1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30,1999
--------------------------------------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 1-1483
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WASHINGTON GAS LIGHT COMPANY
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
District of Columbia and Virginia 53-0162882
- -------------------------------------------------------------- ----------------------------------
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
1100 H Street, N. W., Washington, D. C. 20080
- ----------------------------------------------------- ----------------------------------
(Address of principal executive offices) (Zip Code)
(703) 750-4440
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Registrant's telephone number, including area code
NONE
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(Former name, former address and former fiscal year, if changed since last report.)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common Stock $1.00 par value 46,473,496 July 30, 1999
- ---------------------------- ---------------- ------------
Class Number of Shares Date
2
WASHINGTON GAS LIGHT COMPANY
INDEX
Page No.
--------
PART I. Financial Information:
Item 1. Financial Statements
Consolidated Balance Sheets -
June 30, 1999 and September 30, 1998 2-3
Consolidated Statements of Income -
Three Months Ended June 30, 1999 and 1998 4
Consolidated Statements of Income -
Nine Months Ended June 30, 1999 and 1998 5
Consolidated Statements of Cash Flows -
Nine Months Ended June 30, 1999 and 1998 6
Notes to Consolidated Financial Statements 7-11
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 12-26
Item 3. Quantitative and Qualitative Disclosures About Market Risks
of the Company 26
PART II. Other Information:
Item 5. Other Information 27
Item 6. Exhibits and Reports on Form 8-K 28-29
Signature 29
1
3
WASHINGTON GAS LIGHT COMPANY
CONSOLIDATED BALANCE SHEETS
JUNE 30, Sept. 30,
1999 1998
-------------- ---------------
(Unaudited)
(Thousands)
ASSETS
PROPERTY, PLANT AND EQUIPMENT
At original cost $ 2,094,975 $ 1,992,770
Accumulated depreciation and amortization (709,911) (673,269)
-------------- ---------------
1,385,064 1,319,501
-------------- ---------------
CURRENT ASSETS
Cash and cash equivalents 43,826 17,876
Accounts receivable 77,356 92,178
Gas costs due from customers 11,661 9,921
Accrued utility revenues 17,042 16,304
Allowance for doubtful accounts (7,572) (9,078)
Materials and supplies--principally at average cost 16,257 15,607
Storage gas--at cost (first-in, first-out) 39,297 76,338
Deferred income taxes 17,453 16,337
Other prepayments--principally taxes 8,906 13,864
Other 1,065 849
-------------- ---------------
225,291 250,196
-------------- ---------------
DEFERRED CHARGES AND OTHER ASSETS
Regulatory assets--deferred purchased gas costs - 3,550
Regulatory assets--other 87,473 91,802
Other 23,432 17,384
-------------- ---------------
110,905 112,736
-------------- ---------------
TOTAL $ 1,721,260 $ 1,682,433
============== ===============
- ------------------------
See accompanying Notes to Consolidated Financial Statements.
2
4
WASHINGTON GAS LIGHT COMPANY
CONSOLIDATED BALANCE SHEETS
JUNE 30, Sept. 30,
1999 1998
-------------- ---------------
(Unaudited)
(Thousands)
CAPITALIZATION AND LIABILITIES
CAPITALIZATION
Common shareholders' equity $ 712,215 $ 607,755
Preferred stock 28,422 28,424
Long-term debt (Note 5) 493,008 428,641
-------------- ---------------
1,233,645 1,064,820
-------------- ---------------
CURRENT LIABILITIES
Current maturities of long-term debt (Note 5) 7,913 64,106
Notes payable 3,564 124,943
Accounts and wages payable 121,022 116,770
Dividends declared 14,506 13,485
Customer deposits and advance payments 8,709 19,454
Accrued taxes and interest 44,714 9,200
Pipeline refunds due to customers 2,150 1,437
Gas costs due to customers 4,618 5,671
Other 689 1,146
-------------- ---------------
207,885 356,212
-------------- ---------------
DEFERRED CREDITS
Unamortized investment tax credits 19,808 20,493
Deferred income taxes 145,877 145,519
Regulatory liabilities--deferred purchased gas costs 14,609 -
Other regulatory liabilities and other deferred credits 99,436 95,389
-------------- ---------------
279,730 261,401
-------------- ---------------
TOTAL $ 1,721,260 $ 1,682,433
============== ===============
- ------------------------
See accompanying Notes to Consolidated Financial Statements.
3
5
WASHINGTON GAS LIGHT COMPANY
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three Months Ended
---------------------------------------
JUNE 30, June 30,
1999 1998
-------------- --------------
(Thousands, Except Per Share Data)
OPERATING REVENUES $ 150,714 $ 156,390
Cost of Gas 75,858 83,875
-------------- --------------
NET REVENUES 74,856 72,515
-------------- --------------
OTHER OPERATING EXPENSES
Operation 41,985 41,712
Maintenance 8,107 9,047
Depreciation and amortization 15,169 13,732
General taxes 13,347 14,072
Income taxes (4,231) (5,394)
-------------- --------------
74,377 73,169
-------------- --------------
OPERATING INCOME (LOSS) 479 (654)
Other Income - Net 1,453 2,743
-------------- --------------
INCOME BEFORE INTEREST EXPENSE 1,932 2,089
-------------- --------------
INTEREST EXPENSE
Interest on long-term debt 8,650 8,915
Other 46 196
-------------- --------------
8,696 9,111
-------------- --------------
NET LOSS (6,764) (7,022)
Dividends on Preferred Stock 332 332
-------------- --------------
NET LOSS APPLICABLE TO COMMON STOCK $ (7,096) $ (7,354)
=============== ===============
AVERAGE COMMON SHARES OUTSTANDING 46,410 43,677
============== ==============
LOSS PER AVERAGE COMMON SHARE - BASIC $ (0.15) $ (0.17)
=============== ==============
LOSS PER AVERAGE COMMON SHARE - DILUTED $ (0.15) $ (0.17)
=============== ==============
DIVIDENDS DECLARED PER COMMON SHARE $ 0.305 $ 0.300
============== ==============
- ------------------------
See accompanying Notes to Consolidated Financial Statements.
4
6
WASHINGTON GAS LIGHT COMPANY
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Nine Months Ended
---------------------------------------
JUNE 30, June 30,
1999 1998
-------------- --------------
(Thousands, Except Per Share Data)
OPERATING REVENUES $ 841,051 $ 914,159
Cost of Gas 430,594 505,925
-------------- --------------
NET REVENUES 410,457 408,234
-------------- --------------
OTHER OPERATING EXPENSES
Operation 130,953 125,702
Maintenance 27,137 28,086
Depreciation and amortization 44,166 40,896
General taxes 51,675 57,736
Income taxes 47,891 47,065
-------------- --------------
301,822 299,485
-------------- --------------
OPERATING INCOME 108,635 108,749
Other Income - Net 2,214 4,353
-------------- --------------
INCOME BEFORE INTEREST EXPENSE 110,849 113,102
-------------- --------------
INTEREST EXPENSE
Interest on long-term debt 26,084 25,103
Other 1,770 3,168
-------------- --------------
27,854 28,271
-------------- --------------
NET INCOME 82,995 84,831
Dividends on Preferred Stock 998 999
-------------- --------------
NET INCOME APPLICABLE TO COMMON STOCK $ 81,997 $ 83,832
============== ==============
AVERAGE COMMON SHARES OUTSTANDING 45,837 43,658
============== ==============
EARNINGS PER AVERAGE COMMON SHARE - BASIC $ 1.79 $ 1.92
============== ==============
EARNINGS PER AVERAGE COMMON SHARE - DILUTED $ 1.79 $ 1.92
============== ==============
DIVIDENDS DECLARED PER COMMON SHARE $ 0.910 $ 0.895
============== ==============
- ------------------------
See accompanying Notes to Consolidated Financial Statements.
