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Nicor Inc. (NYSE:GAS)

Q2 2011 Earnings Call

August 3, 2011 10:00 AM ET

Executives

Russ Strobel – Chairman, President and CEO

Kary Brunner – Director, IR

Richard Hawley – CFO

Analysts

Mark Barnett – MorningStar

Operator

Good day ladies and gentlemen, and welcome to Nicor’s Second Quarter 2011 Earnings Conference 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 call is being recorded for replay purposes.

I would now like to turn the call over to your host for today to Mr. Russ Strobel, Chairman, President, and CEO of Nicor. Please proceed.

Russ Strobel

Thanks, Stacy and good morning to everybody on the: Thank you for joining us. With me today are Rick Hawley, our CFO; and Kary Brunner, our Director of Investor Relations.

This morning we’re going to discuss our 2011 second quarter financial results and our 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 provide a brief update on our pending merger with AGL Resources. As you all know, in December 2010 we entered into a merger agreement with AGL Resources. The completion of the transaction is subject to the customary conditions, including among others regulatory approvals and shareholder approvals by both companies.

During the second quarter we made significant progress on those items. On June 14, Nicor shareholders voted overwhelmingly to approve the merger. On the same-day AGL shareholders also voted overwhelmingly on their merger-related proposals.

In late May, the California PUC approved the transfer of ownership of Nicor’s Central Valley Gas Storage Project to AGL Resources. Back in April we were granted early termination of the HSR waiting period by both the Federal Trade Commission and the Department of Justice, and later that month the SEC completed its review on the merger transaction.

A key regulatory approval process that is ongoing is with the only commerce commission. You may recall that we and AGL Resources filed a joint application with the ICC in January for approval of the merger.

The staff of the ICC and several interveners submitted testimony, which is available on the ICC website, recommending that the ICC deny our joint application or impose various conditions on approval.

Since that time, we’ve submitted additional testimony and participated in the ICC’s evidentiary hearings. We are now working with the ICC staff and with the interveners in an attempt to narrow the unresolved issues and to reach solutions that are agreeable to all the parties. We will continue to work diligently to get this merger approved. The ICC has 11 months to act upon the application.

As we have stated in the past, we believe that Nicor has found a strong partner in AGL Resources who shares a commitment to providing safe, reliable and low-cost service to its customers.

As we have previously discussed, AGL Resources has committed to establish its national gas distribution headquarters right here in Illinois to maintain jobs at Nicor gas and to honor our current philanthropic and civic involvement.

These commitments by AGL Resources mean that are 2.2 million utility customers can continue to rely upon Nicor gas to provide high-value, cost-effective service, just as we have done for over half a century.

Nicor gas is proud of the fact that its distribution rates are almost 40% lower than the average for all major utilities in Illinois. We also have consistently among the lowest gas costs. As a result Nicor gas customers enjoy hundreds of millions of dollars a year in savings. We believe that our combination with AGL will not merely continue this tradition, but will enhance it.

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

Kary Brunner

Thanks, Russ, and good morning, everyone. First I would like to remind you that this call includes 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 second quarter 2011 diluted earnings per share were $0.42 compared to $0.53 per share for the same period in 2010. For the six months ended period, diluted earnings per share were $1.40 compared to $1.85 per share in 2010.

Without the approximately $0.42 per share benefit related to the bad debt tracker, last year’s June year-to-date results would have been about $1.43 per share.

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

Richard Hawley

Thanks, Kary, and good morning, everyone. Thanks for joining us on the call. Second quarter 2011 diluted earnings per share compared to 2010 reflected higher operating income in our gas distribution business more than offset by lower operating results at our shipping and other energy related businesses, as well as lower corporate operating results.

The second quarter comparisons also reflected higher pre-tax equity investment income and lower interest expense, partially offset by a higher effective income tax rate in 2011.

For the June year-to-date period, 2011 versus 2010 comparisons reflected lower operating results in the company’s gas distribution, shipping and other energy-related businesses, as well as lower corporate operating results.

The six months ended comparisons also reflected higher pre-tax equity investment income, lower interest expense and a lower effective income tax rate in 2011.

Year-to-date reported earnings included a reduction of approximately $0.03 per share for merger transaction costs. Gas distribution operating income for the second quarter of 2011 was up compared to 2010 on colder weather, partially offset by increased 2011 bad debt expense and depreciation costs.

Our June year-to-date 2011 gas distribution operating income was down compared to 2010, due to the absence of the $31.7 million pre-tax benefit recognized in the first quarter of 2010, associated with the implementation of the bad debt tracker.

This benefit was attributable to the 2008 and 2009’s net under recovery of bad debt expense, and was reported as a reduction in operating and maintenance expense.

Year-to-date gas distribution operating income comparisons also reflected increased natural gas deliveries due to 13% colder weather in 2011 compared to 2010, and lower company use and storage-related gas costs, partially offset by higher depreciation expense in 2011. We currently expect Nicor Gas’ annual operating results for 2011 to meet or exceed our previous estimates.

