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WGL Holdings (NYSE:WGL)

Q1 2013 Earnings Call

February 07, 2013 10:30 am ET

Executives

Douglas Bonawitz - Head of Investor Relations

Terry D. McCallister - Chairman, Chief Executive Officer, Chairman of Executive Committee, Chairman of Washington Gas Light Company and Chief Executive Officer of Washington Gas Light Company

Vincent L. Ammann - Chief Financial Officer, Vice President, Chief Financial Officer of Washington Gas Light Co and Vice President of Washington Gas Light Co

Adrian P. Chapman - President, Chief Operating Officer, President of Washington Gas Light Co and Chief Operating Officer of Washington Gas Light Co

Gautam Chandra - Vice President of Strategy, Business Development & Non-Utility Operations

Analysts

Mark Barnett - Morningstar Inc., Research Division

Operator

Good morning, and welcome to the WGL Holdings Inc. First Quarter Fiscal Year 2013 Earnings Conference Call. At this time, I'd like to inform you that this conference is being recorded. [Operator Instructions] 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 February 14, 2013. You may access the replay by dialing 1 (855) 859-2056 and entering pin number 89861513. 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.

Douglas 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 first quarter of fiscal year 2013 and the drivers of those results. A reconciliation of the operating earnings with results reported in accordance with Generally Accepted Accounting Principles, is provided 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 our first quarter fiscal year 2013 consolidated results. Following that, Vince Ammann, Vice President and Chief Financial Officer, will review the major items that led to the first quarter results. Also on this morning's call is Adrian Chapman, President and Chief Operating Officer, who will discuss key issues affecting our business and the status of some of our initiatives. 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 forward-looking statements made this morning.

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

Terry D. McCallister

Thanks, Doug, and good morning, everyone. I'm happy to discuss good news with you today. Our first quarter operating results reflect the continued successful execution for achieving our long term vision. Our non-GAAP operating earnings for the first quarter shown on Slide 3 in the presentation were $58.9 million or $1.14 per share, up from $58.1 million or $1.13 per share in the first quarter of 2012. Overall, we're on track to meet our goals for 2013. We have affirmed our earnings outlook, as Vince will discuss in a few minutes.

Our utility is performing to expectations and we are optimistic as we wait for the outcome of our rate case in the District of Columbia and the legislative decision regarding the STRIDE legislation in Maryland. Our utility customer base continued to grow as active customer meters increased more than 10,600 year-over-year for the first quarter of fiscal year 2013. We continue to execute our strategy to invest in and grow our non-utility businesses as some of these businesses are beginning to ramp up their contributions to earnings.

Our commercial solar generation capacity has increased to 15.6 megawatts, and we continue to add new projects. Our retail business recently announced PA WindPower, which is an innovative and unique green initiative in Pennsylvania. This community-based marketing campaign will reward communities that purchased WGES PA WindPower electricity source, exclusively from wind farms in Pennsylvania and will help residents, municipalities, civic organizations and other customers realize the mission of cleaner air and carbon reduction and a healthy environment. Finally, as noted in our earnings release, I'm also pleased that we're increasing our annual dividend by $0.08 to $1.68 per share. This 5% increase reflects our confidence in our strategic plan and our commitment to provide sustainable dividend growth for investors. This is the 37th consecutive year that WGL Holdings has increased the dividend on its common stock.

I'd now like to turn the call over to Vince to review the first quarter results by segment and the driver for those results.

Vincent L. Ammann

Thank you, Terry. And I would 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 practice, I will be referencing non-GAAP operating earnings in my comments.

I will begin with a review of our utility segment results. Utility segments operating earnings for the first quarter of fiscal 2013 were essentially unchanged to $0.85 per share, $0.01 below the same period last year. There were several offsetting items this quarter that are detailed on Slide 4.

Higher revenues from the timing of new rates in Maryland improved operating earnings year-over-year by $0.03 per share. As Terry mentioned, we also continue to add new meters. The addition of over 10,600 average active customer meters improved operating earnings by $0.01 per share. A lower effective tax rate and other miscellaneous items increased earnings by $0.02 per share. Offsetting these items, we had higher operations and maintenance expense this quarter, which reduced earnings by $0.01 per share. Higher depreciation expense due to increased investment in the utility plant reduced earnings by $0.04 per share. Finally, operating earnings were lower by $0.02 per share due to reduced revenues related to the recovery of gas inventory carrying cost driven by lower average cost of gas and inventory.

Before discussing our non-utility results, I'd like to remind everyone that we made a small change in November to the definition of our operating segments. All of our alternative energy investments, such as American Solar Direct, Skyline Innovations and Echo, are now reported within commercial energy systems. This segment will continue to include all activities of Washington Gas Energy Systems, which includes our commercial solar projects. The diagram on Page 10 of the presentation should help you visualize how the new structure relates to our previous reporting segments. This change would not happen -- materially changed the results for fiscal year 2012.

