Nicor Q4 2008 Earnings Call Transcript

Feb.25.09 | About: AGL Resources (GAS)

Nicor, Inc. (NYSE:GAS)

Q4 2008 Earnings Call

February 25, 2009 09:30 AM ET

Executives

Russ M. Strobel - Chairman, President and Chief Executive Officer

Kary D. Brunner - Director Investor Relations

Richard L. Hawley - Executive Vice President and Chief Financial Officer

Analysts

Gregory McGowan - Sidoti & Company

Daniel Fidell - Brean Murray Carrat & Co.

David Parker - Robert.W.Baird

Operator

Good day ladies and gentlemen, and welcome to the Nicor Inc. 2008 Fourth Quarter Earnings Conference Call. My name is Carissa, and I will be your coordinator for today. At this time, all participants are in a listen-only mode. We will facilitate a question-and-answer session towards the end of the call. (Operator Instructions)

I would now like to turn the presentation over to your host for today's call, Mr. Russ Strobel, Chairman, CEO and President. Please proceed.

Russ M. Strobel

Thanks, Carissa, and good morning to all and thank you for joining us. With me today are Rick Hawley, our Chief Financial Officer and Kary Brunner, who is our Director of Investor Relations. This morning, we're going to discuss our 2008 full year financial results, and our annual outlook for 2009 earnings. When we've completed our remarks, we'll be happy to take your questions. Let me now start by turning things over to Kary.

Kary D. Brunner

Thanks, Russ. First I'd like to remind you that this call will include certain forward-looking statements about the operations and expectations of our company, subsidiaries and affiliates. Although we believe our representations are based on reasonable assumptions, actual results may vary materially from stated expectations. Information concerning the factors that could cause materially different results can be found in our periodic filings with the Securities and Exchange Commission, and in this morning's press release. As we reported in our press release this morning, preliminary twelve-months ended 2008 diluted earnings per share were $2.63, compared to $2.99 per share for the same period in 2007.

As a reminder, financial results for the 2007 twelve-month ended period included the positive effects of a reserve adjustment and cost recoveries of approximately $0.11 per share after-tax, related to our mercury inspection and repair program that commenced in 2000. Removing the effects of these items for comparison purposes, gives you 2007 twelve-month ended earnings of about $2.88 per share, compared to $2.63 per share in 2008.

Let me now turn things over to Rick, for the discussion of our 2008 results and our outlook for 2009.

Richard L. Hawley

Thanks, Kary. Good morning everyone. twelve-month ended results for 2008 versus 2007, reflect lower operating income in our gas distribution, shipping and other energy related businesses, and lower corporate operating results.

The twelve-month ended comparisons also reflect higher income on equity investments in 2008, partially offset by higher interest expense. We did end the year better than anticipated at the time of our third quarter call, due in large parts of the benefit of colder than normal weather and better than expected results in our shipping and other energy ventures businesses.

As of the effect of the previously mentioned mercury items, full year 2008 gas distribution operating income, compared to last year was up slightly. Full year comparisons were favorably impacted by increased natural gas deliveries due, as noted earlier to colder weather in 2008, and the impact of customer interest. Partially offsetting these positive factors, was the impact of higher operating and maintenance costs due primarily to increased bad-debt expense and payroll and benefit related cost, partially offset by the legal recoveries recorded in the second quarter of 2008.

Operating results were also impacted by higher depreciation expense and lower gains on property sales. It is important to put the results of the gas company in context. Operating income compared to 2007, excluding the 2007 benefit from the mercury items, was up modestly as I said before, just under $4 million. Included in that number, is approximately $15 million of benefit from colder than normal weather, and the legal recoveries in 2008 of just under $4million. The results for 2008 reflect a significant increase in O&M cost, particularly bad-debt that were anticipated and were the basis of our 2000-- excuse me, of our April 2008 filing for rate relief which I will discuss later.

