-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: keymaster@town.hall.org Originator-Key-Asymmetric: MFkwCgYEVQgBAQICAgADSwAwSAJBALeWW4xDV4i7+b6+UyPn5RtObb1cJ7VkACDq pKb9/DClgTKIm08lCfoilvi9Wl4SODbR1+1waHhiGmeZO8OdgLUCAwEAAQ== MIC-Info: RSA-MD5,RSA, kHCQXKuDcy+AoHr1UAzyp3XE3PhKXztpdnM/jVrU1HgKiSceiQNfrjkwp96M0dax JnGTTo0BcoA9I7QMnThPVg== 0000891020-94-000223.txt : 19941230 0000891020-94-000223.hdr.sgml : 19941230 ACCESSION NUMBER: 0000891020-94-000223 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 21 CONFORMED PERIOD OF REPORT: 19940930 FILED AS OF DATE: 19941229 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: WASHINGTON ENERGY CO CENTRAL INDEX KEY: 0000225998 STANDARD INDUSTRIAL CLASSIFICATION: NATURAL GAS DISTRIBUTION [4924] IRS NUMBER: 911005304 STATE OF INCORPORATION: WA FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-11227 FILM NUMBER: 94566994 BUSINESS ADDRESS: STREET 1: P.O. BOX 1869 CITY: SEATTLE STATE: WA ZIP: 98111-1869 BUSINESS PHONE: 2066226767 MAIL ADDRESS: STREET 1: P O BOX 1869 CITY: SEATTLE STATE: WA ZIP: 98111 FILER: COMPANY DATA: COMPANY CONFORMED NAME: WASHINGTON NATURAL GAS CO CENTRAL INDEX KEY: 0000104880 STANDARD INDUSTRIAL CLASSIFICATION: NATURAL GAS TRANSMISSION [4922] IRS NUMBER: 91100530 STATE OF INCORPORATION: WA FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-11271 FILM NUMBER: 94566995 BUSINESS ADDRESS: STREET 1: P.O. BOX 1869 CITY: SEATTLE STATE: WA ZIP: 98111-1869 BUSINESS PHONE: 2066226767 MAIL ADDRESS: STREET 1: P O BOX 1869 CITY: SEATTLE STATE: WA ZIP: 98111-1869 FORMER COMPANY: FORMER CONFORMED NAME: WASHINGTON NATURAL GAS CO (PRED) DATE OF NAME CHANGE: 19920703 FORMER COMPANY: FORMER CONFORMED NAME: WASHINGTON GAS & ELECTRIC CO DATE OF NAME CHANGE: 19600201 10-K 1 WASHINGTON ENERGY/NATURAL GAS FORM 10-K 1 PAGE 1 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, 1994 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. Commission Employer File Exact Name of Registrant as State of Identification Number Specified in Its Charter Incorporation Number - ---------- ------------------------------ ------------- -------------- 001-11227 Washington Energy Company Washington 91-1005304 001-11271 Washington Natural Gas Company Washington 91-1005303
Address of Principal Executive Offices Zip Code - -------------------------------------- -------- 815 Mercer Street, Seattle, Washington 98109
Registrants' Telephone Number, Including Area Code -------------------------------------------------- (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 New York Stock Exchange Washington Energy Company 7.45% Preferred Stock, New York Stock Exchange Series II, $25 Par Value of Washington Natural Gas Company 8.50% Preferred Stock, New York Stock Exchange Series III, $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 Washington Energy Company's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. X 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 14, 1994: $308,480,000. 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 14, 1994 - ------------------------------ -------------- ----------------- Washington Energy Company $5 par value 23,826,205 Washington Natural Gas Company $5 par value 10,774,599
Documents Incorporated by Reference: None ____ 2 PAGE 2 TABLE OF CONTENTS
PART I Page No. Item 1. Business (a) General Development of Business . . . . . . . . . 4 (b) Financial Information About Industry Segments . . 4 (c) Description of Business - Washington Natural Gas Company . . . . . . . . . . . . . . . . . 4 (1) Territory Served . . . . . . . . . . . . 5 (2) Competitive Conditions . . . . . . . . . 5 (3) Customer Usage . . . . . . . . . . . . . 6 (4) Employee Relations . . . . . . . . . . . 6 (5) Franchises . . . . . . . . . . . . . . . 6 (6) Environmental Matters . . . . . . . . . . 7 (7) Gas Supply . . . . . . . . . . . . . . . . 8 General . . . . . . . . . . . . . . . 8 Pipeline and Other Gas Supply Sources 8 (8) Regulation and Rates . . . . . . . . . . . 10 (9) Merchandise Marketing . . . . . . . . . . 12 (10) New Construction . . . . . . . . . . . . 12 (11) Utility Operating Statistics . . . . . . . 13 Description of Business - Oil and Gas Exploration and Production . . . . . . . . . 14 Description of Business - Merchandise and Energy Efficiency Products . . . . . . . . . . . . . 15 Description of Business - Coal and Other Businesses . . . . . . . . . . . . . . . . . 16 Description of Business - Discontinued Biowaste Business . . . . . . . . . . . . . . . . . . 17 (d) Financial Information About Foreign and Domestic Operations and Export Sales . . . . 17
3 PAGE 3 TABLE OF CONTENTS (Continued)
PART I Page No. Item 2. Properties . . . . . . . . . . . . . . . . . . . . 17 Item 3. Legal Proceedings . . . . . . . . . . . . . . . 18 Item 4. Submission of Matters to a Vote of Security Holders 19 Executive Officers of the Registrants . . . . 20 PART II Item 5. Market for Registrant's Common Stock and Related Stockholder Matters . . . . . . . . . . . . . 21 Item 6. Selected Financial Data . . . . . . . . . . . . . 22 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations . . . . 24 Item 8. Financial Statements and Supplementary Data . . 33 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure . . . 73 PART III Item 10. Directors and Executive Officers of the Registrants . . . . . . . . . . . . . . . . . 74 Item 11. Executive Compensation . . . . . . . . . . . . . 77 Item 12. Security Ownership of Certain Beneficial Owners and Management . . . . . . . . . . . . . . . 83 Item 13. Certain Relationships and Related Transactions . 83 PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K . . . . . . . . . . . . . 84 SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 96
4 PAGE 4 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 is engaged in the retail distribution of natural gas. The Company, through other subsidiaries, is also engaged in the business of selling gas appliances, energy efficient and security products for the home; holds an equity position in a publicly traded oil and gas exploration and production company; and holds certain coal-related investments. The Company is exempt from the provisions of the Public Utility Holding Company Act of 1935 ("Act"), except with respect to acquisition of securities of other public utility companies as defined in such Act. The Company was incorporated in 1977 and acquired the common stock of Washington Natural Gas Company ("Washington Natural") and its wholly- owned subsidiaries through a merger in 1978. Washington Natural and its predecessors have manufactured and distributed gas and subsequently distributed natural gas in the Puget Sound region since prior to the turn of the century. Washington Natural entered the gas appliance sales business in the late 1950s when natural gas became available in the region. In response to higher prices for and reduced availability of natural gas in the early 1970s, Washington Natural, through its former subsidiaries, entered the oil and gas exploration and production business, the energy-efficiency products business and initiated its coal-related investments. As part of a change in business strategy, the Company, in 1994, sold its biowaste technology business started in 1984, merged its oil and gas subsidiary, Washington Energy Resources Company ("Resources"), with a subsidiary of Cabot Oil & Gas Corporation ("Cabot") and combined its appliance sales, energy efficiency products and home security businesses in a new subsidiary, Washington Energy Services Company ("Services") in October 1993. The Company's and Washington Natural's principal executive offices are located at 815 Mercer Street, (P.0. Box 1869), Seattle, Washington 98111, and their telephone number is (206) 622-6767. This Form 10-K is filed on behalf of the Company and Washington Natural, which companies are referred to herein as Registrants. (b) Financial Information About Industry Segments See Note 17 of Notes to Financial Statements on page 71. (c) Description of Business Washington Natural Gas Company Washington Natural is engaged predominately in the distribution of natural gas at the retail level. 5 PAGE 5 (1) Territory Served Washington Natural distributes natural gas in the service area extending for approximately 150 miles from north to south in the Puget Sound area of Washington which accounts for approximately 2,619 square miles, or 3.9% of the state's land area. The five counties in which Washington Natural's service area is located have a total estimated population of 3,014,400 (57% of the state's population). During 1994, Washington Natural served an average of 444,623 customers. The four largest cities served are Seattle, Bellevue, Tacoma, and Everett. Metropolitan Seattle, Washington Natural's major service area with 39% of Washington Natural's customers, accounted for 41% of its total 1994 revenues. The Bellevue area, with 23% of the customers, contributed 20% of 1994 revenues. The Tacoma area, with 12% of the customers, accounted for 15% of 1994 revenues. The Everett area supplied 7% of the customers and 8% of revenues for such period. (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 or transportation of natural gas. Large industrial and commercial end-users also have the option to bypass Washington Natural's system by constructing pipelines to interconnect directly with the interstate pipeline which transports all the natural gas consumed in the region. 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 22% more expensive than gas, and electricity for residential space heating was up to 150% more expensive than gas. Conversions of residential users to gas from oil and electricity remain an important source of new customer additions, with approximately 9,000 residential users converting to gas in 1994. Washington Natural successfully competes with all the electric utilities in its service area for new customers in the housing construction market, with approximately 12,100 new homes utilizing gas for space and water heating in 1994. Washington Natural's overall market share of the new single-family home construction market in its service territory exceeded 75% for 1994. Where gas is available, Washington Natural has an approximate 99% share of the new single-family home construction market. Since natural gas costs substantially less than electricity for home space and water heating throughout its service area, Washington Natural expects that its share of the new home market will continue at approximately 75%, and that conversions of existing homes to gas will continue to be a major source of new customers. In 1994, Washington Natural's customer base grew by approximately 21,000 new customers, or 5%. Washington Natural began offering gas transportation service to its industrial customers in 1986. Washington Natural's wholesale gas supplier at the time, Northwest Pipeline Corporation ("Pipeline"), provided "open access" to its system under interim federal regulations that enabled Washington Natural to provide such service. The Federal Energy Regulatory Commission ("FERC") granted Pipeline permanent authority to provide transportation service to 6 PAGE 6 distribution companies and end users in 1988. The availability of both firm and interruptible transportation service, which enables industrial end users to purchase low 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. Cost savings from purchasing gas in the spot (short-term interruptible) market also enable Washington Natural to retain as gas sales customers, industrial end users that have a choice of fuel. Continued evolution in the natural gas industry, resulting primarily from FERC Orders 436, 500 and 636, has served to increase the ability of large gas end users to bypass Washington Natural in obtaining gas supply and transportation services. Nevertheless, to date, Washington Natural has not lost any substantial industrial load as a result of bypass. Further, most industrial users that have a choice of alternate fuels have remained on gas due to price and other considerations. In November 1993, Washington Natural began offering transportation services on its distribution system under a new transportation tariff. While in the past as many as 160 customers annually have taken advantage of the potential savings provided by transportation service, as of October 1994, approximately 50 commercial and industrial customers have chosen to receive only transportation service. Most customers have chosen to remain either firm or interruptible gas sales customers of Washington Natural. Natural gas will continue to play a prominent energy role in the Pacific Northwest due to the abundant supplies available at competitive prices. In the short term, competition with oil in the industrial market will continue but should lessen 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 with weather conditions, particularly in the winter months, because over 90% of its customers use natural gas for space heating. (4) Employee Relations As of November 30, 1994, Washington Energy had 1,413 employees of which 1,294 were employed by Washington Natural. During 1994 Washington Natural reduced overall staffing by 12%, across all employee classifications. Washington Natural has 877 employees organized within eight local unions with which it has collective bargaining agreements. Three collective bargaining agreements are currently under negotiation; one expires in March 1995 and the remaining four expire in April 1995. (5) Franchises Washington Natural holds nonexclusive franchises from all but one of the incorporated communities it services, excluding those communities in which franchise renegotiations are in progress. The Seattle franchise is perpetual and franchises covering other municipalities generally run for terms of 25 years. Washington Natural also holds certain franchises and revocable permits issued by the Washington State Department of Transportation covering Washington Natural's facilities located upon state highway rights-of-way. In addition to the franchises mentioned, Washington Natural holds a Certificate of Public Convenience and Necessity granted by the Washington Utilities and Transportation Commission ("WUTC") to serve the area in which its distribution system is located. 7 PAGE 7 (6) Environmental Matters Washington Natural has principal responsibility for the cleanup of a former manufactured gas plant site in the Tideflats area of Tacoma, Washington, which the U.S. Environmental Protection Agency has determined contains several contaminants and requires cleanup under the Comprehensive Environmental Response, Compensation and Liability Act. Subsequent to fiscal year end, remediation activities have been substantially completed. Based upon cleanup cost estimates at fiscal year end and the cost of insurance litigation, described below, less insurance settlements totaling $7.1 million, Washington Natural's share of the cleanup cost at this site was estimated to be $33.6 million. In 1994, Washington Natural recorded a current liability for the difference between the estimated total unrecovered cleanup cost and the $28.0 million of expenditures incurred through the end of the fiscal year, and also recorded a corresponding receivable in the amount of $33.6 million for the probable insurance recovery based upon the litigation described below. In June 1991, Washington Natural filed a lawsuit in King County Superior Court, State of Washington, against certain insurance companies that provided insurance to Washington Natural at various times dating back to the 1940's. On June 10, 1994, the Superior Court entered final judgement in favor of Washington Natural. Under the terms of the final judgment, Washington Natural is entitled to collect its present and future uncompensated reasonable and necessary costs in remediating the site from the policies of the insurer defendants in the action other than those that previously settled with Washington Natural. The liability of these insurers is joint and several, up to the annual limits of their policies and subject to relevant underlying limits. The judgment provides for limitation of some of the insurers' liability based on the presence in their policies of "owned property" or "alienated premises" clauses. However, Washington Natural does not expect this limitation to affect its ability to collect all of its remediation costs. The final judgment further awards Washington Natural prejudgment interest and declares that Washington Natural is entitled to collect its reasonable attorney fees and costs incurred in obtaining coverage of its remediation costs. The defendants have appealed the judgment to the Washington State Court of Appeals. In the June 1994 quarter, Washington Natural also accrued $2.2 million before income tax for estimated environmental investigation, legal and remediation costs associated with certain former manufactured gas plant sites, one of which is located in Everett, Washington. The Everett site is the subject of a remedial investigation and feasibility study that is scheduled for completion in June 1995. Washington Natural cannot reasonably estimate the extent or range of future remediation costs, if any, at the Everett site until more information is known from the remedial investigation and feasibility study. Based on all known facts and analyses, Washington Natural believes it is not reasonably likely that the identified environmental liabilities, after consideration of insurance recoveries and the judgment entered against certain insurance companies, will result in a material adverse impact on Washington Natural's financial position or operating results and cash flow trends. 8 PAGE 8 (7) Gas Supply General Washington Natural currently purchases a blended portfolio of long-term firm, short-term firm, and spot gas supplies from over 20 major or independent producers (third-party purchases). Until October 8, 1992, Washington Natural purchased firm gas supply from its affiliate, Washington Energy Exploration, Inc. ("Exploration"), a subsidiary of Resources. Until October 31, 1993, Washington Natural purchased firm gas supply from Pipeline under its firm sales agreement. All of Washington Natural's gas supply is transported through Pipeline under long-term firm transportation arrangements. 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 storage facilities and withdrawing it in the winter heating season. The storage facilities at Jackson Prairie in Washington (which is one-third owned by Washington Natural) 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 facility at Plymouth, Washington, and by producing propane air gas at a plant owned by Washington Natural and located on its distribution system. All of the peaking supplies (except propane air gas) are delivered to Washington Natural under firm transportation arrangements with Pipeline. Pipeline and Other Gas Supply Sources Prior to July 1991, Washington Natural was entitled to 150,000 MMBtu (million British thermal units) per day of firm gas supply under its primary firm sales service agreement with Pipeline. In July 1991, Washington Natural elected to convert this agreement to firm transportation service. This conversion was part of the transition subsequently contemplated by FERC Order 636. In May 1992, the FERC issued an order approving this conversion, subject to certain conditions. Subsequently, Pipeline and substantially all of its sales customers, including Washington Natural, requested FERC to remove certain of these conditions. In October 1992, FERC issued an order removing these conditions but imposing certain other conditions. As a result, on November 1, 1992, approximately 50% of the conversion became effective such that Washington Natural's entitlement to firm sales service was reduced from 150,000 MMBtu per day to 75,936 MMBtu per day, and its firm transportation capacity was increased to 268,597 MMBtu per day. Pipeline and affected sales customers, including Washington Natural, sought removal of the remaining conditions affecting the conversion. Orders subsequently issued by the FERC eliminated or resolved the remaining conditions such that the conversion process was completed on October 31, 1993. At that time, Washington Natural's firm transportation capacity increased to 444,533 MMBtu per day, and its pipeline sales entitlement was reduced to zero. Washington Natural's firm transportation capacity entitlement had earlier been increased by 100,000 MMBtu per day on April 1, 1993, when Pipeline expansion facilities were placed in service. Pursuant to a settlement approved by the FERC in May 1994, Washington Natural holds additional firm seasonal transportation capacity totalling 258,872 MMBtu per day which is available exclusively to deliver gas from peaking resources. In addition, Washington Natural has a transportation service agreement with Pipeline for 220,000 MMBtu per day of interruptible transportation capacity. Washington Natural's firm transportation capacity contracts with Pipeline have remaining terms ranging from 10 to 14 years. However, Washington Natural either has the unilateral right to extend its firm 9 PAGE 9 and interruptible transportation contracts under their terms or the right of first refusal to extend such contracts under current FERC orders. Effective November 1, 1992, Washington Natural took assignment of contracts from Pipeline for approximately 25,000 MMBtu per day of firm gas supply in the Rocky Mountain supply region. The balance of Washington Natural's firm gas supply, related to that portion of the conversion to transportation which took place November 1, 1992, was sourced after that date from Washington Natural's firm storage service at Clay Basin. Upon completion of the conversion arrangements with Pipeline on October 31, 1993, Washington Natural took direct control of its pro-rata share of the remaining gas supplies formerly contracted to and managed by Pipeline. Washington Natural has also taken an assignment of rights to approximately 78,000 MMBtu per day of firm supply originating in Alberta, Canada, and the associated Pacific Gas Transmission Co. ("PGT") firm pipeline capacity to deliver this supply to Pipeline. About 60% of the firm supply purchased directly by Washington Natural from producers is Canadian, primarily from British Columbia. The remainder is purchased from domestic sources. Order 636 provides, among other provisions, a complete "unbundling" of interstate pipeline services. The greatest operating impacts of Order 636 on Washington Natural are the implementation of a new design of Pipeline's rates that allows Pipeline to recover all of its fixed costs through demand charges for capacity and a mechanism for the release and resale by Washington Natural of any temporary excess firm capacity. Washington Natural does not expect a significant economic impact as a result of Order 636 due to Washington Natural's relatively high utilization factor and the mitigation effects afforded by the capacity release mechanism. Washington Natural has and will continue to pursue the timely release of contracted pipeline capacity, when warranted, either through pre-arranged assignments or via open market bidding. To the extent that Washington Natural is able to release capacity, it will allow for Washington Natural's recoupment of a portion of the costs associated with any temporary excess firm pipeline capacity. Washington Natural expects that all of its peak day requirements for residential, commercial and small industrial markets will be met by firm gas purchase contracts with third-party suppliers capable of providing reliable supply at reasonable prices as well as through its firm storage service. Washington Natural believes that with its portfolio of contracts for firm supply (including those which were assigned to Washington Natural by Pipeline upon conversion), its ability to purchase incremental firm supplies, and its storage and other available peak-shaving facilities, it will be able to meet anticipated growth in the requirements of firm customers for the foreseeable future. Washington Natural is committed to securing least cost sources of gas supply, including demand side management resources, to serve the needs of its firm customers. During 1994, the approximate weighted average cost of short-term spot gas delivered to Washington Natural's market averaged $1.84 per MMBtu. During 1994, the approximate weighted average cost of firm supply delivered to Washington Natural's market (including Pipeline sales gas, prior to October 31, 1993) averaged $2.51 per MMBtu. In May 1994, Pipeline was ordered by FERC to modify the allocation of transition costs, totaling $34 million plus interest, incurred in "unbundling" interstate pipeline services, comprising supplier settlements recoverable by Pipeline through fixed charges. Under this order, Washington Natural's share 10 PAGE 10 of these costs would increase from $1.2 million, previously paid, to $10.4 million, inclusive of interest. Washington Natural and six other customers filed requests for rehearing. Under another proposed alternative allocation method Washington Natural's share of the these costs would increase by $5.6 million, inclusive of interest. At September 30, 1994, Washington Natural recorded a liability of $5.6 million for this contingency and an offsetting regulatory receivable for the same amount as this additional cost is expected to be fully recoverable in rates through purchased gas cost adjustments. On December 20, 1994, the request for rehearing was denied by FERC. Washington Natural is currently reviewing the order to determine what options are available and what further actions to take. (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 the 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, any changes in the price of gas it purchases from independent third parties, using a purchased gas cost adjustment mechanism. Prior to December 1991, these purchased gas cost adjustments consisted primarily of pass-throughs of Pipeline rates that had been approved by FERC. Accordingly, the WUTC recognized the need for immediate relief and Washington Natural was allowed to pass these cost increases or decreases on to its customers on a timely basis so that there was no effect on net income. The overall effect of these adjustments from 1979 through 1990 was to decrease rates. The purchased gas adjustment filed by Washington Natural in November 1991, which would have reduced rates, was suspended by the WUTC, in part in order to review affiliated company purchases. As a result of the WUTC's disallowance of a portion of Washington Natural's costs of such purchases, Washington Natural no longer purchases gas from affiliates. Since 1991, the WUTC has authorized two additional purchased gas cost adjustments. The combined effects of these adjustments substantially increased rates and were allowed on a timely basis so that there was minimal, if any, effect on net income. In July 1992, Washington Natural filed with the WUTC for a general rate increase, Docket No. UG-920840, requesting an additional 13%, or $41.4 million, in revenues annually. 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 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, primarily in recognition of: (1) the WUTC's decision to defer for later consideration amounts requested in connection with environmental cleanup activities and compressed natural gas public refueling stations; (2) the decline in costs of capital since the original case was filed in July 1992; and (3) a change in the method for allocating costs to Washington Natural's non-regulated merchandise and jobbing activities. 11 PAGE 11 On September 27, 1993, the WUTC issued its decision in the rate case and as a result, Washington Natural decreased its rates by $15.4 million on an annual basis, effective October 9, 1993. The principal differences between the Company's rate request and the WUTC's ordered rate reduction were: (1) 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. This resulted in a difference of approximately $10 million in annual revenue. Incorporated in the allowed overall rate of return was a return on common equity of 10.5% with a capital structure incorporating 44% common equity compared to the 12.0% return on common equity and 45% common equity in the capital structure proposed by Washington Natural. The rate base difference resulted from the allocation of additional plant to non-regulated merchandising activities and the deferral of expenditures for environmental remediation and safety programs; (2) the disallowance by the WUTC of Washington Natural's proposed attrition allowance of $5.2 million in annual revenue; (3) the adjustments made by the WUTC to reduce the annual revenue requirement by approximately $19 million as a result of the disallowance of certain expenses related to advertising, marketing and merchandising as opposed to Washington Natural's proposed reduction in its annual revenue requirement of $8 million; and (4) the acceptance by the WUTC of its Staff's adjustment for normal weather which differed from Washington Natural's by $4.8 million in annual revenue. The Staff determined normal weather by averaging the actual heating degree days for eighteen of the previous twenty years excluding the years with the greatest and least number of heating degree days. Washington Natural's determination of normal weather was based on a fifteen year trended rate for annual heating degree days. After reviewing the WUTC's decision and giving consideration to filing of a motion for reconsideration with the WUTC, Washington Natural determined that the most appropriate way to proceed would be to file a limited-scope general rate case. This case, Docket No. UG-931405, was filed on November 19, 1993, and requested a revenue 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 expansion since calendar year 1991, which was used as the base measurement year in the prior rate case. On May 27, 1994, the WUTC issued an order approving a settlement of the rate case. The terms of the settlement agreement provide for a $19.0 million increase in annual revenues and agreement that Washington Natural will not request an increase in total revenues prior to March 1, 1995. However, Washington Natural may make 1) tracking filings caused by changes in purchased gas and pipeline costs; 2) filings required by law or WUTC order; and 3) filings for increased revenues if conditions necessary for interim/emergency relief exist, including conditions which prevent Washington Natural from financing with unsecured debt. As a result of the WUTC's September 1993 decision in Docket No. UG-920840, Washington Natural filed a Transportation Service, Cost of Service and Rate Redesign Proposal in June 1994. In its September 1993 decision, the WUTC refused to accept any of the cost of service methodologies proposed, explaining that the changing nature of the industry, including the separate 12 PAGE 12 and distinct function of providing transportation service, required additional consideration. Washington Natural's June 1994 filing, in Docket No. UG-940814, includes proposed rates that, if approved, would better reflect the cost of serving various classes of customers. This proposal applies a methodology that takes peak demand costs into consideration in addition to average volumetric throughput. This Peak and Average approach is, in Washington Natural's opinion, responsive to the reality of the current natural gas environment and treats transportation as a separate and distinct function. The filing is revenue neutral but, as proposed, will shift revenue responsibility and in turn, costs among customer classes. Proposed rates for transportation service would decrease by 55% and rates for larger volume industrial sales customers would decrease by 13%. The request also proposes to raise residential rates 5.7% and firm commercial and industrial rates by 1.8%. The changes in transportation and industrial rates would make the utility economically indifferent to customer choices between transportation and sales service. If approved as proposed, the filing would enhance Washington Natural's ability to offer rates that would support cost effective and responsible growth. The WUTC has until May, 1995, to rule on the proposal. Washington Natural also expects to file a general rate case in March 1995 to address all the costs of operating the utility. In addition to updating operating costs and rate base to reflect recent growth, the utility also will request an increase in its allowed rate of return in light of the recent increases in its cost of capital. The WUTC would have until February 1996 to act on such a filing. (9) Merchandise Marketing In order to address the concerns raised by the WUTC regarding allocations between Washington Natural's regulated activities and non-regulated merchandise activities, the merchandise sales business was transferred on October 1, 1993, to Services, a newly-formed subsidiary of Washington Energy. At that time, Washington Natural terminated all merchandise sales activity. See Merchandise and Energy Efficiency Products on page 15. (10) New Construction Washington Natural is one of the fastest growing natural gas utilities in the nation due to economic growth in its service area and the high conversion rate of existing homes to gas. In 1994, Washington Natural made $84.5 million in capital expenditures to add new customers and to maintain the reliability and safety of its distribution system. Washington Natural's estimated capital spending in 1995 is lower at $79 million because customer growth is expected to be slightly lower than the prior year. It is expected that capital expenditures will be initially funded with cash flow from operations and short-term borrowing. See the Liquidity and Capital Resources section of Management's Discussion and Analysis of Financial Condition and Results of Operations on page 29. 13 PAGE 13 (11) Washington Natural Utility Operating Statistics
Year Ended September 30, ---------------------------------------------------------------- 1994 1993 1992 1991 1990 -------- -------- -------- -------- -------- Operating Revenues (in thousands): Residential firm gas sales $206,870 $196,318 $152,015 $160,265 $151,815 Commercial firm gas sales 91,739 87,250 67,393 72,833 70,506 Industrial firm gas sales 28,606 25,209 17,226 20,472 22,052 Interruptible gas sales 51,218 44,160 29,593 43,563 43,523 Transportation 8,569 7,204 11,231 6,783 4,682 Other 9,405 7,712 7,481 7,136 6,754 -------- -------- -------- -------- -------- Total Operating Revenues $396,407 $367,853 $284,939 $311,052 $299,332 ======== ======== ======== ======== ======== Customers, Average Number Served: Residential firm 403,642 383,291 361,454 337,815 313,524 Commercial firm 37,112 35,951 34,503 33,011 31,208 Industrial firm 2,824 2,844 2,857 2,842 2,820 Interruptible 1,009 988 948 1,037 1,041 Transportation 36 68 130 56 40 -------- -------- -------- -------- -------- Average Total Customers 444,623 423,142 399,892 374,761 348,633 ======== ======== ======== ======== ======== Gas Volumes (thousands of therms): Residential firm sales 371,581 382,337 301,887 346,782 288,612 Commercial firm sales 174,729 176,261 142,402 162,915 143,562 Industrial firm sales 62,227 70,013 52,019 49,309 56,195 Interruptible sales 148,641 127,680 78,645 131,278 144,720 Transportation volumes 122,425 145,090 199,143 156,402 108,727 -------- -------- -------- ------- -------- Total Gas volumes 879,603 901,381 774,096 846,686 741,816 Company use 801 848 838 699 700 Unaccounted for 489 (2,318) 660 (2,348) (206) -------- -------- -------- -------- -------- Total Sendout 880,893 899,911 775,594 845,037 742,310 ======== ======== ======== ======== ========
14 PAGE 14 (11) Washington Natural Utility Operating Statistics (Continued)
Year Ended September 30, ---------------------------------------------------------------------- 1994 1993 1992 1991 1990 ---------- ---------- ---------- ---------- ---------- Average Use Per Customer - Therms: Residential firm 921 998 835 1,027 921 Commercial firm 4,708 4,903 4,127 4,935 4,600 Industrial firm 22,035 24,618 18,208 17,350 19,927 Interruptible 147,315 129,231 82,959 126,594 139,020 Transportation 3,400,694 2,133,676 1,531,869 2,792,893 2,718,175 Average Revenue Per Customer: Residential firm $ 513 $ 512 $ 421 $ 474 $ 484 Commercial firm 2,472 2,427 1,953 2,206 2,259 Industrial firm 10,130 8,864 6,029 7,203 7,820 Interruptible 50,761 44,696 31,216 42,009 41,809 Transportation 238,028 105,941 86,392 121,125 117,050 Average Revenue Per Therm (cents): Residential firm 55.7 51.3 50.4 46.2 52.6 Commercial firm 52.5 49.5 47.3 44.7 49.1 Industrial firm 46.0 36.0 33.1 41.5 39.2 Interruptible 34.5 34.6 37.6 33.2 30.1 Total Sales Customers 50.0 46.7 46.3 43.0 45.5 Transportation 7.0 5.0 5.6 4.3 4.3 Average Cost Per Therm (cents) (1): 29.5 24.0 22.7 20.0 23.4 Weather - Degree Days 4,289 4,702 3,933 4,888 4,473 % of normal (30-year average) 90 98 82 101 93
(1) Average Cost Per Therm includes both fixed and variable elements, and it is not a common gas industry practice to allocate these among classes of customers. Washington Natural does not sell or transport gas to any of its customers at a loss or on a break-even basis. The cost of gas for serving firm customers is greater than that for serving interruptible customers. 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. The Company announced its intention late in 1993 to explore options to monetize the value of Resources. On May 2, 1994, Resources was merged with a wholly-owned subsidiary of Cabot Oil & Gas Corporation based in Houston, Texas. Through the merger the Company currently owns 16.6% of Cabot's outstanding voting securities of which 8.6% is common stock and 8.0% is convertible voting preferred stock. William P. Vititoe, Chairman of the Company's Board of Directors, Chief Executive Officer and President, and Robert F. Bailey, a Director of the Company, also became members of Cabot's Board of Directors. See Note 13 of Notes to Financial Statements on page 65 for further discussion of the merger transaction. The Company is accounting for its investment in Cabot's common stock using the equity method, whereby the Company is recording its proportionate share of 15 PAGE 15 Cabot's earnings and losses available to common shareholders as "Other income (expense)". Only a brief summary of Cabot's business taken solely from its 1993 Form 10-K filing will be presented here since Cabot's stock is publicly traded on the New York Stock Exchange and more detailed information is available in its filings with the Securities and Exchange Commission. Cabot's fiscal year corresponds to the calendar year. Prior to the Resources merger, substantially all of Cabot's operations were in the Appalachian Region of West Virginia, Pennsylvania and New York, and in the Anadarko Region of southwestern Kansas, Oklahoma and the Texas Panhandle. Cabot has operated in the Appalachian Region for over 100 years and in the Anadarko Region for over 50 years. Cabot's proved reserves at December 31, 1993, totalled approximately 825 billion cubic feet equivalent ("Bcfe"), 98% 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 made two significant reserve acquisitions in 1993 at a total cost of $82.4 million. In addition to drilling and production, Cabot also operates several gas gathering and pipeline systems in the Appalachian Region made up of approximately 3,500 miles of pipeline with interconnects to interstate pipelines and local distribution companies. The company also has two gas storage fields in the same region. Cabot also purchases substantial quantities of gas from other producers for resale. The Resources merger expanded Cabot's major areas of operation to include the Green River Basin in southwestern Wyoming as well as certain fields in South Texas. The merger increased Cabot's reserves by 191 Bcfe to over 1 trillion cubic feet making Cabot the sixth largest independent oil and gas producing company in the U.S. The majority of Resources' employees, aside from those based in its former Seattle headquarters, have been employed by Cabot. Merchandise and Energy Efficiency Products Since the late 1950s Washington Natural had marketed energy-efficient gas appliances and conservation products which complemented its gas distribution service. In order to address the concerns raised by the WUTC during the 1993 rate case regarding allocations of common costs between Washington Natural's regulated activities and its non-regulated merchandise sales activities, the merchandise sales business was transferred on October 1, 1993, to Washington Energy Services Company, 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 wholly-owned subsidiaries, Thermal Efficiency, Inc. ("Thermal Efficiency"), was also transferred to Services. Services sells three types of products to primarily residential homeowners: gas appliances, including gas furnaces; energy efficient window and siding products; and security systems and monitoring. With the elimination of joint marketing through Washington Natural and the sharing of certain common costs, Services has changed the scope and the manner in which this business is conducted. The product lines have been narrowed to focus on the more high-margin products. All product installations and servicing are conducted by independent dealers and contractors. Product purchases are consolidated with fewer distributors which also perform inventory and delivery functions. Services does not provide its own long-term installment financing for customer purchases. 16 PAGE 16 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. Coal and Other Businesses Washington Energy holds coal and coal-related investments and conducts other business operations through various wholly-owned subsidiaries. Thermal Energy, Inc., owns 95% of the Montco Partnership ("Montco"), which holds leases and other rights to mine coal in Montana with the ultimate objective of opening one or more mines when market conditions are suitable. Montco's coal reserves are concentrated in two areas suitable for surface mining which have been assigned the project names Montco and Cook Mountain. The Montco project involves 12,664 acres in the Ashland-Birney area of southeastern Montana. In adjacent areas, the partnership owns additional coal reserves and has surface rights over coal owned by the U.S. Government. A surface mining permit applied for by Montco with the State of Montana in late 1980 was issued in November 1984 and was renewed for a five-year period in 1989. Montco is currently pursuing an additional renewal of the state permit. The Federal Office of Surface Mining issued a federal surface mining permit in 1985 which was renewed in 1990. The Cook Mountain project, located northeast of Ashland, Montana, involves over 20,000 acres of surface rights held by lease and in fee. Proposals for short-term test burns to be conducted in 1995 have been made to several electric utilities. The results of such tests would better define the quality of the reserves. The partnership's coal reserves, with their low-sulfur content, should be attractive to electric utilities and industries that are required to reduce sulfur dioxide emissions by the year 2000 under amendments of the Clean Air Act passed in 1990. The Company, through its wholly-owned subsidiary ThermRail, Inc., holds an 87.5% partnership interest in the Tongue River Railroad Company ("TRR"), Billings, Montana. TRR was formed to develop a transportation system for the substantial reserves of low-sulfur coal in the northern Powder River Basin area of southeastern Montana, which area includes the Montco holdings described above. TRR has received a Certificate of Public Convenience and Necessity from the Interstate Commerce Commission ("ICC") for a proposed 81-mile rail project. Additionally, TRR has filed with the ICC for an extension of the Tongue River rail line by an additional 42 miles into southeastern Montana. The proposed extension would shorten by about 150 miles the railroad haul between the southeast Montana and northeast Wyoming areas, and electricity generating stations in Minnesota, Michigan and Wisconsin. Certain gas transportation, storage and other contractual arrangements that were excluded from the merger of Resources were transferred to a newly-formed, wholly-owned subsidiary of the Company, Washington Energy Gas Marketing Company. See Note 14 "Commitments and Contingencies" of Notes to Financial Statements on page 66 for further information regarding these excluded contractual arrangements. The Company and its subsidiaries' primary liability insurance coverage is provided by Mercer Insurance Company Limited ("Mercer Insurance"), a Bermuda-domiciled insurance company. Mercer Insurance is wholly-owned by WECO Finance 17 PAGE 17 Company, a wholly-owned subsidiary of Washington Energy. Mercer Insurance does not provide insurance to any non-affiliated parties. Discontinued Biowaste Business The Company had been engaged in the development of biowaste technology since 1984 through Unisyn, a Hawaii general partnership. Unisyn developed and patented an integrated, efficient pollution control technology which processes organic wastes by anaerobic digestion and produces saleable by-products in demand in various markets. A pilot plant was in operation in Waimanalo, Hawaii, however, Unisyn had been unsuccessful in licensing its technology to others. In August 1993, the Company's board of directors 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 operating assets at the date of sale. (d) Financial Information About Foreign and Domestic Operations and Export Sales Washington Energy and its subsidiaries do not export products to, or do significant business in, foreign countries. Item 2. Properties Washington Natural's properties consist primarily of its underground natural gas distribution system and associated facilities owned in fee in 65 cities and towns (principally Seattle, Bellevue, Tacoma and Everett) and parts of five counties in the Puget Sound region of the State of Washington. It owns a total of 268 acres of land, of which 20 acres are sites for peak-shaving plants, 60 acres are sites for city gate stations for purchased or transported natural gas, and the balance is for distribution service facilities and office buildings. Washington Natural also owns a one-third undivided interest in the Jackson Prairie underground storage field consisting of 147 acres of owned surface land and storage, and 3,234 acres of leased storage. The site contains 77 wells for injection and withdrawal of gas and water and compression facilities. Approximately 18.8 billion cubic feet of non-inventory cushion gas is in place. The principal structures owned are service and office buildings and warehouses in Seattle, Tacoma, Bellevue and Auburn, and those housing propane gas production facilities. Small local office and service buildings in various other communities are owned or leased. Substantially all of the property of Washington Natural is subject to the lien of its First Mortgage Bonds. The Company holds interests in coal properties as described on page 16. 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. 18 PAGE 18 Item 3. Legal Proceedings On August 8, 1989, the Washington State Department of Transportation (the "WDOT") commenced a lawsuit in the U.S. District Court, Western District of Washington, against Washington Natural and other defendants. The suit seeks the recovery of approximately $7 million in costs incurred by the WDOT in cleaning up contamination at a former manufactured gas plant which discontinued operations in the early 1900s. The contamination was discovered by the WDOT while constructing a highway. Washington Natural has asserted numerous defenses. The Court has ruled that Washington Natural is not the corporate successor to the company that actually operated the manufactured gas plant at the site. The trial of this matter was bifurcated. A trial to determine whether WDOT has incurred costs recoverable as damages and, if so, the amount of such damages, has been completed. The trial court ruled that WDOT's claim was barred due to its failure to comply with federal law governing the cleanup of hazardous waste sites, and has ordered that judgment be entered in favor of Washington Natural and the other defendants. Accordingly, a second trial to determine the allocation of liability for WDOT's damages will not be necessary at this time. The WDOT has appealed the decision to the United States Court of Appeals for the Ninth Circuit. On May 10, 1994, the WDOT filed an action in the state Superior Court for Pierce County Washington against Washington Natural and other defendants arising out of the same occurrence and seeking the same damages as sought in the lawsuit currently on appeal in the 9th Circuit Court of Appeals. This state court action alleges a claim under Washington's Model Toxic Control Act, which was recently amended to allow a private right of action for cost recovery. The state court action has been stayed by Stipulation and Order dated June 10, 1994. The WDOT has indicated that it will pursue the state court action if the pending appeal is denied by the 9th Circuit Court of Appeals. If the WDOT pursues this matter in the state court, Washington Natural intends to vigorously defend the action on several grounds, however the outcome cannot be predicted at this time. A class-action lawsuit was filed against the Company and two of its officers in U.S. District Court, Western District of Washington, in February 1994, alleging violations of state and federal securities act provisions and associated violations of Washington state law. The essence of the complaint concerned alleged disclosure violations regarding the nature or the extent of the downside financial risk associated with the 1992 utility rate request filing of Washington Natural. In May 1994, the Company filed a Motion to Dismiss which was granted on July 25, 1994. The plaintiffs have appealed the dismissal to the United States Court of Appeals for the Ninth Circuit; however, in management's opinion, the appeal is unlikely to succeed. 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 U.S. District Court, Western District of Washington. Cost Management alleges that Washington Natural has monopolized or attempted to monopolize the market for natural gas in central western Washington. Cost Management also alleges 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 seeks injunctive relief and damages in an unspecified amount. Washington Natural has denied the allegations and is vigorously defending this matter. A Motion to Dismiss the 19 PAGE 19 lawsuit has been filed by Washington Natural. Neither the outcome nor the financial exposure from this lawsuit can be predicted at this time in the absence of pre-trial discovery. For litigation matters pertaining to Washington Natural's former manufactured gas plant in Tacoma, Washington see "Environmental Matters" on Page 7, Note 10 of Notes to Financial Statements on Page 63, and the "Environmental Matters" section of Management's Discussion and Analysis of Financial Condition and Results of Operations on Page 31. 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 ending September 30, 1994. 20 PAGE 20 Executive Officers of the Registrants
Name Title Age - -------------------- ------------------------------------------- --- William P. Vititoe Chairman of the Board of Directors, 56 Chief Executive Officer and President (Chairman and Chief Executive Officer since February, 1994, President since April 1994,). (1) James W. Gustafson Senior Vice President - Operations (since 61 April 1990; Senior Vice President - Gas Supply, Administrative and Rates, August 1979 to April 1990). (2) Robert J. Tomlinson Senior Vice President - Legal and 58 Administration (since February 1990; Senior Vice President - Legal and Secretary, October 1985 to February 1990). (1) James P. Torgerson Senior Vice President - Finance, Planning 42 and Development and Chief Financial Officer (since February 1990; Senior Vice President - Planning and Development, October 1988 - February 1990; Chief Financial Officer, since November 1989). (1) William J. Wortley Senior Vice President - Public Affairs 57 (since February 1993; Vice President - Public Affairs, April 1989 - February 1993; Assistant Vice President - Public Affairs, October 1986 - April 1989). (2) Donald H. Gessel President - Washington Energy Services 52 Company (since June 1994(3); Senior Vice President - Marketing, Gas Supply and Rates, August 1990 to October 1994(2); Senior Vice President - Marketing, September 1986 to August 1990(2)). Allyn P. Hebner Vice President and Chief Accounting Officer 41 (since June 1, 1994(1); Vice President and Treasurer of Washington Energy Resources Company, February 1993 to June 1994(3); Assistant Vice President and Treasurer of Washington Energy Resources Company, April 1991 to February 1993(3); Vice President of Finance/ Controller - Allwaste Services, Inc., March 1988 to February 1991.)
