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Vectren’s (VVC) CEO Carl Chapman on Q4 2014 Results – Earnings Call Transcript

Vectren Corp (NYSE: VVC ) Q4 2014 Earnings Conference Call February 17 2015, 02:00 PM ET Executives Robert Goocher – Vice President of Investor Relations and Treasurer Carl Chapman – Chairman, Chief Executive Officer and President Susan Hardwick – Chief Financial Officer and Senior Vice President Ron Christian – Executive Vice President and Chief Legal and External Affairs Officer Analysts Matt Tucker – KeyBanc Capital Markets Paul Patterson – Glenrock Associates Sarah Akers – Wells Fargo Operator Good afternoon and thank you all for joining us on today’s call. This call is being Webcast and shortly following its conclusion a replay will be available on our website at Vectren.com. Yesterday we released our 2014 results and this morning we filed our Form 10-K with the SEC. Under the investor’s link on our website, you can find copies of the Earnings Release, today’s slide presentation and the 10-K. As further described on Slide two, I would like to remind you that many of the statements we make on this call are forward-looking statements. Actual results may differ materially from those discussed in this presentation. Carl Chapman, Vectren’s Chairman, President and CEO, will provide opening remarks on 2014 results, and review our 2015 earnings guidance. He will then turn it over to Susan Hardwick, Senior Vice President and CFO, who will walk through our expectations for 2015. Also, joining us on today’s call is Ron Christian, Executive Vice President and Chief Legal and External Affairs Officer. Following our prepared remarks, we will be glad to answer any questions you might have. With that, I’ll turn it over to Carl. Carl Chapman Thanks, Robert. And I’d also like to welcome everyone to today’s call. And thank you for your interest in Vectren. Let me start by taking a moment to recognize Robert’s recent announcement of his intention to retire this summer after 40 years in the utility industry. Robert has been an important part of Vectren’s leadership team in his 13 years as treasurer and the last four and a half years as our VP of Investor Relations. All of us at Vectren very much appreciate Robert’s contributions to the company and his role in elevating the treasury and investor relation functions during his time with us. Now lets’ turn to slide four and five as we begin our review of 2014 results, I’d like to remind everyone we’ve excluded Coal Mining results in 2014 and ProLiance results in 2013, the year of disposition for each entity. We believe excluding results or the year of disposition provides the most useful comparison of the results of ongoing operations. You will find a reconciliation of GAAP to non-GAAP measures in the appendix. 2014 consolidated earnings were $2.28 per share in line with guidance and up 7.5% compared to $2.12 per share in 2013. This continues our consistent earnings growth trend that began back in 2010 and continues to be supported by our strong utility results. The Utility Group achieved earnings of $1.08 per share and increased to 4.7% over 2013 earnings of $1.72 per share, drivers of the improved utility results were higher returns from Ohio infrastructure replacement programs and increased margins from residential and commercial customer growth. The weather impact on utility results for the year was minimal as higher electric margins related to increased usage were offset by additional weather related maintenance cost in our GAAP system in the first quarter of 2014. For the year, our Utility Group once again earned near our allowed return. Also, I’m very proud that Vectren’s Electric Utility was the recipient of the 2014 ReliabilityOne Award for top ranked Midsize Utility presented by PA Consulting Group which recognizes Electric Utilities for outage prevention and reduction performance. A lot of effort by our electric employees over the last several years has gone into making our electric systems safe and reliable and when outages do occur they have demonstrated their ability to respond quickly and efficiently to restore service. Congratulations and heartfelt thanks to all of our utility employees for their efforts to meet our customers’ needs every day. Moving on to the Nonutility segment. 2014 earnings were $39.1 million compared to 2013 earnings of $33.0 million. Infrastructure Services continues to experience strong demand for its construction services even though harsh winter weather negatively affected early season construction operations well into the second quarter. This put crews in catch up mode the rest of the year including in the fourth quarter when we also were hampered by weather as the year ended. Because of this weather, overall results for the year for infrastructure services fell short of initial expectations although demand remained strong throughout the year. On April 1st Energy Systems Group acquired the federal sector energy, energy services unit of Chevron Energy Solutions, greatly enhancing our ability to compete for federal energy efficiency projects. We continue to believe 2015 will be a turnaround year for energy services including a return to profitability. And finally on the Nonutility side, Vectren completed the exit of commodity based businesses with the sale of our coal mining segment in August. We are confident that our efforts to narrow our Nonutility business focus over the last few years will continue to lead to consistent and higher quality earnings growth for Vectren shareholders. In conjunction with our simpler, higher quality business mix, back in November we were pleased to provide increased long term growth targets which I’ll discuss more in a few minutes. We are particularly proud of our annualized dividend increase of $0.08 per share or 5.6% in December. This was the largest dividend increase for Vectren or its predecessor since the early 1990s and extended our streak to 55 consecutive years of increasing the dividends paid. Moving onto slide six, I’d like to cover some of the regulatory highlights that will be important to our utility operations and earnings growth for the foreseeable future. Over the last several years, we have worked collaboratively with regulators, legislators and the other utilities in Indiana and Ohio to establish the regulatory framework for the long term cost recovery of our gas infrastructural placement programs that will enhance the reliability and safety of our gas systems. In early 2014, we received approval from the Ohio Commission to recover such costs and in August we received an order from the Indiana Commission under Senate Bills 560 and 251 approving our plans and related recovery. In addition to these orders supporting our gas investment in January 2015 we received an order from the Indiana Commission approving Vectren’s request to upgrade existing emissions control equipment on our coal fired electric generation and approving Vectren’s requested framework for long term cost recovery of the planned investments. This includes equipment required to meet EPA regulations for mercury and air toxic standards or MATS. We expect the total investment to be between $80 million and $90 million. Also in early 2015, Vectren reached an agreement in principle with the Indiana consumers’ advocate to extend gas decoupling until 2020. The final settlement will be filed with the Indiana Commission by March 1st with an order expected well before the December 31 exploration date. As you can see at the bottom of slide six, great strides have been made in creating a regulatory structure that balances the needs of our customers with those of our shareholders. In addition to the various infrastructure recovery mechanisms I discussed, Vectren has also worked collaboratively with our regulators to obtain a number of other regulatory mechanisms to protect margins and recover costs that position Vectren well to earn our allowed return. We believe this outcome is a best-in-class result amongst