UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, 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, 2017June 30, 2018
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| ¨ | Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the transition period from _____ to _____
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Commission File Number | 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 Incorporation | I.R.S. Employer Identification No. |
1-161630-55968
| WGL Holdings, Inc. 101 Constitution1000 Maine Ave., N.W.S.W.
Washington, D.C. 2008020024 (703) 750-2000 | Virginia | 52-2210912 |
| 0-49807 | Washington Gas Light Company 101 Constitution1000 Maine Ave., N.W.S.W.
Washington, D.C. 2008020024 (703) 750-4440 | District of Columbia and Virginia | 53-0162882 |
Indicate by check mark whether each 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 No ¨
Indicate by check mark whether each 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 No ¨
Indicate by check mark whether each 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 filer þ¨ | | Accelerated filer ¨ | | Non-accelerated filer ¨þ | | Smaller reporting company ¨ |
| | | | (Do not check if a smaller reporting company) |
| | Emerging growth 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. ¨ |
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Washington Gas Light Company:
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| | Large accelerated filer ¨ | | Accelerated filer ¨ | | Non-accelerated filer þ | | Smaller reporting company ¨ |
| | | | (Do not check if a smaller reporting company) |
| | Emerging growth 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. ¨ |
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Indicate by check mark whether each registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No þ
Indicate the number of shares outstanding of each of the issuers’ classes of common stock, as of the latest practicable date.
WGL Holdings, Inc. common stock, no par value, outstanding as of JanuaryJuly 31, 2018: 51,359,182100 shares. All of the outstanding shares of common stock, no par value, of WGL Holdings, Inc. are held by Wrangler 1 LLC, an indirect wholly-owned subsidiary of AltaGas Ltd. as of July 31, 2018.
Washington Gas Light Company common stock, $1 par value, outstanding as of JanuaryJuly 31, 2018: 46,479,536 shares
shares. All of the outstanding shares of common stock, ($1$1 par value)value, of Washington Gas Light Company wereare held by Wrangler SPE LLC (the SPE), a direct wholly-owned subsidiary of WGL Holdings, Inc. as of JanuaryJuly 31, 2018.
WGL Holdings, Inc.
Washington Gas Light Company
For the Quarter Ended December 31, 2017June 30, 2018
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
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). Except where the content clearly indicates otherwise, any reference in the report to “WGL,” “we,” “us” or “our” is to the holding company or WGL and all of its subsidiaries, including Washington Gas, which is a wholly owned subsidiary of WGL.
Part I—Financial information in this Quarterly Report on Form 10-Q includes separate condensed 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 acquisitionintegration 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 assume 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 Annual Report on Form 10-K for WGL and Washington Gas for the fiscal year ended September 30, 2017, in Part II, Item 1A,1A. Risk Factors in thisour quarterly reportreports on Form 10-Q and in our other filings with the Securities and Exchange Commission, and may include, but are not limited to the following:
the occurrence of any event, change or other circumstances that could give riseinability to the termination of the Agreementmeet commitments under various orders and Plan of Merger among WGL, AltaGas and Wrangler, Inc. (Merger Agreement);
the inability of WGL or AltaGas to satisfy conditions to the closing of the merger;
the requiredagreements associated with 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 cause a failure of a closing condition to the merger or that could have a detrimental impact on WGL’s business, financial condition, operating results and prospects;
the combined companyinability to successfully be integrated into the operations of AltaGas following completion of the merger;merger with AltaGas and realize anticipated benefits;
the effect of the announcementconsummation of the merger on the ability of WGL to retain customers and retain and hire key personnel;
the effect of the announcementconsummation of the merger on the ability of WGL to maintain relationships with its suppliers;
potential litigation in connection with the merger;
the incurrence 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;
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’ 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 and developments in economic, competitive, political and regulatory conditions;
unusual weather conditions and changes in natural gas consumption patterns;
changes in energy commodity market conditions, including the relative prices of alternative forms of energy such as electricity, fuel oil and propane;
WGL Holdings, Inc.
Washington Gas Light Company
changes in the value of derivative contracts and the availability of suitable derivative counterparties;
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;regulations, including the competitiveness of WGL Energy Systems, Inc. in securing future assets to continue its growth;
legislative, regulatory and judicial mandates or decisions affecting our business operations, including interpretations of the Tax Cuts and Jobs Act (the Tax(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;principles and the effect of accounting pronouncements issued periodically by accounting standard-setting bodies;
our ability to manage the outsourcing of several business processes;
strikes or work stoppages by unionized employees;
acts of nature and catastrophic events, including terrorist acts; and
decisions made by management and co-investors in non-controlled investees.investees; and
changes in AltaGas’ strategy, relationship with us or operating performance.
All such factors are difficult to predict accurately and are generally beyond the direct control of the registrants. Readers are urged to use care and consider the risks, uncertainties and other factors that could affect our 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
| | | (In thousands) | December 31,
2017 | | September 30,
2017 | June 30,
2018 | | September 30,
2017 |
| ASSETS | | | | | | |
| Property, Plant and Equipment | | | | | | |
| At original cost | $ | 6,217,878 |
| | $ | 6,143,841 |
| $ | 6,320,171 |
| | $ | 6,143,841 |
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| Accumulated depreciation and amortization | (1,538,998 | ) | | (1,513,790 | ) | (1,570,890 | ) | | (1,513,790 | ) |
| Net property, plant and equipment | 4,678,880 |
| | 4,630,051 |
| 4,749,281 |
| | 4,630,051 |
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| Current Assets | | | | | | |
| Cash and cash equivalents | 64,110 |
| | 8,524 |
| 33,064 |
| | 8,524 |
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| Receivables | | | | | | |
| Accounts receivable | 519,980 |
| | 398,149 |
| 432,278 |
| | 398,149 |
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| Gas costs and other regulatory assets | 17,663 |
| | 21,705 |
| 3,439 |
| | 21,705 |
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| Unbilled revenues | 278,256 |
| | 165,483 |
| 144,469 |
| | 165,483 |
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| Allowance for doubtful accounts | (32,451 | ) | | (32,025 | ) | (36,257 | ) | | (32,025 | ) |
| Net receivables | 783,448 |
| | 553,312 |
| 543,929 |
| | 553,312 |
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| Materials and supplies—principally at average cost | 20,456 |
| | 20,172 |
| 18,513 |
| | 20,172 |
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| Storage gas | 206,978 |
| | 243,984 |
| 124,767 |
| | 243,984 |
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| Prepaid taxes | 38,824 |
| | 31,549 |
| 36,260 |
| | 31,549 |
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| Other prepayments | 74,612 |
| | 86,465 |
| 62,258 |
| | 86,465 |
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| Derivatives | 17,665 |
| | 15,327 |
| 12,066 |
| | 15,327 |
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| Other | 40,174 |
| | 26,556 |
| 13,660 |
| | 26,556 |
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| Total current assets | 1,246,267 |
| | 985,889 |
| 844,517 |
| | 985,889 |
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| Deferred Charges and Other Assets | | | | | | |
| Regulatory assets | | | | | | |
| Gas costs | 117,474 |
| | 90,136 |
| 54,391 |
| | 90,136 |
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| Pension and other post-retirement benefits | 132,837 |
| | 139,499 |
| 121,678 |
| | 139,499 |
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| Other | 117,962 |
| | 104,596 |
| 116,650 |
| | 104,596 |
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| Prepaid post-retirement benefits | 234,982 |
| | 231,577 |
| 240,577 |
| | 231,577 |
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| Derivatives | 32,168 |
| | 38,389 |
| 19,643 |
| | 38,389 |
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| Investments in unconsolidated affiliates | 489,354 |
| | 394,201 |
| 677,404 |
| | 394,201 |
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| Other | 12,650 |
| | 11,671 |
| 14,144 |
| | 11,671 |
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| Total deferred charges and other assets | 1,137,427 |
| | 1,010,069 |
| 1,244,487 |
| | 1,010,069 |
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Total Assets | $ | 7,062,574 |
| | $ | 6,626,009 |
| $ | 6,838,285 |
| | $ | 6,626,009 |
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| CAPITALIZATION AND LIABILITIES | | | | | | |
| Capitalization | | | | | | |
| WGL Holdings common shareholders’ equity | $ | 1,609,607 |
| | $ | 1,502,690 |
| $ | 1,648,553 |
| | $ | 1,502,690 |
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| Non-controlling interest | 3,210 |
| | 6,851 |
| 6,889 |
| | 6,851 |
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| Washington Gas Light Company preferred stock | 28,173 |
| | 28,173 |
| 28,173 |
| | 28,173 |
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| Total equity | 1,640,990 |
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| 1,537,714 |
| 1,683,615 |
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| 1,537,714 |
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| Long-term debt | 1,679,893 |
| | 1,430,861 |
| 1,879,316 |
| | 1,430,861 |
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| Total capitalization | 3,320,883 |
| | 2,968,575 |
| 3,562,931 |
| | 2,968,575 |
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| Current Liabilities | | | | | | |
| Current maturities of long-term debt | 300,000 |
| | 250,000 |
| 100,000 |
| | 250,000 |
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| Notes payable and project financing | 558,700 |
| | 559,844 |
| 429,520 |
| | 559,844 |
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| Accounts payable and other accrued liabilities | 431,327 |
| | 423,824 |
| 387,326 |
| | 423,824 |
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| Wages payable | 22,146 |
| | 18,096 |
| 24,144 |
| | 18,096 |
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| Accrued interest | 17,669 |
| | 7,806 |
| 18,353 |
| | 7,806 |
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| Dividends declared | 26,520 |
| | 26,452 |
| 25,620 |
| | 26,452 |
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| Customer deposits and advance payments | 55,158 |
| | 65,841 |
| 64,516 |
| | 65,841 |
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| Gas costs and other regulatory liabilities | 57,275 |
| | 22,814 |
| 35,648 |
| | 22,814 |
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| Accrued taxes | 35,676 |
| | 17,657 |
| 28,410 |
| | 17,657 |
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| Derivatives | 35,021 |
| | 43,990 |
| 20,142 |
| | 43,990 |
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| Other | 50,002 |
| | 52,664 |
| 42,609 |
| | 52,664 |
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| Total current liabilities | 1,589,494 |
| | 1,488,988 |
| 1,176,288 |
| | 1,488,988 |
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| Deferred Credits | | | | | | |
| Unamortized investment tax credits | 153,502 |
| | 155,007 |
| 152,316 |
| | 155,007 |
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| Deferred income taxes | 413,065 |
| | 868,067 |
| 444,903 |
| | 868,067 |
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| Accrued pensions and benefits | 184,293 |
| | 181,552 |
| 189,521 |
| | 181,552 |
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| Asset retirement obligations | 300,130 |
| | 296,810 |
| 306,603 |
| | 296,810 |
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| Regulatory liabilities | | | | | | |
| Accrued asset removal costs | 286,234 |
| | 292,173 |
| 272,355 |
| | 292,173 |
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| Other post-retirement benefits | 130,882 |
| | 135,035 |
| 124,072 |
| | 135,035 |
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| Other—principally deferred taxes | 452,091 |
| | 9,403 |
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| Excess deferred taxes and other | | 445,354 |
| | 9,403 |
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| Derivatives | 128,885 |
| | 122,607 |
| 114,383 |
| | 122,607 |
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| Other | 103,115 |
| | 107,792 |
| 49,559 |
| | 107,792 |
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| Total deferred credits | 2,152,197 |
| | 2,168,446 |
| 2,099,066 |
| | 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 |
| $ | 6,838,285 |
| | $ | 6,626,009 |
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WGL Holdings, Inc.
Condensed Consolidated Statements of Income (Unaudited)
Part I—Financial Information
Item 1—Financial Statements (continued)
| | | | Three Months Ended
December 31, | Three Months Ended
June 30, | | Nine Months Ended
June 30, |
| (In thousands, except per share data) | 2017 | | 2016 | 2018 | | 2017 | | 2018 | | 2017 |
| OPERATING REVENUES | | | | | | | | | | |
| Utility | $ | 374,990 |
| | $ | 327,063 |
| $ | 195,177 |
| | $ | 198,968 |
| | $ | 1,093,647 |
| | $ | 992,301 |
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| Non-utility | 277,450 |
| | 282,424 |
| 228,288 |
| | 275,396 |
| | 868,709 |
| | 933,300 |
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| Total Operating Revenues | 652,440 |
| | 609,487 |
| 423,465 |
| | 474,364 |
| | 1,962,356 |
| | 1,925,601 |
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| OPERATING EXPENSES | | | | | | | | | | |
| Utility cost of gas | 122,273 |
| | 75,500 |
| 51,737 |
| | 49,881 |
| | 370,767 |
| | 259,839 |
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| Non-utility cost of energy-related sales | 225,502 |
| | 252,886 |
| 191,198 |
| | 233,025 |
| | 703,904 |
| | 787,691 |
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| Operation and maintenance | 102,226 |
| | 100,717 |
| 107,719 |
| | 97,477 |
| | 322,501 |
| | 316,455 |
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| Depreciation and amortization | 40,985 |
| | 35,283 |
| 40,388 |
| | 39,094 |
| | 122,095 |
| | 113,487 |
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| General taxes and other assessments | 44,887 |
| | 40,388 |
| 35,491 |
| | 32,032 |
| | 135,417 |
| | 122,964 |
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| Total Operating Expenses | 535,873 |
| | 504,774 |
| 426,533 |
| | 451,509 |
| | 1,654,684 |
| | 1,600,436 |
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| OPERATING INCOME | 116,567 |
| | 104,713 |
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| OPERATING INCOME (LOSS) | | (3,068 | ) | | 22,855 |
| | 307,672 |
| | 325,165 |
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| Equity in earnings of unconsolidated affiliates | 5,892 |
| | 265 |
| 7,065 |
| | 7,508 |
| | (14,457 | ) | | 15,117 |
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| Other income (expenses) — net | (780 | ) | | 478 |
| (1,663 | ) | | 884 |
| | (2,834 | ) | | (591 | ) |
| Interest expense | 20,197 |
| | 16,235 |
| 20,593 |
| | 25,062 |
| | 48,427 |
| | 55,552 |
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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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| INCOME (LOSS) BEFORE INCOME TAXES | | (18,259 | ) | | 6,185 |
| | 241,954 |
| | 284,139 |
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| INCOME TAX EXPENSE | | 37,068 |
| | 2,149 |
| | 33,181 |
| | 106,381 |
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| NET INCOME (LOSS) | | $ | (55,327 | ) | | $ | 4,036 |
| | $ | 208,773 |
| | $ | 177,758 |
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| Non-controlling interest | (5,778 | ) | | (2,535 | ) | (6,651 | ) | | (4,559 | ) | | (16,801 | ) | | (12,533 | ) |
| Dividends on Washington Gas Light Company preferred stock | 330 |
| | 330 |
| 330 |
| | 330 |
| | 990 |
| | 990 |
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| NET INCOME APPLICABLE TO COMMON STOCK | $ | 138,040 |
| | $ | 57,972 |
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| NET INCOME (LOSS) APPLICABLE TO COMMON STOCK | | $ | (49,006 | ) | | $ | 8,265 |
| | $ | 224,584 |
| | $ | 189,301 |
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| WEIGHTED AVERAGE COMMON SHARES OUTSTANDING | | | | | | | | | | |
| Basic | 51,319 |
| | 51,172 |
| 51,359 |
| | 51,219 |
| | 51,343 |
| | 51,200 |
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| Diluted | 51,549 |
| | 51,445 |
| 51,359 |
| | 51,493 |
| | 51,571 |
| | 51,469 |
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| EARNINGS PER AVERAGE COMMON SHARE | | | | |
| EARNINGS (LOSS) PER AVERAGE COMMON SHARE | | | | | | | | |
| Basic | $ | 2.69 |
| | $ | 1.13 |
| $ | (0.95 | ) | | $ | 0.16 |
| | $ | 4.37 |
| | $ | 3.70 |
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| Diluted | $ | 2.68 |
| | $ | 1.13 |
| $ | (0.95 | ) | | $ | 0.16 |
| | $ | 4.35 |
| | $ | 3.68 |
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| DIVIDENDS DECLARED PER COMMON SHARE | $ | 0.5100 |
| | $ | 0.4875 |
| $ | 0.5150 |
| | $ | 0.5100 |
| | $ | 1.5400 |
| | $ | 1.5075 |
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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)
| | | | Three Months Ended
December 31, | Three Months Ended
June 30, | | Nine Months Ended June 30, |
| (In thousands) | 2017 | | 2016 | 2018 | | 2017 | | 2018 | | 2017 |
| NET INCOME | $ | 132,592 |
| | $ | 55,767 |
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| NET INCOME (LOSS) | | $ | (55,327 | ) | | $ | 4,036 |
| | $ | 208,773 |
| | $ | 177,758 |
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| OTHER COMPREHENSIVE INCOME, BEFORE INCOME TAXES: | | | | | | | | | | |
| Qualified cash flow hedging instruments | 52 |
| | 49,455 |
| 53 |
| | 51 |
| | 158 |
| | 49,556 |
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| Pension and other post-retirement benefit plans | | | | | | | | | | |
| Change in net prior service credit | (274 | ) | | (217 | ) | (273 | ) | | (217 | ) | | (820 | ) | | (651 | ) |
| Change in actuarial net loss | 527 |
| | 588 |
| 530 |
| | 588 |
| | 1,587 |
| | 1,763 |
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| Total other comprehensive income before taxes | $ | 305 |
| | $ | 49,826 |
| $ | 310 |
| | $ | 422 |
| | $ | 925 |
| | $ | 50,668 |
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| INCOME TAX EXPENSE RELATED TO OTHER COMPREHENSIVE INCOME | 61 |
| | 20,413 |
| 83 |
| | 235 |
| | 248 |
| | 20,816 |
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| OTHER COMPREHENSIVE INCOME | $ | 244 |
| | $ | 29,413 |
| $ | 227 |
| | $ | 187 |
| | $ | 677 |
| | $ | 29,852 |
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| COMPREHENSIVE INCOME | $ | 132,836 |
| | $ | 85,180 |
| |
| COMPREHENSIVE INCOME (LOSS) | | $ | (55,100 | ) | | $ | 4,223 |
| | $ | 209,450 |
| | $ | 207,610 |
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| Non-controlling interest | (5,778 | ) | | (2,535 | ) | (6,651 | ) | | (4,559 | ) | | (16,801 | ) | | (12,533 | ) |
| Dividends on Washington Gas Light Company preferred stock | 330 |
| | 330 |
| 330 |
| | 330 |
| | 990 |
| | 990 |
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| COMPREHENSIVE INCOME ATTRIBUTABLE TO WGL HOLDINGS | $ | 138,284 |
| | $ | 87,385 |
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| COMPREHENSIVE INCOME (LOSS) ATTRIBUTABLE TO WGL HOLDINGS | | $ | (48,779 | ) | | $ | 8,452 |
| | $ | 225,261 |
| | $ | 219,153 |
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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)
| | | | Three Months Ended December 31, | Nine Months Ended June 30, |
| (In thousands) | 2017 | | 2016 | 2018 | | 2017 |
| OPERATING ACTIVITIES | | | | | | |
| Net income | $ | 132,592 |
| | $ | 55,767 |
| $ | 208,773 |
| | $ | 177,758 |
|
| ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIES | | | | | | |
| Depreciation and amortization | 40,985 |
| | 35,283 |
| 122,095 |
| | 113,487 |
|
| Amortization of: | | | | | | |
| Other regulatory assets and liabilities—net | 1,634 |
| | 823 |
| 5,235 |
| | 2,567 |
|
| Debt related costs | 550 |
| | 445 |
| 2,211 |
| | 1,307 |
|
| Deferred income taxes | (29,264 | ) | | 34,852 |
| 38,723 |
| | 81,839 |
|
| Dividends received from equity method investments | 5,628 |
| | — |
| 14,195 |
| | 10,864 |
|
| Accrued/deferred pension and other post-retirement benefit cost | 2,393 |
| | 5,424 |
| 7,943 |
| | 16,227 |
|
| Earnings in equity interest | (5,892 | ) | | 265 |
| (19,543 | ) | | (15,117 | ) |
| Compensation expense related to stock-based awards | 5,802 |
| | 4,912 |
| 12,610 |
| | 12,114 |
|
| Provision for doubtful accounts | 3,781 |
| | 2,704 |
| 16,258 |
| | 11,601 |
|
| Impairment loss | | 34,000 |
| | — |
|
| Unrealized (gain) loss on derivative contracts | 12,524 |
| | (30,339 | ) | 687 |
| | (67,083 | ) |
| Amortization of investment tax credits | (1,845 | ) | | (1,396 | ) | (5,542 | ) | | (5,544 | ) |
| Other non-cash credits—net | (197 | ) | | 2,105 |
| |
| Other non-cash charges (credits)—net | | (768 | ) | | (584 | ) |
| Changes in operating assets and liabilities (Note 16) | (175,402 | ) | | (201,340 | ) | 132,723 |
| | (111,053 | ) |
| Net Cash Used In Operating Activities | (6,711 | ) | | (90,495 | ) | |
| Net Cash Provided by Operating Activities | | 569,600 |
| | 228,383 |
|
| FINANCING ACTIVITIES | | | | | | |
| Common stock issued | — |
| | 251 |
| — |
| | 295 |
|
| Long-term debt issued | 300,000 |
| | — |
| 550,000 |
| | 50,000 |
|
| Long-term debt retired | | (250,000 | ) | | — |
|
| Debt issuance costs | (1,482 | ) | | (375 | ) | (3,060 | ) | | (404 | ) |
| Notes payable issued —net | (1,144 | ) | | 324,001 |
| |
| Notes payable issued (retired) —net | | (103,000 | ) | | 217,000 |
|
| Contributions from non-controlling interest | 1,659 |
| | 7,331 |
| 16,697 |
| | 17,358 |
|
| Distributions to non-controlling interest | (136 | ) | | — |
| (472 | ) | | — |
|
| Project financing | — |
| | 8,877 |
| 989 |
| | 18,396 |
|
| Dividends on common stock and preferred stock | (26,520 | ) | | (23,921 | ) | (79,824 | ) | | (75,672 | ) |
| Other financing activities—net | (6,558 | ) | | (1,295 | ) | (6,558 | ) | | (1,296 | ) |
| Net Cash Provided by Financing Activities | 265,819 |
| | 314,869 |
| 124,772 |
| | 225,677 |
|
| INVESTING ACTIVITIES | | | | | | |
| Capital expenditures (excluding Allowance for Funds Used During Construction) | (99,054 | ) | | (155,758 | ) | (348,396 | ) | | (352,232 | ) |
| Investments in non-utility interests | (104,468 | ) | | (62,007 | ) | (321,436 | ) | | (110,952 | ) |
| Distributions and receipts from non-utility interests | — |
| | 1,565 |
| — |
| | 4,126 |
|
| Proceeds from the sale of assets | | — |
| | 9,858 |
|
| Loans to external parties | — |
| | (863 | ) | — |
| | (863 | ) |
| Net Cash Used in Investing Activities | (203,522 | ) | | (217,063 | ) | (669,832 | ) | | (450,063 | ) |
| INCREASE IN CASH AND CASH EQUIVALENTS | 55,586 |
| | 7,311 |
| 24,540 |
| | 3,997 |
|
| Cash and Cash Equivalents at Beginning of Year | 8,524 |
| | 5,573 |
| 8,524 |
| | 5,573 |
|
| Cash and Cash Equivalents at End of Period | $ | 64,110 |
| | $ | 12,884 |
| $ | 33,064 |
| | $ | 9,570 |
|
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION (Note 16)
| | | | | | |
The accompanying notes are an integral part of these statements.
Washington Gas Light Company
Condensed Balance Sheets (Unaudited)
Part I—Financial Information
Item 1—Financial Statements (continued)
| | | (In thousands) | December 31,
2017 | | September 30,
2017 | June 30,
2018 | | September 30,
2017 |
| ASSETS | | | | | | |
| Property, Plant and Equipment | | | | | | |
| At original cost | $ | 5,358,064 |
| | $ | 5,310,337 |
| $ | 5,491,886 |
| | $ | 5,310,337 |
|
| Accumulated depreciation and amortization | (1,440,276 | ) | | (1,422,622 | ) | (1,472,862 | ) | | (1,422,622 | ) |
| Net property, plant and equipment | 3,917,788 |
| | 3,887,715 |
| 4,019,024 |
| | 3,887,715 |
|
| Current Assets | | | | | | |
| Cash and cash equivalents | 6,652 |
| | 1 |
| 27,185 |
| | 1 |
|
| Receivables | | | | | | |
| Accounts receivable | 263,001 |
| | 190,740 |
| 211,854 |
| | 190,740 |
|
| Gas costs and other regulatory assets | 17,663 |
| | 21,705 |
| 3,439 |
| | 21,705 |
|
| Unbilled revenues | 205,107 |
| | 107,967 |
| 91,307 |
| | 107,967 |
|
| Allowance for doubtful accounts | (24,447 | ) | | (23,741 | ) | (28,634 | ) | | (23,741 | ) |
| Net receivables | 461,324 |
| | 296,671 |
| 277,966 |
| | 296,671 |
|
| Materials and supplies—principally at average cost | 20,410 |
| | 20,126 |
| 18,467 |
| | 20,126 |
|
| Storage gas | 84,960 |
| | 92,753 |
| 54,677 |
| | 92,753 |
|
| Prepaid taxes | 31,899 |
| | 23,350 |
| 23,004 |
| | 23,350 |
|
| Other prepayments | 22,776 |
| | 13,238 |
| 21,473 |
| | 13,238 |
|
| Receivables from associated companies | 27,010 |
| | 32,362 |
| 33,569 |
| | 32,362 |
|
| Derivatives | 4,343 |
| | 5,061 |
| 1,370 |
| | 5,061 |
|
| Other | 120 |
| | 102 |
| 139 |
| | 102 |
|
| Total current assets | 659,494 |
| | 483,664 |
| 457,850 |
| | 483,664 |
|
| Deferred Charges and Other Assets | | | | | | |
| Regulatory assets | | | | | | |
| Gas costs | 117,474 |
| | 90,136 |
| 54,391 |
| | 90,136 |
|
| Pension and other post-retirement benefits | 132,082 |
| | 138,573 |
| 120,967 |
| | 138,573 |
|
| Other | 117,570 |
| | 104,538 |
| 116,263 |
| | 104,538 |
|
| Prepaid post-retirement benefits | 233,676 |
| | 230,283 |
| 239,249 |
| | 230,283 |
|
| Derivatives | 15,385 |
| | 16,244 |
| 9,102 |
| | 16,244 |
|
| Other | 4,459 |
| | 3,561 |
| 5,196 |
| | 3,561 |
|
| Total deferred charges and other assets | 620,646 |
| | 583,335 |
| 545,168 |
| | 583,335 |
|
Total Assets | $ | 5,197,928 |
| | $ | 4,954,714 |
| $ | 5,022,042 |
| | $ | 4,954,714 |
|
| CAPITALIZATION AND LIABILITIES | | | | | | |
| Capitalization | | | | | | |
| Common shareholder’s equity | $ | 1,295,914 |
| | $ | 1,164,749 |
| $ | 1,351,831 |
| | $ | 1,164,749 |
|
| Preferred stock | 28,173 |
| | 28,173 |
| 28,173 |
| | 28,173 |
|
| Long-term debt | 1,084,619 |
| | 1,134,461 |
| 1,084,780 |
| | 1,134,461 |
|
| Total capitalization | 2,408,706 |
| | 2,327,383 |
| 2,464,784 |
| | 2,327,383 |
|
| Current Liabilities | | | | | | |
| Current maturities of long-term debt | 50,000 |
| | — |
| 50,000 |
| | — |
|
| Notes payable and project financing | 205,772 |
| | 166,772 |
| 15,460 |
| | 166,772 |
|
| Accounts payable and other accrued liabilities | 196,363 |
| | 219,827 |
| 185,505 |
| | 219,827 |
|
| Wages payable | 20,191 |
| | 16,508 |
| 22,026 |
| | 16,508 |
|
| Accrued interest | 15,593 |
| | 3,967 |
| 15,704 |
| | 3,967 |
|
| Dividends declared | 22,166 |
| | 22,098 |
| 21,126 |
| | 22,098 |
|
| Customer deposits and advance payments | 54,711 |
| | 64,194 |
| 64,069 |
| | 64,194 |
|
| Gas costs and other regulatory liabilities | 57,275 |
| | 22,814 |
| 35,648 |
| | 22,814 |
|
| Accrued taxes | 46,954 |
| | 12,808 |
| 23,158 |
| | 12,808 |
|
| Payables to associated companies | 107,597 |
| | 94,844 |
| 109,341 |
| | 94,844 |
|
| Derivatives | 24,636 |
| | 30,263 |
| 16,342 |
| | 30,263 |
|
| Other | 7,349 |
| | 7,473 |
| 7,105 |
| | 7,473 |
|
| Total current liabilities | 808,607 |
| | 661,568 |
| 565,484 |
| | 661,568 |
|
| Deferred Credits | | | | | | |
| Unamortized investment tax credits | 3,921 |
| | 4,100 |
| 3,563 |
| | 4,100 |
|
| Deferred income taxes | 463,805 |
| | 888,385 |
| 514,369 |
| | 888,385 |
|
| Accrued pensions and benefits | 182,540 |
| | 179,814 |
| 187,739 |
| | 179,814 |
|
| Asset retirement obligations | 294,939 |
| | 291,871 |
| 301,075 |
| | 291,871 |
|
| Regulatory liabilities | | | | | | |
| Accrued asset removal costs | 286,234 |
| | 292,173 |
| 272,355 |
| | 292,173 |
|
| Other post-retirement benefits | 130,056 |
| | 134,181 |
| 123,306 |
| | 134,181 |
|
| Other—principally deferred taxes | 450,409 |
| | 9,403 |
| |
Excess deferred taxes and other
| | 443,747 |
| | 9,403 |
|
| Derivatives | 119,048 |
| | 112,299 |
| 98,075 |
| | 112,299 |
|
| Other | 49,663 |
| | 53,537 |
| 47,545 |
| | 53,537 |
|
| Total deferred credits | 1,980,615 |
| | 1,965,763 |
| 1,991,774 |
| | 1,965,763 |
|
| Commitments and Contingencies (Note 13) |
| |
|
| |
|
| Total Capitalization and Liabilities | $ | 5,197,928 |
| | $ | 4,954,714 |
| $ | 5,022,042 |
| | $ | 4,954,714 |
|
The accompanying notes are an integral part of these statements.
Washington Gas Light Company
Condensed Statements of Income (Unaudited)
Part I—Financial Information
Item 1—Financial Statements (continued)
| | | | Three Months Ended December 31, | Three Months Ended June 30, | | Nine Months Ended June 30, |
| (In thousands) | 2017 | | 2016 | 2018 | | 2017 | | 2018 | | 2017 |
| OPERATING REVENUES | $ | 377,470 |
| | $ | 333,986 |
| $ | 199,512 |
| | $ | 203,186 |
| | $ | 1,109,022 |
| | $ | 1,012,193 |
|
| OPERATING EXPENSES | | | | | | | | | | |
| Utility cost of gas | 124,745 |
| | 82,431 |
| 56,063 |
| | 54,093 |
| | 386,104 |
| | 279,713 |
|
| Operation and maintenance | 79,551 |
| | 82,166 |
| 82,389 |
| | 77,370 |
| | 252,924 |
| | 246,290 |
|
| Depreciation and amortization | 33,646 |
| | 30,126 |
| 34,043 |
| | 32,761 |
| | 101,157 |
| | 96,003 |
|
| General taxes and other assessments | 39,983 |
| | 36,255 |
| 30,845 |
| | 27,498 |
| | 121,321 |
| | 109,857 |
|
| Total Operating Expenses | 277,925 |
| | 230,978 |
| 203,340 |
| | 191,722 |
| | 861,506 |
| | 731,863 |
|
| OPERATING INCOME | 99,545 |
| | 103,008 |
| |
| OPERATING INCOME (LOSS) | | (3,828 | ) | | 11,464 |
| | 247,516 |
| | 280,330 |
|
| Other expense — net | (1,792 | ) | | (779 | ) | (2,628 | ) | | (908 | ) | | (5,647 | ) | | (3,044 | ) |
| Interest expense | 14,973 |
| | 12,762 |
| 14,455 |
| | 12,960 |
| | 44,100 |
| | 38,727 |
|
| INCOME BEFORE INCOME TAXES | 82,780 |
| | 89,467 |
| |
| INCOME TAX EXPENSE | 24,854 |
| | 34,006 |
| |
| NET INCOME | $ | 57,926 |
| | $ | 55,461 |
| |
| INCOME (LOSS) BEFORE INCOME TAXES | | (20,911 | ) | | (2,404 | ) | | 197,769 |
| | 238,559 |
|
| INCOME TAX EXPENSE (BENEFIT) | | (9,412 | ) | | (733 | ) | | 43,258 |
| | 91,159 |
|
| NET INCOME (LOSS) | | $ | (11,499 | ) | | $ | (1,671 | ) | | $ | 154,511 |
| | $ | 147,400 |
|
| Dividends on Washington Gas preferred stock | 330 |
| | 330 |
| 330 |
| | 330 |
| | 990 |
| | 990 |
|
| NET INCOME APPLICABLE TO COMMON STOCK | $ | 57,596 |
| | $ | 55,131 |
| |
| NET INCOME (LOSS) APPLICABLE TO COMMON STOCK | | $ | (11,829 | ) | | $ | (2,001 | ) | | $ | 153,521 |
| | $ | 146,410 |
|
The accompanying notes are an integral part of these statements.
