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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
/X/ Annual report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 (Fee Required) For the fiscal year ended
September 30, 1996
or
/ / Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 (No Fee Required)
For the transition period from ____________ to ____________.
I.R.S. Employer
Commission Exact Name of Registrant State of Identification
File Number as Specified in Its Charter Incorporation Number
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001-11227 Washington Energy Company Washington 91-1005304
001-11271 Washington Natural Gas Company Washington 91-1005303
Registrants' Telephone Number,
Address of Principal Executive Offices Zip Code Including Area Code
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815 Mercer Street, Seattle, Washington 98109 (206) 622-6767
Securities registered pursuant to Section 12(b) of the Act:
Name of Each Exchange
Title of Each Class on Which Registered
- ---------------------------------------- -----------------------
Common Stock, $5 Par Value of Washington New York Stock Exchange
Energy Company
7.45% Series II, Cumulative Preferred New York Stock Exchange
Stock, $25 Par Value of Washington
Natural Gas Company
8.50% Series III, Cumulative Preferred New York Stock Exchange
Stock, $25 Par Value of Washington
Natural Gas Company
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrants (1) have filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrants were required to file such reports), and (2) have been subject to
such filing requirements for the past 90 days. Yes /X/ No __
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrants' knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10- K or any
amendment to this Form 10-K. __
Aggregate market value of the voting stock held by non-affiliates of Washington
Energy Company, computed by reference to the average of the high and low prices
of such stock on December 15, 1996: $477,094,936.
Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practicable date.
Outstanding
Registrant Title of Stock December 15, 1996
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Washington Energy Company $5 par value 24,310,570
Washington Natural Gas Company $5 par value 11,138,050
Documents Incorporated by Reference: None
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TABLE OF CONTENTS
PART I Page
Item 1. Business 4
(a) General Development of Business 4
(b) Financial Information About Industry Segments 5
(c) Description of Business - Washington Natural Gas Company 5
(1) Territory Served 5
(2) Competitive Conditions 6
(3) Customer Usage 7
(4) Employee Relations 7
(5) Franchise 7
(6) Environmental Matters 8
(7) Gas Supply 8
(8) Regulation and Rates 11
(9) Regulated Equipment Rentals 14
(10) Merchandise Marketing 14
(11) Repair Services 14
(12) New Construction 15
(13) Utility Operating Statistics 16
Description of Business - Oil and Gas Exploration
and Production 17
Description of Business - Merchandise and Energy
Efficiency Products 18
Description of Business - Other Businesses 19
Description of Business - Discontinued Coal and
Railroad Businesses 20
Description of Business - Discontinued Biowaste
Business 20
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TABLE OF CONTENTS (Continued)
PART I (Continued) Page
(d)Financial Information About Foreign and
Domestic Operations and Export Sales 20
Item 2. Properties 20
Item 3. Legal Proceedings 21
Item 4. Submission of Matters to a Vote of Security Holders 21
Executive Officers of the Registrants 22
PART II
Item 5. Market for Registrant's Common Stock and Related
Shareholder Matters 23
Item 6. Selected Financial Data 24
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 27
Item 8. Financial Statements and Supplementary Data 39
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure 86
PART III
Item 10. Directors and Executive Officers of the Registrants 86
Item 11. Executive Compensation 89
Item 12. Security Ownership of Certain Beneficial Owners
and Management 94
Item 13. Certain Relationships and Related Transactions 95
PART IV
Item 14. Exhibits, Financial Statements, Schedules and Reports
on Form 8-K 96
SIGNATURES 104
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NOTE: All references to years and quarters in this filing are on the basis of
a fiscal year ended September 30 unless otherwise indicated.
PART I
Item 1. Business
(a) General Development of Business
Washington Energy Company ("Company" or "Washington Energy") is a holding
company whose principal subsidiary, Washington Natural Gas Company ("Washing
ton Natural") is engaged primarily in the retail distribution of natural gas.
Through other subsidiaries, Washington Energy sells gas appliances, energy
efficiency and security products for the home and holds certain coal-related
investments. The Company also holds an equity position in a publicly traded
oil and gas exploration and production company. The Company is exempt from
the provisions of the Public Utility Holding Company Act of 1935 ("Act"),
except with respect to acquisition of securities of other public utility com
panies as defined in such Act.
The Company was incorporated in 1977 and acquired the common stock of Washing
ton Natural and its wholly-owned subsidiaries through a merger in 1978. Wash
ington Natural and its predecessors have manufactured and distributed gas
since before the turn of the century and since 1956 have distributed natural
gas in the Puget Sound region of western Washington state. Washington Natural
entered the gas appliance sales business in the late 1950s when natural gas
became available in the region. In response to higher prices for and reduced
availability of natural gas in the early 1970s, Washington Natural, through
its former subsidiaries, entered the oil and gas exploration and production
business, the energy-efficiency products business, and made coal-related in
vestments. Washington Energy was formed in 1977 to serve as the holding com
pany for the then-diverse energy related businesses conducted by Washington
Natural and its subsidiaries.
As part of a change in business strategy, the Company, in 1994, sold its
biowaste technology business and merged its oil and gas subsidiary, Washington
Energy Resources Company ("Resources"), with a subsidiary of Cabot Oil & Gas
Corporation ("Cabot"), Houston, Texas. In 1993, the Company combined its
appliance sales, energy efficiency products and home security businesses in a
new subsidiary, Washington Energy Services Company ("Services"). The Company
recently initiated efforts to sell its coal holdings and is accounting for the
results of these coal-related investments as discontinued operations.
Proposed Merger
On October 18, 1995, a definitive agreement was approved by Washington
Energy's and Washington Natural's boards of directors to merge Washington
Energy and Washington Natural into Puget Sound Power & Light Company
("Puget"), as the surviving corporation. The merged company will be named
Puget Sound Energy ("PSE") and will create a combination utility serving more
than 852,000 electric customers and more than 493,000 gas customers in the
state of Washington. See Exhibit 99 for pro forma financial information of
the merged company.
On March 20, 1996, shareholders of Washington Energy, Washington Natural, and
Puget approved the merger of the companies. On July 15, 1996, the companies
completed the required filings with the United States Department of Justice and
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the Federal Trade Commission under the Hart, Scott, Rodino Antitrust
Improvements Act, and all applicable waiting periods have expired. The merger
is subject to approval by the Washington Utilities and Transportation
Commission ("WUTC"). The WUTC held a series of hearings on the merger in
November 1996. On December 11, 1996, Washington Natural, Puget, the staff of
the WUTC and the Public Counsel Section of the Washington State Office of the
Attorney General filed a stipulated settlement agreement related to the merger
for approval by the WUTC. The WUTC held hearings on the settlement on
December 18, 1996. Final briefs are due to be filed with the WUTC on January
3, 1997, and an order from the WUTC is expected by mid-January. If the terms
and conditions of the WUTC order are acceptable to the boards of directors of
the respective companies, the merger could be completed by February 1, 1997.
The merger is estimated to result in cost savings of approximately $370
million, net of costs to achieve the savings, including merger transaction and
transition costs, over a ten-year period following the consummation of the
merger. The cost savings estimated to be achieved by the merger are not
reflected in the pro forma financial statements because the terms and
conditions under which the WUTC may approve the merger are unknown. At the
effective date of the merger, each share of Washington Energy common stock
will be converted into .86 shares of PSE common stock and each share of
Washington Natural preferred stock will be converted into one share of
preferred stock of PSE with like rights and preferences.
The Company's and Washington Natural's principal executive offices are located
at 815 Mercer Street, P.0. Box 1869, Seattle, Washington 98111. The telephone
number is (206) 622-6767. This Form 10-K is filed on behalf of the Company
and Washington Natural, which companies are referred to herein as Registrants.
(b) Financial Information About Industry Segments
Natural gas distribution is the only significant industry segment the Company
is engaged in.
(c) Description of Business
Washington Natural Gas Company
Washington Natural is engaged predominately in the distribution of natural gas
at the retail level. Washington Natural has two subsidiaries, WNG Cap I and
WNG Cap II, created to enhance Washington Natural's ability to lower its
pipeline transportation costs through capacity release and, in the future, to
provide other gas-related services.
(1) Territory Served
Washington Natural distributes natural gas in a service area extending for
approximately 150 miles from north to south in the Puget Sound area of Wash
ington state. The area accounts for approximately 2,625 square miles, or 3.9% of
the state's land area. The five counties in which Washington Natural's service
area is located have a total estimated population of 3,092,000 (56% of the
state's population). During 1996, Washington Natural served an average of
484,000 customers. As of September 30, 1996, Washington Natural served 493,000
customers. Washington Natural's service area includes over 80 incorporated
municipalities. In addition to Seattle, this area includes five other major
cities or industrialized areas, which combine to form the core of Washington
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Natural's service territory. The following table contains the
percentages of customers and revenues associated with each of the six major
cities or industrialized areas:
Percentage Percentage
City of Customers of Revenues
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Seattle 23% 24%
Tacoma 10% 12%
Bellevue 6% 6%
Kent 5% 5%
Renton 4% 4%
Everett 3% 5%
All others 49% 44%
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100% 100%
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(2) Competitive Conditions
The natural gas business competes with oil for industrial uses and space
heating, with electricity for drying, cooking, water heating and space
heating, and with wood for residential space heating. Although Washington
Natural has no direct competition from others distributing natural gas in the
territory it now serves, it does compete with gas marketers in the sale, but
not the delivery (transportation), of natural gas to large volume customers.
Large industrial and commercial end-users also have the option to bypass
Washington Natural's distribution system by constructing pipelines to
interconnect directly with the interstate pipeline which transports all the
natural gas consumed in the region, although no substantial bypass by
customers has occurred to date.
Washington Natural currently has a significant competitive price advantage over
both electricity and fuel oil in its service territory. In a recent Washington
Natural survey of residential energy costs, fuel oil for space heating was
approximately 50% more expensive than gas, and electricity for residential
energy space heating was up to 168% more expensive than gas. Conversions of
residential energy users to gas for a portion of their energy needs remain an
important source of new customer additions, with approximately 8,600 residential
users converting to gas in 1996. Washington Natural successfully competes with
all the electric utilities in its service area for new customers in the new
housing construction market, with approximately 9,500 new homes utilizing gas
for space and water heating in 1996. Washington Natural's overall market share
of the new single-family home construction market in its service territory
estimated to exceed 75% for 1996. In residential areas where gas mains already
exist, Washington Natural's market share for space and water heating in new
construction is even higher. Since the cost of natural gas remains substantially
lower than the cost of electricity for home space and water heating throughout
its service area, Washington Natural expects that its share of the new home
market will continue at 75% or more, and that conversions of existing homes to
gas will continue to be a major source of new customers. In 1996, Washington
Natural's total customer base grew by approximately 18,700 customers, or 4%.
Washington Natural began offering gas transportation service to its industrial
and commercial customers in 1986. Washington Natural's wholesale gas supplier at
the time, Northwest Pipeline Corporation ("Pipeline"), provided "open access"
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to its system that enabled Washington Natural to provide such service.
The availability of both firm and interruptible transportation service, which
enables industrial and commercial end users to purchase lower cost gas
supplies directly from U.S. and Canadian producers, is an important factor in
maintaining gas usage by those end users during periods of low residual oil
prices. Continued evolution in the natural gas industry, resulting primarily
from The Federal Energy Regulatory Commission ("FERC") Order Nos. 436, 500 and
636, has served to increase the ability of large gas end users to bypass
Washington Natural in obtaining gas supply and transportation services. To
date, however, Washington Natural has not lost any substantial industrial load
as a result of bypass. Further, most industrial and commercial users that
have a choice of alternate fuels have continued to use gas due to price and
other considerations.
While in the past as many as 160 customers annually have taken advantage of
the potential savings provided by transportation service, in 1996
approximately 106 commercial and industrial customers, on average, chose to
use transportation service. Most customers have chosen to remain either firm
or interruptible gas sales customers of Washington Natural.
Natural gas should continue to play a prominent energy role in the Pacific
Northwest due to the abundant gas supplies available at competitive prices.
Competition with oil in the industrial market continues but is lessening due
to increasingly stringent air quality control measures in Washington Natural's
service area.
(3) Customer Usage
Washington Natural's operating revenues and earnings vary seasonally with
temperature and weather conditions, particularly in the winter and summer
months, because over 90% of its customers use natural gas for space heating.
See Item (13) for summarized customer and customer usage statistics for the
last five years.
(4) Employee Relations
As of September 30, 1996, Washington Energy had 1,186 employees of which 1,089
were employed by Washington Natural. In 1996, 1995 and 1994, Washington
Natural reduced overall staffing across all employee classifications by 11%,
6% and 12%, respectively. Washington Natural has 820 employees organized
within eight local unions with which it has collective bargaining agreements.
During 1995, Washington Natural reached collective bargaining agreements with
all five unions which had contracts that expired in 1995. The new contracts
generally reflected an average annual increase in base wages and benefits of
3% for each of the next three years, the effect of which is partially offset
by decreases in the premium time wage rate for certain work. There are no
contracts currently under negotiation and the earliest contract expiration is
November 30, 1997.
(5) Franchises
Washington Natural holds nonexclusive franchises from all of the incorporated
communities it services except for one city which provides less than 1% of
Washington Natural's revenues, and excluding three communities in which
franchise renegotiations are in progress but which are expected to be renewed
in 1997. The Seattle franchise is perpetual and franchises covering other
municipalities generally run for terms of 25 years. Washington Natural also
holds certain franchises and revocable permits issued by the Washington State
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Department of Transportation covering Washington Natural's facilities located
beneath state highway rights-of-way. In addition to the franchises mentioned,
Washington Natural holds a Certificate of Public Convenience and Necessity
granted by the WUTC to serve the area in which its distribution system is
located.
(6) Environmental Matters
For a description of environmental matters related to the Company and
Washington Natural, see Note 9 of Notes to Consolidated Financial Statements.
(7) Gas Supply
General
Washington Natural currently purchases a blended portfolio of long-term firm,
short-term firm, and spot gas supplies from a diverse group of major and
independent producers and gas marketers in the U.S. and Canada. Prior to
implementation of FERC Order No. 636 in 1993, Washington Natural purchased a
portion of its firm gas supply from Pipeline under a firm sales agreement.
All of Washington Natural's gas supply is ultimately transported through
Pipeline, the sole interstate pipeline directly supplying the western
Washington area.
For baseload and peak-shaving purposes, Washington Natural supplements its
portfolio of firm gas supply by purchasing natural gas at generally lower
prices in summer, injecting it into underground storage facilities and
withdrawing it during the winter heating season. The storage facilities at
Jackson Prairie in Washington and at Clay Basin in Utah are used for this
purpose. Peaking needs are also met by using Washington Natural's gas held in
Pipeline's liquefied natural gas ("LNG") facility at Plymouth, Washington, and
by producing propane air gas at two plants owned by Washington Natural and
located on its distribution system.
Washington Natural expects to meet its firm peak day requirements for
residential, commercial and industrial markets through its firm gas purchase
contracts, firm transportation capacity, firm storage capacity and other firm
peaking resources. Washington Natural believes that it will be able to
acquire incremental firm gas supply resources, which are reliable and
reasonably priced, to meet anticipated growth in the requirements of its firm
customers for the foreseeable future. Washington Natural is committed to
securing least cost sources of reliable gas supply, including demand-side
management resources, and to optimizing resources to their highest and best
use in order to best serve the needs of its firm customers.
Natural Gas Pipeline Deregulation
The implementation of FERC Order No. 636 by Pipeline in November 1993, completed
the deregulation of its activities as an interstate natural gas pipeline and
unbundled sales services formerly performed by Pipeline. The complete unbundling
of Pipeline's services at that date finalized Washington Natural's transition
from purchasing all of its gas supply from Pipeline prior to 1986 to purchasing
all gas supplies directly from producers and gas marketers. As part of the
transition, Washington Natural was assigned certain long-term firm gas supply
agreements of Pipeline effective November 1, 1992 and November 1, 1993. In order
to deliver purchased gas supplies to its distribution system and to provide
transportation service for customer-owned gas, Washington Natural assumed
long-term, firm transportation capacity on the transmission systems of
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Pipeline and Pacific Gas Transmission Company ("PGT"), together with associated
demand charge obligations. Washington Natural also acquired storage capacity
with associated demand charge obligations at Clay Basin in two increments
effective April 1991 and April 1993.
Gas Supply Portfolio
For the current winter heating season, Washington Natural has contracted for
approximately 26% of its expected peak day gas supply requirement from sources
originating in British Columbia under a combination of long-term and winter
peaking purchase agreements and firm gas exchange arrangements. Long-term gas
supplies from Alberta represent approximately 10% of the peak day requirement.
Long-term and winter peaking arrangements with U.S. suppliers and gas stored
at Clay Basin make up approximately 22% of the peak day portfolio. The
balance of the peak day requirement is expected to be met with gas stored at
Jackson Prairie, LNG held at Pipeline's Plymouth facility and propane air gas,
approximately 30%, 9% and 3%, respectively.
The current firm, long-term gas supply portfolio consists of arrangements with
11 producers and gas marketers, with no single supplier representing more than
10% of the expected peak day requirement. The contracts have remaining terms
of less than one year and up to eight years, with an average term of four
years. All but one of the supply contracts assigned to Washington Natural by
Pipeline have expired. The one remaining contract, with an Alberta supplier,
has a remaining term of eight years. All of the current gas supply contracts
contain market sensitive pricing provisions based on various published
indices.
Washington Natural's firm gas supply portfolio is structured to take advantage
of regional price differentials and to market gas and services outside
Washington Natural's service territory ("off-system sales") when market
opportunities arise and customer demand requirements on system permit. The
geographic mix of suppliers and daily, monthly and annual take requirements
permit a high degree of flexibility in sourcing gas supplies in off-peak
periods to minimize costs. In 1996, Washington Natural's off-system sales
totaled approximately 27 billion cubic feet ("BCF") of gas and generated $8.1
million of gross margin. By way of comparison, Washington Natural's on-system
volumes totaled approximately 73 BCF. Washington Natural also conducts
exchanges of gas with other suppliers or marketers on different pipelines,
which generated $1.4 million of gross margin in 1996. The savings or margin
from these off-system activities do not affect Washington Natural's earnings,
but are passed on to Washington Natural's customers through the purchased gas
adjustment ("PGA") mechanism.
Gas Transportation Capacity
Washington Natural currently holds firm transportation capacity on Pipeline
and PGT. Holders of such capacity pay fixed monthly demand charges for the
right, but not the obligation, to transport a specified quantity of gas from a
receipt point to a delivery point on the pipeline each day for the term of the
agreement.
Washington Natural holds firm capacity on Pipeline totaling 454,533 million
British thermal units ("MMBtu") per day, acquired under seven agreements at
various times. Washington Natural has exchanged certain segments of its firm
capacity with several parties to effectively lower transportation costs. In the
aggregate, Washington Natural's capacity provides for receipt of 204,761 MMBtu
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per day at Sumas on the Washington border with British Columbia, 173,836
MMBtu per day at various points in Wyoming, Colorado, and Utah and 75,936
MMBtu per day at several interconnections with PGT. Washington Natural also
holds seasonal firm capacity on Pipeline for receipt of 236,298 MMBtu per day
at the Jackson Prairie storage field and 70,500 MMBtu per day at the Plymouth
LNG facility. The latter capacity is available to deliver storage gas to
Washington Natural's distribution system during the heating season. Washington
Natural's firm transportation capacity contracts with Pipeline have remaining
terms ranging from 8 to 19 years. However, Washington Natural has either the
unilateral right to extend the contracts under their current terms or the
right of first refusal to extend such contracts under then current FERC
orders.
Washington Natural holds firm transportation capacity on PGT totaling 90,392
MMBtu per day from Kingsgate on the Idaho border with British Columbia to
various interconnections with Pipeline. Gas originating in Alberta is
transported to Pipeline utilizing this capacity for subsequent delivery by
Pipeline to Washington Natural's distribution system. The contract for this
capacity has a remaining term of 27 years.
Gas Storage Capacity
Washington Natural holds storage capacity in the Jackson Prairie and Clay
Basin underground gas storage facilities. The Jackson Prairie facility, one-
third owned and operated by Washington Natural, is used primarily for
intermediate peaking purposes as it is designed to deliver a large volume of
gas over a relatively short time period. Washington Natural has peak, firm
delivery capacity of 236,298 MMBtu per day and total firm storage capacity of
6,341,660 MMBtu at the facility. The location of the Jackson Prairie facility
in Washington Natural's service area provides significant cost savings by
reducing the amount of annual pipeline capacity required to meet peak day gas
requirements. The Clay Basin storage facility is intended as a baseload gas
supply source as well as a peaking supply source. Washington Natural has a
maximum firm withdrawal capacity of 111,300 MMBtu per day from the facility
with total storage capacity of 13,419,000 MMBtu. The capacity is held under
two contracts with remaining terms of 17 and 24 years.
LNG and Propane Air
LNG and propane air gas provide gas supply on short notice for short periods
of time. Due to their high cost, these sources are utilized as the supply of
last resort in extreme peak demand periods lasting a few hours or days.
Washington Natural has long-term contracts for storage of 241,700 MMBtu of its
gas as LNG at Pipeline's Plymouth facility, which equates to approximately
three and one-half days' supply at maximum daily deliverability of 70,500
MMBtu. Washington Natural owns storage capacity for approximately 1.4 million
gallons of propane. The facilities are capable of delivering the equivalent
of 30,000 MMBtu of gas per day for up to four days directly into Washington
Natural's distribution system.
Capacity Release
One of the most significant changes resulting from the deregulation of the
natural gas industry is the advent of capacity release to counter the impact on
pipeline customers of the straight fixed variable rate design used by interstate
pipelines. Under this rate design, essentially all pipeline costs are recovered
from customers through fixed monthly demand charges, rather than volumetrically
as in the past. The FERC provided the capacity release mechanism as the means
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for holders of firm capacity to relinquish temporarily unutilized pipeline
capacity to others in order to recoup all or a portion of the cost of such
capacity. Capacity may be released through several methods including open
bidding and by prearrangement. All capacity available for release is posted on
electronic bulletin boards of the pipelines. In 1996, Washington Natural
utilized buy/sell and capacity release mechanisms to recoup $1.3 million out of
approximately $28.3 million of demand charges for which the capacity was not
utilized in off-peak periods. WNG CAP I and WNG CAP II, wholly-owned
subsidiaries of Washington Natural, were formed to provide additional
flexibility and benefits from capacity release. All savings from capacity
release are passed on to Washington Natural's customers through the PGA
mechanism. In addition, off-system sales activities have often bundled the gas
commodity or other commodity services with transportation, which has increased
capacity utilization. In approving Washington Natural's last PGA, effective May
15, 1995 the WUTC allowed all previously incurred and projected capacity related
demand charges to be recovered in rates.
The Western Market Center
In 1995, Washington Natural announced its intention to participate in The
Western Market Center, a regional gas supply and market hub in the Muddy Creek
Area in southwest Wyoming. Washington Natural's participation had been
predicated upon the successful completion of certain contractual conditions
precedent. The conditions precedent were not successfully completed;
therefore, Washington Natural's participation was not finalized. The costs
incurred by Washington Natural in pursuing participation in The Western Market
Center were not material and were expensed as incurred.
Reallocation of Pipeline Transition Costs
In May 1994, Pipeline was ordered by the FERC to modify the previous
allocation of transition costs, totaling $34 million plus interest, incurred
in "unbundling" interstate pipeline services. Under this order, Washington
Natural's share of these costs increased from $1.2 million, previously paid,
to $10.4 million, inclusive of interest. Washington Natural and six other
customers filed requests for rehearing. In December 1994, the FERC issued an
order denying the rehearing requests and permitting Pipeline to bill customers
under the modified allocation methodology. Pending the outcome of an appeal
to the United States Court of Appeals, Washington Natural paid a total of $9.8
million, inclusive of interest, in monthly installments in 1995 and 1996,
representing its share of the reallocated costs. The court appeal is still
pending. The WUTC has allowed Washington Natural to recover the full amount
of the increased transition costs as part of the PGA which went into effect on
May 15, 1995.
(8) Regulation and Rates
Washington Natural is subject to the jurisdiction of, and regulation by, the
WUTC, a three-member body appointed by the governor of Washington state. Such
regulation relates principally to rates; service; issuance of securities;
acquisition, extension and abandonment of facilities; affiliated party
transactions; and safety regulations. Under Washington law, the WUTC is
required to act upon rate filings within 11 months of the date of filing.
Since 1971, the WUTC has permitted Washington Natural to pass on to its
customers, through changes in its rates, all changes in the price of gas it
purchases from non-affiliated suppliers, using the PGA mechanism. This mechanism
allows Washington Natural to pass these cost increases or decreases on to its
customers
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on a timely basis, resulting in no material impact on net income. Since an order
disallowing a portion of the cost of gas purchased from a subsidiary of
Resources (at that time a Washington Natural affiliate) related to a 1991
filing, the WUTC has authorized three PGAs with no disallowance of purchased gas
costs. The effects of the subsequent adjustments in 1992 and 1993 substantially
increased rates and were allowed on a timely basis. The most recent PGA was
approved by the WUTC, effective May 15, 1995. This PGA resulted in a
pass-through to customers of an annual reduction of $46.5 million in the cost of
purchased gas.
July 1992 Rate Case
In July 1992, Washington Natural filed with the WUTC for a general rate
increase, Docket No. UG-920840 (the "July 1992 Rate Case"), requesting an
additional 13%, or $41.4 million, in annual revenues. Of the requested
amount, $28.4 million, or 8.9%, was for general rate relief. The remainder
covered new programs such as environmental cleanup activities, compliance with
revisions to safety rules, the replacement of unprotected steel and cast iron
underground pipe, and the proposed development of public compressed natural
gas refueling stations for natural gas vehicles. At a subsequent date,
Washington Natural reduced its rate request to $14.8 million on an annual
basis.
On September 27, 1993, the WUTC issued its decision in the July 1992 Rate
Case, ordering a decrease in Washington Natural's rates and margin of $15.4
million on an annual basis, effective October 9, 1993. The principal
differences in the annual revenue requirement between Washington Natural's
rate request and the WUTC's ordered rate reduction were:
(1) approximately $11 million of adjustments made by the WUTC to disallow
certain expenses related to advertising, marketing and merchandising;
(2) approximately $10 million due to an allowed overall rate-of-return of
9.15% on a rate base of $483.9 million, compared to Washington Natural's
proposed overall rate-of-return of 9.98% on $504.0 million of rate base;
(3) $5.2 million related to disallowance of Washington Natural's proposed
attrition allowance; and
(4) $4.8 million associated with the weather normalization calculation.
November 1993 Rate Case
After reviewing the WUTC's decision in the July 1992 Rate Case and giving
consideration to filing of a motion for reconsideration with the WUTC,
Washington Natural determined that the most appropriate action would be to
file a limited-scope general rate case. This case, Docket No. UG-931405, was
filed in November 1993 (the "November 1993 Rate Case"), and requested a
revenue and margin increase of $24.6 million. The primary focus was to seek
recovery of additional operating costs and the inclusion in rate base of
additional utility plant for system improvements and expansions since calendar
year 1991, which was used as the base measurement year in the July 1992 Rate
Case. In May 1994, the WUTC issued an order approving a settlement of the
November 1993 Rate Case. The terms of the settlement agreement provided for a
$19.0 million increase in annual revenue and margin and an agreement that
Washington Natural would not request an increase in total revenues, other than
through PGA filings or in certain limited circumstances, prior to March 1,
1995.
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March 1995 Rate Case
In March 1995, Washington Natural filed a general rate case, (the "March 1995
Rate Case") Docket No. UG-950278, seeking to raise rates by 8.5%, or $35.4
million on an annual basis. The filing was requested in order to reflect the
higher costs of capital and increased operating costs as a result of customer
growth. As part of the filing, Washington Natural petitioned that $17.8
million of the $35.4 million request be granted as interim rate relief.
On May 11, 1995, Washington Natural and the WUTC reached a negotiated
settlement of the March 1995 Rate Case. The settlement provided a $17.7
million annual increase in revenue and margin, excluding municipal utility
taxes on gross revenues. The increase reflected an allowed rate-of-return on
common equity in the range of 11% - 11.25%, up from the previous level of
10.5%. The settlement accepted by the WUTC also stipulated that Washington
Natural will be allowed to earn in excess of that range to the extent that it
can do so by managing its cost of service. The new rates became effective May
15, 1995. As part of the settlement, Washington Natural agreed not to make a
general rate case filing prior to May 15, 1997. The agreement, however, does
not preclude filing under the PGA mechanism or for interim emergency rate
relief if conditions warrant.
Rate Redesign Filing
As a result of the WUTC's decision in the July 1992 Rate Case, Washington
Natural filed a Transportation Service, Cost of Service and Rate Redesign
Proposal in June 1994 (the "Rate Redesign Filing"). In its July 1992 Rate
Case decision, the WUTC did not accept any of the cost of service
methodologies proposed, explaining that the changing nature of the industry,
including the separate and distinct function of providing transportation
service, required additional consideration. The Rate Redesign Filing, Docket
No. UG-940814, included proposed rates that would better reflect the actual
cost of serving various classes of customers. The filing applied a
methodology that takes peak demand costs into consideration in addition to
average volumetric throughput. This peak-and-average approach is, in
Washington Natural's opinion, responsive to the reality of the current natural
gas market and treats transportation as a separate and distinct service.
On May 11, 1995, the WUTC ordered the implementation of a cost-based rate
design effective May 15, 1995. The order, while revenue neutral in total,
shifted rates and costs, and thus margin responsibility, among customer
classes. The average margins on transportation service decreased by 26% and
margins on sales to larger volume industrial sales customers decreased by 27%.
The order also raised average residential margins 4.5%. Firm commercial and
smaller industrial average margins were not affected. The changes in
transportation and industrial margins made the utility economically
indifferent to customer choices between transportation and sales service. The
order enhances Washington Natural's ability to offer rates that support cost
effective and responsible growth.
Line Extension and New Customer Addition Policy
In March 1995, the WUTC approved a new tariff for extending natural gas mains
and services to new customers. Under the new policy, main and service extensions
that meet or exceed the target rate-of-return, currently 9.15%, based on an
analysis of estimated costs and gas usage, are provided without requiring
economic support from customers. This new policy helps ensure that new customer
growth is profitable. If a new main or service extension is estimated to have
<PAGE>
Page 14
a rate-of-return between 6.86% and 9.15%, the customer is required to make
either a one-time contribution or pay a new customer rate, at the customer's
choice. A contribution is a one-time advance payment to cover a portion of the
costs of construction. This advance payment may be refundable over a five-year
period based on additional new customer load which has been added to the new
main or service extension since it was initially installed. The other choice is
payment of a nonrefundable new customer rate for five years. The new customer
rate is essentially a surcharge of 11.5 cents per therm for new residential
developments, or 17 cents per therm for single-family residential or small
commercial conversions. If the main extension is estimated to have a
rate-of-return of less than 6.86%, the customer must make a nonrefundable
contribution in aid of construction in addition to either the refundable advance
payment or the new customer rate discussed above.
