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WGL Holdings, Inc. Reports Fiscal Year 2011 Financial Results; Issues Fiscal Year 2012 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, 2011, of $117.1 million, or $2.28 per share, compared to net income of $109.9 million, or $2.16 per share, reported for the fiscal year ended September 30, 2010.

For the quarter ended September 30, 2011, we reported a net loss determined in accordance with GAAP of $(30.6) million, or $(0.60) per share, compared to a net loss of $(26.1) million, or $(0.51) per share, reported for the same quarter of the prior fiscal year. Reporting a net loss for quarters ended September 30 is typical due to the seasonal nature of our utility operations and the corresponding reduced demand for natural gas during this period.

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; (ii) certain gains and losses associated with optimizing the utility segment's system capacity assets and (iii) 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, 2011, non-GAAP operating earnings were $115.5 million, or $2.25 per share, compared to non-GAAP operating earnings of $115.0 million, or $2.27 per share, for the prior fiscal year. For the fourth quarter of fiscal year 2011, our non-GAAP operating loss was $(13.4) million, or $(0.26) per share, compared to a non-GAAP operating loss of $(14.8) million, or $(0.29) per share, for the same quarter of the prior fiscal year.

"Strong performance in our retail energy-marketing segment and our ongoing focus on cost control helped us to deliver annual earnings that exceeded our most recent guidance, recovering to 2010 levels," said Terry D. McCallister, Chairman and Chief Executive Officer of WGL Holdings. "I am pleased with this achievement in light of the headwinds we've faced this year from increased pension and operating costs, and given the amount of time that has passed since our last rate adjustments. We have also continued to make investments to support our strategy of delivering clean and efficient energy solutions, recently announcing an investment of up to $30 million in an agreement with Skyline Innovations to install and own commercial-scale solar water heating systems. We now look forward to further earnings improvements in 2012 as we conclude rate cases in Maryland and Virginia and continue to benefit from the growth of our non-utility businesses."

Fiscal Year and Fourth Quarter Results by Business Segment

Regulated Utility Segment

For the fiscal year ended September 30, 2011, our regulated utility segment reported net income of $69.2 million, or $1.35 per share, compared to net income of $101.7 million, or $2.00 per share, for the prior fiscal year. Net income for the 2011 fiscal year was impacted by one-time adjustments in the fourth quarter as a result of charges associated with regulatory proceedings. After adjustments, non-GAAP operating earnings for the regulated utility segment were $86.2 million, or $1.68 per share, for the fiscal year ended September 30, 2011, compared to non-GAAP operating earnings of $96.0 million, or $1.89 per share, for the prior fiscal year. The year-over-year comparisons of non-GAAP operating earnings reflect: (i) higher employee benefit expense due to changes in pension and retiree medical plan valuation assumptions; (ii) the impact of the reduction in the Maryland depreciation rates effective on June 1, 2010, creating a timing difference between the recognition and recovery of depreciation expense in 2010; (iii) higher depreciation expense due to the growth in, and mix of, our investment in utility plant; (iv) higher costs for weather protection products related to the District of Columbia; (v) a comparison to 2010 results which were favorably impacted by a one-time retroactive recovery of hexane costs and (vi) higher operating expenses primarily attributable to system software upgrades and workforce planning initiatives. Partially offsetting these unfavorable variances were: (i) higher revenues from an increase in average active customer meters of more than 9,800 over the same twelve month period of the prior fiscal year; (ii) a decrease in recurring business process outsourcing costs and (iii) a decrease in incentive plan benefit costs.

