UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the Fiscal Year Ended September 30, 2008
|
|
|
|
|
|
|
Commission
|
|
Exact name of registrant as
specified in its charter and
|
|
State of
|
|
I.R.S.
|
File Number
|
|
principal office address and telephone number
|
|
Incorporation
|
|
Employer Identification No.
|
|
|
1-16163
|
|
WGL Holdings, Inc.
101 Constitution Ave., N.W.
Washington, D.C. 20080
(703) 750-2000
|
|
Virginia
|
|
52-2210912
|
|
0-49807
|
|
Washington Gas Light Company
101 Constitution Ave., N.W.
Washington, D.C. 20080
(703) 750-4440
|
|
District of
Columbia
and Virginia
|
|
53-0162882
|
|
|
|
|
Securities registered pursuant to Section 12(b) of the
Act (as of September 30, 2008):
|
|
Title of each class
|
|
|
Name of each exchange on which registered
|
|
WGL Holdings, Inc. common
stock, no par value
|
|
|
New York Stock Exchange
|
|
|
|
|
Securities registered pursuant to Section 12(g) of the
Act (as of September 30, 2008):
|
|
Title of each class
|
|
|
Name of each exchange on which registered
|
|
Washington Gas Light Company
preferred stock,
cumulative, without par value:
|
|
|
|
$4.25 Series
|
|
|
Over-the-Counter Bulletin Board
|
$4.80 Series
|
|
|
Over-the-Counter Bulletin Board
|
$5.00 Series
|
|
|
Over-the-Counter Bulletin Board
|
Indicate by check mark if each
registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.
|
|
|
WGL Holdings, Inc.
|
|
Yes
X
No
|
Washington Gas Light Company
|
|
Yes
No
X
|
Indicate by check mark if each
registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the
Act. Yes
No
X
Indicate by check mark whether each
registrant: (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrants were required to file
such reports) and (2) has been subject to such filing
requirements for the past
90 days. Yes
X
No
Indicate by check mark if
disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K
is not contained herein, and will not be contained, to the best
of the registrants knowledge, in definitive proxy or
information statements incorporated by reference in
Part III of this
Form 10-K
or any amendment to this
Form 10-K.
Indicate by check mark whether each
registrant is a large accelerated filer, an accelerated filer,
or a non-accelerated filer (as defined in
Rule 12b-2
of the Exchange Act).
WGL Holdings, Inc.:
|
|
|
|
Large
Accelerated Filer
X
|
Accelerated Filer
|
Non-Accelerated
Filer
|
Smaller Reporting
Company
|
(Do not check if a smaller
reporting company)
Washington Gas Light Company:
|
|
|
|
Large
Accelerated Filer
|
Accelerated Filer
|
Non-Accelerated
Filer
X
|
Smaller Reporting
Company
|
(Do not check if a smaller reporting company)
Indicate by check mark whether each
registrant is a shell company (as defined in
Rule 12b-2
of the Act):
Yes
No
X
The aggregate market value of the
voting common equity held by non-affiliates of the registrant,
WGL Holdings, Inc., amounted to $1,576,843,542 as of
March 31, 2008.
WGL Holdings, Inc. common stock, no
par value outstanding as of October 31, 2008:
49,971,614 shares.
All of the outstanding shares of
common stock ($1 par value) of Washington Gas Light Company
were held by WGL Holdings, Inc. as of October 31, 2008.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of WGL Holdings,
Inc.s definitive
Proxy Statement
and Washington Gas
Light Companys definitive
Information Statement
in
connection with the 2009 Annual Meeting of Shareholders, to be
filed with the Securities and Exchange Commission pursuant to
Regulation 14A and 14C not later than 120 days after
September 30, 2008, are incorporated in Part III of
this report.
WGL
Holdings, Inc.
Washington Gas Light Company
For the Fiscal Year Ended September 30, 2008
Table of Contents
i
WGL
Holdings, Inc.
Washington Gas Light Company
FILING
FORMAT
This Annual Report on
Form 10-K
is a combined report being filed by two separate registrants:
WGL Holdings, Inc. (WGL Holdings) and Washington Gas Light
Company (Washington Gas). Except where the content clearly
indicates otherwise, any reference in the report to WGL
Holdings, we, us or
our is to the holding company or the consolidated
entity of WGL Holdings and all of its subsidiaries, including
Washington Gas which is a distinct registrant that is a wholly
owned subsidiary of WGL Holdings.
The
Managements Discussion and Analysis of Financial
Condition and Results of Operations
(Managements
Discussion) included under Item 7 is divided into two major
sections for WGL Holdings and Washington Gas. Included under
Item 8 are the Consolidated Financial Statements of WGL
Holdings and the Financial Statements of Washington Gas. Also
included are the Notes to Consolidated Financial Statements that
are presented on a combined basis for both WGL Holdings and
Washington Gas.
SAFE HARBOR FOR
FORWARD-LOOKING STATEMENTS
Certain matters discussed in this report, excluding historical
information, include forward-looking statements within the
meaning of the
Private Securities Litigation Reform Act of
1995
with respect to the outlook for earnings, revenues and
other future financial business performance or strategies and
expectations. Forward-looking statements are typically
identified by words such as, but not limited to,
estimates, expects,
anticipates, intends,
believes, plans, and similar
expressions, or future or conditional verbs such as
will, should, would and
could. Although the registrants, WGL Holdings and
Washington Gas, believe such forward-looking statements are
based on reasonable assumptions, they cannot give assurance that
every objective will be achieved. Forward-looking statements
speak only as of today, and the registrants assume no duty to
update them. The following factors, among others, could cause
actual results to differ materially from forward-looking
statements or historical performance:
|
|
|
|
|
the level and rate at which costs and expenses are incurred and
the extent to which they are allowed to be recovered from
customers through the regulatory process in connection with
constructing, operating and maintaining Washington Gass
natural gas distribution system;
|
|
|
|
the ability to implement successful approaches to modify the
current or future composition of gas delivered to customers or
to remediate the effects of the current or future composition of
gas delivered to customers, as a result of the introduction of
gas from the Dominion Cove Point facility to Washington
Gass natural gas distribution system;
|
|
|
|
the availability of natural gas supply and interstate pipeline
transportation and storage capacity;
|
|
|
|
the ability of natural gas producers, pipeline gatherers and
natural gas processors to deliver natural gas into interstate
pipelines for delivery by those interstate pipelines to the
entrance points of Washington Gass natural gas
distribution system as a result of factors beyond our control;
|
|
|
|
changes in economic, competitive, political and regulatory
conditions and developments;
|
|
|
|
changes in capital and energy commodity market conditions;
|
|
|
|
changes in credit ratings of debt securities of WGL Holdings or
Washington Gas that may affect access to capital or the cost of
debt;
|
|
|
|
changes in credit market conditions and creditworthiness of
customers and suppliers;
|
|
|
|
changes in relevant laws and regulations, including tax,
environmental and employment laws and regulations;
|
|
|
|
legislative, regulatory and judicial mandates or decisions
affecting business operations or the timing of recovery of costs
and expenses;
|
|
|
|
the timing and success of business and product development
efforts and technological improvements;
|
|
|
|
the pace of deregulation efforts and the availability of other
competitive alternatives to our products and services;
|
|
|
|
changes in accounting principles;
|
|
|
|
new commodity purchase and sales contracts or financial
contracts and modifications in the terms of existing contracts
that may materially affect fair value calculations under
derivative accounting requirements;
|
1
WGL
Holdings, Inc.
Washington Gas Light Company
|
|
|
|
|
the ability to manage the outsourcing of several business
processes;
|
|
|
|
acts of God;
|
|
|
|
terrorist activities and
|
|
|
|
other uncertainties.
|
The outcome of negotiations and discussions that the registrants
may hold with other parties from time to time regarding utility
and energy-related investments and strategic transactions that
are both recurring and non-recurring may also affect future
performance. All such factors are difficult to predict
accurately and are generally beyond the direct control of the
registrants. Accordingly, while they believe that the
assumptions are reasonable, the registrants cannot ensure that
all expectations and objectives will be realized. Readers are
urged to use care and consider the risks, uncertainties and
other factors that could affect the registrants business
as described in this Annual Report on
Form 10-K.
All forward-looking statements made in this report rely upon the
safe harbor protections provided under the
Private Securities
Litigation Reform Act of 1995
.
2
WGL
Holdings, Inc.
Washington Gas Light Company
GLOSSARY OF KEY
TERMS
Active Customer Meters:
Natural gas meters
that are physically connected to a building structure within the
Washington Gas distribution system and that receive active
service.
Asset Optimization Program:
A program to
optimize the value of Washington Gass long-term natural
gas transportation and storage capacity resources during periods
when these resources are not being used to physically serve
utility customers.
Book Value Per Share:
Common
shareholders equity divided by the number of common shares
outstanding.
Bundled Service:
Service in which customers
purchase both the natural gas commodity and the distribution or
delivery of the commodity from the local regulated utility. When
customers purchase bundled service from Washington Gas, no
mark-up
is
applied to the cost of the natural gas commodity that is passed
through to customers.
Business Process Outsourcing (BPO)
Agreement:
An agreement whereby a service provider
performs certain functions that have historically been performed
by Washington Gas.
City Gate:
A point or measuring station at
which a gas distribution company such as Washington Gas receives
natural gas from an unaffiliated pipeline or transmission system.
Cooling Degree Day (CDD):
A measure of the
variation in weather based on the extent to which the daily
average temperature is above 65 degrees Fahrenheit.
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 Gass design day
represents the maximum anticipated demand on Washington
Gass natural 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.
Design-Build Energy Systems:
Formerly known
as the heating, ventilating and air conditioning
(HVAC) segment, the design-build energy systems segment
includes the operations of Washington Gas Energy Systems, Inc.
which provides design-build energy efficient and sustainable
solutions to government and commercial clients.
Dividend Yield on Book Value:
Dividends
declared per share divided by book value per share.
Earnings Sharing Mechanism (ESM):
A rate
mechanism that enables Washington Gas to share with shareholders
and customers the earnings that exceed a target rate of return
on equity.
Federal Energy Regulatory Commission
(FERC):
A
n independent agency of the
Federal government that regulates the interstate transmission of
electricity, natural gas, and oil. The FERC also reviews
proposals to build 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 gas supply
will not be disrupted to meet the needs of other customers.
Typically, this class of customer comprises residential
customers and most commercial customers.
Gas Administrative Charge (GAC):
A regulatory
mechanism designed to remove the cost of uncollectible accounts
expense related to gas costs from base rates and instead,
permits Washington Gas to collect an amount for this expense
through its Purchased Gas Charge provision.
Gross Margin:
Operating revenues, less the
associated cost of natural gas or electricity and revenue taxes.
Used to measure the success of the retail energy-marketing
segments core strategy for the sale of natural gas and
electricity.
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, which Washington Gas is injecting into its distribution
system to treat vaporized liquefied natural gas.
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.
Liquefied Natural Gas (LNG):
The liquid form
of natural gas.
Lower of Cost or Market:
The process of
adjusting the value of inventory to reflect the lesser of its
original cost or its current market value.
Mark-to-Market:
The process of adjusting the
carrying value of a position held in a physical or financial
derivative to reflect its current fair value.
Market-to-Book Ratio:
Market price of a share
of common stock divided by its book value per share.
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
or CDDs based on historical HDD or CDD data.
3
WGL
Holdings, Inc.
Washington Gas Light Company
Payout Ratio:
Dividends declared per share
divided by basic earnings per share.
Performance-Based Rate (PBR) plan:
A rate
design that includes performance measures for customer service
as well as an ESM.
Physical Contract:
A contract in which the
actual physical commodity is transferred between parties to the
contract.
PSC of DC:
The Public Service Commission of
the District of Columbia is a three-member board that regulates
Washington Gass distribution operations in the District of
Columbia.
PSC of MD:
The Public Service Commission of
Maryland is a five-member board that regulates Washington
Gass 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.
Regulated Utility Segment:
Includes the
operations of Washington Gas which are regulated by regulatory
commissions located in the District of Columbia, Maryland and
Virginia, and the operations of Hampshire Gas Company which are
regulated by the Federal Energy Regulatory Commission.
Retail Energy-Marketing Segment:
Unregulated
sales of natural gas and electricity to end users by our
subsidiary, Washington Gas Energy Services, Inc.
Return on Average Common Equity:
Net income
divided by average common shareholders equity.
Revenue Normalization Adjustment (RNA):
A
regulatory billing mechanism designed to stabilize the level of
net revenues collected from customers by eliminating the effect
of deviations in customer usage caused by variations in weather
from normal levels, and other factors such as conservation.
SCC of VA:
The Commonwealth of Virginia State
Corporation Commission is a three-member board that regulates
Washington Gass distribution operations in Virginia.
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.
Tariffs:
Documents issued by the regulatory
commission in each jurisdiction that set the prices Washington
Gas may charge and the practices it must follow when providing
utility service to its customers.
Third-Party Marketer:
Unregulated companies
that sell natural gas and electricity directly to retail
customers. Washington Gas Energy Services, Inc., a subsidiary
company of Washington Gas Resources Corporation, is a
third-party marketer.
Therm:
A natural gas unit of measurement that
includes a standard measure for heating value. We report our
natural gas sales and deliveries in therms. A therm of gas
contains 100,000 British thermal units of heat, or the energy
equivalent of burning approximately 100 cubic feet of natural
gas under normal conditions. Ten million therms equal
approximately one billion cubic feet of natural gas.
Unbundling:
The separation of the delivery of
natural gas or electricity from the sale of these commodities
and related services that, in the past, were provided only by a
regulated utility.
Utility Net Revenues:
Operating revenues less
the associated cost of energy and applicable revenue taxes. Used
to analyze the profitability of the regulated utility segment,
as the cost of gas associated with sales to customers and
revenue taxes are generally pass-thru amounts.
Value-At-Risk:
A
risk measurement that estimates the largest expected loss over a
specified period of time under normal market conditions within a
specified probabilistic confidence interval.
Washington Gas:
Washington Gas Light Company
is a subsidiary of WGL Holdings, Inc. that sells and delivers
natural gas primarily to retail customers in accordance with
tariffs set by the PSC of DC, the PSC of MD and the SCC of VA.
Washington Gas Resources:
Washington Gas
Resources Corporation is a subsidiary of WGL Holdings, Inc. that
owns the majority of the non-utility subsidiaries.
WGEServices:
Washington Gas Energy Services,
Inc. is a subsidiary of Washington Gas Resources Corporation
that sells natural gas and electricity to retail customers on an
unregulated basis.
WGESystems:
Washington Gas Energy Systems,
Inc., is a subsidiary of Washington Gas Resources Corporation,
that provides design-build energy efficient and sustainable
solutions to government and commercial clients.
WGL Holdings:
WGL Holdings, Inc. is a holding
company that became the parent company of Washington Gas Light
Company and its subsidiaries effective November 1, 2000.
Weather Derivative:
A financial instrument
that provides protection from the negative financial effects of
weather.
Weather Insurance Policy:
An insurance policy
that provides protection from the negative financial effects of
weather.
Weather Normalization Adjustment (WNA):
A
billing adjustment mechanism that is designed to minimize the
effect of variations from normal weather on utility net revenues.
4
WGL
Holdings, Inc.
Washington Gas Light Company
Part I
Item 1. Business
CORPORATE
OVERVIEW
WGL HOLDINGS,
INC.
WGL Holdings is a holding company that was established on
November 1, 2000 as a Virginia corporation to own
subsidiaries that sell and deliver natural gas and provide a
variety of energy-related products and services to customers
primarily in the District of Columbia, and the surrounding
metropolitan areas in Maryland and Virginia. WGL Holdings owns
all of the shares of common stock of Washington Gas, a regulated
natural gas utility, and all of the shares of common stock of
Washington Gas Resources Corporation (Washington Gas Resources),
Hampshire Gas Company (Hampshire) and Crab Run Gas Company (Crab
Run). Washington Gas Resources owns three unregulated
subsidiaries that include Washington Gas Energy Services, Inc.
(WGEServices), Washington Gas Energy Systems, Inc. (WGESystems)
and Washington Gas Credit Corporation (Credit Corp.).
WASHINGTON GAS
LIGHT COMPANY
Washington Gas is a regulated public utility that sells and
delivers natural gas to customers 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 has been engaged in the natural gas distribution business
for 160 years, since its incorporation by an Act of
Congress in 1848. Washington Gas has been a Virginia corporation
since 1953 and a corporation of the District of Columbia since
1957.
INDUSTRY
SEGMENTS
We have three operating segments:
(i) The regulated utility
segment.
The regulated utility segment
consists of Washington Gas and Hampshire. Washington Gas is
regulated by the Public Service Commission of the District of
Columbia (PSC of DC), the Public Service Commission of Maryland
(PSC of MD) and the Virginia State Corporation Commission
(SCC of VA). These regulatory commissions set the rates in their
respective jurisdictions that Washington Gas can charge
customers for its rate-regulated services. These rates are
designed to provide an opportunity for Washington Gas to recover
its expenses and earn a just and reasonable rate of return on
its invested capital. Hampshire is regulated by the Federal
Energy Regulatory Commission (FERC). Hampshire owns full and
partial interests in, and operates underground natural gas
storage facilities including pipeline delivery facilities
located in and around Hampshire County, West Virginia.
Washington Gas purchases all of the storage services of
Hampshire and includes the cost of these services in the bills
sent to its customers. Hampshire operates under a
pass-through cost of service-based tariff approved
by the FERC, and adjusts its billing rates to Washington Gas on
a periodic basis to account for changes in its investment in
utility plant and expenses.
(ii) The retail energy-marketing
segment.
The retail energy-marketing segment
consists of the operations of WGEServices which competes with
regulated utilities and other unregulated third-party marketers
by selling the natural gas and electric commodity directly to
residential, commercial and industrial customers with the
objective of earning a profit through competitively-priced
contracts.
(iii) The design-build energy systems
segment.
The design-build energy systems
segment consists of the operations of WGESystems, which provides
design-build energy efficient and sustainable solutions to
government and commercial clients. WGESystems focuses on
upgrading the mechanical, electrical, water and energy-related
systems of large government and commercial facilities by
implementing both traditional as well as alternative energy
technologies, primarily in the District of Columbia, Maryland
and Virginia. Previously, this segment was referred to as the
heating, ventilating and air conditioning (HVAC)
segment; however, the title design-build energy
systems more accurately reflects the evolving business
activities of this segment. The structure of this segment has
not changed from prior years and no amounts have been restated
as a result of this title change.
Transactions not specifically identifiable in one of these three
segments are accumulated and reported in the category
Other Activities. These transactions primarily
consist of administrative costs associated with WGL Holdings and
Washington Gas Resources. Additionally, these activities include
the operations of Crab Run, a small exploration and production
company, and Credit Corp., which previously offered financing to
customers to purchase gas appliances and other energy-related
equipment, but no longer offers this financing.
Operating revenues, net income, and total assets for each of our
segments are presented in Note 16 of the Notes to
Consolidated Financial Statements.
5
WGL
Holdings, Inc.
Washington Gas Light Company
Part I
Item 1. Business (continued)
REGULATED
UTILITY SEGMENT
Description
The regulated utility segment consists of approximately
93 percent of our consolidated total assets. Washington
Gas, the core of the regulated utility segment, delivers natural
gas to retail customers in accordance with tariffs approved by
the regulatory commissions that have jurisdiction over
Washington Gass rates. 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
). In its
rates charged to utility customers, Washington Gas generally
does not earn a profit or incur a loss associated with the sale
of the natural gas commodity because regulation requires
Washington Gas to bill these customers for the natural gas
commodity at the same cost that Washington Gas incurs. However,
Washington Gas has an asset optimization program which utilizes
Washington Gass storage and transportation capacity
resources during periods when not being used to physically serve
utility customers by entering into commodity-related physical
and financial contracts with third parties with the objective of
deriving a profit to be shared with its utility customers (refer
to the section entitled
Asset Optimization
for a further discussion of our asset optimization program).
Unless otherwise noted, therm deliveries shown do not include
therms delivered related to our asset optimization program.
At September 30, 2008, Washington Gas had
1.053 million active customer meters in an area having a
population estimated at 5.2 million and over two million
households and commercial structures. Active customer meters
reflect all natural gas meters connected to the Washington Gas
distribution system, excluding those meters that are not
currently receiving service. Washington Gas is not dependent on
a single customer or group of customers such that the loss of
any one or more of such customers would have a significant
adverse effect on its business. The following table lists the
number of active customer meters and therms delivered by
jurisdiction as of and for the year ended September 30,
2008.
|
|
|
|
|
|
|
|
|
Active Customer Meters and Therms Delivered by
Jurisdiction
|
|
|
|
|
|
|
|
|
Millions of Therms
|
|
|
|
Active Customer
|
|
|
Delivered
|
|
|
|
Meters as of
|
|
|
Fiscal Year Ended
|
|
Jurisdiction
|
|
September 30, 2008
|
|
|
September 30, 2008
|
|
|
|
|
District of Columbia
|
|
|
151,514
|
|
|
|
306.4
|
|
Maryland
|
|
|
427,554
|
|
|
|
732.1
|
|
Virginia
|
|
|
473,964
|
|
|
|
577.7
|
|
|
Total
|
|
|
1,053,032
|
|
|
|
1,616.2
|
|
|
For additional information on our gas deliveries and meter
statistics, refer to the section entitled
Results of
Operations
in Managements Discussion for
Washington Gas.
Factors critical to the success of the regulated utility segment
include:
(i)
operating a safe and reliable natural
gas distribution system;
(ii)
having sufficient
natural gas supplies to serve the demand of its customers;
(iii)
being competitive with other sources of
energy such as electricity, fuel oil and propane;
(iv)
access to sources of liquidity;
(v)
recovering the costs and expenses of this
business in the rates it charges to customers and
(vi)
earning a just and reasonable rate of return on
invested capital. During fiscal years ended September 30,
2008, 2007 and 2006, the regulated utility segment reported
total operating revenues related to gas sales and deliveries to
external customers of $1.6 billion, $1.5 billion and
$1.6 billion, respectively.
Rates and
Regulatory Matters
Washington Gas is regulated by the following state and local
government agencies which establish the utility rates that it
charges to its customers. Refer to the section entitled
Rates and Regulatory Matters
in
Managements Discussion for Washington Gas for a discussion
of current rates and regulatory matters.
District of
Columbia Jurisdiction
The PSC of DC consists of three full-time members who are
appointed by the Mayor with the advice and consent of the
District of Columbia City Council. The term of each commissioner
is four years. There are no limitations on the number of terms
that can be served. The PSC of DC has no required period of time
by which it must make decisions for modifications to base rates
charged by Washington Gas to its customers.
6
WGL
Holdings, Inc.
Washington Gas Light Company
Part I
Item 1. Business (continued)
Maryland
Jurisdiction
The PSC of MD currently 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.
Washington Gas is required to give 30 days notice
before filing for a rate increase. The PSC of MD may initially
suspend the proposed increase for 150 days following the
30-day
notice period, and then has the option to extend the suspension
for an additional 30 days. If action has not been taken
after 210 days, the requested rates become effective
subject to refund.
Virginia
Jurisdiction
The SCC of VA consists of three full-time members who are
elected by the General Assembly of Virginia. Each commissioner
has a six-year term with no limitation on the number of terms
that can be served.
Either of two methods may be used to request a modification of
existing rates. First, Washington Gas may file an application
for a general rate increase in which it may propose new
adjustments to the cost of service that are different from those
previously approved for Washington Gas by the SCC of VA, as well
as a revised return on equity. The proposed rates under this
process may take effect 150 days after the filing, subject
to refund pending the outcome of the SCC of VAs action on
the application. Second, an expedited rate case procedure is
available which provides that proposed rate increases may be
effective 30 days after the filing date, also subject to
refund. Under the expedited rate case procedure, Washington Gas
may not propose any new adjustments for issues not previously
approved in its last general rate case, or a change in its
return on common equity from the level authorized in its last
general rate case. Once filed, other parties may propose new
adjustments or a change in the cost of capital from the level
authorized in its last general rate case. The expedited rate
case procedure may not be available if the SCC of VA decides
that there has been a substantial change in circumstances since
the last general rate case filed by Washington Gas.
Seasonality of
Business Operations
Washington Gass operations are 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 purposes. Excluding deliveries for electric
generation, in fiscal year 2008, approximately 75 percent
of the total therms delivered in Washington Gass service
area occurred in its first and second fiscal quarters.
Washington Gass earnings are typically generated during
these two quarters, and Washington Gas historically incurs net
losses in the third and fourth fiscal quarters. The seasonal
nature of Washington Gass business creates large
variations in short-term cash requirements, primarily due to the
fluctuations in the level of customer accounts receivable,
unbilled revenues and storage gas inventories. Washington Gas
finances these seasonal requirements primarily through the sale
of commercial paper and unsecured short-term bank loans. For
information on our management of weather risk, refer to the
section entitled
Weather Risk
in
Managements Discussion. For information on our management
of our cash requirements, refer to the section entitled
Liquidity and Capital Resources
in
Managements Discussion.
Natural Gas
Supply and Capacity
Capacity and
Supply Requirements
Washington Gas is responsible for acquiring sufficient natural
gas supplies, interstate pipeline capacity and storage capacity
to meet customer demand. As such, Washington Gas has adopted a
diversified portfolio approach designed to satisfy the supply
and demand of its customers, using multiple supply receipt
points, dependable interstate pipeline transportation and
storage arrangements, and its own substantial storage and
peaking capabilities to meet its customers demands.
Washington Gass supply and pipeline capacity plan is based
on forecasted system requirements, and takes into account
estimated load growth by type of customer, 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 conserve
to the general population and targeted curtailments to specific
sections of the system, consistent with curtailment tariffs
approved by regulators in each of Washington Gass three
jurisdictions.
Washington Gas obtains natural gas supplies that originate from
the Gulf Coast Region, the Appalachian and Canadian regions, as
well as natural gas in the form of vaporized liquefied natural
gas (LNG) through the Cove Point LNG terminal owned by Dominion
Cove Point LNG, LP and Dominion Transmission, Inc. (collectively
Dominion) as discussed below. At September 30, 2008,
Washington Gas had service agreements with four pipeline
companies that provided firm transportation
and/or
storage services directly to Washington Gass city gate.
These contracts have expiration dates ranging from fiscal years
2009 to 2028.
7
WGL
Holdings, Inc.
Washington Gas Light Company
Part I
Item 1. Business (continued)
Cove Point
Natural Gas Supply
In late fiscal year 2003, Dominion reactivated its Cove Point
LNG terminal. The composition of the vaporized LNG received from
the Cove Point LNG terminal has resulted in increased leaks in
certain mechanical couplings on the portion of our distribution
system that directly receives the Cove Point gas. Through
pipeline replacements and the construction of a facility to
treat the Cove Point gas at the gate station that exclusively
receives gas from the Cove Point terminal, Washington Gas has
reduced the occurrence of these coupling leaks. A planned
expansion of the Cove Point terminal could result in a
substantial increase in the receipt of Cove Point gas into
additional portions of Washington Gass distribution system
as greater volumes of Cove Point gas are introduced into other
downstream pipelines that provide service to Washington Gas.
This expansion may occur in December 2008 or shortly thereafter.
Based on studies and our experience, this increase in the
receipt of Cove Point gas is likely to result in a significantly
greater number of leaks in Washington Gass distribution
system, unless our efforts to mitigate these additional leaks
are successful. Washington Gas is attempting to mitigate this
anticipated increase in leaks through:
(i)
additional pipeline replacement programs;
(ii)
the construction of facilities to inject heavy
hydrocarbons into the Cove Point gas;
(iii)
isolating its interstate pipeline receipt
points, where possible, from pipelines that transport Cove Point
gas and
(iv)
continued efforts before the FERC to
condition incremental increases in deliveries from the Cove
Point terminal on the appropriate resolution of safety concerns
consistent with the public interest. Refer to the section
entitled
Operating Issues Related To Cove Point Natural
Gas Supply
in Managements Discussion for a
further discussion of this issue.
Projects for
Expanding Capacity
As the result of growing demand, Washington Gas anticipates
enhancing its peaking capacity by constructing an LNG peaking
facility that is currently expected to be completed and placed
in service by the
2012-2013
winter heating season, subject to favorable outcomes on certain
zoning and legal challenges. This peaking facility will provide
two million therms of daily storage transportation capacity and
10 million therms of annual storage capacity. For
information related to capital expenditures for this peaking
facility, refer to the section entitled
Liquidity and
Capital ResourcesCapital Expenditures
in
Managements Discussion. Additionally, Washington Gas has
contracted with various interstate pipeline and storage
companies to expand its transportation and storage capacity.
Recent projects completed or in progress, to expand Washington
Gass transportation
and/or
storage capacity, are outlined below:
|
|
|
|
|
|
|
|
|
|
|
Projects For Expanding Transportation and Storage
Capacity
(In therms)
|
|
|
Daily Storage
|
|
|
|
|
|
|
|
|
Transportation
|
|
|
Annual Storage
|
|
|
In-Service Date
|
Pipeline Service Provider
|
|
Capacity
|
|
|
Capacity
|
|
|
(Fiscal Year)
|
|
|
Hardy Storage Company
LLC
(a)
|
|
|
800,000
|
|
|
|
56 million
|
|
|
Three-year phase-in that began in 2007
|
Pine Needle LNG Company
LLC
(b)
|
|
|
200,000
|
|
|
|
2 million
|
|
|
2008
|
Spectra Energy (Saltville
Storage)
(b)
|
|
|
700,000
|
|
|
|
7 million
|
|
|
2008
|
Columbia Gas Transmission Corporation (Eastern Market Expansion
Storage)
(a)
|
|
|
500,000
|
|
|
|
30 million
|
|
|
2010
|
Dominion Transmission Inc. Storage Factory
|
|
|
1 million
|
|
|
|
60 million
|
|
|
2014
|
|
|
|
|
|
(a)
|
|
Supplier delivers the stored
natural gas directly to Washington Gass distribution
system using the capabilities of the Columbia Gas
Transmission system.
|
(b)
|
|
Supplier will deliver the stored
natural gas to Washington Gass distribution system using a
pipeline that was part of a Williams-Transco expansion
project completed in Fiscal Year 2008.
|
Washington Gas will continue to monitor other opportunities to
acquire or participate in obtaining additional pipeline and
storage capacity that will support customer growth and improve
or maintain the high level of service expected by its customer
base.
Asset
Optimization
Washington Gas optimizes the value of its long-term natural gas
transportation and storage capacity resources during periods
when these resources are not being used to physically serve
utility customers. Prior to May 1, 2008, Washington Gas
contracted with non-affiliated asset managers to manage a
portion of Washington Gass asset optimization program.
These asset managers paid Washington Gas a fee to utilize the
related capacity resources for their own account when such
resources were not required to meet customer supply needs. On
April 30, 2008, the last of these asset management
contracts expired, and Washington Gas retained the use of all of
its capacity resources to manage the asset optimization program
internally with the assistance of external consultants.
8
WGL
Holdings, Inc.
Washington Gas Light Company
Part I
Item 1. Business (continued)
Washington Gas utilizes:
(i)
its transportation
capacity assets to benefit from favorable natural gas price
differentials between different geographic locations and
(ii)
its storage capacity assets to benefit from
favorable natural gas price differentials between different time
periods. Washington Gas locks in margins for a portion of these
assets using forward physical and financial contracts which are
accounted for as derivatives and recorded at fair value.
Regulatory sharing mechanisms in all three jurisdictions allow
the profit from these transactions to be shared between
Washington Gass customers and shareholders.
A portion of the asset optimization program works in conjunction
with the summer fill operations to inject gas into storage
inventory and through the winter period when firm service
customers take delivery of the inventory withdrawals. The
transactions executed under this program may cause interim
period volatility in earnings and in the valuations of the
inventory and regulatory assets on the balance sheet. The
drivers of this volatility are related to the accounting
recognition for changes in the fair value of financial
derivatives, the physical natural gas volumes in inventory, the
amount recognized for sales margins, and lower of cost or market
inventory valuation adjustments for the affected storage
inventory. Although our asset optimization program may result in
period-to-period volatility, this volatility does not change the
margins that Washington Gas will ultimately realize after the
full settlement of the derivative instruments and after the
completed summer fill and winter withdrawal cycle.
During fiscal year 2008, 520.6 million therms of natural
gas were purchased under our asset optimization program and
520.1 million therms of natural gas were delivered for
contracts that were physically settled related to our internally
managed asset optimization program. Refer to the sections
entitled
Results of OperationsRegulated
Utility
and
Market Risk
in
Managements Discussion for a further discussion of this
program and its effect on earnings.
Annual
Sendout
As reflected in the table below, there were six sources of
delivery through which Washington Gas received natural gas to
satisfy its customer demand requirements in fiscal year 2008.
These same six sources also are expected to be utilized to
satisfy customer demand requirements in fiscal year 2009. Firm
transportation denotes gas transported directly to the entry
point of Washington Gass distribution system in
contractually viable 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 in Hampshire County, West Virginia;
(ii)
the local production of propane air plants
located at Washington Gas-owned facilities in Rockville,
Maryland (Rockville Station) and in Springfield, Virginia
(Ravensworth Station) and
(iii)
other peak-shaving
resources. Unregulated third-party marketers acquire interstate
pipeline and storage capacity and the natural gas commodity on
behalf of Washington Gass delivery service customers under
customer choice programs, some of which may be provided through
transportation, storage and peaking resources that may be
provided by Washington Gas to unregulated third-party marketers
under tariffs approved by the three public service commissions
(refer to the section entitled
Natural Gas
Unbundling
). These retail marketers have natural gas
delivered to the entry point of Washington Gass
distribution system on behalf of those utility customers that
have decided to acquire their natural gas commodity on an
unbundled basis, as discussed below.
During fiscal year 2008, total sendout on the system was
1.610 billion therms, as compared to total sendout of
1.654 billion therms during fiscal year 2007. This excludes
the sendout of sales and deliveries of natural gas used for
electric generation. The decrease in 2008 was the result of
weather in fiscal year 2008 that was warmer than fiscal year
2007. The sendout for fiscal year 2009 is estimated at
1.632 billion therms (based on normal weather), excluding
the sendout for the sales and deliveries of natural gas used for
electric generation. The sources of delivery and related volumes
that were used to satisfy the requirements of fiscal year 2008
and those projected for pipeline year 2009 are shown in the
following table.
|
|
|
|
|
|
|
|
|
Sources of Delivery for Annual Sendout
|
|
|
|
(In millions of therms)
|
|
Fiscal Year
|
|
|
|
Sources of Delivery
|
|
Actual 2008
|
|
|
Projected 2009
|
|
|
|
Firm Transportation
|
|
|
588
|
|
|
|
572
|
|
Transportation Storage
|
|
|
262
|
|
|
|
327
|
|
Hampshire Storage, Company-Owned Propane-Air Plants, and other
Peak-Shaving Resources
|
|
|
20
|
|
|
|
74
|
|
Unregulated Third-Party Marketers
|
|
|
740
|
|
|
|
659
|
|
|
Total
|
|
|
1,610
|
|
|
|
1,632
|
|
|
9
WGL
Holdings, Inc.
Washington Gas Light Company
Part I
Item 1. Business (continued)
Design Day
Sendout
The effectiveness of Washington Gass 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 interruptible customers will be curtailed on the design day.
Washington Gass forecasted design day demand for the
2008-2009
winter season is 18.3 million therms and Washington
Gass projected sources of delivery for design day sendout
is 19.4 million therms. This provides a reserve margin of
approximately 6.0 percent. 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 fiscal year 2009.
|
|
|
|
|
|
|
|
|
Projected Sources of Delivery for Design Day Sendout
|
|
|
|
(In millions of therms)
|
|
Fiscal Year 2009
|
|
|
|
Sources of Delivery
|
|
Volumes
|
|
|
Percent
|
|
|
|
Firm Transportation
|
|
|
5.9
|
|
|
|
30
|
%
|
Transportation Storage
|
|
|
6.0
|
|
|
|
31
|
%
|
Hampshire Storage, Company-Owned Propane-Air Plants, and other
Peak-Shaving Resources
|
|
|
7.3
|
|
|
|
38
|
%
|
Unregulated Third-Party Marketers
|
|
|
0.2
|
|
|
|
1
|
%
|
|
Total
|
|
|
19.4
|
|
|
|
100
|
%
|
|
Natural Gas
Unbundling
At September 30, 2008, customer choice programs for natural
gas customers were available to all of Washington Gass
regulated utility customers in the District of Columbia,
Maryland and Virginia. These programs allow customers to choose
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 Gass
1.053 million active customers at September 30, 2008,
approximately 140,000 customers purchased their natural gas
commodity from unregulated third-party marketers. The following
table provides the status of customer choice programs in
Washington Gass jurisdictions at September 30, 2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
Status of Customer Choice Programs
|
|
At September 30, 2008
|
|
|
|
Jurisdiction
|
|
Customer Class
|
|
Eligible Customers
|
|
|
|
|
|
|
|
Total
|
|
|
% Participating
|
|
|
|
|
|
|
|
District of Columbia
|
|
|
Firm:
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential
|
|
|
|
138,396
|
|
|
|
8
|
%
|
|
|
|
Commercial
|
|
|
|
12,894
|
|
|
|
34
|
%
|
|
|
|
Interruptible
|
|
|
|
224
|
|
|
|
92
|
%
|
Maryland
|
|
|
Firm:
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential
|
|
|
|
397,994
|
|
|
|
15
|
%
|
|
|
|
Commercial
|
|
|
|
29,305
|
|
|
|
39
|
%
|
|
|
|
Interruptible
|
|
|
|
255
|
|
|
|
100
|
%
|
Virginia
|
|
|
Firm:
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential
|
|
|
|
446,203
|
|
|
|
10
|
%
|
|
|
|
Commercial
|
|
|
|
27,550
|
|
|
|
28
|
%
|
|
|
|
Interruptible
|
|
|
|
211
|
|
|
|
94
|
%
|
|
Total
|
|
|
|
|
|
|
1,053,032
|
|
|
|
13
|
%
|
|
10
WGL
Holdings, Inc.
Washington Gas Light Company
Part I
Item 1. Business (continued)
When customers choose to purchase the natural gas commodity from
unregulated third-party marketers, Washington Gass 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.
Competition
The Natural Gas
Delivery Function
The natural gas delivery function, the core business of
Washington Gas, continues to be regulated by local regulatory
commissions. In developing this core business, Washington Gas
has invested $3.2 billion as of September 30, 2008, to
construct and operate a safe and reliable natural gas
distribution system. Because of the high fixed costs and
significant safety and environmental considerations associated
with building and operating a distribution system, Washington
Gas expects to continue being the only owner and operator of a
natural gas distribution system in its current franchise area
for the foreseeable future. The nature of Washington Gass
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 natural gas compared to other energy products and
the comparative prices of those products. In the residential
market, which generates a significant portion of Washington
Gass 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.
In the interruptible market, fuel oil is the prevalent energy
alternative to natural gas. Washington Gass success in
this market depends largely on the relationship between natural
gas and oil prices. The supply of natural gas primarily is
derived from domestic sources, and the relationship between
supply and demand generally has the greatest impact on natural
gas prices. As a large portion of oil comes from foreign
sources, political events can have significant influences on oil
supplies and, accordingly, oil prices.
RETAIL
ENERGY-MARKETING SEGMENT
Description
The retail energy-marketing segment consists of the operations
of WGEServices which competes with regulated utilities and other
unregulated third-party marketers to sell natural gas and
electricity directly to residential, commercial and industrial
customers with the objective of earning a profit through
competitive pricing. WGEServices does not currently own or
operate any natural gas or electric generation, production,
transmission or distribution assets. The commodities that
WGEServices sells are delivered to retail customers through
assets owned by regulated utilities. Washington Gas delivers the
majority of natural gas sold by WGEServices, and unaffiliated
electric utilities deliver all of the electricity sold.
Additionally, WGEServices bills its customers through the
billing services of the regulated utilities that deliver its
commodities as well as directly through its own billing
capabilities. WGEServices is also exploring the expansion of its
renewable energy and energy conservation product and service
offerings. This expansion may include the ownership of renewable
energy producing assets.
At September 30, 2008, WGEServices served approximately
133,300 residential, commercial and industrial natural gas
customers and 61,800 residential, commercial and industrial
electricity customers located in Maryland, Virginia, Delaware
and the District of Columbia. WGEServices is not dependent on a
single customer or concentration of customers such that the loss
of any one or more of such customers would have a significant
adverse effect on its business.
Factors critical to the success of the retail energy-marketing
segment include:
(i)
managing the market risk of the
difference between the sales price committed to customers under
sales contracts and the cost of natural gas and electricity
needed to satisfy these sales commitments;
(ii)
managing credit risks associated with customers
and suppliers;
(iii)
having sufficient
deliverability of natural gas and electric supplies and
transportation to serve the demand of its customers which can be
affected by the ability of natural gas producers, pipeline
gatherers, natural gas processors, interstate pipelines,
electricity generators and regional electric transmission
operators to deliver the respective commodities;
(iv)
access to sources of liquidity;
(v)
controlling the level of selling, general and
administrative expenses, including customer acquisition expenses
and
(vi)
the ability to access markets through
customer choice
11
WGL
Holdings, Inc.
Washington Gas Light Company
Part I
Item 1. Business (continued)
programs or other forms of deregulation. The retail
energy-marketing segments total operating revenues from
external customers were $1.1 billion for both fiscal years
2008 and 2007, and $1.0 billion for fiscal year 2006.
Seasonality of
Business Operations
The operations of WGEServices are seasonal, with larger amounts
of electricity being sold in the summer months and larger
amounts of natural gas being sold in the winter months. Working
capital requirements vary significantly during the year, and
these variations are financed primarily through WGL
Holdings issuance of commercial paper and unsecured
short-term bank loans. WGEServices accesses these funds through
the WGL Holdings money pool. This money pool also accumulates
cash from the periodic issuance of WGL Holdings common stock and
the operations of certain unregulated subsidiaries, and provides
short-term loans to other unregulated subsidiaries to meet
various working capital needs.
Natural Gas
Supply
WGEServices purchases its natural gas from a number of wholesale
suppliers in order to avoid relying on any single provider for
its natural gas supply. Natural gas supplies are delivered to
WGEServices market territories through several interstate
natural gas pipelines. To supplement WGEServices natural
gas supplies during periods of high customer demand, WGEServices
maintains gas storage inventory in storage facilities that are
assigned by natural gas utilities such as Washington Gas. This
storage inventory enables WGEServices to meet daily and monthly
fluctuations in demand and to minimize the effect of market
price volatility.
Electricity
Supply
The PJM Interconnection (PJM) is a regional transmission
organization that regulates and coordinates generation supply
and the wholesale delivery of electricity in the states and
jurisdictions where WGEServices operates. WGEServices buys
wholesale and sells retail electricity in the PJM market
territory and is subject to its rules and regulations. PJM
requires that its market participants have sufficient load
capacity to serve their customers load requirements. As
such, WGEServices has entered into contracts with multiple
electricity suppliers to purchase its electricity and electric
capacity needs. These contracts cover various periods ranging
from one month to several years into the future.
Competition
Natural
Gas
WGEServices competes with the commodity prices offered by
regulated gas utilities and other third-party marketers to sell
natural gas to customers both inside and outside of the
Washington Gas service area. Marketers of natural gas compete
largely on price; therefore, gross margins are relatively small.
To determine competitive pricing and in adherence to its risk
management policies and procedures, WGEServices manages its
natural gas contract portfolio by closely matching the timing of
gas purchases from wholesale suppliers with retail sales
commitments to customers. For a discussion of WGEServices
exposure to and management of price risk, refer to the section
entitled
Market RiskPrice Risk Related to the
Retail Energy-Marketing Segment
in Managements
Discussion.
Electricity
WGEServices competes with regulated electric utilities and other
third-party marketers to sell electricity to customers.
Marketers of electric supply compete largely on price;
therefore, gross margins are relatively small. To determine
competitive pricing and in adherence to its risk management
policies and procedures, WGEServices manages its electricity
contract portfolio by closely matching the timing of electricity
purchases from suppliers with sales commitments to customers.
For a discussion of WGEServices exposure to and management
of price risk, refer to the section entitled
Market
RiskPrice Risk Related to the Retail Energy-Marketing
Segment
in Managements Discussion.
WGEServices electric sales opportunities are significantly
affected by the price for Standard Offer Service (SOS) offered
by electric utilities. These rates are periodically reset based
on the regulatory requirements in each jurisdiction and customer
class. From time-to-time, significant sales opportunities may
exist or sales opportunities may be very limited due to the
relationship of these SOS rates to current market prices.
12
WGL
Holdings, Inc.
Washington Gas Light Company
Part I
Item 1. Business (continued)
DESIGN-BUILD
ENERGY SYSTEMS SEGMENT
Description
The design-build energy systems segment consists of the
operations of our WGESystems subsidiary which provides
design-build energy efficient and sustainable solutions to
government and commercial clients, primarily in the District of
Columbia and portions of Maryland and Virginia. WGESystems
focuses on upgrading the mechanical, electrical, water and
energy-related systems of large government and commercial
facilities, by implementing both traditional as well as
alternative energy technologies. The design-build energy systems
segment derived approximately 77 percent of its revenues
from various agencies of the Federal Government in fiscal year
2008.
As of September 30, 2008 and 2007, WGESystems had a backlog
of $39.3 million and $43.2 million, respectively. This
backlog only includes work associated with signed contracts. Of
the backlog for September 30, 2008, the approximate value
of work to be completed beyond fiscal year 2009 was
$7.4 million.
Factors critical to the success of the design-build energy
systems segment include:
(i)
generating adequate
revenue from the government and private sectors in the facility
construction and retrofit markets;
(ii)
building a
stable base of customer relationships;
(iii)
estimating and managing fixed-price contracts;
(iv)
building and maintaining a stable base of
sub-contractor relationships and
(v)
controlling
selling, general and administrative expenses.
Competition
There are many competitors in this business segment. Within the
government sector, competitors primarily include companies
performing Energy Savings Performance Contracting (ESPC) as well
as utilities performing under Utility Energy Saving Contracts
(UESC). In the commercial markets, in addition to ESPCs and
UESCs, competitors include manufacturers of equipment and
control systems and consulting firms. WGESystems competes on the
basis of strong customer relationships developed over many years
of implementing successful projects, developing and maintaining
strong supplier relationships, and focusing in areas where it
can bring relative expertise.
ENVIRONMENTAL
MATTERS
We are subject to federal, state and local laws and regulations
related to environmental matters. These evolving laws and
regulations may require expenditures over a long timeframe to
control environmental effects. Almost all of the environmental
liabilities we have recorded are for costs expected to be
incurred to remediate sites where we or a predecessor affiliate
operated manufactured gas plants (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
|
|
|
|
variations between the estimated and actual period of time that
must be dedicated 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. Based on the information available
to us, we have concluded that none of the sites are likely to
present an unacceptable risk to human health or the environment.
At one of the former MGP sites, studies show the presence of
coal tar under the site and an adjoining property. Washington
Gas has taken steps to control the movement of contaminants into
an adjacent river by installing a water treatment system that
removes and treats contaminated groundwater at the site.
Washington Gas received approval from governmental authorities
for a comprehensive remediation plan for the majority of the
site that permits commercial development of Washington
Gass property. Washington Gas has entered into an
agreement with a national developer for the development of this
site in phases. The first two phases have been completed, with
Washington Gas retaining a ground lease on each phase. A Record
of Decision for that portion of the site not owned by Washington
Gas was issued in August, 2006. Negotiations on a consent
agreement regarding
13
WGL
Holdings, Inc.
Washington Gas Light Company
Part I
Item 1. Business (concluded)
remediation of that property have been postponed, pending
transfer of the site to a new governmental owner. On
September 21, 2006, governmental authorities notified
Washington Gas of their desire to have the utility investigate
and remediate river sediments in the area directly in front of
the former MGP site. There has been no agreement among
Washington Gas and governmental authorities as to the type and
level of sediment investigation and remediation that should be
undertaken for this area of the river; accordingly, we cannot
estimate at this time the potential future costs of such
investigation and remediation.
At a second former MGP site and on an adjacent parcel of land,
Washington Gas developed a monitoring-only
remediation plan for the site. This remediation plan received
approval under a state voluntary closure program.
We do not expect that the ultimate impact of these matters will
have a material adverse effect on our capital expenditures,
earnings or competitive position. At the remaining eight sites,
either the appropriate remediation is being undertaken, or no
remediation should be necessary. See Note 13 of the Notes
to Consolidated Financial Statements for a further discussion of
environmental response costs.
OTHER
INFORMATION
At September 30, 2008, we had 1,448 employees
comprising 1,359 utility and 89 non-utility employees. At
September 30, 2007, we had 1,638 employees comprising
1,555 utility and 83 non-utility employees.
Our Code of Conduct, Corporate Governance Guidelines, and
charters for the Governance, Audit and Human Resources
committees of the Board of Directors are available on the
corporate Web site
www.wglholdings.com
under the
Corporate Governance link, and any changes or
amendments to these documents will also be posted to this
section of our Web site. Copies also may be obtained by request
to the Corporate Secretary at WGL Holdings, Inc., 101
Constitution Ave., N.W., Washington, D.C. 20080. We make
available free of charge on our corporate Web site, our annual
reports on
Form 10-K,
quarterly reports on
Form 10-Q
and current reports on
Form 8-K,
and any amendments, as soon as reasonably practicable after such
reports have been electronically filed with or furnished to the
Securities and Exchange Commission. Additional information about
WGL Holdings is also available on its Web site and at the
address listed above.
Our Chairman and Chief Executive Officer certified to the New
York Stock Exchange (NYSE) on March 20, 2008 that, as of
that date, he was unaware of any violation by WGL Holdings of
the NYSEs corporate governance listing standards.
Our research and development costs during fiscal years 2008,
2007 and 2006 were not material.
14
WGL
Holdings, Inc.
Washington Gas Light Company
Part I
Item 1A. Risk Factors
The risk factors described below should be read in conjunction
with other information included or incorporated by reference in
this Annual Report on
Form 10-K,
including an in-depth discussion of these risks in the section
entitled
Managements Discussion and Analysis of
Financial Condition and Results of Operations
. The
risks and uncertainties described below are not the only risks
and uncertainties facing us.
HOLDING
COMPANY
Our business may be adversely affected if we are unable to
pay dividends on our common stock and principal and interest on
our outstanding debt.
WGL Holdings is a holding company whose assets consist primarily
of investments in our subsidiaries. Accordingly, we conduct all
of our operations through our subsidiaries. Our ability to pay
dividends on our common stock and to pay principal and accrued
interest on our outstanding debt depends on the payment of
dividends to us by certain of our subsidiaries or the repayment
of funds to us by our principal subsidiaries. The extent to
which our subsidiaries do not pay dividends or repay funds to us
may adversely affect our ability to pay dividends to holders of
our common stock and principal and interest to holders of our
debt.
If we are unable to access sources of liquidity or capital,
or the cost of funds increases significantly, our
subsidiaries business may be adversely affected.
Our ability to obtain adequate and cost effective financing
depends on our credit ratings as well as the liquidity of
financial markets. Our credit ratings depend largely on the
financial performance of our subsidiaries, and a downgrade in
our current credit ratings could adversely affect our access to
sources of liquidity and capital, as well as our borrowing costs.
WASHINGTON GAS
LIGHT COMPANY
Changes in the regulatory environment or unfavorable rate
regulation, that can be affected by new laws or political
considerations, may restrict or delay Washington Gass
ability to earn a reasonable rate of return on its invested
capital to provide utility service and to fully recover its
operating costs.
Washington Gas is regulated by the PSC of DC, the PSC of MD and
the SCC of VA. These regulatory commissions generally have
authority over many of the activities of Washington Gass
business including, but not limited to, the rates it charges to
its customers, the amount and type of securities it can issue,
the nature of investments it can make, the nature and quality of
services it provides, safety standards and other matters. These
regulators also may modify Washington Gass 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. The extent to which the actions of
regulatory commissions restrict or delay Washington Gass
ability to earn a reasonable rate of return on invested capital
and/or
fully
recover operating costs may adversely affect its results of
operations, financial condition and cash flows.
Washington Gass ability to meet customers natural
gas requirements may be impaired if its contracted gas supplies
and interstate pipeline and storage services are not available
or delivered in a timely manner.
Washington Gas is responsible for acquiring sufficient natural
gas supplies, interstate pipeline capacity and storage capacity
to meet current and future customers annual and seasonal
natural gas requirements. If Washington Gas is not able to
maintain a reliable and adequate natural gas supply and
sufficient pipeline capacity to deliver that supply, it may be
unable to meet its customers requirements. If Washington
Gas is unable to meet customers demand requirements, its
results of operations, financial condition and cash flows may be
adversely affected.
Washington Gas needs to acquire additional capacity to
deliver natural gas on the coldest days of the year and it may
not receive the necessary authorizations to do so in a timely
manner.
Washington Gas plans to construct a one billion cubic foot
liquefied natural gas (LNG) storage facility in Chillum,
Maryland, to meet its customers forecasted demand for
natural gas. The new storage facility is expected to be
completed and in service by the
2012-2013
winter heating season. If we are not permitted or are not able
to construct this planned facility on a timely basis for any
reason, the availability of the next best alternative (which is
to acquire additional interstate pipeline transportation or
storage capacity) may be limited by market supply and demand,
and the timing of Washington Gass participation in new
interstate pipeline construction projects. This could cause an
interruption in Washington Gass ability to satisfy the
needs of some of its customers, which could adversely affect its
results of operations and cash flows.
15
WGL
Holdings, Inc.
Washington Gas Light Company
Part I
Item 1A. Risk Factors (continued)
Operating issues could affect public safety and the
reliability of Washington Gass natural gas distribution
system which could adversely affect Washington Gass
results of operations, financial condition and cash flows.
Washington Gass business is exposed to operating issues
that could affect the public safety and reliability of its
natural gas distribution system. Operating issues such as leaks,
mechanical problems and accidents could result in significant
costs to Washington Gass business and loss of customer
confidence. The occurrence of any such operating issues could
adversely affect Washington Gass results of operations,
financial condition and cash flows. If Washington Gas is unable
to recover from customers through the regulatory process all or
some of these costs and its authorized rate of return on these
costs, this also could adversely affect Washington Gass
results of operations, financial condition and cash flows.
The receipt of additional amounts of gas from the Dominion
Cove Point LNG terminal into Washington Gass natural gas
distribution system may result in higher operating expenses and
capital expenditures which may have a material adverse effect on
its financial condition, results of operations and cash flows,
and may impact system safety.
The Federal Energy Regulatory Commission (FERC) has authorized
Dominion Cove Point LNG, LP and Dominion Transmission, Inc.
(collectively Dominion), to expand the capacity of the Dominion
Cove Point LNG terminal (Cove Point terminal). This expansion
may occur in December 2008 or shortly thereafter. An increase in
the volume of vaporized LNG received from the Cove Point
terminal is likely to result in a significantly greater number
of leaks in Washington Gass distribution system, unless
our efforts to mitigate these leaks are successful. We are
attempting to mitigate this anticipated increase in leaks
through several means, including, but not limited to:
|
|
|
|
|
additional gas distribution system mains and services
replacement programs;
|
|
|
|
construction of facilities to inject heavy hydrocarbons into the
Cove Point gas;
|
|
|
|
isolating Washington Gass interstate pipeline receipt
points, where possible, from pipelines that transport Cove Point
gas and
|
|
|
|
continued efforts before the FERC to condition incremental
increases in deliveries from the Cove Point terminal on the
appropriate resolution of safety concerns consistent with the
public interest.
|
If we are unable to implement a satisfactory solution on a
timely basis, additional operating expenses and capital
expenditures may be necessary to contend with the receipt of
increased volumes of gas from the Cove Point LNG terminal into
Washington Gas distribution system. These additional
expenditures may not be recoverable or may not be recoverable on
a timely basis from customers. Additionally, such operating
expenses and capital expenditures may not be timely enough to
mitigate the challenges posed by increased volumes of Cove Point
gas and could result in leakage in couplings at a rate that
could compromise the safety of our distribution system.
Therefore, these conditions could have a material adverse effect
on Washington Gass financial condition, results of
operations and cash flows, and may impact system safety.
Changes in the relative prices of alternative forms of energy
may strengthen or weaken the competitive position of Washington
Gass natural gas delivery service. If the competitive
position of natural gas service weakens, it may reduce the
number of natural gas customers in the future and negatively
affect Washington Gass future cash flows and net
income.
The price of natural gas delivery service that Washington Gas
provides competes with the price of other forms of energy such
as electricity, oil and propane. Changing prices of natural gas
versus other sources of energy that Washington Gas competes
against can cause the competitive position of our natural gas
delivery service to improve or decline. A decline in the
competitive position of natural gas service in relation to
alternative energy sources can lead to fewer natural gas
customers, lower volumes of natural gas delivered, lower cash
flows and lower net income.
A decline in the economy or significant increases in interest
rates may reduce net revenue growth, increase costs and reduce
future net income and cash flows.
A decline in the economy of the region in which Washington Gas
operates, or a significant increase in interest rates to be paid
by potential purchasers of new homes, might adversely affect
Washington Gass ability to grow its customer base and
collect revenues from customers, which may negatively affect net
revenue growth and increase costs. An increase in the interest
rates Washington Gas pays without the recognition of the higher
cost of debt incurred by it in the rates charged to its
customers would adversely affect future net income and cash
flows.
16
WGL
Holdings, Inc.
Washington Gas Light Company
Part I
Item 1A. Risk Factors (continued)
If Washington Gas is unable to access sources of liquidity or
capital, or the cost of funds increases significantly,
Washington Gass business may be adversely affected.
Washington Gass ability to obtain adequate and cost
effective financing depends on its credit ratings as well as the
liquidity of financial markets. Washington Gass credit
ratings depend largely on its financial performance, and a
downgrade in Washington Gass current credit ratings could
adversely affect its access to sources of liquidity and capital,
as well its borrowing costs and ability to earn its authorized
rate of return.
As a wholly owned subsidiary of WGL Holdings, Washington Gas
depends solely on WGL Holdings to raise new common equity
capital and contribute that common equity to Washington Gas. If
WGL Holdings is unable to raise common equity capital, this also
could adversely affect Washington Gass credit ratings and
its ability to earn its authorized rate of return.
Washington Gass risk management strategies and related
hedging activities may not be effective in managing its risks,
and may result in additional liability for which rate recovery
may be disallowed and cause increased volatility in its
earnings.
Washington Gass business requirements expose it to
commodity price, weather, credit and interest-rate risks.
Washington Gas attempts to manage its exposure to these risks by
hedging, setting risk limits and employing other risk management
tools and procedures. Risk management activities may not be as
effective as planned, and cannot eliminate all of its risks.
Washington Gas also may be exposed to additional liability
should the anticipated revenue recovery of costs or losses
incurred with certain of these risk management activities be
subsequently excluded from the determination of revenues by a
regulator.
Washington Gass facilities and operations could be
targets of acts of terrorism.
Washington Gass natural gas distribution, transmission and
storage facilities may be targets of terrorist activities that
could result in a disruption of its ability to meet customer
requirements. Terrorist attacks may also disrupt capital markets
and Washington Gass ability to raise capital. A terrorist
attack on Washington Gass facilities or those of its
natural gas suppliers or customers could result in a significant
decrease in revenues or a significant increase in repair costs,
which could adversely affect its results of operations,
financial position and cash flows.
WASHINGTON GAS
ENERGY SERVICES, INC.
WGEServices business, earnings and cash requirements
are highly weather sensitive and seasonal.
The operations of WGEServices, our retail energy-marketing
subsidiary, are weather sensitive and seasonal, with a
significant portion of revenues derived from the sale of natural
gas to retail customers for space heating during the winter
months, and from the sale of electricity to customers for
cooling during the summer months. Weather conditions directly
influence the volume of natural gas and electricity delivered to
customers. Weather conditions can also affect the short-term
pricing of energy supplies that WGEServices may need to procure
to meet the needs of its customers. Deviations in weather from
normal levels and the seasonal nature of WGEServices
business can create large variations in earnings and short-term
cash requirements.
The ability of WGEServices to meet customers natural
gas and electricity requirements may be impaired if contracted
supply is not available or delivered in a timely manner.
Sufficient capability to deliver natural gas and electric
supplies to serve the demand of WGEServices customers is
dependent upon the ability of natural gas producers, pipeline
gatherers, natural gas processors, interstate pipelines,
suppliers of electricity and regional electric transmission
operators to meet these requirements. If WGEServices is unable
to secure adequate supplies in a timely manner, either due to
the failure of its suppliers to deliver the contracted commodity
or the inability to secure additional quantities during
significant abnormal weather conditions, it may be unable to
meet its customer requirements. Such inability to meet its
delivery obligations to customers could result in WGEServices
experiencing defaults on contractual terms with its customers,
penalties and financial damage payments, the loss of certain
licenses and operating authorities,
and/or
a
need to return customers to the regulated utility companies,
such as Washington Gas.
The risk management strategies and related hedging activities
of WGEServices may not be effective in managing risks and may
cause increased volatility in its earnings.
WGEServices is exposed to commodity price risk to the extent its
natural gas and electricity purchases are not closely matched to
its sales commitments in terms of volume and pricing.
WGEServices attempts to manage its exposure to commodity price
risk, as well as its exposure to weather and credit risks by
hedging, setting risk limits, and employing other risk
management tools and procedures. These risk management
activities may not be as effective as planned, and cannot
eliminate all of WGEServices risks.
17
WGL
Holdings, Inc.
Washington Gas Light Company
Part I
Item 1A. Risk Factors (concluded)
Significant increases in interest rates may increase
costs.
WGEServices depends on short-term debt to finance its accounts
receivable and storage gas inventories. Working capital
requirements vary significantly during the year and are financed
primarily through the issuance of commercial paper and unsecured
short-term bank loans by WGL Holdings. The results of operations
of WGEServices could be adversely affected if short-term
interest rates rose or if we were unable to access capital in a
cost-effective manner.
WGEServices is dependent on guarantees from WGL Holdings.
The ability of WGEServices to purchase natural gas and
electricity from suppliers is dependent upon guarantees issued
on its behalf by WGL Holdings. Should WGL Holdings not renew
such guarantees or if WGL Holdings credit ratings are
downgraded, the ability of WGEServices to make commodity
purchases at reasonable prices may be impaired, adversely
affecting its results of operations, financial position and cash
flows.
Competition may negatively affect WGEServices.
WGEServices competes with other non-regulated retail suppliers
of natural gas and electricity, as well as with the commodity
rate offerings of electric and gas utilities. Increases in
competition including utility commodity rate offers that are
below prevailing market rates may result in a loss of sales
volumes or a reduction in growth opportunities that could
adversely affect results of operations and cash flows.
Regulatory developments may negatively affect WGEServices.
The regulations that govern the conduct of competitive energy
marketers are subject to change as the result of legislation or
regulatory proceedings. Changes in these regulatory rules could
reduce customer growth opportunities for WGEServices, or could
reduce the profit opportunities associated with certain groups
of existing or potential new customers and, thereby, adversely
affect its results of operations and cash flows.
|
|
ITEM 1B.
|
UNRESOLVED
STAFF COMMENTS
|
None.
