1
WASHINGTON GAS LIGHT COMPANY
SELECTED FINANCIAL DATA
1997 1996 1995 1994 1993
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(Dollars in Thousands, Except Per Share Data)
Operating revenues $1,055,754 $ 969,778 $ 828,748 $ 914,863 $ 894,300
Cost of gas 572,925 469,925 390,041 462,195 478,982
---------- ---------- ---------- ---------- ----------
Net revenues $ 482,829 $ 499,853 $ 438,707 $ 452,668 $ 415,318
---------- ---------- ---------- ---------- ----------
Net income $ 82,019 $ 81,591 $ 62,909 $ 60,459 $ 55,079
Dividends on preferred stock 1,331 1,332 1,333 1,335 1,336
---------- ---------- ---------- ---------- ----------
Net income applicable to common stock $ 80,688 $ 80,259 $ 61,576 $ 59,124 $ 53,743
---------- ---------- ---------- ---------- ----------
Earnings per average share of common stock $ 1.85 $ 1.85 $ 1.45 $ 1.41 $ 1.31
---------- ---------- ---------- ---------- ----------
Total assets at year-end $1,552,032 $1,464,601 $1,360,138 $1,332,954 $1,205,788
---------- ---------- ---------- ---------- ----------
Property, plant and equipment--net $1,217,137 $1,130,574 $1,056,058 $ 995,021 $ 921,084
---------- ---------- ---------- ---------- ----------
Capital expenditures $ 139,871 $ 124,414 $ 112,715 $ 119,796 $ 100,778
---------- ---------- ---------- ---------- ----------
Long-term obligations at year-end $ 432,368 $ 353,893 $ 329,051 $ 342,308 $ 347,884
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COMMON STOCK DATA
Annualized dividends per share $ 1.18 $ 1.14 $ 1.12 $ 1.11 $ 1.09
Dividends declared per share $ 1.170 $ 1.135 $ 1.1175 $ 1.105 $ 1.085
Book value per share $ 13.48 $ 12.79 $ 11.95 $ 11.51 $ 11.04
Return on average common equity 14.1% 15.0% 12.3% 12.5% 12.1%
Yield on book value 8.7% 8.9% 9.4% 9.6% 9.8%
Payout ratio 63.2% 61.4% 77.1% 78.4% 82.8%
Common shares outstanding--year-end (thousands) 43,700 43,703 42,932 42,187 41,495
CAPITALIZATION AT YEAR-END
Common shareholders' equity $ 589,035 $ 558,809 $ 513,044 $ 485,504 $ 458,044
Preferred stock 28,430 28,440 28,471 28,498 28,521
Long-term debt 431,575 353,893 329,051 342,270 347,701
---------- ---------- ---------- ---------- ----------
Total $1,049,040 $ 941,142 $ 870,566 $ 856,272 $ 834,266
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GAS SALES & DELIVERIES (thousands of therms)
Gas sold and delivered
Residential 665,452 739,603 596,499 672,958 641,529
Commercial and industrial--
Firm 426,831 473,645 403,177 443,246 422,977
Interruptible 147,375 182,730 247,600 236,068 258,433
Electric generation 51 1,808 112,523 86,183 35,447
---------- ---------- ---------- ---------- ----------
1,239,709 1,397,786 1,359,799 1,438,455 1,358,386
---------- ---------- ---------- ---------- ----------
Gas delivered for others
Firm 27,574 3,772 - - -
Interruptible 185,487 84,788 61,467 26,147 16,699
Electric generation 94,022 57,689 18,538 - -
---------- ---------- ---------- ---------- ----------
307,083 146,249 80,005 26,147 16,699
---------- ---------- ---------- ---------- ----------
Total 1,546,792 1,544,035 1,439,804 1,464,602 1,375,085
---------- ---------- ---------- ---------- ----------
OTHER STATISTICS
Customer meters 798,739 772,281 750,849 725,960 703,122
Degree days 3,876 4,570 3,660 4,311 4,246
Percent colder (warmer) than normal 0.5% 18.6% (5.2)% 11.8% 10.1%
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Certain matters discussed in this report, excluding historical information,
include forward-looking statements. Certain words, such as, but not limited to,
"estimates," "expects," "anticipates," "intends," "believes," and variations of
these words, identify forward-looking statements that involve uncertainties and
risks. Although Washington Gas Light Company (company) believes such
forward-looking statements are based on reasonable assumptions, it cannot give
assurance that every objective will be reached. The company makes such
statements in reliance on the safe harbor protections provided under the Private
Securities Litigation Reform Act of 1995.
As required by such Act, the company hereby identifies the following
important factors that could cause actual results to differ materially from any
results projected, forecasted, estimated or budgeted by the company in
forward-looking statements: (1) risks and uncertainties impacting the company as
a whole primarily related to changes in general economic conditions in the
United States; (2) changes in laws and regulations to which the company is
subject, including tax, environmental and employment laws and regulations; (3)
the cost and effects of legal and administrative claims and proceedings against
the company or which may be brought against the company; (4) conditions of the
capital markets utilized by the company to access capital to finance operations;
(5) the effect of fluctuations in weather from normal levels; (6) variations in
prices of natural gas and competing energy sources; (7) improvements in products
or services offered by competitors; and (8) the company's ability to develop
expanded markets and product offerings as well as to maintain existing markets
and the expenditures required to develop and provide such products and services.
COMPETITION
SOURCES OF COMPETITION
The company faces competition based on its customers' preference for
its product compared to other energy products and also in relation to the price
of those products. Currently, the most significant product-side competition is
between natural gas and electricity in the residential market. This portion of
the company's business currently contributes a substantial amount of the
company's net income. The company continues to derive the majority share of the
new residential construction market in its service territory and believes
customer preference for natural gas allows it to maintain its strong presence.
Currently, for the majority of its business, the price the company charges
its customers is based on the combination of the cost it incurs for the natural
gas commodity delivered to the entry point of the company's distribution system
and the cost it incurs to deliver natural gas from the entry point to the
customers' premises. Although the company continues to generate the majority of
its revenues from the sale and delivery of natural gas on this combined or
bundled basis, state regulatory and company initiatives are seeking to separate
or "unbundle" the sale of the natural gas commodity ("city gate supply service")
from the delivery of gas on the company's distribution system ("delivery
service"). As the company's product becomes unbundled, price competition among
the company and gas marketers for the sale of the natural gas commodity will
become more prevalent.
Unbundling city gate supply service from delivery service allows gas
marketers and non-regulated subsidiaries of other utility companies the
opportunity to gain access to the company's customers, resulting in increased
competition for city gate supply service. As discussed more fully below, local
and national non-regulated marketers have already participated in the company's
limited unbundling and customer choice programs for city gate supply service.
Competition for this market appears to be focused primarily on the price of the
natural gas commodity and is expected to continue to be driven by price. The
company believes this competition supports greater choice in energy suppliers
and, therefore, increased customer satisfaction with natural gas.
Currently, the company generally maintains a price advantage over
electricity in the jurisdictions it serves. However, electricity suppliers are
beginning initial stages of restructuring their services. Their initiatives are
generally focused on separating the generation portion of electric service from
the transmission and distribution portion. The generation service is expected to
move toward a market-based price and allow for third-party providers of
electricity to participate in retail markets. Like the unbundling that is
occurring in the natural gas commodity market, the unbundling of electricity is
likely to result in lower comparative costs for electric service and increased
competition for the company.
In the interruptible market, where customers must be capable of using a fuel
other than natural gas when demand by firm customers peaks, fuel oil is the most
significant competing energy alternative. The company's success in this market
is largely dependent on changes in gas versus oil prices. The price of natural
gas, which is primarily developed from domestic sources, is greatly influenced
by the relationship between supply and demand. However, the price of oil, much
of which comes from foreign sources, is impacted greatly by political events.
NATURAL GAS INDUSTRY RESTRUCTURING
The natural gas industry, which has traditionally included producers, interstate
pipelines and local distribution companies (LDCs) such as the company, has a
long history and has undergone many changes since its inception. Perhaps no
greater change has taken place than that experienced in the past 10 years. These
changes have generally been in response to customers' and regulators' desires to
promote competition in situations where it is economically beneficial to
consumers.
The restructuring of the natural gas industry generally began at the
producer level with the passage of the Natural Gas Policy Act in 1978, which
brought about a gradual decontrol of the wellhead price of natural gas and
allowed for market-based prices. In the pipeline segment of the industry,
Federal Energy Regulatory Commission (FERC) Order No. 636 separated the merchant
function of selling natural gas from the interstate
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WASHINGTON GAS LIGHT COMPANY
transportation and storage services of the pipeline companies in order
to increase competition. As a result of FERC Order No. 636, pipeline companies
are responsible for providing gas storage and transportation services, and LDCs
have taken on the responsibility and risk of separately obtaining storage and
transportation capacity from pipelines and procuring competitive natural gas
supplies from producers and marketers. The rates charged by pipelines for
transmission and storage are still regulated by FERC, but negotiated,
market-based rates are beginning to appear.
As an LDC, the company is undergoing changes similar to those already
experienced by producers and pipelines. Although the company continues to
generate the majority of its revenues from the combined sale and delivery of
natural gas, state regulatory and company initiatives have allowed a limited
opportunity to separate or unbundle the sale of the natural gas commodity from
the delivery of gas. The complete transition in all jurisdictions to unbundled
sale and delivery service to all customer classes could take several years.
Unbundling the city gate supply service component from the delivery service
component allows gas marketers and non-regulated subsidiaries of other utility
companies the opportunity to gain access to the company's customers. This will
result in increased competition for city gate supply service. The company has
sought and gained regulatory approval to open certain of its commercial,
industrial and residential markets to competition for the sale of the natural
gas commodity. Although opportunities are limited due to the small number of
open markets at this time, the company, through its gas-marketing subsidiary,
Washington Gas Energy Services, Inc. (WGES), actively competes against other
marketers in these programs.
Under the traditional regulatory model, where city gate supply service and
delivery service are bundled in one rate, the company's profits are derived
solely from the delivery component, not from the sale of gas. Because only
actual gas costs are passed through to customers, there is not a profit element
from the sale of the natural gas commodity by the utility. Accordingly,
unbundling the city gate supply service is not expected to have an adverse
effect on the company's ability to earn a regulated return on its distribution
system investment. In contrast, a competitive city gate supply service provides
non-regulated sellers of gas, including WGES, the opportunity to profit and to
incur the risk of loss on the sale of gas to customers. As unbundling continues
in the service territories of other gas utilities, WGES is hopeful that it can
gain an increased share of the gas commodity market and increased profit
opportunities. The company supports movement of city gate supply service toward
a fully deregulated, competitive service for all customers.
The company does not expect most delivery service components of its
operations to be subject to competition because of the economic disincentives to
others to construct duplicate facilities. The company also believes that it will
continue to earn a regulated return on its delivery service. Because of the
nature of the company's customer base and the location of its customers in
relation to the interstate pipelines, the company believes that bypass of its
facilities by other potential providers of delivery service is unlikely to be a
significant threat. Although most delivery service components are likely to
remain regulated and earn a regulated return, the company believes certain
aspects of its current delivery service could also be unbundled in the future
and the nature of the regulation with respect to these elements could change.
Activities, including but not limited to billing, reading meters, and other
services on customers premises, could be separated from the cost of providing
delivery service. The cost of these services could undergo greater scrutiny by
customers as this unbundling occurs, because customer bills could separately
display costs for city gate supply service, delivery service and other service
components. In fact, the cost of gas to the city gate and certain appliance
service functions are separated on the company's bills now. To the extent
markets develop for these other service components, it will be important for the
company to ensure its costs are at market-clearing levels. Segregation of costs
of individual services combined with development of new products will also allow
the company to package its services in new bundles on which its customers place
more value. It could also allow the company to access markets outside of its
traditional service area to perform these services.
Unbundled service maximizes choices for customers, creates new opportunities
for service providers and generates potential benefits to shareholders. In
recognition of customer demand for choice in natural gas suppliers, the company
seeks to provide these customers with desired products, services and
convenience. The company believes that success in future energy markets will not
be driven by profits from one product or service, but instead will hinge on a
company's ability to provide, at competitive prices, multiple products and newly
bundled service packages consumers value. Non-regulated energy products and
services that the company already offers include the design and installation of
energy equipment, heating and air-conditioning inspections on both gas and
electric equipment, and energy-related consumer financing.
Currently, some states have instituted initiatives to further extend the
benefits of competition to the consumer. These include performance-based
regulation for gas cost recovery by LDCs and a greater focus on incentive
regulation or basing cost recovery on external measures of efficiency. Depending
on the circumstances in the jurisdictions in which the company operates, some of
these types of alternatives could be initiated on an interim basis before
competitive city gate supply service is fully implemented.
The significant level of change in energy markets provides both
opportunities and challenges to the company over the next several years. Factors
that will likely be important to the company's and its marketing subsidiary's
successes include: (1) their ability to ensure access to a supply of natural gas
and pipeline capacity at competitive prices; (2) their ability to react quickly
to changing market conditions and modify or rebundle their products, services
and conveniences that their customers value; and (3) the timing and extent of
access to their markets by other competitors.
UNBUNDLING IN THE COMPANY'S MAJOR JURISDICTIONS
The company has actively promoted competition for the sale of natural gas. The
company's goal is to provide customers with the products, services and
conveniences they want and in addition gain new opportunities to profit from the
sale of natural gas through its gas-marketing subsidiary, WGES. Programs
allowing such competition are taking place, at different rates, in the company's
major jurisdictions.
Unbundling initiatives have progressed furthest in Maryland. Currently,
competitive natural gas supply options are available in Maryland for all
interruptible customers, and certain firm commercial and residential customers.
For large commercial customers, a tariff change effective September 1, 1997
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lowered the eligibility threshold from 40,000 to 20,000 therms of annual usage.
As a result of this change, customers with 55% of the annual throughput of this
class in Maryland have a choice of gas commodity suppliers.
The company's pilot program for small commercial customers in Maryland is
in its second year. The 4,400 participating customers have chosen from among
four gas commodity suppliers to satisfy their requirements. These customers
represent 53% of the company's small commercial customers' annual throughput
in Maryland.
The company's Customer Choice pilot program for Maryland residential
customers, one of the first in the nation, is in its second year. Under this
program, customers may choose their suppliers of natural gas and the suppliers,
including WGES, may make profits on such sales. Effective November 1, 1997, the
number of customers eligible to choose their gas commodity supplier under this
program increased to 25,000 customers (8.3% of the company's Maryland
residential customers). Of this total, approximately 18,300 customers have
signed up with one of four participating gas commodity suppliers, including the
company's gas-marketing subsidiary, WGES. Approximately 35% of the enrollees or,
6,400 customers, signed up with WGES compared with 15% who chose WGES in last
year's pilot program. The company hopes to expand its customer choice pilot
programs over the next few years until all of the company's Maryland customers
have the option of choosing their gas commodity supplier by 2001.
