Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Executives

Steve Cave, VP, Finance

John Somerhalder, Chairman, President and CEO

Drew Evans, EVP and CFO

Hank Linginfelter - EVP

Bryan Batson

Ralph Cleveland - EVP

Peter Tumminello - EVP

Analysts

Craig Shere - Tuohy Brothers

Ted Durbin - Goldman Sachs

Ryan Rosenthal - Sidoti & Company

Gordon Howald - East Shore Partners

AGL Resources Inc. (AGL) Q2 2010 Earnings Call July 29, 2010 9:00 AM ET

Operator

Good day ladies and gentlemen and welcome to the second quarter 2010 AGL Resources Earnings conference call. At this time all participant are in a listen-only mode. Later we will conduct a question-and-answer session. (Operator Instructions). As a reminder this conference is being recorded for replay purposes.

I would now like to turn the call over to your host for today Mr. Steve Cave, Vice President of Finance. You may proceed.

Steve Cave

Okay thank you Francis and good morning everyone. Thanks for joining us today to review our second quarter and year-to-date earnings results. With me on the call today are John Somerhalder, our Chairman, President, and CEO and Drew Evans, Executive Vice President and CFO. We also have several members of our management team here to answer your questions following our prepared remarks. Our earnings release and Form 10-Q filing are both available on our website, if you do not have copies already.

And let me remind you today that we will be making some forward-looking statements and projections and our actual results could differ materially from those statements. The factors that could cause such material difference are included in our earnings release and our Form 10-Q and are further detailed in the latest Form 10-K filings.

We also describe our business using some non-GAAP measures such as operating margin and EBIT and a reconciliation of those measures to the GAAP financials is available in our earnings release. We will begin with some prepared remarks today before taking your questions and with that let me turn it over to John.

John Somerhalder

Thank you Steve and good morning everyone. Today we reported second quarter earnings of $0.17 per diluted shares. These results are down $0.09 from the results for the second quarter of last year. There are a couple of significant drivers or our quarterly results. First and most significantly just as in prior years we can have hedged gains and losses on our storage and transportation hedges at our wholesale services business.

With an offset in gain or loss occurring in future periods as the economics are fully realized on the hedge storage or transportation positions. During the quarter we had hedged losses primarily from our transportation hedges and to a lesser extent our storage hedges. That value will be recognized in future periods as the positions go to physical delivery or otherwise settled.

Last year we had the opposite effect, which is that we had hedged gains on both storage and transportation hedge positions during the quarter. The second driver is related to the impact of weather on our retail business SouthStar. We are off to a good start with SouthStar year-to-date as the weather in the first quarter was 30% colder than normal in Georgia. In the second quarter however weather was 50% warmer than normal and was particularly warm in April resulting in SouthStar’s lower results for the quarter.

We also completed the sale of our AGL Networks business on July 1. The results for the quarter include $0.02 per share related primarily to the sales cost on that transaction which was consistent with our expectations. Importantly through the first six months of the year our earnings results of $1.90 per diluted shares are up $0.09 compared to prior year year-to-date results.

As a result we continue to be on track to meet our 2010 earnings guidance range of $2.95 to $3.05 per diluted shares. We have had strong performance from each of our business units to help us achieve these results and Drew will describe each of the business unit variances in more details in a few minutes. Before we do that I would like to briefly describe a couple of the major operational and regulatory issues we will focus our attention on in the second half of the year.

As you know we filed the Atlanta Gas Light rate case in early May requesting a total of $54 million to recover prudently incurred investments we had made in the business and increases in estimated operated expenses. The requested increase would raise the typical customer’s annual gas bill by approximately 3%.

The Atlanta Gas Light has not been authorized to increase its base rates for customers since 1993. The outcome of our last rate proceeding required the company to file this rate case now and we believe it is important that we be allowed to recover the prudent cost of operating our business and improving our customer service platform.

We believe that our request is a very reasonably one given the significant amount of time that has elapsed since our last rate increase in Georgia and the stability in base rate customers have seen over that time period. The hearings in the case will begin in late August and we anticipate a decision by the Georgia Public Service Commission in early November. Both Hank Linginfelter and Bryan Batson are here and can answer any specific questions you have about the rate case.

