Search the web
Welcome, Guest
[Sign Out, My Account]
EDGAR_Online

Quotes & Info
Enter Symbol(s):
e.g. YHOO, ^DJI
Symbol Lookup | Financial Search
WGL > SEC Filings for WGL > Form 10-Q on 2-May-2013All Recent SEC Filings

Show all filings for WGL HOLDINGS INC

Form 10-Q for WGL HOLDINGS INC


2-May-2013

Quarterly Report


Item 2-Management's Discussion and Analysis of

Financial Condition and Results of Operations

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

INTRODUCTION

This Management's Discussion and Analysis of Financial Condition and Results of Operations (Management's Discussion) analyzes the financial condition, results of operations and cash flows of WGL Holdings and its subsidiaries. It also includes management's analysis of past financial results and potential factors that may affect future results, potential future risks and approaches that may be used to manage them. Except where the content clearly indicates otherwise, "WGL Holdings," "we," "us" or "our" refers to the holding company or the consolidated entity of WGL Holdings and all of its subsidiaries.

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

- WGL Holdings-This section describes the financial condition and results of operations of WGL Holdings and its subsidiaries on a consolidated basis. It includes discussions of our regulated operations, including Washington Gas and Hampshire Gas Company (Hampshire), and our non-utility operations.

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

Both sections of Management's Discussion-WGL Holdings and Washington Gas-are designed to provide an understanding of our operations and financial performance and should be read in conjunction with the respective company's financial statements and the combined Notes to Consolidated Financial Statements in this quarterly report as well as our combined Annual Report on Form 10-K for WGL Holdings and Washington Gas for the fiscal year ended September 30, 2012 (2012 Annual Report).

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

EXECUTIVE OVERVIEW

Introduction

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

WGL Holdings has four operating segments:

- regulated utility;

- retail energy-marketing;

- commercial energy systems and

- wholesale energy solutions.

Our core subsidiary, Washington Gas, engages in the delivery and sale of natural gas that is regulated by regulatory commissions in the District of Columbia, Maryland and Virginia. Through the wholly owned unregulated subsidiaries of Washington Gas Resources, we offer energy-related products and services. We offer competitively priced natural gas, electricity and energy from renewable sources to customers through WGEServices, our non-utility retail energy-marketing subsidiary. We offer efficient and sustainable commercial energy solutions focused on upgrading energy related systems of large government and commercial facilities as well as own and operate distributed generation assets such as Solar PV systems through WGESystems. Capitol Energy Ventures performs natural gas, pipeline and storage asset optimization activities.

Activities and transactions that are not significant enough on a stand-alone basis to warrant treatment as an operating segment, and that do not fit into one of our four operating segments, are aggregated as "Other Activities" and are included as part of non-utility operations. Administrative costs associated with WGL Holdings and Washington Gas Resources are also included in "Other activities."


Table of Contents

WGL Holdings, Inc.

Washington Gas Light Company

Part I-Financial Information

Item 2-Management's Discussion and Analysis of

Financial Condition and Results of Operations (continued)

Regulated Utility. The regulated utility segment consists of Washington Gas and Hampshire and represents approximately 85% of WGL Holdings' consolidated total assets. Washington Gas, the core of the regulated utility segment, delivers natural gas to retail customers in accordance with tariffs approved by the regulatory commissions that have jurisdiction over Washington Gas' rates and terms of service. These regulatory commissions set the rates in their respective jurisdictions that Washington Gas can charge customers for its rate-regulated services. Washington Gas also sells natural gas to customers who have not elected to purchase natural gas from unregulated third party marketers. Washington Gas recovers the cost of the natural gas purchased to serve firm customers through gas cost recovery mechanisms as approved in jurisdictional tariffs. Any difference between gas costs incurred on behalf of firm customers and the gas costs recovered from those customers is deferred on the balance sheet as an amount to be collected from or refunded to customers in future periods. Therefore, increases or decreases in the cost of gas associated with sales made to firm customers have no direct effect on Washington Gas' net revenues and net income.

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

Hampshire operates and owns full and partial interests in underground natural gas storage facilities, including pipeline delivery facilities located in and around Hampshire County, West Virginia. Washington Gas purchases all of the storage services of Hampshire and includes the cost of these services in the bills sent to its customers. Hampshire operates under a "pass-through" cost of service-based tariff approved by the FERC, and adjusts its billing rates to Washington Gas on a periodic basis to account for changes in its investment in utility plant and associated expenses.

