Document



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K
o
Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

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

For the Transition Period from October 1, 2018 to December 31, 2018
  Commission File Number: 0-49807
WASHINGTON GAS LIGHT COMPANY
(Exact name of Registrant as Specified in Its Charter)
District of Columbia and Virginia
 
 
  
 
  
53-0162882
(State or Other Jurisdiction of
Incorporation)
 
 
  
 
  
(I.R.S. Employer Identification No.)

1000 Maine Ave., S.W.
Washington, D.C. 20024
(Address of Principal Executive Offices and Zip Code)

(703) 750-4440
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
 Title of class

Common stock, $1.00 par value

Preferred Stock, cumulative, without par value:

$4.25 Series
$4.80 Series
$5.00 Series

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes [   ]  No [ü]
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  Yes [   ]  No [ü]
Indicate by check mark whether the 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 [ü]  No [   ]
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).  Yes [ü]  No [   ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  [ü]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.





Large Accelerated Filer o
  
Accelerated Filer o
  
Non-Accelerated Filer [ü]
  
Smaller Reporting Company  o
 
  
 
 
 
 
Emerging growth company  o
 
 
 
 
 
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act):  Yes [   ]  No [ü]
The aggregate market value of the voting common equity held by non-affiliates of the registrant was $0 as of June 30, 2018.
As of January 31, 2019, there were 46,479,536 shares of registrant common stock, $1 par value, outstanding. All of the outstanding shares of common stock are held by Wrangler SPE LLC (the SPE), an indirect wholly owned subsidiary of AltaGas Ltd.







Washington Gas Light Company
Form 10-K Transition Report
For the Transition Period from October 1, 2018 through December 31, 2018
Table of Contents
PART I
 
 
Item 1.
 
 
 
 
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
 
 
PART II
 
 
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
 
Item 9.
Item 9A.
Item 9B.
 
 
 
PART III
 
 
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
 
 
 
PART IV
 
 
Item 15.
Item 16.

(i)

Washington Gas Light Company
Part I



        
EXPLANATORY NOTE REGARDING THIS TRANSITION REPORT
 
On December 28, 2018, our Board of Directors approved a change of Washington Gas Light Company's fiscal year from the period beginning on October 1 and ending on September 30 to the period beginning on January 1 and ending on December 31. This transition report on Form 10-K includes financial information for the three-month transition period from October 1, 2018 through December 31, 2018, or the transition period ended December 31, 2018. References in this report to fiscal year 2018, 2017 and 2016 refer to twelve-month periods ended on September 30 of each year. All amounts presented for the three months ended December 31, 2017 are unaudited. Subsequent to this transition report, our annual reports on Form 10-K will cover the calendar year from January 1 to December 31, with historical periods remaining unchanged. Washington Gas Light Company previously filed combined reports with WGL Holdings, Inc.

SAFE HARBOR FOR FORWARD-LOOKING STATEMENTS
 
Washington Gas Light Company (Washington Gas) is an indirect, majority-owned subsidiary of, among other entities, WGL Holdings, Inc (WGL). WGL is an indirect wholly owned subsidiary of AltaGas Ltd. (AltaGas). Except where the content clearly indicates otherwise, any reference in this report to “Washington Gas”,” “we,” “us”, “our” or “the Company” refers to Washington Gas Light Company. References to “WGL” refer to WGL Holdings, Inc. and all of its subsidiaries.
Certain matters discussed in this report, excluding historical information, include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 with respect to the outlook for earnings, dividends, revenues and other future financial business performance, strategies, financing plans, AltaGas' integration of us and other expectations. Forward-looking statements are typically identified by words such as, but not limited to, “estimates,” “expects,” “anticipates,” “intends,” “believes,” “plans” and similar expressions, or future or conditional terms such as “will,” “should,” “would” and “could.” Forward-looking statements speak only as of the filing date of this report, and the registrants assume no duty to update them. Factors that could cause actual results to differ materially from forward-looking statements or historical performance include those discussed in Item 1A. Risk Factors and may include, but are not limited to the following:
the inability to successfully integrate into the operations of AltaGas and a failure to realize anticipated benefits;
the effect of the consummation of the merger on our ability to maintain supplier relationships, keep customers, and retain and hire key personnel;
unexpected costs incurred in connection with the Merger;
the inability to meet commitments under various orders and agreements associated with regulatory approvals for the merger, which could have a detrimental impact on our business, financial condition, operating results and prospects;
the loss of certain administrative and management functions and services provided by AltaGas;
potential litigation in connection with the merger;
changes in AltaGas' strategy or relationship with Washington Gas that could affect our performance or operations;
changes in our credit rating, WGL's, or AltaGas' credit ratings, and disruptions in credit market conditions or other factors that may affect our access to and cost of capital;
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 our distribution system;
the availability of natural gas supply, interstate pipeline transportation and storage capacity;
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;

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changes in laws and regulations affecting our business, including in the areas of the environment, pipeline integrity, and employment;
changes in energy commodity market conditions, including the relative prices of alternative forms of energy such as electricity, fuel oil and propane;
disruptions or decline in the local economy in which Washington Gas operates;
strikes or work stoppages by unionized employees;
costs of providing retirement plan benefits is subject to change;
changes to government fiscal and trade policies;
security breaches of our information technology infrastructure, including cyber-attacks and cyber-terrorism;
acts of nature and catastrophic events, including terrorist acts;
the credit-worthiness of customers; suppliers and derivatives counterparties;
changes in the value of derivative contracts and the availability of suitable derivative counterparties;
rules implementing the derivatives transaction provisions of the Dodd-Frank Act may impose costs on our derivatives activities;
unusual weather conditions and changes in natural gas consumption patterns;
legislative, regulatory, and judicial mandates or decisions affecting our operations, including interpretations of the Tax Cuts and Jobs Act of 2017 (Tax Act);
our ability to manage the outsourcing of several business processes;
the outcome of new and existing matters before courts, regulators, government agencies or arbitrators, including that relating to the August 2016 explosion and fire at an apartment complex in Silver Spring, Maryland;
changes in accounting principles and the effect of accounting pronouncements issued periodically by accounting standard-setting bodies.
All such factors are difficult to predict accurately and are generally beyond the direct control of the registrant. Readers are urged to use care and consider the risks, uncertainties and other factors that could affect the registrant’s business as described in this transition report on Form 10-K.
 

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Part I



GLOSSARY OF KEY TERMS AND DEFINITIONS
 

Accelerated Pipe Replacement Programs: Programs focused on replacement activities, targeting specific piping materials, installed years and/or locations which are undertaken on an expedited basis in an effort to improve safety, system reliability and to reduce potential greenhouse gas emissions. 

Active Customer Meters: Natural gas meters that are physically connected to a building structure within the Washington Gas distribution system that are receiving natural gas distribution service.

AltaGas Ltd. (AltaGas): AltaGas is a Canadian corporation that became the parent company of WGL Holdings, Inc. upon consummation of the Merger on July 6, 2018.

AltaGas Services (U.S.) Inc. (ASUS): ASUS is a wholly owned subsidiary of AltaGas. It is the parent company of all AltaGas' U.S. subsidiaries.

Area-Wide Contract: A contract between Washington Gas and the General Services Administration for utility and energy-management services.

Asset Optimization Program: A program to optimize the value of Washington Gas’ long-term natural gas transportation and storage capacity resources during periods when these resources are not being used to physically serve customers.

Bundled Service: Service in which customers purchase both the natural gas commodity and the distribution or delivery of the commodity from the local regulated utility. When customers purchase bundled service from Washington Gas, no mark-up is applied to the cost of the natural gas commodity that is passed through to customers. 

Business Process Outsourcing (BPO) Agreement: An agreement whereby a service provider performs certain ongoing support functions.

 
BPO 2.0 Regulatory Asset: Regulatory asset relating to the cost to outsource certain administrative functions.


CARE Ratemaking Adjustment (CRA): A billing mechanism in the state of Virginia that is designed to minimize the effect of factors such as conservation on utility net revenues.

City Gate: A point or measuring station at which a gas distribution company such as Washington Gas receives natural gas from an unaffiliated pipeline or transmission system.

Competitive Service Provider (CSP): Also referred to as Third-Party Marketer (see definition below).

Conservation and Ratemaking Efficiency (CARE Plan): Provides for the CRA as well as cost effective conservation and energy efficient programs.

Delivery Service: The regulated distribution or delivery of natural gas to retail customers. Washington Gas provides delivery service to retail customers in Washington, D.C. and parts of Maryland and Virginia.

Design Day: Washington Gas’ design day represents the maximum anticipated demand on Washington Gas’ distribution system during a 24-hour period assuming a five-degree Fahrenheit average temperature and 17 miles per hour average wind, considered to be the coldest conditions expected to be experienced in the Washington, D.C. region.

Earnings Before Interest and Taxes (EBIT): A performance measure that includes operating income and other income (expense). EBIT is used in assessing the results of Washington Gas' operations.

Federal Energy Regulatory Commission (FERC): An independent agency of the federal government that regulates the interstate transmission of electricity, natural gas, and oil. The FERC also reviews proposals to build

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liquefied natural gas terminals and interstate natural gas pipelines.

Financial Contract: A contract in which no commodity is transferred between parties and only cash payments are exchanged in amounts equal to the financial benefit of holding the contract.

Firm Customers: Customers whose natural gas supply will not be disrupted by the regulated utility to meet the needs of other customers. Typically, this class of customer comprises residential customers and most commercial customers.

Generally Accepted Accounting Principles (GAAP): A standard framework of accounting rules used to prepare, present and report financial statements in the United States of America.

Hampshire: Hampshire Gas Company provides regulated interstate natural gas storage services to Washington Gas under a FERC approved interstate storage service tariff.

Heating Degree Day (HDD): A measure of the variation in weather based on the extent to which the daily average temperature falls below 65 degrees Fahrenheit.

Heavy Hydrocarbons (HHCs): Compounds, such as hexane, that Washington Gas is injecting into its distribution system to treat vaporized liquefied natural gas or domestic sources of gas that have had such HHCs removed as a result of liquids processing.

Interruptible Customers: Large commercial customers whose service can be temporarily interrupted in order for the regulated utility to meet the needs of firm customers. These customers pay a lower delivery rate than firm customers and they must be able to readily substitute an alternate fuel for natural gas. 

Lower-of-Cost or Net Realizable Value: The process of adjusting the value of inventory to reflect the lesser of its original cost or its net realizable value.

Mark-to-Market: The process of adjusting the carrying value of an asset or liability to reflect its current fair value.
 

Merger Agreement: An agreement governing WGL's combination with AltaGas, pursuant to which WGL became an indirect wholly-owned subsidiary of AltaGas (the Merger).

New Customer Meters Added: Natural gas meters that are newly connected to a building structure within the Washington Gas distribution system. Service may or may not have been activated. 

Normal Weather: A forecast of expected HDDs based on historical HDD data.

PROJECTpipes: An accelerated pipe replacement program that provides a recovery mechanism for costs of eligible infrastructure replacements in the District of Columbia.

PSC of DC: The Public Service Commission of the District of Columbia is a three-member board that regulates Washington Gas’ distribution operations in the District of Columbia.
 
PSC of MD: The Maryland Public Service Commission is a five-member board that regulates Washington Gas’ distribution operations in Maryland.
 
Purchased Gas Charge (PGC): The purchased gas charge represents the cost of gas, gas transportation, gas storage services purchased and other gas related costs. The purchased gas charge is collected from customers through tariffs established by the regulatory commissions that have jurisdiction over Washington Gas.

Purchase of Receivables (POR): A program in Maryland, whereby Washington Gas purchases receivables from participating CSPs at approved discount rates.
 
Revenue Normalization Adjustment (RNA): A regulatory billing mechanism in the state of Maryland designed to stabilize the level of net revenues collected from customers by eliminating the effect of deviations in customer usage caused by variations in weather from normal levels, and other factors such as conservation.


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SCC of VA: The Commonwealth of Virginia State Corporation Commission is a three-member board that regulates Washington Gas’ distribution operations in Virginia.

Sendout: The total amount of gas that flows into Washington Gas' distribution system within a certain interval of time.

Service Area: The region in which Washington Gas operates. The service area includes the District of Columbia, and the surrounding metropolitan areas in Maryland and Virginia.

Steps to Advance Virginia’s Energy Plan (SAVE Plan): An accelerated pipe replacement plan that provides a recovery mechanism for costs of eligible infrastructure replacements in the state of Virginia.

Strategic Infrastructure Development and Enhancement Plan (STRIDE Plan): An accelerated pipe replacement plan that provides a recovery mechanism for reasonable and prudent costs associated with infrastructure replacements in the state of Maryland.
 
Tariffs: Documents approved by the regulatory commission in each jurisdiction that set the prices Washington Gas may charge and the practices it must follow when providing utility service to its customers.

Therm: A natural gas unit of measurement that includes a standard measure for heating value. We report our natural gas sales and deliveries in therms. A therm of gas contains 100,000 British thermal units of heat, or the energy equivalent of burning approximately 100 cubic feet of natural gas under normal conditions. Ten million therms equal approximately one billion cubic feet of natural gas. A dekatherm is 10 therms and is abbreviated Dth.

Third-party Marketer: Unregulated companies that sell natural gas and electricity directly to retail customers. WGL Energy Services, an affiliate of Washington Gas and a wholly owned subsidiary company of Washington Gas Resources Corporation, is a third-party marketer.

Unbundling: The separation of the delivery of natural gas or electricity from the sale of these commodities and
 
related services that, in the past, were provided only by a regulated utility.

Utility Net Revenues: A measure used by the regulated utility which is calculated as operating revenues less the associated cost of gas and applicable revenue taxes. For the regulated utility, the cost of gas associated with sales to customers and revenue taxes are generally pass through amounts.

Weather Normalization Adjustment (WNA): A billing adjustment mechanism in Virginia that is designed to minimize the effect of variations from normal weather on utility net revenues.

WGL: WGL Holdings, Inc. is a holding company that is the parent company of Wrangler SPE LLC, Washington Gas Light Company and other subsidiaries. It is an indirect wholly owned subsidiary of AltaGas.

WGL Energy Services: WGL Energy Services, Inc. is a subsidiary of Washington Gas Resources Corporation that sells natural gas and electricity to retail customers on an unregulated basis.

WGL Energy Systems: WGL Energy Systems, Inc. is a subsidiary of Washington Gas Resources Corporation, which provides commercial energy efficient and sustainable solutions to government and commercial clients.

Wrangler 1 LLC: Wrangler 1 LLC is an indirect wholly owned subsidiary of AltaGas Ltd. Upon the effectiveness of the Merger, Wrangler 1 LLC owns all the shares of common stock of WGL.

Wrangler SPE LLC (SPE): Wrangler SPE LLC is a bankruptcy remote special purpose entity which owns all the shares of the common stock of Washington Gas. It was established as a wholly owned subsidiary of WGL upon consummation of the Merger with AltaGas.



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Washington Gas Light Company
Part I
Item 1. Business

ITEM 1.  BUSINESS
 
Corporate Overview
Washington Gas has been engaged in the natural gas distribution business since its incorporation by an Act of Congress in 1848. It was incorporated in Virginia in 1953 and in the District of Columbia in 1957. We are a regulated public utility company that sells and delivers natural gas to retail customers in accordance with tariffs approved by regulatory commissions in the District of Columbia and adjoining areas in Maryland, Virginia and several cities and towns in the northern Shenandoah Valley of Virginia. Washington Gas promotes the efficient use of clean natural gas to improve the environment for the benefit of customers, investors, employees, and the communities it serves.
Washington Gas is an indirect, majority-owned subsidiary of, among other entities, WGL, a Virginia corporation established on November 1, 2000. Washington Gas sells and delivers natural gas to customers primarily in the District of Columbia and the surrounding metropolitan areas in Maryland and Virginia.
On January 25, 2017, WGL entered into a Merger Agreement to combine with AltaGas Ltd., a Canadian corporation (AltaGas). The merger was consummated on July 6, 2018 between AltaGas, WGL, and Wrangler Inc. (Merger Sub), a newly formed indirect wholly owned subsidiary of AltaGas. The Merger Agreement provided for the merger of the Merger Sub with and into WGL, with WGL surviving as an indirect wholly owned subsidiary of AltaGas (the Merger). In connection with the Merger, WGL established Wrangler SPE LLC, a bankruptcy remote special purpose entity (the SPE) for the purposes of owning the common stock of Washington Gas. The SPE is a wholly owned subsidiary of WGL. In addition, WGL owns 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). Additionally, several subsidiaries of WGL own interests in other entities.
For further information on the Merger, see “Safe Harbor and Forward Looking Statements” in the Introduction, Item I. Business, Item 1A. Risk Factors, and Note 18 “Merger with AltaGas Ltd.” of the Notes to Financial Statements in this transition report on Form 10-K.