Turning to our unregulated operations, we have made very good progress on a couple of projects in our pivotal business. We continue to make excellent progress on building our Golden Triangle storage facility in Texas and are planning to begin initial commercial operation for the facility in September. We have leased the cavern and are now nearing completion of the nine mile pipeline header system and finalizing work on the compressor station.

We planned to begin injecting gas into the system in mid to late August in preparation for commercial service. We also have begun the leasing process on the second cavern which is now about 10% complete and remains on schedule for an end service date in early to mid-2012. As we have discussed before we currently have one-third of the first contract cavern contracted and we plan to begin services on that contract when we begin commercial operations and we will make a decision on contracting the remaining capacity as we get closer to full commercial operations.

We also made progress on moving forward with the expansion of our Jefferson Island salt-dome storage facility in Louisiana. At the end of June we filed the required permit applications with the Louisiana Department of Natural Resources. We expect the permitting process to take somewhere in the range of six to nine months. We are continuing to define the engineering project scope of the expansion in order to determine the revised projects schedule and cost estimate. And we will be able to provide you with more detail around that as we get closer to the beginning of construction. We feel very good about the progress on each of these major initiatives and about the progress we have made year-to-date in achieving our earnings targets for the year.

I will now turn it over to Drew for the financial discussion.

Drew Evans

Thanks John and good morning everybody. I will cover a few of the major segment variances and then we can go to your questions. Focus here on the year-to-date variances compared to the prior period not so much on the quarter although Sequent results probably fare a little more explanation around results for the quarter as well as for the year.

The 10-Q that we filed this morning provides most of the operating margin and expense reconciliations you need for the quarter by reporting segment. Our distribution business has performed very well year-to-date. EBIT for that business is up $12 million compared to the first six months of last year. The increase is principally due to the addition of earnings for pipeline projects we couldn’t service last year. That’s the Hampton Roads Crossing in Virginia and Magnolia project in Georgia.

We also benefited from significantly colder than normal weather in the first quarter of this year particularly in Florida and from new rates at Elizabethtown Gas following the rate case settlement in December of last year. Utility expenses were up $6 million primarily because of higher payroll and incentive expenses related to improved corporate results year-over-year and to a lesser extent higher depreciation expense.

Turning to the retail marketing segment EBIT is up $7 million compared to the prior year. The increase is largely a function of higher average customer usage particularly during the first quarter when weather in Georgia was 30% colder than normal. We also saw increased margins in the Ohio and Florida markets offset somewhat by a decline in the average number of customers and a change in the retail pricing plan mix in the Georgia market.

The year-over-year comparison also benefits from a $6 million lower cost to market adjustment (inaudible) taken during the first quarter of 2009. We reported no similar adjustments in either of this year’s quarters. And SouthStar’s operating expenses were flat relative to the prior year. John described it earlier but as we normally see with Sequent quarterly reporting results can be more volatile for this business and for other business segments, particularly in the second and third quarters. This is because we are building inventory and locking in profits of physical delivery, changes in market prices for natural gas will cause us to support either gains or losses on these hedges despite the fact that there is no change in the underlying economics of the transaction.

Commercial activity at Sequent improved $10 million quarter over quarter but price movements this year produced hedge losses of $8 million versus hedge gains last year of $13 million. The heads movements this year which are primarily associated with our transportation capacity positions will unwind in future periods as these positions are sold or in the case of storage hedges when the GAAP inventories are withdrawn and sold later this year and early next.

On a year-over-year basis commercial activity is up $21 million while changes in hedge values increased the year-over-year variance by $33 million. Our storage roll out schedule which is included in our Form 10-Q reflects $25 million of value to be realized in future periods. We also recorded $8 million of LOCOM adjustments in 2009 for the first six months and have reported $4 million of similar adjustments during the first six months of 2010.

Operating expenses were down $7 million year-over-year at Sequent largely a function of lower incentive compensation expense. Turning to energy, the energy investment segment, the variance explanation will be procurement for a while due to the sale of AGL Networks or dark fiber telecommunications business. As John mentioned we have now closed the sale of that business. As you know we have operated that business for about 10 years and while it was profitable it did not fit into our core strategy and so we capitalized on an opportunity to sell it to a company that is primarily focused in the telecommunications business and is better able to make more significant capital investments towards growing the business in the future.

