WGL Holdings Management Discusses Q4 2013 Results - Earnings Call Transcript

| About: WGL Holdings, (WGL)

WGL Holdings (NYSE:WGL)

Q4 2013 Earnings Call

November 14, 2013 10:30 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

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

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


James A. Bardowski - Sidoti & Company, LLC

Spencer E. Joyce - Hilliard Lyons, Research Division

Michael E. Gaugler - Brean Capital LLC, Research Division


Good morning, and welcome to WGL Holdings Incorporated Fourth Quarter Fiscal Year 2013 Earnings Conference Call. At this time, I would like to inform you that this conference is being recorded. [Operator Instructions] The call be available for rebroadcast today, at 1:00 p.m. Eastern Time, running through November 21, 2013. You may access the replay by dialing 1 (855) 859-2056 and entering PIN# 86803561.

If you do not have a copy of the earnings release, you can obtain one at www.wglholdings.com. I will now turn the conference over to Doug Bonawitz. Please, go ahead.

Douglas Bonawitz

Good morning, everyone, and thank you for joining our call. This morning's comments will reference a slide presentation on our website that you can access by going to www.wglholdings.com, clicking on the Investor Relations tab, and then choosing Events & Webcasts from the drop-down menu. The slide presentation highlights the results for our fiscal year 2013 and the drivers of those results. A reconciliation of our operating earnings, with results reported in accordance with Generally Accepted Accounting Principles, is provided as an attachment to our press release, and it's available in the Quarterly Results section of our website.

This morning, Terry McCallister, our Chairman and Chief Executive Officer, will provide some opening comments. Following that, Vince Ammann, Vice President and Chief Financial Officer, will review the major items that led to the fiscal year '13 results and will discuss guidance for fiscal year '14. Adrian Chapman, President and Chief Operating Officer, will discuss key issues affecting our business and the status of some of our principal initiatives.

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

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

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

Terry D. McCallister

Thank you, Doug, and good morning, everyone. Today, we'll comment on the operating highlights of the past fiscal year and review our full year financial results. We'll also discuss recent events affecting our business, including an update on regulatory activities, to provide guidance for the 2014 fiscal year.

Despite strong performance in many of our businesses, our financial results for the year fell below our expectations and our most recent guidance. Our non-GAAP operating loss for the fourth quarter shown on Slide 3 in the presentation is $28.2 million, or $0.55 per share, compared to $5 million, or $0.10 per share, in the fourth quarter of fiscal year 2012.

Non-GAAP operating earnings for fiscal year 2013, shown on Slide 4 in the presentation, were $119.8 million, or $2.31 per share, compared to $138.4 million, or $2.68 per share, for the prior fiscal year.

Strong performance in our utility exceeded our initial earnings targets for the year, as well as our most recent guidance. This was partially offset by onetime charges, including the recognition of the development expenses for the Constitution Pipeline project that we had previously expected would not arrive until 2014. Our results were also negatively affected by the same comps and margin pressures on the electric side of our Retail Energy-Marketing business that have depressed earnings for some of our competitors, including external cost factors that affected the profitability of contracts already in place.

Competitive pressures also impacted margins on new business. Vince will discuss these results in greater detail, along with our strategy to return the Retail Electric business to historical levels of profitability in 2016.

Utility results benefited from disciplined expense management across our operations that limited the impact of increases in pension and post-retirement benefit costs. Utility earnings of $1.93 for the full year also reflected higher revenues from customer growth, rate relief and Accelerated Pipeline Replacement program. These factors will enhance earnings going forward.

In addition, we filed our first STRIDE Accelerated Replacement application last week in Maryland, and we anticipate a final ruling in our Maryland rate case next week. Adrian will discuss this item in a few minutes.

Turning to fiscal year 2014, in our earnings release yesterday, we introduced consolidated non-GAAP earnings guidance for fiscal year 2014 in a range of $2.15 to $2.35 per share. While we are seeing positive developments in many parts of our business, we expect overall earnings to be slightly lower than 2013 levels. This is primarily due to the comps and margin pressures in our Retail Energy-Marketing Electric business that I mentioned earlier. Based on our experience, we expect that once these higher cost levels are appropriately reflected in pricing new customers, realized margins will improve.

