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EXCEL - IDEA: XBRL DOCUMENT - WASHINGTON GAS LIGHT CO | Financial_Report.xls |
EX-32 - EX-32 - WASHINGTON GAS LIGHT CO | w79342exv32.htm |
EX-31.3 - EX-31.3 - WASHINGTON GAS LIGHT CO | w79342exv31w3.htm |
EX-10.1 - EX-10.1 - WASHINGTON GAS LIGHT CO | w79342exv10w1.htm |
EX-31.1 - EX-31.1 - WASHINGTON GAS LIGHT CO | w79342exv31w1.htm |
EX-31.2 - EX-31.2 - WASHINGTON GAS LIGHT CO | w79342exv31w2.htm |
EX-31.4 - EX-31.4 - WASHINGTON GAS LIGHT CO | w79342exv31w4.htm |
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
þ | Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the quarterly period ended June 30, 2010
OR
o | Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
Exact name of registrant as | I.R.S. | ||||||||||
Commission | specified in its charter and principal | State of | Employer | ||||||||
File Number | office address and telephone number | Incorporation | Identification No. | ||||||||
1-16163 |
WGL Holdings, Inc. | Virginia | 52-2210912 | ||||||||
101 Constitution Ave., N.W. | |||||||||||
Washington, D.C. 20080 | |||||||||||
(703) 750-2000 | |||||||||||
0-49807 | Washington Gas Light Company | District of | 53-0162882 | ||||||||
101 Constitution Ave., N.W. | Columbia | ||||||||||
Washington, D.C. 20080 | and Virginia | ||||||||||
(703) 750-4440 | |||||||||||
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 o
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 o
Indicate by check mark whether each registrant is a large accelerated filer, an accelerated filer,
a non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated
filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
(Check one):
WGL Holdings, Inc.:
Large accelerated filer þ
|
Accelerated filer o | Non-accelerated filer o | Smaller reporting company o | |||
(Do not check if a smaller reporting company) |
Washington Gas Light Company:
Large accelerated filer o
|
Accelerated filer o | Non-accelerated filer þ | Smaller reporting company o | |||
(Do not check if a smaller reporting company) |
Indicate by check mark whether each registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). Yes o 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 July 31, 2010: 50,848,848 shares.
All of the outstanding shares of common stock ($1 par value) of Washington Gas Light Company were
held by WGL Holdings, Inc. as of July 31, 2010.
WGL Holdings, Inc.
Washington Gas Light Company
Washington Gas Light Company
For the Quarter Ended June 30, 2010
Table of Contents
PART I. Financial Information |
||||
Item 1. Financial Statements (Unaudited) |
||||
WGL Holdings, Inc. |
||||
Consolidated Balance Sheets |
4 | |||
Consolidated Statements of Income |
5 | |||
Consolidated Statements of Cash Flows |
6 | |||
Washington Gas Light Company |
||||
Balance Sheets |
7 | |||
Statements of Income |
8 | |||
Statements of Cash Flows |
9 | |||
Notes to Consolidated Financial Statements |
||||
WGL Holdings, Inc. and Washington Gas Light Company Combined |
10 | |||
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations |
38 | |||
WGL Holdings, Inc. |
41 | |||
Washington Gas Light Company |
66 | |||
Item 3. Quantitative and Qualitative Disclosures about Market Risk |
75 | |||
Item 4. Controls and Procedures |
75 | |||
PART II. Other Information |
||||
Item 1. Legal Proceedings |
76 | |||
Item 6. Exhibits |
76 | |||
Signature |
78 |
i
WGL Holdings, Inc.
Washington Gas Light Company
Washington Gas Light Company
INTRODUCTION
FILING FORMAT
This Quarterly Report on Form 10-Q is a combined report being filed by two separate
registrants: WGL Holdings, Inc. (WGL Holdings) and Washington Gas Light Company (Washington Gas).
Except where the content clearly indicates otherwise, any reference in the report to WGL
Holdings, we, us or our is to the holding company or the consolidated entity of WGL Holdings
and all of its subsidiaries, including Washington Gas which is a distinct registrant that is a
wholly owned subsidiary of WGL Holdings.
Part I Financial information in this Quarterly Report on Form 10-Q includes separate
financial statements (i.e. balance sheets, statements of income and statements of cash flows) for
WGL Holdings and Washington Gas. The Notes to Consolidated Financial Statements are also included
and are presented on a combined basis for both WGL Holdings and Washington Gas. The Managements
Discussion and Analysis of Financial Condition and Results of Operations (Managements Discussion)
included under Item 2 is divided into two major sections for WGL Holdings 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, revenues and other future financial business
performance or strategies and 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 verbs such as will, should, would
and could. Although the registrants, WGL Holdings and Washington Gas, believe such
forward-looking statements are based on reasonable assumptions, they cannot give assurance that
every objective will be achieved. Forward-looking statements speak only as of today, and the
registrants assume no duty to update them. The following factors, among others, could cause actual
results to differ materially from forward-looking statements or historical performance:
| the level and rate at which costs and expenses are incurred and the extent to which they are allowed to be recovered from customers through the regulatory process in connection with constructing, operating and maintaining Washington Gass natural gas distribution system; | ||
| the ability to implement successful approaches to modify the current or future composition of gas delivered to customers or to remediate the effects of the current or future composition of gas delivered to customers, as a result of the introduction of gas from the Dominion Cove Point or Elba Island facility to Washington Gass natural gas distribution system; | ||
| the availability of natural gas supply and interstate pipeline transportation and storage capacity; | ||
| the ability of natural gas producers, pipeline gatherers and natural gas processors to deliver natural gas into interstate pipelines for delivery by those interstate pipelines to the entrance points of Washington Gass natural gas distribution system as a result of factors beyond our control; | ||
| changes and developments in economic, competitive, political and regulatory conditions and developments; | ||
| changes in capital and energy commodity market conditions; | ||
| changes in credit ratings of debt securities of WGL Holdings or Washington Gas that may affect access to capital or the cost of debt; | ||
| changes in credit market conditions and creditworthiness of customers and suppliers; | ||
| changes in relevant laws and regulations, including tax, environmental and employment laws and regulations; | ||
| legislative, regulatory and judicial mandates or decisions affecting business operations or the timing of recovery of costs and expenses; | ||
| the timing and success of business and product development efforts and technological improvements; | ||
| the pace of deregulation efforts and the availability of other competitive alternatives to our products and services; | ||
| changes in accounting principles; |
ii
WGL Holdings, Inc.
Washington Gas Light Company
Washington Gas Light Company
| new commodity purchase and sales contracts or financial contracts and modifications in the terms of existing contracts that may materially affect fair value calculations under derivative accounting requirements; | ||
| the ability to manage the outsourcing of several business processes; | ||
| acts of nature; | ||
| terrorist activities and | ||
| other uncertainties. |
The outcome of negotiations and discussions that the registrants may hold with other parties
from time to time regarding utility and energy-related investments and strategic transactions that
are both recurring and non-recurring may also affect future performance. All such factors are
difficult to predict accurately and are generally beyond the direct control of the registrants.
Accordingly, while they believe that the assumptions are reasonable, the registrants cannot ensure
that all expectations and objectives will be realized. Readers are urged to use care and consider
the risks, uncertainties and other factors that could affect the registrants business as described
in this Quarterly Report on Form 10-Q. All forward-looking statements made in this report rely upon
the safe harbor protections provided under the Private Securities Litigation Reform Act of 1995.
iii
WGL Holdings, Inc.
June 30, | September 30, | |||||||
(In thousands) | 2010 | 2009 | ||||||
ASSETS |
||||||||
Property, Plant and Equipment |
||||||||
At original cost |
$ | 3,320,969 | $ | 3,242,413 | ||||
Accumulated depreciation and amortization |
(1,018,422 | ) | (973,272 | ) | ||||
Net property, plant and equipment |
2,302,547 | 2,269,141 | ||||||
Current Assets |
||||||||
Cash and cash equivalents |
48,283 | 7,845 | ||||||
Receivables |
||||||||
Accounts receivable |
198,209 | 172,117 | ||||||
Gas costs and other regulatory assets |
25,273 | 77,173 | ||||||
Unbilled revenues |
117,626 | 80,594 | ||||||
Allowance for doubtful accounts |
(19,194 | ) | (20,969 | ) | ||||
Net receivables |
321,914 | 308,915 | ||||||
Materials and suppliesprincipally at average cost |
23,546 | 23,626 | ||||||
Storage gasat cost (first-in, first-out) |
156,885 | 237,681 | ||||||
Deferred income taxes |
16,910 | - | ||||||
Other prepayments |
71,867 | 82,415 | ||||||
Other |
26,113 | 23,032 | ||||||
Total current assets |
665,518 | 683,514 | ||||||
Deferred Charges and Other Assets |
||||||||
Regulatory assets |
||||||||
Gas costs |
- | 13,996 | ||||||
Pension and other post-retirement benefits |
345,926 | 308,544 | ||||||
Other |
60,696 | 53,904 | ||||||
Other |
53,622 | 20,791 | ||||||
Total deferred charges and other assets |
460,244 | 397,235 | ||||||
Total Assets |
$ | 3,428,309 | $ | 3,349,890 | ||||
CAPITALIZATION AND LIABILITIES |
||||||||
Capitalization |
||||||||
Common shareholders equity |
$ | 1,192,667 | $ | 1,097,698 | ||||
Washington Gas Light Company preferred stock |
28,173 | 28,173 | ||||||
Long-term debt |
591,382 | 561,830 | ||||||
Total capitalization |
1,812,222 | 1,687,701 | ||||||
Current Liabilities |
||||||||
Current maturities of long-term debt |
30,097 | 82,592 | ||||||
Notes payable |
7,062 | 183,851 | ||||||
Accounts payable and other accrued liabilities |
202,197 | 213,529 | ||||||
Wages payable |
18,747 | 15,294 | ||||||
Accrued interest |
12,003 | 3,598 | ||||||
Dividends declared |
19,477 | 18,758 | ||||||
Customer deposits and advance payments |
43,156 | 52,908 | ||||||
Gas costs and other regulatory liabilities |
17,426 | 14,842 | ||||||
Deferred income taxes |
- | 5,155 | ||||||
Accrued taxes |
19,902 | 17,119 | ||||||
Other |
37,915 | 26,970 | ||||||
Total current liabilities |
407,982 | 634,616 | ||||||
Deferred Credits |
||||||||
Unamortized investment tax credits |
10,798 | 10,761 | ||||||
Deferred income taxes |
438,689 | 323,505 | ||||||
Accrued pensions and benefits |
275,378 | 273,289 | ||||||
Asset retirement obligations |
42,796 | 32,641 | ||||||
Regulatory liabilities |
||||||||
Accrued asset removal costs |
331,060 | 319,173 | ||||||
Gas costs |
15,950 | - | ||||||
Other |
14,223 | 14,310 | ||||||
Other |
79,211 | 53,894 | ||||||
Total deferred credits |
1,208,105 | 1,027,573 | ||||||
Commitments and Contingencies (Note 14) |
||||||||
Total Capitalization and Liabilities |
$ | 3,428,309 | $ | 3,349,890 | ||||
The accompanying notes are an integral part of these statements.
4
WGL Holdings, Inc.
Consolidated Statements of Income
(Unaudited)
Part IFinancial Information
Item 1Financial Statements (continued)
Part IFinancial Information
Item 1Financial Statements (continued)
Three Months Ended | Nine Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
(In thousands, except per share data) | 2010 | 2009 | 2010 | 2009 | ||||||||||||
OPERATING REVENUES |
||||||||||||||||
Utility |
$ | 168,379 | $ | 185,958 | $ | 1,170,536 | $ | 1,350,836 | ||||||||
Non-utility |
291,294 | 241,078 | 1,073,198 | 943,176 | ||||||||||||
Total Operating Revenues |
459,673 | 427,036 | 2,243,734 | 2,294,012 | ||||||||||||
OPERATING EXPENSES |
||||||||||||||||
Utility cost of gas |
60,001 | 75,185 | 576,200 | 757,112 | ||||||||||||
Non-utility cost of energy-related sales |
243,983 | 222,160 | 1,008,971 | 901,472 | ||||||||||||
Operation and maintenance |
79,062 | 71,448 | 230,850 | 220,221 | ||||||||||||
Depreciation and amortization |
23,634 | 23,168 | 72,032 | 71,494 | ||||||||||||
General taxes and other assessments |
25,752 | 22,852 | 100,179 | 94,534 | ||||||||||||
Total Operating Expenses |
432,432 | 414,813 | 1,988,232 | 2,044,833 | ||||||||||||
OPERATING INCOME |
27,241 | 12,223 | 255,502 | 249,179 | ||||||||||||
Other IncomeNet |
280 | 818 | 1,144 | 1,595 | ||||||||||||
Interest Expense |
||||||||||||||||
Interest on long-term debt |
9,913 | 10,422 | 29,816 | 30,894 | ||||||||||||
AFUDC and other, net |
87 | 390 | 143 | 3,572 | ||||||||||||
Total Interest Expense |
10,000 | 10,812 | 29,959 | 34,466 | ||||||||||||
INCOME BEFORE INCOME TAXES |
17,521 | 2,229 | 226,687 | 216,308 | ||||||||||||
INCOME TAX EXPENSE |
7,510 | 92 | 89,669 | 83,816 | ||||||||||||
NET INCOME BEFORE PREFERRED STOCK DIVIDENDS |
10,011 | 2,137 | 137,018 | 132,492 | ||||||||||||
Dividends on Washington Gas preferred stock |
330 | 330 | 990 | 990 | ||||||||||||
NET INCOME APPLICABLE TO COMMON STOCK |
$ | 9,681 | $ | 1,807 | $ | 136,028 | $ | 131,502 | ||||||||
AVERAGE COMMON SHARES OUTSTANDING |
||||||||||||||||
Basic |
50,664 | 50,141 | 50,422 | 50,092 | ||||||||||||
Diluted |
50,918 | 50,435 | 50,638 | 50,349 | ||||||||||||
EARNINGS PER AVERAGE COMMON SHARE |
||||||||||||||||
Basic |
$ | 0.19 | $ | 0.04 | $ | 2.70 | $ | 2.63 | ||||||||
Diluted |
$ | 0.19 | $ | 0.04 | $ | 2.69 | $ | 2.61 | ||||||||
DIVIDENDS DECLARED PER COMMON SHARE |
$ | 0.3775 | $ | 0.3675 | $ | 1.1225 | $ | 1.0900 | ||||||||
The accompanying notes are an integral part of these statements.
5
WGL Holdings, Inc.
Consolidated Statements of Cash Flows
(Unaudited)
Part IFinancial Information
Item 1Financial Statements (continued)
Part IFinancial Information
Item 1Financial Statements (continued)
Nine Months Ended | ||||||||
June 30, | ||||||||
(In thousands) | 2010 | 2009 | ||||||
OPERATING ACTIVITIES |
||||||||
Net income before preferred stock dividends |
$ | 137,018 | $ | 132,492 | ||||
ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIES |
||||||||
Depreciation and amortization |
72,032 | 71,494 | ||||||
Amortization of: |
||||||||
Other regulatory assets and liabilitiesnet |
2,957 | 2,463 | ||||||
Debt related costs |
570 | 561 | ||||||
Deferred income taxesnet |
75,043 | 21,975 | ||||||
Accrued/deferred pension cost (income) |
8,798 | (3,149 | ) | |||||
Compensation expense related to equity awards |
1,812 | 1,543 | ||||||
Provision for doubtful accounts |
13,739 | 16,713 | ||||||
Other non-cash charges (credits)net |
(144 | ) | (541 | ) | ||||
CHANGES IN ASSETS AND LIABILITIES |
||||||||
Accounts receivable and unbilled revenuesnet |
(78,638 | ) | (54,767 | ) | ||||
Gas costs and other regulatory assets/liabilitiesnet |
54,484 | 35,337 | ||||||
Storage gas |
80,796 | 249,841 | ||||||
Other prepayments |
11,084 | (27,175 | ) | |||||
Accounts payable and other accrued liabilities |
(9,603 | ) | (35,129 | ) | ||||
Wages payable |
3,453 | 3,263 | ||||||
Customer deposits and advance payments |
(9,752 | ) | (3,112 | ) | ||||
Accrued taxes |
2,783 | 28,270 | ||||||
Accrued interest |
8,405 | 9,692 | ||||||
Other current assets |
(3,001 | ) | (6,748 | ) | ||||
Other current liabilities |
10,945 | (16,390 | ) | |||||
Deferred gas costsnet |
29,946 | (15,542 | ) | |||||
Deferred assetsother |
(41,692 | ) | (17,480 | ) | ||||
Deferred liabilitiesother |
(2,418 | ) | (1,822 | ) | ||||
Othernet |
91 | 2,549 | ||||||
Net Cash Provided by Operating Activities |
368,708 | 394,338 | ||||||
FINANCING ACTIVITIES |
||||||||
Common stock issued |
14,141 | 5,070 | ||||||
Long-term debt issued |
51,502 | 61,458 | ||||||
Long-term debt retired |
(74,379 | ) | (26,012 | ) | ||||
Debt issuance costs |
(330 | ) | - | |||||
Notes payable issued (retired)net |
(176,789 | ) | (248,896 | ) | ||||
Dividends on common stock and preferred stock |
(57,048 | ) | (54,949 | ) | ||||
Other financing activitiesnet |
(894 | ) | (839 | ) | ||||
Net Cash Used in Financing Activities |
(243,797 | ) | (264,168 | ) | ||||
INVESTING ACTIVITIES |
||||||||
Capital expenditures (excluding Allowance for Funds Used During Construction) |
(84,473 | ) | (94,705 | ) | ||||
Net Cash Used in Investing Activities |
(84,473 | ) | (94,705 | ) | ||||
INCREASE IN CASH AND CASH EQUIVALENTS |
40,438 | 35,465 | ||||||
Cash and Cash Equivalents at Beginning of Year |
7,845 | 6,164 | ||||||
Cash and Cash Equivalents at End of Year |
$ | 48,283 | $ | 41,629 | ||||
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION |
||||||||
Income taxes paid |
$ | 49,662 | $ | 40,763 | ||||
Interest paid |
$ | 21,182 | $ | 24,173 | ||||
SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING AND FINANCING ACTIVITIES |
||||||||
Extinguishment of project debt financing |
$ | - | 7,375 | |||||
Capital expenditures included in accounts payable and other accrued liabilities |
$ | 3,218 | $ | 5,199 |
The accompanying notes are an integral part of these statements.
6
Washington Gas Light Company
Balance Sheets
(Unaudited)
Part IFinancial Information
Item 1Financial Statements (continued)
Part IFinancial Information
Item 1Financial Statements (continued)
June 30, | September 30, | |||||||
(In thousands) | 2010 | 2009 | ||||||
ASSETS |
||||||||
Property, Plant and Equipment |
||||||||
At original cost |
$ | 3,283,119 | $ | 3,206,576 | ||||
Accumulated depreciation and amortization |
(996,058 | ) | (950,706 | ) | ||||
Net property, plant and equipment |
2,287,061 | 2,255,870 | ||||||
Current Assets |
||||||||
Cash and cash equivalents |
46,642 | 5,160 | ||||||
Receivables |
||||||||
Accounts receivable |
95,313 | 70,382 | ||||||
Gas costs and other regulatory assets |
25,273 | 77,173 | ||||||
Unbilled revenues |
30,275 | 20,905 | ||||||
Allowance for doubtful accounts |
(15,916 | ) | (18,617 | ) | ||||
Net receivables |
134,945 | 149,843 | ||||||
Materials and suppliesprincipally at average cost |
23,494 | 23,573 | ||||||
Storage gasat cost (first-in, first-out) |
117,722 | 168,800 | ||||||
Deferred income taxes |
9,363 | - | ||||||
Other prepayments |
54,589 | 39,690 | ||||||
Receivables from associated companies |
1,277 | 10,441 | ||||||
Other |
9,577 | 11,531 | ||||||
Total current assets |
397,609 | 409,038 | ||||||
Deferred Charges and Other Assets |
||||||||
Regulatory assets |
||||||||
Gas costs |
- | 13,996 | ||||||
Pension and other post-retirement benefits |
344,115 | 306,918 | ||||||
Other |
60,696 | 53,904 | ||||||
Other |
35,655 | 11,846 | ||||||
Total deferred charges and other assets |
440,466 | 386,664 | ||||||
Total Assets |
$ | 3,125,136 | $ | 3,051,572 | ||||
CAPITALIZATION AND LIABILITIES |
||||||||
Capitalization |
||||||||
Common shareholders equity |
$ | 1,034,524 | $ | 966,439 | ||||
Preferred stock |
28,173 | 28,173 | ||||||
Long-term debt |
591,382 | 561,830 | ||||||
Total capitalization |
1,654,079 | 1,556,442 | ||||||
Current Liabilities |
||||||||
Current maturities of long-term debt |
30,097 | 82,592 | ||||||
Notes payable |
20 | 124,811 | ||||||
Accounts payable and other accrued liabilities |
100,459 | 125,295 | ||||||
Wages payable |
17,845 | 14,622 | ||||||
Accrued interest |
12,003 | 3,598 | ||||||
Dividends declared |
18,336 | 18,008 | ||||||
Customer deposits and advance payments |
43,156 | 52,908 | ||||||
Gas costs and other regulatory liabilities |
17,426 | 14,842 | ||||||
Deferred income taxes |
- | 9,285 | ||||||
Accrued taxes |
17,401 | 15,434 | ||||||
Payables to associated companies |
18,961 | 11,390 | ||||||
Other |
11,698 | 12,929 | ||||||
Total current liabilities |
287,402 | 485,714 | ||||||
Deferred Credits |
||||||||
Unamortized investment tax credits |
9,793 | 10,462 | ||||||
Deferred income taxes |
441,112 | 326,921 | ||||||
Accrued pensions and benefits |
273,952 | 271,859 | ||||||
Asset retirement obligations |
41,597 | 31,627 | ||||||
Regulatory liabilities |
||||||||
Accrued asset removal costs |
331,060 | 319,173 | ||||||
Gas costs |
15,950 | - | ||||||
Other |
14,226 | 14,307 | ||||||
Other |
55,965 | 35,067 | ||||||
Total deferred credits |
1,183,655 | 1,009,416 | ||||||
Commitments and Contingencies (Note 14) |
||||||||
Total Capitalization and Liabilities |
$ | 3,125,136 | $ | 3,051,572 | ||||
The accompanying notes are an integral part of these statements.
7
Washington Gas Light Company
Statements of Income
(Unaudited)
Part IFinancial Information
Item 1Financial Statements (continued)
Part IFinancial Information
Item 1Financial Statements (continued)
Three Months Ended | Nine Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
(In thousands) | 2010 | 2009 | 2010 | 2009 | ||||||||||||
OPERATING REVENUES |
||||||||||||||||
Utility |
$ | 172,544 | $ | 190,101 | $ | 1,190,703 | $ | 1,371,868 | ||||||||
Non-utility |
- | 11 | 2 | 33 | ||||||||||||
Total Operating Revenues |
172,544 | 190,112 | 1,190,705 | 1,371,901 | ||||||||||||
OPERATING EXPENSES |
||||||||||||||||
Utility cost of gas |
64,166 | 79,327 | 596,367 | 778,144 | ||||||||||||
Operation and maintenance |
67,874 | 61,471 | 198,869 | 192,342 | ||||||||||||
Depreciation and amortization |
23,130 | 22,738 | 70,610 | 70,130 | ||||||||||||
General taxes and other assessments |
24,126 | 21,737 | 95,190 | 91,362 | ||||||||||||
Total Operating Expenses |
179,296 | 185,273 | 961,036 | 1,131,978 | ||||||||||||
OPERATING INCOME (LOSS) |
(6,752 | ) | 4,839 | 229,669 | 239,923 | |||||||||||
Other IncomeNet |
188 | 774 | 948 | 1,157 | ||||||||||||
Interest Expense |
||||||||||||||||
Interest on long-term debt |
9,913 | 10,422 | 29,816 | 30,887 | ||||||||||||
AFUDC and other, net |
71 | 311 | 5 | 2,864 | ||||||||||||
Total Interest Expense |
9,984 | 10,733 | 29,821 | 33,751 | ||||||||||||
INCOME (LOSS) BEFORE INCOME TAXES |
(16,548 | ) | (5,120 | ) | 200,796 | 207,329 | ||||||||||
INCOME TAX EXPENSE (BENEFIT) |
(6,191 | ) | (2,895 | ) | 79,197 | 80,115 | ||||||||||
NET INCOME (LOSS) BEFORE PREFERRED STOCK DIVIDENDS |
$ | (10,357 | ) | $ | (2,225 | ) | $ | 121,599 | $ | 127,214 | ||||||
Dividends on preferred stock |
330 | 330 | 990 | 990 | ||||||||||||
NET INCOME (LOSS) APPLICABLE TO COMMON STOCK |
$ | (10,687 | ) | $ | (2,555 | ) | $ | 120,609 | $ | 126,224 | ||||||
The accompanying notes are an integral part of these statements.
8
Washington Gas Light Company
Statements of Cash Flows
(Unaudited)
Part IFinancial Information
Item 1Financial Statements (continued)
Part IFinancial Information
Item 1Financial Statements (continued)
Nine Months Ended | ||||||||
June 30, | ||||||||
(In thousands) | 2010 | 2009 | ||||||
OPERATING ACTIVITIES |
||||||||
Net income before preferred stock dividends |
$ | 121,599 | $ | 127,214 | ||||
ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIES |
||||||||
Depreciation and amortization |
70,610 | 70,130 | ||||||
Amortization of: |
||||||||
Other regulatory assets and liabilitiesnet |
2,957 | 2,463 | ||||||
Debt related costs |
570 | 597 | ||||||
Deferred income taxesnet |
77,983 | 29,543 | ||||||
Accrued/deferred pension cost (income) |
8,133 | (3,294 | ) | |||||
Compensation expense related to equity awards |
1,737 | 1,468 | ||||||
Provision for doubtful accounts |
10,701 | 13,772 | ||||||
Other non-cash charges (credits)net |
(850 | ) | (840 | ) | ||||
CHANGES IN ASSETS AND LIABILITIES |
||||||||
Accounts receivable, unbilled revenues and receivables from associated companiesnet |
(38,539 | ) | (22,973 | ) | ||||
Gas costs and other regulatory assets/liabilitiesnet |
54,484 | 35,337 | ||||||
Storage gas |
51,078 | 199,695 | ||||||
Other prepayments |
(14,438 | ) | 22,366 | |||||
Accounts payable and other accrued liabilities, including payables to associated companies |
(15,583 | ) | (53,391 | ) | ||||
Wages payable |
3,223 | 3,050 | ||||||
Customer deposits and advance payments |
(9,752 | ) | (3,361 | ) | ||||
Accrued taxes |
1,967 | 19,874 | ||||||
Accrued interest |
8,405 | 9,692 | ||||||
Other current assets |
2,033 | (8,463 | ) | |||||
Other current liabilities |
(1,231 | ) | (24,459 | ) | ||||
Deferred gas costsnet |
29,946 | (15,542 | ) | |||||
Deferred assetsother |
(32,053 | ) | (12,132 | ) | ||||
Deferred liabilitiesother |
(7,295 | ) | (18,540 | ) | ||||
Othernet |
292 | 2,499 | ||||||
Net Cash Provided by Operating Activities |
325,977 | 374,705 | ||||||
FINANCING ACTIVITIES |
||||||||
Long-term debt issued |
51,502 | 61,458 | ||||||
Long-term debt retired |
(74,379 | ) | (25,018 | ) | ||||
Debt issuance costs |
(330 | ) | - | |||||
Notes payable issued (retired)net |
(124,791 | ) | (230,995 | ) | ||||
Dividends on common stock and preferred stock |
(54,794 | ) | (53,450 | ) | ||||
Other financing activitiesnet |
(788 | ) | (831 | ) | ||||
Net Cash Used in Financing Activities |
(203,580 | ) | (248,836 | ) | ||||
INVESTING ACTIVITIES |
||||||||
Capital expenditures (excluding Allowance for Funds Used During Construction) |
(80,915 | ) | (91,334 | ) | ||||
Net Cash Used in Investing Activities |
(80,915 | ) | (91,334 | ) | ||||
INCREASE IN CASH AND CASH EQUIVALENTS |
41,482 | 34,535 | ||||||
Cash and Cash Equivalents at Beginning of Year |
5,160 | 3,680 | ||||||
Cash and Cash Equivalents at End of Year |
46,642 | 38,215 | ||||||
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION |
||||||||
Income taxes paid |
$ | 38,713 | $ | 33,861 | ||||
Interest paid |
$ | 21,044 | $ | 23,465 | ||||
SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING AND FINANCING ACTIVITIES |
||||||||
Extinguishment of project debt financing |
$ | - | 7,375 | |||||
Capital expenditures included in accounts payable and other accrued liabilities |
$ | 3,206 | $ | 4,822 |
The accompanying notes are an integral part of these statements.
9
WGL Holdings, Inc.
Washington Gas Light Company
Part IFinancial Information
Item 1Financial Statements (continued)
Washington Gas Light Company
Part IFinancial Information
Item 1Financial Statements (continued)
Notes to Consolidated Financial Statements (Unaudited)
NOTE 1. ACCOUNTING POLICIES
Basis of Presentation
WGL Holdings, Inc. (WGL Holdings) is a holding company that owns all of the shares of common
stock of Washington Gas Light Company (Washington Gas), a regulated natural gas utility, and all of
the shares of common stock of Washington Gas Resources Corporation (Washington Gas Resources),
Hampshire Gas Company (Hampshire) and Crab Run Gas Company. Washington Gas Resources owns all of
the shares of common stock of three unregulated subsidiaries that include Washington Gas Energy
Services, Inc. (WGEServices), Washington Gas Energy Systems, Inc. (WGESystems) and Capitol Energy
Ventures Corp. (CEV), formerly known as Washington Gas Credit Corporation. Except where the content
clearly indicates otherwise, WGL Holdings, we, us or our refers to the holding company or
the consolidated entity of WGL Holdings and all of its subsidiaries. Unless otherwise noted, these
notes apply equally to WGL Holdings and Washington Gas.
The interim 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 pursuant to the SEC rules and regulations. The interim consolidated financial
statements and accompanying notes should be read in conjunction with the combined Annual Report on
Form 10-K for WGL Holdings and Washington Gas for the fiscal year ended September 30, 2009. Due to
the seasonal nature of Washington Gass and WGEServices 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, 2010 and 2009 of either WGL Holdings or Washington Gas.
The accompanying unaudited consolidated financial statements for WGL Holdings and Washington
Gas reflect all normal recurring adjustments that are necessary, in our opinion, to present fairly
the results of operations in accordance with GAAP.
For a description of our accounting policies, refer to Note 1 of the Notes to Consolidated
Financial Statements of the combined Annual Report on Form 10-K for WGL Holdings and Washington Gas
for the fiscal year ended September 30, 2009. See Accounting Standards Adopted in the Current
Period below for changes to these policies subsequent to September 30, 2009.
Accounting Standards Adopted in the Current Year
Fair Value. In August 2009, the Financial Accounting Standards Board (FASB) issued Accounting
Standards Update (ASU) 2009-05, Fair Value Measurements and DisclosuresMeasuring Liabilities at
Fair Value (ASU 2009-05). This ASU provides amendments to Accounting Standards Codification (ASC)
Subtopic 820-10, Fair Value Measurements and DisclosuresOverall, for the fair value measurement of
liabilities. ASU 2009-05 provides clarification that in circumstances in which a quoted price in an
active market for the identical liability is not available, a reporting entity is required to
measure fair value using; (i) a valuation technique that uses the quoted price of the identical
liability when traded as an asset, or quoted prices for similar liabilities or similar liabilities
when traded as assets or (ii) another valuation technique that is consistent with the principles of
Topic 820. ASU 2009-05 was effective for us on October 1, 2009. The adoption of this guidance did
not have a material effect on our consolidated financial statements.
Noncontrolling Interests. Effective October 1, 2009,
we adopted revised guidance under ASC Topic 810 relating to, noncontrolling
interests in consolidated financial statements. This guidance establishes accounting and reporting standards for the noncontrolling interest in a subsidiary and
for the deconsolidation of a subsidiary. The adoption of this standard resulted in reclassifying
Washington Gass preferred stock dividends on the Statement of Income to present consolidated net
income attributable to both the shareholders of WGL Holdings Inc. and to the noncontrolling
interest of Washington Gass preferred shareholders as net income. In addition, the Statements of
Cash Flows were changed to include income from all equity holders as a source of cash in Operating
Activities and to reflect the distribution of preferred stock dividends as a use of cash in
Financing Activities. The adoption of this standard had no other effect on our consolidated
financial statements.
