Company Quick10K Filing
Quick10K
WGL Holdings
10-K 2018-09-30 Annual: 2018-09-30
10-Q 2018-06-30 Quarter: 2018-06-30
10-Q 2018-03-31 Quarter: 2018-03-31
10-Q 2017-12-31 Quarter: 2017-12-31
10-K 2017-09-30 Annual: 2017-09-30
10-Q 2017-06-30 Quarter: 2017-06-30
10-Q 2017-03-31 Quarter: 2017-03-31
10-Q 2016-12-31 Quarter: 2016-12-31
10-K 2016-09-30 Annual: 2016-09-30
10-Q 2016-06-30 Quarter: 2016-06-30
10-Q 2016-03-31 Quarter: 2016-03-31
10-Q 2015-12-31 Quarter: 2015-12-31
10-K 2015-09-30 Annual: 2015-09-30
10-Q 2015-06-30 Quarter: 2015-06-30
10-Q 2015-03-31 Quarter: 2015-03-31
10-Q 2014-12-31 Quarter: 2014-12-31
10-K 2014-09-30 Annual: 2014-09-30
10-Q 2014-06-30 Quarter: 2014-06-30
10-Q 2014-03-31 Quarter: 2014-03-31
10-Q 2013-12-31 Quarter: 2013-12-31
8-K 2018-10-15 Accountant, Exhibits
8-K 2018-09-26 Officers
8-K 2018-08-03 Officers, Other Events, Exhibits
8-K 2018-07-30 Officers
8-K 2018-07-06 Enter Agreement, M&A, Shareholder Rights, Control, Officers, Amend Bylaw, Code of Ethics, Shareholder Vote, Exhibits
8-K 2018-05-22 Enter Agreement, Off-BS Arrangement, Exhibits
8-K 2018-04-23 Officers
8-K 2018-03-16 Enter Agreement, Off-BS Arrangement, Exhibits
8-K 2018-02-07 Earnings, Exhibits
JEC Jacobs Engineering Group 10,740
HUBG Hub Group 1,500
FBK FB Financial 1,090
CETV Central European Media Enterprises 980
HLIT Harmonic 509
SBBX SB One Bank 220
UWN Nevada Gold & Casinos 44
MPAY Mobetize 0
PNAT Pura Naturals 0
IBMC IBM Credit 0
WGL 2018-09-30
Part I
Item 1. Business
Item 1. Business (Concluded)
Part I
Item 1A. Risk Factors
Item 1B. Unresolved Staff Comments
Item 2. Properties
Item 3. Legal Proceedings
Part I
Item 4. Mine Safety Disclosures
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Part II
Item 5. Market for Registrant's Common Equity, Related
Item 6. Selected Financial Data
Item 6. Selected Financial Data-Wgl Holdings, Inc.
Part II
Item 6. Selected Financial Data
Item 6. Selected Financial Data-Washington Gas Light Company
Part II
Item 7. Management's Discussion and Analysis Of
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Part II
Item 7. Management's Discussion and Analysis Of
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Part II
Item 8. Financial Statements and Supplementary Data
Note 1. Accounting Policies
Part II
Note 2. Regulated Operations
Note 3. Accounts Payable and Other Accrued Liabilities
Part II
Note 4. Short-Term Debt
Note 5. Long-Term Debt
Part II
Note 6. Common Stock - Wgl
Note 7. Preferred Stock
Note 8. Income Taxes
Part II
Note 9. Pension and Other Post-Retirement Benefit Plans
Note 10. Stock-Based Compensation
Part II
Note 11. Environmental Matters
Note 12. Commitments and Contingencies
Part II
Note 13. Derivative and Weather-Related Instruments
Note 14. Fair Value Measurements
Part II
Note 15. Operating Segment Reporting
Note 16. Other Investments
Part II
Note 17. Related Party Transactions
Note 18. Accumulated Other Comprehensive Income (Loss)
Part II
Note 19. Supplemental Cash Flow Information
Note 20. Merger with Altagas Ltd.
Part II
Item 8. Financial Statements and Supplementary Data (Concluded)
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Item 9A. Controls and Procedures-Wgl Holdings, Inc.
Part II
Item 9A. Controls and Procedures-Washington Gas Light Company
Item 9B. Other Information
Item 5.02. Departure of Directors or Certain Officers; Election of Directors; Appointment of Certain Officers; Compensatory Arrangements of Certain Officers.
Part III
Item 10. Directors, Executive Officers and Corporate Governance of The Registrants
Item 11. Executive Compensation
Part III
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Item 13. Certain Relationships and Related Transactions, and Director Independence
Item 14. Principal Accountant Fees and Services
Part III
Part IV
Item 15. Exhibits and Financial Statement Schedules
Item 16. Form 10-K Summary
EX-10.55 exhibit1055altagasltd-terr.htm
EX-10.56 exhibit1056altagasltd-terr.htm
EX-10.57 exhibit1057termsofemp2da.htm
EX-10.58 exhibit1058termsofempcae.htm
EX-10.59 exhibit1059lgutermuth936.htm
EX-10.60 exhibit1060lesliethorntonc.htm
EX-10.61 exhibit1061altagasltdc43.htm
EX-10.62 exhibit1062.htm
EX-21 wgl-9302018ex21.htm
EX-23 wgl-9302018ex23.htm
EX-24.1 wgl-9302018ex241.htm
EX-24.2 wgl-9302018ex242.htm
EX-31.1 wgl-9302018ex311.htm
EX-31.2 wgl-9302018ex312.htm
EX-31.3 wgl-9302018ex313.htm
EX-31.4 wgl-9302018ex314.htm
EX-32 wgl-9302018ex32.htm

WGL Holdings Earnings 2018-09-30

WGL 10K Annual Report

Balance SheetIncome StatementCash Flow

10-K 1 wgl-930201810k.htm 10-K Document



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

For the Fiscal Year Ended September 30, 2018

OR

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

For the Transition Period from _____ to _____
  Commission
  File Number
 
Exact name of registrant as specified in its charter and
address of principal executive offices and telephone number
  
State or Other Jurisdiction of
Incorporation
  
I.R.S.
Employer Identification No.
0-55968
 
WGL Holdings, Inc.
1000 Maine Ave., S.W.
Washington, D.C. 20024
(703) 750-2000
  
Virginia
  
52-2210912
0-49807
 
Washington Gas Light Company
1000 Maine Ave., S.W.
Washington, D.C. 20024
(703) 750-4440
  
District of
Columbia
and Virginia
  
53-0162882
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Title of each class
WGL Holdings, common stock, no par value
Washington Gas Light Company preferred stock,

cumulative, without par value:

$4.25 Series

$4.80 Series

$5.00 Series


Indicate by check mark if each registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
WGL Holdings, Inc.
  
Yes [   ]  No [ü]

Washington Gas Light Company
  
Yes [   ]  No [ü]
Indicate by check mark if each registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  Yes [   ]  No [ü]
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 [ü]  No [   ]
Indicate by check mark whether each registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes [ü]  No [   ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of the registrants’ knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  [ü]





Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
WGL Holdings, Inc.:
Large Accelerated Filer o
  
Accelerated Filer o
  
Non-Accelerated Filer [ü]
  
Smaller Reporting Company o
 
  
 
 
(Do not check if a smaller reporting company)
 
 
Emerging growth company o
 
 
 
 
 
 
Washington Gas Light Company:
Large Accelerated Filer o
  
Accelerated Filer o
  
Non-Accelerated Filer [ü]
  
Smaller Reporting Company  o
 
  
 
 
(Do not check if a smaller reporting company)
 
Emerging growth company  o
 
 
 
 
 
 
Indicate by check mark whether each registrant is a shell company (as defined in Rule 12b-2 of the Act):  Yes [   ]  No [ü]
The aggregate market value of the voting common equity held by non-affiliates of the registrant, WGL Holdings, Inc., amounted to $4,250,758,369 as of March 31, 2018.
The aggregate market value of the voting common equity held by non-affiliates of the registrant, Washington Gas Light Company, amounted to $0 as of March 31, 2018.
WGL Holdings, Inc. common stock, no par value outstanding as of October 31, 2018: 100 shares. All of the outstanding shares of common stock, no par value, of WGL Holdings, Inc. are held by Wrangler 1 LLC, an indirect wholly owned subsidiary of AltaGas Ltd. as of October 31, 2018.
Washington Gas Light Company common stock, $1 par value, outstanding as of October 31, 2018: 46,479,536 shares. All of the outstanding shares of common stock, $1 par value, of Washington Gas Light Company are held by Wrangler SPE LLC (the SPE), a direct wholly owned subsidiary of WGL Holdings, Inc. as of October 31, 2018.






WGL Holdings, Inc.
Washington Gas Light Company
For the Fiscal Year Ended September 30, 2018
Table of Contents
PART I
 
 
 
 
 
Item 1.
 
 
 
 
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
 
 
PART II
 
 
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
 
 
 
 
Item 9.
Item 9A.
Item 9B.
 
 
 
PART III
 
 
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
 
 
 
PART IV
 
 
Item 15.
Item 16.

(i)


WGL Holdings, Inc.
Washington Gas Light Company

INTRODUCTION
 
FILING FORMAT
This annual report on Form 10-K is a combined report being filed by two separate registrants: WGL Holdings, Inc. (WGL) and Washington Gas Light Company (Washington Gas). Except where the content clearly indicates otherwise, any reference in the report to “WGL,” “we,” “us” or “our” is to the holding company or the consolidated entity of WGL Holdings and all of its subsidiaries, including Washington Gas which is a distinct registrant that is an indirect wholly owned subsidiary of WGL. Washington Gas makes no representations as to the information contained in this report relating to WGL and its subsidiaries, other than Washington Gas.
The Management’s Discussion and Analysis of Financial Condition and Results of Operations (Management’s Discussion) included under Item 7 is divided into two major sections, one for WGL and one for Washington Gas. The Consolidated Financial Statements of WGL and the Financial Statements of Washington Gas are included under Item 8 as well as the Notes to Consolidated Financial Statements that are presented on a combined basis for both WGL and Washington Gas.
SAFE HARBOR FOR FORWARD-LOOKING STATEMENTS
Certain matters discussed in this report, excluding historical information, include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 with respect to the outlook for earnings, dividends, revenues and other future financial business performance, strategies, financing plans, AltaGas Ltd.'s (AltaGas) integration of us and other expectations. Forward-looking statements are typically identified by words such as, but not limited to, “estimates,” “expects,” “anticipates,” “intends,” “believes,” “plans” and similar expressions, or future or conditional terms such as “will,” “should,” “would” and “could.” Forward-looking statements speak only as of the filing date of this report, and the registrants assume no duty to update them. Factors that could cause actual results to differ materially from forward-looking statements or historical performance include those discussed in Item 1A. Risk Factors and may include, but are not limited to the following:
the inability to meet commitments under various orders and agreements associated with regulatory approvals for the merger could have a detrimental impact on WGL’s business, financial condition, operating results and prospects;
the inability to successfully be integrated into the operations of AltaGas following the merger with AltaGas and realize anticipated benefits;
changes in WGL's or AltaGas' credit ratings and disruptions in credit market conditions or other factors that may affect our access to and cost of capital;
the effect of the consummation of the merger on the ability of WGL to retain customers and retain and hire key personnel;
the effect of the consummation of the merger on the ability of WGL to maintain relationships with its suppliers;
potential litigation in connection with the merger;
the level and rate at which we incur costs and expenses, and the extent to which we are allowed to recover from customers, through the regulatory process, such costs and expenses relating to constructing, operating and maintaining Washington Gas’ distribution system;
the availability of natural gas and electricity supply, interstate pipeline transportation and storage capacity;
the outcome of new and existing matters before courts, regulators, government agencies or arbitrators, including those relating to our purchase of natural gas under the Antero gas supply contracts, and the August 2016 explosion and fire at an apartment complex in Silver Spring, Maryland;
factors beyond our control that affect the ability of natural gas producers, pipeline gatherers and natural gas processors to deliver natural gas into interstate pipelines for delivery to the entrance points of Washington Gas' distribution system;

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WGL Holdings, Inc.
Washington Gas Light Company


security breaches of our information technology infrastructure, including cyber-attacks and cyber-terrorism;
the loss of certain services provided by AltaGas;
leaks, mechanical problems, incidents or other operational issues in our natural gas distribution system, including the effectiveness of our efforts to mitigate the effects of receiving low-HHC natural gas;
changes and developments in economic, competitive, political and regulatory conditions;
unusual weather conditions and changes in natural gas consumption patterns;
changes in energy commodity market conditions, including the relative prices of alternative forms of energy such as electricity, fuel oil and propane;
changes in the value of derivative contracts and the availability of suitable derivative counterparties;
factors affecting the timing of construction and the effective operation of pipelines in which we have invested;
the credit-worthiness of customers; suppliers and derivatives counterparties;
changes in laws and regulations, including tax, environmental, pipeline integrity and employment laws and regulations, including the competitiveness of WGL Energy Systems, Inc. in securing future assets to continue its growth;
legislative, regulatory and judicial mandates or decisions affecting our business operations, including interpretations of the Tax Cuts and Jobs Act (Tax Act);
the timing and success of business and product development efforts and technological improvements;
the level of demand from government agencies and the private sector for commercial energy systems, and delays in federal government budget appropriations;
the pace of deregulation of energy markets and the availability of other competitive alternatives to our products and services;
changes in accounting principles and the effect of accounting pronouncements issued periodically by accounting standard-setting bodies;
our ability to manage the outsourcing of several business processes;
strikes or work stoppages by unionized employees;
acts of nature and catastrophic events, including terrorist acts;
decisions made by management and co-investors in non-controlled investees; and
changes in AltaGas’ strategy, relationship with us or performance.
All such factors are difficult to predict accurately and are generally beyond the direct control of the registrants. Readers are urged to use care and consider the risks, uncertainties and other factors that could affect the registrants’ business as described in this annual report on Form 10-K.
 

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Washington Gas Light Company
Part I



GLOSSARY OF KEY TERMS AND DEFINITIONS
 

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

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

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

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

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

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

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

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

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

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

Commercial Energy Systems: Includes the operations of WGL Energy Systems, Inc. and WGSW, Inc. and the results of operations for affiliate owned commercial distributed energy projects.

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

Cooling Degree Day (CDD): A measure of the variation in weather based on the extent to which the daily average temperature is above 65 degrees Fahrenheit.

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

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

Distributed Generation Assets: Assets that use renewable energy sources including Solar Photovoltaic (Solar PV) systems, combined heat and power plants, and natural gas fuel cells to generate electricity near the point of consumption. 

Earnings Before Interest and Taxes (EBIT): A performance measure that includes operating income, other income (expense), earnings from unconsolidated affiliates and is reduced by amounts attributable to non-controlling

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Washington Gas Light Company
Part I



interests. EBIT is used in assessing the results of each segment's operations.

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

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

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

Generally Accepted Accounting Principles (GAAP): A standard framework of accounting rules used to prepare, present and report financial statements in the United States of America.
 
Gross Margin: A measure calculated as operating revenues, less the associated cost of energy and applicable revenue taxes. Gross margin is used to measure the success of the retail energy-marketing segment’s core strategy for the sale of natural gas and electricity.

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

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

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

 
Hypothetical Liquidation at Book Value (HLBV): A balance sheet-oriented approach to the equity method of accounting which provides a methodology for allocating pre-tax GAAP income or loss to the partners. This approach calculates the amount each partner would receive in the event the partnership was liquidated at book value at the end of each measurement period.

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

Liquefied Natural Gas (LNG): The liquid form of natural gas.

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

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

Megawatt (MW): A unit of power that is equivalent to 1 million watts.

Megawatt hour (MWh): A unit of energy. A power source with a power rating of one MW that is turned on for 1 hour will use 1 MWh of energy.

Merger Agreement: an agreement for WGL to combine with AltaGas, with WGL continuing as a surviving corporation in the merger and becoming an indirect wholly owned subsidiary of AltaGas (the Merger).

Midstream Energy Services: The midstream energy services segment includes the operations of WGL Midstream, Inc.

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


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Washington Gas Light Company
Part I



Non-Controlling Interest: The portion of equity (net assets) in a consolidated subsidiary that is not attributable directly or indirectly to WGL.

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

Power Purchase Agreement (PPA): A power purchase agreement, or electricity power agreement, is a contract between two parties, one which generates the electricity and one which is looking to purchase electricity. The PPA defines all of the commercial terms for the sale of electricity between two parties.

PROJECTpipes: An accelerated pipe replacement program to replace bare and/or unprotected steel services, bare and targeted unprotected steel mains, and cast iron mains in the District of Columbia.

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

Purchase of Receivables (POR): A program in Maryland, whereby Washington Gas purchases receivables from participating energy marketers at approved discount rates.
 
Regulated Utility Segment: Includes the operations of Washington Gas and the operations of Hampshire.

Renewable Energy Credits (RECs): A certificate representing the “green attributes” of one megawatt-hour (MWh) of electricity generated from renewable energy.
 

Retail Energy-Marketing Segment: Includes the operations of WGL Energy Services, Inc.
 
Return on Average Common Equity: Net income divided by average common shareholders’ equity.
 
Revenue Normalization Adjustment (RNA): A regulatory billing mechanism in the state of Maryland designed to stabilize the level of net revenues collected from customers by eliminating the effect of deviations in customer usage caused by variations in weather from normal levels, and other factors such as conservation.

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

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

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

SF ASD LLC (SF ASD): A wholly owned subsidiary of WGL Energy Systems.

SF Echo LLC (SF Echo): A wholly owned subsidiary of WGSW.

SFGF, LLC (SFGF): A tax equity partnership whose results of operation are consolidated into WGL's financial statements, as WGSW, Inc. is the primary beneficiary.

SFGF II, LLC (SFGF II): A tax equity partnership whose results of operation are consolidated into WGL's financial statements, as WGSW, Inc. is the primary beneficiary.


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Washington Gas Light Company
Part I



SFRC, LLC (SFRC): A tax equity partnership whose results of operation are consolidated into WGL's financial statements, as WGSW, Inc. is the primary beneficiary.


