-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Pu5KQ/mMYfx6FJpcIdkIFxCpKgSF+aeYPcDdqmHsld3fteoHxbe46EO1rkpF0VOu PUi9lt4aAPX7I12p75rzUg== 0000891020-95-000614.txt : 19951231 0000891020-95-000614.hdr.sgml : 19951231 ACCESSION NUMBER: 0000891020-95-000614 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 13 CONFORMED PERIOD OF REPORT: 19950930 FILED AS OF DATE: 19951229 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: 95605943 BUSINESS ADDRESS: STREET 1: 815 MERCER STREET CITY: SEATTLE STATE: WA ZIP: 98111-1869 BUSINESS PHONE: 2066226767 MAIL ADDRESS: CITY: SEATTLE STATE: WA ZIP: 98111-1869 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: 95605944 BUSINESS ADDRESS: STREET 1: 815 MERCER STREET CITY: SEATTLE STATE: WA ZIP: 98111-1869 BUSINESS PHONE: 2066226767 MAIL ADDRESS: STREET 1: 815 MERCER STREET 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 FORM 10-K FOR THE YEAR ENDING 9/30/95 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, 1995 or / / Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 (No Fee Required) For the transition period from to .
I.R.S. Employer Commission File Exact Name of Registrant as Specified State of Identification Number in Its Charter Incorporation Number - --------------- ------------------------------------- ------------- --------------- 001-11227 Washington Energy Company Washington 91-1005304 001-11271 Washington Natural Gas Company Washington 91-1005303
Registrants' Telephone Number, Address of Principal Executive Offices Zip Code Including Area Code - -------------------------------------- -------- ------------------------------ 815 Mercer Street, Seattle, Washington 98109 (206) 622-6767
Securities registered pursuant to Section 12(b) of the Act:
Name of Each Exchange Title of Each Class on Which Registered ------------------- --------------------- Common Stock, $5 Par Value of Washington New York Stock Exchange Energy Company 7.45% Series II, Cumulative Preferred New York Stock Exchange Stock, $25 Par Value of Washington Natural Gas Company 8.50% Series III, Cumulative Preferred New York Stock Exchange Stock, $25 Par Value of Washington Natural Gas Company
Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark whether the registrants (1) have filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrants were required to file such reports), and (2) have been subject to such filing requirements for the past 90 days. Yes /X/ No / / Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the Registrants' knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. --- Aggregate market value of the voting stock held by non-affiliates of Washington Energy Company, computed by reference to the average of the high and low prices of such stock on December 15, 1995: $455,195,049. Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of the latest practicable date.
Outstanding Registrant Title of Stock December 15, 1995 ---------------------------------- -------------------- ----------------------- Washington Energy Company $5 par value 24,116,294 Washington Natural Gas Company $5 par value 10,982,107
Documents Incorporated by Reference: None - ------------------------------------------------------------------------------- 2 Page 2 TABLE OF CONTENTS
PART I Page Item 1. Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 (a) General Development of Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 (b) Financial Information About Industry Segments . . . . . . . . . . . . . . . . . . . . . . 5 (c) Description of Business - Washington Natural Gas Company . . . . . . . . . . . . . . . . . 5 (1) Territory Served . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 (2) Competitive Conditions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 (3) Customer Usage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 (4) Employee Relations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 (5) Franchises . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 (6) Environmental Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 (7) Gas Supply . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 Natural Gas Pipeline Deregulation . . . . . . . . . . . . . . . . . . . . . . . . . 8 Gas Supply Portfolio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 Gas Transportation Capacity . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 Gas Storage Capacity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 LNG and Propane Air . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 Capacity Release . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 The Western Market Center . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 Reallocation of Pipeline Transition Costs . . . . . . . . . . . . . . . . . . . . . 11 (8) Regulation and Rates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 (9) Regulated Equipment Rentals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 (10) Merchandise Marketing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 (11) New Construction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 (12) Utility Operating Statistics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 Description of Business - Oil and Gas Exploration and Production . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 Description of Business - Merchandise and Energy Efficiency Products . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 Description of Business - Coal and Railroad Properties . . . . . . . . . . . . . . . . . . 18
3 Page 3 TABLE OF CONTENTS (Continued)
PART I (Continued) Page Description of Business - Other Businesses . . . . . . . . . . . . . . . . . . . . . . . . 19 Description of Business - Discontinued Biowaste Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 (d) Financial Information About Foreign and Domestic Operations and Export Sales . . . . . . . . . . . . . . . . . . . . . . . . . . 19 Item 2. Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 Item 3. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 Item 4. Submission of Matters to a Vote of Security Holders . . . . . . . . . . . . . . . . . . . 20 Executive Officers of the Registrants . . . . . . . . . . . . . . . . . . . . . . . . . . 21 PART II Item 5. Market for Registrant's Common Stock and Related Shareholder Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 Item 6. Selected Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . 26 Item 8. Financial Statements and Supplementary Data . . . . . . . . . . . . . . . . . . . . . . . 40 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure . . . . . . . . . . . . . . . . . . . . . . . . . 90 PART III Item 10. Directors and Executive Officers of the Registrants . . . . . . . . . . . . . . . . . . . 90 Item 11. Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 93 Item 12. Security Ownership of Certain Beneficial Owners and Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 99 Item 13. Certain Relationships and Related Transactions . . . . . . . . . . . . . . . . . . . . . . 99 PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 101 SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 109
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, Washington Natural Gas Company ("Washington Natural") is engaged primarily in the retail distribution of natural gas. The Company holds an equity position in a publicly traded oil and gas exploration and production company, and through various subsidiaries, is also engaged in the business of selling gas appliances, energy efficient and security products for the home 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 and its wholly-owned subsidiaries through a merger in 1978. Washington Natural and its predecessors have manufactured and distributed gas since prior to the turn of the century and since 1956 have distributed natural gas in the Puget Sound region of western Washington state. Washington Natural entered the gas appliance sales business in the late 1950s when natural gas became available in the region. In response to higher prices for and reduced availability of natural gas in the early 1970s, Washington Natural, through its former subsidiaries, entered the oil and gas exploration and production business, the energy-efficiency products business and initiated its coal-related investments. Washington Energy was formed in 1977 to serve as the holding company for the diverse energy related businesses conducted by Washington Natural and the other subsidiaries. As part of a change in business strategy, the Company, in 1994, sold its biowaste technology business started in 1984, and merged its oil and gas subsidiary, Washington Energy Resources Company ("Resources"), with a subsidiary of Cabot Oil & Gas Corporation ("Cabot"), Houston, Texas. Additionally, in October 1993 the Company combined its appliance sales, energy efficiency products and home security businesses in a new subsidiary, Washington Energy Services Company ("Services"). On October 18, 1995, Washington Energy and Washington Natural entered into an agreement to merge Washington Energy and Washington Natural with Puget Sound Power & Light Company ("Puget") which, as the surviving corporation, will be renamed at the effective time of the merger. Puget is an electric utility servicing the Puget Sound area of western Washington. The merger would create the largest combined electric and gas utility in the Sate of Washington. The merger must be approved by the holders of the common stock of Washington Energy, the holders of the preferred stock of Washington Natural, and the holders of the common stock of Puget. In addition, the Washington Utilities and Transportation Commission ("WUTC"), which regulates both utilities, must 5 Page 5 approve the merger and certain other conditions in the merger agreement must be satisfied or waived. A joint proxy statement/prospectus will be sent to shareholders of the three companies early in calendar 1996. Washington Energy common shareholders and Washington Natural preferred shareholders will be asked to vote on the merger at a combined shareholder meeting currently scheduled for March 20, 1996, and Puget shareholders will vote at a special shareholder meeting scheduled on the same date. Regulatory approval is expected prior to the end of calendar 1996. The merger requires approval by holders of two-thirds of the common shares of Washington Energy and Puget as well as by two-thirds of the holders of the two series of Washington Natural preferred stock voting separately. In the event the merger is approved by the common shareholders of Washington Energy and Puget, but not by the holders of either series of Washington Natural preferred stock, the merger of Washington Energy or Puget would proceed with Washington Natural remaining a wholly-owned subsidiary of the new company. If the merger is approved, each share of Washington Energy common stock will be exchanged for .860 of a share of Puget common stock and each share of (subject to the approval of the merger by the holders of the Washington Natural preferred stock) preferred stock of Washington Natural will be exchanged for one share of Puget preferred stock with like rights and preferences (including par value, dividends, redemption provisions and rights upon liquidation). 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 Consolidated Financial Statements. (c) Description of Business Washington Natural Gas Company Washington Natural is engaged predominately in the distribution of natural gas at the retail level. Washington Natural has two subsidiaries, WNG Cap I and WNG Cap II, created to enhance Washington Natural's ability to lower its pipeline transportation costs through capacity release and to provide other gas-related services to be determined. (1) Territory Served Washington Natural distributes natural gas in a service area extending for approximately 150 miles from north to south in the Puget Sound area of Washington state 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 approximately 3,054,000 (56% of the state's population). During 1995, Washington Natural served an average of 465,000 customers. 6 Page 6 Washington Natural's service area includes over 60 incorporated municipalities. In addition to Seattle, this area includes four other major cities or industrialized areas which combine to form the core of Washington Natural's service territory. Seattle, with 24% of customers accounted for 25% of 1995 revenues. Tacoma with 11% of customers accounted for 13% of 1995 revenues. Bellevue with 6% of customers accounted for 6% of 1995 revenues. Kent with 5% of customers accounted for 5% of 1995 revenues. And Everett with 3% of customers accounted for 5% of 1995 revenues. (2) Competitive Conditions The natural gas business competes with oil for industrial uses and space heating, with electricity for drying, cooking, water heating and space heating, and with wood for residential space heating. Although Washington Natural has no direct competition from others distributing natural gas in the territory it now serves, it does compete with gas marketers in the sale, but not the delivery (transportation), of natural gas. Large industrial and commercial end-users also have the option to bypass Washington Natural's distribution system by constructing pipelines to interconnect directly with the interstate pipeline which transports all the natural gas consumed in the region, although no significant bypass by customers has occurred to date. Washington Natural currently has a significant competitive price advantage over both electricity and fuel oil in its service territory. In a recent Washington Natural survey of residential energy costs, fuel oil for space heating was approximately 26% more expensive than gas and electricity for residential space heating was up to 169% more expensive than gas. Conversions of residential users to gas from oil and electricity remain an important source of new customer additions, with approximately 8,000 residential users converting to gas in 1995. Washington Natural successfully competes with all the electric utilities in its service area for new customers in the new housing construction market, with approximately 11,000 new homes utilizing gas for space and water heating in 1995. Washington Natural's overall market share of the new single-family home construction market in its service territory exceeded 75% for 1995. In residential areas where gas mains have already been extended, Washington Natural's market share for space and water heating in new construction is even higher. Since the cost of natural gas remains substantially lower than the cost of electricity for home space and water heating throughout its service area, Washington Natural expects that its share of the new home market will continue at approximately 75%, and that conversions of existing homes to gas will continue to be a major source of new customers. In 1995, Washington Natural's total 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 local distribution companies ("LDCs") and end users in 1988. The availability of both firm and interruptible transportation service, which enables industrial end users to purchase lower cost gas supplies directly from U.S. and Canadian producers, is an important factor in maintaining gas usage by those end users during periods of low residual oil prices. Continued evolution in the natural gas industry, resulting primarily from FERC Order 7 Page 7 Nos. 436, 500 and 636, has served to increase the ability of large gas end users to bypass Washington Natural in obtaining gas supply and transportation services. 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 continued to use gas due to price and other considerations. In November 1993, Washington Natural began offering a new tariff for transportation services on its distribution system. While in the past as many as 160 customers annually have taken advantage of the potential savings provided by transportation service, in 1995, on average, approximately 55 commercial and industrial customers chose to receive only transportation service. Most customers have chosen to remain either firm or interruptible gas sales customers of Washington Natural. Natural gas should continue to play a prominent energy role in the Pacific Northwest due to the abundant gas supplies available at competitive prices. Competition with oil in the industrial market continues but is lessening due to increasingly stringent air quality control measures in Washington Natural's service area. (3) Customer Usage Washington Natural's operating revenues and earnings vary seasonally with temperature and weather conditions, particularly in the winter and summer months, because over 90% of its customers use natural gas for space heating. (4) Employee Relations As of September 30, 1995, Washington Energy had 1,340 employees of which 1,217 were employed by Washington Natural. Subsequent to September 30, 1995, Washington Natural reduced the number of its salaried employees by 4%. In 1994, Washington Natural reduced overall staffing by 12%, across all employee classifications. Washington Natural has 820 employees organized within eight local unions with which it has collective bargaining agreements. During 1995, Washington Natural reached collective bargaining agreements with all five unions which had contracts that expired in 1995. The new contracts generally reflected an average annual increase in base wages and benefits of 3% for each of the next three years, the effect of which is partially offset by decreases in the premium time wage rate for certain work. There are no contracts currently under negotiation and the earliest contract expiration is November 30, 1997. (5) Franchises Washington Natural holds nonexclusive franchises from all of the incorporated communities it services except the City of Lacey, and excluding four 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 beneath state highway rights-of-way. In addition to the franchises mentioned, Washington Natural holds a Certificate of Public Convenience and Necessity granted by the WUTC to serve the area in which its distribution system is located. 8 Page 8 (6) Environmental Matters For a description of environmental matters related to the Company and Washington Natural, see Note 10 of Notes to Consolidated Financial Statements. (7) Gas Supply General Washington Natural currently purchases a blended portfolio of long-term firm, short-term firm, and spot gas supplies from a diverse group of major and independent producers and gas marketers in the U.S. and Canada. Prior to implementation of FERC Order No. 636 on November 1, 1993, Washington Natural purchased a portion of its firm gas supply from Pipeline under a firm sales agreement. All of Washington Natural's gas supply is ultimately transported through Pipeline, the sole interstate pipeline directly supplying the western Washington area. For baseload and peak-shaving purposes, Washington Natural supplements its portfolio of firm gas supply by purchasing natural gas at generally lower prices in summer, injecting it into underground storage facilities and withdrawing it during the winter heating season. The storage facilities at Jackson Prairie in Washington and at Clay Basin in Utah are used for this purpose. Peaking needs are also met by using Washington Natural's gas held in Pipeline's liquefied natural gas ("LNG") facility at Plymouth, Washington, and by producing propane air gas at a plant owned by Washington Natural and located on its distribution system. Washington Natural expects to meet its firm peak day requirements for residential, commercial and industrial markets through its firm gas purchase contracts, firm transportation capacity, firm storage capacity and other firm peaking resources. Washington Natural believes that it will be able to acquire incremental firm gas supply resources, which are reliable and reasonably priced, to meet anticipated growth in the requirements of its firm customers for the foreseeable future. Washington Natural is committed to securing least cost sources of reliable gas supply, including demand side management resources, and to optimizing resources to their highest and best use in order to best serve the needs of its firm customers. Natural Gas Pipeline Deregulation The implementation of FERC Order No. 636 by Pipeline on November 1, 1993, completed the deregulation of its activities as an interstate natural gas pipeline and unbundled sales services formerly performed by Pipeline. The complete unbundling of Pipeline's services at that date finalized Washington Natural's transition from purchasing all of its gas supply from Pipeline prior to 1986 to purchasing all gas supplies directly from producers and gas marketers. As part of the transition, Washington Natural was assigned certain long-term firm gas supply agreements of Pipeline effective November 1, 1992, and November 1, 1993. In order to deliver gas supplies purchased directly from suppliers to its distribution system, Washington Natural assumed long-term, firm transportation capacity on the transmission systems of Pipeline and Pacific Gas Transmission Company ("PGT"), together with associated demand charge obligations. Washington Natural also acquired storage capacity with associated demand charge obligations at Clay Basin in two increments effective April 1991 and April 1993. 9 Page 9 Gas Supply Portfolio For the current winter heating season, Washington Natural has contracted for approximately 25% of its expected peak day gas supply requirement from sources originating in British Columbia under a combination of long-term and winter peaking purchase agreements and firm gas exchange arrangements. Long-term gas supplies from Alberta represent approximately 10% of the peak day requirement. Long- term and winter peaking arrangements with U.S. suppliers and gas stored at Clay Basin make up approximately 25% of the peak day portfolio. The balance of the peak day requirement is expected to be met with gas stored at Jackson Prairie, LNG held at Pipeline's Plymouth facility and propane air gas, approximately 25%, 10% and 5%, respectively. The current firm, long-term gas supply portfolio consists of arrangements with 12 producers and gas marketers with no single supplier representing more than 14% of the expected peak day requirement. The contracts have remaining terms from less than one year to nine years with an average term of five years. All but one of the supply contracts assigned to Washington Natural by Pipeline have expired. The one remaining contract, with an Alberta supplier, has a remaining term of nine years. All of the current gas supply contracts contain market sensitive pricing provisions based on various published indices. Washington Natural's firm gas supply portfolio is structured to take advantage of regional price differentials and to market gas and services outside Washington Natural's service territory ("off system sales") when market opportunities arise and system supply requirements permit. The geographic mix of suppliers and daily, monthly and annual take requirements permit a high degree of flexibility in sourcing gas supplies in off-peak periods to minimize costs. These activities lower the overall cost of gas for customers on Washington Natural's distribution system. In 1995, Washington Natural's off system sales totaled approximately 16 billion cubic feet ("BCF") of gas which generated $3.4 million of gross margin. Washington Natural is also an active participant in the exchange of gas with other suppliers or marketers on different pipelines which generated $1.2 million in gross margin. The savings or margin from these activities do not affect Washington Natural's earnings, but are passed on to Washington Natural's ratepayers through the purchased gas adjustment ("PGA") mechanism. Gas Transportation Capacity Washington Natural currently holds firm transportation capacity on Pipeline and PGT. Holders of such capacity pay fixed monthly demand charges for the right, but not the obligation, to transport a specified quantity of gas from a receipt point to a delivery point on the pipeline each day for the term of the agreement. Firm transportation capacity on Pipeline was initially made available to utilities in 1988 under permanent authority of FERC Order No. 436. Washington Natural holds firm capacity on Pipeline totaling 444,533 million British thermal units ("MMBtu") per day acquired under five agreements at various times prior to November 1, 1993, plus an additional 10,000 MMBtu per day acquired effective November 1, 1995. The agreements provide for receipt of 196,705 MMBtu per day at Sumas on the Washington border with British Columbia, 181,892 MMBtu per day at various points in Wyoming, Colorado, and Utah and 75,936 MMBtu per day at several interconnections with PGT. Washington Natural also holds seasonal firm capacity on Pipeline for receipt of 188,372 MMBtu per 10 Page 10 day at the Jackson Prairie storage field and 70,500 MMBtu per day at the Plymouth LNG facility. This capacity is available to deliver storage gas to Washington Natural's distribution system during the heating season. The firm capacity from Jackson Prairie will increase by 47,926 MMBtu per day effective with the completion of an expansion project in the winter of 1996 to increase the rate of daily deliverability from the field. Washington Natural's firm transportation capacity contracts with Pipeline have remaining terms ranging from 9 to 20 years. However, Washington Natural has either the unilateral right to extend the contracts under their current terms or the right of first refusal to extend such contracts under then current FERC orders. Washington Natural holds firm transportation capacity on PGT totaling 90,392 MMBtu per day from Kingsgate on the Idaho border with British Columbia to various interconnections with Pipeline. Gas originating in Alberta is transported to Pipeline utilizing this capacity for subsequent delivery by Pipeline to Washington Natural's distribution system. The contract for this capacity has a remaining term of 28 years. Gas Storage Capacity Washington Natural holds storage capacity in the Jackson Prairie and Clay Basin underground gas storage facilities. The Jackson Prairie facility, one-third owned and operated by Washington Natural, is used primarily for intermediate peaking purposes as it is designed to deliver a large volume of gas over a relatively short time period. Washington Natural has peak, firm delivery capacity of 188,372 MMBtu per day and total firm storage capacity of 6,341,660 MMBtu at the facility. A project will be completed in the winter of 1996 to increase the daily deliverability, but not the total storage capacity, of the Jackson Prairie facility. Washington Natural's share of the expansion will be 47,926 MMBtu per day. The location of the Jackson Prairie facility in Washington Natural's service area provides significant cost savings by reducing the amount of annual pipeline capacity required to meet peak day gas requirements. The Clay Basin storage facility is intended as a baseload gas supply source, as well as a peaking supply source. Washington Natural has a maximum firm withdrawal capacity of 111,300 MMBtu per day from the facility with total storage capacity of 13,419,000 MMBtu. The capacity is held under two contracts with remaining terms of 18 and 25 years. LNG and Propane Air LNG and propane air gas provide gas supply on short notice for short periods of time. These sources are utilized as the supply of last resort in extreme peak demand periods lasting a few hours or days due to their high cost. Washington Natural has long-term contracts for storage of 241,700 MMBtu of its gas as LNG at Pipeline's Plymouth facility which equates to approximately three and one-half days supply at maximum daily deliverability of 70,500 MMBtu. Washington Natural owns storage capacity for approximately 1.4 million gallons of propane. The facilities are capable of delivering the equivalent of 30,000 MMBtu of gas per day for up to four days directly into Washington Natural's distribution system. 11 Page 11 Capacity Release One of the most significant changes resulting from the deregulation of the natural gas industry is the advent of capacity release to counter the impact on pipeline customers of straight fixed variable rate design used by interstate pipelines. Under this rate design, essentially all pipeline costs are recovered from customers through fixed monthly demand charges, rather than volumetrically as in the past. The FERC provided the capacity release mechanism as the means for holders of firm capacity to relinquish temporarily unutilized pipeline capacity to others in order to recoup all or a portion of the cost of such capacity. Capacity may be released through several methods including open bidding and by prearrangement. All capacity available for release is posted on electronic bulletin boards of the pipelines. Washington Natural utilized buy/sell and capacity release mechanisms in off-peak periods to recoup $2.8 million in demand charges in 1995. WNG CAP I and WNG CAP II, wholly-owned subsidiaries of Washington Natural, were formed to provide additional flexibility and benefits from capacity release. All savings from capacity release are passed on to Washington Natural's ratepayers through the PGA mechanism. In addition, off-system sales activities have often bundled gas sales or other services with transportation which has increased capacity utilization. In approving Washington Natural's PGA effective May 15, 1995, the WUTC has allowed all capacity related demand charges incurred through that date to be recovered in rates. The Western Market Center In 1995, Washington Natural elected to participate in The Western Market Center ("TWMC"), a newly-formed, regional gas supply and market hub in the Muddy Creek area in southwest Wyoming. TWMC is essentially a computerized electronic gas trading and management system associated with a hub located at the interconnection of five major pipelines: Pipeline, Questar, Kern River, Colorado Interstate Gas and Overland Trail. Participation in TWMC will enable Washington Natural to provide gas management services including gas parking and lending to a wider market of off-system customers. This is expected to increase off-peak utilization of Washington Natural's storage and pipeline capacity as well as its gas supply resources which should reduce the overall cost of gas supplies for Washington Natural's ratepayers. Washington Natural will have a 10% ownership interest in TWMC. Reallocation of Pipeline Transition Costs In May 1994, Pipeline was ordered by the FERC to modify the previous allocation of transition costs, totaling $34 million plus interest, incurred in "unbundling" interstate pipeline services. Under this order, Washington Natural's share of these costs increased from $1.2 million, previously paid, to $10.4 million, inclusive of interest. Washington Natural and six other customers filed requests for rehearing. On December 20, 1994, the FERC issued an order denying the rehearing requests and permitting Pipeline to bill customers under the modified allocation methodology. Pending the outcome of an appeal to the United States Court of Appeals, Washington Natural began making monthly payments to Pipeline in May 1995 under a 12 month payment schedule. The WUTC has allowed Washington Natural to recover the full amount of the liability as part of the PGA which went into effect on May 15, 1995. 12 Page 12 (8) Regulation and Rates Washington Natural is subject to the jurisdiction of, and regulation by, the WUTC, a three-member body appointed by the governor of Washington state. Such regulation relates principally to rates; service; issuance of securities; acquisition, extension and abandonment of facilities; affiliated party transactions and safety regulations. Under Washington law, the WUTC is required to act upon rate filings within 11 months of the date of filing. Since 1971, the WUTC has permitted Washington Natural to pass-on to its customers, through changes in its rates, all changes in the price of gas it purchases from non-affiliated suppliers, using the PGA mechanism. This mechanism allows Washington Natural to pass these cost increases or decreases on to its customers on a timely basis, resulting in no material impact on net income. Since disallowing a portion of the cost of gas purchased from a subsidiary of Resources, a Washington Natural affiliate, in a 1992 order, the WUTC has authorized three PGAs. The effects of the adjustments in 1992 and 1993 substantially increased rates and were allowed on a timely basis. On May 11, 1995, the most recent PGA was approved by the WUTC, effective May 15, 1995. This PGA results in a pass-through to customers, of an annual reduction in the cost of purchased gas of $46.5 million. July 1992 Rate Case In July 1992, Washington Natural filed with the WUTC for a general rate increase, Docket No. UG-920840 (the "July 1992 Rate Case"), requesting an additional 13%, or $41.4 million, in annual revenues and therefore margin. Of the requested amount, $28.4 million, or 8.9%, was for general rate relief. The remainder covered new programs such as environmental cleanup activities, compliance with revisions to safety rules, the replacement of unprotected steel and cast iron underground pipe, and the proposed development of public compressed natural gas refueling stations for natural gas vehicles. At a subsequent date, Washington Natural reduced its rate request to $14.8 million, on an annual basis. On September 27, 1993, the WUTC issued its decision in the rate case, ordering a decrease in Washington Natural's rates and margin of $15.4 million on an annual basis, effective October 9, 1993. The principal differences in the annual revenue requirement between Washington Natural's rate request and the WUTC's ordered rate reduction were: (1) approximately $11 million of adjustments made by the WUTC to disallow certain expenses related to advertising, marketing and merchandising; (2) approximately $10 million due to an allowed overall rate-of-return of 9.15% on a rate base of $483.9 million compared to Washington Natural's proposed overall rate-of-return of 9.98% on $504.0 million of rate base; (3) $5.2 million related to disallowance of Washington Natural's proposed attrition allowance; and (4) $4.8 million associated with the weather normalization calculation. 13 Page 13 November 1993 Rate Case After reviewing the WUTC's decision in the July 1992 Rate Case and giving consideration to filing of a motion for reconsideration with the WUTC, Washington Natural determined that the most appropriate action would be to file a limited-scope general rate case. This case, Docket No. UG-931405, was filed in November 1993 (the "November 1993 Rate Case"), and requested a revenue and margin increase of $24.6 million. The primary focus was to seek recovery of additional operating costs and the inclusion in rate base of additional utility plant for system improvements and expansions since calendar year 1991, which was used as the base measurement year in the July 1992 Rate Case. On May 27, 1994, the WUTC issued an order approving a settlement of the November 1993 Rate Case. The terms of the settlement agreement provided for a $19.0 million increase in annual revenue and margin and an agreement that Washington Natural would not request an increase in total revenues other than PGA filings or in certain limited circumstances prior to March 1, 1995. March 1995 Rate Case In March 1995, Washington Natural filed a general rate case (the "March 1995 Rate Case") seeking to raise rates by 8.5%, or $35.4 million on an annual basis. The filing was requested in order to reflect the higher costs of capital and increased operating costs as a result of customer growth. As part of the filing, Washington Natural petitioned that $17.8 million of the $35.4 million request be granted as interim rate relief. On May 11, 1995, Washington Natural and the WUTC reached a negotiated settlement of the March 1995 Rate Case. The settlement ordered a $17.7 million annual increase in revenue and margin. The increase reflects an authorized rate-of-return on common equity in the range of 11% - 11.25%, up from the previous level of 10.5%. The WUTC also stipulated that Washington Natural will be allowed to earn in excess of that range to the extent that it can do so by managing its cost of service. The new rates became effective May 15, 1995. As part of the settlement, Washington Natural has agreed not to make a general rate case filing prior to May 15, 1997. The agreement, however, does not preclude filing under the PGA mechanism or for interim emergency rate relief if conditions warrant such rate relief. Rate Redesign Filing As a result of the WUTC's decision in the July 1992 Rate Case, Washington Natural filed a Transportation Service, Cost of Service and Rate Redesign Proposal in June 1994 (the "Rate Redesign Filing"). In its July 1992 Rate Case decision, the WUTC did not accept any of the cost of service methodologies proposed, explaining that the changing nature of the industry, including the separate and distinct function of providing transportation service, required additional consideration. The Rate Redesign Filing, Docket No. UG- 940814, included proposed rates that would better reflect the actual cost of serving various classes of customers. The filing applied a methodology that takes peak demand costs into consideration in addition to average volumetric throughput. This peak and average approach is, in Washington Natural's opinion, responsive to the reality of the current natural gas environment and treats transportation as a separate and distinct service. On May 11, 1995, the WUTC ordered the implementation of a cost-based rate design effective May 15, 1995. The order, while revenue neutral in total, 14 Page 14 shifted rates and costs, and thus margin responsibility, among customer classes. The average margins for transportation service decreased by 26% and margins for larger volume industrial sales customers decreased by 27%. The order also raised average residential margins 4.5%. Firm commercial and smaller industrial average margins were not affected. The changes in transportation and industrial margins make the utility economically indifferent to customer choices between transportation and sales service. The order enhances Washington Natural's ability to offer rates that support cost effective and responsible growth. Line Extension and New Customer Addition Policy In March 1995, the WUTC approved a new tariff for extending natural gas mains and services to new customers. Under the new policy, main and service extensions that meet the target rate-of-return, currently 9.15%, based on an analysis of estimated costs and gas usage, are provided to customers without additional contributions. This new policy helps ensure that new customer growth is profitable. If a new main or service extension is estimated to have a rate-of-return of less than 9.15%, the customer is required to make either a one-time contribution or pay a new customer rate, at the customer's choice. A contribution is a one-time advance payment to cover project costs. This advance payment may be refundable at the end of five years based on additional new customer load which has been added to the new main or service extension since it was initially installed. The other choice is payment of a nonrefundable new customer rate for five years. The new customer rate is essentially a surcharge of 11.5 cents per therm for new residential developments or 17 cents per therm for residential or small commercial conversions. (9) Regulated Equipment Rentals Washington Natural is also engaged in the business of leasing water heaters and conversion burners for residential and commercial use. As of September 30, 1995, Washington Natural had approximately 119,000 active equipment leases to customers with an original cost and net book value of approximately $74 million and $64 million, respectively. Lease revenues are included in the financial statements as part of Regulated Utility Sales since the rates charged are subject to the approval of WUTC. Lease revenues were $10,317,000, $9,405,000 and $7,712,000 for 1995, 1994 and 1993 respectively. (10) 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 19. (11) New Construction Washington Natural is one of the fastest growing natural gas LDCs in the nation due to economic growth in its service area and the high conversion rate of existing homes to gas. In 1995 and 1994, Washington Natural made $87.2 and $84.5 million, respectively, in capital expenditures to add new customers and 15 Page 15 to maintain the reliability and safety of its distribution system. Washington Natural's capital spending in 1996 is projected to be $86 million. See the Liquidity and Capital Resources section of Management's Discussion and Analysis of Financial Condition and Results of Operations at page 36. 16 Page 16 (12) Washington Natural Utility Operating Statistics
Year Ended September 30, ------------------------------------------------------------------ 1995 1994 1993 1992 1991 -------- -------- -------- -------- -------- (in thousands) Regulated utility sales: Residential firm gas sales $231,202 $206,602 $195,936 $152,015 $160,265 Commercial firm gas sales 97,396 91,749 87,644 67,393 72,833 Industrial firm gas sales 25,860 28,827 23,967 17,226 20,472 Interruptible gas sales 44,541 51,425 44,160 29,593 43,563 Transportation services 10,732 8,399 8,434 11,231 6,783 Other 10,317 9,405 7,712 7,481 7,136 -------- -------- -------- -------- -------- Total regulated utility sales $420,048 $396,407 $367,853 $284,939 $311,052 ======== ======== ======== ======== ======== Customers, average number served: Residential firm 423,195 403,642 383,291 361,454 337,815 Commercial firm 38,378 37,112 35,951 34,503 33,011 Industrial firm 2,754 2,824 2,844 2,857 2,842 Interruptible 1,037 1,009 988 948 1,037 Transportation 55 36 68 130 56 ------- ------- ------- ------- ------- Total average customers 465,419 444,623 423,142 399,892 374,761 ======= ======= ======= ======= ======= Gas volumes (thousands of therms): Residential firm sales 398,283 371,472 382,118 301,887 346,782 Commercial firm sales 179,725 174,668 177,724 142,402 162,915 Industrial firm sales 55,365 62,698 54,096 52,019 49,309 Interruptible sales 132,312 151,175 127,678 78,645 131,278 Transportation volumes 156,945 119,590 159,765 199,143 156,402 ------- ------- ------- ------- ------- Total gas volumes 922,630 879,603 901,381 774,096 846,686 Company use 729 801 848 838 699 Unaccounted for 1,328 489 (2,318) 660 (2,348) ------- ------- ------- ------- ------- Total send out 924,687 880,893 899,911 775,594 845,037 ======= ======= ======= ======= =======
17 Page 17 (12) Washington Natural Utility Operating Statistics (Continued)
Year Ended September 30, ------------------------------------------------------------------ 1995 1994 1993 1992 1991 -------- -------- -------- -------- -------- Average use per customer (therms): Residential firm 941 921 998 835 1,027 Commercial firm 4,683 4,708 4,903 4,127 4,935 Industrial firm 20,103 22,035 24,618 18,208 17,350 Interruptible 127,591 147,315 129,231 82,959 126,594 Transportation 2,853,545 3,400,694 2,133,676 1,531,869 2,792,893 Average revenue per customer: Residential firm $ 546 $ 512 $ 511 $ 421 $ 474 Commercial firm 2,538 2,472 2,438 1,953 2,206 Industrial firm 9,390 10,208 8,427 6,029 7,203 Interruptible 42,952 50,966 44,695 31,216 42,009 Transportation 195,127 233,306 124,029 86,392 121,125 Average revenue per therm (cents): Residential firm 58.0 55.6 51.3 50.4 46.2 Commercial firm 54.2 52.5 49.3 47.3 44.7 Industrial firm 46.7 46.0 44.3 33.1 41.5 Interruptible 33.7 34.0 34.6 37.6 33.2 Total sales customers 52.1 49.8 47.4 46.3 43.0 Transportation 6.8 7.0 5.3 5.6 4.3 Average cost per therm (cents) (1): 28.6 29.5 24.0 22.7 20.0 Weather - degree days 4,201 4,289 4,702 3,933 4,888 % of normal (30-yr avg) 88% 90% 98% 82% 101%
(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. Oil and Gas Exploration and Production The Company has participated in the oil and gas exploration and production business since 1974 through Resources and its predecessor, Thermal Exploration, Inc., and since 1994, through its investment in Cabot. On May 2, 1994, Resources was merged in a tax-free exchange with a wholly-owned subsidiary of Cabot based in Houston, Texas. Through the merger the Company currently owns 16.4% of Cabot's outstanding voting securities consisting of 2,133,000 shares of common stock, representing 9.4% of total common shares outstanding, and 1,134,000 shares of convertible voting preferred stock. William P. Vititoe, Chairman of the Board of Directors, Chief Executive Officer and President of Washington Energy, and Robert F. Bailey, a director of Washington Energy, also became members of Cabot's Board of Directors. See Note 13 of Notes to Consolidated Financial Statements 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 18 Page 18 Cabot's earnings and losses available to common shareholders as "Other income (expense)". Only a brief summary of Cabot's business, taken from its 1994 Form 10-K filing, is presented here since Cabot's stock is publicly traded on the New York Stock Exchange ("NYSE") and more detailed information is available in its filings with the Securities and Exchange Commission ("SEC"). Cabot's fiscal year corresponds to the calendar year. Substantially all of Cabot's operations are in the Appalachian Region of West Virginia, Pennsylvania and New York, and in the Western Region, including the Anadarko Basin of southwestern Kansas, Oklahoma and the Texas Panhandle, in the Green River Basin of Wyoming and in South Texas. Cabot has operated in the Appalachian Region for over 100 years and in the Anadarko Basin for over 50 years. Cabot's proved reserves at December 31, 1994, totaled approximately 1,001 billion cubic feet equivalent ("Bcfe"), 95% of which was natural gas, primarily in long-lived fields with extended production histories. Historically, Cabot has maintained its reserve base through low-risk development drilling, although it acquired its interests in the Green River Basin and South Texas through the Resources merger, valued by Cabot at $176 million, and made two other significant reserve acquisitions in 1993 at a total cost of $82.4 million. In addition to drilling and production, Cabot also operates several gas gathering and pipeline systems in the Appalachian Region made up of approximately 3,600 miles of pipeline with interconnections to interstate pipelines and local distribution companies. It also has two gas storage fields in the same region. Cabot also purchases substantial quantities of gas from other producers in the Appalachian Region and the Gulf Coast area for resale to customers in the northeastern United States. The oil and gas production business is highly competitive and Cabot's operating results are largely determined by the natural gas prices prevailing in the markets it serves. In response to the nation-wide decline in natural gas prices during the past year, Cabot has instituted numerous cost reduction measures, including employee lay-offs and consolidation of administrative functions. During the quarter ended September 30, 1995, Cabot wrote down the carrying value of its oil and gas producing assets by $113.9 million in connection with early adoption of Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." See Managements' Discussion and Analysis of Financial Conditions and Results of Operations at page 28 and Note 13 of Notes to Consolidated Financial Statements for further information regarding Cabot's operating results and losses recognized by Washington Energy related to its investment in Cabot. Merchandise and Energy Efficiency Products Since the late 1950s Washington Natural had marketed energy-efficient gas appliances and conservation products which complemented its gas distribution service. In order to address the concerns raised by the WUTC during the July 1992 Rate Case regarding allocations of common costs between Washington Natural's regulated activities and its non-regulated merchandise sales activities, the merchandise sales business was transferred on October 1, 1993, to Services, a newly-formed, wholly-owned subsidiary of Washington Energy. Effective the same date, the Company's HomeGuard(TM) security systems business, which had been conducted by another of the Company's then wholly-owned subsidiaries, Thermal Efficiency, Inc., was also transferred to Services. 19 Page 19 Services sells three types of products, primarily to residential homeowners: gas appliances, including furnaces; energy efficient window and siding products; and security systems and monitoring. With the elimination of joint marketing through Washington Natural and the sharing of certain common costs, Services has changed the scope and the manner in which this business is conducted. The product lines have been narrowed to focus on 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. The markets for Services products are highly competitive. Competitors range from large widely-known national chains to small independent dealers with minimal name recognition. Service's 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 Railroad Properties Thermal Energy, Inc. holds the Company's coal investments through its 95% ownership 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 if market conditions become 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. The Cook Mountain project, located northeast of Ashland, Montana, involves over 20,000 acres of surface rights over coal held by lease and in fee. Proposals for short-term coal test burns, which may be conducted in 1996 or 1997, have been made to several electric utilities. The results of such tests would better define the quality of the reserves and the economics of establishing full scale mining operations. 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 to 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 proposed rail project by an additional 42 miles into southeastern Montana. The proposed extension would shorten by about 150 miles the railroad haul between the coal producing areas further south in Montana and in northeast Wyoming, and electricity generating stations in Minnesota, Michigan and Wisconsin. This would benefit existing coal shippers by reducing haul distances and would increase the value and development potential of Montco's coal reserves. 20 Page 20 In 1995, the Company wrote down the carrying value of its coal reserves and railroad assets to estimated fair market value in conjunction with the early adoption of SFAS No. 121. The coal reserves were written down from $38.7 million to $4.0, million and the railroad assets amounting to $6.0 million, consisting of engineering and other intangible development costs, were written down to zero. See Note 8 of Notes to Consolidated Financial Statements for further information concerning the write-downs. While current coal prices and projections of future coal prices do not support full development of these assets over the next five to ten years, the Company intends to maintain its investments and to periodically reassess the viability of further development. Other Businesses Certain gas transportation, storage and other contractual arrangements that were excluded from the merger of Resources with Cabot were transferred to a newly-formed, wholly-owned subsidiary of the Company, Washington Energy Gas Marketing Company ("WEGM"). See Note 14 of Notes to Consolidated Financial Statements 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 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 and its predecessor. Unisyn developed and patented pollution control technology which processes organic wastes by anaerobic digestion and produces saleable by-products. 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 decided to divest the Unisyn operation which was reported as a discontinued operation in the Company's financial statements in that year. In August 1994, the Company sold the stock of its two wholly-owned subsidiaries, Thermal Efficiency, Inc. and Holdings Northwest, Inc., which jointly owned Unisyn. The two subsidiaries had no other significant operations or assets at the date of sale. See Note 15 of Notes to Consolidated Financial Statements. (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, Kent and Everett) and parts of five counties in the Puget Sound region of Washington State. It owns a total of 268 acres of land, of which 20 acres are sites for peak-shaving 21 Page 21 plants, 60 acres are sites for city gate stations for receipt of 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 or 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 20. The Company believes its properties to be generally in good condition and well maintained and to be suitable and adequate to carry on the Company's business. Item 3. Legal Proceedings For a description of the legal matters related to the Company and Washington Natural see Note 11 of Notes to Consolidated Financial Statements. Item 4. Submission of Matters to a Vote of Security Holders There were no matters submitted to a vote of security holders, through the solicitation of proxies or otherwise, during the fourth quarter ended September 30, 1995. 22 Page 22 Executive Officers of the Registrants
Name Title Age - -------------------- ------------------------------------------------------------------------- --- William P. Vititoe Chairman of the Board of Directors, Chief Executive Officer and President 57 (Chairman and Chief Executive Officer since February 1994, President since April 1994). (1) Timothy J. Hogan Executive Vice President - Chief Operating Officer (since August 1995; 44 Senior Vice President - Supply, Administration and Corporate Secretary, February 1995 - August 1995; Vice President - Supply, Administration and Corporate Secretary, June 1994 - February 1995; Vice President - Legal and Corporate Secretary, February 1990 - June 1994). (1) James P. Torgerson Executive Vice President - Chief Administrative Officer and Chief 43 Financial Officer (since August 1995; Senior Vice President - Finance, Planning and Development and Chief Financial Officer, February 1990 - August 1995). (1) Robert J. Tomlinson Senior Vice President - General Counsel and Corporate Secretary (since 59 August 1995; Senior Vice President - Legal and Administration, February 1990 - August 1995). (1) James W. Gustafson Senior Vice President - Operations (since April 1990). (2) 62 William J. Wortley Senior Vice President - Government Affairs (since August 1995; Senior 58 Vice President - Public Affairs, February 1993 - August 1995; Vice President - Public Affairs, April 1989 - February 1993). (2) Donald H. Gessel President - Washington Energy Services Company (since October 1993 (3); 53 Senior Vice President - Marketing, Gas Supply and Rates, August 1990 - October 1993). (2) Allyn P. Hebner Vice President - Finance, Treasurer and Chief Accounting Officer (since 42 August 1995 (1); Vice President and Chief Accounting Officer, June 1994 - August 1995 (1); Vice President and Treasurer of Washington Energy Resources Company, February 1993 - June 1994 (3); Assistant Vice President and Treasurer of Washington Energy Resources Company, April 1991 - February 1993. (3) (1) of Washington Energy and of Washington Natural. (2) of Washington Natural only. (3) of Washington Energy subsidiary.
There are no family relationships between any of the executive officers or any executive officer and any director. Officers are elected by the Board of Directors and serve until the next annual meeting or until their successors are elected and qualified, provided, however, that any officer may be removed at any time by majority vote of the Board of Directors. 23 Page 23 PART II Item 5. Market for Registrant's Common Stock and Related Shareholder Matters The common stock of Washington Energy is traded on the NYSE (trading symbol is WEG). The following table reflects the dividends paid and the range of high and low selling prices of the Company's common stock on the NYSE by quarter for 1995 and 1994:
Price Range Dividends ------------------------- Period Per Share High Low ------------------- --------- ------- ------- 1995 1st Quarter $.25 $14-3/4 $12-1/2 2nd Quarter .25 14-3/8 13 3rd Quarter .25 16-7/8 13 4th Quarter .25 17-3/8 15-3/4 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
There were approximately 12,159,000 common shareholders of the Company as of December 15, 1995. It is currently the policy of the Board of Directors to declare cash dividends payable in December, March, June and September of each year. The Company and its predecessor have paid cash dividends since 1960. The dividend rate is reassessed regularly in light of existing conditions, the needs of the Company and the interests of shareholders. (See Note 4 of Notes to Consolidated Financial Statements for a description of certain limitations on the Company's ability to pay dividends.) 24 Page 24 Item 6. Selected Financial Data WASHINGTON ENERGY COMPANY AND SUBSIDIARIES
Year Ended September 30, --------------------------------------------------------------------- 1995 1994 1993 1992 1991 ---------- ---------- ---------- ---------- ---------- (in thousands except per share amounts) OPERATING REVENUES: Regulated utility sales $420,048 $396,407 $367,853 $284,939 $311,052 Merchandise and other 23,563 35,618 71,185 72,533 65,414 Oil and natural gas operations -- -- 31,354 17,616 19,098 -------- -------- -------- -------- -------- TOTAL OPERATING REVENUES $443,611 $432,025 $470,392 $375,088 $395,564 ======== ======== ======== ======== ======== OPERATING INCOME $ 51,796 $ 28,168 $ 55,569 $ 45,980 $ 59,394 OTHER INCOME (EXPENSE), net (52,330) (36,717) (1,895) (956) 1,178 -------- -------- -------- -------- -------- GROSS INCOME (LOSS) (534) (8,549) 53,674 45,024 60,572 -------- -------- -------- -------- -------- TOTAL INTEREST CHARGES 41,188 36,751 32,180 31,592 29,716 CAPITALIZED INTEREST (660) (453) (541) (549) (725) -------- -------- -------- -------- -------- INTEREST CHARGES 40,528 36,298 31,639 31,043 28,991 -------- -------- -------- -------- -------- INCOME (LOSS) FROM CONTINUING OPERATIONS (41,062) (44,847) 22,035 13,981 31,581 DISCONTINUED OPERATIONS -- (799) (12,388) (2,542) (3,235) -------- -------- -------- -------- -------- NET INCOME (LOSS) (41,062) (45,646) 9,647 11,439 28,346 DIVIDENDS ON PREFERRED STOCK -- 9 101 105 112 EXCESS PREMIUM, PREFERRED REDEMPTION -- 673 -- -- -- -------- -------- -------- -------- -------- EARNINGS (LOSS) ON COMMON STOCK $(41,062) $(46,328) $ 9,546 $ 11,334 $ 28,234 ======== ======== ======== ======== ======== EARNINGS (LOSS) PER COMMON SHARE FROM: Continuing operations $ (1.72) $ (1.94) $ .95 $ .71 $ 1.73 Discontinued operations -- (.03) (.53) (.13) (.18) -------- -------- -------- -------- -------- EARNINGS (LOSS) PER COMMON SHARE $ (1.72) $ (1.97) $ .42 $ .58 $ 1.55 ======== ======== ======== ======== ========
25 Page 25 Item 6. Selected Financial Data (Continued) WASHINGTON ENERGY COMPANY AND SUBSIDIARIES (Continued)
Year Ended September 30, ----------------------------------------------------------------------------- 1995 1994 1993 1992 1991 ---------- ---------- ---------- ---------- ---------- (in thousands except per share amounts) DIVIDENDS PER COMMON SHARE $ 1.00 $ 1.00 $ 1.40 $ 1.40 $ 1.38 ========== ========== ========== ========== ========== TOTAL COMMON DIVIDENDS DECLARED based on shares outstanding on record dates during each period $ 23,877 $ 23,468 $ 32,282 $ 27,499 $ 25,584 ========== ========== ========== ========== ========== TOTAL ASSETS $ 989,490 $1,036,790 $1,035,817 $ 899,874 $ 809,657 ========== ========== ========== ========== ========== LONG-TERM DEBT AND RE- DEEMABLE PREFERRED STOCK $ 400,060 $ 380,200 $ 370,700 $ 304,228 $ 259,788 ========== ========== ========== ========== ========== COMMON SHAREHOLDERS' INTEREST $ 196,686 $ 256,800 $ 322,931 $ 275,517 $ 284,260 ========== ========== ========== ========== ==========
26 Page 26 Item 6. Selected Financial Data (Continued) WASHINGTON NATURAL GAS COMPANY AND SUBSIDIARIES
Year Ended September 30, --------------------------------------------------------------------------- 1995 1994 1993 1992 1991 -------- -------- -------- -------- -------- (in thousands) OPERATING REVENUES: Regulated utility sales $420,048 $396,407 $367,853 $284,939 $311,052 Merchandise and conser- vation products -- -- 63,210 66,083 60,393 -------- -------- -------- -------- -------- TOTAL OPERATING REVENUES $420,048 $396,407 $431,063 $351,022 $371,445 ======== ======== ======== ======== ======== TOTAL GROSS MARGIN (Regulated utility sales less cost of gas sold) $201,026 $172,905 $186,696 $154,603 $173,020 ======== ======== ======== ======== ======== OPERATING INCOME $ 50,513 $ 26,381 $ 49,889 $ 38,143 $ 51,761 OTHER INCOME (EXPENSE), net (443) (3,860) (1,036) 135 2,450 -------- -------- -------- -------- -------- GROSS INCOME 50,070 22,521 48,853 38,278 54,211 INTEREST CHARGES (32,216) (30,764) (27,082) (26,047) (24,802) -------- -------- -------- -------- -------- NET INCOME (LOSS) 17,854 (8,243) 21,771 12,231 29,409 DIVIDENDS ON PREFERRED STOCK 7,126 3,979 2,720 2,740 2,755 EXCESS PREMIUM, PREFERRED REDEMPTION -- 798 -- -- -- -------- -------- -------- -------- -------- EARNINGS (LOSS) ON COMMON STOCK $ 10,728 $(13,020) $ 19,051 $ 9,491 $ 26,654 ======== ======== ======== ======== ======== TOTAL COMMON DIVIDENDS DECLARED based on shares outstanding on record dates during each period $ -- $ 16,937 $ 26,045 $ 21,691 $ 20,151 ======== ======== ======== ======== ======== TOTAL ASSETS $890,598 $872,549 $834,516 $729,536 $657,727 ======== ======== ======== ======== ======== LONG-TERM DEBT AND REDEEMABLE PREFERRED STOCK $400,060 $380,200 $370,700 $304,280 $259,940 ======== ======== ======== ======== ======== COMMON SHAREHOLDER'S INTEREST $251,528 $235,988 $262,334 $205,599 $210,889 ======== ======== ======== ======== ========
27 Page 27 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Results of Operations Washington Energy Company incurred net losses available to common of $41.1 million, or $1.72 per share, and $46.3 million, or $1.97 per share, in 1995 and 1994, respectively, due to various non-recurring or unusual charges ("Special Charges"). The following table summarizes earnings and losses on common and per share by year (amounts in millions except per share).
1995 1994 1993 -------------------- -------------------- ------------------ Per Per Per Amount Share Amount Share Amount Share ------ ------- ------ ------- ------ ------- Before Special Charges $ 8.1 $ .34 $ (3.8) $ (.16) $ 21.9 $ .95 Special Charges (49.2) (2.06) (41.7) (1.78) -- -- ------ ------ ------ ------ ------ ------ Continuing operations (41.1) (1.72) (45.5) (1.94) 21.9 .95 Discontinued operations -- -- (.8) (.03) (12.4) (.53) ------ ------ ------ ------ ------ ------ Earnings (loss) on common stock $(41.1) $(1.72) $(46.3) $(1.97) $ 9.5 $ .42 ====== ====== ====== ====== ====== ======
The 1995 Special Charges result from; 1) early adoption of SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," which resulted in write-downs of the Company's coal and rail interests in Montana ($26.5 million after tax); 2) a reduction in the value of Washington Energy's investment in Cabot associated with Cabot's implementation of SFAS No. 121 as well as recognition of a permanent impairment of the carrying value of its investment in Cabot ($16.1 million after tax); 3) increased losses projected in the future from certain gas transportation and storage arrangements assumed from the Company's former oil and gas exploration subsidiary ($3.3 million after tax); 4) gas utility employee severance costs ($2.0 million after tax); and 5) deferred income taxes relating to tax contingencies ($1.3 million). The 1994 Special Charges result from: 1) the merger of the Company's oil and gas exploration and production subsidiary with Cabot and reserves established for certain gas transportation and storage arrangements excluded from the merger ($30.0 million after tax); 2) restructuring and down sizing the gas utility subsidiary ($4.6 million after tax); and 3) other write-offs and reserves established in the gas utility ($7.1 million after tax). The decision was made to dispose of the Company's biowaste business, Unisyn, 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 after-tax loss of $799,000 was incurred in 28 Page 28 1994 to complete the disposition through the sale of the two subsidiaries that owned Unisyn. Excluding the Special Charges, the Company's 1995 earnings of $8.1 million are improved from the loss reported in 1994, but remain lower than 1993 earnings. The following table shows the contribution to earnings from each of the Company's continuing businesses (before interest, income taxes and preferred dividend requirements of Washington Natural, in millions).
