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Nicor Inc. (NYSE:GAS)

Q3 2011 Earnings Call

November 1, 2011 09:30 am ET

Executives

Russ Strobel - Chairman, President & CEO

Kary Brunner - Director, IR

Rick Hawley - EVP & CFO

Analysts

Chris Bassett - Decade Capital

Mark Barnett - Morningstar

Operator

Good day ladies and gentlemen, and welcome to Nicor’s third 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 presentation 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. Thank you for joining us. With me today are Rick Hawley, our CFO; and Kary Brunner, our IR Director.

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

Before we get to the numbers let me provide a brief update on our proposed merger with AGL resources. As you know, in December of 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.

As we discussed in last quarter’s call in June Nicor shareholders and AGL shareholders voted overwhelmingly to approve the merger. Earlier this year we obtained the necessary regulatory approvals from the FTC and the Department of Justice. The SEC and the CPUC, a key regulatory approval process that is ongoing is the Illinois Commerce Commission. You may recall that we in AGL filed a joint application with the ICC in January for approval of the proposed merger. The ICC has 11 months to act on the application with their statutory deadline being December 16th 2011. The staff of the ICC and several interveners have been in testimony and legal briefs recommending that the ICC deny our joint application or impose various conditions on approval.

At the end of the September the ICC’s administrative law judge issued a proposed order recommending approval of the merger subject to certain conditions including among others that Nicor Gas no longer use its call center personnel to solicit Nicor Services warranty products. Testimony and legal briefs to the parties as well as the ALJ’s proposed order are all available on the ICC’s website. The ICC may accept, modify or reject the ALJ’s proposed order.

As we stated in the past, Nicor believes that it’s found a strong partner in AGL and that AGL shares Nicor’s longstanding [Technical Difficulty] to providing safe, reliable and low cost service to its customers. AGL Resources has committed to establish its national gas distribution headquarters here in Illinois to maintain jobs at Nicor Gas and to continue our philanthropic and civic involvement. These commitments by AGL mean that our 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.

We continue to expect to complete our merger with AGL resources before the end of the year. With that 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 on our press release this morning preliminary third quarter 2011 diluted earnings per share were $0.12 compared to $0.30 per share for the same period in 2010.

For the nine month ended 2011 period, diluted earnings per share were a $1.52 compared to $2.15 per share in 2010. As a reminder, last year’s three and nine months ended September 30 results included the positive effects of a reserve adjustment of approximately $1.3 million pretax or about $0.02 per share after tax related to our mercury inspection and repair program.

Also, as we noted in this mornings press release, year-to-date results for 2010 included a $19.7 million after tax benefit or approximately $0.42 per share related to the bad debt tracker. Therefore without the approximately $0.42 per share benefit related to the bad debt tracker and the $0.02 per share benefit related to the mercury reserve adjustment, 2010 September year-to-date results would have been about $1.71 per share.

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

Rick Hawley

Thanks Kary and good morning everyone. Excluding the mercury item that Kary just mentioned, third quarter 2011 diluted earnings per share compared to 2010 reflected higher operating income at our gas distribution business and higher quarter corporate operating results more than offset by lower operating results at our shipping and other energy related businesses.

The third quarter comparisons also reflected higher pretax equity investment income and lower interest expense partially offset by a higher effective income tax rate in 2011. For the year-to-date period 2011 versus 2010 comparisons excluding the aforementioned mercury item reflected lower operating results in the company’s gas distribution shipping and other energy related businesses as well as lower corporate operating results.

The nine months ended comparisons also reflected higher pretax equity investment income, lower interest expense partially offset by higher effective income tax rate in 2011.

Year-to-date reported earnings included a reduction of approximately $0.04 per share for merger transaction cost. Gas distribution operating income for the third quarter of 2011 was up compared to 2010 on higher power generation revenues and lower 2011 bad debt expense partially offset by higher depreciation costs.

Our September year-to-date 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’s and 2009’s net under recovery of bad debt expense and was reported as a reduction in 2010 operating and maintenance expense.

Year-to-date gas distribution operating income comparisons also reflected increased natural gas deliveries due to colder weather in 2011 compared to 2010 and lower 2011 bad debt expense partially offset by higher depreciation expense in 2011. We currently expect Nicor Gas’ annual operating results for 2011 to exceed our previous estimates.

Moving to our shipping segment, Tropical’s third 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 Bahamas. In the third quarter, Tropical’s volumes were down about 14% year-over-year. On a year-to-date basis, volumes were down about 13% year-over-year.

As we’ve stated in the past, Tropical’s management has taken steps throughout the year focused on revenue enhancement and cost reductions to combat the persistent economic weakness in their markets. These efforts have helped to mitigate some of the year-to-date volume shortfalls. Because Tropical’s third quarter results came in below our expectations, we have for 2011 earnings guidance purposes, adjusted downward our estimate for Tropical’s annual results.