Washington Gas Light Company
Condensed Statements of Comprehensive Income (Unaudited)
Part I—Financial Information
Item 1—Financial Statements (continued)
| | | | Three Months Ended
December 31, | Three Months Ended
June 30, | | Nine Months Ended
June 30, |
| (In thousands) | 2017 | | 2016 | 2018 | | 2017 | | 2018 | | 2017 |
| NET INCOME | $ | 57,926 |
| | $ | 55,461 |
| |
| NET INCOME (LOSS) | | $ | (11,499 | ) | | $ | (1,671 | ) | | $ | 154,511 |
| | $ | 147,400 |
|
| OTHER COMPREHENSIVE INCOME, BEFORE INCOME TAXES: | | | | | | | | | | |
| Pension and other post-retirement benefit plans | | | | | | | | | | |
| Change in net prior service credit | (274 | ) | | (217 | ) | (273 | ) | | (217 | ) | | (820 | ) | | (651 | ) |
| Change in actuarial net loss | 527 |
| | 588 |
| 530 |
| | 588 |
| | 1,587 |
| | 1,763 |
|
| Total pension and other post-retirement benefit plans | $ | 253 |
| | $ | 371 |
| $ | 257 |
| | $ | 371 |
| | $ | 767 |
| | $ | 1,112 |
|
| INCOME TAX EXPENSE RELATED TO OTHER COMPREHENSIVE INCOME | 61 |
| | 147 |
| 69 |
| | 145 |
| | 204 |
| | 439 |
|
| OTHER COMPREHENSIVE INCOME | $ | 192 |
| | $ | 224 |
| $ | 188 |
| | $ | 226 |
| | $ | 563 |
| | $ | 673 |
|
| COMPREHENSIVE INCOME | $ | 58,118 |
| | $ | 55,685 |
| |
| COMPREHENSIVE INCOME (LOSS) | | $ | (11,311 | ) | | $ | (1,445 | ) |
| $ | 155,074 |
| | $ | 148,073 |
|
The accompanying notes are an integral part of these statements.
Washington Gas Light Company
Condensed Statements of Cash Flows (Unaudited)
Part I—Financial Information
Item 1—Financial Statements (continued)
| | | | Three Months Ended December 31, | Nine Months Ended June 30, |
| (In thousands) | 2017 | | 2016 | 2018 | | 2017 |
| OPERATING ACTIVITIES | | | | | | |
| Net income | $ | 57,926 |
| | $ | 55,461 |
| $ | 154,511 |
| | $ | 147,400 |
|
| ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIES | | | | | | |
| Depreciation and amortization | 33,646 |
| | 30,126 |
| 101,157 |
| | 96,003 |
|
| Amortization of: | | | | | | |
| Other regulatory assets and liabilities—net | 1,634 |
| | 823 |
| 5,235 |
| | 2,567 |
|
| Debt related costs | 401 |
| | 353 |
| 1,195 |
| | 1,031 |
|
| Deferred income taxes | 7,386 |
| | 34,145 |
| 43,795 |
| | 64,040 |
|
| Accrued/deferred pension and other post-retirement benefit cost | 2,398 |
| | 5,411 |
| 7,888 |
| | 16,187 |
|
| Compensation expense related to stock-based awards | 4,518 |
| | 4,652 |
| 10,885 |
| | 11,185 |
|
| Provision for doubtful accounts | 3,928 |
| | 2,241 |
| 16,154 |
| | 9,333 |
|
| Unrealized (gain) loss on derivative contracts | 1,446 |
| | (15,128 | ) | (7,063 | ) | | (39,339 | ) |
| Amortization of investment tax credits | (179 | ) | | — |
| (537 | ) | | (569 | ) |
| Other non-cash charges—net | (197 | ) | | 2,447 |
| |
| Other non-cash charges (credits)—net | | (768 | ) | | (583 | ) |
| Changes in operating assets and liabilities (Note 16) | (141,364 | ) | | (169,830 | ) | 33,719 |
| | (88,642 | ) |
| Net Cash Used In Operating Activities | (28,457 | ) | | (49,299 | ) | |
| Net Cash Provided by Operating Activities | | 366,171 |
| | 218,613 |
|
| FINANCING ACTIVITIES | | | | | | |
| Capital contributions from WGL Holdings, Inc. | 100,000 |
| | — |
| 100,000 |
| | — |
|
| Debt issuance costs | (236 | ) | | (375 | ) | (337 | ) | | (399 | ) |
| Notes payable issued —net | 39,000 |
| | 177,000 |
| |
| Notes payable issued (retired) —net | | (123,000 | ) | | 119,000 |
|
| Project financing | — |
| | 5,200 |
| — |
| | 7,324 |
|
| Dividends on common stock and preferred stock | (22,166 | ) | | (21,453 | ) | (66,622 | ) | | (65,020 | ) |
| Other financing activities—net | (6,197 | ) | | (1,226 | ) | (6,197 | ) | | (1,226 | ) |
| Net Cash Provided by Financing Activities | 110,401 |
| | 159,146 |
| |
| Net Cash (Used in) Provided by Financing Activities | | (96,156 | ) | | 59,679 |
|
| INVESTING ACTIVITIES | | | | | | |
| Capital expenditures (excluding Allowance for Funds Used During Construction) | (75,293 | ) | | (109,847 | ) | (242,831 | ) | | (278,292 | ) |
| Net Cash Used In Investing Activities | (75,293 | ) | | (109,847 | ) | (242,831 | ) | | (278,292 | ) |
| INCREASE IN CASH AND CASH EQUIVALENTS | 6,651 |
| | — |
| 27,184 |
| | — |
|
| Cash and Cash Equivalents at Beginning of Year | 1 |
| | 1 |
| 1 |
| | 1 |
|
| Cash and Cash Equivalents at End of Period | $ | 6,652 |
| | $ | 1 |
| $ | 27,185 |
| | $ | 1 |
|
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION (Note 16)
| | | | | | |
WGL Holdings, Inc.
Washington Gas Light Company
Part I—Financial Information
Item 1—Financial Statements (continued)
Notes to Condensed Consolidated Financial Statements (Unaudited)
NOTE 1. ACCOUNTING POLICIES
Basis of Presentation
On January 25, 2017, WGL Holdings, Inc. (WGL) isentered into an Agreement and Plan of Merger (Merger Agreement) to combine with AltaGas Ltd., a holding company that owns allCanadian Corporation (AltaGas). On July 6, 2018, the merger was consummated between AltaGas, WGL, and Wrangler Inc. (Merger Sub), a newly formed indirect wholly-owned subsidiary of AltaGas. The Merger Agreement provided for the merger of the sharesMerger Sub with and into WGL, with WGL surviving as an indirect wholly-owned subsidiary of AltaGas. In connection with the merger, WGL established Wrangler SPE LLC., a bankruptcy remote special purpose entity (the SPE) for the purposes of owning the common stock of Washington Gas Light Company (Washington Gas), a regulated natural gas utility, andutility. The SPE is a wholly-owned subsidiary of WGL. In addition, WGL continues to own 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). Except where the content clearly indicates otherwise, “WGL,” “we,” “us” or “our” refers to the holding company or the consolidated entity of WGL Holdings, Inc. and all of its subsidiaries. Unless otherwise noted, these notes apply equally to WGL and Washington Gas. Refer to Note 17—Subsequent Events of the Notes to the Condensed Consolidated Financial Statements for a further discussion of the Merger Agreement.
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 Report on Form 10-K for WGL and Washington Gas for the fiscal year ended September 30, 2017. Due to the seasonal nature of our businesses, 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, 2018 and 2017 of either WGL or Washington Gas.
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. These statements do not reflect any costs related to the merger other than those incurred by WGL on its own behalf.
For a complete description of our 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 WGL and Washington Gas for the fiscal year ended September 30, 2017.
Impairment of Long-Lived Assets and Equity Method Investments
Management regularly reviews property and equipment and other long-lived assets, including certain definite-lived intangible assets and our equity method investments for possible impairment. For our equity method investments, an impairment is recorded when the investment has experienced decline in value that is other-than-temporary. Additionally, if the projects in which we hold an investment recognize an impairment loss, we would record our proportionate share of that impairment loss and evaluate the investment for decline in value that is other-than-temporary. This review occurs quarterly, or more frequently if events or changes in circumstances indicate the carrying amount of the asset may not be recoverable.
During the second quarter of fiscal year 2018, management determined that, in light of the recent actions taken by the courts and regulators related to our equity method investment in Constitution Pipeline Company, LLC (Constitution), the decline in value was other-than-temporary, resulting in WGL recording an impairment charge of $34.0 million in “Equity in earnings of unconsolidated affiliates” reducing our investment in Constitution to its estimated fair market value. During the three months ended June 30, 2018, and the three and nine months ended June 30, 2017, WGL did not record any impairments related to our long-lived assets or equity method investments. Refer to Note 9—Fair Value Measurements and Note 11—Other Investments of the Notes to the Condensed Consolidated Financial Statements for a further discussion of Constitution.
WGL Holdings, Inc.
Washington Gas Light Company
Part I—Financial Information
Item 1—Financial Statements (continued)
Notes to Condensed Consolidated Financial Statements (Unaudited)
Change in Accounting Principle and Storage Gas Valuation
On October 1, 2017, Washington Gas and WGL Energy Services implemented a voluntary change in 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 is based on the weighted average cost per unit of inventory. Prior to this change, Washington Gas and WGL Energy Services applied the First-in First-out (FIFO) methodologymethod 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 implemented on a prospective basis, therefore, we did not retrospectively adjust any prior periods or record a cumulative effect adjustment, as discussed below.
Washington Gas implemented the change in accounting principle on a prospective basis in accordance with Accounting Standards Codification (ASC) No. 980, Regulated Operations which permits regulated entities to implement changes for financial reporting purposes in the same way those changes are implemented for regulatory reporting purposes when the change impacts allowable costs. WGL Energy Services implemented the change on a prospective basis as the impact on its financial statements for all periods presented, including the cumulative effect at October 1, 2017, was immaterial. The difference during the quarter between the prior FIFO method and the new average cost method was immaterial.
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, our inventory balances are stated at the lower of cost or net realizable value. Prior to October 1, 2017, our inventory balances were stated at the lower of cost or market. Interim period inventory losses attributable to lower of cost or net realizable value adjustments may be reversed if the net realizable value of the inventory is recovered by the end of the same fiscal year.
For more information see ASU 2015-11 in the accounting standards adopted in fiscal year 2018 table below. For the three and nine months ended June 30, 2018 and 2017, WGL and Washington Gas did not record any lower of cost or net realizable value adjustments.
WGL Holdings, Inc.
Washington Gas Light Company
Part I—Financial Information
Item 1—Financial Statements (continued)
Notes to Condensed Consolidated Financial Statements (Unaudited)
our inventory balances are stated at the lower-of-cost or net realizable value. Prior to October 1, 2017, our inventory balances were stated at the lower-of-cost or market. Interim period inventory losses attributable to lower-of-cost or net realizable value adjustments may be reversed if the net realizable value of the inventory is recovered by the end of the same fiscal year.
For more information see ASU 2015-11 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.
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ACCOUNTING STANDARDS ADOPTED IN FISCAL YEAR 2018 |
| Standard | | Description | | Date of adoption | | Effect on the financial statements or other significant matters |
| ASU 2018-05, Income Taxes (Topic 740)—Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 118 | | This standard adds to the Codification various SEC paragraphs pursuant to the Issuance of Staff Accounting Bulletin (SAB) No. 118. and addresses the specific situation in which the initial accounting for certain income tax effects of the Tax Act will not be complete at the time that financial statements were issued covering the reporting period that includes the enactment date of December 22, 2017. | | October 1, 2017 | | Quarterly disclosures were incorporated in the Income Tax footnote in the first quarter FY 2018 10-Q filed with the SEC on February 8, 2018, which will be updated each quarter until the end of the measurement period. See Note 7, Income Taxes, of theNotes to Condensed Consolidated Financial Statements for additional information. |
ASU 2016-09, Compensation—Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting
| | This standard simplifies several aspects of the accounting for share-based payment transactions, including accounting for income taxes, forfeitures, statutory tax withholding requirements and classification in 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, WGL and Washington Gas recorded $4.3 million and $4.2 million, respectively, on a modified retrospective basis, as a cumulative effect adjustment to retained earnings. For the threenine months ended December 31, 2017,June 30, 2018, WGL and Washington Gas recorded $3.4 million and $3.2 million, respectively, to current tax expense for excess tax benefits related to performance shares that vested in the quarter.period.
Cash Flows - WGL and Washington Gas reclassified $3.6 million and $3.5 million, respectively, retroactively on the statement of cash flows for the threenine months ended December 31, 2016June 30, 2017 from operating to financing activities related to shares withheld to pay for employee taxes. For the presentation of excess tax benefits in the statement of cash flow as in the operating activities, WGL elected to present the change prospectively.
Statutory Tax Withholding - No changes were made.
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WGL Holdings, Inc.
Washington Gas Light Company
Part I—Financial Information
Item 1—Financial Statements (continued)
Notes to Condensed Consolidated Financial Statements (Unaudited)
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| 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-costlower 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. |
WGL Holdings, Inc.
Washington Gas Light Company
Part I—Financial Information
Item 1—Financial Statements (continued)
Notes to Condensed Consolidated Financial Statements (Unaudited)
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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 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash (a consensus of the FASB Emerging Issues Task Force) | | This standard requires restricted cash and restricted cash equivalents to be included in the cash and cash equivalents balances when reconciling the statement of cash flows. Presentation of restricted cash balances should be applied retrospectively to the statement of cash flows. Early adoption is permitted. | | October 1, 2018* | | In July 2018, pursuant to the Merger Agreement, WGL contributed $61.8 million to fund multiple rabbi trusts. Amounts in the rabbi trusts deemed to be restricted cash or restricted cash equivalents will be included in the cash and cash equivalents balances in the statement of cash flows. Early adoption is expected to occur in the fourth quarter of fiscal year 2018. |
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.
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| 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.
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WGL Holdings, Inc.
Washington Gas Light Company
Part I—Financial Information
Item 1—Financial Statements (continued)
Notes to Condensed Consolidated Financial Statements (Unaudited)
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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 impacthas performed assessments and contract reviews of its revenue streams under the timing ofnew revenue recognition for our regulated utility tariff based sales, includingmodel. WGL is finalizing its review and developing the evaluationnew disclosures required by the standard. Currently, WGL does not expect adoption of collectability from customers ifthis standard to have a utility has regulatory mechanismsmaterial effect to help assure recoveryits Consolidated Statements of uncollected accounts from ratepayers and accounting for contributions in aidIncome or require a cumulative adjustment to retained earnings upon adoption of construction (CIAC).the standard. WGL will adopt using the modified retrospective approach.
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WGL Holdings, Inc.
Washington Gas Light Company
Part I—Financial Information
Item 1—Financial Statements (continued)
Notes to Condensed Consolidated Financial Statements (Unaudited)
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| ASU 2016-01, Financial Instruments (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities including subsequent ASUs clarifying the guidance. | | 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. Early adoption is permitted.
| | October 1, 2018* | | We have 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.Footnote however, we do not expect the impact to be material.
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| ASU 2018-02, Income Statement—Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income | | This update provides an option to reclassify the stranded tax effects resulting from the enactment of the Tax Act from accumulated other comprehensive income to retained earnings. The amendment only relates to the reclassification of the income tax effects of the Tax Act and the underlying guidance that requires that the effect of a change in tax laws or rates be included in income from continuing operations is not affected.
Election to reclassify the income tax effects in accumulated other comprehensive income (AOCI) to retained earnings is voluntary and should be disclosed if AOCI is not adjusted.
Early adoption is permitted and can be applied either at the beginning of the period adopted or retrospectively to each period (or periods) in which the effect of the change in the U.S. federal corporate income tax rate in the Tax is recognized. | | October 1, 2019* | | WGL applied the effect of the change in the U.S. federal corporate income tax rate due to the Tax Act in the first quarter of fiscal year 2018. The updates were recorded to the deferred tax asset and liability accounts and the income statement. Tax entries recorded to AOCI for the employee benefit plans, stock compensation and the cash flow hedge were not adjusted to the new rate. We are performing an analysis to determine the amount to adjust to the new tax rate. Early adoption is expected to occur in fourth quarter of fiscal year 2018. |
WGL Holdings, Inc.
Washington Gas Light Company
Part I—Financial Information
Item 1—Financial Statements (continued)
Notes to Condensed Consolidated Financial Statements (Unaudited)
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| ASU 2016-02, Leases (Topic 842) including subsequent ASUs with additional guidance. | | 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*2019 | | We areWGL is performing a scoping exercise by gathering a complete inventory of lease contracts in the process of evaluatingorder to evaluate the impact of adopting ASC 842 on its consolidated financial statements, but expects that the adoption of thisnew standard will have an impact on our financial statements.the Company’s balance sheet as all operating leases will need to be reflected on the balance sheet upon adoption. In addition, WGL currently expects to utilize the transition practical expedients which allow entities to not have to reassess whether an arrangement contains a lease under the provisions of ASC 842.
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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*2020 | | We are in the process of evaluating the impact the adoption of this standard will have on our financial statements.
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| ASU 2017-12, Derivatives and Hedging (Topic 815): Targeted improvements to Accounting for Hedging Activities | | The new standard amends the hedge accounting and recognition requirements by expanding an entity'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 line as the hedged item. | | October 1, 2020* | | We are in the process of evaluating the impactIt is not expected that the adoption of this standard will have a material effect on our financial statements.
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*Subject to acceleration ifWGL may adopt this accounting standard early after the proposed merger with AltaGas is consummated due to align the difference intiming of implementation with its new parent company. WGL uses fiscal year endfor reporting its financial statements, while AltaGas uses calendar year, and the effective dates for accounting standards are different between AltaGasfiscal and WGL. calendar accounting periods.
NOTE 2. ACCOUNTS PAYABLE AND OTHER ACCRUED LIABILITIES
The tables below provide details for the amounts included in “Accounts payable and other accrued liabilities” on the balance sheets for both WGL and Washington Gas.
WGL Holdings, Inc.
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 | June 30, 2018 | | September 30, 2017 |
| Accounts payable—trade | $ | 383.7 |
| | $ | 361.6 |
| $ | 339.6 |
| | $ | 361.6 |
|
| Employee benefits and payroll accruals | 21.2 |
| | 35.0 |
| 29.6 |
| | 35.0 |
|
| Other accrued liabilities | 26.4 |
| | 27.2 |
| 18.1 |
| | 27.2 |
|
| Total | $ | 431.3 |
| | $ | 423.8 |
| $ | 387.3 |
| | $ | 423.8 |
|
| | Washington Gas Light Company | | (In millions) | December 31, 2017 |
| | September 30, 2017 |
| June 30, 2018 |
| | September 30, 2017 |
|
| Accounts payable—trade | $ | 163.5 |
| | $ | 174.9 |
| $ | 149.2 |
| | $ | 174.9 |
|
| Employee benefits and payroll accruals | 20.1 |
| | 32.4 |
| 27.5 |
| | 32.4 |
|
| Other accrued liabilities | 12.8 |
| | 12.5 |
| 8.8 |
| | 12.5 |
|
| Total | $ | 196.4 |
| | $ | 219.8 |
| $ | 185.5 |
| | $ | 219.8 |
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NOTE 3. SHORT-TERM DEBT
WGL and Washington Gas satisfy their 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, 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 their expected maximum commercial paper position. The following is a summary of committed credit available at December 31, 2017June 30, 2018 and September 30, 2017.
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Committed Credit Available ($ In millions) |
| June 30, 2018 | 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 | (402.0 | ) | | — |
| | (402.0 | ) |
| Net committed credit available | $ | 248.0 |
| | $ | 350.0 |
| | $ | 598.0 |
|
| Weighted average interest rate | 2.57 | % | | — | % | | 2.57 | % |
| 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 | % |
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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 | % |
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(a)(b)WGL includes WGL Holdings, Inc. and all subsidiaries other than Washington Gas.
| 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. |
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(b)
| WGL includes WGL Holdings, Inc. and all subsidiaries other than Washington Gas. |
At December 31, 2017June 30, 2018 and September 30, 2017, there were no outstanding bank loans from WGL’s or Washington Gas’ revolving credit facilities.
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' area-wide contract. In connection with work completed under the area-wide contract, the construction work is performed by WGL Energy Systems
WGL Holdings, Inc.
Washington Gas Light Company
Part I—Financial Information
Item 1—Financial Statements (continued)
Notes to Condensed Consolidated Financial Statements (Unaudited)
on behalf of Washington Gas and an inter-company payable is recorded for work provided by WGL Energy Systems. As work is performed, Washington Gas establishes a receivable representing the government's obligation to remit principal and interest.
WGL Holdings, Inc.
Washington Gas Light Company
Part I—Financial Information
Item 1—Financial Statements (continued)
Notes to Condensed Consolidated Financial Statements (Unaudited)
The payable and receivable are equal 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” “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, 2017June 30, 2018, there were two contractswas one contract remaining totaling $43.8$15.5 million on the Washington Gas balance sheet as a short-term obligation to third party lenders in "Notes payable and project financing".
Additionally, at June 30, 2018, there is a financing contract that has not been novated for which no draws have been made for the related project.
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 payable to WGL Energy Systems for the construction work performed for the same amount.
At June 30, 2018 there were two contracts remaining totaling $12.0 million on the WGL Energy Systems balance sheet as a short-term obligation to third party lenders in "Notes payable and project financing".
As of December 31, 2017,June 30, 2018, WGL and Washington Gas recorded $94.6$74.0 million and $85.4 million, respectively, in "Unbilled revenues" on the balance sheet, and $54.8WGL and Washington Gas recorded $27.5 million and $43.8$15.5 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. As of September 30, 2017, WGL and Washington Gas recorded $85.6 million and $78.2 million in "Unbilled revenues" on the balance sheet and WGL and Washington Gas recorded $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. The primary reason for the variance between unbilled revenues and the corresponding short-term obligations to third-party lenders is due to the project for which the financing has not been drawn.
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, 2017June 30, 2018 or September 30, 2017.
NOTE 4. LONG-TERM DEBT
UNSECURED NOTES
WGL and Washington Gas issue long-term notes with individual terms regarding interest rates, maturities and call or put options. These notes can have maturity dates of one or more years from the date of issuance.
At December 31, 2017June 30, 2018 and September 30, 2017, WGL had capacity under a shelf registration statement to issue an unlimitedunspecified 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, 2017June 30, 2018 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). that will expire in September 2018. In May 2018, Washington Gas filed a new MTN shelf with capacity to issue up to $725.0 million of MTNs under that registration statement as of June 30, 2018.
The following tables show our outstanding notes as of December 31, 2017June 30, 2018 and September 30, 2017.
WGL Holdings, Inc.
Washington Gas Light Company
Part I—Financial Information
Item 1—Financial Statements (continued)
Notes to Condensed Consolidated Financial Statements (Unaudited)
| | Long-Term Debt Outstanding | | ($ In millions) | WGL(a) | | Washington Gas | | Total Consolidated | WGL(a) | | Washington Gas | | Total Consolidated |
| December 31, 2017 | | | | | | |
| June 30, 2018 | | | | | | |
Long-term debt (b) | $ | 850.0 |
| | $ | 1,146.0 |
| | $ | 1,996.0 |
| $ | 850.0 |
| | $ | 1,146.0 |
| | $ | 1,996.0 |
|
| Unamortized discount | (1.6 | ) | | (3.0 | ) | | (4.6 | ) | (1.4 | ) | | (3.0 | ) | | (4.4 | ) |
| Unamortized debt expense | (3.1 | ) | | (8.4 | ) | | (11.5 | ) | (4.0 | ) | | (8.3 | ) | | (12.3 | ) |
Total Long-Term Debt
| $ | 845.3 |
| | $ | 1,134.6 |
| | $ | 1,979.9 |
| $ | 844.6 |
| | $ | 1,134.7 |
| | $ | 1,979.3 |
|
| Weighted average interest rate | 2.60 | % | | 4.89 | % | | 3.91 | % | 3.06 | % | | 4.89 | % | | 4.11 | % |
| September 30, 2017 | | | | | | . | | | | |
Long-term debt (b) | $ | 550.0 |
| | $ | 1,146.0 |
| | $ | 1,696.0 |
| $ | 550.0 |
| | $ | 1,146.0 |
| | $ | 1,696.0 |
|
| Unamortized discount | (1.5 | ) | | (3.0 | ) | | (4.5 | ) | (1.5 | ) | | (3.0 | ) | | (4.5 | ) |
| Unamortized debt expense | (2.1 | ) | | (8.5 | ) | | (10.6 | ) | (2.1 | ) | | (8.5 | ) | | (10.6 | ) |
Total Long-Term Debt
| $ | 546.4 |
| | $ | 1,134.5 |
| | $ | 1,680.9 |
| $ | 546.4 |
| | $ | 1,134.5 |
| | $ | 1,680.9 |
|
| Weighted average interest rate | 2.81 | % | | 4.89 | % | | 4.21 | % | 2.81 | % | | 4.89 | % | | 4.21 | % |
(a)WGL includes WGL Holdings, Inc. and all subsidiaries other than Washington Gas.
(b)Includes senior notes, term loans and floating rate notes for WGL and both MTNs and private placement notes for Washington Gas. Represents face value
including current maturities.
The following tables show long-term debt issuances and retirements for WGL for the threenine months ended December 31,June 30, 2018 and 2017. There were no issuance or retirements for Washington Gas.
| | | Long-Term Debt Issuances and Retirements | |
WGL Long-Term Debt Issuances and Retirements(a) | | WGL Long-Term Debt Issuances and Retirements(a) |
| ($ In millions) | Principal(b) | | Interest Rate | | Effective Cost | | Nominal Maturity Date | Principal(b) | | Interest Rate (f) | | Effective Cost (f) | | Nominal Maturity Date |
| Three Months Ended December 31, 2017 | | | | | | | |
WGL(a) | | | | | | | |
| Nine Months Ended June 30, 2018 | | | | | | | |
| Issuances: | | | | | | | | | | | | |
| 11/29/2017 | $ | 300.0 |
| | 1.88 | % | (c) | 2.01 | % | | 11/29/2019 | $ | 300.0 |
| | 1.88 | % | (c) | 2.01 | % | | 11/29/2019 |
| 03/14/2018 | | $ | 250.0 |
| | 2.66 | % | (d) | 2.79 | % | | 03/12/2020 |
| Total consolidated issuances | $ | 300.0 |
| | | | | | $ | 550.0 |
| | | | | |
| Retirements: | | $ | 250.0 |
| | 1.24 | % | | 1.24 | % | | 02/18/2018 |
| Total | | $ | 250.0 |
| | | | | |
| Nine Months Ended June 30, 2017 | | | | | | | |
| Issuances: | | | | | | | |
| 1/26/2017 | | $ | 50.0 |
| | 1.57 | % | (e) | 1.57 | % | | 1/26/2019 |
| Total consolidated issuances | | $ | 50.0 |
| | | | | |
(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.
There were no issuances of long-term debt by Washington Gas for(d)Floating rate per annum and reset quarterly based on terms set forth in the three months ended December 31, 2017 and there were no retirements of long-term debt for WGL or Washington Gas for the three months ended December 31, 2017.
There were no issuances or retirements of long-term debtprospectus supplement filed by WGL or Washington Gas forpursuant to Securities Act Rule 424 on March 13, 2018.
(e)Floating rate per annum that will be determined from time to time based on parameters set forth in the three months ended December 31, 2016.credit agreement.
(f) Represents the interest rate and effective cost at the trade date of the debt.
NOTE 5. COMPONENTS OF TOTAL EQUITY
The tables below reflect the components of “Total equity” for WGL and Washington Gas for the threenine months ended December 31, 2017June 30, 2018 and 2016.2017.
WGL Holdings, Inc.
Washington Gas Light Company
Part I—Financial Information
Item 1—Financial Statements (continued)
Notes to Condensed Consolidated Financial Statements (Unaudited)
| | WGL Holdings, Inc. Components of Total Equity | WGL Holdings, Inc. Components of Total Equity | 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 | 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 | | 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 |
| 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 |
| — |
| — |
| | — |
| | 224,584 |
| | — |
| | 224,584 |
| | (16,801 | ) | | 990 |
| | 208,773 |
|
| Contributions from non-controlling interest | — |
| — |
| | — |
| | — |
| | — |
| | — |
| | 1,659 |
| | — |
| | 1,659 |
| — |
| — |
| | — |
| | — |
| | — |
| | — |
| | 16,697 |
| | — |
| | 16,697 |
|
| Distributions to non-controlling interest | — |
| — |
| | — |
| | — |
| | — |
| | — |
| | (136 | ) | | — |
| | (136 | ) | — |
| — |
| | — |
| | — |
| | — |
| | — |
| | (472 | ) | | — |
| | (472 | ) |
Business combination(a) | — |
| — |
| | — |
| | — |
| | — |
| | — |
| | 614 |
| | — |
| | 614 |
| — |
| — |
| | — |
| | — |
| | — |
| | — |
| | 614 |
| | — |
| | 614 |
|
Other comprehensive income | — |
| — |
| | — |
| | — |
| | 244 |
| | 244 |
| | — |
| | — |
| | 244 |
| — |
| — |
| | — |
| | — |
| | 677 |
| | 677 |
| | — |
| | — |
| | 677 |
|
Stock-based compensation(b) | 133,540 |
| 11,251 |
| | (20,534 | ) | | 4,174 |
| | — |
| | (5,109 | ) | | — |
| | — |
| | (5,109 | ) | 140,182 |
| 12,390 |
| | (17,618 | ) | | 3,832 |
| | — |
| | (1,396 | ) | | — |
| | — |
| | (1,396 | ) |
| Dividends declared: | | | | | | | | | | | | | | | |
|
| | | | | | | | | | | | | | | |
|
|
| Common stock | — |
| — |
| | — |
| | (26,258 | ) | | — |
| | (26,258 | ) | | — |
| | — |
| | (26,258 | ) | — |
| — |
| | — |
| | (78,002 | ) | | — |
| | (78,002 | ) | | — |
| | — |
| | (78,002 | ) |
| Preferred stock | — |
| — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (330 | ) | | (330 | ) | — |
| — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (990 | ) | | (990 | ) |
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 June 30, 2018(d) | | 51,359,182 |
| $ | 595,106 |
| | $ | (7,469 | ) | | $ | 1,066,236 |
| | $ | (5,320 | ) | | $ | 1,648,553 |
| | $ | 6,889 |
| | $ | 28,173 |
| | $ | 1,683,615 |
|
| 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 |
| 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 |
| — |
| — |
| | — |
| | 189,301 |
| | — |
| | 189,301 |
| | (12,533 | ) | | 990 |
| | 177,758 |
|
| Contributions from non-controlling interest | — |
| — |
| | — |
| | — |
| | — |
| | — |
| | 7,331 |
| | — |
| | 7,331 |
| — |
| — |
| | — |
| | — |
| | — |
| | — |
| | 17,358 |
| | — |
| | 17,358 |
|
Other comprehensive income | — |
| — |
| | — |
| | — |
| | 29,413 |
| | 29,413 |
| | — |
| | — |
| | 29,413 |
| — |
| — |
| | — |
| | — |
| | 29,852 |
| | 29,852 |
| | — |
| | — |
| | 29,852 |
|
Stock-based compensation(b) | 104,676 |
| 6,564 |
| | (6,567 | ) | | (126 | ) | | — |
| | (129 | ) | | — |
| | — |
| | (129 | ) | 112,146 |
| 6,564 |
| | (3,971 | ) | | (468 | ) | | — |
| | 2,125 |
| | — |
| | — |
| | 2,125 |
|
Issuance of
common stock(c) | 25,680 |
| 1,613 |
| | — |
| | — |
| | — |
| | 1,613 |
| | — |
| | — |
| | 1,613 |
| 26,242 |
| 1,657 |
| | — |
| | — |
| | — |
| | 1,657 |
| | — |
| | — |
| | 1,657 |
|
| Dividends declared: | | | | | | | | | |
|
| | | | | |
|
| | | | | | | | | |
|
| | | | | |
|
|
| Common stock | — |
| — |
| | — |
| | (24,965 | ) | | — |
| | (24,965 | ) | | — |
| | — |
| | (24,965 | ) | — |
| — |
| | — |
| | (77,213 | ) | | — |
| | (77,213 | ) | | — |
| | — |
| | (77,213 | ) |
| Preferred stock | — |
| — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (330 | ) | | (330 | ) | — |
| — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (990 | ) | | (990 | ) |
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 |
| |
Balance at June 30, 2017 | | 51,219,000 |
| $ | 582,717 |
| | $ | 8,548 |
| | $ | 938,705 |
| | $ | (8,687 | ) | | $ | 1,521,283 |
| | $ | 5,234 |
| | $ | 28,173 |
| | $ | 1,554,690 |
|
(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.