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

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

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

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

Tier 1 Renewable Resource: The renewable portfolio standard is divided into 2 tiers based on the electricity generation resource. Some examples of Tier 1 renewables are solar, wind, and fuel cells powered through renewables.

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

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

Value-At-Risk: A risk measurement that estimates the largest expected loss over a specified period of time under normal market conditions within a specified probabilistic confidence interval.

Washington Gas: Washington Gas Light Company is an indirect wholly owned subsidiary of WGL Holdings, Inc. that sells and delivers natural gas primarily to retail customers in accordance with tariffs approved by the PSC of DC, the PSC of MD and the SCC of VA. As of the close of the Merger, all Washington Gas' common stock is held by Wrangler SPE LLC.

Washington Gas Resources: Washington Gas Resources Corporation is a subsidiary of WGL Holdings, Inc. that owns the majority of the non-utility subsidiaries.

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

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

WGL Energy Services: WGL Energy Services, Inc. is a subsidiary of Washington Gas Resources Corporation that sells natural gas and electricity to retail customers on an unregulated basis.
 
WGL Energy SystemsWGL Energy Systems, Inc. is a subsidiary of Washington Gas Resources Corporation, which provides commercial energy efficient and sustainable solutions to government and commercial clients.

WGL Midstream: WGL Midstream, Inc. is a subsidiary of Washington Gas Resources that engages in acquiring and optimizing natural gas storage and transportation assets.
 

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Washington Gas Light Company
Part I



WGSW: WGSW, Inc. is a subsidiary of Washington Gas Resources Corporation that was formed to invest in certain renewable energy projects.

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

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



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WGL Holdings, Inc.
Washington Gas Light Company
Part I
Item 1. Business


ITEM 1.  BUSINESS
 
CORPORATE OVERVIEW
WGL HOLDINGS, INC.
WGL was established on November 1, 2000 as a Virginia corporation. Through our wholly owned subsidiaries, we sell and deliver natural gas and provide energy-related products and services to customers primarily in the District of Columbia and the surrounding metropolitan areas in Maryland and Virginia, although our non-utility segments provide various energy services across the United States. WGL promotes the efficient use of clean natural gas and renewable energy to improve the environment for the benefit of customers, investors, employees, and the communities it serves. On January 25, 2017, WGL entered into an Agreement and Plan of Merger (Merger Agreement) to combine with AltaGas Ltd., a Canadian Corporation (AltaGas). On July 6, 2018, the merger was consummated between AltaGas, WGL, and Wrangler Inc. (Merger Sub), a newly formed indirect wholly owned subsidiary of AltaGas. The Merger Agreement provided for the merger of the Merger Sub with and into WGL, with WGL surviving as an indirect wholly owned subsidiary of AltaGas (the Merger). In connection with the Merger, WGL established Wrangler SPE LLC., a bankruptcy remote special purpose entity (the SPE) for the purposes of owning the common stock of Washington Gas. The SPE is a wholly owned subsidiary of WGL. In addition, WGL owns all of the shares of common stock of Washington Gas Resources Corporation (Washington Gas Resources) and Hampshire Gas Company (Hampshire). Washington Gas Resources owns all of the shares of common stock of four non-utility subsidiaries that include WGL Energy Services, Inc. (WGL Energy Services), WGL Energy Systems, Inc. (WGL Energy Systems), WGL Midstream, Inc. (WGL Midstream) and WGSW, Inc. (WGSW). Additionally, several subsidiaries of WGL own interests in other entities.
For further information on the Merger, see “Safe Harbor and Forward Looking Statements” in the Introduction, Item I. Business, Item 1A. Risk Factors, and Note 20 “Merger with AltaGas Ltd.” of the Notes to Consolidated Financial Statements in this Form 10-K.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
WGL(1)(3)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Wrangler SPE LLC
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Washington Gas
Regulated Utility
 
 
Hampshire
Regulated Utility
 
 
Washington Gas Resources(2)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
WGL Energy Services Retail
Energy-Marketing
 
WGL Energy Systems
Commercial Energy Systems
 
 
WGSW
Commercial Energy Systems
 
WGL Midstream
Midstream Energy Services
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(1)Crab Run Gas Company is an inactive, wholly owned subsidiary of WGL.
 
(2)Holding company whose stand-alone results are reported in "other activities".
 
(3) WGL is an indirect wholly owned subsidiary of AltaGas.
INDUSTRY SEGMENTS
Our segments include regulated utility, retail energy-marketing, commercial energy systems and midstream energy services. Transactions and activities not specifically identified in one of these four segments are reported as “Other Activities.” The four segments are described below.
REGULATED UTILITY SEGMENT

8


WGL Holdings, Inc.
Washington Gas Light Company
Part I
Item 1. Business (continued)

The regulated utility segment consists of Washington Gas and Hampshire and represents approximately 71% of WGL’s total assets.
Washington Gas Light Company
Washington Gas is a regulated public utility that sells and delivers natural gas to retail customers in accordance with tariffs approved by regulatory commissions in the District of Columbia and adjoining areas in Maryland, Virginia and several cities and towns in the northern Shenandoah Valley of Virginia. Washington Gas has been engaged in the natural gas distribution business since its incorporation by an Act of Congress in 1848. Washington Gas has been a Virginia corporation since 1953 and a corporation of the District of Columbia since 1957.
Washington Gas provides regulated distribution or delivery of natural gas to retail customers under tariff rates designed to provide for a return on and return of the investment used in providing that service. The rates are also designed to provide for recovery of operating expenses and federal and state income taxes incurred in providing that service. Washington Gas also sells natural gas to customers who have not elected to purchase natural gas from unregulated third-party marketers (refer to the section entitled “Natural Gas Unbundling”). Washington Gas recovers the cost of the natural gas purchased to serve firm customers through recovery mechanisms as approved in jurisdictional tariffs. Any difference between gas costs incurred on behalf of firm customers and the gas costs recovered from those customers is deferred on the balance sheet as an amount to be collected from or refunded to customers in future periods. Therefore, increases or decreases in the cost of gas associated with sales made to firm customers have no direct effect on Washington Gas’ net revenues and net income. However, to the extent Washington Gas does not have regulatory mechanisms in place to mitigate the indirect effects of higher gas prices, such as: (i) lower natural gas consumption caused by customer conservation; (ii) increased short-term interest expense to finance a higher natural gas storage and accounts receivables balances and (iii) higher expenses for uncollectible accounts, its net income may decrease.
Washington Gas, under its asset optimization program, makes use of storage and transportation capacity resources when those assets are not required to serve utility customers. The objective of this program is to derive a profit to be shared with its utility customers. These profits are earned by entering into commodity-related physical and financial contracts with third parties (refer to the section entitled “Asset Optimization Derivative Contracts” for further discussion of the asset optimization program). Unless otherwise noted, therm deliveries reported for the regulated utility segment do not include deliveries related to the asset optimization program.
At September 30, 2018, Washington Gas’ service area had a population estimated at 5.9 million and included approximately 2.2 million households and commercial structures. Washington Gas operations are such that the loss of any one customer or group of customers would not have a significant adverse effect on its business. The following table lists the number of active customer meters and therms delivered by jurisdiction as of and for the year ended September 30, 2018 and 2017, respectively.
Active Customer Meters and Therms Delivered by Jurisdiction
Jurisdiction
Active Customer
Meters as of
  September 30, 2018  
 
Millions of Therms
Delivered
Fiscal Year Ended
  September 30, 2018  
 
Active Customer
Meters as of
  September 30, 2017  
 
Millions of Therms
Delivered
Fiscal Year Ended
   September 30, 2017   
 
 
 
 
 
 
 
 
District of Columbia
163,516

 
298.4

 
161,990

 
270.6

Maryland
485,619

 
914.7

 
478,004

 
742.8

Virginia
528,841

 
673.8

 
523,661

 
589.1

Total
1,177,976

 
1,886.9

 
1,163,655

 
1,602.5

For additional information about gas deliveries and meter statistics, refer to the section entitled “Results of Operations” in Management’s Discussion for Washington Gas.
Hampshire Gas Company
Hampshire owns full and partial interests in underground natural gas storage facilities, including pipeline delivery facilities located in and around Hampshire County, West Virginia, and operates those facilities to serve Washington Gas, which purchases all of the storage services of Hampshire. Washington Gas includes the cost of these services in the bills sent to its customers. Hampshire operates under a “pass-through” cost of service-based tariff approved by the FERC and adjusts its billing rates to Washington Gas on a periodic basis to account for changes in its investment in utility plant and associated expenses.

9


WGL Holdings, Inc.
Washington Gas Light Company
Part I
Item 1. Business (continued)

Regulatory Environment
Washington Gas is regulated by the PSC of DC, the PSC of MD and the SCC of VA which approve its terms of service and the billing rates that it charges to its customers. Hampshire is regulated by the FERC. The rates charged to utility customers are designed to recover Washington Gas’ operating expenses and natural gas commodity costs and to provide a return on its investment in the net assets used in its firm gas sales and delivery service. For a discussion of current rates and regulatory matters, refer to the section entitled “Rates and Regulatory Matters” in Management’s Discussion for Washington Gas.
District of Columbia Jurisdiction
The PSC of DC consists of three full-time members who are appointed by the Mayor with the advice and consent of the District of Columbia City Council. The term of each commissioner is four years with no limitations on the number of terms that can be served. The PSC of DC has no time limitation within which it must make decisions regarding modifications to base rates charged by Washington Gas to its customers; however, it targets resolving pending rate cases within three months of the close of record.
Maryland Jurisdiction
The PSC of MD consists of five full-time members who are appointed by the Governor with the advice and consent of the Senate of Maryland. Each commissioner is appointed to a five-year term, with no limit on the number of terms that can be served.
When Washington Gas files for a rate increase, the PSC of MD may initially suspend the proposed increase for 180 days, and then has the option to extend the suspension for an additional 30 days. If action has not been taken after 210 days, the requested rates become effective subject to refund.
Virginia Jurisdiction
The SCC of VA consists of three full-time members who are elected by the General Assembly of Virginia. Each commissioner has a six-year term with no limitation on the number of terms that can be served.
Either of two methods may be used to request a modification of existing rates. Washington Gas may file an application for a general rate increase, in which it may propose new adjustments to the cost of service that are different from those previously approved for Washington Gas by the SCC of VA, as well as a revised return on equity. The proposed rates under this process may take effect 150 days after the filing, subject to refund pending the outcome of the SCC of VA’s action on the application.
Alternatively, an expedited rate case procedure allows proposed rate increases to be effective 30 days after the filing date, subject to refund. Under this procedure, Washington Gas may not propose new adjustments for issues not approved in its last general rate case or request a change in its authorized return on common equity. Once filed, other parties may propose new adjustments or a change in the cost of capital from the level authorized in its last general rate case. The expedited rate case procedure may not be available if the SCC of VA decides that there has been a substantial change in circumstances since the last general rate case filed by Washington Gas.
Seasonality of Business Operations
Washington Gas’ business is weather-sensitive and seasonal because the majority of its business is derived from residential and small commercial customers who use natural gas for space heating. Excluding deliveries for electric generation, 74% and 73% of the total therms delivered in Washington Gas’ service area occurred during its first and second fiscal quarters for fiscal years 2018 and 2017, respectively. Washington Gas’ earnings are typically generated during these two quarters, and Washington Gas typically incurs net losses in the third and fourth fiscal quarters. The seasonal nature of the business creates large variations in short-term cash requirements, primarily due to the season-to-season fluctuations in the level of customer accounts receivable, unbilled revenues and storage gas inventories. Washington Gas finances these seasonal requirements primarily through the sale of commercial paper and unsecured short-term bank loans. For information on our management of weather risk, refer to the section entitled “Weather Risk” in Management’s Discussion and Analysis. For information about management of cash requirements, refer to the section entitled “Liquidity and Capital Resources” in Management’s Discussion and Analysis.
Non-Weather Related Changes in Natural Gas Consumption Patterns
Natural gas supply requirements for the utility are affected by changes in the natural gas consumption patterns of our customers that are driven by factors other than weather. Natural gas usage per customer may decline as customers change their consumption patterns for various reasons, including: (i) more volatile and higher natural gas prices; (ii) customer upgrades to more energy efficient appliances and building structures and (iii) a decline in the economy in the region in which we operate.

10


WGL Holdings, Inc.
Washington Gas Light Company
Part I
Item 1. Business (continued)

For each jurisdiction in which Washington Gas operates, changes in customer usage profiles are reflected in rate case proceedings and rates are adjusted accordingly. Changes in customer usage by existing customers that occur subsequent to rate case proceedings in Maryland generally will not change revenues because the RNA mechanism stabilizes the level of delivery charge revenues received from customers.
In Virginia, decoupling rate mechanisms for residential, small commercial and industrial and group metered apartment customers permit Washington Gas to adjust revenues for non-weather related changes in customer usage. The WNA and the CRA are billing mechanisms that together eliminate the effects of both weather and other factors such as conservation.
In the District of Columbia, a decrease in customer usage that occurs subsequent to a rate case proceeding would have the effect of reducing revenues, which could be offset by additions of new customers.
Natural Gas Supply and Capacity
Capacity and Supply Requirements
Washington Gas must contract for reliable and adequate natural gas supplies, interstate pipeline capacity and storage capacity to provide natural gas to its distribution system, while considering: (i) the dynamics of the commodity supply and interstate pipeline and storage capacity markets; (ii) its own on-system natural gas peaking facilities and (iii) the characteristics of its customer base. Energy-marketing companies that sell natural gas to customers located within Washington Gas’ service territory are responsible for acquiring natural gas for their customers; however, Washington Gas allocates certain storage and pipeline capacity related to these customers in accordance with regulatory requirements.
Washington Gas has adopted a diversified portfolio approach designed to address constraints on supply by using multiple supply receipt points, dependable interstate pipeline transportation and storage arrangements, and its own substantial storage and peak shaving capabilities. Washington Gas’ supply and pipeline capacity plan is based on forecasted system requirements, and takes into account estimated load growth, attrition, conservation, geographic location, interstate pipeline and storage capacity and contractual limitations and the forecasted movement of customers between bundled service and delivery service. Under reduced supply conditions, Washington Gas may implement contingency plans in order to maximize the number of customers served. Contingency plans include requests to the general population to conserve and target curtailments to specific sections of the system, consistent with curtailment tariffs approved by regulators in each of Washington Gas’ three jurisdictions.
Washington Gas obtains natural gas supplies that originate from multiple regions throughout the United States. At September 30, 2018 and 2017, Washington Gas had multiple service agreements with four pipeline companies that provides firm transportation and/or storage services directly to Washington Gas’ city gates. These contracts have expiration dates ranging from fiscal years 2019 to 2045. Additionally, Washington Gas has contracted with various interstate pipeline and storage companies to add to its storage and transportation capacity and continues to monitor other opportunities to acquire or participate in additional pipeline and storage capacity to support customer growth and improve or maintain the high level of service expected by its customer base.
Asset Optimization Derivative Contracts
Under the asset optimization program, Washington Gas utilizes its storage and transportation capacity resources when they are not being used to serve its utility customers. Washington Gas executes commodity-related physical and financial contracts in the form of forwards, futures and options as part of an asset optimization program that is managed by its internal staff. These transactions are accounted for as derivatives. The objective of this program is to derive a profit to be shared with Washington Gas' utility customers. Washington Gas enters into these derivative transaction contracts to secure operating margins that will ultimately be shared between customers and Washington Gas. Because these sharing mechanisms are approved by our regulators in all three jurisdictions, any changes in fair value of the derivatives are recorded either through earnings for margins that are retained by Washington Gas or as regulatory assets or liabilities if the ultimate realized gains and losses will be included in the rates charged to customers.
The derivatives used under this program are subject to fair value accounting treatment which may cause significant period-to-period volatility in earnings from unrealized gains and losses associated with changes in fair value for the portion of net profits attributed to shareholders. However, this earnings volatility does not change the realized margins that Washington Gas expects to earn from these transactions. All physically and financially settled contracts under our asset optimization program are reported on a net basis in the statements of income in “Utility cost of gas.” Total net margins including unrealized gains and losses recorded to “Utility cost of gas” after sharing and management fees associated with all asset optimization transactions for the years ended September 30, 2018, 2017 and 2016, respectively, were net gains of $34.3 million, $82.9 million, and $43.8 million.

11


WGL Holdings, Inc.
Washington Gas Light Company
Part I
Item 1. Business (continued)

Refer to the sections entitled “Results of Operations — Regulated Utility Operating Results” and “Market Risk” in Management’s Discussion for further discussion of the asset optimization program and its effect on earnings.
Annual Sendout
As reflected in the table below, Washington Gas received natural gas from multiple sources in fiscal year 2018 and expects to use those same sources to satisfy customer demand in fiscal year 2019. Firm transportation denotes gas transported directly to the entry point of Washington Gas’ distribution system in contractual volumes. Transportation storage denotes volumes stored by a pipeline during the spring, summer and fall for withdrawal and delivery to the Washington Gas distribution system during the winter heating season to meet load requirements. Peak load requirements are met by: (i) underground natural gas storage at the Hampshire storage field; (ii) the local production of propane air plants located at Washington Gas-owned facilities in Rockville, Maryland (Rockville Station) and in Springfield, Virginia (Ravensworth Station) and (iii) other peak-shaving resources. Unregulated third-party marketers acquire interstate pipeline and storage capacity and the natural gas commodity on behalf of Washington Gas’ delivery service customers under customer choice programs. Washington Gas also provides transportation, storage and peaking resources to unregulated third-party marketers (refer to the section entitled “Natural Gas Unbundling”). These retail marketers have natural gas delivered to the entry point of Washington Gas’ distribution system on behalf of those utility customers that have decided to acquire their natural gas commodity on an unbundled basis, as discussed below.
Excluding the sendout of sales and deliveries of natural gas used for electric generation, the following table outlines total sendout of the system. The sources of delivery and related volumes that were used to satisfy the requirements of fiscal year 2018 and those projected for pipeline year 2019 are shown in the following table.
 