(9) Regulated Equipment Rentals
Washington Natural is also engaged in the business of leasing water heaters
and conversion burners for residential and commercial use. As of September
30, 1996, Washington Natural had approximately 114,000 equipment leases with
customers with original cost and net book value of approximately $71 million
and $61 million, respectively. Lease revenues are included in the financial
statements as part of Regulated Utility Sales since the rates charged are
subject to the approval of the WUTC. The following table summarizes lease
revenues and the number of equipment leases over the last three years ended
September 30,:
1996 1995 1994
----------- ----------- -----------
Lease revenues $10,027,000 $ 9,274,000 $ 8,391,000
Equipment leases 114,000 119,000 123,000
Average revenue per lease $ 88 $ 78 $ 68
The number of equipment leases has been declining over the last several years
because more customers choose to own their gas equipment rather than to lease.
However, lease revenues have increased due to rate increases of approximately
$1 per month per lease for most residential customers in each of the last
three years. The leases may be terminated on 30 day's written notice by the
customer, in which case, Washington Natural removes the equipment at no charge
to the customer. However, most customers elect to purchase the equipment at a
price which approximates net book value of the equipment.
(10) Merchandise Marketing
In order to address the concerns raised by the WUTC in the 1992 Rate Case
regarding allocations between Washington Natural's regulated activities and
non-regulated merchandise activities, the merchandise sales business was
transferred on October 1, 1993 to Services, a newly-formed subsidiary of
Washington Energy. At that time, Washington Natural terminated all
merchandise sales activity. See Merchandise and Energy Efficiency Products on
page 18.
(11) Repair Services
Effective January 8, 1995, the WUTC approved a new customer service policy for
Washington Natural. The policy allows the company to perform emergency and
certain safety and inspection services for customers at no charge. Under this
policy, if the service is performed in 15 minutes or less, there is no charge to
the customer. In addition, the policy allows Washington Natural to perform more
<PAGE>
Page 15
extensive repair services on gas space and water heating equipment for a
charge at market rates. The provision of repair services at market rates is a
nonregulated business activity which is accounted for in the "Other Income
(Expense)" section of the income statement. Repair services contributed pre-
tax net income of $673,995 and $130,714 for 1996 and 1995, respectively.
(12) New Construction
Washington Natural is one of the faster growing natural gas LDCs in the nation
due to economic growth in its service area and the high conversion rate of
existing homes to gas. Washington Natural expects to exceed 500,000 gas
customers by December 31, 1996. In 1996 and 1995, Washington Natural made
$91.0 million and $86.7 million, respectively, in capital expenditures to add
new customers and to maintain the reliability and safety of its distribution
system. Washington Natural's capital spending in 1997 is projected to be
approximately $91 million.
See the Liquidity and Capital Resources section of Management's Discussion and
Analysis of Financial Condition and Results of Operations at page 34.
<PAGE>
Page 16
(13) Washington Natural's Utility Operating Statistics
<TABLE>
<CAPTION>
Year Ended September 30,
--------------------------------------------------
1996 1995 1994 1993 1992
-------- -------- -------- -------- --------
(in thousands)
<S> <C> <C> <C> <C> <C>
Regulated utility sales:
Residential firm gas sales $238,560 $231,202 $206,602 $195,936 $152,015
Commercial firm gas sales 94,251 97,396 91,749 87,644 67,393
Industrial firm gas sales 20,024 25,860 28,827 23,967 17,226
Interruptible gas sales 23,376 44,511 51,425 44,160 29,593
Transportation services 12,812 10,762 8,399 8,434 11,231
Other 11,085 10,317 9,405 7,712 7,481
-------- -------- -------- -------- --------
Total regulated utility
sales $400,108 $420,048 $396,407 $367,853 $284,939
======== ======== ======== ======== ========
Customers, average number
served:
Residential firm 440,586 423,195 403,642 383,291 361,454
Commercial firm 39,651 38,378 37,112 35,951 34,503
Industrial firm 2,762 2,754 2,824 2,844 2,857
Interruptible 1,000 1,037 1,009 988 948
Transportation 106 55 36 68 130
------- ------- ------- ------- -------
Total average customers 484,105 465,419 444,623 423,142 399,892
======= ======= ======= ======= =======
Gas volumes (thousands of
therms):
Residential firm sales 421,727 398,283 371,472 382,118 301,887
Commercial firm sales 188,321 179,725 174,668 177,724 142,402
Industrial firm sales 46,640 55,365 62,698 54,096 52,019
Interruptible sales 72,229 132,316 151,175 127,678 78,645
Transportation volumes 242,299 156,941 119,590 159,765 199,143
------- ------- ------- ------- -------
Total gas volumes 971,216 922,630 879,603 901,381 774,096
======= ======= ======= ======= =======
Working gas volumes in
storage at year end
(thousands of therms)
Jackson Prairie 65,834 65,834 65,834 65,834 65,834
Clay Basin 82,847 130,970 47,557 70,006 43,246
</TABLE>
<PAGE>
Page 17
(13) Washington Natural's Utility Operating Statistics (Continued)
<TABLE>
<CAPTION>
Year Ended September 30,
--------------------------------------------------
1996 1995 1994 1993 1992
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Average use per customer
(therms):
Residential firm 957 941 921 998 835
Commercial firm 4,749 4,683 4,708 4,903 4,127
Industrial firm 16,886 20,103 22,035 24,618 18,208
Interruptible 72,229 127,595 147,315 129,231 82,959
Transportation 2,285,840 2,853,473 3,400,694 2,133,676 1,531,869
Average revenue per customer:
Residential firm $ 541 $ 546 $ 512 $ 511 $ 421
Commercial firm 2,377 2,538 2,472 2,438 1,953
Industrial firm 7,250 9,390 10,208 8,427 6,029
Interruptible 23,376 42,923 50,966 44,695 31,216
Transportation 120,868 195,673 233,306 124,029 86,392
Average revenue per therm
(cents):
Residential firm 56.6 58.0 55.6 51.3 50.4
Commercial firm 50.0 54.2 52.5 49.3 47.3
Industrial firm 42.9 46.7 46.0 44.3 33.1
Interruptible 32.4 33.6 34.0 34.6 37.6
Total sales customers 51.6 52.1 49.8 47.4 46.3
Transportation 5.3 6.9 7.0 5.3 5.6
Average cost per therm of
gas sold (cents) (1): 24.4 28.6 29.5 24.0 22.7
Weather - degree days 4,630 4,201 4,289 4,702 3,933
% of normal (30-yr avg) 97% 88% 90% 98% 82%
(1) Average Cost Per Therm includes both fixed and variable elements, and it
is not common gas industry practice to allocate these among classes of
customers. Washington Natural does not sell or transport gas to any of
its customers at a loss or on a break-even basis.
</TABLE>
Oil and Gas Exploration and Production
The Company has participated in the oil and gas exploration and production
business since 1974 through Resources and its predecessor, Thermal
Exploration, Inc., and since 1994, through its investment in Cabot. In May
1994, Resources was merged in a tax-free exchange with a wholly-owned
subsidiary of Cabot, based in Houston, Texas. Through the merger the Company
owns 16.4% of Cabot's outstanding voting securities, consisting of 2,133,000
shares of common stock representing 9.4% of total common shares outstanding,
and 1,134,000 shares of convertible voting preferred stock. William P.
Vititoe, Chairman of the Washington Energy Board of Directors ("Board of
Directors"), Chief Executive Officer and President of Washington Energy, and
Robert F. Bailey, a director of Washington Energy, also became members of
Cabot's board of directors. See Note 12 of Notes to Consolidated Financial
Statements for further discussion of the merger transaction.
<PAGE>
Page 18
The Company is accounting for its investment in Cabot's common stock using the
equity method, whereby the Company is recording its proportionate share of
Cabot's earnings and losses available to common shareholders as "Other Income
(Expense)." Only a brief summary of Cabot's business, taken from its 1995
Form 10-K filing, is presented here since Cabot's stock is publicly traded on
the New York Stock Exchange ("NYSE") and more detailed information is
available in its filings with the Securities and Exchange Commission ("SEC").
Cabot's fiscal year corresponds to the calendar year.
Substantially all of Cabot's operations are in the Appalachian Region of West
Virginia, Pennsylvania and New York, and in the Western Region, including the
Anadarko Basin of southwestern Kansas, Oklahoma and the Texas Panhandle, in
the Green River Basin of Wyoming and in South Texas. Cabot has operated in the
Appalachian Region for over 100 years and in the Anadarko Basin for over 50
years. Cabot's proved reserves at December 31, 1995 totaled approximately 922
billion cubic feet equivalent ("Bcfe"), 97% of which was natural gas,
primarily in long-lived fields with extended production histories.
Historically, Cabot has maintained its reserve base through low-risk
development drilling, although it acquired its interests in the Green River
Basin and South Texas through the 1994 Resources merger, valued by Cabot at
$176 million, and made two other significant reserve acquisitions in 1993 at a
total cost of $82.4 million. Cabot continues to focus its operations in the
Appalachian and the Western Region through development of undeveloped
reserves, acquisition of oil and gas producing properties and, to a lesser
extent, exploration.
In addition to drilling and production, Cabot also operates several gas
gathering and pipeline systems in the Appalachian Region made up of
approximately 3,600 miles of pipeline with interconnections to interstate
pipelines and local distribution companies. It also has two gas storage
fields in the same region. Cabot also purchases substantial quantities of gas
from other producers in the Appalachian Region and the Gulf Coast area for
resale to customers in the northeastern United States.
The oil and gas production business is highly competitive and Cabot's
operating results are largely determined by the natural gas prices prevailing
in the markets it serves. In response to the nation-wide decline in natural
gas prices in 1995, Cabot instituted numerous cost reduction measures,
including employee lay-offs and consolidation of administrative functions.
Cabot's operating results in 1996 have reflected the positive effects of these
cost reductions and improvements in gas prices. During the quarter ended
September 30, 1995, Cabot wrote down the carrying value of its oil and gas
producing assets by $113.9 million in connection with early adoption of
Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of." See Managements' Discussion and Analysis of Financial Conditions and
Results of Operations at page 27 and Note 12 of Notes to Consolidated
Financial Statements for further information regarding Cabot's operating
results and the SFAS No. 121 write downs recognized by Washington Energy
related to its investment in Cabot.
Merchandise and Energy Efficiency Products
Since the late 1950s Washington Natural had marketed energy-efficient gas
appliances and conservation products which complemented its gas distribution
service. In order to address concerns raised by the WUTC during the July 1992
Rate Case regarding allocations of common costs between Washington Natural's
regulated activities and its non-regulated merchandise sales activities, the
<PAGE>
Page 19
merchandise sales business was transferred on October 1, 1993, to Services, a
newly-formed, wholly-owned subsidiary of Washington Energy. Effective the
same date, the Company's HomeGuardTM security systems business, which had been
conducted by another of the Company's then wholly-owned subsidiaries, Thermal
Efficiency, Inc., was also transferred to Services.
Services sells three types of products, primarily to residential homeowners:
gas appliances, including furnaces; energy efficient window and siding
products; and security systems and monitoring. With the elimination of joint
marketing through Washington Natural and the sharing of certain common costs,
Services has changed the scope and the manner in which this business is
conducted. The product lines have been narrowed to focus on higher margin
products. All product installations and servicing are conducted by
independent dealers and contractors. Product purchases are consolidated with
fewer distributors, who also perform inventory and delivery functions.
Services does not provide its own long-term installment financing for customer
purchases.
The markets for Services' products are highly competitive. Competitors range
from large, widely-known national chains to small, independent dealers with
minimal name recognition. Services' sales strategy is based on an extensive
advertising campaign drawing on association with Washington Energy, the
convenience of in-home purchasing, comprehensive research of the marketplace
and a knowledgeable, well-trained sales force.
In July 1996, Services' president resigned and Services entered into a short-
term management agreement with Northwest Water Heater, Inc. ("Northwest") to
undertake the day-to-day management of Services. Northwest is the largest
supplier and installation and service contractor of Services. During 1996,
transactions with Northwest comprised 58% of Services' cost of goods sold.
Northwest's conduct in providing management services is subject to specific
terms and conditions of the agreement and oversight by officers of Washington
Energy.
Other Businesses
Certain gas transportation, storage and other contractual arrangements that
were excluded from the 1994 merger of Resources with Cabot were transferred to
a newly-formed, wholly-owned subsidiary of the Company, Washington Energy Gas
Marketing Company ("WEGM"). See Note 13 of Notes to Consolidated Financial
Statements for further information regarding these excluded contractual
arrangements.
Between 1987 and June 30, 1996, the Company and its subsidiaries' primary
liability insurance coverage was provided by Mercer Insurance Company Limited
("Mercer Insurance"), a Bermuda-domiciled insurance company. Mercer Insurance
was wholly-owned by WECO Finance Company, a wholly-owned subsidiary of
Washington Energy, and provided insurance only to Washington Energy and its
subsidiaries. On June 30, 1996, Mercer Insurance was liquidated, and the
Company and its subsidiaries assumed the liabilities of Mercer Insurance for
claims and will be self-insured for future losses up to $1,000,000 per event.
The Company and its subsidiaries will continue to maintain umbrella insurance
policies with unrelated commercial carriers for losses in excess of
$1,000,000.
<PAGE>
Page 20
Discontinued Coal and Railroad Operations
The Company has held investments in undeveloped coal properties in Montana
since 1976 through its wholly-owned subsidiary Thermal Energy, Inc., which
currently has a 95% ownership interest in the Montco Partnership ("Montco").
The Company has pursued pre-construction development of a rail line since
1981, through its wholly-owned subsidiary ThermRail, Inc., which holds an
87.5% partnership interest in the Tongue River Railroad Company ("TRR"), to
transport low-sulfur coal from the substantial reserves in southeastern
Montana, including the Montco holdings. In September 1996, the Company
decided to seek a buyer for its undeveloped coal properties and to cease
development efforts on the associated railroad. This decision was based upon
the uncertainty of future coal prices in relation to the high carrying costs
of the properties. Accordingly, the 1996 consolidated financial statements of
the Company reflect the coal and rail operations as discontinued operations.
See Note 14 of Notes to Consolidated Financial Statements for additional
information on the discontinued coal and rail operations.
Discontinued Biowaste Business
Between 1984 and 1994, the Company engaged in the development of biowaste
technology through Unisyn, a Hawaii general partnership and its predecessor.
Unisyn developed and patented pollution control technology which processed
organic wastes by anaerobic digestion and produced saleable by-products;
however, Unisyn was unsuccessful in licensing its technology to others. In
August 1993, the Company decided to divest the Unisyn operation, which was
reported as a discontinued operation in the Company's financial statements in
that year. In August 1994, the Company sold the stock of its two wholly-owned
subsidiaries, Thermal Efficiency, Inc. and Holdings Northwest, Inc., which
jointly owned Unisyn. The two subsidiaries had no other significant
operations or assets at the date of sale. See Note 14 of Notes to
Consolidated Financial Statements for additional information on the
discontinued biowaste business.
(d) Financial Information About Foreign and Domestic Operations and
Export Sales
Washington Energy and its subsidiaries do not export products to, or engage in
significant business activities in, foreign countries.
Item 2. Properties
Washington Natural's properties consist primarily of its underground natural
gas distribution system and associated facilities owned in fee in 65 cities
and towns (principally Seattle, Bellevue, Tacoma, Kent and Everett) and parts
of five counties in the Puget Sound region of Washington State. It owns a
total of 268 acres of land, of which 20 acres are used for peak-shaving
plants, 60 acres for city gate stations for receipt of natural gas, and the
balance for distribution service facilities and office buildings.
Washington Natural also owns a one-third undivided interest in the Jackson
Prairie underground gas storage field, consisting of 300 acres of owned
surface land and storage and 3,234 acres of leased storage. The site includes
81 wells for injection and withdrawal of gas or water and compression
facilities. Approximately 21.5 billion cubic feet of non-inventory cushion
gas is in place.
<PAGE>
Page 21
The principal structures owned are service facilities, office buildings,
warehouses and propane gas production facilities in Seattle, Tacoma, Bellevue
and Auburn. Small local office and service buildings in various other
communities are owned or leased.
Substantially all of the property of Washington Natural is subject to the lien
of its first mortgage bond indenture.
The Company believes its properties to be generally in good condition and well
maintained and to be suitable and adequate to carry on the Company's business.
Item 3. Legal Proceedings
For a description of the legal matters related to the Company and Washington
Natural see Note 10 of Notes to Consolidated Financial Statements.
Item 4. Submission of Matters to a Vote of Security Holders
There were no matters submitted to a vote of security holders, through the
solicitation of proxies or otherwise, during the fourth quarter ended
September 30, 1996.
<PAGE>
Page 22
Executive Officers of the Registrants
<TABLE>
<CAPTION>
Name Title Age
- ------------------- ------------------------------------------------- ---
<S> <C> <C>
William P. Vititoe Chairman of the Board of Directors, Chief 58
Executive Officer and President (Chairman and
Chief Executive Officer since February 1994;
President since April 1994). (1)
Timothy J. Hogan Executive Vice President - Chief Operating Officer 45
since August 1995; Senior Vice President - Supply,
Administration and Corporate Secretary, February
1995 - August 1995; Vice President - Supply,
Administration and Corporate Secretary, June 1994
- February 1995; Vice President - Legal and
Corporate Secretary, February 1990 - June 1994.
(1)
James P. Torgerson Executive Vice President - Chief Administrative 44
Officer and Chief Financial Officer since August
1995; Senior Vice President - Finance, Planning
and Development and Chief Financial Officer,
February 1990 - August 1995. (1)
Robert J. Tomlinson Senior Vice President - General Counsel and 60
Corporate Secretary since August 1995; Senior Vice
President - Legal and Administration, February
1990 - August 1995. (1)
William J. Wortley Senior Vice President - Government Affairs since 59
August 1995; Senior Vice President - Public
Affairs, February 1993 - August 1995; Vice
President - Public Affairs, April 1989 - February
1993. (2)
Allyn P. Hebner Vice President - Finance, Treasurer and Chief 43
Accounting Officer since August 1995 (1); Vice
President and Chief Accounting Officer, June 1994
- August 1995 (1); Vice President and Treasurer of
Washington Energy Resources Company, February 1993
- June 1994 (3); Assistant Vice President and
Treasurer of Washington Energy Resources Company,
April 1991 - February 1993. (3)
(1) of Washington Energy and of Washington Natural.
(2) of Washington Natural only.
(3) of Washington Energy subsidiary.
</TABLE>
There are no family relationships between any of the executive officers or any
executive officer and any director. Officers are elected by the Board of
Directors and serve until the next annual meeting or until their successors
are elected and qualified, provided, however, that any officer may be removed
at any time by majority vote of the Board of Directors.
<PAGE>
Page 23
PART II
Item 5. Market for Registrant's Common Stock and Related Shareholder Matters
The common stock of Washington Energy is traded on the NYSE (trading symbol is
WEG). The following table reflects the dividends paid and the range of high
and low selling prices of the Company's common stock on the NYSE by quarter
for 1996 and 1995:
<TABLE>
<CAPTION>
Price Range
Dividends ----------------------
Period Per Share High Low
- --------------------- --------- ------- -------
<S> <C> <C> <C>
1996 1st Quarter $.25 $19-1/8 $16-1/2
2nd Quarter .25 20-5/8 18-5/8
3rd Quarter .25 20-5/8 18-3/8
4th Quarter .25 19-7/8 18-1/2
1995 1st Quarter $.25 $14-3/4 $12-1/2
2nd Quarter .25 14-3/8 13
3rd Quarter .25 16-7/8 13
4th Quarter .25 17-3/8 15-3/4
</TABLE>
There were approximately 11,470 common shareholders of record of the Company
as of December 15, 1996. It is currently the policy of the Board of Directors
to declare cash dividends payable in December, March, June and September of
each year. The Company and its predecessor have paid cash dividends since
1960. The dividend rate is reassessed regularly in light of existing
conditions, the needs of the Company and the interests of shareholders. See
Note 4 of Notes to Consolidated Financial Statements for a description of
certain limitations on the Company's ability to pay dividends.
Issuance of Unregistered Securities
On January 31, 1996, Washington Energy awarded compensatory stock bonuses of
200 shares of common stock to each of its outside directors pursuant to the
Washington Energy Company Directors' Stock Bonus Plan. Issuance of these
shares was deferred at the election of the directors entitled to receive them.
In addition, in 1996 the Company issued 217 shares of common stock to a former
director who in prior years had elected to defer receipt of his shares. These
stock bonuses were awarded, and the shares of common stock were issued,
without registration under the Securities Act of 1933, as amended (the "Act").
The extent, if any, that such grants and issuances constitute the "sale" of
securities subject to the Act, Washington Energy claims exemption from
registration pursuant to Section 4(2) of the Act.
<PAGE>
Page 24
Item 6. Selected Financial Data
WASHINGTON ENERGY COMPANY AND SUBSIDIARIES
<TABLE>
<CAPTION>
Year Ended September 30,
------------------------------------------------------------
1996 1995 1994 1993 1992
----------- ---------- ---------- ---------- ----------
(in thousands except per share amounts)
<S> <C> <C> <C> <C> <C>
OPERATING REVENUES:
Regulated utility sales $ 400,108 $ 420,048 $ 396,407 $ 367,853 $ 284,939
Merchandise and other 25,603 23,563 35,618 71,185 72,533
Oil and natural gas
operations -- -- -- 31,354 17,616
---------- ---------- ---------- ---------- ----------
TOTAL OPERATING
REVENUES $ 425,711 $ 443,611 $ 432,025 $ 470,392 $ 375,088
========== ========== ========== ========== ==========
OPERATING INCOME $ 71,986 $ 51,841 $ 28,232 $ 55,569 $ 45,980
OTHER INCOME (EXPENSE),
NET (5,870) (25,951) (36,787) (1,895) (956)
---------- ---------- ---------- ---------- ----------
GROSS INCOME (LOSS) 66,116 25,890 (8,555) 53,674 45,024
---------- ---------- ---------- ---------- ----------
INTEREST CHARGES 41,156 40,355 36,162 31,639 31,043
INCOME (LOSS) FROM
CONTINUING OPERATIONS 24,960 (14,465) (44,717) 22,035 13,981
DISCONTINUED OPERATIONS (1,832) (26,597) (929) (12,388) (2,542)
---------- ---------- ---------- ---------- ----------
NET INCOME (LOSS) 23,128 (41,062) (45,646) 9,647 11,439
DIVIDENDS ON PREFERRED
STOCK -- -- 9 101 105
EXCESS PREMIUM, PREFERRED
REDEMPTION -- -- 673 -- --
---------- ---------- ---------- ---------- ----------
EARNINGS (LOSS) ON COMMON
STOCK $ 23,128 $ (41,062) $ (46,328) $ 9,546 $ 11,334
========== ========== ========== ========== ==========
EARNINGS (LOSS) PER COMMON
SHARE FROM:
Continuing operations $ 1.03 $ (.61) $ (1.93) $ .95 $ .71
Discontinued operations (.07) (1.11) (.04) (.53) (.13)
---------- ---------- ---------- ---------- ----------
EARNINGS (LOSS) PER COMMON
SHARE $ .96 $ (1.72) $ (1.97) $ .42 $ .58
========== ========== ========== ========== ==========
</TABLE>
<PAGE>
Page 25
Item 6. Selected Financial Data (Continued)
WASHINGTON ENERGY COMPANY AND SUBSIDIARIES
(Continued)
<TABLE>
<CAPTION>
Year Ended September 30,
-----------------------------------------------------------
1996 1995 1994 1993 1992
---------- ---------- ---------- ---------- ----------
(in thousands except per share amounts)
<S> <C> <C> <C> <C> <C>
DIVIDENDS PER COMMON SHARE $ 1.00 $ 1.00 $ 1.00 $ 1.40 $ 1.40
========== ========== ========== ========== ==========
TOTAL COMMON DIVIDENDS
DECLARED based on shares
outstanding on record
dates during each period $ 24,149 $ 23,877 $ 23,468 $ 32,282 $ 27,499
========== ========== ========== ========== ==========
TOTAL ASSETS $1,034,436 $ 978,785 $1,026,637 $1,027,014 $ 892,728
========== ========== ========== ========== ==========
LONG-TERM DEBT AND RE-
DEEMABLE PREFERRED STOCK $ 434,920 $ 400,060 $ 380,200 $ 370,700 $ 304,228
========== ========== ========== ========== ==========
COMMON SHAREHOLDERS'
INTEREST $ 199,351 $ 196,686 $ 256,800 $ 322,931 $ 275,517
========== ========== ========== ========== ==========
</TABLE>
<PAGE>
Page 26
Item 6. Selected Financial Data (Continued)
WASHINGTON NATURAL GAS COMPANY AND SUBSIDIARIES
<TABLE>
<CAPTION>
Year Ended September 30,
---------------------------------------------------
1996 1995 1994 1993 1992
-------- -------- -------- -------- --------
(in thousands)
<S> <C> <C> <C> <C> <C>
OPERATING REVENUES:
Regulated utility sales $400,108 $420,048 $396,407 $367,853 $284,939
Merchandise and conservation
products -- -- -- 63,210 66,083
-------- -------- -------- -------- --------
TOTAL OPERATING REVENUES $400,108 $420,048 $396,407 $431,063 $351,022
======== ======== ======== ======== ========
TOTAL GROSS MARGIN (Regulated
utility sales less cost of gas
sold) $222,389 $201,026 $172,905 $186,696 $154,603
======== ======== ======== ======== ========
OPERATING INCOME $ 69,076 $ 50,513 $ 26,381 $ 49,889 $ 38,143
OTHER INCOME (EXPENSE), NET (229) (443) (3,860) (1,036) 135
-------- -------- -------- -------- --------
GROSS INCOME 68,847 50,070 22,521 48,853 38,278
INTEREST CHARGES (31,623) (32,216) (30,764) (27,082) (26,047)
-------- -------- -------- -------- --------
NET INCOME (LOSS) 37,224 17,854 (8,243) 21,771 12,231
DIVIDENDS ON PREFERRED STOCK 7,020 7,126 3,979 2,720 2,740
EXCESS PREMIUM, PREFERRED
REDEMPTION -- -- 798 -- --
-------- -------- -------- -------- --------
EARNINGS (LOSS) ON COMMON STOCK $ 30,204 $ 10,728 $(13,020) $ 19,051 $ 9,491
======== ======== ======== ======== ========
TOTAL COMMON DIVIDENDS DECLARED
based on shares outstanding on
record dates during each period $ 16,578 $ -- $ 16,937 $ 26,045 $ 21,691
======== ======== ======== ======== ========
TOTAL ASSETS $943,918 $879,893 $862,397 $825,713 $722,390
======== ======== ======== ======== ========
LONG-TERM DEBT AND REDEEMABLE
PREFERRED STOCK $434,920 $400,060 $380,200 $370,700 $304,280
======== ======== ======== ======== ========
COMMON SHAREHOLDER'S INTEREST $268,774 $251,528 $235,988 $262,334 $205,599
======== ======== ======== ======== ========
</TABLE>
<PAGE>
Page 27
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Results of Operations
Washington Energy's net earnings available to common stock totaled $23.1
million, or $.96 per share, in 1996 compared with net losses incurred of $41.1
million, or $1.72 per share, in 1995 and $46.3 million, or $1.97 per share, in
1994. Net earnings or losses available to common stock for all periods
presented include losses from discontinued operations consisting of carrying
and development costs for undeveloped coal reserves and a related railroad.
The 1994 loss from discontinued operations also includes a loss on disposition
of a biowaste business. The improvement in 1996 earnings resulted from the
absence of substantial asset impairments and other significant charges
associated with strategic realignment and restructuring of the Company
("Special Charges"), and continued improvement in utility earnings. The
following table summarizes net earnings and losses on common by year (amounts
in millions except per share).
<TABLE>
<CAPTION>
1996 1995 1994
---------------- ---------------- ----------------
Per Per Per
Amount Share Amount Share Amount Share
------ ------- ------ ------- ------ -------
<S> <C> <C> <C> <C> <C> <C>
Before Special
Charges $ 24.9 $ 1.03 $ 8.2 $ .34 $ (3.7) $ (.15)
Special Charges -- -- (22.7) (.95) (41.7) (1.78)
------ ------ ------ ------ ------ ------
Continuing
operations 24.9 1.03 (14.5) (.61) (45.4) (1.93)
Discontinued
operations (1.8) (.07) (26.6) (1.11) (.9) (.04)
------ ------ ------ ------ ------ ------
Earnings (loss)
on common stock $ 23.1 $ .96 $(41.1) $(1.72) $(46.3) $(1.97)
====== ====== ====== ====== ====== ======
</TABLE>
In September 1996, the Company decided to seek a buyer for its undeveloped
coal properties and to cease development efforts on the associated railroad.
Accordingly, the Company's financial statements have been restated to reflect
these businesses as discontinued operations. The 1996 loss from discontinued
operations includes an after-tax charge of $446,000 to establish a reserve
for estimated operating losses through disposition. In 1995, the Company
wrote down the carrying value of its coal properties by $34.7 million ($22.6
million after tax) and wrote off its entire railroad investment of $6.0
million ($3.9 million after tax) with adoption of SFAS No. 121.
The 1995 Special Charges resulted from: 1) adoption of SFAS No. 121 by Cabot
and the Company required a large write down of Cabot's oil and gas properties
and a permanent impairment in the carrying value of Washington Energy's
investment in Cabot ($16.1 million after tax); 2) increased losses projected
in the future from certain gas transportation and storage arrangements
excluded from the merger of the Company's former oil and gas exploration
subsidiary with Cabot ($3.3 million after tax); 3) gas utility employee
severance costs ($2.0 million after tax); and 4) deferred income taxes
relating to tax contingencies ($1.3 million).
<PAGE>
Page 28
The 1994 Special Charges resulted from: 1) the merger of the Company's oil
and gas exploration and production subsidiary with Cabot and reserves
established for certain gas transportation and storage arrangements excluded
from the merger ($30.0 million after tax); 2) restructuring and down sizing
the gas utility subsidiary ($4.6 million after tax); and 3) other write-offs
and reserves established in the gas utility ($7.1 million after tax).
The Company's 1996 earnings from continuing operations of $24.9 million are
substantially improved from earnings before Special Charges of $8.2 million
in 1995 and the loss before Special Charges of $3.7 million in 1994. The
improvement in earnings over this period was due largely to increases in
utility margin (revenues less cost of gas sold) combined with successive
annual reductions in utility operations and maintenance ("O&M") expenses
before Special Charges. The increases in utility margin resulted from: 1)
general rate increases granted in June 1994 and May 1995; 2) continued annual
customer growth of 4 to 5%; and 3) relatively colder weather in 1996.
