UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
FORM 10-Q
| [X] | Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the quarterly period ended June 30, 2003
OR
| [ ] | Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
| Exact name of registrant as | I.R.S. | |||||
| Commission | specified in its charter and principal | State of | Employer | |||
| File Number | office address and telephone number | Incorporation | I.D. Number | |||
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| 1-16163 | WGL Holdings, Inc. | Virginia | 52-2210912 | |||
| 1100 H Street, N.W. | ||||||
| Washington, D.C. 20080 | ||||||
| (703) 750-2000 | ||||||
| 0-49807 | Washington Gas Light Company | District of Columbia | 53-0162882 | |||
| 1100 H Street, N.W | and Virginia | |||||
| Washington, D.C. 20080 | ||||||
| (703) 750-4440 |
Indicate by check mark whether each registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrants were required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No
Indicate by check mark whether each registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes No [X]
Indicate the number of shares outstanding of each of the issuers’ classes of common stock as of the latest practicable date:
WGL Holdings, Inc. common stock, no par value, outstanding as of July 31, 2003: 48,600,881 shares.
All of the outstanding shares of common stock ($1 par value) of Washington Gas Light Company were held by WGL Holdings, Inc. as of July 31, 2003.
WGL Holdings, Inc.
Washington Gas Light Company
Table of Contents
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PART I. Financial Information
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Item 1.
Financial Statements:
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WGL Holdings, Inc.:
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Consolidated Balance Sheets
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3 | ||||||
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Consolidated Statements of Income
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4 | ||||||
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Consolidated Statements of Cash Flows
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6 | ||||||
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Washington Gas Light Company:
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Balance Sheets
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7 | ||||||
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Statements of Income
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8 | ||||||
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Statements of Cash Flows
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10 | ||||||
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Notes to Consolidated Financial Statements
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11 | ||||||
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WGL Holdings, Inc. and Washington Gas Light Company — Combined
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Item 2.
Management’s Discussion and Analysis of Financial
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|||||||
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Condition and Results of Operations
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27 | ||||||
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WGL Holdings, Inc.
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30 | ||||||
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Washington Gas Light Company
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41 | ||||||
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Item 3.
Quantitative and Qualitative Disclosures About
Market Risk
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51 | ||||||
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Item 4.
Controls and Procedures
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51 | ||||||
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PART II. Other Information
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Item 6.
Exhibits and Reports on Form 8-K
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51 | ||||||
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Signature
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54 | ||||||
Filing Format- This Quarterly Report on Form 10-Q is a combined report being filed by two separate registrants: WGL Holdings, Inc. (WGL Holdings or the Company) and Washington Gas Light Company (Washington Gas or the regulated utility). Except where the content clearly indicates otherwise, any reference in the report to “WGL Holdings” or “the Company” is to the consolidated entity WGL Holdings and all of its subsidiaries, including Washington Gas, a distinct registrant that is a wholly owned subsidiary of WGL Holdings.
Part I — Financial Information of this Quarterly Report on Form 10-Q includes separate financial statements (i.e., balance sheets, statements of income and statements of cash flows) for consolidated WGL Holdings and Washington Gas.
2
WGL Holdings, Inc.
WGL Holdings, Inc.
Consolidated Balance Sheets (Unaudited)
(Thousands)
June 30,
September 30,
2003
2002
$
2,532,995
$
2,481,810
(903,167
)
(874,967
)
1,629,828
1,606,843
6,551
2,529
241,337
175,344
10,967
6,983
27,514
11,557
(21,384
)
(13,740
)
258,434
180,144
11,471
13,088
88,546
99,087
34,305
29,973
9,423
13,422
201
329
3,126
2,259
412,057
340,831
—
5,272
50,447
64,621
64,678
58,453
25,010
37,644
140,135
165,990
$
2,182,020
$
2,113,664
$
850,902
$
766,403
28,173
28,173
623,305
667,951
1,502,380
1,462,527
66,619
133,261
167,951
152,820
13,456
3,308
15,876
15,743
10,578
15,482
16,490
6,190
68,940
9,957
2,750
750
362,660
337,511
16,066
16,739
215,726
212,631
36,715
37,970
48,473
46,286
316,980
313,626
$
2,182,020
$
2,113,664
The accompanying Notes to Consolidated Financial Statements are an integral part of these consolidated statements.
3
WGL Holdings, Inc.
WGL Holdings, Inc
.
Part 1 — Financial Information
Item 1 — Financial Statements (continued)
Consolidated Statements of Income (Unaudited)
Three Months Ended
June 30,
(Thousands, Except Per Share Data)
2003
2002
$
202,401
$
163,696
101,539
82,839
7,434
3,240
93,428
77,617
43,601
40,587
10,274
11,109
21,315
18,735
9,333
8,881
282
(4,681
)
84,805
74,631
8,623
2,986
163,189
135,532
7,460
14,489
105
475
170,754
150,496
—
(5,051
)
—
(2,131
)
173,084
150,881
(2,990
)
(2,265
)
170,094
148,616
660
(5,302
)
9,283
(2,316
)
(134
)
(327
)
9,149
(2,643
)
10,758
10,749
701
463
11,459
11,212
330
330
$
(2,640
)
$
(14,185
)
48,587
48,566
48,587
48,566
$
(0.05
)
$
(0.29
)
$
(0.05
)
$
(0.29
)
$
0.3200
$
0.3175
The accompanying Notes to Consolidated Financial Statements are an integral part of these consolidated statements.
4
WGL Holdings, Inc.
WGL Holdings, Inc
.
Part 1 — Financial Information
Item 1 — Financial Statements (continued)
Consolidated Statements of Income (Unaudited)
Nine Months Ended
June 30,
(Thousands, Except
Per Share Data)
2003
2002
$
1,197,601
$
809,746
660,838
398,572
33,250
22,884
503,513
388,290
135,501
121,671
29,553
29,343
62,119
54,434
30,790
26,952
82,625
48,809
340,588
281,209
162,925
107,081
559,822
437,541
25,600
47,261
1,225
1,559
586,647
486,361
—
(7,873
)
—
(9,431
)
584,782
480,595
(583
)
(59
)
584,199
480,536
2,448
(11,479
)
165,373
95,602
497
1,653
165,870
97,255
33,218
32,110
1,717
2,343
34,935
34,453
990
990
$
129,945
$
61,812
48,581
48,562
48,737
48,649
$
2.67
$
1.27
$
2.67
$
1.27
$
0.9575
$
0.9500
The accompanying Notes to Consolidated Financial Statements are an integral part of these consolidated statements.
5
WGL Holdings, Inc.
WGL Holdings, Inc.
Part 1 — Financial Information
Item 1 — Financial Statements (continued)
Consolidated Statements of Cash Flows (Unaudited)
Nine Months Ended
June 30,
(Thousands)
2003
2002
$
129,945
$
61,812
66,901
58,546
679
(13,157
)
(673
)
(677
)
(3,711
)
(10,550
)
49
—
—
7,873
—
9,431
(3,422
)
—
(1,019
)
420
(74,306
)
(40,005
)
6,316
36,061
10,541
81,413
3,998
6,653
15,591
(7,178
)
(459
)
(618
)
(4,904
)
886
56,734
27,379
10,148
10,663
1,609
—
8,112
9,324
128
554
(793
)
5,178
221,464
244,008
93
83,398
(59,038
)
(29,623
)
(359
)
(732
)
(52,443
)
(118,338
)
(46,395
)
(46,014
)
1,678
386
(156,464
)
(110,923
)
(92,594
)
(115,389
)
21,300
—
—
(4,814
)
10,316
(16,537
)
(60,978
)
(136,740
)
4,022
(3,655
)
2,529
12,104
$
6,551
$
8,449
| (a) | Includes amounts charged to other accounts. | |
| (b) | Cash equivalents are highly liquid investments with a maturity of three months or less when purchased. |
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SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
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Income taxes paid
|
$ | 26,997 | $ | 31,182 | ||||||
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Interest paid
|
$ | 23,583 | $ | 23,112 | ||||||
The accompanying Notes to Consolidated Financial Statements are an integral part of these consolidated statements.
6
Washington Gas Light Company
Washington Gas Light Company
Part 1 — Financial Information
Item 1 — Financial Statements (continued)
Balance Sheets (Unaudited)
June 30,
September 30,
(Thousands)
2003
2002
$
2,508,411
$
2,457,673
(886,584
)
(859,505
)
1,621,827
1,598,168
7,278
2,637
Accounts receivable
126,713
63,055
10,967
6,983
27,514
11,557
(16,969
)
(9,395
)
148,225
72,200
11,313
12,858
64,644
69,207
29,510
25,387
5,852
8,316
43,537
4,341
310,359
194,946
—
5,272
50,447
64,621
64,355
58,162
21,963
30,968
136,765
159,023
$
2,068,951
$
1,952,137
$
810,398
$
730,320
28,173
28,173
623,256
667,852
1,461,827
1,426,345
28,108
67,943
128,416
96,150
13,456
3,308
15,876
15,764
10,578
15,482
16,490
6,190
66,086
7,220
7,563
692
1,638
29
288,211
212,778
16,041
16,711
219,202
214,200
36,611
37,848
47,059
44,255
318,913
313,014
$
2,068,951
$
1,952,137
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
7
Washington Gas Light Company
Washington Gas Light Company
Part 1 — Financial Information
Item 1 — Financial Statements (continued)
Statements of Income (Unaudited)
Three Months Ended
June 30,
(Thousands)
2003
2002
$
203,095
$
165,793
102,233
84,936
7,434
3,240
93,428
77,617
44,062
41,104
10,188
11,022
21,145
18,569
9,269
8,811
224
(4,765
)
84,888
74,741
8,540
2,876
122
673
122
673
—
7,304
47
(2,935
)
47
4,369
75
(3,696
)
8,615
(820
)
(132
)
(1,452
)
8,483
(2,272
)
10,758
10,749
795
(432
)
11,553
10,317
(3,070
)
(12,589
)
330
330
$
(3,400
)
$
(12,919
)
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
8
Washington Gas Light Company
Washington Gas Light Company
Part 1 — Financial Information
Item 1 — Financial Statements (continued)
Statements of Income (Unaudited)
Nine Months Ended
June 30,
(Thousands)
2003
2002
$
1,208,224
$
821,478
671,461
410,304
33,250
22,884
503,513
388,290
136,759
123,211
29,343
29,172
61,609
53,937
30,653
26,716
82,465
48,497
340,829
281,533
162,684
106,757
1,151
1,601
1,151
1,601
9
8,042
449
(2,914
)
458
5,128
693
(3,527
)
163,377
103,230
(1,070
)
2,162
162,307
105,392
33,218
32,110
2,007
1,978
35,225
34,088
127,082
71,304
990
990
$
126,092
$
70,314
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
9
Washington Gas Light Company
Washington Gas Light Company
Part 1 — Financial Information
Item 1 — Financial Statements (continued)
Statements of Cash Flows (Unaudited)
Nine Months Ended
June 30,
(Thousands)
2003
2002
$
127,082
$
71,304
65,940
57,195
1,532
(9,915
)
(670
)
(672
)
(3,680
)
(10,479
)
49
—
(2,495
)
—
(563
)
698
(111,237
)
(25,680
)
6,316
36,061
4,563
70,168
3,318
6,073
39,868
(46,012
)
(733
)
(510
)
(4,904
)
886
57,223
28,072
10,148
10,663
1,609
—
8,112
9,324
907
6,722
202,385
203,898
—
83,326
(58,838
)
(29,413
)
(258
)
(1,153
)
—
20,186
(25,694
)
(98,724
)
(47,267
)
(46,992
)
182
238
(131,875
)
(72,532
)
(91,933
)
(114,452
)
16,000
—
10,064
(16,537
)
(65,869
)
(130,989
)
4,641
377
2,637
7,537
$
7,278
$
7,914
| (a) | Includes amounts charged to other accounts. | |
| (b) | Cash equivalents are highly liquid investments with a maturity of three months or less when purchased. |
|
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
|
|||||||||
|
Income taxes paid
|
$ | 25,321 | $ | 24,106 | |||||
|
Interest paid
|
$ | 23,070 | $ | 22,646 | |||||
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
10
WGL Holdings, Inc.
Notes to Consolidated Financial Statements
NOTE
1 — ACCOUNTING POLICIES
General
WGL Holdings, Inc. (WGL Holdings or the Company) has four wholly owned
subsidiaries that include Washington Gas Light Company (Washington Gas or the
regulated utility), Crab Run Gas Company, Hampshire Gas Company and Washington
Gas Resources Corporation (Washington Gas Resources). Washington Gas Resources
owns most of the Company’s non-regulated subsidiaries that include, among
others, American Combustion Industries, Inc. (ACI), Washington Gas Energy
Services, Inc. (WGEServices), WG Maritime Plaza 1, Inc. and Washington Gas
Energy Systems, Inc. (WGESystems). Until October 15, 2002, WGL Holdings held a
50 percent equity investment in Primary Investors, LLC (Primary Investors)
(refer to Note 7 included herein). Please refer to WGL Holdings fiscal year
2002 Annual Report on Form 10-K for additional information on the corporate
structure.
This Quarterly Report on Form 10-Q is a combined report of WGL Holdings
and Washington Gas.
These notes are an integral part of the accompanying consolidated
financial statements of WGL Holdings and its subsidiaries, including Washington
Gas. Except where otherwise noted, these Notes to Consolidated Financial
Statements apply equally to WGL Holdings and Washington Gas. Due to the
seasonal nature of Washington Gas’ business, the results of operations shown do
not necessarily represent the expected results of either WGL Holdings or
Washington Gas for the entire fiscal year ending September 30, 2003.
The following policies are certain of the significant accounting policies
used by the Company and its subsidiaries in the preparation of their financial
statements. The policies shown herein do not reflect all of the Company’s
accounting policies that would normally be disclosed in connection with the
preparation of the Company’s annual financial statements. Reference is made to
the Company’s most recent Annual Report on Form 10-K filed with the Securities
and Exchange Commission (SEC) for a complete listing and description of all
significant accounting policies.
Basis of Presentation of Financial Statements
The interim consolidated financial statements have been prepared pursuant
to the rules and regulations of the SEC. Therefore, certain financial
information and footnote disclosures accompanying annual financial statements
prepared in accordance with generally accepted accounting principles (GAAP) in
the United States are omitted in this interim report pursuant to the SEC rules
and regulations. The interim consolidated financial statements and notes
thereto should be read in conjunction with the combined Annual Report on Form
10-K for WGL Holdings and Washington Gas for the fiscal year ended September
30, 2002.
The accompanying unaudited consolidated financial statements for WGL
Holdings and Washington Gas reflect all normal recurring adjustments that are
necessary, in the opinion of management, to present fairly the results of
operations in accordance with GAAP.
11
WGL Holdings, Inc.
Consolidation of Financial Statements
The consolidated financial statements include the accounts of the Company
and its subsidiaries during the periods reported. Intercompany transactions
have been eliminated. WGL Holdings accounted for its former 50 percent
investment in Primary Investors using the equity method (refer to Note 7
included herein). Certain amounts in the financial statements of prior years
have been reclassified to conform to the presentation of the current fiscal
year.
Use of Estimates in the Preparation of Financial Statements
In accordance with United States GAAP, the Company’s management makes
certain estimates and assumptions regarding: 1) reported amounts of assets and
liabilities, 2) disclosure of contingent assets and liabilities at the date of
the financial statements; and 3) reported amounts of revenues, revenues subject
to refund, and expenses during the reporting period. Actual results could
differ from those estimates.
Utility Revenue and Cost of Gas Recognition
For regulated deliveries of natural gas, Washington Gas reads meters and
bills customers on a cycle basis. It accrues revenues for gas that has been
delivered but not yet billed at the end of an accounting period. Such revenues
are recognized as unbilled revenue which are later adjusted in the subsequent
period when actual meter readings are taken.
The regulated utility’s jurisdictional tariffs contain mechanisms that
provide for the recovery of the invoice cost of gas applicable to firm
customers. Under these mechanisms, the regulated utility periodically adjusts
its firm customers’ rates to reflect increases and decreases in the invoice
cost of gas. Annually, the regulated utility reconciles the difference between
the total gas costs collected from firm customers and the invoice cost of gas.
The regulated utility defers any excess or deficiency and either recovers it
from, or refunds it to, customers over a subsequent twelve-month period.
Rate Refunds Due to Customers
If the regulated utility were to file a request with a state regulatory
commission to modify customers’ rates, the regulated utility could at a point
in time after the initial filing, depending on the jurisdiction, begin to
charge customers the new rates, until the regulatory commission renders a final
decision. During this interim period, the regulated utility would potentially
record a provision for a rate refund based on the difference between the amount
it collected in rates subject to refund and the amount it expected to recover
pending the final regulatory decision. Similarly, Washington Gas periodically
records provisions for rate refunds related to other transactions of the
regulated utility. Actual results for these regulatory contingencies are
difficult to predict and could differ significantly from the estimates
reflected in the financial statements. When necessary, in management’s
judgement, Washington Gas establishes an estimated refund to customers.
