AGL Resources Earnings Call Nuggets: Full Year D&A and Regulatory Strategy

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

Full Year D&A

Craig Shere – Tuohy Brothers: So, I’m sorry, on the NiSource Retail, is that $7 million; first, full year or a partial year EBIT contribution and how much is the full year D&A?

Andrew W. Evans – EVP and CFO: It’s full year and D&A – I’d have to pull – is $8 million in total.

John W. Somerhalder II – Chairman, President and CEO: Craig, I mean, we’ll essentially see 11 months of the benefit this year.

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Craig Shere – Tuohy Brothers: But these numbers of $15 million EBITDA assumed 12 month contributions?

Andrew W. Evans – EVP and CFO: No, they assume 11 months contributions.

Craig Shere – Tuohy Brothers: Okay. $15 million for 11 months. And is that including synergies that you expect?

Andrew W. Evans – EVP and CFO: It actually includes some of our integration expense for first full year and so we’ll be able to give you a better run rate when we meet in March. Robin will actually present that – will likely present that business to you. I think the main thing is that we’ve got a really nice platform for Retail Services that was built by Nicor. It’s a very logical consolidation for us, because we’ve got a really nice call center and good personnel in Naperville and we wanted to expand off that base.

Craig Shere – Tuohy Brothers: So, just to be clear, you paid $120 million in 11 months; you’re expecting $15 million in EBITDA, but that includes some headwinds on the integration expense, but no uplift on ongoing synergies?

Andrew W. Evans – EVP and CFO: Yeah, that’s right for 2013.

Craig Shere – Tuohy Brothers: In Midstream storage, what is the sense per Mcf month pricing of the 3.4 Bcf at JISH and 2.0 Bcf at Gold Triangle contract expirations this year?

Peter Tumminello – EVP, Wholesale Services, and President, Sequent Energy Management: I’ll be glad to handle that, Craig. This is Pete Tumminello. JISH we’re rolling off about $0.125 rate there and we’re seeing market rates certainly far less than that going into ’13; at CVGS rolling off rates are little under $0.10 1.5 Bcf and certainly seeing rates near half that rate as we go into 2013.

John W. Somerhalder II – Chairman, President and CEO: Without being too precise, I think Pete stated it correctly. At this point, if you just look at where the market is today, it is roughly half of the rates that we see those rolling off at.

Craig Shere – Tuohy Brothers: I’m sorry. You are saying that it’s mid-single-digits right now?

Peter Tumminello – EVP, Wholesale Services, and President, Sequent Energy Management: Mid-to-high single digit rates, yeah.

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

Peter Tumminello – EVP, Wholesale Services, and President, Sequent Energy Management: That’s correct.

Craig Shere – Tuohy Brothers: One wonders how sustainable that is.

Peter Tumminello – EVP, Wholesale Services, and President, Sequent Energy Management: We do believe that this is an extreme low point, you never can call the lowest point. But as fewer facilities get built over time, as industrial loads start improving, as exports start improving, fundamentally, we do see that returning and growing off of that number, but it’s hard to estimate how much it will grow off of that number.

Andrew W. Evans – EVP and CFO: Craig, I mean, that’s an important point, because what we are seeing this year if you look at the fourth quarter and how this year has started out compared to last year, last year, because storage was so full and we had such mild weather in the fourth quarter of the year before and then earlier in 2012, the storage spreads had – the single cycle storage spreads seasonally had moved out because of that full storage, so that gave some value to storage above what we see this year. Even though, this year, we are seeing colder weather and we’ve seen some volatility because of that, we haven’t seen enough to move the storage value up. So, we’re somewhat in a middle position where we are not getting the benefit of storage congestion that helps storage and volatility value. We are getting enough weather to pull storage levels down, but not enough to drive significant volatility. So we are somewhat in a middle position where that impact not only storage and storage rates, but that’s also impacting our outlook for the new commercial value we can capture with energy market and trade with our Sequent business. So, that’s how we are looking at the year as a challenging year from the standpoint of storage values and price volatility impacting our business.

Craig Shere – Tuohy Brothers: But how much – and I guess, Pete, I’ll throw this to you, but how much do you think is perpetually systemic just because the new kind of manufacturing like work-in-process shale drilling results in virtual storage anyhow; so, people aren’t just worried about getting what their needs are?

Peter Tumminello – EVP, Wholesale Services, and President, Sequent Energy Management: Yeah, I think that’s going to also be locationally sensitive. I think if you look out in California, that’s going to be less impacted in my opinion by the systemic shale issues is that not impacting that market. Gulf Coast storages tend to be more impacted by the systemic growth of shale and those will have to only recover when the shale volumes temper or they’re offset by material growth in industrial power demand and exports.

