UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.D. C. 20549
FORM 10-Q
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þ
| Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the quarterly period ended December 31, 2017September 30, 2019
OR
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¨o
| Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the transition period from _____ to _____Commission File Number:0-49807
WASHINGTON GAS LIGHT COMPANY
(Exact name of Registrant as Specified in Its Charter)
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| District of Columbia and Virginia | | | | | | 53-0162882 |
Commission
File Number
| Exact name of registrant as
specified in its charter; address of principal executive offices; registrant's telephone number, including area code
| (State or Other Jurisdiction of IncorporationIncorporation)
| | | | | | (I.R.S. Employer Identification No. |
1-16163 | WGL Holdings, Inc.
101 Constitution Ave., N.W.
Washington, D.C. 20080
(703) 750-2000
| Virginia | 52-2210912 |
0-49807 | Washington Gas Light Company
101 Constitution Ave., N.W.
Washington, D.C. 20080
(703) 750-4440
| District of
Columbia
and Virginia
| 53-0162882) |
1000 Maine Ave., S.W.
Washington, D.C. 20024
(Address of Principal Executive Offices and Zip Code)
(703) 750-4440
(Registrant’s telephone number, including area code)
Indicate by check mark whether eachthe registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrants were required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes þ[ü] No ¨[ ]
Indicate by check mark whether eachthe registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ[ü] No ¨[ ]
Indicate by check mark whether eachthe registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
WGL Holdings, Inc.:
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| Large accelerated filerAccelerated Filer þo | | Accelerated filerFiler ¨o | | Non-accelerated filerNon-Accelerated Filer ¨[ü]
| | Smaller reporting companyReporting Company ¨o |
| | | | (Do not check if a smaller reporting company) | | |
| Emerging growth company ¨o | | | | | | |
| If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
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Washington Gas Light Company:
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o |
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| Large accelerated filer ¨
| | Accelerated filer ¨
| | Non-accelerated filer þ
| | Smaller reporting company ¨
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| | | (Do not check if a smaller reporting company) |
| Emerging growth company ¨
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| If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
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Indicate by check mark whether eachthe registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).: Yes ¨[ ] No[þü]
Indicate the number of shares outstanding of eachSecurities registered pursuant to Section 12(b) of the issuers’ classesAct: None.
As of common stock, asOctober 30, 2019, there were 46,479,536 shares of the latest practicable date.
WGL Holdings, Inc. common stock, no par value, outstanding as of January 31, 2018: 51,359,182 shares.
Washington Gas Light Companyregistrant common stock, $1 par value, outstanding as of January 31, 2018: 46,479,536 sharesoutstanding.
All of the outstanding shares of common stock ($1 par value) of Washington Gas Light Company were held by WGL Holdings, Inc. as of January 31, 2018.
WGL Holdings, Inc.
Washington Gas Light Company
For the Quarter Ended December 31, 2017September 30, 2019
Table of Contents
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| PART I. Financial Information | |
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Item 1. | Financial Statements (Unaudited) | |
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| PART II. Other Information | |
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WGL Holdings, Inc.
Washington Gas Light Company
Part I-Financial Information
SAFE HARBOR FOR FORWARD-LOOKING STATEMENTS FILING FORMAT
This Quarterly Report on Form 10-Q is a combined report being filed by two separate registrants: WGL Holdings, Inc. (WGL) and Washington Gas Light Company (Washington Gas) is an indirect, majority-owned subsidiary of, among other entities, WGL Holdings, Inc (WGL). WGL is an indirect wholly owned subsidiary of AltaGas Ltd. (AltaGas). Except where the content clearly indicates otherwise, any reference in thethis report to “WGL,“Washington Gas,” “we,” “us”“us,” “our” or “our” is“the Company,” refers to the holding company orWashington Gas Light Company. References to “WGL” refer to WGL Holdings, Inc. and all of its subsidiaries, including Washington Gas, which is a wholly owned subsidiary of WGL.subsidiaries.
Part I—Financial information in this Quarterly Report on Form 10-Q includes separate financial statements (i.e. balance sheets, statements of income and comprehensive income and statements of cash flows) for each of WGL and Washington Gas. The Notes to Condensed Consolidated Financial Statements are presented on a combined basis for both WGL and Washington Gas together. The Management’s Discussion and Analysis of Financial Condition and Results of Operations (Management’s Discussion) included under Item 2 is divided into two major sections for WGL and Washington Gas.
SAFE HARBOR FOR FORWARD-LOOKING STATEMENTS
Certain matters discussed in this report, excluding historical information, include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 with respect to the outlook for earnings, dividends, revenues and other future financial business performance, strategies, financing plans, AltaGas Ltd.'s (AltaGas) proposed acquisitionAltaGas’ integration of us and other expectations. Forward-looking statements are typically identified by words such as, but not limited to, “estimates,”�� “expects,” “anticipates,” “intends,” “believes,” “plans” and similar expressions, or future or conditional terms such as “will,” “should,” “would” and “could.” Forward-looking statements speak only as of the filing date of this report, and the registrants assumeregistrant assumes no duty to update them. Factors that could cause actual results to differ materially from forward-looking statements or historical performance include those discussed in Item 1A. Risk Factors in the combined AnnualCompany’s Transition Report on Form 10-K for WGL and Washington Gas for the fiscal yearthree months ended September 30, 2017, in Part II, Item 1A, Risk Factors in this quarterly report on Form 10-Q and in our other filings with the Securities and Exchange Commission,December 31, 2018 (Form 10-KT), and may include, but are not limited to the following:
the occurrence of any event, change or other circumstances that could give rise to the termination of the Agreement and Plan of Merger among WGL, AltaGas and Wrangler, Inc. (Merger Agreement);
the inability to successfully integrate into the operations of WGL or AltaGas to satisfy conditions to the closing of the merger;
the required regulatory approvals for the merger may not be received, may not be received in a timely manner, or may be received subject to imposed conditions or restrictions that causeand a failure of a closing condition to the merger or that could have a detrimental impact on the combined company following completion of the merger;realize anticipated benefits;
the effect of the announcementconsummation of the merger (as defined below) on theour ability of WGL to retainmaintain supplier relationships, keep customers, and retain and hire key personnel;
unexpected costs incurred in connection with the effect of merger;
the announcement ofinability to meet commitments under various orders and agreements associated with regulatory approvals for the merger, which could have a detrimental impact on our business, financial condition, operating results and prospects;
the abilityloss of WGL to maintain relationships with its suppliers;certain administrative and management functions and services provided by AltaGas;
potential litigation in connection with the merger;
the incurrencechanges in AltaGas’ strategy or relationship with Washington Gas that could affect our performance or operations;
changes in our credit rating, WGL’s, or AltaGas’ credit ratings, and disruptions in credit market conditions or other factors that may affect our access to and cost of significant costs for advisory services in connection with the merger;
the impact of the terms and conditions of the Merger Agreement on WGL’s interim operations and its ability to make significant changes to its business or pursue otherwise attractive business opportunities without the consent of AltaGas;capital;
the level and rate at which we incur costs and expenses, and the extent to which we are allowed to recover from customers, through the regulatory process, such costs and expenses relating to constructing, operating and maintaining Washington Gas’our distribution system;
the availability of natural gas and electricity supply, interstate pipeline transportation and storage capacity;
the outcome of new and existing matters before courts, regulators, government agencies or arbitrators, including those relating to construction of the Constitution Pipeline, disputes relating to our purchase of natural gas under the Antero gas supply contracts, and the August 2016 explosion and fire at an apartment complex in Silver Spring, Maryland;
factors beyond our control that affect the ability of natural gas producers, pipeline gatherers and natural gas processors to deliver natural gas into interstate pipelines for delivery to the entrance points of Washington Gas' distribution system;
security breaches of our information technology infrastructure, including cyber attacks and cyber-terrorism;
WGL Holdings, Inc.
Washington Gas Light Company
leaks, mechanical problems, incidents or other operational issues in our natural gas distribution system, including the effectiveness of our efforts to mitigate the effects of receiving low-HHC natural gas;
changes in laws and developmentsregulations affecting our business, including in economic, competitive, politicalthe areas of the environment, pipeline integrity, and regulatory conditions;
unusual weather conditions and changes in natural gas consumption patterns;employment;
changes in energy commodity market conditions, including the relative prices of alternative forms of energy such as electricity, fuel oil and propane;
disruptions or decline in the local economy in which Washington Gas operates;
strikes or work stoppages by unionized employees;
adjustment to the cost of providing retirement plan benefits;
changes to government fiscal and trade policies;
security breaches of our information technology infrastructure, including cyber-attacks and cyber-terrorism;
Washington Gas Light Company
Part I-Financial Information
acts of nature and catastrophic events, including terrorist acts;
the credit-worthiness of customers; suppliers and derivatives counterparties;
changes in the value of derivative contracts and the availability of suitable derivative counterparties;
rules implementing the derivatives transaction provisions of the Dodd-Frank Act may impose costs on our derivatives activities;
unusual weather conditions and changes in our credit ratings, disruptions in credit market and equity capital market conditions or other factors that may affect our access to and cost of capital;
factors affecting the timing of construction and the effective operation of pipelines in which we have invested;
the credit-worthiness of customers; suppliers and derivatives counterparties;
changes in laws and regulations, including tax, environmental, pipeline integrity and employment laws and regulations;natural gas consumption patterns;
legislative, regulatory, and judicial mandates or decisions affecting our business operations, including interpretations of the Tax Cuts and Jobs Act (the Taxof 2017 (Tax Act);
the timing and success of business and product development efforts and technological improvements;
the level of demand from government agencies and the private sector for commercial energy systems, and delays in federal government budget appropriations;
the pace of deregulation of energy markets and the availability of other competitive alternatives to our products and services;
changes in accounting principles;
our ability to manage the outsourcing of several business processes;
strikesthe outcome of new and existing matters before courts, regulators, government agencies or work stoppagesarbitrators, including that relating to the August 2016 explosion and fire at an apartment complex in Silver Spring, Maryland;
changes in accounting principles and the effect of accounting pronouncements issued periodically by unionized employees;
acts of nature and catastrophic events, including terrorist acts; and
decisions made by management and co-investors in non-controlled investees.accounting standard-setting bodies.
All such factors are difficult to predict accurately and are generally beyond the direct control of the registrants.registrant. Readers are urged to use care and consider the risks, uncertainties and other factors that could affect ourthe registrant’s business as described in this Quarterly Report on Form 10-Q.
WGL Holdings, Inc.
Condensed Consolidated Balance Sheets (Unaudited)
Part I—Financial Information
Item 1—Financial Statements
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| (In thousands) | December 31,
2017 | | September 30,
2017 |
| ASSETS | | | |
| Property, Plant and Equipment | | | |
| At original cost | $ | 6,217,878 |
| | $ | 6,143,841 |
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| Accumulated depreciation and amortization | (1,538,998 | ) | | (1,513,790 | ) |
| Net property, plant and equipment | 4,678,880 |
| | 4,630,051 |
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| Current Assets | | | |
| Cash and cash equivalents | 64,110 |
| | 8,524 |
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| Receivables | | | |
| Accounts receivable | 519,980 |
| | 398,149 |
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| Gas costs and other regulatory assets | 17,663 |
| | 21,705 |
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| Unbilled revenues | 278,256 |
| | 165,483 |
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| Allowance for doubtful accounts | (32,451 | ) | | (32,025 | ) |
| Net receivables | 783,448 |
| | 553,312 |
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| Materials and supplies—principally at average cost | 20,456 |
| | 20,172 |
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| Storage gas | 206,978 |
| | 243,984 |
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| Prepaid taxes | 38,824 |
| | 31,549 |
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| Other prepayments | 74,612 |
| | 86,465 |
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| Derivatives | 17,665 |
| | 15,327 |
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| Other | 40,174 |
| | 26,556 |
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| Total current assets | 1,246,267 |
| | 985,889 |
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| Deferred Charges and Other Assets | | | |
| Regulatory assets | | | |
| Gas costs | 117,474 |
| | 90,136 |
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| Pension and other post-retirement benefits | 132,837 |
| | 139,499 |
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| Other | 117,962 |
| | 104,596 |
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| Prepaid post-retirement benefits | 234,982 |
| | 231,577 |
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| Derivatives | 32,168 |
| | 38,389 |
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| Investments in unconsolidated affiliates | 489,354 |
| | 394,201 |
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| Other | 12,650 |
| | 11,671 |
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| Total deferred charges and other assets | 1,137,427 |
| | 1,010,069 |
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Total Assets | $ | 7,062,574 |
| | $ | 6,626,009 |
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| CAPITALIZATION AND LIABILITIES | | | |
| Capitalization | | | |
| WGL Holdings common shareholders’ equity | $ | 1,609,607 |
| | $ | 1,502,690 |
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| Non-controlling interest | 3,210 |
| | 6,851 |
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| Washington Gas Light Company preferred stock | 28,173 |
| | 28,173 |
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| Total equity | 1,640,990 |
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| 1,537,714 |
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| Long-term debt | 1,679,893 |
| | 1,430,861 |
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| Total capitalization | 3,320,883 |
| | 2,968,575 |
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| Current Liabilities | | | |
| Current maturities of long-term debt | 300,000 |
| | 250,000 |
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| Notes payable and project financing | 558,700 |
| | 559,844 |
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| Accounts payable and other accrued liabilities | 431,327 |
| | 423,824 |
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| Wages payable | 22,146 |
| | 18,096 |
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| Accrued interest | 17,669 |
| | 7,806 |
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| Dividends declared | 26,520 |
| | 26,452 |
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| Customer deposits and advance payments | 55,158 |
| | 65,841 |
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| Gas costs and other regulatory liabilities | 57,275 |
| | 22,814 |
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| Accrued taxes | 35,676 |
| | 17,657 |
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| Derivatives | 35,021 |
| | 43,990 |
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| Other | 50,002 |
| | 52,664 |
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| Total current liabilities | 1,589,494 |
| | 1,488,988 |
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| Deferred Credits | | | |
| Unamortized investment tax credits | 153,502 |
| | 155,007 |
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| Deferred income taxes | 413,065 |
| | 868,067 |
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| Accrued pensions and benefits | 184,293 |
| | 181,552 |
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| Asset retirement obligations | 300,130 |
| | 296,810 |
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| Regulatory liabilities | | | |
| Accrued asset removal costs | 286,234 |
| | 292,173 |
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| Other post-retirement benefits | 130,882 |
| | 135,035 |
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| Other—principally deferred taxes | 452,091 |
| | 9,403 |
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| Derivatives | 128,885 |
| | 122,607 |
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| Other | 103,115 |
| | 107,792 |
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| Total deferred credits | 2,152,197 |
| | 2,168,446 |
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| Commitments and Contingencies (Note 13) |
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| Total Capitalization and Liabilities | $ | 7,062,574 |
| | $ | 6,626,009 |
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The accompanying notes are an integral part of these statements.
WGL Holdings, Inc.
Condensed Consolidated Statements of Income (Unaudited)
Part I—Financial Information
Item 1—Financial Statements (continued)
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| | Three Months Ended
December 31, |
| (In thousands, except per share data) | 2017 | | 2016 |
| OPERATING REVENUES | | | |
| Utility | $ | 374,990 |
| | $ | 327,063 |
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| Non-utility | 277,450 |
| | 282,424 |
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| Total Operating Revenues | 652,440 |
| | 609,487 |
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| OPERATING EXPENSES | | | |
| Utility cost of gas | 122,273 |
| | 75,500 |
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| Non-utility cost of energy-related sales | 225,502 |
| | 252,886 |
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| Operation and maintenance | 102,226 |
| | 100,717 |
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| Depreciation and amortization | 40,985 |
| | 35,283 |
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| General taxes and other assessments | 44,887 |
| | 40,388 |
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| Total Operating Expenses | 535,873 |
| | 504,774 |
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| OPERATING INCOME | 116,567 |
| | 104,713 |
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| Equity in earnings of unconsolidated affiliates | 5,892 |
| | 265 |
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| Other income (expenses) — net | (780 | ) | | 478 |
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| Interest expense | 20,197 |
| | 16,235 |
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| INCOME BEFORE INCOME TAXES | 101,482 |
| | 89,221 |
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| INCOME TAX (BENEFIT) EXPENSE | (31,110 | ) | | 33,454 |
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| NET INCOME | $ | 132,592 |
| | $ | 55,767 |
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| Non-controlling interest | (5,778 | ) | | (2,535 | ) |
| Dividends on Washington Gas Light Company preferred stock | 330 |
| | 330 |
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| NET INCOME APPLICABLE TO COMMON STOCK | $ | 138,040 |
| | $ | 57,972 |
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| WEIGHTED AVERAGE COMMON SHARES OUTSTANDING | | | |
| Basic | 51,319 |
| | 51,172 |
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| Diluted | 51,549 |
| | 51,445 |
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| EARNINGS PER AVERAGE COMMON SHARE | | | |
| Basic | $ | 2.69 |
| | $ | 1.13 |
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| Diluted | $ | 2.68 |
| | $ | 1.13 |
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| DIVIDENDS DECLARED PER COMMON SHARE | $ | 0.5100 |
| | $ | 0.4875 |
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The accompanying notes are an integral part of these statements.
WGL Holdings, Inc.
Condensed Consolidated Statements of Comprehensive Income (Unaudited)
Part I—Financial Information
Item 1—Financial Statements (continued)
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| | Three Months Ended
December 31, |
| (In thousands) | 2017 | | 2016 |
| NET INCOME | $ | 132,592 |
| | $ | 55,767 |
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| OTHER COMPREHENSIVE INCOME, BEFORE INCOME TAXES: | | | |
| Qualified cash flow hedging instruments | 52 |
| | 49,455 |
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| Pension and other post-retirement benefit plans | | | |
| Change in net prior service credit | (274 | ) | | (217 | ) |
| Change in actuarial net loss | 527 |
| | 588 |
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| Total other comprehensive income before taxes | $ | 305 |
| | $ | 49,826 |
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| INCOME TAX EXPENSE RELATED TO OTHER COMPREHENSIVE INCOME | 61 |
| | 20,413 |
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| OTHER COMPREHENSIVE INCOME | $ | 244 |
| | $ | 29,413 |
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| COMPREHENSIVE INCOME | $ | 132,836 |
| | $ | 85,180 |
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| Non-controlling interest | (5,778 | ) | | (2,535 | ) |
| Dividends on Washington Gas Light Company preferred stock | 330 |
| | 330 |
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| COMPREHENSIVE INCOME ATTRIBUTABLE TO WGL HOLDINGS | $ | 138,284 |
| | $ | 87,385 |
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The accompanying notes are an integral part of these statements.
WGL Holdings, Inc.
Condensed Consolidated Statements of Cash Flows (Unaudited)
Part I—Financial Information
Item 1—Financial Statements (continued)
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| | Three Months Ended December 31, |
| (In thousands) | 2017 | | 2016 |
| OPERATING ACTIVITIES | | | |
| Net income | $ | 132,592 |
| | $ | 55,767 |
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| ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIES | | | |
| Depreciation and amortization | 40,985 |
| | 35,283 |
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| Amortization of: | | | |
| Other regulatory assets and liabilities—net | 1,634 |
| | 823 |
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| Debt related costs | 550 |
| | 445 |
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| Deferred income taxes | (29,264 | ) | | 34,852 |
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| Dividends received from equity method investments | 5,628 |
| | — |
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| Accrued/deferred pension and other post-retirement benefit cost | 2,393 |
| | 5,424 |
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| Earnings in equity interest | (5,892 | ) | | 265 |
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| Compensation expense related to stock-based awards | 5,802 |
| | 4,912 |
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| Provision for doubtful accounts | 3,781 |
| | 2,704 |
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| Unrealized (gain) loss on derivative contracts | 12,524 |
| | (30,339 | ) |
| Amortization of investment tax credits | (1,845 | ) | | (1,396 | ) |
| Other non-cash credits—net | (197 | ) | | 2,105 |
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| Changes in operating assets and liabilities (Note 16) | (175,402 | ) | | (201,340 | ) |
| Net Cash Used In Operating Activities | (6,711 | ) | | (90,495 | ) |
| FINANCING ACTIVITIES | | | |
| Common stock issued | — |
| | 251 |
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| Long-term debt issued | 300,000 |
| | — |
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| Debt issuance costs | (1,482 | ) | | (375 | ) |
| Notes payable issued —net | (1,144 | ) | | 324,001 |
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| Contributions from non-controlling interest | 1,659 |
| | 7,331 |
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| Distributions to non-controlling interest | (136 | ) | | — |
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| Project financing | — |
| | 8,877 |
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| Dividends on common stock and preferred stock | (26,520 | ) | | (23,921 | ) |
| Other financing activities—net | (6,558 | ) | | (1,295 | ) |
| Net Cash Provided by Financing Activities | 265,819 |
| | 314,869 |
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| INVESTING ACTIVITIES | | | |
| Capital expenditures (excluding Allowance for Funds Used During Construction) | (99,054 | ) | | (155,758 | ) |
| Investments in non-utility interests | (104,468 | ) | | (62,007 | ) |
| Distributions and receipts from non-utility interests | — |
| | 1,565 |
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| Loans to external parties | — |
| | (863 | ) |
| Net Cash Used in Investing Activities | (203,522 | ) | | (217,063 | ) |
| INCREASE IN CASH AND CASH EQUIVALENTS | 55,586 |
| | 7,311 |
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| Cash and Cash Equivalents at Beginning of Year | 8,524 |
| | 5,573 |
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| Cash and Cash Equivalents at End of Period | $ | 64,110 |
| | $ | 12,884 |
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SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION (Note 16)
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The accompanying notes are an integral part of these statements.
Washington Gas Light Company
Condensed Balance Sheets (Unaudited)
Part I—FinancialI-Financial Information
Item 1—Financial1-Financial Statements (continued)
| | | | | | | September 30, | | December 31, |
| (In thousands) | December 31,
2017 | | September 30,
2017 | 2019 | | 2018 |
| ASSETS | | | | | | |
| Property, Plant and Equipment | | | | | | |
| At original cost | $ | 5,358,064 |
| | $ | 5,310,337 |
| $ | 5,997,026 |
| | $ | 5,702,927 |
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| Accumulated depreciation and amortization | (1,440,276 | ) | | (1,422,622 | ) | (1,580,141 | ) | | (1,513,590 | ) |
| Net property, plant and equipment | 3,917,788 |
| | 3,887,715 |
| 4,416,885 |
| | 4,189,337 |
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| Current Assets | | | | | | |
| Cash and cash equivalents | 6,652 |
| | 1 |
| 1 |
| | 6,082 |
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| Receivables | | | | | | |
| Accounts receivable | 263,001 |
| | 190,740 |
| 175,571 |
| | 292,871 |
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| Gas costs and other regulatory assets | 17,663 |
| | 21,705 |
| 11,100 |
| | 6,020 |
|
| Unbilled revenues | 205,107 |
| | 107,967 |
| 66,230 |
| | 189,497 |
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| Allowance for doubtful accounts | (24,447 | ) | | (23,741 | ) | (25,739 | ) | | (29,461 | ) |
| Net receivables | 461,324 |
| | 296,671 |
| 227,162 |
| | 458,927 |
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| Materials and supplies—principally at average cost | 20,410 |
| | 20,126 |
| 19,870 |
| | 19,727 |
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| Storage gas | 84,960 |
| | 92,753 |
| 92,450 |
| | 103,929 |
|
| Prepaid taxes | 31,899 |
| | 23,350 |
| 30,984 |
| | 27,193 |
|
| Other prepayments | 22,776 |
| | 13,238 |
| 22,035 |
| | 28,232 |
|
| Receivables from associated companies | 27,010 |
| | 32,362 |
| 8,800 |
| | 4,819 |
|
| Derivatives | 4,343 |
| | 5,061 |
| 3,562 |
| | 19,488 |
|
| Other | 120 |
| | 102 |
| 4,378 |
| | 20,347 |
|
| Total current assets | 659,494 |
| | 483,664 |
| 409,242 |
|
| 688,744 |
|
| Deferred Charges and Other Assets | | | | | | |
| Regulatory assets | | | | | | |
| Gas costs | 117,474 |
| | 90,136 |
| 91,913 |
| | 141,636 |
|
| Pension and other post-retirement benefits | 132,082 |
| | 138,573 |
| 77,200 |
| | 86,493 |
|
| Other | 117,570 |
| | 104,538 |
| 82,116 |
| | 99,105 |
|
| Prepaid post-retirement benefits | 233,676 |
| | 230,283 |
| 254,837 |
| | 249,462 |
|
| Right of use asset | | 40,966 |
| | — |
|
| Derivatives | 15,385 |
| | 16,244 |
| 8,462 |
| | 11,318 |
|
| Other | 4,459 |
| | 3,561 |
| 50,098 |
| | 50,490 |
|
| Total deferred charges and other assets | 620,646 |
| | 583,335 |
| 605,592 |
| | 638,504 |
|
Total Assets | $ | 5,197,928 |
| | $ | 4,954,714 |
| $ | 5,431,719 |
| | $ | 5,516,585 |
|
| CAPITALIZATION AND LIABILITIES | | | | | | |
| Capitalization | | | | | | |
| Common shareholder’s equity | $ | 1,295,914 |
| | $ | 1,164,749 |
| $ | 1,539,947 |
| | $ | 1,562,573 |
|
| Preferred stock | 28,173 |
| | 28,173 |
| 28,173 |
| | 28,173 |
|
| Long-term debt | 1,084,619 |
| | 1,134,461 |
| 1,331,116 |
| | 1,035,033 |
|
| Total capitalization | 2,408,706 |
| | 2,327,383 |
| 2,899,236 |
| | 2,625,779 |
|
| Current Liabilities | | | | | | |
| Current maturities of long-term debt | 50,000 |
| | — |
| 50,000 |
| | 50,000 |
|
| Notes payable and project financing | 205,772 |
| | 166,772 |
| 117,000 |
| | 311,460 |
|
| Accounts payable and other accrued liabilities | 196,363 |
| | 219,827 |
| 182,784 |
| | 288,376 |
|
| Wages payable | 20,191 |
| | 16,508 |
| 20,947 |
| | 22,629 |
|
| Accrued interest | 15,593 |
| | 3,967 |
| 4,193 |
| | 14,504 |
|
| Dividends declared | 22,166 |
| | 22,098 |
| — |
| | 24,567 |
|
| Customer deposits and advance payments | 54,711 |
| | 64,194 |
| 42,859 |
| | 54,370 |
|
| Gas costs and other regulatory liabilities | 57,275 |
| | 22,814 |
| 71,978 |
| | 75,151 |
|
| Accrued taxes | 46,954 |
| | 12,808 |
| 35,281 |
| | 28,451 |
|
| Payables to associated companies | 107,597 |
| | 94,844 |
| 68,066 |
| | 95,228 |
|
| Operating lease liability | | 5,632 |
| | — |
|
| Derivatives | 24,636 |
| | 30,263 |
| 12,775 |
| | 20,295 |
|
| Other | 7,349 |
| | 7,473 |
| 7,266 |
| | 7,507 |
|
| Total current liabilities | 808,607 |
| | 661,568 |
| 618,781 |
| | 992,538 |
|
| Deferred Credits | | | | | | |
| Unamortized investment tax credits | 3,921 |
| | 4,100 |
| 2,739 |
| | 3,233 |
|
| Deferred income taxes | 463,805 |
| | 888,385 |
| 431,408 |
| | 454,248 |
|
| Accrued pensions and benefits | 182,540 |
| | 179,814 |
| 165,365 |
| | 156,210 |
|
| Asset retirement obligations | 294,939 |
| | 291,871 |
| 308,470 |
| | 300,769 |
|
| Regulatory liabilities | | | | | | |
| Accrued asset removal costs | 286,234 |
| | 292,173 |
| 245,334 |
| | 264,556 |
|
| Other post-retirement benefits | 130,056 |
| | 134,181 |
| 109,934 |
| | 121,345 |
|
| Other—principally deferred taxes | 450,409 |
| | 9,403 |
| |
Excess deferred taxes and other
| | 400,248 |
| | 431,913 |
|
| Operating lease liability | | 54,686 |
| | — |
|
| Derivatives | 119,048 |
| | 112,299 |
| 105,101 |
| | 116,847 |
|
| Other | 49,663 |
| | 53,537 |
| 90,417 |
| | 49,147 |
|
| Total deferred credits | 1,980,615 |
| | 1,965,763 |
| 1,913,702 |
| | 1,898,268 |
|
| Commitments and Contingencies (Note 13) |
| |
| |
| Commitments and Contingencies (Note 10) | |
| |
|
| Total Capitalization and Liabilities | $ | 5,197,928 |
| | $ | 4,954,714 |
| $ | 5,431,719 |
| | $ | 5,516,585 |
|
The accompanying notes are an integral part of these statements.
Washington Gas Light Company
Condensed Statements of IncomeOperations (Unaudited)
Part I—FinancialI-Financial Information
Item 1—1. Financial Statements (continued)
| | | | Three Months Ended December 31, | Three Months Ended September 30, | | Nine Months Ended September 30, |
| (In thousands) | 2017 | | 2016 | 2019 | | 2018 | | 2019 | | 2018 |
| | | | | | | | | |
| OPERATING REVENUES | $ | 377,470 |
| | $ | 333,986 |
| $ | 122,305 |
| | $ | 139,041 |
| | $ | 914,442 |
| | $ | 870,593 |
|
| OPERATING EXPENSES | | | | | | | | | | |
| Utility cost of gas | 124,745 |
| | 82,431 |
| $ | 33,433 |
| | 20,939 |
| | 331,285 |
| | 282,298 |
|
| Operation and maintenance | 79,551 |
| | 82,166 |
| 101,195 |
| | 282,793 |
| | 300,433 |
| | 461,808 |
|
| Depreciation and amortization | 33,646 |
| | 30,126 |
| 34,383 |
| | 33,914 |
| | 106,623 |
| | 101,425 |
|
| General taxes and other assessments | 39,983 |
| | 36,255 |
| 26,344 |
| | 26,857 |
| | 106,709 |
| | 108,195 |
|
| Total Operating Expenses | 277,925 |
| | 230,978 |
| 195,355 |
| | 364,503 |
| | 845,050 |
| | 953,726 |
|
| OPERATING INCOME | 99,545 |
| | 103,008 |
| |
| Other expense — net | (1,792 | ) | | (779 | ) | |
| OPERATING INCOME (LOSS) | | (73,050 | ) | | (225,462 | ) | | 69,392 |
| | (83,133 | ) |
| Other income (expense) — net | | 3,533 |
| | (10,408 | ) | | 7,298 |
| | (8,621 | ) |
| Interest expense | 14,973 |
| | 12,762 |
| 15,575 |
| | 14,404 |
| | 45,092 |
| | 43,531 |
|
| INCOME BEFORE INCOME TAXES | 82,780 |
| | 89,467 |
| |
| INCOME TAX EXPENSE | 24,854 |
| | 34,006 |
| |
| NET INCOME | $ | 57,926 |
| | $ | 55,461 |
| |
| Dividends on Washington Gas preferred stock | 330 |
| | 330 |
| |
| NET INCOME APPLICABLE TO COMMON STOCK | $ | 57,596 |
| | $ | 55,131 |
| |
| INCOME (LOSS) BEFORE INCOME TAXES | | (85,092 | ) | | (250,274 | ) | | 31,598 |
| | (135,285 | ) |
| INCOME TAX EXPENSE (BENEFIT) | | (19,293 | ) | | (69,121 | ) | | 4,992 |
| | (50,717 | ) |
| NET INCOME (LOSS) | | $ | (65,799 | ) | | $ | (181,153 | ) | | $ | 26,606 |
| | $ | (84,568 | ) |
| Dividends on preferred stock | | — |
| | 330 |
| | 660 |
| | 990 |
|
| NET INCOME (LOSS) APPLICABLE TO COMMON STOCK | | $ | (65,799 | ) | | $ | (181,483 | ) | | $ | 25,946 |
| | $ | (85,558 | ) |
The accompanying notes are an integral part of these statements.
Washington Gas Light Company
Condensed Statements of Comprehensive Income (Loss) (Unaudited)
Part I—FinancialI-Financial Information
Item 1—Financial1-Financial Statements (continued)
|
| | | | | | | |
| | Three Months Ended
December 31, |
| (In thousands) | 2017 | | 2016 |
| NET INCOME | $ | 57,926 |
| | $ | 55,461 |
|
| OTHER COMPREHENSIVE INCOME, BEFORE INCOME TAXES: | | | |
| Pension and other post-retirement benefit plans | | | |
| Change in net prior service credit | (274 | ) | | (217 | ) |
| Change in actuarial net loss | 527 |
| | 588 |
|
| Total pension and other post-retirement benefit plans | $ | 253 |
| | $ | 371 |
|
| INCOME TAX EXPENSE RELATED TO OTHER COMPREHENSIVE INCOME | 61 |
| | 147 |
|
| OTHER COMPREHENSIVE INCOME | $ | 192 |
| | $ | 224 |
|
| COMPREHENSIVE INCOME | $ | 58,118 |
| | $ | 55,685 |
|
|
| | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| (In thousands) | 2019 | | 2018 | | 2019 | | 2018 |
| NET INCOME (LOSS) | $ | (65,799 | ) | | $ | (181,153 | ) | | $ | 26,606 |
| | $ | (84,568 | ) |
| OTHER COMPREHENSIVE INCOME BEFORE INCOME TAXES: | | | | | | | |
| Pension and other post-retirement benefit plans | | | | | | | |
| Change in prior service cost | (163 | ) | | 145 |
| | (486 | ) | | (401 | ) |
| Change in actuarial net gain (loss) | 392 |
| | 4,737 |
| | 2,448 |
| | 5,797 |
|
| Total pension and other post-retirement benefit plans | $ | 229 |
|
| $ | 4,882 |
| | $ | 1,962 |
| | $ | 5,396 |
|
| INCOME TAX EXPENSE (BENEFIT) RELATED TO OTHER COMPREHENSIVE INCOME | (713 | ) | | 2,753 |
| | 534 |
| | 2,896 |
|
| OTHER COMPREHENSIVE INCOME (LOSS) | $ | 942 |
|
| $ | 2,129 |
| | $ | 1,428 |
| | $ | 2,500 |
|
| COMPREHENSIVE INCOME (LOSS) | $ | (64,857 | ) |
| $ | (179,024 | ) | | $ | 28,034 |
| | $ | (82,068 | ) |
The accompanying notes are an integral part of these statements.
Washington Gas Light Company
Condensed Statements of Cash Flows (Unaudited)
Part I—FinancialI-Financial Information
Item 1—1. Financial Statements (continued)
|
| | | | | | |
| | Nine Months Ended September 30, | Nine Months Ended September 30, |
| (In thousands) | 2019 | 2018 |
| OPERATING ACTIVITIES | | |
| Net income | $ | 26,606 |
| $ | (84,568 | ) |
| ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIES | | |
| Depreciation and amortization | 106,623 |
| 101,425 |
|
| Amortization of: | | |
| Other regulatory assets and liabilities—net | 5,583 |
| 5,283 |
|
| Debt related costs | 1,128 |
| 1,179 |
|
| Deferred income taxes—net | 7,087 |
| (33,821 | ) |
| Accrued/deferred pension and other post-retirement benefit cost | (949 | ) | 8,729 |
|
| Compensation expense related to stock-based awards | 2,275 |
| 14,549 |
|
| Provision for doubtful accounts | 10,615 |
| 16,296 |
|
| Impairment loss | — |
| 37,969 |
|
| Unrealized (gain) loss on derivative contracts | (128 | ) | (11,825 | ) |
| Amortization of investment tax credits | (494 | ) | (523 | ) |
| Other non-cash charges (credits)—net | 1,226 |
| (2,253 | ) |
| Changes in operating assets and liabilities (Note 15) | 94,572 |
| 98,314 |
|
| Net Cash Provided by Operating Activities | 254,144 |
| 150,754 |
|
| FINANCING ACTIVITIES | | |
| Capital contributions from parent | — |
| 302,728 |
|
| Long-term debt issued | 298,482 |
| — |
|
| Debt issuance costs | (2,756 | ) | (130 | ) |
| Notes payable issued (retired)—net | (179,000 | ) | (66,998 | ) |
| Project financing | — |
| 53,018 |
|
| Dividends on common stock and preferred stock | (75,227 | ) | (66,742 | ) |
| Net Cash Provided by Financing Activities | 41,499 |
| 221,876 |
|
| INVESTING ACTIVITIES | | |
| Capital expenditures (excluding AFUDC) | (318,895 | ) | (317,537 | ) |
| Insurance proceeds related to investing properties | — |
| 3,238 |
|
| Net Cash Used in Investing Activities | (318,895 | ) | (314,299 | ) |
| INCREASE (DECREASE) IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH | (23,252 | ) | 58,331 |
|
| Cash, Cash Equivalents, and Restricted Cash at Beginning of the Period | 71,423 |
| 6,652 |
|
| Cash, Cash equivalents and Restricted Cash at End of the Period | $ | 48,171 |
| $ | 64,983 |
|
| SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION (Note 15) | | |
|
| | | | | | | |
| | Three Months Ended December 31, |
| (In thousands) | 2017 | | 2016 |
| OPERATING ACTIVITIES | | | |
| Net income | $ | 57,926 |
| | $ | 55,461 |
|
| ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIES | | | |
| Depreciation and amortization | 33,646 |
| | 30,126 |
|
| Amortization of: | | | |
| Other regulatory assets and liabilities—net | 1,634 |
| | 823 |
|
| Debt related costs | 401 |
| | 353 |
|
| Deferred income taxes | 7,386 |
| | 34,145 |
|
| Accrued/deferred pension and other post-retirement benefit cost | 2,398 |
| | 5,411 |
|
| Compensation expense related to stock-based awards | 4,518 |
| | 4,652 |
|
| Provision for doubtful accounts | 3,928 |
| | 2,241 |
|
| Unrealized (gain) loss on derivative contracts | 1,446 |
| | (15,128 | ) |
| Amortization of investment tax credits | (179 | ) | | — |
|
| Other non-cash charges—net | (197 | ) | | 2,447 |
|
| Changes in operating assets and liabilities (Note 16) | (141,364 | ) | | (169,830 | ) |
| Net Cash Used In Operating Activities | (28,457 | ) | | (49,299 | ) |
| FINANCING ACTIVITIES | | | |
| Capital contributions from WGL Holdings, Inc. | 100,000 |
| | — |
|
| Debt issuance costs | (236 | ) | | (375 | ) |
| Notes payable issued —net | 39,000 |
| | 177,000 |
|
| Project financing | — |
| | 5,200 |
|
| Dividends on common stock and preferred stock | (22,166 | ) | | (21,453 | ) |
| Other financing activities—net | (6,197 | ) | | (1,226 | ) |
| Net Cash Provided by Financing Activities | 110,401 |
| | 159,146 |
|
| INVESTING ACTIVITIES | | | |
| Capital expenditures (excluding Allowance for Funds Used During Construction) | (75,293 | ) | | (109,847 | ) |
| Net Cash Used In Investing Activities | (75,293 | ) | | (109,847 | ) |
| INCREASE IN CASH AND CASH EQUIVALENTS | 6,651 |
| | — |
|
| Cash and Cash Equivalents at Beginning of Year | 1 |
| | 1 |
|
| Cash and Cash Equivalents at End of Period | $ | 6,652 |
| | $ | 1 |
|
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION (Note 16)
| | | |
WGL Holdings, Inc.
Washington Gas Light Company
Part I—FinancialI-Financial Information
Item 1—Financial1-Financial Statements (continued)
Notes to Condensed Consolidated Financial Statements (Unaudited)
NOTE 1. ACCOUNTING POLICIES Basis of Presentation
Washington Gas is an indirect, majority owned subsidiary of, among other entities, AltaGas and WGL. On July 6, 2018, a merger of WGL Holdings, Inc. (WGL) isinto AltaGas was consummated (the Merger). In connection with the Merger, WGL, the former parent entity of Washington Gas, formed a holding company that owns all ofwholly owned subsidiary, Wrangler SPE LLC (Wrangler), a bankruptcy remote, special purpose entity to own the shares of common stock of Washington Gas, Light Company (Washington Gas), a regulated natural gas utility, andwhich survived the Merger as an indirect, wholly owned subsidiary of AltaGas. In addition, WGL owns all of the shares of common stock of Washington Gas Resources Corporation (Washington Gas Resources) and Hampshire Gas Company (Hampshire). Washington Gas Resources owns all of the shares of common stock of four non-utility subsidiaries that include WGL Energy Services, Inc. (WGL Energy Services), WGL Energy Systems, Inc. (WGL Energy Systems), WGL Midstream, Inc. (WGL Midstream) and WGSW, Inc. (WGSW). Additionally, several subsidiaries of WGL own interests in other entities. Except where the content clearly indicates otherwise, “WGL,any reference in this report to “Washington Gas,” “we,” “us”“our”, or “our”the “Company,” refers to the holding company or the consolidated entity ofWashington Gas Light Company. References to “WGL” refer to WGL Holdings, Inc. and all of its subsidiaries. Unless otherwise noted, these notes apply equally to WGL and Washington Gas.
The condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (SEC). Therefore, certain financial information and note disclosures accompanying annual financial statements prepared in accordance with generally accepted accounting principles in the United States of America (GAAP) are omitted in this interim report. The interim condensed consolidated financial statements and accompanying notes should be read in conjunction with the combined Annual ReportFinancial Statements on Form 10-K for WGL and Washington Gas for the fiscal year ended September 30, 2017.10-KT. Due to the seasonal nature of our businesses,business, the results of operations for the periods presented in this report are not necessarily indicative of actual results for the full fiscal years ending September 30, 2018December 31, 2019 and 2017 of either WGL or2018.
The information presented in this report on Form 10-Q are presented solely for the registrant Washington Gas.Gas on a stand-alone basis.
The accompanying unaudited condensed financial statements for WGL and Washington Gas reflect all normal recurring adjustments that are necessary, in our opinion, to present fairly the results of operations in accordance with GAAP.
For a complete description of our significant accounting policies, refer to Note 11-Accounting Policies of the Notes to Condensed Consolidated Financial Statements of the combined Annual Report on Form 10-K for WGL10-KT. We include herein certain updates to those policies.
Leases
Lessee
We determine if an arrangement is a lease and Washington Gas for the fiscal year ended September 30, 2017.
Changelease classification at inception. For the operating leases in Accounting Principlewhich we are the lessee, a right-of-use (ROU) asset andStorage Gas Valuation
On October 1, 2017, Washington Gas and WGL Energy Services implemented a voluntary change inlease liability is recognized at the application of an accounting principle with respect to accounting for natural gas, propane, and odorant inventories. Washington Gas and WGL Energy Services now apply the average cost methodology under which the cost of units carried in inventory iscommencement date based on the weighted average cost per unitpresent value of inventory. Priorlease payments over the lease term. We use the rate implicit in the lease to this change, Washington Gasdetermine the present value of the lease payments when the rate is readily determinable or we use our incremental borrowing rate. Our ROU assets are adjusted for lease incentives, any lease payments made in advance, and WGL Energy Services applied the First-in First-out (FIFO) methodology of accounting for inventory under which the oldest inventory items were recorded as being sold first.
We believe the new policy is preferable as it conforms to the method predominately used by our peers, better reflects the physical flow of inventory, conforms to the method used for certain of our other inventories, and will simplify recordkeeping requirements.
The change in accounting principle was implementedinitial direct costs incurred. Lease expenses are recognized on a prospectivestraight-line basis therefore,over the lease term. The estimated lease terms may include options to extend or terminate the lease when it is reasonably certain that we didwill exercise that option. For our lessee building and certain equipment leases, we do not retrospectively adjust any prior periods or record a cumulative effect adjustment,separate the lease and non-lease components. Variable lease payments are recognized as discussed below.lease expense when the related facts and circumstances occur, and are dependent on various external factors, including real estate taxes, common area maintenance and usage charges.
Washington Gas implementedFor our multiple office location leases classified as operating leases, the change in accounting principlelease term begins on the date when construction of the leasehold improvements can start and the lessor has allowed us to occupy the respective locations. Leasehold improvement costs are classified as “Property, Plant, and Equipment” on the balance sheet, and are being amortized to “Depreciation and amortization” expense on a prospectivestraight-line basis in accordance with Accounting Standards Codification (ASC) No. 980, Regulated Operations which permits regulated entities to implement changes for financial reporting purposes inover the same way those changesnon-cancelable period of the leases.
Lessor
We determine if an arrangement is a lease and the lease classification at inception. Lease payments under operating leases are implemented for regulatory reporting purposes when the change impacts allowable costs. WGL Energy Services implemented the changerecognized on a prospectivestraight-line basis asover the impact on its financial statements for all periods presented, includinglease term. For our building leases, we do not separate the cumulative effect at October 1, 2017, was immaterial. The difference during the quarter between the prior FIFO methodlease and the new average cost method was immaterial.non-lease components.
WGL Midstream continues to account for its inventory using the weighted average cost method.
On October 1, 2017, WGL adopted ASU 2015-11, Inventory (Topic 330) - Simplifying the Measurement of Inventory. This standard modified the previous calculation for valuing inventory. As a result of the new standard, beginning October 1, 2017,
WGL Holdings, Inc.
Washington Gas Light Company
Part I—FinancialI-Financial Information
Item 1—Financial1-Financial Statements (continued)
Notes to Condensed Consolidated Financial Statements (Unaudited)
our inventory balances are stated atAccounting Standards Adopted during the lower-of-cost or net realizable value. Prior to October 1, 2017, our inventory balances were stated atPeriod and Other Newly Issued Accounting Standards
The following tables summarize the lower-of-cost or market. Interim period inventory losses attributable to lower-of-cost or net realizable value adjustments mayAccounting Standards Updates (ASUs) adopted by Washington Gas during the nine months ended September 30, 2019 and other newly issued accounting standards that will be reversed if the net realizable value of the inventory is recoveredadopted by the end of the same fiscal year.
For more information see ASU 2015-11Washington Gas in the accounting standards adopted in fiscal year 2018 table below. For the three months ended December 31, 2017, WGL and Washington Gas did not record any lower-of-cost or net realizable value adjustments. For the three months ended December 31, 2016, we did not record any lower-of-cost or market adjustments.future.
|
| | | | | | |
ACCOUNTING STANDARDS ADOPTED IN FISCALCALENDAR YEAR 20182019 |
| Standard | | Description | | Date of adoption | | Effect on the financial statements or other significant matters |
ASU 2016-09, Compensation—Stock Compensation2016-02, Leases (Topic 718):842), ASU 2018-01, Land Easement Practical Expedient for Transition to Topic 842, ASU 2018-11, Targeted Improvements, to Employee Share-Based Payment Accountingand ASU 2018-20, Narrow-Scope Improvements for Lessors, including other subsequent ASUs clarifying the guidance.
| | This standard simplifies several aspectsASU 2016-02 requires recognition of the accounting for share-based payment transactions, including accounting for income taxes, forfeitures, statutory tax withholding requirementsa right-to-use asset and classification inlease liability by lessees on the statement of cash flows.
| | October 1, 2017 | | Forfeitures - WGL has elected to continue to estimate forfeitures for its share-based payment awards rather than account for forfeitures when they occur.
Income Taxes - On October 1, 2017, WGLfinancial position and Washington Gas recorded $4.3 milliondisclosure of key information about leasing arrangements. Lessor accounting remains substantially unchanged but the standard modifies what qualifies as a sales-type and $4.2 million, respectively, ondirect financing lease and eliminated real-estate specific provisions. The standard requires application using a modified retrospective basis,approach.
ASU 2018-01 provides an optional election not to evaluate existing and expired land easements not previously accounted for as a lease.
ASU 2018-11 allows entities to elect to report comparative periods presented after adoption under the old lease standard (ASC Topic 840, Leases) and recognize a cumulative effect adjustment to retained earnings. For the threeopening balance at the date of adoption. The update also provides lessors a practical expedient not requiring the separation of lease and non-lease components provided that certain conditions are met.
ASU 2018-20 allows lessors to include and exclude certain costs from variable payments. The ASU also requires lessors to allocate certain variable payments to the lease and non-lease components when the changes in facts and circumstances on which the variable payments are based occur.
| | January 1, 2019 | | Leases, with terms longer than 12 months, ended December 31, 2017, WGLfor which Washington Gas is the lessee have been reflected on the balance sheet by recording an increase to non- current assets and an increase to deferred credits net of the current portion that is recorded in current liabilities. Upon adoption, Washington Gas recorded $3.4lease liabilities of $58.9 million and $3.2a right-of-use asset of $43.2 million, respectively, to current tax expense for excess tax benefits related to performance shares that vested in the quarter.
