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

By | February 5, 2015

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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. Scalper1 News

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