As we have stated before, our earnings guidance for the year does take into account the effect of the AGL network sale including the absence of income from that business in the second half of the year. Interest expense for the first six months of 2010 is up $5 million over the same period of 2009 and that principally reflects the additional interest expense associated with our $300 million issuance of senior notes in August of last year.

Those were the major drivers. Let’s go to your questions now.

Question-And-Answer Session

Operator

(Operator Instructions) Our first question is from the line of Craig Shere with Tuohy Brothers. You may proceed.

Craig Shere - Tuohy Brothers

Two questions for you. First in the last quarter not only for you all but for other companies the size and duration of development costs for pursuing major storage expansion programs have come increasingly focused. It’s not unlike your cost increased a bit again this quarter. Can you speak to the absolute level of development overhead costs for storage the trend of those costs over the next couple of years and whether we should anticipate any sunset or these costs would eventually go away as the gas storage is brought online. And just the second question is can you just generally speak to the competitive pressures at SouthStar, is this the new norm or are competitors temporarily sacrificing margins for market share and unsustainably long term strategy.

John Somerhalder

Craig I will start out with development costs related to storage and what we have seen is development cost consistent with what we had anticipated. Now I will break it into several different categories but one category relates to the actual construction cost at the facility and Golden Triangle as an example, those costs had been fairly consistent over the last year of what we had anticipated. We do see as we come near to end service a few million dollars on a $300 plus million presence. We have seen small variances and small things we’ve had to incur but it’s been very consistent with what we had anticipated.

At the same time there are certain things that we are expensing out as we are developing those facilities. We have some taxes and other issues but that’s in line with what we had anticipated and then what we are spending to develop other projects that actually fairly see consistent with the last few years. So even though you’ve seen those costs hit we are seeing costs consistent with what we had anticipated over that time period and I might ask Ralph or Drew to comment further but if there’s anything else you can think about on that issue.

Drew Evans

Craig I think I understand your question which is what’s the run rate for development and at what point you stop developing and I think pivotal is a segment for us that’s bit of a corporation in its own right and a number of the expenses that they are incurring will also be important from the ongoing maintenance and operation of these assets and so rather than seeing some large cost reductions we will likely see a transfer of time commitment and materials to these operating assets as opposed to a focus on development but I would say we are spending a whole technical lot on looking for new storage opportunities, some but not a significant number if you look at the pivotal expenses.

Ralph Cleveland

And then Craig on the issues related I think to the Georgia market, yes we have seen essentially with the economic times and just as the markets mature we have seen customer shop to a greater extent and I think that’s driven the change as much as anything and even though that could be shorter term we may see that reverse. We are planning on that trend to continue. In fact we are managing that and we’ve stabilized that in the way we think is important but we are not anticipating a major change from what we are seeing right now and Mike Braswell was here if you want to comment further on that Mike.

Mike Braswell

No I think he covered it well. The good thing we’ve seen this year on market share is its stabilized year-to-date, market share is about the same spot where it was in January in terms of the mix we’ve seen that increase moderate somewhat. So at this point it appears to be like John said it’s a macro economic driver primarily the consumer shopping and competitors reacting to it but it appears to moderate somewhat.

Craig Shere - Tuohy Brothers

So the majority of the headwinds you’ve been facing in terms of competitive pressure have not necessarily started with or mostly come from pricing decision and competitors but I guess changes in consumer behavior.

Mike Braswell

I would say that’s the primary driver. It is just in 2008 when you saw the economy shift really what you saw is a lot of consumers across all retail industry really out there value shopping more than it had in the past. So I think that’s really the initial drivers just consumer valuing shopping to try to improve their own situation at home and then you see competitor rafting about it.

Craig Shere - Tuohy Brothers

I appreciate it, look forward to seeing you Drew next month.

Operator

Your next question from the line of Ted Durbin from Goldman Sachs, you may proceed.