18
WGL
Holdings, Inc.
Washington Gas Light Company
Part I
Item 2. Properties
At September 30, 2008, we 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 their respective
properties and businesses. The regulated utility segment is the
only segment where property, plant and equipment are significant
assets.
Property, plant and equipment is stated at original cost,
including labor, materials, taxes and overhead costs incurred
during the construction period. Washington Gas calculates
depreciation applicable to its utility gas plant in service
primarily using a straight-line method over the estimated
remaining life of the plant. The composite depreciation and
amortization rate of the regulated utility was
3.23 percent, 3.19 percent and 3.44 percent
during fiscal years 2008, 2007 and 2006, respectively, which
included an allowance for estimated accrued non-legal asset
removal costs (see Note 1 of the Notes to Consolidated
Financial Statements).
At September 30, 2008, Washington Gas had approximately
657 miles of transmission mains, 12,223 miles of
distribution mains, and 13,521 miles of distribution
services. Washington Gas has the storage capacity for
approximately 15 million gallons of propane for
peak-shaving.
Washington Gas owns approximately 40 acres of land and a
building (built in 1970) at 6801 Industrial Road in
Springfield, Virginia. The Springfield site 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 also has peaking facilities to enhance
deliverability in periods of peak demand in the winter that
consist of propane air plants in Springfield, Virginia
(Ravensworth Station), and Rockville, Maryland (Rockville
Station). Hampshire owns full and partial interests in, and
operates underground natural gas storage facilities in Hampshire
County, West Virginia. Hampshire accesses the storage field
through 12 storage wells that are connected to an
18-mile
pipeline gathering system. Concurrent with acquiring and
protecting its storage rights, Hampshire has historically
acquired certain exploration and development rights in West
Virginia principally in the Marcellus Shale and other shale
formations. These rights are predominately owned by lease and
they are applicable to approximately 26,000 gross acres for
the storage facilities of which 13,000 acres of land
surrounding its storage facilities may be subject to exploration
in addition to its storage function. Hampshire also operates a
compressor station utilized to increase line pressure for
injection of gas into storage. For fiscal year 2009, we estimate
that the Hampshire storage facility has the capacity to supply
approximately 2.5 billion cubic feet of natural gas to
Washington Gass system for meeting winter season demands.
Washington Gas owns a
12-acre
parcel of land located in Southeast Washington, D.C.
Washington Gas entered into an agreement with a national
developer to develop this land in phases. Washington Gas
selected the developer to design, execute and manage the various
phases of the development. The development, Maritime Plaza, is
intended to be a mixed-use commercial project that will be
implemented in five phases. The first two phases have been
developed, with Washington Gas retaining a
99-year
ground lease on each phase. See the section entitled
Environmental Matters
under Item 1 of
this report for additional information regarding this
development.
Facilities utilized by our corporate headquarters, as well as by
the retail energy-marketing and energy design-build systems
segments, are located in the Washington, D.C. metropolitan
area and are leased.
The Mortgage of Washington Gas dated January 1, 1933
(Mortgage), as supplemented and amended, securing any First
Mortgage Bonds (FMBs) it issues, constitutes a direct lien on
substantially all property and franchises owned by Washington
Gas other than a small amount of property that is expressly
excluded. At September 30, 2008 and 2007, no debt was
outstanding under the Mortgage.
Washington Gas executed a supplemental indenture to its
unsecured Medium-Term Note (MTN) Indenture on September 1,
1993, providing that Washington Gas will not issue any FMBs
under its Mortgage without securing all MTNs with all other debt
secured by the Mortgage.
19
WGL Holdings, Inc.
Washington Gas Light Company
Part I
EXECUTIVE
OFFICERS OF THE REGISTRANTS
The names, ages and positions of the executive officers of the
registrants at October 31, 2008, are listed below along
with their business experience during the past five years. The
age of each officer listed is as of the date of filing of this
report. There is no family relationship among the officers.
Unless otherwise indicated, all officers have served
continuously since the dates indicated, and all positions are
executive officers listed with Washington Gas Light Company.
|
|
|
Executive Officers
|
|
|
Date Elected or
|
Name, Age and Position with the
registrants
|
|
Appointed
|
|
|
Vincent L. Ammann, Jr.,
Age 49 (1,2)
|
|
|
Vice President and Chief Financial Officer
|
|
September 30, 2006
|
Vice President and Chief Financial Officer of WGL Holdings,
Inc.
|
|
September 30, 2006
|
Vice PresidentFinance
|
|
October 1, 2005
|
Vice PresidentFinance of WGL Holdings, Inc.
|
|
October 1, 2005
|
Assistant to the Chief Financial Officer
|
|
March 29, 2004
|
|
|
|
Beverly J. Burke,
Age 57 (1)
|
|
|
Vice President and General Counsel
|
|
July 1, 2001
|
Vice President and General Counsel of WGL Holdings, Inc.
|
|
July 1, 2001
|
|
|
|
Gautam Chandra,
Age 42 (1)
|
|
|
Vice PresidentBusiness Process Outsourcing
|
|
July 2, 2007
|
Vice PresidentBusiness Process Outsourcing and Non-Utility
Operations of WGL Holdings, Inc.
|
|
July 2, 2007
|
Vice PresidentPerformance Improvement
|
|
October 1, 2005
|
Vice PresidentPerformance Improvement and Non-Utility
Operations of WGL Holdings, Inc.
|
|
October 1, 2005
|
Division HeadFinance Support and Non-Utility
Businesses
|
|
January 5, 2004
|
Division HeadAchieving Operational Excellence
|
|
December 12, 2002
|
|
|
|
Adrian P. Chapman,
Age 51
|
|
|
Vice PresidentOperations, Regulatory Affairs and Energy
Acquisition
|
|
October 1, 2005
|
Vice PresidentRegulatory Affairs and Energy Acquisition
|
|
March 31, 1999
|
|
|
|
James H. DeGraffenreidt, Jr.,
Age 55 (1)
|
|
|
Chairman of the Board and Chief Executive Officer
|
|
October 1, 2001
|
Chairman of the Board and Chief Executive Officer of WGL
Holdings, Inc.
|
|
October 1, 2001
|
|
|
|
Marcellous P. Frye, Jr.,
Age 41 (3)
|
|
|
Vice PresidentSupport Services
|
|
March 21, 2008
|
Division HeadInformation Technology
|
|
July 2, 2007
|
DirectorDevelopment and ITS Engineering
|
|
August 15, 2005
|
|
|
|
Shelley C. Jennings,
Age 60 (1)
|
|
|
Treasurer of WGL Holdings, Inc.
|
|
January 13, 2000
|
Treasurer
|
|
March 31, 1999
|
|
|
|
Terry D. McCallister,
Age 52 (1)
|
|
|
President and Chief Operating Officer
|
|
October 1, 2001
|
President and Chief Operating Officer of WGL Holdings, Inc.
|
|
October 1, 2001
|
|
|
|
Mark P. OFlynn,
Age 58 (1)
|
|
|
Controller
|
|
February 18, 2002
|
Controller of WGL Holdings, Inc.
|
|
February 18, 2002
|
|
|
|
Douglas V. Pope,
Age 63 (1)
|
|
|
Secretary of WGL Holdings, Inc.
|
|
January 13, 2000
|
Secretary
|
|
July 25, 1979
|
21
WGL Holdings, Inc.
Washington Gas Light Company
Part I
|
|
|
Executive Officers
|
|
|
Date Elected or
|
Name, Age and Position with the
registrants
|
|
Appointed
|
|
|
|
|
|
Roberta W. Sims,
Age 54
|
|
|
Vice PresidentCorporate Relations and Communications
|
|
January 31, 1996
|
|
|
|
Douglas A. Staebler,
Age 48 (4)
|
|
|
Vice PresidentEngineering and Construction
|
|
October 31, 2006
|
Division HeadEngineering
|
|
July 25, 2005
|
|
|
|
William Zeigler, Jr.,
Age 63
|
|
|
Vice PresidentHuman Resources and Organizational
Development
|
|
February 1, 2004
|
Division HeadOrganizational Development
|
|
February 10, 2003
|
|
|
|
|
(1)
|
Executive Officer of both WGL
Holdings, Inc. and Washington Gas Light Company.
|
|
(2)
|
Mr. Ammann was previously
employed by Southern Connecticut Gas Company and Connecticut
Natural Gas Corporation, subsidiaries of Energy East
Corporation, where he served as Senior Vice President, Finance
and Administration. Prior to working for Southern Connecticut
Gas Company, Mr. Ammann held various audit and consulting
positions for Deloitte & Touche in
Washington, D.C. and Detroit, Michigan.
|
|
(3)
|
Mr. Frye was previously
employed by Global eXchange Services (formerly known as GE
Global eXchange Services) based in Gaithersburg, Maryland, where
he served as Vice President for Global Application Development.
Mr. Frye also held various leadership positions for General
Electric Information Services in Rockville, Maryland.
|
|
(4)
|
Mr. Staebler was previously
employed by NUI CorporationElizabethtown Gas where he held
various positions in engineering, operations and construction
and maintenance.
|
22
WGL
Holdings, Inc.
Part II
Item 5. Market for Registrants Common Equity, Related
Stockholder Matters and Issuer Purchases of Equity Securities
ITEM 5. MARKET
FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES
At October 31, 2008, WGL Holdings had 13,403 common
shareholders of record. During fiscal years 2008 and 2007, WGL
Holdings common stock was listed for trading on the New
York Stock Exchange and was shown as WGL Hold or
WGL Hldgs in newspapers. We did not purchase any of
our outstanding common stock during fiscal years 2008 and 2007.
The table below shows quarterly price ranges and quarterly
dividends paid for fiscal years ended September 30, 2008
and 2007.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock Price Range and Dividends Paid
|
|
|
|
|
|
|
|
|
|
Dividends Paid
|
|
|
Dividend
|
|
|
|
High
|
|
|
Low
|
|
|
Per Share
|
|
|
Payment Date
|
Fiscal Year 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fourth quarter
|
|
|
$
|
36.04
|
|
|
|
$
|
31.10
|
|
|
|
$
|
0.3550
|
|
|
|
|
08/1/08
|
|
Third quarter
|
|
|
|
36.22
|
|
|
|
|
31.84
|
|
|
|
|
0.3550
|
|
|
|
|
05/1/08
|
|
Second quarter
|
|
|
|
34.62
|
|
|
|
|
30.26
|
|
|
|
|
0.3425
|
|
|
|
|
02/1/08
|
|
First quarter
|
|
|
|
35.08
|
|
|
|
|
31.82
|
|
|
|
|
0.3425
|
|
|
|
|
11/1/07
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fourth quarter
|
|
|
$
|
35.01
|
|
|
|
$
|
29.79
|
|
|
|
$
|
0.3425
|
|
|
|
|
08/1/07
|
|
Third quarter
|
|
|
|
35.91
|
|
|
|
|
31.82
|
|
|
|
|
0.3425
|
|
|
|
|
05/1/07
|
|
Second quarter
|
|
|
|
33.00
|
|
|
|
|
30.37
|
|
|
|
|
0.3375
|
|
|
|
|
02/1/07
|
|
First quarter
|
|
|
|
33.55
|
|
|
|
|
31.16
|
|
|
|
|
0.3375
|
|
|
|
|
11/1/06
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
23
WGL
Holdings, Inc.
Washington Gas Light Company
Part II
Item 6. Selected Financial Data
ITEM 6. SELECTED
FINANCIAL DATA
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands, except per share data)
|
|
Years Ended September 30,
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
|
SUMMARY OF EARNINGS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Utility
|
|
$
|
1,536,443
|
|
|
$
|
1,497,274
|
|
|
$
|
1,622,510
|
|
|
$
|
1,379,390
|
|
|
$
|
1,267,948
|
|
Non-utility
|
|
|
1,091,751
|
|
|
|
1,148,734
|
|
|
|
1,015,373
|
|
|
|
783,953
|
|
|
|
798,495
|
|
|
Total operating revenues
|
|
$
|
2,628,194
|
|
|
$
|
2,646,008
|
|
|
$
|
2,637,883
|
|
|
$
|
2,163,343
|
|
|
$
|
2,066,443
|
|
|
Income from continuing operations
|
|
$
|
116,523
|
|
|
$
|
107,900
|
|
|
$
|
94,694
|
|
|
$
|
106,072
|
|
|
$
|
99,595
|
|
Net income applicable to common stock
|
|
$
|
116,523
|
|
|
$
|
107,900
|
|
|
$
|
87,578
|
|
|
$
|
103,493
|
|
|
$
|
96,637
|
|
Earnings per average common share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
$
|
2.35
|
|
|
$
|
2.19
|
|
|
$
|
1.94
|
|
|
$
|
2.18
|
|
|
$
|
2.05
|
|
Net income applicable to common stock
|
|
$
|
2.35
|
|
|
$
|
2.19
|
|
|
$
|
1.80
|
|
|
$
|
2.13
|
|
|
$
|
1.99
|
|
Diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
$
|
2.33
|
|
|
$
|
2.19
|
|
|
$
|
1.94
|
|
|
$
|
2.16
|
|
|
$
|
2.04
|
|
Net income applicable to common stock
|
|
$
|
2.33
|
|
|
$
|
2.19
|
|
|
$
|
1.79
|
|
|
$
|
2.11
|
|
|
$
|
1.98
|
|
CAPITALIZATION-YEAR END
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common shareholders equity
|
|
$
|
1,047,564
|
|
|
$
|
980,767
|
|
|
$
|
921,807
|
|
|
$
|
893,992
|
|
|
$
|
853,424
|
|
Washington Gas Light Company preferred stock
|
|
|
28,173
|
|
|
|
28,173
|
|
|
|
28,173
|
|
|
|
28,173
|
|
|
|
28,173
|
|
Long-term debt, excluding maturities
|
|
|
603,738
|
|
|
|
616,419
|
|
|
|
576,139
|
|
|
|
584,150
|
|
|
|
590,156
|
|
|
Total capitalization
|
|
$
|
1,679,475
|
|
|
$
|
1,625,359
|
|
|
$
|
1,526,119
|
|
|
$
|
1,506,315
|
|
|
$
|
1,471,753
|
|
|
OTHER FINANCIAL DATA
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assetsyear-end
|
|
$
|
3,243,543
|
|
|
$
|
3,046,361
|
|
|
$
|
2,791,406
|
|
|
$
|
2,601,081
|
|
|
$
|
2,506,254
|
|
Property, plant and
equipment-netyear-end
|
|
$
|
2,208,302
|
|
|
$
|
2,150,441
|
|
|
$
|
2,067,895
|
|
|
$
|
1,969,016
|
|
|
$
|
1,914,420
|
|
Capital expenditures
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrual basis
(a)
|
|
$
|
131,433
|
|
|
$
|
158,101
|
|
|
$
|
161,496
|
|
|
$
|
124,014
|
|
|
$
|
113,285
|
|
Cash basis adjustments
|
|
|
3,528
|
|
|
|
6,430
|
|
|
|
(1,739
|
)
|
|
|
(11,246
|
)
|
|
|
(4,897
|
)
|
|
Cash basis
|
|
$
|
134,961
|
|
|
$
|
164,531
|
|
|
$
|
159,757
|
|
|
$
|
112,768
|
|
|
$
|
108,388
|
|
|
Long-term obligationsyear-end
|
|
$
|
603,738
|
|
|
$
|
616,419
|
|
|
$
|
576,139
|
|
|
$
|
584,150
|
|
|
$
|
590,156
|
|
COMMON STOCK DATA
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Annualized dividends per share
|
|
$
|
1.42
|
|
|
$
|
1.37
|
|
|
$
|
1.35
|
|
|
$
|
1.33
|
|
|
$
|
1.30
|
|
Dividends declared per share
|
|
$
|
1.4075
|
|
|
$
|
1.3650
|
|
|
$
|
1.3450
|
|
|
$
|
1.3225
|
|
|
$
|
1.2950
|
|
Closing price
|
|
$
|
32.45
|
|
|
$
|
33.89
|
|
|
$
|
31.34
|
|
|
$
|
32.13
|
|
|
$
|
28.26
|
|
Book value per shareyear-end
|
|
$
|
20.99
|
|
|
$
|
19.89
|
|
|
$
|
18.86
|
|
|
$
|
18.36
|
|
|
$
|
17.54
|
|
Return on average common equity
|
|
|
11.5
|
%
|
|
|
11.3
|
%
|
|
|
9.6
|
%
|
|
|
11.8
|
%
|
|
|
11.6
|
%
|
Dividend yield on book value
|
|
|
6.8
|
%
|
|
|
6.9
|
%
|
|
|
7.2
|
%
|
|
|
7.2
|
%
|
|
|
7.4
|
%
|
Dividend payout ratio
|
|
|
59.9
|
%
|
|
|
62.3
|
%
|
|
|
74.7
|
%
|
|
|
62.1
|
%
|
|
|
65.1
|
%
|
Shares outstandingyear-end (thousands)
|
|
|
49,917
|
|
|
|
49,316
|
|
|
|
48,878
|
|
|
|
48,704
|
|
|
|
48,653
|
|
UTILITY GAS SALES AND DELIVERIES
(thousands of
therms)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gas sold and delivered
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential firm
|
|
|
627,527
|
|
|
|
648,701
|
|
|
|
593,594
|
|
|
|
625,251
|
|
|
|
629,728
|
|
Commercial and industrial
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Firm
|
|
|
199,363
|
|
|
|
203,962
|
|
|
|
213,997
|
|
|
|
222,587
|
|
|
|
226,407
|
|
Interruptible
|
|
|
6,543
|
|
|
|
5,275
|
|
|
|
6,185
|
|
|
|
7,809
|
|
|
|
7,626
|
|
|
Total gas sold and delivered
|
|
|
833,433
|
|
|
|
857,938
|
|
|
|
813,776
|
|
|
|
855,647
|
|
|
|
863,761
|
|
|
Gas delivered for others
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Firm
|
|
|
433,991
|
|
|
|
433,420
|
|
|
|
403,812
|
|
|
|
434,099
|
|
|
|
454,549
|
|
Interruptible
|
|
|
256,626
|
|
|
|
267,305
|
|
|
|
251,003
|
|
|
|
279,924
|
|
|
|
268,483
|
|
Electric generation
|
|
|
92,176
|
|
|
|
111,950
|
|
|
|
108,315
|
|
|
|
73,874
|
|
|
|
41,052
|
|
|
Total gas delivered for others
|
|
|
782,793
|
|
|
|
812,675
|
|
|
|
763,130
|
|
|
|
787,897
|
|
|
|
764,084
|
|
|
Total utility gas sales and deliveries
|
|
|
1,616,226
|
|
|
|
1,670,613
|
|
|
|
1,576,906
|
|
|
|
1,643,544
|
|
|
|
1,627,845
|
|
|
OTHER STATISTICS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Active customer metersyear-end
|
|
|
1,053,032
|
|
|
|
1,046,201
|
|
|
|
1,031,916
|
|
|
|
1,012,105
|
|
|
|
990,062
|
|
New customer meters added
|
|
|
12,962
|
|
|
|
19,373
|
|
|
|
24,693
|
|
|
|
26,682
|
|
|
|
29,438
|
|
Heating degree daysactual
|
|
|
3,458
|
|
|
|
3,955
|
|
|
|
3,710
|
|
|
|
4,023
|
|
|
|
4,024
|
|
Weather percent colder (warmer) than normal
|
|
|
(8.7
|
)%
|
|
|
3.7
|
%
|
|
|
(2.5
|
)%
|
|
|
5.9
|
%
|
|
|
6.1
|
%
|
|
|
|
(a)
|
Excludes Allowance for Funds
Used During Construction and prepayments associated with capital
projects. Includes accruals for capital expenditures and other
non-cash additions.
|
24
WGL
Holdings, Inc.
Washington Gas Light Company
Part II
Item 7. Managements Discussion and Analysis of
Financial Condition and Results of Operations
ITEM 7. MANAGEMENTS
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
INTRODUCTION
This
Managements Discussion and Analysis of Financial
Condition and Results of Operations
(Managements
Discussion) analyzes the financial condition, results of
operations and cash flows of WGL Holdings, Inc. (WGL Holdings)
and its subsidiaries. It also includes managements
analysis of past financial results and potential factors that
may affect future results, potential future risks and approaches
that may be used to manage them. Except where the content
clearly indicates otherwise, WGL Holdings,
we, us or our refers to the
holding company or the consolidated entity of WGL Holdings and
all of its subsidiaries.
Managements Discussion is divided into the following two
major sections:
|
|
|
|
|
WGL Holdings
This section describes the financial
condition and results of operations of WGL Holdings and its
subsidiaries on a consolidated basis. It includes discussions of
our regulated and unregulated operations. WGL Holdings
operations are derived from the results of Washington Gas Light
Company (Washington Gas) and the results of our non-utility
operations.
|
|
|
|
Washington Gas
This section describes the financial
condition and results of operations of Washington Gas, a wholly
owned subsidiary that comprises the majority of our regulated
utility segment.
|
Both of the major sections of Managements
DiscussionWGL Holdings and Washington Gasare
designed to provide an understanding of our operations and
financial performance. Managements Discussion also should
be read in conjunction with the respective companys
financial statements and the combined Notes to Consolidated
Financial Statements.
Unless otherwise noted, earnings per share amounts are presented
on a diluted basis, and are based on weighted average common and
common equivalent shares outstanding.
25
WGL Holdings, Inc.
Washington Gas Light Company
Part II
Item 7. Managements Discussion and Analysis of
Financial Condition and Results of Operations (continued)
Managements
Discussion Table of Contents
|
|
|
|
|
|
|
Page
|
|
|
|
|
26
|
|
|
|
|
28
|
|
|
|
|
32
|
|
|
|
|
35
|
|
|
|
|
|
|
|
|
|
37
|
|
|
|
|
44
|
|
|
|
|
50
|
|
|
|
|
53
|
|
|
|
|
55
|
|
|
|
|
|
|
|
|
|
60
|
|
|
|
|
62
|
|
|
|
|
62
|
|
EXECUTIVE
OVERVIEW
Introduction
WGL Holdings, through its wholly owned subsidiaries, sells and
delivers natural gas and provides a variety of energy-related
products and services to customers primarily in the District of
Columbia and the surrounding metropolitan areas in Maryland and
Virginia. Our core subsidiary, Washington Gas, engages in the
delivery and sale of natural gas that is regulated by regulatory
commissions in the District of Columbia, Maryland and Virginia.
Through the wholly owned, unregulated subsidiaries of Washington
Gas Resources Corporation (Washington Gas Resources), we also
offer energy-related products and services. In response to
changes in federal and state regulation, we offer competitively
priced natural gas and electricity to customers through
Washington Gas Energy Services (WGEServices), our unregulated
retail energy-marketing subsidiary.
WGL Holdings has three operating segments that are described
below:
|
|
|
|
|
regulated utility;
|
|
|
|
retail energy-marketing and
|
|
|
|
design-build energy systems.
|
Transactions that are not significant enough on a stand-alone
basis to warrant treatment as an operating segment, and that do
not fit into one of our three operating segments, are
accumulated and reported in the category Other
Activities.
Regulated Utility.
With approximately
93 percent of our consolidated total assets, the regulated
utility segment consists of Washington Gas and Hampshire Gas
Company (Hampshire). Washington Gas, a wholly owned subsidiary
of WGL Holdings, delivers natural gas to retail customers in
accordance with tariffs approved by the regulatory commissions
that have jurisdiction over Washington Gass rates.
Washington Gas also sells natural gas to customers who have not
elected to purchase natural gas from unregulated third-party
marketers. In its rates charged to utility customers, Washington
Gas generally does not earn a profit or incur a loss associated
with the sale of the natural gas commodity because regulation
requires Washington Gas to bill these customers for the natural
gas commodity at the same cost that Washington Gas incurs.
However, Washington Gas has an asset optimization program which
utilizes Washington Gass storage and transportation
capacity resources during periods when not being used to
physically serve utility customers by entering into
commodity-related physical and financial contracts with third
parties with the objective of deriving a profit to be shared
with its utility customers (refer to the section entitled
Market Risk
for a further discussion of our
asset optimization program). Unless otherwise noted, therm
deliveries shown related to Washington Gas or the regulated
utility segment do not include therms delivered related to our
asset optimization program.
26
WGL Holdings, Inc.
Washington Gas Light Company
Part II
Item 7. Managements Discussion and Analysis of
Financial Condition and Results of Operations (continued)
Hampshire, a wholly owned subsidiary of WGL Holdings, is
regulated by the Federal Energy Regulatory Commission (FERC).
Hampshire owns full and partial interests in, and operates
underground natural gas storage facilities including pipeline
delivery facilities located in and around Hampshire County, West
Virginia. Washington Gas purchases all of the storage services
of Hampshire and includes the cost of these services in the
bills sent to its customers. Hampshire operates under a
pass-through cost of service-based tariff approved
by the FERC, and adjusts its billing rates to Washington Gas on
a periodic basis to account for changes in its investment in
utility plant and associated expenses.
Retail Energy-Marketing.
The retail
energy-marketing segment consists of the operations of
WGEServices, a wholly-owned subsidiary of Washington Gas
Resources. WGEServices competes with regulated utilities and
other unregulated third-party marketers to sell natural gas
and/or
electricity directly to residential, commercial and industrial
customers in Maryland, Virginia, Delaware and the District of
Columbia. WGEServices does not currently own or operate any
natural gas or electric generation, production, transmission or
distribution assets. Rather, it contracts for its supply needs
and buys and resells natural gas and electricity with the
objective of earning a profit through competitively-priced
contracts with end-users. These commodities are delivered to
retail customers through the distribution systems owned by
regulated utilities such as Washington Gas or other unaffiliated
natural gas or electric utilities. WGEServices is also exploring
the expansion of its renewable energy and energy conservation
product and service offerings. This expansion may include the
ownership of renewable energy producing assets.
Design-Build Energy Systems.
Our
design-build energy systems segment, which consists of the
operations of Washington Gas Energy Systems, Inc. (WGESystems),
provides design-build energy efficient and sustainable solutions
to government and commercial clients. WGESystems focuses on
upgrading the mechanical, electrical, water and energy-related
systems of large government and commercial facilities by
implementing both traditional as well as alternative energy
technologies, primarily in the District of Columbia, Maryland
and Virginia. Previously, this segment was referred to as the
heating, ventilating and air conditioning (HVAC)
segment; however, the title design-build energy
systems more accurately reflects the evolving business
activities of this segment. The structure of this segment has
not changed from prior years and no amounts have been restated
as a result of this title change.
Refer to the
Business
section under Item 1 of this
report for a further discussion of our regulated utility and
non-utility business segments. For a further discussion of our
financial performance by operating segment, refer to
Note 16 of the Notes to Consolidated Financial Statements.
Key
Indicators of Financial Condition and Operating
Performance
We have determined that the following are key indicators for
monitoring our financial condition and operating performance:
Net Income.
In our review of overall
operating results for both WGL Holdings on a consolidated basis
and for each segment, we analyze net income as calculated under
Generally Accepted Accounting Principles in the United States of
America (GAAP).
Return on Average Common Equity.
This
measure is calculated by dividing twelve months ended net income
by average common shareholders equity. For Washington Gas,
we compare the actual return on common equity with the return on
common equity that is allowed to be earned by regulators and the
return on equity that is necessary for us to compensate
investors sufficiently and be able to continue to attract
capital.
Common Equity Ratio.
This ratio is
calculated by dividing total common shareholders equity by
the sum of common shareholders equity, preferred stock and
long-term debt (including current maturities). Maintaining this
ratio in the mid-50 percent range affords us financial
flexibility and access to long-term capital at relatively low
costs. Refer to the section entitled
Liquidity and
Capital ResourcesGeneral Factors Affecting Liquidity
for additional comments about our capital structure.
Utility Net Revenues and Gross
Margins.
We analyze the operating results of
the regulated utility segment using utility net revenues and the
retail energy-marketing segment using gross margins. Both
utility net revenues and gross margins are calculated as
revenues less the associated cost of energy and applicable
revenue taxes. We believe utility net revenues is a better
measure to analyze profitability than gross operating revenues
or gross cost of energy for our regulated utility segment since
the cost of the natural gas commodity and revenue taxes are
generally included in the rates that Washington Gas charges to
customers as reflected in operating revenues. Accordingly,
changes in the cost of gas and revenue taxes associated with
sales made to customers generally have no direct effect on
utility net revenues, operating income or net income. We
consider gross margins to be a better reflection of
profitability than gross revenues or gross energy costs for our
retail energy-marketing segment since gross margins are a direct
measure of the success of our core strategy for the sale of
natural gas and electricity.
27
WGL Holdings, Inc.
Washington Gas Light Company
Part II
Item 7. Managements Discussion and Analysis of
Financial Condition and Results of Operations (continued)
You should not consider either utility net revenues or gross
margins an alternative to, or a more meaningful indicator of,
our operating performance than operating income or net income.
Our measures of utility net revenues and gross margins may not
be comparable to similarly titled measures of other companies.
Refer to the sections entitled
Results of
OperationsRegulated Utility Operating Results
and
Results of OperationsNon-Utility
Operating Results
for the calculation of utility net
revenues and gross margins, respectively, as well as a
reconciliation to operating income and net income for both
segments.
PRIMARY FACTORS
AFFECTING WGL HOLDINGS AND WASHINGTON GAS
The following is a summary discussion of the primary factors
that affect the operations
and/or
financial performance of our regulated and unregulated
businesses. Refer to the sections entitled
Business
and
Risk Factors
under Item 1 and Item 1A, respectively, of this
report for additional discussion of these and other factors that
affect the operations
and/or
financial performance of WGL Holdings and Washington Gas.
Weather
Conditions and Weather Patterns
Washington Gas.
Washington Gass
operations are seasonal, with a significant portion of its
revenues derived from the delivery of natural gas to residential
and commercial heating customers during the winter heating
season. Weather conditions directly influence the volume of
natural gas delivered by Washington Gas. Weather patterns tend
to be more volatile during shoulder months within
our fiscal year in which Washington Gas is going into or coming
out of the primary portion of its winter heating season. During
the shoulder months within quarters ending December 31
(particularly in October and November) and within quarters
ending June 30 (particularly in April and May), customer heating
usage may not correlate highly with historical levels or with
the level of heating degree days (HDDs) that occur, particularly
when weather patterns experienced are not consistently cold or
warm.
Washington Gass rates are determined on the basis of
expected normal weather conditions. Washington Gas has a weather
protection strategy that is designed to neutralize the estimated
negative financial effects of
warmer-than-normal
weather. Refer to the section entitled
Market
RiskWeather Risk
for a further discussion of
Washington Gass weather protection strategies.
WGEServices.
The financial results of
our retail energy-marketing subsidiary, WGEServices, also are
affected by deviations in weather from normal levels and
abnormal customer usage during the shoulder months described
above. Since WGEServices sells both natural gas and electricity,
WGEServices financial results may fluctuate due to
unpredictable deviations in weather during the winter heating
and summer cooling seasons. WGEServices purchases weather
derivatives to help manage this risk. Refer to the section
entitled
Market RiskWeather Risk
for a
further discussion of WGEServices weather derivatives.
Regulatory
Environment and Regulatory Decisions
Washington Gas is regulated by the Public Service Commission of
the District of Columbia (PSC of DC), the Public Service
Commission of Maryland (PSC of MD) and the Virginia State
Corporation Commission (SCC of VA). These regulatory commissions
set the rates in their respective jurisdictions that Washington
Gas can charge customers for its rate-regulated services.
Changes in these rates as ordered by regulatory commissions
affect Washington Gass financial performance.
Washington Gas expects that regulatory commissions will continue
to set the prices and terms for delivery service that give it an
opportunity to earn a just and reasonable rate of return on the
capital invested in its distribution system and to recover
reasonable operating expenses.
Natural
Gas Supply and Pipeline Transportation and Storage
Capacity
Natural
Gas Supply and Capacity Requirements
Washington Gas is responsible for acquiring sufficient natural
gas supplies, interstate pipeline capacity and storage capacity
to meet customer requirements. As such, Washington Gas must
contract for both reliable and adequate supplies and delivery
capacity to its distribution system, while considering:
(i)
the dynamics of the interstate pipeline and
storage capacity market;
(ii)
its own on-system
natural gas peaking facilities and
(iii)
the
characteristics of its customer base.
Depleting available pipeline and storage capacity in relation to
the corresponding increase in demand is a business issue for
local distribution companies, such as Washington Gas.
Historically, Washington Gass customer base has grown at
an annual rate of approximately two percent, and this rate is
expected to continue. To help maintain the adequacy of pipeline
and storage capacity for
28
WGL Holdings, Inc.
Washington Gas Light Company
Part II
Item 7. Managements Discussion and Analysis of
Financial Condition and Results of Operations (continued)
its growing customer base, Washington Gas has contracted with
various interstate pipeline and storage companies to expand its
transportation and storage capacity services to Washington Gas.
These capacity expansion projects are expected to be placed into
service during fiscal years
2008-2014.
Additionally, Washington Gas anticipates enhancing its peaking
capacity by constructing a liquefied natural gas (LNG) peaking
facility that is currently expected to be completed and placed
in service by the
2012-2013
winter heating season (refer to the section entitled
Liquidity and Capital ResourcesCapital
Expenditures
). Washington Gas will continue to monitor
other opportunities to acquire or participate in obtaining
additional pipeline and storage capacity that will support
customer growth and improve or maintain the high level of
service expected by its customer base.
Diversity
of Natural Gas Supply
Washington Gas.
An objective of
Washington Gass supply sourcing strategy is to diversify
receipts from multiple production areas to meet all firm
customers natural gas supply requirements. This strategy
is designed to protect Washington Gass receipt of supply
from being curtailed by possible financial difficulties of a
single supplier, natural disasters and other unforeseen events.
WGEServices.
WGEServices diversifies
its wholesale supplier base in order to avoid the negative
impacts of relying on any single provider for its natural gas
supply. To supplement WGEServices natural gas supplies
during periods of high customer demand, WGEServices maintains
gas storage inventory in storage facilities that are assigned by
natural gas utilities such as Washington Gas.
Volatility
of Natural Gas Prices
Volatility of natural gas prices does impact customer usage and
has different short-term and long-term effects on our business.
The impact is also different between the regulated utility
segment and the non-utility retail energy-marketing segment as
described below.
Washington Gas.
Under its regulated gas
cost recovery mechanisms, Washington Gas records cost of gas
expense equal to the cost of gas that is recovered in revenues
from customers for each period reported. An increase in the cost
of gas due to an increase in the purchase price of the natural
gas commodity generally has no direct effect on Washington
Gass net income. However, to the extent Washington Gas
does not have regulatory mechanisms in place to mitigate the
indirect effects of higher gas prices, its net income may be
decreased for such factors as:
(i)
lower natural gas
consumption caused by customer conservation,
(ii)
increased short-term interest expense to
finance higher accounts receivable balance and
(iii)
higher expenses for uncollectible accounts. A
Revenue Normalization Adjustment (RNA) billing mechanism in
Maryland and other regulatory mechanisms in both Maryland and
Virginia help to mitigate these effects on Washington Gass
revenue and net income. Increases in the price of natural gas
also can affect our operating cash flows. Long term impacts of
volatile natural gas prices relate to the relative cost of
natural gas service versus the availability of substitute
products such as electricity, propane and fuel oil.
WGEServices.
WGEServices may be
negatively affected by the indirect effects of significant
increases or decreases in the wholesale price of natural gas.
WGEServices risk management policies and procedures are
designed to minimize the risk that WGEServices purchase
commitments and the related sales commitments do not closely
match (refer to the section entitled
Market
Risk
for a further discussion of Washington Gass
and WGEServices mitigation of commodity price risk).
Additionally, in the short-term, higher natural gas prices may
increase the costs associated with uncollectible accounts,
borrowing costs, certain fees paid to public service commissions
and other costs. To the extent that these costs cannot be
recovered from retail customers in higher rates due to
competitive factors, WGEServices operating results would
be negatively affected. In the long-term, natural gas sales for
WGEServices are subject to the same impacts of volatile natural
gas prices as described above for Washington Gas.
Non-Weather
Related Changes in Natural Gas Consumption Patterns
Natural gas supply requirements 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 in response to:
(i)
more volatile and
higher natural gas prices, as discussed above,
(ii)
customers replacement of older, less
efficient gas appliances with more efficient appliances and
(iii)
a decline in the economy in the region in
which we operate. In each jurisdiction in which Washington Gas
operates, changes in customer usage profiles have been reflected
in recent rate case proceedings where rates have been adjusted
to reflect current customer usage. In the District of Columbia,
changes in customer usage by existing customers that occur
subsequent to its most recent rate case proceeding will have the
effect of reducing revenues, which may be offset by the
favorable effect of adding new customers. Under the RNA
mechanism in Maryland, changes in customer usage by existing
customers that occur subsequent to recent rate case proceedings
in the Maryland jurisdiction generally will not reduce revenues
because the
29
WGL Holdings, Inc.
Washington Gas Light Company
Part II
Item 7. Managements Discussion and Analysis of
Financial Condition and Results of Operations (continued)
RNA mechanism stabilizes the level of delivery charge revenues
received from customers. In Virginia, a declining block rate
structure partially mitigates the income statement effects of
declines in consumption.
Maintaining
the Safety and Reliability of the Natural Gas Distribution
System
Maintaining and improving the public safety and reliability of
Washington Gass natural gas distribution system is our
highest priority which provides benefits to both customers and
investors through lower costs and improved customer service.
Washington Gas continually refines its safety practices, with a
particular focus on design, construction, maintenance,
operation, replacement, inspection and monitoring practices.
Operational issues affecting the public safety and reliability
of Washington Gass natural gas distribution system that
are not addressed within a timely and adequate manner could
significantly and adversely affect our future earnings and cash
flows, as well as result in a loss of customer confidence.
Washington Gas is experiencing operational issues associated
with the receipt of vaporized LNG from the Cove Point LNG
terminal owned by Dominion Cove Point LNG, LP and Dominion
Transmission Inc. (collectively Dominion), and a planned
expansion of this terminal. Refer to the section entitled
Operating Issues Related To Cove Point Natural Gas
Supply
for a discussion of the specific operational
issues involved.
Competitive
Environment
Washington Gas.
Washington Gas faces
competition based on customers preference for natural gas
compared to other energy products, and the comparative prices of
those products. The most significant product competition occurs
between natural gas and electricity in the residential market.
Changes in the competitive position of natural gas relative to
electricity and other energy products have the potential of
causing a decline in the number of future natural gas customers.
At present, Washington Gas has seen no significant evidence that
changes in the competitive position of natural gas has
contributed to such a decline.
The residential market generates a significant portion of
Washington Gass net income. In its service territory,
Washington Gas continues to attract the majority of the new
residential construction market. Consumers continuing
preference for natural gas allows Washington Gas to maintain a
strong market presence.
In each of the jurisdictions served by Washington Gas,
regulators and utilities have implemented customer choice
programs to purchase natural gas. These programs allow customers
the choice of purchasing their natural gas from unregulated
third-party marketers, rather than from the local utility as
part of a bundled service. There is no effect on Washington
Gass net income when customers purchase their natural gas
commodity from unregulated third-party marketers because
Washington Gas charges its customers the cost of gas without any
mark-up.
WGEServices.
Our unregulated retail
energy-marketing subsidiary, WGEServices, competes with
regulated utilities and other unregulated third-party marketers
to sell the natural gas and electric commodity to customers.
Marketers of these commodities compete largely on price;
therefore, gross margins (representing revenues less costs of
energy) are relatively small. WGEServices is exposed to credit
and market risks associated with both its natural gas and
electric supply (refer to the sections entitled
Credit
Risk and Market Risk
for a further
discussion of these risk exposures and WGEServices
management of them).
WGEServices electric sales opportunities are significantly
affected by the price for Standard Offer Service (SOS) offered
by electric utilities. These rates, often identified by customer
class, are periodically reset based on the regulatory
requirements in each jurisdiction. Future opportunities to add
new electric customers will be dependent on the competitiveness
of the relationship between WGEServices service rates, SOS
rates offered by local electric utilities and prices offered by
other energy marketers.
Environmental
Matters
We are subject to federal, state and local laws and regulations
related to environmental matters. These evolving laws and
regulations may require expenditures over a long timeframe to
control environmental effects. It is our position that, at this
time, the appropriate remediation is being undertaken at all the
relevant sites. Refer to Note 13 of the Notes to
Consolidated Financial Statements for a further discussion of
these matters.
30
WGL Holdings, Inc.
Washington Gas Light Company
Part II
Item 7. Managements Discussion and Analysis of
Financial Condition and Results of Operations (continued)
Industry
Consolidation
In recent years, the energy industry has seen a number of
consolidations, combinations, disaggregations and strategic
alliances. Consolidation will present combining entities with
the challenges of remaining focused on the customer and
integrating different organizations. Others in the energy
industry are discontinuing operations in certain portions of the
energy industry or divesting portions of their business and
facilities.
From time to time, we perform studies and, in some cases, hold
discussions regarding utility and energy-related investments and
strategic transactions with other companies. The ultimate effect
on us of any such investments and transactions that may occur
cannot be determined at this time.
Economic
Conditions and Interest Rates
We operate in one of the largest regional economies in the
nation, which includes several of the nations wealthiest
counties. This region has allowed Washington Gas to expand its
regulated delivery service customer base at a relatively stable
rate of growth. In addition, this region provides an active
market for our subsidiaries to market natural gas, electricity
and other energy-related products and services.
The recent decline in the economy in late 2007 and 2008 has had
the result of increasing our uncollectible accounts expense and
slowing our rate of growth. Additionally, a continued decline in
the economy may have further effects on both WGL Holdings and
Washington Gas. These effects may include:
(i)
increased levels of customer conservation;
(ii)
further increases in the levels of
uncollectible accounts expense and
(iii)
further
declines in our rate of growth and related capital expenditures.
Refer to
Non-Weather Related Changes in Natural Gas
Consumption Patterns
, above, for a discussion of
regulatory mechanisms in place to mitigate the effects of
customer conservation at Washington Gas. A sustained economic
decline could further result in a reduction in consumer demand
for all goods and services leading to a deflationary economic
environment, including a lack of liquidity in the capital
markets. Refer to
Inflation/Deflation
below
for a discussion of the regulatory impacts of deflation and the
section entitled
General Factors Affecting
Liquidity
for a discussion of our access to capital
markets. We expect that the potential effects of a decline in
the economy would be partially mitigated for us by the levels of
government spending and by the diversified economic base of our
region, as well as the relatively low level of unemployment and
high median incomes of the customers in our service territory.
Additionally, this decline in the economy and its affect on the
return on financial assets has resulted in decreases, and may
lead to further decreases, in the values of the assets
underlying our pension and other post-retirement plans, which
may result in an increase in expense as well as increased
funding requirements.
We require short-term debt financing to effectively manage our
working capital needs and long-term debt financing to support
the capital expenditures of Washington Gas. A rise in interest
expense paid without the timely recognition of the higher cost
of debt in the utility rates charged by Washington Gas to its
customers could adversely affect future earnings. A rise in
short-term interest rates without the higher cost of debt being
reflected in the prices charged to customers could negatively
affect the results of operations of our retail energy-marketing
segment.
Inflation/Deflation
From time to time, Washington Gas seeks approval for rate
increases from regulatory commissions to help it manage the
effects of inflation on its capital investment and returns. The
most significant impact of inflation is on Washington Gass
replacement cost of plant and equipment. While the regulatory
commissions having jurisdiction over Washington Gass
retail rates allow depreciation only on the basis of historical
cost to be recovered in rates, we anticipate that Washington Gas
should be allowed to recover the increased costs of its
investment and earn a return thereon after replacement of the
facilities occurs. Recovery of increased capital and operating
costs could be delayed in jurisdictions where performance-based
rate structures limit Washington Gass ability to file for
rate relief.
To the extent Washington Gas experiences a sustained
deflationary economic environment, earned returns on invested
capital could rise and exceed the levels established in our
latest regulatory proceedings. If such circumstances occur
during a period or within a jurisdiction not covered by an
approved performance-based rate structure, Washington Gas could
be subject to a regulatory review to reduce future customer
rates in those jurisdictions.
31
WGL Holdings, Inc.
Washington Gas Light Company
Part II
Item 7. Managements Discussion and Analysis of
Financial Condition and Results of Operations (continued)
Use
of Business Process Outsourcing
During fiscal year 2007, Washington Gas entered into a
10-year
business process outsourcing (BPO) agreement to outsource
certain of its business processes related to human resources,
information technology, consumer services and finance
operations. While Washington Gas expects the results of the
agreement to benefit customers and shareholders, its
implementation faces certain challenges, including:
(i)
managing the transition of these business
processes to the service provider,
(ii)
achieving
the efficiencies that were originally anticipated and
(iii)
managing the effectiveness of service levels
being provided once the processes have been successfully
transferred to the service provider.
The majority of these selected business processes have been
transitioned to Accenture. All of the remaining transition items
are expected to be completed by spring of 2009. Washington Gas
has implemented a BPO Governance organization and a
comprehensive set of processes to monitor and control the cost
effectiveness and quality of services provided through the BPO.
Labor
Contracts, Including Labor and Benefit Costs
Washington Gas has five labor contracts with bargaining units
represented by three labor unions. In May 2007, Washington Gas
entered into a five-year labor contract with the Teamsters Local
Union No. 96 (Local 96), a local union affiliated with the
International Brotherhood of Teamsters. The contract covers
approximately 600 employees and is effective through
May 31, 2012. In August 2008, Washington Gas entered into a
30 month labor contract with The Office and Professional
Employees International Union Local No. 2 (A.F.L.-C.I.O.).
The contract covers approximately 120 employees and is
effective beginning October 1, 2008 through March 31,
2011. Local 96, representing union-eligible employees in the
Shenandoah Gas division of Washington Gas, has a five-year labor
contract with Washington Gas that became effective on
June 14, 2007 and expires on July 31, 2012. This
contract covers 23 employees. Additionally, Washington Gas
has two three-year labor contracts with the International
Brotherhood of Electrical Workers Local 1900 that, together,
cover approximately 32 employees. These two contracts are
in effect until August 1 2009, and November 1, 2009,
respectively. Washington Gas is subject to the terms of its
labor contracts with respect to operating practices and
compensation matters dealing with employees represented by the
various bargaining units described above.
Changes
in Accounting Principles
We cannot predict the nature or the effect of potential future
changes in accounting regulations or practices that have yet to
be issued on our operating results and financial condition. New
accounting standards could be issued by the Financial Accounting
Standards Board or the Securities and Exchange Commission (SEC)
that could change the way we record and recognize revenues,
expenses, assets and liabilities.
CRITICAL
ACCOUNTING POLICIES
Preparation of financial statements and related disclosures in
compliance with GAAP requires the selection and the application
of appropriate technical accounting rules to the relevant facts
and circumstances of our operations, as well as our use of
estimates to compile the consolidated financial statements. The
application of these accounting policies involves judgment
regarding estimates and projected outcomes of future events,
including the likelihood of success of particular regulatory
initiatives, the likelihood of realizing estimates for legal and
environmental contingencies, and the probability of recovering
costs and investments in both the regulated utility and
non-utility business segments.
We have identified the following critical accounting policies
discussed below that require our judgment and estimation, where
the resulting estimates have a material effect on the
consolidated financial statements.
Accounting
for Unbilled Revenue and Cost of Gas Recognition
For regulated deliveries of natural gas, Washington Gas reads
meters and bills customers on a monthly cycle basis. The billing
cycles for customers do not coincide with the accounting periods
used for financial reporting purposes. Washington Gas accrues
unbilled revenues for gas that has been delivered but not yet
billed at the end of an accounting period. In connection with
this accrual, Washington Gas must estimate the amount of gas
that has not been accounted for on its delivery system and must
estimate the amount of the unbilled revenue by jurisdiction and
customer class. A similar computation is made for WGEServices to
accrue unbilled revenues.
32
WGL Holdings, Inc.
Washington Gas Light Company
Part II
Item 7. Managements Discussion and Analysis of
Financial Condition and Results of Operations (continued)
Washington Gass jurisdictional tariffs contain mechanisms
that provide for the recovery of the cost of gas applicable to
firm customers. Under these mechanisms, Washington Gas
periodically adjusts its firm customers rates to reflect
increases and decreases in the cost of gas. Annually, Washington
Gas reconciles the difference between the gas costs collected
from firm customers and the cost of gas paid to suppliers.
Washington Gas defers any excess or deficiency and either
recovers it from, or refunds it to, customers over a subsequent
twelve-month period.
Accounting
for Regulatory OperationsRegulatory Assets and
Liabilities
A significant portion of our business is subject to regulation
by independent government regulators. As the regulated utility
industry continues to address competitive market issues, the
cost-of-service
regulation used to compensate Washington Gas for the cost of its
regulated operations will continue to evolve. Non-traditional
ratemaking initiatives and market-based pricing of products and
services could have additional long-term financial implications
for us. We have relied on our projection of continued regulatory
oversight of our operations in order to validate the carrying
cost of Washington Gass investment in fixed assets.
Washington Gas accounts for its regulated operations in
accordance with Statement of Financial Accounting Standards
(SFAS) No. 71,
Accounting for the Effects of Certain
Types of Regulation,
which results in differences in the
application of GAAP between regulated and unregulated
businesses. SFAS No. 71 requires the recording of
regulatory assets and liabilities for certain transactions that
would have been treated as revenue or expense in unregulated
businesses. Future regulatory changes or changes in the
competitive environment could result in WGL Holdings and
Washington Gas discontinuing the application of
SFAS No. 71 for some of its business and require the
write-off of the portion of any regulatory asset or liability
that would be no longer probable of recovery or refund. If
Washington Gas were required to discontinue the application of
SFAS No. 71 for any of its operations, it would record
a non-cash charge or credit to income for the net book value of
its regulatory assets and liabilities. Other adjustments might
also be required.
Currently available facts support both the continued application
of SFAS No. 71 for our regulatory activities and the
conclusion that all of our regulatory assets and liabilities as
of September 30, 2008 and 2007 are recoverable or
refundable through the regulatory environment.
Accounting
for Income Taxes
We recognize deferred income tax assets and liabilities for all
temporary differences between the financial statement basis and
the tax basis of assets and liabilities, including those where
regulators prohibit deferred income tax treatment for ratemaking
purposes of Washington Gas. Regulatory assets or liabilities,
corresponding to such additional deferred tax assets or
liabilities, may be recorded to the extent recoverable from or
payable to customers through the ratemaking process. Amounts
applicable to income taxes due from and due to customers
primarily represent differences between the book and tax basis
of net utility plant in service.
Effective October 1, 2007, we adopted Financial Accounting
Standards Board (FASB) Interpretation No. 48,
Accounting
for Uncertainty in Income Taxes, an interpretation of FASB
Statement No. 109
(FIN 48), as amended.
FIN 48 clarifies the accounting for uncertain events
related to income taxes recognized in financial statements. This
interpretation prescribes a recognition threshold and
measurement attribute for the financial statement recognition
and measurement of a tax position taken or expected to be taken
in a tax return. Additionally, this interpretation provides
guidance on the de-recognition and classification of a tax
position reflected within the financial statements and the
recognition of interest and penalties, accounting in interim
periods, disclosure and transition.
As of October 1, 2007 and September 30, 2008, we did
not have a liability for unrecognized tax benefits. During
fiscal year 2008, we did not recognize any expense for interest
or penalties on uncertain tax provisions, and did not have any
amounts accrued at October 1, 2007 or September 30,
2008, respectively, for the payment of interest and penalties on
uncertain tax positions.
Accounting
for Contingencies
We account for contingent liabilities utilizing
SFAS No. 5,
Accounting for Contingencies
. By
their nature, the amount of the contingency and the timing of a
contingent event are subject to our judgment of such events and
our estimates of the amounts. Actual results related to
contingencies may be difficult to predict and could differ
significantly from the estimates included in reported earnings.
For a discussion of contingencies, see Note 14 of the Notes
to Consolidated Financial Statements.
33
WGL Holdings, Inc.
Washington Gas Light Company
Part II
Item 7. Managements Discussion and Analysis of
Financial Condition and Results of Operations (continued)
Accounting
for Derivative Instruments
We enter into both physical and financial contracts for the
purchase and sale of natural gas and electricity. We designate a
majority of our physical contracts related to the purchase of
natural gas and electricity to serve our customers as
normal purchases and normal sales; therefore, they
are not subject to the
mark-to-market
accounting requirements of SFAS No. 133,
Accounting
for Derivative Instruments and Hedging Activities
, as
amended. The financial contracts and the portion of the physical
contracts that qualify as derivative instruments and are subject
to the
mark-to-market
accounting requirements are recorded on the balance sheet at
fair value. Changes in the fair value of derivative instruments
subject to SFAS No. 71 are recorded as regulatory
assets or liabilities while changes in the fair value of
derivative instruments not affected by rate regulation are
reflected in income. Washington Gas also utilizes derivative
instruments that are designed to minimize the risk of
interest-rate volatility associated with planned issuances of
Medium-Term Notes (MTNs).
Our judgment is required in determining the appropriate
accounting treatment for our derivative instruments. This
judgment involves various factors, including our ability to:
(i)
evaluate contracts and other activities as
derivative instruments subject to the accounting guidelines of
SFAS No. 133;
(ii)
determine whether or
not our derivative instruments are recoverable from or
refundable to customers in future periods and
(iii)
derive the estimated fair value of our
derivative instruments from period to period.
If available, fair value is based on actively quoted market
prices. In the absence of actively quoted market prices, we seek
indicative price information from external sources, including
broker quotes and industry publications. If pricing information
from external sources is not available, we must estimate prices
based on available historical and near-term future price
information
and/or
the
use of statistical methods and models that we developed. These
models reflect derivative pricing theory, formulated market
inputs and forward price projections for various periods.
Effective October 1, 2008, we adopted
SFAS No. 157,
Fair Value Measurements,
as
amended, which defines fair value, establishes a framework for
measuring fair value in GAAP and expands disclosures about fair
value measurements. SFAS No. 157 applies under other
accounting pronouncements that require or permit assets or
liabilities to be measured at fair value, and does not require
any new fair value measurements. Additionally, SFAS No. 157
amends Emerging Issues Task Force (EITF) Issue
No. 02-3,
Issues Involved in Accounting for Derivative Contracts Held
for Trading Purposes and Contracts Involved in Energy Trading
and Risk Management Activities
(EITF 02-3)
to require that any differences between the transaction price
and fair value of a derivative instrument at the inception of
the contract be recognized as a cumulative-effect adjustment to
the opening balance of retained earnings or other appropriate
components of net assets upon adoption of SFAS No. 157. As
a result of adoption, WGL Holdings recorded a $1.7 million
cumulative-effect adjustment to increase the opening balance of
retained earnings. Additionally, Washington Gas recorded a
$4.7 million cumulative adjustment to the opening balance
of regulatory assets, because a large portion of these
differences relate to gas costs that will be recoverable from
customers.
Effective October 1, 2008, we adopted FSP
No. FIN 39-1,
Amendment of FASB Interpretation No. 39
. This FSP
amends FIN 39,
Offsetting of Amounts Related to Certain
Contracts
, to replace the terms conditional
contracts and exchange contracts with the term
derivative instruments as defined in
SFAS No. 133,
Accounting for Derivative Instruments
and Hedging Activities
, as amended (SFAS No. 133).
Additionally, it permits a reporting entity to offset the fair
value amounts recognized for the right to reclaim cash
collateral or the obligation to return cash collateral against
fair value amounts recognized for derivative instruments
executed with the same counterparty under the same master
netting arrangement. As a result of the implementation of this
standard, we will net the fair value recorded for each of our
cash collateral positions against the net fair value amounts
recorded for the associated derivative instruments executed
under the same master netting arrangement. These balances were
not material at October 1, 2008.
Accounting
for Pension and Other Post-Retirement Benefit
Plans
Washington Gas maintains a qualified, trusteed,
employee-non-contributory defined benefit pension plan
(qualified pension plan) covering all active and vested former
employees of Washington Gas and a separate non-funded
supplemental retirement plan (SERP) covering executive officers.
Washington Gas accrues the estimated benefit obligation of the
SERP as earned by the covered employees and Washington Gas pays,
from internal funds, the individual benefits as they are due.
Washington Gas also provides certain healthcare and life
insurance benefits for retired employees which are accrued and
funded in a trust on an actuarial basis over the work life of
the retirees. (The qualified pension plan, SERP and health and
post-retirement plans are collectively referred to as the
Plans).
34
WGL Holdings, Inc.
Washington Gas Light Company
Part II
Item 7. Managements Discussion and Analysis of
Financial Condition and Results of Operations (continued)
The measurement of the Plans obligations and costs is
dependent on a variety of factors, such as employee
demographics, the level of contributions made to the Plans,
earnings on the Plans assets and mortality rates. The
following assumptions are also critical to this measurement.
These assumptions are derived on an annual basis with the
assistance of a third party actuarial firm:
|
|
|
|
|
Discount rate,
|
|
|
|
Expected long-term return on plan assets,
|
|
|
|
Rate of compensation increase and
|
|
|
|
Healthcare cost trend rate.
|
We determine the discount rate by using publicly available
indexes from reliable financial sources that parallel the
duration of plan liabilities including:
(i)
consideration and review of average bond yields
for 30 year maturities;
(ii)
bonds with the
highest yields at each maturity that are of sufficient quality
(AA- or better);
(iii)
bond yields that are
interpolated to prior years
(iv)
and pension
liability indexes. We determine the expected long-term rate of
return by averaging the expected earnings for the target asset
portfolio. In developing the expected rate of return assumption,
we evaluate an analysis of historical actual performance and
long-term return projections, which gives consideration to the
asset mix and anticipated length of obligation of the Plans.
Historically, the expected long-term return on plan assets has
been lower for the health and life benefit plan than for the
qualified pension plan due to differences in the allocation of
the assets in the plan trusts and the taxable status of one of
the trusts. We calculate the rate of compensation increase based
on salary expectations for the near-term, expected inflation
levels and promotional expectations. The healthcare cost trend
rate is determined by working with insurance carriers, reviewing
historical claims data for the health and life benefit plan, and
analyzing market expectations.
The following table illustrates the effect of changing these
actuarial assumptions, while holding all other assumptions
constant:
|
|
|
|
|
|
|
|
|
|
|
Effect of Changing Critical Actuarial Assumptions
|
(In millions)
|
|
|
|
Pension Benefits
|
|
Health and Life Benefits
|
|
|
|
|
|
Increase
|
|
|
|
Increase
|
|
|
|
|
Percentage-Point
|
|
(Decrease)
|
|
Increase
|
|
(Decrease) in
|
|
Increase
|
|
|
Change in
|
|
in Ending
|
|
(Decrease) in
|
|
Ending
|
|
(Decrease) in
|
Actuarial Assumptions
|
|
Assumption
|
|
Obligation
|
|
Annual Cost
|
|
Obligation
|
|
Annual Cost
|
|
Expected long-term return on plan assets
|
|
+/− 1.00 pt.
|
|
n/a
|
|
$(6.4) / $6.4
|
|
n/a
|
|
$(2.6) / $2.6
|
Discount rate
|
|
+/− 0.25 pt.
|
|
$(14.6) / $15.3
|
|
$(0.1) / $0.5
|
|
$(9.7) / $10.2
|
|
$(1.4) / $1.5
|
Rate of compensation increase
|
|
+/− 0.25 pt.
|
|
$2.3 / $(2.3)
|
|
$0.4 / $(0.4)
|
|
n/a
|
|
n/a
|
Healthcare cost trend rate
|
|
+/− 1.00 pt.
|
|
n/a
|
|
n/a
|
|
$42.3 / $(35.1)
|
|
$6.1 / $(4.8)
|
|
|
Differences between actuarial assumptions and actual plan
results are deferred and amortized into cost when the
accumulated differences exceed ten percent of the greater of the
Projected Benefit Obligation or the market-related value of the
plan assets. If necessary, the excess is amortized over the
average remaining service period of active employees. At
September 30, 2008, the discount rate increased to
7.5 percent from 6.0 percent from the comparable
period, reflecting the increase in long-term interest rates
primarily due to the tightening of the credit markets in fiscal
year 2008. Refer to Note 11 of the Notes to Consolidated
Financial Statements for a listing of the actuarial assumptions
used and for a further discussion of the accounting for the
Plans.
OTHER ACCOUNTING
MATTERS
Stock-Based
Compensation
We account for our stock-based compensation in accordance with
SFAS No. 123 (revised 2004),
Share-Based Payment
(SFAS No. 123(R)). Under
SFAS No. 123(R), we measure and record compensation
expense for both our stock option and performance share awards
based on their fair value at the date of grant. Our performance
units, however, are liability awards as they settle in cash;
therefore, we measure and record compensation expense for these
awards based on their fair value at the end of each period until
their vesting date. This may cause fluctuations in earnings that
do not exist under the accounting requirements for both our
stock options and performance shares.
We issued both performance shares and performance units in
fiscal year 2008; however, we did not issue stock options. As of
September 30, 2008, there are prior years option
grants outstanding with an exercise price at the market value of
our common stock
35
WGL Holdings, Inc.
Washington Gas Light Company
Part II
Item 7. Managements Discussion and Analysis of
Financial Condition and Results of Operations (continued)
on the date of the grant. Our stock options generally have a
vesting period of three years, and expire ten years from the
date of the grant.
Both our performance units and performance shares are valued
using a Monte Carlo simulation model, as they both contain
market conditions. Performance units and performance shares are
granted at target levels. Any performance units that may be
earned pursuant to terms of the grant will be paid in cash and
are valued at $1.00 per performance unit. Any performance shares
that are earned will be paid in shares of common stock of WGL
Holdings. The actual number of performance units and performance
shares that may be earned varies based on the total shareholder
return of WGL Holdings relative to a peer group over the three
year performance period. Median performance relative to the peer
group earns performance units and performance shares at the
targeted levels. The maximum that can be earned is
200 percent of the targeted levels and the minimum is zero.
Refer to Notes 1 and 12 of the Notes to Consolidated
Financial Statements for a further discussion of our share-based
awards.
Other
On January 1, 2008, we implemented EITF Issue
No. 06-2,
Accounting for Sabbatical Leave and Other Similar Benefits
Pursuant to FASB Statement No. 43, Accounting for
Compensated Absences
(EITF 06-2).
EITF 06-2
requires entities to accrue compensation cost associated with
sabbatical leave and other similar benefits over the requisite
service period assuming certain conditions are met. The costs
associated with Washington Gass benefits that fall under
EITF 06-2
are included in Washington Gass rates charged to its
customers, as incurred; therefore, upon adoption of this
standard, Washington Gas recorded a liability of
$12.9 million and an offsetting regulatory asset. The
effect of adopting this standard was not material to our balance
sheet accounts and had no effect on the income statement.
36
WGL
Holdings, Inc.
Part II
Item 7. Managements Discussion and Analysis of
Financial Condition and Results of Operations (continued)
WGL HOLDINGS,
INC.
RESULTS
OF OPERATIONS
Summary
Results
WGL Holdings reported net income of $116.5 million, or
$2.33 per share, for the fiscal year ended September 30,
2008, as compared to net income of $107.9 million, or $2.19
per share, and $87.6 million, or $1.79 per share, for the
fiscal years ended September 30, 2007 and 2006,
respectively. We earned a return on average common equity of
11.5 percent, 11.3 percent and 9.6 percent,
respectively, during each of these three fiscal years.
