called in 1995 -- 25,000
8-1/8% due 1997 3,200 3,340
10-1/4% due 1997, called for early redemption 30,000 30,000
9.60% due 2000 25,000 25,000
9.57% due 2020 25,000 25,000
Secured medium-term notes, series A
5.55% and 5.67% due 1995 -- 20,000
8.25% due 1998 11,000 11,000
7.08% due 1999 10,000 10,000
8.51% through 8.55% due 2001 19,000 19,000
7.53% and 7.91% due 2002 30,000 30,000
8.25% through 8.40% due 2022 35,000 35,000
Secured medium-term notes, series B
6.23% through 6.31% due 2003 28,000 28,000
6.07% and 6.10% due 2004 18,500 18,500
6.51% and 6.53% due 2008 4,500 4,500
6.83% and 6.90% due 2013 13,000 13,000
7.19% due 2023 13,000 13,000
Secured medium-term notes, series C
6.92% and 6.93% due 2005 31,000 --
7.02% and 7.04% due 2007 25,000 --
7.12% due 2010 7,000 --
7.35% and 7.36% due 2015 12,000 --
-------- --------
340,200 350,340
Less sinking-fund requirements and maturities
included in current liabilities (30,140) (60,140)
-------- --------
Total long-term debt 310,060 290,200
-------- --------
52%* 46%*
TOTAL CAPITALIZATION $596,746 $637,000
======== ========
100%* 100%*
*Percentage of total capitalization.
The accompanying notes are an integral part of these consolidated statements.
49
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WASHINGTON ENERGY COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EARNINGS (DEFICIT)
REINVESTED IN THE BUSINESS
Year Ended September 30,
-------------------------------------------
1995 1994 1993
--------- -------- --------
(in thousands)
Balance, at beginning of year $ (61,339) $ 8,457 $ 31,193
Net income (loss) (41,062) (45,646) 9,647
Excess premium, preferred redemption -- (673) --
Dividends declared on capital stock:
Common stock, $1.00, $1.00 and
$1.40 per share, respectively (23,877) (23,468) (32,282)
Preferred stock:
5%, series A -- (3) (26)
6%, series B -- (1) (21)
8-7/8%, series C -- (5) (54)
--------- -------- --------
Balance, at end of year $(126,278) $(61,339) $ 8,457
========= ======== ========
WASHINGTON ENERGY COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF PREMIUM ON COMMON STOCK
Year Ended September 30,
-----------------------------------------
1995 1994 1993
-------- -------- --------
(in thousands)
Balance, at beginning of year $199,571 $197,917 $145,075
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 Reinvest-
ment and Stock Purchase Plan 2,974 3,848 6,038
Excess of purchase price over par
value of shares of common stock
issued under the Employee Stock
Purchase and Option Plans 239 481 631
Excess of purchase price over par
value of shares of common stock
issued under the Directors' Stock
Bonus Plan 2 2 8
Common and preferred stock expense (170) (2,185) (378)
-------- -------- --------
Balance, at end of year $202,616 $199,571 $197,917
======== ======== ========
The accompanying notes are an integral part of these consolidated statements.
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WASHINGTON ENERGY COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended September 30,
------------------------------------------
1995 1994 1993
-------- -------- ---------
(in thousands)
Cash flow provided by (used in) operating activities:
Income (loss) from continuing
operations $(41,062) $(44,847) $ 22,035
-------- -------- ---------
Adjustments to reconcile net income (loss) from continuing
operations to net cash provided by operating activities:
Pre-tax loss on merger of subsidiary -- 6,304 --
Pre-tax write-down and equity in
undistributed (earnings) losses of
unconsolidated affiliate 27,826 (699) --
Pre-tax write-down of coal and rail
investments 40,703 -- --
Depreciation, depletion and
amortization 33,784 31,293 38,635
Provision for uncollectible
accounts receivable 1,220 2,457 1,613
Increase (decrease) in:
Federal income tax - current (2,515) 561 (8,844)
Federal income tax - deferred (14,873) (23,452) 17,551
Deferred tax on merger of subsidiary -- 24,784 --
Deferred charges (3,493) (13,943) (20,105)
Accounts receivable (5,163) 29,227 (11,304)
Purchased gas adjustment 36,815 2,608 (13,315)
Environmental recoveries
(expenditures), net 24,210 (11,808) (9,315)
Accounts payable 50 23,217 19,575
Materials and supplies (3,899) 11,824 (4,539)
Other assets and liabilities (8,540) (25,963) 8,251
Other (423) 3,071 (3,632)
-------- -------- ---------
Total adjustments 125,702 59,481 14,571
-------- -------- ---------
Net cash provided by operating
activities 84,640 14,634 36,606
-------- -------- ---------
Cash flow provided by (used in) investing activities:
Utility plant additions (87,240) (84,506) (91,275)
Coal, oil and gas and other property
expenditures (1,503) (2,347) (38,211)
Invested in subsidiary prior to merger -- (20,760) --
Proceeds from merger of subsidiary -- 63,661 --
Proceeds from asset dispositions 412 1,260 1,339
-------- -------- ---------
Net cash (used in) investing
activities (88,331) (42,692) (128,147)
-------- -------- ---------
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WASHINGTON ENERGY COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Continued)
Year Ended September 30,
------------------------------------------
1995 1994 1993
-------- -------- --------
(in thousands)
Cash flow provided by (used in) financing activities:
Proceeds from issuance of:
Common stock 4,824 6,342 70,528
Preferred stock -- 87,887 --
First mortgage bonds 75,000 -- 77,000
Proceeds from issuance of (reduction of):
Commercial paper, net 36,812 (20,316) 24,388
Bank loans, net -- -- (17,100)
Redemptions and repurchases
Preferred stock -- (23,221) (10,200)
Long-term debt (85,140) (3,340) (9,260)
Cash dividend payments
Common (23,877) (23,468) (32,282)
Preferred -- (9) (101)
-------- -------- --------
Net cash provided by financing
activities 7,619 23,875 102,973
-------- -------- --------
Net cash provided by (used in)
continuing operations 3,928 (4,183) 11,432
Net cash (used in) discontinued
operations, primarily operating
activities -- (3,479) (3,795)
-------- -------- --------
Net increase (decrease) in cash and
cash equivalents 3,928 (7,662) 7,637
Beginning cash and cash equivalents 5,387 13,049 5,412
-------- -------- --------
Ending cash and cash equivalents $ 9,315 $ 5,387 $ 13,049
======== ======== ========
Supplemental disclosures of
cash flow information
Cash paid during the year for:
Interest (net of amounts capitalized) $ 41,792 $ 35,468 $ 30,685
Income taxes $ 3,335 $ 5,180 $ 6,598
The accompanying notes are an integral part of these consolidated statements.
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WASHINGTON NATURAL GAS COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
September 30,
-----------------------------
1995 1994
---------- ----------
(in thousands)
UTILITY PLANT, at original cost $1,055,322 $ 977,406
Accumulated depreciation (263,664) (239,520)
---------- ----------
Net utility plant 791,658 737,886
---------- ----------
RECEIVABLES FROM AFFILIATED COMPANIES 102 2,020
---------- ----------
CURRENT ASSETS:
Cash and cash equivalents 3,571 427
Receivables, net of allowance for
uncollectible accounts of $919 and
$1,252, respectively 7,037 2,847
Unbilled revenue 9,607 9,961
Federal income taxes receivable 1,416 1,416
Deferred income taxes 3,707 4,409
Purchased gas receivable -- 21,261
Materials and supplies, at average cost 29,706 25,360
---------- ---------
Total current assets 55,044 65,681
---------- ---------
OTHER ASSETS AND DEFERRED CHARGES:
Environmental receivables 8,116 33,947
Regulatory tax asset 17,605 18,810
Deferred charges and other 18,073 14,205
---------- ----------
Total other assets and deferred charges 43,794 66,962
---------- ----------
Total assets $ 890,598 $ 872,549
========== ==========
The accompanying notes are an integral part of these consolidated balance
sheets.
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WASHINGTON NATURAL GAS COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (Continued)
CAPITALIZATION AND LIABILITIES
September 30,
---------------------------
1995 1994
---------- ----------
(in thousands)
CAPITALIZATION (see Consolidated Statements of Capitalization):
Common shareholder's interest $ 251,528 $ 235,988
Redeemable preferred stock 90,000 90,000
Long-term debt 310,060 290,200
---------- ----------
Total capitalization 651,588 616,188
---------- ----------
CURRENT LIABILITIES:
Current sinking-fund requirements
and debt maturities 30,140 60,140
Accounts payable 26,675 24,715
Purchased gas liability 15,554 --
Accrued general taxes 12,381 11,869
Environmental remediation liabilities 4,578 6,199
Other current liabilities 28,536 27,617
---------- ----------
Total current liabilities 117,864 130,540
---------- ----------
PAYABLES TO AFFILIATED COMPANIES 16,699 29,617
---------- ----------
DEFERRED CREDITS AND OTHER LIABILITIES:
Noncurrent deferred income taxes 69,826 61,214
Regulatory tax liability 11,017 12,560
Unamortized investment tax credits 9,352 10,132
Contributions in aid of construction 14,252 12,298
---------- ----------
Total deferred credits and other liabilities 104,447 96,204
---------- ----------
Total capitalization and liabilities $ 890,598 $ 872,549
========== ==========
The accompanying notes are an integral part of these consolidated balance
sheets.
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WASHINGTON NATURAL GAS COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Year Ended September 30,
----------------------------------------------
1995 1994 1993
-------- -------- --------
(in thousands)
OPERATING REVENUES:
Regulated utility sales $420,048 $396,407 $367,853
Merchandise and conservation
products -- -- 63,210
-------- -------- --------
Total operating revenues 420,048 396,407 431,063
-------- -------- --------
OPERATING EXPENSES:
Cost of gas sold 219,022 223,502 181,157
Utility operations and
maintenance 68,125 81,768 71,578
Merchandise and other operations -- -- 55,801
Depreciation 33,128 30,901 28,183
General taxes 40,729 37,768 35,045
Federal income taxes 8,531 (3,913) 9,410
-------- -------- --------
Total operating expenses 369,535 370,026 381,174
-------- -------- --------
OPERATING INCOME 50,513 26,381 49,889
OTHER INCOME (EXPENSE), net (443) (3,860) (1,036)
-------- -------- --------
GROSS INCOME 50,070 22,521 48,853
INTEREST CHARGES 32,216 30,764 27,082
-------- -------- --------
NET INCOME (LOSS) 17,854 (8,243) 21,771
DIVIDENDS ON PREFERRED STOCK 7,126 3,979 2,720
EXCESS PREMIUM, PREFERRED REDEMPTION -- 798 --
-------- -------- --------
EARNINGS (LOSS) ON COMMON STOCK $ 10,728 $(13,020) $ 19,051
======== ======== ========
The accompanying notes are an integral part of these consolidated statements.
55
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WASHINGTON NATURAL GAS COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CAPITALIZATION
Shares Outstanding
at September 30, September 30,
-------------------- --------------------------
1995 1994 1995 1994
------ ------ -------- --------
(in thousands) (in thousands)
COMMON SHAREHOLDER'S INTEREST:
Common stock, $5 par value;
authorized 25,000,000 shares 10,982 10,775 $ 54,911 $ 53,873
Premium on common stock 167,752 163,978
Shareholder's earnings
reinvested in the business 28,865 18,137
-------- --------
Total common shareholder's
interest 251,528 235,988
-------- --------
39%* 38%*
REDEEMABLE PREFERRED STOCK:
Cumulative; authorized 1,000,000
shares of $100 par value and
4,000,000 shares of $25 par
value
7.45%, Series II, $25 par value 2,400 2,400 60,000 60,000
8.50%, Series III, $25 par value 1,200 1,200 30,000 30,000
-------- --------
Total preferred stock 90,000 90,000
-------- --------
14%* 15%*
*Percentage of total capitalization.
The accompanying notes are an integral part of these consolidated statements.
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WASHINGTON NATURAL GAS COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CAPITALIZATION
(Continued)
September 30,
-------------------------
1995 1994
-------- --------
(in thousands)
LONG-TERM DEBT:
First mortgage bonds
9.96% due 1995 $ -- $ 40,000
8.80% called in 1995 -- 25,000
8-1/8% due 1997 3,200 3,340
10-1/4% due 1997, called for early redemption 30,000 30,000
9.60% due 2000 25,000 25,000
9.57% due 2020 25,000 25,000
Secured medium-term notes, series A
5.55% and 5.67% due 1995 -- 20,000
8.25% due 1998 11,000 11,000
7.08% due 1999 10,000 10,000
8.51% through 8.55% due 2001 19,000 19,000
7.53% and 7.91% due 2002 30,000 30,000
8.25% through 8.40% due 2022 35,000 35,000
Secured medium-term notes, series B
6.23% through 6.31% due 2003 28,000 28,000
6.07% and 6.10% due 2004 18,500 18,500
6.51% and 6.53% due 2008 4,500 4,500
6.83% and 6.90% due 2013 13,000 13,000
7.19% due 2023 13,000 13,000
Secured medium-term notes, series C
6.92% and 6.93% due 2005 31,000 --
7.02% and 7.04% due 2007 25,000 --
7.12% due 2010 7,000 --
7.35% and 7.36% due 2015 12,000 --
-------- --------
340,200 350,340
Less sinking-fund requirements and maturities
included in current liabilities (30,140) (60,140)
-------- --------
Total long-term debt 310,060 290,200
-------- --------
47%* 47%*
TOTAL CAPITALIZATION $651,588 $616,188
======== ========
100%* 100%*
*Percentage of total capitalization.