Subsequent Events. In February 2010, the FASB issued ASU 2010-09, Subsequent EventsAmendments
to Certain Recognition and Disclosure Requirements (ASU 2010-09). This ASU provides amendments to
Subtopic 855-10, Subsequent EventsOverall, which establishes general standards of accounting for
and disclosure of events that occur after the balance
10
WGL Holdings, Inc.
Washington Gas Light Company
Part IFinancial Information
Item 1Financial Statements (continued)
Notes to Consolidated Financial Statements (Unaudited)
Washington Gas Light Company
Part IFinancial Information
Item 1Financial Statements (continued)
Notes to Consolidated Financial Statements (Unaudited)
sheet date but before financial statements are issued or are available to be
issued. Subtopic 855-10 does not apply to the accounting for and disclosure of subsequent events
addressed in other generally accepted accounting principles. ASU 2010-09 eliminates the requirement
to disclose the date through which a registered company has evaluated subsequent events. Effective
March 31, 2010, we adopted ASU 2010-09 for disclosures of events or transactions not within the
scope of other applicable GAAP.
Other Newly Issued Accounting Standards
Postretirement Benefits. In December 2008, the FASB issued FSP FAS 132(R)-1, Employers
Disclosures about Postretirement Benefit Plan Assets (FSP FAS 132(R)-1), now part of ASC Topic
715-20-65. FSP FAS 132(R)-1 contains amendments to ASC Topic 715 that are intended to improve
disclosures of postretirement benefit plan assets. This ASU requires; (i) increased disclosure on
how investment allocation decisions are made, including the factors that are pertinent to an
understanding of investment policies and strategies; (ii) the major categories of plan assets;
(iii) the inputs and valuation techniques used to measure the fair value of plan assets; (iv) the
effect of fair value measurements using significant unobservable inputs on changes in plan assets
for the period and (v) significant concentrations of risk within plan assets. FSP FAS 132(R)-1 is
effective for us on September 30, 2010. We are currently evaluating the possible effect of this
standard on our consolidated financial statements.
Fair Value. In January 2010, the FASB issued ASU 2010-06, Improving Disclosures about Fair
Value Measurements. ASU 2010-06 amends ASC Topic 820 to require the following additional
disclosures regarding fair value measurements: (i) the amounts of transfers between Level 1 and
Level 2 of the fair value hierarchy; (ii) reasons for any transfers in or out of Level 3 of the
fair value hierarchy and (iii) the inclusion of information about purchases, sales, issuances and
settlements in the reconciliation of recurring Level 3 measurements. ASU 2010-06 also amends ASC
Topic 820 to clarify existing disclosure requirements, requiring fair value disclosures by class of
assets and liabilities rather than by major category and the disclosure of valuation techniques and
inputs used to determine the fair value of Level 2 and Level 3 assets and liabilities. With the
exception of disclosures relating to purchases, sales issuances and settlements of recurring Level
3 measurements, ASU 2010-06 was effective for us on January 1, 2010. Refer to Note 11 Fair Value
Measurements for the required disclosure under this standard. The disclosure requirements related
to purchases, sales, issuances and settlements of recurring Level 3 measurements will be effective
for us on October 1, 2011. We are currently evaluating the possible effect of this standard on our
consolidated financial statements.
Receivables. In July 2010, the FASB issued ASU 2010-20, Disclosures about the Credit Quality
of Financing Receivables and the Allowance for Credit Losses (ASU 2010-20). ASU 2010-20 requires
companies to provide more information in their disclosures about the credit quality of their
financing receivables such as aging information and credit quality indicators, and the credit
reserves held against them. Both new and existing disclosures must be disaggregated by portfolio
segment or class. The disaggregation of information is based on how a company develops its
allowance for credit losses and how it manages its credit exposure. ASU 2010-20 is effective for
us on January 1, 2011. We are currently evaluating the possible effect of this standard on our
consolidated financial statements.
11
WGL Holdings, Inc.
Washington Gas Light Company
Part IFinancial Information
Item 1Financial Statements (continued)
Notes to Consolidated Financial Statements (Unaudited)
Washington Gas Light Company
Part IFinancial Information
Item 1Financial Statements (continued)
Notes to Consolidated Financial Statements (Unaudited)
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 Holdings and Washington Gas.
WGL Holdings, Inc. | ||||||||
(In thousands) | Jun 30, 2010 | Sep 30, 2009 | ||||||
Accounts payable - trade |
$ | 176,708 | $ | 174,098 | ||||
Employee benefits and payroll accruals |
16,657 | 28,813 | ||||||
Other accrued liabilities |
8,832 | 10,618 | ||||||
Total |
$ | 202,197 | $ | 213,529 | ||||
Washington Gas Light Company | ||||||||
(In thousands) | Jun 30, 2010 | Sep 30, 2009 | ||||||
Accounts payable - trade |
$ | 78,269 | $ | 90,630 | ||||
Employee benefits and payroll accruals |
15,370 | 26,530 | ||||||
Other accrued liabilities |
6,820 | 8,135 | ||||||
Total |
$ | 100,459 | $ | 125,295 | ||||
NOTE 3. SHORT-TERM DEBT
WGL Holdings and Washington Gas satisfy their short-term financing requirements through the
sale of commercial paper 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. We maintain revolving credit agreements to support our outstanding
commercial paper and to permit short-term borrowing flexibility. Our policy is to maintain bank
credit facilities in an amount equal to or greater than our expected maximum commercial paper
position. The following is a summary of our committed credit available at June 30, 2010 and
September 30, 2009.
Committed Credit Available | ||||||||||||
As of June 30, 2010 | ||||||||||||
Committed credit agreements (In millions) | WGL Holdings | Washington Gas | Total Consolidated | |||||||||
Unsecured revolving credit facility, expires August 3, 2012 (a) |
$ 400.0 | $ 300.0 | $ 700.0 | |||||||||
Less: Commercial Paper |
(7.0 | ) | - | (7.0 | ) | |||||||
Net committed credit available |
$ 393.0 | $ 300.0 | $ 693.0 | |||||||||
As of September 30, 2009 |
||||||||||||
Committed credit agreements (In millions) | WGL Holdings | Washington Gas | Total Consolidated | |||||||||
Unsecured revolving credit facility, expires August 3, 2012 (a) |
$ 400.0 | $ 300.0 | $ 700.0 | |||||||||
Less: Commercial Paper |
(59.0 | ) | (124.8 | ) | (183.8 | ) | ||||||
Net committed credit available |
$ 341.0 | $ 175.2 | $ 516.2 | |||||||||
(a) Both WGL Holdings and Washington Gas have the right to
request extensions with the banks approval. WGL Holdings revolving credit
facility permits it to borrow an additional $50 million, with the banks
approval, for a total of $450 million. Washington Gass revolving credit
facility permits it to borrow an additional $100 million, with the banks
approval, for a total of $400 million.
At June 30, 2010 and September 30, 2009, WGL Holdings and its subsidiaries had
outstanding notes payable in the form of commercial paper of $7.0 million and $183.8 million,
respectively, at a weighted average interest rate of 0.35% and 0.27%, respectively. Substantially
all of the outstanding notes payable balance at June 30, 2010 was commercial
paper issued by WGL
12
WGL Holdings, Inc.
Washington Gas Light Company
Part IFinancial Information
Item 1Financial Statements (continued)
Notes to Consolidated Financial Statements (Unaudited)
Washington Gas Light Company
Part IFinancial Information
Item 1Financial Statements (continued)
Notes to Consolidated Financial Statements (Unaudited)
Holdings. Of the outstanding notes payable balance at September 30, 2009,
$59.0 million was issued by WGL Holdings and $124.8 million was issued by Washington Gas.
As of June 30, 2010 and September 30, 2009, respectively, there were no outstanding bank loans
from WGL Holdings or Washington Gass revolving credit facilities.
NOTE 4. LONG-TERM DEBT
UNSECURED NOTES
Washington Gas issues unsecured Medium-Term Notes (MTNs) and private placement 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.
On November 2, 2009, Washington Gas Light Company entered into a note purchase agreement by
and among certain purchasers for the issuance and sale of $50.0 million of unsecured 4.76% fixed
rate notes with a ten year maturity due November 1, 2019 through a private placement arrangement.
The estimated effective cost of the notes, including consideration of issuance fees and hedge
proceeds, is 4.79%.
In the quarter ended June 30, 2010, Washington Gas retired $74.0 million of MTNs of which $50
million of these retirements relate to the redemption of 1.05% floating rate MTNs due August 26,
2010. These MTNs were repaid by the sale of commercial
paper, cash provided by operating activities, or a combination of those sources of funds.
At June 30, 2010, Washington Gas had the capacity, under a shelf registration to issue up to
$450.0 million of additional MTNs. At June 30, 2010 and September 30, 2009, outstanding notes were
$615.0 million and $639.0 million, respectively. At June 30, 2010 and September 30, 2009, the
weighted average interest rate on all outstanding notes was 6.04% and 5.82%, respectively.
NOTE 5. COMMON SHAREHOLDERS EQUITY
The tables below reflect the changes in Common shareholders equity for WGL
Holdings and Washington Gas for the nine months ended June 30, 2010.
WGL Holdings, Inc. | ||||||||||||||||||||
Components of Common Shareholders Equity | ||||||||||||||||||||
Accumulated Other | ||||||||||||||||||||
Common Stock | Paid-In | Retained | Comprehensive Loss, | |||||||||||||||||
(In thousands) | Amount | Capital | Earnings | Net of Taxes | Total | |||||||||||||||
Balance at September 30, 2009 |
$ | 514,501 | $ | 13,516 | $ | 576,122 | $ | (6,441 | ) | $ | 1,097,698 | |||||||||
Net income applicable to common stock |
- | - | 136,028 | - | 136,028 | |||||||||||||||
Post-retirement benefits adjustment,
net of taxes |
- | - | - | 608 | 608 | |||||||||||||||
Comprehensive income |
- | - | - | - | 136,636 | |||||||||||||||
Stock-based compensation |
19,743 | (4,633 | ) | - | - | 15,110 | ||||||||||||||
Dividends declared: |
||||||||||||||||||||
Common Stock |
- | - | (56,777 | ) | - | (56,777 | ) | |||||||||||||
Balance at June 30, 2010 |
$ | 534,244 | $ | 8,883 | $ | 655,373 | $ | (5,833 | ) | $ | 1,192,667 | |||||||||
13
WGL Holdings, Inc.
Washington Gas Light Company
Part IFinancial Information
Item 1Financial Statements (continued)
Notes to Consolidated Financial Statements (Unaudited)
Washington Gas Light Company
Part IFinancial Information
Item 1Financial Statements (continued)
Notes to Consolidated Financial Statements (Unaudited)
Washington Gas Light Company | ||||||||||||||||||||
Components of Common Shareholders Equity | ||||||||||||||||||||
Accumulated Other | ||||||||||||||||||||
Common Stock | Paid-In | Retained | Comprehensive Loss, | |||||||||||||||||
(In thousands) | Amount | Capital | Earnings | Net of Taxes | Total | |||||||||||||||
Balance at September 30, 2009 |
$ | 46,479 | $ | 469,026 | $ | 457,375 | $ | (6,441 | ) | $ | 966,439 | |||||||||
Net income before preferred stock dividends |
| | 121,599 | | 121,599 | |||||||||||||||
Post-retirement benefits adjustment, net
of taxes |
| | | 608 | 608 | |||||||||||||||
Comprehensive income |
| | | | 122,207 | |||||||||||||||
Stock-based compensation |
| 1,000 | | | 1,000 | |||||||||||||||
Dividends declared: |
||||||||||||||||||||
Common Stock |
| | (54,132 | ) | | (54,132 | ) | |||||||||||||
Preferred Stock |
| | (990 | ) | | (990 | ) | |||||||||||||
Balance at June 30, 2010 |
$ | 46,479 | $ | 470,026 | $ | 523,852 | $ | (5,833 | ) | $ | 1,034,524 | |||||||||
WGL Holdings had 50,720,232 and 50,143,484 shares issued of common stock at June 30,
2010 and September 30, 2009, respectively. Washington Gas had 46,479,536 shares issued of common
stock at both June 30, 2010 and September 30, 2009.
NOTE 6. COMPREHENSIVE INCOME
The tables below reflect the components of Comprehensive income for the three and nine
months ended June 30, 2010 and 2009 for WGL Holdings and Washington Gas. Items that are excluded
from Net income and charged directly to Common shareholders equity are recorded in Other
comprehensive income (loss), net of taxes. The amount of Accumulated other comprehensive loss,
net of taxes is included in Common shareholders equity (refer to Note 5Common Shareholders
Equity).
WGL Holdings, Inc. | ||||||||||||||||
Components of Comprehensive Income | ||||||||||||||||
Three Months Ended | Nine Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
(In thousands) | 2010 | 2009 | 2010 | 2009 | ||||||||||||
Net income applicable to common stock |
$ | 9,681 | $ | 1,807 | $ | 136,028 | $ | 131,502 | ||||||||
Other comprehensive income, net of taxes (a) |
777 | 37 | 608 | 134 | ||||||||||||
Comprehensive income |
$ | 10,458 | $ | 1,844 | $ | 136,636 | $ | 131,636 | ||||||||
(a) | Amounts relate to postretirement benefits. |
14
WGL Holdings, Inc.
Washington Gas Light Company
Part IFinancial Information
Item 1Financial Statements (continued)
Notes to Consolidated Financial Statements (Unaudited)
Washington Gas Light Company
Part IFinancial Information
Item 1Financial Statements (continued)
Notes to Consolidated Financial Statements (Unaudited)
Washington Gas Light Company | ||||||||||||||||
Components of Comprehensive Income | ||||||||||||||||
Three Months Ended | Nine Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
(In thousands) | 2010 | 2009 | 2010 | 2009 | ||||||||||||
Net income (loss) before preferred stock dividends |
$ | (10,357 | ) | $ | (2,225 | ) | $ | 121,599 | $ | 127,214 | ||||||
Other comprehensive income, net of taxes (a) |
777 | 37 | 608 | 134 | ||||||||||||
Comprehensive income (loss) |
$ | (9,580 | ) | $ | (2,188 | ) | $ | 122,207 | $ | 127,348 | ||||||
(a) | Amounts relate to postretirement benefits. |
NOTE 7. EARNINGS PER SHARE
Basic earnings per share (EPS) is computed by dividing net income applicable to common stock
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 WGL Holdings for the three and nine
months ended June 30, 2010 and 2009.
Basic and Diluted EPS | ||||||||||||
Net Income | ||||||||||||
Applicable to | Per Share | |||||||||||
(In thousands, except per share data) | Common Stock | Shares | Amount | |||||||||
Three Months Ended June 30, 2010 |
||||||||||||
Basic EPS |
$ | 9,681 | 50,664 | $ | 0.19 | |||||||
Stock-based compensation plans |
- | 254 | ||||||||||
Diluted EPS |
$ | 9,681 | 50,918 | $ | 0.19 | |||||||
Three Months Ended June 30, 2009 |
||||||||||||
Basic EPS |
$ | 1,807 | 50,141 | $ | 0.04 | |||||||
Stock-based compensation plans |
- | 294 | ||||||||||
Diluted EPS |
$ | 1,807 | 50,435 | $ | 0.04 | |||||||
Nine Months Ended June 30, 2010 |
||||||||||||
Basic EPS |
$ | 136,028 | 50,422 | $ | 2.70 | |||||||
Stock-based compensation plans |
- | 216 | ||||||||||
Diluted EPS |
$ | 136,028 | 50,638 | $ | 2.69 | |||||||
Nine Months Ended June 30, 2009 |
||||||||||||
Basic EPS |
$ | 131,502 | 50,092 | $ | 2.63 | |||||||
Stock-based compensation plans |
- | 257 | ||||||||||
Diluted EPS |
$ | 131,502 | 50,349 | $ | 2.61 | |||||||
For the three and nine months ended June 30, 2010, we did not exclude any outstanding
shares pursuant to stock-based compensation plans in the calculation of diluted EPS. For the three
and nine months ended June 30, 2009, we had weighted average outstanding stock options totaling
approximately 658,000 and 532,000 shares, respectively, which were not included in the calculation
of diluted EPS as their effect would be anti-dilutive.
15
WGL Holdings, Inc.
Washington Gas Light Company
Part IFinancial Information
Item 1Financial Statements (continued)
Notes to Consolidated Financial Statements (Unaudited)
Washington Gas Light Company
Part IFinancial Information
Item 1Financial Statements (continued)
Notes to Consolidated Financial Statements (Unaudited)
NOTE 8. INCOME TAXES
During the quarter ended June 30, 2010, we filed our tax return for the year ended September
30, 2009 which included a change in Washington Gas Lights tax accounting method for repair
deductions. This change in the tax accounting method reduces our current Federal and State taxes payable by approximately $85 million.
We filed federal carry back claims and amended returns for prior years primarily
related to this issue, applied a portion of the proceeds to the current year tax liability, and requested refunds of approximately $59 million which were received in
July of 2010.
Although we believe our tax treatment is appropriate, our uncertain tax positions increased by approximately $23 million related to current year tax
positions as of June 30, 2010 primarily related 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.
We file consolidated federal and District of Columbia returns and various state income tax
returns. We are no longer subject to income tax examinations by the Internal Revenue Service for
years before September 30, 2007. Substantially all state income tax years in major jurisdictions
are closed for years before September 30, 2006.
NOTE 9. EFFECTS OF NEW HEALTHCARE LEGISLATION
On March 23 and March 30, 2010 the Patient Protection and Affordable Care Act and the Health
Care and Education Reconciliation Act, respectively (collectively the PPACA) became law resulting
in comprehensive healthcare reform legislation that affect the accounting for employer provided
benefits.
Washington Gas provides certain healthcare benefits for active and retired employees (the
Plan). Washington Gas is self-insured for the majority of healthcare costs. Because the Plan
provides prescription drug benefits equal to or greater than Medicare Part D coverage, Washington
qualified for a non-taxable subsidy from the Federal government, which has had the effect of
lowering other post retirement employee benefit expense (OPEB) and Washington Gass effective tax
rate.
Since the year ended September 30, 2004, Washington Gas has reflected the favorable tax
benefit (the Med D tax benefit) of the non-taxable subsidy in its effective tax rate.
Healthcare reform legislation eliminated future Med D tax benefits. During the current fiscal
year, the Med D tax benefit has been recognized through the date of the enactment of the PPACA.
The subsequent elimination of the Med D tax benefit is expected to increase the effective tax rate
for the year ending September 30, 2010 by approximately 0.7%. Washington Gas expects the annual
effective tax rate will increase by approximately 1% in subsequent years. In March 2010,
regulatory assets increased by $41.2 million to reflect the probable recovery of the higher future
tax expense from utility customers. An immaterial amount of tax expense was recorded in March 2010
related to the effect of the PPACA on our non-utility business.
Washington Gas is continuing to evaluate the remaining provisions of the PPACA and their
potential effect on the plan, its benefits, and the assumptions around measuring the related OPEB
liability.
16
WGL Holdings, Inc.
Washington Gas Light Company
Part IFinancial Information
Item 1Financial Statements (continued)
Notes to Consolidated Financial Statements (Unaudited)
Washington Gas Light Company
Part IFinancial Information
Item 1Financial Statements (continued)
Notes to Consolidated Financial Statements (Unaudited)
NOTE 10. DERIVATIVE AND WEATHER-RELATED INSTRUMENTS
DERIVATIVE INSTRUMENTS
To the extent that the information below is being disclosed under certain requirements of ASC
Topic 815, no prior information is presented for the nine month period ended June 30, 2009. Under
this guidance, only information after January 1, 2009 is required to be disclosed. Therefore, only
comparative activity for the three months ended June 30, 2010 is being disclosed for the income
statement.
Regulated Utility Operations
Washington Gas enters into contracts related to the sale and purchase of natural gas that
qualify as derivative instruments and are accounted for under ASC Topic 815. These derivative
instruments are recorded at fair value on our balance sheet and Washington Gas does not designate
any derivatives as hedges under ASC Topic 815. Washington Gass derivative contracts relate to: (i)
Washington Gass 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: (i) its
transportation capacity assets to benefit from favorable natural gas prices between different
geographic locations and (ii) 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 forwards, swaps and
option contracts to lock-in operating margins that Washington Gas will ultimately realize. The
derivatives used under this program are subject to mark-to-market accounting treatment.
Regulatory sharing mechanisms in all three jurisdictions allow the profit from these
transactions to be shared between Washington Gass shareholders and customers; therefore, any
changes in fair value are recorded through earnings, or as regulatory assets or liabilities to the
extent that gains and losses associated with these derivative instruments will be included in the
rates charged to customers when they are realized. Valuation changes for the portion of net profits
to be retained for shareholders may cause significant period-to-period volatility in earnings from
unrealized gains and losses. This volatility does not change the locked-in operating margins that
Washington Gas will ultimately realize from these transactions.
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 June 30, 2010 and 2009 were gains of $1.1
million and $2.2 million, respectively, including unrealized gains of $1.3 million and $2.0
million, respectively. Total net margins for the nine months ended June 30, 2010 and 2009 were
gains of $22.9 million and $19.6 million, respectively, including unrealized gains of $13.5 million
and $10.4 million, respectively.
Managing Price Risk. To serve utility customers, as authorized by its regulators, Washington
Gas enters into forward, option, and financial swap contracts and other contracts.
These instruments are accounted for as derivative instruments as a part of managing price risk
associated with acquiring natural gas supply for utility customers. 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 utilizes 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, which is typically over the life of the newly issued debt.
17
WGL Holdings, Inc.
Washington Gas Light Company
Part IFinancial Information
Item 1Financial Statements (continued)
Notes to Consolidated Financial Statements (Unaudited)
Washington Gas Light Company
Part IFinancial Information
Item 1Financial Statements (continued)
Notes to Consolidated Financial Statements (Unaudited)
Non-Utility Operations
Our non-regulated retail energy-marketing subsidiary, WGEServices, also enters into certain
derivative contracts as part of managing the price risk associated with the sale and purchase of
natural gas and electricity to its retail customers. Derivative instruments are recorded at fair
value on our consolidated balance sheets. WGEServices 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 retail energy-marketing segment. These derivatives may cause
significant period-to-period volatility in earnings; however, this volatility will not change the
operating margins that WGEServices will ultimately realize from the sales to its customers.
Consolidated Operations
Reflected in the tables below is information for WGL Holdings as well as Washington Gas. The
information for WGL Holdings includes derivative instruments for both Washington Gas and
WGEServices.
At June 30, 2010, the absolute notional amounts of our derivatives are as follows:
Absolute Notional Amounts | ||||||||
of Open Positions on Derivative instruments | ||||||||
(In millions) | Notional Amounts | |||||||
June 30, 2010 | ||||||||
Derivative transactions | WGL Holdings | Washington Gas | ||||||
Natural Gas(in therms) |
||||||||
Asset Optimization |
1,294.0 | 1,294.0 | ||||||
Retail sales |
6.0 | - | ||||||
Other risk-management activities |
404.0 | 200.0 | ||||||
Electricity (in kWhs) |
||||||||
Retail sales |
1,685.0 | - | ||||||
Other risk-management activities |
16,141.0 | - | ||||||
Interest Rate Swap (notional amount in dollars) |
$75.0 | $75.0 | ||||||
September 30, 2009 | ||||||||
Derivative transactions | WGL Holdings | Washington Gas | ||||||
Natural Gas(in therms) |
||||||||
Asset Optimization |
1,445.9 | 1,445.9 | ||||||
Retail sales |
4.0 | - | ||||||
Other risk-management activities |
477.7 | 301.7 | ||||||
Electricity (in kWhs) |
||||||||
Retail sales |
2,057.0 | - | ||||||
Other risk-management activities |
6,006.0 | - | ||||||
Interest Rate Swap (notional amount in dollars) |
$24.0 | $24.0 | ||||||
18
WGL Holdings, Inc.
Washington Gas Light Company
Part IFinancial Information
Item 1Financial Statements (continued)
Notes to Consolidated Financial Statements (Unaudited)
Washington Gas Light Company
Part IFinancial Information
Item 1Financial Statements (continued)
Notes to Consolidated Financial Statements (Unaudited)
The following tables present the balance sheet classification for all derivative
instruments as of June 30, 2010.
WGL Holdings, Inc. | ||||||||||||||||
Balance Sheet Classification of Derivative Instruments | ||||||||||||||||
As of June 30, 2010 | ||||||||||||||||
(In millions) | ||||||||||||||||
Derivative | Derivative | Netting of | ||||||||||||||
Assets | Liabilities | Collateral | Total | |||||||||||||
Other current assets |
$ | 36.6 | $ | (18.2 | ) | $ | - | $ | 18.4 | |||||||
Deferred charges and other assets - other |
81.7 | (45.7 | ) | - | 36.0 | |||||||||||
Other current liabilities(a) |
5.0 | (39.1 | ) | 0.2 | (33.9 | ) | ||||||||||
Deferred credits - other |
2.3 | (27.4 | ) | 2.9 | (22.2 | ) | ||||||||||
Total |
$ | 125.6 | $ | (130.4 | ) | $ | 3.1 | $ | (1.7 | ) | ||||||
As of September 30, 2009 |
||||||||||||||||
Other current assets |
$ | 23.6 | $ | (7.8 | ) | $ | - | $ | 15.8 | |||||||
Deferred charges and other assets - other |
13.2 | (5.4 | ) | - | 7.8 | |||||||||||
Other current liabilities(b) |
5.4 | (26.0 | ) | 1.4 | (19.2 | ) | ||||||||||
Deferred credits - other |
24.4 | (48.0 | ) | 3.7 | (19.9 | ) | ||||||||||
Total |
$ | 66.6 | $ | (87.2 | ) | $ | 5.1 | $ | (15.5 | ) | ||||||
(a) includes interest rate swaps of ($5.1) million
(b) includes interest rate swaps of ($0.7) million
Washington Gas Light Company | ||||||||||||||||
Balance Sheet Classification of Derivative Instruments | ||||||||||||||||
As of June 30, 2010 | ||||||||||||||||
(In millions) | ||||||||||||||||
Derivative | Derivative | Netting of | ||||||||||||||
Assets | Liabilities | Collateral | Total | |||||||||||||
Other current assets |
$ | 19.2 | $ | (9.6 | ) | $ | - | $ | 9.6 | |||||||
Deferred charges and other assets - other |
69.5 | (45.7 | ) | - | 23.8 | |||||||||||
Other current liabilities(a) |
3.3 | (12.7 | ) | - | (9.4 | ) | ||||||||||
Deferred credits - other |
- | (0.3 | ) | - | (0.3 | ) | ||||||||||
Total |
$ | 92.0 | $ | (68.3 | ) | $ | - | $ | 23.7 | |||||||
As of September 30, 2009 |
||||||||||||||||
Other current assets |
$ | 19.1 | $ | (7.6 | ) | $ | - | $ | 11.5 | |||||||
Deferred charges and other assets - other |
8.0 | (5.4 | ) | - | 2.6 | |||||||||||
Other current liabilities(b) |
2.9 | (8.5 | ) | - | (5.6 | ) | ||||||||||
Deferred credits - other |
23.9 | (27.5 | ) | - | (3.6 | ) | ||||||||||
Total |
$ | 53.9 | $ | (49.0 | ) | $ | - | $ | 4.9 | |||||||
(a) includes interest rate swaps of ($5.1) million
(b) includes interest rate swaps of ($0.7) million
19
WGL Holdings, Inc.
Washington Gas Light Company
Part IFinancial Information
Item 1Financial Statements (continued)
Notes to Consolidated Financial Statements (Unaudited)
Washington Gas Light Company
Part IFinancial Information
Item 1Financial Statements (continued)
Notes to Consolidated Financial Statements (Unaudited)
The following tables present all gains and losses associated with derivative instruments
for the three months ended June 30, 2010 and 2009.
Gains and (Losses) on Derivative Instruments | ||||||||||||||||
WGL Holdings, Inc. | Washington Gas Light Company | |||||||||||||||
June 30, | June 30, | |||||||||||||||
(In millions) | 2010 | 2009 | 2010 | 2009 | ||||||||||||
Recorded to income |
||||||||||||||||
Operating
revenues - non-utility |
$ | (14.1 | ) | $ | (5.2 | ) | $ | - | $ | - | ||||||
Utility cost of gas |
0.5 | 1.4 | 0.5 | 1.4 | ||||||||||||
Non-utility cost of energy-related sales |
29.6 | (9.7 | ) | - | - | |||||||||||
Recorded to regulatory assets/liabilities |
||||||||||||||||
Gas costs |
0.8 | (5.0 | ) | 0.8 | (5.0 | ) | ||||||||||
Other |
(6.2 | ) | - | (6.2 | ) | - | ||||||||||
Total |
$ | 10.6 | $ | (18.5 | ) | $ | (4.9 | ) | $ | (3.6 | ) | |||||
The following table presents all gains and losses associated with derivative instruments for the
nine months ended June 30, 2010.
Gains and (Losses) on Derivative Instruments | ||||||||
(In millions) | WGL Holdings, Inc. | Washington Gas Light Company | ||||||
Recorded to income |
||||||||
Operating revenues - non-utility |
$ | 4.1 | $ | - | ||||
Utility cost of gas |
19.6 | 19.6 | ||||||
Non-utility cost of energy-related sales |
(19.8 | ) | - | |||||
Recorded to regulatory assets/liabilities |
||||||||
Gas costs |
8.7 | 8.7 | ||||||
Other |
(6.0 | ) | (6.0 | ) | ||||
Total |
$ | 6.6 | $ | 22.3 | ||||
Certain of Washington Gass derivative instruments contain contract provisions that would
require collateral to be posted if the credit rating of Washington Gass debt falls below certain
levels. Similarly, certain of WGEServices derivative instruments contain contract provisions that
require collateral to be posted if the credit rating of WGL Holdings falls below certain levels or
if counterparties exposure to WGEServices exceeds a certain level. Due to counterparty exposure
levels, at June 30, 2010 and September 30, 2009, WGEServices had posted $3.1 million and $5.1
million of collateral related to its derivative liabilities that contained credit-related
contingent features. Washington Gas was not required to post any collateral at June 30, 2010. The
following tables show 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 to be posted related to the net fair value of our derivative instruments if
the most intrusive credit-risk-related contingent features underlying these agreements were
triggered on June 30, 2010 and September 30, 2009, respectively.
20
WGL Holdings, Inc.
Washington Gas Light Company
Part IFinancial Information
Item 1Financial Statements (continued)
Notes to Consolidated Financial Statements (Unaudited)
Washington Gas Light Company
Part IFinancial Information
Item 1Financial Statements (continued)
Notes to Consolidated Financial Statements (Unaudited)
Potential Collateral Requirements for Derivative Liabilities
with Credit-risk-Contingent Features
with Credit-risk-Contingent Features
(In millions) | WGL Holdings | Washington Gas | ||||||
June 30, 2010 |
||||||||
Derivative liabilities with credit-risk-contingent features |
$ | 91.2 | $ | 47.8 | ||||
Maximum potential collateral requirements |
46.1 | 5.4 | ||||||
September 30, 2009 |
||||||||
Derivative liabilities with credit-risk-contingent features |
$ | 67.5 | $ | 38.9 | ||||
Maximum potential collateral requirements |
29.0 | 3.1 | ||||||
Neither Washington Gas nor WGEServices enters into derivative contracts for speculative
purposes.
Concentration of Credit Risk
Both Washington Gas and WGEServices are exposed to credit risk associated with agreements with
wholesale counterparties that are accounted for as derivative instruments. We have credit policies
in place that are designed to mitigate credit risk associated with wholesale counterparties through
a requirement for credit enhancements including, but not limited to, letters of credit, parent
guarantees and cash collateral when deemed necessary. For certain counterparties or their
guarantors that meet this policys credit worthiness criteria, both Washington Gas and WGEServices
grant unsecured credit which is continuously monitored. Additionally, our agreements with wholesale
counterparties contain netting provisions which allow the receivable and payable exposure to/from
each counterparty to be offset. At June 30, 2010, three counterparties represented over 10% of
Washington Gass credit exposure to wholesale derivative counterparties, for a total credit risk of
$28.8 million. WGEServices had two counterparties representing over 10% of its credit exposure to
wholesale counterparties for a credit risk of $0.1 million at June 30, 2010.
WEATHER-RELATED INSTRUMENTS
Regulated Utility Operations
On September 21, 2009, Washington Gas executed a heating degree day (HDD) derivative contract
to manage its financial exposure to variations from normal weather in the District of Columbia
during fiscal year 2010. Under this contract, Washington Gas purchased protection against net
revenue shortfalls due to warmer-than-normal weather and sold to the counterparty the right to
receive the benefit when weather is colder than normal. This derivative contract resulted in a
payment to Washington Gas of $2.1 million on the date of execution.
