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Executives

Doug Bonawitz - Investor Relations

Terry McCallister - Chairman and CEO

Vince Ammann - Vice President and CFO

Adrian Chapman - President and COO

Harry Warren - President, Washington Gas Energy Services

Gautam Chandra - Vice President, Strategy and Business Development

Analysts

Dan Fidell - U.S. Capital Advisors

Spencer Joyce - Hilliard Lyons

WGL Holdings Inc. (WGL) F4Q2012 Results Earnings Call November 16, 2012 10:30 AM ET

Operator

Good morning. And welcome to the WGL Holdings, Inc. Fourth Quarter Fiscal Year 2012 Earnings Conference Call. At this time, I would like to inform you that this conference is being recorded and that all participants are in a listen-only mode. We will open the conference call for questions-and-answers after the presentation.

The call will be available for rebroadcast today at 1 p.m. Eastern Time running through November 23, 2012. You may access the replay by dialing 1-855-859-2056 and entering pin number 59434477. If you do not have a copy of the earnings release, you can obtain one at www.wglholdings.com.

I will now turn the conference over to Doug Bonawitz. Please go ahead.

Doug Bonawitz

Good morning, everyone, and thank you for joining our call. This morning's comments will reference a slide presentation on our website that you can access by going to www.wglholdings.com, clicking on the Investor Relations tab and then choosing Events and Webcast from the drop down menu.

The slide presentation highlights the results for our fiscal year 2012 and the drivers of those results. A reconciliation of our operating earnings results reported in accordance with Generally Accepted Accounting Principles is available as an attachment to our press release and is available in the Quarterly Results section of our website.

This morning Terry McCallister, our Chairman and Chief Executive Officer will provide some opening comments and a brief recap of fiscal year 2012 consolidated results. Following that, Vince Ammann, Vice President and Chief Financial Officer, will review the major items that led to the annual results.

Also on this morning's call is Adrian Chapman, President and Chief Operating Officer, who’ll discuss key issues affecting our business and the status of some of our initiatives. Terry will then wrap up with initial guidance for fiscal year 2013.

In addition, Harry Warren, President of Washington Gas Energy Services; and Gautam Chandra, Vice President of Strategy and Business Development are also with us this morning and available to answer your questions.

Finally, we encourage everyone to review our most recent Form 10-K filed with the Securities and Exchange Commission for a more complete discussion of the risks and uncertainties that could cause actual results to vary materially from the forward-looking station -- statements made this morning.

And with that, I would like to turn the call over to Terry McCallister.

Terry McCallister

Thank you, Doug, and good morning, everyone. Today we’ll briefly look back on the past fiscal year and review our full year financial results. We’ll also discuss recent events affecting our business including an update on regulatory activity, and finally, we’ll introduce guidance for 2013 fiscal year.

I’m happy to report to you full year 2012 financial results that exceeded our initial earnings targets for the year, as well as our most recent guidance as shown on slide four of our presentation. We ended the fiscal year 2012 with consolidated non-GAAP operating of $138.4 million or $2.68 per share. This compares to $115.5 million from the prior year or $2.25 a share.

This year’s result exceeded the midpoint of our prior guidance of $2.49 per share with improvements in both our Utility and Non-Utility segments, though operating and maintenance expenses and a decrease in the effective tax rate drove the significant improvement in Utility results compared to previous guidance with the small improvement from our Non-Utility segment as well.

We are also pleased to report that these results represent record non-GAAP earning, with a balance of earnings growth from both our Utility and Non-Utility segments. We achieve these results in the challenging year. We faced extreme weather throughout the year, including record warm temperatures this past winter and an unusually hot summer.

This weather negatively impacted transportation in calendar spreads, as well as price volatility, which suppressed the results of some of our Non-Utility businesses. Some of our Utility operating costs continued to increase, driven primarily by employee benefit cost and pipeline integrity spending.

In addition to our strong financial performance, we also made notable progress this year on advancing our vision of providing clean and efficient energy solutions that produce value for our customers, investors, and community.

For example, less than one year ago, we announced that we are targeting a 70% reduction in green gas emissions from our Utility fleet and facility operations by 2020, as well as significant reductions and emissions from our gas delivery system.

