AGL Resources Management Discusses Q1 2013 Results - Earnings Call Transcript

Apr.30.13 | About: AGL Resources (GAS)

AGL Resources (NYSE:GAS)

Q1 2013 Earnings Call

April 30, 2013 4:00 pm ET

Executives

Sarah M. Stashak - Director of Investor Relations

Andrew W. Evans - Chief Financial Officer and Executive Vice President

John W. Somerhalder - Chairman, Chief Executive Officer, President, Member of Executive Committee and Member of Finance & Risk Management Committee

Peter I. Tumminello - Executive Vice President of Wholesale Services and President of Sequent Energy Management

Analysts

Mark Barnett - Morningstar Inc., Research Division

Craig Shere - Tuohy Brothers Investment Research, Inc.

Theodore Durbin - Goldman Sachs Group Inc., Research Division

Operator

Good day, ladies and gentlemen, and welcome to the Q1 2013 AGL Resources Inc. Earnings Conference Call. My name is Allison, and I'll be your operator for today. [Operator Instructions] As a reminder, this call is being recorded for replay purposes.

I'd now like to turn the call over to Ms. Sarah Stashak, Director of Investor Relations. Please proceed.

Sarah M. Stashak

Thank you, Allison, and thanks everyone for joining us this afternoon to review our first quarter 2013 results.

Joining me on the call today are John Somerhalder, our Chairman, President and CEO; and Drew Evans, our Executive Vice President and CFO. We also have several members of our management team available to answer your questions following our prepared remarks.

Our earnings release, earnings presentation and our Form 10-Q are available on our website. To access these materials, please visit aglresources.com.

Let me remind you today that we will be making some forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements involve matters that are not historical facts, and our forward-looking statements and projections could differ materially from our actual results. The factors that could cause such material differences are included in our earnings release and more fully described in today's 10-Q filing.

We also describe our business using some non-GAAP measures such us operating margin, EBIT and adjusted EPS. A reconciliation of these measures to the GAAP financials is available in the appendix of our presentation, as well as on our website.

We'll begin the call with some prepared remarks before taking your questions. Drew, I'll turn it over to you to begin.

Andrew W. Evans

Thanks, Sarah, and good afternoon, everyone. I'll begin today with a recap of first quarter results, and then I'll turn it over to John for some additional remarks.

First, turn to Slide 3 of our presentation. You can see that we reported GAAP earnings per diluted share for the first quarter of $1.31. This compares to $1.16 in the first quarter of 2012 when you exclude merger expenses related to the Nicor transaction. The primary year-over-year driver of $0.15 increase was more normal weather that benefited both our distribution and retail businesses. When compared to the historically warm weather experienced in 2012, our return to more normal winter temperatures resulted in a $0.13 improvement to EPS year-over-year. The benefit of slightly colder-than-normal weather was $0.03 during the quarter when compared to the 10-year average. As we mentioned on our last earnings call and at our analyst meeting, we also have introduced an EPS measure, excluding wholesale services, in an effort to reduce the impact of mark-to-market accounting on our consolidated EPS. On that basis, diluted earnings per share, excluding wholesale services, was $1.23 for the quarter, which compares to $1.06 for the first quarter of 2012. You can see here that consolidated EBIT was up 14% year-over-year, driven by a significant improvement in our distribution and retail businesses. Cargo shipping also saw an improvement year-over-year, while reported results in our wholesale and midstream segments were lower than last year. I'll speak to wholesale specifically in a moment. Our distribution retail segments contributed 94% of operating EBIT during the first quarter.

Taking a closer look at each segment, a snapshot of our first quarter EBIT for our distribution business is on Slide 4. EBIT was up $24 million compared to first quarter of 2012. That includes an improvement of $14 million at Nicor Gas related to weather and was slightly colder than normal versus record warmth last year. Compared to normal, which is how we set our guidance ranges, the EBIT benefit for the quarter was approximately $2 million. The remainder of the segment also performed well during the first quarter due in part to higher contributions from our ongoing regulatory infrastructure programs. Excluding pass-through expenses, operating and -- operations and maintenance expense is up $3 million or 2% year-over-year. The main reason for this increase is that, as we've discussed in prior forms, we're assuming incentive compensation returns to target levels for 2013. Without this difference, our O&M expense would have been down year-over-year, which speaks to our ongoing focus on cost control and achievement of efficiencies across our business. Our customer count remains stable and reflects a slight increase year-over-year.

