Document:

Exhibit 4.7

 

WGL Holdings, Inc.

Washington Gas Light Company

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

To the Board of Directors and Shareholders of WGL Holdings, Inc.

Washington, DC

 

We have audited the accompanying consolidated balance sheets and consolidated statements of capitalization of WGL Holdings, Inc. and subsidiaries (“WGL”) as of September 30, 2017 and 2016, and the related consolidated statements of income, comprehensive income, changes in equity, and cash flows for each of the three years in the period ended September 30, 2017. These financial statements are the responsibility of WGL’s management. Our responsibility is to express an opinion on the financial statements 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, 2017 and 2016, and the results of their operations and their cash flows for each of the three years in the period ended September 30, 2017, in conformity with accounting principles generally accepted in the United States of America.

 

 

/s/ Deloitte & Touche LLP

 

Mclean, Virginia

November 21, 2017

 

1

 

WGL Holdings, Inc.

Washington Gas Light Company

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

To the Board of Directors and Shareholder of Washington Gas Light Company

Washington, DC

 

We have audited the accompanying balance sheets and statements of capitalization of Washington Gas Light Company (“Washington Gas”) as of September 30, 2017 and 2016, and the related statements of income, comprehensive income, common shareholder’s equity, and cash flows for each of the three years in the period ended September 30, 2017. These financial statements are the responsibility of Washington Gas’ management. Our responsibility is to express an opinion on the financial statements 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. Washington Gas 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 Washington Gas’ 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, 2017 and 2016, and the results of its operations and its cash flows for each of the three years in the period ended September 30, 2017, in conformity with accounting principles generally accepted in the United States of America.

 

/s/ Deloitte & Touche LLP

 

Mclean, Virginia

November 21, 2017

 

2

 

WGL Holdings, Inc.

Washington Gas Light Company

 

WGL Holdings, Inc.

Consolidated Balance Sheets

 

	
 
    	
 
    	
September 30,
    	
 
    
	
(In thousands)
    	
 
    	
2017
    	
 
    	
2016
    	
 
    
	
ASSETS
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Property,   Plant and Equipment
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
At original cost
    	
 
    	
$
    	
6,143,841
    	
 
    	
$
    	
5,542,916
    	
 
    
	
Accumulated   depreciation and amortization
    	
 
    	
(1,513,790
    	
)
    	
(1,415,679
    	
)
    
	
Net property,   plant and equipment
    	
 
    	
4,630,051
    	
 
    	
4,127,237
    	
 
    
	
Current   Assets
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Cash and cash   equivalents
    	
 
    	
8,524
    	
 
    	
5,573
    	
 
    
	
Receivables
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Accounts   receivable
    	
 
    	
398,149
    	
 
    	
329,989
    	
 
    
	
Gas costs and   other regulatory assets
    	
 
    	
21,705
    	
 
    	
15,294
    	
 
    
	
Unbilled   revenues
    	
 
    	
165,483
    	
 
    	
173,076
    	
 
    
	
Allowance for   doubtful accounts
    	
 
    	
(32,025
    	
)
    	
(27,339
    	
)
    
	
Net receivables
    	
 
    	
553,312
    	
 
    	
491,020
    	
 
    
	
Materials and supplies—principally   at average cost
    	
 
    	
20,172
    	
 
    	
18,414
    	
 
    
	
Storage gas
    	
 
    	
243,984
    	
 
    	
207,132
    	
 
    
	
Prepaid taxes
    	
 
    	
31,549
    	
 
    	
33,397
    	
 
    
	
Other   prepayments
    	
 
    	
86,465
    	
 
    	
42,626
    	
 
    
	
Derivatives
    	
 
    	
15,327
    	
 
    	
18,510
    	
 
    
	
Other
    	
 
    	
26,556
    	
 
    	
26,802
    	
 
    
	
Total current   assets
    	
 
    	
985,889
    	
 
    	
843,474
    	
 
    
	
Deferred   Charges and Other Assets
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Regulatory   assets
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Gas costs
    	
 
    	
90,136
    	
 
    	
179,856
    	
 
    
	
Pension and   other post-retirement benefits
    	
 
    	
139,499
    	
 
    	
223,242
    	
 
    
	
Other
    	
 
    	
104,596
    	
 
    	
98,592
    	
 
    
	
Prepaid   post-retirement benefits
    	
 
    	
231,577
    	
 
    	
180,686
    	
 
    
	
Derivatives
    	
 
    	
38,389
    	
 
    	
55,020
    	
 
    
	
Investments in   direct financing leases, capital leases
    	
 
    	
—
    	
 
    	
29,780
    	
 
    
	
Investments in   unconsolidated affiliates
    	
 
    	
394,201
    	
 
    	
303,491
    	
 
    
	
Other
    	
 
    	
11,671
    	
 
    	
8,072
    	
 
    
	
Total deferred   charges and other assets
    	
 
    	
1,010,069
    	
 
    	
1,078,739
    	
 
    
	
Total   Assets
    	
 
    	
$
    	
6,626,009
    	
 
    	
$
    	
6,049,450
    	
 
    
	
CAPITALIZATION   AND LIABILITIES
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Capitalization
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
WGL Holdings   common shareholders’ equity
    	
 
    	
$
    	
1,502,690
    	
 
    	
$
    	
1,375,561
    	
 
    
	
Non-controlling   interest
    	
 
    	
6,851
    	
 
    	
409
    	
 
    
	
Washington Gas   Light Company preferred stock
    	
 
    	
28,173
    	
 
    	
28,173
    	
 
    
	
Total equity
    	
 
    	
1,537,714
    	
 
    	
1,404,143
    	
 
    
	
Long-term debt
    	
 
    	
1,430,861
    	
 
    	
1,435,045
    	
 
    
	
Total   capitalization
    	
 
    	
2,968,575
    	
 
    	
2,839,188
    	
 
    
	
Current   Liabilities
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Current   maturities of long-term debt
    	
 
    	
250,000
    	
 
    	
—
    	
 
    
	
Notes payable   and project financing
    	
 
    	
559,844
    	
 
    	
331,385
    	
 
    
	
Accounts payable   and other accrued liabilities
    	
 
    	
423,824
    	
 
    	
405,351
    	
 
    
	
Wages payable
    	
 
    	
18,096
    	
 
    	
17,908
    	
 
    
	
Accrued interest
    	
 
    	
7,806
    	
 
    	
7,645
    	
 
    
	
Dividends   declared
    	
 
    	
26,452
    	
 
    	
25,283
    	
 
    
	
Customer   deposits and advance payments
    	
 
    	
65,841
    	
 
    	
86,384
    	
 
    
	
Gas costs and   other regulatory liabilities
    	
 
    	
22,814
    	
 
    	
12,973
    	
 
    
	
Accrued taxes
    	
 
    	
17,657
    	
 
    	
15,672
    	
 
    
	
Derivatives
    	
 
    	
43,990
    	
 
    	
82,334
    	
 
    
	
Other
    	
 
    	
52,664
    	
 
    	
41,991
    	
 
    
	
Total current   liabilities
    	
 
    	
1,488,988
    	
 
    	
1,026,926
    	
 
    
	
Deferred   Credits
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Unamortized   investment tax credits
    	
 
    	
155,007
    	
 
    	
163,493
    	
 
    
	
Deferred income   taxes
    	
 
    	
868,067
    	
 
    	
726,763
    	
 
    
	
Accrued pensions   and benefits
    	
 
    	
181,552
    	
 
    	
228,377
    	
 
    
	
Asset retirement   obligations
    	
 
    	
296,810
    	
 
    	
203,105
    	
 
    
	
Regulatory   liabilities
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Accrued asset   removal costs
    	
 
    	
292,173
    	
 
    	
310,788
    	
 
    
	
Other   post-retirement benefits
    	
 
    	
135,035
    	
 
    	
113,875
    	
 
    
	
Other
    	
 
    	
9,403
    	
 
    	
14,450
    	
 
    
	
Derivatives
    	
 
    	
122,607
    	
 
    	
304,198
    	
 
    
	
Other
    	
 
    	
107,792
    	
 
    	
118,287
    	
 
    
	
Total deferred   credits
    	
 
    	
2,168,446
    	
 
    	
2,183,336
    	
 
    
	
Commitments   and Contingencies (Note 13)
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Total   Capitalization and Liabilities
    	
 
    	
$
    	
6,626,009
    	
 
    	
$
    	
6,049,450
    	
 
    

 

The accompanying notes are an integral part of these statements.

 

3

 

WGL Holdings, Inc.

Consolidated Statements of Income

 

	
 
    	
 
    	
Years Ended September 30,
    	
 
    
	
(In thousands, except per share data)
    	
 
    	
2017
    	
 
    	
2016
    	
 
    	
2015
    	
 
    
	
OPERATING   REVENUES
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Utility
    	
 
    	
$
    	
1,143,337
    	
 
    	
$
    	
1,044,117
    	
 
    	
$
    	
1,303,044
    	
 
    
	
Non-utility
    	
 
    	
1,211,387
    	
 
    	
1,305,442
    	
 
    	
1,356,786
    	
 
    
	
Total   Operating Revenues
    	
 
    	
2,354,724
    	
 
    	
2,349,559
    	
 
    	
2,659,830
    	
 
    
	
OPERATING   EXPENSES
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Utility cost of   gas
    	
 
    	
274,247
    	
 
    	
245,189
    	
 
    	
510,900
    	
 
    
	
Non-utility cost   of energy-related sales
    	
 
    	
1,002,908
    	
 
    	
1,123,077
    	
 
    	
1,218,331
    	
 
    
	
Operation and   maintenance
    	
 
    	
429,890
    	
 
    	
401,776
    	
 
    	
395,770
    	
 
    
	
Depreciation and   amortization
    	
 
    	
154,138
    	
 
    	
132,566
    	
 
    	
121,892
    	
 
    
	
General taxes   and other assessments
    	
 
    	
152,528
    	
 
    	
146,655
    	
 
    	
152,164
    	
 
    
	
Total   Operating Expenses
    	
 
    	
2,013,711
    	
 
    	
2,049,263
    	
 
    	
2,399,057
    	
 
    
	
OPERATING   INCOME
    	
 
    	
341,013
    	
 
    	
300,296
    	
 
    	
260,773
    	
 
    
	
Equity   in earnings of unconsolidated affiliates
    	
 
    	
20,216
    	
 
    	
13,806
    	
 
    	
5,468
    	
 
    
	
Other   income — net
    	
 
    	
1,819
    	
 
    	
4,646
    	
 
    	
653
    	
 
    
	
Interest   expense
    	
 
    	
74,026
    	
 
    	
52,310
    	
 
    	
50,511
    	
 
    
	
INCOME   BEFORE INCOME TAXES
    	
 
    	
289,022
    	
 
    	
266,438
    	
 
    	
216,383
    	
 
    
	
INCOME   TAX EXPENSE
    	
 
    	
111,159
    	
 
    	
98,074
    	
 
    	
83,804
    	
 
    
	
NET   INCOME
    	
 
    	
$
    	
177,863
    	
 
    	
$
    	
168,364
    	
 
    	
$
    	
132,579
    	
 
    
	
Non-controlling   interest
    	
 
    	
(16,077
    	
)
    	
(550
    	
)
    	
—
    	
 
    
	
Dividends   on Washington Gas Light Company preferred stock
    	
 
    	
1,320
    	
 
    	
1,320
    	
 
    	
1,320
    	
 
    
	
NET INCOME   APPLICABLE TO COMMON STOCK
    	
 
    	
$
    	
192,620
    	
 
    	
$
    	
167,594
    	
 
    	
$
    	
131,259
    	
 
    
	
WEIGHTED   AVERAGE COMMON SHARES OUTSTANDING
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Basic
    	
 
    	
51,205
    	
 
    	
50,369
    	
 
    	
49,794
    	
 
    
	
Diluted
    	
 
    	
51,475
    	
 
    	
50,564
    	
 
    	
50,060
    	
 
    
	
EARNINGS   PER AVERAGE COMMON SHARE
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Basic
    	
 
    	
$
    	
3.76
    	
 
    	
$
    	
3.33
    	
 
    	
$
    	
2.64
    	
 
    
	
Diluted
    	
 
    	
$
    	
3.74
    	
 
    	
$
    	
3.31
    	
 
    	
$
    	
2.62
    	
 
    
	
DIVIDENDS   DECLARED PER COMMON SHARE
    	
 
    	
$
    	
2.0175
    	
 
    	
$
    	
1.9250
    	
 
    	
$
    	
1.8275
    	
 
    

 

The accompanying notes are an integral part of these statements.

 

4

 

WGL Holdings, Inc.

Consolidated Statements of Comprehensive Income

 

	
 
    	
 
    	
Years Ended September 30,
    	
 
    
	
(In thousands)
    	
 
    	
2017
    	
 
    	
2016
    	
 
    	
2015
    	
 
    
	
NET   INCOME
    	
 
    	
$
    	
177,863
    	
 
    	
$
    	
168,364
    	
 
    	
$
    	
132,579
    	
 
    
	
OTHER   COMPREHENSIVE INCOME (LOSS), BEFORE INCOME TAXES:
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Qualified   cash flow hedging instruments
    	
 
    	
49,610
    	
 
    	
(39,289
    	
)
    	
(11,309
    	
)
    
	
Pension   and other post-retirement benefit plans
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Change in prior   service (cost) credit
    	
 
    	
(767
    	
)
    	
(891
    	
)
    	
696
    	
 
    
	
Change in   actuarial net gain (loss)
    	
 
    	
6,232
    	
 
    	
(936
    	
)
    	
(1,195
    	
)
    
	
TOTAL   OTHER COMPREHENSIVE INCOME (LOSS) BEFORE TAXES
    	
 
    	
$
    	
55,075
    	
 
    	
$
    	
(41,116
    	
)
    	
$
    	
(11,808
    	
)
    
	
INCOME   TAX EXPENSE (BENEFIT) RELATED TO OTHER COMPREHENSIVE INCOME (LOSS)
    	
 
    	
22,533
    	
 
    	
(16,813
    	
)
    	
(5,533
    	
)
    
	
OTHER   COMPREHENSIVE INCOME (LOSS)
    	
 
    	
$
    	
32,542
    	
 
    	
$
    	
(24,303
    	
)
    	
$
    	
(6,275
    	
)
    
	
COMPREHENSIVE   INCOME
    	
 
    	
$
    	
210,405
    	
 
    	
$
    	
144,061
    	
 
    	
$
    	
126,304
    	
 
    
	
Non-controlling   interest
    	
 
    	
(16,077
    	
)
    	
(550
    	
)
    	
—
    	
 
    
	
Dividends   on Washington Gas Light Company preferred stock
    	
 
    	
1,320
    	
 
    	
1,320
    	
 
    	
1,320
    	
 
    
	
COMPREHENSIVE   INCOME ATTRIBUTABLE TO WGL HOLDINGS
    	
 
    	
$
    	
225,162
    	
 
    	
$
    	
143,291
    	
 
    	
$
    	
124,984
    	
 
    

 

The accompanying notes are an integral part of these statements.

 

5

 

WGL Holdings, Inc.

Consolidated Statements of Cash Flows

 

	
 
    	
 
    	
Years Ended September 30,
    	
 
    
	
(In thousands)
    	
 
    	
2017
    	
 
    	
2016
    	
 
    	
2015
    	
 
    
	
OPERATING   ACTIVITIES
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Net income
    	
 
    	
$
    	
177,863
    	
 
    	
$
    	
168,364
    	
 
    	
$
    	
132,579
    	
 
    
	
ADJUSTMENTS TO   RECONCILE NET INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIES
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Depreciation and   amortization
    	
 
    	
154,138
    	
 
    	
132,566
    	
 
    	
121,892
    	
 
    
	
Amortization of:
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Other regulatory   assets and liabilities—net
    	
 
    	
6,422
    	
 
    	
1,909
    	
 
    	
1,305
    	
 
    
	
Debt related   costs
    	
 
    	
2,027
    	
 
    	
1,284
    	
 
    	
1,187
    	
 
    
	
Deferred income   taxes—net
    	
 
    	
114,966
    	
 
    	
163,879
    	
 
    	
104,405
    	
 
    
	
Distributions   received from equity method investments
    	
 
    	
16,738
    	
 
    	
—
    	
 
    	
—
    	
 
    
	
Accrued/deferred   pension and other post-retirement benefit cost
    	
 
    	
22,601
    	
 
    	
19,548
    	
 
    	
25,572
    	
 
    
	
Earnings in   equity interests
    	
 
    	
(20,216
    	
)
    	
(13,806
    	
)
    	
(5,066
    	
)
    
	
Compensation   expense related to stock-based awards
    	
 
    	
17,154
    	
 
    	
12,308
    	
 
    	
16,478
    	
 
    
	
Provision for   doubtful accounts
    	
 
    	
17,212
    	
 
    	
13,036
    	
 
    	
18,197
    	
 
    
	
Impairment loss
    	
 
    	
—
    	
 
    	
4,110
    	
 
    	
5,625
    	
 
    
	
Gain on   consolidation
    	
 
    	
(1,807
    	
)
    	
—
    	
 
    	
—
    	
 
    
	
Unrealized   (gain) loss on derivative contracts
    	
 
    	
(85,591
    	
)
    	
(24,774
    	
)
    	
19,441
    	
 
    
	
Amortization of   investment tax credits
    	
 
    	
(7,504
    	
)
    	
(6,132
    	
)
    	
(4,939
    	
)
    
	
Other non-cash   charges (credits)—net
    	
 
    	
(840
    	
)
    	
(1,308
    	
)
    	
(3,903
    	
)
    
	
Changes in   operating assets and liabilities (Note 20)
    	
 
    	
(182,538
    	
)
    	
(243,218
    	
)
    	
71,286
    	
 
    
	
Net Cash   Provided by Operating Activities
    	
 
    	
230,625
    	
 
    	
227,766
    	
 
    	
504,059
    	
 
    
	
FINANCING   ACTIVITIES
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Common stock   issued
    	
 
    	
293
    	
 
    	
78,287
    	
 
    	
—
    	
 
    
	
Long-term debt   issued
    	
 
    	
245,556
    	
 
    	
498,125
    	
 
    	
298,227
    	
 
    
	
Long-term debt   retired
    	
 
    	
—
    	
 
    	
(25,000
    	
)
    	
(20,000
    	
)
    
	
Debt issuance   costs
    	
 
    	
(665
    	
)
    	
(445
    	
)
    	
(3,497
    	
)
    
	
Notes payable   issued (retired)—net
    	
 
    	
236,000
    	
 
    	
(63,000
    	
)
    	
(121,500
    	
)
    
	
Contributions   from non-controlling interest
    	
 
    	
22,336
    	
 
    	
959
    	
 
    	
—
    	
 
    
	
Distributions to   non-controlling interest
    	
 
    	
(300
    	
)
    	
—
    	
 
    	
—
    	
 
    
	
Project   financing
    	
 
    	
20,386
    	
 
    	
38,468
    	
 
    	
—
    	
 
    
	
Dividends on   common stock and preferred stock
    	
 
    	
(102,123
    	
)
    	
(92,841
    	
)
    	
(91,316
    	
)
    
	
Repurchase of   common stock
    	
 
    	
—
    	
 
    	
—
    	
 
    	
(41,485
    	
)
    
	
Other financing activities—net
    	
 
    	
1,550
    	
 
    	
1,986
    	
 
    	
(1,457
    	
)
    
	
Net Cash   Provided By Financing Activities
    	
 
    	
423,033
    	
 
    	
436,539
    	
 
    	
18,972
    	
 
    
	
INVESTING   ACTIVITIES
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Capital   expenditures (excluding AFUDC)
    	
 
    	
(516,534
    	
)
    	
(530,385
    	
)
    	
(464,291
    	
)
    
	
Investments in   non-utility interests
    	
 
    	
(147,294
    	
)
    	
(158,052
    	
)
    	
(67,447
    	
)
    
	
Distributions   and receipts from non-utility interests
    	
 
    	
4,126
    	
 
    	
8,254
    	
 
    	
10,780
    	
 
    
	
Net proceeds   from sale of assets
    	
 
    	
9,858
    	
 
    	
19,749
    	
 
    	
—
    	
 
    
	
Loans to   external parties
    	
 
    	
(863
    	
)
    	
(5,031
    	
)
    	
(4,151
    	
)
    
	
Net Cash Used in   Investing Activities
    	
 
    	
(650,707
    	
)
    	
(665,465
    	
)
    	
(525,109
    	
)
    
	
INCREASE   (DECREASE) IN CASH AND CASH EQUIVALENTS
    	
 
    	
2,951
    	
 
    	
(1,160
    	
)
    	
(2,078
    	
)
    
	
Cash and Cash   Equivalents at Beginning of Year
    	
 
    	
5,573
    	
 
    	
6,733
    	
 
    	
8,811
    	
 
    
	
Cash   and Cash Equivalents at End of Year
    	
 
    	
$
    	
8,524
    	
 
    	
$
    	
5,573
    	
 
    	
$
    	
6,733
    	
 
    
	
SUPPLEMENTAL   DISCLOSURES OF CASH FLOW INFORMATION (Note 20)
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    

 

The accompanying notes are an integral part of these statements.

 

6

 

WGL Holdings, Inc.

Consolidated Statements of Capitalization

 

	
 
    	
 
    	
September 30,
    	
 
    
	
($ In thousands, except shares)
    	
 
    	
2017
    	
 
    	
 
    	
 
    	
2016
    	
 
    	
 
    	
 
    
	
WGL   Holdings Common Shareholders’ Equity
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Common stock, no   par value, 120,000,000 shares authorized, 51,219,000 and 51,080,612   shares issued, respectively
    	
 
    	
$
    	
582,716
    	
 
    	
 
    	
 
    	
$
    	
574,496
    	
 
    	
 
    	
 
    
	
Paid-in capital
    	
 
    	
10,149
    	
 
    	
 
    	
 
    	
12,519
    	
 
    	
 
    	
 
    
	
Retained   earnings
    	
 
    	
915,822
    	
 
    	
 
    	
 
    	
827,085
    	
 
    	
 
    	
 
    
	
Accumulated   other comprehensive loss, net of taxes
    	
 
    	
(5,997
    	
)
    	
 
    	
 
    	
(38,539
    	
)
    	
 
    	
 
    
	
WGL Holdings   common shareholders’ equity
    	
 
    	
1,502,690
    	
 
    	
50.6
    	
%
    	
1,375,561
    	
 
    	
48.5
    	
%
    
	
Non-controlling   Interest
    	
 
    	
6,851
    	
 
    	
0.2
    	
%
    	
409
    	
 
    	
—
    	
%
    
	
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 authorized—issued 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
    	
 
    	
0.9
    	
%
    	
28,173
    	
 
    	
1.0
    	
%
    
	
Total   Equity
    	
 
    	
1,537,714
    	
 
    	
51.7
    	
%
    	
1,404,143
    	
 
    	
49.5
    	
%
    
	
Long-Term   Debt
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Due fiscal year   2018, 2.11%
    	
 
    	
250,000
    	
 
    	
 
    	
 
    	
250,000
    	
 
    	
 
    	
 
    
	
Due fiscal year   2019, 2.11%
    	
 
    	
50,000
    	
 
    	
 
    	
 
    	
—
    	
 
    	
 
    	
 
    
	
Due fiscal year   2019, 7.46%
    	
 
    	
50,000
    	
 
    	
 
    	
 
    	
50,000
    	
 
    	
 
    	
 
    
	
Due fiscal year   2020, 2.25% to 4.76%
    	
 
    	
150,000
    	
 
    	
 
    	
 
    	
150,000
    	
 
    	
 
    	
 
    
	
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
    	
 
    	
 
    	
 
    
	
Due fiscal year   2041, 5.21%
    	
 
    	
75,000
    	
 
    	
 
    	
 
    	
75,000
    	
 
    	
 
    	
 
    
	
Due fiscal year   2044, 4.22% to 5.00%
    	
 
    	
175,000
    	
 
    	
 
    	
 
    	
175,000
    	
 
    	
 
    	
 
    
	
Due fiscal year   2045, 4.24% to 4.60%
    	
 
    	
200,000
    	
 
    	
 
    	
 
    	
200,000
    	
 
    	
 
    	
 
    
	
Due fiscal year   2046, 3.80%
    	
 
    	
450,000
    	
 
    	
 
    	
 
    	
250,000
    	
 
    	
 
    	
 
    
	
Total   Long-Term Debt
    	
 
    	
1,696,000
    	
 
    	
 
    	
 
    	
1,446,000
    	
 
    	
 
    	
 
    
	
Unamortized   discount
    	
 
    	
(4,541
    	
)
    	
 
    	
 
    	
(1,700
    	
)
    	
 
    	
 
    
	
Unamortized debt   expense
    	
 
    	
(10,598
    	
)
    	
 
    	
 
    	
(9,255
    	
)
    	
 
    	
 
    
	
Less—current   maturities
    	
 
    	
250,000
    	
 
    	
 
    	
 
    	
—
    	
 
    	
 
    	
 
    
	
Total   Long-Term Debt
    	
 
    	
1,430,861
    	
 
    	
48.3
    	
%
    	
1,435,045
    	
 
    	
50.5
    	
%
    
	
Total   Capitalization
    	
 
    	
$
    	
2,968,575
    	
 
    	
100.0
    	
%
    	
$
    	
2,839,188
    	
 
    	
100.0
    	
%
    

 

The accompanying notes are an integral part of these statements.

 

7

 

WGL Holdings, Inc.

Consolidated Statements of Changes in Equity

 

	
(In thousands, except
    	
 
    	
Common Stock
    	
 
    	
Paid-In
    	
 
    	
Retained
    	
 
    	
Accumulated
   Other
   Comprehensive
    	
 
    	
WGL Holdings
   Common
   Shareholders’
    	
 
    	
Non-controlling
    	
 
    	
Washington
   Gas Light
   Company
   Preferred
    	
 
    	
 
    	
 
    
	
shares)
    	
 
    	
Shares
    	
 
    	
Amount
    	
 
    	
Capital
    	
 
    	
Earnings
    	
 
    	
Loss, Net of Taxes
    	
 
    	
Equity
    	
 
    	
Interest
    	
 
    	
Stock
    	
 
    	
Total Equity
    	
 
    
	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Balance, September 30, 2014
    	
 
    	
50,656,553
    	
 
    	
$
    	
525,932
    	
 
    	
$
    	
11,847
    	
 
    	
$
    	
716,758
    	
 
    	
$
    	
(7,961
    	
)
    	
$
    	
1,246,576
    	
 
    	
$
    	
—
    	
 
    	
$
    	
28,173
    	
 
    	
$
    	
1,274,749
    	
 
    
	
Net income
    	
 
    	
—
    	
 
    	
—
    	
 
    	
—
    	
 
    	
131,259
    	
 
    	
—
    	
 
    	
131,259
    	
 
    	
—
    	
 
    	
1,320
    	
 
    	
132,579
    	
 
    
	
Other comprehensive loss
    	
 
    	
—
    	
 
    	
—
    	
 
    	
—
    	
 
    	
—
    	
 
    	
(6,275
    	
)
    	
(6,275
    	
)
    	
—
    	
 
    	
—
    	
 
    	
(6,275
    	
)
    
	
Repurchase of common stock
    	
 
    	
(948,604
    	
)
    	
(41,485
    	
)
    	
—
    	
 
    	
—
    	
 
    	
—
    	
 
    	
(41,485
    	
)
    	
—
    	
 
    	
—
    	
 
    	
(41,485
    	
)
    
	
Stock-based compensation
    	
 
    	
20,713
    	
 
    	
1,009
    	
 
    	
3,087
    	
 
    	
—
    	
 
    	
—
    	
 
    	
4,096
    	
 
    	
—
    	
 
    	
—
    	
 
    	
4,096
    	
 
    
	
Dividends declared:
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Common stock ($1.8275 per share)
    	
 
    	
—
    	
 
    	
—
    	
 
    	
—
    	
 
    	
(90,924
    	
)
    	
—
    	
 
    	
(90,924
    	
)
    	
—
    	
 
    	
—
    	
 
    	
(90,924
    	
)
    
	
Preferred stock
    	
 
    	
—
    	
 
    	
—
    	
 
    	
—
    	
 
    	
—
    	
 
    	
—
    	
 
    	
—
    	
 
    	
—
    	
 
    	
(1,320
    	
)
    	
(1,320
    	
)
    
	
Balance, September 30, 2015
    	
 
    	
49,728,662
    	
 
    	
485,456
    	
 
    	
14,934
    	
 
    	
757,093
    	
 
    	
(14,236
    	
)
    	
1,243,247
    	
 
    	
—
    	
 
    	
28,173
    	
 
    	
1,271,420
    	
 
    
	
Net income
    	
 
    	
—
    	
 
    	
—
    	
 
    	
—
    	
 
    	
167,594
    	
 
    	
—
    	
 
    	
167,594
    	
 
    	
(550
    	
)
    	
1,320
    	
 
    	
168,364
    	
 
    
	
Contributions from non-controlling interest
    	
 
    	
—
    	
 
    	
—
    	
 
    	
—
    	
 
    	
—
    	
 
    	
—
    	
 
    	
—
    	
 
    	
959
    	
 
    	
—
    	
 
    	
959
    	
 
    
	
Other comprehensive loss
    	
 
    	
—
    	
 
    	
—
    	
 
    	
—
    	
 
    	
—
    	
 
    	
(24,303
    	
)
    	
(24,303
    	
)
    	
—
    	
 
    	
—
    	
 
    	
(24,303
    	
)
    
	
Stock-based compensation (a)
    	
 
    	
115,974
    	
 
    	
6,742
    	
 
    	
(2,415
    	
)
    	
(164
    	
)
    	
—
    	
 
    	
4,163
    	
 
    	
—
    	
 
    	
—
    	
 
    	
4,163
    	
 
    
	
Issuance of common stock (b)
    	
 
    	
1,235,976
    	
 
    	
82,298
    	
 
    	
—
    	
 
    	
—
    	
 
    	
—
    	
 
    	
82,298
    	
 
    	
—
    	
 
    	
—
    	
 
    	
82,298
    	
 
    
	
Dividends declared:
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Common stock ($1.9250 per share)
    	
 
    	
—
    	
 
    	
—
    	
 
    	
—
    	
 
    	
(97,438
    	
)
    	
—
    	
 
    	
(97,438
    	
)
    	
—
    	
 
    	
—
    	
 
    	
(97,438
    	
)
    
	
Preferred stock
    	
 
    	
—
    	
 
    	
—
    	
 
    	
—
    	
 
    	
—
    	
 
    	
—
    	
 
    	
—
    	
 
    	
—
    	
 
    	
(1,320
    	
)
    	
(1,320
    	
)
    
	
Balance, September 30, 2016
    	
 
    	
51,080,612
    	
 
    	
574,496
    	
 
    	
12,519
    	
 
    	
827,085
    	
 
    	
(38,539
    	
)
    	
1,375,561
    	
 
    	
409
    	
 
    	
28,173
    	
 
    	
1,404,143
    	
 
    
	
Net income
    	
 
    	
—
    	
 
    	
—
    	
 
    	
—
    	
 
    	
192,620
    	
 
    	
—
    	
 
    	
192,620
    	
 
    	
(16,077
    	
)
    	
1,320
    	
 
    	
177,863
    	
 
    
	
Contributions from non-controlling interest
    	
 
    	
—
    	
 
    	
—
    	
 
    	
—
    	
 
    	
—
    	
 
    	
—
    	
 
    	
—
    	
 
    	
22,336
    	
 
    	
—
    	
 
    	
22,336
    	
 
    
	
Distributions to non-controlling interest
    	
 
    	
—
    	
 
    	
—
    	
 
    	
—
    	
 
    	
—
    	
 
    	
—
    	
 
    	
—
    	
 
    	
(300
    	
)
    	
—
    	
 
    	
(300
    	
)
    
	
Business combination  (c)
    	
 
    	
—
    	
 
    	
—
    	
 
    	
—
    	
 
    	
—
    	
 
    	
—
    	
 
    	
—
    	
 
    	
483
    	
 
    	
—
    	
 
    	
483
    	
 
    
	
Other comprehensive income
    	
 
    	
—
    	
 
    	
—
    	
 
    	
—
    	
 
    	
—
    	
 
    	
32,542
    	
 
    	
32,542
    	
 
    	
—
    	
 
    	
—
    	
 
    	
32,542
    	
 
    
	
Stock-based compensation  (a)
    	
 
    	
112,146
    	
 
    	
6,564
    	
 
    	
(2,370
    	
)
    	
(549
    	
)
    	
—
    	
 
    	
3,645
    	
 
    	
—
    	
 
    	
—
    	
 
    	
3,645
    	
 
    
	
Issuance of common stock  (b)
    	
 
    	
26,242
    	
 
    	
1,656
    	
 
    	
—
    	
 
    	
—
    	
 
    	
—
    	
 
    	
1,656
    	
 
    	
—
    	
 
    	
—
    	
 
    	
1,656
    	
 
    
	
Dividends declared:
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Common stock ($2.0175 per share)
    	
 
    	
—
    	
 
    	
—
    	
 
    	
—
    	
 
    	
(103,334
    	
)
    	
—
    	
 
    	
(103,334
    	
)
    	
—
    	
 
    	
—
    	
 
    	
(103,334
    	
)
    
	
Preferred stock
    	
 
    	
—
    	
 
    	
—
    	
 
    	
—
    	
 
    	
—
    	
 
    	
—
    	
 
    	
—
    	
 
    	
—
    	
 
    	
(1,320
    	
)
    	
(1,320
    	
)
    
	
Balance, September 30, 2017
    	
 
    	
51,219,000
    	
 
    	
$
    	
582,716
    	
 
    	
$
    	
10,149
    	
 
    	
$
    	
915,822
    	
 
    	
$
    	
(5,997
    	
)
    	
$
    	
1,502,690
    	
 
    	
$
    	
6,851
    	
 
    	
$
    	
28,173
    	
 
    	
$
    	
1,537,714
    	
 
    

 

(a) Includes dividend equivalents related to our performance shares.

(b) Includes shares issued under the ATM program and the dividend reinvestment and common stock purchase plans.

(c) Resulted from the consolidation of ASD Solar LP (ASD). For more information, see Note 17—Other investments of the Notes to Consolidated Financial Statements.

 

The accompanying notes are an integral part of these statements.

 

8

 

Washington Gas Light Company

Balance Sheets

 

	
 
    	
 
    	
September 30,
    	
 
    
	
(In thousands)
    	
 
    	
2017
    	
 
    	
2016
    	
 
    
	
ASSETS
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Property,   Plant and Equipment
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
At original cost
    	
 
    	
$
    	
5,310,337
    	
 
    	
$
    	
4,874,905
    	
 
    
	
Accumulated   depreciation and amortization
    	
 
    	
(1,422,622
    	
)
    	
(1,348,173
    	
)
    
	
Net property,   plant and equipment
    	
 
    	
3,887,715
    	
 
    	
3,526,732
    	
 
    
	
Current   Assets
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Cash and cash   equivalents
    	
 
    	
1
    	
 
    	
1
    	
 
    
	
Receivables
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Accounts   receivable
    	
 
    	
190,740
    	
 
    	
140,457
    	
 
    
	
Gas costs and   other regulatory assets
    	
 
    	
21,705
    	
 
    	
15,294
    	
 
    
	
Unbilled   revenues
    	
 
    	
107,967
    	
 
    	
89,945
    	
 
    
	
Allowance for   doubtful accounts
    	
 
    	
(23,741
    	
)
    	
(20,220
    	
)
    
	
Net receivables
    	
 
    	
296,671
    	
 
    	
225,476
    	
 
    
	
Materials and   supplies—principally at average cost
    	
 
    	
20,126
    	
 
    	
18,368
    	
 
    
	
Storage gas
    	
 
    	
92,753
    	
 
    	
82,473
    	
 
    
	
Prepaid taxes
    	
 
    	
23,350
    	
 
    	
16,826
    	
 
    
	
Other   prepayments
    	
 
    	
13,238
    	
 
    	
10,924
    	
 
    
	
Receivables from   associated companies
    	
 
    	
32,362
    	
 
    	
13,799
    	
 
    
	
Derivatives
    	
 
    	
5,061
    	
 
    	
7,285
    	
 
    
	
Other
    	
 
    	
102
    	
 
    	
51
    	
 
    
	
Total current   assets
    	
 
    	
483,664
    	
 
    	
375,203
    	
 
    
	
Deferred   Charges and Other Assets
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Regulatory   assets
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Gas costs
    	
 
    	
90,136
    	
 
    	
179,856
    	
 
    
	
Pension and   other post-retirement benefits
    	
 
    	
138,573
    	
 
    	
221,971
    	
 
    
	
Other
    	
 
    	
104,538
    	
 
    	
98,527
    	
 
    
	
Prepaid   post-retirement benefits
    	
 
    	
230,283
    	
 
    	
179,675
    	
 
    
	
Derivatives
    	
 
    	
16,244
    	
 
    	
25,590
    	
 
    
	
Other
    	
 
    	
3,561
    	
 
    	
2,001
    	
 
    
	
Total deferred   charges and other assets
    	
 
    	
583,335
    	
 
    	
707,620
    	
 
    
	
Total   Assets
    	
 
    	
$
    	
4,954,714
    	
 
    	
$
    	
4,609,555
    	
 
    
	
CAPITALIZATION   AND LIABILITIES
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Capitalization
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Common   shareholder’s equity
    	
 
    	
$
    	
1,164,749
    	
 
    	
$
    	
1,113,446
    	
 
    
	
Preferred stock
    	
 
    	
28,173
    	
 
    	
28,173
    	
 
    
	
Long-term debt
    	
 
    	
1,134,461
    	
 
    	
939,015
    	
 
    
	
Total   capitalization
    	
 
    	
2,327,383
    	
 
    	
2,080,634
    	
 
    
	
Current   Liabilities
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Notes payable   and project financing
    	
 
    	
166,772
    	
 
    	
104,385
    	
 
    
	
Accounts payable   and other accrued liabilities
    	
 
    	
219,827
    	
 
    	
204,980
    	
 
    
	
Wages payable
    	
 
    	
16,508
    	
 
    	
16,235
    	
 
    
	
Accrued interest
    	
 
    	
3,967
    	
 
    	
3,758
    	
 
    
	
Dividends   declared
    	
 
    	
22,098
    	
 
    	
21,453
    	
 
    
	
Customer   deposits and advance payments
    	
 
    	
64,194
    	
 
    	
80,936
    	
 
    
	
Gas costs and   other regulatory liabilities
    	
 
    	
22,814
    	
 
    	
12,973
    	
 
    
	
Accrued taxes
    	
 
    	
12,808
    	
 
    	
17,639
    	
 
    
	
Payables to   associated companies
    	
 
    	
94,844
    	
 
    	
65,770
    	
 
    
	
Derivatives
    	
 
    	
30,263
    	
 
    	
58,295
    	
 
    
	
Other
    	
 
    	
7,473
    	
 
    	
7,193
    	
 
    
	
Total current   liabilities
    	
 
    	
661,568
    	
 
    	
593,617
    	
 
    
	
Deferred   Credits
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Unamortized   investment tax credits
    	
 
    	
4,100
    	
 
    	
4,851
    	
 
    
	
Deferred income   taxes
    	
 
    	
888,385
    	
 
    	
763,720
    	
 
    
	
Accrued pensions   and benefits
    	
 
    	
179,814
    	
 
    	
226,339
    	
 
    
	
Asset retirement   obligations
    	
 
    	
291,871
    	
 
    	
199,377
    	
 
    
	
Regulatory   liabilities
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Accrued asset   removal costs
    	
 
    	
292,173
    	
 
    	
310,788
    	
 
    
	
Other   post-retirement benefits
    	
 
    	
134,181
    	
 
    	
113,169
    	
 
    
	
Other
    	
 
    	
9,403
    	
 
    	
14,450
    	
 
    
	
Derivatives
    	
 
    	
112,299
    	
 
    	
232,040
    	
 
    
	
Other
    	
 
    	
53,537
    	
 
    	
70,570
    	
 
    
	
Total deferred   credits
    	
 
    	
1,965,763
    	
 
    	
1,935,304
    	
 
    
	
Commitments   and Contingencies (Note 13)
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Total   Capitalization and Liabilities
    	
 
    	
$
    	
4,954,714
    	
 
    	
$
    	
4,609,555
    	
 
    

 

The accompanying notes are an integral part of these statements.

 

9

 

Washington Gas Light Company

Statements of Income

 

	
 
    	
 
    	
Years Ended September 30,
    	
 
    
	
(In thousands)
    	
 
    	
2017
    	
 
    	
2016
    	
 
    	
2015
    	
 
    
	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
OPERATING   REVENUES
    	
 
    	
$
    	
1,166,968
    	
 
    	
$
    	
1,070,904
    	
 
    	
$
    	
1,328,191
    	
 
    
	
OPERATING   EXPENSES
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Utility cost of   gas
    	
 
    	
297,856
    	
 
    	
271,975
    	
 
    	
536,027
    	
 
    
	
Operation and   maintenance
    	
 
    	
336,676
    	
 
    	
325,726
    	
 
    	
323,967
    	
 
    
	
Depreciation and   amortization
    	
 
    	
129,428
    	
 
    	
114,605
    	
 
    	
108,902
    	
 
    
	
General taxes   and other assessments
    	
 
    	
134,696
    	
 
    	
130,231
    	
 
    	
136,911
    	
 
    
	
Total   Operating Expenses
    	
 
    	
898,656
    	
 
    	
842,537
    	
 
    	
1,105,807
    	
 
    
	
OPERATING   INCOME
    	
 
    	
268,312
    	
 
    	
228,367
    	
 
    	
222,384
    	
 
    
	
Other   expense — net
    	
 
    	
(4,473
    	
)
    	
(2,143
    	
)
    	
(487
    	
)
    
	
Interest   expense
    	
 
    	
52,207
    	
 
    	
41,444
    	
 
    	
41,828
    	
 
    
	
INCOME   BEFORE INCOME TAXES
    	
 
    	
211,632
    	
 
    	
184,780
    	
 
    	
180,069
    	
 
    
	
INCOME TAX   EXPENSE
    	
 
    	
79,840
    	
 
    	
71,666
    	
 
    	
71,391
    	
 
    
	
NET   INCOME
    	
 
    	
$
    	
131,792
    	
 
    	
$
    	
113,114
    	
 
    	
$
    	
108,678
    	
 
    
	
Dividends   on preferred stock
    	
 
    	
1,320
    	
 
    	
1,320
    	
 
    	
1,320
    	
 
    
	
NET   INCOME APPLICABLE TO COMMON STOCK
    	
 
    	
$
    	
130,472
    	
 
    	
$
    	
111,794
    	
 
    	
$
    	
107,358
    	
 
    

 

The accompanying notes are an integral part of these statements.

 

10

 

Washington Gas Light Company

Statements of Comprehensive Income

 

	
 
    	
 
    	
Years Ended September 30,
    	
 
    
	
(In thousands)
    	
 
    	
2017
    	
 
    	
2016
    	
 
    	
2015
    	
 
    
	
NET   INCOME
    	
 
    	
$
    	
131,792
    	
 
    	
$
    	
113,114
    	
 
    	
$
    	
108,678
    	
 
    
	
OTHER   COMPREHENSIVE INCOME (LOSS), BEFORE INCOME TAXES:
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Pension   and other post-retirement benefit plans
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Change in prior   service (cost) credit
    	
 
    	
(767
    	
)
    	
(891
    	
)
    	
696
    	
 
    
	
Change in   actuarial net gain (loss)
    	
 
    	
6,232
    	
 
    	
(936
    	
)
    	
(1,195
    	
)
    
	
Total   pension and other post-retirement benefit plans
    	
 
    	
$
    	
5,465
    	
 
    	
$
    	
(1,827
    	
)
    	
$
    	
(499
    	
)
    
	
INCOME   TAX EXPENSE (BENEFIT) RELATED TO OTHER COMPREHENSIVE INCOME (LOSS)
    	
 
    	
2,157
    	
 
    	
(709
    	
)
    	
(200
    	
)
    
	
OTHER   COMPREHENSIVE INCOME (LOSS)
    	
 
    	
$
    	
3,308
    	
 
    	
$
    	
(1,118
    	
)
    	
$
    	
(299
    	
)
    
	
COMPREHENSIVE   INCOME
    	
 
    	
$
    	
135,100
    	
 
    	
$
    	
111,996
    	
 
    	
$
    	
108,379
    	
 
    

 

The accompanying notes are an integral part of these statements.

 

11

 

Washington Gas Light Company

Statements of Cash Flows

 

	
 
    	
 
    	
Years Ended September 30,
    	
 
    
	
(In thousands)
    	
 
    	
2017
    	
 
    	
2016
    	
 
    	
2015
    	
 
    
	
OPERATING   ACTIVITIES
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Net income
    	
 
    	
$
    	
131,792
    	
 
    	
$
    	
113,114
    	
 
    	
$
    	
108,678
    	
 
    
	
ADJUSTMENTS TO   RECONCILE NET INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIES
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Depreciation and   amortization
    	
 
    	
129,428
    	
 
    	
114,605
    	
 
    	
108,902
    	
 
    
	
Amortization of:
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Other regulatory   assets and liabilities—net
    	
 
    	
6,422
    	
 
    	
1,909
    	
 
    	
1,305
    	
 
    
	
Debt related   costs
    	
 
    	
1,448
    	
 
    	
1,191
    	
 
    	
1,275
    	
 
    
	
Deferred income   taxes—net
    	
 
    	
77,586
    	
 
    	
123,482
    	
 
    	
76,621
    	
 
    
	
Accrued/deferred   pension and other post-retirement benefit cost
    	
 
    	
22,547
    	
 
    	
19,497
    	
 
    	
24,757
    	
 
    
	
Compensation   expense related to stock-based awards
    	
 
    	
16,153
    	
 
    	
11,452
    	
 
    	
14,958
    	
 
    
	
Provision for   doubtful accounts
    	
 
    	
14,484
    	
 
    	
10,945
    	
 
    	
12,734
    	
 
    
	
Unrealized   (gain) loss on derivative contracts
    	
 
    	
(48,950
    	
)
    	
(11,552
    	
)
    	
6,322
    	
 
    
	
Other non-cash   charges (credits)—net
    	
 
    	
(1,592
    	
)
    	
(197
    	
)
    	
1,679
    	
 
    
	
Changes in   operating assets and liabilities (Note 20)
    	
 
    	
(145,463
    	
)
    	
(147,489
    	
)
    	
15,123
    	
 
    
	
Net Cash   Provided by Operating Activities
    	
 
    	
203,855
    	
 
    	
236,957
    	
 
    	
372,354
    	
 
    
	
FINANCING   ACTIVITIES
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Long-term debt   issued
    	
 
    	
195,556
    	
 
    	
248,125
    	
 
    	
50,000
    	
 
    
	
Long-term debt   retired
    	
 
    	
—
    	
 
    	
(25,000
    	
)
    	
(20,000
    	
)
    
	
Debt issuance   costs
    	
 
    	
(661
    	
)
    	
(333
    	
)
    	
(741
    	
)
    
	
Notes payable   issued (retired)—net
    	
 
    	
81,000
    	
 
    	
(47,000
    	
)
    	
—
    	
 
    
	
Project   financing
    	
 
    	
9,314
    	
 
    	
38,468
    	
 
    	
—
    	
 
    
	
Dividends on common   stock and preferred stock
    	
 
    	
(87,118
    	
)
    	
(83,116
    	
)
    	
(79,763
    	
)
    
	
Other financing   activities—net
    	
 
    	
1,492
    	
 
    	
2,891
    	
 
    	
—
    	
 
    
	
Net Cash   Provided by (Used in) Financing Activities
    	
 
    	
199,583
    	
 
    	
134,035
    	
 
    	
(50,504
    	
)
    
	
INVESTING   ACTIVITIES
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Net proceeds   from sale of assets
    	
 
    	
—
    	
 
    	
19,749
    	
 
    	
—
    	
 
    
	
Capital   expenditures (excluding AFUDC)
    	
 
    	
(403,438
    	
)
    	
(390,741
    	
)
    	
(322,909
    	
)
    
	
Net Cash Used in   Investing Activities
    	
 
    	
(403,438
    	
)
    	
(370,992
    	
)
    	
(322,909
    	
)
    
	
INCREASE   (DECREASE) IN CASH AND CASH EQUIVALENTS
    	
 
    	
—
    	
 
    	
—
    	
 
    	
(1,059
    	
)
    
	
Cash and Cash Equivalents   at Beginning of Year
    	
 
    	
1
    	
 
    	
1
    	
 
    	
1,060
    	
 
    
	
Cash   and Cash Equivalents at End of Year
    	
 
    	
$
    	
1
    	
 
    	
$
    	
1
    	
 
    	
$
    	
1
    	
 
    
	
SUPPLEMENTAL   DISCLOSURES OF CASH FLOW INFORMATION (Note 20)
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    

 

The accompanying notes are an integral part of these statements.

 

12

 

Washington Gas Light Company

Statements of Capitalization

 

	
 
    	
 
    	
September 30,
    	
 
    
	
($ In thousands, except shares)
    	
 
    	
2017
    	
 
    	
 
    	
 
    	
2016
    	
 
    	
 
    	
 
    
	
Common   Shareholder’s Equity
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Common stock, $1 par   value, 80,000,000 shares authorized, 46,479,536 shares issued
    	
 
    	
$
    	
46,479
    	
 
    	
 
    	
 
    	
$
    	
46,479
    	
 
    	
 
    	
 
    
	
Paid-in capital
    	
 
    	
492,101
    	
 
    	
 
    	
 
    	
488,135
    	
 
    	
 
    	
 
    
	
Retained   earnings
    	
 
    	
630,691
    	
 
    	
 
    	
 
    	
586,662
    	
 
    	
 
    	
 
    
	
Accumulated   other comprehensive loss, net of taxes
    	
 
    	
(4,522
    	
)
    	
 
    	
 
    	
(7,830
    	
)
    	
 
    	
 
    
	
Total   Common Shareholder’s Equity
    	
 
    	
1,164,749
    	
 
    	
50.1
    	
%
    	
1,113,446
    	
 
    	
53.5
    	
%
    
	
Preferred   Stock
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Washington Gas   Light Company, without par value, 1,500,000 shares authorized—issued 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
    	
 
    	
1.2
    	
%
    	
28,173
    	
 
    	
1.4
    	
%
    
	
Long-Term   Debt
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Due fiscal year   2019, 7.46%
    	
 
    	
50,000
    	
 
    	
 
    	
 
    	
50,000
    	
 
    	
 
    	
 
    
	
Due fiscal year   2020, 4.76%
    	
 
    	
50,000
    	
 
    	
 
    	
 
    	
50,000
    	
 
    	
 
    	
 
    
	
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
    	
 
    	
 
    	
 
    
	
Due fiscal year   2041, 5.21%
    	
 
    	
75,000
    	
 
    	
 
    	
 
    	
75,000
    	
 
    	
 
    	
 
    
	
Due fiscal year   2044, 4.22% to 5.00%
    	
 
    	
175,000
    	
 
    	
 
    	
 
    	
175,000
    	
 
    	
 
    	
 
    
	
Due fiscal year   2045, 4.24%
    	
 
    	
50,000
    	
 
    	
 
    	
 
    	
50,000
    	
 
    	
 
    	
 
    
	
Due fiscal year   2046, 3.80%
    	
 
    	
450,000
    	
 
    	
 
    	
 
    	
250,000
    	
 
    	
 
    	
 
    
	
Total   Long-Term Debt
    	
 
    	
1,146,000
    	
 
    	
 
    	
 
    	
946,000
    	
 
    	
 
    	
 
    
	
Unamortized   discount
    	
 
    	
(3,042
    	
)
    	
 
    	
 
    	
(109
    	
)
    	
 
    	
 
    
	
Unamortized debt   expense
    	
 
    	
(8,497
    	
)
    	
 
    	
 
    	
(6,876
    	
)
    	
 
    	
 
    
	
Total   Long-Term Debt
    	
 
    	
1,134,461
    	
 
    	
48.7
    	
%
    	
939,015
    	
 
    	
45.1
    	
%
    
	
Total Capitalization
    	
 
    	
$
    	
2,327,383
    	
 
    	
100.0
    	
%
    	
$
    	
2,080,634
    	
 
    	
100.0
    	
%
    

 

The accompanying notes are an integral part of these statements.

 

13

 

Washington Gas Light Company

Statements of Common Shareholder’s Equity

 

	
 
    	
 
    	
Common Stock
    	
 
    	
Paid-In
    	
 
    	
 
    	
 
    	
Accumulated Other
   Comprehensive
    	
 
    	
 
    	
 
    
	
(In thousands, except shares)
    	
 
    	
Shares
    	
 
    	
Amount
    	
 
    	
Capital
    	
 
    	
Retained Earnings
    	
 
    	
Loss, Net of Taxes
    	
 
    	
Total
    	
 
    
	
Balance, September 30, 2014
    	
 
    	
46,479,536
    	
 
    	
$
    	
46,479
    	
 
    	
$
    	
480,620
    	
 
    	
$
    	
529,480
    	
 
    	
$
    	
(6,413
    	
)
    	
$
    	
1,050,166
    	
 
    
	
Net income
    	
 
    	
—
    	
 
    	
—
    	
 
    	
—
    	
 
    	
108,678
    	
 
    	
—
    	
 
    	
108,678
    	
 
    
	
Other comprehensive loss
    	
 
    	
—
    	
 
    	
—
    	
 
    	
—
    	
 
    	
—
    	
 
    	
(299
    	
)
    	
(299
    	
)
    
	
Stock-based compensation  (a)
    	
 
    	
—
    	
 
    	
—
    	
 
    	
3,057
    	
 
    	
—
    	
 
    	
—
    	
 
    	
3,057
    	
 
    
	
Dividends declared:
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Common stock
    	
 
    	
—
    	
 
    	
—
    	
 
    	
—
    	
 
    	
(78,990
    	
)
    	
—
    	
 
    	
(78,990
    	
)
    
	
Preferred stock
    	
 
    	
—
    	
 
    	
—
    	
 
    	
—
    	
 
    	
(1,320
    	
)
    	
—
    	
 
    	
(1,320
    	
)
    
	
Balance, September 30, 2015
    	
 
    	
46,479,536
    	
 
    	
46,479
    	
 
    	
483,677
    	
 
    	
557,848
    	
 
    	
(6,712
    	
)
    	
1,081,292
    	
 
    
	
Net income
    	
 
    	
—
    	
 
    	
—
    	
 
    	
—
    	
 
    	
113,114
    	
 
    	
—
    	
 
    	
113,114
    	
 
    
	
Other comprehensive loss
    	
 
    	
—
    	
 
    	
—
    	
 
    	
—
    	
 
    	
—
    	
 
    	
(1,118
    	
)
    	
(1,118
    	
)
    
	
Stock-based compensation  (a)
    	
 
    	
—
    	
 
    	
—
    	
 
    	
4,458
    	
 
    	
—
    	
 
    	
—
    	
 
    	
4,458
    	
 
    
	
Dividends declared:
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Common stock
    	
 
    	
—
    	
 
    	
—
    	
 
    	
—
    	
 
    	
(82,980
    	
)
    	
—
    	
 
    	
(82,980
    	
)
    
	
Preferred stock
    	
 
    	
—
    	
 
    	
—
    	
 
    	
—
    	
 
    	
(1,320
    	
)
    	
—
    	
 
    	
(1,320
    	
)
    
	
Balance, September 30, 2016
    	
 
    	
46,479,536
    	
 
    	
46,479
    	
 
    	
488,135
    	
 
    	
586,662
    	
 
    	
(7,830
    	
)
    	
1,113,446
    	
 
    
	
Net income
    	
 
    	
—
    	
 
    	
—
    	
 
    	
—
    	
 
    	
131,792
    	
 
    	
—
    	
 
    	
131,792
    	
 
    
	
Other comprehensive loss
    	
 
    	
—
    	
 
    	
—
    	
 
    	
—
    	
 
    	
—
    	
 
    	
3,308
    	
 
    	
3,308
    	
 
    
	
Stock-based compensation  (a)
    	
 
    	
—
    	
 
    	
—
    	
 
    	
3,966
    	
 
    	
—
    	
 
    	
—
    	
 
    	
3,966
    	
 
    
	
Dividends declared:
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Common stock
    	
 
    	
—
    	
 
    	
—
    	
 
    	
—
    	
 
    	
(86,443
    	
)
    	
—
    	
 
    	
(86,443
    	
)
    
	
Preferred stock
    	
 
    	
—
    	
 
    	
—
    	
 
    	
—
    	
 
    	
(1,320
    	
)
    	
—
    	
 
    	
(1,320
    	
)
    
	
Balance, September 30, 2017
    	
 
    	
46,479,536
    	
 
    	
$
    	
46,479
    	
 
    	
$
    	
492,101
    	
 
    	
$
    	
630,691
    	
 
    	
$
    	
(4,522
    	
)
    	
$
    	
1,164,749
    	
 
    

 

(a) Stock-based compensation is based on the stock awards of WGL that are allocated to Washington Gas Light Company for its pro-rata share.

 

The accompanying notes are an integral part of these statements.

 

14

 

WGL Holdings, Inc.

Washington Gas Light Company

Notes to Consolidated Financial Statements

 

NOTE 1. ACCOUNTING POLICIES

 

GENERAL

 

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

 

NATURE OF OPERATIONS

 

Washington Gas and Hampshire comprise our regulated utility segment. Washington Gas is a public utility that sells and delivers natural gas to more than 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 79% of the total therms delivered to customers by Washington Gas in the fiscal year ended September 30, 2017 . Deliveries to interruptible customers accounted for 15% and deliveries to customers who use natural gas to generate electricity accounted for 6% . These amounts do not include deliveries related to Washington Gas’ asset optimization program discussed below. 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).

 

The retail energy-marketing segment consists of WGL Energy Services which competes with regulated utilities and other unregulated third party marketers to sell natural gas and electricity directly to residential, commercial, industrial and governmental customers with the objective of earning a profit through competitive pricing. The commodities that WGL Energy Services sells are delivered to retail customers through assets owned by regulated utilities. Washington Gas delivers the majority of natural gas sold by WGL Energy Services, and unaffiliated electric utilities deliver all of the electricity sold. WGL Energy Services owned multiple solar PV distributed generation assets at September 30, 2017 , though the results from these activities are presented in the commercial energy systems segment. Other than these facilities, WGL Energy Services does not own or operate any other natural gas or electric generation, production, transmission or distribution assets. At September 30, 2017 , WGL Energy Services served approximately 116,200 natural gas customers and approximately 113,700 electricity customers located in Maryland, Virginia, Delaware, Pennsylvania and the District of Columbia.

 

The commercial energy systems segment consists of WGL Energy Systems, WGSW and the results of operations of affiliate-owned commercial distributed energy projects. This segment focuses on clean and energy efficient solutions for its customers, driving earnings through: (i) upgrading the mechanical, electrical, water and energy-related infrastructure of large governmental and commercial facilities by implementing both traditional and alternative energy technologies; (ii) owning and operating distributed generation assets such as solar PV systems, combined heat and power plants, and natural gas fuel cells and (iii) investments in residential and commercial retail solar PV companies. In addition to our primary markets, this segment provides customized energy solutions across a much wider footprint, with business activities across the United States.

 

The midstream energy services segment, which consists of the operations of WGL Midstream, specializes in the investment, management, development and optimization of natural gas storage and transportation midstream infrastructure projects. WGL Midstream enters into both physical and financial transactions in a manner intended to utilize energy risk management products to mitigate risks while seeking to maximize potential profits from the optimization of the transportation and storage assets it has under contract.

 

Refer to Note 16— Operating Segment Reporting for further discussion of our segments.

 

15

 

WGL Holdings, Inc.

Washington Gas Light Company

Notes to Consolidated Financial Statements

 

CONSOLIDATION OF FINANCIAL STATEMENTS

 

The consolidated financial statements include the accounts of WGL and its subsidiaries during the fiscal years reported. On October 1, 2016, WGL and Washington Gas adopted Accounting Standards Update (ASU) 2015-03 and ASU 2015-15. These standards require an entity to account for debt issuance costs as a deduction from the carrying amount of debt in the balance sheet and the amortization of debt issuance costs presented as interest expense, consistent with its accounting treatment of debt discounts. Prior period amounts related to other deferred assets and long-term debt in the accompanying balance sheets have been reclassified to conform to the current period presentation. Inter-company transactions have been eliminated. Refer to Note 18— Related Party Transactions for a discussion of inter-company transactions. WGL has a variable interest in five investments that qualify as variable interest entities (VIEs). At September 30, 2017 , WGSW is the primary beneficiary for four of the VIEs; SFGF, SFRC, SFGF II, and ASD and accordingly, they have been consolidated. WGL and its subsidiaries are not the primary beneficiary for one of the five VIEs; therefore, we have not consolidated this VIE entity. Refer to Note 17— Other Investments for a discussion of VIEs and other investments.

 

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 assets and liabilities; (ii)  disclosed contingent assets and liabilities at the date of the financial statements and (iii)  reported revenues, revenues subject to refund, and expenses during the reporting period. Actual results could differ from those estimates.

 

RECLASSIFICATION ON THE STATEMENT OF CASH FLOWS

 

During the current fiscal year, both WGL and Washington Gas separately presented “Unrealized gain/loss on derivative contracts” as an adjustment to reconcile net income to net cash provided by operating activities on the Statements of Cash Flows.  In prior years, these amounts were included in “Changes in Assets and Liabilities-Derivatives”.  Additionally, for WGL, in the current year we separately presented “Amortization of investment tax credits” as an adjustment to reconcile net income to net cash provided by operating activities on the Statements of Cash Flows.  In previous years, these amounts were included in “Changes in Assets and Liabilities-Unamortized investment tax credits”.   The presentation for prior years has been recast to conform with the current period presentation.  These reclassifications did not change Net Cash Provided by Operating Activities.

 

PROPERTY, PLANT AND EQUIPMENT

 

Property, plant and equipment (comprised principally of utility plant) are stated at original cost, including labor, materials, taxes and overhead costs incurred during the construction period. The cost of utility plant of Washington Gas includes an allowance for funds used during construction (AFUDC) that is calculated under a formula prescribed by our regulators in Maryland and the District of Columbia. Washington Gas capitalizes AFUDC as a component of construction overhead. The rates for AFUDC for fiscal years September 30, 2017 , 2016 and 2015 were 2.73% , 5.51% and 4.12% , respectively. In addition, WGL Energy Systems and WGL Midstream incur capitalized interest during the cost of constructing and acquiring their long-term assets. For the fiscal years ended September 30, 2017, 2016 and 2015, capitalized interest was $ 2.9 million , $ 2.1 million and $ 1.1 million , respectively.

 

Washington Gas charges maintenance and repairs directly to operating expenses. 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 2.80% , 2.70% and 2.73% during fiscal years 2017 , 2016 and 2015 , respectively. In accordance with regulatory requirements, such rates include a component related to asset removal costs for Washington Gas. These asset removal costs are accrued through depreciation expense with a corresponding credit to “Regulatory liabilities—Accrued 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 liabilities—Accrued asset removal costs.” Washington Gas periodically reviews the adequacy of its depreciation rates by considering estimated remaining lives and other factors. For information about Asset Retirement Obligations (ARO’s), refer to the section entitled “Asset Retirement Obligations” .

 

16

 

WGL Holdings, Inc.

Washington Gas Light Company

Notes to Consolidated Financial Statements

 

At September 30, 2017 and 2016 , 87.2 % and 88.7% , respectively, of WGL’s 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
    	
 
    
	
($ In millions)
   September 30,
    	
 
    	
2017
    	
 
    	
2016
    	
 
    
	
Regulated   utility segment
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Distribution,   transmission and storage
    	
 
    	
$
    	
4,544.7
    	
 
    	
74.0
    	
%
    	
$
    	
4,210.6
    	
 
    	
75.9
    	
%
    
	
General,   miscellaneous and intangibles
    	
 
    	
548.5
    	
 
    	
8.9
    	
%
    	
435.2
    	
 
    	
7.9
    	
%
    
	
Construction   work in progress (CWIP)
    	
 
    	
264.8
    	
 
    	
4.3
    	
%
    	
273.1
    	
 
    	
4.9
    	
%
    
	
Total   regulated utility segment
    	
 
    	
5,358.0
    	
 
    	
87.2
    	
%
    	
4,918.9
    	
 
    	
88.7
    	
%
    
	
Unregulated   segments
    	
 
    	
786.0
    	
 
    	
12.8
    	
%
    	
624.1
    	
 
    	
11.3
    	
%
    
	
Total
    	
 
    	
$
    	
6,144.0
    	
 
    	
100.0
    	
%
    	
$
    	
5,543.0
    	
 
    	
100.0
    	
%
    

 

ASSETS SALE - BUILDING

 

During the year ended September 30, 2016, Washington Gas completed the sale of the Springfield Operation Center for approximately $ 20.3 million , net of selling and administrative expenses of $ 0.5 million . As a result of the sale, a minimal loss was recorded to “Other expense-net” in the accompanying Consolidated Statements of Income.