Oil and Gas Related Charges in 1995 and 1994
The Company recorded two fourth quarter 1995 Special Charges related to its
investment in Cabot. Cabot's adoption of SFAS No. 121 resulted in pre-tax
write downs of $113.9 million related to its oil and gas properties. Under
the equity method of accounting for its investment in Cabot common stock, the
Company recorded its 9.4% share of Cabot's write down, which totaled $4.2
million after Cabot's and the Company's tax provisions. In addition, the
Company recorded an $11.9 million after-tax charge to write down, the excess
of its recorded investment in Cabot over its proportional interest in Cabot's
underlying shareholders' equity. The Company believed a permanent impairment
in the value of its investment in Cabot occurred based on fundamental changes
in the natural gas market during 1995, which sharply reduced gas prices and
Cabot's earnings potential. After the write downs and equity losses, the
carrying value of the Company's investment in Cabot totaled $70.0 million at
September 30, 1995, which approximated the market value of the Cabot common
and preferred shares held by the Company at that date.
On May 2, 1994, the Company merged its oil and gas subsidiary, Resources,
with Cabot in a tax-free exchange. The Company received Cabot common and
preferred stock with a fair market value of $98.5 million in addition to the
repayment of $63.7 million of intercompany debt, which resulted in a net loss
of $25.1 million on the transaction after providing for deferred taxes of
approximately $30.0 million. In 1995, the Company recorded an additional
after-tax loss of $327,000 in resolving substantially all remaining merger-
related contingencies with Cabot.
In the fourth quarter of 1995, the Company recorded a $3.3 million after-tax
charge to earnings to increase by $5.0 million its reserve for anticipated
future losses associated with certain gas transportation and storage contractual
arrangements excluded from the merger of Resources with Cabot. Upon completion
of the Resources merger in 1994, the Company had recorded an after-tax charge of
$11.7 million to establish reserves of $16.0 million for anticipated future
losses associated with these excluded contractual arrangements and $2.0 million
for other excluded items. The Company had only limited operating experience with
these arrangements prior to the merger, since they were placed in service
November 1, 1993. During 1996, 1995 and 1994, $2.7 million, $5.8 million and
$3.0 million (pre-tax) of the reserves were utilized, respectively. See Note
<PAGE>
Page 29
13 of Notes to Consolidated Financial Statements for additional information
regarding these projected losses.
Restructuring and Other Special Charges in 1995 and 1994
In the fourth quarter of 1995, the Company recorded after-tax charges
totaling $3.3 million for employee severance costs and income tax
contingencies. The severance charge of $2.0 million related to a 4%
reduction in Washington Natural's work force initiated during that quarter
and completed in the first quarter of 1996. The work-force reduction, which
affected only salaried employees, was part of Washington Natural's ongoing
organizational change efforts initiated in 1994. The restructuring efforts
began in the third quarter of 1994 when Washington Natural recorded after-tax
charges totaling $4.6 million to consolidate operations and downsize its work
force. The charges included severance costs of $2.3 million (after tax) and
expensing $1.9 million of costs (after tax) previously capitalized for
planning a new headquarters building. During 1994, Washington Natural's work
force was reduced 12% from the level at the beginning of the year. Although
the 1994 severance accrual was fully utilized in 1995 and the 1995 severance
accrual has been fully utilized in the first quarter of 1996, certain of the
severance benefits are to be paid over time as specified in certain severance
agreements, rather than in lump sum.
Washington Natural recorded additional after-tax charges in 1994 totaling
$7.1 million to write-off costs deemed to be unrecoverable and to establish
certain reserves. A total charge of $1.5 million (after-tax) was included to
provide for estimated environmental investigation, legal and remediation
costs associated with certain former manufactured gas plant sites and to
write off certain environmental-related deferred costs. Also included was a
$2.2 million after-tax charge for supplemental executive retirement benefits.
Operating Revenues
The following table summarizes the Company's revenues by line of business (in
millions):
<TABLE>
<CAPTION>
1996 1995 1994
------ ------ ------
<S> <C> <C> <C>
Regulated utility sales
Firm gas sales and other $363.9 $364.7 $336.6
Interruptible gas sales 23.4 44.5 51.4
Transportation 12.8 10.8 8.4
Merchandise sales 25.6 23.6 35.6
------ ------ ------
Total $425.7 $443.6 $432.0
====== ====== ======
</TABLE>
Regulated utility sales in 1996 decreased by $19.9 million, or 5%, from the
prior year on a 5% decrease in gas volumes sold while total gas volumes,
including transported gas, increased 5%. The PGA implemented in May 1995, which
reduced rates, and customers switching from gas sales service to transportation,
combined to more than offset the impact of the May 1995 general rate increase
and increases in gas sales due to customer growth and colder weather. Utility
margin increased by $21.4 million, or 11%, due primarily to: the full-year
impact of the $17.7 million general rate increase in May 1995; a 4%, or 19,000
increase in customers; and additional heating load due to weather that was 3%
<PAGE>
Page 30
warmer than normal in 1996 versus 12% warmer than normal in 1995. The May 1995
PGA reduced revenues but did not impact utility margin. The shifting of
customers from sales service to transportation did not materially impact utility
margin, as most were switching from large volume, interruptible gas sales. Due
to the rate redesign implemented in May 1995, the Company generally earns the
same margin on transportation service as it does on large volume, interruptible
gas sales.
The $23.6 million, or 6%, increase in regulated utility sales in 1995 was
largely the result of two general rate increases and customer growth,
partially offset by the impact of the May 1995 PGA, which reduced rates for a
portion of the year. Utility margin increased by $28.1 million, or 16%, due
primarily to the rate increases and customer growth, and was not impacted by
the PGA. The general rate orders increased utility margin by approximately
$18 million. The impact on utility margin in 1995 was less than the full
annualized impact of the two rate orders because of warmer weather and the
timing of the May 1995 increase, which was implemented after the heating
season. Washington Natural's rate of growth in new customers remained at
approximately 4%, or 21,000 customers, during 1995, increasing firm gas sales
volumes by 5% and adding an estimated $6 million in utility margin. During
1995, weather did not have a significant impact on utility margin due to the
fact that much of the winter of 1995 was colder than in 1994, while the rest
of 1995, when heating load was lower, was significantly warmer than 1994.
The Company's merchandise sales revenues increased $2.0 million, or 8%, in
1996 compared to a $12 million, or 34%, decline in 1995. The 1996 revenue
increase was due primarily to certain actions taken late in 1995, such as the
major fall marketing campaign, an extensive sales training program and
restructuring of the sales force. Merchandise revenues have been negatively
impacted by the absence of joint marketing, installation and service
activities with Washington Natural since the bulk of the business, consisting
of gas appliance sales, was transferred from Washington Natural to Services
on October 1, 1993.
Operating Expenses
The following table shows the Company's operating expenses by line of
business, before and after income taxes (in millions):
<TABLE>
<CAPTION>
1996 1995 1994
------ ------ ------
<S> <C> <C> <C>
Utility
Cost of gas sold $177.7 $219.0 $223.5
Operations and maintenance 59.9 68.1 81.8
Depreciation 35.4 33.1 30.9
General taxes 39.0 40.8 37.7
------ ------ ------
Total utility operating expenses 312.0 361.0 373.9
Merchandise sales 25.9 25.3 35.7
Other .6 -- 0.9
------ ------ ------
Total before income taxes 338.5 386.3 410.5
Income taxes 15.2 5.5 (6.7)
------ ------ ------
Consolidated operating expenses $353.7 $391.8 $403.8
====== ====== ======
</TABLE>
<PAGE>
Page 31
The $38.1 million decrease in operating expenses reflected in the income
statement from 1995 to 1996 is due primarily to lower cost of gas sold ($41.3
million) and lower utility O&M expenses ($8.2 million), partially offset by
additional income taxes ($9.7 million) due to higher pre-tax income. The
decrease in cost of gas sold resulted from the lower average per-therm cost
of gas established in the May 1995 PGA and the 5% reduction in gas volumes
sold. The reduction in utility O&M expenses was the result of several
factors: 1) no severance charges were incurred in 1996, compared with $3.2
million in 1995; 2) consulting charges to support the organizational change
efforts decreased to $1.0 million in 1996 from $4.1 million in 1995; and 3)
reserves established in prior years of $3.3 million for collectability of
certain costs related to environmental remediation activities were reversed
in 1996, which lowered O&M expenses. Utility depreciation expense increased
by $2.3 million due to additional capital spending to add customers and to
reinforce the gas distribution system. The decrease of $1.7 million in
general taxes was due primarily to lower revenue based taxes attributable to
lower revenues as discussed above.
During 1996, Services was able to maintain operating expenses at essentially
the same level as in 1995 even though sales increased by $2.0 million. As a
result, Services generated a profit before interest expense and taxes of
$611,000 in 1996, compared to a loss of $1.6 million in 1995 and a profit of
$179,000 in 1994.
The $12.0 million decrease in operating expenses from 1994 to 1995 was due
primarily to lower total utility operating expenses ($13.0 million) and lower
merchandise sales expenses ($10.4 million), partially offset by the change in
income taxes from a benefit to an expense ($12.2 million) due to higher pre-
tax utility earnings. The $13.7 million decrease in utility O&M expenses was
the result of the inclusion of $3.2 million of employee severance costs in
1995 versus $11.7 million of Special Charges included in 1994, ongoing cost
savings of $7.7 million due primarily to the 1994 work-force reduction,
partially offset by $4.1 million of consulting charges to support the
organizational change efforts during 1995. The cost of gas sold decreased in
1995 due to the PGA implemented in May 1995. The increases in depreciation
and general taxes were the result of capital spending to add customers and
revenue growth, respectively.
Oil and Gas Business Operating Results
In 1996, the Company earned pre-tax income of $2.8 million from its
investment in Cabot versus a pre-tax loss of $24.1 million in 1995. The 1995
loss included Special Charges described above of $24.8 million ($16.1 million
after tax) related to adoption of SFAS 121 by Cabot. The 1996 earnings
consisted of $3.4 million of preferred dividends net of an equity loss of
$619,000, which included amortization of the Company's excess investment in
Cabot totaling $500,000. The 1995 results, excluding Special Charges, were
pre-tax earnings of $729,000, consisting of $3.4 million of preferred
dividends net of an equity loss of $2.7 million, which included excess
investment amortization of $1.2 million.
The 1994 earnings contribution from the oil and gas business before interest and
income taxes (consisting of Resources' earnings through the merger date and
earnings from the investment in Cabot thereafter) was $1.9 million. Resources'
1994 earnings through the merger date totaled $1.0 million, which included
losses from the gas transportation and storage arrangements described above.
Subsequent to the merger, Cabot reported losses, of which the Company's
proportionate share totaled $573,000, due primarily to seasonal factors and
generally
<PAGE>
Page 32
lower gas prices. Dividend income from preferred stock was $1.4 million pre-tax.
General Rate Cases
Washington Natural filed and received rate orders for three general rate
cases in the period from July 1992 to May 1995. The following table shows
the filing dates of each case, the annual margin effect based on normal
weather and the effective date of each rate order:
<TABLE>
<CAPTION>
Date of Annual Margin Effective Date
Filing Increase (Decrease) of Rate Order
--------------- ------------------- --------------
<S> <C> <C>
July 1992 ($15.4 million) October 9, 1993
November 1993 $19.0 million June 2, 1994
March 1995 $17.7 million (1) May 15, 1995
(1) Excluding municipal utility taxes
</TABLE>
In the July 1992 filing, Washington Natural had initially sought a $41.4
million rate increase, which was subsequently reduced to $14.8 million. In
September 1993, the WUTC issued an order decreasing rates by $15.4 million
effective in October 1993. The principal differences in the annual revenue
requirement between Washington Natural's revised rate request and the WUTC's
ordered rate reduction were:
(1) approximately $11 million of expenses related to advertising, marketing
and merchandising disallowed by the WUTC;
(2) approximately $10 million due to an allowed overall rate of return of
9.15% on a rate base of $483.9 million, compared to Washington Natural's
proposed overall rate of return of 9.98% on $504.0 million of rate base;
(3) $5.2 million related to disallowance of Washington Natural's proposed
attrition allowance; and
(4) $4.8 million associated with the weather normalization calculation.
In November 1993, Washington Natural filed a limited-scope general rate case
seeking a $24.6 million increase in annual revenues. The primary focus was
to seek recovery of additional operating costs and the inclusion in rate base
of utility plant additions since calendar year 1991, which was the base
measurement year used in the prior rate case. In May 1994, the WUTC issued
an order approving a settlement of the rate case. The settlement provided
for a $19.0 million increase in annual revenue and an agreement that
Washington Natural would not request an increase in total revenues, other
than PGA filings or in other limited circumstances, prior to March 1, 1995.
In the March 1995 general rate case filing, Washington Natural requested a $35.4
million increase in annual revenues, with $17.8 million of the total to be
granted as interim rate relief in May 1995. The rate case was requested to cover
increased costs related to plant additions and upgrades and higher costs for
financing and general operations. In May 1995, the WUTC issued an order
approving a settlement of the case. The settlement provided an additional $17.7
million in annual revenues, excluding municipal utility taxes, and reflected an
authorized rate of return on common equity in the range of 11.0% - 11.25%, up
<PAGE>
Page 33
from the previous level of 10.5%. The settlement accepted by the WUTC also
stipulated that Washington Natural will be allowed to earn in excess of that
range to the extent that it can do so by managing its cost of service. As part
of the rate case settlement, Washington Natural agreed not to make a general
rate case filing prior to May 15, 1997. Washington Natural, however, is not
precluded from PGA filings or filing for interim or emergency rate relief if
conditions warrant.
The May 1995 order also implemented a rate redesign approved by the WUTC in
April 1995. Generally, the rate redesign lowers rates for transportation
customers and large commercial and industrial gas sales customers, while
increasing the rates for residential customers. In a separate decision in
May 1995, the WUTC issued an order to implement a PGA to pass through a $46.5
million annual reduction in the cost of purchased gas to customers in the
form of lower rates.
Inflation and Changing Prices
The Company is directly and indirectly affected by inflation and changing
prices in several ways, most of which are also heavily influenced by the WUTC
regulatory process.
Natural gas prices have been highly volatile in recent years, which has
impacted Washington Natural's cost of purchased gas but has not affected
Washington Natural's earnings due to use of the PGA mechanism. As requested
by Washington Natural, the WUTC has authorized changes in customer rates to
permit the pass- through of projected changes in the cost of purchased gas.
Differences between actual gas costs and those authorized in the prior PGA
are accumulated in balancing accounts for future recovery or refund. Except
for costs disallowed in a 1992 order relating primarily to purchases from
Resources, the WUTC historically has allowed changes in purchased gas costs
to be passed through to customers with no impact on earnings. The most
recent PGA went into effect in May 1995 as described above.
Washington Natural's operating results are impacted by the effects of
inflation on O&M expenses, particularly wages, which historically comprise
approximately 50% of O&M expenses. Washington Natural must request general
rate increases to offset the effects of increases in O&M expenses. Such
requests normally receive intense scrutiny by the WUTC, including extensive
analysis of historical and current O&M expenses. The WUTC has up to eleven
months from the filing date of the request to issue an order. The delay in
receiving rate relief, due to the time required to prepare and file the rate
request and the time required for WUTC review, can result in significant
earnings deterioration in the interim, particularly in periods of higher
inflation. Washington Natural filed for general rate increases in July 1992,
November 1993 and March 1995, as described above.
Inflation also impacts Washington Natural directly through the cost of replacing
portions of its distribution system. Washington Natural's rates are set based on
the historical cost of construction of its distribution system and long
depreciable lives. Due to the long lives, the cost of replacing components of
the system is generally much higher than the original cost, which impacts
Washington Natural's earnings through higher depreciation charges and higher
carrying costs of the new assets. Since replacing components of the system does
not generate additional revenues, Washington Natural must file general rate
cases in order to recover these higher costs. The estimated replacement cost
<PAGE>
Page 34
of Washington Natural's gas mains and service lines is $1.9 billion, which
exceeds historical cost by $1.2 billion.
Inflation affects the Company and Washington Natural indirectly through its
impact on interest rates. In recent years, approximately $350 million of the
Company's capitalization has been long-term debt, and short-term debt levels
have averaged over $150 million on an annual basis. Prior to the interest
rate increases in 1994, rates generally had declined each year since the mid-
1980s. The Company benefited from the declining rates by refinancing higher-
rate notes with lower-rate notes and through reduced interest expense on its
short-term debt. Short-term interest rates have increased to over 7% in 1995
and 1996, compared to an average rate of 6.1% in 1994. Average short-term
interest rates in 1996 did not change significantly from the prior year;
thus, as a result of the 1995 rate increase, the utility is recovering
substantially all of the increased interest costs in rates.
The current level of interest rates is also a major factor in determining
Washington Natural's authorized rate of return on equity associated with its
general rate filings. Prior to the October 1993 rate order in which
Washington Natural's rate of return on common equity was set at 10.5%, the
rate of return on common equity had been set at 16.25%. This rate was based
on a 1985 rate order that corresponded to a period of high interest rates in
the early 1980's. The May 1995 general rate order increased Washington
Natural's authorized return on common equity to 11% - 11.25%.
Liquidity and Capital Resources
Capital expenditures typically represent the largest cash flow item for the
Company due to the capital-intensive nature and growth rate of the utility.
Substantially all of the Company's $91.1 million of 1996 gross capital
expenditures were for utility plant. Washington Natural makes capital
expenditures to add new customers to its gas distribution system and to
replace and enhance components of the system to insure reliability and
safety. The financing strategy of the Company and Washington Natural is to
fund capital expenditures with a combination of cash flow from operations,
after dividend payments, and short-term borrowings on an interim basis. The
short-term borrowings are reduced periodically with the proceeds from issuing
long-term debt and equity securities, the choice and timing of which are
dependent on management's evaluation of need, financial market conditions and
other factors.
<PAGE>
Page 35
The following table summarizes the major cash flow items for the Company for
the three years ended September 30 (in millions):
<TABLE>
<CAPTION>
1996 1995 1994
------ ------ ------
<S> <C> <C> <C>
Operating cash flow $ 83.5 $ 84.9 $ 13.4
Common dividends (24.1) (23.9) (23.5)
Capital expenditures (91.1) (86.9) (84.3)
Short-term borrowing (repayment), net 15.7 36.8 (20.3)
Net issuance of preferred stock -- -- 64.7
Cash from merger of subsidiary, net -- -- 42.9
Issuance of common stock 3.7 4.8 6.3
Net issuance (retirement) of long-term debt 4.3 (10.9) (3.3)
Other, net (.7) (.9) (3.6)
------ ------ ------
Net change in cash $ (8.7) $ 3.9 $ (7.7)
====== ====== ======
</TABLE>
The Company's consolidated operating cash flow of $83.5 million in 1996
equaled the sum of Washington Energy's common dividends paid, net of dividend
reinvestment, and approximately 70% of the Company's investments in utility
plant and other property. However, due to restrictions on the payment of
common dividends by Washington Natural to Washington Energy contained in the
first mortgage bond indenture, Washington Energy funded a substantial portion
of its common dividend payments and non-utility operating and debt service
costs with short-term borrowings. These restrictions, triggered by the
operating loss sustained by Washington Natural in 1994, prevented Washington
Natural from paying dividends to Washington Energy from April 1994 to
February 1996. Washington Natural made $16.6 million in dividend payments to
Washington Energy in 1996 and at September 30, 1996 had $1.1 million of
retained earnings available to pay common dividends under the most
restrictive covenant in the indenture. While there are no restrictions on
payment of dividends by Washington Energy, as a practical matter, Washington
Energy's long-term ability to pay dividends is limited by the restrictions on
dividend payments in the first mortgage bond indenture.
Due to the limitation on dividend payments described above, Washington
Natural was able to fund all of its cash requirements during 1996, including
its capital expenditures and the dividend payments made to Washington Energy,
from operating cash flow and $4.3 million in net proceeds from the retirement
and subsequent issuance of new first mortgage bonds. Washington Natural
called $30.0 million and paid a premium of $342,000 of such bonds early and
issued $35.0 million of additional bonds with lower interest rates. The
$15.7 million of net short-term borrowings reflected in Washington Energy's
consolidated cash flow statement is essentially all related to funding
Washington Energy dividends and non-utility operations and debt service as
described above. The Company also reduced its outstanding cash balance and
borrowing requirements through repatriation of $5.2 million of cash upon
dissolution of its Bermuda-based insurance company.
Two primary factors, apart from successive increases in earnings, contributed to
the higher levels of operating cash flow in 1995 and 1996 of $84.9 million and
$83.5 million, respectively, relative to the 1994 amount of $13.4 million. The
PGA receivable of $21.3 million at September 30, 1994 shifted to a liability of
$15.6 million at September 30, 1995, which further increased to $41.4 million at
September 30, 1996. These changes, due to lower than expected prices for
purchased natural gas, added $36.9 million and $25.8 million of operating cash
flow in 1995 and 1996, respectively. The other factor was the agreement reached
<PAGE>
Page 36
by Washington Natural and its insurers in 1995 whereby Washington Natural
received $29.0 million in settlement of litigation regarding environmental
remediation of a former manufactured gas plant site in Tacoma, Washington. With
the settlement, the Company had net cash receipts of $24.2 million in 1995
related to environmental remediation activities, compared to net cash payments
of $11.8 million in 1994. Net cash flows related to remediation activities in
1996 were insignificant.
Capital expenditures in 1997, primarily to fund Washington Natural's utility
plant additions, are projected to be approximately $91 million. The Company
expects to fund its 1997 capital spending with cash flow from operations and
short-term borrowings.
In addition to short-term borrowing requirements to fund its capital spending
program on an interim basis, Washington Natural has seasonal short-term
borrowing requirements. Operating revenues vary with weather conditions
because approximately 90% of Washington Natural's customers use natural gas
for space heating. This normally produces substantially increased earnings
and operating cash flow during the first eight or nine months of each year
and a loss and negative cash flow in the remaining three or four months, with
the 12 months as a whole being profitable and generating positive operating
cash flow. Because of this, Washington Natural must borrow on a short-term
basis to meet its operating needs for a portion of the year.
The Company has several short-term financing arrangements in place at
September 30, 1996: an aggregate of $250 million of commercial paper and
similar programs backed by a committed credit agreement, of which $72 million
was unused at September 30, 1996; an uncommitted bank credit arrangement of
$25 million, all of which was undrawn at year end; and a committed agreement
to sell up to $90 million of merchandise and gas receivables, of which $77
million was unused at year end. The borrowing capacity under the latter
agreement is effectively limited by the availability of receivables to sell.
At September 30, 1996, a time of year when gas receivable balances are low
due to seasonal factors, the Company had $9.7 million of eligible receivables
which had not been sold under the arrangement.
The Company's ability to utilize its commercial paper and similar programs,
together with the credit facility which supports them, is limited by a
covenant contained in the credit facility with limits total debt to 65% of
total capitalization, measured at the end of each quarter, as further
described in Note 7 of Notes to Consolidated Financial Statements. At
September 30, 1996, debt represented 64.4% of total capitalization which
limited the Company's ability to incur additional debt to $14.6 million under
this covenant. Since the Company's operating cash flow and earnings increase
after September 30 due to seasonal gas usage, debt levels should be reduced
and equity levels increased such that debt will decline as a percentage of
total capitalization as of December 31, 1996. The Company does not expect to
exceed the limitation prior to the anticipated closing of the merger with
Puget.
However, absent completion of the merger with Puget by March 31, 1997, the
Company may be in violation of the 65% debt limitation which would constitute an
event of default under the credit agreement due to implementation SFAS No. 125
on January 1, 1997. Sales of receivables under the Company's existing program
after this date must be accounted for as secured borrowings which will increase
the level of debt used in the calculation of this covenant. In the short term,
the default could be cured by obtaining waivers from the bank group
<PAGE>
Page 37
or by restructuring the receivable sales program to qualify for sales treatment
under SFAS No. 125. Even with the restructuring of the receivable sales program,
the Company may be in default at September 30, 1997 due to seasonal borrowing
requirements and funding of planned capital expenditures. Absent completion of
the merger with Puget, an increase in the equity component or a decrease in the
debt component of the balance sheet would be required. This may be accomplished
with the issuance of additional equity.
In management's opinion, the Company has sufficient capital resources, both
internal and external, to meet anticipated financing requirements.
Environmental Matters
In management's opinion, based on all known facts and analyses, it is not
likely that environmental liabilities identified to date will result in a
material adverse impact on the Company's or Washington Natural's financial
position or operating results and cash flow trends. See Note 9 of Notes to
Consolidated Financial Statements for a detailed description of significant
environmental matters.
Litigation
The Company or Washington Natural is a defendant in several lawsuits. Based
on prior decisions and known facts in the cases, management does not believe
the cases will, individually or in the aggregate, have a material impact on
the Company or Washington Natural. See Note 10 of Notes to Consolidated
Financial Statements for a description of significant litigation.
Significant Balance Sheet Changes Not Addressed Elsewhere
In 1996, deferred charges and other assets increased $11.6 million from 1995.
This is primarily due to $8.0 million of deferred merger related costs that
the Company and Washington Natural have incurred in the current year.
Accounts payable have decreased by $10.9 million from 1995. This is
primarily due to payment of the transition cost liability to Pipeline and
lower gas purchases for underground storage in September 1996. The other
significant changes in the Company's balance sheet during 1996 result
directly from matters previously discussed in the foregoing sections of
Management's Discussion and Analysis of Financial Condition and Results of
Operations.
Future Outlook
(a) Proposed Merger
On October 18, 1995, a definitive agreement was approved by Washington
Energy's and Washington Natural's boards of directors to merge Washington
Energy and Washington Natural into Puget, the surviving corporation. The
merged company will be named Puget Sound Energy ("PSE") and will create a
combination utility serving more than 852,000 electric customers and more
than 493,000 gas customers in the state of Washington. See Exhibit 99 for
pro forma financial information of the merged company.
On March 20, 1996, shareholders of Washington Energy, Washington Natural, and
Puget approved the merger of the companies. The merger is intended to qualify as
a pooling-of-interests. As of September 30, 1996, Washington Energy and
Washington Natural have incurred $8.0 million of costs, primarily professional
<PAGE>
Page 38
and legal fees, directly attributable to the merger. Washington Natural has
requested, as part of the merger application with the WUTC, that these costs be
recovered in rates over a five-year period for regulatory purposes but expects
them to be expensed for financial reporting purposes at the time of the merger.
These costs have been deferred and are included in deferred charges and other
assets, pending consummation of the merger.
The merger is estimated to result in cost savings of approximately $370
million, net of costs to achieve these savings, including merger transaction
and transition costs, over a ten-year period following the consummation of
the merger.
The merger is subject to approval by the WUTC. On December 11, 1996,
Washington Natural, Puget, the staff of the WUTC and the Public Counsel
Section of the Washington State Office of the Attorney General filed a
stipulated settlement agreement related to the merger for approval by the
WUTC. The WUTC held hearings on the settlement on December 18, 1996. Final
briefs are due to be filed with the WUTC on January 3, 1997, and an order
from the WUTC is expected by mid-January. If the terms and conditions of the
WUTC order are acceptable to the boards of directors of the respective
companies, the merger could be completed by February 1, 1997.
(b) 1997 Earnings
If the proposed merger between the Company and Puget is completed in the
first quarter of calendar 1997 as anticipated, PSE should benefit from the
significant synergies that will result from the combining of the two
companies. However, stand-alone, the Company has realized substantial
earnings growth in the current year. In the coming year, the Company should
continue to realize benefits from the restructuring strategies and regulatory
changes that have been put in place since 1994, given no adverse changes in
weather conditions from those experienced in 1996.
The Company expects utility customer growth of 4 to 5% in the coming year.
This is slightly lower than the 5% average customer growth experienced over
the last five years.
The Company discontinued its coal and rail operations in 1996 and expects to
dispose of these businesses in the coming year. This should eliminate a
continual source of operating losses and capital requirements over the past
five years.
(c) Common Dividend
Absent completion of the merger with Puget, management does not currently
intend to recommend to the Board of Directors any change in the dividend. In
management's opinion, the level of future earnings should be sufficient to
support the dividend over the long term.
(d) Forward-Looking Statements
The statements regarding financial performance and results and other
statements, which are not historical facts contained in this document, are
forward-looking statements that involve risk and uncertainties, including but
not limited to market factors, regulatory uncertainties, weather, interest
rates, future operating costs and other factors.
<PAGE>
Page 39
Item 8. Financial Statements and Supplementary Data
1. Financial Statements:
Washington Energy Company and Subsidiaries
Consolidated balance sheets as of September 30, 1996 and 1995.
Consolidated statements of income for each of the three years in the
period ended September 30, 1996.
Consolidated statements of capitalization as of September 30, 1996
and 1995.
Consolidated statements of shareholders' earnings (deficit)
reinvested in the business and premium on common stock for each
of the three years in the period ended September 30, 1996.
Consolidated statements of cash flows for each of the three years in
the period ended September 30, 1996.
Notes to consolidated financial statements.
Washington Natural Gas Company and Subsidiaries.
Consolidated balance sheets as of September 30, 1996 and 1995.
Consolidated statements of income for each of the three years in the
period ended September 30, 1996.
Consolidated statements of capitalization as of September 30, 1996
and 1995.
Consolidated statements of shareholder's earnings reinvested in the
business and premium on common stock for each of the three years
in the period ended September 30, 1996.
Consolidated statements of cash flows for each of the three years in
the period ended September 30, 1996.
Notes to consolidated financial statements.
2. Supplementary Data (Unaudited):
Consolidated selected quarterly financial data for each of the three
years in the period ended September 30, 1996.
<PAGE>
Page 40
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of Washington Energy Company:
We have audited the accompanying consolidated balance sheets and statements
of capitalization of Washington Energy Company (a Washington corporation) and
subsidiaries as of September 30, 1996 and 1995, and the related consolidated
statements of income, shareholders' earnings (deficit) reinvested in the
business, premium on common stock and cash flows for each of the three years
in the period ended September 30, 1996, and the accompanying consolidated
balance sheets and statements of capitalization of Washington Natural Gas
Company (a Washington corporation) and subsidiaries as of September 30, 1996
and 1995, and the related consolidated statements of income, shareholder's
earnings reinvested in the business, premium on common stock and cash flows
for each of the three years in the period ended September 30, 1996. These
financial statements and the schedules referred to below are the
responsibility of the companies' management. Our responsibility is to
express an opinion on these financial statements and schedules based on our
audits.
We conducted our audits in accordance with generally accepted auditing stan
dards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Washington Energy Company
and subsidiaries and of Washington Natural Gas Company and subsidiaries as of
September 30, 1996 and 1995, and the results of their operations and their
cash flows for each of the three years in the period ended September 30,
1996, in conformity with generally accepted accounting principles.