For the quarter ended September 30, 2011, our regulated utility segment reported a seasonal net loss of $(38.4) million, or $(0.75) per share, compared to a net loss of $(19.6) million, or $(0.38) 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 $(24.2) million, or $(0.47) per share, for the quarter ended September 30, 2011, compared to a non-GAAP operating loss of $(19.1) million, or $(0.37) per share, for the same quarter of the prior fiscal year. This three month comparison of non-GAAP operating earnings reflects: (i) higher employee benefit expense due to changes in pension and retiree medical plan valuation assumptions; (ii) higher depreciation expense due to the growth in, and mix of, our investment in utility plant and (iii) a comparison to 2010 results which were favorably impacted by a one-time retroactive recovery of hexane costs. Partially offsetting these unfavorable variances was lower uncollectible accounts expense which was associated with a reserve adjustment recorded in the prior year.

Retail Energy-Marketing Segment

For the fiscal year ended September 30, 2011, the retail energy-marketing segment reported net income of $48.8 million, or $0.95 per share, an increase of $37.7 million, or $0.73 per share, over net income of $11.1 million, or $0.22 per share, reported for the prior fiscal year. Non-GAAP operating earnings for the retail energy-marketing segment were $34.1 million, or $0.67 per share, for the fiscal year ended September 30, 2011, an increase of $11.3 million, or $0.22 per share, over non-GAAP operating earnings of $22.8 million, or $0.45 per share, for the prior fiscal year. For the quarter ended September 30, 2011, the retail energy-marketing segment reported net income of $6.0 million, or $0.12 per share, an increase of $11.7 million, or $0.23 per share, compared to a net loss of $(5.7) million, or $(0.11) per share, reported for the same quarter of the prior fiscal year. Non-GAAP operating earnings for the retail energy-marketing segment were $11.7 million, or $0.23 per share, for the quarter ended September 30, 2011, an increase of $5.8 million, or $0.11 per share, over non-GAAP operating earnings of $5.9 million, or $0.12 per share, for the same quarter of the prior fiscal year.

The differences between GAAP net income and non-GAAP operating earnings are due to adjustments to eliminate unrealized mark-to-market gains and losses attributable to certain wholesale energy supply and retail sales contracts. For both the fiscal year and quarter comparisons, the increase in non-GAAP operating earnings reflects higher realized natural gas and electricity margins, partially offset by higher general and administrative expenses. The increase in natural gas sales margins for the fiscal year is primarily attributed to higher gas sales volumes driven by customer growth and higher unit margins related to colder weather and higher wholesale deliveries. For the quarter, natural gas margin improvements were driven by customer growth and favorable timing on the recognition of margins compared to the prior year. Electric sales margins increased for the full year and fourth quarter primarily due to higher sales volumes driven by customer growth as well as favorable weather and pricing conditions in 2011.

Design-Build Energy Systems Segment

For the fiscal year and quarter ended September 30, 2011, the design-build energy systems segment reported modestly profitable results which contributed approximately $0.01 per share for both periods. This compares favorably to the minor loss of approximately $(0.01) per share, for both the prior fiscal year and the same quarter last year. The increase in earnings in fiscal year 2011 is primarily due to the commencement 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.

Other Activities

Other activities included unallocated net costs of the parent company and the operating results of Capitol Energy Ventures and other investments that were not considered operating segments. For the year ended September 30, 2011, other activities reported a net loss of $(1.4) million, or $(0.03) per share, compared to a net loss of $(2.3) million, or $(0.05) per share, for the prior fiscal year. For the quarter ended September 30, 2011, other activities reported net income of $1.5 million, or $0.02 per share, an increase of $2.1 million, or $0.03 per share, compared to a net loss of $(0.6) million, or $(0.01) per share, for the same period of the prior fiscal year. After adjustments to eliminate mark-to-market gains and losses, the non-GAAP operating loss for other activities was $(5.4) million, or $(0.11) per share, for the year ended September 30, 2011, compared to an operating loss of $(3.1) million, or $(0.06) per share, for the prior fiscal year. For the quarter ended September 30, 2011, other activities reported non-GAAP operating losses of $(1.3) million, or $(0.03) per share, compared to $(1.5) million, or $(0.03) per share, for the same period of the prior fiscal year. Non-GAAP operating losses for the year were higher than in the prior year principally due to higher initial expenses associated with activities of our non-utility wholesale energy company, Capitol Energy Ventures that are expected to contribute revenues in subsequent periods.

