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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.
20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the Fiscal Year Ended September 30, 2006
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Commission
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Exact name of registrant as
specified in its charter and
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States of
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I.R.S.
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File Number
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principal office address and telephone number
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Incorporation
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Employer I.D. Number
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1-16163
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WGL Holdings, Inc.
101 Constitution Ave., N.W.
Washington, D.C. 20080
(703) 750-2000
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Virginia
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52-2210912
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0-49807
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Washington Gas Light Company
101 Constitution Ave., N.W.
Washington, D.C. 20080
(703) 750-4440
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District of
Columbia
and Virginia
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53-0162882
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Securities registered pursuant
to Section 12(b) of the Act (as of September 30,
2006):
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Title of each class
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Name of each exchange on
which registered
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WGL Holdings, Inc. common
stock, no par value
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New York Stock Exchange
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Securities registered pursuant
to Section 12(g) of the Act (as of September 30,
2006):
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Title of each class
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Name of each exchange on
which registered
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Washington Gas Light Company
preferred stock,
cumulative, without par value:
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$4.25 Series
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Over-the-counter
bulletin board
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$4.80 Series
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Over-the-counter
bulletin board
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$5.00 Series
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Over-the-counter
bulletin board
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Indicate by check mark if each registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act.
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WGL Holdings, Inc.
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Yes X No
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Washington Gas Light Company
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Yes No X
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Indicate by check mark if each registrant is not required to
file reports pursuant to Section 13 or Section 15(d)
of the
Act. Yes No X
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 X No
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
is not contained herein, and will not be contained, to the best
of the registrants knowledge, in definitive proxy or
information statements incorporated by reference in
Part III of this
Form 10-K
or any amendment to this
Form 10-K. X
Indicate by check mark whether each registrant is a large
accelerated filer, an accelerated filer, or a non-accelerated
filer (as defined in
Rule 12b-2
of the Exchange Act).
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WGL
Holdings, Inc.
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Large
Accelerated Filer X
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Accelerated
Filer
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Non-Accelerated
Filer
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Washington
Gas Light Company
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Large
Accelerated Filer
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Accelerated
Filer
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Non-Accelerated
Filer X
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Indicate by check mark whether each registrant is a shell
company (as defined in
Rule 12b-2
of the Act):
Yes No X
The aggregate market value of the voting common equity held by
non-affiliates of the registrant, WGL Holdings, Inc., amounted
to $1,475,648,252 as of March 31, 2006.
WGL Holdings, Inc. common stock, no par value outstanding as of
October 31, 2006: 48,885,617 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 October 31, 2006.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of WGL Holdings, Inc.s definitive Proxy
Statement and Washington Gas Light Companys definitive
Information Statement in connection with the 2007 Annual
Meeting of Shareholders, to be filed with the Securities and
Exchange Commission pursuant to Regulation 14A and 14C not
later than 120 days after September 30, 2006, are
incorporated in Part III of this report.
WGL
Holdings, Inc.
Washington Gas Light Company
For the Fiscal Year Ended September 30, 2006
Table of Contents
i
WGL
Holdings, Inc.
Washington Gas Light Company
INTRODUCTION
FILING
FORMAT
This Annual Report on
Form 10-K
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.
The Managements Discussion and Analysis of Financial
Condition and Results of Operations (Managements
Discussion) included under Item 7 is divided into the
following two major sections:
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WGL HoldingsThis section describes the financial
condition and results of operations of WGL Holdings and its
subsidiaries on a consolidated basis. It includes discussions of
our regulated and unregulated operations. The majority of WGL
Holdings operations are derived from the results of
Washington Gas and, to a much lesser extent, the results of its
non-utility operations.
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Washington GasThis section describes the financial
condition and results of operations of Washington Gas, a wholly
owned subsidiary that comprises the majority of WGL
Holdings regulated utility segment.
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Included under Item 8 are Consolidated Financial Statements
of WGL Holdings and the Financial Statements of Washington Gas.
Also included are the Notes to Consolidated Financial Statements
that are presented on a combined basis for both WGL Holdings and
Washington Gas.
The Managements Discussion for both WGL Holdings and
Washington Gas should be read in conjunction with the respective
companys financial statements and the combined Notes to
Consolidated Financial Statements.
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.
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:
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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 the Washington Gas
natural gas distribution system;
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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 facility to Washington
Gas natural gas distribution system;
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the ability to recover the costs of implementing steps to
accommodate delivery of natural gas to customers as a result of
the receipt of gas from the Cove Point facility;
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variations in weather conditions from normal levels;
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the availability of natural gas supply and interstate pipeline
transportation and storage capacity;
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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;
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1
WGL
Holdings, Inc.
Washington Gas Light Company
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changes in economic, competitive, political and regulatory
conditions and developments;
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changes in capital and energy commodity market conditions;
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changes in credit ratings of debt securities of WGL Holdings or
Washington Gas that may affect access to capital or the cost of
debt;
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changes in credit market conditions and creditworthiness of
customers and suppliers;
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changes in relevant laws and regulations, including tax,
environmental and employment laws and regulations;
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legislative, regulatory and judicial mandates or decisions
affecting business operations or the timing of recovery of costs
and expenses;
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the timing and success of business and product development
efforts and technological improvements;
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the pace of deregulation efforts and the availability of other
competitive alternatives to our products and services;
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changes in accounting principles;
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acts of God and terrorist activities and
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other uncertainties.
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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 Annual Report on
Form 10-K.
All forward-looking statements made in this report rely upon the
safe harbor protections provided under the Private Securities
Litigation Reform Act of 1995.
2
WGL
Holdings, Inc.
Washington Gas Light Company
Glossary
of Key Terms
Active Customer Meters: Natural gas meters
that are physically connected to a building structure within the
Washington Gas distribution system and service is active.
Customers are billed for flowing gas
and/or fixed
charges.
Book Value Per Share: Common
shareholders equity divided by the number of common shares
outstanding.
Bundled Service: Service in which customers
purchase both the natural gas commodity and the distribution or
delivery of the commodity from the local regulated utility. When
customers purchase bundled service from Washington Gas, no
mark-up is
applied to the cost of the natural gas commodity that is passed
through to customers. Washington Gas has an opportunity to earn
a fair rate of return on the net investment used to deliver
natural gas.
City Gate: A point or measuring station at
which a gas distribution company such as Washington Gas receives
natural gas from an unaffiliated pipeline or transmission system.
Delivery Service: The regulated distribution
or delivery of natural gas to retail customers. Washington Gas
provides delivery service to retail customers in
Washington, D.C. and parts of Maryland and Virginia.
Dividend Yield on Book Value: Dividends
declared per share divided by book value per share.
Firm Customers: Customers whose gas supply
will not be disrupted to meet the needs of other customers.
Typically, this class of customer comprises residential
customers and the vast majority of commercial customers.
Gross Margin: Revenues, less the associated
cost of energy.
Heating Degree Day (HDD): A measure of the
variation in weather based on the extent to which the daily
average temperature falls below 65 degrees Fahrenheit.
HVAC: Heating, ventilating and air
conditioning products and services.
Interruptible Customers: Large commercial
customers whose service can be temporarily interrupted in order
for the regulated utility to meet the needs of firm customers.
These customers pay a lower delivery rate than firm customers
and they must be able to readily substitute an alternate fuel
for natural gas.
Market-to-Book
Ratio: Market price of a share of common stock
divided by its book value per share.
Merchant Function: The purchase of the
natural gas commodity by Washington Gas on behalf of retail
customers.
New Customer Meters Added: Natural gas meters
that are newly connected to a building structure within the
Washington Gas distribution system. Service may or may not have
been activated.
Payout Ratio: Dividends declared per share
divided by basic earnings per share.
PSC of DC: The Public Service Commission of
the District of Columbia is a three-member board that regulates
Washington Gas distribution operations in the District of
Columbia.
PSC of MD: The Public Service Commission of
Maryland is a five-member board that regulates Washington
Gas distribution operations in Maryland.
Regulated Utility Segment: Includes the
operations of Washington Gas which are regulated by regulatory
commissions located in the District of Columbia, Maryland and
Virginia, and the operations of Hampshire Gas Company which are
regulated by the Federal Energy Regulatory Commission.
Retail Energy-Marketing: Unregulated sales of
natural gas and electricity to end users by our subsidiary,
Washington Gas Energy Services, Inc.
Return on Average Common Equity: Net income
divided by average common shareholders equity.
Revenue Normalization Adjustment (RNA): A
regulatory billing mechanism designed to stabilize the level of
net revenues collected from customers by eliminating the effect
of deviations in customer usage caused by variations in weather
from normal levels, and other factors such as conservation.
Currently, an RNA is in effect for Maryland customers.
SCC of VA: The State Corporation Commission
of Virginia is a three-member board that regulates Washington
Gas distribution operations in Virginia.
Service Area: The region in which Washington
Gas operates. The service area includes Washington, D.C.,
and the surrounding metropolitan areas in Maryland and Virginia.
3
WGL Holdings, Inc.
Washington Gas Light Company
Tariffs: Documents issued by the regulatory
commission in each jurisdiction that set the prices Washington
Gas may charge and the practices it must follow when providing
utility service to its customers.
Third-Party Marketer: Unregulated companies
that sell natural gas and electricity directly to retail
customers. Washington Gas Energy Services, Inc., a subsidiary
company of Washington Gas Resources Corp., is a third-party
marketer.
Therm: A natural gas unit of measurement that
includes a standard measure for heating value. We report our
natural gas sales and deliveries in therms. A therm of gas
contains 100,000 British thermal units of heat, or the energy
equivalent of burning approximately 100 cubic feet of natural
gas under normal conditions. Ten million therms equal
approximately one billion cubic feet of natural gas.
Unbundling: The separation of the delivery of
natural gas or electricity from the sale of these commodities
and related services that, in the past, were provided only by a
regulated utility.
Utility Net Revenues: Utility revenues, less
the associated cost of gas and applicable revenue taxes.
Value-At-Risk: A
risk measurement that estimates the largest expected loss over a
specified period of time under normal market conditions within a
specified probabilistic confidence interval.
Washington Gas: Washington Gas Light Company
is a subsidiary of WGL Holdings, Inc. that delivers and sells
natural gas primarily to retail customers in accordance with
tariffs set by the PSC of DC, the PSC of MD and the SCC of VA.
Washington Gas Resources
Corporation: Washington Gas Resources Corp. is a
subsidiary of WGL Holdings, Inc. that owns the majority of the
non-utility subsidiaries.
WGEServices: Washington Gas Energy Services,
Inc. is a subsidiary of Washington Gas Resources Corp. that
sells natural gas and electricity to retail customers on an
unregulated basis.
WGESystems: Washington Gas Energy Systems,
Inc., is a subsidiary of Washington Gas Resources Corp. that
offers HVAC-related products and services to commercial
customers.
WGL Holdings: WGL Holdings, Inc. is a holding
company that became the parent company of Washington Gas Light
Company and its subsidiaries effective November 1, 2000.
Weather Insurance Policy: An insurance policy
that provides protection from the negative financial effects of
warmer-than-normal
weather during the winter heating season.
Weather Derivative: A financial instrument
that provides protection from the negative financial effects of
warmer-than-normal
weather during the winter heating season.
4
WGL
Holdings, Inc.
Washington Gas Light Company
Part I
Item 1. Business
ITEM 1. BUSINESS
INTRODUCTION
WGL Holdings is a holding company that was established on
November 1, 2000. WGL Holdings owns all of the shares of
common stock of 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 (Crab Run).
Washington Gas Resources owns all of the shares of common stock
of various unregulated, energy-related businesses.
WGL Holdings, through its subsidiaries, sells and delivers
natural gas, and provides a variety of energy-related products
and services to customers primarily in Washington, D.C.,
and the surrounding metropolitan areas in Maryland and Virginia.
Our core subsidiary, Washington Gas, engages in the delivery and
sale of natural gas that is regulated by regulatory commissions
in the District of Columbia, Maryland and Virginia. Through the
wholly owned subsidiaries of Washington Gas Resources, we also
offer energy-related products and services.
SUBSIDIARIES
WGL Holdings is the parent of four direct, wholly owned
subsidiaries. The following paragraphs describe each subsidiary
in the WGL Holdings corporate structure at
September 30, 2006.
Washington Gasis a regulated public
utility that delivers and sells natural gas to customers in
Washington, D.C. and adjoining areas in Maryland, Virginia
and several cities and towns in the northern Shenandoah Valley
of Virginia. Washington Gas has been engaged in the natural gas
distribution business for 158 years, since its
incorporation by an Act of Congress in 1848. Washington Gas has
been a domestic corporation of the Commonwealth of Virginia
since 1953, and a corporation of the District of Columbia since
1957. Washington Gas serves over one million customers in an
area having a population estimated at five million.
As of September 30, 2006, Washington Gas had
1.032 million active customer meters. Active customer
meters reflect all natural gas meters connected to the
Washington Gas distribution system, excluding those meters that
are not currently receiving service. The following table lists
the number of active customer meters and therms delivered by
jurisdiction as of and for the year ended September 30,
2006.
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Active Customer Meters and Therms Delivered by
Jurisdiction
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Millions of Therms
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Active Customer
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Delivered
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Meters as of
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Fiscal Year Ended
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Jurisdiction
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September 30, 2006
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September 30, 2006
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District of Columbia
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150,636
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292.9
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Maryland
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421,216
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725.4
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Virginia
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460,064
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558.6
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Total
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1,031,916
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1,576.9
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Of the 1.577 billion therms delivered in fiscal year 2006,
813.8 million therms, or 51.6 percent, were sold and
delivered by Washington Gas and 763.1 million therms, or
48.4 percent, were delivered by Washington Gas to various
customers that acquired their natural gas from competitive
natural gas suppliers described as third-party marketers. Of the
total therms delivered, Washington Gas delivered
76.8 percent to firm residential and commercial customers,
16.3 percent to interruptible customers, and the remaining
6.9 percent to customers that use natural gas to generate
electricity either under an interruptible or special firm
contract.
Washington Gas Resourcesowns most of
our unregulated subsidiaries. The subsidiaries of Washington Gas
Resources, as described below, include Washington Gas Energy
Services, Inc. (WGEServices), Washington Gas Energy Systems,
Inc. (WGESystems) and Washington Gas Credit Corporation (Credit
Corp.). On September 29, 2006, Washington Gas Resources
sold all of the outstanding shares of common stock of its wholly
owned subsidiary, American Combustion Industries, Inc. (ACI), a
full-service mechanical contractor that offered turnkey products
and services associated with mechanical heating, ventilating and
air conditioning (HVAC) systems. Refer to Note 2 of the
Notes to Consolidated Financial Statements for a further
discussion of the ACI sale. Effective December 4, 2006,
Washington Gas Resources dissolved its wholly owned subsidiary,
WG Maritime Plaza I, Inc. (WG Maritime), which held a
carried interest in two buildings developed on land owned by
Washington Gas. These two buildings were
5
WGL
Holdings, Inc.
Washington Gas Light Company
Part I
Item 1. Business (continued)
sold in fiscal year 2004. Refer to the section entitled
Properties under Item 2 of this
Form 10-K
for further information related to a development project on this
land.
WGEServicesis engaged in the sale of natural
gas and electricity to retail customers in competition with
other unaffiliated, unregulated marketers. At September 30,
2006, WGEServices served approximately 142,700 residential,
commercial and industrial natural gas customers, and 63,300
electricity customers located in Maryland, Virginia, Delaware
and the District of Columbia. WGEServices purchases natural gas
and electricity for resale and does not own or operate any
natural gas or electric generation, production, transmission or
distribution assets. Washington Gas delivers most of the natural
gas sold by WGEServices. Unaffiliated electric utilities deliver
all of the electricity sold by WGEServices.
WGESystemsis a provider of commercial energy
services, including the design, construction and renovation of
mechanical HVAC systems, electrical distribution systems,
control and security systems, energy conservation measures, and
alternative energy technologies to institutional and commercial
customers in the District of Columbia and parts of Virginia and
Maryland.
Credit Corp.offered financing to customers
to purchase gas appliances and other energy-related equipment.
This business no longer offers new loans, but continues to
service its existing loan portfolio. Substantially all of this
loan portfolio has been amortized and, therefore, is not
material.
Hampshireis a regulated utility that
operates an underground natural gas storage facility in
Hampshire County, West Virginia. Washington Gas purchases all of
the storage services of Hampshire. Washington Gas includes the
cost of these services in the bills sent to its customers.
Hampshire is regulated under a cost of service tariff by the
Federal Energy Regulatory Commission (FERC).
Crab Runis an exploration and
production company whose assets are managed by an Oklahoma-based
limited partnership in which Crab Run is a limited partner. At
September 30, 2006, Crab Runs investment in this
partnership was not material. WGL Holdings investment in
this subsidiary also is not material, and we expect that future
investments in Crab Run will be minimal.
INDUSTRY
SEGMENTS
Through our subsidiaries, as described above, we have three
operating segments: 1) regulated utility; 2) retail
energy-marketing and 3) commercial HVAC products and
services. These three segments are described below. Transactions
not specifically identifiable in one of these three segments are
accumulated and reported in the category Other
Activities.
Regulated
Utility
With approximately 92 percent of our consolidated total
assets, the regulated utility segment consists of Washington Gas
and Hampshire. Washington Gas 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. Washington Gas does not earn a profit or
incur a loss when it sells the natural gas commodity because
utility customers are charged for the natural gas commodity at
the same cost that Washington Gas incurs. At September 30,
2006, Washington Gas was selling and delivering the natural gas
commodity to 85.7 percent of its customers. The remaining
14.3 percent of Washington Gas customers utilized the
delivery services of Washington Gas for delivery of the natural
gas commodity purchased from unregulated third-party marketers,
such as WGEServices.
Hampshire, regulated by the FERC, is also part of our regulated
utility segment. Hampshire operates an underground natural gas
storage facility that provides services exclusively to
Washington Gas. 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.
During fiscal years ended September 30, 2006, 2005 and
2004, the regulated utility segment reported total operating
revenues of $1.6 billion, $1.4 billion and
$1.3 billion, respectively, representing 62.1 percent,
64.8 percent and 62.6 percent, respectively, of
consolidated total operating revenues.
Factors critical to the success of the regulated utility segment
include: (i) operating a safe and reliable natural
gas distribution system; (ii) having sufficient
natural gas supplies to serve the demand of its customers;
(iii) being competitive with other sources of
energy such as electricity, fuel oil and propane and
(iv) recovering the costs and expenses of this
business in the rates it charges to customers.
6
WGL
Holdings, Inc.
Washington Gas Light Company
Part I
Item 1. Business (continued)
Retail
Energy-Marketing
The retail energy-marketing segment includes the operations of
our WGEServices subsidiary which competes with other unregulated
third-party marketers by selling natural gas and electricity
directly to residential, commercial and industrial customers.
WGEServices buys and resells natural gas and electricity with
the objective of earning a profit through competitively-priced
contracts. These commodities are delivered to retail customers
through the assets owned by regulated utilities, such as
Washington Gas or other unaffiliated natural gas or electric
utilities.
Factors critical to the success of the retail energy-marketing
segment include: (i) managing the market risk of the
difference between the sales price committed to customers under
sales contracts and the cost of natural gas and electricity
needed to satisfy these sales commitments;
(ii) managing credit risks associated with customers
of and suppliers to this segment; (iii) having
sufficient deliverability of natural gas and electric supplies
and transportation to serve the demand of its customers which
can be affected by the ability of natural gas producers,
pipeline gatherers, natural gas processors, interstate
pipelines, suppliers of electricity and regional electric
transmission operators to deliver the respective commodities and
(iv) controlling the level of selling, general and
administrative expenses, including customer acquisition expenses.
Commercial
HVAC
The commercial HVAC segment includes the operations of our
WGESystems subsidiary which manages design-build and renovation
projects and provides maintenance services to the commercial and
government markets. There are many competitors in this business
segment. WGESystems focuses on retrofitting the mechanical,
electrical and energy-related systems of a large number of aging
commercial and government structures, primarily in the District
of Columbia and portions of Maryland and Virginia. Factors
critical to the success of the commercial HVAC segment include:
(i) generating adequate revenue from the government
and private sectors in the facility construction and retrofit
markets; (ii) building a stable base of customer
relationships; (iii) estimating and managing
fixed-price contracts and (iv) controlling selling,
general and administrative expenses.
For a further discussion of segment financial results, see
Note 17 of the Notes to Consolidated Financial Statements.
RATES AND
REGULATORY MATTERS
Washington Gas is regulated by the Public Service Commission of
the District of Columbia (PSC of DC), the Public Service
Commission of Maryland (PSC of MD) and the State
Corporation Commission of Virginia (SCC of VA). The following
section, General Regulatory Matters, is a
discussion of Washington Gas general regulatory issues,
and the section entitled Jurisdictional Rates and
Regulatory Matters is a discussion of information
regarding each commission and recent regulatory proceedings.
General
Regulatory Matters
For the majority of its business, Washington Gas charges its
customers a price based on the combination of the cost it incurs
for the natural gas commodity, including charges for interstate
pipeline services, and a charge for delivering natural gas to
its customers (also refer to the section below entitled
Natural Gas Unbundling). In all
jurisdictions, the cost of the natural gas commodity and the
charge for the delivery service are determined as separate
components of customers bills. The charge for the delivery
service component of customers bills varies based on the
type of service being provided, such as for firm or
interruptible service.
Regulated Service to Firm Customers. In
the District of Columbia jurisdiction, the rate schedules for
firm delivery service are based upon: (i) a flat
volumetric charge for the delivery of each therm of natural gas
consumed and (ii) a fixed customer charge designed
to recover certain fixed costs associated with maintaining
facilities located on the customers property, as well as
certain other costs that do not vary with the amount of natural
gas consumed by customers. Non-residential firm customers in the
District of Columbia also pay a peak-usage charge designed to
recover the cost to serve customers during peak periods. In the
Maryland and Virginia jurisdictions, the rate schedules for firm
delivery service are composed of: (i) a fixed charge
per customer and (ii) a variable volumetric rate
structured as a declining rate based on increasing blocks of
volumes. Declining block rates have the effect of minimizing
fluctuations in revenues that otherwise would result from
deviations from normal weather. Effective October 1, 2005,
rate schedules in the Maryland jurisdiction also reflect the
effects of a new billing mechanism (refer to the section
entitled Jurisdictional Rates and Regulatory
MattersMaryland Jurisdiction).
The tariff provisions for firm sales service customers in each
Washington Gas jurisdiction contain gas cost recovery
mechanisms. These mechanisms provide for the recovery of the
invoice cost of natural gas, including the cost to store and
transport the gas commodity to Washington Gas city gate,
applicable to firm customers. Under these mechanisms, firm
customer rates are adjusted periodically to reflect increases
and decreases in the actual cost of gas. Moreover, provisions in
each jurisdiction provide for an annual
7
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Holdings, Inc.
Washington Gas Light Company
Part I
Item 1. Business (continued)
reconciliation of gas costs collected from firm customers to the
applicable invoice cost of gas paid to natural gas suppliers, as
well as the invoice cost of storage and transportation paid to
pipeline companies, on behalf of these customers. Differences
between the amount collected from customers and what is paid to
suppliers for natural gas are collected from or refunded to
customers over subsequent periods. Washington Gas receives from
or pays to its customers in the District of Columbia and
Virginia, at short-term interest rates, carrying costs
associated with under- or over-collected gas costs recovered
from its customers.
Regulated Service to Interruptible
Customers. Interruptible service is primarily
a delivery service to certain qualified customers where the
delivery can be interrupted under certain
conditions. A limited number of interruptible customers in the
District of Columbia and Virginia elect to receive a service
which includes the sale of the natural gas commodity and the
delivery of that commodity. To qualify for interruptible
service, customers must be capable of either substituting an
alternate fuel for natural gas or operating without utilizing
natural gas should Washington Gas determine that it must
interrupt service temporarily to meet firm customers needs
during periods of peak demand. 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 and, to a much smaller extent, in Virginia. In the
District of Columbia, Washington Gas shares a majority of the
margins earned on interruptible gas sales and deliveries with
firm customers after a gross margin threshold is reached. A
portion of the fixed costs for servicing interruptible customers
is collected through the firm customers rate design. In
the Virginia jurisdiction, rates for customers using
interruptible delivery service are based on a traditional cost
of service approach, and Washington Gas retains all revenues
from interruptible delivery service. However, a few customers
have been grandfathered into a bundled sales and delivery
service with previously approved bundled interruptible rate
design. A portion of these revenues is shared with firm
customers, but the volumes are small and the amounts of revenues
are not material to our consolidated results of operations.
Prior to October 1, 2005, interruptible customers in the
Maryland jurisdiction had similar margin-sharing arrangements
for interruptible customers in the District of Columbia, as
described above. Effective October 1, 2005, pursuant to
Washington Gas implementation of a new billing mechanism
in the Maryland jurisdiction, rates for interruptible customers
in Maryland are based on a traditional cost of service approach,
and Washington Gas retains a defined amount above a pre-approved
margin threshold level (refer to the section entitled
Jurisdictional Rates and Regulatory
MattersMaryland Jurisdiction).
Natural Gas Unbundling. As discussed
above, although most of Washington Gas revenue is
generated from the sale and delivery of natural gas on a
combined or bundled basis, federal and state
regulation allows for the separation or unbundling
of the sale of the natural gas commodity from the delivery of
natural gas on Washington Gas distribution system
(delivery service). Gross margins generated by Washington Gas
from deliveries of customer-owned gas are equivalent to those
earned on bundled gas service because it is only allowed to
charge its customers the cost it pays for the natural gas
commodity and related charges for interstate pipeline services.
Therefore, Washington Gas does not experience any economic loss
when customers choose to purchase the natural gas commodity from
unregulated third-party marketers.
Throughout the Washington Gas service area, all customers may
choose to purchase natural gas from a variety of unregulated
third-party marketers, including WGEServices, an affiliated
natural gas and electricity retail marketer. When customers
select an unregulated third-party marketer as their gas
supplier, Washington Gas continues to charge these customers to
deliver natural gas through its distribution system at rates
identical to the delivery portion of the bundled sales service
customers. The status of the unbundling programs in Washington
Gas major jurisdictions as of September 30, 2006 is
discussed further in the section entitled
Competition.
WGEServices sells natural gas, as an unregulated third-party
marketer, to both firm and interruptible customers in each
Washington Gas jurisdiction. Washington Gas provides delivery
service for those customers of WGEServices that reside in its
jurisdiction. In addition, WGEServices sells to Delaware and
other areas in Maryland and Virginia that are outside of
Washington Gas jurisdictional service area.
Jurisdictional
Rates and Regulatory Matters
A description of each commission under which Washington Gas is
regulated and a discussion of significant regulatory matters in
each jurisdiction are presented below. Also see the section
entitled Regulatory Matters in
Managements Discussion for a table that summarizes
Washington Gas major rate applications and results.
District
of Columbia Jurisdiction
The PSC of DC consists of three full-time members who are
appointed by the Mayor with the advice and consent of the
District of Columbia City Council. The term of each commissioner
is four years. There are no limitations on the number of terms
that can be
8
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Holdings, Inc.
Washington Gas Light Company
Part I
Item 1. Business (continued)
served. The PSC of DC has no required period of time by which it
must make decisions for modifications to base rates charged by
Washington Gas to its customers.
Rate
Case and Other Regulatory Activities
On May 1, 2006, Washington Gas filed two tariff
applications with the PSC of DC requesting approval of proposed
revisions to the balancing charge provisions of its firm and
interruptible delivery service tariffs that would permit the
utility to recover from its delivery service customers the costs
of hexane (heavy hydrocarbons or HHCs) that are
being injected into Washington Gas natural gas
distribution system. Washington Gas has been recovering the
costs of HHCs from sales customers in the District of Columbia
through its Purchased Gas Charge (PGC) provision in this
jurisdiction. On October 2, 2006, the PSC of DC issued an
order rejecting Washington Gas proposed tariff revisions
until the PSC of MD concludes on its evidentiary hearing related
to this matter which is scheduled to be held on February 6,
2007 (refer to Maryland Jurisdiction
below). On October 12, 2006,
Washington Gas filed a Motion for Clarification requesting that
the PSC of DC affirm that Washington Gas can continue collecting
HHC costs from sales customers through its PGC provision or to
record such HHC costs incurred as a regulatory asset pending a
ruling by the PSC of DC on future cost recovery. Pending the PSC
of DCs decision on the Motion for Clarification,
Washington Gas continues to recover the costs of HHCs from sales
customers in the District of Columbia through its PGC provision,
and is recording these costs as a regulatory asset.
Maryland
Jurisdiction
The PSC of MD currently consists of four full-time members who
are appointed by the Governor with the advice and consent of the
Senate of Maryland; a fifth PSC of MD seat currently is vacant.
Each commissioner is appointed to a five-year term, with no
limit on the number of terms that can be served.
Washington Gas is required to give 30 days notice
before filing for a rate increase. The PSC of MD may initially
suspend the proposed increase for 150 days following the
30-day
notice period, and then has the option to extend the suspension
for an additional 30 days. If action has not been taken
after 210 days, the requested rates become effective
subject to refund.
Rate
Case and Other Regulatory Activities
Accounting Order. On April 28,
2005, Washington Gas filed a request for an Accounting Order
with the PSC of MD in connection with a rehabilitation project
being performed in a portion of Prince Georges County,
Maryland to address an increase in natural gas leaks (refer to
the section entitled Operating Issues in Prince
Georges County, Maryland). In this filing,
Washington Gas requested that the PSC of MD issue an Accounting
Order to ratify Washington Gas interpretation of the
applicable regulatory guidelines regarding the accounting
treatment of a portion of the cost of the rehabilitation
project. Specifically, Washington Gas interpreted the guidelines
to require it to record the estimated $13 million cost to
encapsulate couplings on mains in the affected areas of Prince
Georges County as a capital expenditure. After considering
this matter at the June 1, 2005 Administrative Meeting of
the PSC of MD, the PSC of MD granted Washington Gas
request for an Accounting Order with the understanding that the
accounting treatment will not be determinative of future
ratemaking treatment, and the PSC of MD retains jurisdiction to
adopt any ratemaking treatment it deems appropriate.
Interruptible Transportation Service and RNA
Mechanism. On August 8, 2005, the PSC of
MD approved an unopposed Stipulation and Agreement (Stipulation)
that was previously filed with the PSC of MD by Washington Gas
and three other participants. The Stipulation resolved
outstanding issues from an October 31, 2003 Final Order
issued by the PSC of MD regarding the manner in which
interruptible transportation service is charged to Maryland
customers (refer to the section above entitled
Regulated Service to Interruptible Customers
for a discussion of this service). As proposed in the
Stipulation, the PSC of MD also approved Washington Gas
implementation of a new billing mechanism known as the Revenue
Normalization Adjustment (RNA). The RNA mechanism is designed to
stabilize the level of utility 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. The Stipulation
also allows for the impact of the RNA mechanism on Washington
Gas risk and rate of return to be evaluated in the next
rate case. The RNA became effective on October 1, 2005.
Washington Gas net income for the fiscal year ended
September 30, 2006 reflects the effect of the RNA.
Disallowance of Purchased Gas
Charges. Washington Gas submitted to a
routine review of its gas costs that were billed to customers in
Maryland from September 2003 through August 2004. Each year, the
PSC of MD reviews the annual gas costs collected from customers
to determine if Washington Gas purchased gas costs are not
justified because it failed to support that the charges
9
WGL
Holdings, Inc.
Washington Gas Light Company
Part I
Item 1. Business (continued)
incurred were based solely on increased costs of natural gas, or
it failed to follow competitive and reasonable practices in
procuring and purchasing natural gas. On March 14, 2006, a
Hearing Examiner of the PSC of MD issued a proposed order
approving purchased gas charges of Washington Gas for the
twelve-month period ending August 2004, except for
$4.6 million of such charges that the Hearing Examiner
recommended be disallowed because, in the opinion of the Hearing
Examiner, they were not reasonably and prudently incurred.
Washington Gas filed a Notice of Appeal on April 12, 2006
and a Memorandum on Appeal on April 21, 2006 with the PSC
of MD, asserting that the Hearing Examiners recommendation
is without merit. A reply memorandum was filed on May 11,
2006. After consideration of these issues, we expect the PSC of
MD to issue a Final Order. Over the past ten years, Washington
Gas has incurred similar purchased gas charges which the PSC of
MD has reviewed and approved as being reasonably and prudently
incurred and therefore subject to recovery from customers. Among
other issues included in the appeal, we reminded the PSC of MD
of this prior recovery and requested that similar treatment be
granted for this matter. During the fiscal year ended
September 30, 2006, Washington Gas accrued a liability of
$4.6 million (pre-tax) related to the proposed disallowance
of these purchased gas charges. If the PSC of MD rules in
Washington Gas favor, the liability recorded in the 2006
fiscal year for this issue will be reversed.
Recovery of Hexane costs. In March
2006, Washington Gas began recovering the costs of HHCs that are
being injected into its natural gas distribution system from
Maryland sales customers through its PGC provision in Maryland.
On April 28, 2006, Washington Gas filed an application with
the PSC of MD requesting approval of proposed revisions to the
balancing charge provisions of its firm and interruptible
delivery service tariffs that would permit the utility to
recover the cost of HHCs from its delivery service customers, as
well as from its sales customers. On June 27, 2006, the PSC
of MD issued an order that rejected Washington Gas
proposed tariff revisions until an evidentiary hearing is held
to further consider matters relating to the efficacy of the HHC
injections in addressing existing leaks or in preventing
additional leaks on Washington Gas distribution system
(refer to the section entitled Operating Issues in
Prince Georges County, Maryland). In
addition to ordering an evidentiary hearing, the PSC of MD
directed Washington Gas to cease recovering HHC costs being
recovered through the PGC provision, and to record costs that
will be incurred in the future in a pending account
for future regulatory disposition following the conclusion of
the evidentiary hearing. The PSC of MD also indicated that the
disposition of HHC costs collected previously through the PGC
provision will be determined in the course of the evidentiary
hearing which is scheduled to be held on February 6, 2007.
Virginia
Jurisdiction
The SCC of VA consists of three full-time members who are
elected by the General Assembly of Virginia. Each commissioner
has a six-year term with no limitation on the number of terms
that can be served.
Either of two methods may be used to request a modification of
existing rates. First, Washington Gas may file an application
for a general rate increase in which it may propose new
adjustments to the cost of service that are different from those
previously approved for Washington Gas by the SCC of VA, as well
as a revised return on equity. The proposed rates under this
process may take effect 150 days after the filing, subject
to refund pending the outcome of the SCC of VAs action on
the application. Second, an expedited rate case procedure is
available which provides that proposed rate increases may be
effective 30 days after the filing date, also subject to
refund. Under the expedited rate case procedure, Washington Gas
may not propose any new adjustments for issues not previously
approved in its last general rate case, or a change in its
return on common equity from the level authorized in its last
general rate case. Once filed, other parties may propose new
adjustments or a change in the cost of capital from the level
authorized in its last general rate case. The expedited rate
case procedure may not be available if the SCC of VA decides
that there has been a substantial change in circumstances since
the last general rate case filed by Washington Gas.
Rate
Case and Other Regulatory Activities
Annual Earnings Test. On
December 18, 2003, the SCC of VA issued a Final Order in
response to an application filed by Washington Gas on
June 14, 2002 to increase annual revenues in Virginia. In
connection with this Final Order, the SCC of VA ordered
Washington Gas to reduce its rate base related to net utility
plant by $28 million, which is net of accumulated deferred
income taxes of $14 million, and to establish an equivalent
regulatory asset that Washington Gas has done for regulatory
accounting purposes only. This regulatory asset, which is
presented within Accumulated depreciation and
amortization on the balance sheets, represents the
difference between the accumulated reserve for depreciation
recorded on the books of Washington Gas and a theoretical
reserve that was derived by the Staff of the SCC of VA (VA
Staff) as part of its review of Washington Gas
depreciation rates, less accumulated deferred income taxes. This
regulatory asset is being amortized as a component of
depreciation expense over 32 years pursuant to the Final
Order. The SCC of VA provided for both a return on, and a return
of, this regulatory asset established for regulatory accounting
purposes.
