WGL Holdings (NYSE:WGL)
Q3 2014 Earnings Call
August 07, 2014 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, Senior Vice President, Chief Financial Officer of Washington Gas Light Company and Senior Vice President of Washington Gas Light Company
Adrian P. Chapman - President, Chief Operating Officer, President of Washington Gas Light Company and Chief Operating Officer of Washington Gas Light Company
Spencer E. Joyce - Hilliard Lyons, Research Division
Good morning, and welcome to the WGL Holdings Inc. Third Quarter Fiscal Year 2014 Earnings Conference Call. At this time, I would like to inform you that this call is being recorded. [Operator Instructions] The call will be available for rebroadcast today at 1:00 p.m. Eastern time, running through August 14, 2014. You may access the replay by dialing 1 (855) 859-2056 and entering pin# 81454676. If you do not have a copy of the earnings release, you may obtain one at www.wglholdings.com.
I will now turn the conference over to Doug Bonawitz. Please go ahead.
Good morning, everyone, and thank you for joining our call. This morning's comments will reference a slide presentation on our website that you can access by going to www.wglholdings.com, clicking on the Investor Relations tab, and then choosing Events and Webcast from the drop-down menu. The slide presentation highlights the results for our third quarter of fiscal year 2014 and the drivers of those results. A reconciliation of our operating earnings, with the results reported in accordance with Generally Accepted Accounting Principles, is provided as an attachment to our press release and is available in the Quarterly Results section of our website.
This morning, Terry McCallister, our Chairman and Chief Executive Officer, will provide some opening comments and a brief recap of our third quarter fiscal year 2014 consolidated results. Following that, Vince Ammann, Senior Vice President and Chief Financial Officer, will review the major items that led to the third quarter results.
Also on this morning's call is Adrian Chapman, President and Chief Operating Officer, who will discuss key issues affecting our business and the status of some of our initiatives.
In addition, Gautam Chandra, Vice President of Strategy and Business Development is also with us this morning and available to answer your questions. Please note that Harry Warren, formerly President of Washington Gas Energy Services, is part of the company recently. Rick Moore is now Chief Operating Officer of Washington Gas Energy Services. 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 would like to turn the call over to Terry McCallister.
Terry D. McCallister
Thank you, Doug, and good morning to everyone. WGL had a successful third quarter with improvements in our operating results, an important progress in both our utility and nonregulated businesses that we expect to benefit results for the remainder of fiscal year 2014 and 2015.
Our non-GAAP operating earnings for the third quarter, shown on Slide 3 in our presentation, were $0.8 million or $0.02 a share, up from a non-GAAP operating loss of $1.6 million or $0.03 per share from the third quarter of 2013. As most of you know, our utility business results are seasonal in nature and most of our utility earnings are recorded in the first and second quarter of the fiscal year. On a non-GAAP basis, consolidated operating earnings for the first 9 months were $147.8 million or $2.85 a share. This compares to a $148 million from the prior year or $2.86 per share. The increase in operating earnings in the third quarter was driven by strong results in our Regulated Utility and our Commercial Energy segment -- systems segment shown on Slide 3.
These results reflect strength of our core utility business and a growing earning stream from the utility and solar assets of our Commercial Energy Systems business. Our utility customer base continued to grow as active -- average active customer use increased by over 12,000 meters year-over-year for the third quarter of fiscal year 2014, representing a 1.1% growth rate. We have seen strong meter growth throughout the year, and we're continuing to see success from our standard marketing efforts, which will drive higher growth rates in the future.
Our Regulated Utility and its customers also benefited from positive asset optimization results for the quarter. In addition, we saw positive earnings impact in the segment from the most recent rate cases in Maryland in the District of Columbia and from disciplined cost control. Non-GAAP operating earnings for the non-utility businesses as a whole, were lower during the third quarter than last year, as a result of cost and margin pressures on the electric side of our Retail Energy Marketing business. We are making progress, however, in our efforts to return margins to more normal levels. I'm particularly pleased with the performance of our commercial energy systems business, with earnings growth driven by the many distributed generation assets that we now have in place across the country. The earnings in this business have been steadily growing, as we put additional assets into service. And we're on track to meet our original earnings forecast for this segment.