The accompanying notes are an integral part of these consolidated statements.
57
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WASHINGTON NATURAL GAS COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDER'S EARNINGS
REINVESTED IN THE BUSINESS
Year Ended September 30,
--------------------------------------------
1995 1994 1993
-------- -------- --------
(in thousands)
Balance, at beginning of year $ 18,137 $ 48,094 $ 55,088
Net income (loss) 17,854 (8,243) 21,771
Excess premium, preferred redemption -- (798) --
Dividends declared on capital stock:
Common stock, $-0-, $1.60, and
$2.60 per share, respectively -- (16,937) (26,045)
Cumulative preferred stock:
5%, series A -- (9) (108)
6%, series B -- (13) (154)
8-7/8%, series C -- (23) (271)
8-3/4%, series F -- (22) (437)
8-3/4%, series I -- (88) (1,750)
7.45%, series II (4,470) (3,824) --
8.50%, series III (2,656) -- --
-------- -------- --------
Balance, at end of year $ 28,865 $ 18,137 $ 48,094
======== ======== ========
The accompanying notes are an integral part of these consolidated statements.
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WASHINGTON NATURAL GAS COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF PREMIUM ON COMMON STOCK
Year Ended September 30,
-----------------------------------------
1995 1994 1993
-------- -------- --------
(in thousands)
Balance, at beginning of year $163,978 $161,618 $108,186
Excess of proceeds over par value of
common stock issued to parent company,
less expense of sale -- -- 46,714
Excess of cost over par value of
preferred stock reacquired -- (331) --
Excess of purchase price over par value
of shares of common stock issued under
the parent company's Dividend
Reinvestment and Stock Purchase Plan 3,659 4,507 6,651
Excess of purchase price over par value
of shares of common stock issued under
the parent company's Employee Stock
Purchase Plan 288 350 361
Common and preferred stock expense (173) (2,166) (294)
-------- -------- --------
Balance, at end of year $167,752 $163,978 $161,618
======== ======== ========
The accompanying notes are an integral part of these consolidated statements.
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WASHINGTON NATURAL GAS COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended September 30,
-------------------------------------------
1995 1994 1993
-------- -------- --------
(in thousands)
Cash flow provided by (used in) operating activities:
Net income (loss) $ 17,854 $ (8,243) $ 21,771
-------- -------- --------
Adjustments to reconcile net income (loss)
to net cash provided by operating
activities:
Depreciation 33,432 31,293 28,544
Provision for uncollectible
accounts receivable 1,151 2,406 1,610
Increase (decrease) in:
Federal income tax - current -- 573 1,830
Federal income tax - deferred 8,534 (7,480) 12,724
Accounts receivable (4,987) 34,966 (8,290)
Environmental recoveries
(expenditures), net 24,210 (11,808) (9,315)
Purchased gas adjustment 36,815 2,608 (13,315)
Accounts payable 1,960 18,494 21,774
Materials and supplies (4,346) 14,246 (4,643)
Deferred charges (3,038) (12,168) (17,724)
Other assets and liabilities 1,204 (21,910) 1,413
Other -- 2,854 (2,514)
-------- -------- --------
Total adjustments 94,935 54,074 12,094
-------- -------- --------
Net cash provided by operating
activities 112,789 45,831 33,865
-------- -------- --------
Cash flow provided by (used in)
investing activities:
Utility plant additions (87,240) (84,506) (91,275)
Proceeds from disposition of fixed assets 412 1,260 1,339
-------- -------- --------
Net cash (used in) investing
activities (86,828) (83,246) (89,936)
-------- -------- --------
The accompanying notes are an integral part of these consolidated statements.
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WASHINGTON NATURAL GAS COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Continued)
September 30,
--------------------------------
1995 1994 1993
-------- -------- --------
(in thousands)
Cash flow provided by (used in)
financing activities:
Proceeds from issuance of:
Common stock $ 4,812 $ 6,108 $ 64,023
Preferred stock -- 87,887 --
First mortgage bonds 75,000 -- 77,000
Proceeds from issuance of
(reductions of):
Payables to affiliated companies,
net (11,000) (18,713) (11,250)
Bank loans, net -- -- (17,100)
Redemptions and repurchases:
Preferred stock -- (23,398) (10,300)
Long-term debt (85,140) (3,340) (9,260)
Cash dividend payments:
Common -- (16,937) (26,045)
Preferred (6,489) (3,538) (2,725)
-------- -------- --------
Net cash provided by (used in)
financing activities (22,817) 28,069 64,343
-------- -------- --------
Net increase (decrease) in cash and
cash equivalents 3,144 (9,346) 8,272
Beginning cash and cash equivalents 427 9,773 1,501
-------- -------- --------
Ending cash and cash equivalents $ 3,571 $ 427 $ 9,773
======== ======== ========
Supplemental disclosures of cash
flow information
Cash paid during the year for:
Interest (net of amounts
capitalized) $ 33,892 $ 29,836 $ 26,264
Income taxes $ -- $ 2,400 $ 601
The accompanying notes are an integral part of these consolidated statements.
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WASHINGTON ENERGY COMPANY AND SUBSIDIARIES
WASHINGTON NATURAL GAS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED 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 SIGNIFICANT ACCOUNTING POLICIES
(a) General
The consolidated financial statements include the accounts of Washington Energy
Company and its wholly-owned subsidiaries, after elimination of intercompany
items and transactions. The Company's subsidiaries are:
1. Washington Natural Gas Company and its wholly-owned subsidiaries;
2. Washington Energy Services Company;
3. Washington Energy Gas Marketing Company;
4. WECO Finance Company and its wholly-owned subsidiary;
5. Thermal Energy, Inc., and its wholly-owned subsidiary, and
6. ThermRail, Inc.
Due to the May 1994 merger of Resources, previously a wholly-owned subsidiary of
Washington Energy, with a subsidiary of Cabot, the 1994 financial statements
through the date of the merger show Resources' earnings in "Other income
(expense)" using the equity method of accounting. The 1993 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 FERC uniform system of accounts, which has been adopted by the
WUTC.
(b) Reclassifications
Certain amounts in the 1994 and 1993 financial statements have been reclassified
to conform with the 1995 presentation. The payroll taxes previously included in
"General taxes" are now reported in "Operations and maintenance" expense.
(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
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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
approval of the WUTC. The average depreciation rate used was approximately 3.5%
for 1995, 3.5% for 1994 and 3.6% for 1993.
(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 Washington Natural's gas supplies
and that currently allowed by the WUTC are deferred and recovered or repaid
through the PGA mechanism. Certain income tax deferrals are discussed in Note 2.
The remainder of these costs are included in "Deferred charges and other" in the
financial statements and are amortized and recovered in rates as prescribed by
the WUTC. At September 30, 1995 and 1994, such deferred charges totaled
$4,635,000 and $3,614,000, respectively. Of the year-end 1995 balance,
$2,956,000 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 1995, 1994, and 1993 was $660,000, $453,000, and $250,000,
respectively. The Company discontinued interest capitalization on its coal
projects in 1994 as the projects have not been actively under development since
1993. Total interest capitalized in 1993 related to the coal projects was
$541,000.
(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.
(g) Off-System Sales and Capacity Release
Washington Natural has been selling excess gas supplies and entering into gas
supply exchanges with third parties outside of its distribution area since 1992.
Washington Natural began releasing to third parties excess interstate gas
pipeline capacity and gas storage rights on a short-term basis in 1993 and 1994,
respectively. Washington Natural contracts for firm gas supplies and holds firm
transportation and storage capacity sufficient to meet the expected peak winter
demand for gas for space heating by its firm customers. Due to the variability
in weather and other factors, Washington Natural holds contractual rights to gas
supplies and transportation and storage capacity in excess of its immediate
requirements to serve firm customers on its distribution system for much of the
year. The net proceeds from these gas sales, exchanges and releases of capacity
are accounted for as reductions in the cost of purchased gas and passed on to
ratepayers through the PGA mechanism with no impact on net income. As a result,
Washington Natural does not reflect sales revenue or associated cost of sales
for these transactions in its income statement. The net proceeds from these
activities were $7,374,000, $3,997,000 and $838,000 for 1995, 1994 and 1993,
respectively.
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(h) New Accounting Pronouncements
During 1995, the Company adopted SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and Long-Lived Assets to be Disposed Of." See Notes 8 and 13
regarding the charges recorded for the write-down of coal related investments
and Cabot's write-down of its oil and gas producing properties.
SFAS No. 123, "Accounting for Stock-Based Compensation," was recently issued and
is effective for fiscal years beginning after December 15, 1994. SFAS No. 123
encourages, but does not require, companies to account for stock compensation
awards based on their estimated fair value on the grant date. However, if
companies choose not to account for such compensation on a fair value basis,
they are required to disclose in a footnote to the financial statements any
effect on net income had the company recognized expense for such compensation.
The Company has not yet adopted SFAS No. 123, but as indicated in Note 3, due to
the limited number of options granted by the Company on an annual basis, the
amount of compensation expense which would be required to be expensed or
disclosed, is not material.
(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.
The Company's consolidated income tax provision is as follows (in thousands):
Year Ended September 30,
--------------------------------
1995 1994 1993
-------- -------- --------
Charged (credited) to operations:
Current $ 75 $ (7,291) $ (4,685)
Deferred 6,212 1,375 15,126
Investment tax credit (780) (781) (796)
-------- -------- --------
Total charged (credited) to operations 5,507 (6,697) 9,645
Charged (credited) to other income
and expense, net (24,686) 22,432 51
Charged (credited) to discontinued
operations -- (430) (6,610)
-------- -------- --------
Total income tax expense (benefit) $(19,179) $ 15,305 $ 3,086
======== ======== ========
The amount credited to "Other income and expense" in 1995 consists primarily of
the deferred taxes associated with the write-downs of the Company's investments
in Cabot and coal-related assets (see Notes 13 and 8). The amount charged to
"Other income (expense)" in 1994 consists primarily of deferred income taxes
provided on the Cabot merger.
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Washington Natural's consolidated income tax provision is as follows (in
thousands):
Year Ended September 30,
-----------------------------
1995 1994 1993
------- ------- -------
Charged (credited) to operations:
Current $ 336 $(4,344) $ 2,293
Deferred 8,975 1,212 7,913
Investment tax credit (780) (781) (796)
------- ------- -------
Total charged (credited) to
operations 8,531 (3,913) 9,410
Charged to other income and expense, net (336) (2,078) 137
------- ------- -------
Total income tax expense (benefit) $ 8,195 $(5,991) $ 9,547
======= ======= =======
On October 1, 1993, the Company adopted 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. The temporary differences and
associated tax assets and liabilities comprising the Company's consolidated net
deferred tax liability at September 30 are as follows (in thousands):
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1995 1994
------- --------
Deferred tax liabilities:
Property basis and accelerated depreciation $78,521 $ 70,782
Investment in Cabot stock 14,826 19,358
Coal development activities -- 13,101
Environmental remediation 384 384
Regulatory tax asset net of regulatory tax
liability 2,306 2,187
Demand side management costs and other
deferred utility expenses 1,610 1,098
Other 885 4,943
------- --------
Total deferred tax liabilities 98,532 111,853
------- --------
Deferred tax assets:
Net operating loss carry-forwards 18,625 15,453
Alternative minimum tax credits 5,813 5,813
Reserves for future losses 4,255 4,981
Investment tax credit 3,752 3,553
Contributions in aid of construction 3,273 3,546
Coal development activities 956 --
Compensation related differences 2,892 2,030
Other 3,223 2,934
------- --------
Total deferred tax assets 42,789 38,310
------- --------
Net deferred tax liability 55,743 73,543
Less amount classified as current asset 3,707 4,427
------- --------
Net noncurrent deferred tax liability $59,450 $ 77,970
======= ========
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The temporary differences and associated tax assets and liabilities comprising
Washington Natural's net deferred tax liability at September 30 are as follows
(in thousands):
1995 1994
------- -------
Deferred tax liabilities:
Property basis and accelerated depreciation $78,521 $70,782
Environmental remediation 384 384
Regulatory tax asset net of regulatory
tax liability 2,306 2,187
Demand side management costs and other
deferred utility expenses 1,610 1,098
Other 586 1,453
------- -------
Total deferred tax liabilities 83,407 75,904
------- -------
Deferred tax assets:
Net operating loss carry-forwards 3,004 5,332
Alternative minimum tax credits 3,513 3,513
Investment tax credit 3,752 3,553
Contributions in aid of construction 3,273 3,546
Compensation related differences 2,892 2,030
Other deferred tax assets 854 1,125
------- -------
Total deferred tax asset 17,288 19,099
------- -------
Net deferred tax liability 66,119 56,805
Less amount classified as current asset 3,707 4,409
------- -------
Net noncurrent deferred tax liability $69,826 $61,214
======= =======
The components of consolidated deferred income tax expense for the last year
under which the Company followed SFAS No. 96 are as follows (in thousands):
Year Ended
September
30, 1993
----------
Included in operating expense:
Tax depreciation $ 4,452
Oil and gas exploration and production activities 5,721
Environmental activities 3,461
Coal and railroad development activities 1,442
Interest capitalized 184
Other (134)
--------
15,126
Included in other income:
Other non-utility activities 51
--------
Total deferred tax provision $ 15,177
========
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At September 30, 1995 the following carry-forwards are available to reduce the
Company's future income tax liability (in thousands):
Carry-
forwards Expiration
-------- ----------
1994 net operating losses $44,152 2009
1995 net operating losses 9,061 2010
-------
Total net operating losses $53,213
=======
Alternative minimum tax credits $ 5,813 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
regulatory tax asset or liability has been recorded to reflect the expected
recovery or refund through adjustment of customers' rates when these taxes
become receivable or payable in future periods. Based on the WUTC's past
decisions and policies, it is management's opinion that the Commission will
allow Washington Natural full recovery in its rates of the increased future tax
expense resulting from the use of this accounting method.