Earnings Outlook

Our GAAP earnings estimate for fiscal year 2012 is in a range of $2.63 per share to $2.75 per share. This estimate includes projected fiscal year 2012 earnings from our regulated utility segment in a range of $1.81 per share to $1.87 per share and projected fiscal year 2012 earnings from our unregulated business segments in a range of $0.82 per share to $0.88 per share.

We are also providing a consolidated earnings estimate for fiscal year 2012 based on non-GAAP operating earnings in a range of $2.46 per share to $2.58 per share. This estimate includes projected fiscal year 2012 non-GAAP operating earnings from our regulated utility segment in a range of $1.80 per share to $1.86 per share, and projected fiscal year 2012 non-GAAP operating earnings from our unregulated business segments in a range of $0.66 per share to $0.72 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.

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 2 p.m. Eastern Time on November 21, 2011, to discuss our fourth quarter and fiscal year 2011 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 21, 2011.

Headquartered in Washington, D.C., WGL Holdings, Inc. has three 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 and (iii) the design-build energy systems segment, which consists of Washington Gas Energy Systems, Inc., a provider of design-build energy efficiency solutions to government and commercial clients. 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)   2011   2010
ASSETS
Property, Plant and Equipment
At original cost $ 3,575,973 $ 3,383,364
Accumulated depreciation and amortization   (1,086,072 )   (1,037,156 )
Net property, plant and equipment   2,489,901     2,346,208  
 
Current Assets
Cash and cash equivalents 4,332 8,849
Accounts receivable, net 296,423 298,212
Storage gas — at cost (first-in, first-out) 290,394 242,223
Other   133,584     167,981  
Total current assets   724,733     717,265  
Deferred Charges and Other Assets   594,400     580,421  
Total Assets $ 3,809,034   $ 3,643,894  
 
CAPITALIZATION AND LIABILITIES
Capitalization
Common shareholders' equity $ 1,202,715 $ 1,153,395
Washington Gas Light Company preferred stock 28,173 28,173
Long-term debt   587,213     592,875  
Total capitalization   1,818,101     1,774,443  
 
 
Current Liabilities
Notes payable and current maturities of long-term debt 116,525 130,515
Accounts payable and other accrued liabilities 279,434 225,362
Other   180,781     188,174  
Total current liabilities   576,740     544,051  
Deferred Credits   1,414,193     1,325,400  
Total Capitalization and Liabilities $ 3,809,034   $ 3,643,894  
 

WGL Holdings, Inc.
Consolidated Statements of Income
(Unaudited)

               
   

Three Months Ended
September 30,

 

Fiscal Year Ended
September 30,

(In thousands, except per share data)

  2011     2010     2011   2010  
OPERATING REVENUES
Utility $ 115,523 $ 127,250 $ 1,264,580 1,297,786
Non-utility   332,602     337,892     1,486,921   1,411,090  
Total Operating Revenues   448,125     465,142     2,751,501   2,708,876  
 
OPERATING EXPENSES
Utility cost of gas 39,714 42,108 595,678 618,308
Non-utility cost of energy-related sales 301,838 331,803 1,334,773 1,340,774
Operation and maintenance 93,654 78,239 339,529 309,089
Depreciation and amortization 23,201 21,979 91,325 94,011
General taxes and other assessments   22,906     22,618     146,421   122,797  
Total Operating Expenses   481,313     496,747     2,507,726   2,484,979  
 
