Document

UNITED STATES
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, 2017
OR 
¨
Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from _____ to _____
Commission
File Number
Exact name of registrant as
specified in its charter; address of principal executive offices; registrant's telephone number, including area code
State or Other Jurisdiction of
Incorporation
I.R.S.
Employer
Identification No.
1-16163
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 ¨
Indicate by check mark whether each registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No ¨
Indicate by check mark whether each registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
WGL Holdings, Inc.:
 
Large accelerated filer þ
 
Accelerated filer ¨
 
Non-accelerated filer ¨
 
Smaller reporting company ¨
 
 
 
(Do not check if a smaller reporting company)                        
 
Emerging growth company ¨
 
 
 
 
 
 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
 
Washington Gas Light Company:
 
Large accelerated filer ¨
 
Accelerated filer ¨
 
Non-accelerated filer þ
 
Smaller reporting company ¨
 
 
 
(Do not check if a smaller reporting company) 
 
Emerging growth company ¨
 
 
 
 
 
 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
 
Indicate by check mark whether each registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No þ
Indicate the number of shares outstanding of each of the issuers’ classes of common stock, as of the latest practicable date.
WGL Holdings, Inc. common stock, no par value, outstanding as of January 31, 2018: 51,359,182 shares.
Washington Gas Light Company common stock, $1 par value, outstanding as of January 31, 2018: 46,479,536 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, 2018.



WGL Holdings, Inc.
Washington Gas Light Company

For the Quarter Ended December 31, 2017
Table of Contents
 
PART I. Financial Information
 
 
 
Item 1. Financial Statements (Unaudited)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
PART II. Other Information
 
 
 
 
 
 
 
 
 
 
 

 



(i)


WGL Holdings, Inc.
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) and Washington Gas Light Company (Washington Gas). Except where the content clearly indicates otherwise, any reference in the report to “WGL,” “we,” “us” or “our” is to the holding company or WGL and all of its subsidiaries, including Washington Gas, which is a wholly owned subsidiary of WGL.
Part I—Financial information in this Quarterly Report on Form 10-Q includes separate financial statements (i.e. balance sheets, statements of income and comprehensive income and statements of cash flows) for each of WGL and Washington Gas. The Notes to Condensed Consolidated Financial Statements are presented on a combined basis for both WGL and Washington Gas together. The Management’s Discussion and Analysis of Financial Condition and Results of Operations (Management’s Discussion) included under Item 2 is divided into two major sections for WGL and Washington Gas.
SAFE HARBOR FOR FORWARD-LOOKING STATEMENTS
Certain matters discussed in this report, excluding historical information, include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 with respect to the outlook for earnings, dividends, revenues and other future financial business performance, strategies, financing plans, AltaGas Ltd.'s (AltaGas) proposed acquisition of us and other expectations. Forward-looking statements are typically identified by words such as, but not limited to, “estimates,” “expects,” “anticipates,” “intends,” “believes,” “plans” and similar expressions, or future or conditional terms such as “will,” “should,” “would” and “could.” Forward-looking statements speak only as of the filing date of this report, and the registrants assume no duty to update them. Factors that could cause actual results to differ materially from forward-looking statements or historical performance include those discussed in Item 1A. Risk Factors in the combined Annual Report on Form 10-K for WGL and Washington Gas for the fiscal year ended September 30, 2017, in Part II, Item 1A, Risk Factors in this quarterly report on Form 10-Q and in our other filings with the Securities and Exchange Commission, and may include, but are not limited to the following:

the occurrence of any event, change or other circumstances that could give rise to the termination of the Agreement and Plan of Merger among WGL, AltaGas and Wrangler, Inc. (Merger Agreement);
the inability of WGL or AltaGas to satisfy conditions to the closing of the merger;
the required regulatory approvals for the merger may not be received, may not be received in a timely manner, or may be received subject to imposed conditions or restrictions that cause a failure of a closing condition to the merger or that could have a detrimental impact on the combined company following completion of the merger;
the effect of the announcement of the merger on the ability of WGL to retain customers and retain and hire key personnel;
the effect of the announcement of the merger on the ability of WGL to maintain relationships with its suppliers;
potential litigation in connection with the merger;
the incurrence of significant costs for advisory services in connection with the merger;
the impact of the terms and conditions of the Merger Agreement on WGL’s interim operations and its ability to make significant changes to its business or pursue otherwise attractive business opportunities without the consent of AltaGas;
the level and rate at which we incur costs and expenses, and the extent to which we are allowed to recover from customers, through the regulatory process, such costs and expenses relating to constructing, operating and maintaining Washington Gas’ distribution system;
the availability of natural gas and electricity supply, interstate pipeline transportation and storage capacity;
the outcome of new and existing matters before courts, regulators, government agencies or arbitrators, including those relating to construction of the Constitution Pipeline, disputes relating to our purchase of natural gas under the Antero gas supply contracts, and the August 2016 explosion and fire at an apartment complex in Silver Spring, Maryland;
factors beyond our control that affect the ability of natural gas producers, pipeline gatherers and natural gas processors to deliver natural gas into interstate pipelines for delivery to the entrance points of Washington Gas' distribution system;
security breaches of our information technology infrastructure, including cyber attacks and cyber-terrorism;

(ii)


WGL Holdings, Inc.
Washington Gas Light Company

leaks, mechanical problems, incidents or other operational issues in our natural gas distribution system, including the effectiveness of our efforts to mitigate the effects of receiving low-HHC natural gas;
changes and developments in economic, competitive, political and regulatory conditions;
unusual weather conditions and changes in natural gas consumption patterns;
changes in energy commodity market conditions, including the relative prices of alternative forms of energy such as electricity, fuel oil and propane;
changes in the value of derivative contracts and the availability of suitable derivative counterparties;
changes in our credit ratings, disruptions in credit market and equity capital market conditions or other factors that may affect our access to and cost of capital;
factors affecting the timing of construction and the effective operation of pipelines in which we have invested;
the credit-worthiness of customers; suppliers and derivatives counterparties;
changes in laws and regulations, including tax, environmental, pipeline integrity and employment laws and regulations;
legislative, regulatory and judicial mandates or decisions affecting our business operations, including interpretations of the Tax Cuts and Jobs Act (the Tax Act);
the timing and success of business and product development efforts and technological improvements;
the level of demand from government agencies and the private sector for commercial energy systems, and delays in federal government budget appropriations;
the pace of deregulation of energy markets and the availability of other competitive alternatives to our products and services;
changes in accounting principles;
our ability to manage the outsourcing of several business processes;
strikes or work stoppages by unionized employees;
acts of nature and catastrophic events, including terrorist acts; and
decisions made by management and co-investors in non-controlled investees.
All such factors are difficult to predict accurately and are generally beyond the direct control of the registrants. Readers are urged to use care and consider the risks, uncertainties and other factors that could affect our business as described in this Quarterly Report on Form 10-Q.

 

(iii)


WGL Holdings, Inc.
Condensed Consolidated Balance Sheets (Unaudited)
Part I—Financial Information
Item 1—Financial Statements


(In thousands)
December 31,
2017
 
September 30,
2017
ASSETS
 
 
 
Property, Plant and Equipment
 
 
 
At original cost
$
6,217,878

 
$
6,143,841

Accumulated depreciation and amortization
(1,538,998
)
 
(1,513,790
)
Net property, plant and equipment
4,678,880

 
4,630,051

Current Assets
 
 
 
Cash and cash equivalents
64,110

 
8,524

Receivables
 
 
 
Accounts receivable
519,980

 
398,149

Gas costs and other regulatory assets
17,663

 
21,705

Unbilled revenues
278,256

 
165,483

Allowance for doubtful accounts
(32,451
)
 
(32,025
)
Net receivables
783,448

 
553,312

Materials and supplies—principally at average cost
20,456

 
20,172

Storage gas
206,978

 
243,984

Prepaid taxes
38,824

 
31,549

Other prepayments
74,612

 
86,465

Derivatives
17,665

 
15,327

Other
40,174

 
26,556

Total current assets
1,246,267

 
985,889

Deferred Charges and Other Assets
 
 
 
Regulatory assets
 
 
 
Gas costs
117,474

 
90,136

Pension and other post-retirement benefits
132,837

 
139,499

Other
117,962

 
104,596

Prepaid post-retirement benefits
234,982

 
231,577

Derivatives
32,168

 
38,389

Investments in unconsolidated affiliates
489,354

 
394,201

Other
12,650

 
11,671

Total deferred charges and other assets
1,137,427

 
1,010,069

  Total Assets
$
7,062,574

 
$
6,626,009

CAPITALIZATION AND LIABILITIES
 
 
 
Capitalization
 
 
 
WGL Holdings common shareholders’ equity
$
1,609,607

 
$
1,502,690

Non-controlling interest
3,210

 
6,851

Washington Gas Light Company preferred stock
28,173

 
28,173

Total equity
1,640,990


1,537,714

Long-term debt
1,679,893

 
1,430,861

Total capitalization
3,320,883

 
2,968,575

Current Liabilities
 
 
 