(d) Upon consummation of the merger on July 6, 2018, WGL common stock issued and outstanding immediately prior to the merger was canceled, and WGL's common stock was delisted from the New York Stock Exchange, see Note 17-Subsequent Events of the Notes to Condensed Consolidated Financial Statements.
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 | Washington Gas Light Company Components of Total Equity | Washington Gas Light Company 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 |
| 46,479,536 |
| $ | 46,479 |
| | $ | 492,101 |
| | $ | 630,691 |
| | $ | (4,522 | ) | | $ | 1,164,749 |
|
| Net income | — |
| — |
| | — |
| | 57,926 |
| | — |
| | 57,926 |
| — |
| — |
| | — |
| | 154,511 |
| | — |
| | 154,511 |
|
| Other comprehensive income | — |
| — |
| | — |
| | — |
| | 192 |
| | 192 |
| — |
| — |
| | — |
| | — |
| | 563 |
| | 563 |
|
Stock-based compensation(a) | — |
| — |
| | (8,916 | ) | | 4,197 |
| | — |
| | (4,719 | ) | — |
| — |
| | (6,539 | ) | | 4,197 |
| | — |
| | (2,342 | ) |
| Capital contributed by WGL Holdings | — |
| — |
| | 100,000 |
| | — |
| | — |
| | 100,000 |
| — |
| — |
| | 100,000 |
| | — |
| | — |
| | 100,000 |
|
| Dividends declared: | | | | | | | | | | | | | | | | | | | | |
| Common stock | — |
| — |
| | — |
| | (21,904 | ) | | — |
| | (21,904 | ) | — |
| — |
| | — |
| | (64,660 | ) | | — |
| | (64,660 | ) |
| Preferred stock | — |
| — |
| | — |
| | (330 | ) | | — |
| | (330 | ) | — |
| — |
| | — |
| | (990 | ) | | — |
| | (990 | ) |
| Balance at December 31, 2017 | 46,479,536 |
| $ | 46,479 |
| | $ | 583,185 |
| | $ | 670,580 |
| | $ | (4,330 | ) | | $ | 1,295,914 |
| |
| Balance at June 30, 2018 | | 46,479,536 |
| $ | 46,479 |
| | $ | 585,562 |
| | $ | 723,749 |
| | $ | (3,959 | ) | | $ | 1,351,831 |
|
| Balance at September 30, 2016 | 46,479,536 |
| $ | 46,479 |
| | $ | 488,135 |
| | $ | 586,662 |
| | $ | (7,830 | ) | | $ | 1,113,446 |
| 46,479,536 |
| $ | 46,479 |
| | $ | 488,135 |
| | $ | 586,662 |
| | $ | (7,830 | ) | | $ | 1,113,446 |
|
| Net income | — |
| — |
| | — |
| | 55,461 |
| | — |
| | 55,461 |
| — |
| — |
| | — |
| | 147,400 |
| | — |
| | $ | 147,400 |
|
| Other comprehensive income | — |
| — |
| | — |
| | — |
| | 224 |
| | 224 |
| — |
| — |
| | — |
| | — |
| | 673 |
| | $ | 673 |
|
Stock-based compensation(a) | — |
| — |
| | (6 | ) | | — |
| | — |
| | (6 | ) | — |
| — |
| | 2,319 |
| | — |
| | — |
| | $ | 2,319 |
|
| | | | | | | | | | | | |
| Dividends declared: | | | | | | | | | | | | | | | | | | | |
|
|
| Common stock | — |
| — |
| | — |
| | (21,134 | ) | | — |
| | (21,134 | ) | — |
| — |
| | — |
| | (64,675 | ) | | — |
| | $ | (64,675 | ) |
| Preferred stock | — |
| — |
| | — |
| | (330 | ) | | — |
| | (330 | ) | — |
| — |
| | — |
| | (990 | ) | | — |
| | $ | (990 | ) |
| Balance at December 31, 2016 | 46,479,536 |
| $ | 46,479 |
| | $ | 488,129 |
| | $ | 620,659 |
| | $ | (7,606 | ) | | $ | 1,147,661 |
| |
| Balance at June 30, 2017 | | 46,479,536 |
| $ | 46,479 |
| | $ | 490,454 |
|
| $ | 668,397 |
|
| $ | (7,157 | ) |
| $ | 1,198,173 |
|
(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 policies of the Notes to Condensed Consolidated Financial Statements.
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 and nine months ended December 31, 2017June 30, 2018 and 2016.2017.
WGL Holdings, Inc.
Washington Gas Light Company
Part I—Financial Information
Item 1—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 | Net Income (Loss) Applicable to Common Stock | | Shares | | Per Share Amount |
| Three Months Ended December 31, 2017 | | | | | | |
| Three Months Ended June 30, 2018 | | | | | | |
| Basic EPS | $ | 138,040 |
| | 51,319 |
| | $ | 2.69 |
| $ | (49,006 | ) | | 51,359 |
| | $ | (0.95 | ) |
| Stock-based compensation plans | — |
| | 230 |
| | | — |
| | — |
| | |
| Diluted EPS | $ | 138,040 |
| | 51,549 |
| | $ | 2.68 |
| $ | (49,006 | ) | | 51,359 |
| | $ | (0.95 | ) |
| Three Months Ended December 31, 2016 | | | | | | |
| Three Months Ended June 30, 2017 | | | | | | |
| Basic EPS | $ | 57,972 |
| | 51,172 |
| | $ | 1.13 |
| $ | 8,265 |
| | 51,219 |
| | $ | 0.16 |
|
| Stock-based compensation plans | — |
| | 273 |
| | | — |
| | 274 |
| | |
| Diluted EPS | $ | 57,972 |
| | 51,445 |
| | $ | 1.13 |
| $ | 8,265 |
| | 51,493 |
| | $ | 0.16 |
|
| Nine Months Ended June 30, 2018 | | | | | | |
| Basic EPS | | $ | 224,584 |
| | 51,343 |
| | $ | 4.37 |
|
| Stock-based compensation plans | | — |
| | 228 |
| | |
| Diluted EPS | | $ | 224,584 |
| | 51,571 |
| | $ | 4.35 |
|
| Nine Months Ended June 30, 2017 | | | | | | |
| Basic EPS | | $ | 189,301 |
| | 51,200 |
| | $ | 3.70 |
|
| Stock-based compensation plans | | — |
| | 269 |
| | |
| Diluted EPS | | $ | 189,301 |
| | 51,469 |
| | $ | 3.68 |
|
We incurred a net loss for the three months ended June 30, 2018; therefore, all common shares issuable pursuant to stock-based compensation plans were not considered in the diluted loss per share calculations due to the anti-dilutive effect of such shares. These shares included performance shares of 236,000. There were no anti-dilutive shares issued for the threenine months ended December 31, 2017June 30, 2018 and 2016.the three and nine months ended 2017.
NOTE 7. INCOME TAXES
WGL files a consolidated federal tax return and various other state returns. We are no longer subject to income tax examinations by the Internal Revenue Service for years 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.
As of December 31, 2017June 30, 2018 and September 30, 2017, our uncertain tax positions were approximately $37.5$43.0 million and $48.1 million, respectively, primarily due to the change in tax accounting for repairs. If the 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’s 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.
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, 2017 and September 30, 2017, we did not have an accrual of interest expense or penalties related to uncertain tax positions.
WGL files a consolidated federal tax return and various other state returns. We are no longer subject to income tax examinations by the Internal Revenue Service for years 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.
The Tax Cuts and Jobs Act (“the Act”) was enacted on December 22, 2017. The Tax Act substantially reforms the Tax Code. Among other things, the Tax Act reduced the federal corporate income tax rate from a top marginal rate of 35% to a flat rate of 21%. The Tax 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 Tax Act, the Securities and Exchange Commission ("SEC") staffSEC Staff issued Staff Accounting Bulletin No. 118 (“SAB 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,June 30, 2018, we have not completed our accounting for the tax effects of enactment of the Tax 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 Tax Act. It allows entities to take a reasonable period of time to measure and recognize the effects of the Tax 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 Tax 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 Tax 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, both provisional and final, and the effect of measurement period adjustments on the effective tax rate. There are noAll measurement period adjustments recorded in the first quarter of the fiscal year since the amounts recordednine months ended June 30, 2018 are our initial, provisional amounts.
WGL Holdings, Inc.
Washington Gas Light Company
Part I—Financial Information
Item 1—Financial Statements (continued)
Notes to Condensed Consolidated Financial Statements (Unaudited)
Qualitative disclosures of items having no impact onimpacting the provision for tax expense at December 31, 2017:expense:
Bonus depreciation. Under the Tax 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 quarterafter October 1, 2017 to be ineligible for bonus depreciation. The impact of this provisionchanging the depreciation methodology for public utility property from bonus depreciation to MACRS 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—Financial Information
Item 1—Financial Statements (continued)
Notes to Condensed Consolidated Financial Statements (Unaudited)
on current assumptions of assets to be placed in service, when compared to the amount of deprecationdepreciation expense under the previous rules, and a decrease to 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, the re-measurement of deferred tax assets and liabilities for the regulated public utility gives rise to amounts probable of being collected from or refunded to customers in future periods. In addition, the federal tax expense included in current base rates needs to be adjusted to the new federal rate of 21% effective January 1, 2018. We have reasonably estimated the reduction in current base rates (revenue) and the annual amortization of amounts resulting from the re-measurement of certain deferred tax assets and liabilities beginning January 1, 2018. In January 2018, Washington Gas filed applications for approval to reduce itsthe distribution rates it charges customers to reflect the Tax Cuts and Jobs Act in Maryland, Virginia and the District of Columbia.Columbia to reflect the impact of the Tax Act. These applications proposeproposed 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.treatment and will be refunded to customers in future periods. In addition, amounts collected under other revenue mechanisms remain subjecta portion of this reduction in regulated revenues relates to adjustment for the decrease in the federal tax expense included in current base rates that needs to be adjusted to the new federal rate beginningof 21% effective January 1, 2018. The estimated decrease in regulatedThrough the nine months ended June 30, 2018, revenues is prospective only and had nohave been lowered by $25.1 million to reflect the regulatory impact onof the accounting for the quarter ended December 31, 2017.Tax Act.
Items for which the accounting is not yet complete as of the end of the quarter but for which we have recorded provisional amounts at December 31, 2017June 30, 2018 which are subject to adjustment during the measurement period:
Re-measurement of deferred tax assets and liabilities. 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 Q1first quarter of fiscal year 2018 income tax provision, we did not create new amounts requiring re-measurement in Q1.the first quarter of fiscal year 2018. 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$440.8 million, including net tax gross-up. Of this amount, $417.3$418.9 million is attributable to the regulated utility and $59.1$21.9 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$319.4 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, $59.1a $21.9 million tax benefit 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’sWGL’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’sWGL’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$431.0 million including tax gross-up, and a net increase in regulatory assets in the amount of $5.8$5.9 million, for a net increase in regulatory liabilities in the amount of $423.5$425.1 million. We recorded a decrease in the regulatory asset for flow-through in the amount andof $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$28.3 million, including tax gross-up, for a net increase in regulatory assets in the amount of $5.8$5.9 million.
WGL Holdings, Inc.
Washington Gas Light Company
Part I—Financial Information
Item 1—Financial Statements (continued)
Notes to Condensed Consolidated Financial Statements (Unaudited)
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—Financial Information
Item 1—Financial Statements (continued)
Notes to Condensed Consolidated Financial Statements (Unaudited)
completed the accounting for the tax sharing impacts of the re-measurement of the deferred tax assets and deferred tax liabilities.
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 INSTRUMENTS
DERIVATIVE INSTRUMENTS
Regulated Utility Operations
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 sheets 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 820.
Regulatory sharing mechanisms provide for the annual realized profit from these transactions to be shared between Washington 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 income 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, 2017 wasJune 30, 2018 were a net gain of $5.8$1.9 million, including an unrealized loss of $1.4$3.8 million. During the three months ended December 31, 2016,June 30, 2017, we recorded a net gain of $24.3$9.1 million, including an unrealized gain of $15.4$3.2 million. Total net margins recorded for the nine months ended June 30, 2018 was a net gain of $26.5 million, including an unrealized gain of $7.0 million. During the nine months ended June 30, 2017, we recorded a net gain of $62.5 million, including an unrealized gain of $39.7 million.
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. 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.
Non-Utility Operations
Trading Activities. WGL Midstream enters into derivative contracts for the purpose 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 these derivative instruments are reflected in the earnings of our non-utility operations and may cause significant period-to-period volatility in earnings.
WGL Holdings, Inc.
Washington Gas Light Company
Part I—Financial Information
Item 1—Financial Statements (continued)
Notes to Condensed Consolidated Financial Statements (Unaudited)
instruments are reflected in the earnings of our non-utility operations and may cause significant period-to-period volatility in earnings.
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. As of June 30, 2018, WGL believesbelieved that the debt issuance iswas 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.June 30, 2018. Subsequent to the merger on July 6, 2018, the debt issuance is no longer reasonably possible of occurring and, therefore, the $6.4 million gain recorded in accumulated other comprehensive will be recorded to income during the quarter ending September 30, 2018. In January 2018, WGL settled these swaps and realizedfor a gain of $13.8$13.8 million. For the nine months ended June 30, 2018, we recorded income of $13.2 million, of which approximately $13.2 million will be recorded to interest expense.expense related to these swaps. We did not record any income or expenses related to these swaps for the three months ended June 30, 2018. Refer to Note 17—Planned Merger with AltaGas Ltd.Subsequent Events 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 threenine months ended December 31, 2017June 30, 2018 and 2016.2017.
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, 2017June 30, 2018 and September 30, 2017, respectively, the absolute notional amounts of our derivatives were as follows: | | Absolute Notional Amounts of Open Positions on Derivative Instruments | Absolute Notional Amounts of Open Positions on Derivative Instruments | Absolute Notional Amounts of Open Positions on Derivative Instruments |
| Derivative transactions | WGL Holdings, Inc. | | Washington Gas | WGL Holdings, Inc. | | Washington Gas |
| December 31, 2017 | Notional Amounts | |
| June 30, 2018 | | Notional Amounts |
Natural Gas (In millions of therms) | | | | | | |
| Asset optimization & trading | 21,960.9 |
| | 11,768.0 |
| 24,569.9 |
| | 11,698.4 |
|
| Retail sales | 143.2 |
| | — |
| 117.1 |
| | — |
|
| Other risk-management activities | 1,597.4 |
| | 1,181.0 |
| 1,453.7 |
| | 1,101.2 |
|
Electricity (In millions of kWhs) | | | | | | |
| Retail sales | 9,279.2 |
| | — |
| 8,408.4 |
| | — |
|
Other risk-management activities(a) | 21,569.5 |
| | — |
| 26,355.3 |
| | — |
|
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 |
| 21,663.5 |
| | 11,223.0 |
|
| Retail sales | 124.3 |
| | — |
| 124.3 |
| | — |
|
| Other risk-management activities | 1,546.7 |
| | 1,181.0 |
| 1,546.7 |
| | 1,181.0 |
|
Electricity (In millions of kWhs) | | | | | | |
| Retail sales | 10,011.7 |
| | — |
| 10,011.7 |
| | — |
|
Other risk-management activities(a) | 22,962.1 |
| | — |
| 22,962.1 |
| | — |
|
Interest Rate Swaps (In millions of dollars) | $ | 250.0 |
| | — |
| $ | 250.0 |
| | — |
|
(a)Comprised primarily of financial swaps, financial transmission rights and physical forward purchases.
The following tables present the balance sheet classification for all derivative instruments as of December 31, 2017June 30, 2018 and September 30, 2017.
| | WGL Holdings, Inc. Balance Sheet Classification of Derivative Instruments(b) | WGL Holdings, Inc. Balance Sheet Classification of Derivative Instruments(b) | 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) | |
| As of June 30, 2018 | | Gross Derivative Assets | | Gross Derivative Liabilities | | Netting of Collateral | | Total(a) |
| Current Assets—Derivatives | $ | 29.2 |
| | $ | (11.5 | ) | | $ | — |
| | $ | 17.7 |
| $ | 16.3 |
| | $ | (4.2 | ) | | $ | — |
| | $ | 12.1 |
|
| Deferred Charges and Other Assets—Derivatives | 32.3 |
| | (0.1 | ) | | — |
| | 32.2 |
| 19.6 |
| | — |
| | — |
| | 19.6 |
|
| Accounts payable | | (0.5 | ) | | — |
| | — |
| | (0.5 | ) |
| Current Liabilities—Derivatives | 17.8 |
| | (67.2 | ) | | 14.4 |
| | (35.0 | ) | 22.6 |
| | (45.0 | ) | | 2.3 |
| | (20.1 | ) |
| Deferred Credits—Derivatives | 17.6 |
| | (154.1 | ) | | 7.6 |
| | (128.9 | ) | 10.9 |
| | (135.5 | ) | | 10.2 |
| | (114.4 | ) |
| Total | $ | 96.9 |
| | $ | (232.9 | ) | | $ | 22.0 |
| | $ | (114.0 | ) | $ | 68.9 |
| | $ | (184.7 | ) | | $ | 12.5 |
| | $ | (103.3 | ) |
| As of September 30, 2017 | | | | | | | | | | | | | | |
| Current Assets—Derivatives | $ | 26.6 |
| | $ | (11.3 | ) | | $ | — |
| | $ | 15.3 |
| $ | 26.6 |
| | $ | (11.3 | ) | | $ | — |
| | $ | 15.3 |
|
Deferred Charges and Other Assets—Derivatives
| 38.9 |
| | (0.4 | ) | | (0.1 | ) | | 38.4 |
| 38.9 |
| | (0.4 | ) | | (0.1 | ) | | 38.4 |
|
| Accounts payable | 1.0 |
| | — |
| | — |
| | 1.0 |
| 1.0 |
| | — |
| | — |
| | 1.0 |
|
| Current Liabilities—Derivatives | 10.9 |
| | (57.0 | ) | | 2.1 |
| | (44.0 | ) | 10.9 |
| | (57.0 | ) | | 2.1 |
| | (44.0 | ) |
| Deferred Credits—Derivatives | 19.2 |
| | (148.8 | ) | | 7.0 |
| | (122.6 | ) | 19.2 |
| | (148.8 | ) | | 7.0 |
| | (122.6 | ) |
| Total | $ | 96.6 |
| | $ | (217.5 | ) | | $ | 9.0 |
| | $ | (111.9 | ) | $ | 96.6 |
| | $ | (217.5 | ) | | $ | 9.0 |
| | $ | (111.9 | ) |
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 Balance Sheet Classification of Derivative Instruments(b) | Washington Gas Light Company Balance Sheet Classification of Derivative Instruments(b) | 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) | |
| As of June 30, 2018 | | Gross
Derivative
Assets | | Gross
Derivative
Liabilities | | Netting of
Collateral | | Total(a) |
| Current Assets—Derivatives | $ | 9.4 |
| | $ | (5.1 | ) | | $ | — |
| | $ | 4.3 |
| $ | 1.4 |
| | $ | — |
| | $ | — |
| | $ | 1.4 |
|
| Deferred Charges and Other Assets—Derivatives | 15.4 |
| | — |
| | — |
| | 15.4 |
| 9.1 |
| | — |
| | — |
| | 9.1 |
|
| Current Liabilities—Derivatives | — |
| | (24.7 | ) | | 0.1 |
| | (24.6 | ) | 3.5 |
| | (20.5 | ) | | 0.7 |
| | (16.3 | ) |
| Deferred Credits—Derivatives | — |
| | (119.0 | ) | | — |
| | (119.0 | ) | — |
| | (98.1 | ) | | — |
| | (98.1 | ) |
| Total | $ | 24.8 |
| | $ | (148.8 | ) | | $ | 0.1 |
| | $ | (123.9 | ) | $ | 14.0 |
| | $ | (118.6 | ) | | $ | 0.7 |
| | $ | (103.9 | ) |
| As of September 30, 2017 | | | | | | | | | | | | | | |
| Current Assets—Derivatives | $ | 7.5 |
| | $ | (2.4 | ) | | $ | — |
| | $ | 5.1 |
| $ | 7.5 |
| | $ | (2.4 | ) | | $ | — |
| | $ | 5.1 |
|
| Deferred Charges and Other Assets—Derivatives | 16.5 |
| | (0.3 | ) | | — |
| | 16.2 |
| 16.5 |
| | (0.3 | ) | | — |
| | 16.2 |
|
| Current Liabilities—Derivatives | — |
| | (30.3 | ) | | — |
| | (30.3 | ) | — |
| | (30.3 | ) | | — |
| | (30.3 | ) |
| Deferred Credits—Derivatives | — |
| | (112.3 | ) | | — |
| | (112.3 | ) | — |
| | (112.3 | ) | | — |
| | (112.3 | ) |
| Total | $ | 24.0 |
| | $ | (145.3 | ) | | $ | — |
| | $ | (121.3 | ) | $ | 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 815. All recognized derivative contracts and associated financial collateral subject to a master netting arrangement or similar that is eligible for offset under ASC 815 have been presented net in the balance sheet.
(b)We did not have any derivative instruments outstanding that were designated as hedging instruments at December 31, 2017June 30, 2018 or September 30, 2017.
The following table presents all gains and losses associated with derivative instruments for the three and nine months ended December 31, 2017June 30, 2018 and 2016.2017.
WGL Holdings, Inc.
Washington Gas Light Company
Part I—Financial Information
Item 1—Financial Statements (continued)
Notes to Condensed Consolidated Financial Statements (Unaudited)
| | | 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 | WGL Holdings, Inc. | | Washington Gas |
| Three Months Ended December 31, | 2017 | | 2016 | | 2017 | | 2016 | |
| Three Months Ended June 30, | | 2018 | | 2017 | | 2018 | | 2017 |
| Recorded to income | | | | | | | | | | | | | | |
| Operating revenues—non-utility | $ | (7.5 | ) | | $ | (36.7 | ) | | $ | — |
| | $ | — |
| $ | (22.5 | ) | | $ | 8.3 |
| | $ | — |
| | $ | — |
|
| Utility cost of gas | (2.6 | ) | | 14.7 |
| | (2.6 | ) | | 14.7 |
| (4.5 | ) | | 5.5 |
| | (4.5 | ) | | 5.5 |
|
| Non-utility cost of energy-related sales | 22.2 |
| | 31.3 |
| | — |
| | — |
| 10.7 |
| | (0.8 | ) | | — |
| | — |
|
| Interest expense | (0.4 | ) | | (0.1 | ) | | — |
| | — |
| (0.1 | ) | | (7.9 | ) | | — |
| | — |
|
| Recorded to regulatory assets | | | | | | | | | | | | | | |
| Gas costs | (5.8 | ) | | 19.6 |
| | (5.8 | ) | | 19.6 |
| (9.0 | ) | | 6.4 |
| | (9.0 | ) | | 6.4 |
|
| Recorded to other comprehensive income | 0.1 |
| | 49.5 |
| | — |
| | — |
| 0.1 |
| | 0.1 |
| | — |
| | — |
|
| Total | $ | 6.0 |
| | $ | 78.3 |
| | $ | (8.4 | ) | | $ | 34.3 |
| $ | (25.3 | ) | | $ | 11.6 |
| | $ | (13.5 | ) | | $ | 11.9 |
|
| Nine Months Ended June 30, | | 2018 | | 2017 | | 2018 | | 2017 |
| Recorded to income | | | | | | | | |
| Operating revenues—non-utility | | $ | (26.2 | ) | | $ | 25.8 |
| | $ | — |
| | $ | — |
|
| Utility cost of gas | | (4.1 | ) | | 40.0 |
| | (4.1 | ) | | 40.0 |
|
| Non-utility cost of energy-related sales | | 12.3 |
| | 25.9 |
| | — |
| | — |
|
| Interest expense | | 12.7 |
| | (5.4 | ) | | — |
| | — |
|
| Recorded to regulatory assets | | | | | | | | |
| Gas costs | | (11.3 | ) | | 62.6 |
| | (11.3 | ) | | 62.6 |
|
| Recorded to other comprehensive income | | 0.2 |
| | 49.6 |
| | — |
| | — |
|
| Total | | $ | (16.4 | ) | | $ | 198.5 |
| | $ | (15.4 | ) | | $ | 102.6 |
|
Collateral
WGL 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 derivatives and non-derivative positions. Under WGL’s 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, 2017June 30, 2018 and September 30, 2017, respectively. | | Collateral Not Offset Against Derivative Assets and Liabilities (In millions) | Collateral Not Offset Against Derivative Assets and Liabilities (In millions) | Collateral Not Offset Against Derivative Assets and Liabilities (In millions) |
| December 31, 2017 | Collateral deposits posted with counterparties | | Cash collateral held representing an obligation | |
| June 30, 2018 | | Collateral deposits posted with counterparties | | Cash collateral held representing an obligation |
| Washington Gas | $ | 8.1 |
| | $ | 0.1 |
| $ | 10.9 |
| | $ | 20.5 |
|
| WGL Energy Services | 30.6 |
| | — |
| 14.7 |
| | — |
|
| WGL Midstream | 16.8 |
| | 0.4 |
| 22.0 |
| | 0.4 |
|
| September 30, 2017 | | | | | | |
| Washington Gas | $ | 3.7 |
| | $ | 0.1 |
| $ | 3.7 |
| | $ | 0.1 |
|
| WGL Energy Services | 23.7 |
| | — |
| 23.7 |
| | — |
|
| WGL Midstream | 44.4 |
| | 1.6 |
| 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. Collateral received and not offset against derivative assets and liabilities is included in “Customer deposits and advance payments” in the accompanying balance sheets.
WGL Holdings, Inc.
Washington Gas Light Company
Part I—Financial Information
Item 1—Financial Statements (continued)
Notes to Condensed Consolidated Financial Statements (Unaudited)
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,June 30, 2018, WGL Energy Services posted $11.8$8.1 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. At December 31, 2017June 30, 2018 and September 30, 2017, WGL was not required to post collateral related to a derivative liability that contained a credit-related contingent feature. At both December 31, 2017June 30, 2018 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 December 31, 2017June 30, 2018 and September 30, 2017, 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 | WGL Holdings, Inc. | | Washington Gas |
| December 31, 2017 | | | | |
| June 30, 2018 | | | | |
| Derivative liabilities with credit-risk-contingent features | $ | 14.5 |
| | $ | 1.7 |
| $ | 8.4 |
| | $ | 0.7 |
|
| Maximum potential collateral requirements | $ | 8.1 |
| | $ | 1.6 |
| $ | 1.7 |
| | $ | 0.7 |
|
| September 30, 2017 | | | | | | |
| Derivative liabilities with credit-risk-contingent features | $ | 25.0 |
| | $ | 2.8 |
| $ | 25.0 |
| | $ | 2.8 |
|
| Maximum potential collateral requirements | $ | 21.9 |
| | $ | 2.8 |
| $ | 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 counterpartyJune 30, 2018, three counterparties each represented over 10% of Washington Gas’ credit exposure to wholesale derivative counterparties for a total credit risk of $16.0$18.1 million; three counterparties each represented over 10% of WGL Energy Services’ credit exposure to wholesale counterparties for a total credit risk of $0.9$0.6 million; and one counterpartytwo counterparties each represented over 10% of WGL Midstream’s credit exposure to wholesale counterparties for a total credit risk of $15.9$12.0 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. DuringFor the three months ended December 31,June 30, 2018, WGL Energy Services recorded no pre-tax gain or loss. For the three months ended June 30, 2017, WGL Energy Services recorded a pre-tax loss of $0.3 million. During the nine months ended June 30, 2018 and 2016,2017, WGL Energy Services recorded pre-tax lossesgains of $0.8$3.9 million and $1.5$1.4 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. FAIR VALUE MEASUREMENTS
Recurring Basis
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.
WGL Holdings, Inc.
Washington Gas Light Company
Part I—Financial Information
Item 1—Financial Statements (continued)
Notes to Condensed Consolidated Financial Statements (Unaudited)
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. 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:
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. WGL did not have any Level 1 derivatives at December 31, 2017June 30, 2018 or September 30, 2017.
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 December 31, 2017June 30, 2018 and September 30, 2017, 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.
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, 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 Risk Analysis and Mitigation (RA&M) Group determines the valuation policies and procedures. The RA&M Group reports to WGL’s Chief Financial Officer. In accordance with WGL’s 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&M Group also evaluates changes in fair value measurements on a daily basis.