 

IMPAIRMENT OF LONG-LIVED ASSETS

 

Management regularly reviews property and equipment and other long-lived assets, including certain definite-lived intangible assets and our equity method investments for possible impairment. For our equity method investments, an impairment is recorded when the investment has experienced decline in value that is other-than-temporary. Additionally, if the projects in which we hold an investment recognize an impairment loss, we would record our proportionate share of that impairment loss and evaluate the investment for decline in value that is other-than-temporary. This review occurs quarterly, or more frequently if events or changes in circumstances indicate the carrying amount of the asset may not be recoverable.

 

During the fiscal year ended September 2017, WGL did not record any impairments related to our long-lived assets. During the fiscal year ended September 30, 2016, WGL recorded a $ 4.1 million impairment for the Nextility investment in direct financing leases. During the fiscal year ended September 30, 2015, WGL impaired its entire investment in ASDHI by its carrying value of $ 5.6 million based on management’s assumption of the current valuation and expected return from the investment.

 

Refer to Note 15 — Fair Value Measurements and Note 17 — Other Investments of the Notes to Consolidated Financial Statements for further discussion of these assets.

 

OPERATING LEASES

 

We have classified the lease of our corporate headquarters as an operating lease. We amortize as 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 15 -year non-cancelable period of the lease. Refer to Note 13— Commitments and Contingencies for financial data for all of our operating leases.

 

17

 

WGL Holdings, Inc.

Washington Gas Light Company

Notes to Consolidated Financial Statements

 

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 or our subsidiaries as of September 30, 2017 and 2016 .

 

REVENUE AND COST RECOGNITION

 

Regulated Utility Operations

 

Revenues.   For regulated deliveries of natural gas, Washington Gas reads meters and bills customers on a 19 -day 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 Gas’ jurisdictional tariffs contain mechanisms that provide for the recovery of the cost of gas incurred 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. Under or over-collections of gas costs in the current cycle are charged or credited to deferred charges or credits on the balance sheet as non-current regulatory assets or liabilities. Amounts deferred at the end of the cycle, August 31 of each year, are fully reconciled and transferred to current assets or liabilities under the balance sheet captions “Gas costs and other regulatory assets” and “Gas costs and other regulatory liabilities.” These balances are recovered or refunded to customers over the subsequent 12 month period.

 

Revenue Taxes.   Revenue taxes such as gross receipts taxes, Public Service Commission (PSC) fees, franchise fees and energy taxes are reported gross in operating revenues. During fiscal years ended September 30, 2017, 2016 and 2015, $ 75.1 million ,and $73.0 million , and $83.5 million , respectively, were recorded to operating revenues.

 

Transportation Gas Imbalance.   Interruptible shippers and third party marketer shippers transport gas to Washington Gas’ distribution system as part of the unbundled services offered. The delivered volumes of gas from third party shippers into Washington Gas’ distribution system rarely equal the volumes billed to third party marketer 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 a receivable from or liability to third party marketers associated with gas volumes related to these transportation imbalances but, rather, reflects the financial impact as a regulatory asset or liability related to its gas cost adjustment mechanism, thereby eliminating any profit or loss that would occur as a result of the imbalance. The regulatory treatment combines the imbalance for all marketers, including WGL Energy Services, into a single “net” adjustment to the regulatory asset or liability. Refer to Note 18— Related Party Transactions for 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, futures and option contracts for periods when these resources are not being used to physically serve utility customers. Refer to “Derivative Activities” below for 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 Gas’ customers and shareholders.

 

All unrealized fair value gains and losses, and margins generated from the physical and financial settlement of these asset optimization contracts are recorded in “Utility cost of gas” on the income statement or, in the case of amounts to be shared with rate payers, regulatory assets/liabilities on the balance sheet.

 

Non-Utility Operations

 

Retail Energy-Marketing Segment.  WGL Energy Services sells natural gas and electricity on an unregulated basis to residential, commercial and industrial customers both inside and outside the Washington Gas service territory.

 

18

 

WGL Holdings, Inc.

Washington Gas Light Company

Notes to Consolidated Financial Statements

 

WGL Energy Services 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 5 years , allow WGL Energy Services to bill customers based upon metered gas and electricity usage. Usage is measured either on a cycle basis at customer premises or based on quantities delivered to the local utility, both of which may vary by month. The billing cycles for customers do not coincide with the accounting periods used for financial reporting purposes; therefore, WGL Energy Services accrues unbilled revenues for gas and electricity delivered, but not yet billed, at the end of each accounting period. In addition, WGL Energy Services periodically makes spot sales in the wholesale market due to specific delivery requirements or to reduce customer supply costs.  Revenues are reflected in “Operating Revenues—Non utility.”

 

WGL Energy Services 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 in “Non-Utility cost of energy-related sales.”

 

Commercial Energy Systems Segment.  WGL Energy Systems recognizes income and expenses for all design-build construction contracts using the percentage-of-completion method in “Operating Revenues—Non-utility” and “Non-Utility cost of energy-related sales.” WGL Energy Systems also recognizes income from its distributed energy assets based on the terms of the related power purchase agreements. Renewable Energy Certificates (RECs) are generated by WGL Energy Systems after every 1,000 Kilowatt-hours (kWh) of electricity are produced by an eligible solar facility. WGL Energy Systems recognizes income on the sale of RECs based on the contractual terms and conditions of the sale. Refer to Note 17— Other Investments for discussion of our income from operating lease arrangements and equity method investments.

 

Midstream Energy Services Segment.  WGL Midstream nets its revenues and costs related to its trading activities in “Operating Revenues—Non-utility”. Any profits and losses from WGL Midstream’s pipeline investments are included in “Equity in earnings of unconsolidated affiliates” in the accompanying Consolidated Statement of Income and are added to or subtracted from the carrying amount of WGL’s investment balance. Refer to Note 17— Other Investments for discussion of our pipeline equity method investments.

 

STORAGE GAS VALUATION METHODS

 

For Washington Gas and WGL Energy Services, storage gas inventories are accounted for using the first-in, first-out method. For WGL Midstream, storage gas inventory is accounted for using the weighted average cost method. Our inventory is stated at the lower-of-cost or market. Interim period inventory losses attributable to lower-of-cost or market adjustments may be reversed if the market value of the inventory is recovered by the end of the same fiscal year.

 

For the fiscal year ended September 30, 2017 , Washington Gas and WGL Midstream did not record a lower-of-cost or market adjustment to net income. During the fiscal year ended September 30, 2016, Washington Gas did not record a lower-of-cost or market adjustment to net income and WGL Midstream recorded quarterly adjustments that netted to zero. During the fiscal year ended September 30, 2015, Washington Gas and WGL Midstream recorded lower-of-cost or market adjustments to net income of $ (1.3) million and $ (21.5) million , respectively.

 

WEATHER-RELATED INSTRUMENTS

 

Periodically, we purchase certain weather-related instruments, such as HDD derivatives and CDD derivatives. We account for these weather related instruments in accordance with Financial Accounting Standards Board Accounting Standards Codification (ASC) Subtopic 815-45, Derivatives and Hedging — Weather Derivatives . For weather insurance policies and HDD derivatives, benefits or costs are ultimately recognized to the extent actual HDDs fall above or below the contractual HDDs for each instrument. Benefits or costs are recognized for CDD derivatives when the average temperature exceeds or is below a contractually stated level during the contract period. Premiums for weather-related instruments are amortized based on the pattern of normal temperature days over the coverage period. Weather-related instruments for which we collect a premium are carried at fair value. Refer to Note 14— Derivative and Weather-Related Instruments for further discussion of our weather-related instruments.

 

19

 

WGL Holdings, Inc.

Washington Gas Light Company

Notes to Consolidated Financial Statements

 

DERIVATIVE ACTIVITIES

 

Regulated Utility .  Washington Gas enters into both physical and financial derivative contracts for the purchase and sale of natural gas that are subject to mark-to-market accounting. Changes in the fair value of derivative instruments recoverable or refundable to customers and therefore subject to ASC Topic 980, Regulated Operations , 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 with the primary objective of securing operating margins that Washington Gas expects to 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 earnings volatility will not change the realized margins that Washington Gas expects to earn. In accordance with ASC Topic 815, 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”.

 

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 long-term debt. Gains or losses associated with these derivative transactions are deferred as regulatory assets or liabilities and amortized to interest expense in accordance with regulatory accounting requirements. Refer to Note 14— Derivative and Weather-Related Instruments for further discussion of our derivative activities.

 

Non-Utility Operations.   WGL Energy Services enters into both physical and financial contracts for the purchase and sale of natural gas and electricity. WGL Energy Services designates a portion of these physical contracts related to the purchase of natural gas and electricity to serve our customers as “normal purchases and normal sales;” therefore, they are not subject to the mark-to-market accounting requirements of ASC Topic 815. WGL Energy Services records these derivatives as revenues or expenses depending on the nature of the economically hedged item. WGL Midstream enters into derivative contracts for the purpose of optimizing its storage and transportation capacity as well as managing the transportation and storage assets on behalf of third parties. The financial contracts and the portion of the physical contracts that qualify as derivative instruments are subject to the mark-to-market accounting requirements and are recorded on the balance sheet at fair value and are reflected in earnings. WGL Midstream nets financial and physical contracts in “Operating Revenues-Non-utility”. WGL may, from time to time, designate interest rate swaps used to manage the interest rate risk associated with future debt issuances, as cash flow hedges. Any gains or losses arising from the effective portion of cash flow hedges are recorded in other comprehensive income and are amortized using the effective interest rate method into earnings over the same period as the hedged interest payments are made. Gains or losses arising from the ineffective portion of cash flow hedges are recognized in earnings immediately.

 

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 that are currently excluded 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 in future periods. Refer to Note 2— Regulated Operations for Washington Gas’ regulatory assets and liabilities associated with income taxes due from and due to customers at September 30, 2017 and 2016 . 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 9— Income Taxes which provides detailed financial information related to our income taxes.

 

STOCK-BASED COMPENSATION

 

We account for stock-based compensation expense in accordance with ASC Topic 718, Compensation—Stock Compensation,  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 equity-classified share-based awards, which include performance shares granted to certain employees and shares issued to directors. For liability-classified share-based awards, which include performance units, we recognize stock-based compensation expense based on their fair value at the end of each reporting period. For both equity-classified and liability-classified share-based awards, 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 11— Stock-Based Compensation for further discussion of the accounting for our stock-based compensation plans.

 

20

 

WGL Holdings, Inc.

Washington Gas Light Company

Notes to Consolidated Financial Statements

 

ASSET RETIREMENT OBLIGATIONS

 

Washington Gas accounts for its AROs in accordance with ASC Subtopic 410-20, Asset Retirement and Environmental Obligations—Asset Retirement Obligations. Our asset retirement obligations include the costs to cut, purge and cap Washington Gas’ distribution and transmission system and plug storage wells upon their retirement. We also have asset retirement obligations associated with our distributed generation assets. 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 asset’s acquisition, and accreting the liability until it is settled. There are timing differences between the ARO-related accretion and depreciation amounts being recorded pursuant to GAAP 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 liabilities—Accrued asset removal costs” in accordance with ASC Topic 980. We do not have any assets that are legally restricted related to the settlement of asset retirement obligations.

 

	
WGL   Holdings, Inc.
    	
 
    
	
Changes   in Asset Retirement Obligations
    	
 
    
	
(In millions)
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
September 30,
    	
 
    	
2017
    	
 
    	
2016
    	
 
    
	
Asset retirement   obligations at beginning of year
    	
 
    	
$
    	
210.3
    	
 
    	
$
    	
207.7
    	
 
    
	
Liabilities   incurred in the period
    	
 
    	
3.0
    	
 
    	
12.1
    	
 
    
	
Revaluation of   asset retirement obligation
    	
 
    	
89.5
    	
 
    	
—
    	
 
    
	
Liabilities settled   in the period
    	
 
    	
(7.2
    	
)
    	
(16.9
    	
)
    
	
Accretion   expense
    	
 
    	
8.3
    	
 
    	
7.4
    	
 
    
	
Asset retirement   obligations at the end of the year (a)
    	
 
    	
$
    	
303.9
    	
 
    	
$
    	
210.3
    	
 
    
	
 
    	
 
    
	
Washington   Gas Light Company
    	
 
    
	
Changes   in Asset Retirement Obligations
    	
 
    
	
(In   millions)
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
September 30,
    	
 
    	
2017
    	
 
    	
2016
    	
 
    
	
Asset retirement   obligations at beginning of year
    	
 
    	
$
    	
206.6
    	
 
    	
$
    	
205.9
    	
 
    
	
Liabilities   incurred in the period
    	
 
    	
2.0
    	
 
    	
10.4
    	
 
    
	
Revaluation   of asset retirement obligation
    	
 
    	
89.5
    	
 
    	
—
    	
 
    
	
Liabilities   settled in the period
    	
 
    	
(7.2
    	
)
    	
(16.9
    	
)
    
	
Accretion   expense
    	
 
    	
8.0
    	
 
    	
7.2
    	
 
    
	
Asset retirement   obligations at the end of the year (a)
    	
 
    	
$
    	
298.9
    	
 
    	
$
    	
206.6
    	
 
    

 

(a) Includes short-term asset retirement obligations of $7.1 million and $7.2 million for fiscal year 2017 and 2016 , respectively.

 

21

 

WGL Holdings, Inc.

Washington Gas Light Company

Notes to Consolidated Financial Statements

 

ACCOUNTING STANDARDS ADOPTED IN FISCAL YEAR 2017

 

	
Standard
    	
 
    	
Description
    	
 
    	
Date of adoption
    	
 
    	
Effect on the financial statements
   or other significant matters
    
	
ASU 2014-15, Presentation of Financial   Statements-Going Concern (Subtopic 205-40): Disclosure of Uncertainties about   an Entity’s Ability To Continue As A Going Concern
    	
 
    	
The standard requires an entity to assess the   ability to continue as a going concern. The standard will require management   to evaluate whether there are conditions or events that raise substantial   doubt about the entity’s ability to continue as a going concern for one year   from the date the financial statements were issued.
    	
 
    	
September 30, 2017
    	
 
    	
We have evaluated the impact of this new standard   and no additional footnote disclosure is required.
    
	
ASU 2015-03 and ASU 2015-15, Interest -   Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of   Debt Issuance Cost and Presentation and Subsequent Measurement of Debt   Issuance Costs Associated with Line-of-Credit Arrangements
    	
 
    	
The standard requires an entity to present debt   issuance costs in the balance sheet as a direct deduction of the debt   liability and the amortization of debt issuance costs be presented as   interest expense in a manner consistent with its accounting treatment of debt   discounts. The standard requires retrospective application.
    
   An entity can defer and present debt issuance costs related to line-of-credit   arrangements as an asset and subsequently amortize the deferred debt issuance   costs ratably over the term of the arrangement, regardless of whether there   are any outstanding borrowings on the line-of-credit arrangement.
    
   The new guidance does not change the recognition and measurement guidance for   debt issuance costs.
    	
 
    	
October 1, 2016
    	
 
    	
Implementation of these standards resulted in a   reduction of other deferred assets and long-term debt in our Consolidated   Balance Sheets. The amounts that were reclassified at September 30, 2016   for WGL and Washington Gas were $9.3 million and $6.8 million, respectively.
    

 

22

 

WGL Holdings, Inc.

Washington Gas Light Company

Notes to Consolidated Financial Statements

 

 

	
ASU   2015-02 and ASU 2016-17, Consolidation (Topic 810): Amendments to the   Consolidation Analysis and Interests Held through Related Parties that are   Under Common Control
    	
 
    	
The standards changed   the analysis to be performed in determining whether certain types of legal   entities should be consolidated, specifically the analysis of limited   partnerships and similar entities, fee arrangements and related party   relationships. The standard permits prospective or retrospective application   for different parts. 

 

The consolidation   guidance was also amended as to how a reporting entity, that is the single   decision maker of a VIE, should treat indirect interests in the entity held   through related parties that are under common control with the reporting   entity, when determining whether it is the primary beneficiary of that VIE.
    	
 
    	
October 1, 2016
    	
 
    	
The amendments to the   consolidation guidance under these standards were applied and did not have an   impact on the financial statements.
    
	
ASU   2015-05, Intangibles-Goodwill and Other -Internal-Use Software (Subtopic   350-40)-Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement
    	
 
    	
The standard clarifies   that a cloud computing customer may account for the arrangement as a software   license when (1) the customer has a contractual right to take possession   of the software at any time during the hosting period without significant   penalty, and (2) it is feasible for the customer to either operate the   software on its own hardware or contract with another party unrelated to the   vendor to host the software. If the arrangement does not meet these criteria,   it would be accounted for as a service contract and accounted for as an   operating expense in the period incurred.
    	
 
    	
October 1, 2016
    	
 
    	
WGL elected to apply   the standard on a prospective basis, which did not have a material impact on   the financial statements.
    
	
2015-07,   Fair Value Measurement (Topic 820) - Disclosures in Certain Entities that   Calculate Net Asset Value per Share (or Its Equivalent)
    	
 
    	
This standard removes   the requirement to categorize within the fair value hierarchy all investments   for which fair value is measured using the net asset value (“NAV”) per share   as a practical expedient. Instead, entities would be required to disclose   those investments as a reconciling item to the total fair value of   investments in the disclosure and to be consistent with the amount reported   in the balance sheet. Retrospective application is required.
    	
 
    	
October 1, 2016
    	
 
    	
WGL and Washington Gas   do not have any financial instruments presented in the Consolidated Balance   Sheets measured at NAV. Implementation of the standard affected the fair   value hierarchy related to the pension plan and health and life insurance   plan assets disclosed in Note 10 - Pension   and Other Post-Retirement Benefit Plans.
    

 

23

 

WGL Holdings, Inc.

Washington Gas Light Company

Notes to Consolidated Financial Statements

 

OTHER NEWLY ISSUED ACCOUNTING STANDARDS

 

	
Standard
    	
 
    	
Description
    	
 
    	
Required date of
   adoption
    	
 
    	
Effect on the financial statements
   or other significant matters
    
	
ASU 2016-09, Compensation—Stock Compensation   (Topic 718): Improvements to Employee Share-Based Payment Accounting
    	
 
    	
This standard simplifies several aspects of the   accounting for share-based payment transactions, including accounting for   income taxes, forfeitures, and statutory tax withholding requirements.
    	
 
    	
October 1, 2017
    	
 
    	
WGL has elected to continue to estimate forfeitures   for its share-based payment awards rather than account for forfeitures when   they occur. WGL and Washington Gas each expect to report $6.2 million, as a   cumulative effect adjustment to retained earnings in the first quarter of   fiscal year 2018 related to the recognizing all excess tax benefits   previously unrecognized.
    
	
ASU 2017-07, Compensation - Retirement Benefits   (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net   Periodic Postretirement Benefit Cost
    	
 
    	
This standard requires entities to report the   service cost component in the same financial statement line item as other   compensation costs arising from services rendered by the pertinent employees   during the period.  The other components of net benefit cost are to be   presented separately from service cost and outside of operating income.    In addition, only the service cost component of net benefit cost is eligible   for capitalization.  Changes to the presentation of service costs and   other components of net benefit cost should be applied retrospectively.   Changes in capitalization practices should be implemented prospectively.
    	
 
    	
October 1, 2018*
    	
 
    	
We are in the process of evaluating the impact the   adoption of this standard will have on our financial statements.
    
	
ASU 2016-15, Statement of Cash Flows (Topic   230)—Classification of Certain Cash Receipts and Cash Payments (a consensus   of the FASB Emerging Issues Task Force)
    	
 
    	
This update provides guidance on the classification   of certain cash receipts and payments in the statement of cash flows.
    	
 
    	
October 1, 2018*
    	
 
    	
We are in the process of evaluating the impact the   adoption of this standard will have on our financial statements.
    

 

24

 

WGL Holdings, Inc.

Washington Gas Light Company

Notes to Consolidated Financial Statements

 

	
ASU 2014-09, Revenue from   Contracts with Customers (Topic 606), including subsequent ASUs clarifying   the guidance.
    	
 
    	
ASU 2014-09 establishes a comprehensive revenue   recognition model clarifying the method used to determine the timing and   requirements for revenue recognition from contracts with customers. The   disclosure requirements under the new standard will enable users of financial   statements to understand the nature, amount, timing, and uncertainty of   revenue and cash flows arising from contracts with customers.
    	
 
    	
October 1, 2018*
    	
 
    	
An implementation team is currently evaluating all   revenue streams and reviewing contracts with customers, as well as, related   financial statement disclosures to determine the impact the adoption of this   standard will have on our financial statements. WGL is also monitoring   unresolved industry specific implementation issues that could impact the   timing of revenue recognition for our regulated utility tariff based sales.   WGL will adopt using the modified retrospective approach.
    
	
ASU 2016-01, Financial Instruments (Subtopic   825-10): Recognition and Measurement of Financial Assets and Financial   Liabilities
    	
 
    	
The new standard amends certain disclosure   requirements associated with the fair value of financial instruments, and   significantly revises an entity’s accounting related to the classification   and measurement of investments in equity securities and the presentation of   certain fair value changes for financial liabilities measured at fair value.
    	
 
    	
October 1, 2018*
    	
 
    	
We performed a preliminary evaluation and the   adoption of this standard will primarily impact the disclosure of our   financial instruments in our Fair Value Measurements Footnote.
    
	
ASU 2016-02, Leases (Topic 842)
    	
 
    	
This standard requires recognition of a right-to-use   asset and lease liability on the statement of financial position and   disclosure of key information about leasing arrangements. The standard   requires application using a modified retrospective approach.
    	
 
    	
October 1, 2019*
    	
 
    	
We are in the process of evaluating the impact the   adoption of this standard will have on our financial statements.
    
	
ASU 2017-12, Derivatives and Hedging (Topic   815)—Targeted Improvements to Accounting for Hedging Activities
    	
 
    	
This standard seeks to better align risk management   activities and financial reporting for hedging relationships through changes   to both the designation and measurement guidance for qualifying hedging   relationships and the presentation of hedging results.
    	
 
    	
October 1, 2019*
    	
 
    	
We are in the process of evaluating the impact the   adoption of this standard will have on our financial statements.
    
	
ASU 2016-13, Financial Instruments-Credit Losses   (Topic 326): Measurement of Credit Losses on Financial Instruments
    	
 
    	
For credit losses on financial instruments, this   standard changes the current incurred loss impairment methodology to an   expected loss methodology and requires consideration of a broader range   of reasonable and supportable information to determine credit loss estimates.
    	
 
    	
October 1, 2020*
    	
 
    	
We are in the process of evaluating the impact the   adoption of this standard will have on our financial statements.
    

 

*Subject to acceleration if the merger with AltaGas is consummated due to the difference in Parent and Subsidiary fiscal year ends.

 

25

 

WGL Holdings, Inc.

Washington Gas Light Company

Notes to Consolidated Financial Statements

 

NOTE 2. REGULATED OPERATIONS

 

Washington Gas accounts for its regulated operations in accordance with ASC Topic 980. 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 expense 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 the revenues designed to recover these costs through customers’ rates. Further, regulators can also impose liabilities upon a company for gains previously realized or for amounts previously collected from customers for expenses expected to be incurred in the future (regulatory liabilities).

 

When Washington Gas files a request with certain regulatory commissions to modify customers’ rates, it may be 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 records a provision for a rate refund regulatory liability 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. Refer to Note 13— Commitments and Contingencies for further discussion of regulatory matters and related contingencies.

 

26

 

WGL Holdings, Inc.

Washington Gas Light Company

Notes to Consolidated Financial Statements

 

At September 30, 2017 and 2016 , we recorded the following regulatory assets and liabilities on our balance sheets. These assets and liabilities will be recognized as revenues or expenses in future periods as they are reflected in customers’ rates.

 

	
Regulatory Assets and Liabilities
    	
 
    
	
(In millions)
    	
 
    	
Regulatory Assets
    	
 
    	
Regulatory Liabilities
    	
 
    
	
September 30,
    	
 
    	
2017
    	
 
    	
2016
    	
 
    	
2017
    	
 
    	
2016
    	
 
    
	
Current:
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Gas costs due   from/to customers (a)
    	
 
    	
$
    	
0.2
    	
 
    	
$
    	
4.1
    	
 
    	
$
    	
10.6
    	
 
    	
$
    	
12.1
    	
 
    
	
Interruptible   sharing (a)
    	
 
    	
2.4
    	
 
    	
0.9
    	
 
    	
0.7
    	
 
    	
0.6
    	
 
    
	
Revenue   normalization mechanisms for Maryland and Virginia (a)
    	
 
    	
11.7
    	
 
    	
6.6
    	
 
    	
1.4
    	
 
    	
—
    	
 
    
	
Accelerated   replacement recovery mechanisms
    	
 
    	
7.4
    	
 
    	
3.7
    	
 
    	
1.1
    	
 
    	
0.3
    	
 
    
	
Rates subject to   refund (c)
    	
 
    	
—
    	
 
    	
—
    	
 
    	
9.0
    	
 
    	
—
    	
 
    
	
Total   current
    	
 
    	
$
    	
21.7
    	
 
    	
$
    	
15.3
    	
 
    	
$
    	
22.8
    	
 
    	
$
    	
13.0
    	
 
    
	
Deferred:
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Accrued asset   removal costs
    	
 
    	
$
    	
—
    	
 
    	
$
    	
—
    	
 
    	
$
    	
292.2
    	
 
    	
$
    	
310.8
    	
 
    
	
Deferred gas   costs (a)(b)
    	
 
    	
90.1
    	
 
    	
179.9
    	
 
    	
—
    	
 
    	
—
    	
 
    
	
Pension and   other post-retirement benefits
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Deferred pension   costs—trackers (d)
    	
 
    	
19.7
    	
 
    	
29.8
    	
 
    	
—
    	
 
    	
—
    	
 
    
	
ASC Topic 715   unrecognized costs/income (a)(e)
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Pensions
    	
 
    	
119.6
    	
 
    	
193.4
    	
 
    	
—
    	
 
    	
—
    	
 
    
	
Other   post-retirement benefits
    	
 
    	
0.2
    	
 
    	
—
    	
 
    	
135.0
    	
 
    	
113.9
    	
 
    
	
Total pension   and other post-retirement benefits
    	
 
    	
139.5
    	
 
    	
223.2
    	
 
    	
135.0
    	
 
    	
113.9
    	
 
    
	
Other:
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Income   tax-related amounts due from/to customers (f)
    	
 
    	
37.9
    	
 
    	
33.6
    	
 
    	
3.2
    	
 
    	
3.6
    	
 
    
	
Losses/gains on   issuance and extinguishments of debt and interest-rate derivative instruments   (a)(g)
    	
 
    	
16.4
    	
 
    	
17.5
    	
 
    	
1.4
    	
 
    	
1.5
    	
 
    
	
Deferred gain on   sale of assets (a)
    	
 
    	
—
    	
 
    	
—
    	
 
    	
0.7
    	
 
    	
1.0
    	
 
    
	
Rights-of-way   fees (a)
    	
 
    	
—
    	
 
    	
0.3
    	
 
    	
0.7
    	
 
    	
—
    	
 
    
	
Business process   outsourcing and related costs (a)
    	
 
    	
8.2
    	
 
    	
9.8
    	
 
    	
—
    	
 
    	
—
    	
 
    
	
Non-retirement   post-employment benefits (a)(h)
    	
 
    	
17.8
    	
 
    	
19.2
    	
 
    	
—
    	
 
    	
—
    	
 
    
	
Deferred   integrity management expenditures (a)(i)
    	
 
    	
7.7
    	
 
    	
8.5
    	
 
    	
—
    	
 
    	
—
    	
 
    
	
Recoverable   portion of abandoned LNG facility
    	
 
    	
3.1
    	
 
    	
4.3
    	
 
    	
—
    	
 
    	
—
    	
 
    
	
Environmental   response costs (a)(j)
    	
 
    	
2.5
    	
 
    	
1.3
    	
 
    	
—
    	
 
    	
—
    	
 
    
	
Other regulatory   expenses
    	
 
    	
11.0
    	
 
    	
4.1
    	
 
    	
3.4
    	
 
    	
8.3
    	
 
    
	
Total other
    	
 
    	
$
    	
104.6
    	
 
    	
$
    	
98.6
    	
 
    	
$
    	
9.4
    	
 
    	
$
    	
14.4
    	
 
    
	
Total   deferred
    	
 
    	
$
    	
334.2
    	
 
    	
$
    	
501.7
    	
 
    	
$
    	
436.6
    	
 
    	
$
    	
439.1
    	
 
    
	
Total
    	
 
    	
$
    	
355.9
    	
 
    	
$
    	
517.0
    	
 
    	
$
    	
459.4
    	
 
    	
$
    	
452.1
    	
 
    

 

(a) Washington Gas does not earn its overall rate of return on these assets. Washington Gas is allowed to recover and required to pay, using short-term interest rates, the carrying costs related to billed gas costs due from and to its customers in the District of Columbia and Virginia jurisdictions.

(b) Includes fair value of derivatives, which are not included in customer bills until settled.

(c) Represents provision established for interim base rate billings, subject to refund, in Virginia, effective in the December 2016 billing cycle.

(d) Relates to the District of Columbia jurisdiction.

(e) Refer to Note 10-Pension and Other Post-Retirement Benefit Plans for a further discussion of these amounts.

(f) This balance represents amounts due from customers for deferred tax liabilities related to tax benefits on deduction flowed directly to customers prior to the adoption of income tax normalization for ratemaking purposes.

(g) 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.

(h) Represents the timing difference between the recognition of workers compensation and short-term disability costs in accordance with generally accepted accounting principles and the way these costs are recovered through rates.

(i) This balance represents amounts for deferred expenditures associated with Washington Gas’ Distribution Integrity Management Program (DIMP) in Virginia.

 

27

 

WGL Holdings, Inc.

Washington Gas Light Company

Notes to Consolidated Financial Statements

 

(j) This balance represents allowed remediation expenditures at Washington Gas sites to be recovered through rates for Maryland and the District of Columbia. The recovery period is over several years.

 

As required by ASC Topic 980, Washington Gas monitors its regulatory and competitive environment to determine whether the recovery of its regulatory assets remains 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 ASC Topic 980 continues to apply to our regulated operations, and the recovery of our regulatory assets at September 30, 2017 is probable.

 

NOTE 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 and Washington Gas.

 

 

	
WGL   Holdings, Inc.
    	
 
    
	
 
    	
 
    	
September 30,
    	
 
    
	
(In millions)
    	
 
    	
2017
    	
 
    	
2016
    	
 
    
	
Accounts   payable—trade
    	
 
    	
$
    	
361.6
    	
 
    	
$
    	
353.0
    	
 
    
	
Employee   benefits and payroll accruals
    	
 
    	
35.0
    	
 
    	
34.4
    	
 
    
	
Other accrued   liabilities
    	
 
    	
27.2
    	
 
    	
18.0
    	
 
    
	
Total
    	
 
    	
$
    	
423.8
    	
 
    	
$
    	
405.4
    	
 
    

 

	
Washington   Gas Light Company
    	
 
    
	
 
    	
 
    	
September 30,
    	
 
    
	
(In millions)
    	
 
    	
2017
    	
 
    	
2016
    	
 
    
	
Accounts   payable—trade
    	
 
    	
$
    	
174.9
    	
 
    	
$
    	
161.0
    	
 
    
	
Employee   benefits and payroll accruals
    	
 
    	
32.4
    	
 
    	
32.2
    	
 
    
	
Other   accrued liabilities
    	
 
    	
12.5
    	
 
    	
11.8
    	
 
    
	
Total
    	
 
    	
$
    	
219.8
    	
 
    	
$
    	
205.0
    	
 
    

 

28

 

WGL Holdings, Inc.

Washington Gas Light Company

Notes to Consolidated Financial Statements

 

NOTE 4. SHORT-TERM DEBT

 

WGL and Washington Gas satisfy their short-term financing requirements through the sale of commercial paper, financing arrangements with third-party lenders, or through bank borrowings. Due to the seasonal nature of the regulated utility and retail energy-marketing segments, short-term financing requirements can vary significantly during the year. Revolving credit agreements are maintained to support outstanding commercial paper and to permit short-term borrowing flexibility. The policy of each WGL and Washington Gas is to maintain bank credit facilities in amounts equal to or greater than the expected maximum commercial paper position. The following is a summary of committed credit available at September 30, 2017 and 2016 .

 

	
Committed   Credit Available (In millions)
    	
 
    
	
September 30, 2017
    	
 
    	
WGL (b)
    	
 
    	
Washington
   Gas
    	
 
    	
Total
   Consolidated
    	
 
    
	
Committed credit   agreements
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Unsecured   revolving credit facility, expires December 19, 2019 (a)
    	
 
    	
$
    	
650.0
    	
 
    	
$
    	
350.0
    	
 
    	
$
    	
1,000.0
    	
 
    
	
Less: Commercial   Paper
    	
 
    	
(382.0
    	
)
    	
(123.0
    	
)
    	
(505.0
    	
)
    
	
Net committed   credit available
    	
 
    	
$
    	
268.0
    	
 
    	
$
    	
227.0
    	
 
    	
$
    	
495.0
    	
 
    
	
Weighted average   interest rate
    	
 
    	
1.52
    	
%
    	
1.22
    	
%
    	
1.45
    	
%
    
	
September 30,   2016
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Committed credit   agreements
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Unsecured   revolving credit facility, expires December 19, 2019 (a)
    	
 
    	
$
    	
450.0
    	
 
    	
$
    	
350.0
    	
 
    	
$
    	
800.0
    	
 
    
	
Less: Commercial   Paper
    	
 
    	
(227.0
    	
)
    	
(42.0
    	
)
    	
(269.0
    	
)
    
	
Net committed   credit available
    	
 
    	
$
    	
223.0
    	
 
    	
$
    	
308.0
    	
 
    	
$
    	
531.0
    	
 
    
	
Weighted average   interest rate
    	
 
    	
0.73
    	
%
    	
0.46
    	
%
    	
0.69
    	
%
    

 

(a) Washington Gas has the right to request extensions with the banks’ approval. Washington Gas’ revolving credit facility permits it to borrow an additional $100 million , with the banks’ approval, for a total of $450 million .

(b) WGL includes WGL Holdings and all subsidiaries other than Washington Gas.

 

At September 30, 2017 and 2016 , there were no outstanding bank loans from WGL’s or Washington Gas’ revolving credit facilities.

 

Under the terms of the credit agreements, the ratio of consolidated financial indebtedness to consolidated total capitalization may not exceed 0.65 to 1.0 ( 65.0% ). At September 30, 2017 , WGL’s and Washington Gas’ ratios of consolidated financial indebtedness to consolidated total capitalization were 59.2% and 52.2% , respectively. In addition, WGL 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. Failure to inform the lenders’ agent of these material changes might constitute default under the agreements. Another potential default may be deemed to exist if WGL or Washington Gas were to fail to pay principal or interest when due on any other indebtedness. Such defaults, if not remedied, could lead to suspension of further loans and/or acceleration in which obligations become immediately due and payable. At September 30, 2017 , WGL and Washington Gas were in compliance with all of the covenants under their revolving credit facilities.

 

PROJECT FINANCING

 

Washington Gas previously obtained third-party project financing on behalf of the federal government to provide funds during the construction of certain energy management services projects entered into under Washington Gas’ area-wide contract. In connection with work completed under the area-wide contract, the construction work is performed by WGL Energy Systems on behalf of Washington Gas and an inter-company payable is recorded for work provided by WGL Energy Systems. As work is performed, Washington Gas establishes a receivable representing the government’s obligation to remit principal and interest. The payable and receivable are equal to each other at the end of the construction period, but there may be timing differences in the recognition of the project related payable and receivable during the construction period. When these projects are formally

 

29

 

WGL Holdings, Inc.

Washington Gas Light Company

Notes to Consolidated Financial Statements

 

“accepted” by the government and deemed complete, Washington Gas assigns the ownership of the receivable to the third party lender in satisfaction of the obligation and removes both the receivable and the obligation related to the financing from its financial statements.

 

In December 2016, WGL Energy Systems entered into an agreement to obtain third-party financing and receive funds directly from the third party lender during the construction period associated with the related energy management service projects. As a result, Washington Gas will no longer be liable under future third party financing arrangements, for projects entered into under the area-wide contract. The general terms of the financing agreement are the same as the prior financing arrangements between Washington Gas and the third party lender mentioned above. Washington Gas will continue to record a receivable representing the government’s obligation, and will record an inter-company payable to WGL Energy Systems for the construction work performed for the same amount.

 

As of September 30, 2017 , WGL and Washington Gas recorded $85.6 million and $78.2 million , respectively in “Unbilled revenues” on the balance sheet, and $54.8 million and $43.8 million , respectively, in a corresponding short-term obligation to the lender in “Notes payable and project financing”, for energy management services projects that were not complete. At September 30, 2016 , Washington Gas recorded $73.3 million in “Unbilled revenues” on the balance sheet and a $62.4 million corresponding short-term obligation to third party lenders in “Notes payable and project financing” for energy management services projects that were not complete. WGL Energy Systems did not obtain any third-party project financing on behalf of the Federal Government for the fiscal year ended September 30, 2016. Because these projects are financed for government agencies that have minimal credit risk, and with which we have previous collection experience, neither WGL nor Washington Gas recorded a corresponding reserve for bad debts related to these receivables at September 30, 2017 or September 30, 2016 .

 

NOTE 5. LONG-TERM DEBT

 

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. At September 30, 2017 and 2016 , Washington Gas had no debt outstanding under the Mortgage. Any FMBs that may be issued in the future will represent indebtedness of Washington Gas.

 

SHELF REGISTRATION

 

At September 30, 2017 , WGL had capacity under a shelf registration to issue an unspecified amount of long-term debt securities and Washington Gas had capacity under a shelf registration statement to issue up to $ 100.0 million of additional medium term notes (MTNs). As a result of certain covenants included in the Merger Agreement among WGL, AltaGas and Wrangler, Inc., WGL is limited to the length of term that it may issue debt. Refer to Note 21 — Planned Merger with AltaGas Ltd. for a discussion of the proposed merger.

 

30

 

WGL Holdings, Inc.

Washington Gas Light Company

Notes to Consolidated Financial Statements

 

UNSECURED NOTES

 

WGL and Washington Gas issue long-term notes with individual terms regarding interest rates, maturities and call or put options. These notes can have maturity dates of one or more years from the date of issuance. The following tables show the outstanding notes as of September 30, 2017 and 2016 .

 

 

	
Long-Term Debt Outstanding
    	
 
    
	
($ In millions)
    	
 
    	
WGL (a)
    	
 
    	
Washington Gas
    	
 
    	
Total Consolidated
    	
 
    
	
September 30,   2017
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Long-term   debt  (b)
    	
 
    	
$
    	
550.0
    	
 
    	
$
    	
1,146.0
    	
 
    	
$
    	
1,696.0
    	
 
    
	
Unamortized   discount
    	
 
    	
(1.5
    	
)
    	
(3.0
    	
)
    	
(4.5
    	
)
    
	
Unamortized   debt expenses
    	
 
    	
(2.1
    	
)
    	
(8.5
    	
)
    	
(10.6
    	
)
    
	
Total   Long-Term Debt
    	
 
    	
$
    	
546.4
    	
 
    	
$
    	
1,134.5
    	
 
    	
$
    	
1,680.9
    	
 
    
	
Weighted average   interest rate
    	
 
    	
2.81
    	
%
    	
4.89
    	
%
    	
4.21
    	
%
    
	
September 30,   2016
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Long-term debt  (b)
    	
 
    	
$
    	
500.0
    	
 
    	
$
    	
946.0
    	
 
    	
$
    	
1,446.0
    	
 
    
	
Unamortized discount
    	
 
    	
(1.6
    	
)
    	
(0.1
    	
)
    	
(1.7
    	
)
    
	
Unamortized debt   expenses
    	
 
    	
(2.4
    	
)
    	
(6.9
    	
)
    	
(9.3
    	
)
    
	
Total Long-Term   Debt
    	
 
    	
$
    	
496.0
    	
 
    	
$
    	
939.0
    	
 
    	
$
    	
1,435.0
    	
 
    
	
Weighted average   interest rate
    	
 
    	
2.50
    	
%
    	
5.12
    	
%
    	
4.21
    	
%
    

 

(a) WGL includes WGL Holdings and all subsidiaries other than Washington Gas.

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

 

The indenture for the unsecured MTNs and the note purchase agreement for the private placement notes provide that Washington Gas will not issue any FMBs under its Mortgage without securing all MTNs and the subject private placement notes with the Mortgage.

 

Certain of Washington Gas’ outstanding MTNs and private placement notes 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.

 

On February 18, 2016, WGL entered into a credit agreement providing for a term loan facility. On February 18, 2016 and January 26, 2017, WGL borrowed $ 250 million and $50 million , respectively, under the agreement. The credit agreement provides for maturity dates of February 18, 2018 and January 26, 2019, respectively, with a one year extension option with the lenders’ approval. In addition to the initial borrowings, the credit agreement permits, with the lenders’ approval, additional borrowings of up to $50 million , for maximum potential borrowings under the credit agreement of $350 million . The interest rate on loans made under the credit agreement will be a fluctuating rate that will be determined from time to time based on parameters set forth in the credit agreement.

 

In addition, on September 18, 2017, Washington Gas issued an aggregate principle amount of $200 million , 3.796% medium-term notes due in 2046. The notes are subject to prepayment at Washington Gas’ option at any time in whole or from time to time in part, at a redemption price equal to the greater of (i) 100% of the principal amount thereof and (ii) the sum of the present values of the remaining scheduled payments of principal and interest thereon, plus a make-whole call premium, plus, in either such case, accrued and unpaid interest on the principal of such notes to the date of redemption. At any time on and after March 15, 2046, Washington Gas may redeem the notes on any date or dates, in whole or from time to time in part, at 100% of the principal of such notes, plus accrued and unpaid interest on the principal of such notes to the date of redemption.

 

31

 

WGL Holdings, Inc.

Washington Gas Light Company

Notes to Consolidated Financial Statements

 

The following tables show long-term debt issuances and retirements for the years ended September 30, 2017 and 2016 .

 

	
Long-Term   Debt Issuances and Retirements
    	
 
    
	
($ In millions)
    	
 
    	
Principal (b)
    	
 
    	
Interest
   Rate
    	
 
    	
Effective Cost
    	
 
    	
Nominal
   Maturity  Date
    	
 
    
	
Year   Ended September 30, 2017
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
WGL  (a)
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Issuances:
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
1/26/2017
    	
 
    	
$
    	
50.0
    	
 
    	
1.57
    	
%(c)
    	
1.57
    	
%(c)
    	
1/26/2019
    	
 
    
	
Total
    	
 
    	
$
    	
50.0
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Washington   Gas
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Issuances:
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
9/18/2017
    	
 
    	
$
    	
200.0
    	
 
    	
3.80
    	
%
    	
3.80
    	
%(d)
    	
9/15/2046
    	
 
    
	
Total
    	
 
    	
200.0
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Total   consolidated issuances
    	
 
    	
$
    	
250.0
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Washington   Gas
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Year Ended   September 30, 2016
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
WGL (a)
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Issuances:
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
2/18/2016
    	
 
    	
$
    	
250.0
    	
 
    	
1.34
    	
%(c)
    	
1.34
    	
%(c)
    	
2/18/2018
    	
 
    
	
Total
    	
 
    	
$
    	
250.0
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Washington Gas
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Issuances:
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
9/16/2016
    	
 
    	
$
    	
250.0
    	
 
    	
3.80
    	
%
    	
4.01
    	
%(d)
    	
3/15/2046
    	
 
    
	
Total
    	
 
    	
250.0
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Total   consolidated issuances
    	
 
    	
$
    	
500.0
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Washington Gas
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Retirements:
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
1/18/2016
    	
 
    	
$
    	
25.0
    	
 
    	
5.17
    	
%
    	
n/a
    	
 
    	
1/18/2016
    	
 
    
	
Total
    	
 
    	
$
    	
25.0
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    

 

(a) WGL includes WGL Holdings and all subsidiaries other than Washington Gas.

(b) Represents face amount.

(c) Floating rate per annum that will be determined from time to time based on parameters set forth in the credit agreement. Effective cost reflects current rate.

(d) The estimated effective cost of the issued notes, including consideration of issuance fees and hedge costs.

 

32

 

WGL Holdings, Inc.

Washington Gas Light Company

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, 2017 are summarized in the following table.

 

	
Long-Term Debt Maturities (a)
    	
 
    
	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
(In millions)
    	
 
    	
WGL (b)
    	
 
    	
Washington Gas
    	
 
    	
Total
    	
 
    
	
2018
    	
 
    	
$
    	
250.0
    	
 
    	
$
    	
—
    	
 
    	
$
    	
250.0
    	
 
    
	
2019
    	
 
    	
50.0
    	
 
    	
50.0
    	
 
    	
100.0
    	
 
    
	
2020
    	
 
    	
100.0
    	
 
    	
50.0
    	
 
    	
150.0
    	
 
    
	
2021
    	
 
    	
—
    	
 
    	
—
    	
 
    	
—
    	
 
    
	
2022
    	
 
    	
—
    	
 
    	
—
    	
 
    	
—
    	
 
    
	
Thereafter
    	
 
    	
150.0
    	
 
    	
1,046.0
    	
 
    	
1,196.0
    	
 
    
	
Total
    	
 
    	
$
    	
550.0
    	
 
    	
$
    	
1,146.0
    	
 
    	
$
    	
1,696.0
    	
 
    
	
Less: current   maturities
    	
 
    	
250.0
    	
 
    	
—
    	
 
    	
250.0
    	
 
    
	
Total   non-current
    	
 
    	
$
    	
300.0
    	
 
    	
$
    	
1,146.0
    	
 
    	
$
    	
1,446.0
    	
 
    

 

(a) Excludes unamortized discounts and debt issuance costs of $ 3.6 million and $11.5 million at September 30, 2017 , for WGL and Washington Gas, respectively.

(b) WGL includes WGL Holdings and all subsidiaries other than Washington Gas.

 

NOTE 6. COMMON STOCK — WGL

 

COMMON STOCK OUTSTANDING

 

Shares of common stock outstanding were 51,219,000 and 51,080,612 at September 30, 2017 and 2016 , respectively.

 

COMMON STOCK RESERVES

 

At September 30, 2017 , there were 8,114,587 authorized, but unissued, shares of common stock reserved under the following plans:

 

	
Common Stock Reserves
    	
 
    
	
 
    	
 
    	
 
    	
 
    
	
Reserve for:
    	
 
    	
Number of Shares
    	
 
    
	
Omnibus   incentive compensation plans (a)
    	
 
    	
2,686,036
    	
 
    
	
Dividend   reinvestment and common stock purchase plan
    	
 
    	
2,749,099
    	
 
    
	
Employee savings   plans
    	
 
    	
637,196
    	
 
    
	
Directors’ stock   compensation plan
    	
 
    	
61,224
    	
 
    
	
ATM program
    	
 
    	
1,981,032
    	
 
    
	
Total common   stock reserves
    	
 
    	
8,114,587
    	
 
    

 

(a) In March 2007, WGL adopted a shareholder-approved Omnibus Incentive Compensation Plan to replace on a prospective basis the 1999 Incentive Compensation Plan. In December 2015, the Board of Directors approved the 2016 Omnibus Incentive Compensation Plan that became effective upon shareholder approval at WGL’s Annual Meeting of Shareholders on March 1, 2016. The plan was included as an exhibit to WGL’s proxy statement under cover of Form 14A filed on January 20, 2016. WGL no longer makes equity grants under the 2007 Omnibus Incentive Compensation Plan (but shares issued pursuant to outstanding grants under the 2007 plan will be issued pursuant to that plan). Refer to Note 11—Stock-Based Compensation for a discussion regarding our stock-based compensation plans.

 

33

 

WGL Holdings, Inc.

Washington Gas Light Company

Notes to Consolidated Financial Statements

 

On November 24, 2015, WGL entered into an equity distribution agreement and filed a prospectus supplement relating to a continuous offering under which WGL may sell common stock with an aggregate sales price of up to $ 150 million through an at-the-market (ATM) program. Sales of common stock can be made by means of privately negotiated transactions, as transactions on the New York Stock Exchange at market prices or in such other transactions as agreed upon by WGL and the sales agents and in accordance with applicable securities laws. During the fiscal year ended September 30, 2016 , WGL issued 1,162,305 shares of common stock under the ATM program for gross proceeds of $78.2 million . There were no common shares issued under the ATM program during the fiscal year ended September 30, 2017 due to the Merger Agreement.

 

NOTE 7. PREFERRED STOCK

 

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 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
    	
 
    

 

NOTE 8. EARNINGS PER SHARE

 

Basic EPS of WGL is computed by dividing net income by the weighted average number of common shares outstanding during the reported period. Diluted EPS assumes the issuance of common shares pursuant to stock-based compensation plans at the beginning of the applicable period unless the effect of such issuance would be anti-dilutive (refer to Note 11 —Stock-Based Compensation ).

 

For the fiscal year ended September 30, 2017 , there were no outstanding stock options and there were no anti-dilutive shares excluded from the calculation of diluted EPS. For the fiscal year ended September 30, 2016 , we had 86,500 weighted average performance shares issuable pursuant to our stock-based compensation plans that were excluded from the diluted share calculation due to the anti-dilutive effect of such shares. For the fiscal year ended September 30, 2015 , there were no anti-dilutive shares excluded from the calculation of diluted EPS. The following table reflects the computation of our basic and diluted EPS for the fiscal years ended September 30, 2017 , 2016 and 2015 .

 

34

 

WGL Holdings, Inc.

Washington Gas Light Company

Notes to Consolidated Financial Statements

 

	
Basic and Diluted EPS
    	
 
    
	
   
    	
 
    	
Years Ended September 30,
    	
 
    
	
(In thousands, except per share data)
    	
 
    	
2017
    	
 
    	
2016
    	
 
    	
2015
    	
 
    
	
Basic   earnings per average common share:
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Net income   applicable to common stock
    	
 
    	
$
    	
192,620
    	
 
    	
$
    	
167,594
    	
 
    	
$
    	
131,259
    	
 
    
	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Average common   shares outstanding—basic
    	
 
    	
51,205
    	
 
    	
50,369
    	
 
    	
49,794
    	
 
    
	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Basic earnings   per average common share
    	
 
    	
$
    	
3.76
    	
 
    	
$
    	
3.33
    	
 
    	
$
    	
2.64
    	
 
    
	
Diluted   earnings per average common share:
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Net income   applicable to common stock
    	
 
    	
$
    	
192,620
    	
 
    	
$
    	
167,594
    	
 
    	
$
    	
131,259
    	
 
    
	
Average common   shares outstanding—basic
    	
 
    	
51,205
    	
 
    	
50,369
    	
 
    	
49,794
    	
 
    
	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Stock-based   compensation plans
    	
 
    	
270
    	
 
    	
195
    	
 
    	
266
    	
 
    
	
Total average   common shares outstanding—diluted
    	
 
    	
51,475
    	
 
    	
50,564
    	
 
    	
50,060
    	
 
    
	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Diluted earnings   per average common share
    	
 
    	
$
    	
3.74
    	
 
    	
$
    	
3.31
    	
 
    	
$
    	
2.62
    	
 
    

 

35

 

WGL Holdings, Inc.

Washington Gas Light Company

Notes to Consolidated Financial Statements

 

NOTE 9. INCOME TAXES

 

WGL files a consolidated federal tax return and state returns where there is a business presence. We are no longer subject to income tax examinations by the Internal Revenue Service (IRS) for years ended prior to September 30, 2013 except for pending carryback refund claims. Substantially all state income tax years in major jurisdictions are closed for years ended prior to September 30, 2013.

 

WGL and each of its subsidiaries participate in a tax sharing agreement that establishes the method for allocating tax benefits from losses that are utilized on the consolidated income tax return. The consolidated tax is apportioned among the subsidiaries on the separate return method and losses are allocated to the subsidiaries that have taxable income pro-rata basis. In fiscal year 2017 , Washington Gas recognized a receivable for $ 18.6 million from subsidiaries with taxable income for the utilization of Washington Gas’ net operating loss pursuant to the 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.

 

On September 13, 2013, the U.S. Treasury Department issued final income tax regulations to address the costs incurred in acquiring, producing, or improving tangible property. The regulations are effective for WGL and Washington Gas for the tax year beginning October 1, 2014. WGL and Washington Gas filed Forms 3115 along with its income tax return for the year ended September 30, 2015 in June 2016. The financial impact of these regulations did not have a material impact on the financial statements.

 

On October 1, 2015, WGL and Washington Gas early adopted ASU 2015-17. This standard amends the requirements to separately classify deferred income tax liabilities and assets into current and non-current amounts on a classified balance sheet, and requires all deferred income tax liabilities and assets to be offset by taxing jurisdiction and classified as non-current. WGL and Washington Gas applied ASU 2015-17 retrospectively. As a result of the retrospective adoption, $ 32.8 million and $ 24.7 million were reclassified from “Current Assets-Deferred income taxes” to “Deferred Credits-Deferred income taxes” on WGL’s and Washington Gas’ September 30, 2015 balance sheets, respectively.

 

36

 

WGL Holdings, Inc.

Washington Gas Light Company

Notes to Consolidated Financial Statements

 

The tables below provide the following for WGL 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, 2017 and 2016 .

 

	
WGL Holdings, Inc.
    	
 
    
	
Components of Income Tax Expense
    	
 
    
	
   
    	
 
    	
Years Ended September 30,
    	
 
    
	
(In thousands)
    	
 
    	
2017
    	
 
    	
2016
    	
 
    	
2015
    	
 
    
	
INCOME   TAX EXPENSE
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Current:
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Federal
    	
 
    	
$
    	
430
    	
 
    	
$
    	
(57,690
    	
)
    	
$
    	
(18,639
    	
)
    
	
State
    	
 
    	
3,267
    	
 
    	
(1,983
    	
)
    	
2,977
    	
 
    
	
Total current
    	
 
    	
3,697
    	
 
    	
(59,673
    	
)
    	
(15,662
    	
)
    
	
Deferred:
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Federal
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Accelerated   depreciation
    	
 
    	
83,637
    	
 
    	
93,175
    	
 
    	
71,529
    	
 
    
	
Other
    	
 
    	
13,042
    	
 
    	
49,638
    	
 
    	
17,726
    	
 
    
	
State
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Accelerated   depreciation
    	
 
    	
15,097
    	
 
    	
12,993
    	
 
    	
13,739
    	
 
    
	
Other
    	
 
    	
3,190
    	
 
    	
8,073
    	
 
    	
1,411
    	
 
    
	
Total deferred
    	
 
    	
114,966
    	
 
    	
163,879
    	
 
    	
104,405
    	
 
    
	
Amortization of   investment tax credits
    	
 
    	
(7,504
    	
)
    	
(6,132
    	
)
    	
(4,939
    	
)
    
	
Total income tax   expense
    	
 
    	
$
    	
111,159
    	
 
    	
$
    	
98,074
    	
 
    	
$
    	
83,804
    	
 
    

 

	
WGL Holdings, Inc.
    	
 
    
	
Reconciliation Between the Statutory Federal Income Tax Rate and Effective Tax Rate
    	
 
    
	
   
    	
 
    	
Years Ended September 30,
    	
 
    
	
($ In thousands)
    	
 
    	
2017
    	
 
    	
2016
    	
 
    	
2015
    	
 
    
	
Income taxes at   statutory federal income tax rate
    	
 
    	
$
    	
101,157
    	
 
    	
35.00
    	
%
    	
$
    	
93,253
    	
 
    	
35.00
    	
%
    	
$
    	
75,760
    	
 
    	
35.00
    	
%
    
	
Increase   (decrease) in income taxes resulting from:
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Accelerated depreciation   less amount deferred
    	
 
    	
589
    	
 
    	
0.20
    	
 
    	
908
    	
 
    	
0.34
    	
 
    	
1,187
    	
 
    	
0.55
    	
 
    
	
Amortization of   investment tax credits
    	
 
    	
(7,504
    	
)
    	
(2.60
    	
)
    	
(6,132
    	
)
    	
(2.30
    	
)
    	
(4,939
    	
)
    	
(2.28
    	
)
    
	
Cost of removal
    	
 
    	
(2,944
    	
)
    	
(1.02
    	
)
    	
(3,722
    	
)
    	
(1.40
    	
)
    	
(2,721
    	
)
    	
(1.26
    	
)
    
	
State income   taxes-net of federal benefit
    	
 
    	
12,601
    	
 
    	
4.36
    	
 
    	
12,969
    	
 
    	
4.87
    	
 
    	
11,109
    	
 
    	
5.13
    	
 
    
	
ASDHI impairment
    	
 
    	
—
    	
 
    	
—
    	
 
    	
—
    	
 
    	
—
    	
 
    	
1,969
    	
 
    	
0.91
    	
 
    
	
Merger related   costs
    	
 
    	
2,292
    	
 
    	
0.79
    	
 
    	
—
    	
 
    	
—
    	
 
    	
—
    	
 
    	
—
    	
 
    
	
Non-controlling   interest
    	
 
    	
5,627
    	
 
    	
1.95
    	
 
    	
—
    	
 
    	
—
    	
 
    	
—
    	
 
    	
—
    	
 
    
	
Other items-net
    	
 
    	
(659
    	
)
    	
(0.23
    	
)
    	
798
    	
 
    	
0.30
    	
 
    	
1,439
    	
 
    	
0.66
    	
 
    
	
Total income tax   expense and effective tax rate
    	
 
    	
$
    	
111,159
    	
 
    	
38.45
    	
%
    	
$
    	
98,074
    	
 
    	
36.81
    	
%
    	
$
    	
83,804
    	
 
    	
38.71
    	
%
    

 

37

 

WGL Holdings, Inc.

Washington Gas Light Company

Notes to Consolidated Financial Statements

 

	
WGL Holdings, Inc.
    	
 
    
	
Components of Accumulated Deferred Income Tax Assets (Liabilities)
    	
 
    
	
(In thousands)
    	
 
    	
2017
    	
 
    	
2016
    	
 
    
	
Deferred   income tax assets:
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Pensions
    	
 
    	
$
    	
42,593
    	
 
    	
$
    	
60,685
    	
 
    
	
Uncollectible   accounts
    	
 
    	
10,617
    	
 
    	
12,441
    	
 
    
	
Inventory   overheads
    	
 
    	
6,617
    	
 
    	
5,046
    	
 
    
	
Employee compensation and   benefits
    	
 
    	
45,202
    	
 
    	
49,443
    	
 
    
	
Derivatives
    	
 
    	
13,802
    	
 
    	
58,203
    	
 
    
	
Deferred gas   costs
    	
 
    	
1,485
    	
 
    	
—
    	
 
    
	
Solar   grant/investment tax credit
    	
 
    	
61,773
    	
 
    	
64,149
    	
 
    
	
Tax credit carry   forward
    	
 
    	
160,077
    	
 
    	
118,980
    	
 
    
	
Net operating   loss
    	
 
    	
30,278
    	
 
    	
27,741
    	
 
    
	
Other (a)
    	
 
    	
2,693
    	
 
    	
1,075
    	
 
    
	
Total assets
    	
 
    	
375,137
    	
 
    	
397,763
    	
 
    
	
Deferred income   tax liabilities:
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Other   post-retirement benefits
    	
 
    	
90,031
    	
 
    	
69,899
    	
 
    
	
Accelerated   depreciation and other plant related items
    	
 
    	
1,068,951
    	
 
    	
949,807
    	
 
    
	
Losses/gains on   reacquired debt
    	
 
    	
1,047
    	
 
    	
1,155
    	
 
    
	
Income taxes   recoverable through future rates
    	
 
    	
33,502
    	
 
    	
71,352
    	
 
    
	
Deferred gas   costs
    	
 
    	
—
    	
 
    	
1,696
    	
 
    
	
Partnership   basis differences
    	
 
    	
46,968
    	
 
    	
27,532
    	
 
    
	
Valuation   allowances
    	
 
    	
2,188
    	
 
    	
2,188
    	
 
    
	
Total   liabilities
    	
 
    	
1,242,687
    	
 
    	
1,123,629
    	
 
    
	
Net accumulated   deferred income tax assets (liabilities)
    	
 
    	
$
    	
(867,550
    	
)
    	
$
    	
(725,866
    	
)
    

 

(a) For the fiscal years ended September 30, 2017 and 2016, amount includes $ 0.5 million and $ 0.9 million , respectively, in deferred income tax assets reported in “Deferred charges and other assets” on the consolidated balance sheet.

 

	
Washington Gas Light Company
    	
 
    
	
Components of Income Tax Expense
    	
 
    
	
   
    	
 
    	
Years Ended September 30,
    	
 
    
	
(In thousands)
    	
 
    	
2017
    	
 
    	
2016
    	
 
    	
2015
    	
 
    
	
INCOME   TAX EXPENSE
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Current:
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Federal
    	
 
    	
$
    	
1,722
    	
 
    	
$
    	
(48,064
    	
)
    	
$
    	
(5,305 
    	
)
    
	
State
    	
 
    	
1,283
    	
 
    	
(2,957
    	
)
    	
907
    	
 
    
	
Total current
    	
 
    	
3,005
    	
 
    	
(51,021
    	
)
    	
(4,398
    	
)
    
	
Deferred:
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Federal
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Accelerated   depreciation
    	
 
    	
83,009
    	
 
    	
93,385
    	
 
    	
71,046
    	
 
    
	
Other
    	
 
    	
(18,419
    	
)
    	
13,826
    	
 
    	
(6,619
    	
)
    
	
State
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Accelerated   depreciation
    	
 
    	
15,033
    	
 
    	
13,081
    	
 
    	
13,701
    	
 
    
	
Other
    	
 
    	
(2,037
    	
)
    	
3,190
    	
 
    	
(1,507
    	
)
    
	
Total deferred
    	
 
    	
77,586
    	
 
    	
123,482
    	
 
    	
76,621
    	
 
    
	
Amortization of   investment tax credits
    	
 
    	
(751
    	
)
    	
(795
    	
)
    	
(832
    	
)
    
	
Total income tax   expense
    	
 
    	
$
    	
79,840
    	
 
    	
$
    	
71,666
    	
 
    	
$
    	
71,391
    	
 
    

 

38

 

WGL Holdings, Inc.