5
7
WASHINGTON GAS LIGHT COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended
---------------------------------------
JUNE 30, June 30,
1999 1998
------------- ---------------
(Thousands)
OPERATING ACTIVITIES
Net income $ 82,995 $ 84,831
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization a/ 48,892 44,997
-
Deferred income taxes - net 603 3,062
Amortization of investment tax credits (685) (702)
Allowance for funds used during construction (1,389) (572)
Loss from sale of West Virginia assets (Note 10) 3,300 -
Other noncash charges (credits) - net 60 (1,908)
------------- ---------------
133,776 129,708
Changes in assets and liabilities:
Accounts receivable and accrued utility revenues 12,578 (23,438)
Gas costs due from/to customers - net (2,793) 6,669
Storage gas 37,041 57,246
Other prepayments - principally taxes 4,958 4,348
Accounts and wages payable 3,038 (21,461)
Customer deposits and advance payments (10,745) (7,563)
Accrued taxes and interest 35,514 31,064
Pipeline refunds due to customers 713 (4,860)
Deferred purchased gas costs - net 18,159 10,235
Other - net 348 434
------------- --------------
Net Cash Provided by Operating Activities 232,587 182,382
------------- --------------
FINANCING ACTIVITIES
Common stock issued 63,835 2,490
Common stock repurchased - (2,340)
Long-term debt issued 28,342 72,000
Long-term debt retired (20,293) (23,984)
Premium on long-term debt retired - (493)
Debt issuance costs (Note 5) (2,271) (490)
Notes payable - net (121,379) (67,654)
Dividends on common and preferred stock (42,165) (39,778)
------------- ---------------
Net Cash Used in Financing Activities (93,931) (60,249)
-------------- ---------------
INVESTING ACTIVITIES
Capital expenditures (112,706) (110,600)
Sale of Venture Funds - 1,619
Sale of Propane Assets - 4,050
Payment for purchase of non-utility companies (net of cash acquired) - (2,990)
------------- --------------
Net Cash Used in Investing Activities (112,706) (107,921)
------------- --------------
INCREASE IN CASH AND CASH EQUIVALENTS 25,950 14,212
Cash and Cash Equivalents at Beginning of Period 17,876 9,708
------------- --------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 43,826 $ 23,920
============= ==============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Income taxes paid $ 18,920 $ 23,254
Interest paid $ 20,364 $ 19,470
- ----------------------
a/ Includes amounts charged to other accounts.
- -
See accompanying Notes to Consolidated Financial Statements.
6
8
WASHINGTON GAS LIGHT COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. In the opinion of Washington Gas Light Company (the Company), the
accompanying Consolidated Financial Statements reflect all adjustments
(which include only normal recurring adjustments) necessary to present
fairly the results for such periods. Refer to the Company's Annual Report
on Form 10-K for the fiscal year ended September 30, 1998.
2. Due to the seasonal nature of the Company's business, the results of
operations shown do not indicate the expected results for the fiscal year
ended September 30, 1999.
3. 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.
4. Certain amounts in financial statements of prior years have been
reclassified to conform to the presentation of the current year.
5. Debt Issuance in First Quarter of Fiscal Year 1999
The Company issued $25 million of 10-year Medium-Term Notes (MTNs) in
October 1998 with a coupon rate of 5.49%. In order to lock in the Treasury
yield for this issuance, in June 1998, the Company entered into an
agreement that reflected a forward sale of $24.9 million of 10-year U.S.
Treasury notes at a fixed price. The Company unwound its hedge position
concurrent with the issuance of $25 million of MTNs in October 1998. The
$2.1 million amount the Company paid associated with the settlement of the
hedge agreement was recorded to unamortized debt issuance costs in October
1998 and will be amortized over the life of the MTNs. This accounting
treatment was in accordance with Statement of Financial Accounting
Standards No. 80, "Accounting for Futures Contracts" (SFAS No. 80). The
effective cost of the debt was 6.74%.
Debt Issuance in Fourth Quarter of Fiscal Year 1999
On September 2, 1998, in order to lock in the Treasury yield for an
anticipated $39 million MTN issuance related to the refunding of $39
million of 8-3/4% First Mortgage Bonds (FMBs) on July 1, 1999, the Company
entered into an agreement that reflected the forward sale of $40 million of
10-year U.S. Treasury notes at a fixed price to be paid on July 1, 1999.
The Company unwound its hedge position concurrent with the issuance of $50
million of MTNs in early July 1999. The $2.0 million amount the Company
received associated with the settlement of the hedge agreement was
recorded to unamortized debt issuance costs in July 1999 and will be
amortized over the life of the MTNs in accordance with SFAS No. 80.
The MTNs issued in July 1999 have a 10-year nominal life and a coupon rate
of 6.92%. The $40 million of MTNs to which the hedge agreement applies were
issued at an effective cost of 6.31%. The Company has an option to redeem
the MTNs at any time, as a whole or in part, at the greater of: (1) par
value; or (2) the price implied in the yield to maturity, plus 15 basis
points, of a comparable-maturity U. S. Treasury security. Part of the
proceeds from the MTNs was used to retire the $39 million of 8-3/4% FMBs
on July 1, 1999. Accordingly, pursuant to the provisions of Statement of
Financial Accounting Standards No. 6, "Classification of Short-Term
Obligations Expected to Be Refinanced", the Company at June 30, 1999
reclassified the FMBs from current maturities to long-term debt.
7
9
WASHINGTON GAS LIGHT COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(continued)
6. In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and for Hedging Activities" (SFAS No. 133). In June
1999, FASB amended SFAS No. 133 to be effective for fiscal years beginning
after June 15, 2000, and the Company must adopt it in the first quarter of
fiscal year 2001. SFAS No. 133 establishes accounting and reporting
standards requiring that every derivative instrument (including certain
derivative instruments embedded in other contracts) be recorded in the
balance sheet as either an asset or liability measured at its fair value.
SFAS No. 133 requires that changes in the derivative's fair value be
recognized currently in earnings unless specific hedge accounting
criteria are met. Special accounting for qualifying hedges allows a
derivative's gains and losses to offset related results on the hedged
item in the income statement, and requires that a company must formally
document, designate, and assess the effectiveness of transactions that
receive hedge accounting. The Company continues to assess the impact of
SFAS No. 133 on its financial condition and results of operations.