Vince will discuss these developments in more detail in a few minutes. I remain confident in our ability not just to achieve but to exceed our goals in 2014. With third quarter financial performance overall coming in better than our internal target, we are raising our consolidated earnings outlook by $0.15 per share to a range of $2.55 to $2.75. We will provide a detailed fiscal year 2015 guidance during our year-end conference call in November. However, based on the progress we've made in a number of strategically important areas, we feel confident that we are on track for the overall earnings growth and our financing plans for 2015. I'm now going to turn the call over to Vince, who will review our third quarter results by segment, as well as our updated guidance for 2014.
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. Turning first to our Utility segment. Operating earnings for the third quarter of fiscal year 2014, were $0.01 per share, a $0.07 -- which is $0.07 above the same period last year. The drivers of this change are detailed on Slide 5.
As Terry mentioned, we continued to add new meters. The addition of approximately 12,000 average active customer meters, improved operating earnings by $0.01 per share. Higher apps optimization revenues added $0.02 to earnings, revenues from new rates in D.C. and Maryland improved earnings by $0.02 per share. Consolidated infrastructure investments added $0.02 per share. And lower operating and maintenance expense improved earnings by $0.02 per share. Partially offsetting these items, higher depreciation expense decreased earnings by $0.02 per share. I'd also like to highlight the performance of our asset optimization program. This program has generated $0.27 of earnings for our utility year-to-date and has also delivered in excess of $30 million in benefits to our customers through sharing mechanisms. While we have had excellent results this year, we are also -- we always try to lock in recurring value when opportunities arrive. Based on deferred storage earnings from this winter and other hedging opportunities employed, $0.14 of the $0.21 in earnings we expect from asset optimization in fiscal year 2015, are already locked in.
The $0.21 in total asset optimization earnings assumes normal weather.
Now I'll move to the Retail Energy-Marketing segment. For the third quarter, the retail energy-marketing business had non-GAAP operating earnings of $0.04 per share, compared to operating earnings of $0.12 per share for the same period of the prior year. The primary driver of the decrease, as detailed on Slide 6, was lower electric gross margins, partially offset by higher natural gas gross margins and lower operating expenses.
As noted during the previous quarters, lower electric margins were anticipated throughout this year, due to a combination of higher PJM capacity charges through May 31, higher cost for PJM ancillary services and lower electric unit margins from large commercial customers.
All of these factors contributed to the year-over-year decline in operating earnings this quarter. As expected, new lower capacity charges in PJM took effect June 1. And this will improve margin recognition during the remainder of the fiscal year. These new capacity costs are approximately 40% lower than the previous levels. As we highlighted last year, higher PJM ancillary costs have been incorporated into our pricing models and will result in improved margins, as existing contracts expire or are renewed. Also we've begun to offer customers products that feature lower prices in exchange for the pass-through of certain PJM cost components. This increases the competitive position of our offerings, while providing customers lower cost during normal weather conditions.
At the end of the third quarter, the Retail Energy-Marketing business served 170,000 electric accounts, compared to 178,000 a year earlier. In the Natural Gas business, compared to the prior year, overall gross margins were higher, primarily on higher sales volume. Natural gas realized margins increased due to higher sales volumes, primarily related to spot sales to interruptible customers.
Retail Energy-Marketing business served 161,000 gas accounts, compared to 169,000 a year earlier. Operating expenses declined in the current quarter compared to the same quarter for the prior fiscal year, reflecting a lower year-over-year customer accounts.
Next, I will move to the Commercial Energy System segment. For the third quarter, the Commercial Energy Systems business had earnings of $0.07 per share, compared to earnings of $0.00 per share in the same quarter last year. Earnings in this segment were primarily driven by higher revenues from commercial solar projects. The Commercial Energy Systems segment continues to add new solar energy projects to this portfolio. As of June 30, we have over 55 megawatts of installed solar capacity and 3.4 megawatts of fuel cell capacity. These projects represent over $200 million in capital investment, and we continue to see a robust pipeline of future solar projects. We have an additional 25 megawatts of solar capacity currently under contract or in construction.
During the third quarter, our commercial solar assets generated 23,498 megawatt hours of clean solar electricity.
