Nicor Inc. Q2 2009 Earnings Call Transcript

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Nicor Inc. (NYSE:GAS)

Q2 2009 Earnings Call

July 31, 2009 9:30 am ET


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


Gregory McGowan – Sidoti & Company


Welcome to the Nicor Incorporated 2009 second quarter earnings conference call. My name is [Michelle] and I will be your coordinator for today. (Operator Instructions). I would now like to turn the presentation over to your host for today's call, Mr. Russ Strobel, Chairman, President and CEO. Please proceed, sir.

Russ M. Strobel

Thanks, [Michelle] and good morning to everybody and thank you for joining us. With me this morning are Rick Hawley, our Chief Financial Officer and Kary Brunner, our Director of Investor Relations. This morning we'll discuss our 2009 second quarter and year-to-date financial results as well as our annual outlook for 2009 earnings. When we have completed our remarks, we'll be happy to take your questions.

Let's 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 operation and expectations of our company's 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 second quarter 2009 diluted earnings per share were $0.50 compared to $0.64 per share for the same period in 2008. For the six month ended period, diluted earnings per share were $1.47 compared to a $1.55 per share in 2008.

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

Richard L. Hawley

Thanks, Kary. Good morning, everyone. Compared to 2008, second quarter 2009 diluted earnings per share reflect improved operating income in the company's gas distribution and other energy related businesses offset by lower income in the company's shipping business and lower corporate operating results.

The second quarter comparisons also reflect lower interest income and pre-tax equity investment income and a higher effective income tax rate in 2009. For the year-to-date period, 2009 versus 2008 comparisons reflect lower operating income in the company's gas distribution and shipping businesses and lower corporate operating results, partially offset by higher operating income in the company's other energy-related businesses. The six month ended comparisons also reflect higher equity investment income partially offset by a higher income tax effective rate and lower interest income in 2009.

Our gas distribution business results have started to reflect the benefit of the new rates that became effective in the second quarter of this year. Year-to-date comparisons reflect decreased natural gas deliveries due to lower demand unrelated to weather and 3% warmer weather in 2009 compared to 2008. While both the years were colder than normal, 2008 was just a bit more so.

Gas distribution operating results were also impacted by higher operating and maintenance costs due primarily to increased payroll and benefit related costs, the absence of prior year legal recoveries recorded in the second quarter of 2008 and higher company use and storage related gas costs. These increases were partially offset by lower franchise gas costs and lower bad debt expense attributable principally to lower natural gas prices. Finally, year-to-date 2009 gas distribution operating income, compared to 2008, reflected higher depreciation expense.

Looking ahead, we are expecting natural gas, Nicor gas, to deliver solid 2009 operating results due in part to the benefits of rate relief received in April, colder than normal weather in the first half of the year and lower natural costs combined with a continued emphasis on cost control.

As a side note, I wanted to mention that we have closed on the issuance of $50 million in first mortgage bonds to replace the long-term debt, which matured in earlier 2009. This new 10-year debt will carry a coupon rate of 4.7%.

Moving to our shipping segment, Tropical's year-to-date 2009 operating income was essentially flat year-over-year. Tropical achieved this result in spite of a challenging economic climate resulting in volumes for the first half of 2009 that were lower than the prior period and our earlier expectations.

Management took and continues to take steps that have been successful in reducing the impact of those lower volumes. Steps include intensifying our focus on cost reduction efforts, leveraging our second quarter 2008 acquisition of Caribtrans, introducing rate adjustments in certain ports and adjusting shipping schedules and assets utilized. We expect those efforts will reduce but not totally offset the negative effect of continued lower than expected volumes for the remainder of 2009.

Our other energy ventures year-to-date 2009 reported income was up compared to last year due to higher operating income at our wholesale natural gas marketing business, partially offset by lower income at our retail products and services businesses. We currently estimate that both businesses will perform in line with our earlier expectations.

Six months ended 2009 corporate operating results, compared to 2008, were lower due primarily to the absence of prior year legal recoveries partially offset by the weather-related impact associated with certain of our retail utility bill management products.

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 six months ended 2009, the corporate segment recorded a $2.9 million pre-tax weather-related cost associated with this hedge compared to a $4 million pre-tax weather-related cost in the same period of 2008.