Our other energy ventures’ third quarter and year-to-date 2011 operating income was lower than 2010 due 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.

The third quarter GAAP results for our other energy ventures reflect a lower cost or market adjustment to inventory of approximately $5 million pretax which will turnaround as the inventory is sold. Given that anticipated turnaround, we currently estimate that our other energy ventures businesses for the year will perform near our expectations.

Year-to-date 2011 corporate operating results compared to 2010 were down due to the current year merger transaction costs and the weather related impact associated with certain of our retail utility-bill management products.

Third quarter and year-to-date 2011 comparisons also reflected an increase in pretax equity income of $2.3 million and $6.5 million respectively from the company's investment in Trident, a cargo container leasing company. Finally, the effective tax rate in 2011 was higher than in 2010.

Turning to our forecasted 2011 annual results, we are estimating that 2011 diluted earnings per share will be in the range of $2.30 to $2.40. Our previous guidance indicated a range of $2.30 to $2.50. Consistent with the prior guidance, our annual outlook excludes among other things, the impact of the merger including any incremental merger transaction and integration costs incurred in 2011, and any future impact associated with the ICC’s performance-based rate plan or 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 nature gas markets.

Our estimate for Nicor Gas is based on the colder-than-normal weather experience-to-date and historical weather patterns for the remainder of the year. 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

Thank you, Rick. I’d like to close with several points. First, Nicor Gas’ earnings were on track to exceed our earlier expectations as favorable weather, together with controlling our cost, have benefited this business. Tropical’s 2011 outlook is lower than we’ve previously anticipated as economic weakness in the Bahamas and the Caribbean continue to negatively impact volumes and corresponding revenues.

Looking ahead for our Other Energy-related businesses, we currently expect full-year operating results will be near our earlier expectations. On a side note, construction continues to progress under Central Valley Storage project in Northern California. We’ve completed drilling of all the fields’ wells and we continue to make progress on pipeline construction and the compressor station.

In closing, let me reiterate that Nicor remains very strong financially with credit ratings that are at the highest in the industry. Our cash flow also remains strong and has enabled us to pay a solid dividend to our shareholders, something we’ve done 57 consecutive years.

And with that wrap-up, I’d be happy to take your questions.

Question-and-Answer Session

Operator

(Operator Instructions) And your first question comes from the line of Chris Bassett with Decade Capital. Please proceed.

Chris Bassett - Decade Capital

I was wondering what the weather benefit versus normal was for the year-to-date?

Rick Hawley

Yes. We are looking, I think it’s in the press release but I believe it’s approximately $9 million but let me just -- yes, approximately $9 million pre-tax.

Chris Bassett - Decade Capital

Okay. And then also what’s your revised outlook for Tropical shipment for the year and how should I think about drivers in the 2012 for that business?

Rick Hawley

Well, going to the first one, I think that the drivers are really the levels of volume. Our rates of held up reasonably well. We’re closed to expectations on those rates. But volumes have continued to be below the prior year’s. We are watching, obviously there is a lot of fixed cost in that, we’ve taken out a lot of cost, but we have gotten down to probably close to our fixed cost base on the current footprint we have, so 2012 and beyond results will be based on the volumes we are able to achieve. If you’re looking at tropical for the year, we are looking with our current expectations at being just slightly positive there, just above the breakeven point.

Chris Bassett - Decade Capital

On net income basis?

Rick Hawley

On a net income basis, yeah. Yeah that will be positive operating income, but about after tax pretty close to breakeven.

Operator

Your next question comes from the line of Mark Barnett with Morningstar. Please proceed.

Mark Barnett - Morningstar

Quick question. I am not sure if I just missed this, I just got booted for a minute there and hopped back in, what was the earnings impact from positive weather in Q3 at the gas distribution business?

Rick Hawley

The third quarter, one thing I would say it was $9 million for the year, weather is, there is almost no net income impact on weather in the third quarter. It’s colder than normal, but in our third quarter, that doesn’t mean much, it is not much of a load there.

Mark Barnett - Morningstar

And then I guess may be you talk a little bit about competitive dynamics in Illinois in the retail electric side, I know that’s kind of a newer business, just wanted to hear how things are going?

Russ Strobel

Well this is Russ, Mark. That business is just getting off the ground now. So I think it’s too early to offer any prognostications on where that business is going to go, but Illinois is a market where the regulation and the politics were all very much in favor of a competitive market at the residential level, at the retail level. So we think there is real potential there.

Operator

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

Russ Strobel

Great Stacy, thank you all for your interest in Nicor and have a great day. Thank you.

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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