(1) of Washington Energy and of Washington Natural. (2) of Washington Natural only. (3) of Washington Energy subsidiary There are no family relationships between any of the executive officers or any executive officer and any director. Officers are elected by the Board of Directors and serve until the next annual meeting or until their successors are 21 PAGE 21 elected and qualified, provided, however, that any officer may be removed at any time by majority vote of the Board. PART II Item 5. Market for Registrant's Common Stock and Related Stockholder Matters The common stock of Washington Energy is traded on the New York Stock Exchange (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 New York Stock Exchange by quarter for 1994 and 1993:
Price Range Dividends ----------------------- Fiscal Period Per Share High Low ----------------- --------- ------ ------ 1994 1st Quarter $ .25 20 17-3/8 2nd Quarter .25 18-7/8 16 3rd Quarter .25 17-1/4 14-3/8 4th Quarter .25 15-5/8 14-1/4 1993 1st Quarter $ .35 22-1/4 20-7/8 2nd Quarter .35 24-1/4 21-1/2 3rd Quarter .35 26-3/8 21-5/8 4th Quarter .35 23-5/8 17-1/2
There were approximately 12,838 common stockholders of the Company as of December 14, 1994. It is currently the policy of the Company's 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. The Company's Board of Directors announced in October 1993 its decision to lower the Company's quarterly dividend from 35 cents to 25 cents. (See Note 4 of Notes to Financial Statements on page 59 for a description of certain limitations on the Company's ability to pay dividends.) 22 PAGE 22 Item 6. Selected Financial Data WASHINGTON ENERGY COMPANY AND SUBSIDIARIES
Year Ended September 30, ------------------------------------------------------------------------ 1994 1993 1992 1991 1990 ---------- ---------- -------- -------- -------- (in thousands except per share amounts) OPERATING REVENUES: Regulated utility sales $ 396,407 $ 367,853 $284,939 $311,052 $299,332 Merchandise and other 35,618 71,185 72,533 65,414 55,103 Oil and natural gas operations -- 31,354 17,616 19,098 9,570 ---------- ---------- -------- -------- -------- TOTAL OPERATING REVENUES $ 432,025 $ 470,392 $375,088 $395,564 $364,005 ========== ========== ======== ======== ======== OPERATING INCOME $ 25,730 $ 55,482 $ 45,980 $ 59,394 $ 48,631 OTHER INCOME (EXPENSE), net (34,925) (2,057) (956) 1,178 (4,004) ---------- ---------- -------- -------- -------- GROSS INCOME (LOSS) (9,195) 53,425 45,024 60,572 44,627 ---------- ---------- -------- -------- -------- TOTAL INTEREST CHARGES 36,105 31,931 31,592 29,716 25,886 INTEREST CHARGES CAPITALIZED (453) (541) (549) (725) (829) ---------- ---------- -------- -------- -------- NET INTEREST CHARGES 35,652 31,390 31,043 28,991 25,057 ---------- ---------- -------- -------- -------- INCOME (LOSS) FROM CONTINUING OPERATIONS (44,847) 22,035 13,981 31,581 19,570 DISCONTINUED OPERATIONS (799) (12,388) (2,542) (3,235) (1,577) ---------- ---------- -------- -------- -------- NET INCOME (LOSS) (45,646) 9,647 11,439 28,346 17,993 DIVIDENDS ON PREFERRED STOCK 9 101 105 112 117 EXCESS PREMIUM - PREFERRED REDEMPTION 673 -- -- -- -- ---------- ---------- -------- -------- -------- EARNINGS (LOSS) ON COMMON STOCK $ (46,328) $ 9,546 $ 11,334 $ 28,234 $ 17,876 ========== ========== ======== ======== ======== EARNINGS (LOSS) PER COMMON SHARE FROM: Continuing operations $(1.94) $ .95 $ .71 $1.73 $1.27 Discontinued operations (.03) (.53) (.13) (.18) (.10) ------ ----- ----- ----- ----- EARNINGS (LOSS) PER COMMON SHARE $(1.97) $ .42 $ .58 $1.55 $1.17 ====== ===== ===== ===== ===== DIVIDENDS PER COMMON SHARE $ 1.00 $1.40 $1.40 $1.38 $1.34 ====== ===== ===== ===== ===== TOTAL COMMON DIVIDENDS DECLARED BASED ON SHARES OUTSTANDING ON RECORD DATES DURING EACH PERIOD $ 23,468 $ 32,282 $ 27,499 $ 25,584 $ 20,741 ========== ========== ======== ======== ======== TOTAL ASSETS $1,030,494 $1,035,817 $899,874 $809,657 $713,947 ========== ========== ======== ======== ======== LONG-TERM DEBT AND REDEEMABLE PREFERRED STOCK $ 380,200 $ 370,700 $304,228 $259,788 $257,412 ========== ========== ======== ======== ======== COMMON SHAREHOLDERS' INTEREST $ 256,800 $ 322,931 $275,517 $284,260 $220,381 ========== ========== ======== ======== ========
23 PAGE 23 Item 6. Selected Financial Data (Continued) WASHINGTON NATURAL GAS COMPANY
Year Ended September 30, -------------------------------------------------------------------- 1994 1993 1992 1991 1990 -------- -------- -------- -------- -------- (in thousands except per share amounts) OPERATING REVENUES: Regulated utility sales $396,407 $367,853 $284,939 $311,052 $299,332 Merchandise and conservation products -- 63,210 66,083 60,393 49,008 -------- -------- -------- -------- -------- TOTAL OPERATING REVENUES $396,407 $431,063 $351,022 $371,445 $348,340 ======== ======== ======== ======== ======== TOTAL GROSS MARGIN (Gas Sales Revenues Less Gas Purchases Plus Transportation Margin) $163,500 $178,984 $147,122 $165,884 $144,494 ======== ======== ======== ======== ======== OPERATING INCOME $ 23,942 $ 49,802 $ 38,143 $ 51,761 $ 44,533 OTHER INCOME (EXPENSE), net (2,067) (1,198) 135 2,450 (2,931) -------- -------- -------- -------- -------- GROSS INCOME 21,875 48,604 38,278 54,211 41,602 INTEREST CHARGES (30,118) (26,833) (26,047) (24,802) (22,840) -------- -------- -------- -------- -------- NET INCOME (LOSS) (8,243) 21,771 12,231 29,409 18,762 DIVIDENDS ON PREFERRED STOCK 3,979 2,720 2,740 2,755 2,776 EXCESS PREMIUM, PREFERRED REDEMPTION 798 -- -- -- -- -------- -------- -------- -------- -------- EARNINGS (LOSS) ON COMMON STOCK $(13,020) $ 19,051 $ 9,491 $ 26,654 $ 15,986 ======== ======== ======== ======== ======== TOTAL COMMON DIVIDENDS DECLARED BASED ON SHARES OUTSTANDING ON RECORD DATES DURING EACH PERIOD $ 16,937 $ 26,045 $ 21,691 $ 20,151 $ 16,569 ======== ======== ======== ======== ======== TOTAL ASSETS $885,016 $834,516 $729,536 $657,727 $581,801 ======== ======== ======== ======== ======== LONG-TERM DEBT AND PREFERRED STOCK $380,200 $370,700 $304,280 $259,940 $242,405 ======== ======== ======== ======== ======== COMMON SHAREHOLDER'S INTEREST $235,988 $262,334 $205,599 $210,889 $171,255 ======== ======== ======== ======== ========
24 PAGE 24 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Results of Operations Washington Energy Company ("the Company") incurred a net loss available to common of $46.3 million, or $1.97 per share, in 1994 due to various non-recurring charges and lower operating earnings. The following table summarizes earnings and losses available to common and per share by year:
1994 1993 1992 ---------------- ---------------- --------------- Amounts Per Per Per in millions Amount Share Amount Share Amount Share ------ ------ ------ ----- ------ ----- Before non-recurring charges $ (3.8) $ (.16) $ 21.9 $ .95 $13.9 $ .71 Non-recurring charges (41.7) (1.78) -- -- -- -- ------ ------ ------ ----- ----- ----- Continuing operations (45.5) (1.94) 21.9 .95 13.9 .71 Discontinued operations (.8) (.03) (12.4) (.53) (2.6) (.13) ------ ------ ------ ----- ----- ----- Net income (loss) $(46.3) $(1.97) $ 9.5 $ .42 $11.3 $ .58 ====== ====== ====== ===== ===== =====
The non-recurring charges result from: 1) the merger of the Company's oil and gas exploration and production subsidiary and certain contractual arrangements excluded from the merger ($30.0 million after-tax); 2) restructuring and downsizing 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). Even after excluding these charges, the contribution to earnings from each of the Company's continuing businesses (before interest, income taxes and preferred dividend requirements of the Company's gas utility subsidiary, Washington Natural Gas Company) was substantially lower than in prior years as shown in the following table and discussed below:
In millions 1994 1993 1992 ----- ----- ----- Gas utility $33.3 $50.8 $33.8 Merchandise sales .1 7.9 9.5 Oil and gas 1.9 9.3 6.6 Other (4.1) (2.9) (.7) ----- ----- ----- Total $31.2 $65.1 $49.2 ===== ===== =====
The Company completed the disposition of its biowaste business, Unisyn, through the sale of the two subsidiaries that owned Unisyn. The decision was made to dispose of this business in 1993, and it was first reported as a discontinued operation in that year. In addition to the $2.6 million net operating loss incurred in 1993, a $9.8 million after-tax charge was recorded to write down Unisyn's assets to estimated realizable value and to establish a reserve for operating losses through disposition. An additional loss of $799,000 was incurred in 1994 to complete the disposition. 25 PAGE 25 Merger of Oil and Gas Subsidiary On May 2, 1994, the Company merged its oil and gas subsidiary, Washington Energy Resources Company ("Resources"), with Cabot Oil & Gas Corporation ("Cabot") in a tax-free exchange. The Company received total consideration, including repayment of intercompany debt, valued at $162.2 million, consisting of 2,133,000 shares of Cabot Class A common stock, 1,134,000 shares of Cabot 6% convertible voting preferred stock, and $63.7 million of cash, in exchange for the stock of Resources. The Cabot preferred stock is convertible into 1,972,174 shares of Cabot Class A common stock and is entitled to the same number of votes on shareholder matters, making the Company the holder of 16.6% of Cabot's total voting securities. The Company recorded a net loss on the transaction of $13.9 million after providing for deferred taxes of approximately $32.0 million, and established an after-tax reserve of $4.4 million for a potential downward purchase price adjustment based on the performance of wells in a certain field over a one year time period. Excluded from the Resources merger were certain gas transportation, storage and other contractual arrangements of Resources. The Company established after-tax reserves of $11.7 million ($18.0 million pre-tax) for anticipated future losses associated with these excluded contractual arrangements. Due to the merger and the associated elimination of operating and marketing staffs and Company-owned gas production to aid in managing and utilizing these arrangements, combined with actual operating history for the gas transportation arrangements that were placed in service November 1, 1993, management estimated that these arrangements would continue to generate losses for the foreseeable future. During 1994, $3.7 million (pre-tax) of the reserves was utilized. The merger allows the Company to continue its presence in the upstream oil and gas industry at a reduced investment level and without the need for future additional investment. The Company is accounting for its investment in Cabot common stock using the equity method due to its representation on Cabot's board of directors. Using this accounting method, the Company reports its proportionate share of Cabot's earnings or losses available to common shareholders along with preferred dividends from Cabot in "Other income (expense)." Resources' 1994 earnings through the merger date have been reclassified to "Other income (expense)," consistent with the equity accounting presentation. Prior year financial statements continue to reflect Resources on a consolidated basis, as previously reported, in accordance with generally accepted accounting principles. 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 investments in Cabot thereafter) was $1.9 million, compared with $9.3 million and $6.6 million in 1993 and 1992, respectively. Resources' 1994 earnings of $1.0 million through the merger date were adversely impacted by lower oil prices and losses from the gas transportation arrangements described above. Subsequent to the merger, Cabot reported losses of which the Company's proportionate share totaled $573,000, due primarily to seasonal factors and generally lower gas prices. Dividend income from Cabot preferred stock was $1.4 million. Restructuring and Other Non-recurring Charges In the third quarter, Washington Natural recorded charges totaling $4.6 million after-tax related to a restructuring to consolidate operations and downsize its workforce. The charges included estimated severance costs as well as expensing 26 PAGE 26 the costs previously capitalized for planning a new headquarters building that is not needed currently. At September 30, 1994, Washington Natural's workforce had been reduced 12 percent from the October 1993 level. Washington Natural recorded additional charges totaling $7.1 million after-tax to write off costs deemed to be unrecoverable and to establish certain reserves. A total 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 charge after-tax for the supplemental executive retirement plan to reflect recent management changes. Operating Revenues The following table summarizes the Company's operating revenues by line of business:
In millions 1994 1993 1992 ------ ------ ------ Utility Gas sales $387.0 $360.1 $277.5 Other regulated revenues 9.4 7.7 7.5 Merchandise sales 35.6 70.3 71.9 Oil and gas -- 31.6 25.6 Other -- .7 (7.4) ------ ------ ------ Total $432.0 $470.4 $375.1 ====== ====== ======
Resources' 1994 revenues have been reclassified to "Other income (expense)" as described previously. The 7% increase in utility gas revenues in 1994 was the net result of several factors, including a 23% increase in the cost of purchased gas, which was passed through to customers with no impact on earnings, and customer growth of 5%, or 21,000 customers. Largely offsetting the effects of these factors were lower rates associated with the $15.4 million annual revenue decrease ordered by the Washington Utilities and Transportation Commission ("WUTC") in October 1993, and weather that was 10% warmer than normal and 9% warmer than the prior year. A general rate increase totaling $19.0 million annually, ordered by the WUTC, went into effect on June 2, 1994, but did not have a material impact on revenues for the year since it occurred after the end of the heating season. Gas sales volumes in 1994 were essentially the same as in 1993, while weather was 9% warmer. The 5% increase in customers, combined with the warmer-than-normal temperatures occurring largely during the late spring and summer months, when the heating load was low, resulted in the smaller-than-expected decline in gas sales volumes. Merchandise sales revenues totaled $35.6 million in 1994, a decrease of $34.7 million from 1993. Effective October 1, 1993, the Company reestablished its merchandise sales operation in Washington Energy Services Company ("Services"). The bulk of these sales operations, relating to gas appliances, were previously conducted by Washington Natural. The other operations moved to Services, sales of security and energy- saving products, previously were conducted by a separate 27 PAGE 27 subsidiary. The elimination of joint marketing, installation and service activities and the reorganization of the merchandise functions have negatively impacted the Company's ability to attract new merchandise customers and resulted in Services operating at approximately a breakeven level. The increase in total operating revenues from 1992 to 1993 consisted primarily of higher utility gas revenues as shown above. The increase in utility revenues was due largely to weather that was 20% colder than 1992, per therm gas costs that were 5.7% higher and 6% growth in customers. Operating Expenses The following table shows the Company's operating expenses by line of business, before and after income taxes:
In millions 1994 1993 1992 ------ ------ ------ Utility Purchases of gas $223.5 $181.2 $130.3 Operations and maintenance 81.8 67.0 62.9 Depreciation and amortization 30.9 28.2 25.8 General taxes 41.2 39.0 31.6 Merchandise sales 35.7 62.3 62.6 Oil and gas -- 23.9 19.1 Other .9 3.6 (6.9) ------ ------ ------ Total before income taxes 414.0 405.2 325.4 Income taxes (7.7) 9.7 3.7 ------ ------ ------ Per consolidated income statements $406.3 $414.9 $329.1 ====== ====== ======
The $8.6 million decrease in operating expenses in 1994 reflected in the income statement is due to deconsolidation of Resources ($23.9 million), reduced merchandise sales expenses ($26.6 million) and the change in income taxes from an expense to a benefit ($17.4 million), which were largely offset by growth in utility operating expenses ($62.0 million). The increase in utility operating expenses in 1994 was due primarily to the higher cost of natural gas purchases ($42.3 million) which was recovered from customers through purchased gas cost adjustments. Most of the increase in operations and maintenance ("O&M") expenses of $14.8 million resulted from the non-recurring charges described previously ($11.7 million). The remaining 3% increase in total utility operating expenses resulted largely from customer growth. The restructuring and work force reduction did not materially reduce operating expenses in 1994 since most of the changes occurred in the fourth quarter. The 6% increase in general taxes consisted primarily of higher utility taxes due to the revenue increase during the year. The 10% depreciation increase resulted from the continued high level of capital spending during the last two years. 28 PAGE 28 The increase in operating expenses from 1992 to 1993 was caused by many of the same factors that increased expenses in 1994, with the exception of the non-recurring charges. The only major difference was the 20% colder weather experienced in 1993 versus 1992. As a result, purchased gas volumes increased by 31% in 1993. 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 a "purchased gas cost adjustment" 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 authorized costs and actual costs are accumulated in balancing accounts for future recovery or refund. Except for costs disallowed in a 1992 order relating primarily to purchases from an affiliate, the WUTC historically has allowed changes in purchased gas costs to be passed through to customers with no impact on earnings. Washington Natural no longer purchases gas from affiliates. The most recent purchased gas cost adjustment went into effect in July 1993. Washington Natural's operating results are impacted by the effects of inflation on O&M expenses, particularly wages, which historically comprise approximately 55% of O&M expenses. Washington Natural must request general rate increases to offset the effects of increases in O&M expenses. Such requests normally receive intense scrutiny, including extensive analysis of historical and current O&M expenses, by the WUTC, which has up to eleven months from the filing date of the request to issue an order. The delay in receiving rate relief, due to the time required to prepare and file the rate request and the time required for WUTC review, can result in significant earnings deterioration in the interim, particularly in periods of higher inflation. Washington Natural filed for general rate increases in July 1992 and November 1993, as described below. Inflation impacts the Company and Washington Natural indirectly through its effect on interest rates. In recent years, approximately $225-355 million of the Company's capitalization has been long-term debt, and short-term debt levels have averaged over $100 million on an annual basis. Prior to the interest rate increases in 1994, interest rates generally had declined each year since the mid-1980s. The Company benefited from the declining rates by refinancing higher rate notes with lower rate notes and through reduced interest expense on its short-term debt. The current level of interest rates is also a major factor in determining Washington Natural's allowed rate of return on equity associated with its general rate filings. Prior to the October 1993 rate order in which Washington Natural's allowed rate of return on common equity was set at 10.5%, the allowed rate of return had been set at 16.25%. This rate was based on a 1985 rate order that corresponded to a period of high interest rates. 29 PAGE 29 General Rate Cases Washington Natural filed for a general rate increase in July 1992 and received an order from the WUTC in September 1993 to decrease its rates by $15.4 million on an annual basis effective October 9, 1993. Three primary factors contributed to the rate decrease: 1) the WUTC disallowed recovery in rates of certain expenses that it deemed to be related to the non-regulated merchandise sales business or otherwise outside the scope of, or unnecessary for, utility operations; 2) the timing of the WUTC's order closely coincided with a 15-year low in interest rates which, management believes, weighed heavily in reducing Washington Natural's allowed rate of return on equity from 16.25% to 10.5%; and 3) the order was based on a capital structure for Washington Natural containing a higher percentage of lower-cost debt. In November 1993, Washington Natural filed a limited-scope general rate case seeking a $24.6 million increase in annual revenues. The primary focus was to seek recovery of additional operating costs and the inclusion in rate base of utility plant additions since calendar year 1991, which was the base measurement year used in the prior rate case. On May 27, 1994, the WUTC issued an order approving a settlement of the rate case. The settlement provided for a $19.0 million increase in annual revenues and agreement that Washington Natural would not request an increase in total revenues prior to March 1, 1995. However, Washington Natural may make: 1) tracking filings caused by changes in purchased gas and pipeline costs; 2) filings required by law or WUTC order; and 3) filings for increased revenues if conditions necessary for interim/emergency rate relief exist, including conditions that prevent Washington Natural from financing with unsecured debt. Liquidity and Capital Resources In 1994, the Company changed the manner in which its operations are financed, resulting in a change in its capital structure in response to reduced earnings and operating cash flow and the merger of Resources. The following table summarizes the major cash flow items for the last three years:
In millions 1994 1993 1992 ------- ------- ------- Operating cash flow $ 15.9 $ 36.6 $ 66.3 Common dividends (23.5) (32.3) (27.5) Capital expenditures (86.9) (128.1) (122.7) Short-term borrowing, net (20.3) 7.3 35.9 Net issuance of preferred stock 64.7 (10.2) (.2) Cash from Resources merger, net 42.9 -- -- Issuance of common stock 6.3 70.5 7.4 Net issuance of long-term debt (3.3) 67.7 48.1 Other, net (3.5) (3.9) (3.4) ------ ------- ------- Net change in cash $ (7.7) $ 7.6 $ 3.9 ====== ======= =======
Operating cash flow was inadequate to fund common dividends in 1994. The Company effectively used the $42.9 million net cash proceeds from the Resources merger ($63.7 million proceeds net of cash advanced to Resources prior to the merger) to fund the majority of its common dividend payments and to reduce 30 PAGE 30 short-term debt. Preferred stock was issued to fund most of the Company's capital spending rather than issuing common stock and long-term debt as in 1993 and 1992. With the merger of Resources, the bulk ($84.5 million) of the Company's 1994 gross capital expenditures ($86.9 million) was for utility plant. Washington Natural makes capital expenditures to add new customers to its gas distribution system and to insure the reliability and safety of the system. Capital expenditures normally are funded 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. Washington Natural issued preferred stock twice during 1994 to provide long-term financing for its 1994 capital spending and to fund the early redemption of all outstanding preferred issues to take advantage of lower dividend requirements and to eliminate future sinking-fund requirements. The early redemption occurred in November 1993 at an aggregate cost of $23.2 million. Also in November 1993, the public offering of 2.4 million shares of 7.45% cumulative preferred stock was completed, netting proceeds of $58.8 million. On September 15, 1994, Washington Natural completed a public offering of 1.2 million shares of 8.50% cumulative preferred stock, which netted proceeds of $29.1 million. The 7.45% preferred stock is redeemable on or after November 1, 2003, at par value, and the 8.50% preferred stock is redeemable on or after September 1, 1999, at par value. Capital expenditures in 1995 are projected at $79 million for Washington Natural and $3 million for the Company's other businesses. The Company does not anticipate incurring significant expenditures to develop its coal reserves and associated railroad in the next two years. The Company expects to fund its 1995 capital spending with cash flow from operations and short-term borrowings. Washington Natural is currently prohibited from issuing additional First Mortgage Bonds because of interest coverage tests in the bond indenture. The earliest Washington Natural could expect to be able to issue additional bonds is the fourth quarter of 1995. The Company can issue unsecured debt. In addition to its capital spending program, Washington Natural has seasonal short-term borrowing requirements. Operating revenues vary with weather conditions because approximately 90% of Washington Natural's customers use natural gas for space heating. This normally produces substantially increased earnings and operating cash flow during the first eight or nine months of each year and a loss and negative cash flow in the remaining three or four months, with the 12 months as a whole being profitable and generating positive operating cash flow. Because of this, Washington Natural must borrow on a short-term basis to meet its operating needs for a portion of the year. The Company has several short-term financing arrangements available currently: a $150 million commercial paper program backed by a committed revolving credit agreement, of which $61 million was unused at September 30, 1994; uncommitted bank and other credit arrangements totaling $80 million, of which $44 million was available at year end; and a committed agreement to sell up to $90 million of merchandise and gas receivables, of which $34 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, 1994, a time of 31 PAGE 31 the year when gas receivable balances are low due to seasonal factors, all but $2 million of eligible receivables had been sold under the arrangement. In management's opinion, the Company has sufficient capital resources, both internal and external, to meet anticipated financing requirements. Environmental Matters In management's opinion, based on all known facts and analyses, it is not likely that environmental liabilities identified to date, after consideration of insurance recoveries and the judgment entered against certain insurance companies, will result in a material adverse impact on Washington Natural's financial position or operating results and cash flow trends. (See Note 10 page 63 of Notes to Financial Statements.) Litigation (See Note 11 page 64 of Notes to Financial Statements.) In light of the recent dismissal of the class action lawsuit and known facts in the case, in management's opinion, the appeal of the decision to dismiss the action is unlikely to succeed. Accordingly, no material adverse impact to the Company is likely from this case. Neither the outcome nor the financial exposure from the anti-trust lawsuit filed against Washington Natural by a local natural gas marketing company can be predicted at this time in the absence of pretrial discovery. Washington Natural has denied the allegations and is vigorously defending this matter. Future Outlook A number of changes have been made in the last year that should improve the Company's results of operations and financial position over the next several years. The disposition of the biowaste business has eliminated a continual source of operating losses over the past five years. The merger of the oil and gas business with Cabot has allowed the Company to recoup a portion of its investment and has eliminated a major source of future capital requirements for the Company, which must continue to fund the rapid growth of Washington Natural. At Washington Natural, the recently approved $19 million rate increase will increase operating income in 1995. The recent management restructuring, 12% work force reduction and ongoing re-engineering efforts will contain operating costs in the near term and may provide additional cost savings in the long term. The recent rise in interest rates will have a negative impact on earnings by increasing short-term borrowing costs. Washington Natural's annual customer growth has averaged 6% over the last five years, which is well above the national average among natural gas utilities. Customer growth is expected to be down slightly in 1995, at 4% to 5% or approximately 18,000 to 22,000 new customers. Washington Natural has filed a proposal to redesign its rates to better reflect the cost of serving various classes of customers. Washington Natural filed proposed tariffs with the WUTC in June 1994 that, if approved, would reduce transportation rates by 55% and industrial rates by 13% and make Washington Natural economically indifferent when customers choose between transportation and sales service. The request also proposes to raise residential rates by 32 PAGE 32 5.7% and firm commercial and industrial rates by 1.8%. The effect of these changes, if approved, would be to increase the margin on gas sales to residential and commercial markets (where the majority of Washington Natural's growth occurs), decrease the margin on transportation and larger volume industrial sales, and still maintain the competitive advantage of gas versus alternative energy services. The WUTC has until May 1995 to act on this filing. Washington Natural also expects to file a general rate case in March 1995 to address all of the costs of operating the utility. In addition to updating operating costs and rate base to reflect recent growth, the utility also will request an increase in its allowed rate of return in light of the recent increases in its cost of capital. The WUTC would have until February 1996 to act on such a filing. Common Dividend In October 1993, the Company's quarterly dividend was lowered from 35 cents to 25 cents. Management does not currently intend to recommend to the Board of Directors a further reduction in the dividend. In management's opinion, the strategies the Company is employing, downsizing and re-engineering Washington Natural, greater emphasis on regulatory relations and the merger of the oil and gas exploration subsidiary, should result in earnings to support the dividend over the long term. 33 PAGE 33 Item 8. Financial Statements and Supplementary Data 1. Financial Statements: Washington Energy Company and Subsidiaries Consolidated balance sheets as of September 30, 1994 and 1993. Consolidated statements of income for each of the three years in the period ended September 30, 1994. Consolidated statements of capitalization as of September 30, 1994 and 1993. Consolidated statements of shareholders' earnings reinvested in the business and premium on capital stock for each of the three years in the period ended September 30, 1994. Consolidated statements of cash flows for each of the three years in the period ended September 30, 1994. Washington Natural Gas Company Balance sheets as of September 30, 1994 and 1993. Statements of income for each of the three years in the period ended September 30, 1994. Statements of capitalization as of September 30, 1994 and 1993. Statements of shareholder's earnings reinvested in the business and premium on capital stock for each of the three years in the period ended September 30, 1994. Statements of cash flows for each of the three years in the period ended September 30, 1994. 2. Supplementary Data (Unaudited): Consolidated selected quarterly financial data for each of the three years in the period ended September 30, 1994. 34 PAGE 34 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Shareholders and 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, 1994 and 1993, and the related consolidated statements of income, shareholders' earnings reinvested in the business, premium on capital stock and cash flows for each of the three years in the period ended September 30, 1994, and the accompanying balance sheets and statements of capitalization of Washington Natural Gas Company as of September 30, 1994 and 1993, and the related statements of income, shareholder's earnings reinvested in the business, premium on capital stock and cash flows for each of the three years in the period ended September 30, 1994. These financial statements and the schedules referred to below are the responsibility of the companies' management. Our responsibility is to express an opinion on these financial statements and schedules based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Washington Energy Company and subsidiaries and of Washington Natural Gas Company as of September 30, 1994 and 1993, and the results of their operations and their cash flows for each of the three years in the period ended September 30, 1994, in conformity with generally accepted accounting principles. Our audit was made for the purpose of forming an opinion on the basic financial statements taken as a whole. The schedules listed in Item 14(a) are presented for purposes of complying with the Securities and Exchange Commission's rules and are not part of the basic financial statements. These schedules have been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, fairly state in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole. ARTHUR ANDERSEN LLP Seattle, Washington, October 25, 1994 35 PAGE 35 WASHINGTON ENERGY COMPANY AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS ASSETS
September 30, ------------------------------ 1994 1993 ---------- ---------- (in thousands) PROPERTY, PLANT AND EQUIPMENT: Utility plant, at original cost $ 977,406 $ 903,892 Oil and gas (on full cost method), coal and other 54,398 258,065 Accumulated depreciation, depletion and amortization (249,239) (297,062) ---------- ---------- Net property, plant and equipment 782,565 864,895 ---------- ---------- INVESTMENTS IN UNCONSOLIDATED AFFILIATES 98,139 -- ---------- ---------- CURRENT ASSETS: Cash and cash equivalents 5,387 13,049 Receivables, net of allowance for uncollectible accounts of $2,139 and $474, respectively 5,689 20,868 Unbilled revenue 9,961 11,072 Federal income taxes 6,124 15,354 Purchased gas receivable 21,261 23,869 Materials and supplies, at average cost 28,069 40,779 ---------- ---------- Total current assets 76,491 124,991 ---------- ---------- OTHER ASSETS AND DEFERRED CHARGES: Environmental insurance receivable 33,947 -- Utility tax asset 18,810 18,767 Deferred charges and other 20,542 27,164 ---------- ---------- Total other assets and deferred charges 73,299 45,931 ---------- ---------- Total assets $1,030,494 $1,035,817 ========== ==========
The accompanying notes are an integral part of these consolidated balance sheets. 36 PAGE 36 WASHINGTON ENERGY COMPANY AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Continued) CAPITALIZATION AND LIABILITIES
September 30, -------------------------------- 1994 1993 ---------- ---------- (in thousands) CAPITALIZATION (see statements): Common shareholders' interest $ 256,800 $ 322,931 Redeemable preferred stock 90,000 17,300 Long-term debt 290,200 353,400 ---------- ---------- Total capitalization 637,000 693,631 ---------- ---------- CURRENT LIABILITIES: Notes payable and commercial paper 125,182 145,498 Current sinking fund requirements and debt maturities 60,140 5,528 Accounts payable 34,326 44,484 Other current liabilities 32,261 19,261 Accrued general taxes 12,044 14,198 ---------- ---------- Total current liabilities 263,953 228,969 ---------- ---------- DEFERRED CREDITS AND OTHER LIABILITIES: Accumulated deferred income taxes 72,518 78,688 Other utility tax liabilities 12,560 13,139 Unamortized investment tax credits 10,132 10,913 Contributions in aid of construction 12,298 10,113 Contingency reserves and other 22,033 364 ---------- ---------- Total deferred credits and other liabilities 129,541 113,217 ---------- ---------- Total capitalization and liabilities $1,030,494 $1,035,817 ========== ==========
The accompanying notes are an integral part of these consolidated balance sheets. 37 PAGE 37 WASHINGTON ENERGY COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME
Year Ended September 30, --------------------------------------- 1994 1993 1992 -------- -------- -------- (in thousands, except per share amounts) OPERATING REVENUES: Regulated utility sales $396,407 $367,853 $284,939 Merchandise, conservation products and other 35,618 71,185 72,533 Oil and natural gas operations -- 31,354 17,616 -------- -------- -------- Total operating revenues 432,025 470,392 375,088 OPERATING EXPENSES: Purchases of gas 223,502 180,893 122,355 Utility operations and maintenance 76,049 67,255 62,579 Other operations 42,019 75,927 71,479 Depreciation, depletion and amortization 30,901 38,274 34,852 General taxes 41,487 42,829 34,178 Federal income taxes (7,663) 9,732 3,665 -------- -------- -------- Total operating expenses 406,295 414,910 329,108 -------- -------- -------- OPERATING INCOME 25,730 55,482 45,980 OTHER INCOME (EXPENSE): Pre-tax loss on merger of subsidiary (6,304) -- -- Federal income taxes on merger of subsidiary (23,711) -- -- Preferred dividend requirement - Washington Natural Gas Company (3,970) (2,612) (2,622) Other, net (940) 555 1,666 -------- -------- -------- Gross income (loss) (9,195) 53,425 45,024 INTEREST CHARGES 35,652 31,390 31,043 -------- -------- -------- INCOME (LOSS) FROM CONTINUING OPERATIONS (44,847) 22,035 13,981 DISCONTINUED OPERATIONS: Loss from operations, net of income tax -- (2,570) (2,542) Loss on disposal, net of income tax (799) (9,818) -- -------- -------- -------- NET INCOME (LOSS) (45,646) 9,647 11,439 DIVIDENDS ON PREFERRED STOCK 9 101 105 EXCESS PREMIUM, PREFERRED REDEMPTION 673 -- -- -------- -------- -------- EARNINGS (LOSS) ON COMMON STOCK $(46,328) $ 9,546 $ 11,334 ======== ======== ========
The accompanying notes are an integral part of these consolidated statements. 38 PAGE 38 WASHINGTON ENERGY COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (Continued)
Year Ended September 30, ------------------------------- 1994 1993 1992 ------- ------- ------- (in thousands, except per share amounts) EARNINGS (LOSS) PER COMMON SHARE: From continuing operations $ (1.94) $ .95 $ .71 From discontinued operations (0.03) (.53) (.13) ------- ------- ------- Earnings (loss) per common share $ (1.97) $ .42 $ .58 ======= ======= ======= AVERAGE COMMON SHARES OUTSTANDING 23,486 22,996 19,659 ======= ======= ======= DIVIDENDS PER COMMON SHARE $ 1.00 $ 1.40 $ 1.40 ======= ======= ======= TOTAL COMMON DIVIDENDS DECLARED BASED ON SHARES OUTSTANDING ON RECORD DATES DURING EACH PERIOD $23,468 $32,282 $27,499 ======= ======= =======
The accompanying notes are an integral part of these consolidated statements. 39 PAGE 39 WASHINGTON ENERGY COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CAPITALIZATION
September 30, --------------------- 1994 1993 --------- --------- (in thousands) COMMON SHAREHOLDERS' INTEREST: Common stock, $5 par value, authorized 50,000,000 shares, outstanding 23,713,688 and 23,311,375 shares $ 118,568 $ 116,557 Premium on common stock 199,571 197,917 Shareholders' earnings (deficit) reinvested in the business (61,339) 8,457 --------- --------- Total common shareholders' interest 256,800 322,931 --------- --------- 40%* 47%*
Shares REDEEMABLE PREFERRED STOCK: Outstanding at Washington Energy Company - Cumulative; September 30, authorized 400,000 shares of $100 par (in thousands) value and 800,000 shares of $25 par ------------------ value 1994 1993 Washington Natural - cumulative; ----- ---- authorized 1,000,000 shares of $100 par value and 4,000,000 shares of $25 par value 5%, Series A, $100 par value -- 21 -- 2,100 6%, Series B, $100 par value -- 24 -- 2,448 8-7/8%, Series C, $100 par value -- 30 -- 3,000 8-3/4%, Series F, $100 par value -- 30 -- 3,000 8-3/4%, Series I, $25 par value -- 480 -- 12,000 7.45%, Series II, $25 par value 2,400 -- 60,000 -- 8.50%, Series III, $25 par value 1,200 -- 30,000 -- --------- --------- 90,000 22,548 Less sinking-fund requirements included in current liabilities -- (5,248) --------- --------- Total preferred stock 90,000 17,300 --------- --------- 14%* 2%*
*Percentage of total capitalization. The accompanying notes are an integral part of these consolidated statements. 40 PAGE 40 WASHINGTON ENERGY COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CAPITALIZATION (Continued)
September 30, ------------------- 1994 1993 -------- -------- (in thousands) LONG-TERM DEBT: First Mortgage Bonds 9.96% due 1995 $ 40,000 $ 40,000 8-7/8% due 1996 -- 3,200 8.80% due 1996 25,000 25,000 8-1/8% due 1997 3,340 3,480 10-1/4% due 1997 30,000 30,000 9.60% due 2000 25,000 25,000 9.57% due 2020 25,000 25,000 Secured Medium-Term Notes, Series A 5.55% and 5.67% due 1995 20,000 20,000 8.25% due 1998 11,000 11,000 7.08% due 1999 10,000 10,000 8.51% through 8.55% due 2001 19,000 19,000 7.53% and 7.91% due 2002 30,000 30,000 8.25% through 8.40% due 2022 35,000 35,000 Secured Medium-Term Notes, Series B 6.23% through 6.31% due 2003 28,000 28,000 6.07% and 6.10% due 2004 18,500 18,500 6.51% and 6.53% due 2008 4,500 4,500 6.83% and 6.90% due 2013 13,000 13,000 7.19% due 2023 13,000 13,000 -------- -------- 350,340 353,680 Less sinking-fund requirements and maturities included in current liabilities (60,140) (280) -------- -------- Total long-term debt 290,200 353,400 -------- -------- 46%* 51%*
TOTAL CAPITALIZATION $637,000 $693,631 ======== ======== 100%* 100%* *Percentage of total capitalization. The accompanying notes are an integral part of these consolidated statements. 41 PAGE 41 WASHINGTON ENERGY COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EARNINGS REINVESTED IN THE BUSINESS AND PREMIUM ON CAPITAL STOCK
Year Ended September 30, ------------------------------ 1994 1993 1992 -------- -------- -------- (in thousands) Balance, beginning of year $ 8,457 $ 31,193 $ 47,358 Net income (loss) (45,646) 9,647 11,439 Excess premium, preferred redemption (673) -- -- Cash dividends on capital stock: Common stock, $1.00, $1.40, and $1.40 per share, respectively (23,468) (32,282) (27,499) Preferred stock 5%, Series A (3) (26) (21) 6%, Series B (1) (21) (28) 8-7/8%, Series C (5) (54) (56) -------- -------- -------- Balance, end of year $(61,339) $ 8,457 $ 31,193 -------- -------- --------
WASHINGTON ENERGY COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF PREMIUM ON CAPITAL STOCK
Year Ended September 30, ------------------------------ 1994 1993 1992 -------- -------- -------- (in thousands) Balance at beginning of year $197,917 $145,075 $139,465 Excess of proceeds over par value of common stock issued by public offer- ing, less expense of sale -- 46,543 -- Excess of cost over par value of preferred stock reacquired (492) -- -- Excess of purchase price over par value of shares of common stock issued under the Dividend Reinvestment and Stock Purchase Plan 3,848 6,038 4,967 Excess of purchase price over par value of shares of common stock issued under the Employee Stock Purchase and Owner- ship Plans 481 631 639 Excess of purchase price over par value of shares of common stock issued under the Directors Stock Bonus Plan 2 8 19 Common and preferred stock expense (2,185) (378) (15) -------- -------- -------- Balance at end of year $199,571 $197,917 $145,075 ======== ======== ========
The accompanying notes are an integral part of these consolidated statements. 42 PAGE 42 WASHINGTON ENERGY COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended September 30, ------------------------------ 1994 1993 1992 -------- -------- -------- (in thousands) Cash Flow Provided by (Used in) Operating Activities: Income (loss) from continuing operations $(44,847) $ 22,035 $ 13,981 Adjustments to reconcile income (loss) from continuing operations to net cash provided by operating activities: Pre-tax loss on merger of Resources 6,304 -- -- Depreciation, depletion and amortization 31,293 38,635 36,136 Provision for uncollectible accounts receivable 3,267 1,613 1,195 Increase (decrease) in: Federal income tax - current 6,571 (8,844) (1,571) Federal income tax - deferred (23,452) 17,551 1,396 Deferred tax on merger of Resources 24,784 -- -- Deferred charges (19,953) (20,105) 1,305 Accounts receivable 35,766 (19,126) (21,591) Accounts payable 6,668 4,767 12,312 Materials and supplies 11,824 (4,539) (156) Other assets and liabilities (26,662) 8,251 19,256 Other 4,331 (3,632) 3,988 -------- -------- -------- Total adjustments 60,741 14,571 52,270 -------- -------- -------- Net cash provided by operating activities 15,894 36,606 66,251 -------- -------- -------- Cash Flow Provided by (Used in) Investing Activities: Utility plant additions (84,506) (91,275) (94,860) Coal, oil and gas and other property expenditures (2,347) (38,211) (30,576) Invested in Resources prior to merger (20,760) -- -- Proceeds from merger of Resources 63,661 -- -- Proceeds from disposition -- 1,339 2,689 -------- -------- -------- Net cash used in investing activities (43,952) (128,147) (122,747) -------- -------- --------
The accompanying notes are an integral part of these consolidated statements. 43 PAGE 43 WASHINGTON ENERGY COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
Year Ended September 30, ------------------------------ 1994 1993 1992 ------- -------- -------- (in thousands) Cash Flow Provided by (Used in) Financing Activities: Proceeds from issuance of common stock $ 6,342 $ 70,528 $ 7,437 Proceeds from issuance of preferred stock 87,887 -- -- Proceeds from debt financing (reductions of): First Mortgage Bonds -- 77,000 95,000 Commercial paper, net (20,316) 24,388 18,765 Bank loans, net -- (17,100) 17,100 Redemptions and repurchases Preferred stock (23,221) (10,200) (200) Long-term debt (3,340) (9,260) (46,884) Cash dividend payments Common (23,468) (32,282) (27,499) Preferred (9) (101) (105) -------- -------- ------- Net cash provided by financing activities 23,875 102,973 63,614 -------- -------- ------- Net cash provided by (used in) continuing operations (4,183) 11,432 7,118 Net cash used in discontinued operations (3,479) (3,795) (3,260) -------- -------- ------- Net increase (decrease) in cash (7,662) 7,637 3,858 Beginning cash and cash equivalents 13,049 5,412 1,554 -------- -------- ------- Ending cash and cash equivalents $ 5,387 $ 13,049 $ 5,412 ======== ======== ======= Supplemental Disclosures of Cash Flow Information Cash Paid During the Year for: Interest (net of amounts capitalized) $ 35,468 $ 30,685 $29,726 Income taxes 5,180 6,598 4,165
The accompanying notes are an integral part of these consolidated statements. 44 PAGE 44 WASHINGTON NATURAL GAS COMPANY BALANCE SHEETS ASSETS
September 30, --------------------------------- 1994 1993 --------- --------- (in thousands) UTILITY PLANT, at original cost $ 977,406 $ 903,892 Accumulated depreciation (239,520) (216,781) --------- --------- Net utility plant 737,886 687,111 --------- --------- RECEIVABLES FROM AFFILIATED COMPANIES 2,020 4,459 --------- --------- CURRENT ASSETS: Cash and cash equivalents 427 9,773 Receivables, net of allowance for uncollectible accounts of $2,096 and $474, respectively 2,003 9,066 Unbilled revenue 9,961 11,072 Federal income taxes 20,161 8,000 Purchased gas receivable 21,261 23,869 Materials and supplies, at average cost 25,360 39,606 --------- --------- Total current assets 79,173 101,386 --------- --------- OTHER ASSETS AND DEFERRED CHARGES: Environmental insurance receivable 33,947 -- Utility tax asset 18,810 18,767 Deferred charges and other 13,180 22,793 --------- --------- Total other assets and deferred charges 65,937 41,560 --------- --------- Total assets $ 885,016 $ 834,516 ========= =========