Sources of Delivery for Annual Sendout
(In millions of therms)
 
Fiscal Year       
 
Sources of Delivery
 
Actual
2017 
 
Actual
2018 
 
  Projected  
2019(a)
Firm Transportation
 
513

 
643

 
587

Transportation Storage
 
398

 
501

 
390

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

 
45

 
29

Unregulated Third-Party Marketers
 
783

 
845

 
861

Total
 
1,723

 
2,034

 
1,867

(a)Based on normal weather.
Design Day Sendout
The effectiveness of Washington Gas’ capacity resource plan is largely dependent on the sources used to satisfy forecasted and actual customer demand requirements for its design day. For planning purposes, Washington Gas assumes that all interruptible customers will be curtailed on the design day. Washington Gas’ forecasted design day demand for the 2018-2019 winter season is 19.9 million therms and Washington Gas’ projected sources of delivery for design day sendout is 21.0 million therms. This provides a reserve margin of approximately 5.3%. Washington Gas plans for the optimal utilization of its storage and peaking capacity to reduce its dependency on firm transportation and to lower pipeline capacity costs. The following table reflects the sources of delivery that are projected to be used to satisfy the forecasted design day sendout estimate for fiscal year 2019.

12


WGL Holdings, Inc.
Washington Gas Light Company
Part I
Item 1. Business (continued)

Projected Sources of Delivery for Design Day Sendout
(In millions of therms)
Fiscal Year 2019
Sources of Delivery
Volumes
 
Percent    
Firm Transportation
6.8

 
32
%
Transportation Storage
8.5

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

 
26
%
Unregulated Third-Party Marketers
0.2

 
1
%
Total
21.0

 
100
%
Natural Gas Unbundling
At September 30, 2018, customer choice programs for natural gas customers were available to all of Washington Gas’ regulated utility customers in the District of Columbia, Maryland and Virginia. These programs allow customers to purchase their natural gas from unregulated third-party marketers, rather than purchasing this commodity as part of a bundled service from the local utility. Of Washington Gas’ 1.2 million active customers at September 30, 2018, approximately 174,000 customers purchased their natural gas commodity from unregulated third-party marketers.
The following table provides the percentage of customers participating in customer choice programs in Washington Gas’ jurisdictions at September 30, 2018.
Participation in Customer Choice Programs
At September 30, 2018
Jurisdiction
Customer Class  
Eligible Customers
 
 
Total      
 
% Participating  
  District of Columbia
Firm:
 
 
 
 
Residential
150,417

 
9
%
 
Commercial
12,954

 
34
%
 
Interruptible
145

 
98
%
Maryland
Firm:
 
 
 
 
Residential
454,121

 
19
%
 
Commercial
31,316

 
42
%
 
Interruptible
180

 
99
%
 
Electric Generation
2

 
100
%
Virginia
Firm:
 
 
 
 
Residential
498,790

 
9
%
 
Commercial
29,886

 
31
%
 
Interruptible
165

 
95
%
Total
 
1,177,976

 
 
When customers choose to purchase the natural gas commodity from unregulated third-party marketers, Washington Gas’ net income is not affected because Washington Gas charges its customers the cost of gas without any mark-up. When customers select an unregulated third-party marketer as their gas supplier, Washington Gas continues to charge these customers to deliver natural gas through its distribution system at rates identical to the delivery portion of the bundled sales service customers.
Safety and Reliability of the Natural Gas Distribution System
Maintaining and improving the public safety and reliability of Washington Gas’ distribution system is our highest priority, providing benefits to both customers and investors through improved customer service. Washington Gas continually monitors and reviews changes in requirements of the codes and regulations that govern the operation of the distribution system and refines its safety practices, with a particular focus on design, construction, maintenance, operation, replacement, inspection and monitoring practices to meet or exceed these requirements. Significant changes in regulations can impact the cost of operating and maintaining our distribution system.

13


WGL Holdings, Inc.
Washington Gas Light Company
Part I
Item 1. Business (continued)

Competition
The Natural Gas Delivery Function
The natural gas delivery function, the core business of Washington Gas, continues to be regulated by local and state regulatory commissions. In developing this core business, Washington Gas has invested approximately $4 billion through September 30, 2018, to build, maintain and serve safe and reliable distribution system assets. Because of the high fixed costs and significant safety and environmental considerations associated with building and operating a distribution system, Washington Gas expects to continue being the only owner and operator of a distribution system in its current franchise areas for the foreseeable future. The nature of Washington Gas’ customer base and the distance of most customers from interstate pipelines mitigate the threat of bypass of its facilities by other potential delivery service providers.
Competition with Other Energy Products
Washington Gas faces competition based on customers’ preference for other energy products and the prices of those products compared to natural gas. In the residential market, which generates a significant portion of Washington Gas’ net income, the most significant product competition occurs between natural gas and electricity. Because the cost of electricity is affected by the cost of fuel used to generate electricity, such as natural gas, Washington Gas generally maintains a price advantage over competitive electricity supply in its service area for traditional residential uses of energy such as heating, water heating and cooking. Washington Gas continues to attract the majority of the new residential construction market in its service territory, and consumers’ continuing preference for natural gas allows Washington Gas to maintain a strong market presence. The following table lists the new customer meters added by jurisdiction and major rate class for the year ended September 30, 2018.
New Customer Meters by Area
  
 
Residential
 
 
Commercial and
Interruptible
 
Group Metered
Apartments
 
Total      
Maryland
 
5,692

 
395

 

 
6,087

Virginia
 
5,209

 
344

 
1

 
5,554

District of Columbia
 
818

 
121

 
1

 
940

Total
 
11,719

 
860

 
2

 
12,581

In the interruptible market, fuel oil is the prevalent energy alternative to natural gas. Washington Gas’ success in this market depends largely on the relationship between natural gas and oil prices. The supply of natural gas primarily is derived from domestic sources, and the relationship between supply and demand generally has the greatest impact on natural gas prices. Since the source of a large portion of oil comes from foreign countries, political events and foreign currency conversion rates can influence oil supplies and prices to domestic consumers.
Critical Factors
Factors critical to the success of the regulated utility segment include: (i) operating a safe and reliable natural gas distribution system; (ii) having sufficient natural gas supplies to meet customer demands; (iii) being competitive with other sources of energy such as electricity, fuel oil and propane; (iv) having access to sources of liquidity; (v) recovering the costs and expenses of this business in the rates charged to customers and (vi) earning a just and reasonable rate of return on invested capital.
RETAIL ENERGY-MARKETING SEGMENT
The retail energy-marketing segment consists of the operations of WGL Energy Services, which competes with regulated utilities and other unregulated third-party marketers to sell natural gas and/or electricity directly to residential, commercial and industrial customers in Maryland, Virginia, Delaware, Pennsylvania and the District of Columbia. WGL Energy Services is subject to regulation by the public service regulatory commissions of the states in which the company is authorized as a competitive service provider. These regulatory commissions: (i) authorize WGL Energy Services to provide service, (ii) review certain terms and conditions of service, (iii) establish the regulatory rules for interactions between the utility and the competitive service provider and (iv) issue orders and promulgate rules that establish the broad structure and conduct of retail energy markets. Changes to the rules, rates and orders by the regulatory commissions may affect WGL Energy Services’ financial performance.
WGL Energy Services buys natural gas and electricity with the objective of earning a profit through competitively priced sales contracts with end-users. These commodities are delivered to retail customers through the distribution systems owned by regulated utilities. Washington Gas is one of several utilities that deliver gas to, and on behalf of, WGL Energy Services.

14


WGL Holdings, Inc.
Washington Gas Light Company
Part I
Item 1. Business (continued)

Unaffiliated electric utilities deliver all of the electricity sold by WGL Energy Services. WGL Energy Services bills its customers either independently or through the billing services of the regulated utilities that deliver its commodities. Refer to Note 17—Related Party Transactions of the Notes to Consolidated Financial Statements for further discussion of our purchase of receivables program.
WGL Energy Services also sells wind and other RECs and carbon offsets to retail customers. WGL Energy Services owns solar generating assets which are dedicated to five specific customers. The results of operations for these assets are reported within the Commercial Energy Systems segment. WGL Energy Services does not own or operate any other electric generation, transmission or distribution assets.
At September 30, 2018, WGL Energy Services served approximately 108,900 residential, commercial and industrial natural gas customer accounts and approximately 101,700 residential, commercial and industrial electricity customer accounts located in Maryland, Virginia, Delaware, Pennsylvania and the District of Columbia. Its customer concentration is such that the loss of any one customer or group of customers would not have a significant adverse effect on its business.
Seasonality of Business Operations
The operations of WGL Energy Services are seasonal, with larger amounts of electricity being sold in the summer and peak winter months and larger amounts of natural gas being sold in the winter months. Working capital requirements can vary significantly during the year and these variations are financed through internally generated funds and WGL’s issuance of commercial paper and unsecured short-term bank loans. WGL Energy Services accesses these funds through the WGL money pool. For a discussion of the WGL money pool, refer to the section entitled “Money Pool” in Management’s Discussion and Analysis.
Natural Gas and Electricity Supply
WGL Energy Services contracts for storage and pipeline capacity to meet its customers’ needs primarily through transportation releases and storage services allocated from the utility companies in the various service territories in which it provides retail energy commodity.
On February 20, 2013, WGL Energy Services entered into a five-year secured supply arrangement with Shell Energy North America (US), LP (Shell Energy). Under this arrangement, WGL Energy Services has the ability to purchase the majority of its power, natural gas and related products from Shell Energy in a structure that reduces WGL Energy Services’ cash flow risk from collateral posting requirements. While Shell is intended to be the majority provider of natural gas and electricity, WGL Energy Services retains the right to purchase supply from other providers. On November 7, 2016, the supply arrangement was extended for two years, expiring in 2020.
Natural gas supplies are delivered to WGL Energy Services’ market territories through several interstate natural gas pipelines. To supplement WGL Energy Services’ natural gas supplies during periods of high customer demand, WGL Energy Services maintains gas storage inventory in storage facilities that are assigned by natural gas utilities such as Washington Gas. This storage inventory enables WGL Energy Services to meet daily and monthly fluctuations in demand and to minimize the effect of market price volatility.
The PJM Interconnection (PJM) is a regional transmission organization that regulates and coordinates generation supply and the wholesale delivery of electricity in the states and jurisdictions where WGL Energy Services operates. WGL Energy Services buys wholesale and sells retail electricity in the PJM market territory, subject to its rules and regulations.
Competition
Natural Gas. WGL Energy Services competes with regulated gas utilities and other third-party marketers to sell natural gas to customers both inside and outside of the Washington Gas service area.
Electricity. WGL Energy Services competes with regulated electric utilities and other third-party marketers to sell electricity to customers.
Marketers of natural gas and electric supply compete largely on price; therefore, gross margins are relatively small. To provide competitive pricing to its retail customers and in adherence to its risk management policies and procedures, WGL Energy Services manages its natural gas and electricity contract portfolios by attempting to closely match the commitments for gas and electricity deliveries from suppliers with requirements to serve sales customers.
WGL Energy Services’ residential and small commercial electric customer growth opportunities are significantly affected by the price for Standard Offer Service (SOS) offered by electric utilities. These rates are periodically reset for each customer class

15


WGL Holdings, Inc.
Washington Gas Light Company
Part I
Item 1. Business (continued)

based on the regulatory requirements in each jurisdiction. Customer growth opportunities either expand or contract due to the relationship of these SOS rates to current market prices.
For a discussion of WGL Energy Services’ exposure to and management of price risk, refer to the section entitled “Market Risk—Price Risk Related to the Non-Utility Segments” in Management’s Discussion.
Critical Factors
Factors critical to managing the retail energy-marketing segment include: (i) managing the market risk of the difference between the price committed to customers under sales contracts and the cost of natural gas and electricity needed to satisfy these commitments, including PJM costs and costs to meet renewable portfolio standards; (ii) having sufficient deliverability of natural gas and electric supplies and transportation to serve the demand of its customers, which can be affected by the ability of natural gas producers, pipeline gatherers, natural gas processors, interstate pipelines, electricity generators and regional electric transmission operators to deliver the respective commodities; (iii) access to sources of financial liquidity; (iv) managing credit risks associated with customers and suppliers; (v) controlling the level of selling, general and administrative expenses, including customer acquisition expenses and (iv) access to markets through customer choice programs or other forms of deregulation.
COMMERCIAL ENERGY SYSTEMS SEGMENT
The commercial energy systems segment consists of the operations of WGL Energy Systems, WGSW and the results of operations of wholly owned subsidiaries, consolidated tax equity and other investments and affiliate owned commercial distributed energy projects.
This segment focuses on clean and energy efficient solutions for its customers, driving earnings through (i) investing in distributed generation assets such as Solar PV systems, combined heat and power plants, and natural gas fuel cells and (ii) operating as a general contractor to upgrade the mechanical, electrical, water and energy-related infrastructure of large governmental and commercial facilities by implementing both traditional and alternative energy technologies. This segment has assets and activities across the United States.
As of September 30, 2018, this segment owned $577.1 million of operating distributed generation assets, generating a total of 342,306 megawatt hours in fiscal year 2018. Additionally, as of September 30, 2018, there was $11.0 million of signed projects under construction. These distributed generation assets drive revenue through the sale of renewable power generation under long-term power purchase agreements and the sale of renewable energy credits. As of September 30, 2018, we have $156.1 million in unamortized investment tax credits and grants related to these assets placed in service. These credits and grants are recognized as reductions in tax expense by amortizing them over the useful life of the underlying assets, typically 30 years.
Competition
There are many competitors in this business segment. In the renewable energy and distributed generation market, competitors primarily include other developers, tax equity investors, distributed generation asset owner firms and lending institutions. Within the government sector, competitors primarily include companies contracting with customers under Energy Savings Performance Contracting (ESPC) as well as utilities providing services under Utility Energy Saving Contracts (UESC). WGL Energy Systems competes on the basis of strong customer relationships developed over many years of implementing successful projects, developing and maintaining strong supplier relationships, and focusing in areas where it can bring relevant expertise.
Critical Factors
Factors critical to the success of the commercial energy systems segment include: (i) generating adequate sales commitments from distributed generation channel partners and customers; (ii) generating adequate sales commitments from the government and private sectors in the facility construction and retrofit markets; (iii) building a stable base of customer relationships; (iv) estimating and managing fixed-price contracts with contractors; (v) managing selling, general and administrative expenses; (vi) managing price and operational risk associated with distributed energy projects and (vii) successful operation and optimization of commercial assets.
MIDSTREAM ENERGY SERVICES SEGMENT
WGL Midstream specializes in the investment, management, development and optimization of natural gas storage and transportation assets. At September 30, 2018, WGL Midstream had infrastructure investments totaling $770.0 million. For a discussion of WGL Midstream's infrastructure investments, refer to the section entitled "Liquidity and Capital Resources--Infrastructure Investments" in Management's Discussion.

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

Additionally, WGL Midstream provides natural gas related solutions to its customers and counterparties including producers, utilities, local distribution companies, power generators, wholesale energy suppliers, LNG exporters, pipelines and storage facilities. Moreover, WGL Midstream contracts for storage and pipeline capacity in its trading activities through both long term contracts and short term transportation releases. WGL Midstream also contracts for physical natural gas sales and purchases on both a long term and short term basis.
WGL Midstream enters into both physical and financial derivative transactions to mitigate risks while seeking to maximize potential profits from the optimization of the transportation and storage assets it has under contract. These derivatives may cause significant period-to-period volatility in earnings as recorded under GAAP; however, this earnings volatility will not change the realized margins that WGL Midstream expects to earn on the underlying physical transactions.
WGL Midstream seeks to manage price risk exposure under its risk management policy by matching its forward physical and financial positions with its asset base. For a discussion of WGL Midstream’s exposure to and management of price risk, refer to the section entitled “Market Risk-Price Risk Related to the Non-Utility Segments” in Management’s Discussion and Analysis.
Competition
WGL Midstream competes with other midstream infrastructure and energy services companies, wholesale energy suppliers, producers and other non-utility affiliates of regulated utilities for the acquisition of natural gas storage and transportation assets.
Price Volatility
WGL Midstream can be positively or negatively affected by significant volatility in the wholesale price of natural gas. WGL Midstream risk management policies and procedures are designed to minimize the risk that purchase commitments and the related sale commitments do not closely match. In general, profit opportunities for trading activities are increased for WGL Midstream with increased volatility in natural gas prices. These opportunities are primarily in short term transportation and storage spreads, seasonal storage spreads and long term supply or basis transactions.
Critical Factors
Factors critical to the success of WGL Midstream’s operations include: (i) pipeline investment projects are on time and on budget within set parameters; (ii) internal risk management policies; (iii) winning business in a competitive marketplace; (iv) managing counterparty credit risk; (v) managing contract risks associated with the purchase and sale of natural gas, including index pricing and changes in natural gas markets; (vi) maintaining and leveraging expertise in managing and optimizing natural gas related contracts; (vii) access to sources of financial liquidity and (viii) the level of general and administrative expenses.
OTHER ACTIVITIES
Activities and transactions that are not significant enough on a stand-alone basis to warrant treatment as an operating segment, and that do not fit into one of our other operating segments, are aggregated as “Other activities” in the Operating Segment Financial Information. Transaction fees related to the merger with AltaGas as well as administrative and business development activity costs associated with WGL and Washington Gas Resources are included in this segment.