10
WGL
Holdings, Inc.
Washington Gas Light Company
Part I
Item 1. Business (continued)
In approving the treatment described in the preceding paragraph,
the SCC of VA further ordered that an annual earnings
test be performed to determine if Washington Gas has
earned in excess of its allowed rate of return on common equity
for its Virginia operations. The current procedure for
performing this earnings test does not normalize the actual
return on equity for the effect of weather over the applicable
twelve-month period. To the extent that Washington Gas earns in
excess of its allowed return on equity in any annual earnings
test period, Washington Gas is required to increase depreciation
expense (after considering the impact of income tax benefits),
and increase the accumulated reserve for depreciation for the
amount of the actual earnings in excess of the earnings produced
by a 10.50 percent allowed return on equity. Under the SCC
of VAs requirements for performing earnings tests, if
weather is warmer than normal in a particular annual earnings
test period, Washington Gas is not allowed to restore any amount
of earnings previously eliminated as a result of this earnings
test. These annual earnings tests will be performed until the
$28 million difference between the accumulated reserve for
depreciation recorded on Washington Gas books and the
theoretical reserve derived by the VA Staff, net of accumulated
deferred income taxes, is eliminated or the level of the
regulatory asset established for regulatory accounting purposes
is adjusted as a result of a future depreciation study.
In accordance with a September 27, 2004 SCC of VA-approved
stipulation involving Washington Gas and other participants, as
discussed below, Washington Gas is required to file with the SCC
of VA annual earnings test calculations based on a twelve-month
period ended December 31. These annual calculations are
being estimated by Washington Gas quarterly, and when
appropriate, accounting adjustments are being recorded.
On April 27, 2006, Washington Gas filed an earnings test
for the twelve months ended December 31, 2005. Washington
Gas filing, which is subject to review by the applicable
parties within the SCC of VA, indicated that it had not earned
in excess of its allowed return on equity during the period of
the earnings test. As discussed below, Washington Gas filed a
general rate case application with the SCC of VA on
September 15, 2006. The earnings test for the twelve-month
period ended December 31, 2005 will be reviewed by the VA
Staff in connection with its review of the September 15,
2006 rate application.
Expedited Rate Case and Stipulation. On
January 27, 2004, Washington Gas filed an expedited rate
case with the SCC of VA to increase annual revenues in Virginia
by $19.6 million. On February 26, 2004, based upon
expedited rate case filing procedures, Washington Gas placed the
proposed revenue increase into effect, subject to refund,
pending the SCC of VAs final decision in the proceeding.
On September 27, 2004, the SCC of VA issued a Final Order
approving a proposed stipulation of six participants in the rate
case that included Washington Gas and the VA Staff. The approved
stipulation, among other things, included no change in
Washington Gas annual base revenues, and maintained
Washington Gas allowed rate of return on common equity of
10.50 percent and overall rate of return of
8.44 percent that had been previously approved by a
December 18, 2003 Final Order. Washington Gas had recorded
a provision for rate refunds equal to the full amount of
revenues that had been collected subject to refund through the
fiscal year ended September 30, 2004. Accordingly, there
was no effect on earnings for fiscal year 2004 for the rates
initially put into effect in February 2004. As discussed above,
the stipulation also requires Washington Gas to file with the
SCC of VA annual earnings test calculations based on a
twelve-month period ended December 31.
Application for Rate Increase. On
September 15, 2006, Washington Gas filed an application
with the SCC of VA to increase its annual utility net revenues
in Virginia by approximately $23.0 million. The application
seeks an overall rate of return of 9.12 percent and a
return on common equity of 11.25 percent. This compares to
the current overall rate of return of 8.44 percent and
return on common equity of 10.50 percent as authorized by
the SCC of VA in its Final Order issued to Washington Gas on
December 18, 2003.
In the filed application, Washington Gas also seeks approval of
various billing, rate design and other proposals, including:
(i) the implementation of a billing adjustment
mechanism to stabilize the level of revenue collections;
(ii) the implementation of a Performance-Based Rate
(PBR) plan; (iii) the recovery of its costs of HHCs
as a gas cost from both sales and delivery service customers and
(iv) the implementation of a Gas Administrative
Charge (GAC). Following is a discussion of these proposals.
Washington Gas proposes to implement an RNA billing mechanism in
Virginia similar to the mechanism that was implemented in the
Maryland jurisdiction. The proposed RNA in Virginia would be
designed to stabilize the level of utility net revenues
collected from customers by eliminating the effect of deviations
in customer usage caused by variations in weather from normal
levels and other factors such as customer conservation.
The Virginia application also proposes a PBR plan that is
designed to benefit customers through the incentives given
Washington Gas to improve its performance while preserving
service quality and the reliability and safety of its natural
gas distribution system. The key features of the proposed PBR
plan are: (i) a three-year freeze of base rates;
(ii) identified key service
11
WGL
Holdings, Inc.
Washington Gas Light Company
Part I
Item 1. Business (continued)
quality standards to be upheld by Washington Gas while striving
to control operating costs and (iii) an earnings
sharing mechanism that would enable Washington Gas to share with
both its Virginia customers and shareholders earnings in excess
of the top of the range of its return on equity.
Washington Gas has incurred costs for the purchase of HHCs that
are being injected into its natural gas distribution system to
condition natural gas deliveries from a liquefied natural gas
(LNG) terminal in Cove Point, Maryland. Consistent with its
method of recovering the cost of the natural gas commodity in
all jurisdictions, Washington Gas requests authorization by the
SCC of VA to recover its costs of HHCs from both sales and
unbundled delivery service customers.
Washington Gas also proposes to implement a GAC that would
remove the cost of uncollectible account expense related to gas
costs from base rates of both firm sales and delivery service
customers, and collect an amount through its PGC provision in
Virginia for such costs. Similar to the GAC utilized in the
Maryland jurisdiction, this mechanism would more appropriately
enable the recovery of such costs only from sales customers and
the matching of this expense with changes in gas costs.
In its rate application with the SCC of VA, Washington Gas
requests that it be permitted to implement the newly proposed
increase in revenues, subject to refund, effective for services
rendered on and after February 13, 2007. Washington Gas
requests that it be permitted to implement other proposed tariff
revisions, such as the RNA billing mechanism and PBR plan, upon
final approval by the SCC of VA.
The SCC of VA has adopted a procedural schedule that directs the
VA Staff and any third parties to file testimony and supporting
exhibits during the first quarter of 2007 and sets the hearing
date on this matter for April 23, 2007.
Depreciation
Study
In October 2006, Washington Gas completed a depreciation rate
study based on its property, plant and equipment balances at
December 31, 2005. The results of the depreciation study
indicate that Washington Gas depreciation rates should be
reduced due to asset lives being extended beyond previously
estimated lives. Under regulatory requirements, these
depreciation rates must be approved before they are placed into
effect.
In Maryland and the District of Columbia, regulatory
requirements prescribe that whenever depreciation rates are
revised, there must be a corresponding revision to customer
billing rates. Accordingly, the new depreciation rates in
Maryland and the District of Columbia will not be placed into
effect until a rate case proposal is approved enabling this
change.
In connection with Washington Gas September 15, 2006
rate application with the SCC of VA, on November 8, 2006,
Washington Gas filed with the SCC of VA that portion of the
depreciation study related to the Virginia jurisdiction. Based
on the results of the depreciation study, Washington Gas reduced
the requested $23.0 million rate increase in the
September 15, 2006 SCC of VA application by
$5.8 million. Concurrent with the filing of the
depreciation study, Washington Gas filed supplemental testimony
and schedules reflecting the revised proposed base rate increase
of $17.2 million. Consistent with regulatory precedent,
Washington Gas expects to implement the changes in recorded
depreciation, retroactive to January 1, 2006, upon approval
from the VA Staff which is expected in fiscal year 2007.
UTILITY GAS
SUPPLY AND PIPELINE TRANSPORTATION AND STORAGE
CAPACITY
Supply
and Capacity Requirements
Washington Gas arranges to have natural gas delivered to the
entry points of its distribution system (city gates or gate
stations) using the delivery capacity of interstate pipeline
companies, and also uses on-system peaking facilities to meet
requirements. To provide the greatest amount of flexibility in
meeting its customers diverse demand requirements,
Washington Gas acquires interstate pipeline natural gas delivery
and storage capacity on a system-wide basis using different
interstate pipelines. Washington Gas supply and capacity
plan is based on forecasted system requirements, and takes into
account estimated load growth by type of customer, attrition,
conservation, demand by gate station, interstate pipeline and
storage capacity and contractual limitations and the forecasted
movement of customers between sales service and delivery service.
At September 30, 2006, Washington Gas had service
agreements with four pipeline companies that provided firm
transportation
and/or
storage services directly to Washington Gas city gate.
These contracts have expiration dates ranging from fiscal years
2007 to 2028.
12
WGL
Holdings, Inc.
Washington Gas Light Company
Part I
Item 1. Business (continued)
Washington Gas is responsible for acquiring both sufficient
natural gas supplies and interstate pipeline and storage
capacity to meet customer requirements. As such, Washington Gas
must contract for reliable and adequate delivery capacity to its
distribution system, while considering the dynamics of the
interstate pipeline and storage capacity market, its own
on-system natural gas peaking facilities, as well as the
characteristics of its customer base. Washington Gas
contracting activities take into account customers
tendencies to switch between sales and delivery service;
however, short-term contractual arrangements required to manage
such customer choice diversity may not be available in future
periods under conditions of capacity constraints.
Washington Gas has adopted a diversified portfolio approach
designed to satisfy the supply and deliverability requirements
of its customers, using multiple supply points, dependable
interstate pipeline transportation and storage arrangements, and
its own substantial storage and peaking capabilities to meet its
customers demands. Washington Gas anticipates enhancing
its peaking capacity by constructing an LNG peaking facility
that is currently expected to be completed and placed in service
by the
2011-2012
winter heating season. This represents a delay from the
originally planned completion date, which was expected by the
2008-2009
winter heating season, due to zoning and other legal challenges.
On November 8, 2006, the District Council of Prince
Georges County issued a final decision denying Washington
Gas application related to its proposed construction of
the LNG peaking plant. The District Council held that current
zoning restrictions prohibit such construction. Washington Gas
appealed this decision to the Prince Georges County
Circuit Court on November 22, 2006. Until such time when
these legal challenges are resolved and the LNG plant is built,
Washington Gas has planned for alternative sources of supply to
meet its customers peak day requirements. These planned
alternatives, that are expected to be completed by fiscal year
2011, include acquiring additional interstate pipeline capacity,
in combination with investments by Washington Gas to upgrade the
infrastructure of its transmission and distribution system. This
plan is expected to provide for sufficient delivery of natural
gas to meet customers peak day demand requirements until
the new LNG storage facility is constructed and in service
(refer to the section entitled Liquidity and Capital
ResourcesCapital Expenditures in
Managements Discussion included under Item 7 of this
report for a further discussion of this construction project).
Local distribution companies, such as Washington Gas, along with
other participants in the energy industry have raised concerns
regarding the gradual depletion in the availability of
additional interstate pipeline and storage capacity. Depleting
pipeline and storage capacity is a business issue that must be
managed by Washington Gas, whose customer base has grown at an
annual rate of approximately two percent. This rate of growth is
expected to continue. The increase in the near future in the
number of electric generation facilities that are fueled by
natural gas for the mid-Atlantic region and upstream of the
mid-Atlantic region exacerbates concerns associated with the
availability of pipeline and storage capacity. These facilities,
which utilize significant pipeline and storage capacity, may
ultimately affect deliverability and flexibility of natural gas
delivery into the region. Due to the reluctance on the part of
both marketers and some local distribution companies in
committing to long-term pipeline contracts, pipeline
infrastructure improvements have been limited despite the fact
that the major pipelines serving the Washington Gas system are
fully subscribed. In response to demand, interstate pipelines
are offering infrastructure improvements that will expand
pipeline and storage capacity in the mid-Atlantic region. These
improvement projects, funded through incremental demand charges
by the participating entities, require a minimum of two to five
years to complete the planning, solicitation of interest,
regulatory approval and construction. Recent projects to expand
Washington Gas firm transportation
and/or
storage capacity completed or in progress, are outlined below:
|
|
|
|
|
|
|
|
|
|
|
Projects For Expanding Transportation and Storage Capacity
(In therms)
|
|
|
|
Daily Storage
|
|
|
|
|
|
|
|
|
Transportation
|
|
|
Annual Storage
|
|
|
|
Suppliers
|
|
Capacity
|
|
|
Capacity
|
|
|
In-Service Date
|
|
Hardy Storage Company
LLC(a)
|
|
|
800,000
|
|
|
|
56 million
|
|
|
Three-year phase-in period
beginning in fiscal year 2007
|
Pine Needle LNG Company
LLC(b)
|
|
|
200,000
|
|
|
|
2 million
|
|
|
May 2006
|
Duke Energy Gas Transmission
Company(b)
|
|
|
700,000
|
|
|
|
7 million
|
|
|
Fiscal year 2007
|
Columbia Gas Transmission
Corporation(a)
|
|
|
500,000
|
|
|
|
30 million
|
|
|
Fiscal year 2010
|
|
|
(a) Supplier
delivers the stored natural gas directly to Washington Gas
distribution system.
(b) Supplier
delivers the stored natural gas indirectly to Washington
Gas distribution system through third-party transportation
companies.
Washington Gas will continue to monitor other opportunities to
acquire or participate in obtaining additional pipeline and
storage capacity that will improve or maintain the high level of
service expected by its customer base.
13
WGL
Holdings, Inc.
Washington Gas Light Company
Part I
Item 1. Business (continued)
Sources
of Natural Gas
Annual Sendout. As reflected in the
table below, there were six sources of delivery through which
Washington Gas received natural gas to satisfy the sendout
requirements in pipeline year 2006 (November 1, 2005
through October 31, 2006). These same six sources also are
expected to be utilized to satisfy sendout requirements in
pipeline year 2007 (November 1, 2006 through
October 31, 2007). Firm transportation denotes gas
transported directly to the entry point of Washington Gas
distribution system in contractually viable volumes.
Transportation storage denotes volumes stored by a pipeline
during the summer injection season for withdrawal and delivery
to the Washington Gas distribution system during the winter
heating season to meet load requirements. Peak load requirements
are met by: (i) underground natural gas storage at
the Hampshire storage field in Hampshire County, West Virginia;
(ii) the local production of propane air plants
located at Washington Gas-owned facilities in Rockville,
Maryland (Rockville Station) and in Springfield, Virginia
(Ravensworth Station) and (iii) other peak-shaving
sources. Unregulated third-party marketers acquire interstate
pipeline and storage capacity and the natural gas commodity on
behalf of Washington Gas delivery service customers, some
of which may be provided through transportation, storage and
peaking resources provided by Washington Gas to unregulated
third-party marketers under tariffs approved by the three public
service commissions. These retail marketers have natural gas
delivered to the entry point of Washington Gas delivery
system on behalf of those utility customers that have decided to
acquire their natural gas commodity on an unbundled basis, as
previously discussed.
During pipeline year 2006 (November 1, 2005 through
October 31, 2006), total sendout on the system was
1.552 billion therms, as compared to total sendout of
1.676 billion therms during pipeline year 2005. This
excludes the sendout of sales and deliveries of natural gas used
for electric generation. The decrease in 2006 was the result of
weather in pipeline year 2006 that was warmer than pipeline year
2005. The sendout for pipeline year 2007 is estimated at
1.651 billion therms (based on normal weather), excluding
the sendout for the sales and deliveries of natural gas used for
electric generation. The sources of delivery and related volumes
that were used to satisfy the requirements of pipeline year 2006
and those projected for pipeline year 2007 are shown in the
following table.
|
|
|
|
|
|
|
|
|
Source of Delivery for Annual Sendout
|
|
|
|
(In millions of therms)
|
|
Pipeline Year
|
|
|
|
Source of Delivery
|
|
Actual 2006
|
|
|
Projected 2007
|
|
|
|
Firm Transportation
|
|
|
599
|
|
|
|
625
|
|
Transportation Storage
|
|
|
247
|
|
|
|
322
|
|
Hampshire Storage
|
|
|
|
|
|
|
21
|
|
Company-Owned Propane-Air Plants
|
|
|
3
|
|
|
|
12
|
|
Other Peak-Shaving Sources
|
|
|
8
|
|
|
|
19
|
|
Unregulated Third-Party Marketers
|
|
|
695
|
|
|
|
652
|
|
|
|
Total
|
|
|
1,552
|
|
|
|
1,651
|
|
|
|
Design Day Sendout. The effectiveness
of Washington Gas gas supply program is largely dependent
on the sources used to satisfy delivery requirements for its
design day. A design day is the maximum anticipated demand on
the natural gas distribution system during a
24-hour
period assuming a five-degree Fahrenheit average temperature.
For planning purposes, we assume that all interruptible
customers will be curtailed on the design day. Washington
Gas current design day demand forecast for the
2006-2007
winter season is 18.0 million therms, and Washington
Gas projected sources of delivery for design day sendout
is 19.0 million therms. This provides a reserve margin of
approximately 5.56 percent. Washington Gas is currently
capable of meeting 72 percent of its design day
requirements with storage and peaking capabilities. For its
design day, Washington Gas plans for the optimal utilization
14
WGL
Holdings, Inc.
Washington Gas Light Company
Part I
Item 1. Business (continued)
of its storage and peaking facilities to reduce its dependency
on firm transportation and lower pipeline capacity costs. The
following table reflects the sources of delivery that are
projected to be used to satisfy the design day sendout estimate
for pipeline year 2007.
|
|
|
|
|
|
|
|
|
Projected Sources of Delivery for Design Day Sendout
|
|
(In millions of therms)
|
|
Pipeline Year 2007
|
|
Source of Delivery
|
|
Volumes
|
|
Percent
|
|
Firm Transportation
|
|
|
5.4
|
|
|
|
28
|
%
|
Transportation Storage
|
|
|
5.4
|
|
|
|
28
|
%
|
Company-Owned Propane-Air Plants,
Hampshire Storage
and Other Peaking
|
|
|
7.6
|
|
|
|
40
|
%
|
Unregulated Third-Party Marketers
|
|
|
0.6
|
|
|
|
4
|
%
|
|
|
Total
|
|
|
19.0
|
|
|
|
100
|
%
|
|
|
Gulf Coast Natural Gas Supply
Issues. During the late summer of 2005,
immediately prior to the
2005-2006
winter heating season, the Gulf Coast region experienced a major
disruption of natural gas production and processing due to
hurricanes Katrina, Rita and Wilma. These natural gas production
and processing disruptions resulted in a significant reduction
of natural gas available to be delivered from the Gulf Coast
region. Historically, Washington Gas received a majority of its
natural gas purchases from this region through its contracted
interstate pipeline services. According to the latest report
from the United States Department of the Interior, Minerals
Management Service, over 90 percent of the pre-hurricane
natural gas production and processing from the Gulf Coast region
became available again to the wholesale market. Given the
recovery of available supplies from the Gulf Coast region
following the hurricanes, coupled with the availability of
natural gas supply from alternative production areas, Washington
Gas was able to meet its customers daily demand for
natural gas during the
2005-2006
winter heating season. Storage gas inventory balances were
maintained at adequate operational levels throughout the heating
season. Through the combination of traditional summer
replenishment of its storage resources and the various locations
and diversity of natural gas supply sources that are available
to it, Washington Gas should have adequate supply to meet its
firm service obligations for the
2006-2007
winter heating season.
Should future natural gas production and processing disruptions
severely reduce levels of deliverability, then Washington Gas
may need to implement contingency plans in order to maximize the
number of customers served under such conditions. Contingency
plans include requests to conserve to the general population and
targeted curtailments to specific sections of the system,
consistent with curtailment tariffs approved by regulators in
each of Washington Gas three jurisdictions.
Since hurricanes Katrina, Rita and Wilma, Washington Gas has
modified the composition of its natural gas portfolio to include
a significantly higher percentage of natural gas supply that is
produced from sources outside of the Gulf Coast region,
including natural gas supply from the Appalachian and Canadian
regions, as well as increased levels of natural gas in the form
of vaporized LNG through the Dominion Cove Point (Dominion or
Cove Point) LNG terminal. These natural gas supplies are being
delivered to Washington Gas distribution system utilizing
existing interstate pipeline resources under contract to
Washington Gas that have transportation paths that support
natural gas deliveries outside the Gulf Coast region. The
diversification of its natural gas portfolio will help
Washington Gas to meet customer demand despite unforeseen future
supply issues that may arise similar to those resulting from
weather events in the Gulf Coast region.
Volatility of
Natural Gas Prices
As a result of market concerns about the sufficiency of the
supply of natural gas, the hurricanes in the Gulf Coast region
and other factors during the
2005-2006
winter heating season, the price of the natural gas commodity
paid by Washington Gas customers rose sharply from levels
experienced during the prior years winter heating season.
In fiscal year 2006, higher natural gas prices increased
customers bills dramatically. Under its regulated gas cost
recovery mechanisms, Washington Gas records cost of gas expense
equal to the cost of gas recovered in revenues from customers.
An increase in the cost of gas due to an increase in the
purchase price of the natural gas commodity generally has no
direct effect on Washington Gas utility net revenues and
net income. However, its net income was reduced in fiscal year
2006 primarily due to higher expenses for uncollectible customer
accounts, as well as lower natural gas consumption caused by
customer conservation in Virginia and the District of Columbia
where these adverse effects on earnings are not addressed
through regulatory mechanisms. In Maryland, the RNA and GAC
regulatory mechanisms neutralize these effects on Washington
Gas revenues and net income. Increases in the price of
natural gas also can affect our operating cash flows, as
15
WGL
Holdings, Inc.
Washington Gas Light Company
Part I
Item 1. Business (continued)
well as the competitiveness of natural gas as an energy source
(refer to the section below entitled
CompetitionCompetition with Other Energy
Products).
Changes in
Natural Gas Consumption
Natural gas supply requirements may be affected by changes in
natural gas consumption by customers. Natural gas usage per
customer may decline as customers change their consumption
patterns in response to: (i) more volatile and higher
natural gas prices, as discussed above and (ii)
customers replacement of older, less efficient gas
appliances with more efficient appliances. In each jurisdiction
where it operates, Washington Gas recent rate case
proceedings reflect these changes in customer usage profiles. In
both the District of Columbia and Virginia jurisdictions,
changes in customer usage by existing customers that occur
subsequent to these recent rate case proceedings will have the
effect of reducing revenues, which is offset by the favorable
effect of adding new customers. Effective October 1, 2005,
pursuant to an RNA mechanism approved by the PSC of MD, changes
in customer usage by existing customers that occur subsequent to
recent rate case proceedings in the Maryland jurisdiction
generally will not reduce revenues, but rather will have the
effect of stabilizing the level of delivery charge revenues
received from customers on a monthly basis (refer to the section
entitled Jurisdictional Rates and Regulatory
MattersMaryland Jurisdiction for a further
discussion of this billing adjustment mechanism).
COMPETITION
Competition
with Other Energy Products
Washington Gas faces competition based on customers
preference for natural gas compared to other energy products and
the comparative prices of those products. The most significant
product competition occurs between natural gas and electricity
in the residential market. The residential market generates a
significant portion of Washington Gas net income. In its
service territory, Washington Gas continues to attract the
majority of the new residential construction market.
Consumers continuing preference for natural gas allows
Washington Gas to maintain a strong market presence.
Washington Gas has generally maintained a price advantage over
competitive electricity supply in its service area for
traditional residential uses of energy such as heating, water
heating and cooking. Price volatility in the wholesale natural
gas commodity market during the
2005-2006
winter heating season resulted in significant increases in the
cost of natural gas billed to customers (refer to the section
entitled Volatility of Natural Gas Prices).
Such increases have resulted in a reduction in the traditional
price advantage of natural gas over electricity.
The price advantages of electricity have been partially caused
by artificial price caps on electricity sold by electric
utilities. These price caps have expired in Maryland and the
District of Columbia, and utility sales service price caps in
Virginia will expire in 2010. Since the expiration of price caps
in Maryland and the District of Columbia, market-based utility
standard offer service rates have been put into effect in these
jurisdictions which are subject to change in June of each year
due to changes in the wholesale electricity market. The cost of
generating electricity is affected by the cost of fuel used to
generate electricity. As the prices of those fuels rise and
existing supply contracts for those fuels between electric
generators and fuel suppliers expire, the price of electricity
will likely rise in relation to the current price for other
forms of energy.
In June 2006, a change in standard offer service prices in
Maryland and the District of Columbia resulted in significantly
increased electricity prices in these jurisdictions. Although
price volatility in the wholesale natural gas commodity market
reduced the price advantage of natural gas over electricity, the
significant rise in electric prices has restored some of the
price advantage of natural gas.
Furthermore, as discussed below, the continued restructuring in
both the natural gas and electric industries is leading to
changes in traditional utility pricing models. As part of the
electric industry restructuring effort, large and medium
commercial markets are moving towards competitive retail supply
contracts with third-party marketers of electricity, such as
WGEServices. Competitive electric supply markets may result in
lower comparative pricing for electric service and other
alternative energy sources, including natural gas. These changes
could result in increased competition for Washington Gas.
In the interruptible market, fuel oil is the prevalent energy
alternative to natural gas. Washington Gas success in this
market depends largely on the relationship between natural gas
and oil prices. The supply of natural gas primarily is derived
from domestic sources, and the relationship between supply and
demand generally has the greatest impact on natural gas prices.
As a large portion of oil comes from foreign sources, political
events can have significant influences on oil supplies and,
accordingly, oil prices. The
16
WGL
Holdings, Inc.
Washington Gas Light Company
Part I
Item 1. Business (continued)
introduction of non-domestic supplies of LNG into the United
States natural gas market may affect supply levels and have an
impact on natural gas prices. To date, the effect of LNG on
supply levels has been minimal.
Deregulation
In each of the jurisdictions (the District of Columbia, Maryland
and Virginia) served by Washington Gas, regulators and utilities
have implemented customer choice programs. These programs allow
customers to choose to purchase their natural gas
and/or
electric commodity from unregulated third-party marketers,
rather than purchasing these commodities as part of a bundled
service from the local utility. When customers choose to
purchase their natural gas commodity from unregulated
third-party marketers on an unbundled basis, Washington
Gas utility net revenues or net income are not affected
since Washington Gas charges its customers the cost of gas
without any
mark-up.
However, these customer choice programs provide unregulated
third-party marketers, such as WGEServices, with opportunities
to profit from the sale of the natural gas commodity or
electricity in competitive retail markets. It also enables
customers to have competitive choices for natural gas and
electricity. Participating in this evolving marketplace also
poses risks and challenges that must be addressed in our current
and future strategies.
The Natural
Gas Delivery Function
The natural gas delivery function, the core business of
Washington Gas, continues to be regulated by local regulatory
commissions. In developing this core business, Washington Gas
has invested nearly $2.9 billion as of September 30,
2006 to construct and operate a safe and reliable natural gas
distribution system. Because of the high fixed costs and
significant safety and environmental considerations associated
with building and operating a distribution system, Washington
Gas expects to continue being the only owner and operator of a
natural gas distribution system in its current franchise area
for the foreseeable future. The nature of Washington Gas
customer base and the distance of most customers from interstate
pipelines mitigate the threat of bypass of its facilities by
other potential delivery service providers.
Washington Gas expects that local regulatory commissions will
continue to set the prices and terms for delivery service that
give it an opportunity to earn a just and reasonable rate of
return on the capital invested in its distribution system and to
recover reasonable operating expenses. Washington Gas plans to
continue constructing, operating and maintaining its natural gas
distribution system, and will incur costs necessary to ensure
the safety and reliability of its system, and that operating
issues are addressed in a timely and adequate manner.
17
WGL
Holdings, Inc.
Washington Gas Light Company
Part I
Item 1. Business (continued)
The Merchant
Function and Natural Gas Unbundling
At September 30, 2006, customer choice programs for natural
gas customers were available to all of Washington Gas
regulated utility customers in the District of Columbia,
Maryland and Virginia. Of the 1.032 million active
customers at September 30, 2006, approximately 147,000
customers purchased their natural gas commodity from unregulated
third-party marketers. The following table provides the status
of customer choice programs in Washington Gas major
jurisdictions at September 30, 2006.
|
|
|
|
|
|
|
|
|
|
|
Status of Customer Choice Programs At September 30,
2006
|
|
Jurisdiction
|
|
Customer Class
|
|
Eligible Customers
|
|
|
|
|
|
Total
|
|
% Participating
|
|
|
|
|
|
District of Columbia
|
|
Firm:
|
|
|
|
|
|
|
|
|
|
|
Residential
|
|
|
137,277
|
|
|
|
9
|
%
|
|
|
Commercial
|
|
|
13,130
|
|
|
|
34
|
%
|
|
|
Interruptible
|
|
|
229
|
|
|
|
86
|
%
|
|
|
|
|
|
|
|
|
|
|
|
Maryland
|
|
Firm:
|
|
|
|
|
|
|
|
|
|
|
Residential
|
|
|
391,731
|
|
|
|
15
|
%
|
|
|
Commercial
|
|
|
29,223
|
|
|
|
42
|
%
|
|
|
Interruptible
|
|
|
262
|
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
Virginia
|
|
Firm:
|
|
|
|
|
|
|
|
|
|
|
Residential
|
|
|
433,215
|
|
|
|
12
|
%
|
|
|
Commercial
|
|
|
26,632
|
|
|
|
29
|
%
|
|
|
Interruptible
|
|
|
217
|
|
|
|
93
|
%
|
|
|
Total
|
|
|
|
|
1,031,916
|
|
|
|
14
|
%
|
|
|
Washington Gas prudently enters into contracts to purchase the
natural gas commodity and, therefore, concludes that the costs
being incurred should be recoverable from customers. Currently,
Washington Gas jurisdictional tariffs contain gas cost
mechanisms that allow it to recover the invoice cost of gas,
including both the commodity cost of gas and the interstate
pipeline capacity services, applicable to firm customers. If
future unbundling or other initiatives remove the current gas
cost recovery provisions, Washington Gas could be adversely
impacted to the extent it cannot fully recover the cost of the
natural gas commodity if purchased at above-market prices.
Washington Gas currently has recovery mechanisms for such
potentially stranded costs in the District of Columbia, Maryland
and Virginia.
The same jurisdictional tariffs that allow Washington Gas to
recover the invoice cost of gas applicable to firm customers
also allow the utility to recover from third-party marketers,
100 percent of the cost of the storage and peak shaving
capacity that Washington Gas dedicates to serving unbundled
service customers who purchase their natural gas from a
third-party marketer. Additionally, Washington Gas currently has
mechanisms approved by each of its local commissions to recover
some portion of the costs of transportation capacity from
unregulated third-party marketers. Washington Gas is generally
renewing long-term capacity contracts to meet its forecasts of
continued growth in customers firm gas requirements and to
comply with regulatory mechanisms to provide for or make
available such resources to retail marketers serving customers
in the customer choice programs.
To maximize the value of its long-term capacity, Washington Gas
has entered into contracts with unregulated wholesale energy
services companies that make use of the utilitys firm
storage and transportation rights when Washington Gas does not
need these rights, and to make off-system sales when such
storage and transportation rights are under-utilized. Washington
Gas continues to pay the fixed charges associated with the firm
storage and transportation contracts used to make these sales.
The sale of these rights are accounted for as revenues under
regulated margin-sharing arrangements that vary by jurisdiction
whereby a significant portion of these revenues is shared with
Washington Gas customers as a reduction in natural gas
costs, otherwise recoverable from firm customers. Washington Gas
also has undertaken a portion of this responsibility in order to
maximize the potential value of such resources and subsequently
lower the cost of gas to its sales service customers. These
transactions include fixed-priced and market-priced purchases
and sales which Washington Gas has matched with the purchase of
derivative instruments that simultaneously fix the economic
profit on these transactions.
18
WGL
Holdings, Inc.
Washington Gas Light Company
Part I
Item 1. Business (continued)
UNREGULATED
RETAIL ENERGY-MARKETING OF NATURAL GAS AND
ELECTRICITY
As the role of regulated utilities in the merchant function may
decrease over time, opportunities emerge for unregulated natural
gas and electric providers. In the deregulated marketplace,
third-party marketers have profit-making opportunities from the
sale of the commodity, but they also assume the risk of loss.
In fiscal year 1997, we established WGEServices as an
unregulated retail energy-marketing subsidiary. WGEServices
sells natural gas and electricity to residential, commercial and
industrial customers inside and outside of the Washington Gas
service area. At September 30, 2006, 2005 and 2004,
WGEServices had natural gas customers totaling approximately
142,700, 144,800 and 150,800, respectively. WGEServices had
electric customers totaling approximately 63,300, 36,200 and
44,500 at September 30, 2006, 2005 and 2004, respectively.
WGEServices operating revenues for fiscal years 2006, 2005
and 2004 were $1.0 billion, $773.0 million and
$789.9 million, respectively. WGEServices net income
was $13.3 million, $22.3 million and $8.3 million
for fiscal years 2006, 2005 and 2004, respectively.
Natural Gas
Supply
WGEServices competes with other third-party marketers to sell
the unregulated natural gas commodity to customers. Marketers of
the natural gas commodity compete largely on price, and gross
margins are relatively small. Consequently, gross margins for
the sale of unregulated natural gas are typically lower than
those earned by Washington Gas.
WGEServices faces risks associated with its gas supply because
it may experience a difference between contracted gas purchase
quantities and contractual gas sales commitments. To minimize
this risk, WGEServices manages its natural gas contract
portfolio by closely matching the timing of gas purchases from
suppliers with sales commitments to customers. WGEServices also
purchases its gas from a number of wholesale suppliers in order
to avoid relying on any single provider for its natural gas
supply. Additionally, WGEServices maintains gas storage
inventory that is assigned to it by natural gas utilities such
as Washington Gas. This storage inventory enables WGEServices to
meet daily and monthly fluctuations in demand caused by
variations in weather from normal. WGEServices may, from time to
time, enter into derivative contracts, including weather
derivatives, in order to balance its sales commitments with the
amount of gas it must purchase to satisfy those commitments, or
for purposes of fixing the price at which WGEServices may have
to purchase or sell gas. WGEServices has a risk management
policy in place and periodically reassesses its policy to
determine its adequacy to mitigate risks in changing markets.
For a further discussion about WGEServices exposure to and
management of market risks, refer to the section entitled
Market Risk included in Managements
Discussion.
WGEServices purchases a portion of its natural gas supply from
the Gulf Coast region. Purchase commitments from certain of
WGEServices Gulf Coast-based natural gas suppliers were
interrupted by the supply shortage in the Gulf Coast region in
the immediate aftermath of the hurricanes during the fall 2005
season. During the
2005-2006
winter heating season, all of WGEServices contracted
natural gas supplies from the Gulf Coast region flowed as
contracted, and WGEServices met its customers daily demand
for natural gas and achieved its required storage inventory
balances.
In meeting its natural gas supply needs for the
2006-2007
winter heating season and beyond, WGEServices expects to
continue to rely on a diverse set of supply sources, including
city-gate delivered supplies, natural gas in storage and LNG
from the Cove Point terminal.
Electricity
Supply
Customer choice programs for electric customers have been
implemented in each jurisdiction in which Washington Gas
operates. Similar to the natural gas industry, participants in
these programs can choose either to continue purchasing bundled
electricity service from their local electric distribution
utility or to purchase electricity from a third-party marketer.
WGEServices competes with other third-party marketers to sell
electric supply services to customers. Marketers of electric
supply service compete largely on price, and gross margins are
relatively small.
As of September 30, 2006, WGEServices electric
customers grew 75 percent when compared to the number of
customers as of September 30, 2005. This customer growth
was principally the result of new competitive opportunities that
emerged near the end of the third quarter of fiscal year 2006
due to sharp increases in competing rates offered by electric
utilities in Maryland and Delaware. In other locations, however,
future opportunities to add new electric customers may continue
to be limited by the relationship between electric Standard
Offer Service (SOS) rates offered by local electric utilities
and market prices for electricity. Certain SOS rates in
WGEServices market area continue to be below current
market prices. In certain cases, electric utilities have entered
into
19
WGL
Holdings, Inc.
