Attached files
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EX-32 - EX-32 - WASHINGTON GAS LIGHT CO | w81429exv32.htm |
EX-31.4 - EX-31.4 - WASHINGTON GAS LIGHT CO | w81429exv31w4.htm |
EX-31.3 - EX-31.3 - WASHINGTON GAS LIGHT CO | w81429exv31w3.htm |
EX-31.1 - EX-31.1 - WASHINGTON GAS LIGHT CO | w81429exv31w1.htm |
EX-31.2 - EX-31.2 - WASHINGTON GAS LIGHT CO | w81429exv31w2.htm |
EXCEL - IDEA: XBRL DOCUMENT - WASHINGTON GAS LIGHT CO | Financial_Report.xls |
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 December 31, 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. 101 Constitution Ave., N.W. Washington, D.C. 20080 (703) 750-2000 |
Virginia | 52-2210912 | ||||||||
0-49807 | Washington Gas Light Company 101 Constitution Ave., N.W. Washington, D.C. 20080 (703) 750-4440 |
District of Columbia and Virginia |
53-0162882 | ||||||||
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
January 31, 2011: 51,127,081 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 January 31, 2011.
WGL Holdings, Inc.
Washington Gas Light Company
Washington Gas Light Company
For the Quarter Ended December 31, 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 |
31 | |||
WGL Holdings, Inc. |
34 | |||
Washington Gas Light Company |
53 | |||
Item 3. Quantitative and Qualitative Disclosures about Market Risk |
58 | |||
Item 4. Controls and Procedures |
58 | |||
PART II. Other Information |
||||
Item 1. Legal Proceedings |
59 | |||
Item 6. Exhibits |
59 | |||
Signature |
61 |
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 Gas 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 Gas 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 Gas 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.
Consolidated Balance Sheets
(Unaudited)
Part IFinancial Information
Item 1Financial Statements
December 31, | September 30, | |||||||
(In thousands) | 2010 | 2010 | ||||||
ASSETS |
||||||||
Property, Plant and Equipment |
||||||||
At original cost |
$ | 3,398,096 | $ | 3,383,364 | ||||
Accumulated depreciation and amortization |
(1,040,483 | ) | (1,037,156 | ) | ||||
Net property, plant and equipment |
2,357,613 | 2,346,208 | ||||||
Current Assets |
||||||||
Cash and cash equivalents |
16,624 | 8,849 | ||||||
Receivables |
||||||||
Accounts receivable |
381,242 | 208,467 | ||||||
Gas costs and other regulatory assets |
9,728 | 18,714 | ||||||
Unbilled revenues |
254,019 | 91,337 | ||||||
Allowance for doubtful accounts |
(15,865 | ) | (20,306 | ) | ||||
Net receivables |
629,124 | 298,212 | ||||||
Materials and suppliesprincipally at average cost |
24,116 | 24,646 | ||||||
Storage gasat cost (first-in, first-out) |
210,828 | 242,223 | ||||||
Deferred income taxes |
22,982 | 22,808 | ||||||
Other prepayments |
90,272 | 93,700 | ||||||
Derivatives and other |
31,081 | 26,827 | ||||||
Total current assets |
1,025,027 | 717,265 | ||||||
Deferred Charges and Other Assets |
||||||||
Regulatory assets |
||||||||
Gas costs |
90,303 | 5,991 | ||||||
Pension and other post-retirement benefits |
447,020 | 452,035 | ||||||
Other |
65,491 | 73,342 | ||||||
Derivatives and other |
42,804 | 49,053 | ||||||
Total deferred charges and other assets |
645,618 | 580,421 | ||||||
Total Assets |
$ | 4,028,258 | $ | 3,643,894 | ||||
CAPITALIZATION AND LIABILITIES |
||||||||
Capitalization |
||||||||
Common shareholders equity |
$ | 1,201,658 | $ | 1,153,395 | ||||
Washington Gas Light Company preferred stock |
28,173 | 28,173 | ||||||
Long-term debt |
637,857 | 592,875 | ||||||
Total capitalization |
1,867,688 | 1,774,443 | ||||||
Current Liabilities |
||||||||
Current maturities of long-term debt |
57,100 | 30,098 | ||||||
Notes payable |
93,205 | 100,417 | ||||||
Accounts payable and other accrued liabilities |
355,974 | 225,362 | ||||||
Wages payable |
14,178 | 16,411 | ||||||
Accrued interest |
12,284 | 3,983 | ||||||
Dividends declared |
19,625 | 19,604 | ||||||
Customer deposits and advance payments |
69,932 | 65,343 | ||||||
Gas costs and other regulatory liabilities |
99,780 | 9,893 | ||||||
Accrued taxes |
30,305 | 14,828 | ||||||
Derivatives and other |
34,926 | 58,112 | ||||||
Total current liabilities |
787,309 | 544,051 | ||||||
Deferred Credits |
||||||||
Unamortized investment tax credits |
10,325 | 10,561 | ||||||
Deferred income taxes |
523,520 | 472,544 | ||||||
Accrued pensions and benefits |
359,510 | 359,729 | ||||||
Asset retirement obligations |
64,689 | 64,017 | ||||||
Regulatory liabilities |
||||||||
Accrued asset removal costs |
324,661 | 323,091 | ||||||
Other |
12,807 | 13,446 | ||||||
Derivatives and other |
77,749 | 82,012 | ||||||
Total deferred credits |
1,373,261 | 1,325,400 | ||||||
Commitments and Contingencies (Note 13) |
||||||||
Total Capitalization and Liabilities |
$ | 4,028,258 | $ | 3,643,894 | ||||
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)
Three Months Ended | ||||||||
December 31, | ||||||||
(In thousands, except per share data) | 2010 | 2009 | ||||||
OPERATING REVENUES |
||||||||
Utility |
$ | 409,294 | $ | 390,532 | ||||
Non-utility |
386,580 | 336,891 | ||||||
Total Operating Revenues |
795,874 | 727,423 | ||||||
OPERATING EXPENSES |
||||||||
Utility cost of gas |
208,620 | 197,277 | ||||||
Non-utility cost of energy-related sales |
328,793 | 313,205 | ||||||
Operation and maintenance |
77,568 | 73,516 | ||||||
Depreciation and amortization |
22,644 | 24,163 | ||||||
General taxes and other assessments |
40,472 | 31,420 | ||||||
Total Operating Expenses |
678,097 | 639,581 | ||||||
OPERATING INCOME |
117,777 | 87,842 | ||||||
Other IncomeNet |
888 | 369 | ||||||
Interest Expense |
||||||||
Interest on long-term debt |
9,774 | 9,895 | ||||||
AFUDC and other, net |
172 | (138 | ) | |||||
Total Interest Expense |
9,946 | 9,757 | ||||||
INCOME BEFORE INCOME TAXES |
108,719 | 78,454 | ||||||
INCOME TAX EXPENSE |
43,157 | 30,483 | ||||||
NET INCOME |
65,562 | 47,971 | ||||||
Dividends on Washington Gas preferred stock |
330 | 330 | ||||||
NET INCOME APPLICABLE TO COMMON STOCK |
$ | 65,232 | $ | 47,641 | ||||
AVERAGE COMMON SHARES OUTSTANDING |
||||||||
Basic |
51,067 | 50,241 | ||||||
Diluted |
51,143 | 50,429 | ||||||
EARNINGS PER AVERAGE COMMON SHARE |
||||||||
Basic |
$ | 1.28 | $ | 0.95 | ||||
Diluted |
$ | 1.28 | $ | 0.94 | ||||
DIVIDENDS DECLARED PER COMMON SHARE |
$ | 0.3775 | $ | 0.3675 | ||||
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)
Three Months Ended | ||||||||
December 31, | ||||||||
(In thousands) | 2010 | 2009 | ||||||
OPERATING ACTIVITIES |
||||||||
Net income |
$ | 65,562 | $ | 47,971 | ||||
ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIES |
||||||||
Depreciation and amortization |
22,644 | 24,163 | ||||||
Amortization of: |
||||||||
Other regulatory assets and liabilitiesnet |
916 | 911 | ||||||
Debt related costs |
201 | 210 | ||||||
Deferred income taxesnet |
50,538 | 21,162 | ||||||
Accrued/deferred pension cost (income) |
4,372 | 1,598 | ||||||
Compensation expense related to equity awards |
717 | 597 | ||||||
Provision for doubtful accounts |
4,451 | 3,909 | ||||||
Other non-cash charges (credits)net |
(1,374 | ) | (406 | ) | ||||
CHANGES IN ASSETS AND LIABILITIES |
||||||||
Accounts receivable and unbilled revenuesnet |
(344,349 | ) | (255,370 | ) | ||||
Gas costs and other regulatory assets/liabilitiesnet |
98,873 | 82,555 | ||||||
Storage gas |
31,395 | 38,971 | ||||||
Other prepayments |
3,428 | 26,619 | ||||||
Accounts payable and other accrued liabilities |
133,277 | 59,603 | ||||||
Wages payable |
(2,233 | ) | 596 | |||||
Customer deposits and advance payments |
4,589 | 7,402 | ||||||
Accrued taxes |
15,477 | 3,188 | ||||||
Accrued interest |
8,301 | 9,232 | ||||||
Other current assets |
(3,724 | ) | (2,071 | ) | ||||
Other current liabilities |
(23,186 | ) | 4,026 | |||||
Deferred gas costsnet |
(84,312 | ) | (62,447 | ) | ||||
Deferred assetsother |
18,054 | (4,004 | ) | |||||
Deferred liabilitiesother |
(8,373 | ) | 581 | |||||
Othernet |
551 | 452 | ||||||
Net Cash Provided by (Used in) Operating Activities |
(4,205 | ) | 9,448 | |||||
FINANCING ACTIVITIES |
||||||||
Common stock issued |
5,118 | 884 | ||||||
Long-term debt issued |
75,000 | 51,008 | ||||||
Long-term debt retired |
(22 | ) | (20 | ) | ||||
Debt issuance costs |
(18 | ) | 295 | |||||
Notes payable issued (retired)net |
(7,212 | ) | (7,298 | ) | ||||
Dividends on common stock and preferred stock |
(19,604 | ) | (18,801 | ) | ||||
Other financing activitiesnet |
(3,637 | ) | (791 | ) | ||||
Net Cash Provided by Financing Activities |
49,625 | 25,277 | ||||||
INVESTING ACTIVITIES |
||||||||
Capital expenditures (excluding Allowance for Funds Used During Construction) |
(32,495 | ) | (28,948 | ) | ||||
Investment in non-utility interests |
(5,150 | ) | - | |||||
Net Cash Used in Investing Activities |
(37,645 | ) | (28,948 | ) | ||||
INCREASE IN CASH AND CASH EQUIVALENTS |
7,775 | 5,777 | ||||||
Cash and Cash Equivalents at Beginning of Year |
8,849 | 7,845 | ||||||
Cash and Cash Equivalents at End of Year |
$ | 16,624 | $ | 13,622 | ||||
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION |
||||||||
Income taxes paid |
$ | 67 | $ | 1,836 | ||||
Interest paid |
$ | 1,707 | $ | 490 | ||||
SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING AND FINANCING ACTIVITIES |
||||||||
Extinguishment of project debt financing |
$ | 2,971 | - | |||||
Capital expenditures included in accounts payable and other accrued liabilities |
$ | 5,210 | $ | (1,847 | ) |
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)
December 31, | September 30, | |||||||
(In thousands) | 2010 | 2010 | ||||||
ASSETS |
||||||||
Property, Plant and Equipment |
||||||||
At original cost |
$ | 3,358,353 | $ | 3,343,842 | ||||
Accumulated depreciation and amortization |
(1,017,050 | ) | (1,014,314 | ) | ||||
Net property, plant and equipment |
2,341,303 | 2,329,528 | ||||||
Current Assets |
||||||||
Cash and cash equivalents |
13,524 | 4,390 | ||||||
Receivables |
||||||||
Accounts receivable |
182,165 | 78,357 | ||||||
Gas costs and other regulatory assets |
9,728 | 18,714 | ||||||
Unbilled revenues |
147,966 | 20,484 | ||||||
Allowance for doubtful accounts |
(12,630 | ) | (16,704 | ) | ||||
Net receivables |
327,229 | 100,851 | ||||||
Materials and suppliesprincipally at average cost |
24,064 | 24,594 | ||||||
Storage gasat cost (first-in, first-out) |
130,804 | 169,267 | ||||||
Deferred income taxes |
18,390 | 10,633 | ||||||
Other prepayments |
81,774 | 59,317 | ||||||
Receivables from associated companies |
3,186 | 1,949 | ||||||
Derivatives and other |
4,833 | 7,050 | ||||||
Total current assets |
603,804 | 378,051 | ||||||
Deferred Charges and Other Assets |
||||||||
Regulatory assets |
||||||||
Gas costs |
90,303 | 5,991 | ||||||
Pension and other post-retirement benefits |
444,355 | 449,383 | ||||||
Other |
65,458 | 73,336 | ||||||
Derivatives and other |
23,361 | 33,987 | ||||||
Total deferred charges and other assets |
623,477 | 562,697 | ||||||
Total Assets |
$ | 3,568,584 | $ | 3,270,276 | ||||
CAPITALIZATION AND LIABILITIES |
||||||||
Capitalization |
||||||||
Common shareholders equity |
$ | 1,017,532 | $ | 994,876 | ||||
Preferred stock |
28,173 | 28,173 | ||||||
Long-term debt |
637,857 | 592,875 | ||||||
Total capitalization |
1,683,562 | 1,615,924 | ||||||
Current Liabilities |
||||||||
Current maturities of long-term debt |
57,100 | 30,098 | ||||||
Notes payable |
17,221 | 43,419 | ||||||
Accounts payable and other accrued liabilities |
174,088 | 127,358 | ||||||
Wages payable |
13,786 | 15,512 | ||||||
Accrued interest |
12,284 | 3,983 | ||||||
Dividends declared |
18,476 | 18,460 | ||||||
Customer deposits and advance payments |
69,932 | 63,343 | ||||||
Gas costs and other regulatory liabilities |
99,780 | 9,893 | ||||||
Accrued taxes |
27,584 | 13,277 | ||||||
Payables to associated companies |
25,416 | 9,170 | ||||||
Derivatives and other |
14,555 | 19,714 | ||||||
Total current liabilities |
530,222 | 354,227 | ||||||
Deferred Credits |
||||||||
Unamortized investment tax credits |
9,346 | 9,570 | ||||||
Deferred income taxes |
524,987 | 477,912 | ||||||
Accrued pensions and benefits |
357,212 | 357,456 | ||||||
Asset retirement obligations |
63,537 | 62,801 | ||||||
Regulatory liabilities |
||||||||
Accrued asset removal costs |
324,661 | 323,091 | ||||||
Other |
12,807 | 13,446 | ||||||
Derivatives and other |
62,250 | 55,849 | ||||||
Total deferred credits |
1,354,800 | 1,300,125 | ||||||
Commitments and Contingencies (Note 13) |
||||||||
Total Capitalization and Liabilities |
$ | 3,568,584 | $ | 3,270,276 | ||||
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)
Three Months Ended | ||||||||
December 31, | ||||||||
(In thousands) | 2010 | 2009 | ||||||
OPERATING REVENUES |
||||||||
Utility |
$ | 418,376 | $ | 398,864 | ||||
Non-utility |
- | 7 | ||||||
Total Operating Revenues |
418,376 | 398,871 | ||||||
OPERATING EXPENSES |
||||||||
Utility cost of gas |
217,703 | 205,609 | ||||||
Operation and maintenance |
63,997 | 63,853 | ||||||
Depreciation and amortization |
22,115 | 23,714 | ||||||
General taxes and other assessments |
38,355 | 29,817 | ||||||
Total Operating Expenses |
342,170 | 322,993 | ||||||
OPERATING INCOME |
76,206 | 75,878 | ||||||
Other IncomeNet |
896 | 351 | ||||||
Interest Expense |
||||||||
Interest on long-term debt |
9,774 | 9,895 | ||||||
AFUDC and other, net |
148 | (194 | ) | |||||
