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Nicor Inc. (NYSE:GAS)

Q1 2011 Earnings Call

May 4, 2011 9:30 am ET

Executives

Rick Hawley - EVP & CFO

Kary Brunner - Director of IR

Analysts

David Grumhaus - Copia

Operator

Good day, ladies and gentlemen, and welcome to the Nicor's First Quarter 2011 Earnings Call. My name is Stacy and I will be your conference moderator for today. At this time, all participants are in a listen-only mode. We will conduct a question-and-answer session towards the end of the conference. (Operator Instructions) As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the presentation over to your host for today, Mr. Rick Hawley, Nicor's Executive Vice President and Chief Financial Officer.

Rick Hawley

Thanks Stacy. Good morning and thanks for joining us. I am Rick Hawley, Executive Vice President and Chief Financial Officer of Nicor. Joining me is Kary Brunner, our Director of Investor Relations. Russ Strobel, our Chairman, President and CEO is sidelined this morning with laryngitis and will not be participating on the call this morning.

This morning we will discuss our 2011 first quarter financial results and our annual earnings outlook for 2011 earnings. When we have completed our remarks we will be happy to take your questions.

Before we get into the numbers, let me touch briefly on our proposed merger with AGL Resources. As you know, in December 2010, we entered into a merger agreement with AGL Resources. The completion of the transaction subject to the customary conditions including among others, regulatory and shareholder approvals by both companies.

In the first quarter, we and AGL Resources initiated the regulatory approval processes through filings with the California Public Utilities Commission and the Illinois Commerce Commission.

Last week, the ICC staff and several other interveners that are participating in the proceeding submitted their initial testimony. That testimony recommended that the ICC deny our joint application or impose various requirements on us as conditions of approval. We plan to submit our rebuttal testimony to the ICC in late May.

Let me just say this. Nicor has always placed the utmost importance on our mission of providing safe and reliable service to our customers. This merger will not change that mission. In fact, customers can rest assured they will continue to receive the same reliable, cost effective service from the combined company.

In addition, we and AGL Resources believe that the combined company will serve customers better and more efficiently through the benefits of our greater scale and scope and as we share best practices. A merger of these two great companies will create a leading natural gas distribution company which will be headquartered here in Illinois. Importantly, AGL Resources has also committed to maintaining jobs at Nicor Gas to ensure quality service levels remain consistent as well as continuing Nicor's tradition of contributing to the well-being of Illinois by honoring our current philanthropic commitments.

In early April, we also filed our Hart-Scott-Rodino notification with the Federal Trade Commission and Department of Justice. On April 18, we were granted early termination of that HSR waiting period. We are currently planning to seek shareholder approval for the merger at our June 14 special shareholders' meeting. You can find additional information relating to the proposed merger in the joint proxy statement and prospectus contained in the S4 registration statement that was filed with the Securities and Exchange Commission by AGL Resources and is expected to be mailed to shareholders next week.

With that, now, let me turn things over to Kary as we get into the numbers.

Kary Brunner

Thanks Rick, and good morning everyone. First, I would like to remind that this call includes certain forward-looking statements about the operation 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, this morning, preliminary three months ended March 31, 2011 diluted earnings per share were $0.98 compared to $1.33 per share for the same period in 2010. Excluding the approximately $0.42 per share one time benefit related to the bad debt tracker last year's first quarter result would have been about $0.91 per share.

Let me now turn things back over to Rick for the discussion of our first quarter results and our annual outlook for 2011.

Rick Hawley

Thanks Kary. Three months ended 2011 diluted earnings per share compared to 2010 reflected lower operating results at our Gas Distribution and Shipping businesses as well as lower corporate operating results, partially offset by higher operating income at our other energy related businesses. The first quarter comparisons also reflected higher pretax equity investment income, lower interest expense and a lower effective income tax rate in 2011. Reported earnings included a reduction of approximately $0.02 a share for merger related costs.