Products and Services
Washington Gas provides regulated distribution or delivery of natural gas to retail customers under tariff rates designed to provide for a return on and return of the investment used in providing that service. The rates are also designed to provide for recovery of operating expenses and federal and state income taxes incurred in providing that service. Washington Gas also sells natural gas to customers who have not elected to purchase natural gas from unregulated third-party marketers (refer to the section entitled “Natural Gas Unbundling”). Washington Gas recovers the cost of the natural gas purchased to serve firm customers through recovery mechanisms as approved in jurisdictional tariffs. Any difference between gas costs incurred on behalf of firm customers and the gas costs recovered from those 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. However, to the extent Washington Gas does not have regulatory mechanisms in place to mitigate the indirect effects of higher gas prices, such as: (i) lower natural gas consumption caused by customer conservation; (ii) increased short-term interest expense to finance a higher natural gas storage and accounts receivable balances and (iii) higher expenses for uncollectible accounts, its net income may decrease.
Washington Gas, under its asset optimization program, makes use of storage and transportation capacity resources when those assets are not required to serve utility customers. The objective of this program is to derive a profit to be shared with its utility customers. These profits are earned by entering into commodity-related physical and financial contracts with third parties (refer to the section entitled “Asset Optimization Derivative Contracts” for further discussion of the asset optimization program). Unless otherwise noted, therm deliveries reported do not include deliveries related to the asset optimization program.
At December 31, 2018, Washington Gas’ service area had a population estimated at 5.9 million and included approximately 2.2 million households and commercial structures. Washington Gas operations are such that the loss of any one customer or group of customers would not have a significant adverse effect on its business. The following table lists the number of active customer meters and therms delivered by jurisdiction as of and for the year ended December 31, 2018 and 2017, respectively.

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Washington Gas Light Company
Part I
Item 1. Business (continued)

Active Customer Meters and Therms Delivered by Jurisdiction
Jurisdiction
Active Customer
Meters as of
  December 31, 2018  
 
Millions of Therms
Delivered
Year Ended
  December 31, 2018  
 
Active Customer
Meters as of
  December 31, 2017   
 
Millions of Therms
Delivered
Year Ended
   December 31, 2017  
 
 
 
 
 
 
 
 
District of Columbia
164,509

 
305.7

 
162,683

 
279.6

Maryland
488,844

 
918.4

 
480,913

 
776.5

Virginia
531,477

 
693.2

 
525,698

 
589.1

Total
1,184,830

 
1,917.3

 
1,169,294

 
1,645.2

For additional information about gas deliveries and meter statistics, refer to the section entitled “Results of Operations” in "Management's Discussion and Analysis of Financial Conditions and Results of Operations" (Management’s Discussion and Analysis) for Washington Gas.
Regulatory Environment
Washington Gas is regulated by the PSC of DC, the PSC of MD and the SCC of VA which approve its terms of service and the billing rates that it charges to its customers. 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. For a discussion of current rates and regulatory matters, refer to the section entitled “Rates and Regulatory Matters” in Management’s Discussion and Analysis for Washington Gas.
District of Columbia Jurisdiction
The PSC of DC consists of three full-time members who are appointed by the Mayor with the advice and consent of the District of Columbia City Council. The term of each commissioner is four years with no limit on the number of terms that can be served. The PSC of DC has no time limitation within which it must make decisions regarding modifications to base rates charged by Washington Gas to its customers; however, it targets resolving pending rate cases within three months of the close of record.
Maryland Jurisdiction
The PSC of MD consists of five full-time members who are appointed by the Governor with the advice and consent of the Senate of Maryland. Each commissioner is appointed to a five-year term, with no limit on the number of terms that can be served.
When Washington Gas files for a rate increase, the PSC of MD may initially suspend the proposed increase for 180 days, and then has the option to extend the suspension for an additional 30 days. If action has not been taken after 210 days, the requested rates become effective subject to refund.
Virginia Jurisdiction
The SCC of VA consists of three full-time members who are elected by the General Assembly of Virginia. Each commissioner has a six-year term with no limit on the number of terms that can be served.
Either of two methods may be used to request a modification of existing rates. Washington Gas may file an application for a general rate increase, in which it may propose new adjustments to the cost of service that are different from those previously approved for Washington Gas by the SCC of VA, as well as a revised return on equity. The proposed rates under this process may take effect 150 days after the filing, subject to refund pending the outcome of the SCC of VA’s action on the application.
Alternatively, an expedited rate case procedure allows proposed rate increases to be effective 30 days after the filing date, subject to refund. Under this procedure, Washington Gas may not propose new adjustments for issues not approved in its last general rate case or request a change in its authorized return on common equity. Once filed, other parties may propose new adjustments or a change in the cost of capital from the level authorized in its last general rate case. The expedited rate case procedure may not be available if the SCC of VA decides that there has been a substantial change in circumstances since the last general rate case filed by Washington Gas.
Seasonality of Business Operations

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Washington Gas Light Company
Part I
Item 1. Business (continued)

Washington Gas’ business is weather-sensitive and seasonal because the majority of its business is derived from residential and small commercial customers who use natural gas for space heating. Excluding deliveries for electric generation, 75% and 73% of the total therms delivered in Washington Gas’ service area occurred during its first and fourth quarters for calendar years 2018 and 2017, respectively. Washington Gas’ earnings are typically generated during these two quarters, and Washington Gas typically incurs net losses in the second and third quarters. The seasonal nature of the business creates large variations in short-term cash requirements, primarily due to the season-to-season fluctuations in the level of customer accounts receivable, unbilled revenues and storage gas inventories. Washington Gas finances these seasonal requirements primarily through the sale of commercial paper backed by a revolving credit facility. For information on our management of weather risk, refer to the section entitled “Weather Risk” in Management’s Discussion and Analysis. For information about management of cash requirements, refer to the section entitled “Liquidity and Capital Resources” in Management’s Discussion and Analysis.
Non-Weather Related Changes in Natural Gas Consumption Patterns
Natural gas supply requirements for the utility are affected by changes in the natural gas consumption patterns of our customers that are driven by factors other than weather. Natural gas usage per customer may decline as customers change their consumption patterns for various reasons, including: (i) more volatile and higher natural gas prices; (ii) customer upgrades to more energy efficient appliances and building structures and (iii) a decline in the economy in the region in which we operate.
For each jurisdiction in which Washington Gas operates, changes in customer usage profiles are reflected in rate case proceedings and rates are adjusted accordingly. Changes in customer usage by existing customers that occur subsequent to rate case proceedings in Maryland generally will not change revenues because the RNA mechanism stabilizes the level of delivery charge revenues received from customers.
In Virginia, decoupling rate mechanisms for residential, small commercial and industrial and group metered apartment customers permit Washington Gas to adjust revenues for non-weather related changes in customer usage. The WNA and the CRA are billing mechanisms that together eliminate the effects of both weather and other factors such as conservation.
In the District of Columbia, a decrease in customer usage that occurs subsequent to a rate case proceeding would have the effect of reducing revenues, which could be offset by additions of new customers.
Natural Gas Supply and Capacity
Capacity and Supply Requirements
Washington Gas must contract for reliable and adequate natural gas supplies, interstate pipeline capacity and storage capacity to provide natural gas to its distribution system, while considering: (i) the dynamics of the commodity supply and interstate pipeline and storage capacity markets; (ii) its own on-system natural gas peaking facilities and (iii) the characteristics of its customer base. Energy-marketing companies that sell natural gas to customers located within Washington Gas’ service territory are responsible for acquiring natural gas for their customers; however, Washington Gas allocates certain storage and pipeline capacity related to these customers in accordance with regulatory requirements.
Washington Gas has adopted a diversified portfolio approach designed to address constraints on supply by using multiple supply receipt points, dependable interstate pipeline transportation and storage arrangements, and its own substantial storage and peak shaving capabilities. Washington Gas’ supply and pipeline capacity plan is based on forecasted system requirements, and takes into account estimated load growth, attrition, conservation, geographic location, interstate pipeline and storage capacity and contractual limitations and the forecasted movement of customers between bundled service and delivery service. Under reduced supply conditions, Washington Gas may implement contingency plans in order to maximize the number of customers served. Contingency plans include requests to the general population to conserve and target curtailments to specific sections of the system, consistent with curtailment tariffs approved by regulators in each of Washington Gas’ three jurisdictions.
Washington Gas obtains natural gas supplies that originate from multiple regions throughout the United States. At December 31, 2018, Washington Gas had multiple service agreements with four pipeline companies that provides firm transportation and/or storage services directly to Washington Gas’ city gates. These contracts have expiration dates ranging from calendar years 2019 to 2044. Additionally, Washington Gas has contracted with various interstate pipeline and storage companies to add to its storage and transportation capacity and continues to monitor other opportunities to acquire or participate in additional pipeline and storage capacity to support customer growth and improve or maintain the high level of service expected by its customer base.
Asset Optimization Derivative Contracts

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Washington Gas Light Company
Part I
Item 1. Business (continued)

Under the asset optimization program, Washington Gas utilizes its storage and transportation capacity resources when they are not being used to serve its utility customers. Washington Gas executes commodity-related physical and financial contracts in the form of forwards, futures and options as part of an asset optimization program that is managed by its internal staff. These transactions are accounted for as derivatives. The objective of this program is to derive a profit to be shared with Washington Gas' utility customers. Washington Gas enters into these derivative transaction contracts to secure operating margins that will ultimately be shared between customers and Washington Gas. Because these sharing mechanisms are approved by our regulators in all three jurisdictions, any changes in fair value of the derivatives are recorded either through earnings for margins that are retained by Washington Gas or as regulatory assets or liabilities if the ultimate realized gains and losses will be included in the rates charged to customers.
The derivatives used under this program are subject to fair value accounting treatment which may cause significant period-to-period volatility in earnings from unrealized gains and losses associated with changes in fair value for the portion of net profits attributed to shareholders. However, this earnings volatility does not change the realized margins that Washington Gas expects to earn 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 including unrealized gains and losses recorded to “Utility cost of gas” after sharing and management fees associated with all asset optimization transactions for the three months ended December 31, 2018 and the fiscal years ended September 30, 2018, 2017 and 2016, respectively, were net gains of $1.1 million, $34.3 million, $82.9 million, and $43.8 million.
Refer to the sections entitled “Results of Operations — Regulated Utility Operating Results” and “Market Risk” in Management’s Discussion and Analysis for further discussion of the asset optimization program and its effect on earnings.
Annual Sendout
As reflected in the table below, Washington Gas received natural gas from multiple sources in calendar year 2018 and expects to use those same sources to satisfy customer demand in calendar year 2019. Firm transportation denotes gas transported directly to the entry point of Washington Gas’ distribution system in contractual volumes. Transportation storage denotes volumes stored by a pipeline during the spring, summer and fall for withdrawal and delivery to the Washington Gas distribution system during the winter heating season to meet load requirements. Peak load requirements are met by: (i) underground natural gas storage at the Hampshire storage field; (ii) the local production of propane air plants located at Washington Gas-owned facilities in Rockville, Maryland (Rockville Station) and in Springfield, Virginia (Ravensworth Station) and (iii) other peak-shaving resources. Unregulated third-party marketers acquire interstate pipeline and storage capacity and the natural gas commodity on behalf of Washington Gas’ delivery service customers under customer choice programs. Washington Gas also provides transportation, storage and peaking resources to unregulated third-party marketers (refer to the section entitled “Natural Gas Unbundling”). These retail marketers have natural gas delivered to the entry point of Washington Gas’ distribution system on behalf of those utility customers that have decided to acquire their natural gas commodity on an unbundled basis, as discussed below.
Excluding the sendout of sales and deliveries of natural gas used for electric generation, the following table outlines total sendout of the system. The sources of delivery and related volumes that were used to satisfy the requirements of calendar year 2018 and those projected for calendar year 2019 are shown in the following table.
 
Methods of Delivery of Annual Sendout
(In millions of therms)
Fiscal Year
 
Calendar Year
Sources of Delivery
Actual
2017 
 
Actual
 2018 
 
  Projected  
2019
Firm Transportation
513

 
700

 
594

Transportation Storage
398

 
476

 
422

Hampshire Storage, Company-Owned Propane-Air Plants, and other Peak-Shaving Resources
29

 
37

 
30

Unregulated Third-Party Marketers
783

 
805

 
845

Total
1,723

 
2,018

 
1,891

Design Day Sendout
The effectiveness of Washington Gas’ capacity resource plan is largely dependent on the sources used to satisfy forecasted and actual customer demand requirements for its design day. For planning purposes, Washington Gas assumes that all

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Washington Gas Light Company
Part I
Item 1. Business (continued)

interruptible customers will be curtailed on the design day. Washington Gas’ forecasted design day demand for calendar year 2019 is 19.9 million therms and Washington Gas’ projected sources of delivery for design day sendout is 21.0 million therms. This provides a reserve margin of approximately 5.3%. Washington Gas plans for the optimal utilization of its storage and peaking capacity to reduce its dependency on firm transportation and to lower pipeline capacity costs. The following table reflects the sources of delivery that are projected to be used to satisfy the forecasted design day sendout estimate for calendar year 2019.
Projected Sources of Delivery for Design Day Sendout
(In millions of therms)
Calendar Year 2019
Sources of Delivery
Volumes
 
Percent    
Firm Transportation
6.8

 
32
%
Transportation Storage
8.5

 
41
%
Hampshire Storage, Company-Owned Propane-Air Plants and other Peak-Shaving Resources
5.5

 
26
%
Unregulated Third-Party Marketers
0.2

 
1
%
Total
21.0

 
100
%
Natural Gas Unbundling
At December 31, 2018, customer choice programs for natural gas customers were available to all of Washington Gas’ regulated utility customers in the District of Columbia, Maryland and Virginia. These programs allow customers to purchase their natural gas from unregulated third-party marketers, rather than purchasing this commodity as part of a bundled service from the local utility. Of Washington Gas’ 1.2 million active customers at December 31, 2018, approximately 175,000 customers purchased their natural gas commodity from unregulated third-party marketers.
The following table provides the percentage of customers participating in customer choice programs in Washington Gas’ jurisdictions at December 31, 2018.
Participation in Customer Choice Programs
At December 31, 2018
Jurisdiction
Customer Class  
Eligible Customers
 
 
Total      
 
% Participating  
  District of Columbia
Firm:
 
 
 
 
Residential
151,366

 
9
%
 
Commercial
12,999

 
34
%
 
Interruptible
144

 
99
%
Maryland
Firm:
 
 
 
 
Residential
457,171

 
19
%
 
Commercial
31,500

 
42
%
 
Interruptible
171

 
99
%
 
Electric Generation
2

 
100
%
Virginia
Firm:
 
 
 
 
Residential
501,358

 
10
%
 
Commercial
29,959

 
31
%
 
Interruptible
160

 
96
%
Total
 
1,184,830

 
 
When customers choose to purchase the natural gas commodity from unregulated third-party marketers, Washington Gas’ net income is not affected because Washington Gas charges its customers the cost of gas without any mark-up. When customers select an unregulated third-party marketer as their gas supplier, Washington Gas continues to charge these customers to deliver natural gas through its distribution system at rates identical to the delivery portion of the bundled sales service customers.