Total Interest Expense |
9,922 | 9,701 | ||||||
INCOME BEFORE INCOME TAXES |
67,180 | 66,528 | ||||||
INCOME TAX EXPENSE |
26,403 | 25,678 | ||||||
NET INCOME BEFORE PREFERRED STOCK DIVIDENDS |
$ | 40,777 | $ | 40,850 | ||||
Dividends on preferred stock |
330 | 330 | ||||||
NET INCOME APPLICABLE TO COMMON STOCK |
$ | 40,447 | $ | 40,520 | ||||
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)
Three Months Ended | ||||||||
December 31, | ||||||||
(In thousands) | 2010 | 2009 | ||||||
OPERATING ACTIVITIES |
||||||||
Net income |
$ | 40,777 | $ | 40,850 | ||||
ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIES |
||||||||
Depreciation and amortization |
22,115 | 23,714 | ||||||
Amortization of: |
||||||||
Other regulatory assets and liabilitiesnet |
916 | 911 | ||||||
Debt related costs |
201 | 233 | ||||||
Deferred income taxesnet |
39,121 | 24,060 | ||||||
Accrued/deferred pension cost (income) |
(4,516 | ) | 1,586 | |||||
Compensation expense related to equity awards |
688 | 572 | ||||||
Provision for doubtful accounts |
3,211 | 2,932 | ||||||
Other non-cash charges (credits)net |
(1,362 | ) | (399 | ) | ||||
CHANGES IN ASSETS AND LIABILITIES |
||||||||
Accounts receivable, unbilled revenues and receivables from associated companiesnet |
(239,812 | ) | (188,471 | ) | ||||
Gas costs and other regulatory assets/liabilitiesnet |
98,873 | 82,555 | ||||||
Storage gas |
38,463 | 22,748 | ||||||
Other prepayments |
(22,457 | ) | 13,894 | |||||
Accounts payable and other accrued liabilities, including payables to associated companies |
65,608 | 68,109 | ||||||
Wages payable |
(1,726 | ) | 851 | |||||
Customer deposits and advance payments |
6,589 | 7,402 | ||||||
Accrued taxes |
14,307 | 3,222 | ||||||
Accrued interest |
8,301 | 9,232 | ||||||
Other current assets |
2,747 | 2,967 | ||||||
Other current liabilities |
(5,159 | ) | 983 | |||||
Deferred gas costsnet |
(84,312 | ) | (62,447 | ) | ||||
Deferred assetsother |
25,328 | 855 | ||||||
Deferred liabilitiesother |
3,149 | (2,668 | ) | |||||
Othernet |
469 | 425 | ||||||
Net Cash Provided by Operating Activities |
11,519 | 54,116 | ||||||
FINANCING ACTIVITIES |
||||||||
Long-term debt issued |
75,000 | 51,008 | ||||||
Long-term debt retired |
(22 | ) | (20 | ) | ||||
Debt issuance costs |
(18 | ) | 295 | |||||
Notes payable issued (retired)net |
(26,198 | ) | (56,491 | ) | ||||
Dividends on common stock and preferred stock |
(18,460 | ) | (18,051 | ) | ||||
Other financing activitiesnet |
(462 | ) | (685 | ) | ||||
Net Cash Provided by (Used in) Financing Activities |
29,840 | (23,944 | ) | |||||
INVESTING ACTIVITIES |
||||||||
Capital expenditures (excluding Allowance for Funds Used During Construction) |
(32,225 | ) | (26,474 | ) | ||||
Net Cash Used in Investing Activities |
(32,225 | ) | (26,474 | ) | ||||
INCREASE IN CASH AND CASH EQUIVALENTS |
9,134 | 3,698 | ||||||
Cash and Cash Equivalents at Beginning of Year |
4,390 | 5,160 | ||||||
Cash and Cash Equivalents at End of Year |
$ | 13,524 | $ | 8,858 | ||||
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION |
||||||||
Interest paid |
$ | 1,683 | $ | 433 | ||||
SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING AND FINANCING ACTIVITIES |
||||||||
Extinguishment of project debt financing |
$ | 2,971 | - | |||||
Capital expenditures included in accounts payable and other accrued liabilities |
$ | 5,189 | $ | (1,851 | ) |
The accompanying notes are an integral part of these statements.
9
WGL Holdings, Inc.
Washington Gas Light Company
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 four non-utility subsidiaries that include Washington Gas Energy
Services, Inc. (WGEServices), Washington Gas Energy Systems, Inc. (WGESystems), Capitol Energy
Ventures Corp. (CEV) and WGSW, Inc. 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, 2010. Due to
the seasonal nature of Washington Gas 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, 2011 and 2010 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 complete 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, 2010.
Newly Issued Accounting Standards
Fair Value. In January 2010, the Financial Accounting Standards Board (FASB) issued Accounting
Standards Update (ASU) 2010-06, Improving Disclosures about Fair Value Measurements. ASU 2010-06
amends Accounting Standards Codification (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 10 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 do not expect the adoption of this standard to have a material effect
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. With the exception of
disclosures relating to reporting period activity, ASU 2010-20 was
effective for us on December 31, 2010. The disclosure requirements
related to reporting period activity will be effective for us on
January 1, 2011. Adoption of this standard did not have a material
effect on our consolidated financial statements.
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)
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) | Dec 31, 2010 | Sep 30, 2010 | ||||||
Accounts payable - trade |
$ | 304,274 | $ | 193,776 | ||||
Employee benefits and payroll accruals |
15,275 | 24,078 | ||||||
Other accrued liabilities |
36,425 | 7,508 | ||||||
Total |
$ | 355,974 | $ | 225,362 | ||||
Washington Gas Light Company
(In thousands) | Dec 31, 2010 | Sep 30, 2010 | ||||||
Accounts payable - trade |
$ | 151,578 | $ | 100,608 | ||||
Employee benefits and payroll accruals |
14,454 | 22,322 | ||||||
Other accrued liabilities |
8,056 | 4,428 | ||||||
Total |
$ | 174,088 | $ | 127,358 | ||||
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 December 31, 2010 and
September 30, 2010.
Committed Credit Available (In millions)
As of December 31, 2010 | WGL Holdings | Washington Gas | Total Consolidated | |||||||||
Committed credit agreements |
||||||||||||
Unsecured revolving credit facility, expires August 3, 2012 (a) |
$ | 400.0 | $ | 300.0 | $ | 700.0 | ||||||
Less: Commercial Paper |
(76.0 | ) | (17.2 | ) | (93.2 | ) | ||||||
Net committed credit available |
$ | 324.0 | $ | 282.8 | $ | 606.8 | ||||||
As of September 30, 2010 |
WGL Holdings | Washington Gas | Total Consolidated | |||||||||
Committed credit agreements |
||||||||||||
Unsecured revolving credit facility, expires August 3, 2012 (a) |
$ | 400.0 | $ | 300.0 | $ | 700.0 | ||||||
Less: Commercial Paper |
(57.0 | ) | (43.4 | ) | (100.4 | ) | ||||||
Net committed credit available |
$ | 343.0 | $ | 256.6 | $ | 599.6 | ||||||
(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 Gas revolving credit facility
permits it to borrow an additional $100 million, with the banks approval, for a total of $400 million.
At December 31, 2010 and September 30, 2010, WGL Holdings and its subsidiaries had
outstanding notes payable in the form of commercial paper supported by revolving credit facilities
of $93.2 million and $100.4 million, respectively, at a weighted average interest rate of 0.32% and
0.31%, respectively. As of December 31, 2010 and September 30, 2010, respectively, there were no
outstanding bank loans from WGL Holdings or Washington Gas revolving credit facilities.
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 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 December 3, 2010, Washington Gas issued $75.0 million of 5.21% fixed MTNs with a thirty
year maturity due December 3, 2040. The estimated effective cost of the notes, including
consideration of issuance fees and hedge costs, is 5.96%.
At December 31, 2010, Washington Gas had the capacity, under a shelf registration to issue up
to $375.0 million of additional MTNs. At December 31, 2010 and September 30, 2010, outstanding MTNs
and private placement notes were $690.0 million and $615.0 million, respectively. At December 31,
2010 and September 30, 2010, the weighted average interest rate on all outstanding MTNs and private
placement notes was 5.95% and 6.04%, respectively.
NOTE 5. COMMON SHAREHOLDERS EQUITY
The tables below reflect the changes in Common shareholders equity for WGL
Holdings and Washington Gas for the three months ended December 31, 2010.
WGL Holdings, Inc.
Components of Common Shareholders Equity
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, 2010 |
$ | 543,121 | $ | 8,889 | $ | 609,956 | $ | (8,571 | ) | $ | 1,153,395 | |||||||||
Net income applicable to common stock |
- | - | 65,232 | - | 65,232 | |||||||||||||||
Post-retirement benefits adjustment,
net of taxes |
- | - | - | 129 | 129 | |||||||||||||||
Comprehensive income |
65,361 | |||||||||||||||||||
Stock-based compensation |
5,200 | (3,003 | ) | - | - | 2,197 | ||||||||||||||
Dividends declared: |
||||||||||||||||||||
Common Stock |
- | - | (19,295 | ) | - | (19,295 | ) | |||||||||||||
Balance at December 31, 2010 |
$ | 548,321 | $ | 5,886 | $ | 655,893 | $ | (8,442 | ) | $ | 1,201,658 | |||||||||
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)
Washington Gas Light Company
Components of Common Shareholders Equity
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, 2010 |
$ | 46,479 | $ | 470,825 | $ | 486,143 | $ | (8,571 | ) | $ | 994,876 | |||||||||
Net income before preferred stock dividends |
- | - | 40,777 | - | 40,777 | |||||||||||||||
Post-retirement benefits adjustment, net
of taxes |
- | - | - | 129 | 129 | |||||||||||||||
Comprehensive income |
40,906 | |||||||||||||||||||
Stock-based compensation |
- | 226 | - | - | 226 | |||||||||||||||
Dividends declared: |
||||||||||||||||||||
Common Stock |
- | - | (18,146 | ) | - | (18,146 | ) | |||||||||||||
Preferred Stock |
- | - | (330 | ) | - | (330 | ) | |||||||||||||
Balance at December 31, 2010 |
$ | 46,479 | $ | 471,051 | $ | 508,444 | $ | (8,442 | ) | $ | 1,017,532 | |||||||||
WGL Holdings had 51,112,762 and 50,974,992 shares issued of common stock at December 31,
2010 and September 30, 2010, respectively. Washington Gas had 46,479,536 shares issued of common
stock at both December 31, 2010 and September 30, 2010.
NOTE 6. COMPREHENSIVE INCOME
The tables below reflect the components of Comprehensive income for the three months ended
December 31, 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
Components of Comprehensive Income
Three Months Ended | ||||||||
December 31, | ||||||||
(In thousands) | 2010 | 2009 | ||||||
Net income applicable to common stock |
$ | 65,232 | $ | 47,641 | ||||
Other comprehensive income (loss), net of taxes (a) |
129 | (370 | ) | |||||
Comprehensive income |
$ | 65,361 | $ | 47,271 | ||||
(a) Amounts relate to postretirement benefits. |
||||||||
Washington Gas Light Company
Components of Comprehensive Income
Components of Comprehensive Income
Three Months Ended | ||||||||
December 31, | ||||||||
(In thousands) | 2010 | 2009 | ||||||
Net income before preferred stock dividends |
$ | 40,777 | $ | 40,850 | ||||
Other comprehensive income (loss), net of taxes (a) |
129 | (370 | ) | |||||
Comprehensive income |
$ | 40,906 | $ | 40,480 | ||||
(a) Amounts relate to postretirement benefits. |
||||||||
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)
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 months
ended December 31, 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 December 31, 2010 |
||||||||||||
Basic EPS |
$ | 65,232 | 51,067 | $ | 1.28 | |||||||
Stock-based compensation plans |
- | 76 | ||||||||||
Diluted EPS |
$ | 65,232 | 51,143 | $ | 1.28 | |||||||
Three Months Ended December 31, 2009 |
||||||||||||
Basic EPS |
$ | 47,641 | 50,241 | $ | 0.95 | |||||||
Stock-based compensation plans |
- | 188 | ||||||||||
Diluted EPS |
$ | 47,641 | 50,429 | $ | 0.94 | |||||||
There were no anti-dilutive shares for the three months ended December 31, 2010 or 2009.
NOTE 8. INCOME TAXES
As of December 31, 2010, our uncertain tax positions were approximately $23 million primarily
due to our change in tax accounting for repair deductions in 2010. If the amounts of unrecognized
tax benefits are eventually realized, it would not materially impact the effective tax rate. It is
reasonably possible that the amount of the unrecognized tax benefit with respect to Washington Gas
uncertain tax positions will significantly increase or decrease in the next 12 months due to the
on-going audit of Washington Gas by the IRS with respect to the tax year related to its change in
accounting method for repairs. At this time an estimate of the range of reasonably possible
outcomes cannot be determined. As of December 31, 2010 and 2009, the effective tax rate was 39.7%
and 38.9%, respectively.
Under the provision of ASC Topic 740, Income Taxes, Washington Gas recognizes any accrued
interest associated with uncertain tax positions in interest expense and recognizes any accrued
penalties associated with uncertain tax positions in other expenses in the statements of income.
During the three months ended December 31, 2010, we accrued
$229,000 in expense for interest on uncertain tax positions. We had $210,000 of interest
related to uncertain tax positions accrued as of September 30, 2010.
WGL Holdings files 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. DERIVATIVE AND WEATHER-RELATED INSTRUMENTS
DERIVATIVE INSTRUMENTS
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
Gas derivative contracts relate to: (i) Washington Gas asset optimization program, (ii)
managing price risk associated with the purchase of gas to serve utility customers and (iii)
managing interest rate risk.
