AGL Resources Management Discusses Q2 2013 Results - Earnings Call Transcript

Jul.31.13 | About: AGL Resources (GAS)

AGL Resources (NYSE:GAS)

Q2 2013 Earnings Call

July 31, 2013 9:00 am 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

Scott Carter - Chief Regulatory Officer and Senior Vice President of Commercial Operations

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

Michael Braswell - Chief Executive Officer of Southstar Energy Services, President of Retail Energy and President of Southstar Energy Services

Henry P. Linginfelter - Executive Vice President of Distribution Operations

Analysts

Theodore Durbin - Goldman Sachs Group Inc., Research Division

Carl L. Kirst - BMO Capital Markets U.S.

Craig Shere - Tuohy Brothers Investment Research, Inc.

Mark Barnett - Morningstar Inc., Research Division

Daniel M. Fidell - U.S. Capital Advisors LLC, Research Division

Operator

Good day, ladies and gentlemen, and welcome to the Second Quarter 2013 AGL Resources Inc. Earnings Conference Call. My name is Chantaley, and I will be your facilitator for today's call. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes. I would now like to turn the conference over to your host for today, Ms. Sara Stashak, Director of Investor Relations. Please proceed.

Sarah M. Stashak

Okay. Thank you. Thanks to everyone for joining us this morning to review our second 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 as operating margin, EBIT, adjusted net income and adjusted EPS. A reconciliation of these measures to the GAAP financials is available on 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 morning, everyone. I'll begin today with a recap of second quarter results, and then I'll turn it over to John for some additional remarks.

Before I dig into the numbers at a high level, we have benefited in the first half of 2013 by the return to more normal weather as compared to historically warm weather in 2012. Excluding weather, we achieved growth in our operating margins during the first half of the year, primarily as a result of continued investment in our regulated infrastructure programs, targeted acquisition growth in retail operations and higher contribution from commercial activity in our wholesale segment. We continue to effectively manage costs and leverage our shared services model across our business to largely overcome inflationary effects.

As expected, our operations and maintenance expense in 2013 increased as a result of returning to targeted levels in incentive compensation. And bad debt expenses increased modestly for some of our businesses as a result of colder weather and higher natural gas prices compared to 2012. However, excluding these items as well as additional expense associated with the acquisition of warranty customers earlier this year, our O&M expenses decreased slightly, and we continue to maintain our focus on controlling costs.

Turning to Slide 3 of our presentation, you can see that we reported GAAP earnings per diluted share for the second quarter of $0.41. This compares to $0.30 in the second quarter of 2012 when you exclude merger expenses related to the Nicor transaction. The primary year-over-year drivers of the $0.11 increase were improved commercial activity in our wholesale services segment, the previously disclosed sale of Compass, which added $0.04 during the quarter and additional margin improvement of approximately $0.04 at distribution operations. Slightly colder-than-normal weather resulted in a $0.02 positive impact across our distribution and retail segments during the quarter.

Excluding wholesale services, diluted EPS was $0.38 for the quarter, which compares to $0.35 in the second quarter of 2012. Consolidated EBIT was up 29% year-over-year, driven by improvements in our distribution and wholesale segments. Retail operations and cargo shipping were in line with last year's second quarter, and EBIT for midstream operations declined by $2 million year-over-year.

On Slide 4, you'll find our consolidated results for the year through June. The solid results in the second quarter built on a very strong first quarter through June. Consolidated EBIT increased 18% year-over-year with improvements in all segments, excluding midstream operations. Our distribution retail segments together contributed 94% of operating EBIT through the first 6 months of this year. We currently expect full-year consolidated EPS to be near the high end of our $2.50 to $2.70 guidance range. Excluding wholesale services, we expect to achieve diluted EPS near or above our previously provided guidance range of $2.40 to $2.50 per share. While we are tracking in line with our targets for the wholesale business, mark-to-market accounting movements on transportation and storage hedges associated with this segment made consolidated GAAP EPS for the full year more difficult to forecast. John will walk you through some of the major factors impacting our view on guidance in a few minutes.

Taking a closer look at each segment, a snapshot of second quarter EBIT for our distribution business is on Slide 5. EBIT was up $9 million compared to the second quarter of 2012. This is mainly driven by increased margin from our infrastructure replacement programs and increased customer usage. It also includes an improvement of $1 million at Nicor Gas related to weather that was normal in the second quarter of 2013 versus weather that was warmer than normal in 2012.

For the first half of the year, the main drivers of the $33 million year-over-year EBIT improvement was weather during the first quarter that was 34% colder than the record warm weather we experienced in the first quarter of 2012. Our customer count remains stable and reflects a slight increase year-over-year.

