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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K
(Mark One)
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended September 30, 1997
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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
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(Exact name of registrant as specified in its charter)
District of Columbia and Virginia 53-0162882
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1100 H Street, N. W., Washington, D. C. 20080
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (703) 750-4440
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Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange on
Title of each class which registered
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Common Stock $1.00 par value New York Stock Exchange
Philadelphia Stock Exchange
Preferred Stock, cumulative,
without par value:
$4.25 Series Philadelphia Stock Exchange
$4.36 Convertible Series Philadelphia Stock Exchange
$4.60 Convertible Series Philadelphia Stock Exchange
$4.80 Series Philadelphia Stock Exchange
$5.00 Series Philadelphia Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
None
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/No) X No
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. [X]
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State the aggregate market value of the voting stock held by non-affiliates of
the registrant. The aggregate market value shall be computed by reference to
the price at which the stock was sold, or the average bid and asked prices of
such stock, as of a specified date within 60 days prior to the date of filing.
<TABLE>
<S> <C>
$ 1,135,428,410 October 31, 1997
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Market Value Date
</TABLE>
Indicate the number of shares outstanding of each of the registrant's classes
of common stock, as of the latest practicable date.
<TABLE>
<S> <C> <C>
Common Stock $1.00 par value 43,600,969 November 28, 1997
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Class Number of Shares Date
</TABLE>
DOCUMENTS INCORPORATED BY REFERENCES
List hereunder the following documents if incorporated by reference and
the Part of the Form 10-K:
PART I - Annual Report to Shareholders for the fiscal year ended September
30, 1997.
PART II - Annual Report to Shareholders for the fiscal year ended September
30, 1997 (Pages 20 through 47).
PART III - Proxy Statement dated January 21, 1998.
PART IV - Form S-7 Registration Statement number 2-53658, filed May 12, 1975,
and Amendment No. 2 thereof, filed June 24, 1975.
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TABLE OF CONTENTS
<TABLE>
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PART I PAGE
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Item 1. Business
Subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Rate Regulation, Retail Gas Rates and Rate Increases . . . . . . . . . 4
Competition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Gas Supply and Capacity . . . . . . . . . . . . . . . . . . . . . . . 14
Environmental Matters . . . . . . . . . . . . . . . . . . . . . . . . 16
Year 2000 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Item 2. Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Item 3. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Item 4. Submission of Matters to a Vote of Security Holders . . . . . . . . . . . 20
Executive Officers of the Registrant . . . . . . . . . . . . . . . . . . . . . . . . 21
PART II
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Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters . . . . . . . . . . . . . . . . . . . . . . . . . . 23
Item 6. Selected Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . 23
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations . . . . . . . . . . . . . . . . . . 23
Item 8. Financial Statements and Supplementary Data . . . . . . . . . . . . . . . 23
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure . . . . . . . . . . . . . . . . . . 23
PART III
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Item 10. Directors and Executive Officers of the Registrant . . . . . . . . . . . . 23
Item 11. Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . 23
Item 12. Security Ownership of Certain Beneficial Owners
and Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
Item 13. Certain Relationships and Related Transactions . . . . . . . . . . . . . . 23
PART IV
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Item 14. Exhibits, Financial Statement Schedules, and Reports
on Form 8-K . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
Report of Independent Public Accountants on Schedule . . . . . . . . . . . . . . . . . . 29
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
</TABLE>
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FORWARD-LOOKING STATEMENTS
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 (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 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.
PART I
ITEM 1. BUSINESS
The 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 serves portions of Virginia and West Virginia. The
Company has been engaged in the gas distribution business for 149 years, having
been originally incorporated by an Act of Congress in 1848. It became a
domestic corporation of the Commonwealth of Virginia in 1953 and a corporation
of the District of Columbia in 1957.
The population of the area served by the Company is estimated to be 4.6
million. As of September 30, 1997, the Company and its distribution subsidiary
served 798,739 customer meters. A listing of meters served and therms
delivered as of and for the twelve months ended September 30, 1997,
respectively, by jurisdiction is shown in the table below. A therm of gas
contains 100,000 British Thermal Units of heat, the heat content of
approximately 100 cubic feet of natural gas.
<TABLE>
<CAPTION>
Therms Delivered
Jurisdiction Meters Served (millions)
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<S> <C> <C>
District of Columbia 143,875 335
Maryland 332,494 691
Virginia 319,379 496
West Virginia 2,991 25
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Total 798,739 1,547
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</TABLE>
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Of the 1,547 million therms delivered in fiscal year 1997, 80% was sold by the
Company and its distribution subsidiary and 20% was delivered to various
customers that acquired their gas from other suppliers. Of the therms sold and
delivered by the Company, 54% was sold to firm residential customers, 34% was
sold to firm commercial and industrial customers and 12% was sold to
interruptible commercial, industrial and electric generation customers.
Interruptible customers must 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.
Therms delivered by the parent company amounted to 96% of the total
consolidated deliveries.
SUBSIDIARIES
The Company has four wholly-owned active subsidiaries that are described below.
Shenandoah Gas Company (Shenandoah) is engaged in the delivery and sale of
natural gas at retail in the Shenandoah Valley, including Winchester,
Middletown, Strasburg, Stephens City and New Market, Virginia, and Martinsburg,
West Virginia. Deliveries of natural gas for the twelve months ended September
30, 1997 totaled 64 million therms, of which 12% was sold to firm residential
customers, 30% was sold to firm commercial and industrial customers, 47% was
sold to interruptible commercial and industrial customers, and 11% was
delivered to various customers that acquired their gas from other suppliers.
Hampshire Gas Company (Hampshire) operates an underground gas storage field in
the vicinity of Augusta, West Virginia on behalf of the Company under a cost of
service tariff regulated by the Federal Energy Regulatory Commission (FERC).
Crab Run Gas Company (Crab Run) is an exploration and production subsidiary
whose assets are being managed by an Oklahoma-based limited partnership. At
September 30, 1997, Crab Run's investment in this partnership was not material.
The Company expects that any additional investments in the partnership will be
minimal.
Washington Gas Resources Corp. (WGR) is a wholly-owned subsidiary under which
the Company's non-utility subsidiaries, except Crab Run, are organized. WGR's
subsidiaries, which are described below, are Washington Gas Consumer Services,
Inc. and Washington Gas Energy Services, Inc. (WGES). WGES also has
subsidiaries, as described further below.
Washington Gas Consumer Services, Inc. was formed to provide consumers with
appliance inspection services, for both gas and electric appliances, under its
Certified Performance Program. In addition, this subsidiary plans to offer
programs under which it locates energy-related opportunities, typically gas
conversion projects, and acts as an intermediary between the consumer and the
finance company.
Washington Gas Energy Services, Inc.(WGES) is primarily engaged in the sale of
natural gas in competition with third-party suppliers such as gas marketers and
non-regulated subsidiaries of other utility companies. During its first full
year of operation in fiscal year 1997, WGES sold over 112 million therms of
gas, including 12 million therms sold outside of the Company's traditional
service territory. WGES, having received a power certificate from the FERC,
plans to
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sell electricity as soon as electricity markets open. WGES' subsidiaries are
described below.
Washington Gas Energy Systems, Inc. provides commercial energy services,
including the design and renovation of mechanical heating, air conditioning and
ventilation systems.
Brandywood Estates, Inc. (Brandywood) is a general partner, along with a major
developer, in a venture designed to develop 1,600 acres in Prince George's
County, Maryland for sale or lease. This acreage was contributed to the
Brandywood Development Limited Partnership by Brandywood in 1992. In March
1996, the partnership submitted to Prince George's County a rezoning
application for 790 acres of its property. The mixed-use development plan
proposes approximately 1,600 homes, 100,000 square feet of retail space and
105,000 square feet of office space. Final review of the development proposal
is presently not expected until 1999. Brandywood continues to have sole
ownership of approximately 1,000 additional acres adjacent to this property
that are not being currently developed or otherwise utilized.
Advanced Marketing Concepts, Inc. previously provided services primarily in the
area of energy-related home improvements. This subsidiary is currently
inactive.
RATE REGULATION, RETAIL GAS RATES AND RATE INCREASES
Rate Regulation
The Company is regulated by the Public Service Commission of the District of
Columbia (PSC of DC), the Public Service Commission of Maryland (PSC of MD) and
the State Corporation Commission of Virginia (SCC of VA). Shenandoah is
regulated by the SCC of VA and the Public Service Commission of West Virginia
(PSC of WVA). The FERC regulates Hampshire.
The PSC of DC consists of three full-time members who are appointed by the
Mayor and confirmed by the District of Columbia City Council. The term of each
commissioner is four years. There are no limitations on the number of terms
that can be served. There is no statutory suspension period related to rate
requests.
The PSC of MD consists of five full-time members who are appointed by the
Governor and confirmed by the Senate of Maryland. The term of each
commissioner is five years. There are no limitations on the number of terms
that can be served. The Company is required to give 30 days' notice when
filing for a rate increase. The PSC of MD may initially suspend the proposed
increase for 150 days beyond the 30-day notice period and then has the option
to extend the suspension for an additional 30 days. If action has not been
taken after 210 days, rates may be placed into effect subject to refund.
The SCC of VA consists of three full-time members who are elected by the
General Assembly of Virginia. A commissioner's term is for six years with no
limitation on the number of terms that can be served. An Expedited Rate Case
(ERC) procedure is available which provides that rate increases may take effect
30 days after the filing date. Under the ERC mechanism, the Company may not
propose any changes in accounting policies and the rate of return on common
equity cannot be modified from the rate established in the last fully
adjudicated case. General rate applications may take effect 150 days after the
filing. Before new rates become final, both types of rate increases are
subject to refund.
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RETAIL GAS RATES
Unbundling Initiatives
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 this 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").
Nearly all of the Company's interruptible customers have the option of
purchasing their gas from third-party suppliers including the Company's
gas-marketing subsidiary, WGES. The Company continues to charge these customers
for delivering gas through its distribution system. Firm city gate supply
service is offered only on a limited basis to firm customers in the Company's
Maryland jurisdiction. Current and future unbundling initiatives for firm and
interruptible customers in Maryland, Virginia and the District of Columbia are
discussed further in the Competition section below, under the subsection
entitled Unbundling in the Company's Major Jurisdictions.
WGES provides third-party supplier gas to interruptible customers in all of the
Company's major jurisdictions and to various firm customers in Maryland. WGES
retains the full amount of margins generated on sales of the natural gas
commodity.
Regulated Service to Firm Customers
In the District of Columbia jurisdiction, the firm residential and
non-residential rate schedules are based upon a flat commodity charge for each
therm of gas consumed and a customer charge designed to recover certain fixed
costs. In addition to this two-part rate design, a peak-usage charge is in
place for non-residential firm customers. This charge was established to send
accurate price signals as to the cost of gas to customers during both peak and
non-peak periods. In the Maryland and Virginia jurisdictions, the rate
schedules for firm service are comprised of a fixed customer charge and
declining-block commodity rates. The Company and Shenandoah do not have any
weather normalization mechanisms designed into their rate structures.
The current firm tariff provisions in all jurisdictions of the Company and
Shenandoah contain gas cost recovery 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. Moreover, each
jurisdiction in which the Company and Shenandoah operate provides for an annual
reconciliation of total gas costs recovered from firm customers to the actual
invoice cost of gas applicable to firm customers.
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Regulated Service 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. 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. In Maryland, the Company retains 100% of the
gross margins associated with sales and deliveries to interruptible customers
until the Company has recovered its investment in capital costs associated
therewith. This arrangement has been in effect in Maryland for interruptible
customers added since August 1989.
RATE INCREASES
District of Columbia
On October 8, 1993, the PSC of DC issued a final order based on a rate increase
requested in December 1992 that approved a $4.7 million increase, or 2.5%, in
annual revenues, effective October 19, 1993. The order, which included an
overall rate of return of 9.86% and a return on common equity of 11.50%,
provided for a phase-in, rather than immediate recognition, of the additional
costs associated with the implementation of Statement of Financial Accounting
Standards No. 106, "Employers' Accounting for Postretirement Benefits Other
Than Pensions" (SFAS No. 106). The incremental costs related to SFAS No. 106
are being phased-in over a five year period. In each year of the phase-in, the
Company files for an increase in rates, through streamlined procedures, to
reflect an additional increment of SFAS No. 106 costs in excess of a stipulated
pay-as-you-go level. The difference between the incremental annual amount
reflected in rates during the phase-in period and the full SFAS No. 106 cost is
being deferred as a regulatory asset and will be collected over a 15-year
period beginning in approximately October 1998.
On August 1, 1994, the PSC of DC issued an order approving a Stipulation and
Agreement signed by a majority of the parties to a rate case filed in January
1994, providing for a $6.4 million annual increase in revenues, or 3.4%,
effective August 1, 1994. The agreement did not specify a rate of return. The
agreement provided for an increase in the curtailment charge to interruptible
customers during periods of interruption and established the
previously-discussed peak usage charge for non-residential firm customers.
Maryland
On July 29, 1993, the PSC of MD authorized an increase in base rates designed
to collect an additional $10.6 million, or 3.7%, in annual revenues, effective
August 1, 1993. The order resulted from a settlement agreement entered into by
most of the parties to a rate case filed in March 1993. Recovery of SFAS No.
106 costs, which had been included in the Company's request, was not
specifically addressed in the order; however, the amount authorized was
sufficient to cover the costs associated with implementing this standard in the
Company's Maryland jurisdiction. The order also included a revision to the
Company's purchased gas cost recovery mechanism
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to provide for recovery of carrying costs on actual storage gas balances and
provided for an annual increase in revenues of $1.0 million resulting from the
modification to, or the addition of, certain service-related charges. The
return on equity indicated in the order of 11.50% was not utilized to establish
rates.
On October 18, 1994, the PSC of MD issued an order approving an unopposed
Stipulation and Agreement signed by a majority of the parties to a rate case
filed in June 1994 and base rates, designed to collect an additional $7.4
million, or 2.4%, annually were placed into effect on December 1, 1994.
Virginia
On September 27, 1994, the Company implemented rates designed to recover an
additional $15.7 million annually, based on a rate case filed in April 1994.
These rates were collected subject to refund. On September 28, 1995, the SCC of
VA issued an order approving an increase in annual revenues of $6.8 million, or
2.7%, effective September 27, 1994. The order included an overall rate of
return of 9.72% and a return on equity of 11.50%. The order allowed the Company
to collect SFAS No. 106 costs in accordance with a generic order of the SCC of
VA. The Company refunded amounts associated with the difference between the
interim rates that were collected subject to refund and the amount approved by
the SCC of VA, with interest, by January 1, 1996.
Page 45 of the Company's 1997 Annual Report to Shareholders, which is
incorporated by reference into this report, includes discussion of an on-going
proceeding in the Company's Virginia jurisdiction related to the Virginia
jurisdictional portion of regulatory assets.
Page 31 of the Company's 1997 Annual Report to Shareholders, which is
incorporated by reference into this report, includes a summary of the rate
applications of the parent company described above.
Shenandoah
The PSC of WVA issued an order, effective on September 18, 1995, that approved
a joint Stipulation and Agreement between the Staff of the PSC of WVA and
Shenandoah, based on a rate increase request filed by Shenandoah in January
1995. The agreement provided for an annual increase in rates of $522,000 and
did not specify a return on equity or an overall rate of return. Shenandoah
placed the new rates into effect on December 4, 1995.
On August 6, 1995, Shenandoah placed into effect new rates in Virginia designed
to collect an additional $1.2 million in annual revenues, subject to refund,
based on a rate case filed in July 1995. On May 30, 1996, the SCC of VA issued
an order approving an increase in annual revenues of $883,000, effective August
6, 1995. The increase reflected an overall rate of return of 9.51% and a
return on equity of 11.00%. Shenandoah returned, with interest, amounts
collected under interim rates in excess of the amount ultimately granted to
customers by September 1, 1996.
On February 2, 1996, Shenandoah filed a request with the PSC of WVA for a rate
increase of $604,000. The request included an overall rate of return of 10.33%
and a return on common equity of 12.25%. In addition to requesting the
recovery of increased operating expenses and a return on additional capital
investment,
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Shenandoah requested full recovery of costs associated with SFAS No. 106. On
August 8, 1996, Shenandoah, the Staff of the PSC of WVA, and the Consumer
Advocate Division of the PSC of WVA reached a settlement which resulted in an
increase in annual revenues of $216,000. On November 27, 1996, the PSC of WVA
issued an order approving the terms of the agreement and the increased rates
became effective on December 2, 1996.
On August 1, 1997, Shenandoah filed a request with the SCC of VA for new rates
designed to collect additional annual operating revenues of $2,306,000, or
10.54%. This request included an overall rate of return of 10.03%, a return on
common equity of 12.25%, and a 55.24% common equity ratio. The requested
increase in rates is primarily necessary to compensate Shenandoah for its
increased capital investment. New rates will be placed into effect, subject to
refund, on January 5, 1998. Shenandoah expects a final order from the SCC of
VA in the third quarter of fiscal year 1998.
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 from the delivery of gas on
the Company's distribution system. 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 initial
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
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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 undergone many structural changes over its long history. These
changes have generally been in response to customers' and regulators' desires
to promote competition in situations where it is economically beneficial to
consumers. For the pipeline and distribution parts of the industry, significant
changes have occurred over the past 10 years.