Turning to the retail segment on Slide 5. We recorded EBIT for the first quarter of $70 million, a $10 million increase compared to the first quarter in 2012. The increase mainly reflects weather in Georgia that was closer to normal. Year-over-year, the uplift from weather was $10 million. We also saw a contribution of roughly $1 million from our acquisition of 0.5 million warranty customers at the end of January this year. These benefits were offset somewhat by increased -- increases in transportation and gas costs and slightly lower retail price spreads. Operations and maintenance expense was down 3% year-over-year. And our market share in Georgia remained stable at 32%. And naturally, the number of warranty contracts we are serving is up substantially year-over-year due to the acquisition I just mentioned.

You will find first quarter 2013 results for our wholesale services segment on Slide 6. EBIT of $15 million for the quarter is down $4 million from our recorded EBIT in the first quarter of 2012. There are a few factors affecting year-over-year results, so let me take you through them now. First, our reported commercial activity of $50 million was higher than the $24 million of reported commercial activity in the first quarter of 2012. The increase was largely driven by the withdrawal of storage inventory hedged at the end of 2012 that was included in our storage rollout schedule. In addition, we benefited from the effects of colder weather on certain of our transportation portfolio positions, particularly in the Northeastern United States. This improvement in reported commercial activity was offset by storage and transportation hedge losses recorded during the reporting period that we expect to realize in future periods. Just to remind you, we are required to mark hedges to fair value as natural gas prices change. A decline in gas prices makes hedges look more valuable and correspondingly increases reported earnings, while an increase in gas prices reduces the value of these hedges, producing an accounting loss. This time last year, we were in a declining price environment, whereas we experienced the opposite in the first quarter of 2013. As a result, we recorded hedge losses in the first quarter of 2013 of $21 million compared to hedge gains net of LOCOM of $10 million in the first quarter of last year. That's a $31 million swing period-over-period. Our storage rollout schedule is $34 million compared to $19 million at this time last year and $27 million at the end of 2012. We expect the vast majority of this rollout schedule to be realized in 2013. Again, we see good O&M expense at this point in this business segment, with costs flat year-over-year.

Now let's move to Slide 7. EBIT at our midstream segment was $2 million during the first quarter of 2013, about $1 million lower than the prior year. The decline is due largely to higher depreciation, property tax and other storage-related expenses due to the additional facilities in service when compared to the first quarter of last year. As we have mentioned previously, market fundamentals remain challenging for this business segment due to low natural gas price volatility, abundant market supplies and associated low seasonal storage spreads. As a result, when contracts expire, we've either been recontracting at lower rates reflective of the current market or utilizing in-house management capabilities to optimize the assets until conditions improve to support longer-term contracts.

Briefly, you can see results for the cargo shipping segment on Slide 8. We reported EBIT of $2 million during the first quarter of 2013 compared to $1 million for the same period in 2012. We continue to slowly improve market share and utilization with volume that is 10% higher year-over-year. However, the rate per twenty-foot-equivalent unit or TEU has fallen modestly due to ongoing surplus capacity, changes in cargo mix and competition in the region.

Some balance sheet highlights are noted on Slide 9. Our debt-to-total capitalization improved modestly from quarter-to-quarter. Interest expense was down by $1 million for the quarter compared to the same period in 2012. And as noted in our 10-Q filing, we plan to issue approximately $500 million in long-term debt in the second quarter, in part to refinance our April senior notes maturity, which we redeemed and temporarily funded out of commercial paper, as well as to term out some of our current short-term debt balances.

I would say overall that we've had a very good start to the year from the standpoint of a return to more normal and even slightly favorable weather, as well as efficient control of operating and maintenance expense relative to inflationary pressures.

Thanks for your time today. And now I'll turn the call over to John.

John W. Somerhalder

Thank you, Drew. Given the return to more normal weather following last year's record warmth, it would be easy to infer that weather is the fundamental driver of our year-over-year performance. But I think it is very important to recognize that the actions we've taken over the past 2 years related to merger efficiencies and expense control have positioned us to fully capture the margin benefit of more normal weather with essentially no additional O&M expense. Inflationary pressures alone would have added about $8 million of expense compared to the first quarter of last year. Instead, operations and maintenance expense is up just $1 million despite higher accruals for incentive compensation and addition of O&M expense associated with the warranty contracts we acquired in the first quarter of this year. This is an excellent result, and I am especially proud of our management team and employees for all of their work to achieve synergies and efficiencies across our businesses. With a solid first quarter complete, we remain on track to achieve our guidance ranges of $2.50 to $2.70 on a consolidated basis and $2.40 to $2.50 excluding wholesale services.