Before leaving this slide, I also want to mention that at the end of June, we executed a weather hedge related to our weather exposure in Illinois, specifically the purchase of a put option that allows us to retain upside potential should the fourth quarter be colder than normal but largely mitigates our downside risk in the event of significant warmer-than-normal weather. As we discussed in our analyst day, our primary exposure to weather in the distribution operations segment is at Nicor Gas since we do not have weather normalization mechanisms in place. In order to reduce the potential for negative fourth quarter 2013 earnings impacts from weather, we thought it would be prudent to enter into this cost-effective transaction. We will also evaluate options for mitigating our weather risk in future periods on a continual basis.

Turning to retail slide -- retail segment on Slide 6, we recorded EBIT for the second quarter of $12 million, down just slightly for the second quarter -- compared to the second quarter of 2012. For the first half of the year, EBIT for the segment increased $8 million year-over-year. Operations and maintenance expense increased 28% year-over-year for the quarter and 11% for the first half of the year, due primarily to the acquisition of approximately 500,000 warranty contracts in January of this year. Our market share in the Georgia retail business remains stable at 32%, and in our retail services business, the number of warranty contracts we are serving is up substantially year-over-year due to the acquisition I just mentioned.

We made another opportunistic acquisition to retail business at the end of June. In this instance, we acquired approximately 33,000 residential and commercial customer relationships in Illinois. These are natural gas commodity customers who opt for competitive service in the state. We paid $32 million for the block of customers, and we expect the acquisition to add $0.02 to diluted EPS in 2013 and additional $0.04 in 2014. Effectively, we paid about 3x forecasted 2014 EBITDA, and we are adding margin with very little additional operating expense.

You'll find second quarter 2013 results for our wholesale services segment on Slide 7. EBIT of $11 million for the quarter is up $20 million from our reported EBIT in the second quarter of 2012. The $20 million variance is driven by an $11 million gain on the sale of Compass Energy, as we previously disclosed, and a $13 million improvement in commercial activity. For the first half of the year, EBIT, the wholesale segment, has improved by $16 million year-over-year, driven primarily by the gain on the sale of Compass as well as stronger commercial activity.

Through June, we recorded hedge losses net of lower costs or market adjustments of $8 million compared to hedge gains net of LOCOM of $21 million in the same period of 2012. The storage rollout schedule at the end of June was $14 million compared to $47 million at the end of the same period in 2012. The $33 million year-over-year reduction is reflective of the modernization of many of our storage positions as we withdrew natural gas from storage in the first half of this year.

We continue to see good O&M expense discipline in this business segment with operating expenses down 7% year-to-date.

Now let's move to Slide 8. The midstream segment declined -- decline year-over-year is due largely to the roll-off of legacy contracts that were above current market rates as well as higher depreciation, property taxes and other storage-related expenses due to additional facilities and service when compared to the second 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 have been either 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 9. Second quarter results were in line with the prior year second quarter, and through June, the segment is up about $1 million compared to last year. As a reminder, fourth quarter is when substantially all of the segment's operating income is expected due to the seasonal nature of the business. Importantly, we continue to improve market share and utilization with volume that is higher by 11% year-over-year through June. However, the rate per 20-foot equivalent unit, or TEU, has fallen modestly due to pricing action taken last summer as well as changes in cargo mix and competition in the region. That said, we are starting to see improvements in rate as we move through the year.

Some balance sheet highlights are noted on Slide 10. Our debt-to-capitalization improved modestly from quarter-to-quarter. Interest expense was up by $1 million for the quarter compared to the same period in 2012, largely reflective of the $500 million debt issuance that we completed in May. In that transaction, we issued a 30-year senior note at a 4.4% fixed interest rate, which is well below our weighted average cost of long-term debt.

Through the first 6 months, our margin growth combined with ongoing expense discipline has resulted in strong performance in nearly every business segment. We are very pleased with the foundation -- this foundation, and we'll use it as a platform for continued positive developments over the remainder of the year.

Thank you for your time today. Now I'll turn the call over to John.

John W. Somerhalder

Thank you, Drew. As we noted, our year-over-year performance is very strong, due in part to the fact that we had the warmest year on record last year. But even when you exclude the year-over-year weather impact, we are off to a great start in 2013 due to our ongoing infrastructure investment programs, slightly better customer growth than we expected and our continued focus on expenses, which is enhanced by our shared services model.

As Drew mentioned, at this point, we expect to be near the high end of our consolidated EPS guidance range and near or above the high end of our EPS guidance range, excluding wholesale services. Let me summarize the main drivers.