Turning to the retail energy marketing segment. First quarter 2013 non-GAAP operating earnings were $0.23 per share, down $0.02 per share from the year earlier. The primary drivers of the decrease, as detailed on Slide 5, was lower electric gross margins.

Lower electric unit margins were partially offset by higher sales volumes. Increased electric volumes in this first quarter versus the same quarter the prior year were driven by increased sales to government accounts. At the end of the first quarter, the retail energy marketing business served 186,800 electric accounts compared to 194,400 a year earlier with the account losses primarily among residential customers.

In the natural gas business, overall gross margins were virtually unchanged. Unit margins were lower, offset by higher sales volumes. Natural gas sales volumes increased 15% in the first quarter versus the same quarter last year. But a portion of the volume increased due to higher wholesale volumes from portfolio optimization activities and the remainder attributable to additions of a large state government contract.

The retail energy marketing business served 174,000 gas accounts compared to 177,100 a year earlier. As in our Electric business, the account losses were primarily among residential accounts. As we have discussed in the past, the pattern of quarterly margin recognition varies from year to year for both gas and electricity. And it's important to consider annual margins in evaluating the performance of the business.

Operating expenses declined due to lower customer acquisition expenses in the current quarter compared to the same quarter the prior year. Once again, we are pleased with the financial performance of the retail energy marketing segment considering the warm winter weather we experienced in December. The business units' weather-hedging strategies continue to be effective in the case of extreme temperatures.

Next, I'll move to the commercial energy systems segment. The first quarter -- for the first quarter, commercial energy systems business had earnings of $0.02 per share, an increase of $0.01 compared to last year. The increase is primarily due to increased revenue from solar investments. The commercial solar energy systems segment continues to add new solar energy projects to its portfolio. As of December 31, we have over 15 megawatts of installed solar capacity. During the first quarter, Washington Gas Energy Systems was awarded an additional project totaling $13.7 million in capital investment and representing nearly 5 megawatts of incremental solar capacity. When this new project and other projects currently underway are complete, we will have 30 megawatts of installed capacity representing $105 million in capital investments and a robust pipeline of future projects. As stated earlier, our alternative energy investments, such as American Solar Direct, Skyline Innovations and Echo are now reported within commercial energy systems. These investments now represent $38.9 million in capital investments since inception.

Finally, I'll move to the wholesale energy solutions segment. After adjustments to reflect storage inventory valued at current market prices, the wholesale energy solutions business had non-GAAP operating earnings of $0.07 per share compared to $0.02 per share for the same period of the prior fiscal year. The increase reflects higher realized storage margins driven by our ongoing investment in storage capacity.

Finally, I will provide fiscal year 2013 earnings guidance where we are affirming our consolidated non-GAAP operating earnings estimate. As shown on Slide 7, we are forecasting non-GAAP earnings in a range of $2.37 to $2.49 per share. Although the utility is tracking slightly better than expected due to lower operations expense -- maintenance expense and better asset optimization results, the nonutility subsidiaries overall appear to be on target. Therefore, we are reaffirming our initial guidance as we are still within the guidance range. On the non-utility side, we are seeing a benefit from our diverse businesses because while the Retail Marketing business is currently running slightly ahead of plan, this performance is offset by some modest slippage in our wholesale energy solutions and commercial energy systems businesses.

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

Adrian P. 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 2011, the Public Service Commission initiated an investigation into the reasonableness of our rates. In February 2012, we filed an application to increase our rates by approximately $29 million, of which $26.5 million relates to current and previously deferred pension and OPEB costs. We currently expect a decision in this case by the end of February.

Turning to Maryland, I first want to note that in late December, Governor O'Malley announced the appointment of Commissioner Kevin Hughes as Chairman of the Maryland Public Service Commission taking the seat of Chairman Nazarian, who was appointed to the Court of Special Appeals. Mr. Hughes has been a commissioner since August 2011 and prior to serving on the commission, Commissioner Hughes served as Governor O'Malley's Deputy Legislative Officer for 4 years focusing on energy policy and other matters. We are looking forward to working with Commissioner Hughes in his new role.

As you may recall in past years, we supported the bill on the Maryland legislature that would have put in place a process for funding additional infrastructure investments through a surcharge. During the current legislative session, we are again supporting a bill that will put in place a process for funding these investments. Governor O'Malley has recently indicated that he recognizes the need for accelerated recovery for utilities. And the new PSC Chairman has indicated that he will not oppose the bill in the legislature. We are optimistic that a surcharge mechanism will become a reality during the current legislative session, which ends in April. As currently written, the bill would be effective on June 1, 2013, and limit the surcharge that may be imposed to $2 per month for each residential gas customer.

As previously disclosed, we plan to file a rate case this spring in Maryland. Last year, we started on infrastructure improvements associated with our accelerated pipe replacement plan in Maryland, which calls for spending of $115 million over 5 years. The upcoming rate case should lead to recovery of and on these investments beginning this fall.