Our weather protection instruments are accounted for under ASC Topic 815. For weather
derivative contracts executed by a premium payment, benefits or losses are recognized to the extent
actual HDDs are less than or greater than the contracted HDDs. The cost of our weather-related
instruments is amortized based on the pattern of normal HDDs over the coverage period. For weather
derivative contracts for which we receive a net option premium, we record the receipt as a
liability and mark the contract to fair value each period. The expenses or benefits that are
derived from our weather-related instruments are not considered in establishing the retail rates of
Washington Gas.
During the three months ended June 30, 2010 and 2009, Washington Gas recorded a total pre-tax
gain of $0.2 million and a pre-tax loss of $0.2 million, respectively, including premium costs and
any fair value adjustments related to its weather derivatives. During the nine months ended June
30, 2010 and 2009, Washington Gas recorded a total pre-tax gain of $1.3 million and a pre-tax loss
of $3.3 million, respectively, including premium costs and any fair value adjustments related to
its weather derivatives. Benefits and expenses associated with Washington Gass weather-related
instruments are recorded to Operation and maintenance expense.
Non-Utility Operations
WGEServices utilizes weather-related derivatives for managing the financial effects of weather
risks. These derivatives cover a portion of WGEServices estimated revenue or energy-related cost
exposure to variations in heating or
cooling degree days.
21
WGL Holdings, Inc.
Washington Gas Light Company
Part IFinancial Information
Item 1Financial Statements (continued)
Notes to Consolidated Financial Statements (Unaudited)
Washington Gas Light Company
Part IFinancial Information
Item 1Financial Statements (continued)
Notes to Consolidated Financial Statements (Unaudited)
These contracts may provide for payment to or from WGEServices 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. For the three months ended June 30, 2010,
WGEServices recorded pretax expenses of $1.2 million. For the nine months ended June 30, 2010,
WGEServices recorded pre-tax expenses of $2.3 million. For the three months ended June 30, 2009,
WGEServices recorded a pretax gain of $0.2 million. For the nine months ended June 30, 2009,
WGEServices recorded pre-tax expenses of $1.0 million, related to these derivatives.
NOTE 11. FAIR VALUE MEASUREMENTS
We measure the fair value of our financial assets and liabilities in accordance with ASC Topic
820. These financial assets and liabilities primarily consist of (i) derivatives recorded on our
balance sheet under ASC Topic 815, (ii) weather derivatives for which we receive a net option
premium payment and (iii) long-term debt outstanding that is 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 in pricing the asset or liability,
including assumptions about credit risk (both our own credit risk and the counterpartys credit
risk) and the risks inherent in the inputs to our valuation technique, the income approach.
We enter into derivative contracts in the over-the-counter (OTC) wholesale and retail markets.
These markets are the principal markets for the respective wholesale and retail contracts. We have
determined that all of our existing counterparties and others who have participated in energy
transactions at our delivery points are the relevant market participants. These participants have
access to the same market data as WGL Holdings. We value our derivative contracts based on an
in-exchange premise and valuations are generally based on pricing service data or indicative
broker quotes depending on the market location. We measure the net credit exposure at a
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 & Poors Ratings Services and Moodys Investors Service as
inputs for the determination of 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. Level 1 assets and liabilities primarily
include exchange traded derivatives and securities. At June 30, 2010, we do not have any
financial assets or liabilities in this category.
Level 2. Level 2 of the fair value hierarchy consists of assets or liabilities that are
valued using directly or indirectly observable inputs that are 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 including: (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 June 30, 2010, Level 2 financial assets and liabilities included non-exchange traded
energy-related derivatives such as financial swaps and options and physical forward contracts
for deliveries at active market locations. Additionally, at June 30, 2010, Level 2 financial
instruments included interest rate swaps and a weather derivative valued using observable data.
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 historical volatility and pricing data when delivery
is to inactive market locations. These inputs may be used with industry standard valuation
methodologies that result in our best estimate of fair value
22
WGL Holdings, Inc.
Washington Gas Light Company
Part IFinancial Information
Item 1Financial Statements (continued)
Notes to Consolidated Financial Statements (Unaudited)
Washington Gas Light Company
Part IFinancial Information
Item 1Financial Statements (continued)
Notes to Consolidated Financial Statements (Unaudited)
for the assets or liabilities at the
reporting date. At June 30, 2010, OTC derivative assets and liabilities in this category
included: (i) physical contracts valued with significant basis adjustments to observable market
data when delivery is to inactive market locations; (ii) long-dated positions where observable
pricing is not available over the life of the contract; (iii) contracts valued using historical
volatility assumptions and (iv) valuations using indicative broker quotes for inactive market
locations.
The following table sets forth financial instruments recorded at fair value as of June 30,
2010. A financial instruments 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
Fair Value Measurements Under the Fair Value Hierarchy
At June 30, 2010 | ||||||||||||||||
(In millions) | Level 1 | Level 2 | Level 3 | Total | ||||||||||||
Assets |
||||||||||||||||
Natural gas related derivatives |
$ | - | $ | 35.8 | $ | 58.0 | $ | 93.8 | ||||||||
Electricity related derivatives |
- | 0.9 | 30.9 | 31.8 | ||||||||||||
Total Assets |
$ | - | $ | 36.7 | $ | 88.9 | $ | 125.6 | ||||||||
Liabilities |
||||||||||||||||
Natural gas related derivatives |
$ | - | $ | (31.5 | ) | $ | (43.7 | ) | $ | (75.2 | ) | |||||
Electricity related derivatives |
- | (6.3 | ) | (43.8 | ) | (50.1 | ) | |||||||||
Interest rate swaps |
- | (5.1 | ) | - | (5.1 | ) | ||||||||||
Weather derivative |
- | (0.8 | ) | - | (0.8 | ) | ||||||||||
Total Liabilities |
$ | - | $ | (43.7 | ) | $ | (87.5 | ) | $ | (131.2 | ) | |||||
At September 30, 2009 |
||||||||||||||||
Assets |
||||||||||||||||
Natural gas related derivatives |
$ | - | $ | 31.0 | $ | 25.9 | $ | 56.9 | ||||||||
Electricity related derivatives |
- | 0.4 | 9.3 | 9.7 | ||||||||||||
Total Assets |
$ | - | $ | 31.4 | $ | 35.2 | $ | 66.6 | ||||||||
Liabilities |
||||||||||||||||
Natural gas related derivatives |
$ | - | $ | (19.8 | ) | $ | (57.5 | ) | $ | (77.3 | ) | |||||
Electricity related derivatives |
- | (3.9 | ) | (5.3 | ) | (9.2 | ) | |||||||||
Interest rate swaps |
- | (0.7 | ) | - | (0.7 | ) | ||||||||||
Weather derivative |
- | (2.1 | ) | - | (2.1 | ) | ||||||||||
Total Liabilities |
$ | - | $ | (26.5 | ) | $ | (62.8 | ) | $ | (89.3 | ) | |||||
23
WGL Holdings, Inc.
Washington Gas Light Company
Part IFinancial Information
Item 1Financial Statements (continued)
Notes to Consolidated Financial Statements (Unaudited)
Washington Gas Light Company
Part IFinancial Information
Item 1Financial Statements (continued)
Notes to Consolidated Financial Statements (Unaudited)
Washington Gas Light Company
Fair Value Measurements Under the Fair Value Hierarchy
Fair Value Measurements Under the Fair Value Hierarchy
At June 30, 2010 |
||||||||||||||||
(In millions) |
Level 1 | Level 2 | Level 3 | Total | ||||||||||||
Assets |
||||||||||||||||
Natural gas related derivatives |
$ | - | $ | 35.3 | $ | 56.7 | $ | 92.0 | ||||||||
Total Assets |
$ | - | $ | 35.3 | $ | 56.7 | $ | 92.0 | ||||||||
Liabilities |
||||||||||||||||
Natural gas related derivatives |
$ | - | $ | (23.1 | ) | $ | (40.1 | ) | $ | (63.2 | ) | |||||
Interest rate swaps |
- | (5.1 | ) | - | (5.1 | ) | ||||||||||
Weather derivative |
- | (0.8 | ) | (0.8 | ) | |||||||||||
Total Liabilities |
$ | - | $ | (29.0 | ) | $ | (40.1 | ) | $ | (69.1 | ) | |||||
At September 30, 2009 |
||||||||||||||||
Assets |
||||||||||||||||
Natural gas related derivatives |
$ | - | $ | 28.9 | $ | 25.0 | $ | 53.9 | ||||||||
Total Assets |
$ | - | $ | 28.9 | $ | 25.0 | $ | 53.9 | ||||||||
Liabilities |
||||||||||||||||
Natural gas related derivatives |
$ | - | $ | (17.0 | ) | $ | (31.3 | ) | $ | (48.3 | ) | |||||
Interest rate swaps |
- | (0.7 | ) | - | (0.7 | ) | ||||||||||
Weather derivative |
- | (2.1 | ) | - | (2.1 | ) | ||||||||||
Total Liabilities |
$ | - | $ | (19.8 | ) | $ | (31.3 | ) | $ | (51.1 | ) | |||||
Transfers between different levels of the fair value hierarchy may occur based 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 reporting period. During the nine months ended June 30, 2010, a
$2.1 million fair value liability related to Washington Gass weather derivative was transferred
from level 2 to level 3 in the fair value hierarchy and a $1.0 million liability was transferred
from level 3 to level 2 related to this derivative. These transfers reflected changes in the level
of unobservable market inputs used to value the instrument. There were no other transfers during
the reported periods.
24
WGL Holdings, Inc.
Washington Gas Light Company
Part IFinancial Information
Item 1Financial Statements (continued)
Notes to Consolidated Financial Statements (Unaudited)
Washington Gas Light Company
Part IFinancial Information
Item 1Financial Statements (continued)
Notes to Consolidated Financial Statements (Unaudited)
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 month period ended
June 30, 2010 and 2009, respectively.
Reconciliation of Fair Value Measurements Using Significant Level 3 Inputs
(In millions) | WGL Holdings | Washington Gas | ||||||
Three Months Ended June 30, 2010 |
||||||||
Balance at April 1, 2010 |
$ | (17.6 | ) | $ | 11.6 | |||
Realized and unrealized gains (losses) |
||||||||
Recorded to income |
11.5 | 1.9 | ||||||
Recorded
to regulatory assets - gas costs |
1.1 | 1.1 | ||||||
Transfers in and/or out of Level 3(a) |
1.0 | 1.0 | ||||||
Purchases and settlements, net |
5.4 | 1.0 | ||||||
Balance at June 30, 2010 |
$ | 1.4 | $ | 16.6 | ||||
Three Months Ended June 30, 2009 |
||||||||
Balance at April 1, 2009 |
$ | (10.5 | ) | $ | (7.1 | ) | ||
Realized and unrealized gains (losses) |
||||||||
Recorded to income |
(28.6 | ) | - | |||||
Recorded to
regulatory assets - gas costs |
(0.9 | ) | (0.9 | ) | ||||
Purchases and settlements, net |
10.9 | 0.8 | ||||||
Balance at June 30, 2009 |
$ | (29.1 | ) | $ | (7.2 | ) | ||
(a) Represents weather derivative.
25
WGL Holdings, Inc.
Washington Gas Light Company
Part IFinancial Information
Item 1Financial Statements (continued)
Notes to Consolidated Financial Statements (Unaudited)
Washington Gas Light Company
Part IFinancial Information
Item 1Financial Statements (continued)
Notes to Consolidated Financial Statements (Unaudited)
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 nine months
ended June 30, 2010 and 2009, respectively.
Reconciliation of Fair Value Measurements Using Significant Level 3 Inputs
(In millions) | WGL Holdings | Washington Gas | ||||||
Nine Months Ended June 30, 2010 |
||||||||
Balance at October 1, 2009 |
$ | (27.6 | ) | $ | (6.3 | ) | ||
Realized and unrealized gains (losses) |
||||||||
Recorded to income |
1.4 | 13.1 | ||||||
Recorded
to regulatory assets - gas costs |
8.0 | 8.0 | ||||||
Transfers in and/or out of Level 3(a) |
(1.1 | ) | (1.1 | ) | ||||
Purchases and settlements, net |
20.7 | 2.9 | ||||||
Balance at June 30, 2010 |
$ | 1.4 | $ | 16.6 | ||||
Nine Months Ended June 30, 2009 |
||||||||
Balance at October 1, 2008 |
$ | (9.1 | ) | $ | (17.0 | ) | ||
Realized and unrealized gains (losses) |
||||||||
Recorded to income |
(40.4 | ) | 6.3 | |||||
Recorded to
regulatory assets - gas costs |
1.1 | 1.1 | ||||||
Purchases and settlements, net |
19.3 | 2.4 | ||||||
Balance at June 30, 2009 |
$ | (29.1 | ) | $ | (7.2 | ) | ||
(a) Represents weather derivative.
The tables below sets forth the line items on the Statements of Income of the amounts recorded to income for the three
and nine months ended June 30, 2010, related to fair value measurements using significant level 3 inputs.
WGL Holdings, Inc.
Realized and Unrealized Gains (Losses) Recorded to Income for Level 3 Measurements
Realized and Unrealized Gains (Losses) Recorded to Income for Level 3 Measurements
Three Months Ended | Nine Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
(In millions) | 2010 | 2009 | 2010 | 2009 | ||||||||||||
Operating revenues non-utility |
$ | (14.1 | ) | $ | (5.2 | ) | $ | 4.1 | $ | (6.8 | ) | |||||
Utility cost of gas |
1.9 | - | 12.1 | 6.3 | ||||||||||||
Non-utility cost of energy-related sales |
23.7 | - | (15.8 | ) | ||||||||||||
Operation and maintenance expense |
- | (23.4 | ) | 1.0 | (39.9 | ) | ||||||||||
Total |
$ | 11.5 | $ | (28.6 | ) | $ | 1.4 | $ | (40.4 | ) | ||||||
Washington Gas Light Company
Realized and Unrealized Gains (Losses) Recorded to Income for Level 3 Measurements
Realized and Unrealized Gains (Losses) Recorded to Income for Level 3 Measurements
Three Months Ended | Nine Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
(In millions) | 2010 | 2009 | 2010 | 2009 | ||||||||||||
Utility cost of gas |
$ | 1.9 | $ | - | $ | 12.1 | $ | 6.3 | ||||||||
Operation and maintenance expense |
- | - | 1.0 | - | ||||||||||||
Total |
$ | 1.9 | $ | - | $ | 13.1 | $ | 6.3 | ||||||||
26
WGL Holdings, Inc.
Washington Gas Light Company
Part IFinancial Information
Item 1Financial Statements (continued)
Notes to Consolidated Financial Statements (Unaudited)
Washington Gas Light Company
Part IFinancial Information
Item 1Financial Statements (continued)
Notes to Consolidated Financial Statements (Unaudited)
Unrealized gains (losses) for the three and nine months ended June 30, 2010 attributable to financial
instruments measured using significant Level 3 inputs at June 30, 2010 were recorded as follows:
WGL Holdings, Inc.
Unrealized Gains (Losses) Recorded for Level 3 Measurements
Unrealized Gains (Losses) Recorded for Level 3 Measurements
Three Months Ended | Nine Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
(In millions) | 2010 | 2009 | 2010 | 2009 | ||||||||||||
Recorded to income |
||||||||||||||||
Operating
revenues - non-utility |
$ | (5.1 | ) | $ | 1.8 | $ | 16.1 | $ | 3.7 | |||||||
Utility cost of gas |
1.8 | - | 12.3 | 7.3 | ||||||||||||
Non-utility cost of energy-related sales |
11.9 | (14.2 | ) | (13.6 | ) | (22.6 | ) | |||||||||
Operation and maintenance expense |
- | - | 1.0 | - | ||||||||||||
Recorded to
regulatory assets - gas costs |
2.3 | (1.0 | ) | 9.2 | 2.5 | |||||||||||
Total |
$ | 10.9 | $ | (13.4 | ) | $ | 25.0 | $ | (9.1 | ) | ||||||
Washington Gas Light Company
Unrealized Gains (Losses) Recorded for Level 3 Measurements
Unrealized Gains (Losses) Recorded for Level 3 Measurements
Three Months Ended | Nine Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
(In millions) | 2010 | 2009 | 2010 | 2009 | ||||||||||||
Recorded to income |
||||||||||||||||
Utility cost of gas |
$ | 1.8 | $ | - | $ | 12.3 | $ | 7.3 | ||||||||
Recorded to
regulatory assets - gas costs |
2.3 | (1.0 | ) | 9.2 | 2.5 | |||||||||||
Total |
$ | 4.1 | $ | (1.0 | ) | $ | 21.5 | $ | 9.8 | |||||||
The following table presents the carrying amount and estimated fair value of our
long-term debt at June 30, 2010 and September 30, 2009, respectively. The carrying amount of
any other financial instruments in current assets and current liabilities approximates fair
value because of the short-term maturity of these instruments, and therefore are not shown in
the table below.
Fair Value of Financial Instruments
At June 30, | 2010 | |||||||
(In millions) | Carrying Amount | Fair Value | ||||||
Long-term debt (a) |
$ | 591.4 | $ | 694.3 | ||||
At September 30, | 2009 | |||||||
Carrying Amount | Fair Value | |||||||
Long-term debt (a) |
$ | 561.8 | $ | 627.8 | ||||
(a) Excludes current maturities and unamortized discounts.
27
WGL Holdings, Inc.
Washington Gas Light Company
Part IFinancial Information
Item 1Financial Statements (continued)
Notes to Consolidated Financial Statements (Unaudited)
Washington Gas Light Company
Part IFinancial Information
Item 1Financial Statements (continued)
Notes to Consolidated Financial Statements (Unaudited)
NOTE 12. OPERATING SEGMENT REPORTING
We identify and report on operating segments under the management approach. Our chief
operating decision maker is our President and Chief Operating Officer. Operating segments comprise
revenue-generating components of an enterprise for which we produce separate financial information
internally that we regularly use to make operating decisions and assess performance. We report
three operating segments: (i) regulated utility, (ii) retail energy-marketing and (iii)
design-build energy systems.
With approximately 91% of WGL Holdings consolidated total assets, the regulated utility
segment is our core business and comprises Washington Gas and Hampshire. The regulated utility
segment, through Washington Gas, provides regulated gas distribution services (including the sale
and delivery of natural gas, meter reading, responding to customer inquiries, bill preparation and
the construction and maintenance of its natural gas distribution system) to customers primarily in
the District of Columbia and the surrounding metropolitan areas in Maryland and Virginia.
Hampshire, an underground natural gas storage company that is regulated under a cost of service
tariff by the Federal Energy Regulatory Commission (FERC), provides services exclusively to
Washington Gas.
Through WGEServices, the retail energy-marketing segment sells natural gas and electricity
directly to retail customers, both inside and outside of Washington Gass traditional service
territory, in competition with regulated utilities and unregulated gas and electricity marketers.
Through WGESystems, the design-build energy systems segment provides design-build energy
efficient and sustainable solutions to government and commercial clients under construction
contracts.
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 three operating segments, are aggregated as
Other Activities and included as part of non-utility operations as presented below in the
Operating Segment Financial Information. During the first quarter of 2010, Washington Gas Resources
changed the name of Washington Gas Credit Corporation to Capitol Energy Ventures, (CEV) Corp. to
align better its name with its mission. CEV is an unregulated wholesale energy company that
engages in the business of acquiring and optimizing natural gas storage and transportation assets.
CEV is in the initial stages of operations and has been aggregated in Other Activities.
The same accounting policies applied in preparing our consolidated financial statements, as
discussed in Note 1Accounting Policies, also apply to the reported segments. While net income or
loss applicable to common stock is the primary criterion for measuring a segments performance, we
also evaluate our operating segments based on other relevant factors, such as penetration into
their respective markets and return on equity. The following tables present operating segment
information for the three and nine months ended June 30, 2010 and 2009.
28
WGL Holdings, Inc.
Washington Gas Light Company
Part IFinancial Information
Item 1Financial Statements (continued)
Notes to Consolidated Financial Statements (Unaudited)
Washington Gas Light Company
Part IFinancial Information
Item 1Financial Statements (continued)
Notes to Consolidated Financial Statements (Unaudited)
Operating Segment Financial Information
Non-Utility Operations | ||||||||||||||||||||||||
Regulated | Retail Energy- | Design-Build | Other | |||||||||||||||||||||
(In thousands) | Utility | Marketing | Energy Systems | Activities | Eliminations | Consolidated | ||||||||||||||||||
Three Months Ended June 30, 2010 |
||||||||||||||||||||||||
Operating Revenues (a) |
$ | 172,544 | $ | 286,199 | $ | 5,028 | $ | 67 | $ | (4,165 | ) | $ | 459,673 | |||||||||||
Operating Expenses: |
||||||||||||||||||||||||
Cost of energy-related sales |
64,166 | 239,667 | 4,201 | 115 | (4,165 | ) | 303,984 | |||||||||||||||||
Operation |
55,890 | 10,196 | 902 | 844 | - | 67,832 | ||||||||||||||||||
Maintenance |
11,230 | - | - | - | - | 11,230 | ||||||||||||||||||
Depreciation and amortization |
23,405 | 209 | 20 | - | - | 23,634 | ||||||||||||||||||
General taxes and other assessments: |
||||||||||||||||||||||||
Revenue taxes |
12,510 | 761 | - | - | - | 13,271 | ||||||||||||||||||
Other |
11,701 | 734 | 39 | 7 | - | 12,481 | ||||||||||||||||||
Total Operating Expenses |
178,902 | 251,567 | 5,162 | 966 | (4,165 | ) | 432,432 | |||||||||||||||||
Operating Income (Loss) |
(6,358 | ) | 34,632 | (134 | ) | (899 | ) | - | 27,241 | |||||||||||||||
Other Income (Expenses)-Net |
149 | 21 | 7 | 131 | (28 | ) | 280 | |||||||||||||||||
Interest Expense |
9,984 | 22 | - | 22 | (28 | ) | 10,000 | |||||||||||||||||
Income Tax Expense (Benefit) |
(6,047 | ) | 13,888 | (50 | ) | (281 | ) | - | 7,510 | |||||||||||||||
Dividends on Washington Gas preferred stock |
330 | - | - | - | - | 330 | ||||||||||||||||||
Net Income (Loss) Applicable to Common
Stock |
$ | (10,476 | ) | $ | 20,743 | $ | (77 | ) | $ | (509 | ) | $ | - | $ | 9,681 | |||||||||
Total Assets |
$ | 3,133,173 | $ | 296,150 | $ | 17,304 | $ | 46,975 | $ | (65,293 | ) | $ | 3,428,309 | |||||||||||
Capital Expenditures/Investments |
$ | 26,586 | $ | 185 | $ | 20 | $ | 14 | $ | - | $ | 26,805 | ||||||||||||
Three Months Ended June 30, 2009 |
||||||||||||||||||||||||
Operating Revenues (a) |
$ | 190,101 | $ | 233,122 | $ | 7,950 | $ | 6 | $ | (4,143 | ) | $ | 427,036 | |||||||||||
Operating Expenses: |
||||||||||||||||||||||||
Cost of energy-related sales |
79,327 | 215,901 | 6,259 | 1 | (4,143 | ) | 297,345 | |||||||||||||||||
Operation |
49,934 | 9,575 | 259 | 756 | - | 60,524 | ||||||||||||||||||
Maintenance |
10,924 | - | - | - | - | 10,924 | ||||||||||||||||||
Depreciation and amortization |
22,979 | 174 | 15 | - | - | 23,168 | ||||||||||||||||||
General taxes and other assessments: |
||||||||||||||||||||||||
Revenue taxes |
10,715 | 239 | - | - | - | 10,954 | ||||||||||||||||||
Other |
11,103 | 752 | 40 | 3 | - | 11,898 | ||||||||||||||||||
Total Operating Expenses |
184,982 | 226,641 | 6,573 | 760 | (4,143 | ) | 414,813 | |||||||||||||||||
Operating Income (Loss) |
5,119 | 6,481 | 1,377 | (754 | ) | - | 12,223 | |||||||||||||||||
Other Income (Expenses)-Net |
766 | 31 | 23 | 74 | (76 | ) | 818 | |||||||||||||||||
Interest Expense |
10,733 | 83 | - | 72 | (76 | ) | 10,812 | |||||||||||||||||
Income Tax Expense (Benefit) |
(2,787 | ) | 2,579 | 566 | (266 | ) | - | 92 | ||||||||||||||||
Dividends on Washington Gas preferred stock |
330 | - | - | - | - | 330 | ||||||||||||||||||
Net Income (Loss) Applicable to Common
Stock |
$ | (2,391 | ) | $ | 3,850 | $ | 834 | $ | (486 | ) | $ | - | $ | 1,807 | ||||||||||
Total Assets |
$ | 2,886,405 | $ | 268,131 | $ | 23,657 | $ | 47,299 | $ | (68,792 | ) | $ | 3,156,700 | |||||||||||
Capital Expenditures/Investments |
$ | 28,162 | $ | 582 | $ | 5 | $ | - | $ | - | $ | 28,749 | ||||||||||||
(a)
Operating revenues are reported gross of revenue taxes. Revenue taxes of both the regulated utility and the retail energy-marketing segments include gross receipt
taxes. Revenue taxes of the regulated utility segment also include PSC fees, franchise fees and energy taxes. Operating revenue amounts in the Eliminations column represent total
intersegment revenues associated with sales from the regulated utility segment to the retail energy-marketing segment.
29
WGL Holdings, Inc.
Washington Gas Light Company
Part IFinancial Information
Item 1Financial Statements (continued)
Notes to Consolidated Financial Statements (Unaudited)
Washington Gas Light Company
Part IFinancial Information
Item 1Financial Statements (continued)
Notes to Consolidated Financial Statements (Unaudited)
Operating Segment Financial Information
Non-Utility Operations | ||||||||||||||||||||||||
Regulated | Retail Energy- | Design-Build | Other | |||||||||||||||||||||
(In thousands) | Utility | Marketing | Energy Systems | Activities | Eliminations | Consolidated | ||||||||||||||||||
Nine Months Ended June 30, 2010 |
||||||||||||||||||||||||
Operating Revenues (a) |
$ | 1,190,703 | $ | 1,060,327 | $ | 12,806 | $ | 65 | $ | (20,167 | ) | $ | 2,243,734 | |||||||||||
Operating Expenses: |
||||||||||||||||||||||||
Cost of energy-related sales |
596,367 | 998,110 | 10,746 | 115 | (20,167 | ) | 1,585,171 | |||||||||||||||||
Operation |
163,018 | 28,884 | 2,550 | 2,698 | - | 197,150 | ||||||||||||||||||
Maintenance |
33,700 | - | - | - | - | 33,700 | ||||||||||||||||||
Depreciation and amortization |
71,399 | 588 | 45 | - | - | 72,032 | ||||||||||||||||||
General taxes and other assessments: |
||||||||||||||||||||||||
Revenue taxes |
54,247 | 2,077 | - | - | - | 56,324 | ||||||||||||||||||
Other |
41,163 | 2,548 | 123 | 21 | - | 43,855 | ||||||||||||||||||
Total Operating Expenses |
959,894 | 1,032,207 | 13,464 | 2,834 | (20,167 | ) | 1,988,232 | |||||||||||||||||
Operating Income (Loss) |
230,809 | 28,120 | (658 | ) | (2,769 | ) | - | 255,502 | ||||||||||||||||
Other Income (Expenses)-Net |
832 | 58 | 33 | 380 | (159 | ) | 1,144 | |||||||||||||||||
Interest Expense |
29,821 | 151 | - | 146 | (159 | ) | 29,959 | |||||||||||||||||
Income Tax Expense (Benefit) |
79,604 | 11,214 | (245 | ) | (904 | ) | - | 89,669 | ||||||||||||||||
Dividends on Washington Gas preferred stock |
990 | - | - | - | - | 990 | ||||||||||||||||||
Net Income (Loss) Applicable to Common Stock |
$ | 121,226 | $ | 16,813 | $ | (380 | ) | $ | (1,631 | ) | $ | - | $ | 136,028 | ||||||||||
Total Assets |
$ | 3,133,173 | $ | 296,150 | $ | 17,304 | $ | 46,975 | $ | (65,293 | ) | $ | 3,428,309 | |||||||||||
Capital Expenditures/Investments |
$ | 81,533 | $ | 2,802 | $ | 124 | $ | 14 | $ | - | $ | 84,473 | ||||||||||||
Nine Months Ended June 30, 2009 |
||||||||||||||||||||||||
Operating Revenues (a) |
$ | 1,371,868 | $ | 916,105 | $ | 27,066 | $ | 5 | $ | (21,032 | ) | $ | 2,294,012 | |||||||||||
Operating Expenses: |
||||||||||||||||||||||||
Cost of energy-related sales |
778,144 | 881,194 | 20,277 | 1 | (21,032 | ) | 1,658,584 | |||||||||||||||||
Operation |
158,501 | 24,860 | 2,053 | 2,754 | - | 188,168 | ||||||||||||||||||
Maintenance |
32,053 | - | - | - | - | 32,053 | ||||||||||||||||||
Depreciation and amortization |
70,850 | 601 | 43 | - | - | 71,494 | ||||||||||||||||||
General taxes and other assessments: |
||||||||||||||||||||||||
Revenue taxes |
52,870 | 537 | - | - | - | 53,407 | ||||||||||||||||||
Other |
38,716 | 2,289 | 103 | 19 | - | 41,127 | ||||||||||||||||||
Total Operating Expenses |
1,131,134 | 909,481 | 22,476 | 2,774 | (21,032 | ) | 2,044,833 | |||||||||||||||||
Operating Income (Loss) |
240,734 | 6,624 | 4,590 | (2,769 | ) | - | 249,179 | |||||||||||||||||
Other Income (Expenses)-Net |
1,146 | 69 | 126 | 838 | (584 | ) | 1,595 | |||||||||||||||||
Interest Expense |
33,758 | 594 | (1 | ) | 699 | (584 | ) | 34,466 | ||||||||||||||||
Income Tax Expense (Benefit) |
80,431 | 2,466 | 1,850 | (931 | ) | - | 83,816 | |||||||||||||||||
Dividends on Washington Gas preferred stock |
990 | - | - | - | - | 990 | ||||||||||||||||||
Net Income (Loss) Applicable to Common Stock |
$ | 126,701 | $ | 3,633 | $ | 2,867 | $ | (1,699 | ) | $ | - | $ | 131,502 | |||||||||||
Total Assets |
$ | 2,886,405 | $ | 268,131 | $ | 23,657 | $ | 47,299 | $ | (68,792 | ) | $ | 3,156,700 | |||||||||||
Capital Expenditures/Investments |
$ | 92,741 | $ | 1,937 | $ | 27 | $ | - | $ | - | $ | 94,705 | ||||||||||||
(a) Operating revenues are reported gross of revenue taxes. Revenue taxes of both the regulated utility and the retail energy-marketing segments include gross
receipt taxes. Revenue taxes of the regulated utility segment also include PSC fees, franchise fees and energy taxes. Operating revenue amounts in the Eliminations
column represent total intersegment revenues associated with sales from the regulated utility segment to the retail energy-marketing segment.
30
WGL Holdings, Inc.
Washington Gas Light Company
Part IFinancial Information
Item 1Financial Statements (continued)
Notes to Consolidated Financial Statements (Unaudited)
Washington Gas Light Company
Part IFinancial Information
Item 1Financial Statements (continued)
Notes to Consolidated Financial Statements (Unaudited)
NOTE 13. RELATED PARTY TRANSACTIONS
WGL Holdings and its subsidiaries engage in transactions among each other during the ordinary
course of business. Intercompany transactions and balances have been eliminated from the
consolidated financial statements of WGL Holdings. Washington Gas provides accounting, treasury,
legal and other administrative and general support to affiliates, and files consolidated tax
returns that include affiliated taxable transactions. The actual costs of these services are billed
to the appropriate affiliates and, to the extent such billings are not yet paid, they are reflected
in Receivables from associated companies on Washington Gass 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.
In connection with billing for unregulated third party marketers and with other miscellaneous
billing processes, Washington Gas collects cash on behalf of affiliates and transfers the cash as
quickly as reasonably possible. Cash collected by Washington Gas on behalf of its affiliates but
not yet transferred is recorded in Payables to associated companies on Washington Gass balance
sheets. These transactions recorded by Washington Gas impact the balance sheet only.
At June 30, 2010 and September 30, 2009, the Washington Gas Balance Sheets reflected
receivables from associated companies of $1.3 million and $10.4 million, respectively. At June 30,
2010 and September 30, 2009, the Washington Gas Balance Sheets reflected payables to associated
companies of $19.0 million and $11.4 million, respectively, related to the activities described
above.