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(c) Reconciliation of Statutory Income Tax Rate to Effective Rate
WASHINGTON ENERGY COMPANY AND SUBSIDIARIES
Year Ended September 30,
-----------------------------------
1995 1994 1993
------ ------ ------
Statutory income tax rate (35.0)% (35.0)% 34.8%
Excess of book over tax depreciation
not deferred 0.8 3.4 2.2
Accelerated benefit on early retirement
of depreciable assets (1.4) (2.8) (2.8)
Tax credit on gas produced from tight
sands formations -- 4.9 (5.1)
Amortization of investment tax credit (1.3) (2.7) (2.5)
Dividends-minority interest 4.1 4.8 2.8
Cabot merger and related reserves -- 83.3 --
Effect of tax rate change from 34% to 35% -- -- 2.8
Provision for tax contingencies 2.0 -- --
Dividends received deduction (1.5) (1.2) --
Other, net .5 (0.6) (1.6)
----- ---- ----
Effective income tax rate (31.8)% 54.1% 30.6%
===== ==== ====
WASHINGTON NATURAL GAS COMPANY AND SUBSIDIARIES
Year Ended September 30,
-----------------------------------
1995 1994 1993
------ ------ ------
Statutory income tax rate 35.0% (35.0)% 34.8%
Excess of book over tax depreciation
not deferred 1.9 7.0 2.2
Accelerated benefit on early retirement
of depreciable assets (3.2) (5.7) (2.9)
Amortization of investment tax credit (3.0) (5.5) (2.5)
Other, net 0.8 (2.9) (1.1)
---- ----- ----
Effective income tax rate 31.5% (42.1)% 30.5%
==== ===== ====
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.
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(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 1995, 1994 and
1993, 29,773, 27,055 and 21,549 shares, respectively, were issued under the plan
at average prices per share of $13.06, $16.27 and $20.08, respectively, with
average fair market values on the exercise date of $13.06, $16.44 and $22.09,
respectively. At September 30, 1995, 30,509 shares were authorized for future
issuance.
(c) Dividend Reinvestment and Stock Purchase Plan
This plan, available to all holders of record of the Company's common stock,
provides for reinvestment of dividends at 100% 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 $5,000 per quarter at 100% of the average price on the
dividend payment date. During 1995, 1994 and 1993, 324,839, 363,879 and 367,421
shares, respectively, were issued under the plan. At September 30, 1995, there
were 783,669 shares of the Company's common stock authorized but unissued under
this plan.
(d) Performance Share Plan
A performance share plan was established October 1, 1981, which provides for the
annual award 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. Generally, under the Company's
current policy, at least 50% 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. No performance units were awarded under
the plan in 1995 and no such awards are planned for 1996. Due to the losses
sustained in 1994 and 1995, the minimum performance objectives of the plan
relative to performance units outstanding at September 30, 1995, cannot be met.
In the event of a change in control, however, all participants would receive
payment for 100% of outstanding awards. (See Note 18 regarding the proposed
merger with Puget.) The aggregate number of performance units for which such
payments would be made as a result of a change in control prior to September 30,
1996 would be 41,768 units, and subsequent to September 30, 1996, would be
34,155 units.
(e) Stock Option Plans
The previous stock option plan approved by the shareholders in February 1984,
expired September 30, 1993. The Washington Energy Company 1993 Stock Option
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Plan ("1993 Plan"), was approved by a vote of the Company's shareholders on
February 25, 1994. Under the 1993 Plan, as in the previous plan, options are
offered to executives 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. At September 30, 1995 there were
165,763 and 798,860 shares of the Company's common stock authorized but unissued
under the previous plan and the 1993 Plan, respectively.
At the discretion of the Compensation and Benefits Committee of the Board of
Directors, any option granted may include a stock appreciation right ("SAR").
Any optionee exercising a stock option loses the corresponding SAR as to that
option and vice versa. SARs have been granted in tandem with all options
outstanding under the previous plan and the 1993 Plan.
Option Grant Price
-------------------------------------------------------
$20.06 to
$15.06 $21.38 $18.38 $13.38 Total
-------- --------- ------- -------- --------
Options outstanding
at September 30, 1992 13,227 243,366 -- -- 256,593
Options granted at $21.19 -- 109,800 -- -- 109,800
Options exercised (11,127) (35,700) -- -- (46,827)
Options forfeited -- (1,000) -- -- (1,000)
------- -------- ------- ------- --------
Options outstanding
at September 30, 1993 2,100 316,466 -- -- 318,566
Options granted -- -- 110,600 -- 110,600
Options exercised (700) -- -- -- (700)
Options forfeited (1,400) (114,203) -- -- (115,603)
------- -------- ------- ------- --------
Options outstanding
at September 30, 1994 -- 202,263 110,600 -- 312,863
Options granted -- -- 6,300 199,950 206,250
Options exercised -- -- -- (11,500) (11,500)
Options forfeited -- (36,500) (13,000) -- (49,500)
------- -------- ------- ------- --------
Options outstanding
at September 30, 1995 -- 165,763 103,900 188,450 458,113
======= ======== ======= ======= ========
Unexercised options at September 30, 1995, do not result in a material dilution
of earnings per common share.
(f) Puget Option
In connection with the execution of an Agreement and Plan of Merger (the "Merger
Agreement"), dated as of October 18, 1995, by and among Washington Energy,
Washington Natural and Puget, Washington Energy granted to Puget an option to
purchase up to 19.9% of Washington Energy's common stock at an exercise price of
$20.00 per share (the "Puget Option"). (See Note 18 regarding subsequent
events.) The Puget Option becomes exercisable under certain circumstances if the
Merger Agreement becomes terminable. The Puget
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Option further provides that in the event the option becomes exercisable, Puget
may require Washington Energy to repurchase the option or any previously
purchased shares acquired under the option at a price based on or derived from
the market price or a subsequent third-party offer on the day of exercise. The
Puget Option terminates on the earlier of 1) the effective time of the merger
under the Merger Agreement, 2) the termination of the Merger Agreement pursuant
to its terms (other than a termination relating to or following certain
specified business combinations), or 3) 180 days following any termination of
the Merger Agreement relating to or following certain specified business
combinations.
(g) Directors' Stock Bonus Plan
The Directors' Stock Bonus Plan was approved by the shareholders in February
1991. The plan provides for annual awards of 200 shares of Washington Energy
common stock to each outside director. Shares are issued relative to these
awards after the director leaves the Board of Directors. The director receives
additional awards equivalent to the dividends reinvested on the awarded but
unissued shares. During 1995, 1994 and 1993, 1400, 1400, and 1800 shares,
respectively, were awarded under the plan. During 1995, 1994 and 1993, 204, 190,
and 382 shares, respectively, were issued under the plan. At September 30, 1995,
8,063 shares were awarded but not issued under the plan.
(h) General
The increase in common equity resulting from issuance of shares under the
various plans described above was $4,825,000 in 1995, $6,342,000 in 1994, and
$8,735,000 in 1993.
(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. Washington Natural has not paid dividends to Washington
Natural since April 1994, due to these restrictions. At September 30, 1995,
Washington Natural was restricted from paying dividends to Washington Energy
until its retained earnings increased by more than $12,500,000.
(5) 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 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.
In November 1993, the Company and Washington Natural redeemed early all
previously outstanding preferred stock. A total of 585,480 shares, in five
series, with an aggregate par value of $22,648,000 was redeemed at an average
premium of 2.4%. Washington Natural had previously elected to redeem 170,000
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shares with an aggregate par value of $5,000,000 through additional, optional,
sinking-fund payments at par value in September 1993.
(6) LONG-TERM DEBT
The total principal amount of Washington Natural's first mortgage bonds
authorized by the indenture dated April 1, 1957, as amended and supplemented 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: 1996, $30,140,000; 1997, $3,200,000;
1998, $11,000,000; 1999, $10,000,000; and 2000, $25,000,000. The $30,000,000 of
10-1/4% bonds due in 1997 were called early and redeemed without premium in
December 1995. The redemption was funded by the issuance of additional long-term
debt.
(7) OTHER FINANCING ARRANGEMENTS
On March 31, 1995, the Company entered into a new credit agreement with a
lending group composed of nine commercial banks and terminated its prior $150
million revolving credit agreement. The new agreement provides for a committed
revolving credit facility of up to $250 million for a three-year period.
Advances bear interest at one of several, optional, market-based rates. The
agreement requires payment of a commitment fee on the average unused balance of
the facility. The fee is based on the Company's commercial paper rating and is
currently 1/4 of 1% per annum. This credit agreement is utilized primarily to
provide credit support for various uncommitted, short-term financing
arrangements. No advances were outstanding under this facility at September 30,
1995.
The Company has commercial paper programs available through two sources totaling
$250 million. The Company can borrow up to $40 million at commercial paper rates
through a credit program, credit-enhanced by a commercial bank. Aggregate
borrowings under the commercial paper and enhanced credit facilities are limited
to $250 million. At September 30, 1995, $122 million in commercial paper was
outstanding and $40 million was borrowed under the enhanced credit facility.
The Company also has an uncommitted short-term credit arrangement with a
commercial bank whereby it may borrow up to $25 million at short-term market
rates. At September 30, 1995, no borrowings were outstanding under this
arrangement.
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, 1995,
$28 million of outstanding merchandise and gas receivables had been sold under
the agreement, which represented all but approximately $11 million of total
receivables eligible to be sold to CRC.
The composite interest rate at September 30, 1995, 1994 and 1993, on outstanding
short-term borrowings, including the impact of certain interest rate swaps
discussed below, was 7.1%, 6.3% and 5.0%, respectively. During the
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past three years, short-term borrowing levels and average interest rates,
including the impact of certain interest rate swaps described below, were as
follows:
1995 1994 1993
------ ------ ------
Maximum outstanding (in millions) $242.4 $174.3 $161.4
Average outstanding (in millions) $130.0 $115.5 $116.5
Weighted average rate 7.7% 6.1% 5.8%
The Company has entered into interest rate swap agreements to reduce the impact
of changes in interest rates on its floating-rate, short-term debt. The two
agreements outstanding at September 30, 1995, effectively change the Company's
interest rate on outstanding commercial paper to 8.59% on a notional principal
amount of $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 1995, 1994 and 1993
was $4,098,000, $4,050,000 and $5,098,000, respectively. Minimum annual lease
payments for the next five years and thereafter are: 1996, $2,756,000; 1997,
$2,151,000; 1998, $1,924,000; 1999, $1,522,000; 2000, $1,465,000; and
thereafter, $18,807,000.