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, FERC Order No.
636 separated the merchant function of selling natural gas from the interstate
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.
Driven by changes in other segments of the industry, LDCs are changing too.
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
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markets at this time, the Company, through its gas-marketing subsidiary, 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.
10
<PAGE> 13
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
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
11
<PAGE> 14
developing effective solutions. For example, the 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 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
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 wholesale 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.
12
<PAGE> 15
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 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. In December 1997, the PSC of MD
issued an order which proposed a phased implementation of retail electric
unbundling over a three-year period, commencing in 1999. The PSC of MD directed
the investor-owned electricity companies in Maryland to fully unbundle their
rates. These actions are consistent with testimony submitted by the Company to
the PSC of MD.
In addition, the Maryland General Assembly convened a Task Force to look at the
issues created by the introduction of competition for electricity. The Company
has also submitted testimony to the Task Force that is supportive of the PSC of
MD's order. 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 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 allow the introduction of competition in the
Virginia electric market beginning no sooner than the year 2000 with pilot
programs to be conducted on a limited basis over the next two years.
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
13
<PAGE> 16
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.
Consolidation 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.
The Company, from time to time, performs studies and in some cases holds
discussions regarding utility and energy-related investments and transactions
with other companies. The ultimate impact on the Company of any such
investments and transactions that may occur cannot be determined at this time.
GAS SUPPLY AND CAPACITY
The Company and Shenandoah arrange to have natural gas delivered to the entry
points of their distribution systems using the delivery capacity of interstate
pipeline companies. The Company acquires natural gas delivery and storage
capacity for itself and Shenandoah on a system-wide basis because of the
integrated nature of the service agreements between the pipelines and the
Company's consolidated distribution operations. The Company's supply and
capacity plan is based on the requirements of the system and takes into account
estimated load growth by type of customer as well as customer attrition,
conservation, and movement of customers from bundled to unbundled service.
Pursuant to FERC Order No. 636, the pipeline companies are required to provide
transportation and storage services to gas shippers, such as the Company, that
are comparable to the services the Company received prior to the implementation
of the order. The Company utilizes the delivery capacity of eight pipelines,
four of which connect directly to the Company's distribution system.
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
14
<PAGE> 17
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 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.
As reflected in the first table below, there were five sources of delivery
through which the Company received natural gas to satisfy the sendout
requirements in pipeline year 1997 (November 1, 1996 through October 31, 1997)
and from which supplies can be received in pipeline year 1998 (November 1, 1997
through October 31, 1998). Firm transportation denotes gas purchased on the
spot market or under long-term contracts and transported directly to the city
gates in volumes agreed upon by the Company and the applicable pipeline.
Transportation storage denotes volumes purchased by the Company on the spot
market and/or under long-term contracts and stored by a pipeline for withdrawal
during the heating season. Peak load requirements are met by: (1) underground
natural gas storage at the Hampshire storage field in Hampshire County, West
Virginia; (2) the local production of propane air from plants located at
Company-owned facilities in Rockville, Maryland and Ravensworth, Virginia; and
(3) other storage and peak-shaving arrangements.
During pipeline year 1997, total sendout on the system was 1,289 million
therms, excluding deliveries to electric generation facilities and volumes
delivered to customers that acquire their gas from other suppliers. The
sendout for pipeline year 1998 is estimated to be 1,187 million therms (based
on normal weather) excluding deliveries for electric generation and volumes
delivered for others. The sources of delivery and related volumes that were
used to satisfy the requirements of pipeline year 1997 and those projected for
pipeline year 1998 are shown in the following table.
SOURCES OF DELIVERY FOR
ANNUAL SENDOUT
(millions of therms)
<TABLE>
<CAPTION>
Actual Projected
Sources of Delivery Pipeline Year 1997 Pipeline Year 1998
- -------------------------------- ------------------ ------------------
<S> <C> <C>
Firm Transportation 934 872
Transportation Storage 335 277
Hampshire Storage 10 20
Company-Owned Propane-Air Plants 3 4
Other Peak-Shaving Sources 7 14
----- -----
1,289 1,187
===== =====
</TABLE>
The effectiveness of the Company's gas supply program is largely dependent on
the sources from which the design day requirement is satisfied. A design day is
the maximum anticipated demand on the gas supply system during a 24-hour period
15
<PAGE> 18
assuming a 5 degree Fahrenheit average temperature. The Company assumes that
all interruptible customers will be curtailed on the design day. The Company's
design day estimate is currently 14.0 million therms. The Company is currently
capable of meeting 68% of its design day requirements with storage and peaking
capabilities. Emphasizing storage and peaking facilities on the Company's
design day reduces the necessity to purchase firm transportation, the most
expensive form of capacity from a design day perspective. The following table
reflects the sources of delivery that are projected to be used to satisfy the
design day sendout estimate for pipeline year 1998.
SOURCES OF DELIVERY FOR
DESIGN DAY SENDOUT
(millions of therms)
<TABLE>
<CAPTION>
Pipeline Year 1998
--------------------
Sources of Delivery Therms Percent
- ----------------------------------- ------ -------
<S> <C> <C>
Firm Transportation 4.5 32%
Transportation Storage 4.9 35
Company-Owned Propane-Air Plants,
Hampshire Storage and Other Peaking 4.6 33
--- ----
14.0 100%
==== ====
</TABLE>
The Company believes the combination of the gas supply it can purchase under
short-term and long-term contracts, its peaking supplies, and the capacity on
the pipelines required to deliver the purchased supplies, is sufficient to
satisfy the needs of existing customers and allow for growth in future years.
The Company continues to seek opportunities to restructure existing contracts
to maximize the competitiveness of its gas supply portfolio.
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
16
<PAGE> 19
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.
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.
17
<PAGE> 20
Based on existing knowledge, the Company does not expect that the ultimate
impact of these matters will have a significant effect on its competitive
position, results of operations or the level of future capital expenditures.
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.
OTHER
Revenue from the sale or delivery of natural gas as a percentage of
consolidated operating revenue was 92% for 1997 and 97% for 1996 and 1995. The
Company is not dependent upon a single customer or a few customers such that
the loss of any one or more customers would have a significant adverse effect
on the Company. Large customers are generally on interruptible rate schedules,
and margin-sharing arrangements limit the effects of interruptible customer
usage on net income. As shown on page 2, the Company and Shenandoah had
798,739 customer meters at September 30, 1997.
The Company's utility business is highly seasonal and weather sensitive since
the majority of its business is derived from residential and small commercial
customers who use gas for space heating purposes. In fiscal year 1997, 74% of
the therms delivered by the Company, excluding deliveries for electric
generation, occurred in the Company's first and second fiscal quarters. All of
the Company's earnings are generated in these two quarters and the Company
historically incurs losses in the third and fourth fiscal quarters. Results of
operations can be affected by the timing and level of approved rate increases.
The seasonal nature of the Company's business creates large variations in
short-term cash requirements, primarily due to fluctuations in the level of
customer
18
<PAGE> 21
accounts receivable and storage gas inventory levels. The Company finances
these seasonal requirements primarily through the sale of commercial paper and
short-term bank loans.
Through the cost of services provided by the interstate pipelines, the Company
and Shenandoah contribute to the funding of the Gas Research Institute. The
Institute's primary focus is devoted to developing more efficient gas equipment
and to increase the long-term supply of gas. The Company also belongs to the
Natural Gas Vehicle Coalition and the Institute of Gas Technology. These
organizations are involved in developing new applications and technologies for
the use of natural gas. The cost of these memberships and the Company's own
research and development costs during fiscal years 1997, 1996 and 1995 were not
material.
At September 30, 1997, the Company and its wholly-owned subsidiaries had 2,070
employees. This represents a decline of 204 employees from the level at
September 30, 1996. For a further discussion of labor-related issues, refer to
the caption entitled Labor Matters on page 25 of the 1997 Annual Report to
Shareholders, which is incorporated into this report by reference.
ITEM 2. PROPERTIES
The Company and its subsidiaries hold such valid franchises, certificates of
convenience and necessity, licenses and permits as are necessary for the
maintenance and operation of their respective properties and businesses as now
conducted. The Company has no reason to believe that it will be unable to
renew any of such franchises as they expire.
As of September 30, 1997, the Company and its utility subsidiaries had 621
miles of transmission mains and 9,528 miles of distribution mains. The Company
has the capacity for storage of approximately 15 million gallons of propane for
peak shaving.
The Company owns the land and a 12-story office building (built in 1942) at
1100 H Street, Northwest in Washington, D.C., where its corporate offices are
located. The Company owns the land and a building (built in 1970) at 6801
Industrial Road in Springfield, Virginia, which houses the Company's operating
offices and certain administrative functions. The Company has title to land
and buildings used as substations for its utility operations.
The Company also has peaking facilities consisting of propane air plants in
Ravensworth, Virginia and Rockville, Maryland. Hampshire operates an
underground natural gas storage field in Hampshire County, West Virginia.
Hampshire accesses the storage field through 12 storage wells which are
connected to an 18-mile pipeline gathering system. Hampshire also operates a
compressor station for injection of gas into storage. The Augusta and Little
Capon fields, located in Hampshire County, have the capacity to provide the
Company's system with approximately 2.7 billion cubic feet of natural gas under
design conditions. For pipeline year 1998, it is projected that the Hampshire
storage facility will supply approximately 2.0 billion cubic feet of natural
gas to the Company's system for meeting seasonal demands.
The Company's Mortgage dated January 1, 1933 (Mortgage), as supplemented and
amended, securing the First Mortgage Bonds(FMBs)issued by the Company,
19
<PAGE> 22
constitutes a direct lien on substantially all property and franchises owned by
the Company other than expressly excepted property.
The Company executed a supplemental indenture to its unsecured Medium-Term
Notes (MTNs) Indenture on September 1, 1993, providing that 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.
ITEM 3. LEGAL PROCEEDINGS
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
20
<PAGE> 23
EXECUTIVE OFFICERS OF THE REGISTRANT
<TABLE>
<CAPTION>
Date Elected
Name, Age and Position with the Company or Appointed (1)
- --------------------------------------------------------- ------------------
<S> <C>
Elizabeth M. Arnold, Age 45
Vice President (corporate strategy, investor relations
and internal audit) January 31, 1996
Treasurer May 1, 1993
Director of Marketing Services May 6, 1991
Richard J. Cook, Age 55
Vice President (corporate engineering and environmental
quality assurance) October 1, 1996
Executive Assistant October 1, 1995
Director - Environment and Safety September 1, 1989
James H. DeGraffenreidt, Jr., Age 44 (2)
President and Chief Operating Officer December 1, 1994
Senior Vice President - Jurisdictional Divisions
and Rates and Regulatory Affairs May 1, 1993
Vice President - Rates and Regulatory Affairs November 1, 1991
Richard L. Fisher, Age 50
Vice President (gas distribution) June 1, 1996
Executive Director May 3, 1993
Director - Federal Regulation and Gas Planning October 6, 1986
John K. Keane, Jr., Age 59
Senior Vice President and General Counsel May 1, 1993
Vice President and General Counsel September 1, 1990
Ronald C. King, Age 56
Vice President (customer services) February 21, 1996
Vice President - Customer Services November 1, 1991
Frederic M. Kline, Age 46
Vice President and Treasurer January 31, 1996
Controller November 27, 1985
Patrick J. Maher, Age 61 (2)
Chairman of the Board and Chief Executive Officer November 24, 1992
President and Chief Executive Officer March 1, 1992
Lisa M. Metcalfe, Age 33 (3)
Vice President and Chief Information Officer October 1, 1996
Wayne A. Mills, Age 54
Vice President (oversees Shenandoah, the Frederick division
of the Company and Washington Gas Energy Systems, Inc.) February 21, 1996
Vice President and General Manager - Maryland Division November 1, 1989
</TABLE>
21
<PAGE> 24
EXECUTIVE OFFICERS OF THE REGISTRANT (CONTINUED)
<TABLE>
<CAPTION>
Date Elected
Name, Age and Position with the Company or Appointed (1)
- ------------------------------------------------------------ ------------------
<S> <C>
Douglas V. Pope, Age 52
Secretary July 25, 1979
Joseph M. Schepis, Age 44 (2)
Senior Vice President (gas supply, regulatory activities
and customer services) January 31, 1996
Senior Vice President and Chief Financial Officer December 15, 1994
Vice President - Rates and Regulatory Affairs May 1, 1993
Treasurer October 1, 1986
Roberta W. Sims, Age 43
Vice President (corporate relations and communications) January 31, 1996
Vice President and General Manager -
District of Columbia Division October 1, 1992
Robert A. Sykes, Age 49
Vice President (human resources) February 21, 1996
Vice President - Human Resources October 1, 1987
Robert E. Tuoriniemi, Age 41 (4)
Controller October 1, 1996
James B. White, Age 47
Vice President (business development) February 21, 1996
Vice President and General Manager - Virginia Division May 1, 1993
Director of Sales July 6, 1992
</TABLE>
There is no family relationship among the officers. The age of each officer
listed is as of the date of filing.
(1) Each of the officers has served continuously since the dates indicated.
(2) Effective January 1, 1998, James H. DeGraffenreidt, Jr., becomes President
and Chief Executive Officer. Joseph M. Schepis becomes Executive Vice President
and Chief Operating Officer. Patrick J. Maher continues to serve as Chairman of
the Board.
(3) Ms. Metcalfe was previously employed by the National Wildlife Federation
and served most recently as Vice President of Constituent Systems and Services.
In this capacity, she was responsible for the organization's information
systems, telecommunications systems, facilities, and administrative services.
(4) Mr. Tuoriniemi was previously employed by Central Maine Power Company
(CMP), an electric utility, and served most recently as Comptroller. CMP has a
customer base of 515,000 customer meters. In the Comptroller position, Mr.
Tuoriniemi's responsibilities included all accounting matters, testifying
before regulatory commissions in rate case proceedings, directing tax planning
and coordinating financial reporting activities.
22
<PAGE> 25
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS
The information captioned "Common Stock Price Range and Dividends Paid" and
presented on page 47 of the Company's 1997 Annual Report to Shareholders is
included in Exhibit 13 in this report and is incorporated by reference into
this Item. Only owners of record are counted as common shareholders.
ITEM 6. SELECTED FINANCIAL DATA
Page 20 of the Company's 1997 Annual Report to Shareholders is included in
Exhibit 13 in this report and is incorporated by reference into this Item.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Pages 21 through 31 of the Company's 1997 Annual Report to Shareholders is
included in Exhibit 13 in this report and is incorporated by reference into
this Item.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Pages 32 through 47 of the Company's 1997 Annual Report to Shareholders is
included in Exhibit 13 in this report and is incorporated by reference into
this Item.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information concerning Directors contained in the definitive proxy statement
dated January 21, 1998, is hereby incorporated herein by reference.
Information related to Executive Officers is reflected in Part I hereof.
ITEM 11. EXECUTIVE COMPENSATION
The information captioned "Executive Compensation" in the definitive proxy
statement dated January 21, 1998, is hereby incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information captioned "Security Ownership of Certain Beneficial Owners and
Management" in the definitive proxy statement dated January 21, 1998, is hereby
incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Karen Hastie Williams, a Director of the Company, is a partner in the law firm
Crowell & Moring. This firm performed legal services for the Company during
fiscal year 1997.
23
<PAGE> 26
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND
REPORTS ON FORM 8-K
<TABLE>
<CAPTION>
(a)1 All Financial Statements Pages in 1997
Annual Report to
Shareholders
Included in
Exhibit 13
------------------
<S> <C>
Consolidated Statements of Income - for the years ended
September 30, 1997, 1996 and 1995 . . . . . . . . . . . . . . . . . . . . . . . . 32
Consolidated Balance Sheets - as of September 30, 1997 and 1996 . . . . . . . . . . 33
Consolidated Statements of Cash Flows - for the years ended
September 30, 1997, 1996 and 1995 . . . . . . . . . . . . . . . . . . . . . . . . 34
Consolidated Statements of Capitalization - as of September 30,
1997 and 1996 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
Consolidated Statements of Common Shareholders' Equity -
1997, 1996 and 1995 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
Consolidated Statements of Income Taxes - for the years ended
September 30, 1997, 1996 and 1995 and as of September 30, 1997
and 1996 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . 38-45
Report of Independent Public Accountants . . . . . . . . . . . . . . . . . . . . . 46
</TABLE>
(a)2 Financial Statement Schedules
Separate financial statements for Washington Gas Light Company are omitted
since the Company's total assets, exclusive of investments in and advances to
its subsidiaries, constitute more than 75% of the total assets shown in the
Consolidated Balance Sheets, and the Company's total gross revenue, exclusive
of interest and dividends received or equity in income from the consolidated
subsidiaries, constitutes more than 75% of total gross revenues shown in the
Consolidated Statements of Income.
Schedule II, listed on page 25, should be read in conjunction with the
financial statements in the 1997 Annual Report to Shareholders. Schedules not
included herein have been omitted because they are not applicable or the
required information is shown in the financial statements or notes thereto.