Regulated Operations
The Company accounts for its regulated operations in accordance with
Financial Accounting Standards Board’s (FASB) Statement of Financial Accounting
Standards (SFAS) No. 71,
Accounting for the Effects of Certain Types of
Regulation
, as amended and supplemented. SFAS No. 71 sets specific GAAP for
companies where independent third-party regulators determine their rates. When
setting rates, regulators often make decisions, the economics of which require
companies to record costs as expense (or defer costs or revenues) in different
periods than may be appropriate for unregulated enterprises. When this
situation occurs, the regulated utility defers the associated costs as assets
(regulatory assets) on the balance sheet and records them as expenses on the
income statement as it collects revenues through customers’ rates. Further,
regulators can also impose
12
WGL Holdings, Inc.
liabilities upon a company for amounts previously collected from customers
and for recovery of costs that are expected to be incurred in the future
(regulatory liabilities).
Income Taxes
The Company accounts for income taxes in accordance with SFAS No. 109,
Accounting for Income Taxes
. Under SFAS No. 109, the Company recognizes
deferred income taxes for all temporary differences between the financial
statement and tax basis of assets and liabilities at currently enacted income
tax rates.
SFAS No. 109 also requires recognition of the additional deferred income
tax assets and liabilities for temporary differences where regulators prohibit
deferred income tax treatment for ratemaking purposes of the regulated utility.
Regulatory assets or liabilities corresponding to such additional deferred tax
assets or liabilities may be recorded to the extent the Company believes they
will be recoverable from or payable to customers through the ratemaking
process. Amounts applicable to income taxes due from and due to customers
primarily represent differences between the book and tax basis of net utility
plant in service.
Derivative Activities
The Company applies the provisions of SFAS No. 133,
Accounting for
Derivative Instruments and Hedging Activities
, as amended by SFAS No. 138,
Accounting for Certain Derivative Instruments and Certain Hedging Activities
.
SFAS No. 133, as amended, requires derivative instruments, including certain
derivative instruments embedded in other contracts, to be recorded at fair
value as either an asset or a liability. Changes in the derivative’s fair
value are recorded in earnings, unless the derivative meets specific hedge
accounting criteria. If the derivative is designated as a fair value hedge, the
changes in the fair value of the derivative and the hedged item are recognized
in earnings. If the derivative is designated as a cash flow hedge, changes in
the fair value of the derivative generally are recorded in other comprehensive
income and are recognized in income when the hedged item affects earnings.
SFAS No. 133 requires that the Company formally document, designate and assess
the effectiveness of derivatives that are accounted for as hedging instruments.
For those derivatives that are associated with activities of the
regulated utility that are likely to be recovered from or passed back
to customers in future periods, the corresponding fair value is
recorded as regulatory assets or regulatory
liabilities, rather than through other comprehensive income.
Recent Accounting Standards
Effective October 1, 2002, the Company adopted SFAS No. 142,
Goodwill and
Other Intangible Assets,
which requires that goodwill no longer be amortized
over an estimated useful life, but rather be tested annually for impairment and
written down to the extent the test indicates the existence of an impairment.
Upon implementation of this Statement, the Company performed a transition
impairment test for goodwill as of October 1, 2002, and concluded there was no
impairment required to be recorded. Accordingly, the adoption of SFAS No. 142
did not have any effect on the Company’s financial statements for the quarter
ended June 30, 2003. Unamortized goodwill was $2.1 million at June 30, 2003.
Amortization expense for the three and nine months ended June 30, 2002 was not
material. Discontinuing goodwill amortization for fiscal year 2003 does not
have a significant impact on the financial statements.
Effective October 1, 2002, the Company adopted SFAS No. 143,
Accounting
for Asset Retirement Obligations
(ARO). The standard requires that the Company
identify legal obligations associated with the retirement of tangible
long-lived assets. Liabilities must be recognized and measured at fair value
when it is determined that there is a legal obligation associated with the
retirement of tangible long-lived assets. The cost associated with the
recognition of the liability for
13
WGL Holdings, Inc.
AROs is capitalized as part of the related asset’s book value and is
depreciated over the expected life o f the asset. If a legal obligation does
not exist, or if it can not be measured due to uncertainty about the estimated
amounts, then the accounting for the asset retirement cost is not affected. The
adoption of SFAS No. 143 did not have a material effect on the Company’s
financial statements for the three and nine months ended June 30, 2003 since
the Company did not have a legal obligation to retire any of its tangible
long-lived assets or, for certain immaterial assets, the Company could not
estimate the ARO. The regulated utility currently accrues interim costs of
removal on many regulated, long-lived assets through depreciation expense, with
a corresponding credit to accumulated depreciation, as allowed by the
regulatory commissions that have jurisdiction over its retail rates. However,
because these removal costs meet the requirements of SFAS 71, these accumulated
costs are not classified as liabilities. The regulated utility is in
the process of determining the amount of the accumulated removal
costs included in the accumulated depreciation reserve and will
disclose them in the future.
Effective January 1, 2003, the Company adopted FASB Financial
Interpretation (FIN) No. 45,
Guarantor’s Accounting and Disclosure Requirements
for Guarantees, Including Indirect Guarantees of Indebtedness of Others
. FIN
No. 45 clarifies SFAS No. 5,
Accounting for Contingencies,
by requiring a
guarantor to recognize a liability on its balance sheet for the fair value of
the obligation it has assumed under certain guarantees issued or modified after
December 31, 2002. Additionally, FIN 45 requires expanded disclosures in
interim and annual financial statements about a guarantor’s obligations under
certain guarantees that it has issued. As of June 30, 2003, the Company did
not have any obligations under guarantees that would be required to be
recognized as a liability on the balance sheet. However, the Company did have
obligations under guarantees subject to the disclosure requirements of FIN 45
(refer to Note 12 included herein).
Effective April 1, 2003, the Company adopted SFAS No. 148,
Accounting for
Stock-Based Compensation Transition and Disclosure
. SFAS No. 148 amends SFAS
No. 123,
Accounting for Stock-Based Compensation
, by providing alternative
methods of transition for a voluntary change to the fair value method of
accounting for stock-based employee compensation. In addition, SFAS No. 148
requires prominent disclosure in both annual and interim financial statements.
No compensation expense has been recognized in the Company’s Consolidated
Statements of Income for stock option grants. If compensation expense
associated with the Company’s stock-based compensation plans had been
recognized in income based on the fair value at the grant dates for awards
under these plans consistent with the method prescribed by SFAS No. 123, as
amended by SFAS No. 148, the Company’s net income (loss) and earnings (loss)
per share for the three and nine months ended June 30, 2003 and 2002 would have
been adjusted to the amounts shown in the following pro forma table.
In April 2003, FASB issued SFAS No. 149,
Amendment of Statement 133 on
Derivative Instruments and Hedging Activities
. SFAS No. 149 amends and
clarifies the accounting and reporting for derivative instruments, including
certain derivative instruments embedded in other contracts, and
14
WGL Holdings, Inc.
for hedging activities under SFAS No. 133. The amendments set forth in
SFAS No. 149 require that contracts with comparable characteristics be
accounted for similarly. Specifically, this statement clarifies the
circumstances by which a contract with an initial net investment meets the
characteristics of a derivative according to SFAS No. 133, and when a
derivative contains a financing component that warrants special reporting in
the Statement of Cash Flows.
The requirements of SFAS No. 149 are effective for contracts entered into
or modified after June 30, 2003, and for hedging relationships designated after
June 30, 2003. The provisions of the statement that relate to SFAS No. 133
implementation issues that have been effective for fiscal quarters that began
prior to June 15, 2003, should continue to be applied in accordance with their
respective effective dates. Management is currently evaluating the impacts, if
any, of SFAS No. 149 on the Company’s financial statements.
NOTE 2 — SHORT-TERM DEBT
On May 2, 2003, WGL Holdings and Washington Gas executed new revolving
credit agreements with a banking group in the amounts of $130 million and $175
million respectively. The new credit agreements replaced previously existing
credit agreements of $85 million for WGL Holdings and $220 million for
Washington Gas. WGL Holdings and Washington Gas pay facility fees of 13 basis
points and 11 basis points, respectively, for the new revolving credit
agreements, which will expire on April 30, 2004. Other permanent and seasonal
bank lines of credit available to WGL Holdings and Washington Gas since the end
of fiscal year 2002 have either expired or terminated as of May 2, 2003.
NOTE 3 — LONG-TERM DEBT
Unsecured Medium-Term Notes
The regulated utility issues unsecured Medium-Term Notes (MTNs) with
individual terms regarding interest rates, maturities and call or put options
that are an integral part of the basic debt instrument. These notes can have
maturity dates of one or more years from the date of issuance. During the
three months ended June 30, 2003, the regulated utility did not issue any
unsecured MTNs. Washington Gas filed a new $250.0 million shelf registration
that was declared effective by the SEC on April 24, 2003. The table below
reflects notes payable and current maturities of long-term debt outstanding as
of June 30, 2003 and September 30, 2002.
WGL Holdings, Inc.
Washington Gas Light Company
15
WGL Holdings, Inc.
NOTE 4 — COMMON SHAREHOLDERS’ EQUITY
The tables below reflect the components of Common shareholders’ equity as
of June 30, 2003 and September 30, 2002.
WGL Holdings, Inc.
Washington Gas Light Company
NOTE 5
—
COMPREHENSIVE INCOME (LOSS)
The tables below reflect the components of comprehensive income (loss) for
the three and nine months ended June 30, 2003 and 2002. Items that are
excluded from net income (loss) and charged directly to common shareholders’
equity are accumulated in Other comprehensive income. The amount of
accumulated other comprehensive income is included in Common shareholders’
equity.
WGL Holdings, Inc.
16
WGL Holdings, Inc.
Washington Gas Light Company
NOTE 6
—
EARNINGS (LOSS) PER SHARE
Basic earnings (loss) per average common share (EPS) is computed by
dividing net income by the weighted-average number of common shares outstanding
during the reported period. Diluted EPS assumes the issuance of common shares
pursuant to stock-based compensation plans at the beginning of the applicable
period. The following tables show the computation of basic and diluted EPS of
WGL Holdings for the three and nine months ended June 30, 2003 and 2002.
Basic and Diluted Earnings Per Average Common Share
* Excluded because the effect would be anti-dilutive.
17
WGL Holdings, Inc.
NOTE 7
—
LIMITED LIABILITY COMPANY INVESTMENT
On September 20, 2002, WGL Holdings and Thayer Capital Partners (Thayer)
entered into an agreement to restructure Primary Investors such that WGL
Holdings has no liability or financial commitment to Thayer, Primary Investors
or any subsidiary of Primary Investors. On October 15, 2002, WGL Holdings and
Primary Investors executed a final closing, and WGL Holdings transferred all of
its interest in Primary Investors to Thayer. Since September 30, 2002, the
Company had no net investment in this equity venture and, accordingly, no
effect on net income for this venture. Net income (loss) for the three and
nine months ended June 30, 2002 included an after-tax loss from these
operations totaling $3.0 million and $5.9 million, respectively, as well as an
after-tax impairment provision to reflect the permanent decline in value
totaling $2.1 million and $9.4 million, respectively.
NOTE 8 — DERIVATIVE ACTIVITY
Washington Gas enters into forward contracts for the purchase of natural
gas that qualify as derivatives under SFAS No. 133. Washington Gas has elected
to exempt such contracts as normal purchases and sales, as defined by SFAS No.
133. Certain contracts meet the definition of a derivative and are recorded as
a liability on the balance sheet at fair value. Because such contracts relate
to the acquisition of natural gas under a hedging program that provides for the
recovery of the actual cost (which has been approved by the regulatory bodies
in the District of Columbia, Maryland and Virginia), offsetting mark-to-market
amounts are recorded as a regulatory asset or regulatory liability. The fair
value gain of these contracts at September 30, 2002 was $1.3 million; the fair
value at June 30, 2003 was negligible.
On June 4, 2003, Washington Gas entered into two forward-starting swaps
with an aggregate notional principal of $62 million to mitigate a substantial
portion of interest-rate risk associated with debt transactions anticipated to
be executed during the first quarter of fiscal year 2004 that will end on
December 31, 2003. These swaps have been designated as cash flow hedges which,
in accordance with SFAS No. 133, are carried at fair value. At June 30, 2003,
the estimated fair value gain related to these swaps totaled $853,000. This
gain (along with future changes in the fair value of the swaps) is recorded as
a regulatory liability in accordance with regulatory accounting. These swaps
are scheduled to terminate concurrently with the execution of the anticipated
debt transactions during the first quarter of fiscal year 2004 that will end on
December 31, 2003.
The Company’s non-regulated retail energy-marketing subsidiary,
WGEServices holds a heating degree day option contract, which is used to manage
the risk of increased usage caused by colder-than-normal weather for a limited
number of its customers, where such customers have chosen a fixed-price and
volume service. This contract pays WGEServices a fixed dollar amount for every
heating degree day over a specified level during the calculation period. This
contract is accounted for under the guidelines issued by the Emerging Issues
Task Force (EITF) of the FASB in issue 99-2 and is excluded from the definition
of a hedge contract under SFAS No.133. Except for this heating degree
day option contract, WGEServices held no other open option contracts as
of June 30, 2003.
NOTE 9 — OPERATING SEGMENT REPORTING
WGL Holdings reports three operating segments: 1) regulated utility; 2)
retail energy-marketing; and 3) heating ventilating and air conditioning (HVAC)
activities. Transactions excluded from these three segments were accumulated
in other activities of the Company’s non-utility operations.
With approximately 95 percent of WGL Holdings’ assets, the regulated
utility segment is its core business. Represented almost entirely by Washington
Gas, the regulated utility segment provides regulated gas distribution services
(including the purchase and delivery of natural gas, meter reading, responding
to customer inquiries and bill preparation) to customers in metropolitan
18
WGL Holdings, Inc.
Washington, D.C., and parts of Maryland and Virginia. In addition to the
regulated operations of Washington Gas, the regulated utility segment includes
the operations of Hampshire Gas Company, an underground natural gas storage
facility that is regulated by the Federal Energy Regulatory Commission and
operated on behalf of Washington Gas.
Through WGEServices, the retail energy-marketing segment sells natural gas
and electricity directly to customers, both inside and outside Washington Gas’
traditional service territory, in competition with unregulated gas and
electricity marketers. Through two wholly owned subsidiaries, WGESystems and
ACI, the HVAC segment designs, renovates and services mechanical heating,
ventilating and air conditioning systems for commercial and governmental
customers. In the three and nine months periods ended June 30, 2002, the HVAC
segment also included the results of the Company’s 50 percent former equity
investment in Primary Investors, an entity that provided HVAC services to
residential customers. The Company terminated its interest in Primary
Investors in October 2002 (refer to Note 7 included herein).
19
WGL Holdings, Inc.
The following table presents operating segment information.
OPERATING SEGMENT FINANCIAL INFORMATION
20
WGL Holdings, Inc.
OPERATING SEGMENT FINANCIAL INFORMATION
NOTE 10 — TRANSACTIONS BETWEEN WASHINGTON GAS AND AFFILIATES
Washington Gas and other subsidiaries of WGL Holdings may engage in
transactions with each other during the ordinary course of business. All
significant intercompany transactions and balances have been eliminated from
the consolidated financial statements of WGL Holdings.
Washington Gas provides administrative and general support to affiliates,
and prepares consolidated tax returns, which include affiliated company tax
obligations. All such costs that are billed to affiliates are settled with a
cash transfer or reflected in “Receivables from associated companies” or
“Payables to associated companies” on Washington Gas’ Balance Sheets.
Washington Gas may also, on occasion, borrow funds from, or lend funds to,
affiliated companies through the operation of a money pool. The Washington Gas
Balance Sheets reflect a net receivable of $36.0 million and $3.6 million at
June 30, 2003 and September 30, 2002, respectively, for money pool balances.
Additionally, Washington Gas provides system balancing services to all energy
marketers participating in the customer choice programs on its facilities under
approved tariffs, including $696,000 and $10.6 million of charges to
WGEServices, an affiliated energy
21
WGL Holdings, Inc.
marketer, for balancing services during the
three and nine month periods ended June 30,
2003, respectively. For the three and nine month periods ended June 30,
2002, the charges for balancing services were $2.1 million and $11.7 million,
respectively.
NOTE 11
—
SALE OF ASSETS
In March 2003, the Company’s regulated utility recognized an after-tax
gain of $2.5 million, or $0.05 per share, from the sale of the Company’s
headquarters building and land located in downtown Washington, D.C. This gain
was reported in Other income (expenses) — net for the nine months ended June
30, 2003 in accordance with regulatory accounting. The year-to-date results
also include estimates for potential refunds to customers based on the outcome
of regulatory decisions related to this gain. In the first quarter of fiscal
year 2003, the Company’s non-utility operations recognized an after-tax gain of
$926,000, or $0.02 per share, from the sale of its interest in a land
development venture.
NOTE 12
—
COMMITMENTS AND CONTINGENCIES
Regulated Utility Operations
Certain legal and administrative proceedings, incidental to the Company’s
business, including rate case contingencies, involve WGL Holdings and/or its
subsidiaries. In the opinion of management, the Company has recorded an
adequate provision for probable losses or refunds to customers for rate case
contingencies related to these proceedings in accordance with SFAS No. 5
,
Accounting for Contingencies
. Management believes the amount of the refunds
that are reasonably possible, in excess of the liability recorded at June 30,
2003, is approximately $8.9 million. Below is a description of certain of
Washington Gas’ current regulatory proceedings.