Washington Gas Light Company

Notes to Consolidated Financial Statements

 

	
Washington Gas Light Company
    	
 
    
	
Reconciliation Between the Statutory Federal Income Tax Rate and Effective Tax Rate
    	
 
    
	
   
    	
 
    	
Years Ended September 30,
    	
 
    
	
($ In thousands)
    	
 
    	
2017
    	
 
    	
2016
    	
 
    	
2015
    	
 
    
	
Income taxes at   statutory federal income tax rate
    	
 
    	
$
    	
74,071
    	
 
    	
35.00
    	
%
    	
$
    	
64,673
    	
 
    	
35.00
    	
%
    	
$
    	
63,024
    	
 
    	
35.00
    	
%
    
	
Increase   (decrease) in income taxes resulting from:
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Accelerated depreciation   less amount deferred
    	
 
    	
1,922
    	
 
    	
0.91
    	
 
    	
1,936
    	
 
    	
1.05
    	
 
    	
2,108
    	
 
    	
1.17
    	
 
    
	
Amortization of   investment tax credits
    	
 
    	
(751
    	
)
    	
(0.35
    	
)
    	
(795
    	
)
    	
(0.43
    	
)
    	
(832
    	
)
    	
(0.46
    	
)
    
	
Cost of removal
    	
 
    	
(2,944
    	
)
    	
(1.39
    	
)
    	
(3,722
    	
)
    	
(2.01
    	
)
    	
(2,721
    	
)
    	
(1.51
    	
)
    
	
State income   taxes-net of federal benefit
    	
 
    	
8,610
    	
 
    	
4.07
    	
 
    	
8,310
    	
 
    	
4.50
    	
 
    	
8,986
    	
 
    	
4.99
    	
 
    
	
Consolidated tax   sharing allocation
    	
 
    	
—
    	
 
    	
—
    	
 
    	
1,073
    	
 
    	
0.58
    	
 
    	
(533
    	
)
    	
(0.30
    	
)
    
	
Other items-net
    	
 
    	
(1,068
    	
)
    	
(0.50
    	
)
    	
191
    	
 
    	
0.10
    	
 
    	
1,359
    	
 
    	
0.76
    	
 
    
	
Total income tax   expense and effective tax rate
    	
 
    	
$
    	
79,840
    	
 
    	
37.74
    	
%
    	
$
    	
71,666
    	
 
    	
38.79
    	
%
    	
$
    	
71,391
    	
 
    	
39.65
    	
%
    

 

	
Washington Gas Light Company
    	
 
    
	
Components of Accumulated Deferred Income Tax Assets (Liabilities)
    	
 
    
	
(In thousands)
    	
 
    	
2017
    	
 
    	
2016
    	
 
    
	
Deferred income   tax assets:
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Pensions
    	
 
    	
$
    	
41,907
    	
 
    	
$
    	
59,878
    	
 
    
	
Uncollectible   accounts
    	
 
    	
7,815
    	
 
    	
8,054
    	
 
    
	
Inventory   overheads
    	
 
    	
6,617
    	
 
    	
5,046
    	
 
    
	
Employee   compensation and benefits
    	
 
    	
47,479
    	
 
    	
43,755
    	
 
    
	
Derivatives
    	
 
    	
11,187
    	
 
    	
27,394
    	
 
    
	
Deferred gas   costs
    	
 
    	
1,485
    	
 
    	
—
    	
 
    
	
Net operating   loss
    	
 
    	
—
    	
 
    	
24,588
    	
 
    
	
Total assets
    	
 
    	
116,490
    	
 
    	
168,715
    	
 
    
	
Deferred income   tax liabilities:
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Other   post-retirement benefits
    	
 
    	
89,494
    	
 
    	
69,520
    	
 
    
	
Accelerated   depreciation and other plant related items
    	
 
    	
876,235
    	
 
    	
783,919
    	
 
    
	
Losses/gains on   reacquired debt
    	
 
    	
1,047
    	
 
    	
1,155
    	
 
    
	
Income taxes   recoverable through future rates
    	
 
    	
33,324
    	
 
    	
71,063
    	
 
    
	
Deferred gas   costs
    	
 
    	
—
    	
 
    	
1,696
    	
 
    
	
Other
    	
 
    	
4,775
    	
 
    	
5,082
    	
 
    
	
Total   liabilities
    	
 
    	
1,004,875
    	
 
    	
932,435
    	
 
    
	
Net accumulated   deferred income tax assets (liabilities)
    	
 
    	
$
    	
(888,385
    	
)
    	
$
    	
(763,720
    	
)
    

 

In June 2017 , we filed our tax return for the year ended September 30, 2016 .

 

The following table summarizes the change in unrecognized tax benefits during fiscal year 2017 , 2016 , 2015 and our total unrecognized tax benefits at September 30, under the provisions of ASC Topic 740, Income Taxes:

 

39

 

WGL Holdings, Inc.

Washington Gas Light Company

Notes to Consolidated Financial Statements

 

	
Unrecognized Tax Benefits
    	
 
    
	
(In thousands)
    	
 
    	
2017
    	
 
    	
2016
    	
 
    	
2015
    	
 
    
	
Total   unrecognized tax benefits, October 1,
    	
 
    	
$
    	
42,283
    	
 
    	
$
    	
38,627
    	
 
    	
$
    	
32,613
    	
 
    
	
Increases in tax   positions relating to current year
    	
 
    	
10,766
    	
 
    	
10,645
    	
 
    	
12,848
    	
 
    
	
Decreases in tax   positions relating to prior year
    	
 
    	
(5,040
    	
)
    	
(6,989
    	
)
    	
(6,834
    	
)
    
	
Total   unrecognized tax benefits, September 30,
    	
 
    	
$
    	
48,009
    	
 
    	
$
    	
42,283
    	
 
    	
$
    	
38,627
    	
 
    

 

During the year, the unrecognized tax benefits for WGL and Washington Gas increased by approximately $5.7 million relating to uncertain tax positions, primarily due to the change in tax accounting for repairs. If the amounts of unrecognized tax benefits are eventually realized, it would not materially impact the effective tax rate. It is reasonably possible that the amount of the unrecognized tax benefit with respect to some of WGL’s and Washington Gas’ uncertain tax positions will significantly increase or decrease in the next 12 months. The IRS completed its audit of the tax years related to the change in accounting method for repairs without proposing any changes, however, they could re-examine this issue in the future.

 

WGL and Washington Gas recognize any accrued interest associated with uncertain tax positions in interest expense and recognizes any accrued penalties associated with uncertain tax positions in other expenses in the statements of income. During the fiscal year ended September 30, 2017 , 2016, and 2015, there was no accrued interest expense associated with uncertain tax positions.

 

NOTE 10. PENSION AND OTHER POST-RETIREMENT BENEFIT PLANS

 

Washington Gas maintains a qualified, trusteed, non-contributory defined benefit pension plan (qualified pension plan) covering most active and vested former employees of Washington Gas and certain employees of WGL subsidiaries. The non-contributory defined benefit pension plan is closed to all employees hired on or after January 1, 2010 and instead employees are eligible to receive supplemental contributions to their defined-contribution savings plan. Washington Gas accounts for the qualified pension plan and other post-retirement benefit plans under the provisions of ASC 715, Compensation-Retirement Benefits.

 

Several executive officers of Washington Gas also participate in a non-funded defined benefit supplemental executive retirement plan (DB SERP), a non-qualified pension plan. A rabbi trust has been established for the potential future funding of the DB SERP liability. The DB SERP was closed to new entrants beginning January 1, 2010 and instead, executive officers are eligible to participate in a non-funded defined contribution SERP (DC SERP). In addition, effective January 1, 2010, Washington Gas established a non-funded defined benefit restoration plan (DB restoration) for the purpose of providing supplemental pension and pension-related benefits to a select group of management employees.

 

WGL 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. Total matching contributions to our savings plans were $5.1 million , $5.1 million and $4.6 million during fiscal years ended September 30, 2017 , 2016 and 2015 , respectively. All employees not earning benefits in the qualified pension plan receive an employer provided supplemental contribution ranging from 4% to 6% depending on years of service. Total supplemental contributions to the plan were $2.9 million , $2.6 million and $2.1 million during fiscal years ended September 30, 2017 , 2016 and 2015 , respectively.

 

Washington Gas provides certain healthcare and life insurance benefits for retired employees of Washington Gas and certain employees of WGL subsidiaries. Substantially all employees of Washington Gas may become eligible for such benefits if they attain retirement status while working for Washington Gas. For eligible retirees and dependents not yet receiving Medicare benefits, Washington Gas provides medical, prescription drug and dental benefits through Preferred Provider Organization (PPO) or Health Maintenance Organization (HMO) plans. On April 24, 2014, Washington Gas replaced the existing retiree medical, prescription drug and dental benefit plan options for Medicare-eligible retirees age 65 and older with a special tax-free HRA plan effective January 1, 2015. With the introduction of the new plan, participating retirees and dependents will receive an annual subsidy to help purchase supplemental medical, prescription drug and dental coverage in the marketplace. As part of the new HRA plan, participants who enroll in a Medicare Part D prescription drug plan and meet the

 

40

 

WGL Holdings, Inc.

Washington Gas Light Company

Notes to Consolidated Financial Statements

 

threshold for Medicare catastrophic prescription drug coverage will be eligible for an additional reimbursement of their out-of-pocket prescription drug costs in excess of the threshold. Retirees and dependents under age 65 will still be covered under the existing Washington Gas Light Company Retiree Medical Plan until they become eligible for Medicare at age 65 and can obtain coverage through the new HRA plan. Washington Gas accounts for these benefits under the provisions of ASC 715, Compensation-Retirement Benefits.

 

On September 25, 2015, the Washington Gas Light Company Retiree Medical Plan was amended to limit the aggregate cost of applicable employer-sponsored coverage, thereby avoiding the 40% excise tax enacted by the Patient Protection and Affordable Care Act of 2010. The resolution, which is effective September 30, 2015 applies to plan years beginning on or after January 1, 2018, and includes a limit of $11,850 per participant, with a maximum limit of $30,950 for family coverage. This amendment resulted in a prior service credit of $26.1 million .

 

Almost all costs associated with Washington Gas’ defined benefit post-retirement plans have historically been, and are expected to be, recovered through Washington Gas’ rates. Therefore, in accordance with ASC Topic 980 and ASC Topic 715, Washington Gas established a regulatory asset/liability for the substantial majority of the unrecognized costs/income associated with its defined benefit post-retirement plans. To the extent these amounts will not be recovered through Washington Gas’ rates, they are recorded directly to “Accumulated other comprehensive loss, net of taxes.”

 

41

 

WGL Holdings, Inc.

Washington Gas Light Company

Notes to Consolidated Financial Statements

 

Obligations and Assets

 

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 Gas’ post-retirement benefits:

 

	
Post-Retirement Benefits
    	
 
    
	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
Health and Life
   Benefits
    	
 
    
	
(In millions)
    	
 
    	
Pension Benefits (a)
    	
 
    	
 
    
	
Year Ended September 30,
    	
 
    	
2017
    	
 
    	
2016
    	
 
    	
2017
    	
 
    	
2016
    	
 
    
	
Change   in projected benefit obligation  (b)
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Benefit   obligation at beginning of year
    	
 
    	
$
    	
1,069.3
    	
 
    	
$
    	
947.5
    	
 
    	
$
    	
324.3
    	
 
    	
$
    	
299.9
    	
 
    
	
Service cost
    	
 
    	
16.5
    	
 
    	
14.2
    	
 
    	
5.8
    	
 
    	
4.6
    	
 
    
	
Interest cost
    	
 
    	
38.4
    	
 
    	
41.3
    	
 
    	
11.7
    	
 
    	
13.1
    	
 
    
	
Change in plan   benefits
    	
 
    	
—
    	
 
    	
0.5
    	
 
    	
1.1
    	
 
    	
—
    	
 
    
	
Actuarial loss   (gain)
    	
 
    	
(28.2
    	
)
    	
110.5
    	
 
    	
(18.9
    	
)
    	
19.5
    	
 
    
	
Retiree   contributions
    	
 
    	
—
    	
 
    	
—
    	
 
    	
1.6
    	
 
    	
2.3
    	
 
    
	
Employer group   waiver plan rebates
    	
 
    	
—
    	
 
    	
—
    	
 
    	
0.2
    	
 
    	
1.2
    	
 
    
	
Benefits paid
    	
 
    	
(48.5
    	
)
    	
(44.7
    	
)
    	
(16.8
    	
)
    	
(16.3
    	
)
    
	
Projected   benefit obligation at end of year  (b)
    	
 
    	
$
    	
1,047.5
    	
 
    	
$
    	
1,069.3
    	
 
    	
$
    	
309.0
    	
 
    	
$
    	
324.3
    	
 
    
	
Change   in plan assets
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Fair value of   plan assets at beginning of year
    	
 
    	
$
    	
850.0
    	
 
    	
$
    	
780.2
    	
 
    	
$
    	
505.0
    	
 
    	
$
    	
438.5
    	
 
    
	
Actual return on   plan assets
    	
 
    	
68.6
    	
 
    	
115.0
    	
 
    	
48.1
    	
 
    	
65.1
    	
 
    
	
Company   contributions
    	
 
    	
4.4
    	
 
    	
1.8
    	
 
    	
8.2
    	
 
    	
14.9
    	
 
    
	
Retiree   contributions and employer group waiver plan rebates
    	
 
    	
—
    	
 
    	
—
    	
 
    	
1.8
    	
 
    	
3.5
    	
 
    
	
Expenses
    	
 
    	
(2.0
    	
)
    	
(2.3
    	
)
    	
(5.8
    	
)
    	
(0.7
    	
)
    
	
Benefits paid
    	
 
    	
(48.5
    	
)
    	
(44.7
    	
)
    	
(16.8
    	
)
    	
(16.3
    	
)
    
	
Fair   value of plan assets at end of year
    	
 
    	
$
    	
872.5
    	
 
    	
$
    	
850.0
    	
 
    	
$
    	
540.5
    	
 
    	
$
    	
505.0
    	
 
    
	
Funded   status at end of year
    	
 
    	
$
    	
(175.0
    	
)
    	
$
    	
(219.3
    	
)
    	
$
    	
231.5
    	
 
    	
$
    	
180.7
    	
 
    
	
Total   amounts recognized on balance sheet
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Non-current   asset
    	
 
    	
$
    	
—
    	
 
    	
$
    	
—
    	
 
    	
$
    	
231.5
    	
 
    	
$
    	
180.7
    	
 
    
	
Current   liability
    	
 
    	
(6.5
    	
)
    	
(6.3
    	
)
    	
—
    	
 
    	
—
    	
 
    
	
Non-current   liability
    	
 
    	
(168.5
    	
)
    	
(213.0
    	
)
    	
—
    	
 
    	
—
    	
 
    
	
Total   recognized
    	
 
    	
$
    	
(175.0
    	
)
    	
$
    	
(219.3
    	
)
    	
$
    	
231.5
    	
 
    	
$
    	
180.7
    	
 
    

 

(a) The DB SERP and DB Restoration, included in pension benefits in the table above, have no assets.

(b) For the Health and Life Benefits, the change in projected benefit obligation represents the accumulated benefit obligation.

 

The following table provides the projected benefit obligation (PBO) and accumulated benefit (ABO) for the qualified pension plan, DB SERP and DB Restoration at September 30, 2017 and 2016 .

 

	
Projected and accumulated benefit obligation
    	
 
    
	
(In millions)
    	
 
    	
Qualified Pension Plan
    	
 
    	
DB SERP
    	
 
    	
DB Restoration
    	
 
    
	
September 30,
    	
 
    	
2017
    	
 
    	
2016
    	
 
    	
2017
    	
 
    	
2016
    	
 
    	
2017
    	
 
    	
2016
    	
 
    
	
Projected   benefit obligation
    	
 
    	
$
    	
983.1
    	
 
    	
$
    	
1,005.0
    	
 
    	
$
    	
60.2
    	
 
    	
$
    	
60.4
    	
 
    	
$
    	
4.2
    	
 
    	
$
    	
3.9
    	
 
    
	
Accumulated   benefit obligation
    	
 
    	
$
    	
905.8
    	
 
    	
$
    	
922.3
    	
 
    	
$
    	
57.5
    	
 
    	
$
    	
56.5
    	
 
    	
$
    	
3.0
    	
 
    	
$
    	
2.3
    	
 
    

 

42

 

WGL Holdings, Inc.

Washington Gas Light Company

Notes to Consolidated Financial Statements

 

AMOUNTS RECOGNIZED IN REGULATORY ASSETS/LIABILITIES AND ACCUMULATED OTHER COMPREHENSIVE INCOME

 

The following table provides amounts recorded to regulatory assets, regulatory liabilities and accumulated other comprehensive loss/(income) at September 30, 2017 and 2016 :

 

	
Unrecognized Costs/Income Recorded on the Balance Sheet
    	
 
    
	
(In millions)
    	
 
    	
Pension Benefits
    	
 
    	
Health and
   Life Benefits
    	
 
    
	
September 30,
    	
 
    	
2017
    	
 
    	
2016
    	
 
    	
2017
    	
 
    	
2016
    	
 
    
	
Actuarial net   loss (gain)
    	
 
    	
$
    	
136.1
    	
 
    	
$
    	
211.9
    	
 
    	
$
    	
(21.8
    	
)
    	
$
    	
18.1
    	
 
    
	
Prior service   cost (credit)
    	
 
    	
1.2
    	
 
    	
1.5
    	
 
    	
(124.9
    	
)
    	
(142.5
    	
)
    
	
Total
    	
 
    	
$
    	
137.3
    	
 
    	
$
    	
213.4
    	
 
    	
$
    	
(146.7
    	
)
    	
$
    	
(124.4
    	
)
    
	
Regulatory asset   (liability) (a)
    	
 
    	
$
    	
119.6
    	
 
    	
$
    	
193.4
    	
 
    	
$
    	
(137.2
    	
)
    	
$
    	
(118.0
    	
)
    
	
Pre-tax   accumulated other comprehensive loss (gain) (b)
    	
 
    	
17.7
    	
 
    	
20.0
    	
 
    	
(9.5
    	
)
    	
(6.4
    	
)
    
	
Total
    	
 
    	
$
    	
137.3
    	
 
    	
$
    	
213.4
    	
 
    	
$
    	
(146.7
    	
)
    	
$
    	
(124.4
    	
)
    

 

(a) The regulatory liability recorded on our balance sheets at September 30, 2017 and 2016 is net of a deferred income tax benefit of $ 2.2 million and $4.1 million , respectively.

(b) The total amount of accumulated other comprehensive loss recorded on our balance sheets at September 30, 2017 and 2016 is net of an income tax benefit of $3.6 million and $5.8 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 2017 .

 

	
Amounts Recognized During Fiscal Year 2017
    	
 
    
	
 
    	
 
    	
Regulatory assets/liabilities
    	
 
    	
Accumulated other
   comprehensive loss
    	
 
    
	
(In millions)
    	
 
    	
Pension
   Benefits
    	
 
    	
Health and
   Life Benefits
    	
 
    	
Pension
   Benefits
    	
 
    	
Health and
   Life Benefits
    	
 
    
	
Actuarial   net loss
    	
 
    	
$
    	
19.9
    	
 
    	
$
    	
0.7
    	
 
    	
$
    	
2.1
    	
 
    	
$
    	
—
    	
 
    
	
Prior   service cost (credit)
    	
 
    	
0.2
    	
 
    	
(16.7
    	
)
    	
0.1
    	
 
    	
(0.9
    	
)
    
	
Total
    	
 
    	
$
    	
20.1
    	
 
    	
$
    	
(16.0
    	
)
    	
$
    	
2.2
    	
 
    	
$
    	
(0.9
    	
)
    

 

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 are expected to be recognized as components of net periodic benefit cost during fiscal year 2018 .

 

	
Amounts to be Recognized During Fiscal Year 2018
    	
 
    
	
 
    	
 
    	
Regulatory assets/liabilities
    	
 
    	
Accumulated other
   comprehensive loss
    	
 
    
	
(In millions)
    	
 
    	
Pension
   Benefits
    	
 
    	
Health and
   Life Benefits
    	
 
    	
Pension
   Benefits
    	
 
    	
Health and
   Life Benefits
    	
 
    
	
Actuarial net   loss
    	
 
    	
$
    	
13.5
    	
 
    	
$
    	
—
    	
 
    	
$
    	
2.1
    	
 
    	
$
    	
—
    	
 
    
	
Prior service   cost (credit)
    	
 
    	
0.2
    	
 
    	
(16.5
    	
)
    	
0.1
    	
 
    	
(1.1
    	
)
    
	
Total
    	
 
    	
$
    	
13.7
    	
 
    	
$
    	
(16.5
    	
)
    	
$
    	
2.2
    	
 
    	
$
    	
(1.1
    	
)
    

 

43

 

WGL Holdings, Inc.

Washington Gas Light Company

Notes to Consolidated Financial Statements

 

Realized and unrealized gains and losses for assets under Washington Gas’ post-retirement benefit plans are spread over a period of five years. Each year, 20% 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% of the prior year, 60% of the second prior year, 40% of the third prior year and 20% of the fourth prior year.

 

Net Periodic Benefit Cost

 

The components of the net periodic benefit costs (income) for fiscal years ended September 30, 2017 , 2016 and 2015 related to pension and other post-retirement benefits were as follows:

 

	
Components of Net Periodic Benefit Costs (Income)
    	
 
    
	
(In millions)
    	
 
    	
Pension Benefits
    	
 
    	
Health and Life Benefits
    	
 
    
	
Year Ended September 30,
    	
 
    	
2017
    	
 
    	
2016
    	
 
    	
2015
    	
 
    	
2017
    	
 
    	
2016
    	
 
    	
2015
    	
 
    
	
Service cost
    	
 
    	
$
    	
16.5
    	
 
    	
$
    	
14.2
    	
 
    	
$
    	
15.5
    	
 
    	
$
    	
5.8
    	
 
    	
$
    	
4.6
    	
 
    	
$
    	
7.1
    	
 
    
	
Interest cost
    	
 
    	
38.4
    	
 
    	
41.3
    	
 
    	
39.1
    	
 
    	
11.7
    	
 
    	
13.1
    	
 
    	
14.7
    	
 
    
	
Expected return   on plan assets
    	
 
    	
(41.0
    	
)
    	
(40.9
    	
)
    	
(44.6
    	
)
    	
(22.1
    	
)
    	
(20.4
    	
)
    	
(20.8
    	
)
    
	
Recognized prior   service cost (credit)
    	
 
    	
0.3
    	
 
    	
0.3
    	
 
    	
0.3
    	
 
    	
(17.7
    	
)
    	
(17.7
    	
)
    	
(15.3
    	
)
    
	
Recognized   actuarial loss
    	
 
    	
22.0
    	
 
    	
16.9
    	
 
    	
18.7
    	
 
    	
1.9
    	
 
    	
1.2
    	
 
    	
4.4
    	
 
    
	
Net   periodic benefit cost
    	
 
    	
36.2
    	
 
    	
31.8
    	
 
    	
29.0
    	
 
    	
(20.4
    	
)
    	
(19.2
    	
)
    	
(9.9
    	
)
    
	
Amount allocated   to construction projects
    	
 
    	
(6.4
    	
)
    	
(5.6
    	
)
    	
(4.6
    	
)
    	
4.6
    	
 
    	
4.1
    	
 
    	
1.9
    	
 
    
	
Amount deferred   as regulatory asset (liability)-net
    	
 
    	
6.9
    	
 
    	
7.1
    	
 
    	
7.1
    	
 
    	
—
    	
 
    	
(0.2
    	
)
    	
(0.2
    	
)
    
	
Amount   charged (credited) to expense
    	
 
    	
$
    	
36.7
    	
 
    	
$
    	
33.3
    	
 
    	
$
    	
31.5
    	
 
    	
$
    	
(15.8
    	
)
    	
$
    	
(15.3
    	
)
    	
$
    	
(8.2
    	
)
    

 

Amounts included in the line item “Amount deferred as regulatory asset/liability-net,” as shown in the table above, represent the amortization of previously unrecovered costs of the applicable pension benefits or the health and life benefits as approved in the District of Columbia through 2019.

 

ASSUMPTIONS

 

The weighted average assumptions used to determine net periodic benefit obligations and net periodic benefit costs were as follows:

 

	
Benefit Obligations Assumptions
    	
 
    
	
 
    	
 
    	
Pension Benefits
    	
 
    	
Health and Life Benefits  
    	
 
    
	
September 30,
    	
 
    	
2017
    	
 
    	
2016
    	
 
    	
2017
    	
 
    	
2016
    	
 
    
	
Discount rate (a)
    	
 
    	
3.60%-3.90%
    	
 
    	
3.40%-3.70%
    	
 
    	
3.90
    	
%
    	
3.70
    	
%
    
	
Rate of   compensation increase
    	
 
    	
3.50%-4.10%
    	
 
    	
3.50%-4.10%
    	
 
    	
4.10
    	
%
    	
4.10
    	
%
    

 

(a) The increase in the discount rate in fiscal year 2017 compared to prior year primarily reflects the increase in long-term interest rates.

 

	
Net Periodic Benefit Cost Assumptions
    	
 
    
	
 
    	
 
    	
Pension Benefits
    	
 
    	
Health and Life Benefits
    	
 
    
	
Years Ended September 30,
    	
 
    	
2017
    	
 
    	
2016
    	
 
    	
2015
    	
 
    	
2017
    	
 
    	
2016
    	
 
    	
2015
    	
 
    
	
Discount rate (a)
    	
 
    	
3.40%-3.70%
    	
 
    	
4.10%-4.50%
    	
 
    	
4.00%-4.40%
    	
 
    	
3.70
    	
%
    	
4.50
    	
%
    	
4.40
    	
%
    
	
Expected long-term   return on plan assets (b)
    	
 
    	
5.75%
    	
 
    	
6.00%
    	
 
    	
6.75%
    	
 
    	
5.50
    	
%
    	
5.75
    	
%
    	
6.25
    	
%
    
	
Rate of   compensation increase (c)
    	
 
    	
3.50%-4.10%
    	
 
    	
3.50%-4.10%
    	
 
    	
3.50%-4.10%
    	
 
    	
4.10
    	
%
    	
4.10
    	
%
    	
4.10
    	
%
    

 

(a) The changes in the discount rates over the last three fiscal years primarily reflect the changes in long-term interest rates.

 

44

 

WGL Holdings, Inc.

Washington Gas Light Company

Notes to Consolidated Financial Statements

 

(b) For health and life benefits, the expected returns for certain funds may be lower due to certain portions of income that are subject to an assumed income tax rate of 44.8% .

(c) The changes in the rate of compensation reflects the best estimates of actual future compensation levels including consideration of general price levels, productivity, seniority, promotion, and other factors such as inflation rates.

 

Discount Rate

 

Washington Gas determines the discount rate based on a portfolio of high quality fixed-income investments (AA- as assigned by Standard & Poor’s or Aa3 as assigned by Moody’s or better) whose cash flows would cover our expected benefit payments.

 

Expected long-term return on plan assets

 

Washington Gas determines the expected long-term rate of return on plan assets 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.

 

Mortality Assumptions

 

During the fiscal year ended September 30, 2015, Washington Gas adopted new mortality assumptions for its pension and other post-retirement benefit obligations, which reflect increased life expectancies in the U.S. The adoption of new mortality assumptions increased the projected benefit obligations for Washington Gas’ pension and other post-retirement benefit by $46.8 million and $15.3 million , respectively. At September 30, 2017 and 2016 there were no changes to the mortality assumptions.

 

Healthcare cost trend

 

Washington Gas assumed the healthcare cost trend rates related to the accumulated post-retirement benefit obligation as of September 30, 2017, for non-Medicare eligible retirees, to be 6.3% for fiscal year 2018. Washington Gas expects the trend rate to decrease to 6.0% in fiscal year 2019 and 2.2% in fiscal year 2020, and remain at that level thereafter. The healthcare cost trend rate used to measure the accumulated post-retirement benefit obligation for non-Medicare eligible retirees as of September 30, 2016 was 6.3% for fiscal year 2017 . This rate was expected to decrease to  3.2%  in fiscal year 2018,  2.2%  in fiscal year 2019 and remain at that level thereafter.

 

	
Healthcare Trend
    	
 
    
	
(In millions)
    	
 
    	
One Percentage-Point
   Increase
    	
 
    	
One Percentage-Point
   Decrease
    	
 
    
	
Increase   (decrease) total service and interest cost components
    	
 
    	
$
    	
0.6
    	
 
    	
$
    	
(0.5
    	
)
    
	
Increase   (decrease) post-retirement benefit obligation
    	
 
    	
$
    	
5.5
    	
 
    	
$
    	
(4.9
    	
)
    

 

For Medicare eligible retirees age 65 and older that will receive a subsidy each year as a benefit from the HRA plan, Washington Gas assumed no increase to the annual subsidy in fiscal years 2017 and 2018 and a  3.0%  increase thereafter in order to approximate possible future increases to the stipend. While the plan terms do not guarantee increases to the stipend, Washington Gas intends to review the stipend annually.

 

INVESTMENT POLICIES AND STRATEGIES

 

The investment objective of the qualified pension, healthcare, and life insurance benefit plans (“Plan” or “Plans”) is to allocate each Plan’s assets to appropriate investment asset classes (asset categories) so that the benefit obligations of each Plan are adequately funded, consistent with appropriate risk tolerance guidelines for the Plans’ and Washington Gas’ tolerance for risk. Washington Gas’ portion of retired employee healthcare and life insurance benefits obligation is funded through two trusts: (i) the Washington Gas Light Company Post-retirement Benefit Master Trust for Retired Previously Union-Eligible Employees (“union-eligible trust”) and (ii) the Washington Gas Light Company Post-retirement Benefit Master Trust for Retired Management Employees (“management trust”).

 

45

 

WGL Holdings, Inc.

Washington Gas Light Company

Notes to Consolidated Financial Statements

 

In order to best achieve the investment objectives for each Plan, strategic allocation targets and ranges are established that control exposure to selected investment asset classes. Target qualified pension plan trust asset allocations are 32% U.S. Equities, 8% International Equities, 5% Real Estate and 55% Fixed Income. Target asset allocations are 50% U.S. Large-Cap Equities and 50% Fixed Income for the union-eligible trust. Target asset allocations are 60% U.S. Large-Cap Equities and 40% Fixed Income for the management trust. Actual asset balances are reviewed monthly and are allowed to range within plus or minus 5% or less of the target allocations. Assets are generally rebalanced to target allocations before actual amounts fall below or rise above the allowable ranges.

 

Asset/liability modeling (ALM) is used to test the benefits and risks of several potential strategic asset allocation mixes. Simulated investment performance results based on assumptions about expected return, volatility, and correlation characteristics of the selected asset classes are tested for their effects on contributions, pension expense, PBO funded status, and downside Value at Risk metrics over a ten-year planning time horizon. Important outcomes from past ALM studies include decisions to increase fixed income exposure, lengthen the duration of those fixed income assets and implement a dynamic asset allocation strategy that allows for the de-risking of the portfolio over time. Under this strategy, the target fixed income allocation percentage is increased by 5% for each 5% improvement in the qualified pension plan’s funded ratio, as measured by an investment consultant. This strategy resulted in portfolio de-risking during May 2017 when Fixed Income and U.S. Equities exposures were increased and reduced, respectively.

 

The most recent pension plan ALM study was completed during November 2014. The study did not result in any changes to investment strategy. A new ALM study is expected to be presented in December 2017.

 

For the qualified pension plan, Washington Gas’ funding policy is to contribute an amount sufficient to satisfy the minimum annual funding requirements under the Pension Protection Act. Any contributions above the minimum annual funding requirements would be limited to amounts that are deductible under appropriate tax law. For the healthcare and life insurance benefit plans, Washington Gas’ funding policy is to contribute amounts that are collected from ratepayers.

 

Significant amounts of each various Plan’s assets are managed by the same financial institution. Each Plan has a high exposure to U.S. based investments. There are no other significant risk concentrations related to investments in any entity, industry, country, commodity, or investment fund.

 

Commingled funds are employed in the management of qualified pension plan trust, management trust, and union-eligible trust assets. A publicly offerable mutual fund and a separately managed portfolio are also employed in the management of qualified pension plan trust and management trust assets, respectively.

 

U.S. and international equity assets are diversified across sectors, industries, and investment styles. Fixed income assets are primarily diversified across U.S. government and investment grade corporate debt instruments, with some exposure to foreign sovereign debt and minor exposure to non-investment-grade securities. Real estate is diversified geographically across the U.S. by property type.

 

The qualified pension plan’s investment policy allows the use of futures, options, and other derivatives for purposes of reducing portfolio risk and as a low-cost option for gaining market exposure, but derivatives may not be used for leverage. The qualified pension plan’s investment policy prohibits investments in Washington Gas securities. The prohibition applies to separately managed portfolios but does not apply to any commingled fund investments.

 

46

 

WGL Holdings, Inc.

Washington Gas Light Company

Notes to Consolidated Financial Statements

 

The following tables present the fair value of the pension plan assets and health and life insurance plan assets by asset category as of September 30, 2017 and 2016 :

 

	
Pension Plan Assets
    	
 
    
	
($ In millions)
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
% of
    	
 
    
	
At September 30, 2017
    	
 
    	
Level 1
    	
 
    	
Level 2
    	
 
    	
Level 3
    	
 
    	
Total
    	
 
    	
Total
    	
 
    
	
Cash   and cash equivalents
    	
 
    	
$
    	
0.7
    	
 
    	
$
    	
—
    	
 
    	
$
    	
—
    	
 
    	
$
    	
0.7
    	
 
    	
0.1
    	
%
    
	
Equity   securities
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Preferred   Securities
    	
 
    	
—
    	
 
    	
0.6
    	
 
    	
—
    	
 
    	
0.6
    	
 
    	
0.1
    	
 
    
	
Fixed   income securities
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
U.S.   Treasuries
    	
 
    	
—
    	
 
    	
140.9
    	
 
    	
—
    	
 
    	
140.9
    	
 
    	
16.2
    	
 
    
	
U.S.   Corporate Debt
    	
 
    	
—
    	
 
    	
232.3
    	
 
    	
—
    	
 
    	
232.3
    	
 
    	
26.6
    	
 
    
	
U.S. Agency   Obligations and Government Sponsored Entities
    	
 
    	
—
    	
 
    	
20.0
    	
 
    	
—
    	
 
    	
20.0
    	
 
    	
2.3
    	
 
    
	
Asset-Backed   Securities
    	
 
    	
—
    	
 
    	
2.0
    	
 
    	
—
    	
 
    	
2.0
    	
 
    	
0.2
    	
 
    
	
Municipalities
    	
 
    	
—
    	
 
    	
14.9
    	
 
    	
—
    	
 
    	
14.9
    	
 
    	
1.7
    	
 
    
	
Non-U.S.   Corporate Debt
    	
 
    	
—
    	
 
    	
48.1
    	
 
    	
—
    	
 
    	
48.1
    	
 
    	
5.5
    	
 
    
	
Repurchase   Agreement  (a)
    	
 
    	
—
    	
 
    	
3.7
    	
 
    	
—
    	
 
    	
3.7
    	
 
    	
0.4
    	
 
    
	
Other  (b)
    	
 
    	
—
    	
 
    	
6.7
    	
 
    	
—
    	
 
    	
6.7
    	
 
    	
0.8
    	
 
    
	
Mutual   Funds  (c)
    	
 
    	
41.4
    	
 
    	
—
    	
 
    	
—
    	
 
    	
41.4
    	
 
    	
4.7
    	
 
    
	
Derivatives  (d)
    	
 
    	
—
    	
 
    	
1.9
    	
 
    	
—
    	
 
    	
1.9
    	
 
    	
0.2
    	
 
    
	
Total   investments in the fair value hierarchy
    	
 
    	
$
    	
42.1
    	
 
    	
$
    	
471.1
    	
 
    	
$
    	
—
    	
 
    	
$
    	
513.2
    	
 
    	
58.8 
    	
%
    
	
Investments   measured at net asset value using the NAV practical expedient  (e)
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Commingled   Funds and Pooled Separate Accounts  (f)
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
324.4
    	
 
    	
37.2
    	
%
    
	
Private   Equity/Limited Partnership  (g)
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
37.6
    	
 
    	
4.3
    	
%
    
	
Total   fair value of plan investments
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
875.2
    	
 
    	
100.3
    	
%
    
	
Net   payable  (h)
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
(2.7
    	
)
    	
(0.3
    	
)
    
	
Total   plan assets at fair value
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
$
    	
872.5
    	
 
    	
100.0
    	
%
    

 

47

 

WGL Holdings, Inc.

Washington Gas Light Company

Notes to Consolidated Financial Statements

 

	
Pension Plan Assets
    	
 
    
	
($ In millions)
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
% of
    	
 
    
	
At September 30, 2016
    	
 
    	
Level 1
    	
 
    	
Level 2
    	
 
    	
Level 3
    	
 
    	
Total
    	
 
    	
Total
    	
 
    
	
Cash and cash   equivalents
    	
 
    	
$
    	
0.3
    	
 
    	
$
    	
—
    	
 
    	
$
    	
—
    	
 
    	
$
    	
0.3
    	
 
    	
—
    	
%
    
	
Equity   securities
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
U.S. Small Cap
    	
 
    	
36.5
    	
 
    	
—
    	
 
    	
—
    	
 
    	
36.5
    	
 
    	
4.3
    	
 
    
	
Preferred   Securities
    	
 
    	
—
    	
 
    	
1.1
    	
 
    	
—
    	
 
    	
1.1
    	
 
    	
0.1
    	
 
    
	
Fixed income   securities
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
U.S. Treasuries
    	
 
    	
—
    	
 
    	
135.4
    	
 
    	
—
    	
 
    	
135.4
    	
 
    	
15.9
    	
 
    
	
U.S. Corporate   Debt
    	
 
    	
—
    	
 
    	
200.6
    	
 
    	
—
    	
 
    	
200.6
    	
 
    	
23.6
    	
 
    
	
U.S. Agency   Obligations and Government Sponsored Entities
    	
 
    	
—
    	
 
    	
18.2
    	
 
    	
—
    	
 
    	
18.2
    	
 
    	
2.1
    	
 
    
	
Asset-Backed   Securities and Collateralized Mortgage Obligations
    	
 
    	
—
    	
 
    	
1.5
    	
 
    	
—
    	
 
    	
1.5
    	
 
    	
0.2
    	
 
    
	
Municipalities
    	
 
    	
—
    	
 
    	
13.7
    	
 
    	
—
    	
 
    	
13.7
    	
 
    	
1.6
    	
 
    
	
Non-U.S.   Corporate Debt
    	
 
    	
—
    	
 
    	
45.5
    	
 
    	
—
    	
 
    	
45.5
    	
 
    	
5.4
    	
 
    
	
Other (b)
    	
 
    	
—
    	
 
    	
6.8
    	
 
    	
—
    	
 
    	
6.8
    	
 
    	
0.8
    	
 
    
	
Mutual Funds (c)
    	
 
    	
34.0
    	
 
    	
—
    	
 
    	
—
    	
 
    	
34.0
    	
 
    	
4.0
    	
 
    
	
Derivatives (d)
    	
 
    	
—
    	
 
    	
1.2
    	
 
    	
—
    	
 
    	
1.2
    	
 
    	
0.2
    	
 
    
	
Total   investments in the fair value hierarchy
    	
 
    	
$
    	
70.8
    	
 
    	
$
    	
424.0
    	
 
    	
$
    	
—
    	
 
    	
$
    	
494.8
    	
 
    	
58.2
    	
%
    
	
Investments   measured at net asset value using the NAV practical expedient (e)
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Commingled Funds   and Pooled Separate Accounts (f)
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
$
    	
324.7
    	
 
    	
38.2
    	
%
    
	
Private   Equity/Limited Partnership (g)
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
$
    	
31.8
    	
 
    	
3.8
    	
%
    
	
Total fair value   of plan investments
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
851.3
    	
 
    	
100.2
    	
%
    
	
Net payable (h)
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
(1.3
    	
)
    	
(0.2
    	
)
    
	
Total plan   assets at fair value
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
$
    	
850.0
    	
 
    	
100.0
    	
%
    

 

(a) This category includes Treasury Bills with a pre-commitment from the counterparty to repurchase the same securities on the next business day at an agreed-upon price.

(b) This category primarily includes non-U.S. government bonds as of September 30, 2017 and 2016.

(c) At September 30, 2017 and September 30, 2016, the investment in a mutual fund consisted primarily of common stock of non-U.S. based companies.

(d) At September 30, 2017 and 2016, this category included a combination of long-term U.S. Treasury interest rate future contracts, currency forwards, currency option interest rate swaps, and put and call options on both interest rate swaps and credit default swap index products.

(e) In accordance with ASC Topic 820, these investments are measured at fair value using NAV per share as a practical expedient and, therefore, have not been classified in the fair value hierarchy. The fair value amounts presented in this table are intended to permit reconciliations of the fair value hierarchy to the statements of net assets available for plan benefits.

(f) At September 30, 2017, investments in commingled funds and a pooled separate account consisted primarily of 91% common stock U.S companies; 8% income producing properties located in the United States; and 1% short-term money market investments. As of September 30, 2016, investments in commingled funds and pooled separate accounts consisted primarily of 85% common stock of large-cap U.S companies; 14% income producing properties located in the United States; and 1% short-term money market investments.

(g) At September 30, 2017 and 2016, investments in a private equity/limited partnership consisted of common stock of international companies.

(h) At September 30, 2017 and September 30, 2016 this net payable primarily represents pending trades for investments purchased net of pending trades for investments sold and interest receivable.

 

48

 

WGL Holdings, Inc.

Washington Gas Light Company

Notes to Consolidated Financial Statements

 

	
Healthcare and Life Insurance Plan Assets
    	
 
    
	
($ In millions)
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
% of  
    	
 
    
	
At September 30, 2017
    	
 
    	
Level 1
    	
 
    	
Level 2
    	
 
    	
Level 3
    	
 
    	
Total  
    	
 
    	
Total  
    	
 
    
	
Cash   and Cash Equivalents
    	
 
    	
$
    	
2.6
    	
 
    	
$
    	
—
    	
 
    	
$
    	
—
    	
 
    	
$
    	
2.6
    	
 
    	
0.5
    	
%
    
	
Fixed   Income Securities
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
U.S   Agency Obligations
    	
 
    	
—
    	
 
    	
1.7
    	
 
    	
—
    	
 
    	
1.7
    	
 
    	
0.3
    	
 
    
	
U.S.   Treasuries
    	
 
    	
—
    	
 
    	
36.0
    	
 
    	
—
    	
 
    	
36.0
    	
 
    	
6.7
    	
 
    
	
U.S. Corporate   Debt
    	
 
    	
—
    	
 
    	
41.9
    	
 
    	
—
    	
 
    	
41.9
    	
 
    	
7.8
    	
 
    
	
Municipalities
    	
 
    	
—
    	
 
    	
3.6
    	
 
    	
—
    	
 
    	
3.6
    	
 
    	
0.7
    	
 
    
	
Non-U.S.   Corporate Debt
    	
 
    	
—
    	
 
    	
7.2
    	
 
    	
—
    	
 
    	
7.2
    	
 
    	
1.3
    	
 
    
	
Other  (a)
    	
 
    	
—
    	
 
    	
2.8
    	
 
    	
—
    	
 
    	
2.8
    	
 
    	
0.5
    	
 
    
	
Total   investments in the fair value hierarchy
    	
 
    	
$
    	
2.6
    	
 
    	
$
    	
93.2
    	
 
    	
$
    	
—
    	
 
    	
$
    	
95.8
    	
 
    	
17.8
    	
%
    
	
Investments   measured at net asset value using the NAV practical expedient  (b)
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Commingled   Funds  (c)
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
444.0
    	
 
    	
82.1
    	
%
    
	
Total   fair value of plan investments
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
539.8
    	
 
    	
99.9
    	
%
    
	
Net   receivable  (d)
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
0.7
    	
 
    	
0.1
    	
 
    
	
Total   plan assets at fair value
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
$
    	
540.5
    	
 
    	
100.0
    	
%
    
	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
At   September 30, 2016
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Cash and Cash   Equivalents
    	
 
    	
$
    	
2.2
    	
 
    	
$
    	
—
    	
 
    	
$
    	
—
    	
 
    	
$
    	
2.2
    	
 
    	
0.4
    	
%
    
	
Fixed Income   Securities
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
U.S Agency   Obligations
    	
 
    	
—
    	
 
    	
1.7
    	
 
    	
—
    	
 
    	
1.7
    	
 
    	
0.3
    	
 
    
	
U.S. Treasuries
    	
 
    	
—
    	
 
    	
33.3
    	
 
    	
—
    	
 
    	
33.3
    	
 
    	
6.6
    	
 
    
	
U.S. Corporate   Debt
    	
 
    	
—
    	
 
    	
38.2
    	
 
    	
—
    	
 
    	
38.2
    	
 
    	
7.6
    	
 
    
	
Municipalities
    	
 
    	
—
    	
 
    	
4.1
    	
 
    	
—
    	
 
    	
4.1
    	
 
    	
0.8
    	
 
    
	
Non-U.S.   Corporate Debt
    	
 
    	
—
    	
 
    	
6.4
    	
 
    	
—
    	
 
    	
6.4
    	
 
    	
1.3
    	
 
    
	
Other (a)
    	
 
    	
—
    	
 
    	
2.8
    	
 
    	
—
    	
 
    	
2.8
    	
 
    	
0.6
    	
 
    
	
Total   investments in the fair value hierarchy
    	
 
    	
$
    	
2.2
    	
 
    	
$
    	
86.5
    	
 
    	
$
    	
—
    	
 
    	
$
    	
88.7
    	
 
    	
17.6
    	
%
    
	
Investments   measured at net asset value using the NAV practical expedient (b)
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Commingled Funds   (c)
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
415.6
    	
 
    	
82.3
    	
%
    
	
Total fair value   of plan investments
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
504.3
    	
 
    	
99.9
    	
%
    
	
Net receivable (d)
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
0.7
    	
 
    	
0.1
    	
 
    
	
Total plan   assets at fair value
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
$
    	
505.0
    	
 
    	
100.0
    	
%
    

 

(a) At September 30, 2017 and 2016, this category consisted primarily of non-U.S. government bonds.

(b) In accordance with ASC Topic 820, these investments are measured at fair value using Net Asset Value (NAV) per share as a practical expedient and, therefore, have not been classified in the fair value hierarchy. The fair value amounts presented in this table are intended to permit reconciliations of the fair value hierarchy to the statements of net assets available for plan benefits.

 

49

 

WGL Holdings, Inc.

Washington Gas Light Company

Notes to Consolidated Financial Statements

 

(c) At September 30, 2017, investments held by commingled funds in which the plan invests consisted primarily of 67% of common stock of large-cap U.S. companies, 13% of U.S. Government fixed income securities and 20% of corporate bonds. At September 30, 2016, investments held by commingled funds in which the plan invests consisted primarily of 68% of common stock of large-cap U.S. companies, 12% of U.S. Government fixed income securities and 20% of corporate bonds.

(d) At September 30, 2017 and September 30, 2016, this net receivable primarily represents pending trades for investments sold and interest receivable net of pending trades for investments purchased.

 

Valuation Methods

 

Equity securities are traded on a securities exchange and are valued at the closing quoted market price as of the balance sheet date.

 

Mutual funds are valued at the quoted net asset value (NAV) per share, which is computed as of the close of business on the balance sheet date. Mutual funds with a publicly quoted NAV per share are classified as Level 1; mutual funds with a NAV per share that is not made publicly available are classified as Level 2. A pooled separate account which has redemption restrictions is classified as Level 3.

 

Commingled funds and pooled separate accounts are valued at the quoted NAV per unit, computed as of the close of business on the balance sheet date.

 

The Private Equity/Limited Partnership funds is valued at the quoted NAV, which is computed monthly and allocated based on ownership interest in partners’ capital.

 

Fixed income securities are valued using pricing models that consider various observable inputs such as benchmark yields, reported trades, broker quotes and issuer spreads to determine fair value.

 

The Plans may engage in repurchase transactions. Generally, in accordance with the terms of a repurchase agreement, the Plans take possession of Treasury Bills in exchange for cash and the counterparty is obligated to repurchase, and the Plan to resell, the same securities at an agreed-upon price and time. The repurchase agreements have a one-day maturity and a fair value equal to the Plan’s cash outlay at the time the agreement is executed.

 

Benefit Contribution

 

During fiscal year 2017 , Washington Gas did not contribute to its qualified pension but did contribute $4.4 million to its non-funded DB SERP plan. During fiscal year 2018 , Washington Gas does not expect to make a contribution to its qualified pension plan and expects to make a payment of $6.5 million to its non-funded DB SERP. During fiscal year 2017 , Washington Gas contributed $8.3 million to its health and life insurance benefit plans. Washington Gas expects to make a contribution of $5.2 million to its health and life insurance benefit plans during fiscal year 2018 .

 

Expected Benefit Payments

 

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
    	
 
    
	
(In millions)
    	
 
    	
Pension
   Benefits
    	
 
    	
Health and
   Life Benefits
    	
 
    
	
2018
    	
 
    	
$
    	
52.7
    	
 
    	
$
    	
16.8
    	
 
    
	
2019
    	
 
    	
54.7
    	
 
    	
17.0
    	
 
    
	
2020
    	
 
    	
55.2
    	
 
    	
16.3
    	
 
    
	
2021
    	
 
    	
59.0
    	
 
    	
16.3
    	
 
    
	
2022
    	
 
    	
55.7
    	
 
    	
16.4
    	
 
    
	
2023—2027
    	
 
    	
290.1
    	
 
    	
82.6
    	
 
    
								

 

50

 

WGL Holdings, Inc.

Washington Gas Light Company

Part II

Item 8. Financial Statements and Supplementary Data (continued)

Notes to Consolidated Financial Statements

 

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.

 

District of Columbia Jurisdiction

 

The PSC of DC has approved a level of rates sufficient to recover annual costs associated with the qualified pension and other post-retirement benefits. Expenses of the SERP allocable to the District of Columbia are not recovered through rates. On May 15, 2013, the PSC of DC issued an order providing for recovery of unrecovered costs for pension and other post-retirement benefits as of the effective date of new rates. On March 3, 2017, the Commission issued an order that continued the amortization for prior unrecovered pension and other post-retirement benefits through 2019.

 

Maryland Jurisdiction

 

In Washington Gas’ most recent rate case, the PSC of MD approved 50% of the expenses of the SERP for recovery through rates. The PSC of MD has approved a level of rates sufficient to recover pension and other post-retirement benefit costs as determined under GAAP.

 

Virginia Jurisdiction

 

On September 28, 1995, the 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.

 

51

 

WGL Holdings, Inc.

Washington Gas Light Company

Notes to Consolidated Financial Statements

 

NOTE 11. STOCK-BASED COMPENSATION

 

STOCK-BASED COMPENSATION FOR KEY EMPLOYEES

 

We have stock-based awards outstanding in the form of performance shares and performance units. In March 2016, WGL adopted a shareholder-approved Omnibus Plan (2016 Plan) to replace, on a prospective basis, the Omnibus Incentive Plan (2007 Plan). Stock options, stock appreciation rights, restricted stock, deferred stock as a bonus or awards in lieu of obligations, dividend equivalents, other stock-based awards and cash awards may be granted under the 2016 Plan. The 2016 Plan allows WGL to issue up to 2,197,546  shares of common stock, subject to adjustment as provided by the plan, to persons including officers and key employees, designated by the Human Resources Committee of the Board of Directors. Refer to Note 6— Common Stock —W GL for amounts remaining to be issued under these plans.

 

In March 2007, WGL adopted a shareholder-approved 2007 Plan to replace, on a prospective basis, its then-existing plan. The 2007 Plan allowed WGL to issue up to 1,700,000  shares of common stock, subject to adjustment as provided by the plan, to persons including officers and key employees, designated by the Human Resources Committee of the Board of Directors.

 

During the fiscal year ended September 30, 2017 , we granted performance shares and performance units under the 2016 Plan. We have not issued stock options under either the 2007 Plan or the 2016 Plan.

 

For the fiscal years ended September 30, 2017 , 2016 and 2015 , we recognized stock-based compensation expense of $16.4 million , $11.5 million and $15.5 million , respectively, and related income tax benefits of $6.5 million , $4.6 million and $6.2 million , respectively. As of September 30, 2017 , total unrecognized compensation expense related to stock-based awards granted was $14.1 million . Performance shares and performance units comprised $5.4 million and $8.7 million of total unrecognized compensation expense, respectively. The total unrecognized compensation expense is expected to be recognized over a weighted average cost period of 1.7 years for performance shares and performance units.

 

Description of Awards

 

Performance shares earned pursuant to the terms of the grant are settled in an equivalent number of shares of WGL common stock and, for grants made in fiscal years 2017 and 2016, dividend equivalents paid in cash. Performance units earned pursuant to terms of the grant are paid in cash and are valued at $1.00 per performance unit. Performance units and performance shares provide for accelerated vesting upon a change in control of WGL under certain circumstances. We generally issue new shares of common stock to provide for redemption of performance shares; however, we may, from time to time, repurchase shares of our common stock on the open market in order to meet these requirements. Performance shares are accounted for as equity awards, and performance units are accounted for as liability awards as they are settled in cash. For information regarding the treatment of awards pursuant to the Merger, please refer to our definitive proxy statement on Schedule 14A filed with the SEC on March 31, 2017.

 

During fiscal 2017 and 2016, WGL granted performance shares and performance units that vest three years from the grant date based on the satisfaction of certain market or performance conditions. For half of the performance shares and half of the performance units granted in fiscal year 2017 and 2016, the actual award that vests will vary from zero to 200 percent of the target award based on WGL’s total shareholder return relative to a selected peer group of companies, which is a market condition under ASC Topic 718. The remaining half of the performance shares granted in fiscal year 2017 and 2016 vest if our non-GAAP operating earnings per share on a diluted basis exceed dividends paid per share of common stock during the performance period, which is a performance condition under ASC Topic 718. For the remaining half of the performance units granted in fiscal year 2017 and 2016 the actual award that vests will vary from zero to 200 percent of the target award based on our return on equity ratio achieved during the performance period, which is a performance condition under ASC Topic 718.

 

Prior to fiscal 2016, WGL granted performance shares and performance units that vest three years from the grant date based on the satisfaction of a market condition. The actual performance shares and performance units that vest will vary from zero to 200 percent of the target award based on the Company’s total shareholder return relative to a selected peer group of companies, which is a market condition under ASC Topic 718.

 

52

 

WGL Holdings, Inc.

Washington Gas Light Company

Notes to Consolidated Financial Statements

 

Performance Shares

 

The following table summarizes information regarding performance share activity during the fiscal year ended September 30, 2017 .

 

	
Performance Share Activity
    	
 
    
	
 
    	
 
    	
Year Ended
   September 30, 2017
    	
 
    
	
 
    	
 
    	
Number of
   Shares (a)
    	
 
    	
Weighted Average Grant-
   Date Fair Value
    	
 
    
	
Non-vested and   outstanding, beginning of year
    	
 
    	
292,179
    	
 
    	
$
    	
50.28
    	
 
    
	
Granted
    	
 
    	
87,346
    	
 
    	
67.41
    	
 
    
	
Settled
    	
 
    	
(94,858
    	
)
    	
45.76
    	
 
    
	
Cancelled/forfeited
    	
 
    	
(9,785
    	
)
    	
56.72
    	
 
    
	
Non-vested and   outstanding, end of year
    	
 
    	
274,882
    	
 
    	
$
    	
57.05
    	
 
    

 

(a) The number of common shares issued related to 190,315 non-vested performance shares outstanding at year-end may range from zero to 200% of this number based on our satisfaction of the market condition for total shareholder return relative to a selected peer group of companies. For 84,566 non-vested performance shares outstanding at year-end, the number of common shares issued may range from zero to 100% of this number based on our satisfaction of the performance condition for non-GAAP diluted earnings per share as compared to dividends paid per share.

 

The total intrinsic value of the performance shares outstanding at September 30, 2017 for the shares expected to vest in the future was $26.7 million . The total intrinsic value of performance shares vested during the year ended September 30, 2017 and 2016 was $ 10.2 million and $ 9.2 million , respectively. There were no performance shares vested during the year ended September 30, 2015 .

 

We measure compensation expense related to performance shares based on the fair value of the awards at their date of grant. The grant-date fair value of performance shares that vest based on the satisfaction of a performance condition is the WGL closing stock price on the day prior to the grant date, which was $ 62.70 for performance shares granted in fiscal 2017 . The grant-date fair value of performance shares that vest based on the satisfaction of a market condition is estimated using a Monte Carlo simulation model and the following assumptions:

 

	
Fair Value Assumptions
    	
 
    
	
Years Ended September 30,
    	
 
    	
2017
    	
 
    	
2016
    	
 
    	
2015
    	
 
    
	
Expected   stock-price volatility (a)
    	
 
    	
20.40
    	
%
    	
19.10
    	
%
    	
18.30
    	
%
    
	
Dividend yield (b)
    	
 
    	
—
    	
 
    	
—
    	
 
    	
4.18
    	
%
    
	
Weighted average   grant-date fair value
    	
 
    	
$
    	
72.11
    	
 
    	
$
    	
67.30
    	
 
    	
$
    	
44.44
    	
 
    
											

 

(a) Expected stock-price volatility is based on the daily historical volatility of our common shares for the past three fiscal years.

(b) The dividend yield represents our annualized dividend yield on the closing market price of our common stock at the date of the grant. Performance shares granted in fiscal year 2017 and 2016 accrue dividend equivalents and, therefore, this assumption is not used when determining the grant-date fair value.

 

We recognize compensation expense related to performance shares over the three-year requisite service period. Compensation expense for performance shares that vest based on the satisfaction of a performance condition is recognized for awards that ultimately vest. Compensation expense for performance shares that vest based on the satisfaction of a market conditions is recognized if the requisite service is rendered, but is not adjusted to reflect the ultimate achievement of the market condition.

 

Performance Units

 

The following table summarizes information regarding performance unit activity during the fiscal year ended September 30, 2017 .

 

53

 

WGL Holdings, Inc.

Washington Gas Light Company

Notes to Consolidated Financial Statements

 

	
Performance Unit Activity
    	
 
    
	
   
    	
 
    	
Year Ended
   September 30, 2017
    	
 
    
	
   
    	
 
    	
Number of Units (a)
    	
 
    
	
Non-vested and   outstanding, beginning of year
    	
 
    	
13,724,718
    	
 
    
	
Granted
    	
 
    	
5,476,846
    	
 
    
	
Settled
    	
 
    	
(4,051,340
    	
)
    
	
Cancelled/forfeited
    	
 
    	
(518,226
    	
)
    
	
Non-vested and   outstanding, end of year
    	
 
    	
14,631,998
    	
 
    

 

(a) The number of performance units vested related to 9,543,099 non-vested performance units outstanding at year-end may range from zero to 200% of this number based on our satisfaction of the market condition for total shareholder return relative to a selected peer group of companies. For 5,088,899 non-vested performance units outstanding at year-end, the number of performance units vested may range from zero to 200% of this number based on our satisfaction of the performance condition for the return on equity ratio achieved during the performance period.

 

The total fair value of performance units outstanding at September 30, 2017 for the units expected to vest in the future was $26.3 million . As of September 30, 2017 and 2016 , we recorded a current and deferred liability of $17.6 million and $13.6 million , respectively, related to our performance units. The current liability was recorded in “Accounts payable and other accrued liabilities—other” in the amounts of $8.9 million and $ 6.9 million at September 30, 2017 and 2016 , respectively. The deferred liability was recorded in “Deferred Credits—other” in the amounts of $ 8.7 million and $ 6.7 million , at September 30, 2017 and 2016 , respectively. During the fiscal years ended September 30, 2017 and 2016 , we paid $ 6.9 million and $ 6.4 million , respectively, in cash to settle performance unit awards.

 

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. The percentage of the fair value that is accrued as compensation expense at the end of each period equals the percentage of the requisite service that has been rendered at that date. Consequently, fluctuations in earnings may result, that do not occur under the accounting requirements for our performance shares.

 

The fair value of each performance unit that vests based on the satisfaction of a performance condition is $ 1.00 . The amount of total compensation cost to be recognized for these performance units is a function of this fair value and the number of awards vested as a result of the performance condition being met and the requisite service provided. The fair value of each performance unit that vests based on the satisfaction of a market condition is estimated using a Monte Carlo simulation model and the following assumptions:

 

	
Fair Value Assumptions
    	
 
    
	
   
    	
 
    	
September 30, 2017
    	
 
    
	
   
    	
 
    	
10/1/2016 Grant
    	
 
    	
10/1/2015 Grant
    	
 
    
	
Expected   stock-price volatility (a)
    	
 
    	
19.20
    	
%
    	
17.30
    	
%
    

 

(a)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 amount of total compensation cost to be recognized for these performance units is a function of this estimated fair value and the number of awards granted for which the requisite service is provided.

 

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 270,000  shares of common stock may be awarded under the plan. Shares granted to directors were approximately 10,000 , 13,000 and 15,100 for the fiscal years ended September 30, 2017 , 2016 and 2015 , respectively. For those years, the weighted average fair value of the stock on the grant dates was $76.28 , $62.99 , and $54.05 , respectively. Shares awarded to the participants; (i)  vest immediately and cannot be forfeited; (ii)  may be sold or transferred (subject to WGL’s stock ownership guidelines) and (iii)  have voting and dividend rights. For each of the fiscal years ended September 30, 2017 , 2016 and 2015 , WGL recognized stock-based compensation expense related to stock grants of $0.8 million , net of related income tax benefits of $0.3 million , respectively.

 

54

 

WGL Holdings, Inc.

Washington Gas Light Company

Notes to Consolidated Financial Statements

 

NOTE 12. ENVIRONMENTAL MATTERS

 

We are subject to federal, state and local laws and regulations related to environmental matters. These laws and regulations may require expenditures over a long time frame to control environmental effects. 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 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, and either the appropriate remediation is being undertaken or Washington Gas believes no remediation is necessary.

 

At September 30, 2017 and 2016 , Washington Gas reported a liability of $ 7.7 million and $ 8.2 million , respectively, on an undiscounted basis related to future environmental response costs. These estimates principally include the minimum liabilities associated with a range of environmental response costs expected to be incurred. At September 30, 2017 and 2016 , Washington Gas estimated the maximum liability associated with all of its sites to be approximately $ 24.0 million and $ 18.6 million , respectively. The estimates were determined by Washington Gas’ environmental experts, based on experience in remediating MGP sites and advice from legal counsel and environmental consultants. The variation between the recorded and estimated maximum liability primarily results from differences in the number of years that will be required to perform environmental response processes and the extent of remediation that may be required. Washington Gas is currently conducting a remedial investigation and feasibility study of potential contamination in the Anacostia River associated with and adjacent to one of Washington Gas’ former MGP sites under a 2012 consent decree with the District of Columbia and federal governments.

 

Washington Gas received a letter in February 2016 from the District of Columbia and National Park Service regarding the Anacostia River Sediment Project, indicating that the District of Columbia is conducting a separate remedial investigation and feasibility study of the river to determine if and what cleanup measures may be required and to prepare a natural resource damage assessment. The sediment project draft report identifies one of Washington Gas’ former MGP sites as one of seventeen potential environmental cleanup sites. During the fiscal year ended September 30, 2017, Washington Gas received a request for information related to three Washington Gas properties: the previously identified former MGP site under the 2012 consent decree, one other former MGP site and another Washington Gas location. We are not able to estimate the total amount of potential damages or timing associated with the District of Columbia’s environmental investigation on the Anacostia River at this time. While an allocation method has not been established, Washington Gas has accrued an amount based on a potential range of estimates.

 

Regulatory orders issued by the PSC of MD allow Washington Gas to recover the costs associated with the sites applicable to Maryland over the period ending in 2025. 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

 

55

 

WGL Holdings, Inc.

Washington Gas Light Company

Notes to Consolidated Financial Statements

 

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 the underlying financial data supporting an application for rate change.

 

At September 30, 2017 and 2016 , Washington Gas reported a regulatory asset of $ 2.5 million and $ 1.3 million , respectively, for the portion of environmental response costs that are expected to be recoverable in future rates.

 

We do not expect that the ultimate impact of these matters will have a material effect on our financial position, cash flows, capital expenditures, earnings or competitive position.

 

NOTE 13. 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)
    	
 
    	
 
    	
 
    
	
2018
    	
 
    	
$
    	
8.5
    	
 
    
	
2019
    	
 
    	
5.4
    	
 
    
	
2020
    	
 
    	
8.1
    	
 
    
	
2021
    	
 
    	
8.5
    	
 
    
	
2022
    	
 
    	
8.4
    	
 
    
	
Thereafter
    	
 
    	
89.8
    	
 
    
	
Total
    	
 
    	
$
    	
128.7
    	
 
    

 

Rent expense totaled $8.7 million , $8.4 million and $6.0 million in fiscal years ended September 30, 2017 , 2016 and 2015 , respectively.

 

REGULATED UTILITY OPERATIONS

 

Natural Gas Contracts—Minimum Commitments

 

At September 30, 2017 , 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 2018 to 2034 , 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 2018 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, as well as minimum contractual payments to purchase natural gas at prices based on market conditions during the next five fiscal years and thereafter.

 

56

 

WGL Holdings, Inc.

Washington Gas Light Company

Notes to Consolidated Financial Statements

 

	
Washington Gas Contract Minimums
    	
 
    
	
(In millions)
    	
 
    	
Pipeline
   Contracts (a)
    	
 
    	
Gas Purchase
   Commitments (b)
    	
 
    
	
2018
    	
 
    	
$
    	
206.7
    	
 
    	
$
    	
451.0
    	
 
    
	
2019
    	
 
    	
221.3
    	
 
    	
378.3
    	
 
    
	
2020
    	
 
    	
220.4
    	
 
    	
361.4
    	
 
    
	
2021
    	
 
    	
211.8
    	
 
    	
363.7
    	
 
    
	
2022
    	
 
    	
207.4
    	
 
    	
367.0
    	
 
    
	
Thereafter
    	
 
    	
1,036.3
    	
 
    	
2,701.6
    	
 
    
	
Total
    	
 
    	
$
    	
2,103.9
    	
 
    	
$
    	
4,623.0
    	
 
    

 

(a) Represents minimum payments for natural gas transportation, storage and peaking contracts that have expiration dates through fiscal year 2034 .

