10-Q
Table of Contents

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

FORM 10-Q

 

þ Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended December 31, 2011

OR

 

¨ Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

Commission

File Number

  

Exact name of registrant as

specified in its charter and principal

office address and telephone number

  

State of

Incorporation

  

I.R.S.

Employer

Identification No.

1-16163

  

WGL Holdings, Inc.

101 Constitution Ave., N.W.

Washington, D.C. 20080

(703) 750-2000

   Virginia    52-2210912

0-49807

  

Washington Gas Light Company

101 Constitution Ave., N.W.

Washington, D.C. 20080

(703) 750-4440

  

District of

Columbia

and Virginia

   53-0162882

Indicate by check mark whether each registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrants were required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes þ No ¨

Indicate by check mark whether each registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No ¨

Indicate by check mark whether each registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

WGL Holdings, Inc.:

 

Large accelerated filer þ   Accelerated filer ¨   Non-accelerated filer ¨   Smaller reporting company ¨
  (Do not check if a smaller reporting company)                        

Washington Gas Light Company:

 

Large accelerated filer ¨   Accelerated filer ¨   Non-accelerated filer þ   Smaller reporting company ¨
  (Do not check if a smaller reporting company)                        

Indicate by check mark whether each registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No þ

Indicate the number of shares outstanding of each of the issuers’ classes of common stock, as of the latest practicable date.

WGL Holdings, Inc. common stock, no par value, outstanding as of January 31, 2012: 51,497,582 shares.

All of the outstanding shares of common stock ($1 par value) of Washington Gas Light Company were held by WGL Holdings, Inc. as of January 31, 2012.

 

 

 


Table of Contents

WGL Holdings, Inc.

Washington Gas Light Company

For the Quarter Ended December 31, 2011

Table of Contents

 

PART I. Financial Information

        
Item 1. Financial Statements (Unaudited)   

WGL Holdings, Inc.

  

Consolidated Balance Sheets

     4   

Consolidated Statements of Income

     5   

Consolidated Statements of Cash Flows

     6   

Washington Gas Light Company

  

Balance Sheets

     7   

Statements of Income

     8   

Statements of Cash Flows

     9   

Notes to Consolidated Financial Statements

  

WGL Holdings, Inc. and Washington Gas Light Company — Combined

     10   

Item  2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

     33   

WGL Holdings, Inc.

     36   

Washington Gas Light Company

     53   

Item 3. Quantitative and Qualitative Disclosures about Market Risk

     57   

Item 4. Controls and Procedures

     57   

PART II. Other Information

        

Item 1. Legal Proceedings

     58   

Item 6. Exhibits

     58   

Signature

     59   

 

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Table of Contents

WGL Holdings, Inc.

Washington Gas Light Company

INTRODUCTION

 

FILING FORMAT

This Quarterly Report on Form 10-Q is a combined report being filed by two separate registrants: WGL Holdings, Inc. (WGL Holdings) and Washington Gas Light Company (Washington Gas). Except where the content clearly indicates otherwise, any reference in the report to “WGL Holdings,” “we,” “us” or “our” is to the holding company or the consolidated entity of WGL Holdings and all of its subsidiaries, including Washington Gas which is a distinct registrant that is a wholly owned subsidiary of WGL Holdings.

Part I — Financial information in this Quarterly Report on Form 10-Q includes separate financial statements (i.e. balance sheets, statements of income and statements of cash flows) for WGL Holdings and Washington Gas. The Notes to Consolidated Financial Statements are also included and are presented on a combined basis for both WGL Holdings and Washington Gas. The Management’s Discussion and Analysis of Financial Condition and Results of Operations (Management’s Discussion) included under Item 2 is divided into two major sections for WGL Holdings and Washington Gas.

SAFE HARBOR FOR FORWARD-LOOKING STATEMENTS

Certain matters discussed in this report, excluding historical information, include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 with respect to the outlook for earnings, revenues and other future financial business performance or strategies and expectations. Forward-looking statements are typically identified by words such as, but not limited to, “estimates,” “expects,” “anticipates,” “intends,” “believes,” “plans” and similar expressions, or future or conditional verbs such as “will,” “should,” “would” and “could.” Although the registrants, WGL Holdings and Washington Gas, believe such forward-looking statements are based on reasonable assumptions, they cannot give assurance that every objective will be achieved. Forward-looking statements speak only as of today, and the registrants assume no duty to update them. The following factors, among others, could cause actual results to differ materially from forward-looking statements or historical performance:

 

  the level and rate at which costs and expenses are incurred and the extent to which they are allowed to be recovered from customers through the regulatory process in connection with constructing, operating and maintaining Washington Gas’ natural gas distribution system;

 

  the ability to implement successful approaches to modify the current or future composition of gas delivered to customers or to remediate the effects of the current or future composition of gas delivered to customers, as a result of the introduction of gas from the Dominion Cove Point or the Southern LNG, Inc. Elba Island facility to Washington Gas’ natural gas distribution system;

 

  the availability of natural gas supply and interstate pipeline transportation and storage capacity;

 

  the ability of natural gas producers, pipeline gatherers and natural gas processors to deliver natural gas into interstate pipelines for delivery by those interstate pipelines to the entrance points of Washington Gas’ natural gas distribution system as a result of factors beyond our control;

 

  changes and developments in economic, competitive, political and regulatory conditions;

 

  changes in capital and energy commodity market conditions;

 

  changes in credit ratings of debt securities of WGL Holdings or Washington Gas that may affect access to capital or the cost of debt;

 

  changes in credit market conditions and creditworthiness of customers and suppliers;

 

  changes in relevant laws and regulations, including tax, environmental and employment laws and regulations;

 

  legislative, regulatory and judicial mandates or decisions affecting business operations or the timing of recovery of costs and expenses;

 

  the timing and success of business and product development efforts and technological improvements;

 

  the pace of deregulation efforts and the availability of other competitive alternatives to our products and services;

 

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Table of Contents

WGL Holdings, Inc.

Washington Gas Light Company

 

  changes in accounting principles;

 

  new commodity purchase and sales contracts or financial contracts and modifications in the terms of existing contracts that may materially affect fair value calculations under derivative accounting requirements;

 

  the ability to manage the outsourcing of several business processes;

 

  acts of nature;

 

  terrorist activities and

 

  other uncertainties.

The outcome of negotiations and discussions that the registrants may hold with other parties from time to time regarding utility and energy-related investments and strategic transactions that are both recurring and non-recurring may also affect future performance. All such factors are difficult to predict accurately and are generally beyond the direct control of the registrants. Accordingly, while they believe that the assumptions are reasonable, the registrants cannot ensure that all expectations and objectives will be realized. Readers are urged to use care and consider the risks, uncertainties and other factors that could affect the registrants’ business as described in this Quarterly Report on Form 10-Q. All forward-looking statements made in this report rely upon the safe harbor protections provided under the Private Securities Litigation Reform Act of 1995.

 

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Table of Contents

WGL Holdings, Inc.

Consolidated Balance Sheets (Unaudited)

Part I—Financial Information

Item 1—Financial Statements

 

(In thousands)    December 31,
2011
    September 30,
2011
 

ASSETS

    

 Property, Plant and Equipment

    

At original cost

   $ 3,621,319     $ 3,575,973  

Accumulated depreciation and amortization

     (1,099,883     (1,086,072

  Net property, plant and equipment

     2,521,436       2,489,901  

 Current Assets

    

Cash and cash equivalents

     5,516       4,332  

Receivables

    

  Accounts receivable

     322,106       205,950  

  Gas costs and other regulatory assets

     17,040       14,364  

  Unbilled revenues

     207,651       94,078  

  Allowance for doubtful accounts

     (16,473     (17,969

  Net receivables

     530,324       296,423  

Materials and supplies—principally at average cost

     27,750       27,113  

Storage gas

     321,074       290,394  

Deferred income taxes

     21,135       18,816  

Other prepayments

     51,750       63,839  

Derivatives and other

     60,732       23,816  

  Total current assets

     1,018,281       724,733  

 Deferred Charges and Other Assets

    

Regulatory assets

    

  Gas costs

     35,673       16,798  

  Pension and other post-retirement benefits

     464,721       471,378  

  Other

     68,043       69,279  

Derivatives and other

     46,380       36,945  

  Total deferred charges and other assets

     614,817       594,400  

  Total Assets

   $ 4,154,534     $ 3,809,034  
                  

CAPITALIZATION AND LIABILITIES

    

  Capitalization

    

Common shareholders’ equity

   $ 1,235,719     $ 1,202,715  

Washington Gas Light Company preferred stock

     28,173       28,173  

Long-term debt

     584,041       587,213  

  Total capitalization

     1,847,933       1,818,101  

 Current Liabilities

    

Current maturities of long-term debt

     50,097       77,104  

Notes payable

     227,984       39,421  

Accounts payable and other accrued liabilities

     299,415       279,434  

Wages payable

     14,502       16,949  

Accrued interest

     11,931       3,880  

Dividends declared

     20,285       20,256  

Customer deposits and advance payments

     80,829       78,139  

Gas costs and other regulatory liabilities

     56,939       7,843  

Accrued taxes

     29,716       16,925  

Derivatives and other

     60,340       36,789  

  Total current liabilities

     852,038       576,740  

 Deferred Credits

    

Unamortized investment tax credits

     16,780       11,656  

Deferred income taxes

     553,490       527,189  

Accrued pensions and benefits

     391,684       397,460  

Asset retirement obligations

     67,715       66,928  

Regulatory liabilities

    

  Accrued asset removal costs

     326,188       326,154  

  Other

     18,757       18,574  

Derivatives and other

     79,949       66,232  

  Total deferred credits

     1,454,563       1,414,193  

Commitments and Contingencies (Note 13)

                

  Total Capitalization and Liabilities

   $ 4,154,534     $ 3,809,034  
                  

The accompanying notes are an integral part of these statements.

 

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Table of Contents

WGL Holdings, Inc.

Consolidated Statements of Income (Unaudited)

Part I—Financial Information

Item 1—Financial Statements (continued)

 

      Three Months Ended
December 31,
 
(In thousands, except per share data)    2011      2010  

OPERATING REVENUES

     

 Utility

   $ 364,147      $ 409,294  

 Non-utility

     363,610        386,580  

Total Operating Revenues

     727,757        795,874  

OPERATING EXPENSES

     

 Utility cost of gas

     155,309        208,620  

 Non-utility cost of energy-related sales

     335,862        328,793  

 Operation and maintenance

     81,624        77,568  

 Depreciation and amortization

     24,240        22,644  

 General taxes and other assessments

     36,797        40,472  

Total Operating Expenses

     633,832        678,097  

OPERATING INCOME

     93,925        117,777  

Other Income—Net

     1,041        888  

Interest Expense

     

 Interest on long-term debt

     9,662        9,774  

 AFUDC and other—net

     160        172  

Total Interest Expense

     9,822        9,946  

INCOME BEFORE INCOME TAXES

     85,144        108,719  

INCOME TAX EXPENSE

     34,376        43,157  

NET INCOME

   $ 50,768      $ 65,562  

Dividends on Washington Gas preferred stock

     330        330  

NET INCOME APPLICABLE TO COMMON STOCK

   $ 50,438      $ 65,232  

AVERAGE COMMON SHARES OUTSTANDING

     

 Basic

     51,438        51,067  

 Diluted

     51,533        51,143  

EARNINGS PER AVERAGE COMMON SHARE

     

 Basic

   $ 0.98      $ 1.28  

 Diluted

   $ 0.98      $ 1.28  

DIVIDENDS DECLARED PER COMMON SHARE

   $ 0.3875      $ 0.3775  
                   

The accompanying notes are an integral part of these statements.

 

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WGL Holdings, Inc.