Virginia Jurisdiction — Rate Case Activity
On June 14, 2002, Washington Gas filed an application with the State
Corporation Commission of Virginia (SCC of VA) to increase annual revenues in
Virginia. The Shenandoah Gas Division of Washington Gas is included in the
filing. The application requested to increase overall annual revenues by
approximately $23.8 million. Washington Gas requested an overall rate of return
of 9.42 percent and a return on common equity of 12.25 percent versus its
currently authorized return on common equity of 11.50 percent for Washington Gas and 10.7
percent for Shenandoah Gas. Washington Gas also requested approval of an
Incentive Rate Plan (IRP), which includes a 50/50 sharing between customers and
Washington Gas of weather-normalized Virginia regulated earnings 100 basis
points above or below the SCC of VA’s authorized return on equity. The IRP
proposed no change in the method of recovering the cost of natural gas incurred
by Washington Gas.
On November 15, 2002, the Staff of the SCC of VA (VA Staff) filed
testimony in response to Washington Gas’ presentation. The VA Staff took the
position that Washington Gas’ revenues are sufficient and do not need to be
revised, but recommended that operating revenues for the Shenandoah Gas
Division be decreased by $1.4 million. The VA Staff’s estimate of the cost of
equity for Washington Gas, including the Shenandoah Division, ranged between
9.50 percent and 10.50 percent. The VA Staff recommended the SCC of VA adopt a
10.0 percent return on equity for Washington Gas including the Shenandoah
Division. Washington Gas filed rebuttal testimony in this proceeding on
December 4, 2002. Hearings were held the week of December 16, 2002. At the
hearing, Washington Gas withdrew the IRP from consideration in that proceeding
but reserved the right to propose a performance-based rate plan in a future
rate case. The other parties agreed to leave the record open to permit
Washington Gas to submit by January 10, 2003, the actuarial studies that
support the reasonableness of the updated pension and Other Post-Employment
Benefits (OPEB) expenses proposed by Washington Gas.
On January 30, 2003, the VA Staff filed a motion that requested acceptance
of the VA Staff’s
22
WGL Holdings, Inc.
comments and accompanying schedules that reflected revisions
to the VA Staff’s original position.
Based on its review of additional financial data and actuarial studies,
the VA Staff supported the pension OPEB costs requested by Washington Gas.
After appropriate revisions to reflect Washington Gas’ proposed pension and
OPEB costs, the VA Staff now supports an operating revenue increase of $5.0
million for Washington Gas and an operating revenue reduction of $1.2 million
for the Shenandoah Division.
Washington Gas cannot predict the final outcome of this pending regulatory
proceeding. Under the regulations of the SCC of VA, Washington Gas placed the
requested general revenue increase into effect on November 12, 2002, subject to
refund pending the SCC of VA’s final decision in the proceeding. Washington
Gas has recorded a provision for rate refunds as of June 30, 2003, representing
management’s judgment of the rate case outcome.
Virginia Jurisdiction — Depreciation Issues
In accordance with an Order of the SCC of VA, Washington Gas performed a
depreciation study, using data as of December 31, 2000, to determine the
adequacy of the current depreciation rates that Washington Gas uses to record
depreciation expense for property located in its Virginia jurisdiction.
Washington Gas submitted the study to the Staff in the first quarter of fiscal
year 2002. Following discussions with the Staff, Washington Gas submitted to
the Staff in the third quarter of fiscal year 2002 an updated study based on
data as of December 31, 2001.
The VA Staff issued a letter dated October 2, 2002 approving new
depreciation rates for Washington Gas and the Shenandoah Gas Division that
would increase annual depreciation expense by approximately $4.0 million.
Staff stated its position that the approved rates should be implemented as of
January 1, 2002, but recognized that the implementation date should be decided
by the SCC of VA in the pending rate case discussed above. Washington Gas
believes the new depreciation rates should have been implemented concurrent
with the effective date of new base rates on November 12, 2002. Washington Gas
filed testimony supporting this position with the SCC of VA in the base rate
proceeding discussed previously. Washington Gas believes that it is reasonably
possible that the position it has taken on this matter will be adopted by the
SCC of VA in the pending rate case.
The financial statements as reported in this Quarterly Report on Form 10-Q
do not reflect any modification of depreciation rates for periods prior to
November 12, 2002. However, Washington Gas did utilize the higher depreciation
rates from November 12, 2002 forward. To the extent the position of the VA
Staff is adopted by the SCC of VA in the current rate filing, Washington Gas
would have to record a charge to income for additional depreciation expense,
net of income tax benefits, calculated from January 1, 2002 to November 12,
2002, without a corresponding amount of revenue. This issue is still pending in
the previously discussed rate case.
Maryland Jurisdiction
On March 31, 2003, Washington Gas filed with the Public Service Commission
of Maryland (PSC of MD) an application to increase rates in Maryland. The
application requested an increase to overall annual revenues by approximately
$35.1 million, with a return on common equity of 12.25 percent and an overall
rate of return of 9.39 percent. On June 16, 2003, as a result of information
obtained subsequent to its original filing, Washington Gas revised its overall
requested increase in annual revenue to $28.9 million. On August 1, 2003,
Washington Gas further revised its requested annual revenue increase to $27.2
million. The most recent update reflects no revision to the original request
in regards to Washington Gas’ return on common equity or overall rate of
return.
The proposed rate request includes an IRP that would establish incentives
to increase efficiencies and would set customer service quality standards that
seek to increase the efficiency,
23
WGL Holdings, Inc.
safety, and reliability of service. The IRP
benefits customers by providing for more stable rates, which
would result in less frequent requests for rate increases. The rate
request also includes a proposal that would provide benefits to low-income
customers who qualify for participation in a new Washington Gas program that
would provide bill credits to participants during the winter heating season.
On June 20, 2003, the Staff of the PSC of MD (MD Staff), the Maryland
Office of People’s Counsel (MD OPC), the United States Department of Defense
and the other affected Federal Executive Agencies (DOD) and the Apartment and
Office Building Association of Metropolitan Washington (AOBA) filed testimony in response to Washington Gas’ rate application.
According to its filed testimony, the MD Staff recommended that the PSC of MD
order Washington Gas to reduce its annual revenues by $6.6 million
(subsequently revised on August 1, 2003 to recommend a $13.6 million reduction
in annual revenues based on an alternative rate-making proposal for
interruptible revenues) and to allow Washington Gas a return on common equity of
10.80 percent and an overall rate of return of 8.64 percent. The MD OPC
recommended an annual reduction in revenues of $11.7 million, with a return on
common equity of 9.50 percent and an overall rate of return of 7.92 percent.
Neither the MD Staff nor the MD OPC supported the Washington Gas
proposal to implement an IRP. The DOD recommended a $5.1 million reduction in Washington Gas’ annual
revenues, and a return on common equity of 9.20 percent and an overall rate of
return of 7.81 percent. DOD did not support Washington Gas’ proposal to
implement an IRP, however, it recommended a reduction in the return on common
equity to 8.00 percent if the PSC of MD elects to adopt an IRP.
AOBA did not specify a change in annual revenues, however, it recommended
a return on common equity of 10.10 percent and an overall rate of return of
8.08 percent. While not supporting Washington Gas’ proposal to implement an
IRP, AOBA alternatively proposed a 9.30 percent return on common equity and an
overall rate of return of 7.69 percent if the PSC of MD did adopt an IRP.
On July 14, 2003, Washington Gas filed its rebuttal case. Hearings were
held from August 4, 2003 through August 7, 2003 to discuss the merits of the
proposed rate increase.
Under Maryland law, the PSC of MD may suspend the implementation of the
proposed increase for up to 210 days from the filing date. The PSC of MD
typically uses the 210-day period to review the reasonableness of the proposed
change in rates. If action has not been taken after 210 days, rates may be
placed into effect subject to refund. Due to Maryland’s suspension statute,
Washington Gas anticipates a final Order prior to November 2003.
District of Columbia Jurisdiction
On June 19, 2001, Washington Gas filed with the Public Service Commission
of the District of Columbia (PSC of DC) an application to increase rates in the
District of Columbia. The request sought to increase overall annual revenues
in the District of Columbia by approximately $16.3 million, or 6.8 percent,
based on a proposed return on equity of 12.25 percent.
On October 29, 2002, the PSC of DC issued an Order for Washington Gas to
decrease rates. The Order directed a decrease in overall annual revenues in
the District of Columbia of approximately $7.5 million, and approved a return
on common equity of 10.6 percent and an overall rate of return of 8.83 percent.
On November 6, 2002, Washington Gas filed with the PSC of DC an
Application for Reconsideration of the Order issued by the PSC of DC on October
29, 2002. The District of Columbia’s Office of the People’s Counsel (DC OPC)
and another intervenor also filed Applications for Reconsideration of the
October 29, 2002 Order.
After reviewing the Applications for Reconsideration of Washington Gas and
other parties in the case, the PSC of DC issued its order on reconsideration on
March 28, 2003. New rates resulting
24
WGL Holdings, Inc.
in a $5.4 million annual revenue reduction were put into place in the
District of Columbia for service rendered on and after April 9, 2003.
On May 23, 2003, the DC OPC filed an appeal with the District of Columbia
Court of Appeals seeking to overturn the March 28, 2003 ruling by the PSC of
DC. In its March 28, 2003 ruling, the PSC of DC upheld a previous ruling that
rejected a proposal by the DC OPC to refund to customers, asset management revenues
collected by the Company, and approved the Company’s proposal to share with
customers fifty percent of such future revenues. This ruling became effective
on April 9, 2003. If the District of Columbia Court of Appeals were to rule
in favor of the DC OPC in this matter, the Company would be required to refund the
amounts previously recorded in revenues totaling approximately $8.0 million (on
a pre-tax basis). Though management cannot predict the final outcome of this
matter, it believes that the DC OPC’s appeal is without merit and, accordingly,
the Company has recorded no liability related to this matter.
On February 7, 2003, Washington Gas filed with the PSC of DC an additional
application to increase rates. The request sought to increase overall annual
revenues in the District of Columbia by approximately $14.1 million, or 7.0
percent, to $214.2 million. The application seeks a return on common equity of
12.25 percent and an overall rate of return of 9.25 percent. The rate request
application filed on February 7, 2003 did not reflect the effect of the revenue
reduction indicated in the PSC of DC’s October 29, 2002 Order.
After considering the effect of the base rate reductions that became
effective on April 9, 2003, Washington Gas filed a revision to its February 7,
2003 application on April 23, 2003. This revision increased the amount of the
requested increase from $14.1 million to $19.9 million. On May 2, 2003, in
response to a commission request for supplemental testimony, the requested
increase was modified to $18.8 million, supporting a total level of annual
revenues of $213.2 million. There are no statutory time requirements for a
ruling on the rate request in the District of Columbia. However, Washington
Gas requested the PSC of DC to take action on the request within a nine-month
period from the February filing date. The PSC of DC held a Pre-hearing
Conference in this case on April 10, 2003 to consider interventions and
appearances of interested parties, the procedural schedule in the case and
proposals for issues to be resolved in this case. The PSC of DC has adopted a
procedural schedule that requires final briefs to be filed during the first
week of October 2003.
On June 26, 2003, the DC OPC, AOBA and other intervenors filed testimony
in response to Washington Gas’ District of Columbia rate application.
According to its filed testimony, the DC OPC recommended an annual reduction in
revenues of $9.6 million with a return on common equity of 9.00 percent and an
overall rate of return of 7.39 percent. Included in the $9.6 million annual
revenue reduction is DC OPC’s recommendation to lower Washington Gas’ annual
depreciation expense by $7.7 million due principally to different depreciation
rates that modify the way costs of removal are reflected in depreciation
expense. The DC OPC did not support the Washington Gas proposal to
implement an IRP.
AOBA did not specify a change in annual revenues, however, it recommended
a return on common equity of 10.10 percent and an overall rate of return of
8.08 percent. While not supporting the Washington Gas proposal to implement an
IRP, AOBA alternatively proposed a 9.30 percent return on common equity and an
overall rate of return of 7.69 percent if the PSC of DC did adopt an IRP.
On July 25, 2003, Washington Gas filed its rebuttal case. Hearings are
scheduled from September 16, 2003 through September 18, 2003 to discuss the
merits of the proposed rate increase.
25
WGL Holdings, Inc.
Non-Utility Operations
As discussed below, the Company is party to financial guarantees related
to the energy-marketing activities of WGEServices. WGES also is exposed to the
risk of non-performance associated with its principal electric supplier.
Financial Guarantees
WGL Holdings and Washington Gas Resources are party to agreements naming
them as the guarantor for certain purchases and sales of natural gas and
electricity made by WGEServices. Total guarantees outstanding at June 30, 2003
were $261.8 million, of which $258.8 million and $3.0 million of such
guarantees named WGL Holdings and Washington Gas Resources as the guarantor,
respectively. Of the total guarantees, there were $42.0 million held by WGL
Holdings that were due to expire December 31, 2004. The remaining $219.8
million do not have specific maturity dates.
Electric Supplier Contingency
WGEServices owns no electric generation assets and receives all of its
electric supply to serve its retail customers from Mirant Americas Energy
Marketing L.P. (MAEM), a wholly owned subsidiary of Mirant Americas, Inc.,
which is a wholly owned subsidiary of Mirant Corporation (Mirant). On July 14,
2003, Mirant and substantially all of its subsidiaries filed voluntary
petitions for reorganization under Chapter 11 of the U.S. Bankruptcy Code.
MAEM was included in these bankruptcy filings. Since the bankruptcy filing,
MAEM has continued to perform under its supply contracts with WGEServices.
Future performance by MAEM may be subject to further developments in the
bankruptcy proceedings.
Should MAEM fail to perform under its supply contracts, WGEServices would
be exposed to financial loss equal to the cost of replacement power in excess
of the MAEM contracts and the cost of exercising certain damage limitation
provisions within its customer sales contracts. WGEServices currently has
access to $30 million in collateral from an escrow account established by MAEM
as part of the WGEServices supply contracts. In the opinion of
counsel to the Company, WGEServices has the contractual right to draw on the escrow funds in the account
if MAEM terminates the supply contracts and WGEServices needs to acquire
replacement power at a higher cost or otherwise mitigate its damages. As of
August 7, 2003, the amount of WGEServices’ exposure in the event of termination
of the contracts between WGEServices and MAEM is estimated to be less than the
amount of collateral included in the escrow account. This is based upon satisfying the economic
terms of existing sales contracts until their expiration, and acquiring supply, priced at
forward electricity prices as of August 7, 2003 that will be in
effect until WGEServices exercises certain damage limitation
provisions of its customers’ sales contracts. The actual exposure for
WGEServices may differ from the estimate due to changes for timing of any
contract termination, deviations from normal weather, changes in future market
conditions, or other factors.
26
WGL Holdings, Inc.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Certain matters discussed in this report, excluding historical
information, include forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995
with respect to the outlook
for earnings, revenues and other future financial business performance or
strategies and expectations. Forward-looking statements are typically
identified by words such as, but not limited to, “estimates”, “expects”,
“anticipates”, “intends”, “believes”, “plans” and similar expressions or future
or conditional verbs such as “will”, “should”, “would” and “could”. Although
the Company believes such forward-looking statements are based on reasonable
assumptions, it cannot give assurance that every objective will be achieved.
Forward-looking statements speak only as of today, and the Company assumes no
duty to update them. The following factors, among others, could cause actual
results to differ materially from forward-looking statements or historical
performance: 1) economic, competitive, political and regulatory conditions and
developments; 2) capital and energy commodity market conditions; 3) changes in
credit market conditions and creditworthiness of customers and suppliers; 4)
changes in relevant laws and regulations, including tax, environmental and
employment laws and regulations; 5) weather conditions; 6) legislative,
regulatory, and judicial mandates and decisions; 7) timing and success of
business and product development efforts; 8) technological improvements; 9) the
pace of deregulation efforts and the availability of other competitive
alternatives; 10) terrorist activities; and 11) other uncertainties.
Such uncertainties are difficult to predict accurately and are generally
beyond WGL Holdings, Inc.’s (WGL Holdings or the Company) direct control.
Accordingly, while it believes that the assumptions are reasonable, WGL
Holdings cannot ensure that all expectations and objectives will be realized.
Readers are urged to use care and consider the risks, uncertainties and other
factors that could affect the Company’s business as described in this Quarterly
Report on Form 10-Q. All forward-looking statements made in this report rely
upon the safe harbor protections provided under the
Private Securities
Litigation Reform Act of 1995.
This Management’s Discussion and Analysis of Financial Condition and
Results of Operations 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 brief discussions of WGL Holdings’ regulated utility operations and
non-utility operations. The majority of WGL Holdings’ operations are derived
from the results of the regulated utility, Washington Gas Light Company
(Washington Gas). In addition, WGL Holdings is also impacted by the results of
its non-utility operations. To obtain a complete understanding and review of
all the details of the regulated utility operations, please refer to the
Management’s Discussion and Analysis of Financial Condition and Results of
Operations for Washington Gas.
Washington Gas — This section comprises the vast majority of WGL
Holdings’ regulated utility segment. As such, the financial condition and
results of operations of Washington Gas’ utility operations and
WGL Holdings’
regulated utility segment are essentially the same.
The Management’s Discussion and Analysis of Financial Condition and
Results of Operations for both WGL Holdings and Washington Gas should be read
in conjunction with the respective company’s Consolidated Financial Statements
and the combined Notes thereto.