Current maturities of long-term debt
300,000

 
250,000

Notes payable and project financing
558,700

 
559,844

Accounts payable and other accrued liabilities
431,327

 
423,824

Wages payable
22,146

 
18,096

Accrued interest
17,669

 
7,806

Dividends declared
26,520

 
26,452

Customer deposits and advance payments
55,158

 
65,841

Gas costs and other regulatory liabilities
57,275

 
22,814

Accrued taxes
35,676

 
17,657

Derivatives
35,021

 
43,990

Other
50,002

 
52,664

Total current liabilities
1,589,494

 
1,488,988

Deferred Credits
 
 
 
Unamortized investment tax credits
153,502

 
155,007

Deferred income taxes
413,065

 
868,067

Accrued pensions and benefits
184,293

 
181,552

Asset retirement obligations
300,130

 
296,810

Regulatory liabilities
 
 
 
Accrued asset removal costs
286,234

 
292,173

Other post-retirement benefits
130,882

 
135,035

Other—principally deferred taxes
452,091

 
9,403

Derivatives
128,885

 
122,607

Other
103,115

 
107,792

Total deferred credits
2,152,197

 
2,168,446

Commitments and Contingencies (Note 13)

 

Total Capitalization and Liabilities
$
7,062,574

 
$
6,626,009

The accompanying notes are an integral part of these statements.

4


WGL Holdings, Inc.
Condensed Consolidated Statements of Income (Unaudited)
Part I—Financial Information
Item 1—Financial Statements (continued)
 
  
Three Months Ended 
 December 31,
(In thousands, except per share data)
2017
 
2016
OPERATING REVENUES
 
 
 
Utility
$
374,990

 
$
327,063

Non-utility
277,450

 
282,424

Total Operating Revenues
652,440

 
609,487

OPERATING EXPENSES
 
 
 
Utility cost of gas
122,273

 
75,500

Non-utility cost of energy-related sales
225,502

 
252,886

Operation and maintenance
102,226

 
100,717

Depreciation and amortization
40,985

 
35,283

General taxes and other assessments
44,887

 
40,388

Total Operating Expenses
535,873

 
504,774

OPERATING INCOME
116,567

 
104,713

Equity in earnings of unconsolidated affiliates
5,892

 
265

Other income (expenses) — net
(780
)
 
478

Interest expense
20,197

 
16,235

INCOME BEFORE INCOME TAXES
101,482

 
89,221

INCOME TAX (BENEFIT) EXPENSE
(31,110
)
 
33,454

NET INCOME
$
132,592

 
$
55,767

Non-controlling interest
(5,778
)
 
(2,535
)
Dividends on Washington Gas Light Company preferred stock
330

 
330

NET INCOME APPLICABLE TO COMMON STOCK
$
138,040

 
$
57,972

WEIGHTED AVERAGE COMMON SHARES OUTSTANDING
 
 
 
Basic
51,319

 
51,172

Diluted
51,549

 
51,445

EARNINGS PER AVERAGE COMMON SHARE
 
 
 
Basic
$
2.69

 
$
1.13

Diluted
$
2.68

 
$
1.13

DIVIDENDS DECLARED PER COMMON SHARE
$
0.5100

 
$
0.4875

The accompanying notes are an integral part of these statements.


5


WGL Holdings, Inc.
Condensed Consolidated Statements of Comprehensive Income (Unaudited)
Part I—Financial Information
Item 1—Financial Statements (continued)
 
  
Three Months Ended 
 December 31,
(In thousands)
2017
 
2016
NET INCOME
$
132,592

 
$
55,767

OTHER COMPREHENSIVE INCOME, BEFORE INCOME TAXES:
 
 
 
Qualified cash flow hedging instruments
52

 
49,455

Pension and other post-retirement benefit plans
 
 
 
Change in net prior service credit
(274
)
 
(217
)
Change in actuarial net loss
527

 
588

Total other comprehensive income before taxes
$
305

 
$
49,826

INCOME TAX EXPENSE RELATED TO OTHER COMPREHENSIVE INCOME
61

 
20,413

OTHER COMPREHENSIVE INCOME
$
244

 
$
29,413

COMPREHENSIVE INCOME
$
132,836

 
$
85,180

   Non-controlling interest
(5,778
)
 
(2,535
)
   Dividends on Washington Gas Light Company preferred stock
330

 
330

COMPREHENSIVE INCOME ATTRIBUTABLE TO WGL HOLDINGS
$
138,284

 
$
87,385

The accompanying notes are an integral part of these statements.


6


WGL Holdings, Inc.
Condensed Consolidated Statements of Cash Flows (Unaudited)
Part I—Financial Information
Item 1—Financial Statements (continued)





  
Three Months Ended December 31,
(In thousands)
2017
 
2016
OPERATING ACTIVITIES
 
 
 
Net income
$
132,592

 
$
55,767

ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIES
 
 
 
Depreciation and amortization
40,985

 
35,283

Amortization of:
 
 
 
Other regulatory assets and liabilities—net
1,634

 
823

Debt related costs
550

 
445

Deferred income taxes
(29,264
)
 
34,852

Dividends received from equity method investments
5,628

 

Accrued/deferred pension and other post-retirement benefit cost
2,393

 
5,424

Earnings in equity interest
(5,892
)
 
265

Compensation expense related to stock-based awards
5,802

 
4,912

Provision for doubtful accounts
3,781

 
2,704

Unrealized (gain) loss on derivative contracts
12,524

 
(30,339
)
Amortization of investment tax credits
(1,845
)
 
(1,396
)
Other non-cash credits—net
(197
)
 
2,105

Changes in operating assets and liabilities (Note 16)
(175,402
)
 
(201,340
)
Net Cash Used In Operating Activities
(6,711
)
 
(90,495
)
FINANCING ACTIVITIES
 
 
 
Common stock issued

 
251

Long-term debt issued
300,000

 

Debt issuance costs
(1,482
)
 
(375
)
Notes payable issued —net
(1,144
)
 
324,001

Contributions from non-controlling interest
1,659

 
7,331

Distributions to non-controlling interest
(136
)
 

Project financing

 
8,877

Dividends on common stock and preferred stock
(26,520
)
 
(23,921
)
Other financing activities—net
(6,558
)
 
(1,295
)
Net Cash Provided by Financing Activities
265,819

 
314,869

INVESTING ACTIVITIES
 
 
 
Capital expenditures (excluding Allowance for Funds Used During Construction)
(99,054
)
 
(155,758
)
Investments in non-utility interests
(104,468
)
 
(62,007
)
Distributions and receipts from non-utility interests

 
1,565

Loans to external parties

 
(863
)
Net Cash Used in Investing Activities
(203,522
)
 
(217,063
)
INCREASE IN CASH AND CASH EQUIVALENTS
55,586

 
7,311

Cash and Cash Equivalents at Beginning of Year
8,524

 
5,573

Cash and Cash Equivalents at End of Period
$
64,110

 
$
12,884

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION (Note 16)

 
 
 
The accompanying notes are an integral part of these statements.


7


Washington Gas Light Company
Condensed Balance Sheets (Unaudited)
Part I—Financial Information
Item 1—Financial Statements (continued)

(In thousands)
December 31,
2017
 
September 30,
2017
ASSETS
 
 
 
Property, Plant and Equipment
 
 
 
At original cost
$
5,358,064

 
$
5,310,337

Accumulated depreciation and amortization
(1,440,276
)
 
(1,422,622
)
Net property, plant and equipment
3,917,788

 
3,887,715

Current Assets
 
 
 
Cash and cash equivalents
6,652

 
1

Receivables
 
 
 
Accounts receivable
263,001

 
190,740

Gas costs and other regulatory assets
17,663

 
21,705

Unbilled revenues
205,107

 
107,967

Allowance for doubtful accounts
(24,447
)
 
(23,741
)
Net receivables
461,324

 
296,671

Materials and supplies—principally at average cost
20,410

 
20,126

Storage gas
84,960

 
92,753

Prepaid taxes
31,899

 
23,350

Other prepayments
22,776

 
13,238

Receivables from associated companies
27,010

 
32,362

Derivatives
4,343

 
5,061

Other
120

 
102

Total current assets
659,494

 
483,664

Deferred Charges and Other Assets
 
 
 
Regulatory assets
 
 
 
Gas costs
117,474

 
90,136

Pension and other post-retirement benefits
132,082

 
138,573

Other
117,570

 
104,538

Prepaid post-retirement benefits
233,676

 
230,283

Derivatives
15,385

 
16,244

Other
4,459

 
3,561

Total deferred charges and other assets
620,646

 
583,335

  Total Assets
$
5,197,928

 
$
4,954,714

CAPITALIZATION AND LIABILITIES
 
 
 