Washington Gas Light Company
Part I
Item 1. Business (continued)
wholesale contracts to supply their SOS customers, prior to an
increase in fuel prices required to generate electricity. In
other cases, electric utilities continue to provide service
under previously established rates that are capped.
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, capacity, ancillary services and
transmission service from multiple suppliers to match its
customer requirements in accordance with its risk management
policy. To the extent WGEServices has not matched its customer
requirements with its supply purchases, it could be exposed to
electricity commodity price risk. WGEServices electric
business also is exposed to fluctuations in weather. Generally,
WGEServices makes purchases under fixed-volume contracts that
are based on certain weather assumptions. If there are
significant deviations in weather from these assumptions,
WGEServices may incur price and volume variances that could
negatively impact its expected gross margins.
For a small percentage of its electricity supply, WGEServices
purchased full requirements services from wholesale electricity
suppliers under master purchase and sale agreements, including
electric energy, capacity and certain ancillary services, for
resale to retail electric customers. On October 19, 2006,
WGEServices terminated all remaining full requirements contracts
and received a small termination settlement.
POTENTIAL FOR
FURTHER UNBUNDLING
Currently, Washington Gas provides customer services, such as
preparing bills, reading meters and responding to customer
inquiries, as part of its core utility function. Unregulated
third-party marketers have the option to assume responsibility
for bill preparation and customer collections. In addition to
billing and collecting from customers for the natural gas
commodity, third-party marketers bills may include natural
gas delivery charges due Washington Gas, which they subsequently
remit to it. Although Washington Gas still provides most
customer services on a bundled basis, the potential exists for
future deregulation initiatives to separate these services from
the core utility function. In that case, customers could choose
to have unregulated competitors provide these services.
To remain competitive, we continuously strive to improve quality
and efficiency and to reduce costs to achieve market-level
performance. Accordingly, we will continue to look for
opportunities to profit from further unbundling.
OPERATING
ISSUES IN PRINCE GEORGES COUNTY, MARYLAND
Description of
Operating Issues and Related Causes
On April 1, 2005, Washington Gas announced that it would
address a significant increase in the number of natural gas
leaks on its distribution system in a portion of Prince
Georges County, Maryland. Washington Gas retained a
consultant, ENVIRON International Corporation (Environ), to
determine the reason for the increase in leaks in the affected
area of Prince Georges County. Based on the work conducted
to date by Environ, there is a combination of three contributing
factors to the higher leak rates of seals on couplings. However,
the contributing factor that is unique to the affected area is
the change in the gas composition resulting from a change in the
gas supply arising from the reactivation of the Cove Point LNG
terminal owned by Dominion Resources, Inc. The Cove Point gas
has a lower concentration of HHCs than domestic natural gas. The
consultants report indicated that a characteristic of the
rubber material comprising the seals in the couplings is the
ability of the seals to both adsorb and desorb HHCs. When seals
are exposed to higher levels of HHCs, they swell in size and
cause a tighter seal. However, when gas, such as the gas from
the Cove Point terminal is introduced and it has a lower level
of HHCs, the seals shrink in size and there is a greater
propensity for those seals to cause the couplings to leak.
Environ also considered the age of the couplings and the colder
ground temperature during the winter as potential contributing
factors to the higher leak rate. However, both the age of the
couplings and the colder ground temperatures are common to
couplings in other areas of Washington Gas service
territory where leak patterns have not been observed like those
in the affected area of Prince Georges County. Thus, in
our opinion, the relevant change that explains the higher
incidence of leaks in the affected area of Prince Georges
County is the composition of the gas resulting from the
introduction of gas from the Cove Point LNG terminal.
Washington Gas has continued to evaluate the causes and possible
solutions related to the higher leak rate in the seals discussed
above. Data and analyses continue to confirm that changes in gas
composition explain the higher leak rates. A report by another
consultant, Polymer Solutions, Inc., dated September 27,
2005, discussed and confirmed that changing gas composition has
an effect on coupling seal materials. A later report from
Environ, dated April 10, 2006, concluded in its testing of
full component mechanical
20
WGL
Holdings, Inc.
Washington Gas Light Company
Part I
Item 1. Business (continued)
couplings removed from Washington Gas distribution system
within the affected area of Prince Georges County that the
seals on the couplings will shrink and swell with the exposure
to the change in levels of HHCs between domestic natural gas and
re-vaporized LNG. Testing is continuing on coupling seal
materials to attempt to determine optimum HHC injection rates
necessary to maintain the integrity of the seals and return leak
rates for the couplings to normal maintenance levels experienced
before the introduction of gas coming from the Cove Point
terminal.
Given the increase in the number of natural gas leaks
experienced in the affected area of Prince Georges County,
Maryland in fiscal year 2005, Washington Gas announced in that
year that it would replace gas service lines and rehabilitate
gas mains that contain the applicable mechanical couplings in
the affected area of the distribution system in Prince
Georges County (the rehabilitation project), with a
projected date of completion by the end of December 2007. The
original estimate of the cost of the rehabilitation project is
$144 million. This cost estimate could differ materially
from the actual costs incurred for the work associated with this
project. Washington Gas planned capital expenditures for
fiscal years 2006 through 2008 reflect this cost estimate. As of
September 30, 2006, Washington Gas had completed
approximately 50 percent of the work related to the
rehabilitation project.
We consider the cost of the rehabilitation project described
above necessary to provide safe and reliable utility service. We
anticipate that costs such as these eventually will be
recognized in the ratemaking process as reasonable. Washington
Gas has not yet requested recovery of the capital expenditures
and maintenance costs being incurred. However, we are also
considering the effect of these capital expenditures on
Washington Gas ability to earn its allowed rate of return
in Maryland, and we are evaluating the most appropriate options
to enable full and timely recovery of, and return on, the
amounts being expended. There can be no assurance at this time
that recovery in rates will be allowed or at what point in time
such recovery may begin to be reflected in rates.
We anticipate that additional volumes of gas from the Cove Point
terminal may flow through facilities in both the affected area
of Prince Georges County and in other areas of Washington
Gas distribution system as a result of the FERCs
June 16, 2006 order approving Dominions application
to expand the capacity and output of the Cove Point terminal
(see the section below entitled Proposed Cove Point
Expansion). As such, Washington Gas has examined
potential approaches that will enable it to protect against the
adverse effects of the Cove Point gas. The original
$144 million cost estimate of the rehabilitation project
previously discussed does not consider any costs that have been
incurred to date or that will potentially be incurred associated
with implementing any of these actions. Based upon the
scientific evidence available to date, Washington Gas
constructed the facilities necessary to inject HHCs into the gas
stream at the gate station that exclusively receives gas from
the Cove Point terminal and serves the affected area of Prince
Georges County, Maryland where the increase in gas leaks
had been observed. This facility became operational in January
2006 at a cost of approximately $3.2 million.
Laboratory tests have shown that the injection of HHCs into the
type of gas coming from the Cove Point terminal can be effective
in re-swelling the seals in couplings which increases their
sealing force and, thus, reduces the propensity for the
couplings to leak. Furthermore, since the injection facility
became operational in January 2006, Washington Gas has been
evaluating the effectiveness of this HHC injection process on
the couplings under field conditions. As of September 30,
2006, testing had concluded that the HHCs being injected at this
gate station remain in the gas stream and are carried throughout
that portion of the distribution system where Washington Gas
intends for them to flow.
Washington Gas has observed a notable reduction in leak rates
since the HHC injection facility became operational in January
2006. Given this observation, coupled with the results of the
laboratory tests performed to date that support the
effectiveness of the HHC injection process, we plan to modify
the scope of work on the rehabilitation project through the
2006-2007
winter heating season, and anticipate that the overall scope and
original $144 million cost estimate of this project may be
modified if the expected results materialize in the coming
winter. Washington Gas will continue collecting and analyzing
leak data in the affected area of Prince Georges County
through the
2006-2007
winter heating season and we will continue performing special
leak surveys before drawing a definitive conclusion regarding
the level of effectiveness of the injection process and the
overall scope and cost estimate of the rehabilitation project
that ultimately will be incurred. Until such time, Washington
Gas will continue its rehabilitation efforts within the affected
area in Prince Georges County at modified levels, and will
concurrently continue its gas conditioning solution.
Proposed Cove
Point Expansion
In fiscal year 2005, Dominion (the applicant) requested
authorization from the FERC to expand the capacity and output of
its Cove Point LNG terminal. This expansion would result in a
substantial increase of Cove Point gas introduced into the
Washington Gas distribution system in areas that have
distribution and service lines constructed of similar materials
and in a similar manner to those in the affected area of Prince
Georges County. This could increase the exposure of other
areas within the Washington Gas distribution system to Cove
Point gas that may be either minimally blended with domestic
natural gas pipeline supply or completely
21
WGL
Holdings, Inc.
Washington Gas Light Company
Part I
Item 1. Business (continued)
unblended with any other gas, thereby potentially causing an
increase in leaks on couplings in additional parts of the
Washington Gas distribution system. To address this potential
risk, Washington Gas has begun the planning necessary to
construct two additional facilities to inject HHCs at gate
stations in anticipation that more gas from the Cove Point
terminal may begin flowing into the interconnected pipelines in
fiscal year 2008 or thereafter and, therefore, into other areas
of Washington Gas distribution system. Washington Gas
anticipates that the next gate station injection facility will
be operational by the
2007-2008
winter heating season.
The estimated cost of each of the additional HHC injection
facilities will range from an estimated $3 million to
$4 million. Washington Gas expects that the cost of these
facilities should be includible in the rate base upon which
Washington Gas is allowed to earn an allowed rate of return. The
estimated cost of these facilities does not include the cost of
the purchase of HHCs. At September 30, 2006, Washington Gas
had incurred $2.0 million of HHC purchasing costs, and had
deferred $575,000 of these costs on the balance sheet as a
regulatory asset to be recovered from customers in the future.
Currently, Washington Gas is collecting the cost of HHCs in its
PGC provision in the District of Columbia from its sales
customers. Washington Gas currently is not collecting the cost
allocable to Virginia or Maryland customers associated with the
purchase of HHCs. The regulatory bodies having jurisdiction over
Washington Gas rates will determine the ultimate amount
that is recoverable from customers for the cost of these HHCs
(refer to the section entitled Rates and Regulatory
Matters).
Washington Gas has not yet gathered enough evidence to reach a
definitive conclusion that the injection of HHCs into the gas
distribution system will be completely effective in preventing
additional leaks or retarding the rate at which additional leaks
may occur in the gas distribution system if additional volumes
from the Cove Point terminal are introduced. The winter of
2005-2006
was too mild for a meaningful comparison with the period during
which the unusual leak pattern presented itself in the affected
area of Prince Georges County. Washington Gas continues to
gather and evaluate field and laboratory evidence about this gas
conditioning solution. The timing and implementation of
decisions by the FERC governing the proposed expansion and the
planning and implementation by Dominion may affect our ability
to implement our plans before our system experiences increased
flows of gas from Cove Point. Construction of these additional
facilities may not be timely, permitted or feasible. If the
facilities are constructed, the injection of additional HHCs may
not be effective or only partially effective in preventing
additional leaks on couplings in the gas distribution system. If
the injection of HHCs into the gas distribution system is not
effective or only partially effective in preventing additional
leaks on couplings, Washington Gas will seek an acceptable and
viable alternative to address this issue. If the planned actions
of treating the Cove Point gas are not successful or only
partially effective in preventing additional leaks on couplings,
and if we are not able to determine a satisfactory alternative
solution on a timely basis, additional operating expenses and
capital expenditures may be necessary to contend with the
receipt of increased volumes of gas from the Cove Point LNG
terminal into Washington Gas distribution system.
Notwithstanding Washington Gas current and potential
future actions before its local regulatory commissions with
respect to the recovery of costs related to the construction of
the injection facilities and the purchase of HHCs, our position
is that any costs associated with the remediation related to the
gas from the Cove Point LNG terminal should be the
responsibility of the parties that are introducing gas from the
Cove Point terminal into the interstate pipeline transmission
system that is then introduced into the distribution system of
Washington Gas. Therefore, as further discussed below,
Washington Gas is pursuing certain remedies, and will pursue all
remedies, it has before the FERC and other entities to assure
that its customers are only paying their appropriate share of
the costs of the remediation to maintain the safety of the
Washington Gas distribution system. To the extent that
Washington Gas receives approval and recovers costs from its
retail customers for actions it has taken to maintain the safety
and integrity of its distribution system, Washington Gas will
apply any compensation received as a result of current or future
actions before the FERC or against others, as an offset to
future costs collected from retail customers.
Request for
FERC Action
In November 2005, Washington Gas requested the FERC to invoke
its authority to require Dominion to demonstrate that the
increased volumes of the Cove Point gas would flow safely and
reliably through the Washington Gas distribution system.
Washington Gas specifically requested that the proposed
expansion of the Cove Point LNG terminal be denied until the
applicant has shown that the Cove Point gas: (i) is
of such quality that it is fully interchangeable with the
natural gas historically received by Washington Gas and
(ii) will not cause harm to its customers or to the
infrastructure of Washington Gas distribution system.
The FERC convened a procedural conference in February 2006 to
receive information related to the issues raised by Washington
Gas concerning the compatibility of gas from the Cove Point
terminal and the safety of its distribution system should
significantly larger volumes of gas from the Cove Point terminal
flow into the interconnected interstate pipelines that serve
Washington Gas. Washington Gas presented operational data and
scientific evidence supporting Washington Gas assertions
that the
22
WGL
Holdings, Inc.
Washington Gas Light Company
Part I
Item 1. Business (continued)
unblended re-vaporized LNG is the unique cause of the increase
in leaks. Washington Gas also provided the FERC with all data
that Washington Gas had made available for Environs review.
On June 16, 2006, the FERC issued an order authorizing the
applicants request to expand the capacity and output of
its Cove Point LNG terminal and, thereby, denying Washington
Gas request to require the applicant to demonstrate the
safety and reliability of the Cove Point gas flowing through the
Washington Gas distribution system. Furthermore, the FERC stated
that, although it could not rule out the unblended re-vaporized
LNG as a cause of the leaks on the Washington Gas distribution
system, Washington Gas use of hot tar as a corrosion
protectant, coupled with an increase in the operating pressure
of its system were the principal causative factors
in the increased leaks.
On July 17, 2006, Washington Gas filed a Request for
Rehearing with the FERC to seek modification of the FERCs
June 16, 2006 order that authorized the Cove Point
expansion. In its request, Washington Gas asserted, among other
things, that its application of hot tar was an acceptable
industry practice for corrosion protection when mechanical
couplings were installed between the 1950s and 1970s, and that
this practice was used throughout its service territory. The
increase in leaks occurred only in the area that consistently
receives Cove Point gas as its sole source of supply. Washington
Gas further asserted that its operating pressure has remained
constant in the affected area since the mid-1980s.
Washington Gas is pursuing the rehearing because specific
scientific evidence, points of law and potentially serious
safety issues were not adequately addressed by the FERC in its
June 16, 2006 order on the Cove Point expansion. Washington
Gas is one of several entities requesting such a rehearing.
Filings by the PSC of MD and other organizations, such as
KeySpan Corporation, state that the FERC order failed, in some
way, to protect a wide range of consumers interests.
Washington Gas is committed to the use of natural gas from the
Cove Point terminal to satisfy the needs of its customers.
Washington Gas is willing to work with Dominion Cove Point LNG,
the shippers who bring LNG into the Cove Point terminal and the
interstate pipelines that deliver gas to Washington Gas in order
to achieve and implement an appropriate solution to the issue of
gas interchangeability affecting its system. Washington Gas will
continue taking steps to protect its system by conditioning gas
from Cove Point, and by proceeding with its ongoing
rehabilitation project in the affected portion of Prince
Georges County. The extent to which this project is fully
completed will depend on the effectiveness of the injection
process in the affected area of Prince Georges County
during the winter of
2006-2007.
ENVIRONMENTAL
MATTERS
We are subject to federal, state and local laws and regulations
related to environmental matters. These evolving laws and
regulations may require expenditures over a long timeframe to
control environmental effects. Almost all of the environmental
liabilities we have recorded are for costs expected to be
incurred to remediate sites where we or a predecessor affiliate
operated manufactured gas plants (MGP). Estimates of liabilities
for environmental response costs are difficult to determine with
precision because of the various factors that can affect their
ultimate level. These factors include, but are not limited, to
the following:
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the complexity of the site;
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changes in environmental laws and regulations at the federal,
state and local levels;
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the number of regulatory agencies or other parties involved;
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new technology that renders previous technology obsolete or
experience with existing technology that proves ineffective;
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the level of remediation required and
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variations between the estimated and actual period of time that
must be dedicated to respond to an environmentally-contaminated
site.
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Washington Gas has identified up to ten sites where it or its
predecessors may have operated MGPs. Washington Gas last used
any such plant in 1984. In connection with these operations, we
are aware that coal tar and certain other by-products of the gas
manufacturing process are present at or near some former sites,
and may be present at others. Based on the information available
to us, we have concluded that none of the sites are likely to
present an unacceptable risk to human health or the environment.
At one of the former MGP sites, studies show the presence of
coal tar under the site and an adjoining property. Washington
Gas has taken steps to control the movement of contaminants into
an adjacent river by installing a water treatment system that
removes and treats contaminated groundwater at the site.
Washington Gas received approval from governmental authorities
for a
23
WGL
Holdings, Inc.
Washington Gas Light Company
Part I
Item 1. Business (concluded)
comprehensive remediation plan for the majority of the site that
will allow commercial development of Washington Gas
property. Washington Gas has entered into an agreement with a
national developer for the development of this site in phases.
The first two phases have been completed, with Washington Gas
retaining a ground lease on each phase. The owner of the
affected adjoining property has issued a Record of Decision for
that portion of the site, and Washington Gas will negotiate an
agreement with the owner to perform the remediation. On
September 21, 2006, governmental authorities notified
Washington Gas of their desire to have the utility investigate
and remediate river sediments in the area directly in front of
the former MGP site. There has been no agreement among
Washington Gas and governmental authorities as to the type and
level of sediment investigation and remediation that should be
undertaken for this area of the river; accordingly, we cannot
estimate at this time the potential future costs of such
investigation and remediation.
At a second former MGP site and on an adjacent parcel of land,
Washington Gas developed a monitoring-only
remediation plan for the site. This remediation plan received
approval under a state voluntary closure program.
We do not expect that the ultimate impact of these matters will
have a material adverse effect on our capital expenditures,
earnings or competitive position. At the remaining eight sites,
either the appropriate remediation is being undertaken, or no
remediation should be necessary. See Note 14 of the Notes
to Consolidated Financial Statements for a further discussion of
environmental response costs.
OTHER
INFORMATION ABOUT THE BUSINESS
Washington Gas is not dependent upon a single customer or group
of customers such that the loss of any one or more of such
customers would have a significant adverse effect on its
business. As previously discussed, Washington Gas served over
one million customers at September 30, 2006. Our
energy-marketing segment is not heavily dependent on any one
customer or group of customers. The commercial HVAC segment
derived approximately 67 percent and 54 percent of
revenues from various agencies of the Federal Government, in
fiscal years 2006 and 2005, respectively.
Washington Gas is weather-sensitive and seasonal since the
majority of its business is derived from residential and small
commercial customers who use natural gas for space heating
purposes. In fiscal year 2006, 76 percent of the total
therms delivered in Washington Gas franchise area,
excluding deliveries for electric generation, occurred in its
first and second fiscal quarters. Washington Gas earnings
are typically generated during these two quarters, and the
regulated utility historically incurs net losses in the third
and fourth fiscal quarters. The timing and level of approved
rate increases can affect the results of operations. The
seasonal nature of Washington Gas business creates large
variations in short-term cash requirements, primarily due to the
fluctuations in the level of customer accounts receivable,
unbilled revenues and storage gas inventories. Washington Gas
finances these seasonal requirements primarily through the sale
of commercial paper and unsecured short-term bank loans.
The operations of WGEServices are also seasonal, with large
amounts of electricity being sold in the summer months and large
amounts of natural gas being sold in the winter months. Working
capital requirements vary significantly during the year, and
these variations are financed primarily through WGL
Holdings issuance of commercial paper and unsecured
short-term bank loans.
Our research and development costs during fiscal years 2006,
2005 and 2004 were not material.
At September 30, 2006, we had 1,818 employees comprising
1,606 utility and 212 non-utility employees.
Our Code of Conduct, Corporate Governance Guidelines, and
charters for the Governance, Audit and Human Resources
committees of the Board of Directors are available on the
corporate Web site www.wglholdings.com. Copies also may be
obtained by request to the Corporate Secretary at WGL Holdings,
Inc., 101 Constitution Ave., N.W., Washington, D.C. 20080.
We make available free of charge on our corporate Web site, our
annual reports on
Form 10-K,
quarterly reports on
Form 10-Q
and current reports on
Form 8-K,
and any amendments, as soon as reasonably practicable after such
reports have been electronically filed with or furnished to the
Securities and Exchange Commission (SEC). Additional information
about WGL Holdings is also available on its Web site. Our
Chairman and Chief Executive Officer certified to the New York
Stock Exchange (NYSE) on March 15, 2006 that, as of that
date, he was unaware of any violation by WGL Holdings of the
NYSEs corporate governance listing standards.
24
WGL
Holdings, Inc.
Washington Gas Light Company
Part I
Item 1A. Risk Factors
The risk factors described below should be read in conjunction
with other information included or incorporated by reference in
this Annual Report on
Form 10-K,
including an in-depth discussion of these risks in the section
entitled Managements Discussion and Analysis of
Financial Condition and Results of Operations. The
risks and uncertainties described below are not the only risks
and uncertainties facing us. Additional risks and uncertainties
not presently known or that we currently have concluded are
immaterial may also adversely affect us.
HOLDING
COMPANY
Our
business may be adversely affected if we are unable to pay
dividends on our common stock and principal and interest on our
outstanding debt.
We, WGL Holdings, are a holding company whose assets consist
primarily of investments in our subsidiaries. Accordingly, we
conduct all of our operations through our subsidiaries. Our
ability to pay dividends on our common stock and to pay
principal and accrued interest on our outstanding debt depends
on the payment of dividends to us by Washington Gas or the
repayment of funds to us by our principal subsidiaries. Payments
to us by our subsidiaries depend, in turn, upon their results of
operations and cash flows, which are subject to the risk
factors, discussed below. The extent to which our subsidiaries
do not pay dividends or repay funds to us may adversely affect
our ability to pay dividends to holders of our common stock and
principal and interest to holders of our debt.
If we are
unable to access capital or to access capital cost effectively,
our subsidiaries business may be adversely affected.
Additionally, a downgrade in our credit ratings could adversely
affect our access to capital markets.
Our ability to obtain adequate and cost effective capital
depends largely on our credit ratings, which are greatly
affected by our subsidiaries financial performance and the
liquidity of financial markets. A downgrade in our current
credit ratings could adversely affect our access to capital
markets, as well as our cost of capital.
WASHINGTON GAS
LIGHT COMPANY
Washington
Gas operations, earnings and cash requirements are highly
weather sensitive and seasonal.
The operations of Washington Gas, our regulated utility
subsidiary, are weather sensitive and seasonal, with a
significant portion of revenues derived from the delivery of
natural gas to residential and commercial customers who use
natural gas for space heating. Weather conditions directly
influence the volume of natural gas delivered to customers. The
rates Washington Gas charges its customers are determined on the
basis of expected normal weather conditions. Generally,
Washington Gas delivers more than 75 percent of its total
natural gas volumes, excluding deliveries for electric
generation, in our first and second fiscal quarters. Deviations
in weather from normal levels and the seasonal nature of
Washington Gas business can create large variations in
earnings and short-term cash requirements.
Changes
in the regulatory environment or unfavorable rate regulation,
that can be affected by new laws or political considerations,
may restrict or delay Washington Gas ability to earn a
reasonable rate of return on its invested capital to provide
utility service and to fully recover its operating
costs.
Washington Gas is regulated by the PSC of DC, the PSC of MD and
the SCC of VA. These regulatory commissions generally have
authority over many of the activities of Washington Gas
business including, but not limited to, the rates it charges to
its customers, the amount and type of securities it can issue,
the nature of investments it can make, the nature and quality of
services it provides, safety standards and other matters.
Because the rate setting process is based, in part, on
historical financial information and estimates that are inherent
in the accounting process, the rates Washington Gas charges its
customers may not allow Washington Gas business to earn a
reasonable rate of return on actual invested capital and fully
recover actual operating costs. Regulatory commissions have the
authority to grant rate increases, order rate decreases or
require no change in the rates Washington Gas charges its
customers. These regulators also may modify Washington Gas
rates to change the level, type and methods that it utilizes to
recover its costs, including the costs to acquire, store,
transport and deliver natural gas. Some of these supply costs
are incurred under long-term contracts. The extent to which the
actions of regulatory commissions restrict or delay Washington
Gas ability to earn a reasonable rate of return on
invested capital
and/or fully
recover operating costs may adversely affect its results of
operations, financial condition and cash flows.
25
WGL
Holdings, Inc.
Washington Gas Light Company
Part I
Item 1A. Risk Factors (continued)
Washington
Gas ability to meet customers natural gas
requirements may be impaired if its contracted gas supplies and
interstate pipeline and storage services are not available or
delivered in a timely manner.
Washington Gas is responsible for acquiring sufficient natural
gas supplies and interstate pipeline and storage capacity to
meet current and future customers annual and seasonal
natural gas requirements. If Washington Gas is not able to
maintain a reliable and adequate natural gas supply and
sufficient pipeline capacity to deliver that supply, it may be
unable to meet its customers requirements. If Washington
Gas is unable to meet customers demand requirements, this
could adversely affect its results of operations, financial
condition and cash flows.
Washington
Gas needs to acquire additional capacity to deliver natural gas
on the coldest days of the year, and it may not receive the
necessary authorizations to do so in a timely manner.
Washington Gas plans to construct a one billion cubic foot
liquefied natural gas (LNG) storage facility in Chillum,
Maryland, to meet its customers forecasted demand for
natural gas. The new storage facility is currently expected to
be completed and in service by the
2011-2012
winter heating season. If we are not permitted or are not able
to construct this planned facility on a timely basis for any
reason, the availability of the next best alternative (which is
to acquire additional interstate pipeline transportation or
storage capacity) may be limited by market supply and demand,
and the timing of Washington Gas participation in new
interstate pipeline construction projects. This could cause an
interruption in Washington Gas ability to satisfy the
needs of some of its customers, which could adversely affect its
results of operations and cash flows.
Decreases
in natural gas consumption by Washington Gas customers may
negatively affect revenues and net income.
Increases in the cost of gas due to increases in the purchase
price of the natural gas commodity generally have no direct
effect on Washington Gas revenues and net income because
regulatory mechanisms allow these increased costs to be
reflected in the rates charged to customers. However, a rise in
natural gas prices may reduce Washington Gas net income
due to: (i) lower firm sales margins from decreased
natural gas deliveries that may result from customer
conservation; (ii) increased short-term interest
expense to finance higher accounts receivable balance and
(iii) higher expenses that may be incurred for
uncollectible customer accounts.
In addition to these short-term impacts of higher natural gas
prices, a sustained period of higher prices may result in longer
term decreases in natural gas use per customer as customers
change their consumption patterns by replacing older, less
efficient gas appliances with more efficient appliances. The
resulting conservation would reduce Washington Gas net
revenues and net income in those jurisdictions where Washington
Gas has not filed for or received approval from its regulators
to implement mechanisms that mitigate the financial effect of
such efficiency improvements.
Operating
issues could affect public safety and the reliability of
Washington Gas natural gas distribution system which could
have adverse financial implications.
Washington Gas business is exposed to operational issues
that could affect the public safety and reliability of its
natural gas distribution system. Operational issues such as
leaks, mechanical problems and accidents could result in
significant costs to Washington Gas business and loss of
customer confidence. The occurrence of any such operational
issues could adversely affect Washington Gas results of
operations, financial condition and cash flows. If Washington
Gas is unable to recover from customers through the regulatory
process all or some of these costs and its authorized rate of
return on these costs, this also could adversely affect
Washington Gas results of operations, financial condition
and cash flows.
Washington
Gas is incurring significant capital expenditures in connection
with the rehabilitation of a portion of its natural gas
distribution system in Prince Georges County, Maryland. If
it is unable to recover these costs, this could have a
significant adverse effect on Washington Gas financial
condition, results of operations and cash flows.
Based on scientific evidence from an international consulting
firm, it is our opinion that the introduction of gas from the
Dominion Cove Point LNG terminal into Washington Gas
natural gas distribution system caused the reduction in sealing
force of the rubber seals within certain mechanical couplings on
Washington Gas distribution system in a portion of Prince
Georges County, Maryland. Therefore, we have concluded
that this reduction in sealing force led to a significant
increase in leaks in fiscal year 2005 in the affected area of
Prince Georges County, Maryland.
Given the increase in the number of natural gas leaks,
Washington Gas began to replace gas service lines and
rehabilitate gas mains that contain the applicable mechanical
couplings in the affected area of the distribution system in
Prince Georges County (the rehabilitation project), with a
projected date of completion by the end of December 2007. The
original estimate of the cost of the
26
WGL
Holdings, Inc.
Washington Gas Light Company
Part I
Item 1A. Risk Factors (continued)
rehabilitation project is $144 million; however, actual
costs incurred for the work associated with this project could
differ materially from this cost estimate. If Washington Gas is
unable to recover from customers through the regulatory process
all or some of these costs and its authorized rate of return on
these costs, this could have a significant adverse effect on
Washington Gas financial condition, results of operations
and cash flows.
The
receipt of additional amounts of gas from the Dominion Cove
Point LNG terminal into Washington Gas natural gas
distribution system may result in higher operating expenses and
capital expenditures which may have a material adverse effect on
its financial condition, results of operations and cash
flows.
On June 16, 2006, the FERC issued an order authorizing the
request of Dominion Resources, Inc., the owner of the Dominion
Cove Point LNG facility, to expand the capacity and output of
its Cove Point terminal. This expansion would result in a
substantial increase in the volume of Cove Point gas introduced
into Washington Gas distribution system in areas that have
distribution and service lines constructed of similar materials
and in a similar manner to those in the affected area of Prince
Georges County. We estimate that this increase would occur
in fiscal year 2008 or thereafter. The increased volume of Cove
Point gas that will flow into Washington Gas distribution
system may cause additional leaks on couplings in its system
(except in the area of Prince Georges County, Maryland
that is undergoing the rehabilitation project).
We are taking actions to prepare for the receipt of increased
volumes of gas from the Cove Point terminal. Washington Gas
constructed the facilities necessary to treat the gas from the
Cove Point terminal that is exclusively received at the gate
station that serves the affected area of Prince Georges
County, Maryland where the increase in gas leaks has been
observed. Additionally, Washington Gas has begun the planning
necessary to construct two additional treatment facilities at
gate stations in anticipation that more gas from the Cove Point
terminal may begin flowing into the interconnected pipelines
and, therefore, into other areas of its distribution system.
However, we have not gathered enough evidence yet to conclude
that the treatment of the Cove Point gas received into
Washington Gas distribution system will be completely
effective in preventing additional leaks or retarding the rate
at which additional leaks may occur in the gas distribution
system if additional volumes from the Cove Point terminal are
introduced. Also, construction of these additional facilities
may not be timely, permitted or feasible. If the facilities are
constructed, the treatment of the Cove Point gas may not be
effective or only partially effective in preventing additional
leaks on couplings in the gas distribution system. If the
planned actions of treating the Cove Point gas are not
successful or only partially effective in preventing additional
leaks on couplings, and if we are not able to determine a
satisfactory alternative solution on a timely basis, additional
operating expenses and capital expenditures may be necessary to
contend with the receipt of increased volumes of gas from the
Cove Point LNG terminal into Washington Gas distribution
system. These additional expenditures may not be recoverable or
may not be recoverable on a timely enough basis from customers,
or other parties. Therefore, these conditions could have a
material adverse effect on Washington Gas financial
condition, results of operations and cash flows.
Changes
in the relative prices of alternative forms of energy may
strengthen or weaken the competitive position of Washington
Gas natural gas delivery service. If the competitive
position of natural gas service weakens, it may reduce the
number of natural gas customers in the future and negatively
affect Washington Gas future cash flows and net
income.
The price of natural gas delivery service that Washington Gas
provides competes with the price of other forms of energy such
as electricity, oil and propane. Changing prices of natural gas
versus other sources of energy that Washington Gas competes
against can cause the competitive position of our natural gas
delivery service to improve or decline. A decline in the
competitive position of natural gas service in relation to
alternative energy sources can lead to fewer natural gas
customers, lower volumes of natural gas delivered, lower cash
flows and lower net income.
A decline
in the economy or significant increases in interest rates may
reduce revenues or increase costs.
A decline in the economy of the region in which Washington Gas
operates, or a significant increase in interest rates to be paid
by potential purchasers of new homes, might adversely affect
Washington Gas ability to grow its customer base at the
same rate it has grown in the past. An increase in the interest
rates Washington Gas pays without the recognition of the higher
cost of debt incurred by it in the rates charged to its
customers would adversely affect Washington Gas future
earnings and cash flows.
Washington
Gas inability to access capital or to access capital cost
effectively may adversely affect its business. A downgrade in
Washington Gas credit ratings could increase its borrowing
costs.
Washington Gas ability to obtain adequate and cost
effective capital depends largely on its credit ratings, which
are greatly affected by Washington Gas financial
performance and the liquidity of financial markets. A downgrade
in Washington Gas current credit ratings could affect its
access to capital markets, as well as its cost of capital and
ability to earn its authorized rate of return.
27
WGL
Holdings, Inc.
Washington Gas Light Company
Part I
Item 1A. Risk Factors (continued)
As a wholly owned subsidiary of WGL Holdings, Washington Gas
depends solely on WGL Holdings to raise new common equity
capital and contribute that common equity to Washington Gas. If
WGL Holdings is unable to raise common equity capital, this also
could adversely affect Washington Gas credit ratings and
its ability to earn its authorized rate of return.
Washington
Gas risk management strategies and related hedging
activities may not be effective in managing its risks, and may
result in additional liability for which rate recovery may be
disallowed and cause increased volatility in its
earnings.
Washington Gas business requirements expose it to
commodity price, weather, credit and interest-rate risks.
Washington Gas attempts to manage its exposure to these risks by
hedging, setting risk limits and employing other risk management
tools and procedures. Risk management activities may not be as
effective as planned, and cannot eliminate all of its risks.
Washington Gas also may be exposed to additional liability
should the anticipated revenue recovery of costs or losses
incurred with certain of these risk management activities be
subsequently excluded from the determination of revenues by a
regulator.
Washington
Gas facilities and operations could be targets of acts of
terrorism.
Washington Gas natural gas distribution, transmission and
storage facilities may be targets of terrorist activities that
could result in a disruption of its ability to meet customer
requirements. Terrorist attacks may also disrupt capital markets
and Washington Gas ability to raise capital. A terrorist
attack on Washington Gas facilities or those of its
natural gas suppliers or customers could result in a significant
decrease in revenues or a significant increase in repair costs,
which could adversely affect its results of operations,
financial position and cash flows.
WASHINGTON GAS
ENERGY SERVICES, INC.
WGEServices
business, earnings and cash requirements are highly weather
sensitive and seasonal.
WGEServices, our retail energy-marketing subsidiary, is weather
sensitive and seasonal, with a significant portion of revenues
derived from the sale of natural gas to retail customers for
space heating during the winter months, and from the sale of
electricity to customers for cooling during the summer months.
Weather conditions directly influence the volume of natural gas
and electricity delivered to customers. Weather conditions can
also affect the short-term pricing of energy supplies that
WGEServices may need to procure to meet the needs of its
customers. Deviations in weather from normal levels and the
seasonal nature of WGEServices business can create large
variations in earnings and short-term cash requirements.