The accompanying notes are an integral part of these balance sheets. 45 PAGE 45 WASHINGTON NATURAL GAS COMPANY BALANCE SHEETS (Continued) CAPITALIZATION AND LIABILITIES
September 30, ------------------------------- 1994 1993 -------- --------- (in thousands) CAPITALIZATION (see statements): Common shareholder's interest $ 235,988 $ 262,334 Redeemable preferred stock 90,000 17,300 Long-term debt 290,200 353,400 --------- --------- Total capitalization 616,188 633,034 --------- --------- CURRENT LIABILITIES: Current sinking fund requirements and debt maturities 60,140 5,580 Accounts payable 30,914 27,489 Other current liabilities 26,773 11,204 Accrued general taxes 11,869 10,755 --------- --------- Total current liabilities 129,696 55,028 --------- --------- PAYABLES TO AFFILIATED COMPANIES 39,828 49,809 --------- --------- DEFERRED CREDITS AND OTHER LIABILITIES: Accumulated deferred income taxes 64,314 62,480 Other utility tax liabilities 12,560 13,139 Unamortized investment tax credits 10,132 10,913 Contributions in aid of construction 12,298 10,113 --------- --------- Total deferred credits and other liabilities 99,304 96,645 --------- --------- Total capitalization and liabilities $ 885,016 $ 834,516 ========= =========
The accompanying notes are an integral part of these balance sheets. 46 PAGE 46 WASHINGTON NATURAL GAS COMPANY STATEMENTS OF INCOME
Year Ended September 30, ---------------------------------------- 1994 1993 1992 -------- -------- -------- (in thousands) OPERATING REVENUES: Regulated utility sales $396,407 $367,853 $284,939 Merchandise and conservation products -- 63,210 66,083 -------- -------- -------- Total operating revenues 396,407 431,063 351,022 OPERATING EXPENSES: Purchases of gas 223,502 181,157 130,336 Utility operations and maintenance 78,348 67,644 63,358 Other operations 3,423 55,801 57,182 Depreciation 30,901 28,183 25,786 General taxes 41,169 38,979 31,570 Federal income taxes (4,878) 9,497 4,647 -------- -------- -------- Total operating expenses 372,465 381,261 312,879 -------- -------- -------- OPERATING INCOME 23,942 49,802 38,143 OTHER INCOME (EXPENSE), net (2,067) (1,198) 135 -------- -------- -------- Gross income 21,875 48,604 38,278 INTEREST CHARGES 30,118 26,833 26,047 -------- -------- -------- NET INCOME (LOSS) (8,243) 21,771 12,231 DIVIDENDS ON PREFERRED STOCK 3,979 2,720 2,740 EXCESS PREMIUM, PREFERRED REDEMPTION 798 -- -- -------- -------- -------- EARNINGS (LOSS) ON COMMON STOCK $(13,020) $ 19,051 $ 9,491 ======== ======== ========
The accompanying notes are an integral part of these statements. 47 PAGE 47 WASHINGTON NATURAL GAS COMPANY STATEMENTS OF CAPITALIZATION
September 30, ----------------------- 1994 1993 -------- -------- (in thousands) COMMON SHAREHOLDER'S INTEREST: Common stock, $5 par value, authorized 25,000,000 shares, outstanding 10,774,599 and 10,524,409 shares $ 53,873 $ 52,622 Premium on common stock 163,978 161,618 Shareholder's earnings reinvested in the business 18,137 48,094 -------- -------- Total common shareholder's interest 235,988 262,334 -------- -------- 38%* 41%* Shares REDEEMABLE PREFERRED STOCK: Outstanding at Cumulative; authorized September 30, 1,000,000 shares of $100 par value (in thousands) and 4,000,000 shares of $25 par value -------------------- 1994 1993 ------ ------ 5%, Series A, $100 par value -- 21 -- 2,100 6%, Series B, $100 par value -- 25 -- 2,500 8-7/8%, Series C, $100 par value -- 30 -- 3,000 8-3/4%, Series F, $100 par value -- 30 -- 3,000 8-3/4%, Series I, $25 par value -- 480 -- 12,000 7.45%, Series II, $25 par value 2,400 -- 60,000 -- 8.50%, Series III, $25 par value 1,200 -- 30,000 -- -------- -------- 90,000 22,600 Less sinking-fund requirements included in current liabilities -- (5,300) -------- -------- Total preferred stock 90,000 17,300 -------- -------- 15%* 3%*
*Percentage of total capitalization. The accompanying notes are an integral part of these statements. 48 PAGE 48 WASHINGTON NATURAL GAS COMPANY STATEMENTS OF CAPITALIZATION (Continued)
September 30, ------------------------------- 1994 1993 -------- -------- (in thousands) LONG-TERM DEBT: First Mortgage Bonds 9.96% due 1995 $ 40,000 $ 40,000 8-7/8% due 1996 -- 3,200 8.80% due 1996 25,000 25,000 8-1/8% due 1997 3,340 3,480 10-1/4% due 1997 30,000 30,000 9.60% due 2000 25,000 25,000 9.57% due 2020 25,000 25,000 Secured Medium-Term Notes, Series A 5.55% and 5.67% due 1995 20,000 20,000 8.25% due 1998 11,000 11,000 7.08% due 1999 10,000 10,000 8.51% through 8.55% due 2001 19,000 19,000 7.53% and 7.91% due 2002 30,000 30,000 8.25% through 8.40% due 2022 35,000 35,000 Secured Medium-Term Notes, Series B 6.23% through 6.31% due 2003 28,000 28,000 6.07% and 6.10% due 2004 18,500 18,500 6.51% and 6.53% due 2008 4,500 4,500 6.83% and 6.90% due 2013 13,000 13,000 7.19% due 2023 13,000 13,000 -------- -------- 350,340 353,680 Less sinking-fund requirements and debt maturities included in current liabilities (60,140) (280) -------- -------- Total long-term debt 290,200 353,400 -------- -------- 47%* 56%* TOTAL CAPITALIZATION $616,188 $633,034 ======== ======== 100%* 100%*
*Percentage of total capitalization. The accompanying notes are an integral part of these statements. 49 PAGE 49 WASHINGTON NATURAL GAS COMPANY STATEMENTS OF SHAREHOLDER'S EARNINGS REINVESTED IN THE BUSINESS
Year Ended September 30, ----------------------------------------- 1994 1993 1992 -------- -------- -------- (in thousands) Balance, beginning of year $ 48,094 $ 55,088 $ 67,288 Net income (loss) for the year (8,243) 21,771 12,231 Excess premium, preferred redemption (798) -- -- Cash dividends on capital stock: Common stock $1.60, $2.60, and $2.60 per share, respectively (16,937) (26,045) (21,691) Preferred stock 5%, Series A (9) (108) (113) 6%, Series B (13) (154) (160) 8-7/8%, Series C (23) (271) (280) 8-3/4%, Series F (22) (437) (437) 8-3/4%, Series I (88) (1,750) (1,750) 7.45%, Series II (3,824) -- -- 8.50%, Series III -- -- -- -------- -------- -------- Balance, end of year $ 18,137 $ 48,094 $ 55,088 ======== ======== ========
WASHINGTON NATURAL GAS COMPANY STATEMENTS OF PREMIUM ON CAPITAL STOCK
Year Ended September 30, ----------------------------------------- 1994 1993 1992 -------- -------- -------- (in thousands) Balance at beginning of year $161,618 $108,186 $102,417 Excess of proceeds over par value of common stock issued to parent company, less expense of sale -- 46,714 -- Excess of cost over par value of preferred stock reacquired (331) -- -- Excess of purchase price over par value of shares of common stock issued under the parent company's Dividend Reinvestment and Stock Purchase Plan 4,507 6,651 5,502 Excess of purchase price over par value of shares of common stock issued under the parent company's Employee Stock Purchase Plan 350 361 349 Common and preferred stock expense (2,166) (294) (82) -------- -------- -------- Balance at end of year $163,978 $161,618 $108,186 ======== ======== ========
The accompanying notes are an integral part of these statements. 50 PAGE 50 WASHINGTON NATURAL GAS COMPANY STATEMENTS OF CASH FLOWS
Year Ended September 30, ---------------------------------------- 1994 1993 1992 ------- -------- -------- (in thousands) Cash Flow Provided by (Used in) Operating Activities: Net income (loss) $ (8,243) $ 21,771 $ 12,231 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization 31,293 28,544 26,085 Provision for uncollectible accounts receivable 3,571 1,610 1,173 Increase (decrease) in: Federal income tax - Current (12,161) 1,830 (2,745) Federal income tax - Deferred 1,053 12,724 4,512 Accounts receivable 41,150 (16,112) (20,406) Accounts payable 1,945 6,966 (3,022) Materials and supplies 14,246 (4,643) 42 Deferred charges (18,178) (17,724) (1,114) Other assets and liabilities (21,910) 1,413 18,986 Other 4,114 (1,175) 2,882 -------- -------- -------- Total adjustments 45,123 13,433 26,393 -------- -------- -------- Net cash provided by operating activities 36,880 35,204 38,624 -------- -------- -------- Cash Flow Used in Investing Activities: Utility plant additions (84,506) (91,275) (94,860) -------- -------- --------
The accompanying notes are an integral part of these statements. 51 PAGE 51 WASHINGTON NATURAL GAS COMPANY STATEMENTS OF CASH FLOWS (Continued)
Year Ended September 30, ------------------------------------------- 1994 1993 1992 -------- -------- -------- (in thousands) Cash Flow Provided by (Used in) Financing Activities: Proceeds from issuance of common stock $ 6,108 $ 64,023 $ 6,992 Proceeds from issuance of preferred stock Proceeds from debt financing (reductions of): Preferred stock 87,887 -- -- First mortgage bonds -- 77,000 95,000 Commercial paper (8,502) (11,250) 10,055 Bank loans, net -- (17,100) 17,100 Redemptions and repurchases Preferred stock (23,398) (10,300) (300) Long-term debt (3,340) (9,260) (46,884) Cash dividend payments Common (16,937) (26,045) (21,691) Preferred (3,538) (2,725) (2,745) -------- -------- -------- Net cash provided by financing activities 38,280 64,343 57,527 -------- -------- -------- Net increase (decrease) in cash and cash equivalents (9,346) 8,272 1,291 Beginning cash and cash equivalents 9,773 1,501 210 -------- -------- -------- Ending cash and cash equivalents $ 427 $ 9,773 $ 1,501 ======== ======== ======== Supplemental Disclosures of Cash Flow Information Cash Paid During the Year for: Interest (net of amounts capitalized) $ 29,836 $ 26,264 $ 24,892 Income taxes 2,400 601 3,134
The accompanying notes are an integral part of these statements. 52 PAGE 52 WASHINGTON ENERGY COMPANY AND SUBSIDIARIES WASHINGTON NATURAL GAS COMPANY NOTES TO FINANCIAL STATEMENTS Certain information, necessary to understand Washington Natural's financial condition and results of operations, is substantially the same as disclosed by the Company in this report. (1) SUMMARY OF ACCOUNTING POLICIES: (a) General The consolidated financial statements include the accounts of Washington Energy Company ("the Company") and its wholly-owned subsidiaries, after elimination of intercompany items and transactions. The Company's subsidiaries are Washington Natural Gas Company ("Washington Natural"); Washington Energy Services Company ("Services"); Washington Energy Gas Marketing Company ("WEGM"); WECO Finance Company and its wholly-owned subsidiary; Thermal Energy, Inc., and its wholly-owned subsidiary; and ThermRail, Inc. Due to the merger of Washington Energy Resources Company ("Resources") with a subsidiary of Cabot Oil & Gas Corporation ("Cabot"), Houston, Texas, the current year financial statements through the date of the merger show Resources' earnings in "Other income (expense)," using the equity method of accounting. The prior year financial statements reflect Resources on a consolidated basis in accordance with generally accepted accounting principles ("GAAP"). Washington Natural's accounting records are maintained in accordance with GAAP and with the Federal Energy Regulatory Commission's ("FERC") uniform system of accounts, which has been adopted by the Washington Utilities and Transportation Commission ("WUTC"). (b) Reclassifications Certain amounts in the 1993 and 1992 financial statements have been reclassified to conform with the 1994 presentation. Certain regulated revenues of Washington Natural, which were previously reported as "Merchandise, conservation products and other" in the income statement, are now combined with utility gas sales and reported as "Regulated utility sales". The costs of developing and implementing certain major computer software applications were previously reported as deferred charges and are now reported in property, plant and equipment. (c) Utility Plant and Depreciation Utility plant is stated at the original cost of construction. When a depreciable unit of property is retired, the cost is credited to utility plant and charged to accumulated depreciation together with the cost of removal, less any salvage. No gain or loss is recognized upon normal retirement. Substantially all of the property of Washington Natural is subject to the lien of its First Mortgage Bonds. Provisions for depreciation of utility plant are determined by applying straight-line rates to the original cost of the various classifications of property, adjusted for estimated removal cost and salvage. These rates may be 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 53 PAGE 53 approval of the WUTC. The average depreciation rate used was approximately 3.5% for 1994 and 3.6% for 1993 and 1992. (d) Regulatory Assets Washington Natural defers certain costs that otherwise would be charged to expense if it is probable that the WUTC will permit future recovery of such costs. Differences between the actual cost of purchased gas and that allowed by the WUTC are deferred and recovered or repaid through a "purchased gas cost adjustment" mechanism. Certain income tax deferrals are discussed in Note 2. The remainder of these costs are reported as "Deferred charges and other" in the financial statements and are amortized and recovered in rates as prescribed by the WUTC. At September 30, 1994 and 1993, such deferred charges totaled $3,614,000 and $1,918,000, respectively. Of the total year end 1994 balance, $1,831,000 was being amortized and recovered in rates, with the remainder subject to future regulatory review and approval for recovery. (e) Interest Capitalized The Company capitalizes the interest costs incurred to finance assets under construction or development. Interest capitalized relative to utility plant construction in 1994, 1993 and 1992 was $453,000, $250,000, and $656,000, respectively. The Company discontinued interest capitalization on its coal projects in 1994 as the projects were not actively under development during the year. Total interest capitalized in 1993 and 1992 related to the coal projects was $541,000 and $549,000, respectively. (f) Unbilled Gas Revenues Washington Natural accrues revenues for gas delivered but not billed to customers based on estimated usage from the meter reading dates to month end. (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. 54 PAGE 54 The Company's consolidated income tax provision is as follows (in thousands):
1994 1993 1992 ------- ------- ------- Charged to operations Current $(8,257) $(4,598) $(1,590) Deferred 1,375 15,126 6,035 Investment tax credit, net (781) (796) (780) ------- ------- ------- (7,663) 9,732 3,665 Charged to other income (expense) 23,398 (36) 325 Charged to discontinued operations (430) (6,610) (1,309) ------- ------- ------- Total income tax expense $15,305 $ 3,086 $ 2,681 ======= ======= =======
The amount charged to "Other income (expense)" in 1994 consists primarily of deferred income taxes provided on the Cabot merger (see Note 13 page 65). Washington Natural's consolidated income tax provision is as follows (in thousands):
1994 1993 1992 ------- ------ ------ Charged to operations: Current $(5,309) $2,380 $1,341 Deferred 1,212 7,913 4,086 Investment tax credit, net (781) (796) (780) Charged to other income, net (1,113) 50 254 ------- ------ ------ Total income tax expense (benefit) $(5,991) $9,547 $4,901 ======= ====== ======
On October 1, 1993, the Company adopted Statement of Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes," which superseded SFAS No. 96, the prior accounting standard for income taxes the Company had followed since 1988. SFAS Nos. 109 and 96 both prescribe use of the liability method, whereby deferred tax assets and liabilities are recognized for temporary differences between the carrying amounts of assets and liabilities in the financial statements and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates that will be in effect when the temporary differences are expected to be settled. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period the change is enacted. Adoption of SFAS No. 109 had no material impact on results of operations. 55 PAGE 55 The temporary differences and associated tax assets and liabilities comprising the Company's net deferred tax liability at September 30 are as follows (in thousands):
1994 -------- Deferred tax liabilities Accelerated depreciation $ 61,264 Investment in Cabot stock 29,735 Coal development activities 11,813 Environmental remediation 1,943 Other 1,497 -------- Total 106,252 -------- Deferred tax assets Net operating loss carry- forward 20,045 Alternative minimum tax credits 8,333 Reserves for future losses 4,951 Other 405 -------- Total 33,734 -------- Net deferred tax liability $ 72,518 ========
The components of deferred income tax expense for years under which the Company followed SFAS No. 96 are as follows:
Year Ended September 30, ------------------------ 1993 1992 ------- ------- (in thousands) Included in Operating Expense: Tax depreciation $ 4,452 $3,588 Gas and oil exploration and production activities 5,721 1,960 Coal development activities 1,398 (410) Railroad activities 44 55 Investment activities (69) (161) Waste conversion activities (65) 503 Interest capitalized 184 - Environmental activities 3,461 500 ------- ------ 15,126 6,035 Included in Other Income: Other non-utility activities 50 219 ------- ------ Total deferred tax provision $15,176 $6,254 ======= ======
56 PAGE 56 At September 30, 1994 the following carry-forwards are available to reduce the Company's future income tax liability (in thousands):
Tax Reduction Expiration --------- ---------- Net operating loss $20,045 2009 Alternative minimum tax credits 8,333 Unlimited ======= =========
The Company has determined it is more likely than not that the deferred tax assets will be realized and, therefore, a valuation allowance is not required. The alternative minimum tax credits can be used in the future to reduce the Company's regular tax liability in excess of its minimum tax liability. (b) Flow-through accounting In accordance with a directive from the WUTC, Washington Natural uses "flow-through accounting," wherein no charge is made currently in the income statement for certain income tax payments deferred as allowed by the Internal Revenue Service. However, as required by SFAS No. 109, a deferred tax liability or asset has been recorded for the amount of income tax payments deferred. A deferred utility tax asset or liability has been recorded to reflect the expected recovery through customer rates when these taxes become payable in future periods. Based on the WUTC's past decisions and policies, management expects that the Commission will continue to 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 WASHINGTON ENERGY COMPANY AND SUBSIDIARIES
Year Ended September 30, ------------------------------------ 1994 1993 1992 ------ ------ ------ Statutory income tax rate (35.0%) 34.8% 34.0% Excess of book over tax depreciation not deferred 3.4 2.2 4.9 Accelerated benefit on early retirement of depreciable assets (2.8) (2.8) (3.6) Tax credit on gas produced from tight sands formation 4.9 (5.1) (5.5) Amortization of investment tax credit (2.7) (2.5) (4.3) Dividends-minority interest 4.8 2.8 5.0 Cabot merger and related reserves (see Note 13 page 65) 83.3 -- -- Effect of tax rate change from 34% to 35% -- 2.8 -- Adjustments related to prior years -- -- (4.1) Other, net (1.8) (1.6) (4.2) ---- ---- ---- Effective income tax rate 54.1% 30.6% 22.2% ==== ==== ====
57 PAGE 57 WASHINGTON NATURAL GAS COMPANY
Year Ended September 30, ----------------------------------- 1994 1993 1992 ------ ---- ---- Statutory income tax rate (35.0%) 34.8% 34.0% Excess of book over tax depreciation not deferred 7.0 2.2 5.1 Accelerated benefit on early retirement of depreciable assets (5.7) (2.9) (3.8) Amortization of investment tax credit (5.5) (2.5) (4.5) Other, net (2.9) (1.1) (2.2) ----- ---- ---- Effective income tax rate (42.1%) 30.5% 28.6% ===== ==== ====
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) Public Offering of $5 Par Value Common Stock In October 1992, the Company sold 3,050,000 shares of its common stock to the public for net proceeds of $61,793,000. Proceeds were used to repay a portion of the short-term borrowings outstanding at the time of sale. (b) Employee Stock Purchase Plan The Company has an Employee Stock Purchase Plan, under which options are granted to eligible employees who elect to participate in the plan. The option price under the plan is 90% of the fair market value of the common stock at the grant date, or 100% of the fair market value at the exercise date, whichever is less; but in no event less than the par value of the common stock. In 1994, 1993 and 1992, 27,055, 21,549, and 21,051 shares, respectively, were issued under the plan at average prices per share of $16.27, $20.08, and $19.99, respectively, with average fair market values on the exercise date of $16.44, $22.09, and $22.57, respectively. At September 30, 1994, 60,282 shares were authorized for future issues. (c) Dividend Reinvestment and Stock Purchase Plan This plan, available to all holders of the Company's common stock, provides for reinvestment of dividends at 95% 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 $3,000 per quarter at 100% of the average price on the dividend payment date. During 1994, 1993 and 1992, 363,879, 367,421, and 321,020 shares, respectively, were issued under the plan. At September 30, 1994, there were 108,492 shares of the Company's common stock authorized but unissued under this plan. 58 PAGE 58 (d) Performance Share Plan A Performance Share Plan was established October 1, 1981, which provides for the annual assignment 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. Under current committee policy, unless otherwise authorized by the committee, at least fifty percent of any payments made pursuant to the plan are to be paid in common stock of the Company and the balance of the payments are to be paid in cash or shares of common stock. The actual value of each award at the time of payment depends on (a) the number of contingent performance units assigned, (b) the Company's financial performance for the four year period following the assignment compared with pre-established goals, and (c) the market value of the Company's common stock at the time of any award payment. At September 30, 1994, the remaining maximum number of shares that could be used to make award payments was 774,324 shares of common stock. At September 30, 1994, 118,154 performance units had been assigned under the plan. During 1994, there were 10,489 shares issued under the plan. (e) Stock Option Plan The Stock Option Plan, with stock appreciation rights, approved by the shareholders in February 1984, expired September 30, 1993. As of September 30, 1994, options to purchase 187,300 shares were granted and unexercised, and 198,632 shares had been issued under the plan. The options and appreciation rights exercised during 1994, 1993 and 1992 were 700, 45,427 and 21,600, respectively, at average prices of $15.06, $19.43 and $19.38. Total compensation expense recognized for this plan in 1994, 1993 and 1992, respectively, was $0, $135,845 and $46,508. At September 30, 1994, the exercise price on these options range from a low of $20.06 to a high of $21.38, and expire between 1999 and 2002. The Board of Directors, by resolution at its meeting on December 15, 1993, recommended a new Stock Option Plan which was approved by a vote of the shareholders on February 25, 1994. Under this plan, as in the previous plan, options are offered to executive and key employees to purchase shares of Washington Energy's common stock at a price of not less than 100% of the market value of such shares at the time of granting the option. 800,000 shares of common stock have been authorized for the purposes of this plan. Options to purchase 106,200 shares at prices ranging from $18.25 to $18.375, with expiration dates ranging from December 14, 2003 to January 14, 2004, have been granted under this plan. As of September 30, 1994 all 106,200 options were outstanding. (f) Directors' Stock Bonus Plan The Directors' Stock Bonus Plan was approved by the shareholders in February 1991. The plan provides for annual grants of 200 shares of Washington Energy Company common stock to outside directors. At September 30, 1994, 8,000 shares had been awarded under the plan. These awards are deferred until the director leaves the Board of Directors. When the director leaves the Board of Directors the shares are issued. During 1994, 1993 and 1992, 190, 382, and 1,145 shares, respectively, were issued under the plan. (g) General The increase in common equity resulting from issuance of shares under the plans was $6,342,000 in 1994, $8,735,000 in 1993, and $7,437,000 in 1992. 59 PAGE 59 Unexercised options at September 30, 1994, do not result in any material dilution of earnings per common share. (4) DIVIDEND RESTRICTION: There are no restrictions on payment of dividends by the Company, but as a practical matter, its long term ability to pay dividends is limited by the restrictions on dividend payments in the First Mortgage Bond indentures of Washington Natural. At September 30, 1994, all retained earnings of Washington Natural were restricted under the terms of these indentures. Washington Natural is restricted from paying dividends to Washington Energy until its retained earnings increase by more than $23 million. (5) FINANCING, SOURCES OF CAPITAL AND NEW CONSTRUCTION: The Company's projected 1995 utility construction requirements and other capital expenditures are estimated at $82 million. The Company plans to fund these programs with internally generated cash flow and short-term borrowings. The Company has a $150 million commercial paper program available at current market rates. At September 30, 1994, $61 million of this program was unused. This program is backed by a committed revolving credit agreement with eight banks. The credit agreement allows the Company to borrow at market interest rates for unsecured commercial loans and requires payment of an annual commitment fee of .25% on the average unused amount. The Company has uncommitted short-term credit arrangements whereby it may borrow up to $80 million at current short-term market rates. At September 30, 1994, $44 million of this credit line was available. 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, 1994, $56 million of outstanding merchandise and gas receivables had been sold under the agreement, which represented all but approximately $2 million of total receivables eligible to be sold to CRC. The composite interest rate at September 30, 1994, 1993 and 1992, on outstanding short-term borrowings was 5.01%, 3.33% and 3.52%, respectively. During the past three years, short-term borrowing levels and average interest rates were as follows:
1994 1993 1992 ------ ------ ------ Maximum outstanding (in millions) $174.3 $161.4 $138.2 Average outstanding (in millions) $115.5 $116.5 $111.6 Weighted average rate 4.2% 4.2% 6.0%
The Company has entered into interest rate swap agreements to reduce the impact of changes in interest rates on its floating-term debt. The two agreements outstanding at September 30, 1994, effectively change the Company's interest rate on commercial paper to 8.59% on a notional principal amount of 60 PAGE 60 $25 million expiring December 28, 1995, and to 9.64% on a notional principal amount of $16.5 million expiring March 31, 2000. The Company leases the majority of its motor vehicle fleet, certain computer and telecommunications equipment and office space at four locations, which are accounted for as operating leases. Annual rental expense for 1994, 1993 and 1992 was $4,050,000, $5,098,000 and $4,889,000, respectively. Minimum annual lease payments are as follows (in thousands): 1995 $ 3,694 1996 2,472 1997 1,552 1998 941 1999 495 Thereafter 15,177 ------- Total $24,331 =======
(6) LONG-TERM DEBT: The total principal amount of Washington Natural's First Mortgage Bonds authorized by the indenture dated April 1, 1957, 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: 1995, $60,140,000; 1996, $25,140,000; 1997, $140,000; 1998, $43,920,000; and 1999, none. These are expected to be refunded by a combination of short-term borrowings and the issuance of long-term debt. (7) COAL AND RAILROAD PROPERTIES: Thermal Resources, Inc., a wholly-owned subsidiary of Thermal Energy, Inc., has subleased to Montco, a 95%-owned partnership formed to develop coal properties in southeastern Montana, its rights to surface control over and mineral rights to approximately 270 million tons of recoverable coal reserves and surface control over substantial additional reserves in the area. Proposals for test burns of Montco's coal have been made to several utilities. The results of such tests would better define the quality of the reserves. ThermRail, Inc., holds an 87.5% partnership interest in the Tongue River Railroad Company ("TRR"), which was formed to develop a railroad to transport Montco's coal to market. TRR is currently awaiting approval by the Interstate Commerce Commission of a request to extend the proposed rail line beyond the Montco properties. This would facilitate use of the line by existing coal shippers, which would enhance the economic viability of developing Montco's coal reserves. The Company's investment in Thermal Energy, Inc., totaled $28,001,000 and $26,238,000 at September 30, 1994 and 1993, respectively, and its investment in ThermRail, Inc., totaled $5,584,000 and $4,925,000 at the respective dates. The Company does not anticipate incurring significant expenditures to develop the coal reserves or the railroad during the next two years. In management's opinion, no events have occurred or circumstances exist that indicate any material impairment of these investments. 61 PAGE 61 (8) 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 new preferred stock is redeemable on or after September 1, 1999, at par value and has no sinking-fund requirements. In November 1993, Washington Natural sold 2,400,000 shares of 7.45% cumulative preferred stock, $25 par value, to the public following the early redemption of all its other preferred stock series. The sale netted proceeds to Washington Natural of $58,782,000. The preferred stock is redeemable on or after November 1, 2003, at par value and has no sinking-fund requirements. As part of a plan for early redemption, the Company and Washington Natural redeemed in November 1993, all previously outstanding preferred stock. The following shares were redeemed at the following prices: Series A, 21,000 shares, $102; Series B, 24,480 shares, $101; Series C, 30,000 shares, $101; Series F, 30,000 shares, $102.9167; and Series I, 480,000 shares, $25.7292. Washington Natural had previously elected to redeem at par value 10,000 shares of its preferred stock Series F, $100 par value, and 160,000 shares of preferred stock Series I, $25 par value, through additional, optional sinking-fund payments in September 1993. (9) PENSION AND RETIREMENT BENEFITS: The Company has a defined benefit pension plan (the "Plan") for the benefit of all regular employees who have attained 21 years of age and have completed one year of service. Benefits are based on annual compensation and length of service. The Company's policy is to fund the Plan annually at the level necessary to provide benefits attributable to service to date and for benefits expected to be earned in the future. As required by SFAS No. 87, the Company follows the projected unit credit method for determining pension expense for financial reporting purposes. Application of this accounting method on October 1, 1987, resulted in a transition gain (excess of Plan assets over projected benefit obligations) of $14,584,000, which is being amortized over 18 years. The entry-age normal actuarial cost method continues to be used for funding purposes. 62 PAGE 62 The following tables set forth the Plan's funded status and the pension liability recognized in the consolidated financial statements (in thousands):
1994 1993 1992 ------- ------- ----------- Actuarial present value of accumulated benefit obligations: Vested $36,828 $33,360 $ 28,936 Non-vested 732 478 1,731 ------- ------- ----------- Total $37,560 $33,838 $ 30,667 ======= ======= =========== Projected benefit obligations for service rendered to date $48,538 $43,965 $ 39,963 Plan assets at fair value, primarily marketable stocks, bonds and short-term investments 57,812 57,414 51,906 ------- ------- ----------- Plan assets in excess of projected benefit obligations 9,274 13,449 11,943 Unrecognized amounts Prior service cost 1,976 2,141 2,306 Net gain (4,683) (7,745) (5,212) Net transition gain (8,913) (9,723) (10,533) ------- ------- ----------- Net pension liability included in the balance sheet $(2,346) $(1,878) $ (1,496) ======= ======= =========== Net pension cost includes: Service cost of benefits earned during the period $ 2,577 $ 2,249 $ 2,023 Interest cost on projected benefit obligations 3,238 2,941 2,703 Actual return on Plan assets (1,870) (6,891) (5,665) Amortization of net transition gain (810) (810) (810) Unrecognized prior service cost 165 165 165 Amortization of deferred gain (456) (326) (196) Asset gain (loss) deferred (2,376) 3,054 2,146 ------- ------- ----------- Net pension cost $ 468 $ 382 $ 366 ======= ======= =========== Assumptions used in the calculations: Weighted-average discount rate 7 1/2% 7 1/2% 7 1/2% Long-term rate of return on assets 7 1/2% 7 1/2% 7 1/2-8 1/2% Compensation increase 6% 6% 6% ======= ======= ===========
The Company also has a supplemental executive retirement plan ("SERP") which provides pension benefits to Company officers in addition to those provided by the Plan. Benefits are based on annual compensation and 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. In 1994, the Company recorded a liability for future benefit obligations of SERP and an asset representing the cash surrender value of life insurance policies purchased to fund SERP. For accounting and disclosure purposes, neither the total death benefit from the life insurance policies of 63 PAGE 63 $24,100,000 nor the policies' net cash surrender value of $2,696,000 at September 30, 1994, qualify as plan assets since the proceeds of the policies are not segregated or formally restricted to funding SERP. The following tables set forth SERP's funded status and the liability recognized in the consolidated financial statements (in thousands):
1994 ------- Actuarial present value of accumulated plan benefit obligations Vested $ 4,005 Non-vested 716 ------- Total $ 4,721 ======= Projected benefit obligations for service rendered to date $ 4,721 Plan assets -- ------- Plan assets less than projected benefit obligations (4,721) Unrecognized amounts Prior service cost 4,451 Gain (654) ------- Net pension liability included in the balance sheet $ (924) ======= Net pension cost includes: Service cost of benefits earned during the period $ 322 Interest cost on projected benefit obligations 383 Unrecognized prior service cost 289 ------- Net pension cost $ 994 ======= Assumptions used in the calculations: Weighted-average discount rate 7 1/2% Compensation increase 4 1/2%
The Company does not offer any significant post-retirement benefits other than pensions. (10) LIABILITY FOR ENVIRONMENTAL MATTERS: Washington Natural has principal responsibility for the cleanup of a former manufactured gas plant site in the Tide Flats area of Tacoma, Washington, which the U.S. Environmental Protection Agency has determined contains several contaminants and requires cleanup under the Comprehensive Environmental Response, Compensation and Liability Act. Subsequent to fiscal year end, remediation activities have been substantially completed. Based upon cleanup cost estimates at fiscal year end and the cost of insurance litigation, described below, less insurance settlements totaling $7,140,000, Washington Natural's share of the cleanup cost at this site was estimated to be $33,600,000. In 1994, Washington Natural recorded a current liability for the difference between the estimated total unrecovered cleanup cost and the 64 PAGE 64 $27,998,000 of expenditures incurred through the end of the fiscal year, and also recorded a corresponding receivable in the amount of $33,600,000 for the probable insurance recovery based upon the litigation described below. In June 1991, Washington Natural filed a lawsuit in King County Superior Court, State of Washington, against certain insurance companies that provided insurance to Washington Natural 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 is entitled to collect its present and future uncompensated reasonable and necessary costs in remediating the site from the policies of the insurer defendants in the action other than those that previously settled with Washington Natural. The liability of these insurers is joint and several, up to the annual limits of their policies and subject to relevant underlying limits. The judgment provides for limitation of some of the insurers' liability based on the presence in their policies of "owned property" or "alienated premises" clauses. However, Washington Natural does not expect this limitation to affect its ability to collect all of its remediation costs. The final judgment further awards Washington Natural prejudgment interest and declares that Washington Natural is entitled to collect its reasonable attorney fees and costs incurred in obtaining coverage of its remediation costs. The defendants have appealed the judgment to the Washington State Court of Appeals. In the June 1994 quarter, Washington Natural also accrued $2,231,000 for estimated environmental investigation, legal and remediation costs associated with certain former manufactured gas plant sites, one of which is located in Everett, Washington. The Everett site is the subject of a remedial investigation and feasibility study that is scheduled for completion in June 1995. Washington Natural cannot reasonably estimate the extent or range of future remediation costs, if any, at the Everett site until more information is known from the remedial investigation and feasibility study. Based on all known facts and analyses, Washington Natural believes it is not likely that the identified environmental liabilities, after consideration of insurance recoveries and the judgment entered against certain insurance companies, will result in a material adverse impact on Washington Natural's financial position or operating results and cash flow trends. (11) Litigation Shareholder Lawsuit - A class-action lawsuit was filed against the Company and two of its officers in U.S. District Court, Western District of Washington, in February 1994, alleging violations of state and federal securities act provisions and associated violations of Washington state law. The essence of the complaint concerned alleged disclosure violations regarding the nature or the extent of the downside financial risk associated with the 1992 utility rate request filing of Washington Natural. In May 1994, the Company filed a Motion to Dismiss, which was granted on July 25, 1994. The plaintiffs have appealed the dismissal to the United States Court of Appeals for the Ninth Circuit; however, in management's opinion, the appeal is unlikely to succeed. Anti-Trust Lawsuit - 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 U.S. District Court, Western District of Washington. Cost Management alleges that Washington Natural has monopolized or attempted to monopolize the market for natural gas in central western Washington. Cost Management also 65 PAGE 65 alleges 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 seeks injunctive relief and damages in an unspecified amount. Washington Natural has denied the allegations and is vigorously defending this matter. A Motion to Dismiss the lawsuit has been filed by Washington Natural. Neither the outcome of nor the financial exposure from this lawsuit can be predicted at this time in the absence of pre-trial discovery. (12) 1994 Charges In the third quarter of 1994, the Company recognized $18,308,000 of restructuring and other one-time charges predominantly related to Washington Natural. Charges totaling $7,097,000 relate to restructuring and downsizing utility operations and include employee severance costs and expensing of costs previously capitalized in planning a new headquarters building that is not needed currently. The employee severance charge of $3,500,000 related to a staffing reduction of 12% from the October 1993 level of 1,480 employees. As of September 30, 1994, $1,327,000 in termination benefits had been paid out. The third-quarter charges also included provisions by Washington Natural for estimated environmental investigation, legal and remediation costs associated with certain former manufactured gas plant sites and the write-off of certain deferred costs. These charges totaled $2,231,000. Washington Natural also recorded a $3,351,000 charge for the supplemental executive retirement plan to reflect recent management changes. (13) Merger of Oil and Gas Subsidiary On May 2, 1994, the Company merged its oil and gas exploration and production subsidiary, Resources, with a wholly-owned subsidiary of Cabot in a tax-free exchange. The Company received 2,133,000 shares of Cabot Class A common stock, 1,134,000 shares of 6% convertible voting preferred stock of Cabot, stated value $50, and $63,661,000 cash in exchange for all the outstanding capital stock of Resources. The 1,134,000 shares of Cabot preferred stock are convertible into 1,972,174 shares of Cabot Class A common stock, and are entitled to the same number of votes on shareholder matters, making the Company the holder of 16.6% of Cabot's total voting securities. As part of the transaction Cabot increased its Board of Directors from nine to eleven and appointed two directors nominated by the Company to fill the new positions. The Company recorded a net loss on the merger of $13,895,000, after providing for deferred taxes of approximately $32,000,000, and established a reserve of $6,800,000 for a potential downward purchase price adjustment based on the performance of wells in a certain field over one year. Excluded from the merger were certain gas transportation, storage and other contractual arrangements of Resources that were retained by the Company. Upon completion of the merger, the Company established reserves of $18,000,000 for anticipated future losses associated with these excluded contractual arrangements (see Note 14 page 66). 66 PAGE 66 The Company's interest in Cabot's common stock is being accounted for using the equity method because the Company, through its representation on Cabot's Board, has the ability to exercise significant influence over operating and financial policies of Cabot. The following table details the Company's investment in Cabot at September 30, 1994, and earnings and dividends received from the investment during the year (dollars in thousands): Investment in Cabot Preferred stock $51,619 Common stock 46,182 Percentage of total Cabot common 9.4% Percentage of voting interest in Cabot 16.6% Pre-tax income Preferred dividends accrued $ 1,418 Equity in earnings (loss) (573) Dividends received Preferred $ 567 Common 171
As of the merger date, the carrying value of the Company's investment in Cabot exceeded the amount of underlying equity in the net assets of Cabot by $26,800,000. Based on the closing price on the New York Stock Exchange on September 30, 1994, the aggregate fair value of the Company's investment in Cabot common stock was $39,194,000. No fair value has been determined for the Cabot preferred stock as it is not publicly traded. (14) COMMITMENTS AND CONTINGENCIES WEGM demand charge and gas sales obligations WEGM holds firm rights to transport natural gas on the Nova Corporation of Alberta ("Nova"), Alberta Natural Gas Company ("ANG") and Pacific Gas Transmission Company ("PGT") pipelines from Alberta, Canada, to the northern border of California, as well as certain gas storage rights at the Alberta Energy Company ("AECO") field in Alberta and the Jackson Prairie field in western Washington. These rights were formerly held by a wholly-owned subsidiary of Resources but were excluded from the merger of Resources and Cabot completed in May 1994. WEGM has contracted with IGI Resources ("IGI"), Boise, Idaho, to manage these rights for a five-year period. The transportation rights on the PGT pipeline consist of approximately 25,000 MMBtu per day of annual capacity and 20,000 MMBtu per day of winter-only capacity to Stanfield, Oregon, and approximately 20,000 MMBtu per day of annual capacity to the California border. WEGM holds similar rights on Nova and ANG. Effective November 1, 1995, WEGM has permanently assigned to IGI all of its Stanfield capacity. WEGM's remaining PGT rights expire in October 2023, and the ANG and Nova rights expire in October 2008, with annual renewal options. The annual obligations for future demand charges through the primary term of WEGM's gas transportation and storage contracts are as follows: 1995, $9,403,000; 1996, $5,139,000; 1997, $4,654,000; 1998, $4,654,000; 1999, $4,654,000; thereafter, $92,798,000. WEGM has entered into a 20-year contract to supply gas to an electricity cogeneration plant currently under construction in western Washington. The 67 PAGE 67 contract is for approximately 8,000 MMBtu per day commencing in 1996. Discussions are underway with several Canadian gas producers to provide firm 20-year supply to service the contract. WEGM will transport the gas using a portion of its PGT capacity to California. WEGM expects to secure the gas supply at such price and terms to fully recover its transportation costs. IGI's management contract provides for incentive payments based on the percentage of pipeline demand charges mitigated. Currently, as an expansion capacity holder, WEGM cannot fully recover its demand charges, which are approximately 70 percent higher than those paid by holders of vintage capacity. FERC is currently considering a request from PGT for the cost of the expansion capacity to be "rolled in" with the costs of the vintage capacity to establish a uniform rate for holders of both types of capacity. If approved, a rolled-in rate would significantly reduce WEGM's future demand charge obligation. Upon completion of the merger of Resources and Cabot, WEGM recorded a charge of $16,000,000 to reserve for estimated future losses associated with the transportation and storage commitments. During 1994, $3,001,000 of the reserve was utilized. This reserve will be evaluated periodically to determine its adequacy. 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 29 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 a gas inventory charge calculated as a percentage of the then-current contract commodity price times the minimum quantity 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. 68 PAGE 68 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 (already reflecting the implementation of FERC Order No. 636), which are subject to change. Demand Charge Obligations