ENVIRONMENTAL MATTERS
We are subject to federal, state and local laws and regulations related to environmental matters. These laws and regulations may require expenditures over a long timeframe to control environmental effects. Almost all of the environmental liabilities we have recorded are for costs expected to be incurred to remediate sites where we or a predecessor affiliate operated manufactured gas plants (MGPs). Estimates of liabilities for environmental response costs are difficult to determine with precision because of the various factors that can affect their ultimate level. These factors include, but are not limited to, the following:
the complexity of the site;
changes in environmental laws and regulations at the federal, state and local levels;
the number of regulatory agencies or other parties involved;
new technology that renders previous technology obsolete or experience with existing technology that proves ineffective;
the level of remediation required and

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


variation between the estimated and actual period of time required to respond to an environmentally contaminated site.
Washington Gas has identified up to ten sites where it or its predecessors may have operated MGPs. Washington Gas last used any such plant in 1984. In connection with these operations, we are aware that coal tar and certain other by-products of the gas manufacturing process are present at or near some former sites and may be present at others.
Washington Gas is currently remediating its East Station property, which is adjacent to the Anacostia River, including ground water pump and treat, tar recovery, soil encapsulation and other treatment. Washington Gas is conducting a remedial investigation and feasibility study under a 2012 consent decree with the District of Columbia and the federal government and additional remediation may be required. In addition, manufactured gas waste was discovered at an adjoining property, a parcel of land adjacent to East Station. Washington Gas has agreed to work with the owners of the adjoining property to perform a site investigation, ground water sampling, and report on the contamination at the site pursuant to oversight by Department of Energy and Environment (DOEE).
Washington Gas received a letter in February 2016 from the District of Columbia and National Park Service regarding the Anacostia River Sediment Project, indicating that the District of Columbia is conducting a separate remedial investigation and feasibility study of the river to determine if and what cleanup measures may be required and to prepare a natural resource damage assessment. The sediment project draft remedial investigation report issued on March 30, 2018 identifies East Station as one of seventeen potential environmental cleanup sites. During the fiscal year ended September 30, 2017, Washington Gas received a request for information related to three Washington Gas properties. We are not able to estimate the total amount of potential damages or timing associated with the District of Columbia's environmental investigation on the Anacostia River at this time. While an allocation method has not been established, Washington Gas has accrued an amount based on a potential range of estimates.
See Note 11—Environmental Matters of the Notes to Consolidated Financial Statements for further discussion of environmental response costs.
OTHER INFORMATION
At September 30, 2018, we had 1,648 employees comprising 1,519 utility and 129 non-utility employees.
WGL has determined that none of its entities, either separately or in the aggregate, will be classified as swap dealers or major swap participants under the Dodd-Frank Act.
The following documentation is available on the Web site for WGL (www.wglholdings.com) under “Corporate Governance”: our code of conduct, the AltaGas Code of Business Ethics, which also applies to WGL, and the WGL Audit Committee Charter. Any changes or amendments to these documents will also be posted to this section of the WGL Web site.
The following documentation is available on the Web site for Washington Gas (www.washingtongas.com) under “Corporate Information”/“Governance”: our code of conduct, the AltaGas Code of Business Ethics, which also applies to Washington Gas, the Washington Gas Corporate Governance Guidelines, and the Charters for the Governance & Environment, Health and Safety, Audit and Human Resources Committees of Washington Gas. Any changes or amendments to these documents will also be posted to this section of the Washington Gas Web site.
Copies of any of the aforementioned documents may be obtained by request to the Corporate Secretary at WGL Holdings, Inc., 1000 Maine Ave., S.W., Washington, D.C. 20024. Also on the WGL corporate Web site is additional information about WGL Holdings and free access to our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and any amendments filed with or furnished to the Securities and Exchange Commission.
Our research and development costs during fiscal years 2018, 2017 and 2016 were not material.


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WGL Holdings, Inc.
Washington Gas Light Company
Part I
Item 1A. Risk Factors

ITEM 1A. RISK FACTORS
 
The risk factors described below should be read in conjunction with other information included or incorporated by reference in this annual report on Form 10-K, including an in-depth discussion of these risks in the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
The risk factors discussed below are separated into three sections. The first discusses those factors that affect the consolidated entity of WGL Holdings and all of its subsidiaries, including Washington Gas. The second section describes other risk factors affecting Washington Gas included under “Risks Affecting Washington Gas." The final section focuses on those factors affecting non-utility entities.
RISKS RELATING TO WGL AND ALL OF ITS SUBSIDIARIES
The merger with AltaGas may not achieve its anticipated results, and WGL may be unable to integrate the operations of AltaGas in the manner expected.
WGL and AltaGas entered into the Merger Agreement with the expectation that the merger will result in various benefits, including, among other things, cost savings and operating efficiencies. Achieving the anticipated benefits of the merger is subject to a number of uncertainties, including whether the businesses of WGL and AltaGas can be integrated in an efficient, effective and timely manner. The combination of two independent businesses is complex, costly and time-consuming and may divert significant management attention and resources to combining WGL’s and AltaGas’ business practices and operations, which could otherwise have been devoted to WGL’s business opportunities. This process may disrupt WGL’s and AltaGas’ respective businesses.
In addition, it is possible that the integration process could take longer than anticipated and could result in the disruption of WGL’s businesses, processes and systems or inconsistencies in standards, controls, procedures, practices and policies, any of which could adversely affect the combined company’s ability to achieve the anticipated benefits of the merger as and when expected. The overall combination of WGL’s and AltaGas’ businesses may also result in material unanticipated problems, expenses, liabilities, competitive responses and loss of customer and other business relationships. Failure to achieve these anticipated benefits or the incurrence of unanticipated expenses and liabilities could materially adversely affect WGL’s business, financial condition, operating results and prospects, as well as that of the combined company.
Uncertainties associated with the merger may cause a loss of management personnel and other key employees, which could adversely affect the future business and operations of the combined company.
WGL and AltaGas are dependent on the experience and industry knowledge of their officers and other key employees to execute their respective business plans. The combined company’s success will depend in part upon its ability to retain key management personnel and other key employees of WGL and AltaGas. Current and prospective employees of WGL and AltaGas may experience uncertainty about their future roles with the combined company, which may materially adversely affect the ability of each of WGL and AltaGas to attract and retain key personnel going forward. WGL may also have difficulty addressing possible differences in corporate cultures and management philosophies. Accordingly, no assurance can be given that the combined company will be able to retain key management personnel and other key employees of WGL and AltaGas, which could materially adversely affect WGL’s business, financial condition, operating results and prospects.
WGL may incur unexpected transaction fees and merger-related costs in connection with the merger.
WGL expects to incur a number of non-recurring expenses associated with consummating the merger, as well as expenses related to combining the operations of the two companies. WGL may incur additional unanticipated costs in the integration of the businesses of WGL and AltaGas. Although WGL expects that the elimination of certain duplicative costs, as well as the realization of other efficiencies related to the integration of the two businesses, will offset the incremental transaction and merger-related costs over time, the combined company may not achieve this net benefit in the near term, or at all.
WGL may encounter unexpected difficulties or costs in meeting commitments made under various orders and agreements associated with regulatory approvals for the merger.
As a result of the process to obtain regulatory approvals required for the merger, WGL is committed to various programs, contributions and investments in several agreements and regulatory approval orders. It is possible that WGL may encounter delays, unexpected difficulties or additional costs in meeting these commitments in compliance with the terms of the relevant agreements and orders. Failure to fulfill the commitments in accordance with their terms could result in increased costs or result in penalties or fines that could materially adversely affect WGL’s business, financial condition, operating results and prospects.

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WGL Holdings, Inc.
Washington Gas Light Company
Part I
Item 1A. Risk Factors (continued)


WGL and AltaGas may become targets of securities class action suits and derivative suits, which could result in substantial costs and divert management attention and resources.
Securities class action suits and derivative suits are often brought against companies who have entered into mergers and acquisition transactions. There can be no assurance that WGL or AltaGas will not be targets of such suits in the future, and no guarantee that WGL or AltaGas can successfully defend against any such actions. Defending against these claims, even if meritless, could result in substantial costs to WGL and AltaGas and could divert the attention of management.
A downgrade in WGL’s or AltaGas’ credit ratings could negatively affect WGL’s cost of and ability to access capital.
WGL’s ability to obtain adequate and cost-effective financing depends in part on its credit ratings. A negative change in its ratings outlook or any downgrade in its current investment-grade credit ratings by the rating agencies, particularly below investment grade, could adversely affect WGL’s costs of borrowing and/or access to sources of liquidity and capital. Further, a negative change in AltaGas’ ratings outlook or any downgrade in its credit ratings could negatively impact WGL’s ratings outlook or downgrade its credit ratings. Such downgrades could limit WGL’s access to the credit markets and increase the costs of borrowing under available credit lines. Should WGL’s credit ratings be downgraded, the interest rate on its borrowings under its existing credit facilities and commercial paper program, as well as on any future public or private debt issuances, would increase. An increase in borrowing costs without the ability to recover these higher costs in the rates charged to WGL’s customers, which would be impacted by the merger-related commitment that prohibits Washington Gas from recovering any incremental financing costs due to a credit downgrade, could adversely affect earnings or cash flows by limiting WGL’s ability to earn its allowed rate of return. And if WGL falls below investment grade, WGL may need to obtain additional credit support which may include obtaining a parent guarantee from AltaGas.

WGL may be unable to access capital or the cost of capital may significantly increase.
WGL’s ability to obtain adequate and cost-effective financing is dependent upon the liquidity of the financial markets, in addition to its credit ratings. Disruptions in the capital and credit markets or waning investor sentiment could adversely affect WGL’s ability to access short-term and long-term capital. WGL’s access to funds under its commercial paper program is dependent on investor demand for its commercial paper. Disruptions and volatility in the global credit markets could limit the demand for WGL’s commercial paper or result in the need to offer higher interest rates to investors, which would result in higher expense and could adversely impact liquidity.
As a subsidiary of AltaGas, WGL also may become a party to AltaGas’ existing debt arrangements or rely on access to short-term intercompany borrowings. The inability to access adequate capital or the increase in cost of capital may require WGL to conserve cash, prevent or delay WGL from making capital expenditures, require WGL to reduce or eliminate distributions to AltaGas or other discretionary uses of cash or could negatively affect its future growth or earnings. A significant reduction in WGL’s liquidity could cause a negative change in its ratings outlook or even a reduction in its credit ratings. This could in turn further limit WGL’s access to credit markets and increase its costs of borrowing.
As an indirect, wholly owned subsidiary of AltaGas, WGL is affected by AltaGas’ strategic decisions and performance.
As an indirect, wholly owned subsidiary of AltaGas, WGL’s business and operating performance can be affected by a wide range of strategic decisions that AltaGas may make from time to time. Significant changes in AltaGas’ strategy, its relationship with WGL, as well as material adverse changes in the performance of AltaGas, could have a material adverse effect on WGL’s business, financial condition, operating results and prospects.
Changes to government fiscal and trade policies and state/local renewable energy mandates could adversely affect WGL’s strategic decisions and operating performance.
Any changes in the US trade policy could trigger retaliatory actions by affected companies resulting in increased costs for goods used in our normal course of business, such as solar panels and steel pipe.  Additionally, state and local initiatives adopting or increasing renewable portfolio standards could result in lower demand of natural gas due to mandatory or voluntary efforts.
WGL is a holding company and we depend on the receipt of dividends and other payments from our subsidiaries to pay dividends to our parent company and to pay principal and interest on our outstanding debt.
WGL is a holding company whose assets consist primarily of investments in subsidiaries. Accordingly, we conduct all of our operations through our subsidiaries. Our ability to pay dividends to our parent company and to pay principal and accrued interest on our outstanding debt depends on the payment of dividends to us by certain of our subsidiaries or the repayment of funds to us by our subsidiaries. Our subsidiaries, in turn, may be restricted from paying dividends, making repayments or making other distributions to us for financial, regulatory, legal or other reasons. The extent to which our subsidiaries are not able to pay dividen

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WGL Holdings, Inc.
Washington Gas Light Company
Part I
Item 1A. Risk Factors (continued)


ds or repay funds to us may adversely affect our ability to pay dividends to our parent company and principal and interest to holders of our debt.
If we are unable to access sources of liquidity or capital, or if the cost of funds increases significantly, our business, financial results and strategic growth plans may be adversely affected.
WGL and Washington Gas require access to sources of liquidity to fund our operations and to support our growth strategy. Our ability to obtain adequate and cost-effective financing depends on the credit ratings of WGL and Washington Gas and the liquidity of financial markets. A material downgrade in WGL’s or Washington Gas’ credit ratings or disruptions in the credit market, including as a result of natural disasters and catastrophic events (including terrorist acts), could adversely affect our access to sources of liquidity and increase our borrowing costs.
Our strategic growth plans assume that we will have continued access to liquidity and capital. In addition, the ability of our non-utility subsidiaries to purchase natural gas and electricity from their suppliers is partly dependent upon the creditworthiness of WGL, and upon access to cash collateral through the issuance of commercial paper and unsecured short-term bank loans by WGL. If WGL’s credit ratings are materially downgraded, we may be required to provide additional credit support. If we are required to provide significant additional credit support, or if there is significant disruption in the credit markets, our ability to implement our strategic plans and the ability of our non-utility subsidiaries to make commodity purchases at reasonable prices may be impaired.
Cyber-attacks, including cyber-terrorism or other information technology security breaches, or information technology failures may disrupt our business operations, increase our costs, lead to the disclosure of confidential information and damage our reputation.
Security breaches of our information technology infrastructure, including cyber-attacks and cyber-terrorism, or other failures of our information technology infrastructure could lead to disruptions of our natural gas distribution operations and otherwise adversely impact our ability to safely and effectively operate our pipeline and distributed generation systems and serve our customers. In addition, an attack on or failure of information technology systems could result in the unauthorized release of customer, employee or Company data that is crucial to our operational security or could adversely affect our ability to deliver and collect on customer bills. Such security breaches of our information technology infrastructure could adversely affect our business reputation, diminish customer confidence, subject us to financial liability or increased regulation, increase our costs and expose us to material legal claims and liability and adversely affect our operations and financial results. We have implemented preventive, detective and remediation measures to manage these risks, and we maintain cyber risk insurance to mitigate the effects of these events. Nevertheless, these may not effectively protect all of our systems all of the time. To the extent that the occurrence of any of these cyber-events is not fully covered by insurance, it could adversely affect WGL’s financial condition and results of operations.
As an indirect, wholly owned subsidiary of AltaGas, WGL is dependent on AltaGas for certain services under a services agreement. Loss of such services, if any, could have a material impact on WGL’s business, financial condition, results of operations and cash flows.
WGL receives general corporate services from AltaGas under a service agreement approved by SCC of VA. Under the agreement, WGL relies on AltaGas for certain administrative and management functions and services, including human resources, employee benefits, finance, legal, accounting, tax, information technology, and office services. Should AltaGas not be able to provide such services to WGL for any reason, WGL will need to utilize its own resources for such services or otherwise find a substitute provider for such services. WGL, however, may not have sufficient internal resources to effectively provide such services or may not be able to contract with a substitute service provider on similar terms or at all.  Moreover, the costs of obtaining a substitute service provider, if found, may also be substantial and overly burdensome for WGL. WGL may also experience an interruption in the provision of such services to it.  In addition, in light of AltaGas' familiarity with WGL, a substitute service provider, if any, may not be able to provide the same level of service due to lack of preexisting synergies. If WGL cannot support necessary services from its internal resources or otherwise locate providers that are able to provide it with substantially similar services, WGL’s business, financial condition, results of operations and cash flows could be adversely affected.
Our ability to meet our customers’ requirements may be impaired if contracted supply is not available, if supplies are not delivered in a timely manner, if we lose key suppliers or if we are not able to obtain additional supplies during significant spikes in demand.
Washington Gas must acquire adequate natural gas supply and pipeline and storage capacity to meet current and future customers’ annual and seasonal natural gas requirements. Similarly, WGL Energy Services requires adequate natural gas and

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


electric supplies to serve the demands of its customers and WGL Midstream requires adequate natural gas supply and storage and pipeline capacity to meet its delivery obligations to its customers. We depend on the ability of natural gas producers, pipeline gatherers, natural gas processors, interstate pipelines, suppliers of electricity and regional electric transmission operators to meet these requirements. If we are unable to secure adequate supplies in a timely manner because of a failure of our suppliers to deliver the contracted commodity, capacity or storage, if we are unable to secure additional quantities during significant abnormal weather conditions, or if Washington Gas' or WGL Energy Services' interruptible customers fail to comply with requests to curtail their gas usage during periods of sustained cold weather, we may be unable to meet our customers’ requirements. Such inability could result in defaults under contracts with customers, penalties and financial damage payments, costs relating to procedures to recover from a disruption of service, the loss of key licenses and operating authorities, and the loss of customers, which could have a material adverse effect on our financial results.
Natural disasters and catastrophic events, including terrorist acts, may adversely affect our business.
Natural disasters and catastrophic events such as fires, earthquakes, explosions, floods, tornados, terrorist acts, and other similar occurrences, could damage our operational assets, including utility facilities, information technology infrastructure, distributed generation assets and pipeline assets owned by investees of our non-utility subsidiaries. Such events could likewise damage the operational assets of our suppliers or customers. These events could disrupt our ability to meet customer requirements, significantly increase our response costs, and significantly decrease our revenues. Unanticipated events or a combination of events, failure in resources needed to respond to events, or a slow or inadequate response to events may have an adverse impact on our operations, financial condition, and results of operations. The availability of insurance covering catastrophic events, sabotage and terrorism may be limited or may result in higher deductibles, higher premiums, and more restrictive policy terms.
We are exposed to counterparty and contract-related risks that could adversely affect our results of operations, cash flows and financial condition.
We extend credit to counterparties, including other utilities, holding companies, banks, gas exploration and production companies, government-backed utilities and other participants in the energy industry. Although we believe we have prudent policies in place to manage our credit risk, including credit policies, netting arrangements and margining provisions incorporated in contractual agreements, we may not be able to collect amounts owed to us, which could adversely affect our liquidity and results of operations.
In addition, we enter into agreements with counterparties relating to the sale, purchase and delivery of commodity, transportation capacity, energy system design and construction, investment terms, and other matters.  Our decisions to enter into these agreements are based on our expectations about the ongoing viability of our counterparties, assumptions and expectations underlying pricing terms and conditions, and commercial terms and other matters.  These expectations may prove to be incorrect or our counterparties may dispute key terms of our agreements in ways that we do not anticipate.  Such developments could result in our incurring losses or otherwise not achieving anticipated financial returns, which could have a material adverse effect on our results of operations.  We are currently involved in legal proceedings with Antero Resources (Antero) relating to a dispute over the gas being delivered under natural gas purchase contracts.  To date, WGL Midstream has incurred losses associated with this dispute of approximately $29.6 million.  Separately, Antero has initiated suit against Washington Gas and WGL Midstream, claiming that they have failed to purchase specified daily quantities of gas and seeking alleged cover damages exceeding $100 million as of April 4, 2018, according to Antero's complaint. Washington Gas and WGL Midstream oppose both the validity and amount of Antero’s claim. If we are not successful in these proceedings, our results of operations would be negatively affected.
Our risk management strategies and related hedging activities may not be effective in managing risks and may cause increased volatility in our earnings and, in our utility segment, may result in costs and losses for which rate recovery may be disallowed.
We are exposed to commodity price, weather and interest rate risks. In addition, WGL Energy Services is exposed to pricing of certain ancillary services provided by the power pool in which it operates.
For gas purchases to serve utility customers, Washington Gas attempts to manage its exposure to these risks, in part, through regulatory recovery mechanisms. Our other subsidiaries primarily seek to manage risks by matching natural gas and electricity purchase obligations with sales commitments in terms of volume and pricing. In addition, we attempt to mitigate risks by hedging, setting risk limits and employing other risk management tools and procedures. These risk management activities may not be effective and cannot eliminate these risks in their entirety. If these tools and procedures are ineffective, we could incur significant losses, which could have a material adverse effect on our financial results and liquidity. In addition, although Washington Gas generally anticipates rate recovery of its costs or losses incurred in connection with these risk management