1995 1994 1993 ------ ------ ------ Gas utility $61.4 $33.3 $50.8 Merchandise sales (1.6) .1 7.9 Oil and gas .7 1.9 9.3 Other 1.8 (4.1) (2.9) ----- ----- ----- Total $62.3 $31.2 $65.1 ===== ===== =====
The improvement in Washington Natural's 1995 earnings was due largely to an increase in utility margin (revenues less cost of gas sold) resulting from general rate increases granted in 1994 and 1995 and a reduction in ongoing operations and maintenance ("O&M") expenses. Higher interest expense in 1995, due primarily to increases in interest rates, and additional preferred stock dividends, due to the issuance by Washington Natural of $30.0 million of preferred stock late in 1994, partially offset the improvement in Washington Natural's operating earnings. Coal and Rail Related Charges In the fourth quarter of 1995, the Company elected early adoption of SFAS No. 121 which resulted in $26.5 million in after-tax write-downs of the Company's coal and railroad assets. Based on a mine feasibility study by a mining and geological consulting firm, the Company has concluded that the economics of developing its coal reserves are marginal or subeconomic over the next five to ten years. Although prices for low sulfur coal are expected to increase in real terms over the next five to ten years, prices are not expected to reach the levels necessary to justify the additional capital expenditures necessary to commence full scale mining operations within that time frame. Due to the significance of the write-down indicated, the Company elected early adoption of SFAS No. 121 and wrote down the carrying value of the coal properties from $38.7 million to $4.0 million (after-tax write-down of $22.6 million). As a consequence of the determination that the coal reserves are uneconomical to develop in the foreseeable future, the Company also wrote off its $6.0 million ($3.9 million after tax) railroad investment. The investment consisted of the costs related to planning the railroad necessary to transport coal from the proposed mine sites to the existing rail line for shipment on to markets in the Midwest. Oil and Gas Related Charges The Company recorded two fourth quarter 1995 Special Charges related to its investment in Cabot. Cabot also elected early adoption of SFAS No. 121 which resulted in pre-tax write-downs of $113.9 million related to its oil and gas properties. Under the equity method of accounting for its investment in Cabot common stock, the Company recorded its 9.4% share of Cabot's write-down which 29 Page 29 totaled $4.2 million after tax. In addition, the Company recorded an $11.9 million after-tax charge to write down the excess of its recorded investment in Cabot over its proportional interest in Cabot's underlying shareholder's equity. The Company believes a permanent impairment in the value of its investment in Cabot has occurred based on fundamental changes in the natural gas market over the past year, which have sharply reduced gas prices and Cabot's earnings potential. After the write-downs, the carrying value of the Company's investment in Cabot is $70.0 million which approximates the fair market value of the shares of Cabot common and preferred stock held by the Company at September 30, 1995. On May 2, 1994, the Company merged its oil and gas subsidiary, Resources, with Cabot in a tax-free exchange. The Company received Cabot common and preferred stock with a fair market value of $98.5 million, in addition to the repayment of $63.7 million of intercompany debt. The Company recorded a net loss on the transaction of $18.3 million after providing for deferred taxes of approximately $32.0 million, and establishing a pre-tax reserve of $6.8 million for a potential downward purchase price adjustment based on the performance of wells in a certain field over one year. During 1995 this entire reserve was utilized and the Company recorded an additional pre-tax loss of $503,000 ($327,000 after tax) in resolving substantially all remaining merger-related matters with Cabot. In the fourth quarter of 1995, the Company recorded a $3.3 million after-tax charge to earnings to increase its reserve by $5.0 million for anticipated future losses associated with certain gas transportation and storage contractual arrangements excluded from the merger of Resources with Cabot. Upon completion of the Resources merger in 1994, the Company had recorded an after-tax charge of $11.7 million to establish reserves of $16.0 million for anticipated future losses associated with these excluded contractual arrangements and $2.0 million for other excluded items. The Company had only limited operating experience with these arrangements prior to the merger, since they were placed in service November 1, 1993. Due to the merger and associated elimination of Resources' operating and marketing staffs and gas production to aid in managing and utilizing these arrangements, management anticipated that these arrangements would continue to generate losses for the foreseeable future. During 1995 and 1994, $5.8 and $3.0 million (pre-tax) of the reserves were utilized, respectively. The losses in 1995 were higher than expected due to warmer weather and lower utilization of the pipeline capacity. In addition, further delays are expected in the resolution of the pipeline's rate case before the FERC, the outcome of which is expected to reduce the Company's capacity payments to the pipeline. (See Note 14 of Notes to Consolidated Financial Statements for additional information regarding these projected losses.) Restructuring and Other Special Charges In the fourth quarter of 1995, the Company recorded after-tax charges totaling $3.3 million for employee severance costs and income tax contingencies. The severance charge of $2.0 million related to a 4% reduction in Washington Natural's work force, which was initiated during that quarter and completed in the first quarter of 1996. The work-force reduction, which affected only salaried employees, was part of Washington Natural's ongoing organizational transformation initiated in 1994. The restructuring efforts were initiated in the third quarter of 1994 when Washington Natural recorded after-tax charges totaling $4.6 million to consolidate operations and downsize its work force. 30 Page 30 The charges included severance costs of $2.3 million (after tax) and expensing $1.9 million of costs (after tax) previously capitalized for planning a new headquarters building not currently needed. During 1994, Washington Natural's work force was reduced 12% from the level at the beginning of the year. Although the 1994 severance accrual was fully utilized in 1995 and the 1995 severance accrual has been fully utilized in the first quarter of 1996, certain of the severance benefits are to be paid over time as specified in certain severance agreements, rather than in lump sum. Washington Natural recorded additional charges in 1994 totaling $7.1 million after tax to write off costs deemed to be unrecoverable and to establish certain reserves. A total charge of $1.5 million after tax was included to provide for estimated environmental investigation, legal and remediation costs associated with certain former manufactured gas plant sites and to write off certain environmental-related deferred costs. Also included was a $2.2 million after-tax charge for supplemental executive retirement benefits. Operating Revenues The following table summarizes the Company's revenues by line of business (in millions):
1995 1994 1993 ------ ------ ------ Regulated utility sales $420.0 $396.4 $367.8 Merchandise sales 23.6 35.6 71.2 Oil and gas -- -- 31.4 ------ ------ ------ Total $443.6 $432.0 $470.4 ====== ====== ======
The $23.6 million, or 6%, increase in regulated utility sales in 1995 was largely the result of two general rate increases and customer growth, partially offset by a PGA which reduced revenues but did not impact earnings. Utility margin increased by $28.1 million or 16% due primarily to the rate increases and customer growth, and was not impacted by the PGA. The general rate orders, which are discussed in detail in the General Rate Cases section below, increased utility margin by approximately $18 million. The impact on utility margin in 1995 was less than the full, annualized impact of the two rate orders because of warmer weather and the timing of the second increase which was ordered after the heating season. Washington Natural's rate of growth in new customers remained at 5%, or 21,000 customers, during 1995, which increased gas sales volumes by 5% and added an estimated $6 million in utility margin. Although weather in 1995 was 12% warmer than normal and 2% warmer than in 1994, the year-to-year impact of weather on margin and gas volumes was negligible. Much of the winter of 1995 was colder than in 1994, while the rest of 1995, when heating load was lower, was significantly warmer than 1994. Had weather been normal during 1995, utility margin would have been higher by an estimated $9 million. The 8% increase in regulated utility sales 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 (see General Rate Case section below) ordered in October 1993, and 31 Page 31 weather that was 10% warmer than normal and 9% warmer than the prior year. A general rate increase totaling $19.0 million annually, effective June 2, 1994, did not have a material impact on revenues for the year since it occurred after the end of the heating season. The Company's merchandise sales revenues declined by $12.0 million or 34% in 1995, continuing the trend established when the bulk of this business, consisting of gas appliance sales, was transferred from Washington Natural to Services on October 1, 1993. The absence of joint marketing, installation and service activities with Washington Natural continue to have a negative impact on the ability of Services to attract new merchandise customers. Services completed an extensive sales training program and restructuring of its sales force late in 1995, prior to its major fall marketing campaign; however, these actions were taken too late in the year to significantly impact 1995 revenues. As a result, Services incurred a loss, before interest and income tax, of $1.6 million in 1995, down from profits of $72,000 and $7.9 million in 1994 and 1993, respectively. The Company accounts for its investment in Cabot common stock using the equity method of accounting. Under this accounting method, the Company records 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. The 1993 financial statements continue to reflect Resources on a consolidated basis, as previously reported, in accordance with generally accepted accounting principles. Operating Expenses The following table shows the Company's operating expenses by line of business, before and after income taxes (in millions):
1995 1994 1993 ------ ------ ------ Utility Cost of gas sold $219.0 $223.5 $181.2 Operations and maintenance 68.1 81.8 71.6 Depreciation and amortization 33.1 30.9 28.2 General taxes 40.8 37.8 35.0 ------ ------ ------ Total utility operating expenses 361.0 374.0 316.0 Merchandise sales 25.3 35.7 62.3 Oil and gas -- -- 23.9 Other -- 0.9 3.0 ------ ------ ------ Total before income taxes 386.3 410.6 405.2 Income taxes 5.5 (6.7) 9.6 ------ ------ ------ Per consolidated statements of income $391.8 $403.9 $414.8 ====== ====== ======
The $12.1 million decrease in operating expenses reflected in the income statement in 1995 is due primarily to lower total utility operating expenses 32 Page 32 ($13.0 million) and lower merchandise sales expenses ($10.4 million), partially offset by the change in income taxes from a benefit to an expense ($12.2 million) due to higher pre-tax utility earnings. The $13.0 million decrease in total 1995 utility operating expenses consists primarily of a $13.7 million decrease in O&M expenses. The decrease in O&M expenses resulted from inclusion of $3.2 million of employee severance costs in 1995 versus $11.7 million of Special Charges included in 1994, and from $7.7 million in ongoing cost savings due primarily to the 1994 work-force reduction, partially offset by $4.1 million of consulting charges to support the organizational transformation efforts during 1995. The cost of gas sold decreased in 1995 due to the PGA implemented in May 1995. The increases in depreciation and general taxes were the result of capital spending to add customers and revenue growth, respectively. The $10.9 million decrease in operating expenses from 1993 to 1994 was 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 ($16.3 million), all of which were largely offset by increases in cost of gas sold ($42.3 million) and utility O&M expenses ($10.2 million). The increase in the cost of gas sold was due to higher gas prices, since gas sales volumes were essentially the same in both years, which was recovered from customers through PGAs. The O&M expense increase was due primarily to the $11.7 million in Special Charges recorded in 1994. Oil and Gas Business Operating Results In 1995, the Company recorded losses related to its investment in Cabot totaling $14.8 million after tax. Excluding the write-downs discussed above, the Cabot investment produced a pre-tax profit of $721,000 consisting of preferred dividend income of $3.4 million net of equity in losses of $2.7 million. The Company's 1995 results reflect a full year of Cabot's results, while 1994 results reflect only the five months subsequent to the merger. The 1994 earnings contribution from the oil and gas business before interest and income taxes (consisting of Resources' earnings through the merger date and earnings from the investment in Cabot thereafter) was $1.9 million, compared with $9.3 million of Resources' earnings in 1993. Resources' 1994 earnings of $1.0 million through the merger date were adversely impacted by lower oil prices and losses from the gas transportation and storage arrangements described above. Subsequent to the merger, Cabot reported losses, of which the Company's proportionate share totaled $573,000, due primarily to seasonal factors and generally lower gas prices. Dividend income from preferred stock was $1.4 million pre-tax. 33 Page 33 General Rate Cases Washington Natural filed and received rate orders for three general rate cases in the period from July 1992 to May 1995. The following table shows the filing dates of each case, the annual margin effect based on normal weather and the effective date of each rate order:
Annual Margin Date of Increase Effective Date Filing (Decrease) of Rate Order ------------- --------------- -------------- July 1992 ($15.4 million) October 9, 1993 November 1993 $19.0 million June 2, 1994 March 1995 $17.7 million May 15, 1995
In the July 1992 filing, Washington Natural had initially sought a $41.4 million rate increase which was subsequently reduced to $14.8 million. In September 1993, the WUTC issued an order decreasing rates by $15.4 million effective in October 1993. The principal differences in the annual revenue requirement between Washington Natural's rate request and the WUTC's ordered rate reduction were: (1) approximately $11 million of expenses related to advertising, marketing and merchandising disallowed by the WUTC; (2) approximately $10 million due to an allowed overall rate of return of 9.15% on a rate base of $483.9 million compared to Washington Natural's proposed overall rate of return of 9.98% on $504.0 million of rate base; (3) $5.2 million related to disallowance of Washington Natural's proposed attrition allowance; and (4) $4.8 million associated with the weather normalization calculation. In November 1993, Washington Natural filed a limited-scope general rate case seeking a $24.6 million increase in annual revenues. The primary focus was to seek recovery of additional operating costs and the inclusion in rate base of utility plant additions since calendar year 1991, which was the base measurement year used in the prior rate case. 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 revenue and an agreement that Washington Natural would not request an increase in total revenues, other than PGA filings or in other limited circumstances, prior to March 1, 1995. In the March 1995 general rate case filing, Washington Natural requested a $35.4 million increase in annual revenues, with $17.8 million of the total to be granted as interim rate relief in May 1995. The rate case was requested to cover increased costs related to plant additions and upgrades and higher costs for financing and general operations. On May 11, 1995, the WUTC issued an order approving a settlement of the case. The order provided an additional $17.7 million in annual revenues and reflected an authorized rate of return on common equity in the range of 11.0% - 11.25%, up from the previous level of 10.5%. The WUTC also stipulated that Washington Natural will be allowed to earn in excess of that range to the extent that it can do so by managing its cost of service. As part of the rate case settlement, Washington Natural agreed not to make a general rate case filing prior to May 15, 1997. 34 Page 34 Washington Natural, however, is not precluded from PGA filings or filing for interim or emergency rate relief if conditions warrant. The May 11, 1995 order also implemented a rate redesign approved by the WUTC on April 11, 1995. Generally, the rate redesign lowers the rates for transportation customers and large commercial and industrial customers, while increasing the rates for residential customers. In a separate decision on May 11, 1995, the WUTC issued an order to implement a PGA to pass through a 46.5 million annual reduction in the cost of purchased gas to customers on in the form of lower rates. These actions by the WUTC resolved all outstanding 1995 rate issues. Inflation and Changing Prices The Company is directly and indirectly affected by inflation and changing prices in several ways, most of which are also heavily influenced by the WUTC regulatory process. Natural gas prices have been highly volatile in recent years, which has impacted Washington Natural's cost of purchased gas but has not affected Washington Natural's earnings due to use of the PGA mechanism. As requested by Washington Natural, the WUTC has authorized changes in customer rates to permit the "pass through" of projected changes in the cost of purchased gas. Differences between actual gas costs and those authorized in the prior PGA are accumulated in balancing accounts for future recovery or refund. Except for costs disallowed in a 1992 order relating primarily to purchases from 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 PGA went into effect in May 1995 as described above. Washington Natural's operating results are impacted by the effects of inflation on O&M expenses, particularly wages, which historically comprise approximately 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, November 1993 and March 1995, as described above. Inflation also impacts Washington Natural directly through the cost of replacing portions of its distribution system. Washington Natural's rates are set based on the historical cost of construction of its distribution system and long depreciable lives. Due to the long lives, the cost of replacing components of the system is generally much higher than the original cost which impacts Washington Natural's earnings through higher depreciation charges and higher carrying costs of the new assets. Since replacing components of the system does not generate additional revenues, Washington Natural must file general rate cases in order to recover these higher costs. The estimated replacement cost of Washington Natural's gas mains and service lines is $1.4 billion, which exceeds historical cost by $800 million. 35 Page 35 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. Interest rates, in particular short-term rates, have increased in 1994 and 1995, which has had a negative impact on earnings. The current level of interest rates is also a major factor in determining Washington Natural's authorized rate of return on equity associated with its general rate filings. Prior to the October 1993 rate order in which Washington Natural's rate of return on common equity was set at 10.5%, the rate of return on common equity had been set at 16.25%. This rate was based on a 1985 rate order that corresponded to a period of high interest rates in the early 1980's. The May 1995 general rate order increased Washington Natural's authorized return on common equity to 11% - 11.25%. 36 Page 36 Liquidity and Capital Resources Capital expenditures typically represent the largest cash flow item for the Company due to the capital-intensive nature and growth rate of the utility and, prior to 1994, the oil and gas business. Of the Company's $88.7 million of 1995 gross capital expenditures, $87.2 million were for utility plant. Washington Natural makes capital expenditures to add new customers to its gas distribution system and to replace and enhance components of the system to insure its reliability and safety. Washington Natural's financing strategy is to fund capital expenditures with a combination of cash flow from operations, after dividend payments, and short-term borrowings on an interim basis. The short-term borrowings are reduced periodically with the proceeds from issuing long-term debt and equity securities, the choice and timing of which are dependent on management's evaluation of need, financial market conditions and other factors. The following table summarizes the major cash flow items for the Company for the three years ended September 30 (in millions):
1995 1994 1993 ------ ------ ------ Operating cash flow $ 84.6 $ 14.6 $ 36.6 Common dividends (23.9) (23.5) (32.3) Capital expenditures (88.7) (86.9) (129.5) Short-term borrowing (repayment), net 36.8 (20.3) 7.3 Net issuance (redemption) of preferred stock -- 64.7 (10.2) Cash from merger of subsidiary, net -- 42.9 -- Issuance of common stock 4.8 6.3 70.5 Net issuance (retirement) of long-term debt (10.1) (3.3) 67.7 Other, net .4 (2.2) (2.5) ------ ------ ------ Net change in cash $ 3.9 $ (7.7) $ 7.6 ====== ====== ======
Operating cash flow of $84.6 million in 1995 was sufficient to fund virtually all of the Company's investments in utility plant and other property. Washington Energy funded its common stock dividend payments during 1995 from short-term borrowings due to a restriction on the payment of common stock dividends by Washington Natural in its first mortgage bond indentures. Due to the Special Charges recorded in June 1994, Washington Natural's retained earnings fell below the minimum level at which dividend payments to Washington Energy are permitted. At September 30, 1995, Washington Natural's retained earnings remained $12.5 million below the minimum requirement as cumulative earnings since June 1994 have been insufficient to raise retained earnings to the minimum level. A total of $85.1 million of long-term debt was retired and refinanced through issuance of $75.0 million of medium-term notes, with generally lower interest rates, and short-term borrowings which will produce annual interest savings of approximately $1.3 million. Operating cash flow in 1995 increased by $70.0 million compared to 1994. This was due primarily to the purchased gas adjustment mechanism and environmental- related insurance recoveries in excess of environmental expenditures. The 37 Page 37 purchased gas receivable of $21.3 million at September 30, 1994, shifted to a liability of $15.6 million at September 30, 1995, as Washington Natural was able to purchase gas for most of the year at an average cost below that being recovered in rates based on the prior PGA. This created positive cash flow as the receivable from rate payers was collected and an obligation was established. As indicated in Note 10 of Notes to Consolidated Financial Statements, Washington Natural, in 1995, reached an agreement with its insurers whereby Washington Natural received $29.0 million in settlement of litigation regarding environmental remediation of a former manufactured gas plant site in Tacoma, Washington. Thus, the Company had net cash receipts of $24.2 million in 1995 related to environmental remediation activities compared to net cash payments of $11.8 million and $9.3 million in 1994 and 1993, respectively. Capital expenditures in 1996 are projected at $86 million for Washington Natural and $2 million for the Company's other businesses. The Company has decided not to develop its coal reserves and associated railroad in the foreseeable future. The Company expects to fund its 1996 capital spending with cash flow from operations and short-term borrowings. Washington Natural issued medium-term notes at lower interest rates to refinance $30.0 million of first mortgage bonds called early in December 1995. Washington Natural may issue additional notes during 1996 in lieu of funding capital expenditures with short-term debt, depending on market conditions. 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 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. Washington Natural issued preferred stock twice during 1994 to fund capital spending and the early redemption of all outstanding preferred issues to take advantage of lower dividend requirements and to eliminate future sinking-fund requirements. 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. In September 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 early redemption occurred in November 1993 at an aggregate cost of $23.2 million. In addition to short-term borrowing requirements to fund its capital spending program on an interim basis, Washington Natural has seasonal short-term borrowing requirements. Operating revenues vary with weather conditions because approximately 90% of Washington Natural's customers use natural gas for space heating. This normally produces substantially increased earnings and operating cash flow during the first eight or nine months of each year and a loss and negative cash flow in the remaining three or four months, with the 12 months as a whole being profitable and generating positive operating cash flow. Because of this, Washington Natural must borrow on a short-term basis to meet its operating needs for a portion of the year. The Company has several short-term financing arrangements available currently: an aggregate of $250 million of commercial paper and similar programs backed by a committed revolving credit agreement, of which $88 million was unused at September 30, 1995; an uncommitted bank credit arrangement of $25 million, all of which was available at year end; and a committed agreement to sell up to 38 Page 38 $90 million of merchandise and gas receivables, of which $62 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, 1995, a time of the year when gas receivable balances are low due to seasonal factors, all but $11 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 will result in a material adverse impact on the Company's or Washington Natural's financial position or operating results and cash flow trends. (For a description of Environmental Matters, see Note 10 of Notes to Consolidated Financial Statements.) Litigation The Company or Washington Natural is a defendant in several potentially material lawsuits. Based on prior decisions and known facts in the cases, management does not believe the cases will, individually or in the aggregate, have a material impact on the Company or Washington Natural. (See Note 11 of Notes to Consolidated Financial Statements.) Significant Balance Sheet Changes The tax benefits of the 1995 Special Charges were primarily deferred tax benefits which reduced the noncurrent deferred tax liability by a net $18.5 million from September 30, 1994 to September 30, 1995. The other significant changes in the Company's balance sheet during 1995 result directly from matters previously discussed in the foregoing sections of Management's Discussion and Analysis of Financial Condition and Results of Operations. Future Outlook (a) Proposed Merger On October 18, 1995, a definitive agreement was approved by Washington Energy's and Washington Natural's Boards of Directors to merge Washington Energy and Washington Natural into Puget, which, as the surviving corporation will be renamed at the effective time of the merger. The merged company would be the largest combined electric and gas utility in the state of Washington. The agreement must be approved by the holders of the common stock of Washington Energy, the holders of the preferred stock of Washington Natural, and the holders of the common stock of Puget. In addition, the WUTC, which regulates both utilities, must approve the merger, and certain other conditions in the merger agreement must be satisfied or waived. Shareholders of the three companies will be asked to vote on the merger on March 20, 1996. Regulatory approval is expected prior to the end of calendar 1996. The synergies from the merger are expected to generate substantial cost savings that would not be available absent the merger. Preliminary estimates 39 Page 39 by the management of Washington Energy and Puget, with the assistance of Deloitte & Touche LLP, indicate potential savings (after taking into account the costs incurred to achieve such savings), which could not be achieved but for the merger, of approximately $370 million over the ten-year period following the merger. (b) Expected Improvement in 1996 Earnings Although the expected timing for completion of the merger precludes realizing significant benefits from the synergies of the proposed merger with Puget in 1996, other decisions and actions taken over the past eighteen months will have a favorable impact on the Company's performance in the coming year. First, operating earnings will benefit from the $17.7 million rate increase approved in May 1995, which will be in effect for the winter heating season. Operating earnings could also benefit if weather in the region more closely approximates long-term historical patterns. Second, the Company's organizational transformation efforts are expected to generate approximately $3 million in operating cost savings for the year. Much of the savings will come from the management reorganization and work- force reduction which occurred at the end of 1995. Additional savings will be achieved later in the year as technology improvements are implemented to increase operational efficiency as well as improve customer service. Certain of the changes to be implemented involve joint operations with Puget based on collaborative cost-saving efforts over the past year. Third, the Company expects profitable utility customer growth of about 4%, or 16,000 to 19,000 new customers. Although the utility's growth rate is expected to slow, the new customer addition and line extension policy approved in 1995 should facilitate profitable growth by requiring customer contributions or a rate surcharge for line extensions which do not meet the 9.15% rate-of-return threshold. Fourth, the cost-based rate design implemented in May 1995, results in rates more reflective of the true cost of serving the various classes of customers. In general, the new rate design decreases rates for transportation and larger-volume gas sales customers and increases rates for residential and firm commercial and industrial customers. The new rate design makes Washington Natural economically indifferent to customer choices between transportation and sales service since the margin the utility realizes is now essentially the same. The approval by the WUTC of a contract with The Boeing Company combined with the new rate design significantly reduces the risk of Boeing and other large industrial customers bypassing Washington Natural's distribution system by interconnecting directly with the interstate pipeline. Bypass is now economically feasible for very few customers. (c) 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 cut in the dividend. In management's opinion, the results of the Company's collaborative approach to regulatory relations over the last two years (as evidenced by two general rate increases, the cost based rate redesign and the new customer addition and line extension policy) and the organizational transformation currently underway (including the redesign of key business processes and elimination of excess layers of management) have 40 Page 40 set the stage for future earnings sufficient to support the dividend over the long term. 41 Page 41 Item 8. Financial Statements and Supplementary Data 1. Financial Statements: Washington Energy Company and Subsidiaries Consolidated balance sheets as of September 30, 1995 and 1994. Consolidated statements of income for each of the three years in the period ended September 30, 1995. Consolidated statements of capitalization as of September 30, 1995 and 1994. Consolidated statements of shareholders' earnings (deficit) reinvested in the business and premium on common stock for each of the three years in the period ended September 30, 1995. Consolidated statements of cash flows for each of the three years in the period ended September 30, 1995. Notes to consolidated financial statements Washington Natural Gas Company and Subsidiaries Consolidated balance sheets as of September 30, 1995 and 1994. Consolidated statements of income for each of the three years in the period ended September 30, 1995. Consolidated statements of capitalization as of September 30, 1995 and 1994. Consolidated statements of shareholder's earnings reinvested in the business and premium on common stock for each of the three years in the period ended September 30, 1995. Consolidated statements of cash flows for each of the three years in the period ended September 30, 1995. Notes to consolidated financial statements 2. Supplementary Data (Unaudited): Consolidated selected quarterly financial data for each of the three years in the period ended September 30, 1995. 42 Page 42 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Board of Directors of Washington Energy Company: We have audited the accompanying consolidated balance sheets and statements of capitalization of Washington Energy Company (a Washington corporation) and subsidiaries as of September 30, 1995 and 1994, 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, 1995, and the accompanying consolidated balance sheets and statements of capitalization of Washington Natural Gas Company and subsidiaries as of September 30, 1995 and 1994, and the related consolidated 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, 1995. 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 and subsidiaries as of September 30, 1995 and 1994, and the results of their operations and their cash flows for each of the three years in the period ended September 30, 1995, in conformity with generally accepted accounting principles. As discussed in Note 1 to the financial statements, the Company adopted Statement of Financial Accounting Standards No. 121 "Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed Of" during the current year. 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 27, 1995 43 Page 43 WASHINGTON ENERGY COMPANY AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS ASSETS
September 30, --------------------------- 1995 1994 ---------- ---------- (in thousands) PROPERTY, PLANT AND EQUIPMENT: Utility plant, at original cost $1,055,322 $ 977,406 Coal and other 15,621 54,398 Accumulated depreciation, depletion and amortization (273,735) (249,239) ---------- ---------- Net property, plant and equipment 797,208 782,565 ---------- ---------- INVESTMENTS IN UNCONSOLIDATED AFFILIATES 70,313 98,139 ---------- ---------- CURRENT ASSETS: Cash and cash equivalents 9,315 5,387 Receivables, net of allowance for uncollectible accounts of $979 and $1,295, respectively 10,830 6,533 Unbilled revenue 9,607 9,961 Federal income taxes receivable 10,942 12,134 Deferred income taxes 3,707 4,427 Purchased gas receivable -- 21,261 Materials and supplies, at average cost 31,968 28,069 ---------- ---------- Total current assets 76,369 87,772 ---------- ---------- OTHER ASSETS AND DEFERRED CHARGES: Environmental receivables 8,116 33,947 Regulatory tax asset 17,605 18,810 Deferred charges and other 19,879 15,557 ---------- ---------- Total other assets and deferred charges 45,600 68,314 ----------- ---------- Total assets $ 989,490 $1,036,790 ========== ==========
The accompanying notes are an integral part of these consolidated balance sheets. 44 Page 44 WASHINGTON ENERGY COMPANY AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Continued) CAPITALIZATION AND LIABILITIES
September 30, --------------------------- 1995 1994 ---------- ---------- (in thousands) CAPITALIZATION (see Consolidated Statements of Capitalization): Common shareholders' interest $ 196,686 $ 256,800 Redeemable preferred stock of subsidiary 90,000 90,000 Long-term debt 310,060 290,200 ---------- ---------- Total capitalization 596,746 637,000 ---------- ---------- CURRENT LIABILITIES: Notes payable and commercial paper 161,994 125,182 Current sinking-fund requirements and debt maturities 30,140 60,140 Accounts payable 28,177 28,127 Purchased gas liability 15,554 -- Accrued general taxes 12,556 12,044 Environmental remediation liabilities 4,578 6,199 Other current liabilities 33,517 33,105 ---------- ---------- Total current liabilities 286,516 264,797 ---------- ---------- DEFERRED CREDITS AND OTHER LIABILITIES: Noncurrent deferred income taxes 59,450 77,970 Regulatory tax liability 11,017 12,560 Unamortized investment tax credits 9,352 10,132 Contributions in aid of construction 14,252 12,298 Contingency reserves and other 12,157 22,033 ---------- ---------- Total deferred credits and other liabilities 106,228 134,993 ---------- ---------- Total capitalization and liabilities $ 989,490 $1,036,790 ========== ==========
The accompanying notes are an integral part of these consolidated balance sheets. 45 Page 45 WASHINGTON ENERGY COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME
Year Ended September 30, ------------------------------------------- 1995 1994 1993 -------- -------- -------- (in thousands) OPERATING REVENUES: Regulated utility sales $420,048 $396,407 $367,853 Merchandise, conservation products and other 23,563 35,618 71,185 Oil and natural gas operations -- -- 31,354 -------- -------- -------- Total operating revenues 443,611 432,025 470,392 -------- -------- -------- OPERATING EXPENSES: Cost of gas sold 219,022 223,502 180,893 Operations and maintenance 93,184 118,065 147,116 Depreciation, depletion and amortization 33,128 30,901 38,274 General taxes 40,974 38,086 38,895 Federal income taxes 5,507 (6,697) 9,645 -------- -------- -------- Total operating expenses 391,815 403,857 414,823 -------- -------- -------- OPERATING INCOME 51,796 28,168 55,569 -------- -------- -------- OTHER INCOME (EXPENSE): Pre-tax loss on merger of subsidiary -- (6,304) -- Federal income taxes on merger of subsidiary -- (23,711) -- Pre-tax write-down of coal and rail investments (40,703) -- -- Pre-tax charges related to unconsolidated affiliate (24,803) -- -- Deferred tax benefit of write-downs 22,927 -- -- Preferred dividend requirement - Washington Natural Gas Company (7,126) (3,970) (2,612) Other, net (2,625) (2,732) 717 -------- -------- -------- Total other income (expense) (52,330) (36,717) (1,895) -------- -------- -------- GROSS INCOME (LOSS) (534) (8,549) 53,674 INTEREST CHARGES 40,528 36,298 31,639 -------- -------- -------- INCOME (LOSS) FROM CONTINUING OPERATIONS (41,062) (44,847) 22,035 DISCONTINUED OPERATIONS: Loss from operations, net of income tax -- -- (2,570) Loss on disposal, net of income tax -- (799) (9,818) -------- -------- -------- NET INCOME (LOSS) (41,062) (45,646) 9,647 DIVIDENDS ON PREFERRED STOCK -- 9 101 EXCESS PREMIUM, PREFERRED REDEMPTION -- 673 -- -------- -------- -------- EARNINGS (LOSS) ON COMMON STOCK $(41,062) $(46,328) $ 9,546 ======== ======== ========
The accompanying notes are an integral part of these consolidated statements. 46 Page 46 WASHINGTON ENERGY COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (Continued)
Year Ended September 30, -------------------------------------------- 1995 1994 1993 ------- ------- -------- (in thousands, except per share amounts) EARNINGS (LOSS) PER COMMON SHARE: From continuing operations $ (1.72) $ (1.94) $ .95 From discontinued operations -- (.03) (.53) ------- ------- ------- EARNINGS (LOSS) PER COMMON SHARE $ (1.72) $ (1.97) $ .42 ======= ======= ======= AVERAGE COMMON SHARES OUTSTANDING 23,893 23,486 22,996 ======= ======= ======= DIVIDENDS PAID PER COMMON SHARE $ 1.00 $ 1.00 $ 1.40 ======= ======= ======= TOTAL COMMON DIVIDENDS DECLARED based on shares outstanding on record dates during each period $23,877 $23,468 $32,282 ======= ======= =======
The accompanying notes are an integral part of these consolidated statements. 47 Page 47 WASHINGTON ENERGY COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CAPITALIZATION
Shares Outstanding at September 30, September 30, --------------------- ------------------------ 1995 1994 1995 1994 ------ ------ -------- -------- (in thousands) (in thousands) COMMON SHAREHOLDERS' INTEREST: Common stock, $5 par value, authorized 50,000,000 shares 24,070 23,714 $120,348 $118,568 Premium on common stock 202,616 199,571 Shareholders' accumulated deficit (126,278) (61,339) -------- -------- Total common shareholders' interest 196,686 256,800 -------- -------- 33%* 40%* REDEEMABLE PREFERRED STOCK: Washington Energy Company - Cumulative; authorized 200,000 shares of $100 par value and 800,000 shares of $25 par value. No shares outstanding. Washington Natural Gas Company - Cumulative; authorized 1,000,000 shares of $100 par value and 4,000,000 share of $25 par value 7.45%, Series II, $25 par value 2,400 2,400 60,000 60,000 8.50%, Series III, $25 par value 1,200 1,200 30,000 30,000 -------- -------- Total preferred stock 90,000 90,000 -------- -------- 15%* 14%*
*Percentage of total capitalization. The accompanying notes are an integral part of these consolidated statements. 48 Page 48 WASHINGTON ENERGY COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CAPITALIZATION (Continued)
September 30, -------------------------- 1995 1994 -------- -------- (in thousands) LONG-TERM DEBT: First mortgage bonds 9.96% due 1995 $ -- $ 40,000 8.80% called in 1995 -- 25,000 8-1/8% due 1997 3,200 3,340 10-1/4% due 1997, called for early redemption 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 8.25% due 1998 11,000 11,000 7.08% due 1999 10,000 10,000 8.51% through 8.55% due 2001 19,000 19,000 7.53% and 7.91% due 2002 30,000 30,000 8.25% through 8.40% due 2022 35,000 35,000 Secured medium-term notes, series B 6.23% through 6.31% due 2003 28,000 28,000 6.07% and 6.10% due 2004 18,500 18,500 6.51% and 6.53% due 2008 4,500 4,500 6.83% and 6.90% due 2013 13,000 13,000 7.19% due 2023 13,000 13,000 Secured medium-term notes, series C 6.92% and 6.93% due 2005 31,000 -- 7.02% and 7.04% due 2007 25,000 -- 7.12% due 2010 7,000 -- 7.35% and 7.36% due 2015 12,000 -- -------- -------- 340,200 350,340 Less sinking-fund requirements and maturities included in current liabilities (30,140) (60,140) -------- -------- Total long-term debt 310,060 290,200 -------- -------- 52%* 46%* TOTAL CAPITALIZATION $596,746 $637,000 ======== ======== 100%* 100%*
*Percentage of total capitalization. The accompanying notes are an integral part of these consolidated statements. 49 Page 49 WASHINGTON ENERGY COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EARNINGS (DEFICIT) REINVESTED IN THE BUSINESS
Year Ended September 30, ------------------------------------------- 1995 1994 1993 --------- -------- -------- (in thousands) Balance, at beginning of year $ (61,339) $ 8,457 $ 31,193 Net income (loss) (41,062) (45,646) 9,647 Excess premium, preferred redemption -- (673) -- Dividends declared on capital stock: Common stock, $1.00, $1.00 and $1.40 per share, respectively (23,877) (23,468) (32,282) Preferred stock: 5%, series A -- (3) (26) 6%, series B -- (1) (21) 8-7/8%, series C -- (5) (54) --------- -------- -------- Balance, at end of year $(126,278) $(61,339) $ 8,457 ========= ======== ========
WASHINGTON ENERGY COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF PREMIUM ON COMMON STOCK
Year Ended September 30, ----------------------------------------- 1995 1994 1993 -------- -------- -------- (in thousands) Balance, at beginning of year $199,571 $197,917 $145,075 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 Reinvest- ment and Stock Purchase Plan 2,974 3,848 6,038 Excess of purchase price over par value of shares of common stock issued under the Employee Stock Purchase and Option Plans 239 481 631 Excess of purchase price over par value of shares of common stock issued under the Directors' Stock Bonus Plan 2 2 8 Common and preferred stock expense (170) (2,185) (378) -------- -------- -------- Balance, at end of year $202,616 $199,571 $197,917 ======== ======== ========
The accompanying notes are an integral part of these consolidated statements. 50 Page 50 WASHINGTON ENERGY COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended September 30, ------------------------------------------ 1995 1994 1993 -------- -------- --------- (in thousands) Cash flow provided by (used in) operating activities: Income (loss) from continuing operations $(41,062) $(44,847) $ 22,035 -------- -------- --------- Adjustments to reconcile net income (loss) from continuing operations to net cash provided by operating activities: Pre-tax loss on merger of subsidiary -- 6,304 -- Pre-tax write-down and equity in undistributed (earnings) losses of unconsolidated affiliate 27,826 (699) -- Pre-tax write-down of coal and rail investments 40,703 -- -- Depreciation, depletion and amortization 33,784 31,293 38,635 Provision for uncollectible accounts receivable 1,220 2,457 1,613 Increase (decrease) in: Federal income tax - current (2,515) 561 (8,844) Federal income tax - deferred (14,873) (23,452) 17,551 Deferred tax on merger of subsidiary -- 24,784 -- Deferred charges (3,493) (13,943) (20,105) Accounts receivable (5,163) 29,227 (11,304) Purchased gas adjustment 36,815 2,608 (13,315) Environmental recoveries (expenditures), net 24,210 (11,808) (9,315) Accounts payable 50 23,217 19,575 Materials and supplies (3,899) 11,824 (4,539) Other assets and liabilities (8,540) (25,963) 8,251 Other (423) 3,071 (3,632) -------- -------- --------- Total adjustments 125,702 59,481 14,571 -------- -------- --------- Net cash provided by operating activities 84,640 14,634 36,606 -------- -------- --------- Cash flow provided by (used in) investing activities: Utility plant additions (87,240) (84,506) (91,275) Coal, oil and gas and other property expenditures (1,503) (2,347) (38,211) Invested in subsidiary prior to merger -- (20,760) -- Proceeds from merger of subsidiary -- 63,661 -- Proceeds from asset dispositions 412 1,260 1,339 -------- -------- --------- Net cash (used in) investing activities (88,331) (42,692) (128,147) -------- -------- ---------
51 Page 51 WASHINGTON ENERGY COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
Year Ended September 30, ------------------------------------------ 1995 1994 1993 -------- -------- -------- (in thousands) Cash flow provided by (used in) financing activities: Proceeds from issuance of: Common stock 4,824 6,342 70,528 Preferred stock -- 87,887 -- First mortgage bonds 75,000 -- 77,000 Proceeds from issuance of (reduction of): Commercial paper, net 36,812 (20,316) 24,388 Bank loans, net -- -- (17,100) Redemptions and repurchases Preferred stock -- (23,221) (10,200) Long-term debt (85,140) (3,340) (9,260) Cash dividend payments Common (23,877) (23,468) (32,282) Preferred -- (9) (101) -------- -------- -------- Net cash provided by financing activities 7,619 23,875 102,973 -------- -------- -------- Net cash provided by (used in) continuing operations 3,928 (4,183) 11,432 Net cash (used in) discontinued operations, primarily operating activities -- (3,479) (3,795) -------- -------- -------- Net increase (decrease) in cash and cash equivalents 3,928 (7,662) 7,637 Beginning cash and cash equivalents 5,387 13,049 5,412 -------- -------- -------- Ending cash and cash equivalents $ 9,315 $ 5,387 $ 13,049 ======== ======== ======== Supplemental disclosures of cash flow information Cash paid during the year for: Interest (net of amounts capitalized) $ 41,792 $ 35,468 $ 30,685 Income taxes $ 3,335 $ 5,180 $ 6,598
The accompanying notes are an integral part of these consolidated statements. 52 Page 52 WASHINGTON NATURAL GAS COMPANY AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS ASSETS
September 30, ----------------------------- 1995 1994 ---------- ---------- (in thousands) UTILITY PLANT, at original cost $1,055,322 $ 977,406 Accumulated depreciation (263,664) (239,520) ---------- ---------- Net utility plant 791,658 737,886 ---------- ---------- RECEIVABLES FROM AFFILIATED COMPANIES 102 2,020 ---------- ---------- CURRENT ASSETS: Cash and cash equivalents 3,571 427 Receivables, net of allowance for uncollectible accounts of $919 and $1,252, respectively 7,037 2,847 Unbilled revenue 9,607 9,961 Federal income taxes receivable 1,416 1,416 Deferred income taxes 3,707 4,409 Purchased gas receivable -- 21,261 Materials and supplies, at average cost 29,706 25,360 ---------- --------- Total current assets 55,044 65,681 ---------- --------- OTHER ASSETS AND DEFERRED CHARGES: Environmental receivables 8,116 33,947 Regulatory tax asset 17,605 18,810 Deferred charges and other 18,073 14,205 ---------- ---------- Total other assets and deferred charges 43,794 66,962 ---------- ---------- Total assets $ 890,598 $ 872,549 ========== ==========
The accompanying notes are an integral part of these consolidated balance sheets. 53 Page 53 WASHINGTON NATURAL GAS COMPANY AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Continued) CAPITALIZATION AND LIABILITIES
September 30, --------------------------- 1995 1994 ---------- ---------- (in thousands) CAPITALIZATION (see Consolidated Statements of Capitalization): Common shareholder's interest $ 251,528 $ 235,988 Redeemable preferred stock 90,000 90,000 Long-term debt 310,060 290,200 ---------- ---------- Total capitalization 651,588 616,188 ---------- ---------- CURRENT LIABILITIES: Current sinking-fund requirements and debt maturities 30,140 60,140 Accounts payable 26,675 24,715 Purchased gas liability 15,554 -- Accrued general taxes 12,381 11,869 Environmental remediation liabilities 4,578 6,199 Other current liabilities 28,536 27,617 ---------- ---------- Total current liabilities 117,864 130,540 ---------- ---------- PAYABLES TO AFFILIATED COMPANIES 16,699 29,617 ---------- ---------- DEFERRED CREDITS AND OTHER LIABILITIES: Noncurrent deferred income taxes 69,826 61,214 Regulatory tax liability 11,017 12,560 Unamortized investment tax credits 9,352 10,132 Contributions in aid of construction 14,252 12,298 ---------- ---------- Total deferred credits and other liabilities 104,447 96,204 ---------- ---------- Total capitalization and liabilities $ 890,598 $ 872,549 ========== ==========
The accompanying notes are an integral part of these consolidated balance sheets. 54 Page 54 WASHINGTON NATURAL GAS COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME
Year Ended September 30, ---------------------------------------------- 1995 1994 1993 -------- -------- -------- (in thousands) OPERATING REVENUES: Regulated utility sales $420,048 $396,407 $367,853 Merchandise and conservation products -- -- 63,210 -------- -------- -------- Total operating revenues 420,048 396,407 431,063 -------- -------- -------- OPERATING EXPENSES: Cost of gas sold 219,022 223,502 181,157 Utility operations and maintenance 68,125 81,768 71,578 Merchandise and other operations -- -- 55,801 Depreciation 33,128 30,901 28,183 General taxes 40,729 37,768 35,045 Federal income taxes 8,531 (3,913) 9,410 -------- -------- -------- Total operating expenses 369,535 370,026 381,174 -------- -------- -------- OPERATING INCOME 50,513 26,381 49,889 OTHER INCOME (EXPENSE), net (443) (3,860) (1,036) -------- -------- -------- GROSS INCOME 50,070 22,521 48,853 INTEREST CHARGES 32,216 30,764 27,082 -------- -------- -------- NET INCOME (LOSS) 17,854 (8,243) 21,771 DIVIDENDS ON PREFERRED STOCK 7,126 3,979 2,720 EXCESS PREMIUM, PREFERRED REDEMPTION -- 798 -- -------- -------- -------- EARNINGS (LOSS) ON COMMON STOCK $ 10,728 $(13,020) $ 19,051 ======== ======== ========
The accompanying notes are an integral part of these consolidated statements. 55 Page 55 WASHINGTON NATURAL GAS COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CAPITALIZATION
Shares Outstanding at September 30, September 30, -------------------- -------------------------- 1995 1994 1995 1994 ------ ------ -------- -------- (in thousands) (in thousands) COMMON SHAREHOLDER'S INTEREST: Common stock, $5 par value; authorized 25,000,000 shares 10,982 10,775 $ 54,911 $ 53,873 Premium on common stock 167,752 163,978 Shareholder's earnings reinvested in the business 28,865 18,137 -------- -------- Total common shareholder's interest 251,528 235,988 -------- -------- 39%* 38%* REDEEMABLE PREFERRED STOCK: Cumulative; authorized 1,000,000 shares of $100 par value and 4,000,000 shares of $25 par value 7.45%, Series II, $25 par value 2,400 2,400 60,000 60,000 8.50%, Series III, $25 par value 1,200 1,200 30,000 30,000 -------- -------- Total preferred stock 90,000 90,000 -------- -------- 14%* 15%*
*Percentage of total capitalization. The accompanying notes are an integral part of these consolidated statements. 56 Page 56 WASHINGTON NATURAL GAS COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CAPITALIZATION (Continued)
September 30, ------------------------- 1995 1994 -------- -------- (in thousands) LONG-TERM DEBT: First mortgage bonds 9.96% due 1995 $ -- $ 40,000 8.80% called in 1995 -- 25,000 8-1/8% due 1997 3,200 3,340 10-1/4% due 1997, called for early redemption 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 8.25% due 1998 11,000 11,000 7.08% due 1999 10,000 10,000 8.51% through 8.55% due 2001 19,000 19,000 7.53% and 7.91% due 2002 30,000 30,000 8.25% through 8.40% due 2022 35,000 35,000 Secured medium-term notes, series B 6.23% through 6.31% due 2003 28,000 28,000 6.07% and 6.10% due 2004 18,500 18,500 6.51% and 6.53% due 2008 4,500 4,500 6.83% and 6.90% due 2013 13,000 13,000 7.19% due 2023 13,000 13,000 Secured medium-term notes, series C 6.92% and 6.93% due 2005 31,000 -- 7.02% and 7.04% due 2007 25,000 -- 7.12% due 2010 7,000 -- 7.35% and 7.36% due 2015 12,000 -- -------- -------- 340,200 350,340 Less sinking-fund requirements and maturities included in current liabilities (30,140) (60,140) -------- -------- Total long-term debt 310,060 290,200 -------- -------- 47%* 47%* TOTAL CAPITALIZATION $651,588 $616,188 ======== ======== 100%* 100%*
*Percentage of total capitalization. The accompanying notes are an integral part of these consolidated statements. 57 Page 57 WASHINGTON NATURAL GAS COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDER'S EARNINGS REINVESTED IN THE BUSINESS
Year Ended September 30, -------------------------------------------- 1995 1994 1993 -------- -------- -------- (in thousands) Balance, at beginning of year $ 18,137 $ 48,094 $ 55,088 Net income (loss) 17,854 (8,243) 21,771 Excess premium, preferred redemption -- (798) -- Dividends declared on capital stock: Common stock, $-0-, $1.60, and $2.60 per share, respectively -- (16,937) (26,045) Cumulative preferred stock: 5%, series A -- (9) (108) 6%, series B -- (13) (154) 8-7/8%, series C -- (23) (271) 8-3/4%, series F -- (22) (437) 8-3/4%, series I -- (88) (1,750) 7.45%, series II (4,470) (3,824) -- 8.50%, series III (2,656) -- -- -------- -------- -------- Balance, at end of year $ 28,865 $ 18,137 $ 48,094 ======== ======== ========
The accompanying notes are an integral part of these consolidated statements. 58 Page 58 WASHINGTON NATURAL GAS COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF PREMIUM ON COMMON STOCK
Year Ended September 30, ----------------------------------------- 1995 1994 1993 -------- -------- -------- (in thousands) Balance, at beginning of year $163,978 $161,618 $108,186 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 3,659 4,507 6,651 Excess of purchase price over par value of shares of common stock issued under the parent company's Employee Stock Purchase Plan 288 350 361 Common and preferred stock expense (173) (2,166) (294) -------- -------- -------- Balance, at end of year $167,752 $163,978 $161,618 ======== ======== ========
The accompanying notes are an integral part of these consolidated statements. 59 Page 59 WASHINGTON NATURAL GAS COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended September 30, ------------------------------------------- 1995 1994 1993 -------- -------- -------- (in thousands) Cash flow provided by (used in) operating activities: Net income (loss) $ 17,854 $ (8,243) $ 21,771 -------- -------- -------- Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation 33,432 31,293 28,544 Provision for uncollectible accounts receivable 1,151 2,406 1,610 Increase (decrease) in: Federal income tax - current -- 573 1,830 Federal income tax - deferred 8,534 (7,480) 12,724 Accounts receivable (4,987) 34,966 (8,290) Environmental recoveries (expenditures), net 24,210 (11,808) (9,315) Purchased gas adjustment 36,815 2,608 (13,315) Accounts payable 1,960 18,494 21,774 Materials and supplies (4,346) 14,246 (4,643) Deferred charges (3,038) (12,168) (17,724) Other assets and liabilities 1,204 (21,910) 1,413 Other -- 2,854 (2,514) -------- -------- -------- Total adjustments 94,935 54,074 12,094 -------- -------- -------- Net cash provided by operating activities 112,789 45,831 33,865 -------- -------- -------- Cash flow provided by (used in) investing activities: Utility plant additions (87,240) (84,506) (91,275) Proceeds from disposition of fixed assets 412 1,260 1,339 -------- -------- -------- Net cash (used in) investing activities (86,828) (83,246) (89,936) -------- -------- --------
The accompanying notes are an integral part of these consolidated statements. 60 Page 60 WASHINGTON NATURAL GAS COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
September 30, -------------------------------- 1995 1994 1993 -------- -------- -------- (in thousands) Cash flow provided by (used in) financing activities: Proceeds from issuance of: Common stock $ 4,812 $ 6,108 $ 64,023 Preferred stock -- 87,887 -- First mortgage bonds 75,000 -- 77,000 Proceeds from issuance of (reductions of): Payables to affiliated companies, net (11,000) (18,713) (11,250) Bank loans, net -- -- (17,100) Redemptions and repurchases: Preferred stock -- (23,398) (10,300) Long-term debt (85,140) (3,340) (9,260) Cash dividend payments: Common -- (16,937) (26,045) Preferred (6,489) (3,538) (2,725) -------- -------- -------- Net cash provided by (used in) financing activities (22,817) 28,069 64,343 -------- -------- -------- Net increase (decrease) in cash and cash equivalents 3,144 (9,346) 8,272 Beginning cash and cash equivalents 427 9,773 1,501 -------- -------- -------- Ending cash and cash equivalents $ 3,571 $ 427 $ 9,773 ======== ======== ======== Supplemental disclosures of cash flow information Cash paid during the year for: Interest (net of amounts capitalized) $ 33,892 $ 29,836 $ 26,264 Income taxes $ -- $ 2,400 $ 601
The accompanying notes are an integral part of these consolidated statements. 61 Page 61 WASHINGTON ENERGY COMPANY AND SUBSIDIARIES WASHINGTON NATURAL GAS COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Certain information, necessary to understand Washington Natural's financial condition and results of operations, is substantially the same as disclosed by the Company in this report. (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (a) General The consolidated financial statements include the accounts of Washington Energy Company and its wholly-owned subsidiaries, after elimination of intercompany items and transactions. The Company's subsidiaries are: 1. Washington Natural Gas Company and its wholly-owned subsidiaries; 2. Washington Energy Services Company; 3. Washington Energy Gas Marketing Company; 4. WECO Finance Company and its wholly-owned subsidiary; 5. Thermal Energy, Inc., and its wholly-owned subsidiary, and 6. ThermRail, Inc. Due to the May 1994 merger of Resources, previously a wholly-owned subsidiary of Washington Energy, with a subsidiary of Cabot, the 1994 financial statements through the date of the merger show Resources' earnings in "Other income (expense)" using the equity method of accounting. The 1993 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 FERC uniform system of accounts, which has been adopted by the WUTC. (b) Reclassifications Certain amounts in the 1994 and 1993 financial statements have been reclassified to conform with the 1995 presentation. The payroll taxes previously included in "General taxes" are now reported in "Operations and maintenance" expense. (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 62 Page 62 adjusted prospectively from time to time based upon revised estimates of the useful lives, removal costs and salvage of the various classes of assets, with approval of the WUTC. The average depreciation rate used was approximately 3.5% for 1995, 3.5% for 1994 and 3.6% for 1993. (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 Washington Natural's gas supplies and that currently allowed by the WUTC are deferred and recovered or repaid through the PGA mechanism. Certain income tax deferrals are discussed in Note 2. The remainder of these costs are included in "Deferred charges and other" in the financial statements and are amortized and recovered in rates as prescribed by the WUTC. At September 30, 1995 and 1994, such deferred charges totaled $4,635,000 and $3,614,000, respectively. Of the year-end 1995 balance, $2,956,000 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 1995, 1994, and 1993 was $660,000, $453,000, and $250,000, respectively. The Company discontinued interest capitalization on its coal projects in 1994 as the projects have not been actively under development since 1993. Total interest capitalized in 1993 related to the coal projects was $541,000. (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. (g) Off-System Sales and Capacity Release Washington Natural has been selling excess gas supplies and entering into gas supply exchanges with third parties outside of its distribution area since 1992. Washington Natural began releasing to third parties excess interstate gas pipeline capacity and gas storage rights on a short-term basis in 1993 and 1994, respectively. Washington Natural contracts for firm gas supplies and holds firm transportation and storage capacity sufficient to meet the expected peak winter demand for gas for space heating by its firm customers. Due to the variability in weather and other factors, Washington Natural holds contractual rights to gas supplies and transportation and storage capacity in excess of its immediate requirements to serve firm customers on its distribution system for much of the year. The net proceeds from these gas sales, exchanges and releases of capacity are accounted for as reductions in the cost of purchased gas and passed on to ratepayers through the PGA mechanism with no impact on net income. As a result, Washington Natural does not reflect sales revenue or associated cost of sales for these transactions in its income statement. The net proceeds from these activities were $7,374,000, $3,997,000 and $838,000 for 1995, 1994 and 1993, respectively. 63 Page 63 (h) New Accounting Pronouncements During 1995, the Company adopted SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed Of." See Notes 8 and 13 regarding the charges recorded for the write-down of coal related investments and Cabot's write-down of its oil and gas producing properties. SFAS No. 123, "Accounting for Stock-Based Compensation," was recently issued and is effective for fiscal years beginning after December 15, 1994. SFAS No. 123 encourages, but does not require, companies to account for stock compensation awards based on their estimated fair value on the grant date. However, if companies choose not to account for such compensation on a fair value basis, they are required to disclose in a footnote to the financial statements any effect on net income had the company recognized expense for such compensation. The Company has not yet adopted SFAS No. 123, but as indicated in Note 3, due to the limited number of options granted by the Company on an annual basis, the amount of compensation expense which would be required to be expensed or disclosed, is not material. (2) INCOME TAXES (a) General The Company and all of its subsidiaries file a consolidated federal income tax return. Current and deferred taxes are recorded by each member of the consolidated group as if each were a stand-alone entity using the consolidated rate. Under an informal tax sharing arrangement, each member of the group pays or is paid for the current tax liability or benefit it generates when paid or realized by the consolidated group. The Company's consolidated income tax provision is as follows (in thousands):
Year Ended September 30, -------------------------------- 1995 1994 1993 -------- -------- -------- Charged (credited) to operations: Current $ 75 $ (7,291) $ (4,685) Deferred 6,212 1,375 15,126 Investment tax credit (780) (781) (796) -------- -------- -------- Total charged (credited) to operations 5,507 (6,697) 9,645 Charged (credited) to other income and expense, net (24,686) 22,432 51 Charged (credited) to discontinued operations -- (430) (6,610) -------- -------- -------- Total income tax expense (benefit) $(19,179) $ 15,305 $ 3,086 ======== ======== ========
The amount credited to "Other income and expense" in 1995 consists primarily of the deferred taxes associated with the write-downs of the Company's investments in Cabot and coal-related assets (see Notes 13 and 8). The amount charged to "Other income (expense)" in 1994 consists primarily of deferred income taxes provided on the Cabot merger. 64 Page 64 Washington Natural's consolidated income tax provision is as follows (in thousands):
Year Ended September 30, ----------------------------- 1995 1994 1993 ------- ------- ------- Charged (credited) to operations: Current $ 336 $(4,344) $ 2,293 Deferred 8,975 1,212 7,913 Investment tax credit (780) (781) (796) ------- ------- ------- Total charged (credited) to operations 8,531 (3,913) 9,410 Charged to other income and expense, net (336) (2,078) 137 ------- ------- ------- Total income tax expense (benefit) $ 8,195 $(5,991) $ 9,547 ======= ======= =======
On October 1, 1993, the Company adopted 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. The temporary differences and associated tax assets and liabilities comprising the Company's consolidated net deferred tax liability at September 30 are as follows (in thousands): 65 Page 65
1995 1994 ------- -------- Deferred tax liabilities: Property basis and accelerated depreciation $78,521 $ 70,782 Investment in Cabot stock 14,826 19,358 Coal development activities -- 13,101 Environmental remediation 384 384 Regulatory tax asset net of regulatory tax liability 2,306 2,187 Demand side management costs and other deferred utility expenses 1,610 1,098 Other 885 4,943 ------- -------- Total deferred tax liabilities 98,532 111,853 ------- -------- Deferred tax assets: Net operating loss carry-forwards 18,625 15,453 Alternative minimum tax credits 5,813 5,813 Reserves for future losses 4,255 4,981 Investment tax credit 3,752 3,553 Contributions in aid of construction 3,273 3,546 Coal development activities 956 -- Compensation related differences 2,892 2,030 Other 3,223 2,934 ------- -------- Total deferred tax assets 42,789 38,310 ------- -------- Net deferred tax liability 55,743 73,543 Less amount classified as current asset 3,707 4,427 ------- -------- Net noncurrent deferred tax liability $59,450 $ 77,970 ======= ========
66 Page 66 The temporary differences and associated tax assets and liabilities comprising Washington Natural's net deferred tax liability at September 30 are as follows (in thousands):
1995 1994 ------- ------- Deferred tax liabilities: Property basis and accelerated depreciation $78,521 $70,782 Environmental remediation 384 384 Regulatory tax asset net of regulatory tax liability 2,306 2,187 Demand side management costs and other deferred utility expenses 1,610 1,098 Other 586 1,453 ------- ------- Total deferred tax liabilities 83,407 75,904 ------- ------- Deferred tax assets: Net operating loss carry-forwards 3,004 5,332 Alternative minimum tax credits 3,513 3,513 Investment tax credit 3,752 3,553 Contributions in aid of construction 3,273 3,546 Compensation related differences 2,892 2,030 Other deferred tax assets 854 1,125 ------- ------- Total deferred tax asset 17,288 19,099 ------- ------- Net deferred tax liability 66,119 56,805 Less amount classified as current asset 3,707 4,409 ------- ------- Net noncurrent deferred tax liability $69,826 $61,214 ======= =======
The components of consolidated deferred income tax expense for the last year under which the Company followed SFAS No. 96 are as follows (in thousands):
Year Ended September 30, 1993 ---------- Included in operating expense: Tax depreciation $ 4,452 Oil and gas exploration and production activities 5,721 Environmental activities 3,461 Coal and railroad development activities 1,442 Interest capitalized 184 Other (134) -------- 15,126 Included in other income: Other non-utility activities 51 -------- Total deferred tax provision $ 15,177 ========
67 Page 67 At September 30, 1995 the following carry-forwards are available to reduce the Company's future income tax liability (in thousands):
Carry- forwards Expiration -------- ---------- 1994 net operating losses $44,152 2009 1995 net operating losses 9,061 2010 ------- Total net operating losses $53,213 ======= Alternative minimum tax credits $ 5,813 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 regulatory tax asset or liability has been recorded to reflect the expected recovery or refund through adjustment of customers' rates when these taxes become receivable or payable in future periods. Based on the WUTC's past decisions and policies, it is management's opinion that the Commission will allow Washington Natural full recovery in its rates of the increased future tax expense resulting from the use of this accounting method. 68 Page 68 (c) Reconciliation of Statutory Income Tax Rate to Effective Rate WASHINGTON ENERGY COMPANY AND SUBSIDIARIES
Year Ended September 30, ----------------------------------- 1995 1994 1993 ------ ------ ------ Statutory income tax rate (35.0)% (35.0)% 34.8% Excess of book over tax depreciation not deferred 0.8 3.4 2.2 Accelerated benefit on early retirement of depreciable assets (1.4) (2.8) (2.8) Tax credit on gas produced from tight sands formations -- 4.9 (5.1) Amortization of investment tax credit (1.3) (2.7) (2.5) Dividends-minority interest 4.1 4.8 2.8 Cabot merger and related reserves -- 83.3 -- Effect of tax rate change from 34% to 35% -- -- 2.8 Provision for tax contingencies 2.0 -- -- Dividends received deduction (1.5) (1.2) -- Other, net .5 (0.6) (1.6) ----- ---- ---- Effective income tax rate (31.8)% 54.1% 30.6% ===== ==== ====
WASHINGTON NATURAL GAS COMPANY AND SUBSIDIARIES
Year Ended September 30, ----------------------------------- 1995 1994 1993 ------ ------ ------ Statutory income tax rate 35.0% (35.0)% 34.8% Excess of book over tax depreciation not deferred 1.9 7.0 2.2 Accelerated benefit on early retirement of depreciable assets (3.2) (5.7) (2.9) Amortization of investment tax credit (3.0) (5.5) (2.5) Other, net 0.8 (2.9) (1.1) ---- ----- ---- Effective income tax rate 31.5% (42.1)% 30.5% ==== ===== ====
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. 69 Page 69 (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 1995, 1994 and 1993, 29,773, 27,055 and 21,549 shares, respectively, were issued under the plan at average prices per share of $13.06, $16.27 and $20.08, respectively, with average fair market values on the exercise date of $13.06, $16.44 and $22.09, respectively. At September 30, 1995, 30,509 shares were authorized for future issuance. (c) Dividend Reinvestment and Stock Purchase Plan This plan, available to all holders of record of the Company's common stock, provides for reinvestment of dividends at 100% of the average of the high and low prices of Washington Energy's common stock on each dividend payment date. The plan also provides for the purchase of common stock with optional cash payments not to exceed $5,000 per quarter at 100% of the average price on the dividend payment date. During 1995, 1994 and 1993, 324,839, 363,879 and 367,421 shares, respectively, were issued under the plan. At September 30, 1995, there were 783,669 shares of the Company's common stock authorized but unissued under this plan. (d) Performance Share Plan A performance share plan was established October 1, 1981, which provides for the annual award of performance units to designated officers and other key executives, and for payment of the awards to be contingent upon attainment of future performance objectives of the Company. Generally, under the Company's current policy, at least 50% 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. No performance units were awarded under the plan in 1995 and no such awards are planned for 1996. Due to the losses sustained in 1994 and 1995, the minimum performance objectives of the plan relative to performance units outstanding at September 30, 1995, cannot be met. In the event of a change in control, however, all participants would receive payment for 100% of outstanding awards. (See Note 18 regarding the proposed merger with Puget.) The aggregate number of performance units for which such payments would be made as a result of a change in control prior to September 30, 1996 would be 41,768 units, and subsequent to September 30, 1996, would be 34,155 units. (e) Stock Option Plans The previous stock option plan approved by the shareholders in February 1984, expired September 30, 1993. The Washington Energy Company 1993 Stock Option 70 Page 70 Plan ("1993 Plan"), was approved by a vote of the Company's shareholders on February 25, 1994. Under the 1993 Plan, as in the previous plan, options are offered to executives 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. At September 30, 1995 there were 165,763 and 798,860 shares of the Company's common stock authorized but unissued under the previous plan and the 1993 Plan, respectively. At the discretion of the Compensation and Benefits Committee of the Board of Directors, any option granted may include a stock appreciation right ("SAR"). Any optionee exercising a stock option loses the corresponding SAR as to that option and vice versa. SARs have been granted in tandem with all options outstanding under the previous plan and the 1993 Plan.