2000 and In thousands 1995 1996 1997 1998 1999 thereafter Total ------- ------- ------- ------- ------- ---------- ---------- Firm gas supply $40,498 $34,352 $34,352 $34,352 $33,511 $137,227 $ 314,292 Firm transpor- tation service 50,099 50,099 50,099 50,099 50,099 314,996 565,491 Firm storage and peaking service 7,643 8,723 8,723 8,723 8,723 156,691 199,226 ------- ------- ------- ------- ------- -------- ---------- Total $98,240 $93,174 $93,174 $93,174 $92,333 $608,914 $1,079,009 ======= ======= ======= ======= ======= ======== ==========
Minimum Annual Take Obligations
2000 and In thousands 1995 1996 1997 1998 1999 thereafter Total of therms ------- ------- ------- ------- ------- ---------- --------- Firm gas supply 536,834 376,680 365,730 365,730 310,980 1,148,064 3,104,018 ======= ======= ======= ======= ======= ========= =========
Washington Natural believes that all demand charges will be recoverable in rates charged to its customers. Further, pursuant to implementation of FERC Order No. 636, Washington Natural has the right to resell or release to others any of its unutilized gas supply or transportation and storage capacity. Washington Natural does not anticipate any difficulty in achieving the minimum annual take obligations shown, as such volumes represent less than 67% of expected annual sales for fiscal 1995 and less than 48% of expected sales for subsequent years. Washington Natural's current firm gas supply contracts obligate the suppliers to provide, in the aggregate, annual volumes up to those shown below: Maximum Supply Available Under Current Firm Supply Contracts
2000 and In thousands 1995 1996 1997 1998 1999 thereafter Total of therms ------- ------- ------- ------- ------- ---------- --------- Total 976,805 748,661 722,861 722,861 595,111 2,282,053 6,048,352 ======= ======= ======= ======= ======= ========= =========
In May 1994, Northwest Pipeline Corporation ("Pipeline"), Washington Natural's prior wholesale gas supplier, was ordered by FERC to modify the allocation of transition costs, totaling $34 million plus interest, incurred in "unbundling" interstate pipeline services, comprising supplier settlements recoverable by Pipeline through fixed charges. Under this order, Washington Natural's share of these costs would increase from $1,200,000, previously paid, to $10,400,000, 69 PAGE 69 inclusive of interest. Washington Natural and six other customers filed requests for rehearing. Under another proposed alternative allocation method Washington Natural's share of these costs would increase by $5,600,000 million, inclusive of interest. At September 30, 1994, Washington Natural recorded a liability of $5,600,000 for this contingency and an offsetting regulatory receivable for the same amount as this additional cost is expected to be fully recoverable in rates through purchased gas cost adjustments. On December 20, 1994, the request for rehearing was denied by FERC. Washington Natural is currently reviewing the order to determine what options are available and what actions to take. (15) DISCONTINUED OPERATIONS In August 1993, the Company's board of directors decided to seek a buyer for Unisyn, its biowaste technology business. Accordingly, the consolidated financial statements of the Company were restated for 1993 and prior years to report Unisyn as a discontinued operation. In August 1994, the Company sold the stock of its wholly-owned subsidiaries, Thermal Efficiency, Inc. and Holdings Northwest, Inc., which jointly owned Unisyn. Additional adjustments have been made to the 1994 and prior-year financial statements to properly reflect the business segment sold. The 1993 results include a charge to write off the investment in Unisyn, including estimated losses through the expected disposal date, of $9,818,000, net of $5,286,000 of taxes. The 1994 results include an additional loss of $799,000, net of $430,000 of taxes, realized upon disposition of the two subsidiaries. (16) FAIR VALUE OF FINANCIAL INSTRUMENTS The following methods and assumptions were used to estimate the fair value of each class of financial instrument for which it is practicable to estimate that value. 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. 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. 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. 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 the swap agreement at the reporting date, taking into account current interest rates and the current credit-worthiness of all the parties to the swap. The estimated fair values of the Company's financial instruments are as 70 PAGE 70 follows:
1994 1993 -------------------- ------------------- Carrying Fair Carrying Fair In thousands Amount Value Amount Value -------- -------- -------- -------- Financial liabilities Long-term debt $350,340 $345,043 $353,680 $385,595 Preferred stock $ 90,000 $ 79,956 $ 22,548 $ 22,033 Unrecognized financial instruments: Interest rate swaps $ -- $ (2,639) $ -- $ (8,932)
71 PAGE 71 (17) CONSOLIDATED INDUSTRY SEGMENT INFORMATION:
Year Ended September 30, ------------------------------------ 1994 1993 1992 ---------- ---------- -------- (in thousands) Revenue from unaffiliated customers Natural gas distribution * $ 396,407 $ 367,853 $284,939 Merchandising * 35,618 70,265 71,856 Oil and natural gas -- 31,618 25,597 Less intersegment revenue -- (264) (7,981) Coal and other -- 920 677 ---------- ---------- -------- Total $ 432,025 $ 470,392 $375,088 ========== ========== ======== Operating income (loss) before income taxes Natural gas distribution $ 19,063 $ 52,504 $ 34,373 Merchandising (106) 7,945 9,517 Oil and natural gas -- 7,700 6,514 Coal and other (890) (2,935) (759) ---------- ---------- -------- Total $ 18,067 $ 65,214 $ 49,645 ========== ========== ======== Identifiable assets Natural gas distribution $ 870,906 $ 829,319 $725,848 Merchandising 4,094 3,442 2,894 Oil and natural gas 98,139 153,626 118,088 Biowaste, coal and other 57,355 49,430 53,044 ---------- ---------- -------- Total $1,030,494 $1,035,817 $899,874 ========== ========== ======== Capital expenditures Natural gas distribution $ 84,506 $ 91,275 $ 94,860 Merchandising 1,182 -- -- Oil and natural gas -- 36,445 26,503 Coal and other 1,165 1,766 4,073 ---------- ---------- -------- Total $ 86,853 $ 129,486 $125,436 ========== ========== ========
Washington Energy is engaged principally in natural gas distribution; oil and natural gas exploration and production; sale of natural gas appliances, security systems, conservation and other products; and holds investments in coal properties. * The Company's utility and merchandise sales customers all are located in the Puget Sound area of Washington state. 72 PAGE 72 (18) SUPPLEMENTARY INCOME INFORMATION: Significant taxes (other than federal income taxes) charged to operating expenses by Washington Energy and subsidiaries were as follows:
Year Ended September 30, ------------------------------ 1994 1993 1992 -------- -------- -------- (in thousands) State business, utility and unemployment compensation $ 16,822 $ 17,458 $ 13,615 Real and personal property 7,534 9,483 7,543 Business and occupation 13,943 12,372 9,606 Federal payroll and other 3,188 3,516 3,414 -------- -------- -------- $ 41,487 $ 42,829 $ 34,178 ======== ======== ========
Payroll taxes capitalized totaled $1,093,000, $1,222,000 and $973,000 in 1994, 1993, and 1992, respectively. Maintenance expense totaled $7,931,000, $6,508,000, and $6,107,000 in 1994, 1993, and 1992, respectively. Taxes charged to other accounts are not significant. Rents, royalties and advertising are not significant. The Company has no amortization items which exceed 1% of total sales and revenues. Amounts for Washington Natural are substantially the same. 73 PAGE 73 CONSOLIDATED SELECTED QUARTERLY FINANCIAL DATA Years Ending September 30, (Unaudited) Consolidated operating revenues and income (loss), net income (loss) and earnings (loss) per common share by quarter (in thousands, except per share amounts).
Operating Net Earnings Operating Income Income (Loss) Revenues (Loss) (Loss) Per Share --------- --------- -------- --------- 1994 Quarter* First $146,743 $18,339 $ 8,310 $ .33 Second 151,461 16,365 7,446 .32 Third 79,034 (6,757) (48,916) (2.08) Fourth 54,787 (2,217) (12,486) (.53) -------- ------- -------- ------ For the year $432,025 $25,730 $(45,646) $(1.97)++ ======== ======= ======== ====== 1993 Quarter* First $136,124 $22,778 $ 13,581 $ .60 Second 160,896 24,186 15,563 .67 Third 90,906 7,596 (1,701) (.07) Fourth 82,466 922 (17,796) (.77) -------- ------- -------- ------ For the year $470,392 $55,482 $ 9,647 $ .42 ++ ======== ======= ======== ====== 1992 Quarter* First $119,392 $20,310 $ 11,653 $ .60 Second 125,641 19,032 10,348 .53 Third 69,207 4,870 (3,962) (.20) Fourth 60,848 1,768 (6,600) (.33) -------- ------- -------- ------ For the year $375,088 $45,980 $ 11,439 $ .58 ++ ======== ======= ======== ======
* Results by quarter vary significantly 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 1994 and 1993 quarterly statements have been reclassified to conform with the 1994 presentation. ++ Quarterly earnings per share are based upon the average number of common shares outstanding during each quarter. Because the average number of shares outstanding has increased in each quarter shown, the sum of quarterly earnings does not equal earnings per share for the year. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure: None 74 PAGE 74 PART III Item 10. Directors and Executive Officers of the Registrants (a) Directors: (As to Washington Energy and Washington Natural)
Year First Name, Present Occupation and Elected as Experience for Past Five Years Age Director(1) - ------------------------------------------------------------ ----- ----------- Virginia Anderson (2) (3) 47 1991 Director of Seattle Center, City of Seattle since 1988. Robert F. Bailey (2) (4) (5) 62 1988 President of Trans Republic Energy, L.P., an oil and gas investment company since January 1992 and Mabelle, Inc., 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) 66 1982 Chairman of the Board of Directors of UNICO Properties, Inc., Seattle, since 1992, Chairman and Chief Executive Officer, 1990 to 1992, President and Chief Executive Officer, 1985 to 1990. UNICO Properties, Inc., manages several major office buildings in downtown Seattle. John W. Creighton, Jr. (4) (5) 62 1989 President of Weyerhaeuser Company, Tacoma, Washington, a forest products company, since 1988. Robert L. Dryden (3) (4) 61 1991 Executive Vice President, Airplane Production, Boeing Commercial Airplane Group. From November 1987 to January 1990, he served as President of Boeing Military Airplanes in Wichita, Kansas. Tomio Moriguchi (1) (2) 58 1988 President of Uwajimaya, Inc., food and merchandise distributor, retailer, and exporter, President, Town and Country Travel, Inc., and President, North American Post Publishing Company.
75 PAGE 75 Sally G. Narodick (3) (4) 49 1989 Chairman and Chief Executive Officer of Edmark Corporation, Redmond, Washington, a developer of special education software and print curriculum materials, since October 1989. From April 1987 to October 1989, she was a founder and partner of Narodick, Ross & Associates, a Seattle-based financial and marketing consulting firm. Previously she was Senior Vice President of the retail services division of Seafirst Corporation, a subsidiary of Bank of America, N.T. and S.A. William P. Vititoe (1) (3) (5) 56 1994 Chief Executive Officer and President of Washington Energy Company and Washington Natural Gas since 1994. From November 1990 to November 1993, he served as President and Chief Executive Officer of American Natural Resources Pipeline Co., a natural gas pipeline company. From July 1989 to October 1990, he served as President of Ameritech Enterprises Group, a diversified communications company. Prior to that he served as President and Chief Executive Officer of Michigan Bell Telephone Company from September 1983 to July 1989.
(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) (5) Member of Nominating Committee (Chairman is Robert F. Bailey) The 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 term of Directors Bailey, Creighton and Vititoe expires in 1996; that of Directors Anderson, Moriguchi and Narodick expires in 1997 and that of Directors Covey and Dryden expires in 1995. 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 stockholders is scheduled to be held February 24, 1995. 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 stockholders. During the year ended September 30, 1994, the Board reduced the number of board members from nine to eight upon the retirement of Mr. Robert Golliver, President and C.O.O. The Washington Natural Directors are elected annually. There are no family relationships between any of the Directors, or any Director and any executive officer of the Company. Certain of the Directors are also Directors of other companies that make periodic filings with the Securities and Exchange Commission as follows: Virginia Anderson - Columbia Bank and U.S. Bank of Washington, U.S. Bancorporation; Robert F. Bailey - Texas Commerce Bank-Midland and Cabot 0il & Gas Corporation; John W. Creighton, Jr. - Weyerhaeuser Company, Mortgage Investments Plus, Inc., Portland General Corporation and Quality Food Centers, Inc.; Robert L. Dryden - U.S. Bancorp-U.S. Bank of Washington; Tomio Moriguchi - - Seafirst Corporation, a subsidiary of the Bank of America N.T. & S.A.; Sally G. Narodick - Edmark 76 PAGE 76 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 of Directors met 8 times during the year ended September 30, 1994. Each incumbent director attended more than 75 percent of the aggregate number of meetings of the Board of Directors and committees on which he or she served. Board Committees The Board has a standing Administrative Committee, Audit Committee, Compensation and Benefits Committee, Executive Committee and Nominating Committee. The Audit Committee and the Compensation and Benefits Committee consist exclusively of non-employee directors. Administrative Committee. The Administrative Committee is currently composed of Ms. Narodick, Chairman, Ms. Anderson, Mr. Dryden, Mr. Vititoe and the Company'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 3 times during 1994. Audit Committee. The Audit Committee is currently composed of Mr. Covey, Chairman, Ms. Anderson, Mr. Bailey, and Mr. Moriguchi. The Committee is responsible for oversight of the Company'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 3 times during 1994. Compensation and Benefits Committee. 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 executive officers of the Company. The Committee met 4 times during 1994. Executive Committee. 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 on various matters between Board meetings. The Committee met one time during 1994. 77 PAGE 77 Nominating Committee. The Nominating Committee currently consists of Mr. Bailey, Chairman, Mr. Creighton, Jr., and Mr. Vititoe. The Nominating Committee is responsible for the identification and evaluation of candidates for election to the Board. The Committee met one time during 1994. Any shareholder recommendations for nominations to the Board of Directors for consideration by the Nominating Committee for the 1996 Annual Meeting should be sent to Mr. Bailey, Chairman, Nominating Committee, Washington Energy Company, P.O. Box 1869, Seattle, WA 98111, so as to be received no later than September 15, 1995. (b) Executive Officers: (As to Washington Energy and Washington Natural) See data following Item 4 of Part I. Section 16(a) of the Securities Exchange Act of 1934 requires the Company's Directors and its executive officers to file reports of ownership and reports of changes in ownership of the Company's common stock with the Securities and Exchange Commission and the New York Stock Exchange. Directors and executive officers are also required by Commission regulations to furnish the Company with copies of all such reports that they file. Based solely on its review of the copies of such forms received by it, the Company believes that all filing requirements applicable to its Directors and executive officers were complied with during the year ended September 30, 1994. Item 11. Executive Compensation Some of the executive officers and/or directors of the Company also serve in the identical capacity or capacities with Washington Natural and receive remuneration for such services from Washington Natural, with affiliates being charged for time spent by the officers and directors on the affiliates' business affairs. 78 PAGE 78 The following table shows the total annual and long-term compensation paid by the Company and its affiliates to the persons who, for the year ended September 30, 1994 were the Chief Executive Officer and the other four most highly compensated executive officers of the Company and Washington Natural ("Named Executives"). SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION LONG-TERM COMPENSATION ----------------------------------- ------------------------------------------- Securities Other Annual Underlying Other All Other Name and Salary Bonus Compensation Options/ Incentives Compensation Principal Position Year ($)(5) ($)(1) ($)(6) SARs (#)(2) Payouts ($)(3) ($)(4) - ------------------ ------ -------- --------- ------------ ----------- -------------- ------------ William P. Vititoe 1994 $230,423 $100,000 $78,664 40,000 $ -- $2,437 Chairman, Chief 1993 -- -- -- -- -- -- Executive 1992 -- -- -- -- -- -- Officer and President James A. Thorpe 1994 185,030 -- -- 12,500 -- 4,758 Chairman of the 1993 317,208 -- -- 12,500 50,923 6,866 Board & CEO 1992 308,055 -- -- 12,500 79,982 -- (Retired May 1, 1994) James P. Torgerson 1994 137,346 23,200 -- 2,600 -- 4,119 Sr. Vice 1993 133,128 8,000 -- 2,600 19,804 3,994 President - 1992 129,285 8,900 -- 2,600 29,467 -- Finance, Planning & Development; CFO Robert J. 1994 136,098 8,000 -- 2,600 -- 3,960 Tomlinson 1993 134,532 6,800 -- 2,600 19,804 3,992 Sr. Vice 1992 129,285 6,200 -- 2,600 29,467 -- President - Legal and Administration James W. Gustafson 1994 137,346 7,200 -- 2,600 -- 4,119 Sr. Vice 1993 133,128 6,800 -- 2,600 19,804 3,350 President - 1992 129,285 5,000 -- 2,600 29,467 -- Operations, Washington Natural Gas Company Donald H. Gessel 1994 136,596 6,313 -- 2,600 -- 4,098 President, 1993 133,128 8,900 -- 2,600 19,804 3,817 Washington 1992 129,285 7,000 -- 2,600 29,467 -- Energy Services Company
79 PAGE 79 (1) Incentive compensation is based on performance in the year shown but determined and paid the following year. For example, bonuses for 1994 are based on performance in 1994 and are measured and paid in the fourth quarter of calendar 1994. (2) All options granted to executive officers were in tandem with stock appreciation rights ("SARs"). (3) Amounts in the column relate to payouts under the Company's Second Performance Share Plan further described in the Long-Term Incentive Program section. (4) The amounts in the "All Other Compensation" column are the Company contribution to individual 401(k) accounts. (5) Mr. Vititoe's salary reflects service from January 15, 1994. His annual base salary is $325,000. (6) Mr. Vititoe's "Other Annual Compensation" includes moving expenses and temporary housing of $75,640. The balance of the amount shown in this column is the car allowance paid. 1994 Stock Option/SAR Grants The following table sets forth the number of stock options which were granted to each of the named executives during 1994. In addition, the table provides the present value of the stock options as of the grant date.
Securities Under- lying Options Exercise or Grant Date /SARS Granted % of Total Options Base Price Expiration Present Value Name (#)(1) Granted to Employees ($/Sh) Date ($) (2) ---- ---------------- -------------------- ----------- ---------- ------------- William P. Vititoe 40,000 26% 18.250 01/14/04 70,400 James A. Thorpe 12,500 8% 18.375 12/14/03 24,000 James P. Torgerson 2,600 2% 18.375 12/14/03 4,992 Robert J. Tomlinson 2,600 2% 18.375 12/14/03 4,992 James W. Gustafson 2,600 2% 18.375 12/14/03 4,992 Donald H. Gessel 2,600 2% 18.375 12/14/03 4,992
(1) The exercise price of the options was the fair market value of the Company's stock on the date of the grant. Each option was granted in tandem with an SAR covering the same number of shares. Any optionee exercising their stock options loses the corresponding SARs as to those shares and vice versa. All vested options were immediately exercisable. The options were vested upon grant except for 30,000 of Mr. Vititoe's options. Mr. Vititoe's unvested options will vest 10,000 shares on January 1995 and as to an additional 10,000 shares on the next two anniversaries of that date. (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. 80 PAGE 80 The following table sets forth information concerning each stock option (or tandem SAR) which was exercised during 1994 by each of the named executives and the year-end value of the unexercised stock options (and tandem SARs), provided on an aggregated basis. AGGREGATED OPTIONS/SAR EXERCISES IN 1994 AND YEAR END OPTION/SAR VALUES
Number of Securities Underlying Unexercised Options/ Value of Unexercised Shares Acquired Value SARs at Yr End (#)(3) In-the-Money Options Name on Exercise(#)(1) Realized($)(2) Exercisable/Unexercisable SARs at Yr End ($)(4) - ------------------ ----------------- -------------- --------------------------- --------------------- William P. Vititoe -- -- 10,000 / 30,000 -- James A. Thorpe -- -- 0 / 0 -- James P. Torgerson -- -- 13,000 / 0 -- Robert J. Tomlinson -- -- 13,000 / 0 -- James W. Gustafson -- -- 13,000 / 0 -- Donald H. Gessel -- -- 13,000 / 0 --
(1) This number represents the number of shares with respect to which SARs were exercised. (2) The figures presented in this column have been calculated based upon the difference between the fair market value of each stock option/SAR on the date of exercise and its exercise price. (3) All unexercised options at year end were exercisable; except 30,000 of Mr. Vititoe's options. (4) The exercise price of all unexercised options at year end were more than the closing price of the Company's common stock at year end. LONG-TERM INCENTIVE PROGRAM - AWARDS IN 1994
Estimated Future Payouts Under Non-Stock Price-Based Plans (2)(3) No. of Units Period Until ---------------------------------------- Name (#)(1) Payout Threshold (#) Target(#) Maximum -------------------- ------------ ------------ -------------- --------- ------- William P. Vititoe -- -- -- -- -- James A. Thorpe 3,800 4 years 608 3,800 6,650 James P. Torgerson 1,500 4 years 240 1,500 2,625 Robert J. Tomlinson 1,500 4 years 240 1,500 2,625 James W. Gustafson 1,500 4 years 240 1,500 2,625 Donald H. Gessel 1,500 4 years 240 1,500 2,625
(1) This represents the number of performance units assigned under the Second Washington Energy Company Performance Share Plan. Dependent upon satisfaction of future performance objectives of the Company, each unit can represent the right to receive up to 1-3/4 shares of common stock. (2) This represents the number of shares of common stock that may be awarded with respect to the units granted under the plan. The actual number of shares awarded will depend on (a) the number of contingent performance units assigned, (b) the Company's financial performance for the four-year period following the assignment compared with pre-established goals, and (c) the market value of the Company's common stock at the time of any 81 PAGE 81 award payment. Under current committee policy, unless otherwise authorized by the committee, at least fifty percent of any payments made pursuant to the Plan must be paid in common stock of the Company and the balance of the payments must be paid in cash or shares of common stock. The Compensation and Benefits Committee determines what portion of the payout is to be satisfied in shares of common stock and what portion is to be satisfied in cash. (3) Under the plan, named executives will, after a change in control, generally receive at least one share of common stock per unit, or more depending on the Company's performance through the date of the change in control. Supplemental Executive Retirement Plan Washington Natural Gas Company has a plan to provide officers, including the named executives, with retirement, death and disability benefits supplementing the benefits from the Company's defined benefit plan for salaried employees, reduced by Social Security and benefits payable under plans of other, prior employers. The supplemental plan is designed so 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. The remuneration covered by this plan includes base salary and commissions. It provides payments of annual benefits for life upon retirement from the Company upon reaching age 65 or at the election of the officer, with the Company's consent, at or after age 62 at appropriately reduced benefit levels. Based on the computation through September 30, 1994, the average annual pension benefit (payable in the form of a joint and 50% survivor annuity with ten-year term certain) payable upon retirement from the Company, at age 65, to the named executives would be: Mr. Vititoe $214,623; Mr. Thorpe $213,562; Mr. Torgerson, $88,014; Mr. Tomlinson $88,013; Mr. Gustafson $89,697; and Mr. Gessel $88,015. The portion of the benefit payable under the supplemental retirement plan will be paid net of amounts received from social security, the Company's defined benefit plan for salaried employees and any benefits received from retirement plans of prior employers. Conditional Employment Agreements in the Event of a Change in Control The Company has conditional employment agreements with three of its key executive officers: Messrs. William P. Vititoe, Robert J. Tomlinson and James P. Torgerson. 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 82 PAGE 82 Directors in office prior to such acquisition. The benefits to be provided by the Company include: (1) a cash payment equal to three times the most recent year's annual compensation, or a cash payment equal to annual compensation until normal retirement date if less than three years; (2) lump sum payment for amounts calculated under dissolution of the Performance Share Plan; (3) maintenance of participation in all current employee benefit plans or provision for substantially similar benefits for a three-year period or until normal retirement date if sooner; (4) a cash payment at retirement date equal to the additional retirement compensation to which the executive would have been entitled had the executive continued in the employ of the Company for an additional three years or until normal retirement date if sooner; (5) a cash payment equal to the difference between the exercise prices of all stock options and the higher of: (a) the average of the high and low sales prices on the date of termination, or (b) the highest price actually paid in connection with the change in control of the Company; and (6) a cash payment equal to the excise taxes imposed by the Internal Revenue Code Section 4999, if any, on all payments enumerated in this sentence, plus the tax expense to the executive resulting from this additional payment. If the executive voluntarily terminates 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 1994. Compensation of Directors Each Director who is not an officer of the Company and its subsidiaries is paid a retainer of $8,000 per year and an additional $1,500 per year for serving on the Executive Committee or as Chairman of another Committee of the Board. In addition, each such Director is paid a fee of $600 for attending a regular, special or annual meeting of the Board or for a committee meeting not held on the same day as a Board meeting. None of such directors is eligible to participate in any of the compensation plans described above. The Company also has a Directors Stock Bonus Plan which was approved by the stockholders 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 1994, 1,400 shares of common stock were awarded under the plan. The Company pays no additional remuneration to employees of the Company who are directors. Independent Accountants and Auditors The firm of Arthur Andersen LLP has audited the accounts of the Company, and its predecessor, Washington Natural, for a number of years and has been selected to audit the accounts of the Company for the year ending September 30, 1995. Representatives of Arthur Andersen LLP are expected to be present at the Annual Meeting, with the opportunity to make a statement if they desire to do so, and will be available to respond to appropriate questions submitted in writing to the Secretary of the Company in advance of the meeting. Date for Receipt of 1996 Stockholder Proposals Stockholder proposals intended to be presented at the 1996 Annual Meeting must be received by the Company no later than September 15, 1995 to be considered for inclusion in the proxy statement and proxy for the 1996 meeting. 83 PAGE 83 Item 12. Security Ownership of Certain Beneficial Owners and Management Washington Energy Company SECURITY OWNERSHIP OF DIRECTORS AND OFFICERS (stated as of December 14, 1994)
Name of Amount of Beneficial Percent Beneficial Owner Ownership of Class - --------------------------- -------------------- -------- Directors Virginia Anderson 1,041 -- Robert F. Bailey 4,132 -- Donald J. Covey 6,015 -- John W. Creighton, Jr. 2,242 -- Robert L. Dryden 2,966 -- Tomio Moriguchi 1,919 -- Sally G. Narodick 1,242 -- Named Executive Officers (*also serve as Directors) William P. Vititoe* 55,400 (1) -- James A. Thorpe (Retired May 1, 1994) 63,623 -- James P. Torgerson 19,409 (1) -- Robert J. Tomlinson 26,220 (1) -- James W. Gustafson 38,882 (1) -- Donald H. Gessel 26,564 (1) -- All directors and executive officers as a group (15 persons) 287,007 (1) 1.2%
(1) Includes unexercised options to acquire shares of common stock pursuant to the Company's Stock Option Plan as follows: Mr. Vititoe, 52,500 shares; Mr. Thorpe, 0 shares; Mr. Torgerson, 15,600 shares; Mr. Tomlinson, 15,600; Mr. Gustafson, 13,000; Mr. Gessel, 15,600; and all directors and executive officers as a group, 140,600 shares. Washington Energy is unaware of any person beneficially owning more than five percent of its common stock. With respect to each person who has options to acquire common stock, such options are assumed to be outstanding for the purpose of computing percentage ownership of that person, but are assumed not to be outstanding for purposes of computing percentage ownership for any other person. Washington 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. 84 PAGE 84 PART IV Item 14. Exhibits, Financial Statements, Schedules and Reports on Form 8-K (a) 1. Financial Statements: The financial statements filed as part of this report are listed on the index in Item 8. 2. Financial Statement Schedules: Schedule II -- Amounts receivable from related parties and underwriters, promoters, and employees other than related parties for the years ended September 30, 1994, 1993 and 1992. Washington Energy Company and Subsidiaries Washington Natural Gas Company Schedule III -- Condensed Financial Information of Registrant for the years ended September 30, 1994, 1993 and 1992. Washington Energy Company Schedule V -- Property, plant and equipment for the years ended September 30, 1994, 1993 and 1992. Washington Energy Company and Subsidiaries Washington Natural Gas Company Schedule VI -- Accumulated provision for depreciation, depletion and amortization for the years ended September 30, 1994, 1993 and 1992. Washington Energy Company and Subsidiaries Washington Natural Gas Company Schedule VIII -- Valuation and Qualifying accounts for the years ended September 30, 1994, 1993 and 1992. Washington Energy Company and Subsidiaries Washington Natural Gas Company The information required to be submitted in Schedules VII, IX, X, and XIII has been included in the financial statements or supporting schedules. Schedules I, IV, XI, XII and XIV have been omitted as they are not applicable or not required. 85 PAGE 85 (b) Reports on Form 8-K: A report on Form 8-K was filed by Washington Energy and Washington Natural dated August 1, 1994, regarding third-quarter results and favorable dismissal of shareholder class-action suit. A report on Form 8-K was filed by Washington Energy and Washington Natural dated September 8, 1994, regarding an appeal of the dismissal of shareholder class-action suit and filing of anti-trust lawsuit against Washington Natural. (c) Exhibits: See Exhibit Index at page 97. For the purposes of complying with the amendments to the rules governing Form S-8 (effective July 13, 1990) under the Securities Act of 1933, the undersigned Registrant hereby undertakes as follows, which undertaking shall be incorporated by reference into Registrant'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 the Registrant pursuant to the foregoing provisions, or otherwise, the Registrant 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 the Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant 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, the Registrant 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 and 33-55381. ARTHUR ANDERSEN LLP Seattle, Washington December 22, 1994 86 PAGE 86 Schedule II WASHINGTON ENERGY COMPANY AND SUBSIDIARIES WASHINGTON NATURAL GAS COMPANY AMOUNTS RECEIVABLE FROM RELATED PARTIES FOR THE YEARS ENDED SEPTEMBER 30, 1994, 1993 AND 1992 WASHINGTON ENERGY COMPANY AND SUBSIDIARIES
WESCO WESCO Resources, Inc. Transportation, Inc. --------------- -------------------- (In thousands) Balance 9/30/91 $ -- $ -- Additions 116 102 Deductions -- -- ---- ---- Balance 9/30/92 116 102 Additions 38 11 Deductions -- -- ---- ---- Balance 9/30/93 154 113 Additions 30 9 Reductions -- -- ---- ---- Balance 9/30/94* $184 $122 ---- ----
WASHINGTON NATURAL GAS COMPANY None. * Both interest and principal on these notes are due on December 31, 1994. The interest rate is the Reference Rate of Seafirst Bank of Seattle, Washington, plus 2%. 87 PAGE 87 Schedule III WASHINGTON ENERGY COMPANY CONDENSED FINANCIAL INFORMATION OF REGISTRANT BALANCE SHEETS
September 30, ------------------------ 1994 1993 -------- -------- (in thousands) ASSETS INVESTMENTS IN CONSOLIDATED SUBSIDIARIES: Washington Natural Gas Company $235,982 $268,455 Thermal Energy, Inc. 8,219 9,382 Washington Energy Resources Company -- 40,682 Thermal Efficiency, Inc. -- (16,918) ThermRail, Inc. 1,069 1,108 WECO Finance Company 1,545 988 Holdings Northwest, Inc. -- (771) Washington Energy Gas Marketing (13,121) -- Washington Energy Services Company 1,106 -- -------- -------- Total investments in subsidiaries 234,800 302,926 -------- -------- INVESTMENTS IN UNCONSOLIDATED AFFILIATES 98,139 -- -------- -------- NOTES AND ACCOUNTS RECEIVABLE FROM SUBSIDIARIES 74,600 177,222 -------- -------- CURRENT ASSETS: Other receivables 1,319 955 Federal income taxes receivable 2,902 819 -------- ------- Total current assets 4,221 1,774 -------- ------- OTHER DEFERRED CHARGES 112 235 -------- ------- Total assets $411,872 $482,157 ======== ======== CAPITALIZATION AND LIABILITIES CAPITALIZATION: Common shareholders' interest $256,800 $322,931 Preferred stock -- 5,886 -------- -------- Total capitalization 256,800 328,817 -------- -------- NOTES AND ACCOUNTS PAYABLE TO SUBSIDIARIES 1,854 4,193 -------- -------- CURRENT LIABILITIES: Checks issued in excess of cash in bank 453 1,938 Notes payable and commercial paper 125,182 145,498 Accounts payable and accrued interest 2,636 976 Dividends payable -- 547 Sinking fund requirements - preferred stock -- 188 -------- -------- Total current liabilities 128,271 149,147 -------- -------- DEFERRED CREDITS: Deferred federal income taxes 17,147 -- Contingency reserves 7,800 -- -------- -------- Total deferred credits 24,947 -- -------- -------- Total capitalization and liabilities $411,872 $482,157 ======== ========
88 PAGE 88 Schedule III (Continued) WASHINGTON ENERGY COMPANY CONDENSED FINANCIAL INFORMATION OF REGISTRANT STATEMENTS OF INCOME
Year Ended September 30, -------------------------------- 1994 1993 1992 -------- ------- ------- (in thousands, except per share amounts) EQUITY IN EARNINGS (LOSSES) OF SUBSIDIARIES: Washington Natural Gas Company, including cash dividends received by Washington Energy Company of $16,937, $26,045 and $21,691, respectively $ (8,243) $ 21,771 $12,231 Other subsidiaries (13,670) (10,695) 456 -------- ------- ------- Total equity in earnings (losses) of subsidiaries (21,913) 11,076 12,687 OTHER INCOME AND DEDUCTIONS, NET (23,733) (1,429) (1,248) -------- ------- ------- NET INCOME (LOSS) (45,646) 9,647 11,439 DIVIDENDS ON PREFERRED STOCK 9 101 105 EXCESS PREMIUM, PREFERRED REDEMPTION 673 -- -- -------- ------- ------- EARNINGS (LOSS) ON COMMON STOCK $(46,328) $ 9,546 $11,334 ======== ======= ======= EARNINGS (LOSS) PER COMMON SHARE $ (1.97) $ .42 $ .58 ======== ======= ======= AVERAGE COMMON SHARES OUTSTANDING 23,486 22,996 19,659 ======== ======= ======= DIVIDENDS PER COMMON SHARE OUTSTANDING $ 1.00 $ 1.40 $ 1.40 ======== ======= =======
89 PAGE 89 Schedule III (Continued) WASHINGTON ENERGY COMPANY CONDENSED FINANCIAL INFORMATION OF REGISTRANT STATEMENTS OF CASH FLOWS
Year Ended September 30, ----------------------------------------- 1994 1993 1992 -------- -------- -------- (in thousands) Cash Flow from Operating Activities: Income (loss) from continuing operations $(44,847) $ 22,035 $ 13,981 Adjustments to reconcile income (loss) from continuing operations to net cash provided by operating activities: Pre-tax loss on merger of Resources 6,304 -- -- Increase (decrease) in: Non-cash provisions for merger and and other 6,262 -- -- Federal income tax - current (2,083) (4,528) (680) Federal income tax - deferred (7,637) -- -- Deferred tax on merger of Resources 24,784 -- -- Undistributed losses of affiliates 21,913 14,968 9,004 Other assets and liabilities (611) 1,299 1,413 Other (2,679) (602) 37 -------- -------- -------- Total adjustments 46,253 11,137 9,774 -------- -------- -------- Net cash provided by operating activities 1,406 33,172 23,755 -------- -------- -------- Cash Flow Provided by (Used in) Investing Activities: Dividends received from affiliates 16,937 26,045 21,691 Investment in affiliates (6,620) (95,398) (24,894) Advances to affiliates (6,947) (22,408) (15,755) Invested in Resources prior to merger (20,760) -- -- Proceeds from merger of Resources 63,661 -- -- -------- -------- -------- Net cash provided by (used in) investing activities 46,271 (91,761) (18,958) -------- -------- --------
90 PAGE 90 SCHEDULE III (Continued) WASHINGTON ENERGY COMPANY CONDENSED FINANCIAL INFORMATION OF REGISTRANT STATEMENTS OF CASH FLOWS (Continued)
Year Ended September 30, ---------------------------------------- 1994 1993 1992 -------- --------- -------- (in thousands) Cash Flow Provided by (Used in) Financing Activities: Proceeds from issuance of common stock $ 6,342 $ 70,528 $ 7,437 Proceeds from issuance of commercial paper, net (20,316) 24,388 18,765 Redemptions and repurchases of preferred stock (6,747) (149) (149) Cash dividend payments Common (23,468) (32,282) (27,499) Preferred (9) (101) (105) -------- --------- -------- Net cash provided by (used in) financing activities (44,198) 62,384 (1,551) -------- --------- -------- Net cash provided by continuing operations 3,479 3,795 3,246 Net cash used in discontinued operations (3,479) (3,795) (3,260) -------- --------- -------- Net decrease in cash -- -- (14) Beginning cash and cash equivalents -- -- 14 -------- --------- -------- Ending cash and cash equivalents $ -- $ -- $ -- ======== ========= ======== Supplemental Disclosures of Cash Flow Information Cash Paid During the Year for: Interest (net of amount capitalized) $ 7,283 $ 5,704 $ 6,551 Income taxes $ 0 $ 5,136 $ 851
91 PAGE 91 Schedule V WASHINGTON ENERGY COMPANY AND SUBSIDIARIES WASHINGTON NATURAL GAS COMPANY PROPERTY, PLANT AND EQUIPMENT FOR THE YEAR ENDED SEPTEMBER 30, 1994
Balance Balance September 30, Additions Retire- September 30, Classification 1993 at Cost ments 1994 -------------- ------------- --------- -------- -------------- (in thousands) WASHINGTON NATURAL GAS COMPANY: GAS UTILITY PLANT, at original cost: Tangible property - Production $ 4,038 $ 21 $ 21 $ 4,038 Underground storage plant 10,015 -- -- 10,015 Transmission 23,063 4,406 9 27,460 Distribution 745,820 80,110 10,764 815,166 General 71,720 12,567 198 84,089 Completed work not classified 35,477 (7,735) -- 27,742 Acquisition adjustment 317 -- -- 317 Construction work in progress 10,382 (4,863) -- 5,519 ---------- --------- -------- ---------- 900,832 84,506 10,992 974,346 Intangibles - Organization 159 -- -- 159 Franchises 7 -- -- 7 ---------- --------- -------- ---------- 166 -- -- 166 Gas stored underground - noncurrent 2,894 -- -- 2,894 ---------- --------- -------- ---------- Total utility plant 903,892 84,506 10,992 977,406 OTHER SUBSIDIARIES OF WASHINGTON ENERGY COMPANY: COAL, OIL AND GAS EXPLORATION AND PRODUCTION AND OTHER PROPERTIES 258,065 2,347 206,014 54,398 ---------- --------- -------- ---------- Total $1,161,957 $ 86,853 $217,006 $1,031,804 ========== ========= ======== ==========
92 PAGE 92 Schedule V (Continued) WASHINGTON ENERGY COMPANY AND SUBSIDIARIES WASHINGTON NATURAL GAS COMPANY PROPERTY, PLANT AND EQUIPMENT FOR THE YEAR ENDED SEPTEMBER 30, 1993
Balance Balance September 30, Additions Retire- September 30, Classification 1993 at Cost ments 1994 -------------- ------------- --------- ------- ------------- (in thousands) WASHINGTON NATURAL GAS COMPANY: GAS UTILITY PLANT, at original cost: Tangible property - Production $ 4,029 $ 9 $ -- $ 4,038 Underground storage plant 9,234 781 -- 10,015 Transmission 15,771 7,292 -- 23,063 Distribution 690,369 62,989 7,538 745,820 General 68,086 3,640 6 71,720 Completed work not classified 23,031 12,446 -- 35,477 Acquisition adjustment 317 -- -- 317 Construction work in progress 6,264 4,118 -- 10,382 ---------- --------- ------- ---------- 817,101 91,275 7,544 900,832 Intangibles - Organization 159 -- -- 159 Franchises 7 -- -- 7 ---------- --------- ------- ---------- 166 -- -- 166 Gas stored underground - noncurrent 2,894 -- -- 2,894 ---------- --------- ------- ---------- Total utility plant 820,161 91,275 7,544 903,892 OTHER SUBSIDIARIES OF WASHINGTON ENERGY COMPANY: COAL, OIL AND GAS EXPLORATION AND PRODUCTION AND OTHER PROPERTIES 237,891 38,211 18,037 258,065 ---------- -------- ------- ---------- Total $1,058,052 $129,486 $25,581 $1,161,957 ========== ======== ======= ==========
93 PAGE 93 Schedule V (Continued) WASHINGTON ENERGY COMPANY AND SUBSIDIARIES WASHINGTON NATURAL GAS COMPANY PROPERTY, PLANT AND EQUIPMENT FOR THE YEAR ENDED SEPTEMBER 30, 1992
Balance Balance September 30, Additions Retire- September 30, Classification 1991 at Cost ments 1992 -------------- ------------- --------- -------- ------------- (in thousands) WASHINGTON NATURAL GAS COMPANY: GAS UTILITY PLANT, at original cost: Tangible property - Production $ 3,875 $ 163 $ 9 $ 4,029 Underground storage plant 9,224 10 -- 9,234 Transmission 15,422 466 117 15,771 Distribution 617,335 81,204 8,170 690,369 General 59,932 9,952 1,798 68,086 Completed work not classified 23,798 (767) -- 23,031 Acquisition adjustment 317 -- -- 317 Construction work in progress 2,432 3,832 -- 6,264 -------- --------- -------- ---------- 732,335 94,860 10,094 817,101 Intangibles - Organization 159 -- -- 159 Franchises 7 -- -- 7 -------- --------- -------- ---------- 166 -- -- 166 Gas stored underground - noncurrent 2,894 -- -- 2,894 -------- --------- -------- ---------- Total utility plant 735,395 94,860 10,094 820,161 OTHER SUBSIDIARIES OF WASHINGTON ENERGY COMPANY: COAL, OIL AND GAS EXPLORATION AND PRODUCTION AND OTHER PROPERTIES 210,981 31,379 4,469 237,891 -------- --------- -------- ---------- Total $946,376 $ 126,239 $ 14,563 $1,058,052 ======== ========= ======== ==========
94 PAGE 94 Schedule VI WASHINGTON ENERGY COMPANY AND SUBSIDIARIES WASHINGTON NATURAL GAS COMPANY ACCUMULATED PROVISION FOR DEPRECIATION, DEPLETION AND AMORTIZATION FOR THE YEARS ENDED SEPTEMBER 30, 1994, 1993 AND 1992 (in thousands)
WASHINGTON NATURAL OTHER SUBSIDIARIES OF GAS COMPANY: WASHINGTON ENERGY COMPANY: Accumulated Accumulated provision for provision for depreciation, depletion depreciation and amortization of coal of gas utility and oil and gas exploration plant and production properties Total ------------------ ---------------------------- -------- Balance 9/30/91 $177,522 $ 64,316 $241,838 Additions Charged to income 25,786 9,066 34,852 Charged to transportation 478 -- 478 Other 59 (a) -- -- Discontinued operations -- 1,248 1,248 Deductions Retirements or sales (9,025)(b) (212) (9,237) -------- -------- -------- Balance 9/30/92 194,820 74,418 269,238 Additions Charged to income 28,183 10,091 38,274 Charged to transportation 747 -- 747 Other (337)(a) 154 (183) Discontinued operations -- 1,159 1,159 Deductions Retirements or sales (6,632)(c) -- (6,632) Discontinued operations -- (5,541) (5,541) -------- -------- -------- Balance 9/30/93 216,781 80,281 297,062 Additions Charged to income 30,901 -- 30,901 Charged to transportation 681 -- 681 Charged to construction 564 -- 564 Other (140)(a) 128 (12) Deductions Retirements or sales (9,196)(d) (70,761)(e) (79,957) -------- -------- -------- Balance 9/30/94 $239,591 $ 9,648 $249,239 ======== ======== ========
(a) Represents net change in retirement work in progress. (b) Represents retirements of property other than land of $10,094,000 less net salvage and cost of removal of $1,069,000. (c) Represents retirement of property other than land of $7,544,000 less net salvage and cost of removal of $912,000. (d) Represents retirements of property other than land of $9,200,000, less net salvage and cost of removal of $4,000. (e) Primarily represents merger of Washington Energy Resources Company. 95 PAGE 95 Schedule VIII WASHINGTON ENERGY COMPANY AND SUBSIDIARIES VALUATION AND QUALIFYING ACCOUNTS FOR THE YEARS ENDED SEPTEMBER 30, 1994, 1993 and 1992
Additions -------------------- Balance at Charged Recoveries Written Off Balance Beginning to of Previous as Uncol- at End of Period Income Write-Offs lectible of Period ---------- ------- ----------- ----------- --------- (in thousands) 1994: Allowances for uncol- lectible accounts $474 $2,794 $473 $(1,602) $2,139 ==== ====== ==== ======= ====== 1993: Allowances for uncol- lectible accounts $828 $1,317 $296 $(1,967) $ 474 ==== ====== ==== ======= ====== 1992: Allowances for uncol- lectible accounts $872 $ 853 $342 $(1,239) $ 828 ==== ====== ==== ======= ======
WASHINGTON NATURAL GAS COMPANY VALUATION AND QUALIFYING ACCOUNTS FOR THE YEARS ENDED SEPTEMBER 30, 1994, 1993 and 1992
Additions -------------------- Balance at Charged Recoveries Written Off Balance Beginning to of Previous as Uncol- at End of Period Income Write-Offs lectible of Period ---------- ------- ----------- ----------- --------- (in thousands) 1994: Allowances for uncol- lectible accounts $474 $2,743 $473 $(1,594) $2,096 ==== ====== ==== ======= ====== 1993: Allowances for uncol- lectible accounts $303 $1,314 $296 $(1,439) $ 474 ==== ====== ==== ======= ====== 1992: Allowances for uncol- lectible accounts $368 $ 831 $342 $(1,238) $ 303 ==== ====== ==== ======= ======
96 PAGE 96 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 14, 1994 /s/ William P. Vititoe --------------------------------------------- (William P. Vititoe, Chief Executive Officer) Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrants and in the capacities and on the dates indicated.