Cash Flows - WGLnet of lease incentives and prepaid or deferred rent balances of $15.7 million. Washington Gas reclassified $3.6 millionutilized the transition practical expedients which allow entities to not have to reassess whether an arrangement contains a lease and $3.5 million, respectively, retroactivelythe lease classification under the provisions of ASC Topic 842, land easements, and not separating out the lease and non-lease components for certain classes of assets. As a result of the transition practical expedients, Washington Gas’ operating leases on the statement of cash flows for the three months ended December 31, 2016 from operatingtransition are consistent with its conclusions under ASC 840. Washington Gas has also elected to financing activities related to shares withheld to pay for employee taxes.
present prior comparative information under ASC 840. See Note 3 - Statutory Tax WithholdingLeases - No changes were made.
for further information and the new required lease disclosures.
|
WGL Holdings, Inc.
Washington Gas Light Company
Part I—FinancialI-Financial Information
Item 1—Financial1-Financial Statements (continued)
Notes to Condensed Consolidated Financial Statements (Unaudited)
|
| | | | | | |
ASU 2016-06, Derivatives and Hedging (Topic 815) - Contingent Put and Call Options in Debt Instruments | | The amendments in this update clarify the requirements for assessing whether contingent call (put) options that can accelerate the payment of principal on debt
instruments are clearly and closely related to their debt hosts. The guidance states that for contingent call (put) options to be considered clearly and closely related, they can be indexed only to interest rates or credit risk. An entity is required to assess the embedded call (put) options solely in accordance with the four-step decision sequence.
| | October 1, 2017 | | The implementation of this standard did not have an effect on WGL or Washington Gas' financial statements. |
ASU 2015-11, Inventory (Topic 330) - Simplifying the Measurement of Inventory | | This standard reduces the complexity in the current measurement of inventory. This ASU requires inventory to be measured at the lower of cost and net realizable value, where net realizable value is the estimated selling price in the ordinary course of business less reasonably predictable costs of completion, disposal and transportation (no change to the definition of net realizable value). The amendment eliminates the guidance that requires inventory to be stated at the lower-of-cost or market, which includes consideration of the replacement cost of inventory and the net realizable value of inventory, less an approximately normal profit margin. | | October 1, 2017 | | The implementation of this standard did not have a material effect on WGL or Washington Gas' financial statements. |
|
| | | | | | |
OTHER NEWLY ISSUED ACCOUNTING STANDARDS
|
Standard | | Description | | Required date of adoption
| | Effect on the financial statements or other significant matters |
WGL Holdings, Inc.
Washington Gas Light Company
Part I—Financial Information
Item 1—Financial Statements (continued)
Notes to Condensed Consolidated Financial Statements (Unaudited)
|
| | | | | | |
ASU 2017-07, Compensation - Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost
| | This standard requires entities to report the service cost component in the same financial statement line item as other compensation costs arising from services rendered by the pertinent employees during the period. The other components of net benefit cost are to be presented separately from service cost and outside of operating income. In addition, only the service cost component of net benefit cost is eligible for capitalization. Changes to the presentation of service costs and other components of net benefit cost should be applied retrospectively. Changes in capitalization practices should be implemented prospectively.
| | October 1, 2018 | | We are currently evaluating the interaction of this standard with the various regulatory provisions concerning pensions and post-retirement benefit costs. We anticipate that the change in capitalization of retirement benefits will not have a material impact on WGL or Washington Gas' financial statements.
|
ASU 2016-15, Statement of Cash Flows (Topic 230)—Classification of Certain Cash Receipts and Cash Payments (a consensus of the FASB Emerging Issues Task Force) | | This update provides guidance on the classification of certain cash receipts and payments in the statement of cash flows. | | October 1, 2018* | | We are in the process of evaluating the impact the adoption of this standard will have on our financial statements. We do not anticipate that adoption of this standard will have a material effect on WGL or Washington Gas' financial statements.
|
ASU 2014-09, Revenue from Contracts with Customers (Topic 606), including subsequent ASUs clarifying the guidance.
| | ASU 2014-09 establishes a comprehensive revenue recognition model clarifying the method used to determine the timing and requirements for revenue recognition from contracts with customers. The disclosure requirements under the new standard will enable users of financial statements to understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers.
| | October 1, 2018 | | An implementation team is currently evaluating all revenue streams and reviewing contracts with customers, as well as, related financial statement disclosures to determine the impact the adoption of this standard will have on our financial statements. WGL is also monitoring final conclusions for industry specific implementation issues that could impact the timing of revenue recognition for our regulated utility tariff based sales, including the evaluation of collectability from customers if a utility has regulatory mechanisms to help assure recovery of uncollected accounts from ratepayers and accounting for contributions in aid of construction (CIAC). WGL will adopt using the modified retrospective approach.
|
WGL Holdings, Inc.
Washington Gas Light Company
Part I—Financial Information
Item 1—Financial Statements (continued)
Notes to Condensed Consolidated Financial Statements (Unaudited)
|
| | | | | | |
ASU 2016-01, Financial Instruments (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities | | The new standard amends certain disclosure requirements associated with the fair value of financial instruments, and significantly revises an entity’s accounting related to the classification and measurement of investments in equity securities and the presentation of certain fair value changes for financial liabilities measured at fair value.
| | October 1, 2018* | | We performed a preliminary evaluation and the adoption of this standard will primarily impact the disclosure of our financial instruments in our Fair Value Measurements Footnote.
|
ASU 2016-02, Leases (Topic 842) | | This standard requires recognition of a right-to-use asset and lease liability on the statement of financial position and disclosure of key information about leasing arrangements. The standard requires application using a modified retrospective approach.
| | October 1, 2019* | | We are in the process of evaluating the impact the adoption of this standard will have on our financial statements. |
ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments
| | For credit losses on financial instruments, this standard changes the current incurred loss impairment methodology to an expected loss methodology and requires consideration of a broader range of reasonable and supportable information to determine credit loss estimates.
| | October 1, 2020* | | We are in the process of evaluating the impact the adoption of this standard will have on our financial statements.
|
ASU 2017-12, Derivatives and Hedging (Topic 815): Targeted improvements to Accounting for Hedging Activities and ASU 2018-16, Inclusion of the Secured Overnight Financing Rate (SOFR) Overnight Index Swap (OIS) Rate as a Benchmark Interest Rate for Hedge Accounting Purposes | | The new standardASU 2017-12 amends the hedge accounting and recognition requirements by expanding an entity'sentity’s ability to hedge non-financial and financial risk components and reduce the complexity in fair value hedges of interest rate risk. Additionally, this standard eliminates the requirement to separately measure and disclose the ineffective portion of the hedge with the entire change in the fair value of a hedging instrument to be presented in the same income statement of operations line as the hedged item. Early adoption is permitted.
ASU 2018-16 adds the OIS rate based on SOFR as a fifth U.S. benchmark interest rate for hedge accounting purposes. This standard should be adopted in conjunction with ASU 2017-12 if not early adopted. | | OctoberJanuary 1, 2020*2019 | | The guidance will only have an impact on new transactions that are entered into and where hedge accounting is elected. |
| ASU 2018-15, Intangibles-Goodwill and Other-Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract (a consensus of the FASB Emerging Issues Task Force) | | The update aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements to capitalize implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). Capitalized implementation costs should be presented in the statement of financial position as a prepaid expense and amortized over the term of the hosting arrangement, presented in the statements of operations in the same line items as prepayment of fees associated with the hosting arrangement. The updates in this standard may be applied on a prospective or retrospective basis. Early adoption is permitted. | | January 1, 2019 | | We early adopted this standard on a prospective basis. The adoption of this ASU did not have a material effect on our financial statements.
|
Washington Gas Light Company
Part I-Financial Information
Item 1-Financial Statements (continued)
Notes to Condensed Financial Statements (Unaudited)
|
| | | | | | |
OTHER NEWLY ISSUED ACCOUNTING STANDARDS |
| Standard | | Description | | Required date of adoption | | Effect on the financial statements or other significant matters |
| ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, including other subsequent ASUs clarifying the guidance. | | For credit losses on financial instruments, this standard changes the current incurred loss impairment methodology to an expected loss methodology and requires consideration of a broader range of reasonable and supportable information to determine credit loss estimates. Early adoption is permitted. | | January 1, 2020 | | We are in the process of evaluating the impact the adoption of this standard will have on our financial statements. |
| ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement | | This update modifies the disclosure requirements on fair value measurements. Early adoption is permitted. | | January 1, 2020 | | It is not expected that the adoption of this standard will have a material effect on our financial statements.
|
ASU 2018-17, Consolidation (Topic 810): Targeted Improvements to Related Party Guidance for Variable Interest Entities
| | This standard provides a private-company scope exception to the VIE guidance for certain entities under common control and clarify that indirect interest held through related parties under common control will be considered on a proportional basis when determining whether fees paid to decision makers and service providers are variable interests. Early adoption is permitted.
| | January 1, 2020
| | We are in the process of evaluating this new accounting standard but it is expected that the adoption of this standard will not have a material effect on our financial statements.
|
| ASU 2019-01, Leases (Topic 842) Codification Improvements | | This update addresses the determination of the fair value of the underlying asset by lessors that are not manufacturers or dealers, provides guidance for the presentation of the statement of cash flows for sales-type and direct financing leases, and clarifies transition disclosures related to Topic 250. | | January 1, 2020 | | We do not anticipate that adoption of this standard will have a material effect on our financial statements.
|
| ASU 2018-14, Compensation—Retirement Benefits—Defined Benefit Plans—General (Subtopic 715-20): Disclosure Framework—Changes to the Disclosure Requirements for Defined Benefit Plans | | This standard modifies the disclosure requirements related to defined benefit pension and other postretirement plans. Early adoption is permitted.
| | December 31, 2020 | | We do not anticipate that adoption of this standard will have a material effect on our financial statements.
|
*Subject
Washington Gas Light Company
Part I-Financial Information
Item 1-Financial Statements (continued)
Notes to acceleration ifCondensed Financial Statements (Unaudited)
NOTE 2. REVENUE FROM CONTRACTS WITH CUSTOMERS
The Company adopted ASU 2014-09, Revenue from Contracts with Customers (Accounting Standard Codification (ASC) 606) and subsequent ASUs clarifying the proposed mergerguidance on October 1, 2018, using the modified retrospective method of adoption. Under this approach, prior year results are not required to be restated. Adoption of this standard did not change the timing or pattern of revenue recognition and a cumulative-effect adjustment was not recorded upon adoption. As a result, comparative disclosures for operating results for the three and nine months ended September 30, 2019 are not applicable because implementing the new standard did not change the timing or pattern of revenue recognition.
The Company recognizes revenue from contracts with AltaGascustomers to depict the transfer of goods or services to customers at an amount it expects to be entitled to in exchange for those goods or services. Washington Gas sells natural gas and distribution services to residential, commercial, industrial and governmental customers through regulated tariff rates approved by regulatory commissions in the jurisdictions where it operates (District of Columbia, Maryland, and Virginia). Customers are billed monthly based on regular meter readings. Customer billings are based on two main components: (i) a fixed service fee and (ii) a variable fee based on usage. For customers who choose to purchase their natural gas from Washington Gas, the bill will include a usage based charge for the cost of the commodity. Revenue is consummatedrecognized over time as the natural gas is delivered or as the service is performed. As meter readings are performed on a cycle basis, Washington Gas recognizes accrued revenue for any services rendered to its customers but not billed at month-end. The tariff sales are generally considered daily or “at-will” contracts as customers may cancel their service at any time (subject to notification requirements in the tariff), and revenue generally represents the amount Washington Gas is entitled to invoice. There are certain contracts that have terms of one year or longer. For these contracts, revenue is recognized based on the amount Washington Gas is entitled to bill the customer.
Customers have the choice to purchase natural gas from competitive service providers. Washington Gas charges the competitive service providers balancing fees to manage the natural gas transportation imbalances. Where regulations require, Washington Gas issues customers a consolidated bill to include the natural gas supplied by the competitive service providers and distribution of natural gas. Washington Gas recognizes revenue only for distribution services that it has provided to the customer, and the balancing fees for the services provided to the competitive service provider.
We disaggregate revenue by type of service. The following table disaggregates revenue for the three and nine months ended September 30, 2019.
|
| | | | | | |
| Disaggregated Revenue by Type of Service |
| (In millions) | Three Months Ended September 30, 2019 | Nine Months Ended September 30, 2019 |
| Revenue from contracts with customers | | |
| Gas and transportation sales | | |
| Gas sold and delivered | $ | 70.7 |
| $ | 665.1 |
|
| Gas delivered for others | 33.4 |
| 186.8 |
|
| Other | 10.9 |
| 34.4 |
|
| Other revenues | 1.4 |
| 4.2 |
|
| Total revenue from contracts with customers | $ | 116.4 |
| $ | 890.5 |
|
| Other sources of revenue | | |
Revenue from alternative revenue programs (a) | $ | 3.6 |
| $ | 14.9 |
|
Leasing revenue (b) | 0.2 |
| 0.5 |
|
| Other | 2.1 |
| 8.5 |
|
| Total revenue from other sources | 5.9 |
| 23.9 |
|
| Total Operating Revenue | $ | 122.3 |
| $ | 914.4 |
|
(a) Washington Gas has determined that its Revenue Normalization Adjustment (RNA), Weather Normalization Adjustment (WNA), and Conservation and Ratemaking Efficiency (CARE) Ratemaking Adjustment (CRA) billing adjustment mechanisms and accelerated pipe replacement programs are alternative revenue programs and accounted for under ASC Topic 980.
(b) Revenue generated from Washington Gas lessor operating leases accounted for under ASC Topic 842, Leases. See Note 3-Leases for further information on leases.
Washington Gas accrues unbilled revenues for gas delivered, but not yet billed at the end of each accounting period due to our customer billing cycles. “Unbilled revenues” represent performance obligations that have been satisfied and to which W
Washington Gas Light Company
Part I-Financial Information
Item 1-Financial Statements (continued)
Notes to Condensed Financial Statements (Unaudited)
ashington Gas has an unconditional right to payment, except for contract assets related to Washington Gas’ area-wide contract, which requires project acceptance by federal government for the difference in fiscalright to payment to occur. As of September 30, 2019, contract assets of $40.5 million have been recorded for financed projects within “Unbilled revenues” on the condensed balance sheets. Washington Gas did not have any contract liabilities at September 30, 2019. The Company does not have transaction price amounts allocated to future performance obligations. The Company applies the practical expedient available under ASC Topic 606 and does not disclose information about the remaining performance obligations for (i) contracts with an original expected length of one year end between AltaGasor less, (ii) contracts for which revenue is recognized at the amount to which the Company has the right to invoice for performance completed, and WGL. (iii) contracts with variable consideration that is allocated entirely to a wholly unsatisfied performance obligation or to a wholly unsatisfied promise to transfer a distinct good or service that forms part of a single performance obligation.
On January 1, 2019, the Company adopted ASU 2016-02, Leases (ASC 842) and the following subsequent ASUs which amended the guidance: ASU 2018-01, Land Easement Practical Expedient for Transition to Topic 842, ASU 2018-10, Codification Improvements, and ASU 2018-11, Leases Targeted Improvements, and ASU 2018-20, Narrow-Scope Improvements for Lessors. The new leasing standard requires lessees to recognize a ROU asset and lease liability for leases classified as an operating lease. The significant effects of adopting this standard and the qualitative and quantitative disclosures required to enable users of the financial statements to assess the amount, timing, and uncertainty of cash flows arising from leases are included in Note 1-Accounting Policies and below.
Adoption of the new standard had a material impact to our balance sheet but did not have a material impact to our statement of operations. On January 1, 2019, the Company recorded ROU assets of $43.2 million (net of lease incentives and prepaid or deferred rent of $15.7 million), current lease liability of $2.8 million and non-current lease liability of $56.1 million related to our operating leases. The Company currently does not have finance leases. We elected to implement the new leasing standard retrospectively at the beginning of the period of adoption through a cumulative-effect adjustment. Under this approach, prior year results are not required to be restated and disclosures associated with prior periods are reported under ASC 840.
Lessee Leases
The Company elected to use the transition practical expedient which allows an entity not to reassess whether any expired or existing contracts are, or contain, leases; the lease classification for any expired or existing leases; and the initial direct costs for any existing leases. The practical expedient also allows an entity not to reassess whether existing or expired land easements that were not previously accounted for as a lease under Topic 840 was also elected. The Company elected not to separate lease and non-lease components for its building leases and has elected not to record a ROU asset and lease liability for short-term leases. Short-term leases are defined as leases with a term of 12 months or less at the commencement date, including extension options that are reasonably certain of being exercised, and do not include an option to purchase the underlying asset. Short-term lease costs for the period were not material.
Washington Gas has operating leases for our corporate headquarters and other corporate offices, communication tower space, and certain office equipment. Our leases have remaining lease terms from 1 to 22 years. Some of the leases include options to extend the lease terms for 1 to 5 years with prior written notice or automatically renew if either party does not provide intent to terminate. The leases generally have options to terminate with notice prior to the end of the lease term based on the contract terms. Refer to Note 13-Related Party Transactions for discussion of leases with associated companies.
Washington Gas Light Company
Part I-Financial Information
Item 1-Financial Statements (continued)
Notes to Condensed Financial Statements (Unaudited)
The following table provides our expected operating lease payments as of September 30, 2019. |
| | | |
Maturity of Operating Lease Liabilities
|
| (In millions) | September 30, 2019 |
| 2019 | $ | 1.3 |
|
| 2020 | 5.9 |
|
| 2021 | 5.5 |
|
| 2022 | 5.5 |
|
| 2023 | 5.5 |
|
| Thereafter | 52.1 |
|
| Total lease payments | $ | 75.8 |
|
| Less: Interest | (15.5 | ) |
| Present Value of Lease Liabilities | $ | 60.3 |
|
The following table provides supplemental cash flow information related to operating leases for the three and nine months ended September 30, 2019.
|
| | | | | | |
| Supplemental Cash Flow Information Related to Operating Leases |
| ($ in millions) | Three Months Ended September 30, 2019 | Nine Months Ended September 30, 2019 |
| Cash paid for amounts included in the lease liabilities in the operating cash flows | $ | 0.5 |
| $ | 1.5 |
|
| Operating lease cost (including variable lease costs of $0.5 million and $1.5 million for the three and nine months ended September 30, 2019, respectively) | $ | 1.8 |
| $ | 5.4 |
|
| Right-of-use assets obtained in exchange for new operating lease liabilities | $ | 0.4 |
| $ | 1.5 |
|
At September 30, 2019, the weighted average remaining lease term for operating leases was 13.5 years, and the weighted average discount rate was 3.32%.
Lessor Leases
The Company also has lessor leases for land, office space and communication tower space that are classified as operating leases. The accounting for these operating leases remained unchanged upon the adoption of ASC 842. Washington Gas has elected not to separate the lease and non-lease components for its building leases. Our leases have remaining lease terms ranging from less than a year to 82 years. Some of the leases include options to extend the lease terms for 1 to 5 years with prior written notice or automatically renew if the lessee does not provide intent not to renew. The leases generally have options to terminate the leases with notice prior to the end of the lease term based on the contract terms. The lease agreements do not contain material residual value guarantees.
The following table summarizes the future operating lease payments to be received associated with these leases. |
| | | |
Maturity of Operating Lease Payments(a)
|
(In millions) | September 30, 2019 |
| 2019 | $ | 0.2 |
|
| 2020 | 0.7 |
|
| 2021 | 0.6 |
|
| 2022 | 0.6 |
|
| 2023 | 0.6 |
|
| Thereafter | 58.3 |
|
| Total lease payments | $ | 61.0 |
|
(a) The payments are presented on an undiscounted basis
Washington Gas Light Company
Part I-Financial Information
Item 1-Financial Statements (continued)
Notes to Condensed Financial Statements (Unaudited)
The property, plant and equipment associated with these leases are not material. For information on the lease income recognized during the period, see the Disaggregated Revenue by Type of Service table in Note 2 - Revenue from Contracts with Customers.
During the three and nine months ended September 30, 2019, Washington Gas did not record any impairments related to our leased assets.
NOTE 2.4. ACCOUNTS PAYABLE AND OTHER ACCRUED LIABILITIES The tablestable below provideprovides details for the amounts included in “Accounts payable and other accrued liabilities” on the condensed balance sheets for both WGL and Washington Gas.
sheets.
|
| | | | | | | |
| (In millions) | September 30, 2019 | | December 31, 2018 |
| Accounts payable—trade | $ | 139.4 |
| | $ | 228.9 |
|
| Employee benefits and payroll accruals | 16.5 |
| | 28.0 |
|
| Other accrued liabilities | 26.9 |
| | 31.5 |
|
| Total | $ | 182.8 |
| | $ | 288.4 |
|
Washington Gas Light Company
Part I—Financial Information
Item 1—Financial Statements (continued)
Notes to Condensed Consolidated Financial Statements (Unaudited)
|
| | | | | | | |
| WGL Holdings, Inc. |
| (In millions) | December 31, 2017 | | September 30, 2017 |
| Accounts payable—trade | $ | 383.7 |
| | $ | 361.6 |
|
| Employee benefits and payroll accruals | 21.2 |
| | 35.0 |
|
| Other accrued liabilities | 26.4 |
| | 27.2 |
|
| Total | $ | 431.3 |
| | $ | 423.8 |
|
|
| | | | | | | |
| Washington Gas Light Company |
| (In millions) | December 31, 2017 |
| | September 30, 2017 |
|
| Accounts payable—trade | $ | 163.5 |
| | $ | 174.9 |
|
| Employee benefits and payroll accruals | 20.1 |
| | 32.4 |
|
| Other accrued liabilities | 12.8 |
| | 12.5 |
|
| Total | $ | 196.4 |
| | $ | 219.8 |
|
NOTE 3. SHORT-TERM DEBT
WGL and Washington Gas satisfy theirsatisfies its short-term financing requirements through the sale of commercial paper, financing arrangements with third-party lenders, or through bank borrowings. Due to the seasonal nature of the regulated utility and retail energy-marketing segments,our operations, short-term financing requirements can vary significantly during the year. Revolving credit agreements are maintained to support outstanding commercial paper and to permit short-term borrowing flexibility. The policy of each of WGL and Washington Gas is to maintain bank credit facilities in amounts equal to or greater than theirthe expected maximum commercial paper position. The following is a summary of committed credit available at September 30, 2019 and December 31, 2017 and September 30, 2017.2018.
|
| | | | | | | | | | | |
Committed Credit Available ($ In millions) |
| December 31, 2017 | WGL(b) | | Washington Gas | | Total Consolidated |
| Committed credit agreements | | | | | |
Unsecured revolving credit facility, expires December 19, 2019(a) | $ | 650.0 |
| | $ | 350.0 |
| | $ | 1,000.0 |
|
| Less: Commercial Paper | (341.9 | ) | | (162.0 | ) | | (503.9 | ) |
| Net committed credit available | $ | 308.1 |
| | $ | 188.0 |
| | $ | 496.1 |
|
| Weighted average interest rate | 1.76 | % | | 1.48 | % | | 1.67 | % |
| September 30, 2017 | | | | | |
| Committed credit agreements | | | | | |
Unsecured revolving credit facility, expires December 19, 2019(a) | $ | 650.0 |
| | $ | 350.0 |
| | $ | 1,000.0 |
|
| Less: Commercial Paper | (382.0 | ) | | (123.0 | ) | | (505.0 | ) |
| Net committed credit available | $ | 268.0 |
| | $ | 227.0 |
| | $ | 495.0 |
|
| Weighted average interest rate | 1.52 | % | | 1.22 | % | | 1.45 | % |
|
| | | | | | | | |
| Committed Credit Available |
($ in millions)
| | September 30, 2019 | | December 31, 2018 |
| Committed credit agreements | | | | |
Unsecured revolving credit facility
| | $ | 450.0 |
| | $ | 350.0 |
|
| Less: Commercial paper outstanding | | (117.0 | ) | | (296.0 | ) |
| Net committed credit available | | $ | 333.0 |
| | $ | 54.0 |
|
| Weighted average interest rate | | 2.31 | % | | 2.93 | % |
| |
(a)
| Washington Gas has the right to request extensions with the banks’ approval. Washington Gas’ revolving credit facility permits it to borrow an additional $100 million, with the banks’ approval, for a total of $450 million. |
| |
(b)
| WGL includes WGL Holdings, Inc. and all subsidiaries other than Washington Gas. |
At September 30, 2019 and December 31, 2017 and September 30, 2017,2018, there were no outstanding bank loans from WGL’s or Washington Gas’ revolving credit facilities.
On July 19, 2019, Washington Gas entered into an amended and restated senior unsecured revolving credit facility with a term of five years, plus two one-year extension options, available with the bank group’s approval (Credit Facility). The Credit Facility amended and restated Washington Gas’ prior $350 million credit facility and permits Washington Gas to borrow up to $450 million with an option to increase the facility by an additional $100 million, with the bank group’s approval, for a total potential maximum borrowing of $550 million. Washington Gas incurs credit facility fees, which in some cases are based on the long-term debt ratings of Washington Gas.In the event that the long-term debt ratings are downgraded below certain levels, Washington Gas would be required to pay higher fees. There are five different levels of fees. Under the terms of the credit facilities, the lowest level facility fee is 0.06% and the highest is 0.175%. The interest rate of loans made under the credit facilities will be a fluctuating rate per annum that will be set using certain parameters at the time each loan is made.
PROJECT FINANCINGProject Financing
Washington Gas previously obtained third-party project financing on behalf of the federal government to provide funds duringfor the construction of certain energy management services projects entered into under Washington Gas'Gas’ area-wide contract. In connection with work completed underWashington Gas recorded a project financing obligation in “Notes payable and project financing” on the area-wide contract,balance sheet. As the construction work iswas performed by WGL Energy Systems, Washington Gas established a contract asset in “Unbilled revenue”
WGL Holdings, Inc.
Washington Gas Light Company
Part I—FinancialI-Financial Information
Item 1—Financial1-Financial Statements (continued)
Notes to Condensed Consolidated Financial Statements (Unaudited)
on behalf of Washington Gasrepresenting the government’s obligation to remit principal and an inter-company payable isinterest, and recorded for work provided bya “Payable to associated company” to WGL Energy Systems.Systems for the construction work performed for the same amount. WGL Energy Systems now directly obtains third-party project financing for its energy management services projects. As work is performed, Washington Gas establishes a receivablecontract asset in “Unbilled revenue” representing the government'sgovernment’s obligation to remit principal and interest. The payableinterest and receivable are equalrecords a “Payable to each other at the end of the construction period, but there may be timing differences in the recognition of the project related payable and receivable during the construction period. When these projects are formally“accepted” by the government and deemed complete, Washington Gas assigns the ownership of the receivable to the third party lender in satisfaction of the obligation and removes both the receivable and the obligation related to the financing from its financial statements. In March 2016 the SCC of VA denied Washington Gas' further participation in the third party financing arrangement but allowed existing debt arrangements to remain intact until the related obligations were satisfied. At December 31, 2017 there were two contracts remaining totaling $43.8 million on the Washington Gas balance sheet as a short-term obligation to third party lenders in "Notes payable and project financing".
In December 2016, WGL Energy Systems entered into an agreement to obtain third-party financing and receive funds directly from the third-party lender during the construction period associated with the related energy management service projects. As a result, Washington Gas will no longer be liable under future third-party financing arrangements, for projects entered into under the area-wide contract. The general terms of the financing agreement are the same as the prior financing arrangements between Washington Gas and the third-party lender mentioned above. Washington Gas will continue to record a receivable representing the government’s obligation, and will record an inter-company payablecompany” to WGL Energy Systems for the construction work performed for the same amount.
As of September 30, 2019, Washington Gas recorded $40.5 million of contract assets in “Unbilled revenues” and a $40.5 million payable to WGL Energy Systems in “Payables to associated companies,” respectively, for energy management services projects financed by WGL Energy Systems that were not complete. There was no project financing obligation on Washington Gas’ balance sheet as of September 30, 2019.
As of December 31, 2017, WGL and2018, Washington Gas recorded $94.6$85.3 million and $85.4of contract assets in “Unbilled revenues,” $15.5 million respectively, in "Unbilled revenues" on the balance sheet, and $54.8 million and $43.8 million, respectively, in a corresponding short-term obligationfinancing to third-party lenders in "Notes“Notes payable and project financing",financing,” and $69.7 million accounts payable to WGL Energy Systems in “Payables to associated companies” for energy management services projects that were not complete. As of September 30, 2017,
In October 2018, WGL andEnergy Systems repaid $53.0 million drawn by Washington Gas recorded $85.6from a third-party lender for a specific project for which the lender demanded repayment due to delays in achieving final acceptance from the federal government agency customer. The $53.0 million and $78.2 millionwas included in "Unbilled revenues"“Payables to associated companies” on theWashington Gas’ balance sheet as of December 31, 2018. On January 16, 2019, the federal government agency customer provided notification of final acceptance as of December 14, 2018. In February 2019, WGL sold the receivables, and $54.8 million and $43.8 million, respectively, in a corresponding short-term obligation to third party lenders in "Notes payable and project financing" for energy management services projects that were not complete. Because these projects are financed for government agencies that have minimal credit risk, and with which we have previous collection experience, neither WGL noraccordingly, Washington Gas recordedreversed the associated amount in “Payables to associated companies” and “Unbilled revenue” on its balance sheet.
Washington Gas did not record a corresponding reserve for bad debts related to these receivablescontract assets at September 30, 2019 and December 31, 2017 or September 30, 2017.2018, based on our previous collection experience with receivables that have been financed for government agencies with minimal credit risk.
WGL and Unsecured Notes
Washington Gas issueissues long-term debt in the form of medium-term notes (MTNs), unsecured long-term notes withand private placement notes, all of which contain individual terms regarding interest rates, maturities and call or put options. These notesEach of these note types can have maturity dates of one or more years from the date of issuance.
At December 31, 2017 and September 30, 2017, WGL had capacity under a shelf registration statement to issue an unlimited amount of long-term debt securities. As a result of certain covenants included in the Merger Agreement among WGL, AltaGas and Wrangler, Inc., WGL may not issue debt with a term longer than two years. Refer to Note 17 — Planned Merger with AltaGas Ltd. of the Notes to Condensed Consolidated Financial Statements for a discussion of the proposed merger.
At December 31, 2017 and September 30, 2017, Washington Gas had capacity under a shelf registration statement to issue up to $150.0 million of additional Medium-Term Notes (MTNs).
The following tables show ourtable shows the outstanding notes as of September 30, 2019 and December 31, 2017 and September 30, 2017.
WGL Holdings, Inc.
Washington Gas Light Company
Part I—Financial Information
Item 1—Financial Statements (continued)
Notes to Condensed Consolidated Financial Statements (Unaudited)
2018.
| | Long-Term Debt Outstanding | | ($ In millions) | WGL(a) | | Washington Gas | | Total Consolidated | |
| December 31, 2017 | | | | | | |
Long-term debt (b) | $ | 850.0 |
| | $ | 1,146.0 |
| | $ | 1,996.0 |
| |
| ($ in millions) | | September 30, 2019 | December 31, 2018 |
Total Long-Term Debt(a) | | $ | 1,396.0 |
| $ | 1,096.0 |
|
| Unamortized discount | (1.6 | ) | | (3.0 | ) | | (4.6 | ) | (4.3 | ) | (2.9 | ) |
| Unamortized debt expense | (3.1 | ) | | (8.4 | ) | | (11.5 | ) | (10.6 | ) | (8.1 | ) |
| Less—current maturities | | 50.0 |
| 50.0 |
|
Total Long-Term Debt
| $ | 845.3 |
| | $ | 1,134.6 |
| | $ | 1,979.9 |
| $ | 1,331.1 |
| $ | 1,035.0 |
|
Weighted average interest rate | 2.60 | % | | 4.89 | % | | 3.91 | % | 4.53 | % | 4.77 | % |
| September 30, 2017 | | | | | | |
Long-term debt (b) | $ | 550.0 |
| | $ | 1,146.0 |
| | $ | 1,696.0 |
| |
| Unamortized discount | (1.5 | ) | | (3.0 | ) | | (4.5 | ) | |
| Unamortized debt expense | (2.1 | ) | | (8.5 | ) | | (10.6 | ) | |
Total Long-Term Debt
| $ | 546.4 |
| | $ | 1,134.5 |
| | $ | 1,680.9 |
| |
| Weighted average interest rate | 2.81 | % | | 4.89 | % | | 4.21 | % | |
(a)WGL includes WGL Holdings, Inc.Includes MTNs and all subsidiaries other than Washington Gas.private placement notes. The amount represents face value of long-term debt including current maturities.
(b)Includes senior notes, term loans and floating Weighted average interest rate notesis for WGL and both MTNs and private placement notes for Washington Gas. Represents face value
the long-term debt including current maturities.
The following tables show long-term debt issuances and retirements for the three months ended December 31, 2017.
|
| | | | | | | | | | | |
| Long-Term Debt Issuances and Retirements |
| ($ In millions) | Principal(b) | | Interest Rate | | Effective Cost | | Nominal Maturity Date |
| Three Months Ended December 31, 2017 | | | | | | | |
WGL(a) | | | | | | | |
| Issuances: | | | | | | | |
| 11/29/2017 | $ | 300.0 |
| | 1.88 | % | (c) | 2.01 | % | | 11/29/2019 |
| Total consolidated issuances | $ | 300.0 |
| | | | | | |
(a)WGL includes WGL Holdings, Inc. and all subsidiaries other than Washington Gas.
(b)Represents face amount of notes.
(c)Floating rate per annum and reset quarterly based on terms set forth in the prospectus supplement filed by WGL pursuant to Securities Act Rule 424 on November 27, 2017.
On September 13, 2019, Washington Gas issued medium-term notes with an aggregate principal amount of $300 million and 3.65% fixed interest rate that are due in September 2049. The interest will be paid semi-annually in March and September of each year. The notes have a make-whole call provision at a U.S. Treasury rate plus 25 basis points prior to March 15, 2049, and then are callable at par after March 15, 2049. There werewas no issuancesissuance of long-term debt by Washington Gas for the threenine months ended December 31, 2017 and thereSeptember 30, 2018. There were no retirements of long-term debt for WGL or Washington Gas for the threenine months ended December 31, 2017.
There were no issuancesSeptember 30, 2019 or retirements of long-term debt by WGL or Washington Gas for the three months ended December 31, 2016.2018.
NOTE 5.7. COMPONENTS OF TOTAL EQUITY
The tables below reflect the components of “Total equity” for WGL and Washington Gas for the three and nine months ended December 31, 2017September 30, 2019 and 2016.2018.
WGL Holdings, Inc.
Washington Gas Light Company
Part I—FinancialI-Financial Information
Item 1—Financial1-Financial Statements (continued)
Notes to Condensed Consolidated Financial Statements (Unaudited)
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
WGL Holdings, Inc. Components of Total Equity |
| (In thousands, except shares) | Common Stock | | Paid-In Capital | | Retained Earnings | | Accumulated Other Comprehensive Income (Loss), Net of Taxes | | WGL Holdings Common Shareholders' Equity | | Non-controlling Interest | | Washington Gas Light Company Preferred Stock | | Total Equity |
| Shares | Amount | | | | | | | |
Balance at September 30, 2017 | 51,219,000 |
| $ | 582,716 |
| | $ | 10,149 |
| | $ | 915,822 |
| | $ | (5,997 | ) | | $ | 1,502,690 |
| | $ | 6,851 |
| | $ | 28,173 |
| | $ | 1,537,714 |
|
| Net income (loss) | — |
| — |
| | — |
| | 138,040 |
| | — |
| | 138,040 |
| | (5,778 | ) | | 330 |
| | 132,592 |
|
| Contributions from non-controlling interest | — |
| — |
| | — |
| | — |
| | — |
| | — |
| | 1,659 |
| | — |
| | 1,659 |
|
| Distributions to non-controlling interest | — |
| — |
| | — |
| | — |
| | — |
| | — |
| | (136 | ) | | — |
| | (136 | ) |
Business combination(a) | — |
| — |
| | — |
| | — |
| | — |
| | — |
| | 614 |
| | — |
| | 614 |
|
Other comprehensive income | — |
| — |
| | — |
| | — |
| | 244 |
| | 244 |
| | — |
| | — |
| | 244 |
|
Stock-based compensation(b) | 133,540 |
| 11,251 |
| | (20,534 | ) | | 4,174 |
| | — |
| | (5,109 | ) | | — |
| | — |
| | (5,109 | ) |
| Dividends declared: | | | | | | | | | | | | | | | |
|
|
| Common stock | — |
| — |
| | — |
| | (26,258 | ) | | — |
| | (26,258 | ) | | — |
| | — |
| | (26,258 | ) |
| Preferred stock | — |
| — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (330 | ) | | (330 | ) |
Balance at December 31, 2017 | 51,352,540 |
| $ | 593,967 |
| | $ | (10,385 | ) | | $ | 1,031,778 |
| | $ | (5,753 | ) | | $ | 1,609,607 |
| | $ | 3,210 |
| | $ | 28,173 |
| | $ | 1,640,990 |
|
| Balance at September 30, 2016 | 51,080,612 |
| $ | 574,496 |
| | $ | 12,519 |
| | $ | 827,085 |
| | $ | (38,539 | ) | | $ | 1,375,561 |
| | $ | 409 |
| | $ | 28,173 |
| | $ | 1,404,143 |
|
| Net income (loss) | — |
| — |
| | — |
| | 57,972 |
| | — |
| | 57,972 |
| | (2,535 | ) | | 330 |
| | 55,767 |
|
| Contributions from non-controlling interest | — |
| — |
| | — |
| | — |
| | — |
| | — |
| | 7,331 |
| | — |
| | 7,331 |
|
Other comprehensive income | — |
| — |
| | — |
| | — |
| | 29,413 |
| | 29,413 |
| | — |
| | — |
| | 29,413 |
|
Stock-based compensation(b) | 104,676 |
| 6,564 |
| | (6,567 | ) | | (126 | ) | | — |
| | (129 | ) | | — |
| | — |
| | (129 | ) |
Issuance of
common stock(c) | 25,680 |
| 1,613 |
| | — |
| | — |
| | — |
| | 1,613 |
| | — |
| | — |
| | 1,613 |
|
| Dividends declared: | | | | | | | | | |
|
| | | | | |
|
|
| Common stock | — |
| — |
| | — |
| | (24,965 | ) | | — |
| | (24,965 | ) | | — |
| | — |
| | (24,965 | ) |
| Preferred stock | — |
| — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (330 | ) | | (330 | ) |
Balance at December 31, 2016 | 51,210,968 |
| $ | 582,673 |
| | $ | 5,952 |
| | $ | 859,966 |
| | $ | (9,126 | ) | | $ | 1,439,465 |
| | $ | 5,205 |
| | $ | 28,173 |
| | $ | 1,472,843 |
|
(a) Resulted from the consolidation of SFEE. For more information, see Note 11—Other investments of the Notes to Condensed Consolidated Financial Statements.
(b) Includes dividend equivalents related to our performance shares and implementation of ASU 2016-09, see Note 1—Accounting policies of the Notes to Condensed Consolidated Financial Statements.
(c) Includes dividend reinvestment and common stock purchase plans.
WGL Holdings, Inc.
Washington Gas Light Company
Part I—Financial Information
Item 1—Financial Statements (continued)
Notes to Condensed Consolidated Financial Statements (Unaudited)
.
| | Washington Gas Light Company Components of Total Equity | |
| Components of Total Equity | | Components of Total Equity |
| (In thousands, except shares) | Common Stock | | Paid-In Capital | | Retained Earnings | | Accumulated Other Comprehensive Income (Loss), Net of Taxes | | Total | Common Stock | | Paid-In Capital | | Retained Earnings | | Accumulated Other Comprehensive Income (Loss), Net of Taxes | | Total |
| Shares | Amount | | Shares | Amount | |
| Balance at September 30, 2017 | 46,479,536 |
| $ | 46,479 |
| | $ | 492,101 |
| | $ | 630,691 |
| | $ | (4,522 | ) | | $ | 1,164,749 |
| |
| Net income | — |
| — |
| | — |
| | 57,926 |
| | — |
| | 57,926 |
| |
| Other comprehensive income | — |
| — |
| | — |
| | — |
| | 192 |
| | 192 |
| |
Stock-based compensation(a) | — |
| — |
| | (8,916 | ) | | 4,197 |
| | — |
| | (4,719 | ) | |
| Capital contributed by WGL Holdings | — |
| — |
| | 100,000 |
| | — |
| | — |
| | 100,000 |
| |
| Three Months Ended September 30, 2019 | | Three Months Ended September 30, 2019 | | | | | | | | | |
| Balance at June 30, 2019 | | 46,479,536 |
| 46,479 |
| | 979,273 |
| | 585,193 |
| | (6,141 | ) | | $ | 1,604,804 |
|
| Net loss | | — |
| — |
| | — |
| | (65,799 | ) | | — |
| | $ | (65,799 | ) |
| Other comprehensive income (loss) | | — |
| — |
| | — |
| | — |
| | 942 |
| | $ | 942 |
|
| Dividends declared: | | | | | | | | | | | | | | | | | | |
|
|
| Common stock | — |
| — |
| | — |
| | (21,904 | ) | | — |
| | (21,904 | ) | — |
| — |
| | — |
| | — |
| | — |
| | $ | — |
|
| Preferred stock | — |
| — |
| | — |
| | (330 | ) | | — |
| | (330 | ) | — |
| — |
| | — |
| | — |
| | — |
| | $ | — |
|
| Balance at December 31, 2017 | 46,479,536 |
| $ | 46,479 |
| | $ | 583,185 |
| | $ | 670,580 |
| | $ | (4,330 | ) | | $ | 1,295,914 |
| |
| Balance at September 30, 2016 | 46,479,536 |
| $ | 46,479 |
| | $ | 488,135 |
| | $ | 586,662 |
| | $ | (7,830 | ) | | $ | 1,113,446 |
| |
| Net income | — |
| — |
| | — |
| | 55,461 |
| | — |
| | 55,461 |
| |
| Other comprehensive income | — |
| — |
| | — |
| | — |
| | 224 |
| | 224 |
| |
| Balance at September 30, 2019 | | 46,479,536 |
| 46,479 |
|
| 979,273 |
|
| 519,394 |
|
| (5,199 | ) |
| 1,539,947 |
|
| Three Months Ended September 30, 2018 | | Three Months Ended September 30, 2018 | | | | | | | | | |
| Balance at June 30, 2018 | | 46,479,536 |
| 46,479 |
| | 585,562 |
| | 723,749 |
| | (3,959 | ) | | 1,351,831 |
|
| Net loss | | — |
| — |
| | — |
| | (181,153 | ) | | — |
| | $ | (181,153 | ) |
| Other comprehensive income (loss) | | — |
| — |
| | — |
| | — |
| | 3,613 |
| | $ | 3,613 |
|
Stock-based compensation(a) | — |
| — |
| | (6 | ) | | — |
| | — |
| | (6 | ) | — |
| — |
| | (9,017 | ) | | — |
| | — |
| | $ | (9,017 | ) |
| Capital contribution from parent | | | — |
| | 302,728 |
| | | | | | $ | 302,728 |
|
ASU 2018-02 adoption impact (b) | | | | | | 1,484 |
| | (1,484 | ) | | — |
|
| Dividends declared: | | | | | | | | | | | | | | | | | | |
|
|
| Common stock | — |
| — |
| | — |
| | (21,134 | ) | | — |
| | (21,134 | ) | — |
| — |
| | — |
| | (24,908 | ) | | — |
| | $ | (24,908 | ) |
| Preferred stock | — |
| — |
| | — |
| | (330 | ) | | — |
| | (330 | ) | — |
| — |
| | — |
| | (330 | ) | | — |
| | $ | (330 | ) |
| Balance at December 31, 2016 | 46,479,536 |
| $ | 46,479 |
| | $ | 488,129 |
| | $ | 620,659 |
| | $ | (7,606 | ) | | $ | 1,147,661 |
| |
| Balance at September 30, 2018 | | 46,479,536 |
| 46,479 |
|
| 879,273 |
|
| 518,842 |
|
| (1,830 | ) |
| 1,442,764 |
|
| Nine Months Ended September 30, 2019 | | Nine Months Ended September 30, 2019 | | | | | | | | | |
| Balance at December 31, 2018 | | 46,479,536 |
| 46,479 |
|
| 979,273 |
|
| 543,448 |
|
| (6,627 | ) |
| 1,562,573 |
|
| Net income | | — |
| — |
| | — |
| | 26,606 |
| | — |
| | 26,606 |
|
| Other comprehensive income (loss) | | — |
| — |
| | — |
| | — |
| | 1,428 |
| | 1,428 |
|
| Dividends declared: | | | | | | | | | |
|
|
| Common stock | | — |
| — |
| | — |
| | (50,000 | ) | | — |
| | (50,000 | ) |
| Preferred stock | | — |
| — |
| | — |
| | (660 | ) | | — |
| | (660 | ) |
| Balance at September 30, 2019 | | 46,479,536 |
| 46,479 |
|
| 979,273 |
|
| 519,394 |
|
| (5,199 | ) |
| 1,539,947 |
|
| Nine Months Ended September 30, 2018 | | Nine Months Ended September 30, 2018 | | | | | | | | | |
| Balance at December 31, 2017 | | 46,479,536 |
| 46,479 |
| | 583,185 |
| | 670,580 |
| | (4,330 | ) | | $ | 1,295,914 |
|
| Net income | | — |
| — |
| | — |
| | (84,568 | ) | | — |
| | $ | (84,568 | ) |
| Other comprehensive income (loss) | | — |
| — |
| | — |
| | — |
| | 3,984 |
| | $ | 3,984 |
|
Stock-based compensation(a) | | — |
| — |
| | (6,640 | ) | | — |
| | — |
| | $ | (6,640 | ) |
| Capital contribution from parent | | — |
| — |
| | 302,728 |
| | — |
| | — |
| | $ | 302,728 |
|
ASU 2018-02 adoption impact (b) | | | | | | $ | 1,484 |
| | $ | (1,484 | ) | | — |
|
| Dividends declared: | | | | | | | | | |
|
|
| Common stock | | — |
| — |
| | — |
| | (67,664 | ) | | — |
| | $ | (67,664 | ) |
| Preferred stock | | — |
| — |
| | — |
| | (990 | ) | | — |
| | $ | (990 | ) |
| Balance at September 30, 2018 | | 46,479,536 |
| 46,479 |
|
| 879,273 |
|
| 518,842 |
|
| (1,830 | ) |
| 1,442,764 |
|
(a) Stock-based compensation is based on the stock awards of WGL that are allocated to Washington Gas Light Company for its pro-rata share and includes implementation of ASU 2016-09, see Note 1—Accounting policies2016-09.
(b) Amount related to the adoption of the NotesASU 2018-02. Washington Gas reclassified a credit of $1.5 million from AOCI to Condensed Consolidated Financial Statements.
retained earnings at September 30, 2018.
NOTE 6. EARNINGS PER SHARE
Basic earnings per share (EPS) of WGL is computed by dividing net income by the weighted average number of common shares outstanding during the reported period. Diluted EPS assumes the issuance of common shares pursuant to stock-based compensation plans at the beginning of the applicable period unless the effect of such issuance would be anti-dilutive. The following table reflects the computation of our basic and diluted EPS for the three months ended December 31, 2017 and 2016.
WGL Holdings, Inc.
Washington Gas Light Company
Part I—FinancialI-Financial Information
Item 1—Financial1-Financial Statements (continued)
Notes to Condensed Consolidated Financial Statements (Unaudited)
|
| | | | | | | | | | |
| Basic and Diluted EPS |
| (In thousands, except per share data) | Net Income Applicable to Common Stock | | Shares | | Per Share Amount |
| Three Months Ended December 31, 2017 | | | | | |
| Basic EPS | $ | 138,040 |
| | 51,319 |
| | $ | 2.69 |
|
| Stock-based compensation plans | — |
| | 230 |
| | |
| Diluted EPS | $ | 138,040 |
| | 51,549 |
| | $ | 2.68 |
|
| Three Months Ended December 31, 2016 | | | | | |
| Basic EPS | $ | 57,972 |
| | 51,172 |
| | $ | 1.13 |
|
| Stock-based compensation plans | — |
| | 273 |
| | |
| Diluted EPS | $ | 57,972 |
| | 51,445 |
| | $ | 1.13 |
|
There were no anti-dilutive shares issued forWashington Gas is included in the ASUS consolidated income tax returns beginning with the period from July 7, 2018 to December 31, 2018. We have established a new tax sharing policy with ASUS. During the three and nine months ended December 31, 2017 and 2016.
NOTE 7. INCOME TAXES
As of December 31, 2017 and September 30, 2017, our uncertain tax positions were approximately $37.5 million and $48.1 million, respectively, primarily due2019, Washington Gas did not make or receive any payments to or from its associated companies related to the change inlegacy WGL tax accounting for repairs. Ifsharing agreement or the amountsnew tax sharing agreement.
