WGL Holdings Inc. - Shareholder/Analyst Call

Feb.21.13 | About: WGL Holdings, (WGL)

WGL Holdings, Inc. (NYSE:WGL)

February 21, 2013 9:00 am ET


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

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

Harry A. Warren - President

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

Roberta Willis Sims - Vice President of Regulatory Affairs and Energy Acquisition

Douglas Bonawitz

Okay. We'll get started now. Good morning, everyone. I'm Doug Bonawitz, I'm the Division Head of Investor Relations with WGL Holdings. And I'd like to welcome everyone joining us here today at the NYSE, as well as all of you joining us via the webcast, to the 2013 WGL Holdings Analysts Meeting. We look forward today to giving you some perspective on our recent accomplishments, as well as an update on our strategic plans and our financial plans going forward. We should conclude the presentations by about 11:00 today, and then we'll have some time for a question-and-answer session.

For those of us joining us in person today, as well as through the webcast, you'll receive an e-mail from us within 2 days with a survey regarding today's event. We use this survey to gauge our effectiveness in providing you information, and we would greatly appreciate it if you could take a few minutes to answer the questions once you receive the e-mail. Thanks in advance for your anonymous, timely and honest feedback.

Today, we will be referencing several non-GAAP items in the discussion. Descriptions and a reconciliation of those items with those prepared in accordance with Generally Accepted Accounting Principles are available in the appendix of today's presentation.

We will also be making several forward-looking statements, and we would like to call your attention to our Form 10-K filed with the Securities and Exchange Commission for a more complete discussion of the risks and uncertainties that can cause actual results to vary materially from these forward-looking statements.

With that out of the way, I'd like to now introduce our Chairman and Chief Executive Officer, Terry McCallister.

Terry D. McCallister

Thanks, Doug. Thanks, everybody, for taking a little time out of your day this morning and joining us here. It's always kind of special for us to be able to host this at New York Stock Exchange. It's just kind of a special place, and we appreciate the Exchange working with us to let us host it here. It's a treat for us to get to come in here and this year in particular to get to use the boardroom. It doesn't lay out as well as we would like. It's always kind of fun to be here.

Before we get started, I'd like to take a few moments and introduce the team that's here today from WGL. We've got a fairly large team because we have a couple of days of follow-on meetings. So everybody that was with us is here today. Wandering around, as you checked in, and in the room is Mary Beth, Patty, Rose and Martha. If you have something you don't -- need something you don't have, find one of them, and they'll be glad to give you a hand with it. We also have with us today, Rick Moore, is our Division Head of Strategy and Business Development. We have Mike Donovan, which is Director of our Treasury and our Risk Enterprise -- Enterprise Risk Management Function; along with Tony Nee, our Vice President of -- and Treasurer. We have, in addition to Doug who you just met, Dan Foy, in the back, is also of our Investor Relations team. We have Roberta Sims, Vice President of Rates and Energy Acquisition. Roberta will be joining us for the Q&A session. And our speakers today are Vince Ammann, our Vice President, Chief Financial Officer; Gautam Chandra, Vice President of, almost everything, Strategy, Business Development and all of our Non-utility Functions. We have Harry Warren, President of Washington Gas Energy Services; and Adrian Chapman, our President and Chief Operating Officer.

During the course of this morning, we will continue a conversation and discussion that we started last year with you regarding our growth plans and how we intend to achieve those growth plans. Today, we'll provide you a fair amount of transparency into those plans. I would think that's kind of an understatement when you see what we'd provide you at the end of the day. So we'll provide you a lot of transparency into our plans today. You will see that our investments in our utility and utility-like projects have yielded the benefits such that we continue to believe our 7% growth plan is very achievable. And we think it's achievable in a low risk kind of way, and that investors should continue to value that.

While at the same time last year, we expanded our portfolio of clean and efficient energy solutions that we think customers want and that we believe fit our view of how we can deliver value to those customers in areas of expertise that we possess.

Some of you, who have been around awhile, may have noticed a bit of a new logo up here this morning. Gautam will talk a little bit more about our branding initiatives that's going on in a little while. But generally, the goal here is to present a more consistent image and a more cohesive message across all of our businesses and ultimately position WGL as the place you go to when you need the energy answers and energy solution that fits your particular energy needs. So it's to drive business to our corporation.

We'll start with our vision statement. We have shown you this many times before, and it hasn't changed. We have a clear and consistent vision statement. I think it's useful to begin all of our conversations with that vision statement. It kind of sets the stage for what we're trying to accomplish and a reminder to you, WGL Holdings is the preferred source of clean and efficient energy solutions that produce value for customers, investors and communities.

And by the way, I'll add again my thoughts and belief that natural gas is a clean and efficient energy solution. And I think it will be, by and large, the preferred fuel for many decades to come in this country. Drilling techniques and fracturing technology have all progressed, such that we have 100-year supply of natural gas in this country. And I think over the decades, we will have this real opportunity for the first time in decades and decades and decades to move toward energy independence in this country. And so the real key here for us is to kind of not yet on our own way on that. So I think it will -- it is a clean source. I'm also pleased in what we see on Capitol Hill these days, as well as at the state level. A lot of people are now talking about natural gas and even more importantly, a lot of people are talking positively about natural gas.

I do, however, believe we will continue to move toward a more carbon-constrained environment over time. And as such, we need to be able to participate and be successful in that environment in that future. And so I think the things that we're doing, the lessons we're learning, the expertise that we've been gaining in this area will serve us very well moving into the future.

Listed here are some principles, and I just want to take a minute and share with you. We haven't shared these with you before, but I thought it's worth a minute or 2 to kind of walk you through our definitions of them because you'll see them much more publicly displayed these days. It's in our corporate performance report that we just put out a few weeks ago and it will continue to show up in other places. These principles govern how people, processes and products work to deliver on the promises that we make to our customers.

So quickly, diversity is not only diversity in our people, but it's diversity in our products, our solutions and our geographic area. Innovation is not just -- it's not R&D innovation. For us, we don't think of innovation -- we don't look at ourselves as an R&D company. We don't intend to be that. But it's innovation in what we do and how we do it in all parts of our business, including the utility business.

Sustainability is in addition to the more current definition that gets used today, such as in a way of environmental sustainability but it's also creating sustainability in our businesses, creating sustainability in the communities and for our customers. And then lastly is delivery. Quite simply delivering on the promises that we make in ways that are visible and valuable. So again, those are our governing principles. Those will be driving our behaviors as we accomplish our vision.

Turning to our business segments here just for a second. Each of our business segment plays a key role in our success. The core and the foundation of our business has always been and will always be the natural gas, utility, Washington Gas, with all -- nearly 1.1 million customers in the greater metropolitan area. This business provides that steady foundation, growth returns that investors want. And so it will always be our core business.

Washington Gas Energy Services is our retail energy marketing business. This business has contributed to our growth in significant ways for 15 years now. It has done that through -- we've managed the risk in that business. We've taken -- minimized the risk in that business through effective hedging strategies and other strategies. Whether it's we've had the warmest winter in history last winter or some of the hottest summers that we've experienced in decades, recently, this business comes through those relatively unscathed, thanks to effective policies and hedging practices that we've put in place. We expect this business to continue to be a steady contributor to our business in the long term and a steady growth business for us.

Today, we have some new news to share with you. If you didn't pick it up, we had a press release last night. And so Harry and Vince will talk a little bit about our newest step that we've taken to further minimize risk in this business.

Washington Gas Energy Services and Capital Energy Ventures are our future growth businesses. And while Washington Gas Energy Systems has been in our portfolio for years, delivering clean and efficient design/build energy efficient solutions, primarily to the federal government, as well as large commercial businesses, and it will continue to do so. We put it in our future growth opportunities now because we now house all of our solar and other distributed generation projects in that segment. And as you'll hear from Gautam in a minute, that part of our business, we expect to contribute significantly to our growth over the next 5 years. Both of these businesses are now starting to make good contributions to our earnings.

Just a few operating statistics here. I won't go through them all, just for those that are not familiar with the company. Last year, we report $4.1 billion in assets and $2.5 billion in revenue, and we had a return on average common equity of 11.3%.

We believe we are a good value for the investor. This graphic here is just one way in which to measure that. You can see that we have handily outperformed the S&P 500 over the last 5 years in total return. We've also listed here many of the positive attributes that we think contribute to that success. I mean, we've got a terrific service territory. We've got a strong, efficient utility operations. We have growing profitable low-risk non-utility businesses. And I'd always be remiss if I didn't mention our dividend history and our dividend record. We have 162 years of continuous dividend payment and 37 consecutive years of increasing the dividend, including the 5% that we just announced a couple of weeks ago. We think these attributes will cause us to achieve our goal of long-term top quartile performance in the industry.