Washington Gas provides accounting, legal and other services to its
affiliates at cost, the total amounts of which are not material. Additionally,
Washington Gas provides system balancing
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WGL Holdings, Inc.
services to all energy-marketers participating in the customer choice
programs on its system under approved tariffs which includes $696,000 and $2.1
million of charges to Washington Gas Energy Services, Inc. (WGEServices) for
balancing in the quarters ended June 30, 2003 and 2002, respectively. For the
nine months ended June 30, 2003 and 2002, the charges for balancing services
were $10.6 million and $11.7 million, respectively. All of these related-party
amounts have been eliminated in the consolidated financial statements of WGL
Holdings.
CRITICAL ACCOUNTING POLICIES
Preparation of financial statements and related disclosures in compliance
with generally accepted accounting principles requires the selection and the
application of appropriate technical accounting rules to the relevant facts and
circumstances of the Company’s operations, as well as the use of estimates by
management to compile the consolidated financial statements. The application
of these accounting policies necessarily involves judgments regarding estimates
and projected outcomes of future events, including the likelihood of success of
particular regulatory initiatives, the likelihood of actualizing environmental
estimates and the probability of recovering costs and investments in both the
regulated utility and non-utility operations. These judgments, in and of
themselves, materially impact the financial statements and the related
disclosures.
The Company has identified four critical accounting policies discussed
below that require judgment and estimation, where such estimates have a
material impact on the consolidated financial statements.
Accounting for Utility Revenue and Cost of Gas Recognition
For regulated deliveries of natural gas, Washington Gas reads meters and
bills customers on a cycle basis. It accrues revenues for gas that has been
delivered but not yet billed at the end of an accounting period. Such revenues
are recognized as unbilled revenue which are later adjusted in the subsequent
period when actual meter readings are taken.
The regulated utility’s jurisdictional tariffs contain mechanisms that
provide for the recovery of the invoice cost of gas applicable to firm
customers. Under these mechanisms, the regulated utility periodically adjusts
its firm customers’ rates to reflect increases and decreases in the invoice
cost of gas. Annually, the regulated utility reconciles the difference between
the total gas costs collected from firm customers and the invoice cost of gas.
The regulated utility defers any excess or deficiency and either recovers it
from, or refunds it to, customers over a subsequent twelve-month period.
Accounting for Regulated Operations — Regulatory Assets and Liabilities
A significant portion of the Company’s business is subject to regulation.
As the regulated utility industry continues to address competitive market
issues, the cost-of-service regulation used to compensate the Company’s
regulated utility for the cost of its regulated operations will continue to
evolve. Non-traditional ratemaking initiatives and market-based pricing of
products and services could have additional long-term financial implications
for the Company. Management has relied on its projection of continued
regulatory oversight of its operations in order to validate the carrying cost
of the regulated utility investment in fixed assets.
The Company’s regulated utility accounts for its regulated activities in
accordance with Financial Accounting Standards Board’s (FASB) Statement of
Financial Accounting Standards
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WGL Holdings, Inc.
(SFAS) No. 71,
Accounting for the Effects of Certain Types of Regulation,
which results in differences in the application of generally accepted
accounting principles between regulated and non-regulated businesses. SFAS
No. 71 requires the recognition of regulatory assets and liabilities for
certain transactions that would have been treated as revenue and expense in
non-regulated businesses. In certain circumstances, SFAS No. 71 allows
entities whose rates are determined by third-party regulators to defer costs as
“regulatory” assets on the balance sheet to the extent that the entity expects
to recover these costs in future rates. Future regulatory changes or changes
in the competitive environment could result in the Company discontinuing the
application of SFAS No. 71 for some of its businesses and require the write-off
of the portion of any regulatory asset or liability that was no longer probable
of recovery or refund. In effect, the Company’s regulated utility could be
required to write off certain regulatory assets that had been previously
deferred on the Consolidated Balance Sheets in prior periods, and charge these
costs to expense at the time it determines that the provisions of SFAS No. 71
no longer apply. If WGL Holdings were required to discontinue the application
of SFAS No. 71 for any of its operations, it would have an extraordinary
non-cash charge to income for the net book value of its regulatory assets and
liabilities. Other adjustments might also be required.
Management believes that currently available facts support the continued
application of SFAS No. 71 for the Company’s regulated activities, and that all
regulatory assets and liabilities are recoverable or refundable through the
regulatory environment.
Accounting for Income Taxes
The Company accounts for income taxes in accordance with SFAS No. 109,
Accounting for Income Taxes
. Under SFAS No. 109, the Company recognizes
deferred income taxes for all temporary differences between the financial
statement and tax basis of assets and liabilities at currently enacted income
tax rates.
SFAS No. 109 also requires recognition of the additional deferred income
tax assets and liabilities for temporary differences where regulators prohibit
deferred income tax treatment for ratemaking purposes of the regulated utility.
Regulatory assets or liabilities corresponding to such additional deferred tax
assets or liabilities may be recorded to the extent the Company believes they
will be recoverable from or payable to customers through the ratemaking
process. Amounts applicable to income taxes due from and due to customers
primarily represent differences between the book and tax basis of net utility
plant in service.
Accounting for Contingencies
The Company recognizes contingent liabilities utilizing SFAS No. 5,
Accounting for Contingencies
. By their nature, the amount of the contingency
and the timing of a contingent event are subject to management’s judgment of
such events and management’s estimates of the amounts. Some of these
contingent events and amounts are discussed in Note 12 of the Notes to
Consolidated Financial Statements.
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WGL Holdings, Inc.
WGL HOLDINGS
RESULTS OF OPERATIONS — Three Months Ended June 30, 2003 vs. June 30,
2002
Summary Results
WGL Holdings, Inc. reported a net loss for the three months ended June 30,
2003 of $2.6 million, or $0.05 per share, an improvement of $11.5 million, or
$0.24 per share, over the net loss of $14.2 million, or $0.29 per share,
reported for the same period last year. Unless otherwise noted, earnings (or
loss) per share amounts are presented herein on a diluted basis, and are based
on weighted average common and common equivalent shares outstanding. There
was no difference between basic and diluted earnings (or loss) per share for
the current or prior year’s quarter.
Regulated Utility Operating Results
The Company’s utility operations are weather sensitive with a significant
portion of its revenue coming from deliveries of natural gas to residential and
small commercial heating customers. The utility segment reported a seasonal
net loss of $3.4 million for the third quarter of fiscal year 2003, an
improvement of $5.5 million, or 61.8 percent, over the same quarter in fiscal
year 2002. This improvement reflects a 24.7 percent increase in firm
deliveries due to colder weather during the current quarter. Weather, as
measured by heating degree days, was 32.2 percent colder in the current quarter
than the same period of the prior fiscal year. The current quarter was 41.8
percent colder than normal, as compared to 6.5 percent colder than normal for
the same period last year. The colder-than-normal weather contributed an
estimated $0.08 per share to current quarter results. Also contributing to
current period results were new rates that went into effect in Maryland on
September 30, 2002, and in Virginia on November 12, 2002. The Virginia rate
increase is subject to refund pending a final rate order. Tempering these
year-over-year improvements were higher labor and benefit costs and
depreciation expense. Further discussion of the operating results of the
regulated utility for the three months ended June 30, 2003, is included herein
in the Management’s Discussion and Analysis of Financial Condition and Results
of Operations for Washington Gas.
Non-Utility Operating Results
The Company’s non-utility operations reported net income of $746,000 for
the third quarter of fiscal year 2003, an improvement of $6.1 million over the
same quarter in fiscal year 2002. This improvement is primarily attributable
to after-tax charges recorded in the third quarter fiscal year 2002 totaling
$10.2 million. These charges related to after-tax operating losses of $3.0
million and an impairment provision of $2.1 million associated with the
Company’s former 50 percent equity investment in Primary Investors LLC (Primary
Investors). On October 15, 2002, the Company and Primary Investors executed a
final closing and transferred all of its interest in Primary Investors to
Thayer Capital Partners, the Company’s co-investor. Since September 30, 2002,
the Company had no net investment in this equity venture and, accordingly,
there was no effect on net income for this venture for the current quarter.
The third quarter of the prior year also included an after-tax charge of $5.1
million reflecting a loan loss provision associated with a consumer finance
business that has stopped accepting new loans and is expected to fully amortize
its loan portfolio by 2005.
Partially offsetting the favorable year-over-year comparisons were net
losses totaling $1.1 million from the Company’s retail energy-marketing and
commercial heating ventilating and air conditioning (HVAC) businesses, as
compared to net income totaling $4.8 million for the same period in fiscal year
2002.
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WGL Holdings, Inc.
The following table compares the financial results from non-utility
activities for the quarters ended June 30, 2003 and 2002.
Net Income (Loss) Applicable to Non-Utility Activities
Retail Energy-Marketing
WGL Holdings’ retail energy-marketing subsidiary, WGEServices, sells
natural gas and electricity in competition with other unregulated marketers.
For the third quarter of fiscal year 2003, WGEServices reported a net loss of
$803,000 for the current quarter, as compared to net income of $2.5 million for
the same quarter in fiscal year 2002. The $3.3 million decrease in income
reflects reduced gross margins from natural gas sales due to a higher weighted
average gas cost in the current quarter, partially offset by slightly higher
gross margins from the sale of electricity.
At June 30, 2003, the retail energy-marketing segment supplied natural gas
to 157,200 customers, a two percent increase over the same period last year.
Electricity accounts totaled 79,000 at the end of the current quarter, an
increase of 33 percent over the third quarter of fiscal year 2002.
HVAC — Commercial Operations
Two subsidiaries, American Combustion Industries, Inc. and Washington Gas
Energy Systems, Inc., offer large-scale HVAC installations and related services
to commercial and government customers. The Company’s commercial HVAC
segment reported a net loss of $331,000 for the three months ended June 30,
2003, down from net income of $2.3 million for the comparable 2002 period,
principally reflecting reduced business activity and lower gross margins.
Other Non-Utility Activities
Results for the other non-utility activities of the Company for the 2003
quarter improved $6.9 million over the prior year’s quarter. This improvement
reflects reduced income taxes in the current quarter of $2.1 million resulting
from adjustments reflecting the realization of tax benefits of capital loss
carryforwards. Additionally, the prior year’s quarter included an after-tax
charge of $5.1 million reflecting a loan loss provision associated with a
consumer finance business that has stopped accepting new loans.
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WGL Holdings, Inc.
Other Income (Expenses) — Net
For the quarter ended June 30, 2003, Other Income (Expenses) — Net
reflected a net expense of $134,000, which was relatively unchanged from the
same period in fiscal year 2002.
Interest Expense
WGL Holdings’ total interest expense of $11.5 million for the third
quarter of fiscal year 2003 was essentially unchanged from the same quarter
last year. The components of interest expense are reflected below.
Composition of Interest Expense
Changes
RESULTS OF OPERATIONS — Nine Months Ended June 30, 2003 vs. June 30,
2002
Summary Results
For the first nine months of fiscal year 2003, the Company’s net income
was $129.9 million, or $2.67 per share, more than double the net income of
$61.8 million, or $1.27 per share, for the same period in fiscal year 2002,
principally due to colder weather. Earnings for the current nine-month period
reflect an after-tax gain of $2.5 million from the sale in the second quarter
of the Company’s Washington, D.C. headquarters property. Results for the
current nine-month period also reflect management’s estimates for potential
refunds to customers based on the outcome of regulatory decisions related to
this gain, as well as other pending regulatory matters in Virginia. Actual
results related to these regulatory contingencies are difficult to predict and
could differ significantly from the estimates included in the reported
earnings. These and other factors affecting the Company’s operating results
for the nine-month periods presented are discussed below.
Regulated Utility Operating Results
Net income for the utility segment was $125.7 million for the first nine
months of fiscal year 2003, an increase of $51.7 million over the
corresponding nine-month period in 2002, due primarily to 37.4 percent colder
weather than the prior year. Weather was 20 percent colder than normal for the
current nine-month period, as compared to 13.0 percent warmer than normal for
the same period last year. Firm gas deliveries of 1.298 billion therms for the
nine months ended June 30, 2003 represented an increase of 337 million therms,
or 35 percent, over the corresponding period in 2002. The colder-than-normal
weather for the nine months ended June 30, 2003 enhanced earnings per share by
$0.54. New retail rates put into effect on September 30, 2002 in Maryland and
on November 12, 2002 in Virginia also improved results. Additionally, the
utility segment reflects an adjustment to income taxes in the current
nine-month period that added $2.7 million to income. Tempering these earnings
improvements were higher labor and benefit costs, depreciation levels and
increased expenses associated with uncollectible accounts. The 2002 nine-month
period included an after-tax loss of $1.7 million incurred on a transaction
with a bankrupt energy trader. Further discussion of the operating results of
the regulated utility for the nine months ended June 30, 2003, is included in
the
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WGL Holdings, Inc.
Management’s Discussion and Analysis of Financial Condition and Results of
Operations for Washington Gas.
Non-Utility Operating Results
Net income for the non-utility operations was $4.3 million for the first
nine months of fiscal year 2003, as compared to a net loss of $12.2 million for
the corresponding period in 2002. The inclusion of charges in the first nine
months of fiscal year 2002, for which there were not similar charges in the
first nine months of fiscal year 2003, favorably impacted year-over-year
comparisons. These charges included a $5.1 million after-tax loan loss
provision associated with a consumer finance business that is no longer making
new loans, and a $5.9 million after-tax operating loss and a $9.4 million
after-tax impairment provision associated with the Company’s former 50 percent
equity investment in Primary Investors. There was no impact on financial
results for the current nine-month period from the former residential HVAC
business as the Company no longer has an investment in this entity.
Partially offsetting the favorable year-over-year comparisons was a $6.4
million decline in earnings from the Company’s retail energy-marketing and
commercial HVAC businesses. The following table compares the financial results
from non-utility activities for the nine months ended June 30, 2003 and 2002.
Net Income (Loss) Applicable to Non-Utility Activities
Retail Energy-Marketing
Net income for the retail energy-marketing business was $2.9 million for
the first nine months of fiscal year 2003, down $1.9 million from the same
period in fiscal year 2002. Despite the seasonal storage flexibility and other
risk mitigation strategies that this business utilizes to provide significant
protection from the effects of warmer- and colder-than-normal weather, high gas
prices that occurred in late February and early March of the current fiscal
year were more extreme than the planning parameters prescribed in the Company’s
risk management policy. Consequently, the colder-than-normal weather
experienced in the 2003 second quarter resulted in the need to make additional
purchases of natural gas in the spot market at a cost above its retail selling
price to meet its commitments to customers, thereby significantly reducing net
margins. Net margins from electricity sales increased due to increased volumes
sold and a higher gross margin per kilowatt-hour. Gas sales were 625.9 million
therms in the current period, an increase of 100.9 million therms over last
year. Electric sales for the nine months ended June 30, 2003 of 5.5 billion
kilowatt-hours rose 1.2 billion kilowatt-hours over the same period last year.
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WGL Holdings, Inc.
HVAC — Commercial Operations
The commercial HVAC business reported a net loss of $947,000 for the first
nine months of fiscal year 2003, as compared to net income of $3.5 million for
the same period last year, due primarily to reduced business activity and lower
gross margins.
Other Non-Utility Activities
Results for the other non-utility activities of the Company for the fiscal
year 2003 nine-month period improved $7.5 million over the corresponding period
in 2002. This improvement reflects reduced income taxes in the current quarter
of $2.1 million resulting from adjustments reflecting the realization of tax
benefits of capital loss carryforwards. Additionally, the prior year’s quarter
included an after-tax charge of $5.1 million reflecting a loan loss provision
associated with a consumer finance business that has stopped accepting new
loans.
Other Income (Expenses) — Net
Other Income (Expenses) — Net reflects a $1.2 million decrease in net
income for the first nine months of fiscal year 2003 as compared to the same
period last year. This decrease is due primarily to $8.3 million of after-tax
benefits recorded during the nine-month period of fiscal year 2002 for the
proceeds from a weather insurance policy. There were no weather insurance
proceeds recorded in the current nine-month period. Partially offsetting the
effect of the absence of any weather insurance proceeds in fiscal year 2003
were after-tax gains of $926,000 and $2.5 million related to sales of the
Company’s interest in a land development venture and its headquarters property
during the first and second quarters of fiscal year 2003, respectively.
Lastly, the first quarter of fiscal year 2002 included a $1.7 million after-tax
charge related to business activities with a bankrupt energy trader.
Interest Expense
WGL Holdings’ interest expense of $34.9 million for the nine months ended
June 30, 2003 increased $482,000 over the same period last year due primarily
to an increase in the average balance of long-term debt outstanding, partially
offset by a decrease in the weighted average cost of these borrowings. Reduced
interest costs related to WGL Holdings’ short-term borrowings reflect lower
average balances, as well as a decrease in the weighted average cost of such
borrowings. The components of interest expense are reflected below.
Composition of Interest Expense Changes
WGL Holdings, Inc.
LIQUIDITY AND CAPITAL RESOURCES
General Factors Affecting Liquidity
It is important for the Company to have access to short-term debt markets
to maintain satisfactory liquidity to operate its businesses on a near-term
basis. Acquisition of natural gas, electricity, pipeline capacity and the need
to finance accounts receivable are the most significant short-term financing
requirements of the Company. The need for long-term capital is primarily driven
by capital expenditures and maturities of long-term debt.