At December 31, 2017June 30, 2018 and September 30, 2017, 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 set forth financial instruments recorded at fair value as of December 31, 2017June 30, 2018 and September 30, 2017, 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 | |
WGL Holdings, Inc. Fair Value Measurements Under the Fair Value Hierarchy | | WGL Holdings, Inc. 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 June 30, 2018 | | | | | | | | |
| Assets | | | | | | | | | | | | | | |
| Natural gas related derivatives | $ | — |
| | $ | 8.4 |
| | $ | 16.4 |
| | $ | 24.8 |
| $ | — |
| | $ | 21.7 |
| | $ | 36.6 |
| | $ | 58.3 |
|
| Electricity related derivatives | | — |
| | 1.0 |
| | 9.6 |
| | 10.6 |
|
| Total Assets | $ | — |
| | $ | 8.4 |
| | $ | 16.4 |
| | $ | 24.8 |
| $ | — |
| | $ | 22.7 |
| | $ | 46.2 |
| | $ | 68.9 |
|
| Liabilities | | | | | | | | | | | | | | |
| Natural gas related derivatives | $ | — |
| | $ | (7.0 | ) | | $ | (141.8 | ) | | $ | (148.8 | ) | $ | — |
| | $ | (21.1 | ) | | $ | (144.7 | ) | | $ | (165.8 | ) |
| Electricity related derivatives | | — |
| | (1.2 | ) | | (17.7 | ) | | (18.9 | ) |
| Total Liabilities | $ | — |
| | $ | (7.0 | ) | | $ | (141.8 | ) | | $ | (148.8 | ) | $ | — |
| | $ | (22.3 | ) | | $ | (162.4 | ) | | $ | (184.7 | ) |
| At September 30, 2017 | | | | | | | | | | | | | | |
| Assets | | | | | | | | | | | | | | |
| Natural gas related derivatives | $ | — |
| | $ | 7.0 |
| | $ | 17.0 |
| | $ | 24.0 |
| $ | — |
| | $ | 18.4 |
| | $ | 52.8 |
| | $ | 71.2 |
|
| Electricity related derivatives | | — |
| | 0.1 |
| | 15.5 |
| | $ | 15.6 |
|
| Interest rate derivatives | | — |
| | 9.8 |
| | — |
| | $ | 9.8 |
|
| Total Assets | $ | — |
| | $ | 7.0 |
| | $ | 17.0 |
| | $ | 24.0 |
| $ | — |
| | $ | 28.3 |
| | $ | 68.3 |
| | $ | 96.6 |
|
| Liabilities | | | | | | | | | | | | | | |
| Natural gas related derivatives | $ | — |
| | $ | (5.7 | ) | | $ | (139.6 | ) | | $ | (145.3 | ) | $ | — |
| | $ | (15.5 | ) | | $ | (167.4 | ) | | $ | (182.9 | ) |
| Electricity related derivatives | | — |
| | (4.1 | ) | | (21.7 | ) | | (25.8 | ) |
| Interest rate derivatives | | — |
| | (8.8 | ) | | — |
| | (8.8 | ) |
| Total Liabilities | $ | — |
| | $ | (5.7 | ) | | $ | (139.6 | ) | | $ | (145.3 | ) | $ | — |
| | $ | (28.4 | ) | | $ | (189.1 | ) | | $ | (217.5 | ) |
|
| | | | | | | | | | | | | | | |
Washington Gas Light Company Fair Value Measurements Under the Fair Value Hierarchy |
| (In millions) | Level 1 | | Level 2 | | Level 3 | | Total |
| At June 30, 2018 | | | | | | | |
| Assets | | | | | | | |
| Natural gas related derivatives | $ | — |
| | $ | 3.7 |
| | $ | 10.3 |
| | $ | 14.0 |
|
| Total Assets | $ | — |
| | $ | 3.7 |
| | $ | 10.3 |
| | $ | 14.0 |
|
| Liabilities | | | | | | | |
| Natural gas related derivatives | $ | — |
| | $ | (4.7 | ) | | $ | (113.9 | ) | | $ | (118.6 | ) |
| Total Liabilities | $ | — |
| | $ | (4.7 | ) | | $ | (113.9 | ) | | $ | (118.6 | ) |
| At September 30, 2017 | | | | | | | |
| Assets | | | | | | | |
| Natural gas related derivatives | $ | — |
| | $ | 7.0 |
| | $ | 17.0 |
| | $ | 24.0 |
|
| Total Assets | $ | — |
| | $ | 7.0 |
| | $ | 17.0 |
| | $ | 24.0 |
|
| Liabilities | | | | | | | |
| Natural gas related derivatives | $ | — |
| | $ | (5.7 | ) | | $ | (139.6 | ) | | $ | (145.3 | ) |
| Total Liabilities | $ | — |
| | $ | (5.7 | ) | | $ | (139.6 | ) | | $ | (145.3 | ) |
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 December 31, 2017June 30, 2018 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)
|
| | | | | | | | |
Quantitative Information about Level 3 Fair Value Measurements |
| (In millions) | | Net Fair Value
December 31, 2017June 30, 2018 | | Valuation Techniques | | Unobservable Inputs | | Range |
| | | | | | | | | |
| WGL Holdings, Inc. | | | | | | | | |
| Natural gas related derivatives | | $(113.2)(104.8) | | Discounted Cash Flow | | Natural Gas Basis Price (per dekatherm) | | ($1.125)$(1.638) - $3.400$2.753 |
| | | | | Option Model | | Natural Gas Basis Price (per dekatherm) | | ($1.030)$(0.920) - $3.100$2.718 |
| | | $(3.7)(3.3) | | | | Annualized Volatility of Spot Market Natural Gas | | 30.2% - 714.1%901.0% |
| Electricity related derivatives | | $(12.8)(8.1) | | Discounted Cash Flow | | Electricity Congestion Price (per megawatt hour) | | ($2.977)$(6.075) - $78.990$57.200 |
| | | | | | | | | |
| Washington Gas Light Company | | | | | | | | |
| Natural gas related derivatives | | $(125.4)(103.6) | | Discounted Cash Flow | | Natural Gas Basis Price (per dekatherm) | | ($1.125)$(0.980) - $2.725$0.108 |
| | | | | | | | | |
| (In millions) | | Net Fair Value
September 30, 2017 | | | | | | |
| | | | | | | | | |
| WGL Holdings, Inc. | | | | | | | | |
| Natural gas related derivatives | | $(112.4) | | Discounted Cash Flow | | Natural Gas Basis Price (per dekatherm) | | ($2.095)$(2.095) - $2.805 |
| | | | | Option Model | | Natural Gas Basis Price (per dekatherm) | | ($2.095)$(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) | | ($2.736)$(2.736) - $56.500 |
| | | | | | | | | |
| Washington Gas Light Company | | | | | | | | |
| Natural gas related derivatives | | $(122.6) | | Discounted Cash Flow | | Natural Gas Basis Price (per dekatherm) | | ($1.928)$(1.928) - $2.805 |
The following tables are 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,June 30, 2018 and 2017, and 2016, respectively.
WGL Holdings, Inc.
Washington Gas Light Company
Part I—Financial Information
Item 1—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 | WGL Holdings, Inc.
| Washington Gas Light Company |
| (In millions) | Natural Gas Related Derivatives | | Electricity Related Derivatives | | Total | Total - Natural Gas Related Derivatives | Natural Gas Related Derivatives | | Electricity Related Derivatives | | Total | 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 June 30, 2018 | | | | | | | |
| Balance at April 1, 2018 | | $ | (85.0 | ) | | $ | (10.3 | ) | | $ | (95.3 | ) | $ | (89.0 | ) |
| Realized and unrealized gains (losses) | | | | | | | | | | |
| Recorded to income | (4.1 | ) | | (9.2 | ) | | (13.3 | ) | (3.8 | ) | (13.7 | ) | | 4.6 |
| | (9.1 | ) | (3.5 | ) |
| Recorded to regulatory assets—gas costs | (6.9 | ) | | — |
| | (6.9 | ) | (6.9 | ) | (7.6 | ) | | — |
| | (7.6 | ) | (7.6 | ) |
| Transfers into Level 3 | 0.3 |
| | — |
| | 0.3 |
| 0.2 |
| (7.1 | ) | | — |
| | (7.1 | ) | (7.0 | ) |
| Transfers out of Level 3 | (0.3 | ) | | — |
| | (0.3 | ) | — |
| 0.1 |
| | — |
| | 0.1 |
| — |
|
| Purchases | — |
| | 2.5 |
| | 2.5 |
| — |
| — |
| | (2.5 | ) | | (2.5 | ) | — |
|
| Settlements | 8.7 |
| | 0.1 |
| | 8.8 |
| 7.7 |
| 5.2 |
| | 0.1 |
| | 5.3 |
| 3.5 |
|
| 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 June 30, 2018 | | $ | (108.1 | ) | | $ | (8.1 | ) | | $ | (116.2 | ) | $ | (103.6 | ) |
| Three Months Ended June 30, 2017 | | | | | | | |
| Balance at April 1, 2017 | | $ | (150.2 | ) | | $ | (8.4 | ) | | $ | (158.6 | ) | $ | (155.4 | ) |
| Realized and unrealized gains (losses) | | | | | | | | | | |
| Recorded to income | 10.3 |
| | (3.6 | ) | | 6.7 |
| 17.0 |
| (6.0 | ) | | 1.7 |
| | (4.3 | ) | 2.9 |
|
| Recorded to regulatory assets—gas costs | 22.0 |
| | — |
| | 22.0 |
| 22.0 |
| 3.0 |
| | — |
| | 3.0 |
| 3.0 |
|
| Transfers into Level 3 | (0.2 | ) | | — |
| | (0.2 | ) | 0.2 |
| 0.1 |
| | — |
| | 0.1 |
| — |
|
| Purchases | — |
| | (2.8 | ) | | (2.8 | ) | — |
| — |
| | 2.0 |
| | 2.0 |
| — |
|
| Settlements | 3.4 |
| | 7.2 |
| | 10.6 |
| 3.6 |
| 0.8 |
| | 0.9 |
| | 1.7 |
| (1.2 | ) |
| Balance at December 31, 2016 | $ | (228.6 | ) | | $ | (8.3 | ) | | $ | (236.9 | ) | $ | (208.8 | ) | |
| Balance at June 30, 2017 | | $ | (152.3 | ) | | $ | (3.8 | ) | | $ | (156.1 | ) | $ | (150.7 | ) |
| Nine Months Ended June 30, 2018 | | | | | | | |
| Balance at October 1, 2017 | | $ | (114.6 | ) | | $ | (6.2 | ) | | $ | (120.8 | ) | $ | (122.6 | ) |
| Realized and unrealized gains (losses) | | | | | | |
| Recorded to income | | (28.8 | ) | | 3.0 |
| | (25.8 | ) | (8.0 | ) |
| Recorded to regulatory assets—gas costs | | (15.6 | ) | | — |
| | (15.6 | ) | (15.6 | ) |
| Transfers into Level 3 | | (6.8 | ) | | — |
| | (6.8 | ) | (6.8 | ) |
| Transfers out of Level 3 | | 8.9 |
| | — |
| | 8.9 |
| 9.0 |
|
| Settlements | | 48.8 |
| | (4.9 | ) | | 43.9 |
| 40.4 |
|
| Balance at June 30, 2018 | | $ | (108.1 | ) | | $ | (8.1 | ) | | $ | (116.2 | ) | $ | (103.6 | ) |
| Nine Months Ended June 30, 2017 | | | | | | | |
| Balance at October 1, 2016 | | $ | (264.1 | ) | | $ | (9.1 | ) | | $ | (273.2 | ) | $ | (251.6 | ) |
| Realized and unrealized gains (losses) | | | | | | |
| Recorded to income | | 46.6 |
| | (2.5 | ) | | 44.1 |
| 34.7 |
|
| Recorded to regulatory assets—gas costs | | 55.4 |
| | — |
| | 55.4 |
| 55.4 |
|
| Transfers into Level 3 | | (0.7 | ) | | — |
| | (0.7 | ) | (0.4 | ) |
| Transfers out of Level 3 | | (0.5 | ) | | — |
| | (0.5 | ) | (0.3 | ) |
| Purchases | | — |
| | (1.0 | ) | | (1.0 | ) | — |
|
| Settlements | | 11.0 |
| | 8.8 |
| | 19.8 |
| 11.5 |
|
| Balance at June 30, 2017 | | $ | (152.3 | ) | | $ | (3.8 | ) | | $ | (156.1 | ) | $ | (150.7 | ) |
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 for the periods presented were due to an increase in observable market inputs, primarily reflecting a decrease in the duration of the contracts being valued. Transfers into Level 3 for the periods presented were due to an increase in unobservable market inputs, primarily pricing points.
The table below sets forth the line items on the statements of income to which amounts are recorded for the three months ended December 31, 2017 and 2016, 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—Financial Information
Item 1—Financial Statements (continued)
Notes to Condensed Consolidated Financial Statements (Unaudited)
The table below sets forth the line items on the statements of income to which amounts are recorded for the three and nine months ended June 30, 2018 and 2017, 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 June 30, 2018 | |
| | |
| | |
| |
| Operating revenues—non-utility | $ | (10.9 | ) | | $ | (6.9 | ) | | $ | (17.8 | ) | $ | — |
|
| Utility cost of gas | (3.5 | ) | | — |
| | (3.5 | ) | (3.5 | ) |
| Non-utility cost of energy-related sales | 0.7 |
| | 11.5 |
| | 12.2 |
| — |
|
| Total | $ | (13.7 | ) | | $ | 4.6 |
| | $ | (9.1 | ) | $ | (3.5 | ) |
| Three Months Ended June 30, 2017 | | | | | | |
| Operating revenues—non-utility | $ | (8.9 | ) | | $ | (1.1 | ) | | $ | (10.0 | ) | $ | — |
|
| Utility cost of gas | 2.9 |
| | — |
| | 2.9 |
| 2.9 |
|
| Non-utility cost of energy-related sales | — |
| | 2.8 |
| | 2.8 |
| — |
|
| Total | $ | (6.0 | ) | | $ | 1.7 |
| | $ | (4.3 | ) | $ | 2.9 |
|
| Nine Months Ended June 30, 2018 | |
| | |
| | |
| |
| Operating revenues—non-utility | $ | (18.3 | ) | | $ | (10.7 | ) | | $ | (29.0 | ) | $ | — |
|
| Utility cost of gas | (8.0 | ) | | — |
| | (8.0 | ) | (8.0 | ) |
| Non-utility cost of energy-related sales | (2.5 | ) | | 13.7 |
| | 11.2 |
| — |
|
| Total | $ | (28.8 | ) | | $ | 3.0 |
| | $ | (25.8 | ) | $ | (8.0 | ) |
| Nine Months Ended June 30, 2017 | | | | | | |
| Operating revenues—non-utility | $ | 6.3 |
| | $ | (9.6 | ) | | $ | (3.3 | ) | $ | — |
|
| Utility cost of gas | 34.7 |
| | — |
| | 34.7 |
| 34.7 |
|
| Non-utility cost of energy-related sales | 5.6 |
| | 7.1 |
| | 12.7 |
| — |
|
| Total | $ | 46.6 |
| | $ | (2.5 | ) | | $ | 44.1 |
| $ | 34.7 |
|
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,June 30, 2018 and 2017, and 2016, respectively.
WGL Holdings, Inc.
Washington Gas Light Company
Part I—Financial Information
Item 1—Financial Statements (continued)
Notes to Condensed Consolidated Financial Statements (Unaudited)
| | Unrealized Gains (Losses) Recorded for Level 3 Measurements
| Unrealized Gains (Losses) Recorded for Level 3 Measurements
| Unrealized Gains (Losses) Recorded for Level 3 Measurements
|
| | WGL Holdings, Inc.
| Washington Gas Light Company
| WGL Holdings, Inc.
| Washington Gas Light Company
|
| (In millions) | Natural Gas Related Derivatives | | Electricity Related Derivatives | | Total | Total - Natural Gas Related Derivatives | Natural Gas Related Derivatives | | Electricity Related Derivatives | | Total | Total - Natural Gas Related Derivatives |
| Three Months Ended December 31, 2017 | | | | | | | |
| Three Months Ended June 30, 2018 | | | | | | | |
| Recorded to income | | | | | | | | | | |
| Operating revenues—non-utility | $ | (5.5 | ) | | $ | (13.6 | ) | | $ | (19.1 | ) | $ | — |
| $ | (9.3 | ) | | $ | (4.8 | ) | | $ | (14.1 | ) | $ | — |
|
| Utility cost of gas | (4.6 | ) | | — |
| | (4.6 | ) | (4.6 | ) | (5.9 | ) | | — |
| | (5.9 | ) | (5.9 | ) |
| Non-utility cost of energy-related sales | 4.2 |
| | 6.2 |
| | 10.4 |
| — |
| 0.6 |
| | 8.9 |
| | 9.5 |
| — |
|
| Recorded to regulatory assets—gas costs | (7.5 | ) | | — |
| | (7.5 | ) | (7.5 | ) | (9.9 | ) | | — |
| | (9.9 | ) | (9.9 | ) |
| Total | $ | (13.4 | ) | | $ | (7.4 | ) | | $ | (20.8 | ) | $ | (12.1 | ) | $ | (24.5 | ) | | $ | 4.1 |
| | $ | (20.4 | ) | $ | (15.8 | ) |
| Three Months Ended December 31, 2016 | | | | | | | |
| Three Months Ended June 30, 2017 | | | | | | | |
| Recorded to income | | | | | | | | | | |
| Operating revenues—non-utility | $ | (9.7 | ) | | $ | (5.9 | ) | | $ | (15.6 | ) | $ | — |
| $ | (7.1 | ) | | $ | 5.1 |
| | $ | (2.0 | ) | $ | — |
|
| Utility cost of gas | 15.6 |
| | — |
| | 15.6 |
| 15.6 |
| 2.6 |
| | — |
| | 2.6 |
| 2.6 |
|
| Non-utility cost of energy-related sales | (0.1 | ) | | 11.7 |
| | 11.6 |
| — |
| (0.2 | ) | | 2.0 |
| | 1.8 |
| — |
|
| Recorded to regulatory assets—gas costs | 19.7 |
| | — |
| | 19.7 |
| 19.7 |
| 2.7 |
| | — |
| | 2.7 |
| 2.7 |
|
| Total | $ | 25.5 |
| | $ | 5.8 |
| | $ | 31.3 |
| $ | 35.3 |
| $ | (2.0 | ) | | $ | 7.1 |
| | $ | 5.1 |
| $ | 5.3 |
|
| Nine Months Ended June 30, 2018 | | |
| | |
| | |
| |
| Recorded to income | | | | | | |
| Operating revenues—non-utility | | $ | (16.9 | ) | | $ | (13.5 | ) | | $ | (30.4 | ) | $ | — |
|
| Utility cost of gas | | (1.3 | ) | | — |
| | (1.3 | ) | (1.3 | ) |
| Non-utility cost of energy-related sales | | 2.0 |
| | 15.0 |
| | 17.0 |
| — |
|
| Recorded to regulatory assets—gas costs | | (5.4 | ) | | — |
| | (5.4 | ) | (5.4 | ) |
| Total | | $ | (21.6 | ) | | $ | 1.5 |
| | $ | (20.1 | ) | $ | (6.7 | ) |
| Nine Months Ended June 30, 2017 | | | | | | | |
| Recorded to income | | | | | | |
| Operating revenues—non-utility | | $ | 5.2 |
| | $ | 4.0 |
| | $ | 9.2 |
| $ | — |
|
| Utility cost of gas | | 22.4 |
| | — |
| | 22.4 |
| 22.4 |
|
| Non-utility cost of energy-related sales | | (0.1 | ) | | 8.4 |
| | 8.3 |
| — |
|
| Recorded to regulatory assets—gas costs | | 38.0 |
| | — |
| | 38.0 |
| 38.0 |
|
| Total | | $ | 65.5 |
| | $ | 12.4 |
| | $ | 77.9 |
| $ | 60.4 |
|
The following table presents the carrying amounts and estimated fair values of our financial instruments at December 31, 2017June 30, 2018 and September 30, 2017.
| | WGL Holdings, Inc. Fair Value of Financial Instruments | WGL Holdings, Inc. Fair Value of Financial Instruments | WGL Holdings, Inc. Fair Value of Financial Instruments |
| December 31, 2017 | | September 30, 2017 | June 30, 2018 | | September 30, 2017 |
| (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 |
| $ | 40.9 |
| | $ | 40.9 |
| | $ | 11.8 |
| | $ | 11.8 |
|
Commercial paper (b) | $ | 503.9 |
| | $ | 503.9 |
| | $ | 505.0 |
| | $ | 505.0 |
| $ | 402.0 |
| | $ | 402.0 |
| | $ | 505.0 |
| | $ | 505.0 |
|
Project financing (b) | $ | 94.6 |
| | $ | 94.6 |
| | $ | 54.8 |
| | $ | 54.8 |
| $ | 27.5 |
| | $ | 27.5 |
| | $ | 54.8 |
| | $ | 54.8 |
|
Long-term debt(c) | $ | 1,679.9 |
| | $ | 1,842.8 |
| | $ | 1,430.9 |
| | $ | 1,577.3 |
| $ | 1,879.3 |
| | $ | 1,942.2 |
| | $ | 1,430.9 |
| | $ | 1,577.3 |
|
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 of Financial Instruments | | December 31, 2017 | | September 30, 2017 | June 30, 2018 | | September 30, 2017 |
| (In millions) | Carrying Amount | | Fair Value | | Carrying Amount | | Fair Value | Carrying Amount | | Fair Value | | Carrying Amount | | Fair Value |
Money market funds (a) | $ | 13.7 |
| | $ | 13.7 |
| | $ | 4.8 |
| | $ | 4.8 |
| $ | 39.4 |
| | $ | 39.4 |
| | $ | 4.8 |
| | $ | 4.8 |
|
Commercial paper (b) | $ | 162.0 |
| | $ | 162.0 |
| | $ | 123.0 |
| | $ | 123.0 |
| $ | — |
| | $ | — |
| | $ | 123.0 |
| | $ | 123.0 |
|
Project financing (b) | $ | 85.4 |
| | $ | 85.4 |
| | $ | 43.8 |
| | $ | 43.8 |
| $ | 15.5 |
| | $ | 15.5 |
| | $ | 43.8 |
| | $ | 43.8 |
|
Long-term debt (c) | $ | 1,084.6 |
| | $ | 1,232.9 |
| | $ | 1,134.5 |
| | $ | 1,271.0 |
| $ | 1,084.8 |
| | $ | 1,146.9 |
| | $ | 1,134.5 |
| | $ | 1,271.0 |
|
| |
(a)(a) 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. | 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 December 31, 2017June 30, 2018 and September 30, 2017 is under 30 days. Due to the short-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 nor Washington Gas’ long-term debt is actively traded. The fair value of long-term debt was estimated based on the quoted 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. Our long-term debt fair value measurement is classified as Level 3.
Non Recurring Basis
During the second quarter of fiscal year 2018, WGL Midstream recorded an other than temporary impairment charge of $34.0 million to its equity method investment in Constitution based on the estimated fair value of the investment of $4.0 million. WGL Midstream utilized income and market approaches to determine the fair value of its investment in Constitution, which fall into Level 3 of the fair value hierarchy because of the significant unobservable inputs utilized in these valuation approaches, including consideration of the severity and duration of any decline in fair value of our investment in the project. Our key inputs included, but were not limited to, significant management judgments and estimates, including projections of the timing and amount of the project’s cash flows, determination of a discount rate for the income approach, market multipliers, probability weighting of potential outcomes of legal and regulatory proceedings, and weighting of the valuations produced by the income and market approaches. For more information, see Note 11-Other Investments of the Notes to Condensed Consolidated Financial Statements.
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 ourthe WGL 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 in the District of Columbia, Maryland and Virginia 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.
WGL Holdings, Inc.
Washington Gas Light Company
Part I—Financial Information
Item 1—Financial Statements (continued)
Notes to Condensed Consolidated Financial Statements (Unaudited)
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 and nine months ended December 31, 2017June 30, 2018 and 2016.2017.
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 | 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 | | | | | | | | | | | | | | |
| Three Months Ended June 30, 2018 | | | | | | | | | | | | | | |
| Regulated utility | $ | 377,470 |
| | $ | 34,103 |
| | $ | — |
| | $ | 98,365 |
| | $ | 5,227,299 |
| | $ | 76,762 |
| | $ | — |
| $ | 199,512 |
| | $ | 34,502 |
| | $ | — |
| | $ | (5,965 | ) | | $ | 5,053,930 |
| | $ | 98,846 |
| | $ | — |
|
| Retail energy-marketing | 248,693 |
| | 282 |
| | — |
| | 3,742 |
| | 533,273 |
| | — |
| | — |
| 219,397 |
| | 270 |
| | — |
| | 10,763 |
| | 506,397 |
| | — |
| | — |
|
Commercial energy systems(a) | 20,063 |
| | 6,584 |
| | — |
| | 5,647 |
| | 1,104,588 |
| | 22,292 |
| | — |
| 21,324 |
| | 5,599 |
| | — |
| | 13,332 |
| | 1,087,374 |
| | 39,271 |
| | — |
|
| Midstream energy services | 17,687 |
| | 4 |
| | 5,892 |
| | 22,185 |
| | 802,613 |
| | — |
| | 489,354 |
| (10,329 | ) | | 4 |
| | 7,065 |
| | (5,632 | ) | | 1,082,676 |
| | — |
| | 677,404 |
|
| Other activities | — |
| | — |
| | — |
| | (4,171 | ) | | 269,719 |
| | — |
| | — |
| — |
| | — |
| | — |
| | (2,671 | ) | | 322,560 |
| | — |
| | — |
|
Eliminations(b) | (11,473 | ) | | 12 |
| | — |
| | 1,689 |
| | (874,918 | ) | | — |
| | — |
| (6,439 | ) | | 13 |
| | — |
| | (842 | ) | | (1,214,652 | ) | | — |
| | — |
|
| Total consolidated | $ | 652,440 |
| | $ | 40,985 |
| | $ | 5,892 |
| | $ | 127,457 |
| | $ | 7,062,574 |
| | $ | 99,054 |
| | $ | 489,354 |
| $ | 423,465 |
| | $ | 40,388 |
| | $ | 7,065 |
| | $ | 8,985 |
| | $ | 6,838,285 |
| | $ | 138,117 |
| | $ | 677,404 |
|
| Three Months Ended December 31, 2016 | | | | | | | | | | | | | | |
| Three Months Ended June 30, 2017 | | | | | | | | | | | | | | |
| Regulated utility | $ | 333,986 |
| | $ | 30,560 |
| | $ | — |
| | $ | 102,717 |
| | $ | 4,891,722 |
| | $ | 111,681 |
| | $ | — |
| $ | 203,186 |
| | $ | 33,217 |
| | $ | — |
| | $ | 11,226 |
| | $ | 4,780,169 |
| | $ | 72,750 |
| | $ | — |
|
| Retail energy-marketing | 298,684 |
| | 305 |
| | — |
| | 29,185 |
| | 518,914 |
| | 404 |
| | — |
| 250,025 |
| | 281 |
| | — |
| | 4,335 |
| | 522,496 |
| | (125 | ) | | — |
|
Commercial energy systems(a) | 14,857 |
| | 4,399 |
| | 2,387 |
| | 4,663 |
| | 932,908 |
| | 43,673 |
| | 68,573 |
| 25,645 |
| | 5,585 |
| | 2,355 |
| | 14,354 |
| | 987,827 |
| | 13,062 |
| | 76,341 |
|
| Midstream energy services | (24,988 | ) | | 9 |
| | (2,122 | ) | | (28,484 | ) | | 607,806 |
| | — |
| | 305,492 |
| 4,540 |
| | 2 |
| | 5,153 |
| | 7,651 |
| | 650,204 |
| | — |
| | 348,963 |
|
| Other activities | — |
| | — |
| | — |
| | (1,198 | ) | | 417,672 |
| | — |
| | — |
| — |
| | — |
| | — |
| | (1,622 | ) | | 354,465 |
| | — |
| | — |
|
Eliminations(b) | (13,052 | ) | | 10 |
| | — |
| | 1,108 |
| | (893,632 | ) | | — |
| | — |
| (9,032 | ) | | 9 |
| | — |
| | (138 | ) | | (921,668 | ) | | — |
| | — |
|
| Total consolidated | $ | 609,487 |
| | $ | 35,283 |
| | $ | 265 |
| | $ | 107,991 |
| | $ | 6,475,390 |
| | $ | 155,758 |
| | $ | 374,065 |
| $ | 474,364 |
| | $ | 39,094 |
| | $ | 7,508 |
| | $ | 35,806 |
| | $ | 6,373,493 |
| | $ | 85,687 |
| | $ | 425,304 |
|
| Nine Months Ended June 30, 2018 | | | | | | | | | | | | | | |
| Regulated utility | | $ | 1,109,022 |
| | $ | 102,531 |
| | $ | — |
| | $ | 243,469 |
| | $ | 5,053,930 |
| | $ | 246,425 |
| | $ | — |
|
| Retail energy-marketing | | 784,804 |
| | 830 |
| | — |
| | 29,609 |
| | 506,397 |
| | — |
| | — |
|
Commercial energy systems(a) | | 57,793 |
| | 18,663 |
| | — |
| | 22,541 |
| | 1,087,374 |
| | 101,971 |
| | — |
|
| Midstream energy services | | 40,682 |
| | 13 |
| | (14,457 | ) | | 23,859 |
| | 1,082,676 |
| | — |
| | 677,404 |
|
| Other activities | | — |
| | — |
| | — |
| | (9,027 | ) | | 322,560 |
| | — |
| | — |
|
Eliminations(b) | | (29,945 | ) | | 58 |
| | — |
| | (3,269 | ) | | (1,214,652 | ) | | — |
| | — |
|
| Total consolidated | | $ | 1,962,356 |
| | $ | 122,095 |
|
| $ | (14,457 | ) |
| $ | 307,182 |
|
| $ | 6,838,285 |
|
| $ | 348,396 |
|
| $ | 677,404 |
|
| Nine Months Ended June 30, 2017 | | | | | | | | | | | | | | |
| Regulated utility | | $ | 1,012,193 |
| | $ | 97,349 |
| | $ | — |
| | $ | 279,114 |
| | $ | 4,780,169 |
| | $ | 281,043 |
| | $ | — |
|
| Retail energy-marketing | | 873,625 |
| | 859 |
| | — |
| | 42,775 |
| | 522,496 |
| | 609 |
| | — |
|
Commercial energy systems(a) | | 61,482 |
| | 15,210 |
| | 7,185 |
| | 27,564 |
| | 987,827 |
| | 70,580 |
| | 76,341 |
|
| Midstream energy services | | 18,173 |
| | 21 |
| | 7,932 |
| | 21,160 |
| | 650,204 |
| | — |
| | 348,963 |
|
| Other activities | | — |
| | — |
| | — |
| | (17,887 | ) | | 354,465 |
| | — |
| | — |
|
Eliminations(b) | | (39,872 | ) | | 48 |
| | — |
| | (502 | ) | | (921,668 | ) | | — |
| | — |
|
| Total consolidated | | $ | 1,925,601 |
| | $ | 113,487 |
| | $ | 15,117 |
| | $ | 352,224 |
| | $ | 6,373,493 |
| | $ | 352,232 |
| | $ | 425,304 |
|
(a) As of August 2016, Commercial Energy Systems' operating revenues and depreciation and amortization include revenuesactivity 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’sRECs 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.
WGL Holdings, Inc.
Washington Gas Light Company
Part I—Financial Information
Item 1—Financial Statements (continued)
Notes to Condensed Consolidated Financial Statements (Unaudited)
The following table provides a reconciliation from EBIT to net income applicable to common stock. | | | Three Months Ended December 31, | Three Months Ended June 30, | | Nine Months Ended June 30, |
| (In thousands) | 2017 | | 2016 | 2018 | | 2017 | | 2018 | | 2017 |
| Total consolidated EBIT | $ | 127,457 |
| | $ | 107,991 |
| $ | 8,985 |
| | $ | 35,806 |
| | $ | 307,182 |
| | $ | 352,224 |
|
| Interest expense | 20,197 |
| | 16,235 |
| 20,593 |
| | 25,062 |
| | 48,427 |
| | 55,552 |
|
| Income tax expense (benefit) | (31,110 | ) | | 33,454 |
| |
| Income tax expense | | 37,068 |
| | 2,149 |
| | 33,181 |
| | 106,381 |
|
| Dividends on Washington Gas Light Company preferred stock | 330 |
| | 330 |
| 330 |
| | 330 |
| | 990 |
| | 990 |
|
| Net income applicable to common stock | $ | 138,040 |
| | $ | 57,972 |
| |
| Net income (loss) applicable to common stock | | $ | (49,006 | ) | | $ | 8,265 |
| | $ | 224,584 |
| | $ | 189,301 |
|
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) whosethe equity holders of which, 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 relationshiprelationships with the entity, the legal structure of the entity,
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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.VIE. 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, may not consolidate the entity 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.voting rights. 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 accountingaccounting.
We have investments in both consolidated and unconsolidated entities which are described in detail below. The unconsolidated investments are initially measured at cost. Investmentsaccounted for under the equity method of accounting with profits and losses included in and advances to, affiliated companies are presented“Equity in earnings of unconsolidated affiliates” in the captionaccompanying Condensed Consolidated Statements of Income, and the unconsolidated investment balances included in “Investments in unconsolidated affiliates” in the accompanying Condensed Consolidated Balance Sheets. Consolidated investments are accounted for under the principles of consolidation with profits and losses included in the appropriate revenues and expenses lines in the accompanying Condensed Consolidated Statements of Income, and the consolidated investment balances are included in the appropriate assets and liabilities lines in the accompanying Condensed Consolidated Balance Sheets. Profits and losses associated with non-controlling interests are included in “Net income (loss) attributable to non-controlling interest” in the accompanying Condensed Consolidated Statements of Income and are recorded to Non-controlling interest 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
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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
Entity Investments-Solar
At December 31, 2017,June 30, 2018, WGL's subsidiary, WGSW, Inc. was the primary beneficiary of SFGF LLC (SFGF), SFRC, LLC (SFRC), SFGF II, LLC (SFGF II), ASD Solar LP (ASD) and SFEE LLC (SFEE), because of its ability to direct the activities most significant to the economic performance of those entities.entities plus the right to receive potentially significant benefits or the obligation to absorb potentially significant losses. Accordingly, we have consolidated these VIE's.
SFGF, SFRC, and SFGF II
WGSW, along with its various tax equity partners, formed the tax equity partnerships 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.partner for projects sold into the partnerships. WGL Energy Systems is the developer of the projects and sells them to the partnerships, and is the operations and maintenance provider, and the developer of the projects.provider.
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
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Consolidated Statements of Income and is recorded to Non-controlling interest on the accompanying Condensed Consolidated Balance Sheets.
As of December 31, 2017,June 30, 2018, WGSW has contributed the following amounts$16.8 million, $29.0 million and $20.1 million to SFGF, SFRC, and SFGF II respectively, $16.8 million, $20.8 million and $0.8 million.respectively.
ASD
WGSW is athe 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 athe 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,through the funding commitment period that ended forin January 2014. As of June 30, 2018, WGSW has contributed $72.6 million into the tax equity 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 and sold 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 considered a VIE and is consolidated by WGSW since then.WGSW. As of December 31, 2017,June 30, 2018, WGSW has contributed $6.5 million into the tax equity partnership.
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The following table summarizes the fair value amounts of SFEESFEE’s 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, whichcost. This amount was determined to equatebe equal to the fair value provided by a third-party appraisal.
