AGL Resources Earnings Call Insights: D&A Rates and Pipeline Project

AGL Resources, Inc. (NYSE:GAS) recently reported its second quarter earnings and discussed the following topics in its earnings conference call.

D&A Rates

Ted Durbin – Goldman Sachs: I just wanted to dig in a little D&A study here in Illinois and I appreciate the sensitivity that you gave us. So, how should we think about a reasonable D&A rate versus the 4.1% you’re currently booking?

Andrew W. Evans – EVP and CFO: Well, this is Drew, Ted. I’d just say that the characterization of the assets that we’re depreciating is a little bit different than what we see in the rest of the utility complex. There are a couple of more complex assets, particularly storage assets that had much higher removal costs than what we typically see. And so, I wouldn’t expect that the depreciation study would indicate a number that’s similar to what the comp or utility asset base is in total. I think it’s just a little bit too preliminary, because the filing will be made until the end of August to really give you a good sense of what that number is that will be a matter of public record in pretty short order. The main features I think that John would discuss is that really this has no impact on rates for customers in Illinois, that’s the single most important part for us given our commitments there. And the second piece is that it really incentivizes us relative to our other investment options to make continued investment in Illinois.

Ted Durbin – Goldman Sachs: Next one for me was just – I appreciate the slide here with the replacement CapEx, the pipeline replacement CapEx. It’s falling off in 2013 at Atlanta Gas Light and it seems like that’s been kind of — that pipeline replacement has been a big driver of the year-over-year improvement in earnings. I’m just wondering how we should think about 2014 as that falls off, and then we have this sort of alphabet soup of new projects that potentially come online here. I’m kind of – if there’s a delay or kind of what the impact is of the base, call it pipeline replacement program coming off and how much that’s impacted earnings this year and then how it falls through to ’14?

Andrew W. Evans – EVP and CFO: These projects are a little bit layered and they rated somewhat established mid-year and so I wouldn’t expect that there would be a big falloff in the growth rate related to infrastructure year-over-year. But Scott, if you have a better answer than this?

Scott Carter – Senior Vice President, Commercial Operations and Chief Regulatory Officer: Ted, Scott Carter. I think the way to think about it is those programs generally are going to return on the capital invested, so as the next year is a little bit lower on those capital replacement programs and we’ll probably see a slight decline on the rate of growth that we’ve seen year-over-year. But even with that, there is a lag associated with a half year convention of the rate setting. So, even though we’re deploying less capital there will be some growth into next year from this year’s capital deployment. So, while it will modulate a little bit I think largely it will go consistent with the growth rate we’ve seen just slightly less.

Ted Durbin – Goldman Sachs: And then John I guess just sort of the discussion around co-investing in the long haul pipeline. As I had understood that you’d target probably higher returns than what you usually get in your regulated utilities, I think I heard you say that you’d expect returns in line with the regulated utilities. So, maybe you can just expand a little bit on that and kind of what you’d expect from any kind of investment?

John W. Somerhalder II – Chairman, President and CEO: Yeah, I mean, that is a good point, Ted and that is over the long run, we would expect FERC allowed return on that type of pipeline investment to be above what we see with the utility. We know that as part of getting a pipeline project built, you might have to look at returns that were more in line with our utility returns in early years. So, in the long run, absolutely we would believe it would be an investment that would be at a FERC return which would be above what we see at a state level. But — go ahead, Ted.

Ted Durbin – Goldman Sachs: Certainly I was just going to say, in other words but if some of that higher return predicated on maybe more stock volumes or I’m just wondering is that a sort of fully contracted return or is that — is there some variability on volumes there then?

John W. Somerhalder II – Chairman, President and CEO: It would be, we’re looking at several different options at this point. It’s different under different options. But in one case, it would be a situation where you would earn a good return under the — with the original construction of the facility. But you would really need the first expansion to push you up to the higher level, consistent with FERC. So, it would really be in line with the expansion, not really counting on other value that you get from interruptible transportation or those things. It really would just reflect a larger project where you have to build the first phase, still get a reasonable return, but the expansion would be where you really get up to the full FERC returns.

