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Executives

Steve Cave - Head of IR

John Somerhalder - Chairman, President and CEO

Andrew Evans - EVP and CFO

Hank Linginfelter - EVP, Utility Operations

Douglas Schantz - President of Sequent Energy Management

Ralph Cleveland - SVP, Engineering and Operations

Analysts

Gordon Howald - Calyon

Barry Klein - Citi

Ted Durbin - Goldman Sachs

Carl Kirst - BMO Capital

AGL Resources Inc. (ATG) Q4 2008 Earnings Call February 5, 2009 9:00 AM ET

Operator

Good day ladies and gentlemen, and welcome to the fourth quarter 2008 AGL Resources Earnings Call. My name is Kanisha and I will be your operator for today. At this time, all participants are in listen-only mode. We will conduct a question-and-answer session towards the end of this conference. (Operator Instructions). As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the call over to your host for today's conference, Mr. Steve Cave, Head of Investor Relations. Please proceed, sir.

Steve Cave

Okay. Thank you, Kanisha and good morning everyone. Thanks for joining us today to review our earnings results for the fourth quarter and year-end 2008. As we normally do, we're going to focus most of our time today on reviewing the full-year results in comparison to the prior year, rather than focusing on the fourth quarter results.

Our speakers on the call today will be John Somerhalder, our Chairman, President and CEO, Andrew Evans, our Executive Vice President and CFO. We also have several other members of our management team here with us today to answer questions, following the prepared remarks. So we issued our earnings release and filed our Form 10-K this morning, and if you don't have copies of those already, you can find those on our website.

Before we move to the prepared remarks, let me remind you that our discussion today may contain forward-looking statements and that our actual results could differ materially from those projected in the forward-looking statements. The various factors that could cause such a material difference are included in our press release and are more fully described in our 10-K filing.

We also use some non-GAAP measures such as EBIT, earnings before interest and taxes, and operating margin, in describing our business and a reconciliation of those measures to the GAAP financials is available in the earnings release and the SEC filings on our website. You may also have noticed this morning, we issued another press release and made another important announcement and that is that we are changing our ticker symbol on the New York Stock Exchange from ATG to AGL.

Over the years, we have had a number of investors ask why our ticker symbol is ATG. And the simple answer is that, when we formed the holding company AGL Resources back in 1996, the ticker symbol AGL was already taken, so we went with ATG. We learned a few months ago that the symbol AGL had become available again. So we took this opportunity to change the ticker to something that is a little more reflective of our corporate name, and that change will take effect at the opening of trading on Monday, February 9.

So with that, let us begin the call with some prepared remarks from John and Drew and then, we will open the lines to take your questions. I will turn it over to John.

John Somerhalder

Thanks Steve. Good morning everyone and thank you for joining us today. I will make a few brief comments about our 2008 results and our expectations for 2009 before turning it over to Drew to walk through the financial details for each business unit.

We had a very good year in 2008, despite the economic conditions and the challenges around customer growth we faced in each of our service areas. Our reported results of $2.84 per diluted share resulted in record earnings for the company and at the high end of our guidance range for the year was 4% higher than $2.72 per diluted share we reported in the previous year.

Each of our business units performed well during the year. Our distribution business faced several challenges through out the year, as a result of the economic downturn, including a slowdown in customer growth and an increase in bad debt expense relative to the prior year. EBIT for the distribution segment was down 3% relative to the prior year, but that was largely driven by higher expenses for incentive compensation, as we met our corporate performance targets for the year.

Adjusting for those expenses, distribution operations would have been essentially flat year-over-year. That is a very good result given the economic conditions. And it is a tribute to the way, Hank and his team really focused on managing O&M expenses throughout the year to help offset the impact of lower growth, as well as, the higher bad debt that I talked about.

As we discussed during our last earnings call, we do not expect to see a significant turnaround in customer growth in our service areas throughout 2009. So, we will continue to focus our efforts on cost containment and on seeking regulatory relief, where appropriate, and I will discuss that initiative in a few minutes.

Turning to the retail segment, SouthStar continued to make progress during 2008 on expanding its competitive presence to other deregulating states such as Ohio and Florida. As you know, we had expected SouthStar's earnings contribution to return to a more normal level in 2008 after having experienced an exceptionally strong performance in 2007.