Consolidated Statements of Cash Flows (Unaudited)

Part I—Financial Information

Item 1—Financial Statements (continued)

 

      Three Months Ended
December 31,
 
(In thousands)    2011     2010  

OPERATING ACTIVITIES

    

Net income

   $ 50,768     $ 65,562  

ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH USED IN BY OPERATING ACTIVITIES

    

Depreciation and amortization

     24,240       22,644  

Amortization of:

    

Other regulatory assets and liabilities—net

     61       916  

Debt related costs

     226       201  

Deferred income taxes—net

     23,082       50,538  

Accrued/deferred pension cost

     4,856       4,372  

Compensation expense related to equity awards

     1,954       717  

Provision for doubtful accounts

     4,603       4,451  

Other non-cash charges (credits)—net

     5,511       (1,374

CHANGES IN ASSETS AND LIABILITIES

    

Accounts receivable and unbilled revenues—net

     (235,828     (344,349

Gas costs and other regulatory assets/liabilities—net

     46,420       98,873  

Storage gas

     (30,680     31,395  

Other prepayments

     12,089       3,428  

Accounts payable and other accrued liabilities

     25,783       133,277  

Wages payable

     (2,447     (2,233

Customer deposits and advance payments

     2,690       4,589  

Accrued taxes

     12,791       15,477  

Accrued interest

     8,051       8,301  

Other current assets

     (37,553     (3,724

Other current liabilities

     23,551       (23,186

Deferred gas costs—net

     (18,875     (84,312

Deferred assets—other

     (3,198     18,054  

Deferred liabilities—other

     3,479       (8,373

Other—net

     17        551  

Net Cash Used in Operating Activities

     (78,409     (4,205

FINANCING ACTIVITIES

    

Common stock issued

     1,063       5,118  

Long-term debt issued

            75,000  

Long-term debt retired

     (27,000     (22

Debt issuance costs

            (18

Notes payable issued (retired)—net

     188,563       (7,212

Dividends on common stock and preferred stock

     (18,921     (19,604

Other financing activities—net

     (695     (3,637

Net Cash Provided by Financing Activities

     143,010       49,625  

INVESTING ACTIVITIES

    

Capital expenditures (excluding AFUDC)

     (59,390     (32,495

Investments in non-utility interests

     (4,761     (5,150

Distributions from non-utility interests

     734         

Net Cash Used in Investing Activities

     (63,417     (37,645

INCREASE IN CASH AND CASH EQUIVALENTS

     1,184       7,775  

Cash and Cash Equivalents at Beginning of Year

     4,332       8,849  

Cash and Cash Equivalents at End of Period

   $ 5,516     $ 16,624  
                  

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION

    

Income taxes paid (received)—net

   $ 4,096     $ 67  

Interest paid

   $ 1,898     $ 1,707  

SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING AND FINANCING ACTIVITIES

    

Project debt financing activities—net

   $ (3,154   $ 2,971  

Capital expenditures included in accounts payable and other accrued liabilities

   $ 21,057     $ 5,210  

The accompanying notes are an integral part of these statements.

 

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Table of Contents

Washington Gas Light Company

Balance Sheets (Unaudited)

Part I—Financial Information

Item 1—Financial Statements (continued)

 

(In thousands)    December 31,
2011
    September 30,
2011
 

ASSETS

    

Property, Plant and Equipment

    

At original cost

   $ 3,547,262     $ 3,509,564  

Accumulated depreciation and amortization

     (1,074,014     (1,060,990

Net property, plant and equipment

     2,473,248       2,448,574  

Current Assets

    

Cash and cash equivalents

            1,353  

Receivables

    

Accounts receivable

     157,547       81,778  

Gas costs and other regulatory assets

     17,040       14,364  

Unbilled revenues

     99,387       13,888  

Allowance for doubtful accounts

     (14,230     (15,863

Net receivables

     259,744       94,167  

Materials and supplies—principally at average cost

     27,704       27,061  

Storage gas

     159,766       166,054  

Deferred income taxes

     15,211       15,748  

Other prepayments

     23,734       30,601  

Receivables from associated companies

     4,761       21,167  

Derivatives and other

     9,236       2,465  

Total current assets

     500,156       358,616  

Deferred Charges and Other Assets

    

Regulatory assets

    

Gas costs

     35,673       16,798  

Pension and other post-retirement benefits

     461,917       468,522  

Other

     68,041       69,277  

Derivatives and other

     16,377       17,261  

Total deferred charges and other assets

     582,008       571,858  

Total Assets

   $ 3,555,412     $ 3,379,048  

CAPITALIZATION AND LIABILITIES

    

Capitalization

    

Common shareholder’s equity

   $ 1,015,983     $ 990,135  

Preferred stock

     28,173       28,173  

Long-term debt

     584,041       587,213  

Total capitalization

     1,628,197       1,605,521  

Current Liabilities

    

Current maturities of long-term debt

     50,097       77,104  

Notes payable

     64,999       22  

Accounts payable and other accrued liabilities

     152,293       131,055  

Wages payable

     14,024       16,031  

Accrued interest

     11,931       3,880  

Dividends declared

     18,742       18,717  

Customer deposits and advance payments

     80,829       78,139  

Gas costs and other regulatory liabilities

     56,939       7,843  

Accrued taxes

     34,833       22,829  

Payables to associated companies

     19,723       11,792  

Derivatives and other

     9,396       11,412  

Total current liabilities

     513,806       378,824  

Deferred Credits

    

Unamortized investment tax credits

     8,454       8,677  

Deferred income taxes

     547,207       524,253  

Accrued pensions and benefits

     389,050       394,818  

Asset retirement obligations

     66,494       65,725  

Regulatory liabilities

    

Accrued asset removal costs

     326,188       326,154  

Other

     18,757       18,574  

Derivatives and other

     57,259       56,502  

Total deferred credits

     1,413,409       1,394,703  

Commitments and Contingencies (Note 13)

                

Total Capitalization and Liabilities

   $ 3,555,412     $ 3,379,048  
                  

The accompanying notes are an integral part of these statements.

 

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Table of Contents

Washington Gas Light Company

Statements of Income (Unaudited)

Part I—Financial Information

Item 1—Financial Statements (continued)

 

      Three Months Ended
December 31,
 
(In thousands)    2011      2010  

OPERATING REVENUES

   $ 370,893      $ 418,376  

OPERATING EXPENSES

     

Utility cost of gas

     161,817        217,703  

Operation and maintenance

     67,142        63,997  

Depreciation and amortization

     23,451        22,115  

General taxes and other assessments

     34,264        38,355  

Total Operating Expenses

     286,674        342,170  

OPERATING INCOME

     84,219        76,206  

Other Income—Net

     690        896  

Interest Expense

     

Interest on long-term debt

     9,662        9,774  

AFUDC and other—net

     99        148  

Total Interest Expense

     9,761        9,922  

INCOME BEFORE INCOME TAXES

     75,148        67,180  

INCOME TAX EXPENSE

     30,642        26,403  

NET INCOME

   $ 44,506      $ 40,777  

Dividends on Washington Gas preferred stock

     330        330  

NET INCOME APPLICABLE TO COMMON STOCK

   $ 44,176      $ 40,447  

The accompanying notes are an integral part of these statements.

 

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Washington Gas Light Company

Statements of Cash Flows (Unaudited)

Part I—Financial Information

Item 1—Financial Statements (continued)

 

      Three Months Ended
December 31,
 
(In thousands)    2011     2010  

OPERATING ACTIVITIES

    

Net income

   $ 44,506     $ 40,777  

ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIES

    

Depreciation and amortization

     23,451       22,115  

Amortization of:

    

Other regulatory assets and liabilities—net

     61       916  

Debt related costs

     226       201  

Deferred income taxes—net

     24,201       39,121  

Accrued/deferred pension cost

     4,817       (4,516

Compensation expense related to equity awards

     1,859       688  

Provision for doubtful accounts

     3,597        3,211  

Other non-cash charges (credits)—net

     208       (1,362

CHANGES IN ASSETS AND LIABILITIES

    

Accounts receivable, unbilled revenues and receivables from associated companies—net

     (150,092     (239,812

Gas costs and other regulatory assets/liabilities—net

     46,420       98,873  

Storage gas

     6,288       38,463  

Other prepayments

     6,867       (22,457

Accounts payable and other accrued liabilities, including payables to associated companies

     30,673       65,608  

Wages payable

     (2,007     (1,726

Customer deposits and advance payments

     2,690       6,589  

Accrued taxes

     12,004       14,307  

Accrued interest

     8,051       8,301  

Other current assets

     (7,414     2,747  

Other current liabilities

     (2,016     (5,159

Deferred gas costs—net

     (18,875     (84,312

Deferred assets—other

     2,929       25,328  

Deferred liabilities—other

     (11,933     3,149  

Other—net

     84       469  

Net Cash Provided by Operating Activities

     26,595       11,519  

FINANCING ACTIVITIES

    

Long-term debt issued

            75,000  

Long-term debt retired

     (27,000     (22

Debt issuance costs

            (18

Notes payable issued (retired)—net

     64,977       (26,198

Dividends on common stock and preferred stock

     (18,717     (18,460

Other financing activities—net

     93       (462

Net Cash Provided by Financing Activities

     19,353       29,840  

INVESTING ACTIVITIES

    

Capital expenditures (excluding AFUDC)

     (47,301     (32,225

Net Cash Used in Investing Activities

     (47,301     (32,225

INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS

     (1,353     9,134  

Cash and Cash Equivalents at Beginning of Year

     1,353       4,390  

Cash and Cash Equivalents at End of Period

   $      $ 13,524  
                  

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION

    

Income taxes paid (received)—net

   $ 3,599     $   

Interest paid

   $ 1,837     $ 1,683  

SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING AND FINANCING ACTIVITIES

    

Project debt financing activities—net

   $ (3,154   $ 2,971  

Capital expenditures included in accounts payable and other accrued liabilities

   $ 20,247     $ 5,189  

The accompanying notes are an integral part of these statements.

 

9


Table of Contents

WGL Holdings, Inc.

Washington Gas Light Company

Part I—Financial Information

Item 1—Financial Statements (continued)

Notes to Consolidated Financial Statements (Unaudited)

NOTE 1. ACCOUNTING POLICIES

 

Basis of Presentation

WGL Holdings, Inc. (WGL Holdings) is a holding company that owns all of the shares of common stock of Washington Gas Light Company (Washington Gas), a regulated natural gas utility, and all of the shares of common stock of Washington Gas Resources Corporation (Washington Gas Resources), Hampshire Gas Company (Hampshire) and Crab Run Gas Company. Washington Gas Resources owns all of the shares of common stock of four non-utility subsidiaries that include Washington Gas Energy Services, Inc. (WGEServices), Washington Gas Energy Systems, Inc. (WGESystems), Capitol Energy Ventures Corp. (CEV) and WGSW, Inc. (WGSW). Except where the content clearly indicates otherwise, “WGL Holdings,” “we,” “us” or “our” refers to the holding company or the consolidated entity of WGL Holdings and all of its subsidiaries. Unless otherwise noted, these notes apply equally to WGL Holdings and Washington Gas.

The interim consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (SEC). Therefore, certain financial information and note disclosures accompanying annual financial statements prepared in accordance with generally accepted accounting principles in the United States of America (GAAP) are omitted in this interim report. The interim consolidated financial statements and accompanying notes should be read in conjunction with the combined Annual Report on Form 10-K for WGL Holdings and Washington Gas for the fiscal year ended September 30, 2011. Due to the seasonal nature of our businesses, the results of operations for the periods presented in this report are not necessarily indicative of actual results for the full fiscal years ending September 30, 2012 and 2011 of either WGL Holdings or Washington Gas.

The accompanying unaudited consolidated financial statements for WGL Holdings and Washington Gas reflect all normal recurring adjustments that are necessary, in our opinion, to present fairly the results of operations in accordance with GAAP.

For a complete description of our accounting policies, refer to Note 1 of the Notes to Consolidated Financial Statements of the combined Annual Report on Form 10-K for WGL Holdings and Washington Gas for the fiscal year ended September 30, 2011.

Storage Gas Valuation Methods. For Washington Gas and WGEServices, storage gas inventory is stated at the lower of cost or market as determined using the first-in, first-out method. For CEV, storage gas inventory is stated at the lower of cost or market using the weighted average cost method.

Accounting Standards Adopted in the Current Period

Fair Value. In January 2010, the FASB issued Accounting Standards Update (ASU) 2010-06, Improving Disclosures about Fair Value Measurements. ASU 2010-06 amends ASC Topic 820 to require the following additional disclosures regarding fair value measurements: (i) the amounts of transfers between Level 1 and Level 2 of the fair value hierarchy; (ii) reasons for any transfers in or out of Level 3 of the fair value hierarchy and (iii) the inclusion of information about purchases, sales, issuances and settlements in the reconciliation of recurring Level 3 measurements. ASU 2010-06 also amends ASC Topic 820 to clarify existing disclosure requirements, requiring fair value disclosures by class of assets and liabilities rather than by major category and the disclosure of valuation techniques and inputs used to determine the fair value of Level 2 and Level 3 assets and liabilities. With the exception of disclosures relating to purchases, sales, issuances and settlements of recurring Level 3 measurements, ASU 2010-06 was effective for us on January 1, 2010. Refer to Note 10 – Fair Value Measurements for the required disclosure under this standard. The remaining disclosure requirements were effective for us on October 1, 2011. The adoption of this standard did not have an effect on our financial statements.

Newly Issued Accounting Standards

Balance Sheet Offsetting. In December 2011, the FASB issued ASU 2011-11, Disclosures about Offsetting Assets and Liabilities. This standard amends the disclosure requirements on offsetting in ASC Topic 210 by requiring enhanced disclosures about financial instruments and derivative instruments that are either (i) offset in accordance with existing guidance or (ii) subject to an enforceable master netting arrangement or similar agreement, irrespective of whether they are offset on the balance sheet. ASU 2011-11 will be effective for us on October 1, 2013. We do not expect the adoption of this standard to have a material effect on our financial statements.

