AGL Resources, Inc. Earnings Call Nuggets: Storage Spreads, Recontracting

On Tuesday, AGL Resources, Inc. (NYSE:GAS) reported its first quarter earnings and discussed the following topics in its earnings conference call. Take a look.

Storage Spreads

Carl Kirst – BMO Capital Markets: Good afternoon everybody and very much appreciate all the color with respect to weather as well as the quarterly distribution through the year. My question is really on the improving storage spreads and recognizing that the April to January spread is more of a single cycle seasonal spread versus sort of a high cycle kind of salt dome. Is that something where that that improving spreads you think is going to be captured more in wholesale rather than something like the open seasons of Golden Triangle or as that seasonal spread widened is there an opportunity to see demand for the salt dome increase as well.

A Closer Look: AGL Resources Earnings Cheat Sheet>>

John W. Somerhalder II – Chairman, President and CEO: I’ll take your first part and then I’ll turn it over to Pete, but you are correct that the single cycle spread improvement does benefit all storage, where – even the lower (turn) storage, but because our facilities can be used for that cycle it does, it does add value but you are correct. Additional value for salt dome is inherent in the fact that you turn those facilities as an example of Jefferson Island close to nine items of GTS in the range of six times and with the low volatility, that part of the value we have not seen come back as strong for those facilities. So this does help our ability to re-contract but it’s only part of the value for salt dome facilities. However with Central Valley because we have seen – in California we’ve seen lower hydro availability this year. We’ve seen additional outages on nuclear units there and we’ve seen increased plans for pipeline maintenance, there we’ve seen higher prices and little higher volatility that could result in opportunities for the higher terms of service. So you are right, we’ve seen fundamental that have helped us with our salt-dome storage just related to the simple cycle spread, we’ve seen fundamentals in California, there are heading in a positive direction, but we do need to see longer term a more balanced market to drive the additional value that we should be able to achieve out of the salt-dome and I’ll look to Pete to add any additional.

Peter Tumminello – EVP, Wholesale Services, and President, Sequent Energy Management: Yeah, I think John covered it well. I’ll just add that Central Valley is a low cycle facility, so it should see a direct correlation on at least the shorter term contract in periods of one to two-year benefit due to the simple cycle spreads improving and I think we’ll see some benefit, we are seeing some benefit of Sequent and what we’re capturing is our storage expected rollout value going into this year and first quarter of next year being significantly larger than at this point in time last year based on that value. So, I think we’ll see benefits of both – to both businesses, but more so to Central Valley and to Sequent probably to a lesser extent certainly around Golden Triangle and Jefferson Island.

Carl Kirst – BMO Capital Markets: One just question on the integration of Nicor and John, you sort of mentioned that everything from a cost standpoint was kind of squarely in line with expectations, so just sort of a general question with the integration, is there anything that up to this point with respect to either cost synergies or otherwise that isn’t going as smooth, just so we are aware of it?

John W. Somerhalder II – Chairman, President and CEO: It has been a tremendous amount of hard work for the people involved with closing last year, and with 22 days of earnings. All the other work we have had to do. However, with that hard work, things have gone very smoothly, and I will ask Drew to further comment on this. But as we talked about originally thought about where those synergies would be achieved, we have seen a slight change in where we have been able to accomplish those. But in total, very much in line with what we expected. So it has been smooth and in line with expectations, and Drew can add to that?

Andrew W. Evans – EVP and CFO: I don’t know that it’d be overly additive. The composition has been a little bit different, but the total meets our expectation. I think just as we expected, we’d see a lot of the shared services in concert for all of the business units, having just really good reduction in total expense, and we are operating a lot more efficiently like we should.

John W. Somerhalder II – Chairman, President and CEO: Drew and I have a hard time saying that things have gone smoothly. We know how hard people had to work to make that happen. So we always had to stop and recognize that. Carl, I hate to interject, this is not responsive to your question at all, but I do need to make one correction. There is a reason when in a sentence sometimes, people underline the word ‘not’ because that way people say, I understand I did not say related to Illinois, or I should have said, we do not have a weather normalization, and Steve Cave helped me by double underlining it and letting me know. So I apologize Carl for taking your time.

Carl Kirst – BMO Capital Markets: I appreciate that. I thought I misheard it. So I was going to go back into the transcript. So I appreciate the clarification.