7. In November 1998, the Emerging Issues Task Force (EITF) of the Financial
Accounting Standards Board reached a consensus related to EITF Issue No.
98-10, "Accounting for Contracts Involved in Energy Trading and Risk
Management Activities." This consensus requires that energy trading
contracts, as these are defined in the consensus, are presented at fair
value with periodic gains and losses included in earnings. EITF Issue No.
98-10 is applicable to the Company in its fiscal year 2000. The Company
continues to assess the impact of EITF Issue No. 98-10 on its financial
condition and results of operations.
8. Basic and diluted earnings per share ("EPS") computations for the three and
nine months ended June 30, 1999 and 1998 are shown below. Basic EPS is
computed by dividing net income applicable to common stock by the weighted
average number of common shares outstanding during the periods. Diluted EPS
assumes conversion of convertible preferred stock and the issuance of
common shares pursuant to stock-based compensation plans (see Note 11) at
the beginning of the applicable period.
For the Three Months Ended
June 30, 1999
-----------------------------------------
Per Share
Income Shares Amount
------ ------ ---------
(Thousands, Except Per Share Data)
BASIC EPS:
Net Loss Applicable to Common Stock $(7,096) 46,410 $(0.15)
Effect of Dilutive Securities:
$4.60 and $4.36 Convertible Preferred Stock,
Assuming Conversion on April 1, 1999 2 27
Stock-Based Compensation Plans - 22
------- -------
DILUTED EPS:
Net Loss Applicable to Common Stock
Plus Assumed Conversions $(7,094) 46,459 $(0.15)
======== ====== =======
8
10
WASHINGTON GAS LIGHT COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(continued)
For the Three Months Ended
June 30, 1998
-----------------------------------------
Per Share
Income Shares Amount
------ ------ ---------
(Thousands, Except Per Share Data)
BASIC EPS:
Net Loss Applicable to Common Stock $(7,354) 43,677 $(0.17)
Effect of Dilutive Securities:
$4.60 and $4.36 Convertible Preferred Stock,
Assuming Conversion on April 1, 1998 2 26
------- ------
DILUTED EPS:
Net Loss Applicable to Common Stock
Plus Assumed Conversions $(7,352) 43,703 $(0.17)
======== ====== =======
For the Nine Months Ended
June 30, 1999
-----------------------------------------
Per Share
Income Shares Amount
------- ------ ---------
(Thousands, Except Per Share Data)
BASIC EPS:
Net Income Applicable to Common Stock $81,997 45,837 $1.79
Effect of Dilutive Securities:
$4.60 and $4.36 Convertible Preferred Stock,
Assuming Conversion on October 1, 1998 8 27
Stock-Based Compensation Plans - 7
------ ------
DILUTED EPS:
Net Income Applicable to Common Stock
Plus Assumed Conversions $82,005 45,871 $1.79
======= ====== =====
9
11
WASHINGTON GAS LIGHT COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(continued)
For the Nine Months Ended
June 30, 1998
-----------------------------------------
Per Share
Income Shares Amount
------ ------ ---------
(Thousands, Except Per Share Data)
BASIC EPS:
Net Income Applicable to Common Stock $83,832 43,658 $1.92
Effect of Dilutive Securities:
$4.60 and $4.36 Convertible Preferred Stock,
Assuming Conversion on October 1, 1997 9 27
------- ------
DILUTED EPS:
Net Income Applicable to Common Stock
Plus Assumed Conversions $83,841 43,685 $1.92
======= ====== =====
9. On November 12, 1998, the Company publicly offered 2 million shares of
common stock at $25.0625 per share. On November 18, 1998, the underwriters
involved in the offering exercised their option to purchase an additional
300,000 shares from the Company at the same price per share. Net proceeds
from the sale amounted to $55.7 million, and are being used for general
corporate purposes, including capital expenditures and working capital
requirements.
10. In November 1998, Shenandoah Gas Company (Shenandoah), a wholly owned
subsidiary of the Company, entered into an agreement to sell its natural
gas utility assets located in West Virginia. During the quarter ended
December 31, 1998, the Company recorded a non-recurring $3.3 million
pre-tax loss ($2.1 million after-tax or $0.05 per average common share)
related to this agreement to reflect the anticipated loss at settlement.
Ownership of the assets was transferred to the purchaser effective July 1,
1999.
The purchaser will provide natural gas service to Shenandoah's former 3,600
customers in Martinsburg and surrounding areas in Berkeley County, West
Virginia. Shenandoah will provide natural gas transportation service
through its pipeline system in Virginia to the purchaser to assure
continued natural gas service in the Eastern Panhandle of West Virginia.
Shenandoah will continue to provide natural gas utility service to its
nearly 11,000 customers in the northern Shenandoah Valley of Virginia.
In fiscal year 1998, Shenandoah's natural gas therm deliveries in West
Virginia represented less than two percent of the Company's consolidated
natural gas therm deliveries and less than one percent of associated
consolidated revenues. Shenandoah's West Virginia operations contributed
approximately $200,000 (0.3%) to the Company's fiscal year 1998 net income
applicable to common stock.
10
12
WASHINGTON GAS LIGHT COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(continued)
11. STOCK-BASED COMPENSATION
At the Company's Annual Meeting of stockholders held on February 24, 1999,
stockholders approved the Company's 1999 Incentive Compensation Plan (1999
Plan) replacing the expiring Long-Term Incentive Compensation Plan (LTICP).
Similar to the LTICP, the 1999 Plan provides for the granting of shares of
common stock to officers and key employees of the Company and is designed
to promote the long-term success of the Company by recruiting and retaining
key employees. The maximum number of shares that may be issued under the
1999 Plan is 1,000,000 shares of common stock. The 1999 Plan differs from
the LTICP in that it enables the Company to impose performance goals with
respect to any award, thereby requiring forfeiture of all or part of any
award if such performance goals are not met. The Company applies Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees"
(APB No. 25) and related interpretations in accounting for its stock-based
compensation plans.
On March 31, 1999, the Company granted 99,465 nonqualified stock options
and 45,702 performance shares under the 1999 Plan. The stock options vest
three years after the date of the grant and expire on the tenth anniversary
of the grant date. Since the stock options were granted at the fair market
value of the Company's stock on the grant date, no compensation expense
will be recognized.
For the performance shares, 15,802 shares will vest after 18 months and for
29,900 shares, vesting occurs at the end of 30 months. At the end of the
vesting periods, the ultimate amount of performance shares issued to the
recipients will be adjusted upward or downward based on the Company's total
shareholder return relative to a selected peer company group. In accordance
with APB No. 25, the Company will recognize estimated compensation expense
ratably over the vesting periods of the performance shares.