 

10


Table of Contents

WGL Holdings, Inc.

Washington Gas Light Company

Part I—Financial Information

Item 1—Financial Statements (continued)

Notes to Consolidated Financial Statements (Unaudited)

 

Comprehensive Income. In June 2011, the FASB issued ASU 2011-05, Comprehensive Income (Topic 220): Presentation of Comprehensive Income. ASU 2011-05 is intended to improve financial reporting by requiring companies to present items of net income in either one continuous statement, or in two separate but consecutive statements of net income and other comprehensive net income. The new guidance removes the current presentation options in ASC Topic 220. The requirements of ASU 2011-05 do not change which components of comprehensive income are recognized in net income or other comprehensive income, nor does the update change the computation of earnings per share (EPS). ASU 2011-05 will be effective for us on October 1, 2012. We do not expect the adoption of this standard to have a material effect on our financial statements.

Fair Value. In May 2011, the FASB issued ASU 2011-04, Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRS. ASU 2011-04 amends ASC Topic 820 to include a consistent definition of the term “fair value” and set forth common requirements for measuring fair value and disclosing information about fair value measurements in financial statements. ASU 2011-04 will be effective for us beginning January 1, 2012. We do not expect the adoption of this standard to have a material effect on our financial statements.

NOTE 2. ACCOUNTS PAYABLE AND OTHER ACCRUED LIABILITIES

 

The tables below provide details for the amounts included in “Accounts payable and other accrued liabilities” on the balance sheets for both WGL Holdings and Washington Gas.

 

WGL Holdings, Inc.  
(In millions)    December 31, 2011      September 30, 2011  

Accounts payable—trade

   $ 251.5      $ 210.4  

Employee benefits and payroll accruals

     17.6        26.5  

Derivatives and other accrued liabilities

     30.3        42.5  

Total

   $ 299.4      $ 279.4  
                   

 

Washington Gas Light Company   

(In millions)

    December 31, 2011        September 30, 2011   

Accounts payable—trade

  $ 123.1     $ 103.0  

Employee benefits and payroll accruals

    17.1       23.7  

Derivatives and other accrued liabilities

    12.1       4.4  

Total

  $ 152.3     $ 131.1  
                 

NOTE 3. SHORT-TERM DEBT

 

WGL Holdings and Washington Gas satisfy their short-term financing requirements through the sale of commercial paper or through bank borrowings. Due to the seasonal nature of our businesses, short-term financing requirements can vary significantly during the year. We maintain revolving credit agreements to support our outstanding commercial paper and to permit short-term borrowing flexibility. Our policy is to maintain bank credit facilities in an amount equal to or greater than our expected maximum commercial paper position. The following is a summary of our committed credit available at December 31, 2011 and September 30, 2011.

 

11


Table of Contents

WGL Holdings, Inc.

Washington Gas Light Company

Part I—Financial Information

Item 1—Financial Statements (continued)

Notes to Consolidated Financial Statements (Unaudited)

 

Committed Credit Available (In millions)  
As of December 31, 2011   WGL Holdings     Washington Gas     Total Consolidated  

Committed credit agreements

                       

Unsecured revolving credit facility, expires August 3, 2012(a)

  $ 400.0     $ 300.0     $ 700.0  

Less: Commercial Paper

    (163.0     (65.0     (228.0

Net committed credit available

  $ 237.0     $ 235.0     $ 472.0  
                         
                         
As of September 30, 2011   WGL Holdings     Washington Gas     Total Consolidated  

Committed credit agreements

                       

Unsecured revolving credit facility, expires August 3, 2012(a)

  $ 400.0     $ 300.0     $ 700.0  

Less: Commercial Paper

    (39.4     —          (39.4

Net committed credit available

  $ 360.6     $ 300.0     $ 660.6  
                         

(a)Both WGL Holdings and Washington Gas have the right to request extensions with the banks’ approval. WGL Holdings’ revolving credit facility permits it to borrow an additional $50 million, with the banks’ approval, for a total of $450 million. Washington Gas’ revolving credit facility permits it to borrow an additional $100 million, with the banks’ approval, for a total of $400 million.

At December 31, 2011 and September 30, 2011, WGL Holdings and its subsidiaries had outstanding notes payable in the form of commercial paper from revolving credit facilities of $228.0 million and $39.4 million, respectively, at a weighted average interest rate of 0.29% and 0.20%, respectively. At December 31, 2011 and September 30, 2011, there were no outstanding bank loans from WGL Holdings’ or Washington Gas’ revolving credit facilities.

NOTE 4. LONG-TERM DEBT

 

UNSECURED NOTES

Washington Gas issues unsecured Medium-Term Notes (MTNs) and private placement notes with individual terms regarding interest rates, maturities and call or put options. These notes can have maturity dates of one or more years from the date of issuance.

On October 17 and 19, 2011, Washington Gas retired $7.0 million of 6.05% MTNs and $20.0 million of 6.00% MTNs, respectively.

At December 31, 2011, Washington Gas had the capacity, under a shelf registration to issue up to $375.0 million of additional MTNs. At December 31, 2011 and September 30, 2011, outstanding MTNs and private placement notes were $633.0 million and $660.0 million, respectively. At, both, December 31, 2011 and September 30, 2011, the weighted average interest rate on all MTNs and private placement notes was 5.91%.

 

12


Table of Contents

WGL Holdings, Inc.

Washington Gas Light Company

Part I—Financial Information

Item 1—Financial Statements (continued)

Notes to Consolidated Financial Statements (Unaudited)

 

NOTE 5. COMMON SHAREHOLDERS’ EQUITY

 

The tables below reflect the changes in “Common shareholders’ equity” for WGL Holdings and Washington Gas for the three months ended December 31, 2011.

 

WGL Holdings, Inc.  
Components of Common Shareholders’ Equity  
(In thousands)   Common Stock
Amount
    Paid-In
Capital
    Retained
Earnings
    Accumulated Other
Comprehensive
Loss, Net of Taxes
    Total  

Balance at September 30, 2011

  $ 557,594     $ 7,731     $ 648,052     $ (10,662   $ 1,202,715  

Net income

    -        -        50,768       -        50,768  

Post-retirement benefits adjustment, net of taxes

    -        -        -        (9     (9

Comprehensive income

            50,759  

Dividends reinvestment

    1,557             1,557  

Stock-based compensation

    3,161       (2,188     -        -        973  

Dividends declared:

         

Common Stock

    -        -        (19,955     -        (19,955

Preferred Stock

    -        -        (330     -        (330

Balance at December 31, 2011

  $ 562,312     $ 5,543     $ 678,535     $ (10,671   $ 1,235,719  
                                         

 

Washington Gas Light Company  
Components of Common Shareholder’s Equity  
(In thousands)   Common Stock
Amount
    Paid-In
Capital
    Retained
Earnings
    Accumulated Other
Comprehensive
Loss, Net of Taxes
    Total  

Balance at September 30, 2011

  $ 46,479     $ 473,099     $ 481,219     $ (10,662   $ 990,135  

Net income

    -        -        44,506       -        44,506  

Post-retirement benefits adjustment, net of taxes

    -        -        -        (9     (9

Comprehensive income

            44,497  

Stock-based compensation

    -        93       -        -        93  

Dividends declared:

         

Common Stock

    -        -        (18,412     -        (18,412

Preferred Stock

    -        -        (330     -        (330

Balance at December 31, 2011

  $ 46,479     $ 473,192     $ 506,983     $ (10,671   $ 1,015,983  
                                         

WGL Holdings had 51,483,622 and 51,365,337 shares issued of common stock at December 31, 2011 and September 30, 2011, respectively. Washington Gas had 46,479,536 shares issued of common stock at both December 31, 2011 and September 30, 2011.

 

13


Table of Contents

WGL Holdings, Inc.

Washington Gas Light Company

Part I—Financial Information

Item 1—Financial Statements (continued)

Notes to Consolidated Financial Statements (Unaudited)

 

NOTE 6. COMPREHENSIVE INCOME

 

The tables below reflect the components of comprehensive income (loss) for the three months ended December 31, 2011 and 2010 for WGL Holdings and Washington Gas. Items that are excluded from net income (loss) and charged directly to common shareholders’ equity are recorded in other comprehensive income (loss), net of taxes. The amount of accumulated other comprehensive income (loss), net of taxes is included in common shareholders’ equity (refer to Note 5—Common Shareholders’ Equity).

 

WGL Holdings, Inc.  
Components of Comprehensive Income  
      Three Months Ended
December 31,
 
(In thousands)    2011     2010  

Net income

   $ 50,768     $ 65,562  

Other comprehensive income (loss), net of taxes (a)

     (9     129  

Comprehensive income

   $ 50,759     $ 65,691  
                  
(a) Amounts relate to post-retirement benefits.     
    
Washington Gas Light Company   
Components of Comprehensive Income   
      Three Months Ended
December 31,
 

(In thousands)

     2011       2010  

Net income

   $ 44,506     $ 40,777  

Other comprehensive income (loss), net of taxes (a)

     (9     129  

Comprehensive income

   $ 44,497     $ 40,906  
                  
(a) Amounts relate to post-retirement benefits.     

NOTE 7. EARNINGS PER SHARE

 

Basic EPS is computed by dividing net income by the weighted average number of common shares outstanding during the reported period. Diluted EPS assumes the issuance of common shares pursuant to stock-based compensation plans at the beginning of the applicable period unless the effect of such issuance would be anti-dilutive. The following table reflects the computation of our basic and diluted EPS for the three months ended December 31, 2011 and 2010.

 

Basic and Diluted EPS  
(in thousands, except per share data)    Net Income
Applicable to
Common Stock
     Shares      PerShare
Amount
 

Three Months Ended December 31, 2011

        

Basic EPS

   $  50,438        51,438      $  0.98  
        

 

 

 

Stock-based compensation plans

     -        95     

Diluted EPS

   $ 50,438        51,533      $ 0.98  

 

 

Three Months Ended December 31, 2010

        

Basic EPS

   $ 65,232        51,067      $ 1.28  
        

 

 

 

Stock-based compensation plans

     -         76     

Diluted EPS

   $ 65,232        51,143      $ 1.28  

 

 

There were no anti-dilutive shares for the three months ended December 31, 2011 or 2010.

 

 

14


Table of Contents

WGL Holdings, Inc.

Washington Gas Light Company

Part I—Financial Information

Item 1—Financial Statements (continued)

Notes to Consolidated Financial Statements (Unaudited)

 

NOTE 8. INCOME TAXES

 

As of December 31, and September 30, 2011, our uncertain tax positions were approximately $20.7 million primarily due to the change in tax accounting for repairs. If the amounts of unrecognized tax benefits are eventually realized, it would not materially impact the effective tax rate. It is reasonably possible that the amount of the unrecognized tax benefit with respect to Washington Gas’s uncertain tax positions will significantly increase or decrease in the next 12 months due to the on-going audit of Washington Gas by the IRS with respect to the tax year related to its change in accounting method for repairs. At this time an estimate of the range of reasonably possible outcomes cannot be determined.

Under the provision of FIN 48 (now part of ASC Topic 740, Income Taxes), Washington Gas recognizes any accrued interest associated with uncertain tax positions in interest expense and recognizes any accrued penalties associated with uncertain tax positions in other expenses in the statements of income. During the quarters ended December 31, 2011 and 2010, we accrued $0.3 million and $0.2 million in expense for interest on uncertain tax positions. At December 31, and September 30, 2011, we had a total accrual of $1.2 million and $0.9 million of interest related to uncertain tax positions, included in other deferred credits in the accompanying balance sheets.

NOTE 9. DERIVATIVE AND WEATHER-RELATED INSTRUMENTS

 

DERIVATIVE INSTRUMENTS

Regulated Utility Operations

Washington Gas enters into contracts related to the sale and purchase of natural gas that qualify as derivative instruments and are accounted for under ASC Topic 815. These derivative instruments are recorded at fair value on our balance sheet and Washington Gas does not designate any derivatives as hedges under ASC Topic 815. Washington Gas’ derivative contracts relate to: (i) Washington Gas’ asset optimization program, (ii) managing price risk associated with the purchase of gas to serve utility customers and (iii) managing interest rate risk.

Asset Optimization. Washington Gas optimizes the value of its long-term natural gas transportation and storage capacity resources during periods when these resources are not being used to physically serve utility customers. Specifically, Washington Gas utilizes its transportation capacity assets to benefit from favorable natural gas prices between different geographic locations and its storage capacity assets to benefit from favorable natural gas prices between different time periods. As part of this asset optimization program, Washington Gas enters into physical and financial derivative transactions in the form of forward, swap and option contracts to lock-in operating margins that Washington Gas will ultimately realize. The derivatives used under this program are subject to mark-to-market accounting treatment.