Option Grant Price ------------------------------------------------------- $20.06 to $15.06 $21.38 $18.38 $13.38 Total -------- --------- ------- -------- -------- Options outstanding at September 30, 1992 13,227 243,366 -- -- 256,593 Options granted at $21.19 -- 109,800 -- -- 109,800 Options exercised (11,127) (35,700) -- -- (46,827) Options forfeited -- (1,000) -- -- (1,000) ------- -------- ------- ------- -------- Options outstanding at September 30, 1993 2,100 316,466 -- -- 318,566 Options granted -- -- 110,600 -- 110,600 Options exercised (700) -- -- -- (700) Options forfeited (1,400) (114,203) -- -- (115,603) ------- -------- ------- ------- -------- Options outstanding at September 30, 1994 -- 202,263 110,600 -- 312,863 Options granted -- -- 6,300 199,950 206,250 Options exercised -- -- -- (11,500) (11,500) Options forfeited -- (36,500) (13,000) -- (49,500) ------- -------- ------- ------- -------- Options outstanding at September 30, 1995 -- 165,763 103,900 188,450 458,113 ======= ======== ======= ======= ========
Unexercised options at September 30, 1995, do not result in a material dilution of earnings per common share. (f) Puget Option In connection with the execution of an Agreement and Plan of Merger (the "Merger Agreement"), dated as of October 18, 1995, by and among Washington Energy, Washington Natural and Puget, Washington Energy granted to Puget an option to purchase up to 19.9% of Washington Energy's common stock at an exercise price of $20.00 per share (the "Puget Option"). (See Note 18 regarding subsequent events.) The Puget Option becomes exercisable under certain circumstances if the Merger Agreement becomes terminable. The Puget 71 Page 71 Option further provides that in the event the option becomes exercisable, Puget may require Washington Energy to repurchase the option or any previously purchased shares acquired under the option at a price based on or derived from the market price or a subsequent third-party offer on the day of exercise. The Puget Option terminates on the earlier of 1) the effective time of the merger under the Merger Agreement, 2) the termination of the Merger Agreement pursuant to its terms (other than a termination relating to or following certain specified business combinations), or 3) 180 days following any termination of the Merger Agreement relating to or following certain specified business combinations. (g) Directors' Stock Bonus Plan The Directors' Stock Bonus Plan was approved by the shareholders in February 1991. The plan provides for annual awards of 200 shares of Washington Energy common stock to each outside director. Shares are issued relative to these awards after the director leaves the Board of Directors. The director receives additional awards equivalent to the dividends reinvested on the awarded but unissued shares. During 1995, 1994 and 1993, 1400, 1400, and 1800 shares, respectively, were awarded under the plan. During 1995, 1994 and 1993, 204, 190, and 382 shares, respectively, were issued under the plan. At September 30, 1995, 8,063 shares were awarded but not issued under the plan. (h) General The increase in common equity resulting from issuance of shares under the various plans described above was $4,825,000 in 1995, $6,342,000 in 1994, and $8,735,000 in 1993. (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. Washington Natural has not paid dividends to Washington Natural since April 1994, due to these restrictions. At September 30, 1995, Washington Natural was restricted from paying dividends to Washington Energy until its retained earnings increased by more than $12,500,000. (5) PREFERRED STOCK On September 15, 1994, Washington Natural sold 1,200,000 shares of 8.50% cumulative preferred stock, $25 par value, to the public for net proceeds of $29,105,000. The preferred stock is redeemable on or after September 1, 1999, at par value and has no sinking-fund requirements. In November 1993, Washington Natural sold 2,400,000 shares of 7.45% cumulative preferred stock, $25 par value, to the public following the early redemption of all its other preferred stock series. The sale netted proceeds to 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. In November 1993, the Company and Washington Natural redeemed early all previously outstanding preferred stock. A total of 585,480 shares, in five series, with an aggregate par value of $22,648,000 was redeemed at an average premium of 2.4%. Washington Natural had previously elected to redeem 170,000 72 Page 72 shares with an aggregate par value of $5,000,000 through additional, optional, sinking-fund payments at par value in September 1993. (6) LONG-TERM DEBT The total principal amount of Washington Natural's first mortgage bonds authorized by the indenture dated April 1, 1957, as amended and supplemented is not limited except as restricted by the provisions of the indenture and except as may be limited by law. The Company's sinking fund requirements and long-term debt maturities for the next five years ending September 30 are: 1996, $30,140,000; 1997, $3,200,000; 1998, $11,000,000; 1999, $10,000,000; and 2000, $25,000,000. The $30,000,000 of 10-1/4% bonds due in 1997 were called early and redeemed without premium in December 1995. The redemption was funded by the issuance of additional long-term debt. (7) OTHER FINANCING ARRANGEMENTS On March 31, 1995, the Company entered into a new credit agreement with a lending group composed of nine commercial banks and terminated its prior $150 million revolving credit agreement. The new agreement provides for a committed revolving credit facility of up to $250 million for a three-year period. Advances bear interest at one of several, optional, market-based rates. The agreement requires payment of a commitment fee on the average unused balance of the facility. The fee is based on the Company's commercial paper rating and is currently 1/4 of 1% per annum. This credit agreement is utilized primarily to provide credit support for various uncommitted, short-term financing arrangements. No advances were outstanding under this facility at September 30, 1995. The Company has commercial paper programs available through two sources totaling $250 million. The Company can borrow up to $40 million at commercial paper rates through a credit program, credit-enhanced by a commercial bank. Aggregate borrowings under the commercial paper and enhanced credit facilities are limited to $250 million. At September 30, 1995, $122 million in commercial paper was outstanding and $40 million was borrowed under the enhanced credit facility. The Company also has an uncommitted short-term credit arrangement with a commercial bank whereby it may borrow up to $25 million at short-term market rates. At September 30, 1995, no borrowings were outstanding under this arrangement. Washington Natural has an agreement with Cooperative Receivables Corporation ("CRC") whereby it may sell to CRC up to $90 million principal amount of undivided interests in merchandise and gas accounts receivable at face value. With the transfer of the merchandise business to Services in 1994, new merchandise receivables are no longer being sold to CRC. At September 30, 1995, $28 million of outstanding merchandise and gas receivables had been sold under the agreement, which represented all but approximately $11 million of total receivables eligible to be sold to CRC. The composite interest rate at September 30, 1995, 1994 and 1993, on outstanding short-term borrowings, including the impact of certain interest rate swaps discussed below, was 7.1%, 6.3% and 5.0%, respectively. During the 73 Page 73 past three years, short-term borrowing levels and average interest rates, including the impact of certain interest rate swaps described below, were as follows:
1995 1994 1993 ------ ------ ------ Maximum outstanding (in millions) $242.4 $174.3 $161.4 Average outstanding (in millions) $130.0 $115.5 $116.5 Weighted average rate 7.7% 6.1% 5.8%
The Company has entered into interest rate swap agreements to reduce the impact of changes in interest rates on its floating-rate, short-term debt. The two agreements outstanding at September 30, 1995, effectively change the Company's interest rate on outstanding commercial paper to 8.59% on a notional principal amount of $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 1995, 1994 and 1993 was $4,098,000, $4,050,000 and $5,098,000, respectively. Minimum annual lease payments for the next five years and thereafter are: 1996, $2,756,000; 1997, $2,151,000; 1998, $1,924,000; 1999, $1,522,000; 2000, $1,465,000; and thereafter, $18,807,000. (8) COAL AND RAILROAD PROPERTIES In the fourth quarter of 1995, the Company wrote down the carrying value of its coal and railroad properties by $34,700,000 ($22,555,000 after tax) and $6,000,000 ($3,900,000 after tax), respectively, in conjunction with early adoption of SFAS No. 121. Based on a mine feasibility study by a mining and geological consulting firm, the current and expected future coal prices do not support further expenditures to develop the coal reserves over the next five to ten years. As a consequence of the determination that the coal reserves are uneconomical to develop in the foreseeable future, the Company also wrote off the costs related to planning the railroad necessary to transport coal from the proposed mine sites to the existing rail line for shipment on to markets in the Midwest. The carrying value of the coal assets totaled $4,034,000 and $37,882,000 at September 30, 1995 and 1994, respectively, and the carrying value of the railroad assets was $0 and $5,584,000 at the respective dates. The current $4,034,000 carrying value of the coal reserves is the estimated market value of undeveloped coal reserves in the region based on recent sales. The railroad assets were written off entirely as they consist of planning, engineering and permitting costs, all of which are site specific. The coal properties consist of surface control over and mineral rights to approximately 270 million tons of recoverable coal reserves in southeastern Montana and surface control over substantial additional reserves in the area, owned by Thermal Resources, Inc., a wholly-owned subsidiary of Thermal Energy, Inc., and subleased to Montco, a 95%-owned partnership formed to develop the coal properties. The railroad investment consists of an 87.5% partnership interest in the Tongue River Railroad Company ("TRR"), held by ThermRail, Inc., which was formed to develop the railroad to transport Montco's coal to market. 74 Page 74 Although market conditions do not support current development of these assets, the Company intends to maintain its investments and to periodically reassess the viability of further development. Several test burns of the coal by electric utilities which may be conducted in 1996 or 1997 would better define the quality of the reserves and the economics of full scale mining operations. 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 benefit existing coal shippers by reducing haul distances and would increase the value and development potential of Montco's coal reserves. (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. 75 Page 75 The following tables set forth the Plan's funded status and the pension liability recognized in the consolidated financial statements (in thousands):
1995 1994 1993 -------- -------- -------- Actuarial present value of accumulated benefit obligations: Vested $ 39,319 $ 36,828 $ 33,360 Non-vested 599 732 478 -------- -------- -------- Total $ 39,918 $ 37,560 $ 33,838 ======== ======== ======== Projected benefit obligations for service rendered to date $ 49,819 $ 48,279 $ 43,965 Plan assets at fair value, primarily marketable stocks, bonds and short- term investments 64,248 57,812 57,414 -------- -------- -------- Plan assets in excess of projected benefit obligations 14,429 9,533 13,449 Unrecognized amounts: Prior service cost 1,568 1,717 2,141 Net gains (10,770) (4,683) (7,745) Net transition gain (8,103) (8,913) (9,723) -------- -------- -------- Net pension liability included in the balance sheet $ (2,876) $ (2,346) $ (1,878) ======== ======== ======== Net pension cost includes: Service cost of benefits earned during the period $ 2,163 $ 2,577 $ 2,249 Interest cost on projected benefit obligations 3,568 3,238 2,941 Actual return on Plan assets (8,704) (1,870) (6,891) Amortization of net transition gains (810) (810) (810) Unrecognized prior service cost 149 165 165 Amortization of deferred gains (275) (456) (326) Current asset gain (loss) deferred 4,440 (2,376) 3,054 -------- -------- -------- Net pension cost $ 531 $ 468 $ 382 ======== ======== ======== 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% Compensation increase 6% 6% 6%
The Company also has entered into individual contracts with its officers and those of its subsidiaries to provide pension benefits in addition to those provided by the Plan. The contracts, collectively referred to as the supplemental executive retirement contracts ("SERC") provide benefits based on annual compensation which are payable from general corporate funds. As a long-term funding mechanism, the Company purchases life insurance policies on its officers sufficient to pay expected future benefits. 76 Page 76 In 1994, the Company initially recorded the liability for future benefit obligations of the SERC and the asset representing the cash surrender value of life insurance policies purchased to fund the SERC. For accounting and disclosure purposes, neither the total death benefit from the life insurance policies of $24,100,000 nor the policies' net cash surrender value of $2,696,000 at September 30, 1995, qualify as plan assets since the proceeds of the policies are not segregated or formally restricted to funding the SERC. The following tables set forth the SERC's funded status and the liability recognized in the consolidated financial statements (in thousands):
1995 1994 ------- ------- Actuarial present value of accumulated benefit obligations: Vested $ 4,552 $ 4,005 Non-vested 813 716 ------- ------- Total $ 5,365 $ 4,721 ======= ======= Projected benefit obligations for service rendered to date $ 5,365 $ 4,721 Assets segregated for SERC -- -- ------- ------- Assets less than projected benefit obligations (5,365) (4,721) Unrecognized amounts: Prior service cost 4,570 4,451 Gains (745) (654) ------- ------- Net pension liability included in the balance sheet $(1,540) $ (924) ======= ======= Net pension cost includes: Service cost of benefits earned during the period $ 254 $ 322 Interest cost on projected benefit obligations 362 383 Unrecognized prior service cost 248 289 ------- ------- Net pension cost $ 864 $ 994 ======= ======= Assumptions used in the calculations: Weighted-average discount rate 7 1/2% 7 1/2% Compensation increase 4 1/2% 4 1/2%
The Company does not offer any significant post-retirement benefits other than pensions. (10) LIABILITY FOR ENVIRONMENTAL MATTERS (a) General The distribution of natural gas by Washington Natural involves certain controllable environmental risks. Washington Natural conducts its natural gas 77 Page 77 distribution business using accepted industry practices and procedures. Washington Natural is not aware of any material environmental exposures related to its natural gas distribution activities. However, Washington Natural, as the former operator of, or the successor to a former operator of, several manufactured gas plants in western Washington prior to 1957, has several existing environmental exposures and one recently resolved environmental insurance action. Former manufactured gas plant sites in the following areas are currently undergoing investigation, remedial actions or monitoring actions relating to environmental contamination: 1) the Tideflats area of Tacoma, Washington; 2) Everett, Washington; 3) Chehalis, Washington and 4) "Gas Works Park" in Seattle. There is another former manufactured gas plant site situated at 22nd and "A" Streets in Tacoma, where Washington Natural has incurred costs, primarily for legal defense, because Washington Natural does not believe that it has responsibility for remediation costs as discussed in Note 11 regarding the Washington State Department of Transportation lawsuits. This other site is not expected to result in a significant liability to Washington Natural. The financial statements reflect management's estimates of the costs to be incurred, based on known and available information with regard to the extent of contamination and the potential methods of cleanup or containment believed to be feasible, at each site. Washington Natural is continually evaluating the progress at each site and the cost estimates will be revised, if necessary, as new information is available. The financial statements reflect receivables for the expected recoveries from insurance carriers and other third parties of substantially all of the cleanup costs as discussed in greater detail below. The following table summarizes total expected costs, the costs incurred and recorded through September 30, 1995, the expected recoveries from insurance companies and other parties and the actual recoveries through September 30, 1995, for each of the four sites (in thousands):
Gas Works Tideflats Everett Chehalis Park --------- ------- -------- --------- Estimated total investigation, legal, remediation, and financing costs $43,196 $3,250 $2,000 $1,000 Actual costs to date 42,921 314 1,625 8 ------- ------ ------ ------ Balance expected to be incurred $ 275 $2,936 $ 375 $ 992 ======= ====== ====== ====== Expected recoveries from insurance companies and other parties $42,666 $3,250 $2,000 $1,000 Actual recoveries to date 40,944 -- -- -- ------- ------ ------ ------ Balance expected to be recovered $ 1,722 $3,250 $2,000 $1,000 ======= ====== ====== ======
78 Page 78 (b) Tideflats Washington Natural had 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 ("EPA") determined contained several contaminants and therefore required cleanup under the Comprehensive Environmental Response, Compensation and Liability Act. The remediation activities at the Tideflats site were completed as of July 1995, and confirmed by the EPA in a letter dated September 28, 1995. The remediation was completed in accordance with the terms set forth in Washington Natural's consent decree with the EPA. Monitoring equipment has been installed at the site. In the future, ongoing monitoring and maintenance costs will be expensed as incurred and are not estimated to be material. In June 1991, Washington Natural filed a lawsuit in King County Superior Court, State of Washington, against certain insurance companies that provided insurance applicable to the Tideflats site at various times dating back to the 1940s. On June 10, 1994, the Superior Court entered final judgment in favor of Washington Natural. Under the terms of the final judgment, Washington Natural was entitled to collect its present and future uncompensated reasonable and necessary costs in remediating the site from the policies of certain insurer defendants in the action. The liability of these defendant insurers was joint and several, up to the annual limits of their policies, subject to relevant underlying limits. The final judgment further awarded Washington Natural prejudgment interest and declared that Washington Natural is entitled to collect its reasonable attorneys' fees and costs incurred in obtaining coverage of its remediation costs. The defendants appealed the judgment to the Washington State Court of Appeals. During 1995, Washington Natural settled its lawsuit with the insurance carriers for coverage of the Tideflats remediation costs. In September 1995, Washington Natural received approximately $29,000,000 in final settlement of all claims against insurance carriers regarding this site. Washington Natural, as of September 30, 1995, expects to receive approximately $1,722,000 in equipment salvage value and reimbursement from another responsible party at the site. As a result of this settlement, Washington Natural recovered all but $530,000 of the costs incurred to remediate the Tideflats site. Washington Natural, under an agreement with the WUTC, will seek recovery in future customer rates of the remediation costs which are not reimbursed by third parties. (c) Everett A remedial investigation study of the Everett site was completed in August 1995. A feasibility study to determine the appropriate method of remediation or containment is scheduled for completion in December 1995. Washington Natural cannot estimate the full extent of future remediation costs at the Everett site until more information is available from the feasibility study. However, a reserve for remediation costs of $2,000,000 has been established based on the preliminary information obtained during the remedial investigation. The Everett site was previously owned and operated by other companies who are potentially liable parties ("PLPs") for the remediation of the site. The cost 79 Page 79 estimate reflects the total cost expected to remediate the site before contributions by other PLPs. (d) Chehalis The Chehalis site has been undergoing investigation and remediation activities since September 1992. Due to additional contamination found at the site and complications encountered in the remediation process in 1995, the estimated cost of the cleanup increased from $200,000 to $2,000,000. As of the fall of 1995, Washington Natural has completed source control and installed groundwater monitoring wells. Washington Natural is currently compiling seasonal groundwater data to determine if further remedial measures are required. (e) Gas Works Park Washington Natural sold the site of a former manufactured gas plant at Lake Union, now known as "Gas Works Park," to the City of Seattle on September 4, 1962. The City of Seattle, in a letter from the Seattle City Attorney dated February 24, 1995, requested that Washington Natural participate in a cleanup of this site. The letter also indicated that if Washington Natural does not participate, the City of Seattle will pursue legal remedies which the City of Seattle believes are available. Washington Natural believes that the contract, which sold the land to the City of Seattle, presents substantial defenses against any claims the City of Seattle may make for environmental remediation costs, which may be incurred at this site. To date, the City of Seattle has not formally initiated any legal proceedings and the course of events at this site cannot be predicted. However, Washington Natural has met with and has exchanged correspondence with the City of Seattle seeking a solution to Washington Natural's participation in the cleanup at the Gas Works Park site. During the fourth quarter of 1995, a reserve for $1,000,000 for the potential resolution of this matter with the City of Seattle was established. A receivable of $1,000,000 was also established to reflect the probable recovery of the estimated costs from Washington Natural's insurance carriers. (f) Expected Recoveries Washington Natural's financial statements as of September 30, 1995, include environmental receivables in the amount of $8,116,000 for recoveries from insurance carriers, based upon the successful litigation against its insurers regarding the Tideflats site, and other PLPs. Although the factual situations at the other sites differ in some respects from the factual situation at the Tideflats site, Washington Natural believes, based on the precedents established in the Tideflats case and discussion with legal counsel, that it is probable that it has insurance coverage sufficient to recover costs not recovered from other PLPs. Based on all known facts and analyses, the Company and Washington Natural believe it is not likely that the identified environmental liabilities will result in a material adverse impact on the Company's or Washington Natural's financial position, operating results or cash flow trends. 80 Page 80 (11) LITIGATION (a) Washington State Department of Transportation Lawsuits On August 8, 1989, the Washington State Department of Transportation (the "WDOT") commenced a lawsuit ("Federal Action") in the U.S. District Court, Western District of Washington ("District Court"), against Washington Natural and other defendants. The suit sought from Washington Natural and the other defendants, the recovery of approximately $7 million in costs incurred by the WDOT in cleaning up contamination at the site of a former manufactured gas plant which discontinued operations in the early 1900s. 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 ordered that judgment be entered in favor of Washington Natural and the other defendants. The trial court's decision was affirmed by the United States Court of Appeals for the Ninth Circuit ("Court of Appeals") on July 13, 1995. On May 10, 1994, the WDOT filed an action in the state Superior Court for Pierce County, Washington ("State Action") against Washington Natural and other defendants arising out of the same occurrence and seeking the same damages as sought in the Federal Action described above. The State Action alleges a claim under Washington's Model Toxics Control Act, which was recently amended to allow a private right of action for cost recovery. The State Action was stayed by Stipulation and Order dated June 10, 1994 pending the outcome of the Federal Action. The WDOT has indicated that it would pursue the State Action if the appeal was denied by the Court of Appeals. If the WDOT pursues the State Action, Washington Natural intends to mount a vigorous defense on several grounds and believes that the State Action will not be successful. (b) Alleged Securities Violations A class-action lawsuit was filed against Washington Energy and two of its officers, one of whom has subsequently retired, (collectively, "the Defendants") in District Court, in February 1994, alleging violations of state and federal securities act provisions and associated violations of Washington state law. The essence of the complaint concerned alleged disclosure violations regarding the nature or the extent of the downside financial risk associated with the 1992 utility rate request filing of Washington Natural. In May 1994, the Defendants filed a motion to dismiss the lawsuit. Discovery in the case was stayed pending resolution of this motion and on July 25, 1994, the District Court issued its Order Granting Defendants' Motion To Dismiss and entered a judgment dismissing the action. The plaintiffs have appealed to the Court of Appeals; however, in management's opinion, the District Court's decision should be upheld on appeal. (c) Alleged Anti-Trust Violations On September 6, 1994, Cost Management Services, Inc. ("Cost Management"), a Mercer Island, Washington, company involved in the purchase and resale of natural gas, filed an action against Washington Natural in District Court. Cost Management alleged that Washington Natural has monopolized or attempted to monopolize the market for natural gas in central western Washington. Cost Management also alleged Washington Natural failed to charge its customers in accordance with the prices, terms and conditions set forth in tariffs filed by Washington Natural with the WUTC and that it wrongfully interfered with Cost 81 Page 81 Management's relationships with its customers. Cost Management sought injunctive relief and damages in an unspecified amount. Washington Natural filed a motion to dismiss the lawsuit which was granted on May 5, 1995. In dismissing Cost Management's action the court ruled that the state action doctrine provides antitrust immunity for conduct done pursuant to a clearly articulated and actively supervised state policy, where unfettered competition is replaced with regulation. In dismissing the federal antitrust claims, the court declined to retain jurisdiction over Cost Management's state law claims which were dismissed without prejudice. Cost Management has filed an appeal in the Court of Appeals and it has filed a new lawsuit in Superior Court in King County, which was stayed pending the District Court appeal. In management's opinion, the District Court decision should be upheld on appeal and the suit in the Superior Court is unlikely to succeed. (d) Appeal of FERC Transition Cost Order As discussed in more detail at Note 14 regarding commitments and contingencies, Washington Natural has appealed the order of the FERC which allocates to Washington Natural an additional liability of $9,767,000 inclusive of interest as of September 30, 1995 for deregulation transition costs of Pipeline. On January 31, 1995, Washington Natural filed a suit in U.S. Circuit Court of Appeals (D.C. Circuit) seeking a rehearing. Since Washington Natural has accrued this liability and an off setting regulatory asset as part of the purchased gas adjustment account, there is no financial exposure or potential gain to Washington Natural. However, Washington Natural believes that the FERC's transition cost allocation order is inequitable and the appeal seeks to reduce the transition cost liability which is being passed through to Washington Natural's customers. Management is not able to predict the outcome of the appeal; however, if the appeal is successful, Washington Natural will not directly benefit, as the reduction in cost will be passed on to customers in the form of lower rates. (e) Environmental Insurance Litigation For litigation matters pertaining to Washington Natural's former manufactured gas plant site in Tacoma, Washington, see Note 10. (12) 1995 AND 1994 RESTRUCTURING AND OTHER CHARGES In the fourth quarter of 1995, Washington Natural recorded a $2.0 million after-tax charge for severance costs related to a 4% reduction in its work force, which was initiated during that quarter and completed in the first quarter of 1996. The work-force reduction, which affected only salaried employees, was part of Washington Natural's ongoing organizational transformation initiated in 1994. The severance accrual has been fully utilized in the first quarter of 1996, although certain severance benefits are being paid over time based on terms of individual severance agreements. In addition, the Company recorded a charge of $1,250,000 for federal tax contingencies. In the third quarter of 1994, the Company recognized $18,308,000 ($11,900,000 after tax) of restructuring and other one-time charges predominantly related to Washington Natural. Charges totaling $7,097,000 ($4,613,000 after tax) 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 currently needed. The employee 82 Page 82 severance charge of $3,500,000 ($2,275,000 after tax) related to a staffing reduction of 12% from the October 1993 level of 1,480 employees. As of September 30, 1995, $2,371,000 in termination benefits have been paid out with the balance to be paid in installments subject to the terms of individual severance agreements. The 1994 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 ($1,450,000 after tax). Washington Natural recorded an additional $3,351,000 ($2,178,000 after tax) charge related to supplemental executive retirement contracts. (13) UNCONSOLIDATED OIL AND GAS AFFILIATE In the fourth quarter of 1995, the Company recorded charges totaling $24,803,000 ($16,122,000 after tax) related to the adoption of SFAS No. 121 by Cabot and to recognize a permanent impairment in the carrying value of the Company's investment in Cabot. Cabot elected early adoption of SFAS No. 121 and recognized $113,900,000 of pre-tax impairment losses related to oil and gas producing properties in its fiscal quarter ended September 30, 1995. Under the equity method of accounting, the Company recognized its 9.4% share of the impairment write-down which totaled $6,503,000 after Cabot's income tax provision ($4,227,000 after the Company's tax provision). In addition, the Company determined that the carrying value of its investment in Cabot was in excess of the amount which could be realized through Cabot's future earnings. The Company wrote down its investment in Cabot by an additional $18,300,000 ($11,895,000 after-tax) to a value which approximated the fair market value of the Cabot securities held by the Company and which remains in excess of the Company's proportionate interest in Cabot's underlying equity by $7,300,000. Both charges result primarily from the decline in natural gas prices over the past year and lower projections of future natural gas prices. 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, in exchange for all the outstanding capital stock of Resources, in addition to the repayment of $63,661,000 of intercompany debt. The 1,134,000 shares of Cabot preferred stock are convertible into 1,972,174 shares of Cabot Class A common stock and are entitled to 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 $18,310,000, after providing for deferred taxes of approximately $32,000,000, and establishing a reserve of $6,800,000 ($4,420,000 after tax) for a potential downward purchase price adjustment based on the performance of wells in a certain field over one year. During the fourth quarter of 1995, the Company resolved substantially all remaining merger-related issues with Cabot, including the analysis of well performance, which resulted in an additional charge to earnings of $503,000 ($327,000 after tax). 83 Page 83 See Note 14 regarding certain gas transportation, storage and other contractual arrangements of Resources that were retained by a subsidiary of the Company. The following table details the Company's investment in Cabot at September 30, 1995 and 1994, and earnings and dividends received from the investment during each year (dollars in thousands):
1995 1994 -------- -------- Investment in Cabot $ 69,975 $ 97,801 Percentage of total Cabot common 9.4% 9.4% Percentage of voting interest in Cabot 16.6% 16.6% Pre-tax income Preferred dividends accrued $ 3,402 $ 1,418 Equity in (loss) (9,185) (573) Investment impairment write-down (18,300) -- Dividends received Preferred 3,402 567 Common 341 171
At September 30, 1995, the carrying value of the Company's investment in Cabot exceeded the Company's proportionate interest in the underlying equity of Cabot by $7,300,000. The Company is amortizing the excess carrying value on a straight-line basis over a period of 22 years. Based on the closing price on the NYSE on September 29, 1995, the aggregate fair value of the Company's investment in Cabot common stock was $29,062,000. No fair value is readily available for the Cabot preferred stock as it is not publicly traded; however, the fair value of the Company's shares of Cabot preferred was estimated to be approximately $40,000,000 at September 30, 1995. 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. (14) COMMITMENTS AND CONTINGENCIES (a) 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. Following the merger, WEGM entered into a five-year contract with IGI Resources ("IGI"), Boise, Idaho, to manage these rights. The transportation rights on the PGT pipeline 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 84 Page 84 and ANG. Effective November 1, 1995, WEGM permanently assigned to IGI all of its Stanfield capacity. In addition, WEGM has segmented its capacity to California at Stanfield and permanently assigned 10,000 MMBtu per day of the Alberta to Stanfield segment to a third party effective November 1, 1995. WEGM's remaining PGT rights expire in October 2023, and the ANG and Nova rights expire in October 2008, with annual renewal options. The annual obligations for future demand charges through the primary term of WEGM's gas transportation and storage contracts are as follows: 1996, $3,987,000; 1997, $3,395,000; 1998, $3,395,000; 1999, $3,395,000; 2000, $3,395,000; and thereafter, $64,966,000. WEGM entered into a firm 20-year contract with Tenaska Washington Partners II, L.P. ("Tenaska") to supply approximately 8,000 MMBtu per day of natural gas to an electricity cogeneration plant being constructed in western Washington. The plant was to have sold electricity to the Bonneville Power Administration ("BPA") under a firm, long-term contract; however the BPA has unilaterally canceled the contract. Tenaska has ceased construction of the facility and initiated a lawsuit to recover damages. WEGM is contractually obligated to supply the gas for the plant if the plant is in commercial operation prior to June 30, 1998. However, it appears highly unlikely that this condition will occur, therefore, WEGM has not secured a supply of gas to meet the contractual obligation. 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% higher than those paid by holders of vintage capacity. The FERC is currently considering a request from PGT for the cost of the expansion capacity to be "rolled in" with the cost of the vintage capacity to establish a uniform rate for holders of both types of capacity. If approved, a rolled-in rate would significantly reduce WEGM's future demand charge obligation. Settlement discussions are currently underway among PGT and its firm shippers; however, the outcome and timing of any settlement is uncertain. In the fourth quarter of 1995, WEGM recorded a $5,000,000 ($3,250,000 after- tax) charge to increase its reserve for estimated future losses associated with the transportation and storage commitments to $12,158,000 based on an assessment of the likelihood and timing of approval of rolled-in rates and actual mitigation results in 1995. WEGM initially established the reserve with a $16,000,000 ($10,400,000 after-tax) charge to earnings upon completion of the merger of Resources and Cabot in May 1994. During 1995 and 1994, pre-tax losses totaling $5,841,000 and $3,001,000, respectively, were charged against the reserve. The reserve was increased in 1995 because, in management's opinion, the current PGT rate settlement discussions have a higher probability of failing than succeeding. If the settlement attempt fails, the rate request will most likely be litigated and result in rolled-in rates being phased-in over a period of five years or more, as recommended by the FERC staff, beginning in calendar year 1997. If PGT's proposed settlement is approved, the current $12,158,000 reserve balance is likely excessive. (b) Washington Natural Commitments Washington Natural has entered into various firm supply, transportation and storage service contracts in order to assure adequate availability of gas supply for its firm customers. Many of these contracts, which have remaining terms of from one to 28 years, provide that Washington Natural must pay a 85 Page 85 fixed demand charge each month, regardless of actual usage. Certain of Washington Natural's firm gas supply agreements also obligate Washington Natural to purchase a minimum annual quantity at market-based contract prices. Generally, if the minimum volumes are not purchased and taken during the year, Washington Natural is obligated to pay either: 1) a monthly or annual gas inventory charge calculated as a percentage of the then-current contract commodity price times the minimum quantity not taken; or 2) pay for gas not taken. Alternatively, under some of the contracts, the supplier may exercise a right to reduce its subsequent obligation to provide firm gas to Washington Natural. The following tables summarize Washington Natural's obligations for future demand charges through the primary terms of its existing contracts and the minimum annual take requirements under the gas supply agreements. The quantified obligations are based on current contract prices and FERC authorized rates, which are subject to change. Demand Charge Obligations (in thousands):
2001 & There- 1996 1997 1998 1999 2000 after Total ------- ------- ------- ------- ------- -------- -------- Firm gas supply $32,960 $32,960 $32,828 $31,840 $28,882 $ 85,379 $244,849 Firm transpor- tation service 52,594 52,594 52,594 52,594 52,594 264,546 527,516 Firm storage and peaking service 8,722 8,722 8,722 8,722 8,722 125,209 168,819 ------- ------- ------- ------- ------- -------- -------- Total $94,276 $94,276 $94,144 $93,156 $90,198 $475,134 $941,184 ======= ======= ======= ======= ======= ======== ========
Minimum Annual Take Obligations (in thousands of therms):
2001 & There- 1996 1997 1998 1999 2000 after Total ------- ------- ------- ------- ------- ------- --------- Firm gas supply 475,394 406,062 296,562 258,237 258,237 762,680 2,457,172 ======= ======= ======= ======= ======= ======= =========
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 1996 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: 86 Page 86 Maximum Supply Available Under Current Firm Supply Contracts (in thousands of therms):
2001 & There- 1996 1997 1998 1999 2000 after Total ------- ------- ------- ------- ------- --------- --------- Total 822,675 730,000 584,000 520,125 520,125 1,795,056 4,971,981 ======= ======= ======= ======= ======= ========= =========
(c) Reallocation of Pipeline Transition Costs In May 1994, Pipeline was ordered by the FERC to modify the previous allocation of transition costs, totaling $34 million plus interest, incurred in "unbundling" interstate pipeline services. Under this order, Washington Natural's share of these costs increased from $1,200,000 previously paid, to $10,400,000 inclusive of interest as of September 30, 1994. Washington Natural and six other customers filed requests for rehearing. In September 1994, Washington Natural recorded a liability of $5,600,000 and an offsetting regulatory receivable for the same amount to reflect management's opinion of the outcome of the rehearing process. On December 20, 1994, the FERC issued an order denying the rehearing requests and permitting Pipeline to bill customers under the modified allocation methodology. Pending the outcome of the January 31, 1995 appeal to the United States Court of Appeals, Washington Natural made payments of $4,300,000 in 1995 to Pipeline under a 12-month payment schedule. Washington Natural increased the recorded liability and the offsetting regulatory receivable from $5,600,000 to $9,767,000 inclusive of interest as of September 30, 1995. The WUTC has allowed Washington Natural to recover the full amount of the liability in rates as part of the PGA approved in May 1995. (15) DISCONTINUED OPERATIONS In August 1993, the Company 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. 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. (a) Cash and cash equivalents Cash and cash equivalents include cash and investments with an original maturity of less than 90 days. The carrying value approximates fair value because of the short maturity of these instruments. 87 Page 87 (b) Long-term debt Rates currently available to the Company for debt with similar terms and remaining maturities are used to estimate fair value of existing debt. (c) Preferred stock Prices currently available to the Company for preferred stock with similar terms and remaining maturities are used to estimate fair value of existing preferred stock. (d) Interest rate swap agreements The fair value of interest rate swaps (used for hedging purposes) is the estimated amount that the Company would receive or pay to terminate each swap agreement at the reporting date, taking into account current interest rates and the current credit-worthiness of all the parties to each swap. The estimated fair values of the Company's financial instruments are as follows (in thousands):
1995 1994 --------------------- --------------------- Carrying Fair Carrying Fair Amount Value Amount Value -------- --------- -------- --------- Financial liabilities: Long-term debt $340,200 $ 353,634 $350,340 $ 345,043 Preferred stock $ 90,000 $ 87,900 $ 90,000 $ 79,956 Unrecognized financial instruments: Interest rate swaps $ -- $ (2,627) $ -- $ (2,639)
88 Page 88 (17) CONSOLIDATED INDUSTRY SEGMENT INFORMATION
Year Ended September 30, --------------------------------------- 1995 1994 1993 --------- ----------- ----------- (in thousands) Revenue Natural gas distribution * $ 420,048 $ 396,407 $ 367,853 Merchandise sales * 23,563 35,618 70,265 Oil and natural gas -- -- 31,618 Less intersegment revenue -- -- (264) Coal and other -- -- 920 --------- ----------- ----------- Total $ 443,611 $ 432,025 $ 470,392 ========= =========== =========== Operating income (loss) before income taxes Natural gas distribution $ 59,044 $ 22,467 $ 52,504 Merchandise sales (1,741) (106) 7,945 Oil and natural gas -- -- 7,700 Coal and other -- (890) (2,935) --------- ----------- ----------- Total $ 57,303 $ 21,471 $ 65,214 ========= =========== =========== Identifiable assets Natural gas distribution $ 890,496 $ 870,529 $ 829,319 Merchandise sales 4,717 4,094 3,442 Oil and natural gas 69,975 97,801 153,626 Coal and other 24,302 64,366 49,430 --------- ----------- ----------- Total $ 989,490 $ 1,036,790 $ 1,035,817 ========= =========== =========== Capital expenditures Natural gas distribution $ 87,240 $ 84,506 $ 91,275 Merchandise sales 232 1,182 -- Oil and natural gas -- -- 36,445 Coal and other 1,271 1,165 1,766 --------- ----------- ----------- Total $ 88,743 $ 86,853 $ 129,486 ========= =========== ===========
Washington Energy is engaged principally in natural gas distribution; oil and natural gas exploration and production through its equity investment in Cabot; sales 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. 89 Page 89 (18) SUBSEQUENT EVENT Proposed Merger With Puget Sound Power and Light Company On October 18, 1995, Washington Energy and Washington Natural announced a definitive agreement to merge with Puget Sound Power and Light Company. The agreement provides for each common share of Washington Energy to be exchanged for .860 shares of Puget stock and each share of preferred stock of Washington Natural to be converted into one share of preferred stock of Puget with like rights and preferences. The merger agreement is subject to approval by the common shareholders of Washington Energy and Puget and by the preferred shareholders of Washington Natural. The shareholder votes are scheduled for March 20, 1996. In addition, among other conditions the merger must receive regulatory approval from the WUTC. The approval process is expected to be completed by the end of calendar 1996. 90 Page 90 (19) SUPPLEMENTARY INCOME INFORMATION CONSOLIDATED SELECTED QUARTERLY FINANCIAL DATA Years Ending September 30, (Unaudited) Results vary significantly by quarter because operating revenues and earnings are greatly affected by variations in weather conditions. The three months ending September 30 have usually been a loss period.
Operating Earnings Operating Income Net Income (Loss) Per Revenues (Loss) (Loss) Share++ --------- --------- ---------- ---------- (in thousands, except per share amounts) 1995 Quarter: First $156,245 $ 24,311 $ 13,255 $ .56 Second 157,519 22,710 11,228 .47 Third 78,866 6,673 (5,624) (.26) Fourth 50,981 (1,898) (59,921) (2.49) -------- -------- -------- ------ For the year $443,611 $ 51,796 $(41,062) $(1.72) ======== ======== ======== ====== 1994 Quarter: First $146,743 $ 17,919 $ 8,310 $ .33 Second 151,461 16,930 7,446 .32 Third 79,034 (4,043) (48,916) (2.09) Fourth 54,787 (2,638) (12,486) (.53) -------- -------- -------- ------ For the year $432,025 $ 28,168 $(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 7,640 (1,701) (.07) Fourth 82,466 965 (17,796) (.77) -------- -------- -------- ------ For the year $470,392 $ 55,569 $ 9,647 $ .42 ======== ======== ======== ======
Certain amounts in the 1994 and 1993 quarterly statements have been reclassified to conform with the 1995 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 increased in each quarter, the sum of quarterly earnings may not equal earnings per share for the year. 91 Page 91 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure: None PART III Item 10. Directors and Executive Officers of the Registrants (a) Directors: (As to Washington Energy and Washington Natural)
Year First Name, Present Occupation and Elected as Experience for Past Five Years Age Director - ---------------------------------------------------------- --- ---------- Virginia Anderson (2) (3) 48 1991 Director of Seattle Center, a large civic center owned by the City of Seattle since 1988. Robert F. Bailey (2) (4) (5) 63 1988 President of Trans Republic Energy, L.P., Midland, Texas, an oil and gas investment company since January 1992 and Mabelle, Inc., Midland, Texas, an oil and gas production company. Previously he was President of Alta Energy Corporation, Midland, Texas, an oil and gas drilling and production company operating primarily in the southwestern United States. Donald J. Covey (1) (2) 67 1982 Chairman of the Board of Directors of UNICO Properties, Inc., Seattle, Washington, from 1992 until his retirement on December 31, 1994, Chairman and Chief Executive Officer, 1990 to 1992. UNICO Properties, Inc., manages several major office buildings in downtown Seattle. John W. Creighton, Jr. (4) (5) 63 1989 President of Weyerhaeuser Company, Tacoma, Washington, a forest products company, since 1988. Robert L. Dryden (3) (4) 62 1991 Executive Vice President, Airplane Production, Boeing Commercial Airplane Group, Seattle, Washington, since 1990.
92 Page 92 Tomio Moriguchi (1) (2) 59 1988 Chairman and Chief Executive Officer of Uwajimaya, Inc., Seattle, Washington, a food and merchandise distributor, retailer, and exporter since December 1994. Previously he served as President beginning in 1965. President, Town and Country Travel, Inc., Seattle, Washington, and President, North American Post Publishing Company, Seattle, Washington. Sally G. Narodick (3) (4) 50 1989 Chairman and Chief Executive Officer of Edmark Corporation, Redmond, Washington, a developer and publisher of print and software educational materials, since October 1989. William P. Vititoe (1) (3) (5) 57 1994 Chairman, Chief Executive Officer and President of Washington Energy and Washington Natural since 1994. From November 1990 to November 1993, he served as President and Chief Executive Officer of American Natural Resources Pipeline Co., a natural gas pipeline company. From July 1989 to October 1990, he served as President of Ameritech Enterprises Group, a diversified communications company.
(1) Member of Executive Committee (Chairman is William P. Vititoe) (2) Member of Audit Committee (Chairman is Donald J. Covey) (3) Member of Administrative Committee (Chairman is Sally G. Narodick) (4) Member of Compensation and Benefits Committee (Chairman is John W. Creighton, Jr.) (5) Member of Nominating Committee (Chairman is Robert F. Bailey) Washington Energy directors serve in three classes for staggered terms whereby only directors in a particular class are elected at each annual meeting of stockholders. The terms of Bailey, Creighton and Vititoe expire in 1996; those of Anderson, Moriguchi and Narodick expire in 1997 and those of Covey and Dryden expire in 1998. Each director has served continuously since the date of his or her first election as a director of Washington Energy. The next annual meeting of shareholders is scheduled to be held on March 20, 1996. In case of a vacancy on the Board of Directors, the remaining directors, by majority vote, may elect a successor to serve until the next annual meeting of shareholders. In 1994, the Board of Directors reduced the number of board members from nine to eight upon the retirement of the prior President of Washington Energy and Washington Natural. 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 SEC as follows: Virginia Anderson - Columbia Bank and U.S. Bank of Washington, a subsidiary of U.S. Bancorp; Robert F. Bailey - Texas Commerce Bank-Midland and Cabot Oil & Gas Corporation; John W. Creighton, Jr. - Weyerhaeuser Company, Portland General Corporation, Quality Food Centers, Inc. and Unocal Corporation; Robert L. Dryden - U.S. Bank of Washington, a subsidiary of U.S. Bancorp; Tomio Moriguchi - Seafirst Corporation, a subsidiary of the Bank of America N.T. & S.A.; Sally G. Narodick - Edmark 93 Page 93 Corporation, Pacific Northwest Bank and Penwest; and William P. Vititoe - Cabot Oil & Gas Corporation, Comerica Bank and Amerisure Michigan Mutual Insurance Company. The full Board met eight times during the year ended September 30, 1995. Each incumbent director attended more than 75% of the aggregate number of meetings of the Board 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. The Administrative Committee is currently composed of Ms. Narodick, Chairman, Ms. Anderson, Mr. Dryden, Mr. Vititoe and Washington Energy's Chief Financial Officer, Mr. Torgerson, who serves as a non-director committee member. The committee is responsible for the administration of the defined contribution and the defined benefit retirement plans of the Company. The committee met two times during 1995. The Audit Committee is currently composed of Mr. Covey, Chairman, Ms. Anderson, Mr. Bailey, and Mr. Moriguchi. The committee is responsible for oversight of Washington Energy's and its subsidiaries' corporate accounting practices, financial reporting process and internal accounting and other financial control systems. The committee is also responsible for the review of management's recommendation of independent public accountants. The committee met five times during 1995. The Compensation and Benefits Committee currently consists of Mr. Creighton, Jr., Chairman, Mr. Bailey, Mr. Dryden, and Ms. Narodick. The committee is responsible for determining appropriate compensation and other benefit measures for officers of the Company. The committee met five times during 1995. The Executive Committee currently consists of Mr. Vititoe, Chairman, Mr. Covey and Mr. Moriguchi. It is authorized to act in lieu of the full Board of Directors on various matters between board meetings. The committee met one time during 1995. The Nominating Committee currently consists of Mr. Bailey, Chairman, Mr. Creighton, Jr., and Mr. Vititoe. The committee is responsible for the identification and evaluation of candidates for election to the Board of Directors. The committee did not meet during 1995. Any shareholder recommendations for nominations to the Board of Directors for consideration by the Nominating Committee for the 1997 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, 1996. (b) Executive Officers: (As to Washington Energy and Washington Natural) See data following Item 4 of Part I. Section 16(a) of the Exchange Act requires the directors and executive officers of Washington Energy to file reports of ownership and reports of changes in 94 Page 94 ownership of Washington Energy common stock with the SEC and the NYSE. Directors and executive officers are also required by SEC regulations to furnish Washington Energy with copies of all such reports that they file. Based solely on its review of the copies of such forms received by it, Washington Energy believes that all filing requirements applicable to its directors and executive officers were complied with during the year ended September 30, 1995, except for a failure to timely report non-vested stock options awarded in December 1994 to all executive officers, which were reported by amendments filed in December 1995. Item 11. Executive Compensation The following table shows the total annual and long-term compensation paid by the Company and its subsidiaries to the persons who, for the year ended September 30, 1995, were the Chief Executive Officer and the other five most highly compensated executive officers of the Company or its subsidiaries ("Named Executives"). SUMMARY COMPENSATION TABLE
Annual Compensation Long-Term Compensation ----------------------------------- ------------------------------------ Other Securities All Name Annual Underlying Other Other and Compen- Options/ Incentive Compen- Principal Salary Bonus sation SARs Payouts sation Position Year ($)(1) ($)(2) ($)(3) (#)(4) ($)(5) ($)(6) - -------------------- ---- -------- ------- ------- ---------- ---------- ------- William P. Vititoe 1995 332,596 45,100 34,386 25,800 -- 6,682 Chairman, Chief 1994 230,423 100,000 78,664 40,000 -- 2,437 Executive Officer 1993 -- -- -- -- -- -- and President Timothy J. Hogan 1995 114,000 25,700 13,647 7,850 -- 3,420 Executive Vice 1994 99,024 22,500 -- 1,800 14,145 2,970 President, Chief 1993 94,032 4,600 -- 1,800 23,153 2,820 Operating Officer James P. Torgerson 1995 150,000 15,000 13,647 11,700 -- 4,500 Executive Vice 1994 137,346 23,200 -- 2,600 -- 4,119 President, Chief 1993 133,128 8,000 -- 2,600 19,804 3,994 Administrative and Financial Officer Robert J. Tomlinson 1995 145,008 21,800 13,647 7,850 -- 4,350 Sr. Vice President, 1994 136,098 8,000 -- 2,600 -- 3,960 General Counsel and 1993 134,532 6,800 -- 2,600 19,804 3,992 Corporate Secretary James W. Gustafson 1995 150,000 15,000 13,647 11,700 -- 3,718 Sr. Vice President 1994 137,346 7,200 -- 2,600 -- 4,119 - Operations, 1993 133,128 6,800 -- 2,600 19,804 3,350 Washington Natural Donald H. Gessel 1995 147,000 12,000 13,647 7,850 -- 4,054 President, 1994 136,596 6,313 -- 2,600 -- 4,098 Washington Energy 1993 133,128 8,900 -- 2,600 19,804 3,817 Services Company
(1) Mr. Vititoe's 1994 salary reflects service from January 15, 1994. His annual base salary was $325,000 in 1994. (2) Incentive compensation is based on performance in the year shown but determined and paid the following year. For example, bonuses for 1995 are based on performance in 1995 and are measured and paid in the fourth quarter of calendar 1995. 95 Page 95 (3) Mr. Vititoe's "Other Annual Compensation" includes moving expenses and temporary housing expenses of $22,386 and $75,640 for 1995 and 1994, respectively. The balance of amounts shown in this column for other executive officers are car allowances paid. (4) All options granted to executive officers were in tandem with SARs. (5) Amounts in the "Other Incentive Payouts" column relate to payments under the Company's Second Performance Share Plan further described in the Long-Term Incentive Programs section. (6) The amounts in this column are the Company contributions to individual 401(k) accounts. 1995 Stock Options/SARs The following table sets forth the number of stock options/SARs which were granted to each of the Named Executives during 1995. In addition, the table provides the present value of the stock options/SARs as of the grant date.
