Nicor Inc. Q3 2009 Earnings Call Transcript

Nicor Inc. (GAS)

Q3 2009 Earnings Call Transcript

October 30, 2009 9:30 am ET

Executives

Russ Strobel – Chairman, President and CEO

Kary Brunner – Director, IR

Rick Hawley – EVP and CFO

Analysts

Igor Grinman – Zimmer Lucas Partners

Dave Parker – Robert W. Baird

Presentation

Operator

Good day, ladies and gentlemen, and welcome to the Nicor third quarter earnings conference call. My name is Jeff and I will be your operator for today. (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, Mr. Russ Strobel, Chairman, President and CEO. Please proceed, sir.

Russ Strobel

Jeff, thanks. Good morning to everyone 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. We are going to discuss our 2009 third quarter and year-to-date financial results and our annual outlook for 2009 earnings. When we are done with our remarks, we will be happy to take your questions.

Let's now turn things over to Kary.

Kary Brunner

Thanks, Russ. First, I would like to remind you that this call will include certain forward-looking statements about the operations 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 third quarter 2009 diluted earnings per share were $0.30 compared to $0.03 per share for the same period in 2008. For the nine months ended period, diluted earnings per share were $1.77 compared to a $1.58 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.

Rick Hawley

Thanks, Kary, good morning everyone. Compared to 2008, third quarter 2009 diluted earnings per share reflect improved operating income in the company's gas distribution and other energy related businesses and improved corporate results offset by lower operating income in the company's shipping business. The third quarter comparisons also reflect a lower effective income tax rate partially offset by lower pretax equity investment income in 2009.

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

Our year to date gas distribution business results 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 2% warmer weather in 2009 compared to 2008. While both years were colder than normal, 2008 was a just bit more so.

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

Looking ahead, we are expecting Nicor Gas to deliver solid 2009 operating results, due primarily to the benefits of the rate case approved in March and subsequently updated earlier this month with the rate case rehearing decision combined with continued success in our cost control efforts.

Moving to our shipping segment, Tropical’s year to date operating income was lower than 2008 due to the continued adverse impacts of the challenging economic environment on volume shipped. Management of Tropical continues to make operational adjustments focused on shipping schedules and asset utilizations while implementing cost containment initiatives that have been successful in reducing the impact of lower volumes. We believe success in these and other efforts will allow Tropical to provide solid earnings for the year despite the volume shortfalls.

Our other energy ventures year to date 2009 reported income was up compared to last year, due primarily to higher income at our retail products and services business and our wholesale natural gas marketing business. We currently estimate that both businesses will perform at least in line with earlier expectations. Nine months ended 2009 corporate operating results compared to 2008 were lower, due primarily to the absence of a prior year legal recovery partially offset by lower legal and business development costs and the weather related impact of 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 nine months ended 2009, the corporate segment recorded a $2.8 million pretax cost associated with this hedge compared to a $3.6 million pretax related cost in the same period of 2008. The amount of the offset will vary depending on a number of factors but has typically ranged from around 35% to 65% of our gas company's annual weather impact.

Under terms of a corporate swap agreement, the benefits of costs associated with the retail products resulting from variances in normal weather are recorded primarily in corporate operating results. Year to date 2009 results compared to 2008 also reflect lower interest income due primarily to lower average rates, lower average investment balances, and lower interest on tax matters.

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 of the sale of the company's equity stake in a joint venture EN Engineering of approximately $10 million pretax, $6 million after tax. We continue to estimate that the gain on the transaction, net of the absence of the 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 results of our rate case hearing. On October 7, 2009 the Illinois Commerce Commission approved $11 million increase in the annual base revenues as part of its decision on rehearing in our Nicor Gas rate case. You may recall that the ICC had granted our request for rehearing on the capital structure contained in the ICC’s March rate order. In its rehearing decision, the ICC reduced the amount of short-term debt imputed into our capital structure for rate making purposes for about $256 million to about $128 million, raising our return on rate base from 7.58% in the March order to 8.09% as of the October order. New rates became effective October 15, 2009 on a prospective basis. This $11 million increase is incremental to the $69 million increase approved in the ICC’s March 2009 rate order. Therefore, the total annual base revenue increase resulting from the rate case originally filed by Nicor Gas in April of 2008 is approximately $80 million.