Regulatory sharing mechanisms allow the profit from these transactions to be shared between Washington Gas’ shareholders and customers; therefore, any changes in fair value are recorded through earnings, or as regulatory assets or liabilities to the extent that gains and losses associated with these derivative instruments will be included in the rates charged to customers when they are realized. Valuation changes for the portion of net profits to be retained for shareholders may cause significant period-to-period volatility in earnings from unrealized gains and losses. This volatility does not change the locked-in operating margins that Washington Gas will ultimately realize from these transactions.

All physically and financially settled contracts under our asset optimization program are reported on a net basis in the statements of income in “Utility cost of gas”. Total net margins recorded to “Utility cost of gas” after sharing and management fees associated with all asset optimization transactions for the three months ended December 31, 2011 was a gain of $3.7 million including an unrealized gain of $0.3 million. During the three months ended December 31, 2010 we recorded losses of $1.8 million including unrealized losses of $9.8 million, respectively.

Managing Price Risk. To manage price risk associated with acquiring natural gas supply for utility customers, Washington Gas enters into forward contracts, option contracts, financial swap contracts and other contracts, as authorized by its regulators. These instruments are accounted for as derivative instruments. Any gains and losses associated with these derivatives are recorded as regulatory liabilities or assets, respectively, to reflect the rate treatment for these economic hedging activities.

 

15


Table of Contents

WGL Holdings, Inc.

Washington Gas Light Company

Part I—Financial Information

Item 1—Financial Statements (continued)

Notes to Consolidated Financial Statements (Unaudited)

 

Managing Interest-Rate Risk. Washington Gas utilizes derivative instruments that are designed to minimize the risk of interest-rate volatility associated with planned issuances of debt securities. Any gains and losses associated with these types of derivatives are recorded as regulatory liabilities or assets, respectively, and amortized in accordance with regulatory requirements, which is typically over the life of the newly issued debt.

Non-Utility Operations

WGEServices enters into certain derivative contracts as part of managing the price risk associated with the sale and purchase of natural gas and electricity. CEV enters into derivative contracts for the purpose of optimizing its storage and transportation capacity as well as managing the transportation and storage assets on behalf of third parties. Derivative instruments are recorded at fair value on our consolidated balance sheets. Neither WGEServices nor CEV designate these derivatives as hedges under ASC Topic 815; therefore, changes in the fair value of these derivative instruments are reflected in the earnings of our non-utility operations and may cause significant period-to-period volatility in earnings.

Consolidated Operations

Reflected in the tables below is information for WGL Holdings as well as Washington Gas. The information for WGL Holdings includes derivative instruments for both utility and non-utility operations.

At December 31, 2011 and September 30, 2011, respectively, the absolute notional amounts of our derivatives are as follows:

 

Absolute Notional Amounts   

of Open Positions on Derivative Instruments

  

As of December 31, 2011      Notional Amounts   

Derivative transactions

     WGL Holdings         Washington Gas    

Natural Gas (in millions of therms)

     

Asset Optimization

     2,960.2        2,132.5  

Retail sales

     135.6          

Other risk-management activities

     674.8        369.3  

Electricity (in kWhs)

     

Retail sales

     2,294.5          

Other risk-management activities

     17,174.5          

Absolute Notional Amounts

of Open Positions on Derivative Instruments

  

  

As of September 30, 2011      Notional Amounts   

Derivative transactions

     WGL Holdings         Washington Gas    

Natural Gas (In millions of therms)

     

Asset Optimization

     1,538.6        1,221.7   

Retail sales

     131.4        —    

Other risk-management activities

     656.2        392.0   

Electricity (In kWhs)

     

Retail sales

     606.5        —    

Other risk-management activities

     17,085.1        —    

 

16


Table of Contents

WGL Holdings, Inc.

Washington Gas Light Company

Part I—Financial Information

Item 1—Financial Statements (continued)

Notes to Consolidated Financial Statements (Unaudited)

 

The following tables present the balance sheet classification for all derivative instruments as of December 31, 2011 and September 30, 2011.

 

WGL Holdings, Inc.   
Balance Sheet Classification of Derivative Instruments   

(In millions)

                                   
As of December 31, 2011                                
      Derivative
Assets
     Derivative
Liabilities
     Netting of
Collateral
     Total  

Current Assets — Derivatives and other

   $ 62.4      $ (20.3)       $ 1.6       $ 43.7   

Deferred Charges and Other Assets — Derivatives and other

     54.7        (33.1)         —          21.6   

Accounts payable and other accrued liabilities

     4.8        —          —          4.8   

Current Liabilities — Derivatives and other

     14.2        (72.6)         —          (58.4)   

Deferred Credits — Derivatives and other

     4.8        (29.4)         2.5         (22.1)   

Total

   $ 140.9      $ (155.4)       $ 4.1       $ (10.4)   
                                     

As of September 30, 2011

                                   

Current Assets — Derivatives and other

   $ 26.2      $ (10.1)       $ 0.1      $ 16.2   

Deferred Charges and Other Assets — Derivatives and other

     39.1        (27.4)         —          11.7   

Accounts payable and other accrued liabilities

     7.1        (1.8)         —          5.3   

Current Liabilities — Derivatives and other

     9.6        (41.1)         (0.4)         (31.9)   

Deferred Credits — Derivatives and other

     5.1        (23.2)         3.0         (15.1)   

Total

   $ 87.1      $ (103.6)       $ 2.7       $ (13.8)   
                                     
Washington Gas Light Company   
Balance Sheet Classification of Derivative Instruments   

(In millions)

                                   
As of December 31, 2011                                
      Derivative
Assets
     Derivative
Liabilities
     Netting of
Collateral
     Total  

Current Assets — Derivatives and other

   $ 20.5      $ (13.1)       $ —        $ 7.4   

Deferred Charges and Other Assets — Derivatives and other

     44.4        (33.1)         —          11.3   

Current Liabilities — Derivatives and other

     10.5        (16.9)         —          (6.4)   

Deferred Credits — Derivatives and other

     4.4        (11.2)         —          (6.8)   

Total

   $ 79.8      $ (74.3)       $ —        $ 5.5   
                                     

As of September 30, 2011

                                   

Current Assets — Derivatives and other

   $ 5.8      $ (4.5)       $ —        $ 1.3   

Deferred Charges and Other Assets — Derivatives and other

     36.1        (27.4)         —          8.7   

Current Liabilities — Derivatives and other

     9.0        (15.1)         —          (6.1)   

Deferred Credits — Derivatives and other

     4.5        (11.6)         —          (7.1)   

Total

   $ 55.4      $ (58.6)       $ —        $ (3.2)   
                                     

 

17


Table of Contents

WGL Holdings, Inc.

Washington Gas Light Company

Part I—Financial Information

Item 1—Financial Statements (continued)

Notes to Consolidated Financial Statements (Unaudited)

 

The following table presents all gains and losses associated with derivative instruments for the three months ended December 31, 2011 and 2010.

 

Gains and Losses on Derivative Instruments   
(In millions)    WGL Holdings, Inc.      Washington Gas
Light Company
 
Three Months Ended December 31,      2011        2010        2011        2010  

Recorded to income

           

Operating revenues — non-utility

   $ 33.2       $ (6.8)       $ —        $ —    

Utility cost of gas

     2.6         (5.1)         2.6         (5.1)   

Non-utility cost of energy-related sales

     (42.3)         25.3         —          —    

Recorded to regulatory assets

           

Gas costs

     11.4         (15.3)         11.4         (15.3)   

Other

     —          6.2         —          6.2   

Total

   $ 4.9       $ 4.3       $ 14.0       $ (14.2)   
                                     

Collateral

In accordance with ASC 815, WGL Holdings offsets the fair value of derivative instruments against the right to reclaim or obligation to return collateral for derivative instruments executed under the same master netting arrangement. At December 31, 2011, Washington Gas, WGEServices and CEV had $5.2 million, $11.7 million and $12.0 million, respectively, of collateral deposits with counterparties that were not offset against open and settled derivative contracts. At September 30, 2011, Washington Gas, WGEServices and CEV had $9.7 million, $15.8 million and $9.7 million, respectively, of collateral deposits with counterparties that were not offset against open and settled derivative contracts. In addition, at September 30, 2011, Washington Gas recognized $3.5 million that represents an obligation to return cash collateral held by Washington Gas that was not offset against open and settled derivative contracts. Any collateral posted that is not offset against open and settled derivative contracts is included in “Other prepayments” in the accompanying balance sheet. Collateral received and not offset against open and settled derivative contracts is included in “Customer deposits and advance payments” in the accompanying balance sheet.

Certain of Washington Gas’ derivative instruments contain contract provisions that require collateral to be posted if the credit rating of Washington Gas’ debt falls below certain levels. Certain of WGEServices’ and CEV’s derivative instruments contain contract provisions that require collateral to be posted if the credit rating of WGL Holdings falls below certain levels or if counterparty exposure to WGEServices or CEV exceeds a certain level. Due to counterparty exposure levels, at December 31, 2011 and September 30, 2011, WGEServices’ posted $0.1 million of collateral related to its derivative liabilities that contained credit-related contingent features. Washington Gas and CEV were not required to post any collateral at December 31, 2011 with their counterparties. The following table shows the aggregate fair value of all derivative instruments with credit-related contingent features that are in a liability position, as well as the maximum amount of collateral that would be required to be posted related to the net fair value of our derivative instruments if the most intrusive credit-risk-related contingent features underlying these agreements were triggered on December 31, 2011 and September 30, 2011, respectively.

 

Potential Collateral Requirements for Derivative Liabilities   
with Credit-risk-Contingent Features   
(In millions)      WGL Holdings         Washington Gas    

December 31, 2011

                 

Derivative liabilities with credit-risk-contingent features

   $ 118.1      $ 60.2   

Maximum potential collateral requirements

     56.9        0.4   

September 30, 2011

                 

Derivative liabilities with credit-risk-contingent features

   $ 75.1      $ 45.1   

Maximum potential collateral requirements

     30.1        1.8   

Washington Gas, WGEServices and CEV do not enter into derivative contracts for speculative purposes.

 

18


Table of Contents

WGL Holdings, Inc.

Washington Gas Light Company

Part I—Financial Information

Item 1—Financial Statements (continued)

Notes to Consolidated Financial Statements (Unaudited)

 

Concentration of Credit Risk

Washington Gas, WGEServices and CEV are exposed to credit risk associated with agreements with wholesale counterparties that are accounted for as derivative instruments. We have credit policies in place that are designed to mitigate credit risk associated with wholesale counterparties through a requirement for credit enhancements including, but not limited to, letters of credit, parent guarantees and cash collateral when deemed necessary. For certain counterparties or their guarantors that meet this policy’s credit worthiness criteria, Washington Gas, WGEServices and CEV grant unsecured credit which is continuously monitored. Additionally, our agreements with wholesale counterparties contain netting provisions that allow Washington Gas, WGEServices and CEV to offset the receivable and payable exposure related to each counterparty. At December 31, 2011, three counterparties individually represented over 10% of Washington Gas’ credit exposure to wholesale derivative counterparties for a total credit risk of $14.1 million; two counterparties individually represented over 10% of WGEServices’ credit exposure to wholesale counterparties for a total credit risk of $0.1 million and three counterparties individually represented over 10% of CEV’s credit exposure to wholesale counterparties for a total credit risk of $13.2 million.

WEATHER-RELATED INSTRUMENTS

During the three months ended December 31, 2011 and 2010, Washington Gas used HDD weather derivatives to manage its financial exposure to variations from normal weather in the District of Columbia. Under these contracts, Washington Gas purchased protection against net revenue shortfalls due to warmer-than-normal weather and sold to the counterparty the right to receive the benefit when weather is colder than normal. Washington Gas chose to value all weather derivatives at fair value.

Gains and losses associated with Washington Gas’ weather-related instruments are recorded to “Operation and maintenance” expense. During the three months ended December 31, 2011 and 2010, Washington Gas recorded a pre-tax net fair value gain of $2.8 million and a pre-tax net fair value loss of $1.5 million, respectively, related to weather derivatives.

WGEServices utilizes weather-related derivatives for managing the financial effects of weather risks. These derivatives cover a portion of WGEServices’ estimated revenue or energy-related cost exposure to variations in heating or cooling degree days. These contracts provide for payment to WGEServices of a fixed-dollar amount for every degree day over or under specific levels during the calculation period depending upon the type of contract executed. For the three months ended December 31, 2011 and 2010, WGEServices recorded pre-tax gains of $6.3 million and losses of $1.9 million, respectively, related to these derivatives.

NOTE 10. FAIR VALUE MEASUREMENTS

 

We measure the fair value of our financial assets and liabilities in accordance with ASC Topic 820. These financial assets and liabilities primarily consist of (i) derivatives recorded on our balance sheet under ASC Topic 815, (ii) weather derivatives and (iii) long-term debt outstanding that is required to be disclosed at fair value. Under ASC Topic 820, fair value is defined as the exit price, representing the amount that would be received in the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. To value our financial instruments, we use market data or assumptions that market participants would use in pricing the asset or liability, including assumptions about credit risk (both our own credit risk and the counterparty’s credit risk) and the risks inherent in the inputs to our valuation technique, the income approach.