Securities Underlying % of Grant Options/ Total Exercise Date SARS Options or Base Present Granted Granted to Price Expiration Value Name (#)(1) Employees ($/Sh) Date ($)(2) - ------------------- ---------- ---------- -------- ---------- ------- William P. Vititoe 25,800 13% 13.375 12/15/04 50,052 Timothy J. Hogan 7,850 4% 13.375 12/15/04 15,229 James P. Torgerson 11,700 6% 13.375 12/15/04 22,698 Robert J. Tomlinson 7,850 4% 13.375 12/15/04 15,229 James W. Gustafson 11,700 6% 13.375 12/15/04 22,698 Donald H. Gessel 7,850 4% 13.375 12/15/04 15,229
(1) The exercise price of the options is the fair market value of the Company's stock on the date of the grant. Each option was granted in tandem with a SAR covering the same number of shares. Any optionee exercising their stock options loses the corresponding SARs as to those shares and vice versa. Two separate option grants were made during the year. Options under one grant vested immediately. Options under the other grant vest over an approximate four-year period and were awarded as follows: Mr. Vititoe, 13,300 shares; Mr. Hogan, 5,250 shares; Mr. Torgerson, 9,100 shares; Mr. Tomlinson, 5,250 shares; Mr. Gustafson, 9,100 shares; and Mr. Gessel, 5,250 shares. (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. 96 Page 96 Aggregated Option/SAR Exercises in 1995 and Year-End Option/SAR Values The following table sets forth information concerning each stock option/SAR which was exercised during 1995 by each of the Named Executives and the year-end value of the unexercised stock options/SARs, provided on an aggregated basis.
Value of Unexercised Options/SARs at Year End Options/ --------------------- SARs Value Exercis- Unexer- Exercis- Unexer- Exercised Realized able cisable able cisable Name (# of shares) ($)(1) (#) (#) ($)(2) ($)(2) - ------------------- ------------- -------- -------- ------- -------- ------- William P. Vititoe -- -- 32,500 33,300 46,875 49,875 Timothy J. Hogan -- -- 11,000 5,250 9,750 19,688 James P. Torgerson -- -- 15,600 9,100 9,750 34,125 Robert J. Tomlinson -- -- 15,600 5,250 9,750 19,688 James W. Gustafson -- -- 13,000 9,100 9,750 34,125 Donald H. Gessel -- -- 15,600 5,250 9,750 19,688
(1) Any amounts presented in this column represent the difference between the price of the Company's common stock on the date of exercise and the option/SAR exercise price multiplied by the number of shares. (2) The value of the unexercised options/SARs is calculated as the excess of the WECO common stock price of $17.125 over the exercise price multiplied by the number of options for each grant under which options/SARs are outstanding. Long-Term Incentive Programs The Company has provided long-term performance incentives to the Named Executives since 1986 through the Second Washington Energy Company Performance Share Plan ("Plan"). The determination was made in 1994 that the minimum performance objectives of the Plan could not be met for the years 1994 through 1997 due to the losses sustained in 1994, thereby eliminating the incentive to perform provided by the Plan. No performance units were granted under the Plan in 1995. In December 1994, the Board of Directors approved the Interim Performance Share Plan ("Interim Plan") to provide a long-term performance incentive for the four years 1995 through 1998 for all officers of the Company and its subsidiaries. The Interim Plan provides for cash payments at the end of the performance period based on the percentage of total units awarded which are earned in each of the four years and the price of the Company's common stock at the end of the four-year performance period. Units are earned in each year based on a comparison of total shareholder return (appreciation in stock price plus dividends paid) for Company shareholders with that of a peer group of gas LDCs. The maximum payment a plan participant can receive is equal to the total number of units awarded multiplied by the Company's stock price at the end of the four-year performance period. The Compensation and Benefits Committee may 97 Page 97 elect, at its discretion, to vest any unearned units at the end of the four-year period based on the total shareholder return for the entire period. Participants in the Interim Plan must be employed at September 30, 1998, to be eligible for any payment under the plan, except in the case of retirement, death or disability. The Interim Plan is not affected by a change in control of the Company; however, upon change in control, any unexpired awards under the Plan are payable at the Company's then current stock price. LONG-TERM INCENTIVE PROGRAM AWARDS IN 1995
Estimated Future Payouts Under Non-Stock Price-Based Plans --------------------- Units Awarded Units Beginning of Earned 1995 Period Until to Date Minimum Maximum Name (#) Payout (#) (#)(1) (#)(2) - ------------------- ------------- ------------ ------- ------- ------- William P. Vititoe 11,400 4 yrs 1,710 1,710 11,400 Timothy J. Hogan 7,800 4 yrs 1,170 1,170 7,800 James P. Torgerson 7,800 4 yrs 1,170 1,170 7,800 Robert J. Tomlinson 7,800 4 yrs 1,170 1,170 7,800 James W. Gustafson 7,800 4 yrs 1,170 1,170 7,800 Donald H. Gessel 7,800 4 yrs 1,170 1,170 7,800
(1) Corresponds to the number of units earned since the plan was initiated for which a cash payment will be made subsequent to the end of the four-year performance period on September 30, 1998. (2) Represents the maximum number of units which can be earned over the four-year performance period for which a payment will be made at the end of the four-year period. Supplemental Executive Retirement Contracts The Company has entered into individual contracts which provide officers, including the Named Executives, with retirement, death and disability benefits supplementing the benefits from the Company's defined benefit plan reduced by Social Security and benefits payable under plans of other, prior employers. The supplemental contracts provide that each participant will receive retirement plan payments, primary social security benefits and supplemental plan payments equal, in the aggregate, to 70% of the participant's average salary during the highest three years in the eight years preceding the participant's retirement. It provides payments of annual benefits for life upon retirement from the Company after reaching age 62 or at the election of the officer, with the Company's consent, at or after age 59. Based on a computation using data available at September 30, 1995, the average annual pension benefit (payable in the form of a joint and 50% survivor annuity with ten-year term certain) payable by the Company upon retirement at age 62, to the named executives would be: Mr. Vititoe $223,717; Mr. Hogan, $75,141; 98 Page 98 Mr. Torgerson, $101,063; Mr. Tomlinson, $98,733; Mr. Gustafson $101,063; and Mr. Gessel $99,663. Conditional Employment Agreements in the Event of a Change in Control The Company has conditional employment agreements with four of its key executive officers: Messrs. William P. Vititoe, Timothy J. Hogan, James P. Torgerson, and Robert J. Tomlinson. The employment agreements offer additional security to these key management personnel to better enable them to function effectively without distraction in the event that uncertainties as to the future control of the Company should arise. These agreements provide certain benefits should employment be terminated other than for cause, or by death, disability or normal retirement within three years subsequent to a change in control of the Company. Change in control of the Company includes the acquisition by any person of: 1) power to exercise a controlling influence over management or policies; 2) ownership or power to vote 25% or more of the outstanding voting securities of the Company; or 3) change in the majority of the Board of Directors during the six-year period subsequent to the acquisition by any person of ownership or power to vote 10% or more of the outstanding voting securities of the Company without the approval of the majority of the Board of Directors in office prior to such acquisition. The benefits to be provided by the Company include: 1) a cash payment equal to three times the most recent year's annual compensation, or a cash payment equal to annual compensation until normal retirement date if less than three years; 2) lump sum payment for amounts calculated under dissolution of the Performance Share Plan; 3) maintenance of participation in all current employee benefit plans or provision for substantially similar benefits for a three-year period or until normal retirement date if sooner; 4) a cash payment at retirement date equal to the additional retirement compensation to which the executive would have been entitled had the executive continued in the employ of the Company for an additional three years or until normal retirement date if sooner; 5) a cash payment equal to the difference between the exercise prices of all stock options and the higher of: a) the average of the high and low sales prices on the date of termination, or b) the highest price actually paid in connection with the change in control of the Company; and 6) a cash payment equal to the excise taxes imposed by the Internal Revenue Code Section 4999, if any, on all payments enumerated in this sentence, plus the tax expense to the executive resulting from this additional payment. If the executive voluntarily terminates employment without good reason, as defined in the agreement, no additional or special benefits accrue to the executive. Since the conditions specified in the contracts have not occurred, no amounts proposed were charged to expense by the Company under these agreements in 1995. The merger with Puget would constitute a change in control. 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, an additional $1,500 per year for serving on the executive committee or as chairman of another committee of the Board and . 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 shareholders in February 1991. Under this plan, an outside director is awarded 200 shares of Company common 99 Page 99 stock in January of each year for service on the Board of Directors for the prior year. During 1995, 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 subsidiary, Washington Natural, for a number of years and has been selected to audit the accounts of the Company for the year ending September 30, 1996. 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 1997 Shareholder Proposals Shareholder proposals intended to be presented at the 1997 Annual Meeting must be received by the Company no later than September 15, 1996 to be considered for inclusion in the proxy statement and proxy for the 1997 meeting. 100 Page 100 Item 12. Security Ownership of Certain Beneficial Owners and Management Washington Energy Company SECURITY OWNERSHIP OF DIRECTORS AND OFFICERS (stated as of December 8, 1995)
Amount of Percent Beneficial of Class Name of Beneficial Owner Ownership (2) ---------------------------- ---------- -------- Directors: Virginia Anderson 1,273 -- Robert F. Bailey 4,548 -- Donald J. Covey 6,375 -- John W. Creighton, Jr. 2,499 -- Robert L. Dryden 4,037 -- Tomio Moriguchi 2,190 -- Sally G. Narodick 1,499 -- Named Executive Officers (*also serve as Directors): William P. Vititoe* 69,176 (1) -- Timothy J. Hogan 21,892 (1) -- James P. Torgerson 28,684 (1) -- Robert J. Tomlinson 31,825 (1) -- James W. Gustafson 48,767 (1) -- Donald H. Gessel 32,000 (1) -- All directors and executive officers as a group (15 persons) 282,671 (1) 1.2%
(1) Includes unexercised options to acquire shares of common stock pursuant to the stock option plan as follows: Mr. Vititoe, 65,800 shares; Mr. Hogan, 16,250 shares; Mr. Torgerson, 24,700 shares; Mr. Tomlinson, 20,850 shares; Mr. Gustafson, 22,100 shares; and Mr. Gessel, 20,850 shares; all directors and executive officers as a group, 194,750 shares. (2) With respect to each person who has options to acquire common stock, such options are assumed to be outstanding for the purpose of computing percentage ownership of that person, but are assumed not to be outstanding for purposes of computing percentage ownership for any other person. Washington Energy is unaware of any person beneficially owning more than 5% of its common stock. Washington Natural Gas Company (a) Washington Energy owns of record 100% of Washington Natural's common stock, $5 par value, which is the sole voting security. (b) Holding of equity securities by directors and officers: None. 101 Page 101 Item 13. Certain Relationships and Related Transactions: None. 102 Page 102 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 I -- Condensed Financial Information of Registrant for the years ended September 30, 1995, 1994 and 1993. Washington Energy Company Schedule II -- Valuation and Qualifying accounts for the years ended September 30, 1995, 1994 and 1993. Washington Energy Company and Subsidiaries Washington Natural Gas Company and Subsidiaries The information required to be submitted in Schedule III has been included in the financial statements or supporting schedules. Schedules IV and V have been omitted as they are not applicable or not required. 103 Page 103 (b) Reports on Form 8-K: A report on Form 8-K was filed by Washington Energy and Washington Natural dated August 1, 1995, regarding third-quarter results. A report on Form 8-K was filed by Washington Energy and Washington Natural dated August 25, 1995, regarding the appointment of two Executive Vice Presidents of Washington Energy and Washington Natural and the announced retirement of a Senior Vice President of 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, Washington Energy hereby undertakes as follows, which undertaking shall be incorporated by reference into Washington Energy's Registration Statements on Form S-8 Nos. 33-1348, 2-91092, 33-24221, 2-63093 and 33-55381. Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of Washington Energy pursuant to the foregoing provisions, or otherwise, Washington Energy has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act of 1933 and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by Washington Energy of expenses incurred or paid by a director, officer or controlling person of Washington Energy in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, Washington Energy will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation of our report included in this Form 10-K, into the Company's previously filed Registration Statement File Nos. 33-1348, 2-91092, 33-24221, 2-63093, 33-18684, 33-49599, 33-55381 and 33-61859. ARTHUR ANDERSEN LLP Seattle, Washington December 27, 1995 104 Page 104 Schedule I WASHINGTON ENERGY COMPANY CONDENSED FINANCIAL INFORMATION OF REGISTRANT BALANCE SHEETS
September 30, ---------------------- 1995 1994 --------- --------- (in thousands) ASSETS INVESTMENTS IN CONSOLIDATED SUBSIDIARIES: Washington Natural Gas Company $ 251,521 $ 235,982 Thermal Energy, Inc. (15,625) 8,219 ThermRail, Inc. (3,100) 1,069 WECO Finance Company 2,793 1,545 Washington Energy Gas Marketing (16,544) (13,121) Washington Energy Services Company (84) 1,106 --------- --------- Total investments in subsidiaries 218,961 234,800 --------- --------- INVESTMENTS IN UNCONSOLIDATED AFFILIATES 70,313 98,139 --------- --------- NOTES AND ACCOUNTS RECEIVABLE FROM SUBSIDIARIES 73,202 62,830 --------- --------- CURRENT ASSETS: Other receivables 1,769 1,319 Federal income taxes receivable 3,957 5,409 --------- --------- Total current assets 5,726 6,728 --------- --------- DEFERRED CHARGES: Deferred federal income taxes 2,595 -- Other 378 112 --------- --------- Total deferred charges 2,973 112 --------- --------- Total assets $ 371,175 $ 402,609 ========= ========= CAPITALIZATION AND LIABILITIES CAPITALIZATION: Common shareholders' interest $ 196,686 $ 256,800 --------- --------- NOTES AND ACCOUNTS PAYABLE TO SUBSIDIARIES 11,255 1,854 --------- --------- CURRENT LIABILITIES: Checks issued in excess of cash in bank 10 453 Notes payable and commercial paper 161,994 125,182 Accounts payable and accrued interest 1,230 2,636 --------- --------- Total current liabilities 163,234 128,271 --------- --------- DEFERRED CREDITS: Deferred federal income taxes -- 7,884 Contingency reserves -- 7,800 --------- --------- Total deferred credits -- 15,684 --------- --------- Total capitalization and liabilities $ 371,175 $ 402,609 ========= =========
105 Page 105 Schedule I (Continued) WASHINGTON ENERGY COMPANY CONDENSED FINANCIAL INFORMATION OF REGISTRANT STATEMENTS OF INCOME
Year Ended September 30, -------------------------------- 1995 1994 1993 -------- -------- -------- (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 $-0- $16,937 and $26,045, respectively $ 17,854 $ (8,243) $ 21,771 Other subsidiaries (31,378) (13,670) (10,695) -------- -------- -------- Total equity in earnings (losses) of subsidiaries (13,524) (21,913) 11,076 OTHER INCOME AND DEDUCTIONS, NET (27,538) (23,733) (1,429) -------- -------- -------- NET INCOME (LOSS) (41,062) (45,646) 9,647 DIVIDENDS ON PREFERRED STOCK -- 9 101 EXCESS PREMIUM, PREFERRED REDEMPTION -- 673 -- -------- -------- -------- EARNINGS (LOSS) ON COMMON STOCK $(41,062) $(46,328) $ 9,546 ======== ======== ======== EARNINGS (LOSS) PER COMMON SHARE $ (1.72) $ (1.97) $ .42 ======== ======== ======== AVERAGE COMMON SHARES OUTSTANDING 23,893 23,486 22,996 ======== ======== ======== DIVIDENDS PER COMMON SHARE $ 1.00 $ 1.00 $ 1.40 ======== ======== ========
106 Page 106 Schedule I (Continued) WASHINGTON ENERGY COMPANY CONDENSED FINANCIAL INFORMATION OF REGISTRANT STATEMENTS OF CASH FLOWS
Year Ended September 30, -------------------------------- 1995 1994 1993 -------- -------- -------- (in thousands) Cash flow provided by (used in) operating activities: Net income (loss) from continuing operations $(41,062) $(44,847) $ 22,035 -------- -------- -------- Adjustments to reconcile net income (loss) from continuing operations to net cash provided by operating activities: Pre-tax loss on merger of subsidiary -- 6,304 -- Equity in undistributed (earnings) losses of unconsolidated affiliate 27,826 (699) -- Undistributed losses of consolidated subsidiaries 20,649 22,612 14,968 Increase (decrease) in: Contingency reserves (7,800) 6,262 -- Federal income tax - current 1,452 (4,590) (4,528) Federal income tax - deferred (10,745) (16,900) -- Deferred tax on merger of subsidiary -- 24,784 -- Other assets and liabilities (2,296) (611) 1,299 Other -- (2,679) (602) -------- -------- -------- Total adjustments 29,086 34,483 11,137 -------- -------- -------- Net cash provided by (used in) operating activities (11,976) (10,364) 33,172 -------- -------- -------- Cash flow provided by (used in) investing activities: Dividends received from affiliates -- 16,937 26,045 Investment in affiliates (4,812) (6,620) (95,398) Loans from (advances to) affiliates (971) 4,823 (22,408) Invested in subsidiary prior to merger -- (20,760) -- Proceeds from merger of subsidiary -- 63,661 -- -------- -------- -------- Net cash provided by (used in) investing activities (5,783) 58,041 (91,761) -------- -------- --------
107 Page 107 SCHEDULE I (Continued) WASHINGTON ENERGY COMPANY CONDENSED FINANCIAL INFORMATION OF REGISTRANT STATEMENTS OF CASH FLOWS
September 30, -------------------------------- 1995 1994 1993 -------- -------- -------- (in thousands) Cash flow provided by (used in) financing activities: Proceeds from issuance of common stock $ 4,824 $ 6,342 $ 70,528 Proceeds from issuance (redemption) of commercial paper, net 36,812 (20,316) 24,388 Redemptions and repurchases of preferred stock -- (6,747) (149) Cash dividend payments: Common (23,877) (23,468) (32,282) Preferred -- (9) (101) -------- -------- -------- Net cash provided by (used in) financing activities 17,759 (44,198) 62,384 -------- -------- -------- Net cash provided by continuing operations -- 3,479 3,795 Net cash used in discontinued operations (primarily operating activities) -- (3,479) (3,795) -------- -------- -------- Net change in cash -- -- -- Beginning cash and cash equivalents -- -- -- -------- -------- -------- Ending cash and cash equivalents $ -- $ -- $ -- ======== ======== ======== Supplemental disclosures of cash flow information Cash paid during the year for: Interest (net of amount capitalized) $ 7,901 $ 7,283 $ 5,704 Income taxes $ 3,335 $ -- $ 5,136
108 Page 108 Schedule II WASHINGTON ENERGY COMPANY AND SUBSIDIARIES VALUATION AND QUALIFYING ACCOUNTS FOR THE YEARS ENDED SEPTEMBER 30, 1995, 1994 and 1993
Recoveries Written Balance Balance at Charged of Off as at End Beginning to Previous Uncollect- of of Period Income Write-Offs ible Period ---------- ------- ---------- ---------- ------- (in thousands) 1995: Allowances for uncollectible accounts $1,295 $1,220 $580 $(2,116) $ 979 ====== ====== ==== ======= ====== 1994: Allowances for uncollectible accounts $ 277 $2,457 $475 $(1,914) $1,295 ====== ====== ==== ======= ====== 1993: Allowances for uncollectible accounts $ 828 $1,613 $296 $(2,460) $ 277 ====== ====== ==== ======= ======
109 Page 109 Schedule II WASHINGTON NATURAL GAS COMPANY AND SUBSIDIARIES VALUATION AND QUALIFYING ACCOUNTS FOR THE YEARS ENDED SEPTEMBER 30, 1995, 1994 and 1993
Recoveries Written Balance Balance at Charged of Off as at End Beginning to Previous Uncollect- of of Period Income Write-Offs ible Period ---------- ------- ---------- ---------- ---------- (in thousands) 1995: Allowances for uncollectible accounts $ 1,252 $ 1,151 $ 578 $ (2,062) $ 919 ======= ======= ======= ======== ======= 1994: Allowances for uncollectible accounts $ 277 $ 2,406 $ 473 $ (1,904) $ 1,252 ======= ======= ======= ======== ======= 1993: Allowances for uncollectible accounts $ 303 $ 1,610 $ 296 $(1,932) $ 277 ======= ======= ======= ======= =======
110 Page 110 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 11, 1995 /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 11, 1995 /s/ Virginia Anderson (all signatures) ------------------------------ (Virginia Anderson) Director /s/ R. F. Bailey ------------------------------ (R. F. Bailey) Director /s/ Donald Covey ------------------------------ (Donald Covey) Director /s/ John W. Creighton, Jr. ------------------------------ (John W. Creighton, Jr.) Director /s/ Robert L. Dryden ------------------------------ (Robert L. Dryden) Director /s/ Tomio Moriguchi ------------------------------ (Tomio Moriguchi) Director /s/ Sally G. Narodick ------------------------------ (Sally G. Narodick) Director /s/ William P. Vititoe ------------------------------ (William P. Vititoe) Director, Chairman of the Board, President and Chief Executive Officer /s/ J. P. Torgerson ------------------------------ (J. P. Torgerson) Executive Vice President, Chief Administrative Officer; the Chief Financial Officer /s/ Allyn P. Hebner ------------------------------ (Allyn P. Hebner) Vice President - Finance and Treasurer; the Chief Accounting Officer
111 Page 111 EXHIBIT INDEX Certain of the following exhibits are filed herewith. Certain other of the following exhibits have heretofore been filed with the Commission and are incorporated herein by reference. (*Filed herewith) 2-A.1 Agreement and Plan of Merger by and among Puget Sound Power & Light Company, Washington Energy Company and Washington Natural Gas Company dated as of October 18, 1995 (incorporated herein by reference to Exhibit 2.1 to Washington Energy Company/Washington Natural Gas Company Form 8-K dated October 18, 1995, File Nos. 1-11227 and 1- 11271, respectively). 2-A.2 Stock Option Agreement dated as of October 18, 1995 by and among Puget Sound Power & Light Company and Washington Energy Company (incorporated herein by reference to Exhibit 2.3 to Washington Energy Company/Washington Natural Gas Company Form 8-K dated October 18, 1995, File Nos. 1-11227 and 1-11271, respectively). 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 (incorporated herein by reference to Washington Natural Gas Company Exhibit 4-A.6, Form 10-K for the year ended September 30, 1994, File No. 1-11271).
112 Page 112 4-B.1 Amended and Restated Bylaws of Washington Energy Company adopted October 10, 1990 (incorporated herein by reference to Washington Energy Company Exhibit 3-B.1, Form 10-K for the year ended September 30, 1990, File No. 0-8745). 4-B.2 Amendment to the Bylaws of Washington Energy Company, adopted December 12, 1990 (incorporated herein by reference to Washington Energy Company Exhibit 3-B.2, Form 10-K for the year ended September 30, 1990, File No. 0-8745). 4-B.3 Amendment to the Bylaws of Washington Energy Company, adopted April 20, 1994 (incorporated herein by reference to Washington Natural Gas Company Exhibit 4-B.3, Form 10-K for the year ended September 30, 1994, File No. 1-11271). 4-B.4 Amendment to the Bylaws of Washington Energy Company, adopted October 19, 1994 (incorporated herein by reference to Washington Natural Gas Company Exhibit 4-B.4, Form 10-K for the year ended September 30, 1994, File No. 1-11271). 4-C.1 Amended and Restated Bylaws of Washington Natural Gas Company adopted December 14, 1990 (incorporated herein by reference to Washington Natural Gas Company Exhibit 3-D.1, Form 10-K for the year ended September 30, 1990, File No. 0-951). 4-C.2 Amendment to the Bylaws of Washington Natural Gas Company adopted October 19, 1994 (incorporated herein by reference to Washington Natural Gas Company Exhibit 4-C.2, Form 10-K for the year ended September 30, 1994, File No. 1-11271). 4-D.1 Indenture of First Mortgage dated as of April 1, 1957 (incorporated herein by reference to Washington Natural Gas Company Exhibit 4-B, Registration No. 2-14307). 4-D.2 Sixth Supplemental Indenture dated as of August 1, 1966 (incorporated herein by reference to Washington Natural Gas Company Exhibit to Form 8-K for month of August, 1966, File No. 0-951). 4-D.4 Twelfth Supplemental Indenture dated as of November 1, 1972 (incorporated herein by reference to Washington Natural Gas Company Exhibit to Form 8-K for November 1972, File No. 0-951). 4-D.5 Seventeenth Supplemental Indenture dated as of August 9, 1978 (incorporated herein by reference to Washington Energy Company Exhibit 5-K.18, Registration No. 2-64428). 4-D.6 Twenty-third Supplemental Indenture dated as of July 15, 1986 (incorporated herein by reference to Washington Natural Gas Company Exhibit 4-B.21, Form 10-K for the year ended September 30, 1986, File No. 0-951). 4-D.7 Twenty-sixth Supplemental Indenture dated as of September 1, 1990 (incorporated herein by reference to Washington Natural Gas Company Exhibit 4-B.19, Form 10-K for the year ended September 30, 1990, File No. 0-951). 4-D.8 Twenty-seventh Supplemental Indenture dated as of September 1, 1990 (incorporated herein by reference to Washington Natural Gas Company Exhibit 4-B.20, Form 10-K for the year ended September 30, 1988, File No. 0-951). 4-D.9 Twenty-eighth Supplemental Indenture dated as of July 31, 1991 (incorporated herein by reference to Washington Natural Gas Company
113 Page 113 exhibit 4-A, Form 10-Q for the quarter ended March 31, 1993, File No. 0-951). 4-D.10 Twenty-ninth Supplemental Indenture dated as of June 1, 1993 (incorporated herein by reference to Exhibit 4-A of Washington Natural Gas Company's S-3 Registration Statement, Registration No. 33-49599). 4-D.11 Thirtieth Supplemental Indenture dated as of August 15, 1995 (incorporated herein by reference to Exhibit 4-A of Washington Natural Gas Company's S-3 Registration Statement, Registration No. 33-61859). 10-A Service Agreement dated September 1, 1987 between Northwest Pipeline Corporation and Washington Natural Gas Company for SGS-1 firm storage service at Jackson Prairie (incorporated herein by reference to Washington Natural Gas Company Exhibit 10-A Form 10-K for the year ended September 30, 1994, File No. 11271). 10-B Service Agreement dated April 14, 1993 between Questar Pipeline Corporation and Washington Natural Gas Company for FSS-1 firm storage service at Clay Basin (incorporated herein by reference to Washington Natural Gas Company Exhibit 10-B Form 10-K for the year ended September 30, 1994, File No. 11271). 10-C Service Agreement dated November 1, 1989, with Northwest Pipeline Corporation covering liquefaction storage gas service filed under cover of Form SE dated December 27, 1989. 10-D Firm Transportation Service Agreement dated October 1, 1990 between Northwest Pipeline Corporation and Washington Natural Gas Company (incorporated herein by reference to Washington Natural Gas Company Exhibit 10-D Form 10-K for the year ended September 30, 1994, File No. 11271). 10-E Gas Transportation Service Contract dated June 29, 1990, between Washington Natural Gas Company and Northwest Pipeline Corporation (incorporated herein by reference to Washington Natural Gas Company exhibit 4-A Form 10-Q for the quarter ended March 31, 1993, File No. 0-951). 10-E.1 Gas Transportation Service Contract dated July 31, 1991, between Washington Natural Gas Company and Northwest Pipeline Corporation (incorporated herein by reference to Washington Natural Gas Company exhibit 4-A Form 10-Q for the quarter ended March 31, 1993, File No. 0-951). *10-E.2 Amendment to Gas Transportation Service Contract dated July 31, 1991, between Washington Natural Gas Company and Northwest Pipeline Corporation. *10-E.3 Gas Transportation Service Contract dated August 15, 1994, between Washington Natural Gas Company and Northwest Pipeline Corporation. *10-E.4 Amendment to Gas Transportation Service Contract dated August 15, 1994, between Washington Natural Gas Company and Northwest Pipeline Corporation. *10-F $250,000,000 Credit Agreement dated March 31, 1995, by and among Washington Energy Company, as Borrower, The First National Bank of Chicago, Seattle-First National Bank, The Industrial Bank of Japan, Limited, ABN Amro Bank N.V., Bank of Montreal, First Interstate Bank of Washington, N.A., Nationsbank of Texas, N.A., U.S. Bank of
114 Page 114 Washington, N.A., and CIBC Inc., as Lenders, and The First National Bank of Chicago, as Agent. 10-G Intentionally left blank. *10-H Washington Natural Gas Company Deferred Compensation Plan effective September 1, 1995. *l0-I Form of Washington Natural Gas Company - Executive Retirement Compensation Agreement reflecting all amendments through August 16, 1995. 10-J Second Washington Energy Company Performance Share Plan (amended and restated effective October 1, 1991) (incorporated herein by reference to Washington Energy Company Exhibit 10-L.1, Form 10-K, for the year ended September 30, 1991, File No. 0-8745). *10-J.2 Washington Energy Company Interim Performance Share Plan effective December 7, 1994. 10-K.1 Washington Energy Company Stock Option Plan (incorporated herein by reference to Exhibit 10-C Washington Energy Company Form 10-Q for the quarter ended March 31, 1984, File No. 0-8745). 10-K.2 Amendment to Washington Energy Company Stock Option Plan (incorporated herein by reference to Washington Energy Company Exhibit 10-S, Form 10-K for the year ended September 30, 1986, File No. 0-8745). 10-K.3 Amendment to Washington Energy Company Stock Option Plan dated as of February 26, 1988 (incorporated herein by reference to Washington Energy Company Form S-8, Registration No. 33-24221). 10-K.4 Washington Energy Company Stock Option Plan effective December 15, 1993, (incorporated herein by reference to Washington Energy Company Exhibit 99, Registration No. 33-55381). 10-L Washington Energy Company Directors Stock Bonus Plan (incorporated herein by reference to Washington Energy Company Exhibit 10-O Form 10-K for the year ended September 30, 1990, File No. 0-8745). 10-M.1 Employment Agreement between Washington Energy Company, Washington Natural Gas Company and William P. Vititoe dated January 15, 1994,. (incorporated herein by reference to Washington Natural Gas Company Exhibit 10-M.1, Form 10-K for the year ended September 30, 1994, File No. 1-11271). 10-M.2 Form of Conditional Executive Employment Contract, filed under cover of Form SE dated December 27, 1988, (incorporated herein by reference to Washington Natural Gas Company Exhibit 10-M.2, Form 10-K for the year ended September 30, 1994, File No. 1-11271). *10-M.3 Amended and restated Washington Energy Company and subsidiaries Annual Incentive Plan for Vice Presidents and above, dated October 1994. 10-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 (incorporated herein by reference to Washington Natural Gas Company Exhibit 10-M.4, Form 10-K for the year ended September 30, 1994, File No. 1-11271).
115 Page 115 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 (incorporated herein by reference to Washington Natural Gas Company Exhibit 10-M.5, Form 10-K for the year ended September 30, 1994, File No. 1-11271). 10-N Interest Rate Swap Agreement dated September 27, 1989 between Thermal Resources, Inc., and the First National Bank of Chicago, filed under cover of Form SE dated December 27, 1989, (incorporated herein by reference to Washington Natural Gas Company Exhibit 10-N, Form 10-K for the year ended September 30, 1994, File No. 1-11271). 10-O Firm Transportation Service Agreement dated March 1, 1992 between Northwest Pipeline Corporation and Washington Natural Gas Company, (incorporated herein by reference to Washington Natural Gas Company Exhibit 10-O, Form 10-K for the year ended September 30, 1994, File No. 1-11271). 10-P Firm Transportation Service Agreement dated January 12, 1994 between Northwest Pipeline Corporation and Washington Natural Gas Company for firm transportation service from Jackson Prairie, (incorporated herein by reference to Washington Natural Gas Company Exhibit 10-P, Form 10-K for the year ended September 30, 1994, File No. 1-11271). 10-Q Firm Transportation Service Agreement dated January 12, 1994 between Northwest Pipeline Corporation and Washington Natural Gas Company for firm transportation service from Jackson Prairie, (incorporated herein by reference to Washington Natural Gas Company Exhibit 10-Q, Form 10-K for the year ended September 30, 1994, File No. 1-11271). 10-R Firm Transportation Service Agreement dated January 12, 1994 between Northwest Pipeline Corporation and Washington Natural Gas Company for firm transportation service from Plymouth, LNG, (incorporated herein by reference to Washington Natural Gas Company Exhibit 10-R, Form 10-K for the year ended September 30, 1994, File No. 1-11271). 10-S Service Agreement dated July 9, 1991 with Northwest Pipeline Corporation for SGS-2F Storage Service filed under cover of Form SE dated December 23, 1991, (incorporated herein by reference to Washington Natural Gas Company Exhibit 10-S, Form 10-K for the year ended September 30, 1994, File No. 1-11271). 10-T Firm Transportation Agreement dated October 27, 1993 between Pacific Gas Transmission Company and Washington Natural Gas Company for firm transportation service from Kingsgate, (incorporated herein by reference to Washington Natural Gas Company Exhibit 10-T, Form 10-K for the year ended September 30, 1994, File No. 1-11271). 10-U Firm Storage Service Agreement and Amendment dated April 30, 1991 between Questar Pipeline Company and Washington Natural Gas Company for firm storage service at Clay Basin filed under cover of Form SE dated December 23, 1991. 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-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.
116 Page 116 *12 Computation of Ratios *21 Subsidiaries of the Registrant *23 Consent of Arthur Andersen LLP (Set forth herein on page 103). *27.1 Financial Data Schedule - Washington Energy Company *27.2 Financial Data Schedule - Washington Natural Gas Company
EX-10.E.2 2 AMENDMENT TO CONTRACT DATED 7/31/91 1 Exhibit 10-E.2 AMENDMENT THIS AMENDMENT is entered into as of the 1st day of November, 1995, by and between NORTHWEST PIPELINE CORPORATION, hereinafter referred to as "Transporter", and WASHINGTON NATURAL GAS COMPANY, hereinafter referred to as "Shipper". RECITALS: A. Transporter and Shipper are parties to that certain firm Transportation Agreement (#F-09) dated July 31, 1991 ("Agreement"). B. Transporter and Shipper have entered into various amendments which were effective upon the inservice date of the upgrade to various meter stations and/or the inservice date of new meter stations. C. Transporter and Shipper desire to enter into this Amendment to update the Agreement to reflect receipt and delivery points and volumes on Exhibits "A" and "B" effective and inservice as of November 1, 1995. AGREEMENT: NOW, THEREFORE, in consideration of the premises and mutual covenants contained herein, the parties agree as follows: 1. Exhibits "A" and "B" of the Agreement shall be deleted in their entirety and the attached Exhibits "A" and "B" to this Amendment shall be added to and made a part of the Agreement, effective November 1, 1995, subject to the Federal Energy Regulatory Commission's approval of any necessary tariff waiver. 2. The attached Exhibit "A" shall remain in full force and effect until superseded. Shipper will execute an amendment to Exhibit "A" to reassign the 38,177 MDQ's reallocated from Receipt Points north of the Green River Compressor Station by the attached Exhibit "A" back to an available Receipt Point(s) effective October 1, 1996. 3. Except as amended herein, the Agreement shall remain in full force and effect. 4. This Amendment shall be binding upon and inure to the benefit of the parties hereto and any successors or assigns of such parties. 5. This Amendment may be executed in any number of counterparts. IN WITNESS WHEREOF, the parties hereto have executed two duplicate original copies of this Amendment as of the date and year first written above. NORTHWEST PIPELINE CORPORATION By Joe H. Fields ------------------------------ Joe H. Fields Attorney-In-Fact ATTEST: WASHINGTON NATURAL GAS COMPANY By xxxxxxxxxx By John F. Stefani ----------------------------- ------------------------------ Title: General Manager Name: John F. Stefani Gas Supply & Pipeline Svcs. Title: VP, Gas Supply & Ind. Svcs. 2 EXHIBIT "A" to the TRANSPORTATION AGREEMENT ("F-09") Dated July 31, 1991 (As Amended Effective November 1, 1995) between NORTHWEST PIPELINE CORPORATION and WASHINGTON NATURAL GAS COMPANY RECEIPT POINTS
Maximum Daily Receipt Points Quantity ("MDQ")(1) - -------------- ---------------- Sumas 77,875 Blanco Hub (56498) Transwestern 14,164 Blanco (INWPLBLA) 14,775 Clay Basin 49,115 Green River Gathering 12,000 Starr Road 75,936 Westgas Arkansas 44,438 ------- Total: 288,303
(1) The total of the MDQ's must equal total transportation contract demand as set forth in Section 1.1 - 2 - 3 EXHIBIT "B" to the TRANSPORTATION AGREEMENT ("F-09") DATED July 31, 1991 (As Amended November 1, 1995) between NORTHWEST PIPELINE CORPORATION and WASHINGTON NATURAL GAS COMPANY DELIVERY POINTS
Maximum Daily Delivery Obligation ("MDDO") Primary for each Delivery Delivery Point Delivery Point Pressure - -------------- -------------- -------- (MMBtu) (psig) Bartelheimer Dairy 233 150 Bethel School 9,990 150 Black Diamond 2,830 400 Centrailia/Chehalis 6,100 400 Chehalis Rural Tap 0 150 Covington/Lake Wilderness 4,100 300 Duvall-Cottage Lake 5,000 150 East Auburn/Cameron Village 50 150 Echo Lake Tap 700 150 Evergreen Shores 1,000 350 Fredrickson 1 300 Gold Bar * 1 0 Granite Falls 8,820 250 Issaquah 28,850 260 Lake Francis 4,755 150 Lake Stevens 1,666 150 Little Rock Farm Tap 1,140 150 Maple Heights 750 200 McMillan Farm Tap 0 150 Monroe WA 1,196 150 North Bend/Snolqualmie 10,250 400 North Seattle/Everett 83,600 400 North Tacoma 80,700 260 Olympia 13,400 400 Rainier/Puyallup 5,020 200 Rainier 150 400 Redmond 28,876 400 Snohomish 1,930 150
- 3 - 4 EXHIBIT "B" to the TRANSPORTATION AGREEMENT ("F-09") DATED July 31, 1991 (As Amended November 1, 1995) between NORTHWEST PIPELINE CORPORATION and WASHINGTON NATURAL GAS COMPANY DELIVERY POINTS CONT.