We are confident that the diversity of our business portfolio and the range of positive investment opportunities that are available will allow us to achieve our long-term EPS growth target.

Our business strategy is based upon our diverse combination of regulated and unregulated businesses, anchored by our utility businesses, which is well-positioned in a very attractive market and executing the plan. We expect strong utility customer growth again next year, and we have accelerated investment programs in all 3 of our utility jurisdictions. We will also benefit from nearly a full year of rate relief in Maryland.

Adding to this earnings base are growing investments that generate a second earnings stream. For example, we expect our investments in the Commercial Energy Systems business to deliver annual earnings in the range of $0.30 to $0.40 by 2016. As we've previously indicated, these utility-like solar investments will deliver a reliable earning stream over the next decade and beyond.

Our midstream business now has 24 Bcf of low-cost storage and we continue to evaluate additional midstream opportunities similar to our Constitution Pipeline investments. We have not previously factored the earnings from these pipeline investments into our long-term projections. And they present an opportunity for earnings growth from additional investments in utility-like assets. For example, a typical $100 million investment in a pipeline project should yield incremental earnings of approximately $4 million to $5 million and strong positive cash flows once operational. We are actively pursuing such projects and we have financial strength and flexibility to take advantage of these and other opportunities for growth.

Finally, based on current market conditions, we expect our Retail Energy-Marketing business to return to a more normal run rate on fiscal year 2015, with some of that recovery positively impacting fiscal year 2015. We have in place a strong portfolio of diversified businesses that, over the long-term, will generate a consolidated non-GAAP operating earnings of 5% to 7% growth.

I will now turn the call over to Vince for his comments.

Vincent L. Ammann

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

Let me start with a review of the drivers of the year-over-year change from the Utility segment results. This segment reported fiscal year 2013 operating earnings of $1.93 per share compared to $2.02 per share a year earlier. This was also detailed on Slide 5. As Terry mentioned, we continue to grow and add new meters. The addition of over 11,000 average active customer meters improved operating earnings by $0.04 per share. The higher revenues from the timing of new rates in Maryland improved operating earnings year-over-year by $0.03 per share, while revenues from our accelerated pipe replacement programs added $0.04 to earnings.

The following items partially offset these improvements. Higher operations and maintenance expense reduced earnings by $0.13 per share. These expenses included an increased employee benefit -- in employee pension and post-retirement medical benefit costs due to changes in plan asset valuations -- plan asset values and valuation assumptions. We anticipate that these expenses will decline in fiscal year 2014. Higher depreciation expense due to the increased investment in the utility plant reduced earnings $0.04 per share, other miscellaneous items reduced by $0.02 per share.

Turning to the Retail Energy-Marketing segment. As shown on Slide 4, fiscal year 2013 non-GAAP operating earnings were $0.59 per share, down $0.11 per share from the year earlier.

On Slide 6, you'll see the primary driver of the decrease in operating earnings was lower electric gross margins, partially offset by higher natural gas margins and lower operating expenses.

Electric sales volumes increased $0.03 in fiscal year 2013 versus the prior year, primarily driven by the volumes associated with a large government contract. At the end of fiscal year 2013, Retail Energy-Marketing business served 179,900 electric accounts, a decrease of 7% compared to the year earlier. This decrease was primarily among residential accounts, driven by increased competitive activity in the mass market.

While the number of accounts declined, year-over-year, we did see an increase in electric accounts in the fourth quarter, primarily due to residential additions.

Lower electric unit margins were due to a combination of factors, including cost increases and to a more competitive pricing environment, in particular the large commercial electric business compared to the prior year.

As we mentioned on the last quarter's call, the timing impact of higher PJM capacity cost was unfavorable in the last half of fiscal year 2013 compared to the prior year. We also experienced sharp and unanticipated increases in certain PJM ancillary service charges and RPS compliance costs late in our fiscal year.