We enter into derivative contracts in the over-the-counter (OTC) wholesale and retail markets. These markets are the principal markets for the respective wholesale and retail contracts. We have determined that all of our existing counterparties and others who have participated in energy transactions at our delivery points are the relevant market participants. These participants have access to the same market data as WGL Holdings. We value our derivative contracts based on an “in-exchange” premise and valuations are generally based on pricing service data or indicative broker quotes depending on the market location. We measure the net credit exposure at a counterparty level where the right to set-off exists. The net exposure is determined using the mark-to-market exposure adjusted for collateral, letters of credit and parent guarantees. We use published default rates from Standard & Poor’s Ratings Services and Moody’s Investors Service as inputs for the determination of credit adjustments.

 

19


Table of Contents

WGL Holdings, Inc.

Washington Gas Light Company

Part I—Financial Information

Item 1—Financial Statements (continued)

Notes to Consolidated Financial Statements (Unaudited)

 

ASC Topic 820 establishes a fair value hierarchy that prioritizes the inputs used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. The three levels of the fair value hierarchy under ASC Topic 820 are described below:

Level 1. Level 1 of the fair value hierarchy consists of assets or liabilities that are valued using observable inputs based upon unadjusted quoted prices in active markets for identical assets or liabilities at the reporting date. Level 1 assets and liabilities primarily include exchange traded derivatives and securities. At December 31, 2011, we do not have any financial assets or liabilities in this category.

Level 2. Level 2 of the fair value hierarchy consists of assets or liabilities that are valued using directly or indirectly observable inputs that are corroborated with market data or based on exchange traded market data. Level 2 includes fair values based on industry-standard valuation techniques that consider various assumptions including: (i) quoted forward prices, including the use of mid-market pricing within a bid/ask spread; (ii) discount rates; (iii) implied volatility and (iv) other economic factors. Substantially all of these assumptions are observable throughout the full term of the instrument, can be derived from observable data or are supported by observable levels at which transactions are executed in the relevant market. At December 31, 2011, Level 2 financial assets and liabilities included non-exchange traded energy-related derivatives such as financial swaps and options and physical forward contracts for deliveries at active market locations.

Level 3. Level 3 of the fair value hierarchy consists of assets or liabilities that are valued using significant unobservable inputs at the reporting date. These unobservable assumptions reflect our assumptions about estimates that market participants would use in pricing the asset or liability, including historical volatility and pricing data when delivery is to inactive market locations. These inputs may be used with industry standard valuation methodologies that result in our best estimate of fair value for the assets or liabilities at the reporting date. At December 31, 2011, derivative assets and liabilities in this category included: (i) physical contracts valued with significant basis adjustments to observable market data when delivery is to inactive market locations; (ii) long-dated positions where observable pricing is not available over the life of the contract; (iii) contracts valued using historical volatility assumptions and (iv) valuations using indicative broker quotes for inactive market locations. Additionally, at December 31, 2011 and September 30, 2011, financial instruments included weather derivatives valued using unobservable market data.

The following tables set forth financial instruments recorded at fair value as of December 31, 2011 and September 30, 2011, respectively. A financial instrument’s classification within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. Our assessment of the significance of a particular input to the fair value measurement requires judgment, and may affect the valuation of fair value assets and liabilities and their placement within the fair value hierarchy.

 

20


Table of Contents

WGL Holdings, Inc.

Washington Gas Light Company

Part I—Financial Information

Item 1—Financial Statements (continued)

Notes to Consolidated Financial Statements (Unaudited)

 

WGL Holdings, Inc.

Fair Value Measurements Under the Fair Value Hierarchy

(In millions)    Level 1      Level 2     Level 3     Total  

At December 31, 2011

                                 

Assets

         

Natural gas related derivatives

   $         -       $ 75.2     $ 38.9     $ 114.1    

Electricity related derivatives

     -         -        26.8       26.8    

Weather derivatives

     -         -        1.7       1.7    

Total Assets

   $ -       $ 75.2     $ 67.4     $ 142.6    
                                   

Liabilities

         

Natural gas related derivatives

   $ -       $   (64.7   $   (42.3   $   (107.0

Electricity related derivatives

     -         (14.6     (33.8     (48.4

Weather derivatives

     -         -        (0.3     (0.3

Total Liabilities

   $ -       $ (79.3   $ (76.4   $ (155.7
                                   

At September 30, 2011

                                 

Assets

         

Natural gas related derivatives

   $ -       $ 38.0     $ 29.3     $ 67.3    

Electricity related derivatives

     -         0.2       19.6       19.8    

Weather derivatives

     -         -        1.3       1.3    

Total Assets

   $ -       $ 38.2     $ 50.2     $ 88.4    
                                   

Liabilities

         

Natural gas related derivatives

   $ -       $ (40.2   $ (33.2   $ (73.4 )  

Electricity related derivatives

     -         (3.8     (26.4     (30.2 )  

Weather derivatives

     -         -        (2.7     (2.7 )  

Total Liabilities

   $ -       $ (44.0   $ (62.3   $ (106.3 )  
                                   

 

21


Table of Contents

WGL Holdings, Inc.

Washington Gas Light Company

Part I—Financial Information

Item 1—Financial Statements (continued)

Notes to Consolidated Financial Statements (Unaudited)

 

Washington Gas Light Company

Fair Value Measurements Under the Fair Value Hierarchy

(In millions)    Level 1      Level 2     Level 3     Total  

At December 31, 2011

         

Assets

         

Natural gas related derivatives

   $         -       $ 45.2     $ 34.6     $ 79.8  

Weather derivatives

     -         -        1.7       1.7  

Total Assets

   $ -       $ 45.2     $ 36.3     $ 81.5  
                                   

Liabilities

         

Natural gas related derivatives

   $ -       $ (38.1   $ (36.2   $ (74.3

Weather derivatives

     -         -        (0.3     (0.3

Total Liabilities

   $ -       $   (38.1   $   (36.5   $   (74.6
                                   

At September 30, 2011

                                 

Assets

         

Natural gas related derivatives

   $ -       $ 28.7     $ 26.7     $ 55.4  

Weather derivatives

     -         -        1.3       1.3  

Total Assets

   $ -       $ 28.7     $ 28.0     $ 56.7  
                                   

Liabilities

         

Natural gas related derivatives

   $ -       $ (27.0   $ (31.6   $ (58.6

Weather derivatives

     -         -        (2.7     (2.7

Total Liabilities

   $ -       $ (27.0   $ (34.3   $ (61.3
                                   

The following tables are a summary of the changes in the fair value of our derivative instruments that are measured at net fair value on a recurring basis in accordance with ASC Topic 820 using significant Level 3 inputs during the three months ended December 31, 2011 and 2010, respectively.

WGL Holdings

Reconciliation of Fair Value Measurements Using Significant Level 3 Inputs

(In millions)    Natural Gas
Related
Derivatives
    Electricity
Related
Derivatives
    Weather
Related
Derivatives
    Total  

Three Months Ended December 31, 2011

                                

Balance at October 1, 2011

   $     (3.9   $     (6.8   $     (1.4   $     (12.1

Realized and unrealized gains (losses)

        

Recorded to income

     (0.6     (11.1     2.8       (8.9

Recorded to regulatory assets — gas costs

     2.8        -        -        2.8   

Transfers into Level 3

     -        -        -        -   

Transfers out of Level 3

     (2.1     -        -        (2.1

Purchases

     -        0.9       -        0.9  

Settlements

     0.4       10.0       -        10.4  

Balance at December 31, 2011

   $ (3.4   $ (7.0   $ 1.4     $ (9.0
                                  

 

22


Table of Contents

WGL Holdings, Inc.

Washington Gas Light Company

Part I—Financial Information

Item 1—Financial Statements (continued)

Notes to Consolidated Financial Statements (Unaudited)

 

Washington Gas

Reconciliation of Fair Value Measurements Using Significant Level 3 Inputs

(In millions)    Natural Gas
Related
Derivatives
    Electricity
Related
Derivatives
     Weather
Related
Derivatives
    Total  

Three Months Ended December 31, 2011

                                 

Balance at October 1, 2011

   $     (4.9   $     -       $     (1.4   $     (6.3

Realized and unrealized gains (losses)

         

Recorded to income

     0.1        -         2.8       2.9   

Recorded to regulatory assets — gas costs

     2.8        -         -        2.8   

Transfers into Level 3

     -        -         -        -   

Transfers out of Level 3

     (0.8     -         -        (0.8

Purchases

     -        -         -        -   

Settlements

     1.2       -         -        1.2  

Balance at December 31, 2011

   $     (1.6     $    -         $    1.4     $     (0.2
                                   

Reconciliation of Fair Value Measurements Using Significant Level 3 Inputs

     
(In millions)    WGL Holdings     Washington Gas  

Three Months Ended December 31, 2010

                

Balance at October 1, 2010

   $             (9.6   $             15.2  

Realized and unrealized gains (losses)

    

Recorded to income

     (4.3     (5.6

Recorded to regulatory assets — gas costs

     (12.6     (12.6

Purchases

     -        -   

Settlements

     10.4       -   

Balance at December 31, 2010

   $ (16.1   $ (3.0
                  

Transfers between different levels of the fair value hierarchy may occur based on the level of observable inputs used to value the instruments from period to period. It is our policy to show both transfers into and out of the different levels of the fair value hierarchy at the fair value as of the beginning of the reporting period. Net derivative assets transferred out of Level 3 during the three months ended December 31, 2011, reflected an increase in observable market inputs used to value certain natural gas derivatives as they approach settlement. Net derivative assets transferred into Level 3 during the three months ended December 31, 2011, reflect a decrease in observable market inputs used to value other natural gas derivatives.

 

23


Table of Contents

WGL Holdings, Inc.

Washington Gas Light Company

Part I—Financial Information

Item 1—Financial Statements (continued)

Notes to Consolidated Financial Statements (Unaudited)

 

The table below sets forth the line items on the Statements of Income to which amounts are recorded for the three months ended December 31, 2011 and 2010, respectively, related to fair value measurements using significant level 3 inputs.

WGL Holdings

Realized and Unrealized Gains (Losses) Recorded to Income for Level 3 Measurements

(In millions)   December 31, 2011     December 31, 2010  
     Natural Gas
Related
Derivatives
    Electricity
Related
Derivatives
    Weather
Related
Derivatives
    Total     Total  

Operating revenues — non-utility

  $     3.2     $ 6.5     $      $ 9.7     $     (5.3

Utility cost of gas

    0.1                      0.1        (4.1

Non-utility cost of energy-related sales

    (3.9     (17.6            (21.5     6.6  

Operation and maintenance expense

                  2.8       2.8       (1.5

Total

  $     (0.6   $     (11.1   $     2.8     $     (8.9   $ (4.3
                                         

Washington Gas

Realized and Unrealized Gains (Losses) Recorded to Income for Level 3 Measurements

     December 31, 2011     December 31, 2010  
(In millions)   Natural Gas
Related
Derivatives
    Electricity
Related
Derivatives
    Weather
Related
Derivatives
    Total     Total  

Utility cost of gas

  $     0.1      $      $      $     0.1      $     (4.1)   

Operation and maintenance expense

                  2.8       2.8           (1.5)   

Total

  $ 0.1      $      $     2.8     $ 2.9     $     (5.6)   
                                         

Unrealized gains (losses) for the three months ended December 31, 2011 and 2010, attributable to derivative assets and liabilities measured using significant Level 3 inputs were recorded as follows, respectively:

 

24


Table of Contents

WGL Holdings, Inc.

Washington Gas Light Company

Part I—Financial Information

Item 1—Financial Statements (continued)

Notes to Consolidated Financial Statements (Unaudited)

 

WGL Holdings

Unrealized Gains (Losses) Recorded for Level 3 Measurements

     December 31, 2011     December 31, 2010  
(In millions)   Natural Gas
Related
Derivatives
    Electricity
Related
Derivatives
    Weather
Related
Derivatives
    Total     Total  

Recorded to income

         

Operating revenues — non-utility

  $         3.4     $         9.9     $         —      $         13.3     $         0.3  

Utility cost of gas

    (0.3                   (0.3     (4.1

Non-utility cost of energy-related sales

    (4.9     (10.2            (15.1     7.0  

Operation and maintenance expense

                  2.8       2.8       (1.5

Recorded to regulatory assets — gas costs

    1.9                      1.9        (12.6

Total

  $ 0.1      $ (0.3   $ 2.8     $ 2.6     $ (10.9
                                         

Washington Gas

Unrealized Gains (Losses) Recorded for Level 3 Measurements

     December 31, 2011     December 31, 2010  
(In millions)   Natural Gas
Related
Derivatives
    Electricity
Related
Derivatives
    Weather
Related
Derivatives
    Total     Total  

Recorded to income

         

Utility cost of gas

  $         (0.3   $         —      $         —      $         (0.3   $         (4.1

Operation and maintenance expense

                  2.8       2.8       (1.5

Recorded to regulatory assets — gas costs

    1.9                      1.9        (12.6

Total

  $ 1.6     $      $ 2.8     $ 4.4      $ (18.2
                                         

The following table presents the carrying amounts and estimated fair values of our financial instruments at December 31, 2011 and September 30, 2011. The carrying amount of current assets and current liabilities approximates fair value because of the short-term maturity of these instruments, and therefore are not shown in the table below.