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


activities, a regulator could subsequently disallow these costs or losses from the determination of revenues, which could adversely affect our financial results and increase the volatility of our earnings.
Rules implementing the derivatives transaction provisions of the Dodd-Frank Act could have an adverse impact on our ability to hedge risks associated with our business.
The Dodd-Frank Act regulates derivatives transactions, which include certain instruments, such as interest rate swaps, and commodity options, financial and other contracts, used in our risk management activities. The Dodd-Frank Act requires that most swaps be cleared through a registered clearing facility and that they be traded on a designated exchange or swap execution facility, with certain exceptions for entities that use swaps to hedge or mitigate commercial risk. The Dodd-Frank requirements relating to derivative transactions have not been fully implemented by the SEC and the Commodity Futures Trading Commission. When fully implemented, the law and any new regulations could increase the operational and transactional cost of derivatives contracts and affect the number and/or creditworthiness of available counterparties.
In addition, we may transact with counterparties based in the European Union, Canada or other jurisdictions which, like the U.S., are in the process of implementing regulations to regulate derivatives transactions, some of which are currently in effect and may impose costs on our derivatives activities.
Our business, earnings and cash requirements are highly weather sensitive and seasonal.
The earnings of Washington Gas can vary from year to year depending, in part, on weather conditions. Warmer-than-normal weather can reduce our utility margins as customer consumption declines. In Maryland and Virginia, we have in place regulatory mechanisms and rate designs intended to stabilize the level of net revenues that we collect from customers by eliminating the effect of deviations in customer usage caused by variations in weather from normal levels, and other factors such as conservation. If our rates and tariffs are modified to eliminate these provisions, then we would be exposed to significant risk associated with weather.
The operations of WGL Energy Services, our retail energy-marketing subsidiary, are weather sensitive and seasonal, with a significant portion of revenues derived from the sale of natural gas to retail customers for space heating during the winter months, and from the sale of electricity to retail customers for cooling during the summer months. Weather conditions directly influence the volume of natural gas and electricity delivered to customers. Weather conditions can also affect the short-term pricing of energy supplies that WGL Energy Services may need to procure to meet the needs of its customers. Similarly, the business of WGL Midstream is seasonal due to the tendency of storage and transportation spreads to increase during the winter. In addition, the distributed generation operations of WGL Energy Systems, which derive significant revenues from the sale of electricity to customers from solar generating assets, are weather sensitive because weather conditions directly influence the generation of electricity that is delivered to customers.
Deviations from normal weather conditions and the seasonal nature of these businesses can create large fluctuations in these subsidiaries’ short-term cash requirements and earnings.
Washington Gas and WGL Midstream may face regulatory and financial risks related to pipeline safety legislation.
A number of proposals to require increased oversight over pipeline operations and increased investment in and inspections of pipeline facilities are pending or have previously been proposed in the United States Congress. Additional operating expenses and capital expenditures may be necessary to remain in compliance with the increased federal oversight resulting from such proposals. While we cannot predict with certainty the extent of these expenses and expenditures or when they will become effective, the adoption of such proposals could result in significant additional costs to Washington Gas’ and WGL Midstream’s businesses. Washington Gas may be unable to recover from customers through the regulatory process all or some of these costs and may be unable to earn its authorized rate of return on these costs.
Failure of our service providers could negatively impact our business, results of operations and financial condition.
Certain of our information technology, customer service, supply chain, pipeline and infrastructure installation and maintenance, engineering, payroll and human resources functions that we rely on are provided by third-party vendors. Some of these services may be provided by vendors from centers located outside of the United States. Services provided pursuant to these agreements could be disrupted due to events and circumstances beyond our control. Our reliance on these service providers could have an adverse effect on our business, results of operations and financial condition.
The Tax Act could adversely affect WGL.
On December 22, 2017, President Trump signed into law the Tax Act, which significantly reforms the Internal Revenue Code of 1986, as amended. While WGL has made an initial assessment of the impacts of the Tax Act on it and its subsidiaries, it

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


remains unknown at this time how the Treasury Department may interpret certain provisions of the Tax Act. These interpretations could have a negative impact on the results of operations, cash flows and financial condition of WGL and its subsidiaries.
The Tax Act may impact WGL’s ability to use its net operating loss carryforwards.
The Tax Act includes a limitation on the utilization of net operating losses beginning October 1, 2018 to 80% of current year taxable income and eliminates any NOL carrybacks. Such net operating losses have an unlimited carryforward. These provisions may affect the timing of the utilization of net operating loss carryforwards and investment tax credit carryforwards.

RISKS RELATING TO WASHINGTON GAS
Changes in the regulatory environment or unfavorable rate regulation may restrict or delay Washington Gas’ ability to earn a reasonable rate of return on its capital invested to provide utility service and to recover fully its operating costs.
Washington Gas is regulated by several regulatory commissions and agencies. These regulatory commissions generally have authority over many of the activities of Washington Gas’ business including, but not limited to, the rates it charges to its customers, the amount and type of securities it can issue, the nature of investments it can make, the nature and quality of services it provides, safety standards, collection practices and other matters. These regulators also may modify Washington Gas’ rates to change the level, type and methods that it utilizes to recover its costs, including the costs to acquire, store, transport and deliver natural gas. In addition, the regulatory environment and rate regulation can be affected by new laws and political considerations. Most significantly, we incur both planned and unplanned costs to operate, improve, maintain and repair our operational assets. The amount of these costs may vary from our expectations due to significant unanticipated repairs, maintenance and remediation of our assets, changes in legal and regulatory requirements, natural disasters, terrorism, changes in interest rates of our indebtedness and other events. To the extent these costs are not included in approved rates or tariffs, we seek our recovery through rate cases; however, the regulatory process may be lengthy and costs may be disallowed, causing us to suffer the negative financial effects of costs incurred without the benefit of rate relief. Additionally, the actions of regulatory commissions may restrict or delay Washington Gas’ ability to earn a reasonable rate of return on invested capital.
Washington Gas must acquire additional capacity to deliver natural gas into growth areas and it may not be able to do so in a timely manner.
Washington Gas must acquire additional interstate pipeline transportation or storage capacity and construct transmission and distribution pipe to deliver additional capacity into growth areas on our system. The specific timing of any larger customer additions to our market may not be forecasted with sufficiently long lead time and the availability of these supply options to serve any of our customer additions may be limited by market supply and demand, the timing of Washington Gas’ participation in new interstate pipeline construction projects, local permitting requirements and the ability to acquire necessary rights of way. These limitations could result in an interruption in Washington Gas’ ability to satisfy the needs of some of its customers.
Leaks, mechanical problems, incidents or other operational issues could affect public safety and the reliability of Washington Gas’ distribution system, which could materially affect Washington Gas’ results of operations, financial condition and cash flows.
Washington Gas’ business is exposed to operational issues, hazards and risks inherent in storing and transporting natural gas that could affect the public safety and reliability of its distribution system. While Washington Gas, with support from each of its regulatory commissions, is accelerating the replacement of aging pipeline infrastructure prioritized on a risk-based approach, there are potential operating issues. These issues such as leaks, equipment problems and incidents, including explosions and fire, could result in legal liability, repair and remediation costs, increased operating costs, significant increased capital expenditures, regulatory fines and penalties and other costs and a loss of customer confidence. Any liabilities resulting from the occurrence of these events may not be fully covered by insurance, and Washington Gas may be unable to recover from customers through the regulatory process all of these repair, remediation and other costs and earn its authorized rate of return on these costs.
Washington Gas has implemented preventive and remedial measures to address increased leak rates in its distribution system caused by an increase in the volume of natural gas containing low concentration of HHCs received from its suppliers.  These measures include the injection of hexane to increase the concentration of HHCs and the implementation of pipe replacement programs.  If Washington Gas were unable to inject hexane into its natural gas supply due to limited availability of hexane, equipment or operational problems, or damage to our facilities at which hexane is injected, our leak rates could increase, which

24


WGL Holdings, Inc.
Washington Gas Light Company
Part I
Item 1A. Risk Factors (continued)


would exacerbate the risks discussed above.  In addition, Washington Gas’ ability to continue to recover the cost of these preventive and remedial measures and to earn its authorized rate of return on these costs is subject to the regulatory process.
Current and future environmental regulations may adversely affect Washington Gas’ operations and financial results.
Washington Gas is subject to federal, state and local laws and regulations related to environmental matters. These evolving laws and regulations may require expenditures over a long timeframe. Failure to comply with these laws and regulations may expose Washington Gas to fines, penalties and operational interruptions that could adversely affect its financial results. Moreover, new environmental requirements, revisions and reinterpretations of existing environmental requirements and changes in environmental enforcement policies and practices may stretch Washington Gas’ operational resources and adversely affect its financial results.
In the past, the United States Congress has considered legislative proposals to limit greenhouse gas (GHG) emissions. Future proposals to limit GHG emissions could adversely affect our operating and service costs and demand for our product. Should future proposals become law, operating and service costs may increase and demand for our product could decrease, and utility costs and prices charged to utility customers may increase, which would adversely affect our financial results.
Changes in the relative prices of alternative forms of energy may weaken the competitive position of Washington Gas’ delivery service, which could reduce growth in natural gas customers, reduce the volume of natural gas delivered and negatively affect Washington Gas’ cash flows and earnings.
The price of natural gas delivery service that Washington Gas provides competes with the price of other forms of energy such as electricity, oil and propane. An increase in the price of natural gas compared to other sources of energy may cause the competitive position of our natural gas delivery service to decline. A decline in the competitive position of natural gas service may lead to fewer natural gas customers, lower volumes of natural gas delivered, lower cash flows and lower earnings.
A decline in the local economy in which Washington Gas operates may reduce net revenue growth and reduce future earnings and cash flows.
Approximately 71% of our assets are attributable to our regulated utility businesses, and the dividends paid by Washington Gas to WGL constituted approximately 84% of the amount of WGL Holdings' dividends paid for fiscal year 2018. Further, substantially all of our natural gas utility customers are located in Virginia, Maryland and the District of Columbia. A decline in the economy of the region in which Washington Gas operates or a change in the usage patterns and financial condition of customers in the region might adversely affect Washington Gas’ ability to grow its customer base and collect revenues from existing customers, which may negatively affect net revenue growth and increase costs.
Washington Gas’ business and financial condition could be adversely impacted by strikes or work stoppages by its unionized employees.
Washington Gas’ business is dependent upon employees who are represented by unions and are covered by collective bargaining agreements. Disputes with the unions could result in work stoppages that could impact the delivery of natural gas and other services, which could affect our relationships with customers, vendors and regulators and adversely affect Washington Gas’ business and financial condition.
The availability of adequate interstate pipeline transportation capacity and natural gas supply may decrease.
We purchase almost all of our natural gas supply from interstate sources that must then be transported to our service territory. In particular, while the Marcellus Shale region is rapidly developing as a premier gas formation, the interstate pipeline transportation capacity may limit the availability of gas from the Marcellus Shale region in the near term. A significant disruption to or reduction in interstate pipeline capacity due to events such as operational failures or disruptions, hurricanes, tornadoes, floods, freeze off of natural gas wells, terrorist or cyber-attacks or other acts of war, or legislative or regulatory actions or requirements, including remediation related to integrity inspections, could reduce our normal interstate supply of gas, which may affect our ability to serve customer demand and may reduce our earnings.
The cost of providing retirement plan benefits to eligible current and former employees is subject to changes in the performance of investments, demographics, and other factors and assumptions. These changes may have a material adverse effect on us.
The cost of providing retirement plan benefits to eligible current and former employees is subject to changes in the market value of our retirement plan assets, changing bond yields, changing demographics and changing assumptions. Any sustained declines in equity markets, reductions in bond yields, increases in health care cost trends, or increases in life expectancy of beneficiaries may have an adverse effect on our retirement plan liabilities assets and benefit costs. Additionally, we may be

25


WGL Holdings, Inc.
Washington Gas Light Company
Part I
Item 1A. Risk Factors (continued)


required to increase our contributions in future periods in order to preserve the current level of benefits under the plans and/or due to federal funding requirements.
RISKS RELATING TO THE NON-UTILITY SUBSIDIARIES OF WGL
The construction of WGL Midstream’s pipeline assets have experienced and may continue to experience legislative and regulatory obstacles, and the construction and operation of these assets are subject to hazards, equipment failures, supply chain disruptions, personnel issues and related risks, which could result in decreased values of these investments, including impairments, and/or delays their in-service dates, which would negatively affect our results of operations.
WGL Midstream’s business plan involves making substantial investments in pipeline construction projects, which are subject to FERC and state agency regulation and approval. These construction projects are also subject to environmental, political and legal uncertainties that are beyond our control. These factors may reduce some opportunities to grow our midstream business or impair our existing investments.
In addition, the construction and operation of WGL Midstream’s pipeline assets are subject to risks relating to breakdowns or failures of equipment or processes due to pipeline integrity, fuel supply or transportation disruptions, accidents, labor disputes or work stoppages, construction delays or cost overruns, and shortages of or delays in obtaining equipment, material and labor. Because these assets are interconnected with facilities of third parties, the operation of these facilities could also be adversely affected by unexpected or uncontrollable events occurring on the systems of such third parties. These events could further delay the in-service date of WGL Midstream’s projects or disrupt operations on these projects, which could have an adverse effect on its financial results.
Returns on our non-utility subsidiaries’ investments in renewable energy projects are dependent upon regulatory and tax incentives, which may expire or be reduced or modified.
WGL Energy Systems derives a significant portion of its revenues from the sale of solar renewable energy credits (RECs), which are produced as a result of owning and operating commercial distributed energy systems. The value of these RECs is determined by markets in the states where the distributed energy systems are installed, which are driven by state laws relating to renewable portfolio standards or alternative compliance payment requirements for renewable energy. Overbuilding of distributed energy systems in these states or legislative changes reducing renewable portfolio standards or alternative compliance payment requirements could negatively impact the price of RECs that we sell and the value of the RECs that we hold in our portfolio.
In addition, WGL Energy Systems and WGSW’s investment strategy of participating with counterparties in energy-related investments, or to directly own and operate energy assets and sell energy to customers, has historically allowed us to benefit from incentives in the federal tax code. WGL’s ability to continue to benefit from these investments is based on certain assumptions about the level of our income taxes and our ability to utilize tax incentives to reduce our tax burden. Our ability to continue participating in these investments with counterparties depends in part on the effect of the Tax Act on the market demand for such investments.
WGL may be impacted by changes in federal income tax policy.
WGL is impacted by the United States federal income tax policy, including corporate income tax laws. The Tax Cuts and Jobs Act enacted comprehensive tax reform, including significant changes to the United States corporate income tax laws. Some provisions of the Tax Cuts and Jobs Act require interpretive guidance. As a result, management is currently unable to predict whether these reforms will have a cumulative positive or negative impact on corporations, including WGL. These changes in the United States federal income tax laws could have an adverse effect on cash flow, financial condition, and liquidity.
WGL Energy Systems’ inability to find counterparties for tax equity partnerships could negatively impact its results.
WGL Energy Systems has derived a significant portion of its revenues from alternative energy investments, including investments in tax equity partnerships. The Tax Act reduces the corporate tax rate from 35% to 21%. WGL anticipates that this reduction in the corporate tax rate may have a negative impact on its ability to continue to engage counterparties in these transactions as such counterparties’ appetite for the tax benefits of such partnerships will decrease with the lower overall corporate tax rate. In addition, a base erosion anti-abuse tax, enacted as part of the Tax Act, may decrease the appetite for tax credits by counterparties who engage in business with foreign affiliates. Should WGL be unable to find sufficient or suitable counterparties for these partnerships going forward for any reason, including due to the enactment of the Tax Act, thus limiting its ability to enter into these transactions, WGL’s results of operations, cash flows and financial condition may be negatively impacted.

