10-Q

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 March 31, 2016
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 April 30, 2016: 50,338,313 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 April 30, 2016.



WGL Holdings, Inc.
Washington Gas Light Company

For the Quarter Ended March 31, 2016
Table of Contents
 
PART I. Financial Information
 
 
 
Item 1. Financial Statements (Unaudited)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
PART II. Other Information
 
 
 
 
 
 
 
 
 
 
 

 



(i)


WGL Holdings, Inc.
Washington Gas Light Company

INTRODUCTION
FILING FORMAT
This Quarterly Report on Form 10-Q is a combined report being filed by two separate registrants: WGL Holdings, Inc. (WGL) and Washington Gas Light Company (Washington Gas). Except where the content clearly indicates otherwise, any reference in the report to “WGL,” “we,” “us” or “our” is to the holding company or WGL and all of its subsidiaries, including Washington Gas, which is a wholly owned subsidiary of WGL.
Part I—Financial information in this Quarterly Report on Form 10-Q includes separate financial statements (i.e. balance sheets, statements of income and comprehensive income and statements of cash flows) for WGL and Washington Gas. The Notes to Consolidated Financial Statements are presented on a combined basis for both WGL 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 and Washington Gas.
SAFE HARBOR FOR FORWARD-LOOKING STATEMENTS
Certain matters discussed in this report, excluding historical information, include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 with respect to the outlook for earnings, dividends, revenues and other future financial business performance 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 terms such as “will,” “should,” “would” and “could.” Forward-looking statements speak only as of today, and the registrants assume no duty to update them. Factors that could cause actual results to differ materially from forward-looking statements or historical performance include those discussed in Item 1A. Risk Factors in the combined Annual Report on Form 10-K for WGL and Washington Gas for the fiscal year ended September 30, 2015, in Part II, Item 1A, Risk Factors in this quarterly update on Form 10-Q and in our other filings with the Securities and Exchange Commission, and may include, but are not limited to the following:
the level and rate at which we incur costs and expenses, and the extent to which we are allowed to recover from customers, through the regulatory process, such costs and expenses relating to constructing, operating and maintaining Washington Gas’ distribution system;
the availability of natural gas and electricity supply, interstate pipeline transportation and storage capacity;
factors beyond our control that affect the ability of natural gas producers, pipeline gatherers and natural gas processors to deliver natural gas into interstate pipelines for delivery to the entrance points of Washington Gas' distribution system;
security breaches of our information technology infrastructure, including cyber attacks and cyber-terrorism;
leaks, mechanical problems, incidents or other operational issues in our natural gas distribution system, including the effectiveness of our efforts to mitigate the effects of receiving low-HHC natural gas;
changes and developments in economic, competitive, political and regulatory conditions;
unusual weather conditions and changes in natural gas consumption patterns;
changes in energy commodity market conditions, including the relative prices of alternative forms of energy such as electricity, fuel oil and propane;
changes in the value of derivative contracts and the availability of suitable derivative counterparties;
changes in our credit ratings, disruptions in credit market and equity capital market conditions or other factors that may affect our access to and cost of capital;
factors affecting the timing of construction and the effective operation of pipelines in which we have invested;
the credit worthiness of customers; suppliers and derivatives counterparties;
changes in laws and regulations, including tax, environmental, pipeline integrity and employment laws and regulations;
legislative, regulatory and judicial mandates or decisions affecting our business operations;
the timing and success of business and product development efforts and technological improvements;
the level of demand from government agencies and the private sector for commercial energy systems, and delays in federal government budget appropriations;
the pace of deregulation of energy markets and the availability of other competitive alternatives to our products and services;

(ii)


WGL Holdings, Inc.
Washington Gas Light Company

changes in accounting principles;
our ability to manage the outsourcing of several business processes, including the transition of certain processes to new third party vendors;
strikes or work stoppages by unionized employees;
acts of nature and catastrophic events, including terrorist acts and
decisions made by management and co-investors in non-controlled investees.
All such factors are difficult to predict accurately and are generally beyond the direct control of the registrants. Readers are urged to use care and consider the risks, uncertainties and other factors that could affect our business as described in this Quarterly Report on Form 10-Q.

 

(iii)

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


(In thousands)
March 31,
2016
 
September 30,
2015
ASSETS
 
 
 
Property, Plant and Equipment
 
 
 
At original cost
$
5,199,734

 
$
5,003,910

Accumulated depreciation and amortization
(1,367,215
)
 
(1,331,182
)
Net property, plant and equipment
3,832,519

 
3,672,728

Current Assets
 
 
 
Cash and cash equivalents
9,874

 
6,733

Receivables
 
 
 
Accounts receivable
409,288

 
276,358

Gas costs and other regulatory assets
23,347

 
5,797

Unbilled revenues
172,298

 
102,560

Allowance for doubtful accounts
(27,311
)
 
(26,224
)
Net receivables
577,622

 
358,491

Materials and supplies—principally at average cost
19,027

 
21,402

Storage gas
133,947

 
211,443

Prepaid taxes
38,538

 
48,726

Other prepayments
70,467

 
32,850

Derivatives
19,231

 
22,933

Assets held for sale
22,906

 
22,906

Other
32,596

 
23,057

Total current assets
924,208

 
748,541

Deferred Charges and Other Assets
 
 
 
Regulatory assets
 
 
 
Gas costs
123,988

 
190,676

Pension and other post-retirement benefits
200,243

 
212,041

Other
87,466

 
80,018

Prepaid post-retirement benefits
148,252

 
138,629

Derivatives
33,220

 
32,132

Investments in direct financing leases, capital leases
34,509

 
35,234

Investments in unconsolidated affiliates
260,348

 
136,884

Other
14,812

 
14,476

Total deferred charges and other assets
902,838

 
840,090

  Total Assets
$
5,659,565

 
$
5,261,359

CAPITALIZATION AND LIABILITIES
 
 
 
Capitalization
 
 
 
Common shareholders’ equity
$
1,395,114

 
$
1,243,247

Washington Gas Light Company preferred stock
28,173

 
28,173

Long-term debt
1,194,251

 
944,201

Total capitalization
2,617,538

 
2,215,621

Current Liabilities
 
 
 
Current maturities of long-term debt

 
25,000

Notes payable
329,307

 
332,000

Accounts payable and other accrued liabilities
349,746

 
325,146

Wages payable
23,282

 
21,091

Accrued interest
7,952

 
7,835

Dividends declared
24,869

 
23,377

Customer deposits and advance payments
83,348

 
88,897

Gas costs and other regulatory liabilities
29,220

 
34,551

Accrued taxes
31,855

 
13,867

Derivatives
74,162

 
63,504

Liabilities held for sale
1,621

 
1,621

Other
30,540

 
46,025

Total current liabilities
985,902

 
982,914

Deferred Credits
 
 
 
Unamortized investment tax credits
155,917

 
135,673

Deferred income taxes
724,400

 
672,963

Accrued pensions and benefits
183,445

 
176,128

Asset retirement obligations
208,638

 
200,732

Regulatory liabilities
 
 
 
Accrued asset removal costs
317,961

 
325,496

Other post-retirement benefits
97,590

 
104,382

Other
17,320

 
17,067

Derivatives
232,448

 
322,259

Other
118,406

 
108,124

Total deferred credits
2,056,125

 
2,062,824

Commitments and Contingencies (Note 13)

 

Total Capitalization and Liabilities
$
5,659,565

 
$
5,261,359

The accompanying notes are an integral part of these statements.