While ancillary and RPS costs have fluctuated in the past, during the year, they consistently reached higher levels than we had forecasted or previously experienced. Natural gas sales volumes increased 15% in fiscal year 2013 versus the prior year, primarily as the result of colder weather that increased retail customer usage and a government contract with the state of Maryland.

At the end of fiscal year 2013, the Retail Energy-Marketing business served 167,900 natural gas customers, a decrease of 5% compared to the year earlier. Natural gas unit margins were essentially unchanged in fiscal year 2013.

Operating expenses for fiscal year 2013 were lower than the prior year, driven by a decline in bad debt and purchase of receivable costs.

Next, I'll move to the Commercial Energy Systems segment. For fiscal year 2013, the Commercial Energy Systems business had earnings of $0.06 per share, an increase of $0.01 compared to last year. The increase was primarily due to higher revenues from commercial solar projects, partially offset by less project work for federal customers.

The Commercial Energy Systems segment continued to add new solar energy projects to its portfolio. As of September 30, we had 37 megawatts of installed solar capacity. These projects represent over 110 million in capital investments -- $110 million in capital investments, and we continue to see a robust pipeline of future projects. We have an additional 18 megawatts currently under contract or in construction.

During fiscal year 2013, our commercial solar assets generated 24,000-megawatt hours of clean solar electricity. Our alternative energy investments, such as American Solar Direct, Skyline Innovations and Echo, are also reported within Commercial Energy Systems. These ventures now represent $84 million in capital investments since inception.

We have invested $60 million -- $61 million through American Solar Direct, with over 2,200 residential systems installed. Skyline Innovations has had 11 tranche closings valued at nearly $8 million. We have committed to invest $30 million in this business through July 2014. EchoFirst has had 18 tranches funded for a total of $50 million and we have committed to invest $50 million through December of 2014.

Next, I'll move to the Midstream Energy Services segment, formally Wholesale Energy Solutions. Please note that the company name itself will be changing from Capital Energy Ventures to WGL Midstream Inc.

For fiscal year 2013, the Midstream Energy Services business had a non-GAAP operating loss of $0.10 per share, a decline of $0.06 compared to the prior fiscal year. The decrease was driven by initial expenses associated with our investment in the Constitution Pipeline project, continued compression of storage spreads and higher operations and maintenance expense as a result of new storage optimization arrangements.

Results for the other non-utility activities reflected non-GAAP operating losses $0.15 per share compared to a loss of $0.05 per share for the same period of the prior fiscal year. The increase for 2013 largely reflects onetime impacts for a corporate branding initiative and increase in ongoing business development activities.

The loss of $0.02 per share under interest segment eliminations represents the timing difference between Commercial Energy Systems' recognition of revenue for the sale of SRECs to Retail Energy-Marketing, and Retail Energy-Marketing's recognition of the associated expense. Retail Energy-Marketing has recovered a portion of SREC purchases as inventory to be used in future periods and will expense them at that time.

As Terry stated earlier, our consolidated non-GAAP earnings guidance for fiscal year 2014 is in a range of $2.15 to $2.35 per share. I'll now provide additional details regarding the drivers of this guidance for each operating segment. The range for our Utility non-GAAP earnings for fiscal year 2014 is $1.83 to $1.93 per share. As shown on Slide 10, utility net revenues will be higher in 2014, driven by rate relief and customer growth. Pension and post-retirement benefit costs will be lower in 2014, reflecting the use of higher discount rates in response to the higher long-term interest rates. This is a fundamental change from the last 4 years, when lower interest rates drove up these costs.

O&M expenses, overall, will increase as we accelerate our pipeline integrity and compliance programs. Higher depreciation expense is expected to reduce fiscal year 2014 operating earnings due to increased plant additions. Unfortunately, this higher depreciation expense will be offset by higher revenues driven by accelerated replacement programs.

The range of our non-utility, non-GAAP operating earnings estimate for fiscal year 2014 is $0.32 to $0.42 per share. As shown on Slide 12, our non-utility guidance includes forecasted decreases in electric and natural gas margins, and slightly higher operating expenses at our Retail Energy-Marketing business.