Capitalization
 
 
 
Common shareholder’s equity
$
1,295,914

 
$
1,164,749

Preferred stock
28,173

 
28,173

Long-term debt
1,084,619

 
1,134,461

Total capitalization
2,408,706

 
2,327,383

Current Liabilities
 
 
 
Current maturities of long-term debt
50,000

 

Notes payable and project financing
205,772

 
166,772

Accounts payable and other accrued liabilities
196,363

 
219,827

Wages payable
20,191

 
16,508

Accrued interest
15,593

 
3,967

Dividends declared
22,166

 
22,098

Customer deposits and advance payments
54,711

 
64,194

Gas costs and other regulatory liabilities
57,275

 
22,814

Accrued taxes
46,954

 
12,808

Payables to associated companies
107,597

 
94,844

Derivatives
24,636

 
30,263

Other
7,349

 
7,473

Total current liabilities
808,607

 
661,568

Deferred Credits
 
 
 
Unamortized investment tax credits
3,921

 
4,100

Deferred income taxes
463,805

 
888,385

Accrued pensions and benefits
182,540

 
179,814

Asset retirement obligations
294,939

 
291,871

Regulatory liabilities
 
 
 
Accrued asset removal costs
286,234

 
292,173

Other post-retirement benefits
130,056

 
134,181

Other—principally deferred taxes
450,409

 
9,403

Derivatives
119,048

 
112,299

Other
49,663

 
53,537

Total deferred credits
1,980,615

 
1,965,763

Commitments and Contingencies (Note 13)

 

Total Capitalization and Liabilities
$
5,197,928

 
$
4,954,714

The accompanying notes are an integral part of these statements.

8


Washington Gas Light Company
Condensed Statements of Income (Unaudited)
Part I—Financial Information
Item 1—Financial Statements (continued)
  
Three Months Ended December 31,
(In thousands)
2017
 
2016
OPERATING REVENUES
$
377,470

 
$
333,986

OPERATING EXPENSES
 
 
 
Utility cost of gas
124,745

 
82,431

Operation and maintenance
79,551

 
82,166

Depreciation and amortization
33,646

 
30,126

General taxes and other assessments
39,983

 
36,255

Total Operating Expenses
277,925

 
230,978

OPERATING INCOME
99,545

 
103,008

Other expense — net
(1,792
)
 
(779
)
Interest expense
14,973

 
12,762

INCOME BEFORE INCOME TAXES
82,780

 
89,467

INCOME TAX EXPENSE
24,854

 
34,006

NET INCOME
$
57,926

 
$
55,461

Dividends on Washington Gas preferred stock
330

 
330

NET INCOME APPLICABLE TO COMMON STOCK
$
57,596

 
$
55,131

The accompanying notes are an integral part of these statements.


9


Washington Gas Light Company
Condensed Statements of Comprehensive Income (Unaudited)
Part I—Financial Information
Item 1—Financial Statements (continued)
  
Three Months Ended 
 December 31,
(In thousands)
2017
 
2016
NET INCOME
$
57,926

 
$
55,461

OTHER COMPREHENSIVE INCOME, BEFORE INCOME TAXES:
 
 
 
Pension and other post-retirement benefit plans
 
 
 
Change in net prior service credit
(274
)
 
(217
)
Change in actuarial net loss
527

 
588

Total pension and other post-retirement benefit plans
$
253

 
$
371

INCOME TAX EXPENSE RELATED TO OTHER COMPREHENSIVE INCOME
61

 
147

OTHER COMPREHENSIVE INCOME
$
192

 
$
224

COMPREHENSIVE INCOME
$
58,118

 
$
55,685

The accompanying notes are an integral part of these statements.

10


Washington Gas Light Company
Condensed Statements of Cash Flows (Unaudited)
Part I—Financial Information
Item 1—Financial Statements (continued)


  
Three Months Ended December 31,
(In thousands)
2017
 
2016
OPERATING ACTIVITIES
 
 
 
Net income
$
57,926

 
$
55,461

ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIES
 
 
 
Depreciation and amortization
33,646

 
30,126

Amortization of:
 
 
 
Other regulatory assets and liabilities—net
1,634

 
823

Debt related costs
401

 
353

Deferred income taxes
7,386

 
34,145

Accrued/deferred pension and other post-retirement benefit cost
2,398

 
5,411

Compensation expense related to stock-based awards
4,518

 
4,652

Provision for doubtful accounts
3,928

 
2,241

Unrealized (gain) loss on derivative contracts
1,446

 
(15,128
)
Amortization of investment tax credits
(179
)
 

Other non-cash charges—net
(197
)
 
2,447

Changes in operating assets and liabilities (Note 16)
(141,364
)
 
(169,830
)
Net Cash Used In Operating Activities
(28,457
)
 
(49,299
)
FINANCING ACTIVITIES
 
 
 
Capital contributions from WGL Holdings, Inc.
100,000

 

Debt issuance costs
(236
)
 
(375
)
Notes payable issued —net
39,000

 
177,000

Project financing

 
5,200

Dividends on common stock and preferred stock
(22,166
)
 
(21,453
)
Other financing activities—net
(6,197
)
 
(1,226
)
Net Cash Provided by Financing Activities
110,401

 
159,146

INVESTING ACTIVITIES
 
 
 
Capital expenditures (excluding Allowance for Funds Used During Construction)
(75,293
)
 
(109,847
)
Net Cash Used In Investing Activities
(75,293
)
 
(109,847
)
INCREASE IN CASH AND CASH EQUIVALENTS
6,651

 

Cash and Cash Equivalents at Beginning of Year
1

 
1

Cash and Cash Equivalents at End of Period
$
6,652

 
$
1

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION (Note 16)

 
 
 
The accompanying notes are an integral part of these statements.

11


WGL Holdings, Inc.
Washington Gas Light Company
Part I—Financial Information
Item 1—Financial Statements (continued)
Notes to Condensed Consolidated Financial Statements (Unaudited)



NOTE 1. ACCOUNTING POLICIES
Basis of Presentation
WGL Holdings, Inc. (WGL) 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) and Hampshire Gas Company (Hampshire). Washington Gas Resources owns all of the shares of common stock of four non-utility subsidiaries that include WGL Energy Services, Inc. (WGL Energy Services), WGL Energy Systems, Inc. (WGL Energy Systems), WGL Midstream, Inc. (WGL Midstream) and WGSW, Inc. (WGSW). Except where the content clearly indicates otherwise, “WGL,” “we,” “us” or “our” refers to the holding company or the consolidated entity of WGL Holdings, Inc. and all of its subsidiaries. Unless otherwise noted, these notes apply equally to WGL and Washington Gas.
The condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (SEC). Therefore, certain financial information and note disclosures accompanying annual financial statements prepared in accordance with generally accepted accounting principles in the United States of America (GAAP) are omitted in this interim report. The interim condensed consolidated financial statements and accompanying notes should be read in conjunction with the combined Annual Report on Form 10-K for WGL and Washington Gas for the fiscal year ended September 30, 2017. Due to the seasonal nature of our businesses, the results of operations for the periods presented in this report are not necessarily indicative of actual results for the full fiscal years ending September 30, 2018 and 2017 of either WGL or Washington Gas.
The accompanying unaudited condensed financial statements for WGL and Washington Gas reflect all normal recurring adjustments that are necessary, in our opinion, to present fairly the results of operations in accordance with GAAP.
For a complete description of our accounting policies, refer to Note 1 of the Notes to Condensed Consolidated Financial Statements of the combined Annual Report on Form 10-K for WGL and Washington Gas for the fiscal year ended September 30, 2017.