24
<PAGE> 27
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND
REPORTS ON FORM 8-K (CONTINUED)
<TABLE>
<CAPTION>
Pages in
Schedule Description 10-K
- -------- ----------------------------------------------------------- --------
<S> <C> <C>
II Valuation and Qualifying Accounts and Reserves for the
years ended September 30, 1997, 1996 and 1995 . . . 30-31
(a)-3 Exhibits
Exhibits Filed Herewith:
<CAPTION>
Pages in
Description 10-K
----------- ---------
<S> <C>
10. Material Contracts - See
10.1 Retirement Plan for Outside Directors, Separate
as amended on December 18, 1996 * Volume
10.2 Long-Term Incentive Compensation Plan,
as amended on December 18, 1996 *
10.3 Executive Incentive Compensation Plan,
as amended on December 18, 1996 *
10.4 Supplemental Executive Retirement Plan,
as amended on December 18, 1996 *
* Compensatory plan arrangement required to be
filed pursuant to Item 14(c) of Form 10-K.
11. Statement re Computation of per Share Earnings -
Computation of Earnings per Average Share of
Common Stock Assuming Full Dilution from
Conversion of the $4.60 and $4.36 Convertible
Preferred Stock
12 Statement re Computation of Ratios -
12.0 Computation of Ratio of Earnings to Fixed Charges
12.1 Computation of Ratio of Earnings to Fixed Charges
and Preferred Stock Dividends
13. Annual Report to Security Holders -
1997 Annual Report to Shareholders (except for
the information presented on the front and rear
covers and Pages 1 through 19, which are not
deemed to be filed with the Securities and
Exchange Commission for the purposes of the
Securities Exchange Act of 1934)
21. Subsidiaries of the Registrant
23. Consents of Experts and Counsel
27. Financial Data Schedule
</TABLE>
25
<PAGE> 28
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND
REPORTS ON FORM 8-K (CONTINUED)
Exhibits Incorporated by Reference:
Description
3. Articles of Incorporation and Bylaws:
Bylaws of the Company, filed on Form 10-K for the
period ended September 30, 1996.
Company Charter, filed on Form S-3 dated July 21,
1995.
4. Instruments defining the Rights of Security Holders
including indentures:
Mortgage and Deed of Trust of the Company, dated January
1, 1933, and filed as Exhibit 2.2 of the Registration
Statement on Form S-7 filed with the Commission on May 12,
1975.
Supplemental Indenture, dated September 1, 1986, to the
Company's Mortgage and Deed of Trust, dated January 1,
1933, filed on Form 8-K dated March 13, 1987.
Supplemental Indenture, dated March 1, 1987, to the
Company's Mortgage and Deed of Trust, dated January 1,
1933, filed on Form 8-K dated March 13, 1987.
Supplemental Indenture, dated April 15, 1988, to the
Company's Mortgage and Deed of Trust, dated January 1,
1933, filed on Form 8-K dated April 22, 1988.
Supplemental Indenture, dated July 1, 1989, to the
Company's Mortgage and Deed of Trust, dated January 1,
1933, filed on Form 8-K dated July 12, 1989.
Indenture, dated September 1, 1991 between the Company
and The Bank of New York, as Trustee, regarding issuance
of unsecured notes, filed on Form 8-K on September 19,
1991.
Supplemental Indenture, dated September 1, 1993 between
the Company and The Bank of New York, as Trustee,
regarding the addition of a new section to the Indenture
dated September 1, 1991, filed on Form 8-K on September
10, 1993.
10. Material Contracts:
Service Agreement effective October 1, 1993 with
Transcontinental Gas Pipe Line Corporation related to the
upstream capacity on the CNG Transmission Corporation
system, filed on the Form 10-K for the fiscal year ended
September 30, 1993.
Service Agreement effective October 1, 1993 with
Transcontinental Gas Pipe Line Corporation related to
General Storage Service, filed on Form 10-K for the fiscal
year ended September 30, 1993.
26
<PAGE> 29
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND
REPORTS ON FORM 8-K (CONTINUED)
Service Agreement effective October 1, 1993 with Texas Eastern
Transmission Corporation related to transportation service, filed on
Form 10-K for the fiscal year ended September 30, 1993.
Service Agreement effective November 1, 1993 with Columbia Gas
Transmission Corporation related to Firm Storage Service, filed on Form
10-K for the fiscal year ended September 30, 1993.
Service Agreement effective November 1, 1993 with Columbia Gas
Transmission Corporation related to Firm Transportation Service, filed
on Form 10-K for the fiscal year ended September 30, 1993.
Service Agreement effective November 1, 1993 with Columbia Gulf
Transmission Company related to Firm Transportation Service, filed on
Form 10-K for the fiscal year ended September 30, 1993.
Service Agreement effective November 1, 1993 with Columbia Gulf
Transmission Company related to Interruptible Transportation Service,
filed on Form 10-K for the fiscal year ended September 30, 1993.
Service Agreement effective November 1, 1993 with Columbia Gas
Transmission Corporation related to Storage Service Transportation,
filed on Form 10-K for the fiscal year ended September 30, 1993.
Service Agreement effective November 1, 1993 with Columbia Gas
Transmission Corporation related to Storage In Transit Service, filed
on Form 10-K for the fiscal year ended September 30, 1993.
Service Agreement effective October 1, 1993 with CNG
Transmission Corporation related to Firm Transportation Service, filed
on Form 10-K for the fiscal year ended September 30, 1993.
Service Agreement effective October 1, 1993 with CNG
Transmission Corporation related to Firm Transportation Storage
Service, filed on Form 10-K for the fiscal year ended September 30,
1993.
Service Agreement effective October 1, 1993 with CNG
Transmission Corporation related to General Storage Service, filed on
Form 10-K for the fiscal year ended September 30, 1993.
Service Agreement effective February 1, 1992 between
Transcontinental Gas Pipe Line Corporation and Frederick Gas
Company, Inc. related to Firm Transportation Service, filed
on Form 10-K for the fiscal year ended September 30, 1993.
Service Agreement effective February 1, 1992 with
Transcontinental Gas Pipe Line Corporation related to Firm
Transportation Service, filed on Form 10-K for the fiscal year ended
September 30, 1993.
Service Agreement effective August 1, 1991 with Transcontinental
Gas Pipe Line Corporation related to Washington Storage Service, filed
on Form 10-K for the fiscal year ended September 30, 1993.
Employment Agreement between the Company and the Chief Executive
Officer, dated May 19, 1997, filed on Form 10-Q for the period ended
June 30, 1997.*
27
<PAGE> 30
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND
REPORTS ON FORM 8-K (CONTINUED)
Employment Agreement between the Company and certain executive
officers, as defined in Item 402(a)(3) of Regulation S-K, filed on
Form 10-Q for the period ended June 30, 1997.*
Directors' Stock Compensation Plan, as adopted on October 25,
1995 and filed on Form 10-K for the fiscal year ended September 30,
1995*
Deferred Compensation Plan for Outside Directors as amended filed on
Form 10-K for the fiscal year ended December 31, 1986 *
* Compensatory plan arrangement required to be filed
pursuant to Item 14(c) of Form 10-K.
(b) Reports on Form 8-K:
Although no Reports were filed on Form 8-K during the fourth fiscal
quarter of 1997, on December 9, 1997, the Company filed a Form
8-K under Item 5, reporting the election of James H. DeGraffenreidt,
Jr., President and Chief Executive Officer and Joseph M. Schepis
Executive Vice President and Chief Operating Officer, effective January
1, 1998. Patrick J. Maher continues to serve as Chairman of the Board.
28
<PAGE> 31
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON SCHEDULE
To the Shareholders and Board of Directors of Washington Gas Light Company:
We have audited in accordance with generally accepted
auditing standards, the financial statements included in Washington Gas Light
Company's annual report to shareholders incorporated by reference in this Form
10-K, and have issued our report thereon dated October 27, 1997. Our audit
was made for the purpose of forming an opinion on those statements taken as a
whole. The Schedule II-Valuation and Qualifying Accounts and Reserves for the
years ended September 30, 1997, 1996 and 1995-listed in the index on page 25 is
the responsibility of the Company's management and is presented for purposes of
complying with the Securities and Exchange Commission's rules and is not part
of the basic financial statements. This Schedule II has been subjected to the
auditing procedures applied in the audit of the basic financial statements and,
in our opinion, fairly states in all material respects the financial data
required to be set forth therein in relation to the basic financial statements
taken as a whole.
ARTHUR ANDERSEN LLP
Washington, D.C.,
October 27, 1997.
29
<PAGE> 32
WASHINGTON GAS LIGHT COMPANY AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
FOR THE YEARS ENDED SEPTEMBER 30, 1997, 1996 and 1995
<TABLE>
<CAPTION>
Additions
Charged to
Balance at --------------------------- Balance
Beginning Costs and Other at End
Description of Period Expenses Accounts Deductions (C) of Period
- ------------------------------------------------ ----------- ------------ ----------- ------------ -------------
(Thousands)
<S> <C> <C> <C> <C> <C>
1997
- ----
Valuation and Qualifying Accounts
Deducted from Assets in the Balance Sheet -
Allowance for doubtful accounts $ 11,846 $ 11,237 $ 1,857 (A) $ 13,897 $ 11,043
Provision for impairment of investments
and other deferred charges 6,507 - - 537 5,970
Reserves -
Injuries and damages 9,292 2,146 826 (B) 2,119 10,145
Other 900 - - - 900
1996
- ----
Valuation and Qualifying Accounts
Deducted from Assets in the Balance Sheet -
Allowance for doubtful accounts $ 10,580 $ 7,752 $ 2,070 (A) $ 8,556 $ 11,846
Provision for impairment of investments
and other deferred charges 5,397 1,150 - 40 6,507
Reserves -
Injuries and damages 11,873 2,409 1,845 (B) 6,835 9,292
Other 900 - - - 900
</TABLE>
NOTES: SEE PAGE 2 OF 2.
30
<PAGE> 33
WASHINGTON GAS LIGHT COMPANY AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
FOR THE YEARS ENDED SEPTEMBER 30, 1997, 1996 and 1995
<TABLE>
<CAPTION>
Additions
Charged to
Balance at ---------------------------- Balance
Beginning Costs and Other at End
Description of Period Expenses Accounts Deductions (C) of Period
- ------------------------------------------------ ------------ ------------ ------------- ------------ ------------
(Thousands)
1995
- ----
<S> <C> <C> <C> <C> <C>
Valuation and Qualifying Accounts
Deducted from Assets in the Balance Sheet -
Allowance for doubtful accounts $ 11,300 $ 8,228 $ 2,248 (A) $ 11,196 $ 10,580
Provision for impairment of investments
and other deferred charges 7,356 - - 1,959 5,397
Reserves -
Injuries and damages 10,854 3,248 303 (B) 2,532 11,873
Other 4,448 - - 3,548 900
</TABLE>
NOTES: (A) Recoveries on receivables previously written off as
uncollectible and unclaimed customer deposits, overpayments,
etc., not refundable.
(B) Portion of injuries and damages charged to construction and
reclassification from other accounts.
(C) Includes deductions for purposes for which reserves were
provided or revisions of estimated exposure.
31
<PAGE> 34
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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
PATRICK J. MAHER
----------------------------------
Patrick J. Maher
Chairman of the Board
Date: December 17, 1997 and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act
of 1934, this report has been signed below by the following persons on behalf
of the registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
PATRICK J. MAHER Chairman of the Board 12/17/97
----------------------- and Chief Executive ----------
(Patrick J. Maher) Officer and Director
JAMES H. DEGRAFFENREIDT, JR. President and Chief 12/17/97
-------------------------------- Operating Officer and ----------
(James H. DeGraffenreidt, Jr.) Director
FREDERIC M. KLINE Vice President and 12/17/97
--------------------------- Treasurer ----------
(Frederic M. Kline) (Principal Financial Officer)
ROBERT E. TUORINIEMI Controller 12/17/97
----------------------------- (Principal Accounting Officer) ----------
(Robert E. Tuoriniemi)
FRED J. BRINKMAN Director 12/17/97
--------------------------- -----------
(Fred J. Brinkman)
DANIEL J. CALLAHAN, III Director 12/17/97
------------------------------ -----------
(Daniel J. Callahan, III)
ORLANDO W. DARDEN Director 12/17/97
--------------------------- -----------
(Orlando W. Darden)
MELVYN J. ESTRIN Director 12/17/97
--------------------------- -----------
(Melvyn J. Estrin)
KAREN HASTIE WILLIAMS Director 12/17/97
---------------------------- -----------
(Karen Hastie Williams)
STEPHEN G. YEONAS Director 12/17/97
--------------------------- -----------
(Stephen G. Yeonas)
</TABLE>
32
<PAGE> 35
WASHINGTON GAS LIGHT COMPANY
1997 FORM 10-K EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit Description
------- -----------
<S> <C>
10. Material Contracts -
10.1 Retirement Plan for Outside Directors, as
amended on December 18, 1996 *
10.2 Long-Term Incentive Compensation Plan,
as amended on December 18, 1996 *
10.3 Executive Incentive Compensation Plan,
as amended on December 18, 1996 *
10.4 Supplemental Executive Retirement Plan,
as amended on December 18, 1996 *
* Compensatory plan arrangement required to be
filed pursuant to Item 14(c)of Form 10-K.
11. Statement re Computation of per Share
Earnings - Computation of Earnings per Average
Share of Common Stock Assuming Full Dilution
from Conversion of the $4.60 and $4.36
Convertible Preferred Stock
12 Statement re Computation of Ratios-
12.0 Computation of Ratio of Earnings to
Fixed Charges
12.1 Computation of Ratio of Earnings to Fixed
Charges and Preferred Stock Dividends
13. Annual Report to Security Holders-
1997 Annual Report to Shareholders
(except for the information presented
on the front and rear covers and
pages 1 through 19, which are not
deemed to be filed with the Securities
and Exchange Commission for the purposes
of the Securities Exchange Act of 1934)
21. Subsidiaries of the Registrant
23. Consents of Experts and Counsel
27. Financial Data Schedule
</TABLE>
33
<PAGE> 1
EXHIBIT 10.1
WASHINGTON GAS LIGHT COMPANY
RETIREMENT PLAN FOR
OUTSIDE DIRECTORS
Adopted October 25, 1995
As Amended December 18, 1996
<PAGE> 2
WASHINGTON GAS LIGHT COMPANY
RETIREMENT PLAN
FOR OUTSIDE DIRECTORS
I. Purpose:
. To reward eligible non-employee members of the Board of Directors
("Directors") of Washington Gas Light Company ("Company") for their services as
a Board Member.
. To provide Directors with retirement income after completion of
their service to WGL.
. To remain competitive in Director compensation by providing a
special retirement benefit.
II. Eligibility - Full and Partial Benefits:
. A Director earns a full retirement benefit under this Plan after
ten years of service as a Director. A partial retirement benefit is earned
after at least five years but less than ten years of service. This partial
retirement benefit is earned ratably between years 6 and 10 (i.e., 0% for
service less than 5 years, 50% after 5 years, 60% after 6 years, 70% after 7
years, etc.).
III. Amount and Term of Benefit:
Amount of Benefit:
. For Directors eligible for the full retirement benefit, the annual
benefit is equal to the amount of the retainer provided by WGL at the time of
retirement of the Director from the Board. For example, presently the retainer
is $15,000; thus, a Director eligible for the full retirement benefit would be
entitled to receive an annual benefit of $15,000 for the period specified
below. The amount of the partial retirement benefit would be the percentage of
retainer determined under Paragraph II, above (for example, a Director retiring
after 5 years of service would be entitled to a 50% benefit or $7,500).
<PAGE> 3
Term of Benefit:
. The benefit will be paid to an eligible Director (or designated
beneficiary) for a 10 year period.
. Payments will begin within 30 days after retirement from the Board
to a Director who retires on or after attainment of age 65. If a Director
retires from the Board prior to age 65 and the Director has 5 or more years of
service, payment of benefits will made to the Director within 30 days of his or
her attainment of age 65. In either case, the Director may elect to defer
payments to a later date provided such election is made in writing on a form
and in a manner satisfactory to the Company.
. Benefits will be paid monthly, unless the Director elects to
receive benefit payments annually or semi-annually.
IV. Disability/Death Benefit:
. If a Director, after a minimum of five years of Board service, is
disabled (construed in the same manner as the term "Disability" under the
Washington Gas Light Employees' Pension Plan), such Director will be eligible
for an immediate benefit under the Plan regardless of age. If the disabled
Director has at least five years of service but less than ten years, the
benefit will be a partial benefit determined in the manner described in
Paragraph II, above. The disability benefit will continue for a ten year
period, as in the case of the retirement benefit.
. If a Director, after a minimum of five years of Board service, dies
during the time of active Board service, benefits will be payable to any
designated beneficiary of the Director, for up to 10 years. The amount of the
benefit will be the same as the benefit paid in the case of disability. If a
retired Director dies while receiving benefits hereunder or prior to the date
that deferred benefits payable hereunder were scheduled to be paid, any
residual benefits or benefits otherwise due the Director, as applicable, will
be paid to the Director's designated beneficiary for the same period such
benefits would otherwise have been paid to the Director had he survived. If no
designated beneficiary is alive at the time of the Director's death, then any
benefits which would otherwise have been payable hereunder will be payable to
the Director's estate.
. Directors may elect, on properly completed forms supplied by the
Company, lump sum distributions to be paid to their designated beneficiaries on
their death. Any payments made to a Director's estate will automatically be in
a lump sum distribution. If the lump sum method is applicable, the death
benefit will be equal to the present value of future benefits, discounted at a
rate equal to the current rate on 5-year U.S. treasury securities.