11
13
WASHINGTON GAS LIGHT COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This report may contain statements that are not based on historical facts
and thereby constitute 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 the 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, which are not intended to cover all events, 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 effect of fluctuations in weather from
normal levels; (4) variations in prices of natural gas and competing energy
sources; (5) the Company's ability to develop new markets and product and
service offerings as well as to maintain existing markets and the expenditures
required to develop and provide such products and services; (6) conditions of
the capital markets utilized by the Company to access capital to finance
operations and capital expenditures; (7) improvements in products or services
offered by competitors; (8) the cost and effects of legal and administrative
claims and proceedings against the Company or which may be brought against the
Company; (9) estimates of future costs or the effect on future operations as a
result of events that could result from the Year 2000 issue described further
herein; and (10) the impact of regulatory proceedings initiated by the Company
or other parties before the regulatory commissions that have jurisdiction over
the Company's retail rates.
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 1999 vs. JUNE 30, 1998
Earnings
For the quarter ended June 30, 1999, the Company recorded a seasonal net
loss applicable to common stock of $7.1 million, which was $0.3 million less
than the results for the same period last year. Basic and diluted loss per
average common share in the current quarter was $0.15. This compares to a loss
of $0.17 per basic and diluted share for the same period last year. Last year's
results included a non-recurring gain of $1.6 million or $0.04 per average
common share as a result of the disposal of the Company's retail propane assets.
Accordingly, the adjusted comparison of the loss per average common share
relates $0.21 in the third fiscal quarter of 1998 to $0.15 in the third fiscal
quarter of 1999, an improvement of $0.06 per average common share. Average
common shares increased by 6.3% from the prior year, due to the public offering
of 2.3 million shares of common stock in November 1998 (See Note 9 to the
Consolidated Financial Statements) and common shares issued under the Dividend
Reinvestment and Common Stock Purchase Plan and the Employee Savings Plans. The
improvement in recurring earnings of $1.9 million primarily resulted from higher
net revenues caused by a 5.0% increase in firm therms delivered and increased
net income from energy-related operations. An increase in depreciation and
amortization partially offset these improvements.
12
14
WASHINGTON GAS LIGHT COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(continued)
Net Revenues
Net revenues for the period increased by $2.3 million (3.2%) from the same
period last year to $74.9 million. The following table compares certain
operating statistics for the quarters ended June 30, 1999 and 1998.
Three Months Ended
---------------------------------
JUNE 30, June 30,
1999 1998
---------- -------
GAS SALES AND DELIVERIES (thousands of therms)
Firm
Gas Sold and Delivered 97,818 113,118
Gas Delivered for Others 44,425 22,302
-------- --------
142,243 135,420
------- -------
Interruptible
Gas Sold and Delivered 9,189 9,984
Gas Delivered for Others 54,618 49,069
-------- --------
63,807 59,053
-------- --------
Electric Generation
Gas Delivered for Others 38,506 22,532
-------- --------
Total Deliveries 244,556 217,005
======= =======
DEGREE DAYS
Actual 285 279
Normal 311 310
CUSTOMER METERS (end of period) 846,866 819,062
Gas Delivered to Firm Customers-
The level of gas delivered to firm customers is highly sensitive to
the variability of weather since 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. 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. Weather
for the three months ended June 30, 1999 was 8.4% warmer than normal while
weather for the same period last year was 10.0% warmer than normal.
13
15
WASHINGTON GAS LIGHT COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(continued)
Firm therm deliveries increased by 6.8 million therms (5.0%) in
the current quarter, primarily due to weather that was 2.2% colder than
the same quarter last year and the effect of a 3.4% increase in the
number of customer meters.
Historically, the Company has not made a profit or incurred a
loss as a result of selling the natural gas commodity. Subject to
regulatory prudence reviews, the Company has passed on the costs of the
commodity directly to its customers. Under Customer Choice Programs in
all of the Company's jurisdictions, certain firm customers are offered
the opportunity to purchase their natural gas from the Company as well
as from a third-party supplier, such as unregulated marketers and
unregulated subsidiaries of other utility companies. The Company
continues to serve these customers by delivering gas through its
distribution system, which results in the Company earning a regulated
return on this service.
Net revenues generated from firm customers that do not acquire
their gas supply from the Company are equivalent on a per unit basis to
those earned on sales of gas made by the Company. Therefore, the Company
does not experience any loss of margins from customers that choose to
purchase their gas from a third-party supplier. In those instances where
customers choose to buy their gas from the Company's gas-marketing
subsidiary, Washington Gas Energy Services, Inc. (WGES), 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 WGES are included in
the caption Other Income-Net in the accompanying Income Statements.
Gas Delivered to Interruptible Customers-
Therms delivered to interruptible customers increased by 4.8
million therms (8.1%) in the current quarter. The increase in volumes
delivered resulted primarily from the colder weather experienced in the
current quarter. 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 it reaches a gross margin threshold or in exchange for
the shifting of a portion of the fixed costs of providing service from
the interruptible to the firm class.
Gas Delivered for Electric Generation-
The Company has two customers with facilities in Maryland to
which it sells and/or delivers gas that is used to generate electricity.
Volumes delivered for electric generation in the current quarter
increased by 16.0 million therms (70.9%) over the same period last year,
primarily due to increased usage by these customers. The Company shares
a significant majority of the margins earned on deliveries of gas to
these customers with firm customers and, therefore, changes in volumes
delivered between periods have an immaterial effect on net revenues and
net income.
14
16
WASHINGTON GAS LIGHT COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(continued)
Other Operating Expenses
Depreciation and amortization increased by $1.4 million (10.5%) due to
the Company's increased investment in plant and equipment to meet customer
growth and to upgrade existing facilities and systems. Included in the increase
is $381,000 of amortization due to the completion of a portion of the Company's
new enterprise-wide software that became operational on April 1, 1999. The
remainder of this system became operational in July 1999. Amortization of the
related capitalized costs began in July 1999.
General taxes declined by $725,000 (5.2%) primarily due to a decrease in
gross receipts taxes caused by a decline in the tax rate in the District of
Columbia and lower revenues compared to last year. The Company records the
amounts collected from customers in revenue and in general tax expense, and,
therefore there is generally no effect on net income.
Income taxes, including amounts reflected in Other Income - Net,
increased by $593,000, primarily due to a lower pre-tax loss generated this
quarter.
Other Income - Net
The following table compares the financial results for the Company's
energy-related operations for the three months ended June 30, 1999 and 1998.
Net Income (Loss) Applicable to Energy-Related Operations
Three Months Ended
--------------------------------
JUNE 30, June 30,
1999 1998
--------- --------
(Thousands)
Energy Marketing $ 1,261 $ 694
Commercial Energy Services 244 (87)
Consumer Financing 157 157
--------- --------
Total $ 1,662 $ 764
========= ========
Other Income-Net declined by $1.3 million (47.0%) primarily due to a $1.6
million gain on the sale of the Company's retail propane assets recorded in the
same period in the prior year, partially offset by higher earnings generated
from energy-related operations in the current period.