During the year we completed significant milestones in support of these goals. This summer, we opened our new operation center in Springfield Virginia, powered specially by Bloom Energy Server that convert clean natural gas directly to electricity with fewer emissions.

We also continued to replace our gasoline fleet vehicles with clean natural gas vehicles. We were recently awarded the highest level achievement in the CLEANFleet Certification program. In fact out of the 30 companies in the program Washington Gas was the only one to receive the top level of achievement.

We continue to improve safety and reliability of our distribution system with accelerated investments in infrastructure in all three of our Utility jurisdictions, which will also help reduce emissions from our delivery system. I should also note, we weathered multiple major storm events in our service territories went out significant disruptions to our customers.

We made strong progress on the Non-Utility side as well. Washington Gas Energy Services continues to offer innovative and sustainable clean energy options to both residential and commercial customers. This year more customers took advantage of both our CleanSteps WindPower and CleanSteps Carbon Offsets programs for electricity and natural gas than in any other year.

At Washington Gas Energy Systems we more than doubled our installed capacity of solar project. In Maryland, three school systems selected Washington Gas Energy Systems to install large solar project to power their facility.

The Dorchester County Public School System, Kent County Public Schools and the Caroline County Public Schools System all placed their trust in us to deliver clean solar power for many years to come. In September, the Catholic University of America dedicated the largest solar photovoltaic panel system in the District of Columbia, which features more than 2,600 solar panels.

In the three years since the University began using solar power with Washington Gas Energy Systems, it is nearly tripled the amount of clean energy it produces. This Utility like investments will contribute to our bottom line profitability for years to come.

As you can see, we have proven in many ways this past year the sustainability embedded in our business strategy. I’m proud of our achievements this year in all of these areas and we will continue to advance our vision in 2013.

Vince will now provide more details on our full year earnings and drivers of those results. After that Adrian will give you an update on operations and regulatory developments. I’ll then close with earnings guidance for fiscal year 2013.

I’ll now turn the call over to Vince.

Vince Ammann

Thank you, Terry. I would first like to mention that reconciliations of our GAAP net income to non-GAAP operating earnings can be found in the earnings release that is available on our website. As is our standard practice, I will be referencing non-GAAP operating earnings in my comments.

I’ll start with the review of the drivers for the year-to-year change for the Utility segment results. This segment reported fiscal year 2012 operating earnings of $2.02 per share, compared to a $1.68 per share the year earlier. These results are detailed on slide five.

Higher revenues from the implementation of new rates in Virginia and Maryland improved operating earnings year-over-year by $0.33 per share. New rates were implemented in Virginia on October 1, 2011 and in Maryland on November 14, 2011. We continue to add new customer meters in fiscal year 2012, addition of over 8,900 average active customer meters improved operating earnings by $0.05 per share.

Asset optimization activities increased earnings by $0.03 per share. This increase to asset optimization earnings were partially driven by favorable results -- seldom results in Maryland which Adrian will discuss in a moment.

The reduction in our effective tax rate increased earnings by $0.12 per share, a portion of which was non-recurring. The recurring portion was reflected in the effective tax rate included in our guidance assumptions for fiscal year 2013. Lower interest expense increased earnings by $0.05 per share.

Two items partially offset these improvements, higher operations and maintenance expense reduced earnings by $0.14 per share, higher depreciation expense due to increase investment in utility plant reduced earnings by $0.08 per share.

Turning to the Retail Energy-Marketing segment as shown on slide four, fiscal year 2012 non-GAAP operating earnings were $0.70 per share, up $0.03 per share from the year earlier and a record for this segment of our business. In fact, this was the second consecutive year of record earnings and the third record in the past four years.

On slide six you will see the primary drivers of the increase in operating earnings with higher electric gross margins, partially offset by lower natural gas margins. Both electric volumes and unit margins were higher compared to the prior year.

Electric sales volumes increased 9% in fiscal year 2012 versus the prior year, driven by increases in government contracts and the overall number of customer accounts. At the end of fiscal year 2012, the Retail Energy-Marketing business served 194,300 electric accounts, an increase of 6% compared to year earlier.