Change in Accounting Principle and Storage Gas Valuation
On October 1, 2017, Washington Gas and WGL Energy Services implemented a voluntary change in the application of an accounting principle with respect to accounting for natural gas, propane, and odorant inventories. Washington Gas and WGL Energy Services now apply the average cost methodology under which the cost of units carried in inventory is based on the weighted average cost per unit of inventory. Prior to this change, Washington Gas and WGL Energy Services applied the First-in First-out (FIFO) methodology of accounting for inventory under which the oldest inventory items were recorded as being sold first.
We believe the new policy is preferable as it conforms to the method predominately used by our peers, better reflects the physical flow of inventory, conforms to the method used for certain of our other inventories, and will simplify recordkeeping requirements.
The change in accounting principle was implemented on a prospective basis, therefore, we did not retrospectively adjust any prior periods or record a cumulative effect adjustment, as discussed below.
Washington Gas implemented the change in accounting principle on a prospective basis in accordance with Accounting Standards Codification (ASC) No. 980, Regulated Operations which permits regulated entities to implement changes for financial reporting purposes in the same way those changes are implemented for regulatory reporting purposes when the change impacts allowable costs. WGL Energy Services implemented the change on a prospective basis as the impact on its financial statements for all periods presented, including the cumulative effect at October 1, 2017, was immaterial. The difference during the quarter between the prior FIFO method and the new average cost method was immaterial.
WGL Midstream continues to account for its inventory using the weighted average cost method.
On October 1, 2017, WGL adopted ASU 2015-11, Inventory (Topic 330) - Simplifying the Measurement of Inventory. This standard modified the previous calculation for valuing inventory. As a result of the new standard, beginning October 1, 2017,

12


WGL Holdings, Inc.
Washington Gas Light Company
Part I—Financial Information
Item 1—Financial Statements (continued)
Notes to Condensed Consolidated Financial Statements (Unaudited)

our inventory balances are stated at the lower-of-cost or net realizable value. Prior to October 1, 2017, our inventory balances were stated at the lower-of-cost or market. Interim period inventory losses attributable to lower-of-cost or net realizable value adjustments may be reversed if the net realizable value of the inventory is recovered by the end of the same fiscal year.
For more information see ASU 2015-11 in the accounting standards adopted in fiscal year 2018 table below. For the three months ended December 31, 2017, WGL and Washington Gas did not record any lower-of-cost or net realizable value adjustments. For the three months ended December 31, 2016, we did not record any lower-of-cost or market adjustments.
ACCOUNTING STANDARDS ADOPTED IN FISCAL YEAR 2018
 
Standard
  
Description
  
Date of adoption
 
  
Effect on the financial statements or other significant matters
ASU 2016-09, Compensation—Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting
 
This standard simplifies several aspects of the accounting for share-based payment transactions, including accounting for income taxes, forfeitures, statutory tax withholding requirements and classification in the statement of cash flows.

 
October 1, 2017
 
Forfeitures - WGL has elected to continue to estimate forfeitures for its share-based payment awards rather than account for forfeitures when they occur.

Income Taxes - On October 1, 2017, WGL and Washington Gas recorded $4.3 million and $4.2 million, respectively, on a modified retrospective basis, as a cumulative effect adjustment to retained earnings. For the three months ended December 31, 2017, WGL and Washington Gas recorded $3.4 million and $3.2 million, respectively, to current tax expense for excess tax benefits related to performance shares that vested in the quarter.

Cash Flows - WGL and Washington Gas reclassified $3.6 million and $3.5 million, respectively, retroactively on the statement of cash flows for the three months ended December 31, 2016 from operating to financing activities related to shares withheld to pay for employee taxes.

Statutory Tax Withholding - No changes were made.


13


WGL Holdings, Inc.
Washington Gas Light Company
Part I—Financial Information
Item 1—Financial Statements (continued)
Notes to Condensed Consolidated Financial Statements (Unaudited)

ASU 2016-06, Derivatives and Hedging (Topic 815) - Contingent Put and Call Options in Debt Instruments
 
The amendments in this update clarify the requirements for assessing whether contingent call (put) options that can accelerate the payment of principal on debt
instruments are clearly and closely related to their debt hosts. The guidance states that for contingent call (put) options to be considered clearly and closely related, they can be indexed only to interest rates or credit risk. An entity is required to assess the embedded call (put) options solely in accordance with the four-step decision sequence.
 
October 1, 2017
 
The implementation of this standard did not have an effect on WGL or Washington Gas' financial statements.
ASU 2015-11, Inventory (Topic 330) - Simplifying the Measurement of Inventory
 
This standard reduces the complexity in the current measurement of inventory. This ASU requires inventory to be measured at the lower of cost and net realizable value, where net realizable value is the estimated selling price in the ordinary course of business less reasonably predictable costs of completion, disposal and transportation (no change to the definition of net realizable value). The amendment eliminates the guidance that requires inventory to be stated at the lower-of-cost or market, which includes consideration of the replacement cost of inventory and the net realizable value of inventory, less an approximately normal profit margin.
 
October 1, 2017
 
The implementation of this standard did not have a material effect on WGL or Washington Gas' financial statements.






OTHER NEWLY ISSUED ACCOUNTING STANDARDS
 
Standard
  
Description
  
Required date of adoption
 
  
Effect on the financial statements or other significant matters

14


WGL Holdings, Inc.
Washington Gas Light Company
Part I—Financial Information
Item 1—Financial Statements (continued)
Notes to Condensed Consolidated Financial Statements (Unaudited)

ASU 2017-07, Compensation - Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost
 
This standard requires entities to report the service cost component in the same financial statement line item as other compensation costs arising from services rendered by the pertinent employees during the period.  The other components of net benefit cost are to be presented separately from service cost and outside of operating income.  In addition, only the service cost component of net benefit cost is eligible for capitalization.  Changes to the presentation of service costs and other components of net benefit cost should be applied retrospectively. Changes in capitalization practices should be implemented prospectively.
 
October 1, 2018
 
We are currently evaluating the interaction of this standard with the various regulatory provisions concerning pensions and post-retirement benefit costs. We anticipate that the change in capitalization of retirement benefits will not have a material impact on WGL or Washington Gas' financial statements.

ASU 2016-15, Statement of Cash Flows (Topic 230)—Classification of Certain Cash Receipts and Cash Payments (a consensus of the FASB Emerging Issues Task Force)
 
This update provides guidance on the classification of certain cash receipts and payments in the statement of cash flows.
 
October 1, 2018*
 
We are in the process of evaluating the impact the adoption of this standard will have on our financial statements. We do not anticipate that adoption of this standard will have a material effect on WGL or Washington Gas' financial statements.

ASU 2014-09, Revenue from Contracts with Customers (Topic 606), including subsequent ASUs clarifying the guidance.



 
ASU 2014-09 establishes a comprehensive revenue recognition model clarifying the method used to determine the timing and requirements for revenue recognition from contracts with customers. The disclosure requirements under the new standard will enable users of financial statements to understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers.


 
October 1, 2018
 
An implementation team is currently evaluating all revenue streams and reviewing contracts with customers, as well as, related financial statement disclosures to determine the impact the adoption of this standard will have on our financial statements. WGL is also monitoring final conclusions for industry specific implementation issues that could impact the timing of revenue recognition for our regulated utility tariff based sales, including the evaluation of collectability from customers if a utility has regulatory mechanisms to help assure recovery of uncollected accounts from ratepayers and accounting for contributions in aid of construction (CIAC). WGL will adopt using the modified retrospective approach.



15


WGL Holdings, Inc.
Washington Gas Light Company
Part I—Financial Information
Item 1—Financial Statements (continued)
Notes to Condensed Consolidated Financial Statements (Unaudited)

ASU 2016-01, Financial Instruments (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities
 
The new standard amends certain disclosure requirements associated with the fair value of financial instruments, and significantly revises an entity’s accounting related to the classification and measurement of investments in equity securities and the presentation of certain fair value changes for financial liabilities measured at fair value.
 
October 1, 2018*
 
We performed a preliminary evaluation and the adoption of this standard will primarily impact the disclosure of our financial instruments in our Fair Value Measurements Footnote.

ASU 2016-02, Leases (Topic 842)
 
This standard requires recognition of a right-to-use asset and lease liability on the statement of financial position and disclosure of key information about leasing arrangements. The standard requires application using a modified retrospective approach.
 
October 1, 2019*
 
We are in the process of evaluating the impact the adoption of this standard will have on our financial statements.
ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments
 
For credit losses on financial instruments, this standard changes the current incurred loss impairment methodology to an expected loss methodology and requires consideration of a broader range of reasonable and supportable information to determine credit loss estimates.
 
October 1, 2020*
 
We are in the process of evaluating the impact the adoption of this standard will have on our financial statements.
ASU 2017-12, Derivatives and Hedging (Topic 815): Targeted improvements to Accounting for Hedging Activities
 
The new standard amends the hedge accounting and recognition requirements by expanding an entity's ability to hedge non-financial and financial risk components and reduce the complexity in fair value hedges of interest rate risk. Additionally, this standard eliminates the requirement to separately measure and disclose the ineffective portion of the hedge with the entire change in the fair value of a hedging instrument to be presented in the same income statement line as the hedged item.
 
October 1, 2020*
 
We are in the process of evaluating the impact the adoption of this standard will have on our financial statements.
*Subject to acceleration if the proposed merger with AltaGas is consummated due to the difference in fiscal year end between AltaGas and WGL.

NOTE 2. ACCOUNTS PAYABLE AND OTHER ACCRUED LIABILITIES
The tables below provide details for the amounts included in “Accounts payable and other accrued liabilities” on the balance sheets for both WGL and Washington Gas.
 