We did see that moderation during the year, and we also saw a slight decline in market share in Georgia, and also recorded a significant inventory valuation adjustment, which Drew will discuss in a few minutes. We expect SouthStar to continue to grow in markets outside of Georgia in 2009 and to continue its focus on maintaining its market share in the increasingly competitive Georgia retail market.

Sequent finished the year with stronger than expected results, in part because of much stronger commercial activity in the business particularly during the fourth quarter. The hedge gains on transportation and storage positions also contributed to the reported results for the year.

Our energy investments segment also had strong performance for the year and part of the increase reflects the fact that AGL Networks successfully constructed a network asset for a key customer. And we would not expect that to be repeatable in 2009. Networks also had improved results due to an increase in its customer base during the year.

The remainder of the increase in this segment was higher interruptible margin opportunities at our Jefferson Island Storage Hub. Also, in our energy investments segment we continue to make significant progress on our Golden Triangle Storage project in Texas. Construction is on schedule and our costs continue to be within the range we have discussed previously.

We have completed construction or nearing completion of construction on a number of facilities and those include four brine disposal wells, the brine line, the leeching facilities and drilling of salt at our cavern well number one. We are in the process now of commissioning those facilities and we will be able to start leeching that number one cavern well here over the next several weeks.

Also we have started the drilling of cavern well number two and that is going even better than the results on the drilling of cavern well number one. We are already through the cap rock and into the salt. So the construction process for GTS is going very well and we are on track to meet our initial commercial operations target.

Turning to our guidance for 2009, we have established a range of $2.65 to $2.75 per diluted share. We believe this range provides a realistic expectation for results during the year that will be challenging on a number of fronts; some of which I have already described. This range takes into account our expectations of higher pension costs of about $0.10 per share.

It also assumes a return to a more normal earning level for Sequent, down from the $60 million to around $45 million; a base level year for SouthStar and that would be in the range of about $95 million or our share about $70 million; and it takes into account increased expensing of some development and maintenance costs related to our storage projects at GTS and then maintenance at our Jefferson Island facility.

It assumes that the utility results will be challenged by the customer growth slowdown I described earlier. There is one other important item I want to discuss as we look ahead to 2009, and that is our expectation around upcoming rate cases. As you know, we're filing four rate cases over the next two years, beginning with our filing in New Jersey in less than a month.

We believe the fundamental long-term earnings outlook for our utility business is strong, despite the economic challenge we are facing. We also believe that the upcoming rate proceedings provide the opportunity to establish rates in each of our jurisdictions that will fairly compensate our investors for the capital deployed in those businesses.

We expect these rate resets to begin by early 2010. As you know, we entered into a long-term rate stay-outs in our major jurisdictions several years ago. The structure afforded us the opportunity to manage -- to effectively manage our cost structure and to find organic ways to grow our business in order to avoid seeking rate relief through the regulatory process. We have done that through rigorous attention to cost containment.

At the same time, we have invested in annual rate base growth; that is in the range of 2% to 3%, depending on the jurisdiction. The Hampton Roads Crossing project or pipeline replacement program and the Magnolia project are all examples of the prudent investments we have made in the business to improve the quality, reliability and overall value of the services we provide to our customers.

This higher rate of capital investment in our core utility operations, the higher depreciation expenses associated with that capital spending and an increase in our costs such as pension and health care expenses combined with the recent slow down in customer growth has resulted in essentially flat earnings contribution from the utility business over the past year.

As a result, prudent recovery of this cost to successful rate case outcomes will be an important component of ensuring that rates remain sufficient to recover the capital deployed in our utility business. Clearly, it is too early in the game for us to provide many details around our filings.

We have a history of working cooperatively and in a constructive manner with regulators and we operate in states where the regulatory commissions have shown a willingness to provide appropriate rate relief to other utilities operating in those states.

We have been encouraged by recent regulatory decisions, as they signal a willingness on the part of regulators to compensate utilities for the infrastructure investment they have made and continue to make; to better serve customers at a reasonable price.

If you look at our track record of regulatory accomplishments going back a few years, I think it speaks well of our ability to reach balance solutions with our regulators and to the opportunity we have to achieve fair and reasonable outcomes in each jurisdiction.

Some examples of that success include our recent successful outcomes in rate cases in Tennessee and Maryland; the approvals we received in Florida for amortization of the acquisition premium; the approvals we have received in Virginia for conservation and de-coupling programs, as well as for the collection of AFUDC for the Hampton Roads Crossing pipeline project.