our peers in the industry. Turning to slide seven as reported yesterday, we are affirming our 2015 consolidated EPS guidance provided in November of $2.40 to $2.55 per share. For several years now, Vectren has demonstrated a record of consistent earnings growth. We expect this record to continue as evidenced by our recently increased long term earnings growth target of 5% to 7%. Our dividend growth will be aligned with earnings growth in our 60% payout target. Our anchor for growth is still our premier utility franchise, which has demonstrated the ability to consistently earn allowed returns. Going forward, we expect utility earnings growth of 4% to 6%, growth will be driven by timely recovery of significant gas infrastructure investments coupled with a continued focus on operating cost control from our culture of performance management. And then as I said earlier, we believe our Nonutility portfolio is now positioned to provide a higher quality earnings mix and more consistent earnings growth driven in the near term by infrastructure services. We are very proud of the consistent earnings growth Vectren has been able to achieve for our shareholders. With earnings growth of 8 plus percent over the past several years as a foundation, we are confident we can achieve our growth targets in the years to come. And with that, I’ll turn it over to Susan who will provide the 2015 outlook for out Utility and Nonutility businesses before opening the discussion up for questions. Susan? Susan Hardwick Thanks, Carl. Turning to slide number eight, we’ll begin with our utility outlook with the 2015 EPS guidance midpoint is affirmed that the $1.90 per share up 5.6% from 2014. As you see in the graph at the bottom, Vectren has consistently grown utility earnings in 2011, the year of our last – gas base rate case order. We expect growth over the next several years to be driven by our return on investment in new gas infrastructure. Before I go on too much further, I should note recent headlines concerning the significant drop in oil prices. Our utility results have not yet been impacted but we recognize that some of our customers are sensitive to low oil prices, some unfavorably and some favorably. We will remain in dialogue with our customers and actively monitor this situation. Now back to the 2105 outlook. As I mentioned the key long term utility growth driver relates to investment in our gas infrastructure system where we expect to invest about $1.3 billion of our total $1.9 billion utility CapEx spend over the next five years. As planned these investments will significantly shift our utility earnings contribution from about 45% gas to approximately 65% gas over the next five years, which we believe should improve the evaluation of our utility business as a more gas weighted operation. Moving onto slide number nine in our infrastructure services business. The key takeaways for VISCO are simply these. Number one, our outlook on 2015 is unchanged, and two, the significant majority of VISCOs work is safety and integrity driven infrastructure repair and replacement while the work directly related to gas or oil gas and oil exploration and production activities represents only about 15% of 2015 expected revenues. Again in reference to the currently low oil prices and relatively low natural gas prices we have seen no decrease in backlog and no significant impact to construction operations to date. As shown in the graph on this slide a large majority of VISCOs projected 2015 revenue will come from pipeline integrity or safety related work just as it did in 2014. New E&P share related construction work will mainly focus on projects that must be completed in the near term such as those needed to eliminate gas flaring or connecting already completed wells. We expect that any potential impact of low oil and natural gas prices on demand for new share related pipeline and related construction work will lag eight to twelve months since many projects have already begun or have near term start dates. And because VISCO targets smaller diameter pipe construction projects we don’t expect that an extended period of low oil prices would impact us to the same degree as others in the industry that derive a larger portion of their business from large diameter pipe projects. While we recognize some risk exists in 2016 if oil prices don’t rebound, we believe the nature of the work VISCO predominantly performs gives the business significant installation from oil price related risk. Over the long term, we expect demand for pipeline maintenance and replacement work to remain very strong throughout 2015 and beyond as utilities continue pursue sizeable pipeline replacement programs and as gas and oil transmission pipeline, integrity and replacement work remain a top priority for our customers. Now, on the slide 10, energy services finished 2014 strong with a record $189 million of new contract signed in the year which resulted in a strong year-end backlog. With project construction averaging about 12 months to 18 months, the current backlog sets the great foundation for 2015 earnings. Also the sales funnel is at record levels with federal sector demonstrating exceptionally strong demand and as a result we continue to expect VESCO to return to profitability in 2015. Slide 11 continues our energy services discussion with the federal market update and key long term growth drivers for VESCO. I want to first highlight our emphasis on growing the sustainable infrastructure segment by leveraging our project management expertise in this area. The types of projects and industry targeted in this market segment are very broad. A few examples include things like combined heat & power plants at industrial food processors, CNG fueling stations for municipal transit systems and waste authorities, and the conversion of coal-fired steam systems for natural gas for universities. It is our view that the demand for such projects and others like these will continue to grow as efficiency and environmental solutions are solved by customers with significant infrastructure challenges. As it relates to the federal sector, overall federal market activity and demand is still very high. But as I mentioned the amount of time it takes for customers to close on contracts, remains the key issues. To combat this issue, VESCO is working cooperatively with individual federal agencies, the U.S. Department of Energy and collectively with several trade organizations to identify way to reduce or eliminate the process bottleneck to improve the sales cycle time. All these works to speed up the federal sector sales cycle will be ongoing. In the interim we expect a number of customers who were delayed in 2014 to sign contracts in the first half of 2015. Related to our federal sector acquisition, a failure to meet certain earn out thresholds at December 31, 2014 triggered the reversal of the contingent consideration liability resulting in an after tax gain of about $8.9 million in 2014. Vectren chose to offset these non-recurring earnings by making a contribution of about $9.1 million after tax to Vectren’s charitable foundation, which is now funded for the next four to five years. The bottom-line is that we continue to expect to drive great value from the acquisition and from the federal market as a whole in 2015 and beyond. To wrap things up let’s turn to the best slide in the deck, slide number 12, you can see that our track record for consistent earnings and dividend growth is expected to continue and further improve over the long term. We have executed on our key strategies to get us where we are today and we believe Vectren has a great business mix and solid regulatory foundation in place that will enable us to continue to deliver excellent returns to our shareholders for many years to come. And with that, operator, we are now ready for questions. Question-and-Answer Session Operator Thank you. [Operator Instructions] Your first question is from Matt Tucker with KeyBanc Capital Markets. Your