John W. Somerhalder II – Chairman, President and CEO: It was correctly written, I misspoke. So, thanks for letting me interject that Carl.

Recontracting

Ted Durbin – Goldman Sachs: I just found out that, you were contracted at $0.08 there for storage, would you say that’s kind of where the market is for recontracting, I’m just trying to get a sense when that was struck if we just talked about the seasonal spreads gotten a little better over the last three months. Was that done say before we saw this pickup here in the last from January to March in the spread or maybe just give us a little more sense to that?

John W. Somerhalder II – Chairman, President and CEO: Yeah. We’ve seen several indications of the ability to contract in that range of $0.08 to $0.10, I don’t know Pete is working at the exact number and that has been over the last probably four or five months we’ve seen those type of rates.

Peter Tumminello – EVP, Wholesale Services, and President, Sequent Energy Management: That was related to the Jefferson Island re-contracting and interestingly enough those were done before this new kind of expansion and spreads occurred. So there are some benefit to Sequent who entered into some of those agreements in advance of that occurring but our Midstream business had entered into those as well when they sold out that incremental capacity, but they will be I think a greater benefit to that rate when we go to open seasons this summer for Cavern 2, Golden Triangle and for Central Valley.

Andrew W. Evans – EVP and CFO: But Ted, I think the point that Carl made is appropriate here, even though we’ve seen spreads increase, especially that simple cycle spread, we have not really seen the volatility side increase as much even though in California, good news is we’re seeing some. So we have seen a positive trend but at least at this point, it has not yet translated into rates that are materially different than that $0.08 range that you quote.

Ted Durbin – Goldman Sachs: You mentioned a little bit on the PBR proceeding, I guess I am trying to get a little bit better sense kind of is there – so more give and take you need to do with the AG and CUB to get them to sign on – should we think that $64 million is a good number or kind of what’s the – how do we see this play out through the process?

John W. Somerhalder II – Chairman, President and CEO: I’ll start out and then Hank Linginfelter and Bryan Batson are here, but the $64 million stipulation agreement amount, we believe is a very fair and very good settlement with all parties involved and we feel very strong about the positions that led us arrive with that number, so we think that that is the appropriate way to move forward and let the process play out at the ICC and I’ll let Hank and Bryan add to that additional color.

Hank Linginfelter – EVP, Distribution Operations: I think the hearing is validated the bases of settlement. Those have been completed. Each party sort of maintain their positions on where they were on it, but the facts were – I think highly supportive to settling this thing out and it is a process that we go through at the commission and the commission is responsible for resolving it ultimately, but we think the case was made hearings and our case all along in the settlement have been and stipulation have been very good. So Bryan…

Bryan Batson – SVP, Commercial Operations: I guess the only thing I’d add is that through the hearing process and of course staff defended the stipulation as well as we did. Actually if you go down under the CUBs and AGs position, in many cases the positions we settled with staff matched up on current AG’s position. Predominantly the largest difference between staff and then where AG and CUB, where, is on the storage recycling and frankly the facts don’t support their contingence and that’s what we felt like we proved in the hearing itself, but that still has to come to fruition, so the largest piece of that differential staff didn’t take that position at all and as well we took the position that didn’t have that bearing, so that’s the main difference I think we’ll go – the ALJ will come out in July, with a proposed order, so you can see what the ALJ is going to recommend to the Commission and then you’re calling, the September 4 they actually vote on the proposal order.

Ted Durbin – Goldman Sachs: My last one is just on the synergy capture, realizing that probably most of the cost is hopefully down or well on track, I think there were some revenue capture as well. I am just wondering if that it’s showing up in sort of the quarterly results, realized there’s a lot of noise with the weather, but should we think about still there are upside on the revenue side for synergies?

John W. Somerhalder II – Chairman, President and CEO: Yeah, I’ll again start Ted, on that, and when Drew talked about this being in slightly different buckets than anticipated, we have seen more on the cost side and certainly in this very short term less on the revenue side. We do think over time we’ll have opportunities to have revenues, synergies, but that will (change) over time. So there is some potential upside on the revenue side, but most of what we’ve been able to accomplish and most of what we see now is on cost side. I don’t have anything that’s additive to that.