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Saturday, March 17, 2007

Washington Gas Light Company (WGL, WGLCN, WGLCO, WGLCP)

This is a fairly pointless exercise since it's a preferred stock in a big gas utility (and I've thrown these out in the past), but sometimes I've found interesting things in unexpected areas. And the child laborers dug this one up, so I'll take a look at it.

WGLCN, WASHINGTON GAS LIGHT CO., website, sec, yahoo, chart, Serial Pfd Series $4.25 Cum (No Par)

The common stock is on the NYSE as WGL. In addition to WGLCN, they also have $4.80 Series and $5.00 series of preferred stock, all on OTC BB. All of these are callable by the company.

A holding company comprising a gas utility (Washington, DC) and it owns shares in a lot of regulated gas and unregulated energy-related companies in the DC area (HVAC, "CLEC" style unregulated gas and electricity resellers). Looking at the most recent 10-Q for Dec 31, 2006: Here's an interesting case where the balance sheet lists PP&E above current assets. According to my Wiley GAAP book, this is because current assets doesn't mean much for utilities (as well as broker-dealers, investment companies, and real estate companies).

$3 billion in PP&E, 30% depreciated. Roughly $800 million in current assets matching the same in current liabilities. Capital stack is about 1/3 equity, less than a third long term debt, and a bunch of deferred tax and regulatory liabilities.

Over 40% of revenues is non-utility. 12% operating margins (10% in prior year). For this stuff, let's look at the 2006 10-K.

Some customers are "interruptable" where gas can be supplied at the option of the supplier rather than customer (turning off supply during peak usage times). Obviously these aren't "widows and orphans" but are businesses with alternative sources. Anyone familiar with economics knows the value of having customers like this for a business with high fixed costs and plant that must be sized for maximum usage. In DC, Interruptable customers receive a majority of the profits earned from sales to them above a certain gross margin threshold. Interruptable customers pay a cost of service amount.

All the company's customers can choose their gas supplier independent of the company which owns the pipes to their location.
On September 15, 2006, Washington Gas filed an application with the SCC of VA to increase its annual utility net revenues in Virginia by approximately $23.0 million. The application seeks an overall rate of return of 9.12 percent and a return on common equity of 11.25 percent. This compares to the current overall rate of return of 8.44 percent and return on common equity of 10.50 percent as authorized by the SCC of VA in its Final Order issued to Washington Gas on December 18, 2003.
Here's the upside and downside of being a utility.

They have a pension plan with all the associated liabilities and assumption issues. This one is almost entirely funded. They assume a discount rate of 5.75% and a rate of compensation increase of 4%. They assume assets will have a long-term return of 8.25%, which is a bit high.

This is funny: they have 1.5 million stock options. This is a utility! How much impact will any individual or group have on the price of the stock on the upside? Maybe I'm wrong here, but it seems to me, the company can only screw up and make the stock drop. Most reasons for the stock to go up would be demographic or macroeconomic, no? The stock options granted in 2006 have an average exercise price of $32.13. The stock ranged from around $28 to $33.


Given returns on assets and equity that are this predictable, is it likely that the preferred shares are mispriced? No. Based on the long term chart, the preferred stock doesn't really have enough volatility to make it useful.

The company's use of stock options seems silly to me, given that they have a nearly guaranteed return on equity. This is like Buffett's analogy of putting money in a savings account and setting up incentive options for "managing" it.

I wasn't aware that gas utilities were unbundled.

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