| Income Taxes | INCOME TAXES Through July 6th and prior to the Merger with AltaGas, WGL and its wholly owned subsidiaries filed a consolidated federal income tax return and various state income tax returns where they had a business presence. We are no longer subject to income tax examinations by the Internal Revenue Service (IRS) for years ended prior to September 30, 2013. Substantially all state income tax years in major jurisdictions are closed for years ended prior to September 30, 2013. Through July 6, 2018, WGL and each of its subsidiaries participated in a tax sharing agreement that establishes the method for allocating tax benefits from losses that are utilized on the consolidated income tax return. The consolidated tax is apportioned among the subsidiaries on the separate return method and losses are allocated to the subsidiaries that have taxable income pro-rata basis. In fiscal year 2018, Washington Gas received $ 2.9 million from subsidiaries with taxable income for the utilization of Washington Gas' net operating loss pursuant to the tax sharing agreement. Effective with the Merger and beginning July 7, 2018, our tax year end will change to December 31, 2018, and WGL and its subsidiaries will be included with AltaGas’ wholly owned US subsidiaries’ consolidated income tax return with AltaGas Services (U.S.) (ASUS) being the parent company of the consolidated group. Accordingly, WGL and its subsidiaries will file a final consolidated income tax return for the short tax year from October 1, 2017 to July 6, 2018. We and our wholly owned subsidiaries will be included in the AltaGas consolidated income tax returns beginning with the period from July 7, 2018 to December 31, 2018. We have established a new tax sharing policy with ASUS. The tax sharing policy provides allocation of consolidated tax liabilities and benefits based on amounts participants would incur as standalone corporations. Income taxes recorded for the period October 1, 2017 through July 6, 2018 are based on amounts we and our subsidiaries would incur as standalone corporations. State income tax returns are filed on a separate company basis in most states where we have operations and/or a requirement to file. In July 2018, we filed our tax return for the year ended September 30, 2017. US Federal Income Tax Reform On December 22, 2017, President Trump signed the Tax Cuts and Jobs Act (TCJA) (the Tax Act) into law. The Tax Act substantially reforms the Internal Revenue Code, including, but not limited to, (1) reducing the U.S. federal corporate tax rate from 35% to 21%; (2) creating a limitation on deductible interest expense equal to 30% of adjusted taxable income (not applicable to regulated utilities); (3) allowing 100% expensing for the cost of qualified property (generally not applicable to regulated utilities); (4) eliminating the domestic production activities deduction (not applicable to the consolidated tax group); (5) eliminating the corporate alternative minimum tax and changing how existing alternative minimum tax credits can be realized (not applicable to the consolidated tax group) in taxable years beginning after December 31, 2017 ; and (6) changing rules related to uses and limitations of net operating loss carry - forwards created in tax years beginning after December 31, 2017 . ASC Topic 740 requires companies to recognize the impacts of a change in tax law or tax rates in the period of enactment. The most significant change that impacts the Registrants’ financial statements is the reduction of the corporate federal income tax rate from 35% to 21% beginning January 1, 2018. The Tax Act also made bonus depreciation ineligible for regulated public utilities. The IRS issued proposed transition rules for property acquired and placed into service after September 27, 2017. The TCJA repeals 50% bonus depreciation for all taxpayers and provides 100% expensing for assets for non-utility companies both acquired and placed-in-service after September 27, 2017. On August 8, 2018, the IRS issued proposed regulations allowing regulated utility companies to claim bonus depreciation for assets placed in service for the first year of implementation of The Act. For regulated utility companies, projects that were greater than 1 0 % complete