Our audit was made for the purpose of forming an opinion on the basic finan
cial statements taken as a whole. The schedules listed in Item 14(a) are
presented for purposes of complying with the Securities and Exchange Commis
sion's rules and are not part of the basic financial statements. These
schedules have been subjected to the auditing procedures applied in the audit
of the basic financial statements and, in our opinion, fairly state in all
material respects the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Seattle, Washington
October 31, 1996
<PAGE>
Page 41
<TABLE>
WASHINGTON ENERGY COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
<CAPTION>
September 30,
----------------------
1996 1995
---------- ----------
(in thousands)
<S> <C> <C>
PROPERTY, PLANT AND EQUIPMENT:
Utility plant, at original cost $1,129,849 $1,044,617
Coal and other 15,739 15,621
Accumulated depreciation, depletion and
amortization (304,448) (273,735)
---------- ----------
Net property, plant and equipment 841,140 786,503
---------- ----------
INVESTMENTS IN UNCONSOLIDATED AFFILIATES 69,352 70,313
---------- ----------
CURRENT ASSETS:
Cash and cash equivalents 599 9,315
Receivables, net of allowance for
uncollectible accounts of $930 and
$979, respectively 11,714 10,830
Unbilled revenue 12,199 9,607
Federal income taxes receivable 8,846 10,942
Deferred income taxes 4,663 3,707
Materials and supplies, at average cost 24,955 31,968
---------- ----------
Total current assets 62,976 76,369
---------- ----------
OTHER ASSETS AND DEFERRED CHARGES:
Environmental receivables 10,164 8,116
Regulatory tax asset 19,353 17,605
Deferred charges and other 31,451 19,879
---------- ----------
Total other assets and deferred charges 60,968 45,600
---------- ----------
Total assets $1,034,436 $ 978,785
========== ==========
</TABLE>
<PAGE>
Page 42
<TABLE>
WASHINGTON ENERGY COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (Continued)
CAPITALIZATION AND LIABILITIES
<CAPTION>
September 30,
----------------------
1996 1995
---------- ----------
(in thousands)
<S> <C> <C>
CAPITALIZATION: (see Consolidated Statements of
Capitalization):
Common shareholders' interest $ 199,351 $ 196,686
Redeemable preferred stock of subsidiary 90,000 90,000
Long-term debt 344,920 310,060
---------- ----------
Total capitalization 634,271 596,746
---------- ----------
CURRENT LIABILITIES:
Notes payable and commercial paper 177,709 161,994
Current sinking-fund requirements and debt
maturities 140 30,140
Accounts payable 21,891 32,755
Purchased gas liability 41,368 15,554
Accrued general taxes 14,202 12,556
Environmental remediation liabilities 6,735 4,578
Other current liabilities 25,082 28,939
---------- ----------
Total current liabilities 287,127 286,516
---------- ----------
DEFERRED CREDITS AND OTHER LIABILITIES:
Noncurrent deferred income taxes 75,119 59,450
Regulatory tax liability 10,994 11,017
Unamortized investment tax credits 8,479 9,352
Contributions in aid of construction 5,334 3,547
Contingency reserves and other 13,112 12,157
---------- ----------
Total deferred credits and other
liabilities 113,038 95,523
---------- ----------
Total capitalization and liabilities $1,034,436 $ 978,785
========== ==========
The accompanying notes are an integral part of these consolidated balance sheets.
</TABLE>
<PAGE>
Page 43
<TABLE>
WASHINGTON ENERGY COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<CAPTION>
Year Ended September 30,
---------------------------------
1996 1995 1994
-------- -------- --------
(in thousands)
<S> <C> <C> <C>
OPERATING REVENUES:
Regulated utility sales $400,108 $420,048 $396,407
Merchandise, conservation products
and other 25,603 23,563 35,618
-------- -------- --------
Total operating revenues 425,711 443,611 432,025
-------- -------- --------
OPERATING EXPENSES:
Cost of gas sold 177,719 219,022 223,502
Operations and maintenance 85,689 93,139 118,001
Depreciation 35,777 33,128 30,901
General taxes 39,308 40,974 38,086
Federal income taxes 15,232 5,507 (6,697)
-------- -------- --------
Total operating expenses 353,725 391,770 403,793
-------- -------- --------
OPERATING INCOME 71,986 51,841 28,232
-------- -------- --------
OTHER INCOME (EXPENSE):
Pre-tax loss on merger of subsidiary -- -- (6,304)
Federal income taxes on merger of
subsidiary -- -- (23,711)
Pre-tax charges related to
unconsolidated affiliate -- (24,803) --
Deferred tax benefit of write downs -- 8,681 --
Preferred dividend requirement -
Washington Natural Gas Company (7,020) (7,126) (3,970)
Other, net 1,150 (2,703) (2,802)
-------- -------- --------
Total other income (expense) (5,870) (25,951) (36,787)
-------- -------- --------
GROSS INCOME (LOSS) 66,116 25,890 (8,555)
INTEREST CHARGES 41,156 40,355 36,162
-------- -------- --------
INCOME (LOSS) FROM CONTINUING OPERATIONS 24,960 (14,465) (44,717)
DISCONTINUED OPERATIONS:
Loss from operations, net of income tax (1,386) (26,597) (130)
Loss on disposal, net of income tax (446) -- (799)
-------- -------- --------
NET INCOME (LOSS) 23,128 (41,062) (45,646)
DIVIDENDS ON PREFERRED STOCK -- -- 9
EXCESS PREMIUM, PREFERRED REDEMPTION -- -- 673
-------- -------- --------
EARNINGS (LOSS) ON COMMON STOCK $ 23,128 $ (41,062) $(46,328)
======== ======== ========
</TABLE>
<PAGE>
Page 44
<TABLE>
WASHINGTON ENERGY COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Continued)
<CAPTION>
Year Ended September 30,
--------------------------------
1996 1995 1994
-------- -------- --------
(in thousands
except per share amounts)
<S> <C> <C> <C>
EARNINGS (LOSS) PER COMMON SHARE:
From continuing operations $ 1.03 $ (.61) $ (1.93)
From discontinued operations (.07) (1.11) (.04)
-------- ------- -------
EARNINGS (LOSS) PER COMMON SHARE $ .96 $ (1.72) $ (1.97)
======== ======= =======
AVERAGE COMMON SHARES OUTSTANDING 24,159 23,893 23,486
======== ======= =======
DIVIDENDS PAID PER COMMON SHARE $ 1.00 $ 1.00 $ 1.00
======== ======= =======
TOTAL COMMON DIVIDENDS DECLARED
based on shares outstanding on
record dates during each period $ 24,149 $23,877 $23,468
======== ======= =======
The accompanying notes are an integral part of these consolidated statements.
</TABLE>
<PAGE>
Page 45
<TABLE>
WASHINGTON ENERGY COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CAPITALIZATION
<CAPTION>
Shares Outstanding
at September 30, September 30,
------------------ --------------------
1996 1995 1996 1995
------- ------- -------- --------
(in thousands) (in thousands)
<S> <C> <C> <C> <C>
COMMON SHAREHOLDERS' INTEREST:
Common stock, $5 par value,
authorized 50,000,000 shares 24,268 24,070 $121,339 $120,348
Premium on common stock 205,311 202,616
Shareholders' accumulated deficit (127,299) (126,278)
-------- --------
Total common shareholders'
interest 199,351 196,686
-------- --------
32%* 33%*
REDEEMABLE PREFERRED STOCK:
Washington Energy Company -
Cumulative; authorized 200,000
shares of $100 par value and
800,000 shares of $25 par value;
no shares outstanding.
Washington Natural Gas Company -
Cumulative; authorized 1,000,000
shares of $100 par value and
4,000,000 shares of $25 par value
7.45%, Series II 2,400 2,400 60,000 60,000
8.50%, Series III 1,200 1,200 30,000 30,000
-------- --------
Total preferred stock 90,000 90,000
-------- --------
14%* 15%*
*Percentage of total capitalization.
</TABLE>
<PAGE>
Page 46
<TABLE>
WASHINGTON ENERGY COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CAPITALIZATION
(Continued)
<CAPTION>
September 30,
---------------------
1996 1995
-------- --------
(in thousands)
<S> <C> <C>
LONG-TERM DEBT:
First mortgage bonds
8-1/8% due 1997 $ 3,060 $ 3,200
10-1/4% due 1997, called in December 1995 - 30,000
9.60% due 2000 25,000 25,000
9.57% due 2020 25,000 25,000
Secured medium-term notes, series A
8.25% due 1998 11,000 11,000
7.08% due 1999 10,000 10,000
8.51% through 8.55% due 2001 19,000 19,000
7.53% and 7.91% due 2002 30,000 30,000
8.25% through 8.40% due 2022 35,000 35,000
Secured medium-term notes, series B
6.23% through 6.31% due 2003 28,000 28,000
6.07% and 6.10% due 2004 18,500 18,500
6.51% and 6.53% due 2008 4,500 4,500
6.83% and 6.90% due 2013 13,000 13,000
7.19% due 2023 13,000 13,000
Secured medium-term notes, series C
6.92% and 6.93% due 2005 31,000 31,000
6.58% due 2006 10,000 -
7.02% and 7.04% due 2007 25,000 25,000
6.61% and 6.62% due 2009 8,000 -
7.12% due 2010 7,000 7,000
7.35% and 7.36% due 2015 12,000 12,000
7.15% and 7.20% due 2025 17,000 -
-------- --------
345,060 340,200
Less sinking-fund requirements and maturities
included in current liabilities (140) (30,140)
-------- --------
Total long-term debt 344,920 310,060
-------- --------
54%* 52%*
TOTAL CAPITALIZATION $634,271 $596,746
======== ========
100%* 100%*
*Percentage of total capitalization.
The accompanying notes are an integral part of these consolidated statements.
</TABLE>
<PAGE>
Page 47
<TABLE>
WASHINGTON ENERGY COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EARNINGS (DEFICIT)
REINVESTED IN THE BUSINESS
<CAPTION>
Year Ended September 30,
---------------------------------
1996 1995 1994
--------- -------- --------
(in thousands)
<S> <C> <C> <C>
Balance, at beginning of year $(126,278) $ (61,339) $ 8,457
Net income (loss) 23,128 (41,062) (45,646)
Excess premium, preferred redemption -- -- (673)
Dividends declared on capital stock:
Common stock, $1.00 per share,
respectively (24,149) (23,877) (23,468)
Preferred stock -- -- (9)
--------- --------- --------
Balance, at end of year $(127,299) $(126,278) $(61,339)
========= ========= ========
</TABLE>
<TABLE>
WASHINGTON ENERGY COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF PREMIUM ON COMMON STOCK
<CAPTION>
Year Ended September 30,
--------------------------------
1996 1995 1994
-------- -------- --------
(in thousands)
<S> <C> <C> <C>
Balance, at beginning of year $202,616 $199,571 $197,917
Excess of cost over par value of
preferred stock reacquired -- -- (492)
Excess of purchase price over par
value of shares of common stock
issued under the Dividend Reinvest-
ment and Stock Purchase Plan 2,495 2,974 3,848
Excess of purchase price over par
value of shares of common stock
issued under the Employee Stock
Purchase and Option Plans 237 239 481
Excess of purchase price over par
value of shares of common stock
issued under the Directors' Stock
Bonus Plan 3 2 2
Common and preferred stock expense (40) (170) (2,185)
-------- -------- --------
Balance, at end of year $205,311 $202,616 $199,571
======== ======== ========
The accompanying notes are an integral part of these consolidated statements.
</TABLE>
<PAGE>
Page 48
<TABLE>
WASHINGTON ENERGY COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<CAPTION>
Year Ended September 30,
---------------------------------
1996 1995 1994
-------- -------- --------
(in thousands)
<S> <C> <C> <C>
Cash flow provided by (used in) operating
activities:
Income (loss) from continuing operations $ 24,960 $(14,465) $(44,717)
-------- -------- --------
Adjustments to reconcile net income (loss)
from continuing operations to net cash
provided by operating activities:
Pre-tax loss on merger of subsidiary -- -- 6,304
Pre-tax write down and equity in
undistributed (earnings) losses of
unconsolidated affiliate 961 27,826 (699)
Depreciation and amortization 36,152 33,784 31,293
Provision for uncollectible accounts
receivable 1,229 1,220 2,457
Federal income tax - deferred 13,840 (628) (23,452)
Deferred tax on merger of subsidiary -- -- 24,784
Changes in:
Federal income tax - current 2,096 (2,515) 561
Deferred charges (11,418) (2,773) (13,943)
Accounts receivable (4,705) (5,163) 29,227
Purchased gas adjustment 25,814 36,815 2,608
Environmental recoveries
(expenditures), net 109 24,210 (11,808)
Accounts payable (10,864) 4,628 23,217
Materials and supplies 7,013 (3,899) 11,824
Other assets and liabilities (1,687) (13,671) (27,311)
Other -- (423) 3,071
-------- -------- --------
Total adjustments 58,540 99,411 58,133
-------- -------- --------
Net cash provided by operating
activities 83,500 84,946 13,416
-------- -------- --------
Cash flow provided by (used in) investing
activities:
Utility plant additions (91,013) (86,687) (83,158)
Other property expenditures (118) (232) (1,183)
Invested in subsidiary prior to merger -- -- (20,760)
Proceeds from merger of subsidiary -- -- 63,661
Proceeds from asset dispositions 719 412 1,260
-------- -------- --------
Net cash (used in) investing activities (90,412) (86,507) (40,180)
-------- -------- --------
</TABLE>
<PAGE>
Page 49
<TABLE>
WASHINGTON ENERGY COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Continued)
<CAPTION>
Year Ended September 30,
-----------------------------
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
(in thousands)
Cash flow provided by (used in) financing
activities:
Proceeds from issuance of:
Common stock $ 3,686 $ 4,824 $ 6,342
Preferred stock -- -- 87,887
First mortgage bonds 34,470 74,280 --
Proceeds from issuance (reduction) of
commercial paper, net 15,715 36,812 (20,316)
Redemptions and repurchases:
Preferred stock -- -- (23,221)
First mortgage bonds (30,140) (85,140) (3,340)
Cash dividend payments:
Common (24,149) (23,877) (23,468)
Preferred -- -- (9)
-------- -------- --------
Net cash provided by (used in)
financing activities (418) 6,899 23,875
-------- -------- --------
Net cash provided by (used in) continuing
operations (7,330) 5,338 (2,889)
Net cash (used in) discontinued operations:
Operating activities (1,386) (139) (3,609)
Investing activities -- (1,271) (1,164)
-------- -------- --------
Net increase (decrease) in cash and cash
equivalents (8,716) 3,928 (7,662)
Beginning cash and cash equivalents 9,315 5,387 13,049
-------- -------- --------
Ending cash and cash equivalents $ 599 $ 9,315 $ 5,387
======== ======== ========
Supplemental disclosures of cash flow
information
Cash paid during the year for:
Interest (net of amounts capitalized) $ 35,010 $ 41,792 $ 35,468
Income taxes $ -- $ 3,335 $ 5,180
The accompanying notes are an integral part of these consolidated statements.
</TABLE>
<PAGE>
Page 50
<TABLE>
WASHINGTON NATURAL GAS COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
<CAPTION>
September 30,
------------------------
1996 1995
---------- ----------
(in thousands)
<S> <C> <C>
UTILITY PLANT, AT ORIGINAL COST $1,129,849 $1,044,617
Accumulated depreciation (293,979) (263,664)
---------- ----------
Net utility plant 835,870 780,953
---------- ----------
RECEIVABLES FROM AFFILIATED COMPANIES 102 102
---------- ----------
CURRENT ASSETS:
Cash and cash equivalents 475 3,571
Receivables, net of allowance for
uncollectible accounts of $866 and
$919, respectively 7,772 7,037
Unbilled revenue 12,199 9,607
Federal income taxes receivable -- 1,416
Deferred income taxes 4,663 3,707
Materials and supplies, at average cost 22,799 29,706
---------- ----------
Total current assets 47,908 55,044
---------- ----------
OTHER ASSETS AND DEFERRED CHARGES:
Environmental receivables 10,164 8,116
Regulatory tax asset 19,353 17,605
Deferred charges and other 30,521 18,073
---------- ----------
Total other assets and deferred charges 60,038 43,794
---------- ----------
Total assets $ 943,918 $ 879,893
========== ==========
</TABLE>
<PAGE>
Page 51
<TABLE>
WASHINGTON NATURAL GAS COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (Continued)
CAPITALIZATION AND LIABILITIES
<CAPTION>
September 30,
----------------------
1996 1995
---------- ----------
(in thousands)
<S> <C> <C>
CAPITALIZATION (see Consolidated Statements of
Capitalization):
Common shareholder's interest $ 268,774 $ 251,528
Redeemable preferred stock 90,000 90,000
Long-term debt 344,920 310,060
---------- ----------
Total capitalization 703,694 651,588
---------- ----------
CURRENT LIABILITIES:
Current sinking-fund requirements
and debt maturities 140 30,140
Accounts payable 20,836 31,253
Purchased gas liability 41,368 15,554
Accrued general taxes 13,986 12,381
Federal income taxes payable 5,035 --
Environmental remediation liabilities 6,735 4,578
Other current liabilities 22,576 23,958
---------- ----------
Total current liabilities 110,676 117,864
---------- ----------
PAYABLES TO AFFILIATED COMPANIES 17,114 16,699
---------- ----------
DEFERRED CREDITS AND OTHER LIABILITIES:
Noncurrent deferred income taxes 84,060 69,826
Regulatory tax liability 10,994 11,017
Unamortized investment tax credits 8,479 9,352
Contributions in aid of construction 5,334 3,547
Other deferred credits 3,567 --
---------- ----------
Total deferred credits and other liabilities 112,434 93,742
---------- ----------
Total capitalization and liabilities $ 943,918 $ 879,893
========== ==========
The accompanying notes are an integral part of these consolidated balance sheets.
</TABLE>
<PAGE>
Page 52
<TABLE>
WASHINGTON NATURAL GAS COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<CAPTION>
YEAR ENDED SEPTEMBER 30,
-----------------------------------
1996 1995 1994
-------- -------- --------
(in thousands)
<S> <C> <C> <C>
REGULATED UTILITY SALES $400,108 $420,048 $396,407
-------- -------- --------
OPERATING EXPENSES:
Cost of gas sold 177,719 219,022 223,502
Utility operations and
maintenance 59,875 68,125 81,768
Depreciation 35,377 33,128 30,901
General taxes 39,067 40,729 37,768
Federal income taxes 18,994 8,531 (3,913)
-------- -------- --------
Total operating expenses 331,032 369,535 370,026
-------- -------- --------
OPERATING INCOME 69,076 50,513 26,381
OTHER INCOME (EXPENSE), NET (229) (443) (3,860)
-------- -------- --------
GROSS INCOME 68,847 50,070 22,521
INTEREST CHARGES 31,623 32,216 30,764
-------- -------- --------
NET INCOME (LOSS) 37,224 17,854 (8,243)
DIVIDENDS ON PREFERRED STOCK 7,020 7,126 3,979
EXCESS PREMIUM, PREFERRED REDEMPTION -- -- 798
-------- -------- --------
EARNINGS (LOSS) ON COMMON STOCK $ 30,204 $ 10,728 $(13,020)
======== ======== ========
The accompanying notes are an integral part of these consolidated statements.
</TABLE>
<PAGE>
Page 53
<TABLE>
WASHINGTON NATURAL GAS COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CAPITALIZATION
<CAPTION>
Shares Outstanding
at September 30, September 30,
------------------ ---------------------
1996 1995 1996 1995
------ ------ -------- --------
(in thousands) (in thousands)
<S> <C> <C> <C> <C>
COMMON SHAREHOLDER'S INTEREST:
Common stock, $5 par value;
authorized 25,000,000 shares 11,112 10,982 $ 55,558 $ 54,911
Premium on common stock 170,725 167,752
Shareholder's earnings
reinvested in the business 42,491 28,865
-------- --------
Total common shareholder's
interest 268,774 251,528
-------- --------
38%* 39%*
REDEEMABLE PREFERRED STOCK:
Cumulative; authorized 1,000,000
shares of $100 par value and
4,000,000 shares of $25 par
value
7.45%, Series II 2,400 2,400 60,000 60,000
8.50%, Series III 1,200 1,200 30,000 30,000
-------- --------
Total preferred stock 90,000 90,000
-------- --------
13%* 14%*
*Percentage of total capitalization.
</TABLE>
<PAGE>
Page 54
<TABLE>
WASHINGTON NATURAL GAS COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CAPITALIZATION
(Continued)
<CAPTION>
September 30,
---------------------
1996 1995
-------- --------
(in thousands)
<S> <C> <C>
LONG-TERM DEBT:
First mortgage bonds
8-1/8% due 1997 $ 3,060 $ 3,200
10-1/4% due 1997, called in December 1995 - 30,000
9.60% due 2000 25,000 25,000
9.57% due 2020 25,000 25,000
Secured medium-term notes, series A
8.25% due 1998 11,000 11,000
7.08% due 1999 10,000 10,000
8.51% through 8.55% due 2001 19,000 19,000
7.53% and 7.91% due 2002 30,000 30,000
8.25% through 8.40% due 2022 35,000 35,000
Secured medium-term notes, series B
6.23% through 6.31% due 2003 28,000 28,000
6.07% and 6.10% due 2004 18,500 18,500
6.51% and 6.53% due 2008 4,500 4,500
6.83% and 6.90% due 2013 13,000 13,000
7.19% due 2023 13,000 13,000
Secured medium-term notes, series C
6.92% and 6.93% due 2005 31,000 31,000
6.58% due 2006 10,000 -
7.02% and 7.04% due 2007 25,000 25,000
6.61% and 6.62% due 2009 8,000 -
7.12% due 2010 7,000 7,000
7.35% and 7.36% due 2015 12,000 12,000
7.15% and 7.20% due 2025 17,000 -
-------- --------
345,060 340,200
Less sinking-fund requirements and maturities
included in current liabilities (140) (30,140)
-------- --------
Total long-term debt 344,920 310,060
-------- --------
49%* 47%*
TOTAL CAPITALIZATION $703,694 $651,588
======== ========
100%* 100%*
*Percentage of total capitalization.
The accompanying notes are an integral part of these consolidated statements.
</TABLE>
<PAGE>
Page 55
<TABLE>
WASHINGTON NATURAL GAS COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDER'S EARNINGS
REINVESTED IN THE BUSINESS
<CAPTION>
Year Ended September 30,
----------------------------------
1996 1995 1994
-------- -------- --------
(in thousands)
<S> <C> <C> <C>
Balance, at beginning of year $ 28,865 $ 18,137 $ 48,094
Net income (loss) 37,224 17,854 (8,243)
Excess premium, preferred redemption -- -- (798)
Dividends declared on capital stock:
Common stock, $1.50, $-0-, and
$1.60 per share, respectively (16,578) -- (16,937)
Cumulative preferred stock:
5%, series A -- -- (9)
6%, series B -- -- (13)
8-7/8%, series C -- -- (23)
8-3/4%, series F -- -- (22)
8-3/4%, series I -- -- (88)
7.45%, series II (4,470) (4,470) (3,824)
8.50%, series III (2,550) (2,656) --
-------- -------- --------
Balance, at end of year $ 42,491 $ 28,865 $ 18,137
======== ======== ========
The accompanying notes are an integral part of these consolidated
statements.
</TABLE>
<PAGE>
Page 56
<TABLE>
WASHINGTON NATURAL GAS COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF PREMIUM ON COMMON STOCK
<CAPTION>
Year Ended September 30,
--------------------------------
1996 1995 1994
-------- -------- --------
(in thousands)
<S> <C> <C> <C>
Balance, at beginning of year $167,752 $163,978 $161,618
Excess of cost over par value of
preferred stock reacquired -- -- (331)
Excess of purchase price over par value
of shares of common stock issued under
the parent company's Dividend
Reinvestment and Stock Purchase Plan 2,738 3,659 4,507
Excess of purchase price over par value
of shares of common stock issued under
the parent company's Employee Stock
Purchase Plan 274 288 350
Common and preferred stock expense (39) (173) (2,166)
-------- -------- --------
Balance, at end of year $170,725 $167,752 $163,978
======== ======== ========
The accompanying notes are an integral part of these consolidated statements.
</TABLE>
<PAGE>
Page 57
<TABLE>
WASHINGTON NATURAL GAS COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<CAPTION>
Year Ended September 30,
---------------------------------
1996 1995 1994
-------- -------- --------
(in thousands)
<S> <C> <C> <C>
Cash flow provided by (used in) operating
activities:
Net income (loss) $ 37,224 $ 17,854 $ (8,243)
-------- -------- --------
Adjustments to reconcile net income (loss)
to net cash provided by operating
activities:
Depreciation and amortization 35,752 33,432 31,293
Provision for uncollectible
accounts receivable 1,181 1,151 2,406
Federal income tax - deferred 12,405 8,534 (7,480)
Changes in:
Federal income tax - current 6,451 -- 573
Accounts receivable (4,508) (4,987) 34,966
Environmental recoveries
(expenditures), net 109 24,210 (11,808)
Purchased gas adjustment 25,814 36,815 2,608
Accounts payable (10,417) 6,538 18,494
Materials and supplies 6,907 (4,346) 14,246
Deferred charges (12,293) (2,318) (12,168)
Other assets and liabilities 3,806 (3,927) (23,258)
Other -- -- 2,854
-------- -------- --------
Total adjustments 65,207 95,102 52,726
-------- -------- --------
Net cash provided by operating
activities 102,431 112,956 44,483
-------- -------- --------
Cash flow provided by (used in) investing
activities:
Utility plant additions (91,013) (86,687) (83,158)
Proceeds from asset dispositions 719 412 1,260
-------- -------- --------
Net cash (used in) investing
activities (90,294) (86,275) (81,898)
-------- -------- --------
</TABLE>
<PAGE>
Page 58
<TABLE>
WASHINGTON NATURAL GAS COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Continued)
<CAPTION>
September 30,
---------------------------------
1996 1995 1994
------- ------- -------
(in thousands)
<S> <C> <C> <C>
Cash flow provided by (used in)
financing activities:
Proceeds from issuance of:
Common stock $ 3,620 $ 4,812 $ 6,108
Preferred stock -- -- 87,887
First mortgage bonds 34,470 74,280 --
Changes in receivables and payables
with affiliated companies, net 415 (11,000) (18,713)
Redemptions and repurchases:
Preferred stock -- -- (23,398)
First mortgage bonds (30,140) (85,140) (3,340)
Cash dividend payments:
Common (16,578) -- (16,937)
Preferred (7,020) (6,489) (3,538)
------- ------- -------
Net cash provided by (used in)
financing activities (15,233) (23,537) 28,069
------- ------- -------
Net increase (decrease) in cash and
cash equivalents (3,096) 3,144 (9,346)
Beginning cash and cash equivalents 3,571 427 9,773
------- ------- -------
Ending cash and cash equivalents $ 475 $ 3,571 $ 427
======= ======= =======
Supplemental disclosures of cash
flow information
Cash paid during the year for:
Interest (net of amounts
capitalized) $28,025 $33,892 $29,836
Income taxes $ -- $ -- $ 2,400
The accompanying notes are an integral part of these consolidated statements.
</TABLE>
<PAGE>
Page 59
WASHINGTON ENERGY COMPANY AND SUBSIDIARIES
WASHINGTON NATURAL GAS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Certain information necessary to understand Washington Natural's financial
condition and results of operations is substantially the same as disclosed by
the Company in the following Notes to Consolidated Financial Statements.
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) General
The consolidated financial statements include the accounts of Washington
Energy Company and its wholly-owned subsidiaries, after elimination of
intercompany items and transactions. The Company's subsidiaries are:
1. Washington Natural Gas Company and its wholly-owned
subsidiaries;
2. Washington Energy Services Company;
3. Washington Energy Gas Marketing Company;
4. WECO Finance Company and until June 30, 1996, its wholly-owned
subsidiary;
5. Thermal Energy, Inc., and its wholly-owned subsidiary, and
6. ThermRail, Inc.
The principal business operations of Thermal Energy, Inc. and subsidiary and
ThermRail, Inc. are reported as discontinued operations.
Washington Natural's accounting records are maintained in accordance with GAAP
and with the FERC uniform system of accounts, which has been adopted by the
WUTC.
(b) Reclassifications
Certain amounts in the 1995 and 1994 financial statements have been
reclassified to conform with the 1996 presentation. The two most significant
reclassifications are (1) nonrefundable contributions in aid of construction
are now included as a direct reduction to utility plant and (2) coal and rail
operations are reported as discontinued operations on the income and cash flow
statements.
(c) Utility Plant and Depreciation
Utility plant is stated at the original cost of construction. Costs include
indirect costs such as engineering, supervision, certain taxes and pension and
other benefits. When a depreciable unit of property is retired, the cost is
credited to utility plant and charged to accumulated depreciation together
with the cost of removal, less any salvage. No gain or loss is recognized
upon normal retirement. Substantially all of the property of Washington
Natural is subject to the lien of its first mortgage bond indenture.
Provisions for depreciation of utility plant are determined by applying
straight-line rates to the original cost of the various classifications of
property, adjusted for estimated removal cost and salvage. These rates may be
<PAGE>
Page 60
adjusted prospectively from time to time based upon revised estimates of the
useful lives, removal costs and salvage of the various classes of assets, with
approval of the WUTC. The weighted average depreciation rate used was
approximately 3.6% for 1996 and 3.5% for 1995 and 1994.
(d) Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with a maturity
of three months or less to be cash equivalents.
(e) Materials and Supplies
Materials and supplies are stated at the lower of cost or market and includes
the cost of gas in storage. Cost is determined principally under the weighted
average cost method.
(f) Regulatory Assets and Liabilities
Washington Natural defers certain costs and other liabilities that otherwise
would be charged to expense if it is probable that the WUTC will permit future
recovery of such costs. Differences between the actual cost of Washington
Natural's gas supplies and that currently allowed by the WUTC are deferred and
recovered or repaid through the PGA mechanism. Certain income tax deferrals
are discussed in Note 2. The remainder of these costs is included in
"Deferred charges and other" in the financial statements and is amortized and
recovered in rates as prescribed by the WUTC. At September 30, 1996 and 1995,
such deferred charges totaled $4,589,000 and $4,635,000, respectively. Of the
year-end 1996 balance, $2,763,000 was being amortized and recovered in rates,
with the remainder subject to future regulatory review and approval for
recovery.
(g) Allowance for Funds Used During Construction
The Allowance for Funds Used During Construction ("AFUDC") represents the cost
of both the debt and equity funds used to finance utility plant additions
during the construction period. The AFUDC rate allowed by the WUTC
approximates the Company's weighted average cost of capital determined on a
calendar year basis and was 9.03, 8.68 and 8.72 for 1996, 1995 and 1994,
respectively. The amount of AFUDC recorded varies with the level of
construction work in progress and the AFUDC rate used. AFUDC is capitalized
as a part of the cost of utility plant and is reflected in the income
statement as Other Income. AFUDC capitalized was $600,000, $660,000 and
$400,000 for 1996, 1995 and 1994, respectively.
(h) Allowance for Funds Used to Conserve Energy
The WUTC has authorized the Company to capitalize, as part of its energy
conservation regulatory assets, related carrying costs calculated at a rate
established by the WUTC. This Allowance for Funds Used to Conserve Energy
("AFUCE") is reflected in the income statement as Other Income in the amounts
of $119,000, $67,000 and $53,000 in 1996, 1995 and 1994, respectively.
(i) Unbilled Gas Revenues
Washington Natural accrues revenues for gas delivered but not billed to
customers based on estimated usage from the meter reading dates to month end.