Amounts of unrecognized tax benefits are eventually realized, it would not materially impact the effective tax rate. It is reasonably possible that the amount of the unrecognized tax benefit with respect to some of WGL’sInterest and Washington Gas’ uncertain tax positions will significantly increase or decrease in the next 12 months. At this time, however, an estimate of the range of reasonably possible outcomes cannot be determined.Penalties Recognized
Under Accounting Standards Codification (ASC) Topic 740, Income Taxes, Washington Gas recognizes any accrued interest associated with uncertain tax positions in interest expense and recognizes any accrued penalties associated with uncertain tax positions in other expenses in the statements of income. At December 31, 2017operations. During the three and nine months ended September 30, 2017, we did not have an accrual of2019 and 2018, there were no accrued interest expenseexpenses or penalties related toassociated with uncertain tax positions.
WGL files a consolidated federal tax return
NOTE 9. PENSION AND OTHER POST-RETIREMENT BENEFIT PLANS The following table shows the components of net periodic benefit costs (income) recognized in our financial statements during the three and various other state returns. We are no longer subject to income tax examinations by the Internal Revenue Service for yearsnine months ended prior to September 30, 2014. Substantially all state income tax years in major jurisdictions are closed for years ended prior to September 30, 2014.2019 and 2018:
The Tax Cuts and Jobs Act (“the Act”) was enacted on December 22, 2017. The Act substantially reforms the Tax Code. Among other things, the Act reduced the federal corporate income tax rate from a top marginal rate of 35% to a flat rate of 21%. The Act also denies bonus depreciation to regulated public utilities and imposes limitations on the amount of interest expense which may be deducted by unregulated operations. ASC Topic 740 requires companies to recognize the impacts of a change in tax law or tax rates in the period of enactment. On December 22, 2017, after enactment of the Act, the Securities and Exchange Commission ("SEC") staff issued Staff Accounting Bulletin No. 118 (“SAB 118”) to address the application of US GAAP when a registrant does not have the necessary information available, prepared, or analyzed in reasonable detail to complete the necessary accounting. At December 31, 2017, we have not completed our accounting for the tax effects of enactment of the Act and have followed the guidance issued in SAB 118. SAB 118 expresses the Staff’s views on how ASC Topic 740 should be applied in the context of the Act. It allows entities to take a reasonable period of time to measure and recognize the effects of the Act, while requiring robust disclosures during that period. Under this guidance, registrants record the effects of all items for which the accounting is complete. To the extent a company has not completed the accounting for the effects of the Act, it may record reasonable estimates as provisional amounts. The recorded provisional amounts remain subject to adjustment within the measurement period. The measurement period begins in the reporting period that includes the Act’s enactment date and continues until such time as the accounting can be completed, not to exceed one year from the date of enactment. To the extent a company cannot reasonably estimate the effects of the Act, it should apply the provisions of the tax law that were in effect immediately prior to enactment. SAB 118 requires disclosure of any measurement period adjustments and the effect of measurement period adjustments on the effective tax rate. There are no measurement period adjustments in the first quarter of the fiscal year since the amounts recorded are our initial, provisional amounts.
Qualitative disclosures of items having no impact on provision for tax expense at December 31, 2017:
Bonus depreciation. Under the Act, regulated public utility property is generally ineligible for bonus depreciation and is depreciated under MACRS while non-utility property is generally subject to 100% bonus depreciation. We have considered all public utility property placed in service in this quarter to be ineligible for bonus depreciation. The impact of this provision in the current fiscal year is reasonably estimated to be a reduction in the amount of $88 million in tax depreciation expense based
WGL Holdings, Inc.
Washington Gas Light Company
Part I—FinancialI-Financial Information
Item 1—Financial1-Financial Statements (continued)
Notes to Condensed Consolidated Financial Statements (Unaudited)
|
| | | | | | | | | | | | |
| Components of Net Periodic Benefit Costs (Income) |
| | Three Months Ended September 30, |
| | 2019 | 2018 |
| (In millions) | Pension Benefits | Health and Life Benefits | Pension Benefits | Health and Life Benefits |
| Service cost | $ | 3.0 |
| $ | 1.3 |
| $ | 3.7 |
| $ | 1.3 |
|
| Interest cost | 10.2 |
| 3.0 |
| 9.9 |
| 2.9 |
|
| Expected return on plan assets | (10.7 | ) | (6.1 | ) | (10.6 | ) | (5.9 | ) |
| Recognized prior service cost (credit) | 0.1 |
| (3.9 | ) | 0.1 |
| (4.4 | ) |
| Recognized actuarial loss | 1.3 |
| — |
| 3.9 |
| — |
|
| Net periodic benefit cost (income) | 3.9 |
| (5.7 | ) | 7.0 |
| (6.1 | ) |
| Allocation to affiliates | (0.4 | ) | 0.5 |
| (0.9 | ) | 0.7 |
|
| Adjusted net periodic benefit cost (income) | 3.5 |
| (5.2 | ) | 6.1 |
| (5.4 | ) |
Amount allocated to construction projects(b) | (0.4 | ) | (0.2 | ) | (1.0 | ) | 0.8 |
|
Amount deferred as regulatory asset (liability)-net allocations(c) | — |
| — |
| 1.7 |
| — |
|
| Amount charged (credited) to expense | $ | 3.1 |
| $ | (5.4 | ) | $ | 6.8 |
| $ | (4.6 | ) |
| | | | | |
| | Nine Months Ended September 30, |
| | 2019 | 2018 |
| (In millions) | Pension Benefits | Health and Life Benefits | Pension Benefits | Health and Life Benefits |
| Service cost | $ | 9.1 |
| $ | 3.8 |
| $ | 11.1 |
| $ | 3.9 |
|
| Interest cost | 30.7 |
| 9.0 |
| 29.7 |
| 8.7 |
|
| Expected return on plan assets | (32.1 | ) | (18.3 | ) | (31.7 | ) | (17.7 | ) |
| Recognized prior service cost (credit) | 0.3 |
| (11.7 | ) | 0.3 |
| (13.2 | ) |
| Recognized actuarial loss | 4.0 |
| — |
| 11.7 |
| — |
|
Settlement charge(a) | 4.3 |
| — |
| — |
| — |
|
| Net periodic benefit cost (income) | 16.3 |
| (17.2 | ) | 21.1 |
| (18.3 | ) |
| Allocation to affiliates | (1.3 | ) | 1.8 |
| (2.6 | ) | 2.1 |
|
| Adjusted net periodic benefit cost (income) | 15.0 |
| (15.4 | ) | 18.5 |
| (16.2 | ) |
Amount allocated to construction projects(b) | (1.2 | ) | (0.6 | ) | (3.6 | ) | 2.9 |
|
Amount deferred as regulatory asset (liability)-net allocations(c) | 0.7 |
| — |
| 4.7 |
| — |
|
| Amount charged (credited) to expense | $ | 14.5 |
| $ | (16.0 | ) | $ | 19.6 |
| $ | (13.3 | ) |
(a)Amount relates to a one-time partial settlement charge associated with a lump sum payment to Washington Gas’ defined benefit supplemental executive retirement plan (DB SERP) that was paid in the first quarter of assets2019.
(b)On October 1, 2018, Washington Gas adopted ASU 2017-07. As a result, only the service cost component of net periodic benefit costs (income) is eligible for capitalization.
(c)Amount represents the amortization of previously unrecovered costs of the applicable pension benefits or the health and life benefits as approved in the District of Columbia through 2019.
At September 30, 2019 and December 31, 2018, the rabbi trust balance associated with the DB SERP and non-funded defined benefit restoration plan (DB restoration) plans was $43.8 million and $60.8 million, respectively. $4.2 million and $20.2 million was recorded in “Current Assets-Other” and $39.6 million and $40.6 million was recorded in “Deferred Charges and Other Assets - Other” respectively, along with other rabbi trust balances.
On October 1, 2018, Washington Gas adopted ASU 2017-07. This standard requires entities to report the service cost component in the same financial statement line item as other compensation costs arising from services rendered by the pertinent employees during the period. The other components of net benefit cost are to be placed inpresented separately from service when comparedcost and outside of operating income. In addition, only the service cost component of net benefit cost is eligible for
Washington Gas Light Company
Part I-Financial Information
Item 1-Financial Statements (continued)
Notes to Condensed Financial Statements (Unaudited)
capitalization. Changes to the presentation of service costs and other components of net benefit cost were applied retrospectively. As a result of the retrospective adoption, we reclassified $2.8 million and $8.4 million of net periodic benefit income from “Operation and maintenance” expense to “Other income (expense)-net” on the statement of operations for the three and nine months ended September 30, 2018. Changes in capitalization practices were implemented prospectively.
NOTE 10. COMMITMENTS AND CONTINGENCIES Contractual Obligations
Washington Gas has certain contractual obligations incurred in the normal course of business that require fixed and determinable payments in the future. These commitments include long-term debt, lease obligations, unconditional purchase obligations for pipeline capacity, transportation and storage services, and our commitments related to the business process outsourcing program.
For our contractual obligations, refer to Note 12- Commitments and Contingencies to the Financial Statements in Form 10-KT for the Transition Period from October 1, 2018 to December 31, 2018.
Refer to Note 6- Long-term Debt of the Notes to Condensed Financial Statements for long term debt issued during the current period.
There were no other significant changes to contractual obligations that are out of the normal course of business during the nine months ended September 30, 2019.
Silver Spring, Maryland Incident
On April 23, 2019, the National Transportation and Safety Board (NTSB) held a hearing during which it found, among other things, that the probable cause of the August 10, 2016, explosion and fire at an apartment complex on Arliss Street in Silver Spring, Maryland “was the failure of an indoor mercury service regulator with an unconnected vent line that allowed natural gas into the meter room where it accumulated and ignited from an unknown ignition source. Contributing to the accident was the location of the mercury service regulators where leak detection by odor was not readily available.” Washington Gas disagrees with the NTSB’s probable cause findings. Following this hearing, on June 10, 2019, the NTSB issued an accident report.
In connection with the incident, a total of 37 civil actions related to the incident have been filed and are pending against WGL and Washington Gas in the Circuit Court for Montgomery County, Maryland. All cases have been consolidated for discovery purposes. All of these suits seek unspecified damages for personal injury and/or property damage. A trial date for eight bellwether civil actions has been scheduled for December 2, 2019. In addition, two suits were recently filed related to the incident, one each in the Superior Court for the District of Columbia and one in the Circuit Court of Montgomery County, Maryland.
At this stage of the litigation, the outcome is not yet determinable and management is unable to make an estimate of any potential loss or range of potential losses that are reasonably possible of occurring. As a result, management has only recorded a reserve for a few of the actions for which a settlement offer was made. Washington Gas maintains excess liability insurance coverage from highly-rated insurers, subject to a nominal self-insured retention. Washington Gas believes that this coverage will be sufficient to cover any significant liability that may result from this incident.
Regulatory Contingencies
Certain legal and administrative proceedings incidental to our business, including regulatory contingencies, involve Washington Gas. In our opinion, we have recorded an adequate provision for probable losses or refunds to customers for regulatory contingencies related to these proceedings.
Merger Commitments
In connection with the Merger, AltaGas and WGL made commitments related to the terms of the Public Service Commission of the District of Columbia (PSC of DC) settlement agreement and the conditions of approval from the Public Service Commission of Maryland (PSC of MD) and the State Corporation Commission of Virginia (SCC of VA). Among other things, these commitments include rate credits distributable to both residential and non-residential customers, gas expansion and other programs, various public interest commitments, and safety programs. The cumulative amount expensed as of September 30, 2019 was $136.6 million, of which $118.7 million has been paid, including $1.1 million and $7.6 million paid in the three and nine months ended September 30, 2019, respectively. In March 2019, the PSC of MD directed that the $3.9 million Most Favored Nation adjustment, originally recorded as a commitment expense, should be used to offset future rates under Washington Gas’ natural gas expansion program in Maryland. As a result, Washington Gas reversed the commitment expense in the fi
Washington Gas Light Company
Part I-Financial Information
Item 1-Financial Statements (continued)
Notes to Condensed Financial Statements (Unaudited)
rst quarter of 2019. Further, there are additional regulatory commitments that will be recorded when the costs are incurred in the future, including the hiring of damage prevention trainers in each jurisdiction for a total amount of deprecation expense under$2.4 million over 5 years; investing up to $70.0 million over a 10 year period to further extend natural gas service; and spending $7.5 million for leak mitigation within three years of the previous rules,Merger close.
Application for Approval of Reduction of Distribution Rates
On January 12, 2018, Washington Gas filed applications to reduce customer rates in Maryland, Virginia, and a decreasethe District of Columbia to reflect the forecasted taxable loss. A deferred tax amount related to this depreciation was not recorded; therefore, there is no associated deferred tax amount that was required to be re-measured.
Decrease in regulated revenues: As described above,impact of the Tax Act, including both the impact of the re-measurement of deferred tax assets and liabilities and reduction of the federal tax rate to 21%. Washington Gas began tracking the impact of the Tax Act on revenue requirements beginning January 1, 2018, recording all impacts to regulatory assets and liabilities. In Maryland and the District of Columbia, rates have been adjusted for the regulated public utility gives riseimpact of the Tax Act. In Virginia, the SCC of VA dismissed the application on March 15, 2018. Washington Gas filed a new general rate case on July 31, 2018 incorporating the effects of the Tax Act. On September 16, 2019, the Hearing Examiner (HE) issued a report to amounts probablethe SCC of being collected from orVA recommending the Company increase its liability balance for the Tax Act to $35.4 million and for it to be refunded to customers in future periods. In addition, the federal tax expense included in current base rates needs to be adjusteda one-time sur-credit. Accordingly, at September 30, 2019, Washington Gas recorded an $18.9 million adjustment to the new federal rateliability and will refund the credits after the SCC of 21% effective January 1, 2018. We have reasonably estimatedVA’s final order is issued. See the reduction in current base rates (revenue) anddiscussion below for a further discussion of the annual amortization of amounts resulting from the re-measurement of certain deferred tax assets and liabilities beginning January 1, 2018. In JanuaryHE’s report.
Virginia Jurisdiction
Virginia Rate Case. On July 31, 2018, Washington Gas filed applicationsan application with the SCC of VA to increase its base rates for approvalnatural gas service by $37.6 million, which includes $14.7 million of revenue associated with natural gas pipeline replacement initiatives previously approved by the SCC of VA and paid by customers through a monthly rider. Additionally, the requested revenue increase incorporated the effects of The Tax Act. Interim rates became effective, subject to reducerefund, for usage in the January 2019 billing cycle. On April 12, 2019, Washington Gas filed rebuttal testimony and revised its distributionoriginal return on equity down from 10.6% to 10.3% and its overall rate of return down from 7.94% to 7.81%. Evidentiary hearings were held on April 30 and May 1, 2019. Post hearing briefs were filed on July 3, 2019. On September 16, 2019, the HE issued a report to the SCC of VA which recommended among other things: (i) no increase in base rate revenue; (ii) a return on equity of 9.2% compared to the current authorized return on equity rate of 9.5%; (iii) unprotected plant-related and non-plant-related excess deferred income tax should be amortized as a reduction in rates it chargesover 5 years compared to amortizing using Average Rate Assumption Method (ARAM) and over 15 years, respectively; (iv) refund $5.6 million to customers for tax savings related to reflectthe October 2017 to December 2017 period as part of the Tax CutsAct savings owed to customer, and Jobs Act in Maryland, Virginia and(v) write off a $7.1 million regulatory asset related to flowthrough income taxes that the Districtcompany had recovered previously flowed through depreciation income tax deductions via the SAVE rider. For the nine months ended September 30, 2019, Washington Gas made the following pre-tax adjustments based on the HE’s recommendations: (i) reduced “Operating revenues-Utility” by $7.6 million to accrue additional amounts of Columbia. These applications propose to reduce rates in these jurisdictions by a combined amount of $39.5 million annually, until base rates are reestablished in a general rate case. As described further below, the portion of this reduction in regulated revenues represented by the re-measurement of deferred tax assets and liabilities was recorded as a net regulatory liability under ASC 980, Regulated Operations. The net regulatory liability recorded is the amount we consider probable of regulatory treatment. In addition, amounts collected under other revenue mechanisms remain subject to adjustmentrefund; (ii) reduced “Operating revenues-Utility” by $13.3 million associated with the revised amortization of the Tax Act liability; and (iii) wrote off $2.0 million in “Regulatory Assets - Other” and charged to “Operation and maintenance” expense. Additionally, the Company reduced income tax expense by $11.8 million related to the amortization of excess deferred income tax, and recorded a $5.5 million after-tax impairment of a tax regulatory asset related to flowthrough income taxes. Reply comments on the HE’s report were filed by Washington Gas on October 21, 2019. Washington Gas filed reply comments challenging eleven recommendations contained in the HE’s report, including some of the items highlighted above, where the bases for the decrease infindings either disregard or are contrary to the federal tax rate beginning January 1, 2018. The estimated decrease in regulated revenues is prospective onlysubstantial evidentiary record.
Maryland Jurisdiction
Maryland Show-Cause Order. On September 5, 2019, the PSC of MD ordered the Company, within 30 days, to (i) provide a detailed response to the NTSB’s probable cause findings, and had no impact(ii) provide evidence regarding the status of a 2003 mercury regulator replacement program, and if the program was not completed, to show cause why the Commission should not impose a civil penalty on the accounting forCompany. On September 16, 2019, the quarter ended December 31, 2017.
Items for whichPSC of MD granted the accountingCompany a 14-day extension to file its Response to the Show-Cause Order. On October 18, 2019, the Company filed its Response to the Show-Cause Order, (i) providing a detailed response to the NTSB’s probable cause findings and (ii) providing evidence regarding the status of a 2003 mercury regulator replacement program and why the Commission should not impose a civil penalty on the Company. The PSC of MD has not adopted a procedural schedule with respect to this matter but has indicated that it will schedule one public hearing near the apartment complex at Arliss Street. Given the early stage of the Show-Cause proceeding, the outcome is not yet complete asdeterminable and management is unable to predict the likelihood of the enda civil penalty, or make an estimate of the quarter but for which we have recorded provisional amounts atany potential civil penalty or range of potential civil penalty.
Financial Guarantees
At September 30, 2019 and December 31, 2017 which are subject2018, there were no guarantees to adjustment during the measurement period:
Re-measurement of deferred tax assets and liabilitiesexternal parties.. Under ASC 740, the tax rate or rates that are used to measure deferred tax liabilities and deferred tax assets are the enacted tax rates expected to apply to taxable income in the years that the liability is expected to be settled or the asset recovered. As a result of using a 21% tax rate for our Q1 income tax provision, we did not create new amounts requiring re-measurement in Q1. Therefore, we re-measured the deferred tax balances at September 30, 2017. The re-measurement of our deferred tax assets and liabilities includes the re-measurement of our cumulative net operating loss deferred tax asset (NOL DTA) as of September 30, 2017.
The effect of the re-measurement at a federal tax rate of 21% which resulted in a net decrease in consolidated deferred tax liabilities in the amount of $476.4 million, including net tax gross-up. Of this amount, $417.3 million is attributable to the regulated utility and $59.1 million is attributable to non-utility operations. Of the amount related to utility operations, the net decrease in plant-related deferred tax liabilities was $317.8 million before tax gross-up. In addition an increase in income tax expense of, $6.2 million attributable to the regulated utility was recorded as a discrete item. Of the amount related to non-utility operations, $59.1 million was recorded as a benefit to the tax expense recorded for the period, as a discrete item as a result of the re-measurement of deferred tax liabilities. In addition, the re-measurement of the deferred tax liability associated with the Company’s uncertain tax position was a decrease in the amount of $14.8 million. A reserve for uncertain tax benefits related to prior years would generally not be re-measured if the tax exposure related to prior years. However, WGLH’s reserve for uncertain tax benefits relates solely to repair deductions for which the tax consequence of any disallowed deductions related to these timing differences is expected to be prospective only.
Consolidated deferred tax assets and liabilities were re-measured at a federal rate of 21%, based on the expectation that we will experience a taxable loss in the current fiscal year, increasing our net operating loss carryforward from the prior year. In the event taxable income is reported for the current fiscal year, we would need to apply a blended federal tax rate of 24.5% to any tax owed in the current period, before the utilization of any net operating loss carryforward to offset all or a portion of the taxable income on which federal tax would otherwise be owed. Additionally, the portion of the temporary differences settling or reversing in the first quarter of our fiscal year 2018 would be re-measured at the rate of 24.5% instead of 21%. We have recorded provisional estimates based on current information as the Company continues to work towards refinement and completion of the income tax provision for the current period. Under ASC 980, we recorded a net increase to the regulatory liability for excess deferred income taxes (EDIT) in the amount of $429.3 million including tax gross-up, and a net increase in regulatory assets in the amount of $5.8 million, for a net increase in regulatory liabilities in the amount of $423.5 million. We recorded a decrease in the regulatory asset for flow-through in the amount and $22.4 million, including tax gross-up; and a regulatory asset for the re-measurement of non-plant excess deferred taxes and the net operating loss carryforward deferred tax asset in the amount of $28.2 million, including tax gross-up, for a net increase in regulatory assets in the amount of $5.8 million.
All provisional amounts recorded for re-measurement remain subject to adjustment within the measurement period pending the preparation and analysis of additional information. In addition, we have recorded a provisional estimate but have not fully
WGL Holdings, Inc.
Washington Gas Light Company
Part I—FinancialI-Financial Information
Item 1—Financial1-Financial Statements (continued)
Notes to Condensed Consolidated Financial Statements (Unaudited)
completedAntero Contract
In June 2019, a jury trial was held in the accountingCounty Court for Denver, Colorado to consider a contractual dispute relating to gas pricing between Washington Gas and WGL Midstream (together, the Companies) and Antero Resources Corporation (Antero). Following the trial, the jury returned a verdict in favor of Antero for $95.9 million, of which $11.2 million was against Washington Gas, and $84.7 million against WGL Midstream. Following the official entry of the judgment, the Company filed an appeal on August 16, 2019.
As a result of this verdict, it was determined that a loss contingency is probable and Washington Gas has recorded an estimated liability of $11.2 million in “Accounts payable and accrued liabilities” on the balance sheet as of September 30, 2019, of which $2.6 million had already been recorded in a prior period. Washington Gas has also recorded a receivable from our trading partner of $1.3 million net in “Accounts payable and accrued liabilities” and sharing with customers as the contract relates to asset optimization of $4.5 million in “Deferred charges and other assets - Gas costs”. In addition, Washington Gas has recorded an accrual for estimated court fees of $0.1 million, and an accrual of interest expense associated with the liability.
For the nine months ending September 30, 2019, the net pre-tax loss recorded as a result of the verdict was $3.0 million in “Utility cost of gas” on Washington Gas’ statements of operations.
Environmental Matters
We are subject to federal, state and local laws and regulations related to environmental matters. These laws and regulations may require expenditures over a long time frame to control environmental effects. Almost all of the environmental liabilities we have recorded are for costs expected to be incurred to remediate sites where we or a predecessor affiliate operated manufactured gas plants (MGPs).
Washington Gas has identified up to ten sites where it or its predecessors may have operated MGPs. Washington Gas last used any such plant in 1984. In connection with these operations, we are aware that coal tar and certain other by-products of the gas manufacturing process are present at or near some former sites and may be present at others.
At September 30, 2019 and December 31, 2018, Washington Gas reported a liability of $10.7 million and $11.3 million on an undiscounted basis related to future environmental response costs. These estimates principally include the minimum liabilities associated with a range of environmental response costs expected to be incurred. At September 30, 2019 and December 31, 2018, Washington Gas estimated the maximum liability associated with all of its sites to be approximately $35.8 million and $29.4 million, respectively. The estimates were determined by Washington Gas’ environmental experts, based on experience in remediating MGP sites and advice from legal counsel and environmental consultants. The variation between the recorded and estimated maximum liability primarily results from differences in the number of years that will be required to perform environmental response processes and the extent of remediation that may be required.
Washington Gas is currently remediating its East Station property, located in Washington D.C. adjacent to the Anacostia River, including ground water pump and treat, tar recovery, soil encapsulation and other treatment. Under a 2012 consent decree with the District of Columbia and the federal government, Washington Gas is also conducting a remedial investigation and feasibility study on an adjacent property owned by the District of Columbia. Additional remediation may be required at this property.
In addition, at another adjoining property known as the “Boat Club Property,” located to the east of the property owned by the District of Columbia, Washington Gas agreed to perform a site investigation and report the findings pursuant to oversight by the District of Columbia Department of Energy and Environment (DOEE). This property was subject to a July 12, 2019, Administrative Order from the DOEE. This Administrative Order has been withdrawn. A consent order is being negotiated.
Washington Gas received a letter in February 2016 from the DOEE and National Park Service regarding the Anacostia River Sediment Project, indicating that the District of Columbia is conducting a separate remedial investigation and feasibility study of the river to determine if and what cleanup measures may be required and to prepare a natural resource damage assessment. The sediment project draft remedial investigation report issued on March 30, 2018 identifies East Station as one of seventeen potential environmental cleanup sites. We are not able to estimate the total amount of potential damages or timing associated with the District of Columbia’s environmental investigation on the Anacostia River at this time. While an allocation method has not been established, Washington Gas has accrued an amount for study costs based on a potential range of estimates.
Regulatory orders issued by the PSC of MD allow Washington Gas to recover the costs associated with the sites applicable to Maryland over the period ending in 2025. Rate orders issued by the PSC of DC allow Washington Gas a three-year recovery of prudently incurred environmental response costs and allow Washington Gas to defer additional costs incurred between rate
Washington Gas Light Company
Part I-Financial Information
Item 1-Financial Statements (continued)
Notes to Condensed Financial Statements (Unaudited)
cases. Regulatory orders from the SCC of VA have generally allowed the recovery of prudent environmental remediation costs to the extent they were included in the underlying financial data supporting an application for rate change.
At September 30, 2019 and December 31, 2018, Washington Gas reported a regulatory asset of $6.3 million and $5.8 million for the tax sharing impactsportion of the re-measurement of the deferred tax assets and deferred tax liabilities.environmental response costs that are expected to be recoverable in future rates.
Existing current or deferred tax amounts for which the income tax effects of the Tax Act have not been completed:
Accounting for the tax basis adjustment for ITC. Under prior tax law and under the Act, the basis of property must be reduced by one-half of the investment tax credits claimed thereon. Under GAAP, we gross up the book basis and amortize the investment tax credits over the book life of the associated assets. We have not yet completed the accounting for the effects of the Act on the gross-up of book basis and have not recast the amortization pending additional analysis.
NOTE 8. DERIVATIVE AND WEATHER-RELATED INSTRUMENTS11. DERIVATIVES Regulated Utility OperationsDerivative Instruments
Washington Gas enters into contracts that qualify as derivative instruments and are accounted for under ASC Topic 815. These derivative instruments are recorded at fair value on our balance sheetssheet and Washington Gas does not currently designate any derivatives as hedges under ASC Topic 815. Washington Gas’ derivative instruments relate to: (i) Washington Gas’ asset optimization program; (ii) managing price risk associated with the purchase of gas to serve utility customers and (iii) managing interest rate risk.
Asset Optimization. Washington Gas optimizes the value of its long-term natural gas transportation and storage capacity resources during periods when these resources are not being used to physically serve utility customers. Specifically, Washington Gas utilizes its transportation capacity assets to benefit from favorable natural gas prices between different geographic locations and utilizes its storage capacity assets to benefit from favorable natural gas prices between different time periods. As part of this asset optimization program, Washington Gas enters into physical and financial derivative transactions in the form of forward, futures and option contracts with the primary objective of securing operating margins that Washington Gas will ultimately realize. The derivative transactions entered into under this program are subject to mark-to-market accounting treatment under ASC Topic 820.
Regulatory sharing mechanisms provide for the annual realized profit from these transactions to be shared between Washington Gas'Gas’ shareholders and customers; therefore, changes in fair value are recorded through earnings, or as regulatory assets or liabilities to the extent that it is probable that realized gains and losses associated with these derivative transactions will be included in the rates charged to customers when they are realized. Unrealized gains and losses recorded to earnings may cause significant period-to-period volatility; this volatility does not change the operating margins that Washington Gas expects to ultimately realize from these transactions through the use of its storage and transportation capacity resources.
All physically and financially settled contracts under our asset optimization program are reported on a net basis in the statements of incomeoperations in “Utility cost of gas.” Total net margins recorded to “Utility cost of gas” after sharing and management fees associated with all asset optimization transactions for the three months ended December 31, 2017September 30, 2019 was a net gainloss of $5.8$1.2 million including an unrealized loss of $1.4$6.5 million. During the three months ended December 31, 2016,September 30, 2018, we recorded a net gain of $24.3$7.7 million including an unrealized gain of $15.4$3.3 million. Total net margins recorded to “Utility cost of gas” after sharing and management fees associated with all asset optimization transactions for the nine months ended September 30, 2019 was a net gain of $8.3 million including an unrealized gain of $0.1 million and a $3.0 million loss related to the Antero Contract. During the nine months ended September 30, 2018, we recorded a net gain of $28.5 million including an unrealized gain of $11.8 million. Refer to Note 10-Commitments and Contingencies for further discussion of the Antero Contract.
Managing Price Risk. To manage price risk associated with acquiring natural gas supply for utility customers, Washington Gas enters into physical and financial derivative transactions in the form of forward, option and other contracts, as authorized by its regulators. Any gains and losses associated with these derivatives are recorded as regulatory liabilities or assets, respectively, to reflect the rate treatment for these economic hedging activities.
Managing Interest-Rate Risk.Risk. Washington Gas may utilize derivative instruments that are designed to minimize the risk of interest-rate volatility associated with planned issuances of debt securities. Any gains and losses associated with these types of derivatives are recorded as regulatory liabilities or assets, respectively, and amortized in accordance with regulatory requirements, typically over the life of the related debt. As of September 30, 2019 and December 31, 2018, Washington Gas does not have any interest rate swaps in derivatives.
Non-Utility Operations
Trading Activities. WGL Midstream enters into derivative contracts for the purpose The following table presents absolute notional amounts of optimizing its storage and transportation capacity as well as managing the transportation and storage assets on behalf of third parties. WGL Midstream does not designate these derivatives as hedges under ASC Topic 815; therefore, changes in the fair value of theseour derivative instruments are reflected in the earningsas of our non-utility operationsSeptember 30, 2019 and may cause significant period-to-period volatility in earnings.December 31, 2018. |
| | | | | |
| Absolute Notional Amounts |
| of Open Positions on Derivative Instruments |
| | | Notional Amounts |
| | | September 30, 2019 | December 31, 2018 |
| Natural Gas (In millions of therms) | | | |
| Asset optimization & trading | | 11,951.0 |
| 13,051.0 |
|
| Other risk-management activities | | 950.0 |
| 1,072.0 |
|
WGL Holdings, Inc.
Washington Gas Light Company
Part I—FinancialI-Financial Information
Item 1—Financial1-Financial Statements (continued)
Notes to Condensed Consolidated Financial Statements (Unaudited)
Managing Price Risk. WGL Energy Services enters into certain derivative contracts as part of its strategy to manage the price risk associated with the sale and purchase of natural gas and electricity. WGL Energy Services elects "normal purchases and normal sales" treatment for a portion of these physical contracts related to the purchase of natural gas and electricity to serve its customers, and, therefore, they are not subject to the fair value accounting requirements of ASC Topic 815. Derivative instruments not designated as ''normal purchases and normal sales" are recorded at fair value on our consolidated balance sheets, and changes in the fair value of these derivative instruments are reflected in the earnings of our non-utility operations, which may cause significant period-to-period volatility in earnings. WGL Energy Services does not designate derivatives as hedges under ASC Topic 815.
Managing Interest-Rate Risk. WGL utilizes derivative instruments that are designed to limit the risk of interest-rate volatility associated with future debt issuances.
At December 31, 2017, WGL had $250 million of 30-year forward starting interest rate swaps which settled in January 2018. Through December 2016, WGL had designated these interest rate swaps as cash flow hedges in anticipation of a 30-year debt issuance in January 2018, and reported the effective portion of changes in fair value as a component of other comprehensive income (loss). As a result of certain covenants related to the proposed merger with AltaGas, in January 2017, WGL de-designated these hedges as it was no longer probable that the debt would be issued and any further changes in the fair value of the interest rate swaps were recorded in interest expense. WGL believes that the debt issuance is still reasonably possible to occur, therefore, the fair value of the swaps prior to the dedesignation in the amount of $6.4 million is recorded in accumulated other comprehensive income at December 31, 2017. In January 2018, WGL settled these swaps and realized a gain of $13.8 million, of which approximately $13.2 million will be recorded to interest expense. Refer to Note 17—Planned Merger with AltaGas Ltd. for a discussion of the proposed merger.
WGL's comprehensive income (loss) also includes amounts for settled hedges related to prior debt issuances, which are being amortized to income over the life of the outstanding debt. The amortization was minimal for the three months ended December 31, 2017 and 2016.
Consolidated Operations
Reflected in the tables below is information for WGL as well as Washington Gas. The information for WGL includes derivative instruments for both utility and non-utility operations.
WGL Holdings, Inc.
Washington Gas Light Company
Part I—Financial Information
Item 1—Financial Statements (continued)
Notes to Condensed Consolidated Financial Statements (Unaudited)
At December 31, 2017 and September 30, 2017, respectively, the absolute notional amounts of our derivatives were as follows: |
| | | | | | |
Absolute Notional Amounts of Open Positions on Derivative Instruments |
| Derivative transactions | WGL Holdings, Inc. | | Washington Gas |
| December 31, 2017 | Notional Amounts |
Natural Gas (In millions of therms) | | | |
| Asset optimization & trading | 21,960.9 |
| | 11,768.0 |
|
| Retail sales | 143.2 |
| | — |
|
| Other risk-management activities | 1,597.4 |
| | 1,181.0 |
|
Electricity (In millions of kWhs) | | | |
| Retail sales | 9,279.2 |
| | — |
|
Other risk-management activities(a) | 21,569.5 |
| | — |
|
Interest Rate Swaps (In millions of dollars) | $ | 250.0 |
| | — |
|
| September 30, 2017 | |
Natural Gas (In millions of therms) | | | |
| Asset optimization & trading | 21,663.5 |
| | 11,223.0 |
|
| Retail sales | 124.3 |
| | — |
|
| Other risk-management activities | 1,546.7 |
| | 1,181.0 |
|
Electricity (In millions of kWhs) | | | |
| Retail sales | 10,011.7 |
| | — |
|
Other risk-management activities(a) | 22,962.1 |
| | — |
|
Interest Rate Swaps (In millions of dollars) | $ | 250.0 |
| | — |
|
(a) Comprised primarily of financial swaps, financial transmission rights and physical forward purchases.
The following tables presenttable presents the balance sheet classification for all derivative instruments as of September 30, 2019 and December 31, 2017 and September 30, 2017.2018.
| | WGL Holdings, Inc. Balance Sheet Classification of Derivative Instruments(b) | |
| (In millions) | | | | | | |
| As of December 31, 2017 | Gross Derivative Assets | | Gross Derivative Liabilities | | Netting of Collateral | | Total(a) | |
Balance Sheet Classification of Derivative Instruments(b) | | Balance Sheet Classification of Derivative Instruments(b) |
| (in millions) | | Gross
Derivative
Assets | | Gross
Derivative
Liabilities | | Total(a) |
| As of September 30, 2019 | | | | | | |
| Current Assets—Derivatives | $ | 29.2 |
| | $ | (11.5 | ) | | $ | — |
| | $ | 17.7 |
| $ | 3.0 |
| | $ | 0.6 |
| | $ | 3.6 |
|
| Deferred Charges and Other Assets—Derivatives | 32.3 |
| | (0.1 | ) | | — |
| | 32.2 |
| 8.5 |
| | — |
| | 8.5 |
|
| Current Liabilities—Derivatives | 17.8 |
| | (67.2 | ) | | 14.4 |
| | (35.0 | ) | 0.1 |
| | (12.9 | ) | | (12.8 | ) |
| Deferred Credits—Derivatives | 17.6 |
| | (154.1 | ) | | 7.6 |
| | (128.9 | ) | — |
| | (105.1 | ) | | (105.1 | ) |
| Total | $ | 96.9 |
| | $ | (232.9 | ) | | $ | 22.0 |
| | $ | (114.0 | ) | $ | 11.6 |
| | $ | (117.4 | ) | | $ | (105.8 | ) |
| As of September 30, 2017 | | | | | | | | |
| As of December 31, 2018 | | | | | | |
| Current Assets—Derivatives | $ | 26.6 |
| | $ | (11.3 | ) | | $ | — |
| | $ | 15.3 |
| $ | 25.7 |
| | $ | (6.2 | ) | | $ | 19.5 |
|
Deferred Charges and Other Assets—Derivatives
| 38.9 |
| | (0.4 | ) | | (0.1 | ) | | 38.4 |
| 11.3 |
| | — |
| | 11.3 |
|
| Accounts payable | 1.0 |
| | — |
| | — |
| | 1.0 |
| |
| Current Liabilities—Derivatives | 10.9 |
| | (57.0 | ) | | 2.1 |
| | (44.0 | ) | 1.1 |
| | (21.4 | ) | | (20.3 | ) |
| Deferred Credits—Derivatives | 19.2 |
| | (148.8 | ) | | 7.0 |
| | (122.6 | ) | — |
| | (116.8 | ) | | (116.8 | ) |
| Total | $ | 96.6 |
| | $ | (217.5 | ) | | $ | 9.0 |
| | $ | (111.9 | ) | $ | 38.1 |
| | $ | (144.4 | ) | | $ | (106.3 | ) |
WGL Holdings, Inc.
(a)Washington Gas Light Company
Part I—Financial Information
Item 1—Financial Statements (continued)
Notes to Condensed Consolidated Financial Statements (Unaudited)
|
| | | | | | | | | | | | | | | |
Washington Gas Light Company Balance Sheet Classification of Derivative Instruments(b) |
| (In millions) |
|
|
|
|
|
|
|
| As of December 31, 2017 | Gross
Derivative
Assets | | Gross
Derivative
Liabilities | | Netting of
Collateral | | Total(a) |
| Current Assets—Derivatives | $ | 9.4 |
| | $ | (5.1 | ) | | $ | — |
| | $ | 4.3 |
|
| Deferred Charges and Other Assets—Derivatives | 15.4 |
| | — |
| | — |
| | 15.4 |
|
| Current Liabilities—Derivatives | — |
| | (24.7 | ) | | 0.1 |
| | (24.6 | ) |
| Deferred Credits—Derivatives | — |
| | (119.0 | ) | | — |
| | (119.0 | ) |
| Total | $ | 24.8 |
| | $ | (148.8 | ) | | $ | 0.1 |
| | $ | (123.9 | ) |
| As of September 30, 2017 | | | | | | | |
| Current Assets—Derivatives | $ | 7.5 |
| | $ | (2.4 | ) | | $ | — |
| | $ | 5.1 |
|
| Deferred Charges and Other Assets—Derivatives | 16.5 |
| | (0.3 | ) | | — |
| | 16.2 |
|
| Current Liabilities—Derivatives | — |
| | (30.3 | ) | | — |
| | (30.3 | ) |
| Deferred Credits—Derivatives | — |
| | (112.3 | ) | | — |
| | (112.3 | ) |
| Total | $ | 24.0 |
| | $ | (145.3 | ) | | $ | — |
| | $ | (121.3 | ) |
(a) WGL has elected to offset the fair value of recognized derivative instruments against the right to reclaim or the obligation to return collateral for derivative instruments executed under the same master netting arrangement in accordance with ASC Topic 815. All recognized derivative contracts and associated financial collateral subject to a master netting arrangement or similar that is eligible for offset under ASC Topic 815 have been presented net in the balance sheet.
(b) WeWashington Gas did not have any derivative instruments outstanding that were designated as hedging instruments at September 30, 2019 or December 31, 2017 or September 30, 2017.2018.
The following table presents all gains and losses associated with derivative instruments for the three and nine months ended December 31, 2017September 30, 2019 and 2016.2018.
| | | Gains and Losses on Derivative Instruments | |
| Gains and (Losses) on Derivative Instruments | | Gains and (Losses) on Derivative Instruments |
| (In millions) | WGL Holdings, Inc. | | Washington Gas | Three Months Ended September 30, | | Nine Months Ended September 30, |
| Three Months Ended December 31, | 2017 | | 2016 | | 2017 | | 2016 | |
| | | 2019 | | 2018 | | 2019 | | 2018 |
| Recorded to income | | | | | | | | | | | | | | |
| Operating revenues—non-utility | $ | (7.5 | ) | | $ | (36.7 | ) | | $ | — |
| | $ | — |
| |
| Utility cost of gas | (2.6 | ) | | 14.7 |
| | (2.6 | ) | | 14.7 |
| (5.8 | ) | | 2.0 |
| | (0.1 | ) | | 0.5 |
|
| Non-utility cost of energy-related sales | 22.2 |
| | 31.3 |
| | — |
| | — |
| |
| Interest expense | (0.4 | ) | | (0.1 | ) | | — |
| | — |
| |
| Recorded to regulatory assets | | | | | | | | | | | | | | |
| Gas costs | (5.8 | ) | | 19.6 |
| | (5.8 | ) | | 19.6 |
| (9.6 | ) | | 3.7 |
| | 4.8 |
| | (1.8 | ) |
| Recorded to other comprehensive income | 0.1 |
| | 49.5 |
| | — |
| | — |
| |
| Total | $ | 6.0 |
| | $ | 78.3 |
| | $ | (8.4 | ) | | $ | 34.3 |
| $ | (15.4 | ) | | $ | 5.7 |
| | $ | 4.7 |
| | $ | (1.3 | ) |
Collateral
WGLWashington Gas utilizes standardized master netting agreements, which facilitate the netting of cash flows into a single net exposure for a given counterparty. As part of these master netting agreements, cash, letters of credit and parent company guarantees may be required to be posted or obtained from counterparties in order to mitigate credit risk related to both
Washington Gas Light Company
Part I-Financial Information
Item 1-Financial Statements (continued)
Notes to Condensed Financial Statements (Unaudited)
derivatives and non-derivative positions. Under WGL’sWashington Gas’ offsetting policy, collateral balances are offset against the related counterparties’ derivative positions to the extent the application would not result in the over-collateralization of those derivative positions on the balance sheet.
WGL Holdings, Inc.
Washington Gas Light Company
Part I—Financial Information
Item 1—Financial Statements (continued)
Notes to Condensed Consolidated Financial Statements (Unaudited)
The table below presents collateral not offset against derivative assets and liabilities at December 31, 2017 and September 30, 2017, respectively. |
| | | | | | | |
Collateral Not Offset Against Derivative Assets and Liabilities (In millions) |
| December 31, 2017 | Collateral deposits posted with counterparties | | Cash collateral held representing an obligation |
| Washington Gas | $ | 8.1 |
| | $ | 0.1 |
|
| WGL Energy Services | 30.6 |
| | — |
|
| WGL Midstream | 16.8 |
| | 0.4 |
|
| September 30, 2017 | | | |
| Washington Gas | $ | 3.7 |
| | $ | 0.1 |
|
| WGL Energy Services | 23.7 |
| | — |
|
| WGL Midstream | 44.4 |
| | 1.6 |
|
Any collateral posted that is not offset against derivative assets and liabilities is included in “Other prepayments” in the accompanying condensed balance sheets.sheet. Collateral received and not offset against derivative assets and liabilities is included in “Customer deposits and advance payments” in the accompanying condensed balance sheets.sheet.
At September 30, 2019 and December 31, 2018, Washington Gas had $3.3 million and $7.4 million, respectively, in collateral deposits posted with counterparties that are not offset against derivative asset and liabilities. At September 30, 2019 and December 31, 2018, Washington Gas had $0.1 million and $0.2 million, respectively, cash collateral held representing an obligation, and are not offset against derivative asset and liabilities.
Certain derivative instruments of WGL, Washington Gas WGL Energy Services and WGL Midstream contain contract provisions that require collateral to be posted if the credit rating of Washington Gas or WGL falls below certain levels or if counterparty exposure to WGL, Washington Gas WGL Energy Services or WGL Midstream exceeds a certain level (credit-related contingent features). Due to counterparty exposure levels, at December 31, 2017, WGL Energy Services posted $11.8 million of collateral related to its derivative liabilities that contained credit-related contingent features. At September 30, 2017, WGL Energy Services posted $8.6 million of collateral related to these aforementioned derivative liabilities. At2019 and December 31, 2017 and September 30, 2017, WGL2018, Washington Gas was not required to post collateral related to a derivative liability that contained a credit-related contingent feature. At both December 31, 2017 and September 30, 2017, Washington Gas and WGL Midstream were not required to post any collateral related to their respective derivative liabilities that contained credit-related contingent features.
The following table shows the aggregate fair value of all derivative instruments with credit-related contingent features that are in a liability position, as well as the maximum amount of collateral that would be required if the most intrusive credit-risk-related contingent features underlying these agreements were triggered on September 30, 2019 and December 31, 2017 and September 30, 2017,2018, respectively.
| | Potential Collateral Requirements for Derivative Liabilities with Credit-Risk-Contingent Features | Potential Collateral Requirements for Derivative Liabilities with Credit-Risk-Contingent Features | Potential Collateral Requirements for Derivative Liabilities with Credit-Risk-Contingent Features |
| (In millions) | WGL Holdings, Inc. | | Washington Gas | September 30, 2019 | | December 31, 2018 |
| December 31, 2017 | | | | |
| Derivative liabilities with credit-risk-contingent features | $ | 14.5 |
| | $ | 1.7 |
| $ | — |
| | $ | 1.1 |
|
| Maximum potential collateral requirements | $ | 8.1 |
| | $ | 1.6 |
| — |
| | 1.0 |
|
| September 30, 2017 | | | | |
| Derivative liabilities with credit-risk-contingent features | $ | 25.0 |
| | $ | 2.8 |
| |
| Maximum potential collateral requirements | $ | 21.9 |
| | $ | 2.8 |
| |
We do not enter into derivative contracts for speculative purposes.
Concentration of Credit Risk
We are exposed to credit risk from derivative instruments with wholesale counterparties, which is represented by the fair value of these instruments at the reporting date. We actively monitor and work to minimize counterparty concentration risk through various practices. At December 31, 2017, one counterpartySeptember 30, 2019, two counterparties each represented over 10% of Washington Gas’ credit exposure to wholesale derivative counterparties for a total credit risk of $16.0 million; three counterparties each represented over 10% of WGL Energy Services’ credit exposure to wholesale counterparties for a total credit risk of $0.9 million; and one counterparty represented over 10% of WGL Midstream’s credit exposure to wholesale counterparties for a total credit risk of $15.9$14.6 million.
WEATHER-RELATED INSTRUMENTS
WGL Holdings, Inc.
Washington Gas Light Company
Part I—Financial Information
Item 1—Financial Statements (continued)
Notes to Condensed Consolidated Financial Statements (Unaudited)
WGL Energy Services utilizes weather-related instruments for managing the financial effects of weather risks. These instruments cover a portion of WGL Energy Services’ estimated revenue or energy-related cost exposure to variations in heating or cooling degree days. These contracts provide for payment to WGL Energy Services of a fixed-dollar amount for every degree day over or under specific levels during the calculation period depending upon the type of contract executed. During the three months ended December 31, 2017 and 2016, WGL Energy Services recorded pre-tax losses of $0.8 million and $1.5 million, respectively, related to these instruments included in "Non-utility cost of energy related sales" in the accompanying condensed consolidated statements of income.
NOTE 9.12. FAIR VALUE MEASUREMENTS
We measure the fair value of our financial assets and liabilities using a combination of the income and market approaches in accordance with ASC Topic 820. These financial assets and liabilities primarily consist of derivatives recorded on our balance sheet under ASC Topic 815 and short-term investments, commercial paper and long-term debt outstanding required to be disclosed at fair value. Under ASC Topic 820, fair value is defined as the exit price, representing the amount that would be received in the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. To value our financial instruments, we use market data or assumptions that market participants would use, including assumptions about credit risk (both our own credit risk and the counterparty’s credit risk) and the risks inherent in the inputs to valuation.
We enter into derivative contracts in the futures and over-the-counter (OTC) wholesale and retail markets. These markets are the principal markets for the respective wholesale and retail contracts. Our relevant market participants are our existing counterparties and others who have participated in energy transactions at our delivery points. These participants have access to the same market data as WGL.Washington Gas. Valuations are generally based on pricing service data or indicative broker quotes depending on the market location. We measure the net credit exposure at the counterparty level where the right to set-off exists. The net exposure is determined using the mark-to-market exposure adjusted for collateral, letters of credit and parent guarantees. We use published default rates from Standard & Poor’s Ratings Services and Moody’s Investors Service as inputs for determining credit adjustments.
