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Nicor Inc. (NYSE:GAS)

Q3 2010 Earnings Conference Call

November 2, 2010 9:30 AM ET

Executives

Russ Strobel – Chairman, President & CEO

Kary Brunner – EVP and CFO

Rick Hawley – Director, IR

Operator

Thank you for your patience. Your conference call will begin in just a moment. Again, we thank you for your patience and please continue to standby. Good day, ladies and gentlemen, and welcome to Nicor’s Q3 2010 Earnings Conference Call. My name is Francine and I am your operator for today. (Operator Instructions). I would now like to turn the presentation over to your host for today’s call, Mr. Russ Strobel, Chairman, President and CEO. Sir, you may proceed.

Russ Strobel

Thanks, Francine, and thank you all for joining us. With me today on the call are Rick Hawley, our CFO, and Kary Brunner, our Director of Investor Relations. This morning we’ll discuss our 2010 Q3 financial results and our annual outlook for 2010 earnings. When we’ve completed our remarks we will be happy to take your questions. Let me now turn things over to Kary.

Kary Brunner

Thanks, Russ. First I’d like to remind you that this call will include certain forward-looking statements about the operations and expectations of our company, 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 Q3 2010 diluted earnings per share were $0.30, compared to $0.30 per share for the same period in 2009. For the nine month ended period, diluted earnings per share were $2.15 compared to $1.77 per share in 2009. Results for the three and nine months ended September 30th, 2010, included the positive effects of a reserve adjustment of approximately $1.3 million pretax related to our mercury inspection and repair program. Let me now turn things over to Rick, for the discussion of our 2010 results, and our outlook for the remainder of the year.

Rick Hawley

Thanks, Kary. Good morning everyone. Excluding the mercury item that Kary just mentioned, Q3 2010 diluted earnings per share compared to 2009 reflected higher operating income at our gas distribution and other energy related businesses, partially offset by lower operating income at our shipping businesses and lower corporate operating results. For the year to date period 2010 versus 2009 comparisons, excluding the aforementioned mercury item, reflected higher operating income at our gas distribution and other energy related businesses, as well as improved corporate operating results partially offset by lower operating income at our shipping business. The nine month ended comparisons also reflected lower pretax equity investment income and a higher effective income tax rate in 2010.

Gas distribution operating results for the Q3 and year to date 2010 periods were up compared to 2009. Year to date comparisons reflected the benefit of the rate relief approved in 2009, partially offset by decreased natural gas deliveries due to 10% warmer weather in 2010 compared to 2009, and lower interest on customer balances. Year to date gas distribution operating results were also impacted by lower operating and maintenance costs including lower company use and storage related gas costs, lower pension expense, and lower reported bad debt expense. As we’ve mentioned in previous calls, a bad debt tracker was approved in February, 2010, allowing Nicor Gas to recognize a $31.7 million pretax benefit in the Q1 of 2010 attributable to 2008’s and 2009’s net under-recovery of bad debt expense. The benchmark against which 2010 actual bad debt expense will be compared to is approximately $63 million.

The key takeaways from an economic perspective versus the bookkeeping that you will see for bad debt is that in 2010 we received $32 million pretax benefit for the years 2008 and 2009 as I just mentioned, and our 2010 annual costs net of (inaudible) revenue and excluding the $32 million will be $63 million. Finally, year to date 2010 gas distribution operating income, compared to 2009, reflected higher depreciation expense.

Nicor Gas’ annual outlook for 2010 operating results remains in line with our earlier expectations, which as we indicated in our August call, we expect to be higher than last year’s levels. With Illinois difficult economy, we have seen modest declines versus our budget and weather-normalized demand, but we have managed our costs effectively through the first nine months of the year in order to mitigate this negative impact. As a result, we continue to expect a solid performance by Nicor Gas.

Moving on to our shipping segment, Tropical had Q3 operating income lower than 2009 and lower than our earlier expectations. As we have discussed in previous calls, we are seeing softness in our volumes and rates due to the effect of the challenging market economics in the Caribbean and the Bahamas. While we believe we are generally maintaining our market position, overall demand appears to be down. Tropical’s management implemented a number of initiatives in 2009 and 2010 focused on revenue enhancement, asset utilization, and reduction of controllable costs to offset the negative impact of lower than anticipated results. These initiatives have partially but not entirely reduced the negative bottom line effect of lower than expected revenues. As a result, we currently estimate that Tropical’s full year 2010 after tax earnings will be approximately $18 million.

