Market Overview

WGL Holdings, Inc. Reports Fiscal Year 2012 Financial Results; Issues Fiscal Year 2013 Guidance

WASHINGTON--(BUSINESS WIRE)--

WGL Holdings, Inc. (NYSE: WGL):

Consolidated Results

WGL Holdings, Inc. (NYSE: WGL), the parent company of Washington Gas Light Company (Washington Gas) and other energy-related subsidiaries, today reported net income determined in accordance with generally accepted accounting principles in the United States of America (GAAP) for the fiscal year ended September 30, 2012 of $139.8 million, or $2.71 per share, an increase of $22.7 million, or $0.43 per share, over net income of $117.1 million, or $2.28 per share, reported for the fiscal year ended September 30, 2011.

For the quarter ended September 30, 2012, we reported net income determined in accordance with GAAP of $7.7 million, or $0.15 per share, compared to a net loss of ($30.6) million, or ($0.60) per share, reported for the same quarter of the prior fiscal year.

Financial performance is also evaluated based on non-GAAP operating earnings (loss). Non-GAAP operating earnings (loss) excludes the effects of: (i) unrealized mark-to-market gains (losses) on energy-related derivatives for our regulated utility and retail energy marketing segments; (ii) certain gains and losses associated with optimizing the utility segment's system capacity assets; (iii) changes in the measured value of our inventory for our wholesale energy solutions segment; (iv) the financial effects of warm or cold weather that exceeds weather protection for our regulated utility segment and (v) certain unusual transactions. Refer to “Use of Non-GAAP Operating Earnings (Loss)” and supporting reconciliations attached to this news release for a detailed discussion of management's use of this non-GAAP financial measure, as well as reconciliations of net income determined in accordance with GAAP to non-GAAP operating earnings (loss) for both our consolidated and segment results.

For the fiscal year ended September 30, 2012, non-GAAP operating earnings were $138.4 million, or $2.68 per share, an increase of $22.9 million, or $0.43 per share, over non-GAAP operating earnings of $115.5 million, or $2.25 per share, for the prior fiscal year. For the fourth quarter of fiscal year 2012, our non-GAAP operating loss was ($5.0) million, or ($0.10) per share, compared to a non-GAAP operating loss of ($15.0) million, or ($0.29) per share, for the same quarter of the prior fiscal year.

“We are pleased to announce record non-GAAP earnings per share at WGL Holdings in 2012,” said Terry D. McCallister, Chairman and Chief Executive Officer of WGL Holdings. “Non-GAAP earnings increased 21% for our regulated utility segment. In addition, we saw another year of record results for our retail business and an increase in the contribution from our commercial energy systems segment. These results were realized in spite of record warm temperatures this past winter and an unusually hot summer, and they demonstrate our ability to deliver consistent results in the face of an uncertain economy and unusual weather patterns. We believe we are well positioned to continue to grow earnings.”

Fiscal Year and Fourth Quarter Results by Business Segment

Regulated Utility

For the quarter ended September 30, 2012, our regulated utility segment reported a seasonal net loss of ($1.2) million, or ($0.02) per share, compared to a net loss of ($38.4) million, or ($0.75) per share, reported for the fourth quarter of the prior fiscal year. After adjustments, the non-GAAP operating loss for the regulated utility segment was ($12.6) million, or ($0.24) per share, for the quarter ended September 30, 2012, compared to a non-GAAP operating loss of ($24.2) million, or ($0.47) per share, for the same quarter of the prior fiscal year. This three month comparison of non-GAAP operating earnings reflect: (i) higher revenues from the implementation of new rates in Virginia and Maryland; (ii) higher margins associated with our asset optimization program including the favorable impact of the commission decision in Maryland validating the benefits of our program in the asset optimization case; (iii) lower interest expense and (iv) a lower effective tax rate. Partially offsetting these favorable variances was higher depreciation expense due to the growth in our investment in utility plant.

For the fiscal year ended September 30, 2012, our regulated utility segment reported net income of $109.7 million, or $2.13 per share, an increase of $40.5 million, or $0.78 per share, over net income of $69.2 million, or $1.35 per share, for the prior fiscal year. After adjustments, non-GAAP operating earnings for the regulated utility segment were $104.4 million, or $2.02 per share, for the fiscal year ended September 30, 2012, an increase of $18.2 million, or $0.34 per share, over non-GAAP operating earnings of $86.2 million, or $1.68 per share, for the prior fiscal year. The year-over-year improvement in non-GAAP earnings for the fiscal year ended September 30, 2012 reflects: (i) higher revenues from the implementation of new rates in Virginia and Maryland; (ii) an increase in average active customer meters of more than 8,900 over the same twelve month period of the prior fiscal year; (iii) higher margins associated with our asset optimization program; (iv) lower interest expense and (v) a lower effective tax rate. Partially offsetting these favorable variances were higher operations and maintenance expenses and higher depreciation expense due to the growth in our investment in utility plant.