The pilot programs are designed to help the company and customers manage the
transition to deregulation, identifying potential issues in the early stages and
developing effective solutions. For example, the Public Service Commission of
Maryland (PSC of MD) included an interim method of recovering transitional costs
related to contracts that reserve transportation capacity with interstate
pipelines in its order approving the recent pilot program. As customers choose
other gas commodity suppliers, the needed amount of pipeline capacity the
company has under contract diminishes. To the extent the company is unable to
reduce its contractual obligations, these costs could become "stranded" by the
company's inability to pass these costs on as current practices allow. The PSC
of MD's order allows the company to charge the cost of this capacity to other
marketers and/or customers.
In Virginia, only interruptible customers have an opportunity to choose
their supplier of the natural gas commodity. In fiscal year 1997, the State
Corporation Commission of Virginia (SCC of VA) approved the company's request to
revise its interruptible delivery service tariff to expand the eligible base of
interruptible customers who can purchase gas from third-party suppliers,
including WGES. The revised tariffs, effective January 1, 1997, reduced the
minimum annual requirement for delivery service from 250,000 to 60,000 therms.
Approximately 85% of the company's interruptible customers in Virginia can now
choose their natural gas commodity supplier. The company plans to file a request
with the SCC of VA in the next few months to offer a gas commodity supplier
choice program for certain commercial and residential customers.
In the District of Columbia, the company has filed tariff proposals with the
Public Service Commission of the District of Columbia (PSC of DC) to expand the
number of interruptible and large commercial customers eligible to purchase gas
from third-party suppliers. Currently, approximately 62% of the company's
interruptible customers in the District of Columbia can choose their natural gas
commodity supplier. The company has also proposed a program to allow third-party
sales to large firm commercial customers and a two-year pilot program that would
allow third-party gas sales to a limited group of residential customers. The PSC
of DC has held hearings to address each of the company's proposals and a
decision is expected in the near future.
ELECTRIC INDUSTRY RESTRUCTURING
Although the natural gas industry has progressed further toward unbundling and
deregulation than the electric industry, recent electric deregulation movements
at both the local and national levels have implications for the gas industry.
The company expects that, similar to the gas industry, the local distribution
function of transporting electricity will remain regulated.
Early movements toward deregulation in the electric industry have included:
(1) the Energy Policy Act of 1992, which allowed non-regulated independent power
producers to sell power to wholesale customers in competition with regulated
electric utilities; and (2) FERC Order No. 888, issued in 1996, which intended
to further increase competition within the electric industry beginning in 1998.
FERC Order No. 888 addresses open access and stranded cost issues. Open
access provisions stimulate wholesale electric power sales competition by
requiring public utilities that own, control or operate electric transmission
lines to file non-discriminatory tariffs that offer others the same transmission
services they provide themselves, under comparable terms and conditions. These
utilities must also use these tariffs for their own wholesale energy sales and
purchases. The order also provides that stranded costs, the unrecovered costs
incurred by electric utilities in anticipation of continued service to their
customers, are eligible for recovery, under certain terms and conditions, from
customers who use open access to move to another electricity supplier.
Direct customer access to electricity providers at the retail level is being
implemented in several states in early 1998 and being studied in many more.
Regulatory changes at the state level should increase competition between
electricity providers and in relation to competing fuels, such as natural gas.
Over time, this competition should tend to reduce prices to consumers.
All of the company's major jurisdictions are investigating the advisability
of mandating retail electric unbundling. The company supports moving to an
unbundled electric market and has actively participated in proceedings in its
jurisdictions. In Maryland, the PSC of MD is studying whether Maryland electric
utilities should be required to unbundle services and permit competition in
providing electricity to consumers. The PSC of MD staff issued a report
recommending phased-in unbundling beginning in the spring of 1998, with no
movement of electricity until 2000. The company submitted testimony to the PSC
of MD that largely supported the staff's conclusions, and expects the commission
to issue a decision in December 1997. In addition, the Maryland General Assembly
convened a Task Force to look at the issues created by the introduction of
competition for electricity. The Task Force is expected to issue a report
shortly.
In the District of Columbia, the PSC of DC is conducting a similar review of
electric industry restructuring, which covers many of the same issues faced by
the FERC, Maryland and other local commissions. The company has actively
participated in the matter to date, sponsoring testimony that calls for the
unbundling of electric services and permits competition in providing electricity
to consumers.
In Virginia, the company recently addressed the state's Joint Study
Committee on Restructuring the Electrical Utility Industry. The company proposed
a plan to introduce competitive retail sales to the Virginia electricity
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WASHINGTON GAS LIGHT COMPANY
market as early as 1998. The plan includes provisions for service
reliability, consumer education and protection, taxation, investment recovery,
and penalties for anti-competitive practices. The staff of the SCC of VA has
proposed a Transition Model that would not allow the introduction of
competition in the Virginia electricity market until at least 2000.
As local regulatory commissions move forward on electric deregulation, the
company is planning to take advantage of resulting new opportunities. In
addition to its gas-marketing activities, WGES, having received a power
certificate from the FERC, hopes to sell electricity as soon as electricity
markets open.
INDUSTRY CONSOLIDATION
Many in the energy industry, including the company, believe that the
increasingly deregulated and more competitive energy industry will continue to
lead to industry consolidation, combination, disaggregation and other strategic
alliances and restructuring as energy companies seek to offer a broader range of
energy services to compete more effectively in attracting and retaining
customers. For example, affiliations with other operating utilities could
potentially result in economies and synergies, and combinations could provide a
means to offer customers a more complete range of energy services. Others are
discontinuing operations in certain portions of the energy industry or divesting
portions of their business and facilities.
Consolidations will present combining entities with the challenges of
remaining focused on the customer and integrating different organizations. In
the immediate vicinity of the company, if the proposed merger of Baltimore Gas
and Electric Company and Potomac Electric Power Company is accomplished, it is
expected to affect the competitive environment in the company's service
territory.
Utility companies are also turning to business alliances to improve their
market position. Electric and gas utilities are joining with various non-utility
companies to offer customers packages of products and services ranging from
telephone service and home security to cable television, in addition to standard
heating and cooling. The company continues to survey business alliance
opportunities for potential benefits to shareholders and customers. In 1997,
WGES formed an alliance with Columbia Energy Services, the gas-marketing
subsidiary of The Columbia Gas System, Inc., to provide natural gas services in
the state of Maryland, but outside of the company's traditional service
territory. To date, the alliance has contracted to provide natural gas to, among
others, more than 200 state facilities, including hospitals and schools, with
the possibility for other Maryland state agencies and local governments to sign
up with the alliance for gas service in the future.
ACCOUNTING FOR REGULATED ACTIVITIES
As the industry continues to address changes that have the effect of increasing
the level of competition the company faces, the cost-of-service regulation the
company uses to ensure it is adequately compensated for the costs it has
incurred in the provision of its regulated services will continue to evolve.
Non-traditional ratemaking initiatives and market-based pricing of products and
services could have additional financial implications for the company. The
company accounts for its regulated activities in accordance with Statement of
Financial Accounting Standards No. 71, "Accounting for the Effects of Certain
Types of Regulation" (SFAS No. 71). In certain circumstances, SFAS No. 71 allows
entities whose rates are determined by third-party regulators to defer costs as
"regulatory" assets in the balance sheet to the extent that they are expected to
be recovered in future rates. However, as competition increases and the company
becomes more subject to the impact of deregulation and the attendant effects
that it brings, the company may not be able to continue to apply SFAS No. 71 to
all or parts of its business. If this were to occur, the company would be
required to apply accounting standards utilized by non-regulated enterprises.
This would require the charging to expense, at the time the company determined
the provisions of SFAS No. 71 no longer apply, costs previously deferred as
regulatory assets in the Consolidated Balance Sheets. The composition of
regulatory assets is shown in Note 1 to the Consolidated Financial Statements.
While the company believes the provisions of SFAS No. 71 continue to apply to
its regulated operations, the changing nature of its business requires it to
continually assess the impact of those changes on its accounting policies.
Please refer to Note 11 to the Consolidated Financial Statements for a
discussion of an on-going proceeding in the company's Virginia jurisdiction
regarding SFAS No. 71 as it applies to the Virginia jurisdictional portion of
regulatory assets.
ORGANIZATIONAL REDESIGN
In 1996, in response to changing requirements and greater competition
in the markets in which it operates, the company announced and began
implementing a corporate reorganization. The reorganization moved the company
away from a traditional, functional structure and towards a more
customer-focused organization designed to encourage innovation, initiative and
teamwork. The new structure flattened the corporate hierarchy and resulted in
fewer supervisory positions.
In the course of the reorganization, the company incurred various expenses,
including professional consulting fees and costs associated with a voluntary
separation pay program for certain eligible supervisory employees. In fiscal
year 1996, the company recorded non-recurring operation expenses of $13.4
million related to the reorganization.
GAS SUPPLY AND CAPACITY
The company has the responsibility of acquiring both sufficient gas supplies to
meet customer requirements and appropriate pipeline capacity to ensure delivery
to the company's distribution system.
While considering the continuing trend toward unbundling the sale of the gas
commodity from the delivery of the commodity to the customer, the company must
ensure that it contracts for supply and capacity levels that will allow it to
remain competitive. The company has adopted a diversified portfolio approach
designed to satisfy the supply and deliverability requirements of its customers.
The company maintains numerous sources of supply, dependable transportation and
storage arrangements and its own substantial storage and peaking capabilities to
meet the demands of its customers.
The company has 13 long-term gas supply contracts with various producers or
marketers that expire between fiscal years 1998 and 2004. Under these contracts,
the company can purchase up to 102 million dekatherms of natural gas per year.
The company acquires any supplies not obtained
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under these long-term contracts from seasonal contracts or from
short-term purchases on the spot market. In fiscal year 1997, the company
acquired supplies from a combination of 69 producers or marketers, including
volumes acquired under the 13 contracts previously discussed.
Of the anticipated annual sendout, the company expects to deliver 73% under
contracts with pipelines for firm transportation and 23% from pipelines under
contracts for storage on their transportation system with the remainder
supplied by company-owned peak-shaving facilities or other peak-shaving
sources. The company has contracts for firm storage and transportation services
with four pipeline suppliers that connect directly to the company's
distribution system and four other upstream pipelines. The company pays fixed
charges to these direct and upstream pipeline suppliers for the services they
provide under contracts with termination dates ranging from fiscal years 1998
to 2015.
The company includes the cost of natural gas and pipeline services,
incurred under the contracts previously described, in purchased gas
costs and recovers these costs in the rates charged to customers, subject to
regulatory review. The company's jurisdictional tariffs contain gas cost
mechanisms that provide for the recovery of actual invoice cost of gas
applicable to firm customers. The company believes it prudently entered into
its gas contracts and that the costs being incurred should be recoverable from
customers. If the current gas cost recovery mechanisms are removed in the
future as part of unbundling or other initiatives, the company could be
impacted to the extent its gas costs are not competitive and there are no other
satisfactory regulatory mechanisms available to recover any costs that would
exceed market prices. The company continues to seek opportunities to
restructure existing contracts to maximize the competitiveness of its gas
supply portfolio. See Note 11 to the Consolidated Financial Statements for a
further discussion of the commitments under the contracts previously described.
The company continues to pay to the pipelines transition costs associated
with the implementation of FERC Order No. 636. This matter is discussed in Note
8 to the Consolidated Financial Statements.
LABOR MATTERS
The company has three unions that represent five "bargaining units" or groups of
employees at the company and its subsidiaries. The three unions are the Office
and Professional Employees International Union Local No. 2, the International
Brotherhood of Electrical Workers Local 1900, and the International Brotherhood
of Teamsters Local 96 (Teamsters Local 96). Teamsters Local 96, formerly known
as the International Union of Gas Workers (IUGW), represents workers separately
at the company and at its subsidiary, Shenandoah Gas Company. At September 30,
1997, the company had labor contracts with all of its bargaining units except
the Teamsters Local 96 bargaining unit at the parent company.
On December 11, 1997, field and service personnel of the parent company
represented by Teamsters Local 96 voted to ratify the company's contract offer
of December 5, 1997. The contract, which expires on May 31, 2000 and covers
approximately 830 employees, allows the company more flexible deployment options
of its work force. The agreement contains a general wage increase of 2.25% in
June 1998. In addition, Teamsters Local 96 employees may earn a lump-sum cash
payment for fiscal year 1998 if the company exceeds a targeted return on
equity. The company's agreements with each bargaining unit now provide for
incentive payment opportunities for every union-eligible employee based on the
company's return on equity.
RESULTS OF OPERATIONS
EARNINGS
1997 VS. 1996. Net income applicable to common stock for 1997 was $80.7 million,
reflecting a small increase over last year. Weather in the most recent year was
15.2 % warmer than the prior year. The warmer weather reduced the total amount
of firm therm deliveries in the current year and, as a result, lowered net
revenues, despite a 3.4% increase in customer meters. Operation expenses
declined by more than the drop in net revenues, primarily reflecting the absence
in 1997 of non-recurring costs recorded last year associated with the company's
redesign of its organization and improved operating efficiencies this year.
Higher other income (loss)--net included earnings generated from the company's
non-regulated gas-marketing subsidiary. Earnings per average common share were
$1.85, which were the same as the prior year. Average common shares outstanding
increased by less than 1.0% over last year. The company earned 14.1% on average
common equity in 1997 compared to 15.0% in 1996.
NET INCOME APPLICABLE TO COMMON STOCK
(MILLIONS)
**this graph presented the company's net
income applicable to common stock
for 1992-1997
Year Millions of Dollars
1992 50.9
1993 53.7
1994 59.1
1995 61.6
1996 80.3
1997 80.7
1996 VS. 1995. Net income applicable to common stock for 1996 was $80.3
million, which was $18.7 million higher than the results for 1995. Weather
during 1996 was substantially colder than the prior year, measuring 24.9% colder
than 1995. The colder weather and a 2.9% increase in the number of customer
meters resulted in a significant increase in firm therm deliveries and in net
revenues. Reduced interest expense also contributed to the increase in
EARNINGS PER AVERAGE COMMON SHARE
**this graph presented the company's
earnings per average common share
for 1992-1997
Year Dollars
1992 1.26
1993 1.31
1994 1.41
1995 1.45
1996 1.85
1997 1.85
25
7
WASHINGTON GAS LIGHT COMPANY
net income. Increased other operating expenses, which included expenses
amounting to $13.4 million applicable to costs associated with the
redesign of the company's organization, and lower other income (loss)--net
partially offset the positive impact of the colder weather. Earnings per average
common share were $1.85, or $0.40 higher than 1995. Average common shares
outstanding increased by 1.8%. The company earned 15.0% on average common equity
in 1996 compared to 12.3% in 1995.