Date Signature Title ---- --------- ----- December 14, 1994 /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) Chairman of the Board of Directors, Chief Executive Officer, President and Director /s/ J. P. Torgerson ------------------------------ (J. P. Torgerson) Senior Vice President, Planning and Development and Principal Financial Officer /s/ Allyn P. Hebner ------------------------------ (Allyn P. Hebner) Vice President, Controller and Principal Accounting Officer
97 PAGE 97 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 of Merger by and among Cabot Oil & Gas Corporation, COG Acquisition Company, Washington Energy Resources Company and Washington Energy Company, dated February 25, 1994 (incorporated by reference from Exhibits to Washington Energy Company Schedule 13D, for event dated May 2, 1994). 2-A.2 Amendment No. 1 to Agreement of Merger by and among Cabot Oil & Gas Corporation, COG Acquisition Company, Washington Energy Resources Company and Washington Energy Company, dated May 2, 1994 (incorporated by reference from Exhibits to Washington Energy Company Schedule 13D, for event dated May 2, 1994). 4-A Restated Articles of Incorporation of Washington Energy Company (incorporated herein by reference to Washington Energy Company Exhibit 3-A, Form 10-Q for the quarter ended June 30, 1988, File No. 0-8745). 4-A.1 Articles of Amendment to the Articles of Incorporation of Washington Energy Company, dated March 6, 1990, increasing the $5 par value common stock to 50,000,000 shares from 25,000,000 shares (incorporated herein by reference to Washington Energy Company Exhibit 3-A.1, Form 10-K for the year ended September 30, 1990, File No. 0-8745). 4-A.2 Articles of Amendment to the Articles of Incorporation of Washington Energy Company dated June 14, 1991, changing the length of the term of a Director elected to fill a vacancy (incorporated herein by reference to Washington Energy Company Exhibit 3-A.2, Form 10-K for the year ended September 30, 1991, File 0-8745). 4-A.3 Amended and Restated Articles of Incorporation of Washington Natural Gas Company, dated November 2, 1993 (incorporated herein by reference to Washington Natural Gas Company Exhibit 4-A.2, Registration No. 33-50919). 4-A.4 Articles of Amendment to Amended and Restated Articles of Incorporation of Washington Natural Gas Company, dated November 10, 1993 (incorporated herein by reference to Washington Natural Gas Company Exhibit 4-A.3, Registration No. 33-50919). 4-A.5 Articles of Amendment to Amended and Restated Articles of Incorporation of Washington Natural Gas Company establishing a series of Preferred Stock, dated November 18, 1993 (incorporated herein by reference to Washington Natural Gas Company Exhibit 4-A.5, Form 10-K for the year ended September 30, 1993, File No. 001-1127). *4-A.6 Articles of Amendment to Amended and Restated Articles of Incorporation of Washington Natural Gas Company establishing a series of Preferred Stock, dated September 9, 1994. 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).
98 PAGE 98 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. *4-B.4 Amendment to the Bylaws of Washington Energy Company, adopted October 19, 1994. 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. 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 First Supplemental Indenture dated as of October 1, 1959 (incorporated herein by reference to Washington Natural Gas Company Exhibit 4-D, Registration No. 2-17876). 4-D.3 Seventh Supplemental Indenture dated as of February 1, 1967 (incorporated herein by reference to Washington Natural Gas Company Exhibit 4-M, Registration No. 2-27093). 4-D.4 Eleventh Supplemental Indenture dated as of April 1, 1971 (incorporated herein by reference to Washington Natural Gas Company Exhibit to Form 8-K for April 1971, File No. 0-951). 4-D.5 Twelfth Supplemental Indenture dated as of November 1, 1972 (incorporated herein by reference to Washington Natural Gas Company Exhibit to Form 8-K for November 1972, File No. 0-951). 4-D.6 Sixteenth Supplemental Indenture dated as of June 1, 1977 (incorporated herein by reference to Exhibit 6-05 of Washington Energy Company's S-14 Registration Statement, Registration No. 2-60352). 4-D.7 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.8 Twenty-third Supplemental Indenture dated as of July 15, 1986 (incorporated herein by reference to Washington Natural Gas Compan Exhibit 4-B.21, Form 10-K for the year ended September 30, 1986, File No. 0-951). 4-D.9 Twenty-fourth Supplemental Indenture dated as of December 15, 1987 (incorporated herein by reference to Washington Natural Gas Company Exhibit 4-B.21, Form 10-K for the year ended September 30, 1988, File No. 0-951). 4-D.10 Twenty-fifth Supplemental Indenture dated as of August 15, 1988 (incorporated herein by reference to Washington Natural Gas Company Exhibit 4-B.22, Form 10-K for the year ended September 30, 1988, File No. 0-951).
99 PAGE 99 4-D.11 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.12 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.13 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.14 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). *10-A Service Agreement dated September 1, 1987 between Northwest Pipeline Corporation and Washington Natural Gas Company for SGS-1 fir storage service at Jackson Prairie. *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. 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. 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-F $150,000,000 Amended and Restated Revolving Credit Agreement dated March 18, 1994, by and among Washington Energy Company, Seattle-First National Bank, The Bank of New York, the First National Bank of Chicago, U.S. Bank of Washington, National Association, Bank of Montreal, ABN Amro Bank N.U., The Bank of Nova Scotia and CIBC Inc. 10-G Intentionally left blank. 10-H Intentionally left blank. 10-I Form of Washington Natural Gas Company - Executive Retirement Compensation Agreement (incorporated herein by reference to Washington Natural Gas Company Exhibit 10-N, Registration No. 2-72790).
100 PAGE 100 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-K.1 Washington Energy Company Stock Option Plan (incorporated herein by reference to Exhibit 10-C Washington Energy Company Form 10-Q for the quarter ended March 31, 1984, File No. 0-8745). 10-K.2 Amendment to Washington Energy Company Stock Option Plan (incorporated herein by reference to Washington Energy Company Exhibit 10-S, Form 10-K for the year ended September 30, 1986, File No. 0-8745). 10-K.3 Amendment to Washington Energy Company Stock Option Plan dated as of February 26, 1988 (incorporated herein by reference to Washington Energy Company Form S-8, Registration No. 33-24221). 10-K.4 Washington Energy Company Stock Option Plan effective December 15, 1993, (incorporated herein by reference to Washington Energy Company Exhibit 99, Registration No. 33-55381). 10-L Washington Energy Company Directors Stock Bonus Plan (incorporated herein by reference to Washington Energy Company Exhibit 10-O Form 10-K for the year ended September 30, 1990, File No. 0-8745). *10-M.1 Employment Agreement between Washington Energy Company, Washington Natural Gas Company and William P. Vititoe dated January 15, 1994. 10-M.2 Form of Conditional Executive Employment Contract, filed under cover of Form SE dated December 27, 1988. *10-M.3 Washington Energy Company and subsidiaries Annual Incentive Plan for Vice Presidents and above, dated October 1988. *10-M.4 Agreement dated January 1, 1994, between Washington Energy Company, Washington Natural Gas Company and Robert R. Golliver former President and Chief Operating Officer of Washington Energy Company and Washington Natural Gas Company, providing for termination benefits. *10-M.5 Agreement dated September 30, 1994, between Washington Energy Company and Keith Anderson, former President of Washington Energy Resources Company, providing for termination benefits. 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. *10-O Firm Transportation Service Agreement dated March 1, 1992 between Northwest Pipeline Corporation and Washington Natural Gas Company. *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. *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.
101 PAGE 101 *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. 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. *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. 10-U Firm Storage Service Agreement and Amendment dated April 30, 1991 between Questar Pipeline Company and Washington Natural Gas Company for firm storage service at Clay Basin filed under cover of Form SE dated December 23, 1991. 10-V Interest Rate and Currency Exchange Agreement dated as of December 26, 1990 applicable to the Interest Rate Swap between Bank of America and Washington Energy Corporation filed under cover of Form SE dated December 23, 1991. 10-W Master Energy Price Swap agreement dated February 2, 1993 between Lehman Brothers Commercial Corporation and Washington Energy Marketing, Inc., filed under cover of Form SE dated December 27, 1993. 10-X Interest Rate and Currency Exchange Agreement dated as of August 19, 1991 between Washington Natural Gas Company and Merrill Lynch Capital Services, Inc., filed under cover of Form SE dated December 23, 1991. 10-X.1 Interest Rate Swap Agreement dated as of August 19, 1991 between Washington Natural Gas Company and the First National Bank of Chicago filed under cover of Form SE dated December 23, 1991. 10-X.2 Interest Rate and Currency Exchange Agreement dated as of August 19, 1991, between Washington Natural Gas Company and Bank of America 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 85). *27.1 Financial Data Schedule -- Washington Energy Company *27.2 Financial Data Schedule -- Washington Natural Gas Company
EX-4.A6 2 EXHIBIT 4-A.6; ARTICLES OF AMENDMENT 1 PAGE 102 ARTICLES OF AMENDMENT TO AMENDED AND RESTATED ARTICLES OF INCORPORATION, AS AMENDED OF WASHINGTON NATURAL GAS COMPANY ESTABLISHING A SERIES OF PREFERRED STOCK Washington Natural Gas Company, a Washington corporation, by T.J. Hogan, its duly elected and qualified Vice President and Secretary, hereby provides the following information and delivers to the Secretary of State of the State of Washington for filing these Articles of Amendment Establishing a Series of Preferred Stock in duplicate, pursuant to RCW 23B.06.020, RCW 23B.10.020, and RCW 23B.10.060. 1.0.1 Name. The name of the corporation is Washington Natural Gas Company. 1.0.2 Text of Amendments. Pursuant to the corporation's Amended and Restated Articles of Incorporation, as amended, the amendments establish the designation, preferences, limitations and relative rights of a series of Preferred Stock. The amendments will comprise "Paragraph (5) -- Series of Preferred Stock" of Article IV. Following is the text of each amendment adopted: The third series of Preferred Stock of the par value of $25 per share of the Company authorized by its Amended and Restated Articles of Incorporation shall be designated as "8.5% Preferred Stock, Series III" (hereafter called the "Preferred Stock, Series III") and 1,200,000 shares of the authorized but heretofore unissued shares of Preferred Stock of the par value of $25 per share of the Company shall be issued as shares of Preferred Stock, Series III; the Preferred Stock, Series III shall have the following preferences, limitations, and relative rights: (1) the dividend rate for the Preferred Stock, Series III, shall be 8.5% per annum per share and the date from and including which such dividends shall be cumulative shall be the date of original issuance thereof; (2) the Preferred Stock, Series III, will not be subject to redemption prior to September 1, 1999. At any time on or after September 1, 1999, the Preferred Stock, Series III, may be redeemed, at the election of the Company, in the manner provided in Paragraph 2.04 of Article IV of its Amended and Restated Articles of Incorporation, as a whole or from time to time in part, at part value per share; in each case together with accrued dividends thereon to the date designated for redemption. Prior notice of any redemption pursuant to this paragraph (2) shall be given by first-class mail, postage prepaid by the Company in the manner provided in subparagraph (A) of Paragraph 2.04 of the Restated Articles of Incorporation; (3) all redemptions pursuant to paragraph (2) above shall be pro rata, as nearly as possible, among the holders of the Preferred Stock, Series III, according to the number of shares held by each; (4) all shares of the Preferred Stock, Series III, redeemed, purchased or otherwise acquired and retired by the Company shall be 2 PAGE 103 canceled and shall not be reissued; and, so long as any shares of the Preferred Stock, Series III, are outstanding, the Company shall not issue any of its authorized and unissued shares of the Preferred Stock as additional shares of the Preferred Stock, Series III; and (5) the amount per share payable on the Preferred Stock, Series III, before any payment on the Common Stock in the event of any liquidation, dissolution or winding up of the Company, whether voluntary or involuntary, or any reduction of capital resulting in any distribution of assets to the stockholders shall be $25 per share, together with a sum computed at the said annual dividend rate from the date from which dividends thereon became cumulative to the date fixed for the payment of such distributive amount, less the aggregate of the dividends theretofore or on such date paid thereon or declared and set apart for payment thereon, all as provided in the Amended and Restated Articles of Incorporation. 1.0.3 Amendments Do Not Provide for the Exchange, Reclassification, or Cancellation of Issued Shares. The amendments do not provide for any exchange, reclassification, or cancellation of issued shares. 1.0.4 Date of Adoption. Each such amendment was adopted by the Board of Directors on August 17, 1994. 1.0.5 Shareholder Approval Not Required. The amendments do not require shareholder approval, as provided in RCW 23B.06.020 and RCW 23B.10.020 of the Washington Business Corporation Act. Executed this 9th day of September, 1994. WASHINGTON NATURAL GAS COMPANY By /s/ T. J. Hogan T. J. Hogan Its Vice President and Secretary EX-4.B3 3 EXHIBIT 4-B.3; ARTICLES OF AMENDMENT 1 PAGE 104 AMENDMENT TO BYLAWS ADOPTED APRIL 20, 1994 RESOLVED, by the Board of Directors of Washington Energy Company that this Corporation's Amended and Restated Bylaws be and are hereby further amended by adding a new Section 2 in Article III to read as follows: Section 2. Nominations for Directors at Annual Meetings of Stockholders. (a) Nominations of candidates for election as Directors at an annual meeting of stockholders may only be made (i) by, or at the direction of, the Board of Directors, or (ii) by any stockholder of the Corporation who is entitled to vote at the meeting and who complies with the procedures set forth in the remainder of this Section 2. (b) If a stockholder proposes to nominate one or more candidates for election as Directors at an annual meeting, the stockholder must have given timely notice thereof in writing to the Secretary of the Corporation. To be timely, a stockholder's notice must be delivered to, or mailed and received at, the principal office of the Corporation not less than seventy (70) days prior to the date scheduled for the annual meeting (regardless of any postponements, deferrals or adjournments of that meeting to a later date), or, if notice or public disclosure of the date scheduled for the annual meeting is not given or made at least eighty (80) days prior thereto, not more than ten (10) days following the day on which notice of the date scheduled for the annual meeting is mailed or the day on which disclosure of that date is made, whichever is earlier. (c) A stockholder's notice to the Secretary under Section 2(b) shall set forth, as to each person whom the stockholder proposes to nominate for election as a Director (i) the name, age, business address and residence address of such person, (ii) the principal occupation or employment of such person, (iii) the number and class of shares of stock of the Corporation that are beneficially owned on the date of such notice by such person, and (iv) any other information relating to such person required to be disclosed in solicitations of proxies with respect to nominees for election as directors pursuant to Regulation 14A under the Exchange Act, including but not limited to information required to be disclosed by Schedule 14A of Regulation 14A, and any other information that the stockholder would be required to file with the Securities and Exchange Commission in connection with the stockholder's nomination of such person as a candidate for Director or the stockholder's opposition to any candidate for Director nominated by, or at the direction of, the Board of Directors. In addition to the above information, a stockholder's notice to the Secretary under Section 2(b) shall (A) set forth (i) the name and address, as they appear on the Corporation's books, of the stockholder and of any other stockholders that the stockholder knows or anticipates will support any candidate or candidates nominated by the stockholder, and (ii) the number and class of shares of stock of the Corporation that are beneficially owned on the date of such notice by the stockholder and by any such other stockholders, and (B) be accompanied by a written statement, signed and acknowledged by each candidate nominated by the stockholder, that the candidate agrees to be so nominated and to serve as a Director of the Corporation if elected at 2 PAGE 105 the annual meeting. (d) The Board of Directors, or a designated committee thereof, may reject any stockholder's nomination of one or more candidates for election as Directors if the nomination is not made pursuant to a stockholder's notice timely given in accordance with the terms of Section 2(b). If the Board of Directors, or a designated committee thereof, determines that the information provided in a stockholder's notice does not satisfy the requirements of Section 2(c) in any material respect, the Secretary of the Corporation shall notify the stockholder of the deficiency in the notice. The stockholder shall have an opportunity to cure the deficiency by providing additional information to the Secretary within such period of time, not to exceed five (5) days from the date such deficiency notice is given to the stockholder, as the Board of Directors or such committee shall reasonably determine. If the deficiency is not cured within such period, or if the Board of Directors or such committee determines that the additional information provided by the stockholder, together with information previously provided, does not satisfy the requirements of Section 2(c) in any material respect, then the Board of Directors or such committee may reject the stockholder's notice. (e) Notwithstanding the procedures set forth in Section 2(d), if a stockholder proposes to nominate one or more candidates for election as Directors at an annual meeting, and neither the Board of Directors nor any committee thereof has made a prior determination of whether the stockholder has complied with the procedures set forth in this Section 2 in connection with such nomination, then the Chairman of the annual meeting shall determine and declare at the annual meeting whether the stockholder has so complied. If the Chairman determines that the stockholder has so complied, then the Chairman shall so state and ballots shall be provided for use at the meeting with respect to such nomination. If the Chairman determines that the stockholder has not so complied, then, unless the Chairman, in his sole and absolute discretion, determines to waive such compliance, the Chairman shall state that the stockholder has not so complied and the defective nomination shall be disregarded. and by renumbering the existing Sections contained in Article III of this Corporation's Amended and Restated Bylaws as follows: Section 2 is now Section 3 Section 3 is now Section 4 Section 4 is now Section 5 Section 5 is now Section 6 Section 6 is now Section 7 Section 7 is now Section 8. Except as amended above, this Corporation's Amended and Restated Bylaws shall remain in full force and effect. RESOLVED, FURTHER, that the officers of the Company are hereby authorized and directed to take such further actions and execute such further documents as may be deemed necessary in connection with the adoption of the amendment set forth in the above resolution. EX-4.B4 4 EXHIBIT 4-B.4; ARTICLES OF AMENDMENT 1 PAGE 106 AMENDMENT TO BYLAWS ADOPTED OCTOBER 19, 1994 PAGE 1 RESOLVED, by the Board of Directors of Washington Energy Company, that the second sentence of Article III, BOARD OF DIRECTORS, Section 1. Powers, Number, Classification, Election and Filling of Vacancies of this Corporation's Bylaws is hereby amended to read as follows: "The Number of Directors of the Corporation shall be not more than eleven (11) nor less than three (3), and, until amendment of this Bylaw by either the Stockholders or Directors, the number of Directors shall be eight (8)." EX-4.C2 5 EXHIBIT 4-C.2; ARTICLES OF AMENDMENT 1 PAGE 107 AMENDMENT TO BYLAWS ADOPTED OCTOBER 19, 1994 PAGE 1 RESOLVED, by the Board of Directors of Washington Natural Gas Company, that the second sentence of Article III, BOARD OF DIRECTORS, Section 1. Powers, Number, Classification, Election and Filling of Vacancies of this Corporation's Bylaws is hereby amended to read as follows: "The Number of Directors of the Corporation shall be not more than eleven (11) nor less than three (3), and, until amendment of this Bylaw by either the Stockholders or Directors, the number of Directors shall be eight (8)." EX-10.A 6 EXHIBIT 10-A; SERVICE AGREEMENT 1 Service Agreement (Storage Gas Service) THIS AGREEMENT, made and entered into this 1st day of September, 1987, by and between NORTHWEST PIPELINE CORPORATION, a Delaware Corporation, hereinafter called "Seller," and WASHINGTON NATURAL GAS COMPANY, a Washington Corporation, hereinafter called "Buyer." In consideration of the mutual covenants and agreements herein set forth, the parties hereto agree as follows: ARTICLE I - GAS TO BE SOLD AND PURCHASED Subject to the terms, conditions and limitations hereof and of the applicable Rate Schedule SGS-1, Seller agrees to sell and deliver to Buyer, and Buyer agrees to purchase and receive from Seller, the following quantities of natural gas: A Contract Demand of 1,561,859 therms, A Seasonal Quantity of 46,795,000 therms, A Best Efforts Volume of 311,018 therms. The sum of the Contract Demand and Best Efforts Volumes delivered shall not exceed, however, the Seasonal Quantity set out above. Provided, however, Buyer may release all or a portion of its Contract Demand, Best Efforts Volumes, and/or its Seasonal Contract Quantity to the Washington Water Power Company as provided in Rate Schedule S-1, Section 5.4 of Washington Natural Gas Company's Gas Tariff, Original Volume No. 1. Provided, however, that Seller shall not be obligated on any day to deliver a volume of gas to Buyer for any community or distribution system in excess of the Maximum Daily Quantity therefore specified on Exhibit A hereto and, on any such day, the aggregate of all deliveries made hereunder for all such communities and distribution systems shall not exceed the Contract Demand specified above or the applicable percentage thereof as specified in Rate Schedule SGS-1. Buyer owns an undivided interest in Jackson Prairie Storage Project, and for the purpose of this Agreement and of Rate Schedule SGS-1, Buyer's Owned Storage Demand shall be 1,310,000 therms, and Buyer's Owned Storage Seasonal Quantity shall be 37,728,000 therms. 1 of 3 2 ARTICLE II - DELIVERY POINTS AND PRESSURES Delivery of natural gas by Seller to Buyer shall be at or near the points whose locations are described in Exhibit B hereto. Gas shall be delivered by Seller to Buyer at such pressures as may be available, from time to time, at the said points of delivery but in no event at pressures less than the pressures specified in Exhibit B hereto. ARTICLE III - APPLICABLE RATE SCHEDULES Buyer agrees to pay Seller for all natural gas service rendered under the terms of this Agreement in accordance with Seller's Rate Schedule SGS-1 as filed with the Federal Energy Regulatory Commission, and as such Rate Schedule may be amended or superseded from time to time. This Agreement shall be subject to the provisions of such Rate Schedule and the General Terms and Conditions applicable thereto on file with the Federal Energy Regulatory Commission and effective from time to time, which by this reference are incorporated herein and made a part hereof. ARTICLE IV - TERM OF AGREEMENT This Agreement shall become effective on the date so designated by the Federal Energy Regulatory Commission as the effective date thereof, and shall continue in effect for a period continuing through October 31, 1989. ARTICLE V - CANCELLATION OF PRIOR AGREEMENTS When this Agreement takes effect, it supersedes, cancels, and terminates the following Agreement: Service Agreement dated August 27, 1979, between NORTHWEST PIPELINE CORPORATION, "Seller," and WASHINGTON NATURAL GAS COMPANY, "Buyer." ARTICLE VI - SUCCESSORS AND ASSIGNS This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns. ARTICLE VII - EXHIBITS All exhibits attached hereto are incorporated by reference herein as if set forth in full. 2 of 3 3 IN WITNESS WHEREOF, the Parties hereto have executed this Agreement as of the day and year first above set forth. NORTHWEST PIPELINE CORPORATION (Seller) By /s/ L.C. RANDOLPH, JR. ------------------------------------------------- Vice President, Gas Supply & Marketing (Title) Attest: /s/ MARY E. WHITE -------------------------------------------- Assistant Secretary (Title) WASHINGTON NATURAL GAS COMPANY (Buyer) By /s/ JAMES W. GUSTAFSON ------------------------------------------------- Senior Vice President (Title) Attest: /s/ PAUL A. HOGLUND -------------------------------------------- Senior Vice President (Title) 3 of 3 4 EXHIBIT A TO SERVICE AGREEMENT DATED September 1, 1987, FOR SERVICE UNDER RATE SCHEDULE SGS-1 Effective: Upon the Date so Designated by the Federal Energy Regulatory Commission Supersedes EXHIBIT A Effective: October 1, 1979
Maximum Daily Community or System Ouantity - ------------------- ------------- (Description) (Therms) Centralia and Chehalis, Washington, and environs: 27,000 Lake Stevens, Washington, and environs: 2,000 Monroe, Washington, and environs: 2,000 Seattle, Tacoma, Olympia, Everett, North Bend and Snoqualmie, Washington, and environs: Olympia 36,000 North Tacoma 360,000 South Seattle 572,350 Issaquah 33,000 North Seattle and Everett 355,000 Redmond 67,909 South Tacoma 33,600 Rainier Terrace and Puyallup 19,000 North Bend and Snoqualmie 27,000 Lake Wilderness and Covington 6,000 Evergreen Shores-Black Lake 17,000
1 of 2 5 EXHIBIT A TO SERVICE AGREEMENT DATED September 1, 1987, FOR SERVICE UNDER RATE SCHEDULE SGS-1 (Continued)
Maximum Daily Community or System Quantity - ------------------- ------------- (Description) (Therms) Snohomish, Washington, and environs: 4.000
NORTHWEST PIPELINE CORPORATION (Seller) By /s/ L.C. RANDOLPH ------------------------------------- L.C. Randolph (Title) Vice President, Gas Supply & Marketing Executed on February 17, 1988 ---------------------------- WASHINGTON NATURAL GAS COMPANY (Buyer) By /s/ JAMES W. GUSTAFSON ------------------------------------- James W. Gustafson (Title) Senior Vice President Executed on February 23, 1988 ---------------------------- 2 of 2 6 EXHIBIT B TO SERVICE AGREEMENT DATED September 1, 1987, FOR SERVICE UNDER RATE SCHEDULE SGS-1 Effective: Upon the Date so Designated by the Federal Energy Regulatory Commission Supersedes EXHIBIT B Effective: October 1, 1979
DELIVERY POINT DELIVERY PRESSURE - -------------- ----------------- (Location) (psig) For Centralia and Chehalis, Washington, and environs: Adjacent to Seller's main line in the 400 SE/4NE/4, Section 36, Township 14 North, Range 2 West, Lewis County, Washington Various main line taps located on Seller's 150 transmission line in Lewis County, Washington For Lake Stevens, Washington, and environs: Adjacent to Seller's main line in the 150 NW/4SW/4, Section 9, Township 29 North, Range 6 East, Snohomish County, Washington For Monroe, Washington, and environs: Adjacent to Seller's lateral line in the 150 SE/4NE/4, Section 35, Township 28 North, Range 6 East, Snohomish County, Washington For Seattle, Tacoma, Olympia, Everett, North Bend and Snoqualmie, Washington, and environs: (Olympia) Adjacent to Seller's lateral line 300 in the SW/4NW/4, Section 15, Township 17 North, Range 1 West, Thurston County, Washington (North Tacoma) Adjacent to Seller's lateral 260 line in the SW/4NW/4, Section 7, Township 20 North, Range 5 East, Pierce County, Washington
1 of 3 7 EXHIBIT B TO SERVICE AGREEMENT DATED September 1, 1987, FOR SERVICE UNDER RATE SCHEDULE SGS-1 (Continued)
DELIVERY POINT DELIVERY PRESSURE - -------------- ----------------- (Location) (psig) For Seattle, Tacoma, Olympia, Everett, North Bend and Snoqualmie, Washington, and environs (Continued): (South Seattle) Adjacent to Seller's lateral 260 line in the SE/4SE/4, Section 19, Township 23 North, Range 5 East, King County, Washington (Issaquah) Adjacent to Seller's lateral 260 line in the NW/4SE/4, Section 21, Township 24 North, Range 6 East, King County, Washington (North Seattle and Everett) Adjacent to 260 Seller's lateral line in the NW/4SE/4, Section 15, Township 27 North, Range 4 East, Snohomish County, Washington (Redmond) Adjacent to Seller's main line in the 400 NE/4SE/4, Section 9, Township 25 North, Range 6 East, King County, Washington (South Tacoma) Adjacent to Seller's lateral 400 line in the SE/4NW/4, Section 14, Township 19 North, Range 3 East, Pierce County, Washington (Rainier Terrace - Puyallup) Adjacent to 150 Seller's lateral line in the NW/4NE/4, Section 16, Township 19 North, Range 4 East, Pierce County, Washington (North Bend and Snoqualmie) Adjacent to 400 Seller's main line in the NW/4SW/4, Section 11, Township 24 North, Range 6 East, King County, Washington (Lake Wilderness and Covington) Adjacent to 300 Seller's main line in the NE/4NE/4, Section 31, Township 22 North, Range 6 East, King County, Washington
2 of 3 8 EXHIBIT B TO SERVICE AGREEMENT DATED September 1, 1987, FOR SERVICE UNDER RATE SCHEDULE SGS-1 (Continued)
DELIVERY POINT DELIVERY PRESSURE - -------------- ----------------- (Location) (psig) For Seattle, Tacoma, Olympia, Everett, North Bend and Snoqualmie, Washington, and environs (Continued): (Evergreen Shores-Black Lake) Adjacent to 150 Seller's lateral line in the NW/4NE/4, Section 1, Township 17 North, Range 3 West, Thurston County, Washington Various main line taps located on Seller's 150 transmission line in Thurston, Pierce, King, and Snohomish Counties, Washington For Snohomish, Washington and environs: Adjacent to Seller's main line in the SW/4SE/4, 150 Section 16, Township 28 North, Range 6 East, Snohomish County, Washington
NORTHWEST PIPELINE CORPORATION (Seller) By /s/ L.C. RANDOLPH, JR. ------------------------------------ L.C. Randolph (Title) Vice President Executed on: February 17, 1988 ------------------------- WASHINGTON NATURAL GAS COMPANY (Buyer) By /s/ JAMES W. GUSTAFSON ------------------------------------ James W. Gustafson (Title) Senior Vice President Executed on: February 23, 1988 ------------------------- 3 of 3 EX-10.B 7 EXHIBIT 10-B; SERVICE AGREEMENT 1 FIRM STORAGE SERVICE AGREEMENT Questar Pipeline Company 79 South State Street Salt Lake City, Utah 84111 Contract No. ST047 THIS AGREEMENT is entered into this 14th day of April, 1993, by and between QUESTAR PIPELINE COMPANY, CLAY BASIN STORAGE DIVISION, a Utah corporation, "Seller," and WASHINGTON NATURAL GAS COMPANY, "Buyer." Buyer represents that it desires Seller to store natural gas in Seller's Clay Basin Storage Field; and Seller represents that it is seeking FERC authorization to expand the storage capacity available in order to provide the storage service for Buyer on the terms specified in this agreement. Seller and Buyer agree as follows: AGREEMENT TERMS The terms selected below, together with the terms and conditions of this agreement, including the attached Appendices A and B, constitute the storage service to be provided and the rights and obligations of the parties. Buyer shall designate receipt and delivery points on Appendix A that are acceptable to Seller. 1. BUYER'S STATUS (Please Check One Only): XX ------ Local Distribution Company ------ Intrastate Pipeline Company ------ Interstate Pipeline Company ------ Marketer/Broker ------ Producer ------ End-User ------ Other (Specify) 2. VOLUMES TO BE INJECTED AND WITHDRAWN (Subject to the provisions of Section 8, below): Firm Service (Please see note below for MRD calculation): 2,800 Annual Working Gas Volume (MMcf) 23.33 Minimum Required Deliverability Volume MMcf/day (MRD) Note: MRD must be calculated using the formula shown below: MRD = Annual Working Gas Volume (MMcf/year) 150 days x .80 QPCO149FMSGCBXP 2 3. RATES (Subject to the provisions of paragraph 2 of Appendix B): Firm Storage Service - Rate Schedule FSS DEMAND CHARGES: Deliverability (Please Check One Only): XX ------ the maximum rate set forth in Seller's Statement of Rates ------ a discounted rate of $ /Mcf Inventory Capacity (Please Check One Only): XX ------ the maximum rate set forth in Seller's Statement of Rates ------ a discounted rate of $ /Mcf Prior to the time the terms and conditions set forth in Appendix B are met to the sole satisfaction of Seller, demand charges under this agreement shall be applied to the levels of Annual Working Gas Volume and MRD that Seller, in Seller's sole judgement, can actually provide in the event the Annual Working Gas Volume and MRD requested by Buyer and set forth in Section 2 above cannot reasonably be commenced. Unless Seller notifies Buyer in writing that Seller is unable to provide the service at the requested levels, Buyer shall be responsible for all demand charges, as set forth above in this Section 3. COMMODITY CHARGES: Injection: $0.00851/Mcf Withdrawal: $0.01631/Mcf Overrun: $0.29124/Mcf 4 . ACA CHARGE: XX ---- yes ---- no 5. ADDITIONAL FACILITIES CHARGES: Additional facilities: XX ---- are required ---- are not required Charge: N/A lump-sum payment of $ ---- N/A monthly fee of $ ---- - 2 - 3 6. TERM OF THE AGREEMENT (Subject to the provisions of Section 8, below): (a) Initial term May 1, 1994 to May 22, 2020 (b) Renewal term XX ---- none ---- other: (c) Termination. This agreement shall be renewed as stated in Section 6(b) above. This agreement may be terminated during any renewal period by either party upon 30 days' written notice to the other party prior to each injection period. 7. NOTICE: Unless otherwise provided in Seller's FERC Gas Tariff, Volume No. 2-A, all notices shall be given by telephone or other electronic means and confirmed in writing at the following addresses: Buyer: Washington Natural Gas Company P.O. Box 1869 Seattle, Washington 98111 Attention: Mr. John F. Stefani Telephone: (206) 224-2251 Fax: (206) 328-7875 QUESTAR PIPELINE COMPANY 79 South State Street Salt Lake City, Utah 84111 Attn: Director, Gas Supply Planning Telephone: (801) 530-2020 Fax: (801) 530-2570 8. COMMENCEMENT OF SERVICE: Seller shall not be obligated to commence the requested Clay Basin expansion service under this agreement until all terms and conditions of Appendix B are met to the sole satisfaction of Seller. However, at any time prior to such fulfillment of the Appendix B terms and conditions, service may, if deemed feasible solely by Seller, be made available to Buyer using the priority determined by applying the present value ranking procedures set forth in Section 4.2 of Seller's FERC Gas Tariff, Original Volume No. 2-A to the effective service requests underlying the executed expansion service agreements. Service to remaining Buyers will commence as soon as deemed operationally practicable by Seller. If the FERC authorizes only a portion of the total expansion capacity requested by Seller and the authorized capacity is oversubscribed by Buyers who have executed a tendered firm storage service agreement, then the capacity so approved will be made available to such Buyers using the priority determined by applying the present value ranking procedure set forth in Section 4.2 of Seller's FERC Gas - 3 - 4 Tariff, Original Volume No. 2-A to the respective executed service agreements. Service agreements receiving no allocation of capacity under this methodology, and the respective underlying requests for service, shall be considered void for all purposes. 9. TARIFF: This agreement shall be subject to the terms and conditions attached to and made part of this agreement as Appendix B and all the applicable rate schedules and the General Terms and Conditions of Seller's FERC Gas Tariff, Original Volume No. 2-A, as it may be amended or superseded from time to time. 10. RESTRUCTURING TARIFF: Upon implementation by Seller of tariff changes required by the FERC to comply with restructuring under Order No. 636 in Docket No. RS92-9, this agreement will be reformed to conform to Seller's tariff. The reformed agreement will be issued to Buyer according to the procedures set forth in Seller's tariff, as it may be amended or superseded from time to time. The parties have executed this agreement to be effective the first day of its term. BUYER: WASHINGTON NATURAL GAS CO. QUESTAR PIPELINE COMPANY ----------------------------- By: /s/ JOHN F. STEFANI By: /s/ JOHN B. CARRICABURU ----------------------------- ------------------------------- Title: V.P. Gas Supply & Ind. Mktg. Title: V.P., Gas Supply & Marketing ----------------------------- Date: April 12, 1993 Date: April 14, 1993 ----------------------------- -------------------------------- - 4 - 5 APPENDIX A 1. RECEIPT POINTS DESCRIPTION #000407 NPC Tap Clay Basin QUANTITY/MCF Section 29, T3N, R22E 2,800,000 Daggett County, Utah #000408 W. Terminus of Storage M.L. 70 Section 29, T3N, R22E Daggett County, Utah 2. DELIVERY POINTS DESCRIPTION #000407 NPC Tap Clay Basin QUANTITY/MCF Section 29, T3N, R22E 2,800,000 Daggett County, Utah #000408 W. Terminus of Storage M.L. 70 Section 29, T3N, R22E Daggett County, Utah - 5 - 6 APPENDIX B CONDITIONS PRECEDENT TO SERVICE 1. Seller shall not be obligated to provide expanded firm storage service at Clay Basin under this agreement until the following conditions are met to the sole satisfaction of Seller: a. Receipt by Seller of signed firm storage service agreements from one or more Buyers for sufficient capacity and upon terms and conditions acceptable to Seller that justify construction of the Clay Basin expansion; b. Receipt and acceptance by Seller of all approvals required to expand the capacity at Clay Basin as requested by Seller and to construct the facilities necessary to provide all expanded firm storage service requested by all expansion Buyers and to commence the service, including all necessary authorizations from federal, state and local municipal agencies and other government authorities, in final form and substance satisfactory to Seller, permitting or authorizing the service; c. Receipt and acceptance by Seller of all necessary rights of way, easements and permits, if any, required to construct, operate and maintain the Clay Basin expansion facilities; d. Completion of construction and commencement of actual operation of all facilities, including injection of all required cushion gas, necessary to provide firm storage service to all expansion buyers. 2. Should the FERC approve Clay Basin storage rates for firm service above the rates in effect on February 12, 1993, and such increase is due solely to costs associated directly with the expansion of Clay Basin, Buyer may terminate this agreement. 