Moving to our shipping segment, Tropical's full year 2008 operating income was down compared to 2007, but we believe still reflects solid performance particularly in light of the economic climate Tropical faced. Management worked throughout the year to mitigate the margin impact of lower volumes, resulting primarily from the effects of an economic slowdown in Tropical's markets. But full year results were negatively impacted by those lower volumes.

Tropical eased some of the volume pressures, producing better than expected results in the fourth quarter, by leveraging our second quarter acquisition of Caribtrans, implementing rate adjustments in certain ports, adjusting shipping schedules and enhancing our focus on fuel, processes, personnel and other costs.

Our other energy ventures full year reported income was down compared to last year, due to lower income at our wholesale natural gas marketing business, partially offset by improved income in our retail products and services businesses.

Our wholesale gas business completed the year ahead of expectations on an economic basis. But the impacts of GAAP accounting on the reported results moved income from 2008 into subsequent periods. But, I do want to emphasize again, that this is just a shift from 2008 to future periods. It effectively increases the amount of cumulative unrecognized mark-to-market earnings that will run through the financial statements in subsequent years.

Full year corporate operating results, compared to 2007 were negatively affected by the weather related impact associated with certain of our retail utility-bill management products, partially offset by recoveries of previously incurred legal cost. As a reminder, certain of our utility-bill management products provide a natural and partial offset to the weather risk of our gas distribution business. In the twelve-months ended 2008, we recorded in the corporate segment a $6.2 million of cost, associated with this hedge due to the impact of colder than normal weather.

This compares to a benefit of about a 100,000 for the same period in 2007, when we had near normal weather. The amount of the offset will vary depending on a number of factors, but it is typically ranged from around 40 to 65% of our gas company's annual weather impact.

Under terms of a corporate swap agreement, benefits or costs associated with our retail products, resulting from variances in normal weather are recorded primarily in corporate operating results.

Finally, full year comparisons were also impacted by higher interest expense and increases in our pretax net equity investment income. Higher interest expense results from the absence in 2008, of a 2007 benefit of just under $10 million related to an agreement with the IRS to settle certain tax matters.

Before moving to 2009 earnings guidance, let me now comment briefly on all the turmoil in the capital markets and its impact to us from a liquidity perspective. I touched on this in our third quarter call and the message here now is the same. To date, we have incurred credit related losses of about $300,000 after-tax, and don't believe we are directly exposed to entities one might consider trouble. Because of our strong credit ratings, we have been able to access the commercial paper markets throughout the crisis. As we renewed our seasonal credit line before the recent credit market turmoil began, we have $1.2 billion in bank lines supporting commercial paper borrowings which at year-end approximated $740 million. We are not aware of any significant issues that would impact our ability to access those lines should we need to. But again, we don't expect to need to access those lines directly.

Let me now move to a look at 2009, including the status of our rate case and our earnings guidance. A critical factor for our results in 2009 and future years is the outcome of our pending rate filing. As probably all of you are aware in 2008, Nicor Gas filed with the Illinois Commerce Commission, a request for a revenue increase of approximately a $140 million.

The most recent testimony filed by staff in the Attorney General's office recommends a rate increase of about 64 million and $43 million respectively. On February 9, 2009, the Administrative Law Judges of the ICC issued a proposed order, recommending an increase in base revenues of approximately $69 million. This proposed order also recommends the approval of two new rate adjustment mechanisms; a volume balancing rider that would adjust rates to recover fixed cost, and an energy efficiency rider that would fund energy efficiency programs.

It is important to note that this proposed order is a recommendation by the Administrative Law Judges. Nicor Gas and other parties to the proceedings will have the opportunity to file written briefs to identify points where we agree or disagree with the proposed order. After considering these briefs, the ALJ's may modify the proposed order and will submit their recommendation to the ICC commissioners. The ICC commissioners will then make the final decision on Nicor Gas's rate increase request, and that decision may differ from the ALJ's recommendation. That final decision is expected to be issued no later than March 25, 2009. New rates would be effective prospectively.