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Washington Gas Light Company
Part I
Item 1. Business (continued)

Safety and Reliability of the Natural Gas Distribution System
Maintaining and improving the public safety and reliability of Washington Gas’ distribution system is our highest priority, providing benefits to both customers and investors through improved customer service. Washington Gas continually monitors and reviews changes in requirements of the codes and regulations that govern the operation of the distribution system and refines its safety practices, with a particular focus on design, construction, maintenance, operation, replacement, inspection and monitoring practices to meet or exceed these requirements. Significant changes in regulations can impact the cost of operating and maintaining our distribution system.
Competition
The Natural Gas Delivery Function
The natural gas delivery function, the core business of Washington Gas, continues to be regulated by local and state regulatory commissions. In developing this core business, Washington Gas has approximately $4 billion of invested assets at December 31, 2018, to build and serve customers through safe and reliable distribution system assets. Because of the high fixed costs and significant safety and environmental considerations associated with building and operating a distribution system, Washington Gas expects to continue being the only owner and operator of a distribution system in its current franchise areas for the foreseeable future. The nature of Washington Gas’ customer base and the distance of most customers from interstate pipelines mitigate the threat of bypass of its facilities by other potential delivery service providers.
Competition with Other Energy Products
Washington Gas faces competition based on customers’ preference for other energy products and the prices of those products compared to natural gas. In the residential market, which generates a significant portion of Washington Gas’ net income, the most significant product competition occurs between natural gas and electricity. Because the cost of electricity is affected by the cost of fuel used to generate electricity, such as natural gas, Washington Gas generally maintains a price advantage over competitive electricity supply in its service area for traditional residential uses of energy such as heating, water heating and cooking. Washington Gas continues to attract the majority of the new residential construction market in its service territory, and consumers’ continuing preference for natural gas allows Washington Gas to maintain a strong market presence. The following table lists the new customer meters added by jurisdiction and major rate class for the calendar year ended December 31, 2018.
New Customer Meters by Area
  
 
Residential
 
 
Commercial and
Interruptible
 
Group Metered
Apartments
 
Total      
Maryland
 
5,570

 
382

 

 
5,952

Virginia
 
4,960

 
340

 
1

 
5,301

District of Columbia
 
614

 
107

 
1

 
722

Total
 
11,144

 
829

 
2

 
11,975

In the interruptible market, fuel oil is the prevalent energy alternative to natural gas. Washington Gas’ success in this market depends largely on the relationship between natural gas and oil prices. The supply of natural gas primarily is derived from domestic sources, and the relationship between supply and demand generally has the greatest impact on natural gas prices. Since the source of a large portion of oil comes from foreign countries, political events and foreign currency conversion rates can influence oil supplies and prices to domestic consumers.
Critical Factors
Factors critical to the success of the regulated utility segment include: (i) operating a safe and reliable natural gas distribution system; (ii) having sufficient natural gas supplies to meet customer demands; (iii) being competitive with other sources of energy such as electricity, fuel oil and propane; (iv) having access to sources of liquidity; (v) recovering the costs and expenses of this business in the rates charged to customers and (vi) earning a fair, just and reasonable rate of return on invested capital.

Environmental Matters
We are subject to federal, state and local laws and regulations related to environmental matters. These laws and regulations may require expenditures over a long time frame to control environmental effects. Most of the environmental liabilities we have recorded are for costs expected to be incurred to remediate sites where we or a predecessor affiliate operated manufactured gas

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Washington Gas Light Company
Part I
Item 1. Business (continued)

plants (MGPs). Estimates of liabilities for environmental response costs are difficult to determine with precision because of the various factors that can affect their ultimate level. These factors include, but are not limited to, the following:
the complexity of the site;
changes in environmental laws and regulations at the federal, state and local levels;
the number of regulatory agencies or other parties involved;
new technology that renders previous technology obsolete or experience with existing technology that proves ineffective;
the level of remediation required and
variation between the estimated and actual period of time required to respond to an environmentally contaminated site.
Washington Gas has identified up to ten sites where it or its predecessors may have operated MGPs. Washington Gas last used any such plant in 1984. In connection with these operations, we are aware that coal tar and certain other by-products of the gas manufacturing process are present at or near some former sites and may be present at others.
Washington Gas is currently remediating its East Station property, which is adjacent to the Anacostia River, including ground water pump and treat, tar recovery, soil encapsulation and other treatment. Washington Gas is conducting a remedial investigation and feasibility study under a 2012 consent decree with the District of Columbia and the federal government and additional remediation may be required. In addition, manufactured gas waste was discovered at an adjoining property, a parcel of land adjacent to East Station. Washington Gas has agreed to work with the owners of the adjoining property to perform a site investigation, ground water sampling, and report on the contamination at the site pursuant to oversight by Department of Energy and Environment (DOEE).
Washington Gas received a letter in February 2016 from the District of Columbia and National Park Service regarding the Anacostia River Sediment Project, indicating that the District of Columbia is conducting a separate remedial investigation and feasibility study of the river to determine if and what cleanup measures may be required and to prepare a natural resource damage assessment. The sediment project draft remedial investigation report issued on March 30, 2018 identifies East Station as one of seventeen potential environmental cleanup sites. We are not able to estimate the total amount of potential damages or timing associated with the District of Columbia's environmental investigation on the Anacostia River at this time. While an allocation method has not been established, Washington Gas has accrued an amount based on a potential range of estimates for the feasibility study costs.
See Note 11 —Environmental Matters of the Notes to Financial Statements for further discussion of environmental response costs.
Other Information
At December 31, 2018, we had 1,549 employees.
Washington Gas has determined that it will not be classified as a swap dealer or major swap participant under the Dodd-Frank Act.
The following documentation is available on the Web site for Washington Gas (www.washingtongas.com) under “Corporate Information”/“Governance”: our code of conduct, the AltaGas Code of Business Ethics, the Washington Gas Corporate Governance Guidelines, and the Charters for the Governance & Environment, Health and Safety, Audit and Human Resources Committees of Washington Gas. Any changes or amendments to these documents will also be posted to this section of the Washington Gas Web site.
Copies of any of the aforementioned documents may be obtained by request to the Corporate Secretary at Washington Gas, 1000 Maine Ave., S.W., Washington, D.C. 20024. Also on the Washington Gas corporate Web site is additional information about Washington Gas and access to our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and any amendments filed with or furnished to the Securities and Exchange Commission.
Our research and development costs during the transition period ended December 31, 2018 and fiscal years ended September 30, 2018, 2017 and 2016 were not material.


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Washington Gas Light Company
Part I
Item 1A. Risk Factors

ITEM 1A. RISK FACTORS
 
The risk factors described below should be read in conjunction with other information included or incorporated by reference in this transition report on Form 10-K, including an in-depth discussion of these risks in the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

The merger of WGL with AltaGas may not achieve its anticipated results, and WGL, including Washington Gas, may be unable to integrate the operations of AltaGas in the manner expected.

WGL and AltaGas entered into the Merger Agreement expecting that the Merger will result in various benefits, including, among other things, cost savings and operating efficiencies. Achieving the anticipated benefits of the Merger is subject to a number of uncertainties, including whether the businesses of WGL and AltaGas can be integrated in an efficient, effective and timely manner. The combination of two independent businesses is complex, costly, and time-consuming; and may divert significant management attention and resources, including those of Washington Gas, to combining WGL’s and AltaGas’ business practices and operations, which could otherwise have been devoted to business opportunities of WGL and, specifically, Washington Gas. This process may disrupt Washington Gas’ business.

In addition, it is possible that the integration process could take longer than anticipated and could result in the disruption of Washington Gas’ business, processes, and systems; or inconsistencies in standards, controls, procedures, practices, and policies, any of which could adversely affect the combined company’s ability to achieve the anticipated benefits of the Merger as and when expected. The overall combination of WGL’s and AltaGas’ businesses may also result in material unanticipated problems, expenses, liabilities, competitive responses, and loss of customer and other business relationships. Failure to achieve these anticipated benefits or the incurrence of unanticipated expenses and liabilities could materially adversely affect Washington Gas’ business, financial condition, operating results and prospects, as well as that of the combined company.

Uncertainties associated with the Merger may cause a loss of management personnel and other key employees, which could adversely affect the future business and operations of the combined company.

Washington Gas is dependent on the experience and industry knowledge of its officers and other key employees to execute its business plans. The success of the combined company post-Merger will depend in part upon Washington Gas’ ability to retain key management personnel and other key employees. Current and prospective employees of Washington Gas may experience uncertainty about their future roles with the combined company, which may materially adversely affect the ability of Washington Gas to retain and attract key personnel going forward. Washington Gas may also have difficulty addressing possible differences in corporate cultures and management philosophies. Accordingly, no assurance can be given that the combined company will be able to retain key management personnel and other key employees of Washington Gas, which could materially adversely affect Washington Gas’ business, financial condition, operating results and prospects.

Washington Gas may incur unexpected costs in connection with the Merger.

Washington Gas expects to incur a number of non-recurring expenses associated with and following consummation of the Merger, as well as expenses related to combining the operations of the two companies. Washington Gas may incur additional unanticipated costs in the integration of the businesses of Washington Gas and AltaGas. Although Washington Gas expects that the elimination of certain duplicative costs, as well as the realization of other efficiencies related to the integration of the two businesses, will offset the incremental transaction and Merger-related costs over time, the combined company may not achieve this net benefit in the near term, or at all.

Washington Gas may encounter unexpected difficulties or costs in meeting commitments made under various orders and agreements associated with regulatory approvals for the Merger.

As a result of the process to obtain regulatory approvals required for the Merger, Washington Gas is committed to various programs, contributions and investments in several agreements and regulatory approval orders. It is possible that Washington Gas may encounter delays, unexpected difficulties or additional costs in meeting these commitments in compliance with the terms of the relevant agreements and orders. Failure to fulfill the commitments in accordance with their terms could result in increased costs or result in penalties or fines that could materially adversely affect Washington Gas’ business, financial condition, operating results and prospects.

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Washington Gas Light Company
Part I
Item 1A. Risk Factors (continued)



As an indirect, majority-owned subsidiary of AltaGas, Washington Gas is dependent on AltaGas for certain services under a services agreement. Loss of such services, if any, could have a material impact on Washington Gas’ business, financial condition, results of operations and cash flows.

Washington Gas receives general corporate services from AltaGas under a service agreement approved by the SCC of VA. Under the agreement, Washington Gas relies on AltaGas for certain administrative and management functions and services, including human resources, employee benefits, finance, legal, accounting, tax, information technology, and office services. Should AltaGas not be able to provide such services to Washington Gas for any reason, Washington Gas will need to utilize its own resources for such services or otherwise find a substitute provider for such services. Washington Gas, however, may not have sufficient internal resources to effectively provide such services or may not be able to contract with a substitute service provider on similar terms or at all.  Moreover, the costs of obtaining a substitute service provider, if found, may also be substantial and overly burdensome for Washington Gas. Washington Gas may also experience an interruption in the provision of such services to it.  In addition, in light of AltaGas' familiarity with Washington Gas, a substitute service provider, if any, may not be able to provide the same level of service due to lack of preexisting synergies. If Washington Gas cannot support necessary services from its internal resources or otherwise locate providers that are able to provide it with substantially similar services, Washington Gas’ business, financial condition, results of operations and cash flows could be adversely affected.

WGL and AltaGas may become targets of securities class action suits and derivative suits, which could result in substantial costs and divert management attention and resources.

Securities class action suits and derivative suits are often brought against companies who have entered into Mergers and acquisition transactions. There can be no assurance that WGL or AltaGas will not be targets of such suits in the future, and no guarantee that WGL or AltaGas can successfully defend against any such actions. Defending against these claims, even if meritless, could result not only in substantial costs to WGL and AltaGas, but could divert the attention of management of Washington Gas.

As an indirect, majority-owned subsidiary of AltaGas, Washington Gas is affected by AltaGas' strategic decisions and performance.

Notwithstanding certain protections provided by the merger-related commitments, as an indirect, majority-owned subsidiary of AltaGas, Washington Gas’ business and operating performance can be affected by a wide range of strategic decisions that AltaGas may make from time to time. Significant changes in AltaGas’ strategy, its relationship with Washington Gas, as well as material adverse changes in the performance of AltaGas, could have a material adverse effect on Washington Gas’ business, financial condition, operating results and prospects.

A downgrade in WGL’s or AltaGas’ credit ratings could negatively affect Washington Gas’ cost of, and ability to access, capital.

Washington Gas’ ability to obtain adequate and cost-effective financing depends in part on its credit ratings and the liquidity of financial markets. A negative change in its ratings outlook or any downgrade in its current investment-grade credit ratings by the rating agencies, particularly below investment grade, could adversely affect Washington Gas’ costs of borrowing and/or access to sources of liquidity and capital. Further, a negative change in AltaGas’ or WGL’s ratings outlooks or any downgrade in their credit ratings could negatively impact Washington Gas’ ratings outlook or downgrade its credit ratings. Such downgrades could limit Washington Gas’ access to the credit markets and increase the costs of borrowing under available credit lines. Should Washington Gas’ credit ratings be downgraded, the interest rates on its borrowings under its existing credit facilities and commercial paper program, as well as on any future public or private debt issuances, could increase. An increase in borrowing costs without the ability to recover these higher costs in the rates charged to Washington Gas’ customers, which would be impacted by the merger-related commitment that prohibits Washington Gas from recovering any incremental financing costs due to a credit downgrade, could adversely affect earnings or cash flows by limiting Washington Gas’ ability to earn its allowed rate of return. Additionally, disruptions in the credit market, including as a result of natural disasters and catastrophic events (including terrorist acts), could adversely affect Washington Gas’ access to sources of liquidity and increase its borrowing costs.

Washington Gas may be unable to access capital or the cost of capital may significantly increase.

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Washington Gas Light Company
Part I
Item 1A. Risk Factors (continued)



Washington Gas’ ability to obtain adequate and cost-effective financing is dependent upon the liquidity of the financial markets, in addition to its credit ratings. Disruptions in the capital and credit markets could adversely affect Washington Gas’ ability to access short-term and long-term capital. Washington Gas’ access to funds under its commercial paper program is dependent on investor demand for its commercial paper. Disruptions and volatility in the global credit markets could limit the demand for Washington Gas’ commercial paper or result in the need to offer higher interest rate to investors, which would result in higher expense and could adversely impact liquidity.

Changes in the regulatory environment or unfavorable rate regulation may restrict or delay Washington Gas’ ability to earn a reasonable rate of return on its capital invested to provide utility service and to recover fully its operating costs.

Washington Gas is regulated by several regulatory commissions and agencies. These regulatory commissions generally have authority over many of the activities of Washington Gas’ business including, but not limited to, the rates it charges to its customers, the amount and type of securities it can issue, the nature of investments it can make, the nature and quality of services it provides, safety standards, collection practices and other matters. These regulators also may modify Washington Gas’ rates to change the level, type and methods that it utilizes to recover its costs, including the costs to acquire, store, transport and deliver natural gas. In addition, the regulatory environment and rate regulation can be affected by new laws and political considerations. Most significantly, we incur both planned and unplanned costs to operate, improve, maintain and repair our operational assets. The amount of these costs may vary from our expectations due to significant unanticipated repairs, maintenance and remediation of our assets, changes in legal and regulatory requirements, natural disasters, terrorism, changes in interest rates of our indebtedness and other events. To the extent these costs are not included in approved rates or tariffs, we seek our recovery through rate cases; however, the regulatory process may be lengthy and costs may be disallowed, causing us to suffer the negative financial effects of costs incurred without the benefit of rate relief. Additionally, the actions of regulatory commissions may restrict or delay Washington Gas’ ability to earn a reasonable rate of return on invested capital.