- 2 -
<PAGE> 4
V. Administration:
. The P & C Committee will be Administrator of the Plan. Eligibility
for Retirement and for a Disability benefit will be determined by the P & C
Committee as Plan Administrator.
VI. Funding/ERISA:
. This Plan shall at all times be maintained on an unfunded basis for
federal income tax purposes. A Director's rights to a benefit under this Plan
are contractual in nature and in the event the Company is unable to pay any
benefit required hereunder, the Director shall have, with respect to the
Company, only those rights of an unsecured creditor.
. This Plan does not cover employees of the Company and therefore is
wholly exempt from the requirements and provisions of the Employee Retirement
Income Security Act of 1974, as amended.
VII. Change of Control:
. In the event of a change of control, as defined below, a Director
who has less than 5 years of service as a Director, shall immediately become
100% vested in a benefit as if they had 5 years of service as a Director. For
any additional years of service as a Director, the Director shall continue to
earn benefits in accordance with Paragraph II herein.
. For purposes of this Plan, "Change of Control" means the occurrence
of any one or more of the triggering events specified below:
(a) The acquisition by any individual, entity or
group (within the meaning of Section 13(d)(3) or 14(d)(2) of the
Securities Exchange Act of 1934, as amended (the "Exchange Act") (a
"Person") of beneficial ownership (within the meaning of Rule 13d-3
promulgated under the Exchange Act) of 20% or more of either (i) the
then-outstanding shares of common stock of the Company (the
"Outstanding Company Common Stock") or (ii) the combined voting power
of the then-outstanding voting securities of the Company entitled to
vote generally in the election of directors (the "Outstanding Company
Voting Securities"); provided, however, that for purposes of this
subsection (a), the following acquisitions shall not constitute a
Change of Control: (i) any acquisition directly from the Company, (ii)
any acquisition by the Company, (iii) any acquisition by any employee
benefit plan (or related trust) sponsored or maintained by the Company
or any corporation controlled by the Company, or (iv) any acquisition
by any corporation pursuant to a transaction which complies with
clauses (i), (ii) and (iii) of subsection (c) of this Section VII; or
- 3 -
<PAGE> 5
(b) Individuals who, December 18, 1996, constitute the
Board (the "Incumbent Board") cease for any reason to constitute at
least a majority of the Board; provided, however, that any individual
becoming a Director subsequent to December 18, 1996 whose election, or
nomination for election by the Company's shareholders, was approved by
a vote of at least a majority of the Directors then comprising the
Incumbent Board shall be considered as though such individual were a
member of the Incumbent Board, but excluding, for this purpose, any
such individual whose initial assumption of office occurs as a result
of an actual or threatened election contest with respect to the
election or removal of directors or other actual or threatened
solicitation of proxies or consents by or on behalf of a Person other
than the board; or
(c) Consummation of a reorganization, merger or
consolidation or sale or other disposition of all or substantially all
of the assets of the Company (a "Business Combination"), in each case,
unless, following such Business Combination, (i) all or substantially
all of the individuals and entities who were the beneficial owners,
respectively, of the Outstanding Company Common Stock and Outstanding
Company Voting Securities immediately prior to such Business
Combination beneficially owned, directly or indirectly, more than 50%
of, respectively, the then-outstanding shares of common stock and the
combined voting power of the then-outstanding voting securities
entitled to vote generally in the election of the directors, as the
case may be, of the Corporation resulting from such Business
Combination (including, without limitation, a corporation which as a
result of such transaction owns the Company or all or substantially
all of the Companies assets either directly or through one or more
subsidiaries) in substantially the same proportions as their
ownership, immediately prior to such Business Combination of the
Outstanding Company Common Stock and Outstanding Company Voting
Securities, as the case may be, (ii) no Persons (excluding any
Corporations resulting from such Business Combination or any employee
benefit plan (or related trust) of the Company or such Corporation
resulting from such Business Combination) beneficially owns, directly
or indirectly, 20% or more of, respectively, the then-outstanding
shares of common stock of the Corporation resulting from such Business
Combination, or the Combined Voting Power of the then-outstanding
voting securities of such corporation except to the extent that such
ownership existed prior to the business Combination and (iii) at least
a majority of the members of the Board of Directors of the Corporation
resulting from such Business Combination were members of the Incumbent
Board at the time of the execution of the initial agreement, or the
action of the Board, providing for such Business Combination; or
(d) Approval by the shareholders of the Company of a
complete liquidation or dissolution of the Company.
For purposes of this Section VII, the following terms shall have the
following meanings:
- 4 -
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"Affiliate" means any entity that is (I) a member of a
controlled group of corporations as defined in Section 1563(a) of the
Internal Revenue Code of 1986, as amended ("Code"), determined without
regard to Code Sections 1563(a)(4) and 1563(e)(3)(C), of which the
Company is a member according to Code Section 414(b); (ii) an
unincorporated trade or business that is under common control with the
Company, as determined according to Code Section 414(c); (iii) a
member of an affiliated service group of which the Company is a member
according to Code Section 414(m); or (iv) any other subsidiary
corporation or business in which the Company has a substantial
interest or business relation.
"Common Stock" means the common stock of the Company.
VIII. Governing Law:
. All matters relating to this Plan shall be governed by the
laws of the state of Virginia, without regard to the principles of conflict of
laws.
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EXHIBIT 10.2
WASHINGTON GAS LIGHT COMPANY
LONG-TERM
INCENTIVE COMPENSATION PLAN
Adopted June 28, 1989
As Amended December 18, 1996
<PAGE> 2
WASHINGTON GAS LIGHT COMPANY
LONG-TERM INCENTIVE COMPENSATION PLAN
ARTICLE I
PURPOSE
The purpose of the Washington Gas Light Company Long-Term Incentive
Compensation Plan is to promote the long-term viability and financial success
of the Company and its Affiliates by assisting in the recruiting and retention
of key employees. The Plan is designed to enable key employees to acquire or
increase a proprietary interest in the Company.
ARTICLE II
DEFINITIONS
2.01 Affiliate means any entity that is (i) a member of a
controlled group of corporations as defined in Code Section 1563 (a),
determined without regard to Code Sections 1563 (a) (4) and 1563 (e) (3) (c),
of which the Company is a member according to Code Section 414(b); (ii) an
unincorporated trade or business that is under common control with the Company,
as determined according to Code Section 414(c); (iii) a member of an affiliated
service group of which the Company is a member according to Code Section
414(m); or (iv) any other subsidiary corporation or business in which the
Company has a substantial interest or business relation.
2.02 Agreement means a written agreement (including any amendment
or supplement thereto) between the Company and a Participant specifying the
terms and conditions of an Award.
2.03 Award means Options, Restricted Stock, Stock Appreciation
Rights, Performance Shares, and Dividend Units.
2.04 Board means the Board of Directors of the Company.
2.05 Code means the Internal Revenue Code of 1986, as amended.
2.06 Committee means the Compensation Committee of the Board or any
other Committee of the Board appointed to administer the Plan, provided that
the composition of such Committee shall at all times meet the requirements of
Rule 16b-3 under the Securities Exchange Act of 1934, as amended.
<PAGE> 3
2.07 Common Stock means the Common Stock of the Company, par
value $1.00 per share.
2.08 Company means the Washington Gas Light Company.
2.09 Dividend Unit means an Award granted under Article X of the
Plan.
2.10 Fair Market Value means, on any given date, the closing
price of a share Common Stock as reported on the New York Stock Exchange
composite tape on such day or, if the Common Stock was not traded on such day,
then on the next preceding day that the Common Stock was traded, all as
reported by such source as the Committee may select.
2.11 Option means an Award granted under Article VI of the Plan.
2.12 Participant means a key employee of the Company or of an
Affiliate, including a key employee who is a member of the Board, who
satisfies the requirements of Article IV of the Plan.
2.13 Performance Shares means an Award granted under Article IX
of the Plan.
2.14 Plan means the Washington Gas Light Company Long-Term
Incentive Compensation Plan herein set forth, as the same may from time to time
be amended.
2.15 Restricted Stock means shares of Common Stock awarded to a
Participant under Article VII of the Plan.
2.16 Stock Appreciation Rights means an Award granted under
Article VIII of the Plan.
ARTICLE III
ADMINISTRATION
The Plan shall be administered by the Committee. Except for the
initial Awards as provided for in Section 7.01 (I), the Committee shall
have authority to grant Awards upon such terms (not inconsistent with the
provisions of the Plan) as the Committee may consider appropriate. Such terms
may include conditions (in addition to those contained in the Plan) on the
exercisability of all or any part of an Option or of Stock Appreciation Rights
or on the transferability or forfeitability of Restricted Stock. In addition,
the Committee shall have complete authority to interpret all provisions of the
Plan; to prescribe the form of Agree-
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ments; to adopt, amend, and rescind rules and regulations pertaining to the
administration of the Plan; and to make all other determinations necessary or
advisable for the administration of the Plan. The express grant in the Plan of
any specific power to the Committee shall not be construed as limiting any
power or authority of the Committee. Any decision made, or action taken, by
the Committee shall not be construed as limiting any power or authority of the
Committee. Any decision made, or action taken, by the Committee in connection
with the administration of the Plan shall be final, conclusive, and binding
with respect to all persons including all Participants. No member of the
Committee shall be liable for any act done, or for any failure to act, if such
act or failure to act was done or omitted in good faith with respect to the
Plan or any Agreement or Award.
ARTICLE IV
ELIGIBILITY
Key employees of the Company or of any Affiliate are eligible to
receive Awards under the Plan. An individual may receive more than one
Award. The Committee shall, in its discretion, select the eligible key
employees and shall base its selection on the employees' job responsibilities
and present and potential contributions to the success of the Company and its
Affiliates.
ARTICLE V
GRANT OF AWARDS; SHARES SUBJECT TO THE PLAN
The Committee may, from time to time, grant Awards to one or more
eligible employees, provided that (i) subject to any adjustment pursuant to
Article XI, the aggregate number of shares of Common Stock subject to Awards
under the Plan may not exceed four hundred thousand (400,000) shares; (ii) to
the extent that an Award lapses or the rights of the Participant to whom it was
granted terminate, any shares of Common Stock subject to such Award shall again
be available for the grant of an Award under the Plan; and (iii) shares
delivered by the Company under the Plan may be authorized and unissued Common
Stock, Common Stock held in the treasury of the Company, or Common Stock
purchased on the open market (including private purchases) in accordance with
applicable securities laws. In determining the size of Awards, the Committee
shall take into account a Participant's responsibility level, performance,
potential, and cash compensation level, and the Fair Market Value at the time
of the Award, as well as such other considerations as it deems appropriate.
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ARTICLE VI
STOCK OPTIONS
6.01 GRANT OF OPTIONS. One or more Options may be granted to any
eligible employee. Options shall be embodied in an Agreement in a form
approved by the Committee.
6.02 INCENTIVE STOCK OPTIONS/NONQUALIFIED STOCK OPTIONS. The
Agreement may provide for "incentive stock options" that are intended to
satisfy the requirements of Section 422A of the Code, or such other options
that are not intended to satisfy the requirements of Section 422A of the Code
(hereinafter described as "nonqualified stock options"), that entitle the
holder to purchase from the Company a stated number of shares of Common Stock
at the price set forth in the Agreement. Each Option shall be an incentive
stock option or a nonqualified stock option as specified in the Agreement. All
Options that are not identified as incentive stock options in the Agreement are
intended to be nonqualified stock options.
6.03 OPTION PRICE. Except as provided in Section 6.04, the
exercise price per share of an Option shall be an amount not less than 100%
of the Fair Market Value per share of the Common Stock on the date of grant of
such Option (or, in the case of a grant of an incentive stock option to a
prospective employee, the date the grant becomes effective).
6.04 ADDITIONAL PROVISIONS APPLICABLE TO INCENTIVE STOCK OPTIONS.
The aggregate Fair Market Value (determined at the time any incentive stock
option is granted) of the Common Stock with respect to any Participant's
incentive stock options, together with incentive stock options granted under
any other plan of the Company or any subsidiary (as defined in Code Section 425
(f)), that are exercisable for the first time by such Participant during any
calendar year shall not exceed $100,000. In the event that a Participant holds
incentive stock options that become first exercisable (as a result of
acceleration of exercisability under the Plan or an Agreement, or otherwise) in
any one calendar year for shares having a Fair Market Value at the date of
grant in excess of $100,000, then the most recently granted of such incentive
stock options, to the extent that they are exercisable for shares having an
aggregate Fair Market Value in excess of $100,000, shall be deemed to be
nonqualified stock options.
No incentive stock option may be granted under the Plan to any
person who owns, directly or indirectly, within the meaning of Sections 422A(b)
(6) and 425(d) of the Code, at the time the incentive stock option is granted,
stock possessing more than 10% of the total combined voting power of all
classes of stock of the Company or any subsidiary (as defined in Code Section
425(f)) unless the exercise price is at least 110% of the Fair Market Value of
the shares subject to the incentive stock option, determined on the date of the
grant, and
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<PAGE> 6
the incentive stock option by its terms is not exercisable after the expiration
of five years from the date such incentive stock option is granted.
6.05 OPTION EXERCISE PERIOD. No Option shall be exercisable less
than one year nor more than ten years from the date the Option was granted.
6.06 EMPLOYEE STATUS. In the event that the terms of any Option
provide that it may be exercised only during employment or within a specified
period of time after termination of employment, the Committee may decide in
each case to what extent leaves of absence for governmental or military
service, illness, temporary disability, or other reasons shall not be deemed
terminations of employment.
6.07 NONTRANSFERABILITY. Any Option granted under the Plan shall
not be transferable by the Participant except by will or the laws of descent
and distribution and shall be exercisable during the Participant's lifetime
only by the Participant or, in the event of the Participant's mental or
physical incapacity, by his legal representative.
6.08 EXERCISABILITY.
(i) GENERALLY. Subject to the other provisions of the Plan, an
Option may be exercised in whole at any time or in part, from time to time, at
such times and in compliance with such requirements as set forth in the
Agreement. An Option granted under the Plan may be exercised with respect to
any number of whole shares less than the full number for which the Option could
be exercised. Such partial exercise of an Option shall not affect the right to
exercise the Option from time to time in accordance with the Plan with respect
to remaining shares subject to the Option. Upon the exercise of an Option
granted in connection with Stock Appreciation Rights, the Participant shall
surrender unexercised the Stock Appreciation Rights or, if the Option is not
exercised in full, any portion of the Stock Appreciation Rights to which the
exercised portion of the Option is related.
(ii) DEATH, DISABILITY, OR RETIREMENT. In the event of a
Participant's death or disability, Options shall become exercisable either
according to the terms of the Agreement or on a pro-rata basis based upon the
vesting period specified in the Agreement, whichever permits the Participant or
beneficiary to exercise Options for a greater number of shares of Common Stock.
For purposes of this provision, "disability" means a physical or mental
condition which prevents the Participant from engaging in any substantially
gainful activity. In the event of normal retirement or early retirement as
provided under the Company's Employees' Pension Plan, the Committee may
accelerate the exercisability of Options.
6.09 EXERCISE; PAYMENT.
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<PAGE> 7
(i) EXERCISE. Unless provided otherwise in an Agreement, an
Option shall be exercised, in whole or in part, by a written notice delivered
to the Committee, which notice shall contain the provision or authorization
with respect to tax withholding required by Section 14.06(I). The Option shall
be deemed to have been exercised when such notice is received by the Committee.
(ii) PAYMENT. Payment of the Option exercise price shall be made
in cash or a cash equivalent acceptable to the Committee. If the Agreement so
provides, payment of all or part of the Option exercise price may be made in
shares of Common Stock, or through such other arrangements as specified in the
Agreement. If Common Stock is used to pay all or part of the Option exercise
price, the shares surrendered must have a Fair Market Value (determined as of
the day of exercise) that is not less than such price or part thereof.
6.10 SHAREHOLDER RIGHTS. No Participant shall, as a result of
having been granted any Option, have any rights as a shareholder until the
date the Participant becomes a shareholder of record of shares of Common Stock
upon exercise of such Option.
ARTICLE VII
RESTRICTED STOCK
7.01 AWARDS.
(i) INITIAL AWARDS. The initial Awards of Restricted Stock shall
be by action of the Board taken on June 28, 1989, effective July 3, 1989.
(ii) SUBSEQUENT AWARDS. In accordance with the provisions of
Article IV of the Plan, the Committee may designate individuals to whom any
subsequent Awards of Restricted Stock are to be made and shall specify the
number of shares of Common Stock covered by the Awards.
7.02 GRANT; FORFEITURE OF RESTRICTED STOCK.
(i) GRANT. An Award of Restricted Stock shall be granted for no
consideration other than services.
(ii) FORFEITURE OF RESTRICTED STOCK. In the event that a
Participant granted an Award of Restricted Stock shall cease to be an employee
of the Company and all Affiliates for any reason, including but not limited to
an employing Affiliate's ceasing to be such, other than death, disability, or
retirement prior to the lapse of all restrictions applicable to such
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<PAGE> 8
Restricted Stock, the shares of Restricted Stock awarded to the Participant
shall be forfeited to the Company, effective with the effective date of the
Participant's termination of employment. The Committee may decide in each case
to what extent leaves of absence for governmental or military service, illness,
temporary disability, or other reasons shall not be deemed a termination of
employment.