Our Retail Energy-Marketing estimates for fiscal year 2014 are being affected by the same 3 factors that negatively affected results in the latter part of 2013. As I mentioned earlier, the first is a timing issue. Higher capacity cost in the PJM electric market, combined with the trend for longer-term customer contracts are shifting realized electric margins from fiscal year 2014 to future years. The second issue involves the unexpected increase in PJM ancillary service and RPS compliance costs. These higher costs are affecting the profitability of existing contracts. Future business, industry-wide, will incorporate these higher costs. And the third is increased competition for large commercial and industrial electric customers that have put pressure on margins.

While it's difficult to predict the future trends in margins, we are beginning to see signs of stability for the few of the smaller participants regionally consolidating or exiting the business. We are taking steps to more closely monitor pricing and cost movements, and we expect that annual earnings will return to our previous levels of approximately $30 million by fiscal year 2016.

The Commercial Energy Systems segment is forecasting earnings in fiscal year 2014 with a midpoint guidance of $0.15 per share. Our commercial solar activities will drive 2/3 of these earnings. In fiscal year 2013, our commercial solar assets produced 24,000 megawatt hours of electricity, which is sold to customers through purchase power agreements. In fiscal year 2014, we expect that these commercial solar assets will produce 70,000 megawatt hours of electricity. Our investments in American Solar Direct, Skyline and Echo will contribute 1/3 of these earnings in 2014.

Finally, our Midstream Energy Services segment is forecasting a loss of $0.02 per share in fiscal year 2014, compared to a loss of $0.10 per share in 2013. We are not predicting a marked improvement in seasonal spreads in 2014, but expect that spreads will improve in the future and that our storage assets would make positive contributions to our earnings in the long-term.

Construction of the Constitution Pipeline is expected to begin in the second half of 2014, with an expected in-service date of March of 2015. I'll now turn the call over to Adrian for his comments.

Adrian P. Chapman

Thank you, Vince, and good morning, everyone. I'm pleased to provide you with an update on our operations and regulatory initiatives. In May, the Public Service Commission for the District of Columbia issued an order in our base rate case that deferred its decision on our request to implement the initial 5-year phase of an expanded accelerated pipeline replacement program and surcharge. This deferral was pending Washington Gas' filing of a report providing additional information on pipeline replacement, risk assessment methods and pricing.

This report was filed on August 15, and we currently await a ruling from the commission. If approved, the program will begin to positively impact earnings in fiscal year 2015. Please note that the May order did allow Washington Gas to continue to surcharge cost recovery for the replacement of mechanical couplings, pursuant to a prior order.

Also in the District of Columbia, on November 8, we filed an application for approval of a weather normalization adjustment, or WNA. The proposal would authorize Washington Gas to implement a rate design mechanism that would eliminate the variability of weather from the calculation of revenues and offer customers more stability in their bills during colder-than-normal winter heating season. The WNA will be similar to mechanisms we already have in place in Maryland and Virginia.

In Maryland, you may recall that in April Washington Gas filed a request for the PSC of Maryland for a $30.7 million annual increase in revenues. The application, partially based on forecasted expenditures, also included a proposed overall rate of return of 8.7%, and a return on common equity of 10.7%. On May 31, Washington Gas revised the requested increase in revenues to $28.3 million based on actual test year expenses through March 31.

On October 10, the public utility law judge issued a proposal recommending an $8.8 million increase in annual revenues based on an overall rate of return of 7.54% and a return on common equity of 9.25%. The proposed order includes 3% of no-cost capital in order to create a hypothetical capital structure that totals 100%, without any upward adjustment to rate base.

In addition, the proposed order recommends that Washington Gas be allowed to amortize the cost related to the change in tax treatments related to Medicare Part D, as this allows recovery of the cost to initiate our outsourcing agreement Accenture.

In addition, the proposed order allows for the recovery of the first year of expenditures related to our accelerated replacement program.