Ted Durbin - Goldman Sachs

I guess the first question is just saying about the SouthStar side of thing, you had a transaction announced not really ago to actually sell some storage would you consider monetizing your position is the market does people kind of content with this assets is something that you start getting out whether it’s Golden Triangle or Jefferson potential.

John Somerhalder

Ted right now we feel like it’s a very good fit with the rest of our business if you look at our distribution operations business which makes up about 70% of our income and then the balance we have with retail and with our wholesale business and the experience we have in those businesses it’s a good fit both from a standpoint of size of that business and what we think we can grow to as well as how it fits with our understanding of our natural gas market in total so at this point no, we are looking to further develop Jefferson Island and built out Golden Triangle and that’s our plan. We are not looking at monetizing at that time. But you do bring up a very good point and that is we saw what we believe to be very good values as a example for the asset that recently sold the spectra.

Ted Durbin - Goldman Sachs

And then maybe just a little bit more detail on the Atlanta Gas, Light rate case, have you kind of gotten some signals from staff in terms of some of the things you are asking for like recapturing some of the merger savings on the (NUI) deal, and your capital expenditures on the call centre and what not, maybe just a little more detail there.

John Somerhalde

I’ll let Hank and Bryan discuss that.

Hank Linginfelter

Thanks for the question Ted. Our staff will file their testimony soon and they always file very aggressive testimony usually in the opposite direction where the company is so we will know a lot more where staff is when they file. We’ll have hearings pretty soon week or two and then we will know a lot more about where all the positions come out. But the moment we think the case is just as solid as the day we filed it and you might recall the components but the base case is $18.5 million so traditionally rate case recoveries that we are seeking and several other things little over $7 million in depreciation which would be a cash recovery with no EBIT attached to it. About $14.5 million of the synergies component and it’s a policy question for the commission to deal with whether they want to encourage AGL that way to be a acquirer because the utility customers have benefited from AGLs acquisition over the years. And finally as a $13.5 million in service enhancement that we like to do for technology and customer service quality over the next year or two so it’s those component sometime with spending with recoveries and sometime with just a entry for depreciation base case is $18.5 million of the $54 million is the more traditional view. And we will know a lot more where the commission is in.

Ted Durbin - Goldman Sachs

Okay, thanks Hank I appreciate it and then if I could just do one more little bit more on your joint venture you announced with El Paso. How much capital or how much human resources are you are going to put into this. How are you thinking about the technology safety which would get the regulator involved, can we just get a little more detail there.

Drew Evans

Ted at this point really over the next 6-9 months we are in a really early development phase on that but importantly there is several things that have lined up very well for us and that is that we own and operate LNG infrastructure and importantly as an example where and Elba Island is located, they have access to LNG that can be trucked to a large southeast very efficiently. So it positions us very well to serve in the southeast which is about 25% of the trucking market. What we’ve seen is we not only have the climate change benefits of 25% 30% reduction in carbon footprint with relative price of oil and gas right now with almost 3 to 1 you have a huge cost advantage and the technology has moved significantly and that’s what we are be looking into very quickly as the technology related not only the engines but in the storage but the technology has moved significantly giving ranges closer to where a diesel truck is. So all that needs to pieced together but importantly we’ve received a word back from (inaudible) on our ability to do this related to the Elba Island facility that’s been very positive. So good progress till date but we are spending fairly minor dollars and minor resources over this next 9 months or so to really better define all those issues. And then we can start to answer the questions in a little bit more details.

Operator

(Operator Instructions) your next question is from the line of Ryan Rosenthal from Sidoti

Ryan Rosenthal - Sidoti & Company

My question concerns your wholesale service business and the dynamics we are seeing there in terms of the improvement in commercial activity, can you discuss kind of what you are seeing in terms of the forward curve right now.

Peter Tumminello

This is Peter Tumminello from Sequent. I’ll be glad to address that. In the forward market obviously the natural gas environment being impacted by lot of the shale activity, Haynesville, Marcellus and other significant shale developments. Sequent is very active in providing services to those producers and so we are seeing a lot more commercial activity around that activity to support those producers’ growing volumes in shale. And secondly as we see the heat this summer we are seeing a lot more activity around serving power generation loads. So in terms of market dynamics we are seeing right now, our business befitting in a commercial activity standpoint from those two areas. The area is a little bit of challenge could be where transportation portfolio, it could be negatively impacted because of the additional shale so it’s a little bit of offset to those benefits. But that I think gives you a good view of the commercial activity that we are seeing.