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)
Asset Optimization. Washington Gas optimizes the value of its long-term natural gas
transportation and storage capacity resources during periods when these resources are not being
used to physically serve utility customers. Specifically, Washington Gas utilizes its
transportation capacity assets to benefit from favorable natural gas prices between different
geographic locations and its storage capacity assets to benefit from favorable natural gas prices
between different time periods. As part of this asset optimization program, Washington Gas enters
into physical and financial derivative transactions in the form of forward, swap 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 Gas 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 December 31, 2010 and 2009 were losses of $1.8
million and $0.5 million, respectively, including unrealized losses of $9.8 million and $4.0
million, respectively.
Managing Price Risk. To serve utility customers, as authorized by its regulators, Washington
Gas enters into forward contracts, option contracts, 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.
Non-Utility Operations
WGEServices 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. CEV
enters into derivative contracts for the purpose of optimizing its storage assets as well as
managing the transportation and storage assets on behalf of third parties. Derivative instruments
are recorded at fair value on our consolidated balance sheets. Neither WGEServices nor CEV
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 and CEV will ultimately realize
from the sales to their customers.
Consolidated Operations
In accordance with ASC 815, WGL Holdings offsets the fair
value of derivative instruments against the right to reclaim or obligation to return collateral for derivative instruments executed under the
same master netting arrangement. At December 31, 2010 and September 30, 2010, WGL Holdings had collateral receivables
totaling $14.9 million and $36.0 million, respectively, which were not eligible to be offset under master netting arrangements.
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 utility and non-utility
operations.
At December 31, 2010 and September 30, 2010, respectively, the absolute notional amounts of
our derivatives are as follows:
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)
Absolute Notional Amounts of Open Positions on Derivative instruments |
||||||||
Notional Amounts | ||||||||
As of December 31, 2010 | ||||||||
Derivative transactions | WGL Holdings | Washington Gas | ||||||
Natural Gas(in millions of therms) |
||||||||
Asset Optimization |
$ | 1,364.0 | $ | 1,364.0 | ||||
Retail sales |
5.0 | - | ||||||
Other risk-management activities |
590.4 | 172.6 | ||||||
Electricity (in kWh) |
||||||||
Retail sales |
433.0 | - | ||||||
Other risk-management activities |
$ | 15,783.0 | $ | - | ||||
As of September 30, 2010 | ||||||||
Derivative transactions | WGL Holdings | Washington Gas | ||||||
Natural Gas (in millions of therms) |
||||||||
Asset Optimization |
$ | 1,271.1 | $ | 1,271.1 | ||||
Retail sales |
5.0 | - | ||||||
Other risk-management activities |
316.8 | 123.2 | ||||||
Electricity (in kWh) |
||||||||
Retail sales |
1,417.0 | - | ||||||
Other risk-management activities |
13,278.0 | - | ||||||
Interest Rate Swap (notional principal amount in millions) |
$ | 75.0 | $ | 75.0 | ||||
The following tables present the balance sheet classification for all derivative
instruments as of December 31, 2010 and September 30, 2010, respectively.
WGL Holdings, Inc.
Balance Sheet Classification of Derivative Instruments
Balance Sheet Classification of Derivative Instruments
(In millions) | ||||||||||||||||
Derivative | Derivative | Netting of | ||||||||||||||
As of December 31, 2010 | Assets | Liabilities | Collateral | Total | ||||||||||||
Current Assets - Derivatives and other |
$ | 26.2 | $ | (10.0 | ) | $ | - | $ | 16.2 | |||||||
Deferred Charges and Other Assets - Derivatives and other |
56.2 | (32.4 | ) | - | 23.8 | |||||||||||
Current Liabilities - Derivatives and other |
12.6 | (46.3 | ) | 3.0 | (30.7 | ) | ||||||||||
Deferred Credits - Derivatives and other |
5.8 | (33.7 | ) | 3.8 | (24.1 | ) | ||||||||||
Total |
$ | 100.8 | $ | (122.4 | ) | $ | 6.8 | $ | (14.8 | ) | ||||||
As of September 30, 2010 |
||||||||||||||||
Current Assets - Derivatives and other |
$ | 22.7 | $ | (5.4 | ) | $ | - | $ | 17.3 | |||||||
Deferred Charges and Other Assets - Derivatives and other |
85.1 | (51.9 | ) | - | 33.2 | |||||||||||
Current Liabilities - Derivatives and other(*) |
12.2 | (67.5 | ) | 1.3 | (54.0 | ) | ||||||||||
Deferred Credits - Derivatives and other |
0.9 | (30.2 | ) | 3.3 | (26.0 | ) | ||||||||||
Total |
$ | 120.9 | $ | (155.0 | ) | $ | 4.6 | $ | (29.5 | ) | ||||||
(*) | includes interest rate swaps of ($11.6) million |
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)
Washington Gas Light Company
Balance Sheet Classification of Derivative Instruments
Balance Sheet Classification of Derivative Instruments
(In millions) | ||||||||||||||||
Derivative | Derivative | Netting of | ||||||||||||||
As of December 31, 2010 | Assets | Liabilities | Collateral | Total | ||||||||||||
Current Assets - Derivatives and other |
$ | 14.5 | $ | (10.0 | ) | $ | - | $ | 4.5 | |||||||
Deferred Charges and Other Assets - Derivatives and other |
46.7 | (32.4 | ) | - | 14.3 | |||||||||||
Current Liabilities - Derivatives and other |
6.8 | (16.6 | ) | - | (9.8 | ) | ||||||||||
Deferred Credits - Derivatives and other |
4.0 | (13.0 | ) | - | (9.0 | ) | ||||||||||
Total |
$ | 72.0 | $ | (72.0 | ) | $ | - | $ | - | |||||||
As of September 30, 2010 |
||||||||||||||||
Current Assets - Derivatives and other |
$ | 12.4 | $ | (5.4 | ) | $ | - | $ | 7.0 | |||||||
Deferred Charges and Other Assets - Derivatives and other |
74.1 | (51.9 | ) | - | 22.2 | |||||||||||
Current Liabilities - Derivatives and other(*) |
7.2 | (23.7 | ) | - | (16.5 | ) | ||||||||||
Deferred Credits - Derivatives and other |
0.2 | (0.5 | ) | - | (0.3 | ) | ||||||||||
Total |
$ | 93.9 | $ | (81.5 | ) | $ | - | $ | 12.4 | |||||||
(*) includes interest rate swaps of ($11.6) million |
The following tables present all gains and losses associated with derivative instruments
for the three months ended December 31, 2010 and 2009.
Gains and (Losses) on Derivative Instruments
Washington Gas | ||||||||||||||||
WGL Holdings, Inc. | Light Company | |||||||||||||||
December 31, | December 31, | |||||||||||||||
(In millions) | 2010 | 2009 | 2010 | 2009 | ||||||||||||
Recorded to income |
||||||||||||||||
Operating revenues - non-utility |
$ | (6.8 | ) | $ | 2.5 | $ | - | $ | - | |||||||
Utility cost of gas |
(5.1 | ) | 1.5 | (5.1 | ) | 1.5 | ||||||||||
Non-utility cost of energy-related sales |
25.3 | (3.2 | ) | - | - | |||||||||||
Recorded to regulatory assets/liabilities |
||||||||||||||||
Gas costs |
(15.3 | ) | (4.9 | ) | (15.3 | ) | (4.9 | ) | ||||||||
Other |
6.2 | 0.9 | 6.2 | 0.9 | ||||||||||||
Total |
$ | 4.3 | $ | (3.2 | ) | $ | (14.2 | ) | $ | (2.5 | ) | |||||
Certain of Washington Gas derivative instruments contain contract provisions that
require collateral to be posted if the credit rating of Washington Gas debt falls below certain
levels. 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
counterparty exposure to WGEServices exceeds a certain level. Due to counterparty exposure levels,
at December 31, 2010 and September 30, 2010, WGEServices had posted $0.1 million and $1.1 million,
respectively, of collateral related to its derivative liabilities that contained credit-related
contingent features. Washington Gas was not required to post any collateral at December 31, 2010 or
September 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 December 31, 2010 and September 30, 2010, respectively.
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)
Potential Collateral Requirements for Derivative Liabilities
with Credit-risk-Contingent Features
with Credit-risk-Contingent Features
(In millions) | WGL Holdings | Washington Gas | ||||||
As of December 31, 2010 |
||||||||
Derivative liabilities with credit-risk-contingent features |
$ | 90.1 | $ | 56.2 | ||||
Maximum potential collateral requirements |
36.8 | 5.8 | ||||||
As of September 30, 2010 |
||||||||
Derivative liabilities with credit-risk-contingent features |
$ | 111.3 | $ | 54.6 | ||||
Maximum potential collateral requirements |
67.5 | 12.3 | ||||||
Washington Gas, WGEServices, and CEV do not enter into derivative contracts for
speculative purposes.
Concentration of Credit Risk
Washington Gas, WGEServices and CEV 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, Washington Gas, WGEServices, and CEV
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 December 31, 2010, two counterparties each represented over
10.0% of Washington Gas credit exposure to wholesale derivative counterparties, for a total credit
risk of $15.0 million. Our non-utility operations had three counterparties, each representing over
10.0% of their combined credit exposure to wholesale counterparties for a total credit risk of $9.6 million at
December 31, 2010.
WEATHER-RELATED INSTRUMENTS
Regulated Utility Operations
On September 24, 2010, Washington Gas executed heating degree day (HDD) weather derivatives to
manage its financial exposure to variations from normal weather in the District of Columbia for
fiscal year 2011. Washington Gas purchased protection against net revenue shortfalls due to
warmer-than-normal weather and sold colder weather benefits. Washington Gas elected to value
all weather derivatives at fair value.
During the three months ended December 31, 2010 and 2009, Washington Gas recorded pre-tax
losses of $1.5 million and $1.4 million, respectively. Gains and losses associated with Washington
Gas 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. These contracts provide for payment to
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
December 31, 2010 and 2009, WGEServices recorded pretax expenses of $1.9 million and $0.3 million,
respectively, related to these derivatives these expenses are included in the non-utility cost of
energy-related sales on the accompanying consolidated statements of income of WGL Holdings, Inc.
NOTE 10. 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 and (iii) long-term debt outstanding
that are 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
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)
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 December 31, 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
December 31, 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.
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 for the assets or liabilities at
the reporting date. At December 31, 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. Additionally, at December 31, 2010 and September 30, 2010, respectively, financial
instruments included weather derivatives valued using unobservable market data.
The following table sets forth financial instruments recorded at fair value as of December 31,
2010 and September 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.
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)
WGL Holdings, Inc.
Fair Value Measurements Under the Fair Value Hierarchy
Fair Value Measurements Under the Fair Value Hierarchy
(In millions) | Level 1 | Level 2 | Level 3 | Total | ||||||||||||
At December 31, 2010 |
||||||||||||||||
Assets |
||||||||||||||||
Natural gas related derivatives |
$ | - | $ | 38.1 | $ | 36.7 | $ | 74.8 | ||||||||
Electricity related derivatives |
- | 1.2 | 24.8 | 26.0 | ||||||||||||
Weather derivative |
- | - | 0.9 | 0.9 | ||||||||||||
Total Assets |
$ | - | $ | 39.3 | $ | 62.4 | $ | 101.7 | ||||||||
Liabilities |
||||||||||||||||
Natural gas related derivatives |
$ | - | $ | (41.8 | ) | $ | (41.0 | ) | $ | (82.8 | ) | |||||
Electricity related derivatives |
- | (5.0 | ) | (34.6 | ) | (39.6 | ) | |||||||||
Weather derivative |
- | - | (2.9 | ) | (2.9 | ) | ||||||||||
Total Liabilities |
$ | - | $ | (46.8 | ) | $ | (78.5 | ) | $ | (125.3 | ) | |||||
At September 30, 2010 |
||||||||||||||||
Assets |
||||||||||||||||
Natural gas related derivatives |
$ | - | $ | 39.1 | $ | 57.2 | $ | 96.3 | ||||||||
Electricity related derivatives |
- | - | 24.6 | 24.6 | ||||||||||||
Weather derivative |
- | - | 1.6 | 1.6 | ||||||||||||
Total Assets |
$ | - | $ | 39.1 | $ | 83.4 | $ | 122.5 | ||||||||
Liabilities |
||||||||||||||||
Natural gas related derivatives |
$ | - | $ | (42.1 | ) | $ | (45.3 | ) | $ | (87.4 | ) | |||||
Electricity related derivatives |
- | (10.4 | ) | (45.6 | ) | (56.0 | ) | |||||||||
Interest rate swaps |
- | (11.6 | ) | - | (11.6 | ) | ||||||||||
Weather derivative |
- | - | (2.1 | ) | (2.1 | ) | ||||||||||
Total Liabilities |
$ | - | $ | (64.1 | ) | $ | (93.0 | ) | $ | (157.1 | ) | |||||
Washington Gas Light Company | ||||||||||||||||
Fair Value Measurements Under the Fair Value Hierarchy | ||||||||||||||||
(In millions) | Level 1 | Level 2 | Level 3 | Total | ||||||||||||
At December 31, 2010 |
||||||||||||||||
Assets |
||||||||||||||||
Natural gas related derivatives |
$ | - | $ | 35.7 | $ | 36.3 | $ | 72.0 | ||||||||
Weather derivatives |
- | - | 0.9 | 0.9 | ||||||||||||
Total Assets |
$ | - | $ | 35.7 | $ | 37.2 | $ | 72.9 | ||||||||
Liabilities |
||||||||||||||||
Natural gas related derivatives |
$ | - | $ | (34.7 | ) | $ | (37.3 | ) | $ | (72.0 | ) | |||||
Weather derivatives |
- | - | (2.9 | ) | (2.9 | ) | ||||||||||
Total Liabilities |
$ | - | $ | (34.7 | ) | $ | (40.2 | ) | $ | (74.9 | ) | |||||
At September 30, 2010 |
||||||||||||||||
Assets |
||||||||||||||||
Natural gas related derivatives |
$ | - | $ | 37.3 | $ | 56.6 | $ | 93.9 | ||||||||
Weather derivatives |
- | - | 1.6 | 1.6 | ||||||||||||
Total Assets |
$ | - | $ | 37.3 | $ | 58.2 | $ | 95.5 | ||||||||
Liabilities |
||||||||||||||||
Natural gas related derivatives |
$ | - | $ | (29.0 | ) | $ | (40.9 | ) | $ | (69.9 | ) | |||||
Interest rate swaps |
- | (11.6 | ) | - | (11.6 | ) | ||||||||||
Weather derivatives |
- | - | (2.1 | ) | (2.1 | ) | ||||||||||
Total Liabilities |
$ | - | $ | (40.6 | ) | $ | (43.0 | ) | $ | (83.6 | ) | |||||
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)
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 year ended September 30, 2010, a
$2.0 million fair value liability related to Washington Gas weather derivative was transferred
from level 2 to level 3 in the fair value hierarchy and a $0.9 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.