ASC Topic 820 establishes a fair value hierarchy that prioritizes the inputs used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. The three levels of the fair value hierarchy under ASC Topic 820 are described below:
Washington Gas Light Company
Part I-Financial Information
Item 1-Financial Statements (continued)
Notes to Condensed Financial Statements (Unaudited)
Level 1.Level 1 of the fair value hierarchy consists of assets or liabilities that are valued using observable inputs based upon unadjusted quoted prices in active markets for identical assets or liabilities at the reporting date. WGLWashington Gas did not have any Level 1 derivatives at September 30, 2019 or December 31, 2017 or September 30, 2017.2018.
Level 2.Level 2 of the fair value hierarchy consists of assets or liabilities that are valued using directly or indirectly observable inputs either corroborated with market data or based on exchange traded market data. Level 2 includes fair values based on industry-standard valuation techniques that consider various assumptions: (i) quoted forward prices, including the use of mid-market pricing within a bid/ask spread; (ii) discount rates; (iii) implied volatility and (iv) other economic factors. Substantially all of these assumptions are observable throughout the full term of the instrument, can be derived from observable data or are supported by observable levels at which transactions are executed in the relevant market. At September 30, 2019 and December 31, 2017 and September 30, 2017,2018, Level 2 financial assets and liabilities included energy-related physical and financial derivative transactions such as forward, option and other contracts for deliveries at active market locations, as well as our interest rate swaps.locations.
Level 3.Level 3 of the fair value hierarchy consists of assets or liabilities that are valued using significant unobservable inputs at the reporting date. These unobservable assumptions reflect our assumptions about estimates that market participants would use in pricing the asset or liability, including natural gas basis prices and annualized volatilities of natural gas prices, and electricity congestion prices. A significant change to any one of these inputs in isolation could result in a significant upward or downward fluctuation in the fair value measurement. These inputs may be used with industry standard valuation methodologies that result in our best estimate of fair value for the assets or liabilities at the reporting date.
Our Commodity and Market Risk Analysis and Mitigation (RA&M)(C&MR) Group determines the valuation policies and procedures. The RA&MC&MR Group reports to WGL’s Chief Financial Officer.AltaGas’ Vice President of Commodity Risk. In accordance with WGL’sWashington Gas valuation policy, we may utilize a variety of valuation methodologies to determine the fair value of Level 3 derivative contracts, including internally developed valuation inputs and
WGL Holdings, Inc.
Washington Gas Light Company
Part I—Financial Information
Item 1—Financial Statements (continued)
Notes to Condensed Consolidated Financial Statements (Unaudited)
pricing models. The prices used in our valuations are corroborated using multiple pricing sources, and we periodically conduct assessments to determine whether each valuation model is appropriate for its intended purpose. The RA&MC&MR Group also evaluates changes in fair value measurements on a daily basis.
At September 30, 2019 and December 31, 2017 and September 30, 2017,2018, Level 3 derivative assets and liabilities included: (i) physical contracts valued at illiquid market locations with no observable market data; (ii) long-dated positions where observable pricing is not available over the majority of the life of the contract; (iii) contracts valued using historical spot price volatility assumptions and (iv) valuations using indicative broker quotes for inactive market locations.
The following tables settable sets forth financial instruments recorded at fair value as of September 30, 2019 and December 31, 2017 and September 30, 2017,2018, respectively. A financial instrument’s classification within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. Our assessment of the significance of a particular input to the fair value measurement requires judgment and may affect the valuation of fair value assets and liabilities and their placement within the fair value hierarchy.
|
| | | | | | | | | | | | | | | |
WGL Holdings, Inc. Fair Value Measurements Under the Fair Value Hierarchy |
| (In millions) | Level 1 | | Level 2 | | Level 3 | | Total |
| At December 31, 2017 | | | | | | | |
| Assets | | | | | | | |
| Natural gas related derivatives | $ | — |
| | $ | 24.6 |
| | $ | 53.2 |
| | $ | 77.8 |
|
| Electricity related derivatives | — |
| | 3.1 |
| | 6.3 |
| | 9.4 |
|
| Interest rate derivatives | — |
| | 9.7 |
| | — |
| | 9.7 |
|
| Total Assets | $ | — |
| | $ | 37.4 |
| | $ | 59.5 |
| | $ | 96.9 |
|
| Liabilities | | | | | | | |
| Natural gas related derivatives | $ | — |
| | $ | (33.0 | ) | | $ | (170.1 | ) | | $ | (203.1 | ) |
| Electricity related derivatives | — |
| | (1.6 | ) | | (19.1 | ) | | (20.7 | ) |
| Interest rate derivatives | — |
| | (9.1 | ) | | — |
| | (9.1 | ) |
| Total Liabilities | $ | — |
| | $ | (43.7 | ) | | $ | (189.2 | ) | | $ | (232.9 | ) |
| At September 30, 2017 | | | | | | | |
| Assets | | | | | | | |
| Natural gas related derivatives | $ | — |
| | $ | 18.4 |
| | $ | 52.8 |
| | $ | 71.2 |
|
| Electricity related derivatives | — |
| | 0.1 |
| | 15.5 |
| | $ | 15.6 |
|
| Interest rate derivatives | — |
| | 9.8 |
| | — |
| | $ | 9.8 |
|
| Total Assets | $ | — |
| | $ | 28.3 |
| | $ | 68.3 |
| | $ | 96.6 |
|
| Liabilities | | | | | | | |
| Natural gas related derivatives | $ | — |
| | $ | (15.5 | ) | | $ | (167.4 | ) | | $ | (182.9 | ) |
| Electricity related derivatives | — |
| | (4.1 | ) | | (21.7 | ) | | (25.8 | ) |
| Interest rate derivatives | — |
| | (8.8 | ) | | — |
| | (8.8 | ) |
| Total Liabilities | $ | — |
| | $ | (28.4 | ) | | $ | (189.1 | ) | | $ | (217.5 | ) |
WGL Holdings, Inc.
Washington Gas Light Company
Part I—Financial Information
Item 1—Financial Statements (continued)
Notes to Condensed Consolidated Financial Statements (Unaudited)
| | Washington Gas Light Company Fair Value Measurements Under the Fair Value Hierarchy | |
Fair Value Measurements Under the Fair Value Hierarchy | |
Fair Value Measurements Under the Fair Value Hierarchy |
| (In millions) | Level 1 | | Level 2 | | Level 3 | | Total | Level 1 | | Level 2 | | Level 3 | | Total |
| At December 31, 2017 | | | | | | | | |
| At September 30, 2019 | | | | | | | | |
| Assets | | | | | | | | | | | | | | |
| Natural gas related derivatives | $ | — |
| | $ | 8.4 |
| | $ | 16.4 |
| | $ | 24.8 |
| $ | — |
| | $ | 1.6 |
|
| $ | 10.0 |
| | $ | 11.6 |
|
| Total Assets | $ | — |
| | $ | 8.4 |
| | $ | 16.4 |
| | $ | 24.8 |
| $ | — |
| | $ | 1.6 |
| | $ | 10.0 |
| | $ | 11.6 |
|
| Liabilities | | | | | | | | | | | | | | |
| Natural gas related derivatives | $ | — |
| | $ | (7.0 | ) | | $ | (141.8 | ) | | $ | (148.8 | ) | $ | — |
| | $ | (1.1 | ) | | $ | (116.3 | ) | | $ | (117.4 | ) |
| Total Liabilities | $ | — |
| | $ | (7.0 | ) | | $ | (141.8 | ) | | $ | (148.8 | ) | $ | — |
| | $ | (1.1 | ) | | $ | (116.3 | ) | | $ | (117.4 | ) |
| At September 30, 2017 | | | | | | | | |
| At December 31, 2018 | | | | | | | | |
| Assets | | | | | | | | | | | | | | |
| Natural gas related derivatives | $ | — |
| | $ | 7.0 |
| | $ | 17.0 |
| | $ | 24.0 |
| $ | — |
| | $ | 9.8 |
| | $ | 28.3 |
| | $ | 38.1 |
|
| Total Assets | $ | — |
| | $ | 7.0 |
| | $ | 17.0 |
| | $ | 24.0 |
| $ | — |
| | $ | 9.8 |
| | $ | 28.3 |
| | $ | 38.1 |
|
| Liabilities | | | | | | | | | | | | | | |
| Natural gas related derivatives | $ | — |
| | $ | (5.7 | ) | | $ | (139.6 | ) | | $ | (145.3 | ) | $ | — |
| | $ | (9.5 | ) | | $ | (134.9 | ) | | $ | (144.4 | ) |
| Total Liabilities | $ | — |
| | $ | (5.7 | ) | | $ | (139.6 | ) | | $ | (145.3 | ) | $ | — |
| | $ | (9.5 | ) | | $ | (134.9 | ) | | $ | (144.4 | ) |
The following table includes quantitative information about the significant unobservable inputs used in the fair value measurement of our Level 3 financial instruments and the respective fair values of the net derivative asset and liability positions, by contract type, as of September 30, 2019 and December 31, 2017 and September 30, 2017.2018.
WGL Holdings, Inc.
Washington Gas Light Company
Part I—FinancialI-Financial Information
Item 1—Financial1-Financial Statements (continued)
Notes to Condensed Consolidated Financial Statements (Unaudited)
|
| | | | | | | | |
Quantitative Information about Level 3 Fair Value Measurements |
| (In millions) | | Net Fair Value
December 31, 2017September 30, 2019 | | Valuation Techniques | | Unobservable Inputs | | Range |
| | | | | | | | | |
WGL Holdings, Inc. | | | | | | | | |
Natural gas related derivatives | | $(113.2) | | Discounted Cash Flow | | Natural Gas Basis Price
(per dekatherm)
| | ($1.125) - $3.400 |
| | | | Option Model | | Natural Gas Basis Price
(per dekatherm)
| | ($1.030) - $3.100 |
| | $(3.7) | | | | Annualized Volatility of Spot Market Natural Gas | | 30.2% - 714.1% |
Electricity related derivatives | | $(12.8) | | Discounted Cash Flow | | Electricity Congestion Price
(per megawatt hour)
| | ($2.977) - $78.990 |
| | | | | | | | |
Washington Gas Light Company | | | | | | | | |
| Natural gas related derivatives | | $(125.4)($106.3) | | Discounted Cash Flow | | Natural Gas Basis Price (per dekatherm) | | ($1.125)1.095) - $2.725$3.473 |
| | | | | | | | | |
(In millions) | | Net Fair Value
September 30, 2017 | | | | | | |
| | | | | | | | |
WGL Holdings, Inc. | | December 31, 2018 | | | | | | |
| Natural gas related derivatives | | $(112.4)($106.6) | | Discounted Cash Flow | | Natural Gas Basis Price
(per dekatherm)
| | ($2.095) 1.028)- $2.805 |
| | | | Option Model | | Natural Gas Basis Price
(per dekatherm)
| | ($2.095) - $2.358 |
| | $(2.2) | | | | Annualized Volatility of Spot Market Natural Gas | | 28.7% - 566.8% |
Electricity related derivatives | | $(6.2) | | Discounted Cash Flow | | Electricity Congestion Price
(per megawatt hour)
| | ($2.736) - $56.500 |
| | | | | | | | |
Washington Gas Light Company | | | | | | | | |
Natural gas related derivatives | | $(122.6) | | Discounted Cash Flow | | Natural Gas Basis Price
(per dekatherm)
| | ($1.928) - $2.8055.34 |
The following tables aretable presents a summary of the changes in the fair value of our derivative instruments that are measured at net fair value on a recurring basis in accordance with ASC Topic 820 using significant Level 3 inputs during the three and nine months ended December 31, 2017September 30, 2019 and 2016,2018, respectively.
WGL Holdings, Inc.
Washington Gas Light Company
Part I—FinancialI-Financial Information
Item 1—Financial1-Financial Statements (continued)
Notes to Condensed Consolidated Financial Statements (Unaudited)
| | Reconciliation of Fair Value Measurements Using Significant Level 3 Inputs
| Reconciliation of Fair Value Measurements Using Significant Level 3 Inputs
| Reconciliation of Fair Value Measurements Using Significant Level 3 Inputs |
| | WGL Holdings, Inc.
| Washington Gas Light Company | |
| (In millions) | Natural Gas Related Derivatives | | Electricity Related Derivatives | | Total | Total - Natural Gas Related Derivatives | Total - Natural Gas
Related
Derivatives |
| Three Months Ended December 31, 2017 | | | | | | | |
| Balance at October 1, 2017 | $ | (114.6 | ) | | $ | (6.2 | ) | | $ | (120.8 | ) | $ | (122.6 | ) | |
| Three Months Ended September 30, 2019 | | |
| Balance at July 1, 2019 | | $ | (86.9 | ) |
| Realized and unrealized gains (losses) | | |
| Recorded to income | | (6.2 | ) |
| Recorded to regulatory assets—gas costs | | (10.1 | ) |
| Transfers into Level 3 | | (2.9 | ) |
| Transfers out of Level 3 | | 2.9 |
|
| Purchases | | — |
|
| Sales | | — |
|
| Settlements | | (3.1 | ) |
| Balance at September 30, 2019 | | $ | (106.3 | ) |
| Three Months Ended September 30, 2018 | | |
| Balance at July 1, 2018 | | $ | (103.6 | ) |
| Realized and unrealized gains (losses) | | | | | | |
| Recorded to income | (4.1 | ) | | (9.2 | ) | | (13.3 | ) | (3.8 | ) | 3.5 |
|
| Recorded to regulatory assets—gas costs | (6.9 | ) | | — |
| | (6.9 | ) | (6.9 | ) | 5.6 |
|
| Transfers into Level 3 | 0.3 |
| | — |
| | 0.3 |
| 0.2 |
| (0.1 | ) |
| Transfers out of Level 3 | (0.3 | ) | | — |
| | (0.3 | ) | — |
| (0.1 | ) |
| Purchases | — |
| | 2.5 |
| | 2.5 |
| — |
| — |
|
| Settlements | 8.7 |
| | 0.1 |
| | 8.8 |
| 7.7 |
| 0.6 |
|
| Balance at December 31, 2017 | $ | (116.9 | ) | | $ | (12.8 | ) | | $ | (129.7 | ) | $ | (125.4 | ) | |
| Three Months Ended December 31, 2016 | | | | | | | |
| Balance at October 1, 2016 | $ | (264.1 | ) | | $ | (9.1 | ) | | $ | (273.2 | ) | $ | (251.6 | ) | |
| Balance at September 30, 2018 | | $ | (94.1 | ) |
| Nine Months Ended September 30, 2019 | | |
| Balance at January 1, 2019 | | $ | (106.6 | ) |
| Realized and unrealized gains (losses) | | | | | | |
| Recorded to income | 10.3 |
| | (3.6 | ) | | 6.7 |
| 17.0 |
| (1.4 | ) |
| Recorded to regulatory assets—gas costs | 22.0 |
| | — |
| | 22.0 |
| 22.0 |
| 4.3 |
|
| Transfers into Level 3 | (0.2 | ) | | — |
| | (0.2 | ) | 0.2 |
| (6.7 | ) |
| Transfers out of Level 3 | | 7.9 |
|
| Purchases | — |
| | (2.8 | ) | | (2.8 | ) | — |
| — |
|
| Settlements | 3.4 |
| | 7.2 |
| | 10.6 |
| 3.6 |
| (3.8 | ) |
| Balance at December 31, 2016 | $ | (228.6 | ) | | $ | (8.3 | ) | | $ | (236.9 | ) | $ | (208.8 | ) | |
| Balance at September 30, 2019 | | $ | (106.3 | ) |
| Nine Months Ended September 30, 2018 | | |
| Balance at January 1, 2018 | | $ | (125.4 | ) |
| Realized and unrealized gains (losses) | | |
| Recorded to income | | (0.7 | ) |
| Recorded to regulatory assets—gas costs | | (3.1 | ) |
| Transfers into Level 3 | | (7.1 | ) |
| Transfers out of Level 3 | | 8.9 |
|
| Settlements | | 33.3 |
|
| Balance at September 30, 2018 | | $ | (94.1 | ) |
Transfers between different levels of the fair value hierarchy may occur based on fluctuations in the valuation inputs and on the level of observable inputs used to value the instruments from period to period. It is our policy to show both transfers into and out of the different levels of the fair value hierarchy at the fair value as of the beginning of the period. Transfers out of Level 3 forduring the periods presentedthree and nine months ended September 30, 2019 and 2018 were due to valuations that experienced an increase in observable market inputs, primarily reflecting a decrease in the duration of the contracts being valued.inputs. Transfers into Level 3 forduring the periods presentedthree and nine months ended September 30, 2019 and 2018 were due to an increase in unobservable market inputs, primarily pricing points.
The table below sets forth the line items on the statements of incomeoperations to which amounts are recorded for the three and nine months ended December 31, 2017September 30, 2019 and 2016,2018, respectively, related to fair value measurements using significant Level 3 inputs.
|
| | | | | | | | | | | | | | |
Realized and Unrealized Gains (Losses) Recorded to Income for Level 3 Measurements
|
| | WGL Holdings, Inc.
| Washington Gas Light Company |
| (In millions) | Natural Gas Related Derivatives | | Electricity Related Derivatives | | Total | Total - Natural Gas Related Derivatives |
| Three Months Ended December 31, 2017 | |
| | |
| | |
| |
| Operating revenues—non-utility | $ | (6.5 | ) | | $ | (16.1 | ) | | $ | (22.6 | ) | $ | — |
|
| Utility cost of gas | (3.8 | ) | | — |
| | (3.8 | ) | (3.8 | ) |
| Non-utility cost of energy-related sales | 6.2 |
| | 6.9 |
| | 13.1 |
| — |
|
| Total | $ | (4.1 | ) | | $ | (9.2 | ) | | $ | (13.3 | ) | $ | (3.8 | ) |
| Three Months Ended December 31, 2016 | | | | | | |
| Operating revenues—non-utility | $ | (10.3 | ) | | $ | (10.7 | ) | | $ | (21.0 | ) | $ | — |
|
| Utility cost of gas | 17.0 |
| | — |
| | 17.0 |
| 17.0 |
|
| Non-utility cost of energy-related sales | 3.6 |
| | 7.1 |
| | 10.7 |
| — |
|
| Total | $ | 10.3 |
| | $ | (3.6 | ) | | $ | 6.7 |
| $ | 17.0 |
|
WGL Holdings, Inc.
Washington Gas Light Company
Part I—FinancialI-Financial Information
Item 1—Financial1-Financial Statements (continued)
Notes to Condensed Consolidated Financial Statements (Unaudited)
|
| | | | | | | | |
| Realized and Unrealized Gains (Losses) Recorded to Income for Level 3 Measurements |
| (In millions) | | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | | 2019 | | 2018 | | 2019 | | 2018 |
| Utility cost of gas | | $(6.2) | | $3.5 | | $(1.4) | | $(0.7) |
Unrealized gains (losses) attributable to derivative assets and liabilities measured using significant Level 3 inputs were recorded as follows for the three and nine months ended December 31, 2017September 30, 2019 and 2016,2018, respectively.
| | Unrealized Gains (Losses) Recorded for Level 3 Measurements
| Unrealized Gains (Losses) Recorded for Level 3 Measurements
| Unrealized Gains (Losses) Recorded for Level 3 Measurements
|
| (In millions) | | | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | WGL Holdings, Inc.
| Washington Gas Light Company
| | 2019 | | 2018 | | 2019 | | 2018 |
| (In millions) | Natural Gas Related Derivatives | | Electricity Related Derivatives | | Total | Total - Natural Gas Related Derivatives | |
| Three Months Ended December 31, 2017 | | | | | | | |
| Recorded to income | | | | | | | | | | | | | |
| Operating revenues—non-utility | $ | (5.5 | ) | | $ | (13.6 | ) | | $ | (19.1 | ) | $ | — |
| |
| Utility cost of gas | (4.6 | ) | | — |
| | (4.6 | ) | (4.6 | ) | | $ | (5.9 | ) | | $ | 3.1 |
| | $ | 1.6 |
| | $ | 6.9 |
|
| Non-utility cost of energy-related sales | 4.2 |
| | 6.2 |
| | 10.4 |
| — |
| |
| Recorded to regulatory assets—gas costs | (7.5 | ) | | — |
| | (7.5 | ) | (7.5 | ) | | (10.2 | ) | | 4.8 |
| | 7.9 |
| | 7.7 |
|
| Total | $ | (13.4 | ) | | $ | (7.4 | ) | | $ | (20.8 | ) | $ | (12.1 | ) | | $ | (16.1 | ) |
| $ | 7.9 |
|
| $ | 9.5 |
|
| $ | 14.6 |
|
| Three Months Ended December 31, 2016 | | | | | | | |
| Recorded to income | | | | | | |
| Operating revenues—non-utility | $ | (9.7 | ) | | $ | (5.9 | ) | | $ | (15.6 | ) | $ | — |
| |
| Utility cost of gas | 15.6 |
| | — |
| | 15.6 |
| 15.6 |
| |
| Non-utility cost of energy-related sales | (0.1 | ) | | 11.7 |
| | 11.6 |
| — |
| |
| Recorded to regulatory assets—gas costs | 19.7 |
| | — |
| | 19.7 |
| 19.7 |
| |
| Total | $ | 25.5 |
| | $ | 5.8 |
| | $ | 31.3 |
| $ | 35.3 |
| |
The following table presents the carrying amounts recorded at amortized cost and estimated fair values of our financial instruments at September 30, 2019 and December 31, 2017 and September 30, 2017.2018.
| | WGL Holdings, Inc. Fair Value of Financial Instruments | |
| Fair Value of Financial Instruments | | Fair Value of Financial Instruments |
| December 31, 2017 | | September 30, 2017 | September 30, 2019 | | December 31, 2018 |
| (In millions) | Carrying Amount | | Fair Value | | Carrying Amount | | Fair Value | Carrying Amount | | Fair Value | | Carrying Amount | | Fair Value |
Money market funds(a) | $ | 70.1 |
| | $ | 70.1 |
| | $ | 11.8 |
| | $ | 11.8 |
| $ | 48.7 |
| | $ | 48.7 |
| | $ | 69.7 |
| | $ | 69.7 |
|
Commercial paper (b) | $ | 503.9 |
| | $ | 503.9 |
| | $ | 505.0 |
| | $ | 505.0 |
| $ | 117.0 |
| | $ | 117.0 |
| | $ | 296.0 |
| | $ | 296.0 |
|
Project financing (b) | $ | 94.6 |
| | $ | 94.6 |
| | $ | 54.8 |
| | $ | 54.8 |
| $ | — |
| | $ | — |
| | $ | 15.5 |
| | $ | 15.5 |
|
Current maturities of long-term debt
| | $ | 50.0 |
| | $ | 50.0 |
| | $ | 50.0 |
| | $ | 50.0 |
|
Long-term debt(c) | $ | 1,679.9 |
| | $ | 1,842.8 |
| | $ | 1,430.9 |
| | $ | 1,577.3 |
| $ | 1,331.1 |
| | $ | 1,501.5 |
| | $ | 1,035.0 |
| | $ | 1,096.3 |
|
(a) The balance as of September 30, 2019 includes $0.6 million money market funds located in “Cash and cash equivalents,” $4.2 million rabbi trust investment located in “Current Assets-Other,” and $43.9 million rabbi trust investments located in “Deferred Charges and Other Assets-Other” of the accompanying balance sheet; The balance as of December 31, 2018 includes $4.4 million money market funds located in “Cash and cash equivalents,” $20.2 million rabbi trust investment located in “Current Assets-Other” and $45.1 million rabbi trust investments located in “Deferred Charges and Other Assets-Other.” The amounts in cash and cash equivalent may be offset by outstanding checks. |
| | | | | | | | | | | | | | | |
| Washington Gas Light Company Fair Value of Financial Instruments |
| December 31, 2017 | | September 30, 2017 |
| (In millions) | Carrying Amount | | Fair Value | | Carrying Amount | | Fair Value |
Money market funds (a) | $ | 13.7 |
| | $ | 13.7 |
| | $ | 4.8 |
| | $ | 4.8 |
|
Commercial paper (b) | $ | 162.0 |
| | $ | 162.0 |
| | $ | 123.0 |
| | $ | 123.0 |
|
Project financing (b) | $ | 85.4 |
| | $ | 85.4 |
| | $ | 43.8 |
| | $ | 43.8 |
|
Long-term debt (c) | $ | 1,084.6 |
| | $ | 1,232.9 |
| | $ | 1,134.5 |
| | $ | 1,271.0 |
|
| |
(a)(c) Includes adjustments for current maturities and unamortized discounts, as applicable. | Balance is located in cash and cash equivalents in the accompanying balance sheets. These amounts may be offset by outstanding checks. |
| |
(b)
| Balance is located in notes payable in the accompanying balance sheets. |
| |
(c)
| Excludes current maturities. |
Our money market funds are Level 1 valuations and their carrying amount approximates fair value. Other short-term investments are primarily overnight investment accounts; their carrying amount approximates fair value based on Level 2
WGL Holdings, Inc.
Washington Gas Light Company
Part I—Financial Information
Item 1—Financial Statements (continued)
Notes to Condensed Consolidated Financial Statements (Unaudited)
inputs. The maturity of our commercial paper outstanding at both September 30, 2019 and December 31, 2017 and September 30, 20172018 is under 30 days. Due to the short-termshort term nature of these notes, the carrying cost of our commercial paper approximates fair value using Level 2 inputs. Due to the nature of our project financing arrangements, the carrying cost approximates fair value using Level 2 inputs. Neither WGL’s norDue to the short term nature of current maturities of long-term debt, the carrying cost approximates fair value using Level 2 inputs, Washington Gas’ long-term debt is not actively traded. The fair value of long-term debt was estimated based on the quotedvaluation techniques when observable market prices of the U.S. Treasury issues having a similar term to maturity, adjusted for the credit quality of the debt issuer, WGL or Washington Gas.data is not available. Our long-term debt fair value measurement is classified as Level 3.
NOTE 10. OPERATING SEGMENT REPORTING
We have four reportable operating segments: regulated utility, retail energy-marketing, commercial energy systems and midstream energy services. The division of these segments into separate revenue generating components is based upon regulation, products and services. Our chief operating decision maker is our Chief Executive Officer and we evaluate segment performance based on Earnings Before Interest and Taxes (EBIT). EBIT is defined as earnings before interest and taxes net of amounts attributable to non-controlling interests. Items we do not include in EBIT are interest expense, intercompany financing activity, dividends on Washington Gas preferred stock, and income taxes. EBIT includes transactions between reportable segments. We also evaluate our operating segments based on other relevant factors, such as penetration into their respective markets and return on equity.
Our four segments are summarized below.
Regulated Utility – The regulated utility segment is our core business. It consists of Washington Gas and Hampshire. Washington Gas provides regulated gas distribution services (including the sale and delivery of natural gas) to end use customers and natural gas transportation services to an unaffiliated natural gas distribution company in West Virginia under a Federal Energy Regulatory Commission (FERC) approved interstate transportation service operating agreement. Hampshire provides regulated interstate natural gas storage services to Washington Gas under a FERC approved interstate storage service tariff.
Retail Energy-Marketing – The retail energy-marketing segment consists of WGL Energy Services, which sells natural gas and electricity directly to retail customers in competition with regulated utilities and unregulated gas and electricity marketers.
Commercial Energy Systems – The commercial energy systems segment consists of WGL Energy Systems which provides clean and energy efficient solutions including commercial solar, energy efficiency and combined heat and power projects and other distributed generation solutions to government and commercial clients. In addition, this segment comprises the operations of WGSW, a holding company formed to invest in alternative energy assets.
Midstream Energy Services – The midstream energy services segment consists of WGL Midstream, which specializes in the investment, management, development and optimization of natural gas storage and transportation midstream infrastructure projects.
Administrative and business development activity costs associated with WGL and Washington Gas Resources and activities and transactions that are not significant enough on a stand-alone basis to warrant treatment as an operating segment, and that do not fit into one of our four operating segments, are aggregated as “Other Activities” in the Operating Segment Financial Information presented below. Results for other activities primarily relate to costs associated with the planned merger with AltaGas.
The following tables present operating segment information for the three months ended December 31, 2017 and 2016.
WGL Holdings, Inc.
Washington Gas Light Company
Part I—Financial Information
Item 1—Financial Statements (continued)
Notes to Condensed Consolidated Financial Statements (Unaudited)
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Operating Segment Financial Information |
| (In thousands) | Operating Revenues | | Depreciation and Amortization | | Equity in
Earnings of
Unconsolidated Affiliates | | EBIT | | Total Assets | | Capital Expenditures | | Equity Method Investments |
| Three Months Ended December 31, 2017 | | | | | | | | | | | | | |
| Regulated utility | $ | 377,470 |
| | $ | 34,103 |
| | $ | — |
| | $ | 98,365 |
| | $ | 5,227,299 |
| | $ | 76,762 |
| | $ | — |
|
| Retail energy-marketing | 248,693 |
| | 282 |
| | — |
| | 3,742 |
| | 533,273 |
| | — |
| | — |
|
Commercial energy systems(a) | 20,063 |
| | 6,584 |
| | — |
| | 5,647 |
| | 1,104,588 |
| | 22,292 |
| | — |
|
| Midstream energy services | 17,687 |
| | 4 |
| | 5,892 |
| | 22,185 |
| | 802,613 |
| | — |
| | 489,354 |
|
| Other activities | — |
| | — |
| | — |
| | (4,171 | ) | | 269,719 |
| | — |
| | — |
|
Eliminations(b) | (11,473 | ) | | 12 |
| | — |
| | 1,689 |
| | (874,918 | ) | | — |
| | — |
|
| Total consolidated | $ | 652,440 |
| | $ | 40,985 |
| | $ | 5,892 |
| | $ | 127,457 |
| | $ | 7,062,574 |
| | $ | 99,054 |
| | $ | 489,354 |
|
| Three Months Ended December 31, 2016 | | | | | | | | | | | | | |
| Regulated utility | $ | 333,986 |
| | $ | 30,560 |
| | $ | — |
| | $ | 102,717 |
| | $ | 4,891,722 |
| | $ | 111,681 |
| | $ | — |
|
| Retail energy-marketing | 298,684 |
| | 305 |
| | — |
| | 29,185 |
| | 518,914 |
| | 404 |
| | — |
|
Commercial energy systems(a) | 14,857 |
| | 4,399 |
| | 2,387 |
| | 4,663 |
| | 932,908 |
| | 43,673 |
| | 68,573 |
|
| Midstream energy services | (24,988 | ) | | 9 |
| | (2,122 | ) | | (28,484 | ) | | 607,806 |
| | — |
| | 305,492 |
|
| Other activities | — |
| | — |
| | — |
| | (1,198 | ) | | 417,672 |
| | — |
| | — |
|
Eliminations(b) | (13,052 | ) | | 10 |
| | — |
| | 1,108 |
| | (893,632 | ) | | — |
| | — |
|
| Total consolidated | $ | 609,487 |
| | $ | 35,283 |
| | $ | 265 |
| | $ | 107,991 |
| | $ | 6,475,390 |
| | $ | 155,758 |
| | $ | 374,065 |
|
(a) As of August 2016, Commercial Energy Systems' operating revenues include revenues from non-controlling interest. Commercial energy systems' EBIT is adjusted for the effects of non-controlling interest.
(b) Intersegment eliminations include any mark-to market valuations associated with trading activities between WGL Midstream and WGL Energy Services, intercompany loans and a timing difference between Commercial Energy Systems’ recognition of revenue for the sale of Renewable Energy Credits (RECs) to Retail Energy-Marketing and Retail Energy-Marketing’s recognition of the associated expense. Retail Energy-Marketing has recorded a portion of the REC’s purchased as inventory to be used in future periods at which time they will be expensed. Operating revenue amounts in the “Eliminations” row represent total intersegment revenues associated with sales from the regulated utility segment to the retail energy-marketing segment. Midstream Energy Services’ cost of energy related sales is netted with its gross revenues.
The following table provides a reconciliation from EBIT to net income applicable to common stock. |
| | | | | | | |
| Three Months Ended December 31, |
| (In thousands) | 2017 | | 2016 |
| Total consolidated EBIT | $ | 127,457 |
| | $ | 107,991 |
|
| Interest expense | 20,197 |
| | 16,235 |
|
| Income tax expense (benefit) | (31,110 | ) | | 33,454 |
|
| Dividends on Washington Gas Light Company preferred stock | 330 |
| | 330 |
|
| Net income applicable to common stock | $ | 138,040 |
| | $ | 57,972 |
|
NOTE 11. OTHER INVESTMENTS
WGL has both solar and pipeline investments and accounts for its interests in legal entities as either a: (i) variable interest entity (VIE) or a (ii) voting interest entity (non-VIE). A VIE is a legal entity with one of the following characteristics: (i) has insufficient at-risk equity to fund its activities without additional subordinated financial support from any other party or parties; (ii) whose equity holders as a group lack the characteristics of a controlling financial interest; or (iii) the entity is structured with non-substantive voting rights.
The determination of whether or not to consolidate a VIE under GAAP requires a significant amount of judgment. This includes, but is not limited to, consideration of our contractual relationship with the entity, the legal structure of the entity,
WGL Holdings, Inc.
Washington Gas Light Company
Part I—Financial Information
Item 1—Financial Statements (continued)
Notes to Condensed Consolidated Financial Statements (Unaudited)
whether or not the entity has enough equity to finance its activities without additional financial support, the voting power of the equity holders, the obligation of the equity holders to absorb losses of the entity and their rights to receive any expected residual returns.
We have investments in both consolidated and unconsolidated VIEs which are described in detail below. The unconsolidated investments are accounted for under the equity method of accounting with profits and losses included in “Equity in earnings of unconsolidated affiliates” in the accompanying Condensed Consolidated Statements of Income.
Under the VIE model, we have a controlling financial interest in a VIE (i.e., are the primary beneficiary) and would consolidate the entity when we have current or potential rights that give us the power to direct the activities of a VIE that most significantly impact the VIE’s economic performance combined with a variable interest that gives us the right to receive potentially significant benefits or the obligation to absorb potentially significant losses. When changes occur to the design of an entity, we reconsider whether the entity is a VIE model. We also continuously evaluate whether we have a controlling financial interest in a VIE.
Under the voting interest model, we consolidate an entity when we have a controlling financial interest by holding directly or indirectly, more than 50% of the voting rights or by exercising control through substantive participating rights. However, we consider substantive rights held by other partners in determining if we hold a controlling financial interest, and in some cases, despite owning more than 50% of the common stock of an investee, an evaluation of our rights relative to other investors may result in the determination that we do not have a controlling financial interest and do not consolidate the entity. We reevaluate whether we have a controlling financial interest in these entities when our voting or substantive participating rights change. Where we do not have a controlling financial interest, we apply the equity method of accounting in which investments are initially measured at cost. Investments in, and advances to, affiliated companies are presented in the caption “Investments in unconsolidated affiliates” in the accompanying Condensed Consolidated Balance Sheets.
WGL uses the Hypothetical Liquidation at Book Value (HLBV) methodology to determine its earnings or losses for certain equity method investments as well as for the non-controlling interests in consolidated investments when the governing structuring agreement over the equity investment results in different liquidation rights and priorities than what is reflected by the underlying ownership interest percentage. For investments accounted for under the HLBV method, simply applying the percentage ownership interest to GAAP net income in order to determine earnings or losses does not accurately represent the income allocation and cash flow distributions that will ultimately be received by the investors. The HLBV calculation may vary in its complexity depending on the capital structure and the tax considerations for the investments.
When applying HLBV, WGL determines the amount that it would receive if an equity investment entity were to liquidate all of its assets at book value (as valued in accordance with GAAP) and distribute that cash to the investors based on the contractually defined liquidation priorities. The change in WGL's claim on the investee's book value at the beginning and end of the reporting period (adjusted for contributions and distributions) is WGL’s share of the earnings or losses from the equity investment for the period.
Consolidated Investments
Variable Interest Entities-Solar
At December 31, 2017, WGL's subsidiary, WGSW, Inc. was the primary beneficiary of SFGF, SFRC, SFGF II, ASD and SFEE, because of its ability to direct the activities most significant to the economic performance of those entities. Accordingly, we have consolidated these VIE's.
SFGF, SFRC, and SFGF II
WGSW, along with its various tax equity partners, formed SFGF, SFRC, and SFGF II, investments to acquire, own, and operate distributed generation solar projects nationwide. WGSW is the managing member of these investments and will provide cash equal to the purchase price of the solar projects less any contributions from the tax-equity partner. WGL Energy Systems is the operations and maintenance provider, and the developer of the projects.
Profits and losses are allocated between the partners under the HLBV method of accounting and the portion allocated to the tax equity partner is included in “Net income (loss) attributable to non-controlling interest” on the accompanying Condensed
WGL Holdings, Inc.
Washington Gas Light Company
Part I—Financial Information
Item 1—Financial Statements (continued)
Notes to Condensed Consolidated Financial Statements (Unaudited)
Consolidated Statements of Income and is recorded to Non-controlling interest on the accompanying Condensed Consolidated Balance Sheets.
As of December 31, 2017, WGSW has contributed the following amounts to SFGF, SFRC, and SFGF II, respectively, $16.8 million, $20.8 million and $0.8 million.
ASD
WGSW is a limited partner in ASD Solar LP (ASD), a limited partnership formed to own and operate a portfolio of residential solar projects, primarily rooftop photovoltaic power generation systems. As a limited partner, WGSW had provided funding to the partnership but did not have power to direct the activities that most significantly affect the operations and economic performance of the entity. In January 2014, the funding commitment period ended for the partnership. Prior to July 10, 2017, ASD was being consolidated by the general partner, Solar Direct LLC (Solar Direct). Solar Direct is a wholly owned subsidiary of American Solar Direct Inc. (ASDI).
In June 2017, ASDI filed for Chapter 7 bankruptcy because of financial difficulties. To ensure continuing operations of the partnership and minimal disruptions to the customers, WGSW petitioned the Bankruptcy Court to remove Solar Direct as manager of ASD operations and to approve the appointment of SF ASD, a wholly-owned subsidiary of WGL Energy Systems, which was formed to take over the management and operations of the partnership, as manager of ASD operations. On July 10, 2017, the Bankruptcy Court granted the bankruptcy trustee's emergency motion to assign management rights and control of ASD to SF ASD and WGSW consolidated ASD as a result. As of December 31, 2017, WGSW has contributed $72.5 million into the tax equity partnership.
SFEE
On November 23, 2016, WGSW and a tax equity partner formed SFEE to acquire distributed generation solar projects that were to be developed by a third-party developer or WGL Energy Systems. New projects were to be designed and constructed under long-term power purchase agreements. On November 8, 2017, WGSW terminated the Master Purchase Agreement between SFEE, LLC and the third-party developer. The termination triggered a reassessment of the method of accounting for SFEE and as a result of the reassessment, SFEE is a VIE and consolidated by WGSW since then. As of December 31, 2017, WGSW has contributed $6.5 million into the tax equity partnership.
The following table summarizes the fair value amounts of SFEE assets and liabilities, as well as the estimated fair value of the non-controlling interest as of the date of consolidation.
|
| | | | |
| Fair Value of SFEE at Date of Consolidation |
| (in millions) | | Fair Value |
| Property, plant and equipment | | $ | 10.1 |
|
| Other assets | | 0.1 |
|
| Total assets | | $ | 10.2 |
|
| Net assets | | $ | 10.2 |
|
| Non-controlling interest | | $ | 0.6 |
|
| WGSW equity interest | | $ | 9.6 |
|
Property, plant and equipment represents commercial solar assets for SFEE stated at cost, which was determined to equate fair value provided by a third-party appraisal.
The carrying amounts and classification of the consolidated VIEs’ assets and liabilities included in our accompanying Condensed Consolidated Balance Sheets at December 31, 2017 and September 30, 2017 are as follows:
WGL Holdings, Inc.
Balance Sheet Location of Consolidated Investments
WGL Holdings, Inc.
Washington Gas Light Company
Part I—Financial Information
Item 1—Financial Statements (continued)
Notes to Condensed Consolidated Financial Statements (Unaudited)
|
| | | | | | | |
| (in millions) | | December 31, 2017 | September 30, 2017 |
| Current assets | | $ | 5.8 |
| $ | 4.4 |
|
| Property, Plant and Equipment | | 137.5 |
| 121.7 |
|
| Total assets | | $ | 143.3 |
| $ | 126.1 |
|
| Current liabilities | | 0.2 |
| 0.2 |
|
| Deferred credits | | 1.1 |
| 0.8 |
|
| Total liabilities | | $ | 1.3 |
| $ | 1.0 |
|
Unconsolidated Investments
Variable Interest Entity-Pipelines
Meade
In 2014, WGL through its subsidiary WGL Midstream, entered into a limited liability company agreement and formed Meade Pipeline Co LLC (Meade), a Delaware limited liability company, with Transcontinental Gas Pipe Line Company, LLC (Williams) to invest in a regulated pipeline, a segment of Transco's Atlantic Sunrise project, called Central Penn Pipeline (Central Penn). Central Penn will be an approximately 185-mile pipeline originating in Susquehanna County, Pennsylvania and extending to Lancaster County, Pennsylvania that will have the capacity to transport and deliver up to approximately 1.7 million dekatherms per day of natural gas.
At December 31, 2017 and September 30, 2017, WGL Midstream held a $238.6 million and $146.7 million, respectively, equity method investment in Meade. WGL Midstream plans to invest an estimated $410 million for a 55% interest in Meade. Although WGL Midstream holds greater than a 50% interest in Meade, Meade is accounted for under the equity method of accounting because WGL Midstream does not have the power to direct the activities most significant to the economic performance of Meade. Meade is accounted for under the HLBV equity method of accounting, and any profits and losses are included in “Equity in earnings of unconsolidated affiliates” in the accompanying Condensed Consolidated Statements of Income and are added to or subtracted from the carrying amount of WGL’s investment balance.
At September 30, 2017, this VIE was not consolidated because WGL and its subsidiaries were not the primary beneficiaries. The nature of WGL’s involvement with this investment lacks the characteristics of a controlling financial interest. WGL does not have control over activities that are economically significant to Meade.
Our maximum financial exposure to loss because of our involvement with this VIE is equal to WGL Midstream's capital contributions.
Non-VIE Investments-Pipelines
Constitution
WGL Midstream owns a 10% interest in Constitution Pipeline Company, LLC (Constitution). The Constitution Pipeline is proposed to transport natural gas from the Marcellus region in northern Pennsylvania to major northeastern markets. Constitution is accounted for under the equity method of accounting; any profits and losses are included in “Equity in earnings of unconsolidated affiliates” in the accompanying Condensed Consolidated Statements of Income and are added to or subtracted from the carrying amount of WGL’s investment balance. The equity method is considered appropriate because Constitution is an LLC with specific ownership accounts and ownership between five and fifty percent resulting in WGL Midstream maintaining a more than minor influence over the partnership operating and financing policies.
In December 2014, Constitution received approval from the FERC to construct and operate the proposed pipeline. However, on April 22, 2016, the New York State Department of Environmental Conservation (NYSDEC) denied Constitution’s application for a Section 401 Certification for the pipeline, which is necessary for the construction and operation of the pipeline. In May 2016, Constitution filed actions in both the U.S. Circuit Court of Appeals for the Second Circuit and the U.S. District Court for the Northern District of New York, appealing the decision and seeking declaratory judgment that the State of New York’s permitting authority is preempted by federal law. In May 2016, Constitution appealed the NYSDEC’s denial of the Section 401 certification to the United States Court of Appeals for the Second Circuit, and in August 2017, the court issued a decision denying in part and dismissing in part Constitution’s appeal. The court expressly declined to rule on Constitution’s argument that the NYSDEC’s decision on Constitution’s Section 401 application constitutes a waiver of the certification
WGL Holdings, Inc.
Washington Gas Light Company
Part I—Financial Information
Item 1—Financial Statements (continued)
Notes to Condensed Consolidated Financial Statements (Unaudited)
requirement. Constitution has filed a petition for rehearing with the Second Circuit Court's decision, but in October the court denied our petition. In January 2018, Constitution petitioned the United States Supreme Court to review the Second Circuit Court’s decision.
In October 2017, Constitution filed a petition for declaratory order requesting FERC to find that, by operation of law, the Section 401 certification requirement for the New York State portion of Constitution’s pipeline project was waived due to the failure by the NYSDEC to act on Constitution’s Section 401 application within a reasonable period of time as required by the express terms of such statute. The petition was consistent with a recent decision by the District of Columbia Circuit Court in another proceeding, in which the court clarified that an applicant facing similar circumstances should present evidence of waiver to the FERC. On January 11, 2018, the FERC denied the petition, finding that Section 401 provides that a state waives certification only when it does not act on an application within one year from the date of the application. The project’s sponsors remain committed to the project and plan to seek rehearing and, if necessary, appeal of the FERC’s decision.
Beginning in April 2016, we discontinued capitalization of development costs related to this project. At December 31, 2017 and September 30, 2017, WGL Midstream held a $38.2 million and $38.1 million, equity method investment in Constitution, respectively. We have evaluated our investment in Constitution for other than temporary impairment as of December 31, 2017. Our impairment assessment used income and market approaches in determining the fair value of our investment in Constitution, including consideration of the severity and duration of any decline in fair value of our investment in the project. Our key inputs included, but are not limited to, significant management judgments and estimates, including projections of the project’s cash flows, selection of a discount rate, market multipliers and probability weighting of potential outcomes of legal and regulatory proceedings. At December 31, 2017, we did not record any impairment charge to reduce the carrying value of our investment. In light of FERC’s ruling on January 11, 2018, we expect that we will record an impairment charge of up to $38.2 million, the current carrying amount of the investment, in the quarter ending March 31, 2018. There could also be additional expenditures beyond this impairment; however, we believe that recoveries from the sale of the inventories held by Constitution will mostly offset these expenditures.
Mountain Valley Pipeline
In March 2015, WGL Midstream acquired a 7% equity interest in Mountain Valley Pipeline, LLC (Mountain Valley). On October 24, 2016, WGL Midstream acquired an additional 3% equity interest in Mountain Valley by assuming all of Vega Midstream MVP LLC's (Vega Energy) interest in the joint venture. WGL Midstream now owns a 10% interest in Mountain Valley.
The proposed pipeline to be developed, constructed, owned and operated by Mountain Valley, will transport approximately 2.0 million dekatherms of natural gas per day and connects with EQT Corporation's Equitrans system in Wetzel County, West Virginia to Transcontinental Gas Pipe Line Company LLC's Station 165 in Pittsylvania County, Virginia. The pipeline is scheduled to be in service by December 2018.
At December 31, 2017 and September 30, 2017, WGL Midstream held a $76.8 million and $63.0 million equity method investment in Mountain Valley, respectively. WGL Midstream expects to invest in scheduled capital contributions through the in-service date of the pipeline, its pro rata share (based on its 10% equity interest) of project costs, an estimated aggregate amount of approximately $350.0 million. The equity method is considered appropriate because Mountain Valley is an LLC with specific ownership accounts and ownership between five and fifty percent resulting in WGL Midstream maintaining a more than minor influence over the partnership operating and financing policies. Profits and losses are allocated under the HLBV method of accounting and are included in “Equity in earnings of unconsolidated affiliates” in the accompanying Condensed Consolidated Statements of Income and are added to or subtracted from the carrying amount of WGL’s investment balance.
Stonewall System
WGL Midstream has a 30% equity interest in an entity that owns and operates certain assets known as the Stonewall Gas Gathering System (the Stonewall System). The Stonewall System has the capacity to gather up to 1.4 billion cubic feet of natural gas per day from the Marcellus production region in West Virginia, and connects with an interstate pipeline system that serves markets in the mid-Atlantic region.
At December 31, 2017 and September 30, 2017, WGL Midstream held a $135.7 million and $136.7 million equity method investment in the Stonewall System. The equity method is considered appropriate because the Stonewall System is an LLC with specific ownership accounts and ownership between five and fifty percent resulting in WGL Midstream maintaining a more than minor influence over the partnership operating and financing policies. Profits and losses are allocated under the
WGL Holdings, Inc.
Washington Gas Light Company
Part I—Financial Information
Item 1—Financial Statements (continued)
Notes to Condensed Consolidated Financial Statements (Unaudited)
HLBV method of accounting and are included in “Equity in earnings of unconsolidated affiliates” in the accompanying Condensed Consolidated Statements of Income and are added to or subtracted from the carrying amount of WGL’s investment balance.
The carrying amount of WGL Midstream's investment in the Stonewall System exceeded the amount of the underlying equity in net assets by $8.8 million as of December 31, 2017, which is being amortized over the life of the assets.
The following tables present summary information about our unconsolidated VIEs and non-VIEs:
WGL Holdings, Inc.