We are expecting to file our response to the ALJ proposal soon, reiterating our need for requested relief. While we are pleased that all parties have acknowledged the need for relief, the levels recommended do not provide a recovery of prudently incurred operating and capital cost, and would continue the under recovery of those costs which has occurred for several years.

Our customers benefit directly from a financially strong utility through low rates and low gas costs. Our financial state strength also supports our over 2000 employees and has a positive impact on the local economy. These important benefits have not been disputed. And as I mentioned, the aggregate operating cost level for 2009 used as a basis for our rate relief request, is consistent with our previous estimates. Finally, even if we were given full rate relief, we would still have the lowest rates in Illinois and among the lowest in the entire nation.

Turning to our 2009 guidance; for our purpose of our initial earnings estimates, we have used the rate relief proposed by the ALJ's order of $68.8 million. On that basis, we estimate the 2009 diluted earnings per common share would be in the range of $2.45 to $2.65 a share. Rate relief awarded by the Illinois Commerce Commission may differ substantially from the ALJ's proposed order.

Our 2009 earnings outlook compared to 2008; reflects lower expected results in our gas distribution and shipping businesses, and higher results in our other energy related businesses. Our annual outlook assumes normal level for the remainder of the year, but excludes among other things, any future impacts associated with the ICC's PBR plan and PGA reviews, other contingencies or changes in tax loss. Our estimate also does not reflect the additional variability in earnings, due to fair value accounting adjustments and other impacts that could occur because of future volatility in the natural gas markets. We will provide updates to our annual earnings outlook only as part of our quarterly and annual earnings releases.

With that, let me now turn things back to Russ, for a wrap up.

Russ M. Strobel

Rick, thanks. I want to close by emphasizing several important points. First of all, despite the challenging economic conditions that we're operating in, Nicor's business has generally performed well in 2008. But as Rick mentioned its important for Nicor Gas to obtain appropriate rate relief, to recover the cost providing safe and reliable service to the 2.2 million Illinois homes and businesses that we serve.

Nicor gas is simply not earning its allowed rate of return, and it has not earned its allowed rate of return in any year, since its last rate case. We understand the impact that utility rates can have on our customers, and we are intensely focused on keeping costs low. It's because of this longstanding focus, that Nicor Gas residential customers benefit from the lowest delivery rates in Illinois, rates that are about 40% lower than the average delivery rate of other major Illinois gas utilities. And even with our full request to increase residential rates by under $5 a month, Nicor gas will remain the lowest cost provider of any major Illinois gas utility.

As we've noted, Nicor Gas has been a significant positive contributor to the Illinois economy, providing good wages and good benefits to thousands of employees and retirees and injecting hundreds of millions of dollars annually into our local economy. This is entirely the wrong time to deprive stakeholders of these benefits by providing an unreasonably low level of rate relief.

We will continue to respectfully, but firmly present our case for full rate relief to the entire Illinois Commerce Commission. Tropical shipping continues to face a challenging environment. However in the past during challenging periods, Tropical has been successful at finding new ways to reduce costs, to improve margins, to increase market share and to grow volumes. We will continue to look for ways to rise to the challenges of our current operating environment. We also continue to be pleased with the economic performance of our other energy related businesses. These businesses are expected to continue to make important contributions to Nicor's long terms earnings and are an integral part of our overall growth strategy.

Finally let me reiterate that despite the difficult economic conditions that we operate in, Nicor remains a financially strong company with credit ratings that are among the very highest in the industry and we continue to pay a solid dividend. In fact, our recently announced dividend declaration marks 221 consecutive quarters of dividend payments to our shareholders. And with that we'll be happy to take your questions.

Question-and-Answer Session

Operator

(Operator Instructions). And your first question comes from the line of Greg McGowan of Sidoti & Company. Please proceed.