The
ability of WGEServices to meet customers natural gas and
electricity requirements may be impaired if contracted supply is
not available or delivered in a timely manner.
Sufficient deliverability of natural gas and electric supplies
to serve the demand of WGEServices customers is dependent
upon the ability of natural gas producers, pipeline gatherers,
natural gas processors, interstate pipelines, suppliers of
electricity and regional electric transmission operators to
deliver the respective commodities. If WGEServices is unable to
secure adequate supply in a timely manner, either due to the
failure of its suppliers to deliver the contracted commodity or
the inability to secure additional quantities during significant
abnormal weather conditions, it may be unable to meet its
customer requirements. Such inability to meet its delivery
obligations to customers could result in WGEServices
experiencing defaults on contractual terms with its customers,
penalties and financial damage payments, the loss of certain
licenses and operating authorities,
and/or a
need to return customers to the bundled services of regulated
utility companies, such as Washington Gas.
The risk
management strategies and related hedging activities of
WGEServices may not be effective in managing risks and may cause
increased volatility in its earnings.
WGEServices is exposed to commodity price risk to the extent its
natural gas and electricity purchases are not closely matched to
its sales commitments in terms of volume and pricing.
WGEServices attempts to manage its exposure to commodity price
risk, as well as its exposure to weather and credit risks by
hedging, setting risk limits, and employing other risk
management tools and procedures. These risk management
activities may not be as effective as planned, and cannot
eliminate all of WGEServices risks.
Significant
increases in interest rates may increase costs.
WGEServices depends on short-term debt to finance its accounts
receivable and storage gas inventories. Working capital
requirements vary significantly during the year, and we finance
these requirements primarily through the issuance of commercial
28
WGL
Holdings, Inc.
Washington Gas Light Company
Part I
Item 1A. Risk Factors (concluded)
paper and unsecured short-term bank loans by WGL Holdings. The
results of operations of WGEServices would be adversely affected
if short-term interest rates rose or if we were unable to access
capital in a cost-effective manner.
WGEServices
is dependent on guarantees from WGL Holdings.
The ability of WGEServices to purchase natural gas and
electricity from suppliers is dependent upon guarantees issued
on its behalf by WGL Holdings. Should WGL Holdings not renew
such guarantees after the effective date of their cancellation,
the ability of WGEServices to make commodity purchases at
reasonable prices would be impaired, adversely affecting its
results of operations, financial position and cash flows.
Competition
may negatively affect WGEServices.
WGEServices competes with other non-regulated retail suppliers
of natural gas and electricity, as well as with the commodity
rate offerings of electric and gas utilities. Increases in
competition including utility commodity rate offers that are
below prevailing market rates may cause a loss of sales volumes
or a reduction of growth opportunities for WGEServices that
could adversely affect its results of operations and cash flows.
Regulatory
developments may negatively affect WGEServices.
The regulations that govern the conduct of competitive energy
markets are subject to change as the result of legislation or
regulatory proceedings. Changes in these regulatory rules could
reduce customer growth opportunities for WGEServices, or could
reduce the profit opportunities associated with certain groups
of existing or potential new customers and, thereby, adversely
affect its results of operations and cash flows.
|
|
ITEM 1B.
|
UNRESOLVED STAFF
COMMENTS
|
None.
29
WGL
Holdings, Inc.
Washington Gas Light Company
Part I
Item 2. Properties
ITEM 2. PROPERTIES
At September 30, 2006, we provided services in various
areas of Virginia, the District of Columbia and Maryland, and
held certificates of convenience and necessity, licenses and
permits necessary to maintain and operate their respective
properties and businesses. The regulated utility segment is the
only segment where property, plant and equipment is a
significant asset.
Property, plant and equipment is stated at original cost,
including labor, materials, taxes and overhead costs incurred
during the construction period. Washington Gas calculates
depreciation applicable to its utility gas plant in service
primarily using a straight-line method over the estimated
remaining life of the plant. The composite depreciation and
amortization rate of the regulated utility was 3.44 percent
during fiscal year 2006, and 3.48 percent during fiscal
years 2005 and 2004, which included an allowance for estimated
accrued non-legal asset removal costs (see Note 1 of the
Notes to Consolidated Financial Statements).
At September 30, 2006, Washington Gas had approximately
642 miles of transmission mains, 11,813 miles of
distribution mains, and 13,346 miles of distribution
services. Washington Gas has the storage capacity for
approximately 15 million gallons of propane for peak
shaving.
Washington Gas owns approximately 40 acres of land and a
building (built in 1970) at 6801 Industrial Road in
Springfield, Virginia. The Springfield site performs both
operating and certain administrative functions of the utility.
Washington Gas also holds title to land and buildings used as
substations for its utility operations.
Washington Gas also has peaking facilities to enhance
deliverability in periods of peak demand in the winter that
consist of propane air plants in Springfield, Virginia
(Ravensworth Station), and Rockville, Maryland (Rockville
Station). Hampshire operates an underground natural gas storage
field in Hampshire County, West Virginia. Hampshire accesses the
storage field through 12 storage wells that are connected to an
18-mile
pipeline gathering system. Hampshire also operates a compressor
station for injection of gas into storage. For pipeline year
2007, we estimate that the Hampshire storage facility has the
capacity to supply approximately 2.2 billion cubic feet of
natural gas to Washington Gas system for meeting seasonal
demands.
Washington Gas owns a
12-acre
parcel of land located in Southeast Washington, D.C.
Washington Gas entered into an agreement with a national
developer to develop this land in phases. Washington Gas
selected the developer to design, execute and manage the various
phases of the development. The development, Maritime Plaza, is
intended to be a mixed-use commercial project that will be
implemented in five phases. The first two phases have been
developed, with Washington Gas retaining a
99-year
ground lease on each phase. See the section entitled
Environmental Matters under Item 1
of this report for additional information regarding this
development.
Facilities utilized by our corporate headquarters, as well as by
the retail energy-marketing and commercial HVAC segments, are
located in the Washington, D.C. metropolitan area and are
leased.
The Mortgage of Washington Gas dated January 1, 1933
(Mortgage), as supplemented and amended, securing any First
Mortgage Bonds (FMBs) it issues, constitutes a direct lien on
substantially all property and franchises owned by Washington
Gas other than a small amount of property that is expressly
excluded. At September 30, 2006 and 2005, no debt was
outstanding under the Mortgage.
Washington Gas executed a supplemental indenture to its
unsecured Medium-Term Note (MTN) Indenture on September 1,
1993, providing that Washington Gas will not issue any FMBs
under its Mortgage without securing all MTNs with all other debt
secured by the Mortgage.
30
WGL
Holdings, Inc.
Washington Gas Light Company
Part I
EXECUTIVE
OFFICERS OF THE REGISTRANTS
The names, ages and positions of the executive officers of the
registrants at October 31, 2006, are listed below along
with their business experience during the past five years. The
age of each officer listed is as of the date of filing of this
report. There is no family relationship among the officers.
Unless otherwise indicated, all officers have served
continuously since the dates indicated, and all positions are
executive officers listed with Washington Gas Light Company.
|
|
|
Executive Officers
|
|
|
Date Elected or
|
Name, Age and Position with the
registrants
|
|
Appointed
|
|
|
Vincent L. Ammann, Jr.,
Age 47 (1,2)
|
|
|
Vice President and Chief Financial
Officer
|
|
September 30, 2006
|
Vice President and Chief Financial
Officer of WGL Holdings, Inc.
|
|
September 30, 2006
|
Vice PresidentFinance
|
|
October 1, 2005
|
Vice PresidentFinance of WGL
Holdings, Inc.
|
|
October 1, 2005
|
Assistant to the Chief Financial
Officer
|
|
March 29, 2004
|
|
|
|
Elizabeth M. Arnold,
Age 54 (1)
|
|
|
Vice PresidentStrategy
|
|
January 24, 2004
|
Vice PresidentStrategy of
WGL Holdings, Inc.
|
|
January 24, 2004
|
Vice PresidentStrategy and
Non-Utility Businesses of WGL Holdings, Inc.
|
|
October 31, 2000
|
Vice PresidentStrategy and
Non-Utility Businesses
|
|
July 3, 2000
|
|
|
|
Beverly J. Burke,
Age 55 (1)
|
|
|
Vice President and General Counsel
|
|
July 1, 2001
|
Vice President and General Counsel
of WGL Holdings, Inc.
|
|
July 1, 2001
|
|
|
|
Gautam Chandra,
Age 40 (1,3)
|
|
|
Vice PresidentPerformance
Improvement
|
|
October 1, 2005
|
Vice PresidentPerformance
Improvement and Non-Utility Operations of WGL Holdings,
Inc.
|
|
October 1, 2005
|
Division HeadFinance
Support and Non-Utility Businesses
|
|
January 5, 2004
|
Division HeadAchieving
Operational Excellence
|
|
December 12, 2002
|
|
|
|
Adrian P. Chapman,
Age 49
|
|
|
Vice PresidentOperations,
Regulatory Affairs and Energy Acquisition
|
|
October 1, 2005
|
Vice PresidentRegulatory
Affairs and Energy Acquisition
|
|
March 31, 1999
|
|
|
|
James H.
DeGraffenreidt, Jr.,
Age 53 (1)
|
|
|
Chairman of the Board and Chief
Executive Officer
|
|
October 1, 2001
|
Chairman of the Board and Chief
Executive Officer of WGL Holdings, Inc.
|
|
October 1, 2001
|
|
|
|
Lauren A. Foley,
Age 41 (4)
|
|
|
Vice PresidentConsumer
Services
|
|
October 13, 2006
|
Division HeadCustomer
Services
|
|
July 15, 2002
|
|
|
|
Shelley C. Jennings,
Age 58 (1)
|
|
|
Treasurer of WGL Holdings,
Inc.
|
|
January 13, 2000
|
Treasurer
|
|
March 31, 1999
|
|
|
|
Wilma Kumar-Rubock,
Age 58
|
|
|
Vice President and Chief
Information Officer
|
|
October 1, 2001
|
|
|
|
Terry D. McCallister,
Age 50 (1)
|
|
|
President and Chief Operating
Officer
|
|
October 1, 2001
|
President and Chief Operating
Officer of WGL Holdings, Inc.
|
|
October 1, 2001
|
32
WGL
Holdings, Inc.
Washington Gas Light Company
Part I
|
|
|
Executive Officers
|
|
|
Date Elected or
|
Name, Age and Position with the
registrants
|
|
Appointed
|
|
|
|
|
|
Mark P. OFlynn,
Age 56 (1,5)
|
|
|
Controller
|
|
February 18, 2002
|
Controller of WGL Holdings,
Inc.
|
|
February 18, 2002
|
|
|
|
Douglas V. Pope,
Age 61 (1)
|
|
|
Secretary of WGL Holdings,
Inc.
|
|
January 13, 2000
|
Secretary
|
|
July 25, 1979
|
|
|
|
Roberta W. Sims,
Age 52
|
|
|
Vice PresidentCorporate
Relations and Communications
|
|
January 31, 1996
|
|
|
|
Douglas A. Staebler,
Age 46 (6)
|
|
|
Vice PresidentEngineering
and Construction
|
|
October 31, 2006
|
Division HeadEngineering
|
|
July 25, 2005
|
|
|
|
William Zeigler, Jr.,
Age 61 (7)
|
|
|
Vice PresidentHuman
Resources and Organizational Development
|
|
February 1, 2004
|
Division HeadOrganizational
Development
|
|
February 10, 2003
|
|
|
|
|
(1)
|
Executive Officer of both WGL
Holdings, Inc. and Washington Gas Light Company.
|
|
(2)
|
Mr. Ammann was previously
employed by Southern Connecticut Gas Company and Connecticut
Natural Gas Corporation, subsidiaries of Energy East
Corporation, where he served as Senior Vice President, Finance
and Administration. Prior to working for Southern Connecticut
Gas Company, Mr. Ammann held various audit and consulting
positions for Deloitte & Touche in
Washington, D.C. and Detroit, Michigan.
|
|
(3)
|
Mr. Chandra was previously
employed by Cambridge Strategy Group, LLC where he served as
Managing Director. Prior to working for Cambridge Strategy
Group, LLC, Mr. Chandra was the President & CEO of
SmartEnergy, Inc.
|
|
(4)
|
Ms. Foley was previously
employed by Nstar Electric and Gas where she held various
positions in customer service operations, financial controls and
auditing, project management, and regulatory matters.
|
|
(5)
|
Mr. OFlynn has more
than 30 years of experience in various finance positions
with natural gas and electric utilities. He has previous
experience as a chief financial officer, controller and
treasurer of utility companies that were SEC
registrants.
|
|
(6)
|
Mr. Staebler was previously
employed by NUI CorporationElizabethtown Gas where he held
various positions in engineering, operations and construction
and maintenance.
|
|
(7)
|
Mr. Zeigler was previously
employed by Ernst & Young LLP (E&Y) where he served
as National Director of Leadership and Organizational Change.
Prior to joining E&Y, Mr. Zeigler was Senior Director,
Organization Development and Training with Praxair, Inc. of
Danbury, Connecticut.
|
33
WGL
Holdings, Inc.
Part II
Item 5. Market for Registrants Common Equity,
Related
Stockholder Matters and Issuer Purchases of Equity Securities
ITEM 5. MARKET
FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES
At October 31, 2006, WGL Holdings had 14,951 common
shareholders of record. During fiscal years 2006 and 2005, WGL
Holdings common stock was listed for trading on the New
York Stock Exchange and was shown as WGL Hold or
WGL Hldgs in newspapers. We did not purchase any of
our outstanding common stock during fiscal years 2006 and 2005.
The table below shows quarterly price ranges and quarterly
dividends paid for fiscal years ended September 30, 2006
and 2005.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock Price Range and Dividends Paid
|
|
|
|
|
|
|
|
|
|
Dividends Paid
|
|
|
Dividend
|
|
|
|
High
|
|
|
Low
|
|
|
Per Share
|
|
|
Payment Date
|
Fiscal Year 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fourth quarter
|
|
|
$
|
31.82
|
|
|
|
$
|
28.44
|
|
|
|
$
|
0.3375
|
|
|
|
|
08/1/06
|
|
Third quarter
|
|
|
|
30.74
|
|
|
|
|
27.04
|
|
|
|
|
0.3375
|
|
|
|
|
05/1/06
|
|
Second quarter
|
|
|
|
31.49
|
|
|
|
|
29.59
|
|
|
|
|
0.3325
|
|
|
|
|
02/1/06
|
|
First quarter
|
|
|
|
32.88
|
|
|
|
|
28.86
|
|
|
|
|
0.3325
|
|
|
|
|
11/1/05
|
|
Fiscal Year 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fourth quarter
|
|
|
$
|
34.79
|
|
|
|
$
|
31.39
|
|
|
|
$
|
0.3325
|
|
|
|
|
08/1/05
|
|
Third quarter
|
|
|
|
33.96
|
|
|
|
|
29.66
|
|
|
|
|
0.3325
|
|
|
|
|
05/1/05
|
|
Second quarter
|
|
|
|
31.97
|
|
|
|
|
28.85
|
|
|
|
|
0.3250
|
|
|
|
|
02/1/05
|
|
First quarter
|
|
|
|
31.43
|
|
|
|
|
27.71
|
|
|
|
|
0.3250
|
|
|
|
|
11/1/04
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
34
WGL
Holdings, Inc.
Washington Gas Light Company
Part II
Item 6. Selected Financial Data
ITEM 6. SELECTED
FINANCIAL
DATA(a)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands, except per share data)
|
|
Years Ended September 30,
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
2002
|
|
|
|
|
SUMMARY OF EARNINGS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Utility
|
|
$
|
1,622,510
|
|
|
$
|
1,379,390
|
|
|
$
|
1,267,948
|
|
|
$
|
1,301,057
|
|
|
$
|
925,131
|
|
Non-utility
|
|
|
1,015,373
|
|
|
|
783,953
|
|
|
|
798,495
|
|
|
|
742,508
|
|
|
|
636,859
|
|
|
|
Total operating revenues
|
|
$
|
2,637,883
|
|
|
$
|
2,163,343
|
|
|
$
|
2,066,443
|
|
|
$
|
2,043,565
|
|
|
$
|
1,561,990
|
|
|
|
Income from continuing operations
|
|
$
|
94,694
|
|
|
$
|
106,072
|
|
|
$
|
99,595
|
|
|
$
|
114,463
|
|
|
$
|
37,183
|
|
Net income (applicable to common
stock)
|
|
$
|
87,578
|
|
|
$
|
103,493
|
|
|
$
|
96,637
|
|
|
$
|
112,342
|
|
|
$
|
39,121
|
|
Earnings per average common share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
$
|
1.94
|
|
|
$
|
2.18
|
|
|
$
|
2.05
|
|
|
$
|
2.36
|
|
|
$
|
0.77
|
|
Net income (applicable to common
stock)
|
|
$
|
1.80
|
|
|
$
|
2.13
|
|
|
$
|
1.99
|
|
|
$
|
2.31
|
|
|
$
|
0.81
|
|
Diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
$
|
1.94
|
|
|
$
|
2.16
|
|
|
$
|
2.04
|
|
|
$
|
2.35
|
|
|
$
|
0.76
|
|
Net income (applicable to common
stock)
|
|
$
|
1.79
|
|
|
$
|
2.11
|
|
|
$
|
1.98
|
|
|
$
|
2.30
|
|
|
$
|
0.80
|
|
CAPITALIZATIONYEAR-END
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common shareholders equity
|
|
$
|
921,807
|
|
|
$
|
893,992
|
|
|
$
|
853,424
|
|
|
$
|
818,218
|
|
|
$
|
766,403
|
|
Washington Gas Light Company
Preferred stock
|
|
|
28,173
|
|
|
|
28,173
|
|
|
|
28,173
|
|
|
|
28,173
|
|
|
|
28,173
|
|
Long-term debt, excluding current
maturities
|
|
|
576,139
|
|
|
|
584,150
|
|
|
|
590,156
|
|
|
|
636,614
|
|
|
|
667,852
|
|
|
|
Total capitalization
|
|
$
|
1,526,119
|
|
|
$
|
1,506,315
|
|
|
$
|
1,471,753
|
|
|
$
|
1,483,005
|
|
|
$
|
1,462,428
|
|
|
|
OTHER FINANCIAL DATA
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assetsyear-end
|
|
$
|
2,791,406
|
|
|
$
|
2,601,081
|
|
|
$
|
2,506,254
|
|
|
$
|
2,436,680
|
|
|
$
|
2,340,715
|
|
Property, plant and
equipment-netyear-end
|
|
$
|
2,067,895
|
|
|
$
|
1,969,016
|
|
|
$
|
1,914,420
|
|
|
$
|
1,873,446
|
|
|
$
|
1,830,538
|
|
Capital expenditures
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrual
basis(b)
|
|
$
|
161,496
|
|
|
$
|
124,014
|
|
|
$
|
113,285
|
|
|
$
|
129,011
|
|
|
$
|
161,970
|
|
Adjustments for non-cash items
|
|
|
(1,739
|
)
|
|
|
(11,246
|
)
|
|
|
(4,897
|
)
|
|
|
462
|
|
|
|
1,217
|
|
|
|
Cash basis
|
|
$
|
159,757
|
|
|
$
|
112,768
|
|
|
$
|
108,388
|
|
|
$
|
129,473
|
|
|
$
|
163,187
|
|
|
|
Long-term obligationsyear-end
|
|
$
|
576,139
|
|
|
$
|
584,150
|
|
|
$
|
590,156
|
|
|
$
|
636,614
|
|
|
$
|
667,852
|
|
COMMON STOCK DATA
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Annualized dividends per share
|
|
$
|
1.35
|
|
|
$
|
1.33
|
|
|
$
|
1.30
|
|
|
$
|
1.28
|
|
|
$
|
1.27
|
|
Dividends declared per share
|
|
$
|
1.3450
|
|
|
$
|
1.3225
|
|
|
$
|
1.2950
|
|
|
$
|
1.2775
|
|
|
$
|
1.2675
|
|
Closing price
|
|
$
|
31.34
|
|
|
$
|
32.13
|
|
|
$
|
28.26
|
|
|
$
|
27.58
|
|
|
$
|
23.91
|
|
Book value per shareyear-end
|
|
$
|
18.86
|
|
|
$
|
18.36
|
|
|
$
|
17.54
|
|
|
$
|
16.83
|
|
|
$
|
15.78
|
|
Return on average common equity
|
|
|
9.6
|
%
|
|
|
11.8
|
%
|
|
|
11.6
|
%
|
|
|
14.2
|
%
|
|
|
5.0
|
%
|
Dividend yield on book value
|
|
|
7.2
|
%
|
|
|
7.2
|
%
|
|
|
7.4
|
%
|
|
|
7.6
|
%
|
|
|
8.0
|
%
|
Dividend payout ratio
|
|
|
74.7
|
%
|
|
|
62.1
|
%
|
|
|
65.1
|
%
|
|
|
55.3
|
%
|
|
|
156.5
|
%
|
Shares outstandingyear-end
(thousands)
|
|
|
48,878
|
|
|
|
48,704
|
|
|
|
48,653
|
|
|
|
48,612
|
|
|
|
48,565
|
|
UTILITY GAS SALES AND DELIVERIES
(thousands of
therms)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gas sold and delivered
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential firm
|
|
|
593,594
|
|
|
|
625,251
|
|
|
|
629,728
|
|
|
|
648,809
|
|
|
|
509,243
|
|
Commercial and industrial
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Firm
|
|
|
213,997
|
|
|
|
222,587
|
|
|
|
226,407
|
|
|
|
239,628
|
|
|
|
193,917
|
|
Interruptible
|
|
|
6,185
|
|
|
|
7,809
|
|
|
|
7,626
|
|
|
|
12,163
|
|
|
|
10,646
|
|
|
|
Total gas sold and delivered
|
|
|
813,776
|
|
|
|
855,647
|
|
|
|
863,761
|
|
|
|
900,600
|
|
|
|
713,806
|
|
|
|
Gas delivered for others
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Firm
|
|
|
403,812
|
|
|
|
434,099
|
|
|
|
454,549
|
|
|
|
496,889
|
|
|
|
346,910
|
|
Interruptible
|
|
|
251,003
|
|
|
|
279,924
|
|
|
|
268,483
|
|
|
|
257,799
|
|
|
|
277,367
|
|
Electric generation
|
|
|
108,315
|
|
|
|
73,874
|
|
|
|
41,052
|
|
|
|
67,245
|
|
|
|
169,210
|
|
|
|
Total gas delivered for others
|
|
|
763,130
|
|
|
|
787,897
|
|
|
|
764,084
|
|
|
|
821,933
|
|
|
|
793,487
|
|
|
|
Total utility gas sales and
deliveries
|
|
|
1,576,906
|
|
|
|
1,643,544
|
|
|
|
1,627,845
|
|
|
|
1,722,533
|
|
|
|
1,507,293
|
|
|
|
OTHER STATISTICS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Active customer metersyear-end
|
|
|
1,031,916
|
|
|
|
1,012,105
|
|
|
|
990,062
|
|
|
|
959,922
|
|
|
|
939,291
|
|
New customer meters added
|
|
|
24,693
|
|
|
|
26,682
|
|
|
|
29,438
|
|
|
|
26,167
|
|
|
|
31,205
|
|
Degree daysactual
|
|
|
3,710
|
|
|
|
4,023
|
|
|
|
4,024
|
|
|
|
4,550
|
|
|
|
3,304
|
|
Weather percent colder (warmer)
than normal
|
|
|
(2.5
|
)%
|
|
|
5.9
|
%
|
|
|
6.1
|
%
|
|
|
19.8
|
%
|
|
|
(13.4
|
)%
|
|
|
|
|
(a)
|
On September 29, 2006, we
sold all of the outstanding shares of common stock of ACI,
previously reported as part of our commercial HVAC business
segment. ACI has been reported as a discontinued operation of
WGL Holdings and, accordingly, its operating results have been
presented separately from our continuing operations for all
years presented.
|
(b)
|
Excludes Allowance for Funds
Used During Construction. Includes capital expenditures accrued
and capital expenditure adjustments recorded in the fiscal
year.
|
35
WGL
Holdings, Inc.
Washington Gas Light Company
Part II
Item 7. Managements Discussion and Analysis of
Financial Condition and Results of Operations
ITEM 7. 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. It also includes managements
analysis of past financial results and potential factors that
may affect future results, potential future risks and approaches
that may be used to manage them. Except where the content
clearly indicates otherwise, WGL Holdings,
we, us or our refers to the
holding company or the consolidated entity of WGL Holdings and
all of its subsidiaries.
Managements Discussion is divided into the following two
major sections:
|
|
|
|
|
WGL HoldingsThis section describes the financial
condition and results of operations of WGL Holdings and its
subsidiaries on a consolidated basis. It includes discussions of
our regulated and unregulated operations. The majority of WGL
Holdings operations are derived from the results of
Washington Gas Light Company (Washington Gas) and, to a much
lesser extent, 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 of the major sections of Managements
DiscussionWGL Holdings and Washington Gasshould be
read to obtain an understanding of our operations and financial
performance. Managements Discussion also should be read in
conjunction with the respective companys financial
statements and the combined Notes to Consolidated Financial
Statements.
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. The earnings per share of
any segment does not represent a direct legal interest in the
assets and liabilities allocated to any one segment, but rather
represents a direct equity interest in our assets and
liabilities as a whole.
36
WGL
Holdings, Inc.
Washington Gas Light Company
Part II
Item 7. Managements Discussion and Analysis of
Financial Condition and Results of Operations (continued)
Managements
Discussion Table of Contents
|
|
|
|
|
|
|
Page
|
|
|
|
|
37
|
|
|
|
|
38
|
|
|
|
|
43
|
|
|
|
|
46
|
|
|
|
|
|
|
|
|
|
48
|
|
|
|
|
54
|
|
|
|
|
61
|
|
|
|
|
62
|
|
|
|
|
63
|
|
|
|
|
|
|
|
|
|
67
|
|
|
|
|
71
|
|
|
|
|
71
|
|
|
|
|
72
|
|
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
Washington, D.C. and the surrounding metropolitan areas in
Maryland and Virginia. Our core subsidiary, Washington Gas,
engages in the delivery and sale of natural gas that is
regulated by regulatory commissions in the District of Columbia,
Maryland and Virginia. Through the wholly owned, unregulated
subsidiaries of Washington Gas Resources Corporation (Washington
Gas Resources), we also offer energy-related products and
services. In response to changes in federal and state
regulation, we offer competitively priced natural gas and
electricity to customers through Washington Gas Energy Services
(WGEServices), our unregulated retail energy-marketing
subsidiary.
WGL Holdings has three operating segments that are described
below:
|
|
|
|
|
regulated utility;
|
|
|
|
retail energy-marketing and
|
|
|
|
commercial heating, ventilating and air conditioning (HVAC)
products and services.
|
Transactions not specifically identifiable in one of the above
three segments are accumulated and reported in the category
Other Activities.
Regulated Utility. With approximately
92 percent of our consolidated total assets, the regulated
utility segment consists of Washington Gas and Hampshire Gas
Company (Hampshire). Washington Gas, a wholly owned subsidiary
of WGL Holdings, delivers natural gas to retail customers in
accordance with tariffs approved by the regulatory commissions
that have jurisdiction over Washington Gas rates.
Washington Gas also sells natural gas to customers who have not
elected to purchase natural gas from unregulated third-party
marketers. Washington Gas does not earn a profit or incur a loss
when it sells the natural gas commodity because utility
customers are charged for the natural gas commodity at the same
cost that Washington Gas incurs.
Hampshire, a wholly owned subsidiary of WGL Holdings, operates
an underground natural gas storage facility that is regulated by
the Federal Energy Regulatory Commission (FERC). 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.
37
WGL
Holdings, Inc.
Washington Gas Light Company
Part II
Item 7. Managements Discussion and Analysis of
Financial Condition and Results of Operations (continued)
Retail Energy-Marketing. The retail
energy-marketing segment includes the operations of WGEServices,
a wholly owned subsidiary of Washington Gas Resources.
WGEServices competes with other unregulated third-party
marketers by selling natural gas and electricity directly to
residential, commercial and industrial customers in Maryland,
Virginia, Delaware and the District of Columbia. WGEServices
does not own or operate any natural gas or electric generation,
production, transmission or distribution assets. Rather, it buys
and resells natural gas and electricity with the objective of
earning a profit through competitively-priced contracts. These
commodities are delivered to retail customers through the assets
owned by regulated utilities such as Washington Gas or other
unaffiliated natural gas or electric utilities.
Commercial HVAC. The commercial HVAC
segment includes the operations of WGESystems, a wholly owned
subsidiary of Washington Gas Resources. WGESystems manages
design-build and renovation projects and provides maintenance
services to the commercial and government markets. WGESystems
focuses on retrofitting the mechanical, electrical and
energy-related systems of a large number of aging commercial and
government structures, primarily in the District of Columbia and
portions of Maryland and Virginia. On September 29, 2006,
Washington Gas Resources sold all of the outstanding shares of
common stock of its wholly owned subsidiary, American Combustion
Industries, Inc. (ACI) that was previously reported as part of
the commercial HVAC segment (refer to the section entitled
Discontinued Operations).
Refer to the Business section under Item 1 of this
report for a further discussion of our regulated utility and
non-utility business segments. For a further discussion of our
financial performance by operating segment, refer to
Note 17 of the Notes to Consolidated Financial Statements.
Key
Indicators of Financial Condition and Operating
Performance
We have determined that the following are key indicators for
monitoring our financial condition and operating performance:
Return on Average Common Equity. This
measure is calculated by dividing twelve months ended net income
(applicable to common stock) by average common
shareholders equity. For Washington Gas, we compare the
actual return on common equity with the return on common equity
that is allowed to be earned by regulators and the return on
equity that is necessary for us to compensate investors
sufficiently and be able to continue to attract capital.
Common Equity Ratio. This ratio is
calculated by dividing total common shareholders equity by
the sum of common shareholders equity, preferred stock and
long-term debt (including current maturities). Maintaining this
ratio in the mid-50 percent range affords us financial
flexibility and access to long-term capital at relatively low
costs. Refer to the section entitled Liquidity and
Capital ResourcesGeneral Factors Affecting Liquidity
for a discussion of our capital structure.
PRIMARY
FACTORS AFFECTING WGL HOLDINGS AND WASHINGTON GAS
The following is a summary discussion of the primary factors
that affect the operations
and/or
financial performance of our regulated and unregulated
businesses. Refer to the section entitled
Business under Item 1 of this report for
a more detailed discussion of these and other related factors
that affect the operations
and/or
financial performance of WGL Holdings and Washington Gas.
Weather
Conditions and Weather Patterns
Washington Gas operations are weather sensitive, with a
significant portion of its revenues derived from the delivery of
natural gas to residential and commercial heating customers
during the winter heating season. Generally, weather conditions
directly influence the volume of natural gas delivered by
Washington Gas. However, weather patterns may become erratic
during shoulder months within our fiscal year in
which Washington Gas is going into or coming out of the primary
portion of its winter heating season. During the shoulder months
within quarters ending December 31 (particularly in October
and November) and within quarters ending June 30
(particularly in April and May), customer heating usage may not
correlate highly with the level of recorded heating degree days
during those months when weather patterns experienced are not
consistently cold or warm.
Washington Gas rates are determined on the basis of
expected normal weather conditions. Prior to October 1,
2005, Washington Gas did not have a ratemaking provision in any
of its jurisdictions that allowed for revenues to be adjusted
for the difference between actual weather conditions in a
particular year and the expected normal weather conditions that
are used to establish rates. Consequently, deviations in weather
from normal levels affected Washington Gas financial
performance. Washington
38
WGL
Holdings, Inc.
Washington Gas Light Company
Part II
Item 7. Managements Discussion and Analysis of
Financial Condition and Results of Operations (continued)
Gas managed weather risk for all jurisdictions with a weather
insurance policy designed to protect against 50 percent of
the negative financial effects of
warmer-than-normal
weather. That policy expired on September 30, 2005.
Commencing in fiscal year 2006, Washington Gas implemented new
weather protection strategies designed to provide full
protection from the negative financial effects of
warmer-than-normal
weather. Effective October 1, 2005, Washington Gas
implemented a Revenue Normalization Adjustment (RNA) billing
mechanism in Maryland. Approved by the Public Service Commission
of Maryland (PSC of MD), the RNA is a mechanism 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
certain other factors such as customer conservation. Deliveries
to Maryland customers represent approximately 40 percent of
therms delivered by Washington Gas. As Washington Gas currently
has no similar ratemaking provisions in the District of Columbia
or Virginia, the utility is utilizing a new three-year weather
insurance policy in the District of Columbia that became
effective October 1, 2005, and weather derivatives in
Virginia. Refer to the section entitled Market
RiskWeather Risk for a further discussion of our
weather protection strategies.
While the use of weather insurance and a weather derivative in
the District of Columbia and Virginia, respectively, were
effective in providing full protection from the effects of
warmer-than-normal
weather in those jurisdictions during fiscal year 2006, our
intent is to obtain this protection through ratemaking
provisions in these two jurisdictions similar to the RNA that
was implemented in Maryland. On September 15, 2006,
Washington Gas filed an application with the State Corporation
Commission of Virginia (SCC of VA) requesting, among other
things, to implement a tariff provision for an RNA billing
mechanism in Virginia. A final order by the SCC of VA on this
and all other requests included in the application is pending.
The financial results of our energy-marketing subsidiary,
WGEServices, also are affected by deviations in weather from
normal levels. Since WGEServices sells both natural gas and
electricity, WGEServices financial results may fluctuate
due to deviations in weather from fiscal year to fiscal year
during the winter heating and summer cooling seasons.
Regulatory
Environment and Regulatory Decisions
Washington Gas is regulated by the Public Service Commission of
the District of Columbia (PSC of DC), the PSC of MD and the SCC
of VA. Hampshire is regulated by the FERC. These regulatory
commissions set the rates in their respective jurisdictions that
Washington Gas can charge customers for its rate-regulated
services. Changes in these rates as ordered by regulatory
commissions affect Washington Gas financial performance.
Washington Gas expects that regulatory commissions will continue
to set the prices and terms for delivery service that give it an
opportunity to earn a just and reasonable rate of return on the
capital invested in its distribution system and to recover
reasonable operating expenses.
Gas
Supply and Pipeline Transportation and Storage
Capacity
Natural Gas Supply and Capacity
Requirements. Washington Gas is responsible
for acquiring both sufficient natural gas supplies and
interstate pipeline and storage capacity to meet customer
requirements. As such, Washington Gas must contract for reliable
and adequate delivery capacity to its distribution system, while
considering the dynamics of the interstate pipeline and storage
capacity market, its own on-system natural gas peaking
facilities, as well as the characteristics of its customer base.
Depleting pipeline and storage capacity is a business issue for
local distribution companies, such as Washington Gas. Washington
Gas, whose customer base has grown at an annual rate of
approximately two percent, must manage this issue. This rate of
growth is expected to continue. To help maintain the adequacy of
pipeline and storage capacity for its growing customer base,
Washington Gas has contracted with various interstate pipeline
and storage companies for the acquisition of additional existing
capacity, as well as the construction of new capacity, for firm
transportation and storage services to Washington Gas. These
capacity expansion projects are expected to be placed into
service during fiscal years
2007-2010.
Washington Gas will continue to monitor other opportunities to
acquire or participate in obtaining additional pipeline and
storage capacity that will improve or maintain the high level of
service expected by its customer base.
Gulf Coast Natural Gas Supply
Issues. During the late summer of 2005,
immediately prior to the
2005-2006
winter heating season, the Gulf Coast region experienced a major
disruption of natural gas production and processing due to
hurricanes Katrina, Rita and Wilma. These natural gas production
and processing disruptions resulted in a significant reduction
of natural gas available to be delivered from the Gulf Coast
region. Given the recovery of available supplies from the Gulf
Coast region following the hurricanes,
39
WGL
Holdings, Inc.