On October 24, Washington Gas filed an appeal of the proposed order. We requested the commission accept our proposed actual capital structure and approve a rate of return on equity of no less than 9.6%. We also requested that the commission approve the amortization of the costs related to outsourcing, to correct mathematical problems and clarify other issues in the case. A final order is expected by November 22.

The Maryland case was designed to provide us with a return of and on the first year of our investment in our accelerated replacement program in Maryland, net of depreciation, under a plan authorized in our 2011 rate case. The STRIDE Law is now in effect, and on November 7, Washington Gas submitted an application before the commission requesting approval for an expansion of our original accelerated replacement program and a 5-year rider to recover the costs of our proposed infrastructure replacement projects. Washington Gas proposes spending approximately $200 million over 5 years to expedite replacement and reinforcement of our system.

The Maryland Commission is expecting to rule on the STRIDE application within 180 days of the filing date.

I would also like to update you on our capital spending forecast. Our current forecast, as shown on Page 15 in the presentation, calls for us to spend $447 million in 2014 and $2 billion, cumulatively, in the 2014 to 2018 time frame. This represents an increase of $66 million for 2014 compared to our prior forecast and an increase of $203 million for the period of 2014 through 2017. The primary drivers of the increase for both 2014 and the extended period is an increase in investments in clean and efficient energy projects, and additional accelerated pipeline replacements in the District of Columbia, Maryland and Virginia.

The 2014 to 2018 period includes $164 million of expenditures for pipeline replacement projects intended to meet the requirements of the Virginia SAVE Law. $94 million of expenditures for the mechanical coupling encapsulation and accelerated pipe replacement programs in the District of Columbia and $165 million of planned expenditures under the Maryland accelerated pipeline program. Projected expenditures also include $571 million for non-utility business development, including solar investments and other non-utility projects. I would like to now turn the call back to Terry for his closing comments.

Terry D. McCallister

Thank you, Adrian. The key message that I'd like to leave with today at the conclusion of our call is that while I am not satisfied with our fiscal year 2013 result and the softness that we're seeing in our Retail Energy business, I believe we have opportunities that will allow us to get back on-track fairly quickly. We are still very well-positioned for future growth. Our strong portfolio of regulated and non-regulated energy businesses will continue to provide significant opportunities for investment in projects that generate long-term earnings stream.

The short-term issues in the Retail Energy business will correct, and it will again contribute to the expansion of the entire company. So look forward to providing further visibility during our analyst meeting scheduled for March 14 in New York. So this concludes our prepared remarks, and we will now be happy to take your questions.

Question-and-Answer Session


[Operator Instructions] And your first question comes from James Bardowski from Sidoti & Company.

James A. Bardowski - Sidoti & Company, LLC

I just had a couple of questions here. Now related to the O&M expense of about $103 million, about how much of that is comprised from the Constitution Pipeline expenses?

Adrian P. Chapman

Sorry, James. I missed the first part of your question. Could you repeat the first part? The volume on our speaker was a little low. We didn't get the first part of your question.

James A. Bardowski - Sidoti & Company, LLC

Sure. Regarding the O&M expense, the abrupt increase in that, how much of that was really driven by expenses at the Constitution Pipeline?

Adrian P. Chapman

Oh, okay. In the fourth quarter, we incurred about $3 million of additional -- maybe $3.5 million, I guess, of additional expense related to that business associated with -- in the -- what we're now calling the Midstream Energy Services business for that project.

James A. Bardowski - Sidoti & Company, LLC

Okay. Is it something that's -- we can view as a run rate? Or will this be a more upfront, a little bit less later?

Adrian P. Chapman

These are more of an interim development cost that we don't expect to repeat.

James A. Bardowski - Sidoti & Company, LLC

Excellent. Okay. I guess on the Regulated Utility side, for total gas deliveries, I think there was about 203 million therms. There was a big drop in deliveries for electric power generation. Is there any reason to be alarmed by this? Or have some plants closed? Or is this just merely a hiccup?

Adrian P. Chapman

James, this is Adrian. I'd say that was primarily due to the demand for electricity during the, primarily, the summer period. So we're basically delivering on demand for, primarily, peaking plants and so their demand is certainly weather-sensitive and we're making commodity available based on their demands.