First, we have about a $0.05 benefit due to colder-than-normal weather across our distribution and retail businesses through June. And with the weather hedge that we executed, our exposure to warmer-than-normal weather in the fourth quarter is largely mitigated with the potential for upside should we see colder-than-normal temperatures at the beginning of the winter heating season. Second, we recorded the $0.04 gain on the sale of Compass during the second quarter. Third, the acquisition at the end of the second quarter of additional retail customers in Illinois is expected to add about $0.02 this year. And fourth, our pension and retiree welfare plan expenses are estimated to be lower than our initial expectations, benefiting earnings per share by $0.03 for the year.

These discrete items are in addition to our effective cost control and slight margin improvements relative to expectations across most of our business segments. And I'll just reiterate Drew's comment that mark-to-market accounting related to storage and transportation hedge movements can have a meaningful impact on our wholesale business, making it more difficult to forecast results for that segment on a GAAP basis. That said, at this point in the year, even excluding the gain on sale of Compass, we are on track to achieve our full year EBIT guidance range of $25 million to $35 million for the segment.

We had a very busy quarter with regard to legislative and regulatory developments, and I'll highlight some of these, starting on Slide 11.

In Illinois, 2 impactful pieces of legislation were approved by the general assembly in May, and one was signed into law by the governor in July. The first item noted here is the new law which creates the opportunity for infrastructure investment surcharge to be collected by gas utilities in Illinois serving more than 700,000 customers, which includes Nicor Gas. In our case, this means that we can deploy -- potentially deploy up to $150 million annually to upgrade our pipeline system. However, an exact amount has yet to be determined and must be filed with the ICC, which we expect to occur in 2014.

In order to claim full recovery of capital deployed under this program, we would still be required to spend approximately $200 million in capital under base rates, which is roughly our 5-year average CapEx at Nicor Gas. So we would be looking at about $200 million of CapEx, which would remain subject to normal rate-setting process and potentially an additional $150 million under the new surcharge program. But the exact amount, of course, is yet to be determined. Any rider-based program rates could not take effect until January 2015 for Nicor Gas.

The second item noted here is related to our depreciation rate. The current depreciation rate for Nicor Gas is 4.1%. This rate has been in effect for over 2 decades and is in need of review. The depreciation study is nearly complete, and we expect to file it with the Illinois Commerce Commission by the end of August. We estimate that each 10 basis point reduction could result in lower depreciation expense of between $4 million and $6 million. The legislation is pending before the governor, and he has until August 18 to sign or veto the bill. If he takes no action, it would become law on that date.

A lower depreciation rate would not impact customer rates, and it would provide an incentive to increase capital expenditures in our Nicor Gas service territory, creating more jobs in the state of Illinois and the communities that we serve. The $200 million annually that we currently spend on base capital expenditures at Nicor Gas is just slightly above annual depreciation expense at the 4.1% depreciation rate.

As a reminder, under the legislation, any change in depreciation rate would become effective as of the date that the depreciation study is filed. Accordingly, assuming approval this year, some EPS uplift could be anticipated in the fourth quarter of 2013, with the full-year impact beginning in 2014. Our current EPS guidance does not assume an impact from a modified depreciation rate as we have yet to file the study with the ICC, and a review period would follow.

Moving to Slide 12. Also in Illinois, we continued to see progress in bringing the long-running performance base rate, or PBR, case to conclusion. On June 7, the ICC issued an order requiring that a $72 million refund be issued to current customers over a 12-month period. And we began issuing these refunds on July 1. We have already accrued this amount as a contingent liability on our balance sheet, though we have contested the decision as our stipulated agreement with the ICC staff was for $64 million. Other parties to the case have until August 19 to contest the ruling. The matter remains before the appellate court.

Moving on to key items in our other jurisdictions on Slide 13. In Georgia, we are working on Phase 2 of our STRIDE program related to pipeline enhancements and system expansions at Atlanta Gas Light. Phase 1 began over 10 years ago, and most of the programs sunset in 2013. With our bare steel and cast iron replacement now largely complete, we are looking to replace aging plastic pipeline in our footprint. We have filed an agreement with staff and expect a ruling from the Georgia Commission in early August on our request to replace 750 miles of plastic pipe. The aggregate cost of this program is approximately $275 million, and the program would conclude at the end of 2017.

Also, under the STRIDE umbrella, tomorrow, we expect to file an updated construction and investment plan for continued system reinforcement and customer growth projects. These programs would account for an additional $260 million in capital expenditures over a 4-year period, and we expect the ruling by November 1. I'll also briefly mention that we continue to work towards approval of Elizabethtown Gas' infrastructure program in New Jersey and hope to reach a settlement in the coming weeks.