Washington Gas must acquire additional capacity to deliver natural gas into growth areas and it may not be able to do so in a timely manner.

Washington Gas must acquire additional interstate pipeline transportation or storage capacity and construct transmission and distribution pipe to deliver additional capacity into growth areas on our system. The specific timing of any larger customer additions to our market may not be forecasted with sufficiently long lead time and the availability of these supply options to serve any of our customer additions may be limited by market supply and demand, the timing of Washington Gas’ participation in new interstate pipeline construction projects, local permitting requirements and the ability to acquire necessary rights of way. These limitations could result in an interruption in Washington Gas’ ability to satisfy the needs of some of its customers.

Leaks, mechanical problems, incidents or other operational issues could affect public safety and the reliability of Washington Gas’ distribution system, which could materially affect Washington Gas’ results of operations, financial condition and cash flows.

Washington Gas’ business is exposed to operational issues, hazards and risks inherent in storing and transporting natural gas that could affect the public safety and reliability of its distribution system. While Washington Gas, with support from each of its regulatory commissions, is accelerating the replacement of aging pipeline infrastructure prioritized on a risk-based approach, potential operating issues remain. These issues such as leaks, equipment problems and incidents, including explosions and fire, could result in legal liability, repair and remediation costs, increased operating costs, significant increased capital expenditures, regulatory fines and penalties and other costs and a loss of customer confidence. Any liabilities resulting from the occurrence of these events may not be fully covered by insurance, and Washington Gas may be unable to recover from customers through the regulatory process all of these repair, remediation and other costs and earn its authorized rate of return on these costs.

Washington Gas has implemented preventive and remedial measures to address increased leak rates in its distribution system caused by an increase in the volume of natural gas containing low concentration of HHCs received from its suppliers.  These measures include the injection of hexane to increase the concentration of HHCs and the implementation of pipe replacement programs.  If Washington Gas were unable to inject hexane into its natural gas supply due to limited availability of hexane, equipment or operational problems, or damage to our facilities at which hexane is injected, our leak rates could increase, which

18


Washington Gas Light Company
Part I
Item 1A. Risk Factors (continued)


would exacerbate the risks discussed herein.  In addition, Washington Gas’ ability to continue to recover the cost of these preventive and remedial measures and to earn its authorized rate of return on these costs is subject to the regulatory process.

Current and future environmental regulations may adversely affect Washington Gas’ operations and financial results.

Washington Gas is subject to federal, state and local laws and regulations related to environmental matters. These evolving laws and regulations may require expenditures over a long timeframe. Failure to comply with these laws and regulations may expose Washington Gas to fines, penalties and operational interruptions that could adversely affect its financial results. Moreover, new environmental requirements, revisions and reinterpretations of existing environmental requirements and changes in environmental enforcement policies and practices may stretch Washington Gas’ operational resources and adversely affect its financial results.

In the past, the United States Congress has considered legislative proposals to limit greenhouse gas (GHG) emissions. Also, the District of Columbia has made a pledge to be carbon-neutral by 2050. Future proposals to limit GHG emissions could adversely affect our operating and service costs and demand for our product. Should future proposals become law, operating and service costs may increase and demand for our product could decrease, and utility costs and prices charged to utility customers may increase, which would adversely affect our financial results.

Changes in the relative prices of alternative forms of energy may weaken the competitive position of Washington Gas’ delivery service, which could reduce growth in natural gas customers, reduce the volume of natural gas delivered and negatively affect Washington Gas’ cash flows and earnings.

The price of natural gas delivery service that Washington Gas provides competes with the price of other forms of energy such as electricity, heating oil and propane. An increase in the price of natural gas compared to other sources of energy may cause the competitive position of our natural gas delivery service to decline. A decline in the competitive position of natural gas service may lead to fewer natural gas customers, lower volumes of natural gas delivered, lower cash flows and lower earnings.

A decline in the local economy in which Washington Gas operates may reduce net revenue growth and reduce future earnings and cash flows.

Substantially all of our natural gas utility customers are located in Virginia, Maryland and the District of Columbia. A general decline in the economy of the region in which Washington Gas operates or a change in the usage patterns and financial condition of customers in the region due to factors beyond Washington Gas' control, such as the recent federal government shutdown, might adversely affect Washington Gas’ ability to grow its customer base and collect revenues from existing customers, which may negatively affect net revenue growth and increase costs.

Washington Gas’ business and financial condition could be adversely impacted by strikes or work stoppages by its unionized employees.

Washington Gas’ business is dependent upon employees who are represented by unions and are covered by collective bargaining agreements. Disputes with the unions could result in work stoppages that could impact the delivery of natural gas and other services, which could affect our relationships with customers, vendors and regulators and adversely affect Washington Gas’ business and financial condition.

The availability of adequate pipeline transportation capacity and natural gas supply may decrease.

We purchase almost all of our natural gas supply from sources that must then be transported to our service territory. In particular, while the Marcellus Shale region is rapidly developing as a premier gas formation, the interstate pipeline transportation capacity may limit the availability of gas from the Marcellus Shale region in the near term. A significant disruption to or reduction in pipeline capacity due to events such as operational failures or disruptions, hurricanes, tornadoes, floods, freeze off of natural gas wells, terrorist or cyber-attacks or other acts of war, or legislative or regulatory actions or requirements, including remediation related to integrity inspections, could reduce our normal supply of gas, which may affect our ability to serve customer demand and may reduce our earnings.


19


Washington Gas Light Company
Part I
Item 1A. Risk Factors (continued)


The cost of providing retirement plan benefits to eligible current and former employees is subject to changes in the performance of investments, demographics, and other factors and assumptions. These changes may have a material adverse effect on us.

The cost of providing retirement plan benefits to eligible current and former employees is subject to changes in the market value of our retirement plan assets, changing bond yields, changing demographics and changing assumptions. Any sustained declines in equity markets, reductions in bond yields, increases in health care cost trends, or increases in life expectancy of beneficiaries may have an adverse effect on our retirement plan liabilities assets and benefit costs. Additionally, we may be required to increase our contributions in future periods in order to preserve the current level of benefits under the plans and/or due to federal funding requirements.

Changes to government fiscal and trade policies could adversely affect Washington Gas’ strategic decisions and operating performance.

Any changes in the US trade policy could trigger retaliatory actions by affected companies resulting in increased costs for goods used in our normal course of business, such as steel pipe.  

Cyber-attacks, including cyber-terrorism or other information technology security breaches, or information technology failures may disrupt our business operations, increase our costs, lead to the disclosure of confidential information, and damage our reputation.

Security breaches of our information technology infrastructure, including cyber-attacks and cyber-terrorism, or other failures of our information technology infrastructure could lead to disruptions of our natural gas distribution operations and otherwise adversely impact our ability to safely and effectively operate our pipeline and serve our customers. In addition, an attack on or failure of our information technology systems could result in the unauthorized release of customer, employee or Company data that is crucial to our operational security or could adversely affect our ability to deliver and collect on customer bills. Such security breaches of our information technology infrastructure could adversely affect our business reputation, diminish customer confidence, subject us to financial liability or increased regulation, increase our costs and expose us to material legal claims and liability and adversely affect our operations and financial results. We have implemented preventive, detective, and remediation measures to manage these risks, and we maintain cyber risk insurance to mitigate the effects of these events. Nevertheless, these may not effectively protect all of our systems all the time. To the extent that the occurrence of any of these cyber-events is not fully insured, it could adversely affect Washington Gas’ financial condition and results of operations.

Our ability to meet our customers’ requirements may be impaired if contracted supply is not available, if supplies are not delivered in a timely manner, if we lose key suppliers or if we are not able to obtain additional supplies during significant spikes in demand.

Washington Gas must acquire adequate natural gas supply and pipeline and storage capacity to meet current and future customers’ annual and seasonal natural gas requirements. We depend on the ability of natural gas producers, pipeline gatherers, natural gas processors, and interstate pipelines to meet these requirements. If we are unable to secure adequate supplies in a timely manner because of a failure of our suppliers to deliver the contracted commodity, capacity or storage, if we are unable to secure additional quantities during significant abnormal weather conditions, or if Washington Gas' interruptible customers fail to comply with requests to curtail their gas usage during periods of sustained cold weather, we may be unable to meet our customers’ requirements. Such inability could result in defaults under contracts with customers, penalties and financial damage payments, costs relating to procedures to recover from a disruption of service, the loss of key licenses and operating authorities, and the loss of customers, which could have a material adverse effect on our financial results.

Natural disasters and catastrophic events, including terrorist acts, may adversely affect our business.

Natural disasters and catastrophic events such as fires, earthquakes, explosions, floods, tornados, terrorist acts, and other similar occurrences, could damage our operational assets, including our utility facilities, and information technology infrastructure. Such events could likewise damage the operational assets of our suppliers or customers. These events could disrupt our ability to meet customer requirements, significantly increase our response costs, and significantly decrease our revenues. Unanticipated events or a combination of events, failure in resources needed to respond to events, or a slow or inadequate response to events may have an adverse impact on our operations, financial condition, and results of operations. The

20


Washington Gas Light Company
Part I
Item 1A. Risk Factors (continued)


availability of insurance covering catastrophic events, sabotage and terrorism may be limited or may result in higher deductibles, higher premiums, and more restrictive policy terms that could adversely affect Washington Gas' financial condition and results of operations.

We are exposed to counterparty and contract-related risks that could adversely affect our results of operations, cash flows and financial condition.

We may extend credit to counterparties, including other utilities, holding companies, banks, gas exploration and production companies, government-backed utilities and other participants in the energy industry relating to the sale, purchase and delivery of commodity. Although we believe we have prudent policies in place to manage our credit risk, including credit policies, netting arrangements and margining provisions incorporated in contractual agreements, we may not be able to collect amounts owed to us, which could adversely affect our liquidity and results of operations.

In addition, we enter into agreements with counterparties relating to the sale, purchase and delivery of commodity, transportation capacity and other matters.  Our decisions to enter these agreements are based on our expectations about the ongoing viability of our counterparties, assumptions and expectations underlying pricing terms and conditions, and commercial terms and other matters.  These expectations may prove to be incorrect or our counterparties may dispute key terms of our agreements in ways that we do not anticipate.  Such developments could result in our incurring losses or otherwise not achieving anticipated financial returns, which could have a material adverse effect on our results of operations.  

Our risk management strategies and related hedging activities may not be effective in managing risks and may cause increased volatility in our earnings and may result in costs and losses for which rate recovery may be disallowed.

We are exposed to commodity price, weather, and interest rate risks. For gas purchases to serve utility customers, Washington Gas attempts to manage its exposure to these risks, in part, through regulatory recovery mechanisms. In addition, we attempt to mitigate risks by hedging, setting risk limits and employing other risk management tools and procedures. These risk management activities may not be effective and cannot eliminate these risks in their entirety. If these tools and procedures are ineffective, we could incur significant losses, which could have a material adverse effect on our financial results and liquidity. In addition, although Washington Gas generally anticipates rate recovery of its costs or losses incurred in connection with these risk management activities, a regulator could subsequently disallow these costs or losses from the determination of revenues, which could adversely affect our financial results and increase the volatility of our earnings.

Rules implementing the derivatives transaction provisions of the Dodd-Frank Act could have an adverse impact on our ability to hedge risks associated with our business.

The Dodd-Frank Act regulates derivatives transactions, which include certain instruments, such as interest rate swaps, and commodity options, financial and other contracts, used in our risk management activities. The Dodd-Frank Act requires that a registered clearing facility clear most swaps and that the swaps trade on a designated exchange or swap execution facility, with certain exceptions for entities that use swaps to hedge or mitigate commercial risk. The Dodd-Frank requirements relating to derivative transactions have not been fully implemented by the SEC and the Commodity Futures Trading Commission. When fully implemented, the law and any new regulations could increase the operational and transactional cost of derivatives contracts and affect the number and/or creditworthiness of available counterparties.

In addition, we may transact with counterparties based in the European Union, Canada, or other jurisdictions which, like the U.S., are in the process of implementing regulations to regulate derivatives transactions, some of which are currently in effect and may impose costs on our derivatives activities.

Our business, earnings and cash requirements are highly weather sensitive and seasonal.

The earnings of Washington Gas can vary from year to year depending, in part, on weather conditions. Warmer-than-normal weather can reduce our utility margins as customer consumption declines. In Maryland and Virginia, we have in place regulatory mechanisms and rate designs intended to stabilize the level of net revenues that we collect from customers by eliminating the effect of deviations in customer usage caused by variations in weather from normal levels, and other factors such as conservation. If our rates and tariffs are modified to eliminate these provisions, then we would be exposed to significant

21


Washington Gas Light Company
Part I
Item 1A. Risk Factors (continued)


risk associated with weather. Weather can also impact our operating costs related to system maintenance which is not covered by regulatory mechanisms.

Washington Gas may face regulatory and financial risks related to pipeline safety legislation.

A number of proposals to require increased oversight over pipeline operations and increased investment in and inspections of pipeline facilities are pending or have previously been proposed in the United States Congress. Additional operating expenses and capital expenditures may be necessary to remain in compliance with the increased federal oversight resulting from such proposals. While we cannot predict with certainty the extent of these expenses and expenditures or when they will become effective, the adoption of such proposals could result in significant additional costs to Washington Gas’ business. Washington Gas may be unable to recover from customers through the regulatory process all or some of these costs and may be unable to earn its authorized rate of return on these costs.

Failure of our service providers could negatively impact our business, results of operations and financial condition.

Certain of our information technology, customer service, supply chain, pipeline and infrastructure installation and maintenance, engineering, payroll, and human resources functions that we rely on are provided by third-party vendors. Some of these services may be provided by vendors from centers located outside of the United States. Services provided pursuant to these agreements could be disrupted due to events and circumstances beyond our control. Our reliance on these service providers could have an adverse effect on our business, results of operations and financial condition.

The Tax Act could adversely affect WGL.

On December 22, 2017, President Trump signed into law the Tax Act, which significantly reforms the Internal Revenue Code of 1986, as amended. While Washington Gas has assessed and implemented the impacts of the Tax Act on it, it remains unknown at this time how the Treasury Department may interpret certain provisions of the Tax Act. These interpretations could have a negative impact on the results of operations, cash flows and financial condition of Washington Gas.

The Tax Act may impact Washington Gas’ ability to use its net operating loss (NOL) carry forwards.

The Tax Act includes a limitation on the utilization of net operating losses beginning October 1, 2018 to 80% of current year taxable income and eliminates any NOL carrybacks. Such net operating losses have an unlimited carryforward. These provisions may affect the timing of the utilization of net operating loss carryforwards and investment tax credit carryforwards.