Washington Gas Light Company
Part II
Item 7. Managements Discussion and Analysis of
Financial Condition and Results of Operations (continued)
coupled with the availability of natural gas supply from
alternative production areas, Washington Gas was able to meet
its customers daily demand for natural gas during the
2005-2006
winter heating season. Storage gas inventory balances were
maintained at adequate operational levels throughout the heating
season. Since hurricanes Katrina, Rita and Wilma, Washington Gas
has modified the composition of its natural gas portfolio to
include a significantly higher percentage of natural gas supply
that is produced from sources outside of the Gulf Coast region.
The diversification of its natural gas portfolio will help
Washington Gas to meet customer demand despite unforeseen future
supply issues that may arise similar to those resulting from the
weather events in the Gulf Coast region.
WGEServices purchases a portion of its natural gas supply from
the Gulf Coast region. Purchase commitments from certain of
WGEServices Gulf Coast-based natural gas suppliers were
interrupted by the supply shortage in the Gulf Coast region in
the immediate aftermath of the hurricanes during the fall 2005
season. During the
2005-2006
winter heating season, all of WGEServices contracted
natural gas supplies from the Gulf Coast region flowed as
contracted, and WGEServices met its customers daily demand
for natural gas and achieved its required storage inventory
balances. In meeting its future natural gas supply needs,
WGEServices expects to continue to rely on a diverse set of
supply sources, including city-gate delivered supplies, natural
gas in storage and liquefied natural gas (LNG) from the Dominion
Cove Point (Dominion or Cove Point) LNG terminal.
Volatility of Natural Gas Prices. As a
result of market concerns about the sufficiency of the supply of
natural gas, the hurricanes in the Gulf Coast region and other
factors during the
2005-2006
winter heating season, the price of the natural gas commodity
paid by Washington Gas customers rose sharply from levels
experienced during the prior years winter heating season.
In fiscal year 2006, higher natural gas prices increased
customers bills dramatically. Under its regulated gas cost
recovery mechanisms, Washington Gas records cost of gas expense
equal to the cost of gas recovered in revenues from customers.
An increase in the cost of gas due to an increase in the
purchase price of the natural gas commodity generally has no
direct effect on Washington Gas net income. However, its
net income was reduced in fiscal year 2006 primarily due to
higher expenses for uncollectible customer accounts, as well as
lower natural gas consumption caused by customer conservation in
Virginia and the District of Columbia where these adverse
effects on earnings are not addressed through regulatory
mechanisms. The RNA and other regulatory mechanisms in Maryland
neutralize these effects on Washington Gas revenue and net
income. Increases in the price of natural gas also can affect
our operating cash flows, as well as the competitiveness of
natural gas as an energy source.
WGEServices also may be negatively affected by the indirect
effects of significant increases in the wholesale price of
natural gas such as those that resulted from the Gulf Coast
natural gas supply shortage. WGEServices risk management
policies and procedures are designed to minimize the risk that
WGEServices natural gas purchases and the related sales
commitments do not closely match (refer to the section entitled
Market Risk for a further discussion of
Washington Gas and WGEServices mitigation of
commodity price risk). Higher natural gas prices, however, may
increase the costs associated with uncollectible accounts,
borrowing costs, certain fees paid to public service commissions
and other costs. To the extent that these costs cannot be
recovered from retail customers in higher rates due to
competitive factors, WGEServices operating results would
be negatively affected.
Changes in Natural Gas
Consumption. Natural gas supply requirements
may be affected by changes in natural gas consumption by
customers. Natural gas usage per customer may decline as
customers change their consumption patterns in response to:
(i) more volatile and higher natural gas prices, as
discussed above, and (ii) customers replacement of
older, less efficient gas appliances with more efficient
appliances. In each jurisdiction in which Washington Gas
operates, changes in customer usage profiles have been reflected
in recent rate case proceedings where rates have been adjusted
to reflect current customer usage. In both the District of
Columbia and Virginia jurisdictions, changes in customer usage
by existing customers that occur subsequent to these recent rate
case proceedings will have the effect of reducing revenues,
which is offset by the favorable effect of adding new customers.
Effective October 1, 2005, pursuant to an RNA mechanism
approved by the PSC of MD, changes in customer usage by existing
customers that occur subsequent to recent rate case proceedings
in the Maryland jurisdiction generally will not reduce revenues,
but rather will have the effect of stabilizing the level of
delivery charge revenues received from customers on a monthly
basis. On September 15, 2006, Washington Gas requested
approval from the SCC of VA of a similar RNA mechanism to be put
in place in the Virginia jurisdiction that would also stabilize
rather than reduce revenues (refer to the section entitled
Jurisdictional Rates and Regulatory Matters
under Item 1 of this report).
40
WGL
Holdings, Inc.
Washington Gas Light Company
Part II
Item 7. Managements Discussion and Analysis of
Financial Condition and Results of Operations (continued)
Electricity
Supply
Customer choice programs for electric customers are available in
each jurisdiction in which WGEServices operates. Similar to the
natural gas industry, electric customers participating in these
programs may choose either to continue purchasing bundled
electricity service from their local electric distribution
utility or to purchase electricity from an unregulated
third-party marketer.
Electric customers grew 75 percent in fiscal year 2006 when
compared to the end of the prior fiscal year. This customer
growth was principally the result of new competitive
opportunities that emerged near the end of the third quarter of
fiscal year 2006 due to sharp increases in competing rates
offered by electric utilities in Maryland and Delaware. In other
locations, however, future opportunities to add new electric
customers may continue to be limited by the relationship between
electric Standard Offer Service (SOS) rates offered by local
electric utilities and market prices for electricity. Certain
SOS rates in WGEServices market area continue to be below
current market prices. In certain cases, electric utilities have
entered into wholesale contracts to supply their SOS customers,
prior to an increase in fuel prices required to generate
electricity. In other cases, electric utilities continue to
provide service under previously established rates that are
capped. Refer to the section entitled Market
RiskPrice Risk Related to the Retail Energy-Marketing
Segment for a further discussion of WGEServices
electricity supply.
Maintaining
the Safety and Reliability of the Natural Gas Distribution
System
Maintaining and improving the public safety and reliability of
Washington Gas natural gas distribution system is our
highest priority that benefits both customers and investors
through lower costs and improved customer service. Washington
Gas continually refines its safety practices, with a particular
focus on design, construction, maintenance, operation,
replacement, inspection and monitoring practices. Operational
issues affecting the public safety and reliability of Washington
Gas natural gas distribution system that are not addressed
within a timely and adequate manner could significantly and
adversely affect our future earnings and cash flows, as well as
result in a loss of customer confidence. Washington Gas is
responding to its operational issues in a timely and adequate
manner, and has the financial resources necessary to address
these issues due to its current strong cash position, and the
financing options it has available. Refer to the section
entitled Contractual Obligations, Off-Balance Sheet
Arrangements and Other Commercial CommitmentsOperating
Issues in Prince Georges County, Maryland for a
discussion of an operational issue.
Competitive
Environment
Washington Gas. Washington Gas faces
competition based on customers preference for natural gas
compared to other energy products, and the comparative prices of
those products. The most significant product competition occurs
between natural gas and electricity in the residential market.
Changes in the competitive position of natural gas relative to
electricity and other energy products have the potential of
causing a decline in the number of natural gas customers added
in future years. At the present time, Washington Gas has seen no
significant evidence that changes in the competitive position of
natural gas has contributed to such a decline.
The residential market generates a significant portion of
Washington Gas net income. In its service territory,
Washington Gas continues to attract the majority of the new
residential construction market. Consumers continuing
preference for natural gas allows Washington Gas to maintain a
strong market presence.
In each of the jurisdictions served by Washington Gas,
regulators and utilities have implemented customer choice
programs. These programs allow customers the choice of
purchasing their natural gas
and/or
electric commodity from unregulated third-party marketers,
rather than purchasing these commodities as part of a bundled
service from the local utility. When customers choose to
purchase their natural gas commodity from unregulated
third-party marketers, there is no effect on Washington
Gas net income since Washington Gas charges its customers
the cost of gas without any
mark-up.
Notwithstanding the regulatory mechanisms that protect
Washington Gas from the adverse impact of customer choice
programs, Washington Gas continues to be obligated to purchase
commodity, transportation, storage and peaking services from
interstate pipeline companies under long-term capacity contracts
that were entered into to support Washington Gas expected
merchant function requirements at the time these contracts were
executed. In the District of Columbia and Maryland, unregulated
third-party marketers may utilize their own capacity resources,
rather than those of Washington Gas, to serve new customers who
shift from the utility to third-party marketers in response to
competitive offers or regulatory incentives. Large shifts in
customers to these
41
WGL
Holdings, Inc.
Washington Gas Light Company
Part II
Item 7. Managements Discussion and Analysis of
Financial Condition and Results of Operations (continued)
third-party marketers could potentially impact the cost of the
natural gas commodity billed to the remaining sales customers of
Washington Gas. To minimize the cost risk associated with these
obligations, Washington Gas executes a strategy that focuses on:
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managing efficiently its supply portfolio and the terms of its
long-term contracts in order to balance its sales, delivery and
supply obligations;
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maintaining cost recovery mechanisms in all jurisdictions
related to the potentially stranded costs of the natural gas
commodity;
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recovering from unregulated third-party marketers:
(i) 100 percent of the cost of the storage and
peak shaving capacity that Washington Gas dedicates to serving
unbundled service customers who purchase their natural gas from
a third-party marketer and (ii) a portion of
Washington Gas costs of transportation capacity and
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maximizing the value of contractual assets by entering into
contracts with unregulated wholesale third-party marketers that
make use of the utilitys firm storage and transportation
rights to meet its city gate delivery needs, and to make
off-system sales when such storage and transportation rights are
under-utilized. Washington Gas also self-manages a small portion
of these type assets.
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WGEServices. Our unregulated retail
energy-marketing subsidiary, WGEServices, competes with other
unregulated third-party marketers to sell the natural gas and
electric commodity to customers. Marketers of these commodities
compete largely on price, and gross margins (representing
revenues less costs of energy) are relatively small. WGEServices
is exposed to credit and market risks associated with both its
natural gas and electric supply (refer to the sections entitled
Credit Risk and Market Risk for a
further discussion of these risk exposures and WGEServices
management of them).
Environmental
Matters
We are subject to federal, state and local laws and regulations
related to environmental matters. These evolving laws and
regulations may require expenditures over a long timeframe to
control environmental effects. It is our position that, at this
time, the appropriate remediation is being undertaken at all the
relevant sites. Refer to Note 14 of the Notes to
Consolidated Financial Statements for a further discussion of
these matters.
Industry
Consolidation
In recent years, the energy industry has seen a number of
consolidations, combinations, disaggregations and strategic
alliances. Consolidation will present combining entities with
the challenges of remaining focused on the customer and
integrating different organizations. Others in the energy
industry are discontinuing operations in certain portions of the
energy industry or divesting portions of their business and
facilities.
From time to time, we perform studies and, in some cases, hold
discussions regarding utility and energy-related investments and
strategic transactions with other companies. The ultimate effect
on us of any such investments and transactions that may occur
cannot be determined at this time.
Economic
Conditions and Interest Rates
We operate in one of the fastest growing regions in the nation.
The continued prosperity of this region, supported by a
relatively low interest-rate environment for new housing, has
allowed Washington Gas to expand its regulated delivery service
customer base at a rate of growth almost twice the national
industry average during the past five years. In addition, this
economy has provided a robust market for our subsidiaries to
market natural gas, electricity and other energy-related
products and services. A downturn in the economy of the region
in which we operate, or a significant increase in interest
rates, might adversely affect our ability to grow Washington
Gas customer base and other businesses at the same rate
they have grown in the past.
We have been operating in a relatively low interest-rate
environment in the recent past as it relates to long-term debt
financings. Short-term interest rates had been relatively low in
relation to historical levels. However, actions and
communications by the Federal Reserve in the past year have
resulted in increases in short-term interest rates. A rise in
interest rates without the timely recognition of the higher cost
of debt in the utility rates charged by Washington Gas to its
customers would adversely affect future earnings. A rise in
short-term interest rates without the higher cost of debt being
reflected in the prices charged to customers would negatively
affect the
42
WGL
Holdings, Inc.
Washington Gas Light Company
Part II
Item 7. Managements Discussion and Analysis of
Financial Condition and Results of Operations (continued)
results of operations of our retail energy-marketing segment
which depends on short-term debt to finance its accounts
receivable and storage gas inventories.
Inflation/Deflation
From time to time, Washington Gas seeks approval for rate
increases from regulatory commissions to help it manage the
effects of inflation on its capital investment and returns. The
most significant impact of inflation is on Washington Gas
replacement cost of plant and equipment. While the regulatory
commissions having jurisdiction over Washington Gas retail
rates allow depreciation only on the basis of historical cost to
be recovered in rates, we anticipate that Washington Gas should
be allowed to recover the increased costs of its investment and
earn a return thereon after replacement of the facilities occurs.
To the extent Washington Gas experiences a sustained
deflationary economic environment, actual returns on invested
capital could rise and exceed returns allowed by regulators in
previous regulatory proceedings. Such circumstances could prompt
the initiation of a regulatory review to reduce Washington
Gas revenues under its current regulatory framework.
Labor
Contracts, Including Labor and Benefit Costs
Washington Gas has five labor contracts with bargaining units
represented by three labor unions. Teamsters Local Union
No. 96 (Local 96) is a local union affiliated with the
International Brotherhood of Teamsters. Local 96 has a
three-year labor contract with Washington Gas that began on
June 1, 2004. The contract covers approximately 700
employees. In January 2006, the Office and Professional
Employees International Union Local No. 2 (A.F.L.-C.I.O.)
ratified a thirty-nine month labor contract with Washington Gas
that was effective on January 1, 2006. The contract covers
approximately 290 members, and replaced a previous collective
bargaining agreement that was scheduled to expire on
March 31, 2006. Local 96, representing union-eligible
employees in the Shenandoah Gas division of Washington Gas, has
a three-year labor contract with Washington Gas that began on
August 1, 2004. This contract covers 23 employees.
Additionally, Washington Gas has two three-year labor contracts
with the International Brotherhood of Electrical Workers Local
1900 that, together, cover approximately 32 employees.
Washington Gas is subject to the terms of its labor contracts
with respect to operating practices and compensation matters
dealing with employees represented by the various bargaining
units described above.
Changes
in Accounting Principles
We cannot predict the effect of potential future changes in
accounting regulations or practices that have yet to be issued
on our operating results and financial condition. New accounting
standards could be issued by the Financial Accounting Standards
Board (FASB) or the Securities and Exchange Commission (SEC)
that could change the way we record and recognize revenues,
expenses, assets and liabilities.
CRITICAL
ACCOUNTING POLICIES
Preparation of financial statements and related disclosures in
compliance with Generally Accepted Accounting Principles in the
United States of America (GAAP) requires the selection and the
application of appropriate technical accounting rules 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-utility business segments.
We have identified the following critical accounting policies
discussed below that require our judgment and estimation, where
the resulting estimates have a material effect on the
consolidated financial statements.
Accounting
for Unbilled Revenue and Cost of Gas Recognition
For regulated deliveries of natural gas, Washington Gas reads
meters and bills customers on a cycle basis. Washington Gas
accrues revenues for gas that has been delivered but not yet
billed at the end of an accounting period. In connection with
making this accrual, Washington Gas must estimate the amount of
gas that cannot be accounted for on its delivery system and must
estimate the amount of the unbilled revenue by jurisdiction and
customer class. Such revenues are recognized as unbilled
revenues that are adjusted in subsequent periods when actual
meter readings are taken. A similar computation is made for
WGEServices.
43
WGL
Holdings, Inc.
Washington Gas Light Company
Part II
Item 7. Managements Discussion and Analysis of
Financial Condition and Results of Operations (continued)
Washington Gas jurisdictional tariffs contain mechanisms
that provide for the recovery of the invoice cost of gas
applicable to firm customers. Under these mechanisms, Washington
Gas periodically adjusts its firm customers rates to
reflect increases and decreases in the invoice cost of gas.
Annually, Washington Gas reconciles the difference between the
total gas costs collected from firm customers and the invoice
cost of gas paid to suppliers. Washington Gas defers any excess
or deficiency and either recovers it from, or refunds it to,
customers over a subsequent twelve-month period.
Accounting
for Regulatory OperationsRegulatory Assets and
Liabilities
A significant portion of our business is subject to regulation
by independent government regulators. As the regulated utility
industry continues to address competitive market issues, the
cost-of-service
regulation used to compensate Washington Gas for the cost of its
regulated operations will continue to evolve. Non-traditional
ratemaking initiatives and market-based pricing of products and
services could have additional long-term financial implications
for us. We have relied on our projection of continued regulatory
oversight of our operations in order to validate the carrying
cost of Washington Gas investment in fixed assets.
Washington Gas accounts for its regulated operations in
accordance with Statement of Financial Accounting Standards
(SFAS) No. 71, Accounting for the Effects of Certain
Types of Regulation, which results in differences in the
application of GAAP between regulated and unregulated
businesses. SFAS No. 71 requires the recording of
regulatory assets and liabilities for certain transactions that
would have been treated as revenue or expense in unregulated
businesses. In certain circumstances, SFAS No. 71
allows entities whose rates are determined by third-party
regulators to defer costs as regulatory assets on
the balance sheet to the extent that the entity expects to
recover these costs in future rates. Similarly,
SFAS No. 71 requires that certain amounts be deferred
and recorded as regulatory liabilities to the extent Washington
Gas expects those amounts will be refunded to customers in
future rates. Future regulatory changes or changes in the
competitive environment could result in WGL Holdings and
Washington Gas discontinuing the application of
SFAS No. 71 for some of its business and require the
write-off of the portion of any regulatory asset or liability
that would be no longer probable of recovery or refund. In
effect, Washington Gas could be required to write off certain
regulatory assets and liabilities that had been deferred on the
balance sheets in prior periods, and charge or credit these
amounts to income at the time it determines that the provisions
of SFAS No. 71 no longer apply. If Washington Gas were
required to discontinue the application of SFAS No. 71
for any of its operations, it would record an extraordinary
non-cash charge or credit to income for the net book value of
its regulatory assets and liabilities. Other adjustments might
also be required.
Currently available facts support both the continued application
of SFAS No. 71 for our regulatory activities and the
conclusion that all of our regulatory assets and liabilities as
of September 30, 2006 and 2005 are recoverable or
refundable through the regulatory environment.
Accounting
for Income Taxes
We account for income taxes in accordance with
SFAS No. 109, Accounting for Income Taxes.
Under SFAS No. 109, we recognize deferred income taxes
for all temporary differences between the financial statement
and tax basis of assets and liabilities at currently enacted
income tax rates.
SFAS No. 109 also requires recognition of the
additional deferred income tax assets and liabilities for
temporary differences where regulators prohibit deferred income
tax treatment for ratemaking purposes of Washington Gas.
Regulatory assets or liabilities, corresponding to such
additional deferred tax assets or liabilities, may be recorded
to the extent recoverable from or payable to customers through
the ratemaking process. Amounts applicable to income taxes due
from and due to customers primarily represent differences
between the book and tax basis of net utility plant in service.
Accounting
for Contingencies
We account for contingent liabilities utilizing
SFAS No. 5, Accounting for Contingencies. By
their nature, the amount of the contingency and the timing of a
contingent event are subject to our judgment of such events and
our estimates of the amounts. Actual results related to
contingencies may be difficult to predict and could differ
significantly from the estimates included in reported earnings.
In fiscal years 2006 and 2005, we were involved with regulatory
contingencies with respect to rate cases in Virginia, and
various legal contingencies.
On September 15, 2006, Washington Gas filed an application
with the SCC of VA requesting, among other things, to increase
its annual utility net revenues in Virginia. Washington Gas
further requested that it be permitted to implement the newly
proposed
44
WGL
Holdings, Inc.
Washington Gas Light Company
Part II
Item 7. Managements Discussion and Analysis of
Financial Condition and Results of Operations (continued)
increase in revenues on an interim basis, subject to refund,
effective for services rendered on and after February 13,
2007. If Washington Gas puts the rate increase into effect on
and after February 13, 2007 prior to receiving a Final
Order of approval from the SCC of VA, then Washington Gas will
record, as an offset to the increased revenue, a provision for
rate refunds that will be derived based on our judgment of the
future outcome of this rate case.
In a Final Order issued by the SCC of VA on December 18,
2003, the SCC of VA ordered, among other things, that Washington
Gas perform and submit an annual earnings test to determine if
it had earned in excess of its allowed rate of return on common
equity for its Virginia operations. Any significant differences
between ours and the VA Staffs earnings test calculations
or methodology would have an effect on our operating results.
Washington Gas also is involved in matters with its local
regulatory commissions related to the recovery of certain costs,
including: (i) a proposed disallowance of certain
natural gas costs previously incurred by Washington Gas and
collected from Maryland customers and (ii) the
recovery of the costs of hexane (heavy hydrocarbons or
HHCs) that Washington Gas is incurring. We have
appealed to the PSC of MD the proposed disallowance of natural
gas costs, and are awaiting a Final Order from the local
regulatory commissions on the recovery of Washington Gas
HHC costs.
For further discussion of these regulatory matters and related
contingencies, see Note 15 of the Notes to Consolidated
Financial Statements.
Accounting
for Derivative Instruments
We enter into forward contracts and other related transactions
for the purchase of natural gas and electricity. A majority of
these contracts qualify as normal purchases and sales, and are
exempt from the accounting requirements of
SFAS No. 133, Accounting for Derivative Instruments
and Hedging Activities, as amended. Contracts that qualify
as derivative instruments under SFAS No. 133 are
recorded on the balance sheet at fair value. Changes in the fair
value of derivative instruments subject to SFAS No. 71
are recorded as regulatory assets or liabilities, as discussed
below, while changes in the fair value of derivative instruments
not affected by rate regulation are reflected in income.
Washington Gas also utilizes derivative instruments that are
designed to minimize the risk of interest-rate volatility
associated with planned issuances of Medium-Term Notes (MTNs).
Our judgment is required in determining the appropriate
accounting treatment for our derivative instruments. This
judgment involves various factors, including our ability to:
(i) designate contracts and other activities as
derivative instruments subject to the accounting guidelines of
SFAS No. 133; (ii) derive the estimated
fair value of our derivative instruments from period to period
based on prices available from external sources and internal
modeling techniques and (iii) determine whether or
not our derivative instruments are recoverable from or
refundable to customers in future periods.
Certain of our natural gas forward contracts and other
derivatives that are subject to SFAS No. 133 are
valued using models developed by us. These models reflect, when
appropriate, derivative pricing theory, formulated market inputs
and forward price projections beyond the period that prices are
available from market data sources. We derived a $104,000 net
fair value loss for these contracts at September 30, 2006,
as compared to a net fair value gain of $23.6 million at
September 30, 2005. These valuations reflect our best
estimate.
As previously discussed, changes in the fair value of forward
contracts and other related transactions that qualify as
derivative instruments under SFAS No. 133 and subject
to SFAS No. 71 are recorded as regulatory assets or
liabilities since they relate to activities of Washington Gas in
which costs are likely to be recovered from or refunded to
customers in future periods.
Accounting
for Pension and Other Post-Retirement Benefit
Plans
Washington Gas maintains a qualified, trusteed, non-contributory
defined benefit pension plan (qualified pension plan) covering
all active and vested former employees of Washington Gas and a
separate non-funded supplemental retirement plan (SERP) covering
executive officers. Washington Gas also provides certain
healthcare and life insurance benefits for retired employees.
(The qualified pension plan, SERP and health and post-retirement
plans are collectively referred to as the Plans).
The measurement of the Plans obligations and costs is
dependent on a variety of assumptions. We consider the following
assumptions to be critical to this measurement. These
assumptions are derived on an annual basis with the assistance
of a third party actuarial firm:
45
WGL
Holdings, Inc.
Washington Gas Light Company
Part II
Item 7. Managements Discussion and Analysis of
Financial Condition and Results of Operations (continued)
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Expected long-term return on plan assets;
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Rate of compensation increase and
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Healthcare cost trend rate.
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We determine the discount rate based on the Moodys AA
corporate bond yield as of September 30. We determine the
expected long-term rate of return by averaging the expected
earnings for the target asset portfolio. In developing the
expected rate of return assumption, we evaluate an analysis of
historical actual performance and long-term return projections,
which gives consideration to the asset mix and anticipated
length of obligation of the Plans. Historically, the expected
long-term return on plan assets has been lower for the health
and life benefit plan than for the qualified pension plan due to
differences in the allocation of the assets in the plan trusts.
We calculate the rate of compensation increase based on salary
expectations for the near-term, expected inflation levels and
promotional expectations. The healthcare cost trend rate is
determined by working with insurance carriers, reviewing
historical claims data for the health and life benefit plan, and
analyzing market expectations.
The following table illustrates the effect of changing the
critical actuarial assumptions discussed above, while holding
all other assumptions constant:
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Effect of Changing Critical Actuarial Assumptions
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(In millions)
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Pension Benefits
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Health and Life Benefits
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Percentage-Point
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Increase
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Increase
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Increase
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Increase
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Change in
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(Decrease)
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(Decrease)
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(Decrease)
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(Decrease)
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Actuarial Assumptions
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Assumption
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in Obligation
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in Cost
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in Obligation
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in Cost
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Expected long-term return on plan
assets
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+/ 1.00
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pt.
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n/a
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$(6.1) /$6.1
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n/a
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$(2.0) / $2.0
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Discount rate
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+/ 0.25
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$(19.1)
/ $20.1
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$(1.4)
/ $1.5
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$(16.7)
/ $17.4
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$(1.7)
/ $1.8
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Rate of compensation increase
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+/ 0.25
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$4.8 / $(4.7)
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$0.9 / $(0.8)
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n/a
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n/a
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Healthcare cost trend rate
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+/ 1.00
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n/a
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n/a
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$74.7 / $(61.2)
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$10.9
/ $(9.4)
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Differences between actuarial assumptions and actual plan
results are deferred and amortized into cost when the
accumulated differences exceed ten percent of the greater of the
Projected Benefit Obligation or the market-related value of the
plan assets. If necessary, the excess is amortized over the
average remaining service period of active employees.
In addition to the assumptions listed above, the measurement of
the Plans obligations and costs are dependent on other
factors such as employee demographics, the level of
contributions made to the Plans, earnings on the Plans
assets and mortality rates. Effective September 30, 2006,
Washington Gas updated the mortality table it uses to develop
its mortality rates to reflect more current life expectancy
experience. This change did not have a significant effect on the
obligations of the Plans.
Refer to Note 12 of the Notes to Consolidated Financial
Statements for a listing of the actuarial assumptions used and
for a further discussion of the accounting for the Plans.
OTHER
ACCOUNTING MATTERS
Accounting
for Stock-Based Compensation
Effective October 1, 2005, we adopted SFAS No. 123
(revised 2004), Share-Based Payment
(SFAS No. 123(R)), which replaces
SFAS No. 123, and supersedes Accounting Principles
Board (APB) Opinion No. 25, Accounting for Stock Issued
to Employees and SFAS No. 148, Accounting for
Stock-Based Compensation-Transition and Disclosure. Under
SFAS No. 123(R), we measure and record compensation
expense for both our stock option and performance share awards
based on their fair value at the date of grant. Prior to
October 1, 2005, we had accounted for our share-based
awards in accordance with SFAS No. 123, as amended,
which permitted us to apply APB Opinion No. 25 and related
interpretations in accounting for our stock-based compensation
plans. In accordance with APB Opinion No. 25, we did not
record in our financial statements compensation expense related
to our stock option grants. We did record compensation expense
over the requisite service period related to our performance
shares awarded based on the market value of WGL Holdings
common stock at the end of each reporting period.
As permitted by SFAS No. 123(R), we used the modified
prospective method of adopting the new accounting standard;
accordingly, financial results for fiscal years 2005 and 2004
have not been retroactively adjusted to reflect the effects of
46
WGL
Holdings, Inc.
Washington Gas Light Company
Part II
Item 7. Managements Discussion and Analysis of
Financial Condition and Results of Operations (continued)
SFAS No. 123(R). In accordance with
SFAS No. 123(R), we recognized total stock-based
compensation expense of $4.4 million for the fiscal year
ended September 30, 2006, along with related income tax
benefits of $1.8 million. For fiscal years 2005 and 2004,
we recognized total stock-based compensation expense of
$3.4 million and $1.9 million, respectively, along
with related income tax benefits of $1.2 million and
$660,000, respectively, in accordance with APB Opinion
No. 25.
To value our stock options under SFAS No. 123(R), we
continue to use the Black-Scholes model that was previously used
for disclosure purposes under SFAS No. 123, as
amended. We use a Monte Carlo simulation model to value our
performance shares under SFAS No. 123(R), as they
contain market conditions based on total shareholder return
compared to a peer group.
As of September 30, 2006, there was $4.1 million of
total unrecognized compensation expense related to our
share-based awards. This cost is expected to be recognized over
a weighted average period of 1.6 years, which comprises
1.7 years and 1.5 years for performance shares and
stock options, respectively. Refer to Notes 1 and 13 of the
Notes to Consolidated Financial Statements for a further
discussion of our share-based awards.
Discontinued
Operations
During the quarter ended June 30, 2006, we completed a plan
for the disposition of ACI, a wholly owned subsidiary of
Washington Gas Resources. On September 29, 2006, we sold
all of the outstanding shares of common stock of ACI to an
unrelated party. ACI was previously reported as part of our
commercial HVAC business segment. ACI has been reported as a
discontinued operation of WGL Holdings and, accordingly,
ACIs operating results, financial position and cash flows
have been presented separately from our continuing operations in
the consolidated financial statements of WGL Holdings for all
fiscal years presented. Refer to the section entitled
Results of OperationsSummary
Results for a further discussion of this sale.
47
WGL
Holdings, Inc.
Part II
Item 7. Managements Discussion and Analysis of
Financial Condition and Results of Operations (continued)
WGL HOLDINGS,
INC.
RESULTS
OF OPERATIONS
Summary
Results
WGL Holdings reported net income of $87.6 million, or
$1.79 per share, for the fiscal year ended
September 30, 2006, as compared to net income of
$103.5 million, or $2.11 per share, and
$96.6 million, or $1.98 per share, for the fiscal
years ended September 30, 2005 and 2004, respectively. We
earned a return on average common equity of 9.6 percent,
11.8 percent and 11.6 percent, respectively, during
each of these three fiscal years.
Net income for fiscal year 2006 included an after-tax loss of
$7.1 million, or $0.15 per share, from the
discontinued operations of ACI. This was comprised of a net loss
from ACIs operations of $3.5 million, or
$0.07 per share, and an after-tax loss of
$3.6 million, or $0.08 per share, that resulted from
the September 29, 2006 sale of ACI. Net income for fiscal
years 2005 and 2004 included a net loss from ACIs
discontinued operations of $2.6 million, or $0.05 per
share, and $3.0 million, or $0.06 per share,
respectively.
We reported consolidated income from continuing operations of
$94.7 million, or $1.94 per share, for the fiscal year
ended September 30, 2006, as compared to income from
continuing operations of $106.1 million, or $2.16 per
share, and $99.6 million, or $2.04 per share, reported
for fiscal years 2005 and 2004, respectively. The following is a
discussion of
year-over-year
trends related to our results from continuing operations.
Fiscal Year 2006 vs. Fiscal Year
2005. Income from continuing operations for
fiscal year 2006, when compared to fiscal year 2005, primarily
reflects lower net income from both our retail energy-marketing
and regulated utility segments. Earnings comparisons
attributable to our retail energy-marketing business reflect
lower gross margins from the sale of natural gas, partially
offset by improved gross margins from electric sales. The
year-over-year
decline in earnings of our regulated utility segment was
primarily attributable to lower consumption of natural gas by
customers due to customer conservation, coupled with higher
operating expenses, interest costs and income taxes. Favorably
affecting fiscal year 2006 earnings for the regulated utility
segment were continued customer growth, increased revenues
related to recoverable carrying costs on storage gas inventory
balances, and favorable adjustments related to cost of gas and
customer billings.
Income from continuing operations for fiscal year 2006 compared
to fiscal year 2005 also reflects the following transactions
related to our regulated utility and non-utility business
segments. Fiscal year 2006 included: (i) a charge of
$4.6 million (pre-tax) recorded by our regulated utility
segment related to a proposed regulatory order and
(ii) a $3.1 million (pre-tax) reversal by our
energy-marketing segment of fees that were previously assessed
by a regulatory body and accrued in prior fiscal years. Fiscal
year 2005 included: (i) a favorable tax adjustment
of $2.5 million related to the regulated utility segment
and (ii) a charge of $912,000 that resulted
principally from the resolution of a legal contingency allocated
to the remaining portion of our commercial HVAC business.
Fiscal Year 2005 vs. Fiscal Year
2004. The $6.5 million, or
$0.12 per share, improvement in income from continuing
operations for fiscal year 2005, when compared to fiscal year
2004, primarily reflects higher earnings from our retail
energy-marketing business, driven primarily by increased gross
margins from natural gas sales. This improvement was partially
offset by lower earnings from our regulated utility segment that
were attributable to lower natural gas deliveries to firm
customers and higher operating expenses. Customer growth,
coupled with lower interest costs and income taxes, favorably
affected fiscal year 2005 earnings for our regulated utility
segment.
As discussed above, fiscal year 2005 also included the
$2.5 million favorable tax adjustment related to our
regulated utility segment, and the $912,000 charge related to
our commercial HVAC business segment. Fiscal year 2004 included
the following transactions: (i) the recognition of
additional depreciation expense unrelated to fiscal year 2004 of
$3.5 million (pre-tax) that was recorded in connection with
a Virginia rate order; (ii) an after-tax gain of
$5.8 million from the sale of two buildings in which we
held a carried interest (Maritime sale) and (iii) a
charge of $870,000 for the impairment of goodwill related to the
remaining portion of our commercial HVAC business.
48
WGL Holdings, Inc.
Part II
Item 7. Managements Discussion and Analysis of
Financial Condition and Results of Operations (continued)
The following table summarizes our net income (loss) by
operating segment for fiscal years ended September 30,
2006, 2005 and 2004.
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income (Loss) by Operating Segment
|
|
|
|
|
|
Years Ended September 30,
|
|
|
|
(In thousands)
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
Regulated utility
|
|
$
|
84,599
|
|
|
$
|
87,492
|
|
|
$
|
88,951
|
|
Non-utility operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail energy-marketing
|
|
|
13,315
|
|
|
|
22,294
|
|
|
|
8,280
|
|
Commercial HVAC
|
|
|
450
|
|
|
|
(1,314
|
)
|
|
|
(2,438
|
)
|
|
|
Total major non-utility
|
|
|
13,765
|
|
|
|
20,980
|
|
|
|
5,842
|
|
Other, principally non-utility
activities
|
|
|
(3,670
|
)
|
|
|
(2,400
|
)
|
|
|
4,802
|
|
|
|
Total non-utility
|
|
|
10,095
|
|
|
|
18,580
|
|
|
|
10,644
|
|
|
|
Income from continuing operations
|
|
|
94,694
|
|
|
|
106,072
|
|
|
|
99,595
|
|
Loss from discontinued operations,
net of income tax benefit
|
|
|
(7,116
|
)
|
|
|
(2,579
|
)
|
|
|
(2,958
|
)
|
|
|
Net income
|
|
$
|
87,578
|
|
|
$
|
103,493
|
|
|
$
|
96,637
|
|
|
|
Regulated
Utility Operating Results
The following table summarizes the regulated utility
segments operating results for fiscal years ended
September 30, 2006, 2005 and 2004.
|
|
|
|
|
|
|
|
|
|
|
|
|
Regulated Utility Operating Results
|
|
|
|
|
|
Years Ended September 30,
|
|
|
|
(In thousands)
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
Operating revenues
|
|
$
|
1,637,491
|
|
|
$
|
1,402,905
|
|
|
$
|
1,293,675
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of gas
|
|
|
1,031,650
|
|
|
|
796,413
|
|
|
|
694,639
|
|
Operation and maintenance
|
|
|
236,467
|
|
|
|
241,582
|
|
|
|
231,001
|
|
Depreciation and amortization
|
|
|
92,712
|
|
|
|
89,859
|
|
|
|
91,510
|
|
General taxes and other assessments
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue taxes
|
|
|
55,964
|
|
|
|
58,170
|
|
|
|
50,079
|
|
Other
|
|
|
40,726
|
|
|
|
40,478
|
|
|
|
36,544
|
|
|
|
Total operating expenses
|
|
|
1,457,519
|
|
|
|
1,226,502
|
|
|
|
1,103,773
|
|
|
|
Operating income
|
|
|
179,972
|
|
|
|
176,403
|
|
|
|
189,902
|
|
Interest expense
|
|
|
44,026
|
|
|
|
41,600
|
|
|
|
43,141
|
|
Other (income)
expenses-net,
including preferred stock dividends
|
|
|
(630
|
)
|
|
|
161
|
|
|
|
(917
|
)
|
Income tax expense
|
|
|
51,977
|
|
|
|
47,150
|
|
|
|
58,727
|
|
|
|
Net income
|
|
$
|
84,599
|
|
|
$
|
87,492
|
|
|
$
|
88,951
|
|
|
|
49
WGL Holdings, Inc.