OPERATING INCOME (LOSS) (33,188 ) (31,605 ) 243,775 223,897
Other Income (Expenses) — Net 2,242 (213 ) 2,291 931
Interest Expense
Interest on long-term debt 10,057 9,597 39,976 39,413
AFUDC and other — net   (61 )   511     570   654  
Total Interest Expense   9,996     10,108     40,546   40,067  
INCOME (LOSS) BEFORE INCOME TAXES (40,942 ) (41,926 ) 205,520 184,761
INCOME TAX EXPENSE (BENEFIT)   (10,710 )   (16,113 )   87,150   73,556  
NET INCOME (LOSS) (30,232 ) (25,813 ) 118,370 111,205
Dividends on Washington Gas preferred stock   330     330     1,320   1,320  
 
NET INCOME (LOSS) APPLICABLE TO COMMON STOCK $ (30,562 ) $ (26,143 ) $ 117,050   109,885  
 
AVERAGE COMMON SHARES OUTSTANDING
Basic 51,324 50,871 51,195 50,538
Diluted   51,324     50,871     51,295   50,765  
 
EARNINGS (LOSS) PER AVERAGE COMMON SHARE
Basic $ (0.60 ) $ (0.51 ) $ 2.29 2.17
Diluted $ (0.60 ) $ (0.51 ) $ 2.28   2.16  
 
Net Income (Loss) Applicable To Common Stock — By Segment ($000):
 
Regulated utility $ (38,424 ) $ (19,550 ) $ 69,172   101,698  
 
Non-utility operations:
Retail energy-marketing 6,029 (5,689 ) 48,817 11,124
Design-build energy systems 302 (255 ) 464 (635 )
Other activities   1,531     (649 )   (1,403 ) (2,302 )
Total non-utility   7,862     (6,593 )   47,878   8,187  
NET INCOME (LOSS) APPLICABLE TO COMMON STOCK $ (30,562 ) $ (26,143 ) $ 117,050   109,885  
 

WGL Holdings, Inc.
Consolidated Financial and Operating Statistics
(Unaudited)

 
FINANCIAL STATISTICS                  
            Fiscal Year Ended September 30,
            2011  

2010

 

Closing Market Price — end of period

$ 39.07 $ 37.78
52-Week Market Price Range $41.99-$34.69 $38.08-$30.96
Price Earnings Ratio 17.1 17.4
Annualized Dividends Per Share $ 1.55 $ 1.51
Dividend Yield 4.0 % 4.0 %
Return on Average Common Equity 9.9 % 9.8 %
Total Interest Coverage (times) 5.8 5.5

Book Value Per Share — end of period

$ 23.42 $ 22.63

Common Shares Outstanding — end of period (thousands)

              51,365     50,975
 
UTILITY GAS STATISTICS                  

Three Months Ended
September 30,

Fiscal Year Ended
September 30,

       
(In thousands) 2011   2010       2011     2010
Operating Revenues

Gas Sold and Delivered

Residential — Firm

$ 57,890 $ 70,883 $ 815,843 $ 864,788

Commercial and Industrial — Firm

17,647 18,384 195,659 193,212

Commercial and Industrial — Interruptible

360 507 2,490 3,803
Electric Generation   275   275       1,100     1,100
    76,172   90,049       1,015,092     1,062,903
Gas Delivered for Others
Firm 21,591 21,101 169,127 160,952
Interruptible 7,965 8,054 50,573 47,116
Electric Generation   205   279       458     489
    29,761   29,434       220,158     208,557
105,933 119,483 1,235,250 1,271,460
Other   9,590   7,767       29,330     26,326
Total $ 115,523 $ 127,250   $   1,264,580 $   1,297,786
                   

Three Months Ended
September 30,

 

Fiscal Year Ended
September 30,

       
(In thousands of therms)   2011   2010       2011     2010
Gas Sales and Deliveries
Gas Sold and Delivered