Turning to our 2009 guidance, we have increased our 2009 diluted earnings per common share estimates to be in the range of $2.69 to $2.89. This is up from the previous guidance of $2.54 to $2.74, provided in our second quarter earnings call on July 31, 2009. As a reminder, these estimates include approximately $0.09 per share for the positive impact of the first quarter 2009 sale of our equity interest in EN Engineering. The upward revision to our guidance reflects approved earnings expectations for the gas distribution business, offset in part by a reduction in the expected earnings in the shipping business.

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 laws. Our estimate also does not reflect the additional future 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 annual earnings releases.

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

Russ Strobel

Rick, thanks. I'd like to close by emphasizing several points. First of all, we are pleased with Nicor's year to date results and with our forecasted performance for the year. Nicor’s consolidated performance in the face of the weak overall economy reflects our relentless emphasis on efficiency and cost containment under all market conditions and in all of our businesses. We are now seeing the benefit of new rates in Nicor Gas' results. We were pleased that the Illinois Commerce Commission granted rehearing concerning our capital structure and we believe that the outcome of that process was a positive step forward that provides a foundation for Nicor Gas to produce reasonable returns on equity.

I want to stress however that even with this increase in rates, Nicor Gas continues to be the lowest cost natural gas utility in Illinois and among the lowest in the entire nation. Nicor has and Nicor will continue its long tradition of being a low cost, high-value provider for its customers while at the same time maintaining its strong financial position for the benefits of all stake holders.

Tropical Shipping continues to see softness in volumes due to the economy's negative impact on tourism, construction, and overall activity in our service territory. But as Rick mentioned, Tropical like all of our companies is focused on cost containment and asset utilization. As a result, Topical has been effective in offsetting some of this continued downward pressure on margins. While below our initial expectations, Tropical has produced operating results that we believe are good in the context of the current economic climate, especially when one considers the recent press [ph] suggesting operating losses at many other shipping entities. Even in the face of our volume pressures, we are looking for this business to remain solidly profitable.

We are also pleased with the performance of our other energy-related businesses; they continue to add meaningful value to our consolidated operations with the full-year results forecasted to be at or at least in line with our earlier expectations.

Finally, let me reiterate that despite the difficult economic conditions that we are operating in, Nicor remains financially strong with credit ratings that are among the very highest in the industry, and we continue to pay a solid dividend. Our August dividend marked over 55 consecutive years of dividend payments to our shareholders.

Nicor’s financial strength along with the outstanding operating metrics in all of our businesses has enabled us to continue producing solid earnings during the most challenging economic environments in this generation.

With that summary, we will be happy to take your questions.

Question-and-Answer Session

Operator

(Operator instructions) Our first question comes from the line of Igor Grinman with Zimmer Lucas Partners. Please proceed.

Igor Grinman – Zimmer Lucas Partners

Hi guys, congratulations on the good quarter.

Russ Strobel

Thank you.

Igor Grinman – Zimmer Lucas Partners

Just wondering, besides for the additional rate increase in October, what is driving the increase in expectations at the utility? Is that lower operating costs?

Rick Hawley

Yes, if you look at the utility business, as we have said, we will pick up a little bit from the additional $11 million worth of interest. We actually picked up a little tiny bit from where we were in the second quarter. We continue to have success in our cost containment efforts, and by the way, it is a whole bunch of little things that add up to the differences, there is no one big one. And to be honest with you, even though we expect, and you can see from the press release demand being down from the prior year some of which was anticipated obviously in our projections for the rate case filing, our results through the third quarter are not really down as much as they were as we were forecasting out for the rest of the year in the second quarter. So, a little tiny bit of actually less demand weakness, I guess, if you want to put it that way, or strengthening from our forecast. Again, a bunch of little $1 million kind of items and they cumulated up to put us with good solid earnings, knock on wood, for the gas company for the year.

Igor Grinman – Zimmer Lucas Partners

Fair enough, and the cost containment, are those more temporary or can I consider those ongoing?

Rick Hawley

I think you can consider those ongoing. As you are well aware, we are at the top of all costs, top meaning good cost, cost metrics, among all of the AGA [ph] companies, which in one sense makes it a little harder to find savings but the culture here, which was here long before probably all of us in the room, is very much cost focused without sacrificing anything from the customer side and that just continues. We think, as I have said in earlier calls, we think it is very important now that we have got rate relief, to manage into the cost structure that the Commission provided in the rate case and that is what we have been successful doing so far.