The Company's energy marketing subsidiary, WGES, showed an improvement of
$0.6 million over the level of the prior year as volumes sold increased by 18%.
Margins per therm also improved, in part due to favorable market conditions.
Results for the Company's commercial heating, ventilating and air-conditioning
business shows an improvement of $0.3 million over the same period last year and
includes earnings generated from the American Combustion Industries, Inc. (ACI)
subsidiary acquired in March 1998.
15
17
WASHINGTON GAS LIGHT COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(continued)
Interest Expense
Total interest expense decreased by $415,000 (4.6%) from the same period
last year, reflecting the following changes:
Composition of the Changes in Interest Expense:
Increase/(Decrease)
-------------------
(Thousands)
Long-Term Debt $ (265)
Short-Term Debt 8
Other (158)
-------
Total $ (415)
=======
Long-Term Debt - The decrease in interest on long-term debt of $265,000
was primarily due to a $6.2 million decline in the average amount of
long-term debt outstanding and a decline of 0.06 percentage points in the
weighted-average cost of such debt.
Short-Term Debt - The increase in interest on short-term debt of $8,000
was due to a $0.7 million rise in the average amount of short-term debt
outstanding, partially offset by a decrease of 0.48 percentage points in
the weighted-average cost of such debt.
Other - Other interest expense decreased by $158,000 in the current
quarter primarily reflecting an increase in the accrual for allowance for
funds used during construction primarily associated with the installation
of enterprise-wide software.
NINE MONTHS ENDED JUNE 30, 1999 vs JUNE 30, 1998
Earnings
For the nine months ended June 30, 1999, basic and diluted earnings per
average common share were $1.79, representing a decline of $0.13 from the same
period last year. Average common shares increased by 5.0% resulting from the
previously mentioned common stock offering in the first quarter and common
shares issued under the Dividend Reinvestment and Common Stock Purchase Plan
(DRP) and the Employee Savings Plans. The additional shares of common stock
outstanding in the current nine-month period reduced earnings per average common
share by $0.09.
Net income applicable to common stock totaled $82.0 million, or $1.8
million lower than the results for the same period last year. The level for the
current nine-month period includes a $2.1 million non-recurring net loss from
the disposal of the Company's natural gas utility assets located in West
Virginia (See Note 10 to the Consolidated Financial Statements), which results
in a recurring amount of $84.1 million. In the nine months ended June 30, 1998,
the Company recorded non-recurring net gains of $3.2 million associated with the
sale of the Company's retail propane assets and certain venture capital
investments. The recurring level of net income applicable to common stock for
the nine months ended June 30, 1998 is $80.6 million. Accordingly, on a
recurring basis for the nine-month period, net income applicable to common stock
improved from 1998 to 1999 by $3.5 million. This improvement in recurring
earnings primarily resulted from
16
18
WASHINGTON GAS LIGHT COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(continued)
higher net revenues caused by a 1.4% increase in firm therms delivered and
increased net income from energy-related operations. An increase in operation
and maintenance expenses in the current period due to technology initiatives
partially offset these improvements.
Net Revenues
Net revenues for the current period increased by $2.2 million (0.5%)
from the same period last year to $410.5 million. Weather for the nine months
ended June 30, 1999 was 0.7% warmer than the same period ended in the prior year
and 5.1% warmer than normal. Weather for the same period last year was 4.9%
warmer than normal. Despite the warmer weather experienced this year, a 3.4%
increase in customer meters more than offset the weather's impact and caused a
1.4% increase in firm therms delivered. The following table compares certain
operating statistics for the nine months ended June 30, 1999 and 1998.
Nine Months Ended
----------------------------------
JUNE 30, June 30,
1999 1998
-------------- ---------
GAS SALES AND DELIVERIES (thousands of therms)
Firm
Gas Sold and Delivered 830,832 887,537
Gas Delivered for Others 166,736 96,613
--------- ---------
997,568 984,150
--------- ---------
Interruptible
Gas Sold and Delivered 43,899 66,018
Gas Delivered for Others 225,392 198,542
--------- ---------
269,291 264,560
--------- ---------
Electric Generation
Gas Delivered for Others 68,249 50,502
--------- ---------
Total Deliveries 1,335,108 1,299,212
========= =========
DEGREE DAYS
Actual 3,630 3,656
Normal 3,825 3,843
CUSTOMER METERS (end of period) 846,866 819,062
17
19
WASHINGTON GAS LIGHT COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(continued)
Gas Delivered to Firm Customers-
Firm therm deliveries increased by 13.4 million therms (1.4%) in
the current period, primarily due to the effect of a 3.4% increase in the
number of customer meters which offset 0.7% warmer weather experienced
during the current year.
Gas Delivered to Interruptible Customers-
Therms delivered to interruptible customers increased by 4.7
million therms (1.8%) in the current nine-month period. The increase in
volumes delivered resulted primarily from the colder weather in the third
quarter of this year. As previously described in this report, the effect
on net income of changes in gas deliveries to interruptible customers is
minimal due to margin-sharing arrangements in each of the Company's
jurisdictions.
Gas Delivered for Electric Generation-
Volumes delivered for electric generation in the current
nine-month period increased by 17.7 million therms (35.1%) over the same
period last year, primarily due to increased usage by these customers
during the second and third quarters of fiscal year 1999. Margins earned
on such deliveries are being shared with firm customers as described
previously in this report.
Other Operating Expenses
Operation and maintenance expenses increased by $4.3 million (2.8%) from
the same period last year. This increase is primarily attributable to: (1) the
previously mentioned non-recurring loss ($3.3 million pre-tax) related to the
sale of Shenandoah's natural gas utility assets located in West Virginia; (2)
higher costs associated with technology initiatives; and (3) increased
advertising costs. Partially offsetting these increases are decreased
uncollectible accounts expenses reflecting lower revenues due to a drop in the
cost of gas this year, and lower labor costs.
Depreciation and amortization increased by $3.3 million (8.0%) primarily
due to the Company's increased investment in plant and equipment to meet
customer growth and to upgrade existing facilities and systems. Also included in
the increase is $381,000 of amortization related to the previously mentioned
completion of a portion of the Company's new enterprise-wide software.
General taxes declined by $6.1 million (10.5%) primarily due to a
decrease in gross receipts taxes, reflecting lower revenues caused by a drop in
the cost of gas this year and a rate reduction in the District of Columbia. The
Company records the amounts collected from customers in revenue and general tax
expense, and, therefore there is generally no effect on net income. The decrease
in gross receipts taxes was partially offset by higher property taxes.
Income taxes, including amounts reflected in Other Income - Net,
increased slightly from the same period last year. The effective income tax
rates were 37.26% and 36.42% for 1999 and 1998, respectively.
18
20
WASHINGTON GAS LIGHT COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(continued)
Other Income - Net
The decrease of $2.1 million in Other Income-Net is primarily explained
by $3.2 million in after-tax, non-recurring gains from the sale of the Company's
retail propane assets and certain venture fund investments recorded in the same
period last year and higher miscellaneous general expenses. Higher earnings
generated from energy-related operations partially offset the effect of these
items.