4


WGL Holdings, Inc.
Condensed Consolidated Statements of Income (Unaudited)
Part I—Financial Information
Item 1—Financial Statements (continued)
 
  
Three Months Ended 
 March 31,
 
Six Months Ended 
 March 31,
(In thousands, except per share data)
2016
 
2015
 
2016
 
2015
OPERATING REVENUES
 
 
 
 
 
 
 
Utility
$
442,837

 
$
606,505

 
$
730,990

 
$
988,217

Non-utility
392,852

 
395,228

 
718,083

 
762,753

Total Operating Revenues
835,689

 
1,001,733

 
1,449,073

 
1,750,970

OPERATING EXPENSES
 
 
 
 
 
 
 
Utility cost of gas
121,055

 
310,138

 
171,080

 
439,842

Non-utility cost of energy-related sales
351,720

 
356,535

 
634,207

 
693,103

Operation and maintenance
103,933

 
104,287

 
199,352

 
196,667

Depreciation and amortization
33,170

 
30,103

 
64,582

 
59,463

General taxes and other assessments
51,400

 
57,784

 
87,932

 
97,167

Total Operating Expenses
661,278

 
858,847

 
1,157,153

 
1,486,242

OPERATING INCOME
174,411

 
142,886

 
291,920

 
264,728

Equity in earnings of unconsolidated affiliates
4,768

 
1,832

 
6,031

 
2,976

Other income (expenses)—net
795

 
338

 
1,774

 
(4,017
)
Interest expense
12,999

 
13,254

 
25,759

 
25,564

INCOME BEFORE INCOME TAXES
166,975

 
131,802

 
273,966

 
238,123

INCOME TAX EXPENSE
60,357

 
50,017

 
98,847

 
92,120

NET INCOME
$
106,618

 
$
81,785

 
$
175,119

 
$
146,003

Dividends on Washington Gas Light Company preferred stock
330

 
330

 
660

 
660

NET INCOME APPLICABLE TO COMMON STOCK
$
106,288

 
$
81,455

 
$
174,459

 
$
145,343

WEIGHTED AVERAGE COMMON SHARES OUTSTANDING
 
 
 
 
 
 
 
Basic
50,009

 
49,720

 
49,918

 
49,851

Diluted
50,282

 
49,983

 
50,166

 
50,055

EARNINGS PER AVERAGE COMMON SHARE
 
 
 
 
 
 
 
Basic
$
2.13

 
$
1.64

 
$
3.49

 
$
2.92

Diluted
$
2.11

 
$
1.63

 
$
3.48

 
$
2.90

DIVIDENDS DECLARED PER COMMON SHARE
$
0.4875

 
$
0.4625

 
$
0.9500

 
$
0.9025

The accompanying notes are an integral part of these statements.


5


WGL Holdings, Inc.
Condensed Consolidated Statements of Comprehensive Income (Unaudited)
Part I—Financial Information
Item 1—Financial Statements (continued)
 
  
Three Months Ended 
 March 31,
 
Six Months Ended March 31,
(In thousands)
2016
 
2015
 
2016
 
2015
NET INCOME
$
106,618

 
$
81,785

 
$
175,119

 
$
146,003

OTHER COMPREHENSIVE INCOME, BEFORE INCOME TAXES:
 
 
 
 
 
 
 
Qualified cash flow hedging instruments
(18,634
)
 
222

 
(17,550
)
 
(8,042
)
Pension and other post-retirement benefit plans
 
 
 
 
 
 
 
Change in net prior service credit
(214
)
 
(171
)
 
(428
)
 
(342
)
Change in actuarial net loss
419

 
491

 
838

 
974

Total pension and other post-retirement benefit plans
$
205

 
$
320

 
$
410

 
$
632

INCOME TAX EXPENSE (BENEFIT) RELATED TO OTHER COMPREHENSIVE INCOME
(7,649
)
 
219

 
(7,118
)
 
(3,728
)
OTHER COMPREHENSIVE INCOME (LOSS)
$
(10,780
)
 
$
323

 
$
(10,022
)
 
$
(3,682
)
COMPREHENSIVE INCOME
$
95,838

 
$
82,108

 
$
165,097

 
$
142,321

The accompanying notes are an integral part of these statements.


6

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


  
Six Months Ended March 31,
(In thousands)
2016
 
2015
OPERATING ACTIVITIES
 
 
 
Net income
$
175,119

 
$
146,003

ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIES
 
 
 
Depreciation and amortization
64,582

 
59,463

Amortization of:
 
 
 
Other regulatory assets and liabilities—net
649

 
684

Debt related costs
676

 
638

Deferred income taxes—net
102,753

 
62,916

Accrued/deferred pension and other post-retirement benefit cost
9,888

 
13,092

Compensation expense related to stock-based awards
7,562

 
4,127

Provision for doubtful accounts
6,672

 
9,888

Impairment loss
3,000

 
5,625

Other non-cash charges (credits)—net
(4,044
)
 
1,160

CHANGES IN ASSETS AND LIABILITIES
 
 
 
Accounts receivable and unbilled revenues—net
(188,728
)
 
(381,157
)
Gas costs and other regulatory assets/liabilities—net
(22,881
)
 
57,324

Storage gas
77,496

 
237,479

Prepaid taxes
10,188

 
55,947

Other prepayments
(37,617
)
 
(11,044
)
Accounts payable and other accrued liabilities
23,656

 
48,625

Customer deposits and advance payments
(5,549
)
 
14,302

Unamortized investment tax credits
20,244

 
10,683

Accrued taxes
17,988

 
29,785

Accrued interest
117

 
4,502

Other current assets
(7,682
)
 
4,756

Other current liabilities
(18,727
)
 
13,737

Deferred gas costs—net
66,688

 
(37,612
)
Deferred assets—other
(17,865
)
 
(8,399
)
Deferred liabilities—other
(52,990
)
 
(56,851
)
Derivatives
(94,089
)
 
20,758

Other—net
(128
)
 
(629
)
Net Cash Provided by Operating Activities
136,978

 
305,802

FINANCING ACTIVITIES
 
 
 
Common stock issued
31,900

 

Long-term debt issued
250,000

 
296,481

Long-term debt retired
(25,000
)
 

Debt issuance costs
(284
)
 
(2,744
)
Notes payable issued (retired) —net
(47,000
)
 
(278,500
)
Project financing
20,390

 

Dividends on common stock and preferred stock
(45,462
)
 
(44,656
)
Repurchase of common stock

 
(41,485
)
Other financing activities—net
1,998

 