Significant swings can take place in the level of short-term debt needed
by the Company due primarily to changes in the price of natural gas and the
impact of weather on the volumes of natural gas and electricity that need to be
purchased to satisfy customer demand. Satisfactory backup financing to the
Company’s commercial paper program in the form of revolving credit agreements
and bank lines of credit enables the Company to maintain access to short-term
debt markets. The ability of the Company to obtain such financing depends on
its credit ratings, which are greatly affected by financial performance and the
liquidity of financial markets. Also potentially affecting access to short-term
debt capital is the nature of any restrictions that might be placed upon the
Company such as ratings triggers or a requirement to provide creditors with
additional credit support in the event of a determination of unreasonable
creditworthiness.
The ability to procure sufficient levels of long-term capital at
reasonable costs is determined by the level of the Company’s capital
expenditure requirements, its financial performance, and the impact of these
factors on its credit ratings and investment alternatives available to
investors. The Company’s access to short- and long-term capital may be affected
by contract provisions related to a change in the Company’s creditworthiness.
The Company has a goal to maintain its common equity ratio in the mid-50
percent range of total consolidated capital. Accomplishing this capital
structure objective and maintaining sufficient cash flow are necessary to
maintain attractive credit ratings for the Company and Washington Gas and to
allow access to capital at relatively low costs. As of June 30, 2003, total
consolidated capitalization, including current maturities of long-term debt,
comprised 55.6 percent common equity, 1.8 percent preferred stock and 42.6
percent long-term debt. The cash flow requirements of the Company and the
ability to provide satisfactory resources to satisfy those requirements are
primarily influenced by the activities of Washington Gas and to a lesser extent
the non-utility operations.
Short-Term Cash Requirements and Related Financing
The regulated utility’s business is weather-sensitive and seasonal,
causing short-term cash requirements to vary significantly during the year.
Over 75 percent of the total therms delivered in the regulated utility’s
service area (excluding deliveries to two electric generation facilities) occur
in the first and second fiscal quarters. Cash requirements peak in the fall and
winter months when accounts receivable, accrued utility revenues and storage
gas inventories are at their highest levels. After the winter heating season,
many of these assets are converted into cash, which the Company generally uses
to reduce and sometimes eliminate short-term debt and acquire storage gas for
the next heating season.
The retail energy-marketing subsidiary, WGEServices, has seasonal
short-term cash requirements resulting from purchasing gas in periods that are
not matched with the sale of this commodity. In addition, WGEServices must
finance its accounts receivable for the gas and electricity that it sells, and
the accounts receivable balances are seasonal.
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WGL Holdings, Inc.
Both the regulated utility and the retail energy-marketing segment
maintain storage gas inventory. Storage gas inventories represent gas
purchased from producers and are stored in facilities primarily owned by
interstate pipelines. The regulated utility and retail energy-marketing
subsidiary generally pay for storage gas between heating seasons and withdraw
it during the heating season. Significant variations in storage balances are
usually caused by the price paid to producers and marketers, which is a
function of short-term market fluctuations in gas costs. For the regulated
utility, such costs become a component of the cost of gas recovered from
customers when volumes are withdrawn from storage. In addition, the regulated
utility is able to specifically recover a carrying cost related to the varying
level of storage gas inventory balances in two of the three jurisdictions in
which it operates and it recovers this carrying cost from its customers as a
component of gas costs.
Variations in the timing of collections of gas costs under the regulated
utility’s gas cost recovery mechanisms and the level of refunds from pipeline
companies that will be returned to customers can significantly affect
short-term cash requirements.
The Company and Washington Gas utilize short-term debt in the form of
commercial paper or unsecured short-term bank loans to fund seasonal
requirements. The Company’s policy is to maintain bank credit facilities in an
amount equal to or greater than its expected maximum short-term debt position.
The regulated utility has regulatory authority to issue up to $300 million
of short-term debt. As of June 30, 2003, the regulated utility had bank
facilities totaling $175 million in support of its short-term debt
requirements. WGL Holdings had bank credit facilities of $130 million. These
facilities were provided pursuant to new revolving credit agreements that
became effective on May 2, 2003. The new credit agreements replaced previously
existing credit agreements of $85 million for WGL Holdings and $220 million for
Washington Gas. The Company’s policy is to maintain bank credit facilities in
an amount equal to or greater than its expected maximum short-term debt
position.
WGL Holdings and Washington Gas pay facility fees of 13 basis points and
11 basis points, respectively, for the new revolving credit agreements, which
will expire on April 30, 2004. Other permanent and seasonal bank lines of
credit previously available to WGL Holdings and Washington Gas had expired or
were terminated as of May 2, 2003.
At June 30, 2003, the Company had outstanding notes payable of $38.4
million as compared to $90.9 million outstanding at September 30, 2002. Most
of this decline occurred during the third quarter of fiscal year 2003, after
the winter-heating season when accounts receivable and other assets have been
converted into cash and have been utilized, in part, to reduce short-term debt.
At June 30, 2003, current maturities of long-term debt were $28.2 million as
compared to $42.4 million at September 30, 2002.
Long-Term Cash Requirements and Related Financing
The Company’s long-term cash requirements primarily depend upon the level
of capital expenditures, long-term debt maturity requirements and decisions to
refinance long-term debt. The Company devotes the majority of its capital
expenditures to adding new regulated utility customers in its existing service
area. At June 30, 2003, Washington Gas was authorized to issue up to $250
million of long-term debt under a shelf registration that was declared
effective by the Securities and Exchange Commission (SEC) on April 24, 2003. On
May 20, 2003, Washington Gas executed a Distribution Agreement with certain
financial institutions for the issuance and sale of debt securities included in
the shelf registration statement.
The Company utilizes derivative financial instruments from time to time in
order to minimize its exposure to interest-rate risk associated with its debt
financing costs. On June 4, 2003, Washington Gas entered into two
forward-starting swaps with an aggregate notional principal of $62 million to
mitigate a substantial portion of interest-rate risk associated with debt
transactions anticipated to be
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WGL Holdings, Inc.
executed during the first quarter of fiscal year 2004 that will end on
December 31, 2003. These swaps have been designated as cash flow hedges and,
in accordance with SFAS No. 133, are carried at fair value. At June 30, 2003,
the estimated fair value gain related to these swaps totaled $853,000. These
swaps are scheduled to terminate concurrently with the execution of the
anticipated debt transactions during the first quarter of fiscal year 2004 that
will end on December 31, 2003.
Securities Ratings
The table below shows the ratings on both WGL Holdings’ and Washington
Gas’ debt instruments.
If the Company and/or the regulated utility were to experience a change in
its debt ratings, the cost of its future short-term and long-term debt issues
would likely change. Furthermore, a ratings change could result in a change in
facility fees paid to banks.
Contractual Obligations, Off-Balance Sheet Arrangements and Other
Commercial Commitments
Washington Gas has entered into contracts in the normal course of business
that require it to make fixed and determinable payments for many years in the
future. These obligations consist of long-term debt issued to finance the
regulated utility’s capital investment, and obligations to purchase natural gas
and pipeline transportation capacity for its regulated utility operations.
Reference is made to the section entitled “Contractual Commitments and
Obligations” in Management’s Discussion and Analysis of Financial Condition and
Results of Operations in the Company’s Annual Report on Form 10-K for the
fiscal year ended September 30, 2002, for a detailed discussion of these
contractual obligations. Note 5 of the Notes to Consolidated Financial
Statements in the Company’s 2002 Annual Report on Form 10-K includes a
discussion of long-term debt, including debt maturities. Note 13 of the Notes
to Consolidated Financial Statements in the Company’s 2002 Annual Report on
Form 10-K reflects information about natural gas purchase contracts and
pipeline capacity contracts of Washington Gas and similar contracts of
WGEServices. The comparable information as of June 30, 2003 is not materially
different from that disclosed in the Company’s fiscal year 2002 Annual Report
on Form 10-K.
The Company’s non-regulated consumer financing operation has, in the past,
extended credit to certain residential and small commercial customers to
purchase gas appliances and other energy-related products. The operation
transferred, with recourse, certain of these accounts receivable to commercial
banks. As of June 30, 2003, the recourse obligation to banks, net of related
reserves, was $7.7 million. The Company also finances certain construction
projects managed by its commercial HVAC segment. Under the terms of certain
agreements with a lender related to certain contracts, all payments received from the project
owners are used to satisfy principal and interest
37
WGL Holdings, Inc.
obligations. The Company accounts for these
transfers as sales in accordance with Statement of Financial Accounting
Standards No. 140,
Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities.
Please refer to Note 13 of the Notes to
Consolidated Financial Statements included in the Company’s Annual Report on
Form 10-K for the fiscal year ended September 30, 2002, for a detailed
discussion of these transactions.
In addition to the contractual obligations shown above, WGL Holdings and a
non-regulated subsidiary have guaranteed certain purchases and sales of natural
gas and electricity for its retail energy-marketing subsidiary, WGEServices. At
June 30, 2003, these guarantees totaled $261.8 million, of which $258.8 million
were guaranteed by WGL Holdings and $3.0 million were guaranteed by the
non-regulated subsidiary. Termination of these guarantees is coincident with
the satisfaction of all obligations of WGEServices covered by the guarantees.
WGL Holdings may also cancel any or all future obligations imposed by the
guarantees upon written notice to the counterparty, but WGL Holdings would
continue to honor the obligations which had been created under the guarantee
prior to the date of the notice of cancellation.
Cash Flows From Operating Activities
Net cash provided from operating activities totaled $221.5 million for the
first nine months of fiscal year 2003, a decrease of $22.5 million from the
same period in fiscal year 2002. Although net income and non-cash charges and
credits included in net income increased by $75.1 million in the first nine
months of fiscal year 2003 when compared to the same period of fiscal year
2002, primarily as a result of the changes in net income previously described,
this improvement in cash flow was more than offset by other factors. Accounts
receivable and accrued utility revenues rose and therefore used $34.3 million
more in cash in the first nine months of fiscal year 2003 as compared to the
same period of fiscal year 2002 due to significantly higher volumes of gas sold
in the current nine months. Gas costs due from customers, which represent the
difference between gas costs paid to suppliers and the amount of such costs
collected from customers, provided $29.7 million less cash in the current year.
At the end of fiscal year 2001, a significant undercollection of gas costs
existed that was recovered in the first nine months of fiscal year 2002. A
similar undercollection did not exist at the end of fiscal year 2002,
and gas costs paid to suppliers and collected from customers have stayed
relatively close during the first nine months of fiscal year 2003. Storage gas
inventory normally declines dramatically from September to June as the
volumetric balance declines. Although volumes also fell in the nine months
ended June 30, 2003, the price of storage gas increased dramatically in the
most recent nine months and, accordingly, the source of cash derived from
storage gas between September and June fell $70.9 million less in fiscal year
2003 than the corresponding change in fiscal year 2002. Partially offsetting
these cash declines was the favorable impact of a $22.8 million increase in
accounts payable compared to the prior fiscal year period to fund increased
natural gas and electricity purchases.
Cash Flows Used in Financing Activities
Financing activities in the current period reflect an increased use of
cash of $45.5 million compared to the same period last year, primarily due to
an $83.3 million decline in new long-term debt issued and $29.4 million higher
debt retirements. This was largely offset by a $65.9 million net increase in
notes payable financing to fund unregulated activities.
Cash Flows Used in Investing Activities
During the nine months ended June 30, 2003, net cash used in investing
activities totaled $61.0 million, a decrease of $75.8 million from such cash
levels used for the same period in fiscal year 2002. WGL Holdings’
consolidated capital expenditures were $92.6 million for the first nine
months of fiscal year 2003, down $22.8 million from the $115.4 million
expended for the corresponding 2002 period. Furthermore, the reduction in cash
usage includes the effects of cash proceeds from sales of
38
WGL Holdings, Inc.
the Company’s
headquarters property and its interest in a land development venture during the
second quarter of fiscal year 2003 which generated cash proceeds to the Company
of $16.0 million and $5.3 million, respectively.
PRICE RISK RELATED TO RETAIL ENERGY MARKETING OPERATIONS
The Company’s retail energy-marketing subsidiary, WGEServices, sells
natural gas and electricity to retail customers at both fixed prices and
index-based prices. The Company must manage daily and seasonal demand
fluctuations for these products. The volume and price risk for natural gas and
electicity are evaluated and measured separately.
WGEServices can have exposure to changes in natural gas prices if the
volumes it acquires on behalf of its customers do not match the volumes
consumed by these customers. Purchases of natural gas to fulfill sales
commitments are made under fixed volume contracts that assume normal weather.
Approximately 60 percent of WGEServices’ annual natural gas sales volumes are
subject to variations in demand caused by fluctuations in weather. This could
result in WGEServices having contracted for more or less natural gas than its
customers require. WGEServices attempts to manage much of the risk associated
with volume fluctuations by closely matching purchases from suppliers with
sales commitments to customers. Additionally, WGEServices utilizes storage gas
inventory, peaking services of the regulated utility and purchases call and put
options. The option values are marked-to-market in accordance with the
provisions of SFAS No. 133
, Accounting for Derivative Instruments and Hedging
Activities
. Except for a small heating degree day option contract, discussed
in Note 8 of the Notes to Consolidated Financial Statements, at the end of the
third quarter of fiscal year 2003, WGEServices had no open option contracts
related to its supply management and its risk management practices.
For its electric business, WGEServices has a full-requirements supply
contract with a major generator, Mirant Americas Energy Marketing L.P. (MAEM)
which is an indirect wholly owned subsidiary of Mirant Corporation (Mirant).
On July 14, 2003, Mirant and substantially all of its subsidiaries filed
voluntary petitions for reorganization under Chapter 11 of the U.S. Bankruptcy
Code. MAEM was included in these bankruptcy filings. Since the bankruptcy
filing, MAEM has continued to perform under its supply contracts with
WGEServices. Future performance by MAEM may be subject to further developments
in the bankruptcy proceedings.
WGEServices currently has access to $30 million in collateral from an
escrow account established by MAEM as part of the WGEServices supply contracts.
In the opinion of counsel to the Company, WGEServices has the contractual
right to draw on the escrow funds in the account if the contracts between
WGEServices and MAEM terminate and WGEServices needs to find replacement power
at a higher cost or otherwise mitigate its damages. As of August 7, 2003, the
amount of WGEServices’ exposure in the event of termination of the contracts
between WGEServices and MAEM is estimated to be less than the amount of
collateral included in the escrow account. This is based upon satisfying the
economic terms of existing sales contracts until their expiration, and
acquiring supply, priced at forward electricity prices as of August 7, 2003
that will be in effect until WGEServices exercises certain damage limitation
provisions of its customers’ sales contracts. The actual exposure for
WGEServices may differ from the estimate due to changes for timing of any
contract termination, deviations from normal weather, changes in future market
conditions, or other factors.
39
WGL Holdings, Inc.
Similar to WGEServices’ electric supplier, some of the other supplier
companies that sell gas to WGEServices have relatively low or below investment
grade credit ratings as determined by major credit rating agencies. Depending
on the future ability of these suppliers to deliver natural gas under existing
contracts, WGEServices could be financially exposed for the difference between
the price at which WGEServices has contracted to buy natural gas, and the cost
of any replacement natural gas that may need to be purchased. WGEServices also
has a wholesale supplier credit policy that is designed to mitigate wholesale
credit risks in the current energy environment. Per the terms of this policy,
WGEServices has obtained credit enhancements from various gas suppliers.
WGEServices also measures the market risk of its energy commodity
portfolio and employs risk control mechanisms to measure and determine
mitigating steps related to market risk including the determination and review
of value-at-risk. Value-at-risk is an estimate of the maximum loss that can be
expected at some level of probablity if a portfolio is held for a given time
period. WGEServices’ value-at-risk as of June 30, 2003 was approximately
$100,000, while the value of the open position was approximately $1.6 million.
40
Washington Gas Light Company
WASHINGTON GAS LIGHT COMPANY
This section of the Quarterly Report on Form 10-Q discusses the financial
position and results of operations of Washington Gas for the reported periods.
In many cases, the reasons for the changes in financial position and results of
operations for both WGL Holdings and Washington Gas are essentially the same.
RESULTS OF OPERATIONS — Three Months Ended June 30, 2003 vs. June 30,
2002
Summary Results
Washington Gas reported a seasonal net loss applicable to common stock of
$3.4 million for the three months ended June 30, 2003, an improvement of $9.5
million over the net loss of $12.9 million reported for the same period last
year.
Utility Net Revenues
Net revenues for Washington Gas were $93.4 million for the current
quarter, an increase of $15.8 million over the same quarter in fiscal year
2002. The higher net revenues were primarily due to additional volumes sold as
a result of additional customers being served, and 32.2 percent colder weather
than the same period last year. Also improving current period results were new
rates that went into effect in Maryland on September 30, 2002, and in Virginia
on November 12, 2002. The Virginia rate increase is subject to refund pending
a final rate order. Key gas delivery, weather and meter statistics are shown
in the table below for the three months ended June 30, 2003 and 2002.
Gas Deliveries, Weather and Meter Statistics
The level of gas delivered to firm customers is highly sensitive to
weather variability as a large portion of the natural gas delivered by
Washington Gas is used for space heating. The regulated utility’s rates are
based on normal weather, and none of the tariffs for the jurisdictions in
41
Washington Gas Light Company
which it operates has a weather normalization provision. Nonetheless,
declining block rates in the regulated utility’s Maryland and Virginia
jurisdictions, and the existence of a fixed demand charge in all jurisdictions
to collect a portion of revenues, reduces the impact that variations from
normal weather may have on net revenues.