7.03 RESTRICTION PERIOD.
(i) INITIAL AWARDS. For those initial Awards of Restricted
Stock granted by the Board on June 28, 1989, there shall be a five-year
restriction period during which restrictions shall lapse as follows: 50% after
the third anniversary of the granting of the Award; 25% after the fourth
anniversary of the granting of the Award; and the final 25% after the fifth
anniversary of the granting of the Award.
(ii) SUBSEQUENT AWARDS. The Committee shall establish
restriction periods applicable to any Award made subsequent to the initial
Awards described in Section 7.01 (I).
7.04 DEATH OR DISABILITY; RETIREMENT.
(i) DEATH OR DISABILITY. Restrictions on Restricted Stock shall
lapse on a pro-rata basis in the event of a Participant's death or disability.
On the basis of a five-year restriction period, the restrictions will lapse at
the rate of 2O% for each anniversary of the granting of the Award that has
passed before the occurrence of the Participant's death or disability. For
purposes of this provision, "disability" means a physical or mental condition
which prevents the Participant from engaging in any substantially gainful
activity.
(ii) RETIREMENT. In the event of normal retirement or early
retirement as provided under the Company's Employees' Pension Plan, the
Committee may terminate any remaining restrictions on Restricted Stock.
7.05 SHAREHOLDER RIGHTS. While the shares are Restricted
Stock, a Participant shall have all rights of a shareholder with respect to
such shares, including the right to receive dividends and to vote the shares;
provided, however, that (i) a Participant may not sell, transfer, pledge,
exchange, hypothecate, or otherwise dispose of shares of Restricted Stock and
(ii) the Company shall retain custody of the certificates evidencing shares of
Restricted Stock.
7.06 WITHHOLDING NOTICE. Unless provided otherwise in an
Agreement, at the time at which shares become freely transferable upon the
lapse of restrictions, the Participant shall provide written notice to the
Committee setting forth the provision or authorization with
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<PAGE> 9
respect to tax withholding required by Section 14.06(I).
ARTICLE VIII
STOCK APPRECIATION RIGHTS
8.01 GRANT OF STOCK APPRECIATION RIGHTS. Stock Appreciation
Rights may be granted under the Plan in connection with an Option either at
the time of grant or by amendment, or may be separately awarded. Stock
Appreciation Rights shall be subject to such terms and conditions not
inconsistent with the Plan as the Committee shall impose.
8.02 EXERCISABILITY. Stock Appreciation Rights granted in
connection with an Option shall be exercisable to the extent the Option is
exercisable. Stock Appreciation Rights not granted in connection with an
Option shall be exercisable pursuant to such terms and conditions established
by the Committee in the Award.
8.03 FAILURE TO EXERCISE. If a Participant who has been granted
Stock Appreciation Rights has not exercised such rights as of the day the Stock
Appreciation Rights expire due to passage of time, then such rights shall be
deemed to have been exercised by the Participant on such day. The foregoing
sentence applies only if the Fair Market Value of one share of Common Stock on
such day exceeds the Fair Market Value of one share of Common Stock on the day
the Stock Appreciation Rights were granted.
8.04 EXERCISE; FORM OF PAYMENT.
(i) EXERCISE. Unless otherwise provided otherwise in an
Agreement, Stock Appreciation Rights shall be exercised, in whole or in part,
by a written notice delivered to the Committee, which notice shall contain the
provision or authorization with respect to tax withholding required by Section
14.06(I). The Stock Appreciation Rights shall be deemed to have been exercised
when such notice is received by the Committee.
(ii) FORM OF PAYMENT. Upon the exercise of Stock Appreciation
Rights granted in connection with an Option, the Participant shall surrender
unexercised the Option or, if the Stock Appreciation Rights are not exercised
in full, any portion of the Option to which the Stock Appreciation Rights are
related, and shall be entitled to receive payment (in cash or shares of Common
Stock or a combination thereof as set forth in the Agreement at the time of
grant) equal to the product of the excess of the Fair Market Value of one share
of Common Stock at the date of exercise over the Option price, multiplied by
the number of shares called for by the Stock Appreciation Rights (or portion
thereof) which are so exercised. Upon exercise of Stock Appreciation Rights
not granted in connection with an
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<PAGE> 10
Option, the Participant shall be entitled to payment (in cash or shares of
Common Stock or a combination thereof as set forth in the Agreement at the time
of grant) equal to the product of the excess of the Fair Market Value of one
share of Common Stock at the date of exercise over the Fair Market Value of one
share of Common Stock at the date of grant of the Stock Appreciation Rights,
multiplied by the number of shares called for by the Stock Appreciation Rights
(or portion thereof) which are so exercised. The value of any Common Stock
payable upon exercise of Stock Appreciation Rights shall be the Fair Market
Value of the Common Stock on the day on which the Stock Appreciation Rights are
exercised. Solely for purposes of Article V of the Plan, to the extent that
Stock Appreciation Rights granted in connection with an Option are exercised,
such Option shall be deemed to have been exercised, and shall not be deemed to
have lapsed.
8.05 NONTRANSFERABILITY. Stock Appreciation Rights granted under
the Plan shall not be transferable by the Participant except by will or the
laws of descent and distribution and shall be exercisable during the
Participant's lifetime only by the Participant or, in the event of the
Participant's mental or physical incapacity, by his legal representative.
8.06 LAPSE OF STOCK APPRECIATION RIGHTS. Stock Appreciation
Rights granted in connection with an Option shall lapse in accordance with the
same terms and conditions specified in the underlying Option. Stock
Appreciation Rights not granted in connection with an Option shall lapse in
accordance with the terms and conditions specified by the Committee in the
Award.
8.07 SHAREHOLDER RIGHTS. No Participant shall, as a result of
having been granted Stock Appreciation Rights, have any rights as a shareholder
until the date the Participant becomes a shareholder of record of shares of
Common Stock upon exercise of the Stock Appreciation Rights if shares of Common
Stock are issued to such Participant as a result of such exercise.
ARTICLE IX
PERFORMANCE SHARES
9.01 GRANT OF PERFORMANCE SHARES. Awards made pursuant to
this Article IX shall be granted in the form of bookkeeping entries called
Performance Shares, subject to such terms and conditions not inconsistent with
the Plan as the Committee shall impose. Each Performance Share Award shall
define performance related objectives which shall be specified by the Committee
in the Agreement for the Award. The Agreement shall specify the extent to
which satisfaction of such specified objectives will entitle the Participant to
receive shares of Common Stock of the Company or cash at the end of the
performance period.
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<PAGE> 11
9.02 PERFORMANCE PERIOD. The measuring period to establish the
performance objectives set forth in a Performance Share Agreement shall be no
less than three years.
9.03 FORM OF PAYMENT. Upon the completion of the applicable
performance period, a determination shall be made as to the number of shares of
Common Stock or cash equal to the share value to be paid to the Participant for
no consideration other than services. Unless provided otherwise in an
Agreement, at the time of payment under the Performance Share Award the
Participant shall provide written notice to the Committee setting forth the
provision or authorization with respect to tax withholding required by Section
14.06(I).
9.04 SHAREHOLDER RIGHTS. No Participant shall, as a result of
having been awarded Performance Shares, have any rights as a shareholder until
the date the Participant becomes a shareholder of record of shares of Common
Stock upon payment of the Performance Shares if shares of Common Stock are
issued to such Participant as a result of such payment.
ARTICLE X
DIVIDEND UNITS
The Committee may grant Dividend Units equal to a specified number of
shares of Common Stock on which Participants will receive cash payments equal
to the dividends paid on the underlying number of shares when, as, and if paid.
An Award of Dividend Units shall entitle the Participant to payment of an
amount of cash equal to such cash dividends only and not to any right to the
actual dividends on the underlying shares or to the underlying shares
themselves. Such Awards of Dividend Units may be combined with other Awards.
Payments in respect of Dividend Units will be made at dividend payment dates
and not accumulated.
ARTICLE XI
ADJUSTMENT UPON CHANGE IN CAPITALIZATION
Should the Company effect one or more Common Stock dividends, stock
split-ups, subdivisions, or consolidations of shares or other changes in
capitalization, then the maximum number of shares that may be subject to Awards
under the Plan shall be proportionately adjusted, and the terms of outstanding
Awards shall be adjusted, as the Committee in its discretion shall determine to
be equitably required.
The issuance by the Company of shares of Common Stock of any class, or
securities
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<PAGE> 12
convertible into shares of Common Stock of any class, for cash or property or
for labor or services, either upon direct sale or upon the exercise of rights
or warrants to subscribe therefor, or upon conversion of shares or obligations
of the Company convertible into such shares or other securities, shall not
affect, and no adjustment by reason thereof shall be made with respect to, the
maximum number of shares that may be subject to Awards under the Plan or to the
terms of outstanding Awards.
ARTICLE XII
COMPLIANCE WITH LAW AND APPROVAL OF REGULATORY BODIES; LEGENDS
No Option or Stock Appreciation Rights shall be exercisable, no
Common Stock shall be issued, no certificates for shares of Common Stock shall
be delivered, and no payment shall be made under the Plan except in compliance
with all applicable federal and state laws and regulations (including, without
limitation, tax withholding requirements) and the rules of all stock exchanges
on which the Common Stock may be listed. The Company shall have the right to
rely on an opinion of its counsel as to such compliance. No Option or Stock
Appreciation Rights shall be exercisable, no Common Stock shall be issued, no
certificate for shares shall be delivered, and no payment shall be made under
the Plan until the Company has obtained such consent or approval as the Company
may deem advisable from regulatory bodies having jurisdiction over such
matters. Any share certificate issued to evidence Common Stock or Restricted
Stock may bear such legends and statements as the Company may deem advisable to
assure compliance with the Plan and all federal and state laws and regulations.
ARTICLE XIII
ACCELERATION OF AWARDS; CHANGE OF CONTROL
13.01 ACCELERATION OF AWARDS. Any other provision to the contrary
in the Plan or any Award or Agreement notwithstanding, in the event that an
Award pursuant to the terms of its grant is not immediately exercisable, is
subject to restrictions, or is subject to the meeting of specified performance
objectives, the Award may initially provide, or the Committee may at any time
amend it to provide, for accelerated exercisability, termination of
restrictions, or waiver or modification of performance objectives, subject to
such terms and conditions and upon the occurrence of such events determined by
the Committee in its sole discretion to justify such acceleration.
13.02 CHANGE OF CONTROL - ACCELERATION; AUTOMATIC VESTING OF AWARDS.
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<PAGE> 13
(i) ACCELERATION. Subject to the limitations in Section 13.03,
any other provision to the contrary in the Plan or any Award or Agreement
notwithstanding, all Options and Stock Appreciation Rights shall automatically
become fully exercisable, all restrictions applicable to Restricted Stock shall
automatically terminate and all performance objectives in Performance Share
Awards shall be waived upon the occurrence of any one or more of the triggering
events specified below:
(a) The acquisition by any individual, entity or group (within the
meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934,
as amended (the "Exchange Act") (a "Person") of beneficial ownership (within
the meaning of Rule 13d-3 promulgated under the Exchange Act) of 20% or more of
either (i) the then-outstanding shares of common stock of the Company (the
"Outstanding Company Common Stock") or (ii) the combined voting power of the
then-outstanding voting securities of the Company entitled to vote generally in
the election of directors (the "Outstanding Company Voting Securities");
provided, however, that for purposes of this subsection (a), the following
acquisitions shall not constitute a Change of Control: (i) any acquisition
directly from the Company, (ii) any acquisition by the Company, (iii) any
acquisition by any employee benefit plan (or related trust) sponsored or
maintained by the Company or any corporation controlled by the Company, or (iv)
any acquisition by any corporation pursuant to a transaction which complies
with clauses (i), (ii) and (iii) of subsection (c) of this Section 13.02; or
(b) Individuals who, as of December 18, 1996, constitute the Board
(the "Incumbent Board") cease for any reason to constitute at least a majority
of the Board; provided, however, that any individual becoming a Director
subsequent to December 18, 1996 whose election, or nomination for election by
the Company's shareholders, was approved by a vote of at least a majority of
the Directors then comprising the Incumbent Board shall be considered as though
such individual were a member of the Incumbent Board, but excluding, for this
purpose, any such individual whose initial assumption of office occurs as a
result of an actual or threatened election contest with respect to the election
or removal of directors or other actual or threatened solicitation of proxies
or consents by or on behalf of a Person other than the board; or
(c) Consummation of a reorganization, merger or consolidation or sale
or other disposition of all or substantially all of the assets of the Company
(a "Business Combination"), in each case, unless, following such Business
Combination, (i) all or substantially all of the individuals and entities who
were the beneficial owners, respectively, of the Outstanding Company Common
Stock and Outstanding Company Voting Securities immediately prior to such
Business Combination beneficially owned, directly or indirectly, more than 50%
of, respectively, the then-outstanding shares of common stock and the combined
voting power of the then-outstanding voting securities entitled to vote
generally
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<PAGE> 14
in the election of the directors, as the case may be, of the Corporation
resulting from such Business Combination (including, without limitation, a
corporation which as a result of such transaction owns the Company or all or
substantially all of the Companies assets either directly or through one or
more subsidiaries) in substantially the same proportions as their ownership,
immediately prior to such Business Combination of the Outstanding Company
Common Stock and Outstanding Company Voting Securities, as the case may be,
(ii) no Persons (excluding any Corporations resulting from such Business
Combination or any employee benefit plan (or related trust) of the Company or
such Corporation resulting from such Business Combination) beneficially owns,
directly or indirectly, 20% or more of, respectively, the then-outstanding
shares of common stock of the Corporation resulting from such Business
Combination, or the Combined Voting Power of the then-outstanding voting
securities of such corporation except to the extent that such ownership existed
prior to the business Combination and (iii) at least a majority of the members
of the Board of Directors of the Corporation resulting from such Business
Combination were members of the Incumbent Board at the time of the execution of
the initial agreement, or the action of the Board, providing for such Business
Combination; or
(d) Approval by the shareholders of the Company of a complete
liquidation or dissolution of the Company.
(ii) VESTING OF AWARDS. Except as provided below, upon the
occurrence of any of the triggering events described in Section 13.02 (i)
above, all outstanding Awards shall automatically vest and be surrendered, and
the Participants shall receive in full satisfaction therefor, distribution in
the form of shares of Common Stock.
13.03 CERTAIN REDUCTION OF PAYMENTS. Anything in this Plan to
the contrary notwithstanding, in the event the Company determines that
any payment by it to a Participant (whether paid pursuant to the terms of this
Plan or otherwise) would be nondeductible by the Company for federal income tax
purposes because of Section 28OG of the Code, then any amounts payable to a
Participant pursuant to this Plan shall be reduced automatically to an amount
that maximizes the payments under the Plan without causing any payments to be
nondeductible by the Company because of Section 28OG of the Code.
ARTICLE XIV
GENERAL PROVISIONS
14.01 EFFECT ON EMPLOYMENT. Neither the adoption of the Plan,
nor the receipt of any Award under the Plan, nor any documents under the
Plan (or any part thereof), including but not limited to any Agreement, shall
confer upon any employee any right to continue in
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<PAGE> 15
the employ of the Company or any Affiliate, or in any way affect any right and
power of the Company or any Affiliate to terminate the employment of any
employee at any time with or without assigning a reason therefor.
14.02 UNFUNDED PLAN. The Plan shall be unfunded, and neither the
Company nor any Affiliate shall be required to segregate any assets that may at
any time be represented by Awards under the Plan. Any liability of the Company
or any Affiliate to any person with respect to any Award under the Plan shall
be based solely upon contractual obligations created pursuant to the Plan. No
such obligation of the Company or any Affiliate shall be deemed to be secured
by any pledge of, or other encumbrance on, any property of the Company or any
Affiliate.
14.03 RULES OF CONSTRUCTION. Headings are given to the articles
and sections of the Plan solely as a convenience to facilitate reference. The
reference to any statute, regulation, or other provision of law shall be
construed to refer to any amendment to or successor of such provision of law.
14.04 FRACTIONAL SHARES. Any fractional shares concerning
Awards shall be eliminated by rounding down for fractions less than one-half
and rounding up for fractions equal to or more than one-half. No cash
settlements shall be made with respect to fractional shares eliminated by
rounding.
14.05 NONALIENATION. No benefit provided under the Plan
shall be subject to alienation or assignment by a Participant (or by any person
entitled to such benefit pursuant to the terms of the Plan), nor shall it be
subject to attachment or other legal process of whatever nature. Any attempted
alienation, assignment, or attachment shall be void and of no effect
whatsoever. Payment shall be made only to the Participant entitled to receive
the same or the Participant's authorized legal representative. Deposit of any
sum in any financial institution to the credit of any Participant (or a person
entitled to such sum pursuant to the terms of the Plan) shall constitute
payment to that Participant (or such person).
14.06 TAX WITHHOLDING.
(i) GENERALLY. Either the Company or an Affiliate, as
appropriate, shall have the right to deduct from all Awards paid in cash any
federal, state, or local taxes as it deems to be required by law to be withheld
with respect to such cash payments. In the case of Awards paid in shares of
Common Stock, the Participant receiving such Common Stock may be required to
pay to the Company or an Affiliate, as appropriate, the amount of any such
taxes which the Company or Affiliate is required to withhold with respect to
such Common Stock. At the request of a Participant, or as required by law,
such sums as may be required for the payment of any estimated or accrued income
tax liability may be withheld or paid to the
- 14 -
<PAGE> 16
Company or an Affiliate, as appropriate, and paid over to the governmental
entity entitled to receive the same.