NET REVENUES
Net revenues decreased by $17.0 million, or 3.4%, in 1997 and increased by $61.1
million, or 13.9%, in 1996. The following table provides factors contributing to
the changes in net revenues between years.
COMPOSITION OF THE CHANGES IN NET REVENUES
Increase/(Decrease)
From Prior Year
1997 1996
- -------------------------------------------------------------
(Millions)
Gas Delivered to Firm Customers:
Volumes $(25.8) $56.5
Rate Increases 0.2 2.7
Gas Delivered to Interruptible Customers 2.9 (1.8)
Gross Receipts Taxes 0.2 (0.7)
Other 5.5 4.4
------ -----
$(17.0) $61.1
====== =====
1997 VS. 1996.
GAS DELIVERED TO FIRM CUSTOMERS
The level of gas delivered to firm customers is highly sensitive to the
variability of weather since such a large portion of the company's deliveries of
natural gas is used for space heating. The company's rates are based on normal
weather. Weather for 1997 was less than 1% colder than normal while weather for
1996 was 18.6% colder than normal. For a comparison of actual weather to normal
for the last five years, see the Selected Financial Data on page 20. The company
has no weather normalization tariff provision in any of its jurisdictions.
However, the company has declining block rates in two of its three major
jurisdictions that reduce the impact on net revenues of deviations in weather
from normal.
In the Maryland jurisdiction, the company continues to expand the unbundling
of certain services to firm customers. Under the Maryland tariffs, certain firm
commercial and approximately 25,000 residential customers are eligible to
acquire their gas supply from the company (bundled gas service) or a third-party
supplier, such as gas marketers and non-regulated subsidiaries of other utility
companies. The company continues to serve all customers by delivering gas
through its distribution system (delivery service), which results in the company
earning a regulated return on this service. Customers that do not acquire their
gas supply from the company do not affect net revenues since margins generated
from delivering customer-owned gas are equivalent to those earned on bundled gas
service. In those instances where customers choose to buy their gas from the
company's gas-marketing subsidiary, the company has an opportunity to earn
profits and assumes the risk of incurring losses on the sale of the gas
commodity. The results of the company's gas-marketing activities are included in
the caption Other Income (Loss)--Net in the Consolidated Statements of Income.
Therm deliveries to firm customers, which include the amounts reflected in
the Selected Financial Data shown on page 20 for residential gas sold and
delivered, firm commercial and industrial gas sold and delivered, and firm gas
delivered for others, decreased by 97.2 million therms (8.0%) in 1997, causing a
decrease in net revenues of $25.8 million. This decline was due to 15.2% warmer
weather in 1997, partially offset by a 3.4% increase in customer meters.
The effect of increased rates on net revenues in 1997 amounted to $0.2
million and was limited to an increase granted to Shenandoah Gas Company, a
distribution subsidiary. The company had no rate requests outstanding in any of
its major jurisdictions at September 30, 1997.
GAS DELIVERED TO INTERRUPTIBLE CUSTOMERS
For services provided to interruptible customers, the company requires that
these customers be capable of using an alternate fuel as a substitute for
natural gas when the company determines their service must be interrupted to
accommodate firm customers' needs during periods of peak demand. Nearly all of
this customer class has the option of buying bundled gas service from the
company or electing to have the company deliver gas purchased from third-party
suppliers.
Therms delivered to interruptible customers, which include the amounts in
the Selected Financial Data shown on page 20 for interruptible commercial and
industrial gas sold and delivered, and interruptible gas delivered for others,
increased by 65.3 million therms (24.4%) when compared to 1996. This increase
resulted primarily from the company interrupting service to these customers to
meet its firm commitments to a greater extent in the prior year due to the
significantly colder weather in that period. Net revenues associated with therms
delivered to this customer class increased by $2.9 million.
The effect on net income of changes in delivered volumes and prices to the
interruptible class is minimized by margin-sharing arrangements that are part of
the design of the company's rates. Under these arrangements, the company returns
a majority of the margins earned on interruptible gas sales and deliveries to
firm customers after a gross margin threshold is reached or in exchange for the
shift of a portion of the fixed costs of providing service from the
interruptible to the firm class.
GROSS RECEIPTS TAXES
Various taxing authorities levy a gross receipts tax on the company based on
revenues. The company collects these taxes from customers and remits them to the
various taxing authorities. Gross receipts taxes reflected in revenues increased
by $0.2 million in 1997. The company records the amounts collected from
customers in general tax expense and, therefore, there is no effect on net
income.
OTHER
Other net revenues increased by $5.5 million. Included in this caption are
amounts associated with gas deliveries to customers for electric generation,
amounts generated from maximization of the value of storage facilities and
miscellaneous other operating revenues not associated with volumes of gas sold.
26
8
The company has two customers to which it sells and/or transports gas to
facilities in Maryland where deliveries are used to generate electricity.
Volumes delivered for electric generation in the current period increased by
34.6 million therms from the same period last year, primarily due to the second
customer being added in August 1996. The impact on net revenues and net income
of increases or decreases in volumes delivered for electric generation is not
significant due to a margin-sharing arrangement in the state of Maryland. Under
this arrangement, the company returns substantially all of the gross margins
earned on such sales and deliveries of gas, less related expenses, to firm
customers after the company recovers its investment in the facilities
constructed to serve these two customers. By returning margins from these
deliveries to firm customers in the Maryland jurisdiction, the cost of providing
gas to customers is lowered, thereby enhancing the company's competitive
position.
NET REVENUES AND COST OF GAS
(MILLIONS)
**this graph presented the company's net
revenues and cost of gas
for 1992-1997
Net Cost of
Year Revenues Gas Total
1992 393 353 746
1993 415 479 894
1994 453 462 915
1995 439 390 829
1996 500 470 970
1997 483 573 1056
COST OF GAS
The company's cost of natural gas includes relatively fixed costs known as
demand charges that are paid to pipeline companies for the transportation and
storage of commodity purchases and variable commodity rates that are paid to
natural gas producers. Variations in the company's cost of gas expense result
from changes in gas sales volumes, the price of gas purchased and the level of
gas costs collected through the operation of the firm gas cost recovery
mechanisms included in the company's rate schedules. The company defers in the
current period any difference between actual firm gas costs incurred and the
amount of current gas cost recoveries included in revenues. Any differences are
recovered or refunded to customers in subsequent periods. Therefore, increases
or decreases in the cost of gas associated with sales made to firm customers
have no effect on net income.
The company's cost of gas expense on a per therm basis, excluding the cost
and related volumes applicable to sales made outside of the company's service
territory, increased to 41.11 cents from the 1996 level of 32.81 cents. The
increase resulted primarily from: (1) an increase in the cost of gas recovered
from customers reflecting higher commodity gas prices this year and the effect
of the collection from firm customers of the prior year's undercollection of gas
costs; (2) a decline in the amount of refunds received from pipelines this year;
and (3) the effect of fewer volumes purchased which increases fixed costs per
therm. The commodity cost of gas invoiced the company was 30.96 cents and
26.53 cents per therm for 1997 and 1996, respectively, which reflects the
higher market prices incurred during the early winter months of fiscal year
1997.
1996 VS. 1995.
GAS DELIVERED TO FIRM CUSTOMERS
Therms delivered to firm customers rose by 217.3 million therms (21.7%) in 1996,
causing net revenues to rise by $56.5 million. The significant increase was
primarily caused by weather that was 24.9% colder than the prior year and a 2.9%
increase in firm customer meters.
The impact of increased rates on net revenues for 1996 was $2.7 million. The
increase was due to the effect of higher rates granted in the state of Maryland
in December 1994 that were not fully reflected in net revenues for fiscal year
1995, and amounts granted Shenandoah Gas Company.
GAS DELIVERED TO INTERRUPTIBLE CUSTOMERS
Therms delivered to interruptible customers declined by 41.5 million therms when
compared to 1995. The decrease was due primarily to significantly longer
interruptions in service to these customers in the first and second fiscal
quarters of 1996 due to the colder weather. Net revenues associated with therms
delivered to this customer class declined by $1.8 million.
GROSS RECEIPTS TAXES
Gross receipts taxes decreased by $0.7 million from 1995. The effect of a drop
in the fuel tax rate for service to customers in Montgomery County, Maryland was
largely offset by higher other gross receipts taxes due to higher revenues
because of the colder weather. As discussed previously, the company records the
amount collected from customers in general tax expense and, therefore, net
income is not affected.
COST OF GAS
The company's cost of gas expense on a per therm basis, excluding the cost and
related volumes applicable to sales made outside of the company's service
territory, increased to 32.81 cents from the 1995 level of 28.68 cents. The
increase was primarily due to an increase in the cost of gas recovered from
customers reflecting higher commodity gas prices resulting from increased demand
because of the significantly colder weather. This factor was partially mitigated
by the effect of a reduced firm cost of gas due to the return of prior year
overcollected gas costs to firm customers in 1996, increased refunds from
pipelines during the year, and the effect of increased volumes delivered which
reduced the impact of fixed demand cost on the cost per unit. The commodity cost
of gas invoiced the company for 1996 increased to 26.53 cents per therm from the
1995 level of 19.33 cents per therm due to the effect of the increased demand
during the colder weather.
OTHER OPERATING EXPENSES
1997 VS. 1996. Operation and maintenance expenses declined by $23.9 million
(10.8%) in 1997. The decline was primarily caused by the absence in 1997 of
$13.4 million of non-recurring charges recorded last year associated with the
company's redesign of its organization. For a further discussion of the
company's reorganization, please refer to page 24 and Note 10 to the
Consolidated Financial Statements. Also contributing to this decline were lower
labor and employee benefit costs primarily caused by reduced employee levels.
Partially offsetting these decreases were higher uncollectible expenses due
primarily to increased revenues caused by higher gas costs during the most
recent heating season.
27
9
WASHINGTON GAS LIGHT COMPANY
At September 30, 1997, the company had 2,059 utility employees, a decline of
205 employees (9.1%) from the level at September 30, 1996. For a further
discussion of labor-related issues, please refer to the caption entitled "Labor
Matters" on page 25.
OTHER OPERATING EXPENSES
(MILLIONS)
**this graph presented a breakdown of
the company's operating expenses
for 1992-1997
Operation & Depreciation and
Year Maintenance Taxes Amortization Total
1992 180 94 37 311
1993 185 104 40 329
1994 207 109 44 360
1995 195 106 46 347
1996 221 118 48 387
1997 197 119 52 368
Depreciation and amortization increased by $3.5 million (7.3%) primarily due
to the company's increased investment in new plant and equipment. Capital
expenditures totaled $139.9 million in 1997, and the composite depreciation rate
was 2.94% compared to 2.96% in 1996.
General taxes increased by $2.7 million (3.9%) primarily due to increased
property taxes resulting from greater investments in plant and equipment and
higher gross receipts taxes. Further information on general taxes is shown in
Note 6 to the Consolidated Financial Statements.
The composition of the change in income tax expense is detailed in the
Consolidated Statements of Income Taxes on page 37.
1996 VS. 1995. Operation and maintenance expenses increased by $26.1 million
(13.4%) in 1996. Of this increase, $13.4 million was attributable to
non-recurring charges related to the redesign of the company's organization.
Other factors that contributed to the increase included: (1) increased
compensation to employees, including cash payouts to management and
union-eligible employees and compensation in the form of a common stock grant;
(2) higher labor charged to operating expenses in 1996 as a result of the
lockout of certain union-eligible employees in 1995, which lowered costs that
year; and (3) increased amortization of environmental expenses. Items that
partially offset these increases were lower employee benefits expenses,
including reduced health care expenses reflecting the effect of cost saving
programs and lower pension expenses, and the effect of attrition in the work
force on labor expense.
At September 30, 1996, the company had 2,264 utility employees, a decline of
141 employees (5.9%) from the level at September 30, 1995.
Depreciation and amortization increased by $1.5 million (3.2%) in 1996. The
increase was due to additional depreciation of $2.7 million on the company's
rising investment in plant and equipment. Partially offsetting the additional
depreciation was a decrease in the amount of amortization expense due to the
company's full recovery of its investment to serve certain interruptible
customers in the state of Maryland. The PSC of MD has permitted the company to
recover its investment to serve certain interruptible customers before sharing
with firm customers any margins earned on sales and deliveries to these
customers. In 1996, capital expenditures totaled $124.4 million and the
composite depreciation rate was 2.96% compared to 2.97% in 1995.
General taxes increased by $0.8 million (1.1%) in 1996. This increase was
primarily due to higher property taxes and higher payroll taxes, including
amounts associated with additional employee compensation related to the
company's redesign of its organization. Partially offsetting these increases
were lower gross receipts taxes, primarily reflecting a drop in the fuel tax
rate for service to customers in Montgomery County, Maryland. Further
information on general taxes is shown in Note 6 to the Consolidated Financial
Statements.
The composition of the change in income tax expense is detailed in the
Consolidated Statements of Income Taxes on page 37.
OTHER INCOME (LOSS)--NET
1997 VS. 1996. Other income (loss)--net for 1997 was $0.9 million, an
improvement from 1996 of $1.8 million over the 1996 loss of $0.9 million. The
improvement over last year primarily resulted from valuation reserves for
certain non-utility activities recorded in 1996 and higher earnings
generated from the company's gas-marketing subsidiary, WGES, during its first
full year of operation in 1997. During 1997, WGES sold over 112 million therms,
including 12 million therms sold outside of the company's traditional service
territory.
1996 VS. 1995. Other income (loss)--net declined by $3.5 million in 1996.
The decline primarily reflects the effect of: (1) a 1995 $1.9 million
after-tax gain on the sale of a non-utility subsidiary; (2) valuation reserves
recorded in 1996 related to certain non-utility investments to reflect
diminished expectations of their value; and (3) lower interest income on
temporary cash investments due to substantially lower invested balances and
lower interest rates earned on amounts invested.
INTEREST EXPENSE
1997 VS. 1996. Interest expense increased by $3.5 million (11.6%) in 1997,
reflecting higher interest expense on both long-term and short-term debt,
partially offset by lower interest on supplier refunds. The increase in interest
on long-term debt of $2.5 million was primarily due to a $52.4 million increase
in the average amount of long-term debt outstanding, partially offset by a
decline of 0.3 percentage points in the weighted-average cost of such debt. The
company's embedded cost of long-term debt was 7.1% at September 30, 1997,
compared to 7.5% at September 30, 1996. The decline in the embedded cost of
long-term debt was primarily due to the partial retirement of the 8 5/8% Series
First Mortgage Bonds (FMBs) in March 1997. Other interest expense increased by
$1.0 million, reflecting increased short-term debt interest of $2.0 million
primarily resulting from a $36.5 million increase in the average amount of
short-term debt outstanding, partially offset by a 0.05 percentage point decline
in the weighted-average cost for such debt. Further impacting other interest
expense was a $0.7 million decrease in interest on supplier refunds, reflecting
a decline in the average balance due to customers. Please refer to Short-Term
Cash Requirements and Related Financing on page 29 for a discussion of
fluctuations in short-term debt balances.