Retail Energy-Marketing. The retail energy-marketing segment consists of the operations of WGEServices. WGEServices competes with regulated utilities and other unregulated third party marketers to sell natural gas and/or electricity directly to residential, commercial and industrial customers in Delaware, the District of Columbia, Maryland, Pennsylvania and Virginia. WGEServices contracts for its supply needs and buys and resells natural gas and electricity with the objective of earning a profit through competitively priced contracts with end-users. These commodities are delivered to retail customers through the distribution systems owned by regulated utilities such as Washington Gas or other unaffiliated natural gas or electric utilities. Washington Gas delivers the majority of natural gas sold by WGEServices, and unaffiliated electric utilities deliver all of the electricity sold. Additionally, WGEServices bills its customers through the billing services of the regulated utilities that deliver its commodities as well as directly through its own billing capabilities.

WGEServices also sells renewable energy credits from wind power and other sources as well as carbon offset products to its customers. WGEServices does not own or operate any other natural gas or electric generation, production, transmission or distribution assets.

Commercial Energy Systems. The commercial energy systems segment consists of the operations of WGESystems and WGSW. WGESystems provides commercial energy efficiency and sustainability solutions to governmental and commercial clients. These solutions include energy efficiency projects and distributed generation assets such as Solar PV systems, combined heat and power plants and fuel cells which we own and operate. WGESystems also focuses on upgrading the mechanical, electrical, water and energy-related infrastructure of large governmental and commercial facilities by implementing both traditional as well as alternative energy technologies, primarily in the District of Columbia, Maryland and Virginia. In addition to these three regions, WGESystems is also expanding its portfolio of Solar PV power generating systems into California, Delaware, Massachusetts, New Jersey and New Mexico. WGESystems is also evaluating opportunities in other geographical locations within the United States.

WGSW is a holding company formed to invest in alternative energy assets. WGSW holds a limited partnership in ASD Solar, LP in addition to investments in solar assets through sale leaseback arrangements.

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

Other Activities. Activities and transactions that are not significant enough on a stand-alone basis to warrant treatment as an operating segment, and that do not fit into one of our other operating segments, are aggregated as "Other activities" and included as part of non-utility operations as presented below in the operating segment financial information. Administrative costs associated with WGL Holdings and Washington Gas Resources comprise the majority of transactions included in "Other activities."


Table of Contents

WGL Holdings, Inc.

Washington Gas Light Company

Part I-Financial Information

Item 2-Management's Discussion and Analysis of

Financial Condition and Results of Operations (continued)

PRIMARY FACTORS AFFECTING WGL HOLDINGS AND WASHINGTON GAS

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

weather conditions and weather patterns;

regulatory environment, regulatory decisions and changes in legislation;

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

diversity of natural gas supply;

volatility of natural gas and electricity prices;

non-weather related changes in natural gas consumption patterns;

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

competitive environment;

environmental matters;

industry consolidation;

economic conditions and interest rates;

inflation;

use of business process outsourcing;

labor contracts, including labor and benefit costs; and

changes in accounting principles.

For further discussion of the factors listed above, refer to Management's Discussion within the 2012 Annual Report. Also, refer to the section entitled "Safe Harbor for Forward-Looking Statements" included in this quarterly report for a listing of forward-looking statements related to factors affecting WGL Holdings and Washington Gas.

CRITICAL ACCOUNTING POLICIES

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

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

accounting for unbilled revenue;

accounting for regulatory operations - regulatory assets and liabilities;

accounting for income taxes;

accounting for contingencies;

accounting for derivative instruments;

accounting for pension and other post-retirement benefit plans and

accounting for stock based compensation.

For a description of these critical accounting policies, refer to Management's Discussion within the 2012 Annual Report. There were no new critical accounting policies or changes to our critical accounting policies during the three month period ended March 31, 2013.


Table of Contents

WGL Holdings, Inc.

Washington Gas Light Company

Part I-Financial Information

Item 2-Management's Discussion and Analysis of

Financial Condition and Results of Operations (continued)

WGL HOLDINGS, INC.

RESULTS OF OPERATIONS

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

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

Summary Results

WGL Holdings reported net income of $89.5 million for the three months ended March 31, 2013, compared to $74.2 million reported for the same period of the prior fiscal year. We earned a return on average common equity of 11.8% and 7.6%, respectively.

The following table summarizes our net income (loss) by operating segment for the three months ended March 31, 2013 and 2012.