I have just provided a lot of detail on these infrastructure programs, and if you turn to Slide 14, you can see the bigger picture of what this means for our utility CapEx over time. As the new programs at Atlanta Gas Light and Elizabethtown will be in their start-up phases, we are forecasting a decline in capital spending at our utilities for 2014. However, as spending under these programs ramp up and based on our plans to initiate an infrastructure investment program in Illinois, you can see that we expect significant uplift in 2015. These are all important programs for maintaining the safety and reliability of our system, and the rider-based programs have minimal regulatory lag for cost recovery. As I mentioned on our last call, we continue to evaluate options for meeting our natural gas supply and infrastructure needs in Georgia. We remain in discussions with potential partners about taking an equity stake in an interstate pipeline project. A significant capital investment would be good, stable cash flow into investment returns that are generally in line with our regulated returns in our utility businesses.

We are nearing the decision point and hope to share details with you imminently. Again, we are off to a great start in 2013, and we have made meaningful progress in many of our jurisdictions on key regulatory and legislative priorities. We still have a lot of work to do the remainder of the year to further build on our successes. And we look forward to reporting back to you at the end of the third quarter. We thank you for your time today and for your continued interest in AGL Resources.

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

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of Ted Durbin of Goldman Sachs.

Theodore Durbin - Goldman Sachs Group Inc., Research Division

I just wanted to dig in a little bit on the D&A study here in Illinois. I appreciate the sensitivities that you gave us. What -- how should we think about a reasonable D&A rate versus the 4.1% you're currently booking?

Andrew W. Evans

Well, this is Drew, Ted. I'd just say that the characterization of the assets that were depreciating is a little bit different than what we see in the rest of the utility complex. There are a couple of more complex assets, particularly storage assets, that had much higher removal costs than what we typically see. And so I wouldn't expect that the depreciation study would indicate a number that's similar to what the comp or utility asset base is in total. I think it's just a little bit too preliminary because the filing won't be made until the end of August. To really give you a good sense of what that number is, that'll be a matter of public record in pretty short order. The main features, I think, that John will discuss is that really this has no impact on rates for customers in Illinois. That's the single most important part for us given our commitments there. And the second piece is that it really incentivizes us relative to our other investment options to make continued investment in Illinois.

Theodore Durbin - Goldman Sachs Group Inc., Research Division

Okay. That's helpful. Next one for me was just -- I appreciate the slide here with the replacement CapEx. The pipeline replacement CapEx, it's falling off in 2013 at Atlanta Gas Light. And it seems like that's been kind of the -- that pipeline replacement has been a big driver of the year-over-year improvement in earnings. I'm just wondering how we should think about 2014 as that falls off. And then we have this sort of alphabet soup of new projects that potentially come online here. I'm kind of -- if there's a delay or kind of what the impact is of the base, call it, pipeline replacement program coming off and how much that's impacted earnings this year and then how it falls through to '14.

Andrew W. Evans

There -- these targets are a little bit layered, and the rate is somewhat established midyear. And so I wouldn't expect that there be a big falloff in the growth rate related to infrastructure year-over-year. But I mean, Scott, if you have a better answer than that.

Scott Carter

Ted, Scott Carter. I think the way to think about it is those programs generally are going to return on the capital invested. So as next year, it's a little bit lower on those capital replacement programs, and we'll probably see a slight decline on the rate of growth that we've seen year-over-year. But even with that, there is a lag associated with the half year convention of the rate setting. So even though we're deploying less capital, there'll be some growth in the next year from this year's capital deployment. So while it will modulate a little bit, I think largely, it'll go consistent with the growth we're seeing, just slightly less.

Theodore Durbin - Goldman Sachs Group Inc., Research Division

Got it. Okay. That's great. And then, John, I guess, just the sort of discussion around co-investing in the long-haul pipeline. I -- if I had understood that you target quite higher returns than what you usually get in your regulated utilities, I think I heard you say that you'd expect returns in line with the regulated utilities. So maybe you can just expand a little bit on that and kind of what you'd expect from any kind of investment.

John W. Somerhalder

Yes. I mean, that is a good point, Ted. And that is over the long run, we would expect FERC allowed to return on that type of pipeline investment to be above what we see with the utility. We know as part of getting a pipeline project built, you might have to look at returns that were more in line with our utility returns in early years. So in the long run, absolutely, we would believe it would be an investment that would be at a FERC return, which would be above what we see at the state level. But in terms -- go ahead, Ted.