22

Washington Gas Light Company
Part I



ITEM 1B. UNRESOLVED STAFF COMMENTS
 
None.
ITEM 2. PROPERTIES
 
At December 31, 2018, Washington Gas provided services in various areas of the District of Columbia, Maryland and Virginia, and held certificates of convenience and necessity, licenses and permits necessary to maintain and operate its properties and businesses.
At December 31, 2018, Washington Gas had approximately 578 miles of transmission mains, 13,210 miles of distribution mains and 12,841 miles of distribution services.
Washington Gas owns approximately 20 acres of land and two buildings at 6801 and 6803 Industrial Road in Springfield, Virginia. The Springfield site houses both operating and certain administrative functions of the utility. Washington Gas also holds title to land and buildings used as substations for its utility operations. Washington Gas holds title to land and buildings used for utility operational functions, such as gate stations or substations throughout its service territory in the District of Columbia, Maryland and Virginia.
Washington Gas also has peak shaving facilities in Springfield, Virginia (Ravensworth Plant) and Rockville, Maryland (Rockville Plant). 
Facilities utilized by our corporate headquarters are located in the Washington, D.C. and Baltimore metropolitan areas and are leased.
The Mortgage of Washington Gas dated January 1, 1933 (Mortgage), as supplemented and amended, securing any First Mortgage Bonds (FMBs) it issues, constitutes a direct lien on substantially all property and franchises owned by Washington Gas other than a small amount of property that is expressly excluded. At December 31, 2018, September 30, 2018 and September 30, 2017, there was no debt outstanding under the Mortgage.
ITEM 3. LEGAL PROCEEDINGS
 
The nature of our business ordinarily results in periodic regulatory proceedings before various state and federal authorities. For information regarding pending federal and state regulatory matters, see Note 12-Commitments and Contingencies of the Notes to Consolidated Financial Statements.
Silver Spring, Maryland Incident
Washington Gas continues to support the investigation by the NTSB into the August 10, 2016 explosion and fire at an apartment complex on Arliss Street in Silver Spring, Maryland, the cause of which has not been determined.  The NTSB has scheduled a board meeting, open to the public, on April 23, 2019, “to determine the probable cause” of the incident. A total of 40 civil actions related to the incident have been filed against WGL and Washington Gas in the Circuit Court for Montgomery County, Maryland. All of these suits seek unspecified damages for personal injury and/or property damage. The one action seeking class action status has been amended to assert property damage and loss of use claims. The trial date for the hearings has been scheduled for December 2, 2019. We maintain excess liability insurance coverage from highly-rated insurers, subject to a nominal self-insured retention. We believe that this coverage will be sufficient to cover any significant liability that may result from this incident. Management is unable to determine a range of potential losses that are reasonably possible of occurring and therefore we have not recorded a reserve associated with this incident. Washington Gas was invited by the NTSB to be a party to the investigation and in that capacity, has worked closely with the NTSB to help determine the cause of this incident.
ITEM 4. MINE SAFETY DISCLOSURES
 
Not Applicable.

23

Washington Gas Light Company
Part I



EXECUTIVE OFFICERS OF THE REGISTRANT
 
The names, ages and positions of the executive officers of the registrant at February 5, 2019, are listed below along with their business experience during at least the past five years. The age of each officer listed is as of the date of filing of this report. There is no family relationship among the officers.
Unless otherwise indicated, all officers have served continuously since the dates indicated, and all positions are executive officers listed with Washington Gas Light Company.
Executive Officers
Name, Age and Position with the registrant
 
Date Elected or Appointed
 
Adrian P. Chapman, Age 61
 
 
President and Chief Executive Officer
 
July 6, 2018
President and Chief Operating Officer
 
October 1, 2009
 
 
 
Vincent L. Ammann, Jr., Age 59
 
 
Executive Vice President and Chief Financial Officer
 
July 6, 2018
Senior Vice President and Chief Financial Officer
 
October 1, 2013
Vice President and Chief Financial Officer
 
September 30, 2006
 
 
 
Douglas I. Bonawitz, Age 56
 
 
Vice President and Treasurer
 
July 5, 2017
Assistant Treasurer
 
October 1, 2016
 
 
 
William R. Ford, Age 63
 
 
Vice President and Chief Accounting Officer
 
October 1, 2013
Controller
 
October 1, 2010
 
 
 
Marcellous P. Frye, Jr., Age 51
 
 
Vice President—Economic Development and Strategy
 
February 4, 2019
Vice President—Business Services and Public Policy
 
March 21, 2008
 
 
 
Luanne S. Gutermuth, Age 56
 
 
Executive Vice President and Chief Administrative Officer
 
July 6, 2018
Senior Vice President—Shared Services and Chief Human Resource Officer
 
October 1, 2014
Vice President—Human Resources and Organization Development
 
October 1, 2010
 
 
 
Karen M. Hardwick, Age 55(1)
 
 
Senior Vice President and General Counsel
 
October 15, 2018
 
 
 
Mark A. Lowe, Age 55
 
 
Vice President—Gas Supply and Engineering
 
October 1, 2014
Division Head—Gas Supply
 
March 10, 2008
 
 
 
Richard H. Moore, Age 50
 
 
Vice President—Growth and Customer Experience
 
February 4, 2019

24

Washington Gas Light Company
Part I



Vice President—Corporate Development Officer
 
October 1, 2015
Division Head and Chief Operating Officer, Washington Gas Energy Services
 
May 25, 2014
Division Head—Strategy and Business Development
 
November 30, 2009
 
 
 
John O'Brien, Age 58(2)
 
 
Executive Vice President, Strategy & Public Affairs
 
July 6, 2018
 
 
 
Dorothy Ramsey, Age 64
 
 
Vice President—Human Resources
 
October 15, 2018
Assistant Vice President and Chief Talent Officer
 
September 29, 2016
Director Organization Effectiveness
 
March 13, 2006
 
 
 
Douglas A. Staebler, Age 58
 
 
Senior Vice President—Utility Operations
 
October 1, 2014
Vice President—Operations, Engineering, Construction and Safety
 
October 31, 2006
 
 
 
Tracy L. Townsend, Age 52
 
 
Vice President—Construction, Compliance and Safety
 
October 1, 2014
Division Head—Safety, Compliance, Construction Operations Support and Technology
 
October 1, 2010
 
 
 
(1) Prior to her appointment as General Counsel of Washington Gas Light Company, Ms. Hardwick served as General Counsel for the University of the District of Columbia from March 2016 to October 2018. Prior to that position, Ms. Hardwick served as General Counsel/City Attorney to Annapolis, Maryland from December 2009 to December 2013.
(2) Mr. O'Brien has had various roles within the AltaGas organization since joining in 2015, most recently as President and Chief Operating Officer of AltaGas Services (U.S.) Inc. (ASUS). He is currently also Executive Vice President, Government and Regulatory for ASUS and AltaGas Utility Holdings (U.S.) Inc., both of which are subsidiaries of AltaGas. Prior to AltaGas, Mr. O'Brien held management positions in government relations and regulatory affairs within the energy industry, including most recently in the position of Executive Vice President, Public Policy and External Affairs with Energy Future Holdings (Energy Future Holdings filed for bankruptcy in 2014).

25

Washington Gas Light Company
Part II
Item 5. Market for Registrant's Common Equity, Related
Stockholder Matters and Issuer Purchases of Equity Securities



ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
 
Market Information
All of the outstanding shares of common stock are owed by the SPE, an indirect wholly owned subsidiary of AltaGas Ltd. Washington Gas' common stock is not publicly traded.
On December 17, 2018, we voluntarily registered Washington Gas Light Company's common stock under Section 12(g) of the Securities Exchange Act of 1934, as amended, effective on such date.
Dividends
During the three months ended December 31, 2018, Washington Gas paid cash dividends to the SPE of $23.7 million.
For the fiscal year ended September 30, 2018 and 2017, Washington Gas paid cash dividends to WGL of $87.6 million and $85.8 million, respectively.


26

Washington Gas Light Company
Part II
Item 6. Selected Financial Data

ITEM 6. SELECTED FINANCIAL DATA
 
The following table presents selected financial data for Washington Gas derived from the financial statements as of and for the last five fiscal years and for the three-month transition period ended December 31, 2018. The information should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the audited Financial Statements and the Notes to the Financial Statements.
(In thousands, except per share data)
Three Months Ended December 31,
Fiscal Years Ended September 30
 
2018
2018
 
2017
 
2016
 
2015
2014
SUMMARY OF EARNINGS
 
 
 
 
 
 
 
 
 
Operating revenues
$
402,101

$
1,248,063

 
$
1,166,968

 
$
1,070,904

 
$
1,328,191

$
1,443,800

Net income applicable to common stock
$
48,843

$
(27,962
)
 
$
130,472

 
$
111,794

 
$
107,358

$
97,004

CAPITALIZATION-YEAR END
 
 
 
 
 
 
 
 
 
Common shareholder’s equity
$
1,562,573

$
1,442,764

 
$
1,164,749

 
$
1,113,446

 
$
1,081,292

$
1,050,166

Preferred stock
28,173

28,173

 
28,173

 
28,173

 
28,173

28,173

Long-term debt, excluding current maturities
1,035,033

1,084,933

 
1,134,461

 
939,015

(a) 
691,330

675,095

Total capitalization
$
2,625,779

$
2,555,870

 
$
2,327,383

 
$
2,080,634

(a) 
$
1,800,795

$
1,753,434

OTHER FINANCIAL DATA
 
 
 
 
 
 
 
 
 
Property, plant and equipment-net—year-end
$
4,189,337

$
4,117,454

 
$
3,887,715

 
$
3,526,732

 
$
3,243,446

$
3,022,064

Total assets—year-end
$
5,516,585

$
5,150,082

 
$
4,954,714

 
$
4,609,555

(a) 
$
4,199,577

$
3,938,029

UTILITY GAS SALES AND DELIVERIES (thousands of therms)
(thousands of therms)
 
 
 
 
 
 
 
 
 
Gas sold and delivered
 
 
 
 
 
 
 
 
 
Residential firm
240,894

711,726

 
600,279

 
590,625

 
734,874

738,963

Commercial and industrial
 
 
 
 
 
 
 
 
 
Firm
66,480

205,644

 
174,436

 
167,832

 
197,543

200,153

Interruptible
319

2,520

 
2,554

 
2,771

 
2,072

2,193

Total gas sold and delivered
307,693

919,890

 
777,269

 
761,228

 
934,489

941,309

Gas delivered for others
 
 
 
 
 
 
 
 
 
Firm
166,320

538,266

 
495,031

 
501,030

 
558,125

535,503

Interruptible
66,896

248,151

 
242,545

 
239,013

 
260,264

267,705

Electric generation
24,245

180,626

 
87,611

 
291,252

 
179,061

144,403

Total gas delivered for others
257,461

967,043

 
825,187

 
1,031,295

 
997,450

947,611

Total utility gas sales and deliveries
565,154

1,886,933

 
1,602,456

 
1,792,523

 
1,931,939

1,888,920

OTHER STATISTICS
 
 
 
 
 
 
 
 
 
Active customer meters—year-end
1,184,830

1,177,976

 
1,163,655

 
1,144,160

 
1,129,865

1,117,043

New customer meters added
3,216

12,581

 
12,488

 
12,221

 
12,099

13,327

Heating degree days—actual
1,398

3,759

 
3,127

 
3,341

 
3,929

4,111

Weather percent colder (warmer) than normal
0.4
%
(4.7
)%
 
(15.9
)%
 
(10.4
)%
 
4.6
%
9.6
%

 

27

Washington Gas Light Company
Part II
Item 7. Management’s Discussion and Analysis of
Financial Condition and Results of Operations

ITEM 7. 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 and Analysis) analyzes the financial condition, results of operations and cash flows of Washington Gas. It also includes management’s analysis of past financial results and potential factors that may affect future results, potential future risks and approaches that may be used to manage them. Except where the content clearly indicates otherwise, “Washington Gas,” “we,” “us,” “our” or the "Company" refers to Washington Gas Light Company.
Management’s Discussion and Analysis is designed to provide an understanding of our operations and financial performance and should be read in conjunction with the company’s financial statements and the Notes to Financial Statements in this transition report.
EXECUTIVE OVERVIEW
Washington Gas has one operating segment which engages in the delivery and sale of natural gas that is regulated by regulatory commissions in the District of Columbia, Maryland and Virginia. During the three-month transition period ended December 31, 2018 compared to the same period in 2017, Washington Gas had reduced earnings due to: (i) higher operation and maintenance expenses, (ii) lower realized margins and unrealized mark-to-market valuations associated with our asset optimization program, and (iii) higher depreciation and amortization expense associated with growth in our utility plant. Partially offsetting these unfavorable variances were: (i) customer growth, (ii) higher revenues attributed to colder weather in the District of Columbia compared to 2017, and (iii) new base rates in Maryland.
RESULTS OF OPERATIONS
Our chief operating decision maker utilizes earnings before interest and tax (“EBIT”) as the primary measure of profit and loss in assessing the results of operations. EBIT includes operating income and other income (expense). We believe that our use of EBIT enhances the ability to evaluate Washington Gas' performance because it excludes interest and income tax expense, which are affected by corporate-wide strategies of WGL and AltaGas such as capital financing and tax sharing allocations.
EBIT should not be considered an alternative to, or a more meaningful indicator of our operating performance than, net income. Refer to summary results below for a reconciliation of EBIT to net income applicable to common stock.
Summary Results
The following table summarizes the Company’s financial data for the three months ended December 31, 2018 and 2017, and for the fiscal years ended September 30, 2018, 2017 and 2016.

28

Washington Gas Light Company
Part II
Item 7. Management’s Discussion and Analysis of
Financial Condition and Results of Operations (continued)


        
  
Three Months Ended December 31
 
Fiscal Years Ended September 30,
 
Increase (Decrease)
(In millions)
2018

2017 (unaudited)

 
2018
 
2017
 
2016
 
Three Months
Fiscal Year
 
Fiscal Year

 
 
 
 
2018
vs. 2017
2018
vs. 2017
 
2017
vs. 2016
Net revenues(1):
 
 
 
 
 
 
 
 
 
 
 
 
 
Operating revenues
$
402.1

$
377.5

 
$
1,248.1

 
$
1,167.0

 
$
1,070.9

 
$
24.6

$
81.1

 
$
96.1

Less: Cost of gas
156.6

124.8

 
407.0

 
297.9

 
272.0

 
31.8

109.1

 
25.9

Revenue taxes
24.2

24.0

 
82.5

 
75.1

 
73.0

 
0.2

7.4

 
2.1

Total net revenues
221.3

228.7

 
758.6

 
794.0

 
725.9

 
(7.4
)
(35.4
)
 
68.1

Operation and maintenance
102.7

82.4

 
544.2

 
340.6

 
329.3

 
20.3

203.6

 
11.3

Depreciation and amortization
34.9

33.6

 
135.1

 
129.4

 
114.6

 
1.3

5.7

 
14.8

General taxes and other assessments
14.4

16.0

 
65.6

 
59.6

 
57.2

 
(1.6
)
6.0

 
2.4

Other income (expenses)-net
3.4

1.0

 
(7.7
)
 
(0.6
)
 
1.4

 
2.4

(7.1
)
 
(2.0
)
EBIT
$
72.7

$
97.7

 
$
6.0

 
$
263.8

 
$
226.2

 
$
(25.0
)
$
(257.8
)
 
$
37.6

 
(1)We utilize net revenues, calculated as revenues less the associated cost of energy and applicable revenue taxes, to assist in the analysis of profitability. The cost of the natural gas commodity (as adjusted for Asset Optimization sharing) and revenue taxes are 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. Net revenues should not be considered an alternative to, or a more meaningful indicator of our operating performance than, operating income. Additionally, net revenues may not be comparable to similarly titled measures of other companies.
Three Months Ended December 31, 2018 vs. Three Months Ended December 31, 2017
The EBIT comparisons for the quarter ended December 31, 2018 compared to the quarter ended December 31, 2017 primarily reflect:
higher operation and maintenance expenses primarily related to system safety and operational expenses, corporate allocations and higher employee related expenses;
lower realized margins and higher unrealized mark-to-market valuation loss associated with our asset optimization program; and
lower billed and estimated utility rates associated with the pass-through of future tax savings from the Tax Act, however the decrease is offset by lower income tax expense which is not included in EBIT.
Included in the EBIT comparisons are the favorable effects of:
customer growth of approximately 14,000 average active customer meters;
higher revenues attributed to colder weather in the District of Columbia; and
new base rates in Maryland.