(b) Includes known and reasonably likely commitments to purchase natural gas. Cost estimates are based on forward market prices at September 30, 2017 .

 

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 Gas’ city gate. In order to provide the gas commodity to customers who do not select an unregulated third party marketer, Washington Gas has a commodity acquisition plan to acquire the natural gas supply to serve the customers.

 

To the extent these commitments are to serve its customers, 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, results of operations and cash flows would likely be significant.

 

Silver Spring, Maryland Incident

 

Washington Gas continues to support the investigation by the NTSB into the August 10, 2016 explosion and fire at an apartment complex on Arliss Street in Silver Spring, Maryland, the cause of which has not been determined.  Additional information will be made available by the NTSB at the appropriate time. On November 2, 2016, two civil actions were filed in the District of Columbia Superior Court against WGL and Washington Gas (as well as a property management company that is not affiliated with WGL or Washington Gas), by residents of the apartment complex. In one lawsuit, twenty-nine plaintiffs sought unspecified damages for, among others, wrongful death and personal injury. The other action was a class action suit seeking total damages stated to be less than $ 5 million  for, among others, property damage and various counts relating to the loss of the use of the premises. Both actions alleged causes of action for negligence, product liability, and declaratory relief. The cases were dismissed on November 16, 2017. Thirty-five civil actions have been filed in the Circuit Court for Montgomery County, Maryland seeking unspecified damages for personal injury and property damage. We maintain excess liability insurance coverage from highly-rated insurers, subject to a nominal self-insured retention. We believe that this coverage will be sufficient to cover any significant liability to it that may result from this incident. Management is unable to determine a range of potential losses that are reasonably possible of occurring and therefore we have not recorded a reserve associated with this incident. Washington Gas was invited by the NTSB to be a party to the investigation and in that capacity continues to work closely with the NTSB to help determine the cause of this incident.

 

Regulatory Contingencies

 

Certain legal and administrative proceedings incidental to our business, including regulatory contingencies, involve WGL 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.

 

57

 

WGL Holdings, Inc.

Washington Gas Light Company

Notes to Consolidated Financial Statements

 

District of Columbia Jurisdiction

 

Investigation into Washington Gas’ Cash Reimbursement to Competitive Service Providers (CSPs) . On August 5, 2014, the Office of the People’s Counsel’s (OPC) of DC filed a complaint with the PSC of DC requesting that the Commission open an investigation into Washington Gas’ payments to CSPs to cash-out over-deliveries of natural gas supplies during the 2008-2009 winter heating season. OPC asserted that Washington Gas made excess payments in the amount of $2.4 million to CSPs. On December 19, 2014, the PSC of DC granted the OPC of DC’s request and opened a formal investigation. On October 27, 2015, the PSC of DC issued an order finding that Washington Gas, in performing the cash-out, had violated D.C. Code 34-1101’s requirement that no service shall be provided without Commission approval. The PSC of DC directed Washington Gas to provide calculations showing what the impact would have been had Washington Gas made volumetric adjustments to CSP deliveries as of April 2009, which Washington Gas calculates would result in a refund of approximately $2.4 million , which was recognized by WGL in fiscal year 2015. On February 3, 2016, the PSC of DC issued an order denying OPC’s application for reconsideration and granting in part, and denying in part, Washington Gas’ application for reconsideration. Washington Gas and OPC filed initial briefs on February 18, 2016, and reply briefs on February 29, 2016, on the issue of whether there is a more reasonable way to reconcile the over-deliveries by CSPs such as through volumetric adjustments or through cash payments. On August 11, 2016, the PSC of DC issued an order requiring Washington Gas to refund approximately $2.4 million through the ACA. On August 26, 2016, Washington Gas filed its plan for implementing the $2.4 million refund within a 12-month period. The PSC of DC issued an Order on October 7, 2016, directing WGL to apply the refunds consistent with the next annual 12-month ACA reporting period which is December 1, 2016 to November 30, 2017. During the fiscal year ended September 30, 2017, Washington Gas issued refunds of approximately $1.9 million on active customer bills. Additionally, Washington gas billed third-party CSPs approximately $1.4 million to cover amounts credited to firm rate-payers in connections with the DC order.

 

Virginia Jurisdiction

 

Virginia Rate Case. On June 30, 2016, Washington Gas filed an application with the SCC of VA to increase its base rates for natural gas service by $ 45.6 million , which includes $ 22.3 million of revenue associated with natural gas pipeline replacement initiatives previously approved by the Commission and paid by customers through a monthly rider. Additionally, the proposed rate increase includes provisions designed to deliver the benefits of natural gas to more customers that include: (i) facilitating conversion to natural gas in locations already served by Washington Gas; (ii) expanding the natural gas system to high-growth communities in Virginia and (iii) research and development that we believe will enable innovations to enhance service for our customers.

 

Interim rates went into effect, subject to refund, in the December 2016 billing cycle. Intervenors filed testimony on January 31, 2017, Staff of the SCC of VA filed testimony on February 28, 2017, and Washington Gas filed its rebuttal testimony on March 28, 2017. On April 17, 2017, Washington Gas filed with the SCC of VA a unanimous settlement as to a specific annual revenue increase, but not as to a specific return on equity, specific accounting adjustments, or specific ratemaking methodologies, except as otherwise set forth therein. The Stipulation sets forth, for purposes of settlement, a base rate increase of $ 34 million (of which $ 14.1 million represents incremental base rate revenues over and above the inclusion of SAVE Plan costs which were previously recovered through monthly surcharges). For purposes of the settlement, the mid-point of the return on equity range of 9.0-10.0% will be used in any application or filing, other than a change in base rates, effective December 1, 2016. On June 30, 2017, the Chief Hearing Examiner issued a report recommending that the Commission approve the Stipulation. On September 8, 2017, Washington Gas received a final order from the Commission accepting settlement subject to minor modifications to Washington Gas’ System Expansion Proposals. All parties agreed to a Revised Stipulation filed on September 20, 2017, reflecting the Commission’s denial of one of the System Expansion Proposals and Washington Gas’ withdrawal of the second one. The Commission issued its final order approving the revised stipulation on September 25, 2017. Refunds to customers, which have been accrued by Washington Gas at September 30, 2017, will be made related to the interim billings in accordance with the final order.

 

58

 

WGL Holdings, Inc.

Washington Gas Light Company

Notes to Consolidated Financial Statements

 

NON-UTILITY OPERATIONS

 

WGL Energy Services enters into contracts to purchase natural gas and electricity designed to match the duration of its sales commitments, and to secure a margin on estimated sales over the terms of existing sales contracts. WGL Midstream enters into contracts to acquire, invest in, manage and optimize natural gas storage and transportation assets. Gas purchase commitments increased during fiscal year 2017 due to purchase commitments related to investment pipeline infrastructure and long-term sales agreements.

 

The following table summarizes the minimum commitments and contractual obligations of WGL Energy Services and WGL Midstream for the next five fiscal years and thereafter.

 

	
Contract Minimums
    	
 
    
	
 
    	
 
    	
WGL Energy Services
    	
 
    	
WGL Midstream
    	
 
    	
 
    	
 
    
	
(In millions)
    	
 
    	
Gas Purchase
   Commitments (a)
    	
 
    	
Pipeline
   Contracts (b)
    	
 
    	
Electric
   Purchase
   Commitments (c)
    	
 
    	
Gas Purchase
   Commitments (d)
    	
 
    	
Pipeline
   Contracts (b)
    	
 
    	
Total
    	
 
    
	
2018
    	
 
    	
$
    	
143.8
    	
 
    	
$
    	
3.4
    	
 
    	
$
    	
342.0
    	
 
    	
$
    	
712.9
    	
 
    	
$
    	
42.6
    	
 
    	
$
    	
1,244.7
    	
 
    
	
2019
    	
 
    	
78.5
    	
 
    	
0.9
    	
 
    	
201.4
    	
 
    	
1,385.2
    	
 
    	
85.8
    	
 
    	
1,751.8
    	
 
    
	
2020
    	
 
    	
30.0
    	
 
    	
0.5
    	
 
    	
110.0
    	
 
    	
1,450.1
    	
 
    	
89.4
    	
 
    	
1,680.0
    	
 
    
	
2021
    	
 
    	
7.3
    	
 
    	
0.4
    	
 
    	
43.8
    	
 
    	
1,359.0
    	
 
    	
88.2
    	
 
    	
1,498.7
    	
 
    
	
2022
    	
 
    	
0.4
    	
 
    	
0.3
    	
 
    	
7.4
    	
 
    	
1,307.0
    	
 
    	
85.9
    	
 
    	
1,401.0
    	
 
    
	
Thereafter
    	
 
    	
—
    	
 
    	
0.6
    	
 
    	
1.5
    	
 
    	
20,130.0
    	
 
    	
1,044.3
    	
 
    	
21,176.4
    	
 
    
	
Total
    	
 
    	
$
    	
260.0
    	
 
    	
$
    	
6.1
    	
 
    	
$
    	
706.1
    	
 
    	
$
    	
26,344.2
    	
 
    	
$
    	
1,436.2
    	
 
    	
$
    	
28,752.6
    	
 
    

 

(a) Represents fixed price commitments with city gate equivalent deliveries.

(b) Represents minimum payments for natural gas transportation and storage contracts that have expiration dates through fiscal year 2044.

(c) Represents electric purchase commitments that are based on existing fixed price and fixed volume contracts. Includes $14.7 million of commitments related to renewable energy credits.

(d) Includes known and reasonably likely commitments to purchase natural gas. Cost estimates are based on forward market prices as of September 30, 2017 . Certain of our gas purchase agreements have optionality, which may cause increases in these commitments.

 

Financial Guarantees

 

WGL has guaranteed payments primarily for certain commitments on behalf of certain subsidiaries. At September 30, 2017 , these guarantees totaled $30.7 million , $167.8 million , $124.3 million and $389.1 million for Washington Gas, WGL Energy Services, WGL Energy Systems and WGL Midstream, respectively. At September 30, 2017 , WGL also had guarantees on behalf of other subsidiaries totaling $2.1 million . The amount of such guarantees is periodically adjusted to reflect changes in the level of WGL’s financial exposure related to these commitments. For all of our financial guarantees, WGL may cancel any or all future obligations upon written notice to the counterparty, but WGL would continue to be responsible for the obligations created under the guarantees prior to the effective date of the cancellation. WGL has also guaranteed payments for certain of our external partners. At September 30, 2017 , these guarantees totaled $13.5 million and the fair value of these guarantees was insignificant.

 

Antero Contract

 

Washington Gas and WGL Midstream contracted in June 2014 with Antero Resources Corporation (Antero) to buy gas from Antero at invoiced prices based on an index, and at a delivery point, specified in the contracts. Since deliveries began, however, the index price paid has been more than the fair market value at the same physical delivery point, resulting in losses to date of $25.0 million . Accordingly, Washington Gas and WGL Midstream notified Antero that it sought to apply a provision of the contracts that would permit a new index to be established. Antero objected, claiming that the contract provisions permitting re-pricing did not apply, unless Antero itself chose to sell gas at cheaper prices at the delivery point (which Antero claimed it had not). The dispute was arbitrated in January 2017, and the arbitral tribunal ruled in favor of Antero on the applicability of the re-pricing mechanism. However, the tribunal ruled that it lacked authority to determine whether Antero was in breach of its obligation to deliver gas to Washington Gas and WGL Midstream at a point where they could obtain the higher pricing.

 

59

 

WGL Holdings, Inc.

Washington Gas Light Company

Notes to Consolidated Financial Statements

 

Accordingly, Washington Gas and WGL Midstream filed suit in state court in Colorado for a determination of this issue. The state court granted Antero’s motion to dismiss the case and the case is currently on appeal. Separately, Antero has initiated suit against Washington Gas and WGL Midstream, claiming that they have failed to purchase specified daily quantities of gas and seeking alleged cover damages exceeding $80 million as of October 24, 2017, which amount continues to accumulate daily according to Antero’s complaint. Washington Gas and WGL Midstream oppose both the validity and amount of Antero’s claim. WGL believes the probability that Antero could succeed in collecting these penalties is remote and therefore, no accrual was made as of September 30, 2017.

 

NOTE 14. DERIVATIVE AND WEATHER-RELATED INSTRUMENTS

 

DERIVATIVE INSTRUMENTS

 

Regulated Utility Operations

 

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

 

Asset Optimization. Washington Gas optimizes the value of its long-term natural gas transportation and storage capacity resources during periods when these resources are not being used to physically serve utility customers. Specifically, Washington Gas utilizes its transportation capacity assets to benefit from favorable natural gas prices between different geographic locations and utilizes its storage capacity assets to benefit from favorable natural gas prices between different time periods. As part of this asset optimization program, Washington Gas enters into physical and financial derivative transactions in the form of forwards, futures and option contracts with the primary objective of securing operating margins that Washington Gas will ultimately realize. The derivative transactions entered into under this program are subject to mark-to-market accounting treatment under ASC 820.

 

Regulatory sharing mechanisms provide for the annual realized profit from these transactions to be shared between Washington Gas’ shareholders and customers; therefore, changes in fair value are recorded through earnings, or as regulatory assets or liabilities to the extent that it is probable that realized gains and losses associated with these derivative transactions will be included in the rates charged to customers when they are realized. Unrealized gains and losses recorded to earnings may cause significant period-to-period volatility; this volatility does not change the operating margins that Washington Gas expects to ultimately realize from these transactions through the use of its storage and transportation capacity resources.

 

All physically and financially settled contracts under our asset optimization program are reported on a net basis in the statements of income in “Utility cost of gas.” Total net margins recorded to “Utility cost of gas” after sharing and management fees associated with all asset optimization transactions for the fiscal year ended September 30, 2017 was a net gain of $82.9 million including an unrealized gain of $49.3 million . During the fiscal year ended September 30, 2016 , we recorded a net gain of $43.8 million including an unrealized gain of $12.0 million . During the fiscal year ended September 30, 2015 , we recorded a net gain of $27.9 million including an unrealized loss of $6.3 million .

 

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

 

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

 

Non-Utility Operations

 

Optimization. WGL Midstream enters into derivative contracts for the purpose of optimizing its storage and transportation capacity as well as managing the transportation and storage assets on behalf of third parties. WGL Midstream does not designate these derivatives as hedges under ASC Topic 815; therefore, changes in the fair value of these derivative

 

60

 

WGL Holdings, Inc.

Washington Gas Light Company

Notes to Consolidated Financial Statements

 

instruments are reflected in the earnings of our non-utility operations and may cause significant period-to-period volatility in earnings.

 

Managing Price Risk . WGL Energy Services enters into certain derivative contracts as part of its strategy to manage the price risk associated with the sale and purchase of natural gas and electricity. WGL Energy Services designates a portion of these physical contracts related to the purchase of natural gas and electricity to serve our customers as “normal purchases and normal sales” and therefore, they are not subject to the fair value accounting requirements of ASC Topic 815. Derivative instruments not designated as “normal purchases and normal sales” are recorded at fair value on our consolidated balance sheets, and changes in the fair value of these derivative instruments are reflected in the earnings of our non-utility operations, which may cause significant period-to-period volatility in earnings. WGL Energy Services does not designate derivatives as hedges under ASC Topic 815.

 

Managing Interest-Rate Risk . WGL utilizes derivative instruments that are designed to limit the risk of interest-rate volatility associated with future debt issuances.

 

At September 30, 2017, WGL had $250 million of forward starting interest rate swaps.WGL had designated these interest rate swaps as cash flow hedges in anticipation of a 30-year debt issuance in January 2018 and reported the effective portion of changes in fair value is reported as a component of other comprehensive income (loss). As a result of certain covenants related to the proposed merger with AltaGas, in January 2017, WGL de-designated these hedges and any further changes in the fair value of the interest rate swaps will be recorded to interest expense. The remaining balance in accumulated other comprehensive income at September 30, 2017 is $ 6.4 million related to these hedges. Refer to Note 21 — Planned Merger with AltaGas Ltd. for a discussion of the proposed merger.

 

61

 

WGL Holdings, Inc.

Washington Gas Light Company

Notes to Consolidated Financial Statements

 

Consolidated Operations

 

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

 

At September 30, 2017 and 2016 , respectively, the absolute notional amounts of our derivatives are as follows:

 

	
Absolute Notional Amounts
    	
 
    
	
of Open Positions on Derivative Instruments
    	
 
    
	
 
    	
 
    	
Notional Amounts
    	
 
    
	
Derivative transactions
    	
 
    	
WGL Holdings 
    	
 
    	
Washington Gas
    	
 
    
	
September 30, 2017
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Natural   Gas  (In millions of therms)
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Asset   optimization & trading
    	
 
    	
21,663.5
    	
 
    	
11,223.0
    	
 
    
	
Retail sales
    	
 
    	
124.3
    	
 
    	
—
    	
 
    
	
Other   risk-management activities
    	
 
    	
1,546.7
    	
 
    	
1,181.0
    	
 
    
	
Electricity    (In millions of kWhs)  
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Retail sales
    	
 
    	
10,011.7
    	
 
    	
—
    	
 
    
	
Other   risk-management activities (a)
    	
 
    	
22,962.1
    	
 
    	
—
    	
 
    
	
Interest   Rate Swaps (In millions of   dollars)  
    	
 
    	
$
    	
250.0
    	
 
    	
$
    	
—
    	
 
    
	
September 30,   2016
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Natural   Gas  (In millions of therms)
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Asset   optimization & trading
    	
 
    	
21,084.5
    	
 
    	
12,725.0
    	
 
    
	
Retail sales
    	
 
    	
50.2
    	
 
    	
—
    	
 
    
	
Other   risk-management activities
    	
 
    	
1,789.0
    	
 
    	
1,309.0
    	
 
    
	
Electricity (In millions of kWhs)
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Retail sales
    	
 
    	
4,377.5
    	
 
    	
—
    	
 
    
	
Other   risk-management activities (a)
    	
 
    	
21,070.4
    	
 
    	
—
    	
 
    
	
Interest   Rate Swaps  (In millions of dollars)
    	
 
    	
$
    	
250.0
    	
 
    	
$
    	
—
    	
 
    

 

(a) Comprised primarily of financial swaps, financial transmission rights and physical forward purchases.

 

62

 

WGL Holdings, Inc.

Washington Gas Light Company

Notes to Consolidated Financial Statements

 

The following tables present the balance sheet classification for all derivative instruments as of September 30, 2017 and 2016 .

 

	
WGL Holdings, Inc.
   Balance Sheet Classification of Derivative Instruments
    	
 
    
	
 
    	
 
    	
Derivative Instruments Not
   Designated as Hedging
   Instruments
    	
 
    	
Derivative Instruments
   Designated as Hedging
   Instruments
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
(In millions)
   As of September 30, 2017
    	
 
    	
Gross
   Derivative
   Assets
    	
 
    	
Gross
   Derivative
   Liabilities
    	
 
    	
Gross
   Derivative
   Assets
    	
 
    	
Gross
   Derivative
   Liabilities
    	
 
    	
Netting of
   Collateral
    	
 
    	
Total (a)
    	
 
    
	
Current   Assets—Derivatives
    	
 
    	
$
    	
26.6
    	
 
    	
$
    	
(11.3
    	
)
    	
$
    	
—
    	
 
    	
$
    	
—
    	
 
    	
$
    	
—
    	
 
    	
$
    	
15.3
    	
 
    
	
Deferred   Charges and Other Assets—Derivatives
    	
 
    	
38.9
    	
 
    	
(0.4
    	
)
    	
—
    	
 
    	
—
    	
 
    	
(0.1
    	
)
    	
38.4
    	
 
    
	
Accounts   Payable
    	
 
    	
1.0
    	
 
    	
—
    	
 
    	
—
    	
 
    	
—
    	
 
    	
—
    	
 
    	
1.0
    	
 
    
	
Current   Liabilities—Derivatives
    	
 
    	
10.9
    	
 
    	
(57.0
    	
)
    	
—
    	
 
    	
—
    	
 
    	
2.1
    	
 
    	
(44.0
    	
)
    
	
Deferred   Credits—Derivatives
    	
 
    	
19.2
    	
 
    	
(148.8
    	
)
    	
—
    	
 
    	
—
    	
 
    	
7.0
    	
 
    	
(122.6
    	
)
    
	
Total
    	
 
    	
$
    	
96.6
    	
 
    	
$
    	
(217.5
    	
)
    	
$
    	
—
    	
 
    	
$
    	
—
    	
 
    	
$
    	
9.0
    	
 
    	
$
    	
(111.9
    	
)
    
	
As of   September 30, 2016
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Current   Assets—Derivatives
    	
 
    	
$
    	
24.0
    	
 
    	
$
    	
(5.5
    	
)
    	
$
    	
—
    	
 
    	
$
    	
—
    	
 
    	
$
    	
—
    	
 
    	
$
    	
18.5
    	
 
    
	
Deferred Charges   and Other Assets—Derivatives
    	
 
    	
55.6
    	
 
    	
(0.6
    	
)
    	
—
    	
 
    	
—
    	
 
    	
—
    	
 
    	
55.0
    	
 
    
	
Current   Liabilities—Derivatives
    	
 
    	
18.3
    	
 
    	
(113.2
    	
)
    	
—
    	
 
    	
—
    	
 
    	
12.6
    	
 
    	
(82.3
    	
)
    
	
Deferred   Credits—Derivatives
    	
 
    	
6.4
    	
 
    	
(279.3
    	
)
    	
0.2
    	
 
    	
(43.1
    	
)
    	
11.6
    	
 
    	
(304.2
    	
)
    
	
Total
    	
 
    	
$
    	
104.3
    	
 
    	
$
    	
(398.6
    	
)
    	
$
    	
0.2
    	
 
    	
$
    	
(43.1
    	
)
    	
$
    	
24.2
    	
 
    	
$
    	
(313.0
    	
)
    

 

(a) WGL has elected to offset the fair value of recognized derivative instruments against the right to reclaim or the obligation to return collateral for derivative instruments executed under the same master netting arrangement in accordance with ASC 815. All recognized derivative contracts and associated financial collateral subject to a master netting arrangement or similar that is eligible for offset under ASC 815 have been presented net in the balance sheet.

 

63

 

WGL Holdings, Inc.

Washington Gas Light Company

Notes to Consolidated Financial Statements

 

	
Washington Gas Light Company
   Balance Sheet Classification of Derivative Instruments (b)
    	
 
    
	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
(In millions)
   As of September 30, 2017
    	
 
    	
Gross
   Derivative
   Assets
    	
 
    	
Gross
   Derivative
   Liabilities
    	
 
    	
Total (a)
    	
 
    
	
Current   Assets—Derivatives
    	
 
    	
$
    	
7.5
    	
 
    	
$
    	
(2.4
    	
)
    	
$
    	
5.1
    	
 
    
	
Deferred   Charges and Other Assets—Derivatives
    	
 
    	
16.5
    	
 
    	
(0.3
    	
)
    	
16.2
    	
 
    
	
Current   Liabilities—Derivatives
    	
 
    	
—
    	
 
    	
(30.3
    	
)
    	
(30.3
    	
)
    
	
Deferred   Credits—Derivatives
    	
 
    	
—
    	
 
    	
(112.3
    	
)
    	
(112.3
    	
)
    
	
Total
    	
 
    	
$
    	
24.0
    	
 
    	
$
    	
(145.3
    	
)
    	
$
    	
(121.3
    	
)
    
	
As of   September 30, 2016
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Current   Assets—Derivatives
    	
 
    	
$
    	
11.7
    	
 
    	
$
    	
(4.4
    	
)
    	
$
    	
7.3
    	
 
    
	
Deferred Charges   and Other Assets—Derivatives
    	
 
    	
26.2
    	
 
    	
(0.6
    	
)
    	
25.6
    	
 
    
	
Current   Liabilities—Derivatives
    	
 
    	
1.9
    	
 
    	
(60.2
    	
)
    	
(58.3
    	
)
    
	
Deferred Credits—Derivatives
    	
 
    	
—
    	
 
    	
(232.0
    	
)
    	
(232.0
    	
)
    
	
Total
    	
 
    	
$
    	
39.8
    	
 
    	
$
    	
(297.2
    	
)
    	
$
    	
(257.4
    	
)
    

 

(b) Washington Gas did not have any derivative instruments outstanding that were designated as hedging instruments at September 30, 2017 or 2016 .

 

The following tables present all gains and losses associated with derivative instruments for the years ended September 30, 2017 , 2016 and 2015 .

 

	
Gains and Losses on Derivative Instruments
    	
 
    
	
(In millions)
    	
 
    	
WGL Holdings, Inc.
    	
 
    	
Washington Gas
    	
 
    
	
Fiscal Year Ended September 30,
    	
 
    	
2017
    	
 
    	
2016
    	
 
    	
2015
    	
 
    	
2017
    	
 
    	
2016
    	
 
    	
2015
    	
 
    
	
Recorded   to income
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Operating   revenues—non-utility
    	
 
    	
$
    	
30.8
    	
 
    	
$
    	
5.8
    	
 
    	
$
    	
71.3
    	
 
    	
$
    	
—
    	
 
    	
$
    	
—
    	
 
    	
$
    	
—
    	
 
    
	
Utility cost of   gas
    	
 
    	
50.1
    	
 
    	
12.1
    	
 
    	
(14.5
    	
)
    	
50.1
    	
 
    	
12.1
    	
 
    	
(14.5
    	
)
    
	
Non-utility cost   of energy-related sales
    	
 
    	
33.5
    	
 
    	
33.5
    	
 
    	
(43.7
    	
)
    	
—
    	
 
    	
—
    	
 
    	
—
    	
 
    
	
Interest expense
    	
 
    	
(5.8
    	
)
    	
(0.2
    	
)
    	
(0.6
    	
)
    	
—
    	
 
    	
—
    	
 
    	
—
    	
 
    
	
Recorded   to regulatory assets
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Gas costs
    	
 
    	
77.2
    	
 
    	
13.9
    	
 
    	
(18.4
    	
)
    	
77.2
    	
 
    	
13.9
    	
 
    	
(18.4
    	
)
    
	
Other (a)
    	
 
    	
—
    	
 
    	
(7.3
    	
)
    	
—
    	
 
    	
—
    	
 
    	
(7.3
    	
)
    	
—
    	
 
    
	
Recorded   to other comprehensive income  (b)
    	
 
    	
49.6
    	
 
    	
(39.3
    	
)
    	
(11.3
    	
)
    	
—
    	
 
    	
—
    	
 
    	
—
    	
 
    
	
Total
    	
 
    	
$
    	
235.4
    	
 
    	
$
    	
18.5
    	
 
    	
$
    	
(17.2
    	
)
    	
$
    	
127.3
    	
 
    	
$
    	
18.7
    	
 
    	
$
    	
(32.9
    	
)
    

 

(a) Represents the settlement of Washington Gas’ forward starting interest rate swap in September 2016.

(b) Represents the effective portion of our cash flow hedges. Includes $ 0.2 million , $ 0.2 million , and $ 0.1 million of amortization related to interest rate hedges for WGL for September 30, 2017 , 2016 , and 2015 respectively.

 

Collateral

 

WGL utilizes standardized master netting agreements, which facilitate the netting of cash flows into a single net exposure for a given counterparty. As part of these master netting agreements, cash, letters of credit and parental guarantees may be required to be posted or obtained from counterparties in order to mitigate credit risk related to both derivatives and non-derivative positions. Under WGL’s offsetting policy, collateral balances are offset against the related counterparties’ derivative positions to the extent the application would not result in the over-collateralization of those derivative positions on the balance sheet.

 

64

 

WGL Holdings, Inc.

Washington Gas Light Company

Notes to Consolidated Financial Statements

 

The table below presents collateral positions at September 30, 2017 and 2016 , respectively.

 

	
Collateral Not Offset Against Derivative Assets and Liabilities (In millions)
    	
 
    
	
 
    	
 
    	
Collateral deposits posted with
   counterparties
    	
 
    	
Cash collateral held representing an
   obligation
    	
 
    
	
September 30, 2017
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Washington   Gas
    	
 
    	
$
    	
3.7
    	
 
    	
$
    	
0.1
    	
 
    
	
WGL   Energy Services
    	
 
    	
23.7
    	
 
    	
—
    	
 
    
	
WGL   Midstream
    	
 
    	
44.4
    	
 
    	
1.6
    	
 
    
	
September 30,   2016
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Washington Gas
    	
 
    	
$
    	
4.3
    	
 
    	
$
    	
0.1
    	
 
    
	
WGL Energy   Services
    	
 
    	
9.1
    	
 
    	
—
    	
 
    
	
WGL Midstream
    	
 
    	
18.5
    	
 
    	
5.4
    	
 
    

 

Any collateral posted that is not offset against derivative assets and liabilities is included in “Other prepayments” in the accompanying balance sheets. Collateral received and not offset against derivative assets and liabilities is included in “Customer deposits and advance payments” in the accompanying balance sheets.

 

Certain derivative instruments of WGL, Washington Gas, WGL Energy Services and WGL Midstream contain contract provisions that require collateral to be posted if the credit rating of Washington Gas or WGL falls below certain levels or if counterparty exposure to WGL, Washington Gas, WGL Energy Services or WGL Midstream exceeds a certain level. Due to counterparty exposure levels, at September 30, 2017 , WGL Energy Services posted $8.6 million of collateral related to its derivative liabilities that contained credit-related contingent features. At September 30, 2016 , WGL Energy Services posted $5.5 million of collateral related to these aforementioned derivative liabilities. At September 30, 2017 , WGL was not required to post collateral related to a derivative liability that contained a credit-related contingent feature. At September 30, 2016 , WGL was required to post $6.5 million collateral related to its derivative liabilities that contained credit-related contingent features. At both September 30, 2017 and 2016 , Washington Gas and WGL Midstream were not required to post any collateral related to their respective derivative liabilities that contained credit-related contingent features. The following table shows the aggregate fair value of all derivative instruments with credit-related contingent features that are in a liability position, as well as the maximum amount of collateral that would be required if the most intrusive credit-risk-related contingent features underlying these agreements were triggered on September 30, 2017 and 2016 , respectively.

 

	
Potential Collateral Requirements for Derivative Liabilities
   with Credit-Risk-Contingent Features
    	
 
    
	
(In millions)
    	
 
    	
WGL Holdings, Inc.
    	
 
    	
Washington Gas
    	
 
    
	
September 30,   2017
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Derivative   liabilities with credit-risk-contingent features
    	
 
    	
$
    	
25.0
    	
 
    	
$
    	
2.8
    	
 
    
	
Maximum   potential collateral requirements
    	
 
    	
21.9
    	
 
    	
2.8
    	
 
    
	
September 30,   2016
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Derivative   liabilities with credit-risk-contingent features
    	
 
    	
$
    	
53.9
    	
 
    	
$
    	
11.3
    	
 
    
	
Maximum   potential collateral requirements
    	
 
    	
41.4
    	
 
    	
11.3
    	
 
    

 

We do not enter into derivative contracts for speculative purposes.

 

Concentration of Credit Risk

 

We are exposed to credit risk from derivative instruments with wholesale counterparties, which is represented by the fair value of these instruments at the reporting date. We actively monitor and work to minimize counterparty concentration risk through various practices. At September 30, 2017 , two counterparties each represented over 10% of Washington Gas’ credit exposure to wholesale derivative counterparties for a total credit risk of $27.6 million ; two counterparties each represented over 10% of WGL Energy Services’ credit exposure to wholesale derivative counterparties for a total credit risk of $1.1 million ; and two counterparties represented over 10% of WGL Midstream’s credit exposure to wholesale counterparties for a total credit risk of $26.1 million .

 

65

 

WGL Holdings, Inc.

Washington Gas Light Company

Notes to Consolidated Financial Statements

 

WEATHER-RELATED INSTRUMENTS

 

WGL Energy Services utilizes weather-related instruments for managing the financial effects of weather risks. These instruments cover a portion of WGL Energy Services’ estimated revenue or energy-related cost exposure to variations in heating or cooling degree days. These contracts provide for payment to WGL Energy Services of a fixed-dollar amount for every degree day over or under specific levels during the calculation period depending upon the type of contract executed. During the years ended September 30, 2017 , 2016 and 2015 , WGL Energy Services recorded pre-tax gains of $1.4 million , $1.7 million and $0.6 million , respectively, related to these instruments.

 

NOTE 15. FAIR VALUE MEASUREMENTS

 

Recurring Basis

 

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

 

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

 

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

 

Level 1.   Level 1 of the fair value hierarchy consists of assets or liabilities that are valued using observable inputs based upon unadjusted quoted prices in active markets for identical assets or liabilities at the reporting date. WGL did not have any Level 1 derivatives at September 30, 2017 and 2016 .

 

Level 2.   Level 2 of the fair value hierarchy consists of assets or liabilities that are valued using directly or indirectly observable inputs either corroborated with market data or based on exchange traded market data. Level 2 includes fair values based on industry-standard valuation techniques that consider various assumptions: (i)  quoted forward prices, including the use of mid-market pricing within a bid/ask spread; (ii)  discount rates; (iii)  implied volatility and (iv)  other economic factors. Substantially all of these assumptions are observable throughout the full term of the instrument, can be derived from observable data or are supported by observable levels at which transactions are executed in the relevant market. At September 30, 2017 and 2016 , Level 2 financial assets and liabilities included energy-related physical and financial derivative transactions such as forward, option and other contracts for deliveries at active market locations, as well as our interest rate swaps.

 

Level 3.   Level 3 of the fair value hierarchy consists of assets or liabilities that are valued using significant unobservable inputs at the reporting date. These unobservable assumptions reflect our assumptions about estimates that market participants would use in pricing the asset or liability, including natural gas basis prices, annualized volatilities of natural gas prices, and electricity congestion prices. A significant change to any one of these inputs in isolation could result in a significant upward or downward fluctuation in the fair value measurement. These inputs may be used with industry standard valuation methodologies that result in our best estimate of fair value for the assets or liabilities at the reporting date.

 

66

 

WGL Holdings, Inc.

Washington Gas Light Company

Notes to Consolidated Financial Statements

 

Our Risk Analysis and Mitigation (RA&M) Group determines the valuation policies and procedures. The RA&M Group reports to WGL’s Chief Financial Officer. In accordance with WGL’s valuation policy, we may utilize a variety of valuation methodologies to determine the fair value of Level 3 derivative contracts, including internally developed valuation inputs and pricing models. The prices used in our valuations are corroborated using multiple pricing sources, and we periodically conduct assessments to determine whether each valuation model is appropriate for its intended purpose. The RA&M Group also evaluates changes in fair value measurements on a daily basis.

 

At September 30, 2017 and 2016 , Level 3 derivative assets and liabilities included: (i)  physical contracts valued at illiquid market locations with no observable market data; (ii)  long-dated positions where observable pricing is not available over the life of the contract; (iii)  contracts valued using historical spot price volatility assumptions and (iv)  valuations using indicative broker quotes for inactive market locations.

 

The following tables set forth financial instruments recorded at fair value as of September 30, 2017 and 2016 , respectively. A financial instrument’s classification within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. Our assessment of the significance of a particular input to the fair value measurement requires judgment, and may affect the valuation of fair value assets and liabilities and their placement within the fair value hierarchy.

 

	
WGL Holdings, Inc.
   Fair Value Measurements Under the Fair Value Hierarchy
    	
 
    
	
(In millions)
    	
 
    	
Level 1
    	
 
    	
Level 2
    	
 
    	
Level 3
    	
 
    	
Total
    	
 
    
	
At September 30, 2017
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Assets
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Natural   gas related derivatives
    	
 
    	
$
    	
—
    	
 
    	
$
    	
18.4
    	
 
    	
$
    	
52.8
    	
 
    	
$
    	
71.2
    	
 
    
	
Electricity   related derivatives
    	
 
    	
—
    	
 
    	
0.1
    	
 
    	
15.5
    	
 
    	
15.6
    	
 
    
	
Interest   rate derivatives
    	
 
    	
—
    	
 
    	
9.8
    	
 
    	
—
    	
 
    	
9.8
    	
 
    
	
Total   Assets
    	
 
    	
$
    	
—
    	
 
    	
$
    	
28.3
    	
 
    	
$
    	
68.3
    	
 
    	
$
    	
96.6
    	
 
    
	
Liabilities
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Natural   gas related derivatives
    	
 
    	
$
    	
—
    	
 
    	
$
    	
(15.5
    	
)
    	
$
    	
(167.4
    	
)
    	
$
    	
(182.9
    	
)
    
	
Electricity   related derivatives
    	
 
    	
—
    	
 
    	
(4.1
    	
)
    	
(21.7
    	
)
    	
(25.8
    	
)
    
	
Interest   rate derivatives
    	
 
    	
—
    	
 
    	
(8.8
    	
)
    	
—
    	
 
    	
(8.8
    	
)
    
	
Total   Liabilities
    	
 
    	
$
    	
—
    	
 
    	
$
    	
(28.4
    	
)
    	
$
    	
(189.1
    	
)
    	
$
    	
(217.5
    	
)
    
	
At   September 30, 2016
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Assets
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Natural gas   related derivatives
    	
 
    	
$
    	
—
    	
 
    	
$
    	
28.8
    	
 
    	
$
    	
54.0
    	
 
    	
$
    	
82.8
    	
 
    
	
Electricity   related derivatives
    	
 
    	
—
    	
 
    	
0.6
    	
 
    	
20.9
    	
 
    	
21.5
    	
 
    
	
Interest rate   derivatives
    	
 
    	
—
    	
 
    	
0.2
    	
 
    	
—
    	
 
    	
0.2
    	
 
    
	
Total Assets
    	
 
    	
$
    	
—
    	
 
    	
$
    	
29.6
    	
 
    	
$
    	
74.9
    	
 
    	
$
    	
104.5
    	
 
    
	
Liabilities
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Natural gas   related derivatives
    	
 
    	
$
    	
—
    	
 
    	
$
    	
(46.7
    	
)
    	
$
    	
(318.2
    	
)
    	
$
    	
(364.9
    	
)
    
	
Electricity   related derivatives
    	
 
    	
—
    	
 
    	
(3.8
    	
)
    	
(29.9
    	
)
    	
(33.7
    	
)
    
	
Interest rate   derivatives
    	
 
    	
—
    	
 
    	
(43.1
    	
)
    	
—
    	
 
    	
(43.1
    	
)
    
	
Total   Liabilities
    	
 
    	
$
    	
—
    	
 
    	
$
    	
(93.6
    	
)
    	
$
    	
(348.1
    	
)
    	
$
    	
(441.7
    	
)
    

 

67

 

WGL Holdings, Inc.

Washington Gas Light Company

Notes to Consolidated Financial Statements

 

	
Washington Gas Light Company
   Fair Value Measurements Under the Fair Value Hierarchy
    	
 
    
	
(In millions)
    	
 
    	
Level 1
    	
 
    	
Level 2
    	
 
    	
Level 3
    	
 
    	
Total
    	
 
    
	
At   September 30, 2017
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Assets
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Natural   gas related derivatives
    	
 
    	
$
    	
—
    	
 
    	
$
    	
7.0
    	
 
    	
$
    	
17.0
    	
 
    	
$
    	
24.0
    	
 
    
	
Total   Assets
    	
 
    	
$
    	
—
    	
 
    	
$
    	
7.0
    	
 
    	
$
    	
17.0
    	
 
    	
$
    	
24.0
    	
 
    
	
Liabilities
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Natural   gas related derivatives
    	
 
    	
$
    	
—
    	
 
    	
$
    	
(5.7
    	
)
    	
$
    	
(139.6
    	
)
    	
$
    	
(145.3
    	
)
    
	
Total   Liabilities
    	
 
    	
$
    	
—
    	
 
    	
$
    	
(5.7
    	
)
    	
$
    	
(139.6
    	
)
    	
$
    	
(145.3
    	
)
    
	
At   September 30, 2016
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Assets
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Natural gas   related derivatives
    	
 
    	
$
    	
—
    	
 
    	
$
    	
15.4
    	
 
    	
$
    	
24.4
    	
 
    	
$
    	
39.8
    	
 
    
	
Total Assets
    	
 
    	
$
    	
—
    	
 
    	
$
    	
15.4
    	
 
    	
$
    	
24.4
    	
 
    	
$
    	
39.8
    	
 
    
	
Liabilities
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Natural gas   related derivatives
    	
 
    	
$
    	
—
    	
 
    	
$
    	
(21.2
    	
)
    	
$
    	
(276.0
    	
)
    	
$
    	
(297.2
    	
)
    
	
Total   Liabilities
    	
 
    	
$
    	
—
    	
 
    	
$
    	
(21.2
    	
)
    	
$
    	
(276.0
    	
)
    	
$
    	
(297.2
    	
)
    

 

68

 

WGL Holdings, Inc.

Washington Gas Light Company

Notes to Consolidated Financial Statements

 

The following table includes quantitative information about the significant unobservable inputs used in the fair value measurement of our Level 3 financial instruments and the respective fair values of the net derivative asset and liability positions, by contract type, as of September 30, 2017 and 2016 .

 

	
Quantitative Information about Level 3 Fair Value Measurements
    	
 
    
	
(In millions)
    	
 
    	
Net Fair Value
   September 30, 2017
    	
 
    	
Valuation Techniques
    	
 
    	
Unobservable Inputs
    	
 
    	
Range
    	
 
    
	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
WGL   Holdings, Inc.
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Natural gas   related derivatives
    	
 
    	
$
    	
(112.4
    	
)
    	
Discounted Cash Flow
    	
 
    	
Natural Gas Basis Price (per dekatherm)
    	
 
    	
($2.095) - $2.805
    	
 
    
	
 
    	
 
    	
$
    	
(2.2
    	
)
    	
Option Model
    	
 
    	
Natural Gas Basis Price (per dekatherm)
    	
 
    	
($2.095) - $2.358
    	
 
    
	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
Annualized Volatility of Spot Market Natural Gas
    	
 
    	
28.7% - 566.8
    	
%
    
	
Electricity   related derivatives
    	
 
    	
$
    	
(6.2
    	
)
    	
Discounted Cash Flow
    	
 
    	
Electricity Congestion Price (per megawatt hour)
    	
 
    	
($2.736) - $56.5
    	
 
    
	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Washington   Gas Light Company
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Natural gas   related derivatives
    	
 
    	
$
    	
(122.6
    	
)
    	
Discounted Cash Flow
    	
 
    	
Natural Gas Basis Price (per dekatherm)
    	
 
    	
($1.928) - $2.805
    	
 
    
	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
   
    	
 
    	
Net Fair   Value September 30, 2016
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Natural gas   related derivatives
    	
 
    	
$
    	
(264.1
    	
)
    	
Discounted Cash Flow
    	
 
    	
Natural Gas Basis Price (per dekatherm)
    	
 
    	
($2.021) - $3.290
    	
 
    
	
 
    	
 
    	
$
    	
(0.1
    	
)
    	
Option Model
    	
 
    	
Natural Gas Basis Price (per dekatherm)
    	
 
    	
($2.105) - $3.310
    	
 
    
	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
Annualized Volatility of Spot Market Natural Gas
    	
 
    	
25.5% - 869.9
    	
%
    
	
Electricity   related derivatives
    	
 
    	
$
    	
(9.1
    	
)
    	
Discounted Cash Flow
    	
 
    	
Electricity Congestion Price (per megawatt hour)
    	
 
    	
($6.199) - $68.700
    	
 
    
	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Washington   Gas Light Company
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Natural gas   related derivatives
    	
 
    	
$
    	
(251.6
    	
)
    	
Discounted Cash Flow
    	
 
    	
Natural Gas Basis Price (per dekatherm)
    	
 
    	
($2.021) - $3.290
    	
 
    

 

69

 

WGL Holdings, Inc.

Washington Gas Light Company

Notes to Consolidated Financial Statements

 

The following tables are a summary of the changes in the fair value of our derivative instruments that are measured at net fair value on a recurring basis in accordance with ASC Topic 820 using significant Level 3 inputs during the years ended September 30, 2017 and 2016 , respectively.

 

	
Reconciliation of Fair Value Measurements Using Significant Level 3 Inputs
    	
 
    
	
 
    	
 
    	
WGL Holdings Inc.
    	
 
    	
Washington Gas
   Light Company
    	
 
    
	
(In millions)
   Fiscal Year Ended September 30,
   2017
    	
 
    	
Natural Gas
   Related
   Derivatives
    	
 
    	
Electricity
   Related
   Derivatives
    	
 
    	
Warrants
    	
 
    	
Total
    	
 
    	
Total - Natural Gas
   Related
   Derivatives
    	
 
    
	
Balance   at October 1, 2016
    	
 
    	
$
    	
(264.1
    	
)
    	
$
    	
(9.1
    	
)
    	
$
    	
—
    	
 
    	
$
    	
(273.2
    	
)
    	
$
    	
(251.6
    	
)
    
	
Realized   and unrealized gains (losses)
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Recorded   to income
    	
 
    	
62.0
    	
 
    	
(7.6
    	
)
    	
—
    	
 
    	
54.4
    	
 
    	
44.2
    	
 
    
	
Recorded   to regulatory assets—gas costs
    	
 
    	
69.7
    	
 
    	
—
    	
 
    	
—
    	
 
    	
69.7
    	
 
    	
69.7
    	
 
    
	
Transfers   into Level 3
    	
 
    	
(0.8
    	
)
    	
—
    	
 
    	
—
    	
 
    	
(0.8
    	
)
    	
(0.4
    	
)
    
	
Transfers   out of Level 3
    	
 
    	
(0.7
    	
)
    	
—
    	
 
    	
—
    	
 
    	
(0.7
    	
)
    	
(0.4
    	
)
    
	
Purchases
    	
 
    	
—
    	
 
    	
1.0
    	
 
    	
—
    	
 
    	
1.0
    	
 
    	
—
    	
 
    
	
Settlements
    	
 
    	
19.3
    	
 
    	
9.5
    	
 
    	
—
    	
 
    	
28.8
    	
 
    	
15.9
    	
 
    
	
Balance   at September 30, 2017
    	
 
    	
$
    	
(114.6
    	
)
    	
$
    	
(6.2
    	
)
    	
$
    	
—
    	
 
    	
$
    	
(120.8
    	
)
    	
$
    	
(122.6
    	
)
    
	
Fiscal Year   Ended September 30, 2016
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Balance at   October 1, 2015
    	
 
    	
$
    	
(309.7
    	
)
    	
$
    	
(16.0
    	
)
    	
$
    	
—
    	
 
    	
$
    	
(325.7
    	
)
    	
$
    	
(281.1
    	
)
    
	
Realized and   unrealized gains (losses)
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Recorded to   income
    	
 
    	
18.3
    	
 
    	
(21.4
    	
)
    	
—
    	
 
    	
(3.1
    	
)
    	
4.0
    	
 
    
	
Recorded to regulatory   assets—gas costs
    	
 
    	
4.2
    	
 
    	
—
    	
 
    	
—
    	
 
    	
4.2
    	
 
    	
4.2
    	
 
    
	
Transfers into   Level 3
    	
 
    	
(0.8
    	
)
    	
—
    	
 
    	
—
    	
 
    	
(0.8
    	
)
    	
(0.2
    	
)
    
	
Transfers out of   Level 3
    	
 
    	
8.9
    	
 
    	
—
    	
 
    	
—
    	
 
    	
8.9
    	
 
    	
9.0
    	
 
    
	
Purchases
    	
 
    	
—
    	
 
    	
(2.4
    	
)
    	
—
    	
 
    	
(2.4
    	
)
    	
—
    	
 
    
	
Settlements
    	
 
    	
15.0
    	
 
    	
30.7
    	
 
    	
—
    	
 
    	
45.7
    	
 
    	
12.5
    	
 
    
	
Balance at   September 30, 2016
    	
 
    	
$
    	
(264.1
    	
)
    	
$
    	
(9.1
    	
)
    	
$
    	
—
    	
 
    	
$
    	
(273.2
    	
)
    	
$
    	
(251.6
    	
)
    

 

Transfers between different levels of the fair value hierarchy may occur based on fluctuations in the valuation and on the level of observable inputs used to value the instruments from period to period. It is our policy to show both transfers into and out of the different levels of the fair value hierarchy at the fair value as of the beginning of the period. Transfers out of Level 3 during the fiscal year ended September 30, 2017 and 2016 were due to an increase in valuations using observable market inputs. Transfers into Level 3 during the fiscal year ended September 30, 2017 were due to an increase in unobservable market inputs used in valuations.

 

70

 

WGL Holdings, Inc.

Washington Gas Light Company

Notes to Consolidated Financial Statements

 

The table below sets forth the line items on the statements of income to which amounts are recorded for the fiscal years ended September 30, 2017 , 2016 and 2015 , respectively, related to fair value measurements using significant Level 3 inputs.

 

	
Realized and Unrealized Gains (Losses) Recorded to Income for Level 3 Measurements
    	
 
    
	
 
    	
 
    	
WGL Holdings, Inc.
    	
 
    	
Washington Gas
   Light Company
    	
 
    
	
(In millions)
    	
 
    	
Natural Gas
   Related
   Derivatives
    	
 
    	
Electricity
   Related
   Derivatives
    	
 
    	
Warrants
    	
 
    	
Total
    	
 
    	
Total - Natural Gas
   Related
   Derivatives
    	
 
    
	
Fiscal   Year Ended September 30, 2017
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Operating   revenues—non-utility
    	
 
    	
$
    	
12.2
    	
 
    	
$
    	
(17.5
    	
)
    	
$
    	
—
    	
 
    	
$
    	
(5.3
    	
)
    	
$
    	
—
    	
 
    
	
Utility   cost of gas
    	
 
    	
44.2
    	
 
    	
—
    	
 
    	
—
    	
 
    	
44.2
    	
 
    	
44.2
    	
 
    
	
Non-utility   cost of energy-related sales
    	
 
    	
5.6
    	
 
    	
9.9
    	
 
    	
—
    	
 
    	
15.5
    	
 
    	
—
    	
 
    
	
Total
    	
 
    	
$
    	
62.0
    	
 
    	
$
    	
(7.6
    	
)
    	
$
    	
—
    	
 
    	
$
    	
54.4
    	
 
    	
$
    	
44.2
    	
 
    
	
Fiscal Year   Ended September 30, 2016
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Operating   revenues—non-utility
    	
 
    	
$
    	
8.2
    	
 
    	
$
    	
(26.5
    	
)
    	
$
    	
—
    	
 
    	
$
    	
(18.3
    	
)
    	
$
    	
—
    	
 
    
	
Utility cost of   gas
    	
 
    	
4.0
    	
 
    	
—
    	
 
    	
—
    	
 
    	
4.0
    	
 
    	
4.0
    	
 
    
	
Non-utility cost   of energy-related sales
    	
 
    	
6.1
    	
 
    	
5.1
    	
 
    	
—
    	
 
    	
11.2
    	
 
    	
—
    	
 
    
	
Total
    	
 
    	
$
    	
18.3
    	
 
    	
$
    	
(21.4
    	
)
    	
$
    	
—
    	
 
    	
$
    	
(3.1
    	
)
    	
$
    	
4.0
    	
 
    
	
Fiscal Year   Ended September 30, 2015
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Operating   revenues—non-utility
    	
 
    	
$
    	
(5.7
    	
)
    	
$
    	
19.9
    	
 
    	
$
    	
—
    	
 
    	
$
    	
14.2
    	
 
    	
$
    	
—
    	
 
    
	
Utility cost of   gas
    	
 
    	
(25.0
    	
)
    	
—
    	
 
    	
—
    	
 
    	
(25.0
    	
)
    	
(25.0
    	
)
    
	
Non-utility cost   of energy-related sales
    	
 
    	
—
    	
 
    	
(52.2
    	
)
    	
—
    	
 
    	
(52.2
    	
)
    	
—
    	
 
    
	
Total
    	
 
    	
$
    	
(30.7
    	
)
    	
$
    	
(32.3
    	
)
    	
$
    	
—
    	
 
    	
$
    	
(63.0
    	
)
    	
$
    	
(25.0
    	
)
    

 

71

 

WGL Holdings, Inc.

Washington Gas Light Company

Notes to Consolidated Financial Statements

 

Unrealized gains (losses) attributable to derivative assets and liabilities measured using significant Level 3 inputs were recorded as follows for the fiscal years ended September 30, 2017 ,  2016 and 2015 , respectively:

 

	
Unrealized Gains (Losses) Recorded for Level 3 Measurements
    	
 
    
	
 
    	
 
    	
WGL Holdings, Inc.
    	
 
    	
Washington Gas
   Light Company
    	
 
    
	
(In millions)
    	
 
    	
Natural Gas
   Related
   Derivatives
    	
 
    	
Electricity
   Related
   Derivatives
    	
 
    	
Warrants
    	
 
    	
Total
    	
 
    	
Total - Natural Gas
   Related
   Derivatives
    	
 
    
	
Fiscal Year Ended September 30, 2017
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Recorded   to income
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Operating   revenues—non-utility
    	
 
    	
$
    	
12.6
    	
 
    	
$
    	
0.8
    	
 
    	
$
    	
—
    	
 
    	
$
    	
13.4
    	
 
    	
$
    	
—
    	
 
    
	
Utility   cost of gas
    	
 
    	
31.0
    	
 
    	
—
    	
 
    	
—
    	
 
    	
31.0
    	
 
    	
31.0
    	
 
    
	
Non-utility   cost of energy-related sales
    	
 
    	
(0.4
    	
)
    	
9.4
    	
 
    	
—
    	
 
    	
9.0
    	
 
    	
—
    	
 
    
	
Recorded   to regulatory assets—gas costs
    	
 
    	
51.0
    	
 
    	
—
    	
 
    	
—
    	
 
    	
51.0
    	
 
    	
51.0
    	
 
    
	
Total
    	
 
    	
$
    	
94.2
    	
 
    	
$
    	
10.2
    	
 
    	
$
    	
—
    	
 
    	
$
    	
104.4
    	
 
    	
$
    	
82.0
    	
 
    
	
Fiscal Year   Ended September 30, 2016
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Recorded to   income
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Operating   revenues—non-utility
    	
 
    	
$
    	
9.9
    	
 
    	
$
    	
(2.3
    	
)
    	
$
    	
—
    	
 
    	
$
    	
7.6
    	
 
    	
$
    	
—
    	
 
    
	
Utility cost of   gas
    	
 
    	
0.3
    	
 
    	
—
    	
 
    	
—
    	
 
    	
0.3
    	
 
    	
0.3
    	
 
    
	
Non-utility cost   of energy-related sales
    	
 
    	
(0.4
    	
)
    	
13.2
    	
 
    	
—
    	
 
    	
12.8
    	
 
    	
—
    	
 
    
	
Recorded to   regulatory assets—gas costs
    	
 
    	
(2.6
    	
)
    	
—
    	
 
    	
—
    	
 
    	
(2.6
    	
)
    	
(2.6
    	
)
    
	
Total
    	
 
    	
$
    	
7.2
    	
 
    	
$
    	
10.9
    	
 
    	
$
    	
—
    	
 
    	
$
    	
18.1
    	
 
    	
$
    	
(2.3
    	
)
    
	
Fiscal Year   Ended September 30, 2015
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Recorded to   income
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Operating   revenues—non-utility
    	
 
    	
$
    	
(2.2
    	
)
    	
$
    	
25.1
    	
 
    	
$
    	
—
    	
 
    	
$
    	
22.9
    	
 
    	
$
    	
—
    	
 
    
	
Utility cost of   gas
    	
 
    	
(15.8
    	
)
    	
—
    	
 
    	
—
    	
 
    	
(15.8
    	
)
    	
(15.8
    	
)
    
	
Non-utility cost   of energy-related sales
    	
 
    	
(1.7
    	
)
    	
(41.7
    	
)
    	
—
    	
 
    	
(43.4
    	
)
    	
—
    	
 
    
	
Recorded to   regulatory assets—gas costs
    	
 
    	
(20.9
    	
)
    	
—
    	
 
    	
—
    	
 
    	
(20.9
    	
)
    	
(20.9
    	
)
    
	
Total
    	
 
    	
$
    	
(40.6
    	
)
    	
$
    	
(16.6
    	
)
    	
$
    	
—
    	
 
    	
$
    	
(57.2
    	
)
    	
$
    	
(36.7
    	
)
    

 

The following table presents the carrying amounts and estimated fair values of our financial instruments at September 30, 2017 and 2016 .

 

	
WGL Holdings, Inc.
   Fair Value of Financial Instruments
    	
 
    
	
 
    	
 
    	
September 30, 2017
    	
 
    	
September 30, 2016
    	
 
    
	
(In millions)
    	
 
    	
Carrying
   Amount
    	
 
    	
Fair Value
    	
 
    	
Carrying Amount
    	
 
    	
Fair Value
    	
 
    
	
Money market   funds (a)
    	
 
    	
$
    	
11.8
    	
 
    	
$
    	
11.8
    	
 
    	
$
    	
10.6
    	
 
    	
$
    	
10.6
    	
 
    
	
Other short-term   investments (a)
    	
 
    	
$
    	
—
    	
 
    	
$
    	
—
    	
 
    	
$
    	
1.4
    	
 
    	
$
    	
1.4
    	
 
    
	
Commercial paper   (b)
    	
 
    	
$
    	
505.0
    	
 
    	
$
    	
505.0
    	
 
    	
$
    	
269.0
    	
 
    	
$
    	
269.0
    	
 
    
	
Project   financing (b)
    	
 
    	
$
    	
54.8
    	
 
    	
$
    	
54.8
    	
 
    	
$
    	
62.4
    	
 
    	
$
    	
62.4
    	
 
    
	
Long-term debt (c)
    	
 
    	
$
    	
1,430.9
    	
 
    	
$
    	
1,577.3
    	
 
    	
$
    	
1,444.3
    	
 
    	
$
    	
1,641.9
    	
 
    

 

72

 

WGL Holdings, Inc.

Washington Gas Light Company

Notes to Consolidated Financial Statements

 

	
Washington Gas Light Company Fair Value of Financial Instruments
    	
 
    
	
 
    	
 
    	
September 30, 2017
    	
 
    	
September 30, 2016
    	
 
    
	
(In millions)
    	
 
    	
Carrying
   Amount
    	
 
    	
Fair Value
    	
 
    	
Carrying Amount
    	
 
    	
Fair Value
    	
 
    
	
Money market   funds (a)
    	
 
    	
$
    	
4.8
    	
 
    	
$
    	
4.8
    	
 
    	
$
    	
5.0
    	
 
    	
$
    	
5.0
    	
 
    
	
Other short-term   investments (a)
    	
 
    	
$
    	
—
    	
 
    	
$
    	
—
    	
 
    	
$
    	
1.4
    	
 
    	
$
    	
1.4
    	
 
    
	
Commercial paper   (b)
    	
 
    	
$
    	
123.0
    	
 
    	
$
    	
123.0
    	
 
    	
$
    	
42.0
    	
 
    	
$
    	
42.0
    	
 
    
	
Project   financing (b)
    	
 
    	
$
    	
43.8
    	
 
    	
$
    	
43.8
    	
 
    	
$
    	
62.4
    	
 
    	
$
    	
62.4
    	
 
    
	
Long-term debt (c)
    	
 
    	
$
    	
1,134.5
    	
 
    	
$
    	
1,271.0
    	
 
    	
$
    	
945.9
    	
 
    	
$
    	
1,126.4
    	
 
    

 

(a) Balance is located in cash and cash equivalents in the accompanying balance sheets. These amounts may be offset by outstanding checks.

(b) Balance is located in notes payable in the accompanying balance sheets.

(c) Includes adjustments for current maturities and unamortized discounts, as applicable.

 

Our money market funds are Level 1 valuations and their carrying amount approximates fair value. Other short-term investments are primarily overnight investment accounts; their carrying amount approximates fair value based on Level 2 inputs. The maturity of our commercial paper outstanding at both September 30, 2017 and 2016 is under 30 days. Due to the short term nature of these notes, the carrying cost of our commercial paper approximates fair value using Level 2 inputs. Due to the short term nature of our project financing arrangements, the carrying cost approximates fair value using Level 2 inputs. Neither WGL’s nor Washington Gas’ long-term debt is actively traded. The fair value of long-term debt was estimated based on the quoted market prices of the U.S. Treasury issues having a similar term to maturity, adjusted for the credit quality of the debt issuer, WGL or Washington Gas. Our long-term debt fair value measurement is classified as Level 3.

 

Non Recurring Basis

 

During the fiscal year ended September 30, 2016 , WGSW recognized a loss of $4.1 million associated with the impairment of its investment in direct financing leases from Nextility. The fair value of this investment was a Level 3 measurement. As of September 30, 2017 , there is no investment in direct financing leases.

 

During the fiscal year ended September 30, 2015 , Washington Gas Resources recorded an impairment charge on its investment in ASDHI to its fair value using the income approach. The amount of the impairment was equivalent to the amount of the carrying value of $5.6 million and was due to management’s assumption of the current valuation and expected return from the investment. The fair value of this investment was a Level 3 measurement.

 

NOTE 16. OPERATING SEGMENT REPORTING

 

We have four reportable operating segments: regulated utility, retail energy-marketing, commercial energy systems and midstream energy services. The division of these segments into separate revenue generating components is based upon regulation, products and services. Our chief operating decision maker is our Chief Executive Officer and we evaluate segment performance based on Earnings Before Interest and Taxes (EBIT). EBIT is defined as earnings before interest and taxes net of amounts attributable to non-controlling interests. Items we do not include in EBIT are interest expense, intercompany financing activity, dividends on Washington Gas preferred stock, and income taxes. EBIT includes transactions between reportable segments. We also evaluate our operating segments based on other relevant factors, such as penetration into their respective markets and return on equity.

 

Our four segments are summarized below.

 

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

 

73

 

WGL Holdings, Inc.

Washington Gas Light Company

Notes to Consolidated Financial Statements

 

	
·
    	
 
    	
Retail   Energy-Marketing — The retail energy-marketing segment   consists of WGL Energy Services, which sells natural gas and electricity   directly to retail customers in competition with regulated utilities and   unregulated gas and electricity marketers.
    
	
·
    	
 
    	
Commercial   Energy Systems — The commercial energy systems segment   consists of WGL Energy Systems which provides clean and energy efficient   solutions including commercial solar, energy efficiency and combined heat and   power projects and other distributed generation solutions to government and   commercial clients. In addition, this segment comprises the operations of   WGSW, a holding company formed to invest in alternative energy assets.
    
	
·
    	
 
    	
Midstream   Energy Services — The midstream energy services segment   consists of WGL Midstream, which specializes in the investment, management,   development and optimization of natural gas storage and transportation   midstream infrastructure projects.
    

 

Administrative and business development activity costs associated with WGL and Washington Gas Resources and activities and transactions that are not significant enough on a stand-alone basis to warrant treatment as an operating segment, and that do not fit into one of our four operating segments, are aggregated as “Other Activities” in the Operating Segment Financial Information presented below. Results for other activities primarily relate to external costs associated with the planned merger with AltaGas.

 

As a result of the adoption of ASU 2015-03 and ASU 2015-15, Interest - Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Cost and Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements, prior period total assets have been recast to conform to current quarter presentation.

 

The following tables present operating segment information for the fiscal years ended September 30, 2017 , 2016 and 2015 .

 

74

 

WGL Holdings, Inc.