3. Buyer's creditworthiness shall remain a continuing condition precedent to Seller's obligation to perform. Seller may require Buyer to reverify its creditworthiness as Seller deems necessary. - 6 - EX-10.D 8 EXHIBIT 10-D; SERVICE AGREEMENT 1 2649S TRANSPORTATION AGREEMENT THIS AGREEMENT is made and entered into this 1st day of October, 1990, by and between NORTHWEST PIPELINE CORPORATION, hereinafter referred to as "Transporter", and WASHINGTON NATURAL GAS COMPANY, hereinafter referred to as "Shipper". RECITALS: A. Shipper is a local distribution company of natural gas. B. Shipper owns or controls certain supplies of natural gas which it desires Transporter to transport for Shipper's account pursuant to Part 284 of the regulations of the Federal Energy Regulatory Commission ("FERC"). C. Shipper has made a complete written request to Transporter for the transportation service described herein on February 10, 1989. AGREEMENT: NOW, THEREFORE, in consideration of the premises and mutual covenants set forth herein, the parties agree as follows: ARTICLE I - GAS DELIVERIES AND REDELIVERIES 1.1 Subject to the terms, conditions and limitations hereof, Transporter agrees to receive from Shipper at the Receipt Point(s) specified in Exhibit A herein, transport and deliver to Shipper at the Delivery Point(s) specified in Exhibit B herein, the following quantities of natural gas, known as Transportation Contract Demand: Up to 32,800 MMBtu's/day provided that Transporter's receipt of gas at any receipt point for Shipper's account hereunder on any day shall not exceed the maximum daily quantity set forth for such receipt point on Exhibit "A" hereto, and provided that Transporter's daily obligation to deliver gas to Shipper at any delivery point under this Transportation Agreement shall not exceed the Maximum Daily Delivery Obligation ("MDDO") set forth in Exhibit "B" of this Agreement. 1.2 Pursuant to Article XIV of the General Transportation Terms and Conditions applicable to this Agreement, Shipper has elected to furnish fuel and lost or unaccounted for gas volumes in-kind. Transporter may receive volumes of gas in excess of the maximum daily quantity set forth in Section 1.1 when necessary to cover such fuel gas reimbursement while making full delivery of such maximum daily quantity or to cover certain balancing receipts agreed to by the parties. 1.3 Such transportation shall be on a firm basis. 2 3.5 (Section 3.5 shall be applicable only for the transportation of imported natural gas.) Shipper hereby acknowledges and agrees that either it or its buyer or seller is the "importer of record" and it will comply with all requirements for reporting and submitting payment of duties, fees, and taxes to the United States or agencies thereof to be made on imported natural gas and for making the declaration of entry pursuant to 19 CFR Section 141.19. Shipper agrees to indemnify and hold Transporter harmless from any and all claims of damage or violation of any applicable laws, ordinances and statutes which pertain to the importation of the gas transported hereunder and which require reporting and/or filing of fees in connection with said import. ARTICLE IV - TERM 4.1 This Agreement becomes effective the date first written above and shall remain in full force and effect until October 31, 2004 and year to year thereafter, subject to termination by either party either at the expiration of the primary term or upon any anniversary thereafter by giving written notice so stating to the other party at least twelve (12) months in advance. ARTICLE V - WARRANTY OF ELIGIBILITY FOR TRANSPORTATION 5.1 Any shipper under this Rate Schedule warrants for itself, its successors and assigns, that all gas delivered to Transporter for transportation hereunder shall be eligible for transportation in interstate commerce under applicable rules, regulations or orders of the FERC. Shipper will indemnify Transporter and save it harmless from all suits, actions, damages, costs, losses, expenses (including reasonable attorney fees) and regulatory proceedings, arising from breach of this warranty. ARTICLE VI - NOTICES 6.1 Unless herein provided to the contrary, any notice called for in this Transportation Agreement shall be in writing and shall be considered as having been given if delivered personally, or by mail or telegraph with all postage and charges prepaid to either Shipper or Transporter at the place designated. Routine communications shall be considered as duly delivered when mailed by ordinary mail. Normal operating instructions can be made by telephone. Unless changed, the addresses of the parties are as follows: NORTHWEST PIPELINE CORPORATION P. 0. BOX 58900 SALT LAKE CITY, UTAH 84158-0900 Statements: Attention: T&E Accounting (MS-10496) Payments: Attention: Cash Control (MS-10491) Contractual Notices: Attention: Marketing (MS-10361) Other Notices: Attention: T&E Management (MS-10334) WASHINGTON NATURAL GAS COMPANY 815 Mercer Street Seattle, Washington 98109 Attn: John F. Stefani Vice President Gas Supply & Industrial Marketing - 3 - 3 ARTICLE VII - OTHER OPERATING PROVISIONS 7.1 Pursuant to Section 5.3 of the General Transportation Terms and Conditions of Transporter's FERC Gas Tariff, Original Volume No. 1-A, Shipper shall make payments to Transporter hereunder by wire transfer of immediately available funds by the due date set forth herein. Such funds shall be wire transferred to the First Interstate Bank of Utah located in Salt Lake City, Utah for Transporter's account No. 02-00986-8. ARTICLE VIII - ADJUSTMENTS TO GENERAL TERMS AND CONDITIONS 8.1 Certain of the General Transportation Terms and Conditions are to be adjusted for the purpose of this Agreement, as specified below: None. ARTICLE IX - CANCELLATION OF PRIOR AGREEMENT(S) 9.1 When this Agreement takes effect, it supersedes, cancels and terminates the following agreements(s): None. ARTICLE X - SUCCESSORS AND ASSIGNS 10.1 This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns. No assignment or transfer by either party hereunder shall be made without written approval of the other party. Such approval shall not be unreasonably withheld. As between the parties hereto, such assignment shall become effective on the first day of the month following written notice that such assignment has been effectuated. IN WITNESS WHEREOF, the parties hereto have executed this agreement as of the day and year first above set forth. Washington Natural Gas Company NORTHWEST PIPELINE CORPORATION - ---------------------------------- (Transporter) Shipper By: /s/ JOHN F. STEFANI By: /s/ TIM J. HAUSLER ------------------------------- -------------------------- Name: John F. Stefani Name: Tim J. Hausler ---------------------------- ------------------------- Title: Vice President Gas Supply & Title: Vice President Industrial Marketing Marketing and Customer Services /s/ J. Gary Nece Attest: /s/ Karrie L. Hummel --------------------------- ------------------------------- Attorney-in-Fact Assistant Secretary - 4 - 4 EXHIBIT "A" to the TRANSPORTATION AGREEMENT DATED October 1, 1990 between NORTHWEST PIPELINE CORPORATION and WASHINGTON NATURAL GAS COMPANY RECEIPT POINTS --------------
Maximum Daily Quantity ("MDQ") Receipt Point For Each Receipt Point - ------------- ----------------------------- Sumas 32,800 MMBtu/day
TOTAL MDQ MUST EQUAL TOTAL TRANSPORTATION CONTRACT DEMAND - 5 - 5 EXHIBIT "B" to the TRANSPORTATION AGREEMENT DATED October 1. 1990 between NORTHWEST PIPELINE CORPORATION and WASHINGTON NATURAL GAS COMPANY DELIVERY POINTS ---------------
Maximum Daily Delivery Obligation ("MDDO") Delivery Point For Each Delivery Point - -------------- --------------------------------- South Seattle 32,800
TOTAL MDDO MUST EQUAL TOTAL TRANSPORTATION CONTRACT DEMAND - 6 - EX-10.M1 9 EXHIBIT 10-M.1; EMPLOYMENT AGREEMENT 1 PAGE 108 EMPLOYMENT AGREEMENT Between Washington Energy Company, Washington Natural Gas Company and William P. Vititoe January 15, 1994 THIS EMPLOYMENT AGREEMENT (the "Agreement") is made effective the 15th day of January, 1994 (the "Effective Date"), between WASHINGTON ENERGY COMPANY, a Washington corporation ("WECO"), Washington Natural Gas Company, a Washington corporation, which is a wholly owned subsidiary of WECO ("WNG"), and WILLIAM P. VITITOE ("Employee"). The term "Company" refers to WECO and WNG. The term "Parties" refers to the Company and the Employee. R E C I T A L S 1.1 WECO wishes to employ the Employee as Chairman and Chief Executive Officer of WECO and WNG wishes to employ the Employee as Chairman and Chief Executive Officer of WNG, both subject to the approval of the shareholders of WECO, and the Employee wishes to accept such employment; 1.2 The Parties have reached agreement on the terms and conditions of such employment, and believe that it is in their mutual best interests to enter into a written agreement that specifies those terms and conditions; NOW, THEREFORE, in consideration of the mutual covenants and agreements contained herein, and for other good and valuable consideration, the Parties agree as follows: 1. Employment. The Company hereby agrees to employ Employee and to perform the obligations of the Company under this Agreement. Employee hereby accepts employment by the Company and agrees to perform the obligations of Employee under this Agreement. 2. Term. This Agreement shall commence on the Effective Date and shall terminate on January 14, 1998, subject to earlier termination as provided in Section 13 (Termination Prior to The end of the Term). Employee's election as a director of the Company and as Chairman and Chief Executive Officer of the Company is contingent on shareholder approval at the next annual meeting of the shareholders of WECO, which is presently set for February 25, 1994 ("Shareholder Approval"). 2 PAGE 109 3. Duties. From the Effective Date until the date of Shareholder Approval, Employee shall assist the current Chairman and Chief Executive Officer of WECO with operational matters and the anticipated transition of his duties to Employee. From and after the date of Shareholder Approval, Employee shall serve as the Chairman and Chief Executive Officer of WECO (and WECO shall cause Employee to be elected Chairman and Chief Executive Officer of WNG and of such other affiliates or subsidiaries as the Board of Directors of WECO shall designate), and shall faithfully and diligently perform such duties and exercise such powers as: (i) Are set forth in the description of duties of officers in the current Bylaws of WECO and WNG (which may be amended by WECO and WNG from time to time); (ii) Are customarily expected of the Chairman and Chief Executive Officer of business organizations which are similar to the Company; and (iii) May from time to time be properly assigned to him by the Board of Directors of WECO or WNG. At the request of the Board of Directors of the Company, Employee also shall serve as an officer or as a member of the Board of Directors of any of the Company's subsidiaries and affiliates, without additional compensation. 4. Extent of Services. Employee shall devote his full working time, attention and skill to the duties and responsibilities set forth in Section 3 ("Duties"). Employee may participate in other businesses as an outside director or investor, provided that: (i) Employee shall not actively participate in the operation or management of such businesses; and (ii) Employee shall not, without the prior approval of the Board of Directors of the Company, make or maintain any investment in any entity with which the Company has a commercial relationship of any kind, including that of lessor, partner, investor, vendor, supplier, consultant or otherwise, or an entity which is in direct competition with the Company. 5. Salary. In consideration for the performance of Employee's obligations under the Agreement, the Company shall pay Employee an initial salary of Three Hundred Twenty-Five Thousand Dollars ($325,000) per year, which salary shall be subject to prospective adjustment from time to time by the Board of Directors of the Company (the "Board of Directors"), in its sole discretion, but shall not be reduced during the term of this Agreement. Employee's salary shall be paid in installments in accordance with the Company's payroll policy for other employees. 6. Bonus. The Company shall pay to Employee on or before November 30, 1994 a one-time bonus ("Bonus") of One Hundred Thousand Dollars ($100,000) for his services during the Company's fiscal year ending September 30, 1994. Commencing with the Company's fiscal year beginning October 1, 1994, Employee shall be entitled to participate in WNG's Annual Incentive Plan (the "Annual Incentive Plan"), which may be amended from time to time. Employee is familiar with the Annual Incentive Plan, and acknowledges that any benefits that may be granted to Employee under the Annual Incentive Plan are subject to the approval of the Board of Directors or the Compensation Committee appointed by the Board of Directors, in the exercise of its sole discretion. 7. Stock Options. As an incentive to Employee to use his best efforts to enhance the value of the Company, the Company shall grant to Employee certain options to purchase stock of WECO in accordance with that certain Washington Energy Company Stock Option Plan (the "Option Plan"), which may be amended from 3 PAGE 110 time to time. The options are more particularly described in the Option Plan and in Attachment A to this Agreement. 8. Vacation and Other Benefits. Employee shall be entitled to five (5) weeks of paid vacation each year, in addition to the holidays observed by the Company for its employees in general. Vacation or holiday time that is not taken shall not be carried into the next calendar year. Employee shall be entitled to participate in the WNG Pension Plan and the WNG Salary Investment Plan, in accordance with their terms, each of which may be amended from time to time. WNG shall also enter into an Executive Retirement Compensation Agreement with Employee substantially in the form of Attachment B to this Agreement. The Company shall provide Employee, with medical, life and disability insurance benefits for Employee with terms and provisions substantially as favorable to Employee, as of the Effective Date, as those provided to other executive employees of the Company at that date. The Company may prospectively amend, eliminate or add to the insurance and benefit programs at any time, in its sole discretion. 9. Automobile. The Company shall provide Employee with the use of an automobile to conduct Company business. The Company shall pay all expenses incurred in purchasing or leasing the automobile, and shall in addition either pay or reimburse Employee for all reasonable expenses incurred for maintenance, service, and fuel costs for the automobile on the same basis as for other executive employees of the Company. Employee shall maintain adequate records to reflect any personal use of the automobile. 10. Club Dues. The Company shall pay on behalf of Employee a reasonable number of initial membership fees for clubs to enable the Employee to conduct Company business and represent the Company in the business community. Monthly dues and other charges in connection with such membership shall be handled on the same basis as for other executive employees of the Company. 11. Housing Loan and Moving Expenses. (a) The Company shall loan to Employee at the time of closing of his purchase of a new residence in the Seattle, Washington area, up to One Million Dollars ($1,000,000) on an interest-free basis, under the terms of a promissory note substantially in the form attached hereto as Attachment C, which loan shall be secured by a first position Deed of Trust on the residence being acquired. (b) Company agrees to reimburse Employee for all reasonable moving expenses incurred by Employee in relocating from Michigan to Washington ("Moving Expenses"). Company will also pay to Employee an amount to reimburse Employee for the federal income tax expense associated with the Moving Expenses (the "Tax Payment"). The Tax Payment will equal: TP = 65.56 (M-D) Where TP = Tax Payment M = Moving Expenses D = Moving Expenses deductible by Employee on his federal income tax return. 12. Expenses. The Company shall, upon receipt of adequate supporting documentation, reimburse Employee for reasonable expenses incurred by Employee in promoting the business of the Company, subject to the Company's expense reimbursement policies, which may be amended from time to time. 13. Termination Prior to the End of the Term. 13.1 The Company may terminate this Agreement for cause prior to the end of the term. The term "for cause" shall mean a termination based on a 4 PAGE 111 determination by the Board of Directors that Employee has: committed an act of dishonesty related to his employment; obtained any benefit of money or other property in connection with his employment to which he was not entitled; refused to comply with a lawful directive of the Board of Directors; or engaged in any willful misconduct with respect to his duties or other obligations under this Agreement. The Company shall not terminate this Agreement for cause unless a determination has been made by majority vote of the Board of Directors at a lawfully called meeting at which Employee shall be entitled to be told of the reasons for the termination and given an opportunity to personally respond to the reasons provided by the Board of Directors. In the event of termination of this Agreement by the Company for cause, Employee shall be paid all compensation and benefits earned through the date of termination, the Company shall not be obligated to provide any further compensation or benefits to him under the Agreement, and the Parties' obligations to each other under this Agreement shall cease, with the exception of the Company's obligations under Section 15 (Indemnification) and Employee's obligations under Section 16 (Confidentiality) and Section 17 (Noncompetition). 13.2 The Company may, at its option and at any time, terminate this Agreement prior to the end of the term, without cause. In the event that the Company exercises this right, Employee shall be entitled to receive: all compensation and benefits earned through the date of termination; and a continuation of his salary for the balance of the term of this Agreement, at the level in effect as of the date of termination. In that event, the Parties' obligations to each other under this Agreement shall cease, with the exception of the Company's obligations under Section 14 (Change in Control) and Section 15 (Indemnification) and the Employee's obligations under Section 16 (Confidentiality) and Section 17 (Noncompetition). 13.3 This Agreement shall terminate in the event Employee dies, or is unable to perform his duties as a result of a physical or mental disability at any time during the term of this Agreement. In the event of a termination under this subsection, Employee or his estate shall be paid all compensation and benefits earned through the date of such termination, including a pro-rated Bonus under Section 6, if death or disability occurs prior to September 30, 1994 and shall be entitled to receive benefits under any salary continuation plan which the Company may have in effect as of the date of such termination, the Company shall have no further obligations to provide compensation or benefits to him or his estate under this Agreement, and the Parties' obligations to each other under this Agreement shall cease, with the exception of the Company's obligations under Section 15 (Indemnification) and the Employee's obligations, if he is still living, under Section 16 (Confidentiality) and Section 17 (Noncompetition). For purposes of this Agreement, Employee shall be deemed to be disabled when each of the following conditions are met: (i) The Employee shall become physically or mentally incapable (excluding infrequent and temporary absences due to ordinary illnesses) of properly performing the services required of him by this Agreement; (ii) Employee's physical or mental incapacity shall exist or shall be reasonably expected to exist for more than ninety (90) days in the aggregate during any period of twelve (12) consecutive calendar months; and (iii) Such physical or mental incapacity is independently diagnosed by a qualified medical practitioner. 13.4 Either the Company or the Employee may, at its/his option, terminate this Agreement in the event that Shareholder Approval is not obtained. In the event that either the Company or Employee exercises this right to terminate the Agreement, Employee shall be entitled to receive all compensation and benefits 5 PAGE 112 earned through the date of termination, and the parties' obligations to each other shall cease, with the exception of Employee's obligations under Section 16 (confidentiality). 14. Change in Control. 14.1 The provisions of this section shall survive the expiration of the term of this Agreement, but shall not be effective in the event of a termination of this Agreement prior to the end of the term for cause, in accordance with subsection 13.1, or as a result of the death or incapacity of Employee in accordance with subsection 13.3. The provisions of this Section shall remain in effect for a period of three (3) years ("the Extended Benefit Period") following the date either the Company or Employee provides written notice to the other of its/his intent to terminate the provisions of this section ("Notice of Termination of Extended Benefits"). A Notice of Termination of Extended Benefits may be given during the term of this Agreement, or thereafter, but the Extended Benefit Period may not end prior to the end of the term of this Agreement. Notwithstanding any other provision of this section, the Extended Benefit Period shall terminate when Employee reaches the Normal Retirement Date as that term is defined in the Executive Retirement Compensation Agreement attached hereto as Attachment B (the "Normal Retirement Date"). 14.2 The Board of Directors, in the exercise of its responsibility to serve the best interests of the shareholders of WECO, may at any time consider a merger or acquisition proposal that could result in a Change of Control of WECO. In order to avoid any adverse affect on Employee's performance under this Agreement that might be caused by uncertainties concerning his tenure and treatment by WECO in the event of such a Change in Control, WECO has agreed to provide certain benefits to Employee in certain circumstances involving a Change of Control of WECO in accordance with the provisions of this section. For purposes of this Agreement, a Change in Control shall mean the occurrence of any one of the following actions or events: (i) The acquisition of any person (which, for purposes of this Agreement, shall include a natural person, corporation, partnership, association, joint stock company, trust fund, or organized group of persons) of the power, directly or indirectly, to exercise a controlling influence over the management or policies of WECO (either alone or pursuant to an arrangement or understanding with one or more other persons), whether through the ownership of voting securities through one or more intermediary persons, by contract or otherwise; or (ii) The acquisition by a person (whether alone or pursuant to an arrangement or understanding with one or more other persons) of the ownership or power to vote twenty-five percent (25%) or more of the outstanding voting securities of WECO; or (iii) During a period of six (6) years after the acquisition by any person, directly or indirectly, of the ownership or power to vote ten percent (10%) or more of the outstanding voting securities of WECO, the ceasing of the individuals who prior to such acquisition were directors of WECO ("Prior Directors") to constitute a majority of the board of directors, unless the nomination of each new director was approved by a vote of a majority of the Prior Directors. 14.3 In the event of a Change in Control during the term of this Agreement, or a Change in Control following the expiration of the term, but during the Extended Benefit Period, which in either event is followed by a Material Adverse Change in the terms of Employee's employment, as that term is defined in Section 14.4, which results in the termination, by Employee or WECO, of Employee's employment by WECO, shall entitle Employee to receive the benefits described in 6 PAGE 113 Subsection 14.5. 14.4 For purposes of this section, any of the following shall constitute a Material Adverse Change in the terms of Employee's employment: (i) A material change in Employee's Duties, without Employee's express consent; (ii) A reduction in Employee's base salary in effect prior to the Change in Control, unless such reduction is applied to all officers of the Company, does not exceed the average percentage reduction in base salary for all officers of the Company, and is not greater than a reduction of twenty-five percent (25%); (iii) Failure by the Company to increase Employee's base salary each year following a Change of Control, by an amount which equals at least one-half of the average percentage increase in base salary for all officers of the Company and its subsidiaries or a parent or successor of the Company during the prior two (2) full calendar years; (iv) Failure by the Company to maintain any employee benefits to which Employee is entitled prior to the Change in Control at a level equal to or greater than those in effect prior to the Change of Control, through the continuation of the same or substantially similar programs and policies or the taking of any action by the Company which would adversely affect Employee's participation in or materially reduce Employee's benefits under any such plans, programs or policies, or deprive Employee of any fringe benefits enjoyed by Employee prior to the Change of Control, unless such a reduction in benefits is nondiscriminatory as to Employee and is applied generally to all officers and management employees of the Company, its subsidiaries and affiliates and any parent or successor of the Company. (v) The failure by the Company to provide Employee with the number of paid vacation days to which Employee would be entitled as a salaried employee of the Company, its subsidiaries or affiliates or any parent or successor of the Company on a nondiscriminatory basis; (vi) The Requirement by the Company that Employee relocate his residence or office anywhere outside of the Seattle area, except for required travel on the Company's business to the extent consistent with Employee's duties; (vii) Any purported termination of employment by the Company other than: for cause as defined in Section 13.1, or death or disability as defined in Section 13.3, or prior to Normal Retirement Date, as that term is defined in the Executive Retirement Compensation Agreement, which is attached hereto as Attachment B (the "Normal Retirement Date"). 14.5 In the event of a termination of Employee's employment as described in Subsection 14.4, the Company shall provide to Employee the following benefits for the balance of the Extended Benefit Period: (i) Employee's full base salary earned through the termination date, plus payment for all accrued vacation and any deferred compensation to which Employee is entitled for the fiscal year most recently ended prior to Employee's termination, and Employee's pro rata share of any compensation under any Company plan which has accrued through the date of termination, regardless of whether such amounts are vested or are payable in the year of termination; plus 7 PAGE 114 (ii) Within thirty (30) days following the date of termination, an amount equal to the sum of Employee's annual base salary at the rate in effect as of the date of termination, plus the amount of any additional compensation awarded to Employee for the year most recently ended, including any sums awarded under an annual wage accumulation plan, multiplied by number of years (prorated for any partial years) remaining between the date of termination and the end of the Extended Benefit Period. The Company's obligation to pay this amount shall not be affected by any alternative employment that Employee may obtain. (iii) The Company shall maintain in full force and effect for the remaining term of the Extended Benefit Period all employee benefit plans, programs and policies, including any life or health insurance plans in which employee was entitled to participate immediately prior to termination, provided that Employee is qualified to participate under the general terms and provisions of such plans, programs and policies. In the event that Employee is not qualified to participate in any such plan, program or policy is not possible under its terms and conditions, the Company shall at its option either arrange for Employee to receive benefits substantially similar to those which Employee would have been entitled to receive under each plan, program or policy, or pay to employee an amount equal to the premiums which the Company would pay on Employee's behalf for participation in such plan, program or policy. At the end of the period of coverage, Employee will have the option to receive an assignment at no cost, and with no apportionment of prepaid premiums, any assignable insurance policies owned by the Company and relating to Employee, and to take advantage of any conversion privileges pertinent to the benefits available under Company policies. (iv) In addition to the regular payment of benefits to which Employee is entitled under the retirement plans or programs in effect on the date of Employee's termination, which shall not be affected by such termination, the Company shall pay to Employee in cash at the Normal Retirement Date, an amount equal to the actuarial equivalent of the additional retirement compensation to which Employee would have been entitled under the terms of such retirement plans or programs (without regard to vesting) and Employee continue in the employ of the Company during the balance of the Extended Benefit Period at Employee's base salary rate as of the date of termination, provided that payment shall not extend beyond Employee's Normal Retirement Date. For purposes of this calculation, the actuarial equivalent shall be determined by assuming survival to age eighty (80). (v) Employee shall waive all rights to receive shares of common stock of WECO ("Company Shares") issuable upon exercise of options ("Options"), if any, granted to employee under WECO's stock option plans. In return for that waiver, Employee shall be entitled to receive, within thirty (30) days following the date of termination, a payment equal to the difference between the exercise price of all options held by Employee, whether or not then fully exercisable, and the higher of (1) the average of the high and low sale prices as reported by the New York Stock Exchange on the date of termination (or the closing price on any other national stock exchange on which the Company Shares may then be listed) as reported in the Pacific Edition of the Wall Street Journal on the date of termination); or (2) the highest price per share actually paid for any of the Company Shares in connection with any change in control of the Company. (vi) Notwithstanding any other provisions of this Agreement, if any severance benefits under Section 14 of this Agreement, together with any other Parachute Payments (as defined under Internal Revenue Code 8 PAGE 115 Section 280(G)(b)(2)) made by the Company to Employee, if any, are characterized as Excess Parachute Payments (as defined in Internal Revenue Code, Section 280(G)(b)(1)), then the Company shall pay to Employee, in addition to the payments to be received under this Section, an amount equal to the excise taxes imposed by Section 4999 of the code on Employee's Excess Parachute Payments, plus an amount equal to the federal and, if applicable, state income taxes which will be payable to Employee as a result of this additional payment. 15. Indemnification. The Company shall defend, indemnify and hold Employee harmless from any and all liabilities, obligations, claims or expenses which arise in connection with or as a result of Employee's service as an officer or employee (or director if Employee is elected and serves as a director) of the Company and/or any of its affiliates and subsidiaries to the fullest extent allowed by law; provided, that the Company shall not be obligated to defend, indemnify or hold Employee harmless from any liabilities, obligations, claims or expenses which result from Employee having committed an act of dishonesty, obtained any benefit of money or other property to which he was not entitled, refused to comply with a lawful directive of the Board of Directors, or engaged in any willful misconduct with respect to his duties or other obligations under this Agreement. 16. Confidentiality. Employee shall not, during the term of this Agreement or thereafter, use for his own purposes or disclose to any other person or entity any confidential information concerning the Company, its affiliates or subsidiaries, or any of their business operations, except as may be consistent with his duties hereunder or as may be required by order of a court of competent jurisdiction. Confidential information shall include, without limitation, any information, formula, pattern, compilation, program, device, method, technique, or process that derives independent economic value, actual or potential, from not being generally known to, and not being readily ascertainable by proper means by, other persons or entities. 17. Noncompetition. 17.1 During the term of his employment with the Company, Employee shall comply with his fiduciary obligations as an officer of the Company, shall comply with the restrictions contained in Section 4. 17.2 During the term of his employment with the Company and for a period of two (2) years thereafter, Employee shall not participate in or perform services, whether directly or indirectly, as a director, officer, employee, owner, partner, agent, consultant, lessor, creditor or otherwise, for any person, or entity which is engaged in the same or similar business as the Company or any of the Company's affiliates or subsidiaries is engaged at any time during the term of this Agreement and which provides products or services of the type provided by the Company or any of its affiliates or subsidiaries to any person or entity located in the States of Washington, Oregon or Idaho that was a customer of the Company while Employee was employed by the Company. 17.3 During the term of his employment with the Company and for a period of two (2) years thereafter, Employee shall not, directly or indirectly: solicit for employment any employee of the Company; attempt to persuade or entice any employee of the Company to terminate his or her employment; or persuade or attempt to persuade, any person or company to terminate, cancel, rescind, or revoke its business or contractual relationships with the Company. 17.4 Employee agrees that damages for breach of the covenants contained in this Section would be difficult to determine and therefore agrees that these provisions may be enforced by temporary or permanent injunction. The right to such injunctive relief shall be in addition to and not in place of any other remedies to which the Company may be entitled. Employee agrees that any profits made or benefits obtained by Employee in violation of his obligations 9 PAGE 116 under this Section shall be held by Employee in constructive trust for, and shall be promptly paid to, the Company. 17.5 Employee agrees that the provisions of this Section are reasonable. However, if any court of competent jurisdiction determines that any provision within this Section is unreasonable in any respect, the Parties intend that this Section should be enforced to the fullest extent allowed by such court. 18. Arbitration. Any dispute between the Parties hereto with respect to any of the matters set forth herein shall be submitted to binding arbitration in the City of Seattle, State of Washington. Either Party may commence the arbitration by delivery of a written notice to the other, describing the issue in dispute and its position with regard to the issue. If the Parties are unable to agree on an arbitrator within thirty (30) days following delivery of such notice, the arbitrator shall be selected by a Judge of the Superior Court of the State of Washington for King County upon three (3) days' notice. Discovery shall be allowed in connection with any such arbitration to the same extent permitted by the Washington Rules of Civil Procedure but either Party may petition the arbitrator to limit the scope of such discovery, in which event the arbitrator shall determine the extent of discovery allowable in connection with the dispute in question. Except as otherwise provided herein, the arbitration shall be conducted in accordance with the rules of the American Arbitration Association then in effect for expedited proceedings. The award of the arbitrator shall be final and binding, and judgment upon an award may be entered in any court of competent jurisdiction. The arbitrator shall hold a hearing, at which the Parties may present evidence and argument, within thirty (30) days of his or her appointment, and shall issue an award within fifteen (15) days of the close of the hearing. In any such arbitration, the prevailing Party shall be entitled to recover its costs, including without limitation reasonable attorneys' fees, and the nonprevailing Party shall pay all costs of arbitration, but if neither Party is determined to be the prevailing Party, each Party shall bear its own costs and attorneys' fees and one-half (1/2) of the costs of arbitration. Nothing contained in this Section shall prevent either Party from seeking a temporary restraining order, preliminary injunction or similar injunctive relief from a court of competent jurisdiction to enforce the provisions of this Agreement. In the event that either Party institutes an action in court for such relief or to compel arbitration to or enforce an award of arbitration, the prevailing Party shall be entitled to recover its costs, including without limitation reasonable attorneys' fees. 19. Notices. All notices or other communications required or permitted by this Agreement shall be in writing and shall be sufficiently given if sent by certified mail, postage prepaid, addressed as follows: 10 PAGE 117 If to Employee, to: William P. Vititoe 815 Mercer Street P.O. Box 1869 Seattle, WA 98111 Facsimile: (206) 382-7875 If to Company: Washington Energy Company 815 Mercer Street P.O. Box 1869 Seattle, WA 98111 Attention: Corporate Secretary Facsimile: (206) 382-7875 Any such notice or communication shall be deemed to have been given as of the date mailed. Any address may be changed by giving written notice of such change in the manner provided herein for giving notice. 20. Waiver of Breach. The waiver by a Party of a breach of any provision of this Agreement shall not operate or be construed as a waiver of any subsequent breach. 21. Assignment. This Agreement is for personal services. Neither Party may assign its rights or delegate its duties hereunder without the prior written consent of the other Party. 22. Entire Agreement. This Agreement contains the entire understanding of the Parties with regard to the subject matter of this Agreement and may only be changed by written agreement signed by both Parties. Any and all prior discussions, negotiations, commitments and understandings related thereto are merged herein. 23. Binding Effect. This Agreement shall be binding upon and inure to the benefit of the respective Parties, and their legal representatives, successors, permitted assigns and heirs. 24. Law. This Agreement shall be governed by, construed and enforced in accordance with the laws of the state of Washington, without giving effect to principles and provisions thereof relating to conflict or choice of laws and irrespective of the fact that any one of the Parties is now or may become a resident of a different state. 25. Validity. In case any term of this Agreement shall be invalid, illegal, or unenforceable, in whole or in part, the validity of any of the other terms of this Agreement shall not in any way be affected thereby. "Company" WASHINGTON ENERGY COMPANY By /s/ James A. Thorpe James A. Thorpe Its Chairman of the Board 11 PAGE 118 WASHINGTON NATURAL GAS COMPANY By /s/ James A. Thorpe James A. Thorpe Its Chairman of the Board "Employee" /s/ William P. Vititoe William P. Vititoe Attachment A. Stock Option Agreement Attachment B. Executive Retirement Compensation Agreement Attachment C. Promissory Note Form EX-10.M3 10 EXHIBIT 10-M.3; ANNUAL INCENTIVE PLAN 1 EX-10-M.3 ANNUAL INCENTIVE PLAN Washington Energy Company October 1988 Plan Year: Fiscal year beginning October 1 and ending - --------- September 30. Eligibility: All Vice Presidents and above of Washington Energy - ----------- Company and its subsidiaries. Purposes of Plan: o Provide incentive to meet Company, - ---------------- department, and individual goals. o Link a greater portion of executive pay to achieving objectives. Administration: The plan will be administered by the CEO and/or the - -------------- President at the direction of the Compensation Committee of the Board of Directors.