The following table compares the financial results for the Company's
energy-related operations for the nine months ended June 30, 1999 and 1998.
Net Income (Loss) Applicable to Energy-Related Operations
Nine Months Ended
-------------------------------
JUNE 30, June 30,
1999 1998
----------- --------
(Thousands)
Energy Marketing $ 1,909 $ 275
Commercial Energy Services 748 (47)
Consumer Financing 784 609
------- ---------
Total $ 3,441 $ 837
======= =========
Energy Marketing-
The Company's gas marketing subsidiary, WGES, continues to gain
market share both inside and outside the Company's traditional service
territory. Higher earnings generated this year include the effect of
customer growth as volumes sold increased by 37%. Margins per therm also
improved, in part due to favorable market conditions. Partially
offsetting the effects of this strong growth is relatively significant
customer acquisition costs recorded during the current period in
achieving this effort. WGES intends to grow its customer base
aggressively and it will incur relatively significant customer
acquisition costs in this effort.
Commercial Energy Services-
Positive financial results generated from the Company's
subsidiary, ACI, which was purchased in March 1998, was the primary
reason for increased profits in the current nine-month period.
Consumer Financing-
Consumer financing, which includes the financing of gas
appliances and certain other equipment for residential and small
commercial customers, continues to show positive results.
Interest Expense
Total interest expense for the nine months ended June 30, 1999 decreased
$417,000 (1.5%) from the same period last year, reflecting the following
changes:
19
21
WASHINGTON GAS LIGHT COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(continued)
Composition of the Changes in Interest Expense:
Increase/(Decrease)
-------------------
(Thousands)
Long-Term Debt $ 981
Short-Term Debt (738)
Other (660)
---------
Total $ (417)
=========
Long-Term Debt - The increase in interest on long-term debt of $981,000
was primarily due to a $33.0 million rise in the average amount of
long-term debt outstanding, partially offset by a decline of 0.16
percentage points in the weighted-average cost of such debt. The embedded
cost of long-term debt at June 30, 1999 was 6.8%.
Short-Term Debt - The decrease in interest on short-term debt of $738,000
was due to a $13.3 million decline in the average amount of short-term
debt outstanding and a decrease of 0.45 percentage points in the
weighted-average cost of such debt.
Other - Other interest expense decreased by $660,000 in the current
period primarily reflecting an increase in the accrual for allowance for
funds used during construction primarily associated with the installation
of enterprise-wide software.
LIQUIDITY AND CAPITAL RESOURCES
SHORT-TERM CASH REQUIREMENTS AND RELATED FINANCING
The Company's business is highly weather sensitive and seasonal.
Approximately 75% of the Company's therms delivered (excluding deliveries for
electric generation) occur 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.
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 can
activate these financing options to support or replace the Company's commercial
paper.
At June 30, 1999, the Company had notes payable outstanding of $3.6
million, as compared to $124.9 million at September 30, 1998. The decrease in
notes payable from September 30, 1998 reflects the seasonality of the Company's
cash requirements.
20
22
WASHINGTON GAS LIGHT COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(continued)
LONG-TERM CASH REQUIREMENTS AND RELATED FINANCING
To fund construction expenditures and other capital requirements, the
Company draws upon both internal and external sources of cash. The Company's
ability to generate adequate cash internally depends upon a number of factors,
including the timing and amount of rate increases received and the level of
therm deliveries. The Company's last significant base rate increase became
effective in December 1994. The number of customer meters and the variability of
the weather significantly affect the level of therms delivered.
CASH FLOW
From Operating Activities
Net cash provided by operating activities was $232.6 million during the
first nine months of fiscal year 1999 or an improvement of $50.2 million from
the same period last year. The improvement was brought about by: (1) lower funds
used to support accounts receivable and accrued utility revenues reflecting
decreased gas costs and lower off-system sales; and (2) increased sources of
cash provided by accounts payable resulting from timing of payments related to
gas purchases. Partially offsetting these improvements were higher funds used to
support storage gas balances due to a greater level of gas volumes in storage.
From Financing Activities
As more fully described in Note 9 to the Consolidated Financial
Statements, the Company in the first quarter of this year raised $55.7 million
through the sale of 2.3 million shares of common stock. Additionally, during the
nine months ended June 30, 1999, the Company raised $8.1 million from shares
issued through the Dividend Reinvestment and Common Stock Purchase Plan (DRP)
and the Employee Savings Plans. Effective August 1, 1999 shares issued under the
DRP and Employee Savings Plans are being purchased on the open market instead of
being issued as new shares.
During the nine months ended June 30, 1999, the Company issued $28.3
million of long-term debt. Included in long-term debt issuances were $25 million
of Medium-Term Notes (MTNs) with a coupon rate of 5.49% along with project
financing of approximately $2.9 million. The Company retired $15.2 million of
MTNs with coupon rates ranging from 7.08% to 7.97% and $4.0 million of 8-5/8%
Series First Mortgage Bonds.
From Investing Activities
Capital expenditures for the first nine months of fiscal year 1999 were
$112.7 million on a budget of $141.9 million for fiscal year 1999. Capital
expenditures in the first nine months of fiscal year 1998 were $110.6 million.
Actual capital expenditures for fiscal year 1999 are expected to be $150
million.
Sales of Accounts Receivable
During the nine months ended June 30, 1999, the Company sold, with
recourse, $21.3 million of non-utility accounts receivable, compared to
$21.1 million in the nine months ended June 30, 1998.
21
23
WASHINGTON GAS LIGHT COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(continued)
OTHER FACTORS AFFECTING THE COMPANY
YEAR 2000
The millennial change to the Year 2000 could affect the Company's
software programs and computing infrastructure that use two-digit years to
define the applicable year, rather than four-digit years. As such they may
recognize a date using "00" as the year 1900 rather than the year 2000. This
could result in the computer or device shutting down, performing incorrect
computations or performing inconsistently.
In 1996, the Company began a structured program to address Year 2000
issues. It has been implementing individual strategies targeted at the specific
nature of Year 2000 issues in each of the following areas: (1)
business-application systems including, but not limited to, the Company's
customer service, operations and financial systems and end-user applications;
(2) embedded systems, including equipment that operates such items as the
Company's storage and distribution system, meters, telecommunications, fleet and
buildings; (3) vendor and supplier relationships; (4) communications with
customers; (5) business continuity management planning; and (6) independent
verification and validation.
To implement this comprehensive Year 2000 program, the Company
established a Year 2000 Project Office, chaired by the Vice President and Chief
Information Officer who reports directly to the Chairman and Chief Executive
Officer. The multi-disciplinary project office includes executive management and
employees with expertise from various disciplines including, but not limited to,
information technology, engineering, finance, communications, internal audit,
facilities management, procurement, operations, law and human resources. In
addition, the Company has utilized the expertise of outside consultants to
assist in the implementation of the Year 2000 program in such areas as
business-application system remediation, business-application system
replacement, embedded systems inventory and analysis, business continuity
management planning, and independent verification and validation.