In addition to the value we add for investors, we believe in doing the right thing in everything we do. And that's no more evident anywhere in the corporation than through our employees. Our employees truly take this to heart. They are true performers in the communities in which they live and work. Last year, they donated nearly 10,000 hours of their own time, volunteering in the community, as well as helping us raise nearly $1 million for the Washington Area Fuel Fund, which provides financial energy assistance to those in the community that have trouble paying their energy bill, and it doesn't matter what kind of energy bill. So very engaged in the community.

We've also been recognized by Black Enterprise magazine again for the diversity of our organization, the diversity of our management team, the diversity of our board and the diversity of our spend. And this is the 6th year in a row we've received this recognition. And really, we don't do these things -- any of these things, really, for the recognition, but we're always pleased when somebody takes note and does recognize us for what we're trying to do in the community.

We also endeavor through our vision statement to produce value for our customers. Providing safe, reliable service at reasonable cost is what we strive for in the utility, and we think we do it pretty well. Safety is our first priority. Public safety is priority 1 for us. And everybody says that, but we do that through an active maintenance and pipeline replacement program, as well as through a very, very aggressive damage prevention program, one of the best, if not the best in the country.

The results of that are the reliability statistics that you see here, in that 99.7% of our customers last year experienced no disruption in their service. And at the end of the day, that's kind of what customers want. They want gas to stay in the pipe and they want it to show up where it's supposed to when it's supposed to. So that's what we really work hard to do.

Last year, we announced a sustainability goal for the corporation. We really believe in this. We just put it out again. I think last year, where we were the first -- probably first LDC and we may still be the only LDC with a sustainability goal out there, and we do that because we believe it's the right thing to do. It's not enough just to offer customers clean and efficient energy solutions. We believe in doing our part for the environment as well. So we're on track with this goal.

This year, we have, in addition to this, added a sustainability goal to our corporate scorecard, which is our short-term scorecard, annual scorecard, how we measure our success. And thus, if you believe in what you're doing, then you'll put your money where your mouth is, and so our scorecard really does determine our incentive. And so this is our corporate scorecard for 2013. I always think it's a little crazy when I hear people talking about we need to work hard to make companies tie pay to performance. And I think that's crazy because we've always tied pay to performance. It's the right thing to do. It's good governance for one thing. But the other thing is it's accountability. It's accountability for doing what you say you're going to do, and you do that by tying it directly to short-term incentives. So our short-term incentive program is linked directly to this corporate scorecard and the results of that. We think accountability drives performance. And so we've always done it that way. Our long-term incentive plan is directly linked to total shareholder return. That's exactly how we get paid a long-term incentive. So we tie pay to performance, and we think it's just a good practice. We've always done it that way.

You'll also notice on our scorecard, however, year in, year out, we take a balanced approach for our stakeholders and making sure we're taking care of all of our stakeholders. Whether that's the investor, the customer, the community or employees, we take this balanced approach for our scorecard.

And lastly, let me just hit some of last year's financial success. There's not much else that I can say any other way than we had a great year last year. We really did have a great year. We had record non-GAAP earnings at the holding company level. We had record earnings from Washington Gas Energy Systems. And we increased our return on equity last year by 1.4 percentage points year-over-year.

But as they kind of say, as the saying goes, that was last year. So what are you doing for me now? Going forward, we still believe we can achieve the 7% earnings growth plan that we put out last year. This morning, we'll start with Vince Ammann, our CFO, and Vince will give you an overview of the financial results, which are, really, kind of the results of the plan. And we're going to start that way instead of putting it at the end, so that you can put into perspective all of the other presentations, which are going to give you the details underlying the financial results. What goes in the plan? What are we doing? How are we going to achieve this?

And so we're not going to take a break this morning. It's not very long. So if you need to do so, get up and take one. And we're going to ask you to jot down your questions as you go, and we will have a Q&A session at the end. We'll answer all your questions at the end. And we're going to do that, so that you've kind of got the whole picture before you jot down your questions.

So with that, I'm going to turn the podium over to Vince and we'll get started.

Vincent L. Ammann

Thank you, Terry. As Terry indicated, I'm going to go over the financial aspects of our business plan. And our financial formula for driving shareholder value is fairly simple. We know shareholders drive their total -- derive their total return from a combination of share price appreciation and their dividends. And while we can't deliver directly on share price appreciation, we address this through our earnings growth, which we know the market values, in particular when that earnings growth comes from a quality, low-risk company.

The plan that we have starts with all of these elements on the screen here. We think all of them are important because we start with earnings growth, which then drives our -- focusing on top quartile earnings. We incorporate our risk management process in the execution of our strategies, so that we're able to maintain a strong balance sheet. And from there, earnings growth supports the dividend growth. And our strong balance sheet supports our top-tier credit ratings. By focusing on these 4 elements, our business plan, we -- in our business plan, we think, will drive long-term growth for our shareholders and a balance between risk and return.

Last year, we introduced you to this matrix, which was the result of our strategic study of business opportunities. We indicated that it was our intention to focus our new investments to achieve sustainable, quality earnings growth. We described our investment strategy as mainly targeting opportunities with low earnings risk and low capital risk, and we characterize the best of those opportunities as being utility-like investments. Later in the presentation, Gautam will discuss how our diverse businesses and investments are an outgrowth of our core competencies that we built over the years.

Since last year, we've made progress on our growth initiatives, as Terry said, and we're on track to achieve the 7% earnings growth in our plan. As you may recall, our study indicated that a 7% earnings growth level would support long-term top quartile shareholder returns. Of course, inherent in any business plan, there's the expected variability around the mean. We saw variances from the 7% target in both 2012 and 2013 that were caused mainly by the earnings from our utility. With the expected rate relief in Maryland that we will be seeking, the utility segment should rebound again in 2014.

Also in 2012, we saw the value of our diverse yet related non-utility businesses. While our wholesale energy business was adversely affected by warm weather and certain business development costs, our retail energy business had a record year. Under certain circumstances, we think the earnings from these 2 businesses can act as an earnings hedge against each other.

Similar, with our solar investments, breadth of our presence in the market helped us to balance our growth opportunities. For example, to ramp our -- for example, we were able to ramp up our commercial solar investments in 2012 and 2013 beyond our initial plans, which helped offset some delays in deploying capital with our other alternative energy investment channels.

Let me pause at this point and provide an important foundation for all of the forecasted operating segment details on this slide and later in the other presentations. We believe our presentation provides more specific earnings forecast by segment and by year than our peers. After announcing our 7% earnings growth plan last year, we received requests for more transparency into how our non-utility investments will contribute to these results. In presenting our best estimates, we haven't embedded a lot of ranges in our forecast. Events will certainly cause segment performance to be different from our plan. However, given the nature of our businesses and our risk management approaches, we believe the complement of our businesses provides a portfolio-type effect similar to what we experienced in 2012, which should make consolidated results more predictable in the long term.

To date, we've made enough progress on executing against the plan that we laid out last year. That we see it -- that approximately 40% of our earnings growth coming from the utility and another 40% from the utility-like investments and 20% from competitive businesses, and that's the same formula we laid out for you last year. Gautam will describe in more detail the underlying factors in our non-utility businesses that caused these plans to be achievable.

Our confidence in our plan was recently publicly reinforced by our Board of Directors approving the largest annual dividend increase in our history of $0.08 per share for an annualized rate of $1.68. The 5% dividend increase is our new targeted growth -- dividend growth rate, which will be supported by our 7% earnings growth rate. The annualized dividend chart on the right of the slide depicts our track record of 37 consecutive years of dividend increases and 162 years of consecutive dividend payments. This kind of growth in dividend payments provides the cash flow returns that our investors are seeking.

In order to maintain a comfortable margin to assure sustainability of our dividend, we target a long-term payout ratio of 65%. Over the past 5 years, you can see from this chart that our payout ratio has ranged from 59% to 69%, with an average of approximately 63%. If we achieve our targeted 7% earnings growth, our payout ratio should stay in this range. And by 2016, it would be approximately 61%, assuming a 5% dividend growth rate. Therefore, we believe our new targeted dividend growth rate is certainly sustainable.

Another reason we feel comfortable with our dividend payment plan is that our balance sheet is currently very strong. While we have been making significant investments this year in both our utility and non-utility businesses, our cash flows have supported an equity ratio that's nearly identical to last year.

Clearly, bonus depreciation contributed to part of the story, but our financial strength has also been bolstered by the steps we've taken to minimize the risk of cash flow and earnings volatility. With our resulting top-tier credit ratings, we are well positioned to make investments that are necessary in our business plan.

Another element of our strong balance sheet is our access to liquidity. In the short term, we use the liquidity provided by our commercial paper programs to finance the working capital needs of our businesses. These programs are supported by 2 revolving credit facilities.