                     Net Income (Loss) by Operating Segment

                                              Three Months Ended
                                                   March 31,              Increase/
    (In millions)                             2013            2012       (Decrease)
    Regulated Utility                       $    77.1        $ 72.4      $       4.7
    Non-utility operations:
    Retail Energy-Marketing                      21.7           4.5             17.2
    Commercial Energy Systems                     0.6           0.4              0.2
    Wholesale Energy Solutions                   (9.4 )        (2.7 )           (6.7 )
    Other Activities                             (0.5 )        (0.4 )           (0.1 )
    Total non-utility                            12.4           1.8             10.6
    Net income applicable to common stock   $    89.5        $ 74.2      $      15.3

    EARNINGS PER AVERAGE COMMON SHARE
    Basic                                   $    1.73        $ 1.44      $      0.29
    Diluted                                 $    1.73        $ 1.44      $      0.29


Table of Contents

WGL Holdings, Inc.

Washington Gas Light Company

Part I-Financial Information

Item 2-Management's Discussion and Analysis of

Financial Condition and Results of Operations (continued)

Regulated Utility Operating Results

The following table summarizes the Regulated Utility segment's operating results for the three months ended March 31, 2013 and 2012.

                      Regulated Utility Operating Results

                                                            Three Months Ended
                                                                March 31,               Increase/
(In millions)                                               2013           2012         Decrease
Utility net revenues:
Operating revenues                                       $    536.0       $ 471.1      $      64.9
Less: Cost of gas                                             252.8         197.7             55.1
Revenue taxes                                                  34.2          28.7              5.5
Total utility net revenues                                    249.0         244.7              4.3
Operation and maintenance                                      72.1          68.7              3.4
Depreciation and amortization                                  25.0          23.8              1.2
General taxes and other assessments                            17.0          16.0              1.0
Operating income                                              134.9         136.2             (1.3 )
Other income-net, including preferred stock dividends            -            0.6             (0.6 )
Interest expense                                                8.9           9.4             (0.5 )
Income tax expense                                             48.9          55.0             (6.1 )
Net income applicable to common stock                    $     77.1       $  72.4      $       4.7

The Regulated Utility segment's net income applicable to common stock was $77.1 million for the three months ended March 31, 2013, compared to net income of $72.4 million reported for the same period of the prior fiscal year. The comparison primarily reflects: (i) $5.6 million in lower income taxes due to a decrease in the effective tax rate primarily driven by the write-off of regulatory assets related to the tax effect of Medicare Part D in 2012;
(ii) $3.0 million in higher net revenues attributed to the warm weather impacts of 2012 that were in excess of our weather protection program provisions;
(iii) $1.4 million of favorable effects of changes in natural gas consumption patterns due to shifts in weather patterns and (iv) a $0.8 million increase in revenues related to growth of more than 10,433 average active customer meters. Partially offsetting these variances were: (i) $7.2 million decrease in unrealized margins associated with our asset optimization program; (ii) an increase of $1.1 million in depreciation expense due to the growth in our investment in utility plant and (iii) a $1.0 million decrease in the recovery of carrying costs on lower average storage gas inventory balances.

Utility Net Revenues. The following table provides the key factors contributing to the changes in the utility net revenues of the Regulated Utility segment between the three months ended March 31, 2013 and 2012.

                 Composition of Changes in Utility Net Revenues

                                                       Increase/
               (In millions)                          (Decrease)
               Estimated weather effects              $       7.6
               Natural gas consumption pattern                1.4
               Customer growth                                0.8
               Gas administrative charge                      1.1
               Asset optimization:
               Realized margins                              (0.8 )
               Unrealized mark-to-market valuations          (7.2 )
               Lower-of-cost or market adjustment             0.9
               Storage carrying costs                        (1.0 )
               Other                                          1.5
               Total                                  $       4.3

Estimated weather effects - Weather, when measured by HDDs, was 1.7% colder and 23.6% warmer than normal for the three months ended March 31, 2013 and 2012, respectively. Washington Gas has a weather protection strategy that is designed to neutralize the estimated financial effects of variations from normal weather on net income (refer to the section entitled "Weather Risk" for


Table of Contents

WGL Holdings, Inc.

