AGL Resources Reports Third Quarter 2015 Earnings
Earnings per Share:
|Three Months Ended September 30,||Nine Months Ended September 30,|
|Diluted earnings per share - consolidated||$0.09||$(0.06)||$2.05||$2.80|
|Less: Discontinued operations (per share)||-||(0.25)||-||(0.67)|
|Diluted earnings per share - continuing operations||0.09||0.19||2.05||3.47|
|Add: Merger expenses (per share)||0.18||-||0.18||-|
|Add: Non-cash goodwill impairment (per share)||0.07||-||0.07||-|
|Diluted earnings per share - continuing operations adjusted for merger expenses and goodwill impairment||0.34||0.19||2.30||3.47|
|Less: Wholesale services (per share)||0.09||(0.03)||0.34||1.58|
|Diluted earnings per share - continuing operations adjusted for merger expenses, goodwill impairment and wholesale services||$0.25||$0.22||$1.96||$1.89|
|Segment Earnings Before Interest and Taxes (EBIT):|
|In millions||3Q15||3Q14||Variance||% EBIT Contribution|
|Midstream operations (1)||(16)||(4)||(12)||-|
|Total excluding merger expenses and goodwill impairment||$110||$81||$29|
|In millions||YTD 2015||YTD 2014||Variance||% EBIT Contribution|
|Wholesale services (3)||66||308||(242)||11|
|Midstream operations (1)||(20)||(14)||(6)||-|
|Total excluding merger expenses and goodwill impairment||$588||$817||$(229)|
(1) EBIT for the three and nine months ended September 30, 2015 includes a goodwill impairment of $14 million.
(2) EBIT for the three and nine months ended September 30, 2015 includes merger expenses of $35 million.
(3) Average annual economic earnings expectation for wholesale services is $50 million. YTD 2015 and 2014 results reflect wholesale services' ability to generate significant upside in periods of market volatility.
For the third quarter, the primary drivers of the year-over-year decrease in EBIT were merger expenses and a $14 million goodwill impairment included in the midstream operations segment, which were partially offset by increased operating margin in the wholesale services segment as a result of higher hedge gains and increased commercial activity driven by favorable natural gas price spreads. Excluding wholesale services, merger expenses and the goodwill impairment, EBIT increased by $4 million due primarily to the following:
Increased operating margin from infrastructure replacement programs of $7 million and higher operating margin related to customer usage and customer growth of $4 million at distribution operations; and
Lower operating expenses of $5 million in the retail operations segment due primarily to lower legal expenses; partially offset by
Higher operating expenses in the distribution operations segment due to $5 million of operation and maintenance expenses related to the Pipeline Replacement Program (PRP) true-up settlement at Atlanta Gas Light and $6 million in higher payroll and benefits expenses.
For the first nine months, the primary drivers of the year-over-year decline in EBIT were lower operating margin in the wholesale services segment (operating margin in 2014 reflected record commercial activity resulting from extremely colder temperatures in 2014) and merger expenses. Excluding wholesale services, merger expenses and the goodwill impairment, EBIT increased by $13 million due primarily to the following:
Increased operating margin from infrastructure replacement programs of $18 million and higher operating margin related to customer usage and customer growth of $14 million at distribution operations;
Higher operating margin at retail operations of $15 million related to the recovery of net hedge losses recorded in 2014; and
A retained fuel true-up at one of our storage facilities in 2014; partially offset by
Colder-than-normal weather for the first nine months of 2015 resulting in EBIT of $15 million across the distribution operations and retail operations segments; this compares to additional EBIT of $33 million for the first nine months of 2014 related to significantly colder-than-normal weather; and
Higher depreciation expense in the distribution operations segment of $13 million due to additional assets placed in service.
INTEREST EXPENSE, INCOME TAXES AND NONCONTROLLING INTEREST
Interest expense for the third quarter of 2015 was $42 million, a decrease of $2 million compared to the third quarter of 2014. Interest expense for the first nine months of 2015 was $128 million, a decrease of $7 million compared to the first nine months of 2014 due to the lower interest rates on our commercial paper borrowings issued to repay $200 million of senior notes that matured during the first quarter of 2015.
