Scalper1 News
WGL Holdings, Inc. (NYSE: WGL ) Q4 2015 Earnings Conference Call November 16, 2015 10:30 AM ET Executives Douglas Bonawitz – Head of Investor Relations Terry McCallister – Chairman and Chief Executive Officer Vincent Ammann – Senior Vice President and Chief Financial Officer Adrian Chapman – President and Chief Operating Officer Gautam Chandra – Vice President of Business Development, Strategy and Non-Utility Operations Analysts Q – Operator Good morning and welcome to WGL Holdings, Inc., Fourth Quarter Fiscal Year 2015 Earnings Conference Call. At this time, I would like to inform you that this conference is being recorded and that all participants are in a listen-only mode. We will open the conference call for question-and-answers after the presentation. The call will be available for rebroadcast today at 1:00 PM Eastern Time, running through November 23, 2015. You may access the replay by dialing 1-855-859-2056 and entering the pin number of 72356565. I will now turn the conference over to Doug Bonawitz. Please go ahead. Douglas Bonawitz Good morning, everyone, and thank you for joining our call. Before we begin, I would like to point out that this conference call 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 differ 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. Our earnings release and earnings presentation are available on our website. To access these materials, please go to www.wglholdings.com, click on the Investor Relations tab and choose events and webcasts from the dropdown menu. The slide presentation highlights the results for our fourth quarter of fiscal year 2015 and the drivers of those results. On today’s call, we’ll 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 fiscal year 2015 results. Adrian Chapman, President and Chief Operating Officer, will discuss key issues affecting our business and the status with 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 McCallister Thank you Doug, and good morning to everyone. Today, we’ll briefly look back on the past fiscal year to review our full-year financial results. We will also discuss recent events affecting our business and introduce guidance for fiscal year 2016. I am happy to report to you full-year 2015 financial results that exceeded our initial earnings target for the year as well as our most recent guidance. As shown on Slide 5 of our presentation, we ended fiscal year 2015 with consolidated non-GAAP operating earnings of a $158.2 million or $3.16 per share. This compares to a $139 million in the prior fiscal year of $2.68 per share. This was record income for WGL Holdings and an 18% increase in earnings per share over the prior year. We have now realized a 9% compound annual growth rate and earnings per share since 2011. If you recall, we first established a goal for long-term earnings growth in 2012 when we communicated an expectation of 7% earnings growth over five years from 2011 base. This year we increased our goal to 7% to 10% up of 2014 base. We believe we are establishing a track record of delivering exceptional earnings growth and value for our shareholders. Performance of our utility exceeded initial earnings targets for the year, but utility earnings were slightly lower year-to-year primarily due to higher operations and maintenance expense. The utility results benefited from higher revenues from customer growth, strong asset optimization opportunities and rate recovery related to accelerated pipeline replacement programs. We added approximately 12,800 active utility customer meters in 2015, which represents an overall annual growth of 1.1%. The performance of our non-utility businesses as a whole also exceeded our initial expectations. With both Retail Energy Marketing and Commercial Energy Systems setting new highs in earnings, while the Midstream Energy Services business came in below initial expectations. Our Retail Energy Marketing business performed well with electric margins significantly higher than last year as we forecast at the end of 2014. This business is on a solid path back to long-term historical levels or profitability. In fact this year’s business exceeded those levels. Results from this segment during the fiscal year 2015 exceeded our expectations partially due to specific marketing opportunities that were higher than historical average this fiscal year. Over the long-term, we are still targeting adjusted EBIT for the Retail Marketing Energy segment in the range of $50 million to $55 million per year. The Commercial Energy Systems business delivered a 37% increase in adjusted EBIT compared to last year driven by the utility license distributed generation assets that we now have in place across the country. We now have $500 million in capital invested in this segment and invested a record amount of a $158 million in fiscal year 2015. Turning to Midstream Energy Services, this business underperformed somewhat this year primarily due to lack of optimization opportunities in the marketplace. However, from a long-term perspective, the business accomplished an incredible amount this year announcing the GAIL of transaction and opportunity to invest in a large gathering system and an investment in the Mountain Valley Pipeline. These three developments will create significant shareholder value for many years to come. Turning