Net Cash Provided by (Used in) Financing Activities
186,542

 
(70,904
)
INVESTING ACTIVITIES
 
 
 
Capital expenditures (excluding AFUDC)
(206,928
)
 
(214,306
)
Investments in non-utility interests
(118,583
)
 
(22,810
)
Distributions and receipts from non-utility interests
3,740

 
2,694

Loans to external parties
1,392

 

Net Cash Used in Investing Activities
(320,379
)
 
(234,422
)
INCREASE IN CASH AND CASH EQUIVALENTS
3,141

 
476

Cash and Cash Equivalents at Beginning of Year
6,733

 
8,811

Cash and Cash Equivalents at End of Period
$
9,874

 
$
9,287

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
 
 
 
Income taxes paid—net
$
2,601

 
$
2,011

Interest paid
$
25,341

 
$
20,533

SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING AND FINANCING ACTIVITIES
 
 
 
Project financing activities
$

 
$
(2,032
)
Capital expenditure accruals included in accounts payable and other accrued liabilities
$
47,350

 
$
17,221

Dividends paid in common stock
$
1,300

 
$
2,634

Stock issued related to compensation
$
6,742

 
$

The accompanying notes are an integral part of these statements.

7


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

(In thousands)
March 31,
2016
 
September 30,
2015
ASSETS
 
 
 
Property, Plant and Equipment
 
 
 
At original cost
$
4,650,388

 
$
4,521,535

Accumulated depreciation and amortization
(1,308,928
)
 
(1,278,089
)
Net property, plant and equipment
3,341,460

 
3,243,446

Current Assets
 
 
 
Cash and cash equivalents
4,707

 
1

Receivables
 
 
 
Accounts receivable
216,042

 
126,356

Gas costs and other regulatory assets
23,347

 
5,797

Unbilled revenues
99,685

 
21,027

Allowance for doubtful accounts
(17,399
)
 
(19,254
)
Net receivables
321,675

 
133,926

Materials and supplies—principally at average cost
18,981

 
21,356

Storage gas
39,042

 
94,489

Prepaid taxes
16,534

 
30,365

Other prepayments
26,046

 
11,899

Receivables from associated companies
15,008

 
3,176

Derivatives
4,121

 
4,588

Assets held for sale
22,906

 
22,906

Total current assets
469,020

 
322,706

Deferred Charges and Other Assets
 
 
 
Regulatory assets
 
 
 
Gas costs
123,988

 
190,676

Pension and other post-retirement benefits
199,068

 
210,811

Other
87,397

 
79,946

Prepaid post-retirement benefits
147,375

 
137,754

Derivatives
14,611

 
13,155

Other
5,759

 
5,638

Total deferred charges and other assets
578,198

 
637,980

  Total Assets
$
4,388,678

 
$
4,204,132

CAPITALIZATION AND LIABILITIES
 
 
 
Capitalization
 
 
 
Common shareholder’s equity
$
1,190,189

 
$
1,081,292

Preferred stock
28,173

 
28,173

Long-term debt
695,888

 
695,885

Total capitalization
1,914,250

 
1,805,350

Current Liabilities
 
 
 
Current maturities of long-term debt

 
25,000

Notes payable
177,307

 
89,000

Accounts payable and other accrued liabilities
155,929

 
159,280

Wages payable
21,298

 
19,456

Accrued interest
4,027

 
4,023

Dividends declared
21,131

 
20,269

Customer deposits and advance payments
82,701

 
88,450

Gas costs and other regulatory liabilities
29,220

 
34,551

Accrued taxes
28,964

 
11,659

Payables to associated companies
85,906

 
68,623

Derivatives
30,025

 
33,856

Liabilities held for sale
1,621

 
1,621

Other
7,024

 
7,013

Total current liabilities
645,153

 
562,801

Deferred Credits
 
 
 
Unamortized investment tax credits
5,243

 
5,646

Deferred income taxes
751,446

 
668,764

Accrued pensions and benefits
181,596

 
174,318

Asset retirement obligations
203,567

 
198,938

Regulatory liabilities
 
 
 
Accrued asset removal costs
317,961

 
325,496

Other post-retirement benefits
96,949

 
103,683

Other
17,320

 
17,067

Derivatives
184,591

 
269,661

Other
70,602

 
72,408

Total deferred credits
1,829,275

 
1,835,981

Commitments and Contingencies (Note 13)

 

Total Capitalization and Liabilities
$
4,388,678

 
$
4,204,132

The accompanying notes are an integral part of these statements.

8



Washington Gas Light Company
Condensed Statements of Income (Unaudited)
Part I—Financial Information
Item 1—Financial Statements (continued)
  
Three Months Ended March 31,
 
Six Months Ended March 31,
(In thousands)
2016
 
2015
 
2016
 
2015
OPERATING REVENUES
$
452,024

 
$
615,694

 
$
747,270

 
$
1,002,887

OPERATING EXPENSES
 
 
 
 
 
 
 
Utility cost of gas
130,242

 
319,328

 
187,360

 
454,493

Operation and maintenance
81,210

 
85,680

 
160,518

 
160,637

Depreciation and amortization
28,757

 
26,880

 
55,962

 
53,484

General taxes and other assessments
47,589

 
53,862

 
80,227

 
89,706

Total Operating Expenses
287,798

 
485,750

 
484,067

 
758,320

OPERATING INCOME
164,226

 
129,944

 
263,203

 
244,567

Other expense—net
(501
)
 
(169
)
 
(721
)
 
(619
)
Interest expense
10,395

 
10,564

 
20,718

 
20,828

INCOME BEFORE INCOME TAXES
153,330

 
119,211

 
241,764

 
223,120

INCOME TAX EXPENSE
58,897

 
44,517

 
92,719

 
83,475

NET INCOME
$
94,433

 
$
74,694

 
$
149,045

 
$
139,645

Dividends on Washington Gas preferred stock
330

 
330

 
660

 
660

NET INCOME APPLICABLE TO COMMON STOCK
$
94,103

 
$
74,364

 
$
148,385

 
$
138,985

The accompanying notes are an integral part of these statements.


9


Washington Gas Light Company
Condensed Statements of Comprehensive Income (Unaudited)
Part I—Financial Information
Item 1—Financial Statements (continued)
  
Three Months Ended 
 March 31,
 
Six Months Ended March 31,
(In thousands)
2016
 
2015
 
2016
 
2015
NET INCOME
$
94,433

 
$
74,694

 
$
149,045

 
$
139,645

OTHER COMPREHENSIVE INCOME, BEFORE INCOME TAXES:
 
 
 
 
 
 
 
Pension and other post-retirement benefit plans
 
 
 
 
 
 
 
Change in net prior service credit
(214
)
 
(171
)
 
(428
)
 
(342
)
Change in actuarial net loss
419

 
491

 
838

 
974

Total pension and other post-retirement benefit plans
$
205

 
$
320

 
$
410

 
$
632

INCOME TAX EXPENSE RELATED TO OTHER COMPREHENSIVE INCOME
81

 
127

 
162

 
250

OTHER COMPREHENSIVE INCOME
$
124

 
$
193

 
$
248

 
$
382

COMPREHENSIVE INCOME
$
94,557

 
$
74,887

 
$
149,293

 
$
140,027

The accompanying notes are an integral part of these statements.