- 15 -
<PAGE> 17
(ii) CASHLESS WITHHOLDING. Participants may elect (an "Election")
to have withheld shares of Common Stock (A) to be issued pursuant to the
exercise of an Option or Stock Appreciation Rights, (B) which have become
freely transferable pursuant to the termination of restrictions on Restricted
Stock, or (C) which are issued pursuant to a Performance Share Award, or the
Participant may make an Election to surrender to the Company shares already
owned by the Participant (which may be shares of Common Stock previously
received pursuant to an Award), which shall be sufficient in value to satisfy
applicable tax withholding obligations, or such other withholding arrangements
requested by the Participant or otherwise required as specified above, in
connection with shares received pursuant to an Award. For purposes of such
withholding or surrender, the shares withheld or surrendered shall be valued at
their Fair Market Value on the date as of which the Participant first becomes
subject to taxation for federal income tax purposes in respect of shares of
Common Stock received upon exercise of the Option or Stock Appreciation Rights,
which have become freely transferable upon the termination of restrictions on
Restricted Stock, or which are issued under a Performance Share Award,
whichever is applicable (the "Tax Date"). If the Fair Market Value on the Tax
Date of the number of whole shares of Common Stock withheld or surrendered
pursuant to an Election exceeds the withholding or other applicable tax
obligations, a fractional share shall not be issued or returned for the excess,
but an amount equal to the excess shall be paid to the Participant by the
Company in cash as soon as reasonably practicable after the amount of such
excess is determined by the Company. An Election may be made by a Participant
with respect to all or part of a particular Option or Stock Appreciation Rights
exercise, termination of restrictions on Restricted Stock, or issuance of
shares under a Performance Share Award, to all or a specified class of
previously granted Options, Stock Appreciation Rights, Restricted Stock, or
Performance Share Awards, and/or to all or a specified class of Options, Stock
Appreciation Rights, Restricted Stock, or Performance Share Awards which may be
granted in the future. The Election shall specify whether the Participant
elects to have withheld shares issued pursuant to the Award to which the
Election relates, or to surrender already-owned shares of Common Stock. If the
Participant elects to surrender already-owned shares of Common Stock, the
Election shall be accompanied by certificates, with accompanying stock powers
signed in blank, for a sufficient number of such shares of Common Stock.
An Election by a Participant shall be made prior to the applicable
Tax Date and also shall meet each of the following additional requirements:
(1) The Election, once made, shall be irrevocable;
(2) The Election must be made either (a) during
one of the ten business-day periods beginning on the third
business day following the date of release of the
- 16 -
<PAGE> 18
Company's quarterly or annual summary statements of sales and
earnings and ending on the twelfth business day following such
date; or (b) at least six months prior to the Tax Date for the
Award to which the Election applies;
(3) No Election may be made with respect to any
Award during the first six months after the grant of the
Award, with respect to any Option or Stock Appreciation Rights
which have been exercised during the first six months after
their date of grant, or with respect to any Restricted Stock
for which restrictions have terminated, or any Performance
Share Awards for which shares have been issued, during the
first six months after the date of grant, and, if any Option
or Stock Appreciation Rights with respect to which an Election
is already in effect shall be exercised during the first six
months after the date of grant, or if any Common Stock is
received upon the termination of restrictions on Restricted
Stock or issued pursuant to a Performance Share Award with
respect to which an Election is already in effect during the
first six months after the date of grant of such Award, such
Election shall to the extent of such exercise, termination, or
issuance be deemed void, except that such limitations shall
not apply if such Participant dies or is disabled prior to the
expiration of such six-month period;
(4) No Election shall be made with respect to
shares of Common Stock issued pursuant to an Award if the
Participant has previously filed an election under Section 83
(b) of the Code in connection with such Award or in connection
with the receipt of shares under such Award; and
(5) The Committee shall have sole discretion to
consent or disapprove any Election made by a Participant, and
if the Committee disapproves such an Election, shares shall
not be issued to the Participant upon the exercise of an
Option or Stock Appreciation Rights, become freely
transferable pursuant to the termination of restrictions on
Restricted Stock, or be issued pursuant to a Performance Share
Award to which the disapproved Election applies until the
Participant shall have complied with Section 14.06(i) for
satisfying tax withholding obligations. The Committee by
resolution may approve in advance specified classes of
Elections whether by a given Participant or category of
Awards, or by type of Election; provided, however, that any
such resolution must expressly reserve to the Committee the
right both to disapprove any such Election and to revoke or
modify its advance approval of any such class of Elections.
14.07 GOVERNMENT AND OTHER REGULATIONS. The obligation of
the Company to make payment of Awards in Common Stock or otherwise shall be
subject to all applicable laws, miss, and regulations, and to such approvals by
any government agencies as may be required. The Company shall be under no
obligation to register under the Securities Act of 1933, as
- 17 -
<PAGE> 19
amended, or under any state securities or Blue Sky laws any of the shares of
Common Stock issued, delivered, or paid in settlement under the Plan. If
Common Stock awarded under the Plan may in certain circumstances be exempt from
such registration, the Company may restrict its transfer in such manner as it
deems advisable to ensure such exempt status.
14.08 RELIANCE ON REPORTS. Each member of the Committee shall be
fully justified in relying or acting in good faith upon any report made by the
independent public accountants of the Company and upon any other information
furnished in connection with the Plan. In no event shall any person who is or
shall have been a member of the Committee be liable for any determination made,
any other action taken, or any omission to act in reliance upon any such report
or information.
14.09 COMPANY SUCCESSORS. In the event the Company becomes
a party to a merger, consolidation, sale of substantially all of its assets, or
any other corporate reorganization in which the Company will not be the
surviving corporation or in which the holders of the Common Stock will receive
securities of another corporation (in any such case, the "New Company"), then
the New Company shall assume the rights and obligations of the Company under
the Plan.
14.10 GOVERNING LAW. All matters relating to the Plan, any
Awards, or any Agreements, shall be governed by the laws of the District of
Columbia, without regard to the principles of conflict of laws.
14.11 RELATIONSHIP TO OTHER BENEFITS. No payment under the
Plan shall be taken into account in determining any benefits under any other
pension, retirement, profit-sharing, or other employee benefit plan of the
Company or any Affiliate.
14.12 EXPENSES. The expenses of administering the Plan shall be
borne by the Company.
14.13 PROCEEDS. Any cash proceeds received by the Company
under the Plan shall be used for general corporate purposes, and any shares of
Common Stock withheld by or paid to the Company under the Plan shall be held by
the Company as treasury stock or shall be canceled, as the Company in its
discretion shall determine.
- 18 -
<PAGE> 20
ARTICLE XV
AMENDMENT
The Board may amend the Plan from time to time. No amendment may
become effective until shareholder approval is obtained if such approval is
required by any federal or state law or regulation or the rates of any stock
exchange on which the Common Stock may be listed, or if the Board in its
discretion determines that the obtaining of such shareholder approval is for
any reason advisable. No amendment shall, without a Participant's consent,
adversely affect any rights of such Participant under any Award outstanding at
the time such amendment is made.
ARTICLE XVI
EFFECTIVE DATE; DURATION OF THE PLAN
The effective date of the Plan is June 28, 1989, subject to
shareholder approval. Unless sooner terminated by the Board, the Plan shall
terminate on June 27, 1999; provided, however, that any Award outstanding at
the time of such termination shall continue in full force and effect and shall
continue to be governed by the Plan and its applicable Agreement until the
Award expires or is discharged by its terms.
- 19 -
<PAGE> 1
EXHIBIT 10.3
WASHINGTON GAS LIGHT COMPANY
EXECUTIVE INCENTIVE COMPENSATION PLAN
AS AMENDED THROUGH SEPTEMBER 25, 1985
As further amended November 26, 1986
As further amended December 18, 1996
<PAGE> 2
WASHINGTON GAS LIGHT COMPANY
EXECUTIVE INCENTIVE COMPENSATION PLAN
1. OBJECTIVE OF THE PLAN
To promote achievement of corporate goals and increase the Company's
profits by recognizing a participant's contribution to the attainment of the
Company's goals and profits. An additional objective is to attract and retain
outstanding executive officers.
2. ELIGIBILITY
Executive officers eligible each year to participate in the Plan are
those serving in positions for which the Board of Directors approves
remuneration. Other executive employees may, upon recommendation of the Chief
Executive officer and approval of the Board of Directors, participate in the
Plan in any year.
3. DETERMINATION OF INCENTIVE COMPENSATION POOL
All payments will be payable out of an incentive compensation pool.
Each year, the Board of Directors will fix a target percentage return on
average common stock equity. No compensation pool will be generated unless the
target percentage .is reached. After the Company's financial results for the
year are available, the Board of Directors will determine the amount of the
compensation pool, which will be based, in part, upon the extent to which the
target percentage for the year has been exceeded.
"Common stock equity" is to be determined in accordance with generally
accepted accounting principles.
- 1 -
<PAGE> 3
4. DETERMINATION OF INDIVIDUAL AWARDS
After the Company's financial results for the year have been
determined, the Chief Executive officer will recommend to the Compensation
Committee and it will recommend to the Board of Directors the award, if any, to
be paid to each participant. The Board of Directors, however, will make the
final determination of the award to be paid to any participant and may
determine that no award shall be paid to any participant. The aggregate awards
payable will not exceed the compensation pool, but the entire compensation pool
need not be paid. The award of each participant will be based upon whether the
participant has met or the degree to which individual performance has exceeded
objectives established at the outset of the Plan year. A participant who
becomes eligible to participate in the Plan during the year or who, because of
retirement or other factors, is not employed during the entire year, shall be
eligible to participate, but the extent of participation shall take into
account the period of service as well as other factors.
5. PAYMENT OF AWARDS
The awards will be paid in cash as soon as possible after the
determination of the amount to be paid unless the participant has made a
deferred compensation election in accordance with Schedule A hereto, or unless
the Board determines to change the timing of payments according to the best
interests of the Company.
6. AMENDMENT AND TERMINATION
The Board of Directors may amend or terminate the Plan at any time,
except that any award previously approved or determined by it shall be paid.
- 2 -
<PAGE> 4
SCHEDULE A
TO
WASHINGTON GAS LIGHT COMPANY
EXECUTIVE INCENTIVE COMPENSATION PLAN
A. Deferral of Payment(1)
(1) A Participant may apply to defer payment of all or part of any
award for which the Participant may become eligible. An applicant may request:
(a) a deferral for a four year Period or for a greater
period; and
(b) deferral of an award in twenty-five percent
increments (25%, 50%, 75% air 100%) or payment of a
specific cash amount with a twenty-five percent
increment (25%, 50%, 75% or 100%) applied to the
balance.
(2) A participant my apply to re-defer all accumulated interest
and the amount deferred previously. Partial re-deferrals are
not permitted. Also, a re-deferral must be for a four year
period or for a greater period.
(3) To be effective, an application under Paragraph A(l) or A(2)
must be submitted to the Company and approved on or before
November 30th:
(i) of the year with respect to which there may be an
award, or
(ii) of the year prior to expiration of a current deferral
period.
(4) An approved application to defer or re-defer can not be
modified or revoked.
B. Method of Payment.
(1) Payment of a deferred amount will be in the form of a lump sum
at the expiration of the
- ------------------
1/ Provisions regarding deferrals have been amended--see page following
Schedule A.
- 3 -
<PAGE> 5
relevant deferral period, unless the participant applies to
receive the amount in one to ten (1-10) equal annual
installments beginning at the expiration of the deferral
period. An application to be paid annual installments must be
made and approved on or before November 30th prior to
expiration of the deferral period.
(2) If a participant's employment with the Company is terminated
due to death, disability or retirement, all deferral periods
are canceled. Payment shall be in a lump sum, unless an
application is made pursuant to Paragraph B(l) or a request
has been approved pursuant to Paragraph B(5).
(3) If a participant's employment with the Company is terminated
for any reason other than death, disability or retirement, all
deferral periods are canceled and payment shall be in a lump
sum.
(4) Payments shall be made within thirty (30) days of the
applicable event and shall be made to the participant;
provided that a participant may file with the Company a
written designation of beneficiary which may be revoked or
modified by the participant at any time. If no beneficiary
has been designated or the designated beneficiary does not
survive the participant, payment shall be made on the
participant's behalf to the participant's surviving spouse and
if there is no surviving spouse, payment shall be in equal
proportions to the participants surviving children. If the
participant is not survived by a designated beneficiary, by a
spouse or by children, payments shall be made on the
participant's behalf to the estate of the participant as
established by law.
(5) If requested by the participant in writing on the designation
of beneficiary form, and approved by the Company, payments to
the designated beneficiary of a deceased
- 4 -
<PAGE> 6
participant may begin at the time requested on the form, and
may include a method of payment under Paragraph B(l).
(6) The Company may permit early payment of an amount needed
because of an unforeseeable emergency beyond the control of
the participant or beneficiary which would result in
substantial financial hardship unless early payment were
permitted.
C. Terms and Conditions.
(1) Deferred amounts shall include all or part of a deferred award
and interest compounded quarterly. The quarterly interest
rate shall be the weekly average yield to maturity for
five-year U.S. Treasury fixed interest rate securities
(adjusted to a constant maturity of five years) as published
by the Federal Reserve Board in its Statistical Release H.15
published on or prior to December 31 of the immediately
preceding year.
(2) The terms of this Schedule A, including without limitation,
"plan", "participant", "beneficiary", and "deferred amount"
shall not mean, nor be construed to mean, under any
circumstance, that any person or entity shall have any right,
title or interest in or to any specific asset of the Company.
To the extent that any person acquires a right to receive
payments under the Plan, such right shall be no greater than
the right of any unsecured creditor of the Company.
(3) Rights to receive payments under the Plan may not be assigned,
alienated or pledged.
D. Administration.
(1) The Company may from time to time establish conditions and
procedures for the administration of provisions of this
Schedule A.
- 5 -
<PAGE> 7
(2) The terms "disability" and "retirement", are used herein as
defined in the Washington Gas Light Company Employees' Pension
Plan, as amended from time to time.
- 6 -
<PAGE> 8
AMENDMENT TO DEFERRAL PROVISIONS OF EXECUTIVE INCENTIVE COMPENSATION PLAN
(Amendments adopted November 26, 1986):
1. Deferral periods may be for a minimum of one year (in lieu of
four years as previously provided).
2. The provision for redeferrals is eliminated for any amounts
deferred after December 31, 1986.
3. Elections to defer payments under the Plan may be made on or
before December 31 of the year preceding the year in which any
amount under the Plan is determined and awarded (in lieu of
November 30, as previously provided).
- 7 -
<PAGE> 1
EXHIBIT 10.4
WASHINGTON GAS LIGHT COMPANY
SUPPLEMENTAL EXECUTIVE
RETIREMENT PLAN
AS AMENDED THROUGH DECEMBER 18, 1996
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
Article 1. Purpose 1-1
Article 2. Definitions 2-1
Article 3. Participation 3-1
Article 4. Vesting 4-1
Article 5. Service 5-1
Article 6. Benefits 6-1
Article 7. Death Benefits 7-1
Article 8. Miscellaneous 8-1
</TABLE>
- i -
<PAGE> 3
Article 1
Purpose
1.1 Purpose: The purpose of this Supplemental Executive Retirement Plan
(Supplemental Plan) is to provide a minimum level of retirement income in the
event of normal or early retirement and a minimum level of benefits in the
event of death or disability as a means of attracting, retaining, and
motivating executives. This Supplemental Plan is designed to provide a benefit
which, when added to the benefit provided by the Washington Gas Light Company
Employees' Pension Plan will meet the purpose described above.
The Company intends that the Supplemental Plan shall at all times be
maintained on an unfunded basis for federal income tax purposes under the
Internal Revenue Code of 1986, as amended, and be administered as a "top-hat"
plan exempt from the substantive requirements of the Employee Retirement Income
Security Act of 1974, as amended.
1 - 1
<PAGE> 4
Article 2
Definitions
2.1 Accredited Service: Accredited Service as defined in the Basic Plan.
2.2 Accrued Benefit: The amount expressed in terms of an annual single-life
annuity commencing at Normal Retirement Date and determined in accordance with
Section 6.4 which describes the Normal Retirement Pension.
2.3 Administrator: The Administrator appointed by the Personnel and
Compensation Committee to carry out the administration of this Supplemental
Plan.
2.4 Basic Plan: Washington Gas Light Company Employees' Pension Plan, as
amended from time to time.
2.5 Board or Board of Directors: The Board of Directors of the Washington
Gas Light Company.