Turning briefly to Slide 10. You will find an update on some pending regulatory and legislative items. In Illinois, we mentioned at our Analyst Day in March that legislation is pending with the Illinois house incentive related to process under which we can modify our depreciation rates at Nicor Gas outside of a general rate case. Both chambers are still in session, and we cannot predict whether the legislation will pass. However, we have a depreciation study underway, and we'll file it with the Illinois Commerce Commission later this year either under existing rules or under modified rules should the pending legislation pass. In New Jersey, we now anticipate a ruling on our updated infrastructure replacement program called AIR in the second half of this year. And as we mentioned in Georgia, we are addressing 2 items related to expanded infrastructure investment. The first is the vintage plastic replacement program that we filed in November of last year. The company was asked by the commission to make a recommendation to address the oldest vintages of plastic pipe remaining in use on our system, which is about 500 to 700 miles of pipe. We believe we can replace that pipe over the next 3 to 4 years and have provided an estimated cost of approximately $285 million to complete that work. We expect a ruling on this program in June. Second, in August, we filed an updated forecast for facilities necessary to complete our system reinforcement program under the umbrella of our STRIDE infrastructure program. Along with the new forecast, we will propose a new 3-year construction program for both our Integrated System Reinforcement Program and for the Integrated Customer Growth Program. We expect a ruling on our recommendations wfor these 2 programs by November 1.

The infrastructure needs in Georgia remain at the forefront of our strategic planning. Additionally, we are pursuing opportunities to ensure that low-cost shale gas can effectively make its way into our service territory through investment in interstate pipeline projects. As you know, we have been evaluating some potential interstate pipeline investment opportunities that would provide expanded gas supply options in growing markets in Georgia and in surrounding states in the Southeast. The demand for additional pipeline capacity in the Southeast corridor has been driven primarily by recent growth in existing power generation facilities, as well as other planned expansions in the region. There are several potential opportunities and a number of different configurations for bringing additional supply into these markets. We believe that a significant capital investment in 1 or more of these projects would provide good, stable cash flows and investment returns that are generally in excess of the regulated returns in our utility business. We continue to evaluate these investment and supply opportunities, and we expect to be able to share more details with you in the coming months.

Before we take questions, I'll add a little color to Drew's comments related to our wholesale services business. As he said, while we did see a year-over-year improvement in reported commercial activity during the first quarter, as we progress through the year, we expect to experience challenges capturing additional value on our storage portfolio since spreads have continued to tighten and compress. Current summer to winter price spreads are approximately $0.30 compared to more than $1 at the same time last year. Further, and similar to what we experienced in the fourth quarter of 2012, the first quarter was impacted by forward price volatility experienced at natural gas delivery points throughout the Northeast corridor, as you can see on Slide 11, this volatility related to natural gas supply constraints in the region and it impacted our forward Northeast transportation positions and caused $4 million in mark-to-market accounting hedge losses. However, these same conditions are economically beneficial to our unhedged transportation positions in the Northeast, which have gained in value in the same time period.

On Slide 12, we're reiterating our 2013 priorities, and we are making meaningful progress on each of those. Again, excellent quarter on the whole, and we have started 2013 on solid footing.

We thank you for your time today and for your continued interest in AGL Resources. We look forward to seeing many of you at the AGA Financial Forum next week.

Operator, at this time, I'll turn the call back over to you to begin the Q&A session.

Question-and-Answer Session

Operator

[Operator Instructions] And your first question comes from the line of Mark Barnett of Morningstar.

Mark Barnett - Morningstar Inc., Research Division

I have a couple of quick questions about midstream. The first is just a minor. Can you remind me of the timetable for Golden Triangle 1 coming back into service this year?

John W. Somerhalder

Yes, I'll turn that over to Pete Tumminello.

Peter I. Tumminello

Yes, we're going to be continuing to de-water that facility for the rest of the year, and we'll be just kind of optimizing that de-watering of that facility through the remaining part of this year and into the earlier part of next year.

John W. Somerhalder

But we would expect to have it available to contract next spring, which is really a very good time to contract this. So in that time period -- but as Pete mentioned, we still will be able to achieve some value as we de-water and as we cycle that back into gas service.

Mark Barnett - Morningstar Inc., Research Division

Okay. Okay. So it'd be looking more at spring '14 for those. Okay. And then with the -- 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 kind of -- with 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

Yes, exactly. I mean, what we would look to do in many of these regions, and that's 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 has been tremendous growth in power generation. Most of that serve directly off of interstate pipelines. But then we have seen some growth in select areas here in Georgia. And we have a need to move more gas to the north part of our system. So we have additional needs. 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's the market that has grown the 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.

Operator

And your next question comes from the line of Craig Shere of Touhy Brothers.

Craig Shere - Tuohy Brothers Investment Research, Inc.

So I understand that first quarter gave you some nice opportunities in Sequent, I guess, around the contract, the 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 schedule than heading into the -- coming out of the fourth quarter. And I wonder if you could speak to what happened on the contracted storage side at Sequent and those winter months as well?