line is open. Matt Tucker Hi, good afternoon and congrats on a nice year. Carl Chapman Thanks, Matt. Matt Tucker Just couple of question on the non-utility segments, I guess first, at energy services, could you just talk little bit about, I mean, given the expected steep decline in gross margin that you’re guiding to, how you get to a swing to profitability this year. I assume you’re expecting to hold operating expenses relatively flat or maybe there’s even opportunity to lower them, if you could just add little color there, please? Carl Chapman Sure. The real driver is the increase in revenue and that increase in revenue is driven by larger projects. The larger projects have a lower gross margin typically and of course it also just mix of project, where some of the sustainable infrastructure may have a lower gross margin and some federal will also potentially have lower gross margin. We’ll keep a close watch on the expenses for sure as we always do. But it really will be driven by greater revenue even though the margin percentage will go down. Matt Tucker Got it. Thanks. And it sounds like you been a little bit disappointed with the pace of bookings on the federal side, but can you maybe talk about how the non-federal activity has been shaping up relative to expectations? Carl Chapman Yes. The public sector was really quite strong in 2014 in terms of contract signings, and we still have a very good funnel there as well. So the issue of course in this business is that you have resell projects every year, but you can see that we start with a strong backlog. We indicated how much of that was federal on the slide, but you can see the total backlog is basically double from this time last year. So the public sector we’re shaping up nicely and of course in that backlog is also sustainable infrastructure where we had some success in 2014 also. Matt Tucker Thank you. And then infrastructure services I understand your backlog and kind of what you’re seeing today gave you the confidence to maintain the guidance there which is great. But with respect to kind of eight months to 12 months lag in activity versus energy prices and the potential slowdown maybe next year. Just curious if you’ve already start to see any change in bidding activity or bidding margins on that shale-related work? Carl Chapman Yes. At this point of course we’ve indicated that the E&P related or shale related is relatively smaller percentage. But I would say across all of our business and infrastructure services we really are seeing a lot of bidding activity and more than we might even have expected. So the bidding activity is good. We have no reason to believe that any real change in the margin at this point. You can see that we have in the appendix our midpoint guidance on margin is really the same as we achieved in 2013 and 2014 and we’ve seen nothing to change our perspective on that at this point. Matt Tucker Got it. Thanks. And then just one on the electric side, I believe it was early at least in the first half of 2014, you announced potential loss of a large industrial electric customer, I believe next year. I was just curious if there is any update on that and the expected potential impact of that loss of the customer? Carl Chapman Yes. There is no update to that. I think we disclosed that and we continue to work with them as to exactly what date that will be that they’ll move to cogeneration. But we are working very hard to replace that margin, already we’ve had some success and we continue to work on a number of economic development activities looking to try to replace that. Matt Tucker Great. Thanks a lot. Carl Chapman Thank you. Operator [Operator Instructions] Your next question is from Paul Patterson with Glenrock Associates. Your line is open. Paul Patterson Good afternoon. Carl Chapman Hi, Paul. Paul Patterson Just on slide nine, when we look at that pie chart about the revenue split for E&P, is the margin is similar number? Is the profitability a similar number to that or is it different? Carl Chapman Well, there would be some difference, always going to be as the mix unfolds during the year. This gives you a pretty good sense on the revenue side. There would be some difference in margins, but as you know we have not disclose margin percentages just for competitive reasons between transmission and distribution, and of course for the same reason we’d not be able to share between E&P related and other kinds of business. Paul Patterson Okay. But can you tell it it’s larger or smaller? Carl Chapman Well, I think we have shared before that the transmission business is a higher margin than distribution, but that’s really all we’ve shared in the past and I think we’d be prepare to share today. Paul Patterson Right. I was actually talking about the E&P element? Carl Chapman Well, E&P is going to be transmission related just because of the – where the business is and the workers that do that work. So we have shared before the transmission margin percentages are higher than distribution and certainly E&P directly related would fall under transmission. Paul Patterson Okay. And then, you guys mentioned in the release and you obviously went over in the call that you were talking to your customers and sort of monitoring what the impact would potentially be in 2016 if prices don’t rebound. So could you just share with us a little bit more about what your customers are sort of indicating or what we might have to think about 2016 if prices don’t rebound? Carl Chapman Well, I think Susan said, she was talk about the utility and we do have customers just depending on obviously which industry they’re in. Some are helped. Some are hurt by low oil prices. But at this point we’re not seeing any significant impact to our earnings from that, and that’s we’ve affirmed guidance today. So there clearly will be some impacts, but we’re not seeing anything that causes us to feel differently about the utility earnings and then we shared also with the lag on the infrastructure side and then I just shared while ago with the bidding activity we see, we’re not seeing any big impact at this point in infrastructure services either. Paul Patterson Right. But when I read the release, I got the impression that you guys said well, the drop in oil prices could have a greater impact to 2016, the long term outlook or trends looks good, but I just wondering, if the prices don’t, could you elaborate little bit more about 2016 if oil prices don’t rebound? Carl Chapman Sure. Yes, and again keep in mind we’ve just said that based on what we’ve seen in the utility for 2015 with pluses and minuses we’re not anticipating any real impacts that change our thoughts in 2015. We have no reason to think anything differently in 2016, obviously time will tell and we’ll know a lot more as we move along for the utility. And then when you move over to infrastructure, keep in mind that we’ve said 15% as E&P directly related, and at this point bidding activity is still strong and we’ll just have to see how prices unfold. Paul Patterson Okay. Maybe just move on the federal market in energy services, if you could elaborate just a little bit further on the comments that you made about working to get the contract delays to be in a more efficiently addressed or to move a little bit further along, Susan talked about, I just wondering if you could elaborate a little bit on what you see actually potentially happening and whether that impacts 2015 or when you see the impact actually showing up? Carl Chapman Well, I think that we obviously will continue to work on that. It’s been the disappointment in the federal side as we’ve shared for few months, but what we try to layout here is we really got a number of activities part of which you’re seeing is that the various federal agencies are not use to handling this much work. As you know President Obama increased the better building initiatives. There is lot of different approaches on renewables and efficiency that some of the agencies are looking at. So we’re