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 periods ended December
31, 2010 and 2009, respectively.
Reconciliation of Fair Value Measurements Using Significant Level 3 Inputs
(In millions) | WGL Holdings | Washington Gas | ||||||
Three Months Ended December 31, 2010 |
||||||||
Balance at October 1, 2010 |
$ | (9.6 | ) | $ | 15.2 | |||
Realized and unrealized gains (losses) |
||||||||
Recorded to income |
(4.3 | ) | (5.6 | ) | ||||
Recorded to regulatory assets - gas costs |
(12.6 | ) | (12.6 | ) | ||||
Purchases and settlements, net |
10.4 | - | ||||||
Balance at December 31, 2010 |
$ | (16.1 | ) | $ | (3.0 | ) | ||
Three Months Ended December 31, 2009 |
||||||||
Balance at October 1, 2009 |
$ | (27.6 | ) | (6.3 | ) | |||
Realized and unrealized gains (losses) |
||||||||
Recorded to income |
(16.6 | ) | (1.6 | ) | ||||
Recorded to regulatory assets - gas costs |
(2.5 | ) | (2.5 | ) | ||||
Transfers in and/or out of Level 3(a) |
(2.1 | ) | (2.1 | ) | ||||
Purchases and settlements, net |
10.4 | 1.2 | ||||||
Balance at December 31, 2009 |
$ | (38.4 | ) | $ | (11.3 | ) | ||
(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
months ended December 31, 2010, and 2009, respectively, related to fair value measurements using significant level 3 inputs.
Realized and Unrealized Gains (Losses) Recorded to Income for Level 3 Measurements
Three Months Ended December 31, | ||||||||||||||||
WGL Holdings | Washington Gas | |||||||||||||||
(In millions) | 2010 | 2009 | 2010 | 2009 | ||||||||||||
Operating revenues non-utility |
$ | (5.3 | ) | $ | 2.5 | $ | - | $ | - | |||||||
Utility cost of gas |
(4.1 | ) | (0.2 | ) | (4.1 | ) | (0.2 | ) | ||||||||
Non-utility cost of energy-related sales |
6.6 | (18.9 | ) | - | (1.4 | ) | ||||||||||
Operation and maintenance expense |
(1.5 | ) | - | (1.5 | ) | - | ||||||||||
Total |
$ | (4.3 | ) | $ | (16.6 | ) | $ | (5.6 | ) | $ | (1.6 | ) | ||||
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)
Unrealized gains (losses) for the three months ended December 31, 2010 and 2009, respectively, attributable to
financial instruments measured using significant Level 3 inputs
were recorded as follows:
Unrealized Gains (Losses) Recorded for Level 3 Measurements
WGL Holdings | Washington Gas | |||||||||||||||
(In millions) | 2010 | 2009 | 2010 | 2009 | ||||||||||||
Recorded to income |
||||||||||||||||
Operating revenues - non-utility |
$ | 0.3 | $ | 6.0 | $ | - | $ | - | ||||||||
Utility cost of gas |
(4.1 | ) | (0.1 | ) | (4.1 | ) | (0.1 | ) | ||||||||
Non-utility cost of energy-related sales |
7.0 | (7.9 | ) | - | (1.4 | ) | ||||||||||
Operation and maintenance expense |
(1.5 | ) | - | (1.5 | ) | - | ||||||||||
Recorded to regulatory assets - gas costs |
(12.6 | ) | (2.8 | ) | (12.6 | ) | (2.8 | ) | ||||||||
Total |
$ | (10.9 | ) | $ | (4.8 | ) | $ | (18.2 | ) | $ | (4.3 | ) | ||||
The following table presents the carrying amount and estimated fair value of our long-term debt at December 31,
2010 and September 30, 2010, 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
December 31, 2010 | ||||||||
(In millions) | Carrying Amount | Fair Value | ||||||
Long-term debt (a) |
$ | 637.9 | $ | 718.6 | ||||
September 30, 2010 | ||||||||
Carrying Amount | Fair Value | |||||||
Long-term debt (a) |
$ | 592.9 | $ | 716.5 | ||||
(a) Excludes current maturities and unamortized discounts. |
Washington Gas long-term debt is not actively traded. The fair value of long-term debt was estimated based
on the quoted market prices of U.S. Treasury issues having a similar term to maturity, adjusted for Washington Gas credit
quality.
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)
NOTE 11. 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 89% 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 Gas 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.
Activities and transactions that are not significant enough on a stand-alone basis to warrant
treatment as an operating segment, and that do not fit into one of our 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. These activities include the operations of
Capitol Energy Ventures Corp (CEV), a non-utility wholesale energy company that engages in
acquiring and optimizing natural gas storage and transportation assets and WGSW, Inc., a holding
company formed to invest in solar photovoltaic power generating facilities. Transactions classified
in Other Activities primarily consist of administrative costs associated with WGL Holdings and
Washington Gas Resources and the results of CEVs unrealized gains on energy-related derivatives.
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 months ended December 31, 2010 and 2009.
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)
Operating Segment Financial Information | ||||||||||||||||||||||||
Non-Utility Operations | ||||||||||||||||||||||||
Design-Build | ||||||||||||||||||||||||
Regulated | Retail Energy- | Energy | Other | |||||||||||||||||||||
(In thousands) | Utility | Marketing | Systems | Activities | Eliminations | Consolidated | ||||||||||||||||||
Three Months Ended December 31, 2010 |
||||||||||||||||||||||||
Operating Revenues (a) |
$ | 418,376 | $ | 379,397 | $ | 6,955 | $ | 228 | $ | (9,082 | ) | $ | 795,874 | |||||||||||
Operating Expenses: |
||||||||||||||||||||||||
Cost of energy-related sales |
217,703 | 323,152 | 5,640 | - | (9,082 | ) | 537,413 | |||||||||||||||||
Operation |
52,951 | 12,444 | 1,073 | 826 | - | 67,294 | ||||||||||||||||||
Maintenance |
10,274 | - | - | - | - | 10,274 | ||||||||||||||||||
Depreciation and amortization |
22,415 | 211 | 18 | - | - | 22,644 | ||||||||||||||||||
General taxes and other assessments: |
||||||||||||||||||||||||
Revenue taxes |
25,921 | 882 | - | - | - | 26,803 | ||||||||||||||||||
Other |
12,491 | 1,128 | 42 | 8 | - | 13,669 | ||||||||||||||||||
Total Operating Expenses |
341,755 | 337,817 | 6,773 | 834 | (9,082 | ) | 678,097 | |||||||||||||||||
Operating Income |
76,621 | 41,580 | 182 | (606 | ) | - | 117,777 | |||||||||||||||||
Other Income (Expenses)-Net |
877 | 14 | 5 | 44 | (52 | ) | 888 | |||||||||||||||||
Interest Expense |
9,922 | 44 | - | 32 | (52 | ) | 9,946 | |||||||||||||||||
Income Tax Expense |
26,562 | 16,731 | 73 | (209 | ) | - | 43,157 | |||||||||||||||||
Dividends on Washington Gas preferred stock |
330 | - | - | - | - | 330 | ||||||||||||||||||
Net Income Applicable to Common Stock |
$ | 40,684 | $ | 24,819 | $ | 114 | $ | (385 | ) | $ | - | $ | 65,232 | |||||||||||
Total Assets |
$ | 3,578,931 | $ | 389,849 | $ | 17,254 | $ | 186,981 | $ | (144,757 | ) | $ | 4,028,258 | |||||||||||
Capital Expenditures/Investments |
$ | 32,397 | $ | 90 | $ | 8 | $ | - | $ | - | $ | 32,495 | ||||||||||||
Three Months Ended December 31, 2009 |
||||||||||||||||||||||||
Operating Revenues (a) |
$ | 398,864 | $ | 333,524 | $ | 3,362 | $ | 5 | $ | (8,332 | ) | $ | 727,423 | |||||||||||
Operating Expenses: |
||||||||||||||||||||||||
Cost of energy-related sales |
205,609 | 310,499 | 2,706 | - | (8,332 | ) | 510,482 | |||||||||||||||||
Operation |
51,962 | 8,781 | 959 | 603 | - | 62,305 | ||||||||||||||||||
Maintenance |
11,211 | - | - | - | - | 11,211 | ||||||||||||||||||
Depreciation and amortization |
23,974 | 173 | 16 | - | - | 24,163 | ||||||||||||||||||
General taxes and other assessments: |
||||||||||||||||||||||||
Revenue taxes |
17,407 | 614 | - | - | - | 18,021 | ||||||||||||||||||
Other |
12,460 | 890 | 40 | 9 | - | 13,399 | ||||||||||||||||||
Total Operating Expenses |
322,623 | 320,957 | 3,721 | 612 | (8,332 | ) | 639,581 | |||||||||||||||||
Operating Income (Loss) |
76,241 | 12,567 | (359 | ) | (607 | ) | - | 87,842 | ||||||||||||||||
Other Income (Expenses)-Net |
281 | 19 | 10 | 120 | (61 | ) | 369 | |||||||||||||||||
Interest Expense |
9,701 | 59 | - | 58 | (61 | ) | 9,757 | |||||||||||||||||
Income Tax Expense (Benefit) |
25,795 | 5,020 | (137 | ) | (195 | ) | - | 30,483 | ||||||||||||||||
Dividends on Washington Gas preferred stock |
330 | - | - | - | - | 330 | ||||||||||||||||||
Net Income (Loss) Applicable to Common Stock |
$ | 40,696 | $ | 7,507 | $ | (212 | ) | $ | (350 | ) | $ | - | $ | 47,641 | ||||||||||
Total Assets |
$ | 3,262,330 | $ | 365,295 | $ | 18,303 | $ | 129,959 | $ | (171,031 | ) | $ | 3,604,856 | |||||||||||
Capital Expenditures/Investments |
$ | 26,688 | $ | 2,233 | $ | 27 | $ | - | $ | - | $ | 28,948 | ||||||||||||
(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.
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)
NOTE 12. 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, consistent with jurisdictional
regulatory rules, 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 Gas balance sheets. Washington Gas assigns or allocates these costs directly to its
affiliates and, therefore, does not recognize revenues or expenses associated with providing these
services.
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 Gas balance
sheets. These transactions recorded by Washington Gas impact the balance sheet only.
At December 31, 2010 and September 30, 2010, the Washington Gas balance sheets reflected
receivables from associated companies of $3.2 million and $1.9 million, respectively. At December
31, 2010 and September 30, 2010, the Washington Gas balance sheets reflected payables to associated
companies of $25.4 million and $9.2 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, $9.1 million and $8.3 million for the three
months ended December 31, 2010 and 2009, 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 $1.9 million and $2.3 million at December 31, 2010 and September 30, 2010,
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 13. 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
Revenue Normalization Adjustment. On December 21, 2009, Washington Gas filed a revised tariff
application seeking approval of a Revenue Normalization Adjustment (RNA), a sales adjustment
mechanism that decouples Washington Gas non-gas revenues from actual delivered volumes of gas. On
December 22, 2009, the DC OPC filed a motion requesting that the District of Columbia Public
Service Commission (PSC of DC) establish public hearing procedures to examine the merits of
Washington Gas 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 an evidentiary proceeding to consider issues surrounding
Washington Gas 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.
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)
Washington Gas filed rebuttal testimony on June 29, 2010. Evidentiary hearings were held on July
27-29, 2010. Initial briefs were filed on August 13, 2010, and reply briefs were submitted on
August 26, 2010. On December 17, 2010 the Commission issued an order denying Washington Gas
application for an RNA stating that the RNA should be considered in the context of a base rate case
proceeding. Washington Gas filed an Application for Reconsideration on January 18, 2011. The matter
is pending.
Affiliate
Transactions Code of Conduct. On February 1, 2011, the PSC of DC
issued an order adopting rules governing affiliate transactions code of conduct for
regulated energy utilities and their affiliates. Included among the regulations are limitations
on joint marketing with core service affiliates, and disclosure of customer-specific information,
as well as restrictions on (i) favorable treatment of
affiliates, (ii) the provision of loans and loan guarantees by the
utility to an affiliate, and (iii)
sharing and temporary assignment of electric company employees with an affiliate. These regulations
also require the energy utilities to file Cost Allocation Manuals with the PSC of DC demonstrating
how they allocate and account for shared services with their affiliates. These rules will go into
effect upon publication in the D.C. Register.
Maryland Jurisdiction
Order on and Reviews of Purchased Gas Charges. Each year, the Public Service Commission of
Maryland (PSC of MD) reviews the annual gas costs collected from customers in Maryland to determine
if Washington Gas purchased gas costs are reasonable.
The PSC of MD held a hearing on March 25, 2010 related to Washington Gas 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 Washington Gas gas costs averring that Washington Gas did not have authority
under its tariff to satisfy in cash its obligation (cash-out) for over-deliveries by suppliers over
the 12-months ended March 2009 and also asserting that Washington Gas used an excessive price as the
cash-out price. The PSC of MD Staff recommends that a second phase to the proceeding be initiated
to investigate these assertions. Washington Gas has objected to both these assertions. Discovery
and testimony were filed in the case, and a hearing was held on March 25, 2010. The MD OPC has
taken a position that $2.1 million of gas costs related to the purchase of competitive service
provider (CSP) inventory included in the purchased gas charge should be disallowed. Briefs were
filed April 30, 2010, and reply briefs were filed May 21, 2010. A proposed order was issued by the
Hearing Examiner on August 25, 2010, finding that under the tariff, Washington Gas should have
resolved supplier over-deliveries during the review period by adjusting future delivery volumes by
suppliers, rather than by cash-out. The proposed order directed Washington Gas to refund to
customers the excess costs paid to suppliers as a result of the cash-out of supplier
over-deliveries. The proposed order also directed Washington Gas to present an exact calculation
of the excess amount paid to suppliers in accordance with the methodology proposed by the MD OPC.
The MD OPC had estimated the amount of the excess costs to Maryland ratepayers to be approximately
$2.1 million. The proposed order directs Washington Gas to credit $2.1 million to the actual cost
adjustment (ACA) as recommended by MD OPC. The Staff of the PSC of MD and Washington Gas filed
notices of appeal of the proposed order on September 23 and 24, 2010, respectively, and memorandums
on appeal on October 1 and 4, 2010, respectively. A Commission decision is pending.
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 Gas 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 Gas 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 Gas move to self-optimization of its gas assets,
concluding that the evidence on the record in this case is overwhelming that Washington Gas
decision to transition to self-management has in fact been prudent and resulted in substantial rate
benefits... The POHE approved Washington Gas 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 Gas 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.
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)
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.