Peter I. Tumminello

Yes, Craig, this is Pete. I'd be glad to do that. We experienced some very good values, you mentioned, in the upper Northeast transport and asset management positions, and that was the material contribution to the quarter. Related to storage, we ended the quarter with a rollout value, about $34 million as compared to 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 planned storage withdrawals for the quarter and then starting the process of reinjecting and optimizing forward storage rollout position, we were able to add about I believe it was $7 million of incremental new storage rollout activity, net of all those impacts. So what we've done is downsized a little bit the size of our storage portfolio, recontracted at lower prices starting April 1 and then upgraded the storage rollout value based on the activity I just described.

Craig Shere - Tuohy Brothers Investment Research, Inc.

Okay. So is the -- I guess to some degree, if it's a [indiscernible] cost, it's a [indiscernible] cost, but is the lower overhead giving you the opportunity to execute hedges using the storage at otherwise thinner spreads but still economic?

Peter I. Tumminello

Yes, there is definitely a benefit to the recontracting we had. We had a material part of our storage portfolio expire at the end of March this year. We recontracted at much lower market rates 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 spread on the legacy storage contracts.

John W. Somerhalder

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 opportunities, 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 the 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 is compressed only $0.30, it's not as great a opportunity as what Pete had originally anticipated. So we're off to a very good start, but -- and still an 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 Investment Research, Inc.

Understood. John, maybe I can keep you if you want to give any updates about the whole LNG transport supply efforts?

John W. Somerhalder

Yes. 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 I. Tumminello

You bet. We probably disclosed 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 in expanding that fuel. We have been increasing a little bit of our commercial activity. Our deal flow is picking up, interest is picking up. We're very active at most of the industry conferences, educating customers around the use of LNG and 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 New Birmingham, and that's ready to go at 24 hours a day, 7 days a week to generate LNG full-time.

John W. Somerhalder

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 with LNG 17 there in Houston where it's historically been every 3 years of 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, Chart Industries, Caterpillar has made good presentations in the past. We're accelerated [ph] related to marine. Very strong momentum in all those areas and a lot of products coming out, which were really necessary to drive this market for us. So with the progress we're seeing, the interest we're seeing and then the industry moving into new products and making those available, we still are very optimistic about our opportunities. But again, we're in the early stage of that at this point.

Craig Shere - Tuohy Brothers Investment Research, Inc.

Is this very OEM-driven? Or do we think at least the full capacity at Trussville could be consumed with the likes of the UPS contract?

Peter I. Tumminello

Well, I think the UPS contract will serve 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.

John W. Somerhalder

But at this point, the contracts that we have in hand are in 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'd make a commitment to an investment like Pete is talking about.

Peter I. Tumminello

Yes. We're not yet sold out on our current capabilities with our current plans.

Craig Shere - Tuohy Brothers Investment Research, Inc.

And I know you mentioned this at the Analyst Day, but can you remind us how much it would cost? Because you got a very good deal on putting Trussville together, I think. But what would it cost to build a whole new facility?

Peter I. Tumminello

Well, depending on how you size it, when the equivalently sized facility is going to be in the ballpark of $60 million to $75 million, $80 million equivalent to what I think we've got to Trussville. So we entered at extremely low cost, competitive cost and believe we can be the most competitive competitor certainly in the Southeast corridor.

Operator

Your next question comes from the line of Ted Durbin, Goldman Sachs.

Theodore Durbin - Goldman Sachs Group Inc., Research Division

Just a quick one for me. I'm trying to make sure I'm following all the moving pieces here on the O&M within the distribution segment. So is that $12 million, 7%, it looks like there's some writer delta there. So I'm just trying to get sort of what's the clean number in terms of the O&M increase there. And are you fully accounting for -- I think on your waterfall chart that you introduced $31 million incentive comp year-over-year. Is that all kind of in that number? And is it -- should we think of that as a pro rata per quarter as we go through the year? Or is there any kind of seasonality to how you accrue for the incentive comp?

Andrew W. Evans

Ted, this is Drew. 40% of that number is accrued in the first period, and it is reflected in the GAAP. The only things that we backed out here, I think, are items related to writer base -- or I'm sorry, surcharges and taxes, probably the energy efficiency program in Illinois, in particular. But in general, O&M in distribution is up -- I think it's $2 million year-over-year, including the additional compensation expense we were talking about.

Operator

I'd now like to turn the call back over to Sarah Stashak for closing remarks.

Sarah M. Stashak

Thank you for joining us this afternoon. We'll be available today, tomorrow, the rest of the week to take any follow-up questions that you have. Thanks.

Operator

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. And good day.

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