really working with specific agencies on how we can assist them in moving approvals through the process. And then we’re also working through the trade agencies or the trade groups associated with energy services to see how the approval processes can be shorten. And it’s really that’s what you get into is just the time frame that it takes to get the actual approvals to the various levels of the federal government. Paul Patterson Right. Thanks. But I just wondering is there any improvement that you guys have in your guidance or is there quantifiable amount or is this is something that you’re working on and you hope that its works out sometime in the future, but you don’t’ – I guess I’m just trying to get a sense as to what you think the impact might be financially when these approval processes are improved? Carl Chapman Yes. Well, obviously for 2015 we have affirmed guidance today, so that it give you a good sense of our expectations for 2015 and I think beyond that we certainly would expect improvements in 2016. We would expect federal projects to move quicker based on our activities, but obviously we’re not giving any 2016 guidance today. But we would believe that we would start to see it’s a show-up in backlog in late 2015 and in 2016, but obviously no real change to any outlook for right now. Operator Your next question is from Sarah Akers with Wells Fargo. Your line is open. Sarah Akers Hey, good afternoon. Carl Chapman Hi, Sarah. Sarah Akers Just one question on 2015 guidance, original guidance included $0.03 corporate drag and I believe most of that related to the charitable donations. So with the pre-funding that you did I believe in Q4 is that drag eliminated for the next four to five years or do we need to consider any offset there? Susan Hardwick Well, as we indicated Sarah, that funding of the foundation that amount does take care of funding for the next four to five years. And as you indicated we’ve had $0.03 that was in our initial guidance. We did reaffirm the consolidated guidance, so no change to that. And I think we’ve identified a number of things over the course of the call today that we’re keeping our eye on relative to oil prices and other things. So, in total we are continuing to maintain that overall guidance expectation for 2015. And as we said, it does impact the out years in terms of the expected funding of the foundation in those out years. Sarah Akers Great. Thanks for the clarifications. Carl Chapman Thank you. Operator And there are no further questions at this time. I’ll turn the call back over to Mr. Goocher for any closing remarks. Robert Goocher Well, we’d like thank you everyone for joining us on our call today. On behalf of our entire team, we appreciate your continued interest in Vectren and look forward to seeing many of you at our Investor Day in New York on March, the 16 where other key members of Vectren’s management team including the presidents of our utility, infrastructure services and energy services would join us and sharing further insights into those businesses and plans. And if you can join in the person the event will be webcast start at 10 AM Eastern. With that, we’ll conclude our call for today. Thanks again for your participation. Operator Ladies and gentlemen, this concludes today’s conference call. You may now disconnect. Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) 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This Is How You Invest In Oil Right Now (Without USO)

Summary Many investors are making big bets on oil since it bottomed last month. However, the oil futures curve is in extreme contango, making ETFs like USO and USL very costly. Until the curve flattens, non-integrated oil drillers are a much safer play. This article presents a dynamic model for oil investing to better capitalize on an oil turnaround. Note: This article originally appeared on Hedgewise in October 2014. It has been updated with additional data and republished. Introduction Just about everyone is betting on an oil turnaround sometime soon and trying to figure out how to capitalize on it. Unfortunately, most instruments that provide exposure to oil prices are riddled with high long-term holding costs. One of the most popular oil ETFs, The United States Oil ETF (NYSEARCA: USO ), often suffers from paying high premiums on futures contracts (called “contango”). As you can see here , these costs are particularly severe right now. Investing directly in companies which drill, distribute, or sell oil is a reasonable alternative, but these companies often fail to track the spot price of oil very closely. For example, in 2008, when oil went up 200% , Exxon Mobil (NYSE: XOM ) was only up 88%. This article breaks down the nature of this problem, and presents a dynamic methodology for investing in oil that seeks to avoid these pitfalls. A back-tested simulation that applies this logic can be seen in the graph below, under the label “Dynamic Oil Portfolio.” This portfolio is a rule-based index that invests in a single oil futures contract when the market is in backwardation, or a non-integrated oil company ETF when it is not. It significantly outperforms a long-term investment in USO, and has drastically outperformed in the last few months. This methodology can be applied to any portfolio by keeping track of current market conditions, and then choosing the appropriate ETF (or futures contract) accordingly. Comparison of the WTI Oil Spot Price, USO, and the Dynamic Oil Portfolio, May 2006 – February 2015 (click to enlarge) Sources: Energy Information Administration, Yahoo Finance, Hedgewise Internal Research The Problem First, it is worthwhile to do a quick review of the problems with investing in oil. The most direct way to invest is with an oil futures contract, which commits you to buying oil at an agreed upon price at some point in the future. Unfortunately, much of the time there is a premium on the price of oil futures, called “contango,” because people are betting the price of oil will go up. For example, say the current spot price of oil was $50, and you could buy a futures contract for next month at $55. If the price of oil were to stay exactly flat for the next month, you would probably lose about $5 on that contract. If this were to keep happening, you would lose about 10% per month for the entire year! How This Applies to Oil ETFs The effect of this problem can be seen by examining the performance of ETFs that specialize in trading oil futures contracts. For example, USO has a policy of rolling over the nearest oil futures contract every month. This results in significant cost whenever the market is in contango, which explains its underperformance over time. The iPath S&P Crude Oil Total Return ETN (NYSEARCA: OIL ) and the United States 12 Month Oil ETF (NYSEARCA: USL ) are affected in a similar way. Performance of USO, OIL, and USL vs. WTI Oil Spot Price, December 2007 – February 2015 (click to enlarge) Sources: Energy Information Administration, Yahoo Finance You might notice that USL has performed the best. This is because USL invests in 12 different futures contracts at all times while OIL and USO only invest in the futures contract of the nearest month. This has helped to avoid some of the dramatic costs of trading futures in periods of heavy speculation, such as early 2009. However, it is not enough to avoid the problem altogether. Still, the relative performance of USL provides an important insight. Since different oil futures contracts trade at different prices, there is an opportunity to pick the cheapest one at any point in time. This is the mandate of the PowerShares DB Oil ETF (NYSEARCA: DBO ), and, in theory, should lead to improved performance. Unfortunately, in practice, it has not. Performance of USL and DBO vs. WTI Oil Spot Price, December 2007 – February 2015 (click to enlarge) Sources: Energy Information Administration, Yahoo Finance The main reason that DBO has failed to outperform USL is because of the consistency of the futures curve. It is often