Gregory McGowan - Sidoti & Company

Hello. Good morning everybody.

Russ Strobel

Good morning.

Gregory McGowan - Sidoti & Company

Very quickly before I get to utility, I just want to ask about, Tropical. A lot stronger than anticipated given the tough economic environment that we're in, can you kind of give a little bit more color as to what's happening there operationally. Is it kind of any kind of mix issues. Is it primarily the acquisition for Caribtrans that really helped the margins there?

Richard Hawley

Yeah, thanks. Good morning Greg. The -- a couple of things. Tropical did finish stronger. I mean its 2 to $3 million probably better than we thought at the time of the third quarter call. But we -- a couple of things. We indicated that volumes have been soft. They continue to be soft.

While we're retaining our market share, just the over all market is down given the economics in the area and that has not gone away. I mentioned a couple of times that Tropical had taken actions on the personnel side, looking at ways of trimming cost, adjusting shipping schedules, trying to get rate increases; although those are difficult trying to get those in markets where it made sense et cetera. And what we saw is the impact of those actions and some softening in the fuel costs, in the fourth quarter more than we had anticipated. Those factors combined to let Tropical have a better finish to the year than we anticipated. But again those -- the efforts to manage margins will continue into '09, but we also expect the volume issues to continue into '09.

Gregory McGowan - Sidoti & Company

Okay, but it sounds like for most parts though its picking out operational costs. Its not just fuel necessarily, but it's really a lot of the overhead operating costs out of businesses, is that right?

Richard Hawley

Yeah, it's all of those things together.

Gregory McGowan - Sidoti & Company

Okay, and with that in mind, if you kind of go the guidance and talk about, maybe what you're expecting for the utility versus Tropical versus OEV?

Richard Hawley

Sure, I think as we said of the businesses OEV is the one we're expecting to be up. The retail should be pretty close to prior year, interchange should do a little better as I indicated. We pushed some income from '08 into '09 in later year's with the mark-to-market accounting that goes on. Retail, write around maybe a little bit down from the prior year.

When you look at Tropical, we're projecting Tropical to be down just modestly; a million to $2 million again, because of the volume issues. So, that's close enough that I call that flat. The gas company -- with the recommended rate relief and the fact that it will not come in until essentially April 1, means the gas company will be down from the prior year because we obviously have the cost increases we've anticipated from day one, and rate relief only coming in the first of April.

Gregory McGowan - Sidoti & Company

Okay. And with OEV is there any kind of specifics that you can provide there?

Richard Hawley

Yeah, I would say, we're looking at OEV to be up, probably about 30% on a net income basis over the last year.

Gregory McGowan - Sidoti & Company

Okay. And I guess, does your guidance also include the impact of the decoupling mechanism that the ALJ recommended?

Russ Strobel

Well, as I indicated in the call, we're assuming normal weather for the remainder of the year, so the decoupling wouldn't come in.

Gregory McGowan - Sidoti & Company

Right.

Russ Strobel

If it comes in, then I guess that would -- to the most part ensure normal weather for the remainder of the year, but...

Gregory McGowan - Sidoti & Company

Okay. And, well, actually I'll pass the line at this point then. Thank you very much.

Russ Strobel

Sure.

Operator

Your next question comes from the line of Dan Fidell of Brean Murray Carrat. Please proceed.

Daniel Fidell - Brean Murray Carrat & Co.

Good morning, guys. Thanks for the call.

Richard Hawley

Good morning.

Russ Strobel

Good morning.

Daniel Fidell - Brean Murray Carrat & Co.

Just a couple of quick questions for you. First, can you -- do you have a number -- quantifiable number for the total impact for land sales or other real estate sales or any other one time items for 2008?