Fair Value of Financial Instruments

      December 31, 2011      September 30, 2011  
(In millions)    Carrying Amount      Fair Value      Carrying Amount      Fair Value  

Long-term debt(a)

   $         584.1      $         741.5      $         587.2      $         720.9  
                                     

 

(a)

Excludes current maturities and unamortized discounts.

Washington Gas’ long term debt is not actively traded. The fair value of long-term debt was estimated based on the quoted market prices of the U.S. Treasury issues having a similar term to maturity, adjusted for Washington Gas’ credit quality.

 

25


Table of Contents

WGL Holdings, Inc.

Washington Gas Light Company

Part I—Financial Information

Item 1—Financial Statements (continued)

Notes to Consolidated Financial Statements (Unaudited)

 

NOTE 11. OPERATING SEGMENT REPORTING

 

We identify and report on operating segments under the “management approach.” Our chief operating decision maker is our Chief Executive Officer. Operating segments comprise revenue-generating components of an enterprise for which we produce separate financial information internally that we regularly use to make operating decisions and assess performance.

This quarter, we have made certain changes to our operating segments to reflect the recent growth of our non-utility business activities and the impact of those activities on our financial performance. All of our commercial energy assets and operating activities are now reported within a newly-defined operating segment entitled commercial energy systems. All activities of WGESystems are included in the commercial energy systems segment. WGESystems had previously been reported in the design build energy systems segment, which is now being eliminated as an operating segment. In addition, we have transferred all commercial solar projects, previously reported under retail energy-marketing into the commercial energy systems segment. In the future, commercial solar projects, energy efficiency projects and combined heat and power projects, which we own and manage directly, will be reported as commercial energy systems. We have also established wholesale energy solutions as a new segment that contains the activities of CEV, our non-utility asset optimization business, which we began in fiscal year 2010 and previously included in our segment reporting as part of “other activities”. Prior period operating segment information has been recast to conform to current quarter presentation.

These changes improve visibility into our operations and better align our reporting with current management accountability. Our four segments are summarized below.

 

   

Regulated Utility – The regulated utility segment is our core business. It comprises Washington Gas and Hampshire and provides regulated gas distribution services (including the sale and delivery of natural gas) to customers and natural gas transportation services to an unaffiliated natural gas distribution company in West Virginia under a FERC approved interstate transportation service operating agreement.

 

   

Retail Energy-Marketing – The retail energy-marketing segment consists of WGEServices, which sells natural gas and electricity directly to retail customers and in competition with regulated utilities and unregulated gas and electricity marketers.

 

   

Commercial Energy Systems – The commercial energy systems segment consists of WGESystems and provides design-build energy efficient and sustainable solutions including commercial solar, energy efficiency and combined heat and power projects to government and commercial clients.

 

   

Wholesale Energy Solutions – The wholesale energy solutions segment comprises CEV, which engages in acquiring, managing and optimizing natural gas storage and transportation assets.

Activities and transactions that are not significant enough on a stand-alone basis to warrant treatment as an operating segment, and that do not fit into one of our four operating segments, are aggregated as “Other Activities” and included as part of non-utility operations as presented below in the Operating Segment Financial Information. These activities include the operations of WGSW, a holding company formed to invest in alternative energy power generating facilities, and administrative costs associated with WGL Holdings and Washington Gas Resources.

While net income or loss applicable to common stock is the primary criterion for measuring a segment’s performance, we also evaluate our operating segments based on other relevant factors, such as penetration into their respective markets and return on equity.

The following tables present operating segment information for the three months ended December 31, 2011 and 2010.

 

26


Table of Contents

WGL Holdings, Inc.

Washington Gas Light Company

Part I—Financial Information

Item 1—Financial Statements (continued)

Notes to Consolidated Financial Statements (Unaudited)

 

Operating Segment Financial Information

 

 

           Non-Utility Operations              
(In thousands)   Regulated Utility     Retail
Energy-Marketing
    Commercial
Energy Systems
    Wholesale Energy
Solutions
    Other Activities     Eliminations     Consolidated  

Three Months Ended December 31, 2011

                                                       

Operating Revenues (a)

  $ 370,893      $ 336,459     $ 18,380      $ 8,771      $ —      $ (6,746)      $ 727,757  

Operating Expenses:

             

Cost of Energy-Related Sales

    161,817        319,460       16,402        —        —        (6,508)        491,171  

Operation

    53,655        13,203       969        350        851        (148)        68,880  

Maintenance

    12,744              —        —        —        —        12,744  

Depreciation and Amortization

    23,744        202       358        26        —        (90)        24,240  

General Taxes and Other Assessments:

             

Revenue Taxes

    22,593        1,328       —        —        —        —        23,921  

Other

    11,723        1,041       56        52              —        12,876  

Total Operating Expenses

  $ 286,276      $ 335,234     $ 17,785      $ 428      $ 855      $ (6,746)      $ 633,832  

Operating Income (Loss)

    84,617        1,225       595        8,343        (855)        —        93,925   

Other Income (Expense) — Net

    678        5             —        374        (17)        1,041  

Interest Expense

    9,761        9       —        —        69        (17)        9,822  

Dividends on Washington Gas Preferred Stock

    330              —        —        —        —        330  

Income Tax Expense (Benefit)

    30,798        376       291        3,106        (195)        —        34,376  

Net Income (Loss) Applicable to Common Stock

  $ 44,406      $ 845     $ 305      $ 5,237      $ (355)      $ —      $ 50,438  
                                                         

Total Assets

  $ 3,571,446      $ 393,777     $ 32,448      $ 169,773      $ 221,388      $ (234,298)      $ 4,154,534  
                                                         

Capital Expenditures/Investments

  $ 47,679      $ 143      $ 11,567      $ —      $ 11,629      $ —      $ 71,018   
                                                         

Three Months Ended December 31, 2010

                                                       

Operating Revenues (a)

  $ 418,376       $ 379,381      $ 6,971       $ 228       $ —       $ (9,082)      $ 795,874   

Operating Expenses:

             

Cost of Energy-Related Sales

    217,703         323,152        5,640         —         —         (9,082)        537,413   

Operation

    52,951         12,360        1,157         128         698         —         67,294   

Maintenance

    10,274                —         —         —         —         10,274   

Depreciation and Amortization

    22,415         162        67         —         —         —         22,644   

General Taxes and Other Assessments:

             

Revenue Taxes

    25,921         882        —         —         —         —         26,803   

Other

    12,491         1,116        54                       —         13,669   

Total Operating Expenses

    341,755         337,672        6,918         131         703         (9,082)        678,097   

Operating Income (Loss)

    76,621         41,709        53         97         (703)        —         117,777   

Other Income-Net

    877         13               —         44         (52)        888   

Interest Expense

    9,922         44        —         —         32         (52)        9,946   

Dividends on Washington Gas Preferred Stock

    330                —         —         —         —         330   

Income Tax Expense (Benefit)

    26,562         16,743        61         38         (247)        —         43,157   

Net Income (Loss) Applicable to Common Stock

  $ 40,684       $ 24,935      $ (2)      $ 59       $ (444)      $ —       $ 65,232   
                                                         

Total Assets

  $ 3,578,931       $ 389,849      $ 17,254       $ 71,094       $ 115,887       $ (144,757)      $ 4,028,258   
                                                         

Capital Expenditures/Investments

  $ 32,397       $ 90      $      $ —       $ —       $ —       $ 32,495   
                                                         

(a) Operating revenues are reported gross of revenue taxes. Revenue taxes of both the regulated utility and the retail energy-marketing segments include gross receipt taxes. Revenue taxes of the regulated utility segment also include PSC fees, franchise fees and energy taxes. Operating revenue amounts in the “Eliminations” column represent total intersegment revenues associated with sales from the regulated utility segment to the retail energy-marketing segment.

 

27


Table of Contents

WGL Holdings, Inc.

Washington Gas Light Company

Part I—Financial Information

Item 1—Financial Statements (continued)

Notes to Consolidated Financial Statements (Unaudited)

 

NOTE 12. RELATED PARTY TRANSACTIONS

 

WGL Holdings and its subsidiaries engage in transactions during the ordinary course of business. Inter-company transactions and balances have been eliminated from the consolidated financial statements of WGL Holdings, except as described below. Washington Gas provides accounting, treasury, legal and other administrative and general support to affiliates, and files consolidated tax returns that include affiliated taxable transactions. The actual costs of these services are billed to the appropriate affiliates, which approximates the market value of the service provided. To the extent such billings for these services are not yet paid, they are reflected in “Receivables from associated companies” on Washington Gas’ balance sheets. Washington Gas assigns or allocates these costs directly to its affiliates and, therefore, does not recognize revenues or expenses associated with providing these services.

In connection with billing for unregulated third party marketers and with other miscellaneous billing processes, Washington Gas collects cash on behalf of affiliates and transfers the cash in a reasonable time period. Cash collected by Washington Gas on behalf of its affiliates but not yet transferred is recorded in “Payables to associated companies” on Washington Gas’ balance sheets.

At December 31, 2011 and September 30, 2011, Washington Gas recorded receivables from associated companies of $4.8 million and $21.2 million, respectively. At December 31, 2011 and September 30, 2011, Washington Gas recorded payables to associated companies of $19.7 million and $11.8 million, respectively.

Washington Gas provides gas balancing services related to storage, injections, withdrawals and deliveries to all energy marketers participating in the sale of natural gas on an unregulated basis through the customer choice programs that operate in its service territory. These balancing services include the sale of natural gas supply commodities related to various peaking arrangements contractually supplied to Washington Gas and then partially allocated and assigned by Washington Gas to the energy marketers, including WGEServices. Washington Gas records revenues for these balancing services pursuant to tariffs approved by the appropriate regulatory bodies. In conjunction with such services and the related sales and purchases of natural gas, Washington Gas charged WGEServices $6.5 million and $9.1 million for the three months ended December 31, 2011 and 2010, respectively. These related party amounts have been eliminated in the consolidated financial statements of WGL Holdings.

As a result of these balancing services, an imbalance is created for volumes of natural gas received by Washington Gas that are not equal to the volumes of natural gas delivered to customers of the energy marketers. WGEServices recognized an accounts receivable from Washington Gas in the amount of $3.1 million and $2.1 million at December 31, 2011 and September 30, 2011, respectively, related to an imbalance in gas volumes. Due to regulatory treatment, these receivables are not eliminated in the consolidated financial statements of WGL Holdings. Refer to Note 1—Accounting Policies for further discussion of these imbalance transactions.

On June 29, 2011, Washington Gas implemented a Purchase of Receivables (POR) program as approved by the PSC of MD, whereby it purchases receivables from participating energy marketers at approved discount rates. In addition, WGEServices participates in POR programs with certain Maryland and Pennsylvania utilities, whereby it sells its receivables to various utilities, including Washington Gas, at approved discount rates. The receivables purchased by Washington Gas are included in “Accounts receivable” in the accompanying balance sheet. Any activity between Washington Gas and WGEServices related to the POR program has been eliminated in the accompanying financial statements for WGL Holdings. During the three months ended December 31, 2011, Washington Gas purchased $26.5 million of receivables from WGEServices. This program was not in effect during the quarter ended December 31, 2010.

Effective October 1, 2011, WGL Holdings began charging to its subsidiaries guarantee fees in an amount equal to the daily guarantee exposure multiplied by a monthly weighted average interest rate. During the three months ended December 31, 2011, the total fees charged by WGL Holdings to its subsidiaries were $0.1 million. These fees have been eliminated in the accompanying consolidated financial statements of WGL Holdings. Refer to Note 13—Commitments and Contingencies for further discussion of our guarantees.

 

28


Table of Contents

WGL Holdings, Inc.

Washington Gas Light Company

Part I—Financial Information

Item 1—Financial Statements (continued)

Notes to Consolidated Financial Statements (Unaudited)

 

NOTE 13. COMMITMENTS AND CONTINGENCIES

 

RATES AND REGULATORY MATTERS

Washington Gas determines its request to modify existing rates based on the level of net investment in plant and equipment, operating expenses and the need to earn a just and reasonable return on invested capital. The following is an update on significant current regulatory matters in each of Washington Gas’ jurisdictions. For a more detailed discussion of the matters below please refer to the 2011 Annual Report.