10




11


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

  
Six Months Ended March 31,
(In thousands)
2016
 
2015
OPERATING ACTIVITIES
 
 
 
Net income
$
149,045

 
$
139,645

ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIES
 
 
 
Depreciation and amortization
55,962

 
53,484

Amortization of:
 
 
 
Other regulatory assets and liabilities—net
649

 
684

Debt related costs
629

 
644

Deferred income taxes—net
75,133

 
49,602

Accrued/deferred pension and other post-retirement benefit cost
9,863

 
12,786

Compensation expense related to stock-based awards
6,396

 
8,654

Provision for doubtful accounts
5,494

 
1,330

Other non-cash charges—net
1,759

 
3,036

CHANGES IN ASSETS AND LIABILITIES
 
 
 
Accounts receivable, unbilled revenues and receivables from associated companies—net
(163,608
)
 
(262,292
)
Gas costs and other regulatory assets/liabilities—net
(22,881
)
 
57,324

Storage gas
55,447

 
114,802

Prepaid taxes
13,831

 

Other prepayments
(14,147
)
 
11,039

Accounts payable and other accrued liabilities, including payables to associated companies
24,136

 
36,693

Customer deposits and advance payments
(5,749
)
 
14,157

Accrued taxes
17,305

 
37,485

Accrued interest
4

 
537

Other current assets
2,375

 
2,680

Other current liabilities
(3,157
)
 
(942
)
Deferred gas costs—net
66,688

 
(37,612
)
Deferred assets—other
(16,114
)
 
(10,247
)
Deferred liabilities—other
(5,638
)
 
(2,976
)
Derivatives
(89,890
)
 
9,923

Other—net
(36
)
 
5

Net Cash Provided by Operating Activities
163,496

 
240,441

FINANCING ACTIVITIES
 
 
 
Long-term debt issued

 
50,000

Long-term debt retired
(25,000
)
 

Debt issuance costs
(171
)
 
(722
)
Notes payable issued (retired) —net
44,000

 
(89,000
)
Project financing
20,390

 

Dividends on common stock and preferred stock
(40,538
)
 
(39,320
)
Other financing activities—net
1,949

 

Net Cash Provided by (Used in) Financing Activities
630

 
(79,042
)
INVESTING ACTIVITIES
 
 
 
Capital expenditures (excluding AFUDC)
(159,420
)
 
(157,550
)
Net Cash Used In Investing Activities
(159,420
)
 
(157,550
)
INCREASE IN CASH AND CASH EQUIVALENTS
4,706

 
3,849

Cash and Cash Equivalents at Beginning of Year
1

 
1,060

Cash and Cash Equivalents at End of Period
$
4,707

 
$
4,909

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
 
 
 
Income taxes paid — net
$

 
$
1,850

Interest paid
$
20,300

 
$
15,797

SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING AND FINANCING ACTIVITIES
 
 
 
Project financing activities
$

 
$
(2,032
)
Capital expenditure accruals included in accounts payable and other accrued liabilities
$
31,116

 
$
12,388

The accompanying notes are an integral part of these statements.

12

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



NOTE 1. ACCOUNTING POLICIES
Basis of Presentation
WGL Holdings, Inc. (WGL) is a holding company that owns all of the shares of common stock of Washington Gas Light Company (Washington Gas), a regulated natural gas utility, and all of the shares of common stock of Washington Gas Resources Corporation (Washington Gas Resources) and Hampshire Gas Company (Hampshire). Washington Gas Resources owns all of the shares of common stock of four non-utility subsidiaries that include WGL Energy Services, Inc. (WGL Energy Services), WGL Energy Systems, Inc. (WGL Energy Systems), WGL Midstream, Inc. (WGL Midstream) and WGSW, Inc. (WGSW). Except where the content clearly indicates otherwise, “WGL,” “we,” “us” or “our” refers to the holding company or the consolidated entity of WGL Holdings, Inc. and all of its subsidiaries. Unless otherwise noted, these notes apply equally to WGL and Washington Gas.
The condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (SEC). Therefore, certain financial information and note disclosures accompanying annual financial statements prepared in accordance with generally accepted accounting principles in the United States of America (GAAP) are omitted in this interim report. The interim consolidated financial statements and accompanying notes should be read in conjunction with the combined Annual Report on Form 10-K for WGL and Washington Gas for the fiscal year ended September 30, 2015 and the current report on Form 8-K filed on March 16, 2016, which amended the Annual Report on Form 10-K to recast the balance sheet for the October 1, 2015 adoption of ASU 2105-17, Income Taxes: Balance Sheet Classification of Deferred Taxes. 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, 2016 and 2015 of either WGL or Washington Gas.
The accompanying unaudited financial statements for WGL and Washington Gas reflect all normal recurring adjustments that are necessary, in our opinion, to present fairly the results of operations in accordance with GAAP. Prior period amounts related to deferred income tax assets and liabilities in the accompanying condensed balance sheets have been reclassified to conform to the current period presentation. Refer to Note 7 — Income Taxes of the Notes to Condensed Consolidated Financial Statements.
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 and Washington Gas for the fiscal year ended September 30, 2015.
Assets Held for Sale
At March 31, 2016, the Springfield Operations Center met the criteria to be reported as held for sale. Those criteria specify that (a) the asset must be available for immediate sale in its present condition subject only to terms that are usual and customary for sales of such assets and (b) the sale of the asset must be probable, and its transfer expected to qualify for recognition as a completed sale, within one year, with certain exceptions. At March 31, 2016 and September 30, 2015, the assets and liabilities associated with the Springfield Operations Center are reported at their expected selling price, less selling expenses, as "Assets held for sale" and "Liabilities held for sale" on WGL's and Washington Gas' balance sheets.
Impairments
Management regularly reviews property and equipment and other long-lived assets, including certain definite-lived intangible assets and our equity method investments for possible impairment. For our equity and cost method investments, an impairment is recorded when the investment has experienced a decline in value that is other-than-temporary. Additionally, if the projects in which we hold an investment recognize an impairment loss, we would record our proportionate share of that impairment loss and evaluate the investment for decline in value that is other-than-temporary. This review occurs quarterly, or more frequently if events or changes in circumstances indicate the carrying amount of the asset may not be recoverable.