Income tax expense for the third quarter of 2015 was $7 million, compared to $14 million for the same period in 2014. Income tax expense for the first nine months of 2015 was $150 million, compared to $254 million for the first nine months of 2014. The year-to-date decrease was due to lower earnings relative to the prior year.
Net income attributable to noncontrolling interest was $1 million for the third quarter of 2015, and $15 million and $14 million for the nine months ended September 30, 2015 and 2014, respectively. This reflects the 15% share of earnings attributable to the company's SouthStar Energy Services joint venture partner.
2015 EARNINGS GUIDANCE
Excluding merger expenses and the $0.07 goodwill impairment noted above, AGL Resources expects its consolidated diluted EPS in 2015 to be in the range of $2.85 to $3.10, excluding mark-to-market hedge movements for 2016 and forward positions. Adjusted 2015 earnings per share excluding wholesale services are expected to be in the range of $2.70 to $2.80 excluding merger expenses and the goodwill impairment. Adjusted EPS guidance excludes the wholesale services segment to remove earnings volatility created by mark-to-market accounting in this segment, and to better describe the underlying earnings drivers and results from our other operating segments.
The wholesale services segment is expected to generate economic earnings in the range of $100 million to $110 million in 2015 (substantially higher than the annual average expectation of $50 million). EPS on a GAAP basis related to wholesale services is expected to be $0.30-$0.40 per share. The wholesale services EPS estimate excludes mark-to-market movements that may impact EPS in 2015. Reported EBIT for the wholesale services segment will be provided each quarter along with a reconciliation to economic earnings.
Unanticipated changes in these events or other circumstances could materially impact earnings, and could result in earnings for 2015 significantly above or below this guidance. Factors that could cause such changes are described below in Forward-Looking Statements and in other company documents on file with the Securities and Exchange Commission.
THIRD QUARTER 2015 BUSINESS UPDATES
In September 2015, Elizabethtown Gas, a subsidiary of AGL Resources, proposed a comprehensive plan that will allow the company to continue its investment in the replacement of aging pipeline infrastructure and support the company's No. 1 priority of maintaining a safe and reliable natural gas distribution system. Elizabethtown Gas is seeking approval from the New Jersey Board of Public Utilities (NJBPU) to invest more than $1.1 billion over a 10-year period to replace 630 miles of pipeline. The proposed plan, known as SMART (Safety, Modernization and Reliability Tariff), aims to remove all aging cast iron and steel pipelines by 2027.
In October 2015, the Georgia Public Service Commission (the Georgia Commission) issued a final order involving Atlanta Gas Light (AGL) related to its PRP that concluded in December 2013. Under this order, in October 2015, AGL began recovering $144 million of the $178 million unrecovered program revenue that was requested in its February 2015 filing. This order also permits AGL to recover mitigation costs in future base rate after March 2017. The order from the Georgia Commission marks the completion of AGL's comprehensive, 15-year program.
SOUTHERN COMPANY / AGL RESOURCES MERGER UPDATES
Through November 8, 2015, The Southern Company (Southern Company) and AGL Resources have filed applications for regulatory approval of the proposed merger with the following regulatory authorities: U.S. Department of Justice and Federal Trade Commission (under the Hart-Scott-Rodino Act), Illinois Commerce Commission, NJBPU, Virginia State Corporation Commission and Maryland Public Service Commission. Both companies intend to make their remaining regulatory filings before the end of the year.
In addition, AGL Resources has scheduled a special shareholder meeting for shareholders to vote on the proposed merger with Southern Company. The proposed merger is subject to approval by AGL Resources' shareholders, approval by certain regulatory authorities and certain other customary closing conditions. AGL Resources plans to hold the special meeting of shareholders at its corporate headquarters at Ten Peachtree Place in Atlanta on November 19, 2015, at 9 a.m. ET. The record date for determination of shareholders entitled to vote at the special meeting was the close of business on October 9, 2015.