(8) COAL AND RAILROAD PROPERTIES
In the fourth quarter of 1995, the Company wrote down the carrying value of its
coal and railroad properties by $34,700,000 ($22,555,000 after tax) and
$6,000,000 ($3,900,000 after tax), respectively, in conjunction with early
adoption of SFAS No. 121. Based on a mine feasibility study by a mining and
geological consulting firm, the current and expected future coal prices do not
support further expenditures to develop the coal reserves over the next five to
ten years. As a consequence of the determination that the coal reserves are
uneconomical to develop in the foreseeable future, the Company also wrote off
the costs related to planning the railroad necessary to transport coal from the
proposed mine sites to the existing rail line for shipment on to markets in the
Midwest. The carrying value of the coal assets totaled $4,034,000 and
$37,882,000 at September 30, 1995 and 1994, respectively, and the carrying value
of the railroad assets was $0 and $5,584,000 at the respective dates. The
current $4,034,000 carrying value of the coal reserves is the estimated market
value of undeveloped coal reserves in the region based on recent sales. The
railroad assets were written off entirely as they consist of planning,
engineering and permitting costs, all of which are site specific.
The coal properties consist of surface control over and mineral rights to
approximately 270 million tons of recoverable coal reserves in southeastern
Montana and surface control over substantial additional reserves in the area,
owned by Thermal Resources, Inc., a wholly-owned subsidiary of Thermal Energy,
Inc., and subleased to Montco, a 95%-owned partnership formed to develop the
coal properties. The railroad investment consists of an 87.5% partnership
interest in the Tongue River Railroad Company ("TRR"), held by ThermRail, Inc.,
which was formed to develop the railroad to transport Montco's coal to market.
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Although market conditions do not support current development of these assets,
the Company intends to maintain its investments and to periodically reassess the
viability of further development. Several test burns of the coal by electric
utilities which may be conducted in 1996 or 1997 would better define the quality
of the reserves and the economics of full scale mining operations. 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
benefit existing coal shippers by reducing haul distances and would increase the
value and development potential of Montco's coal reserves.
(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.
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The following tables set forth the Plan's funded status and the pension
liability recognized in the consolidated financial statements (in thousands):
1995 1994 1993
-------- -------- --------
Actuarial present value of
accumulated benefit obligations:
Vested $ 39,319 $ 36,828 $ 33,360
Non-vested 599 732 478
-------- -------- --------
Total $ 39,918 $ 37,560 $ 33,838
======== ======== ========
Projected benefit obligations for
service rendered to date $ 49,819 $ 48,279 $ 43,965
Plan assets at fair value, primarily
marketable stocks, bonds and short-
term investments 64,248 57,812 57,414
-------- -------- --------
Plan assets in excess of projected
benefit obligations 14,429 9,533 13,449
Unrecognized amounts:
Prior service cost 1,568 1,717 2,141
Net gains (10,770) (4,683) (7,745)
Net transition gain (8,103) (8,913) (9,723)
-------- -------- --------
Net pension liability included in
the balance sheet $ (2,876) $ (2,346) $ (1,878)
======== ======== ========
Net pension cost includes:
Service cost of benefits earned
during the period $ 2,163 $ 2,577 $ 2,249
Interest cost on projected benefit
obligations 3,568 3,238 2,941
Actual return on Plan assets (8,704) (1,870) (6,891)
Amortization of net transition gains (810) (810) (810)
Unrecognized prior service cost 149 165 165
Amortization of deferred gains (275) (456) (326)
Current asset gain (loss) deferred 4,440 (2,376) 3,054
-------- -------- --------
Net pension cost $ 531 $ 468 $ 382
======== ======== ========
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%
Compensation increase 6% 6% 6%
The Company also has entered into individual contracts with its officers and
those of its subsidiaries to provide pension benefits in addition to those
provided by the Plan. The contracts, collectively referred to as the
supplemental executive retirement contracts ("SERC") provide benefits based on
annual compensation which 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.
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In 1994, the Company initially recorded the liability for future benefit
obligations of the SERC and the asset representing the cash surrender value of
life insurance policies purchased to fund the SERC. For accounting and
disclosure purposes, neither the total death benefit from the life insurance
policies of $24,100,000 nor the policies' net cash surrender value of $2,696,000
at September 30, 1995, qualify as plan assets since the proceeds of the policies
are not segregated or formally restricted to funding the SERC.
The following tables set forth the SERC's funded status and the liability
recognized in the consolidated financial statements (in thousands):
1995 1994
------- -------
Actuarial present value of accumulated benefit
obligations:
Vested $ 4,552 $ 4,005
Non-vested 813 716
------- -------
Total $ 5,365 $ 4,721
======= =======
Projected benefit obligations for
service rendered to date $ 5,365 $ 4,721
Assets segregated for SERC -- --
------- -------
Assets less than projected
benefit obligations (5,365) (4,721)
Unrecognized amounts:
Prior service cost 4,570 4,451
Gains (745) (654)
------- -------
Net pension liability included
in the balance sheet $(1,540) $ (924)
======= =======
Net pension cost includes:
Service cost of benefits earned during
the period $ 254 $ 322
Interest cost on projected benefit
obligations 362 383
Unrecognized prior service cost 248 289
------- -------
Net pension cost $ 864 $ 994
======= =======
Assumptions used in the calculations:
Weighted-average discount rate 7 1/2% 7 1/2%
Compensation increase 4 1/2% 4 1/2%
The Company does not offer any significant post-retirement benefits other than
pensions.
(10) LIABILITY FOR ENVIRONMENTAL MATTERS
(a) General
The distribution of natural gas by Washington Natural involves certain
controllable environmental risks. Washington Natural conducts its natural gas
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distribution business using accepted industry practices and procedures.
Washington Natural is not aware of any material environmental exposures related
to its natural gas distribution activities. However, Washington Natural, as the
former operator of, or the successor to a former operator of, several
manufactured gas plants in western Washington prior to 1957, has several
existing environmental exposures and one recently resolved environmental
insurance action.
Former manufactured gas plant sites in the following areas are currently
undergoing investigation, remedial actions or monitoring actions relating to
environmental contamination: 1) the Tideflats area of Tacoma, Washington; 2)
Everett, Washington; 3) Chehalis, Washington and 4) "Gas Works Park" in Seattle.
There is another former manufactured gas plant site situated at 22nd and "A"
Streets in Tacoma, where Washington Natural has incurred costs, primarily for
legal defense, because Washington Natural does not believe that it has
responsibility for remediation costs as discussed in Note 11 regarding the
Washington State Department of Transportation lawsuits. This other site is not
expected to result in a significant liability to Washington Natural.
The financial statements reflect management's estimates of the costs to be
incurred, based on known and available information with regard to the extent of
contamination and the potential methods of cleanup or containment believed to be
feasible, at each site. Washington Natural is continually evaluating the
progress at each site and the cost estimates will be revised, if necessary, as
new information is available. The financial statements reflect receivables for
the expected recoveries from insurance carriers and other third parties of
substantially all of the cleanup costs as discussed in greater detail below.
The following table summarizes total expected costs, the costs incurred and
recorded through September 30, 1995, the expected recoveries from insurance
companies and other parties and the actual recoveries through September 30,
1995, for each of the four sites (in thousands):
Gas Works
Tideflats Everett Chehalis Park
--------- ------- -------- ---------
Estimated total investigation,
legal, remediation, and
financing costs $43,196 $3,250 $2,000 $1,000
Actual costs to date 42,921 314 1,625 8
------- ------ ------ ------
Balance expected to be incurred $ 275 $2,936 $ 375 $ 992
======= ====== ====== ======
Expected recoveries from insurance
companies and other parties $42,666 $3,250 $2,000 $1,000
Actual recoveries to date 40,944 -- -- --
------- ------ ------ ------
Balance expected to be recovered $ 1,722 $3,250 $2,000 $1,000
======= ====== ====== ======
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(b) Tideflats
Washington Natural had 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 ("EPA") determined contained several
contaminants and therefore required cleanup under the Comprehensive
Environmental Response, Compensation and Liability Act.
The remediation activities at the Tideflats site were completed as of July 1995,
and confirmed by the EPA in a letter dated September 28, 1995. The remediation
was completed in accordance with the terms set forth in Washington Natural's
consent decree with the EPA. Monitoring equipment has been installed at the
site. In the future, ongoing monitoring and maintenance costs will be expensed
as incurred and are not estimated to be material.
In June 1991, Washington Natural filed a lawsuit in King County Superior Court,
State of Washington, against certain insurance companies that provided insurance
applicable to the Tideflats site at various times dating back to the 1940s. On
June 10, 1994, the Superior Court entered final judgment in favor of Washington
Natural. Under the terms of the final judgment, Washington Natural was entitled
to collect its present and future uncompensated reasonable and necessary costs
in remediating the site from the policies of certain insurer defendants in the
action. The liability of these defendant insurers was joint and several, up to
the annual limits of their policies, subject to relevant underlying limits. The
final judgment further awarded Washington Natural prejudgment interest and
declared that Washington Natural is entitled to collect its reasonable
attorneys' fees and costs incurred in obtaining coverage of its remediation
costs. The defendants appealed the judgment to the Washington State Court of
Appeals.
During 1995, Washington Natural settled its lawsuit with the insurance carriers
for coverage of the Tideflats remediation costs. In September 1995, Washington
Natural received approximately $29,000,000 in final settlement of all claims
against insurance carriers regarding this site. Washington Natural, as of
September 30, 1995, expects to receive approximately $1,722,000 in equipment
salvage value and reimbursement from another responsible party at the site. As a
result of this settlement, Washington Natural recovered all but $530,000 of the
costs incurred to remediate the Tideflats site. Washington Natural, under an
agreement with the WUTC, will seek recovery in future customer rates of the
remediation costs which are not reimbursed by third parties.
(c) Everett
A remedial investigation study of the Everett site was completed in August 1995.
A feasibility study to determine the appropriate method of remediation or
containment is scheduled for completion in December 1995. Washington Natural
cannot estimate the full extent of future remediation costs at the Everett site
until more information is available from the feasibility study. However, a
reserve for remediation costs of $2,000,000 has been established based on the
preliminary information obtained during the remedial investigation.
The Everett site was previously owned and operated by other companies who are
potentially liable parties ("PLPs") for the remediation of the site. The cost
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estimate reflects the total cost expected to remediate the site before
contributions by other PLPs.
(d) Chehalis
The Chehalis site has been undergoing investigation and remediation activities
since September 1992. Due to additional contamination found at the site and
complications encountered in the remediation process in 1995, the estimated cost
of the cleanup increased from $200,000 to $2,000,000. As of the fall of 1995,
Washington Natural has completed source control and installed groundwater
monitoring wells. Washington Natural is currently compiling seasonal groundwater
data to determine if further remedial measures are required.
(e) Gas Works Park
Washington Natural sold the site of a former manufactured gas plant at Lake
Union, now known as "Gas Works Park," to the City of Seattle on September 4,
1962. The City of Seattle, in a letter from the Seattle City Attorney dated
February 24, 1995, requested that Washington Natural participate in a cleanup of
this site. The letter also indicated that if Washington Natural does not
participate, the City of Seattle will pursue legal remedies which the City of
Seattle believes are available. Washington Natural believes that the contract,
which sold the land to the City of Seattle, presents substantial defenses
against any claims the City of Seattle may make for environmental remediation
costs, which may be incurred at this site.
To date, the City of Seattle has not formally initiated any legal proceedings
and the course of events at this site cannot be predicted. However, Washington
Natural has met with and has exchanged correspondence with the City of Seattle
seeking a solution to Washington Natural's participation in the cleanup at the
Gas Works Park site. During the fourth quarter of 1995, a reserve for $1,000,000
for the potential resolution of this matter with the City of Seattle was
established. A receivable of $1,000,000 was also established to reflect the
probable recovery of the estimated costs from Washington Natural's insurance
carriers.
(f) Expected Recoveries
Washington Natural's financial statements as of September 30, 1995, include
environmental receivables in the amount of $8,116,000 for recoveries from
insurance carriers, based upon the successful litigation against its insurers
regarding the Tideflats site, and other PLPs. Although the factual situations at
the other sites differ in some respects from the factual situation at the
Tideflats site, Washington Natural believes, based on the precedents established
in the Tideflats case and discussion with legal counsel, that it is probable
that it has insurance coverage sufficient to recover costs not recovered from
other PLPs.
Based on all known facts and analyses, the Company and Washington Natural
believe it is not likely that the identified environmental liabilities will
result in a material adverse impact on the Company's or Washington Natural's
financial position, operating results or cash flow trends.
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(11) LITIGATION
(a) Washington State Department of Transportation Lawsuits
On August 8, 1989, the Washington State Department of Transportation (the
"WDOT") commenced a lawsuit ("Federal Action") in the U.S. District Court,
Western District of Washington ("District Court"), against Washington Natural
and other defendants. The suit sought from Washington Natural and the other
defendants, the recovery of approximately $7 million in costs incurred by the
WDOT in cleaning up contamination at the site of a former manufactured gas plant
which discontinued operations in the early 1900s. The trial court ruled that
WDOT's claim was barred due to its failure to comply with federal law governing
the cleanup of hazardous waste sites, and ordered that judgment be entered in
favor of Washington Natural and the other defendants. The trial court's decision
was affirmed by the United States Court of Appeals for the Ninth Circuit ("Court
of Appeals") on July 13, 1995.