16


WGL Holdings, Inc.
Washington Gas Light Company
Part I—Financial Information
Item 1—Financial Statements (continued)
Notes to Condensed Consolidated Financial Statements (Unaudited)

WGL Holdings, Inc.
(In millions)
December 31, 2017
 
September 30, 2017
Accounts payable—trade
$
383.7

 
$
361.6

Employee benefits and payroll accruals
21.2

 
35.0

Other accrued liabilities
26.4

 
27.2

Total
$
431.3

 
$
423.8


Washington Gas Light Company
(In millions)
December 31, 2017

 
September 30, 2017

Accounts payable—trade
$
163.5

 
$
174.9

Employee benefits and payroll accruals
20.1

 
32.4

Other accrued liabilities
12.8

 
12.5

Total
$
196.4

 
$
219.8


NOTE 3. SHORT-TERM DEBT
WGL and Washington Gas satisfy their short-term financing requirements through the sale of commercial paper, financing arrangements with third-party lenders, or through bank borrowings. Due to the seasonal nature of the regulated utility and retail energy-marketing segments, short-term financing requirements can vary significantly during the year. Revolving credit agreements are maintained to support outstanding commercial paper and to permit short-term borrowing flexibility. The policy of each of WGL and Washington Gas is to maintain bank credit facilities in amounts equal to or greater than their expected maximum commercial paper position. The following is a summary of committed credit available at December 31, 2017 and September 30, 2017.
Committed Credit Available ($ In millions)
December 31, 2017
WGL(b)
 
Washington Gas
 
Total Consolidated
Committed credit agreements
 
 
 
 
 
Unsecured revolving credit facility, expires December 19, 2019(a)
$
650.0

 
$
350.0

 
$
1,000.0

Less: Commercial Paper
(341.9
)
 
(162.0
)
 
(503.9
)
Net committed credit available
$
308.1

 
$
188.0

 
$
496.1

Weighted average interest rate
1.76
%
 
1.48
%
 
1.67
%
September 30, 2017
 
 
 
 
 
Committed credit agreements
 
 
 
 
 
Unsecured revolving credit facility, expires December 19, 2019(a)
$
650.0

 
$
350.0

 
$
1,000.0

Less: Commercial Paper
(382.0
)
 
(123.0
)
 
(505.0
)
Net committed credit available
$
268.0

 
$
227.0

 
$
495.0

Weighted average interest rate
1.52
%
 
1.22
%
 
1.45
%
(a) 
Washington Gas has the right to request extensions with the banks’ approval. Washington Gas’ revolving credit facility permits it to borrow an additional $100 million, with the banks’ approval, for a total of $450 million.
(b) 
WGL includes WGL Holdings, Inc. and all subsidiaries other than Washington Gas.
At December 31, 2017 and September 30, 2017, there were no outstanding bank loans from WGL’s or Washington Gas’ revolving credit facilities.

PROJECT FINANCING
Washington Gas previously obtained third-party project financing on behalf of the federal government to provide funds during the construction of certain energy management services projects entered into under Washington Gas' area-wide contract. In connection with work completed under the area-wide contract, the construction work is performed by WGL Energy Systems

17


WGL Holdings, Inc.
Washington Gas Light Company
Part I—Financial Information
Item 1—Financial Statements (continued)
Notes to Condensed Consolidated Financial Statements (Unaudited)

on behalf of Washington Gas and an inter-company payable is recorded for work provided by WGL Energy Systems. As work is performed, Washington Gas establishes a receivable representing the government's obligation to remit principal and interest. The payable and receivable are equal to each other at the end of the construction period, but there may be timing differences in the recognition of the project related payable and receivable during the construction period. When these projects are formally “accepted” by the government and deemed complete, Washington Gas assigns the ownership of the receivable to the third party lender in satisfaction of the obligation and removes both the receivable and the obligation related to the financing from its financial statements. In March 2016 the SCC of VA denied Washington Gas' further participation in the third party financing arrangement but allowed existing debt arrangements to remain intact until the related obligations were satisfied. At December 31, 2017 there were two contracts remaining totaling $43.8 million on the Washington Gas balance sheet as a short-term obligation to third party lenders in "Notes payable and project financing".

In December 2016, WGL Energy Systems entered into an agreement to obtain third-party financing and receive funds directly from the third-party lender during the construction period associated with the related energy management service projects. As a result, Washington Gas will no longer be liable under future third-party financing arrangements, for projects entered into under the area-wide contract. The general terms of the financing agreement are the same as the prior financing arrangements between Washington Gas and the third-party lender mentioned above. Washington Gas will continue to record a receivable representing the government’s obligation, and will record an inter-company payable to WGL Energy Systems for the construction work performed for the same amount.

As of December 31, 2017, WGL and Washington Gas recorded $94.6 million and $85.4 million, respectively, in "Unbilled revenues" on the balance sheet, and $54.8 million and $43.8 million, respectively, in a corresponding short-term obligation to third-party lenders in "Notes payable and project financing", for energy management services projects that were not complete. As of September 30, 2017, WGL and Washington Gas recorded $85.6 million and $78.2 million in "Unbilled revenues" on the balance sheet and $54.8 million and $43.8 million, respectively, in a corresponding short-term obligation to third party lenders in "Notes payable and project financing" for energy management services projects that were not complete. Because these projects are financed for government agencies that have minimal credit risk, and with which we have previous collection experience, neither WGL nor Washington Gas recorded a corresponding reserve for bad debts related to these receivables at December 31, 2017 or September 30, 2017.
NOTE 4. LONG-TERM DEBT
UNSECURED NOTES
WGL and Washington Gas issue long-term notes with individual terms regarding interest rates, maturities and call or put options. These notes can have maturity dates of one or more years from the date of issuance.
At December 31, 2017 and September 30, 2017, WGL had capacity under a shelf registration statement to issue an unlimited amount of long-term debt securities. As a result of certain covenants included in the Merger Agreement among WGL, AltaGas and Wrangler, Inc., WGL may not issue debt with a term longer than two years. Refer to Note 17 — Planned Merger with AltaGas Ltd. of the Notes to Condensed Consolidated Financial Statements for a discussion of the proposed merger.
At December 31, 2017 and September 30, 2017, Washington Gas had capacity under a shelf registration statement to issue up to $150.0 million of additional Medium-Term Notes (MTNs).
The following tables show our outstanding notes as of December 31, 2017 and September 30, 2017.

18


WGL Holdings, Inc.
Washington Gas Light Company
Part I—Financial Information
Item 1—Financial Statements (continued)
Notes to Condensed Consolidated Financial Statements (Unaudited)

Long-Term Debt Outstanding
($ In millions)
WGL(a)
 
Washington Gas
 
Total Consolidated
December 31, 2017
 
 
 
 
 
Long-term debt (b)
$
850.0

 
$
1,146.0

 
$
1,996.0

Unamortized discount
(1.6
)
 
(3.0
)
 
(4.6
)
Unamortized debt expense
(3.1
)
 
(8.4
)
 
(11.5
)
   Total Long-Term Debt

$
845.3

 
$
1,134.6

 
$
1,979.9

Weighted average interest rate
2.60
%
 
4.89
%
 
3.91
%
September 30, 2017
 
 
 
 
 
Long-term debt (b)
$
550.0

 
$
1,146.0

 
$
1,696.0

Unamortized discount
(1.5
)
 
(3.0
)
 
(4.5
)
Unamortized debt expense
(2.1
)
 
(8.5
)
 
(10.6
)
   Total Long-Term Debt

$
546.4

 
$
1,134.5

 
$
1,680.9

Weighted average interest rate
2.81
%
 
4.89
%
 
4.21
%
(a)WGL includes WGL Holdings, Inc. and all subsidiaries other than Washington Gas.
(b)Includes senior notes, term loans and floating rate notes for WGL and both MTNs and private placement notes for Washington Gas. Represents face value
including current maturities.

The following tables show long-term debt issuances and retirements for the three months ended December 31, 2017.
Long-Term Debt Issuances and Retirements
($ In millions)
Principal(b)
 
Interest
Rate
 
Effective
Cost
 
Nominal
Maturity Date
Three Months Ended December 31, 2017
 
 
 
 
 
 
 
WGL(a)
 
 
 
 
 
 
 
Issuances:
 
 
 
 
 
 
 
11/29/2017
$
300.0

 
1.88
%
(c) 
2.01
%
 
11/29/2019
Total consolidated issuances
$
300.0

 
 
 
 
 
 
(a)WGL includes WGL Holdings, Inc. and all subsidiaries other than Washington Gas.
(b)Represents face amount of notes.
(c)Floating rate per annum and reset quarterly based on terms set forth in the prospectus supplement filed by WGL pursuant to Securities Act Rule 424 on November 27, 2017.


There were no issuances of long-term debt by Washington Gas for the three months ended December 31, 2017 and there were no retirements of long-term debt for WGL or Washington Gas for the three months ended December 31, 2017.

There were no issuances or retirements of long-term debt by WGL or Washington Gas for the three months ended December 31, 2016.
NOTE 5. COMPONENTS OF TOTAL EQUITY
The tables below reflect the components of “Total equity” for WGL and Washington Gas for the three months ended December 31, 2017 and 2016.