to fiscal year 2016, in our earnings release Friday, we introduced consolidated non-GAAP earnings guidance for fiscal year 2016 in the range of $3.00 to $3.20 per share. While the midpoint of our guidance reflects lower earnings than our 2015 results, we are solidly within the range of 7% to 10% earnings growth from 2014 results that we established as a goal earlier this year. I’ll now turn the call over to Vince. Vincent Ammann Thank you, Terry. Turning first to our Utility segment, adjusted EBIT for fiscal year 2015 was $235.7 million, a decrease of $9 million compared to last year. The drivers of this change are detailed on Slide 7. We continue to grow and add new meters. The addition of 12,800 average active customer meters improved adjusted EBIT by $5.3 million. Higher results from our Asset Optimization program added $12.1 million in adjusted EBIT. Revenues from new rates in Maryland added adjusted EBIT of $2.6 million as new base rates were not effective in Maryland during the first two months of fiscal year 2014. Higher revenues from our accelerated pipe replacement programs added $9.7 million in adjusted EBIT. The favorable effects of changes in natural gas consumption patterns in the District of Columbia added $5.3 million in adjusted EBIT. These items were offset by higher O&M expenses driven primarily by higher labor and outside services in large part due to the cold weather and employee incentives cost, partially mitigated by lower employee benefit costs. These impacts collectively reduced adjusted EBIT by $28.4 million. Higher appreciation expense also reduced adjusted EBIT by $6.4 million, reflecting growth in our investment and utility plan. Other miscellaneous items reduced adjusted EBIT by $8.9 million. I would also like to highlight the performance of our Asset Optimization program for the full-year. This program generated total of $38 million in adjusted EBIT for the utility this year and also delivered approximately $47 million in benefits to our customers through sharing mechanisms. Asset optimization activity this year will also deliver results in 2016 due to deferred storage earnings which I will discuss further when addressing fiscal year 2016 guidance. Turning to the Retail Energy Marketing segment adjusted EBIT for fiscal year 2015 was $68.5 million, an increase of $57.8 million compared to the same period last year. On Slide 8, you will see that the increase was driven primarily by significantly higher electric gross margins. Natural gas gross margins were also slightly higher compared to the prior year. Electric margins increased by $56.5 million, driven by lower capacity charges from the regional power grid operator PJM as well as lower ancillary cost in PJM. Electric margins in the prior year were negatively affected by adverse market dynamics created by the polar vortex weather event that led to a dramatic spike in ancillary and energy charges. Our internal data indicates an ancillary charges in PJM in January 2014. The procedural changes that PJM implemented in the wake of the polar vortex began to take effect in late fiscal year 2014 and continued into fiscal year 2015. The ancillary costs were incurred this year where generally in line with cost levels seen through the – during the three years before the spike caused by extreme weather. In the natural gas business, gross margins were $2 million higher, due to lower natural gas purchase cost and favorable gas supply and pricing opportunities. As stated throughout the year, our Retail Energy Marketing business has increased its focus on large commercial and government account relationships. As a result the overall number of electric and natural gas accounts both declined compared to the prior year. As of September 30, we have approximately $138,000 electric accounts and $144,000 natural gas accounts declined to 15% and 8% respectively. However, indicative of our revised thorough focus electric volumes increased 3% versus the prior year and natural gas volumes only decreased 1% versus the prior year. The increase in commercial loan in both electric and natural gas offset the decline in mass market customers on a biometric basis. Operating expenses for fiscal year 2015 were slightly higher than the prior year. Next, I will move to the Commercial Energy Systems segment, adjusted EBIT for fiscal year 2015 was $16.8 million compared to $12.3 million last year. The increase reflects growth in distributed generation assets in service, as well as higher income from state rebate programs for certain projects. These favorable variances were partially offset by higher operating expenses, including fixed expenses to support future growth. Our commercial distributed generation assets generated over 147,000 megawatt hours of clean electricity during the fiscal year 2015, which is sold to customers through power purchase agreements. This represents a 73% increase in megawatt hours compared to fiscal year 2014. As of September 30, the Commercial Energy Systems segment owned $369 million of operating distributed generation assets. In addition, our alternative energy investments, which include ASD, Nextility and SunEdison represent $128 million in capital investments since inception. In total, we now have approximately $500 million invested in distributed generation assets. Also note, that as