Last year, shortly after this conference, we renewed these facilities for another 5 years and upsized the credit arrangements to a total of $800 million, $450 million at the parent company and $350 million at Washington Gas. At 12/31, we still had ample liquidity available under both programs. This snapshot in December is a conservative view -- sorry about that, I have to change the slide -- is a conservative view of our liquidity because it tends to be a relatively high point in our seasonal borrowing needs. It should also be noted that during 2012, our cash flow allowed us to retire $77 million in medium-term notes, and we issued no new medium-term notes during the year.

As Terry mentioned, last night, we took one more step to manage our cash flow and volatility and protect our long-term investment plans. Yesterday, we entered into a strategic supply and contingent collateral agreement with Shell Energy North America. While we have always taken steps to manage our commodity risks, we've been seeking ways to further mitigate our exposure by partnering with a financially strong commodity supplier, who would recognize the value of our retail contracts together with our accounts receivable as collateral for the related supply commitments.

If we could reduce cash flow volatility and parent guarantee requirements associated with price fluctuations in the commodities future markets, we could assure ourselves that we could have access -- cost-effective access to capital to fund our growth initiatives. Our deal with Shell meets these goals and substantially reduces our exposure to cash flow volatility and contingent collateral requirements.

We are very excited about this new deal with Shell. Later in the presentation, Harry will provide you with some of the operational considerations of this new arrangement.

Beyond our short-term borrowings, currently, the only long-term debt outstanding at the corporation is at Washington Gas. Historically, we've tried to manage the maturities of our long-term borrowings to reduce refinancing exposure in any one year. This schedule shows that we have very modest refinancing needs in any year of our planning horizon. The financing flexibility that I just reviewed with you in the last several slides protects our planed utility and non-utility investments. Gautam and Adrian will give you more details on the components of our investment plans. The level of investments represented here have been incorporated in our long-term financing plans.

I will now turn the presentation over to Gautam, who will update you on the progress we're making in growing our non-utility businesses.

Gautam Chandra

Thank you, Vince, and good morning, everybody. This is Gautam Chandra, and today I'll be discussing with you our strategy for growth especially in our non-utility businesses. And I'll be talking specifically about the commercial energy systems and the wholesale energy solutions segment, and then Harry will talk more about the retail energy segment right after my presentation.

You heard from Terry today how we're making great progress in implementing our vision. You also heard from Vince how implementation of that vision will turn into expected financial growth and results for us in the future. What I will do today is begin a deeper dive into our plans to give you more visibility into how we're planning to achieve those plans and also transparency into our -- the drivers of our forecast. Along the way, I'm going to share some metrics and rules of thumb that you can use to follow our progress as we implement our plans over the next several months and years.

But first, I will begin with a discussion of how we're building -- sorry, how we're building our portfolio of offerings and driving their acceptance in the marketplace. So we're building out a diverse portfolio of energy products and services by adding renewable and clean energy offerings to our existing natural gas heritage. Our efforts are -- and we continue to believe that consumers will continue to demand more and more clean energy in the future.

In choosing our investments as you've heard from Terry and Vince, we strive for balance across utility, our non-utility -- I mean, our utility-like and competitive segments. But the majority of the growth will come from the utility and utility-like investments.

Of course, as we build out our portfolio, we stay focused on our tried and true risk management approach. We've talked to you in the past about our crawl, walk, run methodology, which is whenever we enter a new area, we start with some controlled investments. We learned from that process and then baked out those learnings into accelerated growth in those segments.

I'd like to point out that methodology and action in our retail energy segment. We entered that business about 17 years ago, have consistently made a growing level of income from that business. Over the years, we've shared with you the different risk management techniques that we've used to drive earnings volatility out of that business. And today, we're pleased to share with you a new arrangement that Vince and Harry will be giving you -- or Vince, Terry [ph] and Harry will be giving you more details on that drives out the remaining cash flow -- or much of the remaining cash flow volatility from that business. It also frees up capital for us to invest in other businesses.

Finally, as Terry mentioned, sustainability for us, of course, means environmental stewardship. But beyond that, it's also in the financial sense. We are focused on long-term recurring streams of income that are built over sustained periods of time.

Today, I'll be sharing our plans with you in great details and also pointing out many specific opportunities that we're focusing on. But did want to point out that as we implement over the next several years, those specific opportunities may somewhat change because our focus is always to invest capital in the best, best areas at any given point in time. But my goal today is to give you better visibility into the criteria that we use to select and prioritize the investments that we eventually make.

This is one of my favorite slides, as it highlights our WGL family of companies, and if I may add, a growing family of companies. The tree clearly shows how we have built on our strengths and core competencies over time. The strengths of course include knowledge of the local energy markets, our brand recognition and solid reputation and of course, our financial strengths.

Washington Gas Energy Systems branched out in the 1980s, with energy efficiency offerings for the federal government market. In that process, it acquired a significant amount of expertise in engineering and construction of energy systems for commercial buildings. Energy services branched out in the 1990s, with the competitive gas tariff. And over time, services has broadened its offerings to include electric power and also added several renewable and clean products or energy offerings to its portfolio.

Recently, we have had the opportunity to combine the electric power market knowledge and renewable knowledge at services along with the construction and project management experience that we have at systems to begin to offer solar photovoltaic and solar thermal offerings to our customers under distributed generation-type constructs.

What we're seeing now is, again, our distributed generation expertise combined with what's happening in the natural gas market where there seems to be an endless supply at affordable prices, it's allowing us to now branch out into natural gas distributed generation, which I'll talk about in a minute.

Similarly, we've grown capital energy ventures by first managing our own storage and pipeline capacity. We branched out into managing that capacity for others, and over time, have built a strong portfolio of contractually owned storage. We're leveraging our experience at managing contractually owned storage at CEV with our experience of owning physical storage, Hampshire Gas, to pursue new physical infrastructure investment opportunities in midstream in the shale plays. So I would expect this to continue the same process of building on our core competencies to add more products and services to our addressable markets in the future.

Our product portfolio supports our strategic vision of bringing clean and efficient energy solutions for the benefit of our customers, our investors and our communities. We started with clean natural gas, it still is and will continue to be the biggest part of our portfolio as we move forward. Along the way, we've added renewables, whether they be wind or solar credits or carbon offsets at services or solar-generating or solar thermal offerings at systems.

Our offerings, of course, promote the efficient use of our precious energy resources by helping customers convert natural gas to useful heat or electricity near the point of consumption, whether they be through traditional natural gas appliances or through new technologies like combined heat and power or fuel cells.

And research has shown that the combustion of natural gas near the point of consumption is the most carbon and energy efficient use of this most important fuel. We have, of course, also continued to promote energy conservation measures through all of our various businesses.

And finally, our diverse and growing portfolio of solutions is focused on the mid to downstream sectors of the market, whether they be in the distribution, transportation and storage of natural gas; supply of competitive electricity and natural gas in deregulated markets; or renewable or natural gas-based distributed generation in areas where it makes sense.

And again, you can expect to continue to add to this portfolio as we discover new and promising technologies in our addressable markets.

As Terry mentioned, in conjunction with building out our portfolio, we have also embarked on the study of our corporate identity, including WGL Holdings and all of our operating subsidiaries. The purpose of the study was to understand internal and external perceptions, our stakeholder perceptions of what kind of company we are and how the market values our services and offerings.

After significant research with external and internal stakeholders, we identified that one of the key market demands is for our company to provide energy answers. As you can appreciate, in a time where both the value and the number of energy solutions is very high, customers want a trusted adviser to turn to for answers and for solutions. As a result, one of our major initiatives this year is to build the WGL brand as the parent of a family of companies that provides energy answers and brings innovative new products to our customer base. The focus of our branding effort is both towards external stakeholders and internal stakeholders because we ultimately believe that our employees and our partners delivering on our brand promise is the best way for us to build our brand.

Our brand promises, of course, what our key stakeholders should trust us to provide and what they should expect from us. The ultimate goal again, as Terry said, is to drive more customers to buy more of our products and provide bottom and top line benefit to the company.

On the right of the slide, you see our new logo for the parent company, WGL, and you'll see more of this in the future as we launch our enhanced brand identity. And you'll be seeing more actions and results from this initiative in the coming months and years.

I will now begin discussion for our commercial energy segment, which has begun to provide meaningful contributions to our overall results. Almost all of the growth in this segment comes from what we term as utility-like, where we make upfront investments that provide long-term steady streams of income. And you'll also see from the discussion in this segment that this highlights our stairstep or what I like to call pancaking approach to growing earnings, as we add incremental new investments every year to add to earnings from an established base of assets.

As we reported earlier in our earnings release, this year, we have consolidated our traditional Washington Gas Energy Systems business with our alternate energy investments all under the commercial energy systems reporting segment. So the reporting from this segment includes the results from our project financing agreements with American Solar Direct, Skyline Innovations and EchoFirst. The primary focus of this segment is to own and operate distributed energy systems. This includes large commercial photovoltaic systems under power purchase agreements, residential and small commercial solar photovoltaic and thermal systems under long-term leases. This business is of course enabled by our knowledge of energy technologies, our knowledge of power markets, including the buying and selling of solar renewable energy credits and also our construction project management discipline.