On May 10, 1994, the WDOT filed an action in the state Superior Court for Pierce
County, Washington ("State Action") against Washington Natural and other
defendants arising out of the same occurrence and seeking the same damages as
sought in the Federal Action described above. The State Action alleges a claim
under Washington's Model Toxics Control Act, which was recently amended to allow
a private right of action for cost recovery. The State Action was stayed by
Stipulation and Order dated June 10, 1994 pending the outcome of the Federal
Action. The WDOT has indicated that it would pursue the State Action if the
appeal was denied by the Court of Appeals. If the WDOT pursues the State Action,
Washington Natural intends to mount a vigorous defense on several grounds and
believes that the State Action will not be successful.
(b) Alleged Securities Violations
A class-action lawsuit was filed against Washington Energy and two of its
officers, one of whom has subsequently retired, (collectively, "the Defendants")
in District Court, in February 1994, alleging violations of state and federal
securities act provisions and associated violations of Washington state law. The
essence of the complaint concerned alleged disclosure violations regarding the
nature or the extent of the downside financial risk associated with the 1992
utility rate request filing of Washington Natural. In May 1994, the Defendants
filed a motion to dismiss the lawsuit. Discovery in the case was stayed pending
resolution of this motion and on July 25, 1994, the District Court issued its
Order Granting Defendants' Motion To Dismiss and entered a judgment dismissing
the action. The plaintiffs have appealed to the Court of Appeals; however, in
management's opinion, the District Court's decision should be upheld on appeal.
(c) Alleged Anti-Trust Violations
On September 6, 1994, Cost Management Services, Inc. ("Cost Management"), a
Mercer Island, Washington, company involved in the purchase and resale of
natural gas, filed an action against Washington Natural in District Court. Cost
Management alleged that Washington Natural has monopolized or attempted to
monopolize the market for natural gas in central western Washington. Cost
Management also alleged Washington Natural failed to charge its customers in
accordance with the prices, terms and conditions set forth in tariffs filed by
Washington Natural with the WUTC and that it wrongfully interfered with Cost
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Management's relationships with its customers. Cost Management sought injunctive
relief and damages in an unspecified amount. Washington Natural filed a motion
to dismiss the lawsuit which was granted on May 5, 1995. In dismissing Cost
Management's action the court ruled that the state action doctrine provides
antitrust immunity for conduct done pursuant to a clearly articulated and
actively supervised state policy, where unfettered competition is replaced with
regulation. In dismissing the federal antitrust claims, the court declined to
retain jurisdiction over Cost Management's state law claims which were dismissed
without prejudice. Cost Management has filed an appeal in the Court of Appeals
and it has filed a new lawsuit in Superior Court in King County, which was
stayed pending the District Court appeal. In management's opinion, the District
Court decision should be upheld on appeal and the suit in the Superior Court is
unlikely to succeed.
(d) Appeal of FERC Transition Cost Order
As discussed in more detail at Note 14 regarding commitments and contingencies,
Washington Natural has appealed the order of the FERC which allocates to
Washington Natural an additional liability of $9,767,000 inclusive of interest
as of September 30, 1995 for deregulation transition costs of Pipeline. On
January 31, 1995, Washington Natural filed a suit in U.S. Circuit Court of
Appeals (D.C. Circuit) seeking a rehearing. Since Washington Natural has accrued
this liability and an off setting regulatory asset as part of the purchased gas
adjustment account, there is no financial exposure or potential gain to
Washington Natural. However, Washington Natural believes that the FERC's
transition cost allocation order is inequitable and the appeal seeks to reduce
the transition cost liability which is being passed through to Washington
Natural's customers. Management is not able to predict the outcome of the
appeal; however, if the appeal is successful, Washington Natural will not
directly benefit, as the reduction in cost will be passed on to customers in the
form of lower rates.
(e) Environmental Insurance Litigation
For litigation matters pertaining to Washington Natural's former manufactured
gas plant site in Tacoma, Washington, see Note 10.
(12) 1995 AND 1994 RESTRUCTURING AND OTHER CHARGES
In the fourth quarter of 1995, Washington Natural recorded a $2.0 million
after-tax charge for severance costs related to a 4% reduction in its work
force, which was initiated during that quarter and completed in the first
quarter of 1996. The work-force reduction, which affected only salaried
employees, was part of Washington Natural's ongoing organizational
transformation initiated in 1994. The severance accrual has been fully utilized
in the first quarter of 1996, although certain severance benefits are being paid
over time based on terms of individual severance agreements. In addition, the
Company recorded a charge of $1,250,000 for federal tax contingencies.
In the third quarter of 1994, the Company recognized $18,308,000 ($11,900,000
after tax) of restructuring and other one-time charges predominantly related to
Washington Natural. Charges totaling $7,097,000 ($4,613,000 after tax) 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 currently needed. The employee
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severance charge of $3,500,000 ($2,275,000 after tax) related to a staffing
reduction of 12% from the October 1993 level of 1,480 employees. As of September
30, 1995, $2,371,000 in termination benefits have been paid out with the balance
to be paid in installments subject to the terms of individual severance
agreements.
The 1994 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 ($1,450,000 after tax).
Washington Natural recorded an additional $3,351,000 ($2,178,000 after tax)
charge related to supplemental executive retirement contracts.
(13) UNCONSOLIDATED OIL AND GAS AFFILIATE
In the fourth quarter of 1995, the Company recorded charges totaling $24,803,000
($16,122,000 after tax) related to the adoption of SFAS No. 121 by Cabot and to
recognize a permanent impairment in the carrying value of the Company's
investment in Cabot. Cabot elected early adoption of SFAS No. 121 and recognized
$113,900,000 of pre-tax impairment losses related to oil and gas producing
properties in its fiscal quarter ended September 30, 1995. Under the equity
method of accounting, the Company recognized its 9.4% share of the impairment
write-down which totaled $6,503,000 after Cabot's income tax provision
($4,227,000 after the Company's tax provision). In addition, the Company
determined that the carrying value of its investment in Cabot was in excess of
the amount which could be realized through Cabot's future earnings. The Company
wrote down its investment in Cabot by an additional $18,300,000 ($11,895,000
after-tax) to a value which approximated the fair market value of the Cabot
securities held by the Company and which remains in excess of the Company's
proportionate interest in Cabot's underlying equity by $7,300,000. Both charges
result primarily from the decline in natural gas prices over the past year and
lower projections of future natural gas prices.
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, in exchange for all the outstanding capital stock of Resources, in addition
to the repayment of $63,661,000 of intercompany debt. 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 $18,310,000,
after providing for deferred taxes of approximately $32,000,000, and
establishing a reserve of $6,800,000 ($4,420,000 after tax) for a potential
downward purchase price adjustment based on the performance of wells in a
certain field over one year. During the fourth quarter of 1995, the Company
resolved substantially all remaining merger-related issues with Cabot, including
the analysis of well performance, which resulted in an additional charge to
earnings of $503,000 ($327,000 after tax).
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See Note 14 regarding certain gas transportation, storage and other contractual
arrangements of Resources that were retained by a subsidiary of the Company.
The following table details the Company's investment in Cabot at September 30,
1995 and 1994, and earnings and dividends received from the investment during
each year (dollars in thousands):
1995 1994
-------- --------
Investment in Cabot $ 69,975 $ 97,801
Percentage of total Cabot common 9.4% 9.4%
Percentage of voting interest in Cabot 16.6% 16.6%
Pre-tax income
Preferred dividends accrued $ 3,402 $ 1,418
Equity in (loss) (9,185) (573)
Investment impairment write-down (18,300) --
Dividends received
Preferred 3,402 567
Common 341 171
At September 30, 1995, the carrying value of the Company's investment in Cabot
exceeded the Company's proportionate interest in the underlying equity of Cabot
by $7,300,000. The Company is amortizing the excess carrying value on a
straight-line basis over a period of 22 years. Based on the closing price on the
NYSE on September 29, 1995, the aggregate fair value of the Company's investment
in Cabot common stock was $29,062,000. No fair value is readily available for
the Cabot preferred stock as it is not publicly traded; however, the fair value
of the Company's shares of Cabot preferred was estimated to be approximately
$40,000,000 at September 30, 1995.
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.
(14) COMMITMENTS AND CONTINGENCIES
(a) 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. Following the merger, WEGM entered into a five-year contract with
IGI Resources ("IGI"), Boise, Idaho, to manage these rights.
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
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and ANG. Effective November 1, 1995, WEGM permanently assigned to IGI all of its
Stanfield capacity. In addition, WEGM has segmented its capacity to California
at Stanfield and permanently assigned 10,000 MMBtu per day of the Alberta to
Stanfield segment to a third party effective November 1, 1995. 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: 1996, $3,987,000; 1997, $3,395,000; 1998, $3,395,000;
1999, $3,395,000; 2000, $3,395,000; and thereafter, $64,966,000.
WEGM entered into a firm 20-year contract with Tenaska Washington Partners II,
L.P. ("Tenaska") to supply approximately 8,000 MMBtu per day of natural gas to
an electricity cogeneration plant being constructed in western Washington. The
plant was to have sold electricity to the Bonneville Power Administration
("BPA") under a firm, long-term contract; however the BPA has unilaterally
canceled the contract. Tenaska has ceased construction of the facility and
initiated a lawsuit to recover damages. WEGM is contractually obligated to
supply the gas for the plant if the plant is in commercial operation prior to
June 30, 1998. However, it appears highly unlikely that this condition will
occur, therefore, WEGM has not secured a supply of gas to meet the contractual
obligation.
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% higher than those paid by holders of vintage capacity. The
FERC is currently considering a request from PGT for the cost of the expansion
capacity to be "rolled in" with the cost 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.
Settlement discussions are currently underway among PGT and its firm shippers;
however, the outcome and timing of any settlement is uncertain.
In the fourth quarter of 1995, WEGM recorded a $5,000,000 ($3,250,000 after-
tax) charge to increase its reserve for estimated future losses associated with
the transportation and storage commitments to $12,158,000 based on an assessment
of the likelihood and timing of approval of rolled-in rates and actual
mitigation results in 1995. WEGM initially established the reserve with a
$16,000,000 ($10,400,000 after-tax) charge to earnings upon completion of the
merger of Resources and Cabot in May 1994. During 1995 and 1994, pre-tax losses
totaling $5,841,000 and $3,001,000, respectively, were charged against the
reserve. The reserve was increased in 1995 because, in management's opinion, the
current PGT rate settlement discussions have a higher probability of failing
than succeeding. If the settlement attempt fails, the rate request will most
likely be litigated and result in rolled-in rates being phased-in over a period
of five years or more, as recommended by the FERC staff, beginning in calendar
year 1997. If PGT's proposed settlement is approved, the current $12,158,000
reserve balance is likely excessive.
(b) 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 28 years, provide that Washington Natural must pay a
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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 either: 1) a monthly or annual gas
inventory charge calculated as a percentage of the then-current contract
commodity price times the minimum quantity not taken; or 2) pay for gas 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.
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,
which are subject to change.
Demand Charge Obligations (in thousands):
2001 &
There-
1996 1997 1998 1999 2000 after Total
------- ------- ------- ------- ------- -------- --------
Firm gas supply $32,960 $32,960 $32,828 $31,840 $28,882 $ 85,379 $244,849
Firm transpor-
tation service 52,594 52,594 52,594 52,594 52,594 264,546 527,516
Firm storage
and peaking
service 8,722 8,722 8,722 8,722 8,722 125,209 168,819
------- ------- ------- ------- ------- -------- --------
Total $94,276 $94,276 $94,144 $93,156 $90,198 $475,134 $941,184
======= ======= ======= ======= ======= ======== ========
Minimum Annual Take Obligations (in thousands of therms):
2001 &
There-
1996 1997 1998 1999 2000 after Total
------- ------- ------- ------- ------- ------- ---------
Firm gas supply 475,394 406,062 296,562 258,237 258,237 762,680 2,457,172
======= ======= ======= ======= ======= ======= =========
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 1996 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:
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Maximum Supply Available Under Current Firm Supply Contracts (in thousands of
therms):
2001 &
There-
1996 1997 1998 1999 2000 after Total
------- ------- ------- ------- ------- --------- ---------
Total 822,675 730,000 584,000 520,125 520,125 1,795,056 4,971,981
======= ======= ======= ======= ======= ========= =========
(c) Reallocation of Pipeline Transition Costs
In May 1994, Pipeline was ordered by the FERC to modify the previous allocation
of transition costs, totaling $34 million plus interest, incurred in
"unbundling" interstate pipeline services. Under this order, Washington
Natural's share of these costs increased from $1,200,000 previously paid, to
$10,400,000 inclusive of interest as of September 30, 1994. Washington Natural
and six other customers filed requests for rehearing. In September 1994,
Washington Natural recorded a liability of $5,600,000 and an offsetting
regulatory receivable for the same amount to reflect management's opinion of the
outcome of the rehearing process. On December 20, 1994, the FERC issued an order
denying the rehearing requests and permitting Pipeline to bill customers under
the modified allocation methodology. Pending the outcome of the January 31, 1995
appeal to the United States Court of Appeals, Washington Natural made payments
of $4,300,000 in 1995 to Pipeline under a 12-month payment schedule. Washington
Natural increased the recorded liability and the offsetting regulatory
receivable from $5,600,000 to $9,767,000 inclusive of interest as of September
30, 1995. The WUTC has allowed Washington Natural to recover the full amount of
the liability in rates as part of the PGA approved in May 1995.