Craig Shere – Tuohy Brothers: And I guess I’ll stick with you Pete with the last question. I was a little surprised that Sequent with the modest guidance given $27 million built in from the storage rollout schedule, where do we stand – well, first you want to comment on that – and then, where do we stand on the roll-off of above (I guess) legacy contracts or overhead for both pipeline capacity and storage at Sequent.

Peter Tumminello – EVP, Wholesale Services, and President, Sequent Energy Management: Yeah, we’ll talk more about this at the Analyst Meeting, but we are managing the asset class roll-off according to our plans and that’s going well. We are keeping a tight rein on expense management as well. So, all that’s consistent with what we described in the past. Related to ’13 guidance, what really backs that up is our view that we’re seeing a storage market that is materially tighter in terms of the spreads compared to this time last year. Roughly $0.30 of tighter spreads, ballpark compared to this time last year and that’s the material reason for not being more aggressive on guidance in 2013. Other than that we’re managing our cost roll-off as expected and everything else pretty much as expected.

Regulatory Strategy

Daniel Fidell – U.S. Capital Advisors: Just a couple of quick questions from me. I guess, first, maybe you could talk just a little bit about your regulatory strategy into the next year or so. If you talked about the hit from weather, pension expense, bad debt expense, just any general thoughts in terms of rate cases and maybe going after some additional weather norm in Georgia or Illinois – CapEx track at Illinois, just any kind of thoughts in terms of how we perceive into the next year or two maybe make up some of this?

Hank Linginfelter – EVP, Distribution Operations: This is Hank Linginfelter. And I’ve got Scott Carter who is our Chief Regulatory Officer with me today as well. We think there are opportunities. We have a number of programs we’ll have to free up in the regulatory arena in several states. Our infrastructure programs, some of them are coming to sunset, but we have programs that we’ve anticipated and some of the regulators to replace those because we have lots of infrastructure needs across the system and the regulators in most of our states have shown eagerness to work with us around investment and infrastructure. Of course, we have the liquidity to do that. So, we’re in good shape across those businesses. In Nicor, it’s a more complex environment there. Multiple utilities there that have various needs and there are number of initiatives that each of those utilities have launched. We are participating in some ways around those and while I don’t think we see a weather fix in Illinois any time soon, we do see opportunities around some of the more structural nature of the business, whether it’s how we treat things like depreciation or how we invest in infrastructure; there are initiatives around those things in the state and Scott may have some other things to add to that.

Scott Carter – Senior Vice President, Commercial Operations and Chief Regulatory Officer: Yeah. Dan, the one clarification point you’d asked about weather in Georgia and just to remind you that the utility business in Georgia is not sensitive to weather. They have a straight (fixture) of the rate (environment). So I think certainly what Hank hit on from Illinois is certainly our focus. There are needs there and we are looking at several different opportunities to improve the position up there relative to those issues.

Hank Linginfelter – EVP, Distribution Operations: I’ll add that – you mentioned rate case as well. I think you might recall we’re in three-year stay out in Illinois around general rate cases. That was part of the merger order, and so we won’t have a general rate case this year or next in terms of implementation. We may see a need for rate case and we’ll be prepared to file one when we are authorized to do so if the numbers justify that. We don’t have any pending rate cases in the other jurisdictions where we are performing pretty well against our authorized returns at the moment.

John W. Somerhalder II – Chairman, President and CEO: And just to summarize that as well, we do have our focuses as Scott and Hank talked about related to rider surcharge programs in Georgia, New Jersey, Virginia, and in other locations. Those have been very successful. The benefits of those have been muted to some extent by continuation of bonus depreciation. So, they work very well. We have the programs in place that we need from a regulatory standpoint, but the growth from those because of bonus depreciation has been muted. As Hank and Scott indicated, rate cases in our other jurisdictions and weather normalization, we believe is in – other than Illinois in very good shape, (have) no immediate plans in those areas. But over this next one year to two years, it will be important for us to look at ways to invest in infrastructure, depreciation rates, potentially weather normalization, the right things that work both for our customers in Illinois and we’ll produce continued better results out of that business. So that will be our focus primarily.

Daniel Fidell – U.S. Capital Advisors: And maybe just a final one if I could; different topic? Can you give us – I know you’re going to cover this at the Analyst Day, but can you give us a little bit more color behind the NiSource transaction? Are there other opportunities for retail service layer on this and area you’re interested in building upon beyond this transaction?

Andrew W. Evans – EVP and CFO: This is Drew, Dan. I think we’ve reached pretty decent critical mass. We’ve got to absorb what we’ve got and make sure that we can operate it efficiently. Our next set of priorities really relates to our own Distribution businesses and in the retail energy component here in Georgia, and so we’ll focus the next in 2013 on getting the NiSource calls moved over or integrate it and then we’ll focus on rollout in our own utilities which is actually underway; we want to make sure we get it more fulsome deployment across our own utility base. So, I wouldn’t expect that we would go out and identify additional properties like this too far. These happen to contiguous in a very nice block of customers.