Business-Application Systems
In March 1997, the Company completed its assessment of all its
business-application systems. It is resolving Year 2000 issues through
remediation of 18 systems to recognize the turn of the century and the
replacement of 21 systems with new systems that provide additional business
management information and recognize four-digit years. The Company has completed
modifications to all 18 of the business applications targeted for remediation.
Thus, the applications targeted for remediation have been remediated, tested
and placed back into a Year 2000 operational environment.
The Company used in-house staff to test all remediated applications and
used a testing procedure commonly known as trace-based testing to test modified
business applications for Year 2000 functionality. This method first captures
current processing steps and relevant data, which are run prior to remediation
22
24
WASHINGTON GAS LIGHT COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(continued)
(baseline test) and again after remediation (regression test). This process is
intended to identify any business rules that may have changed during the
remediation effort and to confirm that only date processes have been changed.
Once the regression test was successfully completed, the Company used automated
test software tools to perform additional applicable future date tests for each
system.
The Company installed an enterprise-wide software system that replaced 19
business application systems, including its financial, human resources and
supply chain systems. Two other systems will be replaced with systems not
included in the enterprise-wide software initiative. These 21 business
applications represent approximately one-half of the business application
software code requiring remediation or replacement. The Company has completed
the replacement of all critical and important business applications to be
replaced.
During the fourth quarter of fiscal year 1998, the Company completed a
comprehensive, prioritized inventory of end-user applications (i.e., PC-based
databases) and is implementing project plans to replace or remediate these
applications, as necessary. It expects to complete replacement or remediation,
and testing of critical and important end-user applications by the end of
September 1999.
Embedded Systems
The Company has performed a comprehensive inventory of its embedded
systems at the component level. This inventory identified several hundred
components that were potentially date sensitive. The Company has contacted all
manufacturers of those components that it has identified as critical or
important to its operations. Approximately three percent of the date-sensitive
components that the Company has identified are non-compliant based on
information provided by the manufacturers. All critical and important
components have been remediated, tested and placed back into production.
Vendor and Supplier Relationships
The Company is contacting in writing or through face-to-face discussions
all vendors and suppliers of products and services that it considers critical or
important to its operation. These contacts include providers of interstate
transportation capacity and storage, natural gas suppliers, financial
institutions and electric, telecommunications and water companies. The Company
has evaluated responses and continues the process of following up with the
vendors and suppliers either through meetings or by letter. The Company will
consider new business relationships with alternate providers of products and
services as necessary and to the extent alternatives are available. The Company
recognizes there are no practical alternatives for external infrastructure such
as electric, telecommunications and water services, suppliers of natural gas
and
23
25
WASHINGTON GAS LIGHT COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(continued)
providers of interstate transportation capacity and storage to deliver natural
gas to the Company's distribution system. However, based upon the Company's
communications with these suppliers, the Company has no reason to believe these
providers will not be ready to provide service at the turn of the century and
beyond.
Customer Communications
The Company is communicating with its major interruptible customers to
inform them about the potential vulnerability of embedded boiler and plant
control systems. The Company informed them that they should assess the need to
include potential remediation and/or replacement of these systems as part of
their Year 2000 programs to ensure their ability to switch to an alternate fuel
source, as required by applicable tariffs and contracts and if called on to do
so.
In addition, the Company is communicating its Year 2000 efforts to
customers through individual, community and association presentations, through
responses to written inquiries, through brochures explaining our program, which
were mailed to customers, and through its website.
Year 2000 Risks and Business Continuity Planning
With respect to its internal operations, over which the Company has
direct control, the Company believes the most significant potential risks are:
(1) its ability to use electronic devices to control and operate its
distribution system; (2) its ability to render timely bills to its customers;
(3) its ability to enforce tariffs and contracts applicable to interruptible
customers; and (4) its ability to maintain continuous operation of its computer
systems. The Company's Year 2000 program addresses each of these risks, and
the remediation or replacement of these systems is nearly complete. In the event
that any Year 2000-related problems may occur, the Company's continuity plan
will outline alternatives to mitigate the impact of such failures, to the extent
possible.
The Company relies on the suppliers of natural gas and interstate
transportation and storage capacity to deliver natural gas to the Company's
distribution system. External infrastructure, such as electric,
telecommunications and water services, is necessary for the Company's basic
operation as well as the operations of many of its customers. Should any of
these critical vendors fail, the impact of any such failure could become a
significant challenge to the Company's ability to meet the demands of its
customers, to operate its distribution system and to communicate with its
customers. It could also have a material adverse financial impact including, but
not limited to, lost revenues, increased operating costs and claims from
customers related to business interruptions. The Company has no way of ensuring
that those vendors or suppliers mentioned above for which there are no viable
options will be timely Year 2000 compliant.
As part of its normal business practice, the Company maintains plans to
follow during emergency circumstances. These plans are being used as a basis to
build the Company's continuity plan for potential Year 2000-related problems. As
part of its contingency planning effort the Company has performed table-top
exercises to validate this plan. The Company will continue performing table-top
exercises and drills, which are expected to continue through the end of 1999.
24
26
WASHINGTON GAS LIGHT COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(continued)
The Company maintains and operates a command center that is activated
during emergency circumstances. The Company will manage specific Year 2000
continuity operations from the command center during the millennium change as
well as at other points in time on an as needed basis. The Company has informed
its employees that every employee will be expected to work or be available to
work between December 27, 1999, and January 7, 2000, and between February 22,
2000, and March 7, 2000.
Because of the interconnected nature of potential Year 2000-related
problems, the Company recognizes that effective continuity planning must focus
on both internal and external operations. Therefore, the Company has been in
contact with and will work with federal, state, and local governmental agencies
as well as local organizations and other utilities as it completes its planning
effort.
The Company believes that its work will serve to reduce the risk that its
internal systems will fail for Year 2000 reasons. However, the continuity plan
cannot offset interrupted delivery to the Company's distribution system of
natural gas by the producers of natural gas and providers of interstate
transportation capacity or the impact on operations of failures of electric,
telecommunications and water services.
Independent Verification and Validation
The Company is currently working with external consultants to verify and
validate the Company's Year 2000 remediation and replacement strategies and
results for both business applications and embedded systems.
To verify and validate the Company's remediation efforts of its business
applications, the consultants are reviewing all remediated business applications
to determine that the code was remediated correctly. The consultants are
reviewing the compliance statements received from the manufacturers of the
critical and important embedded system components and where possible are
developing strategies and testing procedures to verify the compliance
statements. The Company has independently tested more than 99% of those
critical and important embedded systems that it has determined it can
meaningfully test.
Financial Implications
To implement its Year 2000 strategies, the Company currently expects to
have generated non-recurring expenses of approximately $12 million over the
three fiscal-year periods ending September 30, 1999 for (1) business-application
systems remediation; (2) embedded systems replacement; (3) end-user applications
remediation and replacement; (4) independent verification and validation; and
(5) certain costs associated with the replacement of certain existing business
systems. The Company will capitalize costs of approximately $46 million incurred
to replace certain existing business-application software systems with new
systems that will be Year 2000 operational and provide additional business
management information and to implement the business continuity initiatives
identified by the Company.