Net income for fiscal year 2006 included an after-tax loss from
discontinued operations of $7.1 million, or $0.15 per
share. We reported consolidated income from continuing
operations of $116.5 million, or $2.33 per share, for the
fiscal year ended September 30, 2008, as compared to income
from continuing operations of $107.9 million, or $2.19 per
share, and $94.7 million, or $1.94 per share, reported for
fiscal years 2007 and 2006, respectively.
The following table summarizes our net income (loss) by
operating segment for fiscal years ended September 30,
2008, 2007 and 2006.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income (Loss) by Operating Segment
|
|
|
|
|
|
Years Ended September 30,
|
|
|
Increase (Decrease)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
(In millions)
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
vs. 2007
|
|
|
vs. 2006
|
|
|
|
Regulated Utility
|
|
$
|
113.7
|
|
|
$
|
89.9
|
|
|
$
|
84.6
|
|
|
$
|
23.8
|
|
|
$
|
5.3
|
|
Non-utility operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail energy-marketing
|
|
|
4.8
|
|
|
|
22.4
|
|
|
|
13.3
|
|
|
|
(17.6
|
)
|
|
|
9.1
|
|
Design-Build Energy Systems
|
|
|
1.8
|
|
|
|
0.4
|
|
|
|
0.5
|
|
|
|
1.4
|
|
|
|
(0.1
|
)
|
Other, principally non-utility activities
|
|
|
(3.8
|
)
|
|
|
(4.8
|
)
|
|
|
(3.7
|
)
|
|
|
1.0
|
|
|
|
(1.1
|
)
|
|
Total non-utility
|
|
|
2.8
|
|
|
|
18.0
|
|
|
|
10.1
|
|
|
|
(15.2
|
)
|
|
|
7.9
|
|
|
Income from continuing operations
|
|
|
116.5
|
|
|
|
107.9
|
|
|
|
94.7
|
|
|
|
8.6
|
|
|
|
13.2
|
|
Loss from discontinued operations, net of income tax benefit
|
|
|
|
|
|
|
|
|
|
|
(7.1
|
)
|
|
|
|
|
|
|
7.1
|
|
|
Net income
|
|
$
|
116.5
|
|
|
$
|
107.9
|
|
|
$
|
87.6
|
|
|
$
|
8.6
|
|
|
$
|
20.3
|
|
|
The following is a summary discussion of
year-over-year
trends related to our results from continuing operations. For a
detailed description of material transactions and results, refer
to our discussion of operating results by segment below.
Fiscal Year 2008 vs. Fiscal Year
2007.
Income from continuing operations for
fiscal year 2008, when compared to fiscal year 2007, reflects
increased earnings from our regulated utility segment, partially
offset by lower earnings from our retail energy-marketing
segment. Favorably affecting fiscal year 2008 earnings for the
regulated utility segment were new rates in all jurisdictions as
well as a new asset optimization strategy. Earnings comparisons
for our retail energy-marketing business reflect lower gross
margins from the sale of electricity, partially offset by
improved gross margins from natural gas.
Fiscal Year 2007 vs. Fiscal Year
2006.
The increase in income from continuing
operations for fiscal year 2007 over fiscal year 2006 primarily
reflects increased earnings from both our retail
energy-marketing and regulated utility segments. This comparison
primarily reflects higher gross margins from the sale of
electricity for our retail energy-marketing business and an
increase in average active customer meters as well as new rates
that went into effect in Virginia on February 13, 2007, for
our regulated utility segment.
37
WGL Holdings, Inc.
Part II
Item 7. Managements Discussion and Analysis of
Financial Condition and Results of Operations (continued)
Regulated
Utility Operating Results
The following table summarizes the regulated utility
segments operating results for fiscal years ended
September 30, 2008, 2007 and 2006.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Regulated Utility Operating Results
|
|
|
|
|
|
Years Ended September 30,
|
|
|
Increase (Decrease)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
(In millions)
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
vs. 2007
|
|
|
vs. 2006
|
|
|
|
Utility net revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating revenues
|
|
$
|
1,552.3
|
|
|
$
|
1,513.8
|
|
|
$
|
1,637.5
|
|
|
$
|
38.5
|
|
|
$
|
(123.7
|
)
|
Less: Cost of gas
|
|
|
885.2
|
|
|
|
892.4
|
|
|
|
1,031.7
|
|
|
|
(7.2
|
)
|
|
|
(139.3
|
)
|
Revenue taxes
|
|
|
55.3
|
|
|
|
55.9
|
|
|
|
56.0
|
|
|
|
(0.6
|
)
|
|
|
(0.1
|
)
|
|
Total utility net revenues
|
|
|
611.8
|
|
|
|
565.5
|
|
|
|
549.8
|
|
|
|
46.3
|
|
|
|
15.7
|
|
Operation and maintenance
|
|
|
250.1
|
|
|
|
246.3
|
|
|
|
236.5
|
|
|
|
3.8
|
|
|
|
9.8
|
|
Depreciation and amortization
|
|
|
94.2
|
|
|
|
89.9
|
|
|
|
92.7
|
|
|
|
4.3
|
|
|
|
(2.8
|
)
|
General taxes and other assessmentsother
|
|
|
43.7
|
|
|
|
40.6
|
|
|
|
40.6
|
|
|
|
3.1
|
|
|
|
|
|
|
Operating income
|
|
|
223.8
|
|
|
|
188.7
|
|
|
|
180.0
|
|
|
|
35.1
|
|
|
|
8.7
|
|
Interest expense
|
|
|
45.4
|
|
|
|
45.2
|
|
|
|
44.0
|
|
|
|
0.2
|
|
|
|
1.2
|
|
Other (income)
expenses-net,
including preferred stock dividends
|
|
|
(0.6
|
)
|
|
|
(1.3
|
)
|
|
|
(0.6
|
)
|
|
|
0.7
|
|
|
|
(0.7
|
)
|
Income tax expense
|
|
|
65.3
|
|
|
|
54.9
|
|
|
|
52.0
|
|
|
|
10.4
|
|
|
|
2.9
|
|
|
Net income
|
|
$
|
113.7
|
|
|
$
|
89.9
|
|
|
$
|
84.6
|
|
|
$
|
23.8
|
|
|
$
|
5.3
|
|
|
Fiscal Year 2008 vs. Fiscal Year
2007.
The regulated utility segment reported
net income of $113.7 million for the fiscal year ended
September 30, 2008, an increase of $23.8 million over
net income of $89.9 million reported for fiscal year 2007.
This
year-over-year
increase in net income primarily reflects:
(i)
new
rates that went into effect in Virginia on February 13,
2007, Maryland on November 27, 2007 and the District of
Columbia on December 31, 2007;
(ii)
a
$13.2 million (pre-tax) increase in realized margins
associated with our asset optimization program;
(iii)
the favorable effects of changes in natural
gas consumption patterns due to shifts in weather patterns and
other factors and
(iv)
an increase of nearly 9,700
average active customer meters over fiscal year 2007. Partially
offsetting this increase were:
(i)
an
$8.8 million (pre-tax) increase in uncollectible accounts
expense due to an adjustment to the accumulated reserve made in
the prior year to reflect better collections, coupled with the
negative effects of the decline in the economy on the current
period;
(ii)
a $2.6 million increase in
expenses related to paving and leak repair primarily as a result
of receiving gas from the Cove Point terminal in a portion of
our distribution system in Virginia and
(iv)
a
$4.8 million accrual for an estimated refund to our
Virginia customers arising from a new Earnings Sharing Mechanism
(ESM) that was implemented as a part of our Performance-Based
Rate (PBR) plan (refer to the section entitled
Rates
and Regulatory MattersPerformance-Based Rate
Plans
included in Managements Discussion for
Washington Gas).
Fiscal Year 2007 vs. Fiscal Year
2006.
The regulated utility segment reported
net income of $89.9 million for the fiscal year ended
September 30, 2007, an increase of $5.3 million over
net income of $84.6 million reported for fiscal year 2006.
The
year-over-year
increase in net income primarily reflects:
(i)
an
increase of over 16,600 average active customer meters over
fiscal year 2006;
(ii)
a $4.6 million favorable
comparison in earnings for the fiscal year 2007 of a charge
recorded in the prior fiscal year related to a proposed
disallowance of certain natural gas costs in Maryland;
(iii)
lower depreciation and amortization expense
associated with a regulatory order in Virginia and
(iv)
a reduction in uncollectible accounts expense
to reflect better collections. Partially offsetting the
year-over-year
increase in net income were reduced revenues from recoverable
carrying costs on lower average storage gas inventory balances
and higher post-retirement benefit costs due to the effect of
using updated mortality assumptions commencing in fiscal year
2007.
38
WGL Holdings, Inc.
Part II
Item 7. Managements Discussion and Analysis of
Financial Condition and Results of Operations (continued)
Utility Net Revenues.
The following
table provides the key factors contributing to the changes in
the utility net revenues of the regulated utility segment
between years.
|
|
|
|
|
|
|
|
|
Composition of Changes in Utility Net Revenues
|
|
|
|
|
|
Increase (Decrease)
|
|
|
|
|
|
2008
|
|
|
2007
|
|
(In millions)
|
|
vs. 2007
|
|
|
vs. 2006
|
|
|
|
|
Customer growth
|
|
$
|
5.0
|
|
|
$
|
8.2
|
|
Estimated Weather effects:
|
|
|
|
|
|
|
|
|
Increase (decrease) in
colder-than-normal
weather effects
|
|
|
(5.4
|
)
|
|
|
1.5
|
|
Offset by weather insurance and derivative products
|
|
|
(4.6
|
)
|
|
|
7.5
|
|
Estimated change in natural gas consumption patterns
|
|
|
10.3
|
|
|
|
1.0
|
|
Impact of rate cases
|
|
|
22.8
|
|
|
|
1.6
|
|
Gas administrative charge (GAC)
|
|
|
3.1
|
|
|
|
(0.5
|
)
|
Asset optimization:
|
|
|
|
|
|
|
|
|
Realized margins
|
|
|
13.2
|
|
|
|
1.4
|
|
Unrealized mark-to market valuations
|
|
|
(0.2
|
)
|
|
|
(2.2
|
)
|
Lower of cost or market adjustment
|
|
|
(2.5
|
)
|
|
|
|
|
Storage carrying costs
|
|
|
4.8
|
|
|
|
(4.2
|
)
|
ESM
|
|
|
(4.8
|
)
|
|
|
|
|
Regulatory adjustment
|
|
|
1.1
|
|
|
|
|
|
Reserve for disallowance of natural gas costs
|
|
|
|
|
|
|
4.6
|
|
Other
|
|
|
3.5
|
|
|
|
(3.2
|
)
|
|
Total
|
|
$
|
46.3
|
|
|
$
|
15.7
|
|
|
Customer growth
Average active customer meters
increased 9,687 from fiscal year 2007 to 2008. Average active
customer meters increased 16,610 from fiscal year 2006 to 2007.
Estimated weather effects
Washington Gas has a
weather protection strategy that is designed to neutralize the
estimated negative financial effects of
warmer-than-normal
weather (refer to the section entitled
Weather
Risk
for a further discussion of our weather
protection strategy). As part of this strategy, Washington Gas
had weather insurance in fiscal year 2008, 2007 and 2006 related
to the District of Columbia, which allowed us to retain the
benefits of
colder-than-normal
weather. In Virginia, weather derivatives we had in fiscal years
2007 and 2006 allowed us to retain the benefits of any
colder-than-normal
weather. Both the effects of weather insurance and weather
derivatives are recorded to Operation and maintenance
expenses.
Weather, when measured by HDDs, was 8.7 percent warmer than
normal in fiscal year 2008, 3.7 percent colder than normal
in fiscal year 2007 and 2.5 percent warmer than normal in
fiscal year 2006. Including the effects of our weather
protection strategy, there were no estimated effects on net
income from the
warmer-than-normal
weather in fiscal year 2008. Including the effects of our
weather protection strategy, net income was enhanced by an
estimated $5.4 million (pre-tax) in fiscal year 2007 in
relation to normal weather. Although fiscal year 2006 was warmer
than normal, Washington Gas benefited $3.9 million
(pre-tax) from the
colder-than-normal
weather in the first quarter of fiscal year 2006. Refer to
Results of Operations
in Managements
Discussion for Washington Gas for a further discussion of the
effects of weather and statistical information for Washington
Gas.
Estimated change in natural gas consumption
patterns
Changes in 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 HDD that occur. Natural gas consumption
patterns may also be affected by non-weather related factors.
Also reflected in these comparisons are adjustments related to
Washington Gass reconciliation of lost-and-unaccounted-for
gas.
Impact of rate cases
New rates went into effect in
Virginia on February 13, 2007, Maryland on
November 27, 2007 and the District of Columbia on
December 31, 2007. The current
year-to-year
comparison includes increases in rates to firm customers in all
jurisdictions as well as interruptible customers in Maryland.
39
WGL Holdings, Inc.
Part II
Item 7. Managements Discussion and Analysis of
Financial Condition and Results of Operations (continued)
GAC
Represents a regulatory mechanism in all
jurisdictions that partially offsets higher uncollectible
accounts expense related to gas costs that is included in
operation and maintenance expenses. This mechanism is new in
Virginia and the District of Columbia as part of the new rates
that went into effect as described above.
Asset optimization
Pre-tax unrealized gains (losses)
associated with our energy-related derivatives were $(487,000),
$(265,000) and $1.9 million in fiscal years 2008, 2007 and
2006, respectively. Pre-tax realized margins related to our
asset optimization program were $15.7 million,
$2.5 million and $17,000 for fiscal years 2008, 2007 and
2006, respectively. Additionally, results from our asset
optimization program for fiscal year 2008 include realized
margins of $3.3 million (pre-tax) for settled derivatives
related to the optimization of Washington Gass system
storage capacity assets and a $2.5 million (pre-tax)
offsetting lower of cost or market adjustment. No such activity
occurred in fiscal year 2007 or 2006. Refer to the section
entitled
Market Risk
for a further discussion
of Washington Gass asset optimization program.
Storage carrying costs
Represents recoverable
carrying costs based on the cost of capital approved in each
jurisdiction, multiplied by the
12-month
average balance of storage gas inventory. The comparison of
fiscal year 2008 to 2007 reflects higher average storage gas
inventory balances in fiscal year 2008 due to a significant
increase in gas prices during the spring and summer of 2008. The
comparison of fiscal year 2007 to 2006 reflects lower average
storage gas inventory balances.
Regulatory adjustment
Represents an adjustment of
$1.1 million (pre-tax) made in fiscal year 2008 applicable
to prior fiscal years as a result of an interpretive change in
the calculation of interruptible revenue sharing in the District
of Columbia.
Reserve for disallowance of natural gas
costs
Represents a $4.6 million expense recorded
in fiscal year 2006 related to a proposed disallowance of
certain natural gas costs in Maryland.
Operation and Maintenance Expenses.
The
following table provides the key factors contributing to the
changes in operation and maintenance expenses of the regulated
utility segment between years.
|
|
|
|
|
|
|
|
|
Composition of Changes in Operation and Maintenance
Expenses
|
|
|
|
Increase (Decrease)
|
|
|
|
(In millions)
|
|
2008 vs. 2007
|
|
|
2007 vs. 2006
|
|
|
|
|
Weather insurance and derivative benefits
|
|
$
|
(4.6
|
)
|
|
$
|
7.5
|
|
Business Process Outsourcing (BPO)
|
|
|
(0.6
|
)
|
|
|
|
|
Labor and incentive plans
|
|
|
3.2
|
|
|
|
2.6
|
|
Employee benefits
|
|
|
(2.6
|
)
|
|
|
5.2
|
|
Employee severance
|
|
|
(1.1
|
)
|
|
|
1.0
|
|
Reversal of costs related to BPO
|
|
|
(1.9
|
)
|
|
|
|
|
Uncollectible accounts
|
|
|
8.8
|
|
|
|
(8.3
|
)
|
Paving and leak repair
|
|
|
2.6
|
|
|
|
(0.7
|
)
|
Other regulatory adjustment
|
|
|
0.9
|
|
|
|
|
|
Other operating expenses
|
|
|
(0.9
|
)
|
|
|
2.5
|
|
|
Total
|
|
$
|
3.8
|
|
|
$
|
9.8
|
|
|
Weather insurance and derivative benefits
The
benefits of weather insurance for the District of Columbia for
fiscal years 2008, 2007 and 2006, as well as the benefits of
weather derivatives for Virginia for fiscal years 2007 and 2006
are recorded to operation and maintenance expense. During fiscal
years 2008 we received a benefit from our weather insurance that
resulted from
warmer-than-normal
weather of $4.6 million. During fiscal year 2007, we
received no benefit as weather was colder than normal during
that period. During fiscal year 2006, we received a benefit from
both our weather insurance and weather derivative of
$4.6 million that resulted from the warmer than normal
weather. These benefits are offset in utility net revenues.
Business Process Outsourcing
This comparison of
fiscal year 2008 to 2007 reflects:
(i)
recurring
costs paid to the service provider;
(ii)
amortization expense related to the regulatory
asset established for initial BPO implementation costs and
(iii)
cost savings as a result of reduced labor and
benefit costs for departments affected by the BPO.
Labor and incentive plans and employee benefits
The
current
year-to-year
comparison excludes costs for departments affected by the BPO.
The cost comparison for these departments is included in
Business Process Outsourcing above.
40
WGL Holdings, Inc.
Part II
Item 7. Managements Discussion and Analysis of
Financial Condition and Results of Operations (continued)
The increase in labor and incentive plans for both
year-to-year
comparisions primarily reflects increases due to incentive costs
related to improved performance. The decrease in employee
benefits expense for the fiscal year 2008 to fiscal year 2007
comparison reflects a reduction in post-retirement benefits
expense primarily due to the BPO curtailment as well as a higher
discount rate assumption used to calculate fiscal year 2008
expense. The increase in employee benefits expense reflected in
the fiscal year 2007 to fiscal year 2006 comparison is primarily
the result of higher post-retirement benefit costs due to the
effect of using updated mortality assumptions commencing in
fiscal year 2007.
Reversal of costs related to BPO
Represents the
reversal of expenses that were incurred in prior fiscal years
for initial implementation costs allocable to the District of
Columbia associated with BPO. These costs were recorded to a
regulatory asset in the first quarter of fiscal year 2008 upon
approval of
10-year
amortization accounting by the PSC of DC in a December 28,
2007 Final Order.
Uncollectible accounts
The fiscal year 2008 to 2007
comparison reflects an adjustment to the accumulated reserve
made in fiscal year 2007 to reflect better collections, coupled
with the negative effects of the decline in the economy on the
current period. The increase in fiscal year 2008 was partially
offset by the GAC included in utility net revenues. The fiscal
year 2007 to 2006 comparison primarily reflects better
collections as well as lower gas costs.
Other regulatory adjustment
Represents a favorable
regulatory adjustment made during the first quarter of fiscal
year 2008 applicable to prior fiscal years due to a
November 16, 2007 Final Order from the PSC of MD which
allowed Washington Gas full cost recovery of the injections of
heavy hydrocarbons (HHCs) related to Maryland sales and delivery
service customers. Refer to the section entitled
Operating Issues Related to Cove Point Natural Gas
Supply
for a further discussion of HHCs.
Depreciation and Amortization.
The
following table provides the key factors contributing to the
changes in depreciation and amortization of the regulated
utility segment between years.
|
|
|
|
|
|
|
|
|
Composition of Changes in Depreciation and Amortization
|
|
|
|
Increase (Decrease)
|
|
|
|
|
|
2008
|
|
|
2007
|
|
(In millions)
|
|
vs. 2007
|
|
|
vs. 2006
|
|
|
|
|
Retroactive depreciation expense adjustment
|
|
$
|
3.9
|
|
|
$
|
(3.9
|
)
|
New depreciation ratesVirginia
|
|
|
|
|
|
|
(5.4
|
)
|
New depreciation ratesDistrict of Columbia
|
|
|
(2.5
|
)
|
|
|
|
|
Increase in property, plant & equipment
|
|
|
3.4
|
|
|
|
3.6
|
|
Other
|
|
|
(0.5
|
)
|
|
|
2.9
|
|
|
Total
|
|
$
|
4.3
|
|
|
$
|
(2.8
|
)
|
|
Retroactive depreciation expense adjustment
In the
first quarter of fiscal year 2007, we recorded a benefit of
$3.9 million applicable to the prior period from
January 1, 2006 to September 30, 2006 related to a
reduction in Washington Gass depreciation rates on fixed
assets in Virginia.
New depreciation rates
Washington Gas implemented
new rates in Virginia during the first quarter of fiscal year
2007, retroactive to January 1, 2006 (see
Retroactive
depreciation expense adjustment
, above). New rates were
implemented in the District of Columbia on January 1, 2008.
Refer to the section entitled
Rates and Regulatory
MattersDepreciation Study
for further discussion
of depreciation matters.
Other Changes in Expenses.
General
taxes increased $3.1 million during the fiscal year ending
September 30, 2008 primarily due to increased property
taxes. Income taxes increased as a result of an increase in
taxable income, partially offset by a lower effective tax rate
resulting from an adjustment to our deferred tax balances.
|
|
|
Non-Utility
Operating Results
|
Our continuing non-utility operations are comprised of two
business segments:
(i)
retail energy-marketing and
(ii)
design-build energy systems. Transactions that
are not significant enough on a stand-alone basis to warrant
treatment as an operating segment, and that do not fit into one
of our three operating segments, are aggregated as Other
Activities and included as part of non-utility operations
for purposes of segment reporting (refer to Note 16 of the
Notes to Consolidated Financial Statements).
41
WGL Holdings, Inc.
Part II
Item 7. Managements Discussion and Analysis of
Financial Condition and Results of Operations (continued)
Total net income from our continuing non-utility operations for
fiscal year 2008 was $2.8 million, a decrease of
$15.2 million from fiscal year 2007. This comparison
primarily reflects decreased earnings of our retail
energy-marketing segment.
Continuing non-utility operations reported total net income of
$18.0 million for the fiscal year ended September 30,
2007, an increase of $7.9 million over fiscal year 2006.
The
year-over-year
improvement in these earnings primarily reflects the increased
earnings of our retail energy-marketing segment.
Retail
Energy-Marketing
Our retail energy-marketing subsidiary, WGEServices, was
established in 1997, and sells natural gas and electricity on an
unregulated, competitive basis directly to residential,
commercial and industrial customers. The following table depicts
the retail energy-marketing segments operating results
along with selected statistical data.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail-Energy Marketing Financial and Statistical Data
|
|
|
|
|
|
Years Ended September 30,
|
|
|
Increase (Decrease)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
vs. 2007
|
|
|
vs. 2006
|
|
|
|
|
Operating Results
(In millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margins:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating revenues
|
|
$
|
1,062.7
|
|
|
$
|
1,138.4
|
|
|
$
|
1,001.6
|
|
|
$
|
(75.7
|
)
|
|
$
|
136.8
|
|
Less: Cost of energy
|
|
|
1,023.3
|
|
|
|
1,071.6
|
|
|
|
960.5
|
|
|
|
(48.3
|
)
|
|
|
111.1
|
|
Revenue taxes
|
|
|
0.6
|
|
|
|
0.7
|
|
|
|
1.4
|
|
|
|
(0.1
|
)
|
|
|
(0.7
|
)
|
|
Total gross margins
|
|
|
38.8
|
|
|
|
66.1
|
|
|
|
39.7
|
|
|
|
(27.3
|
)
|
|
|
26.4
|
|
Operation expenses
|
|
|
26.5
|
|
|
|
23.3
|
|
|
|
16.9
|
|
|
|
3.2
|
|
|
|
6.4
|
|
Depreciation and amortization
|
|
|
0.8
|
|
|
|
0.7
|
|
|
|
0.3
|
|
|
|
0.1
|
|
|
|
0.4
|
|
General taxes and other assessmentsother
|
|
|
2.8
|
|
|
|
2.5
|
|
|
|
(1.9
|
)
|
|
|
0.3
|
|
|
|
4.4
|
|
|
Operating Income
|
|
|
8.7
|
|
|
|
39.6
|
|
|
|
24.4
|
|
|
|
(30.9
|
)
|
|
|
15.2
|
|
Other income (expenses)-net
|
|
|
0.1
|
|
|
|
|
|
|
|
|
|
|
|
0.1
|
|
|
|
|
|
Interest expense
|
|
|
1.1
|
|
|
|
2.9
|
|
|
|
3.2
|
|
|
|
(1.8
|
)
|
|
|
(0.3
|
)
|
Income tax expense
|
|
|
2.9
|
|
|
|
14.3
|
|
|
|
7.9
|
|
|
|
(11.4
|
)
|
|
|
6.4
|
|
|
Net income
|
|
$
|
4.8
|
|
|
$
|
22.4
|
|
|
$
|
13.3
|
|
|
$
|
(17.6
|
)
|
|
$
|
9.1
|
|
|
Analysis of gross margins
(In millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Natural gas
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Realized margins
|
|
$
|
26.6
|
|
|
$
|
23.1
|
|
|
$
|
31.1
|
|
|
$
|
3.5
|
|
|
$
|
(8.0
|
)
|
Unrealized mark-to-market gains (losses)
|
|
|
(1.7
|
)
|
|
|
(1.4
|
)
|
|
|
(4.6
|
)
|
|
|
(0.3
|
)
|
|
|
3.2
|
|
|
Total gross marginsnatural gas
|
|
|
24.9
|
|
|
|
21.7
|
|
|
|
26.5
|
|
|
|
3.2
|
|
|
|
(4.8
|
)
|
|
Electricity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Realized margins
|
|
|
24.7
|
|
|
|
35.9
|
|
|
|
13.2
|
|
|
|
(11.2
|
)
|
|
|
22.7
|
|
Unrealized mark-to-market gains (losses)
|
|
|
(10.8
|
)
|
|
|
8.5
|
|
|
|
|
|
|
|
(19.3
|
)
|
|
|
8.5
|
|
|
Total gross marginselectricity
|
|
|
13.9
|
|
|
|
44.4
|
|
|
|
13.2
|
|
|
|
(30.5
|
)
|
|
|
31.2
|
|
|
Total gross margins
|
|
$
|
38.8
|
|
|
$
|
66.1
|
|
|
$
|
39.7
|
|
|
$
|
(27.3
|
)
|
|
$
|
26.4
|
|
|
Other Retail-Energy Marketing Statistics
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Natural gas
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Therm sales
(millions of therms)
|
|
|
635.0
|
|
|
|
725.5
|
|
|
|
696.7
|
|
|
|
(90.5
|
)
|
|
|
28.8
|
|
Number of customers
(end of period)
|
|
|
133,300
|
|
|
|
140,700
|
|
|
|
142,700
|
|
|
|
(7,400
|
)
|
|
|
(2,000
|
)
|
Electricity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Electricity sales
(millions of kWhs)
|
|
|
3,607.6
|
|
|
|
3,943.8
|
|
|
|
2,412.4
|
|
|
|
(336.2
|
)
|
|
|
1,531.4
|
|
Number of accounts
(end of period)
|
|
|
61,800
|
|
|
|
65,900
|
|
|
|
63,300
|
|
|
|
(4,100
|
)
|
|
|
2,600
|
|
|
42
WGL Holdings, Inc.
Part II
Item 7. Managements Discussion and Analysis of
Financial Condition and Results of Operations (continued)
Fiscal Year 2008 vs. Fiscal Year
2007.
The retail energy-marketing segment
reported net income of $4.8 million for the fiscal year
ended September 30, 2008, compared to net income of
$22.4 million reported for the prior fiscal year. This
comparison primarily reflects lower gross margins from the sale
of electricity, partially offset by higher gross margins from
the sale of natural gas. Also reflected in the earnings
comparison is an increase in operations expense due to higher
expenses associated with uncollectible accounts and higher labor
and benefit costs.
Gross margins from electric sales decreased in fiscal year 2008,
reflecting:
(i)
decreased sales volumes primarily
due to the number of commercial customers as a result of
increased competition and
(ii)
lower margins per
kilowatt-hour
sold primarily as a result of unfavorable weather patterns
experienced early in the summer of 2008 and the unusually high
margins experienced in fiscal year 2007. Also reflected in the
comparison was a $19.3 million (pre-tax) decline in
unrealized
mark-to-market
valuations associated with energy-related derivatives.
Unrealized
mark-to-market
gains and losses are primarily attributable to changes in the
fair value of certain contracts related to the purchase of
energy supplies to match future retail sales commitments. These
supply contracts are subject to
mark-to-market
treatment, while the corresponding retail sales commitments are
not.
Gross margins from natural gas sales increased in fiscal year
2008, reflecting a rise in the margin per therm sold, partially
offset by a decrease in natural gas sales volumes. Also
affecting gross margins from natural gas sales was a $275,000
(pre-tax) increase in unrealized
mark-to-market
losses associated with energy-related derivatives.
Fiscal Year 2007 vs. Fiscal Year
2006.
The retail energy-marketing segment
reported net income of $22.4 million for the fiscal year
ended September 30, 2007, an increase of $9.1 million
over net income of $13.3 million reported for the prior
fiscal year. The increase in earnings for this business
primarily reflects higher gross margins from the sale of
electricity, partially offset by lower gross margins from the
sale of natural gas. Further tempering the improved earnings was
higher operations expense due to increased costs associated with
growing our electric customer base, increased labor and benefits
expenses and higher expenses associated with uncollectible
accounts. Additionally, results from the prior fiscal year
benefited from the reversal of expenses of $3.1 million
(pre-tax) related to certain fees assessed by the PSC of DC that
were accrued in prior fiscal years.
Gross margins from electric sales increased significantly during
fiscal year 2007, reflecting a substantial rise in both electric
sales volumes and the gross margin per kilowatt hour sold. This
growth was the result of new competitive opportunities that
emerged in the second half of fiscal year 2006 as a result of a
sharp increase in competing rates offered by electric utilities
in Maryland and Delaware. Also favorably affecting the gross
margins from electric sales were unrealized
mark-to-market
gains in the current fiscal year resulting from derivatives that
enhanced current fiscal year earnings by $8.5 million
(pre-tax).
Lower gross margins from natural gas sales stemmed from higher
gas costs in relation to retail sales prices, slightly offset by
a 4.1 percent increase in natural gas sales volumes. The
decrease in gross margins was partially offset by lower
unrealized
mark-to-market
losses from natural gas derivatives that enhanced earnings by
$3.2 million (pre-tax), over the prior fiscal year.
Design-Build
Energy Systems
The design-build energy systems segment reported net income of
$1.8 million for fiscal year 2008, an increase of
$1.4 million over net income of $367,000 reported for
fiscal year 2007. This increase primarily reflects higher
revenues and proportionally lower cost of sales associated with
design-build projects.
The design-build energy systems segment reported net income of
$367,000 for fiscal year 2007, relatively unchanged from net
income of $450,000 reported for fiscal year 2006.
Other Non-Utility
Activities
As previously discussed, transactions that are not significant
enough on a stand-alone basis to warrant treatment as an
operating segment, and that do not fit into one of our three
operating segments, are aggregated as Other
Activities and included as part of non-utility operations.
Results for our other non-utility activities for fiscal year
2008 reflect a net loss of $3.8 million as compared to a
net loss of $4.8 million reported for fiscal year 2007.
This comparison primarily reflects lower general and
administrative expenses.
Results for our other non-utility activities for fiscal year
2007 reflect a net loss of $4.8 million as compared to a
net loss of $3.7 million reported for fiscal year 2006.
This comparison primarily reflects higher general and
administrative expenses.
43
WGL Holdings, Inc.
Part II
Item 7. Managements Discussion and Analysis of
Financial Condition and Results of Operations (continued)
|
|
|
Other Income
(Expenses)Net
|
Other income (expenses)net was income of
$2.5 million, $3.4 million and $3.2 million for
fiscal years 2008, 2007 and 2006, respectively. These amounts
primarily comprise interest income from short-term investments
that qualify as cash and cash equivalents as well as interest
income associated with certain regulatory items.
Interest expense was $46.8 million for the fiscal year
ended September 30, 2008, as compared to $48.9 million
and $48.3 million for fiscal year 2007 and 2006. Long-term
debt primarily comprises unsecured MTNs issued solely by
Washington Gas. The weighted average cost of MTNs was
5.95 percent at September 30, 2008 and
6.15 percent at both September 30, 2007 and 2006. The
following table shows the components of the changes in interest
expense between years.
|
|
|
|
|
|
|
|
|
Composition of Interest Expense Changes
|
|
|
|
|
|
Increase (Decrease)
|
|
|
|
(In millions)
|
|
2008 vs. 2007
|
|
|
2007 vs. 2006
|
|
|
|
|
Long-term debt
|
|
$
|
(0.1
|
)
|
|
$
|
(0.6
|
)
|
Short-term debt
|
|
|
(1.1
|
)
|
|
|
0.1
|
|
Other (includes
AFUDC
(a)
)
|
|
|
(0.9
|
)
|
|
|
1.1
|
|
|
Total
|
|
$
|
(2.1
|
)
|
|
$
|
0.6
|
|
|
|
|
|
(a)
|
|
Represents Allowance for Funds
Used During Construction.
|
For fiscal year 2008 compared to fiscal year 2007, the lower
interest expense related to short-term debt reflects a decrease
in the weighted average cost for these borrowings, partially
fully offset by an increase in the average balance outstanding.
The lower interest expense associated with long-term debt
reflects a decrease in the embedded cost of these borrowings as
a result of issuing lower-cost debt, mostly offset by a higher
average balance of long-term debt outstanding. The decrease in
interest expense also reflects a decrease in interest expense
associated with customer deposits and other items.
For fiscal year 2007 compared to fiscal year 2006, the higher
interest expense primarily reflects higher interest costs
associated with customer deposits and other items, partially
offset by a decease in interest expense associated with
long-term debt. The lower interest expense associated with
long-term debt reflects both a decrease in the embedded cost of
these borrowings as a result of refinancing previously
outstanding amounts and a lower average balance of long-term
debt outstanding. Interest expense related to short-term debt
was relatively unchanged from
year-to-year,
reflecting an increase in the weighted average cost for these
borrowings, almost fully offset by a decrease in the average
balance outstanding.
|
|
|
LIQUIDITY
AND CAPITAL RESOURCES
|
|
|
|
General
Factors Affecting Liquidity
|
It is important for us to have access to short-term debt markets
to maintain satisfactory liquidity to operate our businesses on
a near-term basis. Acquisition of natural gas, electricity,
pipeline capacity, and the need to finance accounts receivable
and storage gas inventory are our most significant short-term
financing requirements. The need for long-term capital is driven
primarily by capital expenditures and maturities of long-term
debt.
Our ability to obtain adequate and cost effective financing
depends on our credit ratings as well as the liquidity of
financial markets. Our credit ratings depend largely on the
financial performance of our subsidiaries, and a downgrade in
our current credit ratings could adversely affect our access to
sources of liquidity and capital, as well as our borrowing
costs. Also potentially affecting access to short-term debt
capital is the nature of any restrictions that might be placed
upon us, such as ratings triggers or a requirement to provide
creditors with additional credit support in the event of a
determination of insufficient creditworthiness. Although the
credit markets tightened in the latter half of 2008, we have
maintained our ability to meet our liquidity needs at reasonable
costs through:
(i)
the issuance of commercial paper
by WGL Holdings and Washington Gas;
(ii)
loans made
under the WGL Holdings committed bank credit facility and
(iii)
the issuance of MTNs by Washington Gas to
support its operations.
44
WGL Holdings, Inc.
Part II
Item 7. Managements Discussion and Analysis of
Financial Condition and Results of Operations (continued)
The ability to procure sufficient levels of long-term capital at
reasonable costs is determined by the level of our capital
expenditure requirements, our financial performance and the
effect of these factors on our credit ratings and investment
alternatives available to investors.
We have a goal to maintain our common equity ratio in the
mid-50 percent range of total consolidated capital. The
level of this ratio varies during the fiscal year due to the
seasonal nature of our business. This seasonality is also
evident in the variability of our short-term debt balances,
which are typically higher in the fall and winter months and
substantially lower in the spring when a significant portion of
our current assets is converted into cash at the end of the
winter heating season. Accomplishing this capital structure
objective and maintaining sufficient cash flow are necessary to
maintain attractive credit ratings for WGL Holdings and
Washington Gas, and to allow access to capital at reasonable
costs. As of September 30, 2008, total consolidated
capitalization, including current maturities of long-term debt
and excluding notes payable, comprised 59.7 percent common
equity, 1.6 percent preferred stock and 38.7 percent
long-term debt. Our cash flow requirements and our ability to
provide satisfactory resources to meet those requirements are
primarily influenced by the activities of Washington Gas and
WGEServices and, to a lesser extent, other non-utility
operations.
Our plans provide for sufficient liquidity to satisfy our
financial obligations. At September 30, 2008, we did not
have any restrictions on our cash balances that would affect the
payment of common or preferred stock dividends by WGL Holdings
or Washington Gas.
|
|
|
Short-Term
Cash Requirements and Related Financing
|
Washington Gass business is weather sensitive and
seasonal, causing short-term cash requirements to vary
significantly during the year. Approximately 75 percent of
the total therms delivered in Washington Gass service area
(excluding deliveries to two electric generation facilities)
occur during the first and second fiscal quarters. Accordingly,
Washington Gas typically generates more net income in the first
six months of the fiscal year than it does for the entire fiscal
year. During the first six months of our fiscal year, Washington
Gas generates large sales volumes and its cash requirements peak
when accounts receivable and unbilled revenues are at their
highest levels. During the last six months of our fiscal year,
after the winter heating season, Washington Gas will typically
experience a seasonal net loss due to reduced demand for natural
gas. During this period, many of Washington Gass assets
are converted into cash which Washington Gas generally uses to
reduce and sometimes eliminate short-term debt and to acquire
storage gas for the next heating season.
Washington Gas and WGEServices have seasonal short-term cash
requirements resulting from their need to purchase storage gas
inventory in advance of the winter heating periods in which the
storage gas is sold. Washington Gas generally collects the cost
of its gas under cost recovery mechanisms. WGEServices collects
revenues that are designed to reimburse its commodity costs used
to supply its retail customer contracts. Variations in the
timing of cash receipts from customers under these collection
methods can significantly affect short-term cash requirements.
In addition, both Washington Gas and WGEServices pay their
respective commodity suppliers before collecting the accounts
receivable balances resulting from these sales. WGEServices
derives its funding to finance these activities from short-term
debt issued by WGL Holdings. Additionally, WGL Holdings may be
required to post collateral on behalf of WGEServices for certain
purchases.
The cost of gas injected into storage for Washington Gas for use
in the
2008-2009
winter heating season has increased significantly, resulting in
significantly higher storage gas balances over the
2007-2008
winter heating season. This will increase customers bills
and may affect customers ability to pay their bills in a
timely manner. In addition, Washington Gas has incurred higher
levels of debt and higher interest costs in order to finance the
increased storage gas balances and may incur further borrowing
costs from the resulting higher accounts receivable balances.
These higher costs may be offset, or partially offset, by
recoverable carrying costs on higher average storage gas
inventory balances.
Variations in the timing of collections of gas costs under
Washington Gass gas cost recovery mechanisms can
significantly affect short-term cash requirements. Washington
Gas had a $11.8 million and a $5.1 million net
under-collection of gas costs at September 30, 2008 and
2007, respectively. The under-collection in both fiscal years
stemmed primarily from an excess of gas costs paid to suppliers
over gas costs recovered from customers. Generally, Washington
Gas includes the amounts under-collected and over-collected in
the captions Gas costs and other regulatory assets
and Gas costs and other regulatory liabilities,
respectively, in its balance sheets as current assets and
current liabilities. Amounts under-collected or over-collected
that are generated during the current business cycle are
reflected as a regulatory asset or liability until September 1st
of each year, at which time the accumulated amount is
transferred to gas costs due from/to customers as appropriate.
Most of the current balance will be returned to, or collected
from, customers in fiscal year 2009.
45
WGL Holdings, Inc.
Part II
Item 7. Managements Discussion and Analysis of
Financial Condition and Results of Operations (continued)
WGL Holdings and Washington Gas utilize 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 following is a
summary of our committed credit agreements at September 30,
2008.
|
|
|
|
|
|
|
|
|
Committed Credit Available
(In millions)
|
|
|
|
|
|
WGL Holdings
|
|
|
Washington Gas
|
|
|
|
|
Expiration dateCommitted credit agreements
|
|
|
|
|
|
|
|
|
|
August 3,
2012
(a)(b)
|
|
$
|
400.0
|
|
|
$
|
300.0
|
|
May 27, 2009
|
|
|
|
|
|
|
75.0
|
|
May 29, 2009
|
|
|
|
|
|
|
15.0
|
|
September 19, 2009
|
|
|
|
|
|
|
10.0
|
|
|
Total committed credit agreements
|
|
|
400.0
|
|
|
|
400.0
|
|
Less: Commercial Paper
|
|
|
(23.0
|
)
|
|
|
(231.0
|
)
|
Bank loans
|
|
|
(17.0
|
)
|
|
|
|
|
|
Net committed credit available
|
|
$
|
360.0
|
|
|
$
|
169.0
|
|
|
|
|
|
(a)
|
|
Represents our revolving credit
facilities with commercial banks. Both WGL Holdings and
Washington Gas have the right to request extensions, with the
banks approval.
|
(b)
|
|
WGL Holdings revolving
credit facility permits it to borrow an additional
$50 million, with the banks approval, for a total of
$450 million. Washington Gass revolving credit
facility permits it to borrow an additional $100 million,
with the banks approval, for a total of
$400 million.
|
As of September 30, 2008, we had $17.0 million of
outstanding borrowings under our credit facility for WGL
Holdings. WGL Holdings typically issues commercial paper to meet
its financing requirements; however, due to the tightening of
the credit markets in September 2008, WGL Holdings borrowed from
its committed credit facility to meet its liquidity needs. At
September 30, 2008 there were no outstanding borrowings
under our credit agreements for Washington Gas (refer to
Note 4 of the Notes to the Consolidated Financial
Statements for further information).
Additionally, during fiscal year 2008, Washington Gas entered
into three credit agreements with commercial banks that permit
Washington Gas to borrow up to $100 million. As of
September 30, 2008, there were no outstanding borrowings
under any of the three credit agreements.
At September 30, 2007, WGL Holdings and its subsidiaries
had outstanding notes payable in the form of commercial paper of
$184.2 million. Of the outstanding notes payable balance at
September 30, 2007, $62.2 million and
$122.0 million was commercial paper issued by WGL Holdings
and Washington Gas, respectively. There were no outstanding
borrowing under WGL Holdings or Washington Gass
credit agreements at September 30, 2007.
To manage credit risk, both Washington Gas and WGEServices may
require deposits from certain customers and suppliers, which are
reported as current liabilities in Customer deposits and
advance payments. At September 30, 2008 and
September 30, 2007, Customer deposits and advance
payments totaled $46.1 million and
$49.2 million, respectively. For both periods,
substantially all of these deposits related to customer deposits
for Washington Gas.
For Washington Gas, deposits from customers may be refunded to
the depositor-customer at various times throughout the year
based on the customers payment habits. At the same time,
other customers make new deposits that cause the balance of
customer deposits to remain relatively steady. There are no
restrictions on Washington Gass use of these customer
deposits. Washington Gas pays interest to its customers on these
deposits in accordance with the requirements of its regulatory
commissions.
For WGEServices, these deposits primarily represent collateral
for transactions with wholesale counterparties for the purchase
and sale of natural gas and electricity. These deposits may be
required to be repaid or increased at any time based on the
current value of WGEServices net position with the
counterparty. Currently there are no restrictions on
WGEServices use of these deposit funds and WGEServices
pays interest to the counterparty on these deposits in
accordance with its contractual obligations. Refer to the
section entitled
Credit Risk
for a further
discussion of our management of credit risk.
46
WGL Holdings, Inc.
Part II
Item 7. Managements Discussion and Analysis of
Financial Condition and Results of Operations (continued)
|
|
|
Long-Term Cash
Requirements and Related Financing
|
Our long-term cash requirements primarily depend upon the level
of capital expenditures, long-term debt maturities and decisions
to refinance long-term debt. Our capital expenditures primarily
relate to adding new utility customers and system supply as well
as maintaining the safety and reliability of Washington
Gass distribution system (refer to the section entitled
Capital Expenditures
below).
At September 30, 2008, Washington Gas had the capacity,
under a shelf registration that was declared effective by the
SEC on June 8, 2006, to issue up to $250.0 million of
MTNs. During fiscal year 2007, we did not issue or retire any
MTNs. The following describes MTN activity during fiscal year
2008.
Fiscal Year 2008 MTN Activity.
In
August 2008 Washington Gas retired $20.1 million of
maturing MTNs with rates ranging from 6.51% to 6.61%. On
August 26, 2008, Washington Gas issued $50.0 million
of 3.61 percent floating rate MTNs due August 26,
2010, with a call option at 100 percent of par value to
redeem the MTNs at any time on or after February 26, 2009.
These MTNs have an interest rate which is reset quarterly based
on the
3-month
London Interbank Offer Rate (LIBOR) plus 80.0 basis points.
Proceeds from these MTNs were used by Washington Gas to retire
the maturing MTNs and for general corporate purposes such as the
funding of capital expenditures, working capital needs and the
retirement of commercial paper.
On October 21, 2008, Washington Gas retired
$25 million of 5.49 percent MTNs.
The table below reflects the current credit ratings for the
outstanding debt instruments of WGL Holdings and Washington Gas.
Changes in credit ratings may affect WGL Holdings and
Washington Gass cost of short-term and long-term debt and
their access to the capital markets. A security rating is not a
recommendation to buy, sell or hold securities, it may be
subject to revision or withdrawal at any time by the assigning
rating organization and each rating should be evaluated
independently of any other rating.
|
|
|
|
|
|
|
|
|
Credit Ratings for Outstanding Debt Instruments
|
|
|
|
WGL Holdings
|
|
Washington Gas
|
|
|
Unsecured
|
|
|
|
Unsecured
|
|
|
|
|
Medium-Term Notes
|
|
Commercial
|
|
Medium-Term
|
|
Commercial
|
Rating Service
|
|
(Indicative)
(a)
|
|
Paper
|
|
Notes
|
|
Paper
|
|
|
Fitch Ratings
|
|
A+
|
|
F1
|
|
AA−
|
|
F1+
|
Moodys Investors Service
|
|
Not Rated
|
|
Not Prime
|
|
A2
|
|
P-1
|
Standard & Poors Ratings
Services
(b)
|
|
AA−
|
|
A-1
|
|
AA−
|
|
A-1
|
|
|
|
|
(a)
|
|
Indicates the ratings that may
be applicable if WGL Holdings were to issue unsecured
MTNs.
|
(b)
|
|
The long-term debt rating issued
by Standard & Poors Ratings Services for WGL
Holdings and Washington Gas is stable.
|
|
|
|
Ratings
Triggers and Certain Debt Covenants
|
WGL Holdings and Washington Gas pay facility fees on their
credit facilities based on the long-term debt ratings of
Washington Gas. In the event the long-term debt of Washington
Gas is downgraded below certain levels, WGL Holdings and
Washington Gas would be required to pay higher facility fees.
There are five different levels of fees. The credit facility for
WGL Holdings defines its applicable fee level as one level below
the level applicable to Washington Gas. Under the terms of the
credit facilities, the lowest level facility fee is four basis
points and the highest is eight basis points.
Under the terms of WGL Holdings and Washington Gass
credit agreements, the ratio of consolidated financial
indebtedness to consolidated total capitalization can not exceed
0.65 to 1.0 (65.0 percent). In addition, WGL Holdings and
Washington Gas are required to inform lenders of changes in
corporate existence, financial conditions, litigation and
environmental warranties that might have a material adverse
effect. The failure to inform the lenders agent of changes
in these areas deemed material in nature might constitute
default under the agreements. Additionally, WGL Holdings
or Washington Gass failure to pay principal or interest
when due on any of its 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. At September 30, 2008, we were in compliance with
all of the covenants under our revolving credit facilities.
47
WGL Holdings, Inc.
Part II
Item 7. Managements Discussion and Analysis of
Financial Condition and Results of Operations (continued)
For certain of Washington Gass natural gas purchase and
pipeline capacity agreements, if the long-term debt of
Washington Gas is downgraded to or below the lower of a BBB-
rating by Standard & Poors Ratings Services or a
Baa3 rating by Moodys Investors Service, or if Washington
Gas is deemed by a counterparty not to be creditworthy, then the
counterparty may withhold service or deliveries, or may require
additional credit support. For certain other agreements, if the
counterpartys credit exposure to Washington Gas exceeds a
preset threshold amount, or if Washington Gass credit
rating declines, then the counterparty may require additional
credit support. At September 30, 2008, Washington Gas would
not be required to supply additional credit support by these
arrangements if its long-term debt rating were to be downgraded
one rating level.
WGL Holdings has guaranteed payments for certain purchases of
natural gas and electricity on behalf of WGEServices (refer to
Contractual Obligations, Off-Balance Sheet Arrangements
and Other Commercial Commitments
for a further
discussion of these guarantees). If the credit rating of WGL
Holdings declines, WGEServices may be required to provide
additional credit support for these purchase contracts. At
September 30, 2008, WGEServices had adequate liquidity
available to provide additional credit support for these
arrangements if the long-term debt rating of WGL Holdings were
to be downgraded one rating level.
|
|
|
Cash Flows
Provided by Operating Activities
|
The primary drivers for our operating cash flows are cash
payments received from natural gas and electricity customers,
offset by our payments for natural gas and electricity costs,
operation and maintenance expenses, taxes and interest costs.
Although long-term interest rates remain relatively low and we
have been able to take advantage of refinancing certain of our
long-term debt at lower interest rates, interest expense for
fiscal year 2008 reflects the effect of a rise in short-term
interest rates.
Net cash provided by operating activities totaled
$62.0 million, $213.3 million and $85.7 million
for fiscal years 2008, 2007 and 2006, respectively. Net cash
provided by operating activities includes net income applicable
to common stock, as adjusted for non-cash earnings and charges,
as well as changes in working capital. Certain changes in
working capital from September 30, 2007 to
September 30, 2008 are described below.
|
|
|
|
|
Accounts receivable and unbilled revenuesnet increased
$45.1 million from September 30, 2007. This increase
is primarily due to increased sales volumes associated with
Washington Gass asset optimization program.
|
|
|
|
Storage gas inventory cost levels increased $111.7 million
from September 30, 2007 due to higher natural gas prices
and increased storage capacity to accommodate the requirements
for the
2008-2009
winter heating season. These balances increased more than
expected from September 30, 2007, due to the significant
rise in the cost of gas purchased during the summer months to
replenish storage gas balances to the levels necessary to
accommodate the
2008-2009
winter heating season.
|
|
|
|
Accounts payable and other accrued liabilities increased
$33.5 million, largely attributable to increased volumes of
natural gas purchased under Washington Gass asset
optimization program.
|
|
|
|
Other current liabilities increased $28.5 million primarily
due to unrealized fair value losses associated with
energy-related derivatives for both Washington Gas and
WGEServices.
|
During fiscal year 2007, other prepayments increased
$12.5 million from September 30, 2006, due to an
increase in taxes paid primarily resulting from higher pre-tax
income as well as an advance payment related to transformation
costs made to the service provider for our BPO plan. Accounts
payable and other accrued liabilities increased
$18.9 million, primarily due to:
(i)
the refund
for rates that went into effect in Virginia on February 13,
2007 (refer to the section entitled
Rates and
Regulatory Matters
),
(ii)
an increase in
accounts payable related to the sale of electricity, as a result
of an increase in market prices and kilowatt hours sold and
(iii)
the accrual of severance related costs for our
BPO plan. Deferred gas costsnet increased
$14.3 million due primarily to an increase in fair value
losses associated with certain of Washington Gass
contracts for the purchase and sale of natural gas.
|
|
|
Cash Flows
Provided by (Used in) Financing Activities
|
Cash flows provided by (used in) financing activities totaled
$74.3 million, $(47.2) million and $75.0 million
for fiscal years 2008, 2007 and 2006, respectively. During
fiscal year 2008, we increased our notes payable by a net amount
of $86.7 million due to increased working capital
requirements at Washington Gas. This increase in notes payable
was partially offset by common stock dividend payments totaling
$69.1 million, as well as $14.1 million in cash
proceeds from the issuance of common stock pursuant to our
stock-based compensation plan. Additionally during fiscal year
2008, we retired $20.1 million of MTNs and issued
$50.0 million of lower-cost MTNs (refer to the section
entitled
Long-Term Cash Requirements and Related
Financing
).
48
WGL Holdings, Inc.
Part II
Item 7. Managements Discussion and Analysis of
Financial Condition and Results of Operations (continued)
Cash flows used in financing activities for fiscal year 2007 was
driven by our common stock dividend payments totaling
$66.8 million, partially offset by $11.7 million in
cash proceeds from the issuance of common stock pursuant to our
stock-based compensation plan.
Cash flows provided by financing activities for fiscal year
2006, was driven by an increase in our notes payable by a net
amount of $136.5 million due to increased working capital
requirements. This increase in notes payable was partially
offset by common stock dividend payments totaling
$65.3 million.
The following table reflects the issuances and retirements of
long-term debt that occurred during fiscal years 2008, 2007 and
2006 (also refer to Note 5 of the Notes to Consolidated
Financial Statements).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-Term Debt Activity
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(In millions)
|
|
Interest Rate
|
|
|
Amount
|
|
|
Interest Rate
|
|
|
Amount
|
|
|
Interest Rate
|
|
|
Amount
|
|
|
|
Medium-term notes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issued
(a)
|
|
|
3.61
|
%
|
|
$
|
50.0
|
|
|
|
|
|
|
$
|
|
|
|
|
5.17 5.78
|
%
|
|
$
|
75.0
|
|
Retired
|
|
|
6.51 6.61
|
%
|
|
|
(20.1
|
)
|
|
|
|
|
|
|
|
|
|
|
6.15 7.31
|
%
|
|
|
(75.0
|
)
|
Other financing
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issued
(b)
|
|
|
5.63
|
%
|
|
|
13.3
|
|
|
|
5.57
|
%
|
|
|
1.4
|
|
|
|
4.76 5.61
|
%
|
|
|
5.7
|
|
Retired
(c)
|
|
|
4.76 9.00
|
%
|
|
|
(1.0
|
)
|
|
|
4.76 9.00
|
%
|
|
|
(1.0
|
)
|
|
|
5.61
|
%
|
|
|
(2.7
|
)
|
Other activity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(0.1
|
)
|
|
Total
|
|
|
|
|
|
$
|
42.2
|
|
|
|
|
|
|
$
|
0.4
|
|
|
|
|
|
|
$
|
2.9
|
|
|
|
|
|
(a)
|
|
Interest rate resets quarterly
on November, February, May, and August 26 of each year until
maturity.
|
(b)
|
|
Fiscal year 2006 includes the
non-cash issuance of a $3.0 million note used to finance
capital expenditures.
|
(c)
|
|
Fiscal year 2006 includes the
non-cash extinguishment of project debt financing of
$2.7 million.
|
|
|
|
Cash Flows
Used in Investing Activities
|
Net cash flows used in investing activities totaled
$135.0 million, $165.6 million and $161.2 million
during fiscal years 2008, 2007 and 2006, respectively. In fiscal
years 2008, 2007 and 2006, $133.6 million,
$162.0 million and $156.4 million, respectively, of
cash was utilized for capital expenditures made on behalf of
Washington Gas.
The following table depicts our actual capital expenditures for
fiscal years 2006, 2007 and 2008, and projected capital
expenditures for fiscal years 2009 through 2013. Our capital
expenditure program includes investments to extend service to
new areas, and to ensure safe, reliable and improved service.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital Expenditures
|
|
|
|
Actual
|
|
|
Projected
|
|
(In millions)
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
2011
|
|
|
2012
|
|
|
2013
|
|
|
Total
|
|
|
|
New business
|
|
$
|
48.7
|
|
|
$
|
44.9
|
|
|
$
|
45.8
|
|
|
$
|
55.2
|
|
|
$
|
64.7
|
|
|
$
|
71.4
|
|
|
$
|
75.1
|
|
|
$
|
76.3
|
|
|
$
|
342.7
|
|
Replacements
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rehabilitation project
|
|
|
47.8
|
|
|
|
30.8
|
|
|
|
8.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
22.7
|
|
|
|
33.8
|
|
|
|
38.0
|
|
|
|
43.3
|
|
|
|
44.8
|
|
|
|
45.9
|
|
|
|
47.6
|
|
|
|
48.2
|
|
|
|
229.8
|
|
LNG storage facility
|
|
|
5.8
|
|
|
|
0.3
|
|
|
|
0.1
|
|
|
|
3.7
|
|
|
|
36.5
|
|
|
|
64.9
|
|
|
|
44.6
|
|
|
|
1.1
|
|
|
|
150.8
|
|
Other
|
|
|
36.5
|
|
|
|
48.3
|
|
|
|
39.4
|
|
|
|
45.1
|
|
|
|
39.5
|
|
|
|
26.5
|
|
|
|
22.6
|
|
|
|
27.4
|
|
|
|
161.1
|
|
|
Total-accrual
basis
(a)
|
|
$
|
161.5
|
|
|
$
|
158.1
|
|
|
$
|
131.4
|
|
|
$
|
147.3
|
|
|
$
|
185.5
|
|
|
$
|
208.7
|
|
|
$
|
189.9
|
|
|
$
|
153.0
|
|
|
$
|
884.4
|
|
Cash basis adjustments
|
|
|
(1.7
|
)
|
|
|
6.4
|
|
|
|
3.6
|
|
|
|
(2.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2.1
|
)
|
|
Total-cash basis
|
|
$
|
159.8
|
|
|
$
|
164.5
|
|
|
$
|
135.0
|
|
|
$
|
145.2
|
|
|
$
|
185.5
|
|
|
$
|
208.7
|
|
|
$
|
189.9
|
|
|
$
|
153.0
|
|
|
$
|
882.3
|
|
|
|
|
|
(a)
|
|
Excludes Allowance for Funds
Used During Construction and prepayments associated with capital
projects. Includes accruals for capital expenditures and other
non-cash additions.
|
49
WGL Holdings, Inc.
Part II
Item 7. Managements Discussion and Analysis of
Financial Condition and Results of Operations (continued)
The 2009 to 2013 projected periods include $342.7 million
for continued growth to serve new customers, and
$229.8 million primarily related to the replacement and
betterment of existing capacity. Projected expenditures also
reflect $161.1 million of other expenditures, which include
general plant. Additionally, the projected period contains
capital expenditures to construct a necessary, new source of
peak day capacity within the boundaries of the natural gas
distribution system to support customer growth and pressure
requirements on the entire natural gas distribution system.
Specifically, these estimated expenditures are expected to be
used for the construction of a one billion cubic foot LNG
storage facility on the land historically used for storage
facilities by Washington Gas in Chillum, Maryland. The new
storage facility is expected to be completed and in service by
the
2012-2013
winter heating season at an estimated total cost of
approximately $159 million, subject to certain zoning and
other legal challenges.
On October 30, 2006, the District Council of Prince
Georges County, Maryland denied Washington Gass
application for a special exception related to its proposed
construction of the LNG peaking plant because it believes that
current zoning restrictions prohibit such construction.
Washington Gas appealed this decision to the Prince
Georges County Circuit Court (the Circuit Court) on
November 22, 2006; however, the case was subsequently sent
back to the administrative process by the Circuit Court. On
April 16, 2008, Washington Gas filed a Complaint for
Declaratory and Injunctive Relief with the United States
District Court for the District of Maryland seeking to clarify
the role of the local jurisdiction by affirming all local laws
relating to safety and location of the facility are preempted by
Federal and State law. Until the legal challenges are resolved
and the LNG plant is constructed, Washington Gas has planned for
alternative sources of supply to meet its customers peak
day requirements. These plans include capital expenditures
related to infrastructure improvements which are expected to be
completed by fiscal year 2012 and which provide for adequate
system performance based on projected needs through at least
November 2012. The costs to complete the infrastructure
improvements are reflected in the above table for the projected
periods shown.
|
|
|
CONTRACTUAL
OBLIGATIONS, OFF-BALANCE SHEET ARRANGEMENTS AND OTHER COMMERCIAL
COMMITMENTS
|
WGL Holdings and Washington Gas have certain contractual
obligations that extend beyond fiscal year 2008. These
commitments include long-term debt, lease obligations and
unconditional purchase obligations for pipeline capacity,
transportation and storage services, and certain natural gas and
electricity commodity commitments. The estimated obligations as
of September 30, 2008 for future fiscal years are shown
below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated Contractual Obligations and Commercial
Commitments
|
|
|
|
|
|
Years Ended September 30,
|
|
|
|
(In millions)
|
|
Total
|
|
|
2009
|
|
|
2010
|
|
|
2011
|
|
|
2012
|
|
|
2013
|
|
|
Thereafter
|
|
|
|
Pipeline and storage
contracts
(a)
|
|
$
|
2,057.3
|
|
|
$
|
169.6
|
|
|
$
|
168.9
|
|
|
$
|
155.1
|
|
|
$
|
155.5
|
|
|
$
|
156.9
|
|
|
$
|
1,251.3
|
|
Medium-term
notes
(b)
|
|
|
664.0
|
|
|
|
75.0
|
|
|
|
82.5
|
|
|
|
30.0
|
|
|
|
77.0
|
|
|
|
|
|
|
|
399.5
|
|
Other long-term
debt
(b)
|
|
|
1.1
|
|
|
|
1.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense
(c)
|
|
|
420.0
|
|
|
|
37.4
|
|
|
|
33.6
|
|
|
|
29.0
|
|
|
|
25.5
|
|
|
|
23.8
|
|
|
|
270.7
|
|
Gas purchase commitmentsWashington
Gas
(d)
|
|
|
945.6
|
|
|
|
377.9
|
|
|
|
124.5
|
|
|
|
52.1
|
|
|
|
64.8
|
|
|
|
63.6
|
|
|
|
262.7
|
|
Gas purchase
commitmentsWGEServices
(e)
|
|
|
640.3
|
|
|
|
396.1
|
|
|
|
154.8
|
|
|
|
63.4
|
|
|
|
18.0
|
|
|
|
8.0
|
|
|
|
|
|
Electric purchase
commitments
(f)
|
|
|
410.5
|
|
|
|
238.6
|
|
|
|
124.5
|
|
|
|
38.7
|
|
|
|
7.2
|
|
|
|
1.5
|
|
|
|
|
|
Operating leases
|
|
|
38.6
|
|
|
|
4.0
|
|
|
|
4.0
|
|
|
|
3.9
|
|
|
|
3.9
|
|
|
|
3.9
|
|
|
|
18.9
|
|
Business Process
Outsourcing
(g)
|
|
|
305.1
|
|
|
|
46.0
|
|
|
|
40.4
|
|
|
|
33.5
|
|
|
|
33.1
|
|
|
|
31.7
|
|
|
|
120.4
|
|
Other long-term
commitments
(h)
|
|
|
12.8
|
|
|
|
4.1
|
|
|
|
5.3
|
|
|
|
1.4
|
|
|
|
1.3
|
|
|
|
0.3
|
|
|
|
0.4
|
|
|
Total
|
|
$
|
5,495.3
|
|
|
$
|
1,349.8
|
|
|
$
|
738.5
|
|
|
$
|
407.1
|
|
|
$
|
386.3
|
|
|
$
|
289.7
|
|
|
$
|
2,323.9
|
|
|
50
WGL Holdings, Inc.