Richard Hawley

Well, yeah, 2008; I don't know -- I don't have, I think there was next to nothing in there for land sales, and we have -- I think nothing in for 2009. It's 800,000 in for land sales in 2008, and I mean I think, we have laid out in the press release, the various things that happened during the year. I never get a right figuring out what you guys think as recurring and non-recurring. So I'll let you guys, judge that so.

Daniel Fidell - Brean Murray Carrat & Co.

Alright, just in terms of your 2009, the -- for clarity, you said you are not assuming in your forward guidance any one time gains or other benefits including land sales?

Richard Hawley

Yeah, the budget has -- I think again, zero for land sales and I'm not aware of any other one time items.

Daniel Fidell - Brean Murray Carrat & Co.

Okay. Great. And then, maybe just one additional question. Just given your balance sheet, I just was wondering on the Tropical side, is this is an opportunity to potentially pick up additional shipping assets in the down market cycle. Is that -- I know that you're just coming off an acquisition, but is that something that you are considering for Tropical over the near term?

Kary Brunner

That's great minds thinking alike, as you look at this. I mean, we've said before as, we obviously are building up cash at Tropical in prior downtimes, that has been an opportunity. I think the Caribtrans probably falls into that and we definitely are looking for whether its businesses or assets that might make sense for us to acquire, to prepare ourselves for when we move into the up cycle.

Daniel Fidell - Brean Murray Carrat & Co.

Okay. And nothing eminent, obviously and nothing in your '09 guidance on additional acquisitions made perhaps on the second half of the year or anything like that?

Kary Brunner

Well, as we've looked at Tropical in estimating volumes, we've kind of thrown it off the whole balance of things. What we can do on our ships, where we might add volumes -- volumes from other sources et cetera. But as far as any immediate acquisitions or whatever, obviously like everybody else, we don't comment if anything were in progress, and you'll know when it comes out. But, we certainly have nothing to announce today.

Daniel Fidell - Brean Murray Carrat & Co.

Okay. Great. And then maybe just a last question. Can you give us, maybe an update on the storage project you are working on?

Richard Hawley

Sure. We're actually in the process of checking out the geology and confirming that it's, what we expect it to be. We are -- it's still our plan to go ahead and in doing so we come online, begin operations later in 2010. So that's still part of our plans. One of the things that we are looking at, again, I guess if there are any silver linings in the current economics, is probably some of our cost estimates are coming down because of what's going on. And we are currently in the process of looking at that.

Daniel Fidell - Brean Murray Carrat & Co.

Okay. What's just -- do you have any kind of specifics in terms of the next sort of timing event we should be looking for with that facility?

Richard Hawley

I'm sorry, I couldn't hear right there.

Daniel Fidell - Brean Murray Carrat & Co.

I'm sorry. Just from a timetable standpoint, what's the next sort of catalyst we should be looking for in terms of moving it along, getting the storage up?

Richard Hawley

Well as I said, we're right now looking at the geology and firming up some of the other things, options and all those kinds of things. So I would think probably in each of our calls we'll be in position to provide an update. We need to -- we will be spending in our 10-K, which will come out probably later today. We'll indicate we've put about $40 million in the capital budget for 2009 expenditures. So we should be, as the year progresses in a position to update you on where we are on that.

Daniel Fidell - Brean Murray Carrat & Co.

Right. Thanks very much for your comments and good luck as you finish this rate case. Certainly hope it works out well for you.

Richard Hawley

Thank you.

Operator

(Operator Instructions). And your next question comes from the line of Dave Parker of Robert.W.Baird. Please proceed.

David Parker - Robert.W.Baird

Hi good morning. Congratulations on a good quarter.

Russ Strobel

Thanks Dave.

David Parker - Robert.W.Baird

Your comments both Russ and Rick about the ALJ's recommendation and obviously decoupling is a step in the right direction; can you may be highlight what -- that recommendation, what's the potential in these major areas of drags could be from your proposal and assuming that the commission doesn't may be move upward, what we could expect from a margin drag in the utility side as things present. I guess I'm thinking about pension expense and bad debt expense may be specifically?