Part II
Item 7. Managements Discussion and Analysis of
Financial Condition and Results of Operations (continued)
Fiscal Year 2006 vs. Fiscal Year
2005. The regulated utility segment reported
net income of $84.6 million, or $1.73 per share, for
the fiscal year ended September 30, 2006, as compared to
net income of $87.5 million, or $1.79 per share, for fiscal
year 2005. The
year-over-year
decrease in earnings primarily reflects a decline in total
natural gas deliveries to firm customers due to customer
conservation. Natural gas deliveries to firm customers fell
70.5 million therms, or 5.5 percent, in fiscal year
2006 from 2005. In addition to customer conservation, natural
gas deliveries declined from the effect of warmer weather in
fiscal year 2006. Weather, as measured by heating degree days
(HDDs) was 2.5 percent warmer than normal in fiscal year
2006, as compared to 5.9 percent colder than normal in
fiscal year 2005. Unlike customer conservation, the earnings
effect of
warmer-than-normal
weather experienced in fiscal year 2006 was neutralized by the
application of the RNA mechanism in Maryland and other weather
protection strategies implemented in Virginia and the District
of Columbia, as discussed below.
Favorably affecting earnings for fiscal year 2006 when compared
to the prior fiscal year were: (i) the addition of
19,811 active customer meters since the end of the prior fiscal
year; (ii) $7.3 million (pre-tax) of increased
revenues from recoverable carrying costs on a higher average
balance of storage gas inventory that was the result of both
higher natural gas prices and volumes;
(iii) favorable adjustments related to the annual
reconciliation of
lost-and-unaccounted-for
gas and (iv) favorable adjustments related to the
recovery of natural gas costs.
Our weather protection products, coupled with the timing of HDDs
during fiscal year 2006, resulted in weather having a favorable
effect on net income for fiscal year 2006 in relation to normal
weather. For fiscal year 2006, net income was enhanced in
relation to normal weather by an estimated $2.5 million
(after-tax), or $0.05 per share, despite the
2.5 percent
warmer-than-normal
weather during this period. This benefit resulted primarily from
the
colder-than-normal
weather experienced during the first quarter of fiscal year
2006. For the fiscal year ended September 30, 2005, the
5.9 percent
colder-than-normal
weather during that year contributed an estimated
$5 million (after-tax), or $0.10 per share, to net
income.
Prior to October 1, 2005, we managed weather risk for all
jurisdictions of Washington Gas with a weather insurance policy
designed to protect against 50 percent of the effects of
warmer-than-normal
weather. That policy expired on September 30, 2005.
Commencing in fiscal year 2006, our weather management strategy
varied by jurisdiction: (i) in Maryland, we
implemented the RNA mechanism on October 1, 2005 upon
approval by the PSC of MD (refer to Note 15 of the Notes to
Consolidated Financial Statements); (ii) in the
District of Columbia, we purchased a new weather insurance
policy that became effective on October 1, 2005 and
(iii) in Virginia, we purchased a weather derivative
that became effective on December 18, 2005 and expired on
May 31, 2006 (refer to the section entitled Market
RiskWeather Risk ).
In Maryland, the RNA mechanism is designed to stabilize the
level of revenues collected from customers by eliminating the
effect of deviations in normal customer usage caused by weather
and other factors, such as customer conservation. Periods of
colder-than-normal
weather generally would cause Washington Gas to reduce its
revenues and establish a refund liability to customers, while
the opposite would generally result during periods of
warmer-than-normal
weather. Accordingly, the
warmer-than-normal
weather during fiscal year 2006 resulted in an increase in
revenues and the recording of a receivable from customers to
reflect Washington Gas protection from
warmer-than-normal
weather and factors other than weather, such as customer
conservation, that are covered under the RNA mechanism.
In the District of Columbia and Virginia, both the weather
insurance and the weather derivative were designed to provide
full protection from the negative financial effects of
warmer-than-normal
weather. Unlike the Maryland RNA, the weather insurance and
derivative products enable us to retain the benefits from
colder-than-normal
weather. In fiscal year 2006, the regulated utility segment
benefited $8.9 million (pre-tax) from these weather
protection products in relation to the prior fiscal year. These
realized benefits are reflected in Operation and
maintenance expenses which, for fiscal year 2006, include
a benefit of $4.7 million (pre-tax) from the new weather
insurance and derivative products, net of the related premium
costs of these products. This compares to $4.2 million
(pre-tax) of expense included in Operation and
maintenance expenses for fiscal year 2005 to reflect the
premium cost associated with the expired insurance policy.
Earnings of the regulated utility segment for fiscal year 2006
reflect a $3.8 million (pre-tax) increase in operation and
maintenance expenses, after excluding the $8.9 million
(pre-tax) enhancement to earnings from the weather protection
products, as discussed above. Principally contributing to the
increased expenses was $1.8 million of increased expenses
associated with information technology projects, and
$1.6 million of higher expenses for uncollectible accounts.
Results from the regulated utility segment also reflect higher
depreciation and amortization expense and increased interest
expense that, together, reduced pre-tax income by
$5.3 million. Further discussion of operation and
maintenance and depreciation and amortization expenses of
50
WGL Holdings, Inc.
Part II
Item 7. Managements Discussion and Analysis of
Financial Condition and Results of Operations (continued)
Washington Gas is included under Managements Discussion
for Washington Gas. Also refer to the section of this
Managements Discussion entitled Interest
Expense for a further discussion of this cost.
Fiscal year ended September 30, 2006 also included a charge
of $4.6 million (pre-tax) recorded to Cost of
gas related to a proposed order by a Hearing Examiner of
the PSC of MD that recommends the disallowance of certain
natural gas costs incurred by Washington Gas and billed to
Maryland customers from September 2003 through August 2004. The
Hearing Examiner recommended the disallowance of these costs in
connection with its annual review of Washington Gas
natural gas costs. We have appealed the proposed order before
the PSC of MD, asserting that the recommendation is without
merit (refer to Note 15 of the Notes to Consolidated
Financial Statements). On a comparative basis, the regulated
utility segment benefited in fiscal year 2005 from a favorable
income tax adjustment of $2.5 million related to a change
in estimate.
Fiscal Year 2005 vs. Fiscal Year
2004. The regulated utility segment reported
net income of $87.5 million, or $1.79 per share, for
fiscal year 2005 as compared to net income of
$89.0 million, or $1.82 per share, for fiscal year
2004. This comparison primarily reflects a decrease of
28.7 million therms, or 2.2 percent, in total natural
gas deliveries to firm customers during fiscal year 2005 due, in
part, to warmer weather experienced primarily during the second
quarter of fiscal year 2005, the most significant period of
Washington Gas winter heating season. However, during
other periods within fiscal year 2005, Washington Gas
experienced lower than expected natural gas deliveries because
the increase in HDDs did not correlate highly with the change in
the volume of natural gas delivered during those periods. For
the fiscal year ended September 30, 2005, weather was
5.9 percent colder than normal, enhancing net income in
relation to normal weather by an estimated $5 million
(after-tax), or $0.10 per share. For fiscal year 2004,
weather was 6.1 percent colder than normal, and was
estimated to have improved net income by approximately
$10 million (after-tax), or $0.20 per share.
Favorably affecting earnings for the regulated utility segment
for fiscal year 2005 was the addition of 22,043 active customer
meters, the effect of changes in rates charged to customers that
were implemented in Maryland on November 6, 2003 and in the
District of Columbia on November 24, 2003, as well as
$2.1 million (pre-tax) of increased earnings from carrying
costs on a higher average balance of storage gas inventory.
Earnings for fiscal year 2005, when compared to fiscal year
2004, also reflect $10.6 million (pre-tax) of increased
operation and maintenance expenses, partially offset by
$1.7 million (pre-tax) of lower depreciation and
amortization expense, and $1.5 million (pre-tax) of lower
interest expense (refer to the section of this Managements
Discussion entitled Interest Expense). The
regulated utility segment also benefited from reduced income tax
expense due to a combination of lower pre-tax income and a lower
effective income tax rate which, in part, reflects a favorable
tax adjustment of $2.5 million recorded in fiscal year 2005.
Further discussion of the operating results of Washington Gas is
included in the Managements Discussion for Washington Gas.
Non-Utility
Operating Results
Our continuing non-utility operations are comprised of two
business segments: (i) retail energy-marketing and
(ii) the remaining portion of commercial HVAC after
excluding the effects of discontinued operations. Certain of our
transactions are not significant enough to report as stand-alone
business segments, and therefore are aggregated as Other
Activities which are included as part of non-utility
operations for purposes of segment reporting (refer to
Note 17 of the Notes to Consolidated Financial Statements).
Total net income from our continuing non-utility operations for
fiscal year 2006 was $10.1 million, or $0.21 per
share, a decrease of $8.5 million, or $0.16 per share,
from fiscal year 2005. The
year-over-year
decline in these earnings primarily reflects lower earnings of
our retail energy-marketing segment.
Continuing non-utility operations reported total net income of
$18.6 million, or $0.37 per share, for the fiscal year
ended September 30, 2005, an increase of $8.0 million,
or $0.15 per share, over fiscal year 2004. The
year-over-year
increase in net income was driven by improved earnings from our
retail energy-marketing segment. On a comparative basis, fiscal
year 2004 included an after-tax gain of $5.8 million from
the Maritime sale.
51
WGL Holdings, Inc.
Part II
Item 7. Managements Discussion and Analysis of
Financial Condition and Results of Operations (continued)
The following table depicts the composition of the changes in
revenues for the non-utility business segments.
|
|
|
|
|
|
|
|
|
|
|
|
|
Composition of Non-Utility Revenues and Other Statistics
|
|
|
|
|
|
Years Ended September 30,
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
Non-utility operating revenues
(In
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail energy-marketing
|
|
$
|
1,001,596
|
|
|
$
|
773,046
|
|
|
$
|
789,859
|
|
Commercial HVAC
|
|
|
13,138
|
|
|
|
9,482
|
|
|
|
6,963
|
|
Other
|
|
|
639
|
|
|
|
1,425
|
|
|
|
1,673
|
|
|
|
Total non-utility operating
revenues
|
|
$
|
1,015,373
|
|
|
$
|
783,953
|
|
|
$
|
798,495
|
|
|
|
Retail Energy-Marketing
Statistics
|
|
|
|
|
|
|
|
|
|
|
|
|
Natural gas
|
|
|
|
|
|
|
|
|
|
|
|
|
Therm sales (thousands of
therms)
|
|
|
696,694
|
|
|
|
713,676
|
|
|
|
716,577
|
|
Number of customers (end of
period)
|
|
|
142,700
|
|
|
|
144,800
|
|
|
|
150,800
|
|
|
|
Electricity
|
|
|
|
|
|
|
|
|
|
|
|
|
Electricity sales (thousands of
kWhs)
|
|
|
2,412,407
|
|
|
|
2,680,469
|
|
|
|
6,658,926
|
|
Number of accounts (end of
period)
|
|
|
63,300
|
|
|
|
36,200
|
|
|
|
44,500
|
|
|
|
Retail
Energy-Marketing
Our retail energy-marketing subsidiary, WGEServices, was
established in 1997, and sells natural gas and electricity on an
unregulated, competitive basis directly to residential,
commercial and industrial customers.
Fiscal Year 2006 vs. Fiscal Year
2005. The retail energy-marketing segment
reported net income of $13.3 million, or $0.27 per
share, for the fiscal year ended September 30, 2006, as
compared to net income of $22.3 million, or $0.45 per
share, reported for the prior fiscal year. The
$9.0 million, or $0.18 per share, decline in earnings
for this business primarily reflects lower gross margins
(revenues less costs of energy) from the sale of natural gas
primarily due to: (i) unfavorable changes in the
valuation of derivative contracts; (ii) the
unfavorable
year-over-year
comparison resulting from $2.0 million (after-tax) of
reduced expenses recorded in fiscal year 2005 related to the
termination of two natural gas supply contracts;
(iii) the unfavorable
year-over-year
comparison from the recording in fiscal year 2005 of
$1.2 million (after-tax) of gross margin adjustments
related to certain contracts and (iv) a
2.4 percent decrease in the volume of natural gas sold.
Favorably affecting earnings in fiscal year 2006 were increased
gross margins from the sale of electricity, and the reversal of
expenses in fiscal year 2006 of $3.1 million (pre-tax)
related to certain fees assessed by the PSC of DC that were
accrued in prior fiscal years.
Lower gross margins from natural gas sales were affected, in
part, by net
mark-to-market
losses in fiscal year 2006, as compared to net
mark-to-market
gains recognized in fiscal year 2005. Market valuation losses or
gains are recorded principally in connection with derivative
contracts that are used to mitigate the risk of volatility in
the market price of natural gas during the winter heating
season. The
year-over-year
net change in the valuation of these instruments decreased net
income by $6.1 million (after-tax) for the fiscal year
ended September 30, 2006. Refer to Market
RiskPrice Risk Related to the Retail Energy-Marketing
Segment for a further discussion of these derivative
transactions.
The decrease in gross margins from natural gas sales in fiscal
year 2006 also was attributable to the inclusion in fiscal year
2005 of $2.0 million (after-tax) of reduced expenses
related to the termination of contracts with two suppliers for
the forward purchase of natural gas. These fixed-price contracts
were terminated due to the suppliers inability to fulfill
contractual obligations during the
2005-2006
winter heating season due to the natural gas supply shortage in
the Gulf of Mexico region. In consideration of the contract
termination, the suppliers paid a fee to WGEServices, recorded
as a reduction to Non-utility cost of energy-related
sales in fiscal year 2005, for an amount equivalent to the
excess of the market price over the fixed price that WGEServices
incurred in fiscal year 2006 to replace the contractual
shortfall. The higher cost of the replacement gas was reflected
in fiscal year 2006 when delivered.
52
WGL Holdings, Inc.
Part II
Item 7. Managements Discussion and Analysis of
Financial Condition and Results of Operations (continued)
Gross margins from electric sales increased significantly during
fiscal year 2006, reflecting a dramatic rise in the gross margin
per kilowatt hour sold, partially offset by a 10 percent
decline in electric sales volumes. Electric customers grew
75 percent in fiscal year 2006 when compared to the end of
the prior fiscal year. This customer growth was principally the
result of new competitive opportunities that emerged near the
end of the third quarter of fiscal year 2006 due to sharp
increases in competing rates offered by electric utilities in
Maryland and Delaware.
Favorably affecting the operating results of the
energy-marketing segment for fiscal year 2006 was the reversal
of certain administrative fees that were previously assessed by
the PSC of DC. WGEServices, which recorded these assessments as
an expense in prior fiscal years, protested its payment of these
fees. During fiscal year 2006, WGEServices received a favorable
court decision from its appeal regarding the payment of these
fees in which the court decided that the energy-marketing
business is entitled to a refund. Accordingly, the
energy-marketing segment benefited $3.1 million (pre-tax)
from its reversal in fiscal year 2006 of fees accrued as an
expense in prior fiscal years.
Fiscal Year 2005 vs. Fiscal Year
2004. Net income for the retail
energy-marketing segment was $22.3 million, or
$0.45 per share, for fiscal year 2005, an increase over net
income of $8.3 million, or $0.17 per share, reported
for fiscal year 2004. The $14.0 million, or $0.28 per
share, improvement was attributable to
(i) $2.0 million (after-tax) of reduced
expenses in fiscal year 2005 related to the termination of the
two natural gas supply contracts; (ii) favorable
changes in the valuation of derivative contracts which increased
net income by $1.8 million (after-tax) and
(iii) $1.2 million (after-tax) of favorable
gross margin adjustments recorded in fiscal year 2005 related to
certain contracts. The remainder of the
year-over-year
improvement in earnings for this segment for fiscal year 2005
was attributable to reduced expenses associated with
uncollectible accounts, partially offset by lower gross margins
from electric sales as the 59.7 percent decline in electric
sales volumes more than offset the increase in the gross margin
per kilowatt hour sold.
Commercial
HVAC
As a result of the discontinued operations of ACI, WGESystems
comprises the remaining portion of the commercial HVAC segment.
WGESystems offers large-scale HVAC installations and related
services to commercial and government customers.
The commercial HVAC segment reported net income of $450,000, or
$0.01 per share, for fiscal year 2006, an improvement of
$1.8 million, or $0.04 per share, over the net loss of
$1.3 million, or $0.03 per share, reported for fiscal
year 2005. Operating results for fiscal year 2005 represented an
improvement of $1.1 million, or $0.02 per share, over
the net loss of $2.4 million, or $0.05 per share,
reported for fiscal year 2004. The improvements in both fiscal
years 2006 and 2005 were attributable to higher operating income
that was driven by increased sales and lower selling, general
and administrative expenses. The comparison between fiscal year
2006 and 2005 also was affected by a charge of $912,000, or
$0.02 per share, recorded in fiscal year 2005 that resulted
principally from the resolution of a legal contingency related
to our investment in the HVAC business.
Other
Non-Utility Activities
As previously discussed, certain of our transactions are not
significant enough on a stand-alone basis to warrant treatment
as a business segment. For purposes of segment reporting, these
transactions are aggregated as Other Activities and
included as part of non-utility operations (see Note 17 of
the Notes to Consolidated Financial Statements).
Results for our other non-utility activities for fiscal year
2006 reflect a net loss of $3.7 million, or $0.07 per
share, as compared to a net loss of $2.4 million, or
$0.05 per share, reported for fiscal year 2005. The net
loss in fiscal year 2005 from other non-utility activities
represented a $7.2 million, or $0.15 per share,
decrease from the net income of $4.8 million, or
$0.10 per share, reported for fiscal year 2004. This
decline was primarily due to an after-tax gain of
$5.8 million, or $0.12 per share, realized in fiscal
year 2004 from the Maritime sale.
Other
Income (Expenses)Net
Other income (expenses)net was income of
$3.2 million, $2.3 million and $9.1 million for
fiscal years 2006, 2005 and 2004, respectively. The significant
decrease in income in fiscal year 2005 when compared to 2004 was
principally due to the after-tax gain of $5.8 million
realized in fiscal year 2004 from the Maritime sale.
53
WGL Holdings, Inc.
Part II
Item 7. Managements Discussion and Analysis of
Financial Condition and Results of Operations (continued)
Interest
Expense
Interest expense was $48.3 million for the fiscal year
ended September 30, 2006, an increase of $5.0 million
over fiscal year 2005. Fiscal year 2005 interest expense was
$43.3 million, a decrease of $830,000 from the
$44.1 million level for fiscal year 2004. Long-term debt
primarily comprises unsecured MTNs issued solely by Washington
Gas. The weighted average cost of MTNs was 6.15 percent,
6.27 percent and 6.46 percent at September 30,
2006, 2005 and 2004, respectively. The following table shows the
components of the changes in interest expense between years.
|
|
|
|
|
|
|
|
|
Composition of Interest Expense Changes
|
|
|
|
|
|
Increase/(Decrease)
|
|
|
|
(In millions)
|
|
2006 vs 2005
|
|
|
2005 vs 2004
|
|
|
|
|
Long-term debt
|
|
$
|
(0.4
|
)
|
|
$
|
(0.8
|
)
|
Short-term debt
|
|
|
4.1
|
|
|
|
0.5
|
|
Other (includes AFUDC*)
|
|
|
1.3
|
|
|
|
(0.5
|
)
|
|
|
Total
|
|
$
|
5.0
|
|
|
$
|
(0.8
|
)
|
|
|
* Represents Allowance for
Funds Used During Construction.
The $5.0 million increase in WGL Holdings interest
expense for fiscal year 2006 compared to fiscal year 2005
primarily reflects higher interest costs associated with
short-term borrowings due to an increase of over 200 basis
points in the weighted average cost of these borrowings, coupled
with a higher average balance of short-term debt outstanding.
Approximately two-thirds of the increase in short-term interest
expense resulted from the higher short-term debt requirements of
the non-utility operations. The
year-over-year
increase also reflects higher other interest expense primarily
related to customer deposits and other miscellaneous items.
Partially offsetting the increase in short-term and other
interest expense were reduced interest costs on long-term debt
due to a decrease in the embedded cost of these borrowings as a
result of refinancing previously outstanding amounts, partially
offset by a higher average balance of long-term debt outstanding.
The $830,000 decrease in WGL Holdings interest expense for
fiscal year 2005 compared to fiscal year 2004 reflects reduced
interest costs on long-term debt due to a decrease in the
average balance of long-term debt outstanding. Interest expense
on short-term debt rose, reflecting an increase of approximately
130 basis points in the weighted average cost of short-term
debt, partially offset by a lower average balance of short-term
debt outstanding. Fiscal year 2005 also reflects lower other
interest expense due to an $882,000 loss recorded in fiscal year
2004 related to an interest-rate swap, partially offset by
interest associated with other miscellaneous items.
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.
Significant swings can take place in the level of short-term
debt we require due primarily to changes in the price and volume
of natural gas and electricity purchased to satisfy customer
demand, and also due to seasonal cash collections on accounts
receivable.
Back-up
financing to our commercial paper programs in the form of
revolving credit agreements enables us to maintain access to
short-term debt markets. Our ability to obtain such financing
depends on our credit ratings, which are greatly affected by our
financial performance. Also potentially affecting access to
short-term debt capital is the liquidity of financial markets,
as well as 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.
54
WGL Holdings, Inc.
Part II
Item 7. Managements Discussion and Analysis of
Financial Condition and Results of Operations (continued)
The ability to procure sufficient levels of long-term capital at
reasonable costs is determined by the level of our capital
expenditure requirements, our financial performance and the
effect of these factors on our credit ratings and investment
alternatives available to investors.
We have a capital structure goal to maintain our common equity
ratio in the mid-50 percent 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 is 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 September 30, 2006, total consolidated
capitalization, including current maturities of long-term debt
and excluding notes payable, comprised 58.1 percent common
equity, 1.8 percent preferred stock and 40.1 percent
long-term debt. Our cash flow requirements and our ability to
provide satisfactory resources to satisfy those requirements are
primarily influenced by the activities of Washington Gas and, to
a lesser extent, the non-utility operations.
We believe we have sufficient liquidity to satisfy our financial
obligations. At September 30, 2006, we did not have any
restrictions on our cash balances 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. Over 75 percent 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, unbilled revenues and storage gas
inventories 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.
Our retail energy-marketing subsidiary, WGEServices, has
seasonal short-term cash requirements resulting from its need to
purchase storage gas inventory in advance of the winter period
in which the storage gas is sold. In addition, WGEServices must
continually pay its suppliers of natural gas and electricity
before it collects its accounts receivable balances resulting
from these sales. WGEServices derives its funding to finance
these activities from short-term debt issued by WGL Holdings.
Both Washington Gas and the retail energy-marketing segment
maintain storage gas inventory. WGEServices maintains storage
gas inventory that is assigned to it by natural gas utilities
such as Washington Gas. Storage gas inventories represent gas
purchased from producers and stored in facilities owned by third
parties. Washington Gas and the retail energy-marketing segment
generally pay for storage gas between heating seasons and
withdraw it during the heating season. Significant variations in
storage gas balances between years may occur, and are caused by
the price paid to producers and marketers, which is a function
of market fluctuations in the price of natural gas and changing
requirements for storage volumes. For Washington Gas, such costs
become a component of the cost of gas recovered from customers
when volumes are withdrawn from storage. In addition, Washington
Gas is able to specifically earn and recover its pre-tax cost of
capital related to the varying level of the storage gas
inventory balance it carries in each of the three jurisdictions
in which it operates. For WGEServices, the cost of storage gas
inventory is a component of its expected gas cost considered in
making competitive contract offers to its customers.
Variations in the timing of collections of gas costs under
Washington Gas gas cost recovery mechanisms and the level
of refunds from pipeline companies that will be returned to
customers can significantly affect short-term cash requirements.
Washington Gas had a $2.5 million and a $4.4 million
net over-collection of gas costs at September 30, 2006 and
2005, respectively. The over-collection in both fiscal years
stemmed primarily from an excess of gas costs recovered from
customers over gas costs paid to suppliers. Generally,
Washington Gas includes the amounts under-collected and
over-collected in the captions Gas costs and other
regulatory assets and Gas costs and other regulatory
liabilities, respectively, in its balance sheets as
current assets and current liabilities. Amounts under- or
over-collected that are generated during the current business
cycle are reflected as a regulatory asset or liability until
September 1 of each year, at which time the accumulated
amount is transferred to gas costs due from/to customers as
55
WGL Holdings, Inc.
Part II
Item 7. Managements Discussion and Analysis of
Financial Condition and Results of Operations (continued)
appropriate. Most of the current balance will be returned to, or
collected from, customers in fiscal year 2007. At
September 30, 2006 and 2005, refunds received from
pipelines and to be returned to Washington Gas customers
were not material.
WGL Holdings and Washington Gas utilize short-term debt in the
form of commercial paper or unsecured short-term bank loans to
fund seasonal 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. As of
September 30, 2006, WGL Holdings and Washington Gas each
have revolving credit agreements with a group of commercial
banks that expire on September 30, 2010. The credit
facility for WGL Holdings permits it to borrow up to
$275 million, and further permits us to request prior to
September 30, 2009, and the banks to approve, an additional
line of credit of $50 million above the original credit
limit, for a maximum potential total of $325 million. The
credit facility for Washington Gas permits it to borrow up to
$225 million, and further permits Washington Gas to request
prior to September 30, 2009, and the banks to approve, an
additional line of credit of $100 million above the
original credit limit, for a maximum potential total of
$325 million. There were no outstanding borrowings under
these credit facilities at September 30, 2006 or 2005.
At September 30, 2006 and 2005, WGL Holdings and its
subsidiaries had outstanding notes payable in the form of
commercial paper, of $177.4 million and $40.9 million,
respectively. Of the outstanding notes payable balance at
September 30, 2006, $104.6 million and
$72.8 million was commercial paper issued by WGL Holdings
and Washington Gas, respectively. Of the outstanding notes
payable balance at September 30, 2005, $30.5 million
and $10.4 million was commercial paper issued by WGL
Holdings and Washington Gas, respectively.
As a result of market concerns about the sufficiency of the
supply of natural gas and other factors during the winter of
2005-2006,
the price of the natural gas commodity paid by our customers
rose sharply from levels experienced during the
2004-2005
winter heating season. During fiscal year 2006, higher gas costs
increased customers bills dramatically. Higher natural gas
prices increased the difficulty of customers to pay their bills
in a timely manner. Higher gas costs were a major cause of the
need for WGL Holdings and Washington Gas to finance a higher
level of accounts receivable than in prior years. Higher natural
gas prices, combined with greater volumes, also increased our
storage gas inventory balance. During the fiscal year ended
September 30, 2006, we incurred higher short-term debt
levels and greater short-term debt costs to finance the
increased receivables and storage gas inventory caused by these
circumstances. We also have incurred a higher level of
uncollectible accounts expenses. The relationship between gas
costs and short-term debt costs is likely to continue in the
future.
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. Historically, we have devoted the
majority of our capital expenditures to adding new Washington
Gas customers in its existing service area. However, as a result
of recent operating issues in Prince Georges County,
Maryland, that are described later in Managements
Discussion, we forecast a greater level of replacement capital
expenditures through fiscal year 2008 (refer to the section
entitled Capital Expenditures ).
At September 30, 2006, Washington Gas had the capacity,
under a shelf registration that was declared effective by the
SEC on June 8, 2006, to issue up to $300.0 million of
MTNs. On June 14, 2006, Washington Gas executed a
Distribution Agreement with certain financial institutions for
the issuance and sale of debt securities covered by the shelf
registration statement.
On June 23, 2006, the Maryland General Assembly enacted
legislation which addresses electric industry restructuring
issues in Maryland and other issues for all public utilities.
Effective July 1, 2007, the legislation requires that all
public utilities operating in Maryland, including Washington
Gas, obtain approval from the PSC of MD before issuing stock,
bonds, securities, notes, or other debt with a maturity greater
than 12 months. We plan to request from the PSC of MD all
necessary approvals relating to financing authorizations in
order to maintain continuing access to financial markets.
Fiscal Year 2006 Activity. On
January 18, 2006, Washington Gas issued $25.0 million
of 5.17 percent MTNs due January 18, 2016, and
$25.0 million of 5.70 percent MTNs due
January 18, 2036. In conjunction with the issuance of the
5.17 percent MTNs, Washington Gas received $182,000
associated with the settlement of a forward-starting swap that
had a notional principal amount of $25.0 million.
Similarly, in conjunction with the issuance of the
5.70 percent MTNs, Washington Gas received $104,000
associated with the settlement of a forward-starting swap that
had a notional principal amount of $25.0 million (refer to
the section entitled Market RiskInterest-Rate
Risk ). The effective cost of the newly-issued
debt, after considering the amount received related to the two
forward-starting swaps and amortization of discounts related to
the debt issuances, is 5.16 percent
56
WGL Holdings, Inc.
Part II
Item 7. Managements Discussion and Analysis of
Financial Condition and Results of Operations (continued)
for the MTNs due 2016 and 5.72 percent for the MTNs due
2036. On February 15, 2006, Washington Gas used the
combined cash proceeds from these debt issuances to retire
$50.0 million of 6.15 percent MTNs through its
exercise of call options.
On March 22, 2006, Washington Gas issued $25.0 million
of 5.78 percent MTNs due March 15, 2036. In
conjunction with this issuance, Washington Gas received $303,000
associated with the settlement of a forward-starting swap that
had a notional principal amount of $25.0 million (refer to
the section entitled Market RiskInterest-Rate
Risk ). Additionally, on March 22, 2006,
Washington Gas paid $26.0 million, plus accrued interest,
to retire $25.0 million of 7.31 percent MTNs that were
due on October 30, 2007, by exercising a make-whole call
feature that required Washington Gas to pay to the debt holder a
call premium of $958,000 for redeeming the debt prior to its
stated maturity date. This premium was recorded as a regulatory
asset, and is being amortized in accordance with regulatory
accounting requirements. The effective cost of the newly-issued
debt, after considering the amount received related to the
forward-starting swap, the amount paid related to the make-whole
call premium and discounts related to the debt issuance, is
6.03 percent.
Fiscal Year 2005 Activity. During the
fiscal year ended September 30, 2005, Washington Gas
retired a total of $60.5 million of MTNs. On March 7,
2005, Washington Gas, through exercise of a call option, retired
$20.0 million of MTNs. The MTNs redeemed were
$10.0 million of 7.76 percent MTNs and
$10.0 million of 7.75 percent MTNs that had a nominal
maturity date in March 2025. On June 9, 2005, Washington
Gas, through exercise of a call option, retired
$20.0 million of 6.50 percent MTNs that had a nominal
maturity date in June 2025. Additionally, on June 20, 2005,
Washington Gas retired $20.5 million of 7.45 percent
MTNs that matured on the same date. Washington Gas paid the
applicable accrued interest on each debt retirement date.
In August 2005, Washington Gas replaced the retired debt, as
discussed above, with $60.5 million of newly issued MTNs.
On August 9, 2005, Washington Gas issued $20.0 million
of 4.83 percent MTNs due August 2015 to replace the MTNs
retired on March 7, 2005. On August 11, 2005,
Washington Gas issued $40.5 million of 5.44 percent
MTNs due August 2025 to replace the MTNs retired in June 2005.
Concurrent with the issuance of the $20.0 million of
4.83 percent MTNs, Washington Gas paid $364,000 associated
with the settlement of a forward-starting swap that had a
notional principal amount of $20.0 million. Similarly,
concurrent with the issuance of the $40.5 million of
5.44 percent MTNs, Washington Gas paid $2.2 million
associated with the settlement of a forward-starting swap that
had a notional principal amount of $40.5 million (refer to
the section entitled Market RiskInterest-Rate
Risk). The effective cost of the newly-issued debt,
after considering the amount paid related to the two
forward-starting swaps, is 5.15 percent and
5.98 percent for the $20.0 million and
$40.5 million debt issuances, respectively.
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. Credit ratings can change
at any time.
|
|
|
|
|
|
|
|
|
Credit Ratings for Outstanding Debt Instruments
|
|
|
|
WGL Holdings
|
|
Washington Gas
|
|
|
Unsecured
|
|
|
|
Unsecured
|
|
|
|
|
Medium-Term Notes
|
|
Commercial
|
|
Medium-Term
|
|
Commercial
|
Rating Service
|
|
(Indicative)(a)
|
|
Paper
|
|
Notes
|
|
Paper
|
|
|
Fitch Ratings
|
|
A+
|
|
F1
|
|
AA-
|
|
F1+
|
Moodys Investors Service
|
|
Not Rated
|
|
Not Prime
|
|
A2
|
|
P-1
|
Standard & Poors
Ratings
Services(b)
|
|
AA−
|
|
A-1
|
|
AA−
|
|
A-1
|
|
|
|
|
|
(a) |
|
Indicates the ratings that may
be applicable if WGL Holdings were to issue unsecured
MTNs. |
(b) |
|
This agency has held a negative
outlook on the long-term debt ratings of WGL Holdings and
Washington Gas since July 2, 2004. |
Ratings
Triggers and Certain Debt Covenants
WGL Holdings and Washington Gas pay facility fees on their
credit facilities 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 facility fees.
There are five different levels of fees. The credit facility for
WGL Holdings defines its
57
WGL Holdings, Inc.
Part II
Item 7. Managements Discussion and Analysis of
Financial Condition and Results of Operations (continued)
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 six basis points and the highest is
ten basis points.
Under the terms of the credit facilities, the ratio of
consolidated indebtedness to consolidated total capitalization
can not exceed 0.65 to 1.0 (65.0 percent). 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 agreement. 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 September 30, 2006, 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
Baa2 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.
WGL Holdings has guaranteed payments for certain purchases of
natural gas and electricity on behalf of WGEServices (refer to
Contractual Obligations, Off-balance Sheet Arrangements
and Other Commercial Commitments for a further
discussion of these guarantees). If WGL Holdings is assigned a
credit rating below BBB- by Standard & Poors
Ratings Services or Baa3 by Moodys Investors Service,
WGEServices would be required to provide additional credit
support.
Cash
Flows Provided by Operating Activities
The primary drivers for our operating cash flows are cash
payments received from gas customers, offset by our payments for
gas costs, operation and maintenance expenses, taxes and
interest costs. Although long-term interest rates remain
relatively low and we have been able to take advantage of
refinancing certain of our long-term debt at lower interest
rates, interest expense for fiscal year 2006 reflects the effect
of a rise in short-term interest rates.
Net cash provided by operating activities totaled
$85.7 million, $232.5 million and $237.7 million
for fiscal years 2006, 2005 and 2004, respectively. Net cash
provided by operating activities includes net income applicable
to common stock, as adjusted for non-cash earnings and charges,
as well as changes in working capital. Certain changes in
working capital from September 30, 2005 to
September 30, 2006 are described below.