19


WGL Holdings, Inc.
Washington Gas Light Company
Part I—Financial Information
Item 1—Financial Statements (continued)
Notes to Condensed Consolidated Financial Statements (Unaudited)

WGL Holdings, Inc.
Components of Total Equity
(In thousands, except shares)
Common Stock
 
Paid-In
Capital
 
Retained
Earnings
 
Accumulated Other Comprehensive Income (Loss), Net of Taxes
 
WGL Holdings Common Shareholders' Equity
 
Non-controlling Interest
 
Washington Gas Light Company Preferred Stock
 
Total Equity
Shares
Amount
 
 
 
 
 
 
 
Balance at
September 30, 2017
51,219,000

$
582,716

 
$
10,149

 
$
915,822

 
$
(5,997
)
 
$
1,502,690

 
$
6,851

 
$
28,173

 
$
1,537,714

Net income (loss)


 

 
138,040

 

 
138,040

 
(5,778
)
 
330

 
132,592

Contributions from non-controlling interest


 

 

 

 

 
1,659

 

 
1,659

Distributions to non-controlling interest


 

 

 

 

 
(136
)
 

 
(136
)
Business combination(a)


 

 

 

 

 
614

 

 
614

Other
comprehensive income


 

 

 
244

 
244

 

 

 
244

Stock-based compensation(b)
133,540

11,251

 
(20,534
)
 
4,174

 

 
(5,109
)
 

 

 
(5,109
)
Dividends declared:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


Common stock


 

 
(26,258
)
 

 
(26,258
)
 

 

 
(26,258
)
Preferred stock


 

 

 

 

 

 
(330
)
 
(330
)
Balance at
December 31, 2017
51,352,540

$
593,967

 
$
(10,385
)
 
$
1,031,778

 
$
(5,753
)
 
$
1,609,607

 
$
3,210

 
$
28,173

 
$
1,640,990

Balance at September 30, 2016
51,080,612

$
574,496

 
$
12,519

 
$
827,085

 
$
(38,539
)
 
$
1,375,561

 
$
409

 
$
28,173

 
$
1,404,143

Net income (loss)


 

 
57,972

 

 
57,972

 
(2,535
)
 
330

 
55,767

Contributions from non-controlling interest


 

 

 

 

 
7,331

 

 
7,331

Other
comprehensive income


 

 

 
29,413

 
29,413

 

 

 
29,413

Stock-based compensation(b)
104,676

6,564

 
(6,567
)
 
(126
)
 

 
(129
)
 

 

 
(129
)
Issuance of
common stock
(c)
25,680

1,613

 

 

 

 
1,613

 

 

 
1,613

Dividends declared:
 
 
 
 
 
 
 
 
 


 
 
 
 
 


Common stock


 

 
(24,965
)
 

 
(24,965
)
 

 

 
(24,965
)
Preferred stock


 

 

 

 

 

 
(330
)
 
(330
)
Balance at
December 31, 2016
51,210,968

$
582,673

 
$
5,952

 
$
859,966

 
$
(9,126
)
 
$
1,439,465

 
$
5,205

 
$
28,173

 
$
1,472,843


(a) Resulted from the consolidation of SFEE. For more information, see Note 11—Other investments of the Notes to Condensed Consolidated Financial Statements.
(b) Includes dividend equivalents related to our performance shares and implementation of ASU 2016-09, see Note 1—Accounting policies of the Notes to Condensed Consolidated Financial Statements.
(c) Includes dividend reinvestment and common stock purchase plans.

20


WGL Holdings, Inc.
Washington Gas Light Company
Part I—Financial Information
Item 1—Financial Statements (continued)
Notes to Condensed Consolidated Financial Statements (Unaudited)





Washington Gas Light Company
Components of Total Equity
(In thousands, except shares)
Common Stock
 
Paid-In
Capital
 
Retained
Earnings
 
Accumulated Other
Comprehensive Income (Loss), Net of Taxes
 
Total
Shares
Amount
 
 
 
 
Balance at September 30, 2017
46,479,536

$
46,479

 
$
492,101

 
$
630,691

 
$
(4,522
)
 
$
1,164,749

Net income


 

 
57,926

 

 
57,926

Other comprehensive income


 

 

 
192

 
192

Stock-based compensation(a)


 
(8,916
)
 
4,197

 

 
(4,719
)
Capital contributed by WGL Holdings


 
100,000

 

 

 
100,000

Dividends declared:
 
 
 
 
 
 
 
 
 
 
Common stock


 

 
(21,904
)
 

 
(21,904
)
Preferred stock


 

 
(330
)
 

 
(330
)
Balance at December 31, 2017
46,479,536

$
46,479

 
$
583,185

 
$
670,580

 
$
(4,330
)
 
$
1,295,914

Balance at September 30, 2016
46,479,536

$
46,479

 
$
488,135

 
$
586,662

 
$
(7,830
)
 
$
1,113,446

Net income


 

 
55,461

 

 
55,461

Other comprehensive income


 

 

 
224

 
224

Stock-based compensation(a)


 
(6
)
 

 

 
(6
)
Dividends declared:
 
 
 
 
 
 
 
 
 
 
Common stock


 

 
(21,134
)
 

 
(21,134
)
Preferred stock


 

 
(330
)
 

 
(330
)
Balance at December 31, 2016
46,479,536

$
46,479

 
$
488,129

 
$
620,659

 
$
(7,606
)
 
$
1,147,661

(a) Stock-based compensation is based on the stock awards of WGL that are allocated to Washington Gas Light Company for its pro-rata share and includes implementation of ASU 2016-09, see Note 1—Accounting policies of the Notes to Condensed Consolidated Financial Statements.

NOTE 6. EARNINGS PER SHARE
Basic earnings per share (EPS) of WGL is computed by dividing net income by the weighted average number of common shares outstanding during the reported period. Diluted EPS assumes the issuance of common shares pursuant to stock-based compensation plans at the beginning of the applicable period unless the effect of such issuance would be anti-dilutive. The following table reflects the computation of our basic and diluted EPS for the three months ended December 31, 2017 and 2016.


21


WGL Holdings, Inc.
Washington Gas Light Company
Part I—Financial Information
Item 1—Financial Statements (continued)
Notes to Condensed Consolidated Financial Statements (Unaudited)

Basic and Diluted EPS
(In thousands, except per share data)
Net Income
Applicable to
Common Stock
 
Shares
 
Per Share
Amount
Three Months Ended December 31, 2017
 
 
 
 
 
Basic EPS
$
138,040

 
51,319

 
$
2.69

Stock-based compensation plans

 
230

 
 
Diluted EPS
$
138,040

 
51,549

 
$
2.68

Three Months Ended December 31, 2016
 
 
 
 
 
Basic EPS
$
57,972

 
51,172

 
$
1.13

Stock-based compensation plans

 
273

 
 
Diluted EPS
$
57,972

 
51,445

 
$
1.13

There were no anti-dilutive shares issued for the three months ended December 31, 2017 and 2016.
NOTE 7. INCOME TAXES
As of December 31, 2017 and September 30, 2017, our uncertain tax positions were approximately $37.5 million and $48.1 million, respectively, primarily due to the change in tax accounting for repairs. If the amounts of unrecognized tax benefits are eventually realized, it would not materially impact the effective tax rate. It is reasonably possible that the amount of the unrecognized tax benefit with respect to some of WGL’s and Washington Gas’ uncertain tax positions will significantly increase or decrease in the next 12 months. At this time, however, an estimate of the range of reasonably possible outcomes cannot be determined.
Under Accounting Standards Codification (ASC) Topic 740, Income Taxes, Washington Gas recognizes any accrued interest associated with uncertain tax positions in interest expense and recognizes any accrued penalties associated with uncertain tax positions in other expenses in the statements of income. At December 31, 2017 and September 30, 2017, we did not have an accrual of interest expense or penalties related to uncertain tax positions.
WGL files a consolidated federal tax return and various other state returns. We are no longer subject to income tax examinations by the Internal Revenue Service for years ended prior to September 30, 2014. Substantially all state income tax years in major jurisdictions are closed for years ended prior to September 30, 2014.
The Tax Cuts and Jobs Act (“the Act”) was enacted on December 22, 2017. The Act substantially reforms the Tax Code. Among other things, the Act reduced the federal corporate income tax rate from a top marginal rate of 35% to a flat rate of 21%. The Act also denies bonus depreciation to regulated public utilities and imposes limitations on the amount of interest expense which may be deducted by unregulated operations. ASC Topic 740 requires companies to recognize the impacts of a change in tax law or tax rates in the period of enactment. On December 22, 2017, after enactment of the Act, the Securities and Exchange Commission ("SEC") staff issued Staff Accounting Bulletin No. 118 (“SAB 118”) to address the application of US GAAP when a registrant does not have the necessary information available, prepared, or analyzed in reasonable detail to complete the necessary accounting. At December 31, 2017, we have not completed our accounting for the tax effects of enactment of the Act and have followed the guidance issued in SAB 118. SAB 118 expresses the Staff’s views on how ASC Topic 740 should be applied in the context of the Act. It allows entities to take a reasonable period of time to measure and recognize the effects of the Act, while requiring robust disclosures during that period. Under this guidance, registrants record the effects of all items for which the accounting is complete. To the extent a company has not completed the accounting for the effects of the Act, it may record reasonable estimates as provisional amounts. The recorded provisional amounts remain subject to adjustment within the measurement period. The measurement period begins in the reporting period that includes the Act’s enactment date and continues until such time as the accounting can be completed, not to exceed one year from the date of enactment. To the extent a company cannot reasonably estimate the effects of the Act, it should apply the provisions of the tax law that were in effect immediately prior to enactment. SAB 118 requires disclosure of any measurement period adjustments and the effect of measurement period adjustments on the effective tax rate. There are no measurement period adjustments in the first quarter of the fiscal year since the amounts recorded are our initial, provisional amounts.
Qualitative disclosures of items having no impact on provision for tax expense at December 31, 2017:
Bonus depreciation. Under the Act, regulated public utility property is generally ineligible for bonus depreciation and is depreciated under MACRS while non-utility property is generally subject to 100% bonus depreciation. We have considered all public utility property placed in service in this quarter to be ineligible for bonus depreciation. The impact of this provision in the current fiscal year is reasonably estimated to be a reduction in the amount of $88 million in tax depreciation expense based