Theodore Durbin - Goldman Sachs Group Inc., Research Division

So just to say, in other words, but if some of that higher return predicated on maybe more stock volumes or just wondering, is that a sort of fully contracted return or is that -- is there some variability on volumes there then.

John W. Somerhalder

Yes, it would be -- we're looking at several different options at this point. It's different under different options. But in one case, it would be a situation where you would earn a good return under the -- with the original construction of the facility. But you would really need the first expansion to push you up to the higher-level returns consistent with FERC. So it would really be in line with the expansion, not really counting on other value that you'd get from interruptible transportation or those things. It really would just reflect a larger project where you have to build the first phase, still get a reasonable return, but the expansion would be where you really get up to the full FERC returns.

Operator

Your next question comes from the line of Carl Kirst of BMO Capital Markets.

Carl L. Kirst - BMO Capital Markets U.S.

If I could actually just cue off of some of Ted's questions and maybe first on the pipeline side, and I just want to make sure I'm understanding. John, even as we may have a escalation over time to a FERC rate, at least in one potential scenario, whatever you guys do decide to invest if there is a return component that matches the utility, that would be a base contracted return, right? I mean, there wouldn't be a spot element or an element of risk on that, would there?

John W. Somerhalder

I mean, we're looking at it in a very similar way, Carl. And that is we would at least want to make sure that we have long-term contracts on a pipeline project that moved us close to those type of returns. And we would not want to count on, like you say, interruptible transportation or future contracting on that base project. So that would be our standard. It's we'd at least have to have enough long-term contracts to assure a reasonable return on day 1.

Carl L. Kirst - BMO Capital Markets U.S.

And I figured that was the case, but I just wanted to make sure I understood that. And perhaps then just sort of a -- obviously, we can't talk about numbers now, but is it safe to say then whatever level of participation should this project move forward that, that has been then now already hammered out amongst the owners?

John W. Somerhalder

No. I mean, we believe that very soon, we'll be able to announce whether it's possible for us to invest on a pipeline project and to talk to you about if a deal can be structured. We're talking about several alternatives now. We have not finalized anything as of today with those opportunities. We think, though, that in order to meet the timeline and schedules of the parties that very much need additional gas in the state of Georgia, that those decisions will have to be finalized over just the next several weeks. So we do expect to be able to answer that question, Carl, in very short order. But as of today, those type items have not been finalized.

Carl L. Kirst - BMO Capital Markets U.S.

I appreciate the color given the timeframe here. The second question, I just had also sort of -- Ted brought up with respect to the DD&A. And so, Drew, kind of recognizing what you're saying that these assets may be a little bit different, a little bit unique considering the storage, the one number I just wanted to confirm, perhaps factual number, is that relative to the rest of the LDCs, is that average depreciation rate, if I got my number correctly, at 2.6%?

Andrew W. Evans

That's right.

Carl L. Kirst - BMO Capital Markets U.S.

Okay. And then the last question, and I just want to make sure I understood this. John, just as far as looking at the Illinois rider potential, you said we might be looking at -- obviously, subject to filing, but perhaps $150 million or up to $150 million incremental spend here. Is that -- in rough terms, is that what's equating to this 4% cap of the rate base? Or perhaps maybe a better question is this: can you remind me of what the rate base is in Illinois?

John W. Somerhalder

I'll let Scott talk about the rate.

Scott Carter

Carl, it's 4% of the base rates. So you can increase the base rate revenue requirement about 4% a year under the legislation. Then when you back into what that means in terms of CapEx that can support that level of increase, it's $150 million. So it is a backed into number at this point that gives us our -- and what we said our maximum potential, again, pending filing with the SEC approval of a program.

John W. Somerhalder

And so that's...

Carl L. Kirst - BMO Capital Markets U.S.

Okay. But it's...

John W. Somerhalder

That's -- excuse me, there's that limitation on it. But we also need to go to the ICC and show a list of projects that make sense or that meet our pipeline safety and other needs. We believe that we'll be able to justify a number in that range, but we've got to meet both of those criteria to file and have approval of ICC to move forward on that basis.

Carl L. Kirst - BMO Capital Markets U.S.

And can you remind me of just what the rate base is in Illinois?

Scott Carter

The rate base is roughly $1.5 billion today.

Carl L. Kirst - BMO Capital Markets U.S.

Okay. That's what I think I was confused at. So this is 4% of the base rates, not 4% of the rate base?

John W. Somerhalder

Exactly.

Scott Carter

Right.

Operator

Your next question comes from the line of Craig Shere of Tuohy Brothers.

