AGL Resources Earnings Call Insights: Golden Triangle 1 and Sequent Storage Site

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

Golden Triangle 1

Mark Barnett – Morningstar: I have couple of quick questions about Midstream. The first just a minor, can you remind of the timetable for Golden Triangle 1 coming back into services this year?

John W. Somerhalder II – Chairman, President and CEO: I’ll turn that over to Pete Tumminello.

Peter Tumminello – EVP, Wholesale Services, and President, Sequent Energy Management: Yeah. We are going to be continuing to dewater that facility for the rest of the year and we’ll be just kind of optimizing dewatering of that facility through the remaining part of this year and into the early part of next year.

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John W. Somerhalder II – Chairman, President and CEO: But we would expect to have it available to contract next spring, which is really a very good time to contract that. So, in that time period, but as Pete mentioned we still will be able to achieve some value as we dewater and as we cycle that back into gas service.

Mark Barnett – Morningstar: So it’d be looking more at spring ’14 for those. And then with – I know we talked about this a little bit at the Analyst Day and I know it might be early, but can you talk about any – with the Midstream investments for the gas situation in the Southeast, do you have any feeling for the likelihood of – there are obviously multiple areas where projects might be necessary. Might there be a situation where you are able to take a minority stake in a project and maybe also take capacity from another project or how do you – might there be a mix?

John W. Somerhalder II – Chairman, President and CEO: Yes, exactly. I mean what we would look to do in many of these regions, everywhere from Florida to Georgia, Alabama, Tennessee, even up to Virginia and up further potentially over time in Illinois. We see a need at times to add additional capacity that can serve our markets. As an example, in Florida now we have quite a bit of growth on industrial and other larger commercial. Here in Georgia there’s been tremendous growth in power generation. Most of that’s served directly off of interstate pipelines, but then we have seen some growth in select areas here in Georgia and we have the need to move more gas to the north part of our system, so we have additional lease. So the first thing we would look to do in each one of these markets where we have a market position is take the capacity that supports our customers and supports the utility and provides the best value for gas for them, but then at the same time we’re very interested in taking and making an equity investment in those same projects. And at this point Georgia is the market that has grown in a most significant way and we believe will present the nearest term opportunities and we’ll be talking to you over the next several quarters about those opportunities in more detail.

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Sequent Storage Site

Craig Shere – Tuohy Brothers: So I understand the first quarter gave you some nice opportunities at the Sequent I guess around the contracted pipeline capacity. I also understand that seasonal spreads are very thin right now on the storage side, but it seems like you came out of the first quarter with a larger rollout scheduled than heading into – coming out of the fourth quarter and I wonder if you could speak to what happened on the contracted storage side of Sequent in those winter months as well?

Peter Tumminello – EVP, Wholesale Services, and President, Sequent Energy Management: Greg, this is Pete. I’ll be glad to do that. We experienced some very good values, as you mentioned, in our upper northeast, transport, and asset management positions, and that was a material contribution to the quarter. Related to storage, we ended the quarter with a rollout value of about $34 million as compared, I believe, it was $27 million at the end of the year. And that’s even after taking into account storage hedge losses for the quarter. So, between realizing plans, storage withdrawals for the quarter, and then starting the process of re-injecting and optimizing forward storage rollout positions, we were able to add about $7 million of incremental new storage rollout activity net of all of those impacts. So, what we’ve done is downsized a little bit the size of our storage portfolio, re-contracted at lower prices starting April 1, and then upgraded the storage rollout value based on the activity I just described…

Craig Shere – Tuohy Brothers: So, is the – I guess to some degree (indiscernible) but is the lower overhead giving you the opportunity to execute hedges using the storage at otherwise thinner spreads but still economic?

Peter Tumminello – EVP, Wholesale Services, and President, Sequent Energy Management: Yes, there is definitely a benefit to the re-contracting we had where the material part of our storage portfolio expired at the end of March this year. We re-contracted at a much lower market rate and in line with some of the tighter market conditions. So, we are realigning the portfolio to tighter market conditions, but clearly we entered the year budgeting the legacy contracts at a higher storage spread than what we’re seeing now. So, simply put, Q1 had much greater cash opportunities up in the Northeast, we rolled good storage positions, but the headwinds are really just the forward spreads on the legacy storage contracts.