Additionally, 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 WGEServices. Washington Gas records revenues for
these balancing services pursuant to tariffs approved by the appropriate regulatory bodies. In
conjunction with such services and the related sales and purchases of natural gas, Washington Gas
charged WGEServices, an affiliated energy marketer, $4.2 million and $4.1 million for the three
months ended June 30, 2010 and 2009, respectively. In the nine months ended June 30, 2010 and
2009, the charges were $20.2 million and $21.0 million, respectively. These related party amounts
have been eliminated in the consolidated financial statements of WGL Holdings.
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. WGEServices has recognized an accounts receivable from Washington Gas in
the amount of $4.3 million and $4.6 million at June 30, 2010 and September 30, 2009, respectively,
related to an imbalance in gas volumes. Due to regulatory requirements, these receivables are not
eliminated in the consolidated financial statements of WGL Holdings.
NOTE 14. COMMITMENTS AND CONTINGENCIES
REGULATED UTILITY OPERATIONS
Regulatory Contingencies
Certain legal and administrative proceedings incidental to our business, including regulatory
contingencies, involve WGL Holdings 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.
District of Columbia Jurisdiction
Recovery of Heavy Hydrocarbon (HHC) Costs. On May 1, 2006, Washington Gas filed two tariff
applications with the Public Service Commission of the District of Columbia (PSC of DC) requesting
approval of proposed revisions to the balancing charge provisions of its firm and interruptible
delivery service tariffs that would permit the utility to recover from its delivery service
customers the costs of HHCs that are being injected into Washington Gass natural gas distribution
system to treat vaporized liquefied natural gas from the Dominion Cove Point Facility. Washington
Gas had been recovering the costs of HHCs from sales customers in the District of Columbia through
its Purchased Gas Charge (PGC) provision in this jurisdiction. On October 2, 2006, the PSC of DC
issued an order rejecting Washington Gass proposed
tariff revisions until the Public Service Commission of
31
WGL Holdings, Inc.
Washington Gas Light Company
Part IFinancial Information
Item 1Financial Statements (continued)
Notes to Consolidated Financial Statements (Unaudited)
Washington Gas Light Company
Part IFinancial Information
Item 1Financial Statements (continued)
Notes to Consolidated Financial Statements (Unaudited)
Maryland (PSC of MD) issued a final order
related to this matter. On October 12, 2006, Washington Gas filed a motion for clarification
requesting that the PSC of DC affirm that Washington Gas can continue collecting HHC costs from
sales customers through its PGC provision or to record such HHC costs incurred as a regulatory
asset pending a ruling by the PSC of DC on future cost recovery. On May 11, 2007, the PSC of DC
directed Washington Gas to cease prospective recovery of the cost of HHCs through the PGC
provision, with future HHC costs to be recorded as a pending regulatory asset. On November 16,
2007 the PSC of MD issued a final order in the relevant case supporting full recovery of the HHC
costs in Maryland. On March 25, 2008, the PSC of DC issued an order stating that the consideration
of Washington Gass HHC strategy will move forward and directed interested parties to submit
filings reflecting a proposed procedural schedule. On June 6, 2008, Washington Gas and the District
of Columbia Office of the Peoples Counsel (DC OPC) filed a joint response to the order proposing a
procedural schedule and a list of issues for consideration in the case. The PSC of DC adopted the
proposed issues list and approved a procedural schedule. Washington Gas and other parties
subsequently filed comments, conducted discovery and the parties filed reply comments. On April 30,
2009, the PSC of DC ruled that there were unresolved issues and directed that they should be
addressed in evidentiary hearings. The PSC of DC issued an order establishing a procedural schedule
to address these unresolved issues in the case. Initial testimony was filed May 29, 2009, and
rebuttal testimony was filed on July 24, 2009.
On October 2, 2009, Washington Gas and the DC OPC filed a Joint Motion for Approval of
Unanimous Agreement of Stipulation and Full Settlement with the PSC of DC (Stipulation). The
parties to the Stipulation agreed that hexane (an HHC) commodity costs incurred by Washington Gas
to condition liquefied natural gas received in Washington Gass natural gas system are recoverable
expenses and that Washington Gas is authorized to achieve full cost recovery from sales and
delivery service customers of hexane commodity costs incurred prior to September 30, 2009.
Additionally, the Stipulation:
(i) | approves the recovery of hexane commodity costs incurred after September 30, 2009 from sales and delivery service customers, subject to review as a component of Washington Gass cost of gas; | ||
(ii) | establishes a coupling replacement and encapsulation program (program), wherein Washington Gas will replace or encapsulate a portion of its mechanically coupled pipe in the District of Columbia. The program is expected to conclude in approximately seven years with total spending not to exceed $28.0 million; | ||
(iii) | provides for the cost of the program to be recovered through an annual surcharge based on actual expenditures for coupling replacement and encapsulation that will become effective at the end of the existing base rate freeze (October 1, 2011). The cost will include both a return of and return on the cost of coupling replacement and encapsulation, computed in accordance with the terms of the rates currently in effect and | ||
(iv) | establishes periodic reporting on the level of hexane injected at each of Washington Gass hexane facilities with the associated commodity costs, and continued filing of leak-related information with the PSC of DC. |
On October 16, 2009, the PSC of DC published a Notice of Public Interest Hearing, held on
October 28, 2009. On December 16, 2009, the PSC of DC issued a final order approving the settlement
agreement, including recovery of hexane commodity costs, provided the parties agree to change the
September 30, 2009 date to the effective date of the newly approved tariffs. The parties filed the
modified language consistent with the final order. Pursuant to the final order, Washington Gas
established a regulatory asset by reversing hexane costs previously expensed of $0.7 million into
income.
As of June 30, 2010 Washington Gas has incurred cumulative total hexane costs of $2.5 million
related to the District of Columbia of which approximately $1.0 million has been recovered and $1.5
million has been deferred as a regulatory asset.
Revenue Normalization Adjustment. On December 21, 2009, Washington Gas filed a revised tariff
application seeking approval of an RNA, a sales adjustment mechanism that decouples Washington
Gass non-gas revenues from actual delivered volumes of gas. On December 22, 2009, the DC OPC filed
a motion requesting that the PSC of DC establish public hearing procedures to examine the merits of
Washington Gass RNA application. Washington Gas filed an opposition to the DC OPCs motion on
January 4, 2010. The PSC of DC issued an order on January 19, 2010 granting the DC OPCs motion for
evidentiary hearing and initiated a rate proceeding to consider issues surrounding Washington
Gass tariff application. On April 2, 2010, the
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Washington Gas Light Company
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Notes to Consolidated Financial Statements (Unaudited)
Washington Gas Light Company
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Item 1Financial Statements (continued)
Notes to Consolidated Financial Statements (Unaudited)
PSC of DC issued an order designating issues to be
addressed and establishing a procedural schedule for the case. Washington Gas filed supplemental
testimony on April 13, 2010. The DC OPC, the District of Columbia Office of the Environment (DC
Government) and the Apartment and Office Building Association of Metropolitan Washington (AOBA)
filed direct testimony on May 17, 2010. Washington Gas filed rebuttal testimony on June 29, 2010.
Evidentiary hearings were held on July 27-28, 2010.
Maryland Jurisdiction
Order on and Reviews of Purchased Gas Charges. Each year, the PSC of MD reviews the annual gas
costs collected from customers in Maryland to determine if Washington Gass purchased gas costs are
reasonable. On March 14, 2006, in connection with the PSC of MDs annual review of Washington Gass
gas costs that were billed to customers in Maryland from September 2003 through August 2004, a
Hearing Examiner of the PSC of MD issued a proposed order approving purchased gas charges of
Washington Gas for the twelve-month period ended August 2004, except for $4.6 million of such
charges that the Hearing Examiner recommended be disallowed because, in the opinion of the Hearing
Examiner, they were not reasonably incurred. As a result, during the fiscal year ended September
30, 2006, Washington Gas accrued a liability of $4.6 million related to the proposed disallowance
of these purchased gas charges.
Washington Gas filed appeals with the PSC of MD asserting that the Hearing Examiners
recommendation was without merit. On February 5, 2009, the PSC of MD issued an order that granted
the appeal and reversed the findings of the Hearing Examiner. Accordingly, the gas costs at issue
were deemed recoverable from rate payers. The PSC of MDs order concluded that the responsibility
for recovery of these costs should be assigned to the specific group of customers associated with
unbundled firm delivery service, directing Washington Gas to bill such costs to those customers
over a 24-month period and to provide a credit to firm bundled sales customers over the same
period. As a result of this order, the liability recorded in fiscal year 2006 for this issue was
reversed in the quarter ended December 31, 2008, and Washington Gas recorded income of $4.6 million
to Operating revenues-utility. On February 25, 2009, Washington Gas filed its compliance plan
with the PSC of MD which outlined the plan for returning these funds to its firm sales customers,
as well as collecting funds from firm delivery service customers beginning with Washington Gass
May 2009 billing cycle and ending with its April 2011 billing cycle. On April 29, 2009, the PSC of
MD approved Washington Gass plan.
A hearing was held March 27, 2009 on Washington Gass purchased gas charges for the twelve
month period ended August 31, 2008. No party challenged Washington Gass gas costs incurred during
the period, but the Staff of the PSC of MD (MD Staff) and the PSC of MD Office of the Peoples
Counsel (MD OPC) requested that the case remain open subject to any changes that may result from
the final PSC of MD order regarding Washington Gass asset management and gas purchase practices
(refer to the section entitled Investigation of Asset Management and Gas Purchase Practices for a
further discussion of this case). On April 23, 2010, the Hearing Examiner issued a Proposed Order
which approved Washington Gass gas costs for the period, subject to any changes which may arise
from the Commissions final order in the asset management investigation in Case No. 9158. The
Proposed Order was not appealed by any party and became a final order of the Commission on May 25,
2010.
A hearing was held on March 25, 2010 on Washington Gass purchased gas charges for the twelve
month period ended August 31, 2009. The parties filed initial briefs on April 30, 2010 and reply
briefs on May 21, 2010. The Staff of the PSC of MD and the MD OPC are challenging a portion of the
Companys gas costs averring that the Company did not have authority under its tariff to cash-out
over-deliveries by suppliers over the 12-months ended March 2009 and also asserting that the
Company used an excessive price as the cash-out price. Staff recommends that a second phase to
the proceeding be initiated to investigate these assertions. The Company has denied both these
assertions. The parties are awaiting a decision from the Hearing Examiner.
Virginia Jurisdiction
Conservation and Ratemaking Efficiency Plan. On September 29, 2009, Washington Gas filed with
the Virginia State Corporation Commission (SCC of VA) an application which included a portfolio of
conservation and energy efficiency programs, an associated cost recovery provision and a decoupling
mechanism which will adjust weather normalized non-gas distribution revenues for the impact of
conservation or energy efficiency efforts. An evidentiary hearing in the proceeding was held on
February 9, 2010. On March 26, 2010 the SCC of VA issued an Order approving a
decoupling rate mechanism for residential
33
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Washington Gas Light Company
Part IFinancial Information
Item 1Financial Statements (continued)
Notes to Consolidated Financial Statements (Unaudited)
Washington Gas Light Company
Part IFinancial Information
Item 1Financial Statements (continued)
Notes to Consolidated Financial Statements (Unaudited)
customers and six residential energy efficiency programs
and the cost recovery mechanism for those programs. Washington Gas filed compliance tariffs with
the Staff of the SCC of VA on April 19, 2010 to implement the Conservation and Ratemaking
Efficiency Plan on May 1, 2010. The Company began applying the decoupling mechanism in Virginia in its July billings
consistent with the Commissions approval.
On July 22, 2010,
Washington Gas filed an amendment to the conservation and ratemaking efficiency (CARE) Plan to include small commercial and industrial
customers in Virginia. The application included a portfolio of conservation and energy efficiency
programs, an associated cost recovery provision and a decoupling mechanism and will adjust weather
normalized non-gas distribution revenues for the impact of conservation or energy efficiency
efforts. The Company is currently awaiting the establishment of a docket number and procedural
schedule.
Performance-Based Rate Plans
In rate case proceedings in all jurisdictions, Washington Gas requested permission to
implement Performance-Based Rate (PBR) plans that include performance measures for customer service
and an Earnings Sharing Mechanism (ESM) that enables Washington Gas to share with shareholders and
customers the earnings that exceed a target rate of return on equity.
Effective October 1, 2007, the SCC of VA approved the implementation of a PBR plan through the
acceptance of a settlement stipulation, which includes: (i) a four-year base rate freeze; (ii)
service quality measures to be determined in conjunction with the Staff of the SCC of VA and
reported quarterly for maintaining a safe and reliable natural gas distribution system while
striving to control operating costs; (iii) recovery of initial implementation costs associated with
achieving Washington Gass business process outsourcing (BPO) initiatives over the four-year period
of the PBR plan and (iv) an ESM that enables Washington Gas to share with shareholders and Virginia
customers the earnings that exceed a target of 10.5% return on equity. The calculation of the ESM
excludes $2.4 million of asset management revenues that are being refunded to customers as part of
a new margin sharing agreement in Virginia.
On May 4, 2009, the Staff of the SCC of VA issued a report, commenting on the amount of the
ESM liability that had been reported for the fiscal year ending September 30, 2008. Washington Gas
filed its response to the Staff report on June 18, 2009. On July 17, 2009, Washington Gas and the
Staff of the SCC of VA filed a joint motion to approve stipulation and close proceeding with the
SCC of VA whereby the Staff of the SCC of VA and Washington Gas agreed upon the appropriate refund
to ratepayers under the ESM. The overall difference between the Staff position and Washington Gass
position was not material to the financial statements of Washington Gas. On July 24, 2009, the SCC
of VA granted the joint motion and accepted the stipulation submitted by Washington Gas and the
Staff of the SCC of VA in its final order approving the ESM liability for fiscal year 2008. In
accordance with the provisions of its VA tariff, Washington Gas began crediting customers bills in
April 2009 for the fiscal year 2008 ESM liability. The credits continued through March, 2010. At
June 30, 2010, Washington Gas had fully refunded the ESM liability to its customers.
On January 28, 2010, Washington Gas filed its annual information filing indicating that there
was no ESM liability for fiscal year 2009. On May 24, 2010 the Staff issued its report to the SCC
of VA on the annual informational filing and the ESM. The Staff of the SCC of VA concurred with
Washington Gas that Virginia jurisdictional results did not generate an ESM liability for fiscal
year 2009. On June 9, 2010 Washington Gas filed notice that it had no comments on the Staffs
report. On June 30, 2010, the SCC of VA accepted the Staffs report and agreed that there was no
ESM liability for fiscal year 2009.
Based on the results reflected in the annual information filing, Washington Gas has recorded
revenue of approximately $0.5 million of previously expensed hexane costs and on June 23, 2010
filed an application with the SCC of VA requesting the authority to bill the cost of this hexane to
customers in accordance with the provision of the Settlement Stipulation in the last rate
proceeding. The SCC of VA has not issued a procedural schedule in this proceeding. On July 22,
2010, the Commission issued an Order for Notice and Comment in this proceeding. The Company is
required to file direct testimony by August 18, 2010 with the Staffs Report due October 21, 2010.
The Companys response to the Staffs Report is due November 4, 2010.
On an interim basis, Washington Gas records the effects of the ESM based on year-to-date
earnings in relation to estimated annual earnings as calculated for regulatory purposes. Based on
expected results for 2010, no liability has been recognized for
34
WGL Holdings, Inc.
Washington Gas Light Company
Part IFinancial Information
Item 1Financial Statements (continued)
Notes to Consolidated Financial Statements (Unaudited)
Washington Gas Light Company
Part IFinancial Information
Item 1Financial Statements (continued)
Notes to Consolidated Financial Statements (Unaudited)
2010 and Washington Gas has accrued revenue of approximately $1.0 million
related to the recovery of hexane costs incurred in Virginia in 2010.
On November 16, 2007, the PSC of MD issued a final order
in a rate case which established a
phase-two proceeding to review Washington Gass request to implement a PBR plan and issues raised
by the parties associated with Washington Gass BPO agreement. On September 4, 2008, a proposed
order of the Hearing Examiner was issued in this phase-two proceeding. Consistent with Washington Gass
current accounting methodology, the proposed order approved 10-year amortization accounting for
initial implementation costs related to Washington Gass BPO plan. At June 30, 2010 and September
30, 2009, we had recorded a regulatory asset of $6.7 million and $7.4 million, respectively, net of
amortization, related to initial implementation costs allocable to Maryland associated with our BPO
plan. Washington Gass application seeking approval of a PBR plan was denied. Additionally, the
proposed order (i) directs Washington Gas to obtain an independent management audit related to
issues raised in the phase-two proceeding and (ii) directs the initiation of a collaboration
process in which Washington Gas is directed to engage in discussions with the Staff of the PSC of
MD (MD Staff), the MD OPC and interested parties to develop appropriate customer service metrics
and a periodic form for reporting results similar to the metrics filed by Washington Gas as part of
the approved settlement in Virginia. This proposed order has been appealed by the MD Staff, the MD
OPC and other parties. Washington Gass reply memorandum on appeal was filed on November 5, 2008. A
final decision by the PSC of MD is pending.
The final order issued by the PSC of DC on December 28, 2007 approved amortization accounting
for initial implementation costs related to the BPO plan in approving the stipulated agreement
filed in the proceeding. As part of that approved agreement, Washington Gas withdrew its
application seeking approval of a PBR plan. Washington Gas is prohibited from seeking approval of a
PBR plan in the District of Columbia until the filing of its next base rate case; however, the
settling parties may not seek a change in rates during the rate case filing moratorium period under
the terms of the approved rate settlement, with the exception of the implementation of a revenue
normalization adjustment.
Depreciation Study
In October 2006, Washington Gas completed a depreciation rate study based on its property,
plant and equipment balances as of December 31, 2005. The results of the depreciation study
concluded that Washington Gass depreciation rates should be reduced due to asset lives being
extended beyond previously estimated lives. Under regulatory requirements, these depreciation rates
must be approved before they are placed into effect.
On April 13, 2007, Washington Gas filed the portion of the depreciation study related to the
Maryland jurisdiction. A separate proceeding was established on May 2, 2007, by the PSC of MD to
review Washington Gass request to implement new depreciation rates. On October 25, 2007,
Washington Gas filed a 2007 technical update of the Maryland depreciation study based on property,
plant and equipment balances as of December 31, 2006. Hearings were held May 12 and 13, 2008.
Initial briefs were filed on July 16, 2008 and reply briefs were filed on August 6, 2008. On
October 15, 2008, a proposed order of Hearing Examiner was issued in Maryland, which would reduce
Washington Gass annual depreciation expense related to the Maryland jurisdiction by approximately
$11.2 million when new depreciation rates are implemented, with a corresponding decrease in annual
revenues on a prospective basis to be reflected in future billing rates. Reflected in this
reduction in depreciation expense, among other things, are: (i) a change in methodology for
calculating accrued asset removal costs and (ii) the designation of certain insurance and
relocation reimbursements as salvage value. This reduction in depreciation expense will not impact
annual operating income and will not prevent the recovery of our capital investment; however, it
will have the effect of deferring full recovery of our capital investment into future years. On
November 14, 2008, Washington Gas and the MD OPC noted appeals of the October 15, 2008 proposed
order, thus suspending its effective date.
On February 5, 2010, the PSC of MD issued an order on appeal. The order affirmed the proposed
order with two exceptions: (i) it directed the parties to confer and report on a prospective
allocation method for reimbursements and (ii) it directed Washington Gas to amortize its $13.3
million reserve deficiency imbalance over a 33.5 year time frame. On March 26, 2010, Washington Gas
made a compliance filing with the PSC of MD to revise its depreciation rates in accordance with the
Commissions February 5, 2010 Order. Under Washington Gass proposed revised depreciation rates,
annual depreciation expense applicable to Maryland would be reduced by $11,366,000. As required by
the Commissions Order in Washington Gass most recent base rate case in Maryland, as part of its
compliance filing, Washington Gas also filed revised base rates to reflect the decrease in annual
35
WGL Holdings, Inc.
Washington Gas Light Company
Part IFinancial Information
Item 1Financial Statements (continued)
Notes to Consolidated Financial Statements (Unaudited)
Washington Gas Light Company
Part IFinancial Information
Item 1Financial Statements (continued)
Notes to Consolidated Financial Statements (Unaudited)
depreciation expense
in Maryland. The MD Staff challenged Washington Gass proposed depreciation rates and supported
alternative depreciation rates which would reduce depreciation expense by $11,426,000. On May 12,
2010 the Commission approved the revised depreciation rates and base rates proposed by Staff
effective June 1, 2010. On May 25, 2010, Washington Gas filed a revised compliance filing
reflecting the $11,426,000 reduction in base rates.
NON-UTILITY OPERATIONS
Construction Project Financing
To fund certain of its construction projects, Washington Gas enters into financing
arrangements with third party lenders. As part of these financing arrangements, Washington Gass
customers agree to make principal and interest payments over a period of time, typically beginning
after the projects are completed. Washington Gas assigns these customer payment streams to the
lender in exchange for the contract payments paid to Washington Gas during the construction period.
As the lender funds the construction project, Washington Gas establishes a receivable representing
its customers obligations to remit principal and interest and a long-term payable to the lender.
When these projects are formally accepted by the customer as completed, Washington Gas transfers
the ownership of the receivable to the lender and removes both the receivable and the long-term
financing from its financial statements. As of June 30, 2010, work on these construction projects
that was not completed or accepted by customers was valued at $6.3 million, which is recorded on
the balance sheet as a receivable in Deferred Charges and Other AssetsOther with the
corresponding long-term obligation to the lender in Long-term debt. At any time before these
contracts are accepted by the customer, should there be a contract default, such as, among other
things, a delay in completing the project, the lender may call on Washington Gas to fund the unpaid
principal in exchange for which Washington Gas would receive the right to the stream of payments
from the customer. Once the project is accepted by the customer, the lender will have no recourse
against Washington Gas related to this long-term debt.
Financial Guarantees
WGL Holdings has guaranteed payments for certain purchases of natural gas and electricity on
behalf of the retail energy-marketing segment. At June 30, 2010, these guarantees totaled $543.6
million. The amount of such guarantees is periodically adjusted to reflect changes in the level of
financial exposure related to these purchase commitments. We also receive financial guarantees or
other collateral from suppliers when required by our credit policy. WGL Holdings has issued
guarantees related to purchase commitments of its Capitol Energy Ventures subsidiary. At June 30,
2010, these guarantees totaled $18.0 million. WGL Holdings also issued guarantees totaling $3.0
million at June 30, 2010 that were made on behalf of certain of our non-utility subsidiaries
associated with their banking transactions. Of the total guarantees of $564.6 million, $42.0
million are due to expire on December 31, 2010. The remaining guarantees do not have specific
maturity dates. For all of its financial guarantees, WGL Holdings may cancel any or all future
obligations imposed by the guarantees upon written notice to the counterparty; however, WGL
Holdings would continue to be responsible for the obligations that had been created under the
guarantees prior to the effective date of the cancellation.
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WGL Holdings, Inc.
Washington Gas Light Company
Part IFinancial Information
Item 1Financial Statements (concluded)
Notes to Consolidated Financial Statements (Unaudited)
Washington Gas Light Company
Part IFinancial Information
Item 1Financial Statements (concluded)
Notes to Consolidated Financial Statements (Unaudited)
NOTE 15. PENSION AND OTHER POST-RETIREMENT BENEFIT PLANS
The following tables show the components of net periodic benefit costs (income) recognized in
our financial statements during the three and nine months ended June 30, 2010 and 2009:
Components of Net Periodic Benefit Costs (Income)
Three Months Ended June 30, | ||||||||||||||||
2010 | 2009 | |||||||||||||||
Pension | Health and | Pension | Health and | |||||||||||||
(In thousands) | Benefits | Life Benefits | Benefits | Life Benefits | ||||||||||||
Components of net periodic benefit costs (income) |
||||||||||||||||
Service cost |
$ | 2,438 | $ | 1,648 | $ | 2,117 | $ | 1,283 | ||||||||
Interest cost |
10,478 | 6,331 | 10,678 | 6,257 | ||||||||||||
Expected return on plan assets |
(11,419 | ) | (4,605 | ) | (12,888 | ) | (4,492 | ) | ||||||||
Amortization of prior service cost |
262 | (1,005 | ) | 429 | (1,005 | ) | ||||||||||
Amortization of actuarial loss |
1,050 | 2,196 | 104 | 1,231 | ||||||||||||
Amortization of transition obligation |
- | 272 | - | 272 | ||||||||||||
Partial settlement of the Supplemental Executive Retirement Program |
3,529 | - | - | - | ||||||||||||
Net periodic benefit cost |
6,338 | 4,837 | 440 | 3,546 | ||||||||||||
Amount allocated to construction projects |
(265 | ) | (787 | ) | 34 | (559 | ) | |||||||||
Amount
deferred as regulatory asset/liability - net |
(1,308 | ) | 504 | (991 | ) | 833 | ||||||||||
Other |
6 | - | 72 | - | ||||||||||||
Amount charged (credited) to expense |
$ | 4,771 | $ | 4,554 | $ | (445 | ) | $ | 3,820 | |||||||
Components of Net Periodic Benefit Costs (Income)
Nine Months Ended June 30, | ||||||||||||||||
2010 | 2009 | |||||||||||||||
Pension | Health and | Pension | Health and | |||||||||||||
(In thousands) | Benefits | Life Benefits | Benefits | Life Benefits | ||||||||||||
Components of net periodic benefit costs (income) |
||||||||||||||||
Service cost |
$ | 7,338 | $ | 4,944 | $ | 6,351 | $ | 3,849 | ||||||||
Interest cost |
31,814 | 18,993 | 32,034 | 18,771 | ||||||||||||
Expected return on plan assets |
(34,593 | ) | (13,815 | ) | (38,665 | ) | (13,476 | ) | ||||||||
Amortization of prior service cost |
793 | (3,016 | ) | 1,288 | (3,016 | ) | ||||||||||
Amortization of actuarial loss |
3,207 | 6,586 | 312 | 3,693 | ||||||||||||
Amortization of transition obligation |
- | 815 | - | 815 | ||||||||||||
Partial settlement of the Supplemental Executive Retirement Program |
3,529 | - | - | - | ||||||||||||
Net periodic benefit cost |
12,088 | 14,507 | 1,320 | 10,636 | ||||||||||||
Amount allocated to construction projects |
(789 | ) | (2,314 | ) | 100 | (1,659 | ) | |||||||||
Amount
deferred as regulatory asset/liability - net |
(3,921 | ) | 1,513 | (2,972 | ) | 2,499 | ||||||||||
Other |
21 | - | 22 | - | ||||||||||||
Amount charged (credited) to expense |
$ | 7,399 | $ | 13,706 | $ | (1,530 | ) | $ | 11,476 | |||||||
Amounts included in the line item Amount deferred as regulatory asset/liability-net, as shown in the table above, represent the
difference between the cost of the applicable Pension Benefits or the Health and Life Benefits and the amount that Washington Gas is
permitted to recover in rates that it charges to customers in the District of Columbia.
Under the new changes to the defined contribution savings plan announced on July 20, 2009, 65 employees elected to cease participating in
the non-contributory defined benefit plan in return for receiving an enhanced contribution under the defined contribution savings plan.
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Washington Gas Light Company
Part IFinancial Information
Item 2Managements Discussion and Analysis of
Financial Condition and Results of Operations
Washington Gas Light Company
Part IFinancial Information
Item 2Managements Discussion and Analysis of
Financial Condition and Results of Operations
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
INTRODUCTION
This Managements Discussion and Analysis of Financial Condition and Results of Operations
(Managements Discussion) analyzes the financial condition, results of operations and cash flows of
WGL Holdings, Inc. (WGL Holdings) and its subsidiaries and should be read in conjunction with our
unaudited financial statements and the accompanying notes in this quarterly report, as well as our
combined Annual Report on Form 10-K for WGL Holdings and Washington Gas Light Company (Washington
Gas) for the fiscal year ended September 30, 2009 (2009 Annual Report). Except where the content
clearly indicates otherwise, WGL Holdings, we, us or our refers to the holding company or
the consolidated entity of WGL Holdings and all of its subsidiaries.
Managements Discussion is divided into the following two major sections:
| WGL HoldingsThis section describes the financial condition and results of operations of WGL Holdings and its subsidiaries on a consolidated basis. It includes discussions of our regulated and unregulated operations. WGL Holdings operations are derived from the results of Washington Gas and the results of our non-utility operations. | ||
| Washington GasThis section describes the financial condition and results of operations of Washington Gas, a wholly owned subsidiary that comprises the majority of our regulated utility segment. |
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 Holdings, through its wholly owned 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. WGL Holdings has three
operating segments that are described below.
Regulated Utility. With approximately 91% of our consolidated total assets, the regulated
utility segment consists of Washington Gas and Hampshire Gas Company (Hampshire). Washington Gas, a
wholly owned subsidiary of WGL Holdings, delivers natural gas to retail customers in accordance
with tariffs approved by the regulatory commissions that have jurisdiction over Washington Gass
rates. Washington Gas also sells natural gas to customers who have not elected to purchase natural
gas from unregulated third party marketers.
The rates charged to utility customers, are designed to recover Washington Gass operating
expenses and natural gas commodity costs and to provide a return on its investment in the net
assets used in its firm gas sales and delivery service. Washington Gas recovers the cost of the
natural gas to serve firm customers through the gas cost recovery mechanisms as approved in
jurisdictional tariffs. Any difference between the firm customer gas costs incurred and the gas
costs recovered from those firm customers is deferred on the balance sheet as an amount to be
collected from or refunded to customers in future periods. Therefore, increases or decreases in the
cost of gas associated with sales made to firm customers have no direct effect on Washington Gass
net revenues and net income.
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WGL Holdings, Inc.
Washington Gas Light Company
Part IFinancial Information
Item 2Managements Discussion and Analysis of
Financial Condition and Results of Operations (continued)
Washington Gas Light Company
Part IFinancial Information
Item 2Managements Discussion and Analysis of
Financial Condition and Results of Operations (continued)
Washington Gass asset optimization program utilizes Washington Gass storage and
transportation capacity resources when those assets are not fully utilized to physically serve utility customers.
The objective of this program is to derive a profit to be shared with its utility customers (refer to the
section entitled Market Risk for further discussion of our asset optimization program)
by entering into commodity-related physical and financial contracts with third parties. Unless
otherwise noted, therm deliveries shown related to Washington Gas or the regulated utility segment
do not include therm deliveries related to our asset optimization program.
Hampshire, a wholly owned subsidiary of WGL Holdings, is regulated by the Federal Energy
Regulatory Commission (FERC). Hampshire operates and owns full and partial interests in underground
natural gas storage facilities including pipeline delivery facilities located in and around
Hampshire County, West Virginia. Washington Gas purchases all of the storage services of Hampshire
and includes the cost of these services in the bills sent to its customers. Hampshire operates
under a pass-through cost of service-based tariff approved by the FERC, and adjusts its billing
rates to Washington Gas on a periodic basis to account for changes in its investment in utility
plant and associated expenses.
Retail Energy-Marketing. The retail energy-marketing segment consists of the operations of
Washington Gas Energy Services, Inc. (WGEServices), a wholly owned subsidiary of Washington Gas
Resources. WGEServices competes with regulated utilities and other unregulated third party
marketers to sell natural gas and/or electricity directly to residential, commercial and industrial
customers in Maryland, Virginia, Delaware, Pennsylvania and the District of Columbia. WGEServices
contracts for its supply needs and buys and resells natural gas and electricity with the objective
of earning a profit through competitively priced contracts with end-users. These commodities are
delivered to retail customers through the distribution systems owned by regulated utilities such as
Washington Gas or other unaffiliated natural gas or electric utilities. WGEServices is also
expanding its renewable energy and energy conservation product and service offerings. Other than
its Solar Photovoltaic (Solar PV) facilities, WGEServices does not own or operate any natural gas
or electric generation, production, transmission or distribution assets. Continued expansion may
include the ownership of other renewable energy producing assets.
Design-Build Energy Systems. Our design-build energy systems segment, which consists of the
operations of Washington Gas Energy Systems, Inc. (WGESystems), provides design-build energy
efficient and sustainable solutions to government and commercial clients. WGESystems focuses on
upgrading the mechanical, electrical, water and energy-related systems of large government and
commercial facilities by implementing both traditional as well as alternative energy technologies,
primarily in the District of Columbia, Maryland and Virginia.