Ryan Rosenthal - Sidoti & Company

Following up on that, in your release you did mention that you did see some widening transportation basis right at the starting of the quarter. I’m curious about that given the dynamics for the shale play seems to be narrowing those spreads overtime.

Peter Tumminello

And where you will see some of the basis spread widening or in areas typically where this is not as much as shale activity in the Midwest and the western part of our portfolio and so as we’ve grown that business over the last four or five years. We’ve developed more diversity in our portfolio and our transportation activity has increased significantly in those two regions.

Ryan Rosenthal - Sidoti & Company

And then turning to SouthStar, could you provide the variance in terms of year-over-year with the effect of weather versus the effect of the customer portfolio changes.

Drew Evans

Looking at the year-to-date variance for customer portfolio versus others.

Ryan Rosenthal - Sidoti & Company

Over the third quarter if you have that as well.

Drew Evans

Okay for the quarter its in the queue if you look at the, if you want to say, decreased usage and warmer than normal weather this quarter as well as the colder the normal weather last year, that’s the other thing to remember that variance also incorporates colder the normal weather last year, that was about $3 million and $3 million reduction due to plan in mixed component for the quarter. And then if you look at year-to-date the weather is up about $4 million netted against I’ll say some other GAAP cost and other related items that net against weather when you see higher weather. There are other things that mitigate the positive impacts so that’s about $4 million and then if you look price plan mix the numbers of customers that’s a reduction of about $4 million year-to-date.

Operator

Your next question is from the line of the Gordon Howald from East Shore Partners

Gordon Howald - East Shore Partners

Hank alluded earlier to M&A and how AGL is looking at the (AGLC) rate case for sort of the PUC’s be one consolidation but how are you looking at consolidation in the utility industry from a big picture standpoint and maybe specifically for AGL?

John Somerhalder

I think our position very consistent over the last few years and we do believe that consolidation makes sense in our industry that there are economies of scale. And we’ve shown and continued to show to be a very good operator of distribution operations and gas LDC and have a very good metrics related to how our cost benchmark against our competitors. So we do think that’s logic and there have been limited opportunities but we’ve obviously continued to look for those opportunities but our general belief that consolidation does make sense and that we are logical acquirer or of those type of asset. So we will continue to look, everybody probably gets tired of me saying this but be very careful and disciplined about how we do that and Drew would you like to add any.

Drew Evans

I think probably we talked about this with the board yesterday and the data that we looked at showed 11 LDC transactions since 2006 or 2007. We’ve been pretty active on good portion of those and we will continue to look, it’s an interesting environment but got to think or so.

Gordon Howald - East Shore Partners

Gentlemen would there be opportunities as given your background on the pipeline side, anything outside of the strict (LEC) environment.

John Somerhalder

We’ve had very limited opportunities but important as an example we built Magnolia with El Paso that was only a little less than $50 million project but it’s still a nice contributor to EBIT and earnings. Something unrelated to my background HRX was a good project for us but only those few cases that really fit with our infrastructure it doesn’t seem like we have a competitive advantage or real ability to enter so. Gordon I don’t see any large transaction along those volumes that really fit as well with us, that’s not to say that won’t be the case in the future but at least till date we haven’t identified anything outside of those more defined discreet project that’s fit with our other infrastructure

Gordon Howald - East Shore Partners

And all my other questions have been answered so I appreciate it. Thanks.

Operator

And there are no other questions in the queue and I will now like to turn the call back over to Steve Cave for closing remark.

Steve Cave

Thank you Francis and thanks for joining us today and give us a call if you have any follow-up question and have a good day.

Operator

And ladies and gentlemen thank you all for your participation in today’s conference call. This concludes the presentation and you may now disconnect.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: AGL Resources Inc. Q2 2010 Earnings Call Transcript
This Transcript
All Transcripts