at September 27, 2017, are eligible for 50% bonus depreciation when placed into service. We have recorded a provisional amount pursuant to the transition rule and the proposed depreciation regulation as of September 30, 2018. Upon enactment of the Tax Act on December 22, 2017, the SEC Staff issued Staff Accounting Bulletin No. 118 (SAB 118) to address the application of GAAP when a registrant does not have the necessary information available, prepared, or analyzed in reasonable detail to complete the necessary accounting. We have assessed the majority of the applicable provisions in the TCJA and have recorded the associated provisional impacts as of September 30, 2018 and have followed the guidance issued in SAB 118. SAB 118 allows entities to take a reasonable period of time to measure and recognize the effects of the Tax Act, while requiring disclosures during that period. Registrants disclose the items for which the accounting is complete. A provisional amount is recorded for items for which the company is able to make reasonable estimates. The recorded provisional amounts remain subject to adjustment within the measurement period. The measurement period begins in the reporting period that includes the Tax Act’s enactment date and continues one year from the date of enactment. To the extent a company cannot reasonably estimate the effects of the Tax Act, it applies the provisions of the tax law that were in effect immediately prior to enactment. SAB 118 requires disclosure of any measurement period adjustments, both provisional and final, and the effect of measurement period adjustments on the effective tax rate. Items for which the accounting is substantially complete by September 30, 2018, however may be subject to adjustment pursuant to Technical Corrections of The Act: Bonus depreciation : Under the Tax Act, regulated public utility property is ineligible for bonus depreciation and is depreciated under MACRS while non-utility property is eligible for 100% bonus depreciation. In accordance with the August 8, 2018 proposed depreciation regulations and the transitional rule above, a provisional amount of $ 86 million of additional depreciation deduction for the short period ended July 6, 2018 has been recorded in fiscal year 2018. The company considered all properties placed in service after the Merger as MACRS eligible. Decrease in regulated revenues: In January 2018, Washington Gas filed applications for approval to reduce the distribution rates it charges customers in Maryland, Virginia and the District of Columbia to reflect the impact of the Tax Act. These applications proposed to reduce rates in these jurisdictions by a combined amount of $ 41.2 million annually, until base rates are reestablished in a general rate case. As described further below, the portion of this reduction in regulated revenues represented by the re-measurement of deferred tax assets and liabilities was recorded as a net regulatory liability under ASC 980, Regulated Operations. The net regulatory liability recorded is the amount we consider probable of regulatory treatment and will be refunded to customers in future periods. In addition, a portion of this reduction in regulated revenues relates to the federal tax expense included in current base rates that needs to be adjusted to the new federal rate of 21% effective January 1, 2018. Through the year ended September 30, 2018, revenues have been lowered by $ 27.5 million to reflect the regulatory impact of the Tax Act. Uncertain tax position : T he re-measurement of WGL’s uncertain tax position related to t emporary differences was a decrease in the amount of $ 14.8 million . Generally, a reserve for uncertain tax benefits related to prior years would generally not be re-measured if the tax exposure related to prior years where the federal income tax rate was 35% . However, WGL’s reserve for uncertain tax benefits relates solely to repair deductions for which the tax consequence of any disallowed deductions related to these t emporary differences is expected to be prospective only. All provisional amounts recorded for re-measurement remain subject to adjustment within the measurement period pending the preparation and analysis of additional information. Items for which the accounting