of September 30, our assets in service have generated over a $122 million in investment tax credits and grants. These credits and grants are recognized as reductions in tax expense by amortizing them over the useful life for the underlying assets, which is typically 30 years. Next, I’ll move to the Midstream Energy Services segment. Results for the fiscal year 2015 reflect an adjusted EBIT loss of $3.6 million, compared to adjusted EBIT of $5.1 million last year. The decrease primarily reflects lower storage and transportation spreads in fiscal year 2015, partially offset by lower development expenses and higher income related to our pipeline investments. Results for our other non-utility activities reflecting adjusted EBIT loss of $4 million compared to a loss of $8 million for the prior year. The improvement is primarily related to lower business development and legal expenses. I’ll discuss interest expense on a consolidated basis. Interest expense increased to $50.5 million this year compared to $37.7 million in the prior year. The increase was primarily driven by interest expense on long-term debt issued by both Washington Gas and WGL. I’ll now move to our initial guidance for fiscal year 2016 earnings. We will continue to use adjusted earnings before interest and taxes or adjusted EBIT to provide guidance on the segment level. Guidance regarding non-GAAP operating earnings at the consolidated level was still be provided using an expected range of earnings per share. As Terry have stated earlier, our consolidated non-GAAP earnings guidance for fiscal year 2016 within a range of $3 to $3.20 per share. This earnings guidance includes dilution from the planned issuance of equity in fiscal year 2016. For the utility as shown on Slide 11, the favorable effect of the continued growth of new customers will improve utility results in 2016. In addition, increased revenues from accelerated investment programs will improve utility earnings, lower operating and maintenance expense is also forecast. These improvements will be offset by lower asset optimization revenue and higher depreciation expense due to the increased plant additions. Based on deferred storage earnings from this winter and other hedging opportunities deployed $13 million of the adjusted EBIT we expect from utility asset optimization in fiscal year 2016 is already locked in. The $20 million of total asset optimization EBIT forecasted in fiscal year 2016 assumed normal weather. As shown on Slide 12, our non-utility guidance reflects an increase in electric margins, a decrease in natural gas margins and higher operating expenses at our Retail Energy Marketing business. Electric margins are forecasted to be higher due to the growth in the large commercial segment. The increase in volumes will be partially offset by higher capacity costs that negatively impact the timing of margins through the first eight months of the fiscal year. Gas margins are expected to be lower as several highly favorable items that occurred in fiscal year 2015 are not expected to recur including higher levels of retail and wholesale portfolio optimization as well as declining prices throughout the latter half of fiscal year 2015 that positively impacted natural gas margins. The forecast for fiscal year 2016 is based on historical levels of these activities and benefits. Operating expenses in this segment are expected to increase primarily driven by the increase in commercial electric volume. Higher costs related to volume include broker expense, bad debt expense and increased billing services and staffing costs. The Commercial Energy Systems segment is forecasting higher earnings in fiscal year 2016. In fiscal year 2015, our distributed generation assets produced 147,000 megawatt hours of electricity. In fiscal year 2016, we expect our distributed generation assets will produce over 230,000 megawatt hours of electricity representing a 50% increase in generation. Our Midstream Energy Services segment is forecasting higher earnings at fiscal year 2016 of the $15 million in additional EBIT expected in this segment approximately $6 million is driven by improved storage and transportation spreads, $6 million is related to higher earnings from our pipeline investments and $3 million is driven by decreased expenses primarily non-recurring transaction fees. Please note that the increase related to pipeline investments assumes that our option related to the gathering system will be exercised during the first half of fiscal year 2016. I’ll now turn the call over to Adrian for his comments. Adrian Chapman Thank you, Vince and good morning everyone. I am pleased to provide you with an update on our operations and regulatory initiatives. In the District of Columbia, the settlements have resulted in a surcharge mechanism to recover accelerated pipe replacement investments included requirement to the filings of two rate cases, one no later than August 1, 2016 and the second no later than April 30, 2020. Accordingly, we currently planned to file a rate case during the first half of fiscal year 2016. The anticipated filing will allow us to rebalance our revenues, expenses and other utility investment in the District of Columbia. One item in particular that supports the rate case is our need to recover previously deferred pension tracker costs