Maximum Daily Delivery Obligation ("MDDO") Primary for each Delivery Delivery Point Delivery Point Pressure - -------------- -------------- -------- (MMBtu) (psig) South Seattle 48,000 260 South Tacoma 26,640 400 Startup* 1 0 Sultan* 1 0 Toledo 400 400 Winlock 400 400 Yelm WA 700 400 TOTAL 377,250
* Measurement for these delivery points presently occurs at the Monroe delivery point. - 4 - EX-10.E.3 3 CONTRACT DATED 8/15/94 1 Exhibit 10-E.3 TRANSPORTATION AGREEMENT (Applicable to Rate Schedule TF-1) THIS AGREEMENT is made and entered into this 15th day of August, 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. C. Shipper and Transporter are parties to those certain Facilities Agreements dated March 25, 1994 which provide for construction of the Machias, May Valley and North Puyallup meter stations. D. Transporter and Shipper are parties to an Amendment to Shipper's firm replacement Transportation Agreement dated July 31, 1991 ("F-09") to reduce the Transportation Contract Demand by 5,400 MMBtu's/day and reduce the Ignacio Plant receipt point volume on Exhibit "A" by 5,400 MMBtu's/day. E. The parties desire to enter into this firm Transportation Agreement ("Agreement") to provide for the transfer of the 5,400 MMBtu's/day of Transportation Contract Demand and the Ignacio Plant receipt point volumes from F-09 and provide new MDDO's under Exhibit "B" of the Agreement pursuant to the construction of the Machias, May Valley and North Puyallup meter stations. F. By signing and returning this document to Transporter, Shipper has made a complete written request to Transporter for the transportation service described herein. 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(s) "A" (and/or "T") herein, transport and deliver to Shipper at the Delivery Point(s) specified in Exhibit(s) "B" (and/or "T") herein, the following quantities of natural gas, known as Transportation Contract Demand: 2 Up to "--"1/ MMBtu's/day, as Modified by Exhibit "T" hereto 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 as modified by Exhibit "T", and provided that Transporter's daily obligation to deliver gas to Shipper at any delivery point under this Agreement shall not exceed the Maximum Daily Delivery Obligation ("MDDO") set forth on Exhibit "B" of this Agreement as modified by Exhibit "T". These MDQ and MDDO limitations apply only to primary point volumes and not to alternate point volumes. 1.2 Fuel gas shall be provided in-kind as specified in Rate Schedule TF-1 and in the General Terms and Conditions of this Federal Energy Regulatory Commission ("FERC") Gas Tariff. 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 Large Customer 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 or 3.5 of Rate Schedule TF-1.) 2.2 This Agreement shall be subject to the provisions of such Rate Schedule and the General 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 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. 1/ The total Transportation Contract Demand ultimately shall be 5,400 MMBtu's/day; however, such Transportation Contract Demand shall be implemented in increments of 817 MMBtu's/day (Machias), 1,250 MMBtu's/day (May Valley), 3,333 MMBtu's/day (North Puyallup), with each such increment effective upon the respective inservice date of the corresponding meter station. 2 3 3.3 Upon termination, this Agreement shall cease to have any force or offset, 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 September 1, 1994 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 containing the same provisions of this 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 S 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: 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 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, 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 Citibank, N.A. located In New York City, New York for Transporter's Account No. 3903-7564. ARTICLE VIII - ADJUSTMENTS TO GENERAL TERMS AND CONDITIONS 8.1 Certain of the General 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 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 (Shipper) (Transporter) By: By: ---------------------------- ---------------------------- John F. Stefani Jeffery E. McNeil VP, Gas Supply & Ind. Svcs. Manager, Transportation and Contract Admin. Attest: ------------------------ 4 5 Exhibit "A" to the TRANSPORTATION AGREEMENT DATED August 15, 1994 between NORTHWEST PIPELINE CORPORATION and WASHINGTON NATURAL GAS COMPANY RECEIPT POINTS
Primary Maximum Daily Receipt Point Quantity (MDQ)1/ - ------------- ---------------- Ignacio Plant -- *
*The total Ignacio Plant receipt point volume ultimately shall be 5,400 MMBtu's/day; however, such Ignacio receipt point volume shall be implemented in increments of 817 MMBtu's/day (Machias), 1,250 MMBtu's/day (May Valley), 3,333 MMBtu's/day (North Puyallup), with each such increment effective upon the respective inservice date of the corresponding meter station. 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 TRANSPORTATION AGREEMENT DATED August 15, 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) - --------------- ------- ------ Machias 817* 250 May Valley 1,250* 250 North Puyallup 3,333* 250 ----- TOTAL 5,400
*Effective upon the respective inservice dates of the Machias, May Valley and North Puyallup meter stations. 6 EX-10.E.4 4 AMENDMENT TO CONTRACT DATED 8/15/94 1 Exhibit 10-E.4 AMENDMENT THIS AMENDMENT is entered into as of the 1st day of November, 1995, by and between NORTHWEST PIPELINE CORPORATION, hereinafter referred to as "Transporter", and WASHINGTON NATURAL GAS COMPANY, hereinafter referred to as "Shipper". RECITALS: A. Transporter and Shipper are parties to that certain firm Transportation Agreement (#F-120) dated August 15, 1994 ("Agreement"). B. Transporter and Shipper have entered into various amendments which were effective upon the inservice date of the upgrade to various meter stations and/or the inservice date of new meter stations. C. Transporter and Shipper desire to enter into this Amendment to update the Agreement to reflect receipt and delivery points and volumes on Exhibits "A" and "B" effective and inservice as of November 1, 1995. AGREEMENT: NOW, THEREFORE, in consideration of the premises and mutual covenants contained herein, the parties agree as follows: 1. Exhibits "A" and "B" of the Agreement shall be deleted in their entirety and the attached Exhibits "A" and "B" to this Amendment shall be added to and made a part of the Agreement, effective November 1, 1995. 2. Except as amended herein, the Agreement shall remain in full force and effect. 3. This Amendment shall be binding upon and inure to the benefit of the parties hereto and any successors or assigns of such parties. 4. This Amendment may be executed in any number of counterparts. IN WITNESS WHEREOF, the parties hereto have executed two duplicate original copies of this Amendment as of the date and year first written above. NORTHWEST PIPELINE CORPORATION By --------------------------------- Joe H. Fields Attorney-In-Fact ATTEST: WASHINGTON NATURAL GAS COMPANY By By ------------------------------ ------------------------------ Title: General Manager Name: John F. Stefani Gas Supply & Pipeline Svcs. Title: VP, Gas Supply & Ind. Svcs. 2 EXHIBIT "A" to the TRANSPORTATION AGREEMENT ("F-120") Dated July 31, 1991 (As Amended Effective November 1, 1995) between NORTHWEST PIPELINE CORPORATION and WASHINGTON NATURAL GAS COMPANY RECEIPT POINTS
Maximum Daily Receipt Points Quantity ("MDQ")(1) - -------------- ---------------- Sumas 13,030 Blanco (INWPLBLA) 5,400 Total 18,430
(1) The total of the MDQ's must equal total transportation contract demand as set forth in Section 1.1 - 2 - 3 EXHIBIT "B" to the TRANSPORTATION AGREEMENT ("F-120") DATED August 15, 1994 (As Amended November 1, 1995) between NORTHWEST PIPELINE CORPORATION and WASHINGTON NATURAL GAS COMPANY DELIVERY POINTS
Maximum Daily Delivery Obligation ("MDDO") Primary for each Delivery Delivery Point Delivery Point Pressure - -------------- -------------- -------- (MMBtu) (psig) Evergreen Shores-Black Lake 1,710 350 Machias 817 250 May Valley 1,250 250 North Puyallup 3,333 250 Olympia 11,320 400 ------ Total 18,430
- 3 - EX-10.F 5 CREDIT AGREEMENT DATED 3/31/95 1 Exhibit 10-F CREDIT AGREEMENT ------------------------------ By and among WASHINGTON ENERGY COMPANY, as Borrower, THE FIRST NATIONAL BANK OF CHICAGO, SEATTLE-FIRST NATIONAL BANK, THE INDUSTRIAL BANK OF JAPAN, LIMITED, ABN AMRO BANK N.V., BANK OF MONTREAL, FIRST INTERSTATE BANK OF WASHINGTON, N.A., NATIONSBANK OF TEXAS, N.A., U.S. BANK OF WASHINGTON, N.A., and CIBC INC., as Lenders, and THE FIRST NATIONAL BANK OF CHICAGO, as Agent ------------------------------ $250,000,000 ------------------------------ March 31, 1995 2 TABLE OF CONTENTS
Page ARTICLE I DEFINITIONS. . . . . . . . . . . . . . . . . . . . . . . . . . . 1 Section 1.1 Certain Defined Terms . . . . . . . . . . . . . . . . . . 1 Section 1.2 General Principles Applicable to Definitions . . . . . . . . . . . . . . . . . . . . . . 13 Section 1.3 Accounting Terms . . . . . . . . . . . . . . . . . . . . 13 ARTICLE II THE FACILITY . . . . . . . . . . . . . . . . . . . . . . . . . . 13 Section 2.1 The Facility . . . . . . . . . . . . . . . . . . . . . . 13 Section 2.2 Committed Advances . . . . . . . . . . . . . . . . . . . 14 Section 2.3 Competitive Bid Advances . . . . . . . . . . . . . . . . 16 Section 2.4 Fees . . . . . . . . . . . . . . . . . . . . . . . . . . 20 Section 2.5 General Facility Terms. . . . . . . . . . . . . . . . . . 20 Section 2.6 Lending Installations . . . . . . . . . . . . . . . . . . 25 Section 2.7 Withholding Tax Exemption . . . . . . . . . . . . . . . . 25 ARTICLE III CHANGE IN CIRCUMSTANCES. . . . . . . . . . . . . . . . . . . . . 26 Section 3.1 Yield Protection . . . . . . . . . . . . . . . . . . . . 26 Section 3.2 Changes in Capital Adequacy Regulations . . . . . . . . . 27 Section 3.3 Availability of Rate Options . . . . . . . . . . . . . . 27 Section 3.4 Funding Indemnification . . . . . . . . . . . . . . . . . 28 Section 3.5 Lender Statements; Survival of Indemnity . . . . . . . . 28 ARTICLE IV CONDITIONS TO EFFECTIVENESS AND TO LENDING . . . . . . . . . . . 28 Section 4.1 Conditions to Effectiveness of Agreement . . . . . . . . 28 Section 4.2 Conditions to Initial Advance . . . . . . . . . . . . . . 29 Section 4.3 Conditions to All Advances . . . . . . . . . . . . . . . 30 ARTICLE V REPRESENTATIONS AND WARRANTIES . . . . . . . . . . . . . . . . . 30 Section 5.1 Corporate Existence and Power . . . . . . . . . . . . . . 30 Section 5.2 Corporate Authorization . . . . . . . . . . . . . . . . . 30 Section 5.3 Government Approvals, Etc . . . . . . . . . . . . . . . . 31 Section 5.4 Binding Obligations, Etc . . . . . . . . . . . . . . . . 31 Section 5.5 Litigation . . . . . . . . . . . . . . . . . . . . . . . 31 Section 5.6 Financial Condition . . . . . . . . . . . . . . . . . . . 31 Section 5.7 Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . 32 Section 5.8 Laws, Orders; Other Agreements . . . . . . . . . . . . . 32 Section 5.9 Federal Reserve Regulations . . . . . . . . . . . . . . . 32 Section 5.10 ERISA . . . . . . . . . . . . . . . . . . . . . . . . . 33 Section 5.11 Subsidiaries .. . . . . . . . . . . . . . . . . . . . . . 33 Section 5.12 Investment Company; Public Utility Holding Company . . . . . . . . . . . . . . . . . . . . . 34 Section 5.13 Environmental Compliance. . . . . . . . . . . . . . . . . 34
i 3 Section 5.14 Representations as a Whole . . . . . . . . . . . . . . . 35 ARTICLE VI COVENANTS . . . . . . . . . . . . . . . . . . . . . . . . . . 35 Section 6.1 Use of Proceeds . . . . . . . . . . . . . . . . . . . . . 36 Section 6.2 Financial Statements . . . . . . . . . . . . . . . . . . 36 Section 6.3 Inspection of Property . . . . . . . . . . . . . . . . . 37 Section 6.4 Payment of Taxes . . . . . . . . . . . . . . . . . . . . 37 Section 6.5 Preservation of Corporate Existence . . . . . . . . . . . 38 Section 6.6 Maintenance of Property . . . . . . . . . . . . . . . . . 38 Section 6.7 Insurance . . . . . . . . . . . . . . . . . . . . . . . . 38 Section 6.8 Records and Accounts . . . . . . . . . . . . . . . . . . 38 Section 6.9 Additional Payments . . . . . . . . . . . . . . . . . . . 38 Section 6.10 Compliance With Laws, Etc. . . . . . . . . . . . . . . . 39 Section 6.11 Notification . . . . . . . . . . . . . . . . . . . . . . 39 Section 6.12 Limit on Outstanding Commercial Paper . . . . . . . . . . 39 Section 6.13 Total Debt to Total Capitalization Ratio . . . . . . . . 40 Section 6.14 Liquidation, Merger, Sale of Assets . . . . . . . . . . . 40 Section 6.15 Liens . . . . . . . . . . . . . . . . . . . . . . . . . . 40 Section 6.16 Indemnification . . . . . . . . . . . . . . . . . . . . . 40 ARTICLE VII EVENTS OF DEFAULT . . . . . . . . . . . . . . . . . . . . . . 41 Section 7.1 Events of Default . . . . . . . . . . . . . . . . . . . . 41 Section 7.2 Consequences of Default . . . . . . . . . . . . . . . . . 43 ARTICLE VIII THE AGENT . . . . . . . . . . . . . . . . . . . . . . . . . . 44 Section 8.1 Appointment . . . . . . . . . . . . . . . . . . . . . . . 44 Section 8.2 Powers . . . . . . . . . . . . . . . . . . . . . . . . . 44 Section 8.3 General Immunity . . . . . . . . . . . . . . . . . . . . 44 Section 8.4 No Responsibility for Advances, Recitals, Etc . . . . . . . . . . . . . . . . . . . . . . . . . . . 44 Section 8.5 Action on Instructions of Lenders . . . . . . . . . . . . 45 Section 8.6 Employment of Agents and Counsel . . . . . . . . . . . . 45 Section 8.7 Reliance on Documents; Counsel . . . . . . . . . . . . . 45 Section 8.8 Agent's Reimbursement and Indemnification . . . . . . . . 45 Section 8.9 Rights as a Lender . . . . . . . . . . . . . . . . . . . 46 Section 8.10 Lender Credit Decision . . . . . . . . . . . . . . . . . 46 Section 8.11 Successor Agent . . . . . . . . . . . . . . . . . . . . . 46 ARTICLE IX BENEFIT OF AGREEMENT; ASSIGNMENTS; PARTICIPATIONS . . . . . . . . . . . . . . . . . . . . . . . 47 Section 9.1 Successors and Assigns . . . . . . . . . . . . . . . . . 47 Section 9.2 Participations . . . . . . . . . . . . . . . . . . . . . 48 Section 9.3 Assignments . . . . . . . . . . . . . . . . . . . . . . . 49 Section 9.4 Dissemination of Information . . . . . . . . . . . . . . 49 Section 9.5 Tax Treatment . . . . . . . . . . . . . . . . . . . . . . 50
ii 4 ARTICLE X MISCELLANEOUS . . . . . . . . . . . . . . . . . . . . . . . . 50 Section 10.1 No Waiver; Remedies Cumulative . . . . . . . . . . . . . 50 Section 10.2 Governing Law . . . . . . . . . . . . . . . . . . . . . 50 Section 10.3 Consent to Jurisdiction; Waiver of Immunities . . . . . . . . . . . . . . . . . . . . . . . 50 Section 10.4 Notices . . . . . . . . . . . . . . . . . . . . . . . . 51 Section 10.5 Severability . . . . . . . . . . . . . . . . . . . . . . 51 Section 10.6 Environmental Indemnification . . . . . . . . . . . . . 51 Section 10.7 Survival . . . . . . . . . . . . . . . . . . . . . . . . 51 Section 10.8 Conditions Not Fulfilled . . . . . . . . . . . . . . . . 52 Section 10.9 Entire Agreement; Amendment . . . . . . . . . . . . . . 52 Section 10.10 Headings . . . . . . . . . . . . . . . . . . . . . . . 52 Section 10.11 Counterparts . . . . . . . . . . . . . . . . . . . . . . 52 Section 10.12 Termination of Prior Agreement; Waiver of Notice . . . . . . . . . . . . . . . . . . . . . . . . . 53 EXHIBITS Exhibit A - Committed Note Exhibit B - Competitive Bid Note Exhibit C - Competitive Bid Quote Request Exhibit D - Invitation for Competitive Bid Quotes Exhibit E - Competitive Bid Quote Exhibit F - Legal Opinion of Counsel for Borrower Exhibit G - Notice of Assignment SCHEDULES Schedule 1 - List of Subsidiaries Schedule 2 - Parties' Addresses for Notices Schedule 3 - Litigation
iii 5 CREDIT AGREEMENT THIS CREDIT AGREEMENT ("Agreement") is made as of March 31, 1995, by and among the Lenders from time to time a party hereto, THE FIRST NATIONAL BANK OF CHICAGO as agent for the Lenders (the "Agent"), and WASHINGTON ENERGY COMPANY, a Washington corporation (the "Borrower"). ARTICLE I DEFINITIONS Section 1.1 Certain Defined Terms. As used in this Agreement, the following terms have the following meanings: "Absolute Rate" means, with respect to an Absolute Rate Loan made by a given Lender for the relevant Absolute Rate Interest Period, the rate of interest per annum (rounded to the nearest 1/100 of 1%) offered by such Lender and accepted by the Borrower. "Absolute Rate Advance" means a borrowing hereunder consisting of the aggregate amount of the several Absolute Rate Loans made by some or all of the Lenders to the Borrower at the same time and for the same Interest Period. "Absolute Rate Auction" means a solicitation of Competitive Bid Quotes setting forth Absolute Rates pursuant to Section 2.3. "Absolute Rate Interest Period" means, with respect to an Absolute Rate Advance, a period of not less than seven and not more than 270 days commencing on a Business Day selected by the Borrower pursuant to this Agreement. If such Absolute Rate Interest Period would end on a day which is not a Business Day, such Absolute Rate Interest Period shall end on the next succeeding Business Day. "Absolute Rate Loan" means a Loan which bears interest at the Absolute Rate. "Advance" means a borrowing hereunder (which may be either a Competitive Bid Advance or a Committed Advance) consisting of the aggregate amount of the several Loans made by some or all of the Lenders to the Borrower on the same date, at the same Rate Option (or on the same interest basis in the case of Competitive Bid Advances) and, in the case of Competitive Bid Advances or Eurodollar Committed Advances, for the same Interest Period. 1 6 "Agent" means The First National Bank of Chicago in its capacity as agent for the Lenders pursuant to Article VIII, and not in its individual capacity as a Lender, and any successor Agent appointed pursuant to Article VIII. "Aggregate Commitment" means the aggregate of the Commitments of all the Lenders hereunder, as reduced from time to time pursuant to the terms hereof. "Agreement" means this Credit Agreement, as it may be amended or modified and in effect from time to time. "Alternate Base Rate" means, on any date and with respect to all Floating Rate Advances, a fluctuating rate of interest per annum equal to the higher of (i) the Corporate Base Rate, and (ii) the Federal Funds Rate most recently determined by the Agent plus 1/2% per annum. Changes in the rate of interest on that portion of any Advance maintained as a Floating Rate Advance will take effect simultaneously with each change in the Alternate Base Rate. "Article" means an article of this Agreement unless another document is specifically referenced. "Authorized Officer" means the Chairman, the President, any Senior Vice President, any Vice President, Treasurer or Assistant Treasurer of Borrower. "Borrower" means Washington Energy Company, a Washington corporation, and any permitted Successor or assign pursuant to Section 9.1. "Borrowing Date" means a date on which an Advance is made hereunder. "Business Day" means (i) with respect to any borrowing, payment or rate selection of Eurodollar Committed Advances or Eurodollar Bid Rate Advances, a day other than Saturday or Sunday on which banks generally are open for business in Chicago, New York, and Seattle for the conduct of substantially all of their commercial lending activities and on which dealings in United States dollars are carried on in the London interbank market and (ii) for all other purposes, a day other than Saturday or Sunday on which banks are open for business in Chicago and Seattle. "Code" means the Internal Revenue Code of 1986, as amended from time to time. "Commitment" means, for each Lender, the obligation of the Lender to make Committed Loans not exceeding the amount set 2 7 forth opposite its signature below, as such amount may be modified from time to time pursuant to the terms of this Agreement. "Commitment Fee Percentage" means (a) during any period when the Borrower has a Tier 1 Commercial Paper Rating, 0.10% per annum, (b) during any period when the Borrower has a Tier 2 Commercial Paper Rating, 0.125% per annum, (c) during any period when the Borrower has a Tier 3 Commercial Paper Rating, 0.15% per annum, (d) during any period when the Borrower has a Tier 4 Commercial Paper Rating, 0.175% per annum, (e) during any period when the Borrower has a Tier 5 Commercial Paper Rating, 0.25% per annum, and (f) during any period when the Borrower has a Tier 6 Commercial Paper Rating, 0.3125% per annum. In each case, the Commitment Fee Percentage shall change immediately upon any change in the Tier of Borrower's commercial paper rating. Borrower may, at its option, designate either Fitch Investors Services or Duff & Phelps Credit Rating Co., to replace either S&P or Moody's (but not both), provided that such designated agency has not rated Borrower's commercial paper higher at the time of designation than the rating agency that such designated agency replaces, and, upon such designation, analogous ratings of such other agency shall be substituted for the ratings of either S&P or Moody's (but not both) in determining the Tier of Borrower's commercial paper. "Committed Advance" means a borrowing hereunder consisting of the aggregate amount of the several Committed Loans made by the Lenders to the Borrower at the same time, at the same Rate Option and for the same Interest Period. "Committed Borrowing Notice" is defined in Section 2.2.3. "Committed Conversion/Continuation Notice" is defined in Section 2.2.4. "Committed Loan" means a Loan made by a Lender pursuant to Section 2.2 hereof. "Committed Note" means a promissory note in substantially the form of Exhibit A hereto, duly executed and delivered to the Agent by the Borrower for the account of each Lender and payable to the order of a Lender in the amount of its Commitment, including any amendment, modification, renewal or replacement of such promissory note. "Competitive Bid Advance" means a borrowing hereunder consisting of the aggregate amount of the several Competitive Bid Loans made by some or all of the Lenders to the Borrower at the same time and for the same Interest Period. 3 8 "Competitive Bid Borrowing Notice" is defined in Section 2.3.6. "Competitive Bid Loan" means a Eurodollar Bid Rate Loan or an Absolute Rate Loan, or both, as the case may be. "Competitive Bid Margin" means the margin above or below the applicable Eurodollar Base Rate offered for a Eurodollar Bid Rate Loan, expressed as a percentage (rounded to the nearest 1/100 of 1%) to be added or subtracted from such Eurodollar Base Rate. "Competitive Bid Note" means a promissory note in substantially the form of Exhibit B hereto, with appropriate insertions, duly executed and delivered to the Agent by the Borrower for the account of a Lender and payable to the order of such Lender, including any amendment, modification, renewal or replacement of such promissory note. "Competitive Bid Quote" means a Competitive Bid Quote substantially in the form of Exhibit E hereto completed and delivered by a Lender to the Agent in accordance with Section 2.3.4. "Competitive Bid Quote Request" means a Competitive Bid Quote Request substantially in the form of Exhibit C hereto completed and delivered by the Borrower to the Agent in accordance with Section 2.3.2. "Controlled Group" means all members of a controlled group of corporations and all trades or businesses (whether or not incorporated) under common control which, together with Borrower, are treated as a single employer under Sections 414(b) or 414(c) of the Code. "Corporate Base Rate" means a rate per annum equal to the corporate base rate of interest announced by First Chicago from time to time, changing when and as said corporate base rate changes. "Debt" of Borrower means at any date, without duplication, (i) all obligations of Borrower and its Subsidiaries for borrowed money, (ii) all obligations of Borrower and its Subsidiaries evidenced by bonds (other than surety bonds), debentures, notes or other similar instruments, (iii) all obligations of Borrower and its Subsidiaries to pay the deferred purchase price of property or services, except trade accounts payable arising in the ordinary course of business, (iv) any other obligation of Borrower and its Subsidiaries under leases which shall have been recorded, in accordance with generally accepted accounting principles, on Borrower's books as capital 4 9 leases, (v) all non-contingent reimbursement, indemnity or similar obligations of Borrower and its Subsidiaries in respect of amounts paid under a letter of credit, surety bond or similar instrument, (vi) all Debt of others secured by a Lien on any asset of Borrower and its Subsidiaries, whether or not such Debt is assumed by Borrower and its Subsidiaries, and (vii) all Debt of others Guaranteed by Borrower and its Subsidiaries, all determined on a consolidated basis and including without limitation all Debt whether long-term or short-term. "Default" means any event which but for the passage of time or the giving of notice or both would be an Event of Default. "Environmental Law" means and includes the Comprehensive Environmental Response, Compensation, and liability Act of 1980 ("CERCLA" or the Federal Superfund Act), as amended by the Superfund Amendments and Reauthorization Act of 1986 ("SARA"), 42 U.S.C. Sections 9601-9675; the Resource Conservation and Recovery Act of 1976 ("RCRA"), 42 U.S.C. Section 6901 et seq.; The Clean Water Act, 33 U.S.C. Section 1251 et seq.; the Clean Air Act, 42 U.S.C. Section 7401 et seq.; the Federal Insecticide, Fungicide and Rodenticide Act, 7 U.S.C. Section 136 et seq.; the Toxic Substances Control Act, 15 U.S.C. Sections 2601-2671; all as the same may be from time to time amended and any regulations now or hereafter promulgated thereunder; and any and all other federal, state, county, municipal, local and other statutes, laws, ordinances, rules, regulations, judgments, orders, decrees, permits, licenses, or other governmental restrictions or requirements and the common law which may from time to time relate to or deal with protection of human health, pollution or the environment, including, without limitation, all regulations promulgated by a regulatory body pursuant to an such statute, law or ordinance. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended from time to time. "Eurodollar Auction" means a solicitation of Competitive Bid Quotes setting forth Competitive Bid Margins pursuant to Section 2.3. "Eurodollar Base Rate" means, with respect to a Eurodollar Committed Advance or a Eurodollar Bid Rate Advance for the relevant Eurodollar Interest Period, the rate determined by the Agent to be the arithmetic average of the rates reported to the Agent by each Reference Lender as the rate at which deposits in U.S. dollars are offered by such Reference Lender to first-class banks in the London interbank market at approximately 11:00 a.m. (London time) two Business Days prior to the first day of such Eurodollar Interest Period, in the approximate amount of such Reference Lender's relevant Eurodollar Committed Loan, or, 5 10 in the case of a Eurodollar Bid Rate Advance, the amount of the Eurodollar Bid Rate Advance requested by the Borrower, and having a maturity approximately equal to such Eurodollar Interest Period. If any Reference Lender fails to provide such quotation to the Agent, then the Agent shall determine the Eurodollar Base Rate on the basis of the quotations of the remaining Reference Lender(s). "Eurodollar Bid Rate" means, with respect to a Eurodollar Bid Rate Loan made by a given Lender for the relevant Eurodollar Interest Period, the sum of (i) the Eurodollar Base Rate and (ii) the Competitive Bid Margin offered by such Lender and accepted by the Borrower. "Eurodollar Bid Rate Advance" means a Competitive Bid Advance which bears interest at a Eurodollar Bid Rate. "Eurodollar Bid Rate Loan" means a Loan which bears interest at the Eurodollar Bid Rate. "Eurodollar Committed Advance" means an Advance which bears interest at a Eurodollar Rate requested by the Borrower pursuant to Section 2.2. "Eurodollar Committed Loan" means a Loan which bears interest at a Eurodollar Rate requested by the Borrower pursuant to Section 2.2. "Eurodollar Interest Period" means, with respect to a Eurodollar Committed Advance or a Eurodollar Bid Rate Advance, a period of one, two, three or six months commencing on a Business Day selected by the Borrower pursuant to this Agreement. Such Eurodollar Interest Period shall end on (but exclude) the day which corresponds numerically to such date one, two, three or six months thereafter, provided, however, that if there is no such numerically corresponding day in such next, second, third or sixth succeeding month, such Eurodollar Interest Period shall end on the last Business Day of such next, second, third or sixth succeeding month. If a Eurodollar Interest Period would otherwise end on a day which is not a Business Day, such Eurodollar Interest Period shall end on the next succeeding Business Day, provided, however, that if said next succeeding Business Day falls in a new month, such Eurodollar Interest Period shall end on the immediately preceding Business Day. "Eurodollar Rate" means, with respect to a Eurodollar Committed Advance for the relevant Eurodollar Interest Period, the sum of (i) the quotient of (a) the Eurodollar Base Rate applicable to that Eurodollar Interest Period, divided by (b) one minus the Reserve Requirement (expressed as a decimal) applicable to that Eurodollar Interest Period, plus (ii) the applicable 6 11 Eurodollar Rate Margin. The Eurodollar Rate shall be rounded, if necessary, to the next higher 1/16 of 1%. "Eurodollar Rate Margin" means (a) during any period when the Borrower has a Tier 1 Commercial Paper Rating, 0.30% per annum, (b) during any period when the Borrower has a Tier 2 Commercial Paper Rating, 0.35% per annum, (c) during any period when the Borrower has a Tier 3 Commercial Paper Rating, 0.40% per annum, (d) during any period when the Borrower has a Tier 4 Commercial Paper Rating, 0.45% per annum, (e) during any period when the Borrower has a Tier 5 Commercial Paper Rating, 0.65% per annum, and (f) during any period when the Borrower has a Tier 6 Commercial Paper Rating, .85% per annum. In each case, the Eurodollar Rate Margin shall change immediately upon any change in the Tier of Borrower's commercial paper rating. Borrower may, at its option, designate either Fitch Investors Services or Duff & Phelps Credit Rating Co., to replace either S&P or Moody's (but not both), provided that such designated agency has not rated Borrower's commercial paper higher at the time of designation than the rating agency that such designated agency replaces, and, upon such designation, analogous ratings of such other agency shall be substituted for the ratings of either S&P or Moody's (but not both) in determining the Tier of Borrower's commercial paper. "Event of Default" has the meaning given in Section 7.1. "Federal Funds Rate" means, for any day, an interest rate per annum equal to the weighted average of the rates on overnight Federal funds transactions with members of the Federal Reserve System arranged by Federal funds brokers on such day, as published for such day (or, if such day is not a Business Day, for the immediately preceding Business Day) by the Federal Reserve Bank of New York, or, if such rate is not so published for any day which is a Business Day, the average of the quotations at approximately 10 a.m. (Chicago time) on such day on such transactions received by the Agent from three Federal funds brokers of recognized standing selected by the Agent in its sole discretion. "First Chicago" means The First National Bank of Chicago in its individual capacity, and its successors and assigns. "Fixed Rate" means the Eurodollar Rate, the Eurodollar Bid Rate or the Absolute Rate. "Fixed Rate Advance" means an Advance which bears interest at a Fixed Rate. 7 12 "Fixed Rate Loan" means a Loan which bears interest at a Fixed Rate. "Floating Rate" means, for any day, a rate per annum equal to the Alternate Base Rate, changing when and as the Alternate Base Rate changes. "Floating Rate Advance" means an Advance which bears interest at the Floating Rate. "Floating Rate Loan" means a Loan which bears interest at the Floating Rate. "Government Approval" means an approval, permit, license, authorization, certificate, or consent of any Governmental Authority. "Governmental Authority" means the government of the United States or any State or any foreign country or any political subdivision of any thereof or any branch, department, agency, instrumentality, court, tribunal or regulatory authority which constitutes a part or exercises any sovereign power of any of the foregoing. "Guaranteed" means any agreement by which a Person assumes, guarantees, endorses, contingently agrees to purchase or provide funds for the payment of, or otherwise becomes liable upon, the obligation of any other Person, or agrees to maintain the net worth or working capital or other financial condition of any other Person or otherwise to assure any creditor of such other Person against loss, and shall include, without limitation, any contingent liability under any letter of credit. "Hazardous Material" means asbestos, urea formaldehyde, PCBs, nuclear fuel or materials, chemical waste, radon, radioactive materials, explosives, known carcinogens, petroleum products (including crude oil) and any other dangerous, toxic, or hazardous pollutant, contaminant, chemical, material or substance defined as hazardous or as a pollutant or contaminant in, or the release or disposal of which is regulated by, any Environmental Law. "Indebtedness" means for any Person any Debt of such Person and all other items of indebtedness or liability (including, without limitation, unsatisfied judgments) which would be included in determining total liabilities as shown on the liability side of a balance sheet, prepared in accordance with generally accepted accounting principles, as of the date as of which indebtedness or liability is determined. 8 13 "Interest Period" means a Eurodollar Interest Period or an Absolute Rate Interest Period. "Invitation for Competitive Bid Quotes" means an Invitation for Competitive Bid Quotes substantially in the form of Exhibit D hereto, completed and delivered by the Agent to the Lenders in accordance with Section 2.3.3. "Lenders" means the financial institutions listed on the signature pages of this Agreement and their respective Successors and permitted assigns. "Lending Installation" means with respect to a Lender or the Agent, any office, branch, subsidiary or affiliate of such Lender or the Agent. "Lien" means, for any Person, any security interest, pledge, mortgage, charge, assignment, hypothecation, encumbrance, attachment, garnishment, execution or other voluntary or involuntary lien upon or affecting the revenues of such Person or any real or personal property in which such Person has or hereafter acquires any interest, except (i) liens for Taxes which are not delinquent or which remain payable without penalty or the validity or amount of which is being contested in good faith by appropriate proceedings upon stay of execution of the enforcement thereof; (ii) liens imposed by law (such as mechanics' liens) incurred in good faith in the ordinary course of business which are not delinquent or which remain payable without penalty or the validity or amount of which is being contested in good faith by appropriate proceedings upon stay of execution of the enforcement thereof; (iii) liens arising by law from customer deposits held by such Person; and (iv) deposits or pledges under worker's compensation, unemployment insurance, social security or other similar laws or made to secure the performance of bids, tenders, contracts (except for repayment of borrowed money), or leases, or to secure statutory obligations or surety or appeal bonds or to secure indemnity, performance or other similar bonds given in the ordinary course of business. "Loan" means, with respect to a Lender, such Lender's portion, if any, of any Advance. "Loan Documents" means this Agreement and the Notes. "Material Adverse Effect" means a material adverse effect on or material adverse change in (a)(i) the business, operations, property, financial condition, liabilities (absolute, accrued, contingent or otherwise) or assets of Borrower and Subsidiaries, taken as a whole, or (ii) the ability of Borrower to perform its obligations under this Agreement or any of the other Loan Documents, or (b) the rights or remedies of Agent or 9 14 any Lenders or the holders of the Notes under this Agreement or any of the other Loan Documents upon the occurrence of an Event of Default. "Moody's" means Moody's Investors Service, Inc., a Delaware corporation. "Notes" means, collectively, the Competitive Bid Notes and the Committed Notes; and "Note" means any one of the Notes. "Obligations" means all unpaid principal of and accrued and unpaid interest on the Notes, all accrued and unpaid fees and all other reimbursements, indemnities or other obligations of the Borrower to the Lenders or to any Lender, the Agent or indemnified party hereunder arising under the Loan Documents. "Officer's Certificate" means a certificate signed in the name of Borrower by its Chairman, its President, its Senior Vice President - Finance, Planning and Development, its Vice President and Treasurer, or its Vice President - Chief Accounting Officer. "Payment Date" means the last day of each March, June, September and December. "PBGC" means the Pension Benefit Guaranty Corporation or any entity succeeding to any or all of its functions under ERISA. "Pension Plan" means an "employee pension benefit plan" (as such term is defined in ERISA) from time to time maintained by Borrower or a member of the Controlled Group. "Person" means any corporation, natural person, firm, joint venture, joint-stock company, partnership, limited liability company, trust, unincorporated association or organization, enterprise, government (including political subdivisions), Governmental Authority, any department or agency, or any other entity. "Plan" shall mean, at any time, an employee pension benefit plan which is covered by Title IV of ERISA or subject to the minimum funding standards under Section 412 of the Code and is either (a) maintained by Borrower or any member of a Controlled Group for employees of Borrower or any member of such Controlled Group or (b) maintained pursuant to a collective bargaining agreement or any other arrangement under which more than one employer makes contributions and to which Borrower or any member of a Controlled Group is then making or accruing an obligation to make contributions or has within the preceding five plan years made contributions. 10 15 "Prior Loan Agreement" means the Amended and Restated Revolving Credit Agreement dated as of March 18, 1994 among Borrower, the respective lenders thereto and Seattle-First National Bank, as agent for such lenders. "Rate Option" means the Eurodollar Rate or the Floating Rate. "Reference Lenders" means First Chicago, Seattle-First National Bank, and ABN AMRO Bank N.V. "Required Lenders" means Lenders in the aggregate having at least 60% of the Aggregate Commitment or, if the Aggregate Commitment has been terminated, Lenders in the aggregate holding at least 60% of the aggregate unpaid principal amount of the outstanding Advances. "Reserve Requirement" means, with respect to a Eurodollar Interest Period, the maximum aggregate reserve requirement (including all basic, supplemental, marginal and other reserves) which is imposed under Regulation D of the Board of Governors of the Federal Reserve System on Eurocurrency liabilities. "S&P" means Standard & Poor's Rating Group, a division of McGraw Hill. "Section" means a numbered section of this Agreement, unless another document is specifically referenced. "Subsidiary" of a Person means (i) any corporation more than 50% of the outstanding securities having ordinary voting power of which shall at the time be owned or controlled, directly or indirectly, by such Person or by one or more of its Subsidiaries or by such Person and one or more of its Subsidiaries, or (ii) any partnership, limited liability company, association, joint venture or similar business organization more than 50% of the ownership interests having ordinary voting power of which shall at the time be so owned or controlled. Unless otherwise expressly provided, all references herein to a "Subsidiary" shall mean a Subsidiary of the Borrower. "Successor" means, for any corporation or banking association, any successor by merger or consolidation, or by acquisition of substantially all of the assets of the predecessor. "Tax" means for any Person any tax, assessment, duty, levy, impost or other charge imposed by any Governmental Authority on such Person or on any property, revenue, income, or 11 16 franchise of such Person and any interest or penalty with respect to any of the foregoing. "Termination Date" means March 31, 1998, unless earlier terminated pursuant to the terms of this Agreement. "Tier" means any of the Tier 1 Commercial Paper Rating, the Tier 2 Commercial Paper Rating, the Tier 3 Commercial Paper Rating, the Tier 4 Commercial Paper Rating, the Tier 5 Commercial Paper Rating, or the Tier 6 Commercial Paper Rating. "Tier 1 Commercial Paper Rating" means a rating from S&P of A-1 or better and from Moody's of P-1 or better on Borrower's commercial paper. "Tier 2 Commercial Paper Rating" means a rating from S&P of A-1 or better and from Moody's of P-2 on Borrower's commercial paper or a rating from S&P of A-2 and from Moody's of P-1 or better on Borrower's commercial paper. "Tier 3 Commercial Paper Rating" means a rating from S&P of A-2 and from Moody's of P-2 on Borrower's commercial paper. "Tier 4 Commercial Paper Rating" means a rating from S&P of A-2 or better and from Moody's of P-3 on Borrower's commercial paper or a rating from S&P of A-3 and from Moody's of P-2 or better on Borrower's commercial paper. "Tier 5 Commercial Paper Rating" means a rating from S&P of A-3 and from Moody's of P-3 on Borrower's commercial paper. "Tier 6 Commercial Paper Rating" means a rating from S&P of worse than A-3 or from Moody's of worse than P-3 on Borrower's commercial paper, or Borrower's commercial paper is unrated by either S&P or Moody's. "Tongue River" means Tongue River Holdings, Inc., a Montana corporation, Transportation Properties, a Montana general partnership, and Tongue River Railroad Company, a Montana limited partnership. "Total Capitalization" of Borrower and its Subsidiaries at any date means the sum of (i) the Debt of Borrower and its Subsidiaries, plus (ii) the preferred stock equity of Borrower and its Subsidiaries, plus (iii) the common stock equity of Borrower and its Subsidiaries, all as determined on a consolidated basis. For purposes of determining Total Capitalization, clause (ii) of this definition shall include any preferred equity security issued by any Subsidiary to any Person 12 17 other than Borrower or another Subsidiary and which is reflected on Borrower's consolidated balance sheet as "minority interest in subsidiary." "Unfunded Vested Liabilities" means, with respect to any Plan, at any time, the amount (if any) by which (a) the present value of all vested nonforfeitable benefits under such Plan exceeds (b) the fair market value of all Plan assets allocable to such benefits, all determined as of the then most recent valuation date for such Plan, but only to the extent that such excess represents a potential liability of Borrower or any member of the Controlled Group to the PBGC or such Plan under Title IV of ERISA. Section 1.2 General Principles Applicable to Definitions. Definitions given in Section 1.1 and Article II shall be equally applicable to both singular and plural forms of the terms therein defined and references herein to he or it shall be applicable to persons whether masculine, feminine or neuter. References herein to any document including, but without limitation, this Agreement shall be deemed a reference to such document as it now exists, and as, from time to time hereafter, the same may be amended. Section 1.3 Accounting Terms. Except as otherwise provided herein, accounting terms not specifically defined shall be construed, and all accounting procedures shall be performed, in accordance with generally accepted United States accounting principles consistently applied. ARTICLE II THE FACILITY Section 2.1 The Facility. 2.1.1 Description of Facility. The Lenders grant to the Borrower a revolving credit facility pursuant to which, and upon the terms and subject to the conditions herein set out: (i) each Lender severally agrees to make Committed Loans to the Borrower in accordance with Section 2.2; and (ii) each Lender may, in its sole discretion, make bids to make Competitive Bid Loans to the Borrower in accordance with Section 2.3. 2.1.2 Facility Amount. In no event may the aggregate principal amount of all outstanding Advances (including both the Committed Advances and the Competitive Bid Advances) exceed the Aggregate Commitment. 13 18 2.1.3 Availability of Facility; Maturity. Subject to the terms hereof, the facility is available from the date hereof to the Termination Date. Subject to the terms of this Agreement, the Borrower may borrow, repay and reborrow at any time prior to the Termination Date. Each Competitive Bid Rate Advance shall be paid in full on the last day of its applicable Interest Period and any and all Advances and other Obligations outstanding on the Termination Date shall be paid in full by the Borrower on the Termination Date. Section 2.2 Committed Advances. 2.2.1 Committed Advances. Each Committed Advance hereunder shall consist of borrowings made from the several Lenders ratably in proportion to the amounts of their respective Commitments. Each Lender's Commitment shall be reduced by an amount equal to the aggregate outstanding amount of Competitive Bid Advances multiplied by a fraction whose numerator is such Lender's Commitment and whose denominator is the Aggregate Commitment regardless of which Lender or Lenders make such Competitive Bid Advances. Committed Advances shall be evidenced by the Committed Notes. 2.2.2 Committed Advance Rate Options. The Committed Advances may be Floating Rate Advances or Eurodollar Committed Advances, or a combination thereof, selected by the Borrower in accordance with Section 2.2.3. No Committed Advance may mature after the Termination Date. 2.2.3 Method of Selecting Rate Options and Interest Periods for Committed Advances. The Borrower shall select the Rate Option and, in the case of each Eurodollar Committed Advance, the Eurodollar Interest Period, applicable to each Committed Advance from time to time. The Borrower shall give the Agent irrevocable written notice of a request for a Committed Advance, signed by an Authorized Officer (a "Committed Borrowing Notice"), not later than 11:00 a.m. (Chicago time) on the Borrowing Date of each Floating Rate Advance and on the date three Business Days before the Borrowing Date for each Eurodollar Committed Advance. Notwithstanding the foregoing, a Committed Borrowing Notice for a Floating Rate Advance may be given not later than 15 minutes after the time which the Borrower is required to reject one or more bids offered in connection with an Absolute Rate Auction pursuant to Section 2.3.6 and a Committed Borrowing Notice for a Eurodollar Committed Advance may be given not later than 15 minutes after the time the Borrower is required to reject one or more bids offered in connection with a Eurodollar Auction pursuant to Section 2.3.6. Requests for Advances received after the designated time will be deemed received on the next succeeding Business Day. A Committed Borrowing Notice shall specify: 14 19 (i) the Borrowing Date, which shall be a Business Day, of such Committed Advance, (ii) the aggregate amount of such Committed Advance, (iii) the Rate Option selected for such Committed Advance, and (iv) in the case of each Eurodollar Committed Advance, the Eurodollar Interest Period applicable thereto (which may not end after the Termination Date). A Committed Borrowing Notice that does not conform substantially to these requirements shall be rejected, and the Agent shall promptly notify the Borrower of such rejection by telex, telecopy or telephone. 2.2.4 Conversion and Continuation of Outstanding Committed Advances. Floating Rate Advances shall continue as Floating Rate Advances unless and until such Floating Rate Advances are repaid or converted into Eurodollar Committed Advances pursuant to this Section. Each Eurodollar Committed Advance shall continue as a Eurodollar Committed Advance until the end of the applicable Eurodollar Interest Period, at which time such Eurodollar Committed Advance shall be automatically converted into a Floating Rate Advance unless the Borrower shall have given the Agent a Committed Conversion/Continuation Notice requesting that, at the end of such Eurodollar Interest Period, such Eurodollar Committed Advance continue as a Eurodollar Committed Advance for a new Eurodollar Interest Period. Subject to the terms of Section 2.5.2, the Borrower may elect from time to time to convert all or any part of any Committed Advance into another Committed Advance with a different Rate Option; provided that any conversion of any Eurodollar Committed Advance shall be made on, and only on, the last day of the Eurodollar Interest Period applicable thereto. The Borrower shall give the Agent irrevocable notice (a "Committed Conversion/Continuation Notice") of each conversion of a Committed Advance or continuation of a Eurodollar Committed Advance not later than 11:00 a.m. (Chicago time) on the date of the requested conversion or continuation, in the case of a conversion into a Floating Rate Advance, or on the date three Business Days prior to the requested conversion or continuation, in the case of a conversion into or continuation of a Eurodollar Committed Advance, specifying: (i) the requested date, which shall be a Business Day, of such conversion or continuation; (ii) the aggregate amount and Rate Option of the Committed Advance which is to be converted or continued; and 15 20 (iii) the amount and Rate Option(s) of the Committed Advance(s) into which such Committed Advance is to be converted or continued and, in the case of a conversion into or continuation of a Eurodollar Committed Advance, the duration of the Eurodollar Interest Period applicable thereto. A Committed Conversion/Continuation Notice that does not conform substantially to these requirements shall be rejected, and the Agent shall promptly notify the Borrower of such rejection by telex or telecopy. Section 2.3 Competitive Bid Advances. 2.3.1 Competitive Bid Option. In addition to Committed Advances pursuant to Section 2.2, but subject to the terms and conditions of this Agreement (including, without limitation, the limitation set forth in Section 2.1.2 as to the maximum aggregate principal amount of all outstanding Advances hereunder), the Borrower may, as set forth in this Section 2.3, request the Lenders, prior to the Termination Date, to make offers to make Competitive Bid Advances to the Borrower. Each Lender may, but shall have no obligation to, make such offers and the Borrower may, but shall have no obligation to, accept any such offers in the manner set forth in this Section 2.3. Competitive Bid Advances shall be evidenced by the Competitive Bid Notes. 2.3.2 Competitive Bid Quote Request. When the Borrower wishes to request offers to make Competitive Bid Loans under this Section 2.3, it shall transmit to the Agent by a Competitive Bid Quote Request, signed by an Authorized Officer, substantially in the form of Exhibit C hereto so as to be received no later than (i) 1:00 p.m. (Chicago time) at least four Business Days prior to the Borrowing Date proposed therein, in the case of a Eurodollar Auction or (ii) 1:00 p.m. (Chicago time) at least one Business Day prior to the Borrowing Date proposed therein, in the case of an Absolute Rate Auction specifying: (a) the proposed Borrowing Date, which shall be a Business Day, for the proposed Competitive Bid Advance, (b) the aggregate principal amount of such Competitive Bid Advance, (c) whether the Competitive Bid Quotes requested are to set forth a Eurodollar Bid Rate or an Absolute Rate, or both, and (d) the Interest Period applicable thereto (which may not end after the Termination Date). 16 21 Each Competitive Bid Quote Request shall be in a minimum amount of $5,000,000 or in an integral multiple of $1,000,000 in excess thereof. The Borrower may request offers to make Competitive Bid Loans for more than one Interest Period in a single Competitive Bid Quote Request. No Competitive Bid Quote Request shall be given within five Business Days (or such other number of days as the Borrower and the Agent may agree) of any other Competitive Bid Quote Request. Requests for Advances received after the designated time will be deemed received on the next succeeding Business Day. A Competitive Bid Quote Request that does not conform substantially to the format of Exhibit C hereto shall be rejected, and the Agent shall promptly notify the Borrower of such rejection by telex, telecopy or telephone. 2.3.3 Invitation for Competitive Bid Quotes. Promptly and in any event before the close of business on the same Business Day of receipt of a Competitive Bid Quote Request that is not rejected pursuant to Section 2.3.2, the Agent shall send to each of the Lenders an Invitation for Competitive Bid Quotes substantially in the form of Exhibit D hereto, which shall constitute an invitation by the Borrower to each Lender to submit Competitive Bid Quotes offering to make the Competitive Bid Loans to which such Competitive Bid Quote Request relates in accordance with this Section 2.3. 2.3.4 Submission and Contents of Competitive Bid Quotes. (i) Each Lender may, in its sole discretion, submit a Competitive Bid Quote containing an offer or offers to make Competitive Bid Loans in response to any Invitation for Competitive Bid Quotes. Each Competitive Bid Quote must comply with the requirements of this Section 2.3.4 and must be submitted to the Agent at its offices specified in or pursuant to Section 10.4 not later than (a) 10:00 a.m. (Chicago time) at least three Business Days prior to the proposed Borrowing Date, in the case of a Eurodollar Auction or (b) 10:00 a.m. (Chicago time) on the proposed Borrowing Date, in the case of an Absolute Rate Auction (or, in either case upon reasonable prior notice to the Lenders, such other time and date as the Borrower and the Agent may agree); provided that Competitive Bid Quotes submitted by First Chicago may only be submitted if the Agent or First Chicago notifies the Borrower of the terms of the offer or offers contained therein not later than 15 minutes prior to the latest time at which the relevant Competitive Bid Quotes must be submitted by the other Lenders. Subject to Articles IV and VII, any Competitive Bid Quote so made shall be irrevocable except with the written consent of the Agent given on the instructions of the Borrower. 17 22 (ii) Each Competitive Bid Quote shall be in substantially the form of Exhibit E hereto and shall in any case specify: (a) the proposed Borrowing Date, which shall be the same as that set forth in the applicable Invitation for Competitive Bid Quotes, (b) the principal amount of the Competitive Bid Loan for which each such offer is being made, which principal amount (1) may be greater than, less than or equal to the Commitment of the quoting Lender, (2) must be at least $5,000,000 and an integral multiple of $1,000,000, and (3) may not exceed the principal amount of Competitive Bid Loans for which offers were requested, (c) in the case of a Eurodollar Auction, the Competitive Bid Margin offered for each such Competitive Bid Loan, (d) the minimum amount, if any, of the Competitive Bid Loan which may be accepted by the Borrower, (e) in the case of an Absolute Rate Auction, the Absolute Rate offered for each such Competitive Bid Loan, and (f) the identity of the quoting Lender. (iii) The Agent shall reject any Competitive Bid Quote that: (a) is not substantially in the form of Exhibit E hereto or does not specify all of the information required by Section 2.3.4(ii); (b) contains qualifying, conditional or similar language, other than any such language contained in Exhibit E hereto; (c) proposes terms other than or in addition to those set forth in the applicable Invitation for Competitive Bid Quotes; or (d) arrives after the time set forth in Section 2.3.4(i). If any Competitive Bid Quote shall be rejected pursuant to this Section 2.3.4(iii), then the Agent shall notify the relevant Lender of such rejection as soon as practical. 2.3.5 Notice to Borrower. The Agent shall promptly notify the Borrower of the terms (i) of any Competitive Bid Quote 18 23 submitted by a Lender that is in accordance with Section 2.3.4 and (ii) of any Competitive Bid Quote that amends, modifies or is otherwise inconsistent with a previous Competitive Bid Quote submitted by such Lender with respect to the same Competitive Bid Quote Request. Any such subsequent Competitive Bid Quote shall be disregarded by the Agent unless such subsequent Competitive Bid Quote specifically states that it is submitted solely to correct a manifest error in such former Competitive Bid Quote. The Agent's notice to the Borrower shall specify the aggregate principal amount of Competitive Bid Loans for which offers have been received for each Interest Period specified in the related Competitive Bid Quote Request and the respective principal amounts and Eurodollar Bid Rates or Absolute Rates, as the case may be, so offered. 2.3.6 Acceptance and Notice by Borrower. Not later than (i) 11:00 a.m. (Chicago time) at least three Business Days prior to the proposed Borrowing Date, in the case of a Eurodollar Auction or (ii) 11:00 a.m. (Chicago time) on the proposed Borrowing Date, in the case of an Absolute Rate Auction (or, in either case upon reasonable prior notice to the Lenders, such other time and date as the Borrower and the Agent may agree), the Borrower shall notify the Agent of its acceptance or rejection of the offers so notified to it pursuant to Section 2.3.5; provided, however, that the failure by the Borrower to give such notice to the Agent shall be deemed to be a rejection of all such offers. In the case of acceptance, such notice (a "Competitive Bid Borrowing Notice") shall specify the aggregate principal amount of offers for each Interest Period that are accepted. The Borrower may accept any Competitive Bid Quote in whole or in part (subject to the terms of Section 2.3.4(ii)(d)); provided that: (a) the aggregate principal amount of each Competitive Bid Advance may not exceed the applicable amount set forth in the related Competitive Bid Quote Request, (b) acceptance of offers may only be made on the basis of ascending Eurodollar Bid Rates or Absolute Rates, as the case may be, and (c) the Borrower may not accept any offer that is described in Section 2.3.4(iii) or that otherwise fails to comply with the requirements of this Agreement. 2.3.7 Allocation by Agent. If offers are made by two or more Lenders with the same Eurodollar Bid Rates or Absolute Rates, as the case may be, for a greater aggregate principal amount than the amount in respect of which offers are accepted for the related Interest Period, the principal amount of Competitive Bid Loans in respect of which such offers are accepted shall be allocated by the Agent among such Lenders as 19 24 nearly as possible (in such multiples, not greater than $1,000,000, as the Agent may deem appropriate) in proportion to the aggregate principal amount of such offers; provided, however, that no Lender shall be allocated a portion of any Competitive Bid Advance which is less than the minimum amount which such Lender has indicated that it is willing to accept. Allocations by the Agent of the amounts of Competitive Bid Loans shall be conclusive in the absence of manifest error. The Agent shall promptly, but in any event on the same Business Day, notify each Lender of its receipt of a Competitive Bid Borrowing Notice and the aggregate principal amount of such Competitive Bid Loan allocated to each participating Lender. 2.3.8 Administration Fee. The Borrower hereby agrees to pay to the Agent an administration fee of $200 per Lender per each Competitive Bid Quote Request transmitted by the Borrower to the Agent pursuant to Section 2.3.2. Such administration fee shall be payable in arrears on each Payment Date hereafter and on the Termination Date (or such earlier date on which the Aggregate Commitment shall terminate or be cancelled) for any period then ending for which such fee, if any, shall not have been theretofore paid. Section 2.4 Fees. 2.4.1 Commitment Fee. The Borrower agrees to pay to the Agent for the account of each Lender a commitment fee equal to the Commitment Fee Percentage (calculated as a percentage rate per annum) on the average daily unborrowed portion of such Lender's Commitment from the date hereof to and including the Termination Date, payable in arrears on each Payment Date hereafter and on the Termination Date. For the purposes of calculating the commitment fee under this Section 2.4.1, outstanding Competitive Bid Advances shall not be deemed usage of the Lenders' Commitments. All accrued commitment fees shall be payable on the effective date of any termination of the obligations of the Lenders to make Loans hereunder. Computations of Commitment Fees shall be made on the basis of a year of 360 days for the actual number of days (including the first day but excluding the last day) occurring in the period for which such fees are payable. 2.4.2 Agent's Fees. The Borrower agrees to pay to the Agent, for its own account, the fees agreed to by the Borrower and the Agent pursuant to that certain letter agreement dated February 9, 1995, or as otherwise agreed from time to time. Section 2.5 General Facility Terms. 2.5.1 Method of Borrowing. Not later than 1:00 p.m. (Chicago time) on each Borrowing Date, each Lender shall make 20 25 available its Loan or Loans in funds immediately available in Chicago, to the Agent at its address specified pursuant to Section 10.4. The Agent shall deposit the funds so received from the Lenders in the Borrower's account at the Agent's main office in Chicago or into such other account as the Borrower may reasonably designate in writing to the Agent from time to time. Notwithstanding the foregoing provisions of this Section 2.5.1, to the extent that a Loan made by a Lender matures on the Borrowing Date of a requested Loan, such Lender shall apply the proceeds of the Loan it is then making to the repayment of principal of the maturing Loan. 2.5.2 Minimum Amount of Each Advance. Each Advance shall be in the minimum amount of $5,000,000 (and in integral multiples of $1,000,000 if in excess thereof); provided, however, that any Floating Rate Advance may be in the aggregate amount of the unused Aggregate Commitment. 2.5.3 Cancellation of Commitments. The Borrower may at any time after the date hereof cancel the Aggregate Commitment in whole, or in a minimum aggregate amount of $10,000,000 (and in integral multiples of $1,000,000 if in excess thereof) ratably among the Lenders in proportion to the amounts of their respective Commitments upon at least ten Business Days' prior written notice to the Agent, which notice shall specify the amount of such reduction; provided, however, no such notice of cancellation shall be effective to the extent that it would reduce the Aggregate Commitment to an amount which would be less than the outstanding principal amount of Advances at the time such cancellation is to take effect. Any notice of cancellation given pursuant to this Section shall be irrevocable and shall specify the date upon which such cancellation is to take effect. 2.5.4 Optional Principal Payments. The Borrower may from time to time pay all outstanding Floating Rate Advances, or, in a minimum aggregate amount of $5,000,000 (and in multiples of $1,000,000 if in excess thereof), any portion of the outstanding Floating Rate Advances upon two Business Days' prior notice to the Agent. A Fixed Rate Advance may not be paid prior to the last day of the applicable Interest Period. 2.5.5 Interest Periods. Subject to the provisions of Section 2.5.6, each Advance shall bear interest from and including the first day of the Interest Period applicable thereto to (but not including) the last day of such Interest Period at the interest rate determined as applicable to such Advance. The Borrower shall not request a Fixed Rate Advance if, after giving effect to the requested Fixed Rate Advance, more than eight separate Fixed Rate Advances would be outstanding. 21 26 2.5.6 Rate after Maturity. Except as provided in the next sentence, any Advance not paid at maturity, whether by acceleration or otherwise, shall bear interest until paid in full at a rate per annum equal to the Corporate Base Rate plus 2% per annum. In the case of a Fixed Rate Advance the maturity of which is accelerated, such Fixed Rate Advance shall bear interest for the remainder of the applicable Interest Period, at the higher of the rate otherwise applicable to such Interest Period plus 2% per annum or the Corporate Base Rate plus 2% per annum. 2.5.7 Interest Payment Dates; Interest Basis. Interest accrued on each Floating Rate Advance shall be payable on each Payment Date, commencing with the first such date to occur after the date hereof and at maturity. Interest accrued on each Fixed Rate Advance shall be payable on the last day of its applicable Interest Period and on any date on which such Advance is prepaid, whether due to acceleration or otherwise. Interest accrued on each Fixed Rate Advance having an Interest Period longer than three months shall also be payable on the last day of each three-month interval during such Interest Period. Interest on Fixed Rate Advances shall be calculated for the actual number of days elapsed on the basis of a year consisting of 360 days. Interest on Floating Rate Advances shall be calculated for the actual number of days elapsed on the basis of a year consisting of 365, or, when appropriate, 366 days. Interest shall be payable for the day an Advance is made but not for the day of any payment on the amount paid if payment is received prior to 1:00 p.m. (local time) at the place of payment. If any payment of principal of or interest on an Advance shall become due on a day which is not a Business Day, such payment shall be made on the next succeeding Business Day and, in the case of a principal payment, such extension of time shall be included in computing interest in connection with such payment. 