Part II
Item 7. Managements Discussion and Analysis of
Financial Condition and Results of Operations (continued)
|
|
|
(a)
|
|
Represents minimum payments
under natural gas transportation, storage and peaking contracts
which have expiration dates through fiscal year 2028.
Additionally, includes minimum payments for WGEServices pipeline
contracts.
|
|
|
|
(b)
|
|
Represents scheduled repayment
of principal including the assumed exercise of a put option by
the MTN debt holders of $8.5 million in 2010. Other
long-term debt excludes $14.7 million in debt that is
anticipated to be a non-cash extinguishment of project debt
financing (refer to the section entitled Construction
Project Financing).
|
|
|
|
(c)
|
|
Represents the scheduled
interest payments associated with MTNs and other long-term
debt.
|
|
|
|
(d)
|
|
Includes short-term commitments
to purchase fixed volumes of natural gas, as well as long-term
gas purchase commitments that contain fixed volume purchase
requirements. Cost estimates are based on both forward market
prices and option premiums for fixed volume purchases under
these purchase commitments.
|
|
|
|
(e)
|
|
Represents
commitments
based on
a combination of market prices at September 30, 2008 and
fixed price as well as index priced contract commitments for
natural gas delivered to various city gate stations, including
the cost of transportation to that point, which is bundled in
the purchase price.
|
|
(f)
|
|
Represents electric purchase
commitments which are based on existing fixed price and fixed
volume contracts. Also includes $2.1 million related to
renewable energy credits.
|
|
(g)
|
|
Represents fixed costs to the
service provider related to the
10-year
contract for business process outsourcing. These payments do not
reflect potential inflationary adjustments included in the
contract. Including these inflationary adjustments, required
payments to the service provider could total
$367.2 million.
|
|
|
|
(h)
|
|
Includes certain Information
Technology service contracts. Also includes committed payments
related to certain environmental response costs.
|
The table above reflects fixed and variable obligations. Certain
of these estimates reflect likely purchases under various
contracts, and may differ from minimum future contractual
commitments disclosed in Note 14 of the Notes to
Consolidated Financial Statements.
For commitments related to Washington Gass pension and
post-retirement benefit plans, during fiscal year 2009,
Washington Gas does not expect to make any contributions to its
qualified, trusteed, employee-non-contributory defined benefit
pension plan covering all active and vested former employees of
Washington Gas. Washington Gas expects to make payments totaling
$1.8 million in fiscal year 2009 on behalf of participants
in our non-funded Supplemental Executive Retirement Plan.
Washington Gas also expects to contribute $14.4 million to
our health and life insurance benefit plans on behalf of
retirees during fiscal year 2009. For a further discussion of
our pension and post-retirement benefit plans, refer to
Note 11 of the Notes to Consolidated Financial Statements.
|
|
|
Construction
Project Financing
|
To fund certain of its construction projects, Washington Gas
enters into financing arrangements with third-party lenders. As
part of these financing arrangements, Washington Gass
customers agree to make principal and interest payments over a
period of time, typically beginning after the projects are
completed. Washington Gas then assigns these customer payment
streams to the lender. As the lender funds the construction
project, Washington Gas establishes a note receivable
representing its customers obligations to remit principal
and interest and a long-term note payable to the lender. When
these projects are formally accepted by the customer
as completed, Washington Gas transfers the ownership of the note
receivable to the lender and removes both the note receivable
and the long-term financing from its financial statements. As of
September 30, 2008, work on these construction projects
that was not completed or accepted by customers was valued at
$14.7 million, which is recorded on the balance sheet as a
note receivable in Deferred Charges and Other
AssetsOther with the corresponding long-term
obligation to the lender in Long-term debt. At any
time before these contracts are accepted by the customer, should
there be a contract default, such as, among other things, a
delay in completing the project, the lender may call on
Washington Gas to fund the unpaid principal in exchange for
which Washington Gas would receive the right to the stream of
payments from the customer. Once the project is accepted by the
customer, the lender will have no recourse against Washington
Gas related to this long-term debt.
WGL Holdings has guaranteed payments primarily for certain
purchases of natural gas and electricity on behalf of the retail
energy-marketing segment. At September 30, 2008, these
guarantees totaled $330.7 million. The amount of such
guarantees is periodically adjusted to reflect changes in the
level of financial exposure related to these purchase
commitments. We also receive financial guarantees or other
collateral from suppliers when required by our credit policy
(refer to the section entitled
Credit Risk
for a further discussion of our credit policy). WGL Holdings
also issued guarantees totaling $3.0 million at
September 30, 2008 that were made on behalf of certain of
our non-utility subsidiaries associated with their banking
transactions. For all of its financial guarantees, WGL Holdings
may cancel any or all future obligations imposed by the
guarantees upon written notice to the counterparty, but WGL
Holdings would continue to be responsible for the obligations
that had been created under the guarantees prior to the
effective date of the cancellation.
51
WGL Holdings, Inc.
Part II
Item 7. Managements Discussion and Analysis of
Financial Condition and Results of Operations (continued)
|
|
|
Operating
Issues Related To Cove Point Natural Gas Supply
|
In late fiscal year 2003, Dominion reactivated its Cove Point
LNG terminal. The composition of the vaporized LNG received from
the Cove Point LNG terminal resulted in increased leaks in
mechanical couplings on the portion of our distribution system
in Prince Georges County, Maryland that directly receives
the Cove Point gas. The imported Cove Point gas contains a lower
concentration of HHCs than domestically produced natural gas,
and caused the seals on those mechanical couplings to shrink and
to leak. Independent laboratory tests performed on behalf of
Washington Gas have shown that, in a laboratory environment, the
injection of HHCs into the type of gas coming from the Cove
Point LNG terminal can be effective in re-swelling the seals in
couplings which increases their sealing force and in turn,
reduces the propensity for the affected couplings to leak. As
described below, ongoing field testing will determine the
success of applying this resolution more broadly.
Through a pipeline replacement project and the construction of a
HHC injection facility at the gate station that exclusively
receives gas from the Cove Point terminal, Washington Gas has
reduced the occurrence of new coupling leaks in this area of the
distribution system. A planned expansion of the Cove Point
terminal could result in a substantial increase in the receipt
of Cove Point gas into additional portions of Washington
Gass distribution system as greater volumes of Cove Point
gas are introduced into other downstream pipelines that provide
service to Washington Gas. This expansion may occur in December
2008 or shortly thereafter. Based upon studies and our
experience, this increase in the receipt of Cove Point gas is
likely to result in a significantly greater number of leaks in
other parts of Washington Gass distribution system, unless
our efforts to mitigate these additional leaks are successful.
Washington Gas is attempting to mitigate this anticipated
increase in leaks through:
(i)
additional pipeline
replacement programs;
(ii)
the construction of
additional HHC injection facilities;
(iii)
isolating
or separating its interstate pipeline receipt points, where
possible, from pipelines that transport Cove Point gas and
(iv)
continued efforts before the FERC to condition
incremental increases in deliveries from the Cove Point terminal
on the appropriate resolution of safety concerns consistent with
the public interest.
Washington Gas has completed the construction of a second HHC
injection facility that became operational in December 2007 at a
cost of approximately $4 million and is currently
constructing a third HHC injection facility. The third HHC
injection facility is estimated to cost between $3 million
and $4 million. Assuming current gas flow patterns with the
current pipeline supply configurations, the strategic placement
of the three HHC injection facilities will inject HHCs into the
natural gas supplied to over 95 percent of the pipelines
that contain mechanical couplings within our distribution
system. Washington Gas has been granted recovery for a portion
of these costs allocable to Virginia and Maryland. Additionally,
Washington Gas will seek recovery of the costs allocable to the
District of Columbia in a future base rate proceeding.
Washington Gas expects the cost of these facilities to be
recoverable in all jurisdictions.
The estimated cost of these facilities does not include the cost
of the HHCs injected into the gas stream at the gate stations.
We have been granted cost recovery for the majority of these
costs in Virginia and Maryland, and have requested cost recovery
for both past and future HHC costs in the District of Columbia
(refer to the section entitled
Rates and Regulatory
Matters
).
Washington Gas is replacing or remediating selected mechanically
coupled pipelines within the areas of the distribution system
that may receive high concentrations of Cove Point gas, but that
will not receive HHC injections. Washington Gas has also planned
for additional replacement of mechanically coupled pipeline in
other areas of its distribution system. In total, the current
estimated cost of planned mechanical coupling remediation and
replacement work over the next three years is
$33.0 million, which includes $8.0 million per year as
part of a planned mechanically coupled pipe replacement program
approved by the SCC of VA as part of a Virginia rate case.
Washington Gas continues to gather and evaluate field and
laboratory evidence to determine the efficacy of HHC injections
of the Cove Point gas in preventing additional leaks or
retarding the rate at which additional leaks may occur in the
gas distribution system if expanded volumes from the Cove Point
terminal are introduced. In a report filed with the PSC of MD on
June 30, 2008, Washington Gas reported a notable increase
in leaks in mechanical couplings in a portion of its
distribution system in Virginia where Cove Point gas injected
with HHCs was recently introduced. Although this increase in
leaks was significantly less than the increase experienced in
the affected area of Prince Georges County, Maryland, the
injection of HCCs into the Cove Point gas did not reduce the
occurrence of coupling leaks to an acceptable level that would
allow Washington Gas to safely accommodate the increased
deliveries of revaporized LNG anticipated with the expansion of
the Cove Point terminal. If we are unable to implement a
satisfactory solution on a timely basis, then additional
operating expenses and capital expenditures may be necessary to
contend with the receipt of increased volumes of vaporized LNG
from the Cove Point terminal into Washington Gass
distribution system. Such additional operating expenses and
capital expenditures may not be timely enough to mitigate the
challenges posed by increased volumes of Cove Point gas and
could result in leakage in mechanical couplings at a rate that
could compromise the safety of our distribution system.
Additional legal or regulatory remedies may be necessary to
protect the Washington Gas distribution system and its customers
from
52
WGL Holdings, Inc.
Part II
Item 7. Managements Discussion and Analysis of
Financial Condition and Results of Operations (continued)
the adverse effects of unblended vaporized LNG (refer to the
section entitled
Request for FERC Action
below for a further discussion).
Notwithstanding Washington Gass recovery through local
regulatory commission action of costs related to the
construction of the HHC injection facilities, Washington Gas is
pursuing remedies to keep its customers from having to pay more
than their appropriate share of the costs of the remediation to
maintain the safety of the Washington Gas distribution system.
Request for FERC
Action
In November 2005, Washington Gas requested the FERC to invoke
its authority to require Dominion to demonstrate that the
increased volumes of the Cove Point gas resulting from the
expansion would flow safely through the Washington Gas
distribution system and would be consistent with the public
interest. Washington Gas specifically requested that the
proposed expansion of the Cove Point LNG terminal be denied
until Dominion has shown that the Cove Point gas:
(i)
is of such quality that it is fully
interchangeable with the domestically produced natural gas
historically received by Washington Gas and
(ii)
will not cause harm to its customers or to the
infrastructure of Washington Gass distribution system.
On June 16, 2006, the FERC issued an order authorizing
Dominions request to expand the capacity and output of its
Cove Point LNG terminal and, thereby, denying Washington
Gass request to require Dominion to demonstrate the safety
of the Cove Point gas flowing through the Washington Gas
distribution system. Washington Gas, the PSC of MD, Keyspan
Corporation, the Maryland Office of Peoples Counsel (MD
OPC) and other organizations all filed Requests for Rehearing
with the FERC to seek modification of the FERCs
June 16, 2006 order. These requests were all rejected by
the FERC. On January 26, 2007, Washington Gas filed a
notice of appeal with the United States Court of Appeals for the
District of Columbia Circuit (the Court of Appeals). Washington
Gas requested the Court of Appeals to reverse the June 16,
2006 FERC order that authorized the Cove Point expansion, as
well as a January 4, 2007 FERC order that denied Washington
Gass rehearing request.
On July 18, 2008, the Court of Appeals issued an opinion
vacating the FERC orders to the extent they approve the
expansion. The opinion remanded the case to the FERC to address
whether the expansion can go forward without causing unsafe
leakage on Washington Gas Light Companys distribution
system.
Although Washington Gas agrees with the portion of the Court of
Appeals decision that states the FERC failed to address
adequately the future safety concerns associated with increased
deliveries of LNG into its system, Washington Gas does not agree
with all of the findings of the Court of Appeals, including
conclusions related to the cause of the leaks, and on
September 2, 2008 filed a request for rehearing with the
Court of Appeals. This request has been denied. The FERC held a
technical conference on August 14, 2008 to discuss
the nature and progress of remedial measures taken to date, as
well as the need and benefit of any other remedial measures that
might be taken by WGL and Dominion Cove Point LNG, LP so that
WGLs system can safely accommodate the increased amounts
of regasified LNG from Cove Points LNG import
terminal. Washington Gas filed initial Post Technical
Conference Comments on August 19, 2008 and reply Post
Technical Conference Comments on August 22, 2008. On
October 7, 2008, the FERC issued its reauthorization of the
expansion of the Cove Point terminal, allowing construction to
continue; however, the FERC limited the amount of vaporized LNG
that may flow from the Cove Point terminal into the Columbia Gas
Transmission pipeline and ultimately into the distribution
system of Washington Gas. On November 6, 2008, Washington
Gas filed a Request for Rehearing with the FERC, citing numerous
factual and legal errors in the October 7, 2008
reauthorization. The reauthorization fails to adequately address
future safety concerns as directed by the Court of Appeals.
Although this reauthorization limited the amount of vaporized
LNG that may flow from the Cove Point terminal into Washington
Gass distribution system through the Columbia Gas
Transmission pipeline, this limited amount still far exceeds any
amount of Cove Point gas that has been received by Columbia Gas
Transmission to date.
Washington Gas is committed to maintaining the safety of its
distribution system for its customers and will continue to
oppose the authorization of the Cove Point expansion until a
long-term solution is determined that can address the safety
issues associated with the expanded flows of vaporized LNG from
the Cove Point terminal that flow into the interstate pipeline
system that also serves Washington Gas. Washington Gas welcomes
the opportunity to work with Dominion as well as the shippers
who bring LNG into the Cove Point terminal and the interstate
pipelines that deliver gas to Washington Gas in order to achieve
and implement an appropriate solution to the issue of gas
quality affecting its distribution system.
53
WGL Holdings, Inc.
Part II
Item 7. Managements Discussion and Analysis of
Financial Condition and Results of Operations (continued)
Certain wholesale suppliers that sell natural gas to both
Washington Gas and WGEServices either have relatively low credit
ratings or are not rated by major credit rating agencies.
In the event of a suppliers failure to deliver contracted
volumes of gas, Washington Gas may need to replace those volumes
at prevailing market prices, which may be higher than the
original transaction prices, and pass these costs through to its
sales customers under the purchased gas cost adjustment
mechanisms. Additionally, Washington Gas enters into contracts
with wholesale counterparties to buy and sell natural gas for
the purpose of optimizing the value of its long-term capacity
and storage assets, as well as for hedging natural gas costs and
interest costs. In the event of a default by these
counterparties, Washington Gas may be at risk for financial loss
to the extent these costs are not passed through to its
customers. To manage these various credit risks, Washington Gas
has a credit policy in place that is designed to mitigate these
credit risks through a requirement for credit enhancements
including, but not limited to, letters of credit, parent
guarantees and cash collateral when deemed necessary. In
accordance with this policy, Washington Gas has obtained credit
enhancements from certain of its counterparties. Additionally,
for certain counterparties or their guarantors that meet this
policys creditworthiness criteria, Washington Gas grants
unsecured credit which is continuously monitored.
For WGEServices, depending on the ability of these
counterparties to deliver natural gas or electricity under
existing contracts, WGEServices could be financially exposed for
the difference between the price at which WGEServices has
contracted to buy these commodities and their replacement cost
from another supplier. To the extent that WGEServices sells
natural gas to these wholesale counterparties, WGEServices may
be exposed to payment risk if WGEServices is in a net receivable
position. Additionally, WGEServices enters into contracts with
third parties to hedge the costs of natural gas and electricity.
Depending on the ability of the third parties to fulfill their
commitments, WGEServices could be at risk for financial loss.
WGEServices has an existing credit policy that is designed to
mitigate credit risks through a requirement for credit
enhancements including, but not limited to, letters of credit,
parent guarantees and cash collateral when deemed necessary. In
accordance with this policy, WGEServices has obtained credit
enhancements from certain of its counterparties. If certain
counterparties or their guarantors meet the policys
creditworthiness criteria, WGEServices grants unsecured credit
to those counterparties or their guarantors. The
creditworthiness of all counterparties is continuously monitored.
The following table provides information on our credit exposure,
net of collateral, to wholesale counterparties as of
September 30, 2008 for both Washington Gas and WGEServices,
separately.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit Exposure to Wholesale Counterparties
(In
millions)
|
|
|
|
|
|
Exposure
|
|
|
Offsetting
|
|
|
|
|
|
Number of
|
|
|
Net Exposure of
|
|
|
|
Before Credit
|
|
|
Credit Collateral
|
|
|
Net
|
|
|
Counterparties
|
|
|
Counterparties
|
|
Rating
(a)
|
|
Collateral
(b)
|
|
|
Held
(c)
|
|
|
Exposure
|
|
|
Greater Than
10%
(d)
|
|
|
Greater Than 10%
|
|
|
|
|
Washington Gas
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment Grade
|
|
$
|
9.7
|
|
|
$
|
|
|
|
$
|
9.7
|
|
|
|
2
|
|
|
$
|
5.2
|
|
Non-Investment Grade
|
|
|
0.7
|
|
|
|
|
|
|
|
0.7
|
|
|
|
|
|
|
|
|
|
No External Ratings
|
|
|
6.5
|
|
|
|
5.0
|
|
|
|
1.5
|
|
|
|
1
|
|
|
|
1.5
|
|
|
WGEServices
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment Grade
|
|
$
|
2.2
|
|
|
$
|
|
|
|
$
|
2.2
|
|
|
|
2
|
|
|
$
|
2.1
|
|
Non-Investment Grade
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
No External Ratings
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
|
Included in Investment
Grade are counterparties with a minimum
Standard & Poors or Moodys Investor
Service rating of BBB- or Baa3, respectively. If a counterparty
has provided a guarantee by a higher-rated entity (e.g., its
parent), the guarantors rating is used in this
table.
|
|
|
|
(b)
|
|
Includes the net of all open
positions on energy-related derivatives subject to
mark-to-market
accounting requirements, the net receivable/payable for realized
transactions and net open positions for contracts designated as
normal purchases and normal sales and not recorded on our
balance sheet. Amounts due from counterparties are offset by
liabilities payable to those counterparties to the extent that
legally enforceable netting arrangements are in place.
|
|
|
|
(c)
|
|
Represents cash deposits and
letters of credit received from counterparties, not adjusted for
probability of default.
|
|
|
|
(d)
|
|
Using a percentage of the net
exposure.
|
54
WGL Holdings, Inc.
Part II
Item 7. Managements Discussion and Analysis of
Financial Condition and Results of Operations (continued)
At September 30, 2008, no reserve was recorded related to
wholesale credit risk for either Washington Gas or WGEServices.
Washington Gas is also exposed to the risk of non-payment of
utility bills by certain of its customers. To manage this
customer credit risk, Washington Gas may require cash deposits
from its high risk customers to cover payment of their bills
until the requirements for the deposit refunds are met.
WGEServices is also exposed to the risk of non-payment of
invoiced sales by certain of its retail customers. WGEServices
manages this risk by evaluating the credit quality of new
customers as well as by monitoring collections from existing
customers. To the extent necessary, WGEServices can obtain
collateral from, or terminate service to, its existing customers
based on a credit quality criteria.
We are exposed to various forms of market risk including
commodity price risk, weather risk and interest-rate risk. The
following discussion describes these risks and our management of
them.
|
|
|
Price Risk
Related to the Regulated Utility Segment
|
Washington Gas faces price risk associated with the purchase of
natural gas. Washington Gas recovers the cost of the natural gas
to serve customers through gas cost recovery mechanisms as
approved in jurisdictional tariffs; therefore a change in the
price of natural gas generally has no direct effect on
Washington Gass net income. However, Washington Gas is
responsible for following competitive and reasonable practices
in purchasing natural gas for its customers.
To manage price risk associated with its natural gas supply to
its firm customers, Washington Gas:
(i)
actively
manages its gas supply portfolio to balance sales and delivery
obligations;
(ii)
injects natural gas into storage
during the summer months when prices are generally lower, and
withdraws that gas during the winter heating season when prices
are generally higher and
(iii)
enters into hedging
contracts and other contracts that qualify as derivative
instruments related to the sale and purchase of natural gas.
Washington Gas has specific regulatory approval in the District
of Columbia, Maryland and Virginia to use forward contracts and
option contracts to hedge against potential price volatility for
a limited portion of its natural gas purchases for firm
customers. Specifically, Washington Gas has approval to:
(i)
buy gas in advance using forward contracts;
(ii)
purchase call options that lock in a maximum
price when Washington Gas is ready to buy gas and
(iii)
use a combination of put and call options to
limit price exposure within an acceptable range. Regulatory
approval for Virginia is permanent. The regulatory approvals in
the District of Columbia and Maryland are pursuant to pilot
programs, and Washington Gas is seeking to continue these
programs. Additionally, pursuant to a three-year pilot program
that expired in the latter half of 2008, Washington Gas had
specific regulatory approval in Maryland and Virginia to hedge
the cost of natural gas purchased for storage using financial
transactions in the form of forwards, swaps and option
contracts. Washington Gas is planning to file for renewal of
these programs. Additionally, on October 20, 2008,
Washington Gas received approval in the District of Columbia to
hedge the cost of natural gas for storage pursuant to a
three-year pilot program.
Washington Gas also executes commodity-related physical and
financial contracts in the form of forwards, swaps and option
contracts as part of an asset optimization program that is
managed by its internal staff. These transactions are accounted
for as derivatives. Under this program, Washington Gas realizes
value from its long-term natural gas transportation and storage
capacity resources during periods when not being used to
physically serve utility customers. Regulatory sharing
mechanisms in all three jurisdictions allow the profit from
these transactions to be shared between Washington Gass
customers and shareholders. Prior to May 1, 2008,
Washington Gas contracted for the management of a portion of
Washington Gass asset optimization program with
non-affiliated asset managers. These asset managers assisted in
the acquisition and delivery of natural gas supply to Washington
Gass service territory, and paid Washington Gas a fee to
utilize the related capacity resources for their own account
when they were not required to meet customer supply needs. On
April 30, 2008, the last of these asset management
contracts expired, and Washington Gas retained the use of all of
its capacity resources to manage the asset optimization program
internally with the assistance of external consultants.
55
WGL Holdings, Inc.
Part II
Item 7. Managements Discussion and Analysis of
Financial Condition and Results of Operations (continued)
The following two tables summarize the changes in the fair value
of our net assets (liabilities) associated with the regulated
utility segments energy-related derivatives during the
twelve months ended September 30, 2008:
|
|
|
|
|
Regulated Utility Segment
|
|
Changes in Fair Value of Energy-Related Derivatives
|
|
|
|
(In millions)
|
|
|
|
|
|
Net assets (liabilities) at September 30, 2007
|
|
$
|
(12.3
|
)
|
Net fair value of contracts entered into during the period
|
|
|
(15.5
|
)
|
Other changes in net fair value
|
|
|
3.1
|
|
Realized net settlement of derivatives
|
|
|
(10.9
|
)
|
|
Net assets (liabilities) at September 30, 2008
|
|
$
|
(35.6
|
)
|
|
|
|
|
|
|
Regulated Utility Segment
|
|
Roll Forward of Energy-Related Derivatives
|
|
|
|
(In millions)
|
|
|
|
|
|
Net assets (liabilities) at September 30, 2007
|
|
$
|
(12.3
|
)
|
Recorded to income
|
|
|
8.9
|
|
Recorded to regulatory assets/liabilities
|
|
|
(21.3
|
)
|
Net option premium payments
|
|
|
|
|
Realized net settlement of derivatives
|
|
|
(10.9
|
)
|
|
Net assets (liabilities) at September 30, 2008
|
|
$
|
(35.6
|
)
|
|
The maturity dates of our net assets (liabilities) associated
with the regulated utility segments energy-related
derivatives recorded at fair value at September 30, 2008,
is summarized in the following table based on the approach used
to determine fair value:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Regulated Utility Segment
|
|
Maturity of Net Assets (Liabilities) Associated with our
Energy-Related Derivatives
|
|
|
|
|
|
Years Ended September 30,
|
|
|
|
(In millions)
|
|
Total
|
|
|
2009
|
|
|
2010
|
|
|
2011
|
|
|
2012
|
|
|
2013
|
|
|
Thereafter
|
|
|
|
Prices actively quoted
|
|
$
|
1.9
|
|
|
$
|
(1.5
|
)
|
|
$
|
3.0
|
|
|
$
|
0.4
|
|
|
$
|
0.5
|
|
|
$
|
(0.9
|
)
|
|
$
|
0.4
|
|
Prices provided by other external sources
|
|
|
(0.7
|
)
|
|
|
(0.7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prices based on models and other valuation methods
|
|
|
(36.8
|
)
|
|
|
(30.6
|
)
|
|
|
(2.6
|
)
|
|
|
3.4
|
|
|
|
(1.2
|
)
|
|
|
(1.3
|
)
|
|
|
(4.5
|
)
|
|
Total net assets (liabilities) associated with our
energy-related derivatives
|
|
$
|
(35.6
|
)
|
|
$
|
(32.8
|
)
|
|
$
|
0.4
|
|
|
$
|
3.8
|
|
|
$
|
(0.7
|
)
|
|
$
|
(2.2
|
)
|
|
$
|
(4.1
|
)
|
|
Price Risk
Related to the Retail Energy-Marketing Segment
Our retail energy-marketing subsidiary, WGEServices, sells
natural gas and electricity to retail customers at both fixed
and indexed prices. WGEServices must manage daily and seasonal
demand fluctuations for these products with its suppliers. Price
risk exists to the extent WGEServices does not closely match the
timing and volume of natural gas and electricity it purchases
with the related fixed price or indexed sales commitments.
WGEServices risk management policies and procedures are
designed to minimize this risk.
Natural Gas.
A portion of
WGEServices annual natural gas sales volumes are subject
to variations in customer demand associated with fluctuations in
weather and customer conservation. Purchases of natural gas to
fulfill retail sales commitments are generally made under
fixed-volume contracts. If there is a significant deviation from
normal weather, or other factors, that cause our purchase
commitments to differ significantly from actual customer usage,
WGEServices may be required to purchase incremental natural gas
or sell excess natural gas at prices that negatively impact
gross margins. WGEServices may manage price risk through the use
of derivative instruments that include financial contracts and
wholesale supply contracts that provide for volumetric
variability.
56
WGL Holdings, Inc.
Part II
Item 7. Managements Discussion and Analysis of
Financial Condition and Results of Operations (continued)
WGEServices also uses derivative instruments to mitigate the
price risks associated with purchasing natural gas wholesale and
reselling natural gas to retail customers at prices that are
generally fixed.
Electricity.
WGEServices procures
electricity supply under contract structures in which
WGEServices assumes the responsibility of matching its customer
requirements with its supply purchases. WGEServices assembles
the various components of supply, including electric energy from
various suppliers, and capacity, ancillary services and
transmission service from the PJM Interconnection, a regional
transmission organization, to match its customer requirements in
accordance with its risk management policy.
To the extent WGEServices has not matched its customer
requirements with its supply commitments, it could be exposed to
electricity commodity price risk. WGEServices may manage this
risk through the use of derivative instruments, including
financial contracts.
WGEServices electric business is also exposed to
fluctuations in weather and varying customer usage. Purchases
generally are made under fixed-price, fixed-volume contracts
that are based on certain weather assumptions. If there are
significant deviations in weather or usage from these
assumptions, WGEServices may incur price and volume variances
that could negatively impact expected gross margins (refer to
the section entitled
Weather Risk
for a
further discussion of our management of weather risk).
The following two tables summarize the changes in the fair value
of our net assets (liabilities) associated with the retail
energy-marketing segments energy-related derivatives for
both natural gas and electricity during the twelve months ended
September 30, 2008:
|
|
|
|
|
Retail Energy-Marketing
Segment
|
|
Changes in Fair Value of Energy-Related Derivatives
|
|
|
|
(In millions)
|
|
|
|
|
|
Net assets (liabilities) at September 30, 2007
|
|
$
|
7.6
|
|
Net fair value of contracts entered into during the period
|
|
|
(10.7
|
)
|
Other changes in net fair value
|
|
|
2.0
|
|
Realized net settlement of derivatives
|
|
|
(2.3
|
)
|
|
Net assets (liabilities) at September 30, 2008
|
|
$
|
(3.4
|
)
|
|
|
|
|
|
|
Retail Energy-Marketing
Segment
|
|
Roll Forward of Energy-Related Derivatives
|
|
|
|
(In millions)
|
|
|
|
|
|
Net assets (liabilities) at September 30, 2007
|
|
$
|
7.6
|
|
Recorded to income
|
|
|
(10.2
|
)
|
Recorded to accounts
payable
(a)
|
|
|
1.5
|
|
Net option premium payments
|
|
|
|
|
Realized net settlement of derivatives
|
|
|
(2.3
|
)
|
|
Net assets (liabilities) at September 30, 2008
|
|
$
|
(3.4
|
)
|
|
(a)
Represents
the amount to be paid for future Financial Transmission Rights
related to electricity for WGEServices.
57
WGL Holdings, Inc.
Part II
Item 7. Managements Discussion and Analysis of
Financial Condition and Results of Operations (continued)
The maturity dates of our net assets (liabilities) associated
with the retail energy-marketing segments energy-related
derivatives recorded at fair value at September 30, 2008,
is summarized in the following table based on the approach used
to determine fair value:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail Energy Marketing Segment
|
|
Maturity of Net Assets (Liabilities) Associated with our
Energy-Related Derivatives
|
|
|
|
|
|
Years Ended September 30,
|
|
|
|
(In millions)
|
|
Total
|
|
|
2009
|
|
|
2010
|
|
|
2011
|
|
|
2012
|
|
|
2013
|
|
|
Thereafter
|
|
|
|
|
Prices actively quoted
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Prices provided by other external sources
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prices based on models and other valuation methods
|
|
|
(3.4
|
)
|
|
|
(3.8
|
)
|
|
|
0.1
|
|
|
|
0.2
|
|
|
|
0.1
|
|
|
|
|
|
|
|
|
|
|
Total net assets (liabilities) associated with our
energy-related derivatives
|
|
$
|
(3.4
|
)
|
|
$
|
(3.8
|
)
|
|
$
|
0.1
|
|
|
$
|
0.2
|
|
|
$
|
0.1
|
|
|
$
|
|
|
|
$
|
|
|
|
Value-at-Risk.
WGEServices
measures the market risk of its energy commodity portfolio by
determining its
value-at-risk.
Value-at-risk
is an estimate of the maximum loss that can be expected at some
level of probability if a portfolio is held for a given time
period. The
value-at-risk
calculation for natural gas and electric portfolios include
assumptions for normal weather, new customers and renewing
customers for which supply commitments have been secured. Based
on a 95 percent confidence interval for a
one-day
holding period, WGEServices
value-at-risk
at September 30, 2008 was approximately $48,000 and
$28,000, related to its natural gas and electric portfolios,
respectively.
Weather
Risk
We are exposed to various forms of weather risk in both our
regulated utility and unregulated business segments. For
Washington Gas, a large portion of its revenues is volume driven
and its current rates are based upon an assumption of normal
weather, however, billing adjustment mechanisms described below
address variations from this assumption. Without weather
protection strategies, variations from normal weather will cause
our earnings to increase or decrease depending on the weather
pattern. Washington Gas currently has a weather protection
strategy that is designed to neutralize the estimated negative
financial effects of
warmer-than-normal
weather on its net income, as discussed below.
The financial results of our non-regulated energy-marketing
business, WGEServices, are also affected by variations from
normal weather primarily in the winter relating to its natural
gas sales, and throughout the fiscal year relating to its
electricity sales. WGEServices manages these weather risks with,
among other things, weather derivatives.
Billing Adjustment Mechanisms.
In
Maryland, Washington Gas has a RNA billing mechanism that is
designed to stabilize the level of net revenues collected from
Maryland customers by eliminating the effect of deviations in
customer usage caused by variations in weather from normal
levels and other factors such as conservation. Effective
October 1, 2007, Washington Gas implemented a WNA mechanism
in Virginia which is a billing adjustment mechanism that is
designed to eliminate the effect of variations in weather from
normal levels on utility net revenues. The staff of the SCC of
VA (VA Staff) has approved the WNA calculation for the
2007-2008
winter heating season, and Washington Gas included a billing
adjustment in customers August 2008 bills.
For both the RNA and the WNA mechanisms, periods of
colder-than-normal
weather generally would cause Washington Gas to record a
reduction to its revenues and establish a refund liability to
customers, while the opposite would generally result during
periods of
warmer-than-normal
weather. However, factors such as volatile weather patterns and
customer conservation may cause the RNA to function conversely
because it adjusts billed revenues to provide a designed level
of net revenue per meter.
Weather Insurance.
Effective
October 1, 2005, Washington Gas purchased a weather
insurance policy designed to mitigate the negative effects of
warmer-than-normal
weather in the District of Columbia. The policy had a three-year
term that expired on September 30, 2008. The policys
pre-tax average annual expense was $1.9 million (pre-tax)
over its term and Washington Gas received $5.9 million
(pre-tax) of benefits over the term of this contract. In fiscal
year 2009, Washington Gas will use weather derivatives, as
described below, to mitigate the negative effects of
warmer-than-normal
weather in the District of Columbia.
Weather Derivatives.
On October 1,
2008, Washington Gas purchased an HDD derivative to protect
against
warmer-than-normal
weather in the District of Columbia. Washington Gas will receive
$11,000 for every HDD below 3,835 during the period of
October 1, 2008 through September 30, 2009. The
maximum amount that Washington Gas can
58
WGL Holdings, Inc.
Part II
Item 7. Managements Discussion and Analysis of
Financial Condition and Results of Operations (continued)
receive under this arrangement is $5.3 million. To minimize
the cost of weather protection, Washington Gas sold two HDD
derivatives where Washington Gas will pay a total of $10,000 for
every HDD between 3,835 and 3,995 and $5,000 for every HDD
between 3,995 and 4,425. The maximum amount that Washington Gas
will pay out is $3.8 million for these two derivatives. The
net pre-tax premium cost of this strategy for Washington Gas is
$250,000.
WGEServices utilizes HDD derivatives for managing weather risks
related to its natural gas sales. WGEServices also utilizes
cooling degree day (CDD) derivatives to manage weather
risks related to its electricity sales during the summer cooling
season. These derivatives cover a portion of WGEServices
estimated revenue or energy-related cost exposure to variations
in HDDs or CDDs. Refer to Note 6 of the Notes to
Consolidated Financial Statements for a further discussion of
the accounting for these weather-related instruments.
Interest-Rate
Risk
We are exposed to interest-rate risk associated with our
short-term and long-term financing. Management of this risk is
discussed below.
Short-Term Debt.
At September 30,
2008 and 2007, WGL Holdings and its subsidiaries had outstanding
notes payable of $271.0 million and $184.2 million,
respectively. The carrying amount of our short-term debt
approximates fair value. In fiscal year 2008, a change of
100 basis points in the underlying average interest rate
for our short-term debt would have caused a change in interest
expense of approximately $1.3 million.
Long-Term Debt.
At September 30,
2008, we had fixed-rate MTNs and other long-term debt
aggregating $603.8 million in principal amount, excluding
current maturities and unamortized discounts, and having a fair
value of $564.6 million. Fair value is defined as the
present value of the debt securities future cash flows
discounted at interest rates that reflect market conditions as
of September 30, 2008. While these are fixed-rate
instruments and, therefore, do not expose us to the risk of
earnings loss due to changes in market interest rates, they are
subject to changes in fair value as market interest rates
change. A total of $8.5 million, or approximately one
percent, of Washington Gass outstanding MTNs, excluding
current maturities, have unexpired put options. A total of
$50.0 million, or approximately eight percent of
Washington Gass outstanding MTNs, have unexpired
call options. In addition, a total of $371.5 million, or
approximately 63 percent, of Washington Gass
outstanding MTNs, excluding current maturities, have make-whole
call options, and no associated put options.
Using sensitivity analyses to measure this market risk exposure,
we estimate that the fair value of our long-term debt would
increase by approximately $27.1 million if interest rates
were to decline by ten percent, or 67 basis points, from
current market levels. We also estimate that the fair value of
our long-term debt would decrease by approximately
$24.6 million if interest rates were to increase by ten
percent, or 67 basis points, from current market levels. In
general, such an increase or decrease in fair value would impact
earnings and cash flows only if Washington Gas were to reacquire
all or a portion of these instruments in the open market prior
to their maturity.
Derivative Instruments.
Washington Gas
utilizes derivative instruments from time to time in order to
minimize its exposure to the risk of interest-rate volatility.
There was no activity associated with these types of derivatives
in fiscal years 2008 or 2007.
59
Washington
Gas Light Company
Part II
Item 7. Managements Discussion and Analysis of
Financial Condition and Results of Operations (continued)
WASHINGTON GAS
LIGHT COMPANY
This section of Managements Discussion focuses on
Washington Gas for the reported periods. In many cases,
explanations and disclosures for both WGL Holdings and
Washington Gas are substantially the same.
RESULTS
OF OPERATIONS
The results of operations for the regulated utility segment and
Washington Gas are substantially the same; therefore, this
section primarily focuses on statistical information and other
information that is not discussed in the results of operations
for the regulated utility segment. Refer to the section entitled
Results of OperationsRegulated Utility
in Managements Discussion for WGL Holdings for a
detailed discussion of the results of operations for the
regulated utility segment.
Washington Gass net income applicable to its common stock
was $112.9 million, $89.2 million and
$84.5 million for the fiscal years ended September 30,
2008, 2007 and 2006, respectively. Net income for fiscal year
2008, increased $23.7 million over fiscal year 2007
primarily reflecting new rates in all jurisdictions as well as
earnings from our new asset optimization strategy, partially
offset by higher operation and maintenance expenses. Net income
for fiscal year 2007, when compared to fiscal year 2006,
primarily reflects higher average active customer meters and new
rates that went into effect in Virginia for our regulated
utility segment. Key gas delivery, weather and meter statistics
are shown in the table below for the fiscal years ending
September 30, 2008, 2007 and 2006.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gas Deliveries, Weather and Meter Statistics
|
|
|
|
|
|
Years Ended September 30,
|
|
|
Increase (decrease)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
vs. 2007
|
|
|
vs. 2006
|
|
|
|
|
Gas Sales and Deliveries
(millions of therms)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Firm
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gas sold and delivered
|
|
|
826.9
|
|
|
|
852.7
|
|
|
|
807.6
|
|
|
|
(25.8
|
)
|
|
|
45.1
|
|
Gas delivered for others
|
|
|
434.0
|
|
|
|
433.4
|
|
|
|
403.8
|
|
|
|
0.6
|
|
|
|
29.6
|
|
|
Total firm
|
|
|
1,260.9
|
|
|
|
1,286.1
|
|
|
|
1,211.4
|
|
|
|
(25.2
|
)
|
|
|
74.7
|
|
|
Interruptible
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gas sold and delivered
|
|
|
6.5
|
|
|
|
5.3
|
|
|
|
6.2
|
|
|
|
1.2
|
|
|
|
(0.9
|
)
|
Gas delivered for others
|
|
|
256.7
|
|
|
|
267.3
|
|
|
|
251.0
|
|
|
|
(10.6
|
)
|
|
|
16.3
|
|
|
Total interruptible
|
|
|
263.2
|
|
|
|
272.6
|
|
|
|
257.2
|
|
|
|
(9.4
|
)
|
|
|
15.4
|
|
|
Electric generationdelivered for others
|
|
|
92.1
|
|
|
|
111.9
|
|
|
|
108.3
|
|
|
|
(19.8
|
)
|
|
|
3.6
|
|
|
Total deliveries
|
|
|
1,616.2
|
|
|
|
1,670.6
|
|
|
|
1,576.9
|
|
|
|
(54.4
|
)
|
|
|
93.7
|
|
|
Degree Days
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Actual
|
|
|
3,458
|
|
|
|
3,955
|
|
|
|
3,710
|
|
|
|
(497
|
)
|
|
|
245
|
|
Normal
|
|
|
3,788
|
|
|
|
3,815
|
|
|
|
3,807
|
|
|
|
(27
|
)
|
|
|
8
|
|
Percent colder (warmer) than normal
|
|
|
(8.7
|
)%
|
|
|
3.7
|
%
|
|
|
(2.5
|
)%
|
|
|
n/a
|
|
|
|
n/a
|
|
Average active customer meters
|
|
|
1,055,396
|
|
|
|
1,045,709
|
|
|
|
1,029,099
|
|
|
|
9,687
|
|
|
|
16,610
|
|
New customer meters added
|
|
|
12,962
|
|
|
|
19,373
|
|
|
|
24,693
|
|
|
|
(6,411
|
)
|
|
|
(5,320
|
)
|
|
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 Gass 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 WNA mechanisms, respectively, which are designed to,
among other things, eliminate the effect in 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). In
addition to these mechanisms, the combination of declining block
rates in the
60
Washington Gas Light Company
Part II
Item 7. Managements Discussion and Analysis of
Financial Condition and Results of Operations (continued)
Maryland and Virginia jurisdictions and the existence of a fixed
demand charges in all jurisdictions to collect a portion of
revenues reduce the effect that variations from normal weather
have on net revenues.
Fiscal Year 2008 vs. Fiscal Year
2007.
During the fiscal year ended
September 30, 2008, total gas deliveries to firm customers
were 1.261 billion therms, a decrease of 25.2 million
therms, or 2.0 percent, in deliveries from fiscal year
2007. This comparison in natural gas deliveries to firm
customers primarily reflects warmer weather in the current
fiscal year than the prior year partially offset by an increase
in average active customer meters of 9,687, well as the
favorable effects of changes in natural gas consumption patterns
due to shifts in weather patterns and non-weather related
factors.
In relation to normal weather patterns, weather for fiscal year
2008 was 8.7 percent warmer than normal, as compared to
3.7 percent colder than normal for fiscal year 2007.
Washington Gass overall weather protection strategy is
designed to neutralize the estimated negative financial effects
of
warmer-than-normal
weather on earnings; therefore, there were no estimated effects
on net income from the
warmer-than-normal
weather in the fiscal year ended September 30, 2008.
Including the effects of our weather protection strategies, the
colder-than-normal
weather in fiscal year 2007 enhanced net income by an estimated
$5.4 million (pre-tax).
Many customers choose to buy the natural gas commodity from
unregulated third-party marketers, rather than purchase the
natural gas commodity and delivery service from Washington Gas
on a bundled basis. Natural gas delivered to firm
customers but purchased from unregulated third-party marketers
represented 34.4 percent of total firm therms delivered
during fiscal year 2008, compared to 33.7 percent and
33.3 percent delivered during fiscal years 2007 and 2006,
respectively. On a per unit basis, Washington Gas earns the same
net revenues from delivering gas for others as it earns from
bundled gas sales in which customers purchase both the natural
gas commodity and the associated delivery service from
Washington Gas. Therefore, Washington Gas does not experience
any loss in utility net revenues when customers choose to
purchase the natural gas commodity from an unregulated
third-party marketer.
Fiscal Year 2007 vs. Fiscal Year
2006.
During the fiscal year ended
September 30, 2007, total gas deliveries to firm customers
were 1.286 billion therms, an increase of 74.7 million
therms, or 6.2 percent, in deliveries from fiscal year
2006. The increase in natural gas deliveries to firm customers
reflects higher natural gas consumption by customers due to
colder weather. In relation to normal weather patterns, weather
for fiscal year 2007 was 3.7 percent colder than normal, as
compared to 2.5 percent warmer than normal for fiscal year
2006. For fiscal year 2006, net income was enhanced in relation
to normal weather by an estimated $3.9 million (pre-tax)
despite the
warmer-than-normal
weather during that period. This benefit resulted primarily from
the
colder-than-normal
weather experienced during the first quarter of fiscal year 2006
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
9.4 million therms, or 3.4 percent, in fiscal year
2008 compared to fiscal year 2007, reflecting decreased demand
due to warmer weather. Therm deliveries to these customers
increased by 15.4 million therms, or 6.0 percent, in
fiscal year 2007 over fiscal year 2006, primarily due to colder
weather.
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 Gass rate designs in the District
of Columbia. In the District of Columbia, Washington Gas shares
a majority of the margins earned on interruptible gas sales and
deliveries with firm customers. A portion of the fixed costs for
servicing interruptible customers is collected through the firm
customers rate design. Rates for interruptible customers
in Maryland and Virginia are based on a traditional cost of
service approach. In Virginia, Washington Gas retains all
revenues above a pre-approved margin threshold level. In
Maryland, Washington Gas retains a defined amount of revenues
based on a set threshold.
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 Holdings. During fiscal year 2008,
deliveries to these customers decreased 17.7 percent from
fiscal year 2007. During fiscal year 2007, deliveries to these
customers increased 3.3 percent over fiscal year 2006.
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 Gass cost of natural gas sold to customers
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
61
Washington Gas Light Company
Part II
Item 7. Managements Discussion and Analysis of
Financial Condition and Results of Operations (continued)
variable costs, or the cost of the natural gas commodity itself,
to natural gas producers and suppliers. Variations in the
utilitys cost of gas expense result from changes in gas
sales volumes, the price of the gas purchased and the level of
gas costs collected through the operation of firm gas cost
recovery mechanisms. Under these regulated recovery mechanisms,
Washington Gas records cost of gas expense equal to the cost of
gas recovered from customers and included in revenues. The
difference between the firm gas costs paid and the gas costs
recovered from customers is deferred on the balance sheet as an
amount to be collected from or refunded to customers in future
periods. Therefore, increases or decreases in the cost of gas
associated with sales made to firm customers have no direct
effect on Washington Gass net revenues and net income.
Changes in the cost of gas can cause significant variations in
Washington Gass 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 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
internal asset optimization program. To the extent these amounts
are shared with customers in Virginia and the District of
Columbia, they are a reduction to the cost of gas invoiced to
customers. Amounts shared with Maryland customers are recorded
in operating revenues. Refer to the section entitled
Market RiskRegulated Utility Segment
for a further discussion of Washington Gass
optimization program.
The commodity cost of gas invoiced to Washington Gas (excluding
the cost and related volumes applicable to asset optimization)
were $0.89, $0.85 and $1.10 per therm for fiscal years 2008,
2007 and 2006, respectively. The higher gas costs in fiscal year
2008 reflect a slight increase in the price volatility in the
wholesale market. The lower gas cost in fiscal year 2007
reflects decreased price volatility. Increased gas costs
generally will result in higher short-term debt levels and
greater short-term interest costs to finance higher accounts
receivables and storage gas inventory balances, as well as
result in higher uncollectible accounts expenses.
Revenue
Taxes
Revenue taxes are comprised of gross receipts taxes, PSC fees,
franchise fees and energy taxes. Changes in revenue taxes are
impacted by changes in the volume of gas sold and delivered.
Revenue taxes were relatively unchanged when comparing fiscal
year 2008, 2007 and 2006. Revenue taxes are recorded to
General taxes and other assessments in the
Statements of Income.
LIQUIDITY AND
CAPITAL RESOURCES
Liquidity and capital resources for Washington Gas are
substantially the same as the liquidity and capital resources
discussion included in the Managements Discussion of WGL
Holdings (except for certain items and transactions that pertain
to WGL Holdings and its unregulated subsidiaries). Those
explanations are incorporated by reference into this discussion.
RATES AND
REGULATORY MATTERS
Washington Gas determines its request to modify existing rates
based on the level of net investment in plant and equipment,
operating expenses and the need to earn a just and reasonable
return on invested capital.
The following table summarizes major rate applications and
results.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Summary of Major Rate Increase Applications and Results
|
|
|
|
|
|
|
|
|
|
Test Year
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Application
|
|
|
Effective
|
|
|
12 Months
|
|
|
Increase in Annual
|
|
|
Allowed
|
|
|
|
Jurisdiction
|
|
Filed
|
|
|
Date
|
|
|
Ended
|
|
|
Revenues (Millions)
|
|
|
Rate of Return
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Requested
|
|
|
Granted
|
|
|
Overall
|
|
|
Equity
|
|
|
|
|
District of
Columbia
(a)
|
|
|
12/21/06
|
|
|
|
12/31/07
|
|
|
|
06/30/06
|
|
|
$
|
20.0
|
|
|
|
7.7
|
%
|
|
$
|
1.4
|
|
|
|
0.5
|
%
|
|
|
8.12
|
%
|
|
|
10.00
|
%
|
|
|
District of
Columbia
(b)
|
|
|
02/07/03
|
|
|
|
11/24/03
|
|
|
|
09/30/02
|
|
|
|
18.8
|
|
|
|
9.7
|
%
|
|
|
5.4
|
|
|
|
2.8
|
%
|
|
|
8.42
|
%
|
|
|
10.60
|
%
|
|
|
District of Columbia
|
|
|
06/19/01
|
|
|
|
04/09/03
|
|
|
|
12/31/00
|
|
|
|
16.3
|
|
|
|
6.8
|
%
|
|
|
(5.4
|
)
|
|
|
(2.2
|
)%
|
|
|
8.83
|
%
|
|
|
10.60
|
%
|
|
|
|
Maryland
|
|
|
04/20/07
|
|
|
|
11/27/07
|
|
|
|
12/31/06
|
|
|
|
33.8
|
|
|
|
5.8
|
%
|
|
|
20.6
|
|
|
|
3.6
|
%
|
|
|
8.20
|
%
|
|
|
10.00
|
%
|
|
|
Maryland
|
|
|
03/31/03
|
|
|
|
11/06/03
|
|
|
|
12/31/02
|
|
|
|
27.2
|
|
|
|
6.8
|
%
|
|
|
2.9
|
|
|
|
0.7
|
%
|
|
|
8.61
|
%
|
|
|
10.75
|
%
|
|
|
Maryland
(c)
|
|
|
03/28/02
|
|
|
|
09/30/02
|
|
|
|
12/31/01
|
|
|
|
31.4
|
|
|
|
9.3
|
%
|
|
|
9.3
|
|
|
|
2.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
Virginia
(d)
|
|
|
09/15/06
|
|
|
|
02/13/07
|
|
|
|
12/31/05
|
|
|
|
17.2
|
|
|
|
2.7
|
%
|
|
|
3.9
|
|
|
|
0.6
|
%
|
|
|
8.41
|
%
|
|
|
10.00
|
%
|
|
|
Virginia
(e)
|
|
|
01/27/04
|
|
|
|
10/04/04
|
|
|
|
06/30/03
|
|
|
|
19.6
|
|
|
|
4.7
|
%
|
|
|
|
|
|
|
|
|
|
|
8.44
|
%
|
|
|
10.50
|
%
|
|
|
Virginia
(f)
|
|
|
06/14/02
|
|
|
|
11/12/02
|
|
|
|
12/31/01
|
|
|
|
23.8
|
|
|
|
6.6
|
%
|
|
|
9.9
|
|
|
|
2.7
|
%
|
|
|
8.44
|
%
|
|
|
10.50
|
%
|
|
|
|
62
Washington Gas Light Company
Part II
Item 7. Managements Discussion and Analysis of
Financial Condition and Results of Operations (continued)
|
|
|
(a)
|
|
The final order includes
(i) a rate case filing moratorium until January 1,
2011. Any new rates may not go into effect prior to
October 1, 2011; (ii) a reduction in depreciation
rates for all fixed assets and (iii) amortization
accounting, over a ten-year period, for initial implementation
costs allocable to the District of Columbia related to our BPO
plan.
|
(b)
|
|
The revenue increase includes a
reduction for the effect of a $6.5 million lower level of
pension and other post-retirement benefit costs that had been
previously deferred on the balance sheet of Washington Gas as a
regulatory liability. This deferral mechanism ensures that the
variation in these annual costs, when compared to the levels
collected from customers, does not affect net income.
Additionally, the $5.4 million annual revenue increase
includes an $800,000 per year increase in certain expenses that
are also subject to the regulatory deferral mechanism treatment.
Accordingly, the total annual effect of the Final Order on
Washington Gass pre-tax income results in an annual
increase of $11.1 million.
|
(c)
|
|
Application was settled without
stipulating the return on common equity.
|
(d)
|
|
New depreciation rates were
effective January 1, 2006. The new base rates went into
effect subject to refund on February 13, 2007. Stipulation
agreement settling the case was approved September 19,
2007. The approved Stipulation includes, among other rate design
mechanisms, a PBR plan which includes: (i) a four-year
delivery service base rate freeze; (ii) an earnings sharing
mechanism that enables Washington Gas to share with shareholders
and Virginia customers the earnings that exceed a target of
10.5 percent return on equity and (iii) recovery of
initial implementation costs associated with achieving
Washington Gass business processing outsourcing
initiatives.
|
(e)
|
|
Rates went into effect, subject
to refund, on February 26, 2004 under an expedited rate
application. As the result of the approval of a Stipulation that
resolved all issues related to this expedited rate case,
Washington Gas adjusted its billing rates commencing
October 4, 2004 to reflect the level of annual revenues as
determined in the previous Final Order issued on
December 18, 2003 and noted in (e) below.
|
(f)
|
|
New depreciation rates effective
January 1, 2002. New base rates went into effect subject to
refund on November 12, 2002. Final Order released on
December 18, 2003.
|
The following is a discussion of significant current regulatory
matters in each of Washington Gass jurisdictions.
District of
Columbia Jurisdiction
Recovery of HHC Costs.
On May 1,
2006, Washington Gas filed two tariff applications with the PSC
of DC requesting approval of proposed revisions to the balancing
charge provisions of its firm and interruptible delivery service
tariffs that would permit the utility to recover from its
delivery service customers the costs of HHCs that are being
injected into Washington Gass natural gas distribution
system (refer to the section entitled
Operating Issues
Related to Cove Point Natural Gas Supply
in
Managements Discussion). Washington Gas had been
recovering the costs of HHCs from sales customers in the
District of Columbia through its Purchased Gas Charge (PGC)
provision in this jurisdiction. On October 2, 2006, the PSC
of DC issued an order rejecting Washington Gass proposed
tariff revisions until the PSC of MD issued a final order
related to this matter. On October 12, 2006, Washington Gas
filed a Motion for Clarification requesting that the PSC of DC
affirm that Washington Gas can continue collecting HHC costs
from sales customers through its PGC provision or to record such
HHC costs incurred as a regulatory asset pending a ruling by the
PSC of DC on future cost recovery. On May 11, 2007, the PSC
of DC directed Washington Gas to cease prospective recovery of
the cost of HHCs through the PGC provision, with future HHC
costs to be recorded as a pending regulatory asset.
On November 16, 2007 the PSC of MD issued a Final Order in
the relevant case supporting full recovery of the HHC costs in
Maryland. On March 25, 2008, the PSC of DC issued an order
stating that the consideration of Washington Gass HHC
strategy will move forward and directed interested parties to
submit filings reflecting a proposed procedural schedule. On
June 6, 2008, Washington Gas and the District of Columbia
Office of the Peoples Counsel filed a joint response to
the order proposing a procedural schedule and a list of issues
for consideration in the case. The PSC of DC adopted the
proposed issues list and approved a procedural schedule.
Washington Gas and other parties have filed initial comments,
discovery has been held and Washington Gas filed its reply
comments on November 10, 2008.
Final Order on Application for Rate
Increase.
On December 21, 2006,
Washington Gas filed an application with the PSC of DC
requesting to increase its annual delivery service revenues in
the District of Columbia by approximately $20.0 million,
which included a reduction of $2.4 million for new
depreciation rates. The application requested an overall rate of
return of 8.89 percent and a return on common equity of
11.08 percent. This compares to the previous overall rate
of return of 8.42 percent and return on common equity of
10.60 percent as authorized by the PSC of DC in its Final
Order issued to Washington Gas on November 10, 2003.
On December 28, 2007, the PSC of DC issued a Final Order
approving an unopposed settlement related to this rate case. The
settlement, filed on December 13, 2007, was signed by
Washington Gas, the Apartment and Office Building Association of
Metropolitan Washington, the Federal Executive Agencies and the
District of Columbia Government. Among other issues, including
compliance reporting requirements, the Final Order approves:
|
|
|
|
(i)
|
a net increase in revenue of $1.4 million above the current
level and allows for a rate of return on common equity of
10.0 percent and an overall rate of return of
8.12 percent;
|
|
|
(ii)
|
a rate case filing moratorium or requests to institute an
investigation into the reasonableness of rates by any party
until January 1, 2011. Any new rates may not go into effect
prior to October 1, 2011;
|
|
|
(iii)
|
a reduction in depreciation rates for all fixed assets;
|
63
Washington Gas Light Company
Part II
Item 7. Managements Discussion and Analysis of
Financial Condition and Results of Operations (continued)
|
|
|
|
(iv)
|
amortization accounting, over a ten-year period, for initial
implementation costs allocable to the District of Columbia
related to our BPO plan. As a result of this approval, during
the first quarter of fiscal year 2008, Washington Gas recorded
to a regulatory asset $1.9 million of costs, net of
amortization, incurred in prior periods;
|
|
|
(v)
|
continuation of previously-approved rate levels and accounting
for the annual expense for pension costs and other
post-employment benefit costs, including previously implemented
trackers to match the actual expense levels;
|
|
|
(vi)
|
implementation of the proposed gas administrative charge which
is a cost allocation mechanism that allocates certain
gas-related costs to specific customer classes and
|
|
|
(vii)
|
new rates effective for meters read on or after
December 31, 2007.
|
Maryland
Jurisdiction
Disallowance of Purchased Gas
Charges.
Each year, the PSC of MD reviews the
annual gas costs collected from customers in Maryland to
determine if Washington Gass purchased gas costs are
reasonable. On March 14, 2006, in connection with the PSC
of MDs annual review of Washington Gass gas costs
that were billed to customers in Maryland from September 2003
through August 2004, a Hearing Examiner of the PSC of MD issued
a proposed order approving purchased gas charges of Washington
Gas for the twelve-month period ending August 2004 except for
$4.6 million (pre-tax) of such charges that the Hearing
Examiner recommended be disallowed because, in the opinion of
the Hearing Examiner, they were not reasonably and prudently
incurred. Washington Gas filed a Notice of Appeal on
April 12, 2006 and a Memorandum on Appeal on April 21,
2006 with the PSC of MD asserting that the Hearing
Examiners recommendation is without merit. A reply
memorandum was filed on May 11, 2006. After consideration
of these issues, we expect the PSC of MD to issue a Final Order.
Over the past ten years, Washington Gas has incurred similar
purchased gas charges which the PSC of MD has reviewed and
approved as being reasonably and prudently incurred and
therefore subject to recovery from customers. Among other issues
included in the appeal, we highlighted for the PSC of MD this
prior recovery and requested that similar treatment be granted
for this matter. During the fiscal year ended September 30,
2006, Washington Gas accrued a liability of $4.6 million
(pre-tax) related to the proposed disallowance of these
purchased gas charges. If the PSC of MD rules in Washington
Gass favor, the liability recorded in fiscal year 2006 for
this issue will be reversed to income.
Investigation of Asset Management and Gas Purchase
Practices.
On July 24, 2008, the Office
of Staff Counsel of the PSC of MD submitted a petition to the
PSC of MD to establish an investigation into Washington
Gass asset management program as well as into the cost
recovery of its gas purchases. On September 4, 2008, the
PSC of MD issued a letter order docketing a new proceeding to
consider the issues raised in the petition filed by the Office
of Staff Counsel. In accordance with the procedural schedule,
Washington Gas filed direct testimony on November 21, 2008;
direct testimony by intervening parties is due by
January 30, 2009, and rebuttal testimony by all parties is
due March 6, 2009. A public hearing is scheduled on
March 19, 2009. Washington Gas intends to demonstrate that
both its asset management program and its gas cost recovery
mechanisms are consistent with regulatory requirements and in
the best interest of both its customers and shareholders.
Performance-Based
Rate Plans
In recent rate case proceedings in all jurisdictions, Washington
Gas requested permission to implement PBR plans that include
performance measures for customer service and an ESM that
enables Washington Gas to automatically share with shareholders
and customers the earnings that exceed a target rate of return
on equity.
Effective October 1, 2007, the SCC of VA approved the
implementation of a PBR plan through the acceptance of a
settlement stipulation, which includes:
(i)
a
four-year base rate freeze;
(ii)
service quality
measures to be determined in conjunction with the VA Staff and
reported quarterly for maintaining a safe and reliable natural
gas distribution system while striving to control operating
costs;
(iii)
recovery of initial implementation
costs associated with achieving Washington Gass BPO
initiatives over the four-year period of the PBR plan and
(iv)
an ESM that enables Washington Gas to share
with shareholders and Virginia customers the earnings that
exceed a target of 10.5 percent return on equity. The
calculation of the ESM excludes $2.4 million of asset
management revenues that is being refunded to customers as part
of a new margin sharing agreement in Virginia. On an interim
basis, we record the effects of the ESM based on
year-to-date
earnings in relation to estimated annual earnings as calculated
for regulatory purposes. At September 30, 2008, Washington
Gas had accrued a customer liability of $4.8 million for
estimated sharing under the Virginia ESM.
On November 16, 2007, the PSC of MD issued a Final Order in
a rate case, which established a phase-two proceeding to review
Washington Gass request to implement a PBR plan and issues
raised by the parties associated with Washington Gass BPO
agreement. On September 4, 2008, a Proposed Order of
Hearing Examiner was issued in this phase-two proceeding.
Consistent with
64
Washington Gas Light Company
Part II
Item 7. Managements Discussion and Analysis of
Financial Condition and Results of Operations (concluded)
Washington Gass current accounting methodology, the
Proposed Order approved
10-year
amortization accounting for initial implementation costs related
to Washington Gass BPO plan. At September 30, 2008,
we had recorded a regulatory asset of $6.8 million, net of
amortization, related to initial implementation costs allocable
to Maryland associated with our BPO plan. Washington Gass
application seeking approval of a PBR plan, however, was denied.
Additionally, the Proposed Order
(i)
directs
Washington Gas to obtain an independent management audit related
to issues raised in the phase-two proceeding and
(ii)
directs the initiation of a service
collaboration process in which Washington Gas is directed to
engage in discussions with the Staff of the PSC of MD (MD
Staff), the Maryland Office of Peoples Counsel (MD OPC)
and interested parties to develop appropriate customer service
metrics and a periodic form for reporting results similar to the
metrics filed by Washington Gas as part of the approved
settlement in Virginia. This Proposed Order has been appealed by
the MD Staff, the MD OPC and other parties. Washington
Gass Reply Memorandum on Appeal was filed on
November 5, 2008, and we are currently awaiting a final
decision by the PSC of MD.