2 - 1
<PAGE> 5
2.6 Change of Control: The occurrence of any one or more of the
triggering events specified below:
(a) The acquisition by any individual, entity or group
(within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange
Act of 1934, as amended (the "Exchange Act") (a "Person") of beneficial
ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act)
of 20% or more of either (i) the then-outstanding shares of common stock oif
the Company (the "Outstanding Company Common Stock") or (ii) the combined
voting power of the then-outstanding voting securities of the Company entitled
to vote generally in the election of directors (the "Outstanding Company Voting
Securities"); provided,; however, that for purposes of this subsection (a), the
following acquisitions shall not constitute a Change of Control: (i) any
acquisition directly from the Company, (ii) any acquisition by the Company,
(iii) any acquisition by any employee benefit plan (or related trust) sponsored
or maintained by the Company or any corporation controlled by the Company, or
(iv) any acquisition by any corporation pursuant to a transaction which
complies with clauses (i), (ii) and (iii) of subsection (c) of
2 - 2
<PAGE> 6
this Article 2.6; or
(b) Individuals who, as of December 18, 1996, constitute
the Board (the "Incumbent Board") cease for any reason to constitute at least a
majority of the Board; provided, however, that any individual becoming a
Director subsequent to December 18, 1996 whose election, or nomination for
election by the Company's shareholders, was approved by a vote of at least a
majority of the Directors then comprising the Incumbent Board shall be
considered as though such individual were a member of the Incumbent Board, but
excluding, for this purpose, any such individual whose initial assumption of
office occurs as a result of an actual or threatened election contest with
respect to the election or removal of directors or other actual or threatened
solicitation of proxies or consents by or on behalf of a Person other than the
board; or
(c) Consummation of a reorganization, merger or
consolidation or sale or other disposition of all or substantially all of the
assets of the Company (a "Business Combination"), in each case, unless,
following such Business Combination, (i) all or substantially all of the
individuals and
2 - 3
<PAGE> 7
entities who were the beneficial owners, respectively, of the Outstanding
Company Common Stock and Outstanding Company Voting Securities immediately
prior to such Business Combination beneficially owned, directly or indirectly,
more than 50% of, respectively, the then-outstanding shares of common stock and
the combined voting power of the then-outstanding voting securities entitled to
vote generally in the election of the directors, as the case may be, of the
Corporation resulting from such Business Combination (including, without
limitation, a corporation which as a result of such transaction owns the
Company or all or substantially all of the Companies assets either directly or
through one or more subsidiaries) in substantially the same proportions as
their ownership, immediately prior to such Business Combination of the
Outstanding Company Common Stock and Outstanding Company Voting Securities, as
the case may be, (ii) no Persons (excluding any Corporations resulting from
such Business Combination or any employee benefit plan (or related trust) of
the Company or such Corporation resulting from such Business Combination)
beneficially owns, directly or indirectly, 20% or more of, respectively, the
then-outstanding shares of
2 - 4
<PAGE> 8
common stock of the Corporation resulting from such Business Combination, or
the Combined Voting Power of the then-outstanding voting securities of such
corporation except to the extent that such ownership existed prior to the
business Combination and (iii) at least a majority of the members of the Board
of Directors of the Corporation resulting from such Business Combination were
members of the Incumbent Board at the time of the execution of the initial
agreement, or of the action of the Board, providing for such Business
Combination; or
(d) Approval by the shareholders of the Company of a complete
liquidation or dissolution of the Company.
2.7 Company: Washington Gas Light Company.
2.8 Disability: Disability as defined in the Basic Plan.
2.9 Early Retirement Date: Early Retirement Date as defined in the Basic
Plan.
2 - 5
<PAGE> 9
2.10 Final Average Compensation: The average of the Participant's highest
Rates of Annual Basic Compensation on December 31 of each of the three years
out of the final five years of the Participant's Accredited Service as a
Participant preceding such Participant's Normal Retirement Date, Early
Retirement Date, date of Disability, death or the date of the Participant's
Termination as described in Section 3.2, whichever is applicable; however, if
such five-year period should include any approved leave of absence in effect on
December 31 of any year during such five-year period, his or her Rate of Annual
Basic Compensation in effect at the beginning of such leave shall be deemed to
be his or her Rates of Annual Basic Compensation in effect for that year. In
the event a Participant is entitled to an Accrued Benefit under this
Supplemental Plan but has less than five years of Accredited Service as a
Participant, the Participant's Rate of Annual Basic Compensation on December 31
of each year of service while a Participant shall be averaged and such average
shall be Participant's Final Average Compensation. Should a Participant die or
incur a Disability and have less than one year of Accredited Service, which
year does not include
2 - 6
<PAGE> 10
December 31, the Participant's Final Average Compensation shall be, as
applicable, his or her Rates of Annual Basic Compensation on the day preceding
the date of such Participant's death or the Administrator's acceptance of the
Disability under Section 6.7.
2.11 Normal Retirement Date: Normal Retirement Date as defined in the Basic
Plan.
2.12 Participant: An employee designated as such by the Personnel and
Compensation Committee pursuant to Section 3.1 of this Supplemental Plan.
Unless expressly provided herein to the contrary or the context dictates
otherwise, a Participant shall also include any person (including a
beneficiary) who is entitled to a benefit under this Supplemental Plan.
2.13 Rates of Annual Basic Compensation: Participant's salary as of December
31 and any award declared during the year under the Company's Executive
Incentive Compensation Plan, whether taken in cash or deferred as provided by
the Plan.
2 - 7
<PAGE> 11
2.14 Retirement: Retirement as defined in the Basic Plan.
2.15 Vesting Service: Vesting Service is 1000 hours of service with the
Company as a Participant in any one calendar year.
2 - 8
<PAGE> 12
Article 3
Participation
3.1 Designation: Each employee of the Company who is designated by the
Personnel and Compensation Committee of the Board of Directors shall be a
Participant in this Supplemental Plan. Each officer of the Company, as of June
28, 1989, whose remuneration was approved by the Board of Directors, shall
continue to be a Participant in this Supplemental Plan until further action by
the Personnel and Compensation Committee.
3.2 Termination: In the event Participant's employment with the Company is
terminated for whatever reason or in the event the Personnel and Compensation
Committee withdraws or rescinds its designation of Participant status with
respect to a current employee, such terminated or current employee, as
applicable, shall thereafter accrue no additional benefits under this
Supplemental Plan and shall have, with respect to previously credited benefits,
only such rights as are provided in Articles 4, 5 and 6 hereof.
3 - 1
<PAGE> 13
Article 4
Vesting
4.1 Vested Pension -- General: Except as provided in Section 4.2 of this
Article, a Participant shall be 100% vested in, and have rights to, an Accrued
Benefit only in the event of: (a) Disability while an employee of the Company
in active Participant status, (b) Retirement on or after attaining age 55, or
(c) a Change of Control as defined in Section 2.6.
4.2 Vested Pension -- Exceptions: Notwithstanding the general provisions in
Section 4.1, the following exceptions shall apply --
(a) For participation on or before June 27, 1989, a Participant shall
be vested in, and have rights to, an Accrued Benefit as set out in the table
below. Except as provided in (b) and (c) below, a Participant's vested
percentage shall not increase by reason of participation after June 27, 1989.
4 - 1
<PAGE> 14
<TABLE>
<CAPTION>
Completed Years
of Vested
Vesting Service Percentage
--------------- ----------
<S> <C>
1 20%
2 40%
3 60%
4 80%
5 100%
</TABLE>
(b) A Participant's Accrued Benefit shall vest in accordance with
the table in (a) above if his or her termination of employment occurs as a
result of a Company-initiated action or request or if his or her designation of
Participant status is withdrawn or rescinded by the Company; provided, however,
that this provision shall not apply if the forfeiture provisions of Section 8.5
apply.
(c) The Personnel and Compensation Committee may waive all vesting
requirements or permit accelerated vesting arrangements in any case which, in
the Personnel and Compensation Committee's discretion, represents special
circumstances.
4 - 2
<PAGE> 15
Article 5
Service
5.1 Benefit Service: Except as provided in Section 5.2 of this Article,
Benefit Service shall be equal to Accredited Service as determined under the
Basic Plan plus, for each full year of Accredited Service as a Participant, one
additional year to a maximum of 30 years.
5.2 Prior Benefit Service: A Participant who began participation on or before
June 27, 1989, shall receive Benefit Service which shall be equal to Accredited
Service as determined under the Basic Plan plus, for each full year of
Accredited Service as a Participant, two additional years for participation
through June 27, 1989.
5 - 1
<PAGE> 16
Article 6
Benefits
6.1 Normal Form of Pension: A Participant who is entitled to receive a
retirement benefit under this Supplemental Plan may elect to receive such
benefit in the form of a single-life annuity, joint-and-survivor annuity or any
other optional form of benefit as set forth in Section 5.2 of the Basic Plan.
The normal form of pension under this Supplemental Plan shall be identical to
the form of benefit selected by the Participant under the Basic Plan unless the
Participant requests, and the Company approves, the lump-sum option described
in Section 6.2 of this Supplemental Plan. Any temporary actuarial increase in
benefits generated by Participant's selection of the option in Section 5.2(b)
of the Basic Plan shall not be considered in determining the Normal Retirement
Pension upon which the benefit from this Supplemental Plan is calculated, nor
shall any reduction in Normal Retirement Pension under the Basic Plan at age 62
increase a benefit under this Supplemental Plan.
6 - 1
<PAGE> 17
6.2 Lump-Sum Option: A Participant may request that the portion of his or her
retirement benefit under this Supplemental Plan related to any award declared
under the Company's Executive Incentive Compensation Plan, as used in
determining Rates of Annual Basic Compensation, maybe paid in the form of a
lump sum, the amount of which shall be the actuarial equivalent of the Accrued
Benefit otherwise payable to the Participant under this Supplemental Plan. A
Participant's request for a lump sum payment must be submitted in writing to
the Administrator at least six months prior to the date on which a benefit
would otherwise be payable hereunder and must be accompanied by a medical
certificate of the Participant's good health signed by the Company's Medical
Director in a form satisfactory to the Administrator; provided, however, that
if a Participant's retirement occurs within six months of the date on which
this provision becomes effective, a Participant's written request for a lump
sum payment shall be considered timely filed so long as it is received by the
Administrator at least 60 days prior to the date a benefit would be payable
hereunder. A Participant's request for a lump sum payment shall be subject to
the sole
6 - 2
<PAGE> 18
discretion of the Administrator and shall be approved by the Administrator only
if considered to be in the interests of the Company. If approved by the
Administrator, a Participant's lump-sum payment shall be calculated on the
basis of reasonable actuarial assumptions satisfactory to the Company.
6.3 Election of Benefit: A Participant shall not defer a benefit under the
Basic Plan and receive a benefit under this Supplemental Plan. A Participant
shall not elect a benefit for a beneficiary of over 50% of the Participant's
benefit without presenting a medical certificate of the Participant's good
health signed by the Company's Medical Director in a form satisfactory to the
Administrator.
6.4 Normal Retirement Pension: On Normal Retirement Date, a Participant shall
be eligible to receive a monthly Normal Retirement Pension equal to 1/12 of the
excess of (a) over (b) where:
(a) equals 2% of Final Average Compensation multiplied by
6 - 3
<PAGE> 19
the number of years of Benefit Service; and
(b) equals the sum of:
(1) the Normal Retirement Pension payable under
the Basic Plan; and
(2) the annual amount of any other supplemental
pension benefit provided by the Company.
In no event shall the Normal Retirement Pension be less than the Accrued
Benefit calculated as of June 27, 1989.
6.5 Full Retirement Pension: A Participant who has attained age 60 and has 30
years of Benefit Service shall be eligible for a monthly payment of an amount
equal to 100% of the Normal Retirement Pension.
6.6 Early Retirement Pension: A Participant who has attained age 55 and has
10 or more years of Benefit Service is eligible to select either:
(a) an amount, commencing at age 65, equal to the Accrued Benefit,
determined in the same manner as the Normal
6 - 4
<PAGE> 20
Retirement Pension in Section 6.4, based on Benefit Service
and Final Average Compensation as of the Participant's Early
Retirement Date; or
(b) an amount, commencing immediately upon Retirement, equal to
the Participant's Accrued Benefit subject to an early
retirement reduction determined in accordance with Table B in
Section 4.6 of the Basic Plan.
6.7 Disability Pension: A Participant who has 10 or more years of Benefit
Service and has suffered a Disability shall be eligible for a monthly amount
equal to: (1) the Early Retirement Pension (except that any such Participant
under age 55 will be treated as though age 55); or (2) an amount equal to 110%
of the Disability Pension available from the Basic Plan, whichever is greater;
but in no event shall the amount exceed the Normal Retirement Pension under
this Plan as set out in Section 6.4 above. An Application for a Disability
Pension shall be submitted to the Administrator by the applicant or by the
Company, together with a medical certificate signed by the
6 - 5
<PAGE> 21
Company's Medical Director in a form satisfactory to the Administrator. A
Participant with less than 10 years of Benefit Service who suffers a Disability
supported by a medical certificate satisfactory to the Administrator shall be
eligible for an immediate benefit calculated in a manner consistent with the
Early Retirement Pension described in Section 6.6(b), subject to an actuarial
reduction based on the Participant's actual age at the time of benefit
commencement.
6.8 Benefit Compensation: Except as provided in Section 6.9 of this Article, a
Participant's pension shall be computed under the terms of the Supplemental
Plan in effect as of the date of the Participant's Termination, as described
in Section 3.2 hereof, and shall not be recomputed, increased or decreased
after such Termination, except for supplemental increases, if any, as may be
granted by the Company's Board of Directors.
6.9 Prior Benefit Compensation: Any person who was a Participant in this
Supplemental Plan on June 27, 1989, and who retires at age 60 or above, on or
before December 31, 1998, shall
6 - 6
<PAGE> 22
in no event receive a pension benefit which is less than the benefit calculated
under the provisions of the Supplemental Plan in effect on June 27, 1989.
6 - 7
<PAGE> 23
Article 7
Death Benefits
7.1 Death Benefits: Except for the surviving spouse's annuity described in
Sections 7.2 and 7.3, and any survivor death benefit selected by a Participant
in accordance with Section 7.4, no death benefits shall be payable under this
Supplemental Plan and a Participant shall forfeit all rights to any benefits
hereunder upon his or her death. As used in this Article, the term "surviving
spouse" refers to the person who is legally married to the Participant at the
time of his death and for the full one year (365 days) period immediately prior
to his death.
7.2 Surviving Spouse of Designated Participant: The surviving spouse of a
designated Participant who has not retired shall be eligible to receive a
monthly annuity in an amount equal to 50% of the deceased Participant's Accrued
Benefit (without regard to vesting) determined on the basis of (i) the
Participant's Final Average Compensation at the date of death, and (ii) the
Benefit Service the Participant would have had if employment had
7 - 1
<PAGE> 24
continued until the Normal Retirement Date.
7.3 Surviving Spouse of Person in Termination Status: Upon the death of a
person who is no longer a designated Participant or who is not employed by the
Company at the time of death, the surviving spouse of such person shall receive
an annuity under this Supplemental Plan only to the extent, if any, that such
7 - 2
<PAGE> 25
person was vested in an Accrued Benefit pursuant to Section 4.2. Such annuity
shall be calculated based on the Benefit Service accrued by such person at time
of his or her Termination, as described in Section 3.2 hereof, but in no event
shall such annuity exceed the amount which the surviving spouse would have
received had the spouse been entitled to the annuity described in Section 7.2
hereof.
7.4 Survivor Death Benefit: Upon the death of a retired Participant who
is receiving or is entitled to receive annuity benefits hereunder and who, in
accordance with Section 6.1 hereof, had previously elected to receive his or
her Accrued Benefit in a form which pays a death benefit to a designated
surviving beneficiary, such death benefit shall be paid to such designated
surviving beneficiary in accordance with such prior election.
7 - 3
<PAGE> 26
Article 8
Miscellaneous
8.1 Amendment, Suspension, or Termination: Any amendment, suspension, or
termination of this Supplemental Plan shall have prospective effect only, be
non-discriminatory, and shall not affect any Accrued Benefit or vested right.
8.2 Nonguarantee of Employment: Nothing in this Supplemental Plan shall be
construed as a contract of employment between the Company and any Participant,
or as a right of any Participant to be continued in the employment of the
Company, or as a limitation of the right of the Company to discharge any
Participant, with or without cause.
8.3 Cost: The Company shall pay the full cost of this Supplemental Plan and
the Plan shall at all times be maintained on an unfunded basis. A
Participant's rights to a benefit under this Supplemental Plan are contractual
in nature and in the event the Company is unable to pay any benefit required
hereunder, the
8 - 1
<PAGE> 27
Participant shall have, with respect to the Company, only those rights of an
unsecured creditor.
8.4 Nonalienation of Benefits: Benefits payable under this Supplemental Plan
shall not be subject in any manner to alienation, anticipation, assignment,
charge, encumbrance, execution, garnishment, pledge, sale, transfer, or levy of
any kind, either voluntary or involuntary, including any such liability which
is for alimony or other payments for the support of a spouse or former spouse,
or for any other relative of the Participant, prior to actually being received
by the person entitled to the benefit under the terms of this Supplemental
Plan. Any attempt to alienate, anticipate, assign, charge, encumber, pledge,
sell, transfer, or otherwise dispose of any right to benefits payable under
this Supplemental Plan shall be void. This Supplemental Plan shall not in any
manner be liable for, or subject to, the contracts, debts, liabilities, or
torts of any person entitled to benefits under this Supplemental Plan.