Review of Washington Gas 2009-2013 Gas Portfolio Plan. On March 19, 2009, the PSC of MD
docketed a proceeding to review Washington Gas 20092013 Gas Portfolio Plan, specifically noting
Washington Gas plans to build an on-system peaking facility on the grounds of the decommissioned
Chillum gas storage holders in Chillum, Maryland. Upon consideration of a motion to combine review
of Washington Gas Gas Portfolio Plans, on January 6, 2010, the PSC of MD consolidated this
proceeding with Washington Gas 20102014 Gas Portfolio Plan, which was filed on November 17,
2009. Washington Gas announced on May 6, 2010, that it projected a new in-service date for the
on-system peaking facility: the 2015-2016 winter heating season. As a result, 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 20102014. The Hearing Examiner
subsequently approved Washington Gas portfolio plan, including the reserve margins reflected in
the Washington Gas energy acquisition planning. Initial briefs were filed on August 13, 2010 and
reply briefs were filed on September 17, 2010. On October 27, 2010, the Hearing Examiner issued a
proposed order. The Hearing Examiner found:
(i) | the Gas Portfolio Plan proposed by Washington Gas for years 2009-2013 and 2010-2014 are reasonable; | ||
(ii) | the design day forecasts contained in Washington Gas plans are correct and reasonable in determining the design day requirement; | ||
(iii) | a reserve margin proposed by Washington Gas of 5.0% to 6.5% continues to be reasonable and that | ||
(iv) | some additional information should be filed along with all future plans. |
The proposed order became final on November 30, 2010 as it was not appealed by any party.
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 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. Washington Gas began applying the decoupling mechanism in Virginia in its July
billings for residential customers 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. In accordance
with the procedural schedule established for the proceeding, the Staff of the SCC of VA filed its
report on September 13, 2010 and Washington Gas filed its response to the staff report on September
24, 2010. On November 18, 2010, the Commission issued an order that denied Washington Gas
application. The Commission found that Washington Gas current tariff and its underlying class cost
of service and revenue apportionment studies do not segregate small versus large customers and that
only small customers qualify under the CARE Plan legislation. The Commission stated that Washington
Gas could amend the underlying tariff and studies in connection with its required February 1, 2011
base rate case filing.
On January 31, 2011,
Washington Gas filed a request for a base rate increase of $29.6 million and
proposed that the new rates go into effect subject to refund on October 1, 2011. As part of its base rate case
filing,
Washington Gas proposed revisions to its underlying tariff for large commercial customers
consistent with the Commission orders in its CARE Plan.
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)
Performance-Based Rate Plans
In rate case proceedings in all local 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 Gas 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 January 28, 2010, Washington Gas
indicated in its annual information filing that there
was no ESM liability for fiscal year 2009. 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 a
regulatory asset 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. On July 22, 2010, the Commission issued an Order for Notice and Comment in this
proceeding. Washington Gas filed direct testimony on August 18, 2010 and the Staff issued its report
on October 20, 2010. The Staff found that Washington Gas request to recover $0.5 million of hexane
costs would not result in earnings exceeding Washington Gas 10% allowed return on average common
equity threshold and therefore Washington Gas should be allowed to bill the amounts. Washington Gas
filed its response to the Staffs Report on November 4, 2010. On December 15, 2010, the SCC of VA
issued an Order approving Washington Gas proposed billing of the cost of hexane.
On January 31, 2011,
Washington Gas indicated in its annual information filing that there
was no ESM liability for fiscal year 2010. The matter is pending before the Commission.
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 Gas request to implement a PBR plan and issues raised by
the parties associated with Washington Gas BPO agreement. On September 4, 2008, a proposed order
of the Hearing Examiner was issued in this phase-two proceeding. Consistent with Washington Gas
current accounting methodology, the proposed order approved 10-year amortization accounting for
initial implementation costs related to Washington Gas BPO plan. At December 31, 2010 and
September 30, 2010, we had recorded a regulatory asset of $6.2 million and $6.4 million,
respectively, net of amortization, related to initial implementation costs allocable to Maryland
associated with our BPO plan. Washington Gas 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 BPO 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 MD Staff, the 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. Aspects of this proposed order were appealed by the parties in
November 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 and is prohibited from seeking approval of a PBR plan in
the District of Columbia until the filing of its next base rate case.
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)
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 Gas
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. As the lender funds the construction project, Washington Gas establishes a note receivable
representing its customers obligations to remit principal and interest and a long-term note
payable to the lender. When these projects are formally accepted by the customer as completed,
Washington Gas transfers the ownership of the note receivable to the lender and removes both the
note receivable and the long-term financing from its financial statements. As of December 31, 2010,
work on these construction projects that was not completed or accepted by customers was valued at
$4.8 million, which is recorded on the balance sheet as a note 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 primarily for certain purchases of natural gas and
electricity on behalf of the retail energy-marketing segment. At December 31, 2010, these
guarantees totaled $561.2 million.
WGL Holdings has also guaranteed certain purchase commitments of its CEV subsidiary. At December 31, 2010, these guarantees totaled $78.8 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 counterparties when required by our credit policy.
WGL Holdings also issued guarantees
totaling $3.0 million at December 31, 2010 on behalf of certain of our non-utility
subsidiaries associated with their banking transactions. Of the total guarantees of $643.0 million,
$2.5 million expired on January 31, 2011, $49.1 million are due to expire on October 31, 2011 and
$36.0 million is due to expire on December 31, 2011. 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, 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.
NOTE 14. 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 months ended December 31, 2010 and 2009:
Components of Net Periodic Benefit Costs (Income) | ||||||||||||||||
Three Months Ended December 31, | ||||||||||||||||
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 |
$ | 3,033 | $ | 1,856 | $ | 2,482 | $ | 1,648 | ||||||||
Interest cost |
10,323 | 6,278 | 10,814 | 6,331 | ||||||||||||
Expected return on plan assets |
(11,136 | ) | (4,638 | ) | (11,755 | ) | (4,605 | ) | ||||||||
Amortization of prior service cost |
268 | (980 | ) | 270 | (1,005 | ) | ||||||||||
Amortization of actuarial loss |
3,670 | 2,809 | 1,088 | 2,195 | ||||||||||||
Amortization of transition obligation |
- | 272 | - | 272 | ||||||||||||
Net periodic benefit cost |
6,158 | 5,597 | 2,899 | 4,836 | ||||||||||||
Amount allocated to construction projects |
(745 | ) | (858 | ) | (270 | ) | (769 | ) | ||||||||
Amount
deferred as regulatory asset/liability - net |
(1,785 | ) | 535 | (1,304 | ) | 505 | ||||||||||
Other |
- | - | 7 | - | ||||||||||||
Amount charged to expense |
$ | 3,628 | $ | 5,274 | $ | 1,332 | $ | 4,572 | ||||||||
29
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)
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.
During fiscal year 2011, Washington Gas expects to make contributions totaling $29.6 million
to its qualified pension plan.
NOTE 15. SUBSEQUENT EVENTS
On January 31, 2011, Washington Gas filed a request for a base rate increase of $29.6 million
and proposed that the new rates go into effect subject to refund on October 1, 2011. As part of its base rate case
filing, Washington Gas proposed various billing, rate design and other proposals, including
revisions to its underlying tariff for large commercial customers
consistent with the SCC of VA
orders in its CARE Plan. Refer to the Washington Gas 8-K filing on February 3, 2011.
30
WGL Holdings, Inc.
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, 2010 (2010 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 non-utility operations. WGL Holdings operations are derived from the results of Washington Gas and Hampshire Gas Company (Hampshire) 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. |
Both sections of Managements DiscussionWGL Holdings and Washington Gasare designed to
provide an understanding of our operations and financial performance and should be read in
conjunction with the respective companys financial statements and the combined Notes to
Consolidated Financial Statements in this quarterly report.
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 89% of our consolidated total assets, the regulated
utility segment consists of Washington Gas and 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 Gas 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 Gas 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 Gas
net revenues and net income.
31
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 asset optimization program utilizes Washington Gas 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.
Activities and transactions that are not significant enough on a stand-alone basis to warrant
treatment as an operating segment, and that do not fit into one of our 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. These activities include the operations of
Capitol Energy Ventures Corp. (CEV), a non-utility wholesale energy company that engages in
acquiring and optimizing natural gas storage and transportation assets and WGSW, Inc., a holding
company formed to invest in solar photovoltaic power generating facilities. Transactions classified
in Other Activities primarily consist of administrative costs associated with WGL Holdings and
Washington Gas Resources and the results of CEVs unrealized losses on energy-related derivatives.
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; |
32
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)
non-weather related changes in natural gas consumption patterns; | |||
maintaining the safety and reliability of the natural gas distribution system; | |||
competitive environment; | |||
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 2010 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 2010 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.
33
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 December 31, 2010 vs. December 31, 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 $65.2 million, or $1.28 per
share, for the three months ended December 31, 2010 over net income applicable to common stock of
$47.6 million, or $0.94 per share, reported for the three months ended December 31, 2009.
The comparison of results for the three month period ended December 31, 2010 compared to the
same period of the prior fiscal year primarily reflects an increase in earnings from the
retail-energy marketing segment.
The following table summarizes our net income (loss) applicable to common stock by operating
segment for the three months ended December 31, 2010 and 2009.
Net Income (Loss) by Operating Segment | ||||||||||||
Three Months Ended | ||||||||||||
December 31, | Increase/ | |||||||||||
(In millions) | 2010 | 2009 | (Decrease) | |||||||||
Regulated Utility |
$ | 40.7 | $ | 40.7 | $ | - | ||||||
Non-utility operations: |
||||||||||||
Retail Energy-Marketing |
24.8 | 7.5 | 17.3 | |||||||||
Design-Build Energy Systems |
0.1 | (0.2 | ) | 0.3 | ||||||||
Other, principally non-utility activities |
(0.4 | ) | (0.4 | ) | - | |||||||
Total non-utility |
24.5 | 6.9 | 17.6 | |||||||||
Net income applicable to common stock |
$ | 65.2 | $ | 47.6 | $ | 17.6 | ||||||
EARNINGS PER AVERAGE COMMON SHARE |
||||||||||||
Basic |
$ | 1.28 | $ | 0.95 | $ | 0.33 | ||||||
Diluted |
$ | 1.28 | $ | 0.94 | $ | 0.34 | ||||||
34
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
December 31, 2010 and 2009.
Regulated Utility Operating Results | ||||||||||||
Three Months Ended | ||||||||||||
December 31, | Increase/ | |||||||||||
(In millions) | 2010 | 2009 | (Decrease) | |||||||||
Utility net revenues: |
||||||||||||
Operating revenues |
$ | 418.4 | $ | 398.9 | $ | 19.5 | ||||||
Less: Cost of gas |
217.7 | 205.6 | 12.1 | |||||||||
Revenue taxes |
25.9 | 17.4 | 8.5 | |||||||||
Total utility net revenues |
174.8 | 175.9 | (1.1 | ) | ||||||||
Operation and maintenance |
63.3 | 63.2 | 0.1 | |||||||||
Depreciation and amortization |
22.4 | 24.0 | (1.6 | ) | ||||||||
General taxes and other assessments |
12.5 | 12.5 | - | |||||||||
Operating income |
76.6 | 76.2 | 0.4 | |||||||||
Interest expense |
9.9 | 9.7 | 0.2 | |||||||||
Other (income) expenses-net, including preferred stock dividends |
(0.6 | ) | - | (0.6 | ) | |||||||
Income tax expense |
26.6 | 25.8 | 0.8 | |||||||||
Net income applicable to common stock |
$ | 40.7 | $ | 40.7 | $ | - | ||||||
The regulated utility segments net income applicable to common stock was $40.7 million
for the three months ended December 31, 2010, unchanged for the same three month period in 2009.
Changes in the composition of earnings from the prior period include: (i) a $4.5 million increase
in realized margins associated with our asset optimization program; (ii) a $3.0 million decrease in
recurring Business Process Outsourcing (BPO) costs; (iii) $1.5 million in favorable effects of
changes in natural gas consumption patterns and (iv) a $1.5 million increase in revenues related to
growth of more than 9,600 average active customer meters. Offsetting these favorable variances
were: (i) a $5.8 million decrease in unrealized margins associated with our asset optimization
program; (ii) $3.2 million in higher employee benefit expense due to changes in pension and retiree
medical plan valuation assumptions and (iii) a $1.4 million decrease in the recovery of storage gas
inventory carrying costs reflecting lower average inventory values.
Utility Net Revenues. The following table provides the key factors contributing to the changes
in the utility net revenues of the regulated utility segment between the three months ended
December 31, 2010 and 2009.
Composition of Changes in Utility Net Revenues | ||||
Increase / | ||||
(In millions) | (Decrease) | |||
Asset optimization: |
||||
Realized mark-to-market valuations |
$ | 4.5 | ||
Unrealized mark-to-market valuations |
(5.8 | ) | ||
Impact of rate/depreciation cases |
(3.6 | ) | ||
Estimated change in natural gas consumption patterns |
1.5 | |||
Customer growth |
1.5 | |||
Storage carrying costs |
(1.4 | ) | ||
Estimated weather effects |
1.1 | |||
Other |
1.1 | |||
Total |
$ | (1.1 | ) | |
Asset optimization Pre-tax realized gains related to our asset optimization program
were $4.5 million higher for the quarter ended December 31, 2010 compared to the quarter ended
December 31, 2009. We recorded unrealized losses associated with our energy-related derivatives of
$9.8 million for the three months ended December 31, 2010 compared to losses of $4.0 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. Refer to the section entitled Market RiskPrice Risk Related to the
Regulated Utility Segment for a further discussion of our asset optimization program.
35
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)
Impact of depreciation rate cases New rates reflecting a lower provision for depreciation
expense were effective on June 1, 2010 as a result of an order issued by the Public Service
Commission of Maryland (PSC of MD). This reduction is partially offset by lower depreciation
expense.
Estimated change in natural gas consumption patterns The variance in net revenues reflects
the changes in natural gas consumption patterns of customers in the District of Columbia and, to a
lesser extent, the commercial class of customers in Virginia. 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 heating degree day (HDD) that occur. Natural gas consumption
patterns may also be affected by non-weather related factors such as customer conservation.
Customer growth Average active customer meters increased more than 9,600 for the three
months ended December 31, 2010 compared to the same quarter of the prior fiscal year.
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 three months ended December 31, 2010 is due to lower average
storage gas inventory investment balances reflecting lower weighted average cost of gas in
inventory compared to the prior period.
Estimated weather effects Weather, when measured by HDDs, was 11.8% and 6.2% colder than
normal for the three months ended December 31, 2010 and 2009, respectively. Washington Gas 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
further discussion of our weather protection strategy). Washington Gas executed a heating degree
day derivative contract to manage its exposure to variations from normal weather in the District of
Columbia. Changes in the fair value of this derivative are reflected in operation and maintenance
expenses and offset the benefits reflected above. Including the effects of our weather protection
strategy, there were no material effects on net income attributed to colder or warmer weather for
the three months ended December 31, 2010 or 2009.