26


WGL Holdings, Inc.
Washington Gas Light Company
Part I
Item 1A. Risk Factors (continued)


Legislative and regulatory developments and other uncertainties, delays or cost overruns may negatively affect WGL Energy Services or our other non-utility subsidiaries.
Legislation or changes in the regulations that govern the conduct of competitive energy marketers could reduce customer growth opportunities for WGL Energy Services and could reduce the profit opportunities associated with existing customers. In addition, our non-utility subsidiaries hold investments in natural gas related businesses that are subject to laws and regulations that could adversely affect their performance.
Competition may negatively affect our non-utility subsidiaries.
We face strong competition in our non-utility segments. WGL Energy Services competes with other non-regulated retail suppliers of natural gas and electricity, as well as with the commodity rate offerings of electric and gas utilities. Increases in competition, including utility commodity rate offers that are below prevailing market rates, may result in a loss of sales volumes or a reduction in growth opportunities. WGL Midstream competes with other midstream infrastructure and energy services companies, wholesale energy suppliers and other non-utility affiliates of regulated utilities to acquire natural gas storage and transportation assets. WGL Energy Systems faces many competitors in the commercial energy systems segment, including, for government customers, companies that contract with customers under ESPC and other utilities providing services under UESCs and, in the renewable energy and distributed generation market, other developers, tax equity investors, distributed generation asset owner firms and lending institutions. These competitors may have diversified energy platforms with multiple marketing approaches, broader geographic coverage, greater access to credit and other financial resources, or lower cost structures, and may make strategic acquisitions or establish alliances among themselves. There can be no assurances that we can compete successfully, and our failure to do so could have an adverse impact on our results of operations and cash flow.
WGL subsidiaries invest in non-controlling interests in investments and may have limited ability to manage risks associated with these investments.
We own, and may acquire additional, non-controlling interests in investments. We may not have the right or power to direct the management of these investments, and other investors may take action that is contrary to our interests. In addition, other participants may become bankrupt or have other economic or business objectives that could negatively impact the value and performance of our investments.
Reductions or delays in federal government budget appropriations may negatively impact WGL Energy Systems’ earnings.
The Energy Efficiency and Energy Management operations of WGL Energy Systems are sensitive to federal government agencies’ receipt of funding in a timely manner. A portion of WGL Energy Systems revenues is derived from implementing projects related to energy efficiency and energy conservation measures for federal government agencies in the Washington D.C. metropolitan area. A reduction or delay in funding for these federal agencies directly impacts completion of ongoing projects and may harm WGL Energy Systems’ ability to obtain new contracts, which may negatively impact earnings.

27

WGL Holdings, Inc.
Washington Gas Light Company
Part I



ITEM 1B. UNRESOLVED STAFF COMMENTS
 
None.
ITEM 2. PROPERTIES
 
At September 30, 2018, Washington Gas provided services in various areas of the District of Columbia, Maryland and Virginia, and held certificates of convenience and necessity, licenses and permits necessary to maintain and operate its properties and businesses.
At September 30, 2018, Washington Gas had approximately 576 miles of transmission mains, 13,188 miles of distribution mains and 12,449 miles of distribution services.
Washington Gas owns approximately 20 acres of land and two buildings (completed in 2012) at 6801 and 6803 Industrial Road in Springfield, Virginia. The Springfield site houses both operating and certain administrative functions of the utility. Washington Gas also holds title to land and buildings used as substations for its utility operations. Washington Gas holds title to land and buildings used for utility operational functions, such as gate stations or substations throughout its service territory in the District of Columbia, Maryland and Virginia.
Washington Gas also has peak shaving facilities in Springfield, Virginia (Ravensworth Plant) and Rockville, Maryland (Rockville Plant). At September 30, 2018, Hampshire owns full and partial interests in, and operates, underground natural gas storage facilities in Hampshire County, West Virginia. Hampshire owns certain exploration and development rights in West Virginia principally in the Oriskany Sandstone, the Marcellus Shale and other shale formations. These rights are predominately owned by lease and they are applicable to approximately 26,000 gross acres for the storage facilities. Hampshire also operates a compressor station utilized to increase line pressure for injection of gas into storage.  
In addition, WGL Energy Systems owns 252 megawatts of installed solar capacity across the United States at September 30, 2018.
Facilities utilized by our corporate headquarters, as well as by the retail energy-marketing and commercial energy systems segments, are located in the Washington, D.C. and Baltimore metropolitan area and are leased.
The Mortgage of Washington Gas dated January 1, 1933 (Mortgage), as supplemented and amended, securing any First Mortgage Bonds (FMBs) it issues, constitutes a direct lien on substantially all property and franchises owned by Washington Gas other than a small amount of property that is expressly excluded. At September 30, 2018 and 2017, there was no debt outstanding under the Mortgage.
ITEM 3. LEGAL PROCEEDINGS
 
The nature of our business ordinarily results in periodic regulatory proceedings before various state and federal authorities. For information regarding pending federal and state regulatory matters, see Note 12-Commitments and Contingencies of the Notes to Consolidated Financial Statements.
Silver Spring, Maryland Incident
Washington Gas has continually worked with the NTSB to support its investigation of the August 10, 2016 explosion and fire at an apartment complex on Arliss Street in Silver Spring, Maryland, the cause of which has not been determined.  Additional information will be made available by the NTSB at the appropriate time.  On November 2, 2016, two civil actions were filed in the District of Columbia Superior Court against WGL and Washington Gas (as well as a property management company that is not affiliated with WGL or Washington Gas), by residents of the apartment complex.  In one lawsuit, twenty-nine plaintiffs sought unspecified damages for, among others, wrongful death and personal injury. The other action was a class action suit seeking total damages stated to be less than $5 million for, among others, property damage and various counts relating to the loss of the use of the premises. Both actions alleged causes of action for negligence, product liability, and declaratory relief. These cases were dismissed on November 16, 2017. Thirty-five civil actions have been filed in the Circuit Court for Montgomery County, Maryland seeking unspecified damages for personal injury and property damage.  We maintain excess liability insurance coverage from highly-rated insurers, subject to a nominal self-insured retention. We believe that this

28

WGL Holdings, Inc.
Washington Gas Light Company
Part I



coverage will be sufficient to cover any significant liability to it that may result from this incident. Management is unable to determine a range of potential losses that are reasonably possible of occurring and therefore we have not recorded a reserve associated with this incident.  Washington Gas was invited by the NTSB to be a party to the investigation and in that capacity, has continued to work closely with the NTSB to help determine the cause of this incident. Information about our obligations as a signed party to the investigation can be found in the form of the Certificate of Party Representation, which is available on the investigations page of the NTSB website https://www.ntsb.gov/legal/Documents/NTSB_Investigation_Party_Form.pdf, and 49 CFR 831.13. On August 14, 2017, the NTSB opened the public docket related to its ongoing investigation.
ITEM 4. MINE SAFETY DISCLOSURES
 
Not Applicable.

29

WGL Holdings, Inc.
Washington Gas Light Company
Part I



EXECUTIVE OFFICERS OF THE REGISTRANTS
 
The names, ages and positions of the executive officers of each of the registrants at October 31, 2018, are listed below along with their business experience during at least the past five years. The age of each officer listed is as of the date of filing of this report. There is no family relationship among the officers.
Unless otherwise indicated, all officers have served continuously since the dates indicated, and all positions are executive officers listed with Washington Gas Light Company.
Executive Officers
Name, Age and Position with the registrants
 
Date Elected or Appointed
 
Adrian P. Chapman, Age 61(1)
 
 
President and Chief Executive Officer
 
July 6, 2018
President and Chief Operating Officer
 
October 1, 2009
 
 
 
Vincent L. Ammann, Jr., Age 59(1)
 
 
Executive Vice President and Chief Financial Officer
 
July 6, 2018
Senior Vice President and Chief Financial Officer
 
October 1, 2013
Vice President and Chief Financial Officer
 
September 30, 2006
 
 
 
Douglas I. Bonawitz, Age 56(1)
 
 
Vice President and Treasurer
 
July 5, 2017
Assistant Treasurer
 
October 1, 2016
 
 
 
William R. Ford, Age 63(1)
 
 
Vice President and Chief Accounting Officer
 
October 1, 2013
Controller
 
October 1, 2010
 
 
 
Marcellous P. Frye, Jr., Age 50(2)
 
 
Vice President—Business Services and Public Policy
 
March 21, 2008
 
 
 
Luanne S. Gutermuth, Age 56(1)
 
 
Executive Vice President and Chief Administrative Officer
 
July 6, 2018
Senior Vice President—Shared Services and Chief Human Resource Officer
 
October 1, 2014
Vice President—Human Resources and Organization Development
 
October 1, 2010
 
 
 
Karen M. Hardwick, Age 55(1)(3)
 
 
Senior Vice President and General Counsel
 
October 15, 2018
 
 
 
Mark A. Lowe, Age 55(2)
 
 
Vice President—Gas Supply and Engineering
 
October 1, 2014
Division Head—Gas Supply
 
March 10, 2008
 
 
 
Richard H. Moore, Age 50(1)
 
 
Vice President—Corporate Development Officer
 
October 1, 2015
Division Head and Chief Operating Officer, Washington Gas Energy Services
 
May 25, 2014

30

WGL Holdings, Inc.
Washington Gas Light Company
Part I



Division Head—Strategy and Business Development
 
November 30, 2009
 
 
 
Anthony M. Nee, Age 62(4)
 
 
Vice President, Strategy, Business Development and Non-Utility Operations
 
July 5, 2017
Vice President and Treasurer
 
October 1, 2013
Treasurer
 
February 14, 2009
 
 
 
John O'Brien, Age 58(1)(5)
 
 
Executive Vice President, Strategy & Public Affairs
 
July 6, 2018
 
 
 
Dorothy Ramsey, Age 63(1)
 
 
Vice President—Human Resources
 
October 15, 2018
Assistant Vice President and Chief Talent Officer
 
September 29, 2016
Director Organization Effectiveness
 
March 13, 2006
 
 
 
Douglas A. Staebler, Age 58(2)
 
 
Senior Vice President—Utility Operations
 
October 1, 2014
Vice President—Operations, Engineering, Construction and Safety
 
October 31, 2006
 
 
 
Leslie T. Thornton, Age 60(1)
 
 
Senior Vice President—General Counsel and Merger Transition Counsel
 
October 15, 2018
Senior Vice President—General Counsel and Corporate Secretary
 
October 1, 2014
Vice President and General Counsel
 
January 1, 2012
Counsel to the Chairman
 
November 28, 2011
 
 
 
Tracy L. Townsend, Age 52(2)
 
 
Vice President—Construction, Compliance and Safety
 
October 1, 2014
Division Head—Safety, Compliance, Construction Operations Support and Technology
 
October 1, 2010
 
 
 
(1) At October 31, 2018, Executive Officer of both WGL Holdings, Inc. and Washington Gas Light Company.

(2) At October 31, 2018, Executive Officer of only Washington Gas Light Company.
(3) Prior to her appointment as General Counsel of WGL Holdings, Inc. and Washington Gas Light Company, Ms. Hardwick served as General Counsel for the University of the District of Columbia from March 2016 to October 2018. Prior to that position, Ms. Hardwick served as General Counsel/City Attorney to Annapolis, Maryland from December 2009 to December 2013.
(4) At October 31, 2018, Executive Officer of only WGL Holdings, Inc.
(5) Mr. O'Brien has had various roles within the AltaGas organization since joining in 2015, most recently as President and Chief Operating Officer of ASUS. He is currently also Executive Vice President, Government and Regulatory for ASUS and AUHUS, both of which are subsidiaries of AltaGas. Prior to this appointment, Mr. O'Brien was the President and Chief Operating Officer of AltaGas Services (U.S.) Inc. from April 2016 to July 2018, overseeing its operational and business development activities. Prior to AltaGas, Mr. O'Brien held management positions in Government Relations and Regulatory Affairs within the energy industry, including most recently in the position of Executive Vice President, Public Policy and External Affairs with Energy Future Holdings (Energy Future Holdings filed for bankruptcy in 2014).

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
 
On July 6, 2018, we consummated the Merger with AltaGas. The Merger Agreement provided for the Merger of the Merger Sub, a newly formed indirect wholly owned subsidiary of AltaGas with and into WGL, whereby WGL became an indirect wholly owned subsidiary of AltaGas. Upon consummation of the Merger, all then outstanding shares of WGL common stock were converted into the right to receive the merger consideration of $88.25 per share. Each share of the Merger Sub's issued and outstanding common stock at the time of the consummation of the Merger was converted into one share of no par value

31

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


WGL common stock for a total of 100 WGL post-Merger shares owned by Wrangler 1 LLC, an indirect wholly owned subsidiary of AltaGas (Wrangler 1). As a result of the Merger, WGL's common stock was delisted from the New York Stock Exchange, and there is no longer a market for WGL’s common stock.
In connection with the Merger, WGL established Wrangler SPE LLC (SPE), the special purpose bankruptcy remote entity formed for the purposes of owning the common stock of Washington Gas and providing ring-fencing protections to Washington Gas in the event of a bankruptcy of the larger AltaGas organization. The SPE is a wholly owned subsidiary of WGL. Following the consummation of the Merger, all of Washington Gas’ outstanding shares of common stock previously held by WGL were transferred to the SPE. The Merger had no effect on the Washington Gas preferred stock, which continues to be outstanding.    








32

WGL Holdings, Inc.
Washington Gas Light Company
Part II
Item 6. Selected Financial Data

ITEM 6. SELECTED FINANCIAL DATA-WGL Holdings, Inc.
 
The following table presents selected financial data for WGL derived from our financial statements as of and for the last five fiscal years. The information should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the audited Consolidated Financial Statements and the Notes to the Consolidated Financial Statements.
(In thousands)
  
 
  
 
  
 
  
 
  
 
Years Ended September 30,
2018
 
2017
 
2016
 
2015
 
2014
 
SUMMARY OF EARNINGS
 
 
 
 
 
 
 
 
 
 
Operating Revenues
 
 
 
 
 
 
 
 
 
 
Utility
$
1,229,521

 
$
1,143,337

 
$
1,044,117

 
$
1,303,044

 
$
1,416,951

 
Non-utility
1,112,244

 
1,211,387

 
1,305,442

 
1,356,786

 
1,363,996

 
Total operating revenues
$
2,341,765

 
$
2,354,724

 
$
2,349,559

 
$
2,659,830

 
$
2,780,947

 
Net income applicable to common stock
$
49,343

 
$
192,620

 
$
167,594

 
$
131,259

 
$
105,940

 
CAPITALIZATION-YEAR END
 
 
 
 
 
 
 
 
 
 
WGL Holdings Common shareholders’ equity
$
1,796,478

 
1,502,690

 
$
1,375,561

 
$
1,243,247

 
$
1,246,576

 
Non-controlling interest
7,732

 
6,851

 
409

 

 

 
Washington Gas Light Company preferred stock
28,173

 
28,173

 
28,173

 
28,173

 
28,173

 
Total equity
1,832,383

 
1,537,714

 
1,404,143

 
1,271,420

 
1,274,749

 
Long-term debt, excluding current maturities
1,879,875

 
1,430,861

 
1,435,045

(a) 
937,101

(a) 
675,095

(a) 
Total capitalization
$
3,712,258

 
2,968,575

 
$
2,839,188

(a) 
$
2,208,521

(a) 
$
1,949,844

(a) 
OTHER FINANCIAL DATA
 
 
 
 
 
 
 
 
 
 
Property, plant and equipment-net—year-end
$
4,885,429

 
$
4,630,051

 
$
4,127,237

 
$
3,672,728

 
$
3,314,445

 
Total assets—year-end
$
7,248,087

 
$
6,629,009

 
$
6,049,450

(a) 
$
5,254,259

(a) 
$
4,825,702

(a) 


33

WGL Holdings, Inc.
Washington Gas Light Company
Part II
Item 6. Selected Financial Data

ITEM 6. SELECTED FINANCIAL DATA-Washington Gas Light Company
 
The following table presents selected financial data for Washington Gas derived from the financial statements as of and for the last five fiscal years. The information should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the audited Consolidated Financial Statements and the Notes to the Consolidated Financial Statements.
(In thousands, except per share data)
 
 
 
 
 
 
 
 
 
 
Years Ended September 30,
2018
 
2017
 
2016
 
2015
 
2014
 
SUMMARY OF EARNINGS
 
 
 
 
 
 
 
 
 
 
Operating Revenues
 
 
 
 
 
 
 
 
 
 
Total operating revenues
$
1,248,063

 
$
1,166,968

 
$
1,070,904

 
$
1,328,191

 
$
1,443,800

 
Net income applicable to common stock
$
(27,962
)
 
$
130,472

 
$
111,794

 
$
107,358

 
$
97,004

 
CAPITALIZATION-YEAR END
 
 
 
 
 
 
 
 
 
 
Common shareholder’s equity
$
1,442,764

 
$
1,164,749

 
$
1,113,446

 
$
1,081,292

 
$
1,050,166

 
Preferred stock
28,173

 
28,173

 
28,173

 
28,173

 
28,173

 
Long-term debt, excluding current maturities
1,084,933

 
1,134,461

 
939,015

(a) 
691,330

(a) 
675,095

(a) 
Total capitalization
$
2,555,870

 
$
2,327,383

 
$
2,080,634

(a) 
$
1,800,795

(a) 
$
1,753,434

(a) 
OTHER FINANCIAL DATA
 
 
 
 
 
 
 
 
 
 
Property, plant and equipment-net—year-end
$
4,117,454

 
$
3,887,715

 
$
3,526,732

 
$
3,243,446

 
$
3,022,064

 
Total assets—year-end
$
5,150,082

 
$
4,954,714

 
$
4,609,555

(a) 
$
4,199,577

(a) 
$
3,938,029

(a) 
UTILITY GAS SALES AND DELIVERIES 
(thousands of therms)
 
 
 
 
 
 
 
 
 
 
Gas sold and delivered
 
 
 
 
 
 
 
 
 
 
Residential firm
711,726

 
600,279

 
590,625

 
734,874

 
738,963

 
Commercial and industrial
 
 
 
 
 
 
 
 
 
 
Firm
205,644

 
174,436

 
167,832

 
197,543

 
200,153

 
Interruptible
2,520

 
2,554

 
2,771

 
2,072

 
2,193

 
Total gas sold and delivered
919,890

 
777,269

 
761,228

 
934,489

 
941,309

 
Gas delivered for others
 
 
 
 
 
 
 
 
 
 
Firm
538,266

 
495,031

 
501,030

 
558,125

 
535,503

 
Interruptible
248,151

 
242,545

 
239,013

 
260,264

 
267,705

 
Electric generation
180,626

 
87,611

 
291,252

 
179,061

 
144,403

 
Total gas delivered for others
967,043

 
825,187

 
1,031,295

 
997,450

 
947,611

 
Total utility gas sales and deliveries
1,886,933

 
1,602,456

 
1,792,523

 
1,931,939

 
1,888,920

 
OTHER STATISTICS
 
 
 
 
 
 
 
 
 
 
Active customer meters—year-end
1,177,976

 
1,163,655

 
1,144,160

 
1,129,865

 
1,117,043

 
New customer meters added
12,581

 
12,488

 
12,221

 
12,099

 
13,327

 
Heating degree days—actual
3,759

 
3,127

 
3,341

 
3,929

 
4,111

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

 