Balance Sheet Location of Unconsolidated Investments |
| | | | | | | | | | | | | | | | |
| | Solar Investments | | Pipelines | | |
| (in millions) | | Non-VIEs(a) | | VIEs(b) | | Non-VIEs(c) | | Total |
| December 31, 2017 | | | | | | | | |
| Assets | | | | | | | | |
| Investments in unconsolidated affiliates | | $ | — |
| | $ | 238.6 |
| | $ | 250.8 |
| | $ | 489.4 |
|
| Total assets | | $ | — |
| | $ | 238.6 |
| | $ | 250.8 |
| | $ | 489.4 |
|
| September 30, 2017 | | | | | | | | |
| Assets | | | | | | | | |
| Investments in unconsolidated affiliates | | $ | 9.6 |
| | $ | 146.7 |
| | $ | 237.9 |
| | $ | 394.2 |
|
| Total assets | | $ | 9.6 |
| | $ | 146.7 |
| | $ | 237.9 |
| | $ | 394.2 |
|
(a) Balance relates to interest held in SFEE on September 30, 2017
(b) Balance relates to equity method investment in Meade.
(c) Balance relates to equity method investments in Constitution, Mountain Valley Pipeline and Stonewall System.
NOTE 12.13. RELATED PARTY TRANSACTIONS
Corporate Service Allocation
As a subsidiary of AltaGas and effective with the close of the Merger on July 6, 2018, Washington Gas is charged a proportionate share of corporate governance and other shared services costs from AltaGas, primarily related to human resources, employee benefits, finance, legal, accounting, tax, information technology services, and office services. AltaGas
Washington Gas Light Company
Part I-Financial Information
Item 1-Financial Statements (continued)
Notes to Condensed Financial Statements (Unaudited)
charges Washington Gas for the total shared service costs attributable to WGL and its affiliates and Washington Gas in turn allocates a portion of the costs to WGL’s other subsidiaries engagebased on methodologies further described below.Washington Gas records a payable of the total shared service costs allocated to all WGL’s subsidiaries in inter-company transactions“Payable to associated companies” and a receivable of the shared service costs allocated to WGL’s other subsidiaries in “Receivables from associated companies” on the ordinary coursebalance sheet.
As of business. Inter-company transactionsSeptember 30, 2019, Washington Gas recorded a $15.9 million liability to “Payables to associated companies,” reflecting Washington Gas’ unpaid shared service cost payable to AltaGas, and balances have been eliminateda receivable of $3.4 million to “Receivables from associated companies” on the consolidated financialbalance sheet related to the shared service costs allocated to WGL’s subsidiaries. The net expenses of $5.0 million and $12.5 million were included in “Operation and maintenance” on the statements of WGL, exceptoperations for the three and nine months ended September 30, 2019, respectively, reflecting the shared service cost allocated to Washington Gas.
As of December 31, 2018, Washington Gas recorded a receivable of $0.6 million to “Receivables from associated companies” on the balance sheet related to the shared service costs allocated to WGL’s subsidiaries. There was no payable balance related to the shared service cost payable to AltaGas as described below.of December 31, 2018.
In addition, Washington Gas provides accounting, treasury, legal and other administrative and general support to affiliates,WGL’s subsidiaries, and files consolidated tax returns that include affiliated taxable transactions. Effective upon the approvals by the SCC of Virginia and beginning in January 2019 and June 2019, respectively, Washington Gas also provides accounting, legal, tax and other administrative and general support to various AltaGas U.S. entities and AltaGas. Washington Gas bills its affiliates to which it provides services in accordance with regulatory requirements for the actual cost of providing these services, which approximates their market value. To the extent such billings are outstanding, they are reflected in “Receivables from associated companies” on Washington Gas’ balance sheets.sheet. Washington Gas assigns or allocates these costs directly to its affiliates and, therefore, does not recognize revenues or expenses associated with providing these services. Washington Gas believes that allocations based on broad measures of business activity are appropriate for allocating expenses resulting from common services. Affiliate entities are allocated a portion of common services based on a formula driven by appropriate indicators of activity, as approved by management.
In connection with billing on behalf of unregulated third-party marketers, including WGL Energy Services and with other miscellaneous billing processes, Washington Gas collects cash on behalf of affiliates and transfers the cash in a reasonable time period. Cash collected by Washington Gas on behalf of its affiliates but not yet transferred is recorded in “Payables to associated companies” on Washington Gas’ Condensed Balance Sheets.
Project Financing
Washington Gas previously obtained third-party project financing on behalf of the federal government to provide funds during the construction of certain energy management services projects entered into under Washington Gas'Gas’ area-wide contract. In December 2016, WGL Energy Systems entered into an agreement to obtain third-party financing and receive funds directly from the third-party lender during the construction period associated with the related energy management service projects. As part of the ongoing financing arrangement, Washington Gas recordsrecorded a receivablecontract asset in “Unbilled revenues” representing the government’s obligation and records an inter-companyaccount payable to WGL Energy Systems in “Payable to associated companies” for the construction work performed for the same amount in "Payables to associated companies".amount. Refer to Note 5- Note 3—Short Term Debt of the Notes to Condensed Consolidated Financial Statements for further discussiondiscussions of the project financing.
Related Party Transactions with Hampshire
Hampshire owns full and partial interests in underground natural gas storage facilities, including pipeline delivery facilities located in and around Hampshire County, West Virginia, and operates those facilities to serve Washington Gas, which purchases all of the storage services of Hampshire. Washington Gas includes the cost of these services in the bills sent to its customers and records the cost of the services in “Operation and maintenance” in its statements of operations. Hampshire operates under a “pass-through” cost of service-based tariff approved by the Federal Energy Regulatory Commission (FERC) and adjusts its billing rates to Washington Gas on a periodic basis to account for changes in its investment in utility plant and associated expenses. The following table presentsarrangement between Hampshire and Washington Gas is classified as an operating lease. An ROU asset and lease liability was not recognized upon the receivables fromadoption of ASC 842 because all the costs associated with the arrangement are variable. Washington Gas recorded expenses related to the cost of services provided by Hampshire in Washington Gas’ statements of operations of $1.5 million and payables to associated companies as of December 31, 2017$5.5 million for the three and nine months ended in September 30, 2017.2019, and $1.9 million and $5.3 million for the three and nine months ended in September 30, 2018, respectively. The outstanding balance not cleared between Washington Gas and Hampshire at the end of the reporting period was recorded in “Receivables from associated companies” on Washington Gas’ balance sheet. Refer to Note 3- Leases for further discussion of ASC 842.
Other Related Party Transactions
In connection with billing for unregulated third-party marketers, including WGL Energy Services and with other miscellaneous billing processes, Washington Gas collects cash on behalf of affiliates and transfers the cash in a reasonable time
WGL Holdings, Inc.
Washington Gas Light Company
Part I—FinancialI-Financial Information
Item 1—Financial1-Financial Statements (continued)
Notes to Condensed Consolidated Financial Statements (Unaudited)
|
| | | | | | | |
| Washington Gas Receivables From / Payables To Associated Companies |
| (In millions) | December 31, 2017 | | September 30, 2017 |
| Receivables from associated companies | $ | 27.0 |
| | $ | 32.4 |
|
| Payables to associated companies | $ | 107.6 |
| | $ | 94.8 |
|
Washington Gas provides gas balancing services related to storage, injections, withdrawals and deliveries to all energy marketers participating in the sale of natural gas on an unregulated basis through the customer choice programs that operate in its service territory. These balancing services include the sale of natural gas supply commodities related to various peaking arrangements contractually supplied to Washington Gas and then partially allocated and assigned by Washington Gas to the energy marketers, including WGL Energy Services. Washington Gas records revenues for these balancing services pursuant to tariffs approved by the appropriate regulatory bodies. These related party amounts related to balancing services provided to WGL Energy Services have been eliminated in the consolidated financial statements of WGL. The following table shows the amounts Washington Gas charged WGL Energy Services for balancing services which are located in "Utility Operating Revenues".
services.
| | | Washington Gas - Gas Balancing Service Charges | |
| Gas Balancing Service Charges | | Gas Balancing Service Charges |
| Three Months Ended December 31, | Three Months Ended
September 30, | Nine Months Ended
September 30, |
| (In millions) | 2017 | 2016 | 2019 | 2018 | 2019 | 2018 |
| Gas balancing service charge | $ | 2.5 |
| $ | 6.9 |
| $ | 2.9 |
| $ | 3.2 |
| $ | 14.9 |
| $ | 16.0 |
|
As a result of these balancing services, an imbalance is created for volumes of natural gas received by Washington Gas that are not equal to the volumes of natural gas delivered to customers of the energy marketers. At December 31, 2017 and September 30, 2017,Washington Gas recorded a $2.1 million payable to WGL Energy Services recognized accountsat September 30, 2019 and $0.7 million receivable from Washington Gas of $4.8 million and $1.4 million respectively,WGL Energy Services at December 31, 2018, related to an imbalance in gas volumes. Due to regulatory treatment, these payablesThe receivable and receivablespayable are not eliminatedrecorded in the consolidated financial statements of WGL.“Account receivable” and “Account payable and other accrued liabilities” on Washington Gas’ balance sheet. Refer to Note 1—1- Accounting Policies of the Notes to Condensed Consolidated Financial Statements of our combined Annual Report on Form 10-K10-KT for the fiscal yearthree months ended September 30, 2017December 31, 2018 for further discussion of these imbalance transactions.
Washington Gas participates in a purchase of receivables (POR) program as approved by the Maryland Public Service Commission (PSCPSC of MD),MD and the PSC of DC, whereby it purchases receivables from participating energy marketers, including WGL Energy Services, at approved discount rates. In addition, WGL Energy Services participates in POR programs with certain Maryland and Pennsylvania utilities, whereby it sells its receivables to various utilities, including Washington Gas at approved discount rates.implemented the POR program in the District of Columbia beginning in January 2019. The receivables purchased by Washington Gas are included in “Accounts receivable” in the accompanying balance sheet. Any activity between Washington GasAt September 30, 2019 and WGL Energy Services related to the POR program has been eliminated in the accompanying financial statements for WGL. At December 31, 2017 and September 30, 2017,2018, Washington Gas had balances of $6.0$3.5 million and $3.2$6.4 million, respectively, of purchased receivables from WGL Energy Services which are located in "Accounts receivable".Services.
Refer to Note 8-Income Taxes of the Notes to Condensed Financial Statements for discussion of related party income taxes.
NOTE 13. COMMITMENTS AND CONTINGENCIES
REGULATORY CONTINGENCIES
Certain legal and administrative proceedings incidental to our business, including regulatory contingencies, involve WGL and/or its subsidiaries. In our opinion, we have recorded an adequate provision for probable losses or refunds to customers for regulatory contingencies related to these proceedings.
Virginia Jurisdiction
Virginia Rate Case. On June 30, 2016, Washington Gas filed an application with the Commonwealth of Virginia State Corporation Commission (SCC of VA) to increase its base rates for natural gas service by $45.6 million, which includes $22.3 million of revenue associated with natural gas pipeline replacement initiatives previously approved by the SCC of VA and paid by customers through a monthly rider. Additionally, the proposed rate increase included provisions designed to deliver the benefits of natural gas to more customers that include: (i) facilitating conversion to natural gas in locations already served by
WGL Holdings, Inc.
Washington Gas Light Company
Part I—Financial Information
Item 1—Financial Statements (continued)
Notes to Condensed Consolidated Financial Statements (Unaudited)
Washington Gas; (ii) expanding the natural gas system to high-growth communities in Virginia and (iii) research and development enabling innovations to enhance service for our customers.
Interim rates went into effect, subject to refund, in the December 2016 billing cycle. Intervenors filed testimony on January 31, 2017, Staff of the SCC of VA filed testimony on February 28, 2017 and Washington Gas filed its rebuttal testimony on March 28, 2017. On April 17, 2017, Washington Gas filed with the SCC of VA a unanimous settlement as to a specific annual revenue increase, but not as to a specific return on equity, specific accounting adjustments, or specific ratemaking methodologies, except as otherwise set forth therein. The Stipulation set forth, for purposes of settlement, a base rate increase of $34 million (of which $14.1 million represents incremental base rate revenues over and above the inclusion of SAVE Plan costs which were previously recovered through monthly surcharges). For purposes of the settlement, the mid-point of the return on equity range of 9.0-10.0% will be used in any application or filing, other than a change in base rates, effective December 1, 2016. On June 30, 2017, the Chief Hearing Examiner issued a report recommending that the SCC of VA approve the Stipulation. On September 8, 2017, Washington Gas received a final order from the SCC of VA accepting settlement subject to minor modifications to Washington Gas’ System Expansion Proposals. All parties agreed to a Revised Stipulation filed on September 20, 2017, reflecting the SCC of VA’s denial of one of the System Expansion Proposals and Washington Gas’ withdrawal of the second one. The SCC of VA issued its final order approving the revised stipulation on September 25, 2017. Refunds to customers, which have been accrued by Washington Gas at December 31, 2017, will be made related to the interim billings in accordance with the final order. On December 21, 2017, Washington Gas requested and was granted by the SCC of VA a 45-day extension to complete the refunds.
FINANCIAL GUARANTEES
WGL has guaranteed payments primarily for certain commitments on behalf of some of its subsidiaries. WGL has also guaranteed payments for certain of our external partners. At December 31, 2017, the maximum potential amount of future payments under the guarantees for external parties totaled $0.6 million.
ANTERO CONTRACT
Washington Gas and WGL Midstream contracted in June 2014 with Antero Resources Corporation (Antero) to buy gas from Antero at invoiced prices based on an index, and at a delivery point, specified in the contracts. Since deliveries began, however, the index price paid has been more than the fair market value at the same physical delivery point, resulting in losses to date of $28.4 million. Accordingly, Washington Gas and WGL Midstream notified Antero that it sought to apply a provision of the contracts that would permit a new index to be established. Antero objected, claiming that the contract provisions permitting re-pricing did not apply, unless Antero itself chose to sell gas at cheaper prices at the delivery point (which Antero claimed it had not). The dispute was arbitrated in January 2017, and the arbitral tribunal ruled in favor of Antero on the applicability of the re-pricing mechanism. However, the tribunal ruled that it lacked authority to determine whether Antero was in breach of its obligation to deliver gas to Washington Gas and WGL Midstream at a point where they could obtain the higher pricing. Accordingly, Washington Gas and WGL Midstream filed suit in state court in Colorado for a determination of this issue. The state court granted Antero’s motion to dismiss the case and the case is currently on appeal.
Separately, Antero has initiated suit against Washington Gas and WGL Midstream, claiming that they have failed to purchase specified daily quantities of gas and seeking alleged cover damages exceeding $80 million as of October 24, 2017, which amount continues to accumulate daily according to Antero's complaint. Washington Gas and WGL Midstream oppose both the validity and amount of Antero’s claim. WGL believes the probability that Antero could succeed in collecting these penalties is remote and therefore, no accrual was made as of December 31, 2017. In December 2017, WGL Midstream amended its purchase contract with Antero and, effective February 1, 2018, will no longer be obligated to purchase gas at the delivery point that is the subject of these disputes.
SILVER SPRING, MARYLAND INCIDENT
Washington Gas continues to support the investigation by the NTSB into the August 10, 2016 explosion and fire at an apartment complex on Arliss Street in Silver Spring, Maryland, the cause of which has not been determined. Additional information will be made available by the NTSB at the appropriate time. A total of 40 civil actions related to the incident have been filed against WGL and Washington Gas in the Circuit Court for Montgomery County, Maryland. Thirty-nine of these suits seek unspecified damages for personal injury and/or property damage. The final action is a class action suit seeking total
WGL Holdings, Inc.
Washington Gas Light Company
Part I—Financial Information
Item 1—Financial Statements (continued)
Notes to Condensed Consolidated Financial Statements (Unaudited)
damages stated to be less than $5 million for, among others, property damage and various counts relating to the loss of the use of the premises. Two of the 40 cases were originally filed in the District of Columbia Superior Court, but were dismissed. Those two actions were re-filed in Maryland on November 27, 2017. We maintain excess liability insurance coverage from highly-rated insurers, subject to a nominal self-insured retention. We believe that this coverage will be sufficient to cover any significant liability to it that may result from this incident. Management is unable to determine a range of potential losses that are reasonably possible of occurring and therefore we have not recorded a reserve associated with this incident. Washington Gas was invited by the NTSB to be a party to the investigation and in that capacity, continues to work closely with the NTSB to help determine the cause of this incident.
NOTE 14. PENSION AND OTHER POST-RETIREMENT BENEFIT PLANS
The following table shows the components of net periodic benefit costs (income) recognized in our financial statements during the three months ended December 31, 2017 and 2016.
|
| | | | | | | | | | | | | | | |
| Components of Net Periodic Benefit Costs (Income) |
| Three Months Ended December 31, |
| 2017 | | 2016 |
| (In millions) | Pension Benefits | | Health and Life Benefits | | Pension Benefits | | Health and Life Benefits |
| Service cost | $ | 3.7 |
| | $ | 1.3 |
| | $ | 4.1 |
| | $ | 1.4 |
|
| Interest cost | 9.9 |
| | 2.9 |
| | 9.6 |
| | 2.9 |
|
| Expected return on plan assets | (10.6 | ) | | (5.9 | ) | | (10.3 | ) | | (5.5 | ) |
| Amortization of prior service cost (credit) | 0.1 |
| | (4.4 | ) | | 0.1 |
| | (4.4 | ) |
| Amortization of net actuarial loss | 3.9 |
| | — |
| | 5.5 |
| | 0.2 |
|
| Net periodic benefit cost (income) | 7.0 |
| | (6.1 | ) | | 9.0 |
| | (5.4 | ) |
| Amount allocated to construction projects | (1.1 | ) | | 1.0 |
| | (1.6 | ) | | 1.2 |
|
Amount deferred as regulatory asset/liability—net | 1.7 |
| | — |
| | 1.8 |
| | (0.1 | ) |
| Amount charged (credited) to expense | $ | 7.6 |
| | $ | (5.1 | ) | | $ | 9.2 |
| | $ | (4.3 | ) |
Amounts included in the line item “Amount deferred as regulatory asset/liability-net,” as shown in the table above, represent the amortization of previously unrecovered costs of the applicable pension benefits or the health and life benefits as approved in the District of Columbia. We expect the balances to be fully amortized by October 2019.
NOTE 15. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
The following tables showtable shows the changes in accumulated other comprehensive income (loss) for WGL and Washington Gas by component for the three and nine months ended December 31, 2017September 30, 2019 and 2016.
2018.
|
| | | | | | | |
WGL Holdings, Inc. Changes in Accumulated Other Comprehensive Loss by Component |
| (In thousands) | Three Months Ended December 31, |
| 2017 | | 2016 |
| Beginning Balance | $ | (5,997 | ) | | $ | (38,539 | ) |
Qualified cash flow hedging instruments(a) | 52 |
| | 49,455 |
|
Change in prior service credit(b) | (274 | ) | | (217 | ) |
Amortization of actuarial loss(b) | 527 |
| | 588 |
|
| Current-period other comprehensive income | 305 |
| | 49,826 |
|
| Income tax expense related to other comprehensive income | 61 |
| | 20,413 |
|
| Ending Balance | $ | (5,753 | ) | | $ | (9,126 | ) |
| |
(a)
| Cash flow hedging instruments represent interest rate swap agreements related to debt issuances. Refer to Note 8- Derivative and Weather-related Instruments of the Notes to Condensed Consolidated Financial Statements for further discussion of the interest rate swap agreements. |
|
| | | | | | | | | | | | | | | |
| Changes in Accumulated Other Comprehensive Income (Loss) by Component |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| (In thousands) | 2019 | | 2018 | | 2019 | | 2018 |
| Beginning Balance | $ | (6,141 | ) | | $ | (3,959 | ) | | $ | (6,627 | ) | | $ | (4,330 | ) |
Amortization of prior service cost (a)(b) | (163 | ) | | 145 |
| | (486 | ) | | (401 | ) |
Amortization of actuarial gain (loss)(a)(b)
| 392 |
| | 112 |
| | 1,198 |
| | 1,172 |
|
Actuarial gain (loss) arising during the period (a) | — |
| | 4,625 |
| | 1,250 |
| | 4,625 |
|
| Current-period other comprehensive income (loss) | 229 |
|
| 4,882 |
|
| 1,962 |
|
| 5,396 |
|
Income tax expense (benefit) related to pension and other post-retirement benefit plans
| (713 | ) | | 2,753 |
| | 534 |
| | 2,896 |
|
| Ending Balance | $ | (5,199 | ) |
| $ | (1,830 | ) |
| $ | (5,199 | ) |
| $ | (1,830 | ) |
(a) These accumulated other comprehensive income (loss) components are included in the computation of net periodic benefit cost. Refer to Note 9—Pension and other post-retirement benefit plans for additional details.
WGL Holdings, Inc.
Washington Gas Light Company
Part I—FinancialI-Financial Information
Item 1—Financial1-Financial Statements (continued)
Notes to Condensed Consolidated Financial Statements (Unaudited)
| |
(b)(b) Amortization of prior service cost and amortization of actuarial gain (loss) represent the amounts reclassified out of AOCI to “Other income (expense)” of Statements of Operations for the reporting periods. | These accumulated other comprehensive income (loss) components are included in the computation of net periodic benefit cost. Refer to Note 14- Pension and other post-retirement benefit plans of the Notes to Condensed Consolidated Financial Statements for additional details. |
|
| | | | | | | |
Washington Gas Light Company Changes in Accumulated Other Comprehensive Loss by Component |
| (In thousands) | Three Months Ended December 31, |
| 2017 | | 2016 |
| Beginning Balance | $ | (4,522 | ) | | $ | (7,830 | ) |
Change in prior service credit(a) | (274 | ) | | (217 | ) |
Amortization of actuarial loss(a) | 527 |
| | 588 |
|
| Current-period other comprehensive income | 253 |
| | 371 |
|
| Income tax expense related to other comprehensive income | 61 |
| | 147 |
|
| Ending Balance | $ | (4,330 | ) | | $ | (7,606 | ) |
| |
(a)
| These accumulated other comprehensive income (loss) components are included in the computation of net periodic benefit cost. Refer to Note 14-Pension and other post-retirement benefit plans of the Notes to Condensed Consolidated Financial Statements for additional details. |
Washington Gas Light Company
Part I-Financial Information
Item 1-Financial Statements (continued)
Notes to Condensed Financial Statements (Unaudited)
NOTE 16.15. SUPPLEMENTAL CASH FLOW INFORMATION
The following tables detailtable details the changes in operating assets and liabilities from operating activities, cash payments that have been included in the determination of earnings and non-cash investing and financing activities:activities. |
| | | | | | |
| | Nine Months Ended September 30, | Nine Months Ended September 30, |
| (In thousands) | 2019 | 2018 |
| CHANGES IN OPERATING ASSETS AND LIABILITIES | | |
| Accounts receivable and unbilled revenues | $ | 174,986 |
| $ | 159,066 |
|
| Receivables from associated companies | (3,981 | ) | 24,783 |
|
| Gas costs and other regulatory assets/liabilities—net | (8,253 | ) | (10,509 | ) |
| Storage gas | 11,479 |
| (16,419 | ) |
| Prepaid taxes | (3,791 | ) | 14,167 |
|
| Accounts payable and other accrued liabilities | (109,287 | ) | 15,722 |
|
| Payables to associated companies | 10,383 |
| (86,049 | ) |
| Customer deposits and advance payments | (11,511 | ) | 28,947 |
|
| Accrued taxes | 6,830 |
| (19,527 | ) |
| Other current assets | 5,077 |
| (4,701 | ) |
| Other current liabilities | (240 | ) | 278 |
|
| Deferred gas costs—net | 49,379 |
| 17,717 |
|
| Deferred assets—other | 11,807 |
| 11,754 |
|
| Deferred liabilities—other | (26,879 | ) | (22,038 | ) |
| Pension and other post-retirement benefits | (11,427 | ) | (14,079 | ) |
| Other—net | — |
| (798 | ) |
| Changes in operating assets and liabilities | $ | 94,572 |
| $ | 98,314 |
|
| SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION | | |
| Income taxes paid (refunded)—net | $ | 5,253 |
| $ | (2,025 | ) |
| Interest paid | $ | 54,238 |
| $ | 54,059 |
|
| SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING AND FINANCING ACTIVITIES: | | |
| Extinguishment of project debt financing | $ | (15,460 | ) | $ | (28,312 | ) |
| Capital expenditure accruals included in accounts payable and other accrued liabilities | $ | 39,976 |
| $ | 53,367 |
|
The following table provides a reconciliation of cash, cash equivalents, and restricted cash reported within Washington Gas’ balance sheet that sums to the total of such amounts shown on the statements of cash flows.45
|
| | | | | | |
| (in thousands) | September 30, 2019 | September 30, 2018 |
| Cash and cash equivalents | $ | 1 |
| $ | 1 |
|
| Restricted cash included in Current Assets-Other | $ | 4,225 |
| $ | 20,207 |
|
| Restricted cash included in Deferred Charges and Other Assets-Other | $ | 43,945 |
| $ | 44,775 |
|
| Total cash, cash equivalents and restricted cash shown in the statement of cash flows | $ | 48,171 |
| $ | 64,983 |
|
WGL Holdings, Inc.Restricted cash included in “Current assets—Other” and “Deferred charges and other assets—Other” on the balance sheet represents amount of investment in rabbi trusts to fund deferred compensation, pension and other post-retirement benefits for certain management personnel and directors. The rabbi trusts were funded pursuant to the agreement of merger with AltaGas. The funds in the rabbi trusts can only be used to pay for plan participant benefits and other plan expenses such as investment fees or trustee fees. The funds were invested in money market funds at September 30, 2019 and September 30, 2018. Refer to Note 9-Pension and Other Post-Retirement Benefit Plans for further discussion of rabbi trusts.
Washington Gas Light Company
Part I—Financial InformationI
Item 1—2-Management’s Discussion and Analysis of
Financial Statements (continued)
Notes to Condensed Consolidated Financial Statements (Unaudited)Condition and Results of Operations
WGL Holdings Inc.
|
| | | | | | | |
| For the three months ended December 31, | 2017 | | 2016 |
| (In thousands) | | | |
| CHANGES IN OPERATING ASSETS AND LIABILITIES | | | |
| Accounts receivable and unbilled revenues—net | $ | (237,959 | ) | | $ | (203,098 | ) |
| Gas costs and other regulatory assets/liabilities—net | 38,503 |
| | 35,400 |
|
| Storage gas | 37,006 |
| | (1,709 | ) |
| Prepaid taxes | (7,275 | ) | | (7,901 | ) |
| Accounts payable and other accrued liabilities | 40,575 |
| | 87,512 |
|
| Customer deposits and advance payments | (10,683 | ) | | (12,611 | ) |
| Accrued taxes | 18,019 |
| | 11,149 |
|
| Other current assets | (15,107 | ) | | (21,887 | ) |
| Other current liabilities | (2,662 | ) | | (22,569 | ) |
| Deferred gas costs—net | (26,023 | ) | | (42,189 | ) |
| Deferred assets—other | (18,483 | ) | | (4,431 | ) |
| Deferred liabilities—other | 7,061 |
| | (16,194 | ) |
| Pension and other post-retirement benefits | (291 | ) | | (3,583 | ) |
| Other—net | 1,917 |
| | 771 |
|
| Changes in operating assets and liabilities | $ | (175,402 | ) | | $ | (201,340 | ) |
| SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION | | | |
| Income taxes paid (refunded)—net | $ | (956 | ) | | $ | (4,678 | ) |
| Interest paid | $ | 10,392 |
| | $ | 4,156 |
|
| SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING AND FINANCING ACTIVITIES: | | | |
| Extinguishment of project debt financing | $ | — |
| | $ | (29,871 | ) |
| Capital expenditure accruals included in accounts payable and other accrued liabilities | $ | 34,371 |
| | $ | 55,602 |
|
| Dividends paid in common stock | $ | — |
| | $ | 1,362 |
|
| Stock based compensation | $ | 11,251 |
| | $ | 6,564 |
|
| Transfer of investments to fixed assets | $ | 10,054 |
| | $ | 3,959 |
|
| Transfer of notes receivables to investments | $ | — |
| | $ | 10,031 |
|
WGL Holdings, Inc.
Washington Gas Light Company
Part I—Financial Information
Item 1—Financial Statements (continued)
Notes to Condensed Consolidated Financial Statements (Unaudited)
Washington Gas
|
| | | | | | | |
| For the three months ended December 31, | 2017 | | 2016 |
| (In thousands) | | | |
| CHANGES IN OPERATING ASSETS AND LIABILITIES | | | |
| Accounts receivable, unbilled revenues and receivables from associated companies—net | $ | (167,271 | ) | | $ | (133,605 | ) |
| Gas costs and other regulatory assets/liabilities—net | 38,503 |
| | 35,400 |
|
| Storage gas | 7,793 |
| | (6,029 | ) |
| Prepaid taxes | (8,549 | ) | | (11,934 | ) |
| Accounts payable and other accrued liabilities, including payables to associated companies | 15,409 |
| | 49,444 |
|
| Customer deposits and advance payments | (9,483 | ) | | (8,410 | ) |
| Accrued taxes | 34,146 |
| | 9,307 |
|
| Other current assets | (9,904 | ) | | (9,456 | ) |
| Other current liabilities | (124 | ) | | (29,859 | ) |
| Deferred gas costs—net | (26,023 | ) | | (42,189 | ) |
| Deferred assets—other | (17,649 | ) | | (2,766 | ) |
| Deferred liabilities—other | 539 |
| | (16,657 | ) |
| Pension and other post-retirement benefits | (442 | ) | | (3,586 | ) |
| Other—net | 1,691 |
| | 510 |
|
| Changes in operating assets and liabilities | $ | (141,364 | ) | | $ | (169,830 | ) |
| SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION | | | |
| Income taxes paid (refunded)—net | $ | (958 | ) | | $ | (6,449 | ) |
| Interest paid | $ | 2,977 |
| | $ | 683 |
|
| SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING AND FINANCING ACTIVITIES: | | | |
| Extinguishment of project debt financing | $ | — |
| | $ | (29,871 | ) |
| Capital expenditure accruals included in accounts payable and other accrued liabilities | $ | 25,325 |
| | $ | 40,601 |
|
NOTE 17. PLANNED MERGER WITH ALTAGAS LTD.
On January 25, 2017, WGL entered into an agreement and plan of merger (Merger Agreement) to combine with AltaGas in an all cash transaction valued at approximately $6.4 billion. The Merger Agreement provides for the merger of a newly formed indirect wholly-owned subsidiary of AltaGas with and into WGL, with WGL continuing as the surviving corporation in the merger (the Merger) and becoming an indirect wholly-owned subsidiary of AltaGas. Subject to the terms and conditions set forth in the Merger Agreement, at the Effective Time (as defined in the Merger Agreement) of the Merger, WGL shareholders will receive $88.25 in cash, without interest, for each share of WGL common stock issued and outstanding immediately prior to the Effective Time (as defined in the Merger Agreement). The Boards of Directors of each of WGL and AltaGas have unanimously approved the Merger, which is expected to close during the second calendar quarter of 2018.
Consummation of the Merger is subject to the satisfaction or waiver of specified closing conditions, including, among others, the approval of the Merger by the holders of more than two-thirds of the outstanding shares of WGL common stock, which approval occurred on May 10, 2017, and approvals required from certain antitrust and other regulatory bodies. A status of each of these conditions is described below. The Merger Agreement also contains customary representations, warranties and covenants of both WGL and AltaGas. These covenants include, among others, an obligation on behalf of WGL to operate its business in the ordinary course until the Merger is consummated, subject to certain exceptions.
Under the terms of the Merger Agreement, the Outside Date (as defined in the Merger Agreement) for consummation of the Merger was January 25, 2018. The Merger Agreement permits either WGL or AltaGas to extend the term of the Merger Agreement should the Merger not be consummated by such date. On January 11, 2018, WGL and AltaGas mutually agreed in writing to extend this Outside Date to July 23, 2018. The Merger Agreement also contains certain other termination rights for both AltaGas and WGL. Under specified circumstances, AltaGas would be required to pay a termination fee of $205 million, $182 million, or $68 million (depending on the specific circumstances of termination) to WGL. Under other specific circumstances as outlined in the Merger Agreement, WGL would be required to pay AltaGas a termination fee of $136 million.
In connection with entering into the Merger Agreement, WGL entered into a subscription agreement with AltaGas, pursuant to which WGL agreed, upon the occurrence of certain conditions, to issue and sell to AltaGas up to an aggregate of 15,000 shares of Series A Non-Voting Non-Convertible Perpetual Preferred Stock (Non-Voting Preferred Stock) for a purchase price of
WGL Holdings, Inc.
Washington Gas Light Company
Part I—Financial Information
Item 1—Financial Statements (continued)
Notes to Condensed Consolidated Financial Statements (Unaudited)
$10,000 per share. If the consolidated debt to total capitalization ratio is forecasted to be in excess of 62% in any subsequent quarterly period, AltaGas will purchase a number of shares of Non-Voting Preferred Stock to produce a forecasted ratio equal to 62%, but not more than 5,000 shares in any single quarter or more than 15,000 shares in the aggregate. If the Merger Agreement is terminated or the Outside Date expires, no subscription will be made after the date of termination or expiration, and WGL will have six months thereafter to redeem any Non-Voting Preferred Stock previously issued.
Merger Approval Proceedings
District of Columbia
On April 24, 2017, AltaGas, WGL and Washington Gas ("Applicants") filed an application with the PSC of DC seeking approval of the Merger Agreement. In an order issued on April 25, 2017, the PSC of DC scheduled a procedural conference on May 18, 2017 with the Staff of the PSC of DC and interested parties to consider the factors to be considered in the case to determine whether the Merger is in the public interest, identify factual issues in dispute and consider a procedural schedule for the proceeding. To approve the Merger Agreement, the PSC of DC must find that the Merger taken as a whole is in the public interest. In the April 25, 2017 order, the PSC of DC stated that in making this determination, it has balanced the interests of shareholders and investors with ratepayers and the community; determined that benefits to shareholders must not come at the expense of ratepayers; and found that to be approved, the transaction must produce a direct and tangible benefit to ratepayers. It stated further that in determining whether the public interest requirements are met, the PSC of DC has in past merger cases identified seven factors it has considered in reviewing each transaction, including the effects of the transaction on (i) ratepayers, shareholders, the financial health of the utilities standing alone and as merged, and the economy of the District; (ii) utility management and administrative operations; (iii) public safety and the safety and reliability of services; (iv) risks associated with all of the Applicants' affiliated non-jurisdictional business operations; (v) the PSC of DC's ability to regulate Washington Gas effectively; (vi) competition in the local retail and wholesale markets that impact the District and District ratepayers; and (vii) conservation of natural resources and preservation of environmental quality. The law of the District of Columbia does not impose any time limit on the PSC of DC’s review of the Merger. The District of Columbia Office of the People’s Counsel, the District of Columbia Government and other intervenors filed testimony with the PSC of DC opposing the application on September 29, 2017. The Applicants filed rebuttal testimony on October 27, 2017. Evidentiary hearings took place before the PSC of DC on December 5 through December 15, 2017. An order is expected by the second calendar quarter of 2018.
Maryland
On April 24, 2017, AltaGas, WGL and Washington Gas ("Applicants") filed an application with the PSC of MD seeking approval of the Merger Agreement. On April 26, 2017, the PSC of MD issued an order scheduling a pre-hearing conference on May 30, 2017, to set a procedural schedule for the proceeding, to consider any petition to intervene that have been filed, and to consider any other preliminary matters requested by the parties. Maryland law requires the PSC of MD to approve a merger subject to its review if it finds that the merger agreement is consistent with the public interest, convenience and necessity, including benefits and no harm to consumers. In making this determination, the PSC of MD is required to consider the following criteria: (i) the potential impact of the acquisition on rates and charges paid by customers and on the services and conditions of operation of the public service company; (ii) the potential impact of the acquisition on continuing investment needs for the maintenance of utility services, plant, and related infrastructure; (iii) the proposed capital structure that will result from the acquisition, including allocation of earnings from Washington Gas; (iv) the potential effects on employment; (v) the projected allocation of any savings that are expected between shareholders and rate payers; (vi) issues of reliability, quality of service, and quality of customer service; (vii) the potential impact of the acquisition on community investment; (viii) affiliate and cross-subsidization issues; (ix) the use or pledge of utility assets for the benefit of an affiliate; (x) jurisdictional and choice-of-law issues; (xi) whether it is necessary to revise the PSC of MD's ring-fencing and code of conduct regulations in light of the acquisition; and (xii) any other issues the PSC of MD considers relevant to the assessment of the acquisition in relation to the public interest, convenience, and necessity. The Staff of the PSC of MD, the Maryland Office of People’s Counsel and other intervenors filed testimony opposing the application on August 14, 2017. The Applicants filed rebuttal testimony with the PSC of MD on September 11, 2017. Evidentiary hearings were held before the PSC of MD on October 3, 2017 through October 16, 2017. Initial briefs and reply briefs were filed on November 6, 2017 and November 16, 2017, respectively. The PSC of MD is required to issue an order within 180 days of the date the application was filed, but may extend the date by 45 days for good cause. The PSC of MD issued an order extending the date for review. On December 1, 2017, AltaGas and Washington Gas entered into a settlement agreement with several major parties in the merger application proceedings pending before the PSC of
WGL Holdings, Inc.
Washington Gas Light Company
Part I—Financial Information
Item 1—Financial Statements (concluded)
Notes to Condensed Consolidated Financial Statements (Unaudited)
MD. The PSC of MD will conduct evidentiary hearings in February 2018, to review the settlement agreement reached in December and is expected to render a final decision by April 2018.
Virginia
On April 24, 2017, AltaGas, WGL and Washington Gas, filed a petition with the SCC of VA seeking approval of the Merger Agreement. Virginia law provides that, if the SCC of VA determines, with or without hearing, that adequate service to the public at just and reasonable rates will not be impaired or jeopardized by granting the petition for approval, then the SCC of VA shall approve a merger with such conditions that the SCC of VA deems to be appropriate in order to satisfy this standard. On October 20, 2017, the SCC of VA issued an order approving the merger, subject to accounting, financial, and safety related requirements to which joint applicants agree.
On December 21, 2017, Washington Gas filed an application with the SCC of VA for approval of a new service agreement between Washington Gas and AltaGas Services (U.S.) Inc. ("ASUS") for Washington Gas to receive centralized corporate services, and to authorize affiliate transactions for a period of five years. An order is expected on or before March 21, 2018.
Committee on Foreign Investment in the United States (CFIUS)
On April 24, 2017, AltaGas, WGL and Washington Gas, filed a joint voluntary notice with the CFIUS. This notice was approved on August 18, 2017.
HSR
On June 15, 2017, AltaGas and WGL submitted to the Federal Trade Commission and the Antitrust Division of the Department of Justice completed Premerger Notification and Report Forms with respect to the proposed acquisition by AltaGas of certain voting securities of WGL. The waiting period required by Section 7A(b)(1) of the Clayton Act, 15 U.S.C. Section 18a(b)(1) (aka the Hart-Scott Rodino Antitrust Improvements Act of 1976, as amended) expired on July 17, 2017. The expiration of the Clayton Act’s waiting period deems the Merger approved by the Federal Trade Commission and the Department of Justice.
FERC
On April 24, 2017, AltaGas and WGL Energy Services submitted to FERC a Joint Application for Authorization of Disposition of Jurisdictional Assets and Merger under Section 203 of the Federal Power Act. Under that section, FERC shall approve a merger if it finds that the proposed transaction will be consistent with the public interest. In making this determination, the FERC will consider the following criteria: (i) horizontal competition analysis; (ii) vertical competition issues; (iii) no adverse effect on rates; (iv) no adverse effect on regulation; and (v) no improper cross-subsidization. On July 6, 2017, the FERC issued an order authorizing the Merger, concluding that the proposed transaction is consistent with the public interest.
NOTE 18. SUBSEQUENT EVENTS
Constitution Pipeline
On January 11, 2018, the FERC denied the Section 401 Water Quality Certification for Constitution in which WGL Midstream holds a 10% membership interest. Constitution stated that it plans to appeal the decision and seek a rehearing. In light of the denial of the certification and the anticipated actions to challenge the decision, Refer to Note 11 — Other Investments of the Notes to Condensed Consolidated Financial Statements for further discussion of Constitution.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
INTRODUCTION
WGL Holdings, Inc.
Washington Gas Light Company
Part I—Financial Information
Item 2—This Management’s Discussion and Analysis of
Financial Condition and Results of Operations (continued)
This Management’sDiscussion and Analysis of Financial Condition and Results of Operations (Management’s Discussion)Discussion and Analysis) analyzes the financial condition, results of operations and cash flows of WGL and its subsidiaries.Washington Gas. It also includes management’s analysis of past financial results and potential factors that may affect future results, potential future risks and approaches that may be used to manage them. Except where the content clearly indicates otherwise, “WGL,“Washington Gas,” “we,” “us”“us,” “our” or “our”the “Company,” refers to the holding company or the consolidated entity of WGL Holdings, Inc. and all of its subsidiaries.Washington Gas Light Company.
Management’s Discussion is divided into the following two major sections:
WGL—This section describes the financial condition and results of operations of WGL Holdings, Inc. and its subsidiaries on a consolidated basis. It includes discussions of our regulated operations, including Washington Gas and Hampshire, and our non-utility operations.
Washington Gas—This section describes the financial condition and results of operations of Washington Gas, a subsidiary of WGL, which comprises the majority of the regulated utility segment.
Both sections of Management’s Discussion—WGL and Washington Gas—areAnalysis is designed to provide an understanding of our operations and financial performance and should be read in conjunction with the respective company’sCompany’s financial statements and the combined Notes to Condensed Consolidated Financial Statements in this quarterly report as well as our combined Annual Report onWashington Gas’ Form 10-K for WGL and Washington Gas10-KT for the fiscal year ended September 30, 2017.
Unless otherwise noted, earnings per share amounts are presented on a diluted basis, and are based on weighted average common and common equivalent shares outstanding.period ending December 31, 2018. Our operations are seasonal and, accordingly, our operating results for the interim periods presented are not indicative of the results to be expected for the full fiscal year.
EXECUTIVE OVERVIEW
Introduction
WGL, through its subsidiaries, sells and delivers natural gas and provides a variety of energy-related products and services to customers primarily in the District of Columbia and the surrounding metropolitan areas in Maryland and Virginia. In addition to our primary markets, WGL’s non-utility subsidiaries provide customized energy solutions across a much wider footprint, with business activities across the United States.
WGLWashington Gas has four operating segments:
regulated utility;
retail energy-marketing;
commercial energy systems; and
midstream energy services.
Regulated Utility Operating Segment
The regulated utilityone operating segment is composed of our core subsidiary, Washington Gas. Washington Gasthat engages in the delivery and sale of natural gas, that iswhose operations are regulated by regulatory commissions in the District of Columbia, Maryland and Virginia. During the quarter, our utility earnings reflect: (i) higher customer growth; (ii) new base rates in Virginia and the District of Columbia; and (iii) lower operation and maintenance expenses. These favorable variances were more than offset by lower realized and unrealized margins associated with our asset optimization program as well as higher depreciation and amortization expenses.
Retail Energy-Marketing Operating Segment
We offer competitively priced natural gas, electricity and energy from renewable sources to customers through WGL Energy Services, our non-utility retail energy-marketing subsidiary.During the first quarter, this segment saw lower earnings due to:(i) lower realized electric margins due to lower average unit margins and lower sales volume, (ii) higher operating expenses, and (iii) lower unrealized mark-to-market valuations on energy-related derivatives.
Commercial Energy Systems Operating Segment
WGL Holdings, Inc.
Washington Gas Light Company
Part I—Financial Information
Item 2—Management’s Discussion and Analysis of
Financial Condition and Results of Operations (continued)
Through WGL Energy Systems and WGSW, we offer efficient and sustainable commercial energy solutions focused on owning and operating distributed generation assets such as Solar Photovoltaic (Solar PV) systems and upgrading energy related systems of large government and commercial facilities. During the first quarter, this segment continued to deliver improved results. Growth was attributed to higher earnings from our investment distributed generation business, including investments in tax equity partnerships, partially offset by higher operating expenses in our commercial distributed generation business.
Midstream Energy Services Operating Segment
WGL Midstream specializes in the investment, management, development and optimization of natural gas storage and transportation midstream infrastructure projects. Improved results for the first quarter primarily reflect: (i) higher valuations and realized margins related to storage inventory and the associated economic hedging transactions; (ii) higher realized and unrealized margins on our transportation strategies; and (iii) higher income related to our pipeline investments.
Other Activities
Activities and transactions that are not significant enough on a stand-alone basis to warrant treatment as an operating segment, and that do not fit into one of our four operating segments, are aggregated as “Other Activities” and are included as part of non-utility operations. Administrative and business development costs associated with WGL and Washington Gas Resources are also included in “Other Activities.” Decreased results for the quarter primarily relates to higher costs associated with the proposed Merger with AltaGas.
Planned Merger with AltaGas
On January 25, 2017, WGL entered into the Merger Agreement to combine with AltaGas in an all cash transaction valued at approximately $6.4 billion. Subject to the conditions set forth in the Merger Agreement, including approvals by the PSC of MD and the PSC of DC, at the Effective Time (as defined in the Merger Agreement) of the Merger, WGL shareholders will receive $88.25 in cash, without interest, for each share of WGL common stock issued and outstanding immediately prior to the Effective Time. The Boards of Directors of each of WGL and AltaGas have unanimously approved the Merger, which is expected to close in the second calendar quarter of 2018.
For further information on the Merger, see "Safe Harbor and Forward-Looking Statements" in the Introduction and Item I, Note 17 — Planned Merger with AltaGas Ltd. to the Condensed Consolidated Financial Statements.
CRITICAL ACCOUNTING POLICIES
Preparation of financial statements and related disclosures in compliance with Generally Accepted Accounting Principles in the United States of America requires the selection and the application of appropriate technical accounting guidance to the relevant facts and circumstances of our operations, as well as our use of estimates to compile the consolidated financial statements. The application of these accounting policies involves judgment regarding estimates and projected outcomes of future events, including the likelihood of success of particular regulatory initiatives, the likelihood of realizing estimates for legal and environmental contingencies, and the probability of recovering costs and investments in both the regulated utility and non-regulated business segments.
We have identified the following critical accounting policies that require our judgment and estimation, where the resulting estimates may have a material effect on the consolidated financial statements:
accounting for unbilled revenue;
accounting for regulatory operations — regulatory assets and liabilities;
accounting for income taxes;
accounting for contingencies;
accounting for derivatives;
accounting for fair value instruments;
accounting for investments;
impairment of long-lived assets;
principles of consolidation and non-controlling interests and
accounting for pension and other post-retirement benefit plans.
WGL Holdings, Inc.
Washington Gas Light Company
Part I—Financial Information
Item 2—Management’s Discussion and Analysis of
Financial Condition and Results of Operations (continued)
For a description of these critical accounting policies, refer to Management’s Discussion within our combined Annual Report on Form 10-K for WGL and Washington Gas for the fiscal year ended September 30, 2017. There were no new critical accounting policies or changes to our critical accounting policies during the three month period ended December 31, 2017.
WGL Holdings, Inc.
Washington Gas Light Company
Part I—Financial Information
Item 2—Management’s Discussion and Analysis of
Financial Condition and Results of Operations (continued)
WGL HOLDINGS, INC.
RESULTS OF OPERATIONS—OPERATIONS—Three Months Ended December 31, 2017September 30, 2019 vs. December 31, 2016September 30, 2018
Summary Results
A net loss of $65.8 million was reported for the three months ended September 30, 2019 compared to a net loss of $181.2 million for the same period ended September 30, 2018. The increase of $115.4 million was mainly due higher expenses related to Merger commitments and related expenses recorded in the prior period, offset by lower net revenues associated with the impact of rate cases, including revised amortizations of excess deferred taxes.
Our chief operating decision maker utilizes earnings before interest, tax, depreciation and tax (EBIT)amortization (EBITDA) as the primary measure of profit and loss in assessing the results of each segment’s operations. EBITEBITDA includes operating income and other income (expense) and earnings from unconsolidated affiliates and is adjusted by amounts attributable to non-controlling interests.. We believe that our use of EBITEBITDA enhances the ability to evaluate segmentWashington Gas’ performance because it excludes interest and income tax expense, which are affected by corporate-wide strategies of AltaGas such as capital financing and tax sharing allocations. It also excludes depreciation and amortization which do not affect cash flow.
EBITEBITDA should not be considered an alternative to, or a more meaningful indicator of our operating performance than net income. Refer to summary results below for a reconciliation of EBIT
The following table reconciles EBITDA to net income applicable to common stock.
Summary Results
For the three months ended December 31, 2017, WGL reported net income applicable to common stock of $138.0 million, or $2.68 per share, compared to net income of $58.0 million, or $1.13 per share, reported for the three months ended December 31, 2016. For each of the twelve month periods ended December 31, 2017September 30, 2019 and 2016, we earned a return on average common equity of 17.9% and 11.5%, respectively. The income tax expense for the three months ended December 31, 2017 includes $52.9 million benefit resulting from the re-measurement of accumulated deferred income taxes in connection with the Tax Act. Refer to the "Consolidated Income Taxes" section below for a detailed discussion of the Tax Act.2018.