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|
|
|
|
Accounts receivable and unbilled revenues increased
$32.0 million from September 30, 2005, primarily
reflecting an increase in receivables associated with both
electric and natural gas sales of WGEServices. The increase in
electricity receivables is due to a significant increase in both
the number of customers and retail sales prices of electricity,
while the increased natural gas receivables reflects higher
retail natural gas sales prices.
|
|
|
|
Storage gas inventory levels increased $43.1 million from
September 30, 2005 due to higher natural gas prices and
increased storage capacity to accommodate the requirements for
the
2006-2007
winter heating season.
|
|
|
|
Deferred purchased gas costsnet increased
$23.6 million, representing a regulatory asset of
$12.0 million at September 30, 2006 compared to a
regulatory liability of $11.6 million at September 30,
2005. This increase is due primarily to fair value losses in
2006 associated with certain of Washington Gas contracts
for the purchase and sale of natural gas, as compared to fair
value gains recognized in fiscal year 2005.
|
During fiscal years 2005 and 2004, storage gas inventory rose
$35.3 million and $53.0 million, respectively, due to
higher natural gas costs and increased storage capacity.
Accounts payable and other accrued liabilities increased
$20.8 million and $36.7 million during fiscal years
2005 and 2004, respectively, largely to fund higher natural gas
and electricity purchases. During fiscal year 2005, customer
deposits and advance payments increased $37.7 million from
September 30, 2004 due to a revised credit policy requiring
security deposits from new customers of Washington Gas, and the
receipt of a security deposit held from an electricity supplier
of WGEServices. The deposits at Washington Gas are reported as
current liabilities, and 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 enable the balance of customer
deposits to remain relatively steady.
58
WGL Holdings, Inc.
Part II
Item 7. Managements Discussion and Analysis of
Financial Condition and Results of Operations (continued)
Cash
Flows Provided by (Used in) Financing Activities
Cash flows provided by financing activities totaled
$75.0 million for fiscal year 2006, and cash flows used in
financing activities totaled $119.2 million and
$132.6 million for fiscal years 2005 and 2004,
respectively. During fiscal year 2006, we increased our notes
payable by a net amount of $136.5 million due to increased
working capital requirements. This increase in notes payable was
partially offset by common stock dividend payments totaling
$65.3 million. Additionally during fiscal year 2006, we
refinanced $75.0 million of long-term debt with cash
proceeds from the issuance of lower-cost, long-term debt (refer
to the section entitled Long-Term Cash Requirements and
Related Financing ).
Cash flows used in financing activities during fiscal year 2005
reflect a $54.8 million net decrease in notes payable,
coupled with common stock dividend payments totaling
$64.0 million. Additionally during fiscal year 2005, we
refinanced $60.5 million of long-term debt with proceeds
from the issuance of lower-cost, long-term debt. During fiscal
year 2004, cash flows used in financing activities reflect a
$71.0 million net decrease in notes payable, coupled with
common stock dividend payments totaling $62.7 million.
Additionally during fiscal year 2004, we refinanced
$36.0 million of long-term debt with proceeds from the
issuance of $37.0 million of lower-cost, long-term debt.
The following table reflects the issuances and retirements of
long-term debt that occurred during fiscal years 2006, 2005 and
2004 (also refer to Note 6 of the Notes to Consolidated
Financial Statements).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-Term Debt Activity
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(In millions)
|
|
Interest Rate
|
|
|
Amount
|
|
|
Interest Rate
|
|
|
Amount
|
|
|
Interest Rate
|
|
|
Amount
|
|
|
|
Medium-term notes
Issued
|
|
|
5.17 5.78
|
%
|
|
$
|
75.0
|
|
|
|
4.83 5.44
|
%
|
|
$
|
60.5
|
|
|
|
4.88
|
%
|
|
$
|
37.0
|
|
Retired
|
|
|
6.15 7.31
|
%
|
|
|
(75.0
|
)
|
|
|
6.50 7.76
|
%
|
|
|
(60.5
|
)
|
|
|
6.95
|
%
|
|
|
(36.0
|
)
|
Other financing
Issued(a)
|
|
|
4.76 5.61
|
%
|
|
|
5.7
|
|
|
|
8.00
|
%
|
|
|
0.1
|
|
|
|
6.75
|
%
|
|
|
0.8
|
|
Retired(b)
|
|
|
5.61
|
%
|
|
|
(2.7
|
)
|
|
|
5.99 8.00
|
%
|
|
|
(16.5
|
)
|
|
|
|
|
|
|
|
|
Other activity
|
|
|
|
|
|
|
(0.1
|
)
|
|
|
|
|
|
|
(0.1
|
)
|
|
|
|
|
|
|
(0.1
|
)
|
|
|
Total
|
|
|
|
|
|
$
|
2.9
|
|
|
|
|
|
|
$
|
(16.5
|
)
|
|
|
|
|
|
$
|
1.7
|
|
|
|
|
|
|
(a) |
|
Includes the non-cash issuance
of a $3.0 million note used to finance capital expenditures
for fiscal year 2006. |
(b) |
|
Includes the non-cash
extinguishment of project debt financing of $2.7 million
and $16.4 million for fiscal years 2006 and 2005,
respectively. |
Cash
Flows Used in Investing Activities
Net cash flows used in investing activities totaled
$161.2 million, $115.0 million and $102.9 million
during fiscal years 2006, 2005 and 2004, respectively. In fiscal
years 2006, 2005 and 2004, $156.4 million,
$111.1 million and $107.9 million, respectively, of
cash was utilized for capital expenditures made on behalf of
Washington Gas. Additionally, fiscal year 2004 included cash
proceeds of $6.4 million (pre-tax) received from the
Maritime sale.
59
WGL Holdings, Inc.
Part II
Item 7. Managements Discussion and Analysis of
Financial Condition and Results of Operations (continued)
Capital
Expenditures
The following table depicts our actual capital expenditures for
fiscal years 2004, 2005 and 2006, and projected capital
expenditures for fiscal years 2007 through 2011. Our capital
expenditure program includes investments to extend service to
new areas, and to ensure safe, reliable and improved service.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital Expenditures
|
|
|
|
|
|
Actual
|
|
|
Projected
|
|
(In millions)
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
2011
|
|
|
Total
|
|
|
|
New business
|
|
$
|
67.5
|
|
|
$
|
58.2
|
|
|
$
|
48.7
|
|
|
$
|
54.8
|
|
|
$
|
57.0
|
|
|
$
|
56.9
|
|
|
$
|
67.3
|
|
|
$
|
61.6
|
|
|
$
|
297.6
|
|
Replacements
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rehabilitation project
|
|
|
|
|
|
|
8.2
|
|
|
|
47.8
|
|
|
|
47.2
|
|
|
|
40.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
88.0
|
|
Other
|
|
|
24.9
|
|
|
|
22.5
|
|
|
|
22.7
|
|
|
|
20.9
|
|
|
|
20.5
|
|
|
|
29.9
|
|
|
|
27.2
|
|
|
|
26.6
|
|
|
|
125.1
|
|
LNG storage facility
|
|
|
|
|
|
|
1.5
|
|
|
|
5.8
|
|
|
|
1.1
|
|
|
|
1.5
|
|
|
|
44.5
|
|
|
|
60.0
|
|
|
|
20.0
|
|
|
|
127.1
|
|
Other
|
|
|
20.9
|
|
|
|
33.7
|
|
|
|
36.5
|
|
|
|
34.5
|
|
|
|
39.0
|
|
|
|
33.2
|
|
|
|
22.1
|
|
|
|
20.1
|
|
|
|
148.9
|
|
|
|
Totalaccrual
basis(a)
|
|
|
113.3
|
|
|
|
124.1
|
|
|
|
161.5
|
|
|
|
158.5
|
|
|
|
158.8
|
|
|
|
164.5
|
|
|
|
176.6
|
|
|
|
128.3
|
|
|
|
786.7
|
|
Non-cash adjustments
|
|
|
(4.9
|
)
|
|
|
(11.3
|
)
|
|
|
(1.7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totalcash basis
|
|
$
|
108.4
|
|
|
$
|
112.8
|
|
|
$
|
159.8
|
|
|
$
|
158.5
|
|
|
$
|
158.8
|
|
|
$
|
164.5
|
|
|
$
|
176.6
|
|
|
$
|
128.3
|
|
|
$
|
786.7
|
|
|
|
|
|
|
(a) |
|
Excludes Allowance for Funds
Used During Construction. Includes capital expenditures accrued
and capital expenditure adjustments recorded in the fiscal
year. |
The 2007 to 2011 projected periods include $297.6 million
for continued growth to serve new customers, and
$213.1 million primarily related to the replacement and
betterment of existing capacity. In connection with a
rehabilitation project in Prince Georges County, Maryland,
a total of $56.0 million was expended in fiscal years 2005
and 2006, and up to $88.0 million is projected to be
expended between fiscal years 2007 through 2008, representing a
total of $144.0 million. As explained in the section
entitled Contractual Obligations, Off-Balance
Sheet Arrangements and Other Commercial
CommitmentsOperating Issues in Prince Georges
County, Maryland, the amount that will be expended on
this rehabilitation project could be reduced depending upon the
outcome of procedures and testing being performed on facilities
in a portion of Prince Georges County, Maryland.
Projected expenditures also reflect $148.9 million of other
expenditures, which include general plant. Additionally, the
projected period contains capital expenditures to construct a
necessary, new source of peak day capacity within the boundaries
of the natural gas distribution system to support customer
growth and pressure requirements on the entire natural gas
distribution system. Specifically, these estimated expenditures
are expected to be used to construct a one billion cubic foot
LNG storage facility on the land used for former storage
facilities by Washington Gas in Chillum, Maryland. This new
storage facility is currently estimated to cost a total of
$148.6 million, of which $127.1 million is included in
the Projected Capital Expenditures table as costs that are
expected to be incurred between fiscal years 2007 through 2011.
The constructed facility is currently expected to be completed
and in service by the
2011-2012
winter heating season. This represents a delay from the
originally planned completion date, which was expected by the
2008-2009
winter heating season, due to zoning and other legal challenges.
On November 8, 2006, the District Council of Prince
Georges County issued a final decision denying Washington
Gas application related to its proposed construction of
the LNG peaking plant. The District Council held that current
zoning restrictions prohibit such construction. Washington Gas
appealed this decision to the Prince Georges County
Circuit Court on November 22, 2006. Until such time when
these legal challenges are resolved and the LNG plant is built,
Washington Gas has planned for alternative sources of supply to
meet its customers peak day requirements. These planned
alternatives include the acquisition of additional interstate
pipeline capacity, in combination with investments by Washington
Gas to upgrade the infrastructure of its transmission and
distribution system. Capital expenditures related to the planned
infrastructure improvements are expected to be completed by
fiscal year 2011, and are reflected in the above table for the
projected periods shown. This plan is expected to provide for
sufficient sources of natural gas to meet our customers
peak day demand requirements until the new LNG storage facility
is constructed and in service.
60
WGL Holdings, Inc.
Part II
Item 7. Managements Discussion and Analysis of
Financial Condition and Results of Operations (continued)
CONTRACTUAL
OBLIGATIONS, OFF-BALANCE SHEET ARRANGEMENTS AND OTHER COMMERCIAL
COMMITMENTS
Contractual
Obligations
WGL Holdings and Washington Gas have certain contractual
obligations that extend beyond fiscal year 2006. These
commitments include long-term debt, lease obligations and
unconditional purchase obligations for pipeline capacity,
transportation and storage services, and certain natural gas and
electricity commodity commitments. The estimated obligations as
of September 30, 2006 for future fiscal years are shown
below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated Contractual Obligations and Commercial
Commitments
|
|
|
|
|
|
Years Ended September 30,
|
|
|
|
(In millions)
|
|
Total
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
2011
|
|
|
Thereafter
|
|
|
|
Pipeline and storage
contracts(a)
|
|
$
|
1,415.1
|
|
|
$
|
141.5
|
|
|
$
|
146.5
|
|
|
$
|
129.9
|
|
|
$
|
123.1
|
|
|
$
|
110.1
|
|
|
$
|
764.0
|
|
Medium-term
notes(b)
|
|
|
634.1
|
|
|
|
60.0
|
|
|
|
20.1
|
|
|
|
75.0
|
|
|
|
32.5
|
|
|
|
30.0
|
|
|
|
416.5
|
|
Other long-term
debt(b)
|
|
|
3.2
|
|
|
|
1.0
|
|
|
|
1.1
|
|
|
|
1.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense(c)
|
|
|
394.2
|
|
|
|
37.9
|
|
|
|
35.0
|
|
|
|
31.7
|
|
|
|
28.0
|
|
|
|
25.1
|
|
|
|
236.5
|
|
Gas purchase
commitmentsWashington
Gas(d)
|
|
|
652.0
|
|
|
|
336.3
|
|
|
|
92.3
|
|
|
|
89.8
|
|
|
|
87.5
|
|
|
|
46.1
|
|
|
|
|
|
Gas purchase
commitmentsWGEServices(e)
|
|
|
756.4
|
|
|
|
540.3
|
|
|
|
160.7
|
|
|
|
46.5
|
|
|
|
8.9
|
|
|
|
|
|
|
|
|
|
Electric purchase
commitments(f)
|
|
|
289.9
|
|
|
|
206.0
|
|
|
|
59.7
|
|
|
|
14.6
|
|
|
|
6.9
|
|
|
|
2.7
|
|
|
|
|
|
Operating leases
|
|
|
42.7
|
|
|
|
4.6
|
|
|
|
4.5
|
|
|
|
4.2
|
|
|
|
3.0
|
|
|
|
3.0
|
|
|
|
23.4
|
|
Other long-term
commitments(g)
|
|
|
29.6
|
|
|
|
12.7
|
|
|
|
8.5
|
|
|
|
4.4
|
|
|
|
1.5
|
|
|
|
1.4
|
|
|
|
1.1
|
|
|
|
Total
|
|
$
|
4,217.2
|
|
|
$
|
1,340.3
|
|
|
$
|
528.4
|
|
|
$
|
397.2
|
|
|
$
|
291.4
|
|
|
$
|
218.4
|
|
|
$
|
1,441.5
|
|
|
|
|
|
|
(a) |
|
Represents minimum payments
under natural gas transportation, storage and peaking contracts
which have expiration dates through fiscal year 2028. These
contracts were entered into based on current estimates of growth
of the Washington Gas system, together with current expectations
of the timing and extent of unbundling initiatives in the
Washington Gas service territory. Additionally, includes minimum
payments for WGEServices pipeline contracts. |
(b) |
|
Represents scheduled repayment
of principal including the assumed exercise of a put option by
the debt holders of $60.0 million in 2007 and
$8.5 million in 2010. |
(c) |
|
Represents the scheduled
interest payments associated with MTNs and other long-term
debt. |
(d) |
|
Includes short-term gas purchase
commitments to purchase fixed volumes of natural gas under
Washington Gas regulatory-approved hedging program, as
well as long-term gas purchase commitments that contain fixed
volume purchase requirements. Commitment amounts are estimated
based on both forecasted market prices and fixed premiums for
minimum purchases under these purchase commitments. |
(e) |
|
Represents commitments based on
a combination of market prices at September 30, 2006 and
fixed price contract commitments for natural gas delivered to
various city gate stations, including the cost of transportation
to that point, which is bundled in the purchase price. |
(f) |
|
Represents electric purchase
commitments which are based on existing fixed price and fixed
volume contracts. |
(g) |
|
Includes certain Information
Technology service contracts. Also includes committed payments
related to certain environmental response costs. |
The table above reflects fixed and variable obligations. Certain
of these estimates reflect likely purchases under various
contracts, and may differ from minimum future contractual
commitments disclosed in Note 15 of the Notes to
Consolidated Financial Statements.
When a customer selects an unregulated third-party marketer to
provide natural gas supply, Washington Gas generally assigns
pipeline and storage capacity to unregulated third-party
marketers to deliver natural gas to Washington Gas city
gate. In order to provide the gas commodity to customers who do
not select an unregulated third-party marketer, Washington Gas
has a commodity acquisition plan to acquire the natural gas
supply to serve the customer. In connection with this energy
acquisition plan, Washington Gas utilizes an Asset Manager to
acquire a portion of the necessary supply to serve these
customers. Washington Gas commitment to the Asset Manager,
when implementing its option to purchase gas supply through
April 30, 2007, is at a market price that is tied to
various public indices for natural gas. The contract commitment
is related to customer demand, there are no minimum bill
commitments, and no amount is included in the table above for
these contracts.
For commitments related to Washington Gas pension and
post-retirement benefit plans, during fiscal year 2007,
Washington Gas does not expect to make any contributions to its
qualified, trusteed, non-contributory defined benefit pension
plan covering all active and vested former employees of
Washington Gas. On August 17, 2006, the Pension Protection
Act of 2006 (the Act) was
61
WGL Holdings, Inc.
Part II
Item 7. Managements Discussion and Analysis of
Financial Condition and Results of Operations (continued)
signed into law. The Act, among other things, sets new funding
requirements and new deduction limits for defined benefit
pension plans. The new requirements will be phased in over time.
The impact of this new legislation will be determined in the
future based on how certain provisions are implemented through
regulations and guidelines.
We expect to make payments totaling $1.3 million in fiscal
year 2007 on behalf of participants in our non-funded
Supplemental Executive Retirement Plan. We also expect to
contribute $32.7 million to our health and life insurance
benefit plans on behalf of retirees during fiscal year 2007. For
a further discussion of our pension and post-retirement benefit
plans, refer to Note 12 of the Notes to Consolidated
Financial Statements.
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 September 30, 2006, these
guarantees totaled $327.8 million. Termination of these
guarantees is coincident with the satisfaction of all
obligations of WGEServices covered by the guarantees. WGL
Holdings also issued guarantees totaling $4.0 million at
September 30, 2006 that were made on behalf of certain of
our non-utility subsidiaries associated with their banking
transactions. For all of its financial guarantees, WGL Holdings
may cancel any or all future obligations imposed by the
guarantees upon written notice to the counterparty, but WGL
Holdings would continue to be responsible for the obligations
that had been created under the guarantees prior to the
effective date of the cancellation.
Operating
Issues in Prince Georges County, Maryland
On April 1, 2005, Washington Gas announced that it would
address a significant increase in the number of natural gas
leaks on its distribution system in a portion of Prince
Georges County, Maryland. Washington Gas retained an
engineering consulting firm to determine the reason for the
increase in leaks in the affected area of Prince Georges
County. Based on the work conducted to date by the consulting
firm, there are several contributing factors to the higher leak
rates of seals on couplings. However, in our opinion, the
relevant factor that explains the higher incidence of leaks in
the affected area of Prince Georges County is the change
in the composition of gas resulting from a change in the gas
supply arising from the reactivation of the Dominion Cove Point
LNG terminal.
Given the increase in the number of natural gas leaks
experienced in the affected area of Prince Georges County,
Maryland in fiscal year 2005, Washington Gas announced in that
year that it would replace gas service lines and rehabilitate
gas mains that contain the applicable mechanical couplings in
the affected area of the distribution system in Prince
Georges County (rehabilitation project) with a projected
date of completion by the end of December 2007. The original
estimate of the cost of the rehabilitation project is
$144 million. This cost estimate could differ materially
from the actual costs incurred for the work associated with this
project. Our planned capital expenditures for fiscal years 2007
through 2008 reflect the current cost estimate of the
rehabilitation project.
Refer to the section entitled Operating Issues in
Prince Georges County, Maryland under
Item 1 of this report for a further discussion of this
matter. Also refer to the section entitled Liquidity
and Capital ResourcesCapital Expenditures for a
further discussion of the estimated costs associated with this
project.
CREDIT
RISK
Regulated
Utility Segment
Certain suppliers that sell natural gas to Washington Gas have
either relatively low credit ratings or are not rated by major
credit rating agencies. In the event of a suppliers
failure to deliver contracted volumes of gas, Washington Gas may
need to replace those volumes at prevailing market prices, which
may be higher than the original transaction prices, and pass
these costs through to its sales customers under the purchased
gas cost adjustment mechanisms (refer to the section entitled
Market RiskPrice Risk Related to the Regulated
Utility Segment). To manage this supplier credit
risk, Washington Gas screens suppliers creditworthiness
and asks suppliers as necessary for financial assurances
including, but not limited to, letters of credit and parental
guarantees. During times of rising natural gas prices,
Washington Gas has requested and received increased levels of
financial assurance from its suppliers.
Washington Gas is also 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.
The deposits are held for varying periods of time, typically a
minimum of one year and, as defined by regulatory tariffs, may
be refunded if the customer makes satisfactory payments to
Washington Gas during the holding period of the customer
deposit. There are no
62
WGL Holdings, Inc.
Part II
Item 7. Managements Discussion and Analysis of
Financial Condition and Results of Operations (continued)
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.
Retail
Energy-Marketing Segment
Certain suppliers that sell natural gas or electricity to
WGEServices have either relatively low credit ratings or are not
rated by major credit rating agencies. Depending on the ability
of these suppliers to deliver natural gas or electricity under
existing contracts, WGEServices could be financially exposed for
the difference between the price at which WGEServices has
contracted to buy these commodities, and the replacement cost of
these commodities that may need to be purchased. WGEServices has
a wholesale supplier credit policy in place that is designed to
mitigate wholesale credit risks through a requirement for credit
enhancements. In accordance with this policy, WGEServices has
obtained credit enhancements from certain of its suppliers.
WGEServices continuously monitors the unsecured credit limits it
will accept from certain suppliers or their guarantors.
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 actively manages its gas supply portfolio to
balance its sales and delivery obligations. Washington Gas
includes the cost of the natural gas commodity and pipeline
services in the purchased gas costs that it includes in firm
customers rates, as permitted by its jurisdictional
tariffs and subject to regulatory review.
In order to mitigate commodity price risk for its firm
customers, Washington Gas has specific regulatory approval in
the District of Columbia, Maryland and Virginia to hedge
transactions for a limited portion of its natural gas purchases.
Three types of hedge instruments were approved for Washington
Gas use: (i) forward gas purchases at a fixed
price; (ii) purchases of call options that
effectively cap the cost of gas and (iii) a
combination of call options purchased and put options sold that
limits natural gas price exposure within a narrow band. While
the regulatory approval for Virginia is permanent, the
regulatory approvals in the District of Columbia and Maryland
are pursuant to pilot programs, and Washington Gas is seeking to
continue these programs. Certain of these contracts, as well as
other contracts Washington Gas has entered into for the purchase
or sale of natural gas, are required to be recorded at fair
value (refer to Note 7 of the Notes to Consolidated
Financial Statements for a discussion of the accounting for
these derivative instruments). Such contracts had a net fair
value loss of $490,000 at September 30, 2006, and a net
fair value gain of $18.2 million at September 30,
2005. Of the September 30, 2006 net fair value loss,
$14.4 million represented a fair value loss that was
recorded on the balance sheet as a payable, with a corresponding
$14.0 million recorded as a regulatory asset and $381,000
recorded to expense during fiscal year 2006. This was partially
offset by a $13.9 million fair value gain that was recorded
as a receivable, with a corresponding $11.6 million
recorded as a regulatory liability and $2.3 million
recorded to income during fiscal year 2006. Of the
September 30, 2005 net fair value gain, $19.9 million
represented a fair value gain that was recorded on the balance
sheet as a receivable, with a corresponding amount recorded as a
regulatory liability. This was partially offset by a
$1.7 million fair value loss that was recorded on the
balance sheet as a payable, with a corresponding amount recorded
as a regulatory asset. This accounting is in accordance with
regulatory accounting requirements for recoverable or refundable
costs.
Washington Gas also mitigates price risk by injecting natural
gas into storage during the summer months when prices are
generally lower and less volatile, and withdraws that gas during
the winter heating season when prices are generally higher and
more volatile. Pursuant to a pilot program, Washington Gas has
specific regulatory approval in Maryland and Virginia to hedge
the cost of natural gas purchased for storage injection.
Price
Risk Related to the Retail Energy-Marketing
Segment
Our retail energy-marketing subsidiary, WGEServices, sells
natural gas and electricity to retail customers at both fixed
and indexed prices. We must manage daily and seasonal demand
fluctuations for these products. The volume and price risks are
evaluated and measured separately for natural gas and
electricity.
63
WGL Holdings, Inc.
Part II
Item 7. Managements Discussion and Analysis of
Financial Condition and Results of Operations (continued)
WGEServices is exposed to market risk to the extent it 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 these risks.
Natural Gas. WGEServices faces risk in
that over 50 percent of its annual natural gas sales
volumes are subject to some variations in customer demand
associated with fluctuations in weather and customer
conservation. Purchases of natural gas to fulfill retail sales
commitments are made generally under fixed-volume contracts that
are based on normal weather assumptions. If there is a
significant deviation from normal weather that causes purchase
commitments to differ significantly from sales levels,
WGEServices may be required to buy incremental natural gas or
sell excess natural gas at prices that negatively impact gross
margins. WGEServices manages this volumetric risk by using
storage gas inventory and peaking services offered to marketers
by the regulated utilities that provide delivery service for
WGEServices customers. WGEServices may also manage price
risk through the use of derivative instruments, including
financial options contracts and wholesale supply contracts that
provide for volumetric variability. WGEServices also uses
derivative instruments to minimize the price volatility from
retail sales contracts which provide customers flexibility on
both the price and volumes of natural gas being sold. At
September 30, 2006, all of WGEServices derivative
instruments related to the purchase and sale of natural gas were
recorded on our consolidated balance sheets at a net fair value
gain of $386,000. This amount was comprised of a
$3.3 million fair value gain that was recorded as a
receivable, net of a $2.9 million fair value loss that was
recorded as a payable. At September 30, 2005, our
consolidated balance sheets reflected a fair value gain of
$5.4 million related to these derivative instruments that
was recorded as a receivable. In connection with these
derivative instruments, WGEServices recorded a pre-tax loss of
$4.5 million for the fiscal year ended September 30,
2006, and pre-tax gains of $3.8 million and $892,000 for
the fiscal years ended September 30, 2005 and 2004,
respectively.
Electricity. WGEServices procures
electricity supply under contract structures in which
WGEServices assumes the responsibility of matching its customer
requirements with its supply purchases. WGEServices assembles
the various components of supply, including electric energy,
capacity, ancillary services and transmission service from
multiple suppliers to match its customer requirements in
accordance with its risk management policy.
To the extent WGEServices has not matched its customer
requirements with its supply purchases, it could be exposed to
electricity commodity price risk. WGEServices electric
business also is exposed to fluctuations in weather. Its
purchases generally are made under fixed-volume contracts that
are based on certain weather assumptions. If there are
significant deviations in weather from these assumptions,
WGEServices may incur price and volume variances that could
negatively impact its expected gross margins.
For a small percentage of its electricity supply, WGEServices
purchased full requirements services from wholesale electricity
suppliers under master purchase and sale agreements, including
electric energy, capacity and certain ancillary services, for
resale to retail electric customers. On October 19, 2006,
WGEServices terminated all remaining full requirements contracts
and received a small termination settlement.
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 percent confidence interval for a
one-day
holding period, WGEServices
value-at-risk
at September 30, 2006 was approximately $569,000 and
$579,000, related to its natural gas and electric portfolios,
respectively.
Weather
Risk
We are exposed to various forms of weather risk in both our
regulated utility and unregulated business segments. For
Washington Gas, a large portion of its revenues is volume driven
and its current rates are based upon an assumption of normal
weather. Without weather protection strategies, variations from
normal weather will cause our earnings to increase or decrease,
depending on the weather pattern. Prior to October 1, 2005,
we managed weather risk for all jurisdictions of Washington Gas
with a weather insurance policy that expired on
September 30, 2005. As discussed below, Washington Gas
obtained ratemaking provisions in Maryland that are designed to
moderate the volatility of its revenues and customers
monthly bills due to variations in usage from factors such as
weather and conservation. Washington Gas does not have similar
ratemaking provisions in the District of Columbia or Virginia.
Therefore, Washington Gas has relied on a weather insurance
policy and a weather derivative, respectively, that are designed
to provide full protection from the negative financial effects
of
warmer-than-normal
weather in these jurisdictions, as discussed below. During the
fiscal year ended September 30, 2006, Washington Gas
recorded pre-tax benefits, net of premium costs, of
$4.7 million
64
WGL Holdings, Inc.
Part II
Item 7. Managements Discussion and Analysis of
Financial Condition and Results of Operations (continued)
related to both its weather insurance in the District of
Columbia and weather derivative in Virginia. This compares to
$4.2 million of pre-tax premium expense recorded in both
fiscal years ended September 30, 2005 and 2004 related to
the expired weather insurance policy.
The financial results of our non-regulated energy-marketing
business, WGEServices, are also affected by variations from
normal weather in the winter relating to its natural gas sales,
and in the summer relating to its electricity sales. WGEServices
manages its weather risk related to its natural gas sales with,
among other things, weather hedges, which are also discussed
below in the section entitled HDD Derivatives.
Billing Adjustment Mechanism. In August
2005, Washington Gas received approval from the PSC of MD to
implement the 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. The RNA became effective on
October 1, 2005. On September 15, 2006, Washington Gas
filed an application with the SCC of VA requesting, among other
things, to implement an RNA billing mechanism in Virginia. A
final order by the SCC of VA on this and all other requests
included in the application is pending. Refer to the section
entitled Rates and Regulatory Matters under
Item 1 of this report for a further discussion of these
regulatory matters.
Weather Insurance. Prior to
October 1, 2005, Washington Gas maintained a weather
insurance policy covering all of its jurisdictions designed to
cover 50 percent of the impact of
warmer-than-normal
weather on its financial results. The policy had a five-year
term that expired on September 30, 2005. Effective
October 1, 2005, Washington Gas purchased a new weather
insurance policy designed to provide full protection from its
exposure to
warmer-than-normal
weather in the District of Columbia. The new policy has a
three-year term that expires on September 30, 2008.
The new policy covers Washington Gas estimated net revenue
exposure in the District of Columbia to variations in HDDs,
subject to a maximum annual payment to Washington Gas of
$6.6 million (pre-tax) and cumulative maximum payments of
$13.1 million (pre-tax) over the three-year policy period.
Pre-tax income is provided in the amount of $12,600 for each HDD
warmer-than-normal
during each fiscal year subject to the limitations previously
described. Other than the cost of the insurance, Washington Gas
pays nothing if weather is colder than normal. The policys
pre-tax average annual expense will be $1.9 million for
fiscal years 2006 through 2008. This pre-tax expense is
amortized based on the pattern of normal HDDs over the
three-year policy period. No portion of the cost or benefit of
this policy is considered in the regulatory process. Washington
Gas recorded to income an accrued benefit, net of amortization
expense of the related insurance premium, totaling $238,000
(pre-tax) for the fiscal year ended September 30, 2006
related to the new insurance policy in the District of Columbia.
In October 2006, Washington Gas received a cash benefit of
$1.3 million relating to this insurance policy.
HDD Derivatives. On December 8,
2005, Washington Gas purchased an HDD derivative designed to
provide full protection from
warmer-than-normal
weather in Virginia, providing Washington Gas with $24,600 for
every HDD below 2,833 during the period December 18, 2005
through May 31, 2006. This derivative expired on
May 31, 2006. In June 2006, Washington Gas received a cash
benefit of $6.2 million relating to this derivative. The
pre-tax expense of this derivative of $1.7 million was
amortized over the pattern of normal HDDs over the
51/2-month
term of the weather derivative. Washington Gas recorded to
income a benefit, net of amortization expense of the related
premium, totaling $4.4 million (pre-tax) related to the
weather derivative for the fiscal year ended September 30,
2006.
On October 5, 2006, Washington Gas purchased a new HDD
derivative designed to provide full protection from
warmer-than-normal
weather in Virginia during the upcoming
2006-2007
winter heating season. Washington Gas will receive $25,500 for
every HDD below 3,735 during the period October 15, 2006
through April 30, 2007. The maximum amount that Washington
Gas can receive under this arrangement is $9.4 million. The
pre-tax expense of this derivative is $2.5 million, which
is being amortized over the pattern of normal HDDs during the
61/2-month
term of the weather derivative.
WGEServices utilizes HDD derivatives for managing weather risks
related to its natural gas sales, and also for its program that
allows customers to pay a fixed amount for their gas
requirements regardless of the amount of gas consumed. These
hedges cover a portion of WGEServices estimated net
revenue exposure to variations in HDDs. For fiscal years 2006,
2005 and 2004, we recorded, including premium costs, pre-tax
losses of $2.1 million, $246,000 and $114,000,
respectively, related to these hedges.
Interest-Rate
Risk
We are exposed to interest-rate risk associated with our debt
financing costs. Management of this risk is discussed below.
65
WGL Holdings, Inc.
Part II
Item 7. Managements Discussion and Analysis of
Financial Condition and Results of Operations (continued)
Long-Term Debt. At September 30,
2006, we had fixed-rate MTNs and other long-term debt
aggregating $576.3 million in principal amount, excluding
current maturities and unamortized discounts, and having a fair
value of $593.4 million. Fair value is defined as the
present value of the debt securities future cash flows
discounted at interest rates that reflect market conditions as
of September 30, 2006. While these are fixed-rate
instruments and, therefore, do not expose us to the risk of
earnings loss due to changes in market interest rates, they are
subject to changes in fair value as market interest rates
change. A total of $8.5 million, or approximately one
percent, of Washington Gas outstanding MTNs, excluding
current maturities, have unexpired put options. In addition, a
total of $421.5 million, or approximately 73 percent,
of Washington Gas outstanding MTNs, excluding current
maturities, have make-whole call options, and no associated put
options.
Using sensitivity analyses to measure this market risk exposure,
we estimate that the fair value of our long-term debt would
increase by approximately $25.8 million if interest rates
were to decline by ten percent, or 61 basis points, from
current market levels. We also estimate that the fair value of
our long-term debt would decrease by approximately
$23.8 million if interest rates were to increase by ten
percent, or 61 basis points, from current market levels. In
general, such an increase or decrease in fair value would impact
earnings and cash flows only if Washington Gas were to reacquire
all or a portion of these instruments in the open market prior
to their maturity.
Derivative Instruments. Washington Gas
utilizes derivative instruments from time to time in order to
minimize its exposure to the risk of interest-rate volatility.
As discussed below, during fiscal years 2006 and 2005,
Washington Gas entered into forward-starting swaps that were
intended to mitigate a substantial portion of the risk of rising
interest rates associated with anticipated future debt issuances.
In February 2006, Washington Gas entered into a forward-starting
swap with a notional principal amount of $25.0 million.
Washington Gas terminated this forward-starting swap in
conjunction with the issuance of $25.0 million of MTNs on
March 22, 2006, and received $303,000 associated with the
settlement of this hedge agreement.
In July 2005, Washington Gas entered into two forward-starting
swaps with an aggregate notional principal amount of
$50.0 million. At September 30, 2005, these swaps had
a fair value gain totaling $106,000. Washington Gas terminated
the two forward-starting swaps in conjunction with the issuance
of $50.0 million of MTNs on January 18, 2006, and
received a total of $286,000 associated with the settlement of
these hedge agreements.
In September 2004, Washington Gas entered into two
forward-starting swaps with an aggregate notional principal
amount of $60.5 million. In August 2005, Washington Gas
terminated the two forward-starting swaps concurrent with the
August 2005 issuances of MTNs totaling $60.5 million.
Washington Gas paid a total of $2.6 million associated with
the settlement of these hedge agreements.
Refer to the section entitled Liquidity and Capital
ResourcesLong-Term Cash Requirements and Related
Financing for a further discussion of the debt
transactions related to these derivatives. Also refer to
Note 7 of the Notes to Consolidated Financial Statements
for a further discussion of the accounting for these derivatives
transactions.