is not yet complete as of September 30, 2018 but for which we have recorded provisional amounts which are subject to adjustment during the measurement period: Re-measurement of deferred tax assets and liabilities : Under ASC 740, the tax rate used to measure deferred tax liabilities and deferred tax assets are the tax rates for the years the liability is expected to be settled or the asset recovered. We re-measured the deferred tax balances at September 30, 2017. The re-measurement of our deferred tax assets and liabilities includes an initial estimated impact on our cumulative prior year net operating loss deferred tax asset (NOL DTA), investment tax credit and related attributes and deferred taxes associated with our benefit plans. For the period ended July 6, 2018, the Company had taxable income, but had sufficient NOL DTA to apply against that amount. For the twelve months ended September 30, the Company had cumulative taxable losses, and as a result, the Company has recorded its consolidated deferred tax liabilities at a federal rate of 21%. In addition, we have recorded a provisional estimate but have not fully completed the accounting for the tax sharing impacts of the re-measurement of the deferred tax assets and deferred tax liabilities. The effect of the re-measurement at a federal tax rate of 21% resulted in a net decrease in consolidated deferred tax liabilities in the amount of $ 458.7 million , including net tax gross-up. Of this amount, $ 422.9 million is attributable to the regulated utility and $ 35.8 million is attributable to non-utility operations. Of the amount related to utility operations, the net decrease in plant-related deferred tax liabilities was $ 319.2 million before tax gross-up, increasing the regulatory liability. The re-measurement of deferred tax liabilities not associated with rate-making including all re-measurement of deferred tax liabilities for non-utility subsidiaries are recorded as a reduction to income tax expense of $ 28.7 million . Under ASC 980, we recorded a regulatory liability for excess deferred income taxes of $ 431.0 million including tax gross-up. We recorded a decrease in the regulatory asset for flow-through depreciation related items in an amount of $ 22.4 million , including tax gross-up; and an increase in the regulatory asset for the re-measurement of non-plant excess deferred taxes (including the net operating loss carryforward deferred tax asset) in an amount of $ 28.3 million , including tax gross-up, for a net increase in regulatory assets of $ 5.9 million . Accounting for the tax basis adjustment for ITC: Under prior tax law and under the Tax Act, the tax basis of property must be reduced by one-half of the investment tax credits claimed thereon. Under GAAP, we adjust the book basis and amortize the investment tax credits over the book life of the associated assets. We have recorded certain provisional amounts that account for the effects on the adjustment of book basis. Accounting for the NOL DTA associated with the prior year return to provision true-up adjustments. Following the filing of our 2017 Federal tax return, we booked certain adjustments in the fourth quarter of 2018 to adjust our estimated taxes to the amounts included in the return. We did adjust the associated impacts of temporary differences on our deferred income tax balances resulting from these return to provision adjustments, but have not fully analyzed the impacts to the associated NOL DTA and tax sharing. Components of Income Tax Expense or Benefit The following tables provide the components of income tax expenses for WGL and Washington Gas for the years ended September 30, 2018, 2017 and 2016. WGL Holdings, Inc. Components of Income Tax Expense (Benefit) Years Ended September 30, (In thousands) 2018 2017 2016 INCOME TAX EXPENSE Current: Federal $ (1,684 ) $ 430 $ (57,690 ) State 649 3,267 (1,983 ) Total current (1,035 ) 3,697 (59,673 ) Deferred: Federal Accelerated depreciation (28,498 ) 83,637 93,175 Other (32,490 ) 13,042 49,638 State Accelerated depreciation 12,399 15,097 12,993 Other 3,570 3,190 8,073 Total deferred (a) (45,019 ) 114,966 163,879 Amortization of investment tax credits (7,398 ) (7,504 ) (6,132 ) Total income tax expense (benefit) $ (53,452 ) $ 111,159 $ 98,074 (a) Includes a net benefit of $ 28.7 million related to remeasurement of deferred income taxes. Washington Gas Light Company Components of Income Tax Expense (Benefit) Years Ended September 30, (In thousands) 2018 2017 2016 INCOME TAX EXPENSE Current: Federal $ — $ 1,722 $ (48,064 ) State 1,274 1,283 (2,957 ) Total current 1,274 3,005 (51,021 ) Deferred: Federal Accelerated depreciation (27,846 ) 83,009 93,385 Other (8,485 ) (18,419 ) 13,826 State Accelerated depreciation 12,533 15,033 13,081 Other (2,637 ) (2,037 ) 3,190 Total deferred (a) (26,435 ) 77,586 123,482 Amortization of investment tax credits (702 ) (751 ) (795 ) Total income tax expense $ (25,863 ) $ 79,840 $ 71,666 (a) Includes tax expense of $ 7.0 million related to remeasurement of deferred income taxes. Rate Reconciliation The effective income tax rate from continuing operations varies from the U.S. Federal statutory rate principally due to the following: WGL Holdings, Inc. Reconciliation Between the Statutory Federal Income Tax Rate and Effective Tax Rate Years Ended September 30, ($ In thousands) 2018 2017 2016 Income taxes at statutory federal income tax rate (a) $ (6,784 ) 21.00 % $ 101,157 35.00 % $ 93,253 35.00 % Increase (decrease) in income taxes resulting from: Accelerated depreciation less amount deferred 1,079 (3.34 ) 2,213 0.77 2,445 0.92 Allowance for funds used during construction (1,891 ) 5.85 (1,625 ) (0.56 ) (1,537 ) (0.58 ) Amortization of investment tax credits (7,398 ) 22.90 (7,504 ) (2.60 ) (6,132 ) (2.30 ) Amortization of excess deferred taxes (9,889 ) 30.61 (201 ) (0.07 ) — — Cost of removal (1,561 ) 4.83 (2,944 ) (1.02 ) (3,722 ) (1.40 ) State income taxes-net of federal benefit 3,976 (12.31 ) 13,472 4.66 12,969 4.87 Release of valuation allowance (2,188 ) 6.77 — — — — Merger related costs 2,044 (6.33 ) 2,292 0.79 — — Non-controlling interest 6,199 (19.19 ) 5,627 1.95 — — Re-measurement (28,743 ) 88.97 — — — — ASU 2016-09 adoption (3,521 ) 10.90 — — — — Return to provision adjustment (6,279 ) 19.44 (3,062 ) (1.06 ) (1,012 ) (0.38 ) Other items-net 1,504 (4.66 ) 1,734 0.60 1,810 0.68 Total income tax expense (benefit) and effective tax rate $ (53,452 ) 165.44 % $ 111,159 38.46 % $ 98,074 36.81 % (a) As a result of the merger with AltaGas, the Company is subject to two separate short periods and accompanying returns. The first period through July 6, 2018 is subjected to a higher, blended federal statutory rate. Due to the net operating loss for federal tax purposes through September 30, 2018, all current year activity is ultimately taxed at 21%. As such, for presentational purposes, we applied a 21% rate to the entire fiscal year activity. Washington Gas Light Company Reconciliation Between the Statutory Federal Income Tax Rate and Effective Tax Rate Years Ended September 30, ($ In thousands) 2018 2017 2016 Income taxes at statutory federal income tax rate (a) $ (11,026 ) 21.00 % $ 74,071 35.00 % $ 64,673 35.00 % Increase (decrease) in income taxes resulting from: Accelerated depreciation less amount deferred 1,079 (2.06 ) 2,213 1.05 2,445 1.32 Allowance for funds used during construction (70 ) 0.13 (291 ) (0.14 ) (509 ) (0.28 ) Amortization of investment tax credits (703 ) 1.34 (751 ) (0.35 ) (795 ) (0.43 ) Amortization of excess deferred taxes (9,798 ) 18.66 (196 ) (0.09 ) — — Cost of removal (1,561 ) 2.97 (2,944 ) (1.39 ) (3,722 ) (2.01 ) State income taxes-net of federal benefit (2,659 ) 5.06 9,482 4.48 8,310 4.50 Consolidated tax sharing allocation — — — — 1,073 0.58 Re-measurement 7,031 (13.39 ) — — — — ASU 2016-09 adoption (3,223 ) 6.14 — — — — Return to provision adjustment (4,669 ) 8.89 (4,859 ) (2.30 ) (1,353 ) (0.73 ) Other items-net (264 ) 0.50 3,115 1.47 1,544 0.84 Total income tax expense (benefit) and effective tax rate $ (25,863 ) 49.24 % $ 79,840 37.73 % $ 71,666 38.79 % (a) As a result of the merger with AltaGas, the Company is subject to two separate short periods and accompanying returns. The first period through July 6, 2018 is subjected to a higher, blended federal statutory rate. Due to the net operating loss for federal tax purposes through September 30, 2018, all current year activity is ultimately taxed at 21%. As such, for presentational purposes, we applied a 21% rate to the entire fiscal