The following table summarizes our EBIT by operating segment for the three months ended December 31, 2017 and 2016.
|
| | | | | | | | | | | |
| Analysis of Consolidated Results |
| Three Months Ended December 31, | | Increase/ |
| (In millions) | 2017 | | 2016 | | (Decrease) |
| EBIT: | | | | | |
| Regulated utility | $ | 98.4 |
| | $ | 102.7 |
| | $ | (4.3 | ) |
| Retail energy-marketing | 3.7 |
| | 29.2 |
| | (25.5 | ) |
| Commercial energy systems | 5.6 |
| | 4.7 |
| | 0.9 |
|
| Midstream energy services | 22.2 |
| | (28.5 | ) | | 50.7 |
|
| Other activities | (4.2 | ) | | (1.2 | ) | | (3.0 | ) |
| Intersegment eliminations | 1.7 |
| | 1.1 |
| | 0.6 |
|
| Total | $ | 127.4 |
| | $ | 108.0 |
| | $ | 19.4 |
|
| Interest expense | 20.2 |
| | 16.2 |
| | 4.0 |
|
| Income tax (benefit) expense | (31.1 | ) | | 33.5 |
| | (64.6 | ) |
| Dividends on Washington Gas preferred stock | 0.3 |
| | 0.3 |
| | — |
|
| Net income applicable to common stock | $ | 138.0 |
| | $ | 58.0 |
| | $ | 80.0 |
|
| EARNINGS PER AVERAGE COMMON SHARE | | | | | |
| Basic | $ | 2.69 |
| | $ | 1.13 |
| | $ | 1.56 |
|
| Diluted | $ | 2.68 |
| | $ | 1.13 |
| | $ | 1.55 |
|
|
| | | | | | | | | | |
| Three Months Ended September 30, | | |
| (In millions) | 2019 | 2018 | | Increase/(Decrease) |
| Net income (loss) | $ | (65.8 | ) | $ | (181.2 | ) | | $ | 115.4 |
|
| Interest expense | 15.6 |
| 14.4 |
| | 1.2 |
|
| Income tax expense (benefit) | (19.3 | ) | (69.1 | ) | | 49.8 |
|
| Depreciation and amortization | 34.4 |
| 33.9 |
| | 0.5 |
|
| EBITDA | $ | (35.1 | ) | $ | (202.0 | ) | | $ | 166.9 |
|
WGL Holdings, Inc.
Washington Gas Light Company
Part I—Financial InformationII
Item 2—Management’s2-Management’s Discussion and Analysis of
Financial Condition and Results of Operations (continued)
Regulated Utility OperatingThe higher EBITDA for the quarter ended September 30, 2019 compared to the quarter ended September 30, 2018 reflects higher expenses related to Merger commitments and related expenses recorded in the prior period, offset by lower net revenues associated with the impact of rate cases and lower unrealized mark-to-market valuations.
Summary Financial Results
The following table summarizes the regulated utility segment’sCompany’s financial data for the three months ended December 31, 2017September 30, 2019 and 2016.three months ended September 30, 2018, reconciling operating revenues to EBITDA for the three months ended September 30, 2019 and 2018.
|
| | | | | | | | | | |
| Three Months Ended September 30, | | |
| (In millions) | 2019 | 2018 | | Increase/(Decrease) |
| Net revenues | | | | |
| Operating revenues | $ | 122.3 |
| $ | 139.0 |
| | $ | (16.7 | ) |
| Less: Cost of gas | $ | 33.4 |
| 20.9 |
| | 12.5 |
|
| Revenue taxes | 11.6 |
| 11.7 |
| | (0.1 | ) |
| Total net revenues | 77.3 |
| 106.4 |
| | (29.1 | ) |
| Operation and maintenance | 101.2 |
| 282.8 |
| | (181.6 | ) |
| General taxes and other assessments | 14.7 |
| 15.2 |
| | (0.5 | ) |
| Other income (expense) | 3.5 |
| (10.4 | ) | | 13.9 |
|
| EBITDA | $ | (35.1 | ) | $ | (202.0 | ) | | $ | 166.9 |
|
|
| | | | | | | | | | | |
| Regulated Utility Financial Data |
| Three Months Ended December 31, | | Increase/ |
| (In millions) | 2017 | | 2016 | | (Decrease) |
Utility net revenues(1): | | | | | |
| Operating revenues | $ | 377.5 |
| | $ | 334.0 |
| | $ | 43.5 |
|
| Less: Cost of gas | 124.7 |
| | 82.4 |
| | 42.3 |
|
| Revenue taxes | 24.0 |
| | 22.1 |
| | 1.9 |
|
| Total utility net revenues | 228.8 |
| | 229.5 |
| | (0.7 | ) |
| Operation and maintenance | 78.4 |
| | 81.2 |
| | (2.8 | ) |
| Depreciation and amortization | 34.1 |
| | 30.6 |
| | 3.5 |
|
| General taxes and other assessments | 16.1 |
| | 14.2 |
| | 1.9 |
|
| Other expenses—net | 1.8 |
| | 0.8 |
| | 1.0 |
|
| EBIT | $ | 98.4 |
| | $ | 102.7 |
| | $ | (4.3 | ) |
(1)We also utilizeutility net revenues, calculated as revenues less the associated cost of energy and applicable revenue taxes,toassist in the analysis ofprofitabilityfor the regulated utility segment. profitability. The cost of the natural gas commodity (as adjusted for Asset Optimization sharing) and revenue taxes are generally included in the rates that Washington Gas charges to customers as reflected in operating revenues. Accordingly, changes in the cost of gas and revenue taxes associated with sales made to customers generally have no direct effect on utility net revenues, operating income or net income.Utility net Net revenues should not be considered an alternative to, or a more meaningful indicator of our operating performance than, operating income.revenues. Additionally, utility net revenues may not be comparable to similarly titled measures of other companies. The table above reconciles net revenues to operating revenues for the three months ended September 30, 2019 and 2018 as part of the reconciliation of operating revenues to EBITDA.
EBIT reflectsThe following table provides the following:
higher customer growth;
new base rates in Virginia andkey factors contributing to the District of Columbia; and
lower operation and maintenance expenses primarily due to lower employee benefit costs.
More than offsetting these favorable variances were:
lower realized and unrealized margins associated with our asset optimization program;
higher depreciation and amortization expenses associated with the implementation of our new billing systemchange in the second quarter of the prior year as well as growth in our utility plant.
net revenues between three months ended September 30, 2019 and 2018.
|
| | | |
| Composition of Changes in Net Revenues |
| (In millions) | Increase/(Decrease) |
| Accelerated replacement programs | $ | 3.1 |
|
| Impact of rate cases |
|
| Tax Act refund adjustment | (13.3 | ) |
| Reserve for rate refund | (7.0 | ) |
| Other impact of rate cases | (3.6 | ) |
| Asset optimization: | |
| Realized margins | 0.8 |
|
| Unrealized mark-to-market valuations | (9.8 | ) |
| Other | 0.7 |
|
| Total | $ | (29.1 | ) |
WGL Holdings, Inc.
Washington Gas Light Company
Part I—Financial InformationII
Item 2—Management’s2-Management’s Discussion and Analysis of
Financial Condition and Results of Operations (continued)
Utility Net Revenues. The following table provides the key factors contributing to the changes in the utility net revenues of the regulated utility segment between the three months ended December 31, 2017 and 2016.
|
| | | |
| Composition of Changes in Utility Net Revenues |
| (In millions) | Increase/ (Decrease) |
| Customer growth | $ | 2.5 |
|
| Estimated effects of weather and consumption patterns | 0.6 |
|
| Impact of rate cases | 11.4 |
|
| Asset optimization: | |
| Realized margins | (1.6 | ) |
| Unrealized mark-to-market valuations | (16.9 | ) |
| Revenue taxes | 1.9 |
|
| Other | 1.4 |
|
| Total | $ | (0.7 | ) |
Customer growthAccelerated replacement programs — Average active customer meters increased forApproved accelerated replacement programs are in place with an associated surcharge mechanism to recover the three months ended December 31, 2017, compared to the same period of the prior fiscal year.cost, including a return, on those capital investments.
Estimated effects of weather and consumption patterns — Weather, when measured by heating degree days (HDDs), was 1.8% colder and 9.3% warmer than normal for the three months ended December 31, 2017 and 2016, respectively. In the District of Columbia, Washington Gas does not have a weather normalization billing mechanism nor does it hedge to offset the effects of weather. As a result, the colder weather for the three months ended December 31, 2017, resulted in a positive variance to net revenues. In addition, natural gas consumption patterns may also be affected by non-weather related factors such as customer conservation. Refer to the section entitled " Weather Risk" for a discussion of billing mechanisms in Maryland and Virginia, which are designed to eliminate the net revenue effects of variations in customer usage caused by weather and other factors such as conservation.
Impact of rate cases— — The decrease in net revenues primarily reflects the impact of the HE’s report regarding the Company’s pending Virginia rate case. The report recommends a shorter amortization period of both excess deferred taxes and revenues collected based on the previous federal tax rate. The report also recommends no increase in revenue reflectsto base rates, and accordingly net revenues reflect a higher reserve recorded against new base rates put in the District of Columbia, effective March 24, 2017 and in Virginia, effective November 28, 2016.effect January 1, 2019. Refer to " “Rates and Regulatory Matters"Matters” for further discussion of these matters.
Asset optimization — — We recorded a net loss of $1.3 million including an unrealized loss of $1.4$6.5 million associated with our energy-related derivatives for the three monthsquarter ended December 31, 2017,September 30, 2019, compared to a net gain of $7.7 million including an unrealized gain of $15.4$3.3 million reported for the same period of the prior fiscal year.quarter ended September 30, 2018. When these derivatives settle, any unrealized amounts will ultimately reverse and Washington Gas willexpects to realize margins in combination with related transactions that these derivatives economically hedge. The changelarge swings in the valuations isare partially due to movements in unobservable inputs used in the valuation of long-dated forward contracts. We believe that these values are not reflective of our ultimate cash flows as these purchases are utilized in the optimization of our long-term natural gas transportation and storage capacity resources, the value of which is not reflected at fair value. Refer to the section entitled “Market Risk—Price Risk Related to the Regulated Utility Segment”Risk” for further discussion of our asset optimization program.
WGL Holdings, Inc.
Washington Gas Light Company
Part I—Financial Information
Item 2—Management’s Discussion and Analysis of
Financial Condition and Results of Operations (continued)
Operation and Maintenance Expenses.
The following table provides the key factors contributing to the changes in operation and maintenance expenses of the regulated utility segment forbetween reporting periods.
|
| | | |
| Composition of Changes in Operation and Maintenance Expenses |
| (In millions) | Increase/(Decrease) |
| Merger commitments and related expenses | $ | (190.4 | ) |
| Employee labor costs | 5.5 |
|
| Other | 3.3 |
|
| Total | $ | (181.6 | ) |
Merger commitments and related expenses— During the three months ended December 31, 2017September 30, 2018, we recorded costs for accrued bill credits to customers, an accrual for our commitment of community support, employee benefits related severance, retention and 2016.acceleration of incentive plans, and an impairment that was booked as part of the Merger with AltaGas. See
|
| | | |
| Composition of Changes in Operation and Maintenance Expenses |
| (In millions) | Increase/ (Decrease) |
| Employee incentives, direct labor costs and benefits | $ | (3.0 | ) |
| System safety and integrity | 1.0 |
|
| Support services | (2.0 | ) |
| Uncollectible accounts | 1.7 |
|
| Other | (0.5 | ) |
| Total | $ | (2.8 | ) |
Employee incentives, direct labor costs and benefits — — The decrease in expensequarter-over-quarter variance is primarily due to lower pension and post-retirement benefit costs resulting from an increase in the discount rate.employees and higher salaries.
System safety and integrity — The increase in expense for the three months ended December 31, 2017 over the same period of the previous fiscal year reflects increased safety and reliability activities.
Support services — The decrease in expense for the three months ended December 31, 2017 over the same period of the previous fiscal year was due to lower information technology project costs.
Uncollectible Accounts — The increase in expense for the three months ended December 31, 2017 over the same period of the previous fiscal year was primarily due to higher delinquencies in customer accounts receivable balances, resulting from the suspension of dunning activities during the stabilization period of our new billing system.
WGL Holdings, Inc.
Washington Gas Light Company
Part I—Financial Information
Item 2—Management’s Discussion and Analysis of
Financial Condition and Results of Operations (continued)
Retail Energy-Marketing
The following table depicts the retail energy-marketing segment’s financial data along with selected statistical data for the three months ended December 31, 2017 and 2016. |
| | | | | | | | | | | |
| Retail Energy-Marketing Financial and Statistical Data |
| | Three Months Ended December 31, | | Increase/ |
| (In millions) | 2017 | | 2016 | | (Decrease) |
| Operating Results | | | | | |
Gross margins(1): | | | | | |
| Operating revenues | $ | 248.7 |
| | $ | 298.7 |
| | $ | (50.0 | ) |
| Less: Cost of energy | 228.2 |
| | 254.2 |
| | (26.0 | ) |
| Revenue taxes | 3.0 |
| | 2.7 |
| | 0.3 |
|
| Total gross margins | 17.5 |
| | 41.8 |
| | (24.3 | ) |
| Operation expenses | 12.0 |
| | 11.1 |
| | 0.9 |
|
| Depreciation and amortization | 0.3 |
| | 0.3 |
| | — |
|
| General taxes and other assessments | 1.5 |
| | 1.2 |
| | 0.3 |
|
| Other income (expenses) — net | — |
| | — |
| | — |
|
| EBIT | $ | 3.7 |
| | $ | 29.2 |
| | $ | (25.5 | ) |
Analysis of gross margins (In millions) | | | | | |
| Natural gas | | | | | |
| Realized margins | $ | 8.7 |
| | $ | 7.7 |
| | $ | 1.0 |
|
| Unrealized mark-to-market gains (losses) | (3.0 | ) | | 14.1 |
| | (17.1 | ) |
| Total gross margins—natural gas | $ | 5.7 |
| | $ | 21.8 |
| | $ | (16.1 | ) |
| Electricity | | | | | |
| Realized margins | $ | 11.6 |
| | $ | 14.9 |
| | $ | (3.3 | ) |
| Unrealized mark-to-market gains | 0.2 |
| | 5.1 |
| | (4.9 | ) |
| Total gross margins—electricity | $ | 11.8 |
| | $ | 20.0 |
| | $ | (8.2 | ) |
| Total gross margins | $ | 17.5 |
| | $ | 41.8 |
| | $ | (24.3 | ) |
| Other Retail Energy-Marketing Statistics | | | | | |
| Natural gas | | | | | |
Therm sales (millions of therms) | 198.8 |
| | 220.5 |
| | (21.7 | ) |
Number of customers (end of period) | 113,500 |
| | 126,400 |
| | (12,900 | ) |
| Electricity | | | | | |
Electricity sales (millions of kWhs) | 2,801.4 |
| | 3,103.2 |
| | (301.8 | ) |
Number of accounts (end of period) | 108,900 |
| | 122,600 |
| | (13,700 | ) |
| |
(1)
| We utilize gross margins to assist with the analysis of profitability for the retail energy-marketing segment. Gross margins are calculated as revenues less the associated cost of energy and applicable revenue taxes. We consider gross margins to be a better reflection of performance than gross revenues or gross energy costs for our retail energy-marketing segment because gross margins are a direct measure of the success of our core strategy for the sale of natural gas and electricity. Gross margins should not be considered an alternative to, or a more meaningful indicator of our operating performance than, operating income. Additionally, gross margins may not be comparable to similarly titled measures of other companies. |
The decrease in EBIT reflects: (i) lower unrealized mark-to-market valuation on energy-related derivatives due to fluctuating market prices for derivatives related to natural gas and electricity in the current period; (ii) lower realized electric margins due to lower average unit margins and lower sales volume; and (iii) higher operating expenses. Period-to-period comparisons of quarterly gross margins for this segment can vary significantly and are not necessarily representative of expected annualized results.
Commercial Energy Systems
The table below represents the financial results of the commercial energy systems segment for the three months ended December 31, 2017 and 2016.
WGL Holdings, Inc.
Washington Gas Light Company
Part I—Financial Information
Item 2—Management’s Discussion and Analysis of
Financial Condition and Results of Operations (continued)
|
| | | | | | | | | | | |
| Commercial Energy Systems Segment Financial Information |
| Three Months Ended December 31, | | Increase/ |
| (In millions) | 2017 | | 2016 | | (Decrease) |
| Operating revenues | $ | 20.1 |
| | $ | 14.9 |
| | $ | 5.2 |
|
| Operating expenses: | | | | | |
| Cost of sales | 8.0 |
| | 6.0 |
| | 2.0 |
|
| Operations | 6.3 |
| | 5.9 |
| | 0.4 |
|
| Depreciation and amortization | 6.6 |
| | 4.4 |
| | 2.2 |
|
| General taxes and other assessments | 0.2 |
| | 0.1 |
| | 0.1 |
|
| Operating expenses | $ | 21.1 |
| | $ | 16.4 |
| | $ | 4.7 |
|
| Equity earnings | — |
| | 2.4 |
| | (2.4 | ) |
| Other income | 0.9 |
| | 1.3 |
| | (0.4 | ) |
| Less: Non-controlling interest | (5.7 | ) | | (2.5 | ) | | (3.2 | ) |
| EBIT | $ | 5.6 |
| | $ | 4.7 |
| | $ | 0.9 |
|
| EBIT by division: | | | | | |
| Energy-efficiency contracting | $ | (0.6 | ) | | $ | (0.5 | ) | | $ | (0.1 | ) |
| Commercial distributed generation | (0.5 | ) | | 1.2 |
| | (1.7 | ) |
| Investments in distributed generation | 6.7 |
| | 4.0 |
| | 2.7 |
|
| Total | $ | 5.6 |
| | $ | 4.7 |
| | $ | 0.9 |
|
The increase in EBITother income (expense) between periods reflects higher earnings from our investment distributed generation business, including investmentsincreased costs in tax equity partnerships, partially offset by higher operating expenses in our commercial distributed business.
Additionally, not reflected in EBIT is the amortization of investment tax credits related to our distributed generation assets which were $1.7 million and $1.4 million for the three months ended December 31, 2017 and 2016, respectively.
WGL Holdings, Inc.
Washington Gas Light Company
Part I—Financial Information
Item 2—Management’s Discussion and Analysis of
Financial Condition and Results of Operations (continued)
Midstream Energy Services
The table below represents the financial results of the midstream energy services segment for the three months ended December 31, 2017 and 2016.
|
| | | | | | | | | | | |
| Midstream Energy Services Segment Financial Information |
| Three Months Ended December 31, | | Increase/ |
| (In millions) | 2017 | | 2016 | | (Decrease) |
Operating revenues (a) | $ | 17.7 |
| | $ | (25.0 | ) | | $ | 42.7 |
|
| Operating expenses | 1.4 |
| | 1.4 |
| | — |
|
| Equity earnings | 5.9 |
| | (2.1 | ) | | 8.0 |
|
| EBIT | $ | 22.2 |
| | $ | (28.5 | ) | | $ | 50.7 |
|
(a) The trading margins of Midstream Energy Services, including unrealized gains and losses on derivative instruments, are netted within operating revenues.
Improved results for the quarter primarily reflect: (i) higher valuations and realized margins related to storage inventory and the associated economic hedging transactions, (ii) higher realized and unrealized margins on our transportation strategies, and (iii) higher income related to our pipeline investments.
Although realized margins on our transportation strategies have increased quarter-over-quarter, both periods reflect losses associated with certain gas purchases from Antero beginning in January 2016. The index price used to invoice these purchases had been the subject of an arbitration proceeding: however, in February 2017, the arbitral tribunal ruled in favor of Antero. Losses realized during the three months ended December 31, 2017 and 2016 were $3.5 million and $6.8 million, respectively, associated with this purchase contract. Accumulated losses from the inception of the contract are $28.4 million. In March 2017, we filed suit in state court in Colorado relatedprior year due to the delivery point to which the gas is being delivered by Antero. The state court granted Antero's motion to dismiss the case and the case is currently on appeal.commitment for charitable contributions.
Separately, Antero has initiated suit against Washington Gas and WGL Midstream claiming that they have failed to purchase specified daily quantities of gas and seeking alleged cover damages exceeding $80 million as of October 24, 2017, which amount continues to accumulate daily according to Antero's complaint. Washington Gas and WGL Midstream oppose both the validity and amount of Antero's claim. WGL believes the probability that Antero could succeed in collecting these penalties is remote and therefore, no accrual was made as of December 31, 2017.
In December 2017, WGL Midstream amended its purchase contract with Antero and, effective February 1, 2018, will no longer be obligated to purchase gas at the delivery point that is the subject of these disputes. Refer to Note 13 - Commitments and Contingencies of the Notes to Consolidated Financial Statements for further discussion of this matter.
As of December 31, 2017, WGL Midstream held a $38.2 million equity method investment in Constitution Pipeline Company, LLC (Constitution). On April 22, 2016, the New York State Department of Environmental Conservation denied Constitution's application for a Section 401 Certification for the pipeline, which is necessary for the construction and operation of the pipeline. Constitution has pursued various actions to obtain approval for the pipeline, including filing a petition with the Federal Energy Regulatory Commission (FERC) that was denied in January 2018. While further actions may be successful in obtaining approval for construction, based on the FERC's ruling, we expect to record an impairment charge of up to $38.2 million in the second quarter. No impairment charge for this investment is included in our first quarter results.
Other Non-Utility Activities
Transactions that are not significant enough on a stand-alone basis to warrant treatment as an operating segment, and that do not fit into one of our four operating segments, are aggregated as “Other Activities” and included as part of non-utility operations. Our other non-utility activities reflect EBIT of $(4.2) million and $(1.2) million for the three months ended December 31, 2017 and 2016, respectively. The decrease in EBIT primarily relates to higher costs associated with the proposed Merger with AltaGas.
Intersegment Eliminations
WGL Holdings, Inc.
Washington Gas Light Company
Part I—Financial Information
Item 2—Management’s Discussion and Analysis of
Financial Condition and Results of Operations (continued)
Intersegment eliminations include any mark-to-market valuations associated with trading activities between WGL Midstream and WGL Energy Services, and timing differences between Commercial Energy Systems’ recognition of revenue for the sale of REC's to Retail Energy-Marketing and Retail Energy-Marketing’s recognition of the associated expense.
For further discussion of our financial performance by operating segment, refer to Note 10 - Operating Segment Reporting of the Notes to Condensed Consolidated Financial Statements.
Consolidated Interest Expense
The following table shows the components of WGL's consolidated interest expense for the three months ended December 31, 2017 and 2016. The increase in interest on long-term debt primarily reflects the issuance of additional long-term debt by both WGL and Washington Gas.
|
| | | | | | | | | | | |
| Composition of Consolidated Interest Expense |
| Three Months Ended December 31, | | Increase/ |
| (In millions) | 2017 | | 2016 | | (Decrease) |
| Interest on long-term debt | $ | 19.0 |
| | $ | 15.8 |
| | $ | 3.2 |
|
| Interest on short-term debt | 1.8 |
| | 1.0 |
| | 0.8 |
|
| Other net, including allowance for funds used during construction | (0.6 | ) | | (0.6 | ) | | — |
|
| Total | $ | 20.2 |
| | $ | 16.2 |
| | $ | 4.0 |
|
Consolidated Income Taxes
The following table shows WGL'sWashington Gas’ income tax expense and effective income tax rate for the three months ended December 31, 2017September 30, 2019 and 2016.2018.
|
| | | | | | | | | | | |
| Consolidated Income Taxes |
| Three Months Ended December 31, | | Increase/ |
| (In millions) | 2017 | | 2016 | | (Decrease) |
| Income before income taxes | $ | 101.5 |
| | $ | 89.2 |
| | $ | 12.3 |
|
| Income tax (benefit) expense | (31.1 | ) | | 33.5 |
| | (64.6 | ) |
| Effective income tax rate | (30.6 | )% | | 37.6 | % | | (68.2 | )% |
| Income tax (benefit) expense | (31.1 | ) | | 33.5 |
| | (64.6 | ) |
| Less Discrete re-measurement impact of Tax Act | (52.9 | ) | | — |
| | (52.9 | ) |
| Income tax expense excluding discrete re-measurement impact | 21.8 |
| | 33.5 |
| | (11.7 | ) |
| Effective income tax rate excluding discrete re-measurement impact | 21.5 | % | | 37.6 | % | | (16.1 | )% |
|
| | | | | | | | |
| Income Taxes |
| Three Months Ended September 30, | | Increase/ |
| (In millions) | 2019 | 2018 | | (Decrease) |
| Income (loss) before income taxes | (85.1 | ) | (250.3 | ) | | $ | 165.2 |
|
| Income tax expense (benefit) | (19.3 | ) | (69.1 | ) | | 49.8 |
|
| Effective income tax rate | 22.7 | % | 27.6 | % | | (4.9 | ) |
The decrease in the effective income tax rate is due to the enactment of the Tax Act.
The Tax Act was enacted on December 22, 2017. The Tax Act substantially reforms the Tax Code and impacts individuals, corporations and pass-through entities. Some provisions of the Tax Act are temporary while others are permanent. In addition, there are transition rules, phase-out provisions, and phase-in provisions. Certain key domestic provisions of the Tax Act are described below, with some provisions subject to further guidance and interpretation by Treasury. The impact of the Tax Act on the Company cannot be fully assessed until such guidance is issued and applied to the relevant facts.
Reduction in federal income tax rate to a flat rate of 21% effective January 1, 2018.
WGL Holdings, Inc.
Washington Gas Light Company
Part I—Financial InformationII
Item 2—Management’s2-Management’s Discussion and Analysis of
Financial Condition and Results of Operations (continued)
100% bonus depreciationWe use an estimated annual effective income tax rate for eligible assets (excluding public utility property) placedpurposes of determining the income tax provision during interim reporting periods. Therefore, the effective income tax rate for the quarter may include forecasted information that is expected to occur later in service after the year. The current period effective income tax rate reflects the impact of the HE’s report regarding the Company’s pending Virginia rate case
. Refer to “Rates and Regulatory Matters” for further discussion of these matters.
RESULTS OF OPERATIONS—Nine Months Ended September 27, 201730, 2019 vs. September 30, 2018
Summary Results
Net income was $26.6 million for the nine months ended September 30, 2019 compared to net loss of $84.6 million for the same period ended September 30, 2018. The increase of $111.2 million was mainly due to higher expenses related to Merger commitments and before January 1, 2023,related expenses recorded in the prior year.
The following table reconciles EBITDA to net income for the nine months ended September 30, 2019 and 2018.
|
| | | | | | | | | | |
| Nine Months Ended September 30, | | |
| (In millions) | 2019 | 2018 | | Increase/(Decrease) |
| Net income (loss) | $ | 26.6 |
| $ | (84.6 | ) | | $ | 111.2 |
|
| Interest expense | 45.1 |
| 43.5 |
| | 1.6 |
|
| Income tax expense (benefit) | 5.0 |
| (50.7 | ) | | 55.7 |
|
| Depreciation and amortization | 106.6 |
| 101.4 |
| | 5.2 |
|
| EBITDA | $ | 183.3 |
| $ | 9.6 |
| | $ | 173.7 |
|
The higher EBITDA for the nine months ended September 30, 2019 compared to the nine months ended September 30, 2018 primarily
reflects higher expenses related to Merger commitments and related expenses recorded in the prior period, offset by lower net revenues due to lower realized margins and lower unrealized mark-to-market gains associated with our asset optimization program.
Summary Financial Results
The following table summarizes the percentageCompany’s financial data for the nine months ended September 30, 2019 and nine months ended September 30, 2018, reconciling operating revenues to EBITDA for the nine months ended September 30, 2019 and 2018.
|
| | | | | | | | | | |
| Nine Months Ended September 30, | | |
| (In millions) | 2019 | 2018 | | Increase/(Decrease) |
| Net revenues | | | | |
| Operating revenues | $ | 914.4 |
| $ | 870.6 |
| | $ | 43.8 |
|
| Less: Cost of gas | 331.3 |
| 282.3 |
| | 49.0 |
|
| Revenue taxes | 57.7 |
| 58.6 |
| | (0.9 | ) |
| Total net revenues | 525.4 |
| 529.7 |
| | (4.3 | ) |
| Operation and maintenance | 300.4 |
| 461.8 |
| | (161.4 | ) |
| General taxes and other assessments | 49.0 |
| 49.7 |
| | (0.7 | ) |
| Other income (expenses) | 7.3 |
| (8.6 | ) | | 15.9 |
|
| EBITDA | $ | 183.3 |
| $ | 9.6 |
| | $ | 173.7 |
|
Net Revenues
The table above reconciles net revenues to operating revenues for the nine months ended September 30, 2019 and 2018 as part of bonus depreciation phasing outthe reconciliation of operating revenues to EBITDA.
Washington Gas Light Company
Part II
Item 2-Management’s Discussion and Analysis of
Financial Condition and Results of Operations (continued)
The following table provides the key factors contributing to the change in the net revenues between the nine months ended September 30, 2019 and 2018.
|
| | | |
| Composition of Changes in Net Revenues |
| (In millions) | Increase/(Decrease) |
| Accelerated replacement programs | $ | 6.4 |
|
| Customer growth | 4.9 |
|
| Interruptible revenue (net of sharing) | 2.3 |
|
| Asset optimization: | |
| Realized margins | (5.5 | ) |
| Unrealized mark-to-market valuations | (11.7 | ) |
| Loss related to Antero Contract | (3.0 | ) |
| Impact of rate cases | |
| Net Tax Act refund adjustment | (9.5 | ) |
| Maryland rate case | 6.8 |
|
Other impact of rate cases
| 0.7 |
|
| Other | 4.3 |
|
| Total | $ | (4.3 | ) |
Accelerated replacement programs — Approved accelerated replacement programs are in place with an associated surcharge mechanism to recover the cost, including a return, on those capital investments.
Customer growth — Average active customer meters increased by 20 percent each year thereafterapproximately 13,000 at the nine months ended September 30, 2019, over the number of average active customer meters at the end of the same period of 2018. Washington Gas added 8,290 and 8,759 new customers in the nine months ended September 30, 2019 and 2018, respectively, supported by additional capital and rate base. Adding new customers directly drives earnings growth through December 31, 2026.additional distribution revenues.
For the regulated utility, the re-measurement
Interruptible revenue (net of certain deferred tax assetssharing) — The increase in Interruptible revenue, net of sharing, is due to higher rates in Maryland and liabilities at 21% resultslower margin sharing in District of Columbia.
Asset optimization — We recorded a net amountgain of $8.3 million including an unrealized gain of $0.1 million associated with our energy-related derivatives for the nine months ended September 30, 2019, compared to a net gain of $28.5 million including an unrealized gain of $11.8 million for the nine months ended September 30, 2018.
Loss related to Antero Contractunder Asset optimization— We recorded the net pre-tax loss of $3.0 million in “Utility cost of gas” on the statements of operations for the nine months ended September 30, 2019 due to the litigation related to the Antero Contract. Refer to Note 10 - Commitments and Contingency for further discussion.
Impact of rate cases — The decrease in net revenues primarily reflects the impact of the HE’s report regarding the Company’s pending Virginia rate case. The report recommends a shorter amortization period of both excess deferred taxes and revenues collected based on the previous federal tax rate, as well as no incremental base revenues. Partially offsetting these adjustments are new base rates in Maryland, effective December 2018. Refer to be refunded“Rates and Regulatory Matters” for further discussion of these matters.
Operation and Maintenance Expenses
The following table provides the key factors contributing to ratepayers. The Tax Act prescribes the Average Rate Assumption Method as the methodology for the refundchanges in operation and maintenance expenses between reporting periods.
Washington Gas Light Company
Part II
Item 2-Management’s Discussion and Analysis of certain excess deferred amounts for regulated public utilities with vintage asset records.
For tax years beginning after December 31, 2017, interest deductionsFinancial Condition and Results of unregulated trades or businesses are subject to a limitation of 30% of adjusted taxable income Interest deductions claimed by regulated public utilities are not limited under this provision. The rules for allocating interest between regulated and unregulated operations have not yet been issued.Operations (continued)
|
| | | |
| Composition of Changes in Operation and Maintenance Expenses |
| (In millions) | Increase/(Decrease) |
| Merger commitments and related expenses | $ | (185.6 | ) |
| Employee labor costs | 12.1 |
|
| Corporate allocated services | 8.5 |
|
| System safety and integrity | 6.4 |
|
| Other | (2.8 | ) |
| Total | $ | (161.4 | ) |
Merger commitments and related expenses— During the nine months ended September 30, 2018, we recorded costs for accrued bill credits to customers, an accrual for our commitment of community support, employee benefits related severance, retention and acceleration of incentive plans, and an impairment that was booked as part of the Merger with AltaGas.
Employee labor costs — The year-over-year variance is primarily due to an increase in employees and higher salaries.
Corporate allocated services— The increase in the current year over the prior year period is due to corporate shared services provided by AltaGas after the Merger close in July 2018. Over time, such costs are expected to be offset by reductions in other functional areas.
System safety and integrity — The increase in expense for the nine months ended September 30, 2019 over the same period of 2018 reflects increased safety and reliability activities including leak repair and mitigation.
Other income (expense)
The increase in other income (expenses) between periods reflects the commitment for charitable contributions in the prior year.
Depreciation and Amortization
The increase in depreciation and amortization between periods represents higher depreciation expense on capital additions.
Income Taxes
The following table shows Washington Gas’ income tax expense and effective income tax rate for the nine months ended September 30, 2019 and 2018.
|
| | | | | | | | |
| Income Taxes |
| Nine Months Ended September 30, | | Increase/ |
| (In millions) | 2019 | 2018 | | (Decrease) |
| Income (loss) before income taxes | 31.6 |
| (135.3 | ) | | $ | 166.9 |
|
| Income tax expense (benefit) | 5.0 |
| (50.7 | ) | | 55.7 |
|
| Effective income tax rate | 15.8 | % | 37.5 | % | | (21.7 | ) |
We use an estimated annual effective income tax rate for purposes of determining the income tax provision during interim reporting periods. Therefore, the effective income tax rate for the nine months ended September 30, 2019 may include forecasted information that is expected to occur later in the year. The current period effective income tax rate reflects the impact of the HE’s report regarding the Company’s pending Virginia rate case. Refer to Note 7 -“Rates and Regulatory Matters” Income Taxesfor further discussion of these matters.
Key Operating Statistics
Key gas delivery, weather and meter statistics are shown in the table below for the three and nine months ended September 30, 2019 and 2018.
Washington Gas Light Company
Part II
Item 2-Management’s Discussion and Analysis of
Financial Condition and Results of Operations (continued)
|
| | | | | | | | | | | | | | | | | |
| Gas Deliveries, Weather and Meter Statistics |
| | Three Months Ended September 30, | Increase/ | | Nine Months Ended September 30, | | Increase/ |
| | 2019 | | 2018 | | (Decrease) | | 2019 | | 2018 | | (Decrease) |
Gas Sales and Deliveries (millions of therms) | | | | | | | | | | | |
| Firm | 114.1 |
| | 113.6 |
| | 0.5 |
| | 954.9 |
| | 992.0 |
| | (37.1 | ) |
| Interruptible | 40.8 |
| | 46.3 |
| | (5.5 | ) | | 189.3 |
| | 178.3 |
| | 11.0 |
|
| Electric generation | 21.0 |
| | 40.2 |
| | (19.2 | ) | | 47.1 |
| | 148.5 |
| | (101.4 | ) |
Other
| 12.7 |
| | 13.8 |
| | (1.1 | ) | | 27.6 |
| | 30.3 |
| | (2.7 | ) |
| Total deliveries | 188.6 |
| | 213.9 |
| | (25.3 | ) | | 1,218.9 |
| | 1,349.1 |
| | (130.2 | ) |
| Degree Days | | | | | | | | | | | |
| Actual | — |
| | 1 |
| | (1 | ) | | 2,205 |
| | 2,422 |
| | (217 | ) |
| Normal | 16 |
| | 17 |
| | (1 | ) | | 2,463 |
| | 2,525 |
| | (62 | ) |
| Percent colder (warmer) than normal | (100.0 | ) | % | (94.1 | ) | % | n/a |
| | (10.5 | ) | % | (4.1 | ) | % | n/a |
|
| Average active customer meters | 1,190,000 |
| | 1,177,000 |
| | 13,000 |
| | 1,189,000 |
| | 1,176,000 |
| | 13,000 |
|
| Ending active customer meters | 1,188,909 |
| | 1,177,977 |
| | 10,932 |
| | 1,188,909 |
| | 1,177,977 |
| | 10,932 |
|
| New customer meters added | 3,000 |
| | 2,852 |
| | 148 |
| | 8,290 |
| | 8,759 |
| | (469 | ) |
Gas Service to Firm Customers
The volume of gas delivered to firm customers is highly sensitive to weather variability as a large portion of the Notesnatural gas delivered by Washington Gas is used for space heating. Washington Gas’ rates are established based on an assumption of normal weather. The tariffs in the Maryland and Virginia jurisdictions include RNA and WNA/CRA mechanisms, respectively, that are designed to, Condensed Consolidated Financial Statementsamong other things, eliminate the effects of weather variations on net revenues. (refer to the section entitled “Weather Risk” for a detailed discussion.further discussion of these mechanisms and other weather-related instruments included in our weather protection strategy).
Gas Service to Interruptible Customers
Washington Gas may curtail or interrupt service to this class of customer when the demand by firm customers exceeds specified levels. Per approved tariffs, Washington Gas has sharing mechanisms in all three jurisdictions where it shares a portion of interruptible margins with firm customers.
Gas Service for Electric Generation
Washington Gas delivers natural gas for use at two electric generation facilities in Maryland that are each owned by independent companies. Washington Gas shares with firm customers a significant majority of the margins earned from natural gas deliveries to these customers. Therefore, changes in the volume of interruptible gas deliveries to these customers do not materially affect either net revenues or net income.
LIQUIDITY AND CAPITAL RESOURCES
General Factors Affecting Liquidity
Washington Gas generally meets its liquidity and capital needs through cash on hand, retained earnings, the issuance of commercial paper and long-term debt, and equity infusions from its parent holding companies, routed through Wrangler. Access to short-term debt markets is necessary for funding our short-term liquidity requirements, the most significant of which include buying natural gas electricity and pipeline capacity, and financing both accounts receivable and storage gas inventory. We have accessed long-term capital markets primarily to fund both capital expenditures and investment activities and to retire long-term debt.
During the three months ended December 31, 2017, WGL met its liquidity and capital needs through cash on hand, retained earnings, reduced cash outflows resulting from deferred income taxes and the issuance of commercial paper and long-term debt. Washington Gas met its liquidity and capital needs through cash on hand, including the proceeds of long-term debt issued in the fourth fiscal quarter of 2017, retained earnings, and equity infusion from WGL, reduced cash outflows resulting from deferred income taxes and the issuance of commercial paper.
Our ability to access debt capital markets depends on our credit ratings, general market liquidity, and investor demand for our credit securities. TheIn addition, under Merger Agreement has placed certain restrictions on WGL’scommitments agreed to by Washington Gas during the Merger and other rules imposed by regulatory commissions or state laws in Washington Gas’ service territory, the Company is prohibited and/or restricted in its ability to access the capital markets. Please see Note 17 — Planned Merger with AltaGas Ltd. make advances or issue loans to an affiliate or parent holding company without prior regulatory commission approval.
Washington Gas Light Company
Part II
Item 2-Management’s Discussion and Analysis of
Financial Condition and Results of theNotes to Condensed Consolidated Financial Statementsfor a discussion of the proposed Merger. Operations (continued)
Our credit ratings depend largely on theour financial performance and the ratings of our subsidiaries,parent companies, WGL and aAltaGas. A ratings downgrade could both increase our borrowing costs and trigger the need for us to post additional collateral with our wholesale counterparties or other creditors. In support ofFurther, a negative change in WGL’s or AltaGas’ ratings outlook or any downgrade in their credit ratings could negatively impact our ratings outlook or downgrade our credit ratings, we haveratings. Such downgrades could limit our access to the credit markets and increase the costs of borrowing under available credit lines. Washington Gas has ring fencing measures in place that were further expanded during the Merger regulatory approval process. The ring-fencing measures financially separate Washington Gas from WGL, AltaGas and its non-utility affiliates as a goalway to maintain ourprotect consumers of regulated utility services from financial instability or bankruptcy that may be experienced by its parent or affiliates.
On September 13, 2019, Washington Gas issued an aggregate principal amount of $300 million and 3.65% fixed interest rate, medium-term notes that are due in September 2049. The proceeds from these notes will be used for general corporate purposes, including the retirement of short-term debt and $50 million long-term average common equity ratiodebt due in the 50% rangeNovember 2019, capital expenditures, acquisition of total consolidatedproperty and working capital over the long term. needs.
As of December 31, 2017,September 30, 2019, total consolidated capitalization, including current maturities of long-term debt and notes payable and project financing, comprised 38.5%50.2% common equity, 0.1% non-controlling interest, 0.7%0.9% preferred stock and 60.7% long-48.9% long and short-term debt. This capitalization ratio varies during the fiscal year primarily due to the seasonal nature of Washington Gas'Gas’ business. This seasonality also affects our short-term debt balances, which are typically higherSee discussion regarding seasonal impacts on working capital in the fallShort-Term Cash Requirements and winter months and substantially lower in the spring when a significant portion of Washington Gas' current assets are converted into cash at the end of the heating season. Our cash flow requirements and our ability to provide satisfactory resources to meet those requirements are primarily influenced by the activities of all of WGL’s operating segments.Related Financing below.
Our plans provide for sufficient liquidity to satisfy our financial obligations. Generally, pursuant to its Merger commitments, Washington Gas can make dividend payments in the ordinary course of business unless any of the following regulatory limitations apply: (i) Washington Gas will not pay extraordinary dividends to its parent for three years from the date of the Merger close, (ii) Washington Gas will not pay dividends to its parent company if Washington Gas’ senior unsecured debt rating is below investment grade or (iii) Washington Gas will not make a dividend payment to its parent company if the payment would result in its equity level to drop below 48%. At December 31, 2017,September 30, 2019, we had no significant restrictions on our cash balances or retained earnings that would affect the payment of common or preferred stock dividends by either WGL or Washington Gas.dividends.
Short-Term Cash Requirements and Related Financing
Washington Gas has seasonal short-term cash requirements to fund the purchase of storage gas inventory in advance of the winter heating season. At September 30, 2019 and December 31, 2017 and September 30, 2017,2018, Washington Gas had balances in gas storage of $85.0$92.5 million and $92.8$103.9 million, respectively. Washington Gas collects the cost of gas under cost recovery mechanisms approved by its regulators. Additionally, Washington Gas may be required to post cash collateral for certain purchases. Washington Gas is also subject to the collateral requirements of its counterparties. At September 30, 2019, Washington Gas was not required to post any cash collateral to counterparties.
DuringIn the first six monthsand fourth quarters of each fiscalcalendar year, Washington Gas’ large sales volumes cause its cash requirements to peak when combined storage inventory, accounts receivable, and unbilled revenues are at their highest levels. DuringIn the last six monthssecond and third quarters of each fiscalcalendar year, after the heating season, Washington Gas typically experiences a seasonal net loss due to reduced demand for natural gas. During this period, large amounts of Washington Gas’ current assets are converted to cash, which
WGL Holdings, Inc.
Washington Gas Light Company
Part I—Financial Information
Item 2—Management’s Discussion and Analysis of
Financial Condition and Results of Operations (continued)
Washington Gas generally uses to reduce and usually eliminate short-term debt and acquire storage gas for the next heating season.
Variations in the timing of customer collections under Washington Gas’ gas cost recovery mechanisms can significantly affect its short-term cash requirements. At September 30, 2019 and December 31, 2017 and September 30, 2017,2018, Washington Gas had $1.3$5.0 million and $2.0$2.2 million in net over-collections,under-collections from customers, respectively, of gas costs reflected in current liabilitiesassets as gas costs due tofrom customers. Amounts under-collected or over-collected that are generatedfrom customers during the current gas cost recovery cycle are deferred as a regulatory asset or liability on the balance sheet until September 1 of each year, at which time the accumulated amount is transferred to gas costs due from/to customers as appropriate. At September 30, 2019 and December 31, 2017 and September 30, 2017,2018, Washington Gas had a net regulatory asset of $31.6$12.4 million and $5.6$26.4 million, respectively, related to theunder-collections from customers related to each current gas recovery cycle.
WGL Energy Services and WGL Midstream have seasonal short-term cash requirements to fund the purchase of storage gas inventory in advance of the winter heating season. At December 31, 2017 and September 30, 2017, WGL Energy Services had balances in gas storage of $20.5 million and $33.1 million, respectively. WGL Energy Services collects revenues that are designed to reimburse commodity costs used to supply its retail customer contracts and wholesale counterparty contracts. At December 31, 2017 and September 30, 2017, WGL Midstream had balances in gas storage of $101.5 million and $118.2 million, respectively. As market opportunities arise, WGL Midstream may physically sell the inventory on the wholesale natural gas market, or economically hedge the inventory with financial derivative contracts. WGL Energy Services and WGL Midstream derive funding to finance these activities from short-term debt issued by WGL, which is made available through the money pool as discussed below. Additionally, WGL Energy Services and WGL Midstream may be required to post cash collateral for certain transactions. WGL Energy Services and WGL Midstream may be required to provide parent guarantees from WGL for certain transactions.
In addition to storage gas, WGL Midstream also has cash requirements to fund the capital requirements of its various infrastructure investments. At December 31, 2017 and September 30, 2017, WGL Midstream had investments of $489.4 million and $384.6 million related to these investments, respectively. WGL Midstream initially funds capital calls related to these investments from short-term debt issued by WGL.
WGL Energy Systems has cash requirements to fund the construction and purchase of residential and commercial distributed generation systems. WGL Energy Systems initially finances these activities through short-term debt issued by WGL.
WGL and Washington Gas useuses short-term debt in the form of commercial paper or unsecured short-term bank loans to fund seasonal cash requirements. Our policy is to maintain back-up bank credit facilities in an amount equal to or greater than our expected maximum commercial paper position.
WGL andOn July 19, 2019, Washington Gas each have credit facilities. Theentered into an amended and restated senior unsecured revolving credit facility for WGLwith a term of five years, plus two one-year extension options, available with the bank group’s approval. The Credit Facility amended and restated Washington Gas’ prior $350 million credit facility and permits itWashington Gas to borrow up to $650.0 million. The credit$450 million with an option to increase the facility for Washington Gas permits it to borrow up to $350.0by an additional $100 million, and further permits, with the banks’bank group’s approval, additional borrowings of $100.0 million for a total potential maximum potential totalborrowing of $450.0$550 million. The interest rate onof loans made under each of the credit facilities iswill be a fluctuating rate per annum that iswill be set using certain parameters at the time each loan is made. WGL and Bank credit balance
Washington Gas incur credit facility fees, which in some cases are based on the long-term debt ratingsLight Company
Part II
Item 2-Management’s Discussion and Analysis of WGL
Financial Condition and Washington Gas. In the event that the long-term debt ratings are downgraded below certain levels, WGL and Washington Gas would be requiredResults of Operations (continued)
s available to pay higher fees. There are five different levels of fees. For WGL, under the terms of the credit facilities, the lowest level facility fee is 0.075% and the highest is 0.225%. For Washington Gas under the terms of theexisting credit facilities, the lowest level facility, fee is 0.06% and the highest is 0.175%. The facilities have a maturity date of December 19, 2019, and the credit agreements each provide WGL or Washington Gas with the right, as applicable, to request two additional one-year extensions, with the lenders’ approval. Bank credit balances available to WGL and Washington Gas, net of commercial paper balances were $308.1$333.0 million and $188.0$54.0 million, respectively, at December 31, 2017 and $268.0 million and $227.0 million, respectively, at September 30, 2017.2019 and December 31, 2018, respectively.
To manage credit risk, Washington Gas may require certain customers and suppliers to provide deposits, including collateral from wholesale counterparties, which arecounterparties. At September 30, 2019 and December 31, 2018, the total of these deposits and collateral reported as current liabilities in “Customer deposits and advance payments,” in the accompanying balance sheets. At December 31, 2017payments” were $42.9 million and September 30, 2017, “Customer$54.4 million, respectively. The majority of these balances are customer deposits and advance payments” totaled $54.7 million and $64.2 million, respectively. For Washington Gas, depositscustomer credit balances. Deposits from customers may be refunded at various times throughout the year based on customer payment habits. At the same time, other customers make new deposits that cause the balance of customer deposits to remain relatively steady. There are no restrictions on Washington Gas’ use of these customer deposits. Washington Gas pays interest to its customers on these deposits in accordance with the requirements of its regulatory commissions.