Also in each of our jurisdictions, we have worked cooperatively with regulators to design commission approved asset management agreements that benefit customers, through sharing for fixed fee arrangements. We have had a number of successes and we will be working hard over the next couple of years on the regulatory front to build on that track record.

With that, I will turn it over to, Drew for the financial discussion.

Andrew Evans

Thanks, John. Good morning everyone and thanks for joining us. As we point out in our disclosures and as John discussed, clearly the hedge gains at Sequent had a positive effect on earnings for the year, but these were offset by lower-of-cost-or-market or LOCOM inventory adjustments made for both Sequent and SouthStar, as a result of declining natural gas prices.

I will walk you through those bearings in a minute, but let us start with distribution operations. In the distribution segment, EBIT was down $9 million in 2008 relative to 2007 or less than a 3% decline. Operating margin of $818 was down by only $2 million, primarily the result of lower customer usage offset partially by higher pipeline replacement revenues at Atlanta Gas Light and Elizabethtown Gas and some modest customer growth year-over-year.

Operating expenses were up $8 million, but that was largely a function of higher incentive compensation expenses across all of our businesses, as a result of higher consolidated corporate earnings and of exceeding our corporate goals for 2008. As John pointed out, adjusting for those expenses, the distribution segment was relatively flat year-over-year. We also had to overcome $7 million of higher depreciation costs and $5 million of additional bad debt expense relative to the prior year.

So, you can see the effects of our cost control containment in the segment. Overall, I would say, our utility business performed admirably during the first -- during one of the historical worst residential housing markets with the focus on reducing controllable expense. John described our strong focus on our upcoming rate cases, and I would just add that while we continue to look for cost management opportunities and margin increases through organic growth, rate cases will be a fixture of our operating landscape for the foreseeable future.

Our retail segment, SouthStar, reported lower results for the year, with an EBIT contribution of $57 million down from $83 million in 2007. This contribution represents our 75% share of the earnings from that business, while the minority interest we reported reflects the feed mark portion of the earnings. The 2008 reported results for SouthStar were somewhat perturbed by lower cost or market inventory valuation adjustments in the latter half of the year.

SouthStar had $17 million of LOCOM adjustments impacting its full-year results and did not have any similar adjustments in the prior year. Even adding back the $17 million adjustments to the 2008 results, SouthStar's earnings were lower year-over-year and that was consistent with what we discussed with investors early in 2008.

SouthStar clearly had some market commercial opportunities that drove its 2007 results to a significantly higher level than we had seen before and we expected to see some normalization of these results in 2008. One of the challenges we have faced with SouthStar has been the increasing competitive nature of the market in Georgia; with overall growth slowing all marketers are competing for a bigger share of a fairly stagnant market.

In addition, the economic conditions have resulted in much more consumer price shopping then we have seen in the past and more customers shipping to fixed-price plans rather than floating on a variable plan. What these dynamics have meant for SouthStar is that we have seen market share decline year-over-year in the one percentage point range, although we still maintain our leading market share with 34% of the total market.

SouthStar has done an excellent job of managing bad debt expense and maintains the credit quality of its customer portfolio; no small task in the current environment. The wholesale services business segment, which consists primarily of Sequent, contributed EBIT of $60 million in 2008, which was a $26 million increase over 2007 results.

Operating margin was up $45 million which is a combination of three principle factors. The first is that, Sequent had a $25 million year-over-year increase in commercial activity from $61 million in 2007 to $86 million in 2008. The increase resulted from higher market volatility related to late summer, tropical storm activity in the Golf Coast region and colder weather in the fourth quarter.

Commercial activity is generally a good way to gauge economic value created and recognized during a given period. The second factor is that we recognized the $35 million increase in storage and transportation hedge gains and the third factor is the negative impact of $15 increase of net low comp adjustments; all these reconciliation items are listed in our 10-K on page 34.

Operating expenses for the wholesale service segment were up $19 million year-over-year. The most significant component of the increase was related to the method by which we compensate employees in that segment, which is based on a percentage of EBIT, but headcount related to our base business and expansion into more commercial and industrial marketing activities also played a role.

The important take away for Sequent is that business had a very good year from an economic standpoint. Sequent performed better than we had anticipated for the year with much of that performance coming in the latter half of the year.