Pipeline Project

Carl Kirst – BMO Capital Markets: If I can just cue off of some of Ted’s questions and maybe first on the pipeline side, and I just want to make sure I’m understanding, John. Even as we may have escalation over time to a FERC rate, at least in one potential scenario whatever you guys do decide to invest, if there is a return component that matches the utility; that would be a base contracted return, right, I mean, there wouldn’t be a spot element or an element of risk on that, would there?

John W. Somerhalder II – Chairman, President and CEO: I mean we’re looking at it in a very similar way, Carl, and that is we would at least want to make sure that we have long-term contracts on the pipeline project that moved us close to those types of returns. We would not want to count on, like you say, interruptible transportation or future contracting on that base project. So, that would be our standard as we’d at least have to have enough long-term contracts to assure a reasonable return on day one.

Carl Kirst – BMO Capital Markets: I think that was the case, but I just wanted to make sure I understood that and perhaps then just sort of a — obviously we can’t talk about numbers now, but is it safe to say then whatever level of participation should this project move forward that, that has been then now already hammered out amongst the owners?

John W. Somerhalder II – Chairman, President and CEO: No. I mean, we believe that very soon we’ll be able to announce whether it’s possible for us to invest on a pipeline project and to talk to you about if a deal can be structured. We’re talking about several alternatives now. We have not finalized anything as of today with those opportunities. We think, though that in order to meet the timeline and schedules of the parties that very much need additional gas in the State of Georgia that those decisions will have to be finalized over just the next several weeks. So, we do expect to be able to answer that question, Carl in very short order. But as of today, those type items have not been finalized…

Carl Kirst – BMO Capital Markets: I appreciate the color given the timeframe here. The second question I just had also sort of Ted brought up with respect to the DD&A and so, Drew kind of recognizing what you say that these assets may be a little bit different, a little bit unique considering the storage. The one number I just wanted to confirm, perhaps factual number is, is that relative to the rest of the LDCs is that average depreciation rate, if I’ve got my number correctly at 2.6%?

Andrew W. Evans – EVP and CFO: That’s right.

Carl Kirst – BMO Capital Markets: And then the last question and I just want to make sure I understood this. John, just as far as looking at the Illinois rider potential you said we might be looking at, obviously subject to filing, but perhaps $150 million or up to $150 million incremental spend here, is that – in rough terms is that’s what equating to this 4% cap of the rate base or perhaps maybe a better question is, can you remind me of what the rate base is in Illinois?

John W. Somerhalder II – Chairman, President and CEO: I’ll let Scott talk about the rate base.

Scott Carter – Senior Vice President, Commercial Operations and Chief Regulatory Officer: Carl, it’s 4% of the base rate. So you can increase the base rate revenue requirement by 4% a year under the legislation. Then when you back into what that means in terms of CapEx that can support that level of increase is $150 million. It is backed in two numbers at this point that gives us our, what we said our maximum potential, again pending filing with the ICC approval of any programs…

John W. Somerhalder II – Chairman, President and CEO: There’s that limitation on it, but we also need to go to the ICC and show list of projects that make sense or that meet our pipeline safety and other needs. We believe that we’ll be able to justify number in that range, but we’ve got to meet both of those criteria and have approval of ICC to move forward on that basis.

Carl Kirst – BMO Capital Markets: Can you remind me of just what the rate base is in Illinois?

Scott Carter – Senior Vice President, Commercial Operations and Chief Regulatory Officer: The rate base is roughly $1.5 billion today.

Carl Kirst – BMO Capital Markets: That’s what I think I was confused at. So this is 4% of the base rate, not 4% of the rate base?

Scott Carter – Senior Vice President, Commercial Operations and Chief Regulatory Officer: Exactly.