WGL Holdings, Inc.
Washington Gas Light In addition, customers may have credit balances due to budget credits, over payments and Company
Part I—Financial Information
Item 2—Management’s Discussion and Analysis provided credits. Budget credits, which is the most frequent type of
Financial Condition and Results of Operations (continued)
For WGL Energy Services and WGL Midstream, deposits typically represent collateral credit, occurs only for transactions with wholesale counterparties. These deposits may be reduced, repaid or increased at any time basedcustomers on the current value of WGL Energy Services’ or WGL Midstream’s net position withbudget bill program and happens normally in the counterparty. At December 31, 2017 and September 30, 2017, “Customer deposits and advance payments” totaled $0.5 million and $1.6 million, respectively, for WGL Midstream. There were no such deposits for WGL Energy Services at December 31, 2017 and September 30, 2017. Currently, there are no restrictions onwarmer months when customers’ actual bill is less than the use of deposited funds and interest is paid to the counterparty on these deposits in accordance with our contractual obligations.budget bill amount. Refer to the section entitled "“Credit Risk"Risk” for further discussion of our management of credit risk.
Project Financing
Washington Gas previously obtained third-party project financing on behalf of the federal government to provide funds during the construction of certain energy management services projects entered into under Washington Gas'Gas’ area-wide contract. In connection with work completed under the area-wide contract, theThe construction work is performed by WGL Energy Systems on behalf of Washington Gas and an inter-company payable is recorded for work provided by WGL Energy Systems. As work is performed,Gas. Washington Gas establishesrecorded a receivablecontract asset in “Unbilled revenues” representing the government'sgovernment’s obligation to remit principal and interest. The payableinterest and receivable are equal to each other at the end of the construction period, but there may be timing differencesfinancing obligation in the recognition of the project related payable and receivable during the construction period. When these projects are formally “accepted” by the government and deemed complete, Washington Gas assigns the ownership of the receivable to the third-party lender in satisfaction of the obligation and removes both the receivable and the obligation related to the financing from its financial statements. In March 2016 the SCC of VA denied Washington Gas' participation in the third party financing arrangement. At December 31, 2017 there were two contracts remaining totaling $43.8 million on the Washington Gas balance sheet as a short-term obligation to third party lenders in "Notes“Notes payable and project financing"financing”.
In December 2016, WGL Energy Systems entered into an agreement to obtain third-party financing and receive funds directly from the third-party lender during the construction period associated with the relatedAs of September 30, 2019, Washington Gas had no energy management service projects. As a result, Washington Gas will no longer be liable under future third-party financing arrangements, forservices projects entered into under the area-wide contract. The general terms of the financing agreement are the same as the prior financing arrangements betweenthat were financed through Washington Gas and the third-party lender mentioned above. Washington Gas will continue to record a receivable representing the government’s obligation, and will record an inter-company payable to WGL Energy Systems for the construction work performed for the same amount.
not yet complete. As of December 31, 2017, WGL and2018, Washington Gas recorded $94.6had $69.7 million and $85.4 million, respectively, in "Unbilled revenues"“Unbilled revenues” on the condensed balance sheet and $54.8$15.5 million and $43.8 million, respectively, in a corresponding short-term obligation to third-party lenders in "Notes“Notes payable and project financing",financing,” for energy management services projects that were not complete. As of September 30, 2017, WGL andfinanced through Washington Gas recorded $85.6 million and $78.2 million in "Unbilled revenues" onnot yet complete.
See Note 5-Short-Term Debt of the balance sheet and $54.8 million and $43.8 million, respectively, inNotes to Condensed Financial Statements for a corresponding short-term obligation to third-party lenders in "Notes payable andfurther discussion of project financing" for energy management services projects that were not complete. Because these projects are financed for government agencies that have minimal credit risk, and with which we have previous collection experience, neither WGL nor Washington Gas recorded a corresponding reserve for bad debts related to these receivables at December 31, 2017 or September 30, 2017.financing.
Long-Term Cash Requirements and Related Financing
The primary drivers of our long-term cash requirements includeare capital expenditures non-utility investments and long-term debt maturities. For the regulated utility segment, ourOur capital expenditures primarily relate to adding new utility customers and system supply as well asand maintaining the safety and reliability of Washington Gas’ distribution system. For our non-utility segments, our long-term cash requirements primarily depend on the level of investments and capital expenditures. For WGL Midstream, our investments primarily relate to providing capital for construction of the infrastructure investments. For WGL Energy Systems and WGSW, our investments primarily relate to providing capital for construction of distributed generation and commercial solar projects.
In connection with entering into the Merger Agreement, while the Merger is pending, WGL Holdings, Inc. will not raise capital using common equity issuances or using debt longer than two years in duration.
Previously, WGL and Washington Gas generated significant deferred taxes based on previous tax rates and policies, which reduced the Company’s need for long term financing. WGL is still evaluating the impact on future financing as a result of the Tax Act.
WGL Holdings, Inc.
Washington Gas Light Company
Part I—Financial Information
Item 2—Management’s Discussion and Analysis of
Financial Condition and Results of Operations (continued)
Refer to the section entitled “Capital Investments” for a discussion of our capital expenditures forecast.
Security Ratings
The table below reflects the current credit ratings for the outstanding debt instruments of WGL and Washington Gas. Changes in credit ratings may affect WGL’s and Washington Gas’ cost of short-term and long-term debt and our access to the capital markets. A security rating is not a recommendation to buy, sell or hold securities. Credit ratings are subject to revision or withdrawal at any time by the assigning rating organization and each rating should be evaluated independently of any other rating.
|
| | | | |
| | | | |
| WGL | | Washington Gas |
| Rating Service | | Senior Unsecured | | Commercial Paper | | Senior
Unsecured
| | Commercial
Paper
|
Fitch Ratings(a) | A- | A | | F2 | | A+ | | F1 |
Moody’s Investors Service(b) | A3 | | P-2 | | A1A2 | | P-1 |
Standard & Poor’s Ratings Services(c) | A- | BBB+ | | A-1 | | A | | A-1A-2 |
(a) The credit ratings by Fitch Ratings for Washington Gas were revised on July 10, 2018 and the long-term debt ratings outlook issued by Fitch Ratings for WGL and Washington Gas was adjusted to negative on October 13, 2016.stable.
(b) The long-term debtcredit ratings outlook issued by Moody’s Investors Service for WGL and Washington Gas was adjusted to negativewere revised on February 1, 2017.
(c) TheJuly 9, 2018 and the long-term debt ratings outlook issuedremained negative.
(c) The credit ratings by Standard & Poor’s Rating Services for WGL and Washington Gas was adjusted to negativewere revised on January 26, 2017.December 19, 2018 and the long-term debt ratings outlook remained negative.
Ratings Triggers and Certain Debt Covenants
WGL and Washington Gas pay credit facility fees, which in some cases are based on the long-term debt ratings of Washington Gas. Under the terms of WGL’s and Washington Gas'Gas’ revolving credit agreements, term loan facility and private placement notes, the ratio of consolidated financial indebtedness to consolidated total capitalization cannot exceed 0.65 to 1.0 (65.0%). As of December 31, 2017, WGL's andSeptember 30, 2019, Washington Gas' ratiosGas’ ratio of consolidated financial indebtedness to consolidated total capitalization were 61% and 50%, respectively.was 49%. In addition, WGL and Washington Gas areis required to inform lenders of changes in corporate existence, financial conditions, litigation and
Washington Gas Light Company
Part II
Item 2-Management’s Discussion and Analysis of
Financial Condition and Results of Operations (continued)
environmental warranties that might have a material effect on debt ratings. The failure to inform the lenders’ agent of material changes in these areas might constitute default under the agreements. Additionally, failure to pay principal or interest on any other indebtedness may be deemed a default under our credit agreements. A default, if not remedied, may lead to a suspension of further loans and/or acceleration in which obligations become immediately due and payable. In addition, certain of the credit facilities of Washington Gas contain cross-default provisions. At December 31, 2017,September 30, 2019, we were in compliance with all of the covenants under our revolving credit facilities.facilities, term loan facility, and private placement notes.
For certain of Washington Gas’ natural gas purchase and pipeline capacity agreements, the counterparty may withhold service or deliveries or may require additional credit support if the long-term debt of Washington Gas is downgraded below the lower of a BBB- rating by Standard & Poor’s or a Baa3 rating by Moody’s Investors Service, or if Washington Gas is deemed by a counterparty not to be creditworthy, thencreditworthy. For certain other agreements, the counterparty may withhold service or deliveries, or may require additional credit support. For certain other agreements,support if the counterparty’s credit exposure to Washington Gas exceeds a contractually defined threshold amount, or if Washington Gas’ credit rating declines by a certain rating level, then the counterparty may require additionallevel. Based on its current credit support. At December 31, 2017,ratings, Washington Gas would not be required to provide additional credit support to its counterparties for these arrangementsagreements if its long-term credit rating was to be downgraded by one rating level.
WGL guarantees payments for certain purchases of natural gas and electricity on behalf of WGL Energy Services and WGL Midstream (refer to “Contractual Obligations, Off-Balance Sheet Arrangements and Other Commercial Commitments” for further discussion of these guarantees). If the credit rating of WGL declines, WGL Energy Services and WGL Midstream may be required to provide additional credit support and credit enhancements for these purchase contracts. At December 31, 2017, WGL Energy Services would not be required to provide additional credit support for these arrangements if WGL's credit ratings were to decline by one rating level. At December 31, 2017, WGL Midstream would be required to provide $1.7 million of additional credit support for these arrangements if WGL's credit ratings were to decline by one rating level.
Historical Cash Flows
The following table summarizes WGL’sWashington Gas’ net cash provided by (used in)from operating, investing and financing activities for the threenine months ended December 31, 2017September 30, 2019 and 2016:
WGL Holdings, Inc.
Washington Gas Light Company
Part I—Financial Information
Item 2—Management’s Discussion and Analysis of
Financial Condition and Results of Operations (continued)
2018.
| | | Three Months Ended December 31, | | | Nine months ended September 30, | | Increase / (Decrease) |
| (In millions) | 2017 | | 2016 | | Variance | 2019 | 2018 | | 2019 vs. 2018 |
| Cash provided by (used in): | | | | | | |
| Cash from: | | | | |
| Operating activities | $ | (6.7 | ) | | $ | (90.5 | ) | | $ | 83.8 |
| $ | 254.1 |
| $ | 150.8 |
| | $ | 103.3 |
|
| Financing activities | $ | 265.8 |
| | $ | 314.9 |
| | $ | (49.1 | ) | $ | 41.5 |
| $ | 221.9 |
| | $ | (180.4 | ) |
| Investing activities | $ | (203.5 | ) | | $ | (217.1 | ) | | $ | 13.6 |
| $ | (318.9 | ) | $ | (314.3 | ) | | $ | (4.6 | ) |
Cash Flows Provided byFrom Operating Activities
The regulated utility’sWashington Gas’ cash flows from operating activities principally reflect gas sales and deliveries and the cost of operations. The volume of gas sales and deliveries is dependent primarily on factors external to the utility, such as growth of customer demand, weather, market prices for energy, economic conditions and measures that promote energy efficiency. UnderUnbilled revenue and weather normalization, ratemaking adjustments and decoupling mechanisms in place, changes in delivery volumes from levels assumed when rates were approved may affect the timing of cash flows but not net income. The price at which the utility provides energy to customers is determined in accordance with regulatory-approved tariffs. In general, changes in the utility’s cost of gas may affect the timing of cash flows but not net income because the costs are recovered in accordance with tariff provisions.rate agreements. In addition, the regulated utility’sWashington Gas’ cash flow is impacted by the timing of derivative settlements.
The non-utility cash flows from operating activities primarily reflect: (i) the timing of receipts related to distributed generation and federal projects in the commercial energy systems segment; (ii) the timing of receipts related to electric and gas bills and the timing of payments for the cost of the commodity for WGL Energy Services and (iii) the timing of gas purchases and sales resulting from trading activities at WGL Midstream. Both WGL Energy Services' and WGL Midstream's cash flows are impacted by the timing of derivative settlements.
Net income is the result of cash and non-cash (or accrual) transactions. Only cash transactions affect WGL’sWashington Gas’ cash flows from operating activities. Principal non-cash charges include depreciation, accrued or deferred pension and other post-retirement benefit costs and deferred income tax expense. Non-cash charges or credits may also be accrued under the revenue decoupling and cost reconciliation mechanisms in the utilities'utilities’ rate plans.
Net cash flows used inprovided by operating activities for the threenine months ended December 31, 2017September 30, 2019 was $6.7$254.1 million compared to net cash flows used inprovided by operating activities of $90.5$150.8 million for the threenine months ended December 31, 2016.September 30, 2018. The decreaseincrease in cash flows used inprovided by operating activities was primarily reflects settlementsdriven by cash payment of derivative instruments for WGL Midstream, increasesmerger commitments and related expenses in customer rates, and higher cash collections due to weather normalization.the prior period.
Cash Flows Provided byFrom Financing Activities
Cash flows provided by financing activities for the nine months ended September 30, 2019 totaled $265.8$41.5 million compared to $221.9 million for the threenine months ended December 31, 2017, comparedSeptember 30, 2018 mainly due to cash flows provided by financing activitiesincreased payments of $314.9short-term debts.
In September 2019, Washington Gas issued $300 million formedium-term note to fund its general corporate needs. For the same period of the prior year. This decrease in cash flows primarily reflects a reduction in the issuance of new debt and additional tax withholdings on stock based compensation.
Cash Flows Used in Investing Activities
During the threenine months ended December 31, 2017, cash flows used in investing activities totaled $203.5September 30, 2018, Washington Gas received $303 million compared to $217.1 million used in the three months ended December 31, 2016. This decrease in cash used is primarily due to the decrease in expenditures for Washington Gas' accelerated pipe replacement programs, partially offset by increased investments in non-utility interests.capital infusion from its parent company.
Pipeline Investments
Constitution Pipeline
WGL Midstream owns a 10% interest in Constitution Pipeline Company, LLC (Constitution). The pipeline project is designed to transport at least 650,000 dekatherms of natural gas per day from the Marcellus region in northern Pennsylvania to major northeastern markets. Fully contracted with long-term commitments from established natural gas producers currently operating in Pennsylvania, the pipeline is designed to originate from the Marcellus production areas in Susquehanna County, Pennsylvania, and interconnect with the Iroquois Gas Transmission and Tennessee Gas Pipeline systems in Schoharie County, New York. On December 2, 2014, the Federal Energy Regulatory Commission (FERC) issued an order granting a certificate of public convenience and necessity.
WGL Holdings, Inc.
Washington Gas Light Company
Part I—Financial InformationII
Item 2—Management’s2-Management’s Discussion and Analysis of
Financial Condition and Results of Operations (continued)
On April 22, 2016,Cash Flows From Investing Activities
Net cash flows used in investing activities totaled $318.9 million and $314.3 million for nine months ended September 30, 2019 and 2018, respectively, which primarily consists of utility capital expenditures made by Washington Gas.
Capital Investments
New Business
The Company’s utility service areas have a population estimated at 5.9 million and include approximately 2.2 million households and commercial structures. Washington Gas actively markets and adds new customers through both capital expenditures and different rate mechanisms aimed at bringing the New York State Departmentbenefits of Environmental Conservation (NYSDEC) denied Constitution’s applicationnatural gas, including lower energy bills and reduced carbon emissions to more residents in its territories. Washington Gas added 8,290 and 8,759 new customers in the nine months ended September 30, 2019 and 2018, respectively, supported by additional capital and rate base. Adding new customers directly drives earnings growth through additional distribution revenues.
Replacements, Regulatory Plans - Accelerated Pipe Replacement Plans
Accelerated pipe replacement programs are in place in all three of our jurisdictions. Washington Gas is accelerating pipe replacement in order to reduce risk and further enhance the safety and reliability of its pipeline system. Each regulatory commission with jurisdiction over Washington Gas’ retail rates has approved accelerated replacement programs with an associated surcharge mechanism to recover the cost, including a return, on those capital investments. Capital Expenditures excluding cost of removal for the accelerated pipe replacement programs during the nine months ended September 30, 2019 and 2018 was $119.6 million and $92.2 million respectively. Refer to Rates and Regulatory Matters for a Section 401 Certification forfurther discussion on rate case decisions during the pipeline, which is necessary for the construction and operation of the pipeline. In May 2016, Constitution filed actions in both the U.S. Circuit Court of Appeals for the Second Circuit and the U.S. District Court for the Northern periods.
District of New York, appealing the decision and seeking declaratory judgment that the State of New York’s permitting authority is preempted by federal law.Columbia Jurisdiction. In May 2016, Constitution appealed the NYSDEC’s denial of the Section 401 certification to the United States Court of Appeals for the Second Circuit, and in August 2017 the court issued a decision denying in part and dismissing in part Constitution’s appeal. The court expressly declined to rule on Constitution’s argument that the NYSDEC’s decision on Constitution’s Section 401 application constitutes a waiver of the certification requirement. Constitution has2013, Washington Gas filed a petition for rehearing with the Second Circuit Court's decision, butRevised Accelerated Pipe Replacement Plan (PROJECTpipes) in October the court denied our petition. In January 2018, Constitution petitioned the United States Supreme Courtwhich Washington Gas proposed to review the Second Circuit Court’s decision.
In October 2017 Constitution filed a petition for declaratory order requesting the FERC to find that, by operation of law, the Section 401 certification requirement for the New York State portion of Constitution’s pipeline project was waived due to the failure by the NYSDEC to act on Constitution’s Section 401 application within a reasonable period of time as required by the express terms of such statute. The petition was consistent with a recent decision byreplace bare and/or unprotected steel services, bare and targeted unprotected steel main, and cast iron main in its distribution system in the District of Columbia Circuit CourtColumbia. On January 29, 2015, the PSC of DC issued an order approving the settlement agreement and approving recovery through the surcharge of total project costs up to $110 million through September 30, 2019. On December 7, 2018, Washington Gas filed a request with the PSC of DC for approval of a Project Pipes 2 (PIPES 2 Plan) for the period of October 1, 2019 through December 31, 2024. As of September 5, 2019, the PSC of DC had not made final ruling on PIPES 2 Plan, and issued an order extending PROJECT pipes an additional six months through March 31, 2020, in another proceeding, in whichan amount not to exceed $12.5 million and directed the court clarified that an applicant facing similar circumstances should present evidenceparties to schedule a settlement conference within 15 days of waiverthe order. The parties have until December 13, 2019 to submit a settlement conference report.
Maryland Jurisdiction. In 2014, pursuant to the FERC. On January 11,STRIDE law in Maryland, the PSC of MD approved Washington Gas’ initial STRIDE Plan to recover the reasonable and prudent costs associated with qualifying infrastructure replacements through monthly surcharges. In 2015, the PSC of MD approved one additional program applicable to gas distribution and transmission system replacements and three of the four requested additional programs applicable to gas transmission system replacements at an incremental cost of $218.5 million, including cost of removal, in eligible infrastructure replacements over the remaining four years of the initial STRIDE Plan. In December 2018, the FERC denied the petition, finding that Section 401 provides thatCommission approved a state waives certification only when it does not act on an application within one year from the date5-year extension of the application. The project’s sponsors remain committedCompany’s STRIDE Plan. Washington Gas is authorized, under the extension, to invest $350.5 million, including cost of removal over the five-year calendar period through 2023. Minor adjustments were made to the project and plan to seek rehearing and, if necessary, appeal of the FERC’s decision. WGL Midstream held a $38.2 million equity method investment in Constitution at December 31, 2017. At December 31, 2017, we did not record any impairment charge to reduce the carrying value of our investment. In light of FERC’s ruling on January 11, 2018, however, we expect that we will record an impairment charge of up to $38.2 million, the current carrying amount of the investment,STRIDE Plan in the second quarter ending March 31, 2018. There could also be additional expenditures beyond this impairment; however, we believe that recoveries from the sale of the inventories held by Constitution will mostly offset these expenditures.2019.
ReferVirginia Jurisdiction. On April 21, 2011, the SCC of VA approved, pursuant to Note 11, Other Investmentsthe SAVE Act, Washington Gas’s initial plan under the SAVE Act for accelerated replacement of infrastructure facilities and a rider that would allow the NotesCompany to Condensed Consolidated Financial Statements for further discussionrecover eligible costs associated with those replacement programs. On November 21, 2017, the Commission approved the Company’s application to amend and extend its SAVE Act plan. Washington Gas is authorized to invest $500 million, including cost of this matter.
Meade
In February 2014, WGL Midstream and certain venture partners formed, and WGL Midstream acquired a 55% interest in Meade Pipeline Co LLC (Meade). Meade was formed to develop and own, jointly with Transcontinental Gas Pipe Line Company, LLC (Transco), an approximately 185-mile pipeline originating in Susquehanna County, Pennsylvania and extending to Lancaster County, Pennsylvania (Central Penn) that will haveremoval over the capacity to transport and deliver up to approximately 1.7 million dekatherms per day of natural gas. Additionally, WGL Midstream entered into an agreement with Cabot Oil & Gas Corporation (Cabot) whereby WGL Midstream will purchase 500,000 dekatherms per day of natural gas from Cabot over a 15 year term. As part of this agreement, Cabot has acquired 500,000 dekatherms per day of firm gas transportation capacity on Transco’s Atlantic Sunrise project. This capacity will be released to WGL Midstream.five-year calendar period through 2022.
Central Penn will be an integral part of Transco’s “Atlantic Sunrise” project and will be fully integrated into Transco's system. WGL Midstream will invest an estimated $410 million for its interest in Meade, and Meade will invest an estimated $746 million in Central Penn for an approximate 39% interest in Central Penn. Transco will hold the remaining ownership interests in Central Penn. Central Penn currently has a projected in-service date of mid-2018. On February 3, 2017, the FERC issued an order granting Transco's certificate of public convenience and necessity, subject to certain conditions. On February 6, 2017, Transco accepted the certificate of public convenience and necessity. On September 15, 2017, FERC issued the Notice to Proceed and thereafter, construction on Central Penn has begun.
Mountain Valley Pipeline
WGL Midstream owns a acquired a 10% equity interest in Mountain Valley Pipeline, LLC (Mountain Valley)
The proposed pipeline to be developed, constructed, owned and operated by Mountain Valley, will transport approximately 2.0 million dekatherms of natural gas per day and connects with EQT Corporation's Equitrans system in Wetzel County, West Virginia to Transco's Station 165 in Pittsylvania County, Virginia. The pipeline is scheduled to be in service by December 2018.
WGL Midstream expects to invest in scheduled capital contributions through the in-service date of the pipeline, its pro rata share (based on its 10% equity interest) of project costs, an estimated aggregate amount of approximately $350.0 million. In
WGL Holdings, Inc.
Washington Gas Light Company
Part I—Financial Information
Item 2—Management’s Discussion and Analysis of
Financial Condition and Results of Operations (continued)
addition, WGL Midstream entered into a gas purchase commitment to buy 500,000 dekatherms of natural gas per day, at index-based prices, for a 20 year term, and will also be a shipper on the proposed pipeline.
Stonewall System
WGL Midstream owns a 30% equity interest in an entity that owns and operates certain assets known as the Stonewall System. The Stonewall System has the capacity to gather up to 1.4 billion cubic feet of natural gas per day from the Marcellus production region in West Virginia, and connects with an interstate pipeline system that serves markets in the mid-Atlantic region. WGL Midstream held a $135.7 million and $136.7 million equity method investment in the Stonewall System at December 31, 2017 and September 30, 2017, respectively.
WGL Holdings, Inc.
Washington Gas Light Company
Part I—Financial Information
Item 2—Management’s Discussion and Analysis of
Financial Condition and Results of Operations (continued)
CONTRACTUAL OBLIGATIONS, OFF-BALANCE SHEET ARRANGEMENTS AND OTHER COMMERCIAL COMMITMENTS
Contractual Obligations
WGL and Washington Gas havehas certain contractual obligations incurred in the normal course of business that require fixed and determinable payments in the future. These commitments include long-term debt, lease obligations, unconditional purchase obligations for pipeline capacity, transportation and storage services, certain natural gas and electricity commodity commitments and our commitments related to the business process outsourcing program.
Washington Gas Light Company
Part II
Item 2-Management’s Discussion and Analysis of
Financial Condition and Results of Operations (continued)
Reference is madeRefer to the "Contractual“Contractual Obligations, Off-Balance Sheet Arrangements and Other Commercial Commitments"Commitments” section of Management's“Management’s Discussion in our 2017 Form 10-K.and Analysis” and Note 512- Commitments and Contingencies to the Condensed Consolidated Financial Statements in our 2017 Form 10-K includes a discussion 10-KT for the Transition Period from October 1, 2018 to December 31, 2018 for contractual obligations.
Refer to Note 6- Long-term Debt of long-term debt, including debt maturities. Note 13the Notes to the Condensed Consolidated Financial Statements in our 2017 Form 10-K reflects information aboutfor long term debt issued during the various contracts of Washington Gas, WGL Energy Services and WGL Midstream.current period.
There were no other significant changes to contractual obligations that are out of the normal course of business during the nine months ended September 30, 2019.
Merger Commitments
In connection with the Merger, Washington Gas and AltaGas have made commitments related to the terms of the PSC of DC settlement agreement and the conditions of approval from the PSC of MD and the SCC of VA. Among other things, these commitments include rate credits distributable to both residential and non-residential customers, gas expansion and other programs, various public interest commitments, and safety programs. The cumulative amount expensed related to the Merger commitments as of September 30, 2019 was $136.6 million, of which $118.7 million has been paid, including $1.1 million and $7.6 million paid in the three months and nine months ended September 30, 2019, respectively. In March 2019, the PSC of MD directed that the $3.9 million Most Favored Nation adjustment, originally recorded as a commitment expense, should be used to offset future rates under Washington Gas’ natural gas expansion program in Maryland. As a result, Washington Gas reversed the commitment expense during the three months ended DecemberMarch 31, 2017. 2019. In addition, there are certain additional regulatory commitments that will be recorded when the costs are incurred in the future, including the hiring of damage prevention trainers in each jurisdiction for a total of $2.4 million over 5 years; investing up to $70.0 million over a 10 year period to further extend natural gas service; and spending $7.5 million for leak mitigation within 3 years after the Merger close.
Refer to the Note 17 —18- Planned Merger with AltaGas Ltd. of the Notes to Condensed Consolidated Financial Statements of Washington Gas’ Form 10-KT for information regarding thea detailed discussion of Merger Agreement.related commitments.
Financial Guarantees
WGL has guaranteed payments primarily for certain commitments on behalf of some of its subsidiaries. WGL has also guaranteed payments for certain of our external partners. At September 30, 2019 and December 31, 2017,2018, there were no guarantees to external parties.
Antero Contract
In June 2019, a jury trial was held in the maximum potential amountCounty Court for Denver, Colorado to consider a contractual dispute relating to gas pricing between Washington Gas and WGL Midstream (together, the Companies) and Antero Resources Corporation (Antero). Following the trial, the jury returned a verdict in favor of future payments underAntero for $95.9 million, of which, $11.2 million was against Washington Gas, and $84.7 million against WGL Midstream. Following the guarantees for external parties totaled $0.6 million.official entry of the judgment, the Company filed an appeal on August 16, 2019.
For financial statement impact from Antero Contract, Refer to Note 10- Commitments and Contingencies of the Notes to Condensed Financial Statements.
CREDIT RISK
Wholesale Credit Risk
Certain wholesale suppliers that sell natural gas to any or all of Washington Gas, WGL Energy Services, and WGL Midstream and electricity to WGL Energy Services, may have relatively low credit ratings or may not be rated by major credit rating agencies.
Washington Gas enters into transactions with wholesale counterparties for the purpose of meeting firm ratepayer commitments, to optimize the value of its long-term capacity assets, and for hedging natural gas costs. Certain wholesale suppliers that sell natural gas to Washington Gas may have relatively low credit ratings or may not be rated by major credit rating agencies. In the event of a counterparty’s failure to deliver contracted volumes of gas or fulfill its payment obligations, Washington Gas may incur losses that would typically be passed through to its sales customers under the purchased gas cost adjustment mechanisms; however, Washington Gas may be at risk for financial loss to the extent these losses are not passed through to its customers.
For WGL Energy Services, any failure of wholesale counterparties to deliver natural gas or electricity under existing contracts could cause financial exposure for the difference between the price at which WGL Energy Services has contracted to buy these commodities and their replacement cost from another supplier. To the extent that WGL Energy Services sells natural gas to these wholesale counterparties, WGL Energy Services may be exposed to payment risk if WGL Energy Services is in a net receivable position. Additionally, WGL Energy Services enters into contracts with counterparties to hedge the costs of natural gas and electricity. Depending on the ability of the counterparties to fulfill their commitments, WGL Energy Services could be at risk for financial loss.
WGL Midstream enters into transactions with wholesale counterparties to hedge and optimize its portfolio of owned and managed natural gas assets. Any failure of wholesale counterparties to deliver natural gas under existing contracts could cause financial exposure for the difference between the price at which WGL Midstream has contracted to buy these commodities and their replacement cost. To the extent that WGL Midstream sells natural gas to these wholesale counterparties, WGL Midstream may be exposed to payment risk if it is in a net receivable position. In addition, WGL Midstream enters into contracts with counterparties to hedge the costs of natural gas. Depending on the ability of the counterparties to fulfill their commitments, WGL Midstream could be at risk for financial loss.
Washington Gas WGL Energy Services, and WGL Midstream operateoperates under an existing wholesale counterparty credit policy that is designed to mitigate credit risks through requirements for credit enhancements including, but not limited to, letters
WGL Holdings, Inc.
Washington Gas Light Company
Part I—Financial Information
Item 2—Management’s Discussion and Analysis of
Financial Condition and Results of Operations (continued)
of credit, parent guarantees and cash collateral when deemed necessary. In accordance with this policy, Washington Gas WGL Energy Services, and WGL Midstream have eachhas obtained credit enhancements from certain of theirits counterparties. If certain counterparties or their guarantors meet the policy’s creditworthiness criteria, Washington Gas WGL Energy Services, and WGL Midstream may grant unsecured credit to those counterparties or their guarantors. The creditworthiness of all counterparties is continuously monitored.
Washington Gas, WGL Energy Services and WGL Midstream are also subject to the collateral requirements of their counterparties. At December 31, 2017, Washington Gas, WGL Energy Services and WGL Midstream provided $8.1 million, $42.4 million and $26.7 million in cash collateral to counterparties, respectively.
The following table provides information on our credit exposure, net of collateral, to wholesale counterparties as of December 31, 2017 for September 30, 2019.
Washington Gas WGL Energy ServicesLight Company
Part II
Item 2-Management’s Discussion and WGL Midstream, separately.Analysis of
Financial Condition and Results of Operations (continued)
| | Credit Exposure to Wholesale Counterparties (In millions) | Credit Exposure to Wholesale Counterparties (In millions) | Credit Exposure to Wholesale Counterparties (In millions) |
Rating(a) | Exposure Before Credit Collateral(b) | | Offsetting Credit Collateral Held(c) | | Net Exposure | | Number of Counterparties Greater Than 10%(d) | | Net Exposure of Counterparties Greater Than 10% | Exposure Before Credit Collateral(b) | | Offsetting Credit Collateral Held(c) | | Net Exposure | | Number of Counterparties Greater Than 10%(d) | | Net Exposure of Counterparties Greater Than 10% |
| Washington Gas | | | | | | | | | | |
| | | | | | | | | | | |
| Investment Grade | $ | 37.3 |
| | $ | — |
| | $ | 37.3 |
| | 1 |
| | $ | 16.0 |
| $ | 25.3 |
| | $ | — |
| | $ | 25.3 |
| | 1 |
| | $ | 13.4 |
|
| Non-Investment Grade | — |
| | — |
| | — |
| | — |
| | — |
| — |
| | — |
| | — |
| | — |
| | — |
|
| No External Ratings | 12.7 |
| | 4.0 |
| | 8.7 |
| | — |
| | — |
| 7.4 |
| | 4.0 |
| | 3.4 |
| | 1 |
| | 1.3 |
|
| WGL Energy Services | | | | | | | | | | |
| Investment Grade | $ | 0.9 |
| | $ | 0.1 |
| | $ | 0.8 |
| | 2 |
| | $ | 0.8 |
| |
| Non-Investment Grade | — |
| | — |
| | — |
| | — |
| | — |
| |
| No External Ratings | 0.3 |
| | — |
| | 0.3 |
| | 1 |
| | 0.1 |
| |
| WGL Midstream | | | | | | | | | | |
| Investment Grade | $ | 71.8 |
| | $ | 3.0 |
| | $ | 68.8 |
| | 1 |
| | $ | 15.9 |
| |
| Non-Investment Grade | — |
| | — |
| | — |
| | — |
| | — |
| |
| No External Ratings | 27.3 |
| | 2.9 |
| | 24.4 |
| | — |
| | — |
| |
| |
(a)(a) Investment grade is primarily determined using publicly available credit ratings of the counterparty. If the counterparty has provided a guarantee by a higher-rated entity (e.g., its parent), it is determined based upon the rating of its guarantor. Included in “Investment grade” are counterparties with a minimum Standard & Poor’s or Moody’s Investor Service rating of BBB- or Baa3, respectively. (b) Includes the net of all open positions on energy-related derivatives subject to mark-to-market accounting requirements and the net receivable/payable for the realized transactions. Amounts due from counterparties are offset by liabilities payable to those counterparties to the extent that contractual netting arrangements are in place. (c) Represents cash deposits and letters of credit received from counterparties, not adjusted for probability of default. (d) Using a percentage of the net exposure. | Investment grade is primarily determined using publicly available credit ratings of the counterparty. If the counterparty has provided a guarantee by a higher-rated entity (e.g., its parent), it is determined based upon the rating of it guarantor. Included in “Investment grade” are counterparties with a minimum Standard & Poor’s or Moody’s Investor Service rating of BBB- or Baa3, respectively. |
| |
(b)
| Includes the net of all open positions on energy-related derivatives subject to mark-to-market accounting requirements and the net receivable/payable for the realized transactions. Amounts due from counterparties are offset by liabilities payable to those counterparties to the extent that contractual netting arrangements are in place. |
| |
(c)
| Represents cash deposits and letters of credit received from counterparties, not adjusted for probability of default. |
| |
(d)
| Using a percentage of the net exposure. |
Retail Credit Risk
Washington Gas is exposed to theat risk of non-payment of utility bills by certain of its customers. To manage this customer credit risk, Washington Gas may require cash deposits from its high risk customers to cover payment of their bills until the requirements for the deposit refunds are met. In addition, Washington Gas has a POR program in Maryland and the District of Columbia, whereby it purchases receivables from participating energy marketers at approved discount rates. Under the program, Washington Gas is exposed to the risk of non-payment by the retail customers for these receivables. This risk is factored into the approved discount rate at which Washington Gas purchases the receivables.
WGL Energy Services is also exposed to the risk Base rates include a provision for recovery of non-payment by its retail customers. WGL Energy Services manages this risk by evaluating the credit quality of certain new customers as well as by monitoring collections from existing customers. To the extent necessary, WGL Energy Services can obtain collateral from, or terminate service to, its existing customersuncollectible accounts based on credit quality criteria. In addition, WGL Energy Services participates in POR programs with certain Maryland, Districthistorical levels of Columbia and Pennsylvania utilities, whereby it sells its receivables to various utilities at approved discount rates. Under the POR programs, WGL Energy Services is exposed to the riskcharge offs of non-payment by its retail customers for delivered commodities that have not yet been billed. Once the invoices are billed, however, the associated credit risk is assumed by the purchasing utilities that sponsor POR programs. While participation in POR programs reduces the risk of collection and fixes a discount rate on the receivables, there is a risk that the discount rate paid to participate in the POR program will exceed the actual bad debt expense and billing fees associated with these receivables.
WGL Energy Systems is subject to retail credit risk associated with customers who purchase electricity under long term agreements from distributed generation assets owned by the company. The customers undergo credit evaluation prior to contract
WGL Holdings, Inc.
accounts receivable. Washington Gas Light Company
Part I—Financial Information
Item 2—Management’s Discussion and Analysis of
Financial Condition and Results of Operations (continued)
execution and are monitored periodically during the contract termalso has a provision in its Gas Administrative Charge mechanism that includes an allowance for payment performance and credit quality. These steps mitigate credit risk associated with the distributed generation asset customers.
At December 31, 2017, WGSW was indirectly subject to retail credit risk associated with non-payment by customers who lease distributed energy equipment or maintain energy service agreements through affiliates. This credit risk was mitigated through minimum credit quality criteria establishedcommodity amounts included in each of WGSW’s agreements for customer agreements. These criteria were satisfied to enable WGSW to participate in the project financing arrangement or partnership interest. Refer to Note 11, Other Investments of the Notes to Condensed Consolidated Financial Statements for a further discussion of these investments.
WGL Midstream is not subject to retail credit risk.uncollectible accounts.
MARKET RISK
We are exposed to various forms of market risk including commodity price risk, weather risk and interest-rate risk. The following discussion describes these risks and our management of them.
Price Risk Related to the Regulated Utility Segment
Washington Gas faces price risk associated with the purchase and sale of natural gas. Washington Gas generally recovers the cost of the natural gas to serve customers through gas cost recovery mechanisms as approved in jurisdictional tariffs; therefore, a change in the price of natural gas generally has no direct effect on Washington Gas’ net income. However, Washington Gas is responsible for following competitive and reasonable practices in purchasing natural gas for its customers.
To manage price risk associated with its natural gas supply to its firm customers, Washington Gas: (i) actively manages its gas supply portfolio to balance sales and delivery obligations; (ii) injects natural gas into storage during the summer months when prices are generally lower, and withdraws that gas during the winter heating season when prices are generally higher and (iii) enters into hedging contracts and other contracts that may qualify as derivative instruments related to the sale and purchase of natural gas.
Washington Gas executes commodity-related physical and financial contracts in the form of forward, futures and option contracts as part of an asset optimization program that is managed by its internal staff. Under this program, Washington Gas realizes value from its long-term natural gas transportation and storage capacity resources when they are not being fully used to serve utility customers. Regulatory sharing mechanisms in all three jurisdictions allow the profit from these transactions to be shared between Washington Gas’ customers and shareholders.
The following two tables summarize the changes in the fair value of our net assets (liabilities) associated with the Regulated Utility segment’s energy-related derivatives during the threenine months ended December 31, 2017.September 30, 2019.
Washington Gas Light Company
Part II
Item 2-Management’s Discussion and Analysis of
Financial Condition and Results of Operations (continued)
| | Regulated Utility Segment Changes in Fair Value of Energy-Related Derivatives | |
| Changes in Fair Value of Energy-Related Derivatives | | Changes in Fair Value of Energy-Related Derivatives |
| (In millions) | | |
| Net assets (liabilities) at September 30, 2017 | $ | (121.3 | ) | |
| Net assets (liabilities) at January 1, 2019 | | $ | (106.3 | ) |
| Net fair value of contracts entered into during the period | 1.9 |
| (0.6 | ) |
| Other changes in net fair value | (10.3 | ) | 5.3 |
|
| Realized net settlement of derivatives | 5.7 |
| (4.2 | ) |
| Net assets (liabilities) at December 31, 2017 | $ | (124.0 | ) | |
| Net assets (liabilities) at September 30, 2019 | | $ | (105.8 | ) |
| | Regulated Utility Segment Roll Forward of Energy-Related Derivatives | |
Roll Forward of Energy-Related Derivatives | |
Roll Forward of Energy-Related Derivatives |
| (In millions) | | |
| Net assets (liabilities) at September 30, 2017 | $ | (121.3 | ) | |
| Net assets (liabilities) at January 1, 2019 | | $ | (106.3 | ) |
| Recorded to income | (2.6 | ) | (0.1 | ) |
| Recorded to regulatory assets/liabilities | (5.8 | ) | 4.8 |
|
| Realized net settlement of derivatives | 5.7 |
| (4.2 | ) |
| Net assets (liabilities) at December 31, 2017 | $ | (124.0 | ) | |
| Net assets (liabilities) at September 30, 2019 | | $ | (105.8 | ) |
The maturity dates in calendar years of our net assets (liabilities) associated with the regulated utility segment’s energy-related derivatives recorded at fair value at December 31, 2017,September 30, 2019, is summarized in the following table based on the level of the fair value calculation under ASC Topic 820:
WGL Holdings, Inc.
Washington Gas Light Company
Part I—Financial Information
Item 2—Management’s Discussion and Analysis of
Financial Condition and Results of Operations (continued)
820.
| | Regulated Utility Segment Maturity of Net Assets (Liabilities) Associated with our Energy-Related Derivatives | | | |
Maturity of Net Assets (Liabilities) Associated with our Energy-Related Derivatives | |
Maturity of Net Assets (Liabilities) Associated with our Energy-Related Derivatives | | |
| | | | | | |
| (In millions) | Remainder of 2018 | | 2019 | | 2020 | | 2021 | | 2022 | | Thereafter | | Total | 2019 | | 2020 | | 2021 | | 2022 | | 2023 | | Thereafter | | Total |
| Level 1 — Quoted prices in active markets | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
|
| Level 2 — Significant other observable inputs | 0.9 |
| | 0.5 |
| | — |
| | — |
| | — |
| | — |
| | 1.4 |
| 0.3 |
| | 0.2 |
| | — |
| | — |
| | — |
| | — |
| | 0.5 |
|
| Level 3 — Significant unobservable inputs | (19.3 | ) | | (12.8 | ) | | (9.4 | ) | | (8.4 | ) | | (9.5 | ) | | (66.0 | ) | | (125.4 | ) | 0.2 |
| | (8.9 | ) | | 0.5 |
| | (1.6 | ) | | (1.5 | ) | | (95.0 | ) | | (106.3 | ) |
| Total net assets (liabilities) associated with our energy-related derivatives | $ | (18.4 | ) | | $ | (12.3 | ) | | $ | (9.4 | ) | | $ | (8.4 | ) | | $ | (9.5 | ) | | $ | (66.0 | ) | | $ | (124.0 | ) | $ | 0.5 |
|
| $ | (8.7 | ) |
| $ | 0.5 |
|
| $ | (1.6 | ) |
| $ | (1.5 | ) |
| $ | (95.0 | ) |
| $ | (105.8 | ) |
Refer to Note 8, 11-Derivative and Weather-Related InstrumentsDerivatives and Note 9, 12-Fair Value Measurements of the Notes to Condensed Consolidated Financial Statements for a further discussion of our derivative activities and fair value measurements.
Price Risk Related to the Non-Utility Segments
Retail Energy Marketing. Our retail energy-marketing subsidiary, WGL Energy Services, sells natural gas and electricity to retail customers at both fixed and indexed prices. WGL Energy Services must manage daily and seasonal demand fluctuations for these products with its suppliers. Price risk may exist to the extent WGL Energy Services does not closely match the timing and volume of natural gas and electricity it purchases with the related fixed price or indexed sales commitments. WGL Energy Services’ risk management policies and procedures are designed to minimize this risk.
A portion of WGL Energy Services’ annual natural gas sales volumes is subject to variations in customer demand associated with fluctuations in weather and other factors. Purchases of natural gas to fulfill retail sales commitments are generally made under fixed-volume contracts based on certain weather assumptions. If there is significant deviation from normal weather or from other factors that affect customer usage or utility delivery requirements, purchase commitments may differ significantly from actual customer usage. To the extent that WGL Energy Services cannot match its customer requirements and supply commitments, it may be exposed to commodity price and volume variances, which could negatively impact expected gross margins (refer to the section entitled “Weather Risk” for further discussion of our management of weather risk). WGL Energy Services manages these risks through the use of derivative instruments, including financial products.
WGL Energy Services procures electricity supply under contract structures in which WGL Energy Services assumes the responsibility of matching its customer requirements with its supply purchases. WGL Energy Services assembles the various components of supply, including electric energy from various suppliers, and capacity, ancillary services and transmission service from the PJM Interconnection, a regional transmission organization, in matching its customer requirements obligations. While the capacity and transmission costs within PJM are generally stable and identifiable several years into the future, the cost of ancillary services which support the reliable operation of the transmission system does fluctuate as changes occur in the balance between generation and the consumption mix within the electric system. WGL Energy Services could be exposed to price risk associated with changes in ancillary costs due to lack of available forward market products to sufficiently hedge those risks. Commercial retail contracts for larger customers often include terms which permit WGL Energy Services to pass through regulatory approved changes in capacity and transmission costs, as well as some changes in ancillary costs. These terms reduce the price risk exposure related to these changes for WGL Energy Services.
To the extent WGL Energy Services has not sufficiently matched its customer requirements with its supply commitments, it could be exposed to electric commodity price risk. WGL Energy Services manages this risk through the use of derivative instruments, including financial products.
WGL Energy Services’ electric business is also exposed to fluctuations in weather and varying customer usage. Purchases generally are made under fixed-price, fixed-volume contracts that are based on certain weather assumptions. If there are significant deviations in weather or usage from these assumptions, WGL Energy Services may incur price and volume variances that could negatively impact expected gross margins (refer to the section entitled “Weather Risk” for further discussion of our management of weather risk).
The following two tables summarize the changes in the fair value of our net assets (liabilities) associated with the Retail Energy-Marketing segment’s energy-related derivatives during the three months ended December 31, 2017:
WGL Holdings, Inc.
Washington Gas Light Company
Part I—Financial Information
Item 2—Management’s Discussion and Analysis of
Financial Condition and Results of Operations (continued)
|
| | | |
Retail Energy-Marketing Segment Changes in Fair Value of Energy-Related Derivatives |
| (In millions) | |
| Net assets (liabilities) at September 30, 2017 | $ | (11.8 | ) |
| Net fair value of contracts entered into during the period | (1.2 | ) |
| Other changes in net fair value | (1.7 | ) |
| Realized net settlement of derivatives | (1.2 | ) |
| Net assets (liabilities) at December 31, 2017 | $ | (15.9 | ) |
|
| | | |
Retail Energy-Marketing Segment Roll Forward of Energy-Related Derivatives |
| (In millions) | |
| Net assets (liabilities) at September 30, 2017 | $ | (11.8 | ) |
| Recorded to income | (1.6 | ) |
| Recorded to accounts payable | (1.3 | ) |
| Realized net settlement of derivatives | (1.2 | ) |
| Net assets (liabilities) at December 31, 2017 | $ | (15.9 | ) |
The maturity dates of our net assets (liabilities) associated with the retail energy-marketing segments’ energy-related derivatives recorded at fair value at December 31, 2017 is summarized in the following table based on the level of the fair value calculation under ASC Topic 820:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
Retail Energy-Marketing Segment Maturity of Net Assets (Liabilities) Associated with our Energy-Related Derivatives | | |
| | | |
| (In millions) | Remainder of 2018 | | 2019 | | 2020 | | 2021 | | 2022 | | Thereafter | | Total |
| Level 1 — Quoted prices in active markets | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
|
| Level 2 — Significant other observable inputs | (0.6 | ) | | (2.2 | ) | | (0.7 | ) | | — |
| | — |
| | — |
| | (3.5 | ) |
| Level 3 — Significant unobservable inputs | (2.1 | ) | | (6.0 | ) | | (3.0 | ) | | (1.3 | ) | | — |
| | — |
| | (12.4 | ) |
| Total net assets (liabilities) associated with our energy-related derivatives | $ | (2.7 | ) | | $ | (8.2 | ) | | $ | (3.7 | ) | | $ | (1.3 | ) | | $ | — |
| | $ | — |
| | $ | (15.9 | ) |
Refer to Note 8, Derivative and Weather-Related Instruments and Note 9, Fair Value Measurements of the Notes to Condensed Consolidated Financial Statements for a further discussion of our derivative activities and fair value measurements.
Commercial Energy Systems. WGL Energy Systems sells energy (both electricity and thermal) and RECs from distributed generation assets. The sale of energy is under long term power purchase agreements (PPAs) with a general duration of 20 years, while the sale of RECs are usually under shorter term or immediate delivery contracts. Weather patterns have an effect on WGL Energy Systems solar generation assets to the extent that output is reduced. WGL Energy Systems may also be exposed to REC price risk. The REC market has limited visibility to forward market prices. WGL Energy Systems seeks to mitigate this price risk by entering into bundled energy and REC long-term purchase agreements and independent forward REC sale agreements, when possible.
WGL Energy Systems also earns revenues by providing energy efficiency and sustainability solutions to governmental agencies pursuant to various contractual vehicles, including the area wide contract. WGL Energy Systems earns margins between the price at which the solutions are sold and the cost to design and build them. Margins may be eroded by an underestimation of costs. WGL Energy Systems also conducts business with government agencies and faces future revenue risks relating to such government agencies not receiving appropriations funding or projects being unfunded by Congress.