Turning to energy, the energy investments segment, AGL Networks had a strong year in terms of generating a new business and largely drove the EBIT increase of $4 million year-over-year for the segment. Jefferson Island operating margin was $3 million higher year-over-year, but operating expenses and legal work around the expansion of the Jefferson Island project absorbed that gain.

Interest expense was down $10 million year-over-year and that was due primarily to lower short-term interest rates, partially offset by higher average debt outstanding. Also, our 2007 interest expense included the $3 million premium we paid for early redemption of the $75 million in notes payable.

I want to take a minute to talk about our pension liability, as I know that is probably on top of mind for many company investors given the significantly lower asset values resulting from the market downturn. While, we were not required to make a pension contribution in 2008, we are expecting 2009 to be required to make a minimum contribution in our pension plans of $7 million.

We could make additional contributions in 2009 up to $61 million for a total of up to $68 million in order to preserve the current level of benefits under the plans in accordance with the funding requirements under the Pension Protection Act. We expect our pensions and [personnel] retirement expenses for 2009 to be approximately $50 million higher than in 2008, which as John pointed out, clearly has a negative impact on our earnings expectation for the year as reflected in our earnings guidance range.

Before we go to Q&A, we would just like to reiterate what we said in our last earnings call about our view of the credit markets and liquidity. We have a strong facility in place. We maintain sizable buffers in that facility, over and above our working capital requirements even during peak injection periods, and we have had no significant exposure to banks that collapsed in 2008.

On the table -- the table on page 78 of the 10-K provides more detail on our credit facility and outstanding borrowings and you can see that we currently have $773 million outstanding relative to our $1.1 billion in total capacity. This is a function of the higher gas prices and inventory builds last summer; we have seen better access to the commercial paper markets recently.

We have continued to draw on our lines because of the favorable rates relative to commercial paper. Now that we are past our peak working capital needs and we are in the cash collection cycle, as customers pay their [rental] bills, you will see the outstanding borrowings reduced significantly over the next few months. We pay close attention to maturity -- or to the maturing of our assets and liabilities and we have no significant maturities in 2009 and we expect to build summer inventories that cost significantly lower than last year.

One other thing I should note is that our dividend policy is stable growth, now that we have come in line with our peer group payout ratio. The Board has increased dividends by $0.01 per quarter consistent with the long-term view of sustainable growth for our businesses. This represents only about a $3.5 million increase in that obligation for us each year.

I think that covers the highlights. With that, we can go to your questions.

Question-and-Answer Session

Operator

(Operator Instructions). And your first question comes from the line of Gordon Howald from Calyon. Please proceed.

Gordon Howald - Calyon

Hi, good morning guys.

John Somerhalder

Hi, Gordon.

Andrew Evans

Hi, Gordon.

John Somerhalder

Good morning.

Gordon Howald - Calyon

I noticed, you no longer normalize your earnings for the quarter or for -- you didn't do that for the year, you had done that, I guess, as recently as the third quarter. Could you go through and try to normalize for the gains and losses, these hedging activities, the low comps, things like that? I have got an estimate here. But I was wondering if you guys could provide a little bit of color on what kind of an increase, on a year-over-year basis or decrease you would have as a result of those non-operating activities?

Andrew Evans

Yes. Gordon the principal reason that we didn't do it at year-end is that it's a much more relevant measure for us intra-period. But also, we didn't -- we're not asking for an addition of earnings that are not properly reflected in GAAP earnings. You can kind of see from the roll out schedule that we are not asking for inclusion of anything that might be in that schedule. The other principal component and I should say, by the way, that schedule represents the zero roll out related to storage.

We also have a number -- or saw an increase in other economic activity related to transportation and parking loans and we don't have roll out schedules for those particular items and didn't feel like making the adjustment, [gave] a really good feel for earnings in their entirety. GAAP is a really good representation of our earnings power for the business for this particular year.

Gordon Howald - Calyon

And that's going to be going forward as well, Andrew?

Andrew Evans

I think if we saw large changes in gas price that created significant losses in a particular period and push them into a future, we would just highlight that change, as we have done in the intra quarters or in the quarterly segments throughout the year.

Gordon Howald - Calyon

Okay, two more quick questions. Do you expect to have full blown rate cases for the upcoming rate cases over the next couple of years, or is there a possibility for settlements?