Terry D. McCallister

James, this is Terry. We didn't see a particularly hot summer. We didn't see a hot summer relatively at all here. So it would just have been a decrease in volume.

James A. Bardowski - Sidoti & Company, LLC

Okay, excellent. And one more quick one. I know, Vince, you had mentioned that, at least last quarter, that there was a pretty solid growth at the retail segment accounts pertaining to commercial accounts, which were, of course, offset by residential. Now today, you mentioned that residential saw some gains. Do you see this mix as sustainable? Can we expect gains in both, going forward? Or are both remaining choppy as well?

Gautam Chandra

James, this is Gautam. I'll take a crack at that question. I think, we did see some growth in the commercial accounts. The residential factor was pretty competitive and, as I think we mentioned, we saw some attrition in that. We have seen some stabilization in that attrition at this point. However, I would say that the market's still pretty competitive. We do think that -- we believe we're at a trough in terms of being able to continue to add customers in the future.


And your next question comes from the line of Spencer Joyce from Hilliard Lyons.

Spencer E. Joyce - Hilliard Lyons, Research Division

I wanted to ask about the Commercial Energy Systems segment. The $0.15 of EPS we're looking for next year is a pretty solid jump from the $0.06 we saw this year. And my question is, should we expect to see a little more seasonality to the earnings contribution from that segment? Or, it was such a big full year jump, is it maybe going to be loaded in fiscal Q3 or 4? Just how should we think about spreading that growth out?

Gautam Chandra

Spencer, I'll take a crack at that as well. I think that the $0.15 is our expectation for the year. We will probably see some seasonality in that number because generation is a little higher in the summer. Obviously, the sun shines for longer than it does during the winter months. We also continue to add projects through the year, which so -- so you'll see a little bit more loaded to the back end on the forecast the versus the front end of the forecast.

Spencer E. Joyce - Hilliard Lyons, Research Division

Okay. So a little bit on seasonality and a little back half. So a little bit from both those factors there.

Gautam Chandra

That's correct.

Spencer E. Joyce - Hilliard Lyons, Research Division

Jumping over to the electric gross margin side, what are some macro factors maybe that as outside analysts we can observe that may help us predict or project whether or not we're going to come in a little above or below maybe the targets here? Because it seems like that's been kind of a pretty volatile piece of the earnings stream lately?

Gautam Chandra

Yes, maybe what I'll do is add a little color. I think Vince explained some of the macro issues that are impacting our short-term expectations from that business. So if we look at, for example, '14 expectations, we talked about this bump in PJM capacity costs that are shifting margins from current and immediate future to future periods. And that's about $6 million, I would say, in round numbers that's being impacted in fiscal year '14. Some of these sharp rises that we saw in PJM ancillary costs and RPS compliance costs are basically impacting our results for '14 by about $4 million. And I would say the rest of it's from competitive pressure in the large electric margins. I think if you're following some of the other retail companies, you'll notice the same type of pressures being reported by them, especially in their large electric portfolios. The 2 timing issues that we talked about, we do expect those to be short-term issues. And by fiscal year '16, we expect those to be washed out of our books, so to speak. And the business will return to about $30 million in contributions by 2016, because those will wash out.

Spencer E. Joyce - Hilliard Lyons, Research Division

Okay. And the 30 -- clarify for us again what exactly the $30 million of contribution is. That's obviously after the adjustments. But that is just for the Retail Energy as a whole or the electric piece?

Gautam Chandra

That's Retail Energy as a whole.

Vincent L. Ammann

And that's non-GAAP operating earnings were expecting about 2015. So we're seeing results in '14 that are most significantly impacted by those 3 factors that we went through. But as these higher RPS costs and higher ancillary service costs get baked into new contracts that we are writing, we should be able to recover those costs in the margin. So we don't see that margin depression that is affecting existing contracts continuing into the future with new business that we write.