We're one of a few companies in the country that has learned how to leverage our own tax appetite to build an effective and attractive portfolio of assets. As Vince mentioned in his remarks, we deliberately structure these investments to produce a steady and growing stream of income.

And as I will demonstrate by discussing some of our specific projects, these investments reflect our risk management philosophy: All of the deals require that the end customers be of highest credit quality under long-term contracts. Our portfolio is deliberately designed for geographic diversity to take advantage of the best locations for SREC values, prevalent power prices and state level market structures.

We focus on technologies with long-term potential for growth and structure our investments to minimize risk of capital loss. For example, in all of our developer relationships, the cost of customer default is borne by our development partner.

And then finally, focusing on multiple bite-size investments also reduces the amount of time to bring contract to revenue production and also frees us from dependence on our -- on results from any one customer.

Our growing solar footprint now spans 10 states with the most attractive market structures, and we have 40 megawatts of distributed solar capacity either under contract or already in operation.

Our assets feature diversity from several perspectives. The distribution of our assets, focused geographic diversity, allowing us to take advantage of the best state incentives, installation characteristics and areas that feature the best economic growth prospects.

The diversification continues into our technology selection, which includes solar generating, solar thermal and hybrid technologies that include both solar generating and solar thermal. And finally, our customers range from residential homeowners to small and large commercial enterprises.

Our Kit Carson project with a long-standing and economically stable co-op in New Mexico, is a great example of the types of project we like to invest in commercial energy systems. It's a 1.5-megawatt ground mount system with articulating panels that follow the sun to maximize generation efficiency.

The project allows Kit Carson to provide clean, renewable power to its customers, while allowing us to own and operate an attractive distributed generation asset, which provides for a long and stable stream of financial contributions. The project took less than a year from contract to operation and features 25-year power purchase agreement with an annual escalator built in and the value of the SRECs bundled into PPA offtake. So there is no residual risk of fluctuations in SREC values.

Our project financing commitment to American Solar Direct is a good example of one of our developer relationships. Our initial commitment with ASD signed approximately 2 years ago is almost completed, with 1,500-plus residential systems purchased under 20-year leases. Our customer and asset base features homeowners with very high FICO scores. And again, the state incentives in California are upfront cash payments, so there is no residual risk related to state incentives.

Let me now discuss the financial expectations from this segment. This chart reflects the power of our annual layering or pancaking of results, as we continuously add new distributed generation projects to an established base amount. The systems that we already have in service or under contract awaiting construction and operational commencement will contribute approximately $0.19 per year in EPS or approximately half of our planned total contributions that we expect from this segment by the end of fiscal year '16.

This level of earnings contribution through '16 corresponds to the roughly $100 million in nominal investment plan that Vince referenced in his presentation. And I'd like to also add that built into this projection is a projection of our own tax appetite that we bring to the table, so we believe we have all the essential ingredients that we need to make this plan a reality.

The potential variability that you see in the out-years of fiscal '14 through '16 in the chart largely result from variability in some potential SREC pricing from future projects. Of course, it will depend on the ability for us to continue to build out the projects at the schedule that we've outlined and also some variability introduced from some accounting treatments that I'll discuss in a minute.

And again, I'd like to highlight that these results come from both our directly owned commercial solar systems, as well as our developer relationships. And I'll discuss the drivers of each of those separately.

So turning first to our developer channels. These include American Solar Direct, Skyline and Echo. These are either sale-leaseback arrangements with our developers or they're structured as partnership flip models. And they include residential solar PV systems, small commercial solar thermal or solar PV and hybrid, which are both a combination of solar PV and thermal.

A good rule of thumb to use with these investments is that they will generate about $0.10 to $0.15 of EPS or $100 million of nominal capital investment once they are fully deployed and they've gone through their settling-in period. And from settling-in period, I'm referring to the fact that some of these investments are subject to accounting treatments like HLDV, which stands for Hypothetical Liquidated Book Value, which some of you may have heard of that accounting treatment. But what we've discovered is investments subject to that accounting treatment in the first few years tend to be a little spiky. Once they -- after that they settle into a more stable pattern. We will expect to see some impact from that in our planned period, and we'll certainly provide you more visibility into that when that occurs.

This chart shows the build-out of our commercial scale or directly owned solar PV generating systems. The contributions from this side of the business correlate well to the total amount of generation output realized from these systems. A good rule of thumb in this area is that for each 12,000 megawatt hours of generation that's consumed by our customers, we realize about $0.02 in earnings per share, and we plan to provide you on an ongoing basis with the amount of generation capacity that we have in operation, as well as the actual amount of generation that our systems produce.

Again, our comfort in providing this specific guidance comes from how we manage the 3 major value streams that come from this area. Those value streams are customer payments, investment tax credits and state incentives, or SRECs.

In terms of customer payments, we only accept customers with very strong credit history. And in the commercial area, we have lots of experience with our retail energy business in analyzing commercial credit. It's also worth pointing out that since most customers are saving money, they're not likely to default paying to us because the payments they would make to the utility are typically higher than the payments they're making to us.

In terms of investment tax credits, we amortize these over the life of the deal instead of taking them as income right away, which lets us avoid what some others in the industry are facing in terms of an earnings cliff, if they cannot continue to add projects at the same rate as they were able to do historically. And again, in this area, we size our total investment program to our own tax appetite. So there isn't a huge lag between when the tax credits are generated and when they can be monetized.

And finally, our geographic diversity allows us to operate in many attractive states, and makes us less dependent on the SREC prices or the structure of any particular given state. We also try to lock in multiyear SREC offtakes, as you saw in the Kit Carson project.

In states like Maryland, where we have a sizable portfolio of assets, we actually size our business to the SREC requirements of our retail energy affiliates, so we always have a ready market for those SRECs.

And finally, the business also benefits from the expertise that we have acquired in buying and selling SRECs, especially in PJM within the retail energy segment.

Finally, just as an illustration, we distributed our planned growth in the future equally between the developer channels and our directly owned commercial solar projects, but I would like to say that the actual results may vary from that because again, we try to channel investment in the areas that are most lucrative at any given point in time.

As you can see from this chart, the market is expecting continuous robust growth in distributed solar installations over the next several years. What I'd like to point out is that our plan is not dependent on us growing our solar business at the same rate that's predicted by the market, which is 20% to 30% a year. We basically achieve our plan if we can continue to add systems at the same rate that we have already achieved historically.

The chart on the right-hand side also presents a growing appetite across the nation for distributed natural gas-based generation, which is another growth area of opportunity for systems.

So in terms of what's next. We believe that the growth prospects are very bright for this area. We expect our continued geographic expansion of both residential and commercial solar and already have a solid pipeline of $70 million of future projects that we expect to convert over the next months and over the next year. And these $70 million will yield about 29,000 megawatt hours of generation once they are fully deployed.

The continued outlook for natural gas prices remain low and stable over the next many years. It's prompting a lot of popularity for natural gas-based distributed generation, which includes fuel cells, micro-turbines and even the old reciprocating engine is making a comeback.

There are also a lot of additional state incentives being offered for these systems to promote this technology. For example, we recently worked with the council of the District of Columbia to pass legislation that would exempt CHP facilities from property taxes. The council saw the opportunity for local economic development from these facilities as very, very attractive.

We have several opportunities in this area that are in advanced stages of development, and hope to share some of those soon. We're also seeing innovations like solar leases and PPAs making their way to productizing energy efficiency offerings for both residential and commercial customers, and we hope to be able to capitalize in some of those in the future as well. And both the natural gas-based distributed generation and energy efficiency are attractive because they're not as dependent on tax benefits to be economically viable.

As a final note on this segment, you do not hear me speak anything about our traditional government energy efficiency business, and the reason for that is we are not expecting that business to grow in the next few years. The continued gridlock in Washington that all the government contracting businesses are facing affects us in the same way, where a lot of the projects that, frankly, need to get done are not being released by the government agencies.

I will now begin discussion of our competitive segments, which includes wholesale energy solutions and retail energy marketing, and I'll focus only on the wholesale energy solutions part. This segment again also has started to contribute meaningfully to our earnings contributions. And as you can see from this chart, our current plan is to keep the contributions from all of our competitive businesses to within 25% of our consolidated results, again to stay within our targeted consolidated risk profile.

Wholesale energy solutions consist mostly of low-cost, single term storage that we own under long-term contractual arrangements, as well as some shorter-term asset management activities for third-party storage and transportation assets.

Now I'd like to highlight the term own, because we don't physically own the storage, but we do have very long-term contractual ownership. Some of these contracts span for several decades and then have rights of first refusal beyond that. So we effectively control these assets for a very long period of time.

We have built these assets over the last several years using, first, our own experience in our own backyard in the northeastern markets and branching out from there. And now, we have assets in 16 different pipelines across 20 different states.