Hank Linginfelter

Hi, Gordon. This is, Hank. I think we will have full blown rate cases with the potential for settlements. In other words, the regulators generally want to have full hearings with testimony and following there is always a potential for settlements. In fact that is what New Jersey did with NJR, but it was only after they heard all the evidence and testimony. But we would like to see some, as we think they are possible, in New Jersey and Georgia which are the next two cases.

Gordon Howald - Calyon

Got you. Thanks. Lastly, you noted last quarter and you talked about this, but last quarter commercial activities, were up $16 million at wholesale. I know you were up $25 million for the year and the majority of that was in the second half of the year. Could you give us a little more detail on commercial activities specifically in the fourth quarter?

Douglas Schantz

Actually -- this is, Doug talking, Gordon. In terms of looking at the fourth quarter results, we saw our commercial activity year-over-year plus 18, so I am trying to think how that relates to our third quarter results that we disclosed, but you are correct.

Gordon Howald - Calyon

18 in the fourth quarter from positive activities.

Douglas Schantz

Yes.

Gordon Howald - Calyon

Got you. All right, thanks, guys.

Operator

And your next question comes from the line of Faisel Khan from Citi. Please proceed.

Barry Klein - Citi

This is actually Barry Klein at Citi. I have a few questions for you. With regard to the utilities, you were talking about customer growth slowing down a little bit. What kind of numbers are you expecting?

John Somerhalder

I will start and this is John Somerhalder. What we saw for the year in 2007 to 2008 was essentially flat, as we talked about. It was actually up on an average basis by about 0.1%, but that trend is continuing to decline slightly. So we are forecasting a slight decline in customer count for 2009 over 2008, and Hank can give you a little bit more detail around that?

Hank Linginfelter

Well we do, as John says, anticipate a continuing decline. We still will add something between 10 and 20,000 new customers for the year -- we believe which is down from the previous year. But we'll also -- and we're seeing our attrition number drop as well. So part of slight decline in net customer count, but it's not material.

Barry Klein - Citi

Okay. Then in volumes we could expect the same or will there be a volume decline in excess of the customer declines?

Hank Linginfelter

I think it will be also -- it will just be in line with the customer decline. We have seen at least to this point, not much volume decline per customer, we've seen -- obviously, as winter started out reasonably cold. But even after you adjust for that, we see usage pretty much in line with historical levels after you adjust for the weather. So at this point it looks like the decline will be tied to the number of customers; not to another economic conservation issue.

Barry Klein - Citi

Got you and you mentioned that you are going to file in New Jersey within the next month. What other areas and when do you expect to file this?

Hank Linginfelter

We will file late this year in Georgia, and we file in 2011 in Virginia and then also 2011, I think, in Tennessee case.

John Somerhalder

2010.

Hank Linginfelter

2010, right.

Barry Klein - Citi

2010 for Virginia and Tennessee?

Hank Linginfelter

That is right.

John Somerhalder

Yes.

Barry Klein - Citi

Then with the rates effective in 2011 that would be?

John Somerhalder

Right. That is right.

Hank Linginfelter

That is correct.

John Somerhalder

If you look on page 8 of our 10-K we actually laid out where to what period current rates are effective. So you can use that table as a good gauge as to when the new rates would go into effect.

Barry Klein - Citi

Yes.

John Somerhalder

But a good summary is, that over a time period starting one month from now through about 18 months, we will be filing these four rate cases in those four jurisdictions.

Barry Klein - Citi

Got you. With regard to Jefferson Island you mentioned a legal expense. How much was it? Was it about $3 million or something like that or is that the number you gave?

John Somerhalder

Between $2 and $3 million.

Barry Klein - Citi

Okay. And what is the status of that last cavern that you had legal issues with?

John Somerhalder

The status at this point as we have discussed -- we are pursuing litigation with the State of Louisiana, we think; we have very good rates there and we think that litigation is going well, and our plan is to get that project back on track through litigation or settlement, if possible, and we are looking at both of those alternatives right now.

Barry Klein - Citi

Okay. One final question, relating to debt maturities, you said none in 2009 -- nothing significant in 2009. That's true for 2010 also, correct?

John Somerhalder

That's right. We have a 364 day facility that we used as a supplement in 2008 because of higher gas prices and we'll just take a look at inventory fill and price determining, whether we need to roll that. But generally, we could handle it under the corpus of our $1 billion revolver.

Barry Klein - Citi

Okay. On the bank side you have that -- what they have not given you -- have you talked to them about rolling that over or have they sent any signals?