PRIMARY FACTORS AFFECTING WGL HOLDINGS AND WASHINGTON GAS
The principal business, economic and other factors that affect our operations and/or financial
performance include:
| weather conditions and weather patterns; | |
| regulatory environment and regulatory decisions; | |
| availability of natural gas supply and pipeline transportation and storage capacity; | |
| diversity of natural gas supply; | |
| volatility of natural gas prices; | |
| non-weather related changes in natural gas consumption patterns; | |
| maintaining the safety and reliability of the natural gas distribution system; | |
| competitive environment; |
39
WGL Holdings, Inc.
Washington Gas Light Company
Part IFinancial Information
Item 2Managements Discussion and Analysis of
Financial Condition and Results of Operations (continued)
Washington Gas Light Company
Part IFinancial Information
Item 2Managements Discussion and Analysis of
Financial Condition and Results of Operations (continued)
| environmental matters; | |
| industry consolidation; | |
| economic conditions and interest rates; | |
| inflation/deflation; | |
| use of business process outsourcing; | |
| labor contracts, including labor and benefit costs; and | |
| changes in accounting principles. |
For further discussion of the factors listed above, refer to Managements Discussion within
the 2009 Annual Report. Also, refer to the section entitled Safe Harbor for Forward-Looking
Statements included in this quarterly report for a listing of forward-looking statements related
to factors affecting WGL Holdings and Washington Gas.
CRITICAL ACCOUNTING POLICIES
The preparation of financial statements and related disclosures in compliance with GAAP
requires the selection and the application of appropriate technical accounting guidance to the
relevant facts and circumstances of our operations, as well as our use of estimates to compile the
consolidated financial statements. The application of these accounting policies involves judgment
regarding estimates and projected outcomes of future events, including the likelihood of success of
particular regulatory initiatives, the likelihood of realizing estimates for legal and
environmental contingencies and the probability of recovering costs and investments in both the
regulated utility and non-regulated business segments.
We have identified the following critical accounting policies that require our judgment and
estimation, where the resulting estimates may have a material effect on the consolidated financial
statements:
| accounting for unbilled revenue; | ||
| accounting for regulatory operations regulatory assets and liabilities; | ||
| accounting for income taxes; | ||
| accounting for contingencies; | ||
| accounting for derivative instruments; | ||
| accounting for pension and other post-retirement benefit plans and | ||
| accounting for stock based compensation. |
For a description of these critical accounting policies, refer to Managements Discussion
within the 2009 Annual Report. Refer to Note 1 of the Notes to Consolidated Financial Statements in
this quarterly report for a discussion of newly implemented accounting policies.
40
WGL Holdings, Inc.
Washington Gas Light Company
Part IFinancial Information
Item 2Managements Discussion and Analysis of
Financial Condition and Results of Operations (continued)
Washington Gas Light Company
Part IFinancial Information
Item 2Managements Discussion and Analysis of
Financial Condition and Results of Operations (continued)
WGL HOLDINGS, INC.
RESULTS OF OPERATIONS Three Months Ended June 30, 2010 vs. June 30, 2009
We analyze the operating results of the regulated utility segment using utility net revenues
and the retail energy-marketing segment using gross margins. Both utility net revenues and gross
margins are calculated as revenues less the associated cost of energy and applicable revenue taxes.
We believe utility net revenues is a better measure to analyze profitability than gross operating
revenues for our regulated utility segment because 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. We consider gross margins to be a better reflection of
profitability 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.
Neither utility net revenues nor gross margins should be considered as an alternative to, or a
more meaningful indicator of, our operating performance than net income. Our measures of utility
net revenues and gross margins may not be comparable to similarly titled measures of other
companies. Refer to the sections entitled Results of Operations Regulated Utility Operating
Results and Results of Operations Non-Utility Operating Results for the calculation of utility
net revenues and gross margins, respectively, as well as a reconciliation to operating income and
net income for both segments.
Summary Results
WGL Holdings reported net income applicable to common stock of $9.7 million, or $0.19 per
share, for the three months ended June 30, 2010 over net income applicable to common stock of $1.8
million, or $0.04 per share, reported for the three months ended June 30, 2009.
The comparison of results for the three month period ended June 30, 2010 compared to the same
period of the prior fiscal year primarily reflect an increase in earnings from our retail
energy-marketing segment partially offset by a decrease in earnings from the regulated utility and
design-build energy system segments.
The following table summarizes our net income (loss) applicable to common stock by operating
segment for the three months ended June 30, 2010 and 2009.
Net Income (Loss) by Operating Segment | ||||||||||||
Three Months Ended | ||||||||||||
June 30, | Increase/ | |||||||||||
(In millions) | 2010 | 2009 | (Decrease) | |||||||||
Regulated Utility |
$ | (10.5 | ) | $ | (2.4 | ) | $ | (8.1 | ) | |||
Non-utility operations: |
||||||||||||
Retail Energy-Marketing |
20.7 | 3.9 | 16.8 | |||||||||
Design-Build Energy Systems |
- | 0.8 | (0.8 | ) | ||||||||
Other, principally non-utility activities |
(0.5 | ) | (0.5 | ) | - | |||||||
Total non-utility |
20.2 | 4.2 | 16.0 | |||||||||
Net Income applicable to common stock |
$ | 9.7 | $ | 1.8 | $ | 7.9 | ||||||
EARNINGS PER AVERAGE COMMON SHARE |
||||||||||||
Basic |
$ | 0.19 | $ | 0.04 | $ | 0.15 | ||||||
Diluted |
$ | 0.19 | $ | 0.04 | $ | 0.15 | ||||||
41
WGL Holdings, Inc.
Washington Gas Light Company
Part IFinancial Information
Item 2Managements Discussion and Analysis of
Financial Condition and Results of Operations (continued)
Washington Gas Light Company
Part IFinancial Information
Item 2Managements Discussion and Analysis of
Financial Condition and Results of Operations (continued)
Regulated Utility Operating Results
The following table summarizes the regulated utility
segments operating results for the three months
ended June 30, 2010 and 2009.
Regulated Utility Operating Results | ||||||||||||
Three Months Ended | ||||||||||||
June 30, | Increase/ | |||||||||||
(In millions) | 2010 | 2009 | (Decrease) | |||||||||
Utility net revenues: |
||||||||||||
Operating revenues |
$ | 172.5 | $ | 190.1 | $ | (17.6 | ) | |||||
Less: Cost of gas |
64.2 | 79.3 | (15.1 | ) | ||||||||
Revenue taxes |
12.5 | 10.7 | 1.8 | |||||||||
Total utility net revenues |
95.8 | 100.1 | (4.3 | ) | ||||||||
Operation and maintenance |
67.1 | 60.9 | 6.2 | |||||||||
Depreciation and amortization |
23.4 | 23.0 | 0.4 | |||||||||
General taxes and other assessments |
11.7 | 11.1 | 0.6 | |||||||||
Operating income (loss) |
(6.4 | ) | 5.1 | (11.5 | ) | |||||||
Interest expense |
10.0 | 10.7 | (0.7 | ) | ||||||||
Other (income) expenses-net, including preferred stock dividends |
0.1 | (0.4 | ) | 0.5 | ||||||||
Income tax benefit |
(6.0 | ) | (2.8 | ) | (3.2 | ) | ||||||
Net loss applicable to common stock |
$ | (10.5 | ) | $ | (2.4 | ) | $ | (8.1 | ) | |||
The regulated utility segments net loss applicable to common stock was $10.5 million for
the three months ended June 30, 2010, compared to a net loss of $2.4 million for the same three
month period of the prior fiscal year. The increase in net loss primarily reflects: (i) $8.4
million of higher employee benefit expense due to changes in plan asset values and plan valuation
assumptions and a loss recognized for a partial settlement of the
Supplemental Executive Retirement Program (SERP); (ii) increased tax expense of $1.1 million reflecting a higher effective tax rate;
(iii) $1.6 million of unfavorable effects of changes in natural gas consumption patterns; (iv) a
$0.6 million decrease in unrealized margins associated with our asset optimization program and (v)
$0.5 million decrease in realized margins associated with our asset optimization program.
Partially offsetting this decrease were: (i) an increase in revenue of $0.7 million related to
growth of over 8,300 average active customer meters; (ii) $0.7 million related to uncollectible
accounts; (iii) $1.2 million due to lower regulatory obligations under the Virginia Earnings
Sharing Mechanism (ESM) and (iv) a decrease in interest expense of $0.7 million primarily due to
lower weighted average interest rates and balances associated with our borrowings.
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 June
30, 2010 and 2009.
Composition of Changes in Utility Net Revenues | ||||
Increase / | ||||
(In millions) | (Decrease) | |||
Customer growth |
$ | 0.7 | ||
Estimated Weather effects Offset by weather insurance and derivative products |
(1.3 | ) | ||
Estimated change in natural gas consumption patterns |
(1.6 | ) | ||
Asset optimization: |
||||
Unrealized mark-to-market valuations |
(0.6 | ) | ||
Realized mark-to-market valuations |
(0.5 | ) | ||
Earnings Sharing Mechanism |
1.2 | |||
Gas Administration Charge (GAC) and late fee |
(1.2 | ) | ||
Other |
(1.0 | ) | ||
Total |
$ | (4.3 | ) | |
42
WGL Holdings, Inc.
Washington Gas Light Company
Part IFinancial Information
Item 2Managements Discussion and Analysis of
Financial Condition and Results of Operations (continued)
Washington Gas Light Company
Part IFinancial Information
Item 2Managements Discussion and Analysis of
Financial Condition and Results of Operations (continued)
Customer growth Average active customer meters increased 8,300 for the three months
ended June 30, 2010 compared to the same quarter of the prior fiscal year.
Estimated weather effects Weather, when measured by HDDs, was 2.0% and 11.8% colder than
normal during the three months ended June 30, 2010 and 2009, respectively. Washington Gas
currently has a weather protection strategy that is designed to neutralize the estimated financial
effects of variations from normal weather on net income (refer to the section entitled Weather
Risk for a further discussion of our weather protection strategy). On September 21, 2009,
Washington Gas executed a heating degree day (HDD) derivative contract to manage its exposure to
variations from normal weather in the District of Columbia during fiscal year 2010. Changes in the
fair value of this derivative are reflected in operation and maintenance expense. Including the
effects of our weather protection strategy, there were no material effects on net income attributed
to colder or warmer weather on the three month periods ended June 30, 2010 and 2009.
Estimated change in natural gas consumption patterns The variance in net revenues reflects
the changes in natural gas consumption patterns in the Virginia and District of Columbia
jurisdictions. These changes may be affected by shifts in weather patterns in which customer
heating usage may not correlate highly with average historical levels of usage per HDD that occur.
Natural gas consumption patterns may also be affected by non-weather related factors.
Asset optimization We recorded net unrealized gains associated with our energy-related
derivatives of $1.4 million for the three months ended June 30, 2010 compared to net unrealized
gains of $2.0 million for the same period of 2009. When these derivatives settle, any unrealized
amounts will ultimately be reversed, and Washington Gas will realize margins when combined with the
related transactions these derivatives economically hedge. Pre-tax realized margins related to our
asset optimization program were $0.5 million lower for the quarter ended June 30, 2010 compared to
the quarter ended June 30, 2009 (Refer to the section entitled Market RiskPrice Risk Related to
the Regulated Utility Segment for a further discussion of our asset optimization program).
Earnings Sharing Mechanism The Virginia ESM shares with shareholders and customers in
Virginia, earnings that exceed a target rate of return on equity with shareholders and customers.
A regulatory obligation was recorded related to Virginia earnings during the quarter ended June 30,
2009. An obligation was not incurred under this mechanism during the quarter ended June 30, 2010.
Refer to the section entitled Rates and Regulatory Matters Performance-Based Rate Plans
included in Managements Discussion for Washington Gas for a further discussion of the ESM.
GAC Represents a regulatory mechanism in all jurisdictions that provides for recovery of
uncollectible accounts expense related to changes in gas costs. Lower recoveries reflect the lower
cost of natural gas for the three months ended June 30, 2010 compared to the same period in fiscal
year 2009. The related uncollectible accounts expense is included in operation and maintenance
expenses.
Operation and Maintenance Expenses. The following table provides the key factors contributing
to the changes in operation and maintenance expenses of the regulated utility for the three months
ended June 30, 2010 compared to the same period in 2009.
Composition of Changes in Operation and Maintenance Expenses | ||||
Increase/ | ||||
(in millions) | (Decrease) | |||
Employee benefits |
$ | 8.4 | ||
Uncollectible accounts |
(1.9 | ) | ||
Weather derivatives: |
||||
Benefit |
(1.3 | ) | ||
Premium costs and fair value effects |
0.9 | |||
Other operating expenses |
0.1 | |||
Total |
$ | 6.2 | ||
Employee benefits The increase in benefit expenses primarily reflects higher pension
and other post retirement benefits due to changes in plan asset values and discount rate
assumptions used to measure the benefit obligation and a $3.5 million
loss recognized for a partial settlement of the SERP.
43
WGL Holdings, Inc.
Washington Gas Light Company
Part IFinancial Information
Item 2Managements Discussion and Analysis of
Financial Condition and Results of Operations (continued)
Washington Gas Light Company
Part IFinancial Information
Item 2Managements Discussion and Analysis of
Financial Condition and Results of Operations (continued)
Uncollectible accounts This reduction in uncollectible accounts expense tracks the lower
revenues due to reduced gas costs reflected in the quarter ended June 30, 2010 compared to the same
quarter in fiscal year 2009. This decrease is partially offset by the change in GAC included in
utility net revenues.
Non-Utility Operating Results
Our non-utility operations comprise two business segments: (i) retail energy-marketing and
(ii) design-build energy systems. 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 three
operating segments, are aggregated as Other Activities and included as part of non-utility
operations. Other Activities includes the results of Capitol Energy Ventures. Total net income
from our non-utility operations was $20.2 million for the three months ended June 30, 2010,
compared to net income of $4.2 million for the same three-month period of the prior fiscal year.
This comparison primarily reflects increased earnings from our retail energy-marketing segment.
Retail Energy-Marketing. The following table depicts the retail energy-marketing segments
operating results along with selected statistical data.
Retail-Energy Marketing Financial and Statistical Data | ||||||||||||
Three Months Ended | ||||||||||||
June 30, | Increase / | |||||||||||
2010 | 2009 | (Decrease) | ||||||||||
Operating Results (In millions) |
||||||||||||
Gross margins: |
||||||||||||
Operating revenues |
$ | 286.2 | $ | 233.1 | $ | 53.1 | ||||||
Less: Cost of energy |
239.7 | 215.9 | 23.8 | |||||||||
Revenue taxes |
0.8 | 0.2 | 0.6 | |||||||||
Total gross margins |
45.7 | 17.0 | 28.7 | |||||||||
Operation expenses |
10.2 | 9.6 | 0.6 | |||||||||
Depreciation and amortization |
0.2 | 0.2 | - | |||||||||
General taxes and other assessments |
0.7 | 0.7 | - | |||||||||
Operating income |
34.6 | 6.5 | 28.1 | |||||||||
Interest expense |
- | 0.1 | (0.1 | ) | ||||||||
Income tax expense |
13.9 | 2.5 | 11.4 | |||||||||
Net Income |
$ | 20.7 | $ | 3.9 | $ | 16.8 | ||||||
Analysis of gross margins (In millions) |
||||||||||||
Natural gas |
||||||||||||
Realized margins |
$ | 7.8 | $ | 18.5 | $ | (10.7 | ) | |||||
Unrealized mark-to-market gains |
7.1 | 2.0 | 5.1 | |||||||||
Total gross margins natural gas |
14.9 | 20.5 | (5.6 | ) | ||||||||
Electricity Realized margins |
||||||||||||
Realized margins |
13.5 | 8.1 | 5.4 | |||||||||
Unrealized mark-to-market gains (losses) |
17.3 | (11.6 | ) | 28.9 | ||||||||
Total gross margins electricity |
30.8 | (3.5 | ) | 34.3 | ||||||||
Total gross margins |
$ | 45.7 | $ | 17.0 | $ | 28.7 | ||||||
Other Retail-Energy Marketing Statistics |
||||||||||||
Natural gas |
||||||||||||
Therm sales (millions of therms) |
87.2 | 102.8 | (15.6 | ) | ||||||||
Number of customers (end of period) |
160,900 | 148,800 | 12,100 | |||||||||
Electricity |
||||||||||||
Electricity sales (millions of kWhs) |
2,358.0 | 1,293.3 | 1,064.7 | |||||||||
Number of accounts (end of period) |
141,700 | 98,900 | 42,800 | |||||||||
44
WGL Holdings, Inc.
Washington Gas Light Company
Part IFinancial Information
Item 2Managements Discussion and Analysis of
Financial Condition and Results of Operations (continued)
Washington Gas Light Company
Part IFinancial Information
Item 2Managements Discussion and Analysis of
Financial Condition and Results of Operations (continued)
WGEServices reported net income of $20.7 million for the three months ended June 30,
2010, compared to net income of $3.9 million reported for the same three-month period of the prior
fiscal year.
The quarter-to-quarter comparison primarily reflects large unrealized net gains on an
increased number of electric sales and purchase contracts which are marked-to-market in the quarter
ended June 30, 2010, whereas these types of contracts showed unrealized net losses in the same
period of the prior year. In addition, there was significant growth in the number of electric customers served by WGEServices. This increase
is a result of favorable pricing opportunities in several markets and the extension of our service offering into new market territory.
Opportunities for expansion and growth are continually evaluated to determine if the opportunity is appropriate for WGEServices business.
Period-to-period comparisons of quarterly gross margins for this segment
can vary significantly and are not representative of expected annualized results.
Gross
margins from natural gas sales decreased $5.6 million due to a decrease in realized
margins of $10.7 million as a result of gas price movements which resulted in positive margins in the
third quarter of fiscal year 2009 and warmer weather in the third quarter of fiscal year 2010
compared to the same period in the prior year, offset by a $5.1 million increase in unrealized
mark-to-market gains associated with energy-related derivatives.
Gross margins from electric sales in the current quarter increased $34.3 million from the same
quarter of the prior period. This increase primarily reflects a $28.9 million increase in
unrealized mark-to-market gains associated with energy-related derivatives. Realized margins
increased by $5.4 million as a result of higher electric sales volumes associated with customer
growth.
Design-Build Energy Systems. The design-build energy systems segment reported a net loss of
$77,000 for the third quarter of fiscal year 2010, compared to net income of $834,000 reported for
the same period of fiscal year 2009. This decrease is primarily due to delays in the initiation of
certain planned project work for government agency customers. Operating expenses were also higher
due to increased labor expense associated with expansion plans.
Interest Expense
The following table depicts the components of the change in interest expense for WGL Holdings
for the three months ended June 30, 2010 compared to the same period in 2009.
Composition of Interest Expense Changes | ||||
Increase / | ||||
(In millions) | (Decrease) | |||
Long-term debt |
$ | (0.5 | ) | |
Short-term debt |
(0.4 | ) | ||
Other (includes AFUDC) (a) |
0.1 | |||
Total |
$ | (0.8 | ) | |
(a) | Represents Allowance for Funds Used During Construction. |
WGL Holdings interest expense of $10.0 million for the third quarter of fiscal year 2010
decreased $0.8 million from $10.8 million of the same quarter of fiscal year 2009. Lower interest
expense for the period primarily reflects lower weighted average interest rates and lower borrowing
levels.
RESULTS OF OPERATIONS Nine Months Ended June 30, 2010 vs. June 30, 2009
Summary Results
WGL Holdings reported net income applicable to common stock of $136.0 million, or $2.69 per
share, for the nine months ended June 30, 2010 compared to $131.5 million, or $2.61 per share,
reported for the nine months ended June 30, 2009.
The comparison of results for the nine month period ended June 30, 2010 compared to the same
period of the prior fiscal year primarily reflect an increase in earnings from the retail
energy-marketing partially offset by decreased earnings from our regulated utility and design-build
energy systems segments.
45
WGL Holdings, Inc.
Washington Gas Light Company
Part IFinancial Information
Item 2Managements Discussion and Analysis of
Financial Condition and Results of Operations (continued)
Washington Gas Light Company
Part IFinancial Information
Item 2Managements Discussion and Analysis of
Financial Condition and Results of Operations (continued)
The following table summarizes our net income (loss) applicable to common stock by operating
segment for the nine months ended June 30, 2010 and 2009.
Net Income (Loss) by Operating Segment | ||||||||||||
Nine Months Ended | ||||||||||||
June 30, | Increase/ | |||||||||||
(In millions) | 2010 | 2009 | (Decrease) | |||||||||
Regulated Utility |
$ | 121.2 | $ | 126.7 | $ | (5.5 | ) | |||||
Non-utility operations: |
||||||||||||
Retail Energy-Marketing |
16.8 | 3.6 | 13.2 | |||||||||
Design-Build Energy Systems |
(0.4 | ) | 2.9 | (3.3 | ) | |||||||
Other, principally non-utility activities |
(1.6 | ) | (1.7 | ) | 0.1 | |||||||
Total non-utility |
14.8 | 4.8 | 10.0 | |||||||||
Net Income applicable to common stock |
$ | 136.0 | $ | 131.5 | $ | 4.5 | ||||||
EARNINGS PER AVERAGE COMMON SHARE |
||||||||||||
Basic |
$ | 2.70 | $ | 2.63 | $ | 0.07 | ||||||
Diluted |
$ | 2.69 | $ | 2.61 | $ | 0.08 | ||||||
Regulated Utility Operating Results
The following table summarizes the regulated utility segments operating results for the nine months ended
June 30, 2010 and 2009.
Regulated Utility Operating Results | ||||||||||||
Nine Months Ended | ||||||||||||
June 30, | Increase/ | |||||||||||
(In millions) | 2010 | 2009 | (Decrease) | |||||||||
Utility net revenues: |
||||||||||||
Operating revenues |
$ | 1,190.7 | $ | 1,371.9 | $ | (181.2 | ) | |||||
Less: Cost of gas |
596.4 | 778.1 | (181.7 | ) | ||||||||
Revenue taxes |
54.2 | 52.9 | 1.3 | |||||||||
Total utility net revenues |
540.1 | 540.9 | (0.8 | ) | ||||||||
Operation and maintenance |
196.7 | 190.6 | 6.1 | |||||||||
Depreciation and amortization |
71.4 | 70.9 | 0.5 | |||||||||
General taxes and other assessments |
41.2 | 38.7 | 2.5 | |||||||||
Operating income |
230.8 | 240.7 | (9.9 | ) | ||||||||
Interest expense |
29.8 | 33.8 | (4.0 | ) | ||||||||
Other (income) expenses-net, including preferred stock dividends |
0.2 | (0.2 | ) | 0.4 | ||||||||
Income tax expense |
79.6 | 80.4 | (0.8 | ) | ||||||||
Net income |
$ | 121.2 | $ | 126.7 | $ | (5.5 | ) | |||||
The regulated utility segments net income applicable to common stock was $121.2 million
for the nine months ended June 30, 2010 compared to $126.7 million for the same nine month period
of the prior fiscal year. The decrease in net income primarily reflects: (i) $12.4 million in
higher employee benefit expense due to changes in plan asset values
and plan valuation assumptions and a loss recognized for a
partial settlement of the SERP;
(ii) a $6.6 million decrease in the recovery of storage carrying costs on lower average storage gas
inventory balances; and (iii) a $4.6 million reversal of a reserve in fiscal year 2009 for
disallowed natural gas costs in Maryland due to a favorable February 5, 2009 order from the Public
Service Commission of Maryland (PSC of MD); (iv) $2.0 million in higher property taxes; and (v)
$1.6 million in higher taxes reflecting a higher effective income tax rate. Partially offsetting
this decrease was: (i) $5.0 million of favorable effects of changes in natural gas consumption
patterns; (ii) $5.1 million related to the Virginia Earnings Sharing Mechanism (ESM); (iii) a
decrease in interest expense of $4.0 million primarily due to lower weighted average
46
WGL Holdings, Inc.
Washington Gas Light Company
Part IFinancial Information
Item 2Managements Discussion and Analysis of
Financial Condition and Results of Operations (continued)
Washington Gas Light Company
Part IFinancial Information
Item 2Managements Discussion and Analysis of
Financial Condition and Results of Operations (continued)
interest rates associated with our borrowings;
(iv) an increase in revenues of $3.4 million reflecting the growth of over 8,600 average active
customer meters; (v) a $3.0 million increase in unrealized margins associated with our asset
optimization program and (vi) $2.2 million lower costs for weather protection products related to
the District of Columbia.
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, 2010 and 2009.
Composition of Changes in Utility Net Revenues | ||||
Increase / | ||||
(In millions) | (Decrease) | |||
Customer growth |
$ | 3.4 | ||
Estimated Weather effects Offset by weather insurance and derivative products |
(2.2 | ) | ||
Estimated change in natural gas consumption patterns |
5.0 | |||
Gas administrative charge (GAC) |
(2.9 | ) | ||
Asset optimization: |
||||
Realized margins |
0.3 | |||
Unrealized mark-to-market valuations |
3.0 | |||
Storage carrying costs |
(6.6 | ) | ||
Earnings Sharing Mechanism (ESM) |
5.1 | |||
Reversal of reserve for natural gas costs |
(4.6 | ) | ||
DC ROW and DC Trust Fund |
(0.7 | ) | ||
Other |
(0.6 | ) | ||
Total |
$ | (0.8 | ) | |
Customer growth Average active customer meters increased 8,694 for the nine months
ended June 30, 2010 compared to the same period of the prior fiscal year.
Estimated weather effects Weather, when measured by HDDs, was 2.0% and 11.8% colder than
normal during the nine months ended June 30, 2010 and 2009, respectively. Washington Gas currently
has a weather protection strategy that is designed to neutralize the estimated financial effects of
variations from normal weather on net income (refer to the section entitled Weather Risk for a
further discussion of our weather protection strategy). On September 21, 2009, Washington Gas
executed a heating degree day (HDD) derivative contract to manage its exposure to variations from
normal weather in the District of Columbia during fiscal year 2010. Changes in the fair value of
this derivative are reflected in operation and maintenance expense. Including the effects of our
weather protection strategy, there were no material effects on net income attributed to colder or
warmer weather on the nine month periods ended June 30, 2010 and 2009.
Estimated change in natural gas consumption patterns The variance in net revenues reflects
the changes in natural gas consumption patterns in the Virginia and District of Columbia
jurisdictions. These changes may be affected by shifts in weather patterns in which customer
heating usage may not correlate highly with average historical levels of usage per HDD that occur.
Natural gas consumption patterns may also be affected by non-weather related factors.
GAC Represents a regulatory mechanism in all jurisdictions that provides for recovery of
uncollectible accounts expense related to changes in gas costs. Lower recoveries reflect the lower
cost of natural gas for the nine months of fiscal year 2010 compared to the same period in fiscal
year 2009. The related uncollectible accounts expense is included in operation and maintenance
expenses.
Asset optimization We recorded net unrealized gains associated with our energy-related
derivatives of $13.4 million for the nine months ended June 30, 2010 compared to net unrealized
gains of $10.4 million for the same period of 2009. When these derivatives settle, any unrealized
amounts will ultimately be reversed, and Washington Gas will realize margins when combined with the
related transactions these derivatives economically hedge. Pre-tax realized margins related to our
asset optimization program were $0.3 million higher for the nine months ended June 30, 2010 compared to
the nine months ended June 30, 2009.
47
WGL Holdings, Inc.
Washington Gas Light Company
Part IFinancial Information
Item 2Managements Discussion and Analysis of
Financial Condition and Results of Operations (continued)
Washington Gas Light Company
Part IFinancial Information
Item 2Managements Discussion and Analysis of
Financial Condition and Results of Operations (continued)
(Refer to the section entitled Market RiskPrice
Risk Related to the Regulated Utility Segment for a further discussion of our asset optimization
program).
Storage carrying costs Each jurisdiction provides for the recovery of carrying costs based
on the cost of capital in each jurisdiction, multiplied by the monthly average balance of storage
gas inventory. The decrease in the nine months ended June 30, 2010 is due to lower average storage
gas inventory investment balances primarily reflecting a lower weighted average cost of gas in
inventory during the current period compared to the same period of the prior year.
Earnings Sharing Mechanism The Virginia ESM shares with shareholders and customers in
Virginia, earnings that exceed a target rate of return on equity. A regulatory obligation was
recorded related to Virginia earnings during the nine months of fiscal year 2009 of $5.1 million.
An obligation was not incurred under this mechanism during the nine months ended June 30, 2010.
Refer to the section entitled Rates and Regulatory Matters Performance-Based Rate Plans
included in Managements Discussion for Washington Gas for a further discussion of the ESM.
Reserve for disallowance of natural gas costs In the second quarter of fiscal year 2009,
Washington Gas reversed a $4.6 million reserve for disallowed natural gas costs in Maryland to
income due to a favorable February 5, 2009 order from the PSC of MD. This order resolved a
contingency related to a proposed order issued by a Hearing Examiner of the PSC of MD in fiscal
year 2006. Refer to the section entitled Rates and Regulatory Matters in Managements Discussion
for Washington Gas for further discussion of this matter.
Operation and Maintenance Expenses. The following table provides the key factors contributing
to the changes in operation and maintenance expenses of the regulated utility for the nine months
ended June 30, 2010 compared to the same period in 2009.
Composition of Changes in Operation and Maintenance Expenses | ||||
Increase/ | ||||
(in millions) | (Decrease) | |||
Employee benefits |
$ | 12.4 | ||
Uncollectible accounts |
(3.1 | ) | ||
Weather derivatives |
||||
Premium costs and fair value effects |
(2.4 | ) | ||
Benefit |
(2.2 | ) | ||
Other |
1.4 | |||
Total |
$ | 6.1 | ||
Employee benefits The increase in benefit expenses primarily reflects higher pension
and other post retirement benefits due to changes in plan asset values and discount rate
assumptions used to measure the benefit obligation and a $3.5 million
loss recognized for a partial settlement of the SERP.
Uncollectible accounts This reduction in uncollectible accounts expense tracks the lower
revenues due to reduced gas costs reflected in the nine months of fiscal year 2010 compared to the
same nine month period of the prior fiscal year. This decrease is partially offset by the GAC
included in revenues.
Weather derivatives Washington Gas recorded losses of $0.8 million and $3.0 million related
to its weather derivatives as a direct result of the colder-than-normal weather for the nine months
ended June 30, 2010 and 2009, respectively. These losses are offset by the effect of weather on
utility net revenues. The decrease in expenses associated with weather derivatives reflects a
combination of lower transaction costs and the effects of weather. Warmer weather in the nine
months of fiscal year 2010 resulted in lower derivative losses.
Non-Utility Operating Results
Our non-utility operations are comprised of two business segments: (i) retail energy-marketing
and (ii) design-build energy systems. 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 three
operating segments, are aggregated as Other Activities and included as part of non-utility
48
WGL Holdings, Inc.
Washington Gas Light Company
Part IFinancial Information
Item 2Managements Discussion and Analysis of
Financial Condition and Results of Operations (continued)
Washington Gas Light Company
Part IFinancial Information
Item 2Managements Discussion and Analysis of
Financial Condition and Results of Operations (continued)
operations. Total net income from our non-utility operations was $14.8 million for the nine months
ended June 30, 2010 compared to $4.8 million for the same nine-month period of the prior fiscal
year. This comparison primarily reflects increased earnings from our retail energy-marketing
segment.
Retail Energy-Marketing. The following table depicts the retail energy-marketing segments
operating results along with selected statistical data.