Turning to Virginia, in November, the State Corporation Commission issued an order approving our application to amend our previously approved SAVE Plan to accelerate our pipeline replacement in Virginia. The order approved an increase from approximately $25 million per year to about $40 million per year, which will be supported by a revision to our surcharges to reflect that level of expenditure. Under the plan, the company will have revenue recovery on $191.4 million in anticipated expenditures over a 5-year period beginning January 1, 2013. We initiated work in January to reflect the increased level of approved expenditure.

Also in Virginia, in early December, Washington Gas filed an application to amend its Conservation and Ratemaking Efficiency Plan or CARE Plan. The amendment will extend the CARE Plan to small commercial and industrial customer classes, which will further the decoupling of our revenues in Virginia. A decision from the SEC is due in April.

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

Terry D. McCallister

Thanks, Adrian. I'm encouraged by our business performance so far this fiscal year. I look forward to giving you further updates as the year progresses.

I'd now like to highlight a few developments that occurred during the first quarter. In 2012, we announced our subsidiary, Capitol Energy Ventures, entered into an agreement with UGI Energy Services and Inergy Midstream to develop an interstate pipeline known as Commonwealth Pipeline. We have concluded that the marketing -- we have concluded the marketing phase of this project we're determining in conjunction with our partners that demand for the project did not meet our expectations. Low gas prices and the short term impact of several low-cost expansion projects on existing pipelines hampered demand in the near term. We continue to believe that the market for the short-haul takeaway capacity from Marcellus production will develop, but we will be less active in promoting the pipeline until the market conditions change. We will continue to evaluate this and other midstream opportunities that are a good fit with our long-term strategic vision.

As mentioned earlier, we continue to add to our portfolio of solar assets. In December, Washington Gas Energy Systems signed an agreement with another local organization, the Washington Suburban Sanitary Commission, to install 4.9 megawatts of solar power in 2 of its water treatment plants. Washington Gas Energy Systems will own and finance the $13.7 million project, and the Commission will purchase power through a 20-year purchase power agreement. Construction is expected to start in May and the commercial operations beginning in the fall of 2013.

We're also pleased that in December, the District of Columbia City Council created a business personal property tax invention for solar energy projects and cogeneration systems within the district. Eligible solar and cogeneration systems will be exempt from personal property tax. Incentives in the legislation will likely accelerate the adoption of alternative energy systems in the district, which is consistent with our vision for clean and efficient energy solutions and will likely create additional investment opportunities in the district per our energy systems business. Each of these utility-like projects contributes to our goal of providing a long-term steady, but growing revenue stream for our investors.

I should also note that we're pleased with the American Taxpayer Relief Act passed in early January. The act permanently preserves the 15% dividend tax rates for most individuals. And perhaps more importantly for our industry, it maintains parity between the dividend and capital gains tax rate. This legislation will help maintain a reasonable cost of capital for our industry, allowing us to continue to grow and support the nation's natural gas infrastructure and will ensure that the utilities remain an attractive option for investors seeking steady returns and solid credit ratings.

Finally, we look forward to seeing many of you at our 2013 Analyst Conference on February 21, New York Stock Exchange. At that meeting, we'll be discussing our growth plans for the future and how we intend to accomplish those plans. For those of you that can't attend the conference in person, the webcast and presentation slides will also be available on the website.

So that concludes our prepared remarks, and we'll now be happy to answer your questions.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from Mark Barnett with MorningStar.

Mark Barnett - Morningstar Inc., Research Division

Just a quick question on the infrastructure opportunities. Given that the particular Commonwealth line didn't seem to work out, are there any other kind of earlier-stage projects that you're considering that would be along those lines, maybe a smaller pipeline or another joint venture?

Gautam Chandra

Mark, this is Gautam Chandra. I'll take that question. Yes, as Terry mentioned in his comments, we are actively looking at opportunities. There's nothing at this point yet for us to disclose, but we are very active at looking at other opportunities. We think over the next several years, there will be lots of good opportunities to invest in infrastructure from Marcellus to markets. And we are engaged in those pursuits.

Mark Barnett - Morningstar Inc., Research Division

Okay. And I understand that it might be too early to comment. But do you think in general, you're going to be looking for more bite sized, maybe more numerous projects or pursuing kind of a larger line, like the Commonwealth pipe?

Gautam Chandra

I would say at this point, we're open to all kinds of possibilities and I think the market's still in its early stages. And so we'd like to see and evaluate the different areas we can participate in. I'm not sure that we've made a conclusion that one direction versus the other at this point.

Operator

[Operator Instructions] If there are no further questions, I will turn the call back over to Mr. Bonawitz for any additional or closing remarks.

Douglas Bonawitz

Okay. 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 everyone, and have a great day.

Operator

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

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