(15) DISCONTINUED OPERATIONS
In August 1993, the Company 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. 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.
(a) 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.
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(b) 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.
(c) 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.
(d) 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 each swap
agreement at the reporting date, taking into account current interest rates and
the current credit-worthiness of all the parties to each swap.
The estimated fair values of the Company's financial instruments are as follows
(in thousands):
1995 1994
--------------------- ---------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
-------- --------- -------- ---------
Financial liabilities:
Long-term debt $340,200 $ 353,634 $350,340 $ 345,043
Preferred stock $ 90,000 $ 87,900 $ 90,000 $ 79,956
Unrecognized financial
instruments:
Interest rate swaps $ -- $ (2,627) $ -- $ (2,639)
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(17) CONSOLIDATED INDUSTRY SEGMENT INFORMATION
Year Ended September 30,
---------------------------------------
1995 1994 1993
--------- ----------- -----------
(in thousands)
Revenue
Natural gas distribution * $ 420,048 $ 396,407 $ 367,853
Merchandise sales * 23,563 35,618 70,265
Oil and natural gas -- -- 31,618
Less intersegment revenue -- -- (264)
Coal and other -- -- 920
--------- ----------- -----------
Total $ 443,611 $ 432,025 $ 470,392
========= =========== ===========
Operating income (loss) before
income taxes
Natural gas distribution $ 59,044 $ 22,467 $ 52,504
Merchandise sales (1,741) (106) 7,945
Oil and natural gas -- -- 7,700
Coal and other -- (890) (2,935)
--------- ----------- -----------
Total $ 57,303 $ 21,471 $ 65,214
========= =========== ===========
Identifiable assets
Natural gas distribution $ 890,496 $ 870,529 $ 829,319
Merchandise sales 4,717 4,094 3,442
Oil and natural gas 69,975 97,801 153,626
Coal and other 24,302 64,366 49,430
--------- ----------- -----------
Total $ 989,490 $ 1,036,790 $ 1,035,817
========= =========== ===========
Capital expenditures
Natural gas distribution $ 87,240 $ 84,506 $ 91,275
Merchandise sales 232 1,182 --
Oil and natural gas -- -- 36,445
Coal and other 1,271 1,165 1,766
--------- ----------- -----------
Total $ 88,743 $ 86,853 $ 129,486
========= =========== ===========
Washington Energy is engaged principally in natural gas distribution; oil and
natural gas exploration and production through its equity investment in Cabot;
sales 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.
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(18) SUBSEQUENT EVENT
Proposed Merger With Puget Sound Power and Light Company
On October 18, 1995, Washington Energy and Washington Natural announced a
definitive agreement to merge with Puget Sound Power and Light Company. The
agreement provides for each common share of Washington Energy to be exchanged
for .860 shares of Puget stock and each share of preferred stock of Washington
Natural to be converted into one share of preferred stock of Puget with like
rights and preferences. The merger agreement is subject to approval by the
common shareholders of Washington Energy and Puget and by the preferred
shareholders of Washington Natural. The shareholder votes are scheduled for
March 20, 1996. In addition, among other conditions the merger must receive
regulatory approval from the WUTC. The approval process is expected to be
completed by the end of calendar 1996.
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(19) SUPPLEMENTARY INCOME INFORMATION
CONSOLIDATED SELECTED QUARTERLY FINANCIAL DATA
Years Ending September 30, (Unaudited)
Results vary significantly by quarter 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.
Operating Earnings
Operating Income Net Income (Loss) Per
Revenues (Loss) (Loss) Share++
--------- --------- ---------- ----------
(in thousands, except per share amounts)
1995 Quarter:
First $156,245 $ 24,311 $ 13,255 $ .56
Second 157,519 22,710 11,228 .47
Third 78,866 6,673 (5,624) (.26)
Fourth 50,981 (1,898) (59,921) (2.49)
-------- -------- -------- ------
For the year $443,611 $ 51,796 $(41,062) $(1.72)
======== ======== ======== ======
1994 Quarter:
First $146,743 $ 17,919 $ 8,310 $ .33
Second 151,461 16,930 7,446 .32
Third 79,034 (4,043) (48,916) (2.09)
Fourth 54,787 (2,638) (12,486) (.53)
-------- -------- -------- ------
For the year $432,025 $ 28,168 $(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 7,640 (1,701) (.07)
Fourth 82,466 965 (17,796) (.77)
-------- -------- -------- ------
For the year $470,392 $ 55,569 $ 9,647 $ .42
======== ======== ======== ======
Certain amounts in the 1994 and 1993 quarterly statements have been
reclassified to conform with the 1995 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 increased in each quarter, the sum of quarterly earnings may not
equal earnings per share for the year.
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Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure: None
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
- ---------------------------------------------------------- --- ----------
Virginia Anderson (2) (3) 48 1991
Director of Seattle Center, a large civic
center owned by the City of Seattle since 1988.
Robert F. Bailey (2) (4) (5) 63 1988
President of Trans Republic Energy, L.P.,
Midland, Texas, an oil and gas investment company
since January 1992 and Mabelle, Inc., Midland,
Texas, 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) 67 1982
Chairman of the Board of Directors of UNICO
Properties, Inc., Seattle, Washington, from 1992
until his retirement on December 31, 1994,
Chairman and Chief Executive Officer, 1990 to
1992. UNICO Properties, Inc., manages several
major office buildings in downtown Seattle.
John W. Creighton, Jr. (4) (5) 63 1989
President of Weyerhaeuser Company, Tacoma,
Washington, a forest products company, since
1988.
Robert L. Dryden (3) (4) 62 1991
Executive Vice President, Airplane Production,
Boeing Commercial Airplane Group, Seattle,
Washington, since 1990.
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Tomio Moriguchi (1) (2) 59 1988
Chairman and Chief Executive Officer of
Uwajimaya, Inc., Seattle, Washington, a food and
merchandise distributor, retailer, and exporter
since December 1994. Previously he served as
President beginning in 1965. President, Town and
Country Travel, Inc., Seattle, Washington, and
President, North American Post Publishing
Company, Seattle, Washington.
Sally G. Narodick (3) (4) 50 1989
Chairman and Chief Executive Officer of Edmark
Corporation, Redmond, Washington, a developer and
publisher of print and software educational
materials, since October 1989.
William P. Vititoe (1) (3) (5) 57 1994
Chairman, Chief Executive Officer and President
of Washington Energy and Washington Natural 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.
(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, Jr.)
(5) Member of Nominating Committee (Chairman is Robert F. Bailey)
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 terms of Bailey, Creighton and Vititoe expire in 1996; those
of Anderson, Moriguchi and Narodick expire in 1997 and those of Covey and Dryden
expire in 1998. 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 shareholders is scheduled to be held on March 20, 1996. 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 shareholders. In 1994, the
Board of Directors reduced the number of board members from nine to eight upon
the retirement of the prior President of Washington Energy and Washington
Natural. 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 SEC as follows: Virginia Anderson - Columbia Bank and
U.S. Bank of Washington, a subsidiary of U.S. Bancorp; Robert F. Bailey - Texas
Commerce Bank-Midland and Cabot Oil & Gas Corporation; John W. Creighton, Jr. -
Weyerhaeuser Company, Portland General Corporation, Quality Food Centers, Inc.
and Unocal Corporation; Robert L. Dryden - U.S. Bank of Washington, a subsidiary
of U.S. Bancorp; Tomio Moriguchi - Seafirst Corporation, a subsidiary of the
Bank of America N.T. & S.A.; Sally G. Narodick - Edmark
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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 met eight times during the year ended September 30, 1995. Each
incumbent director attended more than 75% of the aggregate number of meetings of
the Board 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.
The Administrative Committee is currently composed of Ms. Narodick, Chairman,
Ms. Anderson, Mr. Dryden, Mr. Vititoe and Washington Energy'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 two times
during 1995.
The Audit Committee is currently composed of Mr. Covey, Chairman, Ms. Anderson,
Mr. Bailey, and Mr. Moriguchi. The committee is responsible for oversight of
Washington Energy'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 five times
during 1995.
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 officers of the Company. The committee met five times during 1995.
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 of
Directors on various matters between board meetings. The committee met one time
during 1995.
The Nominating Committee currently consists of Mr. Bailey, Chairman, Mr.
Creighton, Jr., and Mr. Vititoe. The committee is responsible for the
identification and evaluation of candidates for election to the Board of
Directors. The committee did not meet during 1995.
Any shareholder recommendations for nominations to the Board of Directors for
consideration by the Nominating Committee for the 1997 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, 1996.
(b) Executive Officers: (As to Washington Energy and Washington Natural)
See data following Item 4 of Part I.
Section 16(a) of the Exchange Act requires the directors and executive officers
of Washington Energy to file reports of ownership and reports of changes in
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ownership of Washington Energy common stock with the SEC and the NYSE. Directors
and executive officers are also required by SEC regulations to furnish
Washington Energy with copies of all such reports that they file. Based solely
on its review of the copies of such forms received by it, Washington Energy
believes that all filing requirements applicable to its directors and executive
officers were complied with during the year ended September 30, 1995, except for
a failure to timely report non-vested stock options awarded in December 1994 to
all executive officers, which were reported by amendments filed in December
1995.
Item 11. Executive Compensation
The following table shows the total annual and long-term compensation paid by
the Company and its subsidiaries to the persons who, for the year ended
September 30, 1995, were the Chief Executive Officer and the other five most
highly compensated executive officers of the Company or its subsidiaries ("Named
Executives").
SUMMARY COMPENSATION TABLE
Annual Compensation Long-Term Compensation
----------------------------------- ------------------------------------
Other Securities All
Name Annual Underlying Other Other
and Compen- Options/ Incentive Compen-
Principal Salary Bonus sation SARs Payouts sation
Position Year ($)(1) ($)(2) ($)(3) (#)(4) ($)(5) ($)(6)
- -------------------- ---- -------- ------- ------- ---------- ---------- -------
William P. Vititoe 1995 332,596 45,100 34,386 25,800 -- 6,682
Chairman, Chief 1994 230,423 100,000 78,664 40,000 -- 2,437
Executive Officer 1993 -- -- -- -- -- --
and President
Timothy J. Hogan 1995 114,000 25,700 13,647 7,850 -- 3,420
Executive Vice 1994 99,024 22,500 -- 1,800 14,145 2,970
President, Chief 1993 94,032 4,600 -- 1,800 23,153 2,820
Operating Officer
James P. Torgerson 1995 150,000 15,000 13,647 11,700 -- 4,500
Executive Vice 1994 137,346 23,200 -- 2,600 -- 4,119
President, Chief 1993 133,128 8,000 -- 2,600 19,804 3,994
Administrative and
Financial Officer
Robert J. Tomlinson 1995 145,008 21,800 13,647 7,850 -- 4,350
Sr. Vice President, 1994 136,098 8,000 -- 2,600 -- 3,960
General Counsel and 1993 134,532 6,800 -- 2,600 19,804 3,992
Corporate Secretary
James W. Gustafson 1995 150,000 15,000 13,647 11,700 -- 3,718
Sr. Vice President 1994 137,346 7,200 -- 2,600 -- 4,119
- Operations, 1993 133,128 6,800 -- 2,600 19,804 3,350
Washington Natural
Donald H. Gessel 1995 147,000 12,000 13,647 7,850 -- 4,054
President, 1994 136,596 6,313 -- 2,600 -- 4,098
Washington Energy 1993 133,128 8,900 -- 2,600 19,804 3,817
Services Company
(1) Mr. Vititoe's 1994 salary reflects service from January 15, 1994. His annual
base salary was $325,000 in 1994.
(2) Incentive compensation is based on performance in the year shown but
determined and paid the following year. For example, bonuses for 1995 are
based on performance in 1995 and are measured and paid in the fourth quarter
of calendar 1995.
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(3) Mr. Vititoe's "Other Annual Compensation" includes moving expenses and
temporary housing expenses of $22,386 and $75,640 for 1995 and 1994,
respectively. The balance of amounts shown in this column for other
executive officers are car allowances paid.