Higher electric unit margins were primarily due to favorable pricing conditions in fiscal year 2012 compared to the prior year. Both natural gas volumes and unit margins were lower compared to the prior year.

Natural gas sales volumes decreased 10% in fiscal year 2012 versus the prior year, primarily driven by the warmer weather than lower retail customer usage, partially offset by higher wholesale activity. At the end of fiscal year 2012, the Retail Energy-Marketing business served 177,500 natural gas customers, an increase of 3% compared to the year earlier.

Natural gas unit margins were slightly lower in fiscal year 2012, due to lower unit margins on portfolio optimization activities.

Operating expenses for fiscal year 2012 were unchanged from the prior year, with increases in customer billing, bad debt expense, broker fees and inter-company charges offset by lower customer acquisition and compensation expenses. Change in our effective tax rate did reduce earnings by $0.03 this year compared to the prior year.

Financial performance of Retail Energy-Marketing segment is impressive this year, considering the extreme weather we experienced, both the very warm winter and the very hot summer. We are pleased with the effectiveness of the business units’ weather hedging strategies that allowed record results to be achieved under those circumstances.

Next, I’ll move to the to the Commercial Energy Systems segment. For fiscal year 2012, the Commercial Energy Systems business had earnings of $0.05 per share, an increase of $0.04 compared to the last year. The increase was primarily due to higher revenue from commercial solar projects, as well as projects work for government customer’s that was delayed in the prior year.

The Commercial Energy Systems segment continues to add new solar energy projects to its portfolio. As of September 30th, we have over 13 megawatts of installed solar capacity.

During the fourth quarter, Washington Gas Energy Systems was awarded five additional projects totaling $31 million, representing nearly 10 megawatts of incremental solar capacity. Four of these projects are in Massachusetts and one is in New Mexico.

When these and 2 megawatts of other projects currently underway are complete, we will have 25 megawatts of installed capacity, representing $90 million in capital investment and robust pipeline of future projects currently under development.

Finally, I’ll move to the Wholesale Energy Solutions segment. For fiscal year 2012, the Wholesale Energy Solutions business had a non-GAAP operating loss of $0.04 per share, decline of $0.01 compared to the prior fiscal year.

The decrease reflects low storage and transportation spreads due to one of the warmers winters on record, which affected optimization opportunities during fiscal year 2012. The decrease also reflect higher operations and maintenance expense, partially due to investments in new storage and optimization arrangements, as well as cost incurred related to the Commonwealth Pipeline project.

I’ll now turn the call over to Adrian for his comments.

Adrian Chapman

Thank you, Vince, and good morning, everyone. I’m pleased to provide you with an update on our operations and regulatory initiatives and I will start with our rate cases.

In the District of Columbia, you may recall that in November of last year, the PSC initiated an investigation into the reasonableness of our rates. In February, we filed an application with the Public Service Commission to increase our rates by approximately $29 million.

Of this amount, approximately $26.5 million relates to current and previously deferred pension and OPEB costs. The recovery of which, would improve cash flow but not contribute significantly to earnings.

We have also included a request for $190 million investment over five years to expand our existing accelerated infrastructure replacement program. Evidentiary hearings were held in October, reply briefs are due on November 20th, and the commission plans to close the record the same day after briefs are filed.

Based on recent pronouncements by the commission, we expect a decision in this case within 90 days of the close of the record. Therefore, we currently anticipate the new rates will become effective in early 2013.

Turning to Maryland, you may recall that in April, we filed a second petition for reconsideration with the commission related to our 2011 rate case. We are seeking rehearing of two aspects of the commission's order related to tax adjustments of approximately $2.4 million and recovery of approximately $1 million of annual amortization of expenses related to our outsourcing agreement.

We also filed conditional appeal in court to preserve our legal rights, pending decision by the commission. This matter is still pending before the commission. In August, the Maryland PSC issued an order approving our proposed changes to our asset optimization program with minor modifications.

The commission affirmed our continued use of a self-asset management program that has been phased in since 9/2006. The commission cited significant economic benefit to both customers and shareholders. The order included the approval of our recommendations to improve the margin sharing formula.