Fiscal Year 2018 vs. Fiscal Year 2017  
The EBIT comparisons for fiscal year 2018 compared to the prior year primarily reflect:
higher operation and maintenance expenses primarily related to merger commitments and related expenses;
lower realized margins and unrealized mark-to-market valuations associated with our asset optimization program;
lower billed and estimated utility rates associated with the pass-through of future tax savings from the Tax Act, however the decrease is offset by lower income tax expense; and
higher depreciation and amortization expenses associated with growth in our utility plant.
Included in the EBIT comparisons are the favorable effects of:

29

Washington Gas Light Company
Part II
Item 7. Management’s Discussion and Analysis of
Financial Condition and Results of Operations (continued)


customer growth of approximately 18,000 average active customer meters;
higher revenues attributed to colder weather in the District of Columbia; and
new base rates in the District of Columbia and Virginia.
Fiscal Year 2017 vs. Fiscal Year 2016
The increase in EBIT primarily reflects the following:
new base rates in Virginia and the District of Columbia;
higher utility net revenue related to growth of approximately 13,000 average active customer meters; and
higher unrealized mark-to-market valuations associated with our asset optimization program.
Partially offsetting these favorable variances were:
higher depreciation and amortization expense; and
higher operation and maintenance expenses.
Net Revenues. The following table provides the key factors contributing to the changes in the net revenues between three months ended December 31, 2018 and 2017, and between fiscal years ended September 30, 2018, 2017, and 2016.
Composition of Changes in Net Revenues
  
Increase (Decrease)
(In millions)
Three Months Ended December 31, 2018 vs 2017
Fiscal Year 2018
vs. 2017
 
Fiscal Year 2017
vs. 2016
Impact of lower tax rates per Tax Act
(11.7
)
(27.8
)
 

Asset optimization:
 
 
 
 
Realized margins
$
(2.0
)
$
(9.7
)
 
$
1.8

Unrealized mark-to-market valuations
(2.8
)
(38.9
)
 
37.4

Impact of rate cases
4.0

11.6

 
33.5

Customer growth
1.8

10.9

 
7.4

Estimated effects of weather and consumption patterns
1.4

8.5

 
(0.4
)
Accelerated pipe replacement programs
1.0

0.8

 
(5.8
)
Late fees
(0.9
)
6.1

 
(2.6
)
Other
1.8

3.1

 
(3.2
)
Total
$
(7.4
)
$
(35.4
)
 
$
68.1


Three Months Ended December 31, 2018 vs. Three Months Ended December 31, 2017
Impact of lower tax rates per Tax Act — The decrease in revenue reflects the impact of the Tax Act on rates charged to customers, however the decrease is offset in net income by lower income tax expense.
Asset optimization — We recorded unrealized mark-to-market losses associated with our energy-related derivatives of $4.2 million for the quarter ended December 31, 2018, compared to unrealized mark-to-market losses of $1.4 million for the quarter ended December 31, 2017. When these derivatives settle, any unrealized amounts will ultimately reverse and Washington Gas expects to realize margins in combination with related transactions that these derivatives economically hedge. The large swings in the valuations are partially due to movements in unobservable inputs used in the valuation of long-dated forward contracts. We believe that these values are not reflective of our ultimate cash flows as these purchases are utilized in the optimization of our long-term natural gas transportation and storage capacity resources, the value of which is not reflected at fair value. Refer to the section entitled “Market Risk—Price Risk” for further discussion of our asset optimization program.
Impact of rate cases — The increase in revenue reflects new base rates in Maryland, effective December 11, 2018. Refer to "Rates and Regulatory Matters" for further discussion of this matter.
Customer growth — Average active customer meters increased by approximately 14,000 for the three months ended December 31, 2018, compared to the same period of 2017.

30

Washington Gas Light Company
Part II
Item 7. Management’s Discussion and Analysis of
Financial Condition and Results of Operations (continued)


Estimated effects of weather and consumption patterns: Weather, when measured by HDDs, was 0.4% colder than normal and 5.9% warmer than normal for the three months ended December 31, 2018 and 2017, respectively. In the District of Columbia, where Washington Gas does not have a billing mechanism or financial instruments to offset the effects of weather, the comparatively cooler weather, partially offset by unfavorable changes in natural gas consumption patterns, for the three months ended December 31, 2018, resulted in a positive variance to net revenues. Natural gas consumption patterns may be affected by shifts in weather patterns in which customer heating usage may not correlate highly with average historical levels of usage per heating degree days that occur. Natural gas consumption patterns may also be affected by non-weather related factors such as customer conservation. Refer to the section entitled "Weather Risk" for a discussion of billing mechanisms in Maryland and Virginia, which are designed to eliminate the net revenue effects of variations in customer usage caused by weather and other factors such as conservation.
Fiscal Year 2018 vs. Fiscal Year 2017 and Fiscal Year 2017 vs. 2016
Asset optimization — We recorded unrealized mark-to-market gain associated with our energy-related derivatives of $10.4 million for the fiscal year ended September 30, 2018, compared to unrealized mark-to-market gains of $49.3 million and unrealized mark-to-market gains of $12.0 million for the fiscal years ended September 30, 2017 and 2016, respectively.
Impact of lower tax rates per Tax Act — The decrease in revenue reflects the impact of the Tax Act on rates charged to customers, however the decrease is offset by lower income tax expense.
Impact of rate cases — The increase in revenue reflects new base rates in the District of Columbia, effective March 24, 2017 and in Virginia, effective November 28, 2016, with modification made in November 2017, as a result of the final approval.
Customer growth — Average active customer meters increased by approximately 18,000 from fiscal year 2017 to 2018. Average active customer meters increased by approximately 13,000 from fiscal year 2016 to 2017.
Estimated effects of weather and consumption patterns: Weather, when measured by HDDs, was 4.7% warmer than normal during the fiscal year ended September 30, 2018, compared to 21.2% warmer than normal and 10.4% warmer than normal during the fiscal years ended September 30, 2017 and 2016. In the District of Columbia, where Washington Gas does not have a billing mechanism or financial instruments to offset the effects of weather, the comparatively cooler weather, partially offset by unfavorable changes in natural gas consumption patterns, for the year ended September 30, 2018, resulted in a positive variance to net revenues.
Late fees - In fiscal year 2017, we temporarily suspended charging late fees during the stabilization period of our new billing system. The year-over-year variances reflect the resumption of charging late fees in fiscal year 2018.
Accelerated pipe replacement programs — The decrease in revenue for fiscal year 2017 compared to fiscal year 2016 primarily reflects the transfer of project costs that were being collected through accelerated pipeline replacement surcharge revenues to new base rates in District of Columbia, effective March 24, 2017 as well as in Virginia, put into effect in the December 2016 billing cycle.
Operation and Maintenance Expenses. The following table provides the key factors contributing to the changes in operation and maintenance expenses between reporting periods.

31

Washington Gas Light Company
Part II
Item 7. Management’s Discussion and Analysis of
Financial Condition and Results of Operations (continued)


Composition of Changes in Operation and Maintenance Expenses
  
Increase/(Decrease)
(In millions)
Three Months Ended December 31, 2018 vs 2017

Fiscal Year 2018
vs. 2017
 
Fiscal Year 2017
vs. 2016
Merger commitments and merger-related expenses
$
3.3

$
187.0

 
$

Employee incentives and direct labor costs
3.6

2.9

 
2.5

Employee benefits
0.1

(3.3
)
 
(0.7
)
System safety and integrity
4.5

10.8

 
1.9

Environmental costs, net
0.6

1.6

 
1.2

Support services
1.7

(5.1
)
 
(1.6
)
Uncollectible accounts
1.9

4.5

 
4.5

Corporate allocated services
4.5

4.0

 

Other
0.1

1.2

 
3.5

Total
$
20.3

$
203.6

 
$
11.3

Three Months Ended December 31, 2018 vs. Three Months Ended December 31, 2017
Merger commitments and merger-related expenses — During the three months ended December 31, 2018, we recorded additional costs for employee benefits related severance associated with the Merger with AltaGas. See Note 18— Merger with AltaGas, Ltd. to the Financial Statements in this transition report for further information on these expenses.
Employee incentives and direct labor costs — The quarter-over-quarter variance is primarily due to an increase in employees and higher salaries.
System safety and integrity — The increase in expense for the three months ended December 31, 2018 over the same period of 2017 reflects increased safety and reliability activities including leak repair and mitigation.
Support services — The increase in expense for the current quarter from the prior year quarter is due to the BPO 2.0 impairment.
Uncollectible accounts — The increase is driven by a higher receivable balance due to the colder weather compared to the prior year period.
Corporate allocated services— The increase in the current quarter over the prior year quarter is due to the allocation of corporate overhead expenses subsequent to the merger with AltaGas. Over time, such costs are expected to be offset by reductions in other functional areas.
Fiscal Year 2018 vs. Fiscal Year 2017 and Fiscal Year 2017 vs. Fiscal Year 2016
Merger commitments and merger-related expenses — In fiscal year ended September 30, 2018, we recorded costs for accrued bill credits to customers, an accrual for our commitment of charitable contributions and community support, employee benefits related severance, retention and acceleration of incentive plans, and an impairment that was booked as part of the Merger with AltaGas.
Employee incentives and direct labor costs — The year-over-year variances for both periods are primarily due to an increase in employees and higher salaries.
Employee benefits — The decrease in employee benefits expense in fiscal year 2018 from the previous fiscal year is primarily due to lower pension and post-retirement benefit costs resulting from an increase in the discount rate. The decrease in employee benefits expense in fiscal year 2017 from the previous fiscal year was primarily due to amendments to the post-retirement benefit plans, which lowered expense in fiscal year 2017.
System safety and integrity — The year-over-year variances for both periods reflect increased safety and reliability activities including leak repair and mitigation.
Environmental costs, net — The year-over-year variances for both periods reflect an increase in the liability associated with sites previously used to operate manufactured gas plants.

32

Washington Gas Light Company
Part II
Item 7. Management’s Discussion and Analysis of
Financial Condition and Results of Operations (continued)


Support services — The decrease in expense for fiscal year 2018 from the previous fiscal year was due to lower project related costs. The decrease in expense for fiscal year 2017 from the previous fiscal year was due to lower business process outsourcing costs.
Uncollectible accounts — The year-over-year variances for both periods reflect a higher delinquency rate resulting from the suspension of dunning activities during the stabilization period of our new billing system. Refer to Rates and Regulatory Matters for a further discussion.
Corporate allocated services— The increase in fiscal year 2018 over the previous fiscal year is due to the initial allocation of corporate overhead expenses subsequent to the merger with AltaGas.
Depreciation and Amortization.  The increases between periods represents the ongoing capital additions.
Interest Expense
The following table shows the components of Washington Gas' interest expense for the three months ended December 31, 2018 and 2017, and for the fiscal years ended September 30, 2018, 2017 and 2016.
Composition of Interest Expense
  
Three Months Ended December 31,
 
Fiscal Years 
Ended September 30,
 
Increase (Decrease)
(In millions)
2018


2017 (unaudited)

 
2018
 
2017
 
2016
 
Three Months
Fiscal Years
 
Fiscal Years

2018
vs. 2017
2018
vs. 2017
 
2017
vs. 2016
Interest on long-term debt
$
14.1

$
14.4

 
$
57.6

 
$
50.1

 
$
40.7

 
$
(0.3
)
$
7.5

 
$
9.4

Interest on short-term debt
1.7

0.6

 
1.1

 
1.6

 
0.7

 
1.1

(0.5
)
 
0.9

Other net, including AFUDC
(0.1
)

 
(0.2
)
 
0.5

 

 
(0.1
)
(0.7
)
 
0.5

Total
$
15.7

$
15.0

 
$
58.5

 
$
52.2

 
$
41.4

 
$
0.7

$
6.3

 
$
10.8

Income Taxes
The following table shows Washington Gas' income tax expense and effective income tax rate for the three months ended December 31, 2018 and for the fiscal years ended September 30, 2018, 2017 and 2016.
The decrease in income tax expense for the three months ended December 31, 2018 compared to the same period of 2017 is mainly due to lower pretax income. The decrease in income tax expense for fiscal year 2018 compared to fiscal year 2017 is due to the enactment of the Tax Act resulting in a re-measurement of our accumulated deferred income taxes and the reduction of the corporate federal income tax rate for 2018 to 21%. The decrease in the effective income tax rate for the three months ended December 31, 2018 compared to the same period in the prior year is due to the impact of excess deferred taxes in various depreciation adjustments.

33

Washington Gas Light Company
Part II
Item 7. Management’s Discussion and Analysis of
Financial Condition and Results of Operations (continued)


Income Taxes
  
Three Months Ended December 31,
 
Fiscal Years
 Ended September 30,
 
Increase (Decrease)
 
 
 
 
 
 
 
 
 
 
Three Months
Fiscal Year
 
Fiscal Year
(In millions)
2018
2017 (unaudited)

 
2018
 
2017
 
2016
 
2018
vs. 2017
2018
vs. 2017
 
2017
vs. 2016
Income before income taxes
$
57.0

$
82.8

 
$
(52.5
)
 
$
211.6

 
$
184.8

 
$
(25.8
)
$
(264.1
)
 
$
26.8

Income tax expense
7.8

24.9

 
(25.9
)
 
79.8

 
71.7

 
(17.1
)
(105.7
)
 
8.1

Effective income tax rate
13.8
%
30.0
%
 
49.2
%
 
37.7
%
 
38.8
%
 
(16.2
)%
11.5
%
 
(1.1
)%
Income tax expense
7.8

24.9

 
(25.9
)
 
79.8

 
71.7

 
(17.1
)
(105.7
)
 
8.1

Less re-measurement impact of Tax Act
1.2

6.2

 
7.0

 

 

 
(5.0
)
7.0

 

Income tax expense excluding re-measurement impact
6.6

18.7

 
(32.9
)
 
79.8

 
71.7

 
(12.1
)
(112.7
)
 
8.1

Effective income tax rate excluding re-measurement impact
11.6
%
22.6
%
 
62.7
%
 
37.7
%
 
38.8
%
 
(11.0
)%
25.0
%
 
(1.1
)%
Refer to Note 8 — Income Taxes of the Notes to the Financial Statements for details.

Statistical Information
Key gas delivery, weather and meter statistics are shown in the table below for the three months ended December 31, 2018 and 2017, and the fiscal years ended September 30, 2018, 2017 and 2016.