Spencer E. Joyce - Hilliard Lyons, Research Division

Okay. One final point. I wanted to touch on the long-term 5% to 7% EPS growth target. I know you guys touched on it a little during the call, but I didn't see any slides on it in the deck this year, or this quarter. Should we be reevaluating maybe what the base number that we want to grow from 5% to 7% is? Or if we still take maybe the 2011 number and extrapolate that out maybe a year or 2 longer, I guess, I'm hearing from you guys you still are comfortable with that 5% to 7% range even given your somewhat volatile business mix with reliance on the non-regulated piece?

Terry D. McCallister

Yes, so this is Terry. Yes, we -- that is the right range. The 11 to 16, is kind of that number. At some point here in the very near future we'll update with a new 5 years starting at some point here, around this time. But we do want people to understand that the commitment or the number we gave you 2 or 3 years ago, now we still think there's a pretty good opportunity for us to get there, in spite of what we're seeing in the Energy Services business over the next couple of years. We do look at our plan from here, and in the next 5 years, and we don't see a range that would tell us beyond the '16 time period that we would see anything different other than 5% to 7% as well. So -- but at some point, we'll say, okay, let's give a new 5 years, so we just want to make sure that people are seeing that what we call that we don't think is achievable.

Vincent L. Ammann

Just to make sure we're clear, I think the earnings volatility, as you call it, that we saw is really this Energy Services issue. The rest of the segments, as you see that Commercial Systems business growing, that is based on existing investments. So we don't see, really, a lot of the growth that's coming in -- earnings growth, coming from that business being subjected to the kind of market price -- market fluctuations that you see in the Energy Services business. So once we get those costs sort of baked into our pricing model, I think we've got a good opportunity to return back to a more consistent earnings growth plan.

Terry D. McCallister

Spencer, this is Terry. I just want to follow-up with the Commercial Energy Systems piece of it. You said it was a pretty healthy jump from $0.06 to $0.15. I just want to make sure that we remind everybody that we amortize all of the upfront credits and tax credits and everything that we get in that, we amortize that over the life of the 15- or 20-year per our agreement, typically. We don't take any of that upfront, so you shouldn't anticipate that, oh, we're going to have some for to clip there. As a matter of fact, they're at number that by fiscal year '16, if we continue with the investments, which we have every intention in our pipeline ready to do so of those kinds of investments, we think that number will be $0.30 to $0.40 by 2016. So that is just a steady layering on with a long-term earnings stream from those investments.

Spencer E. Joyce - Hilliard Lyons, Research Division

Okay. That is a nice and unique piece for you guys. So we can think of '15 as a pretty resilient figure there that we can grow on.

Terry D. McCallister

Yes, absolutely. Absolutely.


[Operator Instructions] Your next question comes from Michael Gaugler from Brean Capital.

Michael E. Gaugler - Brean Capital LLC, Research Division

Most of my questions have been answered. I do have one remaining. On the Commonwealth Pipeline project, your thoughts there, potentially, on bringing that off-the-shelf and if there's been any movement among the partners to reexamine that opportunity?

Gautam Chandra

Michael, this is Gautam. We certainly are vigilant to see if we can bring that project off the shelf. I wouldn't say that right now, we're seeing market conditions that would, in the short term, see us being able to move forward on that. That being said, we do have several other projects that we are evaluating, as Terry mentioned earlier in the call. So we do expect other opportunities in addition to Constitution than we've already announced.

Terry D. McCallister

Mike, I was just going to follow-up. We don't have any of this pipeline projects in our 5-year forecast. But to Gautam's point, we do have numerous things we're looking at, at the moment. I'll put it that way. And we would expect to be successful in a few of those. So just from Constitution, I think we're going to have some investment opportunities that will be additive to our plan.


And again, I would like to remind everyone that you can listen to a rebroadcast of this conference call at 1:00 Eastern Time today, running through November 21, 2013. You may access the replay by dialing 1 (855) 859-2056 and entering PIN number 86803561. And if there are no further questions, I'll turn the call back to Mr. Bonawitz for any additional or closing remarks.

Douglas Bonawitz

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


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

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