that were not addressed in our last rate case. As a reminder, our last rate case in the district was filed in February 2012 with rates effective in June 2013. The Public Service Commission in the District of Columbia has no time limitation in which it must make decisions regarding modifications to base rates. The commission targets resolving pending rate cases within three months of the close of the record in the case. In Maryland, you may recall that we received approval in July of an amendment that expands our currently approved STRIDE plan. We received approval to spend an additional $4 million to $5 million per year on distribution and transmission replacements through 2018. However, the commission excluded from the accelerated recovery program cost related to transmission system replacements physically located outside of Maryland. This treatment was contrary to how common transmission related costs have been recovered in rate cases. Washington Gas filed an appeal with the circuit court from Montgomery County on July 30 to challenge the PSC decision to deny recovery through the surcharge mechanism of cost related to transmission system replacement projects located outside of Maryland. On August 10, the Maryland Office of People’s Counsel filed a notice with the circuit court that it intense to participate in the appeal case. Washington Gas filed an initial brief on October 23, the responsive briefs of the PSC and Office of People’s Counsel are due on November 30. In Virginia, Washington Gas entered into an agreement with Energy Corporation of America in May of this year to acquire natural gas reserves through non-operating working interest in 25 producing wells located in Pennsylvania. Virginia law now allows local distribution companies to recover a return of and return on investments in physical gas reserves that benefit customers by reducing cost, price volatility or supply risk. On May 12, Washington Gas filed an application with the SEC for approval of the gas reserves purchase agreement as part of a natural gas supply investment plan. On November 6, the SEC of Virginia issued an order denying the application by asserting that due to questions regarding issues such as the certainty of volumes delivered and the reasonableness of pricing forecast we used to establish benefits to customers the gas reserve application did not meet the public interest standard. The SEC of Virginia did not close the record in the proceeding and we are reviewing the order with our gas reserve counterparty to determine whether there is an opportunity to file an amendment to the reserve proposal within the 60-day period provided under the law. The SEC will then have 60 days to review and issue a decision on such an amendment. I would also like to update you on the WGL Holdings capital spending forecast. Our current forecast as shown on Slide 14 in the presentation cause for us to spend $835 million in 2016 and $3.3 billion cumulatively in the 2016 to 2020 timeframe. This represents an increase of $275 million for 2016 compared to our prior forecast and an increase of $520 million for the full-year period of 2016 through 2019. The primary drivers of the increase for fiscal year 2016 include $178 million increase related to our pipeline investments primarily related to the Mountain Valley pipeline and the gathering system option and $100 million increase in distributed generation projects at our Commercial Energy Systems segment. The primary drivers of the increase over the extended period are the three previously mentioned items as well as $115 million in additional spending related to our utility accelerated recovery program. For our utility the 2016 to 2020 period includes approximately $650 million of plant expenditures to meet the requirements of the accelerated pipe replacement programs in place in all three of our jurisdictions. Finally, a quick update on the development related to our utility operations. Some of you may recall Washington Gas outsourced many of its customer service, information technology and other functions in 2007 through a multi-year business process outsourcing agreement with Accenture. We’ve recently signed a new agreement with Faneuil, a call center services company that specializes in customer care for the Utility industry. Through this agreement, more than 200 new jobs will be established in Virginia as Washington Gas transitions from offshore customer service operations to two call centers in Hampton and Martinsville, Virginia by the end of next year. Faneuil has a well-established track record of success in the utility sector and I am confident that we have selected our partner that will help us achieve the new heights in customer satisfaction. I would like to now turn the call back to Terry for his closing comments. Terry McCallister Thank, Adrian. I would like to now highlight a few recent developments and provide an update over the status of our midstream and distributed generation investments. First, an update on our investments in the Constitution Pipeline project. We continue to wait with our partners for a permit from the New York State Department of Environmental Conservation. As of September 30, WGL Midstream has invested approximately $29 million in the Constitution Pipeline project based on updated cost estimate, WGL Midstream now