34

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

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
INTRODUCTION
This Management’s Discussion and Analysis of Financial Condition and Results of Operations (Management’s Discussion) analyzes the financial condition, results of operations and cash flows of WGL and its subsidiaries. It also includes management’s analysis of past financial results and potential factors that may affect future results, potential future risks and approaches that may be used to manage them. Except where the content clearly indicates otherwise, “WGL,” “we,” “us” or “our” refers to the holding company or the consolidated entity of WGL Holdings, Inc. and all of its subsidiaries.
Management’s Discussion is divided into the following two major sections:
WGL—This section describes the financial condition and results of operations of WGL Holdings, Inc. and its subsidiaries on a consolidated basis. It includes discussions of our regulated operations, including Washington Gas and Hampshire Gas Company (Hampshire), and our non-utility operations.
Washington Gas—This section describes the financial condition and results of operations of Washington Gas, a subsidiary of WGL, which comprises the majority of the regulated utility segment.
Both sections of Management’s Discussion—WGL and Washington Gas—are designed to provide an understanding of our operations and financial performance and should be read in conjunction with the respective company’s financial statements and the combined Notes to Consolidated Financial Statements in this annual report.
EXECUTIVE OVERVIEW
Introduction
WGL, through its subsidiaries, sells and delivers natural gas and provides a variety of energy-related products and services to customers primarily in the District of Columbia and the surrounding metropolitan areas in Maryland and Virginia. In addition to our primary markets, WGL’s non-utility subsidiaries provide customized energy solutions across a much wider footprint, with business activities across the United States.
WGL has four operating segments:
regulated utility;
retail energy-marketing;
commercial energy systems; and
midstream energy services.
Refer to the Business section under Item 1 of this report for further discussion of our regulated utility and non-utility business segments.
On July 6, 2018, WGL became an indirect wholly owned subsidiary of AltaGas. For further information on the merger, see "Safe Harbor and Forward Looking Statements" in the Introduction, Item I, Item 1A. Risk Factors, and Note 20 — Merger with AltaGas Ltd. of the Notes to Consolidated Financial Statements in this Form 10-K.
Regulated Utility Operating Segment
The regulated utility operating segment is composed of our core subsidiary, Washington Gas and Hampshire. Washington Gas engages in the delivery and sale of natural gas that is regulated by regulatory commissions in the District of Columbia, Maryland and Virginia. During fiscal year 2018 compared to the previous year, this segment had reduced earnings due to: (i) higher operation and maintenance expenses primarily related to merger commitment and related expenses, (ii) lower realized margins and unrealized mark-to-market valuations associated with our asset optimization program, and (iii) higher depreciation and amortization expense associated with growth in our utility plant. Partially offsetting these unfavorable variances were: (i) customer growth, (ii) higher revenues attributed to colder weather in the District of Columbia compared to fiscal year 2017, and (iii) new base rates in the District of Columbia and Virginia.

35

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

Retail Energy-Marketing Operating Segment
We offer competitively priced natural gas, electricity and energy from renewable sources to customers through WGL Energy Services, our non-utility retail energy-marketing subsidiary. During fiscal year 2018 compared to the previous year, this segment had reduced earnings as a result of: (i) unrealized commodity margin losses in the current year compared to gains in the prior year, (ii) lower realized electric margins due to lower average unit margins and lower sales volumes, and (iii) higher operating expenses due to increased corporate overhead allocations and customer marketing expenses. Partially offsetting the reduced earnings was higher realized gas margins due to increased portfolio optimization.
Commercial Energy Systems Operating Segment
Through WGL Energy Systems and WGSW, we offer efficient and sustainable commercial energy solutions focused on owning and operating distributed generation assets such as Solar PV systems and upgrading energy related systems of large government and commercial facilities. During fiscal year 2018 compared to the previous fiscal year, this segment had reduced earnings due to: (i) lower solar renewable energy credit sales and rebate income revenues, (ii) higher costs primarily relating to increased corporate overhead allocation expenses, and (iii) increased bad debt expense. The reduced earnings were partially offset by higher earnings from alternative energy investments, including investments in tax equity partnerships.
Midstream Energy Services Operating Segment
WGL Midstream specializes in the investment, management, development and optimization of natural gas storage and transportation midstream infrastructure projects. Lower earnings for fiscal year 2018 compared to the previous year primarily reflect: (i) an impairment related to our investment in Constitution Pipeline Company, LLC (Constitution), and (ii) a decrease related to valuations on our derivative contracts associated with our commodity trading portfolio. Partially offsetting these unfavorable variances was an increase related to realized margins on both our transportation and storage strategies.
Other Activities
Activities and transactions that are not significant enough on a stand-alone basis to warrant treatment as an operating segment, and that do not fit into one of our four operating segments, are aggregated as “Other Activities” and are included as part of non-utility operations. Administrative and business development costs associated with WGL and Washington Gas Resources are also included in “Other Activities.” Higher losses for fiscal year 2018 compared to the previous year primarily relates to investment banking and legal fees due upon the merger closing with AltaGas.
CRITICAL ACCOUNTING POLICIES
Preparation of financial statements and related disclosures in compliance with GAAP requires the selection and the application of appropriate technical accounting guidance to the relevant facts and circumstances of our operations, as well as our use of estimates to compile the consolidated financial statements. The application of these accounting policies involves judgment regarding estimates and projected outcomes of future events, including the likelihood of success of particular regulatory initiatives, the likelihood of realizing estimates for legal and environmental contingencies, and the probability of recovering costs and investments in both the regulated utility and non-regulated business segments.
We have identified the following critical accounting policies discussed below that require our judgment and estimation, where the resulting estimates have a material effect on the consolidated financial statements.
Accounting for Unbilled Revenue
For regulated deliveries of natural gas, Washington Gas reads meters and bills customers on a monthly cycle basis. The billing cycles for customers do not coincide with the accounting periods used for financial reporting purposes. Washington Gas accrues unbilled revenues for gas that has been delivered but not yet billed at the end of an accounting period by jurisdiction and customer class, including the estimated effects of billing adjustment mechanisms. WGL Energy Services also accrues unbilled revenues for both gas and electricity, which is billed on cycles that do not coincide with the accounting periods used for financial reporting purposes.
Accounting for Regulatory Operations—Regulatory Assets and Liabilities
A significant portion of our business is subject to regulation by independent government entities. As the regulated utility industry continues to address competitive market issues, the cost-of-service regulation used to compensate Washington Gas for the cost of its regulated operations will continue to evolve. Non-traditional ratemaking initiatives and market-based pricing of

36

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

products and services could have additional long-term financial implications for us. The carrying cost of Washington Gas’ investment in fixed assets assumes continued regulatory oversight of our operations.
Washington Gas’ jurisdictional tariffs contain mechanisms that provide for the recovery of the cost of gas consumed by firm customers. Under these mechanisms, Washington Gas periodically adjusts its firm customers’ rates to reflect fluctuations in the cost of gas. Annually, Washington Gas reconciles the difference between the gas costs collected from firm customers and the cost of gas incurred, defers any difference and either recovers deficiencies from, or refunds excess recoveries to, customers over a period of time authorized by its regulators.
Washington Gas accounts for its regulated operations in accordance with FASB Accounting Standards Codification (ASC) Topic 980, Regulated Operations (ASC Topic 980), which results in differences in the application of GAAP between regulated and unregulated businesses. ASC Topic 980 requires recording regulatory assets or liabilities for certain transactions that would have been treated as expense or revenue in unregulated businesses. Washington Gas defers the recognition of an incurred cost and records a regulatory asset when it is probable that these costs will be recovered in future rates. Washington Gas defers the recognition of revenue and records a regulatory liability when it is probable that it will refund an amount previously collected from customers or refund a gain to customers. Additionally, Washington Gas records a regulatory liability when a regulator provides current rates intended to recover costs that will be incurred in the future. Future regulatory changes or changes in the competitive environment could result in WGL and Washington Gas discontinuing the application of ASC Topic 980 for some of its business and require the write-off of the portion of any regulatory asset or liability for which recovery or refund is no longer probable. If Washington Gas were required to discontinue the application of ASC Topic 980 for any of its operations, it would record a non-cash charge or credit to income for the net book value of its regulatory assets and liabilities. Other adjustments might also be required.
The current regulatory environment and Washington Gas’ specific facts and circumstances support both the continued application of ASC Topic 980 for our regulatory activities and the conclusion that all of our regulatory assets and liabilities as of September 30, 2018 are recoverable or refundable through rates charged to customers. See Note 2—Regulated Operations of the Notes to Consolidated Financial Statements for further discussion of our regulated operations.
Accounting for Income Taxes
We recognize deferred income tax assets and liabilities for all temporary differences between the financial statement basis and the tax basis of assets and liabilities, including those temporary differences that regulators exclude from current rates for ratemaking purposes of Washington Gas, in accordance with ASC Topic 740, Accounting for Income Taxes.
Regulatory assets or liabilities, corresponding to such additional deferred tax assets or liabilities, may be recorded to the extent recoverable from or payable to customers through the ratemaking process in future periods. These deferred income tax related regulatory assets and liabilities primarily represent differences between the financial statement basis and tax basis of net utility plant in service.
The company is earning investment tax credits on its renewable energy investments. We have elected to record investment tax credits as deferred credits and amortize the balances to income over the life of the related property.
See Note 8—Income Taxes of the Notes to Consolidated Financial Statements for further discussion of income taxes.
Accounting for Contingencies
We account for contingent liabilities utilizing ASC Topic 450, Contingencies. By their nature, the amount of the contingency and the timing of a contingent event and any resulting accounting recognition are subject to our judgment of such events and our estimates of the amounts. Actual results related to contingencies may be difficult to predict and could differ significantly from the estimates included in reported earnings. For a discussion of contingencies, see Note 12—Commitments and Contingencies of the Notes to Consolidated Financial Statements.
Accounting for Derivatives
We enter into both physical and financial contracts for the purchase and sale of natural gas and electricity and apply the fair value requirements of ASC Topic 815, Derivatives and Hedging. The financial contracts and the portion of the physical contracts that qualify as derivative instruments and are subject to the mark-to-market accounting requirements are recorded on the balance sheet at fair value. A portion of our physical contracts entered into for the purpose of serving our customers are designated as “normal purchases and normal sales” and therefore, not subject to the fair value accounting requirements of ASC Topic 815. Certain physical contracts do not qualify as derivative instruments due to the significance of their notional amounts

37

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

relative to the applicable liquid markets. Future changes related to these markets may result in mark-to-market accounting requirements for these contracts.
WGL and Washington Gas also utilize derivative instruments to minimize the risk of interest-rate volatility associated with planned issuances of debt securities. Depending on the applicability of ASC Topic 980 or hedge accounting, the impact of the instruments may be offset on the balance sheet as regulatory assets or liabilities, in other comprehensive income or in earnings.
The gain or loss on a derivative that qualifies as a cash flow hedge of an exposure to variable cash flows of a forecasted transaction is initially recorded in accumulated other comprehensive income (AOCI) to the extent that the hedge is effective and is subsequently reclassified into earnings, in the same category as the item hedged, when the gain or loss from the forecasted transaction occurs. If a derivative that previously qualified for cash flow hedging no longer qualifies because the underlying forecasted transaction is no longer probable of occurring, then the treatment of the fair value must be assessed. If it is reasonably possible that the forecasted transaction will occur, then the fair value changes going forward will be charged to earnings and previous amounts recorded to AOCI will remain until the forecasted transaction is probable of not occurring, in which case, the deferred gain or loss in AOCI is immediately reclassified into earnings. Gains or losses related to any ineffective portion of the cash flow hedges are also recognized in earnings immediately.
Judgment is required in determining the appropriate accounting treatment for our derivative instruments, including our ability to: (i) evaluate contracts and other activities as derivative instruments subject to the accounting guidelines of ASC Topic 815; (ii) determine whether or not our derivative instruments are recoverable from or refundable to customers in future periods and (iii) derive the estimated fair value of our derivative instruments. See Note 13— Derivative and Weather-Related Instruments of the Notes to Consolidated Financial Statements for a discussion of our derivatives.
Accounting for Fair Value Instruments
Fair value is based on actively quoted market prices when they are available. In the absence of actively quoted market prices, we seek indicative price information from external sources, including broker quotes and industry publications. If pricing information from external sources is not available, internal models are used to estimate prices based on available historical and near-term future price information and/or the use of statistical methods. These inputs are used with industry standard valuation methodologies. See Note 14— Fair Value Measurements of the Notes to Consolidated Financial Statements for a discussion of our valuation methodologies.
Accounting for Investments
WGL evaluates its interests in other legal entities for consolidation under the variable interest entity (VIE) model or the voting interest model. A VIE is an entity where the total equity investment at risk is not sufficient to permit the entity to finance its activities without additional subordinated financial support or its equity investors, as a group, lack the characteristics of a controlling financial interest. WGL would consolidate a VIE when it is the primary beneficiary because it has both the power to direct the activities that have the most significant impact on economic performance and it has the obligation to absorb potentially significant losses or the right to receive potentially significant benefits. If an entity is not a VIE, it is evaluated under the voting interest method and would be consolidated if WGL has a controlling financial interest, which is typically evidenced by an ownership of a voting interest greater than 50% allowing for the control over the operations and policies of the investee.
WGL applies the equity method or cost method of accounting to its investments in which it does not have a controlling financial interest. WGL applies the equity method of accounting to its investments when it can exercise a significant influence over an investee. Under the equity method, WGL reports its interest in the entity and its share of the earnings from the entity as single line items in its financial statements, namely Investments in unconsolidated affiliates.
WGL uses the HLBV methodology for certain equity method investments as well as consolidating entities with non-controlling interests when the governing structuring agreement over the equity investment results in different liquidation rights and priorities than what is reflected by the underlying ownership percentage.
WGL uses the cost method of accounting for investments where it does not exercise significant influence. Under the cost method, WGL reports its investment at cost and recognizes income only to the extent it receives dividends or distributions.
Impairment of Long-lived Assets
Management regularly reviews property and equipment and other long-lived assets, including certain definite-lived intangible assets and our equity method investments for possible impairment whenever events or changes in circumstances indicate that the carrying value of such assets may not be recoverable. For our properties and equipment, the indicators of potential

38

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

impairment may include a deteriorating business or legal climate, a significant adverse change in asset condition, specific regulatory disallowance, advances in technology or plans to dispose of an asset significantly before the end of its useful life, among others. Management performs the recoverability test whenever the indicators show a possible impairment.  The carrying amount of recoverability is determined based on an estimate of undiscounted cash flows, and measurement of an impairment loss is determined based on the fair value of the assets. The determination of fair value requires management to make assumptions about future cash inflows and outflows over the life of an asset. Any changes to the assumptions used for the future cash flow could result in revisions to the evaluation of the recoverability of the long-lived assets and the recognition of an impairment loss in the Consolidated Financial Statements.
For our equity method investments, an impairment is recorded when the investment has experienced decline in value that is other-than-temporary. Additionally, if the projects in which we hold an investment recognize an impairment loss, we would record our proportionate share of that impairment loss and evaluate the investment for decline in value that is other-than-temporary. This review occurs quarterly, or more frequently if events or changes in circumstances indicate the carrying amount of the asset may not be recoverable.
Principles of Consolidation and Non-controlling Interests
We consolidate an entity, after the elimination of intercompany transactions, when we have a controlling financial interest based on our evaluation of the entity under the voting interest model, or when we are the primary beneficiary based on our evaluation of the entity under the VIE model as discussed in the 'Accounting for Investments' section above. These evaluations require the use of judgment. The portion of equity interests attributable to other parties is reported as non-controlling interest.
We report the non-controlling interest in the consolidated balance sheet within the equity section, separately from WGL's common shareholders' equity. Non-controlling interest represents the non-controlling interest holder's proportionate share of consolidated total equity not attributable to WGL or its subsidiaries. Non-controlling interest is determined by the contributions from/distributions to the non-controlling interest holder, as adjusted for the non-controlling interest holder's proportionate share of the earnings or losses and other comprehensive income (loss), if any. The non-controlling interest holder continues to be allocated its share of losses even if it results in a deficit non-controlling interest balance.
Accounting for Pension and Other Post-Retirement Benefit Plans
Washington Gas maintains a qualified, trusteed, employee-non-contributory defined benefit pension plan (qualified pension plan) covering most active and vested former employees of Washington Gas and a separate non-qualified defined benefit supplemental retirement plan (DB SERP) covering certain executive officers. The qualified pension plan and DB SERP were closed to new entrants on January 1, 2010. As of January 1, 2010, all new employees were entitled to participate in our defined contribution plans, and certain management employees receive benefits under a non-funded defined benefit restoration plan (DB Restoration). The DB Restoration was established for the purpose of providing supplemental pension and pension related benefits. Washington Gas also provides certain health care and life insurance benefits for retired employees (health and life benefit plan). Washington Gas accrues the estimated benefit obligation for all of our defined benefit plans as earned by the covered employees. The qualified pension plan and health and life benefit plan benefits are paid out of the respective trusts. For the unfunded DB SERP and DB Restoration, Washington Gas pays, from internal funds, the individual benefits as they are due or from funds held in rabbi trusts formed to fully satisfy certain outstanding employee benefit obligations immediately prior to the merger close. The qualified pension plan, DB SERP, DB Restoration and health and life benefit plans are collectively referred to as the “Plans.”
The measurement of the Plans’ obligations and costs is dependent on a variety of factors, such as employee demographics, the level of contributions made to the Plans, earnings on the Plans’ assets and mortality rates. The following assumptions are also critical to this measurement. These assumptions are derived on an annual basis with the assistance of a third-party actuarial firm:
Discount rate,
Expected long-term return on plan assets,
Rate of compensation increase, 
Healthcare cost trend rate and
Projected increases to the Health Reimbursement Account (HRA) plan stipend.