25
27
WASHINGTON GAS LIGHT COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(continued)
The following tables reflect the amounts charged to expense and
capitalized for the fiscal years ending September 30, 1997 and 1998 and fiscal
year 1999 through June 30, 1999:
- ----------------------------------------------------------------------------------------------------
Business-application systems remediation, embedded systems replacement, end-user applications
remediation and replacement, independent verification and validation costs and business continuity
initiatives
- ----------------------------------------------------------------------------------------------------
(millions) 1999 1998 1997 Total
- ----------------------------------------------------------------------------------------------------
Expense $ 2 $ 1 $ 1 $ 4
- ----------------------------------------------------------------------------------------------------
Capital $ - $ 1 $ - $ 1
- ----------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------
Business-application software systems replacement
- ----------------------------------------------------------------------------------------------------
(millions) 1999 1998 1997 Total
- ----------------------------------------------------------------------------------------------------
Expense $ 3 $ 4 $ - $ 7
- ----------------------------------------------------------------------------------------------------
Capital $20 $19 $ - $39
- ----------------------------------------------------------------------------------------------------
To date the Company has incurred $11 million or approximately 92% of the
estimated costs the Company expects to expense for its Year 2000 strategies for
the three fiscal-year periods ending September 30, 1999. Additionally, the
Company has capitalized $40 million or approximately 87% of the estimated costs
to replace certain existing business-application software systems and embedded
systems, and to implement business continuity initiatives during the same three
fiscal-year periods. As the Company completes further analysis of the impact of
the Year 2000 issue on its continuity planning, it may incur additional costs
as a result of its efforts.
Each of the components of the Company's Year 2000 program is
progressing, and the Company believes it is taking all reasonable steps
necessary to be able to operate successfully through and beyond the turn of the
century.
SALE OF REAL ESTATE
In July 1999, the Company's unregulated subsidiary, Brandywood Estates,
Inc. (Brandywood) sold approximately 1,000 acres of undeveloped land in Prince
George's County, Maryland. As a result of this transaction, the Company will
recognize a non-recurring pre-tax gain of approximately $3 million ($2 million
after-tax or $0.04 per average common share) in the fourth quarter of fiscal
year 1999.
Item 3.
Quantitative and Qualitative Disclosures About Market Risks of the Company
The Company has interest rate risk exposure related to long-term debt.
Additionally, the Company's subsidiary, Washington Gas Energy Services, Inc.
(WGES) has price risk exposure related to gas-marketing activities. For
information regarding the Company's exposure related to these risks see Item 7A
in the Company's most recently filed Form 10-K. The Company's risk associated
with interest rates has not changed from September 30, 1998. At June 30, 1999,
WGES' open position was not material to the Company's financial position or
results of operations.
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PART II. OTHER INFORMATION
Item 5.
Other Information
A. On May 27, 1999, the Company filed a registration statement with the
Securities and Exchange Commission (SEC) for the issuance and sale of up
to a total of $144 million in additional unsecured Medium-Term Notes,
Series E. It was declared by the SEC to be effective on June 17, 1999. To
the extent the notes are sold, the Company expects to use the net proceeds
from the sale of these securities for three primary purposes: (1) the
refunding of maturing long-term debt and satisfaction of sinking fund
requirements; (2) the refunding of higher-coupon long-term debt as market
conditions permit; and (3) for general corporate purposes, including
capital expenditures, acquisition of property, working capital
requirements and retirement of short-term debt. Combined with the $81
million in previously registered notes that the company is carrying
forward, the shelf registration allows the Company to issue up to $225
million over approximately two years.
B. On June 18, 1999, Moody's Investor Service (Moody's) upgraded the
Company's unsecured Medium-Term Notes (MTNs) to Aa2 from Aa3 and its
preferred stock to "aa2" from "aa3". In addition, Moody's confirmed the
Company's Prime-1 commercial paper rating.
C. 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. The Company, from time to time, performs studies, and in
some cases holds discussions regarding utility and energy-related
investments and transactions. The ultimate impact on the Company of any
such investments and transactions that may occur cannot be determined at
this time.
D. On May 17, 1999, the Company filed an application for an Incentive Rate
Plan with the Maryland Public Service Commission. The application
requested that the Company's rates be frozen at current levels for five
years from the date of approval. In addition to the rate freeze, the plan
proposes an asymmetrical sharing mechanism for revenues when the
Company's earnings on its Maryland business exceeds a 12% return on
equity (ROE), with the ratepayers receiving 50% and the Company retaining
50% of the excess. The plan provides for a change in the 12% benchmark
return on equity when the twelve-month average of the 30-year Treasuries
moves by more than 100 basis points in either direction. The plan also
allows for adjustments to rates due to circumstances beyond the Company's
control such as changes in tax laws, legislative mandates, Financial
Accounting Standards Board or Securities and Exchange Commission
accounting modifications or new or increased regulatory requirements. The
plan provides the Company with the opportunity to adjust rates, subject
to Commission review and refund, should its Maryland weather-adjusted ROE
drop below 8.5%. Finally, the plan maintains the gas cost mechanisms that
provide for the recovery of actual costs of gas from firm customers. A
decision is not expected before the fiscal year 2000 heating season.
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Item 6.
Exhibits and Reports on Form 8-K
(a) Exhibits Filed Herewith:
DESCRIPTION PAGE IN 10-Q
- -----------------------------------------------------------------------------------
10 Material Contracts See separate volume
10.1 Employment Agreement between the "
Company and James H. DeGraffenreidt,
Jr.*
10.2 Employment Agreement between the "
Company and Joseph M. Schepis*
10.3 Employment Agreement between the
Company and Frederic M. Kline* "
10.4 Employment Agreement between the
Company and John K. Keane, Jr.* "
27 Financial Data Schedule "
99.0 Computation of Ratio of "
Earnings to Fixed Charges
99.1 Computation of Ratio of "
Earnings to Fixed Charges and
Preferred Stock Dividends
* Compensatory plan agreement required to be filed pursuant to Item 14 (c) of
Form 10-K.
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30
PART II. OTHER INFORMATION
(continued)
(b) Reports on Form 8-K:
On June 28, 1999, the Company reported that on June 23, 1999, it
executed a Distribution Agreement with Salomon Smith Barney Inc., Banc
One Capital Markets, Inc., Merrill Lynch, Pierce, Fenner & Smith
Incorporated, Paine Webber Incorporated and The Williams Capital Group,
L.P. for the issuance and sale of up to $225 million of Medium-Term
Notes.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
WASHINGTON GAS LIGHT COMPANY
--------------------------------------
(Registrant)
Date August 12, 1999 /s/ Robert E. Tuoriniemi
-------------------------------- --------------------------------------
Controller
(Principal Accounting Officer)
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