1996 VS. 1995. Interest expense declined by $1.3 million or 4.1% in 1996.
The decline was primarily due to reduced interest expense on both long-term and
short-term debt. Interest on long-term debt dropped by $0.4 million due to a
decline in the weighted-average cost of such debt of 0.2 percentage points,
partially offset by a $6.1 million increase in the average amount of long-term
debt outstanding. The company's embedded cost
28
10
of long-term debt was 7.5% at September 30, 1996, compared to 7.7% at September
30, 1995. The drop in the cost of long-term debt was due primarily to the effect
of the refinancing of two FMB Series in January 1996. Other interest expense
decreased $0.9 million, primarily due to decreased short-term debt interest of
$0.6 million due to a $9.9 million drop in the average amount of such debt
outstanding and a decline in the weighted-average cost of short-term debt of
0.13 percentage points.
LIQUIDITY AND CAPITAL RESOURCES
The company has historically had a goal of maintaining its common equity ratio
in the mid-50% range of total capital and a general policy of repaying
short-term debt after the heating season ends in the spring as significant
levels of current assets are converted into cash. Accomplishing these objectives
and maintaining sufficient cash flow are necessary to preserve the company's
credit ratings and to allow access to capital at relatively low costs. At
September 30, 1997, total capitalization, excluding current maturities, was
composed of 56.2% common equity, 2.7% preferred stock and 41.1% long-term debt.
Effective November 1, 1996, shares issued through the Dividend Reinvestment and
Common Stock Purchase Plan (DRP) and Employee Savings Plans are purchased on the
open market instead of being issued as new shares.
CAPITALIZATION
(MILLIONS)
**this graph presented a breakdown of
the company's capital structure
for 1992-1997
Common Preferred Long-Term
Year Equity Stock Debt Total
1992 433 29 294 756
1993 458 28 348 834
1994 486 28 342 856
1995 513 29 329 871
1996 559 28 354 941
1997 589 28 432 1049
SHORT-TERM CASH REQUIREMENTS AND RELATED FINANCING
The company's business is highly weather sensitive and seasonal. In 1997, 74% of
total therms delivered in the company's franchise area (excluding deliveries to
two electric generation facilities) were delivered in the first and second
fiscal quarters. This weather sensitivity causes short-term cash requirements to
vary significantly during the year. Cash requirements peak in the fall and
winter months when accounts receivable, accrued utility revenues and storage gas
are at or near their highest levels. After the winter heating season, these
assets are converted into cash and are used to liquidate short-term debt and
acquire storage gas for the subsequent heating season.
Storage gas, which represents gas purchased from producers and primarily
stored in facilities owned by interstate pipelines, is generally paid for
between heating seasons and withdrawn during the heating season. Significant
variations in storage balances at September 30 are usually caused by the price
paid to producers and marketers, which is a function of short-term market
fluctuations in gas costs. Such costs are recovered from customers as a
component of the cost of gas.
Variations in the timing of collections of gas costs under the company's gas
cost recovery mechanisms and the level of refunds from pipeline companies that
will be returned to customers can significantly affect short-term cash
requirements. At September 30, 1997, the company had a temporary net
undercollection of gas costs of $7.0 million, compared to a $26.6 million net
undercollection at September 30, 1996. Amounts that are undercollected and
overcollected are reflected in the captions Gas costs due from customers and Gas
costs due to customers in the Consolidated Balance Sheets. Most of the current
balances will be collected from or returned to customers in fiscal year 1998. At
September 30, 1997, refunds received from pipelines that are being returned to
the company's customers totaled $6.1 million, compared to $8.3 million at
September 30, 1996.
The company uses short-term debt in the form of commercial paper and
short-term bank loans to fund seasonal requirements. Alternative sources include
unsecured lines of credit, some of which are seasonal, and $160 million in a
revolving credit agreement maintained with a group of banks. The company
activates these financing options to support or replace the company's commercial
paper. Additional information regarding the company's short-term borrowing
capabilities is included in Note 2 to the Consolidated Financial Statements.
At September 30, 1997, the company had notes payable outstanding of $67.9
million, as compared with $115.3 million at September 30, 1996. The reduction
was due, in part, to the company's issuance of Medium-Term Notes (MTNs) in the
latter part of fiscal year 1997 to take advantage of relatively low interest
rates. At September 30, 1997, current maturities of long-term debt were $20.9
million, including $18.8 million of MTNs and a $2.0 million required
sinking-fund payment for the 8 5/8% Series FMBs.
LONG-TERM CASH REQUIREMENTS AND RELATED FINANCING
The company's long-term cash requirements are dependent upon the level of
capital expenditures, long-term debt maturity requirements and decisions to
refinance long-term debt. The majority of the company's capital expenditures are
devoted to adding new customers in its existing service area. At September 30,
1997, the company was authorized to issue up to $178 million of long-term debt
under an existing shelf registration which expires in January 1999. The nature
of the company's long-term debt is discussed in Note 3 to the Consolidated
Financial Statements.
1997. As shown in the table on page 31, capital expenditures for 1997
totaled $139.9 million. New business expenditures, which result in additional
therm sales and include amounts invested to convert customers from other energy
sources, totaled $89.3 million, or 63.8% of the total. By the end of fiscal year
1997, customer meters rose to 798,739, an increase of 26,458, or 3.4% over the
level at the end of fiscal year 1996.
In 1997, net cash provided by operating activities amounted to
$154.8 million, an increase of $95.3 million from the 1996 level. The
improvement was derived from: (1) increased collections of gas costs from
customers; (2) higher costs for gas storage withdrawals in the current year,
combined with lower levels of storage gas injections due to this year's warmer
weather; and (3) refunds made to customers in 1996 for amounts overcollected
from the implementation of an interim rate increase. Partially offsetting these
sources of cash were greater funds supporting accounts receivable primarily from
higher gas costs and a decrease in cash provided by accounts
29
11
WASHINGTON GAS LIGHT COMPANY
payable primarily due to payments made during 1997 of amounts associated with
the redesign of the company's organization.
The long-term debt issued in the current year of $125.8 million includes MTN
issuances at a weighted-average interest rate of 6.60%. Proceeds from the MTN
issuances were used to retire $27.5 million of the 8 5/8% Series FMBs in March
1997 and $8.0 million of maturing MTNs, and for other corporate purposes. The
terms of the unsecured MTNs issued are discussed in Note 3 to the Consolidated
Financial Statements.
During 1997, the sum of net income and noncash charges, less dividends on
common and preferred stock, totaled $94.5 million, representing 67.6% of capital
expenditures.
1996. Capital expenditures for 1996 totaled $124.4 million. New business
expenditures, including amounts invested to convert customers from other energy
sources, totaled $77.9 million, or 62.6% of the total. By the end of fiscal year
1996, customer meters rose to 772,281, an increase of 21,432, or 2.9% over the
level at the end of fiscal year 1995.
In 1996, net cash provided by operating activities amounted to $59.5
million, a decline of $118.7 million from the 1995 level. The sharp decrease was
due primarily to: (1) the effect of a shift from an overcollection of gas costs
from customers in 1995 to an undercollection of gas costs in 1996; (2) the
effect of a higher 1996 cost per therm to replace storage gas volumes withdrawn
during the prior winter heating season; (3) higher funds used to support
accounts receivable balances resulting primarily from higher gas costs; and (4)
refunds made to customers for amounts overcollected from the implementation of
an interim rate increase. These uses of cash were partially offset by higher net
income and increased sources of cash reflected in accounts payable due to higher
gas prices and the amounts associated with the redesign of the company's
organization.
In connection with an in-substance defeasance, discussed further in Note 3
to the Consolidated Financial Statements, the company issued $50.0 million of
unsecured MTNs at a coupon rate of 6.15%. The MTNs have a 30-year nominal life
and allow the holder to elect early maturity at par during a one-month period 30
days prior to the tenth anniversary date. Additionally, the company may redeem
the MTNs at par at any time on or after the tenth anniversary date of their
issuance up until the end of the 30-year nominal life. The $69.8 million of
long-term debt retired included $50.0 million of 7 7/8% Series FMBs retired
effective September 1, 1996, $17.325 million of 9 1/4% Series FMBs extinguished
for financial reporting purposes in accordance with the in-substance defeasance,
and a $2.5 million scheduled MTN maturity.
During 1996, the company raised $12.6 million through its DRP and Employee
Savings Plans. The sum of net income and noncash charges, less dividends on
common and preferred stock, totaled $101.0 million or 81.2% of capital
expenditures.
1995. Capital expenditures totaled $112.7 million in 1995. New business
expenditures, including conversions from other energy sources, totaled $78.9
million, or 70.0% of the total. By the end of fiscal year 1995, the company had
750,849 customer meters, an increase of 24,889, or 3.4% over the level at the
end of fiscal year 1994.
In 1995, net cash provided by operating activities amounted to
$178.2 million, an increase of $42.5 million over the 1994 level. Factors
causing this increase included: (1) lower accounts receivable balances
reflecting the timing of sales of non-utility receivables to commercial banks in
1995 and lower therm sales in September 1995; (2) a greater level of gas costs
overcollected and rate refunds due to customers in 1995; and (3) lower payments
made in 1995 related to FERC Order No. 636 transition costs that are reflected
in accounts payable. Partially offsetting these items was the effect of a lower
source of funds from storage gas inventory levels due to a smaller decline in
the cost of gas than was experienced in 1994, and increased income tax payments
in 1995 resulting from increased taxable income.
In 1995, the company issued $40 million of unsecured MTNs at a
weighted-average interest rate of 7.13%. These notes have 30-year terms with
10-year put and call options. Maturing MTNs totaled $8.5 million in 1995.
During 1995, the company raised $13.4 million through its DRP and Employee
Savings Plans. The sum of net income and noncash charges, less dividends on
common and preferred stock, totaled $68.6 million, representing 60.9% of capital
expenditures.
NON-UTILITY ACTIVITIES
During 1997, the company augmented cash flow through the sale of
$33.0 million of certain non-utility accounts receivable related to merchandise.
Similar sales of non-utility accounts receivable in 1996 and 1995 amounted to
$30.5 million and $45.1 million, respectively. In 1995, the company received
$2.0 million in cash as a result of the sale of a non-utility subsidiary.
MATURITIES AND SINKING FUND REQUIREMENTS
The amount of maturities and sinking fund requirements on long-term debt for the
ensuing five-year period is included in Note 3 to the Consolidated Financial
Statements.
SECURITY RATINGS
Shown below are the ratings on the company's debt instruments at year-end for
1997. There were no changes in these ratings from 1996.
First Mortgage Bonds
Standard & Poor's Corporation AA-
Moody's Investors Service Aa2
Fitch Investors Service, Inc. AA-
Unsecured Medium-Term Notes
Standard & Poor's Corporation AA-
Moody's Investors Service Aa3
Fitch Investors Service, Inc. AA-
Commercial Paper
Standard & Poor's Corporation A-1+
Moody's Investors Service P-1
Fitch Investors Service, Inc. F-1+
CAPITAL EXPENDITURES
The company's actual capital expenditures for fiscal years 1995-1997 and
projected capital expenditures for fiscal years 1998-2002 are shown in the table
on page 31. The company believes that the combination of available internal and
external sources of funds will be adequate to meet its capital requirements.
30
12
CAPITAL EXPENDITURES
(Millions)
Actual Projected
-------------------------- -------------------------------------------------------
1995 1996 1997 1998 1999 2000 2001 2002 Total
- ------------------------------------------------------------ -------------------------------------------------------
New Business $ 78.9 $ 77.9 $ 89.3 $ 88.1 $ 79.0 $ 75.3 $ 77.6 $ 77.6 $397.6
Replacements 25.6 34.5 36.4 35.9 31.4 31.7 31.7 32.1 162.8
Other 8.2 12.0 14.2 44.8 19.5 19.3 16.4 17.2 117.2
------ ------ ------ ------ ------ ------ ------ ------ ------
Total $112.7 $124.4 $139.9 $168.8 $129.9 $126.3 $125.7 $126.9 $677.6
====== ====== ====== ====== ====== ====== ====== ====== ======
OTHER FACTORS AFFECTING THE COMPANY
ENVIRONMENTAL MATTERS
The company and its subsidiaries are subject to various laws related to
environmental matters, as discussed in Note 9 to the Consolidated Financial
Statements.
YEAR 2000
Like all companies having business-application software programs written over
many years and a computing infrastructure including computerized devices, the
company is also affected by the so-called "Year 2000" issue. These programs,
which include the company's customer service, operations and financial systems,
were written using two-year digits to define the applicable year, rather than
four. Any of the company's programs that have time-sensitive software may
recognize a date using "00" as the year 1900 rather than the year 2000. This
could result in the computer shutting down or performing incorrect computations.
The computing infrastructure, including computerized devices, could contain
date-sensitive software that could cause the devices to fail to operate or to
operate inconsistently.
The company is completing the process of identifying the programs and
infrastructure that could be affected by the Year 2000 issue and has developed
an implementation plan to resolve the issue. The plan includes the replacement
of certain equipment and modification of certain software to recognize the turn
of the century. The plan is currently expected to result in non-recurring
expenses over the next two years of approximately $8 million to $10 million.
The plan also includes replacing certain existing systems with new
systems that will be Year 2000 operational and will provide additional strategic
information. The costs to replace these systems, of $15 million to $20 million,
will be capitalized.
The company believes, with appropriate replacement or modifications, it will
be able to operate its time-sensitive business-application software programs and
infrastructure through the turn of the century.
INFLATION
To help cope with the effects of inflation on its capital investment and
returns, the company seeks rate relief from its regulatory commissions. The most
significant impact of inflation is on the company's replacement cost of plant
and equipment. While the regulatory commissions having jurisdiction over the
company's retail rates allow depreciation only on the basis of historical cost
to be recovered in rates, the company anticipates that it will be allowed to
recover the increased cost of its investment and earn a return thereon after
replacement of the facilities occurs.
RATE INCREASES
Requests for rate increases are based on increased investment in plant and
equipment, higher operating expenses and the need to earn an adequate return on
invested capital. The company's rates did not change in any of its major
jurisdictions in 1997. A Summary of Major Rate Applications and Results is shown
below.
SUMMARY OF MAJOR RATE APPLICATIONS AND RESULTS
Increase in Annual Revenues
Amount Amount
Test Year 12 Mos. Requested Granted Allowed
Jurisdiction Effective Date Ended (Millions) (Millions) Return on Common Equity
- ------------------------------------------------------------------------------------------------------------------------------
Virginia 7/6/90 3/31/90 $ 7.7 $ 7.1 13.00%
Maryland 8/1/93 12/31/92 26.2 10.6 a/
District of Columbia 10/19/93 9/30/92 24.5 4.7 11.50
District of Columbia 8/1/94 9/30/93 17.3 6.4 b/
Virginia 9/27/94 12/31/93 15.7 6.8 11.50
Maryland 12/1/94 3/31/94 17.6 7.4 a/
a/ Rates were implemented as a result of a settlement agreement. The return
on equity indicated in the order of 11.5% was not utilized to establish
rates.
b/ Application was settled without stipulating the return on common equity.