At March 31, 2016, WGL recorded a $3.0 million impairment for the Nextility investment in direct financing leases. During the six months ended March 31, 2015, WGL impaired its entire investment in ASDHI by its carrying value of $5.6 million based on management's assumption of the current valuation and expected return from the investment. Refer to Note 9 — Fair Value Measurements and Note 11 — Other Investments of the Notes to Condensed Consolidated Financial Statements for further discussion.
Storage Gas Valuation
For Washington Gas and WGL Energy Services, storage gas inventories are stated at the lower-of-cost or market as determined using the first-in, first-out method. For WGL Midstream, storage gas inventory is stated at the lower-of-cost or market using the weighted average cost method. Interim period inventory losses attributable to lower-of-cost or market adjustments may be reversed if the market value of the inventory is recovered by the end of the same fiscal year.
The following table shows the lower-of-cost or market adjustments recorded to net income for the three and six months ended March 31, 2016 and 2015.
Lower-of-Cost or Market Adjustments Pre-Tax Increase (Decrease) to Net Income
  
Three Months Ended March 31,
 
Six Months Ended March 31,
(In millions)
2016
 
2015
 
2016
 
2015
WGL(a)
 
 
 
 
 
 
 
  Operating revenues - non-utility
$
0.8

 
$
(3.0
)
 
$
(1.1
)
 
$
(20.5
)
Washington Gas
 
 
 
 
 
 
 
  Utility cost of gas

 

 
$

 
$
(0.7
)
Total Consolidated
$
0.8

 
$
(3.0
)
 
$
(1.1
)
 
$
(21.2
)

(a) WGL includes WGL Holdings and all subsidiaries other than Washington Gas.
ACCOUNTING STANDARDS ADOPTED IN FISCAL YEAR 2016
 
Standard
  
Description
  
Date of adoption
 
  
Effect on the financial statements or other significant matters
ASU 2015-17, Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes
 
The standard requires an entity to present deferred tax liabilities and assets as noncurrent in a classified statement of financial position. The current requirement that deferred tax liabilities and assets of a tax-paying component of an entity be offset by taxing jurisdiction and presented as a single amount remains the same.
 
October 1, 2015
 
As a result of the standard, we have presented all deferred tax liabilities and assets, net, as non-current in "Deferred credits-Deferred income taxes" in the accompanying balance sheets, retrospectively for all periods presented. The adoption of this standard did not have a material effect on our financial statements. Refer to Note 7 — Income taxes, for further discussion of this standard.

OTHER NEWLY ISSUED ACCOUNTING STANDARDS
 
Standard
  
Description
  
Date of adoption
 
  
Effect on the financial statements or other significant matters
ASU 2016-09, Compensation—Stock Compensation (Topic 718)—Improvements to Employee Share-Based Payment Accounting
 
This standard simplifies several aspects of the accounting for share-based payment transactions, including accounting for income taxes, forfeitures, and statutory tax withholding requirements.
 
October 1, 2017
 
We are in the process of evaluating the impact the adoption of this standard will have on our financial statements.

13

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

ASU 2014-09 and ASU 2016-08, Revenue from Contracts with Customers
(Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net)
and ASU 2015-14, Deferral of the Effective Date.
 
ASU 2014-09 establishes a comprehensive revenue recognition model clarifying the method used to determine the timing and requirements for revenue recognition from contracts with customers. The disclosure requirements under the new standard will enable users of financial statements to understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers.

The amendments in ASU 2016-08 update affect the guidance in ASU 2014-09, Revenue from Contracts with Customers (Topic 606). The update requires an entity to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.

The standard permits retrospective application.
 
October 1, 2018
 
We are in the process of evaluating the impact the adoption of this standard will have on our financial statements.
ASU 2016-02, Leases (Topic 842)
 
This standard requires recognition of a right-to-use asset and lease liability on the statement of financial position and disclosure of key information about leasing arrangements. The standard requires modified retrospective application and early adoption is permitted.

 
October 1, 2019 with early adoption permitted.
 
We are in the process of evaluating the impact the adoption of this standard will have on our financial statements. We may elect early adoption.
ASU 2016-01, Financial Instruments (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities
 
The new standard significantly revises an entity’s accounting related to the classification and measurement of investments in equity securities and the presentation of certain fair value changes for financial liabilities measured at fair value.

 
October 1, 2019
 
We are in the process of evaluating the impact the adoption of this standard will have on our financial statements.

14

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

ASU 2015-03 and ASU 2015-15, Interest - Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Cost and Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements
 
The standard requires an entity to present debt issuance costs in the balance sheet as a direct deduction of the debt liability in a manner consistent with its accounting treatment of debt discounts. The standard requires retrospective application.

An entity can defer and present debt issuance costs related to line-of-credit arrangements as an asset and subsequently amortize the deferred debt issuance costs ratably over the term of the arrangement, regardless of whether there are any outstanding borrowings on the line-of-credit arrangement.
 
October 1, 2016
 
We are in the process of evaluating the impact the adoption of this standard will have on our financial statements.

ASU 2015-02, Consolidation (Topic 810): Amendments to the Consolidation Analysis
 
The standard changes the analysis to be performed in determining whether certain types of legal entities should be consolidated, specifically the analysis of limited partnerships and similar entities, fee arrangements and related party relationships. The standard permits prospective or retrospective application for different parts.
 
October 1, 2016
 
We are in the process of evaluating the impact the adoption of this standard will have on our financial statements.


15

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

NOTE 2. ACCOUNTS PAYABLE AND OTHER ACCRUED LIABILITIES
The tables below provide details for the amounts included in “Accounts payable and other accrued liabilities” on the balance sheets for both WGL and Washington Gas.
 
WGL Holdings, Inc.
(In millions)
March 31, 2016
 
September 30, 2015
Accounts payable—trade
$
290.3

 
$
277.3

Employee benefits and payroll accruals
23.8

 
31.4

Other accrued liabilities
35.6

 
16.4

Total
$
349.7

 
$
325.1


Washington Gas Light Company
(In millions)
March 31, 2016

 
September 30, 2015

Accounts payable—trade
$
116.7

 
$
122.2

Employee benefits and payroll accruals
22.3

 
29.5

Other accrued liabilities
16.9

 
7.6

Total
$
155.9

 
$
159.3


NOTE 3. SHORT-TERM DEBT
WGL and Washington Gas satisfy their short-term financing requirements through the sale of commercial paper, financing arrangements with third-party lenders, or through bank borrowings. Due to the seasonal nature of the regulated utility and retail energy-marketing segments, short-term financing requirements can vary significantly during the year. Revolving credit agreements are maintained to support outstanding commercial paper and to permit short-term borrowing flexibility. The policy of each WGL and Washington Gas is to maintain bank credit facilities in amounts equal to or greater than the expected maximum commercial paper position. The following is a summary of committed credit available at March 31, 2016 and September 30, 2015.
Committed Credit Available ($ In millions)
March 31, 2016
WGL(b)
 
Washington Gas
 
Total Consolidated
Committed credit agreements
 
 
 
 
 
Unsecured revolving credit facility, expires December 19, 2019(a)
$
450.0

 
$
350.0

 
$
800.0

Less: Commercial Paper
(152.0
)
 
(133.0
)
 
(285.0
)
Net committed credit available
$
298.0

 
$
217.0

 
$
515.0

Weighted average interest rate
0.60
%
 
0.45
%
 
0.53
%
September 30, 2015
 
 
 
 
 
Committed credit agreements
 
 
 
 
 
Unsecured revolving credit facility, expires December 19, 2019(a)
$
450.0

 
$
350.0

 
$
800.0

Less: Commercial Paper
(243.0
)
 
(89.0
)
 
(332.0
)
Net committed credit available
$
207.0

 
$
261.0

 
$
468.0

Weighted average interest rate
0.30
%
 
0.16
%
 
0.26
%
(a) 
Both WGL and Washington Gas have the right to request extensions with the banks’ approval. WGL’s revolving credit facility permits it to borrow an additional $100 million, with the banks’ approval, for a total of $550 million. Washington Gas’ revolving credit facility permits it to borrow an additional $100 million, with the banks’ approval, for a total of $450 million.
(b) 
WGL includes WGL Holdings and all subsidiaries other than Washington Gas.
At March 31, 2016 and September 30, 2015, there were no outstanding bank loans from WGL’s or Washington Gas’ revolving credit facilities.