Again, we maintain our same risk management philosophy here, focusing on contracts that are at low prices, concentrating our business on creditworthy counterparties and also robust diversity -- a robust mix of diversity in the assets and geographies where we operate. We also manage our portfolio very actively with very tightly controlled risk tolerances.

This chart highlights our future expected financial contributions from this segment. And a few points I'd like to make about our projections. Most of the contributions come from contractually-owned storage. And as you can see, after a couple of years of investment in this area, we're expecting this segment to begin to materially contribute to our results and build in the future years.

As you look at the potential results in FY '14 through '16, you will notice that our plan is to be on the lower end of the potential EPS range that could be realized, and the reason for that is our plan is currently pegged to the storage spec that we see in the marketplace, which are at historically low levels.

And even though the projected variance in EPS from this segment is decidedly wider because there is exposure to commodity price fluctuations here, it's worthwhile noting and a testament to our risk management philosophy that even in these adverse market conditions, our portfolio is designed to provide positive results with significant upside available so our plan of spreads revert back to historical long-term averages.

The biggest driver for the business -- for this business is the level of long-term storage capacity that we have under contract. We already have over 22 Bcf of long-term storage that will come online through FY '14. And we're only projecting a modest level of increase from those levels in the 5-year plan.

Just to show everybody, our average costs for our storage portfolio is in the high 50s in terms of cents per decatherm of storage that we pay in demand charges. And just for reference, the historical calendar spread for storage has been between $1.10 to $1.80. So that helps you understand some of the economics from this business.

Our EPS projections from this business currently on the plan are based on the prevailing calendar spreads, which again, as I mentioned, are at historically low levels. And the rule of thumb for this business is our long-term EPS expectations from this segment will range from 0.25% to 0.75% per Bcf of storage, with the lower end based on current market conditions and the upper end achievable if storage spreads move back towards their historical levels. And we'll, again, continue to update you on our progress in terms of our asset build-out in this segment over the next -- over the coming months and years.

In addition to continuing to acquire low-cost, long-term storage and opportunistic asset management agreements, our focus in this segment is also to pursue midstream physical infrastructure asset ownership opportunities like the Commonwealth Pipeline. The abundance of natural gas continues to be produced in the Marcellus and other shale plays, combined with the reinvigorated interest across the board in increasing the use of natural gas as a heating fuel, for power generation, for manufacturing and even export, we believe, will continue to drive additional interest in developing midstream infrastructure. And our location in and access to geographically very attractive markets makes us a natural participant to participate in those markets. Of course, many of those projects take a long time to develop, and we expect to be discussing some of those developments with you over the next months and years.

This concludes my portion of the presentation. I look forward to answering any questions you have during the Q&A session. I will now turn the podium over to Harry, who will continue the discussion of our competitive growth segments with retail energy-marketing.

Harry A. Warren

Thanks, Gautam. Good morning, everyone. In my presentation today, I'm going to share with you the strategic principles that continue to form the foundation of the success of our retail marketing business and that differentiate us from others in the industry. And following that, I'll discuss our EPS forecast and the drivers of those forecast.

Our retail energy-marketing business, as you've heard, is a well-established company within the WGL Holdings portfolio with about a 16-year track record. We've grown to be a significant earnings contributor, delivering growing and increasingly predictable results.

The key strategic elements that form our successful approach to retail energy-marketing are: Developing and maintaining a strong market position in the areas we serve; seeking balanced growth across customer segments, geography and energy products; establishing leadership in bringing clean energy solutions and offers to the market; and managing key business risks.

As you'll see on this slide and the next, we maintained significant scale and market share in both natural gas and electric markets in all the jurisdictions within our traditional footprint. We think that scale and market share are important for a number of reasons. They create efficiencies of supply, larger volumes of wholesale purchasing, more gas assets to control, efficiencies that are not available to smaller scale, smaller share competitors. Given the continued fragmentation of business rules and processes across restructured states and utility service areas, scale and share also allow for more internal efficiency in managing the range of billing, marketing and other customer-facing processes. And scale and share increase market reputation, which is important to a retail customer-facing business.

On the electric side of our business, across Maryland, D.C. and Delaware, we hold 17% to 27% shares of the electric load served by competitive suppliers. And in terms of accounts served, the range of our market shares are even higher between 24% and 46%.

In D.C. and Delaware, you'll note that there are higher shares of accounts relative to volumes, and that's due to the fact of our being the most active residential supplier in both of those markets.

The reason for our recent focus on Pennsylvania is clear from the figures on this chart. Quite simply, it is a very large market, larger than the combined market sizes of all the other jurisdictions we serve. A few years after entering the Pennsylvania electric market, while our share is small relative to the areas we've traditionally serve, you can see that it is our second largest market in terms of accounts served and will soon be the second largest in volume. We will continue to focus on building volume, customers and, ultimately, share in Pennsylvania.

On the gas side of our business, our market shares are also substantial. In Maryland, Virginia and D.C., we command significant shares of both load and customers. Delaware only permits gas choice for a handful of the very largest customers. And while we serve most of those accounts, not -- we don't serve the very, very large industrial accounts that tend to drive the load in the state of Delaware.

Pennsylvania holds the same attraction for us as a gas market as it does as an electric market. The overall market is larger than all the other markets that we share -- that we serve, combined. We served our first gas customers in the summer of 2011. And while our market shares among competitive suppliers aren't really measurable yet, even our initial entry has produced a meaningful numbers of accounts and sales volume. As with electricity, our goal is to build scale and share in Pennsylvania.

Our strong positions in the mid-Atlantic place us in the top 20 companies nationally on both residential -- total residential customers served and for non-residential electric load served.

As I've noted for you in the past, we work to build our business across all customer segments, across both gas and electric sales and across jurisdictions in a balanced way. We continue to feel that this diversified approach provides stability to our business in the face of competition and other market pressures and prepares us to capitalize on opportunities, wherever and whenever they arrive.

Since we've just covered jurisdictional data, let me focus here on energy type and customer type. With regard to energy type, we look to both grow both our gas and electric margin contributions in the coming years. Though as you can see from the figures on the slide, we expect the majority of that growth to come from the electric business.

Looking at the various customer groups that will contribute to electric and gas growth, you can see that we expect to increase both residential and commercial sales volumes for both energy types. The big driver on the electric side will be commercial business, while we expect gas growth to be more balanced between residential and commercial customers.

Note that we don't plan to increase government business. We have been much more successful in that market over the past few years than we had been, but while we're happy to expand that business, if it's producing suitable margins, our forward plans don't count on growing that particular segment.

I mentioned a moment ago that the size of our market position overall puts us in the top 20 marketers in the country for non-residential electric sales and for total residential accounts. Because of our balanced growth approach, there are only 7 companies nationally that outrank us in both of those categories.

With regard to maintaining our clean energy leadership, we continue to build participation in our programs, with over 20,000 customers now contracting for significant amount of wind power or carbon offset quantities. As part of our continued national leadership, we brought the U.S. EPA-sponsored Renewable Energy Markets Conference to the -- to Washington D.C. this past September by stepping forward as the city sponsor for that event.

In Pennsylvania, we've launched our PA WindPower offer, for which we source all of the wind supplies within that state. And we've launched a community-based campaign in the greater Philadelphia area to provide some new incentives and buying options there.

Overall, we're proud to say that, in FY '12, our voluntary wind power sales were over 700,000-megawatt hours, and that represents a 70% increase to the roughly 1 million-megawatt hours of renewable energy we're required to source for mandatory RPS compliance.

While we have a solid position in the marketplace today, we're acutely aware of the competitive challenge of maintaining and growing that position. An interesting data point on just how competitive markets are is the recent press release by the Pennsylvania PUC that reports over 200 licensed suppliers in that state.

The 3 strategic elements we've just discussed provide a certain level of differentiation from our competitors as we move forward, but we're looking to develop more differentiators in that crowded competitive field. The corporate positioning that Gautam just described will become a key element of that differentiating strategy as we look to leverage the broader value that the range of corporate capabilities can bring to our customers.

In addition, within Washington Gas Energy Services, we recently completed a comprehensive market position study. The work included both qualitative and quantitative market research that led to custom market segmentation maps and better understanding of our customer needs. It included an internal analysis of customer lifetime value, and it resulted in a more focused brand proposition description.

Taken together, these elements are guiding better customer targeting, more focused product and service development and better customer communications.

Our market entry into Pennsylvania reflects some of the directions that have come from that work. For example, we target customers with a strong interest in green products, and you can see that reflected in the new Pennsylvania-focused wind power offers that I just described.

We have strong relationships with brokers and consultants in the mid-Atlantic. We recognize them as a customer segment, and we're using those channels to get access to commercial customers, augmenting our direct sales efforts. And we're focusing on commercial clients with multiple properties and other group aggregations, where we've developed some differentiated competitive capabilities.