Igor Grinman – Zimmer Lucas Partners

Okay, great, thanks guys.

Operator

Our next question comes from the line of Dave Parker with Robert W. Baird. Please proceed, sir.

Dave Parker – Robert W. Baird

Hi, good morning and congratulations. Just trying to get a little clarity on – utility did well, in order to look at the change from the rate order from the Illinois Commission and that being prospective, so does the third quarter then you get a sort of caught up since the original decision of March, is that the way it works?

Russ Strobel

No, all rate changes are prospective.

Dave Parker – Robert W. Baird

Prospective, okay.

Russ Strobel

Yes, I wish we had a catch up.

Dave Parker – Robert W. Baird

Nice, exactly right.

Russ Strobel

At least, the way it is working right now, any time there is an increase, I wish there is a catch up but –

Dave Parker – Robert W. Baird

So obviously we have had because of the rate (inaudible) change, we have got sort of a skewing or change from where we historically have had margin utilization, utility that play a part of it as well as rate relief, is that the way to look at it Rick?

Rick Hawley

I think that is the case Dave and you have hit it on the head; there were a number of good changes that came out of the rate case. We are obviously pleased that the Commission gave us the revenue increase with the rehearing decision. We have talked about earlier and I think going to your point, some of the rate design changes, moving up the customer charge, the way franchise gas is treated, the way the storage gas is treated, all of those things change the relationship that you might have seen for the way revenues come in and how they are shaped for the year. Once we are through this year, it will not matter on an annual basis, but as you look at quarterly shapings, you probably would be less dependent on weather volumes in the fourth quarter and in the fourth quarter than you would typically expect to be.

Dave Parker – Robert W. Baird

Okay. Then, when it is relative to the fourth quarter, obviously that will be a little different than what we saw in the fourth quarter of last year, like you said less weather dependent but also because of the mixed bill component is bigger and it moves a little bit into the second and third quarter, we ought to expect that to be down some, is that true?

Russ Strobel

You know, I do not do quarters so I cannot tell you that but I guess you can do the subtraction from the year ago but as a general theory perspective, that is right.

Dave Parker – Robert W. Baird

Okay.

Russ Strobel

There are just so many things, to be honest with you, when you look at, weather will be up or down earnings wise rather than just the individual elements, there is so many things going on between the quarters, as you well know, we will have rate relief this quarter, we will also have cost increases as a result of the things that drove the rate increase kind of a thing, but obviously if you back into it, you will see, but generally the shaping will change as I described it.

Dave Parker – Robert W. Baird

Okay, good. Maybe just – because I know in your prepared remarks, you gave a pretty good overview of Tropical but right now if there is anything else anecdotally that you are seeing, any change in demand or the economy or is it still, at least from what I see, it is still pretty tough going but I do not know if you had any rays of hope there?

Rick Hawley

(inaudible).

Dave Parker – Robert W. Baird

Like you said, it has been good, I cannot complain that your profitability has been bad, I was just wondering if you see any change in demand may be.

Russ Strobel

This is Russ. This is reading (inaudible) and we get data on this all the time as a kind of data available publicly on this. But my own personal view is that like, maybe the economy overall, it is not getting any worse. I am not prepared to (inaudible) better, but I think it is the declines, and maybe this is my innate optimism, but I think the declines have slowed or perhaps even stopped.

Dave Parker – Robert W. Baird

Okay, great.

Russ Strobel

The real key at Tropical is unlike a lot of containerized shipping companies. We do not just sit around and let things happen. Okay, so we take action with respect to our assets and where we deploy them to adjust as the markets adjust. That is what we have done and I think that is why we have been more successful than a lot of companies.

Dave Parker – Robert W. Baird

Great. Congratulations on a good year to date. Thanks very much for that color.

Russ Strobel

Thanks, Dave.

Operator

I would now like to turn the call back over to Mr. Strobel for closing remarks.

Russ Strobel

All right, Jeff, thank you and thank you all for participating in our call this morning. Have a great day!

Operator

Ladies and gentlemen, that concludes today’s conference. Thank you for your participation. You may now disconnect. Have a great day.

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