Retail-Energy Marketing Financial and Statistical Data | ||||||||||||
Nine Months Ended | ||||||||||||
June 30, | Increase / | |||||||||||
2010 | 2009 | (Decrease) | ||||||||||
Operating Results (In millions) |
||||||||||||
Gross margins: |
||||||||||||
Operating revenues |
$ | 1,060.3 | $ | 916.1 | $ | 144.2 | ||||||
Less: Cost of energy |
998.1 | 881.2 | 116.9 | |||||||||
Revenue taxes |
2.1 | 0.5 | 1.6 | |||||||||
Total gross margins |
60.1 | 34.4 | 25.7 | |||||||||
Operation expenses |
28.9 | 24.9 | 4.0 | |||||||||
Depreciation and amortization |
0.6 | 0.6 | - | |||||||||
General taxes and other assessmentsother |
2.5 | 2.3 | 0.2 | |||||||||
Operating income |
28.1 | 6.6 | 21.5 | |||||||||
Other income (expenses) net |
| 0.1 | (0.1 | ) | ||||||||
Interest expense |
0.1 | 0.6 | (0.5 | ) | ||||||||
Income tax expense |
11.2 | 2.5 | 8.7 | |||||||||
Net Income |
$ | 16.8 | $ | 3.6 | $ | 13.2 | ||||||
Analysis of gross margins (In millions) |
||||||||||||
Natural gas |
||||||||||||
Realized margins |
$ | 26.5 | $ | 31.6 | $ | (5.1 | ) | |||||
Unrealized mark-to-market losses |
(9.6 | ) | (3.4 | ) | (6.2 | ) | ||||||
Total gross margins natural gas |
16.9 | 28.2 | (11.3 | ) | ||||||||
Electricity |
||||||||||||
Realized margins |
33.7 | 29.9 | 3.8 | |||||||||
Unrealized mark-to-market gains (losses) |
9.5 | (23.7 | ) | 33.2 | ||||||||
Total gross margins electricity |
43.2 | 6.2 | 37.0 | |||||||||
Total gross margins |
$ | 60.1 | $ | 34.4 | $ | 25.7 | ||||||
Other Retail-Energy Marketing Statistics |
||||||||||||
Natural gas |
||||||||||||
Therm sales (millions of therms) |
530.1 | 565.0 | (34.9 | ) | ||||||||
Number of customers (end of period) |
160,900 | 148,800 | 12,100 | |||||||||
Electricity |
||||||||||||
Electricity sales (millions of kWhs) |
6,366.2 | 3,176.3 | 3,189.9 | |||||||||
Number of accounts (end of period) |
141,700 | 98,900 | 42,800 | |||||||||
WGEServices reported net income of $16.8 million for the nine months ended June 30, 2010,
compared to net income of $3.6 million reported for the same nine month period of the prior fiscal
year.
The year-to-date comparison primarily reflects lower gross margins from natural gas activity
offset by higher gross margins related to electric sales. Operation expenses increased, reflecting
the growth in customer base.
There was significant growth in the number of electric customers served by WGEServices. This increase
is a result of favorable pricing opportunities in several markets and the extension of our service offering into new market territory.
Opportunities for expansion and growth are continually evaluated to determine if the opportunity is appropriate for WGEServices business.
Period-to-period comparisons of year-to-date gross margins for this
segment can vary significantly and are not representative of expected annualized results.
Gross
margins from natural gas sales decreased $11.3 million in the nine months ended June 30,
2010 compared to the same period in the prior fiscal year. This decrease reflects a $6.2 million
decrease as a result of unrealized mark-to-market losses
49
WGL Holdings, Inc.
Washington Gas Light Company
Part IFinancial Information
Item 2Managements Discussion and Analysis of
Financial Condition and Results of Operations (continued)
Washington Gas Light Company
Part IFinancial Information
Item 2Managements Discussion and Analysis of
Financial Condition and Results of Operations (continued)
associated with energy-related derivatives
and a decrease of $5.1 million in realized margins. Realized margins decreased primarily due to
lower sales volumes resulting from warmer weather in the nine months of fiscal year 2010 compared
to the same period in the prior year and by gas price movements that resulted in positive margins
in fiscal year 2009.
Gross margins from electric sales increased $37.0 million in the nine months ended June 30,
2010 compared to the same period of the prior fiscal year. This increase reflects a $33.2 million
increase as a result of unrealized mark-to-market gains associated with energy-related derivatives as well as an increase in realized
margins of $3.8 million. Realized margins were higher due to an increase in electric sales volumes
associated with customer growth.
Design-Build Energy Systems. The design-build energy systems segment reported a net loss of $0.4
million for the nine months of fiscal year 2010, compared to net income of $2.9 million reported
for the nine month period of fiscal year 2009. This decrease is primarily due to delays in the
initiation of certain planned project work for government agency customers. Operating expenses
were also higher due to increased labor expense associated with expansion plans.
Interest Expense
The following table depicts the components of the change in interest expense for WGL Holdings
from the nine months ended June 30, 2010 compared to the same period in 2009.
Composition of Interest Expense Changes | ||||
Increase / | ||||
(In millions) | (Decrease) | |||
Long-term debt |
$ | (1.1 | ) | |
Short-term debt |
(3.2 | ) | ||
Other (includes AFUDC) (a) |
(0.2 | ) | ||
Total |
$ | (4.5 | ) | |
(a) | Represents Allowance for Funds Used During Construction. |
WGL Holdings interest expense of $30.0 million for the nine months ended June 30, 2010
decreased $4.5 million from $34.5 million for the same nine month period of the prior fiscal year.
Lower interest expense for the period primarily reflects lower weighted average interest rates and
lower borrowing levels.
LIQUIDITY AND CAPITAL RESOURCES
General Factors Affecting Liquidity
It is important for us to have access to short-term debt markets to maintain satisfactory
liquidity to operate our businesses on a near-term basis. Acquisition of natural gas, electricity,
pipeline capacity and the need to finance accounts receivable and storage gas inventory are our
most significant short-term financing requirements. The need for long-term capital is driven
primarily by capital expenditures and maturities of long-term debt.
Our ability to obtain adequate and cost effective financing depends on our credit ratings as
well as the liquidity of financial markets. Our credit ratings depend largely on the financial
performance of our subsidiaries, and a downgrade in our current credit ratings could require us to
post additional collateral with our wholesale counterparties and adversely affect our borrowing
costs, as well as our access to sources of liquidity and capital. Also potentially affecting access
to short-term debt capital is the nature of any restrictions that might be placed upon us, such as
ratings triggers or a requirement to provide creditors with additional credit support in the event
of a determination of insufficient creditworthiness. During the nine months ended June 30, 2010, we
met our liquidity needs at reasonable cost through the issuance of commercial paper by WGL Holdings
and Washington Gas and the issuance of debt securities by Washington Gas to support its operations.
50
WGL Holdings, Inc.
Washington Gas Light Company
Part IFinancial Information
Item 2Managements Discussion and Analysis of
Financial Condition and Results of Operations (continued)
Washington Gas Light Company
Part IFinancial Information
Item 2Managements Discussion and Analysis of
Financial Condition and Results of Operations (continued)
The level of our capital expenditure requirements, our financial performance, our credit
ratings, and investor demand for our securities, affect the availability of long-term capital at
reasonable costs.
We have a goal to maintain our common equity ratio in the mid-50% range of total
consolidated capital. The level of this ratio varies during the fiscal year due to the seasonal
nature of our business. This seasonality is also evident in the variability of 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 our current assets are converted into cash at the end of the
winter heating season. Accomplishing this capital structure objective and maintaining sufficient
cash flow are necessary to maintain attractive credit ratings for WGL Holdings and Washington Gas,
and to allow access to capital at reasonable costs. As of June 30, 2010, total consolidated
capitalization, including current maturities of long-term debt and excluding notes payable,
comprised 64.8% common equity, 1.5% preferred stock and 33.7% long-term debt. Our cash flow
requirements
and our ability to provide satisfactory resources to meet those requirements are primarily
influenced by the activities of Washington Gas and WGEServices and, to a lesser extent, other
non-utility operations.
Our plans provide for sufficient liquidity to satisfy our financial obligations. At June
30, 2010, we did not have any restrictions on our cash balances or retained earnings that would
affect the payment of common or preferred stock dividends by WGL Holdings or Washington Gas.
Short-Term Cash Requirements and Related Financing
Washington Gass business is weather sensitive and seasonal, causing short-term cash
requirements to vary significantly during the year. Approximately 77.0% of the total therms
delivered in Washington Gass service area (excluding deliveries to two electric generation
facilities) occur during the first and second fiscal quarters. Accordingly, Washington Gas
typically generates more net income in the first nine months of the fiscal year than it does for
the entire fiscal year.
During the first six months of our fiscal year, Washington Gas generates large sales
volumes and its cash requirements peak when accounts receivable and unbilled revenues are at their
highest levels. During the last six months of our fiscal year, after the winter heating season,
Washington Gas will typically experience a seasonal net loss due to reduced demand for natural gas.
During this period, many of Washington Gass assets are converted into cash which Washington Gas
generally uses to reduce and sometimes eliminate short-term debt and to acquire storage gas for the
next heating season.
Washington Gas and WGEServices have seasonal short-term cash requirements resulting from
their need to purchase storage gas inventory in advance of the winter heating periods in which the
storage gas is sold. At June 30, 2010 and September 30, 2009, Washington Gas had investment
balances in gas storage of $156.9 million and $237.7 million, respectively. Washington Gas collects
the cost of gas under cost recovery mechanisms approved by its regulators. WGEServices collects
revenues that are designed to reimburse its commodity costs used to supply its retail customer
contracts. Variations in the timing of cash receipts from customers under these collection methods
can significantly affect short-term cash requirements. In addition, both Washington Gas and
WGEServices pay their respective commodity suppliers before collecting the accounts receivable
balances resulting from these sales. WGEServices derives its funding to finance these activities
from short-term debt issued by WGL Holdings. Additionally, WGEServices may be required to post
collateral, either parent guarantees from WGL Holdings or cash, for certain purchases.
Variations in the timing of collections of gas costs under Washington Gass gas cost
recovery mechanisms can significantly affect short-term cash requirements. At June 30, 2010,
Washington Gas had a $5.5 million balance of unrecovered gas costs due from customers related to the
most recent twelve month gas cost recovery cycle ended August 31, 2009. Most of this balance will
be collected from customers in fiscal year 2010. 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 1st of each year, at which time the accumulated
amount is transferred to gas costs due from/to customers as appropriate. At June 30, 2010,
Washington Gas had a net regulatory asset balance related to the current gas recovery cycle of $7.8
million.
WGL Holdings and Washington Gas utilize 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. The following is a summary of our committed credit agreements at June
30, 2010.
51
WGL Holdings, Inc.
Washington Gas Light Company
Part IFinancial Information
Item 2Managements Discussion and Analysis of
Financial Condition and Results of Operations (continued)
Washington Gas Light Company
Part IFinancial Information
Item 2Managements Discussion and Analysis of
Financial Condition and Results of Operations (continued)
Committed Credit Available | ||||||||||||
As of June 30, 2010 | ||||||||||||
Committed credit agreements (In millions) | WGL Holdings | Washington Gas | Total Consolidated | |||||||||
Unsecured revolving credit facility, expires August 3, 2012 (a) |
$400.0 | $300.0 | $700.0 | |||||||||
Less: Commercial Paper |
(7.0) | - | (7.0) | |||||||||
Net committed credit available |
$393.0 | $300.0 | $693.0 | |||||||||
As of September 30, 2009
Committed credit agreements (In millions) | WGL Holdings | Washington Gas | Total Consolidated | |||||||||
Unsecured revolving credit facility, expires August 3, 2012 (a) |
$400.0 | $300.0 | $700.0 | |||||||||
Less: Commercial Paper |
(59.0) | (124.8) | (183.8) | |||||||||
Net committed credit available |
$341.0 | $175.2 | $516.2 | |||||||||
(a)Both WGL Holdings and Washington Gas have the right to request
extensions with the banks approval. WGL Holdings revolving credit facility
permits it to borrow an additional $50 million, with the banks approval, for a
total of $450 million. Washington Gass revolving credit facility permits it to
borrow an additional $100 million, with the banks approval, for a total of
$400 million.
WGL Holdings typically issues commercial paper to meet its financing requirements
including cash collateral requirements posted to counterparties associated with WGEServices
contracts.
At June 30, 2010 and September 30, 2009, WGL Holdings and its subsidiaries had outstanding
notes payable in the form of commercial paper of $7.0 million and $183.8 million, respectively, at
a weighted average interest rate of 0.30% and 0.27%, respectively. Substantially all of the
outstanding notes payable balance at June 30, 2010 was commercial paper issued by WGL Holdings. Of
the outstanding notes payable balance at September 30, 2009, $59.0 million was issued by WGL
Holdings and $124.8 million was issued by Washington Gas. As of June 30, 2010 and September 30,
2009, there were no outstanding bank loans under WGL Holdings or Washington Gass revolving credit
facilities.
To manage credit risk, both Washington Gas and WGEServices may require deposits from certain
customers and suppliers, which are reported as current liabilities in Customer deposits and
advance payments. At June 30, 2010 and September 30, 2009, Customer deposits and advance
payments totaled $43.2 million and $52.9 million, respectively. For both periods, most of these
deposits related to customer deposits for Washington Gas.
For Washington Gas, deposits from customers may be refunded to the depositor-customer at
various times throughout the year based on the customers 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 Gass use of these customer deposits. Washington
Gas pays interest to its customers on these deposits in accordance with the requirements of its
regulatory commissions.
For WGEServices, deposits typically represent collateral for transactions with wholesale
counterparties for the purchase and sale of natural gas and electricity. These deposits may be
required to be repaid or increased at any time based on the current value of WGEServices net
position with the counterparty. Currently there are no restrictions on WGEServices use of deposit
funds and WGEServices pays interest to the counterparty on these deposits in accordance with its
contractual obligations. Refer to the section entitled Credit Risk for further discussion of our
management of credit risk.
Long-Term Cash Requirements and Related Financing
Our long-term cash requirements primarily depend upon the level of capital expenditures,
long-term debt maturities and decisions to refinance long-term debt. Our capital expenditures
primarily relate to adding new utility customers and system supply as well as maintaining the
safety and reliability of Washington Gass distribution system. Refer to the section entitled Capital Expenditures for discussion
of our capital expenditures forecast and our 2009 Annual Report for
further discussion of our long-term debt maturities.
52
WGL Holdings, Inc.
Washington Gas Light Company
Part IFinancial Information
Item 2Managements Discussion and Analysis of
Financial Condition and Results of Operations (continued)
Washington Gas Light Company
Part IFinancial Information
Item 2Managements Discussion and Analysis of
Financial Condition and Results of Operations (continued)
At June 30, 2010, Washington Gas had the capacity under a shelf registration to issue up to
$450.0 million of additional MTNs. Washington Gas has authority from its regulators to issue other
forms of debt, including private placements.
We are exposed to interest-rate risk associated with our debt financing. Washington Gas
utilizes derivative instruments from time to time in order to minimize its exposure to the risk of
interest-rate volatility. On July 6, 2009, Washington Gas entered into three interest-rate
derivative transactions to mitigate a substantial portion of the risk of rising interest rates
associated with future debt issuances: (i) a Treasury lock that expired August 11, 2009 at a gain
of $311,000, locking in a 3.59% Treasury yield on $50.0 million of ten-year debt that was issued on
November 2, 2009; (ii) a forward starting swap that was terminated on April 5, 2010 at a loss of
$30,000 and (iii) a forward starting swap that expired June 21, 2010 at a loss of $1.6 million. On
April 13, 2010, Washington Gas entered into a forward starting swap that expired May 12, 2010 at a
gain of $13,000, in conjunction with a call of $50.0 million of floating rate debt due August 26,
2010. On May 7, 2010, Washington Gas entered into a forward starting swap that expires November 30,
2010, and locks in a 4.16% cost for the treasury exposure on $75 million of 30-year debt. For
further discussion of our management of interest-rate risk, refer to Managements Discussion within
our 2009 Annual Report.
Security Ratings
The table below reflects the current credit ratings for the outstanding debt instruments
of WGL Holdings and Washington Gas. Changes in credit ratings may affect WGL Holdings and
Washington Gass cost of short-term and long-term debt and their access to the capital markets. A
security rating is not a recommendation to buy, sell or hold securities. The rating may be subject
to revision or withdrawal at any time by the assigning rating organization and each rating should
be evaluated independently of any other rating. On March 5, 2010, Moodys Investors Service
upgraded the commercial paper rating for WGL Holdings to Prime-2 from Not Prime. On June 16, 2010,
Standard & Poors Ratings Services upgraded the commercial paper rating for WGL Holdings and
Washington Gas to A-1+ from A-1.
Credit Ratings for Outstanding Debt Instruments | |||||||||||||||||||
WGL Holdings | Washington Gas | ||||||||||||||||||
Unsecured | Unsecured | ||||||||||||||||||
Medium-Term Notes | Commercial | Medium-Term | Commercial | ||||||||||||||||
Rating Service | (Indicative)(a) | Paper | Notes | Paper | |||||||||||||||
Fitch Ratings |
A+ | F1 | AA- | F1+ | |||||||||||||||
Moodys Investors Service |
Not Rated | P-2 | A2 | P-1 | |||||||||||||||
Standard & Poors Ratings Services (b) |
AA- | A-1+ | AA- | A-1+ | |||||||||||||||
(a) | Indicates the ratings that may be applicable if WGL Holdings were to issue unsecured MTNs. | |
(b) | On June 9, 2010, Standard & Poors Ratings Services revised its outlook on the long-term debt rating of WGL Holdings and Washington Gas from stable to negative. |
Ratings Triggers and Certain Debt Covenants
WGL Holdings and Washington Gas pay fees on their credit facilities, which in some cases are
based on the long-term debt ratings of Washington Gas. In the event the long-term debt of
Washington Gas is downgraded below certain levels, WGL Holdings and Washington Gas would be
required to pay higher fees. There are five different levels of fees. The credit facility for WGL
Holdings defines its applicable fee level as one level below the level applicable to Washington
Gas. Under the terms of the credit facilities, the lowest level facility fee is four basis points
and the highest is eight basis points.
Under the terms of WGL Holdings and Washington Gass credit agreements, the ratio of
consolidated financial indebtedness to consolidated total capitalization cannot exceed 0.65 to 1.0
(65.0%). In addition, WGL Holdings and Washington Gas are required to inform lenders of changes in
corporate existence, financial conditions, litigation and environmental warranties that might have
a material adverse effect. The failure to inform the lenders agent of changes in these areas
deemed material in nature might constitute default under the agreements. Additionally, WGL
Holdings or Washington Gass failure to pay principal or interest when due on any of its other
indebtedness may be deemed to be 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 June 30, 2010, we
were in compliance with all of the covenants under our revolving credit facilities.
53
WGL Holdings, Inc.
Washington Gas Light Company
Part IFinancial Information
Item 2Managements Discussion and Analysis of
Financial Condition and Results of Operations (continued)
Washington Gas Light Company
Part IFinancial Information
Item 2Managements Discussion and Analysis of
Financial Condition and Results of Operations (continued)
For certain of Washington Gass natural gas purchase and pipeline capacity agreements, if the
long-term debt of Washington Gas is downgraded to or below the lower of a BBB- rating by Standard &
Poors Ratings Services or a Baa3 rating by Moodys 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
counterpartys credit exposure to Washington Gas exceeds a contractually defined threshold amount,
or if Washington Gass credit rating declines, then the counterparty may require additional credit
support. At June 30, 2010, Washington Gas would not be required to supply additional credit support
by these arrangements if its long-term debt rating were to be downgraded one rating level.
WGL Holdings has guaranteed payments for certain purchases of natural gas and electricity on
behalf of its wholly-owned subsidiary, WGEServices (refer to our 2009 Annual Report for a further
discussion of these guarantees). If the credit rating of WGL Holdings declines, WGEServices may be
required to provide additional credit support for these purchase contracts. At June 30, 2010,
WGEServices would be required to provide $12.0 million in additional credit support for these
arrangements if the long-term debt rating of WGL Holdings were to be downgraded one rating level.
Cash Flows Provided by Operating Activities
The primary drivers for our operating cash flows are cash payments received from natural gas
and electricity customers, offset by our payments for natural gas and electricity costs, operation
and maintenance expenses, taxes and interest costs.
Net cash provided by operating activities totaled $368.7 million for the nine months ended
June 30, 2010. Net cash provided by operating activities reflects net income before preferred stock
dividends, as adjusted for non-cash earnings and charges and changes in working capital including:
| Accounts receivable and unbilled revenuesnet increased $78.6 million from September 30, 2009, primarily due to increased sales volumes to customers during our winter heating season and increased sales volumes associated with Washington Gass asset optimization program and WGEServices electric sales. |
| Storage gas inventory cost levels decreased $80.8 million from September 30, 2009 due to seasonal physical withdrawals. |
| Gas costs and other regulatory assets / liabilities decreased $54.5 million from September 30, 2009 primarily due to the recovery of gas cost under collections related to the prior gas cost recovery cycle and increases in the liability for weather related billing adjustment mechanisms. |
| Accumulated deferred income taxes increased by $75 million from September 30, 2009 due to a change in Washington Gass tax accounting method for repair deductions resulting in a deferral of income taxes. |
| Deferred purchased gas costsnet decreased $29.9 million primarily due to recoveries in excess of gas costs incurred. |
Cash Flows Used in Financing Activities
Cash flows used in financing activities totaled $243.8 million for the nine months ended June
30, 2010, reflecting the retirement of $176.8 million of notes payable, the retirement of $74.4
million of medium term notes and our common and preferred stock dividend payments totaling $57.0
million. Partially offsetting these cash uses was our long-term debt issuance of $51.5 million.
54
WGL Holdings, Inc.
Washington Gas Light Company
Part IFinancial Information
Item 2Managements Discussion and Analysis of
Financial Condition and Results of Operations (continued)
Washington Gas Light Company
Part IFinancial Information
Item 2Managements Discussion and Analysis of
Financial Condition and Results of Operations (continued)
Cash Flows Used in Investing Activities
During the nine months ended June 30, 2010, cash flows used in investing activities totaled
$84.5 million, which primarily consists of capital expenditures made on behalf of Washington Gas.
Capital Expenditures
We have revised our five-year capital expenditures budget as reported in our 2009 Annual
Report to reflect an increase in projected expenditure related to the replacement and betterment of
existing capacity. The revised five-year projection primarily reflects a $115.2 million increase in
total capital expenditures from $896.3 million as reported in our 2009 Annual Report, to a revised
total of $1,011.5 million. The following table depicts our revised capital expenditures budget for
fiscal years 2010 through 2014.
Projected Capital Expenditures | ||||||||||||||||||||||||
Fiscal Year Ending September 30, |
||||||||||||||||||||||||
(in millions) | 2010 | 2011 | 2012 | 2013 | 2014 | Total | ||||||||||||||||||
New business |
$ | 48.2 | $ | 61.1 | $ | 62.8 | $ | 65.3 | $ | 64.2 | $ | 301.6 | ||||||||||||
Replacements
- Other |
48.0 | 68.7 | 70.6 | 70.9 | 68.9 | 327.1 | ||||||||||||||||||
LNG storage facility |
0.1 | 0.7 | 18.0 | 64.8 | 38.1 | 121.7 | ||||||||||||||||||
SOC redevelopment project |
6.4 | 52.7 | 18.4 | - | - | 77.5 | ||||||||||||||||||
Other |
47.2 | 47.3 | 33.5 | 31.0 | 24.6 | 183.6 | ||||||||||||||||||
Total-accrual basis(a) |
$ | 149.9 | $ | 230.5 | $ | 203.3 | $ | 232.0 | $ | 195.8 | $ | 1,011.5 | ||||||||||||
(a) | Excludes Allowance for Funds Used During Construction. Includes capital expenditures accrued and capital expenditure adjustments recorded in the fiscal year. |
The 2010 to 2014 projected periods include
$301.6 million for continued growth to serve new customers, and $327.1 million primarily related to the replacement and betterment of
existing distribution facilities, including $109.1 million of expenditures for replacement projects intended to meet the requirements
of the Virginia Steps to Advance Virginias Energy (SAVE) legislation as described in an application made by Washington Gas with the
Virginia Public Service Commission on August 4, 2010. Additionally, the projected period contains capital expenditures to construct
a LNG storage facility on land owned by Washington Gas in Chillum, Maryland (refer to the section entitled Chillum LNG Facility).
Projected expenditures also reflect $77.5 million for the development of new office and operations facilities at the Springfield
Operations Center (SOC) and $183.6 million of other expenditures, which include general plant.
CONTRACTUAL OBLIGATIONS, OFF-BALANCE SHEET ARRANGEMENTS AND OTHER COMMERCIAL COMMITMENTS
Contractual Obligations
We have certain contractual obligations incurred in the normal course of business that require
us to make 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 (BPO) program.
Reference is made to the Contractual Obligations, Off-Balance Sheet Arrangements and Other
Commercial Commitments section of Managements Discussion in our 2009 Annual Report for a detailed
discussion of our contractual obligations. Note 4 of the Notes to Consolidated Financial Statements
in our 2009 Annual Report includes a discussion of long-term debt, including debt maturities. Note
13 of the Notes to Consolidated Financial Statements in our 2009 Annual Report reflects information
about the various contracts of Washington Gas and WGEServices. Additionally, refer to Note 8 regarding the increase in uncertain tax positions of $23 million and Note 14 of
the Notes to Consolidated Financial Statements regarding Commitment and Contingencies in this quarterly report.
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Construction Project Financing
To fund certain of its construction projects, Washington Gas enters into financing
arrangements with third party lenders. As part of these financing arrangements, Washington Gass
customers agree to make principal and interest payments over a period of time, typically beginning
after the projects are completed. Washington Gas assigns these customer payment streams to the
lender in exchange for the contract payments paid to Washington Gas during the construction period.
As the lender funds the construction project, Washington Gas establishes a receivable representing
its customers obligations to remit principal and interest and a long-term payable to the lender.
When these projects are formally accepted by the customer as completed, Washington Gas transfers
the ownership of the receivable to the lender and removes both the receivable and the long-term
financing from its financial statements. As of June 30, 2010, work on these construction projects
that was not completed or accepted by customers was valued at $6.3 million, which is recorded on
the balance sheet as a receivable in Deferred Charges and Other AssetsOther with the
corresponding long-term obligation to the lender in Long-term debt. At any time before these
contracts are accepted by the customer, should there be a contract default, such as, among other
things, a delay in completing the project, the lender may call on Washington Gas to fund the unpaid
principal in exchange for which Washington Gas would receive the right to the stream of payments
from the customer. Once the project is accepted by the customer, the lender has no recourse against
Washington Gas related to this long-term debt.
Financial Guarantees
WGL Holdings has guaranteed payments for certain purchases of natural gas and electricity on
behalf of the retail energy-marketing segment. At June 30, 2010, these guarantees totaled $564.6
million. The amount of such guarantees is periodically adjusted to reflect changes in the level of
financial exposure related to these purchase commitments. We also receive financial guarantees or
other collateral from suppliers when required by our credit policy (refer to the section entitled
Credit Risk for a further discussion of our credit policy). WGL Holdings has issued guarantees
related to purchase commitments of its Capitol Energy Ventures subsidiary. At June 30, 2010, these
guarantees totaled $18.0 million. WGL Holdings also issued guarantees totaling $3.0 million at June
30, 2010 that were made on behalf of certain of our non-utility subsidiaries associated with their
banking transactions. For all of its financial guarantees, WGL Holdings may cancel any or all
future obligations imposed by the guarantees upon written notice to the counterparty, but WGL
Holdings would continue to be responsible for the obligations that had been created under the
guarantees prior to the effective date of the cancellation.
Chillum LNG Facility
Washington Gas continues to incorporate in its plans construction of a proposed one billion
cubic foot LNG storage facility on the land owned by Washington Gas in Chillum, Maryland, where
natural gas storage facilities previously existed for meeting customers forecasted peak demand for
natural gas. Subject to the resolution of certain legal and regulatory issues, the new storage
facility is currently expected to be completed and in service by the 2015-2016 winter heating
season at a total estimated cost of $159.0 million.
On October 30, 2006, the District Council of Prince Georges County, Maryland denied
Washington Gass application for a special exception related to its proposed construction of the
LNG peaking plant because of the District Councils position that newly enacted zoning restrictions
prohibit such construction. Washington Gas appealed this decision to the Prince Georges County
Circuit Court (the Circuit Court) on November 22, 2006; however, the case was subsequently sent
back to the administrative process by the Circuit Court. On April 16, 2008, Washington Gas filed a
Complaint for Declaratory and Injunctive Relief with the United States District Court for the
District of Maryland (the U.S. District Court) seeking a declaratory judgment that all local laws
relating to safety and location of the facility are preempted by Federal and State law. On March
26, 2010, the U.S. District Court denied Washington Gass motion for summary judgment, however,
there are further proceedings for consideration of the preemption issues raised by Washington Gas.
In 2005, Washington Gas requested approval from the Maryland Public Service Commission (PSC of
MD) regarding the safety of the proposed facility and compliance with applicable federal
regulations. In 2007, the Engineering Division of the PSC of MD
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confirmed the analyses that had
been presented by Washington Gas and found the proposed facility to be
safely sited. On March 19,
2009, the PSC of MD docketed a proceeding for the purpose of reviewing Washington Gass most recent
gas procurement plan including the role the Chillum facility plays in meeting current and future
customers annual and seasonal natural gas requirements. Refer to the section entitled Rates and
Regulatory MattersMaryland
JurisdictionReview of the Companys 2009-2013 Gas Portfolio Plan for further discussion of
this issue. Washington Gas must begin construction of the storage facility in the spring of 2012 in
order for the Chillum Facility to be completed and in service by the 2015-2016 winter heating
season. Until the LNG plant is constructed, Washington Gas has planned for alternative sources of
supply to meet its customers peak day requirements. These plans include capital expenditures
related to infrastructure improvements which contribute to providing for adequate system
performance based on projected needs.
Operating Issues Related To Cove Point Natural Gas Supply
In late fiscal year 2003, Dominion reactivated its Cove Point LNG terminal. A large portion of
the gas delivered from the Cove Point LNG terminal comes to the Washington Gas service territory as
a result of the Companys multiple delivery points on the Cove Point pipeline and from three
interstate natural gas transmission pipelines also interconnected with the Cove Point pipeline,
each of which serve Washington Gas from delivery points downstream of its Cove Point pipeline
interconnect. The composition of the vaporized LNG received from the Cove Point LNG terminal
resulted in increased leaks in mechanical couplings on the portion of our distribution system in
Prince Georges County, Maryland that directly receives the Cove Point gas. The vaporized Cove
Point gas contains a lower concentration of heavy hydrocarbons (HHCs) than non-liquefied natural
gas, and caused the seals on those mechanical couplings to shrink and to leak. Independent
laboratory tests performed on behalf of Washington Gas have shown that, in a laboratory
environment, the injection of HHCs into the type of gas coming from the Cove Point LNG terminal can
be effective in re-swelling the seals in couplings which increases their sealing force and in turn,
reduces the propensity for the affected couplings to leak.
Through a pipeline replacement project and the construction of a HHC injection facility at the
largest gate station that exclusively receives gas from the Cove Point terminal, Washington Gas has
reduced the occurrence of new coupling leaks in this area of the distribution system. A recent
expansion of the physical capacity of the Cove Point terminal could result in a substantial
increase in the receipt of Cove Point gas into additional portions of Washington Gass distribution
system as greater volumes of Cove Point gas are introduced into other downstream pipelines that
provide service to Washington Gas. Based upon engineering and flow studies and our experience, this
increase in the receipt of Cove Point gas is likely to result in a significantly greater number of
leaks in other parts of Washington Gass distribution system, unless our efforts to mitigate these
additional leaks are successful. Washington Gas is attempting to mitigate this anticipated increase
in leaks through: (i) mechanically coupled pipeline replacement programs; (ii) the operation of two
additional HHC injection facilities; (iii) isolating its interstate pipeline receipt points and
limiting the amount of gas received, where possible, from pipelines that transport Cove Point gas;
and (iv) blending, where possible, the Cove Point gas with other supplies of natural gas from
within the continental United States. Washington Gass position before the FERC has been that the
FERC should condition incremental increases in deliveries from the Cove Point terminal on the
appropriate resolution of safety concerns consistent with the public interest. Washington Gas has
exhausted its administrative remedies before the FERC but will consider any legal remedies
available on an as needed basis.
Washington Gas installed and operates HHC injection facilities at three gate stations.
Assuming current gas flow patterns with the current pipeline supply configurations and ongoing
restrictions imposed on the company to limit low-HHC gas recipients, the strategic placement of the
three operational HHC injection facilities will inject HHCs into the natural gas supplied to over
95% of the pipelines that contain mechanical couplings within our distribution system. Washington
Gas has been granted recovery for a portion of these costs allocable to Virginia and Maryland.
Additionally, Washington Gas will seek recovery of the costs of these facilities allocable to the
District of Columbia in a future base rate proceeding. Washington Gas expects the cost of these
facilities to be recovered in all jurisdictions.
The cost of these facilities does not include the cost of the HHCs injected into the gas
stream at the gate stations. We have been granted cost recovery for the majority of these costs in
all three of our jurisdictions (refer to the section entitled Rates and Regulatory Matters).
Washington Gas has replaced or remediated selected mechanically coupled pipelines within the
areas of the distribution system that may receive higher concentrations of Cove Point gas, but that
will not receive HHC injections. Washington Gas has also planned for additional replacement of
mechanically coupled pipeline in other areas of its
distribution system. In total, the
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current estimated cost of planned mechanical coupling remediation and replacement work over the next three
years is $82.8 million, which includes $4.0 million as part of a planned mechanically coupled pipe
replacement program approved by the Virginia State Corporation Commission (SCC of VA) as part of a
settlement of a Virginia rate case and the December 16, 2009 settlement in the District of Columbia
that includes a targeted mechanically coupled pipe replacement and encapsulation program which will
cost no more than $28.0 million and is expected to take
approximately seven years to complete. Rate recovery of the expenditures is provided for in the
settlement agreements approved respectively by the SCC of VA and the PSC of DC.