upward sloping over time, such that the adjusted cost is about the same no matter which contract you buy. It is helpful to zoom in on different time periods to get a better sense of how this works. You might have already observed how well DBO and USL performed from January 2008 to January 2009. We can examine the futures curve over that time period to understand why this was possible. Note that a “2-Month Oil Futures” contract is one that expires 2 months from today, and a “4-Month Oil Futures” contract is one that expires 4 months from today. If the “4-Month” price is higher than the “2-Month” price, this indicates that the market is in contango. WTI Oil Spot Price vs. 2-Month and 4-Month Futures Contract Prices, January 2008 to January 2009 (click to enlarge) Source: Energy Information Administration The important observation is how close the price of both futures contracts was to the spot price over this entire period. In fact, at some points, the price of the futures contracts was actually below the spot price, which is a case of backwardation. This allowed USL and DBO to outperform. However, this trend changed dramatically in 2010. WTI Oil Spot Price vs. 2-Month and 4-Month Futures Contract Prices, January 2010 to January 2011 (click to enlarge) Source: Energy Information Administration Here, the futures curve was upward sloping, with the price of the 4-Month contract consistently above that of the 2-Month contract. As a result, all of the ETFs involved in trading oil futures suffered. This demonstrates the general point that if you are going to get oil exposure using futures (whether directly or via ETFs), you need to be constantly monitoring the futures curve and adjusting accordingly. When the curve is upward sloping, trading futures will cost a hefty sum over the long term. Unfortunately, this has been the case about 60% of the time over the past decade. Thus, it is necessary to identify alternative ways to get oil exposure, such as investing directly in individual companies. Investing Directly in Oil Companies The most obvious candidates for direct investing are the two largest energy ETFs, the Energy Select Sector SPDR ETF (NYSEARCA: XLE ) and the Vanguard Energy ETF (NYSEARCA: VDE ). Both ETFs invest in most of the biggest energy companies in the world. Performance of XLE and VDE vs. WTI Oil price, June 2006 – February 2015 (click to enlarge) Sources: Energy Information Administration, Yahoo Finance This performance is not terrible, but there is a great deal of tracking error. While in this period the overall effect has been positive, it could just as easily have been negative as it was from 2008 to 2009. The nature of this tracking error can be traced back to the fundamentals of the oil market. First, most large energy companies are grouped into the ‘oil & gas’ sector. This is because natural gas is often found alongside oil, and comprises a significant part of their business. However, the price movements of natural gas are often uncorrelated to the price movements of oil. Second, there are three main functions in the oil industry. Exploration and drilling Equipment and transportation Retail sales Many of the big oil players are involved in all three functions, but equipment, transportation, and retail sales don’t really depend on the current price of oil. For example, if you are selling oil equipment, you would not expect short-term oil fluctuations to change your sales outlook. If you are a gas station, you receive a small mark-up on the price of oil after buying it wholesale. Only exploration and drilling companies (a.k.a., ‘non-integrated’ oil companies) have very direct exposure to oil prices since they are the ones who actually own the oil fields. The good news is that there are ETFs which track these non-integrated oil companies. Two of the largest are the iShares U.S. Oil & Gas Exploration & Production ETF (NYSEARCA: IEO ) and the SPDR S&P Oil & Gas Exploration & Production ETF (NYSEARCA: XOP ). Performance of IEO and XOP vs. WTI Oil Spot Price, June 2006 – February 2015 (click to enlarge) Sources: Energy Information Administration, Yahoo Finance Surprisingly, these stocks actually have an even higher tracking error. To understand why, we have to take a look at the largest actual holdings within the ETFs. XOP primarily invests in smaller-sized owner-operators of oil fields, such as Magnum Hunter Resources Corp. (NYSE: MHR ) and Western Refining, Inc. (NYSE: WNR ). Performance of MHR and WNR vs. WTI Spot Oil Price, June 2006 – February 2015 (click to enlarge) Sources: Energy Information Administration, Yahoo Finance The problem is that these small companies are hugely susceptible to swings due to idiosyncratic factors, like their recent discoveries and the prospects for their particular oil fields. As such, they are fairly uncorrelated to the price of oil. It makes more sense to focus on companies which are diversified across many oil sources rather than only a few, which is the focus of IEO. Two of their biggest holdings are the Anadarko Petroleum Corporation (NYSE: APC ) and EOG Resources, Inc. (NYSE: EOG ), both big drilling companies. Performance of APC and EOG vs. WTI Spot Oil Price, June 2006 – February 2015 (click to enlarge) Sources: Energy Information Administration, Yahoo Finance There is still company-specific variance, but it is muted because these companies are better diversified. Because of this, IEO is likely a better play on oil exposure than XOP. However, it remains unclear whether IEO is a better option than the bigger ETFs; XLE and VDE. Unfortunately, there is no way to make a determination on numbers alone. All three of the ETFs hold oil companies that also invest in natural gas. Each of those companies will have independent factors that affect it year to year. It seems logical that non-integrated oil companies would be more directly exposed to fluctuations in the oil price than the bigger players involved in equipment, transportation, and retail sales. Yet, their relative performance suggests the difference thus far has been pretty negligible. All three are probably reasonable alternatives when the futures market is in contango. Performance of IEO, XLE, and VDE vs. WTI Spot Oil Price, June 2006 – February 2015 (click to enlarge) Sources: Energy Information Administration, Yahoo Finance How to Apply the Model The outcome of all this logic is relatively simple. Invest in the cheapest futures contract (optimizing between USO, USL, and DBO if using an ETF) when there is a downward sloping futures curve, and use a general energy ETF like IEO, XLE, or VDE otherwise. While this requires a little extra work, it may drastically reduce the costs of investing in oil over the long run. We’ve also made this a little easier for you by tracking the current state of the futures curve and its estimated impact on each ETF (linked above). Though the outcome of this model is not perfect, it is certainly more compelling than many of the alternatives. Disclosure: Hedgewise is an Investment Advisor that helps clients implement custom strategies like the one described in this article inexpensively and tax-efficiently. This information does not constitute investment advice or an offer to invest or to provide management services and is subject to correction, completion and amendment without notice. Hedgewise makes no warranties and is not responsible for your use of this information or for any errors or inaccuracies resulting from your use. To the extent that any of the content published may be deemed to be investment advice or recommendations in connection with a particular security, such information is impersonal and not tailored to the investment needs of any specific person. Hedgewise may recommend some of the investments mentioned in this article for use in its clients’ portfolios. Disclosure: The author is long IEO, XLE. (More…) The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it. The author has no business relationship with any company whose stock is mentioned in this article.