The commission approved the modification of the annual incentive sharing program to a graduated tiered structure that rewards our shareholders with a larger percentage of margins after a preset level of margins is achieved for ratepayers in any given year.

In August, the settlement was also reached between Washington Gas, the staff of the Maryland PSC and the Office of People's Counsel regarding a long outstanding case involving the company's decision to cash-out delivered gas imbalances with competitive service providers rather than a settlement by returning gas in kind.

The parties filed a stipulation resolving all issues in the case. The commission had previously remanded this preceding to a law judge for further proceedings. The stipulation accepts the refund, which is approximately $0.5 million lower than the estimate that Washington Gas recorded in the fourth quarter of fiscal 2011 and reflects the party’s agreement that civil penalties should not be assessed. The settlement is pending before the law judge. We see this settlement together with the approval of our asset optimization changes as highly positive developments in Maryland.

As we've indicated previously, we plan to file a case next spring in Maryland. We have started on infrastructure improvements associated with our accelerated pipe replacement plan in Maryland, which calls for spending of $115 million over five years. The upcoming rate case will lead to recovery of and on our first year of these investments beginning in the fall of 2013.

As you may recall in past years, we have supported a bill in the Maryland legislature that would have put in place a process for funding these additional infrastructure investments through a surcharge.

We are encouraged by recent statements by Governor O'Malley that appear to recognize a need for accelerated recovery for utilities. We plan to again support a bill that would allow accelerated recovery of infrastructure investments during the next legislative session in Maryland.

Turning to Virginia, on August 6th, we filed the Virginia State Corporation Commission and application to amend our previously approved Virginia SAVE Plan to accelerate our pipeline replacement in Virginia.

Our request, if approved, would increase our annual expenditure in Virginia from approximately $25 million per year to about $40 million per year, which under the SAVE statue would be supported by a revision to our surcharges to reflect that level of annual expenditure.

We have petitioned to amend the timeframe from calendar years 2010 through 2014, as currently approved to an amended timeframe of calendar years 2013 through 2017. The commission had previously authorized an initial five-year period with expenditures of $116.5 million. The proposed amended infrastructure replacement program totaling $191.4 million would commence on January 1, 2013.

And a report filed on October 26th, the staff in Virginia stated that they do not oppose our proposed amended plan, as an additional programs appear to be safe eligible infrastructure under the SAVE Act.

I would also like to update you on our capital spending forecast. Our current forecast, as shown on page 17 in the presentation, calls for us to spend $368 million in 2013 and $1.8 billion cumulatively in the 2013 through 2017 timeframe. This represents an increase of $85 million for 2013 when compared to our prior forecast, an increase of $347 million for the period of 2013 through 2016.

The primary drivers of the increase for both 2013 and the extended period is an increase in investments in clean and efficient energy projects, and additional accelerated pipe replacement in the District of Columbia, Maryland and Virginia.

We currently expect to add 10,500 average active customer meters in fiscal year 2013, which would be an 18% increase in new meters over last year. As noted at our analyst meeting, we have initiated additional marketing and sales efforts, targeting conversions and the growing multifamily market and we will begin to see the results of these incremental sales activities during fiscal year 2013.

Please note that our current capital spending forecast does not include any spending during this timeframe on construction related to the Chillum liquefied natural gas peaking facility. The current forecast also does not include any capital spending related to the Commonwealth Pipeline as this project is still in development.

I would like to now turn the call back to Terry for his closing comments.

Terry McCallister

Thank you, Adrian and Vince. I will now move to our initial guidance for fiscal year 2013 earnings. First of all, I would like to call to your attention to the fact that we have made a small change to the definition of our operating segment.

Going forward, all of our alternative energy investments such as American Solar Direct, Skyline Innovations and Echo will be housed within commercial energy systems. This segment will continue to include all activities of Washington Gas Energy Systems.

The diagram on page 19 of the presentation should help you to visualize how the new structure relates to our previous reporting segments. These operating segments will be used when we report actual results for the first quarter of 2013. This change in operating segments would not have materially changed our results for fiscal year 2012.

Our consolidated non-GAAP earnings estimate for fiscal year 2013 is in the range of $2.37 to $2.49 per share as shown on slide eight. The range for our utility non-GAAP earnings estimate for fiscal year 2013 is a $1.70 to $1.76 per share.