Washington Gas Light Company

Notes to Consolidated Financial Statements

 

	
Operating Segment Financial Information
    	
 
    
	
(In thousands)
    	
 
    	
Operating
   Revenues (a)
    	
 
    	
Depreciation and
   Amortization
    	
 
    	
Equity in
   Earnings of
   Unconsolidated
   Affiliates
    	
 
    	
EBIT
    	
 
    	
Total
   Assets
    	
 
    	
Capital
   Expenditures
    	
 
    	
Equity Method
   Investments
    	
 
    
	
Fiscal   Year Ended September 30, 2017
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Regulated   utility
    	
 
    	
$
    	
1,166,968
    	
 
    	
$
    	
131,231
    	
 
    	
$
    	
—
    	
 
    	
$
    	
266,307
    	
 
    	
$
    	
4,984,121
    	
 
    	
$
    	
408,308
    	
 
    	
$
    	
—
    	
 
    
	
Retail   energy-marketing
    	
 
    	
1,107,151
    	
 
    	
1,141
    	
 
    	
—
    	
 
    	
53,195
    	
 
    	
513,415
    	
 
    	
614
    	
 
    	
—
    	
 
    
	
Commercial   energy systems  (b)
    	
 
    	
95,178
    	
 
    	
21,690
    	
 
    	
7,303
    	
 
    	
40,834
    	
 
    	
1,031,921
    	
 
    	
107,552
    	
 
    	
9,578
    	
 
    
	
Midstream   energy services
    	
 
    	
31,339
    	
 
    	
25
    	
 
    	
12,913
    	
 
    	
37,689
    	
 
    	
699,560
    	
 
    	
60
    	
 
    	
384,623
    	
 
    
	
Other   activities
    	
 
    	
—
    	
 
    	
—
    	
 
    	
—
    	
 
    	
(19,865
    	
)
    	
409,938
    	
 
    	
—
    	
 
    	
—
    	
 
    
	
Eliminations  (c)
    	
 
    	
(45,912
    	
)
    	
51
    	
 
    	
—
    	
 
    	
965
    	
 
    	
(1,012,946
    	
)
    	
—
    	
 
    	
—
    	
 
    
	
Total   consolidated
    	
 
    	
$
    	
2,354,724
    	
 
    	
$
    	
154,138
    	
 
    	
$
    	
20,216
    	
 
    	
$
    	
379,125
    	
 
    	
$
    	
6,626,009
    	
 
    	
$
    	
516,534
    	
 
    	
$
    	
394,201
    	
 
    
	
Fiscal Year Ended   September 30, 2016
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Regulated utility
    	
 
    	
$
    	
1,070,904
    	
 
    	
$
    	
116,129
    	
 
    	
$
    	
—
    	
 
    	
$
    	
228,219
    	
 
    	
$
    	
4,636,954
    	
 
    	
$
    	
393,501
    	
 
    	
$
    	
—
    	
 
    
	
Retail   energy-marketing
    	
 
    	
1,238,480
    	
 
    	
1,154
    	
 
    	
—
    	
 
    	
64,968
    	
 
    	
486,778
    	
 
    	
8,104
    	
 
    	
—
    	
 
    
	
Commercial energy   systems (b)
    	
 
    	
89,072
    	
 
    	
15,201
    	
 
    	
7,620
    	
 
    	
21,992
    	
 
    	
885,734
    	
 
    	
128,780
    	
 
    	
66,100
    	
 
    
	
Midstream energy   services
    	
 
    	
6,619
    	
 
    	
107
    	
 
    	
6,186
    	
 
    	
7,807
    	
 
    	
485,099
    	
 
    	
—
    	
 
    	
237,391
    	
 
    
	
Other activities
    	
 
    	
—
    	
 
    	
—
    	
 
    	
—
    	
 
    	
(3,184
    	
)
    	
273,738
    	
 
    	
—
    	
 
    	
—
    	
 
    
	
Eliminations (c)
    	
 
    	
(55,516
    	
)
    	
(25
    	
)
    	
—
    	
 
    	
(504
    	
)
    	
(718,853
    	
)
    	
—
    	
 
    	
—
    	
 
    
	
Total   consolidated
    	
 
    	
$
    	
2,349,559
    	
 
    	
$
    	
132,566
    	
 
    	
$
    	
13,806
    	
 
    	
$
    	
319,298
    	
 
    	
$
    	
6,049,450
    	
 
    	
$
    	
530,385
    	
 
    	
$
    	
303,491
    	
 
    
	
Fiscal Year Ended   September 30, 2015
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Regulated utility
    	
 
    	
$
    	
1,328,191
    	
 
    	
$
    	
110,416
    	
 
    	
$
    	
—
    	
 
    	
$
    	
223,977
    	
 
    	
$
    	
4,224,258
    	
 
    	
$
    	
327,429
    	
 
    	
$
    	
—
    	
 
    
	
Retail   energy-marketing
    	
 
    	
1,306,758
    	
 
    	
671
    	
 
    	
—
    	
 
    	
46,629
    	
 
    	
452,424
    	
 
    	
28
    	
 
    	
—
    	
 
    
	
Commercial energy   systems
    	
 
    	
51,813
    	
 
    	
10,733
    	
 
    	
2,095
    	
 
    	
9,688
    	
 
    	
682,149
    	
 
    	
136,749
    	
 
    	
63,521
    	
 
    
	
Midstream energy   services
    	
 
    	
3,191
    	
 
    	
129
    	
 
    	
2,623
    	
 
    	
(2,720
    	
)
    	
237,839
    	
 
    	
85
    	
 
    	
73,363
    	
 
    
	
Other activities
    	
 
    	
—
    	
 
    	
—
    	
 
    	
750
    	
 
    	
(9,667
    	
)
    	
196,515
    	
 
    	
—
    	
 
    	
—
    	
 
    
	
Eliminations (c)
    	
 
    	
(30,123
    	
)
    	
(57
    	
)
    	
—
    	
 
    	
(1,013
    	
)
    	
(538,926
    	
)
    	
—
    	
 
    	
—
    	
 
    
	
Total   consolidated
    	
 
    	
$
    	
2,659,830
    	
 
    	
$
    	
121,892
    	
 
    	
$
    	
5,468
    	
 
    	
$
    	
266,894
    	
 
    	
$
    	
5,254,259
    	
 
    	
$
    	
464,291
    	
 
    	
$
    	
136,884
    	
 
    

 

(a) Operating revenue amounts in the “Eliminations” row represent total intersegment revenues associated with sales from the regulated utility segment to the retail energy-marketing segment. Midstream Energy Services’ cost of energy related sales is netted with its gross revenues.

(b) As of August 2016, Commercial energy systems’ operating revenues include revenues from non-controlling interest. Commercial energy systems’ EBIT is adjusted for the effects of non-controlling interest.

(c) Intersegment eliminations include any mark-to market valuations associated with trading activities between WGL Midstream and WGL Energy Services, intercompany loans and a timing difference between Commercial Energy Systems’ recognition of revenue for the sale of Renewable Energy Credits (RECs) to Retail Energy-Marketing and Retail Energy-Marketing’s recognition of the associated expense. Retail Energy-Marketing has recorded a portion of the REC’s purchased as inventory to be used in future periods at which time they will be expensed.

 

75

 

WGL Holdings, Inc.

Washington Gas Light Company

Notes to Consolidated Financial Statements

 

The following table provides a reconciliation from EBIT to net income applicable to common stock.

 

	
 
    	
 
    	
Fiscal Year Ended September 30,
    	
 
    
	
(In thousands)
    	
 
    	
2017
    	
 
    	
2016
    	
 
    	
2015
    	
 
    
	
Total   consolidated EBIT
    	
 
    	
$
    	
379,125
    	
 
    	
$
    	
319,298
    	
 
    	
$
    	
266,894
    	
 
    
	
Interest expense
    	
 
    	
74,026
    	
 
    	
52,310
    	
 
    	
50,511
    	
 
    
	
Income tax   expense
    	
 
    	
111,159
    	
 
    	
98,074
    	
 
    	
83,804
    	
 
    
	
Dividends on   Washington Gas Light Company preferred stock
    	
 
    	
1,320
    	
 
    	
1,320
    	
 
    	
1,320
    	
 
    
	
Net   income applicable to common stock
    	
 
    	
$
    	
192,620
    	
 
    	
$
    	
167,594
    	
 
    	
$
    	
131,259
    	
 
    

 

NOTE 17. OTHER INVESTMENTS

 

WGL has both solar and pipeline investments and accounts for its interests in legal entities as either a: (i) variable interest entity (VIE) or a (ii) voting interest entity (non-VIE). A VIE is a legal entity with the following characteristics: (i) has insufficient at-risk equity to fund its activities without additional subordinated financial support from any other party or parties; (ii) whose at-risk equity holders as a group do not have the power through voting or similar rights to direct the entity’s activities that most significantly affect its economic performance; or (iii) whose at-risk equity holders do not have the right to receive the expected residual returns.

 

The determination of whether or not to consolidate a VIE under GAAP requires a significant amount of judgment. This includes, but is not limited to, consideration of our contractual relationship with the entity, the legal structure of the entity, whether or not the entity has enough equity to finance its activities without additional financial support, the voting power of the equity holders, the obligation of the equity holders to absorb losses of the entity and their rights to receive any expected residual returns.

 

We have investments in both consolidated and unconsolidated VIEs which are described in detail below. The unconsolidated investments are accounted for under the equity method of accounting with profits and losses included in “Equity in earnings of unconsolidated affiliates” in the accompanying Consolidated Statements of Income.

 

Under the VIE model, we have a controlling financial interest in a VIE (i.e., are the primary beneficiary) when we have current or potential rights that give us the power to direct the activities of a VIE that most significantly impact the VIE’s economic performance combined with a variable interest that gives us the right to receive potentially significant benefits or the obligation to absorb potentially significant losses. When changes occur to the design of an entity, we reconsider whether it is subject to the VIE model. We continuously evaluate whether we have a controlling financial interest in a VIE.

 

Under the voting interest model, we generally have a controlling financial interest in an entity where we currently hold, directly or indirectly, more than 50% of the voting rights or where we exercise control through substantive participating rights. However, we consider substantive rights held by other partners in determining if we hold a controlling financial interest, and in some cases, despite owning more than 50% of the common stock of an investee, an evaluation of our rights may result in the determination that we do not have a controlling financial interest. We reevaluate whether we have a controlling financial interest in these entities when our voting or substantive participating rights change. Where we do not have significant influence, the affiliates are accounted for under the cost method. Investments in, and advances to, affiliated companies are presented in the caption “Investments in unconsolidated affiliates” in the accompanying Consolidated Balance Sheets.

 

WGL uses the Hypothetical Liquidation at Book Value (HLBV) methodology for certain equity method investments as well as consolidating equity investments with non-controlling interests when the governing structuring agreement over the equity investment results in different liquidation rights and priorities than what is reflected by the underlying ownership interest percentage. For investments accounted for under the HLBV method, simply applying the percentage ownership interest to GAAP net income in order to determine earnings or losses does not accurately represent the income allocation and cash flow distributions that will ultimately be received by the investors. The calculation may vary in its complexity depending on the capital structure and the tax considerations for the investments.

 

When applying HLBV, WGL determines the amount that it would receive if an equity investment entity were to liquidate all of its assets at book value (as valued in accordance with GAAP) and distribute that cash to the investors based on the contractually defined liquidation priorities. The change in WGL’s claim on the investee’s book value at the beginning and end of the reporting period (adjusted for contributions and distributions) is WGL’s share of the earnings or losses from the equity investment for the period.

 

76

 

WGL Holdings, Inc.

Washington Gas Light Company

Notes to Consolidated Financial Statements

 

Consolidated Investments

 

Variable Interest Entities

 

At September 30, 2017 , WGL’s subsidiary, WGSW, Inc. was the primary beneficiary of SFGF, SFRC, SFGF II, and ASD as a result of its ability to direct the activities most significant to the economic performance of those entities. Accordingly, we have consolidated those VIE entities.

 

SFGF

 

On August 24, 2016, WGSW and a tax equity partner formed SFGF to acquire distributed generation solar projects in the State of Georgia that were developed by WGL Energy Systems. WGSW is the managing member and contributed cash equity equal to the purchase price of the solar projects less any contributions from the tax-equity partner. As of September 30, 2017 , WGSW has contributed $ 16.8 million into the tax equity partnership.

 

WGL Energy Systems is the operations and maintenance provider and was the developer of the projects. Profits and losses are allocated between the partners under the HLBV method of accounting and the portion allocated to the tax equity partner is included in non-controlling interest on the consolidated statements of income and is recorded to “Non-controlling interest” on the consolidated balance sheets.

 

SFRC

 

On October 28, 2016, WGSW and a tax equity partner formed SFRC to acquire distributed generation solar projects in the State of Minnesota that are developed by WGL Energy Systems. WGSW is the managing member and will provide cash equity equal to the purchase price of the solar projects less any contributions from the tax-equity partner. As of September 30, 2017 , WGSW has contributed $ 20.8 million into the tax equity partnership.

 

WGL Energy Systems is the operations and maintenance provider, and the developer of the projects. Profits and losses are allocated between the partners under the HLBV method of accounting and the portion allocated to the tax equity partner is included in to non-controlling interest on the consolidated statement of income and is recorded to “Non-controlling interest” on the consolidated balance sheets.

 

SFGF II

 

On June 30, 2017, WGSW and a tax equity partner formed SFGF II to acquire distributed generation solar projects in the United States of America that are expected to be developed by WGL Energy Systems. WGSW is the managing member and will provide cash equity equal to the purchase price of the solar projects less any contributions from the tax-equity partner. As of September 30, 2017 , no contributions have been made into the tax equity partnership.

 

WGL Energy Systems will be the operations and maintenance provider and the developer of the projects. Profits and losses are allocated between the partners under the HLBV method of accounting and the portion allocated to the tax equity partner is included in “Net income (loss) attributable to non-controlling interest” on the consolidated statements of income and is recorded to “Non-controlling interest” on the consolidated balance sheets.

 

ASD

 

WGSW is a limited partner in ASD Solar LP (ASD), a limited partnership formed to own and operate a portfolio of residential solar projects, primarily rooftop photovoltaic power generation systems. As a limited partner, WGSW had provided funding to the partnership but did not have power to direct the activities that most significantly affect the operations and economic performance of the entity. In January 2014, the funding commitment period ended for the partnership. Prior to July 10, 2017 ASD was being consolidated by the general partner, Solar Direct LLC (Solar Direct). Solar Direct is a wholly owned subsidiary of American Solar Direct Inc. (ASDI).

 

In June 2017, ASDI filed for Chapter 7 bankruptcy as a result of financial difficulties. To ensure continuing operations of the partnership and minimal disruptions to the customers, WGSW petitioned the Bankruptcy Court to remove Solar Direct as manager of ASD operations and to approve the appointment of SF ASD, a wholly-owned subsidiary of WGL Energy Systems, which was formed to take over the management and operations of the partnership, as manager of ASD operations. On July 10, 2017, the Bankruptcy Court granted the bankruptcy trustee’s emergency motion to assign management rights and control of ASD to SF ASD. As of September 30, 2017 , ASD is a VIE of and consolidated by WGSW.

 

WGSW’s equity method investment was eliminated and Solar Direct’s non-controlling interest in ASD was recognized at fair value. During the fiscal year ended September 30, 2017, WGSW recognized a $ 1.8 million gain to other income based on the difference between WGSW’s net investment in the partnership and WGSW’s partnership interest measured at fair value. Revenue and earnings recognized since the date of consolidation and the impact on WGL’s Consolidated Statements of Income for the current and prior fiscal year were not material. Associated with the financial difficulties of ASDI, WGL paid $ 2.1 million to satisfy a bank guarantee on behalf of ASDI.

 

77

 

WGL Holdings, Inc.

Washington Gas Light Company

Notes to Consolidated Financial Statements

 

The following table summarizes the fair value amounts of ASD assets and liabilities, as well as the non-controlling interest recorded at estimated fair value as of the date of control.

 

	
Fair Value of ASD at Date of Consolidation
    	
 
    
	
(in millions)
    	
 
    	
Fair Value
    	
 
    
	
Current assets
    	
 
    	
$
    	
0.2
    	
 
    
	
Accounts   receivable
    	
 
    	
1.9
    	
 
    
	
Property, plant and   equipment
    	
 
    	
48.2
    	
 
    
	
Total   assets
    	
 
    	
$
    	
50.3
    	
 
    
	
Deferred credits
    	
 
    	
0.6
    	
 
    
	
Total   liabilities
    	
 
    	
$
    	
0.6
    	
 
    
	
Net   assets
    	
 
    	
$
    	
49.7
    	
 
    
	
Non-controlling   interest
    	
 
    	
$
    	
0.5
    	
 
    
	
WGSW   equity interest
    	
 
    	
$
    	
49.2
    	
 
    

 

Property, plant and equipment represents residential solar assets for ASD that were measured at estimated fair value using the income derived from discounted cash flows. The fair values were determined based on significant estimates and assumptions that are judgmental in nature, including projected cash flows and discount rates reflecting inherent risk in the future cash flows.

 

The carrying amounts and classification of the consolidated VIEs’ assets and liabilities included in our consolidated balance sheet at September 30, 2017 and September 30, 2016 are as follows:

 

	
WGL Holdings, Inc.
   Balance Sheet Location of Consolidated Investments
    	
 
    
	
(in millions)
    	
 
    	
September 30, 2017
    	
 
    	
September 30, 2016
    	
 
    
	
Current assets
    	
 
    	
$
    	
4.4
    	
 
    	
$
    	
—
    	
 
    
	
Property, Plant   and Equipment
    	
 
    	
121.7
    	
 
    	
13.2
    	
 
    
	
Total   assets
    	
 
    	
$
    	
126.1
    	
 
    	
$
    	
13.2
    	
 
    
	
Current   liabilities
    	
 
    	
0.2
    	
 
    	
0.6
    	
 
    
	
Deferred credits
    	
 
    	
0.8
    	
 
    	
—
    	
 
    
	
Total   liabilities
    	
 
    	
$
    	
1.0
    	
 
    	
$
    	
0.6
    	
 
    

 

Non-VIE Investments

 

SunEdison

 

As of June 30, 2017, WGSW ended its agreement with SunEdison, Inc. (SunEdison) by assigning the master purchase agreement and master lease agreement with SunEdison to its newly formed affiliate, SF Echo LLC.

 

In April 2017, EchoFirst Finance Company LLC (EchoFirst), the subsidiary of SunEdison that was party to our master purchase and lease agreements filed a voluntary petition with the United States Bankruptcy Court for relief under Title 11 of the United States Code. In April 2016, SunEdison filed a voluntary bankruptcy petition with the United States Bankruptcy Court for relief under Title 11 of the United States Code.

 

In April 2017, we executed an assignment of the master lease agreement, master purchase agreement and the EchoFirst customer leases from SunEdison, allowing SunEdison to divest the WGSW lease arrangement. SF Echo, a wholly-owned subsidiary of WGSW, will operate and maintain the assets and be entitled to all cash flows from the assets for the remainder of their lease terms. The master lease between SF Echo and WGSW is accounted for as a direct financing lease and eliminated in consolidation. SF Echo accounts for the customer leases as operating leases. The fair value of the assets did not result in any adjustments during the year. Our maximum financial exposure is limited to lease payment receivables from retail residential solar customers, future maintenance and performance payments and customer non-payments. On a quarterly basis, we evaluate our lease receivables for credit losses.

 

78

 

WGL Holdings, Inc.

Washington Gas Light Company

Notes to Consolidated Financial Statements

 

SF Echo records lease income in the accompanying consolidated statements of income. We had a balance of $ 9.2 million of unamortized tax credits related to the leased assets in “Unamortized investment tax credits” on the accompanying consolidated balance sheets at September 30, 2017. WGSW did not hold an investment in SunEdison at September 30, 2017.

 

Unconsolidated Investments

 

Variable Interest Entity

 

Meade

 

In 2014, WGL through its subsidiary WGL Midstream, entered into a limited liability company agreement and formed Meade Pipeline Co LLC (Meade), a Delaware limited liability company, with Transcontinental Gas Pipe Line Company, LLC (Williams) to invest in a regulated pipeline, a segment of Transco’s Atlantic Sunrise project, called Central Penn Pipeline (Central Penn). Central Penn will be an approximately 185 -mile pipeline originating in Susquehanna County, Pennsylvania and extending to Lancaster County, Pennsylvania that will have the capacity to transport and deliver up to approximately 1.7 million dekatherms per day of natural gas.

 

WGL Midstream plans to invest an estimated $410 million for a 55% interest in Meade. Although WGL Midstream holds greater than a 50% interest in Meade, Meade is accounted for under the equity method of accounting because WGL Midstream does not have the power to direct the activities most significant to the economic performance of Meade. Meade is accounted for under the HLBV equity method of accounting, and any profits and losses are included in “Equity in earnings of unconsolidated affiliates” in the accompanying Consolidated Statement of Income and are added to or subtracted from the carrying amount of WGL’s investment balance. At September 30, 2017 and 2016 , WGL Midstream held a $146.7 million and $80.8 million , respectively, equity method investment in Meade.

 

At September 30, 2017, this VIE was not consolidated because WGL and its subsidiaries were not the primary beneficiaries. The nature of WGL’s involvement with this investment lacks the characteristics of a controlling financial interest. WGL either does not have control over Meade’s activities that are economically significant to the VIEs and/or WGL does not have the obligation to absorb expected losses or the right to receive expected gains that could be significant to the VIE.

 

Our maximum financial exposure to loss as a result of our involvement with this VIE includes (a) the amount invested in, and advanced to, the VIE as of the reporting date and (b) any legal or contractual obligation to provide financing in the future, such as liquidity arrangements, guarantees, and other contractual commitments.

 

Non-VIE Investments

 

Constitution

 

In 2013, WGL Midstream invested in Constitution Pipeline Company, LLC (Constitution). At September 30, 2017 , WGL Midstream’s share of the total forecasted cash contributions over the term of the construction agreement for Constitution is $95.5 million , reflecting a 10% share in the pipeline venture. This natural gas pipeline venture will transport natural gas from the Marcellus region in northern Pennsylvania to major northeastern markets. Constitution is accounted for under the equity method of accounting; any profits and losses are included in “Equity in earnings of unconsolidated affiliates” in the accompanying Consolidated Statement of Income and are added to or subtracted from the carrying amount of WGL’s investment balance. The equity method is considered appropriate because Constitution is an LLC with specific ownership accounts and ownership between five and fifty percent resulting in WGL Midstream maintaining a more than minor influence over the partnership operating and financing policies.

 

On April 22, 2016, the New York State Department of Environmental Conservation (NYSDEC) denied Constitution’s application for a Section 401 Certification for the pipeline, which is necessary for the construction and operation of the pipeline. Constitution has stated that it remains committed to pursuing the project and that it intends to pursue all available options to challenge the legality and appropriateness of NYSDEC’s decision. In May 2016, Constitution filed actions in both the U.S. Circuit Court of Appeals for the Second Circuit and the U.S. District Court for the Northern District of New York, appealing the decision and seeking declaratory judgment that the State of New York’s permitting authority is preempted by federal law. .  In May 2016, Constitution appealed the NYSDEC’s denial of the Section 401 certification to the United States Court of Appeals for the Second Circuit, and in August 2017 the court issued a decision denying in part and dismissing in part Constitution’s appeal. The court expressly declined to rule on Constitution’s argument that the NYSDEC’s decision on Constitution’s Section 401 application constitutes a waiver of the certification requirement. The court determined that it lacked jurisdiction to address that contention, and found that jurisdiction over the waiver issue lies exclusively with the United States Court of Appeals for the District of

 

79

 

WGL Holdings, Inc.

Washington Gas Light Company

Notes to Consolidated Financial Statements

 

Columbia Circuit. As to the denial itself, the court determined that NYSDEC’s action was not arbitrary or capricious. Constitution has filed a petition for rehearing with the Second Circuit Court’s decision, but in October the court denied our petition.

 

We remain steadfastly committed to the project, and in October 2017, Constitution filed a petition for declaratory order requesting FERC to find that, by operation of law, the Section 401 certification requirement for the New York State portion of Constitution’s pipeline project was waived due to the failure by the NYSDEC to act on Constitution’s Section 401 application within a reasonable period of time as required by the express terms of such statute. The petition is consistent with a recent decision by the District of Columbia Circuit Court in another proceeding, in which the court clarified that an applicant facing similar circumstances should present evidence of waiver to the FERC.

 

Beginning in April 2016, we discontinued capitalization of development costs related to this project. It is also possible that we could incur certain supplier-related costs in the event of a prolonged delay or termination of the project.

 

In light of the forgoing matters, Constitution has revised its target in-service date to as early as the first half of 2019, which assumes the timely receipt of a Notice to Proceed from FERC. We can give no assurance, however, that Constitution’s efforts to obtain the Section 401 Certification will be successful. Beginning in April 2016, Constitution discontinued capitalization of development costs related to this project. At September 30, 2017 and September 30, 2016 , WGL Midstream held a $38.1 million and $38.6 million , equity method investment in Constitution, respectively. We have evaluated our investment in Constitution for other than temporary impairment as of September 30, 2017 . Our impairment assessment used income and market approaches in determining the fair value of our investment in Constitution, including consideration of the severity and duration of any decline in fair value of our investment in the project. Our key inputs included, but are not limited to, significant management judgments and estimates, including projections of the project’s cash flows, selection of a discount rate, market multipliers and probability weighting of potential outcomes of legal and regulatory proceedings. At this time, we do not have an other than temporary impairment and have not recorded any impairment charge to reduce the carrying value of our investment. If Constitution is ultimately unable to obtain the Section 401 Certification or other future developments or indicators of an unfavorable resolution arise subsequently, an impairment charge of up to substantially all of our investment in the capitalized project costs may be required. It is also possible that Constitution could incur certain supplier-related costs in the event of a prolonged delay or termination of the project. We will continue to monitor and update our impairment analysis as required.

 

Mountain Valley Pipeline

 

In March 2015, WGL Midstream acquired a 7% equity interest in Mountain Valley Pipeline, LLC (Mountain Valley). On October 24, 2016, WGL Midstream acquired an additional 3% equity interest in Mountain Valley by assuming all of Vega Midstream MVP LLC’s (Vega Energy) interest in the joint venture. WGL Midstream now owns a 10% interest in Mountain Valley.

 

The proposed pipeline to be developed, constructed, owned and operated by Mountain Valley, will transport approximately 2.0 million dekatherms of natural gas per day from interconnects with EQT Corporation’s Equitrans system, near the MarkWest Mobley plant in West Virginia to Transcontinental Gas Pipe Line Company LLC’s Station 165 in Pittsylvania County, Virginia. The pipeline is scheduled to be in service by December 2018.

 

WGL Midstream expects to invest, in scheduled capital contributions through the in-service date of the pipeline, its pro rata share (based on its 10% equity interest) of project costs, an estimated aggregate amount of approximately $327.6 million . At September 30, 2017 and September 30, 2016 , WGL Midstream held a $ 63.0 million and $ 22.5 million equity method investment in Mountain Valley, respectively. The equity method is considered appropriate because Mountain Valley is an LLC with specific ownership accounts and ownership between five and fifty percent resulting in WGL Midstream maintaining a more than minor influence over the partnership operating and financing policies.

 

The carrying amount of WGL Midstream’s investment in MVP exceeded the amount of the underlying equity in net assets by $ 0.5 million , which will be amortized over the life of the assets when it is put in production. Profits and losses are allocated under the HLBV method of accounting and are included in “Equity in earnings of unconsolidated affiliates” in the accompanying Consolidated Statement of Income and are added to or subtracted from the carrying amount of WGL’s investment balance. On October 13, 2017, FERC issued an order granting a certificate of public convenience and necessity to construct and operate the Mountain Valley Pipeline Project (“Project”). Construction on the Project is expected to begin in late 2017.

 

Stonewall System

 

WGL has a 30% equity interest in an entity that owns and operates certain assets known as the Stonewall Gas Gathering System (the Stonewall System). WGL Midstream paid $89.4 million to acquire the equity interest pursuant to an option that WGL Midstream previously acquired. During the twelve months ended September 30, 2017 , WGL Midstream contributed an additional $ 45.5 million related to retiring

 

80

 

WGL Holdings, Inc.

Washington Gas Light Company

Notes to Consolidated Financial Statements

 

debt at the entity level. The Stonewall System has the capacity to gather up to 1.4 billion cubic feet of natural gas per day from the Marcellus production region in West Virginia, and connects with an interstate pipeline system that serves markets in the mid-Atlantic region.

 

WGL Midstream held a $136.7 million and $ 95.5 million equity method investment in the Stonewall System at September 30, 2017 and September 30, 2016 respectively. The equity method is considered appropriate because the Stonewall System is an LLC with specific ownership accounts and ownership between five and fifty percent resulting in WGL Midstream maintaining a more than minor influence over the partnership operating and financing policies.

 

The carrying amount of WGL Midstream’s investment in the Stonewall System exceeded the amount of the underlying equity in net assets by $8.9 million , which will be amortized over the life of the assets when it is put in production. Profits and losses are allocated under the HLBV method of accounting and are included in “Equity in earnings of unconsolidated affiliates” in the accompanying Consolidated Statement of Income and are added to or subtracted from the carrying amount of WGL’s investment balance.

 

Nextility-Lease Settlement and Assignment

 

On December 9, 2016, WGSW agreed to an amendment and assignment of its sale/leaseback agreement with Nextility and another unrelated third party, with significantly reduced payments and lease terms. Based on the lease classification criteria per ASC Topic 840, it was determined that the amendment and assignment would be considered a termination of the existing lease and the creation of a new lease with the third party.  Under this accounting criteria the new lease is considered an operating lease. As a result, the net investment of $ 5.4 million on the consolidated balance sheet was eliminated. The solar assets were recorded at present fair value utilizing an income approach for valuation as $ 4.0 million to “Property, plant and equipment” with an additional $ 1.4 million recorded as a receivable. The unamortized investment tax credits (ITC) balance associated with these assets continue to be deferred and amortized over the assets’ useful life. As of September 30, 2017 , the deferred net ITC receivable related to these assets is $ 2.7 million . In May 2017, Nextility informed WGSW that it was unable to finalize a financing arrangement and is in the process of winding down its business. A $ 1.0 million reserve was recorded for the receivable due from Nextility as part of the settlement to amend and assign the sale/leaseback agreement.

 

SFEE

 

On November 23, 2016, WGSW and a tax equity partner formed SFEE to acquire distributed generation solar projects that are developed by a third-party developer or WGL Energy Systems. New projects will be designed and constructed under long-term power purchase agreements. As of September 30, 2017 , WGSW has contributed $ 6.5 million and held a $ 9.6 million interest in SFEE.

 

SFEE is not considered a VIE and is not consolidated under the voting interest model for limited partnerships. WGSW is the managing member of SFEE. WGSW is also the operations and maintenance provider for SFEE. In addition, WGL Energy Systems has the option to sell its own distributed generation solar projects to the developer for sale to SFEE and these assets remain on WGL Energy System’s books until we no longer have continuing involvement. The equity method is considered appropriate because WGSW has significant influence over the operating and financial policies of SFEE. Profits and losses are allocated between the partners under the HLBV method of accounting and are included in “Equity in earnings of unconsolidated affiliates” in the accompanying Consolidated Statement of Income and are added to or subtracted from the carrying amount of WGSW’s investment balance. For SFEE, WGL has also provided a guarantee that could require additional future payments of $ 13.0 million .

 

The following tables present summary information about our unconsolidated VIEs and non-VIEs:

 

	
WGL Holdings, Inc.
   Balance Sheet Location of Unconsolidated Investments
    	
 
    
	
 
    	
 
    	
Solar Investments
    	
 
    	
Pipelines
    	
 
    	
 
    	
 
    
	
(in millions)
    	
 
    	
VIEs (a)
    	
 
    	
Non-VIEs (b)
    	
 
    	
VIEs (c)
    	
 
    	
Non-VIEs (d)
    	
 
    	
Total
    	
 
    
	
September 30,   2017
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Assets
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Investments   in unconsolidated affiliates
    	
 
    	
$
    	
—
    	
 
    	
$
    	
9.6
    	
 
    	
$
    	
146.7
    	
 
    	
$
    	
237.9
    	
 
    	
$
    	
394.2
    	
 
    
	
Total   assets
    	
 
    	
$
    	
—
    	
 
    	
$
    	
9.6
    	
 
    	
$
    	
146.7
    	
 
    	
$
    	
237.9
    	
 
    	
$
    	
394.2
    	
 
    
	
September 30,   2016
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Assets
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Investments in   unconsolidated affiliates
    	
 
    	
$
    	
66.1
    	
 
    	
$
    	
—
    	
 
    	
$
    	
80.8
    	
 
    	
$
    	
156.6
    	
 
    	
$
    	
303.5
    	
 
    
	
Investments in   direct financing leases, capital leases (e)
    	
 
    	
29.8
    	
 
    	
—
    	
 
    	
—
    	
 
    	
—
    	
 
    	
29.8
    	
 
    
	
Accounts   receivable (e)
    	
 
    	
1.1
    	
 
    	
—
    	
 
    	
—
    	
 
    	
9.2
    	
 
    	
10.3
    	
 
    
	
Total assets
    	
 
    	
$
    	
97.0
    	
 
    	
$
    	
—
    	
 
    	
$
    	
80.8
    	
 
    	
$
    	
165.8
    	
 
    	
$
    	
343.6
    	
 
    

 

81

 

WGL Holdings, Inc.

Washington Gas Light Company

Notes to Consolidated Financial Statements

 

(a) “Investments in unconsolidated affiliates” balance relates to equity method investment in ASD.

(b) Balance relates to interest held in SFEE.

(c) Balance relates to equity method investment in Meade.

(d) Balance relates to equity method investments in Constitution, Mountain Valley Pipeline and Stonewall System.

(e) Prior year balances relate to direct financing leases in Nextility and SunEdison.

 

82

 

WGL Holdings, Inc.

Washington Gas Light Company

Notes to Consolidated Financial Statements

 

NOTE 18. RELATED PARTY TRANSACTIONS

 

WGL and its subsidiaries engage in inter-company transactions in the ordinary course of business. Inter-company transactions and balances have been eliminated from the consolidated financial statements of WGL, except as described below. Washington Gas provides accounting, treasury, legal and other administrative and general support to affiliates, and files consolidated tax returns that include affiliated taxable transactions. Washington Gas bills its affiliates in accordance with regulatory requirements for the actual cost of providing these services, which approximates their market value. To the extent such billings are not paid, they are reflected in “Receivables from associated companies” on Washington Gas’ balance sheets. Washington Gas assigns or allocates these costs directly to its affiliates and, therefore, does not recognize revenues or expenses associated with providing these services. Washington Gas believes that allocations based on broad measures of business activity are appropriate for allocating expenses resulting from common services. Affiliate entities are allocated a portion of common services based on a formula driven by appropriate indicators of activity, as approved by management.

 

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

 

Washington Gas previously obtained third-party project financing on behalf of the federal government to provide funds during the construction of certain energy management services projects entered into under Washington Gas’ area-wide contract. In December 2016, WGL Energy Systems entered into an agreement to obtain third-party financing and receive funds directly from the third party lender during the construction period associated with the related energy management service projects. Washington Gas will continue to record a receivable representing the government’s obligation, and will record an inter-company payable to WGL Energy Systems for the construction work performed for the same amount. Refer to Note 4—Short Term Debt for further discussions of the project financing.

 

The following table presents the receivables and payables from associated companies as of September 30, 2017 and September 30, 2016.

 

	
Washington Gas Light Company
   Receivables / Payables from Associated Companies
    	
 
    
	
(In millions)
    	
 
    	
September 30, 2017
    	
 
    	
September 30, 2016
    	
 
    
	
Receivables from   Associated Companies
    	
 
    	
$
    	
32.4
    	
 
    	
$
    	
13.8
    	
 
    
	
Payables to   Associated Companies
    	
 
    	
$
    	
94.8
    	
 
    	
$
    	
65.8
    	
 
    

 

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 WGL Energy Services. Washington Gas records revenues for these balancing services pursuant to tariffs approved by the appropriate regulatory bodies. These related party amounts related to balancing services provided to WGL Energy Services have been eliminated in the consolidated financial statements of WGL. The following table shows the amounts Washington Gas charged WGL Energy Services for balancing services.

 

83

 

WGL Holdings, Inc.

Washington Gas Light Company

Notes to Consolidated Financial Statements

 

	
Washington Gas - Gas Balancing Service Charges
    	
 
    
	
 
    	
 
    	
Years Ended September 30,
    	
 
    
	
(In millions)
    	
 
    	
2017
    	
 
    	
2016
    	
 
    	
2015
    	
 
    
	
Gas balancing   service charge
    	
 
    	
$
    	
23.6
    	
 
    	
$
    	
26.8
    	
 
    	
$
    	
25.1
    	
 
    
											

 

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. WGL Energy Services recognized receivable to Washington Gas of $1.4 million and a $0.8 million payable at September 30, 2017 and 2016 , respectively, related to an imbalance in gas volumes. Due to regulatory treatment, these payables are not eliminated in the consolidated financial statements of WGL. Refer to Note 1—Accounting Policies for the Notes to Consolidated Financial Statements for further discussion of these imbalance transactions.

 

Washington Gas participates in a purchase of receivables (POR) program as approved by the PSC of MD, whereby it purchases receivables from participating energy marketers at approved discount rates. In addition, WGL Energy Services participates in POR programs with certain Maryland and Pennsylvania utilities, whereby it sells its receivables to various utilities, including Washington Gas, at approved discount rates. The receivables purchased by Washington Gas are included in “Accounts receivable” in the accompanying balance sheet. Any activity between Washington Gas and WGL Energy Services related to the POR program has been eliminated in the accompanying financial statements for WGL. At September 30, 2017 and 2016 , Washington Gas had balances of $3.2 million and $4.2 million , respectively, of purchased receivables from WGL Energy Services. Additionally, Washington Gas is implementing a program in the District of Columbia to participate in a POR program in fiscal year 2018. Washington Gas expects that it will take seven to nine months to implement the program.

 

84

 

WGL Holdings, Inc.

Washington Gas Light Company

Notes to Consolidated Financial Statements

 

NOTE 19. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

 

The following tables show the changes in accumulated other comprehensive income (loss) for WGL and Washington Gas by component for the fiscal years ended September 30, 2017 and 2016 .

 

	
WGL Holdings, Inc.
   Changes in Accumulated Other Comprehensive Loss by Component
    	
 
    
	
 
    	
 
    	
September 30,
    	
 
    
	
(In thousands)
    	
 
    	
2017
    	
 
    	
2016
    	
 
    
	
Beginning   Balance
    	
 
    	
$
    	
(38,539
    	
)
    	
$
    	
(14,236
    	
)
    
	
Qualified cash   flow hedging instruments (a)
    	
 
    	
49,610
    	
 
    	
(39,289
    	
)
    
	
Change in prior   service cost (b)
    	
 
    	
(767
    	
)
    	
(891
    	
)
    
	
Amortization of   actuarial gain (loss) (b) 
    	
 
    	
6,232
    	
 
    	
(936
    	
)
    
	
Current-period   other comprehensive income (loss)
    	
 
    	
55,075
    	
 
    	
(41,116
    	
)
    
	
Income tax   expense (benefit) related to other comprehensive income (loss)
    	
 
    	
22,533
    	
 
    	
(16,813
    	
)
    
	
Ending   Balance
    	
 
    	
$
    	
(5,997
    	
)
    	
$
    	
(38,539
    	
)
    

 

(a) Cash flow hedging instruments represent interest rate swap agreements related to debt issuances. Refer to Note 14—Derivative and Weather-related Instruments for further discussion of the interest rate swap agreements.

(b) These accumulated other comprehensive income (loss) components are included in the computation of net periodic benefit cost. Refer to Note 10—Pension and other post-retirement benefit plans for additional details.

 

	
Washington Gas Light Company
   Changes in Accumulated Other Comprehensive Loss by Component
    	
 
    
	
 
    	
 
    	
September 30,
    	
 
    
	
(In thousands)
    	
 
    	
2017
    	
 
    	
2016
    	
 
    
	
Beginning   Balance
    	
 
    	
$
    	
(7,830
    	
)
    	
$
    	
(6,712
    	
)
    
	
Change in prior   service cost (a)
    	
 
    	
(767
    	
)
    	
(891
    	
)
    
	
Amortization of   actuarial gain (loss) (a)
    	
 
    	
6,232
    	
 
    	
(936
    	
)
    
	
Current-period   other comprehensive income (loss)
    	
 
    	
5,465
    	
 
    	
(1,827
    	
)
    
	
Income tax   expense (benefit) benefit related to other comprehensive income (loss)
    	
 
    	
2,157
    	
 
    	
(709
    	
)
    
	
Ending   Balance
    	
 
    	
$
    	
(4,522
    	
)
    	
$
    	
(7,830
    	
)
    

 

(a) These accumulated other comprehensive income (loss) components are included in the computation of net periodic benefit cost. Refer to Note 10—Pension and other post-retirement benefit plans for additional details.

 

85

 

WGL Holdings, Inc.

Washington Gas Light Company

Notes to Consolidated Financial Statements

 

NOTE 20. SUPPLEMENTAL CASH FLOW INFORMATION

 

The following tables detail the changes in operating assets and liabilities from operating activities , cash payments that have been included in the determination of earnings and non-cash investing and financing activities:

 

WGL Holdings Inc.

 

	
For the year ended September 30,
   (In thousands)
    	
 
    	
2017
    	
 
    	
2016
    	
 
    	
2015
    	
 
    
	
CHANGES   IN OPERATING ASSETS AND LIABILITIES
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Accounts   receivable and unbilled revenues—net
    	
 
    	
$
    	
(108,236
    	
)
    	
$
    	
(105,720
    	
)
    	
$
    	
(71,514
    	
)
    
	
Gas costs and   other regulatory assets/liabilities—net
    	
 
    	
3,430
    	
 
    	
(31,075
    	
)
    	
9,943
    	
 
    
	
Storage gas
    	
 
    	
(36,852
    	
)
    	
4,311
    	
 
    	
122,159
    	
 
    
	
Prepaid Taxes
    	
 
    	
1,848
    	
 
    	
(76,779
    	
)
    	
(38,630
    	
)
    
	
Accounts payable   and other accrued liabilities
    	
 
    	
51,307
    	
 
    	
31,792
    	
 
    	
25,670
    	
 
    
	
Customer   deposits and advance payments
    	
 
    	
(20,543
    	
)
    	
(2,513
    	
)
    	
20,579
    	
 
    
	
Accrued taxes
    	
 
    	
1,985
    	
 
    	
1,805
    	
 
    	
(266
    	
)
    
	
Other current   assets
    	
 
    	
(30,123
    	
)
    	
(24,502
    	
)
    	
7,364
    	
 
    
	
Other current   liabilities
    	
 
    	
7,072
    	
 
    	
(8,774
    	
)
    	
13,583
    	
 
    
	
Deferred gas   costs—net
    	
 
    	
2,467
    	
 
    	
(5,104
    	
)
    	
(2,054
    	
)
    
	
Deferred   assets—other
    	
 
    	
(18,538
    	
)
    	
(22,312
    	
)
    	
(10,153
    	
)
    
	
Deferred   liabilities—other
    	
 
    	
(29,407
    	
)
    	
2,076
    	
 
    	
8,500
    	
 
    
	
Pension and   other post-retirement benefits
    	
 
    	
(9,950
    	
)
    	
(10,244
    	
)
    	
(14,546
    	
)
    
	
Other—net
    	
 
    	
3,002
    	
 
    	
3,821
    	
 
    	
651
    	
 
    
	
Changes in   operating assets and liabilities
    	
 
    	
$
    	
(182,538
    	
)
    	
$
    	
(243,218
    	
)
    	
$
    	
71,286
    	
 
    
	
SUPPLEMENTAL   DISCLOSURES OF CASH FLOW INFORMATION
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Income taxes   paid (refunded)—net
    	
 
    	
$
    	
(10,002
    	
)
    	
$
    	
(10,723
    	
)
    	
$
    	
6,935
    	
 
    
	
Interest paid
    	
 
    	
$
    	
66,023
    	
 
    	
$
    	
51,838
    	
 
    	
$
    	
45,654
    	
 
    
	
SUPPLEMENTAL   DISCLOSURES OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Extinguishment   of project debt financing
    	
 
    	
$
    	
(27,927
    	
)
    	
$
    	
—
    	
 
    	
$
    	
(8,350
    	
)
    
	
Capital   expenditure accruals included in accounts payable and other accrued   liabilities
    	
 
    	
$
    	
54,212
    	
 
    	
$
    	
84,132
    	
 
    	
$
    	
45,780
    	
 
    
	
Dividends paid   in common stock
    	
 
    	
$
    	
1,362
    	
 
    	
$
    	
4,011
    	
 
    	
$
    	
—
    	
 
    
	
Stock based   compensation
    	
 
    	
$
    	
6,564
    	
 
    	
$
    	
6,742
    	
 
    	
$
    	
1,009
    	
 
    
	
Transfer of   investments to fixed assets (excluding ASD)
    	
 
    	
$
    	
30,114
    	
 
    	
$
    	
—
    	
 
    	
$
    	
—
    	
 
    
	
Transfer of   notes receivables to investments
    	
 
    	
$
    	
10,031
    	
 
    	
$
    	
—
    	
 
    	
$
    	
—
    	
 
    
	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
EFFECTS   OF ASD CONSOLIDATION:
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Elimination of   equity method investment
    	
 
    	
$
    	
(66,719
    	
)
    	
$
    	
—
    	
 
    	
$
    	
—
    	
 
    
	
Consolidation of   property, plant and equipment
    	
 
    	
$
    	
48,248
    	
 
    	
$
    	
—
    	
 
    	
$
    	
—
    	
 
    
	
Elimination of   unamortized investment tax credits
    	
 
    	
$
    	
19,322
    	
 
    	
$
    	
—
    	
 
    	
$
    	
—
    	
 
    
	
Accounts   receivable and other
    	
 
    	
$
    	
956
    	
 
    	
$
    	
—
    	
 
    	
$
    	
—
    	
 
    
	
Gain on   consolidation
    	
 
    	
$
    	
(1,807
    	
)
    	
$
    	
—
    	
 
    	
$
    	
—
    	
 
    

 

86

 

WGL Holdings, Inc.

Washington Gas Light Company

Notes to Consolidated Financial Statements

 

Washington Gas

 

	
For the year ended September 30,
   (In thousands)
    	
 
    	
2017
    	
 
    	
2016
    	
 
    	
2015
    	
 
    
	
CHANGES   IN OPERATING ASSETS AND LIABILITIES
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Accounts   receivable, unbilled revenues and receivables from associated companies—net
    	
 
    	
$
    	
(125,758
    	
)
    	
$
    	
(78,304
    	
)
    	
$
    	
(16,127
    	
)
    
	
Gas costs and   other regulatory assets/liabilities—net
    	
 
    	
3,430
    	
 
    	
(31,075
    	
)
    	
9,943
    	
 
    
	
Storage gas
    	
 
    	
(10,280
    	
)
    	
12,016
    	
 
    	
61,594
    	
 
    
	
Prepaid Taxes
    	
 
    	
(6,524
    	
)
    	
13,539
    	
 
    	
(14,228
    	
)
    
	
Accounts payable   and other accrued liabilities, including payables to associated companies
    	
 
    	
46,995
    	
 
    	
31,408
    	
 
    	
(1,007
    	
)
    
	
Customer   deposits and advance payments
    	
 
    	
(16,742
    	
)
    	
(7,514
    	
)
    	
20,132
    	
 
    
	
Accrued taxes
    	
 
    	
(4,831
    	
)
    	
5,980
    	
 
    	
(12,951
    	
)
    
	
Other current   assets
    	
 
    	
(4,123
    	
)
    	
3,912
    	
 
    	
5,826
    	
 
    
	
Other current   liabilities
    	
 
    	
(3,194
    	
)
    	
(4,486
    	
)
    	
1,435
    	
 
    
	
Deferred gas   costs—net
    	
 
    	
2,467
    	
 
    	
(5,104
    	
)
    	
(2,054
    	
)
    
	
Deferred   assets—other
    	
 
    	
(15,088
    	
)
    	
(22,057
    	
)
    	
(10,036
    	
)
    
	
Deferred   liabilities—other
    	
 
    	
(5,418
    	
)
    	
(57,660
    	
)
    	
(13,912
    	
)
    
	
Pension and   other post-retirement benefits
    	
 
    	
(9,806
    	
)
    	
(10,251
    	
)
    	
(13,750
    	
)
    
	
Other—net
    	
 
    	
3,409
    	
 
    	
2,107
    	
 
    	
258
    	
 
    
	
Changes in   operating assets and liabilities
    	
 
    	
$
    	
(145,463
    	
)
    	
$
    	
(147,489
    	
)
    	
$
    	
15,123
    	
 
    
	
SUPPLEMENTAL   DISCLOSURES OF CASH FLOW INFORMATION
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Income taxes   paid (refunded)—net
    	
 
    	
$
    	
—
    	
 
    	
$
    	
(19,004
    	
)
    	
$
    	
8,902
    	
 
    
	
Interest paid
    	
 
    	
$
    	
50,539
    	
 
    	
$
    	
40,972
    	
 
    	
$
    	
36,971
    	
 
    
	
SUPPLEMENTAL   DISCLOSURES OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Extinguishment   of project debt financing
    	
 
    	
$
    	
(27,927
    	
)
    	
$
    	
—
    	
 
    	
$
    	
(8,350
    	
)
    
	
Capital   expenditure accruals included in accounts payable and other accrued   liabilities
    	
 
    	
$
    	
37,049
    	
 
    	
$
    	
43,687
    	
 
    	
$
    	
40,926
    	
 
    

 

87

 

WGL Holdings, Inc.

Washington Gas Light Company

Notes to Consolidated Financial Statements

 

NOTE 21. PLANNED MERGER WITH ALTAGAS LTD.

 

On January 25, 2017 , WGL entered into an agreement and plan of merger (Merger Agreement) to combine with AltaGas in an all cash transaction valued at approximately $ 6.4 billion . The Merger Agreement provides for the merger of a newly formed indirect wholly-owned subsidiary of AltaGas with and into WGL, with WGL continuing as a surviving corporation in the merger (the Merger) and becoming an indirect wholly-owned subsidiary of AltaGas. Subject to the terms and conditions set forth in the Merger Agreement, at the Effective Time (as defined in the Merger Agreement) of the Merger, WGL shareholders will receive $ 88.25 in cash, without interest, for each share of WGL common stock issued and outstanding immediately prior to the Effective Time (as defined in the Merger Agreement). The Boards of Directors of each of WGL and AltaGas have unanimously approved the Merger, which is expected to close in the second quarter of calendar year 2018.

 

Consummation of the Merger is subject to the satisfaction or waiver of specified closing conditions, including, among others, the approval of the Merger by the holders of more than two-thirds of the outstanding shares of WGL common stock, which occurred on May 10, 2017 and approvals required from certain antitrust and other regulatory bodies. A status of each of these conditions is described below. The Merger Agreement also contains customary representations, warranties and covenants of both WGL and AltaGas. These covenants include, among others, an obligation on behalf of WGL to operate its business in the ordinary course until the Merger is consummated, subject to certain exceptions.

 

The Merger Agreement may be terminated by each of WGL and AltaGas under certain circumstances, including if the Merger is not consummated by January 25, 2018 (subject to a 180 day extension by either party subject to certain conditions being met). The Merger Agreement also contains certain additional termination rights for both AltaGas and WGL, and provides that, upon termination of the Merger Agreement under specified circumstances, AltaGas would be required to pay a termination fee of $ 205 million , $ 182 million , or $ 68 million (depending on the specific circumstances of termination) to WGL, and WGL would be required to pay AltaGas a termination fee of $ 136 million , only under specific circumstances as outlined in the Merger Agreement.

 

In connection with entering into the Merger Agreement, WGL entered into a subscription agreement with AltaGas, in which WGL agreed, upon the occurrence of certain conditions, to issue and sell to AltaGas up to an aggregate of 15,000 shares of Series A Non-Voting Non-Convertible Perpetual Preferred Stock (Non-Voting Preferred Stock) for a purchase price of $ 10,000 per share. If the consolidated debt to total capitalization ratio is forecasted to be in excess of 62% at December 31, 2017 or any quarterly period thereafter, AltaGas will purchase a number of shares of Non-Voting Preferred Stock to produce a forecasted ratio equal to 62% , but not more than 5,000 shares in any single quarter or more than 15,000 shares in the aggregate. If the Merger Agreement is terminated or the Outside Date (as defined in the Merger Agreement) expires, no subscription will be made after the date of termination or expiration, and WGL will have 6 months thereafter to redeem any Non-Voting Preferred Stock previously issued.

 

Merger Approval Proceedings

 

District of Columbia

 

On April 24, 2017, AltaGas, WGL and Washington Gas (“Applicants”) filed an application with the PSC of DC seeking approval of the Merger Agreement. In an order issued on April 25, 2017, the PSC of DC scheduled a procedural conference on May 18, 2017 with the Staff of the PSC of DC and interested parties to consider the factors to be considered in the case to determine whether the Merger is in the public interest, identify factual issues in dispute and consider a procedural schedule for the proceeding. To approve the Merger Agreement, the PSC of DC must find that the Merger taken as a whole is in the public interest. In the April 25, 2017 order, the PSC of DC stated that in making this determination, it has balanced the interests of shareholders and investors with ratepayers and the community; determined that benefits to shareholders must not come at the expense of ratepayers; and found that to be approved, the transaction must produce a direct and tangible benefit to ratepayers. It stated further that in determining whether the public interest requirements are met, the PSC of DC has in past merger cases identified seven factors it has considered in reviewing each transaction, including the effects of the transaction on (i) ratepayers, shareholders, the financial health of the utilities standing alone and as merged, and the economy of the District; (ii) utility management and administrative operations; (iii) public safety and the safety and reliability of services; (iv) risks associated with

 

88

 

WGL Holdings, Inc.

Washington Gas Light Company

Notes to Consolidated Financial Statements

 

all of the applicants’ affiliated non-jurisdictional business operations; (v) the PSC of DC’s ability to regulate Washington Gas effectively; (vi) competition in the local retail and wholesale markets that impact the District and District ratepayers; and (vii) conservation of natural resources and preservation of environmental quality. The law of the District of Columbia does not impose any time limit on the PSC of DC’s review of the Merger. The District of Columbia Office of the People’s Counsel, the District of Columbia Government and other intervenors filed testimony with the PSC of DC opposing the application on September 29, 2017. The Applicants filed rebuttal testimony on October 27, 2017. Evidentiary hearings are scheduled before the PSC of DC in the first half of December 2017. An order is expected by the second calendar quarter of 2018.

 

Maryland

 

On April 24, 2017, AltaGas, WGL and Washington Gas (“Applicants”) filed an application with the PSC of MD seeking approval of the Merger Agreement. On April 26, 2017, the PSC of MD issued an order scheduling a pre-hearing conference on May 30, 2017, to set a procedural schedule for the proceeding, to consider any petition to intervene that have been filed, and to consider any other preliminary matters requested by the parties. Maryland law requires the PSC of MD to approve a merger subject to its review if it finds that the merger agreement is consistent with the public interest, convenience and necessity, including benefits and no harm to consumers. In making this determination, the PSC of MD is required to consider the following criteria: (i) the potential impact of the acquisition on rates and charges paid by customers and on the services and conditions of operation of the public service company; (ii) the potential impact of the acquisition on continuing investment needs for the maintenance of utility services, plant, and related infrastructure; (iii) the proposed capital structure that will result from the acquisition, including allocation of earnings from Washington Gas; (iv) the potential effects on employment; (v) the projected allocation of any savings that are expected between shareholders and rate payers; (vi) issues of reliability, quality of service, and quality of customer service; (vii)  the potential impact of the acquisition on community investment; (viii) affiliate and cross-subsidization issues; (ix) the use or pledge of utility assets for the benefit of an affiliate; (x) jurisdictional and choice-of-law issues; (xi) whether it is necessary to revise the PSC of MD’s ring-fencing and code of conduct regulations in light of the acquisition; and (xii) any other issues the PSC of MD considers relevant to the assessment of the acquisition in relation to the public interest, convenience, and necessity. The Staff of the PSC of MD, the Maryland Office of People’s Counsel and other intervenors filed testimony opposing the application on August 14, 2017. The Applicants filed rebuttal testimony with the PSC of MD on September 11, 2017. Evidentiary hearings were held before the PSC of MD on October 3, 2017 through October 16, 2017. Initial Briefs were filed on November 6, 2017 and Reply Briefs were due by November 16, 2017. The PSC of MD is required to issue an order within 180 days of the date the application was filed, but may extend the date by 45 days for good cause. The PSC of MD issued an order extending the date for review. Accordingly, an order is expected by December 5, 2017.

 

Virginia

 

On April 24, 2017, AltaGas , WGL and Washington Gas, filed a petition with the SCC of VA seeking approval of the Merger Agreement. Virginia law provides that, if the SCC of VA determines, with or without hearing, that adequate service to the public at just and reasonable rates will not be impaired or jeopardized by granting the petition for approval, then the SCC of VA shall approve a merger with such conditions that the SCC of VA deems to be appropriate in order to satisfy this standard. On October 20, 2017, the SCC of VA issued an order approving the merger, subject to accounting, financial, and safety related requirements to which joint applicants agree.

 

Committee on Foreign Investment in the United States

 

On April 24, 2017, AltaGas, WGL and Washington Gas, filed a joint voluntary notice with the CFIUS. This notice was approved on August 18, 2017.

 

HSR

 

On June 15, 2017, AltaGas and WGL submitted to the Federal Trade Commission and the Antitrust Division of the Department of Justice completed Premerger Notification and Report Forms with respect to the proposed acquisition by AltaGas Ltd. of certain voting securities of WGL. The waiting period required by Section 7A(b)(1) of the Clayton Act, 15 U.S.C. Section 18a(b)(1) (aka the Hart-Scott Rodino Antitrust Improvements Act of 1976, as amended) expired on July 17, 2017.  The expiration of the Clayton Act’s waiting period deems the Merger approved by the Federal Trade Commission and the Department of Justice.

 

89

 

WGL Holdings, Inc.

Washington Gas Light Company

Notes to Consolidated Financial Statements

 

FERC

 

On April 24, 2017, AltaGas and WGL Energy Services submitted to FERC a Joint Application for Authorization of Disposition of Jurisdictional Assets and Merger under Section 203 of the Federal Power Act. Under that section, FERC shall approve a merger if it finds that the proposed transaction will be consistent with the public interest. In making this determination, the FERC will consider the following criteria: (i) horizontal competition analysis; (ii) vertical competition issues; (iii) no adverse effect on rates; (iv) no adverse effect on regulation; and (v) no improper cross-subsidization. On July 6, 2017, the FERC issued an order authorizing the Merger, concluding that the proposed transaction is consistent with the public interest.

 

90Exhibit 4.8

 

WGL Holdings, Inc.

Condensed Consolidated Balance Sheets (Unaudited)

 

	
(In thousands)
    	
 
    	
March 31,
   2018
    	
 
    	
September 30,
   2017
    	
 
    
	
ASSETS
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Property,   Plant and Equipment
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
At original cost
    	
 
    	
$
    	
6,199,912
    	
 
    	
$
    	
6,143,841
    	
 
    
	
Accumulated   depreciation and amortization
    	
 
    	
(1,552,274
    	
)
    	
(1,513,790
    	
)
    
	
Net property,   plant and equipment
    	
 
    	
4,647,638
    	
 
    	
4,630,051
    	
 
    
	
Current   Assets
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Cash and cash   equivalents
    	
 
    	
46,319
    	
 
    	
8,524
    	
 
    
	
Receivables
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Accounts   receivable
    	
 
    	
515,903
    	
 
    	
398,149
    	
 
    
	
Gas costs and   other regulatory assets
    	
 
    	
8,723
    	
 
    	
21,705
    	
 
    
	
Unbilled   revenues
    	
 
    	
242,837
    	
 
    	
165,483
    	
 
    
	
Allowance for   doubtful accounts
    	
 
    	
(36,900
    	
)
    	
(32,025
    	
)
    
	
Net receivables
    	
 
    	
730,563
    	
 
    	
553,312
    	
 
    
	
Materials and supplies—principally   at average cost
    	
 
    	
18,592
    	
 
    	
20,172
    	
 
    
	
Storage gas
    	
 
    	
76,199
    	
 
    	
243,984
    	
 
    
	
Prepaid taxes
    	
 
    	
41,086
    	
 
    	
31,549
    	
 
    
	
Other   prepayments
    	
 
    	
75,863
    	
 
    	
86,465
    	
 
    
	
Derivatives
    	
 
    	
10,011
    	
 
    	
15,327
    	
 
    
	
Other
    	
 
    	
22,391
    	
 
    	
26,556
    	
 
    
	
Total current   assets
    	
 
    	
1,021,024
    	
 
    	
985,889
    	
 
    
	
Deferred   Charges and Other Assets
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Regulatory   assets
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Gas costs
    	
 
    	
66,694
    	
 
    	
90,136
    	
 
    
	
Pension and   other post-retirement benefits
    	
 
    	
129,478
    	
 
    	
139,499
    	
 
    
	
Other
    	
 
    	
118,204
    	
 
    	
104,596
    	
 
    
	
Prepaid   post-retirement benefits
    	
 
    	
237,566
    	
 
    	
231,577
    	
 
    
	
Derivatives
    	
 
    	
29,575
    	
 
    	
38,389
    	
 
    
	
Investments in   unconsolidated affiliates
    	
 
    	
584,594
    	
 
    	
394,201
    	
 
    
	
Other
    	
 
    	
12,053
    	
 
    	
11,671
    	
 
    
	
Total deferred   charges and other assets
    	
 
    	
1,178,164
    	
 
    	
1,010,069
    	
 
    
	
Total   Assets
    	
 
    	
$
    	
6,846,826
    	
 
    	
$
    	
6,626,009
    	
 
    
	
CAPITALIZATION   AND LIABILITIES
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Capitalization
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
WGL Holdings   common shareholders’ equity
    	
 
    	
$
    	
1,721,772
    	
 
    	
$
    	
1,502,690
    	
 
    
	
Non-controlling   interest
    	
 
    	
6,868
    	
 
    	
6,851
    	
 
    
	
Washington Gas   Light Company preferred stock
    	
 
    	
28,173
    	
 
    	
28,173
    	
 
    
	
Total equity
    	
 
    	
1,756,813
    	
 
    	
1,537,714
    	
 
    
	
Long-term debt
    	
 
    	
1,879,304
    	
 
    	
1,430,861
    	
 
    
	
Total capitalization
    	
 
    	
3,636,117
    	
 
    	
2,968,575
    	
 
    
	
Current   Liabilities
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Current   maturities of long-term debt
    	
 
    	
100,000
    	
 
    	
250,000
    	
 
    
	
Notes payable   and project financing
    	
 
    	
424,833
    	
 
    	
559,844
    	
 
    
	
Accounts payable   and other accrued liabilities
    	
 
    	
358,046
    	
 
    	
423,824
    	
 
    
	
Wages payable
    	
 
    	
26,681
    	
 
    	
18,096
    	
 
    
	
Accrued interest
    	
 
    	
8,655
    	
 
    	
7,806
    	
 
    
	
Dividends   declared
    	
 
    	
26,780
    	
 
    	
26,452
    	
 
    
	
Customer   deposits and advance payments
    	
 
    	
47,902
    	
 
    	
65,841
    	
 
    
	
Gas costs and   other regulatory liabilities
    	
 
    	
53,983
    	
 
    	
22,814
    	
 
    
	
Accrued taxes
    	
 
    	
33,070
    	
 
    	
17,657
    	
 
    
	
Derivatives
    	
 
    	
26,181
    	
 
    	
43,990
    	
 
    
	
Other
    	
 
    	
47,666
    	
 
    	
52,664
    	
 
    
	
Total current   liabilities
    	
 
    	
1,153,797
    	
 
    	
1,488,988
    	
 
    
	
Deferred   Credits
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Unamortized   investment tax credits
    	
 
    	
154,667
    	
 
    	
155,007
    	
 
    
	
Deferred income   taxes
    	
 
    	
402,204
    	
 
    	
868,067
    	
 
    
	
Accrued pensions   and benefits
    	
 
    	
187,015
    	
 
    	
181,552
    	
 
    
	
Asset retirement   obligations
    	
 
    	
303,361
    	
 
    	
296,810
    	
 
    
	
Regulatory   liabilities
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Accrued asset   removal costs
    	
 
    	
280,026
    	
 
    	
292,173
    	
 
    
	
Other   post-retirement benefits
    	
 
    	
127,748
    	
 
    	
135,035
    	
 
    
	
Excess deferred   taxes and other
    	
 
    	
450,870
    	
 
    	
9,403
    	
 
    
	
Derivatives
    	
 
    	
104,032
    	
 
    	
122,607
    	
 
    
	
Other
    	
 
    	
46,989
    	
 
    	
107,792
    	
 
    
	
Total deferred   credits
    	
 
    	
2,056,912
    	
 
    	
2,168,446
    	
 
    
	
Commitments   and Contingencies (Note 13)
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Total   Capitalization and Liabilities
    	
 
    	
$
    	
6,846,826
    	
 
    	
$
    	
6,626,009
    	
 
    

 

The accompanying notes are an integral part of these statements.

 

1

 

WGL Holdings, Inc.