2.5.8 Method and Application of Payments. Subject to the last sentence of Section 2.5.1, all payments of principal, interest, and fees hereunder shall be made in immediately available funds to the Agent at the Agent's address specified pursuant to Section 10.4 or at any other Lending Installation of the Agent within the United States specified in writing by the Agent to the Borrower (at least one Business Day prior to the applicable due date) by 1:00 p.m. (Chicago time) on the date when due. If Agent receives a payment on the Obligations at a time when no Event of Default has occurred and is continuing and when no payment on the Obligations is due (or the payment received by the Agent is in excess of the amount then due), then such payment (or the portion of such payment that exceeds the amount then due) shall be applied to the Obligations outstanding in such manner as may be specified by the Borrower. To the extent the application of any payment received by Agent in respect of the Obligations is 22 27 not governed by the immediately preceding sentence, such payment shall be applied in the following manner: (i) first, to any fees, expenses, indemnities and other Obligations (other than the principal of and interest on the Advances) then due and, if such payment is insufficient to pay all such Obligations, then such payment shall be applied to such Obligations due to each Lender pro rata based on the respective amounts thereof; (ii) second, to any accrued and unpaid interest then due on the Advances and, if such payment is insufficient to pay all such interest, then such payment shall be applied to the interest due to each Lender pro rata based on the respective amounts thereof; (iii) third, to any unpaid principal amount of the Advances then due and, if such payment is insufficient to pay all such principal, then such payment shall be applied to the principal due to each Lender pro rata based on the respective amounts thereof; and (iv) fourth, to any other Obligations then due and, if such payment is insufficient to pay all such Obligations, then such payment shall be applied to such Obligations owing to each Lender pro rata based on the respective amounts thereof. Each payment delivered to the Agent for the account of any Lender shall be delivered by the Agent to such Lender in the same type of funds which the Agent received at such Lender's address specified pursuant to Article 10.4 or at any Lending Installation specified in a notice received by the Agent from such Lender. If such payment is received by the Agent by 1:00 p.m. (Chicago time) such delivery to the Lenders shall be made on the same day and if received thereafter shall be made on the next succeeding Business Day. Borrower hereby authorizes the Agent and each Lender, if and to the extent any payment is not promptly made to the Agent when due pursuant to this Agreement or any other Loan Document, to set off or otherwise charge from time to time against any or all of the accounts of Borrower with the Agent or such Lender or any affiliate of the Agent or any Lender any amount due hereunder or under such other Loan Document. If any Lender shall obtain any payment in respect of the Obligations (whether voluntary or involuntary, through the exercise of any right of set-off or otherwise) in excess of the amount such Lender would have been entitled to receive under this Section 2.5.8 if such payment had been made to the Agent, such Lender shall hold such excess payment in trust for the Agent and the Lenders and shall forthwith remit the same to the Agent for the Agent's and Lenders' accounts as herein provided. If any Lender is subsequently required to refund to Borrower any sum shared with 23 28 the other Lenders pursuant to this Section 2.5.8, such Lender shall be entitled to recoup from the other Lenders the amount refunded in excess of the amount it would have been entitled to receive under this Section 2.5.8 together with interest thereon for each day from the date such amount was received by such other Lenders to the date such amount is made available to the Borrower at the same rate of interest that the refunding Lender is required to pay to the Borrower on the refunded amount and, thereafter, until repaid to such refunding Lender, at the Federal Funds Rate. For the purpose of calculating the amount owing by Borrower to each Lender, any payments made by Borrower directly to any Lender that are subject to the sharing provisions of this Section 2.5.8 shall be deemed to have been made to the Agent and distributed to the Lenders in accordance with this Section 2.5.8. 2.5.9 Notes; Telephonic Notices. Each Lender is hereby authorized to record on the schedule attached to each of its Notes, or otherwise record in accordance with its usual practice, the date and amount of each of its Loans of the type evidenced by such Note; provided, however, that any failure to so record shall not affect the Borrower's obligations under any Note. The Borrower hereby authorizes the Lenders and the Agent to extend Advances, effect Rate Option selections and submit Competitive Bid Quotes based on telephonic notices made by any person or persons the Agent or any Lender in good faith believes to be an Authorized Officer or an officer, employee or agent of the Borrower designated by an Authorized Officer. The Borrower agrees to deliver promptly to the Agent a written confirmation of each telephonic notice signed by an Authorized Officer. If the written confirmation differs in any material respect from the action taken by the Agent and the Lenders, the records of the Agent and the Lenders shall govern absent manifest error. 2.5.10 Notification of Advances, Interest Rates and Prepayments. Promptly after receipt thereof, the Agent will notify each Lender of the contents of each Aggregate Commitment reduction notice, Committed Borrowing Notice, Committed Conversion/Continuation Notice, and repayment notice received by it hereunder. The Agent will notify each Lender of the interest rate applicable to each Eurodollar Committed Advance promptly upon determination of such interest rate and will give Borrower and each Lender prompt notice of each change in the Alternate Base Rate. Each Reference Lender agrees to furnish timely information for the purpose of determining the Eurodollar Base Rate. 2.5.11 Non-Receipt of Funds by the Agent. Unless the Borrower or a Lender, as the case may be, notifies the Agent prior to the date on which it is scheduled to make payment to the Agent of (i) in the case of a Lender, the proceeds of a Loan or (ii) in the case of the Borrower, a payment of principal, 24 29 interest or fees to the Agent for the account of the Lenders, that it does not intend to make such payment, the Agent may assume that such payment has been made. The Agent may, but shall not be obligated to, make the amount of such payment available to the intended recipient in reliance upon such assumption. If such Lender or the Borrower, as the case may be, has not in fact made such payment to the Agent, the recipient of such payment shall, on demand by the Agent, repay to the Agent the amount so made available together with interest thereon in respect of each day during the period commencing on the date such amount was so made available by the Agent until the date the Agent recovers such amount at a rate per annum equal to (x) in the case of payment by a Lender, the Federal Funds Rate for such day or (y) in the case of payment by the Borrower, the interest rate applicable to the relevant Loan. Section 2.6 Lending Installations. Each Lender may book its Loans at any Lending Installation selected by such Lender and may change its Lending Installation from time to time. Each Lender will notify the Agent and the Borrower on or prior to the date of this Agreement of the Lending Installation which it intends to utilize for each type of Loan hereunder. Each Lender may, by written notice to the Agent and the Borrower, change the Lending Installation through which Loans will be made by it and for whose account Loan payments are to be made. Section 2.7 Withholding Tax Exemption. At least five Business Days prior to the first date on which interest or fees are payable hereunder for the account of any Lender, each Lender that is not incorporated under the laws of the United States of America, or a state thereof, agrees that it will deliver to each of the Borrower and the Agent two duly completed copies of United States Internal Revenue Service Form 1001 or 4224, certifying in either case that such Lender is entitled to receive payments under this Agreement and the Notes without deduction or withholding of any United States federal income taxes. Each Lender which so delivers a Form 1001 or 4224 further undertakes to deliver to each of the Borrower and the Agent two additional copies of such form (or a successor form) on or before the date that such form expires (currently, three successive calendar years for Form 1001 and one calendar year for Form 4224) or becomes obsolete or after the occurrence of any event requiring a change in the most recent forms so delivered by it, and such amendments thereto or extensions or renewals thereof as may be reasonably requested by the Borrower or the Agent, in each case certifying that such Lender is entitled to receive payments under this Agreement and the Notes without deduction or withholding of any United States federal income taxes, unless an event (including without limitation any change in treaty, law or regulation) has occurred prior to the date on which any such delivery would otherwise be required which renders all such forms 25 30 inapplicable or which would prevent such Lender from duly completing and delivering any such form with respect to it and such Lender advises the Borrower and the Agent that it is not capable of receiving payments without any deduction or withholding of United States federal income tax. ARTICLE III CHANGE IN CIRCUMSTANCES Section 3.1 Yield Protection. If, after the date hereof, the introduction of or change in any law or any governmental or quasi-governmental rule, regulation, policy, guideline or directive (whether or not having the force of law), or any interpretation thereof, or compliance of any Lender with such, (i) subjects any Lender or any applicable Lending Installation to any tax, duty, charge or withholding on or from payments due from the Borrower, or changes the basis of taxation of payments to any Lender in respect of its Loans or other amounts due it hereunder (in either case, excluding taxation of the overall net income of any Lender or applicable Lending Installation) or (ii) imposes or increases or deems applicable any reserve, assessment, insurance charge, special deposit or similar requirement against assets of, deposits with or for the account of, or credit extended by, any Lender or any applicable Lending Installation (other than reserves and assessments taken into account in determining the interest rate applicable to Fixed Rate Advances), or (iii) imposes any other condition the result of which is to increase the cost to any Lender or any applicable Lending Installation of making, funding or maintaining loans or reduces any amount receivable by any Lender or any applicable Lending Installation in connection with loans, or requires any Lender or any applicable Lending Installation to make any payment calculated by reference to the amount of loans held or interest received by it, by an amount deemed material by such Lender, then, within 15 days of demand by such Lender, the Borrower shall pay such Lender that portion of such increased expense incurred or reduction in an amount received which such Lender determines is attributable to making, funding and maintaining its Loans and its Commitment; provided, however, if any such Lender fails to provide the Borrower with notice of such increased expense or reduction in amount received within 30 days after such Lender becomes aware of the occurrence of the events giving rise to such increased expense or reduction, then such Lender shall not be entitled to recover any payment from the Borrower under this Section 3.1 for any such increase in expense incurred or such 26 31 reduction in amount occurring prior to the time such Lender delivers such notice to the Borrower; provided, further, that nothing in this Section 3.1 precludes a Lender, after providing initial notice of an occurence of an event described in this Section 3.1, from making successive demands for payment for further compensation with respect to such event, nor does this Section 3.1 limit the ability of such Lender, with respect to subsequent demands, to recover the full amount incurred since the immediately preceding demand for payment. Section 3.2 Changes in Capital Adequacy Regulations. If a Lender determines the amount of capital required or expected to be maintained by such Lender, any Lending Installation of such Lender or any corporation controlling such Lender is increased as a result of a Change, then, within 15 days of demand by such Lender, the Borrower shall pay such Lender the amount necessary to compensate for any shortfall in the rate of return on the portion of such increased capital which such Lender determines is attributable to this Agreement, its Loans or its obligation to make Loans hereunder (after taking into account such Lender's policies as to capital adequacy); provided, however, that nothing in this Section 3.2 precludes a Lender from making successive demands for payment for further compensation with respect to such event, nor does this Section 3.2 limit the ability of such Lender, with respect to subsequent demands, to recover the full amount incurred since the immediately preceding demand for payment. "Change" means (i) any change after the date of this Agreement in the Risk-Based Capital Guidelines or (ii) any adoption of or change in any other law, governmental or quasi-governmental rule, regulation, policy, guideline, interpretation, or directive (whether or not having the force of law) after the date of this Agreement which affects the amount of capital required or expected to be maintained by any Lender or any Lending Installation or any corporation controlling any Lender. "Risk-Based Capital Guidelines" means (i) the risk-based capital guidelines in effect in the United States on the date of this Agreement, including transition rules, and (ii) the corresponding capital regulations promulgated by regulatory authorities outside the United States implementing the July 1988 report of the Basle Committee on Banking Regulation and Supervisory Practices Entitled "International Convergence of Capital Measurements and Capital Standards," including transition rules, and any amendments to such regulations adopted prior to the date of this Agreement. Section 3.3 Availability of Rate Options. If (i) any Lender determines that maintenance of its Eurodollar Committed Loans or Eurodollar Bid Rate Loans, as the case may be, at a suitable Lending Installation would violate any applicable law, rule, regulation, or directive, whether or not having the force of law, (ii) the Required Lenders determine that deposits of a 27 32 type and maturity appropriate to match fund Eurodollar Committed Advances are not available or (iii) the Required Lenders determine that a Rate Option does not accurately reflect the cost of making or maintaining a Committed Advance at such Rate Option, then the Agent shall suspend the availability of the affected Rate Option and, in the case of clause (i) only, require any affected Loans to be repaid. Section 3.4 Funding Indemnification. If any payment of a Fixed Rate Advance occurs on a date which is not the last day of the applicable Interest Period, whether because of acceleration, prepayment or otherwise, or a Fixed Rate Advance is not made on the date specified by the Borrower for any reason other than default by the Lenders, the Borrower will indemnify each Lender for any loss or cost incurred by it resulting therefrom, including, without limitation, any loss or cost in liquidating or employing deposits acquired to fund or maintain the Fixed Rate Advance. Section 3.5 Lender Statements; Survival of Indemnity. To the extent reasonably possible, each Lender shall designate an alternate Lending Installation with respect to its Fixed Rate Loans to reduce any liability of the Borrower to such Lender under Sections 3.1 and 3.2 or to avoid the unavailability of a Rate Option under Section 3.3, so long as such designation is not disadvantageous to such Lender. Each Lender shall deliver a written statement of such Lender as to the amount due, if any, under Sections 3.1, 3.2 or 3.4. Such written statement shall set forth in reasonable detail the calculations upon which such Lender determined such amount and shall be final, conclusive and binding on the Borrower in the absence of manifest error. Determination of amounts payable under such Sections in connection with a Fixed Rate Loan shall be calculated as though each Lender funded its Fixed Rate Loan through the purchase of a deposit of the type and maturity corresponding to the deposit used as a reference in determining the Fixed Rate applicable to such Loan, whether in fact that is the case or not. Unless otherwise provided herein, the amount specified in the written statement shall be payable on demand after receipt by the Borrower of the written statement. The obligations of the Borrower under Sections 3.1, 3.2 and 3.4 shall survive payment of the Obligations and termination of this Agreement. ARTICLE IV CONDITIONS TO EFFECTIVENESS AND TO LENDING Section 4.1 Conditions to Effectiveness of Agreement. This Agreement and the other Loan Documents shall become effective upon, and only upon, the execution and delivery thereof as 28 33 required by Section 4.2(a) and the termination of, and payment of all amounts owing in respect of, the Prior Loan Agreement. Section 4.2 Conditions to Initial Advance. In addition to the conditions set forth in Section 4.3 (to be fulfilled at the time any Advance is made), the obligation of each Lender to make its initial Loan available is subject to fulfillment of the following conditions. (a) Loan Documents. Ten duplicate originals of this Agreement shall have been duly executed and delivered to the Agent by each of the parties hereto and one original of each of the Notes shall have been duly executed and delivered to the Agent by the Borrower, in each case in form and substance satisfactory to the Agent and each Lender. (b) Corporate Certificates. The Agent shall have received ten duplicate originals of each of the following, in each case in form and substance satisfactory to the Agent and each Lender: (i) Copies of the articles of incorporation of Borrower certified by the Secretary of State of Washington not more than five days prior to the date hereof; (ii) Bylaws of Borrower certified by Borrower, as of the date hereof; (iii) Certificate of Existence/Authorization issued by the Secretary of State of Washington with respect to Borrower, dated not more than five days prior to the date hereof; (iv) Certified copies of resolutions adopted by the board of directors of Borrower authorizing the execution, delivery and performance by Borrower of the Loan Documents, dated as of the date hereof; and (v) Incumbency certificates describing the office and identifying the specimen signatures of the individuals signing the Loan Documents on behalf of Borrower, dated as of the date hereof. (c) Legal Opinion. The Agent shall have received ten duplicate originals of an opinion of the law firm of Riddell, Williams, Bullitt & Walkinshaw, counsel to Borrower, in substantially the form of Exhibit F hereto and dated as of the date hereof. (d) Other Information. The Agent and each Lender shall have received such other statements, opinions, certificates, documents and information with respect to the 29 34 matters contemplated by this agreement as it may reasonably request. Section 4.3 Conditions to All Advances. The obligation of the Lenders to fund any Advances hereunder, including the initial Advance, is subject to the condition that, on the date of such Advance, no Default or Event of Default shall have occurred and be continuing or will occur as a result of the making of the Advances; and the representations of Borrower in Article V shall be true on and as of such date with the same force and effect as if made on and as of such date. Each Advance shall be deemed to constitute a representation and warranty by Borrower that, as of the date of such Advance, the statements set forth in Article V are true and correct and no Default or Event of Default has occurred and is continuing or will occur as a result of disbursement of the requested Advance. ARTICLE V REPRESENTATIONS AND WARRANTIES Borrower represents and warrants to the Lenders as follows: Section 5.1 Corporate Existence and Power. Borrower and each Subsidiary are each corporations duly incorporated, validly existing and in good standing under the laws of their respective jurisdictions of incorporation. Borrower and each Subsidiary are each duly qualified to do business in each other jurisdiction where the nature of their respective activities or the ownership of their respective properties requires such qualification, except to the extent that failure to be so qualified does not have a material adverse effect on the business, operations or financial condition of the enterprise comprised of Borrower and its Subsidiaries taken as a whole. Borrower and each Subsidiary have full corporate power, authority and legal right to carry on their business as presently conducted, and to own and operate their properties and assets. Borrower has full corporate power to execute, deliver and perform this Agreement and the other Loan Documents and to borrow hereunder. The term "Subsidiary" as used in this Section 5.1 shall not include Tongue River. Section 5.2 Corporate Authorization. The execution, delivery and performance by Borrower of this Agreement and the other Loan Documents, and any borrowing hereunder or thereunder, have been duly authorized by all necessary corporate action of Borrower, do not require any shareholder approval or the approval or consent of any trustee or the holders of any Indebtedness of Borrower, except such as have been obtained (certified copies thereof having been delivered to the Agent), do not contravene any law, regulation, rule, judgment or order binding on it or its Articles of Incorporation or Bylaws, do not contravene the 30 35 provisions of or constitute a default under any indenture, mortgage, contract or other agreement or instrument to which Borrower or any Subsidiary is a party or by which Borrower or any of its properties may be bound or affected, and do not result in the creation or imposition of any Lien on any assets of Borrower or any Subsidiary. Section 5.3 Government Approvals, Etc. No Government Approval or filing or registration with any Governmental Authority is required for the making and performance by Borrower of this Agreement or the other Loan Documents or in connection with any of the transactions contemplated hereby or thereby, except such as have been heretofore obtained and are in full force and effect (certified copies thereof having been delivered to the Agent). Section 5.4 Binding Obligations, Etc. This Agreement has been duly executed and delivered by Borrower and constitutes, and the other Loan Documents when duly executed and delivered will constitute, the legal, valid and binding obligations of Borrower enforceable against Borrower in accordance with their respective terms, except as such enforceability may be limited by (a) applicable bankruptcy, insolvency, reorganization, moratorium, fraudulent transfer and other similar laws of general application affecting the enforcement of creditors' rights, and (b) by general equitable principles, regardless of whether enforcement is sought in equity or at law. Section 5.5 Litigation. Except as disclosed in Schedule 3 there are no actions, proceedings, investigations, or claims against or affecting Borrower or any Subsidiary now pending before any court, arbitrator or Governmental Authority (nor to the knowledge of Borrower has any thereof been threatened) which if determined adversely to Borrower or any Subsidiary would be likely to have a material adverse effect on the business, operations or financial condition of the enterprise comprised of Borrower and its Subsidiaries taken as a whole or on the ability of Borrower to perform its obligations under this Agreement and the other Loan Documents except as disclosed in Borrower's Form 10-K filed with the Securities and Exchange Commission for its fiscal year ended September 30, 1994, or its Form 10-Q filed with the Securities and Exchange Commission for the fiscal quarter ended December 31, 1994. The term "Subsidiary" as used in this Section 5.5 shall not include Tongue River. Section 5.6 Financial Condition. The consolidated balance sheet of Borrower and its Subsidiaries as of September 30, 1994, and the related statements of income and shareholders' earnings reinvested in the business for the fiscal year then ended, and the consolidated balance sheet of Borrower and its Subsidiaries as of December 31, 1994, and the related statements of income and 31 36 shareholders' earnings reinvested in the business for the fiscal quarter then ended, copies of which have been furnished to the Agent and each Lender, fairly present the consolidated financial condition of Borrower and its Subsidiaries as at such dates and the results of operations of Borrower and its Subsidiaries for the periods then ended, all in accordance with generally accepted accounting principles consistently applied. Borrower and its Subsidiaries did not have on such dates any material contingent liabilities for Taxes, material unusual forward or long-term commitments or material unrealized or anticipated losses from any unfavorable commitments, except as referred to or reflected or provided for in the balance sheets for such dates and in the notes to those financial statements. Since December 31, 1994, there has been no material adverse change in the financial conditions, operations, or business of the enterprise comprised of Borrower or its Subsidiaries taken as a whole. Section 5.7 Taxes. Borrower and its Subsidiaries have filed all tax returns and reports required of them, have paid all Taxes which are due and payable, and have provided adequate reserves for payment of any Tax whose payment is being contested. The charges, accruals and reserves on the books of Borrower and its Subsidiaries in respect of Taxes for all fiscal periods to date are accurate. There are no questions or disputes between Borrower or any Subsidiary and any Governmental Authority with respect to any Taxes except as disclosed in the balance sheets referred to in Section 5.6 or otherwise disclosed to the Agent and to each Lender in writing prior to the date of this Agreement and except disputes which if resolved adversely to the positions being asserted by Borrower or any Subsidiary would not have a material adverse effect on the business, operations or financial condition of the enterprise comprised of Borrower and its Subsidiaries taken as a whole. Section 5.8 Laws, Orders; Other Agreements. Except as described in the financial statements delivered to the Lenders pursuant to Section 5.6, neither Borrower nor any Subsidiary is in material violation of or subject to any material contingent liability on account of any material laws, statutes, rules, regulations and orders of any Governmental Authority, except any thereof whose validity is being contested in good faith by appropriate proceedings upon stay of execution of the enforcement thereof. Neither Borrower nor any Subsidiary is in material breach of or default under any material agreement to which it is a party or which is binding on it or any of its assets. The term "Subsidiary" as used in this Section 5.8 shall not include Tongue River. Section 5.9 Federal Reserve Regulations. Borrower is not engaged principally or as one of its important activities in the business of extending credit for the purpose of purchasing or 32 37 carrying any margin stock (within the meaning of Federal Reserve Regulation U), and no part of the proceeds of any Advance will be used to purchase or carry any such margin stock or to extend credit to others for the purpose of purchasing or carrying any such margin stock or for any other purpose that violates the applicable provisions of any Federal Reserve Regulation. Borrower will furnish to the Agent on request by the Agent or any Lender a statement conforming with the requirements of said Regulation U. Section 5.10 ERISA. (a) The present value of all benefits vested under all Pension Plans did not, as of the most recent valuation date of such Pension Plans, exceed the value of the assets of such Pension Plans allocable to such vested benefits by an amount which would represent a potential material liability of Borrower and its Subsidiaries or affect materially the ability of Borrower to perform its obligations under this Agreement. (b) No Plan or trust created thereunder, or any trustee or administrator thereof, has engaged in a "prohibited transaction" (as such term is defined in Section 406 or Section 2003(a) of ERISA) which could subject such Plan or any other Plan, any trust created thereunder, or any trustee or administrator thereof, or any party dealing with any Plan or any such trust to the tax or penalty on prohibited transactions imposed by Section 502 or Section 2003(a) of ERISA. (c) No Pension Plan or trust has been terminated, except in accordance with the Code, ERISA, and the regulations of the Internal Revenue Service and the PBGC as applicable to solvent plans in which benefits of participants are fully protected. No "reportable event" as defined in Section 4043 of ERISA has occurred for which notice has not been waived or for which alternative notice procedures are permitted. (d) No Pension Plan or trust created thereunder has incurred any "accumulated funding deficiency" (as such term is defined in Section 302 of ERISA) whether or not waived, since the effective date of ERISA. (e) The required allocations and contributions to Pension Plans will not violate Section 415 of the Code. (f) Neither Borrower nor any number of the Controlled Group is a party to any multi-employer plan as defined in Section 4001(a)(3) of ERISA. Section 5.11 Subsidiaries. In respect of Subsidiaries, Schedule 1 to this Agreement sets forth as of the date of this 33 38 Agreement the authorized capitalization of each Subsidiary, the number of shares of each class of capital stock issued and outstanding of each Subsidiary, and the number and percentage of outstanding shares of each such class of capital stock owned by Borrower or by any Subsidiary. The outstanding shares of each Subsidiary have been duly authorized and validly issued and are fully paid and nonassessable. As of the date of this Agreement, Borrower and each Subsidiary owns beneficially and of record and has good title to all the shares it is listed as owning on Schedule 1, free and clear of any Lien. The term "Subsidiary" as used in this Section 5.11 shall not include Tongue River. Section 5.12 Investment Company; Public Utility Holding Company. (a) Borrower is not an "investment company" or a company "controlled" by an investment company within the meaning of the Investment Company Act of 1940, as amended; (b) Borrower does not own any shares of capital stock of a "holding company" as such term is defined in the Public Utility Holding Company Act of 1935, as amended, and is not a "subsidiary company" of a "registered holding company" within the meaning of said Act. Borrower is a "holding company" as defined in said Act by reason of its ownership of all of the outstanding shares of common stock of Washington Natural Gas Company, but is exempt from said Act, except the provisions of Section 9(a)(2) thereof, by virtue of Section 3(a)(1) thereof and Rule 2 thereunder. Section 5.13 Environmental Compliance. (a) (i) Borrower and each Subsidiary is in compliance with the provisions of all Environmental Laws relating to its business, operations, properties or assets, and the ownership, use, control, management, operation or occupancy thereof, where the failure to be in such compliance would have, singly or in the aggregate, a Material Adverse Effect; (ii) neither Borrower nor any Subsidiary nor any of the business, operations, properties or assets of any of them has violated or has been alleged by any Governmental Authority to be in violation of or has been subject to any administrative or judicial proceeding pursuant to, any applicable Environmental Law, which would have, singly or in the aggregate, a Material Adverse Effect; (iii) neither Borrower nor any Subsidiary is subject to any liability under any Environmental Law, which liability could have, singly or in the aggregate, a Material Adverse Effect; (iv) there are no facts or circumstances which could form the basis for the assertion of any claim against Borrower or any Subsidiary relating to any Environmental Law including, but not limited to, any claim arising from past or present practices on, at or from Borrower's or any Subsidiary's business, operations, property or assets and the ownership, use, control, management, operation or occupancy thereof, asserted under any Environmental Law, which would have, singly or in the aggregate, a Material Adverse Effect; (v) there is no asbestos contained in or forming part of any building component, structure 34 39 or office space at any of the property or assets of Borrower or any Subsidiary, where the presence of such asbestos would have, singly or in the aggregate, a Material Adverse Effect; and (vi) no polychlorinated biphenyls ("PCBs") are used, stored or released at any of the property or assets of Borrower or any Subsidiary where the presence of such PCBs would have, singly or in the aggregate, a Material Adverse Effect. (b) There have been no discharges, emissions or releases of Hazardous Material at, on, upon, under, into or from Borrower's or any Subsidiary's business, operations, properties or assets or the ownership, use, control, management, operation or occupancy thereof, which would have, singly or in the aggregate, a Material Adverse Effect. (c) If any storage tanks exist on or under any property of Borrower or any Subsidiary, such storage tanks have been duly registered with all appropriate regulatory and governmental bodies and otherwise are in compliance with applicable Federal, state and local statutes, regulations, ordinances and other regulatory requirements except any non-compliance which would not have, singly or in the aggregate, a Material Adverse Effect. (d) None of the property of Borrower or any Subsidiary is listed or proposed for listing on the National Priorities List or the Comprehensive Environmental Response, Compensation, and Liability Information System, both as promulgated under CERCLA, or on any comparable state or local list which would have, singly or in the aggregate, a Material Adverse Effect, and neither Borrower nor any Subsidiary has received any notification of potential or actual liability or any request for information pursuant to any Environmental Law, including, without limitation, CERCLA or RCRA, or any comparable state or local Environmental Law which would have, singly or in the aggregate, a Material Adverse Effect. Section 5.14 Representations as a Whole. This Agreement, the other Loan Documents, the financial statements referred to in Section 5.6, and all other instruments, documents, certificates and statements furnished to the Agent or any Lender by Borrower, taken as a whole, do not contain any untrue statement of a material fact or omit to state any material fact necessary in order to make the statements contained herein or therein not misleading. ARTICLE VI COVENANTS So long as any Lender shall have any Commitment hereunder and until payment in full of each Advance and the Notes and performance of all other obligations of Borrower under this 35 40 Agreement, Borrower agrees to abide by all of the following unless the Agent, with the approval of the Required Lenders, shall otherwise consent in writing. Section 6.1 Use of Proceeds. Borrower will use the proceeds of the Advances exclusively for general corporate purposes. Section 6.2 Financial Statements. Borrower covenants and agrees that it will deliver to Agent and each Lender: (i) as soon as practicable and in any event within 60 days after the end of each quarterly period (other than the last quarterly period) in each fiscal year, a consolidated statement of income and shareholders' earnings reinvested in the business and consolidated statements of cash flows of Borrower and its Subsidiaries for such quarterly period and for the period from the beginning of the current fiscal year to the end of such quarterly period, and a consolidated balance sheet of Borrower and its Subsidiaries as at the end of such quarterly period, setting forth in each case in comparative form figures for the corresponding period or date in the preceding fiscal year, all in reasonable detail and accompanied by a certificate by an authorized financial officer of Borrower stating that the financial statements were prepared in accordance with generally accepted accounting principles and fairly reflect the financial condition and results of operations of Borrower and its Subsidiaries, subject to changes resulting from year-end adjustments; (ii) as soon as practicable and in any event within 105 days after the end of each fiscal year, a consolidated statement of income and shareholders' earnings reinvested in the business and consolidated statement of cash flows of Borrower and its Subsidiaries for such year, and a consolidated balance sheet of Borrower and its Subsidiaries as of the end of such year, setting forth in each case in comparative form corresponding consolidated figures from the preceding annual audit, all in reasonable detail and accompanied by an audit report by independent public accountants of recognized standing selected by Borrower; (iii) promptly upon transmission thereof, copies of all such financial statements, proxy statements, notices and reports as Borrower shall send to its stockholders and copies of all registration statements (without exhibits) and all reports (without exhibits), if any, which it files with the Securities and Exchange Commission (or any governmental body or agency succeeding to the functions of the Securities and Exchange Commission); and 36 41 (iv) such other financial data, including copies of exhibits referred to in Section 6.2(iii), in the form and at the intervals as Agent or any Lender may reasonably request. Together with each delivery of financial statements required by clauses (i) and (ii) above, Borrower will deliver to Agent and each Lender an Officer's Certificate setting out the Total Debt to Total Capitalization Ratio described in Section 6.13 as of the end of the most recent applicable fiscal period and, further, stating that there has not existed during such fiscal period, and there does not then exist, any Event of Default or Default, or, if any such Event of Default or Default has existed or does then exist, specifying the nature thereof, the period of existence thereof and what action Borrower has taken or proposes to take with respect thereto. Together with each delivery of financial statements required by clause (ii) above, Borrower will deliver to Agent and each Lender a certificate of said accountants stating that, in making the audit necessary to the certification of such financial statements, they have obtained no knowledge of any Event of Default or Default, or, if any such Event of Default or Default exists, specifying the nature and period of existence thereof and further certifying that any sale or disposition of assets during such fiscal year did not exceed the limitation set out in the second sentence of Section 6.14. Section 6.3 Inspection of Property. Borrower covenants and agrees that it will permit any Lender, at such Lender's expense (unless a Default or Event of Default shall have occurred, in which event the expense of such visit and inspection shall be for Borrower's account), to visit and inspect any of the properties of Borrower and its Subsidiaries, to examine the corporate books and financial records of Borrower and its Subsidiaries, and to make copies thereof or extracts therefrom and to discuss the affairs, finances and accounts of any of such persons with the principal officers of Borrower and its independent public accountants, all at such reasonable times and as often as any Lender may reasonably request. Section 6.4 Payment of Taxes. Borrower shall cause to be paid and discharged all Taxes imposed upon Borrower or any Subsidiary or upon the income or profits of Borrower or any Subsidiary or upon property belonging to Borrower or any Subsidiary before the same shall be in default, as well as all lawful claims for labor, materials and supplies which, if unpaid, might become a lien or charge upon such property or any part thereof; provided, however, that Borrower shall not be required to cause to be paid or discharged any such Tax or claim so long as the validity thereof is being contested in good faith by appropriate proceedings, and Borrower and its Subsidiaries shall set aside on their books adequate reserves with respect thereto. 37 42 Section 6.5 Preservation of Corporate Existence. Borrower shall cause to be done all things necessary to preserve and keep in full force and effect its corporate existence and the corporate existence of each of its Subsidiaries (except where the failure to maintain such corporate existence is permitted by Section 6.14). Section 6.6 Maintenance of Property. Borrower shall, and shall cause its Subsidiaries to, at all times keep, maintain, preserve and protect all its and their property in good repair, working order and condition and from time to time to make all needful and proper repairs, renewals, replacements, betterments and improvements thereto, so that the business carried on in connection therewith may be properly and advantageously conducted at all times. Section 6.7 Insurance. Borrower shall, and shall cause its Subsidiaries to, at all times, maintain adequate insurance with financially sound and reputable insurers, on all property of Borrower and its Subsidiaries, of the character usually insured by corporations engaged in the same or similar business against loss or damage of the kinds customarily insured against by such corporations, and carry such other insurance as is usually carried by corporations engaged in the same or similar business. Section 6.8 Records and Accounts. Borrower shall at all times keep and cause each Subsidiary to keep true and complete books of record and accounts in accordance with generally accepted accounting principles. The term "Subsidiary" as used in this Section 6.8 does not include Tongue River. Section 6.9 Additional Payments. From time to time, Borrower will (a) pay or reimburse the Agent for all reasonable costs and expenses (including reasonable attorneys' fees, which may include the internal charges of in-house counsel to the Agent) actually incurred by the Agent in connection with the preparation or amendment of this Agreement or the other Loan Documents, or the making of any Advance or the administration of the transactions contemplated hereby; (b) pay or reimburse the Agent and each Lender for all reasonable costs and expenses, including reasonable legal fees (which may include the internal charges of in-house counsel to the Agent and any Lender), actually incurred by the Agent and Lenders in connection with the enforcement by judicial proceedings or otherwise of any of the rights of the Agent and/or Lenders under this Agreement and/or the other Loan Documents (including, without limitation, enforcement or protection of any such rights in any bankruptcy or other insolvency proceeding); (c) upon Agent's request, obtain and promptly furnish to Agent evidence of all such Government Approvals as may be required to enable Borrower to comply with its obligations under this Agreement and the other Loan 38 43 Documents; and (d) execute and deliver all such instruments and perform all such other acts as the Agent or any Lender may reasonably request to carry out the transactions contemplated by this Agreement. Section 6.10 Compliance With Laws, Etc. Borrower will, and will cause its Subsidiaries to, comply in all material respects with all material laws, regulations, rules, and orders of Governmental Authorities applicable to Borrower or to its Subsidiaries or to their operations or property, except any thereof whose validity is being contested in good faith by appropriate proceedings upon stay of execution of the enforcement thereof. The term "Subsidiary" as used in this Section 6.10 does not include Tongue River. Section 6.11 Notification. Promptly after learning thereof, Borrower will notify the Agent of (a) the details of any action, proceeding, investigation or claim against or affecting Borrower or any Subsidiary instituted before any court, arbitrator or Governmental Authority or, to Borrower's knowledge, threatened to be instituted, which, if determined adversely to Borrower or a Subsidiary would be likely to have a material adverse effect on the financial condition or operations of Borrower and its Subsidiaries taken as a whole; (b) any labor controversy which has resulted in or, to Borrower's knowledge, threatens to result in a strike which would materially affect the business operations of Borrower and its Subsidiaries taken as a whole; (c) if Borrower or any member of the Controlled Group gives or is required to give notice to the PBGC of any "reportable event" (as defined in subsection (b)(1), (2), (5) or (6) of Section 4043 of ERISA) with respect to any Plan (or the Internal Revenue Service gives notice to the PBGC of any "reportable event" as defined in subsection (c)(2) of Section 4043 of ERISA and Borrower obtains knowledge thereof) which might constitute grounds for a termination of such Plan under Title IV of ERISA, or knows that the plan administrator of any Plan has given or is required to give notice of any such reportable event, a copy of the notice of such reportable event given or required to be given to the PBGC; (d) if any Event of Default or Default exists, the nature and period of existence thereof and any action Borrower has taken or proposes to take with respect thereto and (e) any change in the rating on Borrower's commercial paper from S&P or from Moody's or from any other rating agency designated by Borrower pursuant to the definitions of "Commitment Fee Percentage" and "Eurodollar Rate Margin." Section 6.12 Limit on Outstanding Commercial Paper. Borrower shall not permit the aggregate outstanding principal amount of all commercial paper issued by it to at any time exceed the amount by which the Aggregate Commitment exceeds the aggregate outstanding principal balance of the Advances. 39 44 Section 6.13 Total Debt to Total Capitalization Ratio. Borrower and its consolidated Subsidiaries shall have, at the end of each calendar quarter, a ratio of Total Debt to Total Capitalization that does not exceed 0.65 to 1, as determined on a consolidated basis. Section 6.14 Liquidation, Merger, Sale of Assets. Borrower shall not, and shall cause its Subsidiaries not to, liquidate, dissolve or enter into any merger, consolidation, or other combination except that any Subsidiary may merge or consolidate into any other Subsidiary (other than Tongue River) or into the Borrower, and either Borrower or any Subsidiary may merge with a corporation that is not a Subsidiary if the Borrower or such Subsidiary is the surviving entity, provided however that such merger or consolidation shall not cause an Event of Default under this Agreement and, after such merger or consolidation, that the Borrower shall have a commercial paper rating equal to or better than a Tier 5 Commercial Paper Rating. Borrower will not, and will cause its Subsidiaries not to, sell, lease or otherwise dispose of any portion of their business or assets (including the stock of any Subsidiary) if, after taking such disposition into account, at the end of any fiscal quarter in a year, the consolidated total assets of Borrower and its Subsidiaries are not equal to at least 90% of the consolidated total assets of Borrower and its Subsidiaries at the end of the preceding fiscal year, as determined from the financial statements referred to in Section 5.6 or subsequently delivered pursuant to Section 6.2. Section 6.15 Liens. Borrower shall not, and shall cause its Subsidiaries not to, create, assume or suffer to exist any Lien except liens arising under the Indenture of First Mortgage dated April 1, 1957, between Washington Natural Gas Company and Harris Trust and Savings Bank, as trustee, as amended, and any Supplemental Indentures thereto issued, or which may be issued, from time to time to secure first mortgage bonds, on all property of Washington Natural Gas Company (other than "Excepted Property" as defined in said Indenture). Section 6.16 Indemnification. Borrower shall indemnify the Agent and each Lender, and the directors, officers and employees of Agent and each Lender, against all losses, claims, damages, penalties, judgments, liabilities and expenses (including, without limitation, all expenses of litigation or preparation therefor whether or not the Agent or any Lender is a party thereto) which any of them may pay or incur arising out of or relating to this Agreement, the other Loan Documents, the transactions contemplated hereby or the direct or indirect application or proposed application of the proceeds of any Advance hereunder; provided, that Borrower shall have no obligation hereunder for any amount arising from a claim or determination that any Lender's entry into this Agreement was not 40 45 a duly authorized and legal act of such Lender. The obligations of the Borrower under this Section 6.16 shall survive the termination of this Agreement. ARTICLE VII EVENTS OF DEFAULT Section 7.1 Events of Default. The occurrence of any of the following events shall constitute an "Event of Default" hereunder. (a) Payment Default. Borrower shall fail to pay (i) any amount of principal on any Advance when due, or (ii) for a period of five days after the date when due any amount of interest on any Advance or any other amount payable by it hereunder; or (b) Breach of Warranty. Any representation or warranty made or deemed made by Borrower under or in connection with this Agreement or the other Loan Documents shall prove to have been incorrect in any material respect when made or deemed made; or (c) Breach of Certain Covenants. Borrower shall fail to perform or observe any of the covenants set forth in Section 6.5, clause (d) of Section 6.11, Section 6.13, or Section 6.14; or (d) Breach of Other Covenant. Borrower shall fail to perform or observe the covenant set forth in Section 6.12 and such failure shall remain unremedied for five days after the occurrence thereof, or Borrower shall fail to perform or observe any other covenant, obligation or term of this Agreement or any other Loan Document and such failure shall remain unremedied for fifteen (15) days after written notice thereof shall have been given to Borrower by the Agent (acting at the request of any Lender); or (e) Cross-default. Borrower or any Subsidiary shall fail (i) to pay when due (whether by scheduled maturity, required prepayment, acceleration, demand or otherwise) any Indebtedness having an outstanding principal balance in the aggregate in excess of Five Million Dollars ($5,000,000) (except any Advance) or any interest or premium thereon and such failure shall continue after the applicable grace period, if any, specified in the agreement or instrument relating to such Indebtedness, or (ii) to perform any term or covenant on its part to be performed under any agreement or instrument relating to any such Indebtedness and required to be performed and such failure shall continue after the applicable grace period, if any, specified in 41 46 such agreement or instrument, if the effect of such failure to perform is to accelerate or to permit the acceleration of the maturity of such Indebtedness; or (f) Voluntary Bankruptcy, Etc. Borrower or any Subsidiary shall: (1) file a petition seeking relief for itself under Title 11 of the United States Code, as now constituted or hereafter amended, or file an answer consenting to, admitting the material allegations of or otherwise not controverting, or fail timely to controvert, a petition filed against it seeking relief under Title 11 of the United States Code, as now constituted or hereafter amended; or (2) file such petition or answer with respect to relief under the provisions of any other now existing or future applicable bankruptcy, insolvency, or other similar law of the United States of America or any state thereof or of any other country or jurisdiction providing for the reorganization, winding-up or liquidation of corporations or an arrangement, composition, extension or adjustment with creditors; or (g) Involuntary Bankruptcy, Etc. An order for relief shall be entered against Borrower or any Subsidiary under Title 11 of the United States Code, as now constituted or hereafter amended, which order is not stayed; or upon the entry of an order, judgment or decree by operation of law or by a court having jurisdiction in the premises which is not stayed adjudging it a bankrupt or insolvent under, or ordering relief against it under, or approving as properly filed, a petition seeking relief against it under the provisions of any other now existing or future applicable bankruptcy, insolvency or other similar law of the United States of America or any state thereof or of any other country or jurisdiction providing for the reorganization, winding-up or liquidation of corporations or any arrangement, composition, extension or adjustment with creditors, or appointing a receiver, liquidator, assignee, sequestrator, trustee or custodian of Borrower or any Subsidiary or of any substantial part of its property, or ordering the reorganization, winding-up or liquidation of its affairs, or upon the expiration of 60 days after the filing of any involuntary petition against it seeking any of the relief specified in Section 7.1(f) or this Section 7.1(g) without the petition being dismissed prior to that time; or (h) Insolvency, Etc. Borrower or any Subsidiary shall (i) make a general assignment for the benefit of its creditors or (ii) consent to the appointment of or taking possession by a receiver, liquidator, assignee, trustee, or custodian of all or a substantial part of the property of Borrower or any Subsidiary, or (iii) admit its insolvency or inability to pay its debts generally as they become due, or (iv) fail generally to pay its debts as they become due, or (v) take any action (or suffer any action to be taken by its directors or shareholders) the purpose 42 47 of which is to dissolve or liquidate Borrower or any Subsidiary (except as permitted by Section 6.5 or 6.14) or to seek protection or relief under Title 11 of the United States Code or under any other federal or state bankruptcy, insolvency or receivership law; or (i) ERISA. Borrower or any member of the Controlled Group shall fail to pay when due an amount or amounts aggregating in excess of Five Million Dollars ($5,000,000) which it shall have become liable to pay to the PBGC or to a Plan under Section 515 of ERISA or Title IV of ERISA; or notice of intent to terminate a Plan or Plans (other than a multiemployer plan, as defined in Section 4001(3) of ERISA), having aggregate Unfunded Vested Liabilities in excess of Five Million Dollars ($5,000,000) shall be filed under Title IV of ERISA by Borrower, any member of the Controlled Group, any plan administrator or any combination of the foregoing; or the PBGC shall institute proceedings under Title IV of ERISA to terminate any such Plan or Plans; or (j) Ownership of Washington Natural Gas Company. Borrower shall cease for any reason to own 100% of the then outstanding voting stock of Washington Natural Gas Company free and clear of any Liens; or (k) Governmental Approvals. Any Government Approval or registration or filing with any Governmental Authority now or hereafter required in connection with the performance by Borrower of its obligations set forth in the Loan Documents shall be revoked, withdrawn or withheld or shall fail to remain in full force and effect; or (l) Other Government Action. Any act of any Governmental Authority shall deprive Borrower or any Subsidiary of any right, privilege or franchise that is material to the conduct of a material part of the business of Borrower or such Subsidiary or shall substantially restrict the exercise of such right, privilege or franchise, and such act shall not be revoked or rescinded within 60 days after it shall have become effective or within 30 days after notice from the Agent to Borrower requesting revocation or rescission, whichever first occurs. Section 7.2 Consequences of Default. If any of the Events of Default described in Section 7.1(f), Section 7.1(g), Section 7.1(h) or Section 7.1(j) shall occur, the Aggregate Commitment and Commitments shall immediately terminate, and the principal of and the interest on Advances and all other sums payable by Borrower hereunder and under the Notes shall become immediately due and payable, all without protest, presentment, notice or demand, all of which Borrower expressly waives. If any other Event of Default shall occur and be continuing, then in any such case and at any time thereafter so long as any such Event of 43 48 Default shall be continuing, the Agent shall at the request, or may with the consent, of the Required Lenders immediately terminate the Aggregate Commitment and the Commitments and, if Advances shall have been made, the Agent shall at the request, or may with the consent, of the Required Lenders declare the principal of and the interest on the Advances and the Notes and all other sums payable by Borrower hereunder or thereunder to be immediately due and payable, whereupon the same shall become immediately due and payable all without protest, presentment, notice, or demand, all of which Borrower expressly waives. ARTICLE VIII THE AGENT Section 8.1 Appointment. First Chicago is hereby appointed Agent hereunder and under each other Loan Document, and each of the Lenders irrevocably authorizes the Agent to act as the agent of such Lender. The Agent agrees to act as such upon the express conditions contained in this Article VIII. The Agent shall not have a fiduciary relationship in respect of the Borrower or any Lender by reason of this Agreement. Section 8.2 Powers. The Agent shall have and may exercise such powers under the Loan Documents as are specifically delegated to the Agent by the terms of each thereof, together with such powers as are reasonably incidental thereto. The Agent shall have no implied duties to the Lenders, or any obligation to the Lenders to take any action thereunder except any action specifically provided by the Loan Documents to be taken by the Agent. Section 8.3 General Immunity. Neither the Agent nor any of its directors, officers, agents or employees shall be liable to the Borrower, the Lenders or any Lender for any action taken or omitted to be taken by it or them hereunder or under any other Loan Document or in connection herewith or therewith except for its or their own gross negligence or willful misconduct. Section 8.4 No Responsibility for Advances, Recitals, Etc. Neither the Agent nor any of its directors, officers, agents or employees shall be responsible for or have any duty to ascertain, inquire into, or verify (i) any statement, warranty or representation made in connection with any Loan Document or any borrowing hereunder; (ii) the performance or observance of any of the covenants or agreements of any obligor under any Loan Document, including, without limitation, any agreement by an obligor to furnish information directly to each Lender; (iii) the satisfaction of any condition specified in Article IV, except receipt of items required to be delivered to the Agent; or (iv) the validity, effectiveness or genuineness of any Loan 44 49 Document or any other instrument or writing furnished in connection therewith. The Agent shall have no duty to disclose to the Lenders information that is not required to be furnished by the Borrower to the Agent at such time, but is voluntarily furnished by the Borrower to the Agent (either in its capacity as Agent or in its individual capacity). Section 8.5 Action on Instructions of Lenders. The Agent shall in all cases be fully protected in acting, or in refraining from acting, hereunder and under any other Loan Document in accordance with written instructions signed by the Required Lenders, and such instructions and any action taken or failure to act pursuant thereto shall be binding on all of the Lenders and on all holders of Notes. The Agent shall be fully justified in failing or refusing to take any action hereunder and under any other Loan Document unless it shall first be indemnified to its satisfaction by the Lenders pro rata against any and all liability, cost and expense that it may incur by reason of taking or continuing to take any such action. Section 8.6 Employment of Agents and Counsel. The Agent may execute any of its duties as Agent hereunder and under any other Loan Document by or through employees, agents, and attorneys-in-fact and shall not be answerable to the Lenders, except as to money or securities received by it or its authorized agents, for the default or misconduct of any such agents or attorneys-in-fact selected by it with reasonable care. The Agent shall be entitled to advice of counsel concerning all matters pertaining to the agency hereby created and its duties hereunder and under any other Loan Document. Section 8.7 Reliance on Documents; Counsel. The Agent shall be entitled to rely upon any Note, notice, consent, certificate, affidavit, letter, telegram, statement, paper or document believed by it to be genuine and correct and to have been signed or sent by the proper person or persons, and, in respect to legal matters, upon the opinion of counsel selected by the Agent, which counsel may be employees of the Agent. Section 8.8 Agent's Reimbursement and Indemnification. The Lenders agree to reimburse and indemnify the Agent ratably in proportion to their respective Commitments (i) for any amounts not reimbursed by the Borrower for which the Agent is entitled to reimbursement by the Borrower under the Loan Documents, (ii) for any other expenses incurred by the Agent on behalf of the Lenders, in connection with the preparation, execution, delivery, administration and enforcement of the Loan Documents and (iii) for any liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements of any kind and nature whatsoever which may be imposed on, incurred by or asserted against the Agent in any way 45 50 relating to or arising out of the Loan Documents or any other document delivered in connection therewith or the transactions contemplated thereby, or the enforcement of any of the terms thereof or of any such other documents, provided that no Lender shall be liable for any of the foregoing to the extent they arise from the gross negligence or willful misconduct of the Agent. The obligations of the Lenders under this Section 8.8 shall survive payment of the Obligations and termination of this Agreement. Section 8.9 Rights as a Lender. In the event the Agent is a Lender, the Agent shall have the same rights and powers hereunder and under any other Loan Document as any Lender and may exercise the same as though it were not the Agent, and the term "Lender" or "Lenders" shall, at any time when the Agent is a Lender, unless the context otherwise indicates, include the Agent in its individual capacity. The Agent may accept deposits from, lend money to, and generally engage in any kind of trust, debt, equity or other transaction, in addition to those contemplated by this Agreement or any other Loan Document, with the Borrower or any of its Subsidiaries in which the Borrower or such Subsidiary is not restricted hereby from engaging with any other Person. The Agent, in its individual capacity, is not obligated to remain a Lender. Section 8.10 Lender Credit Decision. Each Lender acknowledges that it has, independently and without reliance upon the Agent or any other Lender and based on the financial statements prepared by the Borrower and such other documents and information as it has deemed appropriate, made its own credit analysis and decision to enter into this Agreement and the other Loan Documents. Each Lender also acknowledges that it will, independently and without reliance upon the Agent or any other Lender and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit decisions in taking or not taking action under this Agreement and the other Loan Documents. Section 8.11 Successor Agent. The Agent may resign at any time by giving written notice thereof to the Lenders and the Borrower, such resignation to be effective upon the appointment of a successor Agent or, if no successor Agent has been appointed, forty-five days after the retiring Agent gives notice of its intention to resign. The Agent may be removed at any time with or without cause by written notice received by the Agent from the Required Lenders, such removal to be effective on the date specified by the Required Lenders. Upon any such resignation or removal, the Required Lenders shall have the right to appoint, on behalf of the Borrower and the Lenders, a successor Agent. If no successor Agent shall have been so appointed by the Required Lenders within thirty days after the 46 51 resigning Agent's giving notice of its intention to resign, then the resigning Agent may appoint, on behalf of the Borrower and the Lenders, a successor Agent. If the Agent has resigned or been removed and no successor Agent has been appointed, the Lenders may perform all the duties of the Agent hereunder and the Borrower shall make all payments in respect of the Obligations to the applicable Lender and for all other purposes shall deal directly with the Lenders. No successor Agent shall be deemed to be appointed hereunder until such successor Agent has accepted the appointment. Any such successor Agent shall be a commercial bank having capital and retained earnings of at least $500,000,000. Upon the acceptance of any appointment as Agent hereunder by a successor Agent, such successor Agent shall thereupon succeed to and become vested with all the rights, powers, privileges and duties of the resigning or removed Agent. Upon the effectiveness of the resignation or removal of the Agent, the resigning or removed Agent shall be discharged from its duties and obligations hereunder and under the Loan Documents. After the effectiveness of the resignation or removal of an Agent, the provisions of this Article VIII shall continue in effect for the benefit of such Agent in respect of any actions taken or omitted to be taken by it while it was acting as the Agent hereunder and under the other Loan Documents. ARTICLE IX BENEFIT OF AGREEMENT; ASSIGNMENTS; PARTICIPATIONS Section 9.1 Successors and Assigns. The terms and provisions of the Loan Documents shall be binding upon and inure to the benefit of the Borrower and the Lenders and their respective successors and assigns, except that (i) the Borrower shall not have the right to assign its rights or obligations under the Loan Documents and (ii) any assignment by any Lender must be made in compliance with Section 9.3. Notwithstanding clause (ii) of this Section, any Lender may at any time, without the consent of the Borrower or the Agent, assign all or any portion of its rights under this Agreement and its Notes to a Federal Reserve Bank; provided, however, that no such assignment shall release the transferor Lender from its obligations hereunder. The Agent may treat the payee of any Note as the owner thereof for all purposes hereof unless and until such payee complies with Section 9.3 in the case of an assignment thereof or, in the case of any other transfer, a written notice of the transfer is filed with the Agent. Any assignee or transferee of a Note agrees by acceptance thereof to be bound by all the terms and provisions of the Loan Documents. Any request, authority or consent of any Person, who at the time of making such request or giving such authority or consent is the holder of any Note, shall be conclusive and binding on any subsequent holder, transferee or 47 52 assignee of such Note or of any Note or Notes issued in exchange therefor. Section 9.2 Participations. 9.2.1 Permitted Participants; Effect. Any Lender may, in the ordinary course of its business and in accordance with applicable law, at any time sell to one or more banks or other entities ("Participants") participating interests in any Loan owing to such Lender, any Note held by such Lender, any Commitment of such Lender or any other interest of such Lender under the Loan Documents. In the event of any such sale by a Lender of participating interests to a Participant, such Lender's obligations under the Loan Documents shall remain unchanged, such Lender shall remain solely responsible to the other parties hereto for the performance of such obligations, such Lender shall remain the holder of any such Note for all purposes under the Loan Documents, all amounts payable by the Borrower under this Agreement shall be determined as if such Lender had not sold such participating interests and, except as otherwise provided in Section 9.2.3, such sale shall not entitle the Participant to any direct rights against Borrower under the terms of this Agreement or any other Loan Document. Borrower and the Agent shall continue to deal solely and directly with such Lender in connection with such Lender's rights and obligations under the Loan Documents. 9.2.2 Voting Rights. Each Lender shall retain the sole right to approve, without the consent of any Participant, any amendment, modification or waiver of any provision of the Loan Documents other than any amendment, modification or waiver with respect to any Loan or Commitment in which such Participant has an interest which requires the consent of all Lenders pursuant to Section 10.9. 9.2.3 Benefit of Setoff. The Borrower agrees that each Participant shall be deemed to have the right of setoff provided in Section 2.5.8 in respect of its participating interest in amounts owing under the Loan Documents to the same extent as if the amount of its participating interest were owing directly to it as a Lender under the Loan Documents, provided that each Lender shall retain the right of setoff provided in Section 2.5.8 with respect to the amount of participating interests sold to each Participant. The Lenders agree to share with each Participant, and each Participant, by exercising the right of setoff provided in Section 2.5.8, agrees to share with each Lender, any amount received pursuant to the exercise of its right of setoff, such amounts to be shared in accordance with Section 2.5.8 as if each Participant were a Lender. 48 53 Section 9.3 Assignments. 