As shown on slide 10, higher operations and maintenance expense including employee pension and post-retirement benefit cost put pressure on the utility’s earnings in fiscal year 2013. The higher pension and post retirement benefit cause reflects the use of a lower discount rate in response to lower long-term interest rate.

In addition, higher depreciation expense is expected to reduce fiscal year 2013 operating earnings due to increased planned additions. Some of this impact is related to the accelerated replacement program and the associated regulatory lag in recovery. O&M expenses will also increase as we accelerate our pipeline integrity and compliance programs.

The favorable effect of the continued growth of new customers will improve operating earnings in 2013. It is important to note that many other factors driving lower operating earnings per our utility in fiscal year 2013 involve costs that will be recovered in future rate cases such as the upcoming case in Maryland. The range for our non-utility non-GAAP earnings estimate for fiscal year 2013 is $0.67 to $0.73 per share.

As shown on slide 12, our non-utility guidance reflects the forecast of decrease in electric margins, unchanged natural gas margins and higher operating expenses of our Retail Energy Marketing business which is forecasting earnings with the midpoint guidance of $0.63 a share.

The commercial energy system segment is forecasting earnings in fiscal year 2013 with midpoint guidance of $0.08 a share. Our commercial solar activities will drive $0.05 of these earnings, an increase of $0.03 per share for this area.

In fiscal year 2012, our commercial solar assets produced 10,214 megawatt hours of electricity, which is sold to customers through purchase power agreement. In fiscal year 2013, we expect that these commercial solar assets will produce 30,427 megawatt hours of electricity.

As these guidelines in Echo did not contribute to earnings in 2012, we expect they will contribute only modestly in 2013. We believe our investments in these businesses will lead to meaningful contributions to our results in the future.

Finally, our wholesale energy solution segment is forecasting earnings for the midpoint guidance of $0.07 per share in fiscal year 2013, compared to a loss of $0.04 per share in 2012. The improvement is primarily due to an expected return to more normal temperatures, the recovery of year-on-year spread and traditional assets under ownership.

We have now accumulated approximately 16 Bcf of low cost storage capacity which we expect to deliver $0.04 of the results for the segment. Our other optimization activity should drive $0.03 of the earnings for the wholesale energy solutions.

Earlier this year, we announced that our subsidiary capital energy ventures entered into an agreement with UGI Energy Services and Energy Midstream to market and develop an Interstate Pipeline or its Commonwealth Pipeline. In June, we announced the results of a non-binding open season confirmed demand for the project.

We continue to work with prospective shippers to finalize route selection and negotiate binding precedent agreements that will economically support the project's construction. While we’re certainly interested in pipeline, current market dynamics have caused the project to develop slower than we’d anticipated.

We continue to believe that the market for shortfall takeaway capacity from our sales production will develop and the Commonwealth Pipeline project is well positioned to provide market solution. Before closing, I want to take a moment to offer some thoughts on our expectations for fiscal year 2014.

Historically, we’ve not given guidance beyond the current fiscal year but I do want to share some of our expectation for fiscal year 2014 based on current assumptions. In February last year, we presented a plan that we drive 7% earnings growth over a five-year period beginning in 2012.

On slide 13, we’ve updated that plan to reflect our actual results in 2012 and our expectations for 2013 and ‘14. As you can see, we had record earnings in 2012 as the impact rate release drove our utility segments and the retail business realized directed results.

In 2013, our utility results will be impacted by increased O&M expense but earnings will recover the previous levels in 2014, driven by revenue from rate cases and accelerated replacement program. After considering our expectations for 2014, we are tracking to our 7% O&M driven both by gains in our regulated utility and then our non-utility businesses.

As you can see on slide 14, we expect this three-year period -- I went over this three-year period, about half of our growth in earnings per share will be driven by regulated utility but nearly 40% will result from our utility life investment. Our more competitive segments including Wholesale Energy Solutions and Retail Energy Marketing will also contribute to our growth but then in more modest way.