Balance Sheet Location of Consolidated Investments
The carrying amounts and classification of the consolidated VIEs’ assets and liabilities included in our accompanying Condensed Consolidated Balance Sheets at December 31, 2017June 30, 2018 and September 30, 2017 are as follows:
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Balance Sheet Location of Consolidated Investments
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| | | (in millions) | | December 31, 2017 | September 30, 2017 | | June 30, 2018 | September 30, 2017 |
| Current assets | | $ | 5.8 |
| $ | 4.4 |
| | $ | 9.6 |
| $ | 4.4 |
|
| Property, Plant and Equipment | | 137.5 |
| 121.7 |
| | 202.2 |
| 121.7 |
|
| Total assets | | $ | 143.3 |
| $ | 126.1 |
| | $ | 211.8 |
| $ | 126.1 |
|
| Current liabilities | | 0.2 |
| 0.2 |
| | 0.4 |
| 0.2 |
|
| Deferred credits | | 1.1 |
| 0.8 |
| | 1.4 |
| 0.8 |
|
| Total liabilities | | $ | 1.3 |
| $ | 1.0 |
| | $ | 1.8 |
| $ | 1.0 |
|
Unconsolidated Investments
Variable Interest Entity-PipelinesEntity Investments-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, 2017June 30, 2018 and September 30, 2017, WGL Midstream held a $238.6$415.3 million and $146.7 million, respectively, equity method investment in Meade. WGL Midstream plans to invest an estimated $410$450 million for a 55% interest in Meade. Although WGL Midstream holds greater than a 50% interest in Meade, Meade is not consolidated by WGL Midstream and instead is accounted for under the equity method of accounting becauseaccounting. WGL Midstream is not the primary beneficiary of Meade as it does not have the power to direct the activities most significant to the economic performance of Meade. Meade is accounted for underWGL Midstream applies 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 significantHoldings, Inc.
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Notes to Meade.Condensed Consolidated Financial Statements (Unaudited)
Our maximum financial exposure to loss because of our involvement with this VIE is equal to WGL Midstream's capital contributions.
Non-VIENon-Variable Investment Entity Investments-Pipelines
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.
At June 30, 2018 and September 30, 2017, WGL Midstream held a $121.0 million and $63.0 million equity method investment in Mountain Valley, respectively. WGL Midstream expects to invest approximately $350.0 million in scheduled capital contributions through the in-service date of the pipeline based on its pro rata share of project costs. 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.
In April 2018, WGL Midstream entered into a separate agreement with Mountain Valley to acquire a 5% equity interest in a project to build a lateral interstate natural gas pipeline (the MVP Southgate project). The proposed lateral pipeline will receive gas from the Mountain Valley Pipeline mainline in Pittsylvania County, Virginia and extend approximately 70 miles south to new delivery points in Rockingham and Alamance counties, North Carolina. The total commitment by WGL Midstream is expected to be approximately $17.0 million.
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 June 30, 2018 and September 30, 2017, WGL Midstream held a $137.2 million and $136.7 million equity method investment in the Stonewall System, respectively. 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 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 $10.1 million as of June 30, 2018, which is being amortized over the life of the assets.
Constitution
WGL Midstream owns a 10% interest in Constitution Pipeline Company, LLC (Constitution).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.
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In May 2016, Constitution filed actions in both the U.S. Circuit Court of Appeals for the Second Circuit (Second Circuit Court) 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,March 2017, the U.S. District Court for the Northern District of New York dismissed without prejudice Constitution's lawsuit claiming that New York's state law permit requirements are preempted by the Natural Gas Act. The Court concluded that it lacked subject matter jurisdiction because Constitution appealed the NYSDEC’s denial of the Section 401 certificationhad not demonstrated a traceable injury in fact sufficient to the United States Court of Appeals forestablish standing. In August 2017, the Second Circuit and in August 2017, the courtCourt issued a decision, denying in part and dismissing in part Constitution’s appeal. The court expressly declineddeclining to rule on Constitution’s argument that the NYSDEC’s decision on Constitution’s Section 401 application constitutes a waiver of the certification
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requirement. Constitution has filed a petition for rehearing with the Second Circuit Court's decision, but in October 2017 the court denied ourthe 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 suchthe 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, findingpetition. On February 12, 2018, Constitution filed a request for rehearing with FERC, which was denied on July 19, 2018. On January 16, 2018, Constitution petitioned the U.S. Supreme Court to review the judgment of the Second Circuit Court, asserting that Section 401 provides that a state waives certification only when it does not actthe Second Circuit Court’s decision conflicts with the decisions of the U.S. Supreme Court and federal Courts of Appeals on an application within one year fromimportant question of federal law. On April 30, 2018, the dateU.S. Supreme Court denied Constitution’s petition for writ of the application. certiorari.
The project’s sponsors remain committed to the project, and plan to seek rehearing and, if necessary, appealas such, on June 25, 2018, Constitution requested FERC grant a 24-month extension on construction of the FERC’s decision.pipeline.
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 evaluatedevaluate our investment in Constitution for other than temporary impairment as of December 31, 2017.impairment. Our impairment assessment useduses 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 limitedConstitution. Refer 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 recordNote 9 - Fair Value Measurements. We recorded an other than temporary impairment charge of up$34.0 million to $38.2“Equity in earnings of unconsolidated affiliates”, and recorded a reversal to “Operation and maintenance” expense of a previously recognized expense of $3.0 million during the current carrying amountsecond quarter of fiscal year 2018. We evaluated our remaining investment at June 30, 2018, and determined that there was no additional impairment. There could be additional losses in the value of the investment inbeyond the quarter ending March 31, 2018. There could also be additional expenditures beyond this impairment; however,impairment charge already taken. 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 We also continue to incur legal fees associated with 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.
project. At December 31, 2017June 30, 2018, and September 30, 2017, WGL Midstream held a $76.8$3.9 million and $63.0$38.1 million equity method investment in Mountain Valley,Constitution, 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
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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:investments:
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Balance Sheet Location of Unconsolidated Investments | | | | Solar Investments | | Pipelines | | | Solar Investments | | Pipelines | | |
| (in millions) | | Non-VIEs(a) | | VIEs(b) | | Non-VIEs(c) | | Total | | Non-VIEs(a) | | VIEs(b) | | Non-VIEs(c) | | Total |
| December 31, 2017 | | | | | | | | | |
| June 30, 2018 | | | | | | | | | |
| Assets | | | | | | | | | | | | | | | | |
| Investments in unconsolidated affiliates | | $ | — |
| | $ | 238.6 |
| | $ | 250.8 |
| | $ | 489.4 |
| | $ | — |
| | $ | 415.3 |
| | $ | 262.1 |
| | $ | 677.4 |
|
| Total assets | | $ | — |
| | $ | 238.6 |
| | $ | 250.8 |
| | $ | 489.4 |
| | $ | — |
| | $ | 415.3 |
| | $ | 262.1 |
| | $ | 677.4 |
|
| September 30, 2017 | | | | | | | | | | | | | | | | |
| Assets | | | | | | | | | | | | | | | | |
| Investments in unconsolidated affiliates | | $ | 9.6 |
| | $ | 146.7 |
| | $ | 237.9 |
| | $ | 394.2 |
| | $ | 9.6 |
| | $ | 146.7 |
| | $ | 237.9 |
| | $ | 394.2 |
|
| Total assets | | $ | 9.6 |
| | $ | 146.7 |
| | $ | 237.9 |
| | $ | 394.2 |
| | $ | 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. RELATED PARTY TRANSACTIONS
WGL and its subsidiaries engage in inter-company transactions in the ordinary course of business. Inter-company transactions and balances have been eliminated from the consolidated financial statements of WGL, except as described below. Washington Gas provides accounting, treasury, legal and other administrative and general support to affiliates, and files consolidated tax returns that include affiliated taxable transactions. Washington Gas bills its affiliates in accordance with
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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. 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.
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' 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 records a receivable representing the government’s obligation, and records an inter-company payable to WGL Energy Systems for the construction work performed for the same amount in "Payables to associated companies". Refer to Note 3—Short Term Debt of the Notes to Condensed Consolidated Financial Statements for further discussion of the project financing.
The following table presents the receivables from and payables to associated companies as of December 31, 2017June 30, 2018 and September 30, 2017.
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| | Washington Gas Receivables From / Payables To Associated Companies | | (In millions) | December 31, 2017 | | September 30, 2017 | June 30, 2018 | | September 30, 2017 |
| Receivables from associated companies | $ | 27.0 |
| | $ | 32.4 |
| $ | 33.6 |
| | $ | 32.4 |
|
| Payables to associated companies | $ | 107.6 |
| | $ | 94.8 |
| $ | 109.3 |
| | $ | 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 tofor 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".
| | Washington Gas - Gas Balancing Service Charges | | Three Months Ended December 31, | Three Months Ended June 30, | | Nine Months Ended June 30, |
| (In millions) | 2017 | 2016 | 2018 | 2017 | | 2018 | 2017 |
| Gas balancing service charge | $ | 2.5 |
| $ | 6.9 |
| $ | 4.3 |
| $ | 4.2 |
| | $ | 15.3 |
| $ | 19.9 |
|
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, 2017June 30, 2018 and September 30, 2017, WGL Energy Services recognized accounts receivable from Washington Gas of $4.8$7.4 million and $1.4 million respectively, related to an imbalance in gas volumes. Due to regulatory treatment, these payables and receivables are not eliminated in the consolidated financial statements of WGL. Refer to Note 1—Accounting Policies of the Notes to Condensed Consolidated Financial Statements of our combined Annual Report on Form 10-K for the fiscal year ended September 30, 2017 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 (PSC of MD), whereby it purchases receivables from participating energy marketers at approved discount rates. In
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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. The receivables purchased by Washington Gas are included in “Accounts receivable” in the accompanying balance sheet. Any activity between Washington Gas and WGL Energy Services related to the POR program has been eliminated in the accompanying financial statements for WGL. At December 31, 2017June 30, 2018 and September 30, 2017, Washington Gas had balances of $6.0$4.0 million and $3.2 million, respectively, of purchased receivables from WGL Energy Services which are located in "Accounts receivable".
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.
Application for Approval of Reduction of Distribution Rates
On January 12, 2018, Washington Gas filed applications to reduce customer rates in Maryland, Virginia, and the District of Columbia to reflect the 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, the PSC of MD approved the application effective for bills rendered on or after February 1, 2018.
In Virginia, the application was dismissed on March 15, 2018 and Washington Gas will file a new general rate case in July 2018. On June 29, 2018, the PSC of DC approved the settlement agreement, reflecting an annual reduction in Washington Gas’ distribution rates of $8.3 million, effective for service rendered on or after July 1, 2018. The settling parties were directed to file a joint proposal, by August 1, 2018, depicting the regulatory liability balance for the period January 1, 2018 through June 30, 2018, which will be refunded to customers through a one-time bill credit beginning with Washington Gas’ December 2018 billing cycle.
Washington Gas has recorded regulatory liabilities, representing the amounts owed to customers for reduced rates between January 1, 2018 and June 30, 2018 of 11.5 million and $5.4 million, for Virginia and the District of Columbia respectively. Please refer to Note 7— Income taxes for more information.
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
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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%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 relatedwere completed on February 7, 2018. Washington Gas’ methodology to the interim billings in accordance with the final order. On December 21, 2017, Washington Gas requested and was grantedcompute customer refunds is pending review by the SCC of VA a 45-day extension to complete the refunds.
VA.
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,June 30, 2018, 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,
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Washington Gas Light Company
Part I—Financial Information
Item 1—Financial Statements (continued)
Notes to Condensed Consolidated Financial Statements (Unaudited)
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$29.6 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$100 million as of October 24, 2017, which amount continues to accumulate dailyApril 4, 2018, 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 collectingany loss associated with these penalties isclaims to be remote and therefore, no accrual was made as of December 31, 2017.June 30, 2018. In December 2017, WGL Midstream amended its purchase contract with Antero and, effective February 1, 2018, willis 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-nineAll of these suits seek unspecified damages for personal injury and/or property damage. The finalone action is aseeking class action suit seeking total
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Washington Gas Light Company
Part I—Financial Information
Item 1—Financial Statements (continued)
Notesstatus has been amended to Condensed Consolidated Financial Statements (Unaudited)
damages stated to be less than $5 million for, among others,assert 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.claims. 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.
MERGER WITH ALTAGAS
For a discussion of merger related commitments, refer to Note 17 — Subsequent Events of the Notes to Condensed Consolidated Financial Statements.
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 and nine months ended December 31, 2017June 30, 2018 and 2016.2017.
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Washington Gas Light Company
Part I—Financial Information
Item 1—Financial Statements (continued)
Notes to Condensed Consolidated Financial Statements (Unaudited)
| | Components of Net Periodic Benefit Costs (Income) | | Three Months Ended December 31, | Three Months Ended June 30, |
| 2017 | | 2016 | 2018 | | 2017 |
| (In millions) | Pension Benefits | | Health and Life Benefits | | Pension Benefits | | Health and Life Benefits | Pension Benefits | | Health and Life Benefits | | Pension Benefits | | Health and Life Benefits |
| Service cost | $ | 3.7 |
| | $ | 1.3 |
| | $ | 4.1 |
| | $ | 1.4 |
| $ | 3.7 |
| | $ | 1.3 |
| | $ | 4.1 |
| | $ | 1.4 |
|
| Interest cost | 9.9 |
| | 2.9 |
| | 9.6 |
| | 2.9 |
| 9.9 |
| | 2.9 |
| | 9.6 |
| | 2.9 |
|
| Expected return on plan assets | (10.6 | ) | | (5.9 | ) | | (10.3 | ) | | (5.5 | ) | (10.6 | ) | | (5.9 | ) | | (10.3 | ) | | (5.5 | ) |
| Amortization of prior service cost (credit) | 0.1 |
| | (4.4 | ) | | 0.1 |
| | (4.4 | ) | 0.1 |
| | (4.4 | ) | | 0.1 |
| | (4.4 | ) |
| Amortization of net actuarial loss | 3.9 |
| | — |
| | 5.5 |
| | 0.2 |
| 3.9 |
| | — |
| | 5.5 |
| | 0.2 |
|
| Net periodic benefit cost (income) | 7.0 |
| | (6.1 | ) | | 9.0 |
| | (5.4 | ) | 7.0 |
| �� | (6.1 | ) | | 9.0 |
| | (5.4 | ) |
| Amount allocated to construction projects | (1.1 | ) | | 1.0 |
| | (1.6 | ) | | 1.2 |
| (1.5 | ) | | 1.2 |
| | (1.6 | ) | | 1.1 |
|
Amount deferred as regulatory asset/liability—net | 1.7 |
| | — |
| | 1.8 |
| | (0.1 | ) | 1.8 |
| | — |
| | 1.8 |
| | — |
|
| Amount charged (credited) to expense | $ | 7.6 |
| | $ | (5.1 | ) | | $ | 9.2 |
| | $ | (4.3 | ) | $ | 7.3 |
| | $ | (4.9 | ) | | $ | 9.2 |
| | $ | (4.3 | ) |
| | Nine Months Ended June 30, |
| | 2018 | | 2017 |
| Service cost | | $ | 11.1 |
| | $ | 3.9 |
| | $ | 12.3 |
| | $ | 4.3 |
|
| Interest cost | | 29.7 |
| | 8.7 |
| | 28.8 |
| | 8.7 |
|
| Expected return on plan assets | | (31.8 | ) | | (17.7 | ) | | (30.8 | ) | | (16.6 | ) |
| Amortization of prior service cost (credit) | | 0.3 |
| | (13.2 | ) | | 0.3 |
| | (13.2 | ) |
| Amortization of net actuarial loss | | 11.7 |
| | — |
| | 16.5 |
| | 0.6 |
|
| Net periodic benefit cost (income) | | 21.0 |
| | (18.3 | ) | | 27.1 |
| | (16.2 | ) |
| Amount allocated to construction projects | | (3.7 | ) | | 3.2 |
| | (4.9 | ) | | 3.5 |
|
Amount deferred as regulatory asset/liability—net | | 5.2 |
| | — |
| | 5.3 |
| | (0.1 | ) |
| Amount charged (credited) to expense | | $ | 22.5 |
| | $ | (15.1 | ) | | $ | 27.5 |
| | $ | (12.8 | ) |
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 show the changes in accumulated other comprehensive income (loss) for WGL and Washington Gas by component for the three and nine months ended December 31, 2017June 30, 2018 and 2016.2017.
| | WGL Holdings, Inc. Changes in Accumulated Other Comprehensive Loss by Component | WGL Holdings, Inc. Changes in Accumulated Other Comprehensive Loss by Component | WGL Holdings, Inc. Changes in Accumulated Other Comprehensive Loss by Component |
| (In thousands) | Three Months Ended December 31, | Three Months Ended June 30, | | Nine Months Ended June 30, |
| 2017 | | 2016 | 2018 | | 2017 | | 2018 | | 2017 |
| Beginning Balance | $ | (5,997 | ) | | $ | (38,539 | ) | $ | (5,547 | ) | | $ | (8,874 | ) | | $ | (5,997 | ) | | $ | (38,539 | ) |
Qualified cash flow hedging instruments(a) | 52 |
| | 49,455 |
| 53 |
| | 51 |
| | 158 |
| | 49,556 |
|
Change in prior service credit(b) | (274 | ) | | (217 | ) | (273 | ) | | (217 | ) | | (820 | ) | | (651 | ) |
Amortization of actuarial loss(b) | 527 |
| | 588 |
| |
Change in actuarial net loss(b) | | 530 |
| | 588 |
| | 1,587 |
| | 1,763 |
|
| Current-period other comprehensive income | 305 |
| | 49,826 |
| 310 |
| | 422 |
| | 925 |
| | 50,668 |
|
| Income tax expense related to other comprehensive income | 61 |
| | 20,413 |
| 83 |
| | 235 |
| | 248 |
| | 20,816 |
|
| Ending Balance | $ | (5,753 | ) | | $ | (9,126 | ) | $ | (5,320 | ) | | $ | (8,687 | ) | | $ | (5,320 | ) | | $ | (8,687 | ) |
| |
(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. |
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Washington Gas Light Company
Part I—Financial Information
Item 1—Financial Statements (continued)
Notes to Condensed Consolidated Financial Statements (Unaudited)
| |
(b) | 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. |
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Washington Gas Light Company
Part I—Financial Information
Item 1—Financial Statements (continued)
Notes to Condensed Consolidated Financial Statements (Unaudited)
|
| | | | | | | |
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) | | | | | | | | | | | | | | | | | Washington Gas Light Company Changes in Accumulated Other Comprehensive Loss by Component | | (In thousands) | Three Months Ended June 30, | | Nine Months Ended June 30, | | 2018 | | 2017 | | 2018 | | 2017 | | Beginning Balance | $ | (4,147 | ) | | $ | (7,383 | ) | | $ | (4,522 | ) | | $ | (7,830 | ) | Change in prior service credit(a) | (273 | ) | | (217 | ) | | (820 | ) | | (651 | ) | Change in actuarial net loss(a) | 530 |
| | 588 |
| | 1,587 |
| | 1,763 |
| | Current-period other comprehensive income | 257 |
| | 371 |
| | 767 |
| | 1,112 |
| | Income tax expense related to other comprehensive income | 69 |
| | 145 |
| | 204 |
| | 439 |
| | Ending Balance | $ | (3,959 | ) | | $ | (7,157 | ) | | $ | (3,959 | ) | | $ | (7,157 | ) |
| 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. |
NOTE 16. SUPPLEMENTAL CASH FLOW INFORMATION
The following tables detail 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:
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Washington Gas Light Company
Part I—Financial Information
Item 1—Financial Statements (continued)
Notes to Condensed Consolidated Financial Statements (Unaudited)
WGL Holdings Inc.
| | | For the three months ended December 31, | 2017 | | 2016 | |
| For the nine months ended June 30, | | 2018 | | 2017 |
| (In thousands) | | | | | | |
| CHANGES IN OPERATING ASSETS AND LIABILITIES | | | | | | |
| Accounts receivable and unbilled revenues—net | $ | (237,959 | ) | | $ | (203,098 | ) | $ | (49,268 | ) | | $ | (112,725 | ) |
| Gas costs and other regulatory assets/liabilities—net | 38,503 |
| | 35,400 |
| 31,100 |
| | (11,285 | ) |
| Storage gas | 37,006 |
| | (1,709 | ) | 119,217 |
| | (3,399 | ) |
| Prepaid taxes | (7,275 | ) | | (7,901 | ) | (4,711 | ) | | 11,309 |
|
| Accounts payable and other accrued liabilities | 40,575 |
| | 87,512 |
| (10,911 | ) | | 30,677 |
|
| Customer deposits and advance payments | (10,683 | ) | | (12,611 | ) | (1,325 | ) | | (24,908 | ) |
| Accrued taxes | 18,019 |
| | 11,149 |
| 10,753 |
| | 4,987 |
|
| Other current assets | (15,107 | ) | | (21,887 | ) | 35,291 |
| | (17,386 | ) |
| Other current liabilities | (2,662 | ) | | (22,569 | ) | (9,298 | ) | | 14,588 |
|
| Deferred gas costs—net | (26,023 | ) | | (42,189 | ) | 26,212 |
| | 12,702 |
|
| Deferred assets—other | (18,483 | ) | | (4,431 | ) | (20,424 | ) | | (10,890 | ) |
| Deferred liabilities—other | 7,061 |
| | (16,194 | ) | 3,837 |
| | 76 |
|
| Pension and other post-retirement benefits | (291 | ) | | (3,583 | ) | (1,344 | ) | | (7,178 | ) |
| Other—net | 1,917 |
| | 771 |
| 3,594 |
| | 2,379 |
|
| Changes in operating assets and liabilities | $ | (175,402 | ) | | $ | (201,340 | ) | $ | 132,723 |
| | $ | (111,053 | ) |
| SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION | | | | | | |
| Income taxes paid (refunded)—net | $ | (956 | ) | | $ | (4,678 | ) | $ | 649 |
| | $ | (3,890 | ) |
| Interest paid | $ | 10,392 |
| | $ | 4,156 |
| $ | 54,533 |
| | $ | 53,027 |
|
| SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING AND FINANCING ACTIVITIES: | | | | | | |
| Extinguishment of project debt financing | $ | — |
| | $ | (29,871 | ) | $ | (28,312 | ) | | $ | (27,927 | ) |
| Capital expenditure accruals included in accounts payable and other accrued liabilities | $ | 34,371 |
| | $ | 55,602 |
| $ | 40,986 |
| | $ | 38,101 |
|
| Dividends paid in common stock | $ | — |
| | $ | 1,362 |
| $ | — |
| | $ | 1,362 |
|
| Stock based compensation | $ | 11,251 |
| | $ | 6,564 |
| $ | 12,389 |
| | $ | 6,564 |
|
| Transfer of investments to fixed assets | $ | 10,054 |
| | $ | 3,959 |
| $ | 10,054 |
| | $ | 30,114 |
|
| Transfer of notes receivables to investments | $ | — |
| | $ | 10,031 |
| $ | — |
| | $ | 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
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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. |
| | | | | | | |
| For the nine months ended June 30, | 2018 | | 2017 |
| (In thousands) | | | |
| CHANGES IN OPERATING ASSETS AND LIABILITIES | | | |
| Accounts receivable, unbilled revenues and receivables from associated companies—net | $ | (45,234 | ) | | $ | (109,427 | ) |
| Gas costs and other regulatory assets/liabilities—net | 31,100 |
| | (11,285 | ) |
| Storage gas | 38,076 |
| | 15,270 |
|
| Prepaid taxes | 346 |
| | 5,127 |
|
| Accounts payable and other accrued liabilities, including payables to associated companies | 8,179 |
| | 32,724 |
|
| Customer deposits and advance payments | (125 | ) | | (20,107 | ) |
| Accrued taxes | 10,350 |
| | 2,928 |
|
| Other current assets | (7,329 | ) | | (4,945 | ) |
| Other current liabilities | (368 | ) | | 37 |
|
| Deferred gas costs—net | 26,212 |
| | 12,702 |
|
| Deferred assets—other | (19,084 | ) | | (7,527 | ) |
| Deferred liabilities—other | (10,233 | ) | | 489 |
|
| Pension and other post-retirement benefits | (1,426 | ) | | (7,178 | ) |
| Other—net | 3,255 |
| | 2,550 |
|
| Changes in operating assets and liabilities | $ | 33,719 |
| | $ | (88,642 | ) |
| SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION | | | |
| Income taxes paid (refunded)—net | $ | (958 | ) | | $ | — |
|
| Interest paid | $ | 31,061 |
| | $ | 36,202 |
|
| SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING AND FINANCING ACTIVITIES: | | | |
| Extinguishment of project debt financing | $ | (28,312 | ) | | $ | (27,927 | ) |
| Capital expenditure accruals included in accounts payable and other accrued liabilities | $ | 26,472 |
| | $ | 28,666 |
|
NOTE 18.17. SUBSEQUENT EVENTS
Constitution PipelineMERGER WITH ALTAGAS
OOn January 25, 2017, WGL entered into an agreement and plan of Merger (Merger Agreement) to combine with AltaGas in an all cash transaction. The merger was consummated on n January 11,July 6, 2018. The Merger Agreement provided for 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 lightmerger of the denialMerger Sub, a newly formed indirect wholly-owned subsidiary of AltaGas with and into WGL, whereby WGL became an indirect wholly-owned subsidiary of AltaGas. Upon consummation of the certificationmerger, each share of WGL common stock issued and outstanding immediately prior to the anticipated actionsclosing was converted automatically into the right to challenge the decision, Refer to Note 11 —receive $88.25 Other Investments(Merger Consideration) in cash per share, without interest, less any applicable withholding taxes. Shares of WGL common stock held by WGL, AltaGas, the Merger Sub or any subsidiaries were not entitled to receive the Merger Consideration. All shares of WGL common stock ceased to be outstanding and were automatically canceled. Each share of the Merger Sub's issued and outstanding common stock at the time of the consummation of the merger was converted into one share of WGL common stock for a total of 100 WGL post-Merger shares owned by Wrangler 1 LLC, an indirect wholly-owned subsidiary of AltaGas (Wrangler 1). As a result of the Merger, WGL's common stock was delisted from the New York Stock Exchange.
In connection with the Merger, WGL established Wrangler SPE LLC., the SPE for the purposes of owning the common stock of Washington Gas in a bankruptcy remote entity. The SPE is a wholly-owned subsidiary of WGL. Following the consummation of the merger, all of Washington Gas’ outstanding shares of common stock are now owned by the SPE. The merger had no effect on the Washington Gas preferred stock, which continues to be outstanding.
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. To approve the Merger Agreement, the PSC of DC needed to find that the merger taken as a whole is in the public interest. On May 8, 2018, Washington Gas, AltaGas, and other key stakeholders filed a proposed
WGL Holdings, Inc.
Washington Gas Light Company
Part I—Financial Information
Item 1—Financial Statements (concluded)
Notes to Condensed Consolidated Financial Statements (Unaudited)
unanimous settlement agreement and stipulation with the PSC of DC. On May 23, the PSC of DC issued an Order granting the parties’ request to reopen the record in the proceeding to permit consideration of the Settlement Agreement. On June 28, 2018, the PSC of DC issued an Order granting approval of the Settlement Agreement subject to conditions. The Applicants accepted the conditions set forth in the Order on July 2, 2018.
Maryland and Virginia
In April 2017, the Applicants filed applications with the PSC of MD and SCC of VA seeking approval of the Merger Agreement. Orders granting approval were received from the PSC of MD and the SCC of VA on April 4, 2018 and October 20, 2017, respectively.
On December 21, 2017, Washington Gas filed an application with the SCC of VA for further discussionapproval of Constitution.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. On March 15, 2018, the SCC of VA issued an Order directing Washington Gas to institute certain corrective measures (Revised Agreement) to the original Agreement. On July 25, 2018, Washington Gas filed with the SCC of VA a signed and executed copy of the approved Revised Agreement.
Other Federal Approvals
In addition to the approvals discussed above, AltaGas and WGL received the following approvals on the dates indicated:
FERC - July 6, 2017
Committee on Foreign Investment in the United States (CFIUS) - August 18, 2017
| |
| • | Federal Trade Commission and the Antitrust Division of the Department of Justice - July 17, 2017(a) |
(a)The waiting period required by the Clayton Act, and 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 deemed the merger approved by the Federal Trade Commission and the Department of Justice.
Merger Related Costs
Merger Commitments
Approval of the merger across all jurisdictions was conditioned upon AltaGas and WGL agreeing to certain financial commitments including: customer bill credits, funding for low-income weatherization and energy efficiency initiatives, public safety programs, energy educational programs, gas expansion fund contributions, workplace development initiatives, charitable contributions, and other required commitments. The commitments will be funded by AltaGas within various timeframes from 30 days to 10 years after the merger close. In addition, the commitments related to Maryland and the District of Columbia are subject to a Most Favored Nation (MFN) provision that may change the amount or nature of the commitments. We did not recognize any merger commitment liabilities on our consolidated financial statements as of June 30, 2018. The following table lists commitment obligations that will be recorded to “Operation and maintenance” expense on our Condensed Consolidated Financial Statements in the fourth quarter of fiscal year 2018.
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 Merger Commitments |
| (in millions) |
| Commitment Description | Amount |
| Customer bill credits | $ | 56.4 |
|
| Low-income weatherization and energy efficiency initiatives | 4.5 |
|
| Charitable contributions | 13.5 |
|
| Work place development initiatives | 7.4 |
|
| Gas expansion fund contributions | 30.3 |
|
| Public safety programs | 0.5 |
|
| Energy customer or education programs | 22.8 |
|
| Total merger commitments | $ | 135.4 |
|
The following additional commitments by Washington Gas will have an impact on our consolidated financial statements when the transactions are incurred in the future:
| |
| 1) | Hiring of three damage prevention trainers in each jurisdiction for a total of $2.8 million over 5 years; |
| |
| 2) | Investment of $70.0 million over a 10 year period to further extend natural gas service to areas within Washington Gas's service territory, which will be incorporated into Washington Gas's ongoing capital plan; and |
| |
| 3) | Spending $8.0 million on leak mitigation and reducing leak backlogs. |
In addition, there are a number of operational commitments that will have a impact on the ongoing business of Washington Gas, including reductions of leak backlogs, conducting a root cause analysis related to customer service, increasing supplier diversity, achieving synergy savings benefits, developing protocols for moving meters from inside to outside customers’ premises, as well as reporting and tracking related to all the commitments.
Other Merger Related Costs
Upon consummation of the merger, it is anticipated that WGL will recognize merger related expenses in “Operation and maintenance” expense in the fourth quarter of fiscal year 2018 for the following items:
| |
| 1) | $26.1 million for retention payments to senior executives and key employees and acceleration of stock-based incentive compensation plans; |
| |
| 2) | $29.7 million related to investment banking and legal fees owed upon completion of the merger; and |
| |
| 3) | $38.0 million impairment in “Net property, plant and equipment” associated with the merger. |
Additional acceleration of stock-based incentive compensation plans and severance costs related to senior executives following the merger could be recognized in future quarters.
Pursuant to the Merger agreement, WGL contributed $61.8 million to rabbi trusts formed to fully satisfy certain outstanding employee benefit obligations immediately prior to the merger close.
We recognized merger transaction costs of $1.5 million and $2.3 million for the three and nine months ended June 30, 2018, and $0.8 million and $12.7 million for the three and nine months ended June 30, 2017, respectively, in “Operations and maintenance” in our Condensed Consolidated Statements of Income.
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—Management’s Discussion and Analysis of
Financial Condition and Results of Operations (continued)
This Management’s Discussion and Analysis of Financial Condition and Results of Operations (Management’s Discussion) analyzes the financial condition, results of operations and cash flows of WGL and its subsidiaries. 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,” “we,” “us” or “our” refers to the holding company or the consolidated entity of WGL Holdings, Inc. and all of its subsidiaries.
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—are designed to provide an understanding of our operations and financial performance and should be read in conjunction with the respective company’s financial statements and the combined Notes to Condensed Consolidated Financial Statements in this quarterly report as well as our combined Annual Report on Form 10-K for WGL and Washington Gas 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. 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.
WGL has four operating segments:
regulated utility;
retail energy-marketing;
commercial energy systems; and
midstream energy services.