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 December 31, 2010 compared to the same period in 2009.
Composition of Changes in Operation and Maintenance Expenses | ||||
Increase/ | ||||
(in millions) | (Decrease) | |||
BPO |
$ | (3.0 | ) | |
Employee benefits |
3.2 | |||
Weather derivative benefits: |
||||
Loss |
1.1 | |||
Premium costs and fair value effects |
(1.0 | ) | ||
Other operating expenses |
(0.2 | ) | ||
Total |
$ | 0.1 | ||
Weather derivative benefits The effects of hedging variations from
normal weather in the District of Columbia for the three months ended December 31, 2010 and 2009
are recorded to operation and maintenance expense. Washington Gas recorded losses of $1.9 million
and $0.8 million related to its weather derivatives as a direct result of the colder-than-normal
weather for the quarter ended December 31, 2010 and 2009, respectively. The benefits or losses of
the weather-related instruments are offset by the effect of weather on utility net revenues.
Business process outsourcing The decrease in BPO costs during the quarter ended December
31, 2010 as compared to the same quarter of the prior year reflects a decrease in recurring service
costs.
36
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)
Employee benefits The increase in employee benefits expense reflects higher pension and
other post-retirement benefits due to changes in pension and retiree medical plan valuation
assumptions.
Depreciation and Amortization. The following table provides the key factors contributing to
the changes in depreciation and amortization of the regulated utility for the three months ended
December 31, 2010 compared to the same period in 2009.
Composition of Changes in Depreciation and Amortization | ||||
Increase/ | ||||
(in millions) | (Decrease) | |||
Property, plant and equipment additions |
$ | 1.3 | ||
New depreciation rates - Maryland |
(2.8 | ) | ||
Retirement of plant assets |
(0.1 | ) | ||
Total |
$ | (1.6 | ) | |
New depreciation rates Depreciation expense decreased due to lower depreciation rates
as a result of an order issued by the PSC of MD. This reduction is also included in rates charged
to customers reflected in revenue. Refer to the section entitled Rates and Regulatory Matters
Depreciation Study for further discussion of depreciation matters.
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. These activities include the operations of CEV and WGSW, Inc. Total net income from
our non-utility operations was $24.5 million for the three months ended December 31, 2010, compared
to net income of $6.9 million for the same three-month period of the prior fiscal year. This
comparison primarily reflects increased earnings from our retail energy-marketing segment.
37
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)
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 | ||||||||||||
December 31, | Increase / | |||||||||||
2010 | 2009 | (Decrease) | ||||||||||
Operating Results (In millions) |
||||||||||||
Gross margins: |
||||||||||||
Operating revenues |
$ | 379.4 | $ | 333.5 | $ | 45.9 | ||||||
Less: Cost of energy |
323.2 | 310.5 | 12.7 | |||||||||
Revenue taxes |
0.9 | 0.6 | 0.3 | |||||||||
Total gross margins |
55.3 | 22.4 | 32.9 | |||||||||
Operation expenses |
12.4 | 8.8 | 3.6 | |||||||||
Depreciation and amortization |
0.2 | 0.2 | - | |||||||||
General taxes and other assessments |
1.1 | 0.8 | 0.3 | |||||||||
Operating income |
41.6 | 12.6 | 29.0 | |||||||||
Interest expense |
0.1 | 0.1 | - | |||||||||
Income tax expense |
16.7 | 5.0 | 11.7 | |||||||||
Net Income |
$ | 24.8 | $ | 7.5 | $ | 17.3 | ||||||
Analysis of gross margins (in millions) |
||||||||||||
Natural gas |
||||||||||||
Realized margins |
$ | 10.2 | $ | 13.0 | $ | (2.8 | ) | |||||
Unrealized mark-to-market gains (losses) |
9.9 | (3.4 | ) | 13.3 | ||||||||
Total gross margins natural gas |
20.1 | 9.6 | 10.5 | |||||||||
Electricity Realized margins |
||||||||||||
Realized margins |
14.7 | 9.3 | 5.4 | |||||||||
Unrealized mark-to-market gains |
20.5 | 3.5 | 17.0 | |||||||||
Total gross margins electricity |
35.2 | 12.8 | 22.4 | |||||||||
Total gross margins |
$ | 55.3 | $ | 22.4 | $ | 32.9 | ||||||
Other Retail-Energy Marketing Statistics |
||||||||||||
Natural gas |
||||||||||||
Therm sales (millions of therms) |
216.5 | 177.0 | 39.5 | |||||||||
Number of customers (end of period) |
169,400 | 158,100 | 11,300 | |||||||||
Electricity |
||||||||||||
Electricity sales (millions of kWh) |
2,446.5 | 1,873.4 | 573.1 | |||||||||
Number of accounts (end of period) |
168,300 | 123,800 | 44,500 | |||||||||
WGEServices reported net income of $24.8 million for the three months ended December 31,
2010, an increase of $17.3 million compared to net income of $7.5 million reported for the same
three-month period of the prior fiscal year.
The quarter-to-quarter comparison primarily reflects higher gross margins from electric and
natural gas sales, partially offset by increased marketing initiatives (both mass market and large
commercial) and higher labor costs. 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 increased $10.5 million in the first quarter of fiscal
year 2011 when compared to the same quarter in the prior fiscal year. This increase is primarily
due to an increase in unrealized mark-to-market gains on energy-related derivatives of $13.3
million resulting from fluctuating market prices, partially offset by a decrease in realized
margins of $2.8 million due to favorable spreads between retail
prices and storage withdrawals in the prior year.
Gross margins from electric sales in the current quarter increased $22.4 million from the same
quarter of the prior period. This increase reflects a $17.0 million increase in unrealized
mark-to-market gains on energy-related derivatives
and a $5.4 million increase in realized margins
due to higher electric sales associated with customer growth. Total electric
customers increased by 44,500, or 36%, over the same quarter of the prior year. In addition,
electricity unit margins were higher in the current quarter, generally reflecting a different
pattern of quarterly unit margin recognition in the current fiscal year versus the prior year. The
pattern of quarterly margin recognition varies from year to year.
38
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)
Design-Build Energy Systems. The design-build energy systems segment reported net income of
$0.1 million for the first quarter of fiscal year 2011, compared to a net loss of $0.2 million
reported for the same period of fiscal year 2010. This increase is due to the commencement of new
projects that were delayed in the prior fiscal year. Operating expenses were also higher due to
higher labor expense associated with expansion plans.
Other Non-Utility. Other non-utility activities include the operations of CEV, a non-utility
wholesale energy company that engages in acquiring and optimizing natural gas storage and
transportation assets and WGSW, Inc., a holding company formed to invest in solar photovoltaic
power generating facilities. Also included are transactions primarily consisting of administrative
costs associated with WGL Holdings and Washington Gas Resources.
Interest Expense
The following table depicts the components of the change in interest expense for WGL Holdings
for the three months ended December 31, 2010 compared to the same period in December 31, 2009.
Composition of Interest Expense Changes | ||||
Increase / | ||||
(In millions) | (Decrease) | |||
Long-term debt |
$ | (0.1 | ) | |
Short-term debt |
0.4 | |||
Other (includes AFUDC) (a) |
(0.1 | ) | ||
Total |
$ | 0.2 | ||
(a) | Represents Allowance for Funds Used During Construction. |
WGL Holdings interest expense of $9.9 million for the first quarter of fiscal year 2011
increased $0.2 million from $9.7 million of the same quarter of fiscal year 2010. The increase
relates primarily to higher interest expense related to uncertain tax positions.
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 three months ended December 31,
2010, WGL Holdings met its liquidity and capital needs through the retention of earnings and the
issuance of commercial paper and common stock. Washington Gas met its liquidity and capital needs
through the retention of earnings and the issuance of commercial paper and debt securities.
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.
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)
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 December 31, 2010, total consolidated
capitalization, including current maturities of long-term debt and excluding notes payable,
comprised 62.4% common equity, 1.5% preferred stock and 36.1% 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 December
31, 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 Gas business is weather sensitive and seasonal, causing short-term cash
requirements to vary significantly during the year. Approximately 79.0% of the total therms
delivered in Washington Gas 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 six 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 Gas 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 December 31, 2010 and September 30, 2010, Washington Gas had investment
balances in gas storage of $130.8 million and $169.3 million, respectively. At December 31, 2010
and September 30, 2010, WGEServices had investment balances in gas storage of $46.1 million and
$66.2 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 Gas gas cost recovery
mechanisms can significantly affect short-term cash requirements. At December 31, 2010, Washington
Gas had a $79.4 million balance of unrecovered gas costs due from customers related to the most
recent twelve month gas cost recovery cycle ended August 31, 2010. Most of this balance will be
collected from customers in fiscal year 2011. 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 December 31, 2010,
Washington Gas had a net regulatory liability balance related to the current gas recovery cycle of
$89.4 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
December 31, 2010.
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)
Committed Credit Available (In millions) | ||||||||||||
As of December 31, 2010 | WGL Holdings | Washington Gas | Total Consolidated | |||||||||
Committed credit agreements |
||||||||||||
Unsecured revolving credit facility, expires August 3, 2012 (a) |
$ | 400.0 | $ | 300.0 | $ | 700.0 | ||||||
Less: Commercial Paper |
(76.0 | ) | (17.2 | ) | (93.2 | ) | ||||||
Net committed credit available |
$ | 324.0 | $ | 282.8 | $ | 606.8 | ||||||
As of September 30, 2010 |
WGL Holdings | Washington Gas | Total Consolidated | |||||||||
Committed credit agreements |
||||||||||||
Unsecured revolving credit facility, expires August 3, 2012 (a) |
$ | 400.0 | $ | 300.0 | $ | 700.0 | ||||||
Less: Commercial Paper |
(57.0 | ) | (43.4 | ) | (100.4 | ) | ||||||
Net committed credit available |
$ | 343.0 | $ | 256.6 | $ | 599.6 | ||||||
(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 Gas revolving credit facility
permits it to borrow an additional $100 million, with the banks approval, for a total of $400 million.
WGL Holdings and Washington Gas utilize short-term debt in the form of commercial paper
or unsecured short-term bank loans to meet its financing requirements including cash collateral
requirements posted to counterparties associated with WGEServices contracts.
At December 31, 2010 and September 30, 2010, WGL Holdings and its subsidiaries had outstanding
notes payable in the form of commercial paper of $93.2 million and $100.4 million, respectively, at
a weighted average interest rate of 0.32% and 0.31%, respectively. Bank credit balances available
to WGL Holdings and Washington Gas net of commercial paper balances were $324.0 million and $282.8
million at December 31, 2010 and $343.0 million and $256.6 million at September 30, 2010,
respectively. Refer to Note 3Short-Term Debt of the Notes to the Consolidated Financial
Statements for further information.
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 December 31, 2010 and September 30, 2010, Customer deposits and advance
payments totaled $69.9 million and $65.3 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 Gas use of these customer deposits. Washington Gas
pays interest to its customers on these deposits in accordance with the requirements of its
regulatory commissions.
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 Gas distribution system. Refer to the section entitled
Capital Expenditures for discussion of our capital expenditures forecast and our 2010 Annual
Report for further discussion of our long-term debt maturities.
At December 31, 2010, Washington Gas had the capacity under a shelf registration to issue up
to $375.0 million of additional Medium-Term Notes (MTNs). Washington Gas has authority from its
regulators to issue other forms of debt, including private placements.
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)
We are exposed to interest-rate risk associated with our debt financing. Washington Gas
utilizes derivative instruments
to minimize its exposure to the risk of
interest-rate volatility. On December 3, 2010, Washington Gas Light Company issued $75.0 million
of 5.21% fixed MTNs due December 3, 2040. Refer to the section entitled Interest-Rate Risk
included in Managements Discussion for further discussion of our interest-rate risk management
activity.
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
Gas 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.
Credit Ratings for Outstanding Debt Instruments | ||||||||
WGL Holdings | Washington Gas | |||||||
Unsecured | Unsecured | |||||||
Medium-Term Notes | Medium- Term | |||||||
Rating Service | (Indicative)(a) | Commercial Paper | Notes | Commercial Paper | ||||
Fitch Ratings |
A+ | F1 | AA | F1+ | ||||
Moodys Investors Service |
Not Rated | P-2 | A2 | P-1 | ||||
Standard & Poors Ratings
Services |
AA | A-1+ | AA | A-1+ | ||||
(a)Indicates the ratings that may be applicable if WGL Holdings were to issue unsecured MTNs.
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 Gas 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 Gas failure to pay principal or interest when due on any other
indebtedness may be deemed a default under our credit agreements. A default, if not remedied,
may lead to a suspension of further loans and/or acceleration in which obligations become
immediately due and payable. At December 31, 2010, we were in compliance with all of the covenants
under our revolving credit facilities.
For certain of Washington Gas natural gas purchase and pipeline capacity agreements, if the
long-term debt of Washington Gas is downgraded 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 Gas credit rating declines, then the counterparty may require additional credit
support. At December 31, 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 subsidiaries, WGEServices and CEV (refer to our 2010 Annual Report for a
further discussion of these guarantees). If the credit rating of WGL Holdings declines, WGEServices
and CEV may be required to provide additional credit support for these purchase contracts. At
December 31, 2010, WGEServices and CEV would not be required to
provide additional credit support for these arrangements if the long-term debt rating of WGL
Holdings were to be downgraded one rating level.
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)
Cash Flows Used in 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 used in operating activities totaled $4.2 million for the three months ended December
31, 2010. Net cash used in 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 $344.3 million from September 30, 2010, primarily due to increased sales volumes to customers during our winter heating season and increased sales volumes associated with Washington Gas asset optimization program. | ||
| Storage gas inventory cost levels decreased $31.4 million from September 30, 2010 due to seasonal physical withdrawals. | ||
| Gas costs (current and deferred) and other regulatory assets / liabilities net decreased $14.6 million from September 30, 2010 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, partially offset by recoveries in excess of gas costs incurred. | ||
| Accounts payable and other accrued liabilities increased $133.3 million, due to an increase in the prices and volumes of natural gas purchases and increased trading activity in CEV. Volumes increased both for deliveries to customers for the 2009-2010 winter heating season and for Washington Gas asset optimization program. | ||
| Accrued taxes increased $15.5 million from September 30, 2010 primarily due to an increase in fuel taxes in Maryland and the District of Columbia. | ||
| Other current liabilities, primarily related to derivative instruments, decreased $23.2 million primarily due to increases in energy price levels and an increase in electric swap volumes. |
Cash Flows Provided by Financing Activities
Cash flows provided by financing activities totaled $49.6 million for the three months ended
December 31, 2010, reflecting our long-term debt issuance of $75.0 million, partially offset by the
retirement of $7.2 million of notes payable and our common and preferred stock dividend payments
totaling $19.6 million.