<PAGE>
Page 61
(j) Off-System Sales and Capacity Release
Washington Natural has been selling excess gas supplies and entering into gas
supply exchanges with third parties outside of its distribution area since
1992. Washington Natural began releasing to third parties excess interstate
gas pipeline capacity and gas storage rights on a short-term basis in 1993 and
1994, respectively. Washington Natural contracts for firm gas supplies and
holds firm transportation and storage capacity sufficient to meet the expected
peak winter demand for gas for space heating by its firm customers. Due to
the variability in weather and other factors, however, Washington Natural
holds contractual rights to gas supplies and transportation and storage
capacity in excess of its immediate requirements to serve firm customers on
its distribution system for much of the year which, therefore, are available
for third-party gas sales, exchanges and capacity releases. The net proceeds
from such activities are accounted for as reductions in the cost of purchased
gas and passed on to customers through the PGA mechanism, with no impact on
net income. As a result, Washington Natural does not reflect sales revenue or
associated cost of sales for these transactions in its income statement. The
net proceeds from these activities were $10,711,500, $7,374,000 and $3,997,000
for 1996, 1995 and 1994, respectively.
(k) New Accounting Pronouncements
SFAS No. 125, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities" was issued in June 1996. This pronouncement
provides consistent standards for distinguishing sales of financial assets
from transactions that are secured borrowings. A company is required to
recognize such transactions as sales when control has been surrendered and the
transferred assets are presumptively isolated beyond the reach of the
transferor and its creditors. This standard will be effective for
transactions occuring after December 31, 1996. When effective this
pronouncement will impact the Company's accounting for sales of merchandise
and gas accounts receivable. Under this pronouncement, all such receivable
sales under the Company's current sales agreement occuring after December 31,
1996 would be accounted for as secured borrowings.
SFAS No. 123, "Accounting for Stock-Based Compensation," is effective for
fiscal years beginning after December 15, 1995. SFAS No. 123 encourages, but
does not require, companies to account for stock compensation awards based on
their estimated fair value on the grant date. However, if companies choose
not to account for such compensation on a fair value basis, they are required
to disclose in a footnote to the financial statements any effect on net income
that would have resulted had the company recognized expense for such
compensation. The Company has not yet adopted SFAS No. 123, but as indicated
in Note 3, due to the limited number of shares issued under the Company's
stock plans on an annual basis, the amount of the compensation expense which
would be required to be expensed or disclosed, is not material.
(l) Accounting Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amount 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.
<PAGE>
Page 62
(2) INCOME TAXES
(a) General
The Company and all of its subsidiaries file a consolidated federal income tax
return. Current and deferred taxes are recorded by each member of the
consolidated group as if each were a stand-alone entity using the consolidated
rate. Under an informal tax sharing arrangement, each member of the group
pays or is paid for the current tax liability or benefit it generates when
paid or realized by the consolidated group.
The Company's consolidated income tax provision is as follows (in thousands):
<TABLE>
<CAPTION>
Year Ended September 30,
-------------------------------
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Charged (credited) to operations:
Current $ 1,838 $ 75 $ (7,291)
Deferred 14,267 6,212 1,375
Investment tax credit (873) (780) (781)
-------- -------- --------
Total charged (credited) to operations 15,232 5,507 (6,697)
Charged (credited) to other income
and expense, net 1,253 (10,366) 22,502
Credited to discontinued operations (986) (14,320) (500)
-------- -------- --------
Total income tax expense (benefit) $ 15,499 $(19,179) $ 15,305
======== ======== ========
</TABLE>
The amount credited to "Other income and expense" in 1995 consists primarily
of the deferred taxes associated with the write downs of the Company's
investments in Cabot (see Note 12). The amount charged to "Other income
(expense)" in 1994 consists primarily of deferred income taxes provided on the
Cabot merger.
Washington Natural's consolidated income tax provision is as follows (in
thousands):
<TABLE>
<CAPTION>
Year Ended September 30,
------------------------------
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
Charged (credited) to operations:
Current $ 6,589 $ 336 $(4,344)
Deferred 13,278 8,975 1,212
Investment tax credit (873) (780) (781)
------- ------- -------
Total charged (credited) to operations 18,994 8,531 (3,913)
Charged to other income and expense, net 222 (336) (2,078)
------- ------- -------
Total income tax expense (benefit) $19,216 $ 8,195 $(5,991)
======= ======= =======
</TABLE>
<PAGE>
Page 63
The temporary differences and associated tax assets and liabilities comprising
the Company's consolidated net deferred tax liability at September 30 are as
follows (in thousands):
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
Deferred tax liabilities:
Property basis and accelerated depreciation $ 85,432 $ 78,521
Investment in Cabot stock 13,650 14,826
Environmental remediation receivable 3,557 1,986
Regulatory tax asset net of regulatory tax
liability 2,948 2,306
Demand side management costs and other
deferred utility expenses 1,606 1,610
Other 755 885
-------- --------
Total deferred tax liabilities 107,948 100,134
-------- --------
Deferred tax assets:
Net operating loss carry-forwards 3,212 18,625
Alternative minimum tax credits 15,187 5,813
Reserves for future losses 3,327 4,255
Investment tax credit 2,968 3,752
Contributions in aid of construction 1,867 3,273
Coal development activities - 956
Compensation related differences 3,141 2,892
Environmental remediation liability 2,357 1,602
Other 5,433 3,223
-------- --------
Total deferred tax assets 37,492 44,391
-------- --------
Net deferred tax liability 70,456 55,743
Less amount classified as current asset 4,663 3,707
-------- --------
Net noncurrent deferred tax liability $ 75,119 $ 59,450
======== ========
</TABLE>
<PAGE>
Page 64
The temporary differences and associated tax assets and liabilities comprising
Washington Natural's net deferred tax liability at September 30 are as follows
(in thousands):
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
Deferred tax liabilities:
Property basis and accelerated depreciation $ 85,847 $ 78,521
Environmental remediation receivable 3,557 1,986
Regulatory tax asset net of regulatory
tax liability 2,948 2,306
Demand side management costs and other
deferred utility expenses 1,606 1,610
Other 910 586
-------- --------
Total deferred tax liabilities 94,868 85,009
-------- --------
Deferred tax assets:
Net operating loss carry-forwards 1,848 3,004
Alternative minimum tax credits 1,047 3,513
Investment tax credit 2,968 3,752
Contributions in aid of construction 1,867 3,273
Compensation related differences 3,050 2,892
Environmental remediation liability 2,357 1,602
Other deferred tax assets 2,334 854
-------- --------
Total deferred tax asset 15,471 18,890
-------- --------
Net deferred tax liability 79,397 66,119
Less amount classified as current asset 4,663 3,707
-------- --------
Net noncurrent deferred tax liability $ 84,060 $ 69,826
======== ========
</TABLE>
At September 30, 1996, the following consolidated carry-forwards are available
to reduce the Company's future income tax liability (in thousands):
<TABLE>
<CAPTION>
Carry-
forwards Expiration
-------- ----------
<C> <C> <C>
1994 net operating loss $ 9,176 2009
=======
Alternative minimum tax credits $15,187 Unlimited
=======
</TABLE>
The Company has determined it is more likely than not that the deferred tax
assets will be realized and, therefore, a valuation allowance is not required.
The alternative minimum tax credits can be used in the future to reduce the
Company's regular tax liability in excess of its minimum tax liability. The
Company has certain deferred tax assets which may be subject to restrictions
following the proposed merger with Puget. However, the impact of these
restrictions would not be material.
<PAGE>
Page 65
(b) Flow-Through Accounting
In accordance with a directive from the WUTC, Washington Natural uses "flow-
through accounting," wherein no charge is made currently in the income
statement for certain income tax payments deferred as allowed by the Internal
Revenue Service. However, as required by SFAS No. 109, Accounting for Income
Taxes, a deferred tax liability or asset has been recorded for the amount of
income tax payments deferred. A regulatory tax asset or liability has been
recorded to reflect the expected recovery or refund through adjustment of
customers' rates when these taxes become payable or receivable in future
periods. Based on the WUTC's past decisions and policies, it is management's
opinion that the WUTC will allow Washington Natural full recovery in its rates
of the increased future tax expense resulting from the use of this accounting
method.
(c) Reconciliation of Statutory Income Tax Rate to Effective Rate
<TABLE>
WASHINGTON ENERGY COMPANY AND SUBSIDIARIES
<CAPTION>
Year Ended September 30,
---------------------------
1996 1995 1994
------ ------ ------
<S> <C> <C> <C>
Statutory income tax rate 35.0% (35.0)% (35.0)%
Excess of book over tax depreciation
not deferred 2.8 0.8 3.4
Accelerated benefit on early retirement
of depreciable assets (2.9) (1.4) (2.8)
Tax credit on gas produced from tight
sands formations -- -- 4.9
Amortization of investment tax credit (2.3) (1.3) (2.7)
Dividends-minority interest 6.4 4.1 4.8
Cabot merger and related reserves -- -- 83.3
Provision for tax contingencies 2.3 2.0 --
Dividends received deduction (.7) (1.5) (1.2)
Other, net (.5) .5 (0.6)
----- ----- ----
Effective income tax rate 40.1% (31.8)% 54.1%
===== ===== ====
</TABLE>
<PAGE>
Page 66
<TABLE>
WASHINGTON NATURAL GAS COMPANY AND SUBSIDIARIES
<CAPTION>
Year Ended September 30,
---------------------------
1996 1995 1994
------ ------ ------
<S> <C> <C> <C>
Statutory income tax rate 35.0% 35.0% (35.0)%
Excess of book over tax depreciation
not deferred 1.9 1.9 7.0
Accelerated benefit on early retirement
of depreciable assets (2.0) (3.2) (5.7)
Amortization of investment tax credit (1.6) (3.0) (5.5)
Other, net .7 0.8 (2.9)
---- ---- -----
Effective income tax rate 34.0% 31.5% (42.1)%
==== ==== =====
</TABLE>
The investment tax credit was repealed by Congress in 1986. Credits earned
previously are being credited to income over the lives of the property giving
rise to the credits.
(3) COMMON STOCK:
(a) Dividend Reinvestment and Stock Purchase Plan
This plan, available to all holders of record of the Company's common stock,
provides for reinvestment of dividends at 100% of the average of the high and
low prices of Washington Energy's common stock on each dividend payment date.
The plan also provides for the purchase of common stock with optional cash
payments not to exceed $5,000 per quarter at 100% of the average price on the
dividend payment date.
(b) Employee Stock Purchase Plan
The Company has an employee stock purchase plan, under which options are
granted to eligible employees who elect to participate in the plan on January
1st and July 1st of each year. Participants are allowed to exercise those
options six months later to the extent of payroll deductions or cash payments
accumulated during that six-month period. The option price under the plan is
90% of the fair market value of the common stock at the grant date, or 100% of
the fair market value at the exercise date, whichever is less; but in no event
less than the $5.00 par value of the common stock.
(c) Incentive Stock Option Plans
Incentive stock options have been granted under two separate plans. One plan
was approved in February 1984 ("the Original Plan") which expired in September
1993 and one was approved in February 1994 (the "New Plan"). Both plans
grant, to executives and key employees, options to purchase shares of
Washington Energy's common stock at a price not less than 100% of the market
value of such shares at the time of granting the option. At September 30,
1996, there were 117,003 and 795,277 shares of the Company's common stock
authorized but unissued under the Original Plan and the New Plan,
respectively.
<PAGE>
Page 67
At the discretion of the Compensation and Benefits Committee of the Board of
Directors, any option granted may include a stock appreciation right ("SAR").
Any optionee exercising a stock option loses the corresponding SAR as to that
option and vice versa. SARs have been granted in tandem with all options
outstanding under the Original Plan and the New Plan. The exercise of SARS
and the forfeitures of options do not decrease the amount of shares reserved
for issuance under the New Plan.
<TABLE>
<CAPTION>
Option Grant Price
----------------------------------------------
$20.06 to
$15.06 $21.38 $18.38 $13.38 $18.56 Total
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Options/SARS outstand-
ing at September 30,
1993 2,100 321,466 -- -- -- 323,566
Grants -- -- 152,800 -- -- 152,800
Exercises (700) -- -- -- -- (700)
Forfeitures (1,400) (116,800) (26,500) -- -- (144,700)
------- ------- ------- ------- ------- -------
Options/SARS outstand-
ing at September 30,
1994 -- 204,666 126,300 -- -- 330,966
Grants -- -- -- 191,375 -- 191,375
Exercises -- -- -- (11,500) -- (11,500)
Forfeitures -- (38,700) (20,700) (15,750) -- (75,150)
------- ------- ------- ------- ------- -------
Options/SARS outstand-
ing at September 30,
1995 -- 165,966 105,600 164,125 -- 435,691
Grants -- -- -- -- 88,000 88,000
Exercises -- -- (9,000) (22,636) (8,700) (40,336)
Forfeitures -- (48,963) (8,400) (10,028) (500) (67,891)
Options/SARS outstand-
ing at September 30,
1996 -- 117,003 88,200 131,461 78,800 415,464
======= ======= ======= ======= ======= =======
</TABLE>
Unexercised options at September 30, 1996 do not result in a material dilution
of earnings per common share.
(d) Performance Share Plan
A performance share plan was established October 1, 1981, which provided for
the annual award of performance units to designated officers and other key
executives, and for payment of the awards to be contingent upon attainment of
future performance objectives of the Company over the succeeding four-year
period. Generally, under the Company's current policy, at least 50% of any
payments pursuant to the plan are to be made in common stock of the Company
and the balance of the payments are to be made in cash or shares of common
stock. No performance units were awarded under the plan in 1995 or in 1996,
and no such awards are anticipated for 1997. Due to the losses sustained in
1994 and 1995,
<PAGE>
Page 68
the minimum performance objectives of the plan relative to
performance units outstanding at September 30, 1996, could not be met. In the
event of a change in control, however, all participants would receive payment
for 100% of outstanding awards. The aggregate number of performance units for
which such payments would be made as a result of a change in control prior to
September 30, 1997 would be 19,298 units. See Note 16 regarding the proposed
merger with Puget.
(e) Directors' Stock Bonus Plan
A directors' stock bonus plan was approved by the shareholders in February
1991. The plan provides for annual awards of 200 shares of Washington Energy
common stock to each outside director, and permits the director to defer
issuance of the shares until after the director leaves the Board of Directors.
The director receives additional awards equivalent to the dividends reinvested
on the awarded but unissued shares. During 1996, 1995 and 1994, 1,400 shares
were awarded under the plan. At September 30, 1996, 9,735 shares were awarded
but not issued under the plan.
(f) Summary Table of Stock Plans
Shares issued and available for future issuance pursuant to the dividend
reinvestment and other stock plans are summarized below:
<TABLE>
<CAPTION>
Shares
Reserved for
Issuance at
September 30, Shares Issue
-------------- -----------------------------
1996 1996 1995 1994
------------ -------- -------- --------
<S> <C> <C> <C> <C>
Dividend reinvestment and
stock purchase plan 611,091 172,578 324,839 363,879
Employee stock purchase plan 8,628 21,881 29,773 27,055
Incentive stock option plan 912,280 3,583 1,140 700
Performance share plan 774,324 -- -- 10,489
Directors' stock bonus plan 37,130 217 204 190
--------- ------- ------- -------
Total 2,343,453 198,259 355,956 402,313
========= ======= ======= =======
</TABLE>
The increase in common equity resulting from issuance of shares under the
various plans described above was $3,686,000 in 1996, $4,825,000 in 1995, and
$6,342,000 in 1994.
(g) Puget Option
In connection with the execution of an Agreement and Plan of Merger (the
"Merger Agreement"), dated as of October 18, 1995 by and among Washington
Energy, Washington Natural and Puget, Washington Energy granted to Puget an
option to purchase up to 19.9% of Washington Energy's common stock at an
exercise price of $20.00 per share (the "Puget Option") (See Note 16 regarding
proposed merger). The Puget Option becomes exercisable under certain
circumstances if the Merger Agreement becomes terminable. The Puget Option
further provides that in the event it becomes exercisable, Puget may require
Washington Energy to repurchase
<PAGE>
Page 69
the Puget Option or any previously purchased
shares acquired under such option at a price based on or derived from the
market price or a subsequent third-party offer on the day of exercise. The
Puget Option terminates on the earlier of 1) the effective time of the merger
under the Merger Agreement, 2) the termination of the Merger Agreement
pursuant to its terms (other than a termination relating to or following
certain specified business combinations), or 3) 180 days following any
termination of the Merger Agreement relating to or following certain specified
business combinations.
(4) DIVIDEND RESTRICTION
There are no restrictions on payment of dividends by the Company, but as a
practical matter, its long-term ability to pay dividends is limited by the
restrictions on dividend payments in the first mortgage bond indenture of
Washington Natural. Washington Natural did not pay dividends to Washington
Energy during the period April 1994 to February 1996 due to these
restrictions. During the current year, Washington Natural paid common
dividends totaling $16,578,000 to Washington Energy. At September 30, 1996,
Washington Natural had retained earnings of $1,123,000 in excess of the
restriction level specified in the most restrictive indenture convenant.
(5) PREFERRED STOCK
On September 15, 1994, Washington Natural sold 1,200,000 shares of 8.50%
cumulative preferred stock, $25 par value, to the public for net proceeds of
$29,105,000. The preferred stock is redeemable on or after September 1, 1999
at par value and has no sinking-fund requirements.
In November 1993, Washington Natural sold 2,400,000 shares of 7.45% cumulative
preferred stock, $25 par value, to the public following the early redemption
of all its other preferred stock series. The sale netted proceeds to Wash
ington Natural of $58,782,000. The preferred stock is redeemable on or after
November 1, 2003, at par value and has no sinking-fund requirements.
In November 1993, the Company and Washington Natural redeemed early all
previously outstanding preferred stock. A total of 585,480 shares, in five
series, with an aggregate par value of $22,648,000 was redeemed at an average
premium of 2.4%.
(6) LONG-TERM DEBT
The total principal amount of Washington Natural's first mortgage bonds
authorized by the indenture dated April 1, 1957, as amended and supplemented
is not limited except as restricted by the provisions of the indenture and
except as may be limited by law.
The Company's sinking fund requirements and long-term debt maturities for the
next five years ending September 30 are: 1997, $140,000; 1998, $13,920,000;
1999, $10,000,000; 2000, $25,000,000; and 2001, $19,000,000. The $30,000,000
of 10-1/4% bonds due in 1997 were called early and redeemed with a premium of
1.14% in December 1995. The redemption was funded by the issuance of
additional long-term debt.
<PAGE>
Page 70
(7) OTHER FINANCING ARRANGEMENTS
On March 31, 1995, the Company entered into a new credit agreement with a
lending group composed of nine commercial banks and terminated its prior $150
million revolving credit agreement. The new agreement provides for a
committed revolving credit facility of up to $250 million for a three-year
period. Advances bear interest at one of several, optional, market-based
rates. The agreement requires payment of a commitment fee on the average
unused balance of the facility. The fee is based on the Company's commercial
paper rating and is currently 1/4 of 1% per annum. This credit agreement is
utilized primarily to provide credit support for various uncommitted, short-
term financing arrangements. No advances were outstanding under this facility
at September 30, 1996.
The terms of this credit agreement limit the total debt of Washington Energy
and its subsidiaries to 65% of total capitalization as determined on a
quarterly basis. For purposes of the agreement, debt consists of all borrowed
funds, both short and long term, and total capitalization consists of total
debt plus consolidated common stock equity and preferred stock equity of
Washington Energy, and of Washington Natural to the extent it is held by third
parties. At September 30, 1996, consolidated debt was 64.4% of total
capitalization. Because the first quarter of the year generates substantial
positive operating cash flows, the Company does not expect to exceed the
limitation prior to the anticipated closing of the merger with Puget.
The Company has commercial paper programs available through two sources
totaling $250 million. The Company can borrow up to $40 million at commercial
paper rates through a credit program, credit-enhanced by a commercial bank.
Aggregate borrowings under the commercial paper and enhanced credit facilities
are limited to $250 million. At September 30, 1996, $138 million in
commercial paper was outstanding and $40 million was borrowed under the
enhanced credit facility.
The Company also has an uncommitted short-term credit arrangement with a
commercial bank whereby it may borrow up to $25 million at short-term market
rates. At September 30, 1996, no borrowings were outstanding under this
arrangement.
Washington Natural has an agreement with Cooperative Receivables Corporation
("CRC") whereby it may sell to CRC up to $90 million principal amount of
undivided interests in merchandise and gas accounts receivable at face value.
With the transfer of the merchandise business to Services in 1994, new
merchandise receivables are no longer being sold to CRC. At September 30,
1996, $13 million of outstanding merchandise and gas receivables had been sold
under the agreement, and $9.7 million of eligible receivables had not been
sold under the arrangement. See Note 1, regarding the change in accounting
treatment for receivable sales under this agreement. Absent completion of the
merger with Puget by March 31, 1997, the Company may be in violation of the
65% debt limitation which would constitute an event of default under the
credit agreement due to implementation SFAS No. 125 on January 1, 1997. Sales
of receivables under the Company's existing program after this date must be
accounted for as secured borrowings which will increase the level of debt used
in the calculation of this covenant. In the short term, the default could be
cured by obtaining waivers from the bank group or by restructuring the
receivable sales program to qualify for sales treatment under SFAS No. 125.
Even with the restructuring of the receivable sales program, the Company may
be in default at September 30, 1997 due to seasonal borrowing requirements and
funding of planned capital expenditures. Absent completion of the merger with
Puget, an increase in the equity
<PAGE>
Page 71
component or a decrease in the debt component of the balance sheet would be
required. This may be accomplished with the issuance of additional equity.
The composite interest rate at September 30, 1996, 1995 and 1994, on
outstanding short-term borrowings, including the impact of interest rate
swaps, was 6.3%, 7.1% and 6.3%, respectively. During the past three years,
short-term borrowing levels and average interest rates, including the impact
of interest rate swaps, were as follows:
<TABLE>
<CAPTION>
1996 1995 1994
------ ------ ------
<S> <C> <C> <C>
Maximum outstanding (in millions) $204.9 $242.4 $174.3
Average outstanding (in millions) $146.0 $130.0 $115.5
Weighted average rate 7.3% 7.7% 6.1%
</TABLE>
The Company has, on occasion, entered into interest rate swap agreements to
reduce the impact of changes in interest rates on portions of its floating-
rate, short-term debt. The one agreement outstanding at September 30, 1996
effectively changes the Company's interest rate on outstanding commercial
paper to 9.64% on a notional principal amount of $16.5 million expiring March
31, 2000.
The Company leases the majority of its motor vehicle fleet, certain computer
and telecommunications equipment and office space at four locations, which are
accounted for as operating leases. Annual rental expense for 1996, 1995 and
1994 was $3,680,000, $4,098,000 and $4,050,000, respectively. Minimum annual
lease payments for the next five years and thereafter are: 1997, $2,689,642;
1998, $2,041,197; 1999, $1,244,543; 2000, $1,125,495; 2001, $807,322, and
thereafter, $18,234,000.
(8) PENSION AND RETIREMENT BENEFITS
The Company has a defined benefit pension plan (the "Plan") for the benefit of
all regular employees who have attained 21 years of age and have completed one
year of service. Benefits are based on annual compensation and length of
service. The Company's policy is to fund the Plan annually at the level
necessary to provide benefits attributable to service to date and for benefits
expected to be earned in the future.
As required by SFAS No. 87, the Company follows the projected unit credit
method for determining pension expense for financial reporting purposes.
Application of this accounting method on October 1, 1987, resulted in a
transition gain (excess of Plan assets over projected benefit obligations) of
$14,584,000, which is being amortized over 18 years. The entry-age normal
actuarial cost method continues to be used for funding purposes.
<PAGE>
Page 72
The following tables set forth the Plan's funded status and the pension
liability recognized in the consolidated financial statements (in thousands):
<TABLE>
<CAPTION>
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
Actuarial present value of
accumulated benefit obligations:
Vested $45,405 $39,319 $36,828
Non-vested 524 599 732
------- ------- -------
Total $45,929 $39,918 $37,560
======= ======= =======
Projected benefit obligations for
service rendered to date $55,540 $49,819 $48,279
Plan assets at fair value, primarily
marketable stocks, bonds and short-
term investments 71,748 64,248 57,812
------- ------- -------
Plan assets in excess of projected
benefit obligations 16,208 14,429 9,533
Unrecognized amounts:
Prior service cost 1,418 1,568 1,717
Net gains (12,488) (10,770) (4,683)
Net transition gain (7,293) (8,103) (8,913)
------- ------- -------
Net pension liability included in
the balance sheet $(2,155) $(2,876) $(2,346)
======= ======= =======
Net pension cost includes:
Service cost of benefits earned
during the period $2,116 $ 2,163 $ 2,577
Interest cost on projected benefit
obligations 3,791 3,568 3,238
Actual return on Plan assets (9,483) (8,704) (1,870)
Amortization of net transition gain (810) (810) (810)
Unrecognized prior service cost 149 149 165
Amortization of deferred gains (598) (275) (456)
Current asset gain (loss) deferred 4,113 4,440 (2,376)
------- ------- -------
Net pension cost (income) $ (722) $ 531 $ 468
======= ======= =======
Assumptions used in the calculations:
Weighted-average discount rate 7 1/2% 7 1/2% 7 1/2%
Long-term rate-of-return on assets 8 1/2% 7 1/2% 7 1/2%
Compensation increase 5 1/2% 6% 6%
</TABLE>
The Company also has entered into individual contracts with its officers and
those of its subsidiaries to provide pension benefits in addition to those
provided by the Plan. The contracts, collectively referred to as the
supplemental executive retirement contracts ("SERC") provide benefits based on
annual compensation which are payable from general corporate funds. As a
long-term funding mechanism, the Company purchases life insurance policies on
its officers sufficient to pay expected future benefits.
<PAGE>
Page 73
In 1994, the Company initially recorded the liability for future benefit
obligations of the SERC and the asset representing the cash surrender value of
life insurance policies purchased to fund the SERC. For accounting and
disclosure purposes, neither the net death benefit from the life insurance
policies of $45,600,000 nor the policies' net cash surrender value of
$6,034,000 at September 30, 1996 qualify as plan assets since the proceeds of
the policies are not segregated or formally restricted to funding the SERC.
The following tables set forth the SERC's funded status and the net liability
recognized in the consolidated financial statements (in thousands):
<TABLE>
<CAPTION>
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Actuarial present value of accumulated
benefit obligations:
Vested $ 4,846 $ 4,552 $ 4,005
Non-vested 1,123 813 716
------- ------- -------
Total $ 5,969 $ 5,365 $ 4,721
======= ======= =======
Projected benefit obligations for service
rendered to date $5,969 $ 5,365 $ 4,721
Assets segregated for SERC -- -- --
------- ------- -------
Assets less than projected benefit obligations (5,969) (5,365) (4,721)
Unrecognized amounts:
Prior service cost 4,252 4,570 4,451
Gains (443) (745) (654)
------- ------- -------
Pension liability net of pension asset
included in the balance sheet $(2,160) $(1,540) $ (924)
======= ======= =======
Net pension cost includes:
Service cost of benefits earned during
the period $ 313 $ 254 $ 322
Interest cost on projected benefit
obligations 415 362 383
Unrecognized prior service cost 303 248 289
------- ------- -------
Net pension cost $ 1,031 $ 864 $ 994
======= ======= =======
Assumptions used in the calculations:
Weighted-average discount rate 7 1/2% 7 1/2% 7 1/2%
Compensation increase 4 1/2% 4 1/2% 4 1/2%
</TABLE>
The Company does not offer any significant post-retirement benefits other than
pensions.
<PAGE>
Page 74
(9) LIABILITY FOR ENVIRONMENTAL MATTERS
(a) General
The distribution of natural gas by Washington Natural involves certain
controllable environmental risks. Washington Natural conducts its natural gas
distribution business using accepted industry practices and procedures.
Washington Natural is not aware of any material environmental exposures
related to its current natural gas distribution activities. However,
Washington Natural, as the former operator of, or the successor to a former
operator of, several manufactured gas plants operating in western Washington
prior to 1957, has several existing environmental exposures.
Former manufactured gas plant sites in the following areas are currently
undergoing investigation, remedial actions or monitoring actions relating to
environmental contamination: 1) Everett, Washington; 2) "Gas Works Park" in
Seattle; 3) "Tacoma Upland Source Control Site" in Tacoma, Washington; 4)
Chehalis, Washington; and 5) the "Tideflats" area of Tacoma, Washington.
The financial statements reflect actual costs to date and management's
estimates of the costs to be incurred, based on known and available
information with regard to the extent of contamination and the potential
methods of cleanup or containment believed to be feasible at each site.
Washington Natural is continually evaluating the progress at each site and the
cost estimates will be revised, if necessary, as new information is available.
The financial statements reflect receivables for the expected recovery, from
third parties, of substantially all of the remediation costs deferred pursuant
to Washington Utilities and Transportation Commission authorization.
(b) Everett
Washington Natural is conducting an independent remedial action at the Everett
site. The remedial investigation study and the feasibility study to determine
the appropriate method of remediation or containment were completed in August
1995 and June 1996, respectively. Washington Natural is pursuing a
containment approach as the appropriate method of remediation. This analysis
indicated that the reserve for investigation and remediation costs of
$3,250,000, previously established, is currently sufficient to cover the
expected costs at the site, exclusive of remediation costs, if any, which may
arise in connection with the adjacent Snohomish River. Investigation and
feasibility costs of $463,000 have been incurred through September 30, 1996.
The Everett site was previously owned and operated by other companies who are
potentially liable parties ("PLPs") for the remediation of the site. The cost
estimate reflects the total cost expected to remediate the site before
contributions by other PLPs.
(c) Gas Works Park
Washington Natural sold the site of a former manufactured gas plant at Lake
Union, now known as "Gas Works Park," to the City of Seattle in 1962. The
City of Seattle, in a letter dated February 24, 1995, requested that
Washington Natural participate in a cleanup of this site. Washington Natural
believes that the contract, by which it conveyed the land to the City of
Seattle, presents substantial defenses that mitigate its exposure for
environmental remediation costs which may be incurred at this site.
<PAGE>
Page 75
On July 15, 1996, the City of Seattle completed a preliminary study that
reviewed the range of remediation alternatives at the site. This study
estimated that the costs of the various alternatives were in the range of $4.9
million to $8.6 million exclusive of any remediation costs which may arise in
connection with the adjacent Lake Union. Washington Natural and the City of
Seattle are negotiating an Agreed Order with the Washington State Department
of Ecology, regarding participation in a more definitive investigation of
remedial alternatives at the site. Washington Natural anticipates that in
order to resolve this matter with the City of Seattle, the potential cost to
Washington Natural may approximate $3,000,000. During the fourth quarter of
1996, the reserve for the potential resolution of this matter with the City of
Seattle was increased from $1,000,000 to $3,000,000.