Regulated Utility Operating Segment
The regulated utility operating segment is composed of our core subsidiary, Washington Gas. Washington Gas engages in the delivery and sale of natural gas that is regulated by regulatory commissions in the District of Columbia, Maryland and Virginia. During the third fiscal quarter of 2018 compared to prior year, our utility earnings reflect: (i)reflect higher customer growth; (ii) new base rates in Virginia and the District of Columbia; and (iii) lower operation and maintenance expenses.growth. These favorable variances were more than offset by lower realized and unrealized margins associated with our asset optimization program as well asand higher depreciationoperation and amortizationmaintenance expenses primarily related to uncollectible accounts and higher system safety and integrity 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 firstthird fiscal quarter of 2018 compared to the prior year, this segment saw lowerhigher earnings reflecting higher unrealized margins; higher realized gas margins due to:(i) to differences in storage injection timing; lower realized electric margins due to lower average unit margins and lower sales volume, (ii)volume; and higher operating expenses, and (iii) lower unrealized mark-to-market valuations on energy-related derivatives.expenses.
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
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)
related systems of large government and commercial facilities. During the firstthird fiscal quarter of 2018 compared to prior year, this segment continuedhad reduced earnings due to deliver improved results. Growth was attributed tohigher operating expenses in our commercial distributed generation business, partially offset by 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.partnerships.
Midstream Energy Services Operating Segment
WGL Midstream specializes in the investment, management, development and optimization of natural gas storage and transportation midstream infrastructure projects. ImprovedLower results for the firstthird fiscal quarter of 2018 compared to prior year primarily reflect: (i) higherinclude lower mark-to-market valuations and realizedlower margins relatedassociated with our storage strategies. This was partially offset by the impact of our contract with GAIL Global (USA) LNG LLC (GAIL) which recently came into effect, which provides for the sale of up 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.430,000 dth/day of natural gas per day for a term of 20 years.
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 resultsResults for the third fiscal quarter primarily relatesof 2018 compared to prior year reflect higher costs associated with the proposed Mergermerger 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. SubjectAltaGas. The merger was finalized on July 6, 2018 and each share of WGL’s outstanding common stock was converted into the right 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.cash.
For further information on the Merger,merger, see "Safe Harbor and Forward-Looking Statements" in the Introduction and Item I, Note 17 — Planned Merger with AltaGas Ltd.Subsequent Events 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 AmericaGAAP 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 regulatoryregulated 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;assets and equity method investments;
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 threenine month period ended December 31, 2017.June 30, 2018 and we do not expect any changes to our critical accounting policies as a result of the merger.
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—Three Months Ended December 31,June 30, 2018 vs. June 30, 2017 vs. December 31, 2016
Our chief operating decision maker utilizes earnings before interest and tax (EBIT) as the primary measure of profit and loss in assessing the results of each segment’s operations. EBIT includes operating income, other income (expense) and earnings from unconsolidated affiliates and is adjusted by amounts attributable to non-controlling interests. We believe that our use of EBIT enhances the ability to evaluate segment performance because it excludes interest and income tax expense, which are affected by corporate-wide strategies such as capital financing and tax sharing allocations.
EBIT 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 to net income applicable to common stock.
Summary Results
For the three months ended December 31, 2017,June 30, 2018, WGL reported net incomeloss applicable to common stock of $138.0$49.0 million, or $2.68$0.95 per share, compared to net income of $58.0$8.3 million, or $1.13$0.16 per share, reported for the three months ended December 31, 2016.June 30, 2017. For each of the twelve month periods ended December 31,June 30, 2018 and 2017, and 2016, we earned a return on average common equity of 17.9%14.4% and 11.5%12.3%, respectively. The income tax expense for the three months ended December 31, 2017June 30, 2018 includes $52.9a $44.5 million benefitexpense resulting from a revision to our estimate for 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.more information.
The following table summarizes our EBIT by operating segment for the three months ended December 31, 2017June 30, 2018 and 2016.2017.
| | Analysis of Consolidated Results | | Three Months Ended December 31, | | Increase/ | Three Months Ended June 30, | | Increase/ |
| (In millions) | 2017 | | 2016 | | (Decrease) | 2018 | | 2017 | | (Decrease) |
| EBIT: | | | | | | | | | | |
| Regulated utility | $ | 98.4 |
| | $ | 102.7 |
| | $ | (4.3 | ) | $ | (6.0 | ) | | $ | 11.2 |
| | $ | (17.2 | ) |
| Retail energy-marketing | 3.7 |
| | 29.2 |
| | (25.5 | ) | 10.8 |
| | 4.3 |
| | 6.5 |
|
| Commercial energy systems | 5.6 |
| | 4.7 |
| | 0.9 |
| 13.3 |
| | 14.4 |
| | (1.1 | ) |
| Midstream energy services | 22.2 |
| | (28.5 | ) | | 50.7 |
| (5.6 | ) | | 7.7 |
| | (13.3 | ) |
| Other activities | (4.2 | ) | | (1.2 | ) | | (3.0 | ) | (2.7 | ) | | (1.6 | ) | | (1.1 | ) |
| Intersegment eliminations | 1.7 |
| | 1.1 |
| | 0.6 |
| (0.8 | ) | | (0.2 | ) | | (0.6 | ) |
| Total | $ | 127.4 |
| | $ | 108.0 |
| | $ | 19.4 |
| $ | 9.0 |
| | $ | 35.8 |
| | $ | (26.8 | ) |
| Interest expense | 20.2 |
| | 16.2 |
| | 4.0 |
| 20.6 |
| | 25.1 |
| | (4.5 | ) |
| Income tax (benefit) expense | (31.1 | ) | | 33.5 |
| | (64.6 | ) | |
| Income tax expense | | 37.1 |
| | 2.1 |
| | 35.0 |
|
| Dividends on Washington Gas preferred stock | 0.3 |
| | 0.3 |
| | — |
| 0.3 |
| | 0.3 |
| | — |
|
| Net income applicable to common stock | $ | 138.0 |
| | $ | 58.0 |
| | $ | 80.0 |
| $ | (49.0 | ) | | $ | 8.3 |
| | $ | (57.3 | ) |
| EARNINGS PER AVERAGE COMMON SHARE | | | | | | | | | | |
| Basic | $ | 2.69 |
| | $ | 1.13 |
| | $ | 1.56 |
| $ | (0.95 | ) | | $ | 0.16 |
| | $ | (1.11 | ) |
| Diluted | $ | 2.68 |
| | $ | 1.13 |
| | $ | 1.55 |
| $ | (0.95 | ) | | $ | 0.16 |
| | $ | (1.11 | ) |
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)
Regulated Utility Operating Results
The following table summarizes the regulated utility segment’s financial data for the three months ended December 31, 2017June 30, 2018 and 2016.2017.
| | Regulated Utility Financial Data | | Three Months Ended December 31, | | Increase/ | Three Months Ended June 30, | | Increase/ |
| (In millions) | 2017 | | 2016 | | (Decrease) | 2018 | | 2017 | | (Decrease) |
Utility net revenues(1): | | | | | | | | | | |
| Operating revenues | $ | 377.5 |
| | $ | 334.0 |
| | $ | 43.5 |
| $ | 199.5 |
| | $ | 203.2 |
| | $ | (3.7 | ) |
| Less: Cost of gas | 124.7 |
| | 82.4 |
| | 42.3 |
| 56.1 |
| | 54.1 |
| | 2.0 |
|
| Revenue taxes | 24.0 |
| | 22.1 |
| | 1.9 |
| 16.1 |
| | 13.6 |
| | 2.5 |
|
| Total utility net revenues | 228.8 |
| | 229.5 |
| | (0.7 | ) | 127.3 |
| | 135.5 |
| | (8.2 | ) |
| Operation and maintenance | 78.4 |
| | 81.2 |
| | (2.8 | ) | 81.3 |
| | 76.2 |
| | 5.1 |
|
| Depreciation and amortization | 34.1 |
| | 30.6 |
| | 3.5 |
| 34.5 |
| | 33.2 |
| | 1.3 |
|
| General taxes and other assessments | 16.1 |
| | 14.2 |
| | 1.9 |
| 14.8 |
| | 13.9 |
| | 0.9 |
|
| Other expenses—net | 1.8 |
| | 0.8 |
| | 1.0 |
| 2.7 |
| | 1.0 |
| | 1.7 |
|
| EBIT | $ | 98.4 |
| | $ | 102.7 |
| | $ | (4.3 | ) | $ | (6.0 | ) | | $ | 11.2 |
| | $ | (17.2 | ) |
(1)We utilize utility net revenues, calculated as revenues less the associated cost of energy and applicable revenue taxes, to assist in the analysis of profitability for the regulated utility segment. The cost of the natural gas commodity 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 revenues should not be considered an alternative to, or a more meaningful indicator of our operating performance than, operating income. Additionally, utility net revenues may not be comparable to similarly titled measures of other companies.
The variance in EBIT reflects the following:
higher customer growth;growth.
new base rates in Virginia and the District of Columbia; and
lower operation and maintenance expenses primarily due to lower employee benefit costs.
More than offsetting theseOffsetting this favorable variancesvariance were:
lower realized and unrealized margins associated with our asset optimization program;
higher depreciationlower billed and amortization expensesestimated utility rates associated with the implementationpass-through of our new billingfuture tax savings from the Tax Act, offset in income tax expense; and
higher operation and maintenance expenses primarily related to uncollectible accounts and higher system in the second quarter of the prior year as well as growth in our utility plant.safety and integrity expenses.
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)
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, 2017June 30, 2018 and 2016.2017.
| | Composition of Changes in Utility Net Revenues | | (In millions) | Increase/ (Decrease) | Increase/ (Decrease) |
| Customer growth | $ | 2.5 |
| $ | 3.5 |
|
| Estimated effects of weather and consumption patterns | 0.6 |
| 1.0 |
|
| Impact of rate cases | 11.4 |
| (1.8 | ) |
| Impact of lower tax rates per Tax Act | | (6.4 | ) |
| Asset optimization: | | |
| Realized margins | (1.6 | ) | (0.2 | ) |
| Unrealized mark-to-market valuations | (16.9 | ) | (7.0 | ) |
| Revenue taxes | 1.9 |
| |
| Late fees | | 2.0 |
|
| Other | 1.4 |
| 0.7 |
|
| Total | $ | (0.7 | ) | $ | (8.2 | ) |
Customer growth — Average active customer meters increased for the three months ended December 31, 2017,June 30, 2018, compared to the same period of the prior fiscal year.
Estimated effects of weather and consumption patterns — Weather, when measured by heating degree days (HDDs), was 1.8%9.8% colder and 9.3%31.7% warmer than normal for the three months ended December 31,June 30, 2018 and 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,June 30, 2018, 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 increasedecrease in revenue reflects new base rates in the District of Columbia, effective March 24, 2017 and in Virginia, effective November 28, 2016. Refer2016 with modification made in November 2017, as a result of the final approval. The modification resulted in a higher distribution of the increase in base rates to the winter months than to the summer months.
" Rates and Regulatory Matters"Impact of lower tax rates per Tax Act— for further discussionThe decrease in revenue reflects the estimated and actual impact of these matters.the Tax Act on rates charged to customers, however the decrease is offset by lower income tax expense.
Asset optimization — We recorded an unrealized loss of $1.4$3.8 million associated with our energy-related derivatives for the three months ended December 31, 2017,June 30, 2018, compared to an unrealized gain of $15.4$3.2 million reported for the same period of the prior fiscal year. When these derivatives settle, any unrealized amounts will ultimately reverse and Washington Gas will realize margins in combination with related transactions that these derivatives economically hedge. The change in the valuations is 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” 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 between the three months ended June 30, 2018 and 2017.
|
| | | |
| Composition of Changes in Operation and Maintenance Expenses |
| (In millions) | Increase/ (Decrease) |
| System safety and integrity | $ | 2.0 |
|
| Uncollectible accounts | 2.0 |
|
| Other | 1.1 |
|
| Total | $ | 5.1 |
|
System safety and integrity — The increase in expense for the three months ended June 30, 2018 over the same period of the previous fiscal year reflects increased safety and reliability activities.
Uncollectible Accounts — The increase in expense for the three months ended June 30, 2018 over the same period of the previous fiscal year was due to higher accounts receivable balances and higher delinquencies, resulting from the suspension of dunning activities in the prior year 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 June 30, 2018 and 2017. |
| | | | | | | | | | | |
| Retail Energy-Marketing Financial and Statistical Data |
| | Three Months Ended June 30, | | Increase/ |
| (In millions) | 2018 | | 2017 | | (Decrease) |
| Operating Results | | | | | |
Gross margins(1): | | | | | |
| Operating revenues | $ | 219.4 |
| | $ | 250.0 |
| | $ | (30.6 | ) |
| Less: Cost of energy | 190.5 |
| | 229.4 |
| | (38.9 | ) |
| Revenue taxes | 2.7 |
| | 2.8 |
| | (0.1 | ) |
| Total gross margins | 26.2 |
| | 17.8 |
| | 8.4 |
|
| Operation expenses | 13.7 |
| | 11.7 |
| | 2.0 |
|
| Depreciation and amortization | 0.3 |
| | 0.3 |
| | — |
|
| General taxes and other assessments | 1.4 |
| | 1.5 |
| | (0.1 | ) |
| Other income (expenses) — net | — |
| | — |
| | — |
|
| EBIT | $ | 10.8 |
| | $ | 4.3 |
| | $ | 6.5 |
|
Analysis of gross margins (In millions) | | | | | |
| Natural gas | | | | | |
| Realized margins | $ | 10.9 |
| | $ | 9.8 |
| | $ | 1.1 |
|
| Unrealized mark-to-market gains (losses) | 3.9 |
| | (6.1 | ) | | 10.0 |
|
| Total gross margins—natural gas | $ | 14.8 |
| | $ | 3.7 |
| | $ | 11.1 |
|
| Electricity | | | | | |
| Realized margins | $ | 10.3 |
| | $ | 9.8 |
| | $ | 0.5 |
|
| Unrealized mark-to-market gains | 1.1 |
| | 4.3 |
| | (3.2 | ) |
| Total gross margins—electricity | $ | 11.4 |
| | $ | 14.1 |
| | $ | (2.7 | ) |
| Total gross margins | $ | 26.2 |
| | $ | 17.8 |
| | $ | 8.4 |
|
| Other Retail Energy-Marketing Statistics | | | | | |
| Natural gas | | | | | |
Therm sales (millions of therms) | 118.2 |
| | 113.5 |
| | 4.7 |
|
Number of customers (end of period) | 110,600 |
| | 119,100 |
| | (8,500 | ) |
| Electricity | | | | | |
Electricity sales (millions of kWhs) | 2,783.5 |
| | 3,048.4 |
| | (264.9 | ) |
Number of accounts (end of period) | 103,300 |
| | 117,100 |
| | (13,800 | ) |
| |
(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 increase in EBIT mainly reflects: (i) higher unrealized margins, (ii) higher realized gas margins due to differences in storage injection timing; (iii) lower realized electric margins due to lower average unit margins and lower sales volume; and (iv) 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 June 30, 2018 and 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)
|
| | | | | | | | | | | |
| Commercial Energy Systems Segment Financial Information |
| Three Months Ended June 30, | | Increase/ |
| (In millions) | 2018 | | 2017 | | (Decrease) |
| Operating revenues | $ | 21.3 |
| | $ | 25.6 |
| | $ | (4.3 | ) |
| Operating expenses: | | | | | |
| Cost of sales | 2.0 |
| | 8.2 |
| | (6.2 | ) |
| Operations | 7.7 |
| | 6.1 |
| | 1.6 |
|
| Depreciation and amortization | 5.6 |
| | 5.6 |
| | — |
|
| General taxes and other assessments | 0.3 |
| | 0.1 |
| | 0.2 |
|
| Operating expenses | $ | 15.6 |
| | $ | 20.0 |
| | $ | (4.4 | ) |
| Equity earnings | — |
| | 2.4 |
| | (2.4 | ) |
| Other income | 0.9 |
| | 1.8 |
| | (0.9 | ) |
| Less: Non-controlling interest | (6.7 | ) | | (4.6 | ) | | (2.1 | ) |
| EBIT | $ | 13.3 |
| | $ | 14.4 |
| | $ | (1.1 | ) |
| EBIT by division: | | | | | |
| Energy efficiency | $ | 0.2 |
| | $ | — |
| | $ | 0.2 |
|
| Commercial distributed generation | 4.6 |
| | 7.5 |
| | (2.9 | ) |
| Investment distributed generation | 8.5 |
| | 6.9 |
| | 1.6 |
|
| Total | $ | 13.3 |
| | $ | 14.4 |
| | $ | (1.1 | ) |
The decrease in EBIT reflects lower earnings from our commercial distributed generation business, partially offset by higher earnings from our investment distributed generation business, including investments in tax equity partnerships.
Additionally, not reflected in EBIT is the amortization of investment tax credits related to our distributed generation assets which were $1.7 million and $1.8 million for the three months ended June 30, 2018 and 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)
Midstream Energy Services
The table below represents the financial results of the midstream energy services segment for the three months ended June 30, 2018 and 2017.
|
| | | | | | | | | | | |
| Midstream Energy Services Segment Financial Information |
| Three Months Ended June 30, | | Increase/ |
| (In millions) | 2018 | | 2017 | | (Decrease) |
Operating revenues (a) | $ | (10.3 | ) | | $ | 4.5 |
| | $ | (14.8 | ) |
| Operating expenses | 2.4 |
| | 2.0 |
| | 0.4 |
|
| Equity earnings | 7.1 |
| | 5.2 |
| | 1.9 |
|
| EBIT | $ | (5.6 | ) | | $ | 7.7 |
| | $ | (13.3 | ) |
(a) The trading margins of Midstream Energy Services, including unrealized gains and losses on derivative instruments, are netted within operating revenues.
Lower results for the quarter primarily reflect lower mark-to-market valuations associated with our long-term transportation strategies and lower valuations and realized margins related to storage inventory and the associated economic hedging transactions. These unfavorable variances were partially offset by increases in transportation margins attributable to our agreement to sell natural gas to GAIL Global (USA) LNG LLC, a subsidiary of GAIL (India) Limited, at the Cove Point LNG export facility. Under this agreement, WGL Midstream will sell and deliver a minimum of 340,000 dekatherms per day and up to 430,000 dekatherms per day of natural gas, for a term of 20 years starting March 31, 2018, the in-service date of the Cove Point LNG export facility.
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 $(2.7) million and $(1.6) million for the three months ended June 30, 2018 and 2017, respectively. This decrease in EBIT primarily relates to higher costs associated with the merger with AltaGas.
Intersegment Eliminations
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 RECs to Retail Energy-Marketing and Retail Energy-Marketing’s recognition of the associated expense. Our intersegment eliminations reflect EBIT of $(0.8) million and $(0.2) million for the three months ended June 30, 2018 and 2017, respectively. This variance primarily relates to the timing differences between Commercial Energy Systems’ recognition of revenue for the sale of RECs 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 June 30, 2018 and 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)
|
| | | | | | | | | | | |
| Composition of Consolidated Interest Expense |
| Three Months Ended June 30, | | Increase/ |
| (In millions) | 2018 | | 2017 | | (Decrease) |
| Interest on long-term debt | $ | 21.1 |
| | $ | 16.3 |
| | $ | 4.8 |
|
| Interest on short-term debt | 2.5 |
| | 1.5 |
| | 1.0 |
|
| Loss on interest rate swap | — |
| | 7.8 |
| | (7.8 | ) |
| Other net, including allowance for funds used during construction | (3.0 | ) | | (0.5 | ) | | (2.5 | ) |
| Total | $ | 20.6 |
| | $ | 25.1 |
| | $ | (4.5 | ) |
The decrease in interest expense is due to a loss in the prior year related to the settlement of interest rate swaps, partially offset by the issuance of additional long-term debt by both WGL and Washington Gas.
Consolidated Income Taxes
WGL's income tax expense for the three months ended June 30, 2018 and 2017 was $37.1 million and $2.1 million, respectively. |
| | | | | | | | | | | |
| Consolidated Income Taxes |
| Three Months Ended June 30, | | Increase/ |
| (In millions) | 2018 | | 2017 | | (Decrease) |
| Income before income taxes | $ | (18.3 | ) | | $ | 6.2 |
| | $ | (24.5 | ) |
| Income tax expense | 37.1 |
| | 2.1 |
| | 35.0 |
|
| Effective income tax rate | (202.7 | )% | | 33.9 | % | | (236.6 | )% |
| Income tax expense | 37.1 |
| | 2.1 |
| | 35.0 |
|
| Less discrete re-measurement impact of Tax Act | 44.5 |
| | — |
| | 44.5 |
|
| Income tax (benefit) expense excluding discrete re-measurement impact | (7.4 | ) | | 2.1 |
| | (9.5 | ) |
Effective income tax rate excluding discrete re-measurement impact(a) | 40.4 | % | | 33.9 | % | | 6.5 | % |
(a) The effective tax rate for the quarter can be impacted by seasonality reflected in our earnings.
The increase in the effective income tax rate is due to adjustments relating 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.
RESULTS OF OPERATIONS—Nine Months Ended June 30, 2018 vs. June 30, 2017
Summary Results
For the nine months ended June 30, 2018, WGL reported net income applicable to common stock of $224.6 million, or $4.35 per share, compared to net income of $189.3 million, or $3.68 per share, reported for the nine months ended June 30, 2017. The income tax expense for the nine months ended June 30, 2018 includes a $15.8 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.
The following table summarizes our EBIT by operating segment for the nine months ended June 30, 2018 and 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)
|
| | | | | | | | | | | |
| Analysis of Consolidated Results |
| Nine Months Ended June 30, | | Increase/ |
| (In millions) | 2018 | | 2017 | | (Decrease) |
| EBIT: | | | | | |
| Regulated utility | $ | 243.5 |
| | $ | 279.1 |
| | $ | (35.6 | ) |
| Retail energy-marketing | 29.6 |
| | 42.8 |
| | (13.2 | ) |
| Commercial energy systems | 22.5 |
| | 27.6 |
| | (5.1 | ) |
| Midstream energy services | 23.9 |
| | 21.2 |
| | 2.7 |
|
| Other activities | (9.0 | ) | | (17.9 | ) | | 8.9 |
|
| Intersegment eliminations | (3.3 | ) | | (0.6 | ) | | (2.7 | ) |
| Total | $ | 307.2 |
| | $ | 352.2 |
| | $ | (45.0 | ) |
| Interest expense | 48.4 |
| | 55.5 |
| | (7.1 | ) |
| Income tax (benefit) expense | 33.2 |
| | 106.4 |
| | (73.2 | ) |
| Dividends on Washington Gas preferred stock | 1.0 |
| | 1.0 |
| | — |
|
| Net income applicable to common stock | $ | 224.6 |
| | $ | 189.3 |
| | $ | 35.3 |
|
| EARNINGS PER AVERAGE COMMON SHARE | | | | | |
| Basic | $ | 4.37 |
| | $ | 3.70 |
| | $ | 0.67 |
|
| Diluted | $ | 4.35 |
| | $ | 3.68 |
| | $ | 0.67 |
|
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)
Regulated Utility Operating Results
The following table summarizes the regulated utility segment’s financial data for the nine months ended June 30, 2018 and 2017.
|
| | | | | | | | | | | |
| Regulated Utility Financial Data |
| Nine Months Ended June 30, | | Increase/ |
| (In millions) | 2018 | | 2017 | | (Decrease) |
Utility net revenues(1): | | | | | |
| Operating revenues | $ | 1,109.0 |
| | $ | 1,012.2 |
| | $ | 96.8 |
|
| Less: Cost of gas | 386.1 |
| | 279.7 |
| | 106.4 |
|
| Revenue taxes | 70.8 |
| | 63.1 |
| | 7.7 |
|
| Total utility net revenues | 652.1 |
| | 669.4 |
| | (17.3 | ) |
| Operation and maintenance | 249.7 |
| | 243.0 |
| | 6.7 |
|
| Depreciation and amortization | 102.5 |
| | 97.3 |
| | 5.2 |
|
| General taxes and other assessments | 50.8 |
| | 46.9 |
| | 3.9 |
|
| Other expenses—net | 5.6 |
| | 3.1 |
| | 2.5 |
|
| EBIT | $ | 243.5 |
| | $ | 279.1 |
| | $ | (35.6 | ) |
(1)We 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. The cost of the natural gas commodity 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 revenues should not be considered an alternative to, or a more meaningful indicator of our operating performance than, operating income. Additionally, utility net revenues may not be comparable to similarly titled measures of other companies.
The variance in EBIT reflects the following:
higher customer growth;
new base rates in the District of Columbia and Virginia; and
the effects of colder-than-normal weather in the District of Columbia.
Offsetting these favorable variances were:
lower unrealized margins associated with our asset optimization program;
lower billed and estimated utility rates associated with the pass-through of future tax savings from the Tax Act, however the decrease is offset by lower income tax expense;
higher operation and maintenance expenses primarily related to uncollectible accounts and higher system safety and integrity expenses; and
higher depreciation and amortization expenses associated with growth in our utility plant.
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)
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 nine months ended June 30, 2018 and 2017.
|
| | | |
| Composition of Changes in Utility Net Revenues |
| (In millions) | Increase/ (Decrease) |
| Customer growth | $ | 10.0 |
|
| Estimated effects of weather and consumption patterns | 8.6 |
|
| Impact of rate cases | 14.7 |
|
| Impact of lower tax rates per Tax Act | (25.1 | ) |
| Asset optimization: | |
| Realized margins | (3.3 | ) |
| Unrealized mark-to-market valuations | (32.8 | ) |
| Late fees | 6.7 |
|
| Other | 3.9 |
|
| Total | $ | (17.3 | ) |
Customer growth — Average active customer meters increased for the nine months ended June 30, 2018, compared to the same period of the prior fiscal year.
Estimated effects of weather and consumption patterns — Weather, when measured by heating degree days (HDDs), was 1.6% colder and 15.8% warmer than normal for the nine months ended June 30, 2018 and 2017, 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 nine months ended June 30, 2018, resulted in a positive variance to net revenues.
Impact of rate cases— The increase in revenue reflects new base rates in the District of Columbia, effective March 24, 2017 and in Virginia, effective November 28, 2016 with modification made in November 2017, as a result of the final approval. The increase in Virginia is expected to partially reverse over the course of the year.
Impact of lower tax rates per Tax Act— The decrease in revenue reflects the impact of the Tax Act on rates charged to customers, however the decrease is offset by lower income tax expense.
Asset optimization — We recorded an unrealized gain of $7.1 million associated with our energy-related derivatives for the nine months ended June 30, 2018, compared to an unrealized gain of $39.7 million reported for the same period of the prior fiscal year.
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 for the threenine months ended December 31, 2017June 30, 2018 and 2016.2017.
| | Composition of Changes in Operation and Maintenance Expenses | | (In millions) | Increase/ (Decrease) | Increase/ (Decrease) |
| Employee incentives, direct labor costs and benefits | $ | (3.0 | ) | $ | (2.5 | ) |
| System safety and integrity | 1.0 |
| 3.5 |
|
| Support services | (2.0 | ) | |
| Uncollectible accounts | 1.7 |
| 6.8 |
|
| Other | (0.5 | ) | (1.1 | ) |
| Total | $ | (2.8 | ) | $ | 6.7 |
|
Employee incentives, direct labor costs and benefits — The decrease in expense is primarily due to lower pension and post-retirement benefit costs resulting from an increase in the discount rate.
System safety and integrity — The increase in expense for the threenine months ended December 31, 2017June 30, 2018 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 threenine months ended December 31, 2017June 30, 2018 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 threenine months ended December 31, 2017June 30, 2018 and 2016.2017. | | Retail Energy-Marketing Financial and Statistical Data | | | Three Months Ended December 31, | | Increase/ | Nine Months Ended June 30, | | Increase/ |
| (In millions) | 2017 | | 2016 | | (Decrease) | 2018 | | 2017 | | (Decrease) |
| Operating Results | | | | | | | | | | |
Gross margins(1): | | | | | | | | | | |
| Operating revenues | $ | 248.7 |
| | $ | 298.7 |
| | $ | (50.0 | ) | $ | 784.8 |
| | $ | 873.6 |
| | $ | (88.8 | ) |
| Less: Cost of energy | 228.2 |
| | 254.2 |
| | (26.0 | ) | 701.5 |
| | 782.4 |
| | (80.9 | ) |
| Revenue taxes | 3.0 |
| | 2.7 |
| | 0.3 |
| 8.8 |
| | 8.3 |
| | 0.5 |
|
| Total gross margins | 17.5 |
| | 41.8 |
| | (24.3 | ) | 74.5 |
| | 82.9 |
| | (8.4 | ) |
| Operation expenses | 12.0 |
| | 11.1 |
| | 0.9 |
| 40.1 |
| | 35.3 |
| | 4.8 |
|
| Depreciation and amortization | 0.3 |
| | 0.3 |
| | — |
| 0.8 |
| | 0.8 |
| | — |
|
| General taxes and other assessments | 1.5 |
| | 1.2 |
| | 0.3 |
| 4.0 |
| | 4.0 |
| | — |
|
| Other income (expenses) — net | — |
| | — |
| | — |
| — |
| | — |
| | — |
|
| EBIT | $ | 3.7 |
| | $ | 29.2 |
| | $ | (25.5 | ) | $ | 29.6 |
| | $ | 42.8 |
| | $ | (13.2 | ) |
Analysis of gross margins (In millions) | | | | | | | | | | |
| Natural gas | | | | | | | | | | |
| Realized margins | $ | 8.7 |
| | $ | 7.7 |
| | $ | 1.0 |
| $ | 48.8 |
| | $ | 31.5 |
| | $ | 17.3 |
|
| Unrealized mark-to-market gains (losses) | (3.0 | ) | | 14.1 |
| | (17.1 | ) | (1.8 | ) | | 4.8 |
| | (6.6 | ) |
| Total gross margins—natural gas | $ | 5.7 |
| | $ | 21.8 |
| | $ | (16.1 | ) | $ | 47.0 |
| | $ | 36.3 |
| | $ | 10.7 |
|
| Electricity | | | | | | | | | | |
| Realized margins | $ | 11.6 |
| | $ | 14.9 |
| | $ | (3.3 | ) | $ | 28.4 |
| | $ | 37.8 |
| | $ | (9.4 | ) |
| Unrealized mark-to-market gains | 0.2 |
| | 5.1 |
| | (4.9 | ) | |
| Unrealized mark-to-market gains (losses) | | (0.9 | ) | | 8.8 |
| | (9.7 | ) |
| Total gross margins—electricity | $ | 11.8 |
| | $ | 20.0 |
| | $ | (8.2 | ) | $ | 27.5 |
| | $ | 46.6 |
| | $ | (19.1 | ) |
| Total gross margins | $ | 17.5 |
| | $ | 41.8 |
| | $ | (24.3 | ) | $ | 74.5 |
| | $ | 82.9 |
| | $ | (8.4 | ) |
| Other Retail Energy-Marketing Statistics | | | | | | | | | | |
| Natural gas | | | | | | | | | | |
Therm sales (millions of therms) | 198.8 |
| | 220.5 |
| | (21.7 | ) | 564.5 |
| | 603.1 |
| | (38.6 | ) |
Number of customers (end of period) | 113,500 |
| | 126,400 |
| | (12,900 | ) | 110,600 |
| | 119,100 |
| | (8,500 | ) |
| Electricity | | | | | | | | | | |
Electricity sales (millions of kWhs) | 2,801.4 |
| | 3,103.2 |
| | (301.8 | ) | 8,460.5 |
| | 9,199.9 |
| | (739.4 | ) |
Number of accounts (end of period) | 108,900 |
| | 122,600 |
| | (13,700 | ) | 103,300 |
| | 117,100 |
| | (13,800 | ) |
| |
(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 electricitycommodity margin losses in the current period;year compared to gains in the prior year; (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 grossexpenses; and (iv) higher realized gas margins for this segment can vary significantly and are not necessarily representative of expected annualized results.due to higher portfolio optimization margins.
Commercial Energy Systems
The table below represents the financial results of the commercial energy systems segment for the threenine months ended December 31, 2017June 30, 2018 and 2016.2017.