22


WGL Holdings, Inc.
Washington Gas Light Company
Part I—Financial Information
Item 1—Financial Statements (continued)
Notes to Condensed Consolidated Financial Statements (Unaudited)

on current assumptions of assets to be placed in service, when compared to the amount of deprecation expense under the previous rules, and a decrease to the forecasted taxable loss. A deferred tax amount related to this depreciation was not recorded; therefore, there is no associated deferred tax amount that was required to be re-measured.
Decrease in regulated revenues: As described above, the re-measurement of deferred tax assets and liabilities for the regulated public utility gives rise to amounts probable of being collected from or refunded to customers in future periods. In addition, the federal tax expense included in current base rates needs to be adjusted to the new federal rate of 21% effective January 1, 2018. We have reasonably estimated the reduction in current base rates (revenue) and the annual amortization of amounts resulting from the re-measurement of certain deferred tax assets and liabilities beginning January 1, 2018. In January 2018, Washington Gas filed applications for approval to reduce its distribution rates it charges customers to reflect the Tax Cuts and Jobs Act in Maryland, Virginia and the District of Columbia. These applications propose to reduce rates in these jurisdictions by a combined amount of $39.5 million annually, until base rates are reestablished in a general rate case. As described further below, the portion of this reduction in regulated revenues represented by the re-measurement of deferred tax assets and liabilities was recorded as a net regulatory liability under ASC 980, Regulated Operations. The net regulatory liability recorded is the amount we consider probable of regulatory treatment. In addition, amounts collected under other revenue mechanisms remain subject to adjustment for the decrease in the federal tax rate beginning January 1, 2018. The estimated decrease in regulated revenues is prospective only and had no impact on the accounting for the quarter ended December 31, 2017.
Items for which the accounting is not yet complete as of the end of the quarter but for which we have recorded provisional amounts at December 31, 2017 which are subject to adjustment during the measurement period:
Re-measurement of deferred tax assets and liabilities. Under ASC 740, the tax rate or rates that are used to measure deferred tax liabilities and deferred tax assets are the enacted tax rates expected to apply to taxable income in the years that the liability is expected to be settled or the asset recovered. As a result of using a 21% tax rate for our Q1 income tax provision, we did not create new amounts requiring re-measurement in Q1. Therefore, we re-measured the deferred tax balances at September 30, 2017. The re-measurement of our deferred tax assets and liabilities includes the re-measurement of our cumulative net operating loss deferred tax asset (NOL DTA) as of September 30, 2017.
The effect of the re-measurement at a federal tax rate of 21% which resulted in a net decrease in consolidated deferred tax liabilities in the amount of $476.4 million, including net tax gross-up. Of this amount, $417.3 million is attributable to the regulated utility and $59.1 million is attributable to non-utility operations. Of the amount related to utility operations, the net decrease in plant-related deferred tax liabilities was $317.8 million before tax gross-up. In addition an increase in income tax expense of, $6.2 million attributable to the regulated utility was recorded as a discrete item. Of the amount related to non-utility operations, $59.1 million was recorded as a benefit to the tax expense recorded for the period, as a discrete item as a result of the re-measurement of deferred tax liabilities. In addition, the re-measurement of the deferred tax liability associated with the Company’s uncertain tax position was a decrease in the amount of $14.8 million. A reserve for uncertain tax benefits related to prior years would generally not be re-measured if the tax exposure related to prior years. However, WGLH’s reserve for uncertain tax benefits relates solely to repair deductions for which the tax consequence of any disallowed deductions related to these timing differences is expected to be prospective only.
Consolidated deferred tax assets and liabilities were re-measured at a federal rate of 21%, based on the expectation that we will experience a taxable loss in the current fiscal year, increasing our net operating loss carryforward from the prior year. In the event taxable income is reported for the current fiscal year, we would need to apply a blended federal tax rate of 24.5% to any tax owed in the current period, before the utilization of any net operating loss carryforward to offset all or a portion of the taxable income on which federal tax would otherwise be owed. Additionally, the portion of the temporary differences settling or reversing in the first quarter of our fiscal year 2018 would be re-measured at the rate of 24.5% instead of 21%. We have recorded provisional estimates based on current information as the Company continues to work towards refinement and completion of the income tax provision for the current period. Under ASC 980, we recorded a net increase to the regulatory liability for excess deferred income taxes (EDIT) in the amount of $429.3 million including tax gross-up, and a net increase in regulatory assets in the amount of $5.8 million, for a net increase in regulatory liabilities in the amount of $423.5 million. We recorded a decrease in the regulatory asset for flow-through in the amount and $22.4 million, including tax gross-up; and a regulatory asset for the re-measurement of non-plant excess deferred taxes and the net operating loss carryforward deferred tax asset in the amount of $28.2 million, including tax gross-up, for a net increase in regulatory assets in the amount of $5.8 million.
All provisional amounts recorded for re-measurement remain subject to adjustment within the measurement period pending the preparation and analysis of additional information. In addition, we have recorded a provisional estimate but have not fully

23


WGL Holdings, Inc.
Washington Gas Light Company
Part I—Financial Information
Item 1—Financial Statements (continued)
Notes to Condensed Consolidated Financial Statements (Unaudited)

completed the accounting for the tax sharing impacts of the re-measurement of the deferred tax assets and deferred tax liabilities.
Existing current or deferred tax amounts for which the income tax effects of the Tax Act have not been completed:
Accounting for the tax basis adjustment for ITC. Under prior tax law and under the Act, the basis of property must be reduced by one-half of the investment tax credits claimed thereon. Under GAAP, we gross up the book basis and amortize the investment tax credits over the book life of the associated assets. We have not yet completed the accounting for the effects of the Act on the gross-up of book basis and have not recast the amortization pending additional analysis.
NOTE 8. DERIVATIVE AND WEATHER-RELATED INSTRUMENTS
DERIVATIVE INSTRUMENTS
Regulated Utility Operations
Washington Gas enters into contracts that qualify as derivative instruments and are accounted for under ASC Topic 815. These derivative instruments are recorded at fair value on our balance sheets and Washington Gas does not currently designate any derivatives as hedges under ASC Topic 815. Washington Gas’ derivative instruments relate to: (i) Washington Gas’ asset optimization program; (ii) managing price risk associated with the purchase of gas to serve utility customers and (iii) managing interest rate risk.
Asset Optimization. Washington Gas optimizes the value of its long-term natural gas transportation and storage capacity resources during periods when these resources are not being used to physically serve utility customers. Specifically, Washington Gas utilizes its transportation capacity assets to benefit from favorable natural gas prices between different geographic locations and utilizes its storage capacity assets to benefit from favorable natural gas prices between different time periods. As part of this asset optimization program, Washington Gas enters into physical and financial derivative transactions in the form of forward, futures and option contracts with the primary objective of securing operating margins that Washington Gas will ultimately realize. The derivative transactions entered into under this program are subject to mark-to-market accounting treatment under ASC 820.
Regulatory sharing mechanisms provide for the annual realized profit from these transactions to be shared between Washington Gas' shareholders and customers; therefore, changes in fair value are recorded through earnings, or as regulatory assets or liabilities to the extent that it is probable that realized gains and losses associated with these derivative transactions will be included in the rates charged to customers when they are realized. Unrealized gains and losses recorded to earnings may cause significant period-to-period volatility; this volatility does not change the operating margins that Washington Gas expects to ultimately realize from these transactions through the use of its storage and transportation capacity resources.
All physically and financially settled contracts under our asset optimization program are reported on a net basis in the statements of income in “Utility cost of gas.” Total net margins recorded to “Utility cost of gas” after sharing and management fees associated with all asset optimization transactions for the three months ended December 31, 2017 was a net gain of $5.8 million, including an unrealized loss of $1.4 million. During the three months ended December 31, 2016, we recorded a net gain of $24.3 million, including an unrealized gain of $15.4 million.
Managing Price Risk. To manage price risk associated with acquiring natural gas supply for utility customers, Washington Gas enters into physical and financial derivative transactions in the form of forward, option and other contracts, as authorized by its regulators. Any gains and losses associated with these derivatives are recorded as regulatory liabilities or assets, respectively, to reflect the rate treatment for these economic hedging activities.
Managing Interest-Rate Risk. Washington Gas may utilize derivative instruments that are designed to minimize the risk of interest-rate volatility associated with planned issuances of debt securities. Any gains and losses associated with these types of derivatives are recorded as regulatory liabilities or assets, respectively, and amortized in accordance with regulatory requirements, typically over the life of the related debt.
Non-Utility Operations
Trading Activities. WGL Midstream enters into derivative contracts for the purpose of optimizing its storage and transportation capacity as well as managing the transportation and storage assets on behalf of third parties. WGL Midstream does not designate these derivatives as hedges under ASC Topic 815; therefore, changes in the fair value of these derivative instruments are reflected in the earnings of our non-utility operations and may cause significant period-to-period volatility in earnings.