The amount of the offset will vary depending on a number of factors but it has typically range from about 35% 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, as mentioned in last quarter's call, year-to-date 2009 financial results also included the positive effects of a gain recorded in the first quarter of 2009 on the sale of the company's equity stake in a joint venture EN Engineering of approximately $10 million pre-tax or $6 million after tax.

We continue estimate that the gain on the transaction, net of the absence of estimated earnings for the remainder of the year from this joint venture, will have a positive annual earnings impact of approximately $4 million for 2009.

Before moving to 2009 earnings guidance, let me comment on the status of our rate case rehearing. As we mentioned in the first quarter call, we filed a request for rehearing with the Illinois Commerce Commission on April 24, 2009 to appeal the capital structure and return on equity approved in the ICC's recent rate order, contending that our return on rate base should be higher.

The Attorney General's Office, Citizens Utility Board and the Environmental Law and Policy Center also filed requests for rehearing on various items but raised no issues about the amount of the rate increase Nicor Gas was granted.

On May 13, 2009, the ICC granted the company's request for rehearing on the capital structure contained in the ICC's rate order. All other requests for rehearing filed by interveners in the company were denied. Nicor Gas and other parties to the proceeding have filed written briefs to identify points whether they agree or disagree with the capital structure contained in the ICC's rate order. We expect a final decision by ICC commissioners on Nicor Gas' capital structure no later than October 13, 2009. Any further changes in rates as a result of the rehearing would be effective prospectively.

Turning now to our 2009 guidance, we currently estimate our 2009 diluted earnings per common share to be in the range of $2.54 to $2.74, unchanged from guidance provided in our first quarter's earnings call on May 1, 2009. As a reminder, this estimate includes approximately $0.09 per share for the positive impact of the first quarter 2009 sale of our equity interest in EN Engineering.

Our annual outlook assumes normal weather 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 law. 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.

As a reminder we will provide updates to our annual earnings outlook only as a 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

I'd like to close by emphasizing just a few points. First of all, Nicor's consolidated results for the first half of 2009 are solid, particularly given the significant deterioration in the overall economy during the first half of this year.

Nicor's year-to-date results and our affirmance of our 2009 earnings guidance, reflects our continued emphasis on cost containment and business process improvements. Additionally, we're now seeing the benefit of new rates in Nicor Gas' results.

We're pleased with the ICC decision granting a rehearing concerning our capital structure. A reasonable outcome from that process would enable Nicor Gas to continue its long tradition of being a low cost, high value provider for its customers while maintaining Nicor's strong financial position for the benefit of all of our stakeholders.

Tropical Shipping faces softness in volumes due to the economy's negative impact on tourism, construction and overall economic activity in its service territory. But as Rick mentioned, Tropical's intense focus on cost containment and asset utilization has been effective in offsetting some of this continued pressure on margins. And Tropical has produced operating results that we believe are very good in the context of the current economic climate.

We expect this business will still be able to deliver solid results and strong cash flow even in the face of these volume pressures. I'm confident our experienced management team will continue to rise to the challenges of our current environment, just as it has in the past. We're also pleased with the performance of our other energy-related businesses, and they continue to add meaningful value to our consolidated operations.

Finally, let me reiterate that despite the difficult overall economic conditions, Nicor itself remains a financially strong company with credit ratings that are among the very highest in our industry. And we continue to pay a solid dividend. In fact our recently announced dividend declaration marks over 55 consecutive years of dividend payments to our shareholders.

With that summary, we'd be delighted to take your questions. [Michelle]?

Question-and-Answer Session


(Operator Instructions) Your first question comes from Gregory McGowan – Sidoti & Company.

Gregory McGowan – Sidoti & Company

With Tropical down significantly could you comment about specific actions that you're taking to mitigate the effect of the lower volume?

Richard L. Hawley

Sure, we'd be happy to and a number of these will be familiar to you, Greg. But in no way, I guess particular order, Tropical has, they began a process last year and continued this year focused on headcount reductions in face of reduced volume in the various ports. And they have pretty much completed that although I guess maybe you're never done, but they have reduced headcount.

We have laid off chartered vessels when their charters have come up and rearranged our shipping schedules to use our other assets to meet our volume needs. There are savings there. We are looking at, as with the current economic climate in the shipping industry, we have had and we expect reductions as we renew charters as they come up. I think you're seeing charter rates drop significantly.