WGL Holdings (WGL) Q1 2015 Results – Earnings Call Transcript

WGL Holdings (NYSE: WGL ) Q1 2015 Earnings Call February 05, 2015 10:30 am ET Executives Douglas Bonawitz – Head of Investor Relations Terry D. McCallister – Chairman, Chief Executive Officer, Chairman of Executive Committee, Chairman of Washington Gas Light Company and Chief Executive Officer of Washington Gas Light Company Vincent L. Ammann – Chief Financial Officer, 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 Gautam Chandra – Senior Vice President of Strategy, Business Development and Non-Utility Operations Analysts Mark Barnett – Morningstar Inc., Research Division Operator Good morning, and welcome to the WGL Holdings Inc. First Quarter Fiscal Year 2015 Earnings Conference Call. At this time, I would like to inform you that this conference is being recorded. [Operator Instructions] The call will be available for rebroadcast today at 1:00 p.m. Eastern, running through February 12, 2015. You may access the replay by dialing 1 (855) 859-2056 and entering the pin 70000880. If you do not have a copy of the earnings release, you may obtain one at www.wglholdings.com. I’ll now turn the conference over to Doug Bonawitz. Please go ahead. Douglas Bonawitz Good morning, everyone, and thank you for joining our call. Before we begin, I’d like to point out that this conference will include forward-looking statements under the federal securities laws. Forward-looking statements inherently involve risks and uncertainties that could cause our actual results to vary materially from those predicted in such forward-looking statements. Statements made on this conference call should be considered together with cautionary statements and other information contained in our most recent annual report on Form 10-K and other documents we have filed with or furnished to the SEC. Forward-looking statements speak only as of today and we assume no duty to update them. This morning’s comments will reference a slide presentation on our website, you can access by going to www.wglholdings.com, clicking on the Investor Relations tab, and then, choosing Events and Webcast from the drop down menu. The slide presentation highlights the results for our first quarter of fiscal year 2015 and the drivers of those results. On today’s call, we will make reference to certain non-GAAP financial measures, including operating, earnings of WGL Holdings on a consolidated basis and adjusted EBIT of our operating segments. A reconciliation of these financial measures to the nearest comparable measures reported in accordance with Generally Accepted Accounting Principles or GAAP 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. Following that, Vince Ammann, Senior Vice President and Chief Financial Officer will review the major items that led to our first quarter results. 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, Gautam Chandra, Senior Vice President of Strategy, Business Development and Non-utility Operations, is also with us this morning to answer questions. And with that, I would like to turn the call over to Terry McCallister. Terry D. McCallister Thank you, Doug, and good morning everyone. Our first quarter results have given us a strong start to fiscal year 2015. Our non-GAAP operating earnings for the first quarter as shown on Slide 3 in our presentation were $58 million or $1.15 per share, compared to $51.4 million or $0.99 per share in the first quarter of 2014. This 17% increase in consolidated operating earnings per share was driven by strong results in all 4 of our operating segments this quarter compared to the prior year. At the utility, we saw 6% increase in adjusted EBIT over what had been a strong performance in the first quarter of 2014. Our customer base continue to grow as the active — average active customer meters increased by 12,000 meters year-over-year for the first quarter of 2015. Utility results were also driven by accelerated pipeline replacement programs as well as strong asset optimization revenues. The commercial energy systems business also delivered strong results across the board. We continue to see earnings growth driven by the distributed generation in assets that we own across the country. We invested in an additional $43 million in commercial solar assets this quarter, as part of our plan to spend a total of $150 million on the distributed generation investments this year. These investments will continue to build a steady stream of income from the sale of clean power to our customers. Midstream energy services business delivered higher results compared to the first quarter of 2014. Capitalizing on optimization opportunities offered by the winter weather are continuing to invest in the 2 pipeline projects under development. Finally, our retail energy-marketing business performed well, with electric margins significantly higher in the first quarter of — than in the first quarter of last year. Over the past quarter, PJM capacity pricing returned to expected levels. Also, PJM introduced procedural changes that results in lower ancillary cost. The company has also introduced options, that allow our customers to choose a lower price in exchange for sharing the risks associated with potential costs volatility. As discussed in previous quarters, we continue to drive towards a return to historical levels of earnings in this business. These efforts include an increased focus on large commercial and government account relationships. As an example, WGL Energy recently won the General Services Administration contract to serve power to the federal facilities in the District of Columbia and Maryland. Maryland contract extends 2 years, and the District of Columbia contract extends over 18 months. Of course we hope to work further with GFA to explore opportunities to provide distributed power generation to many of these sites, helping these federal organizations meet the mandated 2020 greenhouse gas reduction goals. Retail energy-marketing business continues to be an important component of our ability to provide a comprehensive set of energy answers to customers. I’m confident in our ability to achieve our financial plan for 2015. Given our results for the first 3 months and our earnings outlook for the remainder of the year, we are affirming our consolidated non-GAAP earnings guidance in the range of $2.70 to $2.90 per share for fiscal year 2015, although at this point, we anticipate being in the higher end of the range. Finally, as noted in our earnings release, I’m also pleased the Board of Directors has approved a $0.09 increase in our dividend to an annual rate of $1.85 per share. This 5% increase reflects our confidence in our strategic plan and our commitment to provide sustainable dividend growth for investors. This is the 39th consecutive year that WGL Holdings has increased the dividend on its common stock. I’m now going to turn the call over to Vince, who will review our first quarter segment’s — our results by segment. Vincent L. Ammann Thank you, Terry. First I’d like to remind you that we’ve made a change to our practice of discussing earning results at the segment level. Going forward, we’ll use non-GAAP adjusted earnings before interest and taxes or adjusted EBIT to discuss results at the segment level. This change will provide more clarity by allowing us to discuss the performance of each business unit, prior to the impact of interest expenses, taxes and accretion and dilution. Turning first to our utility segment. Adjusted EBIT for the first quarter of fiscal year 2015 was $96.6 million, an increase of $5.7 million compared to the same period last year. The drivers of this change are detailed on Slide 5. We continue to grow and add new meters. The addition of over 12,000 average active customer meters, improved adjusted EBIT by $1.5 million. Higher asset optimization revenues added $5.8 million. Revenues from the new rates in Maryland added $2.6 million, as new base rates were effective in Maryland on November 23, 2013. Higher revenues from our accelerated pipe replacement program also added $2.3 million in adjusted EBIT. Partially offsetting these items, were higher O&M expense, primarily driven by higher labor and employee incentive costs, which reduced adjusted EBIT by $4.7 million. Higher depreciation expense also reduced adjusted EBIT by $1.6 million, while reflecting growth in our utility investment, our investment utility plan. Turning to the retail energy-marketing segment. Adjusted EBIT for the first quarter of fiscal year 2015 was $9 million, an increase of $7.6 million compared to the same period last year. On Slide 6, you’ll see that the primary driver of the increase was higher electric gross margins, partially offset by lower natural gas margins. Electric margins