Residential — Firm

29,722 36,115 677,558 662,357

Commercial and Industrial — Firm

13,882 14,570 179,207 170,534

Commercial and Industrial — Interruptible

  487   445       2,573     3,649
    44,091   51,130       859,338     836,540
Gas Delivered for Others
Firm 39,640 44,115 501,187 481,099
Interruptible 44,127 45,373 271,421 267,823
Electric Generation   73,153   104,839       140,557     172,995
    156,920   194,327       913,165     921,917
Total   201,011   245,457       1,772,503     1,758,457
WASHINGTON GAS ENERGY SERVICES                  
Natural Gas Sales
Therm Sales (thousands of therms) 68,152 63,181 678,424 593,319
Number of Customers (end of period)   172,200   160,900       172,200     160,900
Electricity Sales
Electricity Sales (thousands of kWhs) 3,047,798 2,909,970 10,793,095 9,276,202
Number of Accounts (end of period)  

182,500

  154,900       182,500     154,900
UTILITY GAS PURCHASED EXPENSE
(excluding asset optimization)   61.88 ¢ 74.85   ¢   67.57 ¢   74.72 ¢
HEATING DEGREE DAYS                  
Actual 14 - 3,999 3,825
Normal 14 14 3,770 3,765
Percent Colder (Warmer) than Normal   - % (100.0 ) %   6.1 %   1.6 %
Average Active Customer Meters   1,084,110   1,074,396       1,084,388     1,074,505
 

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; (ii) certain gains and losses associated with optimizing the utility segment's capacity assets and (iii) 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:

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)

 
Fiscal Year Ended September 30, 2011
(In thousands, except per share data) Regulated Utility

Retail Energy-
Marketing

Design-Build
Energy Systems

Other Activities* Consolidated
GAAP net income (loss) $ 69,172 $ 48,817 $ 464 $ (1,403 ) $ 117,050
Adjusted for (items shown after-tax):
Unrealized mark-to-market loss (gain) on energy-related derivatives (a) 7,932 (14,684 ) - (4,274 ) (11,026 )
Storage optimization program (b) (1,305 ) - - 301 (1,004 )
Amortization of derivative contract termination (c) (1,065 ) - - - (1,065 )
Weather derivative products (d) 290 - - - 290
Competitive service provider imbalance cash settlement (e) 3,205 - - - 3,205

Regulatory asset write-offoutsourcing implementation costs (f)

3,291 - - - 3,291

Regulatory asset write-off — tax effect Medicare Part D (g)

  4,720     -     -     -     4,720  
Non-GAAP operating earnings (loss) $ 86,240   $ 34,133   $ 464   $ (5,376 ) $ 115,461  
GAAP diluted earnings (loss) per average common share (51,295 shares) $ 1.35 $ 0.95 $ 0.01 $ (0.03 ) $ 2.28
Per share effect of non-GAAP adjustments   0.33     (0.28 )   -     (0.08 )   (0.03 )
Non-GAAP operating earnings (loss) per share $ 1.68   $ 0.67   $ 0.01   $ (0.11 ) $ 2.25  
 
Fiscal Year Ended September 30, 2010
(In thousands, except per share data)

Regulated Utility

Retail Energy-
Marketing

Design-Build
Energy Systems

Other Activities^ Consolidated
GAAP net income (loss) $ 101,698 $ 11,124 $ (635 ) $ (2,302 ) $ 109,885
Adjusted for (items shown after-tax):
Unrealized mark-to-market loss (gain) on energy-related derivatives (a) (7,234 ) 11,719 - (812 ) 3,673
Storage optimization program (b) 204 - - - 204
Amortization of derivative contract termination (c) (964 ) - - - (964 )
Weather derivative products (d) 110 - - - 110

Partial settlement of the Supplemental Executive Retirement Program (h)

  2,140     -     -     -     2,140  
Non-GAAP operating earnings (loss) $ 95,954   $ 22,843   $ (635 ) $ (3,114 ) $ 115,048  
GAAP diluted earnings (loss) per average common share (50,765 shares) $ 2.00 $ 0.22 $ (0.01 ) $ (0.05 ) $ 2.16
Per share effect of non-GAAP adjustments   (0.11 )   0.23     -     (0.01 )   0.11  
Non-GAAP operating earnings (loss) per share $ 1.89   $ 0.45   $ (0.01 ) $ (0.06 ) $ 2.27  
 