Craig Shere - Tuohy Brothers Investment Research, Inc.

Looking forward to seeing Pete out here in a couple of days. So let me just start with something regarding Sequent and midstream. Do you see any implications from Twin Oak's [ph] decision mid-last month to wind down its energy services operations amidst this continued weakness in salt dome storage and the regional basis differentials? I guess what I'm asking is does the falloff of a competitor present commercial opportunities? Or is it just representative of an overwhelmingly weak market condition that may actually be exacerbated by fewer players?

Peter I. Tumminello

Carl, this is Pete. Well, oh, Craig, I'm sorry, this is Pete. I would like to describe it this way. Certainly, when you take a competitor and more than one competitor out of the market, it is providing opportunities -- commercial opportunities for customer growth for Sequent. And when you look at some of the ones that have been exiting, they really had some concentrations in regions of the country that aren't experiencing some of the potential beneficial impact Sequent has. We've got a different structural setup with the management of all of our affiliated assets. We have a large concentration with gas-fired power generation customers that we serve, and we've got a concentration of pipeline capacity that serves producers out of the shales. And so for us, we aren't impacted as greatly as some of the others that just have made more 1 or 2 regional components to their business as we're were more spread out and get to participate in movements that we're seeing in some of the shale regions.

John W. Somerhalder

Yes, Craig, just to follow up on that, I mean, your first assumption is correct that we are seeing, obviously, the impact of lower volatility. That does impact our ability in certain parts of our business. And that's why we'll be seeing the recent forecast on our business that's lower than where we were several years ago. But as Pete indicates, because we well positioned ourselves with power generation and pipeline capacity out of some of the shale areas where there's been some constraints, we are still seeing a reasonable opportunity to make money in those areas and the fact that our competitors are leaving in other areas and some of the same areas we're in, it is a slight positive. And we have seen the direct impact, while I guess, that you have seen some of that impact when you're looking to manage assets for other utilities. The fact that there are fewer players in there has made it a little bit -- we've been in a better position to acquire those assets.

Peter I. Tumminello

That's correct. There are certainly fewer competitors going after asset management transactions. The offset is the challenge in the storage market. As we're seeing some benefit through competitors leaving business, we're still in a very challenging storage market at this point. So that is the one key headwind we have in the business.

Craig Shere - Tuohy Brothers Investment Research, Inc.

Right. Okay. So upside for Sequent and maybe prolonging the trough for midstream?

John W. Somerhalder

Correct. I think that's correct, Craig.

Craig Shere - Tuohy Brothers Investment Research, Inc.

Okay. And on retail, can you guys maybe expound on the acquisition-related activities in terms of the growth we're seeing, the integration efforts and maybe future M&A?

Andrew W. Evans

Yes, I'll give this a shot. Mike Braswell is here, too, who is related to at least one of the transactions. But I'd say that we've just been very opportunistic in a new market that we're in, which is Illinois. The services business was pretty straightforward in that we acquired customer contracts and really just wanted to better utilize the infrastructure that we have in Naperville through the Nicor acquisition. And the same is true of the energy portion of the business where we were serving about 80,000 customers in Illinois. And this was an opportunity really just to move customer contracts into the portfolio and again, do nothing more than have better utilization of the underlying infrastructure that we had in the service list of customers. Is that fair, Mike? We haven't been -- as much as this looks a little like a spree, I'd just say that we've been very opportunistic over the last 6 months and really only acquire things that sit very cleanly into our footprint or into our operating model.

Michael Braswell

I'll agree. I mean, I really don't have anything to add. I mean, it was a great acquisition, immediately accretive. We leveraged the foundation we already have in Illinois, and Drew, you covered it. So the same thing, so yes.

Craig Shere - Tuohy Brothers Investment Research, Inc.

Okay. And last question, and I apologize about beating a dead horse here. I know Ted and Carl hit on the depreciation rates issue. But I'm still trying to get my head around some of this. I understand that any approved lower depreciation rates that directly impacts how you report your earnings will impact the noncash EPS. It will also improve long-term returns not on your capital deployed because you have an incentive to invest because you -- it will be there longer, and you'll get your return on rate base for a longer time rather than just getting it paid back and having to run up the down escalator some more. But what I"m trying to get my head around is, wouldn't in the next year or 2, that lead in a short run to lower operating cash flow as ratepayers don't have to divvy up as much over time for the depreciation on the legacy rate base, that $1.5 billion that you guys were talking about before?