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John W. Somerhalder II – Chairman, President and CEO: And Craig, I’ll add just a few comments. Last year, with the mild weather and the trading opportunities around our pipeline and some storage facilities, it was hard to capture value. This year, Sequent did a very good job in capturing value related to the weather, higher demands, some constraints in certain areas on some pipelines. However, last year, we captured quite a bit of value as we got to the end of the first quarter by filling up storage at very, very good seasonal spreads, and in that case, $1 or more. This year we did not have that same opportunity, so we made the money on the other optimization around those assets, not as much around storage. However, if you look at how much gas we had in the ground at the end of last first quarter, it was almost 15 BCF greater. So we had already captured that value at the end of the first quarter. So this year, we actually have an opportunity to fill a like amount of capacity and capture the storage spread. However since the storage spread has compressed only $0.30, it’s not as greater opportunity as what Pete had originally anticipated. So, we’re off to a very good start, and still opportunity to make money on storage, but with the current spreads, we see that somewhat challenged as far as our upside on that.

Craig Shere – Tuohy Brothers: John, maybe I can keep you if you want to give any updates about the whole LNG transport supply efforts.

John W. Somerhalder II – Chairman, President and CEO: I’ll actually turn that back to Pete because we continue to see good progress on that, and I’ll let Pete go first with one of our recent announcements on where we are.

Peter Tumminello – EVP, Wholesale Services, and President, Sequent Energy Management: We publicly disclose the announced contract with UPS, which is a 10-year supply contract with an average volume of about 500,000 gallons per month, mainly in the Tennessee area of their operations, and they made some announcements around growing natural gas use for their fleet and expanding that fuel. We have been increasing a little bit of our commercial activity. Our deal flow was picking up, interest is picking up, we’re very active at most of the industry conferences educating customers around the use of LNG in natural gas form for replacement for liquid fuel. So we’re continuing to educate the market, continuing to move and contract our facilities, and our Trussville facility is now fully in service. That’s in Alabama near Birmingham and that’s ready to go at 24 hours a day, seven days a week to generate LNG full time…

John W. Somerhalder II – Chairman, President and CEO: So we’re still early on this issue but we are having success and we’re continuing to see very good momentum. One indication of that was a week or so back I spent time at LNG 17 there in Houston where it’s historically been every three years a conference dealing with major global liquefaction projects to export and import, and included this year for the first time was a section on natural gas for transportation. There were good presentations from everyone from Cummins Westport, (charter industries), Caterpillar has made good presentations in the past, Wartsila related to marine, very strong momentum in all those areas and a lot of products coming out, which were really necessary to drive this forward. So with the progress we’re seeing and the interest we’re seeing and the industry moving into new products and making those available. We still are very optimistic about our opportunities, but again we are in the early stage of that at this point.

Craig Shere – Tuohy Brothers: Is this very OEM driven or do we think at least the fall capacity at Trussville could be consumed with the likes of the UPS contract?

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Peter Tumminello – EVP, Wholesale Services, and President, Sequent Energy Management: I think UPS contract will serve as a nice anchor for that part of the world of our LNG supply. And we’ve got several other opportunities around trucking companies that are accelerating their conversion. I think more material though to us in terms of earnings contributions from this will be when we can truly get new facilities or expanded facilities built, more capital invested in this business with long-term contracts anchoring that capital, and that’s really where our efforts are being spent today.

Andrew W. Evans – EVP and CFO: But at this point the contracts that we have in hand and line of sight, at this point we can serve those with the existing facilities we manage and with Trussville. And so it will require additional contracts before we make a commitment to an investment like Pete is talking.

Peter Tumminello – EVP, Wholesale Services, and President, Sequent Energy Management: We are not yet sold out on our current capabilities with our current plants.