(4) All options granted to executive officers were in tandem with SARs.
(5) Amounts in the "Other Incentive Payouts" column relate to payments under the
Company's Second Performance Share Plan further described in the Long-Term
Incentive Programs section.
(6) The amounts in this column are the Company contributions to individual
401(k) accounts.
1995 Stock Options/SARs
The following table sets forth the number of stock options/SARs which were
granted to each of the Named Executives during 1995. In addition, the table
provides the present value of the stock options/SARs as of the grant date.
Securities
Underlying % of Grant
Options/ Total Exercise Date
SARS Options or Base Present
Granted Granted to Price Expiration Value
Name (#)(1) Employees ($/Sh) Date ($)(2)
- ------------------- ---------- ---------- -------- ---------- -------
William P. Vititoe 25,800 13% 13.375 12/15/04 50,052
Timothy J. Hogan 7,850 4% 13.375 12/15/04 15,229
James P. Torgerson 11,700 6% 13.375 12/15/04 22,698
Robert J. Tomlinson 7,850 4% 13.375 12/15/04 15,229
James W. Gustafson 11,700 6% 13.375 12/15/04 22,698
Donald H. Gessel 7,850 4% 13.375 12/15/04 15,229
(1) The exercise price of the options is the fair market value of the
Company's stock on the date of the grant. Each option was granted in
tandem with a SAR covering the same number of shares. Any optionee
exercising their stock options loses the corresponding SARs as to those
shares and vice versa. Two separate option grants were made during the
year. Options under one grant vested immediately. Options under the
other grant vest over an approximate four-year period and were awarded
as follows: Mr. Vititoe, 13,300 shares; Mr. Hogan, 5,250 shares; Mr.
Torgerson, 9,100 shares; Mr. Tomlinson, 5,250 shares; Mr. Gustafson,
9,100 shares; and Mr. Gessel, 5,250 shares.
(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.
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Aggregated Option/SAR Exercises in 1995 and Year-End Option/SAR Values
The following table sets forth information concerning each stock option/SAR
which was exercised during 1995 by each of the Named Executives and the year-end
value of the unexercised stock options/SARs, provided on an aggregated basis.
Value of
Unexercised
Options/SARs at
Year End
Options/ ---------------------
SARs Value Exercis- Unexer- Exercis- Unexer-
Exercised Realized able cisable able cisable
Name (# of shares) ($)(1) (#) (#) ($)(2) ($)(2)
- ------------------- ------------- -------- -------- ------- -------- -------
William P. Vititoe -- -- 32,500 33,300 46,875 49,875
Timothy J. Hogan -- -- 11,000 5,250 9,750 19,688
James P. Torgerson -- -- 15,600 9,100 9,750 34,125
Robert J. Tomlinson -- -- 15,600 5,250 9,750 19,688
James W. Gustafson -- -- 13,000 9,100 9,750 34,125
Donald H. Gessel -- -- 15,600 5,250 9,750 19,688
(1) Any amounts presented in this column represent the difference between
the price of the Company's common stock on the date of exercise and the
option/SAR exercise price multiplied by the number of shares.
(2) The value of the unexercised options/SARs is calculated as the excess
of the WECO common stock price of $17.125 over the exercise price
multiplied by the number of options for each grant under which
options/SARs are outstanding.
Long-Term Incentive Programs
The Company has provided long-term performance incentives to the Named
Executives since 1986 through the Second Washington Energy Company Performance
Share Plan ("Plan"). The determination was made in 1994 that the minimum
performance objectives of the Plan could not be met for the years 1994 through
1997 due to the losses sustained in 1994, thereby eliminating the incentive to
perform provided by the Plan. No performance units were granted under the Plan
in 1995.
In December 1994, the Board of Directors approved the Interim Performance Share
Plan ("Interim Plan") to provide a long-term performance incentive for the four
years 1995 through 1998 for all officers of the Company and its subsidiaries.
The Interim Plan provides for cash payments at the end of the performance period
based on the percentage of total units awarded which are earned in each of the
four years and the price of the Company's common stock at the end of the
four-year performance period. Units are earned in each year based on a
comparison of total shareholder return (appreciation in stock price plus
dividends paid) for Company shareholders with that of a peer group of gas LDCs.
The maximum payment a plan participant can receive is equal to the total number
of units awarded multiplied by the Company's stock price at the end of the
four-year performance period. The Compensation and Benefits Committee may
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elect, at its discretion, to vest any unearned units at the end of the four-year
period based on the total shareholder return for the entire period. Participants
in the Interim Plan must be employed at September 30, 1998, to be eligible for
any payment under the plan, except in the case of retirement, death or
disability. The Interim Plan is not affected by a change in control of the
Company; however, upon change in control, any unexpired awards under the Plan
are payable at the Company's then current stock price.
LONG-TERM INCENTIVE PROGRAM AWARDS IN 1995
Estimated Future
Payouts Under
Non-Stock
Price-Based Plans
---------------------
Units Awarded Units
Beginning of Earned
1995 Period Until to Date Minimum Maximum
Name (#) Payout (#) (#)(1) (#)(2)
- ------------------- ------------- ------------ ------- ------- -------
William P. Vititoe 11,400 4 yrs 1,710 1,710 11,400
Timothy J. Hogan 7,800 4 yrs 1,170 1,170 7,800
James P. Torgerson 7,800 4 yrs 1,170 1,170 7,800
Robert J. Tomlinson 7,800 4 yrs 1,170 1,170 7,800
James W. Gustafson 7,800 4 yrs 1,170 1,170 7,800
Donald H. Gessel 7,800 4 yrs 1,170 1,170 7,800
(1) Corresponds to the number of units earned since the plan was initiated
for which a cash payment will be made subsequent to the end of the
four-year performance period on September 30, 1998.
(2) Represents the maximum number of units which can be earned over the
four-year performance period for which a payment will be made at the
end of the four-year period.
Supplemental Executive Retirement Contracts
The Company has entered into individual contracts which provide officers,
including the Named Executives, with retirement, death and disability benefits
supplementing the benefits from the Company's defined benefit plan reduced by
Social Security and benefits payable under plans of other, prior employers.
The supplemental contracts provide 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.
It provides payments of annual benefits for life upon retirement from the
Company after reaching age 62 or at the election of the officer, with the
Company's consent, at or after age 59.
Based on a computation using data available at September 30, 1995, the average
annual pension benefit (payable in the form of a joint and 50% survivor annuity
with ten-year term certain) payable by the Company upon retirement at age 62, to
the named executives would be: Mr. Vititoe $223,717; Mr. Hogan, $75,141;
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Mr. Torgerson, $101,063; Mr. Tomlinson, $98,733; Mr. Gustafson $101,063; and Mr.
Gessel $99,663.
Conditional Employment Agreements in the Event of a Change in Control
The Company has conditional employment agreements with four of its key executive
officers: Messrs. William P. Vititoe, Timothy J. Hogan, James P. Torgerson, and
Robert J. Tomlinson. 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 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 employment 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 proposed were charged
to expense by the Company under these agreements in 1995. The merger with Puget
would constitute a change in control.
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, an additional $1,500 per year for serving on the
executive committee or as chairman of another committee of the Board and . 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 shareholders in February 1991. Under this
plan, an outside director is awarded 200 shares of Company common
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stock in January of each year for service on the Board of Directors for the
prior year. During 1995, 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
subsidiary, Washington Natural, for a number of years and has been selected to
audit the accounts of the Company for the year ending September 30, 1996.
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 1997 Shareholder Proposals
Shareholder proposals intended to be presented at the 1997 Annual Meeting must
be received by the Company no later than September 15, 1996 to be considered for
inclusion in the proxy statement and proxy for the 1997 meeting.
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Item 12. Security Ownership of Certain Beneficial Owners and Management
Washington Energy Company
SECURITY OWNERSHIP OF DIRECTORS AND OFFICERS
(stated as of December 8, 1995)
Amount of Percent
Beneficial of Class
Name of Beneficial Owner Ownership (2)
---------------------------- ---------- --------
Directors:
Virginia Anderson 1,273 --
Robert F. Bailey 4,548 --
Donald J. Covey 6,375 --
John W. Creighton, Jr. 2,499 --
Robert L. Dryden 4,037 --
Tomio Moriguchi 2,190 --
Sally G. Narodick 1,499 --
Named Executive Officers
(*also serve as Directors):
William P. Vititoe* 69,176 (1) --
Timothy J. Hogan 21,892 (1) --
James P. Torgerson 28,684 (1) --
Robert J. Tomlinson 31,825 (1) --
James W. Gustafson 48,767 (1) --
Donald H. Gessel 32,000 (1) --
All directors and
executive officers as
a group (15 persons) 282,671 (1) 1.2%
(1) Includes unexercised options to acquire shares of common stock pursuant
to the stock option plan as follows: Mr. Vititoe, 65,800 shares; Mr.
Hogan, 16,250 shares; Mr. Torgerson, 24,700 shares; Mr. Tomlinson,
20,850 shares; Mr. Gustafson, 22,100 shares; and Mr. Gessel, 20,850
shares; all directors and executive officers as a group, 194,750
shares.
(2) 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 Energy is unaware of any person beneficially owning more than 5% of
its common stock.
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.
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Item 13. Certain Relationships and Related Transactions: None.
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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 I -- Condensed Financial Information of Registrant for the
years ended September 30, 1995, 1994 and 1993.
Washington Energy Company
Schedule II -- Valuation and Qualifying accounts for the years ended
September 30, 1995, 1994 and 1993.
Washington Energy Company and Subsidiaries
Washington Natural Gas Company and Subsidiaries
The information required to be submitted in Schedule III has been included in
the financial statements or supporting schedules. Schedules IV and V have been
omitted as they are not applicable or not required.
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(b) Reports on Form 8-K:
A report on Form 8-K was filed by Washington Energy and Washington Natural
dated August 1, 1995, regarding third-quarter results.
A report on Form 8-K was filed by Washington Energy and Washington Natural
dated August 25, 1995, regarding the appointment of two Executive Vice
Presidents of Washington Energy and Washington Natural and the announced
retirement of a Senior Vice President of 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, Washington
Energy hereby undertakes as follows, which undertaking shall be incorporated by
reference into Washington Energy'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
Washington Energy pursuant to the foregoing provisions, or otherwise, Washington
Energy 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
Washington Energy of expenses incurred or paid by a director, officer or
controlling person of Washington Energy 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, Washington Energy 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, 33-55381 and 33-61859.