Scott Carter

Scott -- Craig, this is Scott. I'll try to address, and if I don't hit your question exactly, please let me know. But short run on cash flow, it shouldn't have an impact except to the extent, and John hit on it earlier, that we now have the opportunity to invest some additional capital. So that would be an incremental investment from the cash flow, from the existing. It's not going to change it, assuming that rates don't change. So ideally, you go through this. We focused on it from the standpoint of investing the capital, and you talk about it from a return component. There's also a short-term impact. Obviously, on capital deployed to date comes with a higher depreciation expense than what we have in any of our other utilities. So this allows us to deploy that capital with less of an immediate impact on our earnings because we're going to effectively lower the depreciation by some amount. So that is, I think, is the right way to think about the cash flow in it of the proposal. Ideally, fairly minor cash flow -- only cash flow impact is from the extent we would invest additional capital to do some of the programs we need to do on the state.

John W. Somerhalder

Yes. And then I may answer this -- the question in a way that doesn't directly get to your point either. But in general, the way we're looking at this is, and the way we'd analyze this, it will not change the cash flow to us compared to our base plan without a change in depreciation. What it does do, as Scott said, it does allow us to invest more capital, and it also allows with that lower depreciation rate, for us overall a longer time period, to see a different growth in rate base in that business, which is beneficial to us. Importantly, it doesn't change the customer rates when we put these new rates in effect. So the customers don't feel additional pressure on their rates. They see the same rates as we otherwise would have planned. We will invest more to have a better, safer system, better able to serve the customers and create jobs in those regions. So we see it working well for our customers, well for our cash flow, works well for our growth rate, and it does then have the EPS impact on a noncash basis, as you said, the end of this year and on a full year run rate starting next year.

Craig Shere - Tuohy Brothers Investment Research, Inc.

Maybe I could rephrase the question. Apart from the opportunities from rider uplift and increased investment to support system integrity and these depreciation changes that -- when impact current rates, when is the next Illinois general rate case that you would envision?

Henry P. Linginfelter

Craig, this is Hank Lingenfelter. We -- the earliest we could file a rate case is next year. It'll be effective at the end of next year going into 2015. Based on our pro forma where our costs are coming in, which are coming in very nicely, and where revenues would come in as well as earnings and returns that are attached to the changes we think we'd file with the depreciation study and the rider programs, we don't have any plans for a rate case in Illinois at this time.

Craig Shere - Tuohy Brothers Investment Research, Inc.

Are you ever required or only if you feel you're not making your minimal return -- authorized return, do you have the right -- can you be forced then?

Henry P. Linginfelter

There's not a pending obligation on the company to file a rate case under any of the -- given the legislative or the ICC's current standing around these issues. The -- it's generally companies decide when to file rate cases in Illinois, and the commission hears them and deals with them. And even on the modeling of the depreciation ranges that we've looked at, it still gets us very closely to where our authorized returns are, sort in a maximum case that we could see. So we don't think there's any return pressures on the change in depreciation as well.

Operator

Your next question comes from the line of Mark Barnett of MorningStar.

Mark Barnett - Morningstar Inc., Research Division

A quick question on -- you talked a little about the Nicor regulatory environment, but could I ask you just a bit about Georgia? If you managed to approve the filings that you present here, might that avoid a formal rate filing in that jurisdiction for a couple of extra years?

Andrew W. Evans

I think that's true. We don't have -- also, we don't have plans in Georgia for a rate case. I believe the filing we made on the vintage plastics program and when we think our STRIDE program will do -- and again, same story, our management, our cost over time, we feel like we're in reasonably good shape to not need rate relief in the foreseeable future. That could change obviously, but at the moment, we don't see any need for rate relief in Georgia as well.

Mark Barnett - Morningstar Inc., Research Division

Okay. And just a quick -- I am at Nicor. Do you expect much of an appeal's, I guess, situation before the deadline in August for the PBR settlement?

Andrew W. Evans

We haven't seen any activity yet from the parties. There's always the possibility of an appeal that the order from the ICC was very direct, including around the ICC's discretion around the issue, which we think fairly well strengthens the order for an appeal, and yet we didn't agree with everything in that order. So we have an appeal that's there because we want to keep that option open in case we need to move forward with an appeal. But we haven't seen from the other parties. They were opposed to the stipulation as well as they did not support the commission's final order, but we're not aware of any activity yet on appeal side.

Mark Barnett - Morningstar Inc., Research Division

Okay. And the last quick question, any change to the Golden Triangle Storage 1 rewatering timetable? Or is that still the same as last call?

John W. Somerhalder

No, I think that that's gone as expected. Actually, the capital we've invested in that is coming nicely, and I think our timeframe is still on schedule to have everything online back on the count of 1 as we've described before.