31
13
WASHINGTON GAS LIGHT COMPANY
CONSOLIDATED STATEMENTS OF INCOME
Years Ended September 30, 1997 1996 1995
- -----------------------------------------------------------------------------------------
(Thousands, Except Per Share Data)
OPERATING REVENUES (Note 1) $1,055,754 $969,778 $828,748
Cost of Gas (Note 1) 572,925 469,925 390,041
---------- -------- --------
NET REVENUES 482,829 499,853 438,707
---------- -------- --------
OTHER OPERATING EXPENSES
Operation (Note 10) 160,193 187,817 163,518
Maintenance 36,857 33,105 31,268
Depreciation and amortization (Note 1) 51,363 47,887 46,385
General taxes (Note 6) 71,277 68,605 67,829
Income taxes (See Statements and Note 5) 47,864 49,376 37,514
---------- -------- --------
367,554 386,790 346,514
---------- -------- --------
OPERATING INCOME 115,275 113,063 92,193
Other Income (Loss)--Net 886 (874) 2,610
---------- -------- --------
INCOME BEFORE INTEREST EXPENSE 116,161 112,189 94,803
INTEREST EXPENSE
Interest on long-term debt 30,135 27,622 28,012
Other 4,007 2,976 3,882
---------- -------- --------
34,142 30,598 31,894
---------- -------- --------
NET INCOME 82,019 81,591 62,909
Dividends on Preferred Stock 1,331 1,332 1,333
---------- -------- --------
NET INCOME APPLICABLE TO COMMON STOCK $ 80,688 $ 80,259 $ 61,576
========== ======== ========
AVERAGE COMMON SHARES OUTSTANDING 43,706 43,360 42,575
========== ======== ========
EARNINGS PER AVERAGE SHARE OF COMMON STOCK $ 1.85 $ 1.85 $ 1.45
========== ======== ========
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
32
14
WASHINGTON GAS LIGHT COMPANY
CONSOLIDATED BALANCE SHEETS
September 30, 1997 1996
- ---------------------------------------------------------------------------------------
(Thousands)
ASSETS
PROPERTY, PLANT AND EQUIPMENT (Notes 1 and 3)
At original cost $1,846,471 $1,721,956
Accumulated depreciation and amortization (629,334) (591,382)
---------- ----------
1,217,137 1,130,574
---------- ----------
CURRENT ASSETS
Cash and cash equivalents 9,708 4,589
Accounts receivable 65,232 53,587
Gas costs due from customers (Note 1) 9,445 28,109
Allowance for doubtful accounts (11,043) (11,846)
Accrued utility revenues (Note 1) 21,020 15,117
Materials and supplies--principally at average cost 15,186 14,425
Storage gas--at cost (first-in, first-out) 81,072 83,829
Deferred income taxes (See Statements and Note 5) 17,447 17,888
Other prepayments--principally taxes 11,907 10,047
---------- ----------
219,974 215,745
---------- ----------
DEFERRED CHARGES AND OTHER ASSETS
Regulatory assets (Note 1) 101,956 109,515
Other 12,965 8,767
---------- ----------
114,921 118,282
---------- ----------
Total $1,552,032 $1,464,601
========== ==========
CAPITALIZATION AND LIABILITIES
CAPITALIZATION (See Statements)
Common shareholders' equity $ 589,035 $ 558,809
Preferred stock 28,430 28,440
Long-term debt (Note 3) 431,575 353,893
---------- ----------
1,049,040 941,142
---------- ----------
CURRENT LIABILITIES
Current maturities of long-term debt (Note 3) 20,862 8,006
Notes payable (Note 2) 67,900 115,278
Accounts payable 99,578 90,524
Wages payable 13,590 14,308
Dividends declared 13,224 12,787
Customer deposits and advance payments 16,662 12,997
Accrued taxes 5,699 5,594
Accrued interest 5,235 4,910
Pipeline refunds due to customers 6,054 8,262
Gas costs due to customers (Note 1) 2,418 1,488
---------- ----------
251,222 274,154
---------- ----------
DEFERRED CREDITS
Unamortized investment tax credits 21,427 22,381
Deferred income taxes (See Statements and Note 5) 136,682 128,936
Other (Notes 1, 7, 8 and 9) 93,661 97,988
---------- ----------
251,770 249,305
---------- ----------
COMMITMENTS AND CONTINGENCIES (Notes 8, 9, and 11)
Total $1,552,032 $1,464,601
========== ==========
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
33
15
WASHINGTON GAS LIGHT COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended September 30, 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------
(Thousands)
OPERATING ACTIVITIES
Net Income $ 82,019 $ 81,591 $ 62,909
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization (a) 56,886 54,517 52,329
Deferred income taxes--net 10,434 11,337 2,036
Amortization of investment tax credits (954) (972) (992)
Allowance for funds used during construction (411) (465) (443)
Other noncash charges and (credits)--net (1,444) 5,250 1,519
--------- --------- ---------
146,530 151,258 117,358
Changes in assets and liabilities:
Accounts receivable and accrued utility revenues (18,351) (7,587) 21,693
Gas costs due from/to customers--net 19,594 (55,800) 29,008
Storage gas 2,757 (30,468) 6,606
Other prepayments--principally taxes (1,860) (2,248) 43
Accounts payable 8,191 17,578 (8,485)
Wages payable (718) (817) 531
Customer deposits and advance payments 3,665 (2,411) (333)
Accrued taxes 105 (659) (3,394)
Pipeline refunds due to customers (2,208) (2,298) 2,988
Rate refunds due to customers -- (9,306) 9,306
Deferred purchased gas costs 1,543 (1,435) (2,625)
Other--net (4,445) 3,727 5,492
--------- --------- ---------
Net Cash Provided by Operating Activities 154,803 59,534 178,188
--------- --------- ---------
FINANCING ACTIVITIES
Common stock issued 312 12,637 13,368
Long-term debt issued 125,812 50,000 40,000
Long-term debt retired (35,555) (69,830) (9,322)
Premium on long-term debt retired (1,422) (2,263) --
Notes payable--net (47,378) 115,278 (52,912)
Dividends on common and preferred stock (52,033) (50,264) (48,731)
--------- --------- ---------
Net Cash Provided by (Used in) Financing Activities (10,264) 55,558 (57,597)
--------- --------- ---------
INVESTING ACTIVITIES
Proceeds from sale of non-utility subsidiary -- -- 2,000
Capital expenditures (139,871) (124,414) (112,715)
Other investing activities 451 -- 513
--------- --------- ---------
Net Cash Used in Investing Activities (139,420) (124,414) (110,202)
--------- --------- ---------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (b) 5,119 (9,322) 10,389
Cash and Cash Equivalents at Beginning of Year (b) 4,589 13,911 3,522
--------- --------- ---------
Cash and Cash Equivalents at End of Year (b) $ 9,708 $ 4,589 $ 13,911
========= ========= =========
(a) Includes amounts charged to other accounts.
(b) Cash equivalents are highly liquid investments with a maturity of three
months or less when purchased.
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Income taxes paid $ 37,494 $ 41,993 $ 38,824
Interest paid $ 33,662 $ 30,859 $ 30,879
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
34
16
WASHINGTON GAS LIGHT COMPANY
CONSOLIDATED STATEMENTS OF CAPITALIZATION
September 30, 1997 1996
- -------------------------------------------------------------------------------------------------------------------------
(Dollars in Thousands)
COMMON SHAREHOLDERS' EQUITY (See Statements and Note 4)
Common stock, $1 par value, authorized 80,000,000 shares,
issued 43,742,148 and 43,726,853 shares, respectively $ 43,742 $ 43,727
Paid-in capital 305,123 304,691
Retained earnings 243,175 213,626
Deferred compensation (2,022) (2,697)
Treasury stock--at cost, 42,632 and 23,377 shares, respectively (983) (538)
---------- --------
Total Common Shareholders' Equity 589,035 56.2% 558,809 59.4%
---------- ----- -------- -----
PREFERRED STOCK without par value,
authorized 1,500,000 shares, issued and outstanding
$4.80 series, 150,000 shares 15,000 15,000
$4.25 series, 70,600 shares 7,173 7,173
$5.00 series, 60,000 shares 6,000 6,000
$4.36 convertible series, 1,994 and 2,073 shares, respectively 199 207
$4.60 convertible series, 576 and 600 shares, respectively 58 60
---------- --------
Total Preferred Stock 28,430 2.7 28,440 3.0
---------- ----- -------- -----
LONG-TERM DEBT (Note 3)
First Mortgage Bonds
8 5/8% series due March 1, 2017 8,000 35,500
8 3/4% series due July 1, 2019 50,000 50,000
---------- --------
58,000 85,500
---------- --------
Unsecured Medium-Term Notes
Due fiscal year 1997, 6.50% to 6.58% -- 8,000
Due fiscal year 1998, 6.43% to 8.00% 15,800 15,800
Due fiscal year 1999, 6.50% to 7.97% 21,700 21,700
Due fiscal year 2002, 6.90% to 7.56% 45,600 45,600
Due fiscal year 2003, 6.90% 5,000 5,000
Due fiscal year 2008, 6.51% to 6.61% 20,100 20,100
Due fiscal year 2022, 6.94% to 6.95% 5,000 5,000
Due fiscal year 2023, 6.50% to 7.04% 30,000 30,000
Due fiscal year 2024, 6.95% 36,000 36,000
Due fiscal year 2025, 6.50% to 7.76% 40,000 40,000
Due fiscal year 2026, 6.15% 50,000 50,000
Due fiscal year 2027, 6.40% to 6.82% 125,000 --
---------- --------
394,200 277,200
---------- --------
Other long-term debt 952 196
Unamortized premium and (discount)--net (715) (997)
---------- --------
Total long-term debt 452,437 361,899
---------- --------
Less current maturities 20,862 8,006
---------- --------
Long-Term Debt 431,575 41.1 353,893 37.6
---------- ----- -------- -----
Total Capitalization $1,049,040 100.0% $941,142 100.0%
========== ===== ======== =====
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
35
17
WASHINGTON GAS LIGHT COMPANY
CONSOLIDATED STATEMENTS OF COMMON SHAREHOLDERS' EQUITY
Common Stock Issued
------------------- Paid-in Retained Deferred Treasury
Shares Amount Capital Earnings Compensation Stock Total
- ----------------------------------------------------------------------------------------------------------------------
(Dollars in Thousands)
BALANCE SEPTEMBER 30, 1994 42,208,476 $42,208 $276,729 $168,863 $(1,854) $(442) $485,504
Net income -- -- -- 62,909 -- 62,909
Common stock expense -- -- (18) -- -- -- (18)
Deferred compensation -- -- (83) -- 174 203 294
Dividend reinvestment plan 596,140 596 10,264 -- -- -- 10,860
Employee savings plans 137,372 138 2,370 -- -- -- 2,508
Conversion of preferred stock 2,843 3 23 -- -- -- 26
Dividends declared:
Common stock ($1.1175 per share) -- -- -- (47,706) -- -- (47,706)
Preferred stock -- -- -- (1,333) -- -- (1,333)
---------- ------- -------- -------- ------- ----- --------
BALANCE SEPTEMBER 30, 1995 42,944,831 42,945 289,285 182,733 (1,680) (239) 513,044
Net income -- -- -- 81,591 -- -- 81,591
Common stock expense -- -- (9) -- -- -- (9)
Deferred compensation 127,100 127 2,420 -- (1,017) (299) 1,231
Director compensation plan 1,603 2 34 -- -- -- 36
Employee compensation 45,313 45 901 -- -- -- 946
Dividend reinvestment plan 484,415 485 10,007 -- -- -- 10,492
Employee savings plans 120,362 120 2,025 -- -- -- 2,145
Conversion of preferred stock 3,229 3 28 -- -- -- 31
Dividends declared:
Common stock ($1.135 per share) -- -- -- (49,366) -- -- (49,366)
Preferred stock -- -- -- (1,332) -- -- (1,332)
---------- ------- -------- -------- ------- ----- --------
BALANCE SEPTEMBER 30, 1996 43,726,853 43,727 304,691 213,626 (2,697) (538) 558,809
Net income -- -- -- 82,019 -- -- 82,019
Common stock expense -- -- (3) -- -- (3)
Deferred compensation -- -- 128 -- 675 (478) 325
Director compensation plan -- -- -- -- -- 33 33
Dividend reinvestment plan 7,861 8 166 -- -- -- 174
Employee savings plans 6,356 6 132 -- -- -- 138
Conversion of preferred stock 1,078 1 9 -- -- -- 10
Dividends declared:
Common stock ($1.170 per share) -- -- -- (51,139) -- -- (51,139)
Preferred stock -- -- -- (1,331) -- -- (1,331)
---------- ------- -------- -------- ------- ----- --------
BALANCE SEPTEMBER 30, 1997 43,742,148 $43,742 $305,123 $243,175 $(2,022) $(983) $589,035
========== ======= ======== ======== ======= ===== ========
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
36
18
WASHINGTON GAS LIGHT COMPANY
CONSOLIDATED STATEMENTS OF INCOME TAXES
1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------------------
INCOME TAX EXPENSE, YEARS ENDED SEPTEMBER 30 (Note 5), (Dollars in Thousands)
Charged to other operating expenses
Current $39,674 $39,224 $35,598
------- ------- -------
Deferred
Accelerated depreciation 10,438 9,761 10,215
Losses/gains on reacquired debt 233 (112) (469)
Deferred gas costs (4,283) 11,260 (4,450)
Pensions and other employee benefit costs 1,472 (132) 214
Demand-side management costs 281 (481) 1,976
Inventory overheads (562) (4,232) (3,126)
Other 1,565 (4,940) (1,452)
------- ------- -------
Total Deferred Income Tax Expense 9,144 11,124 2,908
------- ------- -------
Amortization of investment tax credits (954) (972) (992)
------- ------- -------
47,864 49,376 37,514
------- ------- -------
Charged to other income (loss)--net
Current (713) (842) 142
Deferred 1,290 213 (872)
------- ------- -------
577 (629) (730)
------- ------- -------
Total Income Tax Expense $48,441 $48,747 $36,784
======= ======= =======
1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------------------
RECONCILIATION BETWEEN THE STATUTORY FEDERAL INCOME
TAX RATE AND THE EFFECTIVE TAX RATE
Income tax at statutory federal income tax rate $45,661 35.00% $45,618 35.00% $34,893 35.00%
------- ----- ------- ----- ------- -----
Increases (decreases) in tax resulting from:
Accelerated depreciation less amount deferred 2,639 2.02 2,705 2.08 2,837 2.85
Amortization of investment tax credits (954) (.73) (972) (.75) (992) (1.00)
Cost of removal (588) (.45) (431) (.33) (488) (.49)
State income taxes 2,036 1.56 2,180 1.67 2,112 2.12
Other items--net (353) (.27) (353) (.27) (1,578) (1.58)
------- ----- ------- ----- ------- -----
Income Tax Expense and Effective Tax Rate $48,441 37.13% $48,747 37.40% $36,784 36.90%
======= ===== ======= ===== ======= =====
1997 1996
- ---------------------------------------------------------------------------------------------------------------------------
ACCUMULATED DEFERRED INCOME TAXES AT SEPTEMBER 30, Current Non-current Current Non-current
------ ---------- ------ ----------
Deferred Income Tax Assets:
Pensions and other employee benefit costs $ 5,650 $ 3,898 $ 6,043 $ 5,614
Uncollectible accounts 2,766 -- 3,158 --
Inventory overheads 9,734 -- 9,397 --
Valuation allowance -- (2,670) -- (2,670)
Other 1,129 12,807 4,819 11,896
------- --------- ------- ---------
Total Assets 19,279 14,035 23,417 14,840
------- --------- ------- ---------
Deferred Income Tax Liabilities:
Accelerated depreciation -- 120,620 -- 110,122
Losses/gains on reacquired debt -- 3,125 -- 2,913
Construction overheads -- 2,914 -- 3,080
Income taxes recoverable through future rates -- 16,284 -- 18,531
Deferred gas costs 1,832 1,599 5,529 2,185
Demand-side management costs -- 7,541 -- 6,945
Other -- (1,366) -- --
------- --------- ------- ---------
Total Liabilities 1,832 150,717 5,529 143,776
------- --------- ------- ---------
Net Accumulated Deferred Income Tax
Assets (Liabilities) $17,447 $(136,682) $17,888 $(128,936)
======= ========= ======= =========
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
37
19
WASHINGTON GAS LIGHT COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ACCOUNTING POLICIES
NATURE OF OPERATIONS
Washington Gas Light Company (company) is a public utility that delivers and
sells natural gas to metropolitan Washington, D.C. and adjoining areas in
Maryland and Virginia. A distribution subsidiary, Shenandoah Gas Company, serves
portions of Virginia and West Virginia. The company also owns a subsidiary that
operates an underground storage field on behalf of the company. At September 30,
1997, the company and its distribution subsidiary served nearly 800,000 customer
meters. Therms delivered to firm customers accounted for 72% of the company's
total therms delivered in fiscal year 1997, and the company is not dependent on
one customer or group of customers.