Three Months Ended September 30, 2011
(In thousands, except per share data) Regulated Utility

Retail Energy-
Marketing

Design-Build
Energy Systems

Other Activities* Consolidated
GAAP net income (loss) $ (38,424 ) $ 6,029 $ 302 $ 1,531 $ (30,562 )
Adjusted for (items shown after-tax):
Unrealized mark-to-market loss (gain) on energy-related derivatives (a) 2,079 5,718 - (3,157 ) 4,640
Storage optimization program (b) 523 - - 301 824
Amortization of derivative contract termination (c) 9 - - - 9
Weather derivative products (d) 441 - - - 441
Competitive service provider imbalance cash settlement (e) 3,205 - - - 3,205

Regulatory asset write-offoutsourcing implementation costs(f)

3,291 - - - 3,291

Regulatory asset write-off — tax effect Medicare Part D (g)

  4,720     -     -     -     4,720  
Non-GAAP operating earnings (loss) $ (24,156 ) $ 11,747   $ 302   $ (1,325 ) $ (13,432 )
GAAP diluted earnings (loss) per average common share (51,324 shares) $ (0.75 ) $ 0.12 $ 0.01 $ 0.02 $ (0.60 )
Per share effect of non-GAAP adjustments   0.28     0.11     -     (0.05 )   0.34  
Non-GAAP operating earnings (loss) per share $ (0.47 ) $ 0.23   $ 0.01   $ (0.03 ) $ (0.26 )
 
Three Months Ended September 30, 2010

(In thousands, except per share data)

Regulated Utility

Retail Energy-
Marketing

Design-Build
Energy Systems

Other Activities^ Consolidated
GAAP net loss $ (19,550 ) $ (5,689 ) $ (255 ) $ (649 ) $ (26,143 )
Adjusted for (items shown after-tax):
Unrealized mark-to-market loss (gain) on energy-related derivatives (a) 929 11,628 - (812 ) 11,745
Storage optimization program (b) (554 ) - - - (554 )

Weather derivative products (d)

  111     -     -     -     111  
Non-GAAP operating earnings (loss) $ (19,064 ) $ 5,939   $ (255 ) $ (1,461 ) $ (14,841 )
GAAP diluted loss per average common share (50,871 shares) $ (0.38 ) $ (0.11 ) $ (0.01 ) $ (0.01 ) $ (0.51 )
Per share effect of non-GAAP adjustments   0.01     0.23     -     (0.02 )   0.22  
Non-GAAP operating earnings (loss) per share $ (0.37 ) $ 0.12   $ (0.01 ) $ (0.03 ) $ (0.29 )

* Other Activities for fiscal year 2011 include the results of operations of Capitol Energy Ventures and include non-GAAP adjustments for net unrealized losses (gains) on energy-related derivatives. Per share amounts may include adjustments for rounding.

^ Other Activities for fiscal year 2010 may include adjustments for rounding in its per share amounts.

(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 2011
    Quarterly Period Ended (i)

(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) (10,667 ) 236 (5,235 ) 4,640 (11,026 )
Storage optimization program (b) (1,720 ) (637 ) 529 824 (1,004 )
Amortization of derivative contract termination (c) (429 ) (645 ) - 9 (1,065 )
Weather derivative products (d) (182 ) 58 (27 ) 441 290
Competitive Service Provider imbalance cash settlement (e) - - - 3,205 3,205

Regulatory asset write-offoutsourcing implementation costs(f)

- - - 3,291 3,291

Regulatory asset write-off — tax effect Medicare Part D (g)