Retail Energy-Marketing

For the quarter ended September 30, 2012, the retail energy-marketing segment reported net income of $14.4 million, or $0.28 per share, an increase of $8.4 million, or $0.16 per share, over net income of $6.0 million, or $0.12 per share, reported for the same quarter of the prior fiscal year. Non-GAAP operating earnings for the retail energy-marketing segment were $8.9 million, or $0.17 per share, for the quarter ended September 30, 2012, compared to non-GAAP operating earnings of $11.8 million, or $0.23 per share, for the same quarter of the prior fiscal year. For the fiscal year ended September 30, 2012, the retail energy-marketing segment reported net income of $39.3 million, or $0.76 per share, compared to net income of $49.0 million, or $0.95 per share, reported for the prior fiscal year. Non-GAAP operating earnings for the retail energy-marketing segment were $36.2 million, or $0.70 per share, for the fiscal year ended September 30, 2012, an increase of $1.9 million, or $0.03 per share, over non-GAAP operating earnings of $34.3 million, or $0.67 per share, for the prior fiscal year.

For the quarter ended September 30, 2012, non-GAAP operating earnings reflect lower realized electric and natural gas unit margins in the current quarter, partially offset by higher sales volumes. The quarterly pattern of margin recognition that the retail energy-marketing segment realizes within a given fiscal year varies from year-to-year. Operating expenses for the quarter were lower primarily due to lower marketing and employee compensation cost, while the effective tax rate was higher.

For the fiscal year comparisons, the increase in non-GAAP operating earnings reflects higher electricity margins due to increased sale volumes resulting from customer growth and favorable price conditions versus the prior fiscal year. Natural gas margins were lower primarily due to lower retail sales volumes resulting from warm weather and lower margins on portfolio optimization activities. Operating expenses did not change significantly year-over-year. Lower levels of customer acquisition and compensation expenses were offset by increases in customer billing, bad debt and other administrative expenses. A change in the effective tax rate reduced earnings.

Commercial Energy Systems

For the quarter ended September 30, 2012, the commercial energy systems segment reported net income of $0.9 million, or $0.02 per share, compared to net income of $0.3 million, or $0.01 per share, for the same quarter of the prior fiscal year. For the fiscal year ended September 30, 2012, the commercial energy systems segment reported net income of $2.4 million, or $0.05 per share, an increase of $0.04 per share, over net income of $0.3 million, or $0.01 per share, for the same period of the prior fiscal year. The increase in earnings is primarily due to higher revenue from commercial solar projects in the current period and the benefits from the timing of project work for government agency customers that was delayed in the prior year. There were no non-GAAP adjustments for this segment for any of the periods presented.

Wholesale Energy Solutions

For the quarter ended September 30, 2012, the wholesale energy solutions segment reported a net loss of ($5.6) million, or ($0.11) per share, compared to net income of $2.5 million, or $0.05 per share, for the same period of the prior fiscal year. Non-GAAP operating losses for the wholesale energy solutions segment were ($1.5) million, or ($0.03) per share, compared to an operating loss of ($1.9) million, or ($0.04) per share, for the same period of the prior fiscal year.

For the fiscal year ended September 30, 2012, the wholesale energy solutions segment reported a net loss of ($9.1) million, or ($0.18) per share, compared to net income of $2.2 million, or $0.04 per share, for the same period of the prior fiscal year. Wholesale energy solutions had a non-GAAP operating loss of ($2.2) million, or ($0.04) per share, compared to an operating loss of ($1.8) million, or ($0.03) per share, for the same period of the prior fiscal year.

The non-GAAP comparison to the prior year reflects low storage and transportation spreads due to one of the warmest winters on record across the country, which affected optimization opportunities. Both the quarter and fiscal year reflect higher operation and maintenance expense as a result of investments in new storage and optimization arrangements, as well as costs incurred from the Commonwealth Pipeline project.

Earnings Outlook

Our GAAP earnings estimate for fiscal year 2013 is in a range of $2.46 per share to $2.58 per share. This estimate includes projected fiscal year 2013 earnings from our regulated utility segment in a range of $1.68 per share to $1.74 per share and projected fiscal year 2013 earnings from our non-utility business segments in a range of $0.78 per share to $0.84 per share.

We are also providing a consolidated earnings estimate for fiscal year 2013 based on non-GAAP operating earnings in a range of $2.37 per share to $2.49 per share. This estimate includes projected fiscal year 2013 non-GAAP operating earnings from our regulated utility segment in a range of $1.70 per share to $1.76 per share and projected fiscal year 2013 non-GAAP operating earnings from our non-utility business segments in a range of $0.67 per share to $0.73 per share. Refer to the “Reconciliation of GAAP Earnings Guidance to Non-GAAP Earnings Guidance” attached to this press release for a reconciliation of our GAAP earnings per share estimate to our estimate based on non-GAAP operating earnings per share.

In addition to providing guidance for 2013 non-GAAP earnings during our earnings call on November 16, 2012, we will discuss our initial expectations for financial performance in 2014.

We assume no obligation to update this guidance. The absence of any statement by us in the future should not be presumed to represent an affirmation of this earnings guidance. For the assumptions underlying this guidance, please refer to the slides accompanying our webcast that will be posted to the WGL Holdings website, www.wglholdings.com.

Other Information

We will hold a conference call at 10:30 a.m. Eastern Time on November 16, 2012, to discuss our fourth quarter and fiscal year 2012 financial results. The live conference call will be available to the public via a link located on the WGL Holdings website, www.wglholdings.com. To hear the live webcast, click on the “Webcast” link located on the home page of the referenced site. The webcast and related slides will be archived on the WGL Holdings website through December 16, 2012.