(d) Tacoma Upland Source Control and Thea Foss Waterway
Washington Natural was the former owner of land, located upland from the Thea
Foss Waterway in Tacoma, Washington where a manufactured gas plant (MGP) was
operated by several other companies. Washington Natural acquired this site
("Tacoma Upland Source Control Site") after the manufactured gas plant was
closed. The site was later sold in parcels to several buyers. The City of
Tacoma, the Washington State Department of Transportation and two former
operators of the plant and Washington Natural as a former owner have been
designated as PLPs at this site. In May 1996, a consultant to the PLPs
estimated the cost of remediating the Tacoma Upland Source Control Site to be
approximately $4,000,000, exclusive of any remediation costs which may arise
in connection with the adjacent Thea Foss Waterway. Because there are
multiple PLPs, Washington Natural believes, based on currently available
information, that its maximum exposure is approximately $700,000, which has
been recorded as a liability.
The City of Tacoma has undertaken an investigation study of contamination in
the Thea Foss Waterway. The extent of the contamination related to possible
MGP operation in the waterway is not currently known and the impact, if any,
on the Company and Washington Natural cannot be currently determined.
(e) Chehalis
The Chehalis site has been undergoing independent remedial actions since
September 1992. As of the fall of 1995, Washington Natural had completed
source control and installed groundwater monitoring wells. Washington Natural
is currently compiling seasonal groundwater data, which to date indicates only
low levels of contamination. In 1997, Washington Natural expects to complete
groundwater monitoring at the site, at which time a determination will be made
as to what, if any, additional remedial measures are required. As of
September 30, 1996, the financial statements include a reserve of $283,000,
which is sufficient to cover remaining costs at the site, assuming that
further remedial measures are not required.
(f) Tideflats
The remediation activities at the Tideflats site were completed as of July 1995,
and confirmed by the U.S. Environmental Protection Agency ("EPA") in a letter
dated September 28, 1995. The remediation activities consisted of a site
excavation pursuant to the Comprehensive Environmental Response, Compensation
and Liability Act under EPA management and oversight whereby contaminated soils
were removed, treated and stockpiled on the site. Monitoring equipment has been
<PAGE>
Page 76
installed at the site. Ongoing monitoring and
maintenance costs are being expensed as incurred and are not material.
In June 1991, Washington Natural filed a lawsuit in Washington State Superior
Court, King County, Washington ("Superior Court"), against certain insurance
companies that provided insurance applicable to the Tideflats site at various
times dating back to the 1940s. On June 10, 1994, the Superior Court entered
final judgment in favor of Washington Natural. Under the terms of the final
judgment, Washington Natural was entitled to collect its present and future
uncompensated reasonable and necessary costs in remediating the site from the
policies of certain insurer defendants in the action. During 1995, Washington
Natural settled its lawsuit with the insurance carriers in consideration of
their dismissal of the appeal of the Superior Court judgment regarding
coverage of the Tideflats remediation costs. In September 1995, Washington
Natural received approximately $29,000,000 in final settlement of all
remaining claims against insurance carriers regarding this site. As a result
of this settlement and amounts previously received, Washington Natural has
recovered substantially all the remediation costs which had been deferred.
(g) Expected Recoveries
Washington Natural's financial statements as of September 30, 1996, include
environmental receivables totaling $10,164,000 primarily for expected
recoveries from insurance carriers, based upon the successful litigation
against its insurers regarding the Tideflats site, and other PLPs. Although
the factual situations at the other sites differ in some respects from the
factual situation at the Tideflats site, Washington Natural believes, based on
the precedents established in the Tideflats case and discussion with legal
counsel, that it is probable that it has insurance coverage sufficient to
recover costs not recovered from other PLPs. In the event that recoveries
from insurance and other PLPs are not sufficient, Washington Natural Gas,
under an agreement with the WUTC, will seek recovery of such unreimbursed
costs in future customer rates.
Based on all known facts and analyses, the Company and Washington Natural
believe it is not likely that the identified environmental liabilities will
result in a material adverse impact on the Company's or Washington Natural's
financial position, operating results or cash flow trends.
(10) LITIGATION
(a) Alleged Securities Violations
A class-action lawsuit was filed against Washington Energy and two of its
officers, one of whom has subsequently retired (collectively, "the
Defendants"), in U.S. District Court, Western District of Washington
("District Court"), in February 1994, alleging violations of state and federal
securities act provisions and associated violations of Washington state law.
The essence of the complaint concerned alleged disclosure violations regarding
the nature or the extent of the financial risk associated with the 1992
utility rate request filing of Washington Natural. In May 1994, the
Defendants filed a motion to dismiss the lawsuit. On July 25, 1994, the
District Court issued an Order Granting Defendants' Motion To Dismiss and
entered a judgment dismissing the action. The plaintiffs appealed to the
Ninth Circuit Court of Appeals ("Court of Appeals"). On May 15, 1996, the
Court of Appeals upheld Washington Natural's motion to dismiss. The
plaintiffs did not pursue a timely appeal to the U.S. Supreme Court, thus
concluding this matter.
<PAGE>
Page 77
(b) Alleged Anti-Trust Violations
On September 6, 1994, Cost Management Services, Inc. ("Cost Management"), a
Mercer Island, Washington, company involved in the purchase and resale of
natural gas, filed an action against Washington Natural in District Court.
Cost Management alleged that Washington Natural monopolized or attempted to
monopolize the market for the sale of natural gas in central western
Washington. Cost Management also alleged Washington Natural failed to charge
its customers in accordance with the prices, terms and conditions set forth in
tariffs filed by Washington Natural with the WUTC and that it wrongfully
interfered with Cost Management's relationships with its customers. Cost
Management sought injunctive relief and damages in an unspecified amount.
Washington Natural filed a motion to dismiss the lawsuit, which was granted on
May 5, 1995. In dismissing Cost Management's action the court ruled that the
state action doctrine provides antitrust immunity for conduct pursuant to a
clearly articulated and actively supervised state policy, where unfettered
competition is replaced with regulation. In dismissing the federal antitrust
claims, the court declined to retain jurisdiction over Cost Management's state
law claims, which were dismissed without prejudice. Cost Management then
filed its state claims in Superior Court. That case was stayed by agreement
of the parties, pending resolution of the federal court action. Cost
Management filed an appeal of the federal court dismissal in the Court of
Appeals. The parties on November 22, 1995 filed briefs with the Court of
Appeals and arguments were presented on August 8, 1996. Subsequent to
September 30, 1996, the Court of Appeals issued a decision which reversed the
District Court's dismissal of the case and remanded the case to the District
Court for rehearing. The Court of Appeals ruled if Cost Management's claims
were assumed to be true for purposes of the Appellate Review, the lower
court's dismissal was improper. No ruling was made on the merits of any of
Cost Management's claims. In the absence of pre-trial discovery, neither the
outcome or the financial exposure from this lawsuit can be predicted at this
time.
(11) 1995 and 1994 RESTRUCTURING AND OTHER CHARGES
In the fourth quarter of 1995, Washington Natural recorded a $3,150,000
($2,000,000 after-tax) charge for severance costs related to a 4% reduction in
its work force, initiated during that quarter and completed in the first
quarter of 1996. The work-force reduction, which affected only salaried
employees, was part of Washington Natural's ongoing organizational change
efforts initiated in 1994. In addition, the Company recorded a charge of
$1,250,000 for federal tax contingencies.
In the third quarter of 1994, the Company recognized $18,308,000 ($11,900,000
after tax) of restructuring and other one-time charges predominantly related
to Washington Natural. Charges totaling $7,097,000 ($4,613,000 after tax)
related to restructuring and downsizing utility operations and included
employee severance costs and expensing of costs previously capitalized in
planning a new headquarters building. The employee severance charge of
$3,500,000 ($2,275,000 after tax) related to a staffing reduction of 12% from
the October 1993 level of 1,480 employees.
The 1994 charges also included provisions by Washington Natural for estimated
environmental investigation, legal and remediation costs associated with
certain former manufactured gas plant sites and the write-off of certain
deferred environmental-related costs. These charges totaled $2,231,000
($1,450,000 after tax). Washington Natural recorded an additional $3,351,000
($2,178,000 after
<PAGE>
Page 78
tax) charge related to supplemental executive retirement
contracts. The combined severance accruals were fully utilized in 1996 and
1995, respectively, although certain severance benefits are being paid over
time under terms of individual severance agreements. During 1996 and 1995,
termination benefits of $3,423,000 and $2,371,000, respectively, were paid.
At September 30, 1996, the amount of such severance benefits remaining to be
paid totaled $856,000.
(12) UNCONSOLIDATED OIL AND GAS AFFILIATE
The following table details the Company's investment in Cabot at September 30,
1996, 1995 and 1994, and earnings and dividends received from the investment
during each year (dollars in thousands):
<TABLE>
<CAPTION>
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Investment in Cabot $69,014 $69,975 $97,801
Percentage of total Cabot common stock 9.4% 9.4% 9.4%
Percentage of voting interest in Cabot 16.6% 16.6% 16.6%
Pre-tax income
Preferred dividends accrued $ 3,402 $ 3,402 $ 1,418
Equity in (loss) (619) (9,185) (573)
Investment impairment write down -- (18,300) --
Dividends received
Preferred 3,402 3,402 567
Common 341 341 171
</TABLE>
At September 30, 1996, the carrying value of the Company's investment in Cabot
exceeded the Company's proportionate interest in the underlying equity of
Cabot by $6,800,000. The Company is amortizing this remaining balance on a
straight-line basis over 16 years. Based on the closing price on the NYSE on
September 30, 1996, the aggregate fair value of the Company's investment in
Cabot common stock was $31,462,000. No fair value is readily available for
the Cabot preferred stock as it is not publicly traded; however, the fair
value of the Company's shares of Cabot preferred was estimated to be
approximately $48,000,000 at September 30, 1996.
The Company's interest in Cabot's common stock is being accounted for using
the equity method because the Company, through its representation on Cabot's
board of directors, has the ability to exercise significant influence over
operating and financial policies of Cabot.
In the fourth quarter of 1995, the Company recorded charges totaling
$24,803,000 ($16,122,000 after tax) related to the adoption of SFAS No. 121 by
Cabot and to recognize a permanent impairment in the carrying value of the
Company's investment in Cabot. Cabot elected early adoption of SFAS No. 121
and recognized $113,900,000 of pre-tax impairment losses related to oil and
gas producing properties in its fiscal quarter ended September 30, 1995.
Under the equity method of accounting, the Company recognized its 9.4% share
of the impairment write down, which totaled $6,503,000 after Cabot's income
tax provision ($4,227,000 after the Company's income tax provision). In
addition, the Company wrote down its investment in Cabot by an additional
$18,300,000 ($11,895,000 after-tax) to a value which approximated the fair
market value of the Cabot securities held by the Company. Both charges
resulted primarily from the decline in natural gas prices during 1995 and
lower projections of future natural gas prices.
<PAGE>
Page 79
On May 2, 1994, the Company merged its oil and gas exploration and production
subsidiary, Resources, with a wholly-owned subsidiary of Cabot in a tax-free
exchange. The Company received 2,133,000 shares of Cabot Class A common stock
and 1,134,000 shares of 6% convertible voting preferred stock of Cabot, stated
value $50, in exchange for all the outstanding capital stock of Resources, in
addition to the repayment of %63,661,000 of intercompany debt. The 1,134,000
shares of Cabot preferred stock are convertible into 1,972,174 shares of Cabot
Class A common stock and are entitled to that number of votes on shareholder
matters, making the Company the holder of 16.6% of Cabot's total voting
securities. As part of the transaction, Cabot increased its board of
directors from nine to eleven and appointed two directors nominated by the
Company to fill the new positions. The Company recorded a net loss on the
merger of $25,110,000, after providing for deferred taxes of approximately
$29,600,000. During the fourth quarter of 1995, the Company resolved certain
merger-related issues with Cabot, which resulted in an additional charge to
earnings of $503,000 ($327,000 after tax).
See Note 13 regarding certain gas transportation, storage and other
contractual arrangements of Resources that were excluded from the Cabot merger
and retained by a subsidiary of the Company
(13) COMMITMENTS AND CONTINGENCIES
(a) WEGM Demand Charge Obligations
WEGM holds firm rights to transport natural gas on the Nova Corporation of
Alberta ("Nova"), Alberta Natural Gas Company ("ANG") and Pacific Gas
Transmission Company ("PGT") pipelines from Alberta, Canada, to the northern
border of California, as well as certain gas storage rights at the Alberta
Energy Company ("AECO") field in Alberta and the Jackson Prairie field in
western Washington. These rights were formerly held by a wholly-owned
subsidiary of Resources but were excluded from the merger of Resources and
Cabot completed in May 1994. Following the merger, WEGM entered into a five-
year contract with IGI Resources ("IGI"), Boise, Idaho, to manage these
rights.
The transportation rights on the PGT pipeline initially consisted of
approximately 25,000 MMBtu per day of annual capacity and 20,000 MMBtu per day
of winter-only capacity to Stanfield, Oregon, and approximately 20,000 MMBtu per
day of annual capacity to the California border. WEGM held similar rights on
Nova and ANG. Effective November 1, 1995, WEGM permanently assigned to IGI all
of its Stanfield capacity and associated rights on Nova and ANG. In addition,
WEGM segmented its capacity to California at Stanfield and permanently assigned
10,000 MMBtu per day of the Alberta to Stanfield rights to a third party
effective November 1, 1995. WEGM's remaining PGT rights expire in October 2023,
and the ANG and Nova rights expire in October 2008, with annual renewal options.
As of September 30, 1996, WEGM has a reserve for future losses associated with
these contractual obligations of $9,505,000. WEGM, as an expansion capacity
holder, has been unable to fully recoup its demand charges, which have been
approximately 70% higher than those paid by holders of vintage capacity. On
September 11, 1996, the FERC approved a request from PGT for the cost of the
expansion capacity to be "rolled in" with the cost of the vintage capacity to
establish a uniform rate for holders of both types of capacity. Rates will be
rolled in, in two stages over six years with the first stage effective November
1, 1996. WEGM's annual obligations for future demand charges through the primary
term of WEGM's gas transportation and storage contracts are as follows: 1997,
$2,833,000; 1998, $2,782,000; 1999, $2,782,000; 2000, $2,782,000; 2001,
<PAGE>
Page 80
$2,782,000; and thereafter, $40,690,000. The IGI management contract provides
for incentive payments to IGI based on actual mitigation of demand charges
relative to targets established on an annual basis.
WEGM initially established the reserve for estimated future losses associated
with the transportation and storage obligations with a $16,000,000 (10,400,000
after tax) charge to earnings upon completion of the merger of Resources and
Cabot in May 1994. In the fourth quarter of 1995, WEGM recorded a $5,000,000
($3,250,000 after tax) charge to increase the reserve based on an assessment
of the likelihood and timing of approval of rolled-in rates and actual
mitigation results in 1995. During 1996, 1995 and 1994, pre-tax losses
totaling $2,652,000, $5,841,000 and $3,001,000, respectively, were charged
against the reserve.
(b) Washington Natural Commitments
Washington Natural has entered into various firm supply, transportation and
storage service contracts in order to assure adequate availability of gas
supply for its firm customers. Many of these contracts, which have remaining
terms of from one to 27 years, provide that Washington Natural must pay a
fixed demand charge each month, regardless of actual usage. Certain of
Washington Natural's firm gas supply agreements also obligate Washington
Natural to purchase a minimum annual quantity at market-based contract prices.
Generally, if the minimum volumes are not purchased and taken during the year,
Washington Natural is obligated to pay either: 1) a monthly or annual gas
inventory charge calculated as a percentage of the then-current contract
commodity price times the minimum quantity not taken; or 2) pay for gas not
taken. Alternatively, under some of the contracts, the supplier may exercise
a right to reduce its subsequent obligation to provide firm gas to Washington
Natural. Washington Natural incurred demand charges in 1996 for firm gas
supply, firm transportation service, and for firm storage and peaking service
of $31,900,000, $53,221,000 and $9,738,000 respectively.
The following tables summarize Washington Natural's obligations for future
demand charges through the primary terms of its existing contracts and the
minimum annual take requirements under the gas supply agreements. The
quantified obligations are based on current contract prices and FERC
authorized rates, which are subject to change.
<TABLE>
Demand Charge Obligations (in thousands):
<CAPTION>
2002 &
There-
1997 1998 1999 2000 2001 after Total
-------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Firm gas
supply $ 30,952 $ 30,821 $ 29,833 $ 26,875 $ 26,875 $ 65,375 $210,731
Firm transpor-
tation service 55,933 55,933 55,933 55,933 55,933 240,796 520,461
Firm storage
and peaking
service 11,943 11,943 11,943 11,943 11,943 172,027 231,742
-------- -------- -------- -------- -------- -------- --------
Total $ 98,828 $ 98,697 $ 97,709 $ 94,751 $ 94,751 $478,198 $962,934
======== ======== ======== ======== ======== ======== ========
</TABLE>
<PAGE>
Page 81
<TABLE>
Minimum Annual Take Obligations (in thousands of therms):
<CAPTION>
2002 &
There-
1997 1998 1999 2000 2001 after Total
------- ------- ------- ------- ------- ------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Firm gas
supply 373,192 354,942 249,092 230,844 230,844 604,020 2,042,934
======= ======= ======= ======= ======= ======= =========
</TABLE>
Washington Natural believes that all demand charges will be recoverable in
rates charged to its customers. Further, pursuant to implementation of FERC
Order No. 636, Washington Natural has the right to resell or release to others
any of its unutilized gas supply or transportation and storage capacity.
Washington Natural does not anticipate any difficulty in achieving the minimum
annual take obligations shown, as such volumes represent less than 53% of
expected annual sales for 1997 and less than 48% of expected sales in
subsequent years.
Washington Natural's current firm gas supply contracts obligate the suppliers
to provide, in the aggregate, annual volumes up to those shown below:
Maximum Supply Available Under Current Firm Supply Contracts (in thousands of
therms):
<TABLE>
<CAPTION>
2002 &
There-
1997 1998 1999 2000 2001 after Total
------- ------- ------- ------- ------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Total 713,575 695,325 567,575 503,700 503,700 1,255,600 4,239,475
======= ======= ======= ======= ======= ========= =========
</TABLE>
(14) DISCONTINUED OPERATIONS
In September 1996, the Company decided to seek a buyer for its undeveloped
coal properties and to cease development efforts on the associated railroad.
Accordingly, the 1996 consolidated financial statements of the Company reflect
these activities as discontinued operations. Results of operations and
statements of cash flows for 1995 and prior periods have been restated to
report these activities as discontinued operations. The 1996 loss from
discontinued operations does not include any asset write downs, but does
include estimated losses of $446,000, net of $240,000 of income taxes, until
disposal is completed. In 1995, the Company wrote down the carrying value of
its coal properties by $34,700,000 ($22,555,000 after tax) with the adoption
of SFAS No. 121. In management's opinion, the current $4,034,000 carrying
value of the coal properties approximates market value. However, due to the
speculative nature of investments in undeveloped coal reserves, the proceeds
from the sale of the reserves may be more or less than the carrying value.
The proceeds of the sale are expected to be in the form of cash and future
royalty payments. The sale is expected to be completed in the first half of
1997.
<PAGE>
Page 82
Summarized operating results for the coal and railroad activities are as
follows:
<TABLE>
<CAPTION>
Years Ended September 30,
-----------------------------
1996 1995 1994
-------- -------- --------
(in thousands)
<S> <C> <C> <C>
Net Sales $ -- $ -- $ --
------- ------- -------
Loss from operations before
income taxes 2,133 40,919 200
Income tax benefit (747) (14,322) (70)
------- -------- -------
Loss from operations, net
of income tax $ 1,386 $26,597 $ 130
======= ======= =======
</TABLE>
In August 1993, the Company decided to sell Unisyn, its biowaste technology
business, and reported Unisyn as a discontinued operation in that year. In
August 1994, the Company sold the stock of its wholly-owned subsidiaries,
Thermal Efficiency, Inc., and Holdings Northwest, Inc., which jointly owned
Unisyn. The 1994 results include a loss in excess of the estimated loss
recorded in 1993 of $799,000, net of $430,000 of income taxes, realized upon
disposition of the two subsidiaries.
(15) FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value of
each class of financial instrument for which it is practicable to estimate
that value.
(a) Cash and cash equivalents
Cash and cash equivalents include cash and investments with an original
maturity of less than 90 days. The carrying value approximates fair value
because of the short maturity of these instruments.
(b) Long-term debt
Rates currently available to the Company for debt with similar terms and
remaining maturities are used to estimate fair value of existing debt.
(c) Preferred stock
Prices currently available to the Company for preferred stock with similar
terms and remaining maturities are used to estimate fair value of existing
preferred stock.
<PAGE>
Page 83
(d) Interest rate swap agreements
The fair value of interest rate swaps (used for hedging purposes) is the
estimated amount that the Company would receive or pay to terminate each swap
agreement at the reporting date, taking into account current interest rates
and the current credit-worthiness of all the parties to each swap.
The estimated fair values of the Company's financial instruments are as
follows (in thousands):
<TABLE>
<CAPTION>
1996 1995
-------------------- -------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Financial liabilities:
Long-term debt $345,060 $350,483 $340,200 $353,634
Preferred stock $ 90,000 $ 92,256 $ 90,000 $ 87,900
Unrecognized financial
instruments:
Interest rate swaps $ -- $ (1,692) $ -- $ (2,627)
</TABLE>
(16) PROPOSED MERGER
On October 18, 1995, a definitive agreement was approved by Washington
Energy's and Washington Natural's boards of directors to merge Washington
Energy and Washington Natural into Puget Sound Power & Light Company,
("Puget") as the surviving corporation. The merged company will be named
Puget Sound Energy ("PSE") and would create a combination utility serving more
than 852,000 electric customers and more than 493,000 gas customers in the
state of Washington.
On March 20, 1996, shareholders of Washington Energy, Washington Natural, and
Puget approved the merger of the companies. The merger was structured to qualify
as a pooling-of-interests. As of September 30, 1996, Washington Energy and
Washington Natural have incurred costs of $8,000,000, primarily for professional
and legal fees, directly attributable to the merger. At September 30, 1996,
these costs have been deferred and are included in deferred charges and other.
Washington Natural has requested, as part of the merger application with the
WUTC, that these costs be amortized in rates over a five-year period for
regulatory purposes and plans to expense these costs for financial reporting
purposes upon consummation of the merger.
Included as Exhibit 99 are unaudited pro forma condensed financial statements
which combine the historical consolidated balance sheets and statements of
income of Washington Energy and Puget after giving effect to the merger. The
unaudited pro forma condensed consolidated balance sheets give effect to the
merger as if it had occurred at each balance sheet date. The unaudited pro forma
condensed consolidated statements of income for the nine months and twelve
months ended September 30, 1996 give effect to the merger as if it had occurred
on October 1, 1995. These statements are prepared on the basis of accounting for
the merger as a pooling-of-interests and are based on the assumptions set forth
in the paragraph below. The unaudited pro forma condensed financial information
has been prepared from, and should be read in conjunction with, Washington
Energy's historical consolidated audited financial statements and related notes
and Puget's historical audited financial statements and related
<PAGE>
Page 84
notes, which are incorporated herein by reference. The information contained
herein with respect to Puget and its subsidiaries has been supplied by Puget.
The information is not necessarily indicative of the financial position or
operating results that would have occurred had the merger been consummated on
the date, or at the beginning of the periods, for which the merger is being
given effect, nor is it necessarily indicative of future operating results or
financial position.
The merger is estimated to result in cost savings of approximately $370
million, net of costs to achieve the savings including merger transaction and
transition costs, over a ten-year period following the consummation of the
merger. The cost savings estimated to be achieved by the merger are not
reflected in the pro forma financial statements because the terms and
conditions under which the WUTC may approve the merger are unknown. Pro forma
per share data and common shares outstanding for PSE give effect to the
conversion of each share of Washington Energy common stock into .86 shares of
PSE common stock and each share of Washington Natural preferred stock into one
share of preferred stock of PSE with like rights and preferences.
The merger is subject to approval by the WUTC. On December 11, 1996,
Washington Natural, Puget, the staff of the WUTC and the Public Counsel
Section of the Washington State Office of the Attorney General filed a
stipulated settlement agreement related to the merger for approval by the
WUTC. The WUTC held hearings on the settlement on December 18, 1996. Final
briefs are due to be filed with the WUTC on January 3, 1997, and an order from
the WUTC is expected by mid-January. If the terms and conditions of the WUTC
order are acceptable to the boards of directors of the respective companies,
the merger could be completed by February 1, 1997.
<PAGE>
Page 85
(17) SUPPLEMENTARY INCOME INFORMATION (Unaudited)
CONSOLIDATED SELECTED QUARTERLY FINANCIAL DATA
Years Ending September 30, (Unaudited)
Results vary significantly by quarter because operating revenues and earnings
are greatly affected by variations in weather conditions. The three months
ending September 30 have usually been a loss period. Certain amounts in the
1995 and 1994 quarterly statements have been reclassified to conform with the
1996 presentation.
<TABLE>
<CAPTION>
Operating Earnings
Operating Income Net Income (Loss) Per
Revenues (Loss) (Loss) Share++
---------- ---------- ---------- ----------
(in thousands, except per share amounts)
<S> <C> <C> <C> <C>
1996 Quarter:
First $127,495 $ 22,300 $ 10,135 $ .42
Second 155,289 29,492 18,023 .75
Third 84,511 12,326 84 --
Fourth 58,416 7,868 (5,114) (.21)
-------- -------- -------- ------
For the year $425,711 $ 71,986 $ 23,128 $ .96
======== ======== ======== ======
1995 Quarter:
First $156,245 $ 24,323 $ 13,255 $ .56
Second 157,519 22,953 11,228 .47
Third 78,866 6,770 (5,624) (.26)
Fourth 50,981 (2,205) (59,921) (2.49)
-------- -------- -------- ------
For the year $443,611 $ 51,841 $(41,062) $(1.72)
======== ======== ======== ======
1994 Quarter:
First $146,743 $ 18,152 $ 8,310 $ .33
Second 151,461 16,236 7,446 .32
Third 79,034 (5,667) (48,916) (2.09)
Fourth 54,787 (489) (12,486) (.53)
-------- -------- -------- ------
For the year $432,025 $ 28,232 $(45,646) $(1.97)
======== ======== ======== ======
++ Quarterly earnings per share are based upon the average number of common
shares outstanding during each quarter. Because the average number of
shares outstanding increased in each quarter, the sum of quarterly earnings
per share may not equal earnings per share for the year.
</TABLE>
<PAGE>
Page 86
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure: None
PART III
Item 10. Directors and Executive Officers of the Registrants
(a) Directors: (As to Washington Energy and Washington Natural)
<TABLE>
<CAPTION>
Year First
Name, Present Occupation and Elected as
Experience for Past Five Years Age Director
- ----------------------------------------------------------- --- ----------
<S> <C> <C>
Virginia Anderson (2) (3) 49 1991
Director of Seattle Center, a large civic center owned
by the City of Seattle since 1988.
Robert F. Bailey (2) (4) (5) 64 1988
President of Trans Republic Energy, L.P., Midland,
Texas, an oil and gas investment company, since January
1992 and Mabelle, Inc., Midland, Texas, an oil and gas
production company. Previously he was President of
Alta Energy Corporation, Midland, Texas, an oil and gas
drilling and production company operating primarily in
the southwestern United States.
Donald J. Covey (1) (2) 68 1982
Chairman of the Board of Directors of UNICO Properties,
Inc., Seattle, Washington, from 1992 until his
retirement on December 31, 1994; Chairman and Chief
Executive Officer, 1990 to 1992. UNICO Properties,
Inc., manages several major office buildings in
downtown Seattle.
John W. Creighton, Jr. (4) (5) 64 1989
President of Weyerhaeuser Company, Tacoma, Washington,
a forest products company, since 1988.
Robert L. Dryden (3) (4) 63 1991
Executive Vice President, Airplane Production, Boeing
Commercial Airplane Group, Seattle, Washington, since
1990.
Tomio Moriguchi (1) (2) 60 1988
Chairman and Chief Executive Officer of Uwajimaya,
Inc., Seattle, Washington, a food and merchandise
distributor, retailer, and exporter, since December
1994. Previously he served as President beginning in
1965. President, Town and Country Travel, Inc.,
Seattle, Washington, and President, North American Post
Publishing Company, Seattle, Washington.
</TABLE>
<PAGE>
Page 87
<TABLE>
<CAPTION>
<S> <C> <C>
Sally G. Narodick (3) (4) 51 1989
Director and former Chairman and Chief Executive
Officer of Edmark Corporation, Redmond, Washington, a
developer and publisher of print and software
educational materials, from October 1989 to September
1996.
William P. Vititoe (1) (3) (5) 58 1994
Chairman, Chief Executive Officer and President of
Washington Energy and Washington Natural since 1994.
From November 1990 to November 1993 he served as
President and Chief Executive Officer of American
Natural Resources Pipeline Co., a natural gas pipeline
company.
(1) Member of Executive Committee (Chairman is William P. Vititoe)
(2) Member of Audit Committee (Chairman is Donald J. Covey)
(3) Member of Administrative Committee (Chairman is Sally G. Narodick)
(4) Member of Compensation and Benefits Committee (Chairman is
John W. Creighton, Jr.)
(5) Member of Nominating Committee (Chairman is Robert F. Bailey)
</TABLE>
Washington Energy directors serve in three classes for staggered terms whereby
only directors in a particular class are elected at each annual meeting of
stockholders. The terms of Anderson, Moriguchi and Narodick expire in 1997;
those of Covey and Dryden expire in 1998 and those of Bailey, Creighton and
Vititoe expire in 1999. Each director has served continuously since the date
of his or her first election as a director of Washington Energy. The next
annual meeting of shareholders will be scheduled on a date to be announced in
April 1997 if the merger with Puget has not occurred. In case of a vacancy on
the Board of Directors, the remaining directors, by majority vote, may elect a
successor to serve until the next annual meeting of shareholders. Washington
Natural directors are elected annually. There are no family relationships
between any of the directors, or any director and any executive officer of the
Company.
Certain of the directors are also directors of other companies that make peri
odic filings with the SEC as follows: Virginia Anderson - Columbia Bank and
U.S. Bank of Washington, a subsidiary of U.S. Bancorp; Robert F. Bailey -
Texas Commerce Bank-Midland and Cabot Oil & Gas Corporation; John W.
Creighton, Jr. - Weyerhaeuser Company, Portland General Corporation, Quality
Food Centers, Inc. and Unocal Corporation; Robert L. Dryden - U.S. Bancorp;
Tomio Moriguchi - Bank of America NW, N.A., doing business as Seafirst Bank, a
subsidiary of the Bank of America N.T. & S.A.; Sally G. Narodick - Edmark
Corporation, Pacific Northwest Bank and Penwest; and William P. Vititoe -
Cabot Oil & Gas Corporation, Comerica Bank and Amerisure Michigan Mutual
Insurance Company.
The full Board met eight times during the year ended September 30, 1996. Each
director attended more than 75% of the aggregate number of meetings of the
Board and committees on which he or she served.