We have, as I mentioned, in addition just rerouting for vessel changes. We have changed sailing schedules, changed, actually some things as small as changing the speed of the ship and get the fuel savings out of those. And we have looked at ports, particularly as you see fuel charges coming down, we're looking at ports where rate increases actually are suggested and appropriate. So it's a combination of all those things.

And I think you can see, while you see Tropical's results are down, as you know it's a fixed cost business and you're looking at volumes that are down 10%, 12% from the prior year. You probably if you just modeled that with no cost reductions you would expect actually net income versus last year to be down dramatically. We're down about a half million bucks I think. So that can tell you – that gives you a good indicator of the success they've had on the cost side.

Gregory McGowan – Sidoti & Company

What are you looking for, for Tropical for the full year at this point?

Richard L. Hawley

As far as what, where volumes are going to be or –

Gregory McGowan – Sidoti & Company

On the net income front?

Richard L. Hawley

I would expect we'll probably be down net income of a similar percentage to what you're seeing volumes being down if you kind of look at last year's net income. So we're in, you guys are probably tired of hearing this, of Tropical's had adequate, good and great years. We're probably in the low good or the high adequate range with what we're seeing right now.

And coming with that number we have tried to be, you never know where the bottom is, but we actually, I would say as we watched that last month or so, I think we're seeing some flattening out of the declines. And we tried to be reasonable looking at what we think volumes are going to be going forward, coming up with that estimate.

Gregory McGowan – Sidoti & Company

Now, I think when you initiated your guidance for this year, you included the benefit of a potential acquisition. Could you talk about how that is going? And actually the environment for acquisitions as a whole, too, would be helpful?

Richard L. Hawley

Sure, I think we indicated that we would continue to look at that and we thought we could accomplish something. We continue to think the economic climate will produce those opportunities. We have looked around and we will continue to look around. When we have something, we'll let you know.

But again we've tried to factor in what we think can reasonably be accomplished into the number I gave you looking at Tropical's results going forward. But I wouldn't expect you to see any huge, big acquisition. We weren't talking about that when we talked about the first of the year. We're looking for the small mom's and pop's, the $2 million, $3 million, $5 million, $10 million kind of acquisition.

And certainly this climate has put pressure on those who are not as well capitalized and flush with cash as we are. So I think we remain optimistic that there's an opportunity to help the long-term earnings capability of this business in this climate.

Gregory McGowan – Sidoti & Company

And, Russ, maybe could you just discuss number one is there anything new at the PBR? I know that the commission has, I think they've continually pushed it back in the past. And number two, if you can maybe just discuss what steps you're taking with the ICC to maybe helping them embrace decoupling. And also do you think the commission would consider granting a regulatory mechanism such as decoupling outside of the general rate case?

Russ M. Strobel

There is very little new on the PBR in addition to what we announced previously. Staff, CUB and the attorney general are presently scheduled to file their opening round of testimony on August 14. I don't know whether they will file or additional continuances will be necessary.

As you know we filed our testimony now, I think, probably a couple of years also. In terms of decoupling we had asked for decoupling in our last rate case. And while we did not get decoupling, Greg, we did get some mechanisms that make us much less volumetric or weather-sensitive.

And they really fall into a couple of categories. First of all we got 10-year weather, which is about 5,600 HDD so that obviously spreads the revenue out over a smaller denominator which is helpful. We also had a very substantial increase in our monthly charge from about $8.50 to something around $13.00. And those are not exact numbers, but I think they're close enough.

So those things help us quite a bit in managing the volatility that would otherwise be inherent in Nicor Gas' operations. And just the monthly charge moves us much closer to a straight fixed variable rate design, probably 90% of our fixed costs are now recovered in that monthly charge, or in the high 80s anyway, in the high 80s. Rick, see that's why I should never offer a number. Now Rick's flashing me the number.

But we're well down the path. We continue to think that decoupling is the way to go. You see it as a rate design that is being increasing accepted across the United States. It reflects the inherent fixed cost nature of our nature of our business. We think it's good for customers. It flattens out their expenses and so we are going to continue to promote the notion of decoupling, and we think that's the long arc of history in the country and in Illinois.


(Operator Instructions). Sir, you have no further questions at this time.

Russ M. Strobel

Great, [Michelle], and thank you all for participating in the call, we appreciate it.


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

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