Headquartered in Washington, D.C., WGL Holdings, Inc. has four operating segments: (i) the regulated utility segment which primarily consists of Washington Gas, a natural gas utility that serves over one million customers throughout metropolitan Washington, D.C., and the surrounding region; (ii) the retail-energy marketing segment which consists of Washington Gas Energy Services, Inc., a third-party marketer that competitively sells natural gas and electricity; (iii) the commercial energy systems segment which consists of Washington Gas Energy Systems, Inc., a provider of design-build energy efficiency solutions to government and commercial clients and commercial solar projects and (iv) the wholesale energy solutions segment which consists of Capitol Energy Ventures Corp., an asset optimization business that acquires, manages and optimizes natural gas storage and transportation assets. Additional information about WGL Holdings, Inc. is available on our website, www.wglholdings.com.

Unless otherwise noted, earnings per share amounts are presented on a diluted basis, and are based on weighted average common and common equivalent shares outstanding.

Please see the attached comparative statements for additional information on our operating results. Also attached to this news release are reconciliations of net income determined in accordance with GAAP to non-GAAP operating earnings (loss) for both our consolidated and segment results as well as reconciliations of our GAAP earnings guidance to our non-GAAP earnings guidance.

Forward-Looking Statements

This news release and other statements by us include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 with respect to the outlook for earnings, revenues and other future financial business performance or strategies and expectations. Forward-looking statements are typically identified by words such as, but not limited to, “estimates,” “expects,” “anticipates,” “intends,” “believes,” “plans,” and similar expressions, or future or conditional verbs such as “will,” “should,” “would,” and “could.” Although we believe such forward-looking statements are based on reasonable assumptions, we cannot give assurance that every objective will be achieved. Forward-looking statements speak only as of today, and we assume no duty to update them. Factors that could cause actual results to differ materially from those expressed or implied include, but are not limited to, general economic conditions and the factors discussed under the “Risk Factors” heading in our most recent annual report on Form 10-K and other documents we have filed with, or furnished to, the U.S. Securities and Exchange Commission.

WGL Holdings, Inc.
Consolidated Balance Sheets

(Unaudited)

             
  September 30,   September 30,
(In thousands)     2012     2011
ASSETS
Property, Plant and Equipment
At original cost $ 3,807,036 $ 3,575,973
Accumulated depreciation and amortization     (1,139,623 )     (1,086,072 )
Net property, plant and equipment     2,667,413       2,489,901  
Current Assets
Cash and cash equivalents 10,263 4,332
Accounts receivable, net 369,907 296,423
Storage gas 283,008 290,394
Derivatives and other     169,583       133,584  
Total current assets     832,761       724,733  
Deferred Charges and Other Assets     610,773       594,400  
Total Assets   $ 4,110,947     $ 3,809,034  
CAPITALIZATION AND LIABILITIES
Capitalization
Common shareholders' equity $ 1,269,556 $ 1,202,715
Washington Gas Light Company preferred stock 28,173 28,173
Long-term debt     589,202       587,213  
Total capitalization     1,886,931       1,818,101  
Current Liabilities
Notes payable and current maturities of long-term debt 247,718 116,525
Accounts payable and other accrued liabilities 270,387 279,434
Derivatives and other     238,910       180,781  
Total current liabilities     757,015       576,740  
Deferred Credits     1,467,001       1,414,193  
Total Capitalization and Liabilities   $ 4,110,947     $ 3,809,034  
 
WGL Holdings, Inc.
Consolidated Statements of Income

(Unaudited)

                         
  Three Months Ended   Fiscal Year Ended
      September 30,     September 30,
(In thousands, except per share data)     2012     2011     2012     2011
OPERATING REVENUES    
Utility $ 123,827 $ 115,523 $ 1,109,355 $ 1,264,580
Non-utility     295,956       332,602       1,315,955       1,486,921  
Total Operating Revenues     419,783       448,125       2,425,310       2,751,501  
OPERATING EXPENSES
Utility cost of gas 10,245 39,714 394,955 595,678
Non-utility cost of energy-related sales 262,453 301,838 1,190,093 1,334,773
Operation and maintenance 86,613 93,654 342,348 339,529
Depreciation and amortization 22,946 23,201 96,476 91,325
General taxes and other assessments     24,412       22,906       135,455       146,421  
Total Operating Expenses     406,669       481,313       2,159,327       2,507,726  
OPERATING INCOME (LOSS) 13,114 (33,188 ) 265,983 243,775
Other Income — Net 710 2,242 4,932 2,291
Interest Expense     7,526       9,996       36,428       40,546  
INCOME (LOSS) BEFORE INCOME TAXES 6,298 (40,942 ) 234,487 205,520
INCOME TAX EXPENSE (BENEFIT)     (1,776 )     (10,710 )     93,349       87,150  
NET INCOME (LOSS) $ 8,074 $ (30,232 ) $ 141,138 $ 118,370
Dividends on Washington Gas preferred stock     330       330       1,320       1,320  
NET INCOME (LOSS) APPLICABLE TO COMMON STOCK   $ 7,744     $ (30,562 )   $ 139,818     $ 117,050  
AVERAGE COMMON SHARES OUTSTANDING
Basic 51,592 51,324 51,522 51,195
Diluted     51,637       51,324       51,589       51,295  
EARNINGS (LOSS) PER AVERAGE COMMON SHARE
Basic $ 0.15 $ (0.60 ) $ 2.71 $ 2.29
Diluted   $ 0.15     $ (0.60 )   $ 2.71     $ 2.28  
 