ARTHUR ANDERSEN LLP
Seattle, Washington
December 27, 1995
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Schedule I
WASHINGTON ENERGY COMPANY
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
BALANCE SHEETS
September 30,
----------------------
1995 1994
--------- ---------
(in thousands)
ASSETS
INVESTMENTS IN CONSOLIDATED SUBSIDIARIES:
Washington Natural Gas Company $ 251,521 $ 235,982
Thermal Energy, Inc. (15,625) 8,219
ThermRail, Inc. (3,100) 1,069
WECO Finance Company 2,793 1,545
Washington Energy Gas Marketing (16,544) (13,121)
Washington Energy Services Company (84) 1,106
--------- ---------
Total investments in subsidiaries 218,961 234,800
--------- ---------
INVESTMENTS IN UNCONSOLIDATED AFFILIATES 70,313 98,139
--------- ---------
NOTES AND ACCOUNTS RECEIVABLE FROM SUBSIDIARIES 73,202 62,830
--------- ---------
CURRENT ASSETS:
Other receivables 1,769 1,319
Federal income taxes receivable 3,957 5,409
--------- ---------
Total current assets 5,726 6,728
--------- ---------
DEFERRED CHARGES:
Deferred federal income taxes 2,595 --
Other 378 112
--------- ---------
Total deferred charges 2,973 112
--------- ---------
Total assets $ 371,175 $ 402,609
========= =========
CAPITALIZATION AND LIABILITIES
CAPITALIZATION:
Common shareholders' interest $ 196,686 $ 256,800
--------- ---------
NOTES AND ACCOUNTS PAYABLE TO SUBSIDIARIES 11,255 1,854
--------- ---------
CURRENT LIABILITIES:
Checks issued in excess of cash in bank 10 453
Notes payable and commercial paper 161,994 125,182
Accounts payable and accrued interest 1,230 2,636
--------- ---------
Total current liabilities 163,234 128,271
--------- ---------
DEFERRED CREDITS:
Deferred federal income taxes -- 7,884
Contingency reserves -- 7,800
--------- ---------
Total deferred credits -- 15,684
--------- ---------
Total capitalization and liabilities $ 371,175 $ 402,609
========= =========
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Schedule I (Continued)
WASHINGTON ENERGY COMPANY
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENTS OF INCOME
Year Ended September 30,
--------------------------------
1995 1994 1993
-------- -------- --------
(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
$-0- $16,937 and $26,045,
respectively $ 17,854 $ (8,243) $ 21,771
Other subsidiaries (31,378) (13,670) (10,695)
-------- -------- --------
Total equity in earnings (losses)
of subsidiaries (13,524) (21,913) 11,076
OTHER INCOME AND DEDUCTIONS, NET (27,538) (23,733) (1,429)
-------- -------- --------
NET INCOME (LOSS) (41,062) (45,646) 9,647
DIVIDENDS ON PREFERRED STOCK -- 9 101
EXCESS PREMIUM, PREFERRED REDEMPTION -- 673 --
-------- -------- --------
EARNINGS (LOSS) ON COMMON STOCK $(41,062) $(46,328) $ 9,546
======== ======== ========
EARNINGS (LOSS) PER COMMON SHARE $ (1.72) $ (1.97) $ .42
======== ======== ========
AVERAGE COMMON SHARES OUTSTANDING 23,893 23,486 22,996
======== ======== ========
DIVIDENDS PER COMMON SHARE $ 1.00 $ 1.00 $ 1.40
======== ======== ========
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Schedule I (Continued)
WASHINGTON ENERGY COMPANY
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENTS OF CASH FLOWS
Year Ended September 30,
--------------------------------
1995 1994 1993
-------- -------- --------
(in thousands)
Cash flow provided by (used in) operating activities:
Net income (loss) from continuing
operations $(41,062) $(44,847) $ 22,035
-------- -------- --------
Adjustments to reconcile net income (loss)
from continuing operations to net
cash provided by operating activities:
Pre-tax loss on merger of subsidiary -- 6,304 --
Equity in undistributed (earnings)
losses of unconsolidated affiliate 27,826 (699) --
Undistributed losses of consolidated
subsidiaries 20,649 22,612 14,968
Increase (decrease) in:
Contingency reserves (7,800) 6,262 --
Federal income tax - current 1,452 (4,590) (4,528)
Federal income tax - deferred (10,745) (16,900) --
Deferred tax on merger of
subsidiary -- 24,784 --
Other assets and liabilities (2,296) (611) 1,299
Other -- (2,679) (602)
-------- -------- --------
Total adjustments 29,086 34,483 11,137
-------- -------- --------
Net cash provided by (used in)
operating activities (11,976) (10,364) 33,172
-------- -------- --------
Cash flow provided by (used in) investing
activities:
Dividends received from affiliates -- 16,937 26,045
Investment in affiliates (4,812) (6,620) (95,398)
Loans from (advances to) affiliates (971) 4,823 (22,408)
Invested in subsidiary prior to merger -- (20,760) --
Proceeds from merger of subsidiary -- 63,661 --
-------- -------- --------
Net cash provided by (used
in) investing activities (5,783) 58,041 (91,761)
-------- -------- --------
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SCHEDULE I (Continued)
WASHINGTON ENERGY COMPANY
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENTS OF CASH FLOWS
September 30,
--------------------------------
1995 1994 1993
-------- -------- --------
(in thousands)
Cash flow provided by (used in) financing activities:
Proceeds from issuance of
common stock $ 4,824 $ 6,342 $ 70,528
Proceeds from issuance (redemption) of
commercial paper, net 36,812 (20,316) 24,388
Redemptions and repurchases of
preferred stock -- (6,747) (149)
Cash dividend payments:
Common (23,877) (23,468) (32,282)
Preferred -- (9) (101)
-------- -------- --------
Net cash provided by (used in)
financing activities 17,759 (44,198) 62,384
-------- -------- --------
Net cash provided by
continuing operations -- 3,479 3,795
Net cash used in discontinued
operations (primarily operating
activities) -- (3,479) (3,795)
-------- -------- --------
Net change in cash -- -- --
Beginning cash and cash
equivalents -- -- --
-------- -------- --------
Ending cash and cash equivalents $ -- $ -- $ --
======== ======== ========
Supplemental disclosures of cash
flow information
Cash paid during the year for:
Interest (net of amount capitalized) $ 7,901 $ 7,283 $ 5,704
Income taxes $ 3,335 $ -- $ 5,136
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Schedule II
WASHINGTON ENERGY COMPANY AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED SEPTEMBER 30, 1995, 1994 and 1993
Recoveries Written Balance
Balance at Charged of Off as at End
Beginning to Previous Uncollect- of
of Period Income Write-Offs ible Period
---------- ------- ---------- ---------- -------
(in thousands)
1995:
Allowances for
uncollectible
accounts $1,295 $1,220 $580 $(2,116) $ 979
====== ====== ==== ======= ======
1994:
Allowances for
uncollectible
accounts $ 277 $2,457 $475 $(1,914) $1,295
====== ====== ==== ======= ======
1993:
Allowances for
uncollectible
accounts $ 828 $1,613 $296 $(2,460) $ 277
====== ====== ==== ======= ======
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Schedule II
WASHINGTON NATURAL GAS COMPANY AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED SEPTEMBER 30, 1995, 1994 and 1993
Recoveries Written Balance
Balance at Charged of Off as at End
Beginning to Previous Uncollect- of
of Period Income Write-Offs ible Period
---------- ------- ---------- ---------- ----------
(in thousands)
1995:
Allowances for
uncollectible
accounts $ 1,252 $ 1,151 $ 578 $ (2,062) $ 919
======= ======= ======= ======== =======
1994:
Allowances for
uncollectible
accounts $ 277 $ 2,406 $ 473 $ (1,904) $ 1,252
======= ======= ======= ======== =======
1993:
Allowances for
uncollectible
accounts $ 303 $ 1,610 $ 296 $(1,932) $ 277
======= ======= ======= ======= =======
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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 11, 1995 /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 11, 1995 /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) Director, Chairman of the
Board, President and Chief
Executive Officer
/s/ J. P. Torgerson
------------------------------
(J. P. Torgerson) Executive Vice President,
Chief Administrative
Officer; the Chief
Financial Officer
/s/ Allyn P. Hebner
------------------------------
(Allyn P. Hebner) Vice President - Finance
and Treasurer; the Chief
Accounting Officer
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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 and Plan of Merger by and among Puget Sound Power &
Light Company, Washington Energy Company and Washington Natural
Gas Company dated as of October 18, 1995 (incorporated herein
by reference to Exhibit 2.1 to Washington Energy
Company/Washington Natural Gas Company Form 8-K dated October
18, 1995, File Nos. 1-11227 and 1- 11271, respectively).
2-A.2 Stock Option Agreement dated as of October 18, 1995 by and
among Puget Sound Power & Light Company and Washington Energy
Company (incorporated herein by reference to Exhibit 2.3 to
Washington Energy Company/Washington Natural Gas Company Form
8-K dated October 18, 1995, File Nos. 1-11227 and 1-11271,
respectively).
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
(incorporated herein by reference to Washington Natural Gas
Company Exhibit 4-A.6, Form 10-K for the year ended September
30, 1994, File No. 1-11271).
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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).
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 (incorporated herein by reference to Washington
Natural Gas Company Exhibit 4-B.3, Form 10-K for the year ended
September 30, 1994, File No. 1-11271).
4-B.4 Amendment to the Bylaws of Washington Energy Company, adopted
October 19, 1994 (incorporated herein by reference to
Washington Natural Gas Company Exhibit 4-B.4, Form 10-K for the
year ended September 30, 1994, File No. 1-11271).
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 (incorporated herein by reference to
Washington Natural Gas Company Exhibit 4-C.2, Form 10-K for the
year ended September 30, 1994, File No. 1-11271).
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 Sixth Supplemental Indenture dated as of August 1, 1966
(incorporated herein by reference to Washington Natural Gas
Company Exhibit to Form 8-K for month of August, 1966, File No.
0-951).
4-D.4 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.5 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.6 Twenty-third Supplemental Indenture dated as of July 15, 1986
(incorporated herein by reference to Washington Natural Gas
Company Exhibit 4-B.21, Form 10-K for the year ended September
30, 1986, File No. 0-951).
4-D.7 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.8 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.9 Twenty-eighth Supplemental Indenture dated as of July 31, 1991
(incorporated herein by reference to Washington Natural Gas
Company
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Page 113
exhibit 4-A, Form 10-Q for the quarter ended March 31, 1993,
File No. 0-951).
4-D.10 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).
4-D.11 Thirtieth Supplemental Indenture dated as of August 15, 1995
(incorporated herein by reference to Exhibit 4-A of Washington
Natural Gas Company's S-3 Registration Statement, Registration
No. 33-61859).
10-A Service Agreement dated September 1, 1987 between Northwest
Pipeline Corporation and Washington Natural Gas Company for
SGS-1 firm storage service at Jackson Prairie (incorporated
herein by reference to Washington Natural Gas Company Exhibit
10-A Form 10-K for the year ended September 30, 1994, File No.
11271).
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 (incorporated herein by reference
to Washington Natural Gas Company Exhibit 10-B Form 10-K for
the year ended September 30, 1994, File No. 11271).
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 (incorporated herein by reference to Washington
Natural Gas Company Exhibit 10-D Form 10-K for the year ended
September 30, 1994, File No. 11271).
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-E.2 Amendment to Gas Transportation Service Contract dated July 31,
1991, between Washington Natural Gas Company and Northwest
Pipeline Corporation.
*10-E.3 Gas Transportation Service Contract dated August 15, 1994,
between Washington Natural Gas Company and Northwest Pipeline
Corporation.
*10-E.4 Amendment to Gas Transportation Service Contract dated August
15, 1994, between Washington Natural Gas Company and Northwest
Pipeline Corporation.
*10-F $250,000,000 Credit Agreement dated March 31, 1995, by and
among Washington Energy Company, as Borrower, The First
National Bank of Chicago, Seattle-First National Bank, The
Industrial Bank of Japan, Limited, ABN Amro Bank N.V., Bank of
Montreal, First Interstate Bank of Washington, N.A.,
Nationsbank of Texas, N.A., U.S. Bank of
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Page 114
Washington, N.A., and CIBC Inc., as Lenders, and The First
National Bank of Chicago, as Agent.
10-G Intentionally left blank.
*10-H Washington Natural Gas Company Deferred Compensation Plan
effective September 1, 1995.
*l0-I Form of Washington Natural Gas Company - Executive Retirement
Compensation Agreement reflecting all amendments through August
16, 1995.
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-J.2 Washington Energy Company Interim Performance Share Plan
effective December 7, 1994.
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,. (incorporated herein by reference to
Washington Natural Gas Company Exhibit 10-M.1, Form 10-K for
the year ended September 30, 1994, File No. 1-11271).
10-M.2 Form of Conditional Executive Employment Contract, filed under
cover of Form SE dated December 27, 1988, (incorporated herein
by reference to Washington Natural Gas Company Exhibit 10-M.2,
Form 10-K for the year ended September 30, 1994, File No.
1-11271).
*10-M.3 Amended and restated Washington Energy Company and subsidiaries
Annual Incentive Plan for Vice Presidents and above, dated
October 1994.
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 (incorporated herein by reference to
Washington Natural Gas Company Exhibit 10-M.4, Form 10-K for
the year ended September 30, 1994, File No. 1-11271).
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Page 115
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
(incorporated herein by reference to Washington Natural Gas
Company Exhibit 10-M.5, Form 10-K for the year ended September
30, 1994, File No. 1-11271).
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,
(incorporated herein by reference to Washington Natural Gas
Company Exhibit 10-N, Form 10-K for the year ended September
30, 1994, File No. 1-11271).
10-O Firm Transportation Service Agreement dated March 1, 1992
between Northwest Pipeline Corporation and Washington Natural
Gas Company, (incorporated herein by reference to Washington
Natural Gas Company Exhibit 10-O, Form 10-K for the year ended
September 30, 1994, File No. 1-11271).
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, (incorporated herein by reference to Washington
Natural Gas Company Exhibit 10-P, Form 10-K for the year ended
September 30, 1994, File No. 1-11271).
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, (incorporated herein by reference to Washington
Natural Gas Company Exhibit 10-Q, Form 10-K for the year ended
September 30, 1994, File No. 1-11271).
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,
(incorporated herein by reference to Washington Natural Gas
Company Exhibit 10-R, Form 10-K for the year ended September
30, 1994, File No. 1-11271).
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, (incorporated herein by
reference to Washington Natural Gas Company Exhibit 10-S, Form
10-K for the year ended September 30, 1994, File No. 1-11271).
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,
(incorporated herein by reference to Washington Natural Gas
Company Exhibit 10-T, Form 10-K for the year ended September
30, 1994, File No. 1-11271).
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-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.
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Page 116
*12 Computation of Ratios
*21 Subsidiaries of the Registrant
*23 Consent of Arthur Andersen LLP
(Set forth herein on page 103).
*27.1 Financial Data Schedule - Washington Energy Company
*27.2 Financial Data Schedule - Washington Natural Gas Company