These projections are very much in line with those that we gave at our 2012 analyst conference and are driven by the execution of our strategic vision. We do hope that these additional details on our growth plans are helpful and we look forward to providing further clarity on the financial drivers of our earnings growth during our analyst meeting early in 2013.

That concludes my prepared remarks and we’ll now be happy to answer your questions.

Question-and-Answer Session

Operator

(Operator Instructions) We will take our first question from Dan Fidell from U.S. Capital Advisors. Your line is open.

Dan Fidell - U.S. Capital Advisors

Good morning.

Terry McCallister

Good morning, Dan.

Vince Ammann

Good morning, Dan.

Dan Fidell - U.S. Capital Advisors

Just wondering, if you could give us a little bit more clarity in terms of the $0.27 per share year-over-year decline coming from the O&M side. You talked about using a lower discount rate and pipeline integrity cost. Can you sort of give us some sense of what rate you’re using in sort of the scale for each of those in terms of the 27 total contribution of the $0.27 year-over-year pull down?

Vince Ammann

Sure. Yeah, Dan, this is Vince. The rates that we’re using for the new valuation on our pension assets and our OPEB assets is, we’re using 6.75% of our pension and our OPEB assets. So that’s down from utility, excuse me, for the pension plan, we were at 7.5%. So we’ve adjusted our asset return rate down.

But the bigger driver of those is the discount rate on liability. We were at 5.3% for the pension liability last year and 5.1% for the OPEB liability and based on our rates for September 30th, we are at 4% for both this point in time. So, just only thought rates could be really low, they were lower. So, that’s driving the pension and OPEB expenses, which for the year from '12 to '13 that’s about $0.07 of the increase in our cost. So that’s that piece of it.

The O&M expenses are the remaining increased -- $0.20 increase is a factor of the lot of different things including pipeline integrity, uncollectibles and lot of other things. So, we don’t have anything really specific more detail on that than I can give you for that O&M expense. Is that helpful, Dan?

Dan Fidell - U.S. Capital Advisors

Yeah. It is. You said, it’s a number of things contributing, but would you say after the discount rate changes that the pipeline integrity and the uncollectibles are the two other largest pieces of it?

Vince Ammann

We expect that we can dig into that little bit further.

Dan Fidell - U.S. Capital Advisors

Okay. Great.

Vince Ammann

Yeah. I would say, we are looking at -- look at some -- we do have some IT projects. But I don’t have that number broken up separately that are driving some O&M expenses both if you’re converting and upgrading some systems and the rest is well, it's just our department expenses associated with pipeline integrity and other issues.

So, the point -- I'm sorry, there is -- I'm sorry, we do have additional marketing costs that Adrian was just highlighting that to me as well. We’ve -- now so we are going to enhance that program for seeking conversion of additional customers in the multifamily homes and that’s driving some of the additional expenses as well. So, I -- the point I was making is all these expenses that we highlighted are one that we think are clearly recoverable in a rate making setting.

Dan Fidell - U.S. Capital Advisors

Got you. Okay and great. And then just one more final question if I could, switching topics quickly on the CapEx refresh. The numbers coming up a little bit and you said I guess part of it are having to do with little faster expectation on the non-utility spend side, you talked about some investments. Can you talk a little bit about maybe little color in terms of what you are aiming for? Is that kind of more solar or there is some CHP projects in the future driving your thoughts here and just any additional color on this would be helpful? Thanks.

Gautam Chandra

Hi, Dan. This is Gautam Chandra. I’ll take that question.

Dan Fidell - U.S. Capital Advisors

Yeah.

Gautam Chandra

The non-utility CapEx, I would say is primarily solar in our forecast. We are looking at CHP projects and other, I would say, distributed generation projects. There are several in the Boards. But in terms of the majority of it at this point, I would say, is solar, whether it’s in our own commercial solar projects or some of the relationships that we have announced such ASD, Skyline and EchoFirst.

Vince Ammann

Dan, I would just say also the part of the uptick in 2013 as we’ve got a number of things in the pipeline, they just didn’t get closed in '12. And what we look forward to having a bigger year in '13 and we had in '12 and then probably leveling out to more of the $100 million number on ongoing basis.

Dan Fidell - U.S. Capital Advisors

That’s correct. Great. Thank you very much.