Net Income (Loss) Applicable To Common Stock — By Segment ($000):
 
Regulated utility   $ (1,215 )   $ (38,424 )   $ 109,696     $ 69,172  
 
Non-utility operations:
Retail energy-marketing 14,354 6,045 39,331 48,970
Commercial energy solutions 938 286 2,363 311
Wholesale energy solutions (5,647 ) 2,549 (9,090 ) 2,183
Other activities     (686 )     (1,018 )     (2,482 )     (3,586 )
Total non-utility   $ 8,959     $ 7,862     $ 30,122     $ 47,878  
NET INCOME (LOSS) APPLICABLE TO COMMON STOCK   $ 7,744     $ (30,562 )   $ 139,818     $ 117,050  
 
WGL Holdings, Inc.
Consolidated Financial and Operating Statistics

(Unaudited)

     
FINANCIAL STATISTICS
                  Fiscal Year Ended September 30,
                      2012         2011  
 
Closing Market Price—end of period $40.25 $39.07
52-Week Market Price Range $44.99-$36.84 $41.99-$34.69
Price Earnings Ratio   15.1   17.1
Annualized Dividends Per Share $1.60 $1.55
Dividend Yield 4.0 % 4.0 %
Return on Average Common Equity 11.3 % 9.9 %
Total Interest Coverage (times) 7.1 5.8
Book Value Per Share—end of period $24.60 $23.42
Common Shares Outstanding—end of period (thousands)                     51,612           51,365  
 
UTILITY GAS STATISTICS                              
Three Months Ended Fiscal Year Ended
      September 30,       September 30,  
(In thousands)     2012     2011         2012         2011  
 
Operating Revenues
Gas Sold and Delivered
Residential - Firm $ 66,501 $ 57,890 $ 697,674 $ 815,843
Commercial and Industrial - Firm 18,272 17,647 155,530 195,659
Commercial and Industrial - Interruptible 187 360 1,585 2,490
Electric Generation     275       275         1,100           1,100  
      85,235       76,172         855,889           1,015,092  
Gas Delivered for Others
Firm 20,635 21,591 173,611 169,127
Interruptible 7,868 7,965 46,124 50,573
Electric Generation     238       205         727           458  
      28,741       29,761         220,462           220,158  
113,976 105,933 1,076,351 1,235,250
Other     9,851       9,590         33,004           29,330  
Total   $ 123,827     $ 115,523     $   1,109,355       $   1,264,580  
                               
Three Months Ended Fiscal Year Ended
      September 30,       September 30,  
(In thousands of therms)     2012     2011         2012         2011  
 
Gas Sales and Deliveries
Gas Sold and Delivered
Residential - Firm 36,742 29,722 540,206 677,558
Commercial and Industrial - Firm 16,550 13,882 149,515 179,207
Commercial and Industrial - Interruptible     257       487         2,042           2,573  
      53,549       44,091         691,763           859,338  
Gas Delivered for Others
Firm 49,608 39,640 436,698 501,187
Interruptible 43,216 44,127 243,031 271,421
Electric Generation     111,922       73,153         343,315           140,557  
      204,746       156,920         1,023,044           913,165  
Total     258,295       201,011         1,714,807           1,772,503  
 
WASHINGTON GAS ENERGY SERVICES                              
Natural Gas Sales
Therm Sales (thousands of therms) 81,283 68,152 610,420 678,424
 
Number of Customers (end of period)     177,500       172,200         177,500           172,200  
 
Electricity Sales
Electricity Sales (thousands of kWhs) 3,394,645 3,047,798 11,794,872 10,793,095
 
Number of Accounts (end of period)     194,300       182,500         194,300           182,500  
 
UTILITY GAS PURCHASED EXPENSE
(excluding asset optimization)     54.40 ¢     61.88 ¢       60.47

¢

   

 

  67.57 ¢
 
HEATING DEGREE DAYS                              
Actual 5 14 3,036 3,999
Normal 13 14 3,799 3,770
Percent Colder (Warmer) than Normal     (61.5 )

%

 

-

%

 

 

  (20.1 )

%

 

 

  6.1 %
 
Average Active Customer Meters     1,093,694       1,084,110         1,093,351           1,084,388  
 

WGL HOLDINGS, INC.

USE OF NON-GAAP OPERATING EARNINGS (LOSS)

(Unaudited)

The attached reconciliations are provided to clearly identify adjustments made to net income calculated in accordance with GAAP to derive non-GAAP operating earnings (loss). Management believes non-GAAP operating earnings (loss) provides a more meaningful representation of our earnings from ongoing operations by adjusting for the effects of: (i) unrealized mark-to-market gains and losses from energy-related derivatives for our regulated utility and retail marketing operations; (ii) certain gains and losses associated with optimizing the utility segment's capacity assets; (iii) changes in the measured value of our inventory for our wholesale energy solutions segment; (iv) the financial effects of warmer-than-normal/colder-than-normal weather that exceeds weather protection for our regulated utility segment and (v) certain unusual transactions. This presentation facilitates analysis by providing a consistent and comparable measure to help management, investors and analysts better understand and evaluate our operating results and performance trends, and assist in analyzing period-to-period comparisons. Additionally, we use this non-GAAP measure to report to the board of directors and to evaluate management's performance. The economic substance underlying our adjustments to calculate non-GAAP operating earnings (loss) is as follows:

  • We exclude unrealized mark-to-market adjustments for our energy-related derivatives for our regulated utility and retail marketing operations to provide a more transparent and accurate view of the ongoing financial results of our operations and to be consistent with regulatory sharing requirements. For our regulated utility segment, we use derivatives to substantially lock-in a future profit. This profit does not change even though the unrealized fair value of the underlying derivatives may change period-to-period, until settlement. Additionally, for the regulated utility segment, sharing with customers is based on realized profit, and does not factor in unrealized gains and losses. For our retail energy-marketing segment, we use derivatives to lock-in a price for energy supplies to match future retail sales commitments. These derivatives are subject to mark-to-market treatment, while most of the corresponding retail sales contracts are not. With the exception of certain transactions related to the optimization of system capacity assets, as discussed below, when these derivatives settle the economic impact is reflected in our non-GAAP operating results, as we are only removing the interim unrealized mark-to-market amounts that are ultimately reversed when the derivatives are settled.
  • We adjust for certain gains and losses associated with the optimization of the regulated utility segment's capacity assets. Transactions to optimize our system storage capacity assets are structured to lock-in a profit that is recognized, for regulatory purposes, as the natural gas is delivered to end-use customers. These transactions may result in gains and losses that consist of: (i) the settlement of physical and financial derivatives related to the management of our storage inventory and (ii) lower-of-cost or market adjustments from the difference between the cost of physical inventory compared to the amount realized through rates when the inventory is ultimately delivered to customers. In our GAAP results, due to timing differences between when the physical and financial transactions settle, and when the natural gas is sold to the end-use customer, gains and losses associated with our storage optimization strategy may be spread across different reporting periods. For purposes of calculating non-GAAP operating earnings (loss), gains and losses associated with these transactions are included in the reporting period when the gas is delivered to the end-use customer and the ultimate profit is realized for regulatory purposes. In addition, losses incurred to terminate long-term contracts affecting transportation capacity optimization margins of future periods are included in the reporting period when the transportation capacity optimization margins earned as a result of the termination are realized. These adjustments reflect a better matching between the economic costs and benefits of the overall optimization strategy.

We also exclude valuation adjustments to the carrying value of non-system natural gas storage inventory in our regulated utility segment. This inventory is held solely to support asset optimization transactions. Valuation adjustments to reflect lower-of-cost or market under current accounting standards may not be representative of the margins that will be realized and shared with our utility ratepayers. Non-GAAP earnings reflect actual margins realized based on the unadjusted historical cost in storage when inventory is withdrawn and sold.

  • Our non-utility wholesale energy solutions segment owns natural gas storage inventory in connection with its asset optimization strategies. Certain of this storage inventory is economically hedged with physical sales contracts. We adjust the value of that inventory using the same forward price that is used to calculate the fair value of the related physical sales contracts under derivative accounting requirements. The remaining storage optimization inventory is valued using delivered market prices for the month following the end of the reporting period. This adjustment also includes the estimated effects of certain sharing mechanisms on all of our non-GAAP unrealized gains and losses. Adjusting our storage optimization inventory in this fashion allows our reported non-GAAP earnings to better align with the settlement of both our physical and financial transactions and allows investors and management to better analyze the results of our non-utility asset optimization strategies.
  • Washington Gas has a weather protection strategy designed to neutralize the estimated financial effects of weather. To the extent, however, the financial effects of warm or cold weather exceed our weather protection, we will exclude these effects from non-GAAP operating earnings (loss). Utilization of normal weather is an industry standard, and it is our practice to evaluate our rate-regulated revenues by utilizing normal weather and to provide estimates and guidance on the basis of normal weather.
  • We exclude certain unusual transactions that may be the result of regulatory or legal decisions, or items that we may deem outside of the ordinary course of business.

There are limits in using non-GAAP operating earnings (loss) to analyze our results, as they are not prepared in accordance with GAAP and may be different from non-GAAP financial measures used by other companies. In addition, using non-GAAP operating earnings (loss) per share to analyze our earnings may have limited value as it excludes certain items that may have a material impact on our reported financial results. We compensate for these limitations by providing investors with the attached reconciliations to net income, the most directly comparable GAAP financial measure.

WGL HOLDINGS, INC. (Consolidating by Segment)
RECONCILIATION OF GAAP NET INCOME (LOSS) TO
NON-GAAP OPERATING EARNINGS (LOSS)

(Unaudited)

           
Three Months Ended September 30, 2012
Retail Energy- Commercial Wholesale Other
(In thousands, except per share data)   Regulated Utility   Marketing   Energy Systems   Energy Solutions   Activities*   Consolidated
GAAP net income (loss) $ (1,215 ) $ 14,354 $ 938 $ (5,647 ) $ (686 ) $ 7,744
Adjusted for (items shown after-tax):
Unrealized mark-to-market gain on energy-related derivatives (a) (7,104 ) (7,428 ) - - - (14,532 )
Storage optimization program (b) (540 ) - - - - (540 )
Weather derivative products (c) (139 ) - - - - (139 )
Change in measured value of inventory (d) - - - 4,137 - 4,137
DC weather impact (e) 21 - - - - 21
VA retroactive depreciation expense adjustment(f) (1,379 ) - - - - (1,379 )
MD Competitive service provider imbalance cash settlement(h)     (2,286 )     1,975       -     -       -       (311 )
Non-GAAP operating earnings (loss)   $ (12,642 )   $ 8,901     $ 938   $ (1,510 )   $ (686 )   $ (4,999 )
GAAP diluted earnings (loss) per average common share (51,637 shares) $ (0.02 ) $ 0.28 $ 0.02 $ (0.11 ) $ (0.02 ) $ 0.15
Per share effect of non-GAAP adjustments     (0.22 )     (0.11 )     -     0.08       -       (0.25 )
Non-GAAP operating earnings (loss) per share   $ (0.24 )   $ 0.17     $ 0.02   $ (0.03 )   $ (0.02 )   $ (0.10 )
 