  -     -     -     4,720     4,720  
Non-GAAP operating earnings (loss) $ 52,234   $ 78,440   $ (1,781 ) $ (13,432 ) $ 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   (0.26 )   (0.02 )   (0.09 )  

0.34

    (0.03 )
Non-GAAP operating earnings (loss) per share $ 1.02   $ 1.53   $ (0.03 ) $ (0.26 ) $ 2.25  
 
Fiscal Year 2010
    Quarterly Period Ended (i)
(In thousands, except per share data) Dec. 31 Mar. 31 Jun. 30 Sept. 30 Fiscal Year
GAAP net income (loss) $ 47,641 78,706 $ 9,681 $ (26,143 ) $ 109,885
Adjusted for (items shown after-tax):
Unrealized mark-to-market (gain) loss on energy-related derivatives (a) 2,371 5,147 (15,590 ) 11,745 3,673
Storage optimization program (b) 385 871 (498 ) (554 ) 204
Amortization of derivative contract termination (c) (385 ) (579 ) - - (964 )
Weather derivative products (d) 786 (1,424 ) 637 111 110
Partial settlement of the Supplemental Executive Retirement Program (h)   -     -     2,140     -     2,140  
Non-GAAP operating earnings (loss) $ 50,798   $ 82,721   $ (3,630 ) $ (14,841 ) $ 115,048  
Diluted average common shares outstanding   50,429     50,572     50,918     50,871     50,765  
GAAP diluted earnings (loss) per average common share $ 0.94 $ 1.56 $ 0.19 $ (0.51 ) $ 2.16
Per share effect of non-GAAP adjustments   0.07     0.08     (0.26 )   0.22     0.11  
Non-GAAP operating earnings (loss) per share $ 1.01   $ 1.64   $ (0.07 ) $ (0.29 ) $ 2.27  

Footnotes:

 

(a)

Represents 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 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 in the other activities 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)

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 recognized in this period to be matched against the margins earned in the quarters that would have been constrained if the contract had not been terminated.

 

(d)

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.

 

(e)

Represents a refund to customers ordered by the Public Service Commission of Maryland (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.

 

(f)

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.

 

(g)

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 Virginia State Corporation Commission (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.

 

(h)

Represents the partial settlement of the Supplemental Employee Retirement Program due to lump sum distributions to certain retired employees that occurred in 2010.

 

(i)

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, 2012

 
Consolidated
    Low   High
GAAP Earnings Per Share Guidance Range $

2.63

$

2.75

Adjusted for:
Unrealized mark-to-market gain on energy-related derivatives (a) (0.16 ) (0.16 )

Storage optimization program (b)

0.02 0.02

Retroactive depreciation expense adjustment (c)

 

(0.03

)

 

(0.03

)

Non-GAAP Operating Earnings Per Share Guidance Range $

2.46

  $

2.58

 
 
 
Regulated Utility Segment
    Low   High
GAAP Earnings Per Share Guidance Range $

1.81

$

1.87

Adjusted for:

Storage optimization program (b)

0.02

0.02

Retroactive depreciation expense adjustment (c)

 

(0.03

)

 

(0.03

)

Non-GAAP Operating Earnings Per Share Guidance Range $ 1.80   $ 1.86  
 
 
Unregulated Business Segments
    Low   High
GAAP Earnings Per Share Guidance Range $

0.82

$

0.88

Adjusted for:

Unrealized mark-to-market gain on energy-related derivatives (a)

  (0.16 )   (0.16 )
Non-GAAP Operating Earnings Per Share Guidance Range $

0.66

  $

0.72

 

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 2012. For the regulated utility segment, to the extent that our unrealized mark-to-market gains and losses are not 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 in the other activities 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 an adjustment that reduces depreciation expense applicable to the period from January 1, 2010, through September 30, 2011. This adjustment will be recorded upon approval of new depreciation rates by the SCC of VA.

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

Source: WGL Holdings, Inc.

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