Although the Final Order issued by the PSC of DC on
December 28, 2007 approved amortization accounting for
initial implementation costs related to the BPO plan, Washington
Gass application seeking approval of a PBR plan was
withdrawn. Washington Gas is prohibited from seeking approval of
a PBR plan in the District of Columbia until the filing of its
next base rate case; however, the settling parties may not seek
a change in rates during the rate case filing moratorium period
under the terms of the approved rate settlement.
Depreciation
Study
In October 2006, Washington Gas completed a depreciation rate
study based on its property, plant and equipment balances as of
December 31, 2005. The results of the depreciation study
concluded that Washington Gass depreciation rates should
be reduced due to asset lives being extended beyond previously
estimated lives. Under regulatory requirements, these
depreciation rates must be approved before they are placed into
effect.
In December 2006, the VA Staff approved the reduction in
Washington Gass depreciation rates. In accordance with
Virginia regulatory policy, Washington Gas implemented the lower
depreciation rates retroactive to January 1, 2006 which
coincides with the measurement date of the approved depreciation
study. Accordingly, our depreciation and amortization expense
for the first quarter of fiscal year 2007 included a benefit
totaling $3.9 million (pre-tax) that was applicable to the
period from January 1, 2006 through September 30, 2006.
Washington Gas included the portion of the depreciation study
related to the District of Columbia in the rate application
filed with the PSC of DC on December 21, 2006. Washington
Gass proposed new depreciation rates were placed into
effect pursuant to the Final Order issued by the PSC of DC on
December 28, 2007.
On April 13, 2007, Washington Gas filed the portion of the
depreciation study related to the Maryland jurisdiction. A
separate proceeding was established on May 2, 2007, by the
PSC of MD to review Washington Gass request to implement
new depreciation rates. On October 25, 2007, Washington Gas
filed a 2007 technical update of the Maryland depreciation study
based on property, plant and equipment balances as of
December 31, 2006. Hearings were held May 12 and 13, 2008.
Initial briefs were filed on July 16, 2008 and reply briefs
were filed on August 6, 2008. On October 15, 2008, a
Proposed Order of Hearing Examiner was issued in Maryland, which
will reduce Washington Gass annual depreciation expense
related to the Maryland jurisdiction by approximately
$11.2 million when new depreciation rates are implemented,
with a corresponding decrease in annual revenues on a
prospective basis to be reflected in future billing rates.
Reflected in this reduction in depreciation expense, among other
things, are:
(i)
a change in methodology for
calculating accrued asset removal costs and
(ii)
the
designation of certain insurance and relocation reimbursements
as salvage value. This reduction in depreciation expense will
not impact annual operating income and will not prevent the
recovery of our capital investment; however, it will have the
effect of deferring full recovery of our capital investment into
future years. On November 14, 2008, Washington Gas and MD
OPC noted appeals of the October 15, 2008 Proposed Order,
thus suspending its effective date. Both Washington Gas and the
MD OPC filed Memoranda on Appeal on November 24, 2008, and
Reply Memoranda will be due 20 days later. The PSC of MD
will issue a final order after considering all of the arguments
by the parties.
65
WGL
Holdings, Inc.
Consolidated Statements of Income
Part II
Item 8. Financial Statements and Supplementary Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended September 30,
|
|
|
|
(In thousands, except per share
data)
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
OPERATING REVENUES
|
|
|
|
|
|
|
|
|
|
|
|
|
Utility
|
|
$
|
1,536,443
|
|
|
$
|
1,497,274
|
|
|
$
|
1,622,510
|
|
Non-utility
|
|
|
1,091,751
|
|
|
|
1,148,734
|
|
|
|
1,015,373
|
|
|
Total Operating Revenues
|
|
|
2,628,194
|
|
|
|
2,646,008
|
|
|
|
2,637,883
|
|
|
OPERATING EXPENSES
|
|
|
|
|
|
|
|
|
|
|
|
|
Utility cost of gas
|
|
|
869,333
|
|
|
|
875,811
|
|
|
|
1,016,669
|
|
Non-utility cost of energy-related sales
|
|
|
1,047,146
|
|
|
|
1,079,378
|
|
|
|
971,560
|
|
Operation and maintenance
|
|
|
282,558
|
|
|
|
275,344
|
|
|
|
258,022
|
|
Depreciation and amortization
|
|
|
95,007
|
|
|
|
90,605
|
|
|
|
93,055
|
|
General taxes and other assessments
|
|
|
102,544
|
|
|
|
100,023
|
|
|
|
96,187
|
|
|
Total Operating Expenses
|
|
|
2,396,588
|
|
|
|
2,421,161
|
|
|
|
2,435,493
|
|
|
OPERATING INCOME
|
|
|
231,606
|
|
|
|
224,847
|
|
|
|
202,390
|
|
Other Income (Expenses)Net
|
|
|
2,525
|
|
|
|
3,378
|
|
|
|
3,241
|
|
Interest Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest on long-term debt
|
|
|
39,930
|
|
|
|
40,047
|
|
|
|
40,634
|
|
Othernet
|
|
|
6,867
|
|
|
|
8,821
|
|
|
|
7,670
|
|
|
Total Interest Expense
|
|
|
46,797
|
|
|
|
48,868
|
|
|
|
48,304
|
|
Dividends on Washington Gas preferred stock
|
|
|
1,320
|
|
|
|
1,320
|
|
|
|
1,320
|
|
|
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES
|
|
|
186,014
|
|
|
|
178,037
|
|
|
|
156,007
|
|
INCOME TAX EXPENSE
|
|
|
69,491
|
|
|
|
70,137
|
|
|
|
61,313
|
|
|
INCOME FROM CONTINUING OPERATIONS
|
|
|
116,523
|
|
|
|
107,900
|
|
|
|
94,694
|
|
Loss from discontinued operations, net of income tax
benefit
|
|
|
|
|
|
|
|
|
|
|
(7,116
|
)
|
|
NET INCOME APPLICABLE TO COMMON STOCK
|
|
$
|
116,523
|
|
|
$
|
107,900
|
|
|
$
|
87,578
|
|
|
AVERAGE COMMON SHARES OUTSTANDING
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
49,607
|
|
|
|
49,172
|
|
|
|
48,773
|
|
Diluted
|
|
|
49,912
|
|
|
|
49,377
|
|
|
|
48,905
|
|
|
EARNINGS PER AVERAGE COMMON SHARE
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
$
|
2.35
|
|
|
$
|
2.19
|
|
|
$
|
1.94
|
|
Loss from discontinued operations
|
|
|
|
|
|
|
|
|
|
|
(0.14
|
)
|
|
Basic earnings per average common share
|
|
$
|
2.35
|
|
|
$
|
2.19
|
|
|
$
|
1.80
|
|
|
Diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
$
|
2.33
|
|
|
$
|
2.19
|
|
|
$
|
1.94
|
|
Loss from discontinued operations
|
|
|
|
|
|
|
|
|
|
|
(0.15
|
)
|
|
Diluted earnings per average common share
|
|
$
|
2.33
|
|
|
$
|
2.19
|
|
|
$
|
1.79
|
|
|
DIVIDENDS DECLARED PER COMMON SHARE
|
|
$
|
1.4075
|
|
|
$
|
1.3650
|
|
|
$
|
1.3450
|
|
|
The accompanying notes are an
integral part of these statements.
67
WGL
Holdings, Inc.
Consolidated Balance Sheets
Part II
Item 8. Financial Statements and Supplementary Data
(continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
|
(In thousands)
|
|
2008
|
|
|
2007
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
Property, Plant and Equipment
|
|
|
|
|
|
|
|
|
At original cost
|
|
$
|
3,184,247
|
|
|
$
|
3,072,935
|
|
Accumulated depreciation and amortization
|
|
|
(975,945
|
)
|
|
|
(922,494
|
)
|
|
Net property, plant and equipment
|
|
|
2,208,302
|
|
|
|
2,150,441
|
|
|
Current Assets
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
|
6,164
|
|
|
|
4,870
|
|
Receivables
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
190,589
|
|
|
|
147,595
|
|
Gas costs and other regulatory assets
|
|
|
26,543
|
|
|
|
13,460
|
|
Unbilled revenues
|
|
|
50,134
|
|
|
|
45,454
|
|
Allowance for doubtful accounts
|
|
|
(17,101
|
)
|
|
|
(14,488
|
)
|
|
Net receivables
|
|
|
250,165
|
|
|
|
192,021
|
|
|
Materials and suppliesprincipally at average cost
|
|
|
21,117
|
|
|
|
18,823
|
|
Storage gasat cost
(first-in,
first-out)
|
|
|
406,629
|
|
|
|
294,889
|
|
Deferred income taxes
|
|
|
7,616
|
|
|
|
12,186
|
|
Other prepayments
|
|
|
32,290
|
|
|
|
29,924
|
|
Other
|
|
|
18,368
|
|
|
|
21,012
|
|
|
Total current assets
|
|
|
742,349
|
|
|
|
573,725
|
|
|
Deferred Charges and Other Assets
|
|
|
|
|
|
|
|
|
Regulatory assets
|
|
|
|
|
|
|
|
|
Gas costs
|
|
|
50,797
|
|
|
|
26,241
|
|
Pension and other post-retirement benefits
|
|
|
133,989
|
|
|
|
141,163
|
|
Other
|
|
|
58,417
|
|
|
|
52,613
|
|
Prepaid qualified pension benefits
|
|
|
24,683
|
|
|
|
90,025
|
|
Other
|
|
|
25,006
|
|
|
|
12,153
|
|
|
Total deferred charges and other assets
|
|
|
292,892
|
|
|
|
322,195
|
|
|
Total Assets
|
|
$
|
3,243,543
|
|
|
$
|
3,046,361
|
|
|
CAPITALIZATION AND LIABILITIES
|
|
|
|
|
|
|
|
|
Capitalization
|
|
|
|
|
|
|
|
|
Common shareholders equity
|
|
$
|
1,047,564
|
|
|
$
|
980,767
|
|
Washington Gas Light Company preferred stock
|
|
|
28,173
|
|
|
|
28,173
|
|
Long-term debt
|
|
|
603,738
|
|
|
|
616,419
|
|
|
Total capitalization
|
|
|
1,679,475
|
|
|
|
1,625,359
|
|
|
Current Liabilities
|
|
|
|
|
|
|
|
|
Current maturities of long-term debt
|
|
|
75,994
|
|
|
|
21,094
|
|
Notes payable
|
|
|
270,955
|
|
|
|
184,247
|
|
Accounts payable and other accrued liabilities
|
|
|
243,123
|
|
|
|
216,861
|
|
Wages payable
|
|
|
14,106
|
|
|
|
13,477
|
|
Accrued interest
|
|
|
4,200
|
|
|
|
4,216
|
|
Dividends declared
|
|
|
18,070
|
|
|
|
17,221
|
|
Customer deposits and advance payments
|
|
|
46,074
|
|
|
|
49,246
|
|
Gas costs and other regulatory liabilities
|
|
|
12,180
|
|
|
|
18,190
|
|
Accrued taxes
|
|
|
12,129
|
|
|
|
9,354
|
|
Other
|
|
|
51,648
|
|
|
|
23,150
|
|
|
Total current liabilities
|
|
|
748,479
|
|
|
|
557,056
|
|
|
Deferred Credits
|
|
|
|
|
|
|
|
|
Unamortized investment tax credits
|
|
|
11,360
|
|
|
|
12,255
|
|
Deferred income taxes
|
|
|
272,227
|
|
|
|
264,400
|
|
Accrued pensions and benefits
|
|
|
131,097
|
|
|
|
199,832
|
|
Asset retirement obligations
|
|
|
30,388
|
|
|
|
29,279
|
|
Regulatory liabilities
|
|
|
|
|
|
|
|
|
Accrued asset removal costs
|
|
|
306,014
|
|
|
|
285,156
|
|
Pension and other post-retirement benefits
|
|
|
|
|
|
|
19,005
|
|
Other
|
|
|
14,974
|
|
|
|
16,880
|
|
Other
|
|
|
49,529
|
|
|
|
37,139
|
|
|
Total deferred credits
|
|
|
815,589
|
|
|
|
863,946
|
|
|
Commitments and Contingencies (Note 14)
|
|
|
|
|
|
|
|
|
|
Total Capitalization and Liabilities
|
|
$
|
3,243,543
|
|
|
$
|
3,046,361
|
|
|
The accompanying notes are an
integral part of these statements.
68
WGL
Holdings, Inc.
Consolidated Statements of Cash Flows
Part II
Item 8. Financial Statements and Supplementary Data
(continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended September 30,
|
|
|
|
(In thousands)
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
OPERATING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income applicable to common stock
|
|
$
|
116,523
|
|
|
$
|
107,900
|
|
|
$
|
87,578
|
|
ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH PROVIDED
BY OPERATING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from discontinued operations, net of income tax benefit
|
|
|
|
|
|
|
|
|
|
|
7,116
|
|
Depreciation and amortization
|
|
|
95,007
|
|
|
|
90,605
|
|
|
|
93,055
|
|
Amortization of:
|
|
|
|
|
|
|
|
|
|
|
|
|
Other regulatory assets and liabilitiesnet
|
|
|
2,666
|
|
|
|
1,613
|
|
|
|
2,583
|
|
Debt related costs
|
|
|
925
|
|
|
|
1,038
|
|
|
|
1,205
|
|
Deferred income taxesnet
|
|
|
5,863
|
|
|
|
6,866
|
|
|
|
9,667
|
|
Accrued/deferred pension cost
|
|
|
(4,219
|
)
|
|
|
1,517
|
|
|
|
(1,501
|
)
|
Compensation expense related to equity awards
|
|
|
4,111
|
|
|
|
5,370
|
|
|
|
4,641
|
|
Other non-cash charges (credits)net
|
|
|
(1,894
|
)
|
|
|
(1,766
|
)
|
|
|
(1,538
|
)
|
CHANGES IN ASSETS AND LIABILITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable and unbilled revenuesnet
|
|
|
(45,061
|
)
|
|
|
4,563
|
|
|
|
(47,598
|
)
|
Gas costs and other regulatory assets/liabilitiesnet
|
|
|
(19,093
|
)
|
|
|
5,127
|
|
|
|
(4,789
|
)
|
Storage gas
|
|
|
(111,740
|
)
|
|
|
1,172
|
|
|
|
(43,136
|
)
|
Other prepayments
|
|
|
(4,379
|
)
|
|
|
(12,506
|
)
|
|
|
(1,531
|
)
|
Accounts payable and other accrued liabilities
|
|
|
33,479
|
|
|
|
18,862
|
|
|
|
(3,188
|
)
|
Wages payable
|
|
|
629
|
|
|
|
(284
|
)
|
|
|
386
|
|
Customer deposits and advance payments
|
|
|
(3,172
|
)
|
|
|
(349
|
)
|
|
|
(2,578
|
)
|
Accrued taxes
|
|
|
356
|
|
|
|
391
|
|
|
|
(4,725
|
)
|
Accrued interest
|
|
|
(16
|
)
|
|
|
918
|
|
|
|
379
|
|
Other current assets
|
|
|
350
|
|
|
|
475
|
|
|
|
3,993
|
|
Other current liabilities
|
|
|
28,498
|
|
|
|
8,734
|
|
|
|
11,094
|
|
Deferred gas costsnet
|
|
|
(24,556
|
)
|
|
|
(14,291
|
)
|
|
|
(23,550
|
)
|
Deferred assetsother
|
|
|
(10,808
|
)
|
|
|
(8,175
|
)
|
|
|
(732
|
)
|
Deferred liabilitiesother
|
|
|
(2,385
|
)
|
|
|
(4,535
|
)
|
|
|
(574
|
)
|
Othernet
|
|
|
878
|
|
|
|
53
|
|
|
|
550
|
|
|
Net Cash Provided by Operating Activities of Continuing
Operations
|
|
|
61,962
|
|
|
|
213,298
|
|
|
|
86,807
|
|
Net Cash Used in Operating Activities of Discontinued Operations
|
|
|
|
|
|
|
|
|
|
|
(1,100
|
)
|
|
Net Cash Provided by Operating Activities
|
|
|
61,962
|
|
|
|
213,298
|
|
|
|
85,707
|
|
|
FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock issued
|
|
|
14,064
|
|
|
|
11,659
|
|
|
|
2,851
|
|
Long-term debt issued
|
|
|
63,285
|
|
|
|
1,446
|
|
|
|
77,692
|
|
Long-term debt retired
|
|
|
(21,110
|
)
|
|
|
(1,009
|
)
|
|
|
(75,136
|
)
|
Debt issuance costs
|
|
|
|
|
|
|
(16
|
)
|
|
|
(796
|
)
|
Notes payable issued (retired)net
|
|
|
86,708
|
|
|
|
6,871
|
|
|
|
136,500
|
|
Dividends on common stock
|
|
|
(69,136
|
)
|
|
|
(66,818
|
)
|
|
|
(65,338
|
)
|
Other financing activitiesnet
|
|
|
482
|
|
|
|
681
|
|
|
|
(757
|
)
|
|
Net Cash Provided by (Used in) Financing Activities
|
|
|
74,293
|
|
|
|
(47,186
|
)
|
|
|
75,016
|
|
|
INVESTING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures (excluding Allowance for Funds Used During
Construction)
|
|
|
(134,961
|
)
|
|
|
(164,531
|
)
|
|
|
(159,757
|
)
|
Other investing activitiesnet
|
|
|
|
|
|
|
(1,061
|
)
|
|
|
(2,179
|
)
|
|
Net Cash Used in Investing Activities of Continuing Operations
|
|
|
(134,961
|
)
|
|
|
(165,592
|
)
|
|
|
(161,936
|
)
|
Net Cash Provided by Investing Activities of Discontinued
Operations
|
|
|
|
|
|
|
|
|
|
|
721
|
|
|
Net Cash Used in Investing Activities
|
|
|
(134,961
|
)
|
|
|
(165,592
|
)
|
|
|
(161,215
|
)
|
|
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
|
|
|
1,294
|
|
|
|
520
|
|
|
|
(492
|
)
|
Cash and Cash Equivalents at Beginning of Year
|
|
|
4,870
|
|
|
|
4,350
|
|
|
|
4,842
|
|
|
Cash and Cash Equivalents at End of Year
|
|
$
|
6,164
|
|
|
$
|
4,870
|
|
|
$
|
4,350
|
|
|
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
|
|
|
|
|
|
|
|
|
|
|
|
|
Income taxes paid
|
|
$
|
67,086
|
|
|
$
|
69,976
|
|
|
$
|
58,848
|
|
Interest paid
|
|
$
|
46,850
|
|
|
$
|
47,541
|
|
|
$
|
47,215
|
|
SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING AND FINANCING
ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
Extinguishment of project debt financing
|
|
|
|
|
|
|
|
|
|
$
|
2,692
|
|
Capital Expenditures included in accounts payable and other
accrued liabilities
|
|
$
|
(7,217
|
)
|
|
$
|
(1,069
|
)
|
|
$
|
(1,243
|
)
|
Note used to finance capital expenditures
|
|
|
|
|
|
|
|
|
|
$
|
2,982
|
|
The accompanying notes are an
integral part of these statements.
69
WGL
Holdings, Inc.
Consolidated Statements of Capitalization
Part II
Item 8. Financial Statements and Supplementary Data
(continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
|
(In thousands, except
shares)
|
|
2008
|
|
|
|
|
|
2007
|
|
|
|
|
|
|
|
Common Shareholders Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock, no par value, 120,000,000 shares authorized,
49,916,883 and 49,316,211 shares issued, respectively
|
|
$
|
507,105
|
|
|
|
|
|
|
$
|
490,257
|
|
|
|
|
|
Paid-in capital
|
|
|
14,398
|
|
|
|
|
|
|
|
12,428
|
|
|
|
|
|
Retained Earnings
|
|
|
527,812
|
|
|
|
|
|
|
|
481,274
|
|
|
|
|
|
Accumulated other comprehensive loss, net of taxes
|
|
|
(1,751
|
)
|
|
|
|
|
|
|
(3,192
|
)
|
|
|
|
|
|
Total Common Shareholders Equity
|
|
|
1,047,564
|
|
|
|
62.4%
|
|
|
|
980,767
|
|
|
|
60.4
|
%
|
|
Preferred Stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
WGL Holdings, Inc., without par value, 3,000,000 shares
authorized, none issued
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Washington Gas Light Company, without par value,
1,500,000 shares authorizedissued and outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$4.80 series, 150,000 shares
|
|
|
15,000
|
|
|
|
|
|
|
|
15,000
|
|
|
|
|
|
$4.25 series, 70,600 shares
|
|
|
7,173
|
|
|
|
|
|
|
|
7,173
|
|
|
|
|
|
$5.00 series, 60,000 shares
|
|
|
6,000
|
|
|
|
|
|
|
|
6,000
|
|
|
|
|
|
|
Total Preferred Stock
|
|
|
28,173
|
|
|
|
1.7%
|
|
|
|
28,173
|
|
|
|
1.7
|
%
|
|
Long-Term Debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Washington Gas Light Company Unsecured Medium-Term Notes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Due fiscal year 2008, 6.51% to 6.61%
|
|
|
|
|
|
|
|
|
|
|
20,100
|
|
|
|
|
|
Due fiscal year 2009, 5.49% to 6.92%
|
|
|
75,000
|
|
|
|
|
|
|
|
75,000
|
|
|
|
|
|
Due fiscal year 2010, 3.61%
|
|
|
50,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Due fiscal year 2010, 7.50% to 7.70%
|
|
|
24,000
|
|
|
|
|
|
|
|
24,000
|
|
|
|
|
|
Due fiscal year 2011, 6.64%
|
|
|
30,000
|
|
|
|
|
|
|
|
30,000
|
|
|
|
|
|
Due fiscal year 2012, 5.90% to 6.05%
|
|
|
77,000
|
|
|
|
|
|
|
|
77,000
|
|
|
|
|
|
Due fiscal year 2014, 4.88% to 5.17%
|
|
|
67,000
|
|
|
|
|
|
|
|
67,000
|
|
|
|
|
|
Due fiscal year 2015, 4.83%
|
|
|
20,000
|
|
|
|
|
|
|
|
20,000
|
|
|
|
|
|
Due fiscal year 2016, 5.17%
|
|
|
25,000
|
|
|
|
|
|
|
|
25,000
|
|
|
|
|
|
Due fiscal year 2023, 6.65%
|
|
|
20,000
|
|
|
|
|
|
|
|
20,000
|
|
|
|
|
|
Due fiscal year 2025, 5.44%
|
|
|
40,500
|
|
|
|
|
|
|
|
40,500
|
|
|
|
|
|
Due fiscal year 2027, 6.40% to 6.82%
|
|
|
125,000
|
|
|
|
|
|
|
|
125,000
|
|
|
|
|
|
Due fiscal year 2028, 6.57% to 6.85%
|
|
|
52,000
|
|
|
|
|
|
|
|
52,000
|
|
|
|
|
|
Due fiscal year 2030, 7.50%
|
|
|
8,500
|
|
|
|
|
|
|
|
8,500
|
|
|
|
|
|
Due fiscal year 2036, 5.70% to 5.78%
|
|
|
50,000
|
|
|
|
|
|
|
|
50,000
|
|
|
|
|
|
|
Total Unsecured Medium Term-Notes
|
|
|
664,000
|
|
|
|
|
|
|
|
634,100
|
|
|
|
|
|
Other long-term debt
|
|
|
15,785
|
|
|
|
|
|
|
|
3,509
|
|
|
|
|
|
Unamortized discount
|
|
|
(53
|
)
|
|
|
|
|
|
|
(96
|
)
|
|
|
|
|
Lesscurrent maturities
|
|
|
75,994
|
|
|
|
|
|
|
|
21,094
|
|
|
|
|
|
|
Total Long-Term Debt
|
|
|
603,738
|
|
|
|
35.9%
|
|
|
|
616,419
|
|
|
|
37.9
|
%
|
|
Total Capitalization
|
|
$
|
1,679,475
|
|
|
|
100.0%
|
|
|
$
|
1,625,359
|
|
|
|
100.0
|
%
|
|
The accompanying notes are an
integral part of these statements.
70
WGL
Holdings, Inc.
Consolidated Statements of Common Shareholders
Equity
and Comprehensive Income
Part II
Item 8. Financial Statements and Supplementary Data
(continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive
|
|
|
|
|
|
|
Common Stock Issued
|
|
|
Paid-In
|
|
|
Retained
|
|
|
Loss, Net of
|
|
|
|
|
(In thousands, except shares)
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Earnings
|
|
|
Taxes
|
|
|
Total
|
|
|
|
|
Balance at September 30, 2005
|
|
|
48,704,340
|
|
|
$
|
472,974
|
|
|
$
|
6,142
|
|
|
$
|
418,649
|
|
|
$
|
(3,773
|
)
|
|
$
|
893,992
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
87,578
|
|
|
|
|
|
|
|
87,578
|
|
Minimum pension liability adjustment, net of taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(856
|
)
|
|
|
(856
|
)
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
86,722
|
|
Stock-based compensation
|
|
|
174,159
|
|
|
|
4,697
|
|
|
|
2,036
|
|
|
|
|
|
|
|
|
|
|
|
6,733
|
|
Dividends declared on common stock ($1.3450 per share)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(65,640
|
)
|
|
|
|
|
|
|
(65,640
|
)
|
|
Balance at September 30, 2006
|
|
|
48,878,499
|
|
|
|
477,671
|
|
|
|
8,178
|
|
|
|
440,587
|
|
|
|
(4,629
|
)
|
|
|
921,807
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
107,900
|
|
|
|
|
|
|
|
107,900
|
|
Minimum pension liability adjustment, net of taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,230
|
|
|
|
1,230
|
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
109,130
|
|
Impact of initially applying SFAS No. 158, net of taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
207
|
|
|
|
207
|
|
Stock-based compensation
|
|
|
437,712
|
|
|
|
12,586
|
|
|
|
4,250
|
|
|
|
|
|
|
|
|
|
|
|
16,836
|
|
Dividends declared on common stock ($1.3650 per share)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(67,213
|
)
|
|
|
|
|
|
|
(67,213
|
)
|
|
Balance at September 30, 2007
|
|
|
49,316,211
|
|
|
|
490,257
|
|
|
|
12,428
|
|
|
|
481,274
|
|
|
|
(3,192
|
)
|
|
|
980,767
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
116,523
|
|
|
|
|
|
|
|
116,523
|
|
Post-retirement benefits adjustment, net of taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,441
|
|
|
|
1,441
|
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
117,964
|
|
Stock-based compensation
|
|
|
600,672
|
|
|
|
16,848
|
|
|
|
1,970
|
|
|
|
|
|
|
|
|
|
|
|
18,818
|
|
Dividends declared on common stock ($1.4075 per share)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(69,985
|
)
|
|
|
|
|
|
|
(69,985
|
)
|
|
Balance at September 30, 2008
|
|
|
49,916,883
|
|
|
$
|
507,105
|
|
|
$
|
14,398
|
|
|
$
|
527,812
|
|
|
$
|
(1,751
|
)
|
|
$
|
1,047,564
|
|
|
The accompanying notes are an
integral part of these statements.
71
Washington
Gas Light Company
Statements of Income
Part II
Item 8. Financial Statements and Supplementary Data
(continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended September 30,
|
|
|
|
(In thousands)
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
OPERATING REVENUES
|
|
|
|
|
|
|
|
|
|
|
|
|
Utility
|
|
$
|
1,552,344
|
|
|
$
|
1,513,839
|
|
|
$
|
1,637,491
|
|
Non-utility
|
|
|
66
|
|
|
|
242
|
|
|
|
632
|
|
|
Total Operating Revenues
|
|
|
1,552,410
|
|
|
|
1,514,081
|
|
|
|
1,638,123
|
|
|
OPERATING EXPENSES
|
|
|
|
|
|
|
|
|
|
|
|
|
Utility cost of gas
|
|
|
885,234
|
|
|
|
892,376
|
|
|
|
1,031,650
|
|
Operation and maintenance
|
|
|
252,915
|
|
|
|
248,817
|
|
|
|
238,086
|
|
Depreciation and amortization
|
|
|
93,189
|
|
|
|
88,893
|
|
|
|
91,962
|
|
General taxes and other assessments
|
|
|
98,721
|
|
|
|
96,493
|
|
|
|
96,523
|
|
|
Total Operating Expenses
|
|
|
1,330,059
|
|
|
|
1,326,579
|
|
|
|
1,458,221
|
|
|
OPERATING INCOME
|
|
|
222,351
|
|
|
|
187,502
|
|
|
|
179,902
|
|
Other Income (Expenses)Net
|
|
|
1,894
|
|
|
|
2,560
|
|
|
|
1,855
|
|
Interest Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest on long-term debt
|
|
|
39,890
|
|
|
|
39,956
|
|
|
|
40,622
|
|
Othernet
|
|
|
5,466
|
|
|
|
5,109
|
|
|
|
3,392
|
|
|
Total Interest Expense
|
|
|
45,356
|
|
|
|
45,065
|
|
|
|
44,014
|
|
|
INCOME BEFORE INCOME TAXES
|
|
|
178,889
|
|
|
|
144,997
|
|
|
|
137,743
|
|
INCOME TAX EXPENSE
|
|
|
64,707
|
|
|
|
54,497
|
|
|
|
51,902
|
|
|
NET INCOME BEFORE PREFERRED STOCK DIVIDENDS
|
|
|
114,182
|
|
|
|
90,500
|
|
|
|
85,841
|
|
Dividends on preferred stock
|
|
|
1,320
|
|
|
|
1,320
|
|
|
|
1,320
|
|
|
NET INCOME APPLICABLE TO COMMON STOCK
|
|
$
|
112,862
|
|
|
$
|
89,180
|
|
|
$
|
84,521
|
|
|
The accompanying notes are an
integral part of these statements.
72
Washington
Gas Light Company
Balance Sheets
Part II
Item 8. Financial Statements and Supplementary Data
(continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
|
(In thousands)
|
|
2008
|
|
|
2007
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
Property, Plant and Equipment
|
|
|
|
|
|
|
|
|
At original cost
|
|
$
|
3,152,259
|
|
|
$
|
3,042,460
|
|
Accumulated depreciation and amortization
|
|
|
(954,974
|
)
|
|
|
(903,239
|
)
|
|
Net property, plant and equipment
|
|
|
2,197,285
|
|
|
|
2,139,221
|
|
|
Current Assets
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
|
3,680
|
|
|
|
4,157
|
|
Receivables
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
105,132
|
|
|
|
59,346
|
|
Gas costs and other regulatory assets
|
|
|
26,543
|
|
|
|
13,460
|
|
Unbilled revenues
|
|
|
18,584
|
|
|
|
15,895
|
|
Allowance for doubtful accounts
|
|
|
(15,736
|
)
|
|
|
(13,215
|
)
|
|
Net receivables
|
|
|
134,523
|
|
|
|
75,486
|
|
|
Materials and suppliesprincipally at average cost
|
|
|
21,065
|
|
|
|
18,820
|
|
Storage gas at cost
(first-in,
first-out)
|
|
|
322,617
|
|
|
|
215,771
|
|
Deferred income taxes
|
|
|
8,429
|
|
|
|
13,297
|
|
Other prepayments
|
|
|
34,375
|
|
|
|
31,200
|
|
Receivables from associated companies
|
|
|
4,636
|
|
|
|
970
|
|
Other
|
|
|
4,833
|
|
|
|
7,689
|
|
|
Total current assets
|
|
|
534,158
|
|
|
|
367,390
|
|
|
Deferred Charges and Other Assets
|
|
|
|
|
|
|
|
|
Regulatory assets
|
|
|
|
|
|
|
|
|
Gas costs
|
|
|
50,797
|
|
|
|
26,241
|
|
Pension and other post-retirement benefits
|
|
|
133,326
|
|
|
|
140,548
|
|
Other
|
|
|
58,400
|
|
|
|
52,613
|
|
Prepaid qualified pension benefits
|
|
|
24,612
|
|
|
|
89,556
|
|
Other
|
|
|
24,188
|
|
|
|
8,637
|
|
|
Total deferred charges and other assets
|
|
|
291,323
|
|
|
|
317,595
|
|
|
Total Assets
|
|
$
|
3,022,766
|
|
|
$
|
2,824,206
|
|
|
CAPITALIZATION AND LIABILITIES
|
|
|
|
|
|
|
|
|
Capitalization
|
|
|
|
|
|
|
|
|
Common shareholders equity
|
|
$
|
935,049
|
|
|
$
|
885,390
|
|
Preferred stock
|
|
|
28,173
|
|
|
|
28,173
|
|
Long-term debt
|
|
|
603,745
|
|
|
|
615,473
|
|
|
Total capitalization
|
|
|
1,566,967
|
|
|
|
1,529,036
|
|
|
Current Liabilities
|
|
|
|
|
|
|
|
|
Current maturities of long-term debt
|
|
|
75,000
|
|
|
|
20,100
|
|
Notes payable
|
|
|
231,013
|
|
|
|
122,048
|
|
Accounts payable and other accrued liabilities
|
|
|
166,060
|
|
|
|
144,791
|
|
Wages payable
|
|
|
13,638
|
|
|
|
13,383
|
|
Accrued interest
|
|
|
4,200
|
|
|
|
4,216
|
|
Dividends declared
|
|
|
17,695
|
|
|
|
17,221
|
|
Customer deposits and advance payments
|
|
|
46,074
|
|
|
|
49,146
|
|
Gas costs and other regulatory liabilities
|
|
|
12,180
|
|
|
|
18,190
|
|
Accrued taxes
|
|
|
11,281
|
|
|
|
8,602
|
|
Payables to associated companies
|
|
|
22,746
|
|
|
|
17,160
|
|
Other
|
|
|
38,249
|
|
|
|
19,194
|
|
|
Total current liabilities
|
|
|
638,136
|
|
|
|
434,051
|
|
|
Deferred Credits
|
|
|
|
|
|
|
|
|
Unamortized investment tax credits
|
|
|
11,355
|
|
|
|
12,248
|
|
Deferred income taxes
|
|
|
279,818
|
|
|
|
264,623
|
|
Accrued pensions and benefits
|
|
|
130,478
|
|
|
|
198,936
|
|
Asset retirement obligations
|
|
|
29,469
|
|
|
|
28,412
|
|
Regulatory liabilities
|
|
|
|
|
|
|
|
|
Accrued asset removal costs
|
|
|
306,014
|
|
|
|
285,156
|
|
Pension and other post-retirement benefits
|
|
|
|
|
|
|
18,900
|
|
Other
|
|
|
14,973
|
|
|
|
16,862
|
|
Other
|
|
|
45,556
|
|
|
|
35,982
|
|
|
Total deferred credits
|
|
|
817,663
|
|
|
|
861,119
|
|
|
Commitments and Contingencies (Note 14)
|
|
|
|
|
|
|
|
|
|
Total Capitalization and Liabilities
|
|
$
|
3,022,766
|
|
|
$
|
2,824,206
|
|
|
The accompanying notes are an
integral part of these statements.
73
Washington
Gas Light Company
Statements of Cash Flows
Part II
Item 8. Financial Statements and Supplementary Data
(continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended September 30,
|
|
|
|
(In thousands)
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
OPERATING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income before preferred stock dividends
|
|
$
|
114,182
|
|
|
$
|
90,500
|
|
|
$
|
85,841
|
|
ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH PROVIDED
BY OPERATING ACTIVITIES
|
Depreciation and amortization
|
|
|
93,189
|
|
|
|
88,893
|
|
|
|
91,962
|
|
Amortization of:
|
|
|
|
|
|
|
|
|
|
|
|
|
Other regulatory assets and liabilitiesnet
|
|
|
2,666
|
|
|
|
1,613
|
|
|
|
2,583
|
|
Debt related costs
|
|
|
885
|
|
|
|
947
|
|
|
|
1,182
|
|
Deferred income taxesnet
|
|
|
13,559
|
|
|
|
4,249
|
|
|
|
12,295
|
|
Accrued/deferred pension cost
|
|
|
(4,199
|
)
|
|
|
1,488
|
|
|
|
(1,509
|
)
|
Compensation expense related to equity awards
|
|
|
3,547
|
|
|
|
4,827
|
|
|
|
4,329
|
|
Other non-cash charges (credits)net
|
|
|
(1,892
|
)
|
|
|
(1,762
|
)
|
|
|
(1,535
|
)
|
CHANGES IN ASSETS AND LIABILITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable, unbilled revenues and receivables from
associated companiesnet
|
|
|
(49,620
|
)
|
|
|
(4,505
|
)
|
|
|
12,452
|
|
Gas costs and other regulatory assets/liabilitiesnet
|
|
|
(19,093
|
)
|
|
|
5,127
|
|
|
|
(4,789
|
)
|
Storage gas
|
|
|
(106,846
|
)
|
|
|
1,471
|
|
|
|
(23,138
|
)
|
Other prepayments
|
|
|
(5,188
|
)
|
|
|
(14,595
|
)
|
|
|
(336
|
)
|
Accounts payable and other accrued liabilities, including
payables to associated companies
|
|
|
34,387
|
|
|
|
14,654
|
|
|
|
(19,482
|
)
|
Wages payable
|
|
|
255
|
|
|
|
(150
|
)
|
|
|
337
|
|
Customer deposits and advance payments
|
|
|
(3,072
|
)
|
|
|
(349
|
)
|
|
|
15,615
|
|
Accrued taxes
|
|
|
260
|
|
|
|
(74
|
)
|
|
|
(1,585
|
)
|
Accrued interest
|
|
|
(16
|
)
|
|
|
918
|
|
|
|
379
|
|
Other current assets
|
|
|
611
|
|
|
|
2,553
|
|
|
|
3,667
|
|
Other current liabilities
|
|
|
19,055
|
|
|
|
9,831
|
|
|
|
7,382
|
|
Deferred gas costsnet
|
|
|
(24,556
|
)
|
|
|
(14,291
|
)
|
|
|
(23,550
|
)
|
Deferred assetsother
|
|
|
(13,872
|
)
|
|
|
(5,210
|
)
|
|
|
(511
|
)
|
Deferred liabilitiesother
|
|
|
(4,871
|
)
|
|
|
(5,261
|
)
|
|
|
1,284
|
|
Othernet
|
|
|
850
|
|
|
|
(924
|
)
|
|
|
(16
|
)
|
|
Net Cash Provided by Operating Activities
|
|
|
50,221
|
|
|
|
179,950
|
|
|
|
162,857
|
|
|
FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt issued
|
|
|
63,285
|
|
|
|
1,446
|
|
|
|
77,692
|
|
Long-term debt retired
|
|
|
(20,117
|
)
|
|
|
(15
|
)
|
|
|
(75,136
|
)
|
Debt issuance costs
|
|
|
|
|
|
|
(16
|
)
|
|
|
(796
|
)
|
Notes payable issued (retired)net
|
|
|
108,965
|
|
|
|
49,273
|
|
|
|
62,366
|
|
Dividends on common stock and preferred stock
|
|
|
(69,711
|
)
|
|
|
(68,138
|
)
|
|
|
(66,658
|
)
|
Other financing activitiesnet
|
|
|
513
|
|
|
|
681
|
|
|
|
(757
|
)
|
|
Net Cash Provided by (Used in) Financing Activities
|
|
|
82,935
|
|
|
|
(16,769
|
)
|
|
|
(3,289
|
)
|
|
INVESTING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures (excluding Allowance for Funds Used During
Construction)
|
|
|
(133,633
|
)
|
|
|
(162,049
|
)
|
|
|
(156,357
|
)
|
Other investing activitiesnet
|
|
|
|
|
|
|
(1,061
|
)
|
|
|
(2,179
|
)
|
|
Net Cash Used in Investing Activities
|
|
|
(133,633
|
)
|
|
|
(163,110
|
)
|
|
|
(158,536
|
)
|
|
INCREASE IN CASH AND CASH EQUIVALENTS
|
|
|
(477
|
)
|
|
|
71
|
|
|
|
1,032
|
|
Cash and Cash Equivalents at Beginning of Year
|
|
|
4,157
|
|
|
|
4,086
|
|
|
|
3,054
|
|
|
Cash and Cash Equivalents at End of Year
|
|
$
|
3,680
|
|
|
$
|
4,157
|
|
|
$
|
4,086
|
|
|
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
|
|
|
|
|
|
|
|
|
|
|
|
|
Income taxes paid
|
|
$
|
59,108
|
|
|
$
|
56,619
|
|
|
$
|
42,803
|
|
Interest paid
|
|
$
|
45,449
|
|
|
$
|
43,829
|
|
|
$
|
42,937
|
|
SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING AND FINANCING
ACTIVITIES
|
Extinguishment of project debt financing
|
|
|
|
|
|
|
|
|
|
|
2,692
|
|
Capital expenditures included in accounts payable and other
accrued liabilities
|
|
$
|
(7,532
|
)
|
|
$
|
(1,007
|
)
|
|
$
|
(702
|
)
|
The accompanying notes are an
integral part of these statements.
74
Washington
Gas Light Company
Statements of Capitalization
Part II
Item 8. Financial Statements and Supplementary Data
(continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
|
(In thousands, except
shares)
|
|
2008
|
|
|
|
|
|
2007
|
|
|
|
|
|
|
Common Shareholders Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock, $1 par value, 80,000,000 shares
authorized, 46,479,536 shares issued
|
|
$
|
46,479
|
|
|
|
|
|
|
$
|
46,479
|
|
|
|
|
|
Paid-in capital
|
|
|
467,761
|
|
|
|
|
|
|
|
463,540
|
|
|
|
|
|
Retained earnings
|
|
|
422,560
|
|
|
|
|
|
|
|
378,563
|
|
|
|
|
|
Accumulated other comprehensive loss, net of taxes
|
|
|
(1,751
|
)
|
|
|
|
|
|
|
(3,192
|
)
|
|
|
|
|
|
Total Common Shareholders Equity
|
|
|
935,049
|
|
|
|
59.7
|
%
|
|
|
885,390
|
|
|
|
57.9
|
%
|
|
Preferred Stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Washington Gas Light Company, without par value,
1,500,000 shares authorizedissued and outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$4.80 series, 150,000 shares
|
|
|
15,000
|
|
|
|
|
|
|
|
15,000
|
|
|
|
|
|
$4.25 series, 70,600 shares
|
|
|
7,173
|
|
|
|
|
|
|
|
7,173
|
|
|
|
|
|
$5.00 series, 60,000 shares
|
|
|
6,000
|
|
|
|
|
|
|
|
6,000
|
|
|
|
|
|
|
Total Preferred Stock
|
|
|
28,173
|
|
|
|
1.8
|
%
|
|
|
28,173
|
|
|
|
1.8
|
%
|
|
Long-Term Debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Washington Gas Light Company Unsecured Medium-Term Notes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Due fiscal year 2008, 6.51% to 6.61%
|
|
|
|
|
|
|
|
|
|
|
20,100
|
|
|
|
|
|
Due fiscal year 2009, 5.49% to 6.92%
|
|
|
75,000
|
|
|
|
|
|
|
|
75,000
|
|
|
|
|
|
Due fiscal year 2010, 3.61%
|
|
|
50,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Due fiscal year 2010, 7.50% to 7.70%
|
|
|
24,000
|
|
|
|
|
|
|
|
24,000
|
|
|
|
|
|
Due fiscal year 2011, 6.64%
|
|
|
30,000
|
|
|
|
|
|
|
|
30,000
|
|
|
|
|
|
Due fiscal year 2012, 5.90% to 6.05%
|
|
|
77,000
|
|
|
|
|
|
|
|
77,000
|
|
|
|
|
|
Due fiscal year 2014, 4.88% to 5.17%
|
|
|
67,000
|
|
|
|
|
|
|
|
67,000
|
|
|
|
|
|
Due fiscal year 2015, 4.83%
|
|
|
20,000
|
|
|
|
|
|
|
|
20,000
|
|
|
|
|
|
Due fiscal year 2016, 5.17%
|
|
|
25,000
|
|
|
|
|
|
|
|
25,000
|
|
|
|
|
|
Due fiscal year 2023, 6.65%
|
|
|
20,000
|
|
|
|
|
|
|
|
20,000
|
|
|
|
|
|
Due fiscal year 2025, 5.44%
|
|
|
40,500
|
|
|
|
|
|
|
|
40,500
|
|
|
|
|
|
Due fiscal year 2027, 6.40% to 6.82%
|
|
|
125,000
|
|
|
|
|
|
|
|
125,000
|
|
|
|
|
|
Due fiscal year 2028, 6.57% to 6.85%
|
|
|
52,000
|
|
|
|
|
|
|
|
52,000
|
|
|
|
|
|
Due fiscal year 2030, 7.50%
|
|
|
8,500
|
|
|
|
|
|
|
|
8,500
|
|
|
|
|
|
Due fiscal year 2036, 5.70% to 5.78%
|
|
|
50,000
|
|
|
|
|
|
|
|
50,000
|
|
|
|
|
|
|
Total Unsecured Medium Term-Notes
|
|
|
664,000
|
|
|
|
|
|
|
|
634,100
|
|
|
|
|
|
Other long-term debt
|
|
|
14,791
|
|
|
|
|
|
|
|
1,522
|
|
|
|
|
|
Unamortized discount
|
|
|
(46
|
)
|
|
|
|
|
|
|
(49
|
)
|
|
|
|
|
Lesscurrent maturities
|
|
|
75,000
|
|
|
|
|
|
|
|
20,100
|
|
|
|
|
|
|
Total Long-Term Debt
|
|
|
603,745
|
|
|
|
38.5
|
%
|
|
|
615,473
|
|
|
|
40.3
|
%
|
|
Total Capitalization
|
|
$
|
1,566,967
|
|
|
|
100.0
|
%
|
|
$
|
1,529,036
|
|
|
|
100.0
|
%
|
|
The accompanying notes are an
integral part of these statements.
75
Washington
Gas Light Company
Statements of Common Shareholders Equity
and Comprehensive Income
Part II
Item 8. Financial Statements and Supplementary Data
(continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive
|
|
|
|
|
|
|
Common Stock Issued
|
|
|
Paid-In
|
|
|
Retained
|
|
|
Loss, Net of
|
|
|
|
|
(In thousands, except
shares)
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Earnings
|
|
|
Taxes
|
|
|
Total
|
|
|
|
|
Balance at September 30, 2005
|
|
|
46,479,536
|
|
|
$
|
46,479
|
|
|
$
|
455,336
|
|
|
$
|
337,715
|
|
|
$
|
(3,773
|
)
|
|
$
|
835,757
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
85,841
|
|
|
|
|
|
|
|
85,841
|
|
Minimum pension liability adjustment, net of taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(856
|
)
|
|
|
(856
|
)
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
84,985
|
|
Stock-based
compensation
(a)
|
|
|
|
|
|
|
|
|
|
|
3,571
|
|
|
|
|
|
|
|
|
|
|
|
3,571
|
|
Dividends declared:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(65,640
|
)
|
|
|
|
|
|
|
(65,640
|
)
|
Preferred stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,320
|
)
|
|
|
|
|
|
|
(1,320
|
)
|
|
Balance at September 30, 2006
|
|
|
46,479,536
|
|
|
|
46,479
|
|
|
|
458,907
|
|
|
|
356,596
|
|
|
|
(4,629
|
)
|
|
|
857,353
|
|
Net Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
90,500
|
|
|
|
|
|
|
|
90,500
|
|
Minimum pension liability adjustment, net of taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,230
|
|
|
|
1,230
|
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
91,730
|
|
Impact of initially applying SFAS No. 158, net of taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
207
|
|
|
|
207
|
|
Stock-based
compensation
(a)
|
|
|
|
|
|
|
|
|
|
|
4,633
|
|
|
|
|
|
|
|
|
|
|
|
4,633
|
|
Dividends declared:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(67,213
|
)
|
|
|
|
|
|
|
(67,213
|
)
|
Preferred stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,320
|
)
|
|
|
|
|
|
|
(1,320
|
)
|
|
Balance at September 30, 2007
|
|
|
46,479,536
|
|
|
|
46,479
|
|
|
|
463,540
|
|
|
|
378,563
|
|
|
|
(3,192
|
)
|
|
|
885,390
|
|
Net Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
114,182
|
|
|
|
|
|
|
|
114,182
|
|
Post-retirement benefits adjustment, net of taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,441
|
|
|
|
1,441
|
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
115,623
|
|
Stock-based
compensation
(a)
|
|
|
|
|
|
|
|
|
|
|
4,221
|
|
|
|
|
|
|
|
|
|
|
|
4,221
|
|
Dividends declared:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(68,865
|
)
|
|
|
|
|
|
|
(68,865
|
)
|
Preferred stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,320
|
)
|
|
|
|
|
|
|
(1,320
|
)
|
|
Balance at September 30, 2008
|
|
|
46,479,536
|
|
|
$
|
46,479
|
|
|
$
|
467,761
|
|
|
$
|
422,560
|
|
|
$
|
(1,751
|
)
|
|
$
|
935,049
|
|
|
|
|
|
(a)
|
|
Stock-based compensation is based
on the stock awards of WGL Holdings that are allocated to
Washington Gas Light Company for its pro-rata share.
|
The accompanying notes are an
integral part of these statements.
76
WGL
Holdings, Inc.
Washington Gas Light Company
Part II
Item 8. Financial Statements and Supplementary Data
(continued)
Notes to Consolidated Financial Statements
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
GENERAL
WGL Holdings, Inc. (WGL Holdings) is a holding company that owns
all of the shares of common stock of Washington Gas Light
Company (Washington Gas), a regulated natural gas utility, and
all of the shares of common stock of Washington Gas Resources
Corporation (Washington Gas Resources), Hampshire Gas Company
(Hampshire) and Crab Run Gas Company. Washington Gas Resources
owns all of the shares of common stock of three unregulated
subsidiaries that include Washington Gas Energy Services, Inc.
(WGEServices), Washington Gas Energy Systems, Inc. (WGESystems)
and Washington Gas Credit Corporation. Except where the content
clearly indicates otherwise, WGL Holdings,
we, us or our refers to the
holding company or the consolidated entity of WGL Holdings and
all of its subsidiaries. Unless otherwise noted, these notes
apply equally to WGL Holdings and Washington Gas.
NATURE
OF OPERATIONS
Our core business is the delivery and sale of natural gas
through Washington Gas. We also offer retail energy-related
products and services that are closely related to our core
business. The majority of these energy-related activities are
performed by wholly owned unregulated subsidiaries of Washington
Gas Resources.
Washington Gas is a regulated public utility that sells and
delivers natural gas to over one million customers primarily in
the District of Columbia, and the surrounding metropolitan areas
in Maryland and Virginia. Deliveries to firm residential and
commercial customers accounted for 78.0 percent of the
total therms delivered to customers by Washington Gas in fiscal
year 2008. Deliveries to interruptible customers accounted for
16.3 percent and deliveries to customers who use natural
gas to generate electricity accounted for 5.7 percent.
These amounts do not include deliveries related to Washington
Gass asset optimization program discussed further below.
Washington Gas does not depend on any one customer or group of
customers to derive income. Hampshire operates an underground
natural gas storage facility that provides services exclusively
to Washington Gas. Hampshire is regulated under a cost of
service tariff by the Federal Energy Regulatory Commission
(FERC). Both Washington Gas and Hampshire comprise our regulated
utility segment.
The retail energy-marketing segment consists of the operations
of WGEServices which competes with regulated utilities and other
unregulated third-party marketers to sell natural gas and
electricity directly to residential, commercial and industrial
customers with the objective of earning a profit through
competitive pricing. WGEServices does not currently own or
operate any natural gas or electric generation, production,
transmission or distribution assets. The commodities that
WGEServices sells are delivered to retail customers through
assets owned by regulated utilities. Washington Gas delivers the
majority of natural gas sold by WGEServices, and unaffiliated
electric utilities deliver all of the electricity sold. At
September 30, 2008, WGEServices served approximately
133,300 residential, commercial and industrial natural gas
customers and 61,800 residential, commercial and industrial
electricity customers located in Maryland, Virginia, Delaware
and the District of Columbia. WGEServices does not depend on any
one customer or group of customers to derive income.
The design-build energy systems segment comprises WGESystems,
which provides design-build energy efficient and sustainable
solutions to government and commercial clients under
construction contracts. Previously, this segment was referred to
as the heating, ventilating and air conditioning
(HVAC) segment; however, the title design-build
energy systems more accurately reflects the evolving
business activities of this segment. The structure of this
segment has not changed from prior years and no amounts have
been restated as a result of this title change. Refer to
Note 16
Operating Segment Reporting
for a
further discussion of our segments.
CONSOLIDATION
OF FINANCIAL STATEMENTS
The consolidated financial statements include the accounts of
WGL Holdings and its subsidiaries during the fiscal years
reported. Intercompany transactions have been eliminated.
USE
OF ESTIMATES IN THE PREPARATION OF FINANCIAL
STATEMENTS
In accordance with Generally Accepted Accounting Principles in
the United States of America (GAAP), we make certain estimates
and assumptions regarding:
(i)
reported amounts of
assets and liabilities,
(ii)
disclosure of
contingent assets and liabilities at the date of the financial
statements and
(iii)
reported amounts of revenues,
revenues subject to refund, and expenses during the reporting
period. Actual results could differ from those estimates.
77
WGL
Holdings, Inc.
Washington Gas Light Company
Part II
Item 8. Financial Statements and Supplementary Data
(continued)
Notes to Consolidated Financial Statements
PROPERTY,
PLANT AND EQUIPMENT
Property, plant and equipment (comprised principally of utility
plant) is stated at original cost, including labor, materials,
taxes and overhead costs incurred during the construction
period. The cost of utility and other plant of Washington Gas
includes an allowance for funds used during construction (AFUDC)
that is calculated under a formula prescribed by our regulators.
Washington Gas capitalizes AFUDC as a component of construction
overhead. The before-tax rates for AFUDC for fiscal years 2008,
2007 and 2006 were 5.46 percent, 6.27 percent and
5.54 percent, respectively. Washington Gas capitalized
AFUDC of $999,000 and $869,000 during the fiscal years ended
September 30, 2008 and 2007, respectively. Capitalized
AFUDC for fiscal year 2006 was $680,000, excluding an offset of
$38,000 related to adjustments to AFUDC for capital items or
projects that were discontinued and expensed.
As approved by our regulators, Washington Gas accrues an annual
amount of asset removal costs through depreciation expense with
a corresponding credit to Regulatory
liabilitiesAccrued asset removal costs. When
Washington Gas retires depreciable utility plant and equipment,
it charges the associated original costs to Accumulated
depreciation and amortization and any related removal
costs incurred are charged to Regulatory
liabilitiesAccrued asset removal costs.
Washington Gas charges maintenance and repairs to operating
expenses, except those charges applicable to transportation and
power-operated equipment, which it allocates to operating
expenses, construction and other accounts based on the use of
the equipment. Washington Gas capitalizes betterments and
renewal costs, and calculates depreciation applicable to its
utility gas plant in service primarily using a straight-line
method over the estimated remaining life of the plant. The
composite depreciation and amortization rate of the regulated
utility segment was 3.23 percent during fiscal year 2008,
and 3.19 percent and 3.44 percent during fiscal years
2007 and 2006, respectively. In accordance with regulatory
requirements, such rates include a component related to asset
removal costs for Washington Gas. Washington Gas periodically
reviews the adequacy of its depreciation rates by considering
estimated remaining lives and other factors. Refer to
Note 14
Commitments and Contingencies
for a
discussion of depreciation-related contingencies.
At both September 30, 2008 and 2007, 99.8 percent of
WGL Holdings consolidated original cost of property, plant
and equipment was related to the regulated utility segment as
shown below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property, Plant and Equipment at Original Cost
|
|
|
|
At September 30,
|
|
2008
|
|
|
2007
|
|
|
|
(In millions)
|
|
Dollars
|
|
|
%
|
|
|
Dollars
|
|
|
%
|
|
|
|
Regulated utility segment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distribution, transmission and storage
|
|
$
|
2,791.2
|
|
|
|
87.7
|
|
|
$
|
2,689.2
|
|
|
|
87.5
|
|
General, miscellaneous and intangibles
|
|
|
314.1
|
|
|
|
9.9
|
|
|
|
296.7
|
|
|
|
9.7
|
|
Construction work in progress (CWIP)
|
|
|
71.8
|
|
|
|
2.2
|
|
|
|
80.2
|
|
|
|
2.6
|
|
|
Total regulated utility segment
|
|
|
3,177.1
|
|
|
|
99.8
|
|
|
|
3,066.1
|
|
|
|
99.8
|
|
Unregulated segments
|
|
|
7.1
|
|
|
|
0.2
|
|
|
|
6.8
|
|
|
|
0.2
|
|
|
Total
|
|
$
|
3,184.2
|
|
|
|
100.0
|
|
|
$
|
3,072.9
|
|
|
|
100.0
|
|
|
OPERATING
LEASES
We have classified the lease of our corporate headquarters as an
operating lease. We amortize to rent expense the total of all
scheduled lease payments (including lease payment escalations)
and tenant allowances on a straight-line basis over the term of
the lease. For this purpose, the lease term began on the date
when the lessor commenced constructing the leasehold
improvements which allowed us to occupy our corporate
headquarters. Leasehold improvement costs are classified as
Property, Plant and Equipment on the Balance Sheets,
and are being amortized to depreciation and amortization expense
on a straight-line basis over the term of the
15-year
non-cancelable period of the lease. Refer to
Note 14
Commitments and Contingencies
for
financial data for all of our operating leases.
REGULATED
OPERATIONS
Washington Gas accounts for its regulated operations in
accordance with Statement of Financial Accounting Standards
(SFAS) No. 71,
Accounting for the Effects of
Certain Types of Regulation
, as amended and supplemented.
This standard includes accounting principles for companies whose
rates are determined by independent third-party regulators. When
setting rates, regulators may require us to record costs as
expense (or defer costs or revenues) in different periods than
may be appropriate for unregulated enterprises. When this
occurs, Washington Gas defers the associated costs as assets
(regulatory assets) on its balance sheet and records them as
expenses on its income statement as it collects revenues through
customers rates. Further, regulators can also impose
liabilities upon a company for amounts previously collected from
customers and for recovery of costs that are expected to be
incurred in the future (regulatory liabilities).
78
WGL
Holdings, Inc.
Washington Gas Light Company
Part II
Item 8. Financial Statements and Supplementary Data
(continued)
Notes to Consolidated Financial Statements
Effective January 1, 2008, Washington Gas revised its
regulatory practice associated with the treatment of certain
indirect overhead costs related to its construction activities
for its fixed assets. The new treatment will be applicable to
the determination of the revenue required to recover such costs
in accordance with SFAS No. 71 for all subsequent
periods and has been adopted for all jurisdictions. The revision
consists of measuring internal labor costs that are spent on the
administration of the construction program and including these
costs in the overhead rates that are allocated to its
constructed assets. This new treatment is in accordance with
regulatory rules applicable to fixed asset accounting and is
common practice within the public utility industry. The result
of this treatment on the fiscal year ended September 30,
2008 was to capitalize $1.1 million (pre-tax) of related
labor costs, including benefits and payroll taxes.
At September 30, 2008 and 2007, we had recorded the
following regulatory assets and liabilities on its balance
sheets. These assets and liabilities will be recognized as
revenues and expenses in future periods as they are reflected in
customers rates.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Regulatory Assets and Liabilities
|
|
|
|
Regulatory
|
|
|
Regulatory
|
|
|
|
(In millions)
|
|
Assets
|
|
|
Liabilities
|
|
|
|
|
At September 30,
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
|
Current:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gas costs due from/to customers
|
|
$
|
19.2
|
|
|
$
|
13.2
|
|
|
$
|
7.4
|
|
|
$
|
8.0
|
|
|
|
Interruptible sharing
|
|
|
5.3
|
|
|
|
0.3
|
|
|
|
|
|
|
|
6.4
|
|
|
|
Earnings sharing mechanism
(ESM)
(a)(b)
|
|
|
|
|
|
|
|
|
|
|
4.8
|
|
|
|
|
|
|
|
Weather Normalization Adjustment (WNA) billing
mechanism
(b)
|
|
|
2.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues Normalization Adjustment (RNA) billing
mechanism
(c)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3.8
|
|
|
|
|
Total current
|
|
|
26.5
|
|
|
|
13.5
|
|
|
|
12.2
|
|
|
|
18.2
|
|
|
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued asset removal costs
|
|
|
|
|
|
|
|
|
|
|
306.0
|
|
|
|
285.2
|
|
|
|
Deferred gas costs
|
|
|
50.8
|
|
|
|
26.2
|
|
|
|
|
|
|
|
|
|
|
|
Pension and other post-retirement benefits
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other post-retirement benefit
coststrackers
(d)
|
|
|
8.7
|
|
|
|
9.7
|
|
|
|
|
|
|
|
|
|
|
|
Deferred pension
costs/incometrackers
(d)
|
|
|
13.9
|
|
|
|
8.9
|
|
|
|
|
|
|
|
|
|
|
|
SFAS No. 158 unrecognized
costs/income
(e)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pensions
|
|
|
52.6
|
|
|
|
7.1
|
|
|
|
|
|
|
|
19.0
|
|
|
|
Other post-retirement benefits
|
|
|
56.3
|
|
|
|
112.4
|
|
|
|
|
|
|
|
|
|
|
|
Other curtailment costs for pensions & other
post-retirement
benefits
(f)
|
|
|
2.5
|
|
|
|
3.1
|
|
|
|
|
|
|
|
|
|
|
|
|
Total pension and other post-retirement benefits
|
|
|
134.0
|
|
|
|
141.2
|
|
|
|
|
|
|
|
19.0
|
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax-related amounts due from/to customers
|
|
|
26.4
|
|
|
|
27.2
|
|
|
|
9.7
|
|
|
|
9.7
|
|
|
|
Losses/gains on issuance and extinguishments of debt and
interest-rate derivative instruments
|
|
|
8.2
|
|
|
|
8.9
|
|
|
|
1.6
|
|
|
|
1.8
|
|
|
|
Deferred gain on sale of assets
|
|
|
|
|
|
|
|
|
|
|
3.2
|
|
|
|
3.5
|
|
|
|
Environmental response costs
|
|
|
2.8
|
|
|
|
2.9
|
|
|
|
|
|
|
|
|
|
|
|
Rights-of-way fees
|
|
|
1.1
|
|
|
|
2.4
|
|
|
|
|
|
|
|
|
|
|
|
Other costsBusiness Process Outsourcing
(BPO)
(a)
|
|
|
12.6
|
|
|
|
8.1
|
|
|
|
|
|
|
|
|
|
|
|
Sabbatical leave and other similar benefits
|
|
|
6.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other regulatory expenses
|
|
|
1.2
|
|
|
|
3.1
|
|
|
|
0.5
|
|
|
|
1.8
|
|
|
|
|
Total other
|
|
|
58.4
|
|
|
|
52.6
|
|
|
|
15.0
|
|
|
|
16.8
|
|
|
|
|
Total deferred
|
|
|
243.2
|
|
|
|
220.0
|
|
|
|
321.0
|
|
|
|
321.0
|
|
|
|
|
Total
|
|
$
|
269.7
|
|
|
$
|
233.5
|
|
|
$
|
333.2
|
|
|
$
|
339.2
|
|
|
|
|
79
WGL
Holdings, Inc.