Condensed Consolidated Statements of Income (Unaudited)

 

	
 
    	
 
    	
Three Months Ended
   March 31,
    	
 
    	
Six Months Ended
   March 31,
    	
 
    
	
(In thousands, except per share data)
    	
 
    	
2018
    	
 
    	
2017
    	
 
    	
2018
    	
 
    	
2017
    	
 
    
	
OPERATING   REVENUES
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Utility
    	
 
    	
$
    	
523,480
    	
 
    	
$
    	
466,270
    	
 
    	
$
    	
898,470
    	
 
    	
$
    	
793,333
    	
 
    
	
Non-utility
    	
 
    	
362,971
    	
 
    	
375,480
    	
 
    	
640,421
    	
 
    	
657,904
    	
 
    
	
Total   Operating Revenues
    	
 
    	
886,451
    	
 
    	
841,750
    	
 
    	
1,538,891
    	
 
    	
1,451,237
    	
 
    
	
OPERATING   EXPENSES
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Utility cost of   gas
    	
 
    	
196,757
    	
 
    	
134,458
    	
 
    	
319,030
    	
 
    	
209,958
    	
 
    
	
Non-utility cost   of energy-related sales
    	
 
    	
287,204
    	
 
    	
301,780
    	
 
    	
512,706
    	
 
    	
554,666
    	
 
    
	
Operation and   maintenance
    	
 
    	
112,556
    	
 
    	
118,261
    	
 
    	
214,782
    	
 
    	
218,978
    	
 
    
	
Depreciation and   amortization
    	
 
    	
40,722
    	
 
    	
39,110
    	
 
    	
81,707
    	
 
    	
74,393
    	
 
    
	
General taxes   and other assessments
    	
 
    	
55,039
    	
 
    	
50,544
    	
 
    	
99,926
    	
 
    	
90,932
    	
 
    
	
Total   Operating Expenses
    	
 
    	
692,278
    	
 
    	
644,153
    	
 
    	
1,228,151
    	
 
    	
1,148,927
    	
 
    
	
OPERATING   INCOME
    	
 
    	
194,173
    	
 
    	
197,597
    	
 
    	
310,740
    	
 
    	
302,310
    	
 
    
	
Equity in earnings   of unconsolidated affiliates
    	
 
    	
(27,414
    	
)
    	
7,344
    	
 
    	
(21,522
    	
)
    	
7,609
    	
 
    
	
Other expenses —   net
    	
 
    	
(391
    	
)
    	
(1,953
    	
)
    	
(1,171
    	
)
    	
(1,475
    	
)
    
	
Interest expense
    	
 
    	
7,637
    	
 
    	
14,255
    	
 
    	
27,834
    	
 
    	
30,490
    	
 
    
	
INCOME   BEFORE INCOME TAXES
    	
 
    	
158,731
    	
 
    	
188,733
    	
 
    	
260,213
    	
 
    	
277,954
    	
 
    
	
INCOME   TAX (BENEFIT) EXPENSE
    	
 
    	
27,223
    	
 
    	
70,778
    	
 
    	
(3,887
    	
)
    	
104,232
    	
 
    
	
NET   INCOME
    	
 
    	
$
    	
131,508
    	
 
    	
$
    	
117,955
    	
 
    	
$
    	
264,100
    	
 
    	
$
    	
173,722
    	
 
    
	
Non-controlling   interest
    	
 
    	
(4,372
    	
)
    	
(5,439
    	
)
    	
(10,150
    	
)
    	
(7,974
    	
)
    
	
Dividends on   Washington Gas Light Company preferred stock
    	
 
    	
330
    	
 
    	
330
    	
 
    	
660
    	
 
    	
660
    	
 
    
	
NET   INCOME APPLICABLE TO COMMON STOCK
    	
 
    	
$
    	
135,550
    	
 
    	
$
    	
123,064
    	
 
    	
$
    	
273,590
    	
 
    	
$
    	
181,036
    	
 
    
	
WEIGHTED   AVERAGE COMMON SHARES OUTSTANDING
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Basic
    	
 
    	
51,358
    	
 
    	
51,217
    	
 
    	
51,336
    	
 
    	
51,192
    	
 
    
	
Diluted
    	
 
    	
51,577
    	
 
    	
51,476
    	
 
    	
51,561
    	
 
    	
51,458
    	
 
    
	
EARNINGS   PER AVERAGE COMMON SHARE
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Basic
    	
 
    	
$
    	
2.64
    	
 
    	
$
    	
2.40
    	
 
    	
$
    	
5.33
    	
 
    	
$
    	
3.54
    	
 
    
	
Diluted
    	
 
    	
$
    	
2.63
    	
 
    	
$
    	
2.39
    	
 
    	
$
    	
5.31
    	
 
    	
$
    	
3.52
    	
 
    
	
DIVIDENDS   DECLARED PER COMMON SHARE
    	
 
    	
$
    	
0.5150
    	
 
    	
$
    	
0.5100
    	
 
    	
$
    	
1.0250
    	
 
    	
$
    	
0.9975
    	
 
    

 

The accompanying notes are an integral part of these statements.

 

2

 

WGL Holdings, Inc.

Condensed Consolidated Statements of Comprehensive Income (Unaudited)

 

	
 
    	
 
    	
Three Months Ended
   March 31,
    	
 
    	
Six Months Ended March 31,
    	
 
    
	
(In thousands)
    	
 
    	
2018
    	
 
    	
2017
    	
 
    	
2018
    	
 
    	
2017
    	
 
    
	
NET   INCOME
    	
 
    	
$
    	
131,508
    	
 
    	
$
    	
117,955
    	
 
    	
$
    	
264,100
    	
 
    	
$
    	
173,722
    	
 
    
	
OTHER   COMPREHENSIVE INCOME, BEFORE INCOME TAXES:
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Qualified   cash flow hedging instruments
    	
 
    	
53
    	
 
    	
48
    	
 
    	
105
    	
 
    	
49,503
    	
 
    
	
Pension   and other post-retirement benefit plans
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Change in net   prior service credit
    	
 
    	
(273
    	
)
    	
(217
    	
)
    	
(547
    	
)
    	
(434
    	
)
    
	
Change in   actuarial net loss
    	
 
    	
530
    	
 
    	
588
    	
 
    	
1,057
    	
 
    	
1,176
    	
 
    
	
Total   other comprehensive income before taxes
    	
 
    	
$
    	
310
    	
 
    	
$
    	
419
    	
 
    	
$
    	
615
    	
 
    	
$
    	
50,245
    	
 
    
	
INCOME   TAX EXPENSE RELATED TO OTHER COMPREHENSIVE INCOME
    	
 
    	
104
    	
 
    	
167
    	
 
    	
165
    	
 
    	
20,580
    	
 
    
	
OTHER   COMPREHENSIVE INCOME
    	
 
    	
$
    	
206
    	
 
    	
$
    	
252
    	
 
    	
$
    	
450
    	
 
    	
$
    	
29,665
    	
 
    
	
COMPREHENSIVE   INCOME
    	
 
    	
$
    	
131,714
    	
 
    	
$
    	
118,207
    	
 
    	
$
    	
264,550
    	
 
    	
$
    	
203,387
    	
 
    
	
Non-controlling   interest
    	
 
    	
(4,372
    	
)
    	
(5,439
    	
)
    	
(10,150
    	
)
    	
(7,974
    	
)
    
	
Dividends   on Washington Gas Light Company preferred stock
    	
 
    	
330
    	
 
    	
330
    	
 
    	
660
    	
 
    	
660
    	
 
    
	
COMPREHENSIVE   INCOME ATTRIBUTABLE TO WGL HOLDINGS
    	
 
    	
$
    	
135,756
    	
 
    	
$
    	
123,316
    	
 
    	
$
    	
274,040
    	
 
    	
$
    	
210,701
    	
 
    

 

The accompanying notes are an integral part of these statements.

 

3

 

WGL Holdings, Inc.

Condensed Consolidated Statements of Cash Flows (Unaudited)

 

	
 
    	
 
    	
Six Months Ended March 31,
    	
 
    
	
(In thousands)
    	
 
    	
2018
    	
 
    	
2017
    	
 
    
	
OPERATING   ACTIVITIES
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Net income
    	
 
    	
$
    	
264,100
    	
 
    	
$
    	
173,722
    	
 
    
	
ADJUSTMENTS TO   RECONCILE NET INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIES
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Depreciation and   amortization
    	
 
    	
81,707
    	
 
    	
74,393
    	
 
    
	
Amortization of:
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Other regulatory   assets and liabilities—net
    	
 
    	
3,548
    	
 
    	
1,797
    	
 
    
	
Debt related   costs
    	
 
    	
1,351
    	
 
    	
873
    	
 
    
	
Deferred income   taxes
    	
 
    	
(192
    	
)
    	
77,278
    	
 
    
	
Dividends   received from equity method investments
    	
 
    	
7,252
    	
 
    	
—
    	
 
    
	
Accrued/deferred   pension and other post-retirement benefit cost
    	
 
    	
5,275
    	
 
    	
10,819
    	
 
    
	
Earnings in   equity interest
    	
 
    	
(12,478
    	
)
    	
(7,609
    	
)
    
	
Compensation   expense related to stock-based awards
    	
 
    	
9,833
    	
 
    	
8,605
    	
 
    
	
Provision for   doubtful accounts
    	
 
    	
12,548
    	
 
    	
3,373
    	
 
    
	
Impairment loss
    	
 
    	
34,000
    	
 
    	
—
    	
 
    
	
Unrealized   (gain) loss on derivative contracts
    	
 
    	
(9,367
    	
)
    	
(73,603
    	
)
    
	
Amortization of   investment tax credits
    	
 
    	
(3,695
    	
)
    	
(3,553
    	
)
    
	
Other non-cash   charges (credits)—net
    	
 
    	
(480
    	
)
    	
3,401
    	
 
    
	
Changes in   operating assets and liabilities (Note 16)
    	
 
    	
(29,019
    	
)
    	
(174,626
    	
)
    
	
Net Cash   Provided by Operating Activities
    	
 
    	
364,383
    	
 
    	
94,870
    	
 
    
	
FINANCING   ACTIVITIES
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Common stock   issued
    	
 
    	
—
    	
 
    	
298
    	
 
    
	
Long-term debt   issued
    	
 
    	
550,000
    	
 
    	
50,000
    	
 
    
	
Long-term debt   retired
    	
 
    	
(250,000
    	
)
    	
—
    	
 
    
	
Debt issuance   costs
    	
 
    	
(2,503
    	
)
    	
(404
    	
)
    
	
Notes payable   issued —net
    	
 
    	
(136,000
    	
)
    	
230,806
    	
 
    
	
Contributions   from non-controlling interest
    	
 
    	
9,808
    	
 
    	
10,816
    	
 
    
	
Distributions to   non-controlling interest
    	
 
    	
(256
    	
)
    	
—
    	
 
    
	
Project financing
    	
 
    	
989
    	
 
    	
9,429
    	
 
    
	
Dividends on   common stock and preferred stock
    	
 
    	
(53,043
    	
)
    	
(49,220
    	
)
    
	
Other financing   activities—net
    	
 
    	
(6,558
    	
)
    	
(1,296
    	
)
    
	
Net Cash   Provided by Financing Activities
    	
 
    	
112,437
    	
 
    	
250,429
    	
 
    
	
INVESTING   ACTIVITIES
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Capital   expenditures (excluding Allowance for Funds Used During Construction)
    	
 
    	
(210,279
    	
)
    	
(266,545
    	
)
    
	
Investments in   non-utility interests
    	
 
    	
(228,746
    	
)
    	
(89,295
    	
)
    
	
Distributions   and receipts from non-utility interests
    	
 
    	
—
    	
 
    	
2,827
    	
 
    
	
Proceeds from   the sale of assets
    	
 
    	
—
    	
 
    	
10,466
    	
 
    
	
Loans to   external parties
    	
 
    	
—
    	
 
    	
(863
    	
)
    
	
Net Cash Used in   Investing Activities
    	
 
    	
(439,025
    	
)
    	
(343,410
    	
)
    
	
INCREASE   IN CASH AND CASH EQUIVALENTS
    	
 
    	
37,795
    	
 
    	
1,889
    	
 
    
	
Cash and Cash   Equivalents at Beginning of Year
    	
 
    	
8,524
    	
 
    	
5,573
    	
 
    
	
Cash   and Cash Equivalents at End of Period
    	
 
    	
$
    	
46,319
    	
 
    	
$
    	
7,462
    	
 
    
	
SUPPLEMENTAL   DISCLOSURES OF CASH FLOW INFORMATION (Note 16)
    	
 
    	
 
    	
 
    	
 
    	
 
    

 

The accompanying notes are an integral part of these statements.

 

4

 

Washington Gas Light Company

Condensed Balance Sheets (Unaudited)

 

	
(In thousands)
    	
 
    	
March 31,
   2018
    	
 
    	
September 30,
   2017
    	
 
    
	
ASSETS
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Property,   Plant and Equipment
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
At original cost
    	
 
    	
$
    	
5,413,647
    	
 
    	
$
    	
5,310,337
    	
 
    
	
Accumulated   depreciation and amortization
    	
 
    	
(1,460,140
    	
)
    	
(1,422,622
    	
)
    
	
Net property,   plant and equipment
    	
 
    	
3,953,507
    	
 
    	
3,887,715
    	
 
    
	
Current   Assets
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Cash and cash   equivalents
    	
 
    	
13,724
    	
 
    	
1
    	
 
    
	
Receivables
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Accounts receivable
    	
 
    	
292,504
    	
 
    	
190,740
    	
 
    
	
Gas costs and   other regulatory assets
    	
 
    	
8,723
    	
 
    	
21,705
    	
 
    
	
Unbilled   revenues
    	
 
    	
181,034
    	
 
    	
107,967
    	
 
    
	
Allowance for   doubtful accounts
    	
 
    	
(28,620
    	
)
    	
(23,741
    	
)
    
	
Net receivables
    	
 
    	
453,641
    	
 
    	
296,671
    	
 
    
	
Materials and   supplies—principally at average cost
    	
 
    	
18,546
    	
 
    	
20,126
    	
 
    
	
Storage gas
    	
 
    	
27,469
    	
 
    	
92,753
    	
 
    
	
Prepaid taxes
    	
 
    	
21,587
    	
 
    	
23,350
    	
 
    
	
Other   prepayments
    	
 
    	
25,961
    	
 
    	
13,238
    	
 
    
	
Receivables from   associated companies
    	
 
    	
30,715
    	
 
    	
32,362
    	
 
    
	
Derivatives
    	
 
    	
1,280
    	
 
    	
5,061
    	
 
    
	
Other
    	
 
    	
120
    	
 
    	
102
    	
 
    
	
Total current   assets
    	
 
    	
593,043
    	
 
    	
483,664
    	
 
    
	
Deferred   Charges and Other Assets
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Regulatory   assets
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Gas costs
    	
 
    	
66,694
    	
 
    	
90,136
    	
 
    
	
Pension and   other post-retirement benefits
    	
 
    	
128,745
    	
 
    	
138,573
    	
 
    
	
Other
    	
 
    	
117,813
    	
 
    	
104,538
    	
 
    
	
Prepaid   post-retirement benefits
    	
 
    	
236,249
    	
 
    	
230,283
    	
 
    
	
Derivatives
    	
 
    	
14,350
    	
 
    	
16,244
    	
 
    
	
Other
    	
 
    	
5,244
    	
 
    	
3,561
    	
 
    
	
Total deferred   charges and other assets
    	
 
    	
569,095
    	
 
    	
583,335
    	
 
    
	
   Total Assets
    	
 
    	
$
    	
5,115,645
    	
 
    	
$
    	
4,954,714
    	
 
    
	
CAPITALIZATION   AND LIABILITIES
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Capitalization
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Common   shareholder’s equity
    	
 
    	
$
    	
1,383,302
    	
 
    	
$
    	
1,164,749
    	
 
    
	
Preferred stock
    	
 
    	
28,173
    	
 
    	
28,173
    	
 
    
	
Long-term debt
    	
 
    	
1,084,757
    	
 
    	
1,134,461
    	
 
    
	
Total   capitalization
    	
 
    	
2,496,232
    	
 
    	
2,327,383
    	
 
    
	
Current   Liabilities
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Current   maturities of long-term debt
    	
 
    	
50,000
    	
 
    	
—
    	
 
    
	
Notes payable   and project financing
    	
 
    	
78,772
    	
 
    	
166,772
    	
 
    
	
Accounts payable   and other accrued liabilities
    	
 
    	
176,282
    	
 
    	
219,827
    	
 
    
	
Wages payable
    	
 
    	
24,356
    	
 
    	
16,508
    	
 
    
	
Accrued interest
    	
 
    	
3,915
    	
 
    	
3,967
    	
 
    
	
Dividends   declared
    	
 
    	
22,286
    	
 
    	
22,098
    	
 
    
	
Customer   deposits and advance payments
    	
 
    	
47,455
    	
 
    	
64,194
    	
 
    
	
Gas costs and   other regulatory liabilities
    	
 
    	
53,983
    	
 
    	
22,814
    	
 
    
	
Accrued taxes
    	
 
    	
24,805
    	
 
    	
12,808
    	
 
    
	
Payables to   associated companies
    	
 
    	
111,555
    	
 
    	
94,844
    	
 
    
	
Derivatives
    	
 
    	
17,381
    	
 
    	
30,263
    	
 
    
	
Other
    	
 
    	
7,107
    	
 
    	
7,473
    	
 
    
	
Total current   liabilities
    	
 
    	
617,897
    	
 
    	
661,568
    	
 
    
	
Deferred   Credits
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Unamortized   investment tax credits
    	
 
    	
3,742
    	
 
    	
4,100
    	
 
    
	
Deferred income   taxes
    	
 
    	
519,813
    	
 
    	
888,385
    	
 
    
	
Accrued pensions   and benefits
    	
 
    	
185,248
    	
 
    	
179,814
    	
 
    
	
Asset retirement   obligations
    	
 
    	
298,007
    	
 
    	
291,871
    	
 
    
	
Regulatory   liabilities
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Accrued asset   removal costs
    	
 
    	
280,026
    	
 
    	
292,173
    	
 
    
	
Other   post-retirement benefits
    	
 
    	
126,952
    	
 
    	
134,181
    	
 
    
	
Excess deferred   taxes and other
    	
 
    	
449,225
    	
 
    	
9,403
    	
 
    
	
Derivatives
    	
 
    	
92,816
    	
 
    	
112,299
    	
 
    
	
Other
    	
 
    	
45,687
    	
 
    	
53,537
    	
 
    
	
Total deferred   credits
    	
 
    	
2,001,516
    	
 
    	
1,965,763
    	
 
    
	
Commitments   and Contingencies (Note 13)
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Total   Capitalization and Liabilities
    	
 
    	
$
    	
5,115,645
    	
 
    	
$
    	
4,954,714
    	
 
    

 

The accompanying notes are an integral part of these statements.

 

5

 

Washington Gas Light Company

Condensed Statements of Income (Unaudited)

 

	
  
    	
 
    	
Three Months Ended March 31,
    	
 
    	
Six Months Ended March 31,
    	
 
    
	
(In thousands)
    	
 
    	
2018
    	
 
    	
2017
    	
 
    	
2018
    	
 
    	
2017
    	
 
    
	
OPERATING   REVENUES
    	
 
    	
$
    	
532,040
    	
 
    	
$
    	
475,021
    	
 
    	
$
    	
909,510
    	
 
    	
$
    	
809,007
    	
 
    
	
OPERATING   EXPENSES
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Utility cost of   gas
    	
 
    	
205,296
    	
 
    	
143,189
    	
 
    	
330,041
    	
 
    	
225,620
    	
 
    
	
Operation and   maintenance
    	
 
    	
90,984
    	
 
    	
86,754
    	
 
    	
170,535
    	
 
    	
168,920
    	
 
    
	
Depreciation and   amortization
    	
 
    	
33,468
    	
 
    	
33,116
    	
 
    	
67,114
    	
 
    	
63,242
    	
 
    
	
General taxes   and other assessments
    	
 
    	
50,493
    	
 
    	
46,104
    	
 
    	
90,476
    	
 
    	
82,359
    	
 
    
	
Total   Operating Expenses
    	
 
    	
380,241
    	
 
    	
309,163
    	
 
    	
658,166
    	
 
    	
540,141
    	
 
    
	
OPERATING   INCOME
    	
 
    	
151,799
    	
 
    	
165,858
    	
 
    	
251,344
    	
 
    	
268,866
    	
 
    
	
Other   expense — net
    	
 
    	
(1,227
    	
)
    	
(1,357
    	
)
    	
(3,019
    	
)
    	
(2,136
    	
)
    
	
Interest   expense
    	
 
    	
14,672
    	
 
    	
13,005
    	
 
    	
29,645
    	
 
    	
25,767
    	
 
    
	
INCOME   BEFORE INCOME TAXES
    	
 
    	
135,900
    	
 
    	
151,496
    	
 
    	
218,680
    	
 
    	
240,963
    	
 
    
	
INCOME   TAX EXPENSE
    	
 
    	
27,816
    	
 
    	
57,886
    	
 
    	
52,670
    	
 
    	
91,892
    	
 
    
	
NET   INCOME
    	
 
    	
$
    	
108,084
    	
 
    	
$
    	
93,610
    	
 
    	
$
    	
166,010
    	
 
    	
$
    	
149,071
    	
 
    
	
Dividends   on Washington Gas preferred stock
    	
 
    	
330
    	
 
    	
330
    	
 
    	
660
    	
 
    	
660
    	
 
    
	
NET   INCOME APPLICABLE TO COMMON STOCK
    	
 
    	
$
    	
107,754
    	
 
    	
$
    	
93,280
    	
 
    	
$
    	
165,350
    	
 
    	
$
    	
148,411
    	
 
    

 

The accompanying notes are an integral part of these statements.

 

6

 

Washington Gas Light Company

Condensed Statements of Comprehensive Income (Unaudited)

 

	
 
    	
 
    	
Three Months Ended
   March 31,
    	
 
    	
Six Months Ended
   March 31,
    	
 
    
	
(In thousands)
    	
 
    	
2018
    	
 
    	
2017
    	
 
    	
2018
    	
 
    	
2017
    	
 
    
	
NET   INCOME
    	
 
    	
$
    	
108,084
    	
 
    	
$
    	
93,610
    	
 
    	
$
    	
166,010
    	
 
    	
$
    	
149,071
    	
 
    
	
OTHER   COMPREHENSIVE INCOME, BEFORE INCOME TAXES:
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Pension   and other post-retirement benefit plans
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Change in net   prior service credit
    	
 
    	
(273
    	
)
    	
(217
    	
)
    	
(547
    	
)
    	
(434
    	
)
    
	
Change in   actuarial net loss
    	
 
    	
530
    	
 
    	
588
    	
 
    	
1,057
    	
 
    	
1,176
    	
 
    
	
Total   pension and other post-retirement benefit plans
    	
 
    	
$
    	
257
    	
 
    	
$
    	
371
    	
 
    	
$
    	
510
    	
 
    	
$
    	
742
    	
 
    
	
INCOME   TAX EXPENSE RELATED TO OTHER COMPREHENSIVE INCOME
    	
 
    	
74
    	
 
    	
148
    	
 
    	
135
    	
 
    	
295
    	
 
    
	
OTHER   COMPREHENSIVE INCOME
    	
 
    	
$
    	
183
    	
 
    	
$
    	
223
    	
 
    	
$
    	
375
    	
 
    	
$
    	
447
    	
 
    
	
COMPREHENSIVE   INCOME
    	
 
    	
$
    	
108,267
    	
 
    	
$
    	
93,833
    	
 
    	
$
    	
166,385
    	
 
    	
$
    	
149,518
    	
 
    

 

The accompanying notes are an integral part of these statements.

 

7

 

Washington Gas Light Company

Condensed Statements of Cash Flows (Unaudited)

 

	
 
    	
 
    	
Six Months Ended March 31,
    	
 
    
	
(In thousands)
    	
 
    	
2018
    	
 
    	
2017
    	
 
    
	
OPERATING   ACTIVITIES
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Net income
    	
 
    	
$
    	
166,010
    	
 
    	
$
    	
149,071
    	
 
    
	
ADJUSTMENTS TO   RECONCILE NET INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIES
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Depreciation and   amortization
    	
 
    	
67,114
    	
 
    	
63,242
    	
 
    
	
Amortization of:
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Other regulatory   assets and liabilities—net
    	
 
    	
3,548
    	
 
    	
1,797
    	
 
    
	
Debt related   costs
    	
 
    	
803
    	
 
    	
692
    	
 
    
	
Deferred income   taxes
    	
 
    	
52,889
    	
 
    	
61,408
    	
 
    
	
Accrued/deferred   pension and other post-retirement benefit cost
    	
 
    	
5,285
    	
 
    	
7,551
    	
 
    
	
Compensation   expense related to stock-based awards
    	
 
    	
8,361
    	
 
    	
8,094
    	
 
    
	
Provision for   doubtful accounts
    	
 
    	
12,223
    	
 
    	
2,410
    	
 
    
	
Unrealized (gain)   loss on derivative contracts
    	
 
    	
(10,846
    	
)
    	
(36,145
    	
)
    
	
Amortization of   investment tax credits
    	
 
    	
(358
    	
)
    	
(378
    	
)
    
	
Other non-cash   charges (credits)—net
    	
 
    	
(480
    	
)
    	
2,343
    	
 
    
	
Changes in   operating assets and liabilities (Note 16)
    	
 
    	
(106,535
    	
)
    	
(133,126
    	
)
    
	
Net Cash Provided   by Operating Activities
    	
 
    	
198,014
    	
 
    	
126,959
    	
 
    
	
FINANCING   ACTIVITIES
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Capital   contributions from WGL Holdings, Inc.
    	
 
    	
100,000
    	
 
    	
—
    	
 
    
	
Debt issuance   costs
    	
 
    	
(237
    	
)
    	
(399
    	
)
    
	
Notes payable   issued —net
    	
 
    	
(88,000
    	
)
    	
121,329
    	
 
    
	
Project   financing
    	
 
    	
—
    	
 
    	
2,034
    	
 
    
	
Dividends on   common stock and preferred stock
    	
 
    	
(44,336
    	
)
    	
(42,921
    	
)
    
	
Other financing   activities—net
    	
 
    	
(6,197
    	
)
    	
(1,226
    	
)
    
	
Net Cash (Used   in) Provided by Financing Activities
    	
 
    	
(38,770
    	
)
    	
78,817
    	
 
    
	
INVESTING   ACTIVITIES
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Capital   expenditures (excluding Allowance for Funds Used During Construction)
    	
 
    	
(145,521
    	
)
    	
(205,776
    	
)
    
	
Net Cash Used In   Investing Activities
    	
 
    	
(145,521
    	
)
    	
(205,776
    	
)
    
	
INCREASE   IN CASH AND CASH EQUIVALENTS
    	
 
    	
13,723
    	
 
    	
—
    	
 
    
	
Cash and Cash   Equivalents at Beginning of Year
    	
 
    	
1
    	
 
    	
1
    	
 
    
	
Cash   and Cash Equivalents at End of Period
    	
 
    	
$
    	
13,724
    	
 
    	
$
    	
1
    	
 
    
	
SUPPLEMENTAL   DISCLOSURES OF CASH FLOW INFORMATION (Note 16)
    	
 
    	
 
    	
 
    	
 
    	
 
    

 

The accompanying notes are an integral part of these statements.

 

8

 

WGL Holdings, Inc.

Washington Gas Light Company

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

NOTE 1. ACCOUNTING POLICIES

 

Basis of Presentation

 

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

 

The condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (SEC). Therefore, certain financial information and note disclosures accompanying annual financial statements prepared in accordance with generally accepted accounting principles in the United States of America (GAAP) are omitted in this interim report. The interim condensed consolidated financial statements and accompanying notes should be read in conjunction with the combined Annual Report on Form 10-K for WGL and Washington Gas for the fiscal year ended September 30, 2017 . Due to the seasonal nature of our businesses, the results of operations for the periods presented in this report are not necessarily indicative of actual results for the full fiscal years ending September 30, 2018 and 2017 of either WGL or Washington Gas.

 

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

 

For a complete description of our accounting policies, refer to Note 1— Accounting Policies of the Notes to Consolidated Financial Statements of the combined Annual Report on Form 10-K for WGL and Washington Gas for the fiscal year ended September 30, 2017 .

 

Impairment of Long-Lived Assets and Equity Method Investments

 

Management regularly reviews property and equipment and other long-lived assets, including certain definite-lived intangible assets and our equity method investments for possible impairment. For our equity method investments, an impairment is recorded when the investment has experienced decline in value that is other-than-temporary. Additionally, if the projects in which we hold an investment recognize an impairment loss, we would record our proportionate share of that impairment loss and evaluate the investment for decline in value that is other-than-temporary. This review occurs quarterly, or more frequently if events or changes in circumstances indicate the carrying amount of the asset may not be recoverable.

 

During the three months ended March 31, 2018, management determined that, in light of the recent actions taken by the courts and regulators related to our equity method investment in Constitution Pipeline Company, LLC (Constitution), the decline in value was other-than-temporary, resulting in WGL recording an impairment charge of $ 34.0 million in “Equity in earnings of unconsolidated affiliates” reducing our investment in Constitution to its estimated fair market value. During the three months ended March 31, 2017, WGL did not record any impairments related to our long-lived assets. Refer to Note 9— Fair Value Measurements  and Note 11— Other Investments  of the Notes to the Condensed Consolidated Financial Statements for a further discussion of Constitution.

 

Change in Accounting Principle and Storage Gas Valuation

 

On October 1, 2017, Washington Gas and WGL Energy Services implemented a voluntary change in the application of an accounting principle with respect to accounting for natural gas, propane, and odorant inventories. Washington Gas and WGL Energy Services now apply the average cost methodology under which the cost of units carried in inventory is based on the weighted average cost per unit of inventory. Prior to this change, Washington Gas and WGL Energy Services applied the First-in First-out (FIFO) method of accounting for inventory under which the oldest inventory items were recorded as being sold first.

 

9

 

WGL Holdings, Inc.

Washington Gas Light Company

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

We believe the new policy is preferable as it conforms to the method predominately used by our peers, better reflects the physical flow of inventory, conforms to the method used for certain of our other inventories, and will simplify recordkeeping requirements.

 

The change in accounting principle was implemented on a prospective basis, therefore, we did not retrospectively adjust any prior periods or record a cumulative effect adjustment, as discussed below.

 

Washington Gas implemented the change in accounting principle on a prospective basis in accordance with Accounting Standards Codification (ASC) No. 980, Regulated Operations which permits regulated entities to implement changes for financial reporting purposes in the same way those changes are implemented for regulatory reporting purposes when the change impacts allowable costs. WGL Energy Services implemented the change on a prospective basis as the impact on its financial statements for all periods presented, including the cumulative effect at October 1, 2017, was immaterial. The difference during the quarter between the prior FIFO method and the new average cost method was immaterial.

 

WGL Midstream continues to account for its inventory using the weighted average cost method.

 

On October 1, 2017, WGL adopted ASU 2015-11, Inventory (Topic 330) - Simplifying the Measurement of Inventory . This standard modified the previous calculation for valuing inventory. As a result of the new standard, beginning October 1, 2017, our inventory balances are stated at the lower of cost or net realizable value. Prior to October 1, 2017, our inventory balances were stated at the lower of cost or market. Interim period inventory losses attributable to lower of cost or net realizable value adjustments may be reversed if the net realizable value of the inventory is recovered by the end of the same fiscal year.

 

For more information see ASU 2015-11 in the accounting standards adopted in fiscal year 2018 table below . For the three and six months ended March 31, 2018 and 2017, WGL and Washington Gas did not record any lower of cost or net realizable value adjustments.

 

10

 

WGL Holdings, Inc.

Washington Gas Light Company

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

ACCOUNTING STANDARDS ADOPTED IN FISCAL YEAR 2018

 

	
Standard
    	
 
    	
Description
    	
 
    	
Date of adoption
    	
 
    	
Effect on the financial statements or
   other significant matters
    
	
ASU 2018-05, Income Taxes (Topic   740)—Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin   No. 118
    	
 
    	
This standard adds to the Codification various SEC   paragraphs pursuant to the Issuance of Staff Accounting Bulletin (SAB)   No. 118. and addresses the specific situation in which the initial   accounting for certain income tax effects of the Tax Act will not be complete   at the time that financial statements were issued covering the reporting   period that includes the enactment date of December 22, 2017.
    	
 
    	
October 1, 2017
    	
 
    	
Quarterly disclosures were incorporated in the   Income Tax footnote in the first quarter FY 2018 10-Q filed with the SEC on   February 8, 2018, which will be updated each quarter until the end of   the measurement period. See Note 7,  Income Taxes,   of the   Notes to Condensed Consolidated   Financial Statements for additional information.
    
	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
ASU 2016-09, Compensation—Stock Compensation   (Topic 718): Improvements to Employee Share-Based Payment Accounting
    	
 
    	
This standard simplifies several aspects of the   accounting for share-based payment transactions, including accounting for   income taxes, forfeitures, statutory tax withholding requirements and   classification in the statement of cash flows.
    	
 
    	
October 1, 2017
    	
 
    	
Forfeitures  - WGL has   elected to continue to estimate forfeitures for its share-based payment   awards rather than account for forfeitures when they occur.

 

Income Taxes  - On   October 1, 2017, WGL and Washington Gas recorded $4.3 million and $4.2   million, respectively, on a modified retrospective basis, as a cumulative   effect adjustment to retained earnings. For the six months ended   March 31, 2018, WGL and Washington Gas recorded $3.4 million and $3.2   million, respectively, to current tax expense for excess tax benefits related   to performance shares that vested in the quarter.

 

Cash Flows  - WGL and   Washington Gas reclassified $3.6 million and $3.5 million, respectively,   retroactively on the statement of cash flows for the six months ended   March 31, 2017 from operating to financing activities related to shares   withheld to pay for employee taxes. For the presentation of excess tax   benefits in the statement of cash flows, WGL elected to present the change   prospectively.

 

Statutory Tax Withholding    - No changes were made.
    

 

11

 

WGL Holdings, Inc.

Washington Gas Light Company

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

	
ASU 2016-06, Derivatives and Hedging (Topic 815)   - Contingent Put and Call Options in Debt Instruments
    	
 
    	
The amendments in this update clarify the   requirements for assessing whether contingent call (put) options that can   accelerate the payment of principal on debt
   instruments are clearly and closely related to their debt hosts. The guidance   states that for contingent call (put) options to be considered clearly and   closely related, they can be indexed only to interest rates or credit risk.   An entity is required to assess the embedded call (put) options solely in   accordance with the four-step decision sequence.
    	
 
    	
October 1, 2017
    	
 
    	
The implementation of this standard did not have an   effect on WGL or Washington Gas’ financial statements.
    
	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
ASU 2015-11, Inventory (Topic 330) -   Simplifying the Measurement of Inventory
    	
 
    	
This standard reduces the complexity in the current measurement   of inventory. This ASU requires inventory to be measured at the lower of cost   and net realizable value, where net realizable value is the estimated selling   price in the ordinary course of business less reasonably predictable costs of   completion, disposal and transportation (no change to the definition of net   realizable value). The amendment eliminates the guidance that requires   inventory to be stated at the lower of cost or market, which includes   consideration of the replacement cost of inventory and the net realizable   value of inventory, less an approximately normal profit margin.
    	
 
    	
October 1, 2017
    	
 
    	
The implementation of this standard did not have a   material effect on WGL or Washington Gas’ financial statements.
    

 

12

 

WGL Holdings, Inc.

Washington Gas Light Company

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

OTHER NEWLY ISSUED ACCOUNTING STANDARDS

 

	
Standard
    	
 
    	
Description
    	
 
    	
Required date of
   adoption
    	
 
    	
Effect on the financial statements
   or other significant matters
    
	
ASU 2017-07, Compensation - Retirement Benefits   (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net   Periodic Postretirement Benefit Cost
    	
 
    	
This standard requires entities to report the   service cost component in the same financial statement line item as other   compensation costs arising from services rendered by the pertinent employees   during the period.  The other components of net benefit cost are to be   presented separately from service cost and outside of operating income.    In addition, only the service cost component of net benefit cost is eligible   for capitalization.  Changes to the presentation of service costs and   other components of net benefit cost should be applied retrospectively.   Changes in capitalization practices should be implemented prospectively.
    	
 
    	
October 1, 2018
    	
 
    	
We are currently evaluating the interaction of this   standard with the various regulatory provisions concerning pensions and   post-retirement benefit costs. We anticipate that the change in   capitalization of retirement benefits will not have a material impact on WGL   or Washington Gas’ financial statements.
    
	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
ASU 2016-15, Statement of Cash Flows (Topic 230)—Classification   of Certain Cash Receipts and Cash Payments (a consensus of the FASB Emerging   Issues Task Force)
    	
 
    	
This update provides guidance on the classification   of certain cash receipts and payments in the statement of cash flows.
    	
 
    	
October 1, 2018*
    	
 
    	
We are in the process of evaluating the impact the   adoption of this standard will have on our financial statements. We do not   anticipate that adoption of this standard will have a material effect on WGL   or Washington Gas’ financial statements.
    
	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
ASU 2014-09, Revenue from Contracts with   Customers (Topic 606), including subsequent ASUs clarifying the guidance.
    	
 
    	
ASU 2014-09 establishes a comprehensive revenue   recognition model clarifying the method used to determine the timing and   requirements for revenue recognition from contracts with customers. The   disclosure requirements under the new standard will enable users of financial   statements to understand the nature, amount, timing, and uncertainty of   revenue and cash flows arising from contracts with customers.
    	
 
    	
October 1, 2018
    	
 
    	
An implementation team is currently evaluating all   revenue streams and reviewing contracts with customers, as well as, related   financial statement disclosures to determine the impact the adoption of this   standard will have on our financial statements. WGL is also monitoring final   conclusions for industry specific implementation issues that could impact the   timing of revenue recognition for our regulated utility tariff based sales,   including the evaluation of collectability from customers if a utility has   regulatory mechanisms to help assure recovery of uncollected accounts from   ratepayers and accounting for contributions in aid of construction (CIAC).   WGL will adopt using the modified retrospective approach.
    

 

13

 

WGL Holdings, Inc.

Washington Gas Light Company

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

	
ASU 2016-01, Financial Instruments (Subtopic   825-10): Recognition and Measurement of Financial Assets and Financial   Liabilities including subsequent ASUs clarifying the guidance.
    	
 
    	
The new standard amends certain disclosure   requirements associated with the fair value of financial instruments, and   significantly revises an entity’s accounting related to the classification   and measurement of investments in equity securities and the presentation of   certain fair value changes for financial liabilities measured at fair value.
    	
 
    	
October 1, 2018*
    	
 
    	
We have performed a preliminary evaluation and the   adoption of this standard will primarily impact the disclosure of our   financial instruments in our Fair Value Measurements Footnote however, we do   not expect the impact to be material.
    
	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
ASU 2018-02, Income Statement—Reporting Comprehensive   Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated   Other Comprehensive Income
    	
 
    	
This update provides an option to reclassify the   stranded tax effects resulting from the enactment of the TCJA from   accumulated other comprehensive income to retained earnings.  The   amendment only relates to the reclassification of the income tax effects of   the TCJA and the underlying guidance that requires that the effect of a   change in tax laws or rates be included in income from continuing operations   is not affected.

 

Election to reclassify the income tax effects in   accumulated other comprehensive income (AOCI) to retained earnings is   voluntary and should be disclosed if AOCI is not adjusted.

 

Early adoption is permitted and can be applied   either at the beginning of the period adopted or retrospectively to each   period (or periods) in which the effect of the change in the U.S. federal   corporate income tax rate in the Tax is recognized.
    	
 
    	
October 1, 2019
    	
 
    	
WGL applied the effect of the change in the U.S.   federal corporate income tax rate due to the TCJA in the first quarter of FY   2018. The updates were recorded to the deferred tax asset and liability   accounts and the income statement. Tax entries recorded to AOCI for the   employee benefit plans, stock compensation and the cash flow hedge were not   adjusted to the new rate. We are performing an analysis to determine the   amount to adjust to the new tax rate. Early adoption is expected to occur in   fourth quarter of fiscal year 2018.
    
	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
ASU 2016-02, Leases (Topic 842) including   subsequent ASUs clarifying the guidance.
    	
 
    	
This standard requires recognition of a right-to-use   asset and lease liability on the statement of financial position and   disclosure of key information about leasing arrangements. The standard   requires application using a modified retrospective approach.
    	
 
    	
October 1, 2019*
    	
 
    	
We are in the process of evaluating the impact the   adoption of this standard will have on our financial statements.
    
	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
ASU 2016-13, Financial Instruments-Credit Losses   (Topic 326): Measurement of Credit Losses on Financial Instruments
    	
 
    	
For credit losses on financial instruments, this   standard changes the current incurred loss impairment methodology to an   expected loss methodology and requires consideration of a broader range   of reasonable and supportable information to determine credit loss estimates.
    	
 
    	
October 1, 2020*
    	
 
    	
We are in the process of evaluating the impact the   adoption of this standard will have on our financial statements.
    

 

14

 

WGL Holdings, Inc.

Washington Gas Light Company

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

	
ASU 2017-12, Derivatives and Hedging (Topic 815):   Targeted improvements to Accounting for Hedging Activities
    	
 
    	
The new standard amends the hedge accounting and   recognition requirements by expanding an entity’s ability to hedge   non-financial and financial risk components and reduce the complexity in fair   value hedges of interest rate risk. Additionally, this standard eliminates   the requirement to separately measure and disclose the ineffective portion of   the hedge with the entire change in the fair value of a hedging instrument to   be presented in the same income statement line as the hedged item.
    	
 
    	
October 1, 2020*
    	
 
    	
We are in the process of evaluating the impact the   adoption of this standard will have on our financial statements.
    

 

*Subject to acceleration if the proposed merger with AltaGas is consummated due to the difference in fiscal year end between AltaGas and WGL.

 

NOTE 2. ACCOUNTS PAYABLE AND OTHER ACCRUED LIABILITIES

 

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

 

WGL Holdings, Inc.

 

	
(In millions)
    	
 
    	
March 31, 2018
    	
 
    	
September 30, 2017
    	
 
    
	
Accounts   payable—trade
    	
 
    	
$
    	
294.8
    	
 
    	
$
    	
361.6
    	
 
    
	
Employee   benefits and payroll accruals
    	
 
    	
21.1
    	
 
    	
35.0
    	
 
    
	
Other accrued   liabilities
    	
 
    	
42.1
    	
 
    	
27.2
    	
 
    
	
Total
    	
 
    	
$
    	
358.0
    	
 
    	
$
    	
423.8
    	
 
    

 

Washington Gas Light Company

 

	
(In millions)
    	
 
    	
March 31, 2018
    	
 
    	
September 30, 2017
    	
 
    
	
Accounts   payable—trade
    	
 
    	
$
    	
138.4
    	
 
    	
$
    	
174.9
    	
 
    
	
Employee   benefits and payroll accruals
    	
 
    	
20.0
    	
 
    	
32.4
    	
 
    
	
Other accrued   liabilities
    	
 
    	
17.9
    	
 
    	
12.5
    	
 
    
	
Total
    	
 
    	
$
    	
176.3
    	
 
    	
$
    	
219.8
    	
 
    

 

15

 

WGL Holdings, Inc.

Washington Gas Light Company

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

NOTE 3. SHORT-TERM DEBT

 

WGL and Washington Gas satisfy their short-term financing requirements through the sale of commercial paper, financing arrangements with third-party lenders, or through bank borrowings. Due to the seasonal nature of the regulated utility and retail energy-marketing segments, short-term financing requirements can vary significantly during the year. Revolving credit agreements are maintained to support outstanding commercial paper and to permit short-term borrowing flexibility. The policy of each of WGL and Washington Gas is to maintain bank credit facilities in amounts equal to or greater than their expected maximum commercial paper position. The following is a summary of committed credit available at March 31, 2018 and September 30, 2017 .

 

Committed Credit Available   ($ In millions)

 

	
March 31, 2018
    	
 
    	
WGL (b)
    	
 
    	
Washington Gas
    	
 
    	
Total Consolidated
    	
 
    
	
Committed   credit agreements
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Unsecured   revolving credit facility, expires December 19, 2019 (a)
    	
 
    	
$
    	
650.0
    	
 
    	
$
    	
350.0
    	
 
    	
$
    	
1,000.0
    	
 
    
	
Less:   Commercial Paper
    	
 
    	
(334.0
    	
)
    	
(35.0
    	
)
    	
(369.0
    	
)
    
	
Net   committed credit available
    	
 
    	
$
    	
316.0
    	
 
    	
$
    	
315.0
    	
 
    	
$
    	
631.0
    	
 
    
	
Weighted   average interest rate
    	
 
    	
2.14
    	
%
    	
1.74
    	
%
    	
2.10
    	
%
    
	
September 30,   2017
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Committed credit   agreements
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Unsecured   revolving credit facility, expires December 19, 2019 (a)
    	
 
    	
$
    	
650.0
    	
 
    	
$
    	
350.0
    	
 
    	
$
    	
1,000.0
    	
 
    
	
Less: Commercial   Paper
    	
 
    	
(382.0
    	
)
    	
(123.0
    	
)
    	
(505.0
    	
)
    
	
Net committed   credit available
    	
 
    	
$
    	
268.0
    	
 
    	
$
    	
227.0
    	
 
    	
$
    	
495.0
    	
 
    
	
Weighted average   interest rate
    	
 
    	
1.52
    	
%
    	
1.22
    	
%
    	
1.45
    	
%
    

 

(a) Washington Gas has the right to request extensions with the banks’ approval. Washington Gas’ revolving credit facility permits it to borrow an additional $100 million , with the banks’ approval, for a total of $450 million .

(b) WGL includes WGL Holdings, Inc. and all subsidiaries other than Washington Gas.

 

At March 31, 2018 and September 30, 2017 , there were no outstanding bank loans from WGL’s or Washington Gas’ revolving credit facilities.

 

16

 

WGL Holdings, Inc.

Washington Gas Light Company

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

PROJECT FINANCING

 

Washington Gas previously obtained third-party project financing on behalf of the federal government to provide funds during the construction of certain energy management services projects entered into under Washington Gas’ area-wide contract. In connection with work completed under the area-wide contract, the construction work is performed by WGL Energy Systems on behalf of Washington Gas and an inter-company payable is recorded for work provided by WGL Energy Systems. As work is performed, Washington Gas establishes a receivable representing the government’s obligation to remit principal and interest. The payable and receivable are equal to each other at the end of the construction period, but there may be timing differences in the recognition of the project related payable and receivable during the construction period. When these projects are formally “accepted” by the government and deemed complete, Washington Gas assigns the ownership of the receivable to the third party lender in satisfaction of the obligation and removes both the receivable and the obligation related to the financing from its financial statements. In March 2016, the SCC of VA denied Washington Gas’ further participation in the third party financing arrangement but allowed existing debt arrangements to remain intact until the related obligations were satisfied. At March 31, 2018, there were two contracts remaining totaling $ 43.8 million on the Washington Gas balance sheet as a short-term obligation to third party lenders in “Notes payable and project financing”. Additionally, at March 31, 2018, there was one contract that had not been novated.

 

In December 2016, WGL Energy Systems entered into an agreement to obtain third-party financing and receive funds directly from the third-party lender during the construction period associated with the related energy management service projects. As a result, Washington Gas will no longer be liable under future third-party financing arrangements, for projects entered into under the area-wide contract. The general terms of the financing agreement are the same as the prior financing arrangements between Washington Gas and the third-party lender mentioned above. Washington Gas will continue to record a receivable representing the government’s obligation, and will record an inter-company payable to WGL Energy Systems for the construction work performed for the same amount. At March 31, 2018, there were two contracts remaining totaling $ 12.0 million on the WGL Energy Systems balance sheet as a short-term obligation to third party lenders in “Notes payable and project financing”.

 

As of March 31, 2018 , WGL and Washington Gas recorded $ 98.8 million and $ 88.9 million , respectively, in “Unbilled revenues” on the balance sheet, and $ 55.8 million and $ 43.8 million , respectively, in a corresponding short-term obligation to third-party lenders in “Notes payable and project financing”, for energy management services projects that were not complete. The variance between the Washington Gas’ recorded unbilled revenues and corresponding short-term obligation to third-party lenders is due to the one contract that has not been novated. As of September 30, 2017 , WGL and Washington Gas recorded $85.6 million and $ 78.2 million in “Unbilled revenues” on the balance sheet and $54.8 million and $ 43.8 million , respectively, in a corresponding short-term obligation to third party lenders in “Notes payable and project financing” for energy management services projects that were not complete. Because these projects are financed for government agencies that have minimal credit risk, and with which we have previous collection experience, neither WGL nor Washington Gas recorded a corresponding reserve for bad debts related to these receivables at March 31, 2018 or September 30, 2017 .

 

17

 

WGL Holdings, Inc.

Washington Gas Light Company

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

NOTE 4. LONG-TERM DEBT

 

UNSECURED NOTES

 

WGL and Washington Gas issue long-term notes with individual terms regarding interest rates, maturities and call or put options. These notes can have maturity dates of one or more years from the date of issuance.

 

At March 31, 2018 and September 30, 2017 , WGL had capacity under a shelf registration statement to issue an unlimited amount of long-term debt securities. As a result of certain covenants included in the Merger Agreement among WGL, AltaGas and Wrangler, Inc., WGL may not issue debt with a term longer than two years. Refer to Note 17 — Planned Merger with AltaGas Ltd. of the Notes to Condensed Consolidated Financial Statements for a discussion of the proposed merger.

 

At March 31, 2018 and September 30, 2017 , Washington Gas had capacity under a shelf registration statement to issue up to $150.0 million of additional Medium-Term Notes (MTNs).

 

The following tables show our outstanding notes as of March 31, 2018 and September 30, 2017 .

 

Long-Term Debt Outstanding

 

	
($ In millions)
    	
 
    	
WGL (a)
    	
 
    	
Washington Gas
    	
 
    	
Total Consolidated
    	
 
    
	
March 31,   2018
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Long-term   debt (b)
    	
 
    	
$
    	
850.0
    	
 
    	
$
    	
1,146.0
    	
 
    	
$
    	
1,996.0
    	
 
    
	
Unamortized   discount
    	
 
    	
(1.4
    	
)
    	
(3.0
    	
)
    	
(4.4
    	
)
    
	
Unamortized   debt expense
    	
 
    	
(4.0
    	
)
    	
(8.3
    	
)
    	
(12.3
    	
)
    
	
Total   Long-Term Debt
    	
 
    	
$
    	
844.6
    	
 
    	
$
    	
1,134.7
    	
 
    	
$
    	
1,979.3
    	
 
    
	
Weighted   average interest rate
    	
 
    	
2.85
    	
%
    	
4.89
    	
%
    	
4.02
    	
%
    
	
September 30,   2017
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Long-term debt (b)
    	
 
    	
$
    	
550.0
    	
 
    	
$
    	
1,146.0
    	
 
    	
$
    	
1,696.0
    	
 
    
	
Unamortized   discount
    	
 
    	
(1.5
    	
)
    	
(3.0
    	
)
    	
(4.5
    	
)
    
	
Unamortized debt   expense
    	
 
    	
(2.1
    	
)
    	
(8.5
    	
)
    	
(10.6
    	
)
    
	
Total Long-Term   Debt
    	
 
    	
$
    	
546.4
    	
 
    	
$
    	
1,134.5
    	
 
    	
$
    	
1,680.9
    	
 
    
	
Weighted average   interest rate
    	
 
    	
2.81
    	
%
    	
4.89
    	
%
    	
4.21
    	
%
    

 

(a) WGL includes WGL Holdings, Inc. and all subsidiaries other than Washington Gas.

(b) Includes senior notes, term loans and floating rate notes for WGL and both MTNs and private placement notes for Washington Gas. Represents face value including current maturities.

 

18

 

WGL Holdings, Inc.

Washington Gas Light Company

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

The following tables show long-term debt issuances and retirements for WGL for the six months ended March 31, 2018 and 2017.

 

WGL Long-Term Debt Issuances and Retirements (a)

 

	
($ In millions)
    	
 
    	
Principal (b)
    	
 
    	
Interest
   Rate
    	
 
    	
Effective
   Cost
    	
 
    	
Nominal
   Maturity Date
    	
 
    
	
Six   Months Ended March 31, 2018
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Issuances:
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
11/29/2017
    	
 
    	
$
    	
300.0
    	
 
    	
1.88
    	
%(c)
    	
2.01
    	
%
    	
11/29/2019
    	
 
    
	
03/14/2018
    	
 
    	
$
    	
250.0
    	
 
    	
2.66
    	
%(d)
    	
2.79
    	
%
    	
03/12/2020
    	
 
    
	
Total   consolidated issuances
    	
 
    	
$
    	
550.0
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Retirements:
    	
 
    	
$
    	
250.0
    	
 
    	
1.24
    	
%
    	
1.24
    	
%
    	
02/18/2018
    	
 
    
	
Total
    	
 
    	
$
    	
250.0
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Six Months Ended   March 31, 2017
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Issuances:
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
1/26/2017
    	
 
    	
$
    	
50.0
    	
 
    	
1.57
    	
%(e)
    	
1.57
    	
%
    	
1/26/2019
    	
 
    
	
Total consolidated   issuances
    	
 
    	
$
    	
50.0
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    

 

(a) WGL includes WGL Holdings, Inc. and all subsidiaries other than Washington Gas.

(b) Represents face amount of notes.

(c) Floating rate per annum and reset quarterly based on terms set forth in the prospectus supplement filed by WGL pursuant to Securities Act Rule 424 on November 27, 2017.

(d) Floating rate per annum and reset quarterly based on terms set forth in the prospectus supplement filed by WGL pursuant to Securities Act Rule 424 on March 13, 2018.

(e) Floating rate per annum that will be determined from time to time based on parameters set forth in the credit agreement.

 

There were no issuances or retirements of long-term debt by Washington Gas for the six months ended March 31, 2018 or 2017.

 

19

 

WGL Holdings, Inc.

Washington Gas Light Company

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

NOTE 5. COMPONENTS OF TOTAL EQUITY

 

The tables below reflect the components of “Total equity” for WGL and Washington Gas for the six months ended March 31, 2018 and 2017.

 

WGL Holdings, Inc.

Components of Total Equity

 

	
(In thousands, except
    	
 
    	
Common Stock
    	
 
    	
Paid-In
    	
 
    	
Retained
    	
 
    	
Accumulated Other
   Comprehensive
   Income (Loss), Net
    	
 
    	
WGL Holdings
   Common
   Shareholders’
    	
 
    	
Non-controlling
    	
 
    	
Washington
   Gas Light
   Company
    	
 
    	
 
    	
 
    
	
shares)
    	
 
    	
Shares
    	
 
    	
Amount
    	
 
    	
Capital
    	
 
    	
Earnings
    	
 
    	
of Taxes
    	
 
    	
Equity
    	
 
    	
Interest
    	
 
    	
Preferred Stock
    	
 
    	
Total Equity
    	
 
    
	
Balance at September 30, 2017
    	
 
    	
51,219,000
    	
 
    	
$
    	
582,716
    	
 
    	
$
    	
10,149
    	
 
    	
$
    	
915,822
    	
 
    	
$
    	
(5,997
    	
)
    	
$
    	
1,502,690
    	
 
    	
$
    	
6,851
    	
 
    	
$
    	
28,173
    	
 
    	
$
    	
1,537,714
    	
 
    
	
Net income (loss)
    	
 
    	
—
    	
 
    	
—
    	
 
    	
—
    	
 
    	
273,590
    	
 
    	
—
    	
 
    	
273,590
    	
 
    	
(10,150
    	
)
    	
660
    	
 
    	
264,100
    	
 
    
	
Contributions from non-controlling interest
    	
 
    	
—
    	
 
    	
—
    	
 
    	
—
    	
 
    	
—
    	
 
    	
—
    	
 
    	
—
    	
 
    	
9,809
    	
 
    	
—
    	
 
    	
9,809
    	
 
    
	
Distributions to non-controlling interest
    	
 
    	
—
    	
 
    	
—
    	
 
    	
—
    	
 
    	
—
    	
 
    	
—
    	
 
    	
—
    	
 
    	
(256
    	
)
    	
—
    	
 
    	
(256
    	
)
    
	
Business combination (a)
    	
 
    	
—
    	
 
    	
—
    	
 
    	
—
    	
 
    	
—
    	
 
    	
—
    	
 
    	
—
    	
 
    	
614
    	
 
    	
—
    	
 
    	
614
    	
 
    
	
Other comprehensive income
    	
 
    	
—
    	
 
    	
—
    	
 
    	
—
    	
 
    	
—
    	
 
    	
450
    	
 
    	
450
    	
 
    	
—
    	
 
    	
—
    	
 
    	
450
    	
 
    
	
Stock-based compensation (b)
    	
 
    	
140,182
    	
 
    	
12,390
    	
 
    	
(18,650
    	
)
    	
4,013
    	
 
    	
—
    	
 
    	
(2,247
    	
)
    	
—
    	
 
    	
—
    	
 
    	
(2,247
    	
)
    
	
Dividends declared:
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Common stock
    	
 
    	
—
    	
 
    	
—
    	
 
    	
—
    	
 
    	
(52,711
    	
)
    	
—
    	
 
    	
(52,711
    	
)
    	
—
    	
 
    	
—
    	
 
    	
(52,711
    	
)
    
	
Preferred stock
    	
 
    	
—
    	
 
    	
—
    	
 
    	
—
    	
 
    	
—
    	
 
    	
—
    	
 
    	
—
    	
 
    	
—
    	
 
    	
(660
    	
)
    	
(660
    	
)
    
	
Balance at  March 31, 2018
    	
 
    	
51,359,182
    	
 
    	
$
    	
595,106
    	
 
    	
$
    	
(8,501
    	
)
    	
$
    	
1,140,714
    	
 
    	
$
    	
(5,547
    	
)
    	
$
    	
1,721,772
    	
 
    	
$
    	
6,868
    	
 
    	
$
    	
28,173
    	
 
    	
$
    	
1,756,813
    	
 
    
	
Balance at September 30, 2016
    	
 
    	
51,080,612
    	
 
    	
$
    	
574,496
    	
 
    	
$
    	
12,519
    	
 
    	
$
    	
827,085
    	
 
    	
$
    	
(38,539
    	
)
    	
$
    	
1,375,561
    	
 
    	
$
    	
409
    	
 
    	
$
    	
28,173
    	
 
    	
$
    	
1,404,143
    	
 
    
	
Net income (loss)
    	
 
    	
—
    	
 
    	
—
    	
 
    	
—
    	
 
    	
181,036
    	
 
    	
—
    	
 
    	
181,036
    	
 
    	
(7,974
    	
)
    	
660
    	
 
    	
173,722
    	
 
    
	
Contributions from non-controlling interest
    	
 
    	
—
    	
 
    	
—
    	
 
    	
—
    	
 
    	
—
    	
 
    	
—
    	
 
    	
—
    	
 
    	
10,816
    	
 
    	
—
    	
 
    	
10,816
    	
 
    
	
Other comprehensive income
    	
 
    	
—
    	
 
    	
—
    	
 
    	
—
    	
 
    	
—
    	
 
    	
29,665
    	
 
    	
29,665
    	
 
    	
—
    	
 
    	
—
    	
 
    	
29,665
    	
 
    
	
Stock-based compensation (b)
    	
 
    	
112,146
    	
 
    	
6,564
    	
 
    	
(5,268
    	
)
    	
(238
    	
)
    	
—
    	
 
    	
1,058
    	
 
    	
—
    	
 
    	
—
    	
 
    	
1,058
    	
 
    
	
Issuance of common stock (c)
    	
 
    	
26,242
    	
 
    	
1,653
    	
 
    	
—
    	
 
    	
—
    	
 
    	
—
    	
 
    	
1,653
    	
 
    	
—
    	
 
    	
—
    	
 
    	
1,653
    	
 
    
	
Dividends declared:
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Common stock
    	
 
    	
—
    	
 
    	
—
    	
 
    	
—
    	
 
    	
(51,091
    	
)
    	
—
    	
 
    	
(51,091
    	
)
    	
—
    	
 
    	
—
    	
 
    	
(51,091
    	
)
    
	
Preferred stock
    	
 
    	
—
    	
 
    	
—
    	
 
    	
—
    	
 
    	
—
    	
 
    	
—
    	
 
    	
—
    	
 
    	
—
    	
 
    	
(660
    	
)
    	
(660
    	
)
    
	
Balance at March 31, 2017
    	
 
    	
51,219,000
    	
 
    	
$
    	
582,713
    	
 
    	
$
    	
7,251
    	
 
    	
$
    	
956,792
    	
 
    	
$
    	
(8,874
    	
)
    	
$
    	
1,537,882
    	
 
    	
$
    	
3,251
    	
 
    	
$
    	
28,173
    	
 
    	
$
    	
1,569,306
    	
 
    

 

(a) Resulted from the consolidation of SFEE. For more information, see Note 11—Other investments of the Notes to Condensed Consolidated Financial Statements.

(b) Includes dividend equivalents related to our performance shares and implementation of ASU 2016-09, see Note 1—Accounting policies of the Notes to Condensed Consolidated Financial Statements.

(c) Includes dividend reinvestment and common stock purchase plans.

 

20

 

WGL Holdings, Inc.

Washington Gas Light Company

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

Washington Gas Light Company

Components of Total Equity

 

	
 
    	
 
    	
Common Stock
    	
 
    	
Paid-In
    	
 
    	
Retained
    	
 
    	
Accumulated Other
   Comprehensive Income
    	
 
    	
 
    	
 
    
	
(In thousands, except shares)
    	
 
    	
Shares
    	
 
    	
Amount
    	
 
    	
Capital
    	
 
    	
Earnings
    	
 
    	
(Loss), Net of Taxes
    	
 
    	
Total
    	
 
    
	
Balance at   September 30, 2017
    	
 
    	
46,479,536
    	
 
    	
$
    	
46,479
    	
 
    	
$
    	
492,101
    	
 
    	
$
    	
630,691
    	
 
    	
$
    	
(4,522
    	
)
    	
$
    	
1,164,749
    	
 
    
	
Net income
    	
 
    	
—
    	
 
    	
—
    	
 
    	
—
    	
 
    	
166,010
    	
 
    	
—
    	
 
    	
166,010
    	
 
    
	
Other   comprehensive income
    	
 
    	
—
    	
 
    	
—
    	
 
    	
—
    	
 
    	
—
    	
 
    	
375
    	
 
    	
375
    	
 
    
	
Stock-based   compensation (a)
    	
 
    	
—
    	
 
    	
—
    	
 
    	
(7,505
    	
)
    	
4,197
    	
 
    	
—
    	
 
    	
(3,308
    	
)
    
	
Capital   contributed by WGL Holdings
    	
 
    	
—
    	
 
    	
—
    	
 
    	
100,000
    	
 
    	
—
    	
 
    	
—
    	
 
    	
100,000
    	
 
    
	
Dividends   declared:
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Common stock
    	
 
    	
—
    	
 
    	
—
    	
 
    	
—
    	
 
    	
(43,864
    	
)
    	
—
    	
 
    	
(43,864
    	
)
    
	
Preferred stock
    	
 
    	
—
    	
 
    	
—
    	
 
    	
—
    	
 
    	
(660
    	
)
    	
—
    	
 
    	
(660
    	
)
    
	
Balance   at March 31, 2018
    	
 
    	
46,479,536
    	
 
    	
$
    	
46,479
    	
 
    	
$
    	
584,596
    	
 
    	
$
    	
756,374
    	
 
    	
$
    	
(4,147
    	
)
    	
$
    	
1,383,302
    	
 
    
	
Balance at   September 30, 2016
    	
 
    	
46,479,536
    	
 
    	
$
    	
46,479
    	
 
    	
$
    	
488,135
    	
 
    	
$
    	
586,662
    	
 
    	
$
    	
(7,830
    	
)
    	
$
    	
1,113,446
    	
 
    
	
Net income
    	
 
    	
—
    	
 
    	
—
    	
 
    	
—
    	
 
    	
149,071
    	
 
    	
—
    	
 
    	
149,071
    	
 
    
	
Other   comprehensive income
    	
 
    	
—
    	
 
    	
—
    	
 
    	
—
    	
 
    	
—
    	
 
    	
447
    	
 
    	
447
    	
 
    
	
Stock-based   compensation (a)
    	
 
    	
—
    	
 
    	
—
    	
 
    	
1,220
    	
 
    	
—
    	
 
    	
—
    	
 
    	
1,220
    	
 
    
	
Dividends   declared:
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Common stock
    	
 
    	
—
    	
 
    	
—
    	
 
    	
—
    	
 
    	
(42,907
    	
)
    	
—
    	
 
    	
(42,907
    	
)
    
	
Preferred stock
    	
 
    	
—
    	
 
    	
—
    	
 
    	
—
    	
 
    	
(660
    	
)
    	
—
    	
 
    	
(660
    	
)
    
	
Balance at   March 31, 2017
    	
 
    	
46,479,536
    	
 
    	
$
    	
46,479
    	
 
    	
$
    	
489,355
    	
 
    	
$
    	
692,166
    	
 
    	
$
    	
(7,383
    	
)
    	
$
    	
1,220,617
    	
 
    

 

(a) Stock-based compensation is based on the stock awards of WGL that are allocated to Washington Gas Light Company for its pro-rata share and includes implementation of ASU 2016-09, see Note 1—Accounting policies of the Notes to Condensed Consolidated Financial Statements.