expects to invest $83 million in total for its 10% share in the project. Regarding our investment in the Central Penn line, the Central Penn line is a Greenfield pipeline segment of Transco’s Atlantic Sunrise Project. The project is on track and the development activities are proceeding as expected. The Central Penn line has a projected in service date in the second half of calendar year 2017. WGL Midstream will invest approximately $412 million in the project as of September 30, our subsidiaries have invested approximately $31 million. Next I’ll provide an update on our investment in the Mountain Valley pipeline project. Mountain Valley pipeline is a 300 mile pipeline in West Virginia and Virginia that will help to meet increasing demand for natural gas in the Mid-Atlantic and Southeast markets. This project is on track and development activities are proceeding as expected. On October 23, Mountain Valley pipeline formally applies to the FERC for authorization to build the pipeline. Pending regulatory approval, construction has anticipated to begin at late 2016 with full and service targeted for the fourth quarter of calendar year 2018. Also please note that on October 1, RGC Midstream acquired a 1% interest in Mountain Valley Pipeline LLC and Roanoke Gas Company will become a Shipper on the pipeline. WGL Midstream will invest between $210 million and $245 million in the Mountain Valley Pipeline project. As of September 30, WGL Midstream has invested approximately $10 million. Finally, an update on an additional opportunity to invest in infrastructure that we first announced last December. As we have discussed previously, we have an option for 30% interest and a $400 million plus gas gathering system in West Virginia, but gathering system will help move gas out of the production fields of West Virginia to an interstate pipeline system for transportation to the Mid-Atlantic region. Construction is nearly complete substantially within our original cost projection. Therefore, our guidance assumption includes the exercise of this option during fiscal year 2016. Turning to our Commercial Energy Systems business, our portfolio of distributed generation assets continue to grow in fiscal year 2015. As of September 30, we have 130 megawatts of capacity in service with an additional 40 megawatts contracted are under construction. We invested $158 million in capital this year which is a 46% increase over last year. And as Adrian mentioned, we plan to invest an additional $200 million in fiscal year 2016. We see a strong pipeline of potential business across the country. And we’ll continue to invest in utility-like distributed generation assets that will generate long-term shareholder value. Our recent agreement with the Architect of the Capitol demonstrates the strong competitive position of diversified energy solutions portfolio and well established position in the government and commercial segment. The Architect of the Capitol is responsible for the maintenance operation and new development of over 17 million square feet of federal buildings. The Architect of the Capitol has selected WGL Energy Systems to develop 7.5 megawatt natural gas co-generation systems for its electricity and heating and cooling requirements. This innovative solution will deliver significant energy efficiency benefits and will help support the federal government’s sustainability goals while reducing its carbon footprint. Regarding sustainability goals, I’d like to provide a quick update on WGL’s accomplishments. We continue to make excellent progress in achieving the aggressive sustainability goals that we set for ourselves four years ago. We are on track to achieve an 18% reduction in Greenhouse gas emissions for every unit of natural gas delivered by our 2020 target base. I am also very pleased to report that given progress to date we expect to achieve the 70% reduction in Greenhouse gas emissions from our fleet facilities earlier than our 2020 target date, reducing our carbon footprint and simplifies the fact that we are using energy efficiently while also improving safety and reliability. As we closed the 2015 fiscal year and looked to 2016, I am proud of our progress and excited about the future. We delivered exceptional financial performance this year delivering earnings per share of $0.36 higher than our initial guidance. Our guidance for 2016 reflects higher utility revenues driven by strong customer growth and accelerated replacement programs. Our guidance for 2016 also reflects the growth potential we see in our non-utility businesses as both energy systems and midstream will began to generate a larger share of total non-utility earnings creating a balanced non-utility portfolio. While we already have a very active capital spending plan in place over the next few years, we continue to look for opportunities to invest in businesses and projects that are in line with our strategic vision and that will add shareholder value with consistent long-term earnings. We are well-positioned to deliver on the 7% to 10% earnings growth target introduced earlier this year and we look forward to providing additional details during our analyst meeting scheduled for March 2016 in New York. This concludes our prepared remarks and we’ll now be happy to answer your questions. Scalper1 News
Scalper1 News