Washington Gas Light Company
Part II
Item 8. Financial Statements and Supplementary Data
(continued)
Notes to Consolidated Financial Statements
|
|
(a)
|
Refer to the section entitled
Performance-Based Rate Plans under
Note 14Commitments and Contingencies for a further
discussion of these amounts.
|
(b)
|
Relates to the Virginia
jurisdiction.
|
|
|
(c)
|
Relates to the Maryland
jurisdiction.
|
|
|
(d)
|
Relates to costs that are
recoverable/refundable in the District of Columbia.
|
|
|
(e)
|
Refer to
Note 11Pension and Other Post-Retirement Benefit
Plans for a further discussion of these amounts.
|
(f)
|
Represents curtailment costs
related to Virginia and Maryland associated with our BPO plan.
Curtailment costs related to the District of Columbia are
included in Other post-retirement
benefitstrackers and Deferred pension
costs/incometrackers.
|
With the exception of gas costs due from customers and deferred
gas costs, there are no material regulatory assets that reflect
an outlay of cash by Washington Gas for which Washington Gas
does not earn its overall rate of return. Washington Gas is
allowed to recover and is required to pay, using short-term
interest rates, the carrying costs related to gas costs due from
and to its customers in the District of Columbia and Virginia
jurisdictions.
As required by SFAS No. 71, Washington Gas monitors
its regulatory and competitive environment to determine whether
the recovery of its regulatory assets continues to be probable.
If Washington Gas were to determine that recovery of these
assets is no longer probable, it would write off the assets
against earnings. We have determined that SFAS No. 71
continues to apply to our regulated operations, and the recovery
of our regulatory assets is probable.
The losses or gains on the issuance and extinguishment of debt
and interest-rate derivative instruments include unamortized
balances from transactions executed in prior fiscal years. These
transactions create gains and losses that are amortized over the
remaining life of the debt as prescribed by regulatory
accounting requirements.
CASH
AND CASH EQUIVALENTS
We consider all investments with original maturities of three
months or less to be cash equivalents. We did not have any
restrictions on our cash balances that would impact the payment
of dividends by WGL Holdings or our subsidiaries as of
September 30, 2008.
REVENUE
AND COST RECOGNITION
Regulated
Utility Operations
Revenues.
For regulated deliveries of
natural gas, Washington Gas reads meters and bills customers on
a monthly cycle basis. The billing cycles for customers do not
coincide with the accounting periods used for financial
reporting purposes; therefore, Washington Gas accrues unbilled
revenues for gas delivered, but not yet billed, at the end of
each accounting period.
Cost of Gas.
Washington Gass
jurisdictional tariffs contain mechanisms that provide for the
recovery of the cost of gas paid to suppliers on behalf of firm
customers, including related pipeline transportation and storage
capacity charges. Under these mechanisms, Washington Gas
periodically adjusts its firm customers rates to reflect
increases and decreases in these costs. Annually, Washington Gas
reconciles the difference between the gas costs collected from
firm customers and paid to suppliers. Any excess or deficiency
is deferred and either recovered from, or refunded to, customers
over a subsequent twelve-month period. The balance sheet
captions Gas costs and other regulatory assets,
Gas costs and other regulatory liabilities and
Regulatory assetsGas costs include amounts
related to these reconciliations.
Revenue Taxes.
Revenue taxes such as
gross receipts taxes, PSC fees, franchise fees and energy taxes
are reported gross in operating revenues. Refer to
Note 16
Operating Segment Reporting
for amounts
recorded related to revenue taxes.
Transportation Gas
Imbalance.
Interruptible shippers and
third-party marketer shippers transport gas on Washington
Gass distribution system as part of the unbundled services
that it offers. The delivered volumes of gas from third-party
shippers into Washington Gass distribution system often do
not equal the volumes delivered to those customers, resulting in
transportation gas imbalances. These imbalances are usually
short-term in duration, and Washington Gas monitors the activity
and regularly notifies the shippers when their accounts have an
imbalance. In accordance with regulatory treatment, Washington
Gas does not record assets or liabilities associated with gas
volumes related to these transportation imbalances but, rather,
reflects the financial impact in its gas cost adjustment
mechanism, thereby eliminating any profit or loss that would
occur as a result of the imbalance. This regulatory treatment
results in recognizing an adjustment to a regulatory asset or a
regulatory liability for Washington Gass value of the
imbalance. The regulatory treatment combines the imbalance for
all marketers, including WGEServices, into a single
net adjustment to the regulatory asset or liability.
Refer to Note 17
Related Party Transactions
for
a further discussion of the accounting for these imbalance
transactions.
Asset Optimization Program.
Washington
Gas optimizes the value of its long-term natural gas
transportation and storage capacity resources by entering into
physical and financial transactions in the form of forwards,
swaps and option contracts during periods when these resources
are not being used to physically serve utility customers. Refer
to
Derivative Activities
below for a
80
WGL
Holdings, Inc.
Washington Gas Light Company
Part II
Item 8. Financial Statements and Supplementary Data
(continued)
Notes to Consolidated Financial Statements
further discussion of the accounting for derivative transactions
entered into under this program. Regulatory sharing mechanisms
in all three jurisdictions allow the profit from these
transactions to be shared between Washington Gass
customers and shareholders. The customer portion does not effect
earnings.
Prior to May 1, 2008, Washington Gas contracted for the
management of a portion of Washington Gass asset
optimization program with non-affiliated asset managers. These
asset managers paid Washington Gas a fee to utilize the related
capacity resources for their own account when they were not
required to meet customer supply needs. On April 30, 2008,
the last of these asset management contracts expired, and
Washington Gas retained the use of all of its capacity resources
to manage the asset optimization program internally with the
assistance of external consultants.
As a result of optimizing Washington Gass storage
capacity, storage gas inventory may be subject to lower of cost
or market adjustments. During the fiscal year ended
September 30, 2008, Washington Gas recorded a
$2.5 million lower of cost or market adjustment related to
its storage gas inventory, which was recorded to Utility
cost of gas. No such adjustments were made during the
fiscal years ended September 30, 2007 and 2006.
Non-Utility
Operations
Retail Energy-Marketing
Segment.
WGEServices, our retail
energy-marketing subsidiary, sells natural gas and electricity
on an unregulated basis to residential, commercial and
industrial customers both inside and outside the Washington Gas
service territory. WGEServices recognizes revenue based on
contractual billing amounts plus accruals for the natural gas
and electricity commodities that are delivered but unbilled.
WGEServices enters into indexed or fixed-rate contracts with
residential, commercial and industrial customers, for sales of
natural gas and electricity. Customer contracts, which typically
have terms less than 24 months, but may extend up to five
years, allow WGEServices to bill customers based upon metered
gas and electricity usage, measured on a cycle basis, at
customer premises or based on quantities delivered to the local
utility, either of which may vary by month.
WGEServices procures natural gas and electricity supply under
contract structures in which it assembles the various components
of supply from multiple suppliers to match its customer
requirements. The cost of natural gas and electricity for these
purchases is recorded using the contracted volumes and prices.
Design-Build Energy Systems
Segment.
WGESystems recognizes income and
expenses for all construction contracts using the
percentage-of-completion method.
RATE
REFUNDS DUE TO CUSTOMERS
When Washington Gas files a request with certain regulatory
commissions to modify customers rates, it is permitted to
charge customers new rates, subject to refund, until the
regulatory commission renders a final decision on the amount of
the authorized change in rates. During this interim period,
Washington Gas would record a provision for a rate refund based
on the difference between the amount it collects in rates and
the amount it expects to recover from a final regulatory
decision. Similarly, Washington Gas periodically records
provisions for rate refunds related to other transactions.
Actual results for these regulatory contingencies are often
difficult to predict and could differ significantly from the
estimates reflected in the financial statements. When necessary,
Washington Gas establishes a liability for an estimated refund
to customers. Refer to Note 14
Commitments and
Contingencies
for a further discussion of regulatory matters
and related contingencies.
REACQUISITION
OF LONG-TERM DEBT
Washington Gas defers gains or losses resulting from the
reacquisition of long-term debt for financial reporting
purposes, and amortizes them over future periods as adjustments
to interest expense in accordance with established regulatory
practice. For income tax purposes, Washington Gas recognizes
these gains and losses when they are incurred.
WEATHER-RELATED
INSTRUMENTS
Periodically, we purchase certain weather related instruments,
such as a weather insurance policy, heating degree day (HDD)
derivatives, and cooling degree day (CDD) derivatives. We
account for these weather related instruments in accordance with
Emerging Issues Task Force (EITF) Issue
No. 99-2,
Accounting for Weather Derivatives
. For our weather
insurance policy and our HDD derivatives, benefits may be
recognized to the extent actual HDDs fall above or below the
contractual HDDs for each instrument. Benefits are recognized
for CDD derivatives when the average temperature exceeds a
contractually stated level during the contract period. Expenses
for these products are amortized based on the pattern of normal
temperature days over the period of the terms of the respective
weather-related instruments. For the weather-related instruments
of Washington Gas, the premium expense and any benefits that are
derived are not considered in establishing retail rates.
Washington Gas does not purchase such instruments
81
WGL
Holdings, Inc.
Washington Gas Light Company
Part II
Item 8. Financial Statements and Supplementary Data
(continued)
Notes to Consolidated Financial Statements
for jurisdictions in which it has received rate mechanisms that
compensate it on a normal weather basis. Refer to
Note 6
Derivative and Weather-Related Instruments
for a further discussion of our weather-related instruments.
CONCENTRATION
OF CREDIT RISK
Regulated
Utility Segment
Washington Gas has a relatively low concentration of credit risk
with respect to its customer base due to its large number of
customers, none of which is singularly large as a percentage of
Washington Gass total customer base. Although Washington
Gas has credit monitoring policies and procedures which are
designed to limit its exposure, it has credit risk to the extent
the implementation of such controls are not effective in
mitigating all of its risk. Certain wholesale suppliers that
sell natural gas to both Washington Gas and WGEServices either
have relatively low credit ratings or are not rated by major
credit rating agencies. In the event of a suppliers
failure to deliver contracted volumes of gas, Washington Gas may
need to replace those volumes at prevailing market prices, which
may be higher than the original transaction prices, and pass
these costs through to its sales customers under the purchased
gas cost adjustment mechanisms. Additionally, Washington Gas
enters into contracts with wholesale counterparties to buy and
sell natural gas for the purpose of optimizing the value of its
long-term capacity and storage assets, as well as for hedging
natural gas costs and interest costs. In the event of a default
by these counterparties, Washington Gas may be at risk for
financial loss to the extent these costs are not passed through
to its customers.
Retail
Energy-Marketing Segment
WGEServices also has credit monitoring policies and procedures
which are designed to limit its credit risk exposure; however,
it has credit risk to the extent the implementation of such
controls are not effective in mitigating all of its risk.
Certain suppliers that sell natural gas or electricity to
WGEServices have either relatively low credit ratings or are not
rated by major credit rating agencies. Depending on the ability
of these suppliers to deliver natural gas or electricity under
existing contracts, WGEServices could be financially exposed for
the difference between the price at which WGEServices has
contracted to buy these commodities and their replacement cost
from another supplier. Additionally, WGEServices enters into
contracts with third parties to hedge the costs of natural gas
and electricity. Depending on the ability of the third parties
to fulfill their commitments, WGEServices could be at risk for
financial loss.
WGEServices is also exposed to the risk of non-payment of
invoiced sales by certain of its retail customers. WGEServices
manages this risk by evaluating the credit quality of new
customers as well as by monitoring collections from existing
customers. To the extent necessary, WGEServices can obtain
collateral from, or terminate service to, its customers.
DERIVATIVE
ACTIVITIES
We enter into both physical and financial contracts for the
purchase and sale of natural gas and electricity. We designate a
majority of our physical contracts related to the purchase of
natural gas and electricity to serve our customers as
normal purchases and normal sales; therefore, they
are not subject to the mark-to-market accounting requirements of
SFAS No. 133,
Accounting for Derivative Instruments
and Hedging Activities
, as amended. The financial contracts
and the portion of the physical contracts that qualify as
derivative instruments and are subject to the mark-to-market
accounting requirements are recorded on the balance sheet at
fair value. Changes in the fair value of derivative instruments
for Washington Gas that are subject to SFAS No. 71 are
recorded as regulatory assets or liabilities while changes in
the fair value of derivative instruments not affected by rate
regulation are reflected in earnings.
As part of its asset optimization program, Washington Gas enters
into derivative contracts related to the sale and purchase of
natural gas at a future price to substantially lock-in operating
margins that Washington Gas will ultimately realize. The
derivatives used under this program may cause significant
period-to-period volatility in earnings for the portion of net
profits retained for shareholders; however, this volatility will
not change the margins that Washington Gas will ultimately
realize from these transactions. In accordance with EITF Issue
No. 02-3,
Issues involved in Accounting for Derivative Contracts held
for Trading Purposes and Contracts Involved in Energy Trading
and Risk Management Activities
(EITF 02-3), all financially
and physically settled contracts under our asset optimization
program are reported on a net basis in the statements of income
in Utility cost of gas. During the year ended
September 30, 2008, $547.3 million of natural gas was
sold, with a cost of $532.0 million, under contracts that
were physically settled as part of Washington Gass
internally managed asset optimization program. During the years
ended September 30, 2007 and 2006, $213.8 million and
$15.6 million, respectively, of natural gas was sold, at a
cost of $201.4 million and $15.6 million,
respectively, under contracts that were physically settled as
part of Washington Gass internally managed asset
optimization program.
From time to time Washington Gas also utilizes derivative
instruments that are designed to minimize the risk of
interest-rate volatility associated with planned issuances of
Medium-Term Notes (MTNs). Gains or losses associated with these
derivative
82
WGL
Holdings, Inc.
Washington Gas Light Company
Part II
Item 8. Financial Statements and Supplementary Data
(continued)
Notes to Consolidated Financial Statements
transactions are deferred as regulatory assets or liabilities
and amortized to interest expense in accordance with regulatory
accounting requirements. Refer to Note 6
Derivative and Weather-Related Instruments
for a further
discussion of our derivative activities.
INCOME
TAXES
We recognize deferred income tax assets and liabilities for all
temporary differences between the financial statement basis and
the tax basis of assets and liabilities, including those where
regulators prohibit deferred income tax treatment for ratemaking
purposes of Washington Gas. Regulatory assets or liabilities,
corresponding to such additional deferred income tax assets or
liabilities, may be recorded to the extent recoverable from or
payable to customers through the ratemaking process. Refer to
the table under Regulated Operations above that
depicts Washington Gass regulatory assets and liabilities
associated with income taxes due from and to customers at
September 30, 2008 and 2007. Amounts applicable to income
taxes due from and due to customers primarily represent
differences between the book and tax basis of net utility plant
in service. We amortize investment tax credits as reductions to
income tax expense over the estimated service lives of the
related properties. Refer to Note 10
Income Taxes
which provides detailed financial information related to our
income taxes. Also refer to
Accounting Standards
Adopted in Fiscal Year 2008
, below, for a discussion
of our adoption of Financial Accounting Standards Board (FASB)
Interpretation No. 48,
Accounting for Uncertainty in
Income Taxes, an interpretation of FASB Statement
No. 109
, as amended (FIN 48).
STOCK-BASED
COMPENSATION
We account for stock-based compensation expense in accordance
with SFAS No. 123 (revised 2004),
Share-Based
Payment
(SFAS No. 123(R)) which requires us to
measure and recognize stock-based compensation expense in our
financial statements based on the fair value at the date of
grant for our share-based awards, which include performance
shares, performance units, stock options and shares issued to
directors. In addition, we estimate forfeitures over the
requisite service period when recognizing compensation expense;
these estimates are periodically adjusted to the extent to which
actual forfeitures differ from such estimates. Refer to
Note 12
Stock-Based Compensation
for a further
discussion of the accounting for our stock-based compensation
plans.
ASSET
RETIREMENT OBLIGATIONS
Washington Gas accounts for its asset retirement obligations
(AROs) in accordance with SFAS No. 143,
Accounting for
Asset Retirement Obligations
, and FIN 47,
Accounting
for Conditional Asset Retirement Obligations, An Interpretation
of FASB Statement No. 143
. Our asset retirement
obligations include the costs to cut, purge and cap our natural
gas distribution system, remove asbestos and plug storage wells
upon their retirement. These standards require recording the
estimated retirement cost over the life of the related asset by
depreciating the present value of the retirement obligation,
measured at the time of the assets acquisition, and
accreting the liability until it is settled. There are timing
differences between the ARO-related accretion and depreciation
amounts being recorded under these FASB standards and the
recognition of depreciation expense for legal asset removal
costs that we are currently recovering in rates. These timing
differences are recorded as a reduction to Regulatory
liabilitiesAccrued asset removal costs in accordance
with SFAS No. 71. We do not have any assets that are
legally restricted related to the settlement of asset retirement
obligations. The current year change in Asset retirement
obligations was primarily the result of accretion of the
existing liability.
PENSION
AND OTHER POST-RETIREMENT BENEFIT PLANS
In September 2006, the FASB issued SFAS No. 158,
Employers Accounting for Defined Benefit Pension and
Other Postretirement Plans,
which amends
SFAS No. 87,
Employers Accounting for
Pensions
, SFAS No. 88,
Employers
Accounting for Settlements and Curtailments of Defined Benefit
Pension Plans and for Termination Benefits
,
SFAS No. 106,
Employers Accounting for
Postretirement Benefits Other Than Pensions
and
SFAS 132 (revised 2003),
Employers Disclosures
about Pensions and Other Postretirement Benefits
.
SFAS No. 158 requires an employer to recognize the
over-funded or under-funded status of a defined benefit
post-retirement plan as an asset or liability on its balance
sheet, and to recognize changes in that funded status in the
year in which the changes occur through other comprehensive
income. Additionally, upon adoption companies were required to
record the initial impact of SFAS No. 158 directly to
accumulated other comprehensive income (loss), net of taxes.
This amount represents the initial recognition in the balance
sheet of unrecognized costs associated with actuarial net losses
and gains, prior service costs and transition obligations which
had previously been presented for disclosure purposes only.
Washington Gas adopted SFAS No. 158 prospectively
effective September 30, 2007. Almost all costs associated
with Washington Gass defined benefit post-retirement plans
have historically been, and will continue to be, recovered
through Washington Gass rates. Therefore, following the
guidance in SFAS No. 71, upon adoption of
SFAS No. 158 Washington Gas established a regulatory
asset or liability for the majority of the unrecognized costs or
income associated with its defined benefit post-retirement
plans. To the extent these amounts are not recovered through
Washington Gass rates, they were recorded directly to
83
WGL
Holdings, Inc.
Washington Gas Light Company
Part II
Item 8. Financial Statements and Supplementary Data
(continued)
Notes to Consolidated Financial Statements
Accumulated other comprehensive loss, net of taxes.
At September 30, 2007, the incremental effect of applying
SFAS No. 158 on our balance sheet was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Incremental Effects of Adopting SFAS No. 158
|
|
|
|
Before
|
|
|
|
|
|
After
|
|
|
|
|
|
application of
|
|
|
SFAS No. 158
|
|
|
Application of
|
|
|
|
(In thousands)
|
|
SFAS No. 158
|
|
|
Adjustments
|
|
|
SFAS No. 158
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Regulatory assetsPension and other post-retirement benefits
|
|
$
|
21,683
|
|
|
$
|
119,480
|
|
|
$
|
141,163
|
|
|
|
Prepaid qualified pension benefits
|
|
|
70,612
|
|
|
|
19,413
|
|
|
|
90,025
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred income taxes
|
|
|
298,401
|
|
|
|
(34,001
|
)
|
|
|
264,400
|
|
|
|
Accrued pensions and benefits
|
|
|
46,150
|
|
|
|
153,682
|
|
|
|
199,832
|
|
|
|
Regulatory liabilitiesPension and other post-retirement
benefits
|
|
|
|
|
|
|
19,005
|
|
|
|
19,005
|
|
|
|
Common shareholders equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated other comprehensive loss, net of taxes
|
|
|
(3,399
|
)
|
|
|
207
|
|
|
|
(3,192
|
)
|
|
|
|
Refer to Note 11
Pensions and Other Post-Retirement
Benefit Plans
for disclosures regarding the funded status of
Washington Gass defined benefit post-retirement plans.
ACCOUNTING
STANDARDS ADOPTED IN FISCAL YEAR 2008
Income
Taxes
Effective October 1, 2007, we adopted FIN 48. This
adoption did not have a material effect on our consolidated
financial statements. FIN 48 clarifies the accounting for
uncertain events related to income taxes recognized in financial
statements. This interpretation prescribes a recognition
threshold and measurement attribute for the financial statement
recognition and measurement of a tax position taken or expected
to be taken in a tax return. Additionally, this interpretation
provides guidance on the de-recognition and classification of a
tax position reflected within the financial statements and the
recognition of interest and penalties, accounting in interim
periods, disclosure and transition.
In May 2007, the FASB issued FASB Staff Position (FSP)
No. FIN 48-1,
Definition of Settlement in FASB Interpretation
No. 48
. This FSP substantively amends FIN 48 to
provide guidance on how an enterprise should determine whether a
tax position is effectively settled for the purpose of
recognizing previously unrecognized tax benefits. This standard
was implemented in conjunction with our implementation of
FIN 48.
As of October 1, 2007 and September 30, 2008, we did
not have a liability for unrecognized tax benefits. We recognize
any accrued interest associated with uncertain tax positions in
interest expense and recognize any accrued penalties associated
with uncertain tax positions in other expenses in the statements
of income. During the fiscal year ended September 30, 2008,
we did not recognize any expense for interest or penalties on
uncertain tax provisions, and did not have any amounts accrued
at October 1, 2007 and September 30, 2008,
respectively, for the payment of interest and penalties on
uncertain tax positions.
We file consolidated Federal and District of Columbia income tax
returns. State income tax returns are filed on a separate
company basis in most states where we have operations
and/or
a
requirement to file. We are no longer subject to income tax
examinations by the Internal Revenue Service for years before
September 30, 2005. Additionally, substantially all tax
returns in major state income tax jurisdictions are closed for
years before September 30, 2002.
Other
In June 2006, the FASB ratified EITF Issue
No. 06-2,
Accounting for Sabbatical Leave and Other Similar Benefits
Pursuant to FASB Statement No. 43, Accounting for
Compensated Absences
(EITF 06-2),
which was effective for Washington Gas on October 1, 2007.
EITF 06-2
requires entities to accrue compensation cost associated with
sabbatical leave and other similar benefits over the requisite
service period assuming certain conditions are met. Washington
Gas implemented this standard on January 1, 2008. The costs
associated with Washington Gass benefits that fall under
EITF 06-2
are included in Washington Gass rates charged to its
customers, as incurred; therefore, upon adoption of this
standard, Washington Gas recorded a liability of
$12.9 million and an
84
WGL
Holdings, Inc.
Washington Gas Light Company
Part II
Item 8. Financial Statements and Supplementary Data
(continued)
Notes to Consolidated Financial Statements
offsetting regulatory asset. The effect of adopting this
standard was not material to our balance sheet accounts and had
no effect on the income statement.
OTHER
NEWLY ISSUED ACCOUNTING STANDARDS
Fair
Value
In September 2006, the FASB issued SFAS No. 157,
Fair Value Measurements,
which defines fair value,
establishes a framework for measuring fair value in GAAP and
expands disclosures about fair value measurements.
SFAS No. 157 applies under other accounting
pronouncements that require or permit assets or liabilities to
be measured at fair value, and does not require any new fair
value measurements. Additionally, SFAS No. 157 amends
EITF 02-3
to require that any differences between the transaction price
and fair value of a derivative instrument at the inception of
the contract be recognized as a cumulative-effect adjustment to
the opening balance of retained earnings or other appropriate
components of net assets upon adoption of SFAS No. 157.
SFAS No. 157 was effective for us on October 1,
2008. As a result of adoption, WGL Holdings recorded a
$1.7 million cumulative-effect adjustment to increase the
opening balance of retained earnings. Additionally, Washington
Gas recorded a $4.7 million cumulative adjustment to the
opening balance of regulatory assets, because a large portion of
these differences relate to gas costs that will be recoverable
from customers.
In February 2008, the FASB issued FSP
No. FAS 157-1,
Application of FASB Statement No. 157 to FASB Statement
No. 13 and Other Accounting Pronouncements That Address
Fair Value Measurements for Purposes of Lease Classification or
Measurement under Statement 13
. This FSP amends
SFAS No. 157 to exclude SFAS No. 13,
Accounting for Leases
, and other accounting
pronouncements that address fair value measurements for purposes
of lease classification or measurement under
SFAS No. 13.
In February 2008, the FASB issued FSP
No. FAS 157-2,
Effective Date of FASB Statement No. 157
. This FSP
delays the effective date of SFAS No. 157 for
non-financial assets and non-financial liabilities, except for
items that are recognized or disclosed at fair value in the
financial statements on a recurring basis.
In October 2008, the FASB issued FSP
No. FAS 157-3,
Determining the Fair Value of a Financial Asset When the
Market for That Asset Is Not Active
. This FSP clarifies the
application of SFAS No. 157 in a market that is not
active and provides an example to illustrate key considerations
in determining the fair value of a financial asset when the
market for that asset is not active. This standard was
implemented in conjunction with our implementation of
SFAS No. 157.
In February 2007, the FASB issued SFAS No. 159,
The
Fair Value Option for Financial Assets and Financial
Liabilities,
which permits entities to choose to measure
financial assets and liabilities and certain other items at fair
value that are not currently required to be measured at fair
value. The objective of SFAS No. 159 is to improve
financial reporting by providing entities with the opportunity
to mitigate volatility in reported earnings caused by measuring
related assets and liabilities differently without having to
apply complex hedge accounting provisions.
SFAS No. 159 applies under other accounting
pronouncements that require or permit fair value measurements
and does not require any new fair value measurements. The fair
value option established by this statement permits all entities
to choose to measure eligible items at fair value at specified
election dates. SFAS No. 159 is effective as of the
beginning of an entitys first fiscal year that begins
after November 15, 2007. Early adoption is permitted as of
the beginning of a fiscal year that begins on or before
November 15, 2007, provided the entity also elects to apply
the provisions of SFAS No. 157,
Fair Value
Measurements
. We did not early adopt SFAS No. 159
and did not elect the fair value option for any eligible assets
and liabilities on our balance sheet as of October 1, 2008.
Derivative
Instruments
In April 2007, the FASB issued FSP
No. FIN 39-1,
Amendment of FASB Interpretation No. 39
. This FSP
amends FIN 39,
Offsetting of Amounts Related to Certain
Contracts
, to replace the terms conditional
contracts and exchange contracts with the term
derivative instruments as defined in
SFAS No. 133,
Accounting for Derivative Instruments
and Hedging Activities
, as amended (SFAS No. 133).
Additionally, it permits a reporting entity to offset the fair
value amounts recognized for the right to reclaim cash
collateral or the obligation to return cash collateral against
fair value amounts recognized for derivative instruments
executed with the same counterparty under the same master
netting arrangement. The guidance in this FSP was effective for
us on October 1, 2008. As a result of the implementation of
this standard, we will net the fair value recorded for each of
our cash collateral positions against the net fair value amounts
recorded for the associated derivative instruments executed
under the same master netting arrangement. These balances were
not material at October 1, 2008.
In March 2008, the FASB issued SFAS No. 161
Disclosures about Derivative Instruments and Hedging
Activities, an amendment of FASB Statement No. 133
.
SFAS No. 161 establishes, among other things, the
disclosure requirements for derivative instruments and for
hedging activities. This statement requires qualitative
disclosures about fair value amounts, gains and losses on
derivative
85
WGL
Holdings, Inc.
Washington Gas Light Company
Part II
Item 8. Financial Statements and Supplementary Data
(continued)
Notes to Consolidated Financial Statements
instruments, and disclosures about credit-risk-related
contingent features in derivative agreements.
SFAS No. 161 is effective for us on January 1,
2009. We are currently evaluating the possible effect of this
standard on our consolidated financial statements.
Other
In May 2008, the FASB issued SFAS No. 162
The
Hierarchy of Generally Accepted Accounting Principles
.
SFAS No. 162 is intended to improve financial
reporting by identifying the sources of accounting principles
and the framework, or hierarchy, for selecting the principles to
be used in the preparation of financial statements of
non-governmental entities that are presented in conformity with
GAAP. SFAS No. 162 will be effective November 15,
2008. We do not expect the adoption of SFAS No. 162 to
have a material impact on our financial position or results of
operations.
In December 2007, the FASB issued SFAS No. 160
Noncontrolling Interests in Consolidated Financial
Statements, an amendment of ARB No. 51
.
SFAS No. 160 establishes accounting and reporting
standards for the noncontrolling interest in a subsidiary and
for the deconsolidation of a subsidiary. SFAS No. 160
is effective for us on October 1, 2009. We are currently
evaluating the possible effect of this standard on our
consolidated financial statements.
|
|
2.
|
DISCONTINUED
OPERATIONS
|
During the quarter ended June 30, 2006, we completed a plan
for the disposition of American Combustion Industries, Inc.
(ACI) and, on September 29, 2006, we sold all of the
outstanding shares of common stock of ACI to an unrelated party.
ACI was previously reported as part of our design-build energy
systems business segment. ACI was reported as a discontinued
operation of WGL Holdings and, accordingly, its operating
results and cash flows for fiscal year 2006 has been presented
separately from our continuing operations in the consolidated
financial statements of WGL Holdings. The terms of the sales
agreement provided for two post-closing adjustments, one in late
2006 and another in late 2007, to adjust the sales price for
issues primarily related to working capital targets and to
settle a hold back amount of the purchase price
which was not conveyed at the closing in September 2006. WGL
Holdings has recorded an estimate for these adjustments on its
balance sheet to Accounts receivable. We have filed
a lawsuit against the purchaser for both working capital
adjustments and the hold back amount due. The
purchaser has disputed our claim and submitted a counter claim
for different issues. If the actual adjustments to the sales
price differ from what we have estimated, these differences will
be reflected in the results of discontinued operations in a
future period. The amount recorded to Accounts
receivable is not material to our financial statements.
For the fiscal year ended September 30, 2006, ACIs
net loss from operations of $3.5 million was presented in
Loss from discontinued operations, net of income tax
benefit on the Consolidated Statements of Income. There
was no activity reported related to ACI for the fiscal years
ended September 30, 2008 and 2007. For the fiscal year
ended September 30, 2006, ACIs net loss from
operations included a related impairment charge of $578,000,
which represents the write-down of ACIs fixed assets to
adjust the carrying value of ACIs net assets to its
approximate fair value (less estimated costs of sale) as of
June 30, 2006. Additionally, Loss from discontinued
operations, net of income tax benefit for the fiscal year
ended September 30, 2006 included a loss of
$3.6 million related to the sale of ACI. We did not
recognize a tax benefit on either the impairment loss or the
loss from the ACI sale because a valuation allowance was
established against the deferred tax assets associated with
these losses.
86
WGL
Holdings, Inc.
Washington Gas Light Company
Part II
Item 8. Financial Statements and Supplementary Data
(continued)
Notes to Consolidated Financial Statements
The following table summarizes selected financial information
related to the operating results of discontinued operations.
|
|
|
|
|
|
|
Operating Results of Discontinued Operations
|
|
|
|
Years Ended
|
|
|
|
|
|
September 30,
|
|
|
|
|
(In thousands)
|
|
2006
|
|
|
|
|
|
Revenues
(a)
|
|
$
|
24,757
|
|
|
|
|
Loss before income tax benefit (including impairment charge)
|
|
$
|
(5,053
|
)
|
|
|
Loss from sale of ACI
|
|
|
(3,556
|
)
|
|
|
Income tax benefit
|
|
|
1,493
|
|
|
|
|
Loss from discontinued operations, net of income tax benefit
|
|
$
|
(7,116
|
)
|
|
|
|
|
|
(a)
|
Includes inter-company revenues
of $1.1 million for the year ended September 30,
2006.
|
|
|
3.
|
ACCOUNTS PAYABLE
AND OTHER ACCRUED LIABILITIES
|
The tables below provide details for the amounts included in
Accounts payable and other accrued liabilities on
the balance sheets for both WGL Holdings and Washington Gas.
|
|
|
|
|
|
|
|
|
|
|
WGL Holdings, Inc.
|
|
|
|
September 30,
|
|
|
|
|
(In thousands)
|
|
2008
|
|
|
2007
|
|
|
|
|
Accounts payabletrade
|
|
$
|
204,283
|
|
|
$
|
172,947
|
|
|
|
Employee benefits and payroll accruals
|
|
|
22,823
|
|
|
|
21,334
|
|
|
|
Other accrued liabilities
|
|
|
16,017
|
|
|
|
22,580
|
|
|
|
|
Total
|
|
$
|
243,123
|
|
|
$
|
216,861
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Washington Gas Light Company
|
|
|
|
September 30,
|
|
|
|
|
(In thousands)
|
|
2008
|
|
|
2007
|
|
|
|
|
Accounts payabletrade
|
|
$
|
131,630
|
|
|
$
|
104,252
|
|
|
|
Employee benefits and payroll accruals
|
|
|
20,631
|
|
|
|
19,261
|
|
|
|
Other accrued liabilities
|
|
|
13,799
|
|
|
|
21,278
|
|
|
|
|
Total
|
|
$
|
166,060
|
|
|
$
|
144,791
|
|
|
|
|
87
WGL
Holdings, Inc.
Washington Gas Light Company
Part II
Item 8. Financial Statements and Supplementary Data
(continued)
Notes to Consolidated Financial Statements
WGL Holdings and Washington Gas satisfy their short-term
financing requirements through the sale of commercial paper or
through bank borrowings. Due to the seasonal nature of the
regulated utility and retail energy-marketing segments,
short-term financing requirements can vary significantly during
the year. We maintain revolving credit agreements to support our
outstanding commercial paper and to permit short-term borrowing
flexibility. Our policy is to maintain bank credit facilities in
an amount equal to or greater than our expected maximum
commercial paper position. The following is a summary of our
committed credit available at September 30, 2008.
|
|
|
|
|
|
|
|
|
|
|
Committed Credit Available
(In millions)
|
|
|
|
|
|
WGL Holdings
|
|
|
Washington Gas
|
|
|
|
|
|
Expiration dateCommitted credit agreements
|
|
|
|
|
|
|
|
|
|
|
|
August 3,
2012
(a)(b)
|
|
$
|
400.0
|
|
|
$
|
300.0
|
|
|
|
May 27, 2009
|
|
|
|
|
|
|
75.0
|
|
|
|
May 29, 2009
|
|
|
|
|
|
|
15.0
|
|
|
|
September 19, 2009
|
|
|
|
|
|
|
10.0
|
|
|
|
|
Total committed credit agreements
|
|
|
400.0
|
|
|
|
400.0
|
|
|
|
Less: Commercial Paper
|
|
|
(23.0
|
)
|
|
|
(231.0
|
)
|
|
|
Bank loans
|
|
|
(17.0
|
)
|
|
|
|
|
|
|
|
Net committed credit available
|
|
$
|
360.0
|
|
|
$
|
169.0
|
|
|
|
|
|
|
(a)
|
Represents our revolving credit
facilities with commercial banks. Both WGL Holdings and
Washington Gas have the right to request extensions, with the
banks approval.
|
(b)
|
WGL Holdings revolving
credit facility permits it to borrow an additional
$50 million, with the banks approval, for a total of
$450 million. Washington Gass revolving credit
facility permits it to borrow an additional $100 million,
with the banks approval, for a total of
$400 million.
|
At September 30, 2008 and 2007, WGL Holdings and its
subsidiaries had outstanding notes payable in the form of
commercial paper and bank loans from revolving credit facilities
of $271.0 million and $184.2 million, respectively, at
a weighted average cost of 2.92 percent and
5.03 percent, respectively. As of September 30, 2008,
WGL Holdings had $17.0 million in outstanding borrowings
under its revolving credit facility. As of September 30,
2008, there were no outstanding borrowings under Washington
Gass credit agreements.
Of the outstanding notes payable balance at September 30,
2007, $62.2 million and $122.0 million was commercial
paper issued by WGL Holdings and Washington Gas, respectively.
There were no outstanding borrowings under either WGL
Holdings or Washington Gass credit agreements as of
September 30, 2007.
Depending on the type of borrowing option chosen under our
revolving credit facilities, loans may bear interest at variable
rates based on the Eurodollar rate, the higher of the prime
lending rate or the Fed Funds effective rate, or at a
competitive rate determined through auction. WGL Holdings and
Washington Gas may elect to have the principal balance of the
loans outstanding at maturity continue as non-revolving term
loans for a period of one year from the maturity date. An
additional 0.25 percent premium shall be applied to the
pricing of the non-revolving term loans. Facility fees related
to these revolving credit facilities for both companies are
based on the long-term debt ratings of Washington Gas. In the
event the long-term debt of Washington Gas is downgraded below
certain levels, WGL Holdings and Washington Gas would be
required to pay higher facility fees.
Additionally, during fiscal year 2008, Washington Gas entered
into three credit agreements with commercial banks that permit
Washington Gas to borrow up to $100 million. Depending on
the type of borrowing option chosen, loans may bear interest at
variable rates based on the Eurodollar rate or the higher of the
prime lending rate or the Fed Funds effective rate plus a
margin, or a combination thereof. As of September 30, 2008,
there were no outstanding borrowings under any of the three
credit agreements.
Under the terms of our credit agreements, the ratio of
consolidated financial indebtedness to consolidated total
capitalization can not exceed 0.65 to 1.0 (65.0 percent).
At September 30, 2008, we were in compliance with this
requirement. In addition, WGL Holdings and Washington Gas are
required to inform lenders of changes in corporate existence,
financial conditions, litigation and environmental warranties
that might have a material adverse effect. The failure to inform
the lenders agent of changes in these areas deemed
material in nature might constitute default under the
agreements. Additionally, WGL Holdings or Washington
Gass failure to pay principal or interest when due on any
of its other indebtedness may be deemed a default under our
credit agreements. A
88
WGL
Holdings, Inc.
Washington Gas Light Company
Part II
Item 8. Financial Statements and Supplementary Data
(continued)
Notes to Consolidated Financial Statements
default, if not remedied, may lead to a suspension of further
loans
and/or
acceleration in which obligations become immediately due and
payable.
FIRST
MORTGAGE BONDS
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. Washington Gas had no debt outstanding under the
Mortgage at September 30, 2008 and 2007. Any FMBs that may
be issued in the future will represent indebtedness of
Washington Gas.
SHELF
REGISTRATION
At September 30, 2008, Washington Gas had the capacity,
under a shelf registration that was declared effective by the
SEC on June 8, 2006, to issue up to $300.0 million of
MTNs. On June 14, 2006, Washington Gas executed a
Distribution Agreement with certain financial institutions for
the issuance and sale of debt securities included in the shelf
registration statement. As of September 30, 2008,
Washington Gas had the capacity to issue up to
$250.0 million of MTNs.
UNSECURED
MEDIUM-TERM NOTES
Washington Gas issues unsecured MTNs with individual terms
regarding interest rates, maturities and call or put options.
These notes can have maturity dates of one or more years from
the date of issuance. At September 30, 2008 and 2007, the
weighted average interest rate on all outstanding MTNs was
5.95 percent.
The indenture for these unsecured MTNs provides that Washington
Gas will not issue any FMBs under its Mortgage without securing
all MTNs with the Mortgage.
Certain of Washington Gass outstanding MTNs have a put
option. Certain other MTNs have a make-whole call feature that
pays the holder a premium based on a spread over the yield to
maturity of a U.S. Treasury security having a comparable
maturity, when that particular note is called by Washington Gas
before its stated maturity date. With the exception of this
make-whole call feature, Washington Gas is not required to pay
call premiums for calling debt prior to the stated maturity
date. MTN activity for the fiscal year ended September 30,
2008 is shown below. During fiscal year 2007, we did not issue
or retire any MTNs.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
MTN Issuances and Retirements
|
|
|
|
|
|
|
|
|
|
Interest
|
|
|
Nominal
|
|
|
|
(In millions)
|
|
Principal
|
|
|
Rate
|
|
|
Maturity Date
|
|
|
|
|
Year Ended September 30, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuances:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
08/26/2008
|
|
$
|
50.0
|
|
|
|
3.61%
|
|
|
|
08/26/2010
|
(a)
|
|
|
|
Total
|
|
$
|
50.0
|
|
|
|
|
|
|
|
|
|
|
|
|
Retirements:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
08/11/2008
|
|
$
|
12.1
|
|
|
|
6.60%
|
|
|
|
08/11/2008
|
|
|
|
08/12/2008
|
|
|
3.0
|
|
|
|
6.61%
|
|
|
|
08/12/2008
|
|
|
|
08/18/2008
|
|
|
3.5
|
|
|
|
6.55%
|
|
|
|
08/18/2008
|
|
|
|
08/18/2008
|
|
|
1.5
|
|
|
|
6.51%
|
|
|
|
08/18/2008
|
|
|
|
|
Total
|
|
$
|
20.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
Floating rate MTN at 80 basis points over the
3-month
LIBOR with a call option at 100 percent of par value to
redeem the MTNs on or after February 26, 2009. Interest
rate resets quarterly on November, February, May, and August 26
of each year until maturity.
|
|
On October 21, 2008, Washington Gas retired
$25 million of 5.49 percent MTNs.
89
WGL
Holdings, Inc.
Washington Gas Light Company
Part II
Item 8. Financial Statements and Supplementary Data
(continued)
Notes to Consolidated Financial Statements
LONG-TERM
DEBT MATURITIES
Maturities of long-term debt for each of the next five fiscal
years and thereafter as of September 30, 2008 are
summarized in the following table.
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-Term Debt
Maturities
(a)
|
|
|
|
(In millions)
|
|
MTNs
|
|
|
Other
|
|
|
Total
|
|
|
|
2009
|
|
$
|
75.0
|
|
|
$
|
1.1
|
|
|
$
|
76.1
|
|
2010
(c)
|
|
|
82.5
|
|
|
|
|
|
|
|
82.5
|
|
2011
|
|
|
30.0
|
|
|
|
|
|
|
|
30.0
|
|
2012
|
|
|
77.0
|
|
|
|
|
|
|
|
77.0
|
|
2013
|
|
|
|
|
|
|
|
|
|
|
|
|
Thereafter
|
|
|
399.5
|
|
|
|
|
|
|
|
399.5
|
|
|
Total (before project debt financing)
|
|
|
664.0
|
|
|
|
1.1
|
|
|
|
665.1
|
|
Project debt
financing
(b)
|
|
|
|
|
|
|
14.7
|
|
|
|
14.7
|
|
|
Total
|
|
|
664.0
|
|
|
|
15.8
|
|
|
|
679.8
|
|
Less: current maturities
|
|
|
75.0
|
|
|
|
1.0
|
|
|
|
76.0
|
|
|
Total non-current
|
|
$
|
589.0
|
|
|
$
|
14.8
|
|
|
$
|
603.8
|
|
|
|
|
|
(a)
|
Excludes unamortized discounts of $53 thousand at
September 30, 2008.
|
|
(b)
|
Project debt financing is anticipated to be a non-cash
extinguishment. Refer to Note 14Commitments and
Contingencies for a further discussion of this construction
project financing.
|
|
|
|
|
(c)
|
Assumes the exercise of a put option by the MTN debt holders
of $8.5 million in 2010.
|
|
|
|
6.
|
DERIVATIVE AND
WEATHER-RELATED INSTRUMENTS
|
DERIVATIVE
INSTRUMENTS
Regulated
Utility Operations
Purchase and Sale of Natural
Gas.
Washington Gas enters into certain
contracts related to the sale and purchase of natural gas that
qualify as derivative instruments and are accounted for under
SFAS No. 133. These contracts relate primarily to
Washington Gass asset optimization program, as well as
certain contracts related to the purchase of gas to serve
utility customers. Washington Gas does not designate these
derivatives as hedges under SFAS No. 133; therefore,
any changes in fair value are recorded as a regulatory asset or
liability, or through earnings. To the extent that gains and
losses associated with these derivative instruments will be
included in the rates charged to customers, Washington Gas
defers these amounts as regulatory liabilities and assets,
respectively. Gains and losses excluded from rates charged to
customers are recorded to earnings. At September 30, 2008
and September 30, 2007, such derivative instruments had
unrealized net fair value losses of $35.6 million and
$12.3 million, respectively. The September 30, 2008
unrealized net fair value loss was comprised of
$45.9 million that was recorded on the balance sheet as a
derivative liability and $10.3 million that was recorded as
a derivative asset. The September 30, 2007 unrealized net
fair value loss was comprised of $23.2 million that was
recorded on the balance sheet as a derivative liability and
$10.9 million that was recorded as a derivative asset. In
connection with these derivative instruments, Washington Gas
recorded to income a pre-tax gain of $8.9 million, a
pre-tax loss of $797,000 and a pre-tax gain of $1.9 million
for the fiscal years ended September 30, 2008, 2007, and
2006, respectively. These amounts are principally reflected in
Utility cost of gas, with amounts shared with
Maryland customers reflected in Operating
revenuesutility. Refer to
Note 1
Accounting Policies
for a further
discussion of our derivative instruments, as well as for a
discussion of our asset optimization program.
Debt Issuances.
Washington Gas utilizes
derivative instruments from time to time that are designed to
minimize the risk of interest-rate volatility associated with
planned issuances of MTNs. There was no activity associated with
these types of derivatives in fiscal year 2008 or 2007. In
fiscal year 2006, Washington Gas settled three forward-starting
swaps in conjunction with debt issuances during that year.
Washington Gas received $589,000 associated with these
settlements. These amounts were recorded as regulatory
liabilities, and are being amortized in accordance with
regulatory requirements.
90
WGL
Holdings, Inc.
Washington Gas Light Company
Part II
Item 8. Financial Statements and Supplementary Data
(continued)
Notes to Consolidated Financial Statements
Non-Utility
Operations
Our non-regulated retail energy-marketing subsidiary,
WGEServices, enters into contracts related to the sale and
purchase of natural gas and electricity that qualify as
derivative instruments that are accounted for under
SFAS No. 133. These derivative instruments are
recorded at fair value on our consolidated balance sheets.
WGEServices does not designate these derivatives as hedges under
SFAS No. 133; therefore, changes in the fair value of
these various derivative instruments are reflected in the
earnings of our retail energy-marketing segment. At
September 30, 2008 and September 30, 2007, these
derivative instruments had an unrealized net fair value loss of
$3.4 million and an unrealized net fair value gain of
$7.6 million, respectively. The September 30, 2008
unrealized net fair value loss was comprised of
$7.6 million that was recorded on the balance sheet as a
derivative asset and $11.0 million that was recorded as a
derivative liability. The September 30, 2007 unrealized net
fair value gain was comprised of $10.3 million that was
recorded as a derivative asset and $2.7 million that was
recorded as a derivative liability. In connection with these
derivative instruments, WGEServices recorded a pre-tax loss of
$10.2 million, a pre-tax gain of $5.6 million and a
pre-tax loss of $4.5 million for the fiscal years ended
September 30, 2008, 2007 and 2006, respectively. These
amounts are principally recorded in Non-utility cost of
energy-related sales.
Consolidated
Operations
The following table summarizes the balance sheet classification
for all open positions on derivative instruments for both WGL
Holdings and Washington Gas. The amounts for WGL Holdings
include the derivatives related to WGEServices as well as
Washington Gas.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance Sheet Classification of Open Positions on Derivative
Instruments
|
|
|
|
(In millions)
|
|
WGL Holdings
|
|
Washington Gas
|
|
|
|
|
|
September 30,
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other current assets
|
|
$
|
12.0
|
|
|
$
|
14.9
|
|
|
$
|
4.9
|
|
|
$
|
7.7
|
|
|
|
Deferred charges and other assetsother
|
|
|
5.9
|
|
|
|
6.3
|
|
|
|
5.4
|
|
|
|
3.2
|
|
|
|
|
Total assets
|
|
$
|
17.9
|
|
|
$
|
21.2
|
|
|
$
|
10.3
|
|
|
$
|
10.9
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other current liabilities
|
|
$
|
43.7
|
|
|
$
|
20.7
|
|
|
$
|
32.7
|
|
|
$
|
18.1
|
|
|
|
Deferred creditsother
|
|
|
13.2
|
|
|
|
5.2
|
|
|
|
13.2
|
|
|
|
5.1
|
|
|
|
|
Total liabilities
|
|
$
|
56.9
|
|
|
$
|
25.9
|
|
|
$
|
45.9
|
|
|
$
|
23.2
|
|
|
|
|
WEATHER-RELATED
INSTRUMENTS
Regulated
Utility Operations
Washington Gas had a weather insurance policy designed to
mitigate the negative financial effects of warmer-than-normal
weather during the heating season in the District of Columbia.
This policy had a three-year term that expired on
September 30, 2008. For both the
2006-2007
and
2005-2006
winter heating seasons, Washington Gas also had a HDD derivative
to provide protection against the financial effects of
warmer-than-normal weather in Virginia. The HDD derivative
purchased for the
2006-2007
winter heating season covered the period October 15, 2006
through April 30, 2007. The HDD derivative purchased for
the
2005-2006
heating season covered the period December 18, 2005 through
May 31, 2006. Effective October 1, 2007, with the
implementation of a WNA in Virginia, Washington Gas no longer
utilizes HDD derivatives as part of its weather protection
strategy in that jurisdiction. Effective October 1, 2008,
Washington Gas Purchased and sold weather derivatives to
mitigate the financial effects of weather during the 2008-2009
heating season in the District of Columbia.
During the fiscal year ended September 30, 2008, Washington
Gas recorded pre-tax income, net of premium costs, of
$1.1 million related to its weather insurance policy.
Washington Gas received a cash benefit related to this insurance
policy of $4.6 million as a result of the
warmer-than-normal weather experienced during fiscal year 2008.
During the fiscal year ended September 30, 2007, Washington
Gas recorded a pre-tax expense of $3.6 million related to
both its weather insurance policy and weather derivative. Due to
the colder-than-normal weather experienced during the
2006-2007
winter heating season, Washington Gas was not entitled to a
payment related to this period under either its weather
insurance policy or weather derivative. During the fiscal year
ended September 30, 2006, Washington Gas recorded benefits,
net of premium and derivative costs, of $4.7 million
related to both its weather insurance policy and weather
derivative. As a result of the warmer-than-normal weather in
fiscal year 2006,
91
WGL
Holdings, Inc.
Washington Gas Light Company
Part II
Item 8. Financial Statements and Supplementary Data
(continued)
Notes to Consolidated Financial Statements
Washington Gas received a total cash benefit of
$7.5 million related to its weather derivative and
insurance policy. Benefits and expenses associated with
Washington Gass weather-related instruments are recorded
to Operation and maintenance expense.
Non-Utility
Operations
WGEServices utilizes weather-related derivatives for managing
the financial effects of weather risks. These derivatives cover
a portion of WGEServices estimated revenue or
energy-related cost exposure to variations in heating or cooling
degree days. These contracts may pay WGEServices a fixed-dollar
amount for every degree day over or under specific levels during
the calculation period dependent upon the type of contract
executed. For the fiscal years ended September 30, 2008,
2007 and 2006, WGEServices recorded pre-tax amortization expense
of $379,000, $1.7 million and $2.1 million,
respectively, related to these derivatives. Benefits and
expenses associated with these derivatives are recorded to
Non-utility cost of energy-related sales.
COMMON
STOCK OUTSTANDING
Shares of common stock outstanding were 49,916,883, 49,316,211
and 48,878,499 at September 30, 2008, 2007 and 2006,
respectively.
COMMON
STOCK RESERVES
At September 30, 2008, there were 3,810,822 authorized, but
unissued, shares of common stock reserved under the following
plans.
|
|
|
|
|
|
|
Common Stock Reserves
|
Reserve for:
|
|
Number of Shares
|
|
|
|
|
1999 Incentive compensation
plan
(a)
|
|
|
640,062
|
|
|
|
Omnibus incentive compensation
plan
(b)
|
|
|
1,700,000
|
|
|
|
Dividend reinvestment and common stock purchase plan
|
|
|
801,381
|
|
|
|
Employee savings plans
|
|
|
637,196
|
|
|
|
Directors stock compensation plan
|
|
|
32,183
|
|
|
|
|
Total common stock reserves
|
|
|
3,810,822
|
|
|
|
|
|
|
|
(a)
|
|
Included are shares that
potentially could be issued and that would reduce the 1999
Incentive Compensation Plan shares authorized. These shares
include 1,017,177 shares dedicated to stock options issued
but not exercised, and 274,258 shares dedicated to
performance shares granted but not vested. If stock options
exercised or performance shares vested under this Plan exceed
amounts in reserve, WGL Holdings would settle in cash. Effective
March 1, 2007, no further awards will be granted under the
1999 Plan.
|
|
|
|
(b)
|
|
Effective March 1, 2007,
WGL Holdings adopted a shareholder-approved Omnibus Incentive
Compensation Plan to replace on a prospective basis the 1999
Plan.
|
Refer to Note 12
Stock-Based Compensation
for a
discussion regarding our stock-based compensation plans.
Washington Gas has three series of cumulative preferred stock
outstanding, and each series is subject to redemption by
Washington Gas. All three series have a dividend preference that
prohibits Washington Gas from declaring and paying dividends on
shares of its common stock unless dividends on all outstanding
shares of the preferred stock have been fully paid for all past
quarterly dividend periods. In addition, all outstanding shares
of preferred stock have a preference as to the amounts that
would be distributed
92
WGL
Holdings, Inc.
Washington Gas Light Company
Part II
Item 8. Financial Statements and Supplementary Data
(continued)
Notes to Consolidated Financial Statements
in the event of a liquidation or dissolution of Washington Gas.
The following table presents this information, as well as call
prices for each preferred stock series outstanding.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred Stock
|
|
|
Preferred
|
|
|
|
Liquidation Preference
|
|
|
|
|
Series
|
|
Shares
|
|
Per Share
|
|
Call Price
|
|
|
Outstanding
|
|
Outstanding
|
|
Involuntary
|
|
Voluntary
|
|
Per Share
|
|
|
$
|
4.80
|
|
|
|
150,000
|
|
|
$
|
100
|
|
|
$
|
101
|
|
|
$
|
101
|
|
|
|
$
|
4.25
|
|
|
|
70,600
|
|
|
$
|
100
|
|
|
$
|
105
|
|
|
$
|
105
|
|
|
|
$
|
5.00
|
|
|
|
60,000
|
|
|
$
|
100
|
|
|
$
|
102
|
|
|
$
|
102
|
|
|
|
|
9. EARNINGS
PER SHARE
Basic earnings per share (EPS) is computed by dividing net
income by the weighted average number of common shares
outstanding during the reported period. Diluted EPS assumes the
issuance of common shares pursuant to stock-based compensation
plans at the beginning of the applicable period unless the
effect of such issuance would be anti-dilutive (refer to
Note 12
Stock-Based Compensation
). The
following table reflects the computation of our basic and
diluted EPS for the fiscal years ended September 30, 2008,
2007 and 2006.
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and Diluted EPS
|
|
|
|
Years Ended September 30,
|
|
|
|
(In thousands, except per share
data)
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
Basic earnings per average common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
$
|
116,523
|
|
|
$
|
107,900
|
|
|
$
|
94,694
|
|
Loss from discontinued operations, net of income tax benefit
|
|
|
|
|
|
|
|
|
|
|
(7,116
|
)
|
|
Net income applicable to common stock
|
|
$
|
116,523
|
|
|
$
|
107,900
|
|
|
$
|
87,578
|
|
|
Average common shares outstandingbasic
|
|
|
49,607
|
|
|
|
49,172
|
|
|
|
48,773
|
|
|
Basic earnings per average common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
$
|
2.35
|
|
|
$
|
2.19
|
|
|
$
|
1.94
|
|
Loss from discontinued operations
|
|
|
|
|
|
|
|
|
|
|
(0.14
|
)
|
|
Basic earnings per average common share
|
|
$
|
2.35
|
|
|
$
|
2.19
|
|
|
$
|
1.80
|
|
|
Diluted earnings per average common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
$
|
116,523
|
|
|
$
|
107,900
|
|
|
$
|
94,694
|
|
Loss from discontinued operations, net of income tax benefit
|
|
|
|
|
|
|
|
|
|
|
(7,116
|
)
|
|
Net income applicable to common stock
|
|
$
|
116,523
|
|
|
$
|
107,900
|
|
|
$
|
87,578
|
|
|
Average common shares outstandingbasic
|
|
|
49,607
|
|
|
|
49,172
|
|
|
|
48,773
|
|
Stock-based compensation plans
|
|
|
305
|
|
|
|
205
|
|
|
|
132
|
|
|
Total average common shares outstandingdiluted
|
|
|
49,912
|
|
|
|
49,377
|
|
|
|
48,905
|
|
|
Diluted earnings per average common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
$
|
2.33
|
|
|
$
|
2.19
|
|
|
$
|
1.94
|
|
Loss from discontinued operations
|
|
|
|
|
|
|
|
|
|
|
(0.15
|
)
|
|
Diluted earnings per average common share
|
|
$
|
2.33
|
|
|
$
|
2.19
|
|
|
$
|
1.79
|
|
|
For the fiscal year ended September 30, 2008, we did not
exclude any weighted average outstanding stock options from the
calculation of diluted EPS. For the fiscal years ended
September 30, 2007 and 2006, we had weighted average stock
options outstanding totaling 398,000 and 363,000 shares,
respectively, that were not included in the calculation of
diluted EPS as their effect would be anti-dilutive.
93
WGL
Holdings, Inc.
Washington Gas Light Company
Part II
Item 8. Financial Statements and Supplementary Data
(continued)
Notes to Consolidated Financial Statements
10. INCOME
TAXES
We file a consolidated federal income tax return. WGL Holdings
and each of its subsidiaries also participate in a tax sharing
agreement that establishes the method for allocating tax
benefits from losses to various subsidiaries that are utilized
on a consolidated federal income tax return. In fiscal year
2008, Washington Gas realized $1.2 million of tax savings
from this tax sharing agreement that was reflected as a tax
benefit on Washington Gass Statements of Income. The
effect of this allocation of benefits to Washington Gas has no
effect on our consolidated financial statements. During fiscal
years 2007 and 2006, Washington Gas realized $1.5 million
and $1.4 million, respectively, of tax savings as a result
of this tax sharing agreement. State income tax returns are
filed on a separate company basis in most states where we have
operations
and/or
a
requirement to file. For the District of Columbia, we file a
consolidated return.
The tables below provide the following for WGL Holdings and
Washington Gas:
(i)
the components of income tax
expense;
(ii)
a reconciliation between the statutory
federal income tax rate and the effective income tax rate and
(iii)
the components of accumulated deferred income
tax assets and liabilities at September 30, 2008 and 2007.
These amounts do not include income taxes associated with
discontinued operations.
|
|
|
|
|
|
|
|
|
|
|
|
|
WGL Holdings, Inc.
|
|
Components of Income Tax Expense
|
|
|
|
Years Ended September 30,
|
|
|
|
(In thousands)
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
INCOME TAX EXPENSE
|
|
|
|
|
|
|
|
|
|
|
|
|
Current:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
54,683
|
|
|
$
|
53,915
|
|
|
$
|
44,041
|
|
State
|
|
|
9,840
|
|
|
|
10,252
|
|
|
|
8,501
|
|
|
Total current
|
|
|
64,523
|
|
|
|
64,167
|
|
|
|
52,542
|
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
|
|
|
|
|
|
|
|
|
|
Accelerated depreciation
|
|
|
5,574
|
|
|
|
4,529
|
|
|
|
5,136
|
|
Other
|
|
|
(3,823
|
)
|
|
|
(3,155
|
)
|
|
|
894
|
|
State
|
|
|
|
|
|
|
|
|
|
|
|
|
Accelerated depreciation
|
|
|
2,357
|
|
|
|
2,302
|
|
|
|
2,188
|
|
Other
|
|
|
1,755
|
|
|
|
3,190
|
|
|
|
1,449
|
|
|
Total deferred
|
|
|
5,863
|
|
|
|
6,866
|
|
|
|
9,667
|
|
|
Amortization of investment tax credits
|
|
|
(895
|
)
|
|
|
(896
|
)
|
|
|
(896
|
)
|
|
Total income tax expense
|
|
$
|
69,491
|
|
|
$
|
70,137
|
|
|
$
|
61,313
|
|
|
94
WGL
Holdings, Inc.
Washington Gas Light Company
Part II
Item 8. Financial Statements and Supplementary Data
(continued)
Notes to Consolidated Financial Statements
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
WGL Holdings, Inc.
|
|
Reconciliation Between the Statutory Federal Income Tax Rate
and Effective Tax Rate
|
|
|
|
Years Ended September 30,
|
|
|
|
(In thousands)
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
Income taxes at statutory federal income tax rate
|
|
$
|
65,567
|
|
|
|
35.00
|
%
|
|
$
|
62,775
|
|
|
|
35.00
|
%
|
|
$
|
55,064
|
|
|
|
35.00
|
%
|
Increases (decreases) in income taxes resulting from:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accelerated depreciation less amount deferred
|
|
|
2,032
|
|
|
|
1.08
|
|
|
|
2,422
|
|
|
|
1.35
|
|
|
|
2,769
|
|
|
|
1.76
|
|
Amortization of investment tax credits
|
|
|
(895
|
)
|
|
|
(0.48
|
)
|
|
|
(896
|
)
|
|
|
(0.50
|
)
|
|
|
(896
|
)
|
|
|
(0.57
|
)
|
Cost of removal
|
|
|
(176
|
)
|
|
|
(0.09
|
)
|
|
|
(319
|
)
|
|
|
(0.18
|
)
|
|
|
(318
|
)
|
|
|
(0.20
|
)
|
State income
taxes-net
of
federal benefit
|
|
|
8,013
|
|
|
|
4.28
|
|
|
|
7,970
|
|
|
|
4.44
|
|
|
|
7,056
|
|
|
|
4.48
|
|
Medicare D subsidy
|
|
|
(2,109
|
)
|
|
|
(1.13
|
)
|
|
|
(2,060
|
)
|
|
|
(1.15
|
)
|
|
|
(1,842
|
)
|
|
|
(1.17
|
)
|
Other
items-net
|
|
|
(2,941
|
)
|
|
|
(1.57
|
)
|
|
|
245
|
|
|
|
0.14
|
|
|
|
(520
|
)
|
|
|
(0.33
|
)
|
|
Total income tax expense and effective tax rate
|
|
$
|
69,491
|
|
|
|
37.09
|
%
|
|
$
|
70,137
|
|
|
|
39.10
|
%
|
|
$
|
61,313
|
|
|
|
38.97
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
WGL Holdings, Inc.
|
|
Components of Deferred Income Tax Assets (Liabilities)
|
|
|
|
September 30,
|
|
|
|
(In thousands)
|
|
2008
|
|
|
2007
|
|
|
|
ACCUMULATED DEFERRED INCOME
TAXES
|
|
Current
|
|
|
Non-current
|
|
|
Current
|
|
|
Non-current
|
|
|
|
Deferred Income Tax Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pensions and other post-retirement benefits
|
|
$
|
|
|
|
$
|
63,489
|
|
|
$
|
|
|
|
$
|
62,099
|
|
Uncollectible accounts
|
|
|
6,809
|
|
|
|
|
|
|
|
5,847
|
|
|
|
|
|
Inventory overheads
|
|
|
4,611
|
|
|
|
|
|
|
|
3,476
|
|
|
|
|
|
Capital gains/losses-net
|
|
|
1,966
|
|
|
|
|
|
|
|
3,005
|
|
|
|
|
|
Valuation allowance
|
|
|
(1,966
|
)
|
|
|
|
|
|
|
(3,005
|
)
|
|
|
|
|
Employee Compensation & benefits
|
|
|
4,960
|
|
|
|
22,769
|
|
|
|
7,326
|
|
|
|
15,188
|
|
Customer advances
|
|
|
|
|
|
|
4,274
|
|
|
|
|
|
|
|
4,288
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
354
|
|
|
Total assets
|
|
|
16,380
|
|
|
|
90,532
|
|
|
|
16,649
|
|
|
|
81,929
|
|
|
Deferred Income Tax Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accelerated depreciation and other plant related items
|
|
|
|
|
|
|
281,800
|
|
|
|
|
|
|
|
273,799
|
|
Losses/gains on reacquired debt
|
|
|
|
|
|
|
2,496
|
|
|
|
|
|
|
|
2,728
|
|
Income taxes recoverable through future rates
|
|
|
|
|
|
|
72,880
|
|
|
|
|
|
|
|
67,588
|
|
Deferred gas costs
|
|
|
8,135
|
|
|
|
3,772
|
|
|
|
3,632
|
|
|
|
2,214
|
|
Other
|
|
|
629
|
|
|
|
1,811
|
|
|
|
831
|
|
|
|
|
|
|
Total liabilities
|
|
|
8,764
|
|
|
|
362,759
|
|
|
|
4,463
|
|
|
|
346,329
|
|
|
Net accumulated deferred income tax assets (liabilities)
|
|
$
|
7,616
|
|
|
$
|
(272,227
|
)
|
|
$
|
12,186
|
|
|
$
|
(264,400
|
)
|
|
95
WGL
Holdings, Inc.