8.5 Forfeiture: Anything herein to the contrary
8 - 2
<PAGE> 28
notwithstanding, if a Participant or retired Participant willfully performs any
act or willfully fails to perform any act of material importance to the
Company, which may result in material discredit or substantial detriment to the
Company, then upon recommendation of the Administrator and upon a majority vote
of the Board of Directors, such Participant or retired Participant or the
surviving spouse of such Participant shall forfeit any benefit payments owing
on and after the date fixed by the Board of Directors and the Company shall
have no further obligation under this Supplemental Plan to such Participant,
retired Participant, or the surviving spouse of such Participant. If a
Participant received his or her benefit in the form of a lump sum payment
pursuant to Section 6.2 hereof, then the Participant or the surviving spouse of
such Participant shall return to the Company a proportionate share of such lump
sum payment calculated as follows: The proportionate share shall equal the
product of the lump sum payment multiplied by a fraction, the numerator of
which is the number of full years and months which elapsed from the time of the
payment to the time of the willful act or failure to act described herein and
the
8 - 3
<PAGE> 29
denominator of which is the number of full years and months of the
Participant's life expectancy determined as of the time of the lump sum
payment.
8.6 Governing Law: All matters relating to this Supplemental Plan shall be
governed by the laws of the state of Virginia, without regard to the principles
of conflict of laws.
8 - 4
<PAGE> 1
EXHIBIT 11
WASHINGTON GAS LIGHT COMPANY AND SUBSIDIARIES
Computation of Earnings per Average Share of Common Stock
Assuming Full Dilution from Conversion of the $4.60 and $4.36
Convertible Preferred Stock
<TABLE>
<CAPTION>
Years Ended September 30,
-------------------------------------------
1997 1996 1995
------------ ------------ -------------
(Thousands, except per share data)
<S> <C> <C> <C>
EARNINGS PER AVERAGE SHARE ASSUMING FULL DILUTION
- -------------------------------------------------
Net Income $ 82,019 $ 81,591 $ 62,909
Dividends on preferred stock (excluding dividends on
convertible preferred stock) 1,320 1,320 1,320
------------ ---------- -----------
Net income applicable to common stock $ 80,699 $ 80,271 $ 61,589
============ ========== ===========
Average common shares outstanding on a fully diluted basis
assuming conversion of the outstanding shares of the
$4.60 and $4.36 convertible preferred stock on October 1
of each year based on the applicable conversion price. 43,733 43,391 42,609
============ ========== ===========
Earnings per average share of common stock assuming
full dilution $ 1.85 $ 1.85 $ 1.45
============ ========== ===========
</TABLE>
- ----------------------------------------------------
Note: These calculations are submitted in accordance with Securities
Exchange Act of 1934 Release No. 9083 although not required by
footnote 2 to paragraph 14 of Accounting Principles Board
Opinion No. 15 because no dilution results.
<PAGE> 1
EXHIBIT 12.0
WASHINGTON GAS LIGHT COMPANY AND SUBSIDIARIES
Computation of Ratio of Earnings to Fixed Charges
Years Ended September 30
(Dollars in Thousands)
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
------------- ------------- ------------- ------------ -------------
<S> <C> <C> <C> <C> <C>
FIXED CHARGES:
Interest Expense $ 33,599 $ 29,876 $ 30,932 $ 30,899 $ 27,872
Amortization of Debt Premium,
Discount and Expense 299 256 315 367 410
Interest Component of Rentals 17 96 56 34 94
------------- ------------- ------------- ------------ -------------
Total Fixed Charges $ 33,915 $ 30,228 $ 31,303 $ 31,300 $ 28,376
============= ============= ============= ============ =============
EARNINGS:
Net Income $ 82,019 $ 81,591 $ 62,909 $ 60,459 $ 55,079
Add:
Income Taxes Applicable to
Operating Income 47,864 49,376 37,514 37,264 34,601
Income Taxes Applicable to
Other Income (Loss) - Net 577 (629) (730) 326 (1,479)
Total Fixed Charges 33,915 30,228 31,303 31,300 28,376
------------- ------------- ------------- ------------ -------------
Total Earnings $ 164,375 $ 160,566 $ 130,996 $ 129,349 $ 116,577
============= ============= ============= ============ =============
Ratio of Earnings to Fixed Charges 4.8 5.3 4.2 4.1 4.1
============= ============= ============= ============ =============
</TABLE>
<PAGE> 1
EXHIBIT 12.1
WASHINGTON GAS LIGHT COMPANY AND SUBSIDIARIES
Computation of Ratio of Earnings to Fixed Charges and
Preferred Stock Dividends
Years Ended September 30
(Dollars in Thousands)
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
FIXED CHARGES AND PRE-TAX PREFERRED STOCK DIVIDENDS
Preferred Dividends $ 1,331 $ 1,332 $ 1,333 $ 1,335 $ 1,336
Effective Income Tax Rate .3713 .3740 .3690 .3834 .3755
Complement of Effective Income
Tax Rate (1 - Tax Rate) .6287 .6260 .6310 .6166 .6245
Pre-tax Preferred Dividends $ 2,117 $ 2,128 $ 2,113 $ 2,165 $ 2,139
========= ========= ========= ========= =========
Interest Expense $ 33,599 $ 29,876 $ 30,932 $ 30,899 $ 27,872
Amortization of Debt Premium,
Discount and Expense 299 256 315 367 410
Interest Component of Rentals 17 96 56 34 94
--------- --------- --------- --------- ---------
Total Fixed Charges 33,915 30,228 31,303 31,300 28,376
Pre-tax Preferred Dividends 2,117 2,128 2,113 2,165 2,139
--------- --------- --------- --------- ---------
Total $ 36,032 $ 32,356 $ 33,416 $ 33,465 $ 30,515
========= ========= ========= ========= =========
EARNINGS:
Net Income $ 82,019 $ 81,591 $ 62,909 $ 60,459 $ 55,079
Add:
Income Taxes Applicable to
Operating Income 47,864 49,376 37,514 37,264 34,601
Income Taxes Applicable to
Other Income (Loss) - Net 577 (629) (730) 326 (1,479)
Total Fixed Charges 33,915 30,228 31,303 31,300 28,376
--------- --------- --------- --------- ---------
Total Earnings $ 164,375 $ 160,566 $ 130,996 $ 129,349 $ 116,577
========= ========= ========= ========= =========
Ratio of Earnings to Fixed Charges
and Preferred Stock Dividends 4.6 5.0 3.9 3.9 3.8
========= ========= ========= ========= =========
</TABLE>
<PAGE> 1
WASHINGTON GAS LIGHT COMPANY
SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
- --------------------------------------------------------------------------------------------------------------------
(Dollars in Thousands, Except Per Share Data)
<S> <C> <C> <C> <C> <C>
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
---------- ---------- ---------- ---------- ----------
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
---------- ---------- ---------- ---------- ----------
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%
</TABLE>
20
<PAGE> 2
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
21
<PAGE> 3
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
22
<PAGE> 4
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
23
<PAGE> 5
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
24
<PAGE> 6
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
<TABLE>
<CAPTION>
Year Millions of Dollars
<S> <C>
1992 50.9
1993 53.7
1994 59.1
1995 61.6
1996 80.3
1997 80.7
</TABLE>
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
<TABLE>
<CAPTION>
Year Dollars
<S> <C>
1992 1.26
1993 1.31
1994 1.41
1995 1.45
1996 1.85
1997 1.85
</TABLE>
25
<PAGE> 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
<TABLE>
<CAPTION>
Increase/(Decrease)
From Prior Year
1997 1996
- -------------------------------------------------------------
(Millions)
<S> <C> <C>
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
====== =====
</TABLE>
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
<PAGE> 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
<TABLE>
<CAPTION>
Net Cost of
Year Revenues Gas Total
<S> <C> <C> <C>
1992 393 353 746
1993 415 479 894
1994 453 462 915
1995 439 390 829
1996 500 470 970
1997 483 573 1056
</TABLE>
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
<PAGE> 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
<TABLE>
<CAPTION>
Operation & Depreciation and
Year Maintenance Taxes Amortization Total
<S> <C> <C> <C> <C>
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
</TABLE>
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
<PAGE> 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
<TABLE>
<CAPTION>
Common Preferred Long-Term
Year Equity Stock Debt Total
<S> <C> <C> <C> <C>
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
</TABLE>
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
<PAGE> 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
<PAGE> 12
CAPITAL EXPENDITURES
(Millions)
<TABLE>
<CAPTION>
Actual Projected
-------------------------- -------------------------------------------------------
1995 1996 1997 1998 1999 2000 2001 2002 Total
- ------------------------------------------------------------ -------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
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
====== ====== ====== ====== ====== ====== ====== ====== ======
</TABLE>
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
<TABLE>
<CAPTION>
Increase in Annual Revenues
Amount Amount
Test Year 12 Mos. Requested Granted Allowed
Jurisdiction Effective Date Ended (Millions) (Millions) Return on Common Equity
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
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/
</TABLE>
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
<PAGE> 13
WASHINGTON GAS LIGHT COMPANY
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Years Ended September 30, 1997 1996 1995
- -----------------------------------------------------------------------------------------
(Thousands, Except Per Share Data)
<S> <C> <C> <C>
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
========== ======== ========
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
32
<PAGE> 14
WASHINGTON GAS LIGHT COMPANY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, 1997 1996
- ---------------------------------------------------------------------------------------
(Thousands)
<S> <C> <C>
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
========== ==========
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
33
<PAGE> 15
WASHINGTON GAS LIGHT COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended September 30, 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------
(Thousands)
<S> <C> <C> <C>
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
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
34
<PAGE> 16
WASHINGTON GAS LIGHT COMPANY
CONSOLIDATED STATEMENTS OF CAPITALIZATION
<TABLE>
<CAPTION>
September 30, 1997 1996
- -------------------------------------------------------------------------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
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%
========== ===== ======== =====
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
35
<PAGE> 17
WASHINGTON GAS LIGHT COMPANY
CONSOLIDATED STATEMENTS OF COMMON SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Common Stock Issued
------------------- Paid-in Retained Deferred Treasury
Shares Amount Capital Earnings Compensation Stock Total
- ----------------------------------------------------------------------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
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
========== ======= ======== ======== ======= ===== ========
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
36
<PAGE> 18
WASHINGTON GAS LIGHT COMPANY
CONSOLIDATED STATEMENTS OF INCOME TAXES
<TABLE>
<CAPTION>
1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
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
======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
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%
======= ===== ======= ===== ======= =====
</TABLE>
<TABLE>
<CAPTION>
1997 1996
- ---------------------------------------------------------------------------------------------------------------------------
ACCUMULATED DEFERRED INCOME TAXES AT SEPTEMBER 30, Current Non-current Current Non-current
------ ---------- ------ ----------
<S> <C> <C> <C> <C>
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)
======= ========= ======= =========
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
37
<PAGE> 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:
<TABLE>
<CAPTION>
1997 1996
- -------------------------------------------------------------------
REGULATORY ASSETS: (Millions)
- ------------------
<S> <C> <C>
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
====== ======
<CAPTION>
REGULATORY LIABILITIES:
- -----------------------
<S> <C> <C>
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
====== ======
</TABLE>
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
<PAGE> 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
<PAGE> 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.
<TABLE>
<CAPTION>
MEDIUM-TERM NOTES ISSUED
- -----------------------------------------------------------
Fiscal Year Date of One-
Amount of Coupon Maturity Time Optional
Date Issued Issuance Rate Date Redemption
- -----------------------------------------------------------
<S> <C> <C> <C> <C>
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
- -----------------------------------------------------------
</TABLE>
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
<PAGE> 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:
<TABLE>
<CAPTION>
1997 1996 1995
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
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
</TABLE>
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:
<TABLE>
<CAPTION>
Years Ended September 30, 1997 1996 1995
- ----------------------------------------------------------
(Millions)
<S> <C> <C> <C>
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
===== ===== =====
</TABLE>
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:
<TABLE>
<CAPTION>
Years Ended September 30, 1997 1996 1995
- ----------------------------------------------------------------------------------
(Millions)
<S> <C> <C> <C>
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%
====== ====== ======
</TABLE>
The following table sets forth the funded status of the plans at September
30, 1997 and 1996.
<TABLE>
<CAPTION>
1997 1996
- ----------------------------------------------------------------------------------
(Millions)
<S> <C> <C>
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%
======= =======
</TABLE>
41
<PAGE> 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:
<TABLE>
<CAPTION>
Years Ended September 30, 1997 1996 1995
- -----------------------------------------------------------------------------------
(Millions)
<S> <C> <C> <C>
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
===== ===== =====
</TABLE>
The following table sets forth the funded status of the trusteed plans at
September 30, 1997 and 1996.
<TABLE>
<CAPTION>
1997 1996
- -------------------------------------------------------------------------------------
(Millions)
<S> <C> <C>
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%
======= =======
</TABLE>
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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<TABLE>
<CAPTION>
1997 1996
- ----------------------------------------------------------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
- ----------------------------------------------------------------------------------
(Millions)
<S> <C> <C> <C> <C>
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
</TABLE>
45
<PAGE> 27
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.
46
<PAGE> 28
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.
<TABLE>
<CAPTION>
Quarter Ended
Dec. 31 March 31 June 30 Sept. 30
- ------------------------------------------------------------------------------------------------------------------------------
(Thousands, Except Per Share Data)
<S> <C> <C> <C> <C>
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)
</TABLE>
(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
<TABLE>
<CAPTION>
Dividends Paid Dividend
High Low Per Share Payment Date
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
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
</TABLE>
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.
47
<PAGE> 1
EXHIBIT 21
WASHINGTON GAS LIGHT COMPANY
SUBSIDIARIES OF THE REGISTRANT
<TABLE>
<CAPTION>
Percent of
Voting
Securities State of
Owned Incorporation
---------- -------------
<S> <C> <C>
Subsidiaries of Washington Gas Light
Company (Parent) -
Shenandoah Gas Company 100% Virginia
Hampshire Gas Company 100% West Virginia
Crab Run Gas Company 100% Virginia
Washington Gas Resources Corp. a/ 100% Delaware
Virginia Intrastate Pipeline Company c/ 100% Virginia
a/ Subsidiary companies of Washington
Gas Resources Corp. -
Washington Gas Energy Services, Inc. b/ 100% Delaware
Washington Gas Consumer Services, Inc. 100% Delaware
b/ Subsidiary companies of Washington
Gas Energy Services, Inc. -
Washington Gas Energy Systems, Inc. 100% Delaware
Brandywood Estates, Inc. 100% Maryland
Advanced Marketing Concepts, Inc. c/ 100% Delaware
c/ Inactive
</TABLE>
<PAGE> 1
EXHIBIT 23
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the
incorporation of our reports included or incorporated by reference in this Form
10-K, into the Company's previously filed Registration Statements File Nos.
33-57041, 33-61199, 333-01469, 333-01471, 333-16181 and 333-18965.
ARTHUR ANDERSEN LLP
Washington, D.C.,
December 15, 1997.
<TABLE> <S> <C>
<ARTICLE> UT
<LEGEND>
This Schedule contains summary financial information extracted from the Income
Statement, Balance Sheet and Statement of Cash Flows and is qualified in its
entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-START> OCT-01-1996
<PERIOD-END> SEP-30-1997
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 1,214,016
<OTHER-PROPERTY-AND-INVEST> 3,121
<TOTAL-CURRENT-ASSETS> 219,974
<TOTAL-DEFERRED-CHARGES> 114,921
<OTHER-ASSETS> 0
<TOTAL-ASSETS> 1,552,032
<COMMON> 43,742
<CAPITAL-SURPLUS-PAID-IN> 302,118
<RETAINED-EARNINGS> 243,175
<TOTAL-COMMON-STOCKHOLDERS-EQ> 589,035
0
28,430
<LONG-TERM-DEBT-NET> 431,575<F1>
<SHORT-TERM-NOTES> 0
<LONG-TERM-NOTES-PAYABLE> 376,290<F2>
<COMMERCIAL-PAPER-OBLIGATIONS> 67,900
<LONG-TERM-DEBT-CURRENT-PORT> 20,862
0
<CAPITAL-LEASE-OBLIGATIONS> 1,289
<LEASES-CURRENT> 495
<OTHER-ITEMS-CAPITAL-AND-LIAB> 412,941
<TOT-CAPITALIZATION-AND-LIAB> 1,552,032
<GROSS-OPERATING-REVENUE> 1,055,754
<INCOME-TAX-EXPENSE> 47,864
<OTHER-OPERATING-EXPENSES> 892,615
<TOTAL-OPERATING-EXPENSES> 940,479
<OPERATING-INCOME-LOSS> 115,275
<OTHER-INCOME-NET> 886
<INCOME-BEFORE-INTEREST-EXPEN> 116,161
<TOTAL-INTEREST-EXPENSE> 34,142
<NET-INCOME> 82,019
1,331
<EARNINGS-AVAILABLE-FOR-COMM> 80,688
<COMMON-STOCK-DIVIDENDS> 51,139
<TOTAL-INTEREST-ON-BONDS> 34,142<F3>
<CASH-FLOW-OPERATIONS> 154,803
<EPS-PRIMARY> 1.85
<EPS-DILUTED> 1.85
<FN>
<F1>Represents total long-term debt including $56,000 in First Mortgage Bonds,
$375,400 in unsecured medium-term notes, $890 in other long-term debt and $(715)
in unamortized premium and discount-net.
<F2>Includes $375,400 in unsecured medium-term notes and other notes of $890.
<F3>Represents total interest expense, per Statement of Income.
</FN>
</TABLE>
