Operating Segment Reporting | NOTE 10. OPERATING SEGMENT REPORTING We have four reportable operating segments: regulated utility, retail energy-marketing, commercial energy systems and midstream energy services. The division of these segments into separate revenue generating components is based upon regulation, products and services. Our chief operating decision maker is our Chief Executive Officer. During the first quarter of 2015, our chief operating decision maker began evaluating segment performance based on Earnings Before Interest and Taxes (EBIT). EBIT is defined as earnings before interest and taxes from continuing operations. Items we do not include in EBIT are interest expense, intercompany financing activity, dividends on Washington Gas preferred stock, and income taxes. EBIT includes transactions between reportable segments. We also evaluate our operating segments based on other relevant factors, such as penetration into their respective markets and return on equity. Our four segments are summarized below. • Regulated Utility – The regulated utility segment is our core business. It consists of Washington Gas and Hampshire. Washington Gas provides regulated gas distribution services (including the sale and delivery of natural gas) to end use customers and natural gas transportation services to an unaffiliated natural gas distribution company in West Virginia under a Federal Energy Regulatory Commission (FERC) approved interstate transportation service operating agreement. Hampshire provides regulated interstate natural gas storage services to Washington Gas under a FERC approved interstate storage service tariff. • Retail Energy-Marketing – The retail energy-marketing segment consists of WGL Energy Services, which sells natural gas and electricity directly to retail customers in competition with regulated utilities and unregulated gas and electricity marketers. • Commercial Energy Systems – The commercial energy systems segment consists of WGL Energy Systems which provides clean and energy efficient solutions including commercial solar, energy efficiency and combined heat and power projects and other distributed generation solutions to government and commercial clients. In addition, this segment comprises the operations of WGSW, a holding company formed to invest in alternative energy assets. • Midstream Energy Services – The midstream energy services segment consists of WGL Midstream, which engages in acquiring, investing in, managing and optimizing natural gas storage and transportation assets. Activities and transactions that are not significant enough on a stand-alone basis to warrant treatment as an operating segment, and that do not fit into one of our four operating segments, are aggregated as “Other Activities” in the Operating Segment Financial Information presented below. Administrative and business development activity costs associated with WGL and Washington Gas Resources are included in “Other Activities”. The following tables present operating segment information for the three and nine months ended June 30, 2015 and 2014 . Operating Segment Financial Information (In thousands) Operating Revenues (a) Depreciation and Amortization Equity in Earnings of Unconsolidated Affiliates EBIT Total Assets Capital Expenditures Equity Method Investments Three Months Ended June 30, 2015 Regulated utility $ 190,345 $ 27,740 $ — $ (6,262 ) $ 4,113,166 $ 75,413 $ — Retail energy-marketing 268,249 151 — 16,654 464,086 — — Commercial energy systems 14,674 2,787 544 3,750 613,124 27,271 64,323 Midstream energy services (25,801 ) 31 718 (26,607 ) 203,591 85 56,967 Other activities — — — (970 ) 106,861 — — Eliminations (b) (6,294 ) (13 ) — (541 ) (492,363 ) — — Total consolidated $ 441,173 $ 30,696 $ 1,262 $ (13,976 ) $ 5,008,465 $ 102,769 $ 121,290 Three Months Ended June 30, 2014 Regulated utility $ 197,752 $ 25,840 $ — $ 4,456 $ 3,809,747 $ 76,073 $ — Retail energy-marketing 275,339 204 — 1,286 387,990 5 — Commercial energy systems 14,260 1,611 733 5,012 459,509 18,171 68,309 Midstream energy services (15,869 ) 31 85 (16,806 ) 181,880 — 22,426 Other activities — — — (2,391 ) 224,220 — 413 Eliminations (b) (3,982 ) (64 ) — (532 ) (502,662 ) — — Total consolidated $ 467,500 $ 27,622 $ 818 $ (8,975 ) $ 4,560,684 $ 94,249 $ 91,148 Nine Months Ended June 30, 2015 Regulated utility $ 1,193,232 $ 81,958 $ — $ 238,645 $ 4,113,166 $ 235,707 $ — Retail energy-marketing 1,003,339 470 — 39,185 464,086 5 — Commercial energy systems 35,745 7,693 1,623 4,731 613,124 81,246 64,323 Midstream energy services (17,997 ) 93 1,865 (23,343 ) 203,591 85 56,967 Other activities — — 750 (8,915 ) 106,861 — — Eliminations (b) (22,176 ) (55 ) — (592 ) (492,363 ) — — Total consolidated $ 2,192,143 $ 90,159 $ 4,238 $ 249,711 $ 5,008,465 $ 317,043 $ 121,290 Nine Months Ended June 30, 2014 Regulated utility $ 1,304,975 $ 76,945 $ — $ 158,444 $ 3,809,747 $ 181,821 $ — Retail energy-marketing 1,035,711 558 — 5,186 387,990 93 — Commercial energy systems 27,013 4,255 1,496 5,961 459,509 59,536 68,309 Midstream energy services (21,938 ) 93 355 (29,410 ) 181,880 — 22,426 Other activities — — — (10,227 ) 224,220 — 413 Eliminations (b) (23,714 ) (335 ) — 110 (502,662 ) — — Total consolidated $ 2,322,047 $ 81,516 $ 1,851 $ 130,064 $ 4,560,684 $ 241,450 $ 91,148 (a) Operating revenues are reported gross of revenue taxes. Revenue taxes of both the regulated utility and the retail energy-marketing segments include gross receipt taxes. Revenue taxes of the regulated utility segment also include public service commission fees, franchise fees and energy taxes. Operating revenue amounts in the “Eliminations” row represent total intersegment revenues associated with sales from the regulated utility segment to the retail energy-marketing segment. Midstream Energy Services’ cost of energy related sales is netted with its gross revenues. (b) Intersegment eliminations include any mark-to market valuations associated with trading activities between WGL Midstream and WGL Energy Services, intercompany loans and a timing difference between Commercial Energy Systems’ recognition of revenue for the sale of Renewable Energy Credits (RECs) to Retail Energy-Marketing and Retail Energy-Marketing’s recognition of the associated expense. Retail Energy-Marketing has recorded a portion of the REC’s purchased as inventory to be used in future periods at which time they will be expensed. The following table provides a reconciliation from EBIT to net income applicable to common stock. Three Months Ended June 30, Nine Months Ended June 30, (In thousands) 2015 2014 2015 2014 Total consolidated EBIT $ (13,976 ) $ (8,975 ) $ 249,711 $ 130,064 Interest expense 13,140 9,503 38,704 28,020 Income (loss) before income taxes (27,116 ) (18,478 ) 211,007 102,044 Income tax expense (benefit) (11,756 ) (6,868 ) 80,364 33,152 Net income (loss) (15,360 ) (11,610 ) 130,643 68,892 Dividends on Washington Gas Light Company preferred stock 330 330 990 990 Net income (loss) applicable to common stock $ (15,690 ) $ (11,940 ) $ 129,653 $ 67,902 |