34

Washington Gas Light Company
Part II
Item 7. Management’s Discussion and Analysis of
Financial Condition and Results of Operations (continued)


Gas Deliveries, Weather and Meter Statistics
 
Three Months Ended December 31,
 
Fiscal Years Ended September 30,
 
Increase (decrease)
 
2018
 
2017
 
2018
 
2017
 
2016
 
Three Months 2018 vs.2017
 
Fiscal Year 2018
vs.  2017
 
Fiscal Year
2017
vs.  2016
Gas Sales and Deliveries (millions of therms)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Firm
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  Gas sold and delivered
307.4

 
282.7

 
917.3

 
774.8

 
758.4

 
24.7

 
142.5

 
16.4

  Gas delivered for others
166.3

 
158.5

 
538.3

 
495.0

 
501.0

 
7.8

 
43.3

 
(6.0
)
Total firm
473.7

 
441.2

 
1,455.6

 
1,269.8

 
1,259.4

 
32.5

 
185.8

 
10.4

Interruptible
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  Gas sold and delivered
0.3

 
0.6

 
2.5

 
2.6

 
2.8

 
(0.3
)
 
(0.1
)
 
(0.2
)
  Gas delivered for others
66.9

 
71.6

 
248.2

 
242.5

 
239.0

 
(4.7
)
 
5.7

 
3.5

Total interruptible
67.2

 
72.2

 
250.7

 
245.1

 
241.8

 
(5.0
)
 
5.6

 
3.3

Electric generation—delivered for others
24.3

 
32.1

 
180.6

 
87.6

 
291.3

 
(7.8
)
 
93.0

 
(203.7
)
Total deliveries
565.2

 
545.5

 
1,886.9

 
1,602.5

 
1,792.5

 
19.7

 
284.4

 
(190.0
)
Degree Days
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  Actual
1,398

 
1,335

 
3,759

 
3,127

 
3,341

 
63

 
632

 
(214
)
  Normal
1,392

 
1,419

 
3,944

 
3,970

 
3,730

 
(27
)
 
(26
)
 
240

Percent colder (warmer) than normal
0.4

%
(5.9
)
%
(4.7
)
%
(21.2
)
%
(10.4
)
%
n/a

 
n/a

 
n/a

Average active customer meters
1,181,000

 
1,167,000

 
1,173,000

 
1,155,000

 
1,142,000

 
14,000

 
18,000

 
13,000

Ending active customer meters
1,184,830

 
1,169,294

 
1,177,976

 
1,163,655

 
1,144,160

 
15,536

 
14,321

 
19,495

New customer meters added
3,216

 
3,673

 
12,581

 
12,488

 
12,221

 
(457
)
 
93

 
267

Gas Service to Firm Customers
The volume of gas delivered to firm customers is highly sensitive to weather variability as a large portion of the natural gas delivered by Washington Gas is used for space heating. Washington Gas’ rates are based on an assumption of normal weather. The tariffs in the Maryland and Virginia jurisdictions include provisions that consider the effects of the RNA and the WNA/CRA mechanisms, respectively, that are designed to, among other things, eliminate the effect on net revenues of variations in weather from normal levels (refer to the section entitled “Weather Risk” for a further discussion of these mechanisms and other weather-related instruments included in our weather protection strategy).
Three Months Ended December 31, 2018 vs. 2017. During the three months ended December 31, 2018, the comparison in natural gas deliveries to firm customers primarily reflects 0.4% colder than normal weather when measured by HDDs, compared to 5.9% warmer than normal weather for the prior year quarter. We also had an increase in average active customer meters of approximately 14,000 during the quarter ended December 31, 2018, when compared to the same quarter prior year.
Many customers choose to buy the natural gas commodity from third-party marketers, rather than purchase the natural gas commodity and delivery service from Washington Gas on a bundled basis. Natural gas delivered to firm customers but purchased from unregulated third-party marketers represented 35.1% of total firm therms delivered during the three months ended December 31, 2018, compared to 35.9% of therms delivered during the same quarter prior year.

35

Washington Gas Light Company
Part II
Item 7. Management’s Discussion and Analysis of
Financial Condition and Results of Operations (continued)


Fiscal Year 2018 vs. Fiscal Year 2017. During the fiscal year ended 2018, the comparison in natural gas deliveries to firm customers primarily reflects 4.7% warmer than normal weather when measured by HDDs, compared to 21.2% warmer than normal weather for fiscal year 2017. We also had an increase in average active customer meters of approximately 18,000 in fiscal year 2018, when compared to fiscal year 2017.
Natural gas delivered to firm customers but purchased from third-party marketers represented 37.0% of total firm therms delivered during fiscal year 2018, compared to 39.0% of therms delivered during fiscal year 2017.
Fiscal Year 2017 vs. Fiscal Year 2016. During the fiscal year ended 2017, the comparison in natural gas deliveries to firm customers primarily reflects 21.2% warmer than normal weather when measured by HDDs, compared to 10.4% warmer than normal weather for fiscal year 2016. This was partially offset by an increase in average active customer meters of approximately 13,000 in fiscal year 2017, when compared to fiscal year 2016.
Natural gas delivered to firm customers but purchased from third-party marketers represented 39.0% of total firm therms delivered during fiscal year 2017, compared to 39.8% of therms delivered during fiscal year 2016.
Gas Service to Interruptible Customers
Washington Gas must curtail or interrupt service to this class of customer when the demand by firm customers exceeds specified levels. Therm deliveries to interruptible customers decreased by 5.0 million therms during the three months ended December 31, 2018 compared to the same period prior year primarily due to decreased demand during the three months ended December 31, 2018.
Therm deliveries to interruptible customers increased by 5.6 million therms in fiscal year ended September 30, 2018 compared to fiscal year 2017 primarily due to increased demand and colder weather during fiscal year 2018. Therm deliveries to interruptible customers increased by 3.3 million therms in fiscal year ended September 30, 2017 compared to fiscal year 2016 primarily due to increased demand, partially offset by warmer weather during fiscal year 2017.
In the District of Columbia, the effect on net income of any changes in delivered volumes and prices to interruptible customers is limited by margin-sharing arrangements that are included in Washington Gas’ firm rate designs. Rates for interruptible customers in Maryland and Virginia are based on a traditional cost of service approach. In Virginia, Washington Gas retains a majority of the margins earned on interruptible gas and delivery sales. Washington Gas shares actual non-gas margins from interruptible sales service customers that are in excess of delivery service rates. In Maryland, Washington Gas retains a defined amount of revenues based on a set threshold. Effective December 2018, Washington Gas no longer shares interruptible margins in Maryland.
Gas Service for Electric Generation
Washington Gas delivers natural gas for use at two electric generation facilities in Maryland that are each owned by companies independent of WGL. During the three months ended December 31, 2018, deliveries to these customers decreased by 7.8 million therms from the three months ended December 31, 2017. During fiscal year ended September 30, 2018, deliveries to these customers increased by 93.0 million therms from fiscal year 2017. During fiscal year ended September 30, 2017, deliveries to these customers decreased by 203.7 million therms from fiscal year 2016. Washington Gas shares with firm customers a significant majority of the margins earned from natural gas deliveries to these customers. Therefore, changes in the volume of interruptible gas deliveries to these customers do not materially affect either net revenues or net income.
Cost of Gas
Washington Gas’ cost of natural gas purchased includes both fixed and variable components. Washington Gas pays fixed costs or “demand charges” to pipeline companies for system capacity needed to transport and store natural gas. Washington Gas pays variable costs, or the cost of the natural gas commodity itself, to natural gas producers and suppliers. Variations in the utility’s cost of gas expense result from changes in gas sales volumes, the price of the gas purchased and the level of gas costs collected through the operation of firm gas cost recovery mechanisms. Under these regulated recovery mechanisms, Washington Gas records cost of gas expense equal to the cost of gas recovered from customers and included in revenues. The difference between the firm gas costs incurred and the gas costs recovered from customers is deferred on the balance sheet as an amount to be collected from or refunded to customers in future periods. Therefore, increases or decreases in the cost of gas associated with sales made to firm customers have no direct effect on Washington Gas’ net revenues and net income. Changes in the cost of gas can cause significant variations in Washington Gas’ cash provided by or used in operating activities. Washington Gas receives from or pays to its customers in the District of Columbia and Virginia, carrying costs associated with

36

Washington Gas Light Company
Part II
Item 7. Management’s Discussion and Analysis of
Financial Condition and Results of Operations (continued)


under-collected or over-collected gas costs recovered from its customers using short-term interest rates. Additionally, included in “Utility cost of gas” for Washington Gas are the net margins associated with our asset optimization program. To the extent these amounts are shared with customers, they are a reduction to the cost of gas invoiced to customers. Refer to the section entitled “Market Risk” for a further discussion of Washington Gas’ optimization program.
The average commodity cost of gas invoiced to Washington Gas (excluding the cost and related volumes applicable to asset optimization) were $0.37, $0.30, $0.27, and $0.21 per therm for the three months ended December 31, 2018 and fiscal years ended September 30, 2018, 2017 and 2016, respectively.
LIQUIDITY AND CAPITAL RESOURCES
General Factors Affecting Liquidity
Washington Gas generally meets its liquidity and capital needs through cash on hand, retained earnings, the issuance of commercial paper and long-term debt, and equity infusions from WGL. Access to short-term debt markets is necessary for funding our short-term liquidity requirements, the most significant of which include buying natural gas and pipeline capacity, and financing both accounts receivable and storage gas inventory. We have accessed long-term capital markets primarily to fund both capital expenditures and to retire long-term debt.
Our ability to access debt capital markets depends on our credit ratings, general market liquidity, and demand for our credit securities. In addition, rules imposed by regulatory commissions or state law in Washington Gas' service territory restrict its ability to make advances or issue loans to its affiliates, including WGL. Washington Gas may not provide loans to an affiliate or its holding company, unless Washington Gas receives prior commission approval.
During the three months ended December 31, 2018 and fiscal year ended September 30, 2018, Washington Gas met its liquidity and capital needs through cash on hand, retained earnings, the issuance of commercial paper, and equity infusions from WGL and the SPE. During the three months ended December 31, 2018, Washington Gas received $100 million in equity infusions from WGL. During the fiscal year ended September 30, 2018, Washington Gas received $403 million in equity infusions from WGL. The infusions were done to fund the Merger-related costs incurred by Washington Gas and to maintain its equity ratio within a reasonable and comparable range in the industry.
Our credit ratings depend largely on our financial performance and the ratings of our parent companies, WGL and AltaGas. A ratings downgrade could both increase our borrowing costs and trigger the need for us to post additional collateral with our wholesale counterparties or other creditors. Further, a negative change in WGL’s or AltaGas’ ratings outlook or any downgrade in their credit ratings could negatively impact our ratings outlook or downgrade our credit ratings. Such downgrades could limit our access to the credit markets and increase the costs of borrowing under available credit lines. Washington Gas has ring fencing measures in place as a result of the merger regulatory approval process. The purpose of the ring-fencing measures is to financially separate Washington Gas from WGL, AltaGas and its non-utility affiliates to protect consumers of regulated utility services from financial instability or bankruptcy in its parent or affiliates resulting from losses that may occur from open market activities.
As of December 31, 2018, total consolidated capitalization, including current maturities of long-term debt and notes payable and project financing, comprised 52.3% common equity, 1.0% preferred stock and 46.7% long and short-term debt. This capitalization ratio varies during the year primarily due to the seasonal nature of Washington Gas' business. See discussion regarding seasonal impacts on working capital below.
Our plans provide for sufficient liquidity to satisfy our financial obligations. Generally, Washington Gas can make dividend payments in the ordinary course of business unless any of the following regulatory limitations apply: (i) Washington Gas will not pay extraordinary dividends to its parent for three years after the Merger Close, (ii) Washington Gas will not pay dividends to its parent company if Washington Gas' senior unsecured debt rating is below investment grade or (iii) Washington Gas will not make a dividend payment to its parent company if the payment would result in its equity level to drop below 48%. At December 31, 2018, we had no significant restrictions on our cash balances or retained earnings that would affect the payment of dividends.
Short-Term Cash Requirements and Related Financing
Washington Gas has seasonal short-term cash requirements to fund the purchase of storage gas inventory in advance of the winter heating season. At December 31, 2018, September 30, 2018 and September 30, 2017, Washington Gas had balances in gas storage of $103.9 million, $101.4 million and $92.8 million, respectively. Washington Gas collects the cost of gas under

37

Washington Gas Light Company
Part II
Item 7. Management’s Discussion and Analysis of
Financial Condition and Results of Operations (continued)


cost recovery mechanisms approved by its regulators. Additionally, Washington Gas may be required to post cash collateral for certain purchases. Washington Gas is also subject to the collateral requirements of its counterparties. At December 31, 2018, Washington Gas provided $7.5 million in cash collateral to counterparties.
In the first and fourth quarters of each calendar year, Washington Gas’ large sales volumes cause its cash requirements to peak when combined storage inventory, accounts receivable, and unbilled revenues are at their highest levels. In the second and third quarters of each calendar year, after the heating season, Washington Gas typically experiences a seasonal net loss due to reduced demand for natural gas. During this period, large amounts of Washington Gas’ current assets are converted to cash, which Washington Gas generally uses to reduce and usually eliminate short-term debt and acquire storage gas for the next heating season.
Variations in the timing of customer collections under Washington Gas' gas cost recovery mechanisms can significantly affect its short-term cash requirements. At December 31, 2018 and September 30, 2018, Washington Gas had $2.2 million and $2.3 million in net under-collections from customers, respectively, reflected in current assets as gas costs due from customers. At September 30, 2017, Washington Gas had $2.0 million in net over-collections from customers of gas costs reflected in current liabilities as gas costs due to customers. Amounts under-collected or over-collected from customers during the current gas cost recovery cycle are deferred as a regulatory asset or liability on the balance sheet until September 1 of each year, at which time the accumulated amount is transferred to gas costs due from/to customers as appropriate. At December 31, 2018, September 30, 2018 and September 30, 2017, Washington Gas had a net regulatory asset of $60.0 million, $13.9 million and $5.6 million, respectively, related to under-collections from customers in the current gas recovery cycle.
Washington Gas uses short-term debt in the form of commercial paper or unsecured short-term bank loans to fund seasonal cash requirements. Our policy is to maintain back-up bank credit facilities in an amount equal to or greater than our expected maximum commercial paper position.
The credit facility for Washington Gas permits it to borrow up to $350.0 million, and further permits, with the banks’ approval, additional borrowings of $100 million for a maximum potential total of $450 million. The interest rate on loans made under each of the credit facilities is a fluctuating rate per annum that is set using certain parameters at the time each loan is made. Washington Gas incurs credit facility fees, which in some cases are based on the long-term debt ratings of Washington Gas. In the event that the long-term debt ratings are downgraded below certain levels, Washington Gas would be required to pay higher fees. There are five different levels of fees. Under the terms of the credit facilities, the lowest level facility fee is 0.06% and the highest is 0.175%. The facilities have a maturity date of December 19, 2019, and the credit agreements provide Washington Gas with the right, as applicable to request two additional one-year extensions, with the lenders’ approval. Bank credit balances available to Washington Gas, net of commercial paper balances are $54.0 million, $255.0 million and $227.0 million at December 31, 2018, September 30, 2018 and September 30, 2017, respectively.
To manage credit risk, Washington Gas may require certain customers and suppliers to provide deposits, including collateral from wholesale counterparties, which are reported as current liabilities in “Customer deposits and advance payments,” in the accompanying balance sheets. At December 31, 2018, September 30, 2018 and September 30, 2017, “Customer deposits and advance payments” totaled $54.4 million, $83.7 million and $64.2 million, respectively. The majority of these balances are customer deposits. Deposits from customers may be refunded at various times throughout the year based on customer payment habits. At the same time, other customers make new deposits that cause the balance of customer deposits to remain relatively steady. There are no restrictions on Washington Gas’ use of these customer deposits. Washington Gas pays interest to its customers on these deposits in accordance with the requirements of its regulatory commissions. Refer to the section entitled “Credit Risk” for further discussion of our management of credit risk.
 Project Financing
Washington Gas previously obtained third-party project financing on behalf of the federal government to provide funds during the construction of certain energy management services projects entered into under Washington Gas' area-wide contract. The construction work is performed by WGL Energy Systems on behalf of Washington Gas. As the financing entity funded the project, Washington Gas established a payable to the financing entity and transferred the funds to WGL Energy Systems. As work is performed, Washington Gas establishes a receivable representing the government's obligation to remit principal and interest. The financing obligation in “Notes payable and project financing” and receivable in “Unbilled revenues” are typically equal to each other at the end of the construction period, but there could be timing differences in the recognition 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 financing entity in satisfaction of the obligation to the financing entity and

38

Washington Gas Light Company
Part II
Item 7. Management’s Discussion and Analysis of
Financial Condition and Results of Operations (continued)


removes both the receivable and the obligation related to the financing from its financial statements. If project acceptance does not occur by a specified date, the lender may require Washington Gas to make interim interest payments or repurchase the contract payments plus a termination fee. In March 2016, the SCC of VA denied Washington Gas' further participation in the third-party financing arrangement but allowed existing debt arrangements to remain intact until the related obligations were satisfied.
In October 2018, WGL Energy Systems repaid $53.0 million drawn by Washington Gas from a third-party lender for a specific project that the lender demanded repayment for due to delays in achieving final acceptance from the federal government agency customer. The $53.0 million was included in "Payable to associated companies" on Washington Gas' balance sheet as of December 31, 2018. On January 16, 2019, the federal government agency customer provided notification of final acceptance as of December 14, 2018.
As of December 31, 2018, Washington Gas had $69.7 million in "Unbilled revenues" on the balance sheet and $15.5 million in "Notes payable and project financing", for energy management services projects that were financed through Washington Gas and not yet complete.
As of September 30, 2018, Washington Gas had $64.3 million in "Unbilled revenues", and $68.5 million in "Notes payable and project financing" on the balance sheet. As of September 30, 2017, Washington Gas had $78.2 million in " Unbilled revenue", and $43.8 million in "Notes payable and project financing" on the balance sheet, for energy management services projects that were financed through Washington Gas. For projects where WGL Energy Systems is the primary contractor and where these projects are financed for government agencies that have minimal credit risk, and with which we have previous collection experience, Washington Gas did not record a corresponding reserve for bad debts related to these receivables at December 31, 2018, September 30, 2018, or September 30, 2017. See Note 5— Short-Term Debt and Note 15 — Related Party Transactions of the Notes to Financial Statements for a further discussion of project financing.
Long-Term Cash Requirements and Related Financing
The primary drivers of our long-term cash requirements include capital expenditures and long-term debt maturities. Our capital expenditures primarily relate to adding new utility customers and system supply as well as maintaining the safety and reliability of Washington Gas’ distribution system.
Security Ratings
Following the merger with AltaGas in July 2018, the credit rating agencies downgraded the senior unsecured debt rating for WGL from A3 to Baa1 for Moody's, from A- to BB+ for S&P, and from A- to BBB for Fitch. At the same time Moody’s downgraded the senior unsecured debt rating for Washington Gas from A1 to A2, S&P from A to BBB+, and Fitch from A+ to A. All three credit agencies cited the merger and issuer ratings for AltaGas as the reason for the downgrades, but also pointed to the ring fencing measures put in place for our regulatory commissions following the merger as limiting the negative impact on the ratings for Washington Gas.
The table below reflects the current credit ratings for the outstanding debt instruments of Washington Gas. Changes in credit ratings may affect Washington Gas' cost of short-term and long-term debt and our access to the capital markets. A security rating is not a recommendation to buy, sell or hold securities. Credit ratings are subject to revision or withdrawal at any time by the assigning rating organization and each rating should be evaluated independently of any other rating.
 