Three Months Ended September 30, 2011 (m)
Retail Energy- Commercial Wholesale Other
(In thousands, except per share data)   Regulated Utility   Marketing   Energy Systems   Energy Solutions   Activities*   Consolidated
GAAP net income (loss) $ (38,424 ) $ 6,045 $ 286 $ 2,549 $ (1,018 ) $ (30,562 )
Adjusted for (items shown after-tax):
Unrealized mark-to-market loss on energy-related derivatives (a) 2,079 5,718 - - - 7,797
Storage optimization program (b) 523 - - - - 523
Weather derivative products (c) 441 - - - - 441
Change in measured value of inventory (d) - - - (4,399 ) - (4,399 )
Competitive service provider imbalance cash settlement(h) 3,205 - - - - 3,205
Amortization of derivative contract termination(j) 9 - - - - 9
Regulatory asset write-off -- outsourcing implementation costs (k) 3,291 - - - - 3,291
Regulatory asset write-off -- tax effect Medicare Part D(l)     4,720       -       -     -       -       4,720  
Non-GAAP operating earnings (loss)   $ (24,156 )   $ 11,763     $ 286   $ (1,850 )   $ (1,018 )   $ (14,975 )
GAAP diluted earnings (loss) per average common share (51,324 shares) $ (0.75 ) $ 0.12 $ 0.01 $ 0.05 $ (0.03 ) $ (0.60 )
Per share effect of non-GAAP adjustments     0.28       0.11       -     (0.09 )     0.01       0.31  
Non-GAAP operating earnings (loss) per share   $ (0.47 )   $ 0.23     $ 0.01   $ (0.04 )   $ (0.02 )   $ (0.29 )
 
Fiscal Year Ended September 30, 2012
Retail Energy- Commercial Wholesale Other
(In thousands, except per share data)   Regulated Utility   Marketing   Energy Systems   Energy Solutions   Activities   Consolidated
GAAP net income (loss) $ 109,696 $ 39,331 $ 2,363 $ (9,090 ) $ (2,482 ) $ 139,818
Adjusted for (items shown after-tax):
Unrealized mark-to-market gain on energy-related derivatives (a) (9,579 ) (5,058 ) - - - (14,637 )
Storage optimization program (b) 532 - - - - 532
Weather derivative products (c) (502 ) - - - - (502 )
Change in measured value of inventory (d) - - - 6,924 - 6,924
DC weather impact (e) 2,099 - - - - 2,099
VA retroactive depreciation expense adjustment(f) (1,379 ) - - - - (1,379 )
Impairment loss on Springfield Operations Center(g) 3,012 - - - - 3,012
MD Competitive service provider imbalance cash settlement(h) (2,286 ) 1,975 - - - (311 )
Regulatory asset write-off — tax effect Medicare Part D(i)     2,827       -       -     -       -       2,827  
Non-GAAP operating earnings (loss)   $ 104,420     $ 36,248     $ 2,363   $ (2,166 )   $ (2,482 )   $ 138,383  
GAAP diluted earnings (loss) per average common share (51,589 shares) $ 2.13 $ 0.76 $ 0.05 $ (0.18 ) $ (0.05 ) $ 2.71
Per share effect of non-GAAP adjustments     (0.11 )     (0.06 )     -     0.14       -       (0.03 )
Non-GAAP operating earnings (loss) per share   $ 2.02     $ 0.70     $ 0.05   $ (0.04 )   $ (0.05 )   $ 2.68  
 
Fiscal Year Ended September 30, 2011(m)
Retail Energy- Commercial Wholesale Other
(In thousands, except per share data)   Regulated Utility   Marketing   Energy Systems   Energy Solutions   Activities*   Consolidated
GAAP net income (loss) $ 69,172 $ 48,970 $ 311 $ 2,183 $ (3,586 ) $ 117,050
Adjusted for (items shown after-tax):
Unrealized mark-to-market loss (gain) on energy-related derivatives (a) 7,932 (14,684 ) - - - (6,752 )
Storage optimization program (b) (1,305 ) - - - - (1,305 )
Weather derivative products (c) 290 - - - - 290
Change in measured value of inventory (d) - - - (3,973 ) - (3,973 )
Competitive service provider imbalance cash settlement(h) 3,205 - - - - 3,205
Amortization of derivative contract termination(j) (1,065 ) - - - - (1,065 )
Regulatory asset write-off -- outsourcing implementation costs (k) 3,291 - - - - 3,291
Regulatory asset write-off -- tax effect Medicare Part D(l)     4,720       -       -     -       -       4,720  
Non-GAAP operating earnings (loss)   $ 86,240     $ 34,286     $ 311   $ (1,790 )   $ (3,586 )   $ 115,461  
GAAP diluted earnings (loss) per average common share (51,295 shares) $ 1.35 $ 0.95 $ 0.01 $ 0.04 $ (0.07 ) $ 2.28
Per share effect of non-GAAP adjustments     0.33       (0.28 )     -     (0.07 )     (0.01 )     (0.03 )
Non-GAAP operating earnings (loss) per share   $ 1.68     $ 0.67     $ 0.01   $ (0.03 )   $ (0.08 )   $ 2.25  
* Per share amounts may include adjustments for rounding.
(Footnote references are described on the following page.)
 