<PAGE>
Page 88
Board Committees
The Board has a standing Administrative Committee, Audit Committee,
Compensation and Benefits Committee, Executive Committee and Nominating
Committee. The Audit Committee and the Compensation and Benefits Committee
consist exclusively of non-employee directors.
The Administrative Committee is currently composed of Ms. Narodick, Chairman,
Ms. Anderson, Mr. Dryden, Mr. Vititoe and Washington Energy's Chief Financial
Officer, Mr. Torgerson, who serves as a non-director committee member. The
committee is responsible for the administration of the defined contribution
and the defined benefit retirement plans of the Company. The committee met
one time during 1996.
The Audit Committee is currently composed of Mr. Covey, Chairman, Ms.
Anderson, Mr. Bailey, and Mr. Moriguchi. The committee is responsible for
oversight of Washington Energy's and its subsidiaries' corporate accounting
practices, financial reporting process and internal accounting and other
financial control systems. The committee is also responsible for the review
of management's recommendation of independent public accountants. The
committee met three times during 1996.
The Compensation and Benefits Committee currently consists of Mr. Creighton,
Jr., Chairman, Mr. Bailey, Mr. Dryden, and Ms. Narodick. The committee is
responsible for determining appropriate compensation and other benefit
measures for officers of the Company. The committee met two times during
1996.
The Executive Committee currently consists of Mr. Vititoe, Chairman, Mr. Covey
and Mr. Moriguchi. It is authorized to act in lieu of the full Board of
Directors on various matters between board meetings. The committee did not
meet during 1996.
The Nominating Committee currently consists of Mr. Bailey, Chairman, Mr.
Creighton, Jr., and Mr. Vititoe. The committee is responsible for the
identification and evaluation of candidates for election to the Board of
Directors. The committee did not meet during 1996.
Any shareholder recommendations for nominations to the Board of Directors for
consideration by the Nominating Committee for the 1998 Annual Meeting, if the
merger with Puget has not occurred, should be sent to Mr. Bailey, Chairman,
Nominating Committee, Washington Energy Company, P.O. Box 1869, Seattle, WA
98111, so as to be received no later than September 15, 1997.
(b) Executive Officers: (As to Washington Energy and Washington Natural)
See data following Item 4 of Part I.
Section 16(a) of the Exchange Act requires the directors and executive
officers of Washington Energy to file reports of ownership and reports of
changes in ownership of Washington Energy common stock with the SEC and the
NYSE. Directors and executive officers are also required by SEC regulations
to furnish Washington Energy with copies of all such reports that they file.
Based solely on its review of the copies of such forms received by it,
Washington Energy believes that all filing requirements applicable to its
directors and executive officers were complied with during the year ended
September 30, 1996.
<PAGE>
Page 89
Item 11. Executive Compensation
The following table shows the total annual and long-term compensation paid by
the Company and its subsidiaries to the persons who, for the year ended
September 30, 1996, were the Chief Executive Officer and the other five most
highly compensated executive officers of the Company or its subsidiaries
("Named Executives").
<TABLE>
SUMMARY COMPENSATION TABLE
<CAPTION>
Annual Compensation Long-Term Compensation
--------------------------- -------------------------------
Other Securities All
Name Annual Underlying Other Other
and Compen- Options/ Incentive Compen-
Principal Salary Bonus sation SARs Payouts sation
Position Year ($)(1)(6) ($)(2) ($)(3)(6) (#)(4) ($) ($)(5)
- ------------------- ---- --------- ------ ------- ---------- ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
William P. Vititoe 1996 338,016 169,000 3,132 12,500 - 4,750
Chairman, Chief 1995 332,596 45,100 36,006 25,800 - 6,682
Executive Officer 1994 230,423 100,000 78,664 40,000 - 2,437
and President
Timothy J. Hogan 1996 132,340 61,000 14,760 2,600 - 3,970
Executive Vice 1995 114,000 25,700 13,647 7,850 - 3,420
President, Chief 1994 99,024 22,500 - 1,800 - 2,970
Operating Officer
James P. Torgerson 1996 162,500 61,875 14,760 2,600 - 4,875
Executive Vice 1995 150,000 15,000 13,647 11,700 - 4,500
President, Chief 1994 137,346 23,200 - 2,600 - 4,119
Administrative and
Financial Officer
Robert J. Tomlinson 1996 150,838 45,600 14,760 2,600 - 2,470
Sr. Vice President, 1995 145,008 21,800 13,647 7,850 - 4,350
General Counsel and 1994 136,098 8,000 - 2,600 - 3,960
Corporate Secretary
Allyn P. Hebner 1996 103,338 26,000 14,760 1,800 - 3,100
Vice President - 1995 100,008 11,700 13,647 5,050 - 3,000
Finance, Treasurer, 1994 85,420 13,000 3,402 - - 2,561
and Chief Accounting
Officer
Donald H. Gessel 1996 133,714 - 29,740 2,600 - 4,011
Former President, 1995 147,000 12,000 13,647 7,850 - 4,054
Washington Energy 1994 136,596 6,313 - 2,600 - 4,098
Services Company
(1) Mr. Vititoe's 1994 salary reflects service from January 15, 1994. His
annual base salary was $325,000 in 1994.
(2) Incentive compensation is based on performance in the year shown but
determined and paid the following year. For example, bonuses for 1996
are based on performance in 1996 and are measured and paid in the fourth
quarter of calendar 1996.
(3) Mr. Vititoe's "Other Annual Compensation" includes moving expenses and
temporary housing expenses of $32,982 and $75,640 for 1995 and 1994,
respectively. The balance of amounts shown in this column are car
allowances paid.
<PAGE>
Page 90
(4) All options granted to executive officers were in tandem with SARs.
(5) The amounts in this column are the Company contributions to individual
401(k) accounts.
(6) Mr. Gessel was employed as President of Washington Energy Services
Company from October 1993 to July 1996. Included in his Other Annual
Compensation is separation pay.
</TABLE>
1996 Stock Options/SARs
The following table sets forth the number of stock options/SARs which were
granted to each of the Named Executives during 1996. In addition, the table
provides the present value of the stock options/SARs as of the grant date.
<TABLE>
<CAPTION>
Securities
Underlying % of Grant
Options/ Total Exercise Date
SARS Options or Base Present
Granted Granted to Price Expiration Value
Name (#)(1) Employees ($/Sh) Date ($)(2)
------------------- ---------- ----------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C>
William P. Vititoe 12,500 14% 18.563 12/11/05 37,250
Timothy J. Hogan 2,600 3% 18.563 12/11/05 7,748
James P. Torgerson 2,600 3% 18.563 12/11/05 7,748
Robert J. Tomlinson 2,600 3% 18.563 12/11/05 7,748
Allyn P. Hebner 1,800 2% 18.563 12/11/05 5,364
Donald H. Gessel 2,600 3% 18.563 12/11/05 7,748
(1) The exercise price of the options is the fair market value of the
Company's stock on the date of the grant. Each option was granted in
tandem with a SAR covering the same number of shares. Any optionees
exercising their stock options lose the corresponding SARs as to those
shares and vice versa. The options were vested upon grant.
(2) The values shown were calculated using the Black-Scholes option
pricing model. That model is based on arbitrary assumptions regarding
variables such as stock price volatility, future dividend yield, and
interest rates. The actual value that an executive may realize, if
any, will depend on the amount by which the stock price at the time of
exercise exceeds the exercise price, which is the fair market value of
the stock at the time of grant. There is no assurance that any
executive will receive the amounts estimated by the Black-Scholes
model.
</TABLE>
<PAGE>
Page 91
Aggregated Option/SAR Exercises in 1996 and Year-End Option/SAR Values
The following table sets forth information concerning each stock option/SAR
which was exercised during 1996 by each of the Named Executives and the year-
end value of the unexercised stock options/SARs, provided on an aggregated
basis.
<TABLE>
<CAPTION>
Value of Unexercised
Options/SARs at Year
Options/ End
SARs ------------------
Exercised Value Exercis- Unexer- Exercis- Unexer-
(# of Realized able cisable able cisable
Name shares) ($)(1) (#) (#) ($)(2) ($)(2)
------------------ -------- ------- -------- ------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
William P. Vititoe -- -- 55,000 23,300 73,913 69,825
Timothy J. Hogan -- -- 13,600 5,250 14,264 27,563
James P. Torgerson -- -- 18,200 9,100 14,464 47,775
Robert J. Tomlinson -- -- 18,200 5,250 14,464 27,563
Allyn P. Hebner -- -- 7,900 3,150 10,538 16,538
Donald H. Gessel (3) 7,800 15,418 -- -- -- --
(1) Any amounts presented in this column represent the difference between the
price of the Company's common stock on the date of exercise and the
option/SAR exercise price multiplied by the number of shares.
(2) The value of the unexercised options/SARs is calculated as the excess of
the WECO common stock price of $18.625 over the exercise price multiplied
by the number of options for each grant under which options/SARs are
outstanding.
(3) Mr. Gessel resigned in July 1996. Unexercisable options/SARS lapsed at
that time.
</TABLE>
Long-Term Incentive Programs
The Company has provided long-term performance incentives to the Named
Executives since 1981, when a performance share plan was established to
provide for annual awards of performance units. The payment of annual awards
are contingent upon attainment of future performance objectives of the Company
over the succeeding four-year period. The determination was made in 1994 that
the minimum performance objectives of the Second Washington Energy Company
Performance Share Plan ("Plan") could not be met for the years 1994 through
1997 due to the losses sustained in 1994, thereby eliminating the incentive to
perform provided by the Plan. No performance units were awarded under the
Plan in 1995 and 1996.
In December 1994, the Board of Directors approved the Interim Performance
Share Plan ("Interim Plan") to provide a long-term performance incentive for
the four years 1995 through 1998 for all officers of the Company and its
subsidiaries. The Interim Plan provides for cash payments at the end of the
performance period based on the percentage of total units awarded which are
earned in each of the four years and the price of the Company's common stock
at the end of the four-year performance period. Units are earned in each year
based on a comparison of total shareholder return (appreciation in stock price
plus dividends paid) for Company shareholders with that of a peer group of gas
LDCs. The maximum payment
<PAGE>
Page 92
a plan participant can receive is equal to the
total number of units awarded multiplied by the Company's stock price at the
end of the four-year performance period. The Compensation and Benefits
Committee may elect, at its discretion, to vest any unearned units at the end
of the four-year period based on the total shareholder return for the entire
period. Participants in the Interim Plan must be employed at September 30,
1998, to be eligible for any payment under the plan, except in the case of
retirement, death or disability. The Interim Plan is not affected by a change
in control of the Company; however, the Company intends that upon a change in
control, any earned awards under the Plan are payable at the Company's then-
current stock price. No performance units were awarded under the Interim Plan
in 1996.
Supplemental Executive Retirement Contracts
The Company has entered into individual contracts which provide officers,
including the Named Executives, with retirement, death and disability benefits
supplementing the benefits from the Company's defined benefit plan reduced by
social security and benefits payable under plans of prior employers.
The supplemental contracts provide that each participant will receive
retirement plan payments, primary social security benefits and supplemental
plan payments equal, in the aggregate, to 70% of the participant's average
salary during the highest three years in the eight years preceding the
participant's retirement. It provides payments of annual benefits for life
upon retirement from the Company on or after age 62, or at the election of the
officer, with the Company's consent, with reduced benefits on or after age 59.
Based on a computation using data available at September 30, 1996 and assumed
annual salary increases of 4.5%, the average annual pension benefit (payable
in the form of a joint and 50% survivor annuity with ten-year term certain)
payable by the Company upon retirement at age 62, to the named executives
would be: Mr. Vititoe $228,015; Mr. Hogan, $84,079; Mr. Torgerson, $107,917;
Mr. Tomlinson, $102,866; Mr. Hebner, $70,783; and Mr. Gessel $85,543. Mr.
Gessel resigned from the Company in July 1996, and his computation does not
reflect future wage increases.
Conditional Employment Agreements in the Event of a Change in Control
The Company has conditional employment agreements with four of its key
executive officers: Messrs. William P. Vititoe, Timothy J. Hogan, James P.
Torgerson, and Robert J. Tomlinson. The employment agreements offer
additional security to these key management personnel to better enable them to
function effectively without distraction in the event that uncertainties as to
the future control of the Company should arise. These agreements provide
certain benefits should employment be terminated other than for cause, or by
death, disability or normal retirement within three years subsequent to a
change in control of the Company. Change in control of the Company includes
the acquisition by any person of: 1) power to exercise a controlling influence
over management or policies; 2) ownership or power to vote 25% or more of the
outstanding voting securities of the Company; or 3) change in the majority of
the Board of Directors during the six-year period subsequent to the
acquisition by any person of ownership or power to vote 10% or more of the
outstanding voting securities of the Company without the approval of the
majority of the Board of Directors in office prior to such acquisition. The
benefits to be provided by the Company include: 1) a cash payment equal to
three times the most recent year's annual compensation, or a cash payment
equal to annual compensation until normal retirement date if less
<PAGE>
Page 93
than three years; 2) lump sum payment for amounts calculated under dissolution
of the Performance Share Plan; 3) maintenance of participation in all current
employee benefit plans or provision for substantially similar benefits for a
three-year period or until normal retirement date if sooner; 4) a cash payment
at retirement date equal to the additional retirement compensation to which the
executive would have been entitled had the executive continued in the employ of
the Company for an additional three years or until normal retirement date if
sooner; 5) a cash payment equal to the difference between the exercise prices of
all stock options and the higher of: a) the average of the high and low sales
prices on the date of termination, or b) the highest price actually paid in
connection with the change in control of the Company; and 6) a cash payment
equal to the excise taxes imposed by the Internal Revenue Code Section 4999, if
any, on all payments enumerated in this sentence, plus the tax expense to the
executive resulting from this additional payment. If the executive voluntarily
terminates employment without good reason, as defined in the agreement, no
additional or special benefits accrue to the executive. Since the conditions
specified in the contracts have not occurred, no amounts were charged to expense
by the Company under these agreements in 1996. The merger with Puget would
constitute a change in control as defined in these agreements.
Compensation of Directors
Each director who is not an officer of the Company and its subsidiaries is
paid a retainer of $10,000 per year, an additional $2,000 per year for serving
on the executive committee or as chairman of another committee of the Board
and a fee of $800 for attending a regular, special or annual meeting of the
Board or a committee meeting not held on the same day as a Board meeting. No
such director is eligible to participate in any of the compensation plans
described above. The Company also has a directors' stock bonus plan which was
approved by the shareholders in February 1991. Under this plan, an outside
director is awarded 200 shares of Company common stock in January of each year
for service on the Board of Directors for the prior year. During 1996, 1,400
shares of common stock were awarded under the plan. The Company pays no
additional remuneration to employees of the Company who are directors.
Independent Accountants and Auditors
The firm of Arthur Andersen LLP has audited the accounts of Washington Energy
Company and Subsidiaries for a number of years. Due to the timing of the
expected merger with Puget an auditor has not been selected for the year
ending September 30, 1997. Should the merger with Puget not occur,
representatives of Arthur Andersen LLP would be expected to be present at an
Annual Meeting, to be called at a later date, with the opportunity to make a
statement if they desire to do so, and would be available to respond to
appropriate questions submitted in writing to the Secretary of the Company in
advance of the meeting.
Date for Receipt of 1998 Shareholder Proposals
In the event that the merger with Puget does not occur, shareholder proposals
intended to be presented at the 1998 Annual Meeting must be received by the
Company no later than September 15, 1997 to be considered for inclusion in the
proxy statement and proxy for the 1998 meeting.
<PAGE>
Page 94
Item 12. Security Ownership of Certain Beneficial Owners and Management of
Washington Energy Company
<TABLE>
<CAPTION>
SECURITY OWNERSHIP OF DIRECTORS AND OFFICERS
(stated as of December 16, 1996)
Amount of Percent
Beneficial of Class
Name of Beneficial Owner Ownership (2)
--------------------------- ---------- ---------
<S> <C> <C>
Directors:
Virginia Anderson 1,529 --
Robert F. Bailey 5,062 --
Donald J. Covey 6,812 --
John W. Creighton, Jr. 2,790 --
Robert L. Dryden 5,048 --
Tomio Moriguchi 2,500 --
Sally G. Narodick 1,790 --
Named Executive Officers (*also serve as Directors):
William P. Vititoe* 94,933 (1) --
Timothy J. Hogan 27,190 (1) --
James P. Torgerson 34,107 (1) --
Robert J. Tomlinson 37,354 (1) --
Allyn P. Hebner 13,086 (1) --
Donald H. Gessel 11,298 (1) --
All directors and
executive officers as
a group (14 persons) 265,084 (1) 1.1%
(1) Includes unexercised options to acquire shares of
common stock as follows: Mr. Vititoe, 90,800 shares;
Mr. Hogan, 21,450 shares; Mr. Torgerson, 29,900
shares; Mr. Tomlinson, 26,050 shares; Mr. Hebner,
12,850 shares; and Mr. Gessel, -0- shares; all
directors and executive officers as a group, 198,600
shares. This includes options granted to officers in
November 1996. Mr. Gessel resigned from the Company
in July 1996 and his unexercised options lapsed at
that time.
(2) With respect to each person who has options to
acquire common stock, such options are assumed to be
outstanding for the purpose of computing percentage
ownership of that person, but are assumed not to be
outstanding for purposes of computing percentage
ownership for any other person.
</TABLE>
<PAGE>
Page 95
Washington Energy is unaware of any person beneficially owning more than 5% of
its common stock.
Washington Natural Gas Company
(a) Washington Energy owns of record 100% of Washington Natural's common
stock, $5 par value, which is the sole voting security.
(b) Holding of equity securities by directors and officers: None.
Item 13. Certain Relationships and Related Transactions: None.
<PAGE>
Page 96
PART IV
Item 14. Exhibits, Financial Statements, Schedules and Reports on Form 8-K
(a) 1. Financial Statements:
The financial statements filed as part of this report are listed in
the index in Item 8.
2. Financial Statement Schedules:
Schedule I -- Condensed Financial Information of Registrant for the
years ended September 30, 1996, 1995 and 1994.
Washington Energy Company
Schedule II -- Valuation and Qualifying accounts for the years ended
September 30, 1996, 1995 and 1994.
Washington Energy Company and Subsidiaries
Washington Natural Gas Company and Subsidiaries
The information required to be submitted in Schedule III has been
included in the financial statements or supporting schedules. Schedules
IV and V have been omitted as they are not applicable or not required.
(b) Reports on Form 8-K:
A report on Form 8-K was filed by Washington Energy and Washington
Natural dated July 25, 1996 regarding third-quarter results.
<PAGE>
Page 97
(c) Exhibits: See Exhibit Index at page 105.
For the purposes of complying with the amendments to the rules governing Form
S-8 (effective July 13, 1990) under the Securities Act of 1933, Washington
Energy hereby undertakes as follows, which undertaking shall be incorporated
by reference into Washington Energy's Registration Statements on Form S-8 Nos.
33-1348, 2-91092, 33-24221, 2-63093 and 33-55381.
Insofar as indemnification for liabilities arising under the Securities Act of
1933 may be permitted to directors, officers and controlling persons of
Washington Energy pursuant to the foregoing provisions, or otherwise,
Washington Energy has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Securities Act of 1933 and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by Washington Energy of expenses incurred or paid by a director,
officer or controlling person of Washington Energy in the successful defense
of any action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered,
Washington Energy will, unless in the opinion of its counsel the matter has
been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication
of such issue.
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of
our report included in this Form 10-K, into the Company's previously filed
Registration Statement File Nos. 33-1348, 2-91092, 33-24221, 2-63093, 33-
18684, 33-49599, 33-55381 and 33-61859.
ARTHUR ANDERSEN LLP
Seattle, Washington
December 20, 1996
<PAGE>
Page 98
<TABLE>
<CAPTION>
Schedule I
WASHINGTON ENERGY COMPANY
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
BALANCE SHEETS
September 30,
---------------------
1996 1995
-------- --------
(in thousands)
<S> <C> <C>
ASSETS
INVESTMENTS IN CONSOLIDATED SUBSIDIARIES:
Washington Natural Gas Company $268,774 $251,528
Thermal Energy, Inc. (17,686) (15,625)
ThermRail, Inc. 36 (3,100)
WECO Finance Company 2,885 2,793
Washington Energy Gas Marketing (17,370) (16,544)
Washington Energy Services Company 88 (84)
-------- --------
Total investments in subsidiaries 236,727 218,968
-------- --------
INVESTMENTS IN UNCONSOLIDATED AFFILIATES 69,352 70,313
-------- --------
NOTES AND ACCOUNTS RECEIVABLE FROM SUBSIDIARIES 60,572 61,947
-------- --------
CURRENT ASSETS:
Other receivables 1,246 1,769
Federal income taxes receivable 8,252 3,957
-------- --------
Total current assets 9,498 5,726
-------- --------
DEFERRED CHARGES:
Deferred federal income taxes 2,324 2,595
Other 120 371
-------- --------
Total deferred charges 2,444 2,966
-------- --------
Total assets $378,593 $359,920
======== ========
CAPITALIZATION AND LIABILITIES
CAPITALIZATION:
Common shareholders' interest $199,351 $196,686
-------- --------
CURRENT LIABILITIES:
Notes payable and commercial paper 177,709 161,994
Accounts payable and accrued interest 1,492 1,240
-------- --------
Total current liabilities 179,201 163,234
-------- --------
DEFERRED CREDITS 41 --
-------- --------
Total capitalization and liabilities $378,593 $359,920
======== ========
</TABLE>
<PAGE>
Page 99
<TABLE>
<CAPTION>
Schedule I (Continued)
WASHINGTON ENERGY COMPANY
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENTS OF INCOME
Year Ended September 30,
--------------------------------
1996 1995 1994
-------- -------- --------
(in thousands,
except per share amounts)
EQUITY IN EARNINGS (LOSSES) OF SUBSIDIARIES:
<S> <C> <C> <C>
Washington Natural Gas Company,
including cash dividends received
by Washington Energy Company of
$16,578, $-0- and $16,937, respectively $ 37,224 $ 17,854 $ (8,243)
Other subsidiaries 2,345 (4,781) (13,540)
-------- -------- --------
Total equity in earnings (losses)
of subsidiaries 39,569 13,073 (21,783)
OTHER INCOME AND (DEDUCTIONS), NET (14,609) (27,538) (22,934)
-------- -------- --------
INCOME (LOSS) FROM CONTINUING OPERATIONS 24,960 (14,465) (44,717)
EQUITY IN LOSS FROM DISCONTINUED
OPERATIONS OF SUBSIDIARIES, NET OF TAX (1,832) (26,597) (929)
-------- -------- -------
NET INCOME (LOSS) $ 23,128 $(41,062) $(45,646)
DIVIDENDS ON PREFERRED STOCK -- -- 9
EXCESS PREMIUM, PREFERRED REDEMPTION -- -- 673
-------- -------- --------
EARNINGS (LOSS) ON COMMON STOCK $ 23,128 $(41,062) $(46,328)
======== ======== ========
EARNINGS (LOSS) PER COMMON SHARE $ .96 $ (1.72) $ (1.97)
======== ======== ========
AVERAGE COMMON SHARES OUTSTANDING 24,159 23,893 23,486
======== ======== ========
DIVIDENDS PER COMMON SHARE $ 1.00 $ 1.00 $ 1.00
======== ======== ========
</TABLE>
<PAGE>
Page 100
<TABLE>
<CAPTION>
Schedule I (Continued)
WASHINGTON ENERGY COMPANY
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENTS OF CASH FLOWS
Year Ended September 30,
---------------------------------
1996 1995 1994
-------- -------- --------
(in thousands)
<S> <C> <C> <C>
Cash flow provided by (used in)
operating activities:
Net income (loss) from continuing
operations $ 24,960 $(14,465) $(44,717)
-------- -------- --------
Adjustments to reconcile net income
(loss) from continuing operations
to net cash used in operating
activities:
Pre-tax loss on merger of
subsidiary 6,304
Equity in undistributed (earnings)
losses of unconsolidated affiliate 961 27,826 (699)
Undistributed losses (earnings)
from continuing operations of
consolidated subsidiaries (32,549) (5,947) 19,003
Federal income tax - deferred 271 (10,479) (16,900)
Deferred tax on merger of
subsidiary -- -- 24,784
Changes in:
Contingency reserves -- (7,800) 6,262
Federal income tax - current (4,295) 1,452 (4,590)
Other assets and liabilities 1,067 (2,562) (611)
Other -- -- (2,679)
-------- -------- --------
Total adjustments (34,545) 2,490 30,874
-------- -------- --------
Net cash used in operating
activities (9,585) (11,975) (13,843)
-------- -------- --------
Cash flow provided by (used in)
investing activities:
Dividends received from affiliates 16,578 -- 16,937
Investment in affiliates (3,620) (4,813) (6,620)
Loans from (advances to) affiliates 1,375 (971) 4,823
Invested in subsidiary prior to
merger -- -- (20,760)
Proceeds from merger of subsidiary -- -- 63,661
------- ------- --------
Net cash provided by (used in)
investing activities 14,333 (5,784) 58,041
------- ------- --------
</TABLE>
<PAGE>
Page 101
<TABLE>
<CAPTION>
SCHEDULE I (Continued)
WASHINGTON ENERGY COMPANY
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENTS OF CASH FLOWS
September 30,
-----------------------------------
1996 1995 1994
--------- --------- ---------
(in thousands)
<S> <C> <C> <C>
Cash flow provided by (used in)
financing activities:
Proceeds from issuance of common stock $ 3,686 $ 4,824 $ 6,342
Proceeds from issuance (redemption) of
commercial paper, net 15,715 36,812 (20,316)
Redemptions and repurchases of
preferred stock -- -- (6,747)
Cash dividend payments:
Common (24,149) (23,877) (23,468)
Preferred -- -- (9)
-------- -------- --------
Net cash provided by (used in)
financing activities (4,748) 17,759 (44,198)
-------- -------- --------
Net change in cash -- -- --
Beginning cash and cash equivalents -- -- --
-------- -------- --------
Ending cash and cash equivalents $ -- $ -- $ --
======== ======== ========
Supplemental disclosures of cash
flow information
Cash paid during the year for:
Interest $ 6,985 $ 7,901 $ 7,283
Income taxes $ -- $ 3,335 $ --
</TABLE>
<PAGE>
Page 102
<TABLE>
<CAPTION>
Schedule II
WASHINGTON ENERGY COMPANY AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED SEPTEMBER 30, 1996, 1995 and 1994
Recoveries Written Balance
Balance at Charged of Off as at End
Beginning to Previous Uncollect- of
of Period Income Write-Offs ible Period
---------- ---------- ---------- ---------- ---------
(in thousands)
<S> <C> <C> <C> <C> <C>
1996:
Allowances for
uncollectible
accounts $ 979 $ 1,229 $ 618 $(1,896) $ 930
======= ======= ======= ======= ======
1995:
Allowances for
uncollectible
accounts $ 1,295 $ 1,220 $ 580 $(2,116) $ 979
======= ======= ======= ======= =======
1994:
Allowances for
uncollectible
accounts $ 277 $ 2,457 $ 475 $(1,914) $ 1,295
======= ======= ======= ======= =======
</TABLE>
<PAGE>
Page 103
<TABLE>
<CAPTION>
Schedule II
WASHINGTON NATURAL GAS COMPANY AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED SEPTEMBER 30, 1996, 1995 and 1994
Recoveries Written Balance
Balance at Charged of Off as at End
Beginning to Previous Uncollect- of
of Period Income Write-Offs ible Period
---------- ---------- ---------- ---------- ----------
(in thousands)
<S> <C> <C> <C> <C> <C>
1996:
Allowances for
uncollectible
accounts $ 919 $ 1,181 $ 598 $ (1,832) $ 866
======= ======= ======= ======= =======
1995:
Allowances for
uncollectible
accounts $ 1,252 $ 1,151 $ 578 $ (2,062) $ 919
======= ======= ======= ======== =======
1994:
Allowances for
uncollectible
accounts $ 277 $ 2,406 $ 473 $ (1,904) $ 1,252
======= ======= ======= ======== =======
</TABLE>
<PAGE>
Page 104
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrants have duly caused this report to be signed on
their behalf by the undersigned, thereunto duly authorized.
WASHINGTON ENERGY COMPANY and
WASHINGTON NATURAL GAS COMPANY
December 18, 1996 /s/ William P. Vititoe
(William P. Vititoe, Chief Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrants and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Date Signature Title
================== ============================== ============================
<S> <C> <C>
December 18, 1996 /s/ Virginia Anderson
(all signatures) (Virginia Anderson) Director
/s/ R. F. Bailey
(R. F. Bailey) Director
/s/ Donald Covey
(Donald Covey) Director
/s/ John W. Creighton, Jr.
(John W. Creighton, Jr.) Director
/s/ Robert L. Dryden
(Robert L. Dryden) Director
/s/ Tomio Moriguchi
(Tomio Moriguchi) Director
/s/ Sally G. Narodick
(Sally G. Narodick) Director
/s/ William P. Vititoe
(William P. Vititoe) Director, Chairman of the
Board, President and Chief
Executive Officer
/s/ J. P. Torgerson
(J. P. Torgerson) Executive Vice President,
Chief Administrative
Officer; the Chief
Financial Officer
/s/ Allyn P. Hebner
(Allyn P. Hebner) Vice President - Finance
and Treasurer; the Chief
Accounting Officer
</TABLE>
<PAGE>
Page 105
EXHIBIT INDEX
Certain of the following exhibits are filed herewith. Certain
other of the following exhibits have heretofore been filed with
the Commission and are incorporated herein by reference.
(*Filed herewith)
2-A.1 Agreement and Plan of Merger by and among Puget Sound Power &
Light Company, Washington Energy Company and Washington Natural
Gas Company dated as of October 18, 1995 (incorporated herein by
reference to Exhibit 2.1 to Washington Energy Company/Washington
Natural Gas Company Form 8-K dated October 18, 1995, File Nos. 1-
11227 and 1-11271, respectively).
2-A.2 Stock Option Agreement dated as of October 18, 1995 by and among
Puget Sound Power & Light Company and Washington Energy Company
(incorporated herein by reference to Exhibit 2.3 to Washington
Energy Company/Washington Natural Gas Company Form 8-K dated
October 18, 1995, File Nos. 1-11227 and 1-11271, respectively).
2-A.3 Stock Option Agreement dated as of October 18, 1995 by and among
Washington Energy Company and Puget Sound Power & Light Company
(incorporated herein by reference to Exhibit 2.2 to Washington
Energy Company/Washington Natural Gas Company Form 8-K dated
October 18, 1995, File Nos. 1-11227 and 1-11271, respectively).
4-A Restated Articles of Incorporation of Washington Energy Company
(incorporated herein by reference to Washington Energy Company
Exhibit 3-A, Form 10-Q for the quarter ended June 30, 1988, File
No. 0-8745).
4-A.1 Articles of Amendment to the Articles of Incorporation of
Washington Energy Company, dated March 60 increasing the $5 par
value common stock to 50,000,000 shares from 25,000,000 shares
(incorporated herein by reference to Washington Energy Company
Exhibit 3-A.1, Form 10-K for the year ended September 30, 1990,
File No. 0-8745).