16

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


PROJECT FINANCING
Washington Gas obtains third-party project financing on behalf of the Federal government to provide funds during the construction of certain energy management services projects entered into under Washington Gas' area-wide contract. As the lender funds the energy management services project, Washington Gas establishes a payable to the lender. As work is performed, Washington Gas establishes a receivable representing the government's obligation to remit principal and interest. The payable and receivable are equal to each other at the end of the construction period, but there could be timing differences in the recognition of project related payable and receivable during the construction period. When these projects are formally “accepted” by the government and deemed complete, Washington Gas assigns the ownership of the receivable to the lender in satisfaction of the obligation to the lender and removes both the receivable and the obligation related to the financing from its financial statements.
As of March 31, 2016, Washington Gas recorded a $48.9 million "Accounts receivable" on the balance sheet and a $44.3 million corresponding short-term obligation to the lender in "Notes payable", for energy management services projects that were not complete. These projects are financed for government agencies which have minimal credit risk, and with which we have previous collection experience. Based on these factors, Washington Gas did not record a corresponding reserve for bad debts related to these receivables at March 31, 2016.

NOTE 4. LONG-TERM DEBT
UNSECURED NOTES
WGL and Washington Gas issue long-term notes with individual terms regarding interest rates, maturities and call or put options. These notes can have maturity dates of one or more years from the date of issuance.
At March 31, 2016 and September 30, 2015, WGL had the capacity under a shelf registration to issue an unspecified amount of long-term debt securities. At March 31, 2016 and September 30, 2015 Washington Gas had the capacity under a shelf registration statement to issue up to $600.0 million of additional Medium-Term Notes (MTNs).
On February 18, 2016, WGL entered into a credit agreement providing for term loans, and borrowed $250 million under the agreement. The credit agreement provides for a maturity date of February 18, 2018, with a one year extension option with the lenders' approval. In addition to the initial borrowings, the credit agreement permits, with the lenders' approval, additional borrowings of up to $100 million for maximum potential borrowings under the credit agreement of $350 million. The interest rate on loans made under the credit agreement is a fluctuating rate per annum that is determined from time to time based on parameters set forth in the credit agreement.
The following tables show the outstanding notes as of March 31, 2016 and September 30, 2015.
Long-Term Debt Outstanding
($ In millions)
WGL(a)

 
Washington Gas

 
Total Consolidated

March 31, 2016
 
 
 
 
 
Long-term debt (b)
$
500.0

 
$
696.0

 
$
1,196.0

Unamortized discount
(1.6
)
 
(0.1
)
 
$
(1.7
)
   Total Long-Term Debt

498.4

 
695.9

 
1,194.3

Weighted average interest rate
2.45
%
 
5.59
%
 
4.28
%
September 30, 2015
 
 
 
 
 
Long-term debt (b)
$
250.0

 
$
721.0

 
$
971.0

Unamortized discount
(1.7
)
 
(0.1
)
 
$
(1.8
)
Less—current maturities

 
(25.0
)
 
(25.0
)
   Total Long-Term Debt

248.3

 
695.9

 
944.2

Weighted average interest rate
3.66
%
 
5.58
%
 
5.08
%
(a) 
WGL includes WGL Holdings and all subsidiaries other than Washington Gas.

17

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

(b) 
Includes Senior Notes and term loans for WGL and both MTNs and private placement notes for Washington Gas. Represents face value including current maturities.

The following tables show long-term debt issuances and retirements for the six months ended March 31, 2016 and 2015. There were no retirements for WGL or Washington Gas for the six months ended March 31, 2015.
Long-Term Debt Issuances and Retirements
($ In millions)
Principal(b)
 
Interest
Rate
 
Effective
Cost(d)
 
Nominal
Maturity Date
Six Months Ended March 31, 2016
 
 
 
 
 
 
 
WGL(a)
 
 
 
 
 
 
 
Issuances:
 
 
 
 
 
 
 
2/18/2016
$
250.0

 
1.24
%
(c) 
1.24
%
 
2/18/2018
Total consolidated issuances
$
250.0

 
 
 
 
 
 
Washington Gas
 
 
 
 
 
 
 
Retirements:
$
25.0

 
5.17
%
 
n/a

 
1/18/2016
Total consolidated retirements
$
25.0

 
 
 
 
 
 
Six Months Ended March 31, 2015
 
 
 
 
 
 
 
WGL (a)
 
 
 
 
 
 
 
Issuances:
 
 
 
 
 
 
 
10/24/2014
$
100.0

 
2.25
%
 
2.42
%
 
11/1/2019
10/24/2014
125.0

 
4.60
%
 
5.11
%
 
11/1/2044
12/16/2014
25.0

 
4.60
%
 
5.53
%
 
11/1/2044
Total
$
250.0

 
 
 
 
 
 
Washington Gas
 
 
 
 
 
 
 
Issuances:
 
 
 
 
 
 
 
12/15/2014
$
50.0

 
4.24
%
 
4.41
%
 
12/15/2044
Total
$
50.0

 
 
 
 
 
 
Total consolidated issuances
$
300.0

 
 
 
 
 
 
(a) 
WGL includes WGL Holdings and all subsidiaries other than Washington Gas.
(b) 
Represents face amount of senior notes and term loans for WGL and both MTNs and private placement notes for Washington Gas.
(c) 
Floating rate per annum that will be determined from time to time based on parameters set forth in the credit agreement.
(d) 
The estimated effective cost of the issued notes, including consideration of issuance fees and hedge costs.




18

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

NOTE 5. COMMON SHAREHOLDERS’ EQUITY
The tables below reflect the components of “Common shareholders’ equity” for WGL and “Common shareholder’s equity” for Washington Gas for the six months ended March 31, 2016.