 

21

 

WGL Holdings, Inc.

Washington Gas Light Company

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

NOTE 6. EARNINGS PER SHARE

 

Basic earnings per share (EPS) of WGL is computed by dividing net income by the weighted average number of common shares outstanding during the reported period. Diluted EPS assumes the issuance of common shares pursuant to stock-based compensation plans at the beginning of the applicable period unless the effect of such issuance would be anti-dilutive. The following table reflects the computation of our basic and diluted EPS for the three and six months ended March 31, 2018 and 2017.

 

Basic and Diluted EPS

 

	
(In thousands, except per share data)
    	
 
    	
Net Income
   Applicable to
   Common Stock
    	
 
    	
Shares
    	
 
    	
Per Share
   Amount
    	
 
    
	
Three   Months Ended March 31, 2018
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Basic   EPS
    	
 
    	
$
    	
135,550
    	
 
    	
51,358
    	
 
    	
$
    	
2.64
    	
 
    
	
Stock-based   compensation plans
    	
 
    	
—
    	
 
    	
219
    	
 
    	
 
    	
 
    
	
Diluted   EPS
    	
 
    	
$
    	
135,550
    	
 
    	
51,577
    	
 
    	
$
    	
2.63
    	
 
    
	
Three Months   Ended March 31, 2017
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Basic EPS
    	
 
    	
$
    	
123,064
    	
 
    	
51,217
    	
 
    	
$
    	
2.40
    	
 
    
	
Stock-based   compensation plans
    	
 
    	
—
    	
 
    	
259
    	
 
    	
 
    	
 
    
	
Diluted EPS
    	
 
    	
$
    	
123,064
    	
 
    	
51,476
    	
 
    	
$
    	
2.39
    	
 
    
	
Six   Months Ended March 31, 2018
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Basic   EPS
    	
 
    	
$
    	
273,590
    	
 
    	
51,336
    	
 
    	
$
    	
5.33
    	
 
    
	
Stock-based   compensation plans
    	
 
    	
—
    	
 
    	
225
    	
 
    	
 
    	
 
    
	
Diluted   EPS
    	
 
    	
$
    	
273,590
    	
 
    	
51,561
    	
 
    	
$
    	
5.31
    	
 
    
	
Six Months Ended   March 31, 2017
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Basic EPS
    	
 
    	
$
    	
181,036
    	
 
    	
51,192
    	
 
    	
$
    	
3.54
    	
 
    
	
Stock-based   compensation plans
    	
 
    	
—
    	
 
    	
266
    	
 
    	
 
    	
 
    
	
Diluted EPS
    	
 
    	
$
    	
181,036
    	
 
    	
51,458
    	
 
    	
$
    	
3.52
    	
 
    

 

There were no anti-dilutive shares issued for the three and six months ended March 31, 2018 and 2017.

 

NOTE 7. INCOME TAXES

 

As of March 31, 2018 and September 30, 2017 , our uncertain tax positions were approximately $40.2 million and $ 48.1 million , respectively, primarily due to the change in tax accounting for repairs. If the amounts of unrecognized tax benefits are eventually realized, it would not materially impact the effective tax rate. It is reasonably possible that the amount of the unrecognized tax benefit with respect to some of WGL’s and Washington Gas’ uncertain tax positions will significantly increase or decrease in the next 12 months. At this time, however, an estimate of the range of reasonably possible outcomes cannot be determined.

 

Under ASC Topic 740, Income Taxes , Washington Gas recognizes any accrued interest associated with uncertain tax positions in interest expense and recognizes any accrued penalties associated with uncertain tax positions in other expenses in the statements of income. At March 31, 2018 and September 30, 2017 , we did not have an accrual of interest expense or penalties related to uncertain tax positions.

 

WGL files a consolidated federal tax return and various other state returns. We are no longer subject to income tax examinations by the Internal Revenue Service for years ended prior to September 30, 2013. Substantially all state income tax years in major jurisdictions are closed for years ended prior to September 30, 2013.

 

The Tax Act was enacted on December 22, 2017. The Tax Act substantially reforms the Tax Code. Among other things, the Tax Act reduced the federal corporate income tax rate from a top marginal rate of 35% to a flat rate of 21% . The Tax Act also denies bonus depreciation to regulated public utilities and imposes limitations on the amount of interest expense which may be deducted by unregulated operations. ASC Topic 740 requires companies to recognize the impacts of a change in tax law or tax rates in the period of enactment.

 

22

 

WGL Holdings, Inc.

Washington Gas Light Company

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

On December 22, 2017, after enactment of the Tax Act, the SEC Staff issued Staff Accounting Bulletin No. 118 (SAB 118) to address the application of GAAP when a registrant does not have the necessary information available, prepared, or analyzed in reasonable detail to complete the necessary accounting. At March 31, 2018, we have not completed our accounting for the tax effects of enactment of the Tax Act and have followed the guidance issued in SAB 118. SAB 118 expresses the Staff’s views on how ASC Topic 740 should be applied in the context of the Tax Act. It allows entities to take a reasonable period of time to measure and recognize the effects of the Tax Act, while requiring robust disclosures during that period. Under this guidance, registrants record the effects of all items for which the accounting is complete. To the extent a company has not completed the accounting for the effects of the Act, it may record reasonable estimates as provisional amounts. The recorded provisional amounts remain subject to adjustment within the measurement period. The measurement period begins in the reporting period that includes the Tax Act’s enactment date and continues until such time as the accounting can be completed, not to exceed one year from the date of enactment. To the extent a company cannot reasonably estimate the effects of the Tax Act, it should apply the provisions of the tax law that were in effect immediately prior to enactment. SAB 118 requires disclosure of any measurement period adjustments, both provisional and final, and the effect of measurement period adjustments on the effective tax rate. All measurement period adjustments recorded in the six months ended March 31, 2018 are provisional amounts.

 

Qualitative disclosures of items impacting the provision for tax expense:

 

Bonus depreciation . Under the Tax Act, regulated public utility property is generally ineligible for bonus depreciation and is depreciated under MACRS while non-utility property is generally subject to 100% bonus depreciation. We have considered all public utility property placed in service after October 1, 2017 to be ineligible for bonus depreciation. The impact of changing the depreciation methodology for public utility property from bonus depreciation to MACRS in the current fiscal year is reasonably estimated to be a reduction in the amount of $ 88 million in tax depreciation expense based on current assumptions of assets to be placed in service, when compared to the amount of depreciation expense under the previous rules, and a decrease to the forecasted taxable loss. A deferred tax amount related to this depreciation was not recorded; therefore, there is no associated deferred tax amount that was required to be re-measured.

 

Decrease in regulated revenues : In January 2018, Washington Gas filed applications for approval to reduce the distribution rates it charges customers in Maryland, Virginia and the District of Columbia to reflect the impact of the Tax Act. These applications proposed to reduce rates in these jurisdictions by a combined amount of $ 39.5 million annually, until base rates are reestablished in a general rate case. Refer to Note 13 - Commitments and Contingencies for more information on the status of these applications. As described further below, the portion of this reduction in regulated revenues represented by the re-measurement of deferred tax assets and liabilities was recorded as a net regulatory liability under ASC 980, Regulated Operations. The net regulatory liability recorded is the amount we consider probable of regulatory treatment and will be refunded to customers in future periods. In addition, a portion of this reduction in regulated revenues relates to the federal tax expense included in current base rates that needs to be adjusted to the new federal rate of 21% effective January 1, 2018. As a result, regulated revenues were reduced by $ 18.7 million for the three months ended March 31, 2018.

 

In addition, amounts collected under other revenue mechanisms remain subject to adjustment for the decrease in the federal tax rate beginning January 1, 2018.

 

Items for which the accounting is not yet complete as of the end of the quarter but for which we have recorded provisional amounts at March 31, 2018 which are subject to adjustment during the measurement period:

 

Re-measurement of deferred tax assets and liabilities . Under ASC 740, the tax rate or rates that are used to measure deferred tax liabilities and deferred tax assets are the enacted tax rates expected to apply to taxable income in the years that the liability is expected to be settled or the asset recovered. As a result of using a 21% tax rate for our first quarter of fiscal year 2018 income tax provision, we did not create new amounts requiring re-measurement in the first quarter of fiscal year 2018. Therefore, we re-measured the deferred tax balances at September 30, 2017. The re-measurement of our deferred tax assets and liabilities includes the re-measurement of our cumulative net operating loss deferred tax asset (“NOL DTA”) as of September 30, 2017.

 

The effect of the re-measurement at a federal tax rate of 21% resulted in a net decrease in consolidated deferred tax liabilities in the amount of $ 485.3 million , including net tax gross-up. Of this amount, $ 418.8 million is attributable to the regulated utility and $ 66.5 million is attributable to non-utility operations. Of the amount related to utility operations, the net decrease in plant-related deferred tax liabilities was $ 319.4 million before tax gross-up. In addition, an increase in income tax expense of $ 6.2 million attributable to the regulated utility was recorded as a discrete item. Of the amount related to non-utility operations, a $ 66.5 million tax benefit was recorded as a discrete item as a result of the re-measurement of deferred tax liabilities. In addition, the re-measurement of the deferred tax liability associated with the Company’s uncertain tax position was a decrease in the amount of $ 14.8 million . A reserve for uncertain tax benefits related to prior years would generally not be re-measured if the tax exposure related to prior years. However, WGLH’s reserve for uncertain tax benefits relates solely to repair deductions for which the tax consequence of any disallowed deductions related to these timing differences is expected to be prospective only.

 

23

 

WGL Holdings, Inc.

Washington Gas Light Company

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

Consolidated deferred tax assets and liabilities were re-measured at a federal rate of 21%, based on the expectation that we will experience a taxable loss in the current fiscal year, increasing our net operating loss carryforward from the prior year. In the event taxable income is reported for the current fiscal year, we would need to apply a blended federal tax rate of 24.5% to any tax owed in the current period, before the utilization of any net operating loss carryforward to offset all or a portion of the taxable income on which federal tax would otherwise be owed. Additionally, the portion of the temporary differences settling or reversing in the first quarter of our fiscal year 2018 would be re-measured at the rate of 24.5% instead of 21%. We have recorded provisional estimates based on current information as the Company continues to work towards refinement and completion of the income tax provision for the current period. Under ASC 980, we recorded a net increase to the regulatory liability for excess deferred income taxes in the amount of $ 431.0 million including tax gross-up, and a net increase in regulatory assets in the amount of $ 5.9 million , for a net increase in regulatory liabilities in the amount of $ 425.1 million . We recorded a decrease in the regulatory asset for flow-through in the amount of $ 22.4 million , including tax gross-up; and a regulatory asset for the re-measurement of non-plant excess deferred taxes and the net operating loss carryforward deferred tax asset in the amount of $ 28.3 million , including tax gross-up, for a net increase in regulatory assets in the amount of $ 5.9 million .

 

All provisional amounts recorded for re-measurement remain subject to adjustment within the measurement period pending the preparation and analysis of additional information. In addition, we have recorded a provisional estimate but have not fully completed the accounting for the tax sharing impacts of the re-measurement of the deferred tax assets and deferred tax liabilities.

 

Existing current or deferred tax amounts for which the income tax effects of the Tax Act have not been completed:

 

Accounting for the tax basis adjustment for ITC.  Under prior tax law and under the Tax Act, the basis of property must be reduced by one-half of the investment tax credits claimed thereon. Under GAAP, we adjust the book basis and amortize the investment tax credits over the book life of the associated assets. We have not yet completed the accounting for the effects of the Tax Act on the adjustment of book basis and have not recast the amortization pending additional analysis.

 

NOTE 8. DERIVATIVE AND WEATHER-RELATED INSTRUMENTS

DERIVATIVE INSTRUMENTS

Regulated Utility Operations

 

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

 

Asset Optimization. Washington Gas optimizes the value of its long-term natural gas transportation and storage capacity resources during periods when these resources are not being used to physically serve utility customers. Specifically, Washington Gas utilizes its transportation capacity assets to benefit from favorable natural gas prices between different geographic locations and utilizes its storage capacity assets to benefit from favorable natural gas prices between different time periods. As part of this asset optimization program, Washington Gas enters into physical and financial derivative transactions in the form of forward, futures and option contracts with the primary objective of securing operating margins that Washington Gas will ultimately realize. The derivative transactions entered into under this program are subject to mark-to-market accounting treatment under ASC 820.

 

Regulatory sharing mechanisms provide for the annual realized profit from these transactions to be shared between Washington Gas’ shareholders and customers; therefore, changes in fair value are recorded through earnings, or as regulatory assets or liabilities to the extent that it is probable that realized gains and losses associated with these derivative transactions will be included in the rates charged to customers when they are realized. Unrealized gains and losses recorded to earnings may cause significant period-to-period volatility; this volatility does not change the operating margins that Washington Gas expects to ultimately realize from these transactions through the use of its storage and transportation capacity resources.

 

All physically and financially settled contracts under our asset optimization program are reported on a net basis in the statements of income in “Utility cost of gas.” Total net margins recorded to “Utility cost of gas” after sharing and management fees associated with all asset optimization transactions for the three months ended March 31, 2018 were a net gain of $18.8 million , including an unrealized gain of $12.3 million . During the three months ended March 31, 2017 , we recorded a net gain of $28.9 million , including an unrealized gain of $21.0 million . Total net margins recorded for the six months ended March 31, 2018 was a net gain of $24.6 million , including an unrealized gain of $10.8 million . During the six months ended March 31, 2017 , we recorded a net gain of $53.4 million , including an unrealized gain of $36.5 million .

 

24

 

WGL Holdings, Inc.

Washington Gas Light Company

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

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

 

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

 

Non-Utility Operations

 

Trading Activities. WGL Midstream enters into derivative contracts for the purpose of optimizing its storage and transportation capacity as well as managing the transportation and storage assets on behalf of third parties. WGL Midstream does not designate these derivatives as hedges under ASC Topic 815; therefore, changes in the fair value of these derivative instruments are reflected in the earnings of our non-utility operations and may cause significant period-to-period volatility in earnings.

 

Managing Price Risk. WGL Energy Services enters into certain derivative contracts as part of its strategy to manage the price risk associated with the sale and purchase of natural gas and electricity. WGL Energy Services elects “normal purchases and normal sales” treatment for a portion of these physical contracts related to the purchase of natural gas and electricity to serve its customers, and, therefore, they are not subject to the fair value accounting requirements of ASC Topic 815. Derivative instruments not designated as ‘‘normal purchases and normal sales” are recorded at fair value on our consolidated balance sheets, and changes in the fair value of these derivative instruments are reflected in the earnings of our non-utility operations, which may cause significant period-to-period volatility in earnings. WGL Energy Services does not designate derivatives as hedges under ASC Topic 815.

 

Managing Interest-Rate Risk . WGL utilizes derivative instruments that are designed to limit the risk of interest-rate volatility associated with future debt issuances.

 

WGL had $250 million of 30-year forward starting interest rate swaps which settled in January 2018. Through December 2016, WGL had designated these interest rate swaps as cash flow hedges in anticipation of a 30-year debt issuance in January 2018, and reported the effective portion of changes in fair value as a component of other comprehensive income (loss). As a result of certain covenants related to the proposed merger with AltaGas, in January 2017, WGL de-designated these hedges as it was no longer probable that the debt would be issued and any further changes in the fair value of the interest rate swaps were recorded in interest expense. WGL believes that the debt issuance is still reasonably possible to occur, therefore, the fair value of the swaps prior to the dedesignation in the amount of $ 6.4 million is recorded in accumulated other comprehensive income at March 31, 2018 . In January 2018, WGL settled these swaps for a gain of $13.8 million . For the three and six months ended March 31, 2018 , we recorded income of $13.2 million and $12.8 million , respectively, to interest expense related to these swaps. Refer to Note 17 —Planned Merger with AltaGas Ltd. for a discussion of the proposed merger.

 

WGL’s comprehensive income (loss) also includes amounts for settled hedges related to prior debt issuances, which are being amortized to income over the life of the outstanding debt. The amortization was minimal for the six months ended March 31, 2018 and 2017 .

 

Consolidated Operations

 

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

 

25

 

WGL Holdings, Inc.

Washington Gas Light Company

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

At March 31, 2018 and September 30, 2017, respectively, the absolute notional amounts of our derivatives were as follows:

 

Absolute Notional Amounts

of Open Positions on Derivative Instruments

 

	
Derivative transactions
    	
 
    	
WGL Holdings, Inc.
    	
 
    	
Washington Gas
    	
 
    
	
 
    	
 
    	
Notional Amounts
    	
 
    
	
March 31,   2018
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Natural   Gas   (In millions of therms)
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Asset   optimization & trading
    	
 
    	
22,841.8
    	
 
    	
11,938.0
    	
 
    
	
Retail sales
    	
 
    	
127.6
    	
 
    	
—
    	
 
    
	
Other   risk-management activities
    	
 
    	
1,530.3
    	
 
    	
1,126.0
    	
 
    
	
Electricity     (In millions of kWhs)
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Retail sales
    	
 
    	
8,880.6
    	
 
    	
—
    	
 
    
	
Other   risk-management activities (a)
    	
 
    	
18,745.7
    	
 
    	
—
    	
 
    
	
Interest   Rate Swaps   (In millions of dollars)
    	
 
    	
$
    	
—
    	
 
    	
—
    	
 
    
	
September 30,   2017
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Natural   Gas   (In millions of therms)
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Asset   optimization & trading
    	
 
    	
21,663.5
    	
 
    	
11,223.0
    	
 
    
	
Retail sales
    	
 
    	
124.3
    	
 
    	
—
    	
 
    
	
Other   risk-management activities
    	
 
    	
1,546.7
    	
 
    	
1,181.0
    	
 
    
	
Electricity     (In millions of kWhs)
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Retail sales
    	
 
    	
10,011.7
    	
 
    	
—
    	
 
    
	
Other   risk-management activities (a)
    	
 
    	
22,962.1
    	
 
    	
—
    	
 
    
	
Interest   Rate Swaps   (In millions of dollars)
    	
 
    	
$
    	
250.0
    	
 
    	
—
    	
 
    

 

(a) Comprised primarily of financial swaps, financial transmission rights and physical forward purchases.

 

The following tables present the balance sheet classification for all derivative instruments as of March 31, 2018 and September 30, 2017 .

 

WGL Holdings, Inc.

Balance Sheet Classification of Derivative Instruments (b)

 

(In millions)

 

	
As of March 31, 2018
    	
 
    	
Gross
   Derivative
   Assets
    	
 
    	
Gross
   Derivative
   Liabilities
    	
 
    	
Netting of
   Collateral
    	
 
    	
Total (a)
    	
 
    
	
Current   Assets—Derivatives
    	
 
    	
$
    	
17.7
    	
 
    	
$
    	
(7.7
    	
)
    	
$
    	
—
    	
 
    	
$
    	
10.0
    	
 
    
	
Deferred   Charges and Other Assets—Derivatives
    	
 
    	
31.0
    	
 
    	
(1.4
    	
)
    	
—
    	
 
    	
29.6
    	
 
    
	
Current   Liabilities—Derivatives
    	
 
    	
5.4
    	
 
    	
(37.8
    	
)
    	
6.2
    	
 
    	
(26.2
    	
)
    
	
Deferred   Credits—Derivatives
    	
 
    	
16.4
    	
 
    	
(126.1
    	
)
    	
5.7
    	
 
    	
(104.0
    	
)
    
	
Total
    	
 
    	
$
    	
70.5
    	
 
    	
$
    	
(173.0
    	
)
    	
$
    	
11.9
    	
 
    	
$
    	
(90.6
    	
)
    
	
As of   September 30, 2017
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Current   Assets—Derivatives
    	
 
    	
$
    	
26.6
    	
 
    	
$
    	
(11.3
    	
)
    	
$
    	
—
    	
 
    	
$
    	
15.3
    	
 
    
	
Deferred Charges   and Other Assets—Derivatives
    	
 
    	
38.9
    	
 
    	
(0.4
    	
)
    	
(0.1
    	
)
    	
38.4
    	
 
    
	
Accounts payable
    	
 
    	
1.0
    	
 
    	
—
    	
 
    	
—
    	
 
    	
1.0
    	
 
    
	
Current   Liabilities—Derivatives
    	
 
    	
10.9
    	
 
    	
(57.0
    	
)
    	
2.1
    	
 
    	
(44.0
    	
)
    
	
Deferred   Credits—Derivatives
    	
 
    	
19.2
    	
 
    	
(148.8
    	
)
    	
7.0
    	
 
    	
(122.6
    	
)
    
	
Total
    	
 
    	
$
    	
96.6
    	
 
    	
$
    	
(217.5
    	
)
    	
$
    	
9.0
    	
 
    	
$
    	
(111.9
    	
)
    

 

26

 

WGL Holdings, Inc.

Washington Gas Light Company

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

Washington Gas Light Company

Balance Sheet Classification of Derivative Instruments (b)

 

(In millions)

 

	
As of March 31, 2018
    	
 
    	
Gross
   Derivative
   Assets
    	
 
    	
Gross
   Derivative
   Liabilities
    	
 
    	
Total (a)
    	
 
    
	
Current   Assets—Derivatives
    	
 
    	
$
    	
3.9
    	
 
    	
$
    	
(2.6
    	
)
    	
$
    	
1.3
    	
 
    
	
Deferred   Charges and Other Assets—Derivatives
    	
 
    	
14.4
    	
 
    	
—
    	
 
    	
14.4
    	
 
    
	
Current   Liabilities—Derivatives
    	
 
    	
—
    	
 
    	
(17.4
    	
)
    	
(17.4
    	
)
    
	
Deferred   Credits—Derivatives
    	
 
    	
0.1
    	
 
    	
(92.9
    	
)
    	
(92.8
    	
)
    
	
Total
    	
 
    	
$
    	
18.4
    	
 
    	
$
    	
(112.9
    	
)
    	
$
    	
(94.5
    	
)
    
	
As of   September 30, 2017
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Current   Assets—Derivatives
    	
 
    	
$
    	
7.5
    	
 
    	
$
    	
(2.4
    	
)
    	
$
    	
5.1
    	
 
    
	
Deferred Charges   and Other Assets—Derivatives
    	
 
    	
16.5
    	
 
    	
(0.3
    	
)
    	
16.2
    	
 
    
	
Current   Liabilities—Derivatives
    	
 
    	
—
    	
 
    	
(30.3
    	
)
    	
(30.3
    	
)
    
	
Deferred   Credits—Derivatives
    	
 
    	
—
    	
 
    	
(112.3
    	
)
    	
(112.3
    	
)
    
	
Total
    	
 
    	
$
    	
24.0
    	
 
    	
$
    	
(145.3
    	
)
    	
$
    	
(121.3
    	
)
    

 

(a) WGL has elected to offset the fair value of recognized derivative instruments against the right to reclaim or the obligation to return collateral for derivative instruments executed under the same master netting arrangement in accordance with ASC 815. All recognized derivative contracts and associated financial collateral subject to a master netting arrangement or similar that is eligible for offset under ASC 815 have been presented net in the balance sheet.

 

(b) We did not have any derivative instruments outstanding that were designated as hedging instruments at March 31, 2018 or September 30, 2017 .

 

The following table presents all gains and losses associated with derivative instruments for the three and six months ended March 31, 2018 and 2017 .

 

Gains and Losses on Derivative Instruments

 

(In millions)

 

	
 
    	
 
    	
WGL Holdings, Inc.
    	
 
    	
Washington Gas
    	
 
    
	
Three Months Ended March 31,
    	
 
    	
2018
    	
 
    	
2017
    	
 
    	
2018
    	
 
    	
2017
    	
 
    
	
Recorded   to income
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Operating   revenues—non-utility
    	
 
    	
$
    	
3.8
    	
 
    	
$
    	
54.2
    	
 
    	
$
    	
—
    	
 
    	
$
    	
—
    	
 
    
	
Utility cost of   gas
    	
 
    	
3.0
    	
 
    	
19.8
    	
 
    	
3.0
    	
 
    	
19.8
    	
 
    
	
Non-utility cost   of energy-related sales
    	
 
    	
(20.6
    	
)
    	
(4.6
    	
)
    	
—
    	
 
    	
—
    	
 
    
	
Interest expense
    	
 
    	
(12.5
    	
)
    	
2.6
    	
 
    	
—
    	
 
    	
—
    	
 
    
	
Recorded   to regulatory assets
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Gas costs
    	
 
    	
3.5
    	
 
    	
36.6
    	
 
    	
3.5
    	
 
    	
36.6
    	
 
    
	
Total
    	
 
    	
$
    	
(22.8
    	
)
    	
$
    	
108.6
    	
 
    	
$
    	
6.5
    	
 
    	
$
    	
56.4
    	
 
    

 

	
Six Months Ended March 31,
    	
 
    	
2018
    	
 
    	
2017
    	
 
    	
2018
    	
 
    	
2017
    	
 
    
	
Recorded   to income
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Operating   revenues—non-utility
    	
 
    	
$
    	
(3.7
    	
)
    	
$
    	
17.5
    	
 
    	
$
    	
—
    	
 
    	
$
    	
—
    	
 
    
	
Utility cost of   gas
    	
 
    	
0.4
    	
 
    	
34.5
    	
 
    	
0.4
    	
 
    	
34.5
    	
 
    
	
Non-utility cost   of energy-related sales
    	
 
    	
1.6
    	
 
    	
26.7
    	
 
    	
—
    	
 
    	
—
    	
 
    
	
Interest expense
    	
 
    	
(12.9
    	
)
    	
2.5
    	
 
    	
—
    	
 
    	
—
    	
 
    
	
Recorded   to regulatory assets
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Gas costs
    	
 
    	
(2.3
    	
)
    	
56.2
    	
 
    	
(2.3
    	
)
    	
56.2
    	
 
    
	
Recorded   to other comprehensive income
    	
 
    	
0.1
    	
 
    	
49.5
    	
 
    	
—
    	
 
    	
—
    	
 
    
	
Total
    	
 
    	
$
    	
(16.8
    	
)
    	
$
    	
186.9
    	
 
    	
$
    	
(1.9
    	
)
    	
$
    	
90.7
    	
 
    

 

27

 

WGL Holdings, Inc.

Washington Gas Light Company

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

Collateral

 

WGL utilizes standardized master netting agreements, which facilitate the netting of cash flows into a single net exposure for a given counterparty. As part of these master netting agreements, cash, letters of credit and parent company guarantees may be required to be posted or obtained from counterparties in order to mitigate credit risk related to both derivatives and non-derivative positions. Under WGL’s offsetting policy, collateral balances are offset against the related counterparties’ derivative positions to the extent the application would not result in the over-collateralization of those derivative positions on the balance sheet.

 

The table below presents collateral not offset against derivative assets and liabilities at March 31, 2018 and September 30, 2017 , respectively.

 

Collateral Not Offset Against Derivative Assets and Liabilities (In millions)

 

	
March 31, 2018
    	
 
    	
Collateral deposits posted with
   counterparties
    	
 
    	
Cash collateral held representing an
   obligation
    	
 
    
	
Washington   Gas
    	
 
    	
$
    	
12.4
    	
 
    	
$
    	
3.1
    	
 
    
	
WGL   Energy Services
    	
 
    	
30.5
    	
 
    	
—
    	
 
    
	
WGL   Midstream
    	
 
    	
14.3
    	
 
    	
0.4
    	
 
    
	
September 30,   2017
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Washington Gas
    	
 
    	
$
    	
3.7
    	
 
    	
$
    	
0.1
    	
 
    
	
WGL Energy   Services
    	
 
    	
23.7
    	
 
    	
—
    	
 
    
	
WGL Midstream
    	
 
    	
44.4
    	
 
    	
1.6
    	
 
    

 

Any collateral posted that is not offset against derivative assets and liabilities is included in “Other prepayments” in the accompanying condensed balance sheets. Collateral received and not offset against derivative assets and liabilities is included in “Customer deposits and advance payments” in the accompanying balance sheets.

 

Certain derivative instruments of WGL, Washington Gas, WGL Energy Services and WGL Midstream contain contract provisions that require collateral to be posted if the credit rating of Washington Gas or WGL falls below certain levels or if counterparty exposure to WGL, Washington Gas, WGL Energy Services or WGL Midstream exceeds a certain level (credit-related contingent features). Due to counterparty exposure levels, at March 31, 2018 , WGL Energy Services posted $11.9 million of collateral related to its derivative liabilities that contained credit-related contingent features. At September 30, 2017 , WGL Energy Services posted $8.6 million of collateral related to these aforementioned derivative liabilities. At March 31, 2018 and September 30, 2017 , WGL was not required to post collateral related to a derivative liability that contained a credit-related contingent feature. At both March 31, 2018 and September 30, 2017 , Washington Gas and WGL Midstream were not required to post any collateral related to their respective derivative liabilities that contained credit-related contingent features. The following table shows the aggregate fair value of all derivative instruments with credit-related contingent features that are in a liability position, as well as the maximum amount of collateral that would be required if the most intrusive credit-risk-related contingent features underlying these agreements were triggered on March 31, 2018 and September 30, 2017 , respectively.

 

Potential Collateral Requirements for Derivative Liabilities

with Credit-Risk-Contingent Features

 

	
(In millions)
    	
 
    	
WGL Holdings, Inc.
    	
 
    	
Washington Gas
    	
 
    
	
March 31,   2018
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Derivative   liabilities with credit-risk-contingent features
    	
 
    	
$
    	
13.3
    	
 
    	
$
    	
0.5
    	
 
    
	
Maximum   potential collateral requirements
    	
 
    	
$
    	
7.9
    	
 
    	
$
    	
0.5
    	
 
    
	
September 30,   2017
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Derivative   liabilities with credit-risk-contingent features
    	
 
    	
$
    	
25.0
    	
 
    	
$
    	
2.8
    	
 
    
	
Maximum   potential collateral requirements
    	
 
    	
$
    	
21.9
    	
 
    	
$
    	
2.8
    	
 
    

 

We do not enter into derivative contracts for speculative purposes.

 

28

 

WGL Holdings, Inc.

Washington Gas Light Company

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

Concentration of Credit Risk

 

We are exposed to credit risk from derivative instruments with wholesale counterparties, which is represented by the fair value of these instruments at the reporting date. We actively monitor and work to minimize counterparty concentration risk through various practices. At March 31, 2018 , two counterparties represented over 10% of Washington Gas’ credit exposure to wholesale derivative counterparties for a total credit risk of $20.2 million ; three counterparties each represented over 10% of WGL Energy Services’ credit exposure to wholesale counterparties for a total credit risk of $0.7 million ; and one counterparty represented over 10% of WGL Midstream’s credit exposure to wholesale counterparties for a total credit risk of $15.3 million .

 

WEATHER-RELATED INSTRUMENTS

 

WGL Energy Services utilizes weather-related instruments for managing the financial effects of weather risks. These instruments cover a portion of WGL Energy Services’ estimated revenue or energy-related cost exposure to variations in heating or cooling degree days. These contracts provide for payment to WGL Energy Services of a fixed-dollar amount for every degree day over or under specific levels during the calculation period depending upon the type of contract executed. For the three months ended March 31, 2018 and 2017 , WGL Energy Services recorded a pre-tax gain of $4.7 million and $3.2 million , respectively. During the six months ended March 31, 2018 and 2017 , WGL Energy Services recorded pre-tax gains of $3.9 million and $1.8 million , respectively, related to these instruments included in “Non-utility cost of energy related sales” in the accompanying condensed consolidated statements of income.

 

NOTE 9. FAIR VALUE MEASUREMENTS

 

Recurring Basis

 

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

 

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

 

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

 

Level 1. Level 1 of the fair value hierarchy consists of assets or liabilities that are valued using observable inputs based upon unadjusted quoted prices in active markets for identical assets or liabilities at the reporting date. WGL did not have any Level 1 derivatives at March 31, 2018 or September 30, 2017 .

 

Level 2. Level 2 of the fair value hierarchy consists of assets or liabilities that are valued using directly or indirectly observable inputs either corroborated with market data or based on exchange traded market data. Level 2 includes fair values based on industry-standard valuation techniques that consider various assumptions: (i)  quoted forward prices, including the use of mid-market pricing within a bid/ask spread; (ii)  discount rates; (iii)  implied volatility and (iv)  other economic factors. Substantially all of these assumptions are observable throughout the full term of the instrument, can be derived from observable data or are supported by observable levels at which transactions are executed in the relevant market. At March 31, 2018 and September 30, 2017 , Level 2 financial assets and liabilities included energy-related physical and financial derivative transactions such as forward, option and other contracts for deliveries at active market locations, as well as our interest rate swaps.

 

Level 3. Level 3 of the fair value hierarchy consists of assets or liabilities that are valued using significant unobservable inputs at the reporting date. These unobservable assumptions reflect our assumptions about estimates that market participants would use in pricing the asset or liability, including natural gas basis prices, annualized volatilities of natural gas prices, and electricity congestion prices.

 

29

 

WGL Holdings, Inc.

Washington Gas Light Company

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

A significant change to any one of these inputs in isolation could result in a significant upward or downward fluctuation in the fair value measurement. These inputs may be used with industry standard valuation methodologies that result in our best estimate of fair value for the assets or liabilities at the reporting date.

 

Our Risk Analysis and Mitigation (RA&M) Group determines the valuation policies and procedures. The RA&M Group reports to WGL’s Chief Financial Officer. In accordance with WGL’s valuation policy, we may utilize a variety of valuation methodologies to determine the fair value of Level 3 derivative contracts, including internally developed valuation inputs and pricing models. The prices used in our valuations are corroborated using multiple pricing sources, and we periodically conduct assessments to determine whether each valuation model is appropriate for its intended purpose. The RA&M Group also evaluates changes in fair value measurements on a daily basis.

 

At March 31, 2018 and September 30, 2017 , Level 3 derivative assets and liabilities included: (i)  physical contracts valued at illiquid market locations with no observable market data; (ii)  long-dated positions where observable pricing is not available over the majority of the life of the contract; (iii)  contracts valued using historical spot price volatility assumptions and (iv)  valuations using indicative broker quotes for inactive market locations.

 

The following tables set forth financial instruments recorded at fair value as of March 31, 2018 and September 30, 2017 , respectively. A financial instrument’s classification within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. Our assessment of the significance of a particular input to the fair value measurement requires judgment, and may affect the valuation of fair value assets and liabilities and their placement within the fair value hierarchy.

 

WGL Holdings, Inc.

Fair Value Measurements Under the Fair Value Hierarchy

 

	
(In millions)
    	
 
    	
Level 1
    	
 
    	
Level 2
    	
 
    	
Level 3
    	
 
    	
Total
    	
 
    
	
At   March 31, 2018
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Assets
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Natural   gas related derivatives
    	
 
    	
$
    	
—
    	
 
    	
$
    	
13.3
    	
 
    	
$
    	
48.1
    	
 
    	
$
    	
61.4
    	
 
    
	
Electricity   related derivatives
    	
 
    	
—
    	
 
    	
0.6
    	
 
    	
8.5
    	
 
    	
9.1
    	
 
    
	
Total   Assets
    	
 
    	
$
    	
—
    	
 
    	
$
    	
13.9
    	
 
    	
$
    	
56.6
    	
 
    	
$
    	
70.5
    	
 
    
	
Liabilities
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Natural   gas related derivatives
    	
 
    	
$
    	
—
    	
 
    	
$
    	
(18.2
    	
)
    	
$
    	
(133.1
    	
)
    	
$
    	
(151.3
    	
)
    
	
Electricity   related derivatives
    	
 
    	
—
    	
 
    	
(2.9
    	
)
    	
(18.8
    	
)
    	
(21.7
    	
)
    
	
Total   Liabilities
    	
 
    	
$
    	
—
    	
 
    	
$
    	
(21.1
    	
)
    	
$
    	
(151.9
    	
)
    	
$
    	
(173.0
    	
)
    
	
At   September 30, 2017
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Assets
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Natural gas   related derivatives
    	
 
    	
$
    	
—
    	
 
    	
$
    	
18.4
    	
 
    	
$
    	
52.8
    	
 
    	
$
    	
71.2
    	
 
    
	
Electricity   related derivatives
    	
 
    	
—
    	
 
    	
0.1
    	
 
    	
15.5
    	
 
    	
$
    	
15.6
    	
 
    
	
Interest rate derivatives
    	
 
    	
—
    	
 
    	
9.8
    	
 
    	
—
    	
 
    	
$
    	
9.8
    	
 
    
	
Total Assets
    	
 
    	
$
    	
—
    	
 
    	
$
    	
28.3
    	
 
    	
$
    	
68.3
    	
 
    	
$
    	
96.6
    	
 
    
	
Liabilities
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Natural gas   related derivatives
    	
 
    	
$
    	
—
    	
 
    	
$
    	
(15.5
    	
)
    	
$
    	
(167.4
    	
)
    	
$
    	
(182.9
    	
)
    
	
Electricity   related derivatives
    	
 
    	
—
    	
 
    	
(4.1
    	
)
    	
(21.7
    	
)
    	
(25.8
    	
)
    
	
Interest rate   derivatives
    	
 
    	
—
    	
 
    	
(8.8
    	
)
    	
—
    	
 
    	
(8.8
    	
)
    
	
Total   Liabilities
    	
 
    	
$
    	
—
    	
 
    	
$
    	
(28.4
    	
)
    	
$
    	
(189.1
    	
)
    	
$
    	
(217.5
    	
)
    

 

30

 

WGL Holdings, Inc.

Washington Gas Light Company

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

Washington Gas Light Company

Fair Value Measurements Under the Fair Value Hierarchy

 

	
(In millions)
    	
 
    	
Level 1
    	
 
    	
Level 2
    	
 
    	
Level 3
    	
 
    	
Total
    	
 
    
	
At   March 31, 2018
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Assets
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Natural   gas related derivatives
    	
 
    	
$
    	
—
    	
 
    	
$
    	
3.1
    	
 
    	
$
    	
15.3
    	
 
    	
$
    	
18.4
    	
 
    
	
Total   Assets
    	
 
    	
$
    	
—
    	
 
    	
$
    	
3.1
    	
 
    	
$
    	
15.3
    	
 
    	
$
    	
18.4
    	
 
    
	
Liabilities
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Natural   gas related derivatives
    	
 
    	
$
    	
—
    	
 
    	
$
    	
(8.6
    	
)
    	
$
    	
(104.3
    	
)
    	
$
    	
(112.9
    	
)
    
	
Total   Liabilities
    	
 
    	
$
    	
—
    	
 
    	
$
    	
(8.6
    	
)
    	
$
    	
(104.3
    	
)
    	
$
    	
(112.9
    	
)
    
	
At   September 30, 2017
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Assets
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Natural gas related   derivatives
    	
 
    	
$
    	
—
    	
 
    	
$
    	
7.0
    	
 
    	
$
    	
17.0
    	
 
    	
$
    	
24.0
    	
 
    
	
Total Assets
    	
 
    	
$
    	
—
    	
 
    	
$
    	
7.0
    	
 
    	
$
    	
17.0
    	
 
    	
$
    	
24.0
    	
 
    
	
Liabilities
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Natural gas   related derivatives
    	
 
    	
$
    	
—
    	
 
    	
$
    	
(5.7
    	
)
    	
$
    	
(139.6
    	
)
    	
$
    	
(145.3
    	
)
    
	
Total   Liabilities
    	
 
    	
$
    	
—
    	
 
    	
$
    	
(5.7
    	
)
    	
$
    	
(139.6
    	
)
    	
$
    	
(145.3
    	
)
    

 

The following table includes quantitative information about the significant unobservable inputs used in the fair value measurement of our Level 3 financial instruments and the respective fair values of the net derivative asset and liability positions, by contract type, as of March 31, 2018 and September 30, 2017 .

 

31

 

WGL Holdings, Inc.

Washington Gas Light Company

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

Quantitative Information about Level 3 Fair Value Measurements

 

	
(In millions)
    	
 
    	
Net Fair Value
   March 31, 2018
    	
 
    	
Valuation Techniques
    	
 
    	
Unobservable Inputs
    	
 
    	
Range
    	
 
    
	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
WGL   Holdings, Inc.
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Natural gas   related derivatives
    	
 
    	
$
    	
(79.3
    	
)
    	
Discounted Cash Flow
    	
 
    	
Natural Gas Basis Price (per dekatherm)
    	
 
    	
$(1.030) - $2.400
    	
 
    
	
 
    	
 
    	
 
    	
 
    	
Option Model
    	
 
    	
Natural Gas Basis Price (per dekatherm)
    	
 
    	
$(1.007) - $2.400
    	
 
    
	
 
    	
 
    	
$
    	
(5.7
    	
)
    	
 
    	
 
    	
Annualized Volatility of Spot Market Natural Gas
    	
 
    	
30.2% - 900.9%
    	
 
    
	
Electricity   related derivatives
    	
 
    	
$
    	
(10.3
    	
)
    	
Discounted Cash Flow
    	
 
    	
Electricity Congestion Price (per megawatt hour)
    	
 
    	
$(2.977) - $57.400
    	
 
    
	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Washington   Gas Light Company
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Natural gas   related derivatives
    	
 
    	
$
    	
(89.0
    	
)
    	
Discounted Cash Flow
    	
 
    	
Natural Gas Basis Price (per dekatherm)
    	
 
    	
$(0.9300) - $0.216
    	
 
    

 

	
(In millions)
    	
 
    	
Net Fair Value September 30, 2017
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
WGL   Holdings, Inc.
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Natural gas   related derivatives
    	
 
    	
$
    	
(112.4
    	
)
    	
Discounted Cash Flow
    	
 
    	
Natural Gas Basis Price (per dekatherm)
    	
 
    	
$
    	
(2.095) - $2.805
    	
 
    
	
 
    	
 
    	
 
    	
 
    	
Option Model
    	
 
    	
Natural Gas Basis Price (per dekatherm)
    	
 
    	
$
    	
(2.095) - $2.358
    	
 
    
	
 
    	
 
    	
$
    	
(2.2
    	
)
    	
 
    	
 
    	
Annualized Volatility of Spot Market Natural Gas
    	
 
    	
28.7% - 566.8%
    	
 
    
	
Electricity   related derivatives
    	
 
    	
$
    	
(6.2
    	
)
    	
Discounted Cash Flow
    	
 
    	
Electricity Congestion Price (per megawatt hour)
    	
 
    	
$
    	
(2.736) - $56.500
    	
 
    
	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Washington Gas   Light Company
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Natural gas   related derivatives
    	
 
    	
$
    	
(122.6
    	
)
    	
Discounted Cash Flow
    	
 
    	
Natural Gas Basis Price (per dekatherm)
    	
 
    	
$
    	
(1.928) - $2.805
    	
 
    

 

The following tables are a summary of the changes in the fair value of our derivative instruments that are measured at net fair value on a recurring basis in accordance with ASC Topic 820 using significant Level 3 inputs during the three and six months ended March 31, 2018 and 2017 , respectively.

 

32

 

WGL Holdings, Inc.

Washington Gas Light Company

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

Reconciliation of Fair Value Measurements Using Significant Level 3 Inputs

 

	
 
    	
 
    	
WGL Holdings, Inc.
    	
 
    	
Washington Gas Light
   Company
    	
 
    
	
(In millions)
    	
 
    	
Natural Gas
   Related
   Derivatives
    	
 
    	
Electricity
   Related
   Derivatives
    	
 
    	
Total
    	
 
    	
Total - Natural Gas
   Related
   Derivatives
    	
 
    
	
Three   Months Ended March 31, 2018
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Balance   at January 1, 2018
    	
 
    	
$
    	
(116.9
    	
)
    	
$
    	
(12.8
    	
)
    	
$
    	
(129.7
    	
)
    	
$
    	
(125.4
    	
)
    
	
Realized   and unrealized gains (losses)
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Recorded   to income
    	
 
    	
(11.0
    	
)
    	
7.6
    	
 
    	
(3.4
    	
)
    	
(0.7
    	
)
    
	
Recorded   to regulatory assets—gas costs
    	
 
    	
(1.1
    	
)
    	
—
    	
 
    	
(1.1
    	
)
    	
(1.1
    	
)
    
	
Transfers   out of Level 3
    	
 
    	
9.1
    	
 
    	
—
    	
 
    	
9.1
    	
 
    	
9.0
    	
 
    
	
Settlements
    	
 
    	
34.9
    	
 
    	
(5.1
    	
)
    	
29.8
    	
 
    	
29.2
    	
 
    
	
Balance   at March 31, 2018
    	
 
    	
$
    	
(85.0
    	
)
    	
$
    	
(10.3
    	
)
    	
$
    	
(95.3
    	
)
    	
$
    	
(89.0
    	
)
    
	
Three Months   Ended March 31, 2017
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Balance at   January 1, 2017
    	
 
    	
$
    	
(228.6
    	
)
    	
$
    	
(8.3
    	
)
    	
$
    	
(236.9
    	
)
    	
$
    	
(208.8
    	
)
    
	
Realized and unrealized   gains (losses)
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Recorded to   income
    	
 
    	
42.3
    	
 
    	
(0.6
    	
)
    	
41.7
    	
 
    	
14.8
    	
 
    
	
Recorded to   regulatory assets—gas costs
    	
 
    	
30.4
    	
 
    	
—
    	
 
    	
30.4
    	
 
    	
30.4
    	
 
    
	
Transfers into   Level 3
    	
 
    	
(0.6
    	
)
    	
—
    	
 
    	
(0.6
    	
)
    	
(0.6
    	
)
    
	
Transfers out of   Level 3
    	
 
    	
(0.5
    	
)
    	
—
    	
 
    	
(0.5
    	
)
    	
(0.3
    	
)
    
	
Purchases
    	
 
    	
—
    	
 
    	
(0.2
    	
)
    	
(0.2
    	
)
    	
—
    	
 
    
	
Settlements
    	
 
    	
6.8
    	
 
    	
0.7
    	
 
    	
7.5
    	
 
    	
9.1
    	
 
    
	
Balance at   March 31, 2017
    	
 
    	
$
    	
(150.2
    	
)
    	
$
    	
(8.4
    	
)
    	
$
    	
(158.6
    	
)
    	
$
    	
(155.4
    	
)
    
	
Six   Months Ended March 31, 2018
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Balance   at October 1, 2017
    	
 
    	
$
    	
(114.6
    	
)
    	
$
    	
(6.2
    	
)
    	
$
    	
(120.8
    	
)
    	
$
    	
(122.6
    	
)
    
	
Realized   and unrealized gains (losses)
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Recorded   to income
    	
 
    	
(15.1
    	
)
    	
(1.6
    	
)
    	
(16.7
    	
)
    	
(4.5
    	
)
    
	
Recorded   to regulatory assets—gas costs
    	
 
    	
(8.0
    	
)
    	
—
    	
 
    	
(8.0
    	
)
    	
(8.0
    	
)
    
	
Transfers   into Level 3
    	
 
    	
0.3
    	
 
    	
—
    	
 
    	
0.3
    	
 
    	
0.2
    	
 
    
	
Transfers   out of Level 3
    	
 
    	
8.8
    	
 
    	
—
    	
 
    	
8.8
    	
 
    	
9.0
    	
 
    
	
Purchases
    	
 
    	
—
    	
 
    	
2.5
    	
 
    	
2.5
    	
 
    	
—
    	
 
    
	
Settlements
    	
 
    	
43.6
    	
 
    	
(5.0
    	
)
    	
38.6
    	
 
    	
36.9
    	
 
    
	
Balance   at March 31, 2018
    	
 
    	
$
    	
(85.0
    	
)
    	
$
    	
(10.3
    	
)
    	
$
    	
(95.3
    	
)
    	
$
    	
(89.0
    	
)
    
	
Six Months Ended   March 31, 2017
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Balance at   October 1, 2016
    	
 
    	
$
    	
(264.1
    	
)
    	
$
    	
(9.1
    	
)
    	
$
    	
(273.2
    	
)
    	
$
    	
(251.6
    	
)
    
	
Realized and unrealized   gains (losses)
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Recorded to   income
    	
 
    	
52.6
    	
 
    	
(4.2
    	
)
    	
48.4
    	
 
    	
31.8
    	
 
    
	
Recorded to   regulatory assets—gas costs
    	
 
    	
52.4
    	
 
    	
—
    	
 
    	
52.4
    	
 
    	
52.4
    	
 
    
	
Transfers into   Level 3
    	
 
    	
(0.8
    	
)
    	
—
    	
 
    	
(0.8
    	
)
    	
(0.4
    	
)
    
	
Transfers out of   Level 3
    	
 
    	
(0.5
    	
)
    	
—
    	
 
    	
(0.5
    	
)
    	
(0.3
    	
)
    
	
Purchases
    	
 
    	
—
    	
 
    	
(3.0
    	
)
    	
(3.0
    	
)
    	
—
    	
 
    
	
Settlements
    	
 
    	
10.2
    	
 
    	
7.9
    	
 
    	
18.1
    	
 
    	
12.7
    	
 
    
	
Balance at   March 31, 2017
    	
 
    	
$
    	
(150.2
    	
)
    	
$
    	
(8.4
    	
)
    	
$
    	
(158.6
    	
)
    	
$
    	
(155.4
    	
)
    

 

33

 

WGL Holdings, Inc.

Washington Gas Light Company

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

Transfers between different levels of the fair value hierarchy may occur based on fluctuations in the valuation inputs and on the level of observable inputs used to value the instruments from period to period. It is our policy to show both transfers into and out of the different levels of the fair value hierarchy at the fair value as of the beginning of the period. Transfers out of Level 3 for the periods presented were due to an increase in observable market inputs, primarily reflecting a decrease in the duration of the contracts being valued. Transfers into Level 3 for the periods presented were due to an increase in unobservable market inputs, primarily pricing points.

 

The table below sets forth the line items on the statements of income to which amounts are recorded for the three and six months ended March 31, 2018 and 2017 , respectively, related to fair value measurements using significant Level 3 inputs.

 

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

 

	
 
    	
 
    	
WGL Holdings, Inc.
    	
 
    	
Washington Gas Light
   Company
    	
 
    
	
(In millions)
    	
 
    	
Natural Gas
   Related
   Derivatives
    	
 
    	
Electricity
   Related
   Derivatives
    	
 
    	
Total
    	
 
    	
Total - Natural Gas Related
   Derivatives
    	
 
    
	
Three   Months Ended March 31, 2018
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Operating   revenues—non-utility
    	
 
    	
$
    	
(0.9  
    	
)
    	
$
    	
12.3
    	
 
    	
$
    	
11.4
    	
 
    	
$
    	
—
    	
 
    
	
Utility   cost of gas
    	
 
    	
(0.7
    	
)
    	
—
    	
 
    	
(0.7
    	
)
    	
(0.7
    	
)
    
	
Non-utility   cost of energy-related sales
    	
 
    	
(9.4
    	
)
    	
(4.7
    	
)
    	
(14.1
    	
)
    	
—
    	
 
    
	
Total
    	
 
    	
$
    	
(11.0  
    	
)
    	
$
    	
7.6
    	
 
    	
$
    	
(3.4
    	
)
    	
$
    	
(0.7
    	
)
    
	
Three Months   Ended March 31, 2017
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Operating   revenues—non-utility
    	
 
    	
$
    	
25.5
    	
 
    	
$
    	
2.2
    	
 
    	
$
    	
27.7
    	
 
    	
$
    	
—
    	
 
    
	
Utility cost of   gas
    	
 
    	
14.8
    	
 
    	
—
    	
 
    	
14.8
    	
 
    	
14.8
    	
 
    
	
Non-utility cost   of energy-related sales
    	
 
    	
2.0
    	
 
    	
(2.8
    	
)
    	
(0.8
    	
)
    	
—
    	
 
    
	
Total
    	
 
    	
$
    	
42.3
    	
 
    	
$
    	
(0.6
    	
)
    	
$
    	
41.7
    	
 
    	
$
    	
14.8
    	
 
    
	
Six   Months Ended March 31, 2018
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Operating   revenues—non-utility
    	
 
    	
$
    	
(7.4  
    	
)
    	
$
    	
(3.8  
    	
)
    	
$
    	
(11.2
    	
)
    	
$
    	
—
    	
 
    
	
Utility   cost of gas
    	
 
    	
(4.5
    	
)
    	
—
    	
 
    	
(4.5
    	
)
    	
(4.5
    	
)
    
	
Non-utility   cost of energy-related sales
    	
 
    	
(3.2
    	
)
    	
2.2
    	
 
    	
(1.0
    	
)
    	
—
    	
 
    
	
Total
    	
 
    	
$
    	
(15.1  
    	
)
    	
$
    	
(1.6
    	
)
    	
$
    	
(16.7
    	
)
    	
$
    	
(4.5
    	
)
    
	
Six Months Ended   March 31, 2017
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Operating   revenues—non-utility
    	
 
    	
$
    	
15.2
    	
 
    	
$
    	
(8.5
    	
)
    	
$
    	
6.7
    	
 
    	
$
    	
—
    	
 
    
	
Utility cost of   gas
    	
 
    	
31.8
    	
 
    	
—
    	
 
    	
31.8
    	
 
    	
31.8
    	
 
    
	
Non-utility cost   of energy-related sales
    	
 
    	
5.6
    	
 
    	
4.3
    	
 
    	
9.9
    	
 
    	
—
    	
 
    
	
Total
    	
 
    	
$
    	
52.6
    	
 
    	
$
    	
(4.2
    	
)
    	
$
    	
48.4
    	
 
    	
$
    	
31.8
    	
 
    

 

Unrealized gains (losses) attributable to derivative assets and liabilities measured using significant Level 3 inputs were recorded as follows, for the three and six months ended March 31, 2018 and 2017 , respectively.

 

34

 

WGL Holdings, Inc.

Washington Gas Light Company

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

Unrealized Gains (Losses) Recorded for Level 3 Measurements

 

	
 
    	
 
    	
WGL Holdings, Inc.
    	
 
    	
Washington Gas Light
   Company
    	
 
    
	
(In millions)
    	
 
    	
Natural Gas
   Related
   Derivatives
    	
 
    	
Electricity
   Related
   Derivatives
    	
 
    	
Total
    	
 
    	
Total - Natural Gas
   Related Derivatives
    	
 
    
	
Three   Months Ended March 31, 2018
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Recorded   to income
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Operating   revenues—non-utility
    	
 
    	
$
    	
(1.8
    	
)
    	
$
    	
4.8
    	
 
    	
$
    	
3.0
    	
 
    	
$
    	
—
    	
 
    
	
Utility   cost of gas
    	
 
    	
5.0
    	
 
    	
—
    	
 
    	
5.0
    	
 
    	
5.0
    	
 
    
	
Non-utility   cost of energy-related sales
    	
 
    	
(5.8
    	
)
    	
(2.1
    	
)
    	
(7.9
    	
)
    	
—
    	
 
    
	
Recorded   to regulatory assets—gas costs
    	
 
    	
6.6
    	
 
    	
—
    	
 
    	
6.6
    	
 
    	
6.6
    	
 
    
	
Total
    	
 
    	
$
    	
4.0
    	
 
    	
$
    	
2.7
    	
 
    	
$
    	
6.7
    	
 
    	
$
    	
11.6
    	
 
    
	
Three Months   Ended March 31, 2017
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Recorded to   income
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Operating   revenues—non-utility
    	
 
    	
$
    	
24.1
    	
 
    	
$
    	
4.9
    	
 
    	
$
    	
29.0
    	
 
    	
$
    	
—
    	
 
    
	
Utility cost of gas
    	
 
    	
11.3
    	
 
    	
—
    	
 
    	
11.3
    	
 
    	
11.3
    	
 
    
	
Non-utility cost   of energy-related sales
    	
 
    	
—
    	
 
    	
(4.3
    	
)
    	
(4.3
    	
)
    	
—
    	
 
    
	
Recorded to   regulatory assets—gas costs
    	
 
    	
27.3
    	
 
    	
—
    	
 
    	
27.3
    	
 
    	
27.3
    	
 
    
	
Total
    	
 
    	
$
    	
62.7
    	
 
    	
$
    	
0.6
    	
 
    	
$
    	
63.3
    	
 
    	
$
    	
38.6
    	
 
    
	
Six   Months Ended March 31, 2018
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Recorded   to income
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Operating   revenues—non-utility
    	
 
    	
$
    	
(7.4
    	
)
    	
$
    	
(8.8
    	
)
    	
$
    	
(16.2
    	
)
    	
$
    	
—
    	
 
    
	
Utility   cost of gas
    	
 
    	
2.6
    	
 
    	
—
    	
 
    	
2.6
    	
 
    	
2.6
    	
 
    
	
Non-utility   cost of energy-related sales
    	
 
    	
1.3
    	
 
    	
4.1
    	
 
    	
5.4
    	
 
    	
—
    	
 
    
	
Recorded   to regulatory assets—gas costs
    	
 
    	
1.7
    	
 
    	
—
    	
 
    	
1.7
    	
 
    	
1.7
    	
 
    
	
Total
    	
 
    	
$
    	
(1.8
    	
)
    	
$
    	
(4.7
    	
)
    	
$
    	
(6.5
    	
)
    	
$
    	
4.3
    	
 
    
	
Six Months Ended   March 31, 2017
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Recorded to   income
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Operating   revenues—non-utility
    	
 
    	
$
    	
13.5
    	
 
    	
$
    	
(1.0
    	
)
    	
$
    	
12.5
    	
 
    	
$
    	
—
    	
 
    
	
Utility cost of   gas
    	
 
    	
21.6
    	
 
    	
—
    	
 
    	
21.6
    	
 
    	
21.6
    	
 
    
	
Non-utility cost   of energy-related sales
    	
 
    	
—
    	
 
    	
7.4
    	
 
    	
7.4
    	
 
    	
—
    	
 
    
	
Recorded to   regulatory assets—gas costs
    	
 
    	
39.4
    	
 
    	
—
    	
 
    	
39.4
    	
 
    	
39.4
    	
 
    
	
Total
    	
 
    	
$
    	
74.5
    	
 
    	
$
    	
6.4
    	
 
    	
$
    	
80.9
    	
 
    	
$
    	
61.0
    	
 
    

 

35

 

WGL Holdings, Inc.

Washington Gas Light Company

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

The following table presents the carrying amounts and estimated fair values of our financial instruments at March 31, 2018 and September 30, 2017 .

 

WGL Holdings, Inc.

Fair Value of Financial Instruments

 

	
 
    	
 
    	
March 31, 2018
    	
 
    	
September 30, 2017
    	
 
    
	
(In millions)
    	
 
    	
Carrying
   Amount
    	
 
    	
Fair Value
    	
 
    	
Carrying Amount
    	
 
    	
Fair Value
    	
 
    
	
Money market   funds (a)
    	
 
    	
$
    	
46.9
    	
 
    	
$
    	
46.9
    	
 
    	
$
    	
11.8
    	
 
    	
$
    	
11.8
    	
 
    
	
Commercial paper   (b)
    	
 
    	
$
    	
369.0
    	
 
    	
$
    	
369.0
    	
 
    	
$
    	
505.0
    	
 
    	
$
    	
505.0
    	
 
    
	
Project   financing (b)
    	
 
    	
$
    	
55.8
    	
 
    	
$
    	
55.8
    	
 
    	
$
    	
54.8
    	
 
    	
$
    	
54.8
    	
 
    
	
Long-term debt (c)
    	
 
    	
$
    	
1,879.3
    	
 
    	
$
    	
1,979.4
    	
 
    	
$
    	
1,430.9
    	
 
    	
$
    	
1,577.3
    	
 
    

 

Washington Gas Light Company Fair Value of Financial Instruments

 

	
 
    	
 
    	
March 31, 2018
    	
 
    	
September 30, 2017
    	
 
    
	
(In millions)
    	
 
    	
Carrying
   Amount
    	
 
    	
Fair Value
    	
 
    	
Carrying Amount
    	
 
    	
Fair Value
    	
 
    
	
Money market   funds (a)
    	
 
    	
$
    	
18.2
    	
 
    	
$
    	
18.2
    	
 
    	
$
    	
4.8
    	
 
    	
$
    	
4.8
    	
 
    
	
Commercial paper   (b)
    	
 
    	
$
    	
35.0
    	
 
    	
$
    	
35.0
    	
 
    	
$
    	
123.0
    	
 
    	
$
    	
123.0
    	
 
    
	
Project   financing (b)
    	
 
    	
$
    	
43.8
    	
 
    	
$
    	
43.8
    	
 
    	
$
    	
43.8
    	
 
    	
$
    	
43.8
    	
 
    
	
Long-term debt (c)
    	
 
    	
$
    	
1,084.8
    	
 
    	
$
    	
1,180.4
    	
 
    	
$
    	
1,134.5
    	
 
    	
$
    	
1,271.0
    	
 
    

 

(a) Balance is located in cash and cash equivalents in the accompanying balance sheets. These amounts may be offset by outstanding checks.

(b) Balance is located in notes payable in the accompanying balance sheets.

(c) Excludes current maturities.

 

Our money market funds are Level 1 valuations and their carrying amount approximates fair value. Other short-term investments are primarily overnight investment accounts; their carrying amount approximates fair value based on Level 2 inputs. The maturity of our commercial paper outstanding at both March 31, 2018 and September 30, 2017 is under 30 days. Due to the short-term nature of these notes, the carrying cost of our commercial paper approximates fair value using Level 2 inputs. Due to the nature of our project financing arrangements, the carrying cost approximates fair value using Level 2 inputs. Neither WGL’s nor Washington Gas’ long-term debt is actively traded. The fair value of long-term debt was estimated based on the quoted market prices of the U.S. Treasury issues having a similar term to maturity, adjusted for the credit quality of the debt issuer, WGL or Washington Gas. Our long-term debt fair value measurement is classified as Level 3.

 

Non Recurring Basis

 

During the second quarter of fiscal year 2018, WGL Midstream recorded an other than temporary impairment charge of $ 34.0 million to its equity method investment in Constitution based on the estimated fair value of the investment of $ 4.0 million . WGL Midstream utilized income and market approaches to determine the fair value of its investment in Constitution, which fall into Level 3 of the fair value hierarchy because of the significant unobservable inputs utilized in these valuation approaches, including consideration of the severity and duration of any decline in fair value of our investment in the project. Our key inputs included, but were not limited to, significant management judgments and estimates, including projections of the timing and amount of the project’s cash flows, determination of a discount rate for the income approach, market multipliers, probability weighting of potential outcomes of legal and regulatory proceedings, and weighting of the valuations produced by the income and market approaches. For more information, see Note 11- Other Investments of the Notes to Condensed Consolidated Financial Statements.

 

36

 

WGL Holdings, Inc.

 

Washington Gas Light Company

 

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

NOTE 10. OPERATING SEGMENT REPORTING

 

We have four reportable operating segments: regulated utility, retail energy-marketing, commercial energy systems and midstream energy services. The division of these segments into separate revenue generating components is based upon regulation, products and services. Our chief operating decision maker is our Chief Executive Officer and we evaluate segment performance based on Earnings Before Interest and Taxes (EBIT). EBIT is defined as earnings before interest and taxes, net of amounts attributable to non-controlling interests. Items we do not include in EBIT are interest expense, intercompany financing activity, dividends on Washington Gas preferred stock, and income taxes. EBIT includes transactions between reportable segments. We also evaluate our operating segments based on other relevant factors, such as penetration into their respective markets and return on equity.

 

Our four segments are summarized below.

 

·                  Regulated Utility — The regulated utility segment is our core business. It consists of Washington Gas and Hampshire. Washington Gas provides regulated gas distribution services (including the sale and delivery of natural gas) to end use customers in the District of Columbia, Maryland and Virginia and natural gas transportation services to an unaffiliated natural gas distribution company in West Virginia under a Federal Energy Regulatory Commission (FERC) approved interstate transportation service operating agreement. Hampshire provides regulated interstate natural gas storage services to Washington Gas under a FERC approved interstate storage service tariff.

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

·                  Commercial Energy Systems — The commercial energy systems segment consists of WGL Energy Systems, which provides clean and energy efficient solutions including commercial solar, energy efficiency and combined heat and power projects and other distributed generation solutions to government and commercial clients. In addition, this segment comprises the operations of WGSW, a holding company formed to invest in alternative energy assets.

·                  Midstream Energy Services — The midstream energy services segment consists of WGL Midstream, which specializes in the investment, management, development and optimization of natural gas storage and transportation midstream infrastructure projects.