During the quarter ended June 30, 2003, firm therm deliveries increased
24.7 percent to 182.4 million therms over the same quarter last year. This
increase primarily reflects significantly colder weather during the third
quarter of the current fiscal year, and additional customers being served.
Weather for the quarter ended June 30, 2003, was 41.8 percent colder than
normal, as compared to 6.5 percent colder than normal for the same period last
year.
An increasing number of customers are choosing to buy the natural gas
commodity from third-party marketers, rather than purchasing the natural gas
commodity and delivery service from Washington Gas on a “bundled” basis. Gas
sold and delivered to firm customers increased to 111.2 million therms during
the quarter ended June 30, 2003, a 10.0 percent rise over the quarter ended
June 30, 2002. Volumes of firm gas delivered for others increased to 71.2
million therms for the quarter ended June 30, 2003, up 57.8 percent over the
same period in the prior year. On a per unit basis, Washington Gas earns the
same net revenues from delivering gas for others as it earns from bundled gas
sales in which customers purchase both the natural gas commodity and the
associated delivery service from Washington Gas. Therefore, the regulated
utility does not experience any loss in net revenues when customers choose to
purchase the natural gas commodity from a third-party marketer.
Gas Service to Interruptible Customers
Therm deliveries to interruptible customers were 8.1% lower than quarter
ended June 30, 2002 primarily due to the customer use of alternative fuels or
conversion to firm deliveries because of higher natural gas prices.
The effect on net income of any changes in delivered volumes and prices to
the interruptible class is minimized by margin-sharing arrangements embedded in
the Washington Gas rate designs. Under these arrangements, Washington Gas
credits a majority of the gross margins earned on interruptible gas sales and
deliveries to firm customers’ bills. This margin sharing occurs in exchange
for shifting many of the fixed costs of providing service to the interruptible
class to the firm class of customers.
Gas Delivered for Electric Generation
Washington Gas sells and/or delivers natural gas for use at two electric
generation facilities in Maryland which are each owned by separate companies
that are independent of WGL Holdings. During the current quarter, deliveries
to these customers decreased 48.2 percent to 14.9 million therms, reflecting
the use of alternative fuels primarily due to higher natural gas prices.
Washington Gas shares a significant majority of the margins earned from
gas deliveries to these customers with firm customers. Therefore, changes in
the volume of interruptible gas deliveries to these customers do not materially
impact either net revenues or net income
.
Utility Operating Expenses
Operation and maintenance expenses for the three months ended June 30,
2003 were $54.2 million, up $2.1 million over the same period last year. This
increase was due primarily to higher
42
Washington Gas Light Company
labor, benefit and uncollectible accounts expenses, partially
offset by lower costs for consulting services.
Depreciation and amortization expense for the third quarter of fiscal year
2003 rose to $21.1 million, an increase of $2.6 million, or 13.9 percent, over
the same period last year reflecting additional plant investment and higher
depreciation rates in effect for the Virginia jurisdiction beginning in
November 2002.
General taxes for the current quarter were $9.3 million, a slight
increase of $0.5 million largely due to higher rights-of-way fees as a result
of increased sales volumes in the current period. Also contributing to the
increase were higher property taxes as a result of increased investment in
plant and equipment.
Other Income (Expenses) — Net
Other Income (Expenses) — Net reflected net expenses of $132,000, as
compared to net expenses of $1.5 million for the same period in fiscal year
2002. This reduction in expense was largely due to charges recorded in the
prior year’s quarter associated with the writeoff of certain miscellaneous
receivables.
Interest Expense
Washington Gas’ total interest expense of $11.6 million for the quarter
ended June 30, 2003 increased $1.2 million over the same quarter last year, due
to carrying charges associated with miscellaneous regulatory liabilities. The
components of interest expense are presented in the table below.
Composition of Interest Expense
Summary Results
For the first nine months of fiscal year 2003, Washington Gas reported net
income applicable to common stock of $126.1 million, an increase of $55.8
million, or 79.3 percent over net income of $70.3 million reported for the same
period of the prior year.
43
Washington Gas Light Company
Utility Net Revenues
Net revenues were $503.5 million for the current nine-month period, an
increase of $115.2 million, or 29.7 percent, over the first nine months of
fiscal year 2002. Higher net revenues primarily resulted from 37.4 percent
colder weather than the same period last year. Also improving current period
results were new rates that went into effect in Maryland on September 30, 2002
and in Virginia on November 12, 2002, subject to refund. Key gas delivery,
weather and meter statistics are shown in the table below for the nine months
ended June 30, 2003 and 2002.
Gas Deliveries, Weather and Meter Statistics
Total gas deliveries of 1.3 billion therms to firm customers for the
current nine-month period increased 336.6 million therms, or 35.0 percent, over
the same period in the prior year. This increase is due to significantly
colder weather during the first nine months of the current fiscal year, coupled
with a 2.6 percent increase in the number of customer meters. Weather for the
nine months ended June 30, 2003 was 20.0 percent colder than normal, while
weather for the same period last year was 13.0 percent warmer than normal.
Gas Service to Interruptible Customers
Therm deliveries to interruptible customers were 5.4 percent lower during
the nine month period ended June 30, 2003 than the same period last year,
primarily reflecting the curtailment of interruptible service by Washington Gas
due to the severe cold weather, and higher natural gas prices which caused some
interruptible customers to switch to alternative fuels. Washington Gas must
curtail or interrupt service to this class of customers when demand by firm
customers exceeds specified levels. This curtailment was mitigated by colder
weather during the first three quarters of the current year.
44
Washington Gas Light Company
Gas Service for Electric Generation
During the current nine-month period, deliveries to the two electric
generation facilities in Maryland decreased 20.0 percent to 52.2 million
therms, reflecting conversion to alternative fuels due to higher natural gas
prices.
Utility Operating Expenses
Operation and maintenance expense was $166.1 million for the fiscal
nine-month period ended June 30, 2003, an increase of $13.7 million, or 9.0
percent, over the same period last year. The higher operating expenses were
largely due to increased labor costs and benefits, and increased expenses
associated with uncollectible accounts that were primarily driven by the
significantly colder weather during the current period.
Depreciation and amortization expense for the first nine months of fiscal
year 2003 was $61.6 million, an increase of $7.7 million, or 14.2 percent, over
the same period last year reflecting additional plant investment and higher
depreciation rates in effect for the Virginia jurisdiction beginning in
November 2002.
General taxes for the current nine-month period were $30.7 million, an
increase of $3.9 million, or 14.7 percent. This increase was largely due to
higher rights-of-way fees assessed and collected as a result of increased throughput volumes during the
current period. Also contributing to the increase were higher property taxes
as a result of increased investment in plant and equipment.
Other Income (Expenses) — Net
Other Income (Expenses) — Net reflects net expense of $1.1 million for the
first nine months of fiscal year 2003, as compared to income of $2.2 million
for the first nine months of fiscal year 2002. The reduction in income is
primarily attributable to benefits from the Company’s weather insurance policy
that were realized during the first nine months of fiscal year 2002. There
were no proceeds realized from this weather insurance policy during the current
nine-month period due to the colder than normal weather. For a further
discussion of weather insurance please refer to the Company’s most recent
Annual Report on Form 10-K for the fiscal year ended September 30, 2002.
Partially offsetting the reduced income were after-tax gains of $926,000 and
$2.5 million related to sales of the Company’s interest in a land development
venture and its headquarters property during the first and second quarters of
fiscal year 2003, respectively. Additionally, the inclusion in fiscal year
2002 of a $1.7 million after-tax charge related to business activities with a
bankrupt energy trader further impacted the year-over-year comparison.
Interest Expense
Washington Gas’ total interest expense of $35.2 million for the nine
months ended June 30, 2003 increased $1.1 million over the corresponding period
in 2002, due primarily to an increase in the average balance of long-term debt
outstanding, partially offset by a decrease in the weighted average cost of
these borrowings. The components of interest expense are presented in the
table below.
45
Washington Gas Light Company
Composition of Interest Expense
General
Liquidity and capital resources for Washington Gas are generally identical
to the liquidity and capital resources of WGL Holdings, except for certain
items and the transactions between WGL Holdings and the other non-regulated
subsidiaries. For purposes of discussing the liquidity and capital resources
of Washington Gas, this section incorporates by reference, the disclosures
provided in this document under the similar section for WGL Holdings, titled
“Liquidity and Capital Resources”.
Other
Washington Gas has five labor contracts with three labor unions. The
contract with the International Brotherhood of Teamsters Local 96 is a
four-year contract that was ratified in June 2000 and applies to approximately
700 members. The contract with the Office and Professional Employees
International Union (OPEIU) Local 2, is a three-year contract that applies to
approximately 340 members. During fiscal year 2003, Washington Gas ratified
new labor contracts with OPEIU Local 2, and another smaller union that covers
approximately 20 employees.
REGULATORY MATTERS
The status of recent regulatory activity in all jurisdictions is shown
below.
Virginia Jurisdiction — Rate Case Activity
On June 14, 2002, Washington Gas filed an application with the State
Corporation Commission of Virginia (SCC of VA) to increase annual revenues in
Virginia. The Shenandoah Gas Division of Washington Gas is included in the
filing. The application requested to increase overall annual revenues by
approximately $23.8 million. Washington Gas requested an overall rate of return
of 9.42 percent and a return on common equity of 12.25 percent versus its
current return on common equity of 11.50 percent for Washington Gas and 10.7
percent for Shenandoah Gas. Washington Gas also requested approval of an
Incentive Rate Plan (IRP), which includes a 50/50 sharing between customers and
Washington Gas of weather-normalized Virginia regulated earnings 100 basis
points above or below the SCC of VA’s authorized return on equity. The IRP
proposed no change in the method of recovering the cost of natural gas incurred
by Washington Gas.
46
Washington Gas Light Company
On November 15, 2002, the Staff of the SCC of VA (VA Staff) filed
testimony in response to Washington Gas’ presentation. The VA Staff took the
position that Washington Gas’ revenues are sufficient and do not need to be
revised, but recommended that operating revenues for the Shenandoah Gas
Division be decreased by $1.4 million. The VA Staff’s estimate of the cost of
equity for Washington Gas, including the Shenandoah Division, ranged between
9.50 percent and 10.50 percent. The VA Staff recommended the SCC of VA adopt a
10.0 percent return on equity for Washington Gas including the Shenandoah
Division. Washington Gas filed rebuttal testimony in this proceeding on
December 4, 2002. Hearings were held the week of December 16, 2002. At the
hearing, Washington Gas withdrew the IRP from consideration in that proceeding
but reserved the right to propose a performance-based rate plan in a future
rate case. The other parties agreed to leave the record open to permit
Washington Gas to submit by January 10, 2003, the actuarial studies that
support the reasonableness of the updated pension and Other Post-Employment
Benefits (OPEB) expenses proposed by Washington Gas.
On January 30, 2003, the VA Staff filed a motion that requested acceptance
of the VA Staff’s comments and accompanying schedules that reflected revisions
to the VA Staff’s original position. Based on its review of additional
financial data and actuarial studies, the VA Staff supported the pension OPEB
costs requested by Washington Gas. After appropriate revisions to reflect
Washington Gas’ proposed pension and OPEB costs, the VA Staff now supports an
operating revenue increase of $5.0 million for Washington Gas and an operating
revenue reduction of $1.2 million for the Shenandoah Division.
Washington Gas cannot predict the final outcome of this pending regulatory
proceeding. Under the regulations of the SCC of VA, Washington Gas placed the
requested general revenue increase into effect on November 12, 2002, subject to
refund pending the SCC of VA’s final decision in the proceeding. Washington
Gas has recorded a provision for rate refunds as of June 30, 2003, representing
management’s judgment of the rate case outcome.
Virginia Jurisdiction — Depreciation Issues
In accordance with an Order of the SCC of VA, Washington Gas performed a
depreciation study, using data as of December 31, 2000, to determine the
adequacy of the current depreciation rates that Washington Gas uses to record
depreciation expense for property located in its Virginia jurisdiction.
Washington Gas submitted the study to the Staff in the first quarter of fiscal
year 2002. Following discussions with the Staff, Washington Gas submitted to
the Staff in the third quarter of fiscal year 2002 an updated study based on
data as of December 31, 2001.
The VA Staff issued a letter dated October 2, 2002 approving new
depreciation rates for Washington Gas and the Shenandoah Gas Division that
would increase annual depreciation expense by approximately $4.0 million.
Staff stated its position that the approved rates should be implemented as of
January 1, 2002, but recognized that the implementation date should be decided
by the SCC of VA in the pending rate case discussed above. Washington Gas
believes the new depreciation rates should have been implemented concurrent
with the effective date of new base rates on November 12, 2002. Washington Gas
filed testimony supporting this position with the SCC of VA in the base rate
proceeding discussed previously. Washington Gas believes that it is reasonably
possible that the position it has taken on this matter will be adopted by the
SCC of VA in the pending rate case.
The financial statements as reported in this Quarterly Report on Form 10-Q
do not reflect any modification of depreciation rates for periods prior to
November 12, 2002. However, Washington Gas did utilize the higher depreciation
rates from November 12, 2002 forward. To the extent the position of the VA
Staff is adopted by the SCC of VA in the current rate filing, Washington Gas
would have to
47
Washington Gas Light Company
record a charge to income for additional depreciation expense, net of
income tax benefits, calculated from January 1, 2002 to November 12, 2002,
without a corresponding amount of revenue. This issue is still pending in the
previously discussed rate case.
Maryland Jurisdiction
On March 31, 2003, Washington Gas filed with the Public Service Commission
of Maryland (PSC of MD) an application to increase rates in Maryland. The
application requested an increase to overall annual revenues by approximately
$35.1 million, with a return on common equity of 12.25 percent and an overall
rate of return of 9.39 percent. On June 16, 2003, as a result of information
obtained subsequent to its original filing, Washington Gas revised its overall
requested increase in annual revenue to $28.9 million. On August 1, 2003,
Washington Gas further revised its requested annual revenue increase to $27.2
million. The most recent update reflects no revision to the original request
in regards to Washington Gas’ return on common equity or overall rate of
return.
The proposed rate request includes an IRP that would establish incentives
to increase efficiencies and would set customer service quality standards that
seek to increase the efficiency, safety, and reliability of service. The IRP
benefits customers by providing for more stable rates, which would result in
less frequent requests for rate increases. The rate request also includes a
proposal that would provide benefits to low-income customers who qualify for
participation in a new Washington Gas program that would provide bill credits
to participants during the winter heating season.
On June 20, 2003, the Staff of the PSC of MD (MD Staff), the Maryland
Office of People’s Counsel (MD OPC), the United States Department of Defense
and the other affected Federal Executive Agencies (DOD) and the Apartment and
Office Building Association of Metropolitan Washington (AOBA)
filed testimony in response to Washington Gas’ rate application.
According to its filed testimony, the MD Staff recommended that the PSC of MD
order Washington Gas to reduce its annual revenues by $6.6 million
(subsequently revised on August 1, 2003 to recommend a $13.6 million reduction
in annual revenues based on an alternative rate-making proposal for interruptible revenues), and to allow Washington Gas a return on common equity of
10.80 percent and an overall rate of return of 8.64 percent. The MD OPC
recommended an annual reduction in revenues of $11.7 million, with a return on
common equity of 9.50 percent and an overall rate of return of 7.92 percent.
Neither the MD Staff nor the MD OPC supported the Washington Gas proposal to implement an IRP.
The DOD recommended a $5.1 million reduction in Washington Gas’ annual
revenues, and a return on common equity of 9.20 percent and an overall rate of
return of 7.81 percent. DOD did not support Washington Gas’ proposal to
implement an IRP, however, it recommended a reduction in the return on common
equity to 8.00 percent if the PSC of MD elects to adopt an IRP.
AOBA did not specify a change in annual revenues, however, it recommended
a return on common equity of 10.10 percent and an overall rate of return of
8.08 percent. While not supporting Washington Gas’ proposal to implement an
IRP, AOBA alternatively proposed a 9.30 percent return on common equity and an
overall rate of return of 7.69 percent if the PSC of MD did adopt an IRP.
On July 14, 2003, Washington Gas filed its rebuttal case. Hearings were
held from August 4, 2003 through August 7, 2003 to discuss the merits of the
proposed rate increase.
Under Maryland law, the PSC of MD may suspend the implementation of the
proposed increase for up to 210 days from the filing date. The PSC of MD
typically uses the 210-day period to review the reasonableness of the proposed
change in rates. If action has not been taken after 210 days, rates may be
placed into effect subject to refund. Due to Maryland’s suspension statute,
Washington Gas anticipates a final Order prior to November 2003.
48
Washington Gas Light Company
District of Columbia Jurisdiction
On June 19, 2001, Washington Gas filed with the Public Service Commission
of the District of Columbia (PSC of DC) an application to increase rates in the
District of Columbia. The request sought to increase overall annual revenues
in the District of Columbia by approximately $16.3 million, or 6.8 percent,
based on a proposed return on equity of 12.25 percent.