The company's non-utility subsidiaries are organized under a wholly-owned
subsidiary, Washington Gas Resources Corp. A gas-marketing subsidiary,
Washington Gas Energy Services Inc., engages in the sale of gas in competition
with third-party suppliers such as gas marketers and non-regulated subsidiaries
of other utility companies. Other non-regulated energy services offered by the
company include the design and installation of energy equipment as well as
heating and air-conditioning inspections on both gas and electric equipment.
CONSOLIDATION
The consolidated financial statements include the accounts of the company and
its subsidiaries. All significant intercompany transactions have been
eliminated. Certain amounts in financial statements of prior years have been
reclassified to conform to the presentation of the current year.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
REGULATED OPERATIONS
The company and its utility subsidiaries account for their regulated operations
in accordance with Statement of Financial Accounting Standards No. 71,
"Accounting for the Effects of Certain Types of Regulation" (SFAS No. 71), as
amended and supplemented by subsequently issued standards. These standards set
forth the application of generally accepted accounting principles to those
companies whose rates are determined by an independent third-party regulator.
The economic effects of regulation can result in regulated companies recording
costs that have been or are expected to be allowed in the rate-setting process
in a period different from the period in which the costs would be charged to
expense by a non-regulated enterprise. When this results, costs are deferred as
assets in the balance sheet (regulatory assets) and recorded as expenses as
those same amounts are reflected in rates charged to customers. Additionally,
regulators can impose liabilities upon a regulated company for amounts
previously collected from customers and for recovery of costs that are expected
to be incurred in the future (regulatory liabilities). As required by SFAS No.
71 (as amended and supplemented), the company monitors the regulatory and
competitive environment in which it operates to determine that its regulatory
assets continue to be probable of recovery. If it is determined that an asset is
no longer probable of recovery, the asset would be written off against income.
The amounts recorded as regulatory assets and regulatory liabilities in the
Consolidated Balance Sheets at September 30, 1997 and 1996 follow:
1997 1996
- -------------------------------------------------------------------
REGULATORY ASSETS: (Millions)
- ------------------
Income tax-related amounts due from
customers (Note 5) $ 38.0 $ 40.9
Demand-side management costs due
from customers 21.7 22.3
Other postretirement benefit costs (Note 7) 13.2 12.5
Environmental response costs (Note 9) 10.2 12.2
Losses on reacquired debt (Note 11) 10.1 9.0
Gas costs due from customers 9.4 28.1
Purchased gas costs 4.5 6.0
FERC Order No. 636 transition costs due from
customers (Note 8) 4.0 5.7
Other 0.3 0.9
------ ------
$111.4 $137.6
====== ======
REGULATORY LIABILITIES:
- -----------------------
Income tax-related amounts due to customers
(Note 5) $ 21.7 $ 22.4
Refunds due to customers 6.1 8.3
Gas costs due to customers 2.4 1.5
Demand-side management costs due to customers 1.1 3.4
Other 3.1 1.8
------ ------
$ 34.4 $ 37.4
====== ======
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is stated at original cost including labor,
materials, taxes and overheads. The company capitalizes an Allowance for Funds
Used During Construction (AFUDC) as a component of construction overheads. The
company capitalized AFUDC of $411,000, $465,000, and $443,000 in 1997, 1996 and
1995, respectively.
The company charges the original cost of depreciable units of plant retired,
together with the cost of removal, net of salvage, to accumulated depreciation.
Maintenance and repairs are charged to operating expenses,
38
20
except that charges applicable to transportation and power-operated equipment
are allocated to operating expenses, construction and other accounts
based on the use of such equipment. Betterments and renewals are capitalized.
Depreciation applicable to the company's gas plant in service is calculated
primarily on a straight-line remaining life basis. The composite depreciation
rate was 2.94% for 1997, 2.96% for 1996 and 2.97% for 1995. The company
periodically reviews the adequacy of its depreciation rates by considering
estimated remaining lives and other factors.
REVENUES
Customer meters are read and bills are rendered on a cycle basis. Revenues are
accrued for gas delivered but not yet billed.
COST OF GAS
The company's jurisdictional tariffs contain gas cost mechanisms that provide
for the recovery of actual invoice cost of gas applicable to firm customers.
Under these mechanisms, the company periodically adjusts its rates to firm
customers to reflect increases and decreases in the cost of gas purchased.
Differences between the total gas costs billed to firm customers and the actual
cost of gas purchased are reconciled annually. The company defers any excess or
deficiency and recovers from or refunds to customers the deferred balance over a
subsequent twelve-month period. The amounts related to these reconciliations are
reflected in the captions "Gas costs due from customers" and "Gas costs due to
customers" in the Consolidated Balance Sheets.
RATE REFUNDS DUE TO CUSTOMERS
The company records a provision for rate refunds for the difference between the
amount it is collecting in rates subject to refund and the amount expected to be
recovered as a result of a final regulatory decision. At September 30, 1997, the
company was not collecting any rates subject to refund.
REACQUISITION OF LONG-TERM DEBT
Gains or losses resulting from the reacquisition of long-term debt are deferred
for book purposes and amortized over future periods as adjustments to interest
expense in accordance with established regulatory practice. The company realized
and deferred losses of $1.7 million in 1997 and $2.3 million in 1996. The
company realized no such gains or losses in 1995. For income tax purposes, the
company recognizes these gains and losses when the debt is legally retired.
Additional discussion of losses on reacquired debt is included in Note 11 to the
Consolidated Financial Statements.
NEW ACCOUNTING STANDARDS
In October 1996, the American Institute of Certified Public Accountants issued
Statement of Position No. 96-1, "Environmental Remediation Liabilities" (SOP No.
96-1), which the company adopted for fiscal year 1997. SOP No. 96-1 provides
additional guidance on the accrual, measurement and disclosure of environmental
liabilities. The adoption of SOP No. 96-1 did not materially impact the
company's financial condition or results of operations.
In February 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 128, "Earnings Per Share" (SFAS
No. 128) and No. 129, "Disclosure of Information about Capital Structure" (SFAS
No. 129). The company will adopt both of these statements in the first quarter
of fiscal year 1998 and does not expect any effect on its Consolidated Financial
Statements.
SFAS No. 128 establishes standards for computing and presenting earnings per
share (EPS) that simplify calculations currently found in Accounting Principles
Board Opinion No. 15, "Earnings per Share," as amended and interpreted, and thus
makes them comparable to international EPS standards. SFAS No. 128 replaces the
presentation of primary EPS with a presentation of basic EPS based on the
weighted-average number of common shares outstanding for the period. It also
requires dual presentation of basic and diluted EPS for companies with complex
capital structures, and requires a reconciliation of the basic EPS calculation
to the diluted EPS computation.
SFAS No. 129 continues the existing requirements to disclose the pertinent
rights and privileges of all security holders other than common stockholders,
but expands the number of companies subject to portions of its requirements.
2. SHORT-TERM DEBT
The company satisfies its short-term financing requirements through the sale of
commercial paper or bank borrowings. The company maintains credit lines and a
revolving credit agreement to support its outstanding commercial paper and to
permit short-term borrowing flexibility.
At September 30, 1997, the company had permanent bank lines of credit
available of $20 million, all of which were unused. In support of the permanent
lines, the company pays commitment or non-usage fees of 0.07% per annum of the
unused lines. These lines expire on June 30, 1998. The company has $20 million
of additional bank lines of credit that are temporary lines that are available
during the heating season and for which no compensation is paid unless
activated. The temporary lines became available on October 1, 1997. Of these
lines, $5 million will expire on April 1, 1998, and $15 million will expire on
April 30, 1998.
At September 30, 1997, the company had a short-term revolving credit
agreement with a group of banks that allows the company to borrow up to $160
million. The company pays facility fees of 0.04% per annum on the daily average
amount of the commitment. The amount of the commitment can be reduced at the
option of the company. The agreement, which expires on May 23, 1998, allows for
annual extension by mutual agreement in each of the next two years, with an
ultimate termination date no later than May 26, 2000.
Collectively, the borrowing options under the bank lines of credit and the
revolving credit agreement include the prime lending rate, as well as rates
based on certificates of deposit and London Interbank Offered Rates.
39
21
WASHINGTON GAS LIGHT COMPANY
At September 30, 1997, the company had $67.9 million in short-term debt
outstanding, excluding current maturities of long-term debt, at a
weighted-average cost of 5.68%. At September 30, 1996, the company had $115.3
million in short-term debt outstanding, excluding current maturities of
long-term debt, at a weighted-average cost of 5.52%.
3. LONG-TERM DEBT
FIRST MORTGAGE BONDS
The company's Mortgage dated January 1, 1933 (Mortgage), as supplemented and
amended, securing the First Mortgage Bonds (FMBs) issued by the company,
constitutes a direct lien on substantially all property and franchises owned by
the company other than expressly excepted property.
UNSECURED MEDIUM-TERM NOTES
The company issues unsecured Medium-Term Notes (MTNs) whose terms are
individually set as to interest rate, maturity and any call or put option. These
notes can have maturity dates of one or more years from date of issuance. The
company will not issue any FMBs under its Mortgage without making effective
provision whereby any outstanding MTNs shall be secured equally and ratably with
any and all other obligations and indebtedness secured by the Mortgage. At
September 30, 1997 and 1996, the weighted-average interest rate on all
outstanding MTNs was 6.81% and 6.90%, respectively.
In fiscal year 1997, the company issued a total of $125.0 million in MTNs.
The table below summarizes the terms of each MTN issuance. Each of these MTNs
gives the holder the right, but not the obligation, to sell the MTN back to the
company at face value on the optional redemption date.
MEDIUM-TERM NOTES ISSUED
- -----------------------------------------------------------
Fiscal Year Date of One-
Amount of Coupon Maturity Time Optional
Date Issued Issuance Rate Date Redemption
- -----------------------------------------------------------
October 1996 $25 million 6.82% 2027 October 2006
October 1996 $22 million 6.63% 2027 October 2003
October 1996 $6 million 6.62% 2027 October 2003
February 1997 $30 million 6.57% 2027 February 2007
July 1997 $6 million 6.40% 2027 July 2004
July 1997 $6 million 6.46% 2027 July 2004
September 1997 $30 million 6.49% 2027 September 2007
- -----------------------------------------------------------
TOTAL $125 MILLION
- -----------------------------------------------------------
IN-SUBSTANCE DEFEASANCE
During 1996, the company issued a combination of MTNs and short-term debt to
refinance $50 million of the 7 7/8% Series FMBs due September 1, 2016 and
$17.325 million of the 9 1/4% Series FMBs due April 15, 2018. The
company established an irrevocable trust for the sole purpose of paying the
principal and interest on these outstanding FMBs. In accordance with accounting
standards effective at that time, the transaction was accounted for as an
in-substance defeasance in which the affected debt was extinguished for
financial reporting purposes, although not legally retired. On September 1,
1996, the company used proceeds from the trust to legally retire the 7 7/8%
Series FMBs. The company is using the remaining proceeds from the trust to pay
the interest and principal payments on the outstanding 9 1/4% Series FMBs up to
and including the first call date on April 15, 1998, at which time the FMBs
will be legally retired. In 1996, the company recorded as a regulatory asset a
$2.3 million premium incurred in acquiring Treasury securities for the trust.
This regulatory asset is being amortized over future periods as an adjustment
to interest expense in accordance with regulatory practice.
MATURITIES AND SINKING FUND REQUIREMENTS
The amount of maturities and sinking fund requirements on long-term debt for the
ensuing five-year period at September 30, 1997 is $20.9 million in 1998, $73.8
million in 1999, $2.1 million in 2000 and 2001, and $47.7 million in 2002.
4. COMMON STOCK
Shares of Common Stock outstanding, net of Treasury stock, were 43,699,516,
43,703,476 and 42,931,963 as of September 30, 1997, 1996 and 1995, respectively.
At September 30, 1997, there were 1,243,980 authorized but unissued shares
of Common Stock reserved for the Dividend Reinvestment and Common Stock Purchase
Plan, for the Directors' Stock Compensation Plan, for conversion of Convertible
Preferred Stock and as an investment alternative in the company's qualified
Employee Savings Plans. The company has also reserved 800,000 shares of Common
Stock for grants under its Long-Term Incentive Compensation Plan (LTICP), and
420,150 shares remain reserved for potential future LTICP grants at September
30, 1997.