Washington Gas Light Company
Part II
Item 8. Financial Statements and Supplementary Data
(continued)
Notes to Consolidated Financial Statements
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Washington Gas Light Company
|
|
Components of Income Tax Expense
|
|
|
|
Years Ended September 30,
|
|
|
|
|
|
|
(In thousands)
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
INCOME TAX EXPENSE
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
45,662
|
|
|
$
|
44,942
|
|
|
$
|
35,458
|
|
|
|
|
|
State
|
|
|
6,379
|
|
|
|
6,199
|
|
|
|
5,042
|
|
|
|
|
|
|
Total current
|
|
|
52,041
|
|
|
|
51,141
|
|
|
|
40,500
|
|
|
|
|
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accelerated depreciation
|
|
|
5,544
|
|
|
|
4,523
|
|
|
|
5,069
|
|
|
|
|
|
Other
|
|
|
2,314
|
|
|
|
(5,196
|
)
|
|
|
4,689
|
|
|
|
|
|
State
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accelerated depreciation
|
|
|
2,357
|
|
|
|
2,302
|
|
|
|
2,188
|
|
|
|
|
|
Other
|
|
|
3,344
|
|
|
|
2,620
|
|
|
|
349
|
|
|
|
|
|
|
Total deferred
|
|
|
13,559
|
|
|
|
4,249
|
|
|
|
12,295
|
|
|
|
|
|
|
Amortization of investment tax credits
|
|
|
(893
|
)
|
|
|
(893
|
)
|
|
|
(893
|
)
|
|
|
|
|
|
Total income tax expense
|
|
$
|
64,707
|
|
|
$
|
54,497
|
|
|
$
|
51,902
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Washington Gas Light Company
|
|
Reconciliation Between the Statutory Federal Income Tax Rate
and Effective Tax Rate
|
|
|
|
Years Ended September 30,
|
|
(In thousands)
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
Income taxes at statutory federal income tax rate
|
|
$
|
62,611
|
|
|
|
35.00
|
%
|
|
$
|
50,749
|
|
|
|
35.00
|
%
|
|
$
|
48,210
|
|
|
|
35.00
|
%
|
Increases (decreases) in income taxes resulting from:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accelerated depreciation less amount deferred
|
|
|
2,032
|
|
|
|
1.13
|
|
|
|
2,422
|
|
|
|
1.67
|
|
|
|
2,769
|
|
|
|
2.01
|
|
Amortization of investment tax credits
|
|
|
(893
|
)
|
|
|
(0.50
|
)
|
|
|
(893
|
)
|
|
|
(0.62
|
)
|
|
|
(893
|
)
|
|
|
(0.65
|
)
|
Cost of removal
|
|
|
(176
|
)
|
|
|
(0.10
|
)
|
|
|
(319
|
)
|
|
|
(0.22
|
)
|
|
|
(318
|
)
|
|
|
(0.23
|
)
|
State income
taxes-net
of
federal benefit
|
|
|
7,546
|
|
|
|
4.22
|
|
|
|
6,119
|
|
|
|
4.22
|
|
|
|
5,872
|
|
|
|
4.26
|
|
Consolidated tax sharing allocation
|
|
|
(1,196
|
)
|
|
|
(0.67
|
)
|
|
|
(1,485
|
)
|
|
|
(1.02
|
)
|
|
|
(1,350
|
)
|
|
|
(0.98
|
)
|
Medicare D subsidy
|
|
|
(2,101
|
)
|
|
|
(1.17
|
)
|
|
|
(2,038
|
)
|
|
|
(1.41
|
)
|
|
|
(1,827
|
)
|
|
|
(1.33
|
)
|
Other
items-net
|
|
|
(3,116
|
)
|
|
|
(1.74
|
)
|
|
|
(58
|
)
|
|
|
(0.04
|
)
|
|
|
(561
|
)
|
|
|
(0.40
|
)
|
|
Total income tax expense and effective tax rate
|
|
$
|
64,707
|
|
|
|
36.17
|
%
|
|
$
|
54,497
|
|
|
|
37.58
|
%
|
|
$
|
51,902
|
|
|
|
37.68
|
%
|
|
96
WGL
Holdings, Inc.
Washington Gas Light Company
Part II
Item 8. Financial Statements and Supplementary Data
(continued)
Notes to Consolidated Financial Statements
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Washington Gas Light Company
|
|
Components of Deferred Income Tax Assets (Liabilities)
|
|
|
|
September 30,
|
|
|
|
(In thousands)
|
|
2008
|
|
|
2007
|
|
|
|
ACCUMULATED DEFERRED INCOME
TAXES
|
|
Current
|
|
|
Non-current
|
|
|
Current
|
|
|
Non-current
|
|
|
|
Deferred Income Tax Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pensions and other post-retirement benefits
|
|
$
|
|
|
|
$
|
63,076
|
|
|
$
|
|
|
|
$
|
61,726
|
|
Uncollectible accounts
|
|
|
6,248
|
|
|
|
|
|
|
|
5,334
|
|
|
|
|
|
Inventory overheads
|
|
|
4,610
|
|
|
|
|
|
|
|
3,475
|
|
|
|
|
|
Employee Compensation & benefits
|
|
|
4,934
|
|
|
|
15,917
|
|
|
|
7,270
|
|
|
|
16,119
|
|
Customer advances
|
|
|
|
|
|
|
4,274
|
|
|
|
|
|
|
|
4,288
|
|
Other
|
|
|
772
|
|
|
|
|
|
|
|
850
|
|
|
|
|
|
|
Total assets
|
|
|
16,564
|
|
|
|
83,267
|
|
|
|
16,929
|
|
|
|
82,133
|
|
|
Deferred Income Tax Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accelerated depreciation and other plant related items
|
|
|
|
|
|
|
281,926
|
|
|
|
|
|
|
|
274,025
|
|
Losses/gains on reacquired debt
|
|
|
|
|
|
|
2,495
|
|
|
|
|
|
|
|
2,728
|
|
Income taxes recoverable through future rates
|
|
|
|
|
|
|
72,609
|
|
|
|
|
|
|
|
67,398
|
|
Deferred gas costs
|
|
|
8,135
|
|
|
|
3,772
|
|
|
|
3,632
|
|
|
|
2,214
|
|
Other
|
|
|
|
|
|
|
2,283
|
|
|
|
|
|
|
|
391
|
|
|
Total liabilities
|
|
|
8,135
|
|
|
|
363,085
|
|
|
|
3,632
|
|
|
|
346,756
|
|
|
Net accumulated deferred income tax assets (liabilities)
|
|
$
|
8,429
|
|
|
$
|
(279,818
|
)
|
|
$
|
13,297
|
|
|
$
|
(264,623
|
)
|
|
11. PENSION
AND OTHER POST-RETIREMENT BENEFIT PLANS
Washington Gas maintains a qualified, trusteed, non-contributory
defined benefit pension plan (qualified pension plan) covering
all active and vested former employees of Washington Gas.
Executive officers of Washington Gas also participate in a
non-funded supplemental executive retirement plan (SERP), a
non-qualified defined benefit pension plan. A rabbi trust has
been established for the potential future funding of the SERP
liability.
Washington Gas provides certain healthcare and life insurance
benefits for retired employees. Substantially all employees of
Washington Gas may become eligible for such benefits if they
attain retirement status while working for Washington Gas.
Washington Gas accounts for these benefits under the provisions
of SFAS No. 106,
Employers Accounting for
Postretirement Benefits Other Than Pensions
(SFAS No. 106).
Washington Gas elected to amortize
the accumulated post-retirement benefit obligation of
$190.6 million existing at the October 1, 1993
adoption date of this standard, known as the transition
obligation, over a twenty-year period.
On September 29, 2008, Washington Gas announced changes to
post-retirement medical benefits to increase the sharing of
costs with retirees who elect medical coverage. This amendment
reduced Washington Gass post-retirement benefit obligation
by $43.8 million at September 30, 2008, and will be
effective January 1, 2010.
Certain of our subsidiaries offer defined-contribution savings
plans to all eligible employees. These plans allow participants
to defer on a pre-tax or after-tax basis, a portion of their
salaries for investment in various alternatives. We make
matching contributions to the amounts contributed by employees
in accordance with the specific plan provisions. These
contributions to the plans were $3.0 million,
$2.9 million and $3.3 million during fiscal years
2008, 2007 and 2006, respectively.
Washington Gas adopted SFAS No. 158 prospectively
effective September 30, 2007. Almost all costs associated
with Washington Gass defined benefit post-retirement plans
have historically been, and will continue to be, recovered
through Washington Gass rates. Therefore, following the
guidance in SFAS No. 71, upon adoption of
SFAS No. 158, Washington Gas established a regulatory
asset/liability for the majority of the unrecognized
costs/income associated with its defined benefit post-retirement
plans. To the extent these amounts are not recovered through
Washington Gass rates they were recorded directly to
Accumulated other comprehensive loss, net of taxes.
SFAS No. 158 did not change the determination of
pension and other post-
97
WGL
Holdings, Inc.
Washington Gas Light Company
Part II
Item 8. Financial Statements and Supplementary Data
(continued)
Notes to Consolidated Financial Statements
retirement costs under SFAS No. 87, and SFAS
No. 106. Refer to Note 1
Accounting Policies
for further discussion of the implementation of this
standard.
Washington Gas uses a measurement date of September 30 for its
pension, and retiree healthcare and life insurance benefit
plans. The following table provides certain information about
Washington Gass post-retirement benefits:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Post-Retirement Benefits
|
|
|
|
|
|
|
Health and Life
|
|
(In millions)
|
|
Pension Benefits
|
|
|
Benefits
|
|
|
|
Year Ended September 30,
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
Change in projected benefit obligation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit obligation at beginning of year
|
|
$
|
680.3
|
|
|
$
|
697.4
|
|
|
$
|
426.6
|
|
|
$
|
448.4
|
|
Service cost
|
|
|
9.8
|
|
|
|
11.9
|
|
|
|
8.8
|
|
|
|
10.6
|
|
Interest cost
|
|
|
39.7
|
|
|
|
39.0
|
|
|
|
25.0
|
|
|
|
25.2
|
|
Curtailment gain
|
|
|
|
|
|
|
(9.5
|
)
|
|
|
|
|
|
|
(10.5
|
)
|
Change in plan benefits
|
|
|
|
|
|
|
|
|
|
|
(43.8
|
)
|
|
|
|
|
Actuarial gain
|
|
|
(99.3
|
)
|
|
|
(19.1
|
)
|
|
|
(52.2
|
)
|
|
|
(29.6
|
)
|
Retiree contributions
|
|
|
|
|
|
|
|
|
|
|
1.0
|
|
|
|
0.9
|
|
Medicare part D reimbursements
|
|
|
|
|
|
|
|
|
|
|
1.3
|
|
|
|
1.1
|
|
Benefits paid
|
|
|
(40.0
|
)
|
|
|
(39.4
|
)
|
|
|
(22.8
|
)
|
|
|
(19.5
|
)
|
|
Projected benefit obligation at end of year
|
|
$
|
590.5
|
|
|
$
|
680.3
|
|
|
$
|
343.9
|
|
|
$
|
426.6
|
|
|
Change in plan assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets at beginning of year
|
|
$
|
740.7
|
|
|
$
|
699.9
|
|
|
$
|
258.1
|
|
|
$
|
220.3
|
|
Actual return on plan assets
|
|
|
(114.4
|
)
|
|
|
81.7
|
|
|
|
(22.1
|
)
|
|
|
22.6
|
|
Company contributions
|
|
|
1.9
|
|
|
|
1.4
|
|
|
|
26.3
|
|
|
|
32.7
|
|
Retiree contributions
|
|
|
|
|
|
|
|
|
|
|
1.1
|
|
|
|
0.9
|
|
Medicare part D reimbursements
|
|
|
|
|
|
|
|
|
|
|
1.3
|
|
|
|
1.1
|
|
Expenses
|
|
|
|
|
|
|
(2.9
|
)
|
|
|
|
|
|
|
|
|
Benefits paid
|
|
|
(40.0
|
)
|
|
|
(39.4
|
)
|
|
|
(22.8
|
)
|
|
|
(19.5
|
)
|
|
Fair value of plan assets at end of year
|
|
$
|
588.2
|
|
|
$
|
740.7
|
|
|
$
|
241.9
|
|
|
$
|
258.1
|
|
|
Funded status at end of year
|
|
$
|
(2.3
|
)
|
|
$
|
60.4
|
|
|
$
|
(102.0
|
)
|
|
$
|
(168.5
|
)
|
|
Total amounts recognized on balance sheet
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prepaid benefit cost
|
|
$
|
24.7
|
|
|
$
|
90.0
|
|
|
$
|
|
|
|
$
|
|
|
Current liability
|
|
|
(1.5
|
)
|
|
|
(1.5
|
)
|
|
|
|
|
|
|
|
|
Accrued benefit liability
|
|
|
(25.5
|
)
|
|
|
(28.1
|
)
|
|
|
(102.0
|
)
|
|
|
(168.5
|
)
|
|
Total recognized
|
|
$
|
(2.3
|
)
|
|
$
|
60.4
|
|
|
$
|
(102.0
|
)
|
|
$
|
(168.5
|
)
|
|
The Projected Benefit Obligation (PBO) and Accumulated Benefit
Obligation (ABO) for the qualified pension plan was
$563.6 million and $525.7 million, respectively, as of
September 30, 2008, and $650.7 million and
$606.6 million, respectively, at September 30, 2007.
The PBO and ABO for the non-funded SERP was $26.9 million
and $23.8 million, respectively, as of September 30,
2008, and $29.6 million and $26.3 million,
respectively, as of September 30, 2007. The SERP, included
in pension benefits in the table above, has no assets.
The pre-tax amount included in other comprehensive loss due to
the increase in the minimum pension obligation related to the
SERP was $2.0 million ($1.2 million after income
taxes) and $1.7 million ($856,000 after income taxes) for
the fiscal years ended September 30, 2007 and 2006,
respectively. Subsequent to the implementation of
SFAS No. 158 the additional minimum pension obligation
no longer exists.
98
WGL
Holdings, Inc.
Washington Gas Light Company
Part II
Item 8. Financial Statements and Supplementary Data
(continued)
Notes to Consolidated Financial Statements
The following table provides amounts recorded to regulatory
assets, regulatory liabilities and accumulated other
comprehensive loss at September 30, 2008 and 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrecognized Costs/Income Recorded on the Balance Sheet
|
|
(In millions)
|
|
Pension Benefits
|
|
|
Health and Life Benefits
|
|
|
|
Year Ended September 30,
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
|
Unrecognized actuarial net (gain)/loss
|
|
$
|
49.4
|
|
|
$
|
(17.6
|
)
|
|
$
|
122.6
|
|
|
$
|
143.3
|
|
Unrecognized prior service cost (credit)
|
|
|
5.4
|
|
|
|
7.1
|
|
|
|
(43.4
|
)
|
|
|
|
|
Unrecognized transition obligation
|
|
|
|
|
|
|
|
|
|
|
5.4
|
|
|
|
7.0
|
|
|
Total
|
|
$
|
54.8
|
|
|
$
|
(10.5
|
)
|
|
$
|
84.6
|
|
|
$
|
150.3
|
|
|
Regulatory asset
|
|
$
|
52.6
|
|
|
$
|
7.1
|
|
|
$
|
56.3
|
|
|
$
|
112.4
|
|
Regulatory liability
|
|
|
|
|
|
|
(19.0
|
)
|
|
|
|
|
|
|
|
|
Deferred income tax benefit
|
|
|
|
|
|
|
|
|
|
|
25.7
|
|
|
|
33.4
|
|
Accumulated other comprehensive loss
(pre-tax)
(a)
|
|
|
2.2
|
|
|
|
1.4
|
|
|
|
2.6
|
|
|
|
4.5
|
|
|
Total
|
|
$
|
54.8
|
|
|
$
|
(10.5
|
)
|
|
$
|
84.6
|
|
|
$
|
150.3
|
|
|
|
|
|
(a)
|
|
The total amount of accumulated
other comprehensive loss recorded on our balance sheets at
September 30, 2008 and 2007 is net of an income tax benefit
of $3.0 million and $2.7 million,
respectively.
|
The following table provides amounts that are included in
regulatory assets/liabilities and accumulated other
comprehensive loss associated with our unrecognized pension and
other post-retirement benefit costs that were recognized as
components of net periodic benefit cost during fiscal year 2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts Recognized During Fiscal Year 2008
|
|
|
|
Regulatory assets/liabilities
|
|
|
Accumulated other comprehensive loss
|
|
|
|
|
|
|
|
|
Health and
|
|
|
|
|
|
Health and
|
|
(In millions)
|
|
Pension Benefits
|
|
|
Life Benefits
|
|
|
Pension Benefits
|
|
|
Life Benefits
|
|
|
|
|
Actuarial net loss
|
|
$
|
0.8
|
|
|
$
|
7.7
|
|
|
$
|
0.2
|
|
|
$
|
0.2
|
|
Prior service cost
|
|
|
1.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transition obligation
|
|
|
|
|
|
|
1.0
|
|
|
|
|
|
|
|
0.2
|
|
|
Total
|
|
$
|
2.5
|
|
|
$
|
8.7
|
|
|
$
|
0.2
|
|
|
$
|
0.4
|
|
|
The following table provides amounts that are included in
regulatory assets/liabilities and accumulated other
comprehensive loss associated with our unrecognized pension and
other post-retirement benefit costs that will be recognized as
components of net periodic benefit cost during fiscal year 2009.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts to be Recognized During Fiscal Year 2009
|
|
|
|
Regulatory assets/liabilities
|
|
|
Accumulated other comprehensive loss
|
|
|
|
|
|
|
|
|
Health and
|
|
|
|
|
|
Health and
|
|
(In millions)
|
|
Pension Benefits
|
|
|
Life Benefits
|
|
|
Pension Benefits
|
|
|
Life Benefits
|
|
|
|
|
Actuarial net loss
|
|
$
|
0.3
|
|
|
$
|
4.8
|
|
|
$
|
0.1
|
|
|
$
|
0.1
|
|
Prior service cost (credit)
|
|
|
1.7
|
|
|
|
(4.0
|
)
|
|
|
|
|
|
|
|
|
Transition obligation
|
|
|
|
|
|
|
1.0
|
|
|
|
|
|
|
|
0.2
|
|
|
Total
|
|
$
|
2.0
|
|
|
$
|
1.8
|
|
|
$
|
0.1
|
|
|
$
|
0.3
|
|
|
99
WGL
Holdings, Inc.
Washington Gas Light Company
Part II
Item 8. Financial Statements and Supplementary Data
(continued)
Notes to Consolidated Financial Statements
Realized and unrealized gains and losses for assets under
Washington Gass post-retirement benefit plans are spread
over a period of five years. Each year, 20 percent of the
prior five years asset gains and losses are recognized.
The market-related value of assets is equal to the market value
of assets less the following percentages of prior years
realized and unrealized gains and losses on equities:
80 percent of the prior year, 60 percent of the second
prior year, 40 percent of the third prior year and
20 percent of the fourth prior year.
Washington Gas employs a total return investment approach
whereby a mix of equities, fixed income and other investments
can be used to maximize the long-term return of plan assets for
a prudent level of risk. The intent of this strategy is to
minimize plan expenses through asset growth over the long run.
Risk tolerance is established through consideration of plan
liabilities, plan funded status, and corporate financial
condition. Investment risk is measured and monitored on an
ongoing basis through annual liability measurements, periodic
asset/liability studies, and quarterly investment portfolio
reviews.
The asset allocations for the qualified pension plan and
healthcare and life insurance benefit trusts as of
September 30, 2008 and 2007, and the weighted average
target asset allocations as of September 30, 2008, by asset
category, are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Post-Retirement Investment Allocations
|
|
|
|
|
|
Pension Benefits
|
|
|
Health and Life Benefits
|
|
|
|
|
|
Target
|
|
|
Actual
|
|
|
Target
|
|
|
Actual
|
|
|
|
Allocation
|
|
|
Allocation
|
|
|
Allocation
|
|
|
Allocation
|
|
|
|
September 30,
|
|
2008
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2008
|
|
|
2007
|
|
|
|
Asset Category
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
(a)
|
|
|
60
|
%
|
|
|
57
|
%
|
|
|
60
|
%
|
|
|
50
|
%
|
|
|
44
|
%
|
|
|
51
|
%
|
Debt
|
|
|
35
|
%
|
|
|
38
|
%
|
|
|
36
|
%
|
|
|
50
|
%
|
|
|
56
|
%
|
|
|
49
|
%
|
Real Estate
|
|
|
5
|
%
|
|
|
5
|
%
|
|
|
4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
|
(a)
|
None of WGL Holdings common stock is included in these
plans.
|
Expected benefit payments, including benefits attributable to
estimated future employee service, which are expected to be paid
over the next ten years are as follows:
|
|
|
|
|
|
|
|
|
Expected Benefit Payments
|
|
|
|
|
|
Pension
|
|
|
Health and Life
|
|
(In millions)
|
|
Benefits
|
|
|
Benefits
|
|
|
|
2009
|
|
$
|
42.0
|
|
|
$
|
21.8
|
|
2010
|
|
|
42.2
|
|
|
|
22.0
|
|
2011
|
|
|
43.0
|
|
|
|
23.2
|
|
2012
|
|
|
44.1
|
|
|
|
24.8
|
|
2013
|
|
|
45.4
|
|
|
|
26.2
|
|
20142018
|
|
|
244.1
|
|
|
|
148.7
|
|
|
During fiscal year 2009, Washington Gas does not expect to make
any contributions related to its qualified pension plan.
Washington Gas expects to make payments totaling
$1.8 million in fiscal year 2009 on behalf of participants
in its non-funded SERP. Washington Gas expects to contribute
$14.4 million to its health and life insurance benefit
plans during fiscal year 2009.
100
WGL
Holdings, Inc.
Washington Gas Light Company
Part II
Item 8. Financial Statements and Supplementary Data
(continued)
Notes to Consolidated Financial Statements
The components of the net periodic benefit costs (income) for
fiscal years 2008, 2007 and 2006 related to pension and other
postretirement benefits were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Components of Net Periodic Benefit Costs (Income)
|
|
(In millions)
|
|
Pension Benefits
|
|
|
Health and Life Benefits
|
|
|
|
Year Ended September 30,
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
Components of net periodic benefit costs (income)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service cost
|
|
$
|
9.8
|
|
|
$
|
11.9
|
|
|
$
|
10.5
|
|
|
$
|
8.8
|
|
|
$
|
10.6
|
|
|
$
|
10.2
|
|
Interest cost
|
|
|
39.7
|
|
|
|
39.0
|
|
|
|
37.2
|
|
|
|
25.0
|
|
|
|
25.2
|
|
|
|
21.8
|
|
Expected return on plan assets
|
|
|
(52.9
|
)
|
|
|
(50.7
|
)
|
|
|
(50.6
|
)
|
|
|
(17.4
|
)
|
|
|
(15.4
|
)
|
|
|
(14.3
|
)
|
Recognized prior service cost
|
|
|
1.7
|
|
|
|
2.3
|
|
|
|
2.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recognized actuarial loss
|
|
|
1.0
|
|
|
|
3.7
|
|
|
|
3.3
|
|
|
|
7.9
|
|
|
|
11.5
|
|
|
|
10.3
|
|
Amortization of transition obligation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1.2
|
|
|
|
1.5
|
|
|
|
1.5
|
|
Curtailment loss
|
|
|
|
|
|
|
2.4
|
|
|
|
|
|
|
|
|
|
|
|
1.6
|
|
|
|
|
|
|
Net periodic benefit cost (income)
|
|
|
(0.7
|
)
|
|
|
8.6
|
|
|
|
2.7
|
|
|
|
25.5
|
|
|
|
35.0
|
|
|
|
29.5
|
|
|
Amount allocated to construction projects
|
|
|
0.4
|
|
|
|
(0.4
|
)
|
|
|
|
|
|
|
(3.4
|
)
|
|
|
(4.2
|
)
|
|
|
(3.8
|
)
|
Amount deferred as regulatory asset (liability)-net
|
|
|
(3.5
|
)
|
|
|
(4.7
|
)
|
|
|
(4.1
|
)
|
|
|
1.5
|
|
|
|
0.3
|
|
|
|
(0.7
|
)
|
|
Amount charged (credited) to expense
|
|
$
|
(3.8
|
)
|
|
$
|
3.5
|
|
|
$
|
(1.4
|
)
|
|
$
|
23.6
|
|
|
$
|
31.1
|
|
|
$
|
25.0
|
|
|
The Curtailment loss relates to our BPO plan and the
table above excludes certain adjustments to capitalize and
amortize these amounts. Amounts included in the line item
Amount deferred as regulatory asset/liability-net,
represent the difference between the cost of the applicable
pension benefits and the health and life benefits and the amount
that Washington Gas is permitted to recover in rates that it
charges to customers in the District of Columbia.
As a sponsor of a retiree health care benefit plan that is at
least actuarially equivalent to Medicare (Medicare Part D),
Washington Gas is eligible to receive a federal subsidy under
the Medicare Prescription Drug, Improvement and Modernization
Act of 2003. All amounts received related to this subsidy are
contributed by Washington Gas to its retiree healthcare plan.
Expected receipts attributable to the Medicare subsidy to be
received over the next ten years are as follows:
|
|
|
|
|
Medicare Subsidy Receipts
|
|
|
|
|
|
Health and Life
|
|
(In millions)
|
|
Benefits
|
|
|
|
2009
|
|
$
|
1.4
|
|
2010
|
|
|
1.6
|
|
2011
|
|
|
1.7
|
|
2012
|
|
|
2.0
|
|
2013
|
|
|
2.2
|
|
20142018
|
|
|
13.4
|
|
|
The weighted average assumptions used to determine net periodic
benefit obligations and net periodic benefit costs were as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Periodic Benefit Obligations Assumptions
|
|
|
|
|
|
|
Health and Life
|
|
|
|
Pension Benefits
|
|
|
Benefits
|
|
|
|
Years Ended September 30,
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
Discount
rate
(a)
|
|
|
7.50
|
%
|
|
|
6.00
|
%
|
|
|
7.50
|
%
|
|
|
6.00
|
%
|
Rate of compensation increase
|
|
|
4.00
|
%
|
|
|
4.00
|
%
|
|
|
4.00
|
%
|
|
|
4.00
|
%
|
|
|
|
(a)
|
The increase in the discount rate from September 30,
2008 compared to 2007 primarily reflects the increase in
long-term interest rates primarily due to the tightening of the
credit markets in fiscal year 2008.
|
101
WGL
Holdings, Inc.
Washington Gas Light Company
Part II
Item 8. Financial Statements and Supplementary Data
(continued)
Notes to Consolidated Financial Statements
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Periodic Benefit Cost Assumptions
|
|
|
|
|
|
|
Health and Life
|
|
|
|
Pension Benefits
|
|
|
Benefits
|
|
|
|
Years Ended September 30,
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
Discount rate
|
|
|
6.00
|
%
|
|
|
5.75
|
%
|
|
|
5.50
|
%
|
|
|
6.00
|
%
|
|
|
5.75
|
%
|
|
|
5.50
|
%
|
Expected long-term return on plan
assets
(a)
|
|
|
8.25
|
%
|
|
|
8.25
|
%
|
|
|
8.25
|
%
|
|
|
7.25
|
%
|
|
|
7.25
|
%
|
|
|
7.25
|
%
|
Rate of compensation increase
|
|
|
4.00
|
%
|
|
|
4.00
|
%
|
|
|
4.00
|
%
|
|
|
4.00
|
%
|
|
|
4.00
|
%
|
|
|
4.00
|
%
|
|
|
|
(a)
|
For health and life benefits, the expected returns for
certain funds may be lower due to certain portions of income
that are subject to taxes.
|
Washington Gas determines the expected long-term rate of return
by averaging the expected earnings for the target asset
portfolio. In developing the expected rate of return assumption,
Washington Gas evaluates an analysis of historical actual
performance and long-term return projections, which gives
consideration to our asset mix and anticipated length of
obligation of our plan.
Washington Gas assumed the healthcare cost trend rates related
to the accumulated post-retirement benefit obligation for
Medicare and non-Medicare eligible retirees to be
10.00 percent for fiscal year 2008 and 10.96 percent
and 9.25 percent, respectively, for fiscal year 2007.
Washington Gas expects these rates to decrease gradually to
5.00 percent in 2013 and remain at those levels thereafter.
The assumed healthcare trend rate has a significant effect on
the amounts reported for the healthcare plans. A one
percentage-point change in the assumed healthcare trend rate
would have the following effects:
|
|
|
|
|
|
|
|
|
Healthcare Trends
|
|
|
One
|
|
One
|
|
|
Percentage-Point
|
|
Percentage-Point
|
(In millions)
|
|
Increase
|
|
Decrease
|
|
Increase (decrease) total service and interest cost components
|
|
$
|
6.1
|
|
|
$
|
(4.8
|
)
|
Increase (decrease) post-retirement benefit obligation
|
|
$
|
42.3
|
|
|
$
|
(35.1
|
)
|
|
REGULATORY
MATTERS
A significant portion of the estimated pension and
post-retirement medical and life insurance benefits apply to our
regulated activities. Each regulatory commission having
jurisdiction over Washington Gas requires it to fund amounts
reflected in rates for post-retirement medical and life
insurance benefits into irrevocable trusts. The expected pre-tax
long-term rate of return on the assets in the trusts was
7.25 percent for fiscal years 2008, 2007 and 2006.
Washington Gas assumes a 41.5 percent income tax rate to
compute taxes on the taxable portion of the income in the trusts.
District of
Columbia Jurisdiction
Washington Gas recovers all costs allocable to the District of
Columbia associated with its qualified pension plan and other
post-retirement medical and life insurance benefits. Expenses of
the SERP allocable to the District of Columbia are not recovered
through rates. The Public Service Commission of the District of
Columbia (PSC of DC) granted the recovery of post-retirement
medical and life insurance benefit costs determined in
accordance with GAAP through a five-year phase-in plan that
ended September 30, 1998. Washington Gas deferred the
difference generated during the phase-in period as a regulatory
asset. Effective October 1, 1998, the PSC of DC granted
Washington Gas full recovery of costs determined under GAAP,
plus a fifteen-year amortization of the regulatory asset
established during the phase-in period.
Virginia
Jurisdiction
On September 28, 1995, the Virginia State Corporation
Commission (SCC of VA) issued a generic order that allowed
Washington Gas to recover most costs determined under GAAP for
post-retirement medical and life insurance benefits in rates
over twenty years. The SCC of VA, however, set a forty-year
recovery period of the transition obligation. As prescribed by
GAAP, Washington Gas amortizes these costs over a twenty-year
period. With the exception of the transition obligation, the SCC
of VA has approved a level of rates sufficient to recover annual
costs for all pension and other post-retirement medical and life
insurance benefit costs determined under GAAP.
102
WGL
Holdings, Inc.
Washington Gas Light Company
Part II
Item 8. Financial Statements and Supplementary Data
(continued)
Notes to Consolidated Financial Statements
Maryland
Jurisdiction
The Public Service Commission of Maryland (PSC of MD) has not
rendered a decision that specifically addresses recovery of
post-retirement medical and life insurance benefit costs
determined in accordance with GAAP. However, the PSC of MD has
approved a level of rates sufficient to recover these costs and
pension costs as determined under GAAP.
|
|
12.
|
STOCK-BASED
COMPENSATION
|
STOCK-BASED
COMPENSATION FOR KEY EMPLOYEES
We have share-based awards outstanding in the form of stock
options, performance shares and performance units. We have
issued stock options and performance shares under our
shareholder-approved 1999 Incentive Compensation Plan, as
amended and restated (1999 Plan). The 1999 Plan allows WGL
Holdings to issue up to 2,000,000 shares of common stock to
persons designated by the Human Resources Committee of the Board
of Directors, including officers and key employees. Effective
March 1, 2007, WGL Holdings adopted a shareholder-approved
Omnibus Incentive Compensation Plan (Omnibus Plan). The Omnibus
Plan was adopted to replace, on a prospective basis, the 1999
Plan. The Omnibus Plan provides similar benefits as provided
under the 1999 Plan. Stock options, stock appreciation rights,
restricted stock, deferred stock, stock granted as a bonus in
lieu of other awards, dividend equivalents, other stock-based
awards and cash awards may be granted under the Omnibus Plan.
The Omnibus Plan allows WGL Holdings to issue up to
1,700,000 shares of common stock, subject to adjustment as
provided by the plan, to persons designated by the Human
Resources Committee of the Board of Directors, including
officers and key employees. Refer to Note 7
Common Stock
for amounts remaining to be issued under
these plans.
During the fiscal year ended September 30, 2008, we granted
Performance Shares and Performance Units under the Omnibus Plan;
however, we did not issue any stock options. As of
September 30, 2008, there are prior years stock
option grants outstanding with an exercise price at the market
value of our common stock on the date of the grant.
For both performance shares and performance units, we impose
performance goals based on certain market conditions, which if
unattained, may result in no performance shares or units being
earned for the applicable performance period. These performance
awards generally vest over three years from the date of grant.
The actual number of performance shares and units that may be
earned varies based on the total shareholder return of WGL
Holdings relative to a selected peer group of companies over the
three year performance period. Any performance shares that are
earned will be paid in shares of common stock of WGL Holdings.
Any performance units that may be earned pursuant to terms of
the grant will be paid in cash and are valued at $1.00 per
performance unit. Our stock options generally have a vesting
period of three years, and expire ten years from the date of the
grant. Performance units, performance shares and stock option
awards provide for accelerated vesting upon change in control.
Additionally, stock options provide for accelerated vesting upon
retirement, death or disability. We generally issue new shares
of common stock in order to satisfy stock issuances related to
performance shares and stock options; however, we may, from time
to time, repurchase shares of our common stock on the open
market in order to satisfy these issuances. Both performance
shares and stock options are accounted for as equity awards, and
Performance Units are accounted for as liability awards as they
will settle in cash.
For the year ended September 30, 2008, we recognized
stock-based compensation expense related to our performance
shares, performance units and stock options of
$4.6 million, along with related income tax benefits of
$1.8 million. For the years ended September 30, 2007
and 2006, we recognized stock-based compensation expenses
related to our performance shares and stock options of
$5.0 million and $4.4 million, respectively, along
with related income tax benefits of $2.0 million and
$1.8 million, respectively.
As of September 30, 2008, there was $5.2 million of
total unrecognized compensation expense related to share-based
awards granted. Performance shares, performance units and stock
options comprised $3.1 million, $1.8 million and
$311,000 of total unrecognized compensation expense,
respectively. The total unrecognized compensation expense is
expected to be recognized over a weighted average period of
1.7 years, which comprises 1.7 years, two years and
one year for performance shares, performance units and stock
options, respectively. During both the fiscal years ended
September 30, 2008 and 2006, we paid $1.1 million and
$1.0 million, respectively, for income taxes withheld in
connection with the settlement of share-based awards. During
fiscal year 2007, there were no cash payments in connection with
the settlement of our share-based awards.
103
WGL
Holdings, Inc.
Washington Gas Light Company
Part II
Item 8. Financial Statements and Supplementary Data
(continued)
Notes to Consolidated Financial Statements
Performance
Shares
The following table summarizes information regarding performance
share activity during the fiscal year ended September 30,
2008.
|
|
|
|
|
|
|
|
|
Performance Share Activity
|
|
|
|
Year Ended
|
|
|
|
September 30, 2008
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
|
Number of
|
|
|
Grant-Date
|
|
|
|
Shares
(a)
|
|
|
Fair Value
|
|
|
|
Non-vested and outstanding, beginning of year
|
|
|
288,087
|
|
|
$
|
30.57
|
|
Granted
|
|
|
100,905
|
|
|
$
|
34.01
|
|
Vested
|
|
|
(94,779
|
)
|
|
$
|
29.62
|
|
Cancelled/forfeited
|
|
|
(19,955
|
)
|
|
$
|
31.97
|
|
|
Non-vested and outstanding, end of year
|
|
|
274,258
|
|
|
$
|
32.06
|
|
|
|
|
|
(a)
|
|
The number of common shares
issued related to performance shares may range from zero to
200 percent of the number of shares shown in the table
above based on our achievement of performance goals for total
shareholder return relative to a selected peer group of
companies.
|
The total intrinsic value of performance shares vested during
the years ended September 30, 2008 and 2006 was
$3.2 million and $2.6 million, respectively. No common
shares were issued related to performance shares that vested in
fiscal year 2007. Performance shares non-vested and outstanding
at September 30, 2008 had a weighted average remaining
contractual term of one year.
We measure compensation expense related to performance shares
based on the fair value of these awards at their date of grant.
Compensation expense for performance shares is recognized for
awards that ultimately vest, and is not adjusted based on the
actual achievement of performance goals. We estimated the fair
value of performance shares on the date of grant using a Monte
Carlo simulation model based on the following assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Assumptions
|
|
|
|
Years Ended September 30,
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
Expected stock-price volatility
|
|
|
17.7
|
%
|
|
|
15.7
|
%
|
|
|
17.6
|
%
|
Dividend yield
|
|
|
4.0
|
%
|
|
|
4.3
|
%
|
|
|
4.1
|
%
|
Risk-free interest rate
|
|
|
4.0
|
%
|
|
|
4.6
|
%
|
|
|
4.2
|
%
|
Weighted average fair value of performance shares granted during
the year
|
|
$
|
34.01
|
|
|
$
|
29.68
|
|
|
$
|
32.62
|
|
|
Expected stock-price volatility is based on the daily historical
volatility of our common shares for the past three fiscal years.
The dividend yield represents our annualized dividend yield on
the closing market price of our common stock at the date of the
grant. The risk-free interest rate is based on the zero-coupon
U.S. Treasury bond, with a term equal to the remaining
contractual term of the performance units.
Performance
Units
Our performance units are liability awards as they settle in
cash; therefore, we measure and record compensation expense for
these awards based on their fair value at the end of each period
until their vesting date. This may cause fluctuations in
earnings that do not exist under the accounting requirements for
both our stock options and performance shares.
104
WGL
Holdings, Inc.
Washington Gas Light Company
Part II
Item 8. Financial Statements and Supplementary Data
(continued)
Notes to Consolidated Financial Statements
The following table summarizes information regarding performance
unit activity during the fiscal year ended September 30,
2008.
|
|
|
|
|
Performance Unit Activity
|
|
|
|
Year Ended
|
|
|
|
September 30, 2008
|
|
|
|
|
|
Number of Units
|
|
|
|
Non-vested and outstanding, beginning of year
|
|
|
|
|
Granted
|
|
|
3,419,656
|
|
Vested
|
|
|
|
|
Cancelled/forfeited
|
|
|
(201,076
|
)
|
|
Non-vested and outstanding, end of year
|
|
|
3,218,580
|
|
|
The weighted average fair value of our performance units
outstanding at September 30, 2008 was $2.7 million. As of
September 30, 2008, we had recorded a liability of $898,000
related to our performance units. This liability is recorded in
Deferred credits other.
We estimated the fair value of performance units using a Monte
Carlo simulation model. The following table provides the
year-end assumptions used to value our performance units:
|
|
|
|
|
Fair Value Assumptions
|
|
September 30,
|
|
2008
|
|
Expected stock-price volatility
|
|
|
23.6
|
%
|
Risk free interest rate
|
|
|
1.8
|
%
|
|
Expected stock-price volatility is based on the daily historical
volatility of our common shares for a period equal to the
remaining term of the performance units. The risk-free interest
rate is based on the zero-coupon U.S. Treasury bond, with a
term equal to the remaining contractual term of the performance
units.
Stock
Options
The following table summarizes information regarding stock
option activity during the fiscal year ended September 30,
2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock Option Activity
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Average
|
|
|
|
|
|
|
Number
|
|
|
Average
|
|
|
Remaining
|
|
|
Aggregate
|
|
|
|
of
|
|
|
Exercise
|
|
|
Contractual
|
|
|
Intrinsic Value
|
|
|
|
Options
|
|
|
Price
|
|
|
Term (In years)
|
|
|
(In thousands)
|
|
|
|
Outstanding at September 30, 2007
|
|
|
1,542,140
|
|
|
$
|
29.28
|
|
|
|
7.20
|
|
|
$
|
7,105
|
|
Granted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(524,963
|
)
|
|
|
26.79
|
|
|
|
|
|
|
|
|
|
Cancelled/forfeited
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at September 30, 2008
|
|
|
1,017,177
|
|
|
|
30.57
|
|
|
|
6.87
|
|
|
$
|
1,913
|
|
|
Exercisable at September 30, 2008
|
|
|
333,226
|
|
|
|
28.34
|
|
|
|
5.62
|
|
|
$
|
1,369
|
|
|
105
WGL
Holdings, Inc.
Washington Gas Light Company
Part II
Item 8. Financial Statements and Supplementary Data
(continued)
Notes to Consolidated Financial Statements
We received $14.1 million, $11.7 million, and
$2.9 million related to the exercise of stock options
during the years ended September 30, 2008, 2007, and 2006,
respectively. The actual tax benefits realized for the fiscal
years ended September 30, 2008, 2007 and 2006 were
$1.8 million, $962,000 and $274,000, respectively.
We measured compensation expense related to stock options based
on the fair value of these awards at their date of grant.
Compensation expense for stock options is recognized for awards
that ultimately vest. We estimated the fair value of stock
options on the date of the grant using the Black-Scholes
option-pricing model based on the following assumptions:
|
|
|
|
|
|
|
|
|
Fair Value
Assumptions
(a)
|
|
|
|
Years Ended September 30,
|
|
2007
|
|
|
2006
|
|
|
|
Expected stock-price volatility
|
|
|
19.8
|
%
|
|
|
22.1
|
%
|
Dividend yield
|
|
|
4.3
|
%
|
|
|
4.1
|
%
|
Risk-free interest rate
|
|
|
4.6
|
%
|
|
|
4.3
|
%
|
Expected option term
|
|
|
5.9 years
|
|
|
|
6.5 years
|
|
Weighted average fair value of stock options granted during the
year
|
|
|
$4.78
|
|
|
|
$5.51
|
|
|
|
|
(a)
|
There were no stock options granted in fiscal year 2008.
|
Expected stock-price volatility is based on the daily historical
volatility of our common shares over a period that approximates
the expected term of the stock options. The dividend yield
represents our annualized dividend yield on the closing market
price of our common stock at the date of grant. The risk-free
interest rate is based on the zero-coupon U.S. Treasury
bond, with a term equal to the expected term of the stock
options. The expected option term is based on our historical
experience with respect to stock option exercises and
expectations about future exercises.
STOCK
GRANTS TO DIRECTORS
Non-employee directors receive a portion of their annual
retainer fee in the form of common stock through the
Directors Stock Compensation Plan. Up to
120,000 shares of common stock may be awarded under the
plan. Shares granted to directors totaled 12,600 for both fiscal
years 2008 and 2007, and 8,400 for fiscal year 2006. For those
years, the fair value of the stock on the grant dates was
$32.55, $32.72, and $30.55, respectively. Shares awarded to the
participants:
(i)
vest immediately and cannot be
forfeited,
(ii)
may be sold or transferred and
(iii)
have voting and dividend rights. For the years
ended September 30, 2008, 2007 and 2006, WGL Holdings
recognized stock-based compensation expense related to these
stock grants of $410,000, $412,000 and $257,000, respectively,
along with related income tax benefits of $148,000, $149,000 and
$93,000, respectively.
|
|
13.
|
ENVIRONMENTAL
MATTERS
|
We are subject to federal, state and local laws and regulations
related to environmental matters. These evolving laws and
regulations may require expenditures over a long timeframe to
control environmental effects. Almost all of the environmental
liabilities we have recorded are for costs expected to be
incurred to remediate sites where we or a predecessor affiliate
operated manufactured gas plants (MGP). Estimates of liabilities
for environmental response costs are difficult to determine with
precision because of the various factors that can affect their
ultimate level. These factors include, but are not limited, to
the following:
|
|
|
|
|
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
|
|
|
|
variations between the estimated and actual period of time that
must be dedicated 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
106
WGL
Holdings, Inc.
Washington Gas Light Company
Part II
Item 8. Financial Statements and Supplementary Data
(continued)
Notes to Consolidated Financial Statements
manufacturing process are present at or near some former sites,
and may be present at others. Based on the information available
to us, we have concluded that none of the sites are likely to
present an unacceptable risk to human health or the environment.
At one of the former MGP sites, studies show the presence of
coal tar under the site and an adjoining property. Washington
Gas has taken steps to control the movement of contaminants into
an adjacent river by installing a water treatment system that
removes and treats contaminated groundwater at the site.
Washington Gas received approval from governmental authorities
for a comprehensive remediation plan for the majority of the
site that permits commercial development of Washington
Gass property. Washington Gas has entered into an
agreement with a national developer for the development of this
site in phases. The first two phases have been completed, with
Washington Gas retaining a ground lease on each phase. A Record
of Decision for that portion of the site not owned by Washington
Gas was issued in August, 2006. Negotiations on a consent
agreement regarding remediation of that property have been
postponed, pending transfer of the site to a new governmental
owner. On September 21, 2006, governmental authorities
notified Washington Gas of their desire to have the utility
investigate and remediate river sediments in the area directly
in front of the former MGP site. There has been no agreement
among Washington Gas and governmental authorities as to the type
and level of sediment investigation and remediation that should
be undertaken for this area of the river; accordingly, we cannot
estimate at this time the potential future costs of such
investigation and remediation.
At a second former MGP site and on an adjacent parcel of land,
Washington Gas developed a monitoring-only
remediation plan for the site. This remediation plan received
approval under a state voluntary closure program.
We do not expect that the ultimate impact of these matters will
have a material adverse effect on our capital expenditures,
earnings or competitive position. At the remaining eight sites,
either the appropriate remediation is being undertaken, or no
remediation should be necessary.
At September 30, 2008 and 2007, Washington Gas had a
liability of $6.9 million and $7.1 million,
respectively, on an undiscounted basis related to future
environmental response costs, which included the estimated costs
for the ten MGP sites. These estimates principally include the
minimum liabilities associated with a range of environmental
response costs expected to be incurred at the sites identified.
At September 30, 2008 and 2007, Washington Gas estimated
the maximum liability associated with all of its sites to be
approximately $13.5 million and $10.8 million,
respectively. The estimates were determined by Washington
Gass environmental experts, based on experience in
remediating MGP sites and advice from legal counsel and
environmental consultants. Variations within the range of
estimated liability result primarily from differences in the
number of years that will be required to perform environmental
response processes at each site and the extent of remediation
that may be required.
Regulatory orders issued by the PSC of MD allow Washington Gas
to recover the costs associated with the sites applicable to
Maryland over periods ranging from five to thirty years. Rate
orders issued by the PSC of DC allow Washington Gas a three-year
recovery of prudently incurred environmental response costs, and
allow Washington Gas to defer additional costs incurred between
rate cases. Regulatory orders from the SCC of VA have generally
allowed the recovery of prudent environmental remediation costs
to the extent they were included in a test year.
At September 30, 2008 and 2007, Washington Gas reported a
regulatory asset of $2.8 million and $2.9 million,
respectively, for the portion of environmental response costs
that are expected to be recoverable in future rates. Washington
Gas does not expect that the ultimate impact of these matters
will have a material adverse effect on its financial statements.
107
WGL
Holdings, Inc.
Washington Gas Light Company
Part II
Item 8. Financial Statements and Supplementary Data
(continued)
Notes to Consolidated Financial Statements
|
|
14.
|
COMMITMENTS AND
CONTINGENCIES
|
OPERATING
LEASES
Minimum future rental payments under operating leases over the
next five years and thereafter are as follows:
|
|
|
|
|
|
|
Minimum Payments Under Operating Leases
|
(In millions)
|
2009
|
|
$
|
4.0
|
|
|
|
2010
|
|
|
4.0
|
|
|
|
2011
|
|
|
3.9
|
|
|
|
2012
|
|
|
3.9
|
|
|
|
2013
|
|
|
3.9
|
|
|
|
Thereafter
|
|
|
18.9
|
|
|
|
|
Total
|
|
$
|
38.6
|
|
|
|
|
Rent expense totaled $4.9 million, $4.8 million and
$4.3 million in fiscal years ended September 30, 2008,
2007 and 2006, respectively.
REGULATED
UTILITY OPERATIONS
Natural Gas
ContractsMinimum Commitments
At September 30, 2008, Washington Gas had service
agreements with four pipeline companies that provide direct
service for firm transportation
and/or
storage services. These agreements, which have expiration dates
ranging from fiscal years 2009 to 2028, require Washington Gas
to pay fixed charges each month. Additionally, Washington Gas
had agreements for other pipeline and peaking services with
expiration dates ranging from 2009 to 2027. These agreements
were entered into based on current estimates of growth of the
Washington Gas system, together with other factors, such as
current expectations of the timing and extent of unbundling
initiatives in the Washington Gas service territory.
The following table summarizes the minimum contractual payments
that Washington Gas will make under its pipeline transportation,
storage and peaking contracts during the next five fiscal years
and thereafter.
|
|
|
|
|
|
|
Washington Gas Contract Minimums
|
|
(In millions)
|
|
Pipeline Contracts
|
|
|
|
2009
|
|
$
|
167.0
|
|
|
|
2010
|
|
|
167.9
|
|
|
|
2011
|
|
|
154.5
|
|
|
|
2012
|
|
|
155.1
|
|
|
|
2013
|
|
|
156.5
|
|
|
|
Thereafter
|
|
|
1,249.0
|
|
|
|
|
Total
|
|
$
|
2,050.0
|
|
|
|
|
Not included in the table above are short-term minimum
commitments of $76.8 million to purchase natural gas in
fiscal year 2009, as well as long-term obligations to purchase
fixed quantities of natural gas totaling 367.6 million
therms for the period from
2009-2011
at
prices based on market conditions at the time the natural gas is
purchased. These commitments relate to purchases of natural gas
to serve utility customers. Additionally, excluded from the
table above are purchases under our asset optimization program
totaling 552.6 million therms from
2009-2017,
which are mostly offset by matching sales contracts of 541.0
therms over that same period. Contracts under our asset
optimization program are accounted for as derivatives (refer to
Note 1
Accounting Policies
for a description of
our asset optimization program and
Note 6
Derivative and Weather-Related Instruments
for a discussion of our derivative instruments).
When a customer selects a third-party marketer to provide
supply, Washington Gas generally assigns pipeline and storage
capacity to unregulated third-party marketers to deliver gas to
Washington Gass city gate. In order to provide the gas
commodity to
108
WGL
Holdings, Inc.
Washington Gas Light Company
Part II
Item 8. Financial Statements and Supplementary Data
(continued)
Notes to Consolidated Financial Statements
customers who do not select an unregulated third-party marketer,
Washington Gas has a commodity acquisition plan to acquire the
natural gas supply to serve the customer.
Currently, Washington Gas recovers its cost of gas to serve its
customers through the purchased gas cost recovery mechanisms
included in its retail rate schedules in each of its
jurisdictions. However, the timing and extent of Washington
Gass initiatives or regulatory requirements to separate
the purchase and sale of natural gas from the delivery of gas
could cause its gas supply commitments to exceed its continued
sales obligations.
Washington Gas has rate provisions in each of its jurisdictions
that would allow it to continue to recover these commitments in
rates. Washington Gas also actively manages its supply portfolio
to ensure its sales and supply obligations remain balanced. This
reduces the likelihood that the contracted supply commitments
would exceed supply obligations. However, to the extent
Washington Gas were to determine that changes in regulation
would cause it to discontinue recovery of these costs in rates,
Washington Gas would be required to charge these costs to
expense without any corresponding revenue recovery. If this
occurred, depending upon the timing of the occurrence, the
related impact on our financial position and results of
operations would likely be significant.
Regulatory
Contingencies
Certain legal and administrative proceedings incidental to our
business, including regulatory contingencies, involve WGL
Holdings
and/or
its
subsidiaries. In our opinion, we have recorded an adequate
provision for probable losses or refunds to customers for
regulatory contingencies related to these proceedings.
District of
Columbia Jurisdiction
Recovery of HHC Costs.
On May 1,
2006, Washington Gas filed two tariff applications with the PSC
of DC requesting approval of proposed revisions to the balancing
charge provisions of its firm and interruptible delivery service
tariffs that would permit the utility to recover from its
delivery service customers the costs of heavy hydrocarbons
(HHCs) that are being injected into Washington Gass
natural gas distribution system to treat vaporized liquefied
natural gas from the Dominion Core Point Facility. Washington
Gas had been recovering the costs of HHCs from sales customers
in the District of Columbia through its Purchased Gas Charge
(PGC) provision in this jurisdiction. On October 2, 2006,
the PSC of DC issued an order rejecting Washington Gass
proposed tariff revisions until the PSC of MD issued a final
order related to this matter. On October 12, 2006,
Washington Gas filed a Motion for Clarification requesting that
the PSC of DC affirm that Washington Gas can continue collecting
HHC costs from sales customers through its PGC provision or to
record such HHC costs incurred as a regulatory asset pending a
ruling by the PSC of DC on future cost recovery. On May 11,
2007, the PSC of DC directed Washington Gas to cease prospective
recovery of the cost of HHCs through the PGC provision, with
future HHC costs to be recorded as a pending
regulatory asset. On November 16, 2007 the PSC of MD issued
a Final Order in the relevant case supporting full recovery of
the HHC costs in Maryland. On March 25, 2008, the PSC of DC
issued an order stating that the consideration of Washington
Gass HHC strategy will move forward and directed
interested parties to submit filings reflecting a proposed
procedural schedule. On June 6, 2008, Washington Gas and
the District of Columbia Office of the Peoples Counsel
filed a joint response to the order proposing a procedural
schedule and a list of issues for consideration in the case. The
PSC of DC adopted the proposed issues list and approved a
procedural schedule. Washington Gas and other parties have filed
initial comments, discovery has been held and Washington Gas
filed its reply comments on November 10, 2008.
Maryland
Jurisdiction
Disallowance of Purchased Gas
Charges.
Each year, the PSC of MD reviews the
annual gas costs collected from customers in Maryland to
determine if Washington Gass purchased gas costs are
reasonable. On March 14, 2006, in connection with the PSC
of MDs annual review of Washington Gass gas costs
that were billed to customers in Maryland from September 2003
through August 2004, a Hearing Examiner of the PSC of MD issued
a proposed order approving purchased gas charges of Washington
Gas for the twelve-month period ending August 2004 except for
$4.6 million (pre-tax) of such charges that the Hearing
Examiner recommended be disallowed because, in the opinion of
the Hearing Examiner, they were not reasonably and prudently
incurred. Washington Gas filed a Notice of Appeal on
April 12, 2006 and a Memorandum on Appeal on April 21,
2006 with the PSC of MD asserting that the Hearing
Examiners recommendation is without merit. A reply
memorandum was filed on May 11, 2006. After consideration
of these issues, we expect the PSC of MD to issue a Final Order.
Over the past ten years, Washington Gas has incurred similar
purchased gas charges which the PSC of MD has reviewed and
approved as being reasonably and prudently incurred and
therefore subject to recovery from customers. Among other issues
included in the appeal, we highlighted for the PSC of MD this
prior recovery and requested that similar treatment be granted
for this matter. During the fiscal year ended September 30,
2006, Washington Gas
109
WGL
Holdings, Inc.
Washington Gas Light Company
Part II
Item 8. Financial Statements and Supplementary Data
(continued)
Notes to Consolidated Financial Statements
accrued a liability of $4.6 million (pre-tax) related to
the proposed disallowance of these purchased gas charges. If the
PSC of MD rules in Washington Gass favor, the liability
recorded in fiscal year 2006 for this issue will be reversed to
income.
Performance-Based
Rate Plans
In recent rate case proceedings in all jurisdictions, Washington
Gas requested permission to implement performance-based rate
(PBR) plans that include performance measures for customer
service and an ESM that enables Washington Gas to automatically
share with shareholders and customers the earnings that exceed a
target rate of return on equity.
Effective October 1, 2007, the SCC of VA approved the
implementation of a PBR plan through the acceptance of a
settlement stipulation, which includes:
(i)
a
four-year base rate freeze;
(ii)
service quality
measures to be determined in conjunction with the staff of the
SCC of VA (VA Staff) and reported quarterly for maintaining a
safe and reliable natural gas distribution system while striving
to control operating costs;
(iii)
recovery of
initial implementation costs associated with achieving
Washington Gass BPO initiatives over the four-year period
of the PBR plan and
(iv)
an ESM that enables
Washington Gas to share with shareholders and Virginia customers
the earnings that exceed a target of 10.5 percent return on
equity. The calculation of the ESM excludes $2.4 million of
asset management revenues that is being refunded to customers as
part of a new margin sharing agreement in Virginia. On an
interim basis, we record the effects of the ESM based on
year-to-date earnings in relation to estimated annual earnings
as calculated for regulatory purposes. At September 30,
2008, Washington Gas had accrued a customer liability of
$4.8 million for estimated sharing under the Virginia ESM.
On November 16, 2007, the PSC of MD issued a Final Order in
a rate case, which established a phase-two proceeding to review
Washington Gass request to implement a PBR plan and issues
raised by the parties associated with Washington Gass BPO
agreement. On September 4, 2008, a Proposed Order of
Hearing Examiner was issued in this phase-two proceeding.
Consistent with Washington Gass current accounting
methodology, the Proposed Order approved
10-year
amortization accounting for initial implementation costs related
to Washington Gass BPO plan. At September 30, 2008,
we had recorded a regulatory asset of $6.8 million, net of
amortization, related to initial implementation costs allocable
to Maryland associated with our BPO plan. Washington Gass
application seeking approval of a PBR plan, however, was denied.
Additionally, the Proposed Order
(i)
directs
Washington Gas to obtain an independent management audit related
to issues raised in the phase-two proceeding and
(ii)
directs the initiation of a service
collaboration process in which Washington Gas is directed to
engage in discussions with the Staff of the PSC of MD (MD
Staff), the Maryland Office of Peoples Counsel (MD OPC)
and interested parties to develop appropriate customer service
metrics and a periodic form for reporting results similar to the
metrics filed by Washington Gas as part of the approved
settlement in Virginia. This Proposed Order has been appealed by
the MD Staff, the MD OPC and other parties. Washington
Gass Reply Memorandum on Appeal was filed on
November 5, 2008, and we are currently awaiting a final
decision by the PSC of MD.
Although the Final Order issued by the PSC of DC on
December 28, 2007 approved amortization accounting for
initial implementation costs related to the BPO plan, Washington
Gass application seeking approval of a PBR plan was
withdrawn. Washington Gas is prohibited from seeking approval of
a PBR plan in the District of Columbia until the filing of its
next base rate case; however, the settling parties may not seek
a change in rates during the rate case filing moratorium period
under the terms of the approved rate settlement.
Depreciation
Study
In October 2006, Washington Gas completed a depreciation rate
study based on its property, plant and equipment balances as of
December 31, 2005. The results of the depreciation study
concluded that Washington Gass depreciation rates should
be reduced due to asset lives being extended beyond previously
estimated lives. Under regulatory requirements, these
depreciation rates must be approved before they are placed into
effect.
In December 2006, the VA Staff approved the reduction in
Washington Gass depreciation rates. In accordance with
Virginia regulatory policy, Washington Gas implemented the lower
depreciation rates retroactive to January 1, 2006 which
coincides with the measurement date of the approved depreciation
study. Accordingly, our depreciation and amortization expense
for the first quarter of fiscal year 2007 included a benefit
totaling $3.9 million (pre-tax) that was applicable to the
period from January 1, 2006 through September 30, 2006.
Washington Gas included the portion of the depreciation study
related to the District of Columbia in the rate application
filed with the PSC of DC on December 21, 2006. Washington
Gass proposed new depreciation rates were placed into
effect pursuant to the Final Order issued by the PSC of DC on
December 28, 2007.
110
WGL
Holdings, Inc.
Washington Gas Light Company
Part II
Item 8. Financial Statements and Supplementary Data
(continued)
Notes to Consolidated Financial Statements
On April 13, 2007, Washington Gas filed the portion of the
depreciation study related to the Maryland jurisdiction. A
separate proceeding was established on May 2, 2007, by the
PSC of MD to review Washington Gass request to implement
new depreciation rates. On October 25, 2007, Washington Gas
filed a 2007 technical update of the Maryland depreciation study
based on property, plant and equipment balances as of
December 31, 2006. Hearings were held May 12 and 13, 2008.
Initial briefs were filed on July 16, 2008 and reply briefs
were filed on August 6, 2008. On October 15, 2008, a
Proposed Order of Hearing Examiner was issued in Maryland, which
will reduce Washington Gass annual depreciation expense
related to the Maryland jurisdiction by approximately
$11.2 million when new depreciation rates are implemented,
with a corresponding decrease in annual revenues on a
prospective basis to be reflected in future billing rates.