Cash Flows Used in Investing Activities
During the three months ended December 31, 2010, cash flows used in investing activities
totaled $37.6 million, which primarily consists of capital expenditures made on behalf of
Washington Gas. In addition, investing activities also reflects our initial investment in
commercial solar PV systems and investments in a tax partnership to directly fund residential solar PV systems.
Capital Expenditures
The following table depicts our revised capital expenditures budget for fiscal years 2011
through 2015. Our capital expenditures program includes investments to extend service to new
areas, and to provide safe, reliable and improved service.
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)
Projected Capital Expenditures | ||||||||||||||||||||||||
Year Ending September 30, | ||||||||||||||||||||||||
(in millions) | 2011 | 2012 | 2013 | 2014 | 2015 | Total | ||||||||||||||||||
New business |
$ | 50.5 | $ | 55.4 | $ | 51.7 | $ | 53.3 | $ | 59.3 | $ | 270.2 | ||||||||||||
Replacements - Other |
69.6 | 67.9 | 68.2 | 65.6 | 71.0 | 342.3 | ||||||||||||||||||
LNG storage facility |
0.7 | 18.3 | 66.2 | 39.2 | 31.5 | 155.9 | ||||||||||||||||||
SOC redevelopment project |
52.7 | 15.6 | - | - | - | 68.3 | ||||||||||||||||||
Other |
66.0 | 65.8 | 72.0 | 38.8 | 34.7 | 277.3 | ||||||||||||||||||
Total-accrual basis(a) |
$ | 239.5 | $ | 223.0 | $ | 258.1 | $ | 196.9 | $ | 196.5 | $ | 1,114.0 | ||||||||||||
(a)
Excludes Allowance for Funds Used During Construction. Includes capital
expenditures accrued and capital expenditure adjustments recorded in the fiscal year.
The 2011 to 2015 projected periods include $270.2 million for continued growth to serve
new customers, and $342.3 million primarily related to the replacement and betterment of existing
distribution facilities, including $114.0 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 SCC of VA on August 4, 2010, and $18.4
million of expenditures for a mechanically coupled pipeline encapsulation program in the District
of Columbia. Additionally, the projected period contains capital expenditures to construct a
Liquefied Natural Gas (LNG) storage facility on land owned by Washington Gas in Chillum, Maryland
(refer to the section entitled Chillum LNG Facility). Projected expenditures also reflect $68.3
million for the development of new office and operations facilities at the Springfield Operations
Center (SOC) and $277.3 million of other expenditures, which include general plant and various
non-utility investments. Non-utility investments include additional commercial solar PV systems and
investments in a tax partnership to directly fund residential solar PV systems.
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 BPO program.
Reference is made to the Contractual Obligations, Off-Balance Sheet Arrangements and Other
Commercial Commitments section of Managements Discussion in our 2010 Annual Report for a detailed
discussion of our contractual obligations. Note 4 of the Notes to Consolidated Financial Statements
in our 2010 Annual Report includes a discussion of long-term debt, including debt maturities. Note
13 of the Notes to Consolidated Financial Statements in our 2010 Annual Report reflects information
about the various contracts of Washington Gas and WGEServices. Additionally, refer to Note 13 of
the Notes to Consolidated Financial Statements in this quarterly report.
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 Gas
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. As the lender funds the construction project, Washington Gas establishes a note receivable
representing its customers obligations to remit principal and interest and a long-term note
payable to the lender. When these projects are formally accepted by the customer as completed,
Washington Gas transfers the ownership of the note receivable to the lender and removes both the
note receivable and the long-term financing from its financial statements. As of December 31, 2010,
work on these construction projects that was not completed or accepted by customers was valued at
$4.8 million, which is recorded on the balance sheet as a note 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.
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)
Financial Guarantees
WGL Holdings has guaranteed payments primarily for certain purchases of natural gas and
electricity on behalf of the retail energy-marketing segment. At December 31, 2010, these
guarantees totaled $561.2 million.
WGL Holdings has also guaranteed certain purchase commitments of its CEV subsidiary. At December 31, 2010, these guarantees totaled $78.8 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 counterparties when required by our credit policy.
WGL Holdings also issued guarantees
totaling $3.0 million at December 31, 2010 on behalf of certain of our non-utility
subsidiaries associated with their banking transactions. Of the total guarantees of $643.0 million,
$2.5 million expired on January 31, 2011, $49.1 million are due to expire on October 31, 2011 and
$36.0 million is due to expire on December 31, 2011. 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, 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 Gas 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 Gas 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 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 confirmed the analysis 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 Gas 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 Washington Gas 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. In June 2006, the
FERC issued an order approving a request by Dominion to expand the capacity and output of its Cove
Point LNG terminal by the end of 2008.
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)
Washington Gas has since filed several petitions with the United States Court of Appeals for the
District of Columbia Circuit Court (the Court of Appeals), all of which have been denied,
requesting a stay of action on the proposed expansion and further evidence from Dominion
demonstrating the safety of Cove Point gas flowing through the Washington Gas distribution system.
Most recently, 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 Washington Gas petition for review.
Washington Gas did not appeal this decision.
A large portion of the gas delivered from the Cove Point LNG terminal comes to the Washington
Gas service territory as a result of Washington Gas 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 a portion of our distribution
system 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.
An additional 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 Gas
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 Gas distribution system, unless there is a
decrease in the flow of Cove Point gas or blending of the gas sufficient to allow Washington Gas
time to mitigate the effects of such flows. Washington Gas is attempting to mitigate this
anticipated increase in leaks through: (i) mechanically coupled pipeline replacement programs; (ii)
the operation of three 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 Gas installed and operates HHC injection facilities at three gate stations. 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. The current planned
mechanical coupling remediation and replacement work includes approximately $2.0 million as part of
a planned $32 million 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. Additionally,
Washington Gas has budgeted $8.0 million towards replacing mechanically coupled pipe in Maryland in
fiscal year 2011. Washington Gas has also filed for a fifteen-year replacement program for certain
vintages of mechanically coupled pipe in the Virginia service territory under the Virginia SAVE act
(refer to the section entitled Rates and Regulatory Matters for further discussion of this
matter). Washington Gas estimates that it will spend approximately $256.0 million over the
fifteen-year period.
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 and increased flow of the gas from Cove
Point. 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 Gas distribution
system.
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)
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 Gas 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.
CREDIT RISK
Wholesale Credit Risk
Certain wholesale suppliers that sell natural gas to any or all of Washington Gas,
WGEServices, and CEV 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.
For WGEServices,
any failure of wholesale counterparties to deliver natural gas
or electricity under existing contracts could cause financial exposure for the
difference between the price at which 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.
CEV enters into transactions with wholesale counterparties for the purposes of optimizing its
portfolio of owned and managed natural gas assets. In the event of a counterpartys failure to
deliver contracted volumes or fulfill purchase obligations, CEV could be financially exposed to the
difference between the price at which it had contracted to buy or sell these commodities and the
replacement cost or sale price, respectively. In addition to price risk, CEV may be exposed to
payment risk if it is in a net receivable position with counterparties.
Washington Gas, WGEServices, and CEV have existing credit
policies that are 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
these policies, both Washington Gas, WGEServices, and CEV have obtained credit enhancements from
certain of its counterparties. If certain counterparties or their guarantors meet the policys
credit worthiness criteria, Washington Gas, WGEServices, and CEV may grant unsecured credit to
those counterparties or their guarantors. The credit worthiness of all counterparties is
continuously monitored.
WGEServices is also subject to the credit
policies of its counterparties
that may 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 December 31, 2010,
WGEServices had provided $21.7 million in cash collateral to supplier counterparties.
CEV is also subject to
the credit policies of its counterparties that may
require similar credit enhancements from CEV under these contracts. CEVs
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 December 31, 2010, CEV had not provided any
cash collateral to counterparties.
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)
The following table provides information on our credit exposure, net of collateral, to wholesale counterparties as of December 31, 2010 for both Washington Gas and Non-utility
operations, 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 |
$ | 18.3 | $ | - | $ | 18.3 | 2 | $ | 15.0 | |||||||||||
Non-Investment Grade |
0.2 | - | 0.2 | - | - | |||||||||||||||
Non-utility operations |
||||||||||||||||||||
Investment Grade |
$ | 11.2 | $ | - | $ | 11.2 | 2 | $ | 8.0 | |||||||||||
Non-Investment Grade |
- | - | - | - | - | |||||||||||||||
No External Ratings |
1.7 | - | 1.7 | 1 | 1.6 | |||||||||||||||
(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 recently approved purchase of receivable program for Maryland utilities has begun.
This program, which has been implemented by certain electric utilities and one gas utility, is
intended to purchase the receivables of competitive suppliers who render their charges through the
utilities billing process. The implementation of the purchase of receivables program began in July
2010. Certain other electric utilities began in October 2010 and the remaining natural gas
utilities will begin in the near future. WGEServices bills the majority of its customers through
utilities, and the shift to this purchase of receivables program affects WGEServices historical
billing practices, cash collections and bad debt expense.
CEV is not subject to retail credit risk.
MARKET RISK
We are exposed to various forms of market risk including commodity price risk, weather risk
and interest-rate risk. The following discussion describes these risks and our management of them.
Price Risk Related to the Regulated Utility Segment
Washington Gas faces price risk associated with the purchase of natural gas. Washington Gas
generally recovers the cost of the natural gas to serve customers through gas cost recovery
mechanisms as approved in jurisdictional tariffs; therefore a change in the price of natural gas
generally has no direct effect on Washington Gas net income. However, Washington Gas is
responsible for following competitive and reasonable practices in purchasing natural gas for its
customers.
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)
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 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
Gas customers and shareholders.
The following two tables summarize the changes in the fair value of our net assets
(liabilities) associated with the regulated utility segments energy-related
derivatives during the three months ended December 31, 2010:
Regulated Utility Segment
Changes in Fair Value of Energy-Related Derivatives
Changes in Fair Value of Energy-Related Derivatives
(In millions) | ||||
Net assets (liabilities) at September 30, 2010 |
$ | 24.0 | ||
Net fair value of contracts entered into during the period |
(7.9 | ) | ||
Other changes in net fair value |
(12.5 | ) | ||
Realized net settlement of derivatives |
(3.6 | ) | ||
Net assets (liabilities) at December 31, 2010 |
$ | - | ||
Regulated Utility Segment
Roll Forward of Energy-Related Derivatives
Roll Forward of Energy-Related Derivatives
(In millions) | ||||
Net assets (liabilities) at September 30, 2010 |
$ | 24.0 | ||
Recorded to income |
(5.1 | ) | ||
Recorded to regulatory assets/liabilities |
(15.3 | ) | ||
Realized net settlement of derivatives |
(3.6 | ) | ||
Net assets (liabilities) at December 31, 2010 |
$ | - | ||
The maturity dates of our net assets (liabilities) associated with the regulated utility segments energy-related derivatives recorded at fair value at December 31, 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
Maturity of Net Assets (Liabilities) Associated with our Energy-Related Derivatives
Years Ended September 30, | ||||||||||||||||||||||||||||
Remainder | ||||||||||||||||||||||||||||
(In millions) | Total | 2011 | 2012 | 2013 | 2014 | 2015 | Thereafter | |||||||||||||||||||||
Level 1 Quoted prices in active markets |
$ | - | $ | - | $ | - | $ | - | $ | - | $ | - | $ | - | ||||||||||||||
Level 2 Significant other observable inputs |
1.0 | (2.7 | ) | 1.2 | 2.4 | 0.1 | - | - | ||||||||||||||||||||
Level 3 Significant unobservable inputs |
(1.0 | ) | (2.6 | ) | (1.9 | ) | (1.4 | ) | 0.5 | 1.9 | 2.5 | |||||||||||||||||
Total net assets (liabilities) associated
with our energy-related derivatives |
$ | - | $ | (5.3 | ) | $ | (0.7 | ) | $ | 1.0 | $ | 0.6 | $ | 1.9 | $ | 2.5 | ||||||||||||
Refer
to Notes 9 and 10 of the Notes to Consolidated Financial Statements in this quarterly report for a further discussion of our derivative activities and fair value measurements.
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)
Price Risk Related to the Non-Utility Segments
WGEServices. 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.
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.
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).
Other
Non-Utility. Our asset optimization subsidiary, CEV, engages in wholesale commodity transactions to optimize
its owned and managed assets. CEVs risk management policy requires it to closely match its forward
physical and financial positions with its asset base, thereby minimizing its price risk exposure.
Depending upon the nature of its forward hedges, CEV may be exposed to fluctuations in
mark-to-market valuations based on changes in forward price curves.
The following two tables summarize the changes in the fair value of our net assets (liabilities) associated with
the non-utility segments energy-related derivatives for both natural gas and electricity during the three months ended December
31, 2010:
Non-Utility Segments
Changes in Fair Value of Energy-Related Derivatives
Changes in Fair Value of Energy-Related Derivatives
(In millions) | ||||
Net assets (liabilities) at September 30, 2010 |
$ | (46.5 | ) | |
Net fair value of contracts entered into during the period |
0.9 | |||
Other changes in net fair value |
16.0 | |||
Realized net settlement of derivatives |
8.0 | |||
Net assets (liabilities) at December 31, 2010 |
$ | (21.6 | ) | |
Non-Utility Segments
Roll Forward of Energy-Related Derivatives
Roll Forward of Energy-Related Derivatives
(In millions) | ||||
Net assets (liabilities) at September 30, 2010 |
$ | (46.5 | ) | |
Recorded to income |
19.6 | |||
Recorded to accounts payable |
(2.7 | ) | ||
Realized net settlement of derivatives |
8.0 | |||
Net assets (liabilities) at December 31, 2010 |
$ | (21.6 | ) | |
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 maturity dates of our net assets (liabilities) associated with the non-utility segments energy-related derivatives recorded at fair value at December 31, 2010 is summarized in the following table
based on the level of the fair value calculation under ASC Topic 820:
Non-Utility Segments
Maturity of Net Assets (Liabilities) Associated with our Energy-Related Derivatives
Maturity of Net Assets (Liabilities) Associated with our Energy-Related Derivatives
Years Ended September 30, | ||||||||||||||||||||||||||||
Remainder | ||||||||||||||||||||||||||||
(In millions) | Total | 2011 | 2012 | 2013 | 2014 | 2015 | Thereafter | |||||||||||||||||||||
Level 1 Quoted prices in active markets |
$ | - | $ | - | $ | - | $ | - | $ | - | $ | - | $ | - | ||||||||||||||
Level 2 Significant other observable inputs |
(8.5 | ) | (4.9 | ) | (2.0 | ) | (1.4 | ) | (0.2 | ) | - | - | ||||||||||||||||
Level 3 Significant unobservable inputs |
(13.1 | ) | (4.3 | ) | (7.4 | ) | (1.4 | ) | - | - | - | |||||||||||||||||
Total net assets (liabilities) associated with our
energy-related derivatives |
$ | (21.6 | ) | $ | (9.2 | ) | $ | (9.4 | ) | $ | (2.8 | ) | $ | (0.2 | ) | $ | - | $ | - | |||||||||
Refer
to Note 9 and 10 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 December
31, 2010 was approximately $72,000 and $310,000, 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 non-utility
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 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-utility 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 adjustment
(RNA) billing mechanism that is designed to stabilize the level of net revenues
collected from Maryland customers by eliminating the effect of deviations in customer
usage caused by variations in weather from normal levels and other factors such as conservation.