Our retail business must be anchored in careful risk management, especially the balance of retail sales commitments and wholesale supply purchases. And with our 16-year track record, we feel that we -- assume [ph] we're equal to that task.

In the past few years, moreover, we've been focusing not only on managing that risk, but also on increasing the predictability of our gross margins through sophisticated weather and price hedging. Last winter was the warmest on record in the D.C. region. And despite a deficit of 23% in heating-degree days relative to normal, we only saw our natural gas margins erode by 1% from our initial normal weather budget for the year.

Similarly, the last 2 summers were 2 of the 4 hottest on record, with cooling-degree days 17% and 20% above average. Our margins results came in on target both years and, in fact, showed some modest improvement in the environment of very low power prices.

As you saw in our press release yesterday and as Terry and Vince have already mentioned, we've entered into an agreement with Shell Energy North America, under which we can purchase the substantial majority of our energy supplies from and through Shell in a secured arrangement that greatly limits our need to post collateral on those transactions.

We mentioned at last year's conference that we were investigating new credit arrangements to reduce the collateral support requirements we placed on the holding company and to untie our future growth opportunities from the practical limitations of credit support. After investigating a range of structural options and proposals, we settled on this relationship as the clear winner. Shell has significant experience in this type of arrangement, and we're very excited to be working with them.

This slide shows a few of the particular features of the facility, some of which Vince has already noted, but there's 2 that I'd like to focus on at this moment. First, note that the facility provides us with access to other suppliers in the market through Shell. While we expect Shell to originate substantial volumes, we need to assure access to the most cost-effective supply available at all times, and this facility allows us to do that.

Second, we will slow some energy and purchases outside the facility to maintain access to some small specialty suppliers in our region, weather hedge counterparties and to handle the purchases of products that we make directly from RTOs and utilities.

Note that the projected fees associated with this arrangement are baked into the financial forecast that we're about to discuss.

So moving on into our projected financial results. The top line drivers of earnings growth are sales volumes, together with achieving adequate unit margins. As I've said in these presentations over the years, the unit margins, dollars per decatherm for gas and dollars per megawatt hour for electricity are numbers that we focus a lot of attention on in managing our business and they are good numbers for you to monitor. There is year-to-year variation in unit margins. And as we discussed in our quarterly earnings release calls, the quarter-to-quarter margin recognition can be even more variable, so annual figures are the ones to focus on.

For gas, our target unit margin continues to be $0.55 per decatherm. We did better than that in the past 2 years. In FY '11, asset optimization on our side added significantly to unit margins and overall earnings. And in FY '12, our ability to preserve total margins in the low-sales volume situation led to the higher-than-average unit margins. Our current FY '13 guidance is based on unit margins slightly above target as well.

On the electric side of the business, you can see that we will be working to continue the upward trajectory of sales volumes that we've been on. We've also been over performing on our electric unit margins relative to our long-term goals. And for those of you who remember our discussions from prior years, you'll see that we've increased our long-term target from $5 per megawatt hour for electric margins now up to about $5.50 in our current forecast.

In the remaining years of the company's 5-year plan, our retail energy-marketing business is forecast to continue to be a strong and stable earnings contributor. Now the projections you see here don't seem to reveal the growing trajectory of volumes that we've just been talking about. But I'd ask you to keep in mind a couple of things. The better-than-expected results in fiscal year '11 and '12 were driven by those opportunities in managing the gas assets I just mentioned a few slides ago. And in FY '12, our earnings benefited from the combination of a very hot summer and unusually low power prices.

As for FY '13 and the out years of the forecast, the cost of this new supply credit facility with Shell are baked in. That is an added cost, but it renormalizes the risk profile of the business, and it creates a better platform for future growth.

For your reference, the FY '16 figure in this graph includes nearly $7 million pretax in fees associated with the secured supply hedging facility. So I will note that if you add the $0.69 projected contribution shown on this slide for FY '16 to the planned contribution from wholesale energy solutions that Gautam discussed earlier at that low end of the range, you'll see that the 24% of EPS goal for the competitive supply businesses is met by these plans.

So that concludes my formal remarks. Again, I'll be available to answer your questions later in the program. So I'd now like to turn the presentation over to Adrian Chapman, our President and Chief Operating Officer, to discuss the utility business.

Adrian P. Chapman

Thank you very much, Harry, and good morning, everyone. I'm Adrian Chapman, President, Chief Operating Officer. Very happy to be here today.

This morning, I'll provide you with an update on our key regulatory, operational and growth initiatives at Washington Gas utility. We're successfully executing on the plans that we've laid out, many of which we've discussed with you previously. As Terry mentioned, safety and reliability are the foremost priority for our utility operations. We're expanding our pipeline infrastructure investments, and we'll use our surcharge mechanisms, as well as periodic rate cases to achieve a timely return on these safety-related investments.

We're also making investments in technology to improve our operating efficiency to complement our ongoing BPO success. And we're dedicating additional resources to maximizing our customer growth above historical levels.

It's important to recognize that there are substantive employment diversity in the Washington D.C. area as described in the chart on this slide. The federal government represents only 13% of the jobs in our region. Although federal spending certainly affects employment in many of the other sectors.

Given the potential for federal spending cuts, we routinely review data and analysis performed by George Mason University, Delta Associates, as well as Metrostudy, to explore potential effects on our local economy.

Federal spending is down from 2010, where it peaked. However, while we don't anticipate federal spending increases, studies indicate that even under worst-case scenarios on federal spending, the Washington region will still produce a positive gross regional product because of the performance of other sectors in the D.C. economy. Therefore, we believe the Washington D.C. region will continue to hold its favorable position relative to the economies of other areas, and local economists and experts are predicting high demand for jobs.

The lower graph on this slide demonstrates the robustness of this region from an employment perspective. As of December 2012, the unemployment remained -- rate remained the lowest in the nation among major metro areas at 5.2%, down from 5.4% a year earlier. Our region also continues to top all other U.S. Metro regions in educational attainment, as nearly half the population over the age of 25 has a bachelor's degree or higher.

Greater Washington ranks well below New York, San Francisco and Los Angeles in terms of cost of living. And when combined with the region's higher income, as shown in the upper chart, equals a powerful and attractive combination. All of this data regarding wealth, employment and affordability mean that our customers can choose gas as their preferred product, and they can pay their bills on a timely basis.

As described in the prior slide, strong job creation, diverse industries and low unemployment give the greater Washington region an edge. The Washington area ended 2012, exhibiting growing strength in the housing market and increases in new construction spending. Surveys report that nearly 60% of our consumers still prefer our product and continue to capture -- we continue to capture new residential market share at more than 90%, in part due to gases' affordability, environmental benefits and comfort.

And while single-family and townhouse markets had been part of our housing rebound, the Washington Metro area continues to be one of the best apartment markets in the nation due to the robust job market that's appealed to young workers and a transient workforce.

Last year, we started a conversion initiative, targeting nearly 50,000 potential [indiscernible] customers and ended up tripling our annual conversion prospects. And therefore, across our residential, multi-family and conversion markets, Washington Gas anticipates that it will add between 11,000 and 17,000 new meters each year over this forecast period, reaching a growth rate of 1.5%.

Our capital budget includes investments to support that growing number of customers that we serve and to make timely investments in the replacement of infrastructure, equipment and technology.

Our pipe replacement programs in the District of Columbia and Virginia provide for timely cost recovery through surcharge mechanisms. And we have legislative support for a bill in Maryland that, if signed by the governor, would provide policy guidance to the Maryland Commission to support a surcharge mechanism for accelerated pipe replacements.

I'd like to highlight on this chart that our new business and pipe replacement programs, including our efforts to enlarge our surcharge-based programs in D.C. and that pending legislation in Maryland, represent about 50% of our annual planned additions that are subject to funding outside of traditional base rate cases, therefore immediately contributing to earnings.

Overall, we plan for continued utility investment in our business to achieve safety, reliability, efficiency and earnings success. The chart on this slide shows how our investment plan realizes rate base growth across each of our jurisdictions over the 5-year period from $1.6 billion to $2.1 billion.

Slide 77 shows how the same net rate base growth from $1.6 billion to $2.1 billion will be realized through our capital expenditure budget through 2016. As you can see, our support for new customers, safety-related and other investments, including our expectation to fund a new customer information system, all net of depreciation and deferred taxes, realized $0.5 billion growth in net rate base.

I'll now address our regulatory strategy of utility as it's focused on supporting our financial objectives around stable earnings growth. Our utility earnings growth traditionally starts by adding new customers and their associated revenues. The revenues provide for a return on and of the associated capital expenditures. Revenues above that level help to offset O&M increases above the level embedded in our existing rates in each jurisdiction and can provide for return on the non-revenue-producing planned investment.