year activity . Components of accumulated deferred income tax assets and liabilities The following tables provide the components of accumulated deferred income tax assets (liabilities) for WGL and Washington Gas at September 30, 2018 and 2017. WGL Holdings, Inc. Components of Accumulated Deferred Income Tax Assets (Liabilities) (In thousands) 2018 2017 Deferred income tax assets: Pensions $ 43,553 $ 42,593 Uncollectible accounts 3,714 10,617 Inventory overheads 4,090 6,617 Employee compensation and benefits 52,526 45,202 Income taxes recoverable through future rates 121,145 — Derivatives 10,787 13,802 Deferred gas costs — 1,485 Solar grant/investment tax credit 58,514 61,773 Tax credit carry forward 158,167 160,077 Net operating loss 114,625 30,278 Other (a) 5,346 2,693 Total assets 572,467 375,137 Deferred income tax liabilities: Other post-retirement benefits 106,700 90,031 Accelerated depreciation and other plant related items 756,022 1,068,951 Losses/gains on reacquired debt 581 1,047 Income taxes recoverable through future rates — 33,502 Deferred gas costs 3,041 — Partnership basis differences 41,459 46,968 Valuation allowances — 2,188 Total liabilities 907,803 1,242,687 Net accumulated deferred income tax assets (liabilities) $ (335,336 ) $ (867,550 ) (a) For the fiscal years ended September 30, 2018 and 2017, amount includes $ 1.0 million and $ 0.5 million , respectively, in deferred income tax assets reported in "Deferred charges and other assets" on the consolidated balance sheet. Washington Gas Light Company Components of Accumulated Deferred Income Tax Assets (Liabilities) (In thousands) 2018 2017 Deferred income tax assets: Pensions $ 43,071 $ 41,907 Uncollectible accounts 1,131 7,815 Inventory overheads 4,090 6,617 Employee compensation and benefits 51,006 47,479 Derivatives 7,435 11,187 Income taxes recoverable through future rates 121,357 — Deferred gas costs — 1,485 Net operating loss 90,943 — Total assets 319,033 116,490 Deferred income tax liabilities: Other post-retirement benefits 106,289 89,494 Accelerated depreciation and other plant related items 615,499 876,235 Losses/gains on reacquired debt 581 1,047 Income taxes recoverable through future rates — 33,324 Deferred gas costs 3,041 — Other 3,430 4,775 Total liabilities 728,840 1,004,875 Net accumulated deferred income tax assets (liabilities) $ (409,807 ) $ (888,385 ) The Company’s net operating losses generated through July 6, 2018 have expiration dates beginning in 2036. The Company’s investment tax credit carry forwards expire over various years beginning 2032. Tabular Reconciliation of Unrecognized Tax Benefits The following table summarizes the change in unrecognized tax benefits during fiscal year 2018, 2017, 2016 and our total unrecognized tax benefits at September 30, under the provisions of ASC Topic 740, Income Taxes: Unrecognized Tax Benefits (In thousands) 2018 2017 2016 Total unrecognized tax benefits, October 1, $ 48,009 $ 42,283 $ 38,627 Increases in tax positions relating to current year 10,947 10,766 10,645 Decreases in tax positions relating to prior year (15,389 ) (5,040 ) (6,989 ) Total unrecognized tax benefits, September 30, $ 43,567 $ 48,009 $ 42,283 During the year, the unrecognized tax benefits for WGL and Washington Gas decreased by approximately $ 4.4 million relating to uncertain tax positions, primarily due to the change in tax accounting for repairs. If the amounts of unrecognized tax benefits are eventually realized, it would not materially impact the effective tax rate. It is reasonably possible that the amount of the unrecognized tax benefit with respect to some of WGL’s and Washington Gas’ uncertain tax positions will significantly increase or decrease in the next 12 months, if the IRS were to finalize and issue its proposed revenue procedure for gas distribution repair deductions. Amounts of Interest and Penalties Recognized WGL and Washington Gas recognize any accrued interest associated with uncertain tax positions in interest expense and recognizes any accrued penalties associated with uncertain tax positions in other expenses in the statements of income. During the fiscal year ended September 30, 2018, 2017, and 2016, there was no accrued interest expense associated with uncertain tax positions. |