The company has granted restricted stock to employees both through its LTICP
and on a periodic basis to non-LTICP participants, as discussed further below.
In addition, the company gave the following stock grants to employees in fiscal
year 1996: (1) stock granted to certain employees through the Savings Plan, as
described in Note 7 to the Consolidated Financial Statements, and (2) a stock
grant of 45,313 shares to eligible employees, at a weighted-average fair value
on the grant date of $20.87 per share, for a total expense of approximately
$946,000.
In 1997, the company adopted the disclosure provisions of Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" (SFAS No. 123), but opted to continue using the expense
recognition provisions of Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" (APB No. 25), as permitted under SFAS
No. 123. Because the company values shares that it grants as stock-based
compensation at fair value (market value) on the grant date in determining
compensation expense, net income and earnings per share for fiscal years 1997,
1996 and 1995 are the same under the expense recognition provisions of both APB
No. 25 and SFAS No. 123.
The company's grants of restricted stock, both to LTICP and non-LTICP
participants, have restrictions that lapse with the passage of time.
40
22
The expense, which the company recognizes ratably over the periods during which
the restrictions lapse, amounted to $952,000, $1,498,000, and $497,000 in 1997,
1996 and 1995, respectively. Restricted stock is subject to restrictions on
vesting, sale and transferability but entitles the participants to full dividend
and voting rights. The company holds certificates for restricted stock during
the periods in which the restrictions on vesting are effective. The following
table summarizes the grants of restricted stock over the past three fiscal
years. Shares granted in 1997 and 1995 were previously held as Treasury stock:
1997 1996 1995
- ------------------------------------------------------------------------------
Shares of Restricted Stock Granted 17,850 127,100 17,500
Weighted-Average Fair Value of Stock on
Grant Date(s) $22.16 $20.08 $18.44
5. INCOME TAXES
The company and its subsidiaries file a consolidated federal income tax return.
The company's federal income tax returns for all years through September 30,
1993 have been reviewed and closed or closed without review by the Internal
Revenue Service.
The company is amortizing investment tax credits, which were deferred
because of regulatory requirements, as credits to income over the estimated
service lives of the related properties.
The company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes" (SFAS No.
109). Under SFAS No. 109, deferred income taxes are recognized for all temporary
differences between the financial statement and tax basis of assets and
liabilities at currently enacted income tax rates.
SFAS No. 109 requires recognition of the additional deferred income tax
assets and liabilities for timing differences for which deferred income tax
treatment has been prohibited for ratemaking purposes. Regulatory assets or
liabilities corresponding to such additional deferred tax assets or liabilities
may be recorded to the extent the company believes they will be recoverable from
or be payable to customers through the ratemaking process. The company's
regulatory assets and liabilities associated with income taxes due from and to
customers at September 30, 1997 and 1996, are shown in Note 1 to the
Consolidated Financial Statements.
The Consolidated Statements of Income Taxes on page 37 show the components
of income tax expense, a reconciliation between income tax expense computed by
using the statutory federal income tax rate and the actual income tax expense
recorded, and the components of Accumulated Deferred Income Tax Assets and
Liabilities at September 30, 1997 and 1996.
6. GENERAL TAXES
The company is subject to significant taxes that are not related to income. The
amount of such general taxes recorded in the financial statements for the last
three years is detailed in the following table:
Years Ended September 30, 1997 1996 1995
- ----------------------------------------------------------
(Millions)
Total Taxes:
Gross receipts $45.5 $43.1 $43.7
Property 17.8 16.5 15.4
Payroll 8.9 9.3 8.8
Other 2.1 1.8 2.8
----- ----- -----
Total General Taxes $74.3 $70.7 $70.7
===== ===== =====
Allocation of Taxes:
Charged to operating expenses $71.3 $68.6 $67.8
Charged to other income
(loss)--net 1.0 0.3 0.3
Charged to construction 2.0 1.8 2.6
----- ----- -----
Total General Taxes $74.3 $70.7 $70.7
===== ===== =====
7. POSTEMPLOYMENT BENEFITS
PENSION BENEFITS
The company maintains a trusteed, noncontributory defined benefit pension plan
covering all active and vested former employees of the company and its utility
subsidiaries. Executive officers also participate in a nonfunded supplemental
executive retirement plan (SERP). A trust has been established for the future
funding of the SERP liability. It is the company's policy to fund pension costs
accrued for the trusteed plan to the extent allowable by law. Plan assets
consist primarily of common stock and fixed income securities.
Net periodic pension cost included the following components:
Years Ended September 30, 1997 1996 1995
- ----------------------------------------------------------------------------------
(Millions)
Service cost--benefits earned during the period $ 7.8 $ 8.9 $ 7.8
Interest cost on projected benefit obligation 28.7 27.0 27.5
Actual return on plan assets (87.7) (54.5) (80.7)
Net amortization and deferral 46.8 17.6 46.9
------ ------ ------
Net periodic pension (income) cost $ (4.4) $ (1.0) $ 1.5
====== ====== ======
Expected long-term rate of return on plan assets 8.25% 8.25% 8.25%
====== ====== ======
The following table sets forth the funded status of the plans at September
30, 1997 and 1996.
1997 1996
- ----------------------------------------------------------------------------------
(Millions)
Actuarial present value of benefit obligations:
Vested benefit obligation $(340.0) $(267.9)
======= =======
Accumulated benefit obligation $(363.6) $(284.6)
======= =======
Projected benefit obligation $(428.2) $(357.4)
Plan assets at market value 591.4 506.1
------- -------
Plan assets in excess of projected benefit obligation 163.2 148.7
Unrecognized net gains (185.8) (164.6)
Unrecognized prior service costs 15.8 6.4
Unrecognized net asset at transition (10.2) (12.7)
------- -------
Accrued pension costs in the
consolidated balance sheets $ (17.0) $ (22.2)
======= =======
Discount rate 7.50% 8.00%
======= =======
Rate of compensation increase 4.50% 5.00%
======= =======
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23
WASHINGTON GAS LIGHT COMPANY
OTHER POSTRETIREMENT BENEFITS
The company provides certain health care and life insurance benefits for retired
employees. Substantially all employees may become eligible for such benefits if
they attain retirement status while working for the company. The company
accounts for these benefits under the provisions of Statement of Financial
Accounting Standards No. 106, "Employers' Accounting for Postretirement Benefits
Other Than Pensions." The company elected to amortize the accumulated
postretirement benefit obligation existing at the October 1, 1993 adoption date
of this standard (the transition obligation) of $190.6 million over a
twenty-year period.
Net periodic postretirement benefit cost included the following
components:
Years Ended September 30, 1997 1996 1995
- -----------------------------------------------------------------------------------
(Millions)
Service cost--benefits attributed to service
during the period $ 4.6 $ 4.9 $ 4.9
Interest cost on accumulated postretirement
benefit obligation 15.0 14.1 14.9
Actual return on plan assets (2.9) (1.8) (1.0)
Amortization of transition obligation 9.5 9.5 9.5
Other (2.0) (1.7) (0.3)
----- ----- -----
Net periodic postretirement benefit cost 24.2 25.0 28.0
Amount capitalized as construction cost (4.8) (4.6) (5.7)
Amount deferred as a regulatory asset--net (0.7) (2.0) (3.8)
----- ----- -----
Amount charged to expense $18.7 $18.4 $18.5
===== ===== =====
The following table sets forth the funded status of the trusteed plans at
September 30, 1997 and 1996.
1997 1996
- -------------------------------------------------------------------------------------
(Millions)
Accumulated postretirement benefit obligation:
Retirees $ (98.9) $ (95.2)
Fully eligible active employees (15.2) (18.2)
Other active employees (84.0) (79.3)
------- -------
Total accumulated postretirement benefit obligation (198.1) (192.7)
Plan assets at fair value--invested primarily in
short-term debt securities 66.4 47.8
------- -------
Accumulated postretirement benefit obligation in
excess of plan assets (131.7) (144.9)
Unrecognized net gains (42.2) (36.9)
Unrecognized transition obligation 152.6 162.1
------- -------
Accrued postretirement benefit costs in the
consolidated balance sheets $ (21.3) $ (19.7)
======= =======
Discount rate 7.50% 8.00%
======= =======
Rate of compensation increase 4.50% 5.00%
======= =======
The assumed health care cost trend rates for fiscal year 1998 for Medicare
eligible and non-Medicare eligible retirees are 6.50% and 8.00%, respectively;
these rates are assumed to decrease gradually to 5.00% and 5.25%, respectively,
in 2003 and remain at those levels thereafter. The health care cost trend rate
assumption has a significant effect on the amounts reported. If the health care
cost trend rate were increased by 1% in each year, the accumulated
postretirement benefit obligation at September 30, 1997 would increase by $25.9
million, and the aggregate of the service and interest cost components of net
periodic postretirement benefit cost for fiscal year 1997 would rise by $2.9
million.
Almost all of the estimated postretirement benefit costs and the
transition obligation are applicable to the company's and its subsidiaries'
rate-regulated activities. The Public Service Commission of the District of
Columbia (PSC of DC) has granted the company recovery through a five-year
phase-in for the approximate difference between the cost of these benefits
determined under generally accepted accounting principles (GAAP) and the amount
previously paid in cash for these benefits. The company is deferring the
difference generated during the phase-in period as a regulatory asset. In an
order dated September 28, 1995, the State Corporation Commission of Virginia
(SCC of VA) granted the company recovery in accordance with a generic order
allowing for recovery of costs determined under GAAP in rates, with the
exception of allowing recovery of the transition obligation over forty years as
opposed to the twenty-year maximum amortization allowed under GAAP. The Public
Service Commission of Maryland (PSC of MD) has not rendered a decision to the
company that specifically addresses recovery of postretirement benefit costs
determined in accordance with GAAP; however, the level of rates the PSC of MD
has allowed is sufficient to recover the cost determined under GAAP. The amount
of postretirement benefit costs deferred as a regulatory asset at September 30,
1997 is $13.2 million, and the company expects that these costs will be
recovered over a twenty-year period that began October 1, 1993.
All of the regulatory commissions having jurisdiction over the company's
rates are requiring the company to fund amounts reflected in rates for
postretirement benefits to irrevocable trusts. The expected long-term rate of
return on the assets in the trust was 8.25% for 1997 and 1996. To the extent the
income in the trusts is taxable, the income tax rate associated with the taxable
portion of this return is assumed to be 39.6%.
EMPLOYEE SAVINGS PLANS
The company offers employee savings plans for eligible management (Savings Plan)
and union-eligible (Capital Appreciation Plan) employees that are designed to
provide employees with an incentive to save and invest regularly. The Savings
Plan is a defined contribution plan, allowing salary deferral by participants
from 1 percent to 14 percent of their salaries invested among various
alternatives. An employer contribution equal to 100 percent of the first 4
percent of the employees' compensation they contribute on a pre-tax basis, or
100 percent of the first 2 percent and 50 percent of the next 2 percent on an
after-tax basis, is invested among various alternatives. The Capital
Appreciation Plan is a defined contribution plan, allowing salary deferral by
participants from 1 percent to 14 percent of their salaries, along with an
employer contribution, based on
42
24
the first 1 or 2 percent of the employees' compensation they contribute on a
pre-tax basis, depending upon bargaining unit affiliation. These amounts are
invested among various alternatives. The company's contributions to the plans
for fiscal years 1997, 1996 and 1995 were $2.2 million, $2.2 million, and $2.3
million, respectively. In fiscal year 1996, the company granted 100 shares of
stock to the accounts of certain employees participating in the Savings Plan.
The cost per share was $23.558, for a total compensation expense to the company
of $1.8 million.
8. FERC ORDER NO. 636 AND TRANSITION COSTS
On November 1, 1993, the Federal Energy Regulatory Commission (FERC) implemented
Order No. 636 (Order). The Order removed the merchant function from interstate
pipeline companies' operations and required them to provide storage and
transportation services to gas shippers such as the company.
The pipeline companies are incurring certain costs, known as transition
costs, in connection with the implementation of the Order. Transition costs that
the FERC considers to be prudently incurred can be recovered from customers of
the pipelines, such as the company. Through September 30, 1997, the company had
paid $46.7 million in such costs to six pipeline companies and currently
estimates that additional transition costs to be assigned to the company will
not be less than $4.0 million. The company has recorded a liability in the
balance sheet at September 30, 1997 in this amount.
The total level of transition costs that will ultimately be incurred by
the company and reflected in the financial statements cannot be estimated at
this time. This is because the level is not determinable with available
information, the costs have yet to be incurred by the applicable pipeline
companies, or the level of costs may be affected by requests pending or to be
filed at FERC.
The company is currently in the process of collecting transition costs
paid to the pipeline companies through the gas cost recovery mechanisms of the
company's retail rate schedules. At September 30, 1997, the company had recorded
a regulatory asset of $4.0 million for amounts yet to be recovered from its
customers.
9. ENVIRONMENTAL MATTERS
The company and its subsidiaries are subject to federal, state and local laws
and regulations related to environmental matters. These evolving laws and
regulations may require expenditures over a long period of time to control
environmental impacts.
Estimates of liabilities for environmental response costs are difficult to
determine with precision because of the factors that can affect their ultimate
level. These factors include, but are not limited to: (1) the complexity of the
site; (2) changes in environmental laws and regulations at the federal, state
and local levels; (3) the number of regulatory agencies or other parties
involved; (4) new technology that renders previous technology obsolete, or
experience with existing technology that proves ineffective; (5) the ultimate
selection of technology; (6) the level of remediation required; and (7)
variations between the estimated number of years that must be devoted to respond
to an environmentally contaminated site as compared to the actual number of
years required.
The company has identified up to ten sites where the company, its
subsidiaries, or their predecessors may have operated manufactured gas plants
(MGPs). The company last used any such plant in 1984. In connection with these
operations, the company is aware that certain by-products of the gas
manufacturing process are present at or near some former sites and may be
present at others.
At one of the former MGP sites, studies show the presence of coal tar
under the site and an adjoining property. The company's risk assessment study
performed on the site shows that there is no unacceptable risk to human health
or the environment. The company has taken steps to control the movement of
contaminants into an adjacent river. A water treatment system removes and treats
contaminated groundwater at the site. The company has determined that a
previously considered alternative to address contamination on the adjoining
property through bioremediation is not the preferable course of action, based on
the efficacy of the demonstration tests performed to date. The company continues
to advance discussions of remediation options with the appropriate governmental
agency and the adjacent landowner. The company expects to complete a feasibility
study of remedial alternatives in fiscal year 1998, which would include a
recommended remedial action plan. After the company submits the results of this
study, it expects the governmental agency to issue a decision document outlining
the appropriate remediation methodology.