Reflected in this reduction in depreciation expense, among other
things, are:
(i)
a change in methodology for
calculating accrued asset removal costs and
(ii)
the
designation of certain insurance and relocation reimbursements
as salvage value. This reduction in depreciation expense will
not impact annual operating income and will not prevent the
recovery of our capital investment; however, it will have the
effect of deferring full recovery of our capital investment into
future years. On November 14, 2008, Washington Gas and MD
OPC noted appeals of the October 15, 2008 Proposed Order,
thus suspending its effective date. Both Washington Gas and the
MD OPC filed Memoranda on Appeal on November 24, 2008, and
Reply Memoranda will be due 20 days later. The PSC of MD
will issue a final order after considering all of the arguments
by the parties.
NON-UTILITY
OPERATIONS
WGEServices enters into contracts to purchase natural gas and
electricity designed to match the duration of its sales
commitments, and effectively to lock in a margin on estimated
sales over the terms of existing sales contracts. As listed
below, natural gas purchase commitments are based on existing
fixed-price purchase contracts using city gate equivalent
deliveries, the majority of which are for fixed volumes. Also
listed below are electricity purchase commitments that are based
on existing fixed-price purchase commitments, all of which are
for fixed volumes.
The following table summarizes the contractual obligations and
minimum commitments of WGEServices for both natural gas and
electricity for the next five years and thereafter:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
WGEServices Contract Minimums
|
|
|
|
Gas Purchase
|
|
Pipeline
|
|
Electric Purchase
|
|
|
(In millions)
|
|
Commitments
(a)
|
|
Contracts
|
|
Commitments
(b)
|
|
Total
|
|
2009
|
|
$
|
396.1
|
|
|
$
|
2.6
|
|
|
$
|
238.6
|
|
|
$
|
637.3
|
|
2010
|
|
|
154.8
|
|
|
|
1.0
|
|
|
|
124.5
|
|
|
|
280.3
|
|
2011
|
|
|
63.4
|
|
|
|
0.6
|
|
|
|
38.7
|
|
|
|
102.7
|
|
2012
|
|
|
18.0
|
|
|
|
0.4
|
|
|
|
7.2
|
|
|
|
25.6
|
|
2013
|
|
|
8.0
|
|
|
|
0.4
|
|
|
|
1.5
|
|
|
|
9.9
|
|
Thereafter
|
|
|
|
|
|
|
2.3
|
|
|
|
|
|
|
|
2.3
|
|
|
Total
|
|
$
|
640.3
|
|
|
$
|
7.3
|
|
|
$
|
410.5
|
|
|
$
|
1,058.1
|
|
|
|
|
(a)
|
Represents fixed price commitments with city gate equivalent
deliveries.
|
(b)
|
Includes $2.1 million of commitments related to
renewable energy credits.
|
Construction
Project Financing
To fund certain of its construction projects, Washington Gas
enters into financing arrangements with third-party lenders. As
part of these financing arrangements, Washington Gass
customers agree to make principal and interest payments over a
period of time, typically beginning after the projects are
completed. Washington Gas then assigns these customer payment
streams to the lender. As the lender funds the construction
project, Washington Gas establishes a note receivable
representing its customers obligations to remit principal
and interest and a long-term note payable to the lender. When
these projects are formally accepted by the customer
as completed, Washington Gas transfers the ownership of the note
receivable to the lender and removes both the note receivable
and the long-term financing from its financial statements. As of
September 30, 2008, work on these construction projects
that was not completed or accepted by customers was valued at
$14.7 million, which is recorded on the balance sheet as a
note receivable in Deferred Charges and Other
AssetsOther with the corresponding long-term
obligation to the lender in Long-term debt. At any
time before these contracts are accepted by the customer, should
there be a contract default, such as, among other things, a
delay in completing the project, the lender may call on
Washington Gas to fund the unpaid principal in exchange for
which
111
WGL
Holdings, Inc.
Washington Gas Light Company
Part II
Item 8. Financial Statements and Supplementary Data
(continued)
Notes to Consolidated Financial Statements
Washington Gas would receive the right to the stream of payments
from the customer. Once the project is accepted by the customer,
the lender will have no recourse against Washington Gas related
to this long-term debt.
Financial
Guarantees
WGL Holdings has guaranteed payments primarily for certain
purchases of natural gas and electricity on behalf of the retail
energy-marketing segment. At September 30, 2008, these
guarantees totaled $330.7 million. The amount of such
guarantees is periodically adjusted to reflect changes in the
level of financial exposure related to these purchase
commitments. WGL Holdings also issued guarantees totaling
$3.0 million at September 30, 2008 that were made on
behalf of certain of our non-utility subsidiaries associated
with their banking transactions. Of the total guarantees of
$333.7 million, $15 million, $60,000 and
$4.0 million are due to expire on December 31, 2008,
January 31, 2009 and June 30, 2009, respectively. The
remaining guarantees of $314.6 million do not have specific
maturity dates. For all of its financial guarantees, WGL
Holdings may cancel any or all future obligations imposed by the
guarantees upon written notice to the counterparty, but WGL
Holdings would continue to be responsible for the obligations
that had been created under the guarantees prior to the
effective date of the cancellation.
15. FAIR
VALUE OF FINANCIAL INSTRUMENTS
The following table presents the carrying amounts and estimated
fair values of our financial instruments at September 30,
2008 and 2007. The fair value of a financial instrument
represents the amount at which the instrument could be exchanged
in a current transaction between willing parties. The carrying
amount of current assets and current liabilities approximates
fair value because of the short-term maturity of these
instruments, and therefore are not shown in the table below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value of Financial Instruments
|
At September 30,
|
|
2008
|
|
2007
|
|
|
|
Carrying
|
|
Fair
|
|
Carrying
|
|
Fair
|
(In millions)
|
|
Amount
|
|
Value
|
|
Amount
|
|
Value
|
|
Preferred stock
|
|
$
|
28.2
|
|
|
$
|
26.8
|
|
|
$
|
28.2
|
|
|
$
|
25.4
|
|
Long-term
debt
(a)
|
|
$
|
603.8
|
|
|
$
|
564.6
|
|
|
$
|
616.5
|
|
|
$
|
623.8
|
|
|
|
|
(a)
|
Excludes current maturities and unamortized discounts.
|
We calculate the fair market value of our preferred stock based
on quoted market prices from the Over-The-Counter
Bulletin Board (OTCBB). The fair value of long-term debt
was estimated based on the quoted market prices of
U.S. Treasury issues having a similar term to maturity,
adjusted for Washington Gass credit quality and the
present value of future cash flows.
16. OPERATING
SEGMENT REPORTING
We identify and report on operating segments under the
management approach. Our chief operating decision
maker is our Chief Operating Officer. Operating segments
comprise revenue-generating components of an enterprise for
which we produce separate financial information internally that
we regularly use to make operating decisions and assess
performance. We report three operating segments:
(i)
regulated utility,
(ii)
retail
energy-marketing and
(iii)
design-build energy
systems.
With approximately 93 percent of WGL Holdings
consolidated total assets, the regulated utility segment is our
core business and comprises Washington Gas and Hampshire. The
regulated utility segment, through Washington Gas, provides
regulated gas distribution services (including the sale and
delivery of natural gas, meter reading, responding to customer
inquiries, bill preparation and the construction and maintenance
of its natural gas distribution system) to customers primarily
in the District of Columbia and the surrounding metropolitan
areas in Maryland and Virginia. In addition to the regulated
operations of Washington Gas, the regulated utility segment
includes the operations of Hampshire, an underground natural gas
storage company that is regulated under a cost of service tariff
by the FERC and provides services exclusively to Washington Gas.
Through WGEServices, the retail energy-marketing segment sells
natural gas and electricity directly to retail customers, both
inside and outside of Washington Gass traditional service
territory, in competition with regulated utilities and
unregulated gas and electricity marketers. Through WGESystems,
the design-build energy systems segment provides design-build
energy efficient and sustainable solutions to government and
commercial clients under construction contracts.
112
WGL
Holdings, Inc.
Washington Gas Light Company
Part II
Item 8. Financial Statements and Supplementary Data
(continued)
Notes to Consolidated Financial Statements
Transactions that are not significant enough on a stand-alone
basis to warrant treatment as an operating segment, and that do
not fit into one of our three operating segments, are aggregated
as Other Activities and included as part of
non-utility operations as presented below in the Operating
Segment Financial Information.
The same accounting policies applied in preparing our
consolidated financial statements, as discussed in
Note 1
Accounting Policies
also apply to the
reported segments. While net income or loss is the primary
criterion for measuring a segments performance, we also
evaluate our operating segments based on other relevant factors,
such as penetration into their respective markets and return on
equity. The following tables present operating segment
information for the fiscal years ended September 30, 2008,
2007 and 2006.
Operating
Segment Financial Information
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-Utility Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Regulated
|
|
|
Energy-
|
|
|
Design-Build
|
|
|
Other
|
|
|
Discontinued
|
|
|
|
|
|
|
|
(In thousands)
|
|
Utility
|
|
|
Marketing
|
|
|
Energy Systems
|
|
|
Activities
|
|
|
Operations
|
|
|
Eliminations
|
|
|
Consolidated
|
|
|
|
|
Year Ended September 30, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
Revenues
(a)
|
|
$
|
1,552,344
|
|
|
$
|
1,062,692
|
|
|
$
|
29,051
|
|
|
$
|
8
|
|
|
$
|
|
|
|
$
|
(15,901
|
)
|
|
$
|
2,628,194
|
|
|
Operating Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of Energy-Related Sales
|
|
|
885,234
|
|
|
|
1,023,297
|
|
|
|
23,849
|
|
|
|
|
|
|
|
|
|
|
|
(15,901
|
)
|
|
|
1,916,479
|
|
Operation
|
|
|
205,311
|
|
|
|
26,531
|
|
|
|
2,621
|
|
|
|
3,276
|
|
|
|
|
|
|
|
|
|
|
|
237,739
|
|
Maintenance
|
|
|
44,819
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
44,819
|
|
Depreciation and Amortization
|
|
|
94,156
|
|
|
|
803
|
|
|
|
48
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
95,007
|
|
General Taxes and Other Assessments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue Taxes
|
|
|
55,349
|
|
|
|
548
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
55,897
|
|
Other
|
|
|
43,685
|
|
|
|
2,841
|
|
|
|
92
|
|
|
|
29
|
|
|
|
|
|
|
|
|
|
|
|
46,647
|
|
|
Total Operating Expenses
|
|
|
1,328,554
|
|
|
|
1,054,020
|
|
|
|
26,610
|
|
|
|
3,305
|
|
|
|
|
|
|
|
(15,901
|
)
|
|
|
2,396,588
|
|
|
Operating Income (Loss)
|
|
|
223,790
|
|
|
|
8,672
|
|
|
|
2,441
|
|
|
|
(3,297
|
)
|
|
|
|
|
|
|
|
|
|
|
231,606
|
|
Other Income (Expenses)Net
|
|
|
1,910
|
|
|
|
93
|
|
|
|
388
|
|
|
|
1,254
|
|
|
|
|
|
|
|
(1,120
|
)
|
|
|
2,525
|
|
Interest Expense
|
|
|
45,397
|
|
|
|
1,139
|
|
|
|
|
|
|
|
1,381
|
|
|
|
|
|
|
|
(1,120
|
)
|
|
|
46,797
|
|
Dividends on Washington Gas Preferred Stock
|
|
|
1,320
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,320
|
|
Income Tax Expense
|
|
|
65,260
|
|
|
|
2,813
|
|
|
|
1,038
|
|
|
|
380
|
|
|
|
|
|
|
|
|
|
|
|
69,491
|
|
|
Income (Loss) from Continuing Operations
|
|
|
113,723
|
|
|
|
4,813
|
|
|
|
1,791
|
|
|
|
(3,804
|
)
|
|
|
|
|
|
|
|
|
|
|
116,523
|
|
Loss from Discontinued Operations, Net of Tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income (Loss) Applicable to Common Stock
|
|
$
|
113,723
|
|
|
$
|
4,813
|
|
|
$
|
1,791
|
|
|
$
|
(3,804
|
)
|
|
$
|
|
|
|
$
|
|
|
|
$
|
116,523
|
|
|
Total Assets
|
|
$
|
3,020,471
|
|
|
$
|
231,839
|
|
|
$
|
21,647
|
|
|
$
|
60,462
|
|
|
$
|
|
|
|
$
|
(90,876
|
)
|
|
$
|
3,243,543
|
|
|
Capital Expenditures/Investments
|
|
$
|
134,570
|
|
|
$
|
231
|
|
|
$
|
160
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
134,961
|
|
|
Year Ended September 30, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
Revenues
(a)
|
|
$
|
1,513,839
|
|
|
$
|
1,138,440
|
|
|
$
|
10,175
|
|
|
$
|
119
|
|
|
$
|
|
|
|
$
|
(16,565
|
)
|
|
$
|
2,646,008
|
|
|
Operating Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of Energy-Related Sales
|
|
|
892,376
|
|
|
|
1,071,563
|
|
|
|
7,815
|
|
|
|
|
|
|
|
|
|
|
|
(16,565
|
)
|
|
|
1,955,189
|
|
Operation
|
|
|
206,623
|
|
|
|
23,253
|
|
|
|
2,053
|
|
|
|
3,730
|
|
|
|
|
|
|
|
|
|
|
|
235,659
|
|
Maintenance
|
|
|
39,685
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
39,685
|
|
Depreciation and Amortization
|
|
|
89,907
|
|
|
|
674
|
|
|
|
24
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
90,605
|
|
General Taxes and Other Assessments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue Taxes
|
|
|
55,949
|
|
|
|
753
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
56,702
|
|
Other
|
|
|
40,648
|
|
|
|
2,561
|
|
|
|
87
|
|
|
|
25
|
|
|
|
|
|
|
|
|
|
|
|
43,321
|
|
|
Total Operating Expenses
|
|
|
1,325,188
|
|
|
|
1,098,804
|
|
|
|
9,979
|
|
|
|
3,755
|
|
|
|
|
|
|
|
(16,565
|
)
|
|
|
2,421,161
|
|
|
Operating Income (Loss)
|
|
|
188,651
|
|
|
|
39,636
|
|
|
|
196
|
|
|
|
(3,636
|
)
|
|
|
|
|
|
|
|
|
|
|
224,847
|
|
Other Income (Expenses)Net
|
|
|
2,615
|
|
|
|
39
|
|
|
|
446
|
|
|
|
3,220
|
|
|
|
|
|
|
|
(2,942
|
)
|
|
|
3,378
|
|
Interest Expense
|
|
|
45,157
|
|
|
|
2,930
|
|
|
|
|
|
|
|
3,723
|
|
|
|
|
|
|
|
(2,942
|
)
|
|
|
48,868
|
|
Dividends on Washington Gas Preferred Stock
|
|
|
1,320
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,320
|
|
Income Tax Expense
|
|
|
54,900
|
|
|
|
14,319
|
|
|
|
275
|
|
|
|
643
|
|
|
|
|
|
|
|
|
|
|
|
70,137
|
|
|
Income (Loss) from Continuing Operations
|
|
|
89,889
|
|
|
|
22,426
|
|
|
|
367
|
|
|
|
(4,782
|
)
|
|
|
|
|
|
|
|
|
|
|
107,900
|
|
Loss from Discontinued Operations, Net of Tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income (Loss) Applicable to Common Stock
|
|
$
|
89,889
|
|
|
$
|
22,426
|
|
|
$
|
367
|
|
|
$
|
(4,782
|
)
|
|
$
|
|
|
|
$
|
|
|
|
$
|
107,900
|
|
|
Total Assets
|
|
$
|
2,836,492
|
|
|
$
|
224,150
|
|
|
$
|
12,475
|
|
|
$
|
70,329
|
|
|
$
|
|
|
|
$
|
(97,085
|
)
|
|
$
|
3,046,361
|
|
|
Capital Expenditures/Investments
|
|
$
|
162,561
|
|
|
$
|
1,885
|
|
|
$
|
85
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
164,531
|
|
|
113
WGL
Holdings, Inc.
Washington Gas Light Company
Part II
Item 8. Financial Statements and Supplementary Data
(continued)
Notes to Consolidated Financial Statements
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Segment Financial
Information
|
|
|
|
|
|
|
Non-Utility Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
Regulated
|
|
|
Retail Energy-
|
|
|
Design-Build
|
|
|
Other
|
|
|
Discontinued
|
|
|
|
|
|
|
|
(In thousands)
|
|
Utility
|
|
|
Marketing
|
|
|
Energy Systems
|
|
|
Activities
|
|
|
Operations
|
|
|
Eliminations
|
|
|
Consolidated
|
|
|
|
|
Year Ended September 30, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
Revenues
(a)
|
|
$
|
1,637,491
|
|
|
$
|
1,001,596
|
|
|
$
|
13,138
|
|
|
$
|
639
|
|
|
$
|
|
|
|
$
|
(14,981
|
)
|
|
$
|
2,637,883
|
|
|
Operating Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of Energy-Related Sales
|
|
|
1,031,650
|
|
|
|
960,516
|
|
|
|
11,044
|
|
|
|
|
|
|
|
|
|
|
|
(14,981
|
)
|
|
|
1,988,229
|
|
Operation
|
|
|
198,044
|
|
|
|
16,944
|
|
|
|
1,736
|
|
|
|
2,875
|
|
|
|
|
|
|
|
|
|
|
|
219,599
|
|
Maintenance
|
|
|
38,423
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
38,423
|
|
Depreciation and Amortization
|
|
|
92,712
|
|
|
|
333
|
|
|
|
10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
93,055
|
|
General Taxes and Other Assessments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue Taxes
|
|
|
55,964
|
|
|
|
1,395
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
57,359
|
|
Other
|
|
|
40,726
|
|
|
|
(1,976
|
)
|
|
|
49
|
|
|
|
29
|
|
|
|
|
|
|
|
|
|
|
|
38,828
|
|
|
Total Operating Expenses
|
|
|
1,457,519
|
|
|
|
977,212
|
|
|
|
12,839
|
|
|
|
2,904
|
|
|
|
|
|
|
|
(14,981
|
)
|
|
|
2,435,493
|
|
|
Operating Income (Loss)
|
|
|
179,972
|
|
|
|
24,384
|
|
|
|
299
|
|
|
|
(2,265
|
)
|
|
|
|
|
|
|
|
|
|
|
202,390
|
|
Other Income (Expenses)Net
|
|
|
1,950
|
|
|
|
3
|
|
|
|
357
|
|
|
|
3,784
|
|
|
|
|
|
|
|
(2,853
|
)
|
|
|
3,241
|
|
Interest Expense
|
|
|
44,026
|
|
|
|
3,172
|
|
|
|
|
|
|
|
3,959
|
|
|
|
|
|
|
|
(2,853
|
)
|
|
|
48,304
|
|
Dividends on Washington Gas Preferred Stock
|
|
|
1,320
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,320
|
|
Income Tax Expense (Benefit)
|
|
|
51,977
|
|
|
|
7,900
|
|
|
|
206
|
|
|
|
1,230
|
|
|
|
|
|
|
|
|
|
|
|
61,313
|
|
|
Income (Loss) from Continuing Operations
|
|
|
84,599
|
|
|
|
13,315
|
|
|
|
450
|
|
|
|
(3,670
|
)
|
|
|
|
|
|
|
|
|
|
|
94,694
|
|
Loss from Discontinued Operations, Net of Tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(7,116
|
)
|
|
|
|
|
|
|
(7,116
|
)
|
|
Net Income (Loss) Applicable to Common Stock
|
|
$
|
84,599
|
|
|
$
|
13,315
|
|
|
$
|
450
|
|
|
$
|
(3,670
|
)
|
|
$
|
(7,116
|
)
|
|
$
|
|
|
|
$
|
87,578
|
|
|
Total Assets
|
|
$
|
2,574,186
|
|
|
$
|
226,675
|
|
|
$
|
12,061
|
|
|
$
|
107,089
|
|
|
$
|
|
|
|
$
|
(128,605
|
)
|
|
$
|
2,791,406
|
|
|
Capital
Expenditures/Investments
(b)
|
|
$
|
157,906
|
|
|
$
|
1,849
|
|
|
$
|
2
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
159,757
|
|
|
|
|
|
(a)
|
|
Operating revenues are reported
gross of revenue taxes. Revenue taxes of both the regulated
utility and the retail energy-marketing segments include gross
receipts taxes. Revenue taxes of the regulated utility segment
also include PSC fees, franchise fees and energy
taxes.
|
(b)
|
|
Excludes capital expenditures of
discontinued operations totaling $158 thousand for fiscal
year ended September 30, 2006.
|
|
|
17.
|
RELATED PARTY
TRANSACTIONS
|
WGL Holdings and its subsidiaries engage in transactions during
the ordinary course of business. Intercompany transactions and
balances have been eliminated from the consolidated financial
statements of WGL Holdings. Washington Gas provides accounting,
treasury, legal and other administrative and general support to
affiliates, and files consolidated tax returns that include
affiliated taxable transactions. The actual costs of these
services are billed to the appropriate affiliates and to the
extent such billings are not yet paid, they are reflected in
Receivables from associated companies on Washington
Gass balance sheets. Washington Gas assigns or allocates
these costs directly to its affiliates and, therefore, does not
recognize revenues or expenses associated with providing these
services.
In connection with billing for unregulated third-party marketers
and with other miscellaneous billing processes, Washington Gas
collects cash on behalf of affiliates and transfers the cash as
quickly as reasonably possible. Cash collected by Washington Gas
on behalf of its affiliates but not yet transferred is recorded
in Payables to associated companies on the
Washington Gas balance sheets. These transactions recorded by
Washington Gas impact the balance sheet only.
At September 30, 2008 and 2007, the Washington Gas Balance
Sheets reflected a receivable from associated companies of
$4.6 million and $970,000, respectively. At
September 30, 2008 and 2007, the Washington Gas Balance
Sheets reflected a payable to associated companies of
$22.7 million and $17.2 million, respectively, related
to the activities described above.
114
WGL
Holdings, Inc.
Washington Gas Light Company
Part II
Item 8. Financial Statements and Supplementary Data
(continued)
Notes to Consolidated Financial Statements
Additionally, Washington Gas provides gas balancing services
related to storage, injections, withdrawals and deliveries to
all energy marketers participating in the sale of natural gas on
an unregulated basis through the customer choice programs that
operate in its service territory. These balancing services
include the sale of natural gas supply commodities related to
various peaking arrangements contractually supplied to
Washington Gas and then partially allocated and assigned by
Washington Gas to the energy marketers, including WGEServices.
Washington Gas records revenues for these balancing services
pursuant to tariffs approved by the appropriate regulatory
bodies. In conjunction with such services and the related sales
and purchases of natural gas, Washington Gas charged
WGEServices, an affiliated energy marketer, $15.9 million,
$16.6 million and $15.0 million for the fiscal years
ended September 30, 2008, 2007 and 2006, respectively.
These related party amounts have been eliminated in the
consolidated financial statements of WGL Holdings.
As a result of these balancing services, an imbalance is created
for volumes of natural gas received by Washington Gas that are
not equal to the volumes of natural gas delivered to customers
of the energy marketers. WGEServices has recognized an accounts
receivable from Washington Gas in the amount of
$5.4 million and $7.0 million at September 30,
2008 and 2007, respectively, related to an imbalance in gas
volumes. Due to regulatory treatment, these receivables are not
eliminated in the consolidated financial statements of WGL
Holdings. Refer to Note 1
Accounting Policies
for a further discussion of these imbalance transactions.
115
WGL
Holdings, Inc.
Washington Gas Light Company
Part II
Item 8. Financial Statements and Supplementary Data
(continued)
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of WGL Holdings, Inc.
We have audited the accompanying consolidated balance sheets and
consolidated statements of capitalization of WGL Holdings, Inc.
and subsidiaries (the Company) as of
September 30, 2008 and 2007, and the related consolidated
statements of income, common shareholders equity and
comprehensive income, and cash flows for each of the three years
in the period ended September 30, 2008. Our audits also
included the financial statement schedule listed in the Index at
Item 15 under Schedule II. These financial statements
and financial statement schedule are the responsibility of the
Companys management. Our responsibility is to express an
opinion on the financial statements and financial statement
schedule based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present
fairly, in all material respects, the financial position of WGL
Holdings, Inc. and subsidiaries as of September 30, 2008
and 2007, and the results of their operations and their cash
flows for each of the three years in the period ended
September 30, 2008, in conformity with accounting
principles generally accepted in the United States of America.
Also, in our opinion, such financial statement schedule, when
considered in relation to the basic consolidated financial
statements taken as a whole, presents fairly, in all material
respects, the information set forth therein.
As discussed in Note 1 to the consolidated financial
statements, the Company adopted Statement of Financial
Accounting Standards No. 158,
Employers Accounting
for Defined Benefit Pension and Other Postretirement Plans
,
as of September 30, 2007.
We have also audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
Companys internal control over financial reporting as of
September 30, 2008, based on the criteria established in
Internal Control Integrated Framework
issued
by the Committee of Sponsoring Organizations of the Treadway
Commission and our report dated December 1, 2008 expressed
an unqualified opinion on the Companys internal control
over financial reporting.
DELOITTE & TOUCHE LLP
McLean, Virginia
December 1, 2008
116
WGL
Holdings, Inc.
Washington Gas Light Company
Part II
Item 8. Financial Statements and Supplementary Data
(continued)
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholder of Washington Gas
Light Company
We have audited the accompanying balance sheets and statements
of capitalization of Washington Gas Light Company (the
Company) as of September 30, 2008 and 2007, and
the related statements of income, common shareholders
equity and comprehensive income, and cash flows for each of the
three years in the period ended September 30, 2008. Our
audits also included the financial statement schedule listed in
the Index at Item 15 under Schedule II. These
financial statements and financial statement schedule are the
responsibility of the Companys management. Our
responsibility is to express an opinion on the financial
statements and financial statement schedule based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. The Company is not required to
have, nor were we engaged to perform, an audit of its internal
control over financial reporting. Our audits included
consideration of internal control over financial reporting as a
basis for designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion
on the effectiveness of the Companys internal control over
financial reporting. Accordingly, we express no such opinion. An
audit also includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all
material respects, the financial position of Washington Gas
Light Company as of September 30, 2008 and 2007, and the
results of its operations and its cash flows for each of the
three years in the period ended September 30, 2008, in
conformity with accounting principles generally accepted in the
United States of America. Also, in our opinion, such financial
statement schedule, when considered in relation to the basic
financial statements taken as a whole, presents fairly, in all
material respects, the information set forth therein.
As discussed in Note 1 to the financial statements, the
Company adopted Statement of Financial Accounting Standards
No. 158,
Employers Accounting for Defined Benefit
Pension and Other Postretirement Plans
, as of
September 30, 2007.
DELOITTE & TOUCHE LLP
McLean, Virginia
December 1, 2008
117
WGL
Holdings, Inc.
Washington Gas Light Company
Part II
Item 8. Financial Statements and Supplementary Data
(concluded)
SUPPLEMENTARY
FINANCIAL INFORMATION (Unaudited)
QUARTERLY
FINANCIAL DATA
All adjustments necessary for a fair presentation have been
included in the quarterly information provided below. Due to the
seasonal nature of our business, we report substantial
variations in operations on a quarterly basis.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended
|
|
|
|
(In thousands, except per share
data)
|
|
December 31
(a)(b)
|
|
|
March 31
|
|
|
June 30
|
|
|
September 30
(c)
|
|
|
|
|
Fiscal Year 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating revenues
|
|
$
|
751,626
|
|
|
$
|
1,020,037
|
|
|
$
|
464,649
|
|
|
$
|
391,882
|
|
Operating income (loss)
|
|
|
89,935
|
|
|
|
145,009
|
|
|
|
9,502
|
|
|
|
(12,840
|
)
|
Net income (loss) applicable to common stock
|
|
|
47,197
|
|
|
|
81,038
|
|
|
|
(492
|
)
|
|
|
(11,220
|
)
|
Earnings (loss) per average share of common stock:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
(d)
|
|
|
0.96
|
|
|
|
1.64
|
|
|
|
(0.01
|
)
|
|
|
(0.22
|
)
|
Diluted
(d)
|
|
|
0.95
|
|
|
|
1.63
|
|
|
|
(0.01
|
)
|
|
|
(0.22
|
)
|
Fiscal Year 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating revenues
|
|
$
|
732,962
|
|
|
$
|
1,119,903
|
|
|
$
|
467,458
|
|
|
$
|
325,685
|
|
Operating income
|
|
|
87,752
|
|
|
|
115,916
|
|
|
|
32,616
|
|
|
|
(11,437
|
)
|
Net income (loss) applicable to common stock
|
|
|
45,098
|
|
|
|
63,375
|
|
|
|
12,971
|
|
|
|
(13,544
|
)
|
Earnings (loss) per average share of common stock:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
(d)
|
|
|
0.92
|
|
|
|
1.29
|
|
|
|
0.26
|
|
|
|
(0.27
|
)
|
Diluted
(d)
|
|
|
0.92
|
|
|
|
1.29
|
|
|
|
0.26
|
|
|
|
(0.27
|
)
|
|
|
|
|
|
(a)
|
|
Earnings for the regulated
utility segment for the quarter ended December 31, 2007
included $2.0 million (pre-tax) of favorable regulatory
adjustments applicable to prior fiscal years due to a Final
Order for the PSC of MD that allowed full recovery of HHC costs
as well as an interpretive change in the calculation of
interruptible revenue sharing in the District of Columbia.
Additionally, earnings for the regulated utility segment for the
quarter ended December 31, 2007 included $1.9 million
related to the reversal of expenses that were incurred in prior
fiscal years for initial implementation costs allocable to the
District of Columbia associated with our business process
outsourcing plan. These costs were recorded to a regulatory
asset in the first quarter of fiscal year 2008 upon approval of
10-year
amortization accounting by the PSC of DC in a December 28,
2007 Final Order.
|
|
(b)
|
|
Earnings for the regulated
utility segment for the quarter ended December 31, 2006
included a $3.9 million (pre-tax) adjustment that reduced
depreciation expense applicable to the period from
January 1, 2006 through September 30, 2006. This
adjustment was recorded upon approval by the VA Staff.
|
|
(c)
|
|
Earnings for the regulated
utility segment for the quarter ended September 30, 2008
included a benefit of $2.6 million related to an adjustment
to deferred taxes.
|
|
(d)
|
|
The sum of quarterly per share
amounts may not equal annual per share amounts as the quarterly
calculations are based on varying numbers of common
share.
|
118
WGL
Holdings, Inc.
Washington Gas Light Company
Part II
ITEM 9. CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
|
|
ITEM 9A.
|
CONTROLS
AND PROCEDURES
|
EVALUATION OF
DISCLOSURE CONTROLS AND PROCEDURES
Senior management, including the Chairman and Chief Executive
Officer, and the Vice President and Chief Financial Officer,
evaluated the effectiveness of WGL Holdings disclosure
controls and procedures as of September 30, 2008. Based on
this evaluation process, the Chairman and Chief Executive
Officer, and the Vice President and Chief Financial Officer have
concluded that WGL Holdings disclosure controls and
procedures were effective as of September 30, 2008.
MANAGEMENTS
REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Management of WGL Holdings is responsible for establishing and
maintaining adequate internal control over financial reporting
as defined in
Rules 13a-15(f)
and
15d-15(f)
under the Securities Exchange Act of 1934. WGL Holdings
internal control over financial reporting is designed to provide
reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for
external purposes in accordance with generally accepted
accounting principles in the United States of America.
Because of the inherent limitations of internal control over
financial reporting, including the possibility of human error
and the circumvention or overriding of controls, material
misstatements may not be prevented or detected on a timely
basis. Accordingly, even internal controls determined to be
effective can provide only reasonable assurance with respect to
financial statement preparation and presentation. Furthermore,
projections of any evaluation of the effectiveness to future
periods are subject to the risk that such controls may become
inadequate due to changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.
Management has assessed the effectiveness of WGL Holdings
internal control over financial reporting as of
September 30, 2008 based upon the criteria set forth in a
report entitled
Internal Control Integrated
Framework
issued by the Committee of Sponsoring
Organizations of the Treadway Commission. Based on its
assessment, management has concluded that WGL Holdings
maintained effective internal control over financial reporting
as of September 30, 2008.
CHANGES IN
INTERNAL CONTROL OVER FINANCIAL REPORTING
There have been no changes in the internal control over
financial reporting of WGL Holdings during the quarter ended
September 30, 2008 that have materially affected, or are
reasonably likely to materially affect, the internal control
over financial reporting of WGL Holdings.
119
WGL Holdings, Inc.
Washington Gas Light Company
Part II
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of WGL Holdings, Inc.
We have audited the internal control over financial reporting of
WGL Holdings, Inc. and subsidiaries (the Company) as
of September 30, 2008, based on criteria established in
Internal Control Integrated Framework
issued
by the Committee of Sponsoring Organizations of the Treadway
Commission. The Companys management is responsible for
maintaining effective internal control over financial reporting
and for its assessment of the effectiveness of internal control
over financial reporting, included in the accompanying
Managements Report on Internal Control over Financial
Reporting. Our responsibility is to express an opinion on the
Companys internal control over financial reporting based
on our audit.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control
over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of
internal control over financial reporting, assessing the risk
that a material weakness exists, testing and evaluating the
design and operating effectiveness of internal control based on
the assessed risk, and performing such other procedures as we
considered necessary in the circumstances. We believe that our
audit provides a reasonable basis for our opinion.
A companys internal control over financial reporting is a
process designed by, or under the supervision of, the
companys principal executive and principal financial
officers, or persons performing similar functions, and effected
by the companys board of directors, management, and other
personnel to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A companys
internal control over financial reporting includes those
policies and procedures that (1) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of
management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
companys assets that could have a material effect on the
financial statements.
Because of the inherent limitations of internal control over
financial reporting, including the possibility of collusion or
improper management override of controls, material misstatements
due to error or fraud may not be prevented or detected on a
timely basis. Also, projections of any evaluation of the
effectiveness of the internal control over financial reporting
to future periods are subject to the risk that the controls may
become inadequate because of changes in conditions, or that the
degree of compliance with the policies or procedures may
deteriorate.
In our opinion, the Company maintained, in all material
respects, effective internal control over financial reporting as
of September 30, 2008, based on the criteria established in
Internal Control Integrated Framework
issued
by the Committee of Sponsoring Organizations of the Treadway
Commission.
We have also audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
consolidated financial statements and the financial statement
schedule as of and for the year ended September 30, 2008 of
the Company and our report dated December 1, 2008 expressed
an unqualified opinion on those consolidated financial
statements and financial statement schedule.
DELOITTE & TOUCHE LLP
McLean, Virginia
December 1, 2008
120
WGL Holdings, Inc.
Washington Gas Light Company
Part II
|
|
ITEM 9AT.
|
CONTROLS
AND PROCEDURES
|
Washington Gas is a non-accelerated filer; therefore, management
has included this Item 9AT as part of this combined report
being filed by the two separate registrants: WGL Holdings and
Washington Gas. Managements Report on Internal Control
over Financial Reporting included below is furnished to, but not
filed with, the Securities and Exchange Commission.
EVALUATION OF
DISCLOSURE CONTROLS AND PROCEDURES
Senior management, including the Chairman and Chief Executive
Officer, and the Vice President and Chief Financial Officer,
evaluated the effectiveness of Washington Gass disclosure
controls and procedures as of September 30, 2008. Based on
this evaluation process, the Chairman and Chief Executive
Officer, and the Vice President and Chief Financial Officer have
concluded that Washington Gass disclosure controls and
procedures were effective as of September 30, 2008.
MANAGEMENTS
REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Management of Washington Gas is responsible for establishing and
maintaining adequate internal control over financial reporting
as defined in
Rules 13a-15(f)
and
15d-15(f)
under the Securities Exchange Act of 1934. Washington Gass
internal control over financial reporting is designed to provide
reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for
external purposes in accordance with generally accepted
accounting principles in the United States of America.
Because of the inherent limitations of internal control over
financial reporting, including the possibility of human error
and the circumvention or overriding of controls, material
misstatements may not be prevented or detected on a timely
basis. Accordingly, even internal controls determined to be
effective can provide only reasonable assurance with respect to
financial statement preparation and presentation. Furthermore,
projections of any evaluation of the effectiveness to future
periods are subject to the risk that such controls may become
inadequate due to changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.
Management has assessed the effectiveness of Washington
Gass internal control over financial reporting as of
September 30, 2008 based upon the criteria set forth in a
report entitled
Internal Control Integrated
Framework
issued by the Committee of Sponsoring
Organizations of the Treadway Commission. Based on its
assessment, management has concluded that Washington Gas
maintained effective internal control over financial reporting
as of September 30, 2008.
This Annual Report on
Form 10-K
does not include an attestation report of Washington Gass
registered public accounting firm regarding internal control
over financial reporting pursuant to temporary rules of the
Securities and Exchange Commission that permit Washington Gas to
provide only this managements report in this Annual Report
on
Form 10-K.
CHANGES IN
INTERNAL CONTROL OVER FINANCIAL REPORTING
There have been no changes in the internal control over
financial reporting of Washington Gas during the quarter ended
September 30, 2008 that have materially affected, or are
reasonably likely to materially affect, the internal control
over financial reporting of Washington Gas.
121
WGL
Holdings, Inc.
Washington Gas Light Company
ITEM 10. DIRECTORS
AND EXECUTIVE OFFICERS OF THE REGISTRANTS
Information concerning the Companys Board of Directors and
the audit committee financial expert contained in WGL
Holdings definitive
Proxy Statement
and Washington
Gass definitive
Information Statement
for the
March 5, 2009 Annual Meetings of Shareholders is hereby
incorporated by reference. Information related to Executive
Officers is reflected in Part I hereof.
ITEM 11. EXECUTIVE
COMPENSATION
Information concerning Executive Compensation contained in WGL
Holdings definitive
Proxy Statement
and Washington
Gass definitive
Information Statement
for the
March 5, 2009 Annual Meetings of Shareholders is hereby
incorporated by reference. Information related to Executive
Officers as of September 30, 2008 is reflected in
Part I hereof.
ITEM 12. SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The information captioned
Security Ownership of Management
and Certain Beneficial Owners
and the information captioned
Equity Compensation Plan Information
in WGL
Holdings definitive
Proxy Statement
and Washington
Gass definitive
Information Statement
for the
March 5, 2009 Annual Meetings of Shareholders is hereby
incorporated by reference.
ITEM 13. CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS
The information captioned
Related Person Transactions During
Fiscal Year 2008
in WGL Holdings definitive
Proxy
Statement
and Washington Gass definitive
Information Statement
for the March 5, 2009 Annual
Meetings of Shareholders is hereby incorporated by reference.
ITEM 14. PRINCIPAL
ACCOUNTANT FEES AND SERVICES
The information captioned
Fiscal Years 2008 and 2007 Audit
Firm Fee Summary
in WGL Holdings definitive
Proxy
Statement
and Washington Gass definitive
Information Statement
for the March 5, 2009 Annual
Meetings of Shareholders is hereby incorporated by reference.
123
WGL
Holdings, Inc.
Washington Gas Light Company
Part IV
Item 15. Exhibits and Financial Statement Schedules
ITEM 15. EXHIBITS AND
FINANCIAL STATEMENT SCHEDULES
Financial
Statement Schedules
(a)(1)
All of the financial statements and financial statement
schedules filed as a part of the Annual Report on
Form 10-K
are included in Item 8.
(a)(2)
Schedule II should be read in conjunction with the
financial statements in this report. Schedules not included
herein have been omitted because they are not applicable or the
required information is shown in the financial statements or
notes thereto.
|
|
|
Schedule/
|
|
|
Exhibit
|
|
Description
|
|
II
|
|
Valuation and Qualifying Accounts and Reserves for the years
ended September 30, 2008, 2007 and 2006WGL Holdings,
Inc.
|
|
|
|
|
|
Valuation and Qualifying Accounts and Reserves for the years
ended September 30, 2008, 2007 and 2006Washington Gas
Light Company.
|
|
|
|
(a)(3)
|
|
Exhibits
|
|
|
Exhibits Filed Herewith:
|
|
|
|
10.1
|
|
WGL Holdings, Inc. and Washington Gas Light Company Change in
Control Severance Plan for Certain Executives, as amended on
September 24, 2008.*
|
|
|
|
10.2
|
|
WGL Holdings, Inc. and Washington Gas Light Company Deferred
Compensation Plan for Outside Directors, amended and restated
effective January 1, 2005, as further amended on
September 24, 2008.*
|
|
|
|
10.3
|
|
Washington Gas Light Company Supplemental Executive Retirement
Plan, amended and restated effective January 1, 2005, as
further amended on September 24,2008.*
|
|
|
|
12.1
|
|
Computation of Ratio of Earnings to Fixed ChargesWGL
Holdings, Inc.
|
|
|
|
12.2
|
|
Computation of Ratio of Earnings to Fixed Charges and Preferred
Stock DividendsWGL Holdings, Inc.
|
|
|
|
12.3
|
|
Computation of Ratio of Earnings to Fixed
ChargesWashington Gas Light Company.
|
|
|
|
12.4
|
|
Computation of Ratio of Earnings to Fixed Charges and Preferred
Stock DividendsWashington Gas Light Company
|
|
|
|
21
|
|
Subsidiaries of WGL Holdings, Inc.
|
|
|
|
23
|
|
Consent of Deloitte & Touche LLP.
|
|
|
|
24
|
|
Power of Attorney
|
|
|
|
31.1
|
|
Certification of James H. DeGraffenreidt, Jr., the Chairman and
Chief Executive Officer of WGL Holdings, Inc., pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
|
|
|
|
31.2
|
|
Certification of Vincent L. Ammann, Jr., the Vice President and
Chief Financial Officer of WGL Holdings, Inc., pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
|
|
|
|
31.3
|
|
Certification of James H. DeGraffenreidt, Jr., the Chairman and
Chief Executive Officer of Washington Gas Light Company,
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
|
|
|
|
31.4
|
|
Certification of Vincent L. Ammann, Jr., the Vice President and
Chief Financial Officer of Washington Gas Light Company,
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
|
|
|
|
32
|
|
Certification of James H. DeGraffenreidt, Jr., the Chairman and
Chief Executive Officer, and Vincent L. Ammann, Jr., the Vice
President and Chief Financial Officer, pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
|
124
WGL Holdings, Inc.
Washington Gas Light Company
Part IV
Item 15. Exhibits and Financial Statement Schedules
(continued)
|
|
|
Schedule/
|
|
|
Exhibit
|
|
Description
|
|
|
|
|
(a)(3)
|
|
Exhibits (continued)
|
|
|
|
|
|
Exhibits Incorporated by Reference:
|
|
|
|
2
|
|
Plan of Merger between WGL Holdings, Inc. and Washington Gas
Light Company, filed on
Form S-4
dated February 2, 2000.
|
|
|
|
3
|
|
Articles of Incorporation & Bylaws:
|
|
|
|
|
|
Washington Gas Light Company Charter, filed on
Form S-3
dated July 21, 1995. WGL Holdings, Inc. Charter, filed on
Form S-4
dated February 2, 2000.
|
|
|
|
|
|
Bylaws of WGL Holdings, Inc. as amended on September 26,
2007, filed as Exhibit 3.1 to
Form 10-K
for the fiscal year ended September 30, 2007.
|
|
|
|
|
|
Bylaws of Washington Gas Light Company as amended on
September 26, 2007, filed as Exhibit 3.2 to
Form 10-K
for the fiscal year ended September 30, 2007.
|
|
|
|
4
|
|
Instruments Defining the Rights of Security Holders including
Indentures:
|
|
|
|
|
|
Indenture, dated September 1, 1991 between Washington Gas
Light Company and The Bank of New York, as Trustee, regarding
issuance of unsecured notes, filed as an exhibit to
Form 8-K
on September 19, 1991.
|
|
|
|
|
|
Supplemental Indenture, dated September 1, 1993 between
Washington Gas Light Company and The Bank of New York, as
Trustee, regarding the addition of a new section to the
Indenture dated September 1, 1991, filed as an exhibit to
Form 8-K
on September 10, 1993.
|
|
|
|
|
|
Other Services Contracts
|
|
|
|
|
|
Master Services Agreement, effective June 19, 2007, with
Accenture LLP, related to business process outsourcing, and
service technology enhancements, filed as Exhibit 10.1 to
Form 10-Q
for the quarter ended June 30, 2007. Portions of this
exhibit were omitted pursuant to a request for confidential
treatment submitted to the Securities and Exchange Commission.
|
|
|
|
|
|
Gas transportation and storage contracts
|
|
|
|
|
|
Service Agreement, effective April 1, 2007, with Hardy
Storage Company related to Firm Storage Service, filed as
Exhibit 10.1 to
Form 10-K
for the fiscal year ended September 30, 2007.
|
|
|
|
|
|
Service Agreement, effective November 1, 2007, with
Columbia Gas Transmission Company related to Firm Transportation
Service, filed as Exhibit 10.2 to
Form 10-K
for the fiscal year ended September 30, 2007.
|
|
|
|
|
|
Service Agreement, effective November 1, 2007, with
Transcontinental Gas Pipe Line Corporation related to Firm
Transportation Service, filed as Exhibit 10.3 to
Form 10-K
for the fiscal year ended September 30, 2007.
|
|
|
|
|
|
Service Agreement, effective November 1, 2005, with
Columbia Gulf Transmission Company related to Firm
Transportation Service, filed as Exhibit 10.1 to
Form 10-K
for the fiscal year ended September 30, 2005.
|
|
|
|
|
|
Service Agreement, effective November 1, 2005, with
Columbia Gas Transmission Corporation related to Firm Storage
Service (Agreement 85037), filed as Exhibit 10.2 to
Form 10-K
for the fiscal year ended September 30, 2005.
|
|
|
|
|
|
Service Agreement, effective November 1, 2005, with
Columbia Gas Transmission Corporation related to Storage Service
(Agreement 85038), filed as Exhibit 10.3 to
Form 10-K
for the fiscal year ended September 30, 2005.
|
|
|
|
|
|
Service Agreement, effective November 1, 2005, with
Columbia Gas Transmission Corporation related to Firm
Transportation Service (Agreement 85036), filed as
Exhibit 10.4 to
Form 10-K
for the fiscal year ended September 30, 2005.
|
|
|
|
|
|
Service Agreement, effective November 1, 2005, with Cove
Point LNG FPS2 related to Peaking Service, filed as
Exhibit 10.5 to
Form 10-K
for the fiscal year ended September 30, 2005.
|
125
WGL Holdings, Inc.
Washington Gas Light Company
Part IV
Item 15. Exhibits and Financial Statement Schedules
(continued)
|
|
|
Schedule/
|
|
|
Exhibit
|
|
Description
|
|
|
|
|
(a)(3)
|
|
Exhibits (continued)
|
|
|
|
|
|
Service Agreement, effective November 1, 2005, with Cove
Point LNG FPS3 related to Peaking Service, filed as
Exhibit 10.6 to
Form 10-K
for the fiscal year ended September 30, 2005
|
|
|
|
|
|
Service Agreement, effective May 1, 2005, as amended, with
Dominion Cove Point LNG, LP related to Firm Transportation
Service, filed as Exhibit 10.2 to
Form 10-K
for the fiscal year ended September 30, 2004
|
|
|
|
|
|
Service Agreement, effective November 1, 2004, with
Dominion Transmission Inc. related to Firm Transportation
Service from the Mid Atlantic project, filed as
Exhibit 10.5 to
Form 10-K
for the fiscal year ended September 30, 2004
|
|
|
|
|
|
Service Agreement, renegotiated and effective June 1, 2004,
as amended, with Columbia Gas Transmission Corporation related
to Firm Storage Service, filed as Exhibit 10.7 to
Form 10-K
for the fiscal year ended September 30, 2004. (Agreement
78844)
|
|
|
|
|
|
Service Agreement, renegotiated and effective June 1, 2004,
as amended, with Columbia Gas Transmission Corporation related
to Firm Storage Service, filed as Exhibit 10.7 to
Form 10-K
for the fiscal year ended September 30, 2004. (Agreement
78845)
|
|
|
|
|
|
Service Agreement, renegotiated and effective June 1, 2004,
as amended, with Columbia Gas Transmission Corporation related
to Firm Storage Service, filed as Exhibit 10.7 to
Form 10-K
for the fiscal year ended September 30, 2004. (Agreement
78846)
|
|
|
|
|
|
Service Agreement, renegotiated and effective June 1, 2004,
as amended, with Columbia Gas Transmission Corporation related
to Storage Service filed as Exhibit 10.8 to
Form 10-K
for the fiscal year ended September 30, 2004.
(Agreement 78838)
|
|
|
|
|
|
Service Agreement, renegotiated and effective June 1, 2004,
as amended, with Columbia Gas Transmission Corporation related
to Storage Service filed as Exhibit 10.8 to
Form 10-K
for the fiscal year ended September 30, 2004.
(Agreement 78839)
|
|
|
|
|
|
Service Agreement, renegotiated and effective June 1, 2004,
as amended, with Columbia Gas Transmission Corporation related
to Storage Service filed as Exhibit 10.8 to
Form 10-K
for the fiscal year ended September 30, 2004.
(Agreement 78840)
|
|
|
|
|
|
Service Agreement, renegotiated and effective June 1, 2004,
as amended, with Columbia Gas Transmission Corporation related
to Firm Transportation Service, filed as Exhibit 10.9 to
Form 10-K
for the fiscal year ended September 30, 2004. (Agreement
78834)
|
|
|
|
|
|
Service Agreement, renegotiated and effective June 1, 2004,
as amended, with Columbia Gas Transmission Corporation related
to Firm Transportation Service, filed as Exhibit 10.9 to
Form 10-K
for the fiscal year ended September 30, 2004. (Agreement
78835)
|
|
|
|
|
|
Service Agreement, renegotiated and effective June 1, 2004,
as amended, with Columbia Gas Transmission Corporation related
to Firm Transportation Service, filed as Exhibit 10.9 to
Form 10-K
for the fiscal year ended September 30, 2004. (Agreement
78836)
|
|
|
|
|
|
Service Agreement, effective January 1, 1996, with
Transcontinental Gas Pipe Line Corporation related to Firm
Transportation Service, filed as Exhibit 10.11 to
Form 10-K
for the fiscal year ended September 30, 2004
|
|
|
|
|
|
Service Agreement effective November 1, 2002 with the
Transcontinental Gas Pipe Line Corporation for the MarketLink
Firm Transportation Capacity, filed as Exhibit 10.1 to
Form 10-K
for the fiscal year ended September 30, 2003
|
|
|
|
|
|
Service Agreement effective October 1, 1993 with
Transcontinental Gas Pipe Line Corporation related to General
Storage Service filed as Exhibit 10.3 to
Form 10-K
for the fiscal year ended September 30, 1993
|
126
WGL Holdings, Inc.
Washington Gas Light Company
Part IV
Item 15. Exhibits and Financial Statement Schedules
(concluded)
|
|
|
Schedule/
|
|
|
Exhibit
|
|
Description
|
|
|
|
|
(a)(3)
|
|
Exhibits (continued)
|
|
|
|
|
|
Service Agreement effective October 1, 1993 with Dominion
Transmission, Inc. related to Firm Transportation Service, filed
as Exhibit 10.11 to
Form 10-K
for the fiscal year ended September 30, 1993
|
|
|
|
|
|
Service Agreement effective October 1, 1993 with Dominion
Transmission, Inc. related to General Storage Service, filed as
Exhibit 10.13 to
Form 10-K
for the fiscal year ended September 30, 1993
|
|
|
|
|
|
Service Agreement effective August 1, 1991 with
Transcontinental Gas Pipe Line Corporation related to Washington
Storage Service, filed as Exhibit 10.16 to
Form 10-K
for the fiscal year ended September 30, 1993
|
|
|
|
|
|
Management Contracts with Executive Officers and Directors
|
|
|
|
|
|
WGL Holdings, Inc. Omnibus Incentive Compensation Plan, filed as
Exhibit 10.2 to
form 8-K
dated December 21, 2006.*
|
|
|
|
|
|
WGL Holdings, Inc. 1999 Incentive Compensation Plan, as amended
and restated as of March 5, 2003, filed as
Exhibit 10.15 to
Form 10-K
for the fiscal year ended September 30, 2004.*
|
|
|
|
|
|
Form of Nonqualified Stock Option Award Agreement, filed as
Exhibit 10.01 to
Form 8-K
dated October 5, 2004.*
|
|
|
|
|
|
Form of Performance Share Award Agreement, filed as
Exhibit 10.02 to
Form 8-K
dated October 5, 2004.*
|
|
|
|
|
|
WGL Holdings, Inc. and Washington Gas Light Company Deferred
Compensation Plan for Outside Directors, adopted
December 18, 1985, and amended as of November 1, 2000,
filed as Exhibit 10.2 to
Form 10-K
in the fiscal year ended September 30, 2001.*
|
|
|
|
|
|
Washington Gas Light Company Supplemental Executive Retirement
Plan amended November 1, 2000, filed as Exhibit 10.8
to
Form 10-K
for the fiscal year ended September 30, 2001.*
|
|
|
|
|
|
Debt and Credit Agreements
|
|
|
|
|
|
Amended and Restated Credit Agreement dated as of August 3,
2007 among WGL Holdings, Inc., the Lenders, Wachovia Bank,
National Association, as administrative agent; Bank of
Tokyo-Mitsubishi Trust Company, as syndication agent;
Citibank, N.A., SunTrust Bank and Wells Fargo Bank, National
Association, as documentation agents; and Wachovia Capital
Markets, LLC, as lead arranger and book runner, filed as
Exhibit 10.2 to
Form 10-Q
for the quarter ended June 30, 2007.
|
|
|
|
|
|
Amended and Restated Credit Agreement dated as of August 3,
2007 among Washington Gas Light Company, the Lenders, Wachovia
Bank, National Association, as administrative agent; Bank of
Tokyo-Mitsubishi Trust Company, as syndication agent;
Citibank, N.A., SunTrust Bank, and Wells Fargo Bank, National
Association, as documentation agents; and Wachovia Capital
Markets, LLC, as lead arranger and book runner, filed as
Exhibit 10.3 to
Form 10-Q
for the quarter ended June 30, 2007.
|
|
|
|
|
|
Form of Distribution Agreement dated June 14, 2006 among
Washington Gas Light Company and Citigroup Global Markets Inc.,
Banc of America Securities LLC, Merrill Lynch, Pierce,
Fenner & Smith Incorporated, SunTrust Capital Markets,
Inc., The Williams Capital Group, L.P. and Wachovia Capital
Markets, LLC regarding the issuance and sale by Washington Gas
Light Company of up to $300 million of Medium-Term Notes,
Series H under an Indenture dated as of September 1,
1991. Filed as Exhibit 1.1 to
Form 8-K
dated June 15, 2006.
|
|
|
|
|
|
* This asterisk designates an
agreement that is a compensatory plan or arrangement.
|
127
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
WGL Holdings, Inc. and Subsidiaries
|
|
Schedule IIValuation and Qualifying Accounts and
Reserves
|
|
Years Ended September 30, 2008, 2007 and 2006
|
|
|
|
|
|
|
|
|
Additions Charged To
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at
|
|
|
|
|
|
|
|
|
|
|
|
Balance
|
|
|
|
|
Beginning
|
|
|
|
Costs and
|
|
|
|
Other
|
|
|
|
|
|
|
|
at End of
|
|
(In thousands)
|
|
|
of Period
|
|
|
|
Expenses
|
|
|
|
Accounts
(a)
|
|
|
|
Deductions
(b)
|
|
|
|
Period
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Valuation and Qualifying Accounts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deducted from Assets in the Balance Sheet:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for Doubtful Accounts
|
|
|
$
|
14,488
|
|
|
|
$
|
19,958
|
|
|
|
$
|
4,657
|
|
|
|
$
|
22,002
|
|
|
|
$
|
17,101
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Valuation and Qualifying Accounts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deducted from Assets in the Balance Sheet:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for Doubtful Accounts
|
|
|
$
|
17,676
|
|
|
|
$
|
9,645
|
|
|
|
$
|
4,123
|
|
|
|
$
|
16,956
|
|
|
|
$
|
14,488
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Valuation and Qualifying Accounts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deducted from Assets in the Balance Sheet:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for Doubtful Accounts
|
|
|
$
|
16,835
|
|
|
|
$
|
16,203
|
|
|
|
$
|
4,548
|
|
|
|
$
|
19,910
|
|
|
|
$
|
17,676
|
|
|
Notes:
|
(a)
Recoveries
on receivables previously written off as uncollectible and
unclaimed customer deposits, overpayments, etc., not
refundable.
|
(b)
Includes
deductions for purposes for which reserves were provided or
revisions made of estimated exposure.
|
|
128
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Washington Gas Light Company
|
|
Schedule IIValuation and Qualifying Accounts and
Reserves
|
|
Years Ended September 30, 2008, 2007 and 2006
|
|
|
|
|
|
|
|
|
Additions Charged To
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at
|
|
|
|
|
|
|
|
|
|
|
|
Balance at
|
|
|
|
|
Beginning
|
|
|
|
Costs and
|
|
|
|
Other
|
|
|
|
|
|
|
|
End of
|
|
(In thousands)
|
|
|
of Period
|
|
|
|
Expenses
|
|
|
|
Accounts
(a)
|
|
|
|
Deductions
(b)
|
|
|
|
Period
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Valuation and Qualifying Accounts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deducted from Assets in the Balance Sheet:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for Doubtful Accounts
|
|
|
$
|
13,215
|
|
|
|
$
|
16,761
|
|
|
|
$
|
4,207
|
|
|
|
$
|
18,447
|
|
|
|
$
|
15,736
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Valuation and Qualifying Accounts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deducted from Assets in the Balance Sheet:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for Doubtful Accounts
|
|
|
$
|
16,543
|
|
|
|
$
|
7,884
|
|
|
|
$
|
4,123
|
|
|
|
$
|
15,335
|
|
|
|
$
|
13,215
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Valuation and Qualifying Accounts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deducted from Assets in the Balance Sheet:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for Doubtful Accounts
|
|
|
$
|
14,981
|
|
|
|
$
|
14,001
|
|
|
|
$
|
4,548
|
|
|
|
$
|
16,987
|
|
|
|
$
|
16,543
|
|
|
Notes:
|
(a)
Recoveries
on receivables previously written off as uncollectible and
unclaimed customer deposits, overpayments, etc., not
refundable.
|
(b)
Includes
deductions for purposes for which reserves were provided or
revisions made of estimated exposure.
|
|
129
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrants have duly
caused this report to be signed on their behalf by the
undersigned, thereunto duly authorized.
WGL HOLDINGS, INC.
and
WASHINGTON GAS LIGHT COMPANY
(Co-registrants)
/s/ Vincent
L. Ammann, Jr.
Vincent L. Ammann, Jr.
Vice President and
Chief Financial Officer
Date: December 1, 2008
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons
on behalf of the registrants and in the capacities and on the
dates indicated.
|
|
|
|
|
|
|
Signature
|
|
Title
|
|
Date
|
|
|
|
|
|
|
/s/ James
H. DeGraffenreidt, Jr.
(James
H. DeGraffenreidt, Jr.)
|
|
Chairman of the Board and Chief Executive Officer
|
|
December 1, 2008
|
|
|
|
|
|
/s/ Terry
D. McCallister
(Terry
D. McCallister)
|
|
President and Chief Operating Officer
|
|
December 1, 2008
|
|
|
|
|
|
/s/ Vincent
L. Ammann, Jr.
(Vincent
L. Ammann, Jr.)
|
|
Vice President and Chief Financial Officer (Principal Financial
Officer)
|
|
December 1, 2008
|
|
|
|
|
|
/s/ Mark
P. OFlynn
(Mark
P. OFlynn)
|
|
Controller
(Principal Accounting Officer)
|
|
December 1, 2008
|
|
|
|
|
|
*
(Michael
D. Barnes)
|
|
Director
|
|
December 1, 2008
|
|
|
|
|
|
*
(George
P. Clancy, Jr.)
|
|
Director
|
|
December 1, 2008
|
|
|
|
|
|
*
(James
W. Dyke, Jr.)
|
|
Director
|
|
December 1, 2008
|
|
|
|
|
|
*
(Melvyn
J. Estrin)
|
|
Director
|
|
December 1, 2008
|
|
|
|
|
|
*
(James
F. Lafond)
|
|
Director
|
|
December 1, 2008
|
|
|
|
|
|
*
(Debra
L. Lee)
|
|
Director
|
|
December 1, 2008
|
|
|
|
|
|
*
(Karen
Hastie Williams)
|
|
Director
|
|
December 1, 2008
|
|
|
|
|
|
|
|
*By:
|
|
Vincent L. Ammann,
Jr.
(Vincent
L. Ammann, Jr.)
Attorney-in-Fact
|
|
|
|
December 1, 2008
|
130
WGL
HOLDINGS, INC. and WASHINGTON GAS LIGHT COMPANY 2008
Form 10-K
Exhibit Index
|
|
|
Exhibit
|
|
Description
|
|
|
|
|
10.1
|
|
WGL Holdings, Inc. and Washington Gas Light Company Change in
Control Severance Plan for Certain Executives, as amended on
September 24, 2008.
|
|
|
|
10.2
|
|
WGL Holdings, Inc. and Washington Gas Light Company Deferred
Compensation Plan for Outside Directors, amended and restated
effective January 1, 2005, as further amended on
September 24, 2008.
|
|
|
|
10.3
|
|
Washington Gas Light Company Supplemental Executive Retirement
Plan, amended and restated effective January 1, 2005, as
further amended on September 24, 2008.
|
|
|
|
12.1
|
|
Computation of Ratio of Earnings to Fixed ChargesWGL
Holdings, Inc.
|
|
|
|
12.2
|
|
Computation of Ratio of Earnings to Fixed Charges and Preferred
Stock DividendsWGL Holdings, Inc.
|
|
|
|
12.3
|
|
Computation of Ratio of Earnings to Fixed
ChargesWashington Gas Light Company.
|
|
|
|
12.4
|
|
Computation of Ratio of Earnings to Fixed Charges and Preferred
Stock DividendsWashington Gas Light Company.
|
|
|
|
21
|
|
Subsidiaries of WGL Holdings, Inc.
|
|
|
|
23
|
|
Consent of Deloitte & Touche LLP.
|
|
|
|
24
|
|
Power of Attorney
|
|
|
|
31.1
|
|
Certification of James H. DeGraffenreidt, Jr., the Chairman and
Chief Executive Officer of WGL Holdings, Inc., pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
|
|
|
|
31.2
|
|
Certification of Vincent L. Ammann, Jr., the Vice President and
Chief Financial Officer of WGL Holdings, Inc., pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
|
|
|
|
31.3
|
|
Certification of James H. DeGraffenreidt, Jr., the Chairman and
Chief Executive Officer of Washington Gas Light Company,
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
|
|
|
|
31.4
|
|
Certification of Vincent L. Ammann, Jr., the Vice President and
Chief Financial Officer of Washington Gas Light Company,
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
|
|
|
|
32
|
|
Certification of James H. DeGraffenreidt, Jr., the Chairman and
Chief Executive Officer, and Vincent L. Ammann, Jr., the Vice
President and Chief Financial Officer, pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
|
131