Award Levels: Award Levels (% of Base Salary) - ------------- -------------------------------- Position Threshold Target Maximum -------- --------- ------ ------- CEO 15% 25% 40% President 10% 20% 30% Senior VPs 10% 15% 20% VPs 5% 10% 15%
-1- 2 4804ZZ32 10/88 Weighting of Company A portion of the participant's potential award and Department will be determined by "Corporate Performance" and Performance Results: the remaining portion will be determined by - -------------------- "Department Performance". These portions will be based on position as follows:
Percentage of Target Award Based on: ---------------------------- Corporate Department Position Performance Performance -------- ----------- ----------- CEO, President 100% -- Senior VPs 60% 40% VP-Subsidiary Heads 40% 60% Other VPs 40% 60%
Corporate and Corporate Performance. Corporate performance will be Department defined as Washington Energy Company performance. The Performance Corporate performance measure(s) will be as shown on Measures: the attached exhibit. Other financial measures may be - ------------- used at the discretion of the Committee. All financial measures for regulated operations will be weather adjusted. Department Performance. Through the planning process, the President and/or CEO will discuss the Department's goals for the plan year with each participant. Each of these goals will be weighted based on their relative importance. Overall Department performance will be determined by applying these weights to the performance of each specific goal. -2- 3 4804ZZ32 10/88 Minimum Corporate The Corporate portion of the incentive cash payment Performance: will not be paid if net income before adjusting for - ----------------- weather is inadequate to pay common and preferred dividends. Award Adjustments: The CEO can recommend discretionary award adjustments - ------------------ of plus/minus 30% of the award amount. If individual performance is significantly inferior, the CEO may significantly reduce or eliminate the total incentive cash payment award for that participant regardless of Corporate or Department performance. The Effect of In comparing actual performance against the Extraordinary and performance goals, the Compensation Committee may Nonrecurring Items: exclude from such comparison any extraordinary or - ------------------- nonrecurring gains, losses, charges, or credits which appear on the Company's books and records as it deems appropriate. Less Than Full-Year If an individual becomes a participant after the Plan Participation: beginning of the Plan Year, the President and/or CEO - ------------------- will develop department performance measures for the remainder of the plan year for that participant. The final award will be calculated by multiplying the award by a proration factor. The proration factor will be equal to the number of full weeks the individual actually spent as a Plan participant, divided by fifty-two. -3- 4 4804ZZ32 10/88 If a participant's employment is terminated during a plan year for reason of death, disability, or normal retirement, an award will be determined based on the performance as of the date of termination. The final award (paid after the end of the plan year) will be calculated by multiplying the award by a proration factor. The proration factor will be equal to the number of full weeks of employment during the plan year divided by fifty-two. If a participant's employment is terminated by resignation or for cause, an incentive award will not be paid. Change-In-Control: Change-in-control will be defined as set forth in the - ------------------ Performance Share Plan. Upon change-in-control, target incentive cash payment for the year will be paid if a participant is terminated without cause. Form and Timing of Payment: All awards will be paid in cash, less applicable - --------------- withholding requirements. The final award will be paid as soon as practicable following the end of the Plan Year. Modifications: The Compensation Committee will approve all elements - -------------- and goals of the Plan each year and reserves the right to modify, amend or repeal the Plan. No modifications, however, may adversely affect an award which has previously been earned, either in whole or in part. -4- 5 4804ZZ32 10/88 Final Award The Compensation Committee of the Board of Directors Payment Approval: has final approval of all incentive cash payments. -5- 6 4804ZZ32 10/88 EXAMPLE OF AWARD CALCULATION Position: Senior Vice President - -------------------------------- o Base salary: $90,000 o Performance criteria weightings: 60% Company/40% Department
o Award levels Threshold Target Maximum --------- ------ ------- 10% 15% 20%
Assumptions: - ------------ o Company performance: 95% of target o Department performance: 105% of target o Awards as percent of target performance:
Threshold Target Maximum ------------- --------------- ------------- 90% of target Target perform- 110% of target performance ance measure performance measure measure
o Earnings are sufficient to pay dividends. Award Determination - ------------------- Company Performance:
Award-Level Base Salary Company Award ----------- ----------- ------------- 12.5% x $90,000 = $11,250
Department Performance:
Department Award Level Base Salary Award ----------- ----------- ---------- 17.5% x $90,000 = $15,750
Company Department Performance Department Award Total Company Award Weighting Award Weighting Award ------------- ----------- ---------- ---------- ------- ($11,250 x .60) + ($15,750 x .40) = $13,050
7 FISCAL YEAR 1989 EARNINGS AVAILABLE TO COMMON
WASHINGTON EARNINGS WASHINGTON THERMAL THERMAL THERMAL ENERGY CO. PER SAHRE NATURAL GAS ENERGY EXPLORATION EFFICIENCY CONSOLIDATED (AVERAGE) ----------- --------- ----------- ---------- ------------ --------- o 1989 BUDGET $18,312,000 $(308,000) $ 722,000 $1,059,000 $19,936,000 $1.46 o 1989 LONG-RANGE PLAN (S&W) $19,180,000 $(218,000) $(1,399,000) $ 218,000 $19,408,000 $1.42
CORPORATE GOALS
WEIGHTING THRESHOLD TARGET MAXIMUM --------- ---------- ---------- ---------- o EARNINGS PER SHARE (AVERAGE) 80% $1.35 $1.46 $1.57 o NON-REGULATED OPERATIONS AS % OF TOTAL 10% $6,400,000 $7,100,000 $7,800,000 o INTERNALLY GENERATED CASH AS % OF TOTAL CASH REQUIREMENTS 10% 36% 40% 44% 42 at update corrected goals 10/26/88
EX-10.M4 11 EXHIBIT 10-M.4; EMPLOYMENT AGREEMENT 1 PAGE 119 EMPLOYMENT AGREEMENT THIS EMPLOYMENT AGREEMENT (the "Agreement") is entered into effective as of the 1st day of January 1994, between WASHINGTON ENERGY COMPANY and WASHINGTON NATURAL GAS COMPANY, Washington corporations (collectively the "Employer"), and ROBERT R. GOLLIVER ("Employee"). R E C I T A L S A. Employee has been employed by Employer and its subsidiary, Washington Natural Gas Company, and currently serves as their President and Chief Operating Officer (references in this Agreement to "Employer" are also intended to refer to other direct and indirect subsidiaries of Employer, unless the context clearly indicates otherwise). B. Employer desires Employee to continue in the employ of Employer, and Employee is willing to continue in the employ of Employer. NOW, THEREFORE, in consideration of the mutual covenants set forth in this Agreement, Employer and Employee agree as follows: A. EMPLOYMENT. Employee shall continue in the employ of Employer upon the terms and conditions set forth in this Agreement. 1. Subject to Section 6 below, from the date of this Agreement until June 30, 1995 (this period, as the same may be shortened pursuant to Section 2 below, will be referred to as the "Employment Period"), Employee shall continue to serve as the President and Chief Operating Officer of Employer and shall perform such other duties as from time to time may reasonably be assigned to Employee by the Chief Executive Officer of Employer and Employer will pay to Employee the monthly salary provided for in Section 4.1. 2. Subject to Section 6 below, from July 1, 1995, until June 30, 1997 (this period, as the same may be lengthened pursuant to Section 2 below, will be referred to as the "Extended Payment Period"), Employer will pay to Employee the monthly payment provided for in Section 4.2. 3. At the effective time of termination of the Employment Period, Employee agrees to resign as a Director of Washington Energy Company and all of its direct or indirect subsidiaries. B. EARLIER TRANSITION TO EXTENDED PAYMENT PERIOD. At any time during the Employment Period, either Employer or Employee shall be entitled, by written notice to the other, to elect to cause the Extended Payment Period to begin prior to July 1, 1995. Such notice will be effective as of the first day of the month following the month in which it is given or such later date as is specified in the notice. Notwithstanding the foregoing, if there is a change in control of Employer, Employer shall not be entitled to provide the notice under this Section 2 and thereby lengthen the Extended Payment Period unless Employer pays to Employee all of the compensation that Employee would have received under Section 4.1 of this Agreement if the Employment Period had continued through June 30, 1995. For purposes of this Agreement, the term "change in control" shall be interpreted in a manner consistent with other agreements to which Employer is a party which provide for benefits to senior executive officers of Employee following a change in control. C. PERFORMANCE OF SERVICES. Employee shall diligently and competently devote his time, attention and energies to the performance of his duties under this Agreement, on a full-time basis, during the Employment Period and shall exert his best efforts to further the business of Employer and to preserve for the benefit of Employer the goodwill of Employer's customers and those who have business relationships with Employer. Employee shall comply with all laws, statutes, ordinances, rules and regulations relating to the services provided by 2 PAGE 120 him under this Agreement. D. COMPENSATION. 1. During the Employment Period, Employer shall pay a base salary to Employee at the rate of Eighteen Thousand Three Hundred Thirty Three and 34/100 Dollars ($18,333.34) per month, payable in accordance with Employer's payroll policies from time to time in effect with respect to personnel at Employee's level, subject to possible increases during the Employment Period, at the sole discretion of the Board of Directors of Employer. 2. During the Extended Payment Period, Employer shall pay to Employee an amount equal to sixty (60) percent of the base salary in effect under Section 4.1 at the time of termination of the Employment Period payable on the first (1st) business day of each month. 3. Employer shall be entitled to deduct from the amounts owed Employee under this Agreement any amounts that Employer is required by applicable federal, state or local law to withhold therefrom on account of employment, income or similar taxes. E. COMPENSATION AND FRINGE BENEFIT PLANS 1. During the Employment Period, Employee shall be entitled to participate in the same compensation and fringe benefit plans as prior to the effective date of this Agreement (the level of participation in plans requiring grants or awards by the Board of Directors of Employer or a committee thereof shall be within the discretion of the Board of Directors or such committee), subject to the express eligibility requirements of such plans and any changes to such plans that are hereafter adopted by the Board of Directors of Employer and are applicable generally to all full-time employees of Employer or, in the case of top-hat plans, to all senior executive officers of Employer. Such plans currently include, but are not necessarily limited to (a) the Washington Energy Company Second Performance Share Plan; (b) the Washington Energy Company Employee Stock Purchase Plan; (c) the Washington Energy Company Stock Option Plan; (d) the Washington Natural Gas Retirement Plan; (e) the Washington Natural Gas Salary Investment Plan (401(k) Plan); (f) Annual Incentive Plan; (g) group term life insurance; (h) hospital, medical, surgical and dental plans; (i) vacation and paid holidays; (j) use of corporate memberships at the Bellevue Athletic Club and the Washington Athletic Club; (k) use of a company car; and (l) reimbursement of business expenses. To the extent permitted by law and the provisions of such plans, Employer shall interpret and administer such plans so that Employee shall be considered an employee of Employer for the term of the Employment Period. 2. Section 5(a)(i) of the Executive Retirement Compensation Agreement dated May 1, 1992 between Washington Natural Gas Company and Employee (the "Supplemental Agreement") is hereby amended to read as follows: (i) Vesting - Notwithstanding the foregoing, if the Executive's employment is terminated prior to his or her Normal Retirement Date, disability or death, he or she shall be entitled to a monthly pension under this Agreement calculated and payable in accordance with the provisions of Paragraph 1 above, except that the applicable percentage of the Executive's average basic monthly salary shall be 60% and such benefit payments shall not commence until the month after he or she has attained age 62. Provided, however, that such monthly pension will not be payable unless as of the date of his or her termination of employment, the Executive (x) is 50 years of age or older; and (y) has completed at least ten (10) full fiscal years of service with the Company, and at least five (5) of such years of service were performed while an "officer," as defined under state corporation laws. 3. Notwithstanding Section 5.1 above, if Employee at any time during the term of this Agreement does not satisfy the eligibility requirements for 3 PAGE 121 Employer's group term life insurance plan, Employer agrees to provide an individual term life insurance policy on the life of Employee providing coverage in the same amount as would be available under Employer's group term life insurance plan if Employee were a full-time employee of Employer earning the base salary provided for in Section 4.1 above. 4. Notwithstanding Section 5.1 above, if Employee at any time during the term of this Agreement does not satisfy the eligibility requirements for Employer's hospital, medical, surgical and dental plans, Employer agrees to provide to Employee and his spouse at Employer's expense, hospital, medical, surgical and dental coverage comparable to that from time to time generally in effect for full-time employee of Employer. 5. After termination of this Agreement (other than pursuant to Section 6.2 or 6.3), and until Employee attains the age of 65, Employer agrees to provide to Employee and his spouse, at Employer's expense, hospital, medical, surgical and dental coverage comparable to that from time to time generally in effect for full-time employees of Employer. 6. After termination of the Employment Period (other than pursuant to Section 6.2 or 6.3), Employer agrees to transfer into the individual name of Employee a corporate membership at each of the Bellevue Athletic Club and the Washington Athletic Club (or to pay to Employee the cost of obtaining a new individual membership). Employee shall be responsible for all dues payable with respect to such memberships following such transfer. 7. After termination of the Employment Period (other than pursuant to Section 6.2 or 6.3), Employee shall have an option exercisable for 30 days to purchase, at its wholesale "Blue Book" price, the company car then being used by Employee. F. TERMINATION OF AGREEMENT. This Agreement will terminate upon the earliest to occur of the following: 1. June 30, 1997; 2. The date of death of Employee; 3. The date Employer terminates this Agreement by delivering a written notice to Employee upon the occurrence of any one or more of the following events: (a) Repeated substantial breaches of this Agreement by Employee; or (b) The occurrence of any material act of dishonesty, theft or moral turpitude by Employee. Notwithstanding anything to the contrary in this Agreement, any termination of this Agreement by Employer shall be consistent with such employment policies of Employer as may be in effect from time to time (other than policies of Employer with respect to severance benefits, which the parties intend this Agreement to override) as well as with any requirements of applicable law. G. EFFECT OF TERMINATION. Upon the effective date of termination of this Agreement pursuant to Section 6 above -- (a) except for benefits payable under retirement or other compensation and fringe benefit plans of Employer or under the Supplemental Agreement, or as provided in Section 5.3 through Section 5.7 above, or as other required by applicable law, no salary, compensation, severance benefits or other amounts shall be paid to Employee, under this Agreement or otherwise, with respect to any period subsequent to the effective date of such termination, or with respect to the employment of Employee by Employer, whether before or after the execution of this Agreement; and (b) neither party shall thereafter have any further rights or obligations under this Agreement, but each party shall remain liable 4 PAGE 122 and responsible to the other for all obligations hereunder, and for all acts and omissions of such party, its agents, servants and employees, prior to the effective date of such termination. H. CONFIDENTIALITY 1. Employee agrees to treat all Proprietary Information (as that term is defined in Section 8.5 below) as confidential and as proprietary to Employer. Except to the extent necessary in connection with the discharge of his duties as an employee of Employer, Employee agrees not to directly or indirectly disclose to or discuss with anyone, use, reproduce or publish any Proprietary Information, either during or after the end of his employment by Employer, unless Employee first secures the written permission of Employer. 2. Promptly after termination of the Employment Period, Employee agrees to deliver to Employer all originals, and copies in the control or possession of Employee, of any and all writings, records, journals, data or other objects or documents that describe, depict, contain or record any Proprietary Information. 3. The restrictions in Section 8.1 shall not apply to Proprietary Information -- 3.1 that becomes part of the public domain through no act, omission or fault of Employee; or 3.2 that Employee is legally required to disclose by statute or regulation or in connection with any litigation, arbitration or other legal proceeding, including pursuant to a subpoena or similar document, provided, however, that Employee shall use his best efforts to immediately notify Employer as soon as Employee becomes aware of the need for such disclosure. 4. Employee acknowledges that Employer will suffer immediate and irreparable harm that will not be compensable by damages alone in the event Employee repudiates or breaches any of the foregoing provisions of this Section 8 or threatens or attempts to do so. In the event of any such breach or any threatened or attempted breach, Employee agrees that Employer, in addition to and not in limitation of any other rights, remedies or damages available to it at law or in equity, shall be entitled to obtain temporary, preliminary and permanent injunctions in order to prevent or restrain any such breach, and Employer shall not be required to post a bond as a condition for the granting of such relief. 5. As used in this Section 8, the term "Proprietary Information" shall mean any and all scientific, technical and business information, not publicly known, that relates to the business activities of Employer and that has been or is hereafter disclosed, or otherwise has become or hereafter becomes known, to Employee during the term of or in connection with his employment by Employer, whether before or after the execution of this Agreement, including, but not limited to, any such information relating to Employer's products, product specifications, production techniques, technology, processes or other know-how, test procedures or results, product development or research, future plans, merchandising or selling techniques, customer lists, market studies, cost or price studies, or financial results or information. I. NONCOMPETITION. 1. As used in this Section 9, the term "Applicable Businesses" means any business directly or indirectly conducted by Employer at the time of termination of this Agreement. 2. After termination of the Employment Period and until December 31, 1997, Employee agrees that he will not, in the states of Washington, Oregon, or Idaho, directly or indirectly -- 2.1 engage in any business which is directly competitive with any Applicable Business; 2.2 have any business dealings or contacts, except those which demonstrably do not relate to or compete with any Applicable 5 PAGE 123 Business, with any customer or client of Employer or any person or firm which, at any time within eighteen (18) months prior to the termination of this Agreement was contacted or identified by Employer as a potential customer or client; 2.3 solicit any employees of Employer to leave their employ; or 2.4 be employed by, consult with, own, manage, operate, control, participate in the ownership, management, operation or control of, or otherwise in any manner be connected with, any person or entity that does any of the activities listed in Section 9.2(a) or Section 9.2(b); PROVIDED, HOWEVER, that the foregoing shall not prohibit Employee from owning less than one percent (1%) of the outstanding stock or other securities of a publicly-traded entity. The foregoing restrictions will apply to the activities listed regardless of whether or not they involve use of any Proprietary Information. Employee agrees that the duration of the restrictions under this Section 9 shall be extended by and for the duration of any period during which Employee is in violation of this Section 9. J. INDEMNIFICATION OF EMPLOYEE. Employer agrees that with respect to Employees' services as an officer and director of Employer, they shall take all necessary actions to insure that during the term of this Agreement, and thereafter, Employee is entitled to the maximum indemnification provided to officers and directors generally of Employer under their respective Articles of Incorporation, Bylaws, Directors and Officers Liability Insurance Policies and by the laws of the State of Washington. K. NOTICES. Each notice or other communication required or permitted to be given by this Agreement shall be in writing and shall be given and deemed received when it is hand delivered to the party entitled thereto and a signed receipt is given therefor or when it is mailed by registered or certified U.S. mail, return receipt requested, to the following address: If to Employer, to: Washington Energy Company 815 Mercer Street P.O. Box 1869 Seattle, Washington 98111 If to Employee, to: Robert R. Golliver _________________________ _________________________ or at such other address as may have been given to the notifying party by the party to be notified by notice provided in the above manner. L. MISCELLANEOUS 1. This Agreement shall be binding upon and inure to the benefit of Employer, its successors and assigns. This Agreement shall be binding upon Employee and his heirs, personal and legal representatives, and guardians, and shall inure to the benefit of Employee. Neither this Agreement nor any part hereof or interest herein shall be assignable by Employee. 2. The terms and provisions of this Agreement may only be modified or supplemented by a written instrument duly executed by each party hereto. 3. This Agreement shall be governed by and enforced and construed in accordance with the laws of the State of Washington. 4. This Agreement sets forth the entire understanding and agreement of the parties hereto with respect to the subject matter hereof and supersedes all prior or contemporaneous agreements or understandings, written or oral, between Employer and Employee except for the Supplement Agreement. Without limiting the 6 PAGE 124 foregoing, Employee acknowledges and agrees that the provisions of this Agreement, together with those of the Supplemental Agreement and the benefits available under the compensation and fringe benefit plans in which Employee is entitled to participate as provided in Section 5, are intended to be in lieu of any other obligations that Employer may now or hereafter have to provide any compensation or benefits to Employee in connection with his employment by Employer, whether before or after the execution of this Agreement, even though the possibility of such compensation or benefits may have been discussed between Employer and Employee or agreed to by Employer. 5. The headings in this Agreement are included for the convenience of reference and shall be given no effect in the construction of this Agreement. 6. Each of the parties hereto shall have the right to waive compliance in a particular circumstance with a covenant set forth in this Agreement, but no such waiver shall operate as a waiver of compliance with such covenant in any other circumstance or as a waiver of compliance with any other covenant set forth in this Agreement. In any event, no such waiver shall be deemed effective unless it is in writing and signed by the party so waiving. IN WITNESS WHEREOF, the parties have executed, acknowledged, sealed and delivered this Agreement effective as of the day and year first hereinabove set forth. "Employer" WASHINGTON ENERGY COMPANY By /s/ James A. Thorpe -------------------------------------- James A. Thorpe, Chairman of the Board WASHINGTON NATURAL GAS COMPANY By /s/ James A. Thorpe "Employee" -------------------------------------- James A.Thorpe, Chairman of the Board /s/ Robert R. Golliver -------------------------------------- ROBERT R. GOLLIVER EX-10.M5 12 EXHIBIT 10-M.5; EMPLOYMENT AGREEMENT 1 PAGE 125 AGREEMENT Agreement between Washington Energy Company ("WECO") and Keith E. Anderson ("Anderson"). RECITALS WHEREAS, on December 21, 1993 WECO and Anderson entered into an Employment and Change In Control Agreement ("Employment Agreement") relating to Anderson's employment as President of Washington Energy Resources Company, a Washington corporation, ("Resources"), and at that time a wholly-owned subsidiary of WECO; WHEREAS, on May 2, 1994 Resources was merged into COG Acquisition Company, a wholly owned subsidiary of Cabot Oil & Gas Corporation ("Cabot") and Anderson's employment as President of Resources terminated on that day; WHEREAS, by notice sent on July 14, 1994, Anderson's employment by WECO as Vice President-Natural Resources was also terminated; WHEREAS, because of the change in control of Resources resulting in Anderson's termination of employment by Resources and Anderson's termination of employment by WECO, Anderson is entitled, among other things, to the benefits provided for under Sections 7, 8 and 16 of the Employment Agreement; and WHEREAS, the parties hereto wish to enter into this Agreement to further evidence their mutual rights and obligations under the Employment Agreement. NOW, THEREFORE for in consideration of the premises and other good and valuable consideration, the receipt and sufficiency of which consideration is hereby acknowledged, WECO and Anderson do hereby agree as follows: Benefits Under Employment Agreement Now Due. A "change in control" of Resources, as defined in the Employment Agreement, has occurred; Anderson's employment with Resources has been terminated as a result thereof other than by reason of normal retirement, disability or "for cause"; Anderson's employment by WECO has been terminated; and Anderson is entitled to the benefits provided for in the Employment Agreement. Employment Agreement - Section 7(i) and (ii) Payments. WECO agrees to pay to Anderson in complete satisfaction of its obligations under Section 7(i) and (ii) of the Employment Agreement the amounts set forth in Exhibit "A" attached hereto. Payment shall be made within 10 days after the effective date of this Agreement. Interest compounded daily at the rate of 12% per year shall accrue on the amounts set forth in Exhibit A from July 14, 1994 until paid. Employment Agreement - Section 7(iii) Benefits. In complete satisfaction of its obligations under Section 7(iii) of the Employment Agreement WECO agrees to provide to Anderson the employee benefits plans, programs and policies described in Exhibit "B" attached hereto for a period of three (3) years from July 14, 1994. Executive Retirement Compensation Agreement; Additional Retirement Payment. With respect to Section 7(iv) of the Employment Agreement WECO agrees as follows: Anderson shall be deemed vested in and entitled to all benefits accrued through July 14, 1994, under the Executive Retirement Compensation Agreement dated May 1, 1992 between Anderson and Washington Natural Gas Company ("WNG"), a wholly- 2 PAGE 126 owned subsidiary of WECO (the "SERP"). WECO/WNG shall pay Anderson in cash at age sixty-five or such earlier retirement date after reaching age sixty-two (62) as he may elect, an amount equal to the actuarial equivalent on the date payment is made of an additional retirement benefit of $86.80 per month for his life, beginning at age 65. For purposes of any calculation of a lump-sum payment, "the actuarial equivalent" shall be determined by assuming Anderson's survival to age eighty and a discount rate of 6.5% per year. WECO/WNG shall pay Anderson in cash within 10 days after the effective date of this agreement an amount equal to the present value of matching contributions that would have been allocated to Anderson's account under the Salary Investment Plan for Employees of Washington Natural Gas Company and Affiliates (the "401(k) Plan") if Anderson had continued in the employ of Resources until July 14, 1997, at his base salary rate as of the date of termination and had elected to defer $8,764 annually. Each year's matching contribution shall be deemed to be $4,382. The present value shall be determined as of the payment date assuming that the matching contribution for 1994 would be made on that date, and the matching contribution for each of the following two years would be made as of that same date for each year. The present value shall be determined using a discount rate of 6.5% per year. In the event Anderson dies before payment of the amounts in 4a, b or c, the additional amounts due under 4a, b and c shall be paid to the beneficiary designated by Anderson under the terms of the SERP. WECO Stock Options. In complete satisfaction of WECO's obligations under Section 7(v) of the Employment Agreement WECO agrees to cause the Board of Directors of WECO to grant to Anderson stock options having an identical number of vested but unexercised options to acquire common stock of WECO as were available to him at the cessation of his rights under the WECO Stock Option Plan (all as described in Exhibit "C" attached hereto) on the same terms and conditions as provided by such plan, exercisable within the twenty-four (24) month period ending July 14, 1996. WECO shall cause the shares to be issued to Anderson pursuant to said options to be registered under the Securities Act of 1933. WECO Performance Share Plan. Pursuant to authority granted in Section 7.04 of the First and Second Washington Energy Company Performance Share Plans, ("Performance Share Plans"), the Compensation and Benefits Committee of the Board of Directors of WECO has elected to waive in whole the lapse which would otherwise occur under Section 7.04 of the Performance Shares Plans as a result of Anderson's termination of employment. Accordingly, the awards to Anderson in each of the award periods 1990-1994, 1991-1995, 1992-1996 and 1993-1997 shall remain in effect, subject in all other respects to the provisions of said Performance Share Plans. Employment Agreement - Section 16 Payments. With respect to Section 16 of the Employment Agreement, Anderson agrees to provide to WECO his federal income tax returns commencing with the return for calendar year 1994 along with such other information as WECO may reasonably request in order to enable WECO to calculate such additional amounts, if any, as may be due pursuant to the terms of Section 16 of the Employment Agreement. WECO shall pay any additional amount required to provide Anderson with payments and benefits under this Agreement that are the same, after payment of all federal and state excise, income and employment taxes as Anderson would have received, after payment of all federal and state income and employment taxes, had no payments or benefits been subject to excise taxes imposed by Section 4999 of the Internal Revenue Code. Exhibit D illustrates the methodology to be employed in determining the amount of additional payment required under Section 16 of the Employment Agreement and this paragraph. Any 3 PAGE 127 such additional payment shall be made no later than the date of any payment under this Agreement that would be subject to excise taxes imposed by Section 4999 of the Internal Revenue Code and shall be subject to withholding of all applicable federal and state excise, income and employment taxes. Bonus. In recognition of the efforts of Anderson in connection with the merger of Resources with Cabot, WECO agrees to pay Anderson a bonus of $12,000, subject to any applicable federal income tax, Social Security and related tax withholding. Continuation of Salary and Benefits to Effective Date. Until the effective date of this Agreement, WECO shall continue to pay Anderson his full base salary and Anderson shall continue to participate in all employee benefits in which he was a participant as of July 14, 1994 (including provision of a company car and payment of income taxes due with respect to personal use of the company car). Attorneys Fees and Expenses. WECO shall pay all of Anderson's attorney fees and costs incurred during the dispute with WECO of the amounts due under the Employment Agreement and in negotiations of this Agreement. Payment shall be due within 30 days following the rendering of the final invoice of Anderson's legal counsel. Waiver and Release of Non-compete Provision. WECO hereby waives and agrees to release Anderson from that portion of Section 10 of the Employment Agreement which reads as follows: You also agree you will not enter into the employment in an executive or consultant capacity or serve on the Board of Directors of any enterprise in whatever form organized and carried on which is directly competitive with any business activity then conducted by the Company or its subsidiaries. Return of Property. Anderson warrants and represents that he will promptly return all company-owned property in his possession, including, but not limited to all keys and access cards to company buildings or property, all company-owned equipment and all company documents and papers, customer lists manuals files, price lists, and all other company files and information; provided however, that Anderson shall be entitled to purchase the company-owned automobile currently assigned to him at its residual lease value as of the date of this Agreement. Waiver and Release of Claims by Anderson. Anderson hereby waives and releases any and all claims, causes of action and rights, whether known or unknown, contingent or noncontingent, contractual or otherwise, against WECO or any of its related, affiliated or subsidiary organizations, and each of their respective directors, officers, agents, representatives and employees, past and present, and each of their successors and assigns ("Releasees") arising out of his employment with Resources or WECO and the separation thereof. Anderson makes this commitment even though he understands that he may not, as of this date, know all of the claims he may lawfully have against the Releasees arising out of his employment relationship and that he is relinquishing the right to pursue any claims which he could have pursued before courts or administrative agencies without having the opportunity to pursue those claims to a trial and having the damages set by a judge and/or jury. Anderson understands that the commitment not to pursue any claims against WECO and all other named Releasees includes not filing any lawsuits, not filing any complaints with any administrative agencies such as, but not limited to, the Washington State Human Rights Commission, and the Equal Employment Opportunity 4 PAGE 128 Commission and not requesting any attorneys to assert any claims or demands upon Releasees arising out of or relating to Anderson's employment by Resources or WECO or the separation thereof. Anderson acknowledges that among the claims that he is releasing may be claims for wrongful discharge, breach of contract, negligent or intentional infliction of emotional distress, defamation, violations of the Age Discrimination in Employment Act, Title VII of the Civil Rights Act, Americans with Disabilities Act, and the Washington State Human Rights Act, as well as any other statutes, administrative regulations or legal doctrines governing claims for separation from employment. Anderson's waiver and release shall not apply to claims arising under this Agreement or those portions of the Employment Agreement that survive under paragraph 19, below. Indemnification of Anderson. WECO shall indemnify, defend and hold Anderson harmless against all losses, expenses, claims, damages, or liabilities arising out of actions or omissions occurring during the time of his service as an officer or director of Resources or WECO, to the fullest extent permitted or required under the Washington Business Corporation Act or under WECO's Articles of Incorporation or its Bylaws and shall also advance expenses as incurred to the fullest extent permitted, provided that Anderson provides an undertaking to repay such advances if it is ultimately determined that he is not entitled to indemnification. WECO shall maintain in full force and effect for the benefit of Anderson, his estate or personal representative, such directors' and officers' liability insurance as WECO maintains for the directors and officers of WECO, generally, for a period of not less than six (6) years from the date of this Agreement. Confidentiality. Anderson agrees to keep the fact and terms of this Agreement confidential except to members of his immediate family, his counselor, and persons assisting him in financial planning or income tax preparation, provided that these people agree to keep such information confidential. Without limiting the foregoing, Employee agrees that it shall be a breach of this provision to in any way disclose, discuss, or characterize the Agreement to third parties other than as set forth above. Free and Voluntary Act of Anderson. Anderson is entering into this Agreement as a free and voluntary act, has been given at least twenty-one (21) days to decide whether to sign this Agreement, and signs it only after full reflection and analysis. Anderson further acknowledges that he has been advised to consult an attorney before signing this Agreement, and that he has read and understands the complete Agreement. No Admission of Liability. This Agreement shall not be construed as an admission by WECO or Anderson of any liability, breach of any agreement between WECO or Anderson, or violation by WECO or Anderson of any statute, law or regulation. Binding Agreement. This Agreement shall inure to the benefit of and be enforceable by Anderson's personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. If Anderson should die while any amounts are still payable to him hereunder, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to his devisee, legatee, or other designee or, if there is no such designee, to his estate. Survival. The parties hereto agree that by their execution of this 5 PAGE 129 Agreement the Employment Agreement is hereby terminated and shall have no further force or effect, except that the provisions of Sections 9 and 10 of the Employment Agreement and the provisions of Section 8 of the Employment Agreement that relate to payment of Anderson's costs of recovering benefits described in Sections 3, 4 and 7 of this Agreement shall survive in accordance with their respective terms as they may be modified by this Agreement. Notice. For the purposes of this Agreement, notices and all other communications provided for in this Agreement shall be in writing and shall be deemed to have been duly given when delivered by United States certified mail, return receipt requested, postage prepaid, in the case of WECO addressed to the Senior Vice President-Legal, 815 Mercer Street, Seattle, WA 98109 and in the case of Anderson addressed to 14562 Edgewater Lane N.E., Seattle, WA 98155; or to such other address as either party may have furnished to the other in writing in accordance herewith; provided, that notices of change of address shall be effective only upon receipt. Governing/Law and Venue. This Agreement shall be governed by the laws of the State of Washington in effect as of the date of this Agreement. In any dispute arising out of or relating to this Agreement, the parties agree that venue shall be had in King County, Washington. In any action to enforce any of the provisions of this Agreement, the prevailing party shall be entitled to recover its reasonable attorneys' fees and costs, in addition to any other damages and remedies available at law or in equity. Revocation. This Agreement may be revoked by Anderson by returning payment in full along with written notice of revocation to WECO's Senior Vice President-Legal at 815 Mercer Street, Seattle, WA 98109 within seven (7) days of Anderson's execution of the Agreement. Unless revoked in accordance with this paragraph, this Agreement shall become final and irrevocable on the eighth (8th) day following Anderson's execution of the Agreement. Effective Date. This Agreement shall be effective on September 30, 1994. IN WITNESS WHEREOF, the parties have entered into this Agreement as of the 30th day of September, 1994. WASHINGTON ENERGY COMPANY By: /s/ ROBERT J. TOMLINSON /s/ KEITH E. ANDERSON ----------------------------- --------------------------- Robert J. Tomlinson Keith E. Anderson Its: Senior Vice President - Legal and Human Resources ------------------------------------------------- AGREED to this 30th day of September, 1994. WASHINGTON NATURAL GAS COMPANY By: /s/ ROBERT J. TOMLINSON -------------------------- Robert J. Tomlinson 6 PAGE 130 EXHIBIT A KEITH E. ANDERSON (Section 7(i) and (ii) payments) 1. 3 times pay*(including salary and additional compensation) $516,330.00 2. Payment of Accrued Vacation* through July 15, 1994 = 192 hours $11,558.40 (including 56 hours carry-over from 1993)
*Less applicable withholding plus interest 7 PAGE 131 Exhibit B KEITH E. ANDERSON Paragraph 7(iii) CONTINUED BENEFITS FOR PERIOD JULY 15, 1994 TO JULY 14, 1997 MEDICAL: Coverage to be continued for Keith E. Anderson and spouse through United of Omaha Insurance. DENTAL: Coverage to be continued for Keith E. Anderson and spouse through United of Omaha Insurance. LIFE INSURANCE: Coverage to be continued through United of Omaha Insurance. LONG TERM DISABILITY: Coverage cannot be continued through current plan. Company will provide comparable coverage outside of plan. EMPLOYEE ASSISTANCE PROGRAM: Company EAP plan services will be available. TUITION REIMBURSEMENT: Program will be available. EXECUTIVE PHYSICAL Program will be available. 8 PAGE 132 Exhibit D KEITH ANDERSON - Illustration of Parachute Tax
PARACHUTE PAYMENTS WITHOUT WITH GROSS-UP GROSS-UP Excess parachute $400,000 $598,020 Regular tax $158,400 $236,816 -------- Net after tax $241,600 $361,204 ======== Excess parachute $400,000 Plus Gross-up $198,020 -------- Total excess $598,020 Excise tax at 20% $119,604 Regular Tax $236,816 -------- Net after all tax $241,600 ========