Operator

(Operator Instructions) Your next question comes from the line of Spencer Joyce with Hilliard Lyons. Your line is open.

Spencer Joyce - Hilliard Lyons

Hi, guys. How are you?

Terry McCallister

Hey, how are you?

Spencer Joyce - Hilliard Lyons

Doing well. Quick question here on customer growth for the regulated utility. Are you all still saying a considerable tailwind from customer conversions or is any portion of that either from this year or in gamuts for next year due to a possible uptick in housing or general economic uptick there?

Gautam Chandra

Yeah, Spencer. This is Gautam Chandra. I’ll take -- crack at that question as well. We are seeing some modest improvement in housing especially in our service territories. So, I think we are seeing some growth related to that.

And Adrian had mentioned I think in the analyst conference earlier this year, we did put in additional emphasis on conversion and multifamily markets and we are seeing some early benefits from some of those efforts as well. So, you are seeing both of those factored into our -- I would say, our improved outlook for customer additions.

Spencer Joyce - Hilliard Lyons

Yeah. Thanks for the color there and look to me like this quarter was pretty good on the customer side. I wanted to switch of gears just a second this just kind of popped into my mind with Dan’s questions there. You talked about most of the incremental non-utility CapEx being geared towards solar, that’s why I think you just kind of layout one or two of the drivers behind the investment decision there.

I know sort of across the industry we’ve heard that tax effort quite often drives the solar investment decision. I know you guys are outside of the New Jersey market and are being a bit more national and I think you’re vicious in your investment decisions. But can you just talk about a couple of the major points that you are looking for in evaluating those projects?

Gautam Chandra

Certainly. This is Gautam here, I will take that. So, when we look at potential solar projects, we are looking at -- again, our strategy is to invest in these projects and make them as utility like. So we try to make sure that the economics to the projects are going to be consistent and there is good -- a good regulatory framework in the geographies that we operate in.

So, we do look for very high credit quality customers that will ultimately be housing the projects. We make sure that the state incentives are transparent and that we are able to lock-in. State incentives to be extent that we can for the length of the contract that we have with the customers.

And our solar investment program is geared to take advantage of the tax advertise that we have. So, that we are not overextending ourselves and the ability to utilize the federal tax incentive. So, we look at all of those factors among others to decide, where we actually put those projects in place.

Spencer Joyce - Hilliard Lyons

Okay.

Terry McCallister

Spencer, this is Terry. I would add one other things, we remind people. Well, I think now it’s become more common place but from the beginning we’ve chosen to amortize any of those incentives over the 15 or 20 year life contract, so that we don’t have that earning cliff so to speak, everybody talks about the cliff these days. So, we don’t have that earning cliff upfront we provide a nice reliable, stream over the life contract for us.

Spencer Joyce - Hilliard Lyons

I’ve have use that earnings cliff at time to return to conversations. That’s what I had. Thanks a lot, guys.

Terry McCallister

Thank you.

Operator

(Operator Instructions)

Vince Ammann

Dan, I would just add -- I have been looking at some additional data since Dan’s calling. One other things that we have not really discussed is and looking at that fairly large increase in O&M from FY '12 to FY '13 is the fact that in this last quarter we did experience a significant lower O&M that what we’ve considered to be our run rate of O&M.

Part of that was driven by lower employee incentive costs that we’ve recorded in the current fiscal year. So, we're down about $0.08 from what would have been the guidance that we’ve based our O&M expenses on. So, I'm sure Dan is still listening. I just want to make sure that’s another probably piece of how we get back to the run rate that we have in FY '13.

Operator

Again, I would like to remind everyone that you can listen to a rebroadcast of this conference call at 1 p.m. Eastern Time today, running through November 23, 2012. You may access the replay by dialing 1-855-859-2056 and entering pin number 59434477. If there are no further questions, I will turn the call back to Mr. Bonawitz for any additional or closing remarks.

Doug Bonawitz

Well, thank you, everyone for joining us this morning. If you have any further questions, please don't hesitate to call me at 202-624-6129. Thanks and have a great day.

Operator

This concludes our conference call today. Thank you for participating. All parties may disconnect now.

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