24


WGL Holdings, Inc.
Washington Gas Light Company
Part I—Financial Information
Item 1—Financial Statements (continued)
Notes to Condensed Consolidated Financial Statements (Unaudited)

Managing Price Risk. WGL Energy Services enters into certain derivative contracts as part of its strategy to manage the price risk associated with the sale and purchase of natural gas and electricity. WGL Energy Services elects "normal purchases and normal sales" treatment for a portion of these physical contracts related to the purchase of natural gas and electricity to serve its customers, and, therefore, they are not subject to the fair value accounting requirements of ASC Topic 815. Derivative instruments not designated as ''normal purchases and normal sales" are recorded at fair value on our consolidated balance sheets, and changes in the fair value of these derivative instruments are reflected in the earnings of our non-utility operations, which may cause significant period-to-period volatility in earnings. WGL Energy Services does not designate derivatives as hedges under ASC Topic 815.
Managing Interest-Rate Risk. WGL utilizes derivative instruments that are designed to limit the risk of interest-rate volatility associated with future debt issuances.

At December 31, 2017, WGL had $250 million of 30-year forward starting interest rate swaps which settled in January 2018. Through December 2016, WGL had designated these interest rate swaps as cash flow hedges in anticipation of a 30-year debt issuance in January 2018, and reported the effective portion of changes in fair value as a component of other comprehensive income (loss). As a result of certain covenants related to the proposed merger with AltaGas, in January 2017, WGL de-designated these hedges as it was no longer probable that the debt would be issued and any further changes in the fair value of the interest rate swaps were recorded in interest expense. WGL believes that the debt issuance is still reasonably possible to occur, therefore, the fair value of the swaps prior to the dedesignation in the amount of $6.4 million is recorded in accumulated other comprehensive income at December 31, 2017. In January 2018, WGL settled these swaps and realized a gain of $13.8 million, of which approximately $13.2 million will be recorded to interest expense. Refer to Note 17—Planned Merger with AltaGas Ltd. for a discussion of the proposed merger.
 
WGL's comprehensive income (loss) also includes amounts for settled hedges related to prior debt issuances, which are being amortized to income over the life of the outstanding debt. The amortization was minimal for the three months ended December 31, 2017 and 2016.
Consolidated Operations
Reflected in the tables below is information for WGL as well as Washington Gas. The information for WGL includes derivative instruments for both utility and non-utility operations.

25


WGL Holdings, Inc.
Washington Gas Light Company
Part I—Financial Information
Item 1—Financial Statements (continued)
Notes to Condensed Consolidated Financial Statements (Unaudited)


At December 31, 2017 and September 30, 2017, respectively, the absolute notional amounts of our derivatives were as follows: 
Absolute Notional Amounts
of Open Positions on Derivative Instruments
Derivative transactions
WGL Holdings, Inc.
 
Washington Gas
December 31, 2017
Notional Amounts
Natural Gas (In millions of therms)
 
 
 
Asset optimization & trading
21,960.9

 
11,768.0

Retail sales
143.2

 

Other risk-management activities
1,597.4

 
1,181.0

Electricity (In millions of kWhs)
 
 
 
Retail sales
9,279.2

 

Other risk-management activities(a)
21,569.5

 

Interest Rate Swaps (In millions of dollars)
$
250.0

 

September 30, 2017
 
Natural Gas (In millions of therms)
 
 
 
Asset optimization & trading
21,663.5

 
11,223.0

Retail sales
124.3

 

Other risk-management activities
1,546.7

 
1,181.0

Electricity (In millions of kWhs)
 
 
 
Retail sales
10,011.7

 

Other risk-management activities(a)
22,962.1

 

Interest Rate Swaps (In millions of dollars)
$
250.0

 

(a) Comprised primarily of financial swaps, financial transmission rights and physical forward purchases.
The following tables present the balance sheet classification for all derivative instruments as of December 31, 2017 and September 30, 2017.
WGL Holdings, Inc.
Balance Sheet Classification of Derivative Instruments(b)
(In millions)
 
 
  
 
  
As of December 31, 2017
Gross
Derivative
Assets
 
Gross
Derivative
Liabilities
 
Netting of
Collateral
 
Total(a)
Current Assets—Derivatives
$
29.2

 
$
(11.5
)
 
$

 
$
17.7

Deferred Charges and Other Assets—Derivatives
32.3

 
(0.1
)
 

 
32.2

Current Liabilities—Derivatives
17.8

 
(67.2
)
 
14.4

 
(35.0
)
Deferred Credits—Derivatives
17.6

 
(154.1
)
 
7.6

 
(128.9
)
Total
$
96.9

 
$
(232.9
)
 
$
22.0

 
$
(114.0
)
As of September 30, 2017
 
 
 
 
 
 
 
Current Assets—Derivatives
$
26.6

 
$
(11.3
)
 
$

 
$
15.3

Deferred Charges and Other Assets—Derivatives

38.9

 
(0.4
)
 
(0.1
)
 
38.4

Accounts payable
1.0

 

 

 
1.0

Current Liabilities—Derivatives
10.9

 
(57.0
)
 
2.1

 
(44.0
)
Deferred Credits—Derivatives
19.2

 
(148.8
)
 
7.0

 
(122.6
)
Total
$
96.6

 
$
(217.5
)
 
$
9.0

 
$
(111.9
)
 

26


WGL Holdings, Inc.
Washington Gas Light Company
Part I—Financial Information
Item 1—Financial Statements (continued)
Notes to Condensed Consolidated Financial Statements (Unaudited)

Washington Gas Light Company
Balance Sheet Classification of Derivative Instruments(b)
(In millions)







As of December 31, 2017
Gross
Derivative
Assets
 
Gross
Derivative
Liabilities
 
Netting of
Collateral
 
Total(a)
Current Assets—Derivatives
$
9.4

 
$
(5.1
)
 
$

 
$
4.3

Deferred Charges and Other Assets—Derivatives
15.4

 

 

 
15.4

Current Liabilities—Derivatives

 
(24.7
)
 
0.1

 
(24.6
)
Deferred Credits—Derivatives

 
(119.0
)
 

 
(119.0
)
Total
$
24.8

 
$
(148.8
)
 
$
0.1

 
$
(123.9
)
As of September 30, 2017
 
 
 
 
 
 
 
Current Assets—Derivatives
$
7.5

 
$
(2.4
)
 
$

 
$
5.1

Deferred Charges and Other Assets—Derivatives
16.5

 
(0.3
)
 

 
16.2

Current Liabilities—Derivatives

 
(30.3
)
 

 
(30.3
)
Deferred Credits—Derivatives

 
(112.3
)
 

 
(112.3
)
Total
$
24.0

 
$
(145.3
)
 
$

 
$
(121.3
)
(a) WGL has elected to offset the fair value of recognized derivative instruments against the right to reclaim or the obligation to return collateral for derivative instruments executed under the same master netting arrangement in accordance with ASC 815. All recognized derivative contracts and associated financial collateral subject to a master netting arrangement or similar that is eligible for offset under ASC 815 have been presented net in the balance sheet.

(b) We did not have any derivative instruments outstanding that were designated as hedging instruments at December 31, 2017 or September 30, 2017.
The following table presents all gains and losses associated with derivative instruments for the three months ended December 31, 2017 and 2016.
Gains and Losses on Derivative Instruments
(In millions)
WGL Holdings, Inc.