EX-10.O 13 EXHIBIT 10-O; SERVICE AGREEMENT 1 TRANSPORTATION AGREEMENT THIS AGREEMENT is made and entered into this 1st day of March, 1992, by and between NORTHWEST PIPELINE CORPORATION, hereinafter referred to as "Transporter", and WASHINGTON NATURAL GAS COMPANY, hereinafter referred to as "Shipper". RECITALS: A. Shipper is a local distribution company of natural gas. B. Shipper owns or controls certain supplies of natural gas which it desires Transporter to transport for Shipper's account pursuant to Part 284 of the regulations of the Federal Energy Regulatory Commission ("FERC"). C. Shipper has made a complete written request to Transporter for the transportation service described herein on February 10, 1989. AGREEMENT: NOW, THEREFORE, in consideration of the promises and mutual covenants set forth herein, the parties agree as follows: ARTICLE I - GAS DELIVERIES AND REDELIVERIES 1.1 Subject to the terms, conditions and limitations hereof, Transporter agrees to receive from Shipper at the Receipt Point(s) specified in Exhibit A herein, transport and deliver to Shipper at the Delivery Point(s) specified in Exhibit B herein, the following quantities of natural gas, known as Transportation Contract Demand: Up to 5,000 MMBtu's/day provided that Transporter's receipt of gas at any receipt point for Shipper's account hereunder on any day shall not exceed the Maximum Daily Quantity set forth for such receipt point on Exhibit "A" hereto, and provided that Transporter's daily obligation to deliver gas to Shipper at any delivery point under this Transportation Agreement shall not exceed the Maximum Daily Delivery Obligation ("MDDO") set forth in Exhibit "B" of this Agreement. 1.2 Pursuant to Article XIV of the General Transportation Terms and Conditions of Transporter's FERC Gas Tariff, Original Volume No. 1-A, applicable to this Agreement, Shipper has elected to furnish fuel and lost or unaccounted for gas volumes in-kind. Transporter may receive volumes of gas in excess of the maximum daily quantity set forth in Section 1.1 when necessary to cover such fuel gas reimbursement while making full delivery of such maximum daily quantity or to cover certain balancing receipts agreed to by the parties. 2 1.3 Such transportation shall be on a firm basis. ARTICLE II - TRANSPORTATION RATES AND CHARGES 2.1 (a) Shipper agrees to pay Transporter for all natural gas transportation service rendered under the terms of this Agreement in accordance with Transporter's Rate Schedule TF-1 as filed with the FERC, and as such rate schedule may be amended or superseded from time to time. (b) (Reserved for rate adjustments made pursuant to Section 3.4 of Rate Schedule TF-1.) 2.2 This Agreement shall be subject to the provisions of such Rate Schedule and the General Transportation Terms and Conditions applicable thereto (and as they may be amended by Article VIII of this Agreement) and effective from time to time, which by this reference are incorporated herein and made a part hereof. ARTICLE III - GOVERNMENTAL REQUIREMENTS 3.1 Shipper shall reimburse Transporter for any and all filing fees incurred by Transporter in seeking governmental authorization for the initiation, extension or termination of service under this Transportation Agreement. 3.2 The transportation service contemplated herein shall be provided by Transporter pursuant to Section 284.223 of the FERC's regulations. 3.3 Upon termination, this Transportation Agreement shall cease to have any force or effect, save as to any unsatisfied obligations or liabilities of either party arising hereunder prior to the date of such termination, or arising thereafter as a result of such termination. Provided, however that this provision shall not supersede any abandonment authorization which may be required. 3.4 (Section 3.4 shall be applicable only for the transportation of imported natural gas.) Shipper hereby acknowledges and agrees that either it or its buyer or seller is the "importer of record" and it will comply with all requirements for reporting and submitting payment of duties, fees, and taxes to the United States or agencies thereof to be made on imported natural gas and for making the declaration of entry pursuant to 19 CFR 141.19. Shipper agrees to indemnify and hold Transporter harmless from any and all claims of damage or violation of any applicable laws, ordinances and statutes which pertain to the importation of the gas transported hereunder and which require reporting and/or filing of fees in connection with said import. 2 3 ARTICLE IV - TERM 4.1 This Agreement becomes effective the date first written above and all remain in full force and effect until October 31, 2004 and year to year thereafter, subject to termination by either party either at the expiration of the primary term or upon any anniversary thereafter by giving written notice so stating to the other party at least twelve (12) months in advance. ARTICLE V - WARRANTY OF ELIGIBILITY FOR TRANSPORTATION 5.1 Any shipper under this Rate Schedule warrants for itself, its successors and assigns, that all gas delivered to Transporter for transportation hereunder shall be eligible for transportation in interstate commerce under applicable rules, regulations or orders of the FERC. Shipper will indemnify Transporter and save it harmless from all suits, actions, damages, costs, losses, expenses (including reasonable attorney fees) and regulatory proceedings, arising from breach of this warranty. ARTICLE VI - NOTICES 6.1 Unless herein provided to the contrary, any notice called for in this Transportation Agreement shall be in writing and shall be considered as having been given if delivered personally, or by mail to telegraph with all postage and charges prepaid to either Shipper or Transporter at the place designated. Routine communications shall be considered as duly delivered when mailed by ordinary mail. Normal operating instructions can be made by telephone. Unless changed, the addresses of the parties are as follows: NORTHWEST PIPELINE CORPORATION P. 0. BOX 58900 SALT LAKE CITY, UTAH 84158-0900 Statements: Attention: T&E Accounting (MS-10496) Payments: Attention: Cash Control (MS-10491) Contractual Notices: Attention: Transportation (MS-10361) Other Notices: Attention: T&E Management (MS-10334) WASHINGTON NATURAL GAS COMPANY P. O. Box 1869 815 Mercer Street Seattle, Washington 98111 Attention: John Stefani 3 4 ARTICLE VII - OTHER OPERATING PROVISIONS 7.1 Pursuant to Section 5.3 of the General Transportation Terms and Conditions, Shipper shall make payments to Transporter hereunder by wire transfer of immediately available funds by the due date set forth herein. Such funds shall be wire transferred to the First Interstate Bank of Utah located In Salt Lake City, Utah for Transporter's Account No. 02-07358-3. ARTICLE VIII - ADJUSTMENTS TO GENERAL TERMS AND CONDITIONS 8.1 Certain of the General Transportation Terms and Conditions are to be adjusted for the purpose of this Agreement, as specified below: None. ARTICLE IX - CANCELLATION OF PRIOR AGREEMENT(S) 9.1 When this Agreement takes effect, it supersedes, cancels and terminates the following agreement(s): None. ARTICLE X - SUCCESSORS AND ASSIGNS 10.1 This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns. No assignment or transfer by Shipper hereunder shall be made without written approval of Transporter. Such approval shall not be unreasonably withheld. As between the parties hereto, such assignment shall become effective on the first day of the month following written notice that such assignment has been effectuated. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year first above set forth. WASHINGTON NATURAL GAS COMPANY NORTHWEST PIPELINE CORPORATION (Shipper) (Transporter) By: /s/ JOHN F. STEFANI By: /s/ MATT J. GILLIS --------------------------------- -------------------------------- Name: John F. Stefani, Vice President Matt J. Gillis Title: Gas Supply & Industrial Marketing Attorney-in-Fact Attest: /s/ Brad A. Barnds ---------------------------- 5 EXHIBIT "A" to the TRANSPORTATION AGREEMENT DATED March 1, 1992 between NORTHWEST PIPELINE CORPORATION and WASHINGTON NATURAL GAS COMPANY RECEIPT POINTS --------------
Maximum Daily Quantity Receipt Point For Each Receipt Point - ------------- ---------------------- (MMBtus) Sumas 5,000
TOTAL MDQ MUST EQUAL TOTAL TRANSPORTATION CONTRACT DEMAND 5 6 EXHIBIT "B" to the TRANSPORTATION AGREEMENT DATED March 1, 1992 between NORTHWEST PIPELINE CORPORATION and WASHINGTON NATURAL GAS COMPANY DELIVERY POINTS ---------------
Maximum Daily Delivery Obligation ("MDDO") Delivery Point For Each Delivery Point - -------------- ----------------------- South Seattle 5,000
TOTAL MDDO MUST EQUAL TOTAL TRANSPORTATION CONTRACT DEMAND 6 EX-10.P 14 EXHIBIT 10-P; SERVICE AGREEMENT 1 SERVICE AGREEMENT (Firm Redelivery Transportation under Rate Schedule TF-2) THIS AGREEMENT is entered into this 12th day of January, 1994, by and between NORTHWEST PIPELINE CORPORATION, hereinafter referred to as "Transporter", and WASHINGTON NATURAL GAS COMPANY, hereinafter referred to as "Shipper". RECITALS: A. Shipper is a local distribution company for natural gas. B. Shipper owns certain supplies of natural gas which it desires Transporter to transport for Shipper's account pursuant to Section 284.223 of the regulations of the Federal Energy Regulatory Commission ("FERC"). C. Shipper and Transporter are parties to that certain Storage Gas Service Agreement (SGS-1) dated January 12, 1994. D. Shipper and Transporter desire to enter into this Agreement to conform to the provisions of the approved Joint Offer of Settlement in Docket No. RP93-5-011 which unbundled the storage and redelivery transportation services. E. Shipper and Transporter desire to enter into this Agreement effective on the date so designated by the FERC. AGREEMENT: NOW, THEREFORE, in consideration of the premises and mutual covenants set forth herein, the parties agree as follows: ARTICLE I - GAS DELIVERIES AND REDELIVERIES 1.1 Subject to the terms, conditions and limitations hereof, Transporter agrees to receive from Shipper at the Receipt Point specified in Exhibit "A" herein, transport and deliver to Shipper at the Delivery Point(s) specified in Exhibit "B" herein, the following quantities of natural gas, known as Transportation Contract Demand: Up to 178,905 MMBtu's/day provided that Transporter's receipt of gas at any receipt point for Shipper's account hereunder on any day shall not exceed the Maximum Daily Quantity ("MDQ") set forth for such receipt point on Exhibit "A" hereto, and provided that Transporter's daily obligation to deliver gas to Shipper at any delivery point under this Transportation Agreement shall not exceed the Maximum Daily Delivery Obligation ("MDDO") set forth in Exhibit "B" of this Agreement. 2 1.2 The following quantity is Shipper's Annual Contract Quantity: Up to 6,063,663 MMBtus 1.3 The following quantity is Shipper's Monthly Billing Quantity: Up to 16,613 MMBtus 1.4 Fuel gas shall be provided in-kind as specified in Rate Schedule TF-2 and in the General Terms and Conditions of Transporter's FERC Gas Tariff. 1.5 Such transportation shall be on a firm basis. ARTICLE II - TRANSPORTATION RATES AND CHARGES 2.1 (a) Shipper agrees to pay Transporter for all natural gas transportation service rendered under the terms of this Agreement in accordance with Transporter's Rate Schedule TF-2 as filed with the FERC, and as such rate schedule may be amended or superseded from time to time. (b) (Reserved for rate adjustments made pursuant to Section 3.4 of Rate Schedule TF-2). ARTICLE III - GOVERNMENTAL REQUIREMENTS 3.1 Shipper shall reimburse Transporter for any and all filing fees to be incurred by Transporter in seeking governmental authorization for the initiation, extension or termination of service under this Agreement. 3.2 The transportation service contemplated herein shall be provided by Transporter pursuant to Section 284.223 of the FERC's regulations. 3.3 Upon termination, this Agreement shall cease to have any force or effect, save as to any unsatisfied obligations or liabilities of either party arising hereunder prior to the date of such termination, or arising thereafter as a result of such termination. Provided, however that this provision shall not supersede any abandonment authorization which may be required. 2 3 3.4 (Section 3.4 shall be applicable only for the transportation of imported natural gas.) Shipper hereby acknowledges and agrees that either it or its buyer or seller is the "importer of record" and it will comply with all requirements for reporting and submitting payment of duties, fees, and taxes to the United States or agencies thereof to be made on imported natural gas and for making the declaration of entry pursuant to 19 CFR Section 141.19. Shipper agrees to indemnify and hold Transporter harmless from any and all claims of damage or violation of any applicable laws, ordinances and statutes which pertain to the importation of the gas transported hereunder and which require reporting and/or filing of fees in connection with said import. ARTICLE IV - TERM 4.1 This Agreement becomes effective on the date so designated by the FERC and shall remain in full force and effect until October 31, 2004 and year to year thereafter at Shipper's sole option. Shipper may terminate all or any portion of service under this Agreement either at the expiration of the primary term, or upon any anniversary thereafter by giving written notice to Transporter so stating at least twelve (12) months in advance. Shipper also shall have the sole option to enter into a new Agreement for all or any portion of the service under this Agreement at or after the end of the primary term of this Agreement. It is Transporter's and Shipper's intent that this term provision provide Shipper with a "contractual right to continue such service" and to provide Transporter with concurrent pregranted abandonment of any volume that Shipper terminates within the meaning of 18 CFR Section 284.221(d)(2)(i) as promulgated by Order 636 on May 8, 1992. ARTICLE V - WARRANTY OF ELIGIBILITY FOR TRANSPORTATION 5.1 Any shipper under this Rate Schedule warrants for itself, its successors and assigns, that all gas delivered to Transporter for transportation hereunder shall be eligible for transportation in interstate commerce under applicable rules, regulations or orders of the FERC. Shipper will indemnify Transporter and save it harmless from all suits, actions, damages, costs, losses, expenses (including reasonable attorney fees) and regulatory proceedings, arising from breach of this warranty. ARTICLE VI - NOTICES 6.1 Unless herein provided to the contrary, any notice called for in this Agreement shall be in writing and shall be considered as having been given if delivered personally, or by mail or telegraph with all postage and charges prepaid to either Shipper or Transporter at the place designated. Routine communications shall be considered as duly delivered when mailed by ordinary mail. Normal operating instructions can be made by telephone. Unless changed, the addresses of the parties are as follows: 3 4 NORTHWEST PIPELINE CORPORATION P. O. Box 58900 Salt Lake City, Utah 84158-0900 Statements: Attention: Transmission Accounting Payments: Attention: Treasury Services Contractual Notices: Attention: Transportation and Contract Administration Other Notices: Attention: Nominations Notices & Statements: WASHINGTON NATURAL GAS COMPANY 815 Mercer Street (98109) P. O. Box 1869 Seattle, Washington 98111 ARTICLE VII - OTHER OPERATING PROVISIONS 7.1 Pursuant to Section 5.3 of the General Transportation Terms and Conditions of Transporter's FERC Gas Tariff, Third Revised Volume No. 1, Shipper shall make payments to Transporter hereunder by wire transfer or check of immediately available funds by the due date set forth herein. If such funds are wire transferred, the funds shall be wire transferred to the First Interstate Bank of Utah located in Salt Lake City, Utah for Transporter's account No. 02-00986-8. ARTICLE VII - ADJUSTMENTS TO GENERAL TERMS AND CONDITIONS 8.1 Certain of the General Transportation Terms and Conditions are to be adjusted for the purpose of this Agreement, as specified below: None. ARTICLE IX - CANCELLATION OF PRIOR AGREEMENT(S) 9.1 When this Agreement takes effect, it supersedes, cancels and terminate the following agreement(s): None 4 5 ARTICLE X - SUCCESSORS AND ASSIGNS 10.1 This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns. No assignment or transfer by either party hereunder shall be made without written approval of the other party. Such approval shall not be unreasonably withheld. As between the parties hereto, such assignment shall become effective on the first day of the month following written notice that such assignment has been effectuated. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year first above set forth. "SHIPPER" "TRANSPORTER" WASHINGTON NATURAL GAS COMPANY NORTHWEST PIPELINE CORPORATION By: /s/ JOHN F. STEFANI By: /s/ JOE H. FIELDS --------------------------- --------------------------- Name: Joe H. Fields ------------------------- Attorney-In-Fact Title: Approved As To Form ------------------------ This Date 1/12/94 --------- By PES ----------------- 5 6 EXHIBIT "A" to the SERVICE AGREEMENT (Firm Redelivery Transportation under Rate Schedule TF-2) Dated January 12, 1994 between NORTHWEST PIPELINE CORPORATION and WASHINGTON NATURAL GAS COMPANY RECEIPT POINTS --------------
Primary Maximum Daily Receipt Points Quantity (MDQ)(1) - -------------- ----------------- Jackson Prairie Storage Facility 178,905
- ------------- (1) The total of the MDQ's must equal total transportation contract demand as set forth in Section 1.1. 6 7 EXHIBIT "B" to the SERVICE AGREEMENT (Firm Redelivery Transportation under Rate Schedule TF-2) Dated January 12, 1994 between NORTHWEST PIPELINE CORPORATION and WASHINGTON NATURAL GAS COMPANY DELIVERY POINTS ---------------
Maximum Daily Delivery Obligation Delivery ("MDDO") Primary for each Pressure Delivery Point Delivery Points (MMBtu) (psig) - --------------- ------------------- ------ Centralia 2,700 400 Duvall-Cottage Lake 5,654 150 Evergreen Shores 1,700 150 Issaquah 3,300 260 Lake Stevens 200 150 Lake Wilderness 600 300 Monroe 200 150 North Bend 2,700 400 North Seattle 35,500 260 North Tacoma 36,000 260 Olympia 3,600 300 Rainier Terrace -- Puyallup 1,900 150 Redmond 6,791 400 Snohomish 400 150 South Seattle 74,300 260 South Tacoma 3,360 400
7 EX-10.Q 15 EXHIBIT 10-Q; SERVICE AGREEMENT 1 SERVICE AGREEMENT (Firm Redelivery Transportation under Rate Schedule TF-2) THIS AGREEMENT is entered into this 12th day of January, 1994, by and between NORTHWEST PIPELINE CORPORATION, hereinafter referred to as "Transporter", and WASHINGTON NATURAL GAS COMPANY, hereinafter referred to as "Shipper". RECITALS: A. Shipper is a local distribution company for natural gas. B. Shipper owns certain supplies of natural gas which it desires Transporter to transport for Shipper's account pursuant to Section 284.223 of the regulations of the Federal Energy Regulatory Commission ("FERC"). C. Shipper and Transporter desire to enter this Agreement to conform to the provisions of the approved Joint Offer of Settlement in Docket No. RP93-5-011 which provides redelivery transportation service from storage facilities. D. Shipper and Transporter desire to enter into this Agreement effective on the date so designated by the FERC. AGREEMENT: NOW, THEREFORE, in consideration of the premises and mutal covenants set forth herein, the parties agree as follows: ARTICLE I -- GAS DELIVERIES AND REDELIVERIES 1.1 Subject to the terms, conditions and limitations hereof, Transporter agrees to receive from Shipper at the Receipt Point specified in Exhibit "A" herein, transport and delivery to Shipper at the Delivery Point(s) specified in Exhibit "B" herein, the following quantities of natural gas, known as Transportation Contract Demand: Up to 9,467 MMBtu's/day provided that Transporter's receipt of gas at any receipt point for Shipper's account hereunder on any day shall not exceed the Maximum Daily Quantity ("MDQ") set forth for such receipt point on Exhibit "A" hereto, and provided that Transporter's daily obligation to deliver gas to Shipper at any delivery point under this Transportation Agreement shall not exceed the Maximum Daily Delivery Obligation ("MDDO") set forth in Exhibit "B" of this Agreement. 1.2 The following quantity is Shipper's Annual Contract Quantity: Up to 277,997 MMBtus 2 1.3 The following quantity is Shipper's Monthly Billing Quantity: Up to 762 MMBtus 1.4 Fuel gas shall be provided in-kind as specified in Rate Schedule TF-2 and in the General Terms and Conditions of Transporter's FERC Gas Tariff. 1.5 Such transportation shall be on a firm basis. ARTICLE II - TRANSPORTATION RATES AND CHARGES 2.1 (a) Shipper agrees to pay Transporter for all natural gas transportation service rendered under the terms of this Agreement in accordance with Transporter's Rate Schedule TF-2 as filed with the FERC, and as such rate schedule may be amended or superseded from time to time. (b) (Reserved for rate adjustments made pursuant to Section 3.3 of Rate Schedule TF-2.) ARTICLE III - GOVERNMENTAL REQUIREMENTS 3.1 Shipper shall reimburse Transporter for any and all filing fees to be incurred by Transporter in seeking governmental authorization for the initiation, extension or termination of service under this Agreement. 3.2 The transportation service contemplated herein shall be provided by Transporter pursuant to Section 284.223 of the FERC's regulations. 3.3 Upon termination, this Agreement shall cease to have any force or effect, save as to any unsatisfied obligations or liabilities of either party arising hereunder prior to the date of such termination, or arising thereafter as a result of such termination. Provided, however that this provision shall not supersede any abandonment authorization which may be required. 3.4 (Section 3.4 shall be applicable only for the transportation of imported natural gas.) Shipper hereby acknowledges and agrees that either it or its buyer or seller is the "importer of record" and it will comply with all requirements for reporting and submitting payment of duties, fees, and taxes to the United States or agencies thereof to be made on imported natural gas and for making the declaration of entry pursuant to 19 CFR Section 141.19. Shipper agrees to indemnify and hold Transporter harmless from any and all claims of damage or violation of any applicable laws, ordinances and statutes which pertain to the importation of the gas transported hereunder and which require reporting and/or filing of fees in connection with said import. 2 3 ARTICLE IV - TERM 4.1 This Agreement becomes effective on the date so designated by the FERC and shall remain in full force and effect until October 31, 2004 and year to year thereafter at Shipper's sole option. Shipper may terminate all or any portion of service under this Agreement either at the expiration of the primary term, or upon any anniversary thereafter by giving written notice to Transporter so stating at least twelve (12) months in advance. Shipper also shall have the sole option to enter into a new Agreement at or after the end of the primary term of this Agreement. It is Transporter's and Shipper's intent that the term provision provide Shipper with a "contractual right to continue such service" and to provide Transporter with concurrent pregranted abandonment of any volume that Shipper terminates within the meaning of 18 CFR Section 284.221(d)(2)(i) as promulgated by Order No. 636 on May 8, 1992. ARTICLE V - WARRANTY OF ELIGIBILITY FOR TRANSPORTATION 5.1 Any shipper under this Rate Schedule warrants for itself, its successors and assigns, that all gas delivered to Transporter for transportation hereunder shall be eligible for transportation in interstate commerce under applicable rules, regulations or orders of the FERC. Shipper will indemnify Transporter and save it harmless from all suits, actions, damages, costs, losses, expenses (including reasonable attorney fees) and regulatory proceedings, arising from breach of this warranty. ARTICLE VI - NOTICES 6.1 Unless herein provided to the contrary, any notice called for in this Agreement shall be in writing and shall be considered as having been given if delivered personally, or by mail or telegraph with all postage and charges prepaid to either Shipper or Transporter at the place designated. Routine communications shall be considered as duly delivered when mailed by ordinary mail. Normal operating instructions can be made by telephone. Unless changed, the addresses of the parties are as follows: NORTHWEST PIPELINE CORPORATION P.O. Box 58900 Salt Lake City, Utah 84158-0900 Statements: Attention: Transmission Accounting Payments: Attention: Treasury Services Contractual Notices: Attention: Transportation and Contract Administration Other Notices: Attention: Nominations Notices & Statements: Washington Natural Gas Company 815 Mercer Street (98109) P.O. Box 1869 Seattle, Washington 98111 3 4 ARTICLE VII - OTHER OPERATING PROVISIONS 7.1 Pursuant to Section 5.3 of the General Transportation Terms and Conditions of Transporter's FERC Gas Tariff, Third Revised Volume No. 1, Shipper shall make payments to Transporter hereunder by wire transfer or check of immediately available funds by the due date set forth herein. If such funds are wire transferred, the funds shall be wire transferred to the First Interstate Bank of Utah located in Salt Lake City, Utah for Transporter's account No. 02-00986-8. ARTICLE VIII - ADJUSTMENTS TO GENERAL TERMS AND CONDITIONS 8.1 Certain of the General Transportation Terms and Conditions are to be adjusted for the purpose of this Agreement, as specified below: None. ARTICLE IX - CANCELLATION OF PRIOR AGREEMENT(S) 9.1 When this Agreement takes effect, it supersedes, cancels and terminate the following agreement(s): None. ARTICLE X - SUCCESSORS AND ASSIGNS 10.1 This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns. No assignment or transfer by either party hereunder shall be made without written approval of the other party. Such approval shall not be unreasonably withheld. As between the parties hereto, such assignment shall become effective on the first day of the month following written notice that such assignment has been effectuated. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year first above set forth. "SHIPPER" "TRANSPORTER" WASHINGTON NATURAL GAS COMPANY NORTHWEST PIPELINE CORPORATION By: /s/ JOHN F. STEFANI By: /s/ JOE H. FIELDS --------------------------- --------------------------- Name: Joe H. Fields ------------------------- Attorney-In-Fact APPROVED AS TO FORM Title: THIS DATE 1/12/94 ------------------------ --------- BY PES -----------------
4 5 EXHIBIT "A" to the SERVICE AGREEMENT (Firm Redelivery Transportation under Rate Schedule TF-2) Dated January 12, 1994 between NORTHWEST PIPELINE CORPORATION and WASHINGTON NATURAL GAS COMPANY RECEIPT POINTS --------------
Primary Maximum Daily Receipt Points Quantity (MDQ)(1) - -------------- ----------------- Jackson Prairie Storage Facility 9,467
- ------------- (1) The total of the MDQ's must equal total transportation contract demand as set forth in Section 1.1. 5 6 EXHIBIT "B" to the SERVICE AGREEMENT (Firm Redelivery Transportation under Rate Schedule TF-2) Dated January 14, 1994 between NORTHWEST PIPELINE CORPORATION and WASHINGTON NATURAL GAS COMPANY DELIVERY POINTS ---------------
Maximum Daily Delivery Obligation ("MDDO") for each Delivery Primary Delivery Point Pressure Delivery Points (MMBtu) (psig) - --------------- ------------------- -------- Granite Falls 9,467 250
6 EX-10.R 16 EXHIBIT 10-R; SERVICE AGREEMENT 1 SERVICE AGREEMENT (Firm Redelivery Transportation under Rate Schedule TF-2) THIS AGREEMENT is entered into this 12th day of January, 1994, by and between NORTHWEST PIPELINE CORPORATION, hereinafter referred to as "Transporter", and WASHINGTON NATURAL GAS COMPANY, hereinafter referred to as "Shipper". RECITALS: A. Shipper is a local distribution company for natural gas. B. Shipper owns certain supplies of natural gas which it desires Transporter to transport for Shipper's account pursuant to Section 284.223 of the regulations of the Federal Energy Regulatory Commission ("FERC"). C. Shipper and Transporter are parties to that certain Liquefaction Storage Gas Service Agreement (LS-1) dated January 12, 1994. D. Shipper and Transporter desire to enter into this Agreement to conform to the provisions of the approved Joint Offer of Settlement in Docket No. RP93-5-011 which unbundled the storage and redelivery transportation services. E. Shipper and Transporter desire to enter into this Agreement effective on the date so designated by the FERC. AGREEMENT: NOW, THEREFORE, in consideration of the premises and mutual covenants set forth herein, the parties agree as follows: ARTICLE I - GAS DELIVERIES AND REDELIVERIES 1.1 Subject to the terms, conditions and limitations hereof, Transporter agrees to receive from Shipper at the Receipt Point specified in Exhibit "A" herein, transport and deliver to Shipper at the Delivery Point(s) specified in Exhibit "B" herein, the following quantities of natural gas, known as Transportation Contract Demand: Up to 70,500 MMBtu's/day provided that Transporter's receipt of gas at any receipt point for Shipper's account hereunder on any day shall not exceed the Maximum Daily Quantity ("MDQ") set forth for such receipt point on Exhibit "A" hereto, and provided that Transporter's daily obligation to deliver gas to Shipper at any delivery point under this Transportation Agreement shall not exceed the Maximum Daily Delivery Obligation ("MDDO") set forth in Exhibit "B" of this Agreement. 2 1.2 The following quantity is Shipper's Annual Contract Quantity: Up to 241,700 MMBtus 1.3 The following quantity is Shipper's Monthly Billing Quantity: Up to 662 MMBtus 1.4 Fuel gas shall be provided in-kind as specified in Rate Schedule TF-2 and in the General Terms and Conditions of Transporter's FERC Gas Tarrif. 1.5 Such transportation shall be on a firm basis. 1.6 Transporter shall not be obligated on any day to deliver under Rate Schedule TF-2, a volume of gas to Shipper at any delivery point(s) described on Exhibit "B" which in conjunction with other firm deliveries by Transporter to Shipper shall be in excess of the capacity of Transporter's facilities delivering gas to such point(s) on any such day. The aggregage of all deliveries made on any such day under Rate Schedule TF-2 at all such delivery point(s) shall not exceed the Transportation Contract Demand, except as provided by the delivery provisions in Rate Schedule TF-2. ARTICLE II - TRANSPORTATION RATES AND CHARGES 2.1 (a) Shipper agrees to pay Transporter for all natural gas transportation service rendered under the terms of this Agreement in accordance with Transporter's Rate Schedule TF-2 as filed with the FERC, and as such rate schedule may be amended or superseded from time to time. (b) (Reserved for rate adjustments made pursuant to Section 3.4 of Rate Schedule TF-2.) ARTICLE III - GOVERNMENTAL REQUIREMENTS 3.1 Shipper shall reimburse Transporter for any and all filing fees to be incurred by Transporter in seeking governmental authorization for the initiation, extension or termination of service under this Agreement. 3.2 The transportation service contemplated herein shall be provided by Transporter pursuant to Section 284.223 of the FERC's regulations. 2 3 3.3 Upon termination, this Agreement shall cease to have any force or effect, save as to any unsatisfied obligations or liabilities of either party arising hereunder prior to the date of such termination, or arising thereafter as a result of such termination. Provided, however that this provision shall not supersede any abandonment authorization which may be required. 3.4 (Section 3.4 shall be applicable only for the transportation of imported natural gas.) Shipper hereby acknowledges and agrees that either it or its buyer or seller is the "importer of record" and it will comply with all requirements for reporting and submitting payment of duties, fees, and taxes to the United States or agencies thereof to be made on imported natural gas and for making the declaration of entry pursuant to 19 CFR Section 141.19. Shipper agrees to indemnify and hold Transporter harmless from any and all claims of damage or violation of any applicable laws, ordinances and statutes which pertain to the importation of the gas transported hereunder and which require reporting and/or filing of fees in connection with said import. ARTICLE IV - TERM 4.1 This Agreement becomes effective on the date so designated by the FERC and shall remain in full force and effect until October 31, 2004 and year to year thereafter at Shipper's sole option. Shipper may terminate all or any portion of service under this Agreement either at the expiration of the primary term, or upon any anniversary thereafter by giving written notice to Transporter so stating at least twelve (12) months in advance. Shipper also shall have the sole option to enter into a new Agreement for all or any portion of the service under this Agreement at or after the end of the primary term of this Agreement. It is Transporter's and Shipper's intent that this term provision provide Shipper with a "contractual right to continue such service" and to provide Transporter with concurrent pregranted abandonment of any volume that Shipper terminates within the meaning of 18 CFR Section 284.221(d)(2)(i) as promulgated by Order 636 on May 8, 1992. ARTICLE V - WARRANT OF ELIGIBILITY FOR TRANSPORTATION 5.1 Any shipper under this Rate Schedule warrants for itself, its successors and assigns, that all gas delivered to Transporter for transportation hereunder shall be eligible for transportation in interstate commerce under applicable rules, regulations or orders of the FERC. Shipper will indemnify Transporter and save it harmless from all suits, actions, damages, costs, losses, expenses (including reasonable attorney fees) and regulatory proceedings, arising from breach of this warranty. 3 4 ARTICLE VI - NOTICES 6.1 Unless herein provided to the contrary, any notice called for in this Agreement shall be in writing and shall be considered as having been given if delivered personally, or by mail or telegraph with all postage and charges prepaid to either Shipper or Transporter at the place designated. Routine communications shall be considered as duly delivered when mailed by ordinary mail. Normal operating instructions can be made by telephone. Unless changed, the addresses of the parties are as follows: NORTHWEST PIPELINE CORPORATION P. O. Box 58900 Salt Lake City, Utah 84158-0900 Statements: Attention: Transmission Accounting Payments: Attention: Treasury Services Contractual Notices: Attention: Transportation and Contract Administration Other Notices: Attention: Nominations Notices & Statements: WASHINGTON NATURAL GAS COMPANY 815 Mercer Street (98109) P. O. Box 1869 Seattle, Washington 98111 ARTICLE VII - OTHER OPERATING PROVISIONS 7.1 Pursuant to Section 5.3 of the General Transportation Terms and Conditions of Transporter's FERC Gas Tariff, Third Revised Volume No. 1, Shipper shall make payments to Transporter hereunder by wire transfer or check of immediately available funds by the due date set forth herein. If such funds are wire transferred, the funds shall be wire transferred to the First Interstate Bank of Utah located in Salt Lake City, Utah for Transporter's account No. 02-00986-8. ARTICLE VIII - ADJUSTMENTS TO GENERAL TERMS AND CONDITIONS 8.1 Certain of the General Transportation Terms and Conditions are to be adjusted for the purpose of this Agreement, as specified below: None. ARTICLE IX - CANCELLATION OF PRIOR AGREEMENT(S) 9.1 When this Agreement takes effect, it supersedes, cancels and terminate the following agreement(s): None 4 5 ARTICLE X - SUCCESSORS AND ASSIGNS 10.1 This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns. No assignment or transfer by either party hereunder shall be made without written approval of the other party. Such approval shall not be unreasonably withheld. As between the parties hereto, such assignment shall become effective on the first day of the month following written notice that such assignment has been effectuated. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year first above set forth. "SHIPPER" "TRANSPORTER" WASHINGTON NATURAL GAS COMPANY NORTHWEST PIPELINE CORPORATION By: /s/ JOHN F. STEFANI By: /s/ JOE H. FIELDS --------------------------- --------------------------- Name: Joe H. Fields ------------------------- Attorney-In-Fact Title: Approved As To Form ------------------------ This Date 1/12/94 --------- By PES ----------------- 5 6 EXHIBIT "A" to the SERVICE AGREEMENT (Firm Redelivery Transportation under Rate Schedule TF-2) Dated January 12, 1994 between NORTHWEST PIPELINE CORPORATION and WASHINGTON NATURAL GAS COMPANY RECEIPT POINTS -------------- Primary Maximum Daily Receipt Points Quantity (MDQ)(1) - -------------- ----------------- Plymouth LNG Storage Facility 70,500 - --------------------------------- (1) The total of the MDQ's must equal total transportation contract demand as set forth in Section 1.1. 6 7 EXHIBIT "B" to the SERVICE AGREEMENT (Firm Redelivery Transportation under Rate Schedule TF-2) Dated January 12, 1994 between NORTHWEST PIPELINE CORPORATION and WASHINGTON NATURAL GAS COMPANY DELIVERY POINTS ---------------
Maximum Daily Delivery Obligation ("MDDO") for each Delivery Primary Delivery Point Pressure Delivery Points (MMBtu) (psig) - --------------- ------------------- --------
Delivery of natural gas by Transporter to Shipper shall be at or near the points whose locations are described in Shipper's currently effective Service Agreement (F-09) dated July 31, 1991 under Rate Schedule TF-1. 7 EX-10.T 17 EXHIBIT 10-T; TRANSPORTATION AGREEMENT 1 FIRM TRANSPORTATION SERVICE AGREEMENT THIS AGREEMENT is made and entered into this 27th day of October, 1993, by and between PACIFIC GAS TRANSMISSION COMPANY, a California corporation (hereinafter referred to as "PGT"), and WASHINGTON NATURAL GAS COMPANY, a corporation existing under the laws of the State of Washington (hereinafter referred to as "Shipper"). WHEREAS, PGT owns and operates a natural gas interstate pipeline transmission system which extends from a point of interconnection with the pipeline facilities of Alberta Natural Gas Company Ltd. (ANG) at the International Boundary near Kingsgate, British Columbia, through the states of Idaho, Washington and Oregon to a point of interconnection with Pacific Gas and Electric Company at the Oregon-California border near Malin, Oregon; and WHEREAS, Shipper desires PGT, on a firm basis, to transport certain quantities of natural gas from the International Boundary in the vicinity of Kingsgate, British Columbia and/or from Stanfield, Oregon (receipt points) to various delivery points as specified in Exhibit A of this Agreement; and WHEREAS, since July 15, 1981, PGT has provided firm transportation service to the Northwest Pipeline Corporation ("Northwest") under the terms and conditions of a firm transportation service agreement between PGT and Northwest and PGT's Rate Schedule T-1; and WHEREAS, the Federal Energy Regulatory Commission ("FERC") has authorized Northwest in Docket No. CP92-79 to, among other things, convert its gas sales service to Shipper on Northwest's interstate pipeline transmission system to firm transportation service; and WHEREAS, the FERC has authorized PGT in Docket No. G-17350-012 to assign to Shipper a portion of Northwest's firm transportation service on PGT formerly provided under Rate Schedule T-1 and to provide such service to Shipper under Part 284 of the FERC's regulations; and WHEREAS, Shipper desires to accept said assignment of Northwest firm transportation services on PGT; and WHEREAS, PGT is willing to transport certain quantities of natural gas for Shipper, on a firm basis, utilizing its pipeline facilities, NOW, THEREFORE, the parties agree as follows: 2 I. GOVERNMENTAL AUTHORITY 1.1 This Firm Transportation Service Agreement ("Agreement") is made pursuant to the regulations of the Federal Energy Regulatory Commission (FERC) contained in I 8 CFR Part 284, as amended from time to time. 1.2 This Agreement is subject to all valid legislation with respect to the subject matters hereof, either state or federal, and to all valid present and future decisions, orders, rules, regulations and ordinances of all duly constituted governmental authorities having jurisdiction. II. QUANTITY OF GAS 2.1 The Maximum Daily Quantity of gas, as defined in Paragraph I of the Transportation General Terms and Conditions of PGT's FERC Gas Tariff First Revised Volume No. I-A, which is the maximum quantity of gas that PGT is required to deliver for Shipper's account to Shipper's point(s) of delivery is set forth in Exhibit A, attached hereto and made a part hereof. 2.2 The maximum quantity of gas which Shipper has a right to deliver to PGT at Shipper's point(s) of receipt, as identified in Exhibit A, equals the Maximum Daily Quantity plus an amount for fuel and line losses as set forth in PGT's Rate Schedule FTS-1 of PGT's FERC Gas Tafiff First Revised Volume No. 1-A. 2.3 PGT's obligation to deliver Shipper's gas from the Shipper's point(s) of receipt to the Shipper's point(s) of delivery is limited to the actual quantity of gas received by PGT for Shipper's account at Shipper's point(s) of receipt less Shipper's requirement to provide fuel and line losses, as set forth in PGT's Rate Schedule FTS-1, up to Shipper's Maximum Daily Quantity. III. TERM OF AGREEMENT 3.1 This Agreement shall become effective on November 1, 1993 (Effective Date) and shall continue in full force and effect until thirty (30) years from the Effective Date (Initial Term). Thereafter, this Agreement shall continue in effect from year to year (Subsequent Term), or a longer term if agreed to by PGT, unless Shipper gives PGT twelve (12) months prior written notice of Shipper's desire to terminate this Agreement. 3.2 Neither party may terminate this Agreement during the Initial Term. 3 IV. POINTS OF RECEIPT AND DELIVERY 4.1 The point(s) of receipt of gas deliveries to PGT is/are as designated in Exhibit A, attached hereto. 4.2 The point(s) of delivery of gas is/are as designated in Exhibit A, attached hereto. 4.3 The delivery pressure, actual average atmospheric pressure, and other pertinent factors applicable to the points of receipt and delivery are also set forth in Exhibit A. V. OPERATING PROCEDURES 5.1 Shipper shall conform to all of the operating procedures set forth in the Transportation General Terms and Conditions of PGT's FERC Gas Tariff First Revised Volume No. 1-A. 5.2 Shipper shall furnish gas for compressor fuel and line loss as set forth in PGT's Rate Schedule FTS-1. VI. RATE(S) 6.1 Shipper shall pay PGT each month all rates applicable to services rendered pursuant to this Agreement in accordance with PGT's Rate Schedule FTS-1, or superseding rate schedule(s), and PGT's current Statement of Effective Rates and Charges in PGT's FERC Gas Tariff First Revised Volume No. 1-A, on file with and subject to the jurisdiction of the FERC. This Agreement in all respects shall be and remains subject to the applicable provisions of PGT's Rate Schedule FTS-1, or superseding rate schedule(s), and of the Transportation General Terms and Conditions of PGT's FERC Gas Tariff First Revised Volume No. 1-A on file with the FERC, all of which are by this reference made a part hereof 6.2 PGT shall have the right from time to time to propose, file and cause to be made effective with the FERC such changes in the rates and charges or service obligations applicable to transportation services pursuant to this Agreement, the rate schedule under which this service is hereunder provided, or any provisions of PGT's Transportation General Terms and Conditions applicable to such services. Shipper shall have the right to protest any such changes proposed by PGT and to exercise any other rights that Shipper may have with respect thereto. VII. MISCELLANEOUS 7.1 This Agreement shall be interpreted according to the laws of the state of California. 4 VII. MISCELLANEOUS (continued) 7.2 Unless herein provided to the contrary, any notice called for in this Agreement and/or PGT's Transportation General Terms and Conditions shall be in writing and shall be considered as having been given if delivered by facsimile or registered mail, with all postage or charges prepaid, to either PGT or Shipper at the place designated below. Routine communications, including monthly statements and payment, shall be considered as duly delivered when received by ordinary mail or facsimile. Shipper's daily nominations shall be considered as duly delivered when received by electronic data interchange. Unless changed, the addresses of the parties are as follows: "PGT" PACIFIC GAS TRANSMISSION COMPANY 160 Spear Street Room 1900 San Francisco, California 94105-1570 Attention: President & CEO "SHIPPER" WASHINGTON NATURAL GAS COMPANY 815 Mercer Street Seattle, Washington 98109 Attention: [STRICKEN] Mr. Brad Barnds Vice President, Gas Supply & Industrial Marketing 7.3 Prior to initiation of service, Shipper shall provide PGT with any information required by the FERC, as well as all information identified in PGT's Transportation General Terms and Conditions applicable to service under PGT's Rate Schedule FTS-1 and this Agreement. 7.4 A waiver by either party of any one or more defaults by the other hereunder shall not operate as a waiver of any future default or defaults, whether of a like or of a different character. 7.5 Nothing in this Agreement shall be deemed to create any rights or obligations between the parties hereto after the expiration of the Initial or Subsequent Term(s) set forth herein, except that expiration of this Agreement shall not relieve either party of the obligation to correct any quantity imbalances or Shipper of the obligation to pay any amounts due to PGT to the date of expiration. 7.6 Shipper warrants for itself, its successors and assigns, that it will have at the time of delivery of the gas to PGT hereunder good title to such gas and that all gas delivered to PGT for transportation hereunder is eligible for all requested transportation in interstate commerce under applicable rules, regulations or orders of the FERC, or other agency having jurisdiction. Shipper will indemnify PGT and save and hold it harmless from all suits, action, damages (including reasonable attorneys' fees) and costs connected with regulatory or legal proceedings, arising from the breach of this warranty. 5 VII. MISCELLANEOUS (Continued) 7.7 This Agreement constitutes the full agreement between Shipper and PGT and any subsequent changes to this Agreement must be made in writing by an amendment to this Agreement. This Agreement may only be amended by an instrument in writing executed by both parties hereto. IN WITNESS WHEREOF the parties hereto have caused this Agreement to be executed as of the day and year first above written. PACIFIC GAS TRANSMISSION COMPANY By: /s/ STEPHEN P. REYNOLDS ---------------------------- Name: Stephen P. Reynolds Title: President & CEO WASHINGTON NATURAL GAS COMPANY By: /s/ JOHN F. STEFANI ---------------------------- Name: John F. Stefani Title: Vice President, Gas Supply & Industrial Marketing 6 EXHIBIT A To the FIRM TRANSPORTATION SERVICE AGREEMENT Dated November 1, 1993 Between PACIFIC GAS TRANSMISSION COMPANY And WASHINGTON NATURAL GAS COMPANY
Maximum Delivered Receipt Point(1) Delivery Point(2) Quantity (MMBtu/d)(1) Kingsgate, Spokane, NPC, 77,000 British Columbia(1) Washington Kingsgate, Stanfield Exchange, 13,392 British Columbia(1) Oregon Spokane NPC,(1) Stanfield Exchange, 11,608 Washington Oregon
(1) The total quantity of gas received by PGT from Shipper at Kingsgate, British Columbia shall not exceed 90,392 MMBtu per day plus the quantities of gas furnished by Shipper for fuel and line loss in accordance with PGT's Rate Schedule FTS-1 and the Statement of Effective Rates and charges of PGT's FERC Gas Tariff First Revised Volume No. 1-A for service under Rate Schedule FTS-1. (2) Pursuant to Paragraph 29 of PGT's Transportation General Terms and Conditions of PGT's FERC Gas Tariff First Revised Volume No. 1-A, Shipper may designate other receipt and delivery points as "secondary receipt points" such as Stanfield, Oregon, the interconnection of PGT's system with the system of Northwest Pipeline Corporation. EX-12 18 EXHIBIT 12; COMPUTATION OF RATIOS 1 PAGE 133 WASHINGTON NATURAL GAS COMPANY Statement of Ratio of Earnings to Combined Fixed Charges and Preferred Stock Dividend Requirements (000's omitted)
Fiscal Year Ended September 30 ------------------------------------------------ 1990 1991 1992 1993 1994 ------- ------- ------- ------- -------- 1. Net Income (Loss) $18,762 $29,409 $12,231 $21,771 $ (8,243) 2. Add: Federal income taxes 6,995 14,000 4,902 9,446 (5,991) ------- ------- ------- ------- -------- 3. Adjusted net income (loss) from continuing operations 25,757 43,409 17,133 31,217 (14,234) Add Fixed Charges: Interest on funded and unfunded debt (not capitalized) 20,424 24,425 26,249 26,381 29,276 Amortization of debt discount 149 169 299 361 392 Rental for leased properties 1,287 1,353 1,498 1,507 1,122 ------- ------- ------- ------- -------- 4. Net Earnings Available for Fixed Charges 47,617 69,356 45,179 59,466 16,556 5. Fixed Charges: Interest on funded and unfunded debt 20,424 24,425 26,249 26,381 29,276 Amortization of debt discount 149 169 299 361 392 Rental for leased properties 1,287 1,353 1,498 1,507 1,122 Preferred dividends (pre-tax equivalent) 4,271 4,238 4,215 4,185 6,122 ------- ------- ------- ------- -------- 6. Total fixed charges $26,131 $30,185 $32,261 $32,434 $ 36,912 ------- ------- ------- ------- -------- 7. Ratio of earnings to fixed charges (4 divided by 6) 1.82 2.30 1.40 1.83 0.45(1) ======= ======= ======= ======= ========
(1) For the year ended September 30, 1994, earnings are inadequate to cover fixed charges by $20,356,000. EX-21 19 EXHIBIT 21; SUBSIDIARIES OF THE REGISTRANTS 1 PAGE 134 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. EX-27.1 20 EXHIBIT 27.1; FINANCIAL DATA SCHEDULE
UT 0000225998 WASHINGTON ENERGY CO. 1,000 YEAR SEP-30-1994 SEP-30-1994 PER-BOOK 737,886 142,818 76,491 20,542 52,757 1,030,494 118,568 199,571 (61,339) 256,800 0 90,000 290,200 0 0 125,182 60,140 0 0 0 208,172 1,030,494 432,025 (7,663) 413,958 406,295 25,730 (34,925) (9,195) 35,652 (45,646) 9 (46,328) 23,468 28,939 15,894 (1.97) (1.97)
EX-27.2 21 EXHIBIT 27.2; FINANCIAL DATA SCHEDULE
UT 0000104880 WASHINGTON NATURAL GAS COMPANY 1,000 YEAR SEP-30-1994 SEP-30-1994 PER-BOOK 737,886 0 79,173 13,180 54,777 885,016 53,873 163,978 18,137 235,988 0 90,000 290,200 0 0 0 60,140 0 0 0 208,688 885,016 396,407 (4,878) 377,343 372,465 23,942 (2,067) 21,875 30,118 (8,243) 3,979 (13,020) 16,937 28,939 36,880 (1.22) (1.22)
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