4-A.2 Articles of Amendment to the Articles of Incorporation of
Washington Energy Company dated June 14, 1991 changing the length
of the term of a Director elected to fill a vacancy (incorporated
herein by reference to Washington Energy Company Exhibit 3-A.2,
Form 10-K for the year ended September 30, 1991, File 0-8745).
4-A.3 Amended and Restated Articles of Incorporation of Washington
Natural Gas Company, dated November 2, 1993 (incorporated herein
by reference to Washington Natural Gas Company Exhibit 4-A.2,
Registration No. 33-50919).
4-A.4 Articles of Amendment to Amended and Restated Articles of
Incorporation of Washington Natural Gas Company, dated November
10, 1993 (incorporated herein by reference to Washington Natural
Gas Company Exhibit 4-A.3, Registration No. 33-50919).
<PAGE>
Page 106
4-A.5 Articles of Amendment to Amended and Restated Articles of
Incorporation of Washington Natural Gas Company establishing a
series of Preferred Stock, dated November 18, 1993 (incorporated
herein by reference to Washington Natural Gas Company Exhibit 4-
A.5, Form 10-K for the year ended September 30, 1993, File No.
001-1127).
4-A.6 Articles of Amendment to Amended and Restated Articles of
Incorporation of Washington Natural Gas Company establishing a
series of Preferred Stock, dated September 9, 1994 (incorporated
herein by reference to Washington Natural Gas Company Exhibit 4-
A.6, Form 10-K for the year ended September 30, 1994, File No. 1-
11271).
4-B.1 Amended and Restated Bylaws of Washington Energy Company adopted
October 10, 1990 (incorporated herein by reference to Washington
Energy Company Exhibit 3-B.1, Form 10-K for the year ended
September 30, 1990, File No. 0-8745).
4-B.2 Amendment to the Bylaws of Washington Energy Company, adopted
December 12, 1990 (incorporated herein by reference to Washington
Energy Company Exhibit 3-B.2, Form 10-K for the year ended
September 30, 1990, File No. 0-8745).
4-B.3 Amendment to the Bylaws of Washington Energy Company, adopted
April 20, 1994 (incorporated herein by reference to Washington
Natural Gas Company Exhibit 4-B.3, Form 10-K for the year ended
September 30, 1994, File No. 1-11271).
4-B.4 Amendment to the Bylaws of Washington Energy Company, adopted
October 19, 1994 (incorporated herein by reference to Washington
Natural Gas Company Exhibit 4-B.4, Form 10-K for the year ended
September 30, 1994, File No. 1-11271).
4-C.1 Amended and Restated Bylaws of Washington Natural Gas Company
adopted December 14, 1990 (incorporated herein by reference to
Washington Natural Gas Company Exhibit 3-D.1, Form 10-K for the
year ended September 30, 1990, File No. 0-951).
4-C.2 Amendment to the Bylaws of Washington Natural Gas Company adopted
October 19, 1994 (incorporated herein by reference to Washington
Natural Gas Company Exhibit 4-C.2, Form 10-K for the year ended
September 30, 1994, File No. 1-11271).
4-D.1 Indenture of First Mortgage dated as of April 1, 1957
(incorporated herein by reference to Washington Natural Gas
Company Exhibit 4-B, Registration No. 2-14307).
4-D.2 Sixth Supplemental Indenture dated as of August 1, 1966
(incorporated herein by reference to Washington Natural Gas
Company Exhibit to Form 8-K for month of August 1966, File No. 0-
951).
4-D.4 Twelfth Supplemental Indenture dated as of November 1, 1972
(incorporated herein by reference to Washington Natural Gas
Company Exhibit to Form 8-K for November 1972, File No. 0-951).
<PAGE>
Page 107
4-D.5 Seventeenth Supplemental Indenture dated as of August 9, 1978
(incorporated herein by reference to Washington Energy Company
Exhibit 5-K.18, Registration No. 2-64428).
4-D.6 Twenty-third Supplemental Indenture dated as of July 15, 1986
(incorporated herein by reference to Washington Natural Gas
Company Exhibit 4-B.21, Form 10-K for the year ended September
30, 1986, File No. 0-951).
4-D.7 Twenty-sixth Supplemental Indenture dated as of September 1, 1990
(incorporated herein by reference to Washington Natural Gas
Company Exhibit 4-B.19, Form 10-K for the year ended September
30, 1990, File No. 0-951).
4-D.8 Twenty-seventh Supplemental Indenture dated as of September 1,
1990 (incorporated herein by reference to Washington Natural Gas
Company Exhibit 4-B.20, Form 10-K for the year ended September
30, 1988, File No. 0-951).
4-D.9 Twenty-eighth Supplemental Indenture dated as of July 31, 1991
(incorporated herein by reference to Washington Natural Gas
Company exhibit 4-A, Form 10-Q for the quarter ended March 31,
1993, File No. 0-951).
4-D.10 Twenty-ninth Supplemental Indenture dated as of June 1, 1993
(incorporated herein by reference to Exhibit 4-A of Washington
Natural Gas Company's S-3 Registration Statement, Registration
No. 33-49599).
4-D.11 Thirtieth Supplemental Indenture dated as of August 15, 1995
(incorporated herein by reference to Exhibit 4-A of Washington
Natural Gas Company's S-3 Registration Statement, Registration
No. 33-61859).
10-A Service Agreement dated September 1, 1987 between Northwest
Pipeline Corporation and Washington Natural Gas Company for SGS-1
firm storage service at Jackson Prairie (incorporated herein by
reference to Washington Natural Gas Company Exhibit 10-A Form 10-
K for the year ended September 30, 1994, File No. 11271).
10-B Service Agreement dated April 14, 1993 between Questar Pipeline
Corporation and Washington Natural Gas Company for FSS-1 firm
storage service at Clay Basin (incorporated herein by reference
to Washington Natural Gas Company Exhibit 10-B Form 10-K for the
year ended September 30, 1994, File No. 11271).
10-C Service Agreement dated November 1, 1989, with Northwest Pipeline
Corporation covering liquefaction storage gas service filed under
cover of Form SE dated December 27, 1989.
10-D Firm Transportation Service Agreement dated October 1, 1990
between Northwest Pipeline Corporation and Washington Natural Gas
Company (incorporated herein by reference to Washington Natural
Gas Company Exhibit 10-D Form 10-K for the year ended September
30, 1994, File No. 11271).
<PAGE>
Page 108
10-E Gas Transportation Service Contract dated June 29, 1990 between
Washington Natural Gas Company and Northwest Pipeline Corporation
(incorporated herein by reference to Washington Natural Gas
Company exhibit 4-A Form 10-Q for the quarter ended March 31,
1993, File No. 0-951).
10-E.1 Gas Transportation Service Contract dated July 31, 1991 between
Washington Natural Gas Company and Northwest Pipeline Corporation
(incorporated herein by reference to Washington Natural Gas
Company exhibit 4-A Form 10-Q for the quarter ended March 31,
1993, File No. 0-951).
10-E.2 Amendment to Gas Transportation Service Contract dated July 31,
1991 between Washington Natural Gas Company and Northwest
Pipeline Corporation.
10-E.3 Gas Transportation Service Contract dated July 15, 1994 between
Washington Natural Gas Company and Northwest Pipeline Corporation
10-E.4 Amendment to Gas Transportation Service Contract dated August 15,
1994 between Washington Natural Gas Company and Northwest
Pipeline Corporation.
10-F $250,000,000 Credit Agreement dated March 31, 1995 by and among
Washington Energy Company, as Borrower, The First National Bank
of Chicago, Seattle-First National Bank, The Industrial Bank of
Japan, Limited, ABN Amro Bank N.V., Bank of Montreal, First
Interstate Bank of Washington, N.A., Nationsbank of Texas, N.A.,
U.S. Bank of Washington, N.A., and CIBC Inc., as Lenders, and The
First National Bank of Chicago, as Agent.
10-G Intentionally left blank.
10-H Washington Natural Gas Company Deferred Compensation Plan
effective September 1, 1995.
10-I Form of Washington Natural Gas Company - Executive Retirement
Compensation Agreement reflecting all amendments through August
16, 1995.
10-J Second Washington Energy Company Performance Share Plan (amended
and restated effective October 1, 1991) (incorporated herein by
reference to Washington Energy Company Exhibit 10-L.1, Form 10-K
for the year ended September 30, 1991, File No. 0-8745).
10-J.2 Washington Energy Company Interim Performance Share Plan
effective December 7, 1994.
10-K.1 Washington Energy Company Stock Option Plan (incorporated herein
by reference to Exhibit 10-C Washington Energy Company Form 10-Q
for the quarter ended March 31, 1984, File No. 0-8745).
10-K.2 Amendment to Washington Energy Company Stock Option Plan
(incorporated herein by reference to Washington Energy Company
Exhibit 10-S, Form 10-K for the year ended September 30, 1986,
File No. 0-8745).
<PAGE>
Page 109
10-K.3 Amendment to Washington Energy Company Stock Option Plan dated as
of February 26, 1988 (incorporated herein by reference to
Washington Energy Company Form S-8, Registration No. 33-24221).
10-K.4 Washington Energy Company Stock Option Plan effective December
15, 1993 (incorporated herein by reference to Washington Energy
Company Exhibit 99, Registration No. 33-55381).
10-L Washington Energy Company Directors Stock Bonus Plan
(incorporated herein by reference to Washington Energy Company
Exhibit 10-O Form 10-K for the year ended September 30, 1990,
File No. 0-8745).
10-M.1 Employment Agreement between Washington Energy Company,
Washington Natural Gas Company and William P. Vititoe dated
January 15, 1994 (incorporated herein by reference to Washington
Natural Gas Company Exhibit 10-M.1, Form 10-K for the year ended
September 30, 1994, File No. 1-11271).
10-M.2 Form of Conditional Executive Employment Contract, filed under
cover of Form SE dated December 27, 1988, (incorporated herein by
reference to Washington Natural Gas Company Exhibit 10-M.2, Form
10-K for the year ended September 30, 1994, File No. 1-11271).
10-M.3 Amended and restated Washington Energy Company and subsidiaries
Annual Incentive Plan for Vice Presidents and above, dated
October 1994.
10-N Interest Rate Swap Agreement dated September 27, 1989 between
Thermal Resources, Inc., and the First National Bank of Chicago,
filed under cover of Form SE dated December 27, 1989,
(incorporated herein by reference to Washington Natural Gas
Company Exhibit 10-N, Form 10-K for the year ended September 30,
1994, File No. 1-11271).
10-O Firm Transportation Service Agreement dated March 1, 1992 between
Northwest Pipeline Corporation and Washington Natural Gas
Company, (incorporated herein by reference to Washington Natural
Gas Company Exhibit 10-O, Form 10-K for the year ended September
30, 1994, File No. 1-11271).
10-P Firm Transportation Service Agreement dated January 12, 1994
between Northwest Pipeline Corporation and Washington Natural Gas
Company for firm transportation service from Jackson Prairie,
(incorporated herein by reference to Washington Natural Gas
Company Exhibit 10-P, Form 10-K for the year ended September 30,
1994, File No. 1-11271).
10-Q Firm Transportation Service Agreement dated January 12, 1994
between Northwest Pipeline Corporation and Washington Natural Gas
Company for firm transportation service from Jackson Prairie,
(incorporated herein by reference to Washington Natural Gas
Company Exhibit 10-Q, Form 10-K for the year ended September 30,
1994, File No. 1-11271).
10-R Firm Transportation Service Agreement dated January 12, 1994
between Northwest Pipeline Corporation and Washington Natural Gas
Company for firm transportation service from Plymouth, LNG,
<PAGE>
Page 110
(incorporated herein by reference to Washington Natural Gas
Company Exhibit 10-R, Form 10-K for the year ended September 30,
1994, File No. 1-11271).
10-S Service Agreement dated July 9, 1991 with Northwest Pipeline
Corporation for SGS-2F Storage Service filed under cover of Form
SE dated December 23, 1991 (incorporated herein by reference to
Washington Natural Gas Company Exhibit 10-S, Form 10-K for the
year ended September 30, 1994, File No. 1-11271).
10-T Firm Transportation Agreement dated October 27, 1993 between
Pacific Gas Transmission Company and Washington Natural Gas
Company for firm transportation service from Kingsgate,
(incorporated herein by reference to Washington Natural Gas
Company Exhibit 10-T, Form 10-K for the year ended September 30,
1994, File No. 1-11271).
10-U Firm Storage Service Agreement and Amendment dated April 30, 1991
between Questar Pipeline Company and Washington Natural Gas
Company for firm storage service at Clay Basin filed under cover
of Form SE dated December 23, 1991.
*12 Computation of Ratios.
*21 Subsidiaries of the Registrant.
*23 Consent of Arthur Andersen LLP (set forth herein on page 97).
*27.1 Financial Data Schedule - Washington Energy Company.
*27.2 Financial Data Schedule - Washington Natural Gas Company.
*99 Unaudited Proforma Condensed Financial Statements for the
proposed merger of Washington Energy Company and Puget Sound
Power and Light Company.
<TABLE>
WASHINGTON NATURAL GAS COMPANY
Computations of Ratio of Earnings to Fixed Charges
Consolidated
<CAPTION>
Fiscal Year Ended September 30
-------------------------------------------------------------
1992 1993 1994 1995 1996
-------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
(In thousands, except ratios)
Fixed Charges, as defined:
Interest on long-term debt $23,155 $25,468 $29,078 $27,628 $26,303
Interest on short-term debt 3,094 913 197 2,647 46
Amortization of Debt Discount 299 361 392 375 375
Other interest expense (502) 340 1,097 1,566 4,899
Interest charges capitalized 656 250 453 727 719
Interest portion of rentals 1,517 1,633 1,337 1,338 951
-------------------------------------------------------------
Total fixed charges $28,219 $28,965 $32,554 $34,281 $33,293
========= ========= ========= ========= =========
Earnings, as defined:
Net Income (loss) from
Continuing operations 12,231 21,771 (8,243) 17,854 37,224
Add: Federal Income taxes 4,902 9,547 (5,991) 8,195 19,216
-------------------------------------------------------------
Pre-tax income from continuing 17,133 31,318 (14,234) 26,049 56,440
operations
Add total fixed charges above 28,219 28,965 32,554 34,281 33,293
Less adjustments to fixed charges
(a) Interest capitalized during the
period (656) (250) (453) (727) (719)
-------------------------------------------------------------
Total earnings available for fixed
charges $44,696 $60,033 $17,867 $59,603 $89,014
========= ========= ========= ========= =========
Ratio of earnings to fixed charges 1.58 2.07 0.55 1.74 2.67
Earnings deficit to cover fixed charges (14,687)
</TABLE>
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANTS
Subsidiaries of Washington Energy Company:
Washington Natural Gas Company, a Washington corporation, distributes natural
gas at the retail level in the Puget Sound area of western Washington.
WNG CAP I, Inc., a Washington corporation, and WNG CAP II, Inc., a
Washington corporation, were formed to provide operational flexibility
with respect to firm transportation agreements of Washington Natural
Gas Company.
Thermal Energy, Inc., a Washington corporation, owns or leases undeveloped coal
reserves and surface rights to undeveloped coal in Montana.
Thermal Resources, Inc., a Montana corporation, is a wholly-owned
subsidiary of Thermal Energy, Inc. Thermal Resources, Inc., is a
single purpose company that leases undeveloped coal reserves in
Montana to Montco, a partnership controlled by Thermal Energy, Inc.
ThermRail, Inc., a Washington corporation, was formed to participate as a
partner in the Tongue River Railroad Company. The purpose of Tongue River
Railroad Company is to develop and operate a rail line to transport coal from
future mines in Montana's Tongue River area to existing east-west rail lines.
Tongue River Holdings, Inc., a Montana corporation, is a limited
partner in Tongue River Railroad Company, a Montana limited
partnership. ThermRail, Inc., owns 87.5% of the common stock of this
corporation.
WECO Finance Company, a Washington corporation, is holder of the common stock
of Mercer Insurance Company Limited.
Mercer Insurance Company Limited, a wholly-owned subsidiary of WECO
Finance Company, is a Bermuda domiciled corporation providing primary
liability insurance for Washington Energy Company and its affiliates.
Washington Energy Services Company, a Washington corporation, was formed
October 1, 1993 to consolidate the merchandise marketing activities that
previously were part of Washington Natural Gas Company and a former subsidiary
of Washington Energy.
Washington Energy Gas Marketing, a Washington corporation, was formed in 1994
to assume certain contractual arrangements excluded from the merger of
Washington Energy Resources Company, the former oil and gas exploration and
production subsidiary of Washington Energy, with a subsidiary of Cabot Oil &
Gas Corporation.
<TABLE> <S> <C>
<ARTICLE> UT
<CIK> 225998
<NAME> WASHINGTON ENERGY COMPANY
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1996
<PERIOD-END> SEP-30-1996
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 835,870
<OTHER-PROPERTY-AND-INVEST> 74,622
<TOTAL-CURRENT-ASSETS> 62,976
<TOTAL-DEFERRED-CHARGES> 31,451
<OTHER-ASSETS> 29,517
<TOTAL-ASSETS> 1,034,436
<COMMON> 121,339
<CAPITAL-SURPLUS-PAID-IN> 205,311
<RETAINED-EARNINGS> (127,299)
<TOTAL-COMMON-STOCKHOLDERS-EQ> 199,351
0
90,000
<LONG-TERM-DEBT-NET> 344,920
<SHORT-TERM-NOTES> 0
<LONG-TERM-NOTES-PAYABLE> 0
<COMMERCIAL-PAPER-OBLIGATIONS> 177,709
<LONG-TERM-DEBT-CURRENT-PORT> 140
0
<CAPITAL-LEASE-OBLIGATIONS> 0
<LEASES-CURRENT> 0
<OTHER-ITEMS-CAPITAL-AND-LIAB> 222,316
<TOT-CAPITALIZATION-AND-LIAB> 1,034,436
<GROSS-OPERATING-REVENUE> 425,711
<INCOME-TAX-EXPENSE> 15,232
<OTHER-OPERATING-EXPENSES> 338,493
<TOTAL-OPERATING-EXPENSES> 353,725
<OPERATING-INCOME-LOSS> 71,986
<OTHER-INCOME-NET> (5,870)
<INCOME-BEFORE-INTEREST-EXPEN> 66,116
<TOTAL-INTEREST-EXPENSE> 41,156
<NET-INCOME> 23,128
0
<EARNINGS-AVAILABLE-FOR-COMM> 23,128
<COMMON-STOCK-DIVIDENDS> 24,149
<TOTAL-INTEREST-ON-BONDS> 26,303
<CASH-FLOW-OPERATIONS> 83,500
<EPS-PRIMARY> .96
<EPS-DILUTED> .96
</TABLE>
<TABLE> <S> <C>
<ARTICLE> UT
<CIK> 104880
<NAME> WASHINGTON NATURAL GAS COMPANY
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1996
<PERIOD-END> SEP-30-1996
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 835,870
<OTHER-PROPERTY-AND-INVEST> 0
<TOTAL-CURRENT-ASSETS> 47,908
<TOTAL-DEFERRED-CHARGES> 30,521
<OTHER-ASSETS> 29,619
<TOTAL-ASSETS> 943,918
<COMMON> 55,558
<CAPITAL-SURPLUS-PAID-IN> 170,725
<RETAINED-EARNINGS> 42,491
<TOTAL-COMMON-STOCKHOLDERS-EQ> 268,774
0
90,000
<LONG-TERM-DEBT-NET> 344,920
<SHORT-TERM-NOTES> 0
<LONG-TERM-NOTES-PAYABLE> 0
<COMMERCIAL-PAPER-OBLIGATIONS> 0
<LONG-TERM-DEBT-CURRENT-PORT> 140
0
<CAPITAL-LEASE-OBLIGATIONS> 0
<LEASES-CURRENT> 0
<OTHER-ITEMS-CAPITAL-AND-LIAB> 240,084
<TOT-CAPITALIZATION-AND-LIAB> 943,918
<GROSS-OPERATING-REVENUE> 400,108
<INCOME-TAX-EXPENSE> 18,994
<OTHER-OPERATING-EXPENSES> 312,038
<TOTAL-OPERATING-EXPENSES> 331,032
<OPERATING-INCOME-LOSS> 69,076
<OTHER-INCOME-NET> (229)
<INCOME-BEFORE-INTEREST-EXPEN> 68,847
<TOTAL-INTEREST-EXPENSE> 31,623
<NET-INCOME> 37,224
7,020
<EARNINGS-AVAILABLE-FOR-COMM> 30,204
<COMMON-STOCK-DIVIDENDS> 16,578
<TOTAL-INTEREST-ON-BONDS> 26,303
<CASH-FLOW-OPERATIONS> 102,431
<EPS-PRIMARY> 2.74
<EPS-DILUTED> 2.74
</TABLE>
<TABLE>
UNAUDITED PRO FORMA CONDENSED STATEMENT OF INCOME Exhibit 99
FOR THE PROPOSED MERGER OF WASHINGTON ENERGY COMPANY
AND PUGET SOUND POWER & LIGHT COMPANY
FOR NINE MONTHS ENDED SEPTEMBER 30, 1996
<CAPTION>
Pro Forma
Puget WECo Combined (1)
<S> <C> <C> <C>
(in thousands, except per share)
OPERATING REVENUES $841,208 $298,216 $1,139,424
OPERATING EXPENSES (4):
Purchased and interchanged power and gas purchases 300,227 121,942 422,169
Other operating expenses and maintenance 180,032 62,339 242,371
Depreciation and amortization 81,919 26,727 108,646
Taxes other than federal income taxes 84,664 27,778 112,442
Federal income taxes 56,776 9,744 66,520
-----------------------------------------------
Total operating expenses 703,618 248,530 952,148
-----------------------------------------------
OPERATING INCOME 137,590 49,686 187,276
-----------------------------------------------
OTHER INCOME (EXPENSE):
Preferred dividend requirement - WNG (5) - (5,265) -
Other - net of taxes 8,020 702 8,722
-----------------------------------------------
Total other income (expense) 8,020 (4,563) 8,722
-----------------------------------------------
INCOME BEFORE INTEREST CHARGES 145,610 45,123 195,998
INTEREST CHARGES 57,438 30,565 88,003
-----------------------------------------------
INCOME FROM CONTINUING OPERATIONS BEFORE
PREFERRED DIVIDENDS 88,172 14,558 107,995
PREFERRED STOCK DIVIDEND ACCRUALS (5) 11,337 - 16,602
LOSS FROM DISCONTINUED OPERATIONS
LOSS FROM OPERATIONS, NET OF INCOME TAX - 1,119 1,119
LOSS ON DISPOSAL, NET OF INCOME TAX - 446 446
-----------------------------------------------
EARNINGS ON COMMON STOCK $76,835 $12,993 $89,828
===============================================
COMMON SHARES OUTSTANDING WEIGHTED AVERAGE (2) and (3) 63,641 24,193 84,447
EARNINGS (LOSS) PER COMMON SHARE
FROM CONTINUING OPERATIONS $1.21 $0.60 $1.08
FROM DISCONTINUED OPERATIONS - ($0.06) ($0.02)
-----------------------------------------------
EARNINGS PER COMMON SHARE $1.21 $0.54 $1.06
See accompanying Notes to Unaudited Pro Forma Condensed Financial Statements
</TABLE>
<PAGE>
<TABLE>
UNAUDITED PRO FORMA CONDENSED STATEMENT OF INCOME Exhibit 99
FOR THE PROPOSED MERGER OF WASHINGTON ENERGY COMPANY
AND PUGET SOUND POWER & LIGHT COMPANY
FOR TWELVE MONTHS ENDED SEPTEMBER 30, 1996
<CAPTION>
Pro Forma
Puget WECo Combined (1)
<S> <C> <C> <C>
(in thousands, except per share)
OPERATING REVENUES $1,172,017 $425,711 1,597,728
OPERATING EXPENSES (4):
Purchased and interchanged power and gas purchases 416,443 177,719 594,162
Other operating expenses and maintenance 245,993 85,689 331,682
Depreciation, depletion and amortization 108,710 35,777 144,487
Taxes other than federal income taxes 113,176 39,308 152,484
Federal income taxes 85,815 15,232 101,047
-----------------------------------------------
Total operating expenses 970,137 353,725 1,323,862
-----------------------------------------------
OPERATING INCOME 201,880 71,986 273,866
-----------------------------------------------
OTHER INCOME (EXPENSE):
Preferred dividend requirement - WNG (5) - (7,020) -
Other - net of taxes 9,169 1,150 10,319
-----------------------------------------------
Total other income (expense) 9,169 (5,870) 10,319
-----------------------------------------------
INCOME BEFORE INTEREST CHARGES 211,049 66,116 284,185
INTEREST CHARGES 77,786 41,156 118,942
-----------------------------------------------
INCOME FROM CONTINUING OPERATIONS BEFORE
PREFERRED DIVIDENDS 133,263 24,960 165,243
PREFERRED STOCK DIVIDEND ACCRUALS (5) 15,139 - 22,159
LOSS FROM DISCONTINUED OPERATIONS
LOSS FROM OPERATIONS, NET OF INCOME TAX - 1,386 1,386
LOSS ON DISPOSAL, NET OF INCOME TAX - 446 446
-----------------------------------------------
EARNINGS ON COMMON STOCK $118,124 $23,128 $141,252
===============================================
COMMON SHARES OUTSTANDING WEIGHTED AVERAGE (2) and (3) 63,641 24,159 84,418
EARNINGS (LOSS) PER COMMON SHARE
FROM CONTINUING OPERATIONS $1.86 $1.03 $1.69
FROM DISCONTINUED OPERATIONS - ($0.07) ($0.02)
-----------------------------------------------
EARNINGS PER COMMON SHARE $1.86 $0.96 $1.67
See accompanying Notes to Unaudited Pro Forma Condensed Financial Statements
</TABLE>
<PAGE>
<TABLE>
UNAUDITED PRO FORMA CONDENSED BALANCE SHEET Exhibit 99
FOR THE PROPOSED MERGER OF WASHINGTON ENERGY COMPANY
AND PUGET SOUND POWER & LIGHT COMPANY
AT SEPTEMBER 30, 1996
<CAPTION>
Pro Forma
Puget WECo Combined
<S> <C> <C> <C>
(in thousands)
ASSETS
Property, Plant and Equipment:
Utility plant $3,465,960 $1,129,849 $4,595,809
Accumulated provisions for depreciation
and amortization 1,171,428 293,979 1,465,407
-----------------------------------------------
Net property, plant and equipment 2,294,532 835,870 3,130,402
-----------------------------------------------
Other Property and Investments:
Investment in Bonneville Exchange Power Contract 88,678 - 88,678
Investment in and advances to subsidiaries 105,776 - 105,776
Investment in unconsolidated affiliates - 69,352 69,352
Other 12,979 5,270 18,249
-----------------------------------------------
Total other property and investments 207,433 74,622 282,055
-----------------------------------------------
Current Assets:
Cash 2,466 599 3,065
Accounts receivable 96,173 11,714 107,887
Estimated unbilled revenue 59,872 12,199 72,071
PRAM accrued revenues 61,451 - 61,451
Materials and supplies, at average cost 37,904 24,955 62,859
Prepayments and other 5,356 13,509 18,865
-----------------------------------------------
Total current assets 263,222 62,976 326,198
-----------------------------------------------
Long-Term Assets:
Regulatory asset for deferred income taxes 236,781 19,353 256,134
Unamortized energy conservation charges 40,193 - 40,193
Other 117,748 41,615 159,363
-----------------------------------------------
Total long-term assets 394,722 60,968 455,690
-----------------------------------------------
TOTAL ASSETS $3,159,909 $1,034,436 $4,194,345
===============================================
See accompanying Notes to Unaudited Pro Forma Condensed Financial Statements
</TABLE>
<PAGE>
<TABLE>
UNAUDITED PRO FORMA CONDENSED BALANCE SHEET Exhibit 99
FOR THE PROPOSED MERGER OF WASHINGTON ENERGY COMPANY
AND PUGET SOUND POWER & LIGHT COMPANY
AT SEPTEMBER 30, 1996
<CAPTION>
Pro Forma
Puget WECo Combined
<S> <C> <C> <C>
(in thousands)
CAPITALIZATION AND LIABILITIES
Capitalization:
Common stock and additional paid-in capital $965,372 $326,650 $1,292,022
Earnings reinvested (accumulated deficit) 199,560 (127,299) 72,261
Preferred stock not subject to mandatory redemption 125,000 90,000 215,000
Preferred stock subject to mandatory redemption 87,840 - 87,840
Long-term debt 920,549 344,920 1,265,469
-----------------------------------------------
Total capitalization 2,298,321 634,271 2,932,592
-----------------------------------------------
Current Liabilities:
Accounts payable 49,798 21,891 71,689
Short-term debt 121,305 177,709 299,014
Current maturities of long-term debt 8,000 140 8,140
Accrued taxes 85,459 14,202 99,661
Other 17,243 73,185 90,428
-----------------------------------------------
Total current liabilities 281,805 287,127 568,932
-----------------------------------------------
Deferred Taxes:
Deferred income taxes 493,707 75,119 568,826
Deferred investment credits - 8,479 8,479
-----------------------------------------------
Total deferred taxes 493,707 83,598 577,305
-----------------------------------------------
Other Deferred Credits:
Customer advances for construction 21,548 5,334 26,882
Other 64,528 24,106 88,634
-----------------------------------------------
Total other deferred credits 86,076 29,440 115,516
-----------------------------------------------
TOTAL CAPITALIZATION AND LIABILITIES $3,159,909 $1,034,436 $4,194,345
===============================================
See accompanying Notes to Unaudited Pro Forma Condensed Financial Statements
</TABLE>
<PAGE>
Exhibit 99
NOTES TO THE UNAUDITED PRO FORMA CONDENSED FINANCIAL STATEMENTS
(1) Puget's fiscal year ends on December 31. Washington Energy Company's
("WECo") fiscal year ends on September 30. The pro forma financial data
for the nine months and twelve months ended September 30, 1996 are the
results of nine months and twelve months ended September 30, 1996 for
Puget and WECo.
(2) The pro forma condensed financial statements reflect the conversion of
each share of WECo common stock outstanding into .860 share of Puget Sound
Energy ("PSE") common stock and the conversion of each WNG preferred share
into one share of PSE preferred stock. The pro forma condensed financial
statements are presented as if the merger had been consummated prior to
the periods presented.
(3) The number of shares of common stock outstanding, by company, were as
follows:
Puget WECo Pro Forma
----------- ----------- -----------
at September 30, 1996 63,641,000 24,268,000 84,511,000
(4) The pro forma financial statements do not reflect the $370 million net
cost savings estimated to be achieved in the ten-year period following
consummation of the merger because the terms and conditions under which
the WUTC may approve the merger are unknown.
(5) Assumes WNG preferred stock has been exchanged for PSE preferred
stock. In the pro forma condensed statements of income, these
dividend requirements are included in the "preferred stock dividend
accruals", instead of "preferred dividend requirement-WNG".