Washington Gas Light Company

Part I-Financial Information

Item 2-Management's Discussion and Analysis of

Financial Condition and Results of Operations (continued)

further discussion of our weather protection strategy). Washington Gas executed heating degree day derivative contracts to manage its exposure to variations from normal weather in the District of Columbia. Changes in the fair value of these derivatives are reflected in operation and maintenance expenses and offset the benefits reflected above.

Natural gas consumption pattern - The variance in net revenues reflects the changes in natural gas consumption patterns. These changes may be affected by shifts in weather patterns in which customer heating usage may not correlate highly with average historical levels of usage per heating degree days that occur. Natural gas consumption patterns may also be affected by non-weather related factors such as customer conservation.

Customer growth - Average active customer meters increased by more than 10,400 for the three months ended March 31, 2013 compared to the same period of the prior fiscal year.

Gas administrative charge (GAC) -Represents a regulatory mechanism in all jurisdictions that provides for recovery of uncollectible accounts expense related to changes in gas costs. High/lower recoveries reflect GAC rate changes in Maryland, Virginia and the District of Columbia. The related uncollectible accounts expense is included in operation and maintenance expense.

Asset optimization -We recorded net unrealized losses associated with our energy-related derivatives of $6.1 million for the three months ended March 31, 2013, compared to unrealized gains of $1.1 million reported for the same period of the prior fiscal year. When these derivatives settle, any unrealized amounts will ultimately reverse and Washington Gas will realize margins in combination with related transactions that these derivatives economically hedge. Washington Gas recorded no lower-of-cost or market adjustments related to its storage gas inventory during the three months ended March 31, 2013. Washington Gas recorded lower-of-cost or market adjustments related to its storage gas inventory, after the effects of regulatory sharing, of $0.9 million during the three months ended March 31, 2012. Refer to the section entitled "Market Risk-Price Risk Related to the Regulated Utility Segment" for further discussion of our asset optimization program.

Storage carrying costs - Each jurisdiction provides for the recovery of carrying costs based on the pre-tax cost of capital in each jurisdiction, multiplied by the monthly average balance of storage gas inventory. The three month comparison reflects lower average storage gas inventory investment balances primarily due to lower weighted average cost of gas in inventory.

Operation and Maintenance Expenses. The following table provides the key factors contributing to the changes in operation and maintenance expenses of the Regulated Utility for the three months ended March 31, 2013 and 2012.

          Composition of Changes in Operation and Maintenance Expenses

                                                            Increase/
           (In millions)                                   (Decrease)
           Employee benefits                               $       1.4
           Weather derivative benefits:
           Loss                                                    4.6
           Premium costs and fair value effects                   (0.4 )
           Uncollectible accounts- reserve adjustment             (1.7 )
           Operation, engineering, compliance and safety          (1.4 )
           Other operating expenses                                0.9
           Total                                           $       3.4

Employee benefits - The increase in employee benefits expense reflects higher pension expense, partially offset by lower other post-retirement benefits primarily due to changes in the discount rate and other plan assumptions used to measure the benefit obligation.

Weather derivative benefits - The effects of hedging variations from normal weather in the District of Columbia for the three months ended March 31, 2013 and 2012 are recorded to operation and maintenance expense. The increase in O&M for the weather derivative reflects the level of heating degree days this year compared to the same period last year. This year, while HDD's were lower than normal, they were greater than last year, resulting in provision being derived from the weather derivative. During three months ended March 31, 2013, Washington Gas recorded losses of $0.4 million (pre-tax) related to its weather-related instruments as a result of colder-than-normal weather and received a benefit of $0.7 million for premiums on its weather-related instruments. During three months ended March 31, 2012, Washington Gas recorded a gain of $4.2 million related to its weather-related instruments as a result of warmer-than-normal weather and received a benefit of $0.3 million for premiums on its weather-related instruments. The benefits or losses of the weather-related instruments are offset by the effect of weather on utility net revenues.

. . .

  Add WGL to Portfolio     Set Alert         Email to a Friend  
Get SEC Filings for Another Symbol: Symbol Lookup
Quotes & Info for WGL - All Recent SEC Filings
Copyright © 2014 Yahoo! Inc. All rights reserved. Privacy Policy - Terms of Service
SEC Filing data and information provided by EDGAR Online, Inc. (1-800-416-6651). All information provided "as is" for informational purposes only, not intended for trading purposes or advice. Neither Yahoo! nor any of independent providers is liable for any informational errors, incompleteness, or delays, or for any actions taken in reliance on information contained herein. By accessing the Yahoo! site, you agree not to redistribute the information found therein.