Moving to our shipping segment; Tropical second quarter 2011 operating results were lower than 2010 and our earlier expectations due to the adverse impacts on our volumes of the challenging markets and competition in the Caribbean and the Bahamas. On a year-to-date basis, volumes were down about 13% year-over-year.

Rate increases and cost initiatives have helped offset some of this volume decline. Tropical’s management took additional steps in the second quarter, focused on revenue enhancement and cost reductions to mitigate the negative impact of lower than anticipated volumes in revenue. We believe that these efforts will result in improving results in the last half of the year.

Our Other Energy Ventures’ second quarter and year-to-date 2011 operating income was lower than 2010, due primarily to lower results at our wholesale natural gas marketing business as a result of the negative impacts of low price volatility in the natural gas markets. On a year-to-date basis, we did see improved year-over-year results at our retail products and services businesses.

We currently estimate that our other Energy Ventures businesses will perform in line with earlier expectations. Second quarter and year-to-date 2011 corporate operating results compared to 2010 were down, due primarily to current-year merger transaction costs and the weather-related impact associated with certain of our retail utility bill management products.

Second quarter and year-to-date 2011 comparisons also reflected an increase in pre-tax equity income of 1.4 million and $4.2 million, respectively, from the company’s investments in Triton, a cargo container leasing company. Finally, the effective tax rate was lower year-to-date 2011 compared to 2010.

Turning to our forecasted 2011 annual results, we are affirming our previous guidance that 2011 diluted earnings per common share would be in the range of $2.30 to $2.50. As previously discussed, year-to-date results for the gas distribution business benefited from colder than expected weather.

Retention of those benefits and success in Tropical’s management of rate, volume and other cost initiatives forecasted for the remainder of the year, together with the expected results in our Other Energy Ventures, would produce earnings at the higher end of or possibly above our range.

Consistent with the prior guidance, and our annual outlook excludes, among other things, the impacts of the merger, including any merger transaction and integration costs incurred in 2011, and any future impacts associated with the ICC’s performance-based rate plant and purchased gas adjustment reviews, other contingencies or future changes in 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 the natural gas market.

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. I would like to close with several points. First of all, our consolidated results for the first half of 2011 were solid. Nicor Gas the favorable weather that we experienced, together with, among other items, our continued focus on managing control costs put us ahead of our earlier expectations for that business.

Tropical’s revenues were lower than we had previously anticipated as challenging markets in the Bahamas and the Caribbean continue to impact volume shift. Looking ahead for our other energy-related ventures, we currently expect full-year operating results will be in line with our earlier expectations.

And on a side note, construction continues to progress on our central valley storage project in Northern California. We still expect firm storage services to be available from this field starting in early 2012.

And in closing, let me reiterate that Nicor remains a very strong company financially with credit ratings that are the very highest in the industry. Our cash flow also remains strong and enables us to continue to pay a solid dividend to our shareholders, something we are proud to say we have been doing for 57 consecutive years.

And with that, I will be happy to take your questions.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from line of Mark Barnett with MorningStar.

Mark Barnett – MorningStar

A quick question. With the hearings that were held over in July and kind of the remaining issues that you are hashing out with the ICC, I know you probably don’t want to talk too much in detail but – sorry are you still there?

Russ Strobel

Go ahead Mark. Yes we are here.

Mark Barnett – MorningStar

Okay. Some of the remaining issues of the ICC – can you maybe talk – may be generally about what those might be?

Russ Strobel

Yes. I think that it fell into a couple of categories Mark. One, some of the parties feel that there should be a savings at the utility that should, at the present time, go into a reduction in our rates.

We and AGL have pointed out that Nicor Gas is currently, by far, the lowest cost provider in our territory and that this is not a transaction that is primarily predicated on savings with the gas utility, that we believe that we can become more efficient at the utility, we can adopt each other’s best practices and that, by virtue of those kinds of activities, we can mitigate future cost increases that are coming down the pipe from things like integrity management, labor costs going up, etcetera., etcetera.

We also point out with respect to the issue that AGL Resources has made a real commitment to maintain staffing levels at Nicor Gas, which also indicates that savings, if any, are likely to be highly speculative.

There are also some issues around the Company’s capital structure and credit ratings. We are continuing to negotiate those issues out also with the other parties, primarily with staff on that one.

So those, I think, are a couple of the bigger issues in the case. We remain confident that the transaction will ultimately be approved. We are committed to continuing to work with ICC staff and all the interveners to see that that happens.

Mark Barnett – MorningStar

Okay. Thanks. And I guess just one last question on the PBR kind of review process – I know that that’s going to be probably entirely separate from the merger. But given that it’s been a long, kind of ongoing thing, is there any chance that the merger closes before that review is finished or how – is that going to have any kind of bearing on the closing of the merger?

Russ Strobel

I think that those two issues are entirely separate and one will have no bearing on the other. The PBR has simply not been an issue in the merger proceedings.

Mark Barnett – MorningStar

Okay. Thanks for that.

Operator

(Operator Instructions) And at this time, I would like to turn the call back over to Mr. Strobel.

Russ Strobel

Okay. Thank you all for your interest in Nicor. We appreciate it. Have a great day.

Operator

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

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