 
 
 
 
  
 
Washington Gas
Rating Service
 
Senior Unsecured
 
Commercial Paper
Fitch Ratings(a)
 
A
 
F2
Moody’s Investors Service(b)
 
A2
 
P-1
Standard & Poor’s Ratings Services(c)
 
BBB+
 
A-2
(a) The credit ratings by Fitch Ratings for Washington Gas were revised on July 10, 2018 and the long-term debt ratings outlook was adjusted to stable.
(b) The credit ratings by Moody’s Investors Service for Washington Gas were revised on July 9, 2018 and the long-term debt ratings outlook remained negative.
(c) The credit ratings by Standard & Poor’s Rating Services for Washington Gas were revised on December 19, 2018 and the long-term debt ratings outlook remained negative.
Ratings Triggers and Certain Debt Covenants

39

Washington Gas Light Company
Part II
Item 7. Management’s Discussion and Analysis of
Financial Condition and Results of Operations (continued)


Under the terms of Washington Gas' revolving credit agreements, term loan facility and private placement notes, the ratio of consolidated financial indebtedness to consolidated total capitalization cannot exceed 0.65 to 1.0 (65.0%). As of December 31, 2018, Washington Gas' ratios of consolidated financial indebtedness to consolidated total capitalization were 47%. In addition, Washington Gas is required to inform lenders of changes in corporate existence, financial conditions, litigation and environmental warranties that might have a material effect on debt ratings. The failure to inform the lenders’ agent of material changes in these areas might constitute default under the agreements. Additionally, failure to pay principal or interest on any other indebtedness may be deemed a default under our credit agreements. A default, if not remedied, may lead to a suspension of further loans and/or acceleration in which obligations become immediately due and payable. In addition, certain of the credit facilities of Washington Gas contain cross-default provisions. At December 31, 2018, we were in compliance with all of the covenants under our revolving credit facilities, term loan facility, and private placement notes.
For certain of Washington Gas’ natural gas purchase and pipeline capacity agreements, the counterparty may withhold service or deliveries or may require additional credit support if the long-term debt of Washington Gas is downgraded below the lower of a BBB- rating by Standard & Poor’s or a Baa3 rating by Moody’s Investors Service, or if Washington Gas is deemed by a counterparty not to be creditworthy. For certain other agreements, the counterparty may require additional credit support if the counterparty’s credit exposure to Washington Gas exceeds a contractually defined threshold amount, or if Washington Gas’ credit rating declines by a certain rating level. Based on its current credit ratings, Washington Gas would not be required to provide additional credit support to its counterparties for these agreements if its long-term credit rating was to be downgraded by one rating level.
Historical Cash Flows
The following table summarizes Washington Gas' net cash provided by (used in) operating, investing and financing activities for three months ended December 31, 2018 and 2017, and for the fiscal years ended September 30, 2018, 2017 and 2016:
 
Three Months Ended December 31,
Fiscal Years Ended 
September 30,
 
Increase / (Decrease)
(In millions)
2018
(Unaudited) 2017
2018
 
2017
 
2016
 
Three Months 2018 vs.2017
Fiscal Year 2018 vs. 2017
 
Fiscal Year
2017 vs. 2016
Cash provided by (used in):
 
 
 
 
 
 
 
 
 
.
 
 
Operating activities
$
(94.5
)
$
(28.5
)
$
122.3

 
$
207.3

 
$
240.1

 
$
(66.0
)
$
(85.0
)
 
$
(32.8
)
Financing activities
$
226.9

$
110.4

$
332.3

 
$
196.1

 
$
130.9

 
$
116.5

$
136.2

 
$
65.2

Investing activities
$
(126.0
)
$
(75.3
)
$
(389.6
)
 
$
(403.4
)
 
$
(371.0
)
 
$
(50.7
)
$
13.8

 
$
(32.4
)

Cash Flows Provided by Operating Activities
Washington Gas' cash flows from operating activities principally reflect gas sales and deliveries and the cost of operations. The volume of gas sales and deliveries is dependent primarily on factors external to the utility, such as growth of customer demand, weather, market prices for energy, economic conditions and measures that promote energy efficiency. Unbilled revenue and weather normalization, ratemaking adjustments and decoupling mechanisms in place, changes in delivery volumes from levels assumed when rates were approved may affect the timing of cash flows but not net income. The price at which the utility provides energy to customers is determined in accordance with regulatory-approved tariffs. In general, changes in the utility’s cost of gas may affect the timing of cash flows but not net income because the costs are recovered in accordance with rate agreements. In addition, the regulated utility’s cash flow is impacted by the timing of derivative settlements.
Net income is the result of cash and non-cash (or accrual) transactions. Only cash transactions affect Washington Gas’ cash flows from operating activities. Principal non-cash charges include depreciation, accrued or deferred pension and other post-retirement benefit costs and deferred income tax expense. Non-cash charges or credits may also be accrued under the revenue decoupling and cost reconciliation mechanisms in the utilities’ rate plans.
Net cash flows used in operating activities for three months ended December 31, 2018 was $94.5 million compared to net cash used in operating activities of $28.5 million for the three months ended December 31, 2017. The increase in cash flows

40

Washington Gas Light Company
Part II
Item 7. Management’s Discussion and Analysis of
Financial Condition and Results of Operations (continued)


used in operating activities was primarily driven by increased account receivable balance as a result of the colder weather in three months ended December 31, 2018 compared to the same period in 2017, and cash payment of merger commitments during the three months ended December 31, 2018.
The $85 million decrease in cash flows provided by operating activities for the fiscal year 2018 compared to fiscal year 2017 was mainly due to cash payments of merger commitments, financial and legally advisory costs, severance costs, retention and acceleration of incentive plans due to the Merger in fiscal year 2018, offset by higher cash collections due to colder weather.
The decrease in cash flows provided by operating activities for the fiscal year 2017 compared to fiscal year 2016 was mainly driven by increased account receivable balance due to new base rates in Virginia and the District of Columbia in 2017.
Cash Flows Provided by Financing Activities
Cash flows provided by financing activities for the three months ended December 31, 2018 totaled $226.9 million compared to $110.4 million for the three months ended December 31, 2017 mainly due to an increase in the net issuance of notes payable. We had a net issuance of note payable of $201 million during the three months ended December 31, 2018 compared to $39 million in the same period of 2017.
Cash flows provided by financing activities increased $136.2 million in fiscal year 2018 compared to fiscal year 2017. The increase was mainly from an equity infusion from WGL in 2018, offset by a decrease in long-term debt issuances in 2018 compared to 2017.
The increase of financing activities from fiscal year 2016 to fiscal year 2017 was primarily driven by an increase in the net issuance of notes payable.
The following table reflects the issuances and retirements of long-term debt that occurred during the three months ended December 31, 2018 and 2017, and the fiscal years ended September 30, 2018, 2017 and 2016 (also refer to Note 5 —Long Term Debt of Notes to Consolidated Financial Statements).
Long-Term Debt Activity
 
Three Months Ended
 December 31, 2018
Three Months Ended
 December 31, 2017
Fiscal Year 2018
 
Fiscal Year 2017
 
Fiscal Year 2016
($ In millions)
Interest Rate
 
Face value
Interest Rate
 
Face value
Interest Rate
 
Face value
 
Interest Rate
 
Face value
 
Interest Rate
 
Face value
Long Term Debt(a)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Issued

 


 


 

 
3.80%

 
$200.0

 
3.80
%
 
$
250.0

Retired
7.46%

 
$50.0


 


 

 

 

 
5.17
%
 
$
25.0

(a) Includes MTN's and private placement debt.

41

Washington Gas Light Company
Part II
Item 7. Management’s Discussion and Analysis of
Financial Condition and Results of Operations (continued)


Cash Flows Used in Investing Activities
Net cash flows used in investing activities totaled $126.0 million and $75.3 million for the three months ended December 31, 2018 and 2017, and $389.6 million, $403.4 million and $371.0 million during fiscal years ended September 30, 2018, 2017 and 2016, respectively, which primarily consists of utility capital expenditures made by Washington Gas.
The following table depicts our actual capital investments for three months ended December 31, 2018 and 2017, and for the fiscal years ended September 30, 2016, 2017 and 2018. Our capital outlays include expenditures to extend service to new areas, and to ensure safe, reliable and improved service for our utility.
Capital Expenditures
 
Three Months Ended December 31
Fiscal Year
(In millions)
2018
2017
2018
2017
2016
New business(a)
$
33.2

$
24.2

$
141.3

$
129.4

$
106.6

Replacements:
 
 
 
 
 
Accelerated Replacement plans(b)
31.8

24.4

111.7

131.0

132.2

Other
22.6

10.4

70.5

68.1

74.8

Customer information system
 
 

28.1

39.4

Other utility
16.8

4.5

72.3

40.4

38.3

Cash basis adjustments
21.6

11.8

(3.0
)
6.4

(0.6
)
Total (c)
126.0

75.3

392.8

403.4

390.7

(a) Includes certain projects that support the existing distribution system.
(b) Represents capital expenditures (excluding cost of removal), both approved, and expected to be approved, under our Accelerated Pipeline
Replacement Programs in all jurisdictions. Refer to the section entitled "Accelerated Pipeline Replacement Programs" for a further discussion.
(c) Excludes Allowance for Funds Used During Construction and cost of removal. Includes capital expenditures accrued and capital expenditure
adjustments recorded in the period.
New Business
The Company’s utility service areas have a population estimated at 5.9 million and include approximately 2.2 million households and commercial structures. Washington Gas actively markets and adds new customers through both capital expenditures and different rate mechanisms aimed at bringing the benefits of natural gas, including lower energy bills and reduced carbon emissions to more residents in its territories. Washington Gas added 3,216, and 12,581 new customers in the three months ended December 31, 2018 and fiscal year ended September 30, 2018, respectively, supported by additional capital and rate base. Adding new customers directly drives earnings growth through additional distribution revenues.
Replacements, Regulatory Plans - Accelerated Pipe Replacement Plans
Accelerated pipe replacement programs are in place in all three of our jurisdictions. Washington Gas is accelerating pipe replacement in order to reduce risk and further enhance the safety and reliability of the pipeline system. Each regulatory commission having jurisdiction over Washington Gas’ retail rates has approved accelerated replacement programs with an associated surcharge mechanism to recover the cost, including a return, on those capital investments. In contrast to the traditional rate-making approach to capital investments, for the accelerated pipe replacement programs, Washington Gas is receiving recovery for these investments through the approved surcharges for each program and is authorized to invest in each of these programs over a five-year period. The following table presents the expenditures made and revenues recognized for the accelerated pipe replacement programs during the three months ended December 31, 2018 and 2017, and the fiscal years ended September 30, 2018 and 2017. Refer to Rates and Regulatory Matters for a further discussion on rate case decisions during the periods.

42

Washington Gas Light Company
Part II
Item 7. Management’s Discussion and Analysis of
Financial Condition and Results of Operations (continued)


Accelerated Pipe Replacement Programs
 
Three Months Ended
Fiscal Year Ended
(in millions)

December 31, 2018

December 31, 2017

September 30,
2018


September 30,
2017
September 30,
2016
Capital expenditures(a)
 
 
 


 
District of Columbia
$
4.3

$
6.5

$
23.2

$
18.1

$
17.1

Maryland
7.2

7.6

31.2

48.6

54.1

Virginia
20.3

10.3

57.3

64.2

61

Total
$
31.8

$
24.4

$
111.7

$
130.9

$
132.2

Revenues recognized
 
 
 


 
District of Columbia
1.5

1.9

5.5

5.5

5.9

Maryland
3.1

3.9

13.4

13.4

7.6

Virginia
3.1

1.8

8.1

6.6

17.8

Total
$
7.7

$
7.6

$
27.0

$
25.5

$
31.3

(a) Capital expenditures are reported without the cost of removal.
 
District of Columbia Jurisdiction.  In 2013, Washington Gas filed a Revised Accelerated Pipe Replacement Plan (PROJECTpipes) in which Washington Gas proposed to replace bare and/or unprotected steel services, bare and targeted unprotected steel main, and cast iron main in its distribution system in the District of Columbia. On January 29, 2015, the Public Service Commission of the District of Columbia issued an order approving the settlement agreement and approving recovery through the surcharge of total project costs up to $110 million through fiscal year 2019. - On December 7, 2018, Washington Gas filed a request with the PSC of DC for approval of a Project Pipes 2 (“PIPES 2 Plan”) extension plan for the period of October 1, 2019 through December 31, 2024.  Cumulative plant additions through September 30, 2015 were included in rate base in the most recent rate cases and are now being recovered in base rate.
Maryland Jurisdiction. In 2014, pursuant to the Strategic Infrastructure Development and Enhancement (STRIDE) law in Maryland, the PSC of MD approved Washington Gas’ initial STRIDE Plan to recover the reasonable and prudent costs associated with qualifying infrastructure replacements through monthly surcharges. The Commission approved replacement of bare and/or unprotected steel services and targeted copper and/or pre-1975 plastic services, bare and targeted unprotected steel main, mechanically coupled pipe main and service, and cast iron main in Washington Gas' Maryland distribution system at an estimated five-year cost of $200 million, including cost of removal, through calendar year 2018. In December 2018, the Commission approved the extension of the STRIDE. Washington Gas is authorized to invest $350.5 million, including cost of removal over the five-year calendar period through 2023. Cumulative plant additions through September 30, 2018 were included in rate base in the most recent rate cases and are now being recovered in base rates.
Virginia Jurisdiction. On April 21, 2011, the Virginia State Corporation Commission approved, pursuant to a new law to advance Virginia’s Energy Plan (“SAVE Act”), Washington Gas’s initial SAVE Plan for accelerated replacement of infrastructure facilities and a SAVE Rider to recover eligible costs associated with those replacement programs. Cumulative expenditures through November 30, 2016 were included in rate base in the most recent rate cases and are now being recovered in base rates. On November 21, 20