Washington Gas continues to gather and evaluate field and laboratory evidence to determine the
efficacy of HHC injections of the Cove Point gas in preventing additional leaks or impeding the
rate at which additional leaks may occur in the gas distribution system if expanded volumes from
the Cove Point terminal are introduced. In a report filed with the PSC of MD on June 30, 2008,
Washington Gas reported a notable increase in leaks in mechanical couplings in a portion of its
distribution system in Virginia where Cove Point gas injected with HHCs was introduced for a short
period of time. Although this increase in leaks was significantly less than the increase
experienced in the affected area of Prince Georges County, Maryland, the injection of HHCs into
the Cove Point gas did not reduce the occurrence of coupling leaks to an acceptable level that
would allow Washington Gas to safely accommodate the increased deliveries of revaporized LNG
anticipated with the expansion of the Cove Point terminal. If we are unable to implement a
satisfactory solution on a timely basis, additional operating expenses and capital expenditures may
be necessary to contend with leaks that may accompany the receipt of increased volumes of vaporized
LNG from the Cove Point terminal into Washington Gass distribution system. Such additional
operating expenses and capital expenditures may not be timely enough to mitigate the challenges
posed by increased volumes of Cove Point gas potentially resulting in leakage from mechanical
couplings at a rate that could compromise the safety of our distribution system. Additional legal
or regulatory remedies may be necessary to protect the Washington Gas distribution system and its
customers from the adverse effects of unblended vaporized LNG (refer to the section entitled
Request for FERC Action below for a further discussion).
Notwithstanding Washington Gass recovery of costs related to the construction of the
injection facilities and HHC commodity costs through local regulatory commission action, Washington
Gas has pursued all available remedies to keep its customers from having to pay more than their
appropriate share of the costs of the remediation to maintain the safety of the Washington Gas
distribution system.
Request for FERC Action Regarding Cove Point
In November 2005, Washington Gas requested the FERC to require Dominion to demonstrate that
the increased volumes of the Cove Point gas resulting from the expansion would flow safely through
the Washington Gas distribution system and would be consistent with the public interest. Washington
Gas specifically requested that the proposed expansion of the Cove Point LNG terminal be denied
until Dominion has shown that the Cove Point gas: (i) is of such quality that it is fully
interchangeable with the domestically produced natural gas historically received by Washington Gas
and (ii) will not cause harm to its customers or to the infrastructure of Washington Gass
distribution system.
On June 16, 2006, the FERC issued an order authorizing Dominions request to expand the
capacity and output of its Cove Point LNG terminal and, thereby, denying Washington Gass request
to require Dominion to demonstrate the safety of the Cove Point gas flowing through the Washington
Gas distribution system. Washington Gas, the PSC of MD, Keyspan Corporation, the Maryland Office of
Peoples Counsel (MD OPC) and other organizations all filed Requests for Rehearing with the FERC to
seek modification of the FERCs June 16, 2006 order. These requests were all rejected by the FERC.
On January 26, 2007, Washington Gas filed a notice of appeal with the United States Court of
Appeals for the District of Columbia Circuit (the Court of Appeals). Washington Gas requested the
Court of Appeals to reverse the June 16, 2006 FERC order that authorized the Cove Point expansion,
as well as a January 4, 2007 FERC order that denied Washington Gass rehearing request.
On July 18, 2008, the Court of Appeals issued an opinion vacating the FERC orders to the
extent they approve the expansion. The opinion remanded the case to the FERC to address whether the
expansion can go forward without causing unsafe leakage on Washington Gas Light Companys
distribution system.
Although Washington Gas agrees with the portion of the Court of Appeals decision that states
the FERC failed to address adequately the future safety concerns associated with increased
deliveries of LNG into its system, Washington Gas does not
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agree with all of the findings of the
Court of Appeals, including conclusions related to the cause of the leaks, and on September 2, 2008
filed a request for rehearing with the Court of Appeals. This request has been denied.
The FERC held a technical conference on August 14, 2008 to discuss the nature and progress of
remedial measures taken to date, as well as the need and benefit of any other remedial measures
that might be taken by Washington Gas and Dominion Cove Point LNG, LP so that Washington Gass
system can safely accommodate the increased amounts of regasified LNG from Cove Points LNG
terminal. Washington Gas filed initial Post Technical Conference Comments on August 19, 2008 and
reply Post Technical Conference Comments on August 22, 2008. On October 7, 2008, the FERC issued
its reauthorization of the expansion of the Cove Point terminal, allowing construction to continue;
however, the
FERC limited the amount of vaporized LNG that may flow from the Cove Point terminal into the
Columbia Gas Transmission pipeline and ultimately into the distribution system of Washington Gas.
On November 6, 2008, Washington Gas filed a Request for Rehearing with the FERC, citing numerous
factual and legal errors in the October 7, 2008 reauthorization. The reauthorization fails to
adequately address future safety concerns as directed by the Court of Appeals. Although this
reauthorization limited the amount of vaporized LNG that may flow from the Cove Point terminal into
Washington Gass distribution system through the Columbia Gas Transmission pipeline, this limited
amount far exceeds any amount of Cove Point gas that has been received by Columbia Gas Transmission
to date. On January 15, 2009, the FERC issued an order denying Washington Gass request for
rehearing and affirmed its reauthorization of the expansion of the Cove Point terminal. On February
13, 2009, Washington Gas filed a request with the FERC for an emergency stay of the effectiveness
of the orders the FERC issued on October 7, 2008 and January 15, 2009. On March 19, 2009, the FERC
denied Washington Gass request for a stay. On March 13, 2009, Washington Gas filed a Petition for
Review in the Court of Appeals of the FERCs order on remand issued on October 7, 2008, and its
order on rehearing of the October 7, 2008 order, issued January 15, 2009, that established a cap on
the volume of LNG that could be delivered to the Columbia Gas interconnection with the Cove Point
pipeline. The October 2008 decision did not fully address the concerns raised earlier by the Court
of Appeals that the Cove Point expansion should not proceed until FERC addressed the safety
concerns raised by Washington Gas. On July 20, 2009 the Court of Appeals issued an order setting a
briefing schedule with final briefs due on January 27, 2010. Oral argument was held on March 11,
2010. The Court of Appeals issued a decision on April 27, 2010 finding that the FERC had
satisfactorily ensured that the Expansion will not result in an increased risk of unsafe natural
gas leakage and therefore upheld the FERC decision and denied the Companys petition for review.
Washington Gas did not appeal this decision.
Washington Gas is committed to maintaining the safety of its distribution system for its
customers and will use all feasible options to create long-term solutions that can address the
safety issues associated with the expanded flows of vaporized LNG from the Cove Point terminal that
flow into the interstate pipeline system that also serves Washington Gas.
Washington Gas welcomes the opportunity to work with Dominion as well as the shippers who
bring LNG into the Cove Point terminal and the interstate pipelines that deliver gas to Washington
Gas in order to achieve and implement an appropriate solution to the issue of gas quality affecting
its distribution system.
Additional LNG Supply from the Elba Island Expansion
On September 20, 2007, the FERC approved the expansion of the existing Elba Island LNG
receiving terminal near Savannah, Georgia owned by Southern LNG, Inc. (Southern LNG). Concurrent
with this approval, the FERC granted Southern LNG certificate authority to construct and operate a
new interstate natural gas pipeline to transport regasified LNG from the Elba Island facility to
Georgia and South Carolina. On March 31, 2009, Transcontinental Gas Pipe Line Corporation (Transco)
filed with FERC for authority to construct and operate interconnections in Georgia and South
Carolina between the Elba Island pipeline and the Transco pipeline. This expansion and the
requested interconnections were completed in March 2010. Liquefied natural gas deliveries from
Elba Express to Transco will be blended with flowing gas. This low HHC liquefied natural gas will
blend with the domestic natural gas typically flowing on Transco, thus reducing the overall HHC
level in the gas being delivered to the Washington Gas service territory by Transco through one of
four interconnects. This may result in increased leaks in Washington Gass distribution system. Washington Gas
has the ability to condition the gas, if necessary, at one of the four interconnects. Washington
Gas has filed with FERC to challenge Transcos interconnection request and has conditioned our
support of such interconnection on Transco maintaining minimum HHC levels in the blended gas that
would be delivered into the Washington Gas system. On September 17, 2009, the FERC issued an order
granting Transcos request for authorization to construct the interconnections between
the Elba
Island facility and the Transco pipeline. The FERC stated that
Washington Gas had not raised any new
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evidence to support claims of damage to the distribution system and that the Cove Point orders
had addressed the same issues. The FERC also found it was unreasonable to impose restrictions on a
long distance pipeline to accommodate the Washington Gas system. On October 19, 2009, Washington
Gas filed a rehearing request of the FERC order with the FERC. On February 18, 2010, the FERC
issued an order denying the rehearing request of Washington Gas. Washington Gas did not appeal the
decision.
CREDIT RISK
Wholesale Credit Risk
Certain wholesale suppliers that sell natural gas to Washington Gas and/or WGEServices either
have relatively low credit ratings or are not 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 counterpartys 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.
Washington Gas may be at risk for financial loss to the extent these losses are not passed through
to its customers. To manage these various credit risks, Washington Gas has a credit policy in place
that is designed to mitigate these credit risks through a requirement for credit enhancements
including, but not limited to, letters of credit, parent guarantees and cash collateral when deemed
necessary. In accordance with this policy, Washington Gas has obtained credit enhancements from
certain of its counterparties. Additionally, for certain counterparties or their guarantors that
meet this policys credit worthiness criteria, Washington Gas grants unsecured credit which is
continuously monitored.
For WGEServices, depending on the ability of wholesale counterparties to deliver natural gas
or electricity under existing contracts, WGEServices could be financially exposed for the
difference between the price at which WGEServices has contracted to buy these commodities and their
replacement cost from another supplier. To the extent that WGEServices sells natural gas to these
wholesale counterparties, WGEServices may be exposed to payment risk if WGEServices is in a net
receivable position. Additionally, WGEServices enters into contracts with third parties to hedge
the costs of natural gas and electricity. Depending on the ability of the third parties to fulfill
their commitments, WGEServices could be at risk for financial loss. WGEServices has an existing
credit policy that is designed to mitigate credit risks through a requirement for credit
enhancements including, but not limited to, letters of credit, parent guarantees and cash
collateral when deemed necessary. In accordance with this policy, WGEServices has obtained credit
enhancements from certain of its counterparties. If certain counterparties or their guarantors meet
the policys credit worthiness criteria, WGEServices grants unsecured credit to those
counterparties or their guarantors. The credit worthiness of all counterparties is continuously
monitored.
WGEServices is also subject to the credit policy requirements of their counterparties which
under certain circumstances require similar credit enhancements from WGEServices under these
contracts. WGEServices credit risks may extend beyond the price or payment risk outlined above to
the extent that cash collateral has been provided to the counterparty. At June 30, 2010,
WGEServices had provided $16.9 million in cash collateral to supplier counterparties.
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The following table provides information on our credit exposure, net of collateral, to wholesale counterparties as of June 30, 2010 for both Washington Gas and WGEServices, separately.
Credit Exposure to Wholesale Counterparties (In millions) | ||||||||||||||||||||
Offsetting | Number of | Net Exposure of | ||||||||||||||||||
Exposure | Credit | Counterparties | Counterparties | |||||||||||||||||
Before Credit | Collateral | Net | Greater | Greater Than | ||||||||||||||||
Rating (a) | Collateral(b) | Held(c) | Exposure | Than 10%(d) | 10% | |||||||||||||||
Washington Gas |
||||||||||||||||||||
Investment Grade |
$ | 30.6 | $ | - | $ | 30.6 | 3 | $ | 28.8 | |||||||||||
Non-Investment Grade |
1.2 | - | 1.2 | - | - | |||||||||||||||
No External Ratings |
0.3 | - | 0.3 | - | - | |||||||||||||||
WGEServices |
||||||||||||||||||||
Investment Grade |
$ | 0.1 | $ | - | $ | 0.1 | 2 | $ | 0.1 | |||||||||||
Non-Investment Grade |
- | - | - | - | - | |||||||||||||||
No External Ratings |
- | - | - | - | - | |||||||||||||||
(a) Included in Investment Grade are counterparties with a minimum Standard & Poors or Moodys Investor Service rating of BBB- or Baa3, respectively. If a counterparty has provided a guarantee by a higher-rated entity (e.g., its parent), the guarantors rating is used in this table. |
(b) Includes the net of all open positions on energy-related derivatives subject to mark-to-market accounting requirements, the net receivable/payable for realized transactions and net open positions sheet. Amounts due from counterparties are offset by liabilities payable to those counterparties to the extent that legally enforceable 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.
WGEServices is also exposed to the risk of non-payment of invoiced sales by its retail
customers. WGEServices manages this risk by evaluating the credit quality of new customers as well
as by monitoring collections from existing customers. To the extent necessary, WGEServices can
obtain collateral from, or terminate service to its existing customers based on credit quality
criteria. The PSC of MD has recently approved proposals by certain electric utilities to purchase
the receivables of competitive suppliers who render their charges through the utilities billing
process. The MD PSC approval included implementation of the purchase of receivables by certain
electric utilities beginning July 2010. The PSC of MD is also reviewing and evaluating similar
proposals by other utilities including gas utilities. WGEServices bills the majority of its
customers through utilities, and the shift to this new purchase of receivables will affect
WGEServices billing practices, cash collections and bad debt expense.
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 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 Gass net income. However, Washington Gas is
responsible for following competitive and reasonable practices in purchasing natural gas for its
customers.
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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 historically lower, and
withdraws that gas during the winter heating season when prices are historically higher and (iii)
enters into hedging contracts and other contracts that qualify as derivative instruments related to
the sale and purchase of natural gas.
Washington Gas has specific regulatory approval in the District of Columbia and Virginia to
use forward contracts and option contracts to hedge against potential price volatility for a
limited portion of its natural gas purchases for firm customers. Specifically, Washington Gas has
approval to: (i) buy gas in advance using forward contracts; (ii) purchase call options that lock
in a maximum price when Washington Gas is ready to buy gas and (iii) use a combination of put and
call options to limit price exposure within an acceptable range. Regulatory approval for Virginia
is permanent. The regulatory approval in the District of Columbia is pursuant to a pilot program,
and Washington Gas will be seeking to continue this program. Washington Gas currently has no
regulatory approval for hedging in Maryland but has requested this approval. The request is
currently being reviewed by the Maryland Commission. The PSC of MD issued an order on April 28,
2010 requesting further information before approving Washington Gass proposed plans for summer
hedging. The Order required Washington Gas to file its proposed interim hedging program for the
Summer Storage Injection Season 2010 and winter 2010-2011 heating season by May 7, 2010.
On July 21, 2010, the Commission issued an Order approving the proposed hedging program for the
remainder of the 2010 summer storage injection season. On July 22, 2010, the Commission issued a
Notice for Comment and of Hearing on the Companys winter hedging proposal. Comments were submitted
by the Commission Staff (recommends approval with conditions) and the Maryland Office of Peoples Counsel
(has no objection to the program with conditions) on August 4, 2010. A hearing on the merits of the winter
hedging proposal is scheduled before the Maryland Commission on August 12, 2010.
Washington Gas also executes commodity-related physical and financial contracts in the form of
forwards, swaps and option contracts as part of an asset optimization program that is managed by
its internal staff. These transactions are accounted for as derivatives. Under this program,
Washington Gas realizes value from its long-term natural gas transportation and storage capacity
resources when not fully being used to serve utility customers. Regulatory sharing mechanisms in
all three jurisdictions allow the profit from these transactions to be shared between Washington
Gass customers and shareholders.
The following two tables summarize the changes in the fair value of our net assets
(liabilities) associated with the regulated utility segments energy-related
derivatives during the nine months ended June 30, 2010:
Regulated Utility Segment | ||||
Changes in Fair Value of Energy-Related Derivatives | ||||
(In millions) | ||||
Net assets (liabilities) at September 30, 2009 |
$ | 5.6 | ||
Net fair value of contracts entered into during the period |
4.5 | |||
Other changes in net fair value |
25.0 | |||
Realized net settlement of derivatives |
(6.3 | ) | ||
Net assets (liabilities) at June 30, 2010 |
$ | 28.8 | ||
Regulated Utility Segment | ||||
Roll Forward of Energy-Related Derivatives | ||||
(In millions) | ||||
Net assets (liabilities) at September 30, 2009 |
$ | 5.6 | ||
Recorded to income |
19.6 | |||
Recorded to regulatory assets/liabilities |
8.7 | |||
Net option premium payments |
1.2 | |||
Realized net settlement of derivatives |
(6.3 | ) | ||
Net assets (liabilities) at June 30, 2010 |
$ | 28.8 | ||
62
WGL Holdings, Inc.
Washington Gas Light Company
Part IFinancial Information
Item 2Managements Discussion and Analysis of
Financial Condition and Results of Operations (continued)
Washington Gas Light Company
Part IFinancial Information
Item 2Managements Discussion and Analysis of
Financial Condition and Results of Operations (continued)
The maturity dates of our net assets (liabilities) associated with the regulated utility segments energy-related derivatives recorded at fair value at June 30, 2010, is summarized in the following table based on the level of the fair value calculation under ASC Topic 820:
Regulated Utility Segment | ||||||||||||||||||||||||||||
Maturity of Net Assets (Liabilities) Associated with our Energy-Related Derivatives | ||||||||||||||||||||||||||||
Years Ended September 30, | ||||||||||||||||||||||||||||
Remainder | ||||||||||||||||||||||||||||
(In millions) | Total | 2010 | 2011 | 2012 | 2013 | 2014 | Thereafter | |||||||||||||||||||||
Level 1 Quoted prices in active markets |
$ | - | $ | - | $ | - | $ | - | $ | - | $ | - | $ | - | ||||||||||||||
Level 2 Significant other observable inputs |
12.2 | 1.9 | 6.6 | 0.1 | 1.5 | 0.3 | 1.8 | |||||||||||||||||||||
Level 3 Significant unobservable inputs |
16.6 | (3.7 | ) | 0.1 | 4.2 | 3.9 | 3.6 | 8.5 | ||||||||||||||||||||
Total net assets (liabilities) associated
with our energy-related derivatives |
$ | 28.8 | $ | (1.8 | ) | $ | 6.7 | $ | 4.3 | $ | 5.4 | $ | 3.9 | $ | 10.3 | |||||||||||||
Refer to Notes 10 and 11 of the Notes to Consolidated Financial Statements in this quarterly report for a further discussion of our derivative activities and fair value measurements.
Price Risk Related to the Retail Energy-Marketing Segment
Our retail energy-marketing subsidiary, WGEServices, sells natural gas and electricity to
retail customers at both fixed and indexed prices. WGEServices must manage daily and seasonal
demand fluctuations for these products with its suppliers. Price risk exists to the extent
WGEServices does not closely match the timing and volume of natural gas and electricity it
purchases with the related fixed price or indexed sales commitments. WGEServices risk management
policies and procedures are designed to minimize this risk.
Natural Gas. A portion of WGEServices 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
other factors which affect customer usage, this may cause our purchase commitments to differ
significantly from actual customer usage. To the extent that WGEServices 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. WGEServices may manage these risks through
the use of derivative instruments including financial products and wholesale supply contracts that
provide for volumetric variability.
Electricity. WGEServices procures electricity supply under contract structures in which
WGEServices assumes the responsibility of matching its customer requirements with its supply
purchases. WGEServices 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, to match its customer requirements in
accordance with its risk management policy.
To the extent WGEServices has not sufficiently matched its customer requirements with its
supply commitments, it could be exposed to electricity commodity price risk. WGEServices may manage
this risk through the use of derivative instruments, including financial products.
WGEServices 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, WGEServices may incur price and volume variances that could negatively impact
expected gross margins (refer to the section entitled Weather Risk for a further discussion of
our management of weather risk).
63
WGL Holdings, Inc.
Washington Gas Light Company
Part IFinancial Information
Item 2Managements Discussion and Analysis of
Financial Condition and Results of Operations (continued)
Washington Gas Light Company
Part IFinancial Information
Item 2Managements Discussion and Analysis of
Financial Condition and Results of Operations (continued)
The following two tables summarize the changes in the fair value of our net assets (liabilities)
associated with the retail energy-marketing segments energy-related derivatives for both natural gas and electricity
during the nine months ended June 30, 2010:
Retail Energy-Marketing Segment | ||||
Changes in Fair Value of Energy-Related Derivatives | ||||
(In millions) | ||||
Net assets (liabilities) at September 30, 2009 |
$ | (25.5 | ) | |
Net fair value of contracts entered into during the period |
(11.7 | ) | ||
Other changes in net fair value |
(6.8 | ) | ||
Realized net settlement of derivatives |
15.5 | |||
Net assets (liabilities) at June 30, 2010 |
$ | (28.5 | ) | |
Retail Energy-Marketing Segment | ||||
Roll Forward of Energy-Related Derivatives | ||||
(In millions) | ||||
Net assets (liabilities) at September 30, 2009 |
$ | (25.5 | ) | |
Recorded to income |
(15.8 | ) | ||
Recorded to accounts payable |
(3.2 | ) | ||
Net option premium payments |
0.5 | |||
Realized net settlement of derivatives |
15.5 | |||
Net assets (liabilities) at June 30, 2010 |
$ | (28.5 | ) | |
The maturity dates of our net assets (liabilities) associated with the retail energy-marketing segments energy-related derivatives recorded at fair value at June 30, 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 | ||||||||||||||||||||||||||||
Years Ended September 30, | ||||||||||||||||||||||||||||
Remainder | ||||||||||||||||||||||||||||
(In millions) | Total | 2010 | 2011 | 2012 | 2013 | 2014 | Thereafter | |||||||||||||||||||||
Level 1 Quoted prices in active markets |
$ | - | $ | - | $ | - | $ | - | $ | - | $ | - | $ | - | ||||||||||||||
Level 2 Significant other observable inputs |
(13.2 | ) | (2.2 | ) | (8.0 | ) | (1.7 | ) | (1.2 | ) | (0.1 | ) | - | |||||||||||||||
Level 3 Significant unobservable inputs |
(15.3 | ) | 0.4 | (7.5 | ) | (6.8 | ) | (1.4 | ) | - | - | |||||||||||||||||
Total net assets (liabilities) associated with our
energy-related derivatives |
$ | (28.5 | ) | $ | (1.8 | ) | $ | (15.5 | ) | $ | (8.5 | ) | $ | (2.6 | ) | $ | (0.1 | ) | $ | - | ||||||||
Refer to Note 8 and 9 of the Notes to Consolidated Financial Statements in this quarterly report for a further discussion of our derivative activities and fair value measurements.
Value-at-Risk. WGEServices 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 customers and renewing customers for which supply commitments have been secured. Based
on a 95% confidence interval for a one-day holding period, WGEServices value-at-risk at June 30,
2010 was approximately $40,000 and $162,000, related to its natural gas and electric portfolios,
respectively.
Weather Risk
We are exposed to various forms of weather risk in both our regulated utility and unregulated
business segments. For Washington Gas, a large portion of its revenues is volume driven and its
current rates are based upon an assumption of normal weather, however, billing adjustment
mechanisms described below address variations from this assumption. Without weather
64
WGL Holdings, Inc.
Washington Gas Light Company
Part IFinancial Information
Item 2Managements Discussion and Analysis of
Financial Condition and Results of Operations (continued)
Washington Gas Light Company
Part IFinancial Information
Item 2Managements Discussion and Analysis of
Financial Condition and Results of Operations (continued)
protection strategies, variations from normal weather will cause our earnings
to increase or decrease depending on the weather pattern. Washington Gas currently has a weather
protection strategy that is designed to neutralize the estimated financial effects of weather on
its net income, as discussed below.
The financial results of our non-regulated energy-marketing business, WGEServices, are also
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. WGEServices manages these
weather risks with, among other things, weather derivatives.
Billing Adjustment Mechanisms. In Maryland, Washington
Gas has a revenue normalization
agreement (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) mechanism which is a billing adjustment
mechanism that is designed to eliminate the effect of variations in weather from normal levels on
utility net revenues. The SCC of VA, in its order on March 26, 2010 accepted a decoupling mechanism
which adjusts weather normalized non-gas distribution revenues for the impact of conservation or
energy efficiency efforts effective May 1, 2010 for residential customers. The order rejected the
adoption of a commercial energy efficiency program and an associated decoupling rate mechanism for
commercial customers. Washington Gas prepared a filing to address concerns raised by the SCC of
VA associated with the commercial energy efficiency program. Should the SCC of VA approve a
revision to the commercial energy efficiency program, a decoupling rate mechanism for commercial
customers would be approved for implementation. The SCC of VA approval of this filing is expected
prior to the winter of 2010-2011.
For both the RNA and the WNA 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 to
function conversely because it adjusts billed revenues to provide a designed level of net revenue
per meter.
Weather Derivatives. On September 21, 2009, Washington Gas executed an HDD derivative contract
to manage its exposure to variations from normal weather in the District of Columbia during fiscal
year 2010. Under this contract, Washington Gas purchased protection against net revenue shortfalls
due to warmer-than-normal weather and sold cold weather benefits. This derivative contract resulted
in a payment to Washington Gas of $2.1 million.
WGEServices utilizes HDD derivatives from time to time to manage weather risks related to its
natural gas and electricity sales. WGEServices also utilizes cooling degree day (CDD) derivatives
to manage weather risks related to its electricity sales during the summer cooling season. These
derivatives cover a portion of WGEServices estimated revenue or energy-related cost exposure to
variations in HDDs or CDDs. Refer to Note 8 of the Notes to Consolidated Financial Statements for a
further discussion of the accounting for these weather-related instruments.
Interest-Rate Risk
We are exposed to interest-rate risk associated with our short-term and long-term financing.
Washington Gas utilizes derivative instruments from time to time in order to minimize its exposure
to the risk of interest-rate volatility. On July 6, 2009, Washington Gas entered into three
interest-rate derivative transactions to mitigate a substantial portion of the risk of rising
interest rates associated with future debt issuances, all of which were settled as of
June 30, 2010. In addition, on April 13, 2010, Washington Gas executed a forward starting
swap expiring in May related to the call of $50 million of floating rate debt.
On May 7, 2010, Washington Gas executed a forward starting swap expiring in November 2010 related to $75 million of floating rate debt. Refer to the section
entitled Long-Term Cash Requirements and Related Financing for further discussion of our
interest-rate risk management activity.
65
WGL Holdings, Inc.
Washington Gas Light Company
Part IFinancial Information
Item 2Managements Discussion and Analysis of
Financial Condition and Results of Operations (continued)
Washington Gas Light Company
Part IFinancial Information
Item 2Managements Discussion and Analysis of
Financial Condition and Results of Operations (continued)
WASHINGTON GAS LIGHT COMPANY
This section of Managements Discussion focuses on the financial position and results of
operations of Washington Gas for the reported periods. In many cases, explanations for the changes
in financial position and results of operations for both WGL Holdings and Washington Gas are
substantially the same.
RESULTS OF OPERATIONS Three Months Ended June 30, 2010 vs. June 30, 2009
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 in Managements
Discussion for WGL Holdings for a detailed discussion of the results of operations for the
regulated utility segment.
Washington Gas reported a net loss applicable to common stock of $10.7 million for the three
months ended June 30, 2010, compared to a net loss applicable to common stock of $2.6 million
reported for the same three months of the prior fiscal year. The increase in net loss primarily
reflects: (i) $8.4 million of higher employee benefit expense due to changes in plan asset values
and plan valuation assumptions and a loss recognized for a
partial settlement of the SERP; (ii) increased tax expense of $1.1 million reflecting a higher
effective tax rate; (iii) $1.6 million of unfavorable effects of changes in natural gas consumption
patterns; (iv) a $0.6 million decrease in unrealized margins associated with our asset optimization
program and (v) $0.5 million decrease in realized margins associated with our asset optimization
program. Partially offsetting this decrease were: (i) an increase in revenue of $0.7 million
related to growth of over 8,300 average active customer meters; (ii) $0.7 million related to
uncollectible accounts; (iii) $1.2 million due to lower regulatory obligations under the Virginia
Earnings Sharing Mechanism (ESM) and (iv) a decrease in interest expense of $0.7 million primarily
due to lower weighted average interest rates and balances associated with our borrowings.
Key gas delivery, weather and meter statistics are shown in the table below for the three months ended June 30, 2010 and 2009.
Gas Deliveries, Weather and Meter Statistics | ||||||||||||
Three Months Ended | ||||||||||||
June 30, | Increase/ | |||||||||||
2010 | 2009 | (Decrease) | ||||||||||
Gas Sales and Deliveries (millions of therms) |
||||||||||||
Firm |
||||||||||||
Gas sold and delivered |
75.6 | 99.2 | (23.6 | ) | ||||||||
Gas delivered for others |
66.5 | 69.0 | (2.5 | ) | ||||||||
Total firm |
142.1 | 168.2 | (26.1 | ) | ||||||||
Interruptible |
||||||||||||
Gas sold and delivered |
0.3 | 0.7 | (0.4 | ) | ||||||||
Gas delivered for others |
47.0 | 55.1 | (8.1 | ) | ||||||||
Total interruptible |
47.3 | 55.8 | (8.5 | ) | ||||||||
Electric generationdelivered for others |
44.6 | 12.4 | 32.2 | |||||||||
Total deliveries |
234.0 | 236.4 | (2.4 | ) | ||||||||
Degree Days |
||||||||||||
Actual |
217 | 343 | (126 | ) | ||||||||
Normal |
300 | 302 | (2 | ) | ||||||||
Percent colder (warmer) than normal |
(27.7)% | 13.6% | n/a | |||||||||
Average active customer meters |
1,077,562 | 1,069,189 | 8,373 | |||||||||
New customer meters added |
2,710 | 2,064 | 646 | |||||||||
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 Gass rates are based on an assumption of normal weather. The
tariffs in the Maryland and Virginia jurisdictions include
provisions that consider the effects
66
WGL Holdings, Inc.
Washington Gas Light Company
Part IFinancial Information
Item 2Managements Discussion and Analysis of
Financial Condition and Results of Operations (continued)
Washington Gas Light Company
Part IFinancial Information
Item 2Managements Discussion and Analysis of
Financial Condition and Results of Operations (continued)
of the RNA and WNA mechanisms, respectively, which 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). In
addition to these mechanisms, the combination of declining block rates in the Maryland and Virginia
jurisdictions and the existence of fixed demand charges in all jurisdictions to collect a portion
of revenues reduce the effect that variations from normal weather have on net revenues.
During the quarter ended June 30, 2010, total gas deliveries to firm customers were 142.1
million therms compared to 168.2 million therms delivered in the same quarter of the prior fiscal
year. This comparison in natural gas deliveries to firm customers reflects warmer weather in the
current three-month period than in the same period of the prior fiscal year.
Weather, when measured by HDDs, was 27.7% warmer than normal in the third quarter of fiscal
year 2010, compared to 13.6% colder than normal for the same quarter of fiscal year 2009. Including
the effects of our weather protection strategy, there were no material effects on net income
attributed to colder or warmer weather on either the quarter ended June 30, 2010 or June 30, 2009.
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. Therm deliveries
to interruptible customers were 47.3 million therms during the third quarter of fiscal year 2010,
compared to 55.8 million therms for the same quarter last year, reflecting decreased demand due to
weather.
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 Gass rate designs in the District of Columbia. In the District of Columbia, Washington
Gas shares a majority of the margins earned on interruptible gas sales and deliveries with firm
customers. A portion of the fixed costs for servicing interruptible customers is collected through
the firm customers rate design. Rates for interruptible customers in Maryland and Virginia are
based on a traditional cost of service approach. In Virginia, Washington Gas retains all revenues
above a pre-approved margin threshold level. 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
Holdings. During the three months ended June 30, 2010, deliveries to these customers increased by
32.2 million therms, when compared to the same quarter of the prior fiscal year. 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.