9.3.1 Permitted Assignments. Any Lender may, in the ordinary course of its business and in accordance with applicable law, at any time assign to one or more banks or other entities ("Purchasers") all or any part of its rights and obligations under the Loan Documents; provided, that each such assignment shall be in a minimum amount of $10,000,000 or, if less, all of such Lender's rights and obligations under the Loan Documents. Such assignment shall be in a form acceptable to Agent and the other parties thereto. The consent of the Borrower and the Agent shall be required prior to an assignment becoming effective with respect to a Purchaser which is not a Lender or an Affiliate thereof; provided, however, that if a Default has occurred and is continuing, the consent of the Borrower shall not be required. Such consent shall not be unreasonably withheld. 9.3.2 Effect; Effective Date. Upon (i) delivery to the Agent of a notice of assignment in substantially the form of Exhibit G hereto (a "Notice of Assignment"), together with any consents required by Section 9.3.1, and (ii) payment of a $4,000 fee to the Agent by the assignor or the assignee for processing such assignment, such assignment shall become effective on the effective date specified in such Notice of Assignment. The Notice of Assignment shall contain a representation by the Purchaser to the effect that none of the consideration used to make the purchase of the Commitment and Loans under the applicable assignment agreement are "plan assets" as defined under ERISA and that the rights and interests of the Purchaser in and under the Loan Documents will not be "plan assets" under ERISA. On and after the effective date of such assignment, such Purchaser shall for all purposes be a Lender party to this Agreement and any other Loan Document executed by the Lenders and shall have all the rights and obligations of a Lender under the Loan Documents, to the same extent as if it were an original party hereto, and no further consent or action by the Borrower, the Lenders or the Agent shall be required to release the transferor Lender with respect to the percentage of the Aggregate Commitment and Loans assigned to such Purchaser. Upon the consummation of any assignment to a Purchaser pursuant to this Section 9.3.2, the transferor Lender, the Agent and the Borrower shall make appropriate arrangements so that replacement Notes are issued to such transferor Lender and new Notes or, as appropriate, replacement Notes, are issued to such Purchaser, in each case in principal amounts reflecting their Commitment, as adjusted pursuant to such assignment. Section 9.4 Dissemination of Information. The Borrower authorizes each Lender to disclose to any Participant or Purchaser or any other Person acquiring an interest in the Loan Documents by operation of law (each a "Transferee") and any 49 54 prospective Transferee any and all information in such Lender's possession concerning the creditworthiness of the Borrower and its Subsidiaries; provided, however, that such disclosing Lender shall cause each such actual or potential Transferee to enter into or otherwise be bound by a confidentiality agreement in form and substance similar to the agreement signed by such disclosing Lender in connection with this Agreement. Section 9.5 Tax Treatment. If any interest in any Loan Document is transferred to any Transferee which is organized under the laws of any jurisdiction other than the United States or any State thereof, the transferor Lender shall cause such Transferee, concurrently with the effectiveness of such transfer, to comply with the provisions of Section 2.7. ARTICLE X MISCELLANEOUS Section 10.1 No Waiver; Remedies Cumulative. No failure by the Agent or any Lender to exercise, and no delay in exercising, any right, power or remedy under this Agreement or any other Loan Document shall operate as a waiver thereof, nor shall any single or partial exercise of any right, power or remedy under this Agreement or any other Loan Document preclude any other or further exercise thereof or the exercise of any other right, power, or remedy. The exercise of any right, power, or remedy shall in no event constitute a cure or waiver of any Event of Default under this Agreement or any other Loan Document nor prejudice the rights of the Agent or any Lender in the exercise of any right hereunder or thereunder. The rights and remedies provided herein and therein are cumulative and not exclusive of any right or remedy provided by law. Section 10.2 Governing Law. This Agreement and the other Loan Documents shall be governed by and construed in accordance with the laws of the State of Washington, U.S.A. Section 10.3 Consent to Jurisdiction; Waiver of Immunities. Borrower hereby irrevocably submits to the nonexclusive jurisdiction of any state or federal court sitting in Seattle, King County, Washington, in any action or proceeding brought to enforce or otherwise arising out of or relating to this Agreement or any other Loan Document and irrevocably waives to the fullest extent permitted by law any objection which it may now or hereafter have to the laying of venue in any such action or proceeding in any such forum, and hereby further irrevocably waives any claim that any such forum is an inconvenient forum. Borrower agrees that a final judgment in any such action or proceeding shall be conclusive and may be enforced in any other 50 55 jurisdiction by suit on the judgment or in any other manner provided by law. Section 10.4 Notices. Except as specified in Section 2.5.9 all notices and other communications provided for in this Agreement shall be in writing or (unless otherwise specified) by telex or facsimile transmission and shall be mailed (with first class postage prepaid) or sent or delivered to each party at the address set forth under its name on Schedule 2 hereto, or at such other address as shall be designated by such party in a written notice to each other party. Except as otherwise specified all notices sent by mail, if duly given, shall be effective three Business Days after deposit into the mails, all notices sent by a nationally recognized overnight courier service, if duly given, shall be effective one Business Day after delivery to such courier service, and all other notices and communications if duly given or made shall be effective upon receipt. Section 10.5 Severability. Any provision of this Agreement or any other Loan Document which is prohibited or unenforceable in any jurisdiction shall as to such jurisdiction be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof or thereof or affecting the validity or enforceability of such provision in any other jurisdiction. To the extent permitted by applicable law, the parties waive any provision of law which renders any provision hereof or thereof prohibited or unenforceable in any respect. Section 10.6 Environmental Indemnification. The Borrower agrees to indemnify and hold harmless the Agent and each Lender and each of their respective directors, officers, employees and agents from and against any and all claims, damages, liabilities and expenses (including, without limitation, fees and disbursements of counsel) which may be incurred by or asserted against the Agent or such Lender or any such director, officer, employee or agent which would not have been incurred by or asserted against such person but for the Agent or such Lender being a party to this Agreement, in connection with or arising out of any investigation, litigation, or proceeding related to any claim that Borrower's property or operations do not comply with, or require remedial activity pursuant to, any applicable law, rule, regulation, ordinance or directive issued by any Governmental Authority, including but not limited to environmental laws and regulations. Section 10.7 Survival. The representations, warranties and indemnities of Borrower in favor of the Agent and the Lenders and the representations, warranties and indemnities of the Lenders in favor of the Agent shall survive indefinitely and, without limiting the foregoing, shall survive the execution and delivery 51 56 of this Agreement and the other Loan Documents, the making of any Advance, the Termination Date, and the repayment of all Advances and other amounts due hereunder. Section 10.8 Conditions Not Fulfilled. If the Commitments are not borrowed, owing to nonfulfillment of any condition precedent specified in Article IV, no party hereto shall be responsible to any other party for any damage or loss by reason thereof, except that Borrower shall in any event be liable to pay the amounts for which it is obligated under Section 3.4. If for any other reason the Commitment of any Lender is not borrowed or a Advance is not made, neither the Agent nor any other Lender shall be responsible to Borrower for any damage or loss by reason thereof, nor shall any other Lender or Borrower be excused from its performance hereunder. Section 10.9 Entire Agreement; Amendment. The Loan Documents comprise the entire agreement of the parties and may not be amended or modified except by written agreement of Borrower and the Agent. No provision of any of the Loan Documents may be waived except in writing and then only in the specific instance and for the specific purpose for which given. Without the consent of the Required Lenders, the Agent shall not change or modify any of the Loan Documents or waive any of the terms thereof and, without the consent of all Lenders, the Agent shall not change, modify or waive (a) any of the conditions precedent to all loans set out in Section 4.3, (b) the timing or rates of interest payments, (c) the timing or amounts of commitment fees, (d) the timing or amounts of principal payments due in respect of Advances, (e) the definition of Required Lenders or the acts which must be approved by the Required Lenders or by all Lenders, (f) the Termination Date, including any extension thereof, or (g) the Aggregate Commitment or any Lender's Commitment. The terms of Articles II and VIII shall not be amended without the prior written consent of the Agent (acting for its own account). ORAL AGREEMENTS OR ORAL COMMITMENTS TO LOAN MONEY, EXTEND CREDIT, OR FORBEAR FROM ENFORCING REPAYMENT OF A DEBT ARE NOT ENFORCEABLE UNDER WASHINGTON LAW. Section 10.10 Headings. The headings of the various provisions of this Agreement are for convenience of reference only, do not constitute a part hereof, and shall not affect the meaning or construction of any provision hereof. Section 10.11 Counterparts. This Agreement may be executed in any number of counterparts and by different parties hereto in separate counterparts, each of which when so executed shall be 52 57 deemed to be an original, and all of which taken together shall constitute one and the same Agreement. Section 10.12 Termination of Prior Agreement; Waiver of Notice.. Borrower, each of the Lenders that is a party to the Prior Loan Agreement and Seattle-First National Bank, in its capacity as Agent thereunder, agree that the Prior Loan Agreement shall automatically terminate immediately upon the execution and delivery of this Agreement by all parties hereto and the payment in full of all amounts under the Prior Loan Agreement and the other Loan Documents (as defined therein). The Lenders that are parties to the Prior Loan Agreement and Seattle-First National Bank, in such agency capacity, hereby waive any prior notice of such termination. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed by their respective officers or agents thereunto duly authorized as of the date first above written. BORROWER: WASHINGTON ENERGY COMPANY By -------------------------------- Its ---------------------- LENDERS: Amount: $50,000,000 THE FIRST NATIONAL BANK OF CHICAGO By -------------------------------- Its ---------------------- Amount: $50,000,000 SEATTLE-FIRST NATIONAL BANK By -------------------------------- Its ---------------------- 53 58 Amount: $30,000,000 THE INDUSTRIAL BANK OF JAPAN, LIMITED, acting through its Los Angeles Agency By -------------------------------- Its ---------------------- Amount: $25,000,000 ABN AMRO BANK N.V. By -------------------------------- Its ---------------------- By -------------------------------- Its ---------------------- Amount: $20,000,000 BANK OF MONTREAL By -------------------------------- Its ---------------------- Amount: $20,000,000 FIRST INTERSTATE BANK OF WASHINGTON, N.A. By -------------------------------- Its ---------------------- Amount: $20,000,000 NATIONSBANK OF TEXAS, N.A. By -------------------------------- Its ---------------------- 54 59 Amount: $20,000,000 U.S. BANK OF WASHINGTON, N.A. By -------------------------------- Its ---------------------- Amount: $15,000,000 CIBC INC. By -------------------------------- Its ---------------------- AGENT: THE FIRST NATIONAL BANK OF CHICAGO By -------------------------------- Its ---------------------- 55 60 SCHEDULE 1 List of Subsidiaries 56 61 SCHEDULE 2 List of Parties' Addresses for Notices LENDERS: FIRST NATIONAL BANK OF CHICAGO Attn: Mr. Richard Waldman Managing Director Mail Suite 0363 - 10th Fl. One First National Plaza Chicago, IL 60670 Tel: (312) 732-3520 Fax: (312) 732-3055 and to: Attn: Ms. Lynn Pozsgay Client Services Professional Mail Suite 0364 - 10th Fl. One First National Plaza Chicago, IL 60670 Tel: (312) 732-8705 Fax: (312) 732-4840 SEATTLE-FIRST NATIONAL BANK Attn: Mr. David A. Dehlendorf Vice President 701 Fifth Avenue, 12th Floor Seattle, WA 98104 Tel: (206) 358-3034 Fax: (206) 358-3113 THE INDUSTRIAL BANK OF JAPAN, LIMITED, acting through its Los Angeles Agency attn: Washington Energy Relationship Manager 350 South Grand, Suite 1500 Los Angeles, CA 90071 Tel: (213) 893-6453 Fax: (213) 488-9840 ABN AMRO BANK N.V. attn: Mr. David McGinnis Vice President One Union Square, #2323 600 University St. Seattle, WA 98101 Tel: (206) 587-0342 Fax: (206) 682-5641 57 62 FIRST INTERSTATE BANK OF WASHINGTON, N.A. attn: Ms. Sue Hendrixson Vice President 999 Third Avenue Seattle, WA 98104 Tel: (206) 292-3483 Fax: (206) 292-3120 BANK OF MONTREAL attn: Mr. James B. Whitmore Director, Natural Resources U.S. Corporate Banking 601 So. Figueroa St., #4900 Los Angeles, CA 90017 Tel: (213) 239-0635 Fax: (213) 239-0680 U.S. BANK OF WASHINGTON, N.A. attn: Mr. Wade Black Asst. Vice President 1420 Fifth Avenue Seattle, WA 98101 Tel: (206) 587-5234 Fax: (206) 587-5259 CIBC INC. attn: Mr. Peter R. Saggau Vice President, Utilities Group 200 West Madison St., #2300 Chicago, IL 60606 Tel: (312) 855-3252 Fax: (312) 750-0927 NATIONSBANK OF TEXAS, N.A. attn: Mr. Jeff A. Forbis Senior Vice President, Utility Finance Division 901 Main Street, 64th Fl. Dallas, TX 75202-3714 Tel: (214) 508-1453 Fax: (214) 508-3943 58 63 AGENT: FIRST NATIONAL BANK OF CHICAGO Attn: Mr. Richard Waldman Managing Director Mail Suite 0363 - 10th Fl. One First National Plaza Chicago, IL 60670 Tel: (312) 732-3520 Fax: (312) 732-3055 and to: Attn: Ms. Lynn Pozsgay Client Services Professional Mail Suite 0364 - 10th Fl. One First National Plaza Chicago, IL 60670 Tel: (312) 732-8705 Fax: (312) 732-4840 BORROWER: WASHINGTON ENERGY COMPANY attn: Ms. Betsy Moseley Vice President & Treasurer 815 Mercer Street Seattle, WA 98109 Tel: (206) 224-2270 Fax: (206) 224-2183 59 64 SCHEDULE 3 Litigation 1. Claim made by the City of Seattle in a letter dated February 24, 1995, a copy of which has been provided to the Agent. 60 65 EXHIBIT A NOTE (Committed Loans) $[Lender's Commitment] March 31, 1995 Washington Energy Company, a Washington corporation (the "Borrower"), promises to pay, on or before the Termination Date (as defined in the Agreement referred to below), to the order of ______________________ (the "Lender") the lesser of the principal sum of _________________ Dollars or the aggregate unpaid principal amount of all Committed Loans made by the Lender to the Borrower pursuant to Sections 2.1 and 2.2 of the Credit Agreement (as the same may be amended or modified, the "Agreement") hereinafter referred to, in lawful money of the United States of America in immediately available funds at the main office of The First National Bank of Chicago in Chicago, Illinois, as Agent, together with interest in like money and funds on the unpaid principal amount hereof at the rates and on the dates set forth in the Agreement. The Lender shall, and is hereby authorized to, record on the schedule attached hereto, or to otherwise record in accordance with its usual practice, the date and amount of each Committed Loan and the date and amount of each principal payment hereunder; provided, however, that any failure to so record shall not affect the Borrower's obligations hereunder. This Note (Committed Loans) is one of the Notes issued pursuant to, and is entitled to the benefits of, the Credit Agreement, dated as of March 31, 1995, among the Borrower, The First National Bank of Chicago, individually and as Agent, and the banks named therein, including the Lender, to which Agreement, as it may be amended from time to time, reference is hereby made for a statement of the terms and conditions under which this Note may be prepaid or its maturity date accelerated. Capitalized terms used herein and not otherwise defined herein are used with the meanings attributed to them in the Agreement. WASHINGTON ENERGY COMPANY By: -------------------------------- Title: ---------------------- 61 66 SCHEDULE OF LOANS AND PAYMENTS OF PRINCIPAL TO NOTE (COMMITTED LOANS) OF WASHINGTON ENERGY COMPANY, DATED MARCH 31, 1995
Principal Maturity of Principal Amount of Rate Interest Amount Unpaid Date Advance Option Period Paid Balance - ---- --------- ------ ----------- --------- -------
62 67 EXHIBIT B NOTE (Competitive Bid Loans) __________, 19___ Washington Energy Company, a Washington corporation (the "Borrower"), promises to pay to the order of ____________ (the "Lender"), on or before the Termination Date (as defined in the Agreement referred to below) the aggregate unpaid principal amount of all Competitive Bid Loans made by the Lender to the Borrower pursuant to Sections 2.1 and 2.3 of the Credit Agreement hereinafter referred to (as the same may be amended or modified, the "Agreement"), in lawful money of the United States in immediately available funds at the main office of The First National Bank of Chicago, as Agent, in Chicago, Illinois, together with interest, in like money and funds, on the unpaid principal amount hereof at the rates and on the dates determined in accordance with the Agreement. The Borrower shall pay each Competitive Bid Loan in full on the last day of such Competitive Bid Loan's applicable Interest Period. The Lender shall, and is hereby authorized to, record on the schedule attached hereto, or otherwise record in accordance with its usual practice, the date and amount of each Competitive Bid Loan and the date and amount of each principal payment hereunder; provided, however, that any failure to so record shall not affect the Borrower's obligations hereunder. This Note (Competitive Bid Loans) is one of the Notes issued pursuant to, and is entitled to the benefits of, the Credit Agreement dated as of March 31, 1995, among the Borrower, The First National Bank of Chicago, individually and as Agent, and the banks named therein, including the Lender, to which Agreement, as it may be amended from time to time, reference is hereby made for a statement of the terms and conditions under which this Note may be prepaid or its maturity date accelerated. Capitalized terms used herein and not otherwise defined herein are used with the meanings attributed to them in the Agreement. WASHINGTON ENERGY COMPANY By: -------------------------- Title: -------------- 63 68 SCHEDULE OF LOANS AND PAYMENTS OF PRINCIPAL TO NOTE (COMPETITIVE BID LOANS) OF WASHINGTON ENERGY COMPANY, DATED MARCH 31, 1995
Principal Maturity of Principal Amount of Rate Interest Amount Unpaid Date Advance Option Period Paid Balance - ---- --------- ------ ----------- --------- -------
64 69 EXHIBIT C COMPETITIVE BID QUOTE REQUEST (Section 2.3.2) __________, 19___ To: The First National Bank of Chicago, as agent (the "Agent") From: Washington Energy Company ("Borrower") Re: Credit Agreement (the "Agreement") dated as of March 31, 1995, among the Borrower, The First National Bank of Chicago, individually and as Agent, and the Lenders listed on the signature pages thereof. We hereby give notice pursuant to Section 2.3.2 of the Agreement that we request Competitive Bid Quotes for the following proposed Competitive Bid Advance(s): Borrowing Date: __________, 19___ Principal Amount(1) Interest Period(2) $ Such Competitive Bid Quotes should offer a [Competitive Bid Margin] [Absolute Rate]. Upon acceptance by the undersigned of any or all of the Competitive Bid Advances offered by Lenders in response to this request, the undersigned shall be deemed to affirm as of such date the representations and warranties made in the Agreement to the extent specified in Article IV thereof. Capitalized terms used herein have the meanings assigned to them in the Agreement. WASHINGTON ENERGY COMPANY By: -------------------------- Title: -------------- - -------------------- (1) Amount must be at least $5,000,000 and an integral multiple of $1,000,000. (2) One, two, three or six months (Eurodollar Auction) or at least seven and up to 270 days (Absolute Rate Auction), subject to the provisions of the definitions of Eurodollar Interest Period and Absolute Rate Interest Period. 65 70 EXHIBIT D INVITATION FOR COMPETITIVE BID QUOTES (Section 2.3.3) __________, 19___ To: [Name of Lender] Re: Invitation for Competitive Bid Quotes to Washington Energy Company (the "Borrower") Pursuant to Section 2.3.3 of the Credit Agreement dated as of March 31, 1995 (the "Agreement") among the Borrower, the Lenders parties thereto and the undersigned, as Agent, we are pleased on behalf of the Borrower to invite you to submit Competitive Bid Quotes to the Borrower for the following proposed Competitive Bid Advance(s): Borrowing Date: __________, 19___ Principal Amount Interest Period $ Such Competitive Bid Quotes should offer a [Competitive Bid Margin] [Absolute Rate]. Your Competitive Bid Quote must comply with Section 2.3.4 of the Agreement and the foregoing terms in which the Competitive Bid Quote Request was made. Capitalized terms used herein have the meanings assigned to them in the Agreement. Please respond to this invitation by no later than 10:00 a.m. Chicago time on __________ , 19___. THE FIRST NATIONAL BANK OF CHICAGO, as Agent By: ---------------------------------- Authorized Officer 66 71 EXHIBIT E COMPETITIVE BID QUOTE (Section 2.3.4) __________, 19___ To: The First National Bank of Chicago, as Agent Attn:__________________ Re: Competitive Bid Quote to Washington Energy Company (the "Borrower") In response to your invitation on behalf of the Borrower dated_________, 19___, we hereby make the following Competitive Bid Quote pursuant to Section 2.3.4 of the Credit Agreement hereinafter referred to and on the following terms: 1. Quoting Lender:_______________________________________ 2. Person to contact at Quoting Lender:__________________ 3. Borrowing Date: ___________, 19___.(1) 4. We hereby offer to make Competitive Bid Loan(s) in the following principal amounts, for the following Interest Periods and at the following rates: - --------------------- (1) As specified in the related Invitation. 67 72
Principal Interest [Competitive [Absolute Minimum Amount(2) Period(3) Bid Margin(4)] Rate(5)] Amount(6) - --------- --------- -------------- --------- --------- $
We understand and agree that the offer(s) set forth above, subject to the satisfaction of the applicable conditions set forth in the Credit Agreement dated as of March 31, 1995 among the Borrower, the Lenders listed on the signature pages thereof and yourselves, as Agent, irrevocably obligates us to make the Competitive Bid Loan(s) for which any offer(s) are accepted, in whole or in part. Very truly yours, [NAME OF LENDER] Dated: __________, 19___ By:_______________________________ Authorized Officer - -------------------------- (2) Principal amount bid for each Interest Period may not exceed principal amount requested. Bids must be made for at least $5,000,000 and an integral multiple of $1,000,000. (3) One, two, three or six months (Eurodollar Auction) or at least seven and up to 270 days (Absolute Rate Auction), as specified in the related Invitation. (4) Competitive Bid Margin over or under the Eurodollar Base Rate determined for the applicable Interest Period. Specify percentage (rounded to the nearest 1/100 of 1%) and specify whether "PLUS" or "MINUS". (5) Specify rate of interest per annum (rounded to the nearest 1/100 of 1%). (6) Specify minimum amount which the Borrower may accept (see Section 2.3.4(ii)(d)). 68 73 EXHIBIT F LEGAL OPINION OF COUNSEL FOR BORROWER March __, 1995 The First National Bank of Chicago Seattle-First National Bank The Industrial Bank of Japan, Limited ABN AMRO Bank N.V. Bank of Montreal First Interstate Bank of Washington, N.A. NationsBank of Texas, N.A. U.S. Bank of Washington, N.A. CIBC Inc. Re: Washington Energy Company 1995 Credit Agreement Ladies and Gentlemen: We have acted as counsel for Washington Energy Company, a Washington corporation (the "Borrower"), in connection with the execution and delivery by the Borrower of that certain Credit Agreement (the "Agreement"), dated as of March 31, 1995, by and among the Borrower and The First National Bank of Chicago, Seattle-First National Bank, The Industrial Bank of Japan, Limited, ABN AMRO Bank N.V., Bank of Montreal, First Interstate Bank of Washington, N.A., NationsBank of Texas, N.A., U.S. Bank of Washington, N.A., and CIBC Inc. (the "Lenders"), and The First National Bank of Chicago, as Agent for the Lenders. Capitalized terms used herein and not otherwise defined are used as defined in the Agreement. The term "First-Tier Subsidiary" as used herein shall mean those Subsidiaries that are identified as First Tier Subsidiaries on Schedule 1 to the Agreement. In connection with this opinion we have examined only the following documents, certificates and records (the "Documents"). (1) The Agreement, together with all exhibits and schedules thereto. (2) The Notes. (3) The documents furnished by the Borrower pursuant to Section 4.2(b) of the Agreement. (4) The Articles of Incorporation of each of the First-Tier Subsidiaries and all amendments thereto. 74 Page 2 (5) The Bylaws of each of the First-Tier Subsidiaries and all amendments thereto. (6) The stock records of each of the First-Tier Subsidiaries and resolutions of the respective Boards of Directors of the First-Tier Subsidiaries relating to issuance of their respective shares. (7) The Borrower's Annual Report on Form 10-K filed with the Securities and Exchange Commission ("SEC") for the Borrower's fiscal year ended September 30, 1994. (8) The Borrower's Quarterly Report on Form 10-Q filed with the SEC for the Borrower's fiscal quarter ended December 31, 1994. (9) Certificates from the Secretary of State of Washington, dated March __, 1995, certifying that each of the Borrower and the First-Tier Subsidiaries is duly authorized to transact business or conduct affairs as a corporation in the State of Washington. (10) Certificates, dated as of the date of this opinion, of officers of the Borrower and the First-Tier Subsidiaries with respect to certain matters, copies of which are attached hereto. (11) The Indenture of First Mortgage dated April 1, 1957, between Washington Natural Gas Company and Harris Trust and Savings Bank, as trustee, as amended. (12) Such other documents and matters as we have deemed necessary as a basis for our opinion. We have based our opinion expressed in paragraph 1 below as to the good standing of the Borrower and the First-Tier Subsidiaries under the laws of the State of Washington solely upon the certificates identified in items (9) and (10) above. ASSUMPTIONS In connection with this opinion, we have assumed: (i) The authenticity of each Document submitted to us as an original, the conformity to the original of each Document submitted to us as a copy, the genuineness of all signatures that are on such originals or copies (other than the signature of 75 Page 3 Borrower on the Agreement and the Notes), the legal capacity of all natural persons executing Documents, and the completeness and accuracy as of the date of this opinion of the information contained in the Documents. (ii) The Agreement constitutes the valid and binding obligation of all parties thereto other than the Borrower and is enforceable against such parties in accordance with its terms. (iii) If the Lenders seek to enforce their rights under the Agreement and the Notes, they will do so in a commercially reasonable manner and in accordance with applicable procedural law and requirements. As used in this opinion, the term "current actual knowledge" means (a) such knowledge as we have obtained from our examination of the Documents and from inquiries of officers of each of Borrower and the First-Tier Subsidiaries (as to, among other matters, those indentures, mortgages, contracts or other agreements or instruments to which the Borrower or any First-Tier Subsidiary is a party), and (b) the actual knowledge of attorneys who are currently members of this firm and who are currently involved in substantive legal representation of the Borrower or the First-Tier Subsidiaries. We have not undertaken any independent investigation to determine the accuracy of any statements qualified by this term, and any limited inquiry undertaken by us during the preparation of this opinion should not be regarded as such an investigation. In addition, no inference as to our knowledge of any matters bearing on the accuracy of any statements qualified by this term should be drawn from the fact of our representation of the Borrower and the First-Tier Subsidiaries. Based solely on the foregoing and on our examination of such questions of law as we have deemed necessary or appropriate for the purpose of this opinion, and subject to the assumptions, qualifications and limitations set forth herein, it is our opinion that: 1. Each of the Borrower and the First-Tier Subsidiaries is a corporation duly incorporated, validly existing and in good standing under the laws of the State of Washington. The Borrower is not required to qualify to do business as a foreign corporation in any jurisdiction. To our current actual knowledge, each First-Tier Subsidiary is duly qualified to do business in each jurisdiction where the nature of its activities or the ownership of its properties requires such qualification, 76 Page 4 except to the extent that failure to be so qualified does not have a material adverse effect on the business, operations or financial condition of the Borrower and the First-Tier Subsidiaries taken as a whole. The Borrower and the First-Tier Subsidiaries have full corporate power to carry on their respective businesses as presently conducted and to own and operate the respective properties and assets that each of them now owns and operates. The Borrower has full corporate power to execute, deliver and perform the Agreement and the Notes. 2. The execution, delivery and performance by the Borrower of the Agreement and the Notes, and borrowing by the Borrower under and in accordance with the terms and conditions of the Agreement, have been duly authorized by all necessary corporate action of the Borrower; do not require any approval by the shareholders of the Borrower; do not require the approval or consent of any trustee or holder of any Indebtedness of the Borrower of which we have current actual knowledge; do not contravene any law or regulation or the Borrower's Articles of Incorporation or Bylaws; to our current actual knowledge, do not contravene any order which is binding on the Borrower; and do not contravene the provisions of or constitute a default under any indenture, mortgage, contract or other agreement or instrument of which we have current actual knowledge and to which the Borrower or any First-Tier Subsidiary is a party or by which the Borrower or any First-Tier Subsidiary or any of the properties of the Borrower or any First-Tier Subsidiary may be bound or affected; and do not result in the creation or imposition of any Lien on any of the assets of the Borrower or any First-Tier Subsidiary pursuant to any indenture, mortgage, contract or other agreement or instrument of which we have current actual knowledge and to which the Borrower or any First-Tier Subsidiary is a party. 3. Except for reports required to be filed by the Borrower with the United States Securities and Exchange Commission (the "SEC") under the Securities Exchange Act of 1934, no federal or state Government Approval or filing or registration with any federal or state Governmental Authority is required for the execution, delivery and performance by the Borrower of the Agreement or the Notes or in connection with borrowings under the Agreement. 4. The Agreement and the Notes have been duly executed and delivered by the Borrower and are valid and binding obligations of the Borrower enforceable against the Borrower in accordance with their respective terms, except as such enforceability may be limited by (a) applicable bankruptcy, insolvency, reorganization, 77 Page 5 moratorium, fraudulent transfer and other similar laws of general application affecting the enforcement of creditors' rights, (b) implied obligations of good faith and fair dealing and considerations of commercial reasonableness, or (c) other applicable laws and equitable principles which may affect certain of the remedies provided therein which applicable laws and equitable principles do not make the remedies provided in the Loan Documents in connection with a material breach of a material covenant inadequate for the practical realization of the principal benefits intended to be provided thereby. 5. Except as disclosed in the Borrower's Form 10-K filed with the SEC for the Borrower's fiscal year ended September 30, 1994, in the Borrower's Form 10-Q filed with the SEC for the Borrower's fiscal quarter ended December 31, 1994, or on Schedule 3 to the Agreement, to our current actual knowledge, there are no actions, proceedings, investigations or claims against the Borrower or any of the First-Tier Subsidiaries now pending before any court, arbitrator or Governmental Authority (nor, to our current actual knowledge, has any thereof been threatened), which if determined adversely to the Borrower or any of the First-Tier Subsidiaries would be likely to have a material adverse effect on the business, operations or financial condition of the Borrower and the First-Tier Subsidiaries taken as a whole or on the ability of the Borrower to perform its obligations under the Agreement and the Notes. 6. To our current actual knowledge, except as described in the financial statements furnished by the Borrower to the Lenders pursuant to Section 5.6 of the Agreement (a) neither the Borrower nor any First-Tier Subsidiary is in violation of or subject to any contingent liability on account of any laws, rules, regulations and orders of any Governmental Authority, except for violations which in the aggregate do not have a material adverse effect on the business, operations or financial condition of the Borrower and the First-Tier Subsidiaries taken as a whole, and (b) neither the Borrower nor any First-Tier Subsidiary is in material breach of or material default under any agreement to which it is a party or which is binding on it or any of its assets. 7. To our current actual knowledge, the Borrower is not engaged principally or as one of its important activities in the business of extending credit for the purpose of purchasing or carrying any margin stock (within the meaning of Federal Reserve Regulation U). 78 Page 6 8. Schedule 1 to the Agreement correctly sets forth, as of the date hereof, the authorized capitalization of each First-Tier Subsidiary and, to our current actual knowledge, the number of shares of each class of capital stock issued and outstanding of each First-Tier Subsidiary. The outstanding shares of each First-Tier Subsidiary have been duly authorized and validly issued and are fully paid and nonassessable. To our current actual knowledge, each of the Borrower and the First-Tier Subsidiaries owns beneficially and of record the respective shares it is listed as owning on Schedule 1. 9. The Borrower is not an "investment company" or a company "controlled" by an investment company within the meaning of the Investment Company Act of 1940, as amended. To our current actual knowledge, the Borrower does not own any shares of capital stock of a "holding company" as such term is defined in the Public Utility Holding Company Act of 1935, as amended, and is not a "subsidiary company" of a "registered holding company" within the meaning of said Act. Borrower is a "holding company" as defined in said Act by reason of its ownership of all of the outstanding shares of common stock of Washington Natural Gas Company, but is exempt from said Act, except the provisions of Section 9(a)(2) thereof, by virtue of Section 3(a)(1) thereof and Rule 2 thereunder. We do not purport to be experts on, or to express any opinion herein concerning, any law other than the law of the State of Washington and the federal laws of the United States. This opinion is rendered to you in connection with the above transaction and is solely for your benefit. This opinion may not be relied upon by you for any other purpose and may not be relied upon by any other person, firm or corporation (other than your successors and permitted assigns) for any purpose without our prior written consent except in connection with the enforcement of the Agreement and the Notes or the inspection of your files by governmental examiners or auditors or as required by law. We disclaim any responsibility to advise you, your successors and permitted assigns, or the Borrower of any changes in facts or applicable law that occur after the date hereof and that might affect this opinion. Very truly yours, Enclosures - -- Copies of Officer Certificates 79 EXHIBIT G NOTICE OF ASSIGNMENT ________________, 19__ To: WASHINGTON ENERGY COMPANY ========================= THE FIRST NATIONAL BANK OF CHICAGO ================================== From: [NAME OF ASSIGNOR] (the "Assignor") [NAME OF ASSIGNEE] (the "Assignee") 1. We refer to the Credit Agreement dated as of March ___, 1995 among Washington Energy Company (the "Borrower"), the Lenders party thereto and The First National Bank of Chicago, as Agent for the Lenders (the "Credit Agreement"). Capitalized terms used herein and not otherwise defined herein shall have the meanings attributed to them in the Credit Agreement. 2. This Notice of Assignment (this "Notice") is given and delivered to ***[the Borrower and]***(1) the Agent pursuant to Section 9.3.2 of the Credit Agreement. 3. The Assignor and the Assignee have entered into an Assignment Agreement, dated as of _______, 19__ (the "Assignment"), pursuant to which, among other things, the Assignor has sold, assigned, delegated and transferred to the Assignee, and the Assignee has purchased, accepted and assumed from the Assignor an undivided ___% interest in all outstandings, rights and obligations of the Assignor ***[other than Competitive Bid Loans made by the Assignor]*** under the Credit Agreement. The Effective Date of the Assignment shall be the later of ____________, 19__ or two Business Days (or such shorter period as agreed to by the Agent) after this Notice of Assignment and any consents and fees required by Sections 9.3.1 and 9.3.2 of the Credit Agreement have been delivered to the Agent, provided that the Effective Date shall not occur if any condition precedent - ---------------------- (1) To be included only if consent must be obtained from the Borrower pursuant to Section 9.3.1 of the Credit Agreement. 80 agreed to by the Assignor and the Assignee has not been satisfied. 4. The Assignor and the Assignee hereby give to the Borrower and the Agent notice of the assignment and delegation referred to herein. The Assignor will confer with the Agent before __________, 19__ to determine if the Assignment Agreement will become effective on such date pursuant to Section 3 hereof, and will confer with the Agent to determine the Effective Date pursuant to Section 3 hereof if it occurs thereafter. The Assignor shall notify the Agent if the Assignment Agreement does not become effective on any proposed Effective Date as a result of the failure to satisfy the conditions precedent agreed to by the Assignor and the Assignee. At the request of the Agent, the Assignor will give the Agent written confirmation of the satisfaction of the conditions precedent. 5. The Assignor or the Assignee shall pay to the Agent on or before the Effective Date the processing fee of $4,000 required by Section 9.3.2 of the Credit Agreement. 6. If Notes are outstanding on the Effective Date, the Assignor and the Assignee request and direct that the Agent prepare and cause the Borrower to execute and deliver new Notes or, as appropriate, replacement notes, to the Assignor and the Assignee. The Assignor and, if applicable, the Assignee each agree to deliver to the Agent the original Note received by it form the Borrower upon its receipt of a new Note in the appropriate amount. 7. The Assignee advises the Agent that notice and payment instructions are set forth in the attachment of this Notice of Assignment. 8. The Assignee hereby represents and warrants that none of the funds, monies, assets or other consideration being used to make the purchase pursuant to the Assignment are "plan assets" as defined under ERISA and that its rights, benefits, and interests in and under the Loan Documents will not be "plan assets" under ERISA. 9. The Assignee authorizes the Agent to act as its agent under the Loan Documents in accordance with the terms thereof. The Assignee acknowledges that the Agent has no duty to supply information with respect to the Borrower or the Loan Documents to the Assignee until the Assignee becomes a party to the Credit Agreement.***(2). - ---------------------- (2) May be eliminated if Assignee is a party to the Credit Agreement prior to the Effective Date. 2 81 NAME OF ASSIGNOR NAME OF ASSIGNEE By: _____________________ By: __________________________ Title: __________________ Title: _______________________ ACKNOWLEDGED ACKNOWLEDGED [AND CONSENTED TO] BY: [AND CONSENTED TO] BY: THE FIRST NATIONAL BANK WASHINGTON ENERGY COMPANY OF CHICAGO By: _____________________ By: __________________________ Title: __________________ Title: _______________________ 3 82 WASHINGTON ENERGY COMPANY (WECO) CREDIT AGREEMENT SCHEDULE 1 LIST OF SUBSIDIARIES A. FIRST-TIER SUBSIDIARIES 1. WASHINGTON NATURAL GAS COMPANY, a Washington corporation Common Stock: common stock has $5 par value shares authorized total 25,000,000 shares outstanding total 10,842,131 shares owned by WECO total 10,842,131, representing 100% ownership Preferred Stock: authorized: 1,000,000 shares of $100 par value and 4,000,000 shares of $25 par value -
Shares Outstanding 7.45%, Series II, $25 par value 2,400,000 8.50%, Series III, $25 par value 1,200,000
2. THERMAL ENERGY, INC., a Washington corporation common stock has $10 par value shares authorized total 1,000,000 shares outstanding total 600,000 shares owned by WECO total 600,000, representing 100% ownership 3. THERMRAIL, INC., a Washington corporation common stock has $10 par value shares authorized total 300,000 shares outstanding total 100,000 shares owned by WECO total 100,000, representing 100% ownership 1 83 4. WECO FINANCE COMPANY, a Washington corporation common stock has no par value shares authorized total 500,000 shares outstanding total 110,000 shares owned by WECO total 110,000, representing 100% ownership 5. WASHINGTON ENERGY SERVICES COMPANY, a Washington corporation common stock has $10 par value shares authorized total 100,000 shares outstanding total 100,000 shares owned by WECO total 100,000, representing 100% ownership 6. WASHINGTON ENERGY GAS MARKETING COMPANY, a Washington corporation common stock has $10 par value shares authorized total 1,000,000 shares outstanding total 1,000 shares owned by WECO total 1,000, representing 100% ownership B. OTHER SUBSIDIARIES 1. THERMAL RESOURCES, INC., a Montana corporation common stock has no par value shares authorized total 50,000 shares issued total 50,000 shares owned by Thermal Energy, Inc. total 50,000, representing 100% ownership 2. MERCER INSURANCE COMPANY LIMITED, a Bermuda corporation common stock has $10 par value shares authorized total 40,000 shares outstanding total 40,000 shares owned by WECO Finance Company total 39,993, representing 99.9% ownership 3. WNG CAP I, INC., a Washington corporation common stock has $10 par value shares authorized total 50,000 shares outstanding total 100 shares owned by WNG total 100, representing 100% ownership 2 84 4. WNG CAP II, INC., a Washington corporation common stock has $10 par value shares authorized total 50,000 shares outstanding total 100 shares owned by WNG total 100, representing 100% ownership 5. TONGUE RIVER HOLDINGS, INC., a Montana corporation common stock has $1 par value shares authorized total 200 shares outstanding total 170 shares owned by Transportation Properties, a partnership, total 170, representing 100% ownership 6. TRANSPORTATION PROPERTIES, a Montana General Partnership owned 90% by ThermRail, Inc. 7. TONGUE RIVER RAILROAD COMPANY, a Montana Limited Partnership owned 99.22% by Transportation Properties and .78% by Tongue River Holdings, Inc. 3 EX-10.H 6 DEFERRED COMPENSATION PLAN EFFECTIVE 9/1/95 1 Exhibit 10-H WASHINGTON NATURAL GAS COMPANY DEFERRED COMPENSATION PLAN (AMENDED AND RESTATED SEPTEMBER 1, 1995) 2 TABLE OF CONTENTS Purpose . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 ARTICLE 1 Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 ARTICLE 2 Selection, Enrollment, Eligibility . . . . . . . . . . . . . . . . . . . . . . . . 7 2.1 Selection by Committee . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 2.2 Enrollment Requirements . . . . . . . . . . . . . . . . . . . . . . . . . . 7 2.3 Eligibility; Commencement of Participation . . . . . . . . . . . . . . . . . 7 ARTICLE 3 Deferral Commitments/Interest Crediting . . . . . . . . . . . . . . . . . . . . . 7 3.1 Minimum Deferral . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 3.2 Maximum Deferral . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 3.3 Election to Defer: Effect of Election Form . . . . . . . . . . . . . . . . . 8 3.4 Withholding of Deferral Amounts . . . . . . . . . . . . . . . . . . . . . . 8 3.5 Interest Crediting Prior to Distribution . . . . . . . . . . . . . . . . . . 8 3.6 Installment Distributions . . . . . . . . . . . . . . . . . . . . . . . . . 9 3.7 FICA and Other Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 ARTICLE 4 Short-Term Payout: Unforeseeable Financial Emergencies; Withdrawal Election . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 4.1 Short Term Payout . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 4.2 Withdrawal Payout/Suspensions for Unforeseeable Financial Emergencies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 4.3 Withdrawal Election . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 ARTICLE 5 Retirement Benefit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 5.1 Retirement Benefit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 5.2 Payment of Retirement Benefits . . . . . . . . . . . . . . . . . . . . . . . 11 5.3 Death Prior to Completion of Retirement Benefits . . . . . . . . . . . . . . 11 ARTICLE 6 Pre-Retirement Survivor Benefit . . . . . . . . . . . . . . . . . . . . . . . . . 12 6.1 Pre-Retirement Survivor Benefit . . . . . . . . . . . . . . . . . . . . . . 12 6.2 Payment of Pre-Retirement Survivor Benefits . . . . . . . . . . . . . . . . 12 6.3 Restriction in the Event of Suicide or Falsely Provided Information . . . . 12 ARTICLE 7 Termination Benefit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 7.1 Termination Benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 7.2 Payment of Termination Benefit . . . . . . . . . . . . . . . . . . . . . . . 13 ARTICLE 8 Disability Waiver and Benefit . . . . . . . . . . . . . . . . . . . . . . . . . . 13 8.1 Disability Waiver . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 8.2 Disability Benefit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
i 3 ARTICLE 9 Beneficiary Designation . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 9.1 Beneficiary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 9.2 Beneficiary Designation; Change; Spousal Consent . . . . . . . . . . . . . 14 9.3 Receipt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 9.4 No Beneficiary Designation . . . . . . . . . . . . . . . . . . . . . . . . 14 9.5 Doubt as to Beneficiary . . . . . . . . . . . . . . . . . . . . . . . . . 15 9.6 Discharge of Obligations . . . . . . . . . . . . . . . . . . . . . . . . . 15 ARTICLE 10 Leave of Absence . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 10.1 Paid Leave of Absence . . . . . . . . . . . . . . . . . . . . . . . . . . 15 10.2 Unpaid Leave of Absence . . . . . . . . . . . . . . . . . . . . . . . . . 15 ARTICLE 11 Termination, Amendment or Modification . . . . . . . . . . . . . . . . . . . . 15 11.1 Termination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 11.2 Amendment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 11.3 Interest Rate in the Event of a Change in Control and Interest . . . . . . 16 11.4 Effect of Payment . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 ARTICLE 12 Administration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 12.1 Committee Duties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 12.2 Agents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 12.3 Binding Effect of Decisions . . . . . . . . . . . . . . . . . . . . . . . 17 12.4 Indemnity of Committee . . . . . . . . . . . . . . . . . . . . . . . . . . 17 12.5 Employer Information . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 ARTICLE 13 Other Benefits and Agreements . . . . . . . . . . . . . . . . . . . . . . . . . 18 13.1 Coordination with Other Benefits . . . . . . . . . . . . . . . . . . . . . 18 ARTICLE 14 Claims Procedures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 14.1 Presentation of Claim . . . . . . . . . . . . . . . . . . . . . . . . . . 18 14.2 Notification of Decision . . . . . . . . . . . . . . . . . . . . . . . . . 18 14.3 Review of a Denied Claim . . . . . . . . . . . . . . . . . . . . . . . . . 19 14.4 Decision on Review . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 14.5 Legal Action . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 ARTICLE 15 Trust . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 15.1 Establishment of the Trust . . . . . . . . . . . . . . . . . . . . . . . . 19 15.2 Interrelationship of the Plan and the Trust . . . . . . . . . . . . . . . 20 ARTICLE 16 Miscellaneous . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 16.1 Unsecured General Creditor . . . . . . . . . . . . . . . . . . . . . . . . 20 16.2 Employer's Liability . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 16.3 Nonassignability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 16.4 Not a Contract of Employment . . . . . . . . . . . . . . . . . . . . . . . 21 16.5 Furnishing Information . . . . . . . . . . . . . . . . . . . . . . . . . . 21
ii 4 16.6 Terms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 16.7 Captions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 16.8 Governing Law . . . . . . . . . . . . . . . . . . . . . . . . . . 21 16.9 Notice . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 16.10 Successors . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 16.11 Spouse's Interest . . . . . . . . . . . . . . . . . . . . . . . . 22 16.12 Validity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 16.13 Incompetent . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 16.14 Court Order . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 16.15 Distribution in the Event of Taxation . . . . . . . . . . . . . . 22 16.16 Taxes and Withholding . . . . . . . . . . . . . . . . . . . . . . 23 16.17 Enforcement of Rights After Change in Control . . . . . . . . . . 23
iii 5 WASHINGTON NATURAL GAS COMPANY DEFERRED COMPENSATION PLAN Amended and Restated September 1, 1995 Purpose This Plan, as amended and restated effective September 1, 1995, is a continuation of an existing plan known as the Washington Energy Company Deferred Compensation Plan for Non-Employee Directors. The purpose of this Plan is to provide specified benefits to a select group of management, highly compensated Employees and Directors who contribute materially to the continued growth, development and future business success of Washington Natural Gas Company, a Washington corporation, and its subsidiaries and affiliates, if any, that sponsor this Plan. This Plan shall be unfunded for tax purposes and for purposes of Title I of ERISA. ARTICLE 1 Definitions For purposes hereof, unless otherwise clearly apparent from the context, the following phrases or terms shall have the following indicated meanings: 1.1 "Account Balance" shall mean the sum of (i) the Deferral Amount, plus (ii) interest credited in accordance with all the applicable interest crediting provisions of this Plan, less (iii) all distributions. This account shall be a bookkeeping entry only and shall be utilized solely as a device for the measurement and determination of the amounts to be paid to a Participant pursuant to this Plan. 1.2 "Annual Bonus" shall mean any compensation, in addition to Base Annual Salary, paid annually to a Participant as an Employee under any Employer's annual bonus and incentive plans. 1.3 "Annual Deferral Amount" shall mean that portion of a Participant's Base Annual Salary, Annual Bonus and/or Directors Fees that a Participant elects to have and is deferred, in accordance with Article 3, for any one Plan Year. In the event of a Participant's Retirement, Disability (if deferrals cease in accordance with Section 8.1), death or a Termination of Employment prior to the end of a Plan Year, such year's Annual Deferral Amount shall be the actual amount withheld prior to such event. 1.4 "Base Annual Salary" shall mean the annual compensation, excluding bonuses, commissions, overtime, relocation expenses, incentive payments, nonmonetary 1 6 awards, directors fees and other fees, and including automobile allowances, paid to a Participant for employment services rendered to any Employer, before reduction for compensation deferred pursuant to all qualified, nonqualified and Code Section 125 plans of any Employer. 1.5 "Beneficiary" shall mean one or more persons, trusts, estates or other entities, designated in accordance with Article 9, that are entitled to receive benefits under this Plan upon the death of a Participant. 1.6 "Beneficiary Designation Form" shall mean the form established from time to time by the Committee that a Participant completes, signs and returns to the Committee to designate one or more Beneficiaries. 1.7 "Board" shall mean the board of directors of the Company. 1.8 "Bonus Rate" shall mean, for a Plan Year, an interest rate, if any, determined by the Committee, in its sole discretion, which rate shall be determined and announced before the commencement of the Plan Year for the which the rate applies. This rate may be zero for any Plan Year. 1.9 "Change in Control" shall mean the first to occur of any of the following events: (a) Any "person" (as that term is used in Section 13 and 14(d)(2) of the Securities Exchange Act of 1934 ("Exchange Act")) becomes the beneficial owner (as that term is used in Section 13(d) of the Exchange Act), directly or indirectly, of 50% or more of the Company's capital stock entitled to vote in the election of directors; (b) During any period of not more than two consecutive years, not including any period prior to the adoption of this Plan, individuals who at the beginning of such period constitute the board of directors of the Company, and any new director (other than a director designated by a person who has entered into an agreement with the Company to effect a transaction described in clause (a), (c), (d) or (e) of this Section 1.9) whose election by the board of directors or nomination for election by the Company's stockholders was approved by a vote of at least three-fourths (3/4ths) of the directors then still in office who either were directors at the beginning of the period or whose election or nomination for election was previously so approved, cease for any reason to constitute at least a majority thereof; (c) The shareholders of the Company approve any consolidation or merger of the Company, other than a consolidation or merger of the Company in which the holders of the common stock of the Company immediately 2 7 prior to the consolidation or merger hold more than 50% of the common stock of the surviving corporation immediately after the consolidation or merger; (d) The shareholders of the Company approve any plan or proposal for the liquidation or dissolution of the Company, or a sale of substantially all of the assets of the Company; or (e) Substantially all of the assets of the Company are sold or otherwise transferred to parties that are not within a "controlled group of corporations" (as defined in Code Section 1563) in which the Company is a member. 1.10 "Claimant" shall have the meaning set forth in Section 14.1. 1.11 "Code" shall mean the Internal Revenue Code of 1986, as may be amended from time to time. 1.12 "Committee" shall mean the committee described in Article 12. 1.13 "Company" shall mean Washington Natural Gas Company, a Washington corporation. 1.14 "Crediting Rate" shall mean, for each Plan Year, an interest rate determined and announced by the Committee before the Plan Year for which it is to be used that is equal to the Moody's Rate. The Moody's Rate for a Plan Year shall be an interest rate that (i) is published in Moody's Bond Record under the heading of "Moody's Corporate Bond Yield Averages -- Av. Corp," and (ii) is equal to the average corporate bond yield most recently published prior to the Plan Year for which the rate is to be used. 1.15 "Deferral Amount" shall mean the sum of all of a Participant's Annual Deferral Amounts. 1.16 "Deduction Limitation" shall mean the following described limitation on the annual benefit that may be distributed pursuant to the provisions of this Plan. Except as otherwise provided, this limitation shall be applied to all distributions under this Plan. If an Employer determines in good faith prior to a Change in Control that there is a reasonable likelihood that any compensation paid to a Participant for a taxable year of the Employer would not be deductible by the Employer solely by reason of the limitation under Code Section 162(m), then to the extent deemed necessary by the Employer to ensure that the entire amount of any distribution to the Participant pursuant to this Plan prior to the Change in Control is deductible, the Employer may defer all or any portion of a distribution under this Plan. Any amounts deferred 3 8 pursuant to this limitation shall continue to be credited with interest in accordance with Section 3.5 below. The amounts so deferred and interest thereon shall be distributed to the Participant or his or her Beneficiary (in the event of the Participant's death) at the earliest possible date, as determined by the Employer in good faith, on which the deductibility of compensation paid or payable to the Participant for the taxable year of the Employer during which the distribution is made will not be limited by Section 162(m), or if earlier, the effective date of a Change in Control. 1.17 "Director" shall mean any member of the board of directors of any Employer. 1.18 "Directors Fees" shall mean the annual fees paid by any Employer, including retainer fees and meetings fees, as compensation for serving on the board of directors. 1.19 "Disability" shall mean a period of disability during which a Participant qualifies for benefits under the Participant's Employer's long-term disability plan, or, if a Participant does not participate in such a plan, a period of disability during which the Participant would have qualified for benefits under such a plan had the Participant been a participant in such a plan, as determined in the sole discretion of the Committee. If the Participant's Employer does not sponsor such a plan or discontinues to sponsor such a plan, Disability shall be determined by the Committee in its sole discretion. 1.20 "Disability Benefit" shall mean the benefit set forth in Article 8. 1.21 "Election Form" shall mean the form established from time to time by the Committee that a Participant completes, signs and returns to the Committee to make an election under the Plan. 1.22 "Employee" shall mean a person who is an employee of any Employer. 1.23 "Employer(s)" shall mean the Company and/or any of its subsidiaries and affiliates that have been selected by the Board to participate in the Plan. 1.24 "ERISA" shall mean the Employee Retirement Income Security Act of 1974, as may be amended from time to time. 1.25 "Participant" shall mean any Employee or Director (i) who is selected to participate in the Plan, (ii) who elects to participate in the Plan, (iii) who signs a Plan Agreement, an Election Form and a Beneficiary Designation Form, (iv) whose signed Plan Agreement, Election Form and Beneficiary Designation Form are accepted by the Committee, (v) who commences participation in the Plan, and (vi) whose Plan Agreement has not terminated. 4 9 1.26 "Plan" shall mean the Company's Deferred Compensation Plan, which shall be evidenced by this instrument and by each Plan Agreement, as may be amended from time to time. 1.27 "Plan Agreement" shall mean a written agreement, as may be amended from time to time, which is entered into by and between an Employer and a Participant. Each Plan Agreement executed by a Participant shall provide for the entire benefit to which such Participant is entitled to under the Plan, and the Plan Agreement bearing the latest date of acceptance by the Committee shall govern such entitlement. 1.28 "Plan Year" shall, for the first Plan Year for Participants other than Directors, begin on September 1, 1995, and end on December 31, 1995. For each Plan Year thereafter, the Plan Year shall begin on January 1 of each year and continue through December 31. 1.29 "Preferred Rate" shall mean, for each Plan Year, an interest rate that is the sum of the Crediting Rate and the Bonus Rate for that Plan Year. 1.30 "Pre-Retirement Survivor Benefit" shall mean the benefit set forth in Article 6. 1.31 "Retirement", "Retires" or "Retired" shall mean, with respect to an Employee, severance from employment from all Employers for any reason other than a leave of absence, death or Disability on or after the earlier of the attainment of (a) age sixty-five (65) or (b) age fifty-five with ten (10) Years of Service; and shall mean, with respect to a Director who is not an Employee, severance of his or her directorships with all Employers. If a Participant is both an Employee and a Director, Retirement shall not occur until he or she Retires as both an Employee and a Director, which Retirement shall be deemed to be a Retirement as a Director; provided, however, that such a Participant may elect, prior to Retirement and in accordance with the policies and procedures established by the Committee, to Retire for purposes of this Plan at the time he or she Retires as an Employee, which Retirement shall be deemed to be a Retirement as an Employee. 1.32 "Retirement Benefit" shall mean the benefit set forth in Article 5. 1.33 "Short-Term Payout" shall mean the payout set forth in Section 4.1. 1.34 "Termination Benefit" shall mean the benefit set forth in Article 7. 1.35 "Termination of Employment" shall mean the ceasing of employment with all Employers, or service as a Director of all Employers, voluntarily or involuntarily, for any reason other than Retirement, Disability, death or an authorized leave of absence. If a Participant is both an Employee and a 5 10 Director, a Termination of Employment shall occur only upon the termination of the last position held; provided, however, that such a Participant may elect, in accordance with the policies and procedures established by the Committee, to be treated for purposes of this Plan as having experienced a Termination of Employment at the time he or she ceases employment with an Employer as an Employee. 1.36 "Trust" shall mean the trust established pursuant to that certain Master Trust Agreement, dated as of September 1, 1995, between the Company and the trustee named therein, as amended from time to time. 1.37 "Unforeseeable Financial Emergency" shall mean an unanticipated emergency that is caused by an event beyond the control of the Participant that would result in severe financial hardship to the Participant resulting from (i) a sudden and unexpected illness or accident of the Participant or a dependent of the Participant, (ii) a loss of the Participant's property due to casualty, or (iii) such other extraordinary and unforeseeable circumstances arising as a result of events beyond the control of the Participant, all as determined in the sole discretion of the Committee. 1.38 "Years of Plan Participation" shall mean the total number of full Plan Years a Participant has been a Participant in the Plan prior to his or her Termination of Employment (determined without regard to whether deferral elections are made under this Plan). For purposes of a Participant's first Plan Year of participation only, any partial Plan Year of participation shall be treated as a full Plan Year. 1.39 "Years of Service" shall mean the total number of full years in which a Participant has been employed by one or more Employers. For purposes of this definition, a year of employment shall be a 365 day period (or 366 day period in the case of a leap year) that, for the first year of employment, commences on the Employee's date of hiring and that, for any subsequent year, commences on an anniversary of that hiring date. Any partial year of employment shall not be counted. ARTICLE 2 Selection, Enrollment, Eligibility 2.1 Selection by Committee. Participation in the Plan shall be limited to a select group of management, highly compensated Employees and Directors of the Employers. From that group, the Committee shall select, in its sole discretion, Employees and Directors to participate in the Plan. 2.2 Enrollment Requirements. As a condition to participation, each selected Employee or Director shall complete, execute and return to the Committee 6 11 within 30 days of selection a Plan Agreement, an Election Form and a Beneficiary Designation Form. In addition, the Committee shall establish from time to time such other enrollment requirements as it determines in its sole discretion are necessary. 2.3 Eligibility; Commencement of Participation. Provided an Employee or Director selected to participate in the Plan has met all enrollment requirements set forth in this Plan and required by the Committee, including returning all required documents to the Committee within 30 days of selection, that Employee or Director shall commence participation in the Plan on the first day of the month following the month in which the employee or Director completes all enrollment requirements. If an Employee or a Director fails to meet all such requirements within the required 30 day period, that Employee or the Director shall not be eligible to participate in the Plan until the first day of the Plan Year following the delivery to and acceptance by the Committee of the required documents. ARTICLE 3 Deferral Commitments/Interest Crediting 3.1 Minimum Deferral. (a) Minimum. For each Plan Year, a Participant may elect to defer Base Annual Salary, Annual Bonus and/or Directors Fees in the following minimum amounts for each deferral elected:
Minimum Deferral Amount -------- ------- Base Annual Salary and Annual Bonus $2,000 Directors Fees $ 0
For the first (short) Plan Year September 1, 1995 to December 31, 1995, a minimum of $600 of Base Annual Salary and Annual Bonus must be elected to be deferred. If no election is made, the amount deferred shall be zero. (b) Short Plan Year. If a Participant first becomes a Participant after the first day of a Plan Year, the minimum Base Annual Salary deferral shall be an amount equal to the minimum set forth above, multiplied by a fraction, the numerator of which is the number of complete months remaining in the Plan Year and the denominator of which is 12. 7 12 3.2 Maximum Deferral. For each Plan Year, a Participant may elect to defer Base Annual Salary, Annual Bonus and/or Directors Fees up to the following maximum percentages for each deferral elected:
Maximum Deferral Amount -------- -------- Base Annual Salary 100% Annual Bonus 100% Directors Fees 100%