 

Administrative and business development activity costs associated with WGL and Washington Gas Resources and activities and transactions that are not significant enough on a stand-alone basis to warrant treatment as an operating segment, and that do not fit into one of our four operating segments, are aggregated as “Other Activities” in the Operating Segment Financial Information presented below. Results for other activities primarily relate to costs associated with the planned merger with AltaGas.

 

37

 

WGL Holdings, Inc.

Washington Gas Light Company

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

The following tables present operating segment information for the three and six months ended March 31, 2018 and 2017 .

 

	
Operating Segment Financial Information
    	
 
    
	
(In thousands)
    	
 
    	
Operating
   Revenues
    	
 
    	
Depreciation and
   Amortization
    	
 
    	
Equity in
   Earnings of
   Unconsolidated
   Affiliates
    	
 
    	
EBIT
    	
 
    	
Total
   Assets
    	
 
    	
Capital
   Expenditures
    	
 
    	
Equity Method
   Investments
    	
 
    
	
Three Months Ended March 31, 2018
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Regulated utility
    	
 
    	
$
    	
532,040
    	
 
    	
$
    	
33,926
    	
 
    	
$
    	
—
    	
 
    	
$
    	
151,069
    	
 
    	
$
    	
5,145,550
    	
 
    	
$
    	
70,817
    	
 
    	
$
    	
—
    	
 
    
	
Retail energy-marketing
    	
 
    	
316,714
    	
 
    	
278
    	
 
    	
—
    	
 
    	
15,104
    	
 
    	
526,833
    	
 
    	
—
    	
 
    	
—
    	
 
    
	
Commercial energy systems  (a)
    	
 
    	
16,406
    	
 
    	
6,480
    	
 
    	
—
    	
 
    	
3,562
    	
 
    	
1,067,381
    	
 
    	
40,408
    	
 
    	
—
    	
 
    
	
Midstream energy services
    	
 
    	
33,324
    	
 
    	
5
    	
 
    	
(27,414
    	
)
    	
7,306
    	
 
    	
1,046,184
    	
 
    	
—
    	
 
    	
584,594
    	
 
    
	
Other activities
    	
 
    	
—
    	
 
    	
—
    	
 
    	
—
    	
 
    	
(2,185
    	
)
    	
263,298
    	
 
    	
—
    	
 
    	
—
    	
 
    
	
Eliminations  (b)
    	
 
    	
(12,033
    	
)
    	
33
    	
 
    	
—
    	
 
    	
(4,116
    	
)
    	
(1,202,420
    	
)
    	
—
    	
 
    	
—
    	
 
    
	
Total consolidated
    	
 
    	
$
    	
886,451
    	
 
    	
$
    	
40,722
    	
 
    	
$
    	
(27,414
    	
)
    	
$
    	
170,740
    	
 
    	
$
    	
6,846,826
    	
 
    	
$
    	
111,225
    	
 
    	
$
    	
584,594
    	
 
    
	
Three Months Ended March 31, 2017
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Regulated utility
    	
 
    	
$
    	
475,021
    	
 
    	
$
    	
33,572
    	
 
    	
$
    	
—
    	
 
    	
$
    	
165,171
    	
 
    	
$
    	
4,852,633
    	
 
    	
$
    	
96,612
    	
 
    	
$
    	
—
    	
 
    
	
Retail energy-marketing
    	
 
    	
324,916
    	
 
    	
273
    	
 
    	
—
    	
 
    	
9,255
    	
 
    	
512,583
    	
 
    	
330
    	
 
    	
—
    	
 
    
	
Commercial energy systems (a)
    	
 
    	
20,980
    	
 
    	
5,226
    	
 
    	
2,443
    	
 
    	
8,547
    	
 
    	
945,847
    	
 
    	
13,845
    	
 
    	
74,922
    	
 
    
	
Midstream energy services
    	
 
    	
38,621
    	
 
    	
10
    	
 
    	
4,901
    	
 
    	
41,993
    	
 
    	
611,221
    	
 
    	
—
    	
 
    	
333,777
    	
 
    
	
Other activities
    	
 
    	
—
    	
 
    	
—
    	
 
    	
—
    	
 
    	
(15,067
    	
)
    	
338,405
    	
 
    	
—
    	
 
    	
—
    	
 
    
	
Eliminations (b)
    	
 
    	
(17,788
    	
)
    	
29
    	
 
    	
—
    	
 
    	
(1,472
    	
)
    	
(850,954
    	
)
    	
—
    	
 
    	
—
    	
 
    
	
Total consolidated
    	
 
    	
$
    	
841,750
    	
 
    	
$
    	
39,110
    	
 
    	
$
    	
7,344
    	
 
    	
$
    	
208,427
    	
 
    	
$
    	
6,409,735
    	
 
    	
$
    	
110,787
    	
 
    	
$
    	
408,699
    	
 
    
	
Six Months Ended March 31, 2018
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Regulated utility
    	
 
    	
$
    	
909,510
    	
 
    	
$
    	
68,029
    	
 
    	
$
    	
—
    	
 
    	
$
    	
249,434
    	
 
    	
$
    	
5,145,550
    	
 
    	
$
    	
147,579
    	
 
    	
$
    	
—
    	
 
    
	
Retail energy-marketing
    	
 
    	
565,407
    	
 
    	
560
    	
 
    	
—
    	
 
    	
18,846
    	
 
    	
526,833
    	
 
    	
—
    	
 
    	
—
    	
 
    
	
Commercial energy systems  (a)
    	
 
    	
36,469
    	
 
    	
13,064
    	
 
    	
—
    	
 
    	
9,209
    	
 
    	
1,067,381
    	
 
    	
62,700
    	
 
    	
—
    	
 
    
	
Midstream energy services
    	
 
    	
51,011
    	
 
    	
9
    	
 
    	
(21,522
    	
)
    	
29,491
    	
 
    	
1,046,184
    	
 
    	
—
    	
 
    	
584,594
    	
 
    
	
Other activities
    	
 
    	
—
    	
 
    	
—
    	
 
    	
—
    	
 
    	
(6,356
    	
)
    	
263,298
    	
 
    	
—
    	
 
    	
—
    	
 
    
	
Eliminations  (b)
    	
 
    	
(23,506
    	
)
    	
45
    	
 
    	
—
    	
 
    	
(2,427
    	
)
    	
(1,202,420
    	
)
    	
—
    	
 
    	
—
    	
 
    
	
Total consolidated
    	
 
    	
$
    	
1,538,891
    	
 
    	
$
    	
81,707
    	
 
    	
$
    	
(21,522
    	
)
    	
$
    	
298,197
    	
 
    	
$
    	
6,846,826
    	
 
    	
$
    	
210,279
    	
 
    	
$
    	
584,594
    	
 
    
	
Six Months Ended March 31, 2017
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Regulated utility
    	
 
    	
$
    	
809,007
    	
 
    	
$
    	
64,132
    	
 
    	
$
    	
—
    	
 
    	
$
    	
267,888
    	
 
    	
$
    	
4,852,633
    	
 
    	
$
    	
208,293
    	
 
    	
$
    	
—
    	
 
    
	
Retail energy-marketing
    	
 
    	
623,600
    	
 
    	
578
    	
 
    	
—
    	
 
    	
38,440
    	
 
    	
512,583
    	
 
    	
734
    	
 
    	
—
    	
 
    
	
Commercial energy systems (a)
    	
 
    	
35,837
    	
 
    	
9,625
    	
 
    	
4,830
    	
 
    	
13,210
    	
 
    	
945,847
    	
 
    	
57,518
    	
 
    	
74,922
    	
 
    
	
Midstream energy services
    	
 
    	
13,633
    	
 
    	
19
    	
 
    	
2,779
    	
 
    	
13,509
    	
 
    	
611,221
    	
 
    	
—
    	
 
    	
333,777
    	
 
    
	
Other activities
    	
 
    	
—
    	
 
    	
—
    	
 
    	
—
    	
 
    	
(16,265
    	
)
    	
338,405
    	
 
    	
—
    	
 
    	
—
    	
 
    
	
Eliminations (b)
    	
 
    	
(30,840
    	
)
    	
39
    	
 
    	
—
    	
 
    	
(364
    	
)
    	
(850,954
    	
)
    	
—
    	
 
    	
—
    	
 
    
	
Total consolidated
    	
 
    	
$
    	
1,451,237
    	
 
    	
$
    	
74,393
    	
 
    	
$
    	
7,609
    	
 
    	
$
    	
316,418
    	
 
    	
$
    	
6,409,735
    	
 
    	
$
    	
266,545
    	
 
    	
$
    	
408,699
    	
 
    

 

38

 

WGL Holdings, Inc.

Washington Gas Light Company

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

(a) Commercial Energy Systems’ operating revenues and depreciation and amortization include activity from non-controlling interest. Commercial energy systems’ EBIT is adjusted for the effects of non-controlling interest.

(b) Intersegment eliminations include any mark-to market valuations associated with trading activities between WGL Midstream and WGL Energy Services, intercompany loans and a timing difference between Commercial Energy Systems’ recognition of revenue for the sale of Renewable Energy Credits (RECs) to Retail Energy-Marketing and Retail Energy-Marketing’s recognition of the associated expense. Retail Energy-Marketing has recorded a portion of the RECs purchased as inventory to be used in future periods at which time they will be expensed. Operating revenue amounts in the “Eliminations” row represent total intersegment revenues associated with sales from the regulated utility segment to the retail energy-marketing segment. Midstream Energy Services’ cost of energy related sales is netted with its gross revenues.

 

The following table provides a reconciliation from EBIT to net income applicable to common stock.

 

	
 
    	
 
    	
Three Months Ended March
   31,
    	
 
    	
Six Months Ended March 31,
    	
 
    
	
(In thousands)
    	
 
    	
2018
    	
 
    	
2017
    	
 
    	
2018
    	
 
    	
2017
    	
 
    
	
Total   consolidated EBIT
    	
 
    	
$
    	
170,740
    	
 
    	
$
    	
208,427
    	
 
    	
$
    	
298,197
    	
 
    	
$
    	
316,418
    	
 
    
	
Interest expense
    	
 
    	
7,637
    	
 
    	
14,255
    	
 
    	
27,834
    	
 
    	
30,490
    	
 
    
	
Income tax   expense (benefit)
    	
 
    	
27,223
    	
 
    	
70,778
    	
 
    	
(3,887
    	
)
    	
104,232
    	
 
    
	
Dividends on   Washington Gas Light Company preferred stock
    	
 
    	
330
    	
 
    	
330
    	
 
    	
660
    	
 
    	
660
    	
 
    
	
Net   income applicable to common stock
    	
 
    	
$
    	
135,550
    	
 
    	
$
    	
123,064
    	
 
    	
$
    	
273,590
    	
 
    	
$
    	
181,036
    	
 
    

 

NOTE 11. OTHER INVESTMENTS

 

WGL has both solar and pipeline investments and accounts for its interests in legal entities as either a: (i) variable interest entity (VIE) or a (ii) voting interest entity (non-VIE). A VIE is a legal entity with one of the following characteristics: (i) has insufficient at-risk equity to fund its activities without additional subordinated financial support from any other party or parties; (ii) the equity holders of which, as a group, lack the characteristics of a controlling financial interest; or (iii) the entity is structured with non-substantive voting rights.

 

The determination of whether or not to consolidate a VIE under GAAP requires a significant amount of judgment. This includes, but is not limited to, consideration of our contractual relationships with the entity, the legal structure of the entity, the voting power of the equity holders, the obligation of the equity holders to absorb losses of the entity and their rights to receive any expected residual returns.

 

Under the VIE model, we have a controlling financial interest in a VIE (i.e., are the primary beneficiary) and would consolidate the entity when we have current or potential rights that give us the power to direct the activities of a VIE that most significantly impact the VIE’s economic performance combined with a variable interest that gives us the right to receive potentially significant benefits or the obligation to absorb potentially significant losses. When changes occur to the design of an entity, we reconsider whether the entity is a VIE. We also continuously evaluate whether we have a controlling financial interest in a VIE.

 

We have investments in both consolidated and unconsolidated VIEs which are described in detail below. The unconsolidated investments are accounted for under the equity method of accounting with profits and losses included in “Equity in earnings of unconsolidated affiliates” in the accompanying Condensed Consolidated Statements of Income.

 

Under the voting interest model, we consolidate an entity when we have a controlling financial interest by holding directly or indirectly, more than 50% of the voting rights or by exercising control through substantive participating rights. However, we consider substantive rights held by other partners in determining if we hold a controlling financial interest, and in some cases, may not consolidate the entity despite owning more than 50% of the voting rights. We reevaluate whether we have a controlling financial interest in these entities when our voting or substantive participating rights change. Where we do not have a controlling financial interest, we apply the equity method of accounting in which investments are initially measured at cost. Investments in, and advances to, affiliated companies are presented in the caption “Investments in unconsolidated affiliates” in the accompanying Condensed Consolidated Balance Sheets.

 

WGL uses the Hypothetical Liquidation at Book Value (HLBV) methodology to determine its earnings or losses for certain equity method investments as well as for the non-controlling interests in consolidated investments when the governing structuring agreement over the equity investment results in different liquidation rights and priorities than what is reflected by the underlying ownership interest percentage. For investments accounted for under the HLBV method, simply applying the percentage ownership interest to GAAP net income in order to determine earnings or losses does not accurately represent the income allocation and cash flow distributions that will ultimately be received by the investors. The HLBV calculation may vary in its complexity depending on the capital structure and the tax considerations for the investments.

 

When applying HLBV, WGL determines the amount that it would receive if an equity investment entity were to liquidate all of its assets at book value (as valued in accordance with GAAP) and distribute that cash to the investors based on the contractually defined liquidation

 

39

 

WGL Holdings, Inc.

Washington Gas Light Company

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

priorities. The change in WGL’s claim on the investee’s book value at the beginning and end of the reporting period (adjusted for contributions and distributions) is WGL’s share of the earnings or losses from the equity investment for the period.

 

Consolidated Investments

 

Variable Interest Entity Investments-Solar

 

At March 31, 2018, WGL’s subsidiary, WGSW, Inc. was the primary beneficiary of SFGF LLC (SFGF), LLC, SFRC, LLC (SFRC), SFGF II, LLC (SFGF II), ASD Solar LP (ASD) and SFEE LLC (SFEE), because of its ability to direct the activities most significant to the economic performance of those entities plus the right to receive potentially significant benefits or the obligation to absorb potentially significant losses. Accordingly, we have consolidated these VIE’s.

 

SFGF, SFRC, and SFGF II

 

WGSW, along with its various tax equity partners, formed the tax equity partnerships SFGF, SFRC, and SFGF II to acquire, own, and operate distributed generation solar projects nationwide. WGSW is the managing member of these investments and will provide cash equal to the purchase price of the solar projects less any contributions from the tax-equity partner for projects sold by WGL Energy Systems into the partnerships. WGL Energy Systems is the operations and maintenance provider, and the developer of the projects.

 

Profits and losses are allocated between the partners under the HLBV method of accounting and the portion allocated to the tax equity partner is included in “Net income (loss) attributable to non-controlling interest” on the accompanying Condensed Consolidated Statements of Income and is recorded to Non-controlling interest on the accompanying Condensed Consolidated Balance Sheets.

 

As of March 31, 2018, WGSW has contributed $ 16.8 million, $ 29.0 million and $ 4.0 million to SFGF, SFRC, and SFGF II respectively.

 

ASD

 

WGSW is the limited partner in ASD, a limited partnership formed to own and operate a portfolio of residential solar projects, primarily rooftop photovoltaic power generation systems. As a limited partner, WGSW had provided funding to the partnership but did not have power to direct the activities that most significantly affect the operations and economic performance of the entity. In January 2014, the funding commitment period ended for the partnership. Prior to July 10, 2017, ASD was being consolidated by the general partner, Solar Direct LLC (Solar Direct). Solar Direct is a wholly owned subsidiary of American Solar Direct Inc. (ASDI).

 

In June 2017, ASDI filed for Chapter 7 bankruptcy because of financial difficulties. To ensure continuing operations of the partnership and minimal disruptions to the customers, WGSW petitioned the Bankruptcy Court to remove Solar Direct as manager of ASD operations and to approve the appointment of SF ASD, a wholly-owned subsidiary of WGL Energy Systems, formed to take over the management and operations of the partnership, as manager of ASD operations. On July 10, 2017, the Bankruptcy Court granted the bankruptcy trustee’s emergency motion to assign management rights and control of ASD to SF ASD and WGSW consolidated ASD as a result. As of March 31, 2018, WGSW has contributed $ 72.6 million into the tax equity partnership.

 

SFEE

 

On November 23, 2016, WGSW and a tax equity partner formed SFEE to acquire distributed generation solar projects that were to be developed and sold by a third-party developer or WGL Energy Systems. New projects were to be designed and constructed under long-term power purchase agreements. On November 8, 2017, WGSW terminated the Master Purchase Agreement between SFEE, LLC and the third-party developer. The termination triggered a reassessment of the method of accounting for SFEE and, as a result, SFEE is considered a VIE and is consolidated by WGSW. As of March 31, 2018, WGSW has contributed $ 6.5 million into the tax equity partnership.

 

The following table summarizes the fair value amounts of SFEE’s assets and liabilities, as well as the estimated fair value of the non-controlling interest as of the date of consolidation.

 

40

 

WGL Holdings, Inc.

Washington Gas Light Company

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

Fair Value of SFEE at Date of Consolidation

 

	
(in millions)
    	
 
    	
Fair Value
    	
 
    
	
Property, plant   and equipment
    	
 
    	
$
    	
10.1
    	
 
    
	
Other assets
    	
 
    	
0.1
    	
 
    
	
Total   assets
    	
 
    	
$
    	
10.2
    	
 
    
	
Net   assets
    	
 
    	
$
    	
10.2
    	
 
    
	
Non-controlling   interest
    	
 
    	
$
    	
0.6
    	
 
    
	
WGSW   equity interest
    	
 
    	
$
    	
9.6
    	
 
    

 

Property, plant and equipment represents commercial solar assets for SFEE stated at cost. This amount was determined to be equal to the fair value provided by a third-party appraisal.

 

Balance Sheet Location of Consolidated Investments

 

The carrying amounts and classification of the consolidated VIEs’ assets and liabilities included in our accompanying Condensed Consolidated Balance Sheets at March 31, 2018 and September 30, 2017 are as follows:

 

WGL Holdings, Inc.

Balance Sheet Location of Consolidated Investments

 

	
(in millions)
    	
 
    	
March 31, 2018
    	
 
    	
September 30, 2017
    	
 
    
	
Current assets
    	
 
    	
$
    	
7.4
    	
 
    	
$
    	
4.4
    	
 
    
	
Property, Plant   and Equipment
    	
 
    	
161.1
    	
 
    	
121.7
    	
 
    
	
Total   assets
    	
 
    	
$
    	
168.5
    	
 
    	
$
    	
126.1
    	
 
    
	
Current   liabilities
    	
 
    	
—
    	
 
    	
0.2
    	
 
    
	
Deferred credits
    	
 
    	
1.3
    	
 
    	
0.8
    	
 
    
	
Total   liabilities
    	
 
    	
$
    	
1.3
    	
 
    	
$
    	
1.0
    	
 
    

 

Unconsolidated Investments

 

Variable Interest Entity Investments-Pipelines

 

Meade

 

In 2014, WGL through its subsidiary WGL Midstream, entered into a limited liability company agreement and formed Meade Pipeline Co LLC (Meade), a Delaware limited liability company, with Transcontinental Gas Pipe Line Company, LLC (Williams) to invest in a regulated pipeline, a segment of Transco’s Atlantic Sunrise project, called Central Penn Pipeline (Central Penn). Central Penn will be an approximately 185 -mile pipeline originating in Susquehanna County, Pennsylvania and extending to Lancaster County, Pennsylvania that will have the capacity to transport and deliver up to approximately 1.7 million dekatherms per day of natural gas.

 

At March 31, 2018 and September 30, 2017, WGL Midstream held a $ 337.1 million and $ 146.7 million, respectively, equity method investment in Meade. WGL Midstream plans to invest an estimated $ 434 million for a 55% interest in Meade. Although WGL Midstream holds greater than a 50% interest in Meade, Meade is not consolidated by WGL Midstream and instead is accounted for under the equity method of accounting. WGL Midstream is not the primary beneficiary of Meade as it does not have the power to direct the activities most significant to the economic performance of Meade. Specifically, WGL Midstream applies the HLBV equity method of accounting and any profits and losses are included in “Equity in earnings of unconsolidated affiliates” in the accompanying Condensed Consolidated Statements of Income and are added to or subtracted from the carrying amount of WGL’s investment balance.

 

Our maximum financial exposure to loss because of our involvement with this VIE is equal to WGL Midstream’s capital contributions.

 

41

 

WGL Holdings, Inc.

Washington Gas Light Company

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

Non-Variable Investment Entity Investments-Pipelines

 

Constitution

 

WGL Midstream owns a 10% interest in Constitution. The Constitution Pipeline is proposed to transport natural gas from the Marcellus region in northern Pennsylvania to major northeastern markets. Constitution is accounted for under the equity method of accounting; any profits and losses are included in “Equity in earnings of unconsolidated affiliates” in the accompanying Condensed Consolidated Statements of Income and are added to or subtracted from the carrying amount of WGL’s investment balance. The equity method is considered appropriate because Constitution is an LLC with specific ownership accounts and ownership between five and fifty percent resulting in WGL Midstream maintaining a more than minor influence over the partnership operating and financing policies.

 

In December 2014, Constitution received approval from the FERC to construct and operate the proposed pipeline. However, on April 22, 2016, the New York State Department of Environmental Conservation (NYSDEC) denied Constitution’s application for a Section 401 Certification for the pipeline, which is necessary for the construction and operation of the pipeline. In May 2016, Constitution filed actions in both the U.S. Circuit Court of Appeals for the Second Circuit and the U.S. District Court for the Northern District of New York, appealing the decision and seeking declaratory judgment that the State of New York’s permitting authority is preempted by federal law.  In May 2016, Constitution appealed the NYSDEC’s denial of the Section 401 certification to the United States Court of Appeals for the Second Circuit, and in August 2017, the court issued a decision denying in part and dismissing in part Constitution’s appeal. The court expressly declined to rule on Constitution’s argument that the NYSDEC’s decision on Constitution’s Section 401 application constitutes a waiver of the certification requirement. Constitution has filed a petition for rehearing with the Second Circuit Court’s decision, but in October the court denied our petition.

 

In October 2017, Constitution filed a petition for declaratory order requesting FERC to find that, by operation of law, the Section 401 certification requirement for the New York State portion of Constitution’s pipeline project was waived due to the failure by the NYSDEC to act on Constitution’s Section 401 application within a reasonable period of time as required by the express terms of such statute. The petition was consistent with a recent decision by the District of Columbia Circuit Court in another proceeding, in which the court clarified that an applicant facing similar circumstances should present evidence of waiver to the FERC. On January 11, 2018, the FERC denied the petition, finding that Section 401 provides that a state waives certification only when it does not act on an application within one year from the date of the application. On February 12, 2018, Constitution filed a request for rehearing with FERC. FERC has not ruled on the request for a rehearing. On January 16, 2018, Constitution petitioned the U.S. Supreme Court to review the judgment of the U.S. Court of Appeals for the Second Circuit, asserting that the Second Circuit’s decision conflicts with the decisions of the U.S. Supreme Court and federal Courts of Appeals on an important question of federal law. On April 30, 2018, the U.S. Supreme Court denied Constitution’s petition for writ of certiorari . The project’s sponsors remain committed to the project.

 

We have evaluated our investment in Constitution for other than temporary impairment as of March 31, 2018. Our impairment assessment used income and market approaches in determining the fair value of our investment in Constitution. Refer to Note 9 -  Fair Value Measurements. In light of the recent actions taken by the courts and regulators to uphold NYSDEC’s denial of certification and our estimation of the likelihood of an unfavorable outcome associated with the remaining legal and regulatory challenges, we recorded an other than temporary impairment charge of $ 34.0 million to “Equity in earnings of unconsolidated affiliates”, and recorded a reversal to “Operation and maintenance” expense of a previously recognized expense of $ 3.0 million . There could be additional losses in the value of the investment beyond this impairment charge. However, we believe that recoveries from the sale of the inventories held by Constitution will mostly offset these legal expenditures. We also continue to incur legal fees associated with the project. At March 31, 2018, and September 30, 2017, WGL Midstream held a $ 4.0 million and $ 38.1 million equity method investment in Constitution, respectively.

 

Mountain Valley Pipeline

 

In March 2015, WGL Midstream acquired a 7% equity interest in Mountain Valley Pipeline, LLC (Mountain Valley). On October 24, 2016, WGL Midstream acquired an additional 3% equity interest in Mountain Valley by assuming all of Vega Midstream MVP LLC’s (Vega Energy) interest in the joint venture. WGL Midstream now owns a 10% interest in Mountain Valley.

 

The proposed pipeline to be developed, constructed, owned and operated by Mountain Valley, will transport approximately 2.0 million dekatherms of natural gas per day and connects with EQT Corporation’s Equitrans system in Wetzel County, West Virginia to Transcontinental Gas Pipe Line Company LLC’s Station 165 in Pittsylvania County, Virginia.

 

42

 

WGL Holdings, Inc.

Washington Gas Light Company

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

At March 31, 2018 and September 30, 2017, WGL Midstream held a $ 104.3 million and $ 63.0 million equity method investment in Mountain Valley, respectively. WGL Midstream expects to invest approximately $350.0 million in scheduled capital contributions through the in-service date of the pipeline based on its pro rata share of project costs. The equity method is considered appropriate because Mountain Valley is an LLC with specific ownership accounts and ownership between five and fifty percent resulting in WGL Midstream maintaining a more than minor influence over the partnership operating and financing policies. Profits and losses are allocated under the HLBV method of accounting and are included in “Equity in earnings of unconsolidated affiliates” in the accompanying Condensed Consolidated Statements of Income and are added to or subtracted from the carrying amount of WGL’s investment balance.

 

In April 2018, WGL Midstream entered into a separate agreement with Mountain Valley to acquire a 5% equity interest in a project to build a lateral interstate natural gas pipeline connecting to the mainline.

 

Stonewall System

 

WGL Midstream has a 30% equity interest in an entity that owns and operates certain assets known as the Stonewall Gas Gathering System (the Stonewall System). The Stonewall System has the capacity to gather up to 1.4 billion cubic feet of natural gas per day from the Marcellus production region in West Virginia, and connects with an interstate pipeline system that serves markets in the mid-Atlantic region.

 

At March 31, 2018 and September 30, 2017, WGL Midstream held a $139.3 million and $136.7 million equity method investment in the Stonewall System, respectively. The equity method is considered appropriate because the Stonewall System is an LLC with specific ownership accounts and ownership between five and fifty percent resulting in WGL Midstream maintaining a more than minor influence over the partnership operating and financing policies. Profits and losses are allocated under the HLBV method of accounting and are included in “Equity in earnings of unconsolidated affiliates” in the accompanying Condensed Consolidated Statements of Income and are added to or subtracted from the carrying amount of WGL’s investment balance.

 

The carrying amount of WGL Midstream’s investment in the Stonewall System exceeded the amount of the underlying equity in net assets by $8.8 million as of March 31, 2018, which is being amortized over the life of the assets.

 

The following tables present summary information about our unconsolidated investments:

 

WGL Holdings, Inc.

Balance Sheet Location of Unconsolidated Investments

 

	
 
    	
 
    	
Solar Investments
    	
 
    	
Pipelines
    	
 
    	
 
    	
 
    
	
(in millions)
    	
 
    	
Non-VIEs (a)
    	
 
    	
VIEs (b)
    	
 
    	
Non-VIEs (c)
    	
 
    	
Total
    	
 
    
	
March 31,   2018
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Assets
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Investments   in unconsolidated affiliates
    	
 
    	
$
    	
—
    	
 
    	
$
    	
337.1
    	
 
    	
$
    	
247.5
    	
 
    	
$
    	
584.6
    	
 
    
	
Total   assets
    	
 
    	
$
    	
—
    	
 
    	
$
    	
337.1
    	
 
    	
$
    	
247.5
    	
 
    	
$
    	
584.6
    	
 
    
	
September 30,   2017
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Assets
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Investments in   unconsolidated affiliates
    	
 
    	
$
    	
9.6
    	
 
    	
$
    	
146.7
    	
 
    	
$
    	
237.9
    	
 
    	
$
    	
394.2
    	
 
    
	
Total assets
    	
 
    	
$
    	
9.6
    	
 
    	
$
    	
146.7
    	
 
    	
$
    	
237.9
    	
 
    	
$
    	
394.2
    	
 
    

 

(a) Balance relates to interest held in SFEE on September 30, 2017

(b) Balance relates to equity method investment in Meade.

(c) Balance relates to equity method investments in Constitution, Mountain Valley Pipeline and Stonewall System.

 

NOTE 12. RELATED PARTY TRANSACTIONS

 

WGL and its subsidiaries engage in inter-company transactions in the ordinary course of business. Inter-company transactions and balances have been eliminated from the consolidated financial statements of WGL, except as described below. Washington Gas provides accounting, treasury, legal and other administrative and general support to affiliates, and files consolidated tax returns that include affiliated taxable transactions. Washington Gas bills its affiliates in accordance with regulatory requirements for the actual cost of providing these services, which approximates their market value. To the extent such billings are outstanding, they are reflected in “Receivables from associated companies” on Washington Gas’ balance sheets. Washington Gas assigns or allocates these costs directly to its affiliates and, therefore, does not recognize revenues or expenses associated with providing these services. Washington Gas believes that allocations based on broad measures of business activity are appropriate for allocating expenses resulting from common services. Affiliate entities are allocated a portion of common services

 

43

 

WGL Holdings, Inc.

Washington Gas Light Company

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

based on a formula driven by appropriate indicators of activity, as approved by management.

 

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

 

Washington Gas previously obtained third-party project financing on behalf of the federal government to provide funds during the construction of certain energy management services projects entered into under Washington Gas’ area-wide contract. In December 2016, WGL Energy Systems entered into an agreement to obtain third-party financing and receive funds directly from the third-party lender during the construction period associated with the related energy management service projects. As part of the ongoing financing arrangement, Washington Gas records a receivable representing the government’s obligation, and records an inter-company payable to WGL Energy Systems for the construction work performed for the same amount in “Payables to associated companies”. Refer to Note 3—Short Term Debt of the Notes to Condensed Consolidated Financial Statements for further discussion of the project financing.

 

The following table presents the receivables from and payables to associated companies as of March 31, 2018 and September 30, 2017 .

 

Washington Gas Receivables From / Payables To Associated Companies

 

	
(In millions)
    	
 
    	
March 31, 2018
    	
 
    	
September 30, 2017
    	
 
    
	
Receivables from   associated companies
    	
 
    	
$
    	
30.7
    	
 
    	
$
    	
32.4
    	
 
    
	
Payables to   associated companies
    	
 
    	
$
    	
111.6
    	
 
    	
$
    	
94.8
    	
 
    

 

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 WGL Energy Services. Washington Gas records revenues for these balancing services pursuant to tariffs approved by the appropriate regulatory bodies. These related party amounts related to balancing services provided to WGL Energy Services have been eliminated in the consolidated financial statements of WGL. The following table shows the amounts Washington Gas charged WGL Energy Services for balancing services which are located in “Utility Operating Revenues”.

 

Washington Gas - Gas Balancing Service Charges

 

	
 
    	
 
    	
Three Months Ended March 31,
    	
 
    	
Six Months Ended March 31,
    	
 
    
	
(In millions)
    	
 
    	
2018
    	
 
    	
2017
    	
 
    	
2018
    	
 
    	
2017
    	
 
    
	
Gas balancing   service charge
    	
 
    	
$
    	
8.5
    	
 
    	
$
    	
8.8
    	
 
    	
$
    	
11.0
    	
 
    	
$
    	
15.7
    	
 
    
														

 

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. At March 31, 2018 and September 30, 2017, WGL Energy Services recognized accounts receivable from Washington Gas of $7.9 million and $1.4 million respectively, related to an imbalance in gas volumes. Due to regulatory treatment, these payables and receivables are not eliminated in the consolidated financial statements of WGL. Refer to Note 1— Accounting Policies of the Notes to Consolidated Financial Statements of our combined Annual Report on Form 10-K for the fiscal year ended September 30, 2017 for further discussion of these imbalance transactions.

 

Washington Gas participates in a purchase of receivables (POR) program as approved by the Maryland Public Service Commission (PSC of MD), whereby it purchases receivables from participating energy marketers at approved discount rates. In addition, WGL Energy Services participates in POR programs with certain Maryland and Pennsylvania utilities, whereby it sells its receivables to various utilities, including Washington Gas, at approved discount rates. The receivables purchased by Washington Gas are included in “Accounts receivable” in the accompanying balance sheet. Any activity between Washington Gas and WGL Energy Services related to the POR program has been

 

44

 

WGL Holdings, Inc.

Washington Gas Light Company

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

eliminated in the accompanying financial statements for WGL. At March 31, 2018 and September 30, 2017, Washington Gas had balances of $8.2 million and $3.2 million, respectively, of purchased receivables from WGL Energy Services which are located in “Accounts receivable”.

 

NOTE 13. COMMITMENTS AND CONTINGENCIES

 

REGULATORY CONTINGENCIES

 

Certain legal and administrative proceedings incidental to our business, including regulatory contingencies, involve WGL 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.

 

Application for Approval of Reduction of Distribution Rates

 

On January 12, 2018, Washington Gas filed applications to reduce customer rates in Maryland, Virginia, and the District of Columbia to reflect the impact of the Tax Act, including both the impact of the re-measurement of deferred tax assets and liabilities and reduction of the federal tax rate to 21%. Washington Gas began tracking the impact of the Tax Act on revenue requirements beginning January 1, 2018, recording all impacts to regulatory assets and liabilities. In Maryland, the PSC of MD approved the application effective for bills rendered on or after February 1, 2018.

 

As of March 31, 2018, the applications with Virginia and the District of Columbia are still on-going. In Virginia, the application was dismissed on March 15, 2018 and Washington Gas will file a new general rate case in July 2018. In the District of Columbia, Washington Gas filed a revised application on February 12, 2018 and subsequently filed a joint motion and unanimous agreement of stipulation for full settlement on April 30, 2018. As a result of the on-going applications in Virginia and the District of Columbia, Washington Gas recorded a regulatory liability, representing the amounts owed to customers for reduced rates starting in January 2018 of $ 8.8 million and $ 3.1 million, respectively. Please refer to Note 7— Income taxes for more information.

 

Virginia Jurisdiction

 

Virginia Rate Case.  On June 30, 2016, Washington Gas filed an application with the Commonwealth of Virginia State Corporation Commission (SCC of VA) to increase its base rates for natural gas service by $ 45.6 million, which includes $ 22.3 million of revenue associated with natural gas pipeline replacement initiatives previously approved by the SCC of VA and paid by customers through a monthly rider. Additionally, the proposed rate increase included provisions designed to deliver the benefits of natural gas to more customers that include: (i) facilitating conversion to natural gas in locations already served by Washington Gas; (ii) expanding the natural gas system to high-growth communities in Virginia and (iii) research and development enabling innovations to enhance service for our customers.

 

Interim rates went into effect, subject to refund, in the December 2016 billing cycle. Intervenors filed testimony on January 31, 2017, Staff of the SCC of VA filed testimony on February 28, 2017 and Washington Gas filed its rebuttal testimony on March 28, 2017. On April 17, 2017, Washington Gas filed with the SCC of VA a unanimous settlement as to a specific annual revenue increase, but not as to a specific return on equity, specific accounting adjustments, or specific ratemaking methodologies, except as otherwise set forth therein. The Stipulation set forth, for purposes of settlement, a base rate increase of $ 34 million (of which $ 14.1 million represents incremental base rate revenues over and above the inclusion of SAVE Plan costs which were previously recovered through monthly surcharges). For purposes of the settlement, the mid-point of the return on equity range of 9.0% - 10.0% % will be used in any application or filing, other than a change in base rates, effective December 1, 2016. On June 30, 2017, the Chief Hearing Examiner issued a report recommending that the SCC of VA approve the Stipulation. On September 8, 2017, Washington Gas received a final order from the SCC of VA accepting settlement subject to minor modifications to Washington Gas’ System Expansion Proposals. All parties agreed to a Revised Stipulation filed on September 20, 2017, reflecting the SCC of VA’s denial of one of the System Expansion Proposals and Washington Gas’ withdrawal of the second one. The SCC of VA issued its final order approving the revised stipulation on September 25, 2017. Refunds to customers, which have been accrued by Washington Gas at December 31, 2017, were completed on February 7, 2018. Washington Gas’ methodology to compute customer refunds is pending review by the SCC of VA.

 

FINANCIAL GUARANTEES

 

WGL has guaranteed payments primarily for certain commitments on behalf of some of its subsidiaries. WGL has also guaranteed payments for certain of our external partners. At March 31, 2018, the maximum potential amount of future payments under the guarantees for external parties totaled $0.6 million .

 

45

 

WGL Holdings, Inc.

Washington Gas Light Company

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

ANTERO CONTRACT

 

Washington Gas and WGL Midstream contracted in June 2014 with Antero Resources Corporation (Antero) to buy gas from Antero at invoiced prices based on an index, and at a delivery point, specified in the contracts. Since deliveries began, however, the index price paid has been more than the fair market value at the same physical delivery point, resulting in losses to date of $29.6 million . Accordingly, Washington Gas and WGL Midstream notified Antero that it sought to apply a provision of the contracts that would permit a new index to be established.  Antero objected, claiming that the contract provisions permitting re-pricing did not apply, unless Antero itself chose to sell gas at cheaper prices at the delivery point (which Antero claimed it had not).  The dispute was arbitrated in January 2017, and the arbitral tribunal ruled in favor of Antero on the applicability of the re-pricing mechanism.  However, the tribunal ruled that it lacked authority to determine whether Antero was in breach of its obligation to deliver gas to Washington Gas and WGL Midstream at a point where they could obtain the higher pricing. Accordingly, Washington Gas and WGL Midstream filed suit in state court in Colorado for a determination of this issue. The state court granted Antero’s motion to dismiss the case and the case is currently on appeal.

 

Separately, Antero has initiated suit against Washington Gas and WGL Midstream, claiming that they have failed to purchase specified daily quantities of gas and seeking alleged cover damages exceeding $100 million as of April 4, 2018, of which continues to accumulate daily according to Antero’s complaint. Washington Gas and WGL Midstream oppose both the validity and amount of Antero’s claim. WGL believes the probability that Antero could succeed in collecting these penalties is remote and therefore, no accrual was made as of March 31, 2018 .  In December 2017, WGL Midstream amended its purchase contract with Antero and, effective February 1, 2018, is no longer obligated to purchase gas at the delivery point that is the subject of these disputes.

 

SILVER SPRING, MARYLAND INCIDENT

 

Washington Gas continues to support the investigation by the NTSB into the August 10, 2016 explosion and fire at an apartment complex on Arliss Street in Silver Spring, Maryland, the cause of which has not been determined.  Additional information will be made available by the NTSB at the appropriate time. A total of 40 civil actions related to the incident have been filed against WGL and Washington Gas in the Circuit Court for Montgomery County, Maryland. Thirty-nine of these suits seek unspecified damages for personal injury and/or property damage. The final action is a class action suit seeking total damages stated to be less than $ 5 million for, among others, property damage and various counts relating to the loss of the use of the premises. Two of the 40 cases were originally filed in the District of Columbia Superior Court, but were dismissed. Those two actions were re-filed in Maryland on November 27, 2017.  We maintain excess liability insurance coverage from highly-rated insurers, subject to a nominal self-insured retention. We believe that this coverage will be sufficient to cover any significant liability to it that may result from this incident. Management is unable to determine a range of potential losses that are reasonably possible of occurring and therefore we have not recorded a reserve associated with this incident. Washington Gas was invited by the NTSB to be a party to the investigation and in that capacity, continues to work closely with the NTSB to help determine the cause of this incident.

 

46

 

WGL Holdings, Inc.

Washington Gas Light Company

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

NOTE 14. PENSION AND OTHER POST-RETIREMENT BENEFIT PLANS

 

The following table shows the components of net periodic benefit costs (income) recognized in our financial statements during the three and six months ended March 31, 2018 and 2017 .

 

Components of Net Periodic Benefit Costs (Income)

 

	
 
    	
 
    	
Three Months Ended March 31,
    	
 
    
	
 
    	
 
    	
2018
    	
 
    	
2017
    	
 
    
	
(In millions)
    	
 
    	
Pension
   Benefits
    	
 
    	
Health and
   Life Benefits
    	
 
    	
Pension
   Benefits
    	
 
    	
Health and
   Life Benefits
    	
 
    
	
Service cost
    	
 
    	
$
    	
3.7
    	
 
    	
$
    	
1.3
    	
 
    	
$
    	
4.1
    	
 
    	
$
    	
1.5
    	
 
    
	
Interest cost
    	
 
    	
9.9
    	
 
    	
2.9
    	
 
    	
9.6
    	
 
    	
2.9
    	
 
    
	
Expected return   on plan assets
    	
 
    	
(10.6
    	
)
    	
(5.9
    	
)
    	
(10.2
    	
)
    	
(5.6
    	
)
    
	
Amortization of   prior service cost (credit)
    	
 
    	
0.1
    	
 
    	
(4.4
    	
)
    	
0.1
    	
 
    	
(4.4
    	
)
    
	
Amortization of   net actuarial loss
    	
 
    	
3.9
    	
 
    	
—
    	
 
    	
5.5
    	
 
    	
0.2
    	
 
    
	
Net   periodic benefit cost (income)
    	
 
    	
7.0
    	
 
    	
(6.1
    	
)
    	
9.1
    	
 
    	
(5.4
    	
)
    
	
Amount allocated   to construction projects
    	
 
    	
(1.1
    	
)
    	
1.0
    	
 
    	
(1.7
    	
)
    	
1.2
    	
 
    
	
Amount deferred   as regulatory asset/liability — net
    	
 
    	
1.7
    	
 
    	
—
    	
 
    	
1.7
    	
 
    	
—
    	
 
    
	
Amount   charged (credited) to expense
    	
 
    	
$
    	
7.6
    	
 
    	
$
    	
(5.1
    	
)
    	
$
    	
9.1
    	
 
    	
$
    	
(4.2
    	
)
    

 

	
 
    	
 
    	
Six Months Ended March 31,
    	
 
    
	
 
    	
 
    	
2018
    	
 
    	
2017
    	
 
    
	
Service cost
    	
 
    	
$
    	
7.4
    	
 
    	
$
    	
2.6
    	
 
    	
$
    	
8.2
    	
 
    	
$
    	
2.9
    	
 
    
	
Interest cost
    	
 
    	
19.8
    	
 
    	
5.8
    	
 
    	
19.2
    	
 
    	
5.8
    	
 
    
	
Expected return   on plan assets
    	
 
    	
(21.2
    	
)
    	
(11.8
    	
)
    	
(20.5
    	
)
    	
(11.1
    	
)
    
	
Amortization of   prior service cost (credit)
    	
 
    	
0.2
    	
 
    	
(8.8
    	
)
    	
0.2
    	
 
    	
(8.8
    	
)
    
	
Amortization of   net actuarial loss
    	
 
    	
7.8
    	
 
    	
—
    	
 
    	
11.0
    	
 
    	
0.4
    	
 
    
	
Net   periodic benefit cost (income)
    	
 
    	
14.0
    	
 
    	
(12.2
    	
)
    	
18.1
    	
 
    	
(10.8
    	
)
    
	
Amount allocated   to construction projects
    	
 
    	
(2.2
    	
)
    	
2.0
    	
 
    	
(3.3
    	
)
    	
2.4
    	
 
    
	
Amount deferred   as regulatory asset/liability — net
    	
 
    	
3.4
    	
 
    	
—
    	
 
    	
3.5
    	
 
    	
(0.1
    	
)
    
	
Amount   charged (credited) to expense
    	
 
    	
$
    	
15.2
    	
 
    	
$
    	
(10.2
    	
)
    	
$
    	
18.3
    	
 
    	
$
    	
(8.5
    	
)
    

 

Amounts included in the line item “Amount deferred as regulatory asset/liability-net,” as shown in the table above, represent the amortization of previously unrecovered costs of the applicable pension benefits or the health and life benefits as approved in the District of Columbia. We expect the balances to be fully amortized by October 2019.

 

47

 

WGL Holdings, Inc.

Washington Gas Light Company

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

NOTE 15. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

 

The following tables show the changes in accumulated other comprehensive income (loss) for WGL and Washington Gas by component for the three and six months ended March 31, 2018 and 2017 .

 

WGL Holdings, Inc.

Changes in Accumulated Other Comprehensive Loss by Component

 

	
 
    	
 
    	
Three Months Ended
   March 31,
    	
 
    	
Six Months Ended March
   31,
    	
 
    
	
(In thousands)
    	
 
    	
2018
    	
 
    	
2017
    	
 
    	
2018
    	
 
    	
2017
    	
 
    
	
Beginning   Balance
    	
 
    	
$
    	
(5,753
    	
)
    	
$
    	
(9,126
    	
)
    	
$
    	
(5,997
    	
)
    	
$
    	
(38,539
    	
)
    
	
Qualified cash   flow hedging instruments (a)
    	
 
    	
53
    	
 
    	
48
    	
 
    	
105
    	
 
    	
49,503
    	
 
    
	
Change in prior   service credit (b)
    	
 
    	
(273
    	
)
    	
(217
    	
)
    	
(547
    	
)
    	
(434
    	
)
    
	
Change in   actuarial net loss (b)
    	
 
    	
530
    	
 
    	
588
    	
 
    	
1,057
    	
 
    	
1,176
    	
 
    
	
Current-period   other comprehensive income
    	
 
    	
310
    	
 
    	
419
    	
 
    	
615
    	
 
    	
50,245
    	
 
    
	
Income tax   expense related to other comprehensive income
    	
 
    	
104
    	
 
    	
167
    	
 
    	
165
    	
 
    	
20,580
    	
 
    
	
Ending   Balance
    	
 
    	
$
    	
(5,547
    	
)
    	
$
    	
(8,874
    	
)
    	
$
    	
(5,547
    	
)
    	
$
    	
(8,874
    	
)
    

 

(a)        Cash flow hedging instruments represent interest rate swap agreements related to debt issuances. Refer to Note 8- Derivative and Weather-related Instruments of the Notes to Condensed Consolidated Financial Statements for further discussion of the interest rate swap agreements.

(b)        These accumulated other comprehensive income (loss) components are included in the computation of net periodic benefit cost. Refer to Note 14- Pension and other post-retirement benefit plans of the Notes to Condensed Consolidated Financial Statements for additional details.

 

Washington Gas Light Company

Changes in Accumulated Other Comprehensive Loss by Component

 

	
 
    	
 
    	
Three Months Ended
   March 31,
    	
 
    	
Six Months Ended March
   31,
    	
 
    
	
(In thousands)
    	
 
    	
2018
    	
 
    	
2017
    	
 
    	
2018
    	
 
    	
2017
    	
 
    
	
Beginning   Balance
    	
 
    	
$
    	
(4,330
    	
)
    	
$
    	
(7,606
    	
)
    	
$
    	
(4,522
    	
)
    	
$
    	
(7,830
    	
)
    
	
Change in prior   service credit (a)
    	
 
    	
(273
    	
)
    	
(217
    	
)
    	
(547
    	
)
    	
(434
    	
)
    
	
Change in   actuarial net loss (a)
    	
 
    	
530
    	
 
    	
588
    	
 
    	
1,057
    	
 
    	
1,176
    	
 
    
	
Current-period   other comprehensive income
    	
 
    	
257
    	
 
    	
371
    	
 
    	
510
    	
 
    	
742
    	
 
    
	
Income tax   expense related to other comprehensive income
    	
 
    	
74
    	
 
    	
148
    	
 
    	
135
    	
 
    	
295
    	
 
    
	
Ending   Balance
    	
 
    	
$
    	
(4,147
    	
)
    	
$
    	
(7,383
    	
)
    	
$
    	
(4,147
    	
)
    	
$
    	
(7,383
    	
)
    

 

(a) These accumulated other comprehensive income (loss) components are included in the computation of net periodic benefit cost. Refer to Note 14-Pension and other post-retirement benefit plans of the Notes to Condensed Consolidated Financial Statements for additional details.

 

48

 

WGL Holdings, Inc.

Washington Gas Light Company

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

NOTE 16. SUPPLEMENTAL CASH FLOW INFORMATION

 

The following tables detail the changes in operating assets and liabilities from operating activities, cash payments that have been included in the determination of earnings and non-cash investing and financing activities:

 

WGL Holdings Inc.

 

	
For the six months ended March 31,
    	
 
    	
2018
    	
 
    	
2017
    	
 
    
	
(In thousands)
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
CHANGES   IN OPERATING ASSETS AND LIABILITIES
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Accounts   receivable and unbilled revenues—net
    	
 
    	
$
    	
(198,651
    	
)
    	
$
    	
(210,871
    	
)
    
	
Gas costs and   other regulatory assets/liabilities—net
    	
 
    	
44,151
    	
 
    	
8,767
    	
 
    
	
Storage gas
    	
 
    	
167,785
    	
 
    	
67,998
    	
 
    
	
Prepaid taxes
    	
 
    	
(9,537
    	
)
    	
6,375
    	
 
    
	
Accounts payable   and other accrued liabilities
    	
 
    	
(40,948
    	
)
    	
27,698
    	
 
    
	
Customer   deposits and advance payments
    	
 
    	
(17,939
    	
)
    	
(25,986
    	
)
    
	
Accrued taxes
    	
 
    	
15,413
    	
 
    	
5,780
    	
 
    
	
Other current   assets
    	
 
    	
13,436
    	
 
    	
(11,498
    	
)
    
	
Other current   liabilities
    	
 
    	
(4,241
    	
)
    	
(29,013
    	
)
    
	
Deferred gas   costs—net
    	
 
    	
7,599
    	
 
    	
(8,552
    	
)
    
	
Deferred   assets—other
    	
 
    	
(18,359
    	
)
    	
(4,508
    	
)
    
	
Deferred   liabilities—other
    	
 
    	
11,945
    	
 
    	
8,930
    	
 
    
	
Pension and   other post-retirement benefits
    	
 
    	
(2,552
    	
)
    	
(9,215
    	
)
    
	
Other—net
    	
 
    	
2,879
    	
 
    	
(531
    	
)
    
	
Changes in   operating assets and liabilities
    	
 
    	
$
    	
(29,019
    	
)
    	
$
    	
(174,626
    	
)
    
	
SUPPLEMENTAL   DISCLOSURES OF CASH FLOW INFORMATION
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Income taxes   paid (refunded)—net
    	
 
    	
$
    	
88
    	
 
    	
$
    	
(4,650
    	
)
    
	
Interest paid
    	
 
    	
$
    	
41,198
    	
 
    	
$
    	
32,429
    	
 
    
	
SUPPLEMENTAL   DISCLOSURES OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Extinguishment   of project debt financing
    	
 
    	
$
    	
—
    	
 
    	
$
    	
(29,871
    	
)
    
	
Capital   expenditure accruals included in accounts payable and other accrued   liabilities
    	
 
    	
$
    	
36,703
    	
 
    	
$
    	
41,892
    	
 
    
	
Dividends paid   in common stock
    	
 
    	
$
    	
—
    	
 
    	
$
    	
1,362
    	
 
    
	
Stock based   compensation
    	
 
    	
$
    	
11,251
    	
 
    	
$
    	
6,564
    	
 
    
	
Transfer of   investments to fixed assets
    	
 
    	
$
    	
10,054
    	
 
    	
$
    	
3,959
    	
 
    
	
Transfer of   notes receivables to investments
    	
 
    	
$
    	
—
    	
 
    	
$
    	
10,031
    	
 
    

 

49

 

WGL Holdings, Inc.

Washington Gas Light Company

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

Washington Gas

 

	
For the six months ended March 31,
    	
 
    	
2018
    	
 
    	
2017
    	
 
    
	
(In thousands)
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
CHANGES   IN OPERATING ASSETS AND LIABILITIES
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Accounts   receivable, unbilled revenues and receivables from associated companies—net
    	
 
    	
$
    	
(180,528
    	
)
    	
$
    	
(183,096
    	
)
    
	
Gas costs and   other regulatory assets/liabilities—net
    	
 
    	
44,151
    	
 
    	
8,767
    	
 
    
	
Storage gas
    	
 
    	
65,284
    	
 
    	
51,406
    	
 
    
	
Prepaid taxes
    	
 
    	
1,763
    	
 
    	
4,001
    	
 
    
	
Accounts payable   and other accrued liabilities, including payables to associated companies
    	
 
    	
(7,206
    	
)
    	
15,863
    	
 
    
	
Customer   deposits and advance payments
    	
 
    	
(16,739
    	
)
    	
(21,186
    	
)
    
	
Accrued taxes
    	
 
    	
11,997
    	
 
    	
8,841
    	
 
    
	
Other current   assets
    	
 
    	
(11,163
    	
)
    	
(9,175
    	
)
    
	
Other current   liabilities
    	
 
    	
(366
    	
)
    	
24
    	
 
    
	
Deferred gas   costs—net
    	
 
    	
7,599
    	
 
    	
(8,553
    	
)
    
	
Deferred   assets—other
    	
 
    	
(22,173
    	
)
    	
(4,079
    	
)
    
	
Deferred   liabilities—other
    	
 
    	
877
    	
 
    	
8,746
    	
 
    
	
Pension and   other post-retirement benefits
    	
 
    	
(2,703
    	
)
    	
(5,975
    	
)
    
	
Other—net
    	
 
    	
2,672
    	
 
    	
1,290
    	
 
    
	
Changes in   operating assets and liabilities
    	
 
    	
$
    	
(106,535
    	
)
    	
$
    	
(133,126
    	
)
    
	
SUPPLEMENTAL   DISCLOSURES OF CASH FLOW INFORMATION
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Income taxes   paid (refunded)—net
    	
 
    	
$
    	
(953
    	
)
    	
$
    	
(6,449
    	
)
    
	
Interest paid
    	
 
    	
$
    	
28,668
    	
 
    	
$
    	
25,478
    	
 
    
	
SUPPLEMENTAL   DISCLOSURES OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Extinguishment   of project debt financing
    	
 
    	
$
    	
—
    	
 
    	
$
    	
(29,871
    	
)
    
	
Capital   expenditure accruals included in accounts payable and other accrued   liabilities
    	
 
    	
$
    	
23,949
    	
 
    	
$
    	
28,063
    	
 
    

 

NOTE 17. PLANNED MERGER WITH ALTAGAS LTD.

 

On January 25, 2017, WGL entered into an agreement and plan of merger (Merger Agreement) to combine with AltaGas in an all cash transaction valued at approximately $6.4 billion . The Merger Agreement provides for the merger of a newly formed indirect wholly-owned subsidiary of AltaGas with and into WGL, with WGL continuing as the surviving corporation in the merger (the Merger) and becoming an indirect wholly-owned subsidiary of AltaGas. Subject to the terms and conditions set forth in the Merger Agreement, at the Effective Time (as defined in the Merger Agreement) of the Merger, WGL shareholders will receive $88.25 in cash, without interest, for each share of WGL common stock issued and outstanding immediately prior to the Effective Time (as defined in the Merger Agreement). The Boards of Directors of each of WGL and AltaGas have unanimously approved the Merger, which is expected to close by the end of the second calendar quarter of 2018.

 

Consummation of the Merger is subject to the satisfaction or waiver of specified closing conditions, including, among others, the approval of the Merger by the holders of more than two-thirds of the outstanding shares of WGL common stock, which approval occurred on May 10, 2017, and approvals required from certain antitrust and other regulatory bodies. A status of each of these conditions is described below. The Merger Agreement also contains customary representations, warranties and covenants of both WGL and AltaGas. These covenants include, among others, an obligation on behalf of WGL to operate its business in the ordinary course until the Merger is consummated, subject to certain exceptions.

 

Under the terms of the Merger Agreement, the Outside Date (as defined in the Merger Agreement) for consummation of the Merger was January 25, 2018. The Merger Agreement permits either WGL or AltaGas to extend the term of the Merger Agreement should the Merger not be consummated by such date. On January 11, 2018, WGL and AltaGas mutually agreed in writing to extend this Outside Date to July 23, 2018. The Merger Agreement also contains certain other termination rights for both AltaGas and WGL. Under specified circumstances, AltaGas would be required to pay a termination fee of $ 205 million, $ 182 million, or $ 68 million (depending on the specific circumstances of termination)

 

50

 

WGL Holdings, Inc.

Washington Gas Light Company

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

to WGL. Under other specific circumstances as outlined in the Merger Agreement, WGL would be required to pay AltaGas a termination fee of $ 136 million . In connection with entering into the Merger Agreement, WGL entered into a subscription agreement with AltaGas, pursuant to which WGL agreed, upon the occurrence of certain conditions, to issue and sell to AltaGas up to an aggregate of 15,000 shares of Series A Non-Voting Non-Convertible Perpetual Preferred Stock (Non-Voting Preferred Stock) for a purchase price of $ 10,000 per share. If the consolidated debt to total capitalization ratio is forecasted to be in excess of 62% in any subsequent quarterly period, AltaGas will purchase a number of shares of Non-Voting Preferred Stock to produce a forecasted ratio equal to 62%, but not more than 5,000 shares in any single quarter or more than 15,000 shares in the aggregate. If the Merger Agreement is terminated or the Outside Date expires, no subscription will be made after the date of termination or expiration, and WGL will have six months thereafter to redeem any Non-Voting Preferred Stock previously issued.

 

Merger Approval Proceedings

 

District of Columbia

 

On April 24, 2017, AltaGas, WGL and Washington Gas (“Applicants”) filed an application with the PSC of DC seeking approval of the Merger Agreement. In an order issued on April 25, 2017, the PSC of DC scheduled a procedural conference on May 18, 2017 with the Staff of the PSC of DC and interested parties to consider the factors to be considered in the case to determine whether the Merger is in the public interest, identify factual issues in dispute and consider a procedural schedule for the proceeding. To approve the Merger Agreement, the PSC of DC must find that the Merger taken as a whole is in the public interest. In the April 25, 2017 order, the PSC of DC stated that in making this determination, it has balanced the interests of shareholders and investors with ratepayers and the community; determined that benefits to shareholders must not come at the expense of ratepayers; and found that to be approved, the transaction must produce a direct and tangible benefit to ratepayers. It stated further that in determining whether the public interest requirements are met, the PSC of DC has in past merger cases identified seven factors it has considered in reviewing each transaction, including the effects of the transaction on (i) ratepayers, shareholders, the financial health of the utilities standing alone and as merged, and the economy of the District; (ii) utility management and administrative operations; (iii) public safety and the safety and reliability of services; (iv) risks associated with all of the Applicants’ affiliated non-jurisdictional business operations; (v) the PSC of DC’s ability to regulate Washington Gas effectively; (vi) competition in the local retail and wholesale markets that impact the District and District ratepayers; and (vii) conservation of natural resources and preservation of environmental quality. The law of the District of Columbia does not impose any time limit on the PSC of DC’s review of the Merger. The District of Columbia Office of the People’s Counsel, the District of Columbia Government and other intervenors filed testimony with the PSC of DC opposing the application on September 29, 2017. The Applicants filed rebuttal testimony on October 27, 2017. Evidentiary hearings took place before the PSC of DC on December 5 through December 15, 2017. An order is expected by the end of the second calendar quarter of 2018.

 

Maryland

 

On April 24, 2017, AltaGas, WGL and Washington Gas (“Applicants”) filed an application with the PSC of MD seeking approval of the Merger Agreement. On April 26, 2017, the PSC of MD issued an order scheduling a pre-hearing conference on May 30, 2017, to set a procedural schedule for the proceeding, to consider any petition to intervene that have been filed, and to consider any other preliminary matters requested by the parties. Maryland law requires the PSC of MD to approve a merger subject to its review if it finds that the merger agreement is consistent with the public interest, convenience and necessity, including benefits and no harm to consumers. In making this determination, the PSC of MD is required to consider the following criteria: (i) the potential impact of the acquisition on rates and charges paid by customers and on the services and conditions of operation of the public service company; (ii) the potential impact of the acquisition on continuing investment needs for the maintenance of utility services, plant, and related infrastructure; (iii) the proposed capital structure that will result from the acquisition, including allocation of earnings from Washington Gas; (iv) the potential effects on employment; (v) the projected allocation of any savings that are expected between shareholders and rate payers; (vi) issues of reliability, quality of service, and quality of customer service; (vii) the potential impact of the acquisition on community investment; (viii) affiliate and cross-subsidization issues; (ix) the use or pledge of utility assets for the benefit of an affiliate; (x) jurisdictional and choice-of-law issues; (xi) whether it is necessary to revise the PSC of MD’s ring-fencing and code of conduct regulations in light of the acquisition; and (xii) any other issues the PSC of MD considers relevant to the assessment of the acquisition in relation to the public interest, convenience, and necessity. The Staff of the PSC of MD, the Maryland Office of People’s Counsel and other intervenors filed testimony opposing the application on August 14, 2017. The Applicants filed rebuttal testimony with the PSC of MD on September 11, 2017. Evidentiary hearings were held before the PSC of MD on October 3, 2017 through October 16, 2017. Initial briefs and reply briefs were filed on November 6, 2017 and November 16, 2017, respectively. The PSC of MD is required to issue an order within 180 days of the

 

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WGL Holdings, Inc.

Washington Gas Light Company

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

date the application was filed, but may extend the date by 45 days for good cause. The PSC of MD issued an order extending the date for review. On December 1, 2017, AltaGas and Washington Gas entered into a settlement agreement with several major parties in the merger application proceedings pending before the PSC of MD. The PSC of MD conducted evidentiary hearings in February 2018 to review the settlement agreement reached in December 2017. Reply briefs were filed by all parties in March 2018 and on April 4, 2018, the PSC of MD issued an Order granting approval of the Merger subject to conditions set forth in the Order. On April 5, 2018, the Applicants accepted the conditions set forth in the Order.

 

Virginia

 

On April 24, 2017, AltaGas, WGL and Washington Gas, filed a petition with the SCC of VA seeking approval of the Merger Agreement. Virginia law provides that, if the SCC of VA determines, with or without hearing, that adequate service to the public at just and reasonable rates will not be impaired or jeopardized by granting the petition for approval, then the SCC of VA shall approve a merger with such conditions that the SCC of VA deems to be appropriate in order to satisfy this standard. On October 20, 2017, the SCC of VA issued an order approving the merger, subject to accounting, financial, and safety related requirements to which joint applicants agree.

 

On December 21, 2017, Washington Gas filed an application with the SCC of VA for approval of a new service agreement between Washington Gas and AltaGas Services (U.S.) Inc. (“ASUS”) for Washington Gas to receive centralized corporate services, and to authorize affiliate transactions for a period of five years. On March 15, 2018, the SCC of VA issued an Order directing Washington Gas to institute certain corrective measures (“Revised Agreement”) to the original Agreement. Washington Gas has 90 days from the effective date of the Order to file with the SCC of VA a signed and executed copy of the approved Revised Agreement.

 

Committee on Foreign Investment in the United States (CFIUS)

 

On April 24, 2017, AltaGas, WGL and Washington Gas, filed a joint voluntary notice with the CFIUS. This notice was approved on August 18, 2017.

 

HSR

 

On June 15, 2017, AltaGas and WGL submitted to the Federal Trade Commission and the Antitrust Division of the Department of Justice completed Premerger Notification and Report Forms with respect to the proposed acquisition by AltaGas of certain voting securities of WGL. The waiting period required by Section 7A(b)(1) of the Clayton Act, 15 U.S.C. Section 18a(b)(1) (aka the Hart-Scott Rodino Antitrust Improvements Act of 1976, as amended) expired on July 17, 2017.  The expiration of the Clayton Act’s waiting period deems the Merger approved by the Federal Trade Commission and the Department of Justice.

 

FERC

 

On April 24, 2017, AltaGas and WGL Energy Services submitted to FERC a Joint Application for Authorization of Disposition of Jurisdictional Assets and Merger under Section 203 of the Federal Power Act. Under that section, FERC shall approve a merger if it finds that the proposed transaction will be consistent with the public interest. In making this determination, the FERC will consider the following criteria: (i) horizontal competition analysis; (ii) vertical competition issues; (iii) no adverse effect on rates; (iv) no adverse effect on regulation; and (v) no improper cross-subsidization. On July 6, 2017, the FERC issued an order authorizing the Merger, concluding that the proposed transaction is consistent with the public interest.

 

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