District of Columbia Jurisdiction

Investigation of Depreciation Practices. On September 9, 2011, the PSC of DC docketed a proceeding to review the proper and adequate rates of depreciation of the several classes of Washington Gas’ property. In accordance with the procedural schedule, interested parties’ comments were filed by October 24, 2011. Washington Gas’ reply comments were filed on November 14, 2011, wherein Washington Gas requested that the PSC of DC consider depreciation issues in the context of the newly-initiated rate case, referenced below. A commission decision is pending.

District of Columbia Base Rate Case. On November 2, 2011, the PSC of DC docketed a proceeding to investigate the reasonableness of Washington Gas’ base rates and charges. The PSC of DC required Washington Gas to file a base rate case no later than 90 days from the date of the order. On November 29, 2011, Washington Gas requested an additional 30 days to file its base rate case and requested that the PSC of DC consolidate the proceeding related to Washington Gas’ depreciation rates and practices, referenced above, into the base rate proceeding. On December 8, 2011, the PSC of DC approved Washington Gas’ request for an extension of time in which to file its base rate application but did not address whether the proceedings would be consolidated. Accordingly, Washington Gas must file its base rate request by March 1, 2012.

Maryland Jurisdiction

Order on and Reviews of Purchased Gas Charges. Each year, the PSC of MD reviews the annual gas costs collected from customers in Maryland to determine if Washington Gas’ purchased gas costs are reasonable.

On September 9, 2011, the PSC of MD issued an order approving purchased gas charges of Washington Gas for the twelve-month period ending August 2009, except for an undetermined amount related to excess gas deliveries by competitive service providers (CSP) which were cashed-out by Washington Gas. The PSC of MD found that the cash-out of excess deliveries was in violation of Washington Gas’ tariff and that Washington Gas should not have cashed-out the excess deliveries by CSPs, but rather should have eliminated the imbalances through volumetric adjustments in the future and designated that the hearing examiner in a separate proceeding determine whether civil penalties should be levied against Washington Gas. In accordance with generally accepted accounting principles, Washington Gas recorded a $5.3 million estimated regulatory liability associated with this decision during the fourth quarter of fiscal year 2011. On October 11, 2011, Washington Gas filed an application for rehearing of the order with respect to the decision that a violation of the tariff occurred and that civil penalties might be levied. Washington Gas requested that the PSC of MD find that Washington Gas is authorized to cash-out CSP account imbalances under its tariff and therefore is not subject to civil penalties. On January 3, 2012, the PSC of MD issued an order denying Washington Gas’ request for rehearing. Pending the ultimate decision of the PSC of MD, if recovery from ratepayers is denied, further action may be taken with respect to recovery from the CSPs.

Investigation of Asset Management and Gas Purchase Practices. In 2008, the Office of Staff Counsel of the PSC of MD submitted a petition to the PSC of MD to establish an investigation into Washington Gas’ asset management program and cost recovery of its gas purchases.

In November 2009, the Chief Hearing Examiner of the PSC of MD issued a Proposed Order of Hearing Examiner (POHE), which approved Washington Gas’ proposal for the sharing of margins from asset optimization between Washington Gas and customers and its current methodology for pricing storage injections.

Subsequently, both the MD Staff and the Office of People’s Counsel (OPC) filed notices of appeal of the POHE followed by a memorandum on appeal in support of their positions. In January 2010, Washington Gas filed a reply memorandum in response to the Staff of the PSC of MD and the MD OPC’s memoranda on appeal. A decision by the PSC of MD is pending.

 

29


Table of Contents

WGL Holdings, Inc.

Washington Gas Light Company

Part I—Financial Information

Item 1—Financial Statements (continued)

Notes to Consolidated Financial Statements (Unaudited)

 

Maryland Base Rate Case. On November 14, 2011, the PSC of MD issued an order authorizing: (i) an annual revenue increase of $8.4 million as compared to Washington Gas’ revised request of $27.8 million; (ii) a rate of return on common equity of 9.60% and an overall rate of return of 8.09%; and (iii) an end of test period equity ratio of 57.88%. The order also authorized Washington Gas to implement the initial 5-year phase of the accelerated pipe replacement plan, but denied the proposed cost recovery mechanism; and disallowed the amortization of costs to achieve under Washington Gas’ BPO agreement.

On December 14, 2011, Washington Gas filed a petition for rehearing and clarification of the PSC of MD’s November 14, 2011 order to (i) correct the methodology used to calculate the adjustment related to interest synchronization, which would increase the revenue requirement determined by the PSC of MD in its order by $0.7 million, (ii) correct the omission of an adjustment related to “Other Tax Adjustments,” which would increase the revenue requirement by an additional $2.4 million, and (iii) reverse the decision to disallow $1.0 million of Washington Gas’ test period costs to achieve Washington Gas’ BPO agreement. Washington Gas also requested clarification related to implementation of the accelerated pipe replacement plan and what annual reporting requirements may apply. A commission decision is pending.

Virginia Jurisdiction

Conservation and Ratemaking Efficiency (CARE) Plan. On July 22, 2010, Washington Gas filed an amendment to the CARE Plan to include small commercial and industrial customers in Virginia. The application included a portfolio of conservation and energy efficiency programs, an associated cost recovery provision and a decoupling mechanism that will adjust weather normalized non-gas distribution revenues for the impact of conservation or energy efficiency efforts. On November 18, 2010, the SCC of VA issued an order that denied Washington Gas’ application. The SCC of VA found that Washington Gas’ current tariff and its underlying class cost of service and revenue apportionment studies do not segregate small versus large customers and that only small customers qualify under the CARE law. The SCC of VA stated that Washington Gas could amend the underlying tariff and studies in connection with its required 2011 base rate case filing. Such a tariff amendment was proposed in the new base rate case filing made with the SCC of VA, which is pending a commission decision.

Steps to Advance Virginia’s Energy (SAVE) Plan. On September 1, 2011, Washington Gas filed an application with the SCC of VA for approval to implement its 2012 SAVE rider, effective from January 1, 2012 up to December 31, 2012. The estimated amount, $29.8 million, will be allocated among Washington Gas’ four approved SAVE plan projects as follows: (i) bare and/or unprotected steel service replacement program—$10.3 million; (ii) bare and unprotected steel main replacement program—$2.1 million; (iii) mechanically coupled pipe replacement program—$17.1 million and (iv) enhancement of Optimain decision support computer program—$0.3 million. On November 28, 2011, the SCC of VA issued an order approving Washington Gas’ SAVE rider effective with customer bills rendered on and after January 1, 2012. On January 3, 2012, Washington Gas filed revised tariffs reflecting the current SAVE rider in effect.

Virginia Base Rate Case. On January 31, 2011, Washington Gas filed a request with the SCC of VA for a $29.6 million annual increase in revenues. The filing was made pursuant to the settlement agreement reached by the parties and approved by the SCC of VA in Washington Gas’ last base rate case, which resulted in a Performance-Based Rate (PBR) plan. On May 12, 2011, Washington Gas revised its requested revenue increase from $29.6 million to $28.5 million as a result of new proposed depreciation rates. Interim rates went into effect on October 1, 2011 with the requested increase subject to refund pending a final commission decision.

On October 6, 2011 the staff filed testimony in this proceeding recommending a revenue increase of $12.3 million with a proposed return on common equity of 9.0%. Additionally, the staff recommended that all asset optimization revenues be shared with 75.0% directed to ratepayers and 25.0% to shareholders after an initial $2.7 million credit to ratepayers. In connection with this case and in another case, the staff took exception to the regulatory asset that had been established in 2010 for the change in the tax treatment of Medicare Part D (Med D). Based on this position, Washington Gas determined that the recovery of the asset was not probable and recorded a $4.7 million charge to income tax expense to write-off the regulatory asset during the fourth quarter of fiscal year 2011.

On November 30, 2011, Washington Gas filed a stipulation to reflect settlement terms to which Washington Gas, the Staff, and other stipulating parties to the settlement agreed. The Apartment and Office Building Association (AOBA) did not support this stipulation. In the stipulation, the settling parties agreed to a $20.0 million rate increase, a 9.75% return on equity, an 8.261% overall rate of return, and a provision for sharing margins from asset optimization activities between Washington Gas and customers which includes a $3.2 million annual guarantee. Evidentiary hearings were held on December 5 and 6, 2011. Post-hearing briefs were filed on January 26, 2012. A commission decision is pending.

 

30


Table of Contents

WGL Holdings, Inc.

Washington Gas Light Company

Part I—Financial Information

Item 1—Financial Statements (continued)

Notes to Consolidated Financial Statements (Unaudited)

 

Affiliate Transactions. On June 16, 2011, Washington Gas submitted an application to the SCC of VA requesting approval of three affiliate transactions with CEV: (i) the transfer to CEV of the remainder of the term of two agreements for natural gas storage service at the Washington Storage Service (WSS) and Eminence Storage Service (ESS) storage fields; (ii) the sale to CEV of any storage gas balances associated with the WSS and ESS agreements; and (iii) the assignment to CEV of Washington Gas’ rights to buy base gas in the WSS storage field. Washington Gas proposed to make these affiliate transactions by September 30, 2011, coincident with the expiration of its PBR plan approved by the SCC of VA in a separate proceeding. On September 14, 2011, the SCC of VA issued an order denying Washington Gas’ application to transfer Washington Gas’ contracts for certain storage capacity resources to its affiliate, CEV. On October 4, 2011, Washington Gas filed a petition for reconsideration on this proceeding. On October 5, 2011, the SCC of VA granted Washington Gas’ request that the matter be reconsidered, but has not made a final ruling on Washington Gas’ petition for reconsideration. On December 6, 2011, the VA Staff submitted a supplement to action brief seeking to provide evidence to the commission that ratepayers have been funding the WSS and ESS assets during the PBR period based on the netting of costs associated with those assets when calculating net revenues. Washington Gas submitted comments rejecting the Staff position and showing that the ratepayers had not funded these assets. These comments were appended to the VA Staff’s brief on December 9, 2011. A commission decision is pending.

NON UTILITY OPERATIONS

Construction Project Financing

To fund certain of its construction projects, Washington Gas enters into financing arrangements with third party lenders. As part of these financing arrangements, Washington Gas’ customers agree to make principal and interest payments over a period of time, typically beginning after the projects are completed. Washington Gas assigns these customer payment streams to the lender. As the lender funds the construction project, Washington Gas establishes a receivable representing its customers’ obligations to remit principal and interest and a long-term payable to the lender. When these projects are formally “accepted” by the customer as completed, Washington Gas transfers the ownership of the receivable to the lender and removes both the receivable and the long-term financing from its financial statements. As of December 31, 2011 and September 30, 2011, work on these construction projects that was not completed or accepted by customers was valued at $1.1 million and $4.2 million, respectively, which are recorded on the balance sheet as a receivable in “Deferred Charges and Other Assets—Other” with the corresponding long-term obligation to the lender in “Long-term debt.” At any time before these contracts are accepted by the customer, should there be a contract default, such as, among other things, a delay in completing the project, the lender may call on Washington Gas to fund the unpaid principal in exchange for which Washington Gas would receive the right to the stream of payments from the customer. Construction projects are financed primarily for government agencies, which Washington Gas considers to have minimal credit risk. Based on this assessment and previous collection experience, Washington Gas did not record a corresponding reserve for bad debts related to these receivables at December 31, 2011 and September 30, 2011, respectively.

Financial Guarantees

WGL Holdings has guaranteed payments primarily for certain purchases of natural gas and electricity on behalf of WGEServices and for certain purchase commitments of CEV. At December 31, 2011, these guarantees totaled $530.5 million and $113.6 million for WGEServices and CEV, respectively. The amount of such guarantees is periodically adjusted to reflect changes in the level of financial exposure related to these purchase commitments. We also receive financial guarantees or other collateral from counterparties when required by our credit policy. WGL Holdings also issued guarantees totaling $3.0 million at December 31, 2011 on behalf of certain of our non-utility subsidiaries associated with their banking transactions. Of the total guarantees of $647.1 million, $5.0 million expired on January 13, 2012, $4.8 million is due to expire on April 30, 2012 and $22.2 million is due to expire on October 31, 2012. The remaining guarantees do not have specific maturity dates. For all of its financial guarantees, WGL Holdings may cancel any or all future obligations imposed by the guarantees upon written notice to the counterparty, but WGL Holdings would continue to be responsible for the obligations that had been created under the guarantees prior to the effective date of the cancellation.

 

31


Table of Contents

WGL Holdings, Inc.