increased by $8.8 million, driven by lower capacity charges and lower costs for PJM ancillary services, partially offset by lower sales volumes. Electric volumes decreased 6% in the first quarter versus the prior year, primarily, due to a decline in customers and warmer weather. PJM capacity prices for the territories that we serve were on average about 60% of the levels seen in the prior PJM year, which led to more favorable electric margins in this quarter versus the same quarter last year. I would also like to note that ancillary charges in PJM have been well below the levels seen during the polar vortex that occurred last year. While peak demand on the PJM systems this winter has been close to the levels hit during the January of 2014 polar vortex. New PJM procedures that improve generation reliability and cost allocation have resulted in lower energy costs and reduced ancillary service costs this winter. In the natural gas business, gross margins were $1.5 million lower as benefits realized last year related to wholesale portfolio optimization and interruptible spots sales did not recur. Natural gas volumes decreased 5% in the first quarter versus the prior, primarily due to decline in customers and warmer weather. As Terry mentioned, the focus of our sales effort recently as well as going forward, will be on the large commercial and government accounts in both the electric and natural gas margins. We believe this strategy will facilitate the return of earnings to historical levels. Next, I’ll move to the commercial energy systems segment. Adjusted EBIT for first quarter of fiscal year 2015 was $1.2 million, an increase of $1.2 million compared to the same period last year. The increase reflects growth in distributed generation assets in service, as well as improved margins in the federal contracting business and higher earnings in investment solar businesses. Please note the earnings for this segment are somewhat seasonal in nature, and while our earnings are modest year-to-date, we are on track to meet our original adjusted EBIT forecast for the segment. The commercial energy systems segment continue to add new projects to its portfolio. As of December 31, we have over $80 million — over 80 megawatts of installed solar capacity and 3 megawatts of solar fuel cell capacity. We have an additional 20 megawatts of distributed generation, currently under contract or in construction. In total, these projects represent over $330 million of capital investments and we continue to see a robust pipeline of future distributed generation assets. During the first quarter, our commercial distribution generation assets generated over 19,000-megawatt hours of clean electricity, which is sold to customers through all purchase agreements. This is more than double the amount generated during the first quarter of last year. As Terry mentioned earlier, we are on track to invest $150 million in commercial solar, other distribution — distributed generation projects, during the fiscal year 2015. Next, I’ll move to the midstream energy services segment. Adjusted EBIT for the first quarter of fiscal year 2015 was $2.6 million compared to $1.8 million in the same period last year. The increase, primarily reflects favorable storage spreads, partially offset by the development expenses. Results of other non-utility activities reflecting adjusted EBIT loss of $1.5 million compared to a loss of $1.9 million for the same period of the prior year. Please note that in December of 2014, WGL fully impaired it’s equity investment in ASD Holdings Inc. for a charge of $5.6 million. The impairment was recorded as a non-GAAP adjustment. The charge of solar related to revaluation of our equity investment in the development company, and all of our leases, solar residential assets prior to this relationship are performing as expected. I’ll now move to a discussion of interest expense on a consolidated basis for the first quarter. Interest expense primarily driven by long-term debt, increased to $12.3 million during the first quarter compared to $9 million in the prior period. In October, WGL issued $100 million of 5-year notes and $125 million of 30-year notes. In December, WGL sold an additional $25 million of 30-year notes. In total $250 million of long-term debt was issued at the holding company during the first quarter. Proceeds are being used primarily to fund our share repurchase program and non-utility capital investments. In December, Washington Gas also issued $50 million of 30-year notes. We also took advantage of the opportunities to extend our revolving credit facilities to December of 2019. Facilities previously had a maturity date of April, 2017. On August 7, we announced a $150 million share repurchase program authorized by our Board of Directors. The plan authorizes WGL to repurchase shares based on market and other financial conditions. During the quarter ended, December 31, we purchased — we repurchased 1 million shares of common stock for a cost of $42 million. Since the plan’s inception, WGL has invested $98 million to repurchase 2.3 million shares of WGL common stock under the plan at an average price of $43.31. As Terry stated earlier, we are affirming our consolidated non-GAAP operating earnings guidance in a range of $2.70 and $2.90 per share with a focus on the higher end of the range, primarily, due to strong performance at the regulated utility. 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 addition to Columbia, you may recall that the Public Service Commission issued an order in March of 2014, conditionally approving an expanded accelerated pipeline replacement plan. The plan would increase spending in the District of Columbia to approximately $110 million over a 5-year period. In August, 2014, the commission granted final approval of the revised accelerated pipe replacement plan pending the determination of an appropriate cost recovery mechanism. I’m pleased to report, that the commission recently approved a unanimous settlement agreement that authorizes a surcharge to provide timely recovery of our return on and off pipeline replacement investment, including all replacement activity since June of 2014. As a result, this program will begin to positively impact earnings fiscal year 2015 as expected. In Maryland, the Public Service Commission issued an order in December approving the stride project list for 2015. The project list targets approximately $37 million in accelerated infrastructure replacement capital expenditures and also includes an associated surcharge factor, subject to adjustments made by the staff of the PSC. The calendar year 2015 factor is estimated to collect $3.8 million in revenue. In Virginia, we plan to file by Monday February 9, an application at the SEC of Virginia for approval to amend our current SAVE plan. The Virginia State Act established a regulatory framework for local distribution companies to accelerate infrastructure replacement, and receive current cost recoveries through a surcharge. The commission previously approved and amended SAVE plan in November 2012 that increased our SAVE expenditures to $191 million, over a 5-year period beginning in January, 2013, and ending on December 31, 2017. Based on the company’s experience to date with the implementation of approved SAVE plan program, as well as analysis of our distribution integrity management plan, Washington Gas will propose amendments to the SAVE plan. The amendments in our filing will include both revisions to approve SAVE plan programs, as well as proposals for new eligible infrastructure replacement programs, including the replacement of infrastructure on Washington Gas’ transmission system. The company will request approval for the amended SAVE plan up through December 31, 2017, which is the expiration date for the previously approved SAVE plan. As required by the SAVE Act, the proposed new programs will enhance system safety and reliability by reducing system integrity risks and will also help reduce green house gas emissions. Also in Virginia, legislation was enacted in 2014 that will allow local distribution companies to invest in gas reserves to realize longer-term gas cost to reliability benefits for customers. We initiated a process last year to identify opportunities that would benefit our customers in Virginia. And we are currently evaluating proposals with the goal of presenting a proposal to the commission in the third fiscal quarter of this year. And one final item in Virginia, I’m pleased to report that legislation was recently introduced in the general assembly that supports the expansion of natural gas infrastructure to serve potential customers, located at areas not currently served. Local distribution companies will be able to file a system expansion