At a second former MGP site, tests identified tar products under
the property, and a risk assessment showed that there was no unacceptable risk
to human health or the environment. The company designed and installed a
state-approved treatment and recovery system to recover free tar and continues
to recover minimal volumes of tar products from pumping. The company will
continue to pump tar, monitor the site, and provide annual activity reports to
the state's Department of the Environment.
At a third former MGP site, initial studies show that tar products are
present under the property. The company completed and submitted a remedial
investigation/feasibility study (RI/FS) to the appropriate state regulatory
agency. The company has yet to receive any response from the state regarding its
submission, but continues to monitor the site. The company expects to install a
recovery system to recover free tar after the state responds to the company's
RI/FS.
At a fourth former MGP site and on an adjacent parcel of land, the company
plans to perform an RI/FS in fiscal year 1998, which will include a risk
assessment to assist in determining the appropriate remedial action, and submit
the results to the applicable state regulatory agency.
43
25
WASHINGTON GAS LIGHT COMPANY
At a fifth former MGP site, a treatment system for contaminated
groundwater has been operating for seven years. The company believes, at this
time, that no additional action other than water treatment will be necessary.
Through September 30, 1997, the company had paid $10.0 million for
environmental response costs. The company has recorded a liability of $11.0
million on an undiscounted basis at September 30, 1997 related to future
environmental response costs. This estimate is primarily composed of the minimum
liabilities associated with a range of environmental response costs expected to
be incurred at the five sites described above. The company estimates the maximum
liability associated with these sites to be approximately $22.3 million at
September 30, 1997. The estimates were determined by the company's environmental
experts based on experience in remediating MGP sites and advice from legal
counsel and environmental consultants. Variations within the range of estimated
liability result primarily from differences in the number of years that will be
required to perform environmental response processes at each site (5 to 25
years) and the extent of remediation that may be required.
The company believes, at this time, that no remediation of any of the
remaining five sites will be necessary.
Orders issued by the PSC of MD allow the company to recover the costs
associated with the sites applicable to Maryland over periods ranging from five
to thirty years. Rate orders issued by the PSC of DC allow the company a
three-year recovery of prudently incurred environmental response costs and allow
the company to defer additional costs incurred between rate cases. At September
30, 1997, there is no environmental regulatory asset subject to recovery in
Virginia. The Public Service Commission of West Virginia has allowed a
subsidiary to recover certain environmental response costs.
At September 30, 1997, the company has recorded a regulatory asset of
$10.2 million for the portion of environmental response costs it believes are
recoverable in rates. Based on existing knowledge, the company does not expect
that the ultimate impact of these matters will have a materially adverse effect
on its financial condition or results of operations.
10. ORGANIZATIONAL REDESIGN
In 1996, in response to changing requirements and greater competition
in the markets in which it operates, the company announced and began
implementing a corporate reorganization. The reorganization moved the company
away from a traditional, functional structure and towards a more
customer-focused organization designed to encourage innovation, initiative and
teamwork. The new structure flattened the corporate hierarchy and resulted in
fewer supervisory positions.
In the course of the reorganization, the company incurred various
expenses, including professional consulting fees and costs associated with a
voluntary separation pay program for certain eligible supervisory employees. In
1996, the company recorded non-recurring operation expenses of $13.4 million
related to the reorganization, that were paid in fiscal years 1996 and 1997.
11. COMMITMENTS AND CONTINGENCIES
TRANSFERS AND SERVICING OF FINANCIAL ASSETS
The company has extended credit to certain residential and small commercial
customers to purchase gas appliances and equipment and energy conservation
products. The company transfers with recourse certain of these non-utility
accounts receivable to commercial banks. Effective for transfers after December
31, 1996, the company accounts for these transfers in accordance with Statement
of Financial Accounting Standards No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishment of Liabilities" (SFAS No. 125),
which supersedes Statement of Financial Accounting Standards No. 77, "Reporting
by Transferors for Transfers of Receivables with Recourse" (SFAS No. 77).
The company's transfers of receivables with recourse totaled $33.0 million
and $30.5 million in 1997 and 1996, respectively. The transfers after December
31, 1996 were recognized as a sale in accordance with SFAS No. 125 and in
accordance with SFAS No. 77 for prior sales. Under the sales agreements with the
banks, the company acts as an agent for the banks and services the receivables.
At September 30, 1997, the company had a $0.8 million receivable representing
the present value of estimated future net cash flows related to these sales. The
company has also recognized a liability related to its estimated recourse
obligation for sales of receivables in 1997.
Receivables transferred with recourse are considered financial instruments
with off-balance sheet risk. At September 30, 1997, the company's exposure to
credit loss in the event of non-performance by customers is represented by the
$59.0 million balance of transferred receivables that remain outstanding, less
the previously mentioned liability for the recourse obligation of $0.5 million
(for transfers after December 31, 1996) and a provision for uncollectible
accounts of $2.3 million (for transfers prior to January 1, 1997).
NATURAL GAS CONTRACTS
The company has 13 long-term natural gas purchase contracts with producers or
marketers to purchase natural gas at market-sensitive prices. These contracts
provide for commodity charges based upon an ascertain-
44
26
able index and either fixed reservation charges based on contracted minimum
volumes or premiums built into volumetric charges. The contracts also provide
for the company to pay monthly and/or annual deficiency charges if actual
volumes fall below minimum levels. These gas purchase contracts have expiration
dates ranging from fiscal years 1998 to 2004. At September 30, 1997, the company
is required to make total fixed payments under these natural gas purchase
contracts in the amount of approximately $33.2 million, including annual
payments of $7.4 million in 1998, $6.9 million in 1999, $6.5 million in 2000,
$5.4 million in 2001, and $3.9 million in 2002.
The company also has pipeline service agreements with four pipelines that
serve the company directly and four upstream pipelines that provide for firm
transportation and storage services. These agreements, which have expiration
dates ranging from fiscal years 1998 to 2015, provide for the company to pay
fixed monthly charges. The aggregate amount of required payments under the
pipeline service agreements totals approximately $874 million at September 30,
1997, including required annual payments of $106 million in 1998, $105 million
in 1999, $104 million in 2000, $95 million in 2001 and $83 million in 2002.
The company recovers the costs incurred under these natural gas purchase
contracts as part of the cost of gas through the gas cost recovery mechanisms
included in the company's retail rate schedules in each jurisdiction in which
the company operates.
VIRGINIA REGULATORY MATTERS
In those years when the company does not request a modification of its basic
rates in a prior twelve-month period, the company is required to make a filing
with the SCC of VA that allows the staff of the commission to make a
recommendation to the SCC of VA on the reasonableness of the company's rates on
a prospective basis. Such a filing was made by the company in March 1997 on the
basis of its results of operations for the twelve months ended December 31,
1996. In August 1997, the staff of the commission filed a report with the SCC of
VA after having reviewed the company's most recent filing. Although the staff
report concluded that the company earned in excess of the allowed range of the
granted return on equity for the twelve months ended December 31, 1996, it did
not recommend that rates be adjusted on a prospective basis. However, the staff
did conclude that the company's earnings level in calendar year 1996 had
effectively allowed it to recover certain regulatory assets associated with
losses on reacquired debt that were recorded on the company's books at December
31, 1996 and thus recommended that these regulatory assets be written off. The
write-off proposed by the staff amounts to $3.3 million ($2.1 million after
income taxes).
The company has taken exception to the staff's report and both the company
and staff have participated in a hearing in which the positions of both parties
were presented before a Hearing Examiner. The company believes that the staff's
recommendation was not made in accordance with the procedures that have been
established by the commission and that it violates the prohibition against
retroactive ratemaking. A decision of the Hearing Examiner is not expected
before the end of the second quarter of fiscal year 1998.
The company continues to believe that the regulatory assets recorded on
its books applicable to operations in Virginia are probable of recovery.
However, if the staff of the SCC of VA prevails in requiring the company to
write off the Virginia portion of the regulatory asset related to losses on
reacquired debt, the company believes it is likely that it will have to write
off an additional $11.1 million of other regulatory assets associated with
Virginia operations that was recorded at September 30, 1997.
12. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following table presents the carrying amounts and estimated fair value of
the company's financial instruments at September 30, 1997 and 1996. The fair
value of a financial instrument is the amount at which the instrument could be
exchanged in a current transaction between willing parties.
Financial instruments included in current assets are cash and cash
equivalents, net accounts receivable, accrued utility revenues and other
miscellaneous receivables. Financial instruments included in current liabilities
are total current liabilities from the Consolidated Balance Sheets excluding
capital lease obligations and accrued vacation costs. The carrying amount of the
financial instruments included in current assets and current liabilities
approximates fair value because of the short maturity of these instruments. The
fair value of long-term debt was estimated based on the quoted market prices of
U.S. Treasury issues having a similar term to maturity, adjusted for the
company's credit quality and the present value of future cash flows.
FAIR VALUE OF FINANCIAL INSTRUMENTS
1997 1996
- ----------------------------------------------------------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
- ----------------------------------------------------------------------------------
(Millions)
Current assets $ 94.4 $ 94.4 $ 89.6 $ 89.6
Current liabilities 240.0 240.0 262.3 262.3
Long-term debt 431.6 437.1 353.9 353.1
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WASHINGTON GAS LIGHT COMPANY
MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL STATEMENTS
The presentation of financial data that accurately and fairly reflects the
results of operations and financial position of the company is one of
management's stewardship obligations to its shareholders. Management has
prepared the accompanying financial statements in accordance with generally
accepted accounting principles, including the estimates and judgments made by
management which are necessary to prepare the statements in accordance with such
principles. To assure the integrity of the underlying financial records
supporting the financial statements, management maintains a system of internal
accounting controls sufficient to provide reasonable assurances at reasonable
costs that assets are properly safeguarded and accounted for and are utilized
only in accordance with management's authorization.
The system of internal accounting controls is augmented by the company's
internal audit department, which has unrestricted access to all levels of
company management. In addition, the internal auditor meets periodically with
the Audit Review Committee of the Board of Directors to discuss, among other
things, the company's system of internal accounting controls and the adequacy of
the internal audit program. The report of the Audit Review Committee appears
below.
As discussed in its report, the Audit Review Committee also meets
periodically with Arthur Andersen LLP, the company's independent public
accountants, with and without management, to discuss the results of Arthur
Andersen LLP's audit of the company's financial statements. The report of Arthur
Andersen LLP appears below.
/s/ PATRICK J. MAHER
Patrick J. Maher, Chairman of the Board and Chief Executive Officer
/s/ FREDERIC M. KLINE
Frederic M. Kline, Vice President and Treasurer
REPORT OF THE AUDIT REVIEW COMMITTEE
The Audit Review Committee of the Board of Directors of Washington Gas Light
Company is comprised of five directors who are not employees of the company:
Orlando W. Darden (Chairman), Fred J. Brinkman, Daniel J. Callahan, III, Karen
Hastie Williams and Stephen G. Yeonas. The committee held five meetings during
fiscal year 1997.
The Audit Review Committee oversees Washington Gas Light Company's
financial reporting process on behalf of Washington Gas Light Company's Board of
Directors. In fulfilling its responsibility, the committee recommended to the
Board of Directors, subject to ratification by the stockholders, the selection
of Washington Gas Light Company's independent public accountants, Arthur
Andersen LLP.
The Audit Review Committee discussed with the company's internal auditor
and the independent public accountants the overall scope and specific plans for
their respective audits, and the adequacy of the company's internal controls.
The committee discussed the company's financial statements with the independent
public accountants and met separately with the company's internal auditor and
independent public accountants, with and without management present, to discuss
the results of their audits, their evaluation of the company's internal
controls, and the overall quality of the company's financial reporting. The
meetings also were designed to facilitate and encourage any private
communication between the committee and the internal auditor or independent
public accountants.
/s/ ORLANDO W. DARDEN
Orlando W. Darden, Chairman, Audit Review Committee
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders and Board of Directors of Washington Gas Light Company:
We have audited the accompanying consolidated balance sheets and consolidated
statements of capitalization of Washington Gas Light Company (a District of
Columbia and Virginia corporation) and subsidiaries as of September 30, 1997 and
1996, and the related consolidated statements of income, cash flows, common
shareholders' equity and income taxes for each of the three years in the period
ended September 30, 1997. These financial statements are the responsibility of
the company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform an 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 Gas Light Company
and subsidiaries as of September 30, 1997 and 1996, and the results of their
operations and their cash flows for each of the three years in the period ended
September 30, 1997, in conformity with generally accepted accounting principles.
/s/ ARTHUR ANDERSEN LLP
Washington, D.C.,
October 27, 1997.
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SUPPLEMENTARY FINANCIAL INFORMATION (UNAUDITED)
QUARTERLY FINANCIAL INFORMATION
In the opinion of the company, the quarterly financial information shown below
includes all adjustments necessary for a fair presentation of such periods. Due
to the seasonal nature of the company's business, there are substantial
variations in operations reported on a quarterly basis.
Quarter Ended
Dec. 31 March 31 June 30 Sept. 30
- ------------------------------------------------------------------------------------------------------------------------------
(Thousands, Except Per Share Data)
FISCAL YEAR 1997
Operating revenues $344,958 $431,465 $171,942 $107,389
Operating income (loss) 46,056 66,961 7,018 (4,760)
Net income (loss) 37,424 59,144 (365) (14,184)
Earnings (loss) per average share of common stock 0.85 1.35 (0.02) (0.33)
FISCAL YEAR 1996
Operating revenues $274,326 $431,826 $157,760 $105,866
Operating income (loss) 47,021 75,458 1,587 (11,003)
Net income (loss) 38,340 66,909 (5,421) (18,237)
Earnings (loss) per average share of common stock(a) 0.88 1.54 (0.13) (0.43)
(a) The sum of these amounts does not equal the annual amount because the
quarterly calculations are based on varying numbers of common shares
outstanding.
COMMON STOCK PRICE RANGE AND DIVIDENDS PAID
Dividends Paid Dividend
High Low Per Share Payment Date
- -----------------------------------------------------------------------------------------------------------------
FISCAL YEAR 1997
Fourth quarter $26 1/2 $23 15/16 $0.295 8/1/97
Third quarter 25 5/8 20 7/8 0.295 5/1/97
Second quarter 23 1/2 21 5/8 0.285 2/1/97
First quarter 25 21 1/8 0.285 11/1/96
FISCAL YEAR 1996
Fourth quarter $22 7/8 $20 3/8 $0.285 8/1/96
Third quarter 22 19 1/8 0.285 5/1/96
Second quarter 22 1/2 20 1/2 0.280 2/1/96
First quarter 22 3/8 18 1/2 0.280 11/1/95
The common stock of the company is listed for trading on the New York Stock
Exchange and on the Philadelphia Stock Exchange, and is shown as WashGasLt or
WashGs in newspapers. At September 30, 1997, the company had 24,581 common
shareholders.
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