Our alternative energy investments such as American Solar Direct, Skyline Innovations and Todd Edison [ph] are also reported within the commercial energy systems. These ventures now represent $102 million in capital investment since inception and these investments are beginning to contribute in a meaningful way to earnings.
We are pleased with the results we're seeing from this segment and expect increasing earnings contribution to continue in the future, as we execute our distributed generation plan. The cash flows generated by this segment are highly predictable, with roughly 75% fully contracted and hedges in place where appropriate for the 25% represented by abstract value. In addition, we expect the segment to deliver earnings growth of 15% to 25% per annum over the forecast horizon.
Finally, I'll move to Midstream Energy Services segment. After adjustments to reflect storage inventory value, the current market prices, the Midstream Energy Services business had non-GAAP operating loss of $0.05 per share compared to a loss of $0.06 per share the same period of the prior fiscal year. The decrease in operating loss for this quarter relates to the development expenses associated with the contribution pipeline incurred in the prior period. We expect this segment to make a positive contribution to earnings for the full year despite the costs associated with continued investment in other pipeline projects.
Finally, I'll provide fiscal year 2014 earnings guidance, where we are raising our consolidated non-GAAP operating earnings estimate. As shown on Slide 7, we are forecasting non-GAAP earnings in the range of $2.55 to $2.75 per share. The increase is primarily due to strong performance at our utility, driven by disciplined cost control, asset optimization opportunities, accelerated infrastructure investment and a lower effective tax rate. And I'll 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 of regulatory initiatives. In Maryland, the Public Service Commission issued an order on May 6, approving our STRIDE application. The commission approved our STRIDE plan with the January 1, 2014 start date. Washington Gas plans to spend $200 million over the initial 5 years of the program to expedite replacement and reinforcement of our system. The cost of these projects will be recovered through a STRIDE surcharge that will begin to positively impact revenue this month in August 2014. New rates put in place will allow us to recover 12 months of calendar year 2014 return on expenses over the next 5 months.
In Virginia, we continue to implement our previously approved SAVE plan targeting $40 million in accelerated pipe replacement each year with an associated surcharge to recover a return of and on those investments and related expenses. In the District of Columbia, you may recall that the Public Service Commission issued an order in March conditionally approving our proposal for an expanded accelerated pipeline replacement plan. The plan would increase our spending on replacements in the District of Columbia to approximately $110 million over a 5-year period. We continue to anticipate, based on the commission's order, conditionally approving our plan, and its stated intention to fast track this phase of the proceeding that the final order will be issued soon.
Pending a final order, the program will begin to positively impact earnings in fiscal year 2015, as construction resources are put in place over the balance of this fiscal year. Also in the District of Columbia, you may recall that in November of last year, Washington Gas filed an application for approval of a weather normalization adjustment or WNA. The WNA will be similar to mechanisms we already have in place in Maryland and Virginia and will provide an adjustment for changes in usage due to weather. We await a final ruling from the commission on whether it will decide the issue in this proceeding or await a fully litigated base rate case.
This past winter demonstrated the need for additional infrastructure to transport natural gas from supply areas to market areas in the Northeast and mid-Atlantic and to help stabilize the cost of gas, particularly during peak periods of demand. Therefore, we welcome the legislation and act in Virginia that will allow local distribution companies to invest in gas reserves to realize longer-term gas cost or reliability benefits for customers. We are actively investigating opportunities pursuant to this law that would benefit our customers in Virginia. I would like to now turn the call back to Terry for his closing comments.
Terry D. McCallister
Thank you, Adrian. Before proceeding, I'd like to comment on a legal matter that was disclosed in our latest 10-Q. WGL Holdings has been cooperating with an investigation by the U.S. Department of Justice into certain American Recovery and Reinvestment Act project, in which our non-utility subsidiary, Washington Gas Energy Systems, participated as a subcontractor to a prime contractor.
It is probable that we will ultimately incur a loss in connection with this matter, but we do not expect that the resolution will have a material adverse effect on our business. You can read more details on this matter in our 10-Q.