We generally have filed rate cases every 3 to 5 years to rebalance our revenues and expenses, the timing driven by the number of new customers, additions and the underlying cost of serving all of our customers. Through both legislative and regulatory advocacy, we're seeing a higher percentage of our safety-related investments being supported through surcharges that provide us with a timely return on those investments. And in the absence of associated revenues from surcharges, these investments may require more frequent rate cases to earn on our higher net plan.

We've had a number of regulatory successes in our jurisdictions over the last 2 years. In Maryland, while not achieving surcharge recovery, our accelerated pipe replacement program was authorized by the commission. One of the very few instances where the commission has affirmed prudence of plan investment in advance of construction. We did receive PSC support in Maryland for one of the contested items from our 2011 rate case related to interest synchronization, resulting in an additional $700,000 in revenue requirements on an annual basis. And we also received favorable Maryland PSC support in an order approving our increase in our retained pipeline asset optimization revenues, an affirmation of the reasonableness of our decision to internalize the asset optimization activity.

And in Virginia, we received State Corporation Commission support for an expansion of our accelerated pipe replacement program, moving from an annual spending level of $25 million to $40 million.

As you've heard on our quarterly conference calls, we filed our District of Columbia rate case last February based on an order from the D.C. PSC. The main driver for an increase in the revenue requirements in that case was the recovery of pension and OPEB costs that have been tracked and deferred over a number of years. Establishing the recovery of those deferred expenses will not result in a change in net income.

We took the opportunity through that case to rebalance -- to propose rate changes that rebalanced our overall expenses and revenues in the district where the items you see presented on this slide, including labor expenses and reflecting ongoing conservation.

We also asked the commission to expand the scope of a previously approved pipe replacement program and its associated surcharge mechanism, increasing the level of annual expenditures in that program from $4 million to $25 million, consistent with our spending levels in Maryland. The record in this case is closed, and we expect the commission to issue an order by the end of this month.

In our 2011 Maryland rate case, we filed a second request for reconsideration at the end of April 2012, which is still pending. That request was to realize almost $4 million in additional revenue requirements.

Under our Virginia CARE program, we developed conservation programs for approval by the State Corporation Commission, and we received current cost recovery for program expenditures, as well as a rate-making adjustment to address loss conservation revenues through a decoupling mechanism. We have previously received approval for residential conservation programs and a residential decoupling mechanism. We filed for approval of commercial energy efficiency programs and expect to receive the commission's order decision in April. The commercial conservation programs will realize revenues from decoupling of about $600,000 on an annual basis.

As we stated during the last several months, the cost not recognized by the Maryland PSC in our last case and our move to implement our associated pipe replacement programs in the absence of an associated cost recovery surcharge have caused us to plan for a 2013 rate case this spring in Maryland. We'll use this as an opportunity to rebalance our rates and expenditures in Maryland and include end rates the first year of our accelerated pipe replacement program.

As I mentioned earlier, we are cautiously optimistic about legislation in Maryland that would authorize an infrastructure replacement surcharge for natural gas distributors. Should this legislation be enacted, we would expect the result to be fewer rate cases in Maryland in the future.

And as a result of the appointment of Doug Nazarian to the Court of Special Appeals, Kevin Hughes has been appointed by Governor O'Malley to replace Doug Nazarian as Chairman of the Maryland Commission. We are looking forward to working with Commissioner Hughes in his new role.

Our 5-year plan does include additional plan rate relief, which, together with revenue streams from expected customer growth and infrastructure investments, will continue to provide for a very large, stable base of earnings growth.

While recent rate case decisions have slightly lowered our weighted average allowed return on equity to 9.72%, we see our actual performance over the 5-year horizon, on average, very near that level.

I'll now turn to some of our operational activities. Our move to manage internally our pipeline asset optimization program has been well-received by all of our regulators. We are now operating a program in each jurisdiction that provides both our customers and our shareholders an opportunity to benefit equally from our success, managing pipeline assets on a daily basis when they're not being used to serve our customers directly.

In Maryland and Virginia, this equal sharing occurs after a certain minimum revenue thresholds are achieved. For 2012, our customers realized benefits that have reduced their cost of gas by just over $22 million. In that same period, our shareholders received benefits of approximately $13 million.

Our focus on efficiency improvements continues, as identified on Slide 85. While we previously discussed workforce, BPO, marketing and accounting activities, our work now includes investments in cyber security initiatives that protect the integrity of our information and our operations.

Additionally, we are planning a new customer information system to supplement the positive customer satisfaction results that we've already received -- achieved.

As part of our safety-focused culture, we're proactively managing our operating risks with a focus on both human and physical capital. We've added to our existing and successful safety and compliance programs at the utility, as well as increased our pipe replacement program by a fourfold factor to make sure that our pipes are fit for service far into the future. And we're especially proud of our industry-leading, third-party damage prevention program that reinforces, as Terry mentioned, our 99%-plus reliability record in serving our customers.

As Terry mentioned earlier, we continue to drive forward in our goal to be the preferred source of clean and efficient energy solutions. And as part of that, we established the greenhouse gas reduction goal at the utility. In support of this goal, we've undertaken a number of initiatives to realize the reductions on this slide while simultaneously improving safety and reliability, as well as lowering our operating costs, including use of 120 natural gas vehicles to support our daily operations and moving into our new office and operation center in Springfield, Virginia that's well on its way to LEED Gold certification.

I'd like to now turn the presentation over to Terry for his closing comments.

Terry D. McCallister

Well, that concludes and wraps up our presentations today. We hope that we've given you a fair amount of insight into our plans. We hope we've given you a fair amount of transparency into how we think we're going to achieve our 7% growth plan. We know we have provided you a lot of details by segment and by year. That's not something we normally do, but we thought it would be beneficial to you to have some understanding as to why we think our plan is achievable. The only thing I can assure you about this plan at 2016, it will not look like what we just laid out today. So I would encourage you not to go back and put this in stone and, say, 2015, you said exactly this via segment because it won't work that way. The world will change, the world have changed, the regulators will change, the regulations will changed and policies will change, and we will change with it. What we are confident, however, is that with -- we see plenty of opportunities within the space, in which we're going to operate and which we constrain ourselves. And we'll move around in that territory, finding the best opportunities, and we're convinced there are plenty of opportunities out there that'll let us achieve 7% by 2016. So don't put this in stone. It's the plan as we see it today. But we certainly think it's an achievable plan, and we look forward to updating you on it as we go.

So this last slide literally is why we think we continue to be a very good investment. We have those great service territories. You heard from Adrian, we've got a strong efficient utility operations; growing profitable low-risk, non-utility businesses; top-tier credit ratings; and we've got an excellent dividend history.

So with that, we'll go into some question and answers. I'll ask everybody to join me at the front here, including Roberta Sims, who didn't speak -- but Roberta, as I said, is Regulatory Affairs & Energy Acquisition Group.

Question-and-Answer Session

Terry D. McCallister

We have microphones for you. And so, if you got a question, just raise your hand and we'll hand you a microphone, so that the folks on the webcast can hear you as well. So we have a question over here, Mary Beth [ph]?

Unknown Analyst

I was very taken with this arrangement that you have with Shell. And I wonder if you could offer some more details. Specifically, will this moderate the mark-to-market adjustments that have seem to occur every year with regard to gas purchase agreements and -- as against your fixed-price sales? And how does Shell earn its fee? And were there other oil companies that -- or major gas company -- gas producers that had similar arrangements or offered you a similar arrangement, which was less competitive than the agreement you took with Shell?

Harry A. Warren

Right. So this is Harry Warren. I'll try to answer that set of questions, so stop me if I missed one of them. So I think your first question was, does this arrangement affect -- what I presume you're referring to is the sort of GAAP net income volatility. And the short answer to that is no. I mean, we will still be purchasing gas from Shell or through Shell for the same sort of wholesale fixed-price contracts that we do in the marketplace today. And what you see in terms of GAAP net income volatility is that accounting rules for various types of retail and wholesale contracts just demand that they be marked in certain ways. So that really won't change at all. You'll see that same effect that's not affected by this facility. The second question you had regarded the fees that we pay. So we're paying in some volumetric fees, and that's really compensating them for -- at a high-level of the credit risk that they are bearing, by now relying very heavily on Washington Gas Energy Services accounts receivable and retail contracts as the underlying collateral against those accounts receivables exposures, that they have mark-to-market exposures that they could have to us. Whereas today, those things are collateralized either through parent guarantees, from holdings or from other cash collateral or letters of credit that we would post under certain situation.

Unknown Analyst

But is this a fee which is just based on a standard so much percents per million Btu, or does it fluctuate in some way?