3.3 Election to Defer: Effect of Election Form. In connection with a Participant's commencement of participation in the Plan, the Participant shall make a deferral election by timely delivering to the Committee (in accordance with Section 2.3 above) a completed and signed Election Form, which election and form must be accepted by the Committee for a valid election to exist. For each succeeding Plan Year, a new Election Form must be delivered to the Committee, in accordance with its rules and procedures, before the end of the Plan Year preceding the Plan Year for which the election is made. If no Election Form is timely delivered for a Plan Year, no Annual Deferral Amount shall be withheld for that Plan Year. 3.4 Withholding of Deferral Amounts. For each Plan Year, the Base Annual Salary portion of the Annual Deferral Amount shall be withheld each payroll period in equal amounts from the Participant's Base Annual Salary. The Annual Bonus and/or Directors Fees portion of the Annual Deferral Amount shall be withheld at the time the Annual Bonus or Directors Fees are or otherwise would be paid to the Participant. 3.5 Interest Crediting Prior to Distribution. Prior to any distribution of benefits under Articles 4, 5, 6, 7 or 8, interest shall be credited and compounded annually on a Participant's Account Balance as though the Annual Deferral Amount for that Plan Year was withheld at the beginning of the Plan Year or, in the case of the first year of Plan participation, was withheld on the date that the Participant commenced participation in the Plan. The rate of interest for crediting shall be the Preferred Rate, except as otherwise provided in this Plan. In the event of Retirement, Disability, death or Termination of Employment prior to the end of a Plan Year, the basis for that year's interest crediting will be a fraction of the full year's interest, based on the number of full months that the Participant was employed with the Employer during the Plan Year prior to the occurrence of such event. If a distribution is made under this Plan, for purposes of crediting interest, the Account Balance shall be reduced as of the first day of the month in which the distribution is made. 8 13 3.6 Installment Distributions. In the event a benefit is paid in installments under Articles 5, 6 or 8, installment payment amounts shall be determined in the following manner: (a) Interest Rate. The interest rate to be used to calculate installment payment amounts shall be a fixed interest rate that is determined by averaging the Preferred Rates for the Plan Year in which installment payments commence and the four (4) preceding Plan Years. If a Participant has completed fewer than five (5) Plan Years, this average shall be determined using the Preferred Rates for the Plan Years during which the Participant participated in the Plan. (b) "Deemed" Installment Payments. For purposes of calculating installment payment amounts only (and notwithstanding the fact that installment payments shall actually be paid monthly), installment payments for each 12 month period, starting with the date that the Participant became eligible to receive a benefit under this Plan (the "Eligibility Date") and continuing thereafter for each additional 12 month period until the Participant's Account Balance is paid in full, shall be deemed to have been paid in one sum as of the first day of each such 12 month period. (The result of this is that interest crediting shall be made on an annual basis after taking into account the "deemed" annual installment payment for the 12 month period.) (c) Amortization. Based on the interest rate determined in accordance with Section 3.6(a) above and the "deemed" form of installment payments determined in accordance with Section 3.6(b) above, the Participant's Account Balance shall be amortized in equal annual installment payments over the term of the specified payment period (starting as of the Eligibility Date and stated in years rather than months). (d) Monthly Payments. The annual installment payment determined in Section 3.6(c) above shall be divided by 12, and the resulting number shall be the monthly installment payment that is to be paid each month during the specified monthly installment payment period in accordance with the other terms and conditions of this Plan. 3.7 FICA and Other Taxes. For each Plan Year in which an Annual Deferral Amount is being withheld, the Participant's Employer(s) shall ratably withhold from that portion of the Participant's Base Annual Salary that is not being deferred, the Participant's share of FICA and other employment taxes. If necessary, the Committee shall reduce the Annual Deferral Amount in order to comply with this Section 3.7. ARTICLE 4 9 14 Short-Term Payout: Unforeseeable Financial Emergencies; Withdrawal Election 4.1 Short Term Payout. Subject to the Deduction Limitation, in connection with each election to defer an Annual Deferral Amount, a Participant may elect to receive a future "Short-Term Payout" from the Plan with respect to that Annual Deferral Amount. The Short-Term Payout shall be a lump sum payment in an amount that is equal to the Annual Deferral Amount plus interest credited in the manner provided in Section 3.5 above on that amount, but using the applicable interest rate set forth in Section 7.1 below. Subject to the other terms and conditions of this Plan, each Short-Term payout elected shall be paid within 60 days of the first day of the Plan Year that is 5 years after the first day of the Plan Year in which the Annual Deferral Amount is actually deferred. 4.2 Withdrawal Payout/Suspensions for Unforeseeable Financial Emergencies. If the Participant experiences an Unforeseeable Financial Emergency, the Participant may petition the Committee to (i) suspend any deferrals required to be made by a Participant and/or (ii) receive a partial or full payout from the Plan. The payout shall not exceed the lesser of the Participant's Account Balance, calculated as if such Participant were receiving a Termination Benefit, or the amount reasonably needed to satisfy the Unforeseeable Financial Emergency. If, subject to the sole discretion of the Committee, the petition for a suspension and/or payout is approved, suspension shall take effect upon the date of approval and any payout shall be made within 60 days of the date of approval. The payment of any amount under this Section 4.2 shall not be subject to the Deduction Limitation. 4.3 Withdrawal Election. A Participant may elect, at any time, to withdraw all of his or her Account Balance less a 10% withdrawal penalty (the net amount shall be referred to as the "Withdrawal Amount). No partial withdrawals of that balance shall be allowed. The Participant shall make this election by giving the Committee advance written notice of the election in a form determined from time to time by the Committee. The penalty shall be equal to 10% of the Participant's Account Balance determined immediately prior to the withdrawal. The Participant shall be paid the Withdrawal Amount within 60 days of his or her election. Once the Withdrawal Amount is paid, the Participant's participation in the Plan shall terminate and the Participant shall not be eligible to participate in the Plan in the future. The payment of this Withdrawal Amount shall not be subject to the Deduction Limitation. ARTICLE 5 Retirement Benefit 5.1 Retirement Benefit. Subject to the Deduction Limitation, a Participant who Retires shall receive, as a Retirement Benefit, his or her Account Balance. 10 15 5.2 Payment of Retirement Benefits. A Participant, in connection with his or her commencement of participation in the Plan, shall elect on an Election Form to receive the Retirement Benefit in a lump sum or in equal monthly payments (the latter determined in accordance with Section 3.6 above) over a period of 60, 120 or 180 months. The Participant may change his or her election to an allowable alternative payout period by submitting a new Election Form to the Committee, provided that any such Election Form is submitted at least 3 years prior to the Participant's Retirement and is accepted by the Committee in its sole discretion. The Election Form most recently accepted by the Committee shall govern the payout of the Retirement Benefit. The lump sum payment shall be made, or installment payments shall commence, no later than 60 days after the date the Participant Retires. 5.3 Death Prior to Completion of Retirement Benefits. If a Participant dies after Retirement but before the Retirement Benefit is paid in full, the Participant's unpaid Retirement Benefit payments shall continue and shall be paid to the Participant's Beneficiary (a) over the remaining number of months and in the same amounts as that benefit would have been paid to the Participant had the Participant survived, or (b) in a lump sum, if requested by the Beneficiary and allowed in the sole discretion of the Committee, that is equal to the Participant's unpaid remaining Account Balance. 11 16 ARTICLE 6 Pre-Retirement Survivor Benefit 6.1 Pre-Retirement Survivor Benefit. Subject to the Deduction Limitation, and except as provided in Section 6.3 below, if a Participant dies before he or she Retires, experiences a Termination of Employment or suffers a Disability, the Participant's Beneficiary shall receive a Pre-Retirement Survivor Benefit equal to the Participant's Account Balance. 6.2 Payment of Pre-Retirement Survivor Benefits. A Participant, in connection with his or her commencement of participation in the Plan, shall elect on an Election Form whether the Pre-Retirement Survivor Benefit shall be received by his or her Beneficiary in a lump sum or in equal monthly payments (the latter determined in accordance with Section 3.6 above) over a period of 60, 120 or 180 months. The Participant may change this election to an allowable alternative payout period by submitting a new Election Form to the Committee, which form must be accepted by the Committee in its sole discretion. The Election Form most recently accepted by the Committee prior to the Participant's death shall govern the payout of the Participant's Pre-Retirement Survivor Benefit. Despite the foregoing, if the Participant's Account Balance at the time of his or her death is less than $25,000, payment of the Pre-Retirement Survivor Benefit may be made, in the sole discretion of the Committee, in a lump sum or in installment payments that do not exceed five years in duration. The lump sum payment shall be made, or installment payments shall commence, no later than 60 days after the date the Committee is provided with proof that is satisfactory to the Committee of the Participant's death. 6.3 Restriction in the Event of Suicide or Falsely Provided Information. In the event of a Participant's suicide within 2 years after the Participant first becomes a Participant, or in the event the Participant's death is determined to be from a bodily or mental cause or causes, the information about which was withheld, knowingly concealed, or falsely provided by the Participant if requested to furnish evidence of good health, the Pre-Retirement Survivor Benefit shall be equal to the sum of the Participant's Annual Deferral Amounts, without interest, all determined as of his or her date of death. ARTICLE 7 Termination Benefit 7.1 Termination Benefits. Subject to the Deduction Limitation, if a Participant experiences a Termination of Employment prior to his or her Retirement, death or Disability, the Participant shall receive a Termination Benefit, which shall be equal to the Participant's Account Balance, with interest credited in 12 17 the manner provided in Section 3.5 above, but using the applicable interest rate set forth in the following schedule:
COMPLETION OF YEARS OF PLAN PARTICIPATION APPLICABLE RATE Less than five years Crediting Rate Five or more years Preferred Rate
Notwithstanding the foregoing, if a Participant experiences a Termination of Employment before completing five (5) Years of Plan Participation as a result, in the judgment of the Committee, of an reorganization of his or her Employer, the applicable interest rate shall be the Preferred Rate. 7.2 Payment of Termination Benefit. The Termination Benefit shall be paid in a lump sum within 60 days of the Termination of Employment. ARTICLE 8 Disability Waiver and Benefit 8.1 Disability Waiver. (a) Eligibility. By participating in the Plan, all Participants are eligible for this waiver. (b) Waiver of Deferral; Credit for Plan Year of Disability. A Participant who is determined by the Committee to be suffering from a Disability shall be excused from fulfilling that portion of the Annual Deferral Amount commitment that would otherwise have been withheld from a Participant's Base Annual Salary, Annual Bonus and/or Directors Fees for the Plan Year during which the Participant first suffers a Disability. During the period of Disability, the Participant shall not be allowed to make any additional deferral elections. (c) Return to Work. If a Participant returns to employment or service as a Director with an Employer after a Disability ceases, the Participant may elect to defer an Annual Deferral Amount for the Plan Year following his or her return to employment or service and for every Plan Year thereafter while a Participant in the Plan; provided such deferral elections are otherwise allowed and an Election Form is delivered to and accepted by the Committee for each such election in accordance with Section 3.3 above. 13 18 8.2 Disability Benefit. A Participant suffering a Disability shall, for benefit purposes under this Plan, continue to be considered to be employed or in the service of an Employer as a Director and shall be eligible for the benefits provided for in Articles 4, 5, 6 or 7 in accordance with the provisions of those Articles. Notwithstanding the above, the Committee shall have the right, in its sole and absolute discretion and for purposes of this Plan only, to terminate a Participant's employment or service as a Director at any time after such Participant is determined to be permanently disabled (i) under the Participant Employer's long-term disability plan (or would have been determined to be permanently disabled had he or she participated in that plan), or (ii) if such a plan does not exit, by the Committee in its sole discretion. ARTICLE 9 Beneficiary Designation 9.1 Beneficiary. Each Participant shall have the right, at any time, to designate his or her Beneficiary(ies) (both primary as well as contingent) to receive any benefits payable under the Plan to a beneficiary upon the death of a Participant. The Beneficiary designated under this Plan may be the same as or different from the Beneficiary designation under any other plan of an Employer in which the Participant participates. 9.2 Beneficiary Designation; Change; Spousal Consent. A Participant shall designate his or her Beneficiary by completing and signing the Beneficiary Designation Form, and returning it to the Committee or its designated agent. A Participant shall have the right to change a Beneficiary by completing, signing and otherwise complying with the terms of the Beneficiary Designation Form and the Committee's rules and procedures, as in effect from time to time. If the Participant names someone other than his or her spouse as a Beneficiary, a spousal consent, in the form designated by the Committee, must be signed by that Participant's spouse and returned to the Committee. Upon the receipt by the Committee of a new Beneficiary Designation Form, all Beneficiary designations previously filed shall be cancelled. The Committee shall be entitled to rely on the last Beneficiary Designation Form filed by the Participant prior to his or her death. 9.3 Receipt. No designation or change in designation of a Beneficiary shall be effective until received by the Committee or its designated agent. 9.4 No Beneficiary Designation. If a Participant fails to designate a Beneficiary as provided in Sections 9.1, 9.2 and 9.3 above or, if all designated Beneficiaries predecease the Participant or die prior to complete distribution of the Participant's benefits, then the Participant's designated Beneficiary shall be deemed to be his or her surviving spouse. If the Participant has no surviving spouse, the benefits remaining under the Plan to be paid to a Beneficiary shall 14 19 be payable to the executor or personal representative of the Participant's estate. 9.5 Doubt as to Beneficiary. If the Committee has any doubt as to the proper Beneficiary to receive payments pursuant to this Plan, the Committee shall have the right, exercisable in its discretion, to cause the Participant's Employer to withhold such payments until this matter is resolved to the Committee's satisfaction. 9.6 Discharge of Obligations. The payment of benefits under the Plan to a Beneficiary shall fully and completely discharge all Employers and the Committee from all further obligations under this Plan with respect to the Participant, and that Participant's Plan Agreement shall terminate upon such full payment of benefits. ARTICLE 10 Leave of Absence 10.1 Paid Leave of Absence. If a Participant is authorized by the Participant's Employer for any reason to take a paid leave of absence from the employment of the Employer, the Participant shall continue to be considered employed by the Employer and the Annual Deferral Amount shall continue to be withheld during such paid leave of absence in accordance with Section 3.3. 10.2 Unpaid Leave of Absence. If a Participant is authorized by the Participant's Employer for any reason to take an unpaid leave of absence from the employment of the Employer, the Participant shall continue to be considered employed by the Employer and the Participant shall be excused from making deferrals until the earlier of the date the leave of absence expires or the Participant returns to a paid employment status. Upon such expiration or return, deferrals shall resume for the remaining portion of the Plan Year in which the expiration or return occurs, based on the deferral election, if any, made for that Plan Year. If no election was made for that Plan Year, no deferral shall be withheld. ARTICLE 11 Termination, Amendment or Modification 11.1 Termination. Any Employer reserves the right to terminate the Plan at any time with respect to its participating Employees and Directors by the action of its board of directors. Upon the termination of the Plan, all Plan Agreements of a Participant shall terminate and his or her Account Balance, determined as if he or she had experienced a Termination of Employment on the date of Plan termination or, if Plan termination occurs after the date upon which the Participant was eligible to Retire, the Participant had Retired on the date of 15 20 Plan termination, shall be paid to the Participant as follows. Prior to a Change in Control, an Employer shall have the right, in its sole discretion, and notwithstanding any elections made by the Participant, to pay such benefits in a lump sum or in monthly installments for up to 15 years, with interest credited during the installment period as provided in Section 3.6. After a Change in Control, the Employer shall be required to pay such benefits in a lump sum. The termination of the Plan shall not adversely affect any Participant or Beneficiary who has become entitled to the payment of any benefits under the Plan as of the date of termination; provided however, that the Employer shall have the right to accelerate installment payments by paying the present value equivalent of such payments, using the Crediting Rate for the Plan Year in which the termination occurs as the discount rate, in a lump sum or pursuant to a different payment schedule. 11.2 Amendment. Any Employer may, at any time, amend or modify the Plan in whole or in part with respect to that Employer by the action of its board of directors; provided, however, that no amendment or modification shall be effective to decrease or restrict the value of a Participant's Account Balance in existence at the time the amendment or modification is made, calculated as if the Participant had experienced a Termination of Employment as of the effective date of the amendment or modification, or, if the amendment or modification occurs after the date upon which the Participant was eligible to Retire, the Participant had Retired as of the effective date of the amendment or modification. The amendment or modification of the Plan shall not affect any Participant or Beneficiary who has become entitled to the payment of benefits under the Plan as of the date of the amendment or modification; provided, however, that the Employer shall have the right to accelerate installment payments by paying the present value equivalent of such payments, using the Crediting Rate for the Plan Year of the amendment or modification as the discount rate, in a lump sum or pursuant to a different payment schedule. 11.3 Interest Rate in the Event of a Change in Control and Interest. If a Change in Control occurs, the applicable interest rate to be used in determining a Participant's benefit in connection with a Termination of Employment after the Change in Control, or a Plan termination, amendment or modification under Sections 11.1 and 11.2, shall be the Preferred Rate. However, the Crediting Rate for the applicable Plan Year, and not the Preferred Rate, shall be used as the discount rate for determining present value. 11.4 Effect of Payment. The full payment of the applicable benefit under Articles 5, 6, 7 or 8 of the Plan shall completely discharge all obligations to a Participant and his or her designated Beneficiaries under this Plan and the Participant's Plan Agreement shall terminate. 16 21 ARTICLE 12 Administration 12.1 Committee Duties. This Plan shall be administered by a Committee which shall consist of the Board, or such committee as the Board shall appoint. Members of the Committee may be Participants under this Plan. The Committee shall also have the discretion and authority to (i) make, amend, interpret, and enforce all appropriate rules and regulations for the administration of this Plan and (ii) decide or resolve any and all questions including interpretations of this Plan, as may arise in connection with the Plan. 12.2 Agents. In the administration of this Plan, the Committee may, from time to time, employ agents and delegate to them such administrative duties as it sees fit (including acting through a duly appointed representative) and may from time to time consult with counsel who may be counsel to any Employer. 12.3 Binding Effect of Decisions. The decision or action of the Committee with respect to any question arising out of or in connection with the administration, interpretation and application of the Plan and the rules and regulations promulgated hereunder shall be final and conclusive and binding upon all persons having any interest in the Plan. 12.4 Indemnity of Committee. All Employers shall indemnify and hold harmless the members of the Committee against any and all claims, losses, damages, expenses or liabilities arising from any action or failure to act with respect to this Plan, except in the case of willful misconduct by the Committee or any of its members. 12.5 Employer Information. To enable the Committee to perform its functions, each Employer shall supply full and timely information to the Committee on all matters relating to the compensation of its Participants, the date and circumstances of the Retirement, Disability, death or Termination of Employment of its Participants, and such other pertinent information as the Committee may reasonably require. 17 22 ARTICLE 13 Other Benefits and Agreements 13.1 Coordination with Other Benefits. The benefits provided for a Participant and Participant's Beneficiary under the Plan are in addition to any other benefits available to such Participant under any other plan or program for employees of the Participant's Employer. The Plan shall supplement and shall not supersede, modify or amend any other such plan or program except as may otherwise be expressly provided. ARTICLE 14 Claims Procedures 14.1 Presentation of Claim. Any Participant or Beneficiary of a deceased Participant (such Participant or Beneficiary being referred to below as a "Claimant) may deliver to the Committee a written claim for a determination with respect to the amounts distributable to such Claimant from the Plan. If such a claim relates to the contents of a notice received by the Claimant, the claim must be made within 60 days after such notice was received by the Claimant. The claim must state with particularity the determination desired by the Claimant. All other claims must be made within 180 days of the date on which the event that caused the claim to arise occurred. The claim must state with particularity the determination desired by the Claimant. 14.2 Notification of Decision. The Committee shall consider a Claimant's claim within a reasonable time, and shall notify the Claimant in writing: (a) that the Claimant's requested determination has been made, and that the claim has been allowed in full; or (b) that the Committee has reached a conclusion contrary, in whole or in part, to the Claimant's requested determination, and such notice must set forth in a manner calculated to be understood by the Claimant: (i) the specific reason(s) for the denial of the claim, or any part of it; (ii) specific reference(s) to pertinent provisions of the Plan upon which such denial was based; (iii) a description of any additional material or information necessary for the Claimant to perfect the claim, and an explanation of why such material or information is necessary; and 18 23 (iv) an explanation of the claim review procedure set forth in Section 14.3 below. 14.3 Review of a Denied Claim. Within 60 days after receiving a notice from the Committee that a claim has been denied, in whole or in part, a Claimant (or the Claimant's duly authorized representative) may file with the Committee a written request for a review of the denial of the claim. Thereafter, but not later than 30 days after the review procedure began, the Claimant (or the Claimant's duly authorized representative): (a) may review pertinent documents; (b) may submit written comments or other documents; and/or (c) may request a hearing, which the Committee, in its sole discretion, may grant. 14.4 Decision on Review. The Committee shall render its decision on review promptly, and not later than 60 days after the filing of a written request for review of the denial, unless a hearing is held or other special circumstances require additional time, in which case the Committee's decision must be rendered within 120 days after such date. Such decision must be written in a manner calculated to be understood by the Claimant, and it must contain: (a) specific reasons for the decision; (b) specific reference(s) to the pertinent Plan provisions upon which the decision was based; and (c) such other matters as the Committee deems relevant. 14.5 Legal Action. A Claimant's compliance with the foregoing provisions of this Article 14 is a mandatory prerequisite to a Claimant's right to commence any legal action with respect to any claim for benefits under this Plan. ARTICLE 15 Trust 15.1 Establishment of the Trust. The Company shall establish the Trust, and the Employers shall at least annually transfer over to the Trust such assets as the Employers determine, in their sole discretion, are necessary to provide for their respective future liabilities created with respect to the Annual Deferral Amounts and interest credits for that year. 19 24 15.2 Interrelationship of the Plan and the Trust. The provisions of the Plan and the Plan Agreement shall govern the rights of a Participant to receive distributions pursuant to the Plan. The provisions of the Trust shall govern the rights of the Employers, Participants and the creditors of the Employers to the assets transferred to the Trust. Each Employer shall at all times remain liable to carry out its obligations under the Plan. Each Employer's obligations under the Plan may be satisfied with Trust assets distributed pursuant to the terms of the Trust, and any such distribution shall reduce the Employer's obligations under this Agreement. ARTICLE 16 Miscellaneous 16.1 Unsecured General Creditor. Participants and their Beneficiaries, heirs, successors and assigns shall have no legal or equitable rights, interests or claims in any property or assets of an Employer. Any and all of an Employer's assets shall be, and remain, the general, unpledged unrestricted assets of the Employer. An Employer's obligation under the Plan shall be merely that of an unfunded and unsecured promise to pay money in the future. 16.2 Employer's Liability. An Employer's liability for the payment of benefits shall be defined only by the Plan and the Plan Agreement as entered into between the Employer and a Participant. An Employer shall have no obligation to a Participant under the Plan except as expressly provided in the Plan and his or her Plan Agreement. 16.3 Nonassignability. Neither a Participant nor any other person shall have any right to commute, sell, assign, transfer, pledge, anticipate, mortgage or otherwise encumber, transfer, hypothecate or convey in advance of actual receipt, the amounts, if any, payable hereunder, or any part thereof, which are, and all rights to which are expressly declared to be, unassignable and non-transferable, except that the foregoing shall not apply to any family support obligations set forth in a court order. No part of the amounts payable shall, prior to actual payment, be subject to seizure or sequestration for the payment of any debts, judgments, alimony or separate maintenance owed by a Participant or any other person, nor be transferable by operation of law in the event of a Participant's or any other person's bankruptcy or insolvency. 16.4 Not a Contract of Employment. The terms and conditions of this Plan shall not be deemed to constitute a contract of employment between any Employer and the Participant. Such employment is hereby acknowledged to be an "at will" employment relationship that can be terminated at any time for any reason, or no reason, with or without cause, and with or without notice, unless expressly provided in a written employment agreement. Nothing in this Plan shall be deemed to give a Participant the right to be retained in the service of 20 25 any Employer, either as an Employee or a Director, or to interfere with the right of any Employer to discipline or discharge the Participant at any time. 16.5 Furnishing Information. A Participant or his or her Beneficiary will cooperate with the Committee by furnishing any and all information requested by the Committee and take such other actions as may be requested in order to facilitate the administration of the Plan and the payments of benefits hereunder, including but not limited to taking such physical examinations as the Committee may deem necessary. 16.6 Terms. Whenever any words are used herein in the singular or in the plural, they shall be construed as though they were used in the plural or the singular, as the case may be, in all cases where they would so apply. 16.7 Captions. The captions of the articles, sections and paragraphs of this Plan are for convenience only and shall not control or affect the meaning or construction of any of its provisions. 16.8 Governing Law. Subject to ERISA, the provisions of this Plan shall be construed and interpreted according to the internal laws of the State of Washington without regard to its conflicts of laws principles. 16.9 Notice. Any notice or filing required or permitted to be given to the Committee under this Plan shall be sufficient if in writing and hand-delivered, or sent by registered or certified mail, to the address below: 815 Mercer Street P.O. Box 1869 Seattle, Washington 98111 Such notice shall be deemed given as of the date of delivery or, if delivery is made by mail, as of the date shown on the postmark on the receipt for registration or certification. Any notice or filing required or permitted to be given to a Participant under this Plan shall be sufficient if in writing and hand-delivered, or sent by mail, to the last known address of the Participant. 16.10 Successors. The provisions of this Plan shall bind and inure to the benefit of the Participant's Employer and its successors and assigns and the Participant and the Participant's designated Beneficiaries. 21 26 16.11 Spouse's Interest. The interest in the benefits hereunder of a spouse of a Participant who has predeceased the Participant shall automatically pass to the Participant and shall not be transferable by such spouse in any manner, including but not limited to such spouse's will, nor shall such interest pass under the laws of intestate succession. 16.12 Validity. In case any provision of this Plan shall be illegal or invalid for any reason, said illegality or invalidly shall not affect the remaining parts hereof, but this Plan shall be construed and enforced as if such illegal or invalid provision had never been inserted herein. 16.13 Incompetent. If the Committee determines in its discretion that a benefit under this Plan is to be paid to a minor, a person declared incompetent or to a person incapable of handling the disposition of that person's property, the Committee may direct payment of such benefit to the guardian, legal representative or person having the care and custody of such minor, incompetent or incapable person. The Committee may require proof of minority, incompetency, incapacity or guardianship, as it may deem appropriate prior to distribution of the benefit. Any payment of a benefit shall be a payment for the account of the Participant and the Participant's Beneficiary, as the case may be, and shall be a complete discharge of any liability under the Plan for such payment amount. 16.14 Court Order. The Committee is authorized to make any payments directed by court order in any action in which the Plan or the Committee has been named as a party. 16.15 Distribution in the Event of Taxation. (a) General. If, for any reason, all or any portion of a Participant's benefit under this Plan becomes taxable to the Participant prior to receipt, a Participant may petition the Committee for a distribution of that portion of his or her benefit that has become taxable. Upon the grant of such a petition, which grant shall not be unreasonably withheld, a Participant's Employer shall distribute to the Participant immediately available funds in an amount equal to the taxable portion of his or her benefit (which amount shall not exceed a Participant's unpaid Account Balance under the Plan). If the petition is granted, the tax liability distribution shall be made within 90 days of the date when the Participant's petition is granted. Such a distribution shall affect and reduce the benefits to be paid under this Plan. (b) Trust. If the Trust terminates in accordance with Section 3.6(e) of the Trust and benefits are distributed from the Trust to a Participant in 22 27 accordance with that Section, the Participant's benefits under this Plan shall be reduced to the extent of such distributions. 16.16 Taxes and Withholding. The Participant's Employer(s), or the trustee of the Trust in accordance with the terms of the Trust, may withhold from any distribution under this Plan any and all employment and income taxes that are required to be withheld under applicable law. 16.17 Enforcement of Rights After Change in Control. The Company is aware that upon the occurrence of a Change in Control, the Board (which might then be composed of new members) or a shareholder of the Company or of any successor corporation, might then cause or attempt to cause the Company or such successor to refuse to comply with its obligations under the Plan and might cause or attempt to cause the Company to institute, or may institute, litigation seeking to deny Participants the benefits intended under the Plan. In these circumstances, the purpose of the Plan could be frustrated. Accordingly, if, following a Change in Control, the Company fails to comply with any of its obligations under the Plan or any agreement thereunder or, if the Company or any other person takes any action to declare the Plan void or unenforceable or institutes any litigation or other legal action designed to deny, diminish or to recover from any Participant the benefits intended to be provided, then such Participant may retain counsel of his or her choice to represent such Participant in connection with the initiation or defense of any litigation or other legal action, whether by or against the Company or any director, officer, shareholder or other person affiliated with the Company or any successor thereto in any jurisdiction. In any litigation or other legal action, the prevailing party shall be entitled to recover reasonable attorney's fees and costs. IN WITNESS WHEREOF, the Company has signed this Plan document as of September 1, 1995. Washington Natural Gas Company By: ---------------------- Title: ---------------------- 23 EX-10.I 7 EXECUTIVE RETIREMENT COMPENSATION AGREEMENT 1 EXHIBIT 10-I WASHINGTON NATURAL GAS COMPANY AMENDED EXECUTIVE RETIREMENT COMPENSATION AGREEMENT THIS AMENDED AGREEMENT made and entered into in the City of Seattle, State of Washington, this 16th day of August, 1995, by and between WASHINGTON NATURAL GAS COMPANY, a Washington company (hereinafter referred to as "the Company") and ________________, (hereinafter referred to as the "Executive"). WHEREAS, the Executive has been employed by the Company in an executive capacity for a number of years, upon the terms from time to time mutually agreed upon by the Company and the Executive, and has rendered valuable services to the Company; and WHEREAS, the Company wishes to be reasonably assured that the Executive will continue with the Company and desires to retain his or her services and to provide an incentive for such Executive to continue to perform exceptional services and to devote his or her full abilities and industry to the success of the Company's business; Now, Therefore, in consideration of the services performed in the past and to be performed in the future by said Executive, the parties hereto agree as follows: 1. Normal Retirement. The Executive's Normal Retirement Date under this Agreement shall be the first day of the month coincident with or next following his or her 65th birthday. Upon such date the Executive shall retire from the active and daily service of the Company, unless the Company requests, and the Executive agrees to, his or her continued employment. Notwithstanding the Normal Retirement Date, the Executive may elect to retire from or after the first day of the month coincident with or next following his or her 62nd birthday. Upon retirement, pursuant to this section 1 of this Agreement the Company shall pay to the Executive a monthly pension in an amount sufficient to provide a Total Monthly Retirement Benefit (as defined below) equal to 70% of the Executive's average basic monthly salary (excluding bonuses, fringe benefits and other special pay, but including commissions) for his or her highest three (3) years within the last eight (8) years of employment with the Company or, if the Executive has not been employed by the Company for eight (8) years, such lesser number of years of actual employment with the Company. For purposes of this determination, each year of employment shall be a twelve (12) month period ending on the last day of the month preceding the month of retirement. In determining the monthly pension payable hereunder the Executive's "Total Monthly Retirement 1 2 Benefit" shall include the aggregate of the following benefits available each month to the Executive at the time of his or her retirement: (i) the Primary Insurance Amount available under Social Security; (ii) the maximum monthly benefit amounts available to the Executive (regardless of the form of distribution actually paid) under the Company's Retirement Plan or any other retirement plan or plans (excluding cash/deferred or stock bonus or ownership plans) maintained by the Company or any former employer of the Executive; and (iii) benefits payable under this Agreement. If any of the benefits described in clause (ii) preceding are distributed in lump-sum or any other form other than monthly, such amount shall be actuarially converted to a monthly benefit for purposes of calculating the retirement benefit payable under this Agreement. Such amount shall be payable to the Executive upon the first business day of each calendar month beginning the month after his or her retirement. The Company shall make such monthly payments as calculated above to the Executive for his or her life. If the Executive should die prior to 120 months after his or her retirement payments commence, the Company shall continue to make the monthly payments as calculated to the beneficiary or beneficiaries designated in the Executive's Beneficiary Designation Form for the balance of the 120 months; provided, however, that the Company may elect payment of the balance in annual, rather than monthly, payments; and provided further that if the Executive's designated beneficiary is his or her spouse at the time of his or her retirement and such spouse is still the designated beneficiary and married to the Executive at the time of his or her death (whether during or after the 120-month period following retirement), the monthly payments as calculated above shall continue beyond such 120 months at a reduced level for the life of such surviving spouse, in an amount equal to fifty percent (50%) of such monthly payment. If there are no such surviving beneficiaries or if the designation should be ineffective for any reason, the monthly (or annual) payment shall be paid to the executor or administrator of the Executive for the balance of the 120-month period. 2. Early Retirement. The Executive's early retirement date under this Agreement shall be the first day of the month coincident with or next following his or her 59th birthday. At any time on or after such date the Executive may, with the consent of the Compensation and Benefits Committee of the Company's Board of Directors, retire from the active and daily service of the Company ("Early Retirement"). In the event of such Early Retirement, pursuant to this Agreement the Company shall pay to the Executive a monthly pension in an amount sufficient to provide a "Total Monthly Retirement Benefit" (as defined and calculated under Paragraph 1 above) equal to the following percentage of the Executive's average basic monthly salary (excluding bonuses, fringe benefits and other special pay, but including commissions) for his 2 3 or her highest three (3) years within the last eight (8) years of employment with the Company or, if the Executive has not been employed by the Company for eight (8) years, such lesser number of years of actual employment with the Company. For purposes of this determination, each year of employment shall be a twelve (12) month period ending on the last day of the month preceding the month of retirement.
Age at Early Retirement Applicable Percentage - ----------------------- --------------------- 59 60% 60 63% 61 67%
Such amount shall be payable to the Executive (or his or her beneficiaries in the event of death) in the same time and manner as provided in Paragraph 1 with respect to payments upon Normal Retirement. 3. Disability. In the event that Executive shall, while still in the active employ of the Company, but prior to his or her Normal Retirement Date, become totally and permanently disabled (as determined in accordance with the provisions of the Company's long-term disability plan), the Company shall pay to him or her, beginning with the first day of the month after he or she ceases to be considered an employee under the terms of the Company's long-term disability plan, a monthly pension of ___________ per month. The Company shall make such monthly payments to Executive for his or her life. If Executive should die prior to 120 months after his or her payments hereunder commence, the Company shall continue to make the monthly payments to the beneficiary or beneficiaries designated in the attached Beneficiary Designation Form for the balance of the 120 months; provided, however, that the Company may elect payment of the balance in annual, rather than monthly, payments. If there are no such surviving beneficiaries, or if the designation should be ineffective for any reason, the monthly (or annual) payments shall be paid to the executor or administrator of the Executive. Provided, however, that notwithstanding any other provision of this Agreement, in no event shall the combination of the monthly payments hereunder and monthly payments under the Company's Long Term Disability Plan exceed 75% of the Executive's monthly compensation at the time of his or her disability. In the event this limitation would otherwise be exceeded, it is understood and agreed that the Company shall reduce its payments hereunder accordingly, it being the intention of this Agreement and the parties hereto that there shall be no reduction in the payments 3 4 otherwise available to the Executive under the terms of the Company's insured Long Term Disability Income Plan. 4. Death. If Executive should die while still in the active employ of the Company, but prior to his or her Normal Retirement Date, the Company will pay to the beneficiary or beneficiaries designated in the attached Beneficiary Designation Form 120 monthly installments of ___________ per month, beginning the first day of the month following the month in which the Executive dies; provided, however, that the Company may elect payment of the balance in annual, rather than monthly, installments; and provided further that if the Executive's designated beneficiary is his or her current spouse at the time of his or her death, the monthly payment provided for in this section shall continue beyond 120 months at a reduced level for the life of such surviving spouse, in an amount equal to fifty percent (50%) of such monthly payment. If there are no such surviving beneficiaries, or if the designation should be ineffective for any reason, the monthly (or annual) payments shall be paid to the executor or administrator of the Executive for the 120-month period. 5. Conditions of Payments - Vesting. (a) Except as hereafter provided, in order to become entitled to any payments under this Agreement the Executive must be an employee of the Company at the time of his or her retirement, death or disability (as set forth above). Except as hereafter provided, termination of the Executive's employment with or without cause, or voluntarily or involuntarily, except by retirement, death or disability (as set forth above), shall constitute a failure to comply with the terms of this Paragraph: (i) Vesting - Notwithstanding the foregoing, if the Executive's employment is involuntarily terminated by the Company (with or without cause), 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 Paragraphs 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 65, and except that for purposes of calculating the monthly pension, each year of employment shall be a twelve (12) month period ending on the last day of the month preceding the month of involuntary termination. 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. 4 5 (ii) Change in Control - Notwithstanding any other term or provision of this Agreement, the Executive's rights to the benefits provided in this Agreement shall be 100% vested (i.e. nonforfeitable) upon a change in control of Washington Energy Company, a Washington corporation ("WECO"). In such event, the benefits described in Paragraphs 1, 2, 3, 4 or 5(a)(i) shall be payable to the Executive when he or she reaches his or her Normal Retirement Date, elects Early Retirement (which shall not require employer consent after a change in control of WECO), becomes disabled, dies, or is terminated (regardless of his or her age or years of service upon termination), whichever occurs first. For purposes of this Agreement, a "change in control of WECO" shall mean a change in control of a nature that would be required to be reported in response to Item 6(e), or any successor section, of Schedule 14A of Regulation 14A promulgated under the Securities Exchange Act of 1934, as amended ("Exchange Act"); provided that, without limitation, such a change in control shall be deemed to have occurred if (i) any "person" (as such term is used in Sections 13(d) and 14(d) of the Exchange Act) is or becomes the "beneficial owner" (as defined in Rule 13d - 3 under the Exchange Act), directly or indirectly, of securities of the WECO representing 10% or more of the combined voting power of the WECO's then outstanding securities; or (ii) during any period of two consecutive years, individuals who at the beginning of such period constitute the Board cease for any reason to constitute at least a majority thereof and the election, or the nomination for election by the WECO's stockholders, of each new director was opposed by a vote of at least one-third of the directors then still in office who were directors at the beginning of the period. (b) Notwithstanding any other provision of this Agreement, for purposes of this Agreement employment and officer status with any related corporations which are members of the affiliated group (as such term is defined in Section 1504(a) of the Internal Revenue Code) of corporations of which the Company is a member, shall be considered as employment and officer status with the Company. 6. Nonassignability. Neither the Executive, nor any beneficiary under this Agreement shall have any power to transfer, assign, anticipate, hypothecate, or otherwise encumber in advance any of the benefits payable hereunder, nor shall said benefits be subject to seizure for the benefit of any debts or judgments, or be transferable by operation of law in the event of bankruptcy, insolvency or otherwise. 7. Other Benefits Not Affected. Nothing in this Agreement shall diminish or impair the Executive's eligibility, participation or benefit entitlement under any other benefit, insurance or 5 6 compensation plan or agreement of this Company now or hereafter in effect. 8. Successors. This Agreement shall be binding upon the parties hereto, their heirs, executors, administrators or successors. 9. Amendment. This Agreement may be amended or revoked at any time by mutual written agreement of the parties. 10. Claim Procedure. The parties hereby adopt the following claim procedure for the Company's unfunded and non-qualified deferred compensation plan (the "Plan") provided under this Executive Retirement Compensation Agreement; and, for purposes of implementing such claims procedure (but not for any other purpose), the Administrative Committee which also administers the Company's Retirement Plan is hereby designated as the "Named Fiduciary" and "Plan Administrator" of this Plan: (a) Filing of a Claim for Benefits. A participant or beneficiary of the Plan shall make a claim for the benefits provided by delivering a written request to the Administrative Committee. (b) Notification to Claimant of Decision. If a claim is wholly or partially denied, notice of the decision, meeting the requirements of Paragraph (c) following, shall be furnished the claimant within a reasonable period of time after receipt of the claim by the Administrative Committee. (c) Content of Notice. The Administrative Committee shall provide to every claimant who is denied a claim for benefits written notice setting forth in a manner calculated to be understood by the claimant, the following: (1) The specific reason or reasons for the denial; (2) Specific reference to pertinent Plan provisions on which the denial is based; (3) A description of any additional material or information necessary for the claimant to perfect the claim and an explanation of why such material or information is necessary; and (4) An explanation of the Plan's claim review procedure, as set forth in Paragraph (d) and (e) following. 6 7 (d) Review Procedure. The purpose of the review procedure set forth in this paragraph and in paragraph (e) following is to provide a procedure by which a claimant under the Plan may have a reasonable opportunity to appeal a denial of a claim to the Administrative Committee for a full and fair review. To accomplish that purpose, the claimant or his or her duly authorized representative: (1) May request a review upon written application to the Administrative Committee; (2) May review pertinent Plan documents; and (3) May submit issues and comments in writing. A claimant (or his or her duly authorized representative) shall request a review by filing a written application for review with the Administrative Committee at any time within sixty (60) days after receipt by the claimant of written notice of the denial of his claim. (e) Decision on Review. The decision on review of a denied claim shall be made in the following manner: (1) The decision on review shall be made by the Administrative Committee, which may in its discretion hold a hearing on the denied claim. The Administrative Committee shall make its decision promptly, and not later than sixty (60) days after receipt of the request for review, unless special circumstances (such as the need to hold a hearing) require an extension of time for processing, in which case a decision shall be rendered as soon as practicable, but not later than one hundred twenty (120) days after receipt of a request for review. (2) The decision on review shall be in writing and shall include specific reasons for the decision, written in a manner calculated to be understood by the claimant, and specific references to the pertinent Plan provisions on which the decision is based. 11. Withholding. Anything to the contrary notwithstanding, all payments required to be made by the Company hereunder to the Executive or his or her estate or beneficiaries shall be subject to the withholding of such amounts, if any, relating to tax and other payroll deductions as the Company may reasonably determine it should withhold pursuant to any applicable law or regulation. In lieu of withholding such amounts, the Company may accept other provisions to the end that it has sufficient funds to pay all taxes 7 8 required by law to be withheld in respect of any or all of such payments. 12. No Trust. Anything to the contrary notwithstanding, this Agreement shall not be deemed to create a trust of any kind or to create a fiduciary relationship. Any investments (including, without limitation, any insurance contract on the life of the Executive) or earmarking of any funds by the Company made with respect to this Agreement shall continue for all purposes to be a part of the Company's general funds, and no person other than the Company shall, by virtue of any provisions of this Agreement, have any interest in any such investments or funds. To the extent that the Executive acquires a right to receive payments under this Agreement, such right shall be no greater than the right of any unsecured general creditor of the Company. 13. Prior Agreement(s) Superseded. This Agreement revokes, replaces and supersedes any prior retirement compensation agreements between the Executive and the Company, including the Agreement dated May 1, 1992 and any amendments thereto, but any prior beneficiary designations by Executive shall remain in effect. IN WITNESS WHEREOF, the Company has caused this Agreement to be executed by its Chief Executive Officer and its corporate seal affixed, duly attested by its Secretary, and the Executive has signed this Agreement, on the date first above written. WASHINGTON NATURAL GAS COMPANY By: ------------------------------- William P. Vititoe, Chief Executive Officer (SEAL) ATTEST: - -------------------------------- Robert J. Tomlinson, Secretary EXECUTIVE: ------------------------------- Name 8 EX-10.J.2 8 INTERIM PERFORMANCE SHARE PLAN EFFECTIVE 12/7/94 1 EXHIBIT 10-J.2 INTERIM PERFORMANCE AWARD PLAN Washington Energy Company December 7, 1994 2 RATIONALE In place of the current performance share plan, Washington Energy recommends the implementation of an interim performance award plan to accomplish the following purpose: To develop an award structure for the new executive management team to motivate and reward attainment of new financial and strategic goals reflecting the successful reorganization of the company. On the following pages are recommended specifications for a new plan. 1 3 INTERIM PERFORMANCE AWARD PLAN SPECIFICATIONS
Comments Eligibility All current performance share plan Retirees would not be eligible and would participants who are active employees on just continue under their existing October 1, 1994. cycles. Performance Four years Reflects restructuring plans. Cycle October 1, 1994 - September 30, 1998 Award Total Shareholder Return (TSR) TSR is an appealing measure to use where Measures shareholder value creation is a primary strategic objective. See discussion of TSR and suggested award measures on page 4. Award Recommended Typical Opportunities Units* Range ---------------------------------------- CEO 11,400 9,500-15,000 CFO, SRVP - Operations 7,800 6,500-10,500 SRVP - Legal and HR 4,500 3,500-6,000 VP - Supply and Administration, President WES Other VPs and 2,000-3,500 SRVP - Public Affairs *Unit equals cash value of one share of WECO common stock. Grant This is a one-time only special grant. Frequency A new ongoing performance plan will be initiated in the following year. Vesting of Vesting of a percentage of total units If a cumulative award target is met at Shares would be made annually based on the end of the cycle, the Compensation achievement of Committee has discretion to vest performance targets. remaining shares not previously vested through achievement of annual targets. 1995 15% 1996 15% 1997 30% 1998 40% Award Paid in cash at the end of the Cash plan would not be subject to Payments performance cycle. shareholder approval.
2 4 Dividends Dividend equivalents on total target Dividends are assumed to be reinvested units would be accrued during the in stock equivalents. performace period. Payment would be made at the end of the cycle for the percentage that was vested. Termination Participants must be active employees at Death, retirement, or disability of the the end of the performance cycle executive would be the only exceptions (9/30/98) to be eligible for any award to this. In that case, payment would be payments. made for vested units earned to date.
3 5 TOTAL SHAREHOLDER RETURN Definition of TSR = Appreciation in stock Price + Dividends* ---------------------------------------- Beginning Stock Price - - TSR can be measured annually or cumulatively over a period of time. - - The beginning stock price will be equal to the average of the high and low prices of stock for each day of the month of September 1994. The ending stock price for the annual calculations will be the average of high and low for each day of September in 1995, 1996, 1997, and 1998. *The proxy TSR chart and the dividend equivalents in the plan assume reinvestment of dividends in stock. However, for purposes of calculating TSR in the award formula below, no reinvestment of dividends is assumed for Washington Energy or the comparator group. RECOMMENDED APPROACH
Annual Earned Vesting Percent --------------- Cumulative 75th %ile 100% Relative TSR Compared to 50th %ile 50% AGA Member Distribution 30th %ile 30% Companies with Total Less than 0% Capitalization 30th %ile >$200 Million
- - There is also a minimum 7.5% Absolute TSR that must be achieved annually for any vesting to occur in that year. The Compensation Committee has the discretion to adjust the minimum Absolute TSR as it deems appropriate to reflect issues such as extraordinary items or dividends paid but not earned. - - At the end of the performance cycle, if the cumulative Relative TSR is greater than or equal to the 50th percentile, the Compensation Committee can choose to vest any portion (or all) of the remaining shares. 4 6 EXAMPLE: VP (2,700 INTERIM UNITS)
Annual Cumulative Annual Vesting Absolute Relative TSR Annual Earned Units Opportunity TSR %ile Vesting % Earned - -------------------------------------------------------------------------------- 1995 15% 405 4% 55%ile 0% 0 1996 15% 405 8% 65%ile 50% 203 1997 30% 810 12% 75%ile 100% 810 1998 40% 1,080 12% 70%ile 50% 540 --- ----- ----- 100% 2,700 1,553
Since the cumulative TSR was greater than the 50th percentile at the end of the performance cycle, the Compensation Committee cold choose to vest additional units up to the maximum (2,700) number of units. 5 EX-10.M.3 9 AMENDED & RESTATED ANNUAL INCENTIVE PLAN 1 EXHIBIT 10-M.3 ANNUAL INCENTIVE PLAN Washington Energy Company October 1994 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: - Provide incentive to meet Company, department, and individual goals. - Link a greater portion of executive pay to achieving objectives. Administration: The plan will be administered by the Chairman, CEO, and President at the direction of the Compensation Committee of the Board of Directors. Award Levels: Award Levels (% of Base Salary) ------------------------------------------------- Position Threshold Target Maximum --------- ------ ------- Chairman, CEO, and President 20 40 60 SVP - Planning, Dev & CFO 15 30 45 SVP - Operations 15 30 45 SVP - Legal and HR and 15 25 35 President, WESCO 15 25 35 VP - Supply and Administration 15 25 35 SVP - Public Affairs 10 20 30 VP's 10 20 30 Weighting of Company and Department A portion of the participant s potential award will be Performance Results: determined by "Corporate Performance" and the remaining portion will be determined by "Department Performance." These portions will be based on position as follows: Percentage of Target Award Based On: ------------------------------------------------- Position Corporate Department Performance Performance ----------- ----------- Chairman, CEO, and President 100% - SVP - Planning, Development & CFO 100% - SVP - Operations 100% SVP s/VP - Supply & Administration 60% 40% President, WESCO 25% 75% Other VP s 50% 50%
-1- 2 Corporate and Department Corporate Performance. Corporate performance will be Performance Measures: defined as Washington Energy Company Performance. The Corporate performance measure(s) will be as shown on the attached Exhibit 1. Other financial measures may be used at the discretion of the Committee. 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. Minimum Corporate Performance: The incentive cash payment for any specific Corporate Performance Measure achieved will be paid for that measure independent of attainment on other measures as long as threshold attainment has been achieved for that specific measure. Award Adjustments: The Chairman, CEO and President can recommend discretionary award adjustments of +30% of the award amount. If individual performance is significantly inferior, the Chairman, CEO and President may significantly reduce or eliminate the total incentive cash payment award for that participant regardless of Corporate or Department performance. The Effect of Extraordinary and In comparing actual performance against the Nonrecurring Items: performance goals, the Compensation Committee may exclude from such comparison any extra-ordinary or nonrecurring gains, losses, charges, or credits which appear on the Company s books and records as it deems appropriate. Less Than Full-Year Plan If an individual becomes a participant after the Participation: beginning of the Plan Year, the Chairman, CEO, and President 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. 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.
-2- 3 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. Final Award Payment Approval: The Compensation Committee of the Board of Directors has final approval of all incentive cash payments.
-3- 4 Exhibit #1 Corporate Performance Measures Fiscal Year 1995
Measure* Threshold Target Maximum - ------------------------------------------------------------------------------------------------------------ Productivity O&M cost per average O&M cost per average O&M cost per average Customer less than or Customer less than or Customer less than or equal to $137 equal to $134 equal to $130 Operating Income Target for 1995 greater Target for 1995 greater than or equal to $59.5mm than or equal to $62.5mm Capital Expenditures - Non-revenue gen- - Non-revenue gen- erating capital erating capital less than or less than or equal to $34mm equal to $32mm - Revenue - generat- - Revenue-generating ing capital earns capital earns rate/return rate/return - ------------------------------------------------------------------------------------------------------------
* Performance measures shall be weighted equally. -4- EX-12 10 COMPUTATION OF RATIOS 1 Exhibit 12 WASHINGTON NATURAL GAS COMPANY
Ratio of earnings to fixed charges: Fiscal Year Ended September 30 ------------------------------------------------------------ 1991 1992 1993 1994 1995 ------ ------ ------ ------- ------ 1. Net Income (loss) 29,409 12,231 21,771 (8,243) 17,854 2. Add: Federal Income taxes 14,000 4,902 9,547 (5,991) 8,195 Extraordinary Non Recurring Items of expense ------ ------ ------ ------- ------ 3. Subtotal 43,409 17,133 31,318 (14,234) 26,049 4. Deduct interest capitalized (622) (656) (250) (453) (660) 5. Adjusted Net Income from Continuing Operations 42,787 16,477 31,068 (14,687) 25,389 Add Fixed Charges: Interest Expense on Funded and Unfunded Debt 24,425 26,249 26,381 29,275 30,275 Amortization of Debt Discount 169 299 361 392 375 Other interest expense 208 (502) 340 1,097 1,566 Interest Capitalized 622 656 250 453 660 Rental for leased properties 1,406 1,517 1,633 1,337 1,338 ------ ------ ------ ------- ------ 8. Total fixed charges 26,830 28,219 28,965 32,554 34,214 9. Preferred dividend requirement (pre-tax equivalent) 4,067 3,838 3,913 6,122 10,397 ------ ------ ------ ------- ------ 10. Total combined fixed charges and preferred dividends 30,897 32,057 32,878 38,676 44,611 11. Net Earnings Available for Combined Fixed Charges and Preferred dividends (5 plus 8) 69,617 44,696 60,033 17,867 59,603 12. Ratio of Earnings to combined fixed charges and preferred dividends (11 divided by 10) 2.25 1.39 1.83 0.46 (1) 1.34 ====== ====== ====== ======= ======
(1) For the year ended September 30, 1994, earnings were inadequate to cover fixed charges by $ 20,809,000. Page 1 EX-21 11 SUBSIDIARIES OF THE REGISTRANT 1 EXHIBIT 21 SUBSIDIARIES OF THE REGISTRANTS Subsidiaries of Washington Energy Company: Washington Natural Gas Company, a Washington corporation, distributes natural gas at the retail level in the Puget Sound area of western Washington. WNG CAP I, Inc., a Washington corporation, and WNG CAP II, Inc., a Washington corporation, were formed to provide operational flexibility with respect to firm transportation agreements of Washington Natural Gas Company. Thermal Energy, Inc., a Washington corporation, owns or leases undeveloped coal reserves and surface rights to undeveloped coal in Montana. Thermal Resources, Inc., a Montana corporation, is a wholly-owned subsidiary of Thermal Energy, Inc. Thermal Resources, Inc., is a single purpose company that leases undeveloped coal reserves in Montana to Montco, a partnership controlled by Thermal Energy, Inc. ThermRail, Inc., a Washington corporation, was formed to participate as a partner in the Tongue River Railroad Company. The purpose of Tongue River Railroad Company is to develop and operate a rail line to transport coal from future mines in Montana's Tongue River area to existing east-west rail lines. Tongue River Holdings, Inc., a Montana corporation, is a limited partner in Tongue River Railroad Company, a Montana limited partnership. ThermRail, Inc., owns 87.5% of the common stock of this corporation. WECO Finance Company, a Washington corporation, is holder of the common stock of Mercer Insurance Company Limited. Mercer Insurance Company Limited, a wholly-owned subsidiary of WECO Finance Company, is a Bermuda domiciled corporation providing primary liability insurance for Washington Energy Company and its affiliates. Washington Energy Services Company, a Washington corporation, was formed October 1, 1993 to consolidate the merchandise marketing activities that previously were part of Washington Natural Gas Company and a former subsidiary of Washington Energy. Washington Energy Gas Marketing, a Washington corporation, was formed in 1994 to assume certain contractual arrangements excluded from the merger of Washington Energy Resources Company, the former oil and gas exploration and production subsidiary of Washington Energy, with a subsidiary of Cabot Oil & Gas Corporation. EX-27.1 12 WASHINGTON ENERGY CO. FINANCIAL DATA SCHEDULE
UT 0000225998 WASHINGTON ENERGY CO. 1,000 YEAR SEP-30-1995 SEP-30-1995 PER-BOOK 791,658 75,863 76,369 19,879 25,721 989,490 120,348 202,616 (126,278) 196,686 0 90,000 310,060 0 0 161,994 30,140 0 0 0 200,610 989,490 443,611 5,507 386,308 391,815 51,796 (52,330) (534) 40,528 (41,062) 0 (41,062) 23,877 27,677 84,640 (1.72) (1.72)
EX-27.2 13 WASHINGTON NATURAL GAS FINANCIAL DATA SCHEDULE
UT 0000104880 WASHINGTON NATURAL GAS COMPANY 1,000 YEAR SEP-30-1995 SEP-30-1995 PER-BOOK 791,658 0 55,044 18,073 25,823 890,598 54,911 167,752 28,865 251,528 0 90,000 310,060 0 0 0 30,140 0 0 0 208,870 890,598 420,048 8,531 361,004 369,535 50,513 (443) 50,070 32,216 17,854 7,126 10,728 0 27,677 112,789 .99 .99
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