Now I'd like to highlight a few business developments that occurred during the third quarter. Earlier this year, WGL Midstream announced an agreement with 3 other parties to create a company that will jointly develop and own together with Transco the Central Penn Line, a 177-mile pipeline originating in Susquehanna County, Pennsylvania, and extending to Lancaster County, Pennsylvania. The Central Penn Line is the Greenfield pipeline segment, Transco's recently announced Atlantic Sunrise project.
WGL Midstream will invest approximately $410 million. The project is on track and development activities are proceeding as expected. We continue to evaluate additional midstream opportunities, similar to the constitutional pipeline in Central Penn investment, as we continue with our strategy to provide infrastructure solution to move gas from producing areas into customer market areas.
In March, we announced our first Bloom Energy fuel project on the West Coast. Washington Gas Energy Systems now owns and operates a 2.6-megawatt project to sell all of the electricity to Santa Clara County, California under a 20-year purchase power agreement. I am happy to report that all 4 of the designated sites are now operational. We plan to continue to partner with Bloom Energy in other areas of the country to expand our certified energy portfolio.
As mentioned earlier, we also continue to add to our portfolio of solar assets. Washington Gas Energy Systems recently signed agreement to participate in the second round of the advanced solar initiative program in Georgia. Washington Gas Energy Systems will own and operate these solar projects under a 20-year purchase power agreement. These projects, in total, will total an additional 9.5 megawatts, are expected to be in service by the end of the calendar year.
At the utility, we continue our focus this quarter on updating our utility plant to provide reliable service to customers through accelerated pipeline replacement program. These investments will also help reduce emissions from our delivery system. In line with our previously announced goal of 70% reduction in greenhouse gas emissions from our fleet facilities operations by 2020, and an 18% reduction from our gas delivery system over the same period.
Finally before closing, I'm also sad to announce that one of our Board members, Melvyn Estrin, passed away in early July. Melvyn served on our Board since 1991 and he was a key contributor to our growth over the past two decades. Our thoughts are with his family at this time. We will miss his advise, counsel and friendship. That concludes our prepared remarks. We will now be happy to take your questions.
[Operator Instructions] Your first question comes from the line of Spencer Joyce from Hilliard Lyons.
Spencer E. Joyce - Hilliard Lyons, Research Division
Just one quick one from me. You all touched on the STRIDE legislation in Maryland a little bit. If you could, could you just go over the timetable and the time frame for when we're going to start seeing some financial benefit from that?
Adrian P. Chapman
Yes, I'll start. This is Adrian, Spencer. So, we started under the approved program actually back in January with our construction to support the $40 million we expect to spend this year. The commission approved those projects and approved our surcharge that is now being on our -- now being added to our customer bills starting this month, August. And so we are now beginning to collect the revenues. Over the last 5 months this year, that will provide a return of and on our expenditures of $40 million expenditures over the entire year. So we should be seeing a contribution through the fourth quarter, and we'll be able to identify that at that time. So that will continue and we will be, per plan, spending $40 million each year for the next 4 years starting in '15 and will continue to have the surcharge in place to reflect the building balance year-over-year.
Spencer E. Joyce - Hilliard Lyons, Research Division
Okay. So yes, I thought I heard that we would have kind of a full year benefit compacted into the last 5 months, but so we will see that. And then the overall benefit that we see here in fiscal '14 or excuse me, over the end of calendar '14, should be what we would expect to see over a traditional calendar year from that legislation?
Adrian P. Chapman
To the degree that will be the surcharge as it gets updated, will be reflecting not only the additional years' planned expenditures, but will also continue to reflect the expenditures that have already been made. So we should be building that $40 million in plant balance and then return of and on each year, as we go forward. So the collection this year will reflect one year's of investment. Next year, we'll be collecting not only the incremental year, but also the return of and on of the first year, so there'll be a build of that each year.
Spencer E. Joyce - Hilliard Lyons, Research Division
Okay. Fair point there.
As there are no further questions. I will turn the call back over to Mr. Bonawitz, for additional closing remarks.
Okay. Thank you, everyone, for joining the call 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.
Again, I'd like to remind everyone that you can listen to the rebroadcast of this conference call at 1:00 p.m. Eastern time today, running through August 14, 2014. You may access the replay by dialing 1 (855) 859-2056 and entering the pin# 81454676.
This concludes our conference call for today. Thank you for participating. All parties may now disconnect.
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