WGL HOLDINGS, INC. (Consolidated by Quarter)
RECONCILIATION OF GAAP NET INCOME (LOSS) TO
NON-GAAP OPERATING EARNINGS (LOSS)

(Unaudited)

 
Fiscal Year 2012
    Quarterly Period Ended (n)
(In thousands, except per share data)   Dec. 31   Mar. 31   Jun. 30   Sept. 30   Fiscal Year
GAAP net income   $ 50,438   $ 74,179   $ 7,457   $ 7,744   $ 139,818
Adjusted for (items shown after-tax):
Unrealized mark-to-market (gain) loss on energy-related derivatives (a) 11,997 197 (12,299 ) (14,532 ) (14,637 )
Storage optimization program (b) 138 841 93 (540 ) 532
Weather derivative products (c) (228 ) (186 ) 51 (139 ) (502 )
Change in measured value of inventory (d) (4,238 ) 1,604 5,421 4,137 6,924
DC weather impact (e) - 1,857 221 21 2,099
VA retroactive depreciation expense adjustment (f) - - - (1,379 ) (1,379 )
Impairment loss on Springfield Operations Center (g) - - 3,012 - 3,012
MD Competitive service provider imbalance cash settlement (h) - - - (311 ) (311 )
Regulatory asset write-off -- tax effect Medicare Part D (i)     -       2,827       -       -       2,827  
Non-GAAP operating earnings (loss)   $ 58,107     $ 81,319     $ 3,956     $ (4,999 )   $ 138,383  
Diluted average common shares outstanding     51,533       51,561       51,632       51,637       51,589  
GAAP diluted earnings per average common share $ 0.98 $ 1.44 $ 0.14 $ 0.15 $ 2.71
Per share effect of non-GAAP adjustments     0.15       0.14       (0.06 )     (0.25 )     (0.03 )
Non-GAAP operating earnings (loss) per share   $ 1.13     $ 1.58     $ 0.08     $ (0.10 )   $ 2.68  
 
Fiscal Year 2011 (m)
    Quarterly Period Ended (n)
(In thousands, except per share data)   Dec. 31   Mar. 31   Jun. 30   Sept. 30   Fiscal Year
GAAP net income (loss) $ 65,232 79,428 $ 2,952 $ (30,562 ) $ 117,050
Adjusted for (items shown after-tax):
Unrealized mark-to-market (gain) loss on energy-related derivatives (a) (12,196 ) 1,186 (3,539 ) 7,797 (6,752 )
Storage optimization program (b) (1,720 ) (637 ) 529 523 (1,305 )
Weather derivative products (c) (182 ) 58 (27 ) 441 290
Change in measured value of inventory (d) 1,878 (1,807 ) 355 (4,399 ) (3,973 )
Amortization of derivative contract termination (j) (429 ) (645 ) - 9 (1,065 )
Competitive service provider imbalance cash settlement (h) - - - 3,205 3,205
Regulatory asset write-off -- outsourcing implementation costs(k) - - - 3,291 3,291
Regulatory asset write-off -- tax effect Medicare Part D(l)     -       -       -       4,720       4,720  
Non-GAAP operating earnings (loss)   $ 52,583     $ 77,583     $ 270     $ (14,975 )   $ 115,461  
Diluted average common shares outstanding     51,143       51,242       51,314       51,324       51,295  
GAAP diluted earnings (loss) per average common share $ 1.28 $ 1.55 $ 0.06 $ (0.60 ) $ 2.28
Per share effect of non-GAAP adjustments     (0.25 )     (0.04 )     (0.05 )     0.31       (0.03 )
Non-GAAP operating earnings (loss) per share   $ 1.03     $ 1.51     $ 0.01     $ (0.29 )   $ 2.25  
 

Footnotes:

(a)

 

Adjustments to eliminate the change in the unrealized mark-to-market positions of our energy-related derivatives that were recorded to income during the period. For the regulated utility segment, to the extent that our unrealized mark-to-market gains and losses are not recognized as being shared with customers, these amounts are recorded directly to income. All unrealized mark-to-market gains and losses for the retail energy-marketing segment and the wholesale energy solutions segment are recorded directly to income.

 

(b)

Adjustments to shift the timing of storage optimization margins from the periods recognized for GAAP purposes to the periods in which such margins are recognized for regulatory sharing purposes. In addition, lower-of-cost-or-market adjustments related to system and non-system storage optimization are eliminated for non-GAAP reporting, since the margins will be recognized for regulatory purposes when the withdrawals are made at the unadjusted historical cost of storage inventory.

 

(c)

Represents weather derivatives that are recorded at fair value rather than being valued based on actual variations from normal weather. Thus, any portion of recorded fair value that is not directly offset by an increase/decrease in revenue due to weather is excluded for non-GAAP purposes.

