Washington Gas sees 'mixed' rate case impeding ROE goal, affecting capex choices

Recent regulatory decisions for Washington Gas Light Co. in Maryland and Washington, DC, will require the gas utility to pursue additional rate case filings and sharpen its focus on cost management, AltaGas Ltd. President and CEO Vern Yu said.

The outcomes of future proceedings could also influence where Alberta-based AltaGas deploys capital across Washington Gas' three-state footprint and its Michigan gas utility, SEMCO Energy Inc., executives told analysts during a March 8 earnings conference call.

Improving return on equity at Washington Gas remains a top priority within AltaGas' utility segment, Yu said. Since 2019, Washington Gas has improved ROE by 240 basis points, the company said in an investor presentation.

But December 2023 regulatory decisions in DC and Maryland marked a setback in the utility's effort to earn the full ROE authorized by regulators, and AltaGas now expects to file rate cases in both jurisdictions in 2024, Yu said.

"We made good strides to date, but the journey continues," the CEO said. "The recent regulatory decisions in Maryland and DC were mixed for us."

"So to close the ROE gap we'll have to be even more vigilant on how we deploy capital and manage our costs. We will also need to continue to be very proactive and timely with our rate filings," he said.

Regulatory climate deteriorating

The District of Columbia Public Service Commission (PSC) on Dec. 15, 2023, authorized a 9.65% ROE for Washington Gas, a positive outcome relative to past decisions that was in line with prevailing nationwide averages, according to Regulatory Research Associates, a group within S&P Global Commodity Insights. However, the PSC slashed Washington Gas' rate request by half and denied the company's request to implement several regulatory mechanisms.

The preceding day, the Maryland Public Service Commission (PSC) approved a rate increase that was less than a quarter of the gas distribution base rate hike that Washington Gas sought. The commission also authorized an ROE below the return approved in the company's prior rate case and rolled back constructive regulatory practices.

RRA views the regulatory climate for energy utilities in both DC and Maryland to be restrictive from an investor viewpoint. Building electrification movements are also advancing in DC and Maryland, prompting Yu to reiterate his pledge to take a more aggressive approach to advocating for gas use.

RRA recently lowered its ranking for Maryland's regulatory climate. In DC, RRA highlighted the regulatory lag that remains prevalent due to the lack of a statutory time frame for the PSC to act on rate applications.

Going in for new rate cases in 2024 will help the company minimize the amount of its invested capital that is subject to regulatory lag, said Donald "Blue" Jenkins, president of Washington Gas and AltaGas' utilities segment. Regulatory lag is the gap between when utilities invest in capital projects and when they recover those costs from ratepayers.

Rethinking capital deployment

Washington Gas is optimistic that the DC PSC's July 2023 request for input on streamlining future rate case applications will lead to a rulemaking that addresses DC's lengthy proceedings, Jenkins said.

The company is also getting a handle on the Maryland PSC's regulatory trajectory following a clean energy-focused shakeup of the commission under Democratic Gov. Wes Moore, Jenkins said. Washington Gas is assessing what the reconstituted PSC's policy direction means for the company's capital decisions, he said.

Washington Gas has invested $4 billion in its system since AltaGas acquired the utility in 2018, Jenkins said during the company's Dec. 5, 2023, investor day. The operator intends to spend $1.7 billion through 2028 as it seeks to replace leak-prone pipe, including more than 400 miles of cast iron main in DC, he said.

Though Washington Gas' vintage pipe inventory presents a long-run investment opportunity, accelerated pipeline replacement programs have come under scrutiny as regulators in Maryland; Washington, DC; and other states with aggressive climate goals consider non-pipe alternatives to the programs.

"We clearly have a capital plan outlaid that is focused on ensuring safety and reliability and modernizing our system for lower-carbon fuels as well as continuing to serve our customers with highly reliable and affordable energy," Jenkins said March 8.

"But we'll need to think about — as we look across our jurisdictions — how we manage the capital across those jurisdictions based on the timeliness and the lag that does result from that," he said.

Earnings results

AltaGas on March 8 reaffirmed its full-year 2024 normalized EPS guidance of C$2.05-C$2.25, but Yu said the company is currently experiencing more headwinds than tailwinds. AltaGas counted the Maryland rate case outcome among its earnings challenges.

The company reported full-year adjusted EBITDA of nearly C$1.58 billion, or diluted EPS of C$1.89 per share, down from C$1.92 in 2022 and just short of Wall Street's expectation for $1.91.

For its fourth quarter, AltaGas posted adjusted EBITDA of $502 million, or diluted EPS of 75 cents per share, topping year-ago EPS of 67 cents and the S&P Capital IQ consensus forecast for 66 cents.

Shares of AltaGas ended trading 2.1% lower on March 8.