On October 29, 2002, the PSC of DC issued an Order for Washington Gas to
decrease rates. The Order directed a decrease in overall annual revenues in
the District of Columbia of approximately $7.5 million, and approved a return
on common equity of 10.6 percent and an overall rate of return of 8.83 percent.
On November 6, 2002, Washington Gas filed with the PSC of DC an
Application for Reconsideration of the Order issued by the PSC of DC on October
29, 2002. The District of Columbia’s Office of the People’s Counsel (DC OPC)
and another intervenor also filed Applications for Reconsideration of the
October 29, 2002 Order.
After reviewing the Applications for Reconsideration of Washington Gas and
other parties in the case, the PSC of DC issued its order on reconsideration on
March 28, 2003. New rates resulting in a $5.4 million annual revenue reduction
were put into place in the District of Columbia for service rendered on and
after April 9, 2003.
On May 23, 2003, the DC OPC filed an appeal with the District of Columbia
Court of Appeals seeking to overturn the March 28, 2003 ruling by the PSC of
DC. In its March 28, 2003 ruling, the PSC of DC upheld a previous ruling that
rejected a proposal by the DC OPC to refund to customers, asset management revenues
collected by the Company, and approved the Company’s proposal to share with
customers fifty percent of such future revenues. This ruling became effective
on April 9, 2003. If the District of Columbia Court of Appeals were to rule
in favor of the DC OPC in this matter, the Company would be required to refund the
amounts previously recorded in revenues totaling approximately $8.0 million
(on a pre-tax basis). Though management cannot predict the final
outcome of this matter, it believes that the DC OPC’s appeal is without merit
and, accordingly, the Company has recorded no liability related to this matter.
On February 7, 2003, Washington Gas filed with the PSC of DC an additional
application to increase rates. The request sought to increase overall annual
revenues in the District of Columbia by approximately $14.1 million, or 7.0
percent, to $214.2 million. The application seeks a return on common equity of
12.25 percent and an overall rate of return of 9.25 percent. The rate request
application filed on February 7, 2003 did not reflect the effect of the revenue
reduction indicated in the PSC of DC’s October 29, 2002 Order.
After considering the effect of the base rate reductions that became
effective on April 9, 2003, Washington Gas filed a revision to its February 7,
2003 application on April 23, 2003. This revision increased the amount of the
requested increase from $14.1 million to $19.9 million. On May 2, 2003, in
response to a commission request for supplemental testimony, the requested
increase was modified to $18.8 million, supporting a total level of annual
revenues of $213.2 million. There are no statutory time requirements for a
ruling on the rate request in the District of Columbia. However, Washington
Gas requested the PSC of DC to take action on the request within a nine-month
period from the February filing date. The PSC of DC held a Pre-hearing
Conference in this case on April 10, 2003 to consider interventions and
appearances of interested parties, the procedural schedule in the
case and proposals for issues to be resolved in this case. The PSC of DC
has adopted a procedural schedule that requires final briefs to be filed during
the first week of October 2003.
49
Washington Gas Light Company
On June 26, 2003, the DC OPC, AOBA and other intervenors filed testimony
in response to Washington Gas’ District of Columbia rate application.
According to its filed testimony, the DC OPC recommended an annual reduction in
revenues of $9.6 million with a return on common equity of 9.00 percent and an
overall rate of return of 7.39 percent. Included in the $9.6 million annual
revenue reduction is DC OPC’s recommendation to lower Washington Gas’ annual
depreciation expense by $7.7 million due principally to different depreciation
rates that modify the way costs of removal are reflected in depreciation
expense. The DC OPC did not support the Washington Gas proposal to implement an IRP.
AOBA did not specify a change in annual revenues, however, it recommended
a return on common equity of 10.10 percent and an overall rate of return of
8.08 percent. While not supporting the Washington Gas’ proposal to implement an
IRP, AOBA alternatively proposed a 9.30 percent return on common equity and an
overall rate of return of 7.69 percent if the PSC of DC did adopt an IRP.
On July 25, 2003, Washington Gas filed its rebuttal case. Hearings are
scheduled from September 16, 2003 through September 18, 2003 to discuss the
merits of the proposed rate increase.
50
WGL Holdings, Inc.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
WGL Holdings and its subsidiary, Washington Gas, have interest-rate risk
exposure related to long-term debt. Additionally, WGL Holdings’ subsidiary,
WGEServices has price risk exposure related to gas marketing activities. For
information regarding the exposure related to these risks, see the caption
Price Risk Related to Retail Energy Marketing Operations
in the
Management’s
Discussion and Analysis
section of this document and in the caption
Price Risk
Related to Retail- Energy Marketing Operations
and Item 7A in WGL Holdings’ and
Washington Gas’ most recently filed Annual Report on Form 10-K. Neither WGL
Holdings nor Washington Gas’ risk associated with interest rates have
materially changed from September 30, 2002. At June 30, 2003, WGEServices’
open position was not material to WGL Holdings’ financial position or results
of operations.
ITEM 4. CONTROLS AND PROCEDURES
Senior management, including the Chief Executive Officer and the Chief
Financial Officer, evaluated the effectiveness of WGL Holdings’ and Washington
Gas’ disclosure controls and procedures as of June 30, 2003. Based on this
evaluation process, the Chief Executive Officer and the Chief Financial Officer
have concluded that WGL Holdings’ and Washington Gas’ disclosure controls and
procedures are effective. There have been no changes in the Registrants’
internal control over financial reporting during the quarter ended June 30,
2003 that have materially affected, or is reasonably likely to materially
affect, the registrants’ internal control over financial reporting.
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
51
WGL Holdings, Inc.
(b) Reports on Form 8-K:
52
WGL Holdings, Inc.
53
WGL Holdings, Inc.
Signature
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Washington Gas Light Company
Part 1 – Financial Information
Item 1– Financial Statements (continued)
(Unaudited)
Washington Gas Light Company
Part 1 – Financial Information
Item 1– Financial Statements (continued)
Washington Gas Light Company
Part 1 — Financial Information
Item 1- Financial Statements (continued)
Washington Gas Light Company
Part 1 — Financial Information
Item 1- Financial Statements (continued)
Washington Gas Light Company
Part 1 — Financial Information
Item 1- Financial Statements (continued)
(In thousands)
June 30, 2003
September 30, 2002
$
28,198
$
42,396
38,421
90,865
$
66,619
$
133,261
(In thousands)
June 30, 2003
September 30, 2002
$
28,097
$
42,238
11
25,705
$
28,108
$
67,943
Washington Gas Light Company
Part 1 — Financial Information
Item 1- Financial Statements (continued)
(In
thousands)
June 30, 2003
September 30, 2002
$
471,497
$
471,497
2,372
1,645
379,093
295,676
(40
)
(120
)
(676
)
—
(1,344
)
(2,295
)
$
850,902
$
766,403
(In
thousands)
June 30, 2003
September 30, 2002
$
46,479
$
46,479
450,600
449,518
314,035
234,443
(40
)
(120
)
(676
)
—
$
810,398
$
730,320
Three Months Ended
Nine Months Ended
June 30,
June 30,
(In
thousands)
2003
2002
2003
2002
$
(2,640
)
$
(14,185
)
$
129,945
$
61,812
—
—
(676
)
—
$
(2,640
)
$
(14,185
)
$
129,269
$
61,812
Washington Gas Light Company
Part 1 — Financial Information
Item 1- Financial Statements (continued)
Three Months Ended
Nine Months Ended
June 30,
June 30,
(In
thousands)
2003
2002
2003
2002
$
(3,400
)
$
(12,919
)
$
126,092
$
70,314
—
—
(676
)
—
$
(3,400
)
$
(12,919
)
$
125,416
$
70,314
Net
Per Share
(Thousands,
Except Per Share Data)
Income
Shares
Amount
$
(2,640
)
48,587
$
(0.05
)
—
—
—
$
(2,640
)
48,587
$
(0.05
)
$
(14,185
)
48,566
$
(0.29
)
—
—
—
$
(14,185
)
48,566
$
(0.29
)
$
129,945
48,581
$
2.67
—
156
—
$
129,945
48,737
$
2.67
$
61,812
48,562
$
1.27
—
87
—
$
61,812
48,649
$
1.27
Washington Gas Light Company
Part 1 — Financial Information
Item 1- Financial Statements (continued)
Washington Gas Light Company
Part 1 — Financial Information
Item 1- Financial Statements (continued)
Washington Gas Light Company
Part 1 — Financial Information
Item 1- Financial Statements (continued)
Non-Utility Operations
Regulated
Retail Energy
Other
Eliminations/
(Thousands)
Utility
Marketing
HVAC
Activities
Total
Other
Consolidated
$
203,097
$
163,189
$
7,460
$
105
$
170,754
$
(696
)
$
373,155
21,315
(265
)
34
157
(74
)
—
21,241
172,877
164,672
7,976
510
173,158
(696
)
345,339
282
(547
)
(207
)
(2,236
)
(2,990
)
—
(2,708
)
194,474
163,860
7,803
(1,569
)
170,094
(696
)
363,872
8,623
(671
)
(343
)
1,674
660
—
9,283
11,261
132
3
114
249
(51
)
11,459
(418
)
—
15
320
335
(51
)
(134
)
330
—
—
—
—
—
330
$
(3,386
)
$
(803
)
$
(331
)
$
1,880
$
746
$
—
$
(2,640
)
$
2,055,678
$
133,982
$
20,999
$
50,971
$
205,952
$
(79,610
)
$
2,182,020
$
32,114
$
—
$
(16
)
$
(12
)
$
(28
)
$
—
$
32,086
$
166,482
$
135,532
$
14,489
$
475
$
150,496
$
(2,786
)
$
314,192
18,735
132
162
154
448
—
19,183
149,442
131,205
10,610
8,618
150,433
(2,786
)
297,089
(4,681
)
1,366
(403
)
(3,228
)
(2,265
)
—
(6,946
)
163,496
132,703
10,369
5,544
148,616
(2,786
)
309,326
—
—
(5,051
)
—
(5,051
)
—
(5,051
)
2,986
2,829
(931
)
(5,069
)
(3,171
)
—
(185
)
10,902
291
19
—
310
—
11,212
(609
)
—
282
—
282
—
(327
)
—
—
(2,131
)
—
(2,131
)
—
(2,131
)
330
—
—
—
—
—
330
$
(8,855
)
$
2,538
$
(2,799
)
$
(5,069
)
$
(5,330
)
$
—
$
(14,185
)
$
1,926,662
$
106,576
$
25,779
$
37,259
$
169,614
$
(40,400
)
$
2,055,876
$
45,915
$
560
$
2,726
$
—
$
3,286
$
—
$
49,201
a.
Includes cost of gas and revenue taxes during all reported periods.
b.
The amounts reported for Other Non-Operating Income. (Expense) are net of
applicable income taxes.
c.
Certain amounts in the fiscal year 2002 period have been reclassified to
conform to the presentation of the current fiscal year period.
Eliminations included in the Other Activities segment in fiscal year 2002 have been reclassified into the
Eliminations/Other column to conform to the same presentation in fiscal year 2003.
Washington Gas Light Company
Part 1 — Financial Information
Item 1- Financial Statements (continued)
Non-Utility Operations
Regulated
Retail Energy
Other
Eliminations/
Utility
Marketing
HVAC
Activities
Total
Other
Consolidated
$
1,208,226
$
559,822
$
25,600
$
1,225
$
586,647
$
(10,625
)
$
1,784,248
62,119
(118
)
100
469
451
—
62,570
900,557
554,763
27,118
2,450
584,331
(10,625
)
1,474,263
82,625
1,876
(655
)
(1,804
)
(583
)
—
82,042
1,045,301
556,521
26,563
1,115
584,199
(10,625
)
1,618,875
162,925
3,301
(963
)
110
2,448
—
165,373
34,334
413
11
513
937
(336
)
34,935
(1,946
)
11
27
2,741
2,779
(336
)
497
990
—
—
—
—
—
990
$
125,655
$
2,899
$
(947
)
$
2,338
$
4,290
$
—
$
129,945
$
2,055,678
$
133,982
$
20,999
$
50,971
$
205,952
$
(79,610
)
$
2,182,020
$
92,427
$
8
$
159
$
—
$
167
$
—
$
92,594
$
823,493
$
437,541
$
47,261
$
1,559
$
486,361
$
(13,747
)
$
1,296,107
54,434
356
464
464
1,284
—
55,718
613,169
429,038
40,746
9,527
479,311
(13,747
)
1,078,733
48,809
2,581
640
(3,280
)
(59
)
—
48,750
716,412
431,975
41,850
6,711
480,536
(13,747
)
1,183,201
—
—
(7,873
)
—
(7,873
)
—
(7,873
)
107,081
5,566
(2,462
)
(5,152
)
(2,048
)
—
105,033
33,381
771
288
13
1,072
—
34,453
1,279
—
374
—
374
—
1,653
—
—
(9,431
)
—
(9,431
)
—
(9,431
)
990
—
—
—
—
—
990
$
73,989
$
4,795
$
(11,807
)
$
(5,165
)
$
(12,177
)
$
—
$
61,812
$
1,926,662
$
106,576
$
25,779
$
37,259
$
169,614
$
(40,400
)
$
2,055,876
$
114,626
$
410
$
5,168
$
(1
)
$
5,577
$
—
$
120,203
(a)
Includes cost of gas and revenue taxes during all reported periods.
(b)
The amounts reported for Other Non-Operating Inc. (Expense) are net of
applicable income taxes.
(c)
Certain amounts in the fiscal year 2002 period have been reclassified to
conform to the presentation of the current fiscal year period.
Eliminations included in the Other Activities segment in fiscal year 2002 have been reclassified into the Eliminations/Other
column to conform to the same presentation in fiscal year 2003.
Washington Gas Light Company
Part 1 — Financial Information
Item 1- Financial Statements (continued)
Washington Gas Light Company
Part 1 — Financial Information
Item 1- Financial Statements (continued)
Washington Gas Light Company
Part 1 — Financial Information
Item 1- Financial Statements (continued)
Washington Gas Light Company
Part 1 — Financial Information
Item 1- Financial Statements (continued)
Washington Gas Light Company
Part 1 — Financial Information
Item 1- Financial Statements (concluded)
Washington Gas Light Company
Part 1 — Financial Information
Financial Condition and Results of Operations
Washington Gas Light Company
Part 1 — Financial Information
Item 2- Management’s Discussion and Analysis of
Financial Condition and Results of Operations (continued)
Washington Gas Light Company
Part 1 — Financial Information
Item 2- Management’s Discussion and Analysis of
Financial Condition and Results of Operations (continued)
Part 1 — Financial Information
Item 2- Management’s Discussion and Analysis of
Financial Condition and Results of Operations (continued)
Part 1 — Financial Information
Item 2- Management’s Discussion and Analysis of
Financial Condition and Results of Operations (continued)
(In thousands of dollars)
Three Months Ended
June 30,
2003
2002
Variance
$
(803
)
$
2,538
$
(3,341
)
(331
)
2,300
(2,631
)
(1,134
)
4,838
(5,972
)
1,880
(5,069
)
6,949
—
(5,099
)
5,099
$
746
$
(5,330
)
$
6,076
*
Not an operating unit in the 2003 period.
Part 1 — Financial Information
Item 2- Management’s Discussion and Analysis of
Financial Condition and Results of Operations (continued)
(In thousands of dollars)
Three Months Ended
June 30,
2003
2002
Variance
$
10,758
$
10,749
$
9
106
143
(37
)
595
320
275
$
11,459
$
11,212
$
247
Part 1 — Financial Information
Item 2- Management’s Discussion and Analysis of
Financial Condition and Results of Operations (continued)
(In thousands of dollars)
Nine Months Ended
June 30,
2003
2002
Variance
$
2,899
$
4,795
$
(1,896
)
(947
)
3,537
(4,484
)
1,952
8,332
(6,380
)
2,338
(5,165
)
7,503
—
(15,344
)
15,344
$
4,290
$
(12,177
)
$
16,467
*
Not an operating unit in the 2003 period.
Part 1 — Financial Information
Item 2- Management’s Discussion and Analysis of
Financial Condition and Results of Operations (continued)
(In thousands of dollars)
Nine Months Ended
June 30,
2003
2002
Variance
$
33,218
$
32,110
$
1,108
758
1,472
(714
)
959
871
88
$
34,935
$
34,453
$
482
Part 1 — Financial Information
Item 2- Management’s Discussion and Analysis of
Financial Condition and Results of Operations (continued)
Part 1 — Financial Information
Item 2- Management’s Discussion and Analysis of
Financial Condition and Results of Operations (continued)
Part 1 — Financial Information
Item 2- Management’s Discussion and Analysis of
Financial Condition and Results of Operations (continued)
WGL Holdings, Inc.
Washington Gas
Unsecured
Unsecured
Medium-Term
Commercial
Medium-Term
Commercial
Rating Service
Notes (Indicative)*
Paper
Notes
Paper
A+
F1
AA-
F1+
**
P-2
A2
P-1
AA-
A-1+
AA-
A-1+
*
Indicates the ratings that would be applicable if WGL Holdings were to
issue unsecured medium-term notes.
**
Unpublished.