Harry A. Warren

No, actually, we've got them -- in this particular deal, they're structured -- as I think we have a bullet on the slide here. They are structured as volumetric fixed fees. So that's how they structured it. Now as far as your third question, I don't know if I'm -- I would -- I could answer you very specifically about what other companies we talked to and what their arrangements were. But I can tell you this, we spent a really long time on this. We were -- I think, I've probably spent, along with some other people, the better part of a couple of years talking to wholesale suppliers, banks of different kinds, of all different ways to structure credit arrangements. And we got proposals on a variety of different structures, and I think the strength that Shell brought to the table in part was they have these kind of relationships historically in place with a lot of other suppliers, generally smaller ones than we are, but it's a business that they actually understand how to do. So I think they were able to come up with a very clear vision of how things would work, some good experience to bring to that and a very cleared-eye view. And so, from a cost standpoint, even though the fees are not insignificant, part of the deal was that they seem like some of the best cost approaches that we could achieve.

Vincent L. Ammann

If I could add just quickly, the mark-to-market accounting that you're referring to, on the -- Harry is right. This won't change our GAAP accounting at all. But the fluctuations in those mark-to-market variations that reflect the forward curve movements are under the same fluctuations that gave rise to the collateral requirements. And under this arrangement, we would -- we'd be -- we would escape having to post parent guarantees or cash collateral.

Douglas Bonawitz

We'll remind folks again joining us via webcast, they have the ability to e-mail us questions as well.

Unknown Analyst

Quick question on regulatory strategy, maybe. You've obviously been fairly active. But I'm wondering if over time, something you might consider -- or if this is a priority at all, would be looking for more forward-looking test years in your rate cases across your jurisdiction?

Roberta Willis Sims

That's an excellent comment. Yes, indeed, we'd look at the possibility of doing a projected cash year. Each time we make a filing, it's part of our analysis. And so, it is part of the analysis. At this point, we'll continue to do that. We have decided in our last couple of cases to use the historic test year, but it is something we certainly have looked at and will continue to look at.

Vincent L. Ammann

Roberta, if I could add, one of elements that we had success in our jurisdictions in the past has been using the most current valuations for pension and OPEB costs, which in prior years, was a large component of our increase in O&M expenses. So by getting the most recent valuation, whether it was in the test period or not, included in rates, that's helped us stay pretty current.

Unknown Analyst

And if I may, another quick question on, I guess, the utility CapEx for 2014. There's a little bit of jump in the other. Is that coming from that customer information system upgrade?

Vincent L. Ammann

The beginning of that, yes, correct.

Douglas Bonawitz

There's no questions? Yes, Charlene [ph]?

Unknown Analyst

Can you speak to the regulatory lag across your various jurisdictions? Especially, as you continue to invest, what's the outlook there?

Roberta Willis Sims

We -- that's an issue that -- this is Roberta Sims, and thank you for the question. That's an issue that we face to some degree across all of our jurisdictions. Now in the case of Virginia and Maryland, we have suspension statutes where they're required to act in a certain amount of time. In the case of the district, while we don't have any time limitations up in the district, the commission has committed to deciding cases within a certain period of time. Traditionally, they've committed to deciding cases within 9 months of filing. Now what's interesting is that, number one, they've not always met that goal. But in our pending case, they've modified that policy slightly and that's been a long-standing policy. They modified that policy. And so, in our current case, what they said is that they will decide the case within 3 months of the close of the record. So statements like that we know are designed to address regulatory lag. One of our challenges, though, is that -- you noted on one of the Adrian's slides that there are matters that are still pending before the Maryland Commission applications for reconsideration, petitions for rehearing. Those types of actions don't have a time deadline. So we're challenged with those to some degree.

Terry D. McCallister

Charlene [ph], clearly, our accelerated pipe replacement programs and our initiative to get that kind of program in all of our jurisdictions, we're very optimistic we're going to get this STRIDE legislation in Maryland. It's moving along very well. But clearly, all of those are designed to help us kind of get around some of the regulatory lag that we experienced. We get trackers most of the D.C. case I think we said is pension OPEB tracker true-ups. So we'll get trackers and anything we can do, carrying costs and things like that to try to not create anymore regulatory line than we have to. But we're going to always have some.

Unknown Analyst

Harry, I assume Pennsylvania continues to be, I guess, the best growth potential opportunities for you. Are there other states that are on your horizon? And, secondly, what would be your best guess to -- like on average, what percent of your customers were traditionally Washington Gas customers?

Harry A. Warren

Okay. Answering the first question, I -- there's certainly a lot of good activity across the Midwestern states, I think, now from a competition standpoint. But I would say that at this moment, we stay resolutely focused on Pennsylvania. It's a big playground. And again, our real belief that market share is important is something we are really committed to, I think. So at this moment, we're really focused on that. We've been building out, over the past couple of years, our ability to serve all the different customer classes, gas and electric, throughout the state. And again, that kind of speaks to the same business model that we've used that give us that kind of diversity and customer leverage and presence that we want. So there are some other states, but that's really where our focus is now. And I guess, your second question was...

Unknown Analyst

Well, like...

Harry A. Warren

Oh, the...

Unknown Analyst

Would you say, the bulk of your customers have -- were traditional Washington Gas customers.

Harry A. Warren

Right. I think that goes a couple of ways. So certainly, on the gas side of our business, I would say that a big portion -- I don't really have the number for you off the top of my head. But I would say the majority of our gas customers are D.C. suburban Maryland, suburban Virginia, traditional Washington Gas utility footprint. We have a very big presence throughout the rest of the State of Maryland, especially the Baltimore gas and electric region. But the other utilities service territories throughout Maryland, Delaware, there's just a little bit. Other parts of Virginia, they're not as -- there's not really that much good competition in those areas.

[Technical Difficulty]

So on the electric side, of course, that's now become 2/3 of our business. And even though some of those people are in the Washington Metro area as well, electric is all brand-new customers, I mean, in that sense to our business kind of establishing ourselves as electric suppliers. So while we get a little cross-pollination and leverage there, there are many people who are electric customers who don't even have gas service, especially in the commercial ends of the world. So that's really been a brand-new customer base for us.

Unknown Analyst

Could you speak to your efforts in the clean energy, particularly with respect to the -- your distributed generation for solar? One of the concerns I heard when I was traveling through California was the fact that they -- those taking advantage of that offering were mostly the well-to-do at the expense of the, well, less well-off. And there is an anticipation there that at some point, there will be some rather serious issues concerning price and who is paying the true cost -- and just a better distribution of the benefits and the cost. In your -- the way your contracts are done, do you have any concerns around payments, change in the PPAs, or can they be challenged? Just how do you stand with respect to the pricing landscape for renewables in general and solar in particular?

Terry D. McCallister

Yes. Gautam, why don't you talk particularly about California. It comes up a lot so...

Gautam Chandra

Yes, I think -- great question. There is a lot of chatter certainly between maybe customer classes, but there's also obviously some concerns that some utilities are raising as a lot of distributed generation goes in, and their cost to actually balance their system is something that they're looking to recuperate. So we are -- we monitor those developments. I don't think in the areas that we operate, we have seen any developments that would make us worried about our investments in that area. Certainly, our contracts are with the end customers. So it's really the credit quality of the end customers that sign up with us that we have exposure to. Could there be some legislation passed that overrides those contracts? I certainly, I haven't seen any material proceedings, but I would also imagine if that happens, there will be a lot of legal challenges to some of those legislations. So we feel very comfortable with the established base of assets that we have to underlying contracts, and we continue to watch developments. And certainly, if we see developments in any geographies that we feel threaten our continued business there, then we'll -- again, that's the advantage of having a geographically-diverse business. We're not going to continue to add contracts there. I don't know if that addresses the specific question that you had.

Douglas Bonawitz

Any other questions? [indiscernible]

Unknown Analyst

Terry, on Page 20, you gave us some of your goals. Are they goals that you've just instituted? Or could you give us maybe where you are now on the goals?

Terry D. McCallister

20, is that our corporate scorecard?

Unknown Analyst

Yes, the sustainability.

Terry D. McCallister

Oh, our sustainability goals. Oh, so our sustainability targets? Yes, those are goals we put in place for targets we put in greenhouse gas reduction targets we've put in place last year. So we are well on our way toward achieving that. I think the fleet conversion is right on track. We just ran through this the other day. The target reduction for therms delivered is literally a function of our pipe replacement program. So the faster and the more quickly we replace pipe, the fewer emissions we're going to have from the old pipe that we have. And as you've heard from Adrian, we've got an aggressive program in place with 4x what we normally replace in that. And then, our internal operations, at least a significant portion of that, is moving into our new building. Our new operation center is going -- is on track to be Gold LEED certified. And so, moving from our former facility to our new facility will help us in that category significantly. So we are on track. [indiscernible] But we can say we're on track to meet all those. And everybody shook their heads and said "Yes, we are".

Douglas Bonawitz

Okay. Folks, just another reminder, if you could help us out and fill out the surveys that we email you, that would really help us out. Thank you in advance for that. If there are further questions that come up in the future, please give me a call. Again, this is Doug Bonawitz at (202) 624-6129. And that concludes our presentation for today. Thanks for joining us, and have a great day.

Terry D. McCallister

Thank you, everyone.

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