Operator

Your next question comes from the line of Dan Fidell of U.S. Capital Advisors.

Daniel M. Fidell - U.S. Capital Advisors LLC, Research Division

Just a couple of quick questions. Most of my questions have been asked and answered. I guess first, Drew, I just wanted to make sure that I understood you correctly. On the retail services side, you do remain somewhat opportunistic for additional pickups in that area?

Andrew W. Evans

Actually, no. I don't think so. We -- the next sort of phase of that business really is deployment against our own legacy utilities. We think it's a good service that helps people make better decisions in their home, and so we'll focus there. But we really don't have any M&A aspirations across retail really beyond what we've done this year.

Daniel M. Fidell - U.S. Capital Advisors LLC, Research Division

Okay, great. Also just a housekeeping item on the weather hedge for the fourth quarter. Can you give us some detail on that? I don't know if you've provided that or not in the past just in terms of what you paid for that.

Andrew W. Evans

I don't know that we've disclosed much detail because it's not overly material, and that will amortize affectively over the next couple of quarters. But it was a couple of million -- less than a couple million dollars' worth of protection that just really limits our downside but preserves upside. It's the purchase of a put option affectively. It's exactly what it was.

John W. Somerhalder

And it provided more protection under extreme weather than what Drew indicated. But it was at a cost of less than $1.5 million to provide that protection and still allow us the upside opportunity. So when we analyzed it, it was very cost-effective in this environment. And that can change depending on what happens with counterparties and the weather. But at this time, it was a very cost-effective hedge, weather hedge for us to put in place.

Daniel M. Fidell - U.S. Capital Advisors LLC, Research Division

Great. Just another question real quickly. You mentioned -- and maybe a question for Hank, in terms of the rate freeze in Illinois, in terms of a higher charge not before January 1, 2015, to your understanding that any rider -- as you've gotten the documents here, any rider couldn't be -- on the infrastructure side, couldn't be starting to work in the rates until that time. Is that the case? I guess my thinking on that phrase was tied to the merger, and this might be a separate issue and just seems somewhat counterintuitive for -- if they're trying to incentivize sort of infrastructure replacement behavior and eliminate lag to kind of make you wait a while.

Henry P. Linginfelter

Yes, you're right, Dan. The legislation specifically limits Nicor to file because of its rate freeze for recovery of these costs that go in the infrastructure program. The good news for us is the rule-making hasn't even occurred yet with the ICC, and that will take some time. So we're really not losing much of an opportunity in the interim. That will go on for some months. They'll move it as quickly as they can. They've been encouraged to do so through the legislative process. But once those parameters are set up, we'll know then what fits, doesn't fit in a program that we'd like to propose. But in the meantime, we've already got our engineering and construction function working on a very good, prudent project that we could deploy capital, that we would file next year after all the rules are set in advance of the commission's ability to deal with those so that we could execute as quickly as we prudently could after we're authorized to do so. And our goal would to be very tied on that timing so that we are getting these projects in for system reliability and safety for our customers, and we're deploying capital so that we can earn return on them.

John W. Somerhalder

But you are right. It is a slight delay for us compared to potentially what the other utilities in Illinois will be able to do. But as Hank indicated, we don't think it's a material delay, and it actually works pretty well with timing to make sure we have the best program in place and we can ramp up the engineering and all of the contracting around making sure we're ready to go. So it still works well for us, even though it has that slight delay.

Daniel M. Fidell - U.S. Capital Advisors LLC, Research Division

Great color there. Just final question for me. On the cargo segment, if you could just maybe talk a little bit about the long-term strategy there. And just potentially, is that an area that could be used as a source of funds for some other growth opportunities you have in front of you?

Andrew W. Evans

We -- our principal focus there is just making sure that, that business returns to really good levels of earnings. We've got fantastic management in place, and they've been serving their customers really well this year. The #1 focus is just to get utilization of those fleet up to historical levels. That is actually pretty close to that and then hopefully, see some improvements in rate. We're about to hit sort of the most important season for that business, and we'll see some seasonal TEU surcharges. But I don't know. I just have to say that short term, our focus really is just getting that business back on stable footing. We're seeing some loss of competitors in that market. We've seen a couple of competitors leave a couple of particular ports that we serve. And we just want to make sure that we've got good service going to those areas because there's still customers down there.

Operator

At this time, there are no additional questions in the queue. And I would like to turn the call back over to management for closing remarks. Please proceed.

Sarah M. Stashak

Thank you for joining us today. If you have any follow-up questions, feel free to call me, and we'll address them. Thank you.

Operator

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

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