 

(d)

Adjustments to reflect storage inventory at market or at a value based on the price used to value the physical forward sales contract that is economically hedging the storage inventory. This adjustment also includes the estimated effects of certain sharing mechanisms on all of our non-GAAP unrealized gains and losses.

 

(e)

Eliminates the financial effects of warm or cold weather that exceeds weather protection for our regulated utility segment in the District of Columbia.

 

(f)

Adjustment that eliminates the reduction in depreciation expense applicable to the period from January 1, 2010 through September 30, 2011 resulting from the Virginia State Corporation Commission (SCC of VA) decision received on July 24, 2012. This adjustment was recorded in the fourth quarter of 2012.

 

(g)

During the third quarter of fiscal year 2012, Washington Gas recorded an impairment charge related to its Springfield Operations Center. Non-GAAP earnings have been adjusted to reflect a comparable measure in analyzing period-to-period comparisons.

 

(h)

Eliminates the financial effect of a refund to customers ordered by the Maryland Public Service Commission (PSC of MD) in September 2011 associated with a cash settlement of gas imbalances with competitive service providers. The order remanded the matter to a hearing examiner to determine the amount of the refund as the difference between charges made to customers and the charges that would have been incurred had the imbalances been made up through volumetric adjustments. Based on the progress in this case, the estimated loss was revised downward in the fourth quarter of 2012. Additionally, the regulated utility recorded a receivable from the competitive service providers the amount that is projected to be refunded to customers. This adjustment eliminates the financial effect of these transactions on the regulated utility and the retail-energy marketing segments.

 

(i)

In March 2010, the Patient Protection and Affordable Care Act (PPACA) eliminated future Medicare Part D (Med D) tax benefits for Washington Gas' tax years beginning after September 30, 2013. The deferred tax asset related to this benefit was reversed and a regulatory asset was established to reflect the probable recovery of higher future tax expense from customers. Based on positions taken by the PSC of MD in Washington Gas' rate case, the PSC of MD would not permit recovery of this asset.

 

(j)

During the fourth quarter of fiscal year 2009, Washington Gas terminated a long-term energy-related derivative contract related to its transportation capacity optimization and recognized an associated loss of $3.9 million for GAAP purposes. For non-GAAP purposes, this loss is being reflected in the appropriate period to be matched against the margins earned in the quarters that would have been constrained if the contract had not been terminated.

 

(k)

Represents a write-off of a previously approved Maryland regulatory asset established in 2008 for the initial implementation costs associated with our business process outsourcing plan. As a result of the rate case in Maryland, these costs are no longer probable of recovery and therefore do not qualify for regulatory asset treatment.

 

(l)

In March 2010, the PPACA eliminated future Med D tax benefits for Washington Gas' tax years beginning after September 30, 2013. The deferred tax asset related to this benefit was reversed and a regulatory asset was established to reflect the probable recovery of higher future tax expense from customers. Based on positions taken by the SCC of VA in Washington Gas' rate case and in other cases, we determined that it was not probable that the SCC of VA would permit recovery of this asset.

 

(m)

Consolidated non-GAAP earnings have been revised to reflect the change in the non-GAAP adjustment methodology in the wholesale energy solutions segment to include unrealized gains and losses of physical and financial purchase and sales contracts in non-GAAP earnings and to value the storage inventory to market value or to the price used in valuing the physical forward sale economically hedging the storage.

 

(n)

Quarterly earnings per share may not sum to year-to-date or annual earnings per share as quarterly calculations are based on weighted average common and common equivalent shares outstanding, which may vary for each of those periods.

WGL HOLDINGS, INC.
RECONCILIATION OF GAAP EARNINGS GUIDANCE TO
NON-GAAP EARNINGS GUIDANCE
FISCAL YEAR ENDING SEPTEMBER 30, 2013
 
Consolidated
    Low   High
GAAP Earnings Per Share Guidance Range   $ 2.46   $ 2.58
Adjusted for:
Unrealized mark-to-market gain on energy-related derivatives (a)     (0.09 )     (0.09 )
Non-GAAP Operating Earnings Per Share Guidance Range   $ 2.37     $ 2.49  
 
 
Regulated Utility Segment
    Low   High
GAAP Earnings Per Share Guidance Range $ 1.68 $ 1.74
Adjusted for:
Unrealized mark-to-market loss on energy-related derivatives (a)     0.02       0.02  
Non-GAAP Operating Earnings Per Share Guidance Range   $ 1.70     $ 1.76  
 
 
Non-Utility Business Segments
    Low   High
GAAP Earnings Per Share Guidance Range $ 0.78 $ 0.84
Adjusted for:
Unrealized mark-to-market gain on energy-related derivatives (a)     (0.11 )     (0.11 )
Non-GAAP Operating Earnings Per Share Guidance Range   $ 0.67     $ 0.73  
 

Footnotes:

(a)

 

Represents the estimated reversal of certain of our existing unrealized mark-to-market positions related to our energy derivatives that will be recorded to income during fiscal year 2013. For the regulated utility segment, to the extent that our unrealized mark-to-market gains and losses are not recognized as being shared with customers, these amounts are recorded directly to income. All unrealized mark-to-market gains and losses for the retail-energy marketing segment and to Capitol Energy Ventures Corp. in the other activities segment are recorded directly to income.

WGL Holdings, Inc.
News Media
Ruben Rodriguez, 202-624-6620
or
Financial Community
Douglas Bonawitz, 202-624-6129

 

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