In Virginia, Washington Gas has a Weather Normalization Adjustment
(WNA) 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. In the District of
Columbia, Washington Gas has filed a revised tariff application seeking approval
of an RNA, a sales adjustment mechanism that decouples Washington Gas non-gas revenues
from actual delivered volumes of gas. A commission decision was issued on December 17,
2010, wherein the Commission determined that it would be more
appropriate to consider Washington Gas RNA proposal in the context of a fully litigated base rate case.
Washington Gas filed an application for reconsideration on January 18, 2011.
The matter is pending. For a discussion of current rates and regulatory matters,
refer to the section entitled Rates and Regulatory Matters in Managements Discussion for Washington Gas.
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 and
Conservation and Ratemaking Efficiency (CARE) to function conversely because it adjusts billed revenues to provide a designed level of net
revenue per meter.
Weather Derivatives. 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.
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)
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. Refer to the section entitled Long-Term Cash
Requirements and Related Financing for further discussion of our interest-rate risk management
activity.
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)
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 December 31, 2010 vs. December 31, 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 net income applicable to common stock of $40.4 million for the three
months ended December 31, 2010, compared to a net income applicable to common stock of $40.5
million reported for the same three months of the prior fiscal year. Changes in the composition of
earnings from the prior period include: (i) a $4.5 million increase in realized margins associated
with our asset optimization program; (ii) a $3.0 million decrease in recurring BPO costs; (iii)
$1.5 million in favorable effects of changes in natural gas consumption patterns and (iv) a $1.5
million increase in revenues related to growth of more than 9,600 average active customer meters.
Offsetting these favorable variances were: (i) a $5.8 million decrease in unrealized margins
associated with our asset optimization program; (ii) $3.2 million in higher employee benefit
expense due to changes in pension and retiree medical plan valuation assumptions and (iii) a $1.4
million decrease in the recovery of storage gas inventory carrying costs reflecting lower average
inventory values.
Key gas delivery, weather and meter statistics are shown in the table below for the three months ended December 31, 2010 and 2009.
Gas Deliveries, Weather and Meter Statistics | ||||||||||||
Three Months Ended | ||||||||||||
December 31, | Increase/ | |||||||||||
2010 | 2009 | (Decrease) | ||||||||||
Gas Sales and Deliveries (millions of therms) |
||||||||||||
Firm |
||||||||||||
Gas sold and delivered |
301.2 | 269.9 | 31.3 | |||||||||
Gas delivered for others |
166.8 | 158.9 | 7.9 | |||||||||
Total firm |
468.0 | 428.8 | 39.2 | |||||||||
Interruptible |
||||||||||||
Gas sold and delivered |
0.8 | 1.5 | (0.7 | ) | ||||||||
Gas delivered for others |
86.3 | 77.5 | 8.8 | |||||||||
Total interruptible |
87.1 | 79.0 | 8.1 | |||||||||
Electric generationdelivered for others |
16.3 | 11.1 | 5.2 | |||||||||
Total deliveries |
571.4 | 518.9 | 52.5 | |||||||||
Degree Days |
||||||||||||
Actual |
1,505 | 1,431 | 74 | |||||||||
Normal |
1,346 | 1,347 | (1 | ) | ||||||||
Percent colder (warmer) than normal |
11.8% | 6.2% | n/a | |||||||||
Average active customer meters |
1,079,141 | 1,069,533 | 9,608 | |||||||||
New customer meters added |
2,827 | 3,084 | (257 | ) | ||||||||
Gas Service to Firm Customers. The volume of gas delivered to firm customers is highly
sensitive to weather variability as a large portion of the natural gas delivered by Washington Gas
is used for space heating. Washington Gas rates are based on an assumption of normal weather. The
tariffs in the Maryland and Virginia jurisdictions include provisions that consider the effects of
the RNA and 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 fixed demand charges in the District of
Columbia to collect a portion of revenues reduce the effect that variations from normal weather
have on net revenues.
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)
During the quarter ended December 31, 2010, total gas deliveries to firm customers were 468.0
million therms compared to 428.8 million therms delivered in the same quarter of the prior fiscal
year. This comparison in natural gas deliveries to firm customers reflects colder weather in the
current three-month period than in the same period of the prior fiscal year as well as an increase
in average active customer meters of 9,608.
Weather, when measured by HDDs, was 11.8% colder than normal in the first quarter of fiscal
year 2011, compared to 6.2% colder than normal for the same quarter of fiscal year 2010. Including
the effects of our weather protection strategy, there were no material effects on net income
attributed to colder weather on either the quarter ended December 31, 2010 or December 31, 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 87.1 million therms during the first quarter of fiscal year 2010,
compared to 79.0 million therms for the same quarter last year, reflecting increased demand due to
colder 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 Gas 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 December 31, 2010, deliveries to these customers increased
by 5.2 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.
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 non-utility 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 Gas jurisdictions.
District of Columbia Jurisdiction
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 Gas
non-gas revenues from actual delivered volumes of gas. On December 22, 2009, the DC OPC filed a
motion requesting that the District of Columbia Public Service Commission (PSC of DC) establish
public hearing procedures to examine the merits of Washington Gas 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 an evidentiary
proceeding to consider issues surrounding Washington Gas 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.
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)
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. Initial briefs were filed on
August 13, 2010, and reply briefs were submitted on August 26, 2010. On December 17, 2010 the
Commission issued an order denying the Washington Gas application for an RNA stating that the RNA should
be considered in the context of a base rate case proceeding. Washington Gas filed an Application for
Reconsideration on January 18, 2011. The matter is pending.
Affiliate Transactions Code of Conduct.
On February 1, 2011, the PSC of DC issued an order adopting rules governing affiliate
transactions code of conduct for regulated energy utilities and their affiliates. Included
among the regulations are limitations on joint marketing with core service affiliates, and disclosure
of customer-specific information, as well as restrictions on (i)
favorable treatment of affiliates, (ii)
the provision of loans and loan guarantees by the utility to an
affiliate, and (iii) sharing and temporary
assignment of electric company employees with an affiliate. These regulations also require the energy
utilities to file Cost Allocation Manuals with the PSC of DC demonstrating how they allocate and account
for shared services with their affiliates. These rules will go into effect upon publication in the D.C. Register.
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 Gas purchased gas costs are
reasonable.
The PSC of MD held a hearing on March 25, 2010 related to Washington Gas 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 Washington Gas gas costs averring that Washington Gas did not have authority
under its tariff to satisfy in cash its obligation (cash-out) for over-deliveries by suppliers over
the 12-months ended March 2009 and also asserting that Washington Gas used an excessive price as the
cash-out price. The PSC of MD Staff recommends that a second phase to the proceeding be initiated
to investigate these assertions. Washington Gas has objected to both these assertions. Discovery
and testimony were filed in the case, and a hearing was held on March 25, 2010. The MD OPC has
taken a position that $2.1 million of gas costs related to the purchase of competitive service
provider (CSP) inventory included in the purchased gas charge should be disallowed. Briefs were
filed April 30, 2010, and reply briefs were filed May 21, 2010. A proposed order was issued by the
Hearing Examiner on August 25, 2010, finding that under the tariff, Washington Gas should have
resolved supplier over-deliveries during the review period by adjusting future delivery volumes by
suppliers, rather than by cash-out. The proposed order directed Washington Gas to refund to
customers the excess costs paid to suppliers as a result of the cash-out of supplier
over-deliveries. The proposed order also directed Washington Gas to present an exact calculation
of the excess amount paid to suppliers in accordance with the methodology proposed by the MD OPC.
The MD OPC had estimated the amount of the excess costs to Maryland ratepayers to be approximately
$2.1 million. The proposed order directs Washington Gas to credit $2.1 million to the actual cost
adjustment (ACA) as recommended by MD OPC. The Staff of the PSC of MD and Washington Gas filed
notices of appeal of the proposed order on September 23 and 24, 2010, respectively, and memorandums
on appeal on October 1 and 4, 2010, respectively. A Commission decision is pending.
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 Gas 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 Gas 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 Gas move to self-optimization of its gas assets,
concluding that the evidence on the record in this case is overwhelming that Washington Gas
decision to transition to self-management has in fact been prudent and resulted in substantial rate
benefits... The POHE approved Washington Gas 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 Gas 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 strongly urged 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.
55
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)
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.
Review of Washington Gas 2009 2013 Gas Portfolio Plan. On March 19, 2009, the PSC of MD
docketed a proceeding to review Washington Gas 2009 2013 Gas Portfolio Plan, specifically
noting Washington Gas 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. Upon consideration of a motion to
combine review of Washington Gas Gas Portfolio Plans, on January 6, 2010, the PSC of MD
consolidated this proceeding with Washington Gas 2010 2014 Gas Portfolio Plan, which was filed
on November 17, 2009. Washington Gas announced on May 6, 2010, that it projected a new in-service
date for the on-system peaking facility: the 2015-2016 winter heating season. As a result, 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. The Hearing
Examiner subsequently approved Washington Gas portfolio plan, including the reserve margins
reflected in the Washington Gas energy acquisition planning. Initial briefs were filed on August
13, 2010 and reply briefs were filed on September 17, 2010. On October 27, 2010, the Hearing
Examiner issued a proposed order. The Hearing Examiner found:
(i) | the Gas Portfolio Plan proposed by Washington Gas for years 2009-2013 and 2010-2014 are reasonable; | ||
(ii) | the design day forecasts contained in Washington Gas plans are correct and reasonable in determining the design day requirement; | ||
(iii) | a reserve margin proposed by Washington Gas of 5.0% to 6.5% continues to be reasonable and that | ||
(iv) | some additional information should be filed along with all future plans. |
The proposed order became final on November 30, 2010 as it was not appealed by any party.
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. Washington Gas began
applying the decoupling mechanism in Virginia in its July billings for residential customers
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. In accordance with the
procedural schedule established for the proceeding, the Staff of the SCC of VA filed its report on
September 13, 2010 and Washington Gas filed its response to the staff report on September 24, 2010.
On November 18, 2010, the Commission issued an order that denied Washington Gas application. The
Commission found that Washington Gas current tariff and its underlying class cost of service and
revenue apportionment studies do not segregate small versus large customers and that only small
customers qualify under the CARE Plan legislation. The Commission stated that Washington Gas could
amend the underlying tariff and studies in connection with its required February 1, 2011 base rate
case filing.
On January 31, 2011,
Washington Gas filed a request for a base rate increase of $29.6 million and
proposed that the new rates go into effect on October 1, 2011. As part of its base rate case
filing, Washington Gas proposed revisions to its underlying tariff for large commercial customers
consistent with the Commission orders in its CARE Plan.
56
WGL Holdings, Inc.
Washington Gas Light Company
Part IFinancial Information
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)
Performance-Based Rate Plans
In rate case proceedings in all local 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 Gas 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 January 28, 2010, Washington Gas indicated in its annual information filing that there
was no ESM liability for fiscal year 2009. 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 a
regulatory asset 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. On July 22, 2010, the Commission issued an Order for Notice and Comment in this
proceeding. Washington Gas filed direct testimony on August 18, 2010 and the Staff issued its report
on October 21, 2010. The Staff found that Washington Gas request to recover $0.5 million of hexane
costs would not result in earnings exceeding Washington Gas 10% allowed rate of return on average
common equity threshold and therefore Washington Gas should be allowed to bill the amounts.
Washington Gas filed its response to the Staffs Report on November 4, 2010. On December 15, 2010,
the SCC of VA issued an Order approving the Washington Gas proposed billing of the cost of hexane.
On January 31, 2011, Washington Gas indicated in its annual information filing that there
was no ESM liability for fiscal year 2010. The matter is pending before the Commission.
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 Gas request to implement a PBR plan and issues raised by
the parties associated with Washington Gas BPO agreement. On September 4, 2008, a proposed order
of the Hearing Examiner was issued in this phase-two proceeding. Consistent with Washington Gas
current accounting methodology, the proposed order approved 10-year amortization accounting for
initial implementation costs related to Washington Gas BPO plan. At December 31, 2010 and
September 30, 2010, we had recorded a regulatory asset of $6.2 million and $6.4 million,
respectively, net of amortization, related to initial implementation costs allocable to Maryland
associated with our BPO plan. Washington Gas 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 BPO 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. Aspects of this
proposed order were appealed by the parties in November, 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 and is prohibited from seeking approval of a PBR plan in
the District of Columbia until the filing of its next base rate case.
57
WGL Holdings, Inc.
Washington Gas Light Company
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 Non-Utility Segments | ||
| 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 December 31, 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. Disclosure controls and procedures
include, without limitation, controls and procedures designed to provide reasonable assurance that
information required to be disclosed by WGL Holdings in the reports that it files or submits under
the Exchange Act is accumulated and communicated to senior management, including the Chairman and
Chief Executive Officer, and the Vice President and Chief Financial Officer, as appropriate to
allow timely decisions regarding required disclosure. There have been no changes in the internal
control over financial reporting of WGL Holdings during the quarter ended December 31, 2010 that
have materially affected, or are reasonably likely to materially affect, the internal control over
financial reporting of WGL Holdings.
58
WGL Holdings, Inc.
Washington Gas Light Company
Washington Gas Light Company
Part IIOther Information
Item 6Exhibits
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 13 Commitments and
Contingencies, contained in Part 1 under the Notes to Consolidated Financial Statements.
ITEM 6.
EXHIBITS
Exhibits: | ||
Schedule/ | ||
Exhibit | Description | |
(a)(3)
|
Exhibits | |
Exhibits Filed Herewith: | ||
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 December 31, 2010, filed on February 4, 2011 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. | ||
Bylaws of Washington Gas Light Company as amended on December 3, 2010, filed as Exhibit 3(ii) to Form 8-K on December 7, 2010. | ||
59
WGL Holdings, Inc.
Washington Gas Light Company
Part IIOther Information
Item 6Exhibits
Washington Gas Light Company
Part IIOther Information
Item 6Exhibits
* | 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 ST, 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. |
60
WGL Holdings, Inc.
Washington Gas Light Company
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: February 4, 2011
|
/s/ William R. Ford | |||
William R. Ford | ||||
Controller | ||||
(Principal Accounting Officer) |
61