plans that will address the deferral and recovery of costs, that would be considered uneconomic under utilities new customer economic test and require large upfront contributions in aid of construction from potential customers. A system expansion wider will allow for the recovery of eligible systems expansion infrastructure costs, as a monthly surcharge from effected new customers, as a separate mechanism from the customer rates established in rate case, as well as the deferral of unrecovered eligible system expansion infrastructure costs. To fully support this legislative initiative, that will help bring the benefits of natural gas to more customers in Virginia, including our franchised service territory. I would now like to turn the call back to Terry for his closing comments. Terry D. McCallister Thanks, Adrian. I’d now like to highlight a few of our recent developments. First, an update on our constitution — our investment in the constitution pipeline project. In early December, the FERC issued a certificate of public convenience and necessity for the pipeline. We are still waiting for permitting for the project from the state of New York. Given the permitting delays we now expect in services date sometime in the second half of 2016. While we are disappointed in this delay, we are still confident that the project will move forward to provide an important stream of future earnings. As of December 31, our subsidiary WGL Midstream has invested approximately $24 million in the constitution pipeline project, we expect to invest an additional $55 million through completion. Now turning to our larger investment in the Central Penn Line. The Central Penn Line is greenfield pipeline segment of Transco’s announced Atlantic Sunrise project, WGL Midstream will invest approximately $410 million. This project is on track and development activities are proceeding as expected. The Central Penn Line have a projected in-service date in the second half of 2017. As of December 31, our subsidiary WGL Midstream has invested approximately $10 million in the Central Penn Line project. In late November, WGL Midstream entered into a gas sale and purchase and capacity agreement with GAIL Global USA, a subsidiary of GAIL India. WGL Midstream agreed to sell and deliver a minimum of 340,000 decatherm per day and up to 430,000 decatherms per day of natural gas for a term of 20 years from the in-service date of the Cove Point LNG export facility. WGL Midstream will make deliveries using transportation capacity released by GAIL through an Asset Management arrangement. The majority of the natural gas will be purchased by WGL Midstream through an existing arrangement with Antero Resources, one of the most active operators in the Marcellus and Utica Shale regions. Under these arrangements, WGL Midstream also has an option to acquire a 30% interest in the 70-mile extension of an existing gathering system, pipeline system that will support the Antero’s deliveries to pipeline serving the Mid-Atlantic market. We look forward to a long-term relationship with both GAIL Global and Antero Resources, which capitalize on the growing supply of abundant natural gas from the Marcellus shale region. We continue to evaluate additional midstream opportunities, similar to the projects announced to date, as we continue our strategy to provide infrastructure solutions to move gas from producing areas to the customer market areas. Now turning to our commercial energy systems business. As mentioned earlier, we continue to add to our portfolio of distributed generation assets. In December, Washington Gas Energy systems announced the completion of 20 solar projects, totaling more than 15-megawatts, that will produce renewable energy for Georgia Power. All of its solar arrays will be owned and operated by Washington Gas Energy Systems under our 20-year purchase — power purchasing agreement with Georgia Power. These projects significantly increased renewable energy capacity in the state through the Georgia Power advanced solar initiatives. And we look forward to completing more parts — projects through this partnership. All in all, we are off to a good start for the year. We look forward to providing further information regarding successes and opportunities during our analyst meeting, scheduled for March 18, at the New York Stock Exchange. This concludes our prepared remarks, and we’ll now be happy to answer your questions. Question-and-Answer Session Operator [Operator Instructions] We’ll take our first question from Mark Barnett, Morningstar. Mark Barnett – Morningstar Inc., Research Division Just a couple of quick questions. One, just more broadly, can you talk about how the supply agreement — not the supply, but the financing agreements with Shell has been impacting your operations, and whether that’s something that’s working well for you? Kind of how has the benefits started to show up? Can you maybe discuss that a little bit? Gautam Chandra Mark, this is Gautam. I will take that. Yes, I think the Shell agreement has been performing as we expected. We put that in place, primarily, to reduce short-term capital requirements. Because we’re just leaving a lot of purchases through Shell. And also, just reduction and collateral requirements from the holding company. And I would say, we’ve been achieving that over the last couple of years, where we’ve been operating with Shell and the relationships work very smoothly. So I would say, as expected. Mark Barnett – Morningstar Inc., Research Division Okay. And just shifting to some of the regulatory items you mentioned, the rider proposals for the gas infrastructure in Virginia, I mean, that’s fairly similar to what’s been discussed, I guess, in New England, but there’s been some resistance there. Of course, that’s kind of a multi-state question. I’m wondering what the political climate around that is in Virginia, what you’ve heard, I guess, from stakeholders to-date? Adrian P. Chapman This is Adrian. I’ll address that, Mark. Certainly, there was a some initial perception that this will address to facilitated some of the pipeline activity that’s happening in Virginia, and there was some initial push back, but I think once that was clarified that there’s been certainly generally a wide degree of support due to the economic development benefits of making gas available to currently unserved areas in Virgina. So I think it’s a little premature to predict exactly how the bill will evolve, but it has made good progress through committee and is heading close to the legislative final votes in each chamber of the house. So my expectation is that we’ve been able to clearly articulate the benefits. And what’s been important is it is, there is a signs of cost to those who directly benefit from the development activity that we would do. So those who get access to get service are ones who would directly pay for it. And principally, where we saw that contribution in native construction, sometimes being so large, that it stopped development, now we made that a much more affordable activity for new developers and customers to undertake. Terry D. McCallister Mark, this is Terry. I’d also add to that, this goes through the legislature. We wouldn’t expect — I wouldn’t expect any pushback from the governor, because he clearly drew his support behind the interstate pipeline that’s been proposed to the state earlier this year. So he is a big advocate of natural gas for pipelines for economic development for the state. Mark Barnett – Morningstar Inc., Research Division Okay, okay. And one last question on the regulatory treatment of gas reserves. Could you remind me, would that agreement be directly with an E&P? Terry D. McCallister Yes, it would. Yes, so we are working on a number of arrangements. But ultimately, it would be buying reserves from producer Adrian P. Chapman That’s what the legislation anticipates. Mark Barnett – Morningstar Inc., Research Division Right, I thought so. I just wanted to make sure, because there is obviously a couple of things, you have to work around that, but — okay, it’s great. Operator Again, I would like remind everyone that you can listen the rebroadcast of this conference call at 1 p.m. Eastern today, running through February 12, 2015. You may access the replay by dialing 1 (855) 859-2056 and then entering the pin 70000880. If there are no further questions, I will now turn the call back over to Mr. Bonawitz for any additional or closing remarks. Douglas Bonawitz Well, thank you, all, for joining us this morning. If you do have any further questions, please don’t hesitate to call me at (202) 624-6129. Thanks, again, and have a great day. Operator This concludes our conference call for today. Thank you for participating. And all parties may disconnect now.