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)
| | Commercial Energy Systems Segment Financial Information | | Three Months Ended December 31, | | Increase/ | Nine Months Ended June 30, | | Increase/ |
| (In millions) | 2017 | | 2016 | | (Decrease) | 2018 | | 2017 | | (Decrease) |
| Operating revenues | $ | 20.1 |
| | $ | 14.9 |
| | $ | 5.2 |
| $ | 57.8 |
| | $ | 61.5 |
| | $ | (3.7 | ) |
| Operating expenses: | | | | | | | | | | |
| Cost of sales | 8.0 |
| | 6.0 |
| | 2.0 |
| 13.7 |
| | 24.5 |
| | (10.8 | ) |
| Operations | 6.3 |
| | 5.9 |
| | 0.4 |
| 21.5 |
| | 18.0 |
| | 3.5 |
|
| Depreciation and amortization | 6.6 |
| | 4.4 |
| | 2.2 |
| 18.7 |
| | 15.2 |
| | 3.5 |
|
| General taxes and other assessments | 0.2 |
| | 0.1 |
| | 0.1 |
| 0.7 |
| | 0.3 |
| | 0.4 |
|
| Operating expenses | $ | 21.1 |
| | $ | 16.4 |
| | $ | 4.7 |
| $ | 54.6 |
| | $ | 58.0 |
| | $ | (3.4 | ) |
| Equity earnings | — |
| | 2.4 |
| | (2.4 | ) | — |
| | 7.2 |
| | (7.2 | ) |
| Other income | 0.9 |
| | 1.3 |
| | (0.4 | ) | 2.5 |
| | 4.4 |
| | (1.9 | ) |
| Less: Non-controlling interest | (5.7 | ) | | (2.5 | ) | | (3.2 | ) | (16.8 | ) | | (12.5 | ) | | (4.3 | ) |
| EBIT | $ | 5.6 |
| | $ | 4.7 |
| | $ | 0.9 |
| $ | 22.5 |
| | $ | 27.6 |
| | $ | (5.1 | ) |
| EBIT by division: | | | | | | | | | | |
| Energy-efficiency contracting | $ | (0.6 | ) | | $ | (0.5 | ) | | $ | (0.1 | ) | |
| Energy efficiency | | $ | (1.8 | ) | | $ | (0.9 | ) | | $ | (0.9 | ) |
| Commercial distributed generation | (0.5 | ) | | 1.2 |
| | (1.7 | ) | 4.3 |
| | 10.1 |
| | (5.8 | ) |
| Investments in distributed generation | 6.7 |
| | 4.0 |
| | 2.7 |
| |
| Investment distributed generation | | 20.0 |
| | 18.4 |
| | 1.6 |
|
| Total | $ | 5.6 |
| | $ | 4.7 |
| | $ | 0.9 |
| $ | 22.5 |
| | $ | 27.6 |
| | $ | (5.1 | ) |
The increasedecrease in EBIT reflects higherlower earnings from our investmentcommercial distributed generation business, including investments 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$5.0 million and $1.4$5.0 million for the threenine months ended December 31,June 30, 2018 and 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 threenine months ended December 31, 2017June 30, 2018 and 2016.2017.
| | Midstream Energy Services Segment Financial Information | | Three Months Ended December 31, | | Increase/ | Nine Months Ended June 30, | | Increase/ |
| (In millions) | 2017 | | 2016 | | (Decrease) | 2018 | | 2017 | | (Decrease) |
Operating revenues (a) | $ | 17.7 |
| | $ | (25.0 | ) | | $ | 42.7 |
| $ | 40.7 |
| | $ | 18.2 |
| | $ | 22.5 |
|
| Operating expenses | 1.4 |
| | 1.4 |
| | — |
| 2.4 |
| | 4.9 |
| | (2.5 | ) |
| Equity earnings | 5.9 |
| | (2.1 | ) | | 8.0 |
| (14.4 | ) | | 7.9 |
| | (22.3 | ) |
| EBIT | $ | 22.2 |
| | $ | (28.5 | ) | | $ | 50.7 |
| $ | 23.9 |
| | $ | 21.2 |
| | $ | 2.7 |
|
(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 quarternine months ended June 30, 2018 over the same period of the prior fiscal year primarily reflect: (i)reflect higher margins on both our transportation and storage strategies, partially offset by lower mark-to-market valuations associated with long-term transportation strategies and realized marginsa $34.0 million impairment related to storage inventory andour investment in Constitution. Also contributing to the associated economic hedging transactions, (ii) higher realized and unrealizedimproved results was the impact of our contract with GAIL which recently came into effect, which provides for the sale of up to 430,000 dth/day of natural gas per day for a term of 20 years.
Realized 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 threenine months ended December 31,June 30, 2018 and 2017 and 2016 were $3.5$4.6 million and $6.8$7.7 million, respectively, associated with this purchase contract. Accumulated losses from the inception of the contract are $28.4$29.6 million. In March 2017, we filed suit in state court in Colorado related 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.
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$100 million as of October 24, 2017, which amount continues to accumulate dailyApril 4, 2018, 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.June 30, 2018.
In December 2017, WGL Midstream amended its purchase contract with Antero and, effective February 1, 2018, willwas 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 $(4.2)$(9.0) million and $(1.2)$(17.9) million for the threenine months ended December 31,June 30, 2018 and 2017, and 2016, respectively. The decreaseincrease in EBIT primarily relates to higherlower costs associated with the proposed Mergermerger 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. Our intersegment eliminations reflect EBIT of $(3.3) million and $(0.6) million for the nine months ended June 30, 2018 and 2017, respectively. This variance primarily relates to timing differences between Commercial Energy
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)
Systems’ recognition of revenue for the sale of RECs 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 threenine months ended December 31, 2017June 30, 2018 and 2016. 2017.
|
| | | | | | | | | | | |
| Composition of Consolidated Interest Expense |
| Nine Months Ended June 30, | | Increase/ |
| (In millions) | 2018 | | 2017 | | (Decrease) |
| Interest on long-term debt | $ | 60.1 |
| | $ | 48.1 |
| | $ | 12.0 |
|
| Interest on short-term debt | 7.1 |
| | 3.7 |
| | 3.4 |
|
| (Gain) loss on interest rate swap | (12.8 | ) | | 5.2 |
| | (18.0 | ) |
| Other net, including capitalized interest | (6.0 | ) | | (1.5 | ) | | (4.5 | ) |
| Total | $ | 48.4 |
| | $ | 55.5 |
| | $ | (7.1 | ) |
The increasedecrease in interest expense is due to the gain on long-term debt primarily reflectsinterest rate swap settlements partially offset by higher interest expense due to 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's income tax expense and effective income tax rate for the threenine months ended December 31, 2017June 30, 2018 and 2016.2017.
| | Consolidated Income Taxes | | Three Months Ended December 31, | | Increase/ | Nine Months Ended June 30, | | Increase/ |
| (In millions) | 2017 | | 2016 | | (Decrease) | 2018 | | 2017 | | (Decrease) |
| Income before income taxes | $ | 101.5 |
| | $ | 89.2 |
| | $ | 12.3 |
| 242.0 |
| | 284.1 |
| | $ | (42.1 | ) |
| Income tax (benefit) expense | (31.1 | ) | | 33.5 |
| | (64.6 | ) | 33.2 |
| | 106.4 |
| | (73.2 | ) |
| Effective income tax rate | (30.6 | )% | | 37.6 | % | | (68.2 | )% | 13.7 | % | | 37.5 | % | | (23.8 | )% |
| Income tax (benefit) expense | (31.1 | ) | | 33.5 |
| | (64.6 | ) | |
| Income tax expense | | 33.2 |
| | 106.4 |
| | (73.2 | ) |
| Less Discrete re-measurement impact of Tax Act | (52.9 | ) | | — |
| | (52.9 | ) | (15.8 | ) | | — |
| | (15.8 | ) |
| Income tax expense excluding discrete re-measurement impact | 21.8 |
| | 33.5 |
| | (11.7 | ) | 49.0 |
| | 106.4 |
| | (57.4 | ) |
| Effective income tax rate excluding discrete re-measurement impact | 21.5 | % | | 37.6 | % | | (16.1 | )% | 20.2 | % | | 37.5 | % | | (17.3 | )% |
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 reformsresulting in a re-measurement of our accumulated deferred income taxes related to our Non-Utility operations and 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 inexpected federal income tax rate to a flat ratefor 2018 of 21% effective January 1, 2018.
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)
100% bonus depreciation for eligible assets (excluding public utility property) placed in service after September 27, 2017 and before January 1, 2023, with the percentage of bonus depreciation phasing out by 20 percent each year thereafter through December 31, 2026.
For the regulated utility, the re-measurement of certain deferred tax assets and liabilities at 21% results in a net amount of excess deferred taxes to be refunded to ratepayers. The Tax Act prescribes the Average Rate Assumption Method as the methodology for the refund of certain excess deferred amounts for regulated public utilities with vintage asset records.
For tax years beginning after December 31, 2017, interest deductions 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.
. Refer to Note 7 - Income Taxes of the Notes to Condensed Consolidated Financial Statements for a detailed discussion.
LIQUIDITY AND CAPITAL RESOURCES
General Factors Affecting Liquidity
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.
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)
During the threenine months ended December 31, 2017,June 30, 2018, 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 fiscalcalendar quarter of 2017, retained earnings, and equity infusion from WGL, and reduced cash outflows resulting from deferred income taxes and the issuance of commercial paper.
Our ability to access capital markets depends on our credit ratings, general market liquidity, and investor demand for our securities. The Merger Agreement has placed certain restrictions on WGL’s ability to access the capital markets. Please see Note 17 — Planned Merger with AltaGas Ltd. of theNotes to Condensed Consolidated Financial Statementsfor a discussion of the proposed Merger. Our credit ratings depend largely on the financial performance of our subsidiaries, and 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 of ourFollowing the merger with AltaGas, Moody’s downgraded their senior unsecured debt rating for WGL Holdings from A3 to Baa1, S&P from A- to BBB-, and Fitch from A- to BBB. At the same time Moody’s downgraded the senior unsecured debt rating for Washington Gas from A1 to A2, S&P from A to A-, and Fitch from A+ to A. All three credit agencies cited the merger and issuer ratings we have a goalfor AltaGas as the reason for the downgrades, but credited ring fencing measures put in place as merger commitments to maintain our long-term average common equity ratioregulatory commissions as limiting the impact on the ratings for Washington Gas. These downgrades may impact borrowing costs in the 50% range of total consolidated capital over the long term.future, and are expected to immediately increase fees for WGL Holdings’ revolving credit agreement by approximately $0.7 million. As of December 31, 2017,June 30, 2018, total consolidated capitalization, including current maturities of long-term debt and notes payable and project financing, comprised 38.5%40.3% common equity, 0.1%0.2% non-controlling interest, 0.7% preferred stock and 60.7%58.8% long- and short-term debt. This ratio varies during the fiscal year primarily due to the seasonal nature of Washington Gas' business. This seasonality also affects our short-term debt balances, which are typically higher in the fall 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.
Our plans provide for sufficient liquidity to satisfy our financial obligations. At December 31, 2017,June 30, 2018, 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.
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 December 31, 2017June 30, 2018 and September 30, 2017, Washington Gas had balances in gas storage of $85.0$54.7 million and $92.8 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.
During the first six months of each fiscal 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. During the last six months of each fiscal 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 collections under Washington Gas’ gas cost recovery mechanisms can significantly affect its short-term cash requirements. At December 31, 2017June 30, 2018 and September 30, 2017, Washington Gas had $1.3$0.3 million in net under-collections and $2.0 million in net over-collections, respectively, of gas costs reflected in current liabilities as gas costs due to customers. Amounts under-collected or over-collected that are generated 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 December 31, 2017June 30, 2018 and September 30, 2017, Washington Gas had a net regulatory liability of $26.0 million and a net regulatory asset of $31.6 million and $5.6 million, respectively, related to the 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, 2017June 30, 2018 and September 30, 2017, WGL Energy Services had balances in gas storage of $20.5$13.2 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, 2017June 30, 2018 and September 30, 2017, WGL Midstream had balances in gas storage of $101.5$57.0 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
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)
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, 2017June 30, 2018 and September 30, 2017, WGL Midstream had investments of $489.4$677.4 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 use 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 and Washington Gas each have credit facilities. The credit facility for WGL permits it to borrow up to $650.0 million. The credit facility for Washington Gas permits it to borrow up to $350.0 million, and further permits, with the banks’ approval, additional borrowings of $100.0 million for a maximum potential total of $450.0 million. The interest rate on loans made under each of the credit facilities is a fluctuating rate per annum that is set using certain parameters at the time each loan is made. WGL and Washington Gas incur credit facility fees, which in some cases are based on the long-term debt ratings of WGL and Washington Gas. In the event that the long-term debt ratings are downgraded below certain levels, WGL and Washington Gas would be required 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 the 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$248.0 million and $188.0$350.0 million, respectively, at December 31, 2017June 30, 2018 and $268.0 million and $227.0 million, respectively, at September 30, 2017.
To manage credit risk, Washington Gas may require certain customers and suppliers to provide deposits, including collateral from wholesale counterparties, which are reported as current liabilities in “Customer deposits and advance payments,” in the accompanying balance sheets. At December 31, 2017June 30, 2018 and September 30, 2017, “Customer deposits and advance payments” totaled $54.7$64.1 million and $64.2 million, respectively. For Washington Gas, 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 Company
Part I—Financial Information
Item 2—Management’s Discussion and Analysis of
Financial Condition and Results of Operations (continued)
For WGL Energy Services and WGL Midstream, deposits typically represent collateral for transactions with wholesale counterparties. These deposits may be reduced, repaid or increased at any time based on the current value of WGL Energy Services’ or WGL Midstream’s net position with the counterparty. At December 31, 2017June 30, 2018 and September 30, 2017, “Customer deposits and advance payments” totaled $0.5$0.4 million and $1.6 million, respectively, for WGL Midstream. There were no such deposits for WGL Energy Services at December 31, 2017June 30, 2018 and September 30, 2017. Currently, there are no restrictions on the use of deposited funds and interest is paid to the counterparty on these deposits in accordance with our contractual obligations. Refer to the section entitled "Credit 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' area-wide contract. In connection with work completed under the area-wide contract, the 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, Washington Gas establishes a receivable representing the government's obligation to remit principal and interest. The payable and receivable are equal 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.arrangement but allowed existing debt arrangements to remain intact until the related obligations were satisfied. At December 31, 2017June 30, 2018, there were twowas one contracts remaining totaling $43.8$15.5 million on the Washington Gas balance sheet as a short-term obligation
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Item 2—Management’s Discussion and Analysis of
Financial Condition and Results of Operations (continued)
to third party lenders in "Notes payable and project financing".
Additionally, at June 30, 2018, there is a finance contract that has not been novated for which no draws have been made for the related project.
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 payable to WGL Energy Systems for the construction work performed for the same amount. At June 30, 2018, there were two contracts remaining totaling $12.0 million on the WGL Energy Systems balance sheet as a short-term obligation to third party lenders in "Notes payable and project financing".
As of December 31, 2017,June 30, 2018, WGL and Washington Gas recorded $94.6$74.0 million and $85.4 million, respectively, in "Unbilled revenues" on the balance sheet, and $54.8WGL and Washington Gas recorded $27.5 million and $43.8$15.5 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. The primary reason for the variance between unbilled revenues and the corresponding short-term obligations to third-party lenders is due to the project for which the financing has not been drawn.
As of September 30, 2017, WGL and Washington Gas recorded $85.6 million and $78.2 million in "Unbilled revenues" on the balance sheet and WGL and Washington Gas recorded $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 nor Washington Gas recorded a corresponding reserve for bad debts related to these receivables at December 31, 2017June 30, 2018 or September 30, 2017.
Long-Term Cash Requirements and Related Financing
The primary drivers of our long-term cash requirements include capital expenditures, non-utility investments and long-term debt maturities. For the regulated utility segment, our capital expenditures primarily relate to adding new utility customers and system supply as well as 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 The investments are mainly tax equity partnerships that create funding for the tax benefits associated 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 resultprojects. For more information, see Note 11— Other investments of the Tax Act.
Notes to Condensed Consolidated Financial Statements. In addition, on March 28, 2018, WGL Holdings, Inc.
Washington Gas Light Company
Part I—Financial Information
Item 2—Management’s DiscussionEnergy Systems entered into a new tax equity financing arrangement under which it can sell and Analysislease back up to $75 million of
Financial Condition commercial solar asset projects that it may develop and Resultsplace into service. WGL Energy Systems will have 18 months to sell the commercial solar asset projects under the arrangement and then it would lease each project back over a period of Operations (continued)
Referup to 25 years. The facility will be collateralized by the section entitled “Capital Investments” for a discussion of our capital expenditures forecast.leased projects.
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-BBB | | F2 | | A+A | | F1F2 |
Moody’s Investors Service(b) | A3Baa1 | | P-2 | | A1A2 | | P-1 |
Standard & Poor’s Ratings Services(c) | BBB- | | A-2 | | A- | | A-1 | | A | | A-1A-2 |
(a) The long-term debtcredit ratings outlook issued by Fitch Ratings for WGL and Washington Gas was adjusted to negativewere revised on October 13, 2016.
(b) TheJuly 10, 2018 and the long-term debt ratings outlook issuedwas adjusted to stable.
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(b) The credit ratings 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.July 9, 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' 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,June 30, 2018, WGL's and Washington Gas' ratios of consolidated financial indebtedness to consolidated total capitalization were 61%59% and 50%46%, respectively. In addition, WGL and Washington Gas are required to inform lenders of changes in corporate existence, financial conditions, litigation and 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. At December 31, 2017,June 30, 2018, we were in compliance with all of the covenants under our revolving credit facilities.
For certain of Washington Gas’ natural gas purchase and pipeline capacity agreements, 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, then the counterparty may withhold service or deliveries, or may require additional credit support. For certain other agreements, 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 additional credit support. At December 31, 2017,With the current credit ratings, Washington Gas would not be required to provide approximately $0.3 million of additional credit support for these arrangements 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).Midstream. 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,With the current credit ratings, 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 $1.7approximately $7.0 million of additional credit support for these arrangements if WGL's credit ratings were to decline by one rating level. WGL Midstream would be required to provide approximately $31.6 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’s net cash provided by (used in) operating, investing and financing activities for the threenine months ended December 31, 2017June 30, 2018 and 2016:
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Item 2—Management’s Discussion and Analysis of
Financial Condition and Results of Operations (continued)
2017:
| | | Three Months Ended December 31, | | | Nine Months Ended June 30, | | |
| (In millions) | 2017 | | 2016 | | Variance | 2018 | | 2017 | | Variance |
| Cash provided by (used in): | | | | | | | | | | |
| Operating activities | $ | (6.7 | ) | | $ | (90.5 | ) | | $ | 83.8 |
| $ | 569.6 |
| | $ | 228.4 |
| | $ | 341.2 |
|
| Financing activities | $ | 265.8 |
| | $ | 314.9 |
| | $ | (49.1 | ) | $ | 124.8 |
| | $ | 225.7 |
| | $ | (100.9 | ) |
| Investing activities | $ | (203.5 | ) | | $ | (217.1 | ) | | $ | 13.6 |
| $ | (669.8 | ) | | $ | (450.1 | ) | | $ | (219.7 | ) |
Cash Flows Provided by Operating Activities
The regulated utility’s 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. Under 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
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Item 2—Management’s Discussion and Analysis of
Financial Condition and Results of Operations (continued)
recovered in accordance with tariff provisions. In addition, the regulated utility’s 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’s 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' rate plans.
Net cash flows used inprovided by operating activities for the threenine months ended December 31, 2017June 30, 2018 was $6.7$569.6 million compared to net cash flows used inprovided by operating activities of $90.5$228.4 million for the threenine months ended December 31, 2016.June 30, 2017. The decreaseincrease in cash flows used inprovided by operating activities primarily reflects settlements of derivative instrumentshigher margins for both storage and transportation strategies at WGL Midstream increases in customer rates, and higher cash collections due to colder weather normalization.at Washington Gas.
Cash Flows Provided by Financing Activities
Cash flows provided by financing activities totaled $265.8$124.8 million for the threenine months ended December 31, 2017,June 30, 2018, compared to cash flows provided by financing activities of $314.9$225.7 million for the same period of the prior year. This decrease in cash flows primarily reflects a reductiondecrease in the issuanceshort term financing of new$320.0 million offset by an increase in long term debt and additional tax withholdings on stock based compensation.financing of $250.0 million.
Cash Flows Used in Investing Activities
During the threenine months ended December 31, 2017,June 30, 2018, cash flows used in investing activities totaled $203.5$669.8 million compared to $217.1$450.1 million used in the threenine months ended December 31, 2016.June 30, 2017. This decreaseincrease in cash used is primarily due to theincreased investments in non-utility interests, partially offset by a decrease in expenditures for Washington Gas'Gas’ accelerated pipe replacement programs, partially offset by increased investments in non-utility interests.programs.
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.
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Part I—Financial Information
Item 2—Management’s Discussion and Analysis of
Financial Condition and Results of Operations (continued)
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 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 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 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. 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, 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.
Refer to Note 11, Other Investments of the Notes to Condensed Consolidated Financial Statements for further discussion 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 have 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.
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$450 million for its interest in Meade, and Meade will invest an estimated $746$816 million in Central Penn for an approximate 39%38% 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. WGL Midstream held a $415.3 million and $146.7 million equity method investment in Meade at June 30, 2018 and September 30, 2017, respectively. Central Penn is expected to be placed in service during the quarter ending September 2018.
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. TheAs a result of court proceedings, Mountain Valley has modified its construction schedule and now the pipeline is scheduledprojected to be in service by December 2018.in the first quarter of 2019.
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 addition, WGL Midstream entered into a gas purchase commitment to between 455,000 and 500,000 dekatherms of natural gas
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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. WGL Midstream held a $121.0 million and $63.0 million equity method investment in Mountain Valley at June 30, 2018 and September 30, 2017, respectively.
In April 2018, WGL Midstream entered into a separate agreement with Mountain Valley to acquire a 5% equity interest in a project to build a lateral interstate natural gas pipeline (the MVP Southgate project). The proposed lateral pipeline will receive gas from the Mountain Valley Pipeline mainline in Pittsylvania County, Virginia and extend approximately 70 miles south to new delivery points in Rockingham and Alamance counties, North Carolina. The total commitment by WGL Midstream is expected to be approximately $17.0 million and the lateral pipeline is expected to be placed into service in late 2020.
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$137.2 million and $136.7 million equity method investment in the Stonewall System at December 31, 2017June 30, 2018 and September 30, 2017, respectively.
Constitution
WGL Midstream owns a 10% interest in 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 (Second Circuit Court) 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 March 2017, the U.S. District Court for the Northern District of New York dismissed without prejudice Constitution's lawsuit claiming that New York's state law permit requirements are preempted by the Natural Gas Act. The Court concluded that it lacked subject matter jurisdiction because Constitution had not demonstrated a traceable injury in fact sufficient to establish standing. In August 2017, the Second Circuit Court issued a decision, declining 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 filed a petition for rehearing with the Second Circuit Court's decision, but in October 2017 the court denied the petition. 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 the statute. On January 11, 2018, the FERC denied the petition. On February 12, 2018, Constitution filed a request for rehearing with FERC, which was denied on July 19, 2018. On January 16, 2018, Constitution petitioned the U.S. Supreme Court to review the judgment of the Second Circuit Court, asserting that the Second Circuit Court’s decision conflicts with the decisions of the U.S. Supreme Court and federal Courts of Appeals on an important question of federal law. On April 30, 2018, the U.S. Supreme Court denied Constitution’s petition for writ of certiorari.
The project’s sponsors remain committed to the project, and as such, on June 25, 2018, Constitution requested FERC grant a 24-month extension on construction of the pipeline.
We continually evaluate our investment in Constitution for other than temporary impairment. Our impairment assessment uses income and market approaches in determining the fair value of our investment in Constitution. Refer to Note 9 - Fair Value Measurements. We recorded an other than temporary impairment charge of $34.0 million to “Equity in earnings of unconsolidated affiliates”, and recorded a reversal to “Operation and maintenance” expense of a previously recognized expense of $3.0 million during the second quarter of fiscal year 2018. We evaluated our remaining investment at June 30, 2018, and determined that there was no additional impairment. There could be additional losses in the value of the investment beyond the impairment charge already taken. However, we believe that recoveries from the sale of the inventories held by Constitution will
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Item 2—Management’s Discussion and Analysis of
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mostly offset these expenditures. We also continue to incur legal fees associated with the project. At June 30, 2018, and September 30, 2017, WGL Midstream held a $3.9 million and $38.1 million equity method investment in Constitution, respectively.
Refer to Note 11 - Other Investments of the Notes to Condensed Consolidated Financial Statements for further discussion of this matter.
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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 have 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.
Reference is made to the "Contractual Obligations, Off-Balance Sheet Arrangements and Other Commercial Commitments" section of Management's Discussion in our 2017 Form 10-K. Note 5 to the Condensed Consolidated Financial Statements in our 2017 Form 10-K includes a discussion of long-term debt, including debt maturities. Note 13 to the Condensed Consolidated Financial Statements in our 2017 Form 10-K reflects information about the various contracts of Washington Gas, WGL Energy Services and WGL Midstream.
There were no significant changes to contractual obligations during the three and nine months ended December 31, 2017.June 30, 2018. Refer to Note 17 — Planned Merger with AltaGas Ltd.Subsequent Events of the Notes to Condensed Consolidated Financial Statements for information regarding the Merger Agreement.Agreement and the merger 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 December 31, 2017,June 30, 2018, the maximum potential amount of future payments under the guarantees for external parties totaled $0.6 million.
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. 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 operate 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
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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 each obtained credit enhancements from certain of their counterparties. If certain
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Item 2—Management’s Discussion and Analysis of
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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,June 30, 2018, Washington Gas, WGL Energy Services and WGL Midstream provided $8.1$11.7 million, $42.4$22.8 million and $26.7$25.5 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, 2017June 30, 2018 for Washington Gas, WGL Energy Services and WGL Midstream, separately.
| | 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 |
| $ | 23.8 |
| | $ | — |
| | $ | 23.8 |
| | 1 |
| | $ | 15.2 |
|
| Non-Investment Grade | — |
| | — |
| | — |
| | — |
| | — |
| — |
| | — |
| | — |
| | — |
| | — |
|
| No External Ratings | 12.7 |
| | 4.0 |
| | 8.7 |
| | — |
| | — |
| 22.5 |
| | 18.3 |
| | 4.2 |
| | 2 |
| | 2.9 |
|
| WGL Energy Services | | | | | | | | | | | | | | | | | | |
| Investment Grade | $ | 0.9 |
| | $ | 0.1 |
| | $ | 0.8 |
| | 2 |
| | $ | 0.8 |
| $ | 0.6 |
| | $ | — |
| | $ | 0.6 |
| | 3 |
| | $ | 0.6 |
|
| 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 |
| $ | 69.6 |
| | $ | 31.8 |
| | $ | 37.8 |
| | 2 |
| | $ | 12.0 |
|
| Non-Investment Grade | — |
| | — |
| | — |
| | — |
| | — |
| — |
| | — |
| | — |
| | — |
| | — |
|
| No External Ratings | 27.3 |
| | 2.9 |
| | 24.4 |
| | — |
| | — |
| 9.3 |
| | 3.8 |
| | 5.5 |
| | — |
| | — |
|
| |
(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 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. | 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 the 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, 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 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 customers based on credit quality criteria. In addition, WGL Energy Services participates in POR programs with certain Maryland, District 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 risk 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.
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 term for payment performance and credit quality. These steps mitigate credit risk associated with the distributed generation asset customers.
At December 31, 2017,June 30, 2018, 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 established 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.
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.June 30, 2018.
| | Regulated Utility Segment Changes in Fair Value of Energy-Related Derivatives | Regulated Utility Segment Changes in Fair Value of Energy-Related Derivatives | Regulated Utility Segment Changes in Fair Value of Energy-Related Derivatives |
| (In millions) | | |
| Net assets (liabilities) at September 30, 2017 | $ | (121.3 | ) | $ | (121.3 | ) |
| Net fair value of contracts entered into during the period | 1.9 |
| 7.9 |
|
| Other changes in net fair value | (10.3 | ) | (23.3 | ) |
| Realized net settlement of derivatives | 5.7 |
| 32.1 |
|
| Net assets (liabilities) at December 31, 2017 | $ | (124.0 | ) | |
| Net assets (liabilities) at June 30, 2018 | | $ | (104.6 | ) |
| | Regulated Utility Segment Roll Forward of Energy-Related Derivatives | Regulated Utility Segment Roll Forward of Energy-Related Derivatives | Regulated Utility Segment Roll Forward of Energy-Related Derivatives |
| (In millions) | | |
| Net assets (liabilities) at September 30, 2017 | $ | (121.3 | ) | $ | (121.3 | ) |
| Recorded to income | (2.6 | ) | (4.1 | ) |
| Recorded to regulatory assets/liabilities | (5.8 | ) | (11.3 | ) |
| Realized net settlement of derivatives | 5.7 |
| 32.1 |
|
| Net assets (liabilities) at December 31, 2017 | $ | (124.0 | ) | |
| Net assets (liabilities) at June 30, 2018 | | $ | (104.6 | ) |
The maturity dates of our net assets (liabilities) associated with the regulated utility segment’s energy-related derivatives recorded at fair value at December 31, 2017,June 30, 2018, 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)
| | Regulated Utility Segment Maturity of Net Assets (Liabilities) Associated with our Energy-Related Derivatives | Regulated Utility Segment Maturity of Net Assets (Liabilities) Associated with our Energy-Related Derivatives | | | Regulated Utility Segment Maturity of Net Assets (Liabilities) Associated with our Energy-Related Derivatives | | |
| | | | | | |
| (In millions) | Remainder of 2018 | | 2019 | | 2020 | | 2021 | | 2022 | | Thereafter | | Total | Remainder of 2018 | | 2019 | | 2020 | | 2021 | | 2022 | | Thereafter | | Total |
| Level 1 — Quoted prices in active markets | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
|
| Level 2 — Significant other observable inputs | 0.9 |
| | 0.5 |
| | — |
| | — |
| | — |
| | — |
| | 1.4 |
| (1.2 | ) | | 0.2 |
| | — |
| | — |
| | — |
| | — |
| | (1.0 | ) |
| Level 3 — Significant unobservable inputs | (19.3 | ) | | (12.8 | ) | | (9.4 | ) | | (8.4 | ) | | (9.5 | ) | | (66.0 | ) | | (125.4 | ) | (1.7 | ) | | (11.5 | ) | | (10.3 | ) | | (9.3 | ) | | (8.5 | ) | | (62.3 | ) | | (103.6 | ) |
| Total net assets (liabilities) associated with our energy-related derivatives | $ | (18.4 | ) | | $ | (12.3 | ) | | $ | (9.4 | ) | | $ | (8.4 | ) | | $ | (9.5 | ) | | $ | (66.0 | ) | | $ | (124.0 | ) | $ | (2.9 | ) | | $ | (11.3 | ) | | $ | (10.3 | ) | | $ | (9.3 | ) | | $ | (8.5 | ) | | $ | (62.3 | ) | | $ | (104.6 | ) |
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.
Price Risk Related to the Non-Utility Segments
Retail Energy Marketing.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 threenine months ended December 31, 2017:June 30, 2018:
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 | Retail Energy-Marketing Segment Changes in Fair Value of Energy-Related Derivatives | Retail Energy-Marketing Segment Changes in Fair Value of Energy-Related Derivatives |
| (In millions) | | |
| Net assets (liabilities) at September 30, 2017 | $ | (11.8 | ) | $ | (11.8 | ) |
| Net fair value of contracts entered into during the period | (1.2 | ) | (1.5 | ) |
| Other changes in net fair value | (1.7 | ) | 1.3 |
|
| Realized net settlement of derivatives | (1.2 | ) | 0.4 |
|
| Net assets (liabilities) at December 31, 2017 | $ | (15.9 | ) | |
| Net assets (liabilities) at June 30, 2018 | | $ | (11.6 | ) |
| | Retail Energy-Marketing Segment Roll Forward of Energy-Related Derivatives | Retail Energy-Marketing Segment Roll Forward of Energy-Related Derivatives | Retail Energy-Marketing Segment Roll Forward of Energy-Related Derivatives |
| (In millions) | | |
| Net assets (liabilities) at September 30, 2017 | $ | (11.8 | ) | $ | (11.8 | ) |
| Recorded to income | (1.6 | ) | (3.1 | ) |
| Recorded to accounts payable | (1.3 | ) | 2.8 |
|
| Realized net settlement of derivatives | (1.2 | ) | 0.5 |
|
| Net assets (liabilities) at December 31, 2017 | $ | (15.9 | ) | |
| Net assets (liabilities) at June 30, 2018 | | $ | (11.6 | ) |
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, 2017June 30, 2018 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 | Retail Energy-Marketing Segment Maturity of Net Assets (Liabilities) Associated with our Energy-Related Derivatives | | | 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 | 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 | ) | 0.7 |
| | (0.1 | ) | | (1.4 | ) | | (0.8 | ) | | (0.1 | ) | | — |
| | (1.7 | ) |
| Level 3 — Significant unobservable inputs | (2.1 | ) | | (6.0 | ) | | (3.0 | ) | | (1.3 | ) | | — |
| | — |
| | (12.4 | ) | 0.1 |
| | (2.7 | ) | | (5.1 | ) | | (2.0 | ) | | (0.2 | ) | | — |
| | (9.9 | ) |
| Total net assets (liabilities) associated with our energy-related derivatives | $ | (2.7 | ) | | $ | (8.2 | ) | | $ | (3.7 | ) | | $ | (1.3 | ) | | $ | — |
| | $ | — |
| | $ | (15.9 | ) | $ | 0.8 |
| | $ | (2.8 | ) | | $ | (6.5 | ) | | $ | (2.8 | ) | | $ | (0.3 | ) | | $ | — |
| | $ | (11.6 | ) |
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.