John Somerhalder

We actually did that facility -- the small supplemental facility in, let's say, September.

Barry Klein - Citi

Okay.

John Somerhalder

I think it actually closed in the very beginning of October this year and we will just have to make a determination whether it is something that we require. We just want to make sure we maintain a reasonable buffer of liquidity but that was done in the -- I think in a decent historical timeframe. So…

Barry Klein - Citi

Okay.

John Somerhalder

In a pretty good shape.

Barry Klein - Citi

Okay. Thanks a lot.

Operator

And your next question comes from the line of Ted Durbin from Goldman Sachs. Please proceed.

Ted Durbin - Goldman Sachs

Hey guys, a question on Elizabethtown in terms of growth where you are now, it looks like you earned an ROE of about 7.7%. I'm just -- at the table on your 10-K; it's deteriorated. I mean do you expect that to sort of continue to see deterioration through '09 until the new rates go into effect? And then just in terms of rate case itself what are you thinking about in terms of decoupling, maybe, the impact that might have on the allowed ROE things like that?

Andrew Evans

This is Andrew. Just from a financial perspective the slight deterioration in RORs is generally the result of increased investment in those areas. Costs have been relatively constant and so has margin, and so what you are seeing is just an increase in our investment in those jurisdictions. And so that will continue through rate case; it's the principal foundation in a lot of the rate case work that we're doing.

John Somerhalder

I think the other piece of that is that New Jersey, in particular, has already approved decoupling, this is [for south] Jersey and for NJR and they have generally maintained their ROEs at traditional levels.

Ted Durbin - Goldman Sachs

Okay. So no adjustment for sort of lower risk rates and like that?

Andrew Evans

We are not planning them.

Ted Durbin - Goldman Sachs

Okay. If I could just ask about Golden Triangle, sort of where are you in terms of the commerciality of the caverns in terms of the drilling results that you are getting so far? What's your comfort level of that?

John Somerhalder

Comfort level Ted, I will go first and then Ralph is here as well and he can speak about it. Our comfort level is high. We have completed the drilling of cavern well number one and that was a major milestone to reach. And now we essentially have majority of the surface facilities related to the leeching done; that is everything from the brine line, the brine disposal wells, the pumps of all of the tanks; all of that needed and we are in the process now of completing the water line.

So obviously, moving to the brining operation of cavern well one will be the next important step, but we are very confident. Things have gone very much inline with what our expectations were. And in fact, what we learned on drilling cavern well one has allowed us to move even quicker, and we have started drilling cavern well two. That's gone even better and we are down in the salt, getting down through the rock and through the cap rock is the most critical part in getting in the salt, we've already done that.

So we feel good not only about cavern well one, in the fact that we are going to again start leeching, but about cavern well two as well. Ralph, if you want to add anything to that?

Ralph Cleveland

I really do not have anything else to add. The technical work continues to move forward inline with the expectations that we've had.

Ted Durbin - Goldman Sachs

Okay, and if I could just ask one more. In terms of the pension expense, how do we have to think about how much of that's recoverable through the next round of rate cases and what not, or is this more sort of corporate, just help us think through that?

Andrew Evans

The vast majority of our pension expense does relate to utility distribution operations. We view that all costs related to our employees in particular, are prudently incurred and should be recoverable in rates. We are going to make contributions that make sure that plan is viable for our employees. That is our primary focus.

Ted Durbin - Goldman Sachs

Good work guys. Thanks.

Operator

And your next question comes from the line of Carl Kirst from BMO Capital. Please proceed.

Carl Kirst - BMO Capital

Hi guys, Carl Kirst from BMO. Most of my questions are answered; just a few clean up actually on that last pension issue. Maybe to ask it in another way, does Georgia just given the size, does it account for the lion's share, for instance of that increase in pension expense? I assume that the net pension expense here is just sort of a consolidation of individual pensions at each utility.

Andrew Evans

Yes. Georgia certainly, if you think about employee base and customer account, maybe it is a loose measure; Atlanta Gas Light dominates that terminal. We do have separate pension plans that we manage because of our NUI employees; that plan requires a little bit less contribution than the legacy AGL plan requires, but pension expense really moves across those utilities pretty evenly based on employee base.

Carl Kirst - BMO Capital

Okay. But certainly that as -- as we file in Georgia late this year there is going to be a big component that's pension expense, I would imagine. And just sort of, from a regulatory nuance, if the expense, right it's not the funding for that would go into rates, correct me?