66
Washington
Gas Light Company
Part
II
Item 7. Managements 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
Summary
Results
Washington Gas net income applicable to its common stock
was $84.5 million, $87.9 million and
$95.3 million for the fiscal years ended September 30,
2006, 2005 and 2004, respectively. Net income for fiscal year
2006, when compared to fiscal year 2005, reflects higher
expenses, including depreciation and amortization expense,
interest expense and income taxes. Favorably affecting the
earnings comparisons between fiscal years 2006 and 2005 were
increased utility net revenues (utility revenues less the
associated cost of gas and applicable revenue taxes). Net income
for fiscal year 2005, when compared to fiscal year 2004,
primarily reflects higher operation and maintenance expenses and
increased general taxes and other assessments, partially
mitigated by reduced depreciation and amortization expense and
income taxes.
Utility
Net Revenues
We analyze Washington Gas financial performance based on
its utility net revenues. As discussed below, Washington Gas
includes the cost of the natural gas commodity and revenue taxes
in its rates charged to customers. Both the cost of the natural
gas commodity and revenue taxes are reflected in operating
revenues. Accordingly, changes in the cost of natural gas and
revenue taxes associated with sales made to customers have no
direct effect on Washington Gas utility net revenues or
net income. The following table presents utility net revenues
for fiscal years ended September 30, 2006, 2005 and 2004.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Utility Net Revenues
|
|
|
|
Years Ended September 30,
|
|
|
|
|
(In thousands)
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
|
Operating revenues
|
|
$
|
1,637,491
|
|
|
$
|
1,402,905
|
|
|
$
|
1,293,675
|
|
|
|
Less: Cost of gas
|
|
|
1,031,650
|
|
|
|
796,413
|
|
|
|
694,639
|
|
|
|
Revenue
taxes
|
|
|
55,964
|
|
|
|
58,170
|
|
|
|
50,079
|
|
|
|
|
|
Utility net revenues
|
|
$
|
549,877
|
|
|
$
|
548,322
|
|
|
$
|
548,957
|
|
|
|
|
|
Utility net revenues for Washington Gas were $549.9 million
for fiscal year 2006, a slight improvement of $1.6 million
over utility net revenues of $548.3 million for fiscal year
2005. Favorably contributing to the increase in utility net
revenues was: (i) the addition of 19,811 active
customer meters since the end of the prior fiscal year;
(ii) increased revenues from recoverable carrying
costs on a higher average balance of storage gas inventory;
(iii) favorable adjustments related to Washington
Gas annual reconciliation of
lost-and-unaccounted-for
gas and (iv) favorable adjustments related to the
recovery of natural gas costs. Substantially offsetting the
improvements in utility net revenues was the effect of a decline
in total natural gas deliveries to firm customers due to factors
such as customer conservation, as well as warmer weather in
fiscal year 2006 when compared to fiscal year 2005. The
financial effects of
warmer-than-normal
weather experienced in fiscal year 2006 were neutralized by the
application of the regulatory RNA mechanism in Maryland, as well
as other weather protection strategies implemented in Virginia
and the District of Columbia. The net benefits derived from the
weather protection strategies in Virginia and the District of
Columbia for fiscal year 2006 are reflected in Operation
and maintenance expense as discussed below. Utility net
revenues for fiscal year 2006 were also affected by a charge of
$4.6 million (pre-tax) recorded to Utility cost of
gas related to a proposed regulatory order to disallow
certain natural gas costs incurred by Washington Gas and billed
to Maryland customers.
Utility net revenues were $548.3 million for fiscal year
2005 compared to $549.0 million for fiscal year 2004. This
comparison primarily reflects lower natural gas deliveries to
firm customers, despite the fact that weather was relatively
unchanged in fiscal year 2005 when compared to fiscal year 2004.
Favorably contributing to utility net revenues for fiscal year
2005 was the addition of 22,043 active customer meters, coupled
with the favorable effect of changes in rates charged to
customers that were implemented in Maryland on November 6,
2003 and the District of Columbia on November 24, 2003.
67
Washington
Gas Light Company
Part
II
Item 7. Managements Discussion and Analysis
of
Financial Condition and Results of Operations (continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gas Deliveries, Weather and Meter Statistics
|
|
|
|
|
|
Years Ended September 30,
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
|
|
|
Gas Sales and
Deliveries
(thousands of therms)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Firm
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gas sold and delivered
|
|
|
807,591
|
|
|
|
847,838
|
|
|
|
856,135
|
|
|
|
|
|
Gas delivered for others
|
|
|
403,812
|
|
|
|
434,099
|
|
|
|
454,549
|
|
|
|
|
|
|
|
Total firm
|
|
|
1,211,403
|
|
|
|
1,281,937
|
|
|
|
1,310,684
|
|
|
|
|
|
|
|
Interruptible
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gas sold and delivered
|
|
|
6,185
|
|
|
|
7,809
|
|
|
|
7,626
|
|
|
|
|
|
Gas delivered for others
|
|
|
251,003
|
|
|
|
279,924
|
|
|
|
268,483
|
|
|
|
|
|
|
|
Total interruptible
|
|
|
257,188
|
|
|
|
287,733
|
|
|
|
276,109
|
|
|
|
|
|
|
|
Electric generationdelivered
for others
|
|
|
108,315
|
|
|
|
73,874
|
|
|
|
41,052
|
|
|
|
|
|
|
|
Total deliveries
|
|
|
1,576,906
|
|
|
|
1,643,544
|
|
|
|
1,627,845
|
|
|
|
|
|
|
|
Degree Days
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Actual
|
|
|
3,710
|
|
|
|
4,023
|
|
|
|
4,024
|
|
|
|
|
|
Normal
|
|
|
3,807
|
|
|
|
3,798
|
|
|
|
3,792
|
|
|
|
|
|
Percent colder (warmer) than normal
|
|
|
(2.5
|
)%
|
|
|
5.9
|
%
|
|
|
6.1
|
%
|
|
|
|
|
Active customer meters
(end of period)
|
|
|
1,031,916
|
|
|
|
1,012,105
|
|
|
|
990,062
|
|
|
|
|
|
New customer meters
added
|
|
|
24,693
|
|
|
|
26,682
|
|
|
|
29,438
|
|
|
|
|
|
|
|
Gas Service to Firm Customers. The
level 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 normal weather. The
tariffs in the Maryland jurisdiction also include the effects of
the RNA mechanism that was implemented in Maryland on
October 1, 2005 upon approval by the PSC of MD (refer to
the section entitled Jurisdictional Rates and
Regulatory MattersMaryland Jurisdiction
included under Item 1 of this report). The tariffs for the
remaining two jurisdictions in which Washington Gas operates do
not have a weather normalization mechanism. Nonetheless, the
combination of declining block rates in the Maryland and
Virginia jurisdictions and the existence of a fixed demand
charge in all jurisdictions to collect a portion of revenues
reduce the effect that variations from normal weather have on
utility net revenues.
During the fiscal year ended September 30, 2006, total gas
deliveries to firm customers were 1.211 billion therms, a
decrease of 70.5 million therms, or 5.5 percent, in
deliveries from fiscal year 2005. The decline in natural gas
deliveries to firm customers reflects lower natural gas
consumption by customers due to customer conservation. The
decline in natural gas deliveries also was attributable to
warmer weather in fiscal year 2006 than in the prior fiscal
year. In relation to normal weather patterns, weather for fiscal
year 2006 was 2.5 percent warmer than normal, as compared
to 5.9 percent colder than normal for fiscal year 2005.
Although the warmer weather in fiscal year 2006 reduced total
natural gas deliveries, the effect on net income of
warmer-than-normal
weather experienced in fiscal year 2006 was neutralized by the
application of the RNA mechanism in Maryland, weather insurance
in the District of Columbia and a weather derivative in
Virginia. (Refer to the section entitled Weather
Risk included in Managements Discussion
for WGL Holdings for a further discussion of the weather
protection strategies implemented in the District of Columbia
and Virginia). Deliveries to Maryland customers represent
approximately 40 percent of all therms delivered by
Washington Gas.
During fiscal year 2005, firm therm deliveries decreased
28.7 million therms, or 2.2 percent, from fiscal year
2004 to 1.282 billion therms. The decrease in natural gas
deliveries to firm customers occurred even though HDDs were
relatively unchanged from fiscal year 2004. The decrease in
natural gas deliveries was due, in part, to warmer weather
experienced primarily during the second quarter of fiscal year
2005, the most significant period of Washington Gas winter
heating season. Washington Gas also experienced lower than
expected natural gas deliveries during other periods within
fiscal year 2005 that occurred because the increase in HDDs did
not correlate highly with the change in the volume of gas
delivered during those periods.
Many customers choose to buy the natural gas commodity from
unregulated third-party marketers, rather than purchase the
natural gas commodity and delivery service from Washington Gas
on a bundled basis. Natural gas delivered to firm
customers but purchased from unregulated third-party marketers
represented 33.3 percent of total firm therms delivered
during fiscal year 2006, compared to 33.9 percent and
34.7 percent delivered during fiscal years 2005 and 2004,
respectively. On a per unit basis, Washington
68
Washington
Gas Light Company
Part
II
Item 7. Managements Discussion and Analysis
of
Financial Condition and Results of Operations (continued)
Gas earns the same net revenues from delivering gas for others
as it earns from bundled gas sales in which customers purchase
both the natural gas commodity and the associated delivery
service from Washington Gas. Therefore, Washington Gas does not
experience any loss in utility net revenues when customers
choose to purchase the natural gas commodity from an unregulated
third-party marketer.
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 decreased by 30.5 million therms,
or 10.6 percent, in fiscal year 2006 compared to fiscal
year 2005 primarily due to customers use of alternative
fuels as a result of higher natural gas prices. Therm deliveries
to these customers increased by 11.6 million therms, or
4.2 percent, in fiscal year 2005 over fiscal year 2004,
reflecting less curtailment of interruptible service due to
warmer weather.
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 and, to a much smaller
extent, in Virginia. In the District of Columbia, Washington Gas
shares a majority of the margins earned on interruptible gas
sales and deliveries with firm customers after a gross margin
threshold is reached. A portion of the fixed costs for servicing
interruptible customers is collected through the firm
customers rate design. In the Virginia jurisdiction, rates
for customers using interruptible delivery service are based on
a traditional cost of service approach, and Washington Gas
retains all revenues from interruptible delivery service.
Effective October 1, 2005, pursuant to implementing the
Maryland RNA, rates for interruptible customers in Maryland are
based on a traditional cost of service approach, and Washington
Gas retains a defined amount above a pre-approved margin
threshold level.
Gas Service for Electric
Generation. Washington Gas sells
and/or
delivers natural gas for use at two electric generation
facilities in Maryland that are each owned by companies
independent of WGL Holdings. During fiscal year 2006, deliveries
to these customers increased 46.6 percent over fiscal year
2005, and increased 80.0 percent in fiscal year 2005 over
fiscal year 2004. These increases reflect the increased use by
these customers of natural gas rather than alternative fuels.
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.
Cost
of Gas
Washington Gas cost of natural gas includes both fixed and
variable components. Washington Gas pays fixed costs or
demand charges to pipeline companies for system
capacity needed to transport and store natural gas. Washington
Gas pays variable costs, or the cost of the natural gas
commodity itself, to natural gas producers. Variations in the
utilitys cost of gas expense result from changes in gas
sales volumes, the price of the gas purchased and the level of
gas costs collected through the operation of firm gas cost
recovery mechanisms. Under these regulated recovery mechanisms,
Washington Gas records cost of gas expense equal to the cost of
gas recovered from customers and included in revenues. The
difference between the firm gas costs paid and the gas costs
recovered from 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 utility net revenues and net
income. Changes in the cost of gas can cause significant
variations in Washington Gas cash provided by or used in
operating activities. Washington Gas receives from or pays to
its customers in the District of Columbia and Virginia, at
short-term interest rates, carrying costs associated with under-
or over-collected gas costs recovered from its customers.
The commodity costs of gas invoiced to Washington Gas (excluding
the cost and related volumes applicable to sales made outside of
the utilitys service territory, referred to as off-system
sales) were $1.10, $0.72 and $0.61 per therm for fiscal
years 2006, 2005 and 2004, respectively. The higher gas costs in
fiscal years 2006 and 2005 reflect increased price volatility in
the wholesale market. This volatility intensified during the
2005-2006
winter heating season as a result of natural gas supply
disruptions caused by hurricanes in the Gulf Coast region.
Increased gas costs for fiscal year 2005 also reflect higher
commodity gas prices associated with greater demand that
resulted from
colder-than-normal
weather during that year. Increased gas costs generally will
result in higher short-term debt levels and greater short-term
interest costs to finance higher accounts receivables and
storage gas inventory balances, as well as result in higher
uncollectible accounts expenses.
Revenue
Taxes
Revenue taxes, comprised principally of gross receipts taxes,
decreased by $2.2 million in fiscal year 2006, and
increased $8.1 million in fiscal year 2005. Changes in
revenue taxes are impacted by changes in the volume of gas sold
and delivered and the cost of the natural gas commodity. The
decline in revenue taxes for fiscal year 2006 was attributable
to a decline in volumes of gas sold and delivered, and to a
change in the method of computation. In December 2005, the
District of Columbia changed its method of tax
69
Washington
Gas Light Company
Part
II
Item 7. Managements Discussion and Analysis
of
Financial Condition and Results of Operations (continued)
computation from a percent of revenue computation to a volume
based computation. The increase in revenue taxes for fiscal year
2005 is principally due to an increase in tax rates charged to
customers in Maryland. Washington Gas is allowed recovery of
these amounts from its customers and, therefore, these increased
fees do not affect total utility net revenues.
Utility
Operating Expenses
Operation and Maintenance
Expenses. Operation and maintenance expenses
decreased $5.1 million, or 2.1 percent, from fiscal
year 2005 to fiscal year 2006, and increased $11.3 million,
or 4.9 percent, from fiscal year 2004 to fiscal year 2005.
The following table summarizes the major factors that
contributed to the changes in operation and maintenance expenses.
|
|
|
|
|
|
|
|
|
|
|
Composition of Operation and Maintenance Expense Changes
|
|
|
|
Increase/(Decrease)
|
|
(In millions)
|
|
2006 vs 2005
|
|
|
2005 vs 2004
|
|
|
|
|
Weather insurance and derivative
benefitsnet
|
|
$
|
(8.9
|
)
|
|
$
|
|
|
|
|
Labor and incentive plans
|
|
|
1.7
|
|
|
|
4.2
|
|
|
|
Employee severance
|
|
|
(0.1
|
)
|
|
|
(2.3
|
)
|
|
|
Employee benefits
|
|
|
(1.7
|
)
|
|
|
6.9
|
|
|
|
Uncollectible accounts
|
|
|
1.6
|
|
|
|
2.2
|
|
|
|
Information technology costs
|
|
|
1.8
|
|
|
|
1.2
|
|
|
|
Other non-labor operating expenses
|
|
|
0.5
|
|
|
|
(0.9
|
)
|
|
|
|
|
Total
|
|
$
|
(5.1
|
)
|
|
$
|
11.3
|
|
|
|
|
|
In fiscal year 2006, Washington Gas managed weather risk for the
District of Columbia and Virginia with a weather insurance
policy and weather derivative, respectively. Prior to fiscal
year 2006, Washington Gas utilized a weather insurance policy,
which expired on September 30, 2005, to manage weather risk
for all three jurisdictions. Operation and maintenance expenses
for fiscal year 2006, reflect a benefit of $4.7 million
(pre-tax) from the proceeds of the new weather insurance and
derivative products, net of premium costs, as compared to fiscal
year 2005 which reflect a premium cost of $4.2 million
(pre-tax) associated with the expired insurance policy. There
was no change in the annual premium cost for fiscal year 2005
from fiscal year 2004.
Expenses related to labor and incentive plans increased
$1.7 million in fiscal year 2006, and increased
$4.2 million in fiscal year 2005. The increase in this
expense for fiscal year 2006 relative to 2005 was due primarily
to increased costs associated with equity-based compensation
awards that were recorded pursuant to a new accounting standard
that became effective on October 1, 2005 (refer to
Note 1 of the Notes to Consolidated Financial Statements).
The increase in these expenses in fiscal year 2005 relative to
2004 was due primarily to increased costs related to employee
base pay and performance-based incentive awards, coupled with
increased costs related to overtime incurred in connection with
response to issues that arose in a portion of Washington
Gas distribution system in Prince Georges County,
Maryland such as special leak surveys, emergency response site
visits and repairs. Fiscal year 2005 also benefited
$2.3 million from reduced employee severance costs that
were incurred in fiscal year 2004 related to operational
efficiencies.
The $1.7 million decrease in employee benefits expenses in
fiscal year 2006 when compared to 2005 was largely related to
lower post-retirement benefit costs. The $6.9 million
increase in these expenses in fiscal year 2005 when compared to
2004 largely reflects $10.0 million of increased
post-retirement benefit costs, partially offset by a cost
reduction of $3.1 million associated with a Medicare
prescription drug subsidy (refer to Note 12 of the Notes to
Consolidated Financial Statements).
The $1.6 million and $2.2 million increase in the
provision for uncollectible accounts for fiscal years 2006 and
2005, respectively, were primarily attributable to increased
revenues associated with higher natural gas prices. Operation
and maintenance expenses for fiscal years 2006 and 2005 also
reflect increased information technology costs of
$1.8 million and $1.2 million, respectively, and other
miscellaneous non-labor operating expenses.
Depreciation and
Amortization. Depreciation and amortization
expense for fiscal year 2006 was $92.0 million, an increase
of $2.8 million, or 3.2 percent, over fiscal year
2005. The
year-over-year
increase is attributable, in part, to a reversal in fiscal year
2005 of $1.0 million of depreciation expense that was
previously recorded in fiscal year 2004 related to the
performance of an earnings test required by a December 18,
2003 Final Order of the SCC of VA (refer to Note 15 of the
Notes to Consolidated Financial Statements). The remainder of
the
year-over-year
increase reflects increased investment in property, plant and
equipment.
70
Washington
Gas Light Company
Part
II
Item 7. Managements Discussion and Analysis
of
Financial Condition and Results of Operations (continued)
Depreciation and amortization expense for fiscal year 2005 fell
to $89.1 million, a decrease of $1.7 million, or
1.8 percent, from fiscal year 2004. The lower expense is
attributable, in part, to the $1.0 million reversal of
depreciation expense in fiscal year 2005 that was previously
recorded in fiscal year 2004 related to the SCC of VA earnings
test. The decline in this expense in fiscal year 2005, when
compared to 2004, is also due to the inclusion in fiscal year
2004 of depreciation expense of $3.5 million (pre-tax) that
was recorded in connection with the 2003 Virginia rate order.
Washington Gas composite depreciation and amortization
rate was 3.44 percent for fiscal years 2006, and 3.48 for
fiscal years 2005 and 2004.
General Taxes and Other
Assessments. General taxes and other
assessments decreased by $1.8 million in fiscal year 2006
compared to 2005, and increased by $12.2 million in fiscal
year 2005 compared to 2004. General taxes and other assessments,
as reported on Washington Gas Statements of Income,
include revenue taxes which decreased $2.2 million in
fiscal year 2006 when compared to fiscal year 2005, and
increased $8.1 million in fiscal year 2005 over 2004. As
discussed above, we analyze revenue taxes as a component of
utility net revenues. After considering the $8.1 million
increase in revenue taxes for fiscal year 2005, the remaining
$4.1 million increase in general taxes and other
assessments for fiscal year 2005 was attributable to a sales and
use tax that was newly assessed in Virginia, as well as
increased real and personal property taxes in Maryland and other
miscellaneous items.
Interest
Expense
The explanations for changes in Washington Gas interest
expense are substantially the same as the explanations included
in the Managements Discussion of WGL Holdings. Those
explanations are incorporated by reference into this discussion.
Income
Taxes
Income taxes increased $4.5 million in fiscal year 2006
when compared to 2005 primarily due to a combination of higher
pre-tax income, coupled with a favorable tax adjustment of
$2.5 million that benefited the prior fiscal year and
thereby resulted in a comparably higher effective tax rate for
fiscal year 2006. Income taxes decreased $6.2 million in
fiscal year 2005 relative to 2004 primarily due to a combination
of lower pre-tax income and a lower effective income tax rate.
The lower effective income tax rate in fiscal year 2005 was
primarily attributable to the $2.5 million favorable tax
adjustment recorded in fiscal year 2005, coupled with increased
non-taxable benefits associated with the Medicare prescription
drug subsidy.
LIQUIDITY AND
CAPITAL RESOURCES
Liquidity and capital resources for Washington Gas are
substantially the same as the liquidity and capital resources
discussion included in the Managements Discussion of WGL
Holdings (except for certain items and transactions that pertain
to WGL Holdings and its unregulated subsidiaries). Those
explanations are incorporated by reference into this discussion.
REGULATORY
MATTERS
The effects of regulatory decisions issued in fiscal years 2006
and 2005 have contributed favorably to Washington Gas
overall operating results. The operating results of Washington
Gas reflect certain accounting adjustments necessitated by
regulatory decisions.
Washington Gas determines its requests 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. Over the last five years, Washington
Gas has actively filed for rate relief in all of its
jurisdictions to reflect the underlying cost of providing
utility service. On September 15, 2006, Washington Gas
filed an application with the SCC of VA to increase its annual
utility net revenues in Virginia. This rate application is
pending a Final Order by the SCC of VA (refer to
Jurisdictional Rates and Regulatory
MattersVirginia Jurisdiction under
Item 1 of this report). The following table summarizes
major rate applications and results.
71
Washington
Gas Light Company
Part II
Item 7. Managements Discussion and Analysis of
Financial Condition and Results of Operations (concluded)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Summary of Major Rate Increase Applications and Results
|
|
|
|
|
|
|
|
|
|
Test Year
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Application
|
|
|
Effective
|
|
|
12 Months
|
|
|
Increase in Annual
|
|
|
Allowed
|
|
|
|
Jurisdiction
|
|
Filed
|
|
|
Date
|
|
|
Ended
|
|
|
Revenues (Millions)
|
|
|
Rate of Return
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Requested
|
|
|
Granted
|
|
|
Overall
|
|
|
Equity
|
|
|
|
|
District of Columbia
|
|
|
02/07/03
|
|
|
|
11/24/03
|
|
|
|
09/30/02
|
|
|
$
|
18.8
|
|
|
|
9.7
|
%
|
|
$
|
5.4
|
(a)
|
|
|
2.8
|
%
|
|
|
8.42
|
%
|
|
|
10.60
|
%
|
|
|
District of Columbia
|
|
|
06/19/01
|
|
|
|
04/09/03
|
|
|
|
12/31/00
|
|
|
|
16.3
|
|
|
|
6.8
|
%
|
|
|
(5.4
|
)
|
|
|
(2.2
|
)%
|
|
|
8.83
|
%
|
|
|
10.60
|
%
|
|
|
District of Columbia
|
|
|
01/14/94
|
|
|
|
08/01/94
|
|
|
|
09/30/93
|
|
|
|
17.3
|
|
|
|
9.0
|
%
|
|
|
6.4
|
|
|
|
3.4
|
%
|
|
|
|
(b)
|
|
|
|
(b)
|
|
|
|
|
Maryland
|
|
|
03/31/03
|
|
|
|
11/06/03
|
|
|
|
12/31/02
|
|
|
|
27.2
|
|
|
|
6.8
|
%
|
|
|
2.9
|
|
|
|
0.7
|
%
|
|
|
8.61
|
%
|
|
|
10.75
|
%
|
|
|
Maryland
|
|
|
03/28/02
|
|
|
|
09/30/02
|
|
|
|
12/31/01
|
|
|
|
31.4
|
|
|
|
9.3
|
%
|
|
|
9.3
|
|
|
|
2.8
|
%
|
|
|
|
(b)
|
|
|
|
(b)
|
|
|
Maryland
|
|
|
06/01/94
|
|
|
|
12/01/94
|
|
|
|
03/31/94
|
|
|
|
17.6
|
|
|
|
5.7
|
%
|
|
|
7.4
|
|
|
|
2.4
|
%
|
|
|
9.79
|
%(c)
|
|
|
11.50
|
%(c)
|
|
|
|
|
Virginia
|
|
|
01/27/04
|
|
|
|
10/04/04
|
|
|
|
06/30/03
|
|
|
|
19.6
|
|
|
|
4.7
|
%
|
|
|
|
(e)
|
|
|
|
(e)
|
|
|
8.44
|
%
|
|
|
10.50
|
%
|
|
|
Virginia
|
|
|
06/14/02
|
|
|
|
11/12/02
|
(d)
|
|
|
12/31/01
|
|
|
|
23.8
|
|
|
|
6.6
|
%
|
|
|
9.9
|
|
|
|
2.7
|
%
|
|
|
8.44
|
%
|
|
|
10.50
|
%
|
|
|
Virginia
|
|
|
04/29/94
|
|
|
|
09/27/94
|
|
|
|
12/31/93
|
|
|
|
15.7
|
|
|
|
6.4
|
%
|
|
|
6.8
|
|
|
|
2.7
|
%
|
|
|
9.72
|
%
|
|
|
11.50
|
%
|
|
|
|
|
|
|
|
(a) |
|
The revenue increase includes a
reduction for the effect of a $6.5 million lower level of
pension and other post-retirement benefit costs that had been
previously deferred on the balance sheet of Washington Gas as a
regulatory liability. This deferral mechanism ensures that the
variation in these annual costs, when compared to the levels
collected from customers, does not affect net income.
Additionally, the $5.4 million annual revenue increase
includes an $800,000 per year increase in certain expenses
that are also subject to the regulatory deferral mechanism
treatment. Accordingly, the total annual effect of the Final
Order on Washington Gas pre-tax income results in an
annual increase of $11.1 million. |
(b) |
|
Application was settled without
stipulating the return on common equity. |
(c) |
|
Rates were implemented as a
result of a settlement agreement. The return on equity indicated
in the Final Order of 11.50 percent was not utilized to
establish rates. |
(d) |
|
New depreciation rates effective
January 1, 2002. New base rates went into effect subject to
refund on November 12, 2002. Final Order released on
December 18, 2003. |
(e) |
|
Rate increases went into effect,
subject to refund, on February 26, 2004 under an expedited
rate application. On September 27, 2004, a Final Order was
issued approving a proposed Stipulation filed by Washington Gas
and other participants to resolve all issues related to this
expedited rate case. Under the approved Stipulation, Washington
Gas adjusted its billing rates commencing October 4, 2004
to reflect the level of annual revenues as determined in the
previous Final Order issued on December 18, 2003 and noted
in (d) above. |
Refer to the section entitled Rates and Regulatory
Matters under Item 1 of this report and
Note 15 of the Notes to Consolidated Financial Statements
for a further discussion of Washington Gas regulatory
activities and related contingencies.
POTENTIAL
BUSINESS OUTSOURCING
On July 11, 2006, we informed our employees that Washington
Gas will evaluate proposals for possible business outsourcing
portions of certain business functions. This evaluation follows
our strategic objective of achieving improvements in the
performance of Washington Gas business and builds on our
commitment to provide safe, reliable gas delivery service to our
customers at a reasonable cost. The issuance of Requests for
Proposals does not commit Washington Gas to outsource any
functions, and
follow-up
action will be determined after completing a thorough evaluation
of the proposals. However, if Washington Gas does ultimately
outsource certain functions, it will do so with the intent of
providing improved performance and reducing certain expenses.
The timing and amount of any expense savings that may be
realized and any costs that are incurred to achieve those
savings, if outsourcing occurs, can not be determined at this
time.
72
WGL
Holdings, Inc.
Consolidated Statements of Income
Part II
Item 8. Financial Statements and Supplementary Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended September 30,
|
|
|
|
(In thousands, except per share data)
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
|
OPERATING REVENUES
|
|
|
|
|
|
|
|
|
|
|
|
|
Utility
|
|
$
|
1,622,510
|
|
|
$
|
1,379,390
|
|
|
$
|
1,267,948
|
|
Non-utility
|
|
|
1,015,373
|
|
|
|
783,953
|
|
|
|
798,495
|
|
|
|
Total Operating
Revenues
|
|
|
2,637,883
|
|
|
|
2,163,343
|
|
|
|
2,066,443
|
|
|
|
OPERATING EXPENSES
|
|
|
|
|
|
|
|
|
|
|
|
|
Utility cost of gas
|
|
|
1,016,669
|
|
|
|
772,898
|
|
|
|
668,968
|
|
Non-utility cost of energy-related
sales
|
|
|
971,560
|
|
|
|
713,522
|
|
|
|
751,272
|
|
Operation and maintenance
|
|
|
258,022
|
|
|
|
262,575
|
|
|
|
258,136
|
|
Depreciation and amortization
|
|
|
93,055
|
|
|
|
90,135
|
|
|
|
91,792
|
|
General taxes and other assessments
|
|
|
96,187
|
|
|
|
113,048
|
|
|
|
98,156
|
|
|
|
Total Operating
Expenses
|
|
|
2,435,493
|
|
|
|
1,952,178
|
|
|
|
1,868,324
|
|
|
|
OPERATING INCOME
|
|
|
202,390
|
|
|
|
211,165
|
|
|
|
198,119
|
|
Other Income
(Expenses)Net
|
|
|
3,241
|
|
|
|
2,291
|
|
|
|
9,108
|
|
Interest
Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest on long-term debt
|
|
|
40,634
|
|
|
|
41,049
|
|
|
|
41,822
|
|
Othernet
|
|
|
7,670
|
|
|
|
2,254
|
|
|
|
2,311
|
|
|
|
Total Interest Expense
|
|
|
48,304
|
|
|
|
43,303
|
|
|
|
44,133
|
|
Dividends on Washington Gas
preferred stock
|
|
|
1,320
|
|
|
|
1,320
|
|
|
|
1,320
|
|
|
|
INCOME FROM CONTINUING
OPERATIONS BEFORE INCOME TAXES
|
|
|
156,007
|
|
|
|
168,833
|
|
|
|
161,774
|
|
INCOME TAXES
|
|
|
61,313
|
|
|
|
62,761
|
|
|
|
62,179
|
|
|
|
INCOME FROM CONTINUING
OPERATIONS
|
|
|
94,694
|
|
|
|
106,072
|
|
|
|
99,595
|
|
Loss from discontinued
operations, net of income tax benefit
|
|
|
(7,116
|
)
|
|
|
(2,579
|
)
|
|
|
(2,958
|
)
|
|
|
NET INCOME (APPLICABLE TO COMMON
STOCK)
|
|
$
|
87,578
|
|
|
$
|
103,493
|
|
|
$
|
96,637
|
|
|
|
AVERAGE COMMON
SHARES OUTSTANDING
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
48,773
|
|
|
|
48,688
|
|
|
|
48,640
|
|
Diluted
|
|
|
48,905
|
|
|
|
49,008
|
|
|
|
48,847
|
|
|
|
EARNINGS PER AVERAGE COMMON
SHARE
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
$
|
1.94
|
|
|
$
|
2.18
|
|
|
$
|
2.05
|
|
Loss from discontinued operations
|
|
|
(0.14
|
)
|
|
|
(0.05
|
)
|
|
|
(0.06
|
)
|
|
|
Basic earnings per average common
share
|
|
$
|
1.80
|
|
|
$
|
2.13
|
|
|
$
|
1.99
|
|
|
|
Diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
$
|
1.94
|
|
|
$
|
2.16
|
|
|
$
|
2.04
|
|
Loss from discontinued operations
|
|
|
(0.15
|
)
|
|
|
(0.05
|
)
|
|
|
(0.06
|
)
|
|
|
Diluted earnings per average common
share
|
|
$
|
1.79
|
|
|
$
|
2.11
|
|
|
$
|
1.98
|
|
|
|
DIVIDENDS DECLARED PER COMMON
SHARE
|
|
$
|
1.3450
|
|
|
$
|
1.3225
|
|
|
$
|
1.2950
|
|
|
|
The accompanying notes are an
integral part of these statements.
74
WGL
Holdings, Inc.
Consolidated Balance Sheets
Part II
Item 8. Financial Statements and Supplementary Data
(continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
|
(In thousands)
|
|
2006
|
|
|
2005
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
Property, Plant and
Equipment
|
|
|
|
|
|
|
|
|
At original cost
|
|
$
|
2,949,951
|
|
|
$
|
2,779,878
|
|
Accumulated depreciation and
amortization
|
|
|
(882,056
|
)
|
|
|
(810,862
|
)
|
|
|
Net property, plant and equipment
|
|
|
2,067,895
|
|
|
|
1,969,016
|
|
|
|
Current Assets
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
|
4,350
|
|
|
|
4,842
|
|
Receivables
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
154,443
|
|
|
|
135,980
|
|
Gas costs and other regulatory
assets
|
|
|
14,609
|
|
|
|
9,711
|
|
Unbilled revenues
|
|
|
46,557
|
|
|
|
32,181
|
|
Allowance for doubtful accounts
|
|
|
(17,676
|
)
|
|
|
(16,835
|
)
|
|
|
Net receivables
|
|
|
197,933
|
|
|
|
161,037
|
|
|
|
Materials and
suppliesprincipally at average cost
|
|
|
18,302
|
|
|
|
16,823
|
|
Storage gasat cost
(first-in,
first-out)
|
|
|
296,061
|
|
|
|
252,925
|
|
Deferred income taxes
|
|
|
11,360
|
|
|
|
13,778
|
|
Other prepaymentsprincipally
taxes
|
|
|
12,208
|
|
|
|
10,677
|
|
Other
|
|
|
21,808
|
|
|
|
11,680
|
|
Current assets of discontinued
operations
|
|
|
|
|
|
|
9,679
|
|
|
|
Total current assets
|
|
|
562,022
|
|
|
|
481,441
|
|
|
|
Deferred Charges and Other
Assets
|
|
|
|
|
|
|
|
|
Regulatory assets
|
|
|
|
|
|
|
|
|
Gas costs
|
|
|
11,950
|
|
|
|
|
|
Other
|
|
|
65,330
|
|
|
|
64,236
|
|
Prepaid qualified pension benefits
|
|
|
76,245
|
|
|
|
75,965
|
|
Other
|
|
|
7,964
|
|
|
|
9,756
|
|
Other assets of discontinued
operations
|
|
|
|
|
|
|
667
|
|
|
|
Total deferred charges and other
assets
|
|
|
161,489
|
|
|
|
150,624
|
|
|
|
Total Assets
|
|
$
|
2,791,406
|
|
|
$
|
2,601,081
|
|
|
|
CAPITALIZATION AND
LIABILITIES
|
|
|
|
|
|
|
|
|
Capitalization
|
|
|
|
|
|
|
|
|
Common shareholders equity
|
|
$
|
921,807
|
|
|
$
|
893,992
|
|
Washington Gas Light Company
preferred stock
|
|
|
28,173
|
|
|
|
28,173
|
|
Long-term debt
|
|
|
576,139
|
|
|
|
584,150
|
|
|
|
Total capitalization
|
|
|
1,526,119
|
|
|
|
1,506,315
|
|
|
|
Current Liabilities
|
|
|
|
|
|
|
|
|
Current maturities of long-term debt
|
|
|
60,994
|
|
|
|
50,122
|
|
Notes payable
|
|
|
177,376
|
|
|
|
40,876
|
|
Accounts payable and other accrued
liabilities
|
|
|
208,501
|
|
|
|
203,315
|
|
Wages payable
|
|
|
13,761
|
|
|
|
13,375
|
|
Accrued interest
|
|
|
3,298
|
|
|
|
2,919
|
|
Dividends declared
|
|
|
16,826
|
|
|
|
16,524
|
|
Customer deposits and advance
payments
|
|
|
49,595
|
|
|
|
52,173
|
|
Gas costs and other regulatory
liabilities
|
|
|
14,212
|
|
|
|
14,103
|
|
Accrued taxes
|
|
|
8,963
|
|
|
|
13,688
|
|
Other
|
|
|
7,316
|
|
|
|
1,622
|
|
Current liabilities of discontinued
operations
|
|
|
|
|
|
|
3,210
|
|
|
|
Total current liabilities
|
|
|
560,842
|
|
|
|
411,927
|
|
|
|
Deferred Credits
|
|
|
|
|
|
|
|
|
Unamortized investment tax credits
|
|
|
13,151
|
|
|
|
14,047
|
|
Deferred income taxes
|
|
|
295,718
|
|
|
|
292,273
|
|
|