WGSW holds project financing arrangements, whereby it holds an interest in a limited partnership that acquires distributed generation solar assets at fair market value and leases back those assets to counterparties, with a fixed a target rates of return over terms between 6-20 years. WGSW also enters into arrangements in which investment partners purchase solar assets and leases them to retail customers. In these cases, the purchased solar assets are expected to achieve a target rate of return from the lease payments that are collected from the retail customers. WGSW manages this price risk through its investment agreements and evaluation of the asset purchase in conjunction with the inception of the lease.
Midstream Energy Services. WGL Midstream engages in wholesale commodity transactions to optimize its owned and managed natural gas assets. Price risk exists to the extent WGL Midstream does not closely match the volume of physical
WGL Holdings, Inc.
Washington Gas Light Company
Part I—Financial Information
Item 2—Management’s Discussion and Analysis of
Financial Condition and Results of Operations (continued)
natural gas in storage with the related forward sales entered into as hedges. WGL Midstream seeks to mitigate this risk by actively managing and hedging these assets in accordance with corporate risk management policies and procedures. Depending upon the nature of its forward hedges, WGL Midstream may also be exposed to fluctuations in mark-to-market valuations based on changes in forward price curves. WGL Midstream pays fixed, fair market prices for its owned storage assets and is subject to variations in annual summer-winter price differentials associated with weather and other market factors. To the extent there are significant variations in weather, WGL Midstream may incur price variances that negatively impact expected gross margins (refer to the section entitled “Weather Risk” for further discussion of our management of weather risk). WGL Midstream manages this risk through the use of derivative instruments, including financial products.
The following two tables summarize the changes in the fair value of our net assets (liabilities) associated with the Midstream Energy Services segments’ energy-related derivatives during the three months ended December 31, 2017:
|
| | | |
Midstream Energy Services Segment Changes in Fair Value of Energy-Related Derivatives |
| (In millions) | |
| Net assets (liabilities) at September 30, 2017 | $ | 11.2 |
|
| Net fair value of contracts entered into during the period | 4.7 |
|
| Other changes in net fair value | 11.6 |
|
| Realized net settlement of derivatives | (24.2 | ) |
| Net assets (liabilities) at December 31, 2017 | $ | 3.3 |
|
|
| | | |
Midstream Energy Services Segment Roll Forward of Energy-Related Derivatives |
| (In millions) | |
| Net assets (liabilities) at September 30, 2017 | $ | 11.2 |
|
| Recorded to income | 16.3 |
|
| Realized net settlement of derivatives | (24.2 | ) |
| Net assets (liabilities) at December 31, 2017 | $ | 3.3 |
|
The maturity dates of our net assets (liabilities) associated with the Midstream Energy Services segments’ energy-related derivatives recorded at fair value at December 31, 2017 is summarized in the following table based on the level of the fair value calculation under ASC Topic 820:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
Midstream Energy Services Segment Maturity of Net Assets (Liabilities) Associated with our Energy-Related Derivatives | | |
| | | |
| (In millions) | Remainder of 2018 | | 2019 | | 2020 | | 2021 | | 2022 | | Thereafter | | Total |
| Level 1 — Quoted prices in active markets | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
|
| Level 2 — Significant other observable inputs | (6.8 | ) | | 2.1 |
| | (0.1 | ) | |
|
| |
|
| | — |
| | (4.8 | ) |
| Level 3 — Significant unobservable inputs | (1.0 | ) | | 2.6 |
| | 1.6 |
| | 0.8 |
| |
|
| | 4.1 |
| | 8.1 |
|
| Total net assets associated with our energy-related derivatives | $ | (7.8 | ) | | $ | 4.7 |
| | $ | 1.5 |
| | $ | 0.8 |
| | $ | — |
| | $ | 4.1 |
| | $ | 3.3 |
|
Refer to Note 8, Derivative and Weather-Related Instruments and Note 9, Fair Value Measurements of the Notes to Condensed Consolidated Financial Statements for a further discussion of our derivative activities and fair value measurements.
Value-at-Risk
WGL Energy Services measures the market risk of its energy commodity portfolio by determining its value-at-risk. Value-at-risk is an estimate of the maximum loss that can be expected at some level of probability if a portfolio is held for a given time period. The value-at-risk calculation for natural gas and electric portfolios include assumptions for normal weather, new customer additions and renewing customers for which supply commitments have been secured. Based on a 95% confidence interval for a one-day holding period, WGL Energy Services’ value-at-risk at December 31, 2017 was approximately $6,400 and $47,800, related to its natural gas and electric portfolios, respectively. The high, low and average value-at-risk for natural gas and electric portfolios between the period October 1, 2017 and December 31, 2017 are noted in the table below.
WGL Holdings, Inc.
Washington Gas Light Company
Part I—Financial Information
Item 2—Management’s Discussion and Analysis of
Financial Condition and Results of Operations (continued)
|
| | | | | | | | | | | |
WGL Energy Services Value-at-Risk |
| (In thousands) | High | | Low | | Average |
| Natural Gas Portfolio | $ | 184.0 |
| | $ | 2.1 |
| | $ | 11.2 |
|
| Electric Portfolio | 60.2 |
| | 21.9 |
| | 38.6 |
|
| Total | $ | 244.2 |
| | $ | 24.0 |
| | $ | 49.8 |
|
Weather Risk
We are exposed to various forms of weather risk in both our regulated utility and non-utility business segments.risk. Washington Gas’ operations are seasonal, with a significant portion of its revenues derived from the delivery of natural gas to residential and commercial heating customers during the winter heating season. Weather conditions directly influence the volume of natural gas delivered by Washington Gas. Weather patterns tend to be more volatile during “shoulder” months within our fiscalcalendar year in which Washington Gas is going into or coming out of the primary portion of its winter heating season. During the shoulder months within quarters ending June 30 (particularly in April and May) and December 31 (particularly in October and November) and June 30 (particularly in April and May), customer heating usage may not highly correlate with historical levels or with the level HDDsof heating degree days that occur, particularly when weather patterns experienced are not consistently cold or warm.
To the extent Washington Gas does not have a weather related instrumentsinstrument or billing adjustment mechanismsmechanism in place,the District of Columbia and as a result, its revenues are volume driven and its current rates are based upon an assumption of normal weather. In the District of Columbia, withoutWithout weather protection strategies, variations from normal weather will cause our earnings to increase or decrease depending on the weather pattern.
The financial results of our retail energy-marketing business, WGL Energy Services, are affected by variations from normal weather primarily in the winter relating to its natural gas sales, and throughout the fiscal year relating to its electricity sales. WGL Energy Services manages these weather risks with, among other things, weather related instruments.
Weather patterns have an effect on WGL Energy Systems solar generation assets to the extent that output is reduced. WGL Energy Systems seeks to mitigate weather risk by negotiating unit contingency and other measures to limit exposure in the PPAs.
Variations from normal weather may also affect the financial results of our wholesale energy business, WGL Midstream, primarily with regards to summer-winter price differentials between time periods and transportation delivery locations throughout the fiscal year. WGL Midstream manages these weather risks with, among other things, physical and financial hedging products.
Billing Adjustment Mechanisms. In Maryland, Washington Gas has a Revenue Normalization Adjustment (RNA)an RNA billing mechanism that is designed to stabilize the level of net revenues collected from Maryland customers by eliminating the effect of deviations in customer usage caused by variations in weather from normal levels and other factors such as conservation. In Virginia, Washington Gas has a Weather Normalization Adjustment (WNA)WNA billing adjustment mechanism that is designed to eliminate the effect of variations in weather from normal levels on utility net revenues.
Washington Gas Light Company
Part II
Item 2-Management’s Discussion and Analysis of
Financial Condition and Results of Operations (continued)
revenues for residential, commercial and industrial and group metered apartment customers. Additionally, in Virginia, as part of the Conservation and Ratemaking Efficiency (CARE)CARE plan, Washington Gas has a CARE Ratemaking Adjustment (CRA)CRA mechanism that in conjunction with the WNA, eliminates the effect of both weather and other factors such as conservation for residential small commercial and industrial and group metered apartment customers.
For the RNA, WNA and CRA mechanisms, periods of colder-than-normal weather generally would cause Washington Gas to record a reduction to its revenues and establish a refund liability to customers, while the opposite would generally result during periods of warmer-than-normal weather. However, factors such as volatile weather patterns and customer conservation may cause the RNA and the CRA mechanisms to function conversely because they adjust billed revenues to provide a designed level of net revenue per meter.
Weather-Related Instruments. WGL Energy Services utilizes HDD instruments from time to time to manage weather risks related to its natural gas and electricity sales. WGL Energy Services also utilizes cooling degree day (CDD) instruments and other instruments to manage weather and price risks related to its electricity sales during the summer cooling season. These instruments cover a portion of estimated revenue or energy-related cost exposure to variations in HDDs or CDDs. Refer to Note 8—Derivative and Weather-Related Instruments of the Notes to Condensed Consolidated Financial Statements for further discussion of the accounting for these weather-related instruments.
Interest-Rate Risk
WGL Holdings, Inc.
Washington Gas Light Company
Part I—Financial Information
Item 2—Management’s Discussion and Analysis of
Financial Condition and Results of Operations (continued)
We are exposed to interest-rate risk associated with our short-term and long-term financing. WGL and Washington Gas utilizehas previously utilized derivative instruments from time to time in order to reduce theirits exposure to the risk of interest-rate volatility.volatility, with resulting gains and losses typically being recovered through each jurisdiction’s overall allowed rate of return.
Short-Term Debt. At September 30, 2019 and December 31, 2017 and September 30, 2017, WGL and its subsidiaries2018, Washington Gas had outstanding notes payable, including commercial paper and project financing of $558.7$117.0 million, and $559.8$311.5 million, respectively. The carrying amount of our short-term debt approximates fair value. A change of 100 basis points in the underlying average interest rate for our short-term debtcommercial paper would have caused a change in interest expense of approximately $3.2 million for the quarter.$2.2 million.
Long-Term Debt. At September 30, 2019 and December 31, 2017 and September 30, 2017, WGL2018, Washington Gas had outstanding fixed-rate and variable rate MTNs and other long-term debt of $1,679.9$1,331.1 million and $1,430.9$1,035.0 million, respectively, excluding current maturities. While fixed-rate debt does not expose us to earnings risk when market interest rates change, such debt is subject to changes in fair value. Fair value is defined as the present value of the debt securities’ future cash flows discounted at interest rates that reflect market conditions as of the measurement date. As of December 31, 2017,September 30, 2019, the fair value of WGL’sWashington Gas’ fixed-rate debt was $1,842.8$1,501.5 million. Our sensitivity analysis indicates that fair value would increase by approximately $74.6$77.4 million or decrease by approximately $69.1 million if interest rates were to decline or increase by 10%, respectively, from current market levels. At December 31, 2017, Washington Gas had outstanding fixed-rate MTNs and other long-term debt of $1,084.6 million, excluding current maturities. As of December 31, 2017, the fair value of Washington Gas’ fixed-rate debt was $1,232.9 million. Our sensitivity analysis indicates that fair value would increase by approximately $61.8 million or decrease by approximately $57.3$71.8 million if interest rates were to decline or increase by 10%, respectively, from current market levels. In general, such an increase or decrease in fair value would impact earnings and cash flows only if WGL or Washington Gas were to reacquire some or all of these instruments in the open market prior to their maturity.
A total of $1,202.6$1,202.5 million, or approximately 70.9% of the face amount of WGL’s outstanding long-term debt, excluding current maturities, have make-whole call options which, if exercised, would require us to pay a premium over the face amount.
A total of $952.5 million, or approximately 86.9%89.3% of the face amount of Washington Gas’ outstanding long-term debt, excluding current maturities, have make-whole call options which if exercised, would require us to pay a premium over the face amount.
On October 1, 2016, WGL and Washington Gas adopted ASU 2015-03 and ASU 2015-15. This standard requires an entityamount if we were to account for debt issuance costs as a valuation account presented as a deduction from the face amount of debt in the balance sheet. Prior period amounts related to long-term debt in the accompanying condensed balance sheets have been reclassified to conform to the current period presentation.exercise them.
Derivative Instruments. In anticipation of the issuance of 30-year debt, WGL entered into forward starting interest rate swaps with a total notional amount outstanding of $250.0 million, to hedge the variability in future interest payments. WGL designated these interest rate swaps as cash flow hedges. Through December 31, 2016, the effective portion of changes in fair value was reported as a component of other comprehensive income (loss). As a result of certain covenants related to the proposed merger with AltaGas, in January 2017, WGL de-designated these hedges and began recording charges in their fair value in interest expense. The balance in accumulated other comprehensive income at December 31, 2017 was $6.4 million related to these hedges. In January 2018, WGL settled these swaps and realized a gain of $13.8 million, of which approximately $13.2 million will be recorded to interest expense. Although WGL did not issue 30-year debt with this settlement, it remains reasonably possible that we may issue this debt within the originally designated two year hedging period.
Refer to Note 8 - 11-Derivative and Weather-Related InstrumentsDerivatives of the Notes to Condensed Consolidated Financial Statements for a further discussion of our interest-rate risk management activity.
WGL Holdings, Inc.
Washington Gas Light Company
Part I—Financial Information
Item 2—Management’s Discussion and Analysis of
Financial Condition and Results of Operations (continued)
WASHINGTON GAS LIGHT COMPANY
This section of Management’s Discussion focuses on Washington Gas for the reported periods. In many cases, explanations and disclosures for both WGL and Washington Gas are substantially the same.
RESULTS OF OPERATIONS—Three Months Ended December 31, 2017 vs. December 31, 2016
The results of operations for the regulated utility segment and Washington Gas are substantially the same; therefore, this section primarily focuses on statistical information and other information that is not discussed in the results of operations for the regulated utility segment. Refer to the section entitled “Results of Operations—Regulated Utility Operating Results” for a detailed discussion of the results of operations for the regulated utility segment.
Key gas delivery, weather and meter statistics are shown in the table below for the three months ended December 31, 2017 and 2016.
|
| | | | | | | | |
| Gas Deliveries, Weather and Meter Statistics |
| | Three Months Ended December 31, | | Increase/ |
| 2017 | | 2016 | | (Decrease) |
Gas Sales and Deliveries (millions of therms) | | | | �� | |
| Firm | | | | | |
| Gas sold and delivered | 282.7 |
| | 265.2 |
| | 17.5 |
|
| Gas delivered for others | 158.5 |
| | 161.6 |
| | (3.1 | ) |
| Total firm | 441.2 |
| | 426.8 |
| | 14.4 |
|
| Interruptible | | | | | |
| Gas sold and delivered | 0.6 |
| | 0.8 |
| | (0.2 | ) |
| Gas delivered for others | 71.6 |
| | 64.2 |
| | 7.4 |
|
| Total interruptible | 72.2 |
| | 65.0 |
| | 7.2 |
|
| Electric generation—delivered for others | 32.1 |
| | 23.6 |
| | 8.5 |
|
| Total deliveries | 545.5 |
| | 515.4 |
| | 30.1 |
|
| Degree Days | | | | | |
| Actual | 1,335 |
| | 1,196 |
| | 139 |
|
| Normal | 1,311 |
| | 1,318 |
| | (7 | ) |
| Percent colder (warmer) than normal | 1.8 | % | | (9.3 | )% | | n/a |
|
| Average active customer meters | 1,166,700 |
| | 1,148,900 |
| | 17,800 |
|
| New customer meters added | 3,673 |
| | 3,703 |
| | (30 | ) |
Gas Service to Firm Customers. The volume of gas delivered to firm customers is highly sensitive to weather variability as a large portion of the natural gas delivered by Washington Gas is used for space heating. Washington Gas’ rates are based on an assumption of normal weather. The tariffs in the Maryland and Virginia jurisdictions include provisions that consider the effects of the RNA and the WNA/CRA mechanisms, respectively, that are designed to, among other things, eliminate the effect on net revenues of variations in weather from normal levels (refer to the section entitled “Weather Risk” for further discussion of these mechanisms and other weather-related instruments included in our weather protection strategy). The comparison of firm volumes delivered for the current quarter compared to the prior quarter primarily reflects colder weather in the current quarter.
Gas Service to Interruptible Customers. Washington Gas must curtail or interrupt service to this class of customer when the demand by firm customers exceeds specified levels.
In the District of Columbia, the effect on net income of any changes in delivered volumes and prices to interruptible customers is limited by margin-sharing arrangements that are included in Washington Gas’ firm rate designs. Rates for interruptible customers in Maryland and Virginia are based on a traditional cost of service approach. In Virginia, Washington Gas retains a majority of the margins earned on interruptible gas and delivery sales. Washington Gas shares actual non-gas margins from interruptible sales service customers that are in excess of delivery service rates. In Maryland, Washington Gas retains a defined amount of revenues based on a set threshold.
WGL Holdings, Inc.
Washington Gas Light Company
Part I—Financial Information
Item 2—Management’s Discussion and Analysis of
Financial Condition and Results of Operations (continued)
Gas Service for Electric Generation. Washington Gas delivers natural gas for use at two electric generation facilities in Maryland that are each owned by companies independent of WGL. Washington Gas shares with firm customers a significant majority of the margins earned from natural gas deliveries to these customers. Therefore, changes in the volume of interruptible gas deliveries to these customers do not materially affect either net revenues or net income.
Interest Expense
Washington Gas' interest expense for the three months ended December 31, 2017 and 2016 was $15.0 million and $12.8 million, respectively. The increase in interest expense primarily reflects the issuance of additional long-term debt by Washington Gas.
Income Taxes
The following table shows Washington Gas' income tax expense and effective income tax rate for the three months ended December 31, 2017 and 2016.
|
| | | | | | | | | |
| Income Taxes |
| Three Months Ended December 31, | | Increase/ |
| (In millions) | 2017 | | 2016 | | (Decrease) |
| Income before income taxes | 82.8 |
| | 89.5 |
| | $ | (6.7 | ) |
| Income tax expense | 24.9 |
| | 34.0 |
| | (9.1 | ) |
| Effective income tax rate | 30.1 | % | | 38.0 | % | | (7.9 | )% |
| Income tax expense | 24.9 |
| | 34.0 |
| | (9.1 | ) |
| Less Discrete re-measurement impact of Tax Act | 6.2 |
| | — |
| | 6.2 |
|
| Income tax expense excluding discrete re-measurement impact | 18.7 |
| | 34.0 |
| | (15.3 | ) |
| Effective income tax rate excluding discrete re-measurement impact | 22.6 | % | | 38.0 | % | | (15.4 | )% |
The decrease in the effective income tax rate is due to the enactment of the Tax Act. Refer to Note 7 - Income Taxes of the Notes to Condensed Consolidated Financial Statements for a detailed discussion.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity and capital resources for Washington Gas are substantially the same as the liquidity and capital resources discussion included in the Management’s Discussion of WGL (except for certain items and transactions that pertain to WGL and its unregulated subsidiaries). Those explanations are incorporated by reference into this discussion.
During the quarter ended December 31, 2017, WGL made a $100 million equity infusion to Washington Gas. This infusion was done to maintain Washington Gas’ equity ratio in a reasonable and comparable range.
RATES AND REGULATORY MATTERS
Washington Gas makes its requests to modify existing rates based on its determination of the level of net investment in plant and equipment, operating expenses, and a level of return on invested capital that is just and reasonable. The following is an update of significant current regulatory matters in Washington Gas’ jurisdictions.
For a more detailed discussion of the matters below, refer to our combined Annual Report onWashington Gas’ Form 10-K for WGL and Washington Gas10-KT for the fiscal yearthree months ended September 30, 2017.December 31, 2018.
District of Columbia Jurisdiction
Project Pipes 2 Plan - On December 7, 2018, Washington Gas filed a request with the PSC of DC for approval of the PIPES 2 Plan extension plan for the period of October 1, 2019 through December 31, 2024. The PIPES 2 Plan seeks to address relatively higher risk pipe associated with an aging infrastructure by replacing pipe materials and components, as well as adding new features to enhance the safety of Washington Gas’s system, with an estimated total cost of $305.3 million. On March 22, 2019, comments were filed by OPC, the Apartment and Office Building Association of Metropolitan Washington, the District Department of Energy and Environment, and DC Climate Action. Washington Gas and OPC filed reply comments on April 8, 2019. On September 5, 2019, the PSC of DC issued an order extending PROJECT pipes an additional six months through March 31, 2020, in an amount not to exceed $12.5 million. On September 13, 2019, Washington Gas submitted a revised year 5 final annual project list. Reply comments were due by October 15, 2019.
Maryland Jurisdiction
District of ColumbiaMaryland Rate Case.Case 2019. On February 26, 2016,April 22, 2019, Washington Gas filed an application with the PSC of DC. The application, as amended, requested anMD to increase of $17.3 million toits base rates for natural gas delivery service. This request included $4.5service, generating $30.8 million associated with the transfer toin additional annual revenue. The revenue increase represents an increase in base rates of revenue associated with natural gas$35.9 million, of which approximately $5.0 million relates to costs being collected through the monthly STRIDE surcharges for system upgrades previously approved by the PSC of DC and currently recovered through monthly surcharges.upgrades. The filing addressed rate reliefalso requested an increase to the Company’s return on equity from 9.7% to 10.4%. The Company also is proposing a Safety Response Tracker to reconcile leak management expenses above or below the test year l
WGL Holdings, Inc.
Washington Gas Light Company
Part I—Financial InformationII
Item 2—Management’s2-Management’s Discussion and Analysis of
Financial Condition and Results of Operations (continued)
necessary forevel on an annual basis outside of a base rate case. On August 30, 2019 Washington Gas, to recover its costs and earn its allowed rate of return. The filing also satisfied the requirement for Washington Gas to file a new rate proposal by August 1, 2016, under a settlement agreement approved by the PSC of DC in 2015, which provides for the recovery through a surcharge mechanism of costs related to an accelerated pipe replacement program to upgrade the Washington Gas distribution system and enhance safety.
On March 3, 2017, the PSC of DC issued an Order approving an overall increase in rates for Washington Gas of $8.5 million effective for services rendered on and after March 24, 2017. This increase is based on a hypothetical 55.7% equity component of Washington Gas' capital structure and an overall return of 7.57%, which retained the current return on equity of 9.25%. Washington Gas had requested an increase of $17.3 million, assuming a 57.8% equity component and a 10.25% return on equity. The PSC of DC denied Washington Gas’ request for approval of an RNA and Combined Heat and Power (CHP) tariffs; however, the PSC of DC approved a two-year pilot incentive program for developers of multi-family housing projects to bring the benefits of natural gas, including lower energy bills and reduced carbon emissions to more residents in the District of Columbia. On April 3, 2017, the Apartment and Office Building Association of Metropolitan Washington (AOBA) and DC Climate Action filed applications for reconsideration of portions of the Opinion and Order. On May 12, 2017, the PSC of DC denied the application for reconsideration filed by AOBA and denied, in part, the application for reconsideration of DC Climate Action. Further, the PSC of DC directed its staff to develop proposed criteria to facilitate the PSC of DC’s review of the economic benefits of the Multifamily Piping Program and submit the criteria for public comment. On June 30, 2017, the PSC of DC issued a Notice outlining its proposed evaluation criteria for the pilot Multifamily Piping Program. Comments on the proposed criteria were filed by Washington Gas and DC Climate Action. On January 17, 2018, the PSC of DC adopted the proposed evaluation criteria, with modifications, and extended the pilot program for an additional two years.
Investigation into the Establishment of a Purchase of Receivables Program. On June 15, 2017, the PSC of DC directed Washington Gas to develop a Purchase of Receivables program for natural gas suppliers and their customers in the District of Columbia. On July 15, 2017, Washington Gas submitted its Purchase of Receivables Implementation Plan which was approved by the PSC of DC on October 19, 2017. Washington Gas expects that it will take seven to nine months to implement the program.
Application for Approval of Reduction of Distribution Rates. On January 12, 2018, Washington Gas filed an application with the PSC of DC for approval of reduction of distribution rates to reflect the Tax Act. Washington Gas is seeking to change current distribution service rates for all classes of customers served in the District of Columbia, effective for meter readings on and after January 29, 2018. Additionally, Washington Gas is seeking an expedited hearing and waiver of provisions of the DC code and District of Columbia municipal regulations ("DCMR") to ensure the proposed rate reductions will become effective as of February 1, 2018. On January 17, 2018, the Office of the People's Counsel filed a motion to oppose the expedited hearing and waivers. On January 23, 2018, the PSC of DC issued an Order which accepted Washington Gas' application but denied the request to waive any applicable provisions of the DC Code and DCMR, because the Order established the process under which the PSC of DC will conduct this proceeding. Washington Gas was directed to track the impact of the Tax Act on revenue requirements beginning January 1, 2018, recording all impacts to regulatory assets and liabilities. Washington Gas has been directed to file a revised application by February 12, 2018, including all work papers that support the calculation of the effect of the tax change, and including the ratemaking adjustments and across-the-board revenue reduction distributed to customer classes based on revenues approved in the PSC of DC's most recent rate case. Refer to Note 7 - Income Taxes of theNotes to Condensed Consolidated Financial Statements for a discussion of regulatory liabilities we have established related to tax reform.
Maryland Jurisdiction
Termination Notice Inquiry. On March 28, 2017, the PSC of MD initiated an investigation into the service termination notices sent by Washington Gas to its customers between December 1, 2013 and December 31, 2016. The case is investigating whether the service termination notices complied with Code of Maryland Regulations (COMAR). The PSC of MD’s investigation of this matter is considering whether fines and or a civil penalty should be assessed. A procedural schedule was adopted in the case, but was suspended to permit the parties to engage in settlement discussions. As of January 8, 2018, Washington Gas and the Office of the People's Counsel had reached a settlement in principle. The Staff of the PSC of MD, the Maryland Office of MD Attorney General and Montgomery County, MDPeople’s Counsel and the Apartment and& Office Building Association of Metropolitan Washington remain as parties or participants in the case in settlement discussions but will not
WGL Holdings, Inc.
Washington Gas Light Company
Part I—Financial Information
Item 2—Management’s Discussionsubmitted a Stipulation and Analysis of
Financial Condition and Results of Operations (continued)
formally join the settlement. We anticipate approval of a settlement agreement during the first or second calendar quarter of 2018. At December 31, 2017, we have recordedSettlement designed to generate an estimated liability of $2.0additional $27.0 million in connection with this matter.base rates. The Stipulation stated an overall rate of return of 7.42%, established a return on equity of 9.70%, and stated a common equity ratio of 53.5% for the Company’s hypothetical capital structure. The Stipulation and Settlement did not adopt the proposed Safety Response Tracker. On October 15, 2019 the PSC of MD issued Final Order No. 89303 which accepted the Stipulation and Settlement without change. Pursuant to Order No. 89303 Washington Gas’s revised base rates went into effect for service rendered on or after October 15, 2019.
Application for Approval of Reduction of Distribution Rates.Maryland Rate Case 2018. On January 12,May 15, 2018, Washington Gas filed an application with the PSC of MD to increase its base rates for approvalnatural gas service, generating $41.3 million in additional annual revenue. The PSC of reduction of distribution ratesMD granted the Company $28.6 million in new revenues and increased the Company’s return on equity to reflect the Tax Act.9.7%. On January 10, 2019, Washington Gas seeks to change current distribution service ratesfiled an application for all classes of customers served in Maryland, effective for meter readings on and after January 29, 2018. On January 31, 2018,rehearing with the PSC of MD, approvedalleging two errors in the application effective for bills rendered on or after February 1, 2018. Refer to Note 7 — Income Taxes agency’s final order. On June 25, 2019, the PSC of theNotes to Condensed Consolidated Financial StatementsMD issued an order granting in part and denying in part Washington Gas’ application for a discussion of regulatory liabilities we have established related to tax reform.rehearing, resulting in an additional $0.5 million increase in annual distribution revenues.
Maryland Show-Cause Order. On September 5, 2019, the PSC of MD ordered the Company, within 30 days, to (i) provide a detailed response to the NTSB’s probable cause findings, and (ii) provide evidence regarding the status of a 2003 mercury regulator replacement program, and if the program was not completed, to show cause why the Commission should not impose a civil penalty on the Company. On September 16, 2019, the PSC of MD granted the Company a 14-day extension to file its Response to the Show-Cause Order. On October 18, 2019, the Company filed its Response to the Show-Cause Order, (i) providing a detailed response to the NTSB’s probable cause findings and (ii) providing evidence regarding the status of a 2003 mercury regulator replacement program and why the Commission should not impose a civil penalty on the Company. The PSC of MD has not adopted a procedural schedule with respect to this matter but has indicated that it will schedule one public hearing near the apartment complex at Arliss Street. Given the early stage of the Show-Cause proceeding, the outcome is not yet determinable and management is unable to predict the likelihood of a civil penalty, or make an estimate of any potential civil penalty or range of potential civil penalty.
Virginia Jurisdiction
Application for the SAVE Act Plan Rider. On September 3, 2019, Washington Gas filed with the SCC of VA an application for approval of the SAVE Plan Rider for Calendar Year 2020 of its annual adjustment of its Commission-approved SAVE Act under which the Company's 2020 SAVE Plan Rider is reconciled and adjusted. Washington Gas proposes to invest approximately $132 million over calendar year 2020 to continue work on previously approved distribution and transmission system accelerated replacement programs.
Public comments are due by October 31, 2019. A decision is expected by the end of the year.
Service Agreement with AltaGas Entities. On April 1, 2019, Washington Gas filed an application with the SCC of VA, requesting approval of a revised service agreement between WGL and SEMCO Energy, Inc. (“SEMCO”), a U.S. affiliate of AltaGas and a new affiliate service agreement between WGL and AltaGas. In addition, WGL requested interim authority to provide specific services to SEMCO and AltaGas, pending Commission review of the application. On June 27, 2019 the SCC of VA issued a final order approving the revised service agreement and the new affiliate agreement (“service agreements”). The service agreements are limited to five years from the date of the order. Additionally, the service agreements are subject to certain administrative requirements which Washington Gas did not oppose. On September 25, 2019 as directed by the SCC of VA, Washington Gas submitted signed and executed copies of the agreements between SEMCO and AltaGas.
Virginia Rate Case.Case - 2018. On June 30, 2016,July 31, 2018, Washington Gas filed an application with the SCC of VA to increase its base rates for natural gas service by $45.6$37.6 million, which includes $22.3$14.7 million of revenue associated with natural gas pipeline replacement initiatives previously approved by the SCC of VA and paid by customers through a monthly rider. Additionally, the proposed raterequested revenue increase included provisions designed to deliverincorporated the benefitseffects of natural gas to more customers that include: (i) facilitating conversion to natural gas in locations already served by Washington Gas; (ii) expanding the natural gas system to high-growth communities in Virginia and (iii) research and development enabling innovations to enhance service for our customers.
The Tax Act. Interim rates went into effect,became effective, subject to refund, for usage in the December 2016January 2019 billing cycle. IntervenorsOn April 12, 2019, Washington Gas filed rebuttal testimony and revised its original return on January 31, 2017, Staffequity down from 10.6% to 10.3% and its overall rate of return down from 7.94% to 7.81%. Evidentiary hearings were held on April 30 and May 1, 2019. Post hearing briefs were filed on July 3, 2019. On September 16, 2019, the HE issued a report to the SCC of VA filed testimony on February 28, 2017, and Washington Gas filed its rebuttal testimony on March 28, 2017. On April 17, 2017, Washington Gas filed with the SCC of VA a unanimous settlement as to a specific annual revenuewhich recommended among other things: (i) no increase but not as to in base rate revenue; (ii) a specific return on equity specific accounting adjustments, or specific ratemaking methodologies, except as otherwise set forth therein. The Stipulation set forth, for purposes of settlement, a base rate increase of $34 million (of which $14.1 million represents incremental base rate revenues over and above9.2% compared to the inclusion of SAVE Plan costs which were previously recovered through monthly surcharges). For purposes of the settlement, the mid-point of thecurrent authorized return on equity rangerate of 9.0-10.0% will9.5%; (iii) unprotected plant-related and non-plant-related excess deferred income tax should be usedamortized as a reduction in any application or filing, other than a change in base rates effective December 1, 2016. On June 30, 2017, the Chief Hearing Examiner issued a report recommending that the SCC of VA approve the Stipulation. On September 8, 2017, Washington Gas received a final order from the SCC of VA accepting settlement subjectover 5 years compared to minor modifications to Washington Gas’ System Expansion Proposals. All parties agreed to a Revised Stipulation filed on September 20, 2017, reflecting the SCC of VA's denial of one of the System Expansion Proposalsamortizing using Average Rate Assumption Method (ARAM) and Washington Gas’ withdrawal of the second one. The SCC of VA issued its final order approving the revised stipulation on September 25, 2017. Refundsover 15 years, respectively; (iv) refund $5.6 million to customers will be madefor tax savings related to the interim billings in accordance with the final order. OnOctober 2017 to December 21, 2017 Washington Gas requested and was granted by the SCCperiod as part of VA a 45-day extension to complete the refunds.
Application for Approval of Reduction of Distribution Rates. On January 12, 2018, Washington Gas filed an application with the SCC of VA for approval of reduction of distribution rates to reflect the Tax Act. Washington Gas seeksAct savings owed to change current distribution service rates for all classes of customers served in Virginia, effective for meter readings oncustomer, and after January 29, 2018. A decision is expected in February 2018. Refer to Note 7 — Income Taxes (v)for a discussion of regulatory liabilities we have established related to tax reform. write off $7.1 million re
WGL Holdings, Inc.
Washington Gas Light Company
Part I—II
Item 2-Management’s Discussion and Analysis of
Financial Condition and Results of Operations (continued)
gulatory asset related to flowthrough income taxes that the company had recovered previously flowed through depreciation income tax deductions via the SAVE rider. For the nine months ended September 30, 2019, Washington Gas made the following pre-tax adjustments based on the HE’s recommendations: (i) reduced “Operating revenues-Utility” by $7.6 million to accrue additional amounts of liability subject to refund; (ii) reduced “Operating revenues-Utility” by $13.3 million associated with the revised amortization of the Tax Act liability; and (iii) wrote off $2.0 million in “Regulatory Assets - Other” and charged to “Operation and maintenance” expense. Additionally, the Company reduced income tax expense by $11.8 million related to the amortization of excess deferred income tax, and recorded $5.5 million after-tax impairment of a tax regulatory asset related to flowthrough income taxes. Reply comments on the HE’s report were filed by Washington Gas on October 21, 2019.
Washington Gas filed reply comments challenging eleven recommendations contained in the HE’s report, including some of the items highlighted above, where the bases for the findings either disregard or are contrary to the substantial evidentiary record.
CRITICAL ACCOUNTING POLICIES
Preparation of financial statements and related disclosures in compliance with GAAP requires the selection and the application of appropriate technical accounting guidance to the relevant facts and circumstances of our operations, as well as our use of estimates to compile the financial statements. The application of these accounting policies involves judgment regarding estimates and projected outcomes of future events, including the likelihood of success of particular regulatory initiatives, the likelihood of realizing estimates for legal and environmental contingencies, and the probability of recovering costs and investments.
We have identified the following critical accounting policies that require our judgment and estimation, where the resulting estimates may have a material effect on the financial statements:
revenue from contracts with customers;
accounting for unbilled revenue;
accounting for regulatory operations — regulatory assets and liabilities;
accounting for income taxes;
accounting for contingencies;
accounting for derivatives;
accounting for fair value instruments;
impairment of long-lived assets; and
accounting for pension and other post-retirement benefit plans.
For a description of these critical accounting policies, refer to Management’s Discussion and Analysis within our Form 10-KT. There were no new critical accounting policies or changes to our critical accounting policies during the three month period ended September 30, 2019.
Washington Gas Light Company
Part I-Financial Information
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The following issues related to our market risks are included under Item 2, Management’s Discussion and Analysis of Financial Condition and Results of Operations, and are incorporated by reference into this discussion.
Price Risk Related to the Regulated Utility Segment
Price Risk Related to the Non-Utility Segments
Value-At-Risk
Weather Risk
Interest-Rate Risk
ITEM 4. CONTROLS AND PROCEDURES—WGL Holdings, Inc.PROCEDURES
Senior management, including the ChairmanPresident and Chief Executive Officer and the Senior Vice President, and Chief Financial Officer and Treasurer of WGL,Washington Gas, evaluated the effectiveness of WGL’sWashington Gas’ disclosure controls and procedures (as such term is defined in Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) as of December 31, 2017.September 30, 2019. Based on this evaluation, process, the ChairmanPresident and Chief Executive Officer and the Senior Vice President, and Chief Financial Officer and Treasurer have concluded that Washington Gas’ disclosure controls and procedures of WGL were effective as of December 31, 2017. There have been no changes in the internal control over financial reporting of WGL during the quarter ended December 31, 2017 that have materially affected, or are reasonably likely to materially affect, the internal control over financial reporting of WGL.
ITEM 4. CONTROLS AND PROCEDURES—Washington Gas Light Company
Senior management, including the Chairman and Chief Executive Officer and the Senior Vice President and Chief Financial Officer of Washington Gas, evaluated the effectiveness of Washington Gas' disclosure controls and procedures (as such term is defined in Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) as of December 31, 2017. Based on this evaluation process, the Chairman and Chief Executive Officer and the Senior Vice President and Chief Financial Officer have concluded that disclosure controls and procedures of Washington Gas were effective as of December 31, 2017.September 30, 2019. There have been no changes in the internal control over financial reporting of Washington Gas during the quarter ended December 31, 2017September 30, 2019 that have materially affected, or are reasonably likely to materially affect, the internal control over financial reporting of Washington Gas.
WGL Holdings, Inc.
Washington Gas Light Company
Part II—OtherII-Other Information
ITEM 1. LEGAL PROCEEDINGS
The nature of our business ordinarily results in periodic regulatory proceedings before various state and federal authorities. For information regarding pending federal and state regulatory matters, see Note 13—Commitments10-Commitments and Contingencies of the Notes to Condensed Consolidated Financial Statements.
Silver Spring, Maryland Incident
Washington Gas continues to supportOn April 23, 2019, the investigation byNational Transportation and Safety Board (NTSB) held a hearing during which it found, among other things, that the NTSB intoprobable cause of the August 10, 2016, explosion and fire at an apartment complex on Arliss Street in Silver Spring, Maryland “was the failure of an indoor mercury service regulator with an unconnected vent line that allowed natural gas into the meter room where it accumulated and ignited from an unknown ignition source. Contributing to the accident was the location of the mercury service regulators where leak detection by odor was not readily available.” Washington Gas disagrees with the NTSB’s probable cause of which has not been determined. Additional information will be made available byfindings. Following this hearing, on June 10, 2019, the NTSB atissued an accident report.
In connection with the appropriate time. Aincident, a total of 4037 civil actions related to the incident have been filed and are pending against WGL and Washington Gas in the Circuit Court for Montgomery County, Maryland. Thirty-nineAll cases have been consolidated for discovery purposes. All of these suits seek unspecified damages for personal injury and/or property damage. The final action is a class action suit seeking total damages stated to be less than $5 millionA trial date for among others, property damage and various counts relatingeight bellwether civil actions has been scheduled for December 2, 2019. In addition, two suits were recently filed related to the loss ofincident, one each in the use of the premises. Two of the 40 cases were originally filed inSuperior Court for the District of Columbia Superiorand one in the Circuit Court but were dismissed. Those twoof Montgomery County, Maryland.
At this stage of the litigation, the outcome is not yet determinable and management is unable to make an estimate of any potential loss or range of potential losses that are reasonably possible of occurring. As a result, management has only recorded a reserve for a few of the actions were re-filed in Maryland on November 27, 2017. We maintainfor which a settlement offer was made. Washington Gas maintains excess liability insurance coverage from highly-rated insurers, subject to a nominal self-insured retention. We believeWashington Gas believes that this coverage will be sufficient to cover any significant liability to it that may result from this incident. Management
In connection with the incident, on September 5, 2019, the PSC of MD ordered the Company, within 30 days, to (i) provide a detailed response to the NTSB’s probable cause findings and (ii) provide evidence regarding the status of a 2003 mercury regulator replacement program and, if the program was not completed, to show cause why the PSC of MD should not impose a civil penalty on the Company.
On September 16, 2019, the PSC of MD granted the Company a 14-day extension to file its Response to the Show-Cause Order.
On October 18, 2019, the Company filed its Response to the Show-Cause Order, (i) providing a detailed response to the NTSB’s probable cause findings and (ii) providing evidence regarding the status of a 2003 mercury regulator replacement program and why the PSC of MD should not impose a civil penalty on the Company.
The PSC of MD has not adopted a procedural schedule with respect to this matter but has indicated that it will schedule one public hearing near the apartment complex at Arliss Street.
Given the early stage of the Show-Cause proceeding, the outcome is not yet determinable and management is unable to determinepredict the likelihood of a civil penalty, or make an estimate of any potential civil penalty or range of potential losses that are reasonably possible of occurring and therefore we have not recorded a reserve associated with this incident. Washington Gas was invited by the NTSB to be a party to the investigation and in that capacity, continues to work closely with the NTSB to help determine the cause of this incident. Information about our obligations as a signed party to the investigation can be found in the form of the Certificate of Party Representation, which is available on the investigations page of the NTSB website (http://www.ntsb.gov/legal/Documents/NTSB_Investigation_Party_Form.pdf), and 49 CFR 831.13. On August 14, 2017, the NTSB opened the public docket related to its ongoing investigation.civil penalty.
WGL Holdings, Inc.
Washington Gas Light Company
Part II—Other Information
ITEM 1A. RISK FACTORS
RISKS RELATING TO WGL AND ALL OF ITS SUBSIDIARIES
U.S. federal income tax reform could adversely affect WGL.
On December 22, 2017, President Trump signed into law the Tax Act, which significantly reforms the Internal Revenue Code of 1986, as amended. While WGL has made an initial assessment of the impacts of the Tax Act on it and its subsidiaries, it is unknown at this time how the Treasury Department may interpret certain provisions of the Tax Act. These interpretations could have a negative impact on the results of operations, cash flows and financial condition of WGL and its subsidiaries. One impact of the decrease in the federal corporate tax rate under the Tax Act is the refund of excess deferred income taxes to ratepayers and the resulting decrease in revenues from regulated operations. WGL has filed proposals for the amount and timing of such refunds with the commissions in each of its jurisdictions. The proposed refunds remain subject to regulatory approval and oversight.
The Tax Act may impact WGL’s ability to use its net operating loss carryforwards.
The Tax Act includes a limitation on the utilization of certain net operating losses to 80% of current year taxable income and, for these certain net operating losses, eliminates carrybacks. Such net operating losses have an unlimited carryforward. These provisions may affect the timing of the utilization of net operating loss carryforwards and investment tax credit carryforwards.
RISKS RELATING TO THE NON-UTILITY SUBSIDIARIES OF WGL
Returns on our non-utility subsidiaries’ investments in renewable energy projects are dependent upon regulatory and tax incentives, which may expire or be reduced or modified.
WGL Energy Systems derives a significant portion of its revenues from the sale of solar renewable energy credits (SRECs), which are produced as a result of owning and operating commercial distributed energy systems. The value of these SRECs is determined by markets in the states where the distributed energy systems are installed, which are driven by state laws relating to renewable portfolio standards or alternative compliance payment requirements for renewable energy. Overbuilding of distributed energy systems in these states or legislative changes reducing renewable portfolio standards or alternative compliance payment requirements could negatively impact the price of SRECs that we sell and the value of the SRECs that we hold in our portfolio.
In addition, WGL Energy Systems and WGSW’s investment strategy of participating with counterparties in energy-related investments, or to directly own and operate energy assets and sell energy to customers, has historically allowed us to benefit from incentives in the federal tax code. WGL’s ability to continue to benefit from these investments is based on certain assumptions about the level of our income taxes and our ability to utilize tax incentives to reduce our tax burden. Our ability to continue participating in these investments with counterparties depends in part on the effect of the Tax Act on the market demand for such investments.
WGL Energy Systems’ inability to find counterparties for tax equity partnerships could negatively impact its results.
WGL Energy Systems has derived a significant portion of its revenues from alternative energy investments, including investments in tax equity partnerships. The Tax Act reduces the corporate tax rate from a top marginal rate of 35% to a flat rate of 21%. WGL anticipates that this reduction in the corporate tax rate may have a negative impact on its ability to continue to engage counterparties in these transactions as such counterparties’ appetite for the tax benefits of such partnerships will decrease with the lower overall corporate tax rate. In addition, a base erosion anti-abuse tax, enacted as part of the Tax Act, may decrease the appetite for tax credits by counterparties who engage in business with foreign affiliates. Should WGL be unable to find sufficient or suitable counterparties for these partnerships going forward for any reason, including due to the enactment of the Tax Act, thus limiting its ability to enter into these transactions, WGL’s results of operations, cash flows and financial condition may be negatively impacted.Not Applicable.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.Applicable.
WGL Holdings, Inc.
Washington Gas Light Company
Part II—OtherII-Other Information
ITEM 6. EXHIBITS
Exhibits:
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Schedule/ Exhibit | | Description |
| |
| (a)(3) | | Exhibits |
| | |
| | | Exhibits Incorporated by Reference: |
| | | |
| | Indenture,Terms Agreement, dated November 29, 2017, by andSeptember 10, 2019, between WGL Holdings,Washington Gas Light Company, MUFG Securities Americas Inc. and The BankTD Securities (USA) LLC, as representatives of New York Mellon, as Trusteethe agents (incorporated by reference to Exhibit 4.11.2 to WGL Holdings, Inc.’sWashington Gas Light Company’s Form 8-K filed December 1, 2017)September 16, 2019). |
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| | First Supplemental Indenture,Agent Accession Letter, dated November 29, 2017, by andSeptember 10, 2019, between WGL Holdings,Washington Gas Light Company, MUFG Securities Americas Inc., TD Securities (USA) LLC, CIBC World Markets Corp., RBC Capital Markets, LLC, U.S. Bancorp Investments, Inc. and The Bank of New York Mellon, as TrusteeWilliams Capital Group, L.P. (incorporated by reference to Exhibit 4.21.1 to WGL Holdings, Inc.’sWashington Gas Light Company’s Form 8-K filed December 1, 2017)September 16, 2019). |
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| | FormAmended and Restated Credit Agreement, dated as of Floating Rate Note dueJuly 19, 2019 among Washington Gas Light Company, and the lenders parties thereto, Wells Fargo Bank, National Association, as administrative agent; Branch Banking and Trust Company, MUFG Bank, Ltd. and TD Bank, N.A., as co-syndication agents; and Wells Fargo Securities LLC, BB&T Capital Markets, MUFG Bank, Ltd. and TD Securities (USA) LLC, as joint lead arrangers and joint book runners (incorporated by reference to Exhibit 4.310.1 to WGL Holdings, Inc.’sWashington Gas Light Company’s Form 8-K filed December 1, 2017)July 25, 2019). |
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| | | Exhibits Filed Herewith: |
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| | Letter Agreement, dated January 11, 2018, by and between WGL Holdings, Inc. and AltaGas Ltd. |
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| | Preferability Letter Regarding Change in Accounting Principles for WGL Holdings, Inc. |
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| | Preferability Letter Regarding Change in Accounting Principles for Washington Gas |
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| | Certification of Terry D. McCallister,Adrian P. Chapman, the Chairman and Chief Executive Officer of WGL Holdings, Inc., pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
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| | Certification of Vincent L. Ammann, Jr., the Senior Vice President and Chief Financial Officer of WGL Holdings, Inc., pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
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| | Certification of Terry D. McCallister, the Chairman and Chief Executive Officer of Washington Gas Light Company, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
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| | Certification of Vincent L. Ammann, Jr.,Douglas I. Bonawitz, the Senior Vice President, and Chief Financial Officer and Treasurer of Washington Gas Light Company, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
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| | Certification of Terry D. McCallister,Adrian P. Chapman, the ChairmanPresident and Chief Executive Officer, of the Registrants, and Vincent L. Ammann, Jr.,Douglas I. Bonawitz, the Senior Vice President, and Chief Financial Officer of the Registrants,and Treasurer, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
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| 101.INS | | XBRL Instance Document |
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| 101.SCH | | XBRL Schema Document |
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| 101.CAL | | XBRL Calculation Linkbase Document |
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| 101.LAB | | XBRL Labels Linkbase Document |
| | | |
| 101.PRE | | XBRL Presentation Linkbase Document |
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| 101.DEF | | XBRL Definition Linkbase Document |
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WGL Holdings, Inc.
Washington Gas Light Company
Signature
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrants haveRegistrant has duly caused this report to be signed on theirits behalf by the undersigned, thereunto duly authorized.
|
| | |
| WGL HOLDINGS, INC.
and
WASHINGTON GAS LIGHT COMPANY (Co-registrants) |
| (Registrant) |
| |
| | /s/ Gunnar J. Gode |
Date: February 7, 2018 | /s/ William R. Ford | Gunnar J. Gode |
| William R. Ford | |
| Vice President and Chief Accounting Officer (signingController |
(signing on behalf of the RegistrantsRegistrant and as |
Principal Accounting Officer of each of the Registrants) | Registrant) |
Date: October 30, 2019