Our first quarter 2011 Gas Distribution operating income was down compared to 2010, due to the absence of $31.7 million pretax benefit recognized in the first quarter of 2010 associated with the implementation of the bad debt tracker. This benefit was attributable to 2008 and 2009’s net under recovery of bad debt expense and was reported in 2010 as a reduction in operating and maintenance expense. If you exclude this item from 2010, operating income at the gas distribution company was up in 2011. First quarter Gas Distribution operating income comparisons also reflected increased natural gas deliveries due to 6% colder weather in 2011 compared to 2010, lower bad debt expense related to 2011 operations, and lower companies use in start related gas costs, partially offset by higher depreciation expense.

Moving to our Shipping segment, Tropical’s first quarter of 2011 operating results were lower than 2010 due to the adverse impacts on our volumes of the challenging markets and competition in the Caribbean and Bahamas. Improvement in our base rates and cost initiatives helped to soften this volume decline. Tropical's management took additional steps in the first quarter focused on revenue enhancement and cost reductions to mitigate the negative impact lower than anticipated volumes in revenue. We currently expect that these actions will help Tropical remain on track to achieve their annual plan despite the revenues short fall in the first quarter.

Our other energy ventures first quarter 2011 operating income was higher than 2010 as improved results at our retail products and services business were partially offset by lower results at our wholesale natural gas marketing business due to the negative impacts of low price volatility in the natural gas markets.

First quarter 2011, corporate operating results compared to 2010 were down due primarily to current year merger transaction costs associated with the proposed merger with AGL Resources, and the weather related impact associated with certain of our retail utility bill management products.

Finally, 2011 comparisons reflected an increase in equity income of $2.8 million from the company’s investment in Trident, a cargo container leasing company. Also the effective tax rate was lower in the first quarter of 2011 due primarily to an adjustment to reduce certain state income tax liabilities.

Turning to our 2011 guidance, we estimate 2011 diluted earnings per common share would be in the range $2.30 to $2.50. This range is the same as our guidance provided in our earnings call on February 23, consistent with prior guidance, our annual outlook excludes, among other things, the impact including any merger transaction and integration costs incurred in 2011 of the proposed merger with AGL Resources and any future impacts associated with the ICC’s performance based rate plan or purchase gas adjustment reviews, other contingencies or future changes in tax laws. 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.

Now, I want to close with several points: first, our consolidated financial results for the first quarter were solid. At Nicor Gas, the favorable weather together with, among other items, our continued focus on managing controllable costs put us ahead of our earlier expectations to this business.

Tropical's first quarter revenues were lower than we previously anticipated as the challenging markets in the Bahamas and Caribbean continue to impact volumes. It is important to remember that first quarter rates were up close to where we expected them to be. The additional actions that we took in Q1 focused on both rates and costs are expected to enable Tropical to achieve its year end target.

Looking ahead for our other energy related businesses, we currently expect full year operating results will be in line with our earlier expectations. Also, I am pleased to report that last month we broke ground on the construction of our Central Valley Gas Storage Project in Northern California. We continue to expect firm storage service to be available starting in early 2012.

In closing, let me reiterate that Nicor remains very solid financially with credit ratings that are among the highest in the industry. On that note, I wanted to mention that Nicor Gas has recently renewed it is $400 million seasonal credit facility and received positive market response on this renewal. Our cash-flows remain strong and enable us to pay a solid dividend to our shareholders, something we have done for 57 consecutive years.

Now, I will be happy to take the questions.

Question-and-Answer Session

Operator

(Operator Instructions). Your first question come from line of David Grumhaus with Copia. Please proceed.

David Grumhaus - Copia

Question for your obviously on the merger and the stat filing coming back against the transaction at least that this was laid out, I know you have got a rebuttal coming back, but can you give us some thoughts on where you think staff had had and what you think they are looking for you, looking from you also to satisfy them?

Rick Hawley

Sure. I appreciate the question and sure it's what's on everybody’s mind. As far as what staff had is that I guess I cannot comment on that, but I am looking at the Illinois order requirement, the statuette indicates the Commission won't approve the proposed reorganization if it finds that the reorganization will adversely affect utility's ability to perform as duties under the Act. Then there is much of bindings in the utility 6 or 7 findings the Commission must find in order to approve it, and things like that the reorg won't diminish the utility's ability to provide safe reliable service, won't result in unjustified subsidization of subsidiaries unfair allocation cost, restrict access to the capital markets, those kinds of things. So, it is fairly straight forward.