Part 1 — Financial Information
Item 2- Management’s Discussion and Analysis of
Financial Condition and Results of Operations (continued)
Part 1 — Financial Information
Item 2- Management’s Discussion and Analysis of
Financial Condition and Results of Operations (continued)
Part 1 — Financial Information
Item 2- Management’s Discussion and Analysis of
Financial Condition and Results of Operations (continued)
Part 1 — Financial Information
Item 2- Management’s Discussion and Analysis of
Financial Condition and Results of Operations (continued)
Three Months Ended
June 30,
Percent
Increase
2003
2002
Variance
(Decrease)
111,221
101,116
10,105
10.0
%
71,168
45,111
26,057
57.8
%
182,389
146,227
36,162
24.7
%
2,890
2,034
856
42.1
%
52,632
58,360
(5,728
)
(9.8)
%
55,522
60,394
(4,872
)
(8.1)
%
14,942
28,821
(13,879
)
(48.2)
%
252,853
235,442
17,411
7.4
%
431
326
105
32.2
%
304
306
(2
)
(0.7)
%
41.8
%
6.5
%
n/a
n/a
958,088
933,636
24,452
2.6
%
Part 1 — Financial Information
Item 2- Management’s Discussion and Analysis of
Financial Condition and Results of Operations (continued)
Part 1 — Financial Information
Item 2- Management’s Discussion and Analysis of
Financial Condition and Results of Operations (continued)
(In thousands of dollars)
Three Months Ended
June 30,
2003
2002
Variance
$
10,758
$
10,749
$
9
1
2
(1
)
794
(434
)
1,228
$
11,553
$
10,317
$
1,236
Part 1 — Financial Information
Item 2- Management’s Discussion and Analysis of
Financial Condition and Results of Operations (continued)
Nine Months Ended
June 30,
Percent
Increase
2003
2002
Variance
(Decrease)
842,865
645,227
197,638
30.6
%
454,646
315,650
138,996
44.0
%
1,297,511
960,877
336,634
35.0
%
10,226
8,799
1,427
16.2
%
215,728
230,075
(14,347
)
(6.2)
%
225,954
238,874
(12,920
)
(5.4)
%
52,159
65,189
(13,030
)
(20.0)
%
1,575,624
1,264,940
310,684
24.6
%
4,537
3,303
1,234
37.4
%
3,782
3,797
(15
)
(0.4)
%
20.0
%
(13.0
)%
n/a
n/a
958,088
933,636
24,452
2.6
%
Part 1 — Financial Information
Item 2- Management’s Discussion and Analysis of
Financial Condition and Results of Operations (continued)
Part 1 — Financial Information
Item 2- Management’s Discussion and Analysis of
Financial Condition and Results of Operations (continued)
(In thousands of dollars)
Nine Months Ended
June 30,
2003
2002
Variance
$
33,218
$
32,110
$
1,108
270
1,075
(805
)
1,737
903
834
$
35,225
$
34,088
$
1,137
Part 1 — Financial Information
Item 2- Management’s Discussion and Analysis of
Financial Condition and Results of Operations (continued)
Part 1 — Financial Information
Item 2- Management’s Discussion and Analysis of
Financial Condition and Results of Operations (continued)
Part 1 — Financial Information
Item 2- Management’s Discussion and Analysis of
Financial Condition and Results of Operations (continued)
Part 1 — Financial Information
Item 2- Management’s Discussion and Analysis of
Financial Condition and Results of Operations (concluded)
Washington Gas Light Company
Part II — Other Information
12.1
Computation of Ratio of Earnings to Fixed Charges—WGL Holdings, Inc.
12.2
Computation of Ratio of Earnings to Fixed Charges and
Preferred Stock Dividends—WGL Holdings, Inc.
12.3
Computation of Ratio of Earnings to Fixed Charges—Washington Gas Light Company
12.4
Computation of Ratio of Earnings to Fixed Charges and
Preferred Stock Dividends—Washington Gas Light Company
31.1
Certification of James H. DeGraffenreidt, Jr., the Chairman and Chief
Executive Officer of WGL Holdings, Inc., pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
31.2
Certification of Frederic M. Kline, the Chief Financial Officer of WGL
Holdings, Inc., pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.3
Certification of James H. DeGraffenreidt, Jr., the Chairman and Chief
Executive Officer of Washington Gas Light Company, pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.
31.4
Certification of Frederic M. Kline, the Chief Financial Officer of
Washington Gas Light Company, pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
Washington Gas Light Company
Part II — Other Information (continued)
32.1
Certification of James H. DeGraffenreidt, Jr., the Chairman and Chief
Executive Officer, and Frederic M. Kline, the Chief Financial Officer,
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
•
Form 8-K filed on April 14, 2003
Maryland Regulatory Matters
On March 31, 2003, Washington Gas filed an application with the PSC of MD
to increase rates in Maryland. The request seeks to increase overall
annual revenues by approximately $35.1 million. The application seeks a
return on common equity of 12.25 percent and an overall rate of return of
9.39 percent. The proposed rate request includes an Incentive Rate Plan
(IRP) that would establish incentives to increase efficiencies and would
set customer service quality standards that seek to increase the
efficiency, safety, and reliability of service.
District of Columbia Regulatory Matters
After reviewing the applications for reconsideration of the October 2002
order submitted by Washington Gas and other parties in the case, the PSC
of DC issued its order on reconsideration on March 28, 2003. In this
order, the PSC of DC directed Washington Gas to compute a new revenue
requirement and to file supporting information with the PSC of DC.
Pursuant to that order, Washington Gas filed new rates that reflect a $5.4
million annual revenue reduction. These lower rates went into effect for
service rendered on and after April 9, 2003. In this order, the PSC of DC
also reaffirmed its previous ruling that rejected retroactive refunds of
asset management revenues collected by Washington Gas in the past and
approved the regulated utility’s proposal to share with customers, fifty
percent of such future revenues.
On February 7, 2003, Washington Gas filed a new rate case requesting
approval by the PSC of DC for an annual revenue requirement of $214.2
million. Based on the level of rates that were in effect at the time of
this February 2003 filing, Washington Gas would need to increase its
annual revenues by $14.1 million. The application seeks a return on common
equity of 12.25 percent and an overall rate of return of 9.25 percent.
•
Form 8-K filed on May 2, 2003
WGL Holdings, Inc. issued an earnings news release on April 30, 2003
covering the results of operations for the three and six months ended
March 31, 2003, as well as earnings guidance for the third quarter and
annual results for fiscal year 2003.
•
Form 8-K filed on May 22, 2003
On May 20, 2003, Washington Gas executed a Distribution Agreement with
Citigroup Capital Markets Inc., Banc One Capital Markets, Inc., Merrill
Lynch, Pierce, Fenner & Smith Incorporated, The Williams Capital Group,
L.P. and Wachovia Securities, Inc. for the issuance and sale of up to
$250,000,000 of Medium-Term Notes, Series G, under an Indenture dated as
of September 1, 1991.
•
Form 8-K filed on June 27, 2003
Maryland Regulatory Matters
On June 16, 2003, as a result of information obtained subsequent to its
original filing to the PSC of MD in March 2003 of an application to
increase rates, Washington Gas revised its overall requested increase in
annual revenue from $35.1 million to $28.9 million. Washington Gas made no
revision to its requested return on common equity or overall rate of
return.
On June 20, 2003, the MD Staff, the MD OPC, the DOD, the AOBA and other
intervenors filed testimony in response to Washington Gas’ rate
application. The Form 8-K also disclosed that
Washington Gas Light Company
Part II — Other Information (concluded)
Washington Gas would file its rebuttal case on July 14, 2003.
District of Columbia Regulatory Matters
On June 26, 2003, the DC OPC, AOBA and other intervenors filed testimony
in response to Washington Gas’ District of Columbia rate application filed
on February 7, 2003. The Form 8-K also disclosed that Washington Gas
would file its rebuttal case on July 25, 2003.
•
Form 8-K filed on July 15, 2003
On July 14, 2003, Mirant Corporation (Mirant) issued a press release
announcing that Mirant and substantially all of its subsidiaries filed
voluntary petitions for reorganization under Chapter 11 of the U.S.
Bankruptcy Code. WGEServices, the energy-marketing segment of WGL
Holdings, owns no electric generation assets and receives all of its
electricity supply from Mirant Americas Energy Marketing L.P. (MAEM), a
wholly owned subsidiary of Mirant Americas, Inc., which is a wholly owned
subsidiary of Mirant Corporation (Mirant). MAEM was included in Mirant’s
bankruptcy filings. Since the bankruptcy filing, MAEM has continued to
perform under its supply contracts with WGEServices. Future performance
by MAEM may be subject to further developments in the bankruptcy
proceedings. The Form 8-K also disclosed that as of July 14, 2003, the
amount of WGEServices’ exposure in the event of termination of the
contracts between WGEServices and MAEM is estimated to be less than the
amount of collateral included in an escrow account established in
connection with certain supply contracts between WGES and MAEM. The
actual exposure for WGEServices may differ from the estimate due to
changes for timing of any contract termination, deviations from normal
weather, changes in future market conditions, or other factors.
•
Form 8-K filed on July 31, 2003
WGL Holdings, Inc. issued an earnings news release on July 30, 2003
covering the results of operations for the three and nine months ended
June 30, 2003. WGL Holdings also provided earnings guidance for the
fourth quarter and annual results for fiscal year 2003.
Washington Gas Light Company
WGL HOLDINGS, INC.
and
WASHINGTON GAS LIGHT COMPANY
(Co-Registrants)
Date:
August 14, 2003
/s/ Mark P. O’Flynn
Mark P. O’Flynn
Controller
(Principal Accounting Officer)
54
Exhibit 12.1
WGL HOLDINGS, INC. AND SUBSIDIARIES
Computation of Ratio of Earnings to Fixed Charges
Twelve Months Ended June 30, 2003
(Dollars in Thousands)
(Unaudited)
$
44,900
847
12
$
45,759
$
108,574
62,518
(1,201
)
774
45,759
$
216,424
4.7
Exhibit 12.2
WGL HOLDINGS, INC. AND SUBSIDIARIES
Computation of Ratio of Earnings to Fixed Charges
and Preferred Stock Dividends
Twelve Months Ended June 30, 2003
(Dollars in Thousands)
(Unaudited)
$
1,320
0.3638
0.6362
$
2,075
$
44,900
847
12
45,759
2,075
$
47,834
$
108,574
62,518
(1,201
)
774
45,759
$
216,424
4.5
Exhibit 12.3
WASHINGTON GAS LIGHT COMPANY
Computation of Ratio of Earnings to Fixed Charges
Twelve Months Ended June 30, 2003
(Dollars in Thousands)
(Unaudited)
$
44,233
847
12
$
45,092
$
104,465
62,231
1,101
(1,804
)
45,092
$
211,085
4.7
Exhibit 12.4
WASHINGTON GAS LIGHT COMPANY
Computation of Ratio of Earnings to Fixed Charges
and Preferred Stock Dividends
Twelve Months Ended June 30, 2003
(Dollars in Thousands)
(Unaudited)
$
1,320
0.3707
0.6293
$
2,098
$
44,233
847
12
45,092
2,098
$
47,190
$
104,465
62,231
1,101
(1,804
)
45,092
$
211,085
4.5
Exhibit 31.1
CERTIFICATION OF WGL HOLDINGS, INC.
I, James H. DeGraffenreidt, Jr., certify that:
Date: August 14, 2003
/s/ James H. DeGraffenreidt, Jr.
1.
I have reviewed this quarterly report on Form 10-Q of WGL Holdings, Inc.
and Washington Gas Light Company;
2.
Based on my knowledge, this report does not contain any untrue statement
of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this
report;
3.
Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this report;
4.
The registrant’s other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant
and have:
a)
Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in
which this report is being prepared;
b)
Evaluated the effectiveness of the registrant’s disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation; and
c)
Disclosed in this report any change in the registrant’s internal
control over financial reporting that occurred during the registrant’s
most recent fiscal quarter that has materially affected, or is
reasonably likely to materially affect, the registrant’s internal
control over financial reporting; and
5.
The registrant’s other certifying officer and I have disclosed, based on
our most recent evaluation of internal control over financial reporting,
to the registrant’s auditors and the audit committee of the registrant’s
board of directors (or persons performing the equivalent functions):
a)
All significant deficiencies and material weaknesses in the design
or operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant’s ability to
record, process, summarize and report financial information; and
b)
Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant’s
internal control over financial reporting.
James H. DeGraffenreidt, Jr.
Chairman and Chief Executive Officer
Exhibit 31.2
CERTIFICATION OF WGL HOLDINGS, INC.
I, Frederic M. Kline, certify that:
August 14, 2003
/s/ Frederic M. Kline
1.
I have reviewed this quarterly report on Form 10-Q of WGL Holdings, Inc.
and Washington Gas Light Company;
2.
Based on my knowledge, this report does not contain any untrue statement
of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this
report;
3.
Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this report;
4.
The registrant’s other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant
and have:
a)
Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in
which this report is being prepared;
b)
Evaluated the effectiveness of the registrant’s disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation; and
c)
Disclosed in this report any change in the registrant’s internal
control over financial reporting that occurred during the registrant’s
most recent fiscal quarter that has materially affected, or is
reasonably likely to materially affect, the registrant’s internal
control over financial reporting; and
5.
The registrant’s other certifying officer and I have disclosed, based on
our most recent evaluation of internal control over financial reporting,
to the registrant’s auditors and the audit committee of the registrant’s
board of directors (or persons performing the equivalent functions):
a)
All significant deficiencies and material weaknesses in the design
or operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant’s ability to
record, process, summarize and report financial information; and
b)
Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant’s
internal control over financial reporting.
Frederic M. Kline
Vice President and Chief Financial Officer
Exhibit 31.3
CERTIFICATION OF WASHINGTON GAS LIGHT COMPANY
I, James H. DeGraffenreidt, Jr., certify that:
Date: August 14, 2003
/s/ James H. DeGraffenreidt, Jr.
1.
I have reviewed this quarterly report on Form 10-Q of WGL Holdings, Inc.
and Washington Gas Light Company;
2.
Based on my knowledge, this report does not contain any untrue statement
of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this
report;
3.
Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this report;
4.
The registrant’s other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant
and have:
a)
Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in
which this report is being prepared;
b)
Evaluated the effectiveness of the registrant’s disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation; and
c)
Disclosed in this report any change in the registrant’s internal
control over financial reporting that occurred during the registrant’s
most recent fiscal quarter that has materially affected, or is
reasonably likely to materially affect, the registrant’s internal
control over financial reporting; and
5.
The registrant’s other certifying officer and I have disclosed, based on
our most recent evaluation of internal control over financial reporting,
to the registrant’s auditors and the audit committee of the registrant’s
board of directors (or persons performing the equivalent functions):
a)
All significant deficiencies and material weaknesses in the design
or operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant’s ability to
record, process, summarize and report financial information; and
b)
Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant’s
internal control over financial reporting.
James H. DeGraffenreidt, Jr.
Chairman and Chief Executive Officer
Exhibit 31.4
CERTIFICATION OF WASHINGTON GAS LIGHT COMPANY
I, Frederic M. Kline, certify that:
Date: August 14, 2003
/s/ Frederic M. Kline
1.
I have reviewed this quarterly report on Form 10-Q of WGL Holdings, Inc.
and Washington Gas Light Company;
2.
Based on my knowledge, this report does not contain any untrue statement
of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this
report;
3.
Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this report;
4.
The registrant’s other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant
and have:
a)
Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in
which this report is being prepared;
b)
Evaluated the effectiveness of the registrant’s disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation; and
c)
Disclosed in this report any change in the registrant’s internal
control over financial reporting that occurred during the registrant’s
most recent fiscal quarter that has materially affected, or is
reasonably likely to materially affect, the registrant’s internal
control over financial reporting; and
5.
The registrant’s other certifying officer and I have disclosed, based on
our most recent evaluation of internal control over financial reporting,
to the registrant’s auditors and the audit committee of the registrant’s
board of directors (or persons performing the equivalent functions):
a)
All significant deficiencies and material weaknesses in the design
or operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant’s ability to
record, process, summarize and report financial information; and
b)
Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant’s
internal control over financial reporting.
Frederic M. Kline
Vice President and Chief Financial Officer
Exhibit 32.1
CERTIFICATION OF THE CHAIRMAN AND CHIEF EXECUTIVE OFFICER
In connection with the combined Quarterly Report of WGL Holdings and
Washington Gas Light Company (the “Companies”) on Form 10-Q for the quarterly
period ending June 30, 2003 as filed with the Securities and Exchange
Commission on the date hereof (the “Report”), James H. DeGraffenreidt, Jr.,
Chairman and Chief Executive Officer of the Companies, and Frederic M. Kline,
Vice President and Chief Financial Officer of the Companies, each hereby
certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the
Sarbanes-Oxley Act of 2002, to the best of their knowledge, that:
This certification is being made for the exclusive purpose of compliance
by the Chief Executive Officer and the Chief Financial Officer of the Companies
with the requirements of Section 906 of the Sarbanes-Oxley Act of 2002, and may
not be disclosed, distributed, or used by any person for any reason other than
as specifically required by law.
/s/ James H. DeGraffenreidt, Jr.
/s/ Frederic M. Kline
August 14, 2003
AND THE CHIEF FINANCIAL OFFICER
PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
(1)
The Report fully complies with the requirements of Section 13(a) of
the Securities Exchange Act of 1934; and
(2)
The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of
the Companies.
James H. DeGraffenreidt, Jr.
Chairman and Chief Executive Officer
Frederic M. Kline
Vice President and Chief Financial Officer