RESULTS OF OPERATIONS Nine Months Ended June 30, 2010 vs. June 30, 2009
Washington Gas reported net income applicable to common stock of $120.6 million for the nine
months ended June 30, 2010, compared to a net income applicable to common stock of $126.2 million
reported for the same nine months of the prior fiscal year. The decrease in net income primarily
reflects: (i) $12.4 million in higher employee benefit expense due to changes in plan asset values
and plan valuation assumptions and a loss recognized for a
partial settlement of the SERP; (ii) a $6.6 million decrease in the recovery of storage carrying
costs on lower average storage gas inventory balances; and (iii) a $4.6 million reversal of a
reserve in fiscal year 2009 for disallowed natural gas costs in Maryland due to a favorable
February 5, 2009 order from the Public Service Commission of Maryland (PSC of MD); (iv) $2.0
million in higher property taxes; and (v) $1.6 million in higher taxes reflecting a higher
effective income tax rate. Partially offsetting this decrease was: (i) $5.0 million of favorable
effects of changes in natural gas consumption patterns; (ii) $5.1 million related to the Virginia
Earnings Sharing Mechanism (ESM); (iii) a decrease in interest expense of $4.0 million primarily
due to lower weighted average interest rates associated with our borrowings; (iv) an increase in
revenues of $3.4 million reflecting the growth of over 8,900 average active customer meters; (v) a
$3.0 million increase in unrealized margins associated with our asset optimization program and (vi)
$2.2 million lower costs for weather protection products related to the District of Columbia.
67
WGL Holdings, Inc.
Washington Gas Light Company
Part IFinancial Information
Item 2Managements Discussion and Analysis of
Financial Condition and Results of Operations (continued)
Washington Gas Light Company
Part IFinancial Information
Item 2Managements Discussion and Analysis of
Financial Condition and Results of Operations (continued)
Key gas delivery, weather and meter statistics are shown in the table below for the nine
months ended June 30, 2010 and 2009.
Gas Deliveries, Weather and Meter Statistics | ||||||||||||
Nine Months Ended | ||||||||||||
June 30, | Increase/ | |||||||||||
2010 | 2009 | (Decrease) | ||||||||||
Gas Sales and Deliveries (millions of therms) |
||||||||||||
Firm |
||||||||||||
Gas sold and delivered |
782.2 | 839.0 | (56.8 | ) | ||||||||
Gas delivered for others |
437.0 | 416.6 | 20.4 | |||||||||
Total firm |
1,219.2 | 1,255.6 | (36.4 | ) | ||||||||
Interruptible |
||||||||||||
Gas sold and delivered |
3.2 | 2.9 | 0.3 | |||||||||
Gas delivered for others |
222.5 | 228.5 | (6.0 | ) | ||||||||
Total interruptible |
225.7 | 231.4 | (5.7 | ) | ||||||||
Electric generationdelivered for others |
68.1 | 58.8 | 9.3 | |||||||||
Total deliveries |
1,513.0 | 1,545.8 | (32.8 | ) | ||||||||
Degree Days |
||||||||||||
Actual |
3,825 | 4,203 | (378 | ) | ||||||||
Normal |
3,751 | 3,759 | (8 | ) | ||||||||
Percent colder (warmer) than normal |
2.0% | 11.8% | n/a | |||||||||
Average active customer meters |
1,074,619 | 1,065,925 | 8,694 | |||||||||
New customer meters added |
7,783 | 8,093 | (310 | ) | ||||||||
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 Gass 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 WNA mechanisms, respectively, which 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). In addition to these mechanisms, the combination of
declining block rates in the Maryland and Virginia jurisdictions and the existence of fixed demand
charges in all jurisdictions to collect a portion of revenues reduce the effect that variations
from normal weather have on net revenues.
During the nine months ended June 30, 2010, total gas deliveries to firm customers were
1,219.2 million therms compared to 1,255.6 million therms delivered in the same period of the prior
year. This comparison in natural gas deliveries to firm customers reflects warmer weather in the
current nine month period than in the same period of the prior fiscal year.
Weather, when measured by HDDs, was 2.0% colder than normal in the nine months ended June
30, 2010, compared to 11.8% colder than normal for the same period of the prior year. Including the
effects of our weather protection strategy,
there were no material effects on net income attributed to colder or warmer weather on either the
nine months ended June 30, 2010 or June 30, 2009.
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. Therm deliveries
to interruptible customers were 225.7 million therms during the nine months ended June 30, 2010,
compared to 231.4 million therms for the same nine month period of the prior year, reflecting
decreased demand due to weather.
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 Gass rate designs in the District of Columbia. In the District of Columbia,
Washington Gas shares a majority of the margins earned on interruptible gas sales and deliveries
with firm customers. A portion of the fixed costs for servicing interruptible customers is
collected through the firm customers rate design. Rates for interruptible customers in Maryland
and Virginia are based on a traditional cost of service approach. In Virginia,
68
WGL Holdings, Inc.
Washington Gas Light Company
Part IFinancial Information
Item 2Managements Discussion and Analysis of
Financial Condition and Results of Operations (continued)
Washington Gas Light Company
Part IFinancial Information
Item 2Managements Discussion and Analysis of
Financial Condition and Results of Operations (continued)
Washington Gas retains all revenues above a pre-approved
margin threshold level. 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
Holdings. During the nine months ended June 30, 2010, deliveries to these customers increased by
9.3 million therms, when compared to the same period of the prior fiscal year. Washington Gas
shares with firm customers a significant majority of the margins earned from natural gas deliveries
to these customers. Therefore, changes in the volume of interruptible gas deliveries to these
customers do not materially affect either net revenues or net income.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity and capital resources for Washington Gas are substantially the same as the liquidity
and capital resources discussion included in the Managements Discussion of WGL Holdings (except
for certain items and transactions that pertain to WGL Holdings and its unregulated subsidiaries).
Those explanations are incorporated by reference into this discussion.
RATES AND REGULATORY MATTERS
Washington Gas determines its request to modify existing rates based on the level of net
investment in plant and equipment, operating expenses and the need to earn a just and reasonable
return on invested capital. The following is a discussion of significant current regulatory matters
in each of Washington Gass jurisdictions.
District of Columbia Jurisdiction
Recovery of HHC Costs. On May 1, 2006, Washington Gas filed two tariff applications with the
PSC of DC requesting approval of proposed revisions to the balancing charge provisions of its firm
and interruptible delivery service tariffs that would permit the utility to recover from its
delivery service customers the costs of HHCs that are being injected into Washington Gass natural
gas distribution system to treat vaporized liquefied natural gas from the Dominion Cove Point
Facility (refer to the section entitled Operating Issues Related to Cove Point Natural Gas Supply
in Managements Discussion). Washington Gas had been recovering the costs of HHCs from sales
customers in the District of Columbia through its Purchased Gas Charge (PGC) provision in this
jurisdiction. On October 2, 2006, the PSC of DC issued an order rejecting Washington Gass proposed
tariff revisions until the PSC of MD issued a final order related to this matter. On October 12,
2006, Washington Gas filed a motion for clarification requesting that the PSC of DC affirm that
Washington Gas can continue collecting HHC costs from sales customers through its PGC provision or
to record such HHC costs incurred as a regulatory asset pending a ruling by the PSC of DC on future
cost recovery. On May 11, 2007, the PSC of DC directed Washington Gas to cease prospective recovery
of the cost of HHCs through the PGC provision, with future HHC costs to be recorded as a pending
regulatory asset. On November 16, 2007 the PSC of MD issued a final order in the relevant case
supporting full recovery of the HHC costs in Maryland. On March 25, 2008, the PSC of DC issued an
order stating that the consideration of Washington Gass HHC strategy will move forward and
directed interested parties to submit filings reflecting a proposed procedural schedule. On June 6,
2008, Washington Gas and the District of Columbia Office of the Peoples Counsel filed a joint
response to the order proposing a procedural schedule and a list of issues for consideration in the
case. The PSC of DC adopted the proposed issues list and approved a procedural schedule. Washington
Gas and other parties subsequently filed comments, conducted discovery and the parties filed reply
comments. On April 30, 2009, the PSC of DC ruled that there were unresolved issues and directed
that they should be addressed in evidentiary hearings. The PSC of DC issued an order establishing a
procedural schedule to address these unresolved issues in the case. Initial testimony was filed May
29, 2009, and rebuttal testimony was filed on July 24, 2009.
On October 2, 2009, Washington Gas and the DC OPC filed a Joint Motion for Approval of
Unanimous Agreement of Stipulation and Full Settlement with the PSC of DC (Stipulation). The
parties to the Stipulation agreed that hexane (an HHC) commodity costs incurred by Washington Gas
to condition liquefied natural gas received in Washington Gass natural gas system are recoverable
expenses and that Washington Gas is authorized to achieve full cost recovery from sales and
delivery service customers of hexane commodity costs incurred prior to September 30, 2009.
Additionally, the Stipulation:
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(i) | approves the recovery of hexane commodity costs incurred after September 30, 2009 from sales and delivery service customers, subject to review as a component of Washington Gass cost of gas; | ||
(ii) | establishes a coupling replacement and encapsulation program (Program), wherein Washington Gas will replace or encapsulate a portion of its mechanically coupled pipe in the District of Columbia. The Program is expected to conclude in approximately seven years with total spending not to exceed $28.0 million; | ||
(iii) | provides for the cost of the Program to be recovered through an annual surcharge based on actual expenditures for coupling replacement and encapsulation that will become effective at the end of the existing base rate freeze (October 1, 2011). The cost will include both a return of and return on the cost of coupling replacement and encapsulation, computed in accordance with the terms of the rates currently in effect and | ||
(iv) | establishes periodic reporting on the level of hexane injected at each of Washington Gass hexane facilities with the associated commodity costs, and continued filing of leak-related information with the PSC of DC. |
On October 16, 2009, the PSC of DC published a Notice of Public Interest Hearing, held on
October 28, 2009. On December 16, 2009, the PSC of DC issued a final order approving the settlement
agreement, including recovery of hexane commodity costs, provided the parties agree to change the
September 30, 2009 date to the effective date of the newly approved tariffs. The parties filed the
modified language consistent with the final order. Pursuant to the final order, Washington Gas
established a regulatory asset by reversing hexane costs previously expensed of $0.7 million into
income.
As of June 30, 2010 Washington Gas has incurred cumulative total hexane costs of $2.5 million
related to the District of Columbia of which approximately $1.0 million has been recovered and $1.5
million has been deferred as a regulatory asset.
Revenue Normalization Adjustment. On December 21, 2009, Washington Gas filed a revised tariff
application seeking approval of an RNA, a sales adjustment mechanism that decouples Washington
Gass non-gas revenues from actual delivered volumes of gas. On December 22, 2009, the DC OPC filed
a motion requesting that the PSC of DC establish public hearing procedures to examine the merits of
Washington Gass RNA application. Washington Gas filed an opposition to the DC OPCs motion on
January 4, 2010. The PSC of DC issued an order on January 19, 2010 granting the DC OPCs motion for
evidentiary hearing and initiated a rate proceeding to consider issues surrounding Washington Gass
tariff application. On April 2, 2010, the PSC of DC issued an order designating issues to be
addressed and establishing a procedural schedule for the case. Washington Gas filed supplemental
testimony on April 13, 2010. The DC OPC, the District of Columbia Office of the Environment (DC
Government) and the Apartment and Office Building Association of Metropolitan Washington (AOBA)
filed direct testimony on May 17, 2010. Washington Gas filed rebuttal testimony on June 29, 2010.
Evidentiary hearings were held on July 27-29, 2010.
Maryland Jurisdiction
Order on and Reviews of Purchased Gas Charges. Each year, the PSC of MD reviews the annual gas
costs collected from customers in Maryland to determine if Washington Gass purchased gas costs are
reasonable. On March 14, 2006, in connection with the PSC of MDs annual review of Washington Gass
gas costs that were billed to customers in Maryland from September 2003 through August 2004, a
Hearing Examiner of the PSC of MD issued a proposed order approving purchased gas charges of
Washington Gas for the twelve-month period ended August 2004, except for $4.6 million of such
charges that the Hearing Examiner recommended be disallowed because, in the opinion of the Hearing
Examiner, they were not reasonably incurred. As a result, during the fiscal year ended September
30, 2006, Washington Gas accrued a liability of $4.6 million related to the proposed disallowance
of these purchased gas charges.
Washington Gas filed appeals with the PSC of MD asserting that the Hearing Examiners
recommendation was without merit. On February 5, 2009, the PSC of MD issued an order that granted
the appeal and reversed the findings of the Hearing Examiner. Accordingly, the gas costs at issue
were deemed recoverable from rate payers. The PSC of MDs order concluded that the responsibility
for recovery of these costs should be assigned to the specific group of customers associated with
unbundled firm delivery service, directing Washington Gas to bill such costs to those customers
over a 24-month period and to provide a credit to firm bundled sales customers over the same
period. As a result of this order, the liability recorded in fiscal year 2006 for this issue was
reversed in the quarter ended December 31, 2008, and
Washington Gas recorded income of $4.6 million to
Operating revenues-utility. On February
25, 2009, Washington Gas filed its compliance plan with the PSC of MD which outlined the plan for
returning these funds to its firm sales customers, as well as collecting funds from firm delivery
service customers beginning with Washington Gass May 2009 billing cycle and ending with its April
2011 billing cycle. On April 29, 2009, the PSC of MD approved Washington Gass plan.
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A hearing was held March 27, 2009 on Washington Gass purchased gas charges for the twelve
month period ended August 31, 2008. No party challenged Washington Gass gas costs incurred during
the period, but the Staff of the PSC of MD (MD Staff) and the PSC of MD Office of the Peoples
Counsel (MD OPC) requested that the case remain open subject to any changes that may result from
the final PSC of MD order regarding Washington Gass asset management and gas purchase practices
(refer to the section entitled Investigation of Asset Management and Gas Purchase Practices for a
further discussion of this case). On April 23, 2010, the Hearing Examiner issued a Proposed Order
which approved Washington Gass gas costs for the period, subject to any changes which may arise
from the Commissions final order in the asset management investigation in Case No. 9158. The
Proposed Order was not appealed by any party and became a final order of the Commission on May 25,
2010.
A hearing was held on March 25, 2010 on Washington Gass purchased gas charges for the twelve
month period ended August 31, 2009. The parties filed initial briefs on April 30, 2010 and reply
briefs on May 21, 2010. The Staff of the PSC of MD and the MD OPC are challenging a portion of the
Companys gas costs averring that the Company did not have authority under its tariff to cash-out
over-deliveries by suppliers over the 12-months ended March 2009 and also asserting that the
Company used an excessive price as the cash-out price. Staff recommends that a second phase to
the proceeding be initiated to investigate these assertions. The Company has denied both these
assertions. The parties are awaiting a decision from the Hearing Examiner.
Investigation of Asset Management and Gas Purchase Practices. On July 24, 2008, the Office of
Staff Counsel of the PSC of MD submitted a petition to the PSC of MD to establish an investigation
into Washington Gass asset management program and cost recovery of its gas purchases. On September
4, 2008, the PSC of MD docketed a new proceeding to consider the issues raised in the petition
filed by the Staff. In accordance with the procedural schedule, Washington Gas filed direct
testimony on November 21, 2008; direct testimony by intervening parties was filed on February 4,
2009, and Washington Gass rebuttal testimony was filed March 11, 2009. A public hearing was held
on March 19, 2009. Initial briefs were filed by Washington Gas and other parties on June 25, 2009.
Reply briefs were filed on August 3, 2009.
On November 2, 2009, the Chief Hearing Examiner of the PSC of MD issued a Proposed Order of
Hearing Examiner (POHE) which supports Washington Gass move to self-optimization of its gas
assets, concluding that the evidence on the record in this case is overwhelming that Washington
Gass decision to transition to self-management has in fact been prudent and resulted in
substantial rate benefits... The POHE also approved Washington Gass proposal for the sharing of
margins from asset optimization between Washington Gas and customers based on a graduated, tiered
approach. The POHE directed Washington Gas to pass credits to customers through the PGC provision.
The POHE approved Washington Gass current methodology for pricing storage injections.
However, the POHE stated that the parties will have 60 days from the date of a final order in the
case to suggest any alternative pricing methods. The POHE also directed Washington Gas to consult
with the other parties to develop greater transparency and separate accounting or tracking of asset
optimization activities and to provide a proposal or report within 60 days after a final order is
issued.
The POHE directed Washington Gas to include language in its tariff that would prevent
losses from asset optimization activity over a full year from being passed on to ratepayers, but
recognizes that timing differences or accounting adjustments, which may appear as a loss in a
particular month, may occur.
On December 2, 2009, both the MD Staff and the Office of Peoples Counsel filed Notices of
Appeal of the POHE and on December 14, 2009, both filed a Memorandum on Appeal in support of their
positions. On January 4, 2010, Washington Gas filed a Reply Memorandum in response to the Staff of
the PSC of MD and the MD OPCs Memoranda on Appeal. A Commission decision is pending.
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Investigation Into Operating Issues Related to Cove Point Natural Gas Supply. On February 2,
2009, the PSC of MD issued an order reopening the evidentiary proceedings in a previously
established case for the purpose of investigating and considering revised solutions to the gas
distribution system leak problems (refer to the section entitled Operating Issues Related to Cove
Point Natural Gas Supply). A technical conference was held on May 22, 2009, interested parties are
currently engaged in discovery and status reports by the parties were filed with the Hearing
Examiner on July 23, 2009, September 18, 2009 and November 5, 2009. On December 4, 2009, the
parties filed a letter with the Hearing Examiner stating that all parties are in agreement that no
further evidentiary hearings are necessary at the present time. Washington Gas agreed to provide
additional information to the Staff of the PSC of MD and the MD OPC in on-going quarterly reports
filed with the Commission and to discuss the quarterly reports after they are filed.
Review of the Companys 2009 2013 Gas Portfolio Plan. On March 19, 2009, the PSC of MD
docketed a proceeding to review the Washington Gass 2009 2013 Gas Portfolio Plan, specifically
noting Washington Gass plans to build an on-system peaking facility on the grounds of the
decommissioned Chillum gas storage holders in Chillum, Maryland. Refer to the section entitled
Chillum LNG Facility for further discussion of this matter. A pre-hearing conference was held on
April 15, 2009, at which time interventions were granted and a procedural schedule was established.
Upon consideration of a motion to combine review of Washington Gass Gas Portfolio Plans, on
January 6, 2010, the PSC of MD consolidated this proceeding with Washington Gass 2010 2014 Gas
Portfolio Plan, which was filed on November 17, 2009. Washington Gas filed supplemental testimony
on February 18, 2010. Testimony by the Staff of the PSC of MD, the MD OPC and other interveners was
filed on April 14, 2010 and Rebuttal Testimony was filed on May 28, 2010. Washington Gas announced
on May 6, 2010, that it projected a new in-service date for the on-system peaking facility until
the 2015-2016 winter heating season. As a result, at a motions hearing on June 10, 2010, the
Hearing Examiner ruled that the facility is not subject to review as part of the Gas Portfolio
Plans being considered in the current proceeding, which had a term from 2010 2014. Hearings
were held on June 15 and 16, 2010 on the remaining issues in the case. Initial briefs are due
August 13, 2010 and reply briefs are due September 17, 2010.
Virginia Jurisdiction
Conservation and Ratemaking Efficiency Plan. On September 29, 2009, Washington
Gas filed with the SCC of VA an application which included a portfolio of conservation and energy
efficiency programs, an associated cost recovery provision and a decoupling mechanism which will
adjust weather normalized non-gas distribution revenues for the impact of conservation or energy
efficiency efforts. An evidentiary hearing in the proceeding was held on February 9, 2010. On March
26, 2010 the SCC of VA issued an Order approving a decoupling rate mechanism for residential
customers and six residential energy efficiency programs and the cost recovery mechanism for those
programs. Washington Gas filed compliance tariffs with the Staff of the SCC of VA on April 19,
2010 to implement the Conservation and Ratemaking Efficiency Plan on May 1, 2010.
The Company began applying the decoupling mechanism in Virginia in its July billings consistent with the Commissions approval.
On July 22, 2010, Washington Gas filed an amendment to the CARE
Plan to include small commercial and industrial customers in Virginia. The application included a
portfolio of conservation and energy efficiency programs, an associated cost recovery provision and
a decoupling mechanism and will adjust weather normalized non-gas distribution revenues for the
impact of conservation or energy efficiency efforts. The Company is currently awaiting the
establishment of a docket number and procedural schedule.
Performance-Based Rate Plans
In rate case proceedings in all jurisdictions, Washington Gas requested permission to
implement Performance-Based Rate (PBR) plans that include performance measures for customer service
and an ESM that enables Washington Gas to share with shareholders and customers the earnings that
exceed a target rate of return on equity.
Effective October 1, 2007, the SCC of VA approved the implementation of a PBR plan through the
acceptance of a settlement stipulation, which includes: (i) a four-year base rate freeze; (ii)
service quality measures to be determined in conjunction with the Staff of the SCC of VA and
reported quarterly for maintaining a safe and reliable natural gas distribution system while
striving to control operating costs; (iii) recovery of initial implementation costs associated with
achieving Washington Gass BPO initiatives over the four-year period of the PBR plan and (iv) an
ESM that enables Washington Gas to share with shareholders and Virginia customers the earnings that
exceed a target of 10.5% return on
equity. The calculation of the ESM excludes $2.4 million of asset management revenues that are
being refunded to customers as part of a new margin sharing agreement in Virginia.
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Item 2Managements Discussion and Analysis of
Financial Condition and Results of Operations (continued)
On May 4, 2009, the Staff of the SCC of VA issued a report, commenting on the amount of the
ESM liability that had been reported for the fiscal year ending September 30, 2008. Washington Gas
filed its response to the Staff report on June 18, 2009. On July 17, 2009, Washington Gas and the
Staff of the SCC of VA filed a joint motion to approve stipulation and close proceeding with the
SCC of VA whereby the Staff of the SCC of VA and Washington Gas agreed upon the appropriate refund
to ratepayers under the ESM. The overall difference between the Staff position and Washington Gass
position was not material to the financial statements of Washington Gas. On July 24, 2009, the SCC
of VA granted the joint motion and accepted the stipulation submitted by Washington Gas and the
Staff of the SCC of VA in its final order approving the ESM liability for fiscal year 2008. In
accordance with the provisions of its VA tariff, Washington Gas began crediting customers bills in
April 2009 for the fiscal year 2008 ESM liability. The credits continued through March, 2010. At
June 30, 2010, Washington Gas had fully refunded the ESM liability to its customers.
On January 28, 2010, Washington Gas filed its annual information filing indicating that there
was no ESM liability for fiscal year 2009. On May 24, 2010 the Staff issued its report to the SCC
of VA on the annual informational filing and the ESM. The Staff of the SCC of VA concurred with
Washington Gas that Virginia jurisdictional results did not generate an ESM liability for fiscal
year 2009. On June 9, 2010 Washington Gas filed notice that it had no comments on the Staffs
report. On June 30, 2010, the SCC of VA accepted the Staffs report and agreed that there was no
ESM liability for fiscal year 2009.
Based on the results reflected in the annual information filing, Washington Gas has recorded
revenue of approximately $0.5 million of previously expensed hexane costs and on June 23, 2010
filed an application with the SCC of VA requesting the authority to bill the cost of this hexane to
customers in accordance with the provision of the Settlement Stipulation in the last rate
proceeding. The SCC of VA has not issued a procedural schedule in this proceeding. On July 22,
2010, the Commission issued an Order for Notice and Comment in this proceeding. The Company is
required to file direct testimony by August 18, 2010 with the Staffs Report due October 21, 2010.
The Companys response to the Staffs Report is due November 4, 2010.
On an interim basis, Washington Gas records the effects of the ESM based on year-to-date
earnings in relation to estimated annual earnings as calculated for regulatory purposes. Based on
expected results for 2010, no liability has been recognized for 2010 and Washington Gas has accrued
revenue of approximately $1.0 million related to the recovery of hexane costs incurred in Virginia
in 2010.
On November 16, 2007, the PSC of MD issued a final order in a rate case, which established a
phase-two proceeding to review Washington Gass request to implement a PBR plan and issues raised
by the parties associated with Washington Gass BPO agreement. On September 4, 2008, a proposed
order of the Hearing Examiner was issued in this phase-two proceeding. Consistent with Washington Gass
current accounting methodology, the proposed order approved 10-year amortization accounting for
initial implementation costs related to Washington Gass BPO plan. At June 30, 2010 and September
30, 2009, we had recorded a regulatory asset of $6.7 million and $7.4 million, respectively, net of
amortization, related to initial implementation costs allocable to Maryland associated with our BPO
plan. Washington Gass application seeking approval of a PBR plan was denied. Additionally, the
proposed order (i) directs Washington Gas to obtain an independent management audit related to
issues raised in the phase-two proceeding and (ii) directs the initiation of a collaboration
process in which Washington Gas is directed to engage in discussions with the Staff of the PSC of
MD (MD Staff), the MD OPC and interested parties to develop appropriate customer service metrics
and a periodic form for reporting results similar to the metrics filed by Washington Gas as part of
the approved settlement in Virginia. This proposed order has been appealed by the MD Staff, the MD
OPC and other parties. Washington Gass reply memorandum on appeal was filed on November 5, 2008. A
final decision by the PSC of MD is pending.
The final order issued by the PSC of DC on December 28, 2007 approved amortization accounting
for initial implementation costs related to the BPO plan in approving the stipulated agreement
filed in the proceeding. As part of that approved agreement, Washington Gas withdrew its
application seeking approval of a PBR plan. Washington Gas is prohibited from seeking approval of a
PBR plan in the District of Columbia until the filing of its next
base rate case; however, the settling parties may not seek a change in rates during the rate case filing moratorium
period under the terms of the approved rate settlement, with the exception of the implementation of
a revenue normalization adjustment.
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Item 2Managements Discussion and Analysis of
Financial Condition and Results of Operations (concluded)
Washington Gas Light Company
Part IFinancial Information
Item 2Managements Discussion and Analysis of
Financial Condition and Results of Operations (concluded)
Depreciation Study
In October 2006, Washington Gas completed a depreciation rate study based on its property,
plant and equipment balances as of December 31, 2005. The results of the depreciation study
concluded that Washington Gass depreciation rates should be reduced due to asset lives being
extended beyond previously estimated lives. Under regulatory requirements, these depreciation rates
must be approved before they are placed into effect.
On April 13, 2007, Washington Gas filed the portion of the depreciation study related to the
Maryland jurisdiction. A separate proceeding was established on May 2, 2007, by the PSC of MD to
review Washington Gass request to implement new depreciation rates. On October 25, 2007,
Washington Gas filed a 2007 technical update of the Maryland depreciation study based on property,
plant and equipment balances as of December 31, 2006. Hearings were held May 12 and 13, 2008.
Initial briefs were filed on July 16, 2008 and reply briefs were filed on August 6, 2008. On
October 15, 2008, a proposed order of Hearing Examiner was issued in Maryland, which would reduce
Washington Gass annual depreciation expense related to the Maryland jurisdiction by approximately
$11.2 million when new depreciation rates are implemented, with a corresponding decrease in annual
revenues on a prospective basis to be reflected in future billing rates. Reflected in this
reduction in depreciation expense, among other things, are: (i) a change in methodology for
calculating accrued asset removal costs and (ii) the designation of certain insurance and
relocation reimbursements as salvage value. This reduction in depreciation expense will not impact
annual operating income and will not prevent the recovery of our capital investment; however, it
will have the effect of deferring full recovery of our capital investment into future years. On
November 14, 2008, Washington Gas and the MD OPC noted appeals of the October 15, 2008 proposed
order, thus suspending its effective date.
On February 5, 2010, the PSC of MD issued an order on appeal. The order affirmed the proposed
order with two exceptions: (i) it directed the parties to confer and report on a prospective
allocation method for reimbursements and (ii) it directed Washington Gas to amortize its $13.3
million reserve deficiency imbalance over a 33.5 year time frame. On March 26, 2010, Washington Gas
made a compliance filing with the PSC of MD to revise its depreciation rates in accordance with the
Commissions February 5, 2010 Order. Under Washington Gass proposed revised depreciation rates,
annual depreciation expense applicable to Maryland would be reduced by $11,366,000. As required by
the Commissions Order in Washington Gass most recent base rate case in Maryland, as part of its
compliance filing, Washington Gas also filed revised base rates to reflect the decrease in annual
depreciation expense in Maryland. The MD Staff challenged Washington Gass proposed depreciation
rates and supported alternative depreciation rates which would reduce depreciation expense by
$11,426,000. On May 12, 2010 the Commission approved the revised depreciation rates and base rates
proposed by Staff effective June 1, 2010. On May 25, 2010, Washington Gas filed a revised
compliance filing reflecting the $11,426,000 reduction in base rates.
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Part IFinancial Information
Washington Gas Light Company
Part IFinancial Information
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The following issues related to our market risks are included under Item 2, Managements
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 Retail Energy-Marketing Segment | ||
| Weather Risk | ||
| Interest-Rate Risk |
ITEM 4. CONTROLS AND PROCEDURES
Senior management, including the Chairman and Chief Executive Officer, and the Vice President
and Chief Financial Officer, evaluated the effectiveness of WGL Holdings 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 June 30, 2010. Based on this evaluation process, the Chairman and Chief
Executive Officer, and the Vice President and Chief Financial Officer have concluded that WGL
Holdings disclosure controls and procedures are effective. There have been no changes in the
internal control over financial reporting of WGL Holdings during the quarter ended June 30, 2010
that have materially affected, or are reasonably likely to materially affect, the internal control
over financial reporting of WGL Holdings.
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Part IIOther Information
ITEM 1. LEGAL PROCEEDINGS
The nature of our business ordinarily results in periodic regulatory proceedings before
various state and federal authorities and litigation incidental to the business. For information
regarding pending federal and state regulatory matters, see Note 14 Commitments and
Contingencies, contained in Part 1 under the Notes to Consolidated Financial Statements.
ITEM 6.
EXHIBITS
Exhibits Filed Herewith: | ||
10.1 |
Master Construction Contract, effective June 8, 2010, with Hitt Contracting Inc., related to general contracting services for the Washington Gas Springfield Operations Center redevelopment project. | |
31.1 |
Certification of Terry D. McCallister, the Chairman and Chief Executive Officer of WGL Holdings, Inc., pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
31.2 |
Certification of Vincent L. Ammann, Jr., the Vice President and Chief Financial Officer of WGL Holdings, Inc., pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
31.3 |
Certification of Terry D. McCallister, the Chairman and Chief Executive Officer of Washington Gas Light Company, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
31.4 |
Certification of Vincent L. Ammann, Jr., the Vice President and Chief Financial Officer of Washington Gas Light Company, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
32 |
Certification of Terry D. McCallister, the Chairman and Chief Executive Officer, and Vincent L. Ammann, Jr., the Vice President and Chief Financial Officer, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
Exhibits Submitted Herewith: | ||
101 |
The following materials from the WGL Holdings, Inc. and Washington Gas Light Company Quarterly Report on Form 10-Q for the quarter ended June 30, 2010, filed on August 6, 2010 formatted in Extensible Business Reporting Language (XBRL):* | |
(i) Consolidated Balance Sheets (Unaudited); | ||
(ii) Consolidated Statements of Income (Unaudited); | ||
(iii) Consolidated Statements of Cash Flows (Unaudited); | ||
(iv) Balance Sheets (Unaudited); | ||
(v) Statements of Income (Unaudited); | ||
(vi) Statements of Cash Flows (Unaudited) and | ||
(vii) Related Footnotes (Unaudited). | ||
Exhibits Incorporated by Reference: | ||
3 |
Articles of Incorporation & Bylaws: | |
Washington Gas Light Company Charter, filed on Form S-3 dated July 21, 1995. | ||
WGL Holdings, Inc. Charter, filed on Form S-4 dated February 2, 2000. | ||
Bylaws of WGL Holdings, Inc. as amended on March 5, 2009, filed as Exhibit 3(ii) to Form 8-K on March 6, 2009. |
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Part IIOther Information
Washington Gas Light Company
Part IIOther Information
Bylaws of Washington Gas Light Company as amended on September 23, 2009, filed as Exhibit 3(ii) to Form 8-K on September 25, 2009. | ||
22
|
Published Report Regarding Matters Submitted to Vote of Security Holders: | |
Submission of Matters to a Vote of Security Holders, filed as Exhibit 5.07 to Form 8-K dated March 9, 2010. |
* | Attached as Exhibit 101 to this Quarterly Report are the financial statements and related footnotes of WGL Holdings, Inc. and Washington Gas Light Company formatted in extensible business reporting language (XBRL). Pursuant to Rule 406T of Regulation S-T, these interactive data files are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933 or Section 18 of the Securities Exchange Act of 1934 and otherwise are not subject to liability. We also make available on our web site the Interactive Data Files submitted as Exhibit 101 to this Quarterly Report. |
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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.
WGL HOLDINGS, INC. | ||||
and | ||||
WASHINGTON GAS LIGHT COMPANY | ||||
(Co-Registrants) | ||||
Date: August 6, 2010
|
/s/ Mark P. OFlynn | |||
Controller | ||||
(Principal Accounting Officer) |
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