Obviously, the filing that we made with AGL we believe addressed all of those points including the commitment to maintain or actually move the gas distribution headquarters for the combined company here and a commitment to maintain levels of employment and investments in the community.

We thought that those were all important things to give the people that are actually going to be making a decision on this, the ICC commissioners. The comfort that the low cost service that we provide will continue. Obviously, this afternoon interveners have comments along those seven requirements, and you can go to the ICC website to address all of those but they are raising questions around, "Well, are you going to provide safe and reliable service?" Questions around cost allocations among the company. What are the access to the credit markets are going to be like, and what the cost is going to be? It is important to remember that and almost all cases with I think one exception, the staff members have suggestions about what could be done to put the Commission in a position to make these findings to approve the merger. So, we appreciate the fact that they put forth those statements.

The interveners, I do not believe any of them suggested denial of the merger, but they also had suggestion as to what could be done, what sorts of things we and AGL should do in order to get approval. As you said, we will file our rebuttal testimony. We obviously think we have addressed all those things in the original filing. We will try to make it clear in the rebuttal filing that we have in fact addressed those points. We will talk to the parties to see if there are reasonable things that can be done to let them know that we are not going to abandon our customers with this merger.

As we look forward in discussions of cost synergies etc, we have told everyone including on a number of these calls, one of the things you have to keep in context is Nicor has distribution rates that are around 40% or lower than the average for all major utilities in Illinois. We are always number one or maybe once in a while number two as far as the lowest gas costs and so, our customers are already benefiting to the tune of hundreds of millions of dollars a year because of those two things.

Those all provide context in which we think that we will address the concerns raised by staff and the interveners, and we are going to work diligently to get this merger approved.

David Grumhaus - Copia

Any update in the PBR case and is there any reason to think that Illinois will want this settled before the mergers can close?

Rick Hawley

Well, we did have a status hearing that was scheduled to talk about setting a scheduling hearing that was, you will be shocked to know, it was deferred. As far as we know, there is no requirement for the PBR to be settled as part the merger. We have had two ray cases in which the PBR didn’t came into to play. It has nothing to do with the findings the Commission has to make in order approve the merger. Having said that, I suspect the PBR will be a discussion point as we go forward and we will just have to see how that develops.

David Grumhaus - Copia

Switching gears just quickly on the performance, two things, one on the shifting side, sounds like you are trying to mitigate lower volumes. Does fuel cost have a big effect on you or is that something that is a pretty much a pass through?

Rick Hawley

We have the ability to tack on a fuel surcharge. What you se on that is a little bit of a lag and when that fuel surcharge gets adjusted, so we tend to lose a little bit on the upside and we tend to make it up when fuel prices start to drop. For the most part, it bounces itself out during the years. So fuel is not a major impact expect to the extent that we and others have to have fuel surcharges, it raises the cost of our customers, which is never a good thing.

David Grumhaus - Copia

Then lastly just on the tax rate. The tax rate was obviously a little lower this quarter despite the Illinois tax rate actually going up. Was that a one time adjustment in there, and is there sort of a tax rate that is embedded in your guidance.

Rick Hawley

Yes, if you look on and go forward I think you will see our tax rate will be in the mid 30’s going forward. I think it's we reported for the quarter. It is, as you pointed out, the result of an adjustment to certain tax reserves as we settled upon some uncertain tax positions. The numbers were not huge but in a quarter they can affect the tax rate, and in this case they affected it positively.

We have these things all the time and we had tax reserve adjustments last year also. So, I might not label them one-time but that’s what was driving the rates down. As you indicated, the Illinois tax rate did go up and on a normalized basis that probably, as you look out into future after you sort out all the various reserve adjustments etc, that probably cost us a couple of million dollars a year.

Operator

(Operator Instructions).

At this time I would like to turn the presentation back over to Mr. Hawley for closing remarks

Rick Hawley

Well, thanks to everyone for participating in the call and for your questions. We appreciate your interest in Nicor. Hope you all have a good day.

Operator

We thank you for your participation in your in today’s conference. As it does conclude your presentation you may now disconnect and have a great day.

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