WGL Holdings: An Under-Recognized Natural Gas Utility With Growing Non-Regulated Businesses

by: Kathleen Wailes

Summary

Third quarter earnings swung to a profit from a loss last year.

Guidance raised for the second time in 2014.

Share buyback authorized.

WGL reported improved earnings for the third quarter and raised its guidance for 2014 by $.10 a share to a range of $2.55-$2.75 per share. Third quarter 2014 operating earnings beat consensus of ($.07) and swung to a non-GAAP profit of $.02 per share from a non-GAAP loss of $.03 per share in the 2013 third quarter (Results are seasonal because the utility recognizes most of its earnings in the first and second quarters.) For the first nine months of 2014, WGL had non-GAAP earnings of $2.85 per share compared to $2.86 share in the prior year period.

While risks such as weather can always affect results, trend lines for the company are moving in the right direction, and the company just announced a buyback of up to $150 million. The company's retail energy operations, which had a shortfall in the 4th quarter of 2013, are improving and should contribute higher results in this year's fourth quarter. In addition, the company had positive asset optimization in the quarter and expects that two -thirds of its expected 2015 earnings from this source are already locked in assuming normal weather. The utility's customer base is growing and its regulatory cases are producing positive outcomes in all three jurisdictions that it serves.

WGL is an under-appreciated energy company that merits a closer look by investors. An investment in WGL presents an excellent value because it represents strategic positions that meet the needs of an evolving energy marketplace and the demand for cleaner, more efficient energy. In addition to its Washington Gas unit, which is growing in a robust metropolitan Maryland, Virginia and Washington, DC market, WGL has an expanding earnings stream from utility-like solar assets and $102 million in alternative energy investments that are beginning to contribute significantly to earnings.

WGL's asset-based holdings include its marquis natural gas utility, midstream pipelines, storage assets and solar energy. These positions will ensure that the company benefits as natural gas displaces imports and energy from coal. WGL has a 10% investment in Constitution Pipeline, which is expected to come on stream between late 2015 and 2016.

The company announced in March that, through its subsidiary WGL Midstream, it would be a major investor in the Central Penn Line, a 177-mile pipeline originating in Susquehanna County, Pennsylvania and extending to Lancaster County, Pennsylvania. WGL and three other parties have created a company that will jointly own and develop with Transco the Central Penn Line. As part of Transco's Atlantic Sunrise Project, the Central Penn line will provide new firm gas transportation capacity from various supply points in northeast Pennsylvania to a delivery point in Transco's mainline in southeast Pennsylvania with the capacity to transport and deliver up to approximately 1.7 million dekatherms per day of natural gas. With an investment of approximately $410 million, WGL will have majority ownership interest in the company that will co-own the Central Penn Line with Transco.

WGL also entered into an agreement related to the Central Penn Line project with Cabot Oil and Gas Corporation to purchase 500,000 dekatherms per day of natural gas over a 15 year term. This agreement provides WGL Midstream with low-risk access to Marcellus supply that is particularly attractive to east coast customers. This innovative deal, in which WGL is both partially financing the pipeline and taking its output, is an attractive financing vehicle.

The company anticipates numerous opportunities for such investments over the next 5 years, and is financially well-positioned to take advantage of them as desired. Its liquidity, strong balance sheet and cash flow give it the flexibility to take advantage of growth opportunities while maintaining a strong dividend payout ratio (4.1%) and excellent credit rating. Management has a proven track record and has managed through industry and economic ups and downs successfully, which should give investors confidence.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Business relationship disclosure: I wrote the article myself and am a consultant to the company.