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. 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 threenine months ended December 31, 2017:June 30, 2018:
| | Midstream Energy Services Segment Changes in Fair Value of Energy-Related Derivatives | Midstream Energy Services Segment Changes in Fair Value of Energy-Related Derivatives | Midstream Energy Services Segment Changes in Fair Value of Energy-Related Derivatives |
| (In millions) | | |
| Net assets (liabilities) at September 30, 2017 | $ | 11.2 |
| $ | 11.2 |
|
| Net fair value of contracts entered into during the period | 4.7 |
| (7.4 | ) |
| Other changes in net fair value | 11.6 |
| (3.4 | ) |
| Realized net settlement of derivatives | (24.2 | ) | — |
|
| Net assets (liabilities) at December 31, 2017 | $ | 3.3 |
| |
| Net assets (liabilities) at June 30, 2018 | | $ | 0.4 |
|
| | Midstream Energy Services Segment Roll Forward of Energy-Related Derivatives | Midstream Energy Services Segment Roll Forward of Energy-Related Derivatives | Midstream Energy Services Segment Roll Forward of Energy-Related Derivatives |
| (In millions) | | |
| Net assets (liabilities) at September 30, 2017 | $ | 11.2 |
| $ | 11.2 |
|
| Recorded to income | 16.3 |
| (10.8 | ) |
| Realized net settlement of derivatives | (24.2 | ) | — |
|
| Net assets (liabilities) at December 31, 2017 | $ | 3.3 |
| |
| Net assets (liabilities) at June 30, 2018 | | $ | 0.4 |
|
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, 2017June 30, 2018 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 | Midstream Energy Services Segment Maturity of Net Assets (Liabilities) Associated with our Energy-Related Derivatives | | | 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 | 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 | ) | 1.9 |
| | 0.3 |
| | 0.4 |
| | 0.5 |
| |
|
| | — |
| | 3.1 |
|
| Level 3 — Significant unobservable inputs | (1.0 | ) | | 2.6 |
| | 1.6 |
| | 0.8 |
| |
|
| | 4.1 |
| | 8.1 |
| (0.8 | ) | | 3.6 |
| | 2.1 |
| | (0.7 | ) | | (1.0 | ) | | (5.9 | ) | | (2.7 | ) |
| Total net assets associated with our energy-related derivatives | $ | (7.8 | ) | | $ | 4.7 |
| | $ | 1.5 |
| | $ | 0.8 |
| | $ | — |
| | $ | 4.1 |
| | $ | 3.3 |
| $ | 1.1 |
| | $ | 3.9 |
| | $ | 2.5 |
| | $ | (0.2 | ) | | $ | (1.0 | ) | | $ | (5.9 | ) | | $ | 0.4 |
|
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, 2017June 30, 2018 was approximately $6,400$31,200 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)
$29,200, 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 June 30, 2018 are noted in the table below.
| | WGL Energy Services Value-at-Risk | WGL Energy Services Value-at-Risk | WGL Energy Services Value-at-Risk |
| (In thousands) | High | | Low | | Average | High | | Low | | Average |
| Natural Gas Portfolio | $ | 184.0 |
| | $ | 2.1 |
| | $ | 11.2 |
| $ | 184.0 |
| | $ | 2.2 |
| | $ | 11.0 |
|
| Electric Portfolio | 60.2 |
| | 21.9 |
| | 38.6 |
| 97.2 |
| | 10.3 |
| | 41.0 |
|
| Total | $ | 244.2 |
| | $ | 24.0 |
| | $ | 49.8 |
| $ | 281.2 |
| | $ | 12.5 |
| | $ | 52.0 |
|
Weather Risk
We are exposed to various forms of weather risk in both our regulated utility and non-utility business segments. 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 fiscal 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 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 HDDs that occur, particularly when weather patterns experienced are not consistently cold or warm.
To the extent Washington Gas does not have weather related instruments or billing adjustment mechanisms in place, its revenues are volume driven and its current rates are based upon an assumption of normal weather. In the District of Columbia, without 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) 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) billing adjustment mechanism that is designed to eliminate the effect of variations in weather from normal levels on utility net revenues. Additionally, in Virginia, as part of the Conservation and Ratemaking Efficiency (CARE) plan, Washington Gas has a CARE Ratemaking Adjustment (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)
Interest-Rate Risk
We are exposed to interest-rate risk associated with our short-term and long-term financing. WGL and Washington Gas utilize derivative instruments from time to time in order to reduce their exposure to the risk of interest-rate volatility.
Short-Term Debt. At December 31, 2017June 30, 2018 and September 30, 2017, WGL and its subsidiaries had outstanding notes payable and project financing of $558.7$429.5 million and $559.8 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 debt would have caused a change in interest expense of approximately $3.2$3.5 million for the quarter.
Long-Term Debt. At December 31, 2017June 30, 2018 and September 30, 2017, WGL had outstanding fixed-rate and variable rate MTNs and other long-term debt of $1,679.9$1,879.3 million and $1,430.9 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,June 30, 2018, the fair value of WGL’s debt was $1,842.8$1,942.2 million. Our sensitivity analysis indicates that fair value would increase by approximately $74.6$77.0 million or decrease by approximately $69.1$70.9 million if interest rates were to decline or increase by 10%, respectively, from current market levels. At December 31, 2017,June 30, 2018, Washington Gas had outstanding fixed-rate MTNs and other long-term debt of $1,084.6$1,084.8 million, excluding current maturities. As of December 31, 2017,June 30, 2018, the fair value of Washington Gas’ fixed-rate debt was $1,232.9$1,146.9 million. Our sensitivity analysis indicates that fair value would increase by approximately $61.8$63.0 million or decrease by approximately $57.3$58.0 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%63.4% 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% 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 entity 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.
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, 2017June 30, 2018 was $6.4 million related to these hedges. Subsequent to the merger on July 6, 2018, the debt issuance is no longer reasonably possible of occurring and, therefore, the $6.4 million gain recorded in accumulated other comprehensive will be recorded to income during the quarter ended September 30, 2018. In January 2018, WGL settled these swaps and realized a gain of $13.8 million,million. For the nine months ended June 30, 2018, we recorded income 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.expense related to these swaps.
Refer to Note 8 - Derivative and Weather-Related Instruments 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,June 30, 2018 vs. June 30, 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, 2017June 30, 2018 and 2016.2017.
| | Gas Deliveries, Weather and Meter Statistics | | | Three Months Ended December 31, | | Increase/ | Three Months Ended June 30, | | Increase/ |
| 2017 | | 2016 | | (Decrease) | 2018 | | 2017 | | (Decrease) |
Gas Sales and Deliveries (millions of therms) | | | | �� | | | | | | |
| Firm | | | | | | | | | | |
| Gas sold and delivered | 282.7 |
| | 265.2 |
| | 17.5 |
| 124.7 |
| | 92.7 |
| | 32.0 |
|
| Gas delivered for others | 158.5 |
| | 161.6 |
| | (3.1 | ) | 89.7 |
| | 76.2 |
| | 13.5 |
|
| Total firm | 441.2 |
| | 426.8 |
| | 14.4 |
| 214.4 |
| | 168.9 |
| | 45.5 |
|
| Interruptible | | | | | | | | | | |
| Gas sold and delivered | 0.6 |
| | 0.8 |
| | (0.2 | ) | 0.4 |
| | 0.3 |
| | 0.1 |
|
| Gas delivered for others | 71.6 |
| | 64.2 |
| | 7.4 |
| 53.2 |
| | 61.0 |
| | (7.8 | ) |
| Total interruptible | 72.2 |
| | 65.0 |
| | 7.2 |
| 53.6 |
| | 61.3 |
| | (7.7 | ) |
| Electric generation—delivered for others | 32.1 |
| | 23.6 |
| | 8.5 |
| 88.6 |
| | 22.5 |
| | 66.1 |
|
| Total deliveries | 545.5 |
| | 515.4 |
| | 30.1 |
| 356.6 |
| | 252.7 |
| | 103.9 |
|
| Degree Days | | | | | | | | | | |
| Actual | 1,335 |
| | 1,196 |
| | 139 |
| 315 |
| | 198 |
| | 117 |
|
| Normal | 1,311 |
| | 1,318 |
| | (7 | ) | 287 |
| | 290 |
| | (3 | ) |
| Percent colder (warmer) than normal | 1.8 | % | | (9.3 | )% | | n/a |
| 9.8 | % | | (31.7 | )% | | n/a |
|
| Average active customer meters | 1,166,700 |
| | 1,148,900 |
| | 17,800 |
| 1,175,900 |
| | 1,157,000 |
| | 18,900 |
|
| New customer meters added | 3,673 |
| | 3,703 |
| | (30 | ) | 3,164 |
| | 3,177 |
| | (13 | ) |
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)
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.
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,June 30, 2018 and 2017 and 2016 was $15.0$14.5 million and $12.8$13.0 million, respectively. The increase in interest expense primarily reflects the issuance of additional long-term debt by Washington Gas.
Income Taxes
Washington Gas' income tax benefit for the three months ended June 30, 2018 and 2017 was $9.4 million and $0.7 million, respectively.
|
| | | | | | | | | |
| Income Taxes |
| Three Months Ended June 30, | | Increase/ |
| (In millions) | 2018 | | 2017 | | (Decrease) |
| Income before income taxes | (20.9 | ) | | (2.4 | ) | | $ | (18.5 | ) |
| Income tax benefit | (9.4 | ) | | (0.7 | ) | | (8.7 | ) |
Effective income tax rate(a) | 45.0 | % | | 29.2 | % | | 15.8 | % |
(a) The effective tax rate for the quarter can be impacted by seasonality reflected in our earnings.
Refer to Note 7 - Income Taxes of the Notes to Condensed Consolidated Financial Statements for a detailed discussion.
RESULTS OF OPERATIONS—Nine Months Ended June 30, 2018 vs. June 30, 2017
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 nine months ended June 30, 2018 and 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)
|
| | | | | | | | |
| Gas Deliveries, Weather and Meter Statistics |
| | Nine Months Ended June 30, | | Increase/ |
| 2018 | | 2017 | | (Decrease) |
Gas Sales and Deliveries (millions of therms) | | | | | |
| Firm | | | | | |
| Gas sold and delivered | 860.1 |
| | 711.0 |
| | 149.1 |
|
| Gas delivered for others | 471.1 |
| | 420.5 |
| | 50.6 |
|
| Total firm | 1,331.2 |
| | 1,131.5 |
| | 199.7 |
|
| Interruptible | | | | | |
| Gas sold and delivered | 2.4 |
| | 2.5 |
| | (0.1 | ) |
| Gas delivered for others | 202.0 |
| | 200.8 |
| | 1.2 |
|
| Total interruptible | 204.4 |
| | 203.3 |
| | 1.1 |
|
| Electric generation—delivered for others | 140.5 |
| | 59.3 |
| | 81.2 |
|
| Total deliveries | 1,676.1 |
| | 1,394.1 |
| | 282.0 |
|
| Degree Days | | | | | |
| Actual | 3,756 |
| | 3,121 |
| | 635 |
|
| Normal | 3,697 |
| | 3,706 |
| | (9 | ) |
| Percent colder (warmer) than normal | 1.6 | % | | (15.8 | )% | | n/a |
|
| Average active customer meters | 1,171,500 |
| | 1,153,200 |
| | 18,300 |
|
| New customer meters added | 9,729 |
| | 9,013 |
| | 716 |
|
Gas Service to Firm Customers. The comparison of firm volumes delivered for the current period compared to the prior period primarily reflects colder weather in the current period.
Gas Service to Interruptible Customers. The increase in therm deliveries to interruptible customers reflects increased demand.
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 nine months ended June 30, 2018 and 2017 was $44.1 million and $38.7 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 threenine months ended December 31, 2017June 30, 2018 and 2016.2017.
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)
| | Income Taxes | | Three Months Ended December 31, | | Increase/ | Nine Months Ended June 30, | | Increase/ |
| (In millions) | 2017 | | 2016 | | (Decrease) | 2018 | | 2017 | | (Decrease) |
| Income before income taxes | 82.8 |
| | 89.5 |
| | $ | (6.7 | ) | 197.8 |
| | 238.6 |
| | $ | (40.8 | ) |
| Income tax expense | 24.9 |
| | 34.0 |
| | (9.1 | ) | 43.3 |
| | 91.2 |
| | (47.9 | ) |
| Effective income tax rate | 30.1 | % | | 38.0 | % | | (7.9 | )% | 21.9 | % | | 38.2 | % | | (16.3 | )% |
| Income tax expense | 24.9 |
| | 34.0 |
| | (9.1 | ) | 43.3 |
| | 91.2 |
| | (47.9 | ) |
| Less Discrete re-measurement impact of Tax Act | 6.2 |
| | — |
| | 6.2 |
| 6.2 |
| | — |
| | 6.2 |
|
| Income tax expense excluding discrete re-measurement impact | 18.7 |
| | 34.0 |
| | (15.3 | ) | 37.1 |
| | 91.2 |
| | (54.1 | ) |
| Effective income tax rate excluding discrete re-measurement impact | 22.6 | % | | 38.0 | % | | (15.4 | )% | 18.8 | % | | 38.2 | % | | (19.4 | )% |
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 on Form 10-K for WGL and Washington Gas for the fiscal year ended September 30, 2017.
District of Columbia Jurisdiction
District of Columbia Rate Case. On February 26, 2016, Washington Gas filed an application with the PSC of DC. The application, as amended, requested an increase of $17.3 million to base rates for natural gas delivery service. This request included $4.5 million associated with the transfer to base rates of revenue associated with natural gas system upgrades previously approved by the PSC of DC and currently recovered through monthly surcharges. The filing addressed rate relief
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)
necessary for 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. On March 30, 2018, Washington Gas filed its proposed Purchase of Receivables discount rates for Commission approval. On June 7, 2018, one of the parties in the case requested a six week extension for implementation of the program. On June 19, 2018, the PSC of DC issued an Order granting approval of the implementation date extension. Washington Gas expects that it will take seven to nine months to implement the program.program during the first billing cycle of September 2018.
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 seekingsought an expedited hearing and waiver of provisions of the DC codeCode and District of Columbia municipal regulations ("DCMR")(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. Additionally, as directed by the PSC of DC, Washington Gas has been directed to filefiled a revised application byon 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
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)
distributed to customer classes based on revenues approved in the PSC of DC's most recent rate case. The Order also allowed parties to file comments/objections to Washington Gas’ revised application within 60 days of the date of the Order with any responses to the comments due within 75 days of the date of the Order. On March 22, 2018, Washington Gas requested that the PSC of DC extend the period of time to file comments until April 16, 2018 and reply comments, until April 30, 2018. On March 28, 2018, the PSC of DC granted the request.
On April 9, 2018, Washington Gas advised the Commission that it had reached a settlement in principle with the parties in the case and requested that the Commission suspend the procedural schedule to allow the parties sufficient time to finalize the terms and conditions of a settlement agreement and file it with the Commission for approval. On April 12, 2018, the PSC of DC issued an order granting Washington Gas’ motion to suspend the Procedural Schedule. As directed by the Commission, Washington Gas and several parties in the case filed a joint motion and unanimous agreement of stipulation for full settlement on April 30, 2018. On May 23, 2018, the PSC of DC issued an Order granting the request to waive the hearing required by the Rules of Practice in the Joint Motion for Approval of the Unanimous Agreement of Stipulation and Full Settlement filed by WGL and other party members. Additionally, the Order allowed interested parties to file comments by June 18, 2018. On June 29, 2018, the PSC of DC approved the settlement agreement, effective for service rendered on or after July 1, 2018. The settling parties were directed to file a joint proposal, by August 1, 2018, depicting the regulatory liability balance for the period January 1, 2018 through June 30, 2018, which will be refunded to customers through a one-time bill credit beginning with Washington Gas’s December 2018 billing cycle. Refer to Note 7 - 7—Income Taxes of the Notes to Condensed Consolidated Financial Statements for a discussion of regulatory liabilities we have established related to tax reform.
Maryland Jurisdiction
Maryland Rate Case. On May 15, 2018, Washington Gas filed an application with the PSC of MD to increase its base rates for natural gas service, generating $41.3 million in additional annual revenue. The revenue increase includes an increase in base rates of $56.3 million partially offset by a reduction of $15.0 million in annual surcharges currently paid by customers for system upgrades. These surcharges that customers have been paying monthly since 2014 are associated with Washington Gas' natural gas infrastructure replacement and environmental improvement initiatives, previously approved by the Commission under Maryland's Strategic Infrastructure Development and Enhancement (“STRIDE”) statute. Additionally, the proposed rate increase includes provisions designed to deliver the benefits of natural gas to more customers that include: (i) continued progress towards the replacement of aging infrastructure; (ii) ongoing network upgrades for improved service in Maryland and (iii) rising cost of service of providing safe, reliable natural gas service in its Maryland service territory. On May 18, 2018 the PSC of MD suspended the proposed rates for a period of not more than 150 days from May 14, 2018, and pursuant to MD law, the PSC of MD may suspend the proposed rates for an additional 30 days at its discretion. On June 22, 2018 the PSC of MD issued an Order that adopted a procedural schedule in this matter. Intervenor direct testimony must be filed by August 21, 2018. Rebuttal testimony and evidentiary hearings will take place in September and October 2018, respectively. All parties must file a single brief by November 9, 2018. A PSC of MD decision is expected in mid-December 2018.
Maryland STRIDE 2 Case. On June 15, 2018 Washington Gas filed an application with the PSC of MD for approval of the second phase of its accelerated natural gas pipeline replacement initiative. The application asks for approval of $393.6 million in accelerated infrastructure replacements for the 2019-2023 period. A prehearing conference was set for July 25, 2018. A PSC of MD decision is expected in mid-December 2018.
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 investigatinginvestigated whether the service termination notices complied with Code of Maryland Regulations (COMAR).Regulations. The PSC of MD’s investigation of this matter is consideringconsidered 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. AsOn April 6, 2018, the Chief Public Utility Law Judge for the PSC of January 8, 2018,MD issued a proposed order approving the settlement agreement between Washington Gas and the Maryland Office of the People'sPeople’s Counsel had reached a settlement in principle. The Staff of(OPC), which was filed with the PSC of MD on February 15, 2018. The proposed order became a final order of the OfficeCommission on April 23, 2018. A draft Compliance Plan was provided to the PSC of MD Attorney GeneralStaff and Montgomery County, MDOPC on April 16, 2018. The final Compliance Plan was filed June 14, 2018. Per the settlement agreement, in lieu of any civil penalty or fine, Washington Gas made a distribution to the Washington Area Fuel Fund in May 2018. In June 2018, Washington Gas issued $1.4 million of refunds to current and the Apartment and Office Building Association of Metropolitan Washington remain as parties or participantsformer customers. Additional refunds will be issued in the caseAugust 20, 2018, billing cycle. At June 30, 2018, we have recorded an estimated liability of $0.6 million in settlement discussions but will notconnection with this matter.
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)
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 recorded an estimated liability of $2.0 million in connection with this matter.
Application for Approval of Reduction of Distribution Rates. On January 12, 2018, Washington Gas filed an application with the PSC of MD for approval of reduction of distribution rates to reflect the Tax Act. Washington Gas seekssought to change current distribution service rates for all classes of customers served in Maryland, effective for meter readings on and after January 29, 2018. On January 31, 2018, the PSC of MD approved the application effective for bills rendered on or after February 1, 2018. Refer to Note 7 — 7—Income Taxes of the Notes to Condensed Consolidated Financial Statements for a discussion of regulatory liabilities we have established related to tax reform.
Virginia Jurisdiction
Virginia Rate Case. On June 30, 2016, Washington Gas filed an application with the 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 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 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.
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 seeks to change current distribution service rates for all classes of customers served in Virginia, effective for meter readings on and after January 29, 2018. A decision is expected2018 solely for the effect of the Tax Act. In addition, the SCC of VA Staff filed a motion requesting the SCC of VA to require Washington Gas to file all of the schedules required for a rate case and treat this filing as a general rate case rather than a single issue proceeding. On February 7, 2018, the SCC of VA Staff filed a motion requesting the SCC of VA to, among other things, permit Washington Gas to place into effect, on an interim basis, its revised rate schedules proposed in the rate application. On February 2018.21, 2018, Washington Gas filed its response to the Staff’s motion which included, among other things, a proposal to file a new general rate case in July 2018 and to dismiss the current rate application which will be addressed in the proposed general rate case filing. On March 15, 2018, the SCC of VA issued an Order denying Staff’s motions and granting Washington Gas’ request to file a new general rate case in July 2018 and to dismiss the current rate application. Refer to Note 7 — 7—Income Taxesfor a discussion of regulatory liabilities we have established related to tax reform.
WGL Holdings, Inc.
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.
Senior management, including the ChairmanPresident and Chief Executive Officer and the SeniorExecutive Vice President and Chief Financial Officer of WGL, evaluated the effectiveness of WGL’s 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.June 30, 2018. Based on this evaluation process, the ChairmanPresident and Chief Executive Officer and the SeniorExecutive Vice President and Chief Financial Officer have concluded that disclosure controls and procedures of WGL were effective as of December 31, 2017.June 30, 2018. There have been no changes in the internal control over financial reporting of WGL during the quarter ended December 31, 2017June 30, 2018 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 ChairmanPresident and Chief Executive Officer and the SeniorExecutive 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.June 30, 2018. Based on this evaluation process, the ChairmanPresident and Chief Executive Officer and the SeniorExecutive Vice President and Chief Financial Officer have concluded that disclosure controls and procedures of Washington Gas were effective as of December 31, 2017.June 30, 2018. There have been no changes in the internal control over financial reporting of Washington Gas during the quarter ended December 31, 2017June 30, 2018 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—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—Commitments and Contingencies of the Notes to Condensed Consolidated Financial Statements.
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-nineAll of these suits seek unspecified damages for personal injury and/or property damage. The finalone action is aseeking class action suit seeking total damages statedstatus has been amended to be less than $5 million for, among others,assert 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.claims. 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. 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.
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 reformThe merger with AltaGas may not achieve its anticipated results, and WGL may be unable to integrate the operations of AltaGas in the manner expected.
WGL and AltaGas entered into the Merger Agreement with the expectation that the merger will result in various benefits, including, among other things, cost savings and operating efficiencies. Achieving the anticipated benefits of the merger is subject to a number of uncertainties, including whether the businesses of WGL and AltaGas can be integrated in an efficient, effective and timely manner. The combination of two independent businesses is complex, costly and time-consuming and may divert significant management attention and resources to combining WGL’s and AltaGas’ business practices and operations, which could otherwise have been devoted to WGL’s business opportunities. This process may disrupt WGL’s and AltaGas’ respective businesses.
In addition, it is possible that the integration process could take longer than anticipated and could result in the disruption of WGL’s businesses, processes and systems or inconsistencies in standards, controls, procedures, practices and policies, any of which could adversely affect WGL.
On December 22, 2017, President Trump signed into law the Tax Act, which significantly reformscombined company’s ability to achieve the Internal Revenue Code of 1986, as amended. While WGL has made an initial assessmentanticipated benefits of the impactsmerger as and when expected. The overall combination of WGL’s and AltaGas’ businesses may also result in material unanticipated problems, expenses, liabilities, competitive responses and loss of customer and other business relationships. Failure to achieve these anticipated benefits or the incurrence of unanticipated expenses and liabilities result could materially adversely affect WGL’s business, financial condition, operating results and prospects, as well as that of the Tax Act on itcombined company.
Uncertainties associated with the merger may cause a loss of management personnel and its subsidiaries, it is unknown at this time howother key employees, which could adversely affect the Treasury Department may interpret certain provisionsfuture business and operations of the Tax Act. These interpretations could have a negative impactcombined company.
WGL and AltaGas are dependent on the resultsexperience and industry knowledge of operations, cash flowstheir officers and financial conditionother key employees to execute their respective business plans. The combined company’s success will depend in part upon its ability to retain key management personnel and other key employees of WGL and its subsidiaries. One impactAltaGas. Current and prospective employees of WGL and AltaGas may experience uncertainty about their future roles with the combined company, which may materially adversely affect the ability of each of WGL and AltaGas to attract and retain key personnel going forward. WGL may also have difficulty addressing possible differences in corporate cultures and management philosophies. Accordingly, no assurance can be given that the combined company will be able to retain key management personnel and other key employees of WGL and AltaGas, which could materially adversely affect WGL’s business, financial condition, operating results and prospects.
WGL may incur unexpected transaction fees and merger-related costs in connection with the merger.
WGL expects to incur a number of non-recurring expenses associated with consummating the merger, as well as expenses related to combining the operations of the decreasetwo companies. WGL may incur additional unanticipated costs in the federal corporate tax rateintegration of the businesses of WGL and AltaGas. Although WGL expects that the elimination of certain duplicative costs, as well as the realization of other efficiencies related to the integration of the two businesses, will offset the incremental transaction and merger-related costs over time, the combined company may not achieve this net benefit in the near term, or at all.
WGL may encounter unexpected difficulties or costs in meeting commitments it made under the Tax Act is the refund of excess deferred income taxes to ratepayersvarious orders and the resulting decrease in revenues from regulated operations. WGL has filed proposalsagreements associated with regulatory approvals for the amountmerger.
As a result of the process to obtain regulatory approvals required for the merger, WGL is committed to various programs, contributions and timinginvestments in several agreements and regulatory approval orders. It is possible that WGL may encounter delays, unexpected difficulties or additional costs in meeting these commitments in compliance with the terms of the relevant agreements and orders. Failure to fulfill the commitments in accordance with their terms could result in increased costs or result in penalties or fines that could materially adversely affect WGL’s business, financial condition, operating results and prospects.
WGL and AltaGas may become targets of securities class action suits and derivative suits, which could result in substantial costs and divert management attention and resources.
Securities class action suits and derivative suits are often brought against companies who have entered into mergers and acquisition transactions. There can be no assurance that WGL or AltaGas will not be targets of such refunds withsuits in the commissionsfuture, and no guarantee that WGL or AltaGas can successfully defend against any such actions. Defending against these claims, even if meritless, could result in eachsubstantial costs to WGL and AltaGas and could divert the attention of its jurisdictions. The proposed refunds remain subjectmanagement.
A downgrade in WGL’s or AltaGas’ credit ratings could negatively affect WGL’s cost of and ability to regulatory approval and oversight.access capital.
The Tax Act may impact
WGL Holdings, Inc.
Washington Gas Light Company
Part II—Other Information
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 incomeobtain adequate 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 counterpartiescost-effective financing depends in part on its credit ratings. A negative change in its ratings outlook or any downgrade in its current investment-grade credit ratings by the effectrating agencies, particularly below investment grade, could adversely affect WGL’s costs of the Tax Act on the market demand for such investments.
WGL Energy Systems’ inabilityborrowing and/or access to find counterparties for tax equity partnershipssources of liquidity and capital. Further, a negative change in AltaGas’ ratings outlook or any downgrade in its credit ratings could negatively impact WGL’s ratings outlook or downgrade its results.
credit ratings. Such downgrades could limit WGL’s access to the credit markets and increase the costs of borrowing under available credit lines. Should WGL’s credit ratings be downgraded, the interest rate on its borrowings under its existing credit facilities and commercial paper program, as well as on any future public or private debt issuances, would increase. An increase in borrowing costs without the ability to recover these higher costs in the rates charged to WGL’s customers could adversely affect earnings or cash flows by limiting WGL’s ability to earn its allowed rate of return.
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 sufficientaccess capital or suitable counterpartiesthe cost of capital may significantly increase.
WGL’s ability to obtain adequate and cost-effective financing is dependent upon the liquidity of the financial markets, in addition to its credit ratings. Disruptions in the capital and credit markets or waning investor sentiment could adversely affect WGL’s ability to access short-term and long-term capital. WGL’s access to funds under its commercial paper program is dependent on investor demand for these partnerships going forwardits commercial paper. Disruptions and volatility in the global credit markets could limit the demand for any reason, includingWGL’s commercial paper or result in the need to offer higher interest rates to investors, which would result in higher expense and could adversely impact liquidity.
As a subsidiary of AltaGas, WGL also may become a party to AltaGas’ existing debt arrangements or rely on access to short-term intercompany borrowings. The inability to access adequate capital or the increase in cost of capital may require WGL to conserve cash, prevent or delay WGL from making capital expenditures, require WGL to reduce or eliminate distributions to AltaGas or other discretionary uses of cash or could negatively affect its future growth or earnings. A significant reduction in WGL’s liquidity could cause a negative change in its ratings outlook or even a reduction in its credit ratings. This could in turn further limit WGL’s access to credit markets and increase its costs of borrowing.
As an indirect, wholly-owned subsidiary of AltaGas, WGL is affected by AltaGas’ strategic decisions and operating performance.
As an indirect, wholly-owned subsidiary of AltaGas, WGL’s business and operating performance can be affected by a wide range of strategic decisions that AltaGas may make from time to time. Significant changes in AltaGas’ strategy, its relationship with WGL, as well as material adverse changes in the performance of AltaGas, could have a material adverse effect on WGL’s business, financial condition, operating results and prospects.
Changes to government fiscal and trade policies and state/local renewable energy mandates could adversely affect WGL’s strategic decisions and operating performance.
Any changes in the US trade policy could trigger retaliatory actions by affected companies resulting in increased costs for goods used in our normal course of business, such as solar panels and steel pipe. Additionally, state and local initiatives adopting or increasing renewable portfolio standards could result in lower demand of natural gas 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.mandatory or voluntary efforts.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
WGL Holdings, Inc.
Washington Gas Light Company
Part II—Other Information
ITEM 6. EXHIBITS
Exhibits:
WGL Holdings, Inc.
Washington Gas Light Company
Part II—Other Information
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Schedule/ Exhibit | | Description |
| (a)(3) | | Exhibits |
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| | | Exhibits Incorporated by Reference:Filed Herewith: |
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| | Indenture, dated November 29, 2017, by and betweenBylaws of WGL Holdings, Inc. and The Bank of New York Mellon,, as Trusteeamended effective July 6, 2018 (incorporated by reference to Exhibit 4.13.1 to WGL Holdings, Inc.’s Form 8-K filed December 1, 2017)July 12, 2018). |
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| | First Supplemental Indenture, dated November 29, 2017, by and between WGL Holdings, Inc. and The BankBylaws of New York Mellon,Washington Gas Light Company, as Trusteeamended effective July 6, 2018 (incorporated by reference to Exhibit 4.23.2 to WGL Holdings, Inc.’sWashington Gas Light Company’s Form 8-K filed December 1, 2017)July 12, 2018). |
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| | Form of Floating Rate Note due 2019Third Amendment to Credit Agreement, dated May 16, 2018, between WGL Holdings, Inc., the lenders party thereto, and Wells Fargo Bank, National Association, as administrative agent for the lenders (incorporated by reference to Exhibit 4.310.1 to WGL Holdings, Inc.’s Form 8-K filed December 1, 2017)May 22, 2018). |
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| | Third Amendment to Credit Agreement, dated May 16, 2018, between Washington Gas Light Company, the lenders party thereto, and Wells Fargo Bank, National Association, as administrative agent for the lenders (incorporated by reference to Exhibit 10.2 to Washington Gas Light Company’s Form 8-K filed May 22, 2018). |
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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 ChairmanPresident 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 SeniorExecutive 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,Adrian P. Chapman, the ChairmanPresident 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., the SeniorExecutive Vice President and Chief Financial Officer 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., the SeniorExecutive Vice President and Chief Financial Officer of the Registrants, 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 |
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| 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 have duly caused this report to be signed on their behalf by the undersigned, thereunto duly authorized.
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| | WGL HOLDINGS, INC. and WASHINGTON GAS LIGHT COMPANY (Co-registrants) | |
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Date: February 7,August 1, 2018 | /s/ William R. Ford | |
| | William R. Ford | |
| | Vice President and Chief Accounting Officer (signing on behalf of the Registrants and as Principal Accounting Officer of each of the Registrants) | |