WGL Holdings, Inc.
Components of Common Shareholders’ Equity
(In thousands, except shares)
Common Stock
 
Paid-In
Capital
 
Retained
Earnings
 
Accumulated Other Comprehensive Loss, Net of Taxes
 
Total
Shares
Amount
 
 
 
 
Balance at September 30, 2015
49,728,662

$
485,456

 
$
14,934

 
$
757,093

 
$
(14,236
)
 
$
1,243,247

Net income


 

 
175,119

 

 
175,119

Other comprehensive loss


 

 

 
(10,022
)
 
(10,022
)
Stock-based compensation(a)
115,974

6,742

 
(4,838
)
 
(80
)
 

 
1,824

Issuance of common stock(b)
492,250

33,200

 

 

 

 
33,200

Dividends declared:
 
 
 
 
 
 
 
 
 
 
Common stock


 

 
(47,594
)
 

 
(47,594
)
Preferred stock


 

 
(660
)
 

 
(660
)
Balance at March 31, 2016
50,336,886

$
525,398

 
$
10,096

 
$
883,878

 
$
(24,258
)
 
$
1,395,114

(a) Includes dividend equivalents related to our performance shares.
(b) Includes shares issued under the ATM program (discussed below) and the dividend reinvestment and common stock purchase plans.
Washington Gas Light Company
Components of Common Shareholder’s Equity
(In thousands, except shares)
Common Stock
 
Paid-In
Capital
 
Retained
Earnings
 
Accumulated Other
Comprehensive Loss, Net of Taxes
 
Total
Shares
Amount
 
 
 
 
Balance at September 30, 2015
46,479,536

$
46,479

 
$
483,677

 
$
557,848

 
$
(6,712
)
 
$
1,081,292

Net income


 

 
149,045

 

 
149,045

Other comprehensive income


 

 

 
248

 
248

Stock-based compensation


 
1,005

 

 

 
1,005

Dividends declared:
 
 
 
 
 
 
 
 
 
 
Common stock


 

 
(40,741
)
 

 
(40,741
)
Preferred stock


 

 
(660
)
 

 
(660
)
Balance at March 31, 2016
46,479,536

$
46,479

 
$
484,682

 
$
665,492

 
$
(6,464
)
 
$
1,190,189


On November 24, 2015, WGL entered into an equity distribution agreement and filed a prospectus supplement relating to a continuous offering under which WGL may sell common stock with an aggregate sales price of up to $150 million through an at-the-market (ATM) program. Sales of common stock can be made by means of privately negotiated transactions, as transactions on the New York Stock Exchange at market prices or in such other transactions as agreed upon by WGL and the sales agents and in accordance with applicable securities laws. During the quarter ended March 31, 2016, WGL has issued 466,467 shares of common stock under the ATM program for net proceeds of $31.5 million.



19

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

NOTE 6. EARNINGS PER SHARE
Basic EPS of WGL is computed by dividing net income by the weighted average number of common shares outstanding during the reported period. Diluted EPS assumes the issuance of common shares pursuant to stock-based compensation plans at the beginning of the applicable period unless the effect of such issuance would be anti-dilutive. The following table reflects the computation of our basic and diluted EPS for the three and six months ended March 31, 2016 and 2015.

Basic and Diluted EPS
(in thousands, except per share data)
Net Income
Applicable to
Common Stock
 
Shares
 
Per Share
Amount
Three Months Ended March 31, 2016
 
 
 
 
 
Basic EPS
$
106,288

 
50,009

 
$
2.13

Stock-based compensation plans

 
273

 
 
Diluted EPS
$
106,288

 
50,282

 
$
2.11

Three Months Ended March 31, 2015
 
 
 
 
 
Basic EPS
$
81,455

 
49,720

 
$
1.64

Stock-based compensation plans

 
263

 
 
Diluted EPS
$
81,455

 
49,983

 
$
1.63

Six Months Ended March 31, 2016
 
 
 
 
 
Basic EPS
$
174,459

 
49,918

 
$
3.49

Stock-based compensation plans

 
248

 
 
Diluted EPS
$
174,459

 
50,166

 
$
3.48

Six Months Ended March 31, 2015
 
 
 
 
 
Basic EPS
$
145,343

 
49,851

 
$
2.92

Stock-based compensation plans

 
204

 
 
Diluted EPS
$
145,343

 
50,055

 
$
2.90

There were no anti-dilutive shares for the three months ended March 31, 2016 or the three and six months ended March 31, 2015. For the six months ended March 31, 2016, 76,000 performance shares issuable pursuant to our stock-based compensation plans, were not considered in the diluted share calculation due to the anti-dilutive effect of such shares.
NOTE 7. INCOME TAXES
As of March 31, 2016 and September 30, 2015, our uncertain tax positions were approximately $37.1 million and $38.6 million, respectively, primarily due to the change in tax accounting for repairs. If the amounts of unrecognized tax benefits are eventually realized, it would not materially impact the effective tax rate. It is reasonably possible that the amount of the unrecognized tax benefit with respect to some of WGL’s and Washington Gas’ uncertain tax positions will significantly increase or decrease in the next 12 months. At this time, however, an estimate of the range of reasonably possible outcomes cannot be determined.
Under ASC Topic 740, Income Taxes, Washington Gas recognizes any accrued interest associated with uncertain tax positions in interest expense and recognizes any accrued penalties associated with uncertain tax positions in other expenses in the statements of income. At March 31, 2016 and September 30, 2015, we did not have an accrual of interest expense related to uncertain tax positions.
WGL files a consolidated federal tax return and various other state returns. We are no longer subject to income tax examinations by the Internal Revenue Service for years ended prior to September 30, 2012. Substantially all state income tax years in major jurisdictions are closed for years ended prior to September 30, 2011.
On October 1, 2015, WGL and Washington Gas early adopted ASU 2015-17. This standard amends the requirements to separately classify deferred income tax liabilities and assets into current and noncurrent amounts on a classified balance sheet and requires all deferred income tax liabilities and assets to be offset by taxing jurisdiction and classified as noncurrent. WGL and Washington Gas are applying ASU 2015-17 retrospectively. As a result of the retrospective adoption, $32.8 million and $24.7 million for WGL and Washington Gas, respectively, were reclassified from "Current Assets-Deferred income taxes" to "Deferred Credits-Deferred income taxes" on WGL's and Washington Gas' September 30, 2015 balance sheets.