Andrew Evans

That's generally true. Yes. There is a little bit of -- we get a little bit of recognition for the contributions in one or two jurisdictions, but the vast majority is expense related.

Carl Kirst - BMO Capital

Okay.

Andrew Evans

Rate making generally tries to smooth these expenses overtime, so that they don't impact any one customer group and any particular time period and so that's -- it's more logical for them to focus on expense.

Carl Kirst - BMO Capital

Any thoughts here of, knowing your PUCs; are any of them open to actual trackers or is it just sort of [through ups] as you go through the years?

John Somerhalder

You want pension only or general?

Carl Kirst - BMO Capital

Well, I'm really thinking of more on the pension. But certainly, if you have to take on the general I like to hear it?

John Somerhalder

I think pensions generally they have not used trackers for pension in our territories. But we do have trackers in other things and in fact New Jersey does have a program right now around infrastructure deployment that may -- that's looking like a tracker. That's something that has come from the Governors office that the Board of our utilities in New Jersey is embracing around infrastructure investment for the utilities. We think that might look a lot more like a tracker for that capital deployed, that would be more real time recovery like our Georgia pipeline replacement program represents.

Andrew Evans

And that's on a fast track. We've made a filing, and we do think there is a good chance to get that type of tracker. And that would allow us to invest in infrastructure in New Jersey that would help our customers get higher reliability to service, do some things like pipeline replacement and have a good financial result for the company as well.

Carl Kirst - BMO Capital

Should we then think, as New Jersey kind of comes to our head that we should be able to get resolution, as I mean, if we are open to settlement; I mean potentially within six months or should we just generally think of this as kind of a year-end, early 2010 I think to one of your earlier comments?

John Somerhalder

I think Carl we are looking at a prosecuting case throughout the year that we believe is right for decision before the end of the year. We have not modeled anything on the rate case into our assumptions for '09. But if there's some modest possibility, we could have on our decision and new rates before the end of the year. But I think it's more likely in 2010, before we'll have that result.

Hank Linginfelter

We are essentially, Carl, filing for rates to be in effective from first of 2010 and that's the most likely outcome.

Carl Kirst - BMO Capital

Okay -- no -- yeah.

Hank Linginfelter

I'm sorry, John's earlier point though, that investment -- infrastructure investment tracker could be some thing we get -- some results in this year for.

John Somerhalder

Yes. Good point.

Carl Kirst - BMO Capital

Great. And then just two other clean ups; the $15 million pension expense is that after-tax or pre-tax?

John Somerhalder

It's the pre-tax expense.

Carl Kirst - BMO Capital

Okay. And then lastly, Drew, were you guys seeing any net recouping of working capital year-over-year or just looking at gas prices going into storage this year versus last year? And, if so, is that material at all?

Andrew Evans

Yes. Absolutely it will be material. You can see from the cash flow statement in the 10-K that we had I would say $150 million, $170 million net year-over-year build. That was because our weighted average cost of gas and inventory approaches $10, because of high prices from last summer.

We budget something that is probably in between where we are today in that price, but if you look at the forward script, we expect builds to be in much more moderated range. That was the principle use of our working capital last year.

Carl Kirst - BMO Capital

Okay. Any estimate if the script stays where it is, kind of how much working capital you should basically get back year-over-year?

Andrew Evans

We would anticipate something in excess of a couple $100 million.

Carl Kirst - BMO Capital

Couple $100 million, not much, okay.

Andrew Evans

Yes. If you think about this rate, Carl we've got 90 bcf billion cubic feet of storage that we built and we built at an average price that approached $10 last year; that's consistent with inventories that were in the $900 million range. And we would expect build inventories at the given say, its forward script at a much lower rate. But I think a reasonable budgeting estimate is something closer to $7.50.

Carl Kirst - BMO Capital

Got you. Okay. I appreciate the help guys.

Operator

(Operator Instructions). At this time there are no questions in queue. I will now turn the call back over to Mr. Cave for closing remarks.

Steve Cave

All right. Well, thank you everyone for joining us today and certainly give us a call for any follow-up questions. Have a good day.

Operator

Thank you for your participation in today's conference. This concludes your presentation. You may now disconnect and have a wonderful day.

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Source: AGL Resources Inc. Q4 2008 Earnings Call Transcript
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