Our attention remains on efforts to both minimize the short-term impacts of this economic environment and to position Tropical to enhance its long-term value. We took another step in this effort last month when we acquired the assets of VI Cargo Services. While this acquisition was small in relation to Tropical’s total volumes, it continues the strategic expansion that we have seen over the past couple of years of our footprint in the Caribbean region for less-than-container-load volumes.

Moving on to our other energy ventures, our other energy ventures year to date 2010 operating income was up compared to last year due to higher operating income at our retail products and services business and at our wholesale natural gas marketing business. We currently estimate that our other energy ventures will perform in line with our budget, even though our current estimates for the Q4 gas prices push about $3 million of previously anticipated 2010 GAAP net income out in the future years. Year to date 2010 corporate operating results compared to 2009 were up due to the weather related impact associated with certain of our retail utility bill management products. Finally, year to date 2010 comparisons reflected the absence of the gain recorded in the Q1 of 2009 in the sale of the company’s equity stake in a joint venture, Ian Engineering, of approximately $10 million pretax or $6 million after tax.

Moving now into our earnings guidance, we currently estimate 2010 diluted earnings per common share will be in the range of $3.00 to $3.10 versus the $3.10 to $3.30 guidance from the Q2. As I previously mentioned, Tropical’s lower than anticipated operating results were the driver for this revision. Consistent with prior guidance, our annual outlook excludes among other things any future impact associated with the ICC’s performance-based rate plan and purchase gas adjustment review, other contingencies, or further changes in the tax law. Our estimate also does not reflect the additional variability in earnings due to fair value accounting adjustments and other impacts that could occur because of future volatility in natural gas markets. Our estimate for Nicor Gas is based on historical weather patterns. As a reminder, we will provide updates to our annual earnings outlook only as part of our quarterly and annual earnings releases. With that, let me now turn things back to Russ for a wrap up.

Russ Strobel

Thanks, Rick, and I’d like to close by making several points. First, Nicor’s consolidated financial results for the first nine months of 2010 were modestly less than we had originally anticipated, but they were good considering the current overall economic environment, especially in the markets that Tropical serves. At Nicor Gas, we delivered year to date results that were modestly ahead of budget as our tight cost controls and intense focus on operating efficiencies helped to offset the impact of lower gas deliveries due to warmer weather and the weakened economy. These continued efforts are expected to enable us to achieve our full year outlook for this business.

Tropical Shipping faced challenging market economics in its service territories throughout the first nine months of the year. Progress has been made on revenue enhancement and on cost containment strategies that we believe help reposition Tropical for the current economy. We continue to focus on aggressively managing controllable costs to offset the negative impacts of lower revenues in this business. And in particular in the Q3, we took additional steps towards improving our performance with selected rate increases operational adjustments focused on asset utilization. Also, as Rick mentioned, the purchase of VI Cargo Services was another addition to our strategic expansion of the more profitable less-than-container-load business in the Caribbean. This acquisition, though relatively small, further demonstrates Tropical’s ability to take advantage of opportunities, even in the current downturn. Our other energy related businesses continued to perform well, and we expect full year operating results will be in line with our budget. We’re also pleased to have received approval last month from the CPUC for our Central Valley gas storage project in Northern California. That was an important step in our plan to develop these storage assets to serve the West Coast markets, and we look forward to starting construction on this process at the beginning of the coming year.

In closing, let me reiterate that Nicor remains very strong financially with credit ratings that are the highest in our industry. Our cash flow remains strong and enables us to continue to pay a solid dividend to our shareholders, something that we have now done for 56 consecutive years. And with that, we’ll be happy to take your questions.

Question-and-Answer Session

Operator

(Operator Instructions.) Sir, we have no questions. Ladies and gentlemen, I’d like to turn the call back over to Mr. Russ Strobel. Sir?

Russ Strobel

Okay. Thank you all for joining us this morning and have a great day. Thanks.

Operator

Ladies and gentlemen, we thank you for your participation in today’s conference. This concludes today’s presentation. You may now disconnect and have a great day.

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