Richard Hawley

Well Dave, thanks for your comments. As you look, as we indicated the ALJ would -- order would provide about $69 million. I guess to some rules of thumb just as you look ahead and what comes out, the'09 impact given its a partial year, every $10 million of rate relief is worth between 4 and $5 million of net income to the gas company.

I think part of what you are asking about -- the big drivers in the difference between what they want to grant and our request is on the operating cost side, they pretty much accepted what we filed, with the exception of reducing our bad debt expense by about $7 million which, -- we ended the year as a percentage of revenue at -- we started the year thinking bad debt expense for 2008 would be about 2% of revenue. It ended the year at 2.2%.

We had put 2.25% in the test year for the rate case. The ALJ pretty much accepted the staff recommendations and move us down to two just over 2%. So that's on the operating cost. That's the one item they disallowed, but the major difference between our request and what the ALJ proposed really had to do with ROE and the cap structure. Because they created a hypothetical cap structure and imputed in an enormous amount of short term debt, even though it's clear from the record we don't use it for rate base assets. For the first time ever the ALJ imputed that in.

That reduces the ROR down to a very low number, 757 versus the 927 that we asked for. That's the big difference along with an adjustment on the ROE from the 11.17 that we asked down to 10.17 I think or somewhere in there -- just over 10. So those are the differences. Obviously as Russ mentioned, if they only give us half of our requested relief, then we will in fact under earn and I -- at the gas company even after the rates come into effect.

David Parker - Robert.W.Baird

Yeah. Is there any -- Rick is there any testimony on file just to potentially maybe the commission could grab on bad debt trackers, or maybe pension or benefit expense trackers as well like some of the states have adopted?

Richard Hawley

Sure, and I forgot to answer part of your question, I'll (ph) come back. We have certainly filed evidence on bad debt trackers. Other utilities have requested those in the Illinois, so they've seen all of that. But the so there's information out there.

Same thing with the volume adjusters and things like that. One of the comments, and specifically the pension; we are seeing a dramatic increase in our pension expense from the prior year. I think I -- we have mentioned before; 2008 had the benefit of about $12 million worth of pension income pretax. The 2009 estimates have an estimate of an expense of about $12 million. So a $24 million swing. Now, with adjustments we have made in budgets, further emphasis on cost increases et cetera, the forecast for 2009 that we gave you actually has total O&M, including bad-debt in pension, almost exactly on what we included in our rate case filing with the commission.

David Parker - Robert.W.Baird

Okay. Good. Keep up the good work. And we look forward to March for the final ruling.

Richard Hawley

Thanks, Dave.

Operator

You have a follow question from the line of Greg McGowan of Sidoti and Company. Please proceed.

Gregory McGowan - Sidoti & Company

Hi, most of the additional questions were answered, but I was wondering if you can give us the total CapEx number for 2009, for the entire company?

Richard Hawley

Sure the -- we are looking at CapEx of about $310 million, and that includes, just so you know that I mentioned about $40 million for the storage project and it also includes looking at investments of additional capital down in Tropical, really looking at some of the things that have come up on this call, opportunities that might be there to position ourselves for the future.

Gregory McGowan - Sidoti & Company

Okay. But you aren't taking in any acquisitions from Tropical into your 2009 guidance, right, in terms of -- on an EPS basis?

Richard Hawley

We do have volumes where we think we can pick them up, whether it's through acquisitions or other arrangements with other careers, built into the Tropical estimate.

Gregory McGowan - Sidoti & Company

Okay. Thank you very much.

Operator

(Operator Instructions). And at this time, I'd like to turn the call back over to Mr. Russ Strobel for closing remarks.

Russ Strobel

Thanks, Carissa. I'll keep them short. Thank you all for your interest in Nicor and have a great day. Good bye.

Operator

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Good day.

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