Washington Gas Light Company

Part I—Financial Information

Item 1—Financial Statements (concluded)

Notes to Consolidated Financial Statements (Unaudited)

 

NOTE 14. PENSION AND OTHER POST-RETIREMENT BENEFIT PLANS

 

The following tables show the components of net periodic benefit costs (income) recognized in our financial statements during the three months ended December 31, 2011 and 2010:

 

Components of Net Periodic Benefit Costs (Income)  
      Three Months Ended December 31,  
      2011     2010  
(In millions)    Pension
Benefits
    Health and
Life Benefits
    Pension
Benefits
    Health and
Life Benefits
 

Components of net periodic benefit costs (income)

        

Service cost

   $ 3.2     $ 2.0     $ 3.0     $ 1.8  

Interest cost

     10.1       6.3       10.3       6.3  

Expected return on plan assets

     (10.9     (4.7     (11.1     (4.6

Amortization of prior service cost

     0.3       (1.0     0.3       (1.0

Amortization of actuarial loss

     4.0       3.3       3.7       2.8  

Amortization of transition obligation

            0.3              0.3  

Net periodic benefit cost

     6.7       6.2       6.2       5.6  

Amount allocated to construction projects

     (0.8     (1.0     (0.8     (0.8

Amount deferred as regulatory asset (liability) — net

     (1.8     0.5       (1.8     0.5  

Amount charged to expense

   $ 4.1     $ 5.7     $ 3.6     $ 5.3  
   

Amounts included in the line item “Amount deferred as regulatory asset/liability-net,” as shown in the table above, represent the difference between the cost of the applicable pension benefits or the health and life benefits and the amount that Washington Gas is permitted to recover in rates that it charges to customers in the District of Columbia.

 

32


Table of Contents

WGL Holdings, Inc.

Washington Gas Light Company

Part I—Financial Information

Item 2—Management’s Discussion and Analysis of

Financial Condition and Results of Operations

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

INTRODUCTION

This Management’s Discussion and Analysis of Financial Condition and Results of Operations (Management’s Discussion) analyzes the financial condition, results of operations and cash flows of WGL Holdings, Inc. (WGL Holdings) and its subsidiaries. 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.

Management’s Discussion is divided into the following two major sections:

 

  WGL Holdings—This 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 operations, including Washington Gas and Hampshire Gas Company (Hampshire), and our non-utility operations.

 

  Washington Gas Light Company (Washington Gas)—This section describes the financial condition and results of operations of Washington Gas, a wholly owned subsidiary of WGL Holdings, which comprises the majority of the regulated utility segment.

Both sections of Management’s Discussion—WGL Holdings and Washington Gas—are designed to provide an understanding of our operations and financial performance and should be read in conjunction with the respective company’s financial statements and the combined Notes to Consolidated Financial Statements in this quarterly report as well as our combined Annual Report on Form 10-K for WGL Holdings and Washington Gas for the fiscal year ended September 30, 2011 (2011 Annual Report).

Unless otherwise noted, earnings per share amounts are presented on a diluted basis, and are based on weighted average common and common equivalent shares outstanding. Our operations are seasonal and, accordingly, our operating results for the interim periods presented are not indicative of the results to be expected for the full fiscal year.

EXECUTIVE OVERVIEW

Introduction

WGL Holdings, through its wholly owned subsidiaries, sells and delivers natural gas and provides a variety of energy-related products and services to customers primarily in the District of Columbia and the surrounding metropolitan areas in Maryland and Virginia.

This quarter, we have made certain changes to our operating segments to reflect the recent growth of our non-utility business activities and the impact of those activities on our financial performance. All of our commercial energy assets and operating activities are now reported within a newly-defined operating segment entitled commercial energy systems. All activities of Washington Gas Energy Systems, Inc. (WGESystems) are included in the commercial energy systems segment. WGESystems had previously been reported in the design build energy systems segment, which is now being eliminated as an operating segment. In addition, we have transferred all commercial solar projects, previously reported under retail energy-marketing into the commercial energy systems segment. In the future, commercial solar projects, energy efficiency projects and combined heat and power projects, which we own and manage directly, will be reported as commercial energy systems. We have also established wholesale energy solutions as a new segment that contains the activities of Capitol Energy Ventures Corp. (CEV), our non-utility asset optimization business, which we began in fiscal year 2010 and previously included in our segment reporting as part of “other activities”. Prior period operating segment information has been reclassified to conform to current quarter presentation.

These changes improve visibility into our operations and better align our reporting with current management accountability. Our four segments are described below.

 

33


Table of Contents

WGL Holdings, Inc.

Washington Gas Light Company

Part I—Financial Information

Item 2—Management’s Discussion and Analysis of

Financial Condition and Results of Operations (continued)

 

Regulated Utility. With approximately 86% 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.

The rates charged to utility customers are designed to recover Washington Gas’ operating expenses and natural gas commodity costs and to provide a return on its investment in the net assets used in its firm gas sales and delivery service. Washington Gas recovers the cost of the natural gas purchased to serve firm customers through the gas cost recovery mechanisms as approved in jurisdictional tariffs. Any difference between the firm customer gas costs incurred and the gas costs recovered from those firm customers is deferred on the balance sheet as an amount to be collected from or refunded to customers in future periods. Therefore, increases or decreases in the cost of gas associated with sales made to firm customers have no direct effect on Washington Gas’ net revenues and net income.

Washington Gas’ asset optimization program utilizes Washington Gas’ storage and transportation capacity resources when those assets are not fully utilized to physically serve utility customers. The objective of this program is to derive a profit to be shared with its utility customers (refer to the section entitled “Market Risk” for further discussion of our asset optimization program) by entering into commodity-related physical and financial contracts with third parties. Unless otherwise noted, therm deliveries shown related to Washington Gas or the regulated utility segment do not include therm deliveries related to our asset optimization program.

Hampshire, a wholly owned subsidiary of WGL Holdings, is regulated by the Federal Energy Regulatory Commission (FERC). Hampshire operates and owns full and partial interests in underground natural gas storage facilities including pipeline delivery facilities located in and around Hampshire County, West Virginia. Washington Gas purchases all of the storage services of Hampshire and includes the cost of these services in the bills sent to its customers. Hampshire operates under a “pass-through” cost of service-based tariff approved by the FERC, and adjusts its billing rates to Washington Gas on a periodic basis to account for changes in its investment in utility plant and associated expenses.

Retail Energy-Marketing. The retail energy-marketing segment consists of the operations of Washington Gas Energy Services, Inc. (WGEServices), a wholly owned subsidiary of Washington Gas Resources, which is a wholly owned subsidiary of WGL Holdings. WGEServices competes with regulated utilities and other unregulated third party marketers to sell natural gas and/or electricity directly to residential, commercial and industrial customers in Maryland, Virginia, Delaware, Pennsylvania and the District of Columbia. WGEServices contracts for its supply needs and buys and resells natural gas and electricity with the objective of earning a profit through competitively priced contracts with end-users. These commodities are delivered to retail customers through the distribution systems owned by regulated utilities such as Washington Gas or other unaffiliated natural gas or electric utilities.

Commercial Energy Systems. Our commercial energy systems segment, which consists of the operations of WGESystems, a wholly owned subsidiary of Washington Gas Resources, provides design-build energy efficient and sustainable solutions to government and commercial clients. WGESystems focuses on upgrading the mechanical, electrical, water and energy-related systems of large government and commercial facilities by implementing both traditional as well as alternative energy technologies, primarily in the District of Columbia, Maryland and Virginia. WGESystems is also increasing its investments in commercial solar, energy efficiency, and combined heat and power projects, which we own and manage directly. This expansion includes the ownership and management of its renewable energy producing assets. These investments are part of our long-term commitment to providing clean and efficient energy solutions to our customers and communities in select markets across the United States.

Wholesale Energy Solutions. The wholesale energy solutions segment, which consists of the operations of CEV, engages in acquiring, managing and optimizing natural gas storage and transportation assets. CEV enters into both physical and financial transactions in a manner intended to utilize the most effective energy risk management products available to mitigate risks while maximizing potential profits from the optimization of these assets under its management.

Other Activities. Activities and transactions that are not significant enough on a stand-alone basis to warrant treatment as an operating segment, and that do not fit into one of our other operating segments, are aggregated as “Other activities” and included as part of non-utility operations as presented below in the operating segment financial information. These activities include the operations of WGSW, Inc. (WGSW), a wholly owned subsidiary of Washington Gas Resources, which is a holding company formed to invest in alternative energy power generating facilities. Administrative costs associated with WGL Holdings and Washington Gas Resources are also included in “Other activities.”

 

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Table of Contents

WGL Holdings, Inc.

Washington Gas Light Company

Part I—Financial Information

Item 2—Management’s Discussion and Analysis of

Financial Condition and Results of Operations (continued)

 

PRIMARY FACTORS AFFECTING WGL HOLDINGS AND WASHINGTON GAS

The principal business, economic and other factors that affect our operations and/or financial performance include:

 

   

weather conditions and weather patterns;

 

   

regulatory environment, regulatory decisions and changes in legislation;

 

   

availability of natural gas supply and pipeline transportation and storage capacity;

 

   

diversity of natural gas supply;

 

   

volatility of natural gas and electricity prices;

 

   

non-weather related changes in natural gas consumption patterns;

 

   

maintaining the safety and reliability of the natural gas distribution system;

 

   

competitive environment;

 

   

environmental matters;

 

   

industry consolidation;

 

   

economic conditions and interest rates;

 

   

inflation/deflation;

 

   

use of business process outsourcing;

 

   

labor contracts, including labor and benefit costs; and

 

   

changes in accounting principles.

For further discussion of the factors listed above, refer to Management’s Discussion within the 2011 Annual Report. Also, refer to the section entitled “Safe Harbor for Forward-Looking Statements” included in this quarterly report for a listing of forward-looking statements related to factors affecting WGL Holdings and Washington Gas.

CRITICAL ACCOUNTING POLICIES

The preparation of financial statements and related disclosures in compliance with generally accepted accounting principles in the United States of America (GAAP) requires the selection and the application of appropriate technical accounting guidance to the relevant facts and circumstances of our operations, as well as our use of estimates to compile the consolidated financial statements. The application of these accounting policies involves judgment regarding estimates and projected outcomes of future events, including the likelihood of success of particular regulatory initiatives, the likelihood of realizing estimates for legal and environmental contingencies and the probability of recovering costs and investments in both the regulated utility and non-utility business segments.

We have identified the following critical accounting policies that require our judgment and estimation, where the resulting estimates may have a material effect on the consolidated financial statements:

 

   

accounting for unbilled revenue;

 

   

accounting for regulatory operations — regulatory assets and liabilities;

 

   

accounting for income taxes;

 

   

accounting for contingencies;

 

   

accounting for derivative instruments;

 

   

accounting for pension and other post-retirement benefit plans and

 

   

accounting for stock based compensation.

For a description of these critical accounting policies, refer to Management’s Discussion within the 2011 Annual Report. There were no new critical accounting policies or changes to our critical accounting policies during the three month period ended December 31, 2011.

 

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Table of Contents

WGL Holdings, Inc.

Washington Gas Light Company

Part I—Financial Information

Item 2—Management’s Discussion and Analysis of

Financial Condition and Results of Operations (continued)

 

WGL HOLDINGS, INC.

RESULTS OF OPERATIONS

We analyze the operating results using utility net revenues for the regulated utility segment and gross margins for the retail energy-marketing segment. Both utility net revenues and gross margins are calculated as revenues less the associated cost of energy and applicable revenue taxes. We believe utility net revenues is a better measure to analyze profitability than gross operating revenues for our regulated utility segment because the cost of the natural gas commodity and revenue taxes are generally included in the rates that Washington Gas charges to customers as reflected in operating revenues. Accordingly, changes in the cost of gas and revenue taxes associated with sales made to customers generally have no direct effect on utility net revenues, operating income or net income. We consider gross margins to be a better reflection of profitability than gross revenues or gross energy costs for our retail energy-marketing segment because gross margins are a direct measure of the success of our core strategy for the sale of natural gas and electricity.

Neither utility net revenues nor gross margins should be considered as an alternative to, or a more meaningful indicator of our operating performance, than net income. Our measures of utility net revenues and retail energy-marketing gross margins may not be comparable to similarly titled measures of other companies. Refer to the sections entitled “Results of Operations—Regulated Utility Operating Results” and “Results of Operations—Retail Energy-Marketing” for the calculation of utility net revenues and gross margins, respectively, as well as a reconciliation to operating income and net income for both segments.

Summary Results

WGL Holdings reported net income of $50.4 million and $65.2 million for the three months ended December 31, 2011 and 2010, respectively. We earned a return on average common equity of 8.4% and 10.9%, respectively, during these periods.

The following table summarizes our net income (loss) by operating segment for the three months ended December 31, 2011 and 2010.

 

Net Income (Loss) by Operating Segment  
     Three Months Ended
December 31,
    Increase/  
(In millions)    2011     2010     (Decrease)  

Regulated Utility

   $ 44.4     $ 40.7     $ 3.7  

Non-utility operations:

      

Retail Energy-Marketing

     0.8       24.9       (24.1

Commercial Energy Systems

     0.3              0.3  

Wholesale Energy Solutions

     5.2       0.1       5.1  

Other Activities

     (0.3     (0.5     0.2  

Total non-utility

     6.0        24.5       (18.5