20

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


NOTE 8. DERIVATIVE AND WEATHER-RELATED INSTRUMENTS
DERIVATIVE INSTRUMENTS
Regulated Utility Operations
Washington Gas enters into contracts that qualify as derivative instruments and are accounted for under ASC Topic 815. These derivative instruments are recorded at fair value on our balance sheets and Washington Gas does not currently designate any derivatives as hedges under ASC Topic 815. Washington Gas’ derivative instruments relate to: (i) Washington Gas’ asset optimization program; (ii) managing price risk associated with the purchase of gas to serve utility customers and (iii) managing interest rate risk.
Asset Optimization. Washington Gas optimizes the value of its long-term natural gas transportation and storage capacity resources during periods when these resources are not being used to physically serve utility customers. Specifically, Washington Gas utilizes its transportation capacity assets to benefit from favorable natural gas prices between different geographic locations and utilizes its storage capacity assets to benefit from favorable natural gas prices between different time periods. As part of this asset optimization program, Washington Gas enters into physical and financial derivative transactions in the form of forward, futures and option contracts with the primary objective of locking in operating margins that Washington Gas will ultimately realize. The derivative transactions entered into under this program are subject to mark-to-market accounting treatment.
Regulatory sharing mechanisms provide for the annual realized profit from these transactions to be shared between Washington Gas' shareholders and customers; therefore, changes in fair value are recorded through earnings, or as regulatory assets or liabilities to the extent that it is probable that realized gains and losses associated with these derivative transactions will be included in the rates charged to customers when they are realized. Unrealized gains and losses recorded to earnings may cause significant period-to-period volatility; however, this volatility does not change the locked-in operating margins that Washington Gas expects to ultimately realize from these transactions through the use of its storage and transportation capacity resources.
All physically and financially settled contracts under our asset optimization program are reported on a net basis in the statements of income in “Utility cost of gas.” Total net margins recorded to “Utility cost of gas” after sharing and management fees associated with all asset optimization transactions for the three months ended March 31, 2016 was a net gain of $22.6 million including an unrealized gain of $13.7 million. During the three months ended March 31, 2015 we recorded a net loss of $14.0 million including an unrealized loss of $28.0 million. Total net margins recorded for the six months ended March 31, 2016 was a net gain of $49.3 million including an unrealized gain of $33.1 million. During the six months ended March 31, 2015, we recorded a net gain of $17.1 million including an unrealized loss of $2.9 million.
Managing Price Risk. To manage price risk associated with acquiring natural gas supply for utility customers, Washington Gas enters into physical and financial derivative transactions in the form of forward, option and other contracts, as authorized by its regulators. 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.
Managing Interest-Rate Risk. Washington Gas may utilize derivative instruments that are designed to minimize the risk of interest-rate volatility associated with planned issuances of debt securities. Any gains and losses associated with these types of derivatives are recorded as regulatory liabilities or assets, respectively, and amortized in accordance with regulatory requirements, typically over the life of the related debt issued.
Non-Utility Operations
Asset Optimization. WGL Midstream enters into derivative contracts for the purpose of optimizing its storage and transportation capacity as well as managing the transportation and storage assets on behalf of third parties. WGL Midstream does not designate these derivatives as hedges under ASC Topic 815; therefore, changes in the fair value of these derivative instruments are reflected in the earnings of our non-utility operations and may cause significant period-to-period volatility in earnings.
Managing Price Risk. WGL Energy Services enters into certain derivative contracts as part of its strategy to manage the price risk associated with the sale and purchase of natural gas and electricity. WGL Energy Services designates a portion of these physical contracts related to the purchase of natural gas and electricity to serve our customers as "normal purchases and normal sales" and therefore, they are not subject to the fair value accounting requirements of ASC Topic 815. Derivative

21

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

instruments not designated as "normal purchases and normal sales" are recorded at fair value on our consolidated balance sheets, and changes in the fair value of these derivative instruments are reflected in the earnings of our non-utility operations, which may cause significant period-to-period volatility in earnings. WGL Energy Services does not designate derivatives as hedges under ASC Topic 815.
Managing Interest-Rate Risk. WGL utilizes derivative instruments that are designed to limit the risk of interest-rate volatility associated with future debt issuances.
In January 2016, WGL entered into an additional forward starting interest rate hedge agreement, with a notional amount of $50.0 million and designated it as a cash flow hedge in accordance with ASC 815. In August 2015, WGL entered into two forward starting interest rate swap agreements, with a total notional amount of $125.0 million. These derivatives hedge the variability in future interest payments due to changes in interest rates prior to WGL's expected issuance of 30-year debt in January 2018. WGL designated these agreements as cash flow hedges in accordance with ASC 815, with the effective portion of changes in fair value recorded through other comprehensive income. The effective portion of changes in the fair value of qualified derivatives designated as cash flow hedges is recorded in accumulated other comprehensive income (loss) and subsequently reclassified into earnings in the period that the hedged forecasted transactions affect earnings. Any ineffective portion of these derivatives will be recognized directly through earnings as interest expense. 
Additionally, WGL elected cash flow hedge accounting for interest rate derivative instruments, which settled with the issuance of the related debt issuance in the first quarter of fiscal 2015. The effective portion of the gains and losses on the hedge were recorded within other comprehensive income and are being amortized over the life of the debt (through 2044). The amortization was minimal for the three and six months ended March 31, 2016 and 2015.
Consolidated Operations
Reflected in the tables below is information for WGL as well as Washington Gas. The information for WGL includes derivative instruments for both utility and non-utility operations.

At March 31, 2016 and September 30, 2015, respectively, the absolute notional amounts of our derivatives were as follows: 
Absolute Notional Amounts
of Open Positions on Derivative Instruments
Derivative transactions
WGL Holdings, Inc.
 
Washington Gas
March 31, 2016
Notional Amounts
Natural Gas (In millions of therms)
 
 
 
Asset Optimization
22,108.1

 
13,243.2

Retail sales
50.0

 

Other risk-management activities
1,855.6

 
1,343.9

Electricity (In millions of kWhs)
 
 
 
Retail sales
4,521.7

 

Other risk-management activities
18,348.5

 

Interest Rate Swaps (In millions of dollars)
$
175.0

 
$

September 30, 2015
 
Natural Gas (In millions of therms)
 
 
 
Asset Optimization
20,829.2

 
13,316.7

Retail sales
52.2

 

Other risk-management activities
1,811.7

 
1,381.8

Electricity (In millions of kWhs)
 
 
 
Retail sales
4,292.7

 

Other risk-management activities
19,965.7

 

Interest Rate Swaps (In millions of dollars)
$
125.0

 
$


22

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

The following tables present the balance sheet classification for all derivative instruments as of March 31, 2016 and September 30, 2015.
WGL Holdings, Inc.
Balance Sheet Classification of Derivative Instruments
($ In millions)
Derivative Instruments Not Designated as Hedging Instruments
 
Derivative Instruments Designated as Hedging Instruments
 
  
 
  
As of March 31, 2016
Gross
Derivative
Assets
 
Gross
Derivative
Liabilities
 
Gross
Derivative
Assets
 
Gross
Derivative
Liabilities
 
Netting of
Collateral
 
Total(a)
Current Assets—Derivatives
$
20.6

 
$
(1.4
)
 
$

 
$

 
$

 
$
19.2

Deferred Charges and Other Assets—Derivatives
33.9

 
(0.7
)
 

 

 

 
33.2

Current Liabilities—Derivatives
15.1

 
(102.7
)
 

 

 
13.4

 
(74.2
)
Deferred Credits—Derivatives
15.3

 
(232.4
)
 

 
(21.0
)
 
5.7

 
(232.4
)
Total
$
84.9

 
$
(337.2
)
 
$

 
$
(21.0
)
 
$
19.1

 
$
(254.2
)
As of September 30, 2015
 
 
 
 
 
 
 
 
 
 
 
Current Assets—Derivatives
$
29.7

 
$
(6.8
)
 
$

 
$

 
$

 
$
22.9

Deferred Charges and Other Assets—Derivatives
32.3

 
(0.2
)