39

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

We determine the discount rate based on a portfolio of high quality fixed-income investments (AA- as assigned by Standard & Poor’s or Aa3 as assigned by Moody’s or better) whose cash flows would cover our expected benefit payments. We determine the expected long-term rate of return by averaging the expected earnings for the target asset portfolio. In developing the expected rate of return assumption, we evaluate an analysis of historical actual performance and long-term return projections, which gives consideration to the asset mix and anticipated length of obligation of the Plans. Historically, the expected long-term return on plan assets has been lower for the health and life benefit plan than for the qualified pension plan due to differences in the allocation of the assets in the plan trusts and the taxable status of one of the trusts. We calculate the rate of compensation increase based on salary expectations, expected inflation levels, union negotiated salary rates and promotional expectations. The healthcare cost trend rate is determined by working with insurance carriers, reviewing historical claims data for the health and life benefit plan, considering plan provisions and analyzing market expectations. Effective January 1, 2015, Medicare eligible retirees and dependents age 65 and older receive an annual subsidy of $3,300 as a benefit from the HRA plan and, therefore, the value of the benefits provided to these participants is not affected by the healthcare cost trend rate. While the HRA plan terms do not guarantee increases to the stipend, Washington Gas intends to review the stipend annually. Washington Gas assumed no increase to the annual subsidy until 2020 when the stipend is expected to increase 3.0% each year in order to approximate possible future increases to the stipend.
The following table illustrates the effect of changing these actuarial assumptions, while holding all other assumptions constant:
Effect of Changing Critical Actuarial Assumptions
(In millions)
 
 
Pension Benefits
  
Health and Life Benefits
Actuarial Assumptions
Percentage-Point
Change in
Assumption
  
Increase
(Decrease) in
Ending
Obligation
  
Increase
(Decrease) in
Annual Cost
  
Increase
(Decrease) in
Ending
Obligation
  
Increase  
(Decrease) in
Annual Cost  
Expected long-term return on plan assets
+/- 1.00 pt.
  
n/a
 
$(7.4) / $7.4
  
n/a
 
$(4.9) / $4.9
Discount rate
+/- 0.25 pt.
  
$(30.0) / $31.6
 
$(2.8) / $3.0
  
$(8.9) / $9.5
 
$(0.0) / $0.0
Rate of compensation increase
+/- 0.25 pt.
  
$5.0 / $(4.8)
 
$1.1 / $(1.1)
  
n/a
 
n/a
Healthcare cost trend rate
+/- 1.00 pt.
  
n/a
 
n/a
  
$5.2 / $(4.6)
 
$0.6 / $(0.5)
Projected increases to the HRA plan stipend
+/- 1.00 pt.
 
n/a
 
n/a
 
$32.2 / $(26.3)
 
$3.6 / $(2.3)
We have historically utilized the Society of Actuaries’ (SOA) published mortality data in developing a best estimate of mortality as part of the calculation of the pension and other post-retirement benefit obligations. On October 27, 2014, the SOA published updated mortality tables for U.S. plans (RP-2014) and an updated improvement scale (MP-2014), which both reflect improved longevity. The MP-2014 improvement scale assumes that short-term rates of mortality improvement will converge to 1.00% per annum up to age 85 trending down to 0% between age 85 and age 115 with the ultimate long-term rate of improvement over a 20-year period from 2007 to 2027. Based upon an evaluation of the information provided by the SOA related to the RP-2014 tables and the MP-2014 improvement scale as well as recent additional studies of mortality improvement, we adopted the RP-2014 tables and adopted a modified improvement scale. We have modified the MP-2014 improvement scale to (a) adjust the ultimate long-term rate of mortality improvement from 1.00% to 0.75% per annum up to age 85 trending down to 0% between age 85 and age 115; and (b) shorten the convergence period from short term to ultimate rates of improvement from the 20-year period to a 15-year period. These mortality assumptions were used to determine the benefit obligations as of September 30, 2018 and 2017. Subsequently, the SOA published updated improvement scales (MP-2015, MP-2016, and MP-2017) which, compared to MP-2014, includes more recent mortality experience data and projects a lower rate of future mortality improvement. These updates are consistent with the adjustments we made to MP-2014 to develop our modified improvement scale.
Differences between actuarial assumptions and actual plan results are deferred and amortized into cost when the accumulated differences exceed ten percent of the greater of the projected benefit obligation or the market-related value of the plan assets. If necessary, the excess is amortized over the average remaining service period of active employees. At September 30, 2018, the discount rate for the pension, DB SERP and DB Restoration plans increased to 4.4%, 4.3% and 4.3%, from 3.9%, 3.6% and 3.6%, respectively, for the comparable period in the prior year. The health and post-retirement plans discount rate also increased

40

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

to 4.4% from 3.9% during the same period. The higher discount rates reflect the change in long-term interest rates primarily due to current market conditions. The change in the discount rates resulted in actuarial gains decreasing our pension and other post-retirement obligations by $66.4 million and $19.5 million, respectively, for the year ended September 30, 2018. Refer to Note 9 —Pension and Other Post-Retirement Benefit Plans of the Notes to Consolidated Financial Statements for a listing of the actuarial assumptions used and for further discussion of the accounting for the Plans.
WGL HOLDINGS, INC.
RESULTS OF OPERATIONS
Our chief operating decision maker utilizes earnings before interest and tax (“EBIT”) as the primary measure of profit and loss in assessing the results of each segment’s operations. EBIT includes operating income, other income (expense), earnings from unconsolidated affiliates and is adjusted by amounts attributable to non-controlling interests. We believe that our use of EBIT enhances the ability to evaluate segment performance because it excludes interest and income tax expense, which are affected by corporate-wide strategies of AltaGas such as capital financing and tax sharing allocations.
EBIT should not be considered an alternative to, or a more meaningful indicator of our operating performance than, net income. Refer to summary results below for a reconciliation of EBIT to net income applicable to common stock.
Summary Results
WGL reported net income (loss) applicable to common stock of $49.3 million, $192.6 million and $167.6 million for the fiscal years ended September 30, 2018, 2017 and 2016, respectively. Fiscal year 2018 results reflect $236.7 million of expenses incurred by the Company in connection with its merger with AltaGas.
The following table summarizes our EBIT by operating segment for fiscal years ended September 30, 2018, 2017 and 2016
Analysis of Consolidated Results
  
Years Ended September 30,
 
Increase (Decrease)
(In millions)
2018
 
2017
 
2016
 
2018
vs. 2017
 
2017
vs. 2016
EBIT:
 
 
 
 
 
 
 
 
 
Regulated utility
$
7.9

 
$
266.3

 
$
228.2

 
$
(258.4
)
 
$
38.1

Retail energy-marketing
31.5

 
53.2

 
65.0

 
(21.7
)
 
(11.8
)
Commercial energy systems
34.9

 
40.8

 
22.0

 
(5.9
)
 
18.8

Midstream energy services
29.4

 
37.7

 
7.8

 
(8.3
)
 
29.9

Other activities
(40.0
)
 
(19.9
)
 
(3.2
)
 
(20.1
)
 
(16.7
)
Intersegment eliminations
(4.4
)
 
1.0

 
(0.5
)
 
(5.4
)
 
1.5

  Total
$
59.3

 
$
379.1

 
$
319.3

 
$
(319.8
)
 
$
59.8

Interest expense
62.1

 
74.0

 
52.3

 
(11.9
)
 
21.7

Income tax expense (benefit)
(53.4
)
 
111.2

 
98.1

 
(164.6
)
 
13.1

Dividends on Washington Gas preferred stock
1.3

 
1.3

 
1.3

 

 

Net income applicable to common stock
$
49.3

 
$
192.6

 
$
167.6

 
$
(143.3
)
 
$
25.0

Regulated Utility Operating Results
The following table summarizes the regulated utility segment’s financial data for fiscal years ended September 30, 2018, 2017 and 2016.

41

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

Regulated Utility Financial Data         
  
Years Ended September 30,
 
Increase (Decrease)
(In millions)
2018
 
2017
 
2016
 
2018
vs. 2017
 
2017
vs. 2016
Utility net revenues(1):
 
 
 
 
 
 
 
 
 
Operating revenues
$
1,248.1

 
$
1,167.0

 
$
1,070.9

 
$
81.1

 
$
96.1

Less: Cost of gas
407.0

 
297.9

 
272.0

 
109.1

 
25.9

Revenue taxes
82.5

 
75.1

 
73.0

 
7.4

 
2.1

Total utility net revenues
758.6

 
794.0

 
725.9

 
(35.4
)
 
68.1

Operation and maintenance
528.8

 
332.2

 
322.0

 
196.6

 
10.2

Depreciation and amortization
136.9

 
131.2

 
116.1

 
5.7

 
15.1

General taxes and other assessments
66.0

 
59.8

 
57.4

 
6.2

 
2.4

Other income (expenses)-net
(19.0
)
 
(4.5
)
 
(2.2
)
 
(14.5
)
 
(2.3
)
EBIT
$
7.9

 
$
266.3

 
$
228.2

 
$
(258.4
)
 
$
38.1

 
(1)We utilize utility net revenues, calculated as revenues less the associated cost of energy and applicable revenue taxes, to assist in the analysis of profitability for the regulated utility segment. The cost of the natural gas commodity (as adjusted for Asset Optimization sharing) and revenue taxes are included in the rates that Washington Gas charges to customers as reflected in operating revenues. Accordingly, changes in the cost of gas and revenue taxes associated with sales made to customers generally have no direct effect on utility net revenues, operating income or net income. Utility net revenues should not be considered an alternative to, or a more meaningful indicator of our operating performance than, operating income. Additionally, utility net revenues may not be comparable to similarly titled measures of other companies.
Fiscal Year 2018 vs. Fiscal Year 2017  
The EBIT comparisons for the current year compared to the prior year primarily reflect:
higher operation and maintenance expenses primarily related to merger commitments and related expenses;
lower realized margins and unrealized mark-to-market valuations associated with our asset optimization program;
lower billed and estimated utility rates associated with the pass-through of future tax savings from the Tax Act, however the decrease is offset by lower income tax expense; and
higher depreciation and amortization expenses associated with growth in our utility plant.
Included in the EBIT comparisons are the favorable effects of:
customer growth of approximately 18,000 average active customer meters;
higher revenues attributed to colder weather in the District of Columbia; and
new base rates in the District of Columbia and Virginia.
Fiscal Year 2017 vs. Fiscal Year 2016
The increase in EBIT primarily reflects the following:
new base rates in Virginia and the District of Columbia;
higher utility net revenue related to growth of approximately 13,000 average active customer meters; and
higher unrealized mark-to-market valuations associated with our asset optimization program.
Partially offsetting these favorable variances were:
higher depreciation and amortization expense; and
higher operation and maintenance expenses.
Utility Net Revenues. The following table provides the key factors contributing to the changes in the utility net revenues of the regulated utility segment between years.

42

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

Composition of Changes in Utility Net Revenues
  
Increase (Decrease)
(In millions)
2018
vs. 2017
 
2017
vs. 2016
Asset optimization:
 
 
 
Realized margins
$
(9.7
)
 
$
1.8

Unrealized mark-to-market valuations
(38.9
)
 
37.4

Impact of lower tax rates per Tax Act
(27.8
)
 

Impact of rate cases
11.6

 
33.5

Customer growth
10.9

 
7.4

Estimated effects of weather and consumption patterns
8.5

 
(0.4
)
Late fees
6.1

 
(2.6
)
Accelerated pipe replacement programs
0.8

 
(5.8
)
Other
3.1

 
(3.2
)
Total
$
(35.4
)
 
$
68.1

Asset optimization — We recorded unrealized mark-to-market gains associated with our energy-related derivatives of $10.4 million for the year ended September 30, 2018, compared to unrealized mark-to-market gains of $49.3 million and unrealized mark-to-market gains of $12.0 million for the fiscal years ended September 30, 2017 and 2016, respectively. When these derivatives settle, any unrealized amounts will ultimately reverse and Washington Gas expects to realize margins in combination with related transactions that these derivatives economically hedge. The large swings in the valuations are partially due to movements in unobservable inputs used in the valuation of long-dated forward contracts. We believe that these values are not reflective of our ultimate cash flows as these purchases are utilized in the optimization of our long-term natural gas transportation and storage capacity resources, the value of which is not reflected at fair value. Refer to the section entitled “Market Risk—Price Risk Related to the Regulated Utility Segment” for further discussion of our asset optimization program.
Impact of lower tax rates per Tax Act — The decrease in revenue reflects the impact of the Tax Act on rates charged to customers, however the decrease is offset by lower income tax expense.
Impact of rate cases — The increase in revenue reflects new base rates in the District of Columbia, effective March 24, 2017 and in Virginia, effective November 28, 2016, with modification made in November 2017, as a result of the final approval. Refer to "Rates and Regulatory Matters" for further discussion of this matter.
Customer growth — Average active customer meters increased by approximately 18,000 from fiscal year 2017 to 2018. Average active customer meters increased by more than 13,000 from fiscal year 2016 to 2017.
Estimated effects of weather and consumption patterns— Weather, when measured by HDDs, was 4.7% warmer than normal during the year ended September 30, 2018, compared to 15.9% warmer than normal and 10.4% warmer than normal during the years ended September 30, 2017 and 2016. In the District of Columbia, where Washington Gas does not have a billing mechanism or financial instruments to offset the effects of weather, the comparatively cooler weather, partially offset by unfavorable changes in natural gas consumption patterns, for the year ended September 30, 2018, resulted in a positive variance to net revenues. Natural gas consumption patterns may be affected by shifts in weather patterns in which customer heating usage may not correlate highly with average historical levels of usage per heating degree days that occur. Natural gas consumption patterns may also be affected by non-weather related factors such as customer conservation. Refer to the section entitled "Weather Risk" for a discussion of billing mechanisms in Maryland and Virginia, which are designed to eliminate the net revenue effects of variations in customer usage caused by weather and other factors such as conservation.
Late fees - In fiscal year 2017, we temporarily suspended charging late fees during the stabilization period of our new billing system. The year-over-year variances reflect the resumption of charging late fees in fiscal year 2018.
Accelerated pipe replacement programs — The decrease in revenue for fiscal year 2017 compared to fiscal year 2016 primarily reflects the transfer of project costs that were being collected through accelerated pipeline replacement surcharge revenues to new base rates in District of Columbia, effective March 24, 2017 as well as in Virginia, put into effect in the December 2016 billing cycle.

43

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

Operation and Maintenance Expenses. The following table provides the key factors contributing to the changes in operation and maintenance expenses of the regulated utility segment between years.
Composition of Changes in Operation and Maintenance Expenses
  
Increase/(Decrease)
(In millions)
2018
vs. 2017
 
2017
vs. 2016
Merger commitments and related expenses
$
187.0

 
$

Employee incentives and direct labor costs
2.9

 
2.5

Employee benefits
(10.7
)
 
(1.0
)
System safety and integrity
10.8

 
1.9

Environmental costs, net
1.6

 
1.2

Support services
(5.1
)
 
(1.6
)
Uncollectible accounts
4.5

 
4.5

Corporate Allocation
4.0

 

Other
1.6

 
2.7

Total
$
196.6

 
$
10.2

Merger commitments and related expenses — In fiscal year 2018, we recorded costs for accrued bill credits to customers, an accrual for our commitment of charitable contributions and community support, employee benefits related severance, retention and acceleration of incentive plans, and an impairment that was booked as part of the Merger with AltaGas. See Note 20— Merger with AltaGas, Ltd. to the Consolidated Financial Statements in this Form 10-K for further information on these expenses.
Employee incentives and direct labor costs — The year-over-year variances for both periods are primarily due to an increase in employees and higher salaries.
Employee benefits — The decrease in employee benefits expense in fiscal year 2018 from the previous fiscal year is primarily due to lower pension and post-retirement benefit costs resulting from an increase in the discount rate. The decrease in employee benefits expense in fiscal year 2017 from the previous fiscal year was primarily due to amendments to the post-retirement benefit plans, which lowered expense in fiscal year 2017.
System safety and integrity — The year-over-year variances for both periods reflect increased safety and reliability activities including leak repair and mitigation.
Environmental costs, net — The year-over-year variances for both periods reflect an increase in the liability associated with sites previously used to operate manufactured gas plants.
Support services — The decrease in expense for fiscal year 2018 from the previous fiscal year was due to lower project related costs. The decrease in expense for fiscal year 2017 from the previous fiscal year was due to lower business process outsourcing costs.
Uncollectible accounts — The year-over-year variances for both periods reflect a higher delinquency rate resulting from the suspension of dunning activities during the stabilization period of our new billing system. Refer to Rates and Regulatory Matters for a further discussion.
Corporate Allocation— The increase in fiscal year 2018 over the previous fiscal year is due to the initial allocation of corporate overhead expenses subsequent to the merger with AltaGas. Over time, such costs are expected to be offset by reductions in other functional areas.
Depreciation and Amortization.  The following table provides the key factors contributing to the changes in depreciation and amortization of the regulated utility segment between years. The decrease in software amortization is due to certain capitalized software reaching the end of its amortizable life.

44

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

Composition of Changes in Depreciation and Amortization
  
Increase (Decrease)        
(In millions)
2018
vs. 2017
 
2017
vs. 2016
Accelerated pipe replacement programs
$
2.4

 
$
2.7

Software
(1.4
)
 
6.7

Other capital expenditures, net
4.7

 
5.7

Total
$
5.7

 
$
15.1


45

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

Non-Utility Operating Results
Retail Energy-Marketing
The following table depicts the retail energy-marketing segment’s operating results along with selected statistical data.
Retail-Energy Marketing Financial and Statistical Data
 
Years Ended September 30,
 
Increase (Decrease)
 
2018
 
2017
 
2016
 
2018
vs. 2017
 
2017
vs. 2016
Operating Results (In millions)
 
 
 
 
 
 
 
 
 
Gross margins(1):
 
 
 
 
 
 
 
 
 
Operating revenues
$
1,009.7

 
$
1,107.2

 
$
1,238.5

 
$
(97.5
)
 
$
(131.3
)
Less: Cost of energy
904.5

 
989.0

 
1,110.4

 
(84.5
)
 